Facts:

This case revolves around Azolla Farms International Philippines and its Chairman, Francisco R. Yuseco, as petitioners against the Court of Appeals and the Savings Bank of Manila as respondents. The dispute originated from a loan that Azolla Farms obtained from the Savings Bank for participating in the National Azolla Production Program, aiming to produce organic minerals for food production. On August 31, 1982, the Board of Directors authorized Yuseco to borrow up to P2,200,000 from the Savings Bank. Subsequently, Yuseco executed a promissory note for P1,400,000 on September 13, 1982, yet only P1,225,443.31 was released due to incomplete conditions set by the bank. Petitioner later executed additional promissory notes for P300,000 each on September 27, 1982, and January 4, 1983, respectively.

However, the Azolla Farms project collapsed, which the petitioners attributed to the Savings Bank's unjust reluctance to release the remaining P300,000, thereby impairing their project

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Facts:

Parties and Background

• Petitioners:
• Azolla Farms International Philippines (“Azolla Farms”), a corporation engaged in the production, marketing, and sale of natural, organic minerals, among other activities.
• Francisco R. Yuseco, Jr., Chairman, President, and Chief Operating Officer of Azolla Farms.
• Respondents:
• Court of Appeals, which rendered a decision reversing a trial court judgment.
• Savings Bank of Manila, a banking institution involved in the financing arrangement.

Loan Arrangement and Project Initiation

• Azolla Farms’ Participation in the National Azolla Production Program
• The project involved the purchase of Azolla produced by designated beneficiaries, with government and private sector participation (including the Ministry of Agriculture, Kilusang Kabuhayan at Kaunlaran, and Kiwanis).
• The program aimed at optimizing the use of natural, organic minerals to promote food production.
• Financing of the Project
• Petitioners applied for a loan with Credit Manila, Inc., which endorsed the application to its sister company, Savings Bank of Manila.
• The Board of Directors of Azolla Farms authorized a borrowing limit of up to ₱2,200,000.00 in a resolution dated August 31, 1982.

Execution of Loan Documents and Security Arrangements

• Loan Approval and Promissory Notes
• Savings Bank approved the loan, prompting Francisco R. Yuseco, Jr. to execute a promissory note on September 13, 1982, promising to pay ₱1,400,000.00 by September 13, 1983.
• Subsequent promissory notes were executed on September 27, 1982, and January 4, 1983, each for ₱300,000.00.
• Collateral and Security Instruments
• The net proceeds of ₱1,225,443.31 were released and applied in connection with the mortgage of a 548-square meter lot with a residential house owned by Yuseco.
• The mortgage originally held by FNCB Finance was released after the funds were dispersed, and the property was re-mortgaged to Savings Bank as additional collateral.
• An assignment of shares in Azolla Farms was also executed by Yuseco and Francisco Bargas to secure the obligations.

Allegations and Procedural History in the Lower Courts

• Project Collapse and Damage Allegations
• The Azolla Farms project eventually collapsed, with petitioners alleging that Savings Bank unreasonably delayed the release of ₱300,000.00, thus impairing the project’s timetable and viability.
• Petitioners claimed actual damages (initially ₱1,000,000.00, later amended to ₱5,000,000.00) along with moral damages, attorney’s fees, and legal interest.
• Trial Court Proceedings
• A complaint for damages was filed on October 3, 1983, before the Regional Trial Court of Manila (Branch 25).
• After respondent Savings Bank rested its case and petitioners moved to amend the complaint, the trial court admitted the amended complaint.
• On June 17, 1994, the trial court rendered a decision annulling the promissory notes and the real estate mortgage, and it ordered the bank to return possession of the mortgaged property along with the payment of damages and other costs.

Appeal and the Issue of Novation

• Savings Bank elevated the case to the Court of Appeals, which reversed and set aside the trial court’s decision in its February 19, 1999 ruling.
• The appellate decision declared the promissory notes and real estate mortgage valid and binding, also affirming the extrajudicial foreclosure and sale of the property.
• The petition for certiorari under Rule 45 was subsequently filed, arguing that the Court of Appeals committed reversible error.

Issue:

Whether the trial court erred in admitting petitioners’ amended complaint.

• Petitioners sought to amend the complaint to include issues raised by evidence, particularly the testimony of the defense witness Jesus Venturina regarding the alleged invalidity of the promissory notes and the real estate mortgage.
• The trial court admitted the amended complaint under Section 5, Rule 10 of the Rules of Court, allowing amendments to conform the pleadings to the evidence.

Whether the trial court erred in nullifying (declaring novated and unenforceable) the promissory notes, the real estate mortgage, and the extrajudicial foreclosure sale.

• Petitioners asserted that the promissory notes and mortgage were novated due to changes in the parties and the loan amount.
• The issue revolved around whether novation had occurred and whether such novation rendered the documents unenforceable.

Ruling:

• (Subscriber-Only)

Ratio:

• (Subscriber-Only)

Doctrine:

• (Subscriber-Only)