Title
Babst vs. Court of Appeals
Case
G.R. No. 99398
Decision Date
Jan 26, 2001
ELISCON defaulted on loans; BPI sued for recovery. SC ruled novation occurred via DBP's assumption, releasing ELISCON, MULTI, and Babst from liability.
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Case Digest (G.R. No. 99398)

Facts:

  1. Loan and Promissory Note:
    On June 8, 1973, Elizalde Steel Consolidated, Inc. (ELISCON) obtained a loan from Commercial Bank and Trust Company (CBTC) amounting to P8,015,900.84, evidenced by a promissory note with a 14% annual interest rate. ELISCON defaulted on its payments, leaving an outstanding debt of P2,795,240.67 as of October 31, 1982.

  2. Letters of Credit:
    CBTC opened three domestic letters of credit for ELISCON, totaling P3,850,982.77, to purchase tin black plates from National Steel Corporation. ELISCON defaulted on these obligations, leaving an outstanding balance of P3,963,372.08 as of October 31, 1982.

  3. Guarantee by Pacific Multi-Commercial Corporation (MULTI):
    MULTI, through a board resolution, allowed ELISCON to use its credit facilities with CBTC and guaranteed the payment of the letters of credit. Antonio Roxas Chua and Chester Babst executed a Continuing Suretyship, binding themselves jointly and severally liable for MULTI's obligations to CBTC up to P8,000,000.00 each.

  4. Merger of CBTC and BPI:
    On December 22, 1980, CBTC merged with the Bank of the Philippine Islands (BPI), with BPI as the surviving entity. BPI acquired all assets and assumed all liabilities of CBTC, including ELISCON's outstanding obligations.

  5. Financial Difficulties and Dacion en Pago:
    ELISCON faced financial difficulties and proposed to convey its fixed assets to the Development Bank of the Philippines (DBP) through a Deed of Cession of Property in Payment of Debt to settle its obligations. DBP took over ELISCON's assets in October 1981 and proposed settlement formulas to creditors, which BPI rejected.

  6. Filing of Complaint:
    On January 17, 1983, BPI filed a complaint against ELISCON, MULTI, and Babst to recover the amounts due under the promissory note and letters of credit.

  7. Defenses Raised:

    • ELISCON argued that the complaint was premature since DBP was negotiating settlements.
    • Babst claimed he signed the suretyship only for MULTI's obligations, not for third-party liabilities like ELISCON.
    • MULTI denied knowledge of the merger and argued that its guaranty did not cover trust receipts.
  8. Trial Court Decision:
    The trial court ruled in favor of BPI, holding ELISCON, MULTI, and Babst jointly and severally liable for the amounts due.

  9. Court of Appeals Decision:
    The Court of Appeals modified the trial court's decision, reducing the amounts due but maintaining the liability of ELISCON, MULTI, and Babst.

  10. Petitions for Review:
    ELISCON and Babst filed separate petitions for review, raising issues of novation, substitution of debtors, and liability of sureties.

Issue:

  1. Whether BPI consented to the substitution of DBP as the new debtor in place of ELISCON, thereby effecting novation and releasing ELISCON from its obligations.
  2. Whether MULTI and Babst are solidarily liable for ELISCON's obligations under the letters of credit.
  3. Whether the DBP takeover of ELISCON constituted a fortuitous event, exculpating ELISCON from further liabilities.
  4. Whether the dacion en pago between DBP and ELISCON relieved ELISCON, MULTI, and Babst of liability to BPI.

Ruling:

The Supreme Court granted the consolidated petitions and reversed the Court of Appeals' decision. The Court held that:

  1. Novation by Substitution of Debtor:
    BPI's failure to object to DBP's assumption of ELISCON's obligations during the creditors' meeting and thereafter constituted implied consent to the substitution of debtors. This resulted in a valid novation, releasing ELISCON from its obligations to BPI.

  2. Liability of MULTI and Babst:
    The contracts of suretyship executed by MULTI and Babst were accessory obligations that were extinguished upon the novation of the principal obligation. Thus, MULTI and Babst were no longer liable to BPI.

  3. Fortuitous Event:
    The DBP takeover of ELISCON did not constitute a fortuitous event, as it was a deliberate act by the government to address ELISCON's financial difficulties.

  4. Dacion en Pago:
    The dacion en pago between DBP and ELISCON did not relieve ELISCON, MULTI, and Babst of liability to BPI, as BPI did not consent to the arrangement.

Ratio:

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