G.R. No. 169407 - Bank of the Philippine Islands vs. Domingo

On September 27, 1993, respondent Amador Domingo and his late wife, Mercy Maryden Domingo, executed a Promissory Note in favor of Makati Auto Center, Inc. for P629,856.00, payable in 48 monthly installments of P13,122.00 each.
Simultaneously, they executed a Deed of Chattel Mortgage over a 1993 Mazda 323 to secure the payment of the Promissory Note.
Makati Auto Center, Inc. assigned its rights over the Promissory Note and chattel mortgage to Far East Bank and Trust Company (FEBTC).

On April 7, 2000, the Securities and Exchange Commission (SEC) approved the merger of FEBTC with Bank of the Philippine Islands (BPI), with BPI as the surviving corporation. All assets and liabilities of FEBTC were transferred to BPI.

The spouses Domingo defaulted on 21 consecutive monthly installments from January 15, 1996, to September 15, 1997.
BPI demanded payment of the balance or the return of the vehicle for foreclosure. When the spouses failed to comply, BPI filed a Complaint for Replevin and Damages on November 14, 2000.

In their Answer, the spouses Domingo raised several affirmative defenses, including lack of cause of action, lack of jurisdiction, and the claim that the vehicle had been sold to Carmelita Gonzales with the bank's approval, who assumed the mortgage payments.

Vicente Magpusao, a BPI employee, testified that the spouses Domingo defaulted on their payments and that BPI had sent demand letters.
Amador Domingo testified that the vehicle was sold to Carmelita Gonzales, who assumed the mortgage payments, and that the bank returned their postdated checks. However, he admitted that there was no written approval from the bank for the sale and assumption of mortgage.

The MeTC ruled in favor of BPI, finding that novation (substitution of debtors) was not proven. The court ordered Amador Domingo to pay the outstanding balance of P275,562.00, plus interest and attorney's fees.

The RTC and the Court of Appeals (CA) reversed the MeTC decision, ruling that novation occurred when the bank returned the checks to the spouses Domingo, indicating consent to the substitution of debtors.

Whether novation occurred, releasing the spouses Domingo from their obligation under the Promissory Note.
Whether the return of the postdated checks by the bank constituted consent to the substitution of debtors.
Whether the interest rate of 36% per annum stipulated in the Promissory Note is excessive and unconscionable.

The Supreme Court reversed the decisions of the RTC and CA, reinstating the MeTC decision with modifications.
The Court held that novation was not proven, as there was no clear and unmistakable consent from the bank to release the spouses Domingo from their obligation.
The Court found the 36% per annum interest rate excessive and reduced it to 12% per annum from January 29, 1997, to June 30, 2013, and 6% per annum from July 1, 2013, until fully paid.
The heirs of Amador Domingo were ordered to pay the outstanding balance, attorney's fees, and costs of suit, but their liability is limited to the value of the inheritance they received from Amador.