G.R. No. 195592 - Magdiwang Realty Corp. vs. Manila Banking Corp.

The case stems from a complaint for sum of money filed on April 18, 2000 by The Manila Banking Corporation (TMBC) against Magdiwang Realty Corporation, Renato P. Dragon, and Esperanza Tolentino after the petitioners allegedly defaulted in the payment of their debts under five promissory notes.
The promissory notes, executed by the petitioners, had the following terms:

Promissory Note No. 4953 – Maturity Date: December 27, 1976, Amount: Php500,000.00
Promissory Note Nos. 10045, 10046, 10047, and 10048 – Maturity Date: March 27, 1982, Amount: Php500,000.00 each

Each note stipulated the payment of interest and additional penalty charges in the event of default.

Despite repeated demands for payment by TMBC, the petitioners did not file an answer or any responsive pleading within the prescribed fifteen (15)-day period.
On October 12, 2000, well beyond the allowable period, the petitioners filed a Motion for Leave to Admit Attached Motion to Dismiss and a Motion to Dismiss raising issues such as novation, lack of cause of action against individuals Dragon and Tolentino, and the impossibility of the novated contract due to subsequent legislative enactments.
TMBC opposed the motions, requesting that the petitioners be declared in default for their failure to file a timely responsive pleading.

The Regional Trial Court (RTC) of Makati City, Branch 148, docketed the case as Civil Case No. 00-511.
The RTC issued an Order on July 5, 2001, declaring the petitioners in default based on the findings that summons had been duly served (through substituted service) and that the petitioners had failed to respond within the reglementary period.
Notably, no Motion for Extension of Time was sought by the petitioners, and the late filing of their Motion to Dismiss rendered it inadmissible as a responsive pleading.

Dissatisfied with the RTC decision and the denial of their motion for reconsideration on August 2, 2005, the petitioners filed a petition for certiorari with the Court of Appeals (CA), which was docketed as CA-G.R. SP No. 91820.
Meanwhile, TMBC’s evidence continued to be presented ex parte before the RTC, reinforcing its claim against the petitioners.
On May 20, 2007, the RTC rendered its Decision, ruling in favor of TMBC and ordering the petitioners to pay:

The principal amount of Php500,000.00 under PN No. 4953 along with interest at 14% per annum, penalty charges at 4% per annum, and attorney’s fees of 10% of the total obligation.
Joint and several liabilities for the remaining promissory notes (PN Nos. 10045, 10046, 10047, and 10048) with corresponding interest (16% per annum), penalty (1% per month on the outstanding amounts), and attorney’s fees.

On October 11, 2010, the CA dismissed the petitioners’ appeal, affirming the RTC’s rulings, including the declaration of default, the interruption of the prescriptive period, and the denial of the defense of novation.
A subsequent motion for reconsideration before the CA was also denied on January 31, 2011.

The prescriptive period was not legally interrupted because there was no valid extrajudicial demand.
The principle of novation, as applied by TMBC, was improperly employed to hold them liable.
The award of attorney’s fees was erroneous.

They challenged the authenticity, receipt, and factual basis of the letters exchanged which the lower courts relied upon to interrupt the prescriptive period.

The evidence presented included several correspondences between the parties: letters dated November 14, 1984; March 24, 1987; February 14, 1990; and September 10, 1999, which indicated acknowledgment of the debt and proposals for restructuring.
The CA held that the prescriptive period was indeed interrupted by these correspondences, which reset the ten (10)-year period for filing the action.
On novation, the CA found that the necessary requisites – namely, a clear release of the original debtor and the creditor’s consent – were not met.

Whether the ten (10)-year prescriptive period under Article 1142 of the New Civil Code was effectively interrupted by the petitioners’ correspondence proposing a restructuring of the loans and TMBC’s subsequent demand letters.
Whether the defense of novation has merit, considering the absence of a clear and express release of the original debtor combined with the requisite consent of the creditor.
Whether the award of attorney’s fees against the petitioners was properly imposed under Article 2208(2) of the New Civil Code in view of their default and conduct during litigation.
Whether the petitioners’ failure to file a timely responsive pleading and their subsequent actions constitute a waiver of the opportunity to contest the evidence regarding the interruption of the prescriptive period.