A.C. No. 10021-22 - AAA vs. Atty. Antonio N. de los Reyes

On August 6, 1906, James J. Peterson, by his attorney W. A. Kincaid, filed a complaint before the Court of First Instance of Manila.
The complaint sought a judgment against Rafael Azada requiring payment of 1,160 pesos and 55 centavos, plus interest at 1% per month from June 10, 1906, until full payment.
The underlying transaction involved a promissory note dated May 1, 1906, wherein Azada acknowledged a debt of 3,800 pesos, received by him in the course of business.
Several valuable pieces of jewelry were pledged as security for the note, with a clause providing that if full payment was not made by the maturity date, Peterson, with the assistance of Antonio G. Serrano, had the authority to sell the jewelry at the best obtainable price.
It was agreed that any surplus over the note’s amount from the sale would be returned to the debtor, and that the unpaid balance would accrue interest at 1% per month.

Peterson alleged that from the total debt (including proceeds from the sale of certain jewelry items amounting to 1,739 pesos and 45 centavos), Azada had paid only 2,639 pesos and 45 centavos, leaving an outstanding balance of 1,160 pesos and 55 centavos.
The complaint also noted that the demurrer was overruled on August 28, 1906, and the defendant subsequently filed his answer on September 3, 1906, where, except for the first paragraph, all allegations were denied.
In his answer, Azada contended that the May 1, 1906 note was an attempted novation of two earlier promissory notes (dated March 2, 1905, and March 14, 1905) and should therefore be void due to an alleged error.
Azada maintained that the original notes, secured respectively by a diamond ring and an additional obligation, should be treated as a loan contract with a pledge, and that any sale of the jewelry was wrongful if executed as the creditor’s property.
Additionally, he argued that even if a valid novation existed, the enforcement of the balance due should not commence until December 10, 1906, and that the interest rate should be reduced to no more than 6% per annum based on an alleged regulation concerning usurious practices.

During trial, the record revealed that the promissory note of May 1, 1906 had been duly executed by Azada, with no denial of its proper execution under oath.
The defendant’s answer acknowledged that the amounts of 500 and 3,000 pesos from the earlier notes, plus an additional 300 pesos, were incorporated in the new note, thereby creating a perfect novation which extinguished the former obligations.
There was no satisfactory evidence to support that Azada had assented to the new note in error; he admitted to having his signature affixed after having the document read to him in the presence of both the creditor and his agent, Antonio Serrano.

The May 1, 1906 note and the accompanying contract stipulated that if the debt was not fully paid on its maturity date, Peterson was entitled to sell the pledged jewelry.
In execution of this clause, the creditor sold the jewelry through a third person, Antonio Matute, in accordance with the agreement.
The document also provided that interest on the remaining unpaid balance should accrue at the rate of 1% per month from the date of maturity until the balance was settled.

Whether the promissory note dated May 1, 1906, which incorporated the amounts of 500, 3,000, and an additional 300 pesos, constituted a valid novation extinguishing the previous obligations.
Whether the defendant’s claim of having signed the document in error or under misapprehension has any factual or legal basis.

Whether the sale of the pledged jewelry by Peterson, as provided in the contract, was executed in accordance with the agreed terms.
Whether the process followed in selling the jewelry was proper and did not violate any legal requirements.

Whether the contractual stipulation for interest at 1% per month on the unpaid balance is enforceable.
Whether the defendant’s contention regarding the imposition of a higher rate or an extended due date for payment is legally tenable.

Whether the agreement, as amended by the new promissory note, met all essential requirements under the Civil Code.
Whether any element of deceit, error, or misrepresentation can annul or modify the contractual obligations of the debtor.