G.R. No. 159748 - Spouses Anastacio-Calina vs. Development Bank of the Philippines

Case Digest (G.R. No. 159748)
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Facts:

Background of the Loan Agreement and Security Documents

On July 16, 1975, the Spouses Virgilio and Digna Anastacio-Calina (petitioners) and the Development Bank of the Philippines (DBP) entered into an agricultural (deep-sea fishing) loan agreement for the amount of P1,356,000.00.
On July 24, 1975, the petitioners executed a promissory note in favor of DBP, agreeing to repay P1,356,000.00 with 12% interest per annum. The repayment scheme provided for:

Payment of interest and advances due at the end of the third month following the full release (or completion of boat if full release was not availed).
Full repayment within five (5) years thereafter, with scheduled quarterly payments of P91,144.50 covering both principal amortizations and interest.

Also on July 24, 1975, the petitioners executed a Deed of Undertaking setting the conditions for the loan, including:

Use of the loan proceeds to finance 80% of the total fixed cost relating to purchasing a "Purse Seine" type fishing vessel, nets, and accessories.
Borrower’s obligation to contribute additional funds amounting to P614,658.00 covering both fixed and operating costs, with proof of availability of P275,400.00 for operating cost required prior to initial release.
A period of six (6) months within which the borrower had to avail of the loan proceeds, failing which commitment fees would accrue on the unreleased amount.
Security for the loan through a chattel mortgage on the fishing boat, its engine, and accessories, provided the vessel had an “all risk” insurance policy.

On July 31, 1975, pursuant to the conditions of the Deed of Undertaking, Towers Assurance Corporation executed a Performance Bond for P319,085.60 as surety for the petitioners.

Construction and Utilization of Loan Proceeds

In August 1975, the petitioners began construction of the fishing boat at a site in Panakan, Palawan, using the first release of the loan proceeds along with their own funds for materials and labor costs.
Subsequent releases from DBP were used to:

Purchase a Cummins Marine Diesel Engine, which was initially stored and not immediately installed.
Acquire additional equipment through a third release, bringing the total released amount to P451,589.80.

In December 1975, the petitioners requested an inspection by DBP of the partially completed keel, but the inspection could not be effected due to the unavailability of the DBP inspectors.
In late January 1976, typhoon Asyang struck Palawan, completely destroying the fishing boat under construction and washing away all materials.

Abandonment of the Project and Subsequent Developments

On January 26, 1978, petitioner Virgilio Calina notified DBP of his decision to abandon the fishing vessel project.
He requested a 60-day period in which to sell the Cummins Marine Diesel Engine to satisfy the outstanding obligations under the loan.
On October 3, 1978, DBP formally demanded immediate payment of P666,195.55, representing the outstanding obligation (principal plus interest computed from August 18, 1978, exclusive of daily additional interest).

Legal Proceedings and Contractual Disputes

DBP filed a complaint on December 11, 1980, seeking a writ of preliminary attachment against the Cummins Marine Diesel Engine.

Towers Assurance Corporation raised defenses including laches and argued that the surety bond was not exposed to risk, as the funds were used for the diesel engine rather than the construction of the vessel.

The petitioners filed an Answer with Counterclaim on August 14, 1981, demanding damages.
Throughout the litigation process, the petitioners attempted to sell the engine:

An offer of P600,000.00 was received on September 17, 1984, though DBP initially refused to conform to the sale.
DBP eventually agreed in a letter dated August 26, 1985, to the sale of the engine for P600,000.00 with the proceeds to settle the agricultural loan and condoning penalty charges and interest on past due amounts.
The engine, however, remained unsold until a joint motion (filed on August 28, 1989) resulted in the trial court lifting the writ of attachment so that the engine could be sold pending litigation.
On February 3, 1992, the engine was sold for P550,000.00 and applied to the loan, although parties disputed whether the total loan obligation was thus settled.

Trial Court and Appellate Court Decisions

The trial court, after extensive findings and conclusions, held that:

Only P451,589.80 had been released under the loan agreement.
The non-completion of the fishing vessel resulted from a fortuitous event, and that DBP had effectively novated the contract by condoning interest and penalties upon petitioners’ failure to pay the stipulated P600,000.00.
The subsequent sale of the engine for P550,000.00 constituted substantial compliance with the novated agreement and was sufficient to pay off the advances after condonation.
Consequently, the trial court dismissed the case.

DBP, disagreeing with the trial court’s ruling, filed a petition for review on July 29, 1998, with the Court of Appeals.

The CA reversed the trial court’s decision, ordering the petitioners to pay the outstanding amount of P666,195.55 plus 12% interest from August 18, 1978, computed on a diminishing balance, after deducting the P550,000.00 from the engine sale and applying 10% attorney’s fees.

Review on Certiorari and Final Decision

The petitioners filed a Pet. for Review on Certiorari, raising several errors, including:

The treatment of DBP’s conduct as constituting a novation or compromise settlement,
The application of interest on the advance, and
The awarding of attorney’s fees despite absence of bad faith.

DBP, in its Comments, contended that the petitioners had failed to repay their debt as agreed and stressed that:

The DBP’s insistence on collecting interest on the advanced amount was supported by the promissory note,
The novation theory was properly adopted by the trial court and then abandoned by the petitioners in subsequent proceedings.

Ultimately, the Supreme Court affirmed the ruling of the Court of Appeals with modifications:

It reaffirmed that the petitioners owed P666,195.55 plus 12% interest from August 18, 1978, to February 2, 1992, less the P550,000.00 previously paid.
Interest on the remaining balance would continue from February 3, 1992 until full payment, and
The award for attorney’s fees was deleted.

Issues:

Existence and Revocation of Novation

Whether DBP’s conduct in condoning interest and penalties amounted to a novation of the original contract.
Whether the failure of the petitioners to pay the stipulated P600,000.00 effectively revoked any purported novation, thereby nullifying the benefits of condonation.

Computation and Extent of Outstanding Obligation

Whether the sale of the Cummins Marine Diesel Engine for P550,000.00 should be considered as full settlement or partial offset of the advanced loan amount.
Whether interest should continue to accrue on the original principal, particularly on the portion advanced (P451,589.80) as stipulated in the promissory note.

Characterization of the Post-Complaint Agreement

Whether the arrangements made after the project’s discontinuation should be considered a compromise settlement or a revocation of the novated terms.
Whether the subsequent application of the proceeds of the engine sale constitutes substantial compliance with any sanctioning novation.

Award of Attorney’s Fees

Whether awarding 10% attorney’s fees is justified given the absence of any element of bad faith and given that the contract provided for fees only in the event of forced litigation.

Judicial Role in Factual Findings

Whether the Supreme Court should reexamine the trial and appellate courts’ findings on fact, especially on issues raised by the petitioners’ arguments concerning novation and compromise.

Ruling:

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Ratio:

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Case Digest (G.R. No. 159748)
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Case Digest (G.R. No. 159748)
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