Title
Ajax Marketing and Development Corp. vs. Court of Appeals
Case
G.R. No. 118585
Decision Date
Sep 14, 1995
A partnership secured loans via real estate mortgages, later consolidated into one loan. Foreclosure was valid for secured loans but improper for unsecured ones; no novation occurred despite corporate conversion.
extrajudicial foreclosure
validity
consolidation of loans
A

Case Summary (G.R. No. 139465)

Procedural Posture

The Court of Appeals, in a March 30, 1994 decision, affirmed the trial court’s judgment upholding the validity of Metrobank’s extrajudicial foreclosure of the Paco property. Petitioners’ motion for reconsideration before the Court of Appeals was denied, prompting this petition for review on certiorari to the Supreme Court. Petitioners advanced four interrelated assignments of error contesting (1) that consolidation of the three loans into a single P1,000,000 obligation effected a novation extinguishing the mortgages; (2) that the consolidated loan lacked a new REM and was therefore unsecured; (3) that inclusion of an admittedly unsecured loan (P970,000 under PN BDS No. 3583) in the foreclosure invalidated the foreclosure under C & C Commercial Corp. v. PNB; and (4) that the extrajudicial foreclosure should be declared null and void.

Facts as Found by the Court of Appeals

The Court of Appeals’ factual findings, adopted for decision, state that Ylang-Ylang Merchandising Company (partnership of Angelita Rodriguez and Antonio Tan) obtained P250,000 from Metrobank secured by petitioners’ REM on the Paco property; the partnership renamed Ajax Marketing Company obtained P150,000 likewise secured by another REM; later, after conversion to Ajax Marketing and Development Corporation (incorporators including Antonio and Elisa Tan and others) a P600,000 loan was obtained secured by a third REM on the same property. In December 1980 the three loans, totaling P1,000,000, were restructured and consolidated into PN No. BDS-3605 executed by Ajax Marketing and Development Corporation (with Antonio and Elisa Tan signing in corporate and personal capacities). The consolidated PN expressly bore the typewritten notation “secured by REM” and stated “COLLATERAL. This is wholly/partly secured by: (x) real estate.” The REMs themselves contained language securing future loans, renewals, or extensions and fixed the principal amounts at P600,000/P150,000/P250,000 respectively while reserving the mortgage to remain in full force unless the secured obligations were paid.

Issues Presented

Primary legal issues: (1) Whether consolidation of the three loans into PN No. BDS-3605 effected a novation that extinguished the original obligations and the accessory mortgage contracts, thereby releasing the realty from liability; (2) Whether PN No. BDS-3605 was unsecured for lack of a new REM and thus improperly included in foreclosure; (3) Whether inclusion of the separately unsecured PN No. BDS-3583 (P970,000) in the foreclosure invalidated the foreclosure proceedings under controlling jurisprudence; and (4) Whether extrajudicial foreclosure must be declared null and void.

Legal Standard on Novation

The court recited settled principles: novation extinguishes an obligation by substitution of a new obligation and creates a new one; it may be objective (change in object or principal conditions), subjective (change in debtor or creditor), or mixed. Novation is not presumed; it requires clear, express agreement or acts of equal import. For objective novation the new obligation must expressly declare extinguishment of the old obligation or be irreconcilable with it; for subjective novation by substitution of debtor the old debtor must be expressly released—otherwise a third person assuming the obligation becomes co-debtor or surety. The court relied on Article 1292 of the Civil Code and established jurisprudence limiting novation by strict proof of intent.

Court’s Analysis — No Novation Occurred

Applying the standards, the court found no novation. PN No. BDS-3605 contained express indications that it was “secured by REM” and stated collateral would be real estate, which negated any assertion that the consolidation extinguished the mortgages. The REMs themselves explicitly secured the principal amounts of P600,000/P150,000/P250,000 and also secured “those that may hereafter be obtained including the renewals or extension thereof,” demonstrating an intention that the mortgages would cover future consolidations or restructurings. The mortgage annotations at the back of TCT No. 105233 remained uncancelled, indicating continued subsistence of the mortgages. The conversion of the partnership into a corporation, without documentary or testimonial evidence of express release of prior debtors, did not effect subjective novation; at most Ajax became a co-debtor or surety. Because novation is never presumed and requires an unequivocal intent to extinguish the prior obligations, neither objective nor subjective novation was shown.

Foreclosure Inclusion of the Consolidated Loan and the Separate Unsecured Loan

The court held that inclusion of the consolidated P1,000,000 obligation under PN No. BDS-3605 in the foreclosure sale was proper because the consolidated PN was secured by the REMs as evidenced on its face and by the mortgages’ terms securing future loans and renewals. Conversely, inclusion of the separate PN No. BDS-3583 (P970,000) that was admittedly unsecured was improper; the Court of Appeals so found and that ruling was left undisturbed because Metrobank did not appeal the point. Importantly, the court determined that the erroneous inclusion of the unsecured PN BDS No. 3583 in the auction bid price did not invalidate the entire foreclosure proceeding. T

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