Case Summary (G.R. No. 241437)
Relevant Dates and Documents
Promissory Note and Deed of Chattel Mortgage executed September 27, 1993. Default period: January 15, 1996 to September 15, 1997 (21 installments). Deed of Sale with Assumption of Mortgage executed July 5, 1994 (between Mercy and Carmelita). Merger of FEBTC into BPI approved by SEC on April 7, 2000. BPI filed Complaint for Replevin and Damages on November 14, 2000. MeTC decision: June 10, 2004 (order modified September 6, 2004). RTC decision reversing MeTC: February 10, 2005. Court of Appeals decision affirming RTC with modification: July 11, 2005 (resolution denying reconsideration August 19, 2005). Supreme Court decision: March 25, 2015.
Transaction and Security Instrument
The spouses Domingo executed a promissory note for P629,856.00 payable in 48 monthly installments and concurrently executed a chattel mortgage over a 1993 Mazda 323 to secure the obligation. Makati Auto Center, Inc. assigned the note and mortgage to FEBTC. No new promissory note or chattel mortgage in the name of Carmelita was produced in the record.
Corporate Merger Transferring Rights
FEBTC later merged into BPI; by virtue of the merger BPI succeeded to FEBTC’s assets and liabilities, including its rights under the assigned promissory note and chattel mortgage. BPI pursued enforcement of the loan after the spouses’ default.
Default, Demand and Complaint
The spouses failed to pay 21 consecutive installments. BPI (as FEBTC’s successor) sent demand letters seeking payment of the loan balance or return of the vehicle for foreclosure. After noncompliance, BPI filed suit for replevin and damages (alternative: collection of sums, interest, charges, and attorney’s fees), naming a John Doe because the vehicle was then in the possession of a third party.
Defenses Raised by the Spouses Domingo
Affirmative defenses included lack of cause of action, lack of jurisdiction, need to serve John Doe by publication, and the assertion that Mercy sold the vehicle to Carmelita with the bank’s conformity and that the buyer assumed the mortgage (implying novation or substitution of debtors).
Trial Evidence Presented by Plaintiff (Magpusao)
BPI’s witness Magpusao testified regarding the original promissory note, the chattel mortgage, the assignment to FEBTC, the spouses’ default, demand letters, and the account balance (P275,562.00 as of October 31, 2000, exclusive of interest and charges). He acknowledged he began handling the account in 1997, had access to records, admitted FEBTC did not turn over all records to BPI, and that some checks allegedly representing payments by the new buyer were missing or only partly documented by photocopy.
Testimony of Respondent Amador Domingo
Amador testified that Mercy sold the car to Carmelita who assumed the mortgage; that Carmelita furnished a notarized deed of sale and issued checks to FEBTC; that postdated checks issued by Mercy were returned; that they received verbal assurances (by phone) from a FEBTC representative that papers were in order; and that no demand was made by FEBTC during the period Carmelita allegedly made payments. Amador admitted lack of personal knowledge of the bank dealings (his wife and Carmelita primarily transacted with FEBTC) and that the returned postdated checks had been discarded.
Metropolitan Trial Court Ruling
MeTC found BPI established a valid cause of action and ruled against Amador. The court applied the rule that novation is never presumed and requires express release of the original debtor; absent express release, a third person who assumes the obligation becomes a co-debtor or surety. MeTC awarded monetary reliefs: P275,562.00 with 36% interest per annum from November 15, 2000, 25% attorney’s fees later reduced to 10%, and costs of suit (later modified to 10% attorney’s fees).
Regional Trial Court and Court of Appeals Decisions
The RTC reversed the MeTC, finding novation by delegacion based on implied consent of the creditor, citing FEBTC/BPI’s alleged knowledge of the deed, acceptance of payments from Carmelita, return of the spouses’ checks, and delay in demanding payment. RTC awarded moral, exemplary damages, attorney’s fees and litigation expenses to Amador. The Court of Appeals affirmed the RTC’s finding of novation but deleted awards of moral/exemplary damages and attorney’s fees for noncompliance with requirements for reasoned decisions and lack of factual/legal justification, and also deleted litigation expenses and costs of suit.
Legal Principles on Novation Applied by the Supreme Court
The Court reiterated established doctrine: novation by substitution of debtor (expromision or delegacion) requires the creditor’s consent; while traditionally consent must be express, jurisprudence (e.g., Asia Banking) allows that consent may be inferred from clear and unmistakable acts of the creditor, but novation is never presumed and must be shown by express agreement or acts of equal import. The burden of proving novation rests upon the party asserting it.
Supreme Court’s Factual Findings and Evidentiary Analysis
The Supreme Court conducted a factual review justified by recognized exceptions (e.g., misapprehension of facts, conflicting findings). It found no express consent of BPI/FEBTC and concluded that the RTC and CA were incorrect to infer consent from the bank’s alleged knowledge of the deed, acceptance of payments, and delay in demanding payment. The Court emphasized that possession of the deed in the bank’s file does not equate to the bank’s conformity where the deed itself expressly states the parties would seek the mortgagee’s conformity, and no formal conformity was produced.
Novation Not Established — Effect of Payments and Return of Checks
The Court held that acceptance of payments by the creditor from a third person,
...continue readingCase Syllabus (G.R. No. 241437)
Citation and Procedural Posture
- G.R. No. 169407; 757 Phil. 23; First Division; Decision promulgated March 25, 2015.
- Petition for Review on Certiorari under Rule 45 filed by petitioner Bank of the Philippine Islands (BPI) seeking reversal and setting aside of the Court of Appeals Decision dated July 11, 2005 and Resolution dated August 19, 2005 in CA-G.R. SP No. 88836.
- Case originated in a Complaint for Replevin and Damages (alternative cause of action for collection of sum of money, interest and other charges, and attorney’s fees) filed by BPI in the Metropolitan Trial Court (MeTC) of Manila, Branch 9, docketed as Civil Case No. 168949-CV.
- Appeal progression: MeTC decision (June 10, 2004) → MeTC Order on reconsideration (Sept. 6, 2004) → Appeal to Regional Trial Court (RTC), Manila, Branch 26 (Civil Case No. 04-111100) decision (Feb. 10, 2005) → Petition to Court of Appeals (CA-G.R. SP No. 88836) decision (July 11, 2005) and resolution denying partial reconsideration (Aug. 19, 2005) → Petition for Review to the Supreme Court.
Facts Established in the Record
- On September 27, 1993, Amador Domingo and his wife, Mercy Maryden Domingo (spouses 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.
- On the same date, the spouses Domingo executed a Deed of Chattel Mortgage over a 1993 Mazda 323 (motor no. B6-270146; serial no. BG1062M9100287) to secure the promissory note.
- Makati Auto Center, Inc. assigned the promissory note and chattel mortgage to Far East Bank and Trust Company (FEBTC).
- SEC approved the Articles and Plan of Merger between BPI (surviving corporation) and FEBTC (absorbed corporation) on April 7, 2000; the merger resulted in transfer of FEBTC’s assets and liabilities to BPI (records also reflect merger formalization referenced as April 10, 2000 in parts of the record).
- The spouses Domingo defaulted by failing to pay 21 consecutive monthly installments from January 15, 1996 to September 15, 1997.
- BPI demanded payment of the balance and/or return of the vehicle to effect foreclosure; when spouses did not comply, BPI filed suit on November 14, 2000. A John Doe defendant was included because the vehicle was then in possession of an unidentified third person.
- Mercy Maryden Domingo died on November 27, 2003.
Pleadings, Defenses and Claims
- BPI’s complaint sought replevin and damages or, alternatively, collection for money, interest, charges and attorney’s fees.
- Affirmative defenses raised by the spouses Domingo included: lack of cause of action by BPI, lack of jurisdiction, that John Doe was an indispensable party and service by publication should precede trial, and an assertion that Mrs. Domingo had previously sold the car to Carmelita S. Gonzales with the bank’s conformity and that the buyer assumed the mortgaged loan.
- Amador sought damages from BPI for alleged malicious prosecution and other harms (claiming moral damages P200,000; attorney’s fees P75,000; appearance fee P5,000 as pleaded in testimony).
Evidence Presented at Trial (Witness Testimony and Documents)
- Vicente Magpusao (former FEBTC employee; then Account Analyst of BPI) testified for plaintiff:
- Identified the Promissory Note, Chattel Mortgage and confirmed assignment by Makati Auto Center to FEBTC.
- Testified that spouses Domingo defaulted on 21 successive installments and that a demand letter was sent.
- Based on Statement of Account dated October 31, 2000, outstanding balance was P275,562.00 exclusive of interest and charges.
- Explained he first handled the account in 1997; had access to promissory note, chattel mortgage and payment records; subsidiary ledger showed three checks from the new buyer had bounced with only one photocopy (P325,431.60) available; two checks missing.
- Testified that the bank did not approve the Deed of Sale with Assumption of Mortgage and that FEBTC did not turn over all records to BPI.
- Amador Domingo testified for the defense:
- Acknowledged execution of promissory note and chattel mortgage; recounted that his wife issued forty-eight postdated checks and that twelve checks were cleared through October 1994.
- Recounted that Carmelita Gonzales expressed interest to buy the car and assume the mortgage; after a Deed of Sale with Assumption of Mortgage was furnished to the bank, Carmelita allegedly issued checks/payments to FEBTC and remaining postdated checks of the spouses were returned.
- Stated Carmelita made payments from November 14, 1995 to December 1995 and on May 19, 1997 issued a check (allegedly P385,431.60) that was dishonored for account closed; testified about receipt of demand letters from law firms and responses by counsel.
- Testified to telephone assurances from a Marvin Orence/Oronce of FEBTC that there was “nothing to worry” and that documents were “in order.”
- Admitted that he did not personally attend bank meetings between his wife and Carmelita and that the alleged returned postdated checks had been discarded and were not presented in evidence.
MeTC Findings and Ruling (June 10, 2004) and Reconsideration Order (Sept. 6, 2004)
- MeTC concluded BPI established a cause of action by preponderance of evidence and ruled in favor of BPI.
- MeTC applied the rule that novation is never presumed and must be clearly shown by express agreement or acts of equal import; subjective novation by substitution of debtor requires an express release of the old debtor.
- MeTC found Amador’s bare testimony insufficient to prove express release of the spouses Domingo and to show Carmelita had expressly assumed their obligation; at best Carmelita became a co-debtor or surety.
- Dispositive portion of MeTC Decision (June 10, 2004) ordered Amador to:
- Pay P275,562.00 plus interest at 36% per annum from November 15, 2000 until fully paid;
- Pay attorney’s fees equal to 25% of total amount due; and
- Pay costs of suit.
- On motion for reconsideration, MeTC affirmed its decision but reduced attorney’s fees from 25% to 10% by Order dated September 6, 2004.
RTC Findings and Ruling (Feb. 10, 2005) — Trial Court on Appeal
- On appeal, the RTC reversed the MeTC, holding that novation may be implied and that the consent of the creditor to substitution of debtor need not always be express.
- RTC found circumstances demonstrating implied consent by FEBTC/BPI:
- Knowledge of the Deed of Sale and Assumption of Mortgage by FEBTC but no objection interposed;
- Return of spouses Domingo’s personal checks by FEBTC and acceptance of payments made by Carmelita;
- BPI’s demand for payment from spouses Domingo only after 30 months from the time Carmelita allegedly assumed payment, indicating acquiescence by the creditor.
- Accordingly, the RTC dismissed BPI’s complaint and awarded damages to Amador: P100,000 moral damages; P50,000 exemplary damages; P50,000 attorney’s fees; P25,000 litigation expenses; and costs of suit.
Court of Appeals Decision (July 11, 2005) and Resolution (Aug. 19, 2005)
- Court of Appeals affirmed RTC’s finding that novation (by delegacion) occurred, reasoning that creditor consent may be inferred from acts of the creditor when such acts constitute a clear and unmistakable expression of consent (citing Babst v. Court of Appeals and other jurisprudence).
- CA relied on the following factual inferences supporting consent by FEBTC:
- FEBTC returned the postdated checks issued by Mercy (spouse);
- FEBTC accepted payments made by Carmelita;
- FEBTC did not object despite knowledge of the Deed of Sale with Assumption of Mortgage;
- FEBTC (and later BPI) did not demand payment from spouses Domingo for thirty months.
- CA rejected BPI’s arguments regarding the alleged insufficiency of payments by Carmelita, observing trial testimony (Vicente Magpusao) and subsidiary ledger entries to support that Carmelita made several payments and that three checks (of which one photocopy existed) were recorded as bounced.
- CA deleted the RTC’s award of moral and exemplary damages, attorney’s fees, litigation expenses and costs of suit because the RTC’s dispositive awards were not supported by explicit factual and legal reasoning in the body of the decision and in light of constitutional and jurisprudential mandates for express findings (citing Solid Homes, Inc. and constitutional requirements on judicial decisions).
- Court of Appeals denied BPI’s Motion for Partial Reconsideration in its August 19, 2005 Resolution.
Issue Before the Supreme Court
- Sole issue presented: Whether or not novation of the loan obligation with chattel mortgage of the spouses Domingo to BPI occurred such that the spouses Domingo were released from the obligation and Carmelita Gonzales was substituted as debtor.
Legal Principles on Novation Applied by the Supreme Court
- Novation by substitution of the debtor (subjective novation) extinguishes the original obligation by replacing the debtor with a new one; it requires the consent of the creditor (Article 1293 New Civil Code).
- Two specific forms of substitution recognized: expromision (third person assumes obligation without debtor’s initiative) and delegacion (debtor offers a third person and creditor accepts); in both forms creditor consent is indispensable (citing De Cortes v. Venturanza and related authorities).
- Novation is never presumed; it must be established clearly by express agreement or acts of equal import (citing Ajax Marketing and related jurisprudence).
- Creditor consent may be express, but may also be inferred from acts when those acts constitute a clear and unmistakable expression of consent (qualified rule from Asia Banking v. Elser and related authorities).
- The burden of proving novation rests on the party asserting it.
Supreme Court’s Review Standard and Exceptions to Deference on Facts
- Ordinarily Supreme Court under Rule 45 reviews errors of law and defers to factual findings of lower courts; findings of facts by the Court of Appeals are generally conclusive.
- The Court recognized exceptions allowing factual review here: inference manifestly mist