Title
California Bus Lines Inc. vs. State Investment House Inc.
Case
G.R. No. 147950
Decision Date
Dec 11, 2003
Delta assigned promissory notes to SIHI; CBLI defaulted, leading to foreclosure. SIHI’s collection claim upheld; compromise agreement didn’t bar SIHI. Attachment valid; CBLI’s counterclaim dismissed.

Case Summary (G.R. No. 147950)

Factual Background

Delta obtained a P25,000,000 credit line from SIHI in 1979 and discounted receivables with SIHI; Delta became indebted to SIHI. CBLI purchased 35 M.A.N. diesel buses and two engines from Delta and, to secure payment, executed sixteen promissory notes (each for P2,314,000) and chattel mortgages. CBLI defaulted; on October 7, 1981 CBLI and Delta entered a restructuring agreement revising payment terms, increasing interest and fees, and providing Delta authority to take over CBLI management upon specified defaults. In September 1983 Delta assigned five of the sixteen promissory notes to SIHI. SIHI thereafter demanded direct remittance from CBLI. Delta and CBLI later entered a compromise (July 24, 1984) in the Pasay injunction case providing for extrajudicial foreclosure of the chattel mortgages over the 35 buses. SIHI instituted a separate collection action against CBLI for the five assigned notes, obtained preliminary attachments, and eventually the parties litigated the enforceability of the five notes, the effect of the restructuring and compromise agreements, and the validity of the attachments and foreclosures.

Issues Presented

  1. Whether the October 7, 1981 restructuring agreement between Delta and CBLI novated (i.e., extinguished) the five promissory notes assigned to SIHI.
  2. Whether the July 24, 1984 compromise agreement between Delta and CBLI superseded and discharged CBLI’s obligations under the five promissory notes assigned to SIHI.
  3. Related contentions: whether SIHI was estopped from pursuing its claims by failure to intervene in the Pasay case; whether Article 1484(3) (no deficiency action after chattel mortgage foreclosure) barred SIHI recovery; and the validity of SIHI’s preliminary attachment and CBLI’s counterclaim for damages.

Legal Principles Governing Novation and Assignment

  • Novation is the extinguishment of an existing obligation by the substitution of a new one; it may be extinctive (old obligation terminated) or modificatory (old obligation persists to the extent compatible with the new agreement).
  • Four requisites for novation: (1) a previous valid obligation; (2) agreement of all concerned to a new contract; (3) extinguishment of the old obligation; and (4) birth of a valid new obligation. Novation is never presumed; the animus novandi must appear expressly or by acts that are clear and unequivocal.
  • Novation by implication requires clear incompatibility between the old and new obligations such that they cannot stand together. Changes in incidental elements (e.g., schedule, increased incidental charges) that do not alter the object or principal conditions ordinarily do not constitute novation. Precedents emphasize that an instrument which expressly recognizes the old obligation and only changes payment terms or adds compatible obligations ordinarily does not novate the original obligation.
  • Assignment pendente lite: transfer of an interest while an action is pending separates the assigned interest from the pending action unless the court directs substitution or joinder; intervention by the assignee is permissive, not mandatory.
  • Article 1878 of the Civil Code requires a special power of attorney to compromise on behalf of another (i.e., to bind a third‑party creditor by compromise).
  • Article 1484(3) bars a vendor who forecloses a chattel mortgage in a sale of personal property from suing for any unpaid balance, but its applicability depends on whether the creditor foreclosing is the same party entitled to collect the debt.

Court’s Analysis on Novation (Restructuring Agreement)

  • The Court examined the restructuring agreement’s terms and found no express declaration extinguishing the original promissory notes. Paragraph 8 of the restructuring expressly ratified the terms of the promissory notes and provided that, “Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN Nos. ... shall continue to govern the relationship between the parties,” and the chattel mortgages and other securities “shall continue to secure the obligation until full payment.”
  • The restructuring adjusted the schedule of payments, increased interest and added documentation and restructuring fees, and provided additional remedies (e.g., management takeover on certain defaults). These adjustments were characterized as changes in incidental elements and additional security/remedies but not changes to the object or principal conditions of the obligations.
  • Given the explicit recognition of the original notes and absence of incompatibility between the notes and the restructuring agreement, the Court held that the restructuring agreement was at most modificatory and did not extinguish the original promissory notes by novation. Novation was not established expressly, nor was there the irreconcilable incompatibility required for an implied novation.

Court’s Analysis on the Effect of the Compromise Agreement

  • The Court noted that by the time Delta and CBLI executed the July 24, 1984 compromise, the five promissory notes at issue had already been assigned to SIHI in September 1983; thus Delta no longer had the rights to those notes and could not validly compromise SIHI’s proprietary rights in them.
  • The Deed of Assignment/Continuing Deed of Assignment limited Delta’s authority; any authority to compromise SIHI’s rights would have required a special power of attorney per Article 1878, which was not present. SIHI’s December 13, 1983 demand to CBLI to remit directly to SIHI further evidenced that Delta’s limited collection authority had been revoked when SIHI elected to collect directly.
  • The compromise agreement contained an express clause stating it constituted a full and final settlement of rights and obligations “by and between the plaintiffs and the defendants” in that action (Delta and CBLI). The Court held that a compromise binds only the parties thereto; absent SIHI’s participation or an express authority for Delta to compromise SIHI’s rights, the compromise did not bind SIHI or extinguish CBLI’s obligations to SIHI under the five assigned notes.
  • Consequently, res judicata did not bar SIHI’s separate action: there was no identity of parties nor identity of subject matter with respect to the five assigned notes.

Court’s Analysis on Estoppel, Intervention and Assignment Pendente Lite

  • SIHI’s non‑intervention in the Pasay injunction case did not estop it from instituting an independent action against CBLI. The assignment in September 1983 had effectively severed SIHI’s rights from the litigation then pending between Delta and CBLI. Intervention is permissive; the assignee is not required to intervene if the assignee prefers to vindicate rights in a separate suit. The rule on assignment pendente lite supports continuation by or against the original parties but does not preclude a separate action by an assignee whose

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