Case Summary (G.R. No. 154377)
Factual Background
The dispute arose from an omnibus credit line of Php 10,000,000 granted by International Exchange Bank to Rudy S. Labos & Associates, Inc. (RSLAI) under a Letter Agreement of June 6, 2003 and a Credit Agreement of July 2, 2003. As interim collateral, RSLAI executed a Deed of Assignment dated July 2, 2003 assigning its rights over Condominium Unit 23-A Luna Gardens, Rockwell Center, Makati City to the Bank, with a covenant that the assigned property shall not be transferred without the Bank’s written consent. RSLAI executed several promissory notes that matured July 30, 2004 and thereafter defaulted. The parties negotiated a consolidation and extension that yielded Promissory Note No. SCL04469 dated October 29, 2004, which matured January 31, 2005. RSLAI again defaulted. Thereafter Rockwell, acting on a prior Contract to Sell with RSLAI, accepted an assignment and later effectuated transfer of the unit to JHL & Sons Realty, Inc., producing a conflict of interests between the Bank and subsequent transferees.
Trial Court Proceedings
The Bank filed an action for sum of money with prayer for preliminary attachment against RSLAI, the Spouses Labos, and Rockwell. The RTC found RSLAI and the Spouses Labos jointly and severally liable to the Bank for Php 5,729,726.94 plus interest and collection attorney’s fees, but dismissed the complaint against Rockwell for failure of the Bank to establish Rockwell’s liability by a preponderance of evidence. The RTC viewed the Deed of Assignment as an agreement between RSLAI and the Bank and held that Rockwell was not a party thereto.
Court of Appeals Proceedings
On partial appeal the CA, in a November 23, 2011 Decision, modified the RTC ruling and declared Rockwell jointly and severally liable with RSLAI and the Spouses Labos, reasoning that Rockwell’s signature on the Deed of Assignment constituted assent that subrogated the Bank to the buyer’s rights and that novation had occurred thereby creating a new contract to sell. Rockwell filed a motion for reconsideration. By Resolution dated December 20, 2012, the CA granted reconsideration, reversed its earlier decision, and affirmed the RTC in toto, holding that Rockwell did not assume any obligation under the Deed of Assignment and that its signing was a mere conforme to RSLAI’s act of assignment in accordance with the Contract to Sell.
Issues Presented
The dispositive issue was whether Rockwell could be held liable to International Exchange Bank for RSLAI’s unpaid loan obligations in the amount of Php 5,729,726.94 by virtue of the Deed of Assignment and Rockwell’s signed conformity thereto, including whether novation or subrogation rendered Rockwell a party to or successor in interest under the Contract to Sell.
Supreme Court's Disposition
The petition was denied for lack of merit. The Supreme Court affirmed the CA’s December 20, 2012 Resolution and the RTC Decision dated December 22, 2009 in Civil Case No. 05-313, absolving Rockwell of liability to the Bank. The Court found that Rockwell was not bound by the Deed of Assignment and that novation, bad faith, double sale, and solidary liability had not been established.
Contracts Bind Only the Parties
The Court reiterated the principal of the relativity of contracts embodied in Art. 1311, Civil Code, namely that contracts take effect only between the parties, their assigns, and heirs, and cannot prejudice or favor a third person absent transmissibility by stipulation or law. The Deed of Assignment identified only RSLAI as assignor and the Bank as assignee; Rockwell’s signature on a conforme line did not make Rockwell a contracting party.
Nature and Purpose of the Deed of Assignment
The Court analyzed the Deed of Assignment’s recitals and operative provisions and concluded that the instrument was executed as an interim security to guarantee RSLAI’s loan obligations. The Deed expressly contemplated a future Deed of Real Mortgage once title issued to RSLAI and provided that the Deed of Assignment would become null and void upon such mortgage. Consequently, the Deed partook of the nature of a mortgage rather than an absolute conveyance, consistent with the maxim that an assignment to guarantee is in effect a mortgage.
Interpretation of Rockwell’s Conforme
The Court found that Rockwell’s signing of the conforme portion was required by the Contract to Sell, which accorded the developer the right to give express written consent to any transfer or assignment by the purchaser. The Court held that Padilla’s signature reflected Rockwell’s recognition of RSLAI’s exercise of its contractual right to assign and did not amount to assumption of RSLAI’s obligations toward the Bank.
Novation Not Proven
The Court held that novation is never presumed and must be proven either by express stipulation or by irreconcilable incompatibility between the old and new obligations. The Court found no express agreement that the original Contract to Sell would be extinguished in favor of a new contract with the Bank as purchaser. The Contract to Sell and the Deed of Assignment were compatible and could coexist; therefore novation did not occur.
Absence of Bad Faith, Double Sale, or Doubl
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Case Syllabus (G.R. No. 154377)
Parties and Procedural Posture
- International Exchange Bank filed an action for sum of money with prayer for preliminary attachment against Rudy S. Labos & Associates, Inc., Spouses Rodolfo S. Labos and Consuelo R. Labos, and Rockwell Land Corporation.
- The Regional Trial Court of Makati City, Branch 62 rendered a Decision dated December 22, 2009 that held Rudy S. Labos & Associates, Inc. and the Spouses Labos jointly and severally liable to International Exchange Bank but dismissed the complaint as to Rockwell Land Corporation.
- The Court of Appeals issued a Decision dated November 23, 2011 that modified the RTC Decision by holding Rockwell Land Corporation jointly and severally liable with the other defendants.
- The Court of Appeals subsequently granted Rockwell Land Corporation’s Motion for Reconsideration and, by Resolution dated December 20, 2012, reversed its November 23, 2011 Decision and affirmed the RTC Decision in toto.
- International Exchange Bank filed a Petition for Review on Certiorari to the Court seeking reversal of the CA Resolution of December 20, 2012.
- The Supreme Court denied the petition and affirmed the CA Resolution dated December 20, 2012 and the RTC Decision dated December 22, 2009 in toto.
Key Factual Allegations
- Rudy S. Labos & Associates, Inc. obtained a Php 10,000,000 credit line from International Exchange Bank under a Letter Agreement dated June 6, 2003 and a Credit Agreement dated July 2, 2003.
- Rudy S. Labos & Associates, Inc. executed a Deed of Assignment dated July 2, 2003 assigning its rights over Unit 23-A Luna Gardens, Rockwell Center, Makati City as partial security for the credit line.
- Spouses Rodolfo S. Labos and Consuelo R. Labos executed a Continuing Surety Agreement dated July 2, 2003 as additional security.
- Rudy S. Labos & Associates, Inc. executed several promissory notes aggregating Php 9,438,744.94 that matured in 2004, defaulted, and later consolidated into Promissory Note No. SCL04469 dated October 29, 2004 for Php 5,434,709.95 maturing January 31, 2005, which also remained unpaid.
- International Exchange Bank issued demand letters and, upon inquiry, learned that Rudy S. Labos & Associates, Inc. executed a Deed of Assignment dated August 25, 2004 transferring the subject property to JHL & Sons Realty, Inc., with Condominium Certificate No. 85534 issued October 1, 2004.
- International Exchange Bank alleged that Rockwell Land Corporation allowed the transfer without obtaining the bank’s written consent under Section 2.04 of the Deed of Assignment and thus caused the bank’s substantial loss of collateral.
- Rudy S. Labos & Associates, Inc. and the Spouses Labos pleaded novation, challenged the service of summons, and counterclaimed for moral and exemplary damages and attorney’s fees.
- Rockwell Land Corporation denied privity with the Deed of Assignment, asserted that its signature on the document merely signified conformity under the Contract to Sell, alleged absence of obligation or liability under the Deed of Assignment, and counterclaimed for attorney’s fees and damages.
Issues
- The principal issue was whether Rockwell Land Corporation should be held liable to International Exchange Bank for the unpaid obligations of Rudy S. Labos & Associates, Inc. in the amount of Php 5,729,726.94.
- Subsidiary issues were whether the Deed of Assignment created privity between Rockwell Land Corporation and International Exchange Bank, whether novation occurred, whether Rockwell Land Corporation acted in bad faith or committed a double sale, and whether solidary liability coul