Case Summary (G.R. No. 174631)
Petitioner
Swagman Hotels and Travel, Inc. (joined in the trial court by its President and Vice-President as co-defendants).
Respondents
Hon. Court of Appeals (as tribunal of review) and Neal B. Christian (as plaintiff below).
Key Dates
– Promissory notes executed: August 7, 1996; March 14, 1997; July 14, 1997.
– Alleged renegotiation and payment adjustment: December 1997.
– Complaint filed: February 2, 1999.
– Trial court decision: May 5, 2000.
– Court of Appeals decision: September 5, 2003; resolution denying reconsideration: December 4, 2003.
– Supreme Court decision: April 8, 2005.
Applicable Law
– 1987 Constitution of the Republic of the Philippines.
– 1997 Rules of Civil Procedure, Rule 10, Section 5.
– Civil Code of the Philippines: Articles on novation (Art. 1292) and payment of interest before principal (Art. 1253).
Issue
Whether a complaint that alleges no cause of action at the time of filing may be “cured” by the subsequent accrual of a cause of action during the pendency of the suit under Section 5, Rule 10 of the Rules of Civil Procedure.
Facts
- In 1996–1997, Swagman, through Infante and Hegerty, borrowed three sums of US$50,000 each from Christian, evidenced by promissory notes payable in three years with 15% interest per annum, payable quarterly.
- Beginning January 1998, Swagman paid only 6% interest per annum and remitted US$750 monthly. Christian accepted these payments and waived the original interest, as reflected in receipts labeling them “Investment Payment” and “Capital Repayment.”
- On December 16, 1998, Christian declared the loans terminated and demanded US$150,000 plus unpaid interest.
- On February 2, 1999, Christian sued Swagman, Infante, and Hegerty for the full principal, unpaid interest from January to December 1998, moral damages, attorney’s fees, and costs.
- Defendants answered, pleading lack of cause of action (notes not yet due) and novation (agreement to reduce interest and amortize principal).
Trial Court Decision
– Declared the first two notes (due August 7, 1999 and March 14, 2000) became demandable during trial.
– Held no novation of principal, only modification of interest rate to 6%.
– Applied Section 5, Rule 10 to permit recovery on the first two notes once they matured, despite lack of cause at filing.
– Exonerated Infante and Hegerty from personal liability.
Court of Appeals Ruling
– Affirmed in toto:
• No novation of principal obligation; Christian merely accommodated monthly payments.
• Under Section 5, Rule 10, introduction of evidence that notes matured cured initial lack of cause of action.
• Infante and Hegerty properly absolved of personal liability.
Issues on Petition for Review
- Whether Infante and Hegerty, having been dropped as parties by a final trial court order, could nonetheless be treated as appellants.
- Whether a complaint without any cause of action at filing may be validated by evidence of subsequent maturity of obligations.
- Whether a valid novation was effected in December 1997, altering the original terms of the promissory notes.
Supreme Court Ruling
– GRANTED the petition.
– HOLDING on Cause of Action: A cause of action must exist at the time of commencement of suit; an action prematurely filed is groundless and cannot be “cured” by subsequent accrual of claim. Section 5, Rule 10 only applies to defective pleadings that omit essential facts of an existing cause, not to the absence of any cause at filing.
– HOLDING on Novation: The trial court and CA findings denying novation of interest ignore uncontroverted receipts and a summary of payments showing principal amortization and waiver of interest. The December 1997 renegotiation effected a modificatory novation: interest was waived and principal was repayable in US$750 monthly installments. No default having occurred, Christian had no cause of action in February 1999.
– HOLDING on Personal Liability: The CA’s misnaming of Infante and Hegerty as appellants was harmless, as it correctly held them not personally liable.
– RESULT: The decisions below are REVERSED and SET ASIDE. Civil Case No. 4282-R is DISMISSED for lack of cause of action. No costs.
Legal Analysis
- Cause of Action: Under Rule 2, Section 2, a cause of action requires (a) plaintiff’s right, (b) defendant’s obl
Case Syllabus (G.R. No. 174631)
Facts
- In 1996 and 1997, Swagman Hotels and Travel, Inc., through its president (Rodney David Hegerty) and its corporate counsel (Atty. Leonor L. Infante), obtained three loans from Neal B. Christian, each evidenced by a US$50,000 promissory note dated August 7, 1996; March 14, 1997; and July 14, 1997.
- Each note provided for a three-year term and 15% per annum interest payable quarterly.
- Between August 1996 and December 1997, the petitioner paid interest as agreed.
- In December 1997, facing business reverses, the parties allegedly renegotiated the terms: Swagman claims Christian waived all 15% interest and accepted US$750 monthly payments toward principal; Christian contends he only agreed to reduce the interest rate to 6% per annum, payable monthly.
- Starting January 1998, Swagman made monthly payments of US$750, evidenced by cash vouchers labeled “Investment Payment” (January 1998) and “Capital Repayment” (February 1998 to September 1999), all accepted by Christian or his representatives.
- By December 16, 1998, Christian sent a demand letter declaring the loans terminated and demanding US$150,000 principal plus US$13,500 unpaid interest.
- On February 2, 1999, Christian sued in the Regional Trial Court of Baguio City (Branch 59) for US$150,000 principal, US$13,500 interest, ₱100,000 moral damages, ₱50,000 attorney’s fees, and costs, alleging underpayment of interest since January 1998.
Procedural History
- Swagman, Hegerty, and Infante answered, pleading:
• Lack of cause of action (notes not yet due)
• Extinctive novation or waiver of interest
• Payment in installments
They counterclaimed for moral and exemplary damages and attorney’s fees. - Trial Court Decision (May 5, 2000):
• Declared the first two notes (due August 7, 1999 and March 14, 2000) matured during the pendency;
• Found only a reduction of interest from 15% to 6%, no novation;
• Ordered payment of US$100,000 principal on the first two notes plus 6% interest;
• Held Hegerty and Infante not personally liable. - Court of Appeals Decision (September 5, 2003):
• Affirmed the trial court in toto;
• Emphasized strict requirements for novation;
• Applied Section 5, Rule 10 to allow Christian to recover on matured notes despite initial prematurity objection. - CA Resolu