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ARTICLE 1293 REYES V SECRETARY OF JUSTICE 1996
FACTS - Elsa Reyes is the president of Eurotrust Capital Corporation (EUROTRUST), a domestic corporation engaged in credit financing. Graciela Eleazar, private respondent, is the president of B.E. Ritz Mansion International Corporation (BERMIC), a domestic enterprise engaged in real estate development. The other respondent, Armed Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-MBAI), is a corporation duly organized primarily to perform welfare services for the Armed Forces of the Philippines. - Eurotrust and Bermic entered into a loan agreement. Pursuant to the said contract, Eurotrust extended to Bermic P216.053,126.80 to finance the construction of the latter's Ritz Condominium and Gold Business Park. In turn, Bermic issued 21 postdated checks to cover payments of the loan packages. However, when those checks were presented for payment, the same were dishonored by the drawee bank, Rizal Commercial Banking Corporation (RCBC), due to stop payment order made by Graciela Eleazar. Despite Eurotrust's notices and repeated demands to pay, Eleazar failed to make good the dishonored checks, prompting Reyes to file against her several criminal complaints for violation of B.P. 22 and estafa under Article 315, 4th paragraph, No. 2 (d) of the Revised Penal Code. - Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust, by buying from it government securities, conducted its own investigation and found that after Eurotrust delivered to AFP-MBAI the securities it purchased, the former borrowed the same securities but failed to return them to AFP-MBAI; and that the amounts paid by AFP-MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to Bermic and others. - On February 15, 1991, the representatives of Eurotrust and Bermic agreed that Bermic would directly settle its obligations with the real owners of the fundAFP-MBAI and DECS-IMC. Pursuant to this understanding, Bermic negotiated with AFP-MBAI and DECS-IMC and made payments to the latter. In fact, Bermic paid AFP-MBAI P31,711.11 and a check of P1-million. - However, Graciela Eleazar later learned that Elsa Reyes continued to collect on the postdated checks issued by her (Eleazar) contrary to their agreement. So, Bermic wrote to Eurotrust to hold the amounts "in constructive trust" for the real owners. But Reyes continued to collect on the other postdated checks dated April 17 to June 28, 1991. Upon her counsel's advise, Eleazar had the payment stopped. Hence, her checks issued in favor of Eurotrust were dishonored. - After investigation, the Office of the Provincial Prosecutor of Rizal issued a resolution dismissing the complaints filed by Elsa Reyes against Graciela Eleazar on the ground that when the latter assumed the obligation of Reyes to AFP-MBAI, it constituted novation, extinguishing any criminal liability on the part of Eleazar. - Reyes filed a petition for review of the said resolution with respondent Secretary of Justice contending that novation did not take place. - The Secretary of Justice dismissed the petition holding that "the novation of the loan agreement prevents the rise of any incipient criminal liability since the novation had the effect of canceling the checks and rendering without effect the subsequent dishonor of the already cancelled checks." - At the time of the pendency of the cases filed by Elsa Reyes against Graciela Eleazar, AFP-MBAI lodged a separate complaint for estafa and a violation of BP 22 against Elsa Reyes with the office of the city prosecutor of Quezon City docketed as I.S. 92-926. Between August 1989 and September 1990, Eurotrust offered to sell to AFP-MBAI various marketable securities, including government securities - AFP-MBAI decided to purchase several securities amounting to P120,000,000.00 from Eurotrust. From February 1990 to September 1990, a total of 21 transactions were entered into between Eurotrust and AFP-MBAI. Eurotrust delivered to AFP-MBAI treasury notes amounting to P73 million. However, Eurotrust fraudulently borrowed all those treasury notes from the AFP-MBAI for purposes of verification with the Central Bank. Despite AFP-MBAI's repeated demands, Eurotrust failed to return the said treasury notes. Instead it delivered 21 postdated checks in favor of AFP-MBAI which were dishonored upon presentment for payment. Eurotrust nonetheless made partial payment to AFPMBAI amounting to P35,151,637.72. However, after deducting this partial payment, the amounts of P73 million treasury notes with interest and P35,151,637.72 have remained unpaid. Consequently, AFP-MBAI filed with the Office of the City Prosecutor of Quezon City a complaint for violation of BP 22 and estafa against Elsa Reyes. - Reyes interposed the defense of novation and insisted that AFP-MBAI's claim of unreturned P73 million worth of government securities has been satisfied upon her payment of P30 million. With respect to the remaining P43 million, the same was paid when Eurotrust assigned its Participation Certificates to AFPMBAI. - Office of the City Prosecutor of Quezon City issued a resolution recommending the filing of an information against Reyes for violation of BP 22 and estafa. - Reyes filed a petition for review with respondent Secretary of Justice. The latter

. 23 1996. Novation is never presumed.On February 2. On the same day. It is evident that the two letters merely gave respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and DECS-IMC.On Dec. Petitioner Romeo Garcia and Eduardo de Jesus borrowed P400. GARCIA V LLAMAS PANGANIBAN. . finding no reversible error in the decision appealed from dated May 12.The first Department of Justice Resolution dated January 23.Nothing therein that would evince that respondent AFP-MBAI agreed to substitute for the petitioner as the new creditor of respondent Eleazar in the contract of loan. Disposition ACCORDINGLY. when there is clearly no agreement to release petitioner from her responsibility. It is a rule that novation by substitution of debtor must always be made with the consent of the creditor. No new agreement for substitution of creditor war forged among the parties concerned which would take the place of the preceding contract. The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar who acquiesced to assume the obligation of petitioner under the contract of sale of securities. Hence.The consent of the creditor to a novation by change of debtor is as indispensable as the creditor's consent in conventional subrogation in order that a novation shall legally take place. ISSUE WON novation took place in the instant case HELD NO Ratio In order that a novation can take place. c) there must be the extinguishment of the old contract. DEC 8. There must be an express intention to novate — animus novandi. and d) there must be the validity of the new contract.P. . Her motion for reconsideration was likewise denied in a Resolution 5 dated June 27. 22 and estafa ruled that the contract of loan between petitioner and respondent Eleazar had been novated when they agreed that respondent Eleazar should settle her firm's (BERMIC) loan obligations directly with AFP-MBAI and DECS-IMC instead of court which pointed out that "the first contract was novated in the sense that there was a substitution of creditor" 6 when respondent Eleazar. however.Novation by substitution of creditor requires an agreement among the three parties concerned — the original creditor.000 from Respondent Dionisio Llamas. . . There was no mention whatsoever of AFP-MBAI's consent to the new agreement between petitioner and respondent Eleazar much less an indication of AFP-MBAI's intention to be the substitute creditor in the loan contract. It is essentially an agreement between petitioner and respondent Eleazar only.2 |Page dismissed the petition on the ground that only resolutions of the prosecutors dismissing criminal complaints are cognizable for review by the Department of Justice. The absence of a new contract extinguishing the old one destroys any possibility of novation by conventional subrogation . The foregoing elements are found wanting in the case at bar. . directly paid her obligations to AFP-MBAI. It is a new contractual relation based on the mutual agreement among all the necessary parties. 2003 FACTS . prohibition and mandamus with the respondent court which. does not constitute novation.A thorough examination of the records shows that no hard evidence was presented which would expressly and unequivocably demonstrate the intention of respondent AFP-MBAI to release petitioner from her obligation to pay under the contract of sale of securities. the debtor and the new creditor. b) there must be an agreement of the parties concerned to a new contract. the same is hereby AFFIRMED in all respects. with the agreement of Reyes. . 1995. Hence. petitioner seeking the nullification of either of the two resolutions of the respondent Secretary of Justice filed a petition for certiorari. there is no novation if no new contract was executed by the parties. denied and dismissed her petition. the concurrence of the following requisites is indispensable: a) there must be a previous valid obligation.The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted them does not ipso facto result in novation. 1994. this present petition. 1992 which sustained the Provincial Prosecutor's decision dismissing petitioner's complaints against respondent Eleazar for violation of B. they executed a promissory note wherein they bound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5% interest per month .Last three essential requisites of novation are wanting in the instant case. 1995.

However.000.000 of the debt. He then filed for the recovery of said amount. the latter knew the former to be only an accommodation part 3. was totally in accord with the terms thereof. As the CA correctly observed. Verily. petitioner would be liable for the promissory note. the check answers for it. . 1997 until the same shall have been fully paid. it must be noted that for novation to be valid and legal.00 representing interests already paid by x x x de Jesus. . alternatively.that he signed the promissory note allegedly as a mere accommodation party. He cannot avail of the Negotiable Instrument’s Law’s provisions on the liabilities and defenses of an accommodation party.Respondent however said that the said check has bounced . The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the acceptance of the check.00 having been advance interest thereon for two months. the two can stand together.De Jesus in his answer said that out of the supposed P400.000.Moreover. Won the CA was correct in treating the case as a summary judgement HELD 1.The CA affirmed the trial court’s ruling regarding Garcia. or that the check would take the place of the note. There is no incompatibility between the promissory note and the check. Such payment was already provided for in the promissory note and. NO . less the amount of P120. the check -. On the one hand.00. The respondent nonetheless filed the instant case while his retirement was being processed. the check was issued precisely to pay for the loan that was covered by the promissory note jointly and severally undertaken by petitioner and De Jesus. .3 |Page . not a genuine.Petitioner’s Answer apparently raised several issues -.000. NO novation took place. still.The trial court found in favor of the respondent. since this is not a negotiable instrument.Neither could the payment of interests change the terms and conditions of the obligation. these are not factual issues requiring trial. facts are asserted in the complaint regarding which there is yet no admission. an accommodation party is liable for the instrument to a holder for value even if. WON the defense that petitioner was only an accommodation party had any basis 3. the check had been issued precisely to answer for the obligation. but the issues are fictitious as shown by the pleadings. issue regarding any material fact. Novation is never presumed. According to the CA. and that.bounced upon its presentment. .00 representing the principal amount plus 5% interest thereon per month from January 23. the issuance of the check and respondent’s acceptance thereof novated or superseded the note. He claims to have paid P120. and that the obligation was extinguished by either payment or novation. despite the repeated demands by the respondent. like the check. Even granting arguendo that the NIL was applicable. depositions or admissions . Garcia averred that he assumed no liability under the promissory note because he signed it merely as an accommodation party for de Jesus. at the time of its taking. or specific denials or affirmative defenses are set forth in the answer. YES .000. . since he was a joint and solidary obligor of the loan 2. first. disavowal or qualification.000.The petitioner’s reasoning is untenable. Disposition Petition denied . the note evidences the loan obligation. and on the other. since the respondent has agreed to accept the benefits de Jesus would receive for his retirement. Under Article 29 of Act 2031. IT ruled that no novation has taken place respondent accepted the check from De Jesus.which had been intended to extinguish the obligation -. the P40. the old one must be expressly released from the obligation. and. in any event.The loan was not paid. that he is relieved from any liability arising from the note inasmuch as the loan had been paid by de Jesus by means of a check dated 17 April 1997. In order to change the person of the debtor.De Jesus also is not a third person to the obligation. he received only P360. Consequently. ISSUES 1. WON there was novation in the obligation 2. the law requires that the creditor expressly consent to the substitution of a new debtor. . and the third person or new debtor must assume the former’s place in the relation.A summary judgment is a procedural device designed for the prompt disposition of actions in which the pleadings raise only a legal. the obligation incurred by him and petitioner was joint and several. second.00 loan. ordering petitioner and de jesus to pay P400. and. Respondent’s acceptance of the check did not serve to make De Jesus the sole debtor because. substitution of debtors. He also claims that the respondent acted in bad faith in instituting the case.

BPI has a right to institute the present case.73. Hence. Held [1]: There was a valid merger between BPI and CBTC.67 as of 31 October 1982.805.963. while the other is dissolved and all its rights. BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor. ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was. Its failure to do so can only mean an acquiescence in the assumption by DBP of ELISCON's obligations.000. the National Development Company took over the business of ELISCON and undertook to pay ELISCON's creditors. The authority granted by BPI to its account officer to attend the creditors' meeting was an authority to represent the bank. BPI could have subsequently registered its objection to the substitution. the Bank of the Philippine Islands (BPI) and CBTC entered into a merger. however. In fact. was capable of payment. wherein BPI. including its indebtedness to BPI. respectively. on the other hand. Its authorized capital stock was increased by the government. BPI gives no cogent reason in withholding its consent to the substitution. however. As repeatedly pointed out by ELISCON and MULTI. instituted with the Regional Trial Court of Makati.08. leaving an outstanding indebtedness in the amount of P2.015.4 |Page Summary: Babst vs. the trial court rendered its Decision in favor of BPI.372. Subsequently.00 each. DBP. In due time. CBTC opened for ELISCON in favor of National Steel Corporation (NSC) 3 domestic letters of credit in the amounts of P1. In October 1981. on 17 January 1983. at the creditors' meeting held in June 1981 and thereafter.833. which ELISCON used to purchase tin black plates from NSC. Inc.702. Meanwhile. and earmarked for that purpose the amount of P4.015. It is settled that in the merger of two existing corporations. BPI. MULTI and Babst (Civil Case 49226).16. pursuant to the Resolution of the Board of Directors of MULTI adopted on 31 August 1977. with interest at the rate of 14% per annum. on 26 September 1978.869. On 20 February 1987.32 and P200. Consequently. other than its desire to preserve its causes of action and legal recourse against the sureties of ELISCON. also Elizalde Steel Consolidated Inc. ELISCON filed a petition for review on certiorari (GR. evidenced by a promissory note. On 28 December 1978. as the surviving corporation.84. a complaint for sum of money against ELISCON. Court of Appeals (GR 99398. consented to the assumption by DBP of the obligations of ELISCON. BPI. the surviving corporation in a merger with CBTC. Meanwhile. 26 January 2001) Babst vs. Babst also filed a petition for review with the Court (GR 99398). insisted in going after the sureties. but BPI expressly rejected the formula submitted to it for not being acceptable. as payment for its total indebtedness in the amount of P201. 26 January 2001]. Sometime in October 1978. the Court of Appeals rendered a Decision modifying the judgment of the trial court. The letters of credit. Babst executed a Continuing Suretyship. Subsequently. one of the corporations survives and continues the business. ELISCON. Ynares Santiago (J): 4 concur Facts: On 8 June 1973. vs.181. it is deemed to have consented to the substitution of DBP for ELISCON as debtor.946. Even granting arguendo that the said account officer was not so empowered. Issue [1]: Whether the BPI can institute the present case. ELISCON encountered financial difficulties and became heavily indebted to the Development Bank of the Philippines (DBP).307.54 for payment to BPI. Notwithstanding the fact that a reliable institution backed by government funds was offering to pay ELISCON's debts. whereby they bound themselves jointly and severally liable to pay any existing indebtedness of MULTI to CBTC to the extent of P8. Held [2]: Due to the failure of BPI to register its objection to the take-over by DBP of ELISCON's assets. were opened for ELISCON by CBTC using the credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank.000. More importantly.240. which had stepped into the shoes of ELISCON. properties and liabilities are acquired by the surviving corporation. It must be remembered. Court of Appeals [GR 104625] First Division. P1. BPI's objection was to the proposed payment formula. especially after it had already learned that DBP had taken over the assets and assumed the liabilities of ELISCON. denied in a Resolution dated 9 March 1992. his obligation to pay only arises upon the principal debtor's failure or refusal to pay. Court of Appeals [GR 99398. ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets. as successor-in-interest of CBTC. MULTI and Babst filed their respective notices of appeal. Elizalde Steel Consolidated. there . he did so on behalf of and for the bank. Branch 147. that while a surety is solidarily liable with the principal debtor. ELISCON defaulted in its obligation to pay the amounts of the letters of credit. not as mere surety but as substitute principal debtor. in the total amount of P3. DBP proposed formulas for the settlement of all of ELISCON's obligations to its creditors. On 29 April 1991. Issue [2]: Whether BPI. Antonio Roxas Chua and Chester G. Hence. 104625). leaving an outstanding account. ELISCON and DBP executed a Deed of Cession of Property in Payment of Debt. ELISCON obtained from Commercial Bank and Trust Company (CBTC) a loan in the amount of P8.900. Thereafter. In June 1981. as of 31 October 1982.795. DBP formally took over the assets of ELISCON.72. There was no indication that the principal debtor will default in payment. acquired all the assets and assumed all the liabilities of CBTC. ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP.534. (ELISCON) defaulted in its payments. such that when he failed to object to the substitution of debtors. On 22 December 1980. In order to settle its obligations. for reasons known only to itself. not to the substitution itself.

Although it issued a temporary restraining order. Qua were stockholders of Ladtek. GERVEL and QUA each covenant that each will respectively reimburse the party made to pay the Lenders to the extent and subject to the limitations set forth herein. the liability of RGC. 144413 FACTS:  Petitioners Republic Glass Corporation (RGC) and Gervel. and GERVEL. he can recover reimbursement from the co-debtors only in so far as his payment exceeded his share in the obligation. RGC and Gervel furnished Qua with notices of foreclosure of Qua’s pledged shares. RGC and Gervel insist that it is not an essential condition that the entire obligation must first be paid before they can seek reimbursement from Qua." RGC and Gervel eventually foreclosed all the pledged shares of stock at public auction. RTC denied Qua’s "Urgent Petition to Suspend Foreclosure Sale.  RGC and Gervel’s counsel. Whether the solidary debtor has paid the creditor. he would then recover from RGC and Gervel the excess payment. the other solidary debtors should indemnify the former once his liability becomes absolute. If a solidary debtor pays the obligation in part. This is precisely because if a solidary debtor pays an amount equal to his July 30. all sums of money which the party made to pay the Lenders shall pay or become liable to pay by reason of any of the foregoing. V. Ladtek obtained loans from Metrobank and Private Development Corporation of the Philippines (PDCP) with RGC. payment of any amount will not automatically result in reimbursement. Antonio C. and will make such payments within 5 days from the date that the party made to pay the Lenders gives written notice to the parties hereto that it shall have become liable therefor and has advised the Lenders of its willingness to pay whether or not it shall have already paid out such sum or any part thereof to the Lenders or to the persons entitled thereto. Gervel and Qua became absolute simultaneously when Ladtek defaulted in its loan payment.Payment of the entire obligation by one or some of the solidary debtors results in a corresponding obligation of the other debtors to reimburse the paying debtor. As a result. Thus. RGC and Gervel contend that Qua should pay 42. Later. Qua refused to reimburse the amount to RGC and Gervel. Gervel and Qua executed Agreements for Contribution.22% of any amount which they paid or would pay Metrobank and PDCP.  Qua filed a complaint for injunction and damages with application for a temporary restraining order to prevent RGC and Gervel from foreclosing the pledged shares. This situation is absurd and circuitous. ARTICLE 1292 REPUBLIC GLASS CORP.If we allow RGC and Gervel to collect from Qua his proportionate share. Qua pledged stocks of General Milling Corporation (GMC) in favor of RGC and Gervel.  Under the same Agreements. Atty. Qua would have to pay his liability of P6. In addition to the amount claimed by RGC and Gervel. Gervel and Qua.R. Gervel and Qua as sureties. QUA G. INC. Inc. However. Subsequently. Gervel and Qua all became directly liable at the same time to Metrobank and PDCP. in this case. whose cause of action should be directed against DBP as the new debtor. RGC. Inc.  Ladtek defaulted on its loan obligations to Metrobank and PDCP. we agree with RGC and Gervel’s contention that in this case payment of the entire obligation is not an essential condition before they can seek reimbursement from Qua. RGC. then Qua would pay much more than his stipulated liability under the Agreements. RGC and Gervel paid Metrobank P7M. 2004 . RGC and Gervel cannot automatically claim for indemnity from Qua because Qua himself is liable directly to Metrobank and PDCP.2 million to Metrobank and more than P1 million to PDCP. Hence.  The Agreements states that in case of default in the payment of Ladtek’s loans. ISSUE: WON RGC & GERVEL MAY SEEK REIMBURSEMENT FROM QUA? HELD: NO. RGC and Gervels’ contention is partly meritorious. During the pendency of Collection Case.Contrary to RGC and Gervel’s claim. Since Qua would surely exceed his proportionate share. demanded that Qua pay reimbursement of the total amount RGC and Gervel paid to Metrobank and PDCP. Indemnity and Pledge of Shares of Stocks. LAWRENCE C. RGC and Gervel assail the Court of Appeals’ ruling that the parties’ liabilities under the Agreements depend on the full payment of the obligation. Metrobank filed a collection case against Ladtek. However.5 |Page was a valid novation which resulted in the release of ELISCON from its obligation to BPI. Metrobank executed a waiver and quitclaim in favor of RGC and Gervel. Among themselves. together with respondent Lawrence C. The pledged shares of stock served as security for the payment of any sum which RGC and Gervel may be held liable under the Agreements. Pastelero. The Agreements are contracts of indemnity not only against actual loss but against liability as well. The words of the Agreements are clear. the parties would reimburse each other the proportionate share of any sum that any might pay to the creditors. No. RGC. RGC.

Because the novation was without their knowledge and consent. then he in effect pays only what is due from him. and (4) validity of the new one. either by changing the object or principal conditions. 1995. ISSUE: Whether there was a novation of the mortgage loan contract between petitioners and BPI-FSB that would result in the extinguishment of petitioners’ liability to the bank. never claimed that their payments exceeded their shares in the obligations. RGC and Gervel cannot validly seek reimbursement from Qua. when they learned of the new loan agreement sometime in December 1996. This RGC and Gervel failed to do. RGC and Gervel. They claimed that the new loan novated the loan agreement of March 24. Court of Appeals. with respect to obligations to pay a sum of money. . Since they only made partial payments. they were allegedly released from their obligation under the mortgage. The cancellation of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly. he cannot demand reimbursement because his payment is less than his actual debt. (3) the extinguishment of the old contract. (2) the agreement of all the parties to the new contract. the well-settled rule is that. In fact. or by substituting the person of the debtor. changes only the terms of payment. RULING: We agree with the CA that there was none. Novation is defined as the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates the first. Petitioners aver that they were not informed about the restructuring of Transbuilders’ loan.6 |Page proportionate share in the obligation. the bank restructured the loan through a promissory note executed by Transbuilders in its favor. Thus. or the new contract merely supplements the old one. In Garcia. or subrogating a third person in the rights of the creditor. Jr. Consequently.000. (BPI-FSB) to secure a P15. ARTICLE 1292 Reyes v. the obligation is not novated by an instrument that expressly recognizes the old. If the debtor pays less than his share in the obligation. v. adds other obligations not incompatible with the old ones. we held that: In every novation there are four essential requisites:(1) a previous valid obligation. in fact. BPI Family Bank FACTS: Reyes spouses executed a real estate mortgage on their property in Iloilo City in favor of respondent BPI Family Savings Bank.000 loan of Transbuilders Resources and Development Corporation (Transbuilders). they wrote BPI-FSB requesting the cancellation of their mortgage and the return of their certificate of title to the mortgaged property. Inc. RGC and Gervel should clearly and convincingly show that their payments to Metrobank and PDCP exceeded their proportionate shares in the obligations before they can seek reimbursement from Qua. When Transbuilders failed to pay its P15M loan within the stipulated period of one year.

including SSD-005-85 listed under Dynetics. and in so doing. petitioner. There was absolutely no intention by the parties to supersede or abrogate the old loan contract secured by the real estate mortgage executed by petitioners in favor of BPI-FSB.The Sandiganbayan declared the national government as the principal obligor of the L/C even though the liability remained in the books of the PNB for accounting and monitoring purposes. The novation of a contract cannot be presumed. Chuidian filed before the US Court. It was further stipulated that instead of Chuidian reimbursing the payments made by Philguarantee arising from Chuidian’s default. and then PNB President Edgardo B. Chuidian allegedly used false pretenses to induce the officers of the Philippine Export and Foreign Loan Guarantee Corporation (PHILGUARANTEE).000. Incorporated (ARCI) sometime in September 1980. ARCI.000. the RP filed a motion for issuance of writ attachment over th L/C. The RP averred that if Chuidian would insist payment of L/C.00. 1999. SANDIGANBAYAN (Fifth Division) and the REPUBLIC OF THE PHILIPPINES. denied Chuidian’s motion for reconsideration of the denial of his motion to lift attachment. Philguarantee shall absolve Chuidian from all civil and criminal liability. The said Deed of Transfer provided for the transfer to the government of certain assets of PNB in exchange for which the government would assume certain liabilities of PNB. VICENTE B. novation takes place only when the old and the new obligations are incompatible on every point. In the absence of an express agreement. a Deed of Transfer[11] was executed between then Secretary of Finance. to facilitate the procurement and issuance of a loan guarantee in favor of the Asian Reliability Company. which Chuidian was able to make 2 monthly drawings at Los Angeles Branch of PNB.400. Philguarantee sued Chuidian FOR VIOLATION OF THE TERMS OF THE LOAN AS WELL AS misuse of funds. With the advent of the Aquino administration. the Philippine government shall pay Chuidian the amount of Five Million. On February 27. the former defaulted in the payments thereof. in June 1985. was granted a loan guarantee of Twenty-Five Million U. on the ground that it will redound to the benefit of both parties. however. an action against PNB to compel it to pay the proceeds of the LC. PNB refused to be compelled and cannot be held liable for breach under principles of illegality.The Sandiganbayan. among others. while the case was pending .7 |Page BPI-FSB and Transbuilders only extended the repayment term of the loan from one year to twenty quarterly installments at 18% interest per annum. Payments was actually received by petitioner. . Dollars (US$25. In the meantime. the remaining 4 million shall be paid through an irrevocable Letter of Credit (L/C). CHUIDIAN. respondents. When L/C was frozen by PCGG.[12] Among those liabilities which the government assumed were unused commercial L/C’s and Deferred L/C’s. FACTS: Vicente B.00) The government filed charges against Chaudian with conspiracy with the Marcoses. the intention of the new agreement was precisely to revive the old obligation after the original period expired and the loan remained unpaid. the Board of Investments (BOI) and the Central Bank. On November 27. 1987. the Sandiganbayan gave due course to Chuidian’s plea for the attached L/C to be deposited in an interest-bearing account.000. as part of the government’s economic recovery program. As a favored business associate of the Marcoses. compelling Philguarantee to undertake payments for the same. Philguarantee filed a motion before the Superior Court of Santa Clara County of California seeking to vacate the stipulated judgment containing the settlement between Philguarantee and Chuidian. to facilitate the rehabilitation of PNB. Incorporated in favor of Chuidian in the amount of Four Million Four Hundred Thousand Dollars (US$4. Although ARCI had received the proceeds of the loan guaranteed by Philguarantee. he can ask the said foreign court to compel the PNB Los Angeles Branch. desist from pursuing any suit against Chuidian concerning the payments Philguarantee had made on Chuidian’s defaulted loans. While ARCI represented to Philguarantee that the loan proceeds would be used to establish five inter-related projects in the Philippines. Consequently. Chuidian was alleged to be a dummy or nominee of Ferdinand and Imelda Marcos in several companies said to have been illegally acquired by the Marcos spouses. On July 13. In return. In fact. The federal Court issue a judgment in favor of PNB. 1985. the newly-established Presidential Commission on Good Government (PCGG) sequestered the properties of Chuidian as he was believe to be cronies of the Marcoses. 98% of which was allegedly owned by Chuidian.S. Espiritu. vs. Philguarantee entered into a compromise agreement with Chuidian whereby petitioner Chuidian shall assign and surrender title to all his companies in favor of the Philippine in favor of the government. Chuidian reneged on the approved business plan and instead invested the proceeds of the loan in corporations operating in the United States.

it does not necessarily make the contracts and obligations affected thereby exceptions to the above-quoted law. frozen or taken over and vest it in the sequestering agency. Sandiganbayan. one of which requires that: (b) the BANK shall have secured such governmental and creditors’ approvals as may be necessary to establish the consummation. the Deed of Transfer that was executed between PNB and the government pursuant to the said Presidential Proclamation specifically stated that it shall be deemed effective only upon compliance with several conditions. Even though Presidential Proclamation No.8 |Page ISSUE: WON the PNB upon its execution of Deed of Transfer to the government had made a valid substitution of debtor? HELD: There was no valid substitution of debtor. .” Thus.S. Even the Sandiganbayan found that: x x x Movant has basis in pointing out that inasmuch as the L/C was issued in his favor. Thus. The petition is DISMISSED. such that the substitution of debtor can be validly made even without the consent of the creditor. In fact. he is deemed to be the lawful payee-beneficiary of said L/C. until such time that the government is able to successfully prove that petitioner has no right to claim the proceeds of the L/C. for which any substitution of debtor requires his consent. whose consent thereto cannot just be presumed. Accordingly. $4. he is presumed to be the lawful payee-beneficiary of the L/C until such time that the plaintiff successfully proves that said L/C is ill-gotten and he has no right over the same In Republic v. Presidential Proclamation No. Article 1293 of the New Civil Code provides: Novation which consists in substituting a new debtor in the place of the original one. natural or juridical. such as freeze orders and sequestration. PNB is estopped from denying its liability thereunder considering that neither the PNB nor the government bothered to secure petitioner’s consent to the substitution of debtors. the Government or other person. The PNB is DIRECTED to remit to the Sandiganbayan the proceeds of Letter of Credit the amount of U. The principal and its interest shall remain in said account until ordered released by the Court in accordance with law. 50 was not intended to set aside laws that govern the very lifeblood of the nation’s commerce and economy. The Sandiganbayan thus erred in relieving PNB of its liability as the original debtor. be deemed an admission that the L/C is valid and binding. in effect. We are not unmindful that any effort to secure petitioner’s consent at that time would. but not without the consent of the creditor. any substitution of debtor must be with the consent of the creditor. legality and enforceability of the transactions contemplated hereby. who shall eventually be adjudged lawfully entitled thereto. for the account of Sandiganbayan in escrow for the person or persons. 50 can be considered an “insuperable cause”.[43] we held that the provisional remedies.” The validity of this Deed of Transfer is not disputed. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. may be made without the knowledge or against the will of the latter. the same to earn interest at the current legal bank rates. were not “meant to deprive the owner or possessor of his title or any right to the property sequestered.4 million the same to be placed under special time deposit with the Land Bank of the Philippines.