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PEOPLE'S BANK AND TRUST COMPANY, plaintiff-

appellee,
vs.
SYVEL'S INCORPORATED, ANTONIO Y. SYYAP and ANGEL
Y SYYAP, defendants-appellants.
Defendant entered into a commercial credit line
in the amount of 900k with the plaintiff which
was granted by the latter. To secure the loan it
executed a chattel mortgage on the guaranty of
the merchandise or stocks in goods of the said
corporation .
On May 20, 1965, defendants Antonio V. Syyap
and Angel Y. Syyap executed an undertaking in
favor of the plaintiff whereby they both agreed
to guarantee absolutely and unconditionally
and without the benefit of excussion the full
and prompt payment of any indebtedness to be
incurred on account of the said credit line
." In view of the failure of the defendant
corporation to make payment in accordance
with the terms and conditions agreed upon in
the Commercial Credit Agreement the plaintiff
started to foreclose extrajudicially the chattel
mortgage.
However, because of an attempt to have the
matter settled, the extra-judicial foreclosure
was not pushed thru. As no payment had been
paid, an action for foreclosure was evetually
filed in this Court.
During the pendency of the case the defendant
requested that the plaintiff dismiss this case
because he did not want to have the goodwill of
Syvel's Incorporated impaired, and offered to
execute a real estate mortgage on his real
property located in Bacoor, Cavite. The plaintiff
consented to it.
Mr. de las Alas consented, and so the Real
Estate Mortgage (Exhibit "A") was executed by
defendant Antonio Syyap and his wife
Margarita Bengco Syyap on June 22, 1967.
Defendants did not agree with plaintiffs motion
to dismiss which included the dismissal of their
counterclaim and filed instead their own
motion to dismiss (Record on Appeal, pp. 68-72)
on the ground that by the execution of said real
estate mortgage, the obligation secured by the
chattel mortgage subject of this case was
novated, and therefore, appellee's cause of
action thereon was extinguished.
Issue:
Whether The lower court erred in not holding that
the obligation secured by the Chattel Mortgage
sought to be foreclosed in the above-entitled case
was novated by the subsequent execution between
appellee and appellant Antonio V, Syyap of a real
estate mortgage as additional collateral to the
obligation secured by said chattel mortgage?
Held:
No. Novation takes place when the object or
principal condition of an obligation is changed or
altered. It is elementary that novation is never
presumed; it must be explicitly stated or there must
be manifest incompatibility between the old and the
new obligations in every aspect (Goni v. CA, 144
SCRA 223 [1986]; National Power Corp. v. Dayrit,
125 SCRA 849 [1983]).
In the case at bar, there is nothing in the Real
Estate Mortgage which supports
appellants'submission. The contract on its face
does not show the existence of an explicit novation
nor incompatibility on every point between the "old
and the "new" agreements as the second contract
evidently indicates that the same was executed as
new additional security to the chattel mortgage
previously entered into by the parties.
Moreover, records show that in the real estate
mortgage, appellants agreed that the chattel
mortgage "shall remain in full force and shall not be
impaired by this (real estate) mortgage."
It is clear, therefore, that a novation was not
intended. The real estate mortgage was evidently
taken as additional security for the performance of
the contract (






Young v. CA
Facts:
Victor Young entered into a contract of lease of
a parcel of land with Humiliano Rodriguez &
Timoteo Rodrigues.
Under their contract of lease , at the end of the
least contract or after 21 years , the lessor may
purchase the Liza theatre building at their
option from the ;essee, provided that if the
lessors do not exercise this option to buy, the
lessee shal continue for another peiod of 21
years
On Dec. 18, 1961, exactly the same contract
was executed by the same parties except that
the estate of Humiliano Rodriguez was this time
represented by Antolin Jariol, instead of
miguela Rodriguez.
During the period of the lease, the two estates
were finally settled, and the land leased to
Victor Young was distributed among Fausta R.
Jagdon, Amparo R. Casafranca, Miguela R.
Jariol, the herein private respondents, and
Teresita R. Natividad.
Natividad later sold her share, consisting of 223
square meters, to Johnny Young, son of Victor
D. Young.
On November 5, 1982, or two days before the
expiration of the first contract, the heirs (except
Natividad) filed a suit for specific performance
against Victor D. Young to compel him to sell to
them his theater-building for P 135,000.00.
They tendered this amount with the clerk of
court by way of consignation. They also sued
Victor Young's son, Johnny, as an unwilling co-
plaintiff.
The defendants contended that the plaintiffs
had no cause of action because the complaint
was premature. The lease contract of
November 7, 1961, had been novated by the
second lease contract dated December 18,
1961; hence, the lease was terminated on
December 18, 1982, and not November 7, 1982
Regional Trial Court of Cebu found in favor of
the plaintiffs and held that there was no
novation.
On appeal. The CA modified the decision and
declared that the original period of the lease
contract was wxtwnded by the second contract.
Issue:
Whether there was a novation?
Held:
No. Novation has been defined as the extinguishment of
an obligation by a subsequent one which terminates it,
either by changing its object or principal conditions,
referred to as objective or real novation or by
substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor,
also called as subjective or personal novation. But as
explained by this Court, novation is never presumed; it
must be explicitly stated or there must be a manifest
incompatibility between the old and the new
obligations in every aspect. The test of incompatibility
between two obligations or contracts, is whether or not
they can stand together, each one having an
independent existence. If they cannot, they are
incompatible, and the later obligation novates the first.
(Emphasis supplied.)
A careful examination of the text of the two contracts
will show that the only change introduced in the second
contract was the substitution by Antolin A. Jariol of his
wife Miguela as signatory for the estate of Humiliano
Rodriguez. There was no express declaration in the
second contract that it was novating the first.
To determine if there was at least an implied novation
because of a clear incompatibility between the old and
new contracts, we apply the rule that
In order that there may be implied novation arising from incompatibility
of the old and new obligations, the change must refer to the object, the
cause, or the principal conditions of the obligation. In other words,
there must be an essential change.
There was clearly no implied novation for lack of an
essential change in the object, cause, or principal
conditions of the obligation. At most, the substitution of a
signatory in the second contract can be considered only
an accidental modification which, according to Tolentino,
"does not extinguish an existing obligation. When the
changes refer to secondary agreements, and not to the
object or principal conditions of the contract there is no
novation; such changes will produce modifications of
incidental facts, but will not extinguish the original
obligation."
3

Hence, he concludes, "it is not proper to consider an
obligation novated by unimportant modifications which
do not alter its essence."
4

There being no novation, the lease is properly deemed
to have commenced on November 7, 1961, and so
ended 21 years later on November 7, 1982. It is
significant that it was in fact from this first date that Victor
Young effectively started as lessee.
Philippine Savings Bank v. Sps Manalac
Facts:
On October 8, 1976, respondent-spouses Rodolfo
and Rosita Maalac (Maalac) obtained a
P1,300,000.00 loan from PSBank covered by
promissory note.
As security for the loan, Maalac executed a Real
Estate Mortgage in favor of the bank over 8 parcels
of land
In view of Maalacs inability to pay the loan
installments as they fell due, their loan obligation
was restructured on October 13, 1977.
Accordingly, Maalac signed another promissory
note.
On March 5, 1979, Maalac and spouses Igmidio
and Dolores Galicia, with the prior consent of
PSBank,
5
entered into a Deed of Sale with
Assumption of Mortgage involving 3 of the
mortgaged properties
On August 25, 1981, the spouses Galicia obtained a
second loan from PSBank in the amount of
P3,250,000.00 for which they executed Promissory
They also executed a Real Estate Mortgage in favor
of the bank covering TCT Nos. N-36192, N-36193, N-
36194, 75584 and 87690.
10

Since Maalac defaulted again in the payment of
their loan installments and despite repeated
demands still failed to pay their past due obligation
which now amounted to P1,804,241.76, PSBank
filed with the Office of the Provincial Sheriff of Rizal
a petition for extrajudicial foreclosure of their 5
remaining mortgaged properties
on May 3, 1982, the foreclosure sale of the subject
real properties proceeded with PSBank as the
highest bidder
Maalac failed to redeem the properties hence
titles thereto were consolidated in the name of
PSBank and new certificates of title were issued in
favor of the bank
On December 16, 1983, Maalac wrote the
Chairman of the Board of PSBank asking
information on their request for the partial release
of the mortgage , which were registered in the
name of Galicias
On May 23, 1985, the bank sold the property
covered by TCT No. 79996 (previously TCT No.
343593) to Ester Villanueva who thereafter sold it
to Maalac.
Thereafter, or on October 20, 1986, Maalac
instituted an action for damages, against PSBank.
The RTC ordered the annulment of the certificate of
sale of 3 parcels of lands issued in favor of
petitioner PSB and likewise dismissed the Land
Registration case filed.
On Appeal,. The CA affirmed the decision of the RTC
with modifications.
Hence, this petition.
Issue:
Whether the CA erred in upholding that there was
novation when PS bank applied 1m of the 1.2 PCIB
Check tendered to the loan account of the Galicias and
the remaining 200k to manalac account?
Held:
Yes. In order for novation to take place, the
concurrence of the following requisites is indispensable:
1. There must be a previous valid obligation,
2. There must be an agreement of the parties concerned to a
new contract,
3. There must be the extinguishment of the old contract, and
4. There must be the validity of the new contract.
The elements of novation are patently lacking in the
instant case. Maalac tendered a check for
P1,200,000.00 to PSBank for the release of 4 parcels of
land covered by TCT Nos. N-36192, 36193, and 36194,
under the loan account of the Galicias and 417012 (now
TCT No. 79996) under the loan account of Maalac.
However, while the bank applied the tendered amount
to the accounts as specified by Maalac, it nevertheless
refused to release the subject properties. Instead, it
issued a receipt with a notation that the acceptance of
the check is not a commitment on the part of the bank
to release the 4 TCTs as requested by Maalac.
Neither can Maalac be deemed substitute debtor
within the contemplation of Article 1293 of the Civil
Code, In order to change the person of the debtor, the
old one must be expressly released from the obligation,
and the third person or new debtor must assume the
formers place in the relation. Novation is never
presumed. Consequently, that which arises from a
purported change in the person of the debtor must be
clear and express.


Astro-Electronic Corp v. PEFLC
Facts:
Astro was granted several loans by the
Philippine Trust Company (Philtrust) amounting
to P3,000,000.00 with interest and secured by
three promissory notes
In each of these promissory notes, it appears
that petitioner Roxas signed twice, as President
of Astro and in his personal capacity.1[2] Roxas
also signed a Continuing Surety ship Agreement
in favor of Philtrust Bank, as President of Astro
and as surety.
Thereafter, Philguarantee, with the consent of
Astro, guaranteed in favor of Philtrust the
payment of 70% of Astros loan,2[4] subject to
the condition that upon payment by
Philguanrantee of said amount, it shall be
proportionally subrogated to the rights of
Philtrust against Astro.3[5]
As a result of Astros failure to pay its loan
obligations, despite demands, Philguarantee
paid 70% of the guaranteed loan to Philtrust.
Subsequently, Philguarantee filed against Astro
and Roxas a complaint for sum of money with
the RTC of Makati.
the RTC rendered its decision in favor of
Philguarantee.
On appeal, the CA affirmed the RTCs decision
Hence. This petition.
Issue:












































Sps Reyes v. BPI
Facts:
On March 24, 1995, the Reyes spouses executed a
real estate mortgage on their property in Iloilo City
in favor of respondent BPI Family Savings Bank, Inc.
(BPI-FSB) to secure a P15,000,000 loan of
Transbuilders Resources and Development
Corporation (Transbuilders).
When Transbuilders failed to pay its P15M loan
within the stipulated period of one year, the bank
restructured the loan through a promissory note
executed by Transbuilders in its favor
Petitioners aver that they were not informed about
the restructuring of Transbuilders loan. In fact,
when they learned of the new loan agreement
sometime in December 1996, they wrote BPI-FSB
requesting the cancellation of their mortgage and
the return of their certificate of title to the
mortgaged property. They claimed that the new
loan novated the loan agreement of March 24,
1995. Because the novation was without their
knowledge and consent, they were allegedly
released from their obligation under the mortgage.
When BPI-FSB refused to cancel the mortgage,
petitioners filed separate petitions for mandamus
and prohibition with the Regional Trial Court (RTC)
of Manila to compel the bank to return their
certificate of title and cancel the mortgage
BPI-FSB, on the other hand, instituted extrajudicial
foreclosure proceedings against petitioners in Iloilo
City after Transbuilders defaulted in its payments.
The Manila RTC dismissed petitioners actions for
mandamus and prohibition. Their appeal to the
Court of Appeals was likewise dismissed:
MR denied. Hence, this appeal.
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?
Held:
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, either by changing the object or principal
conditions, or by substituting the person of the
debtor, or subrogating a third person in the rights
of the creditor.
6

Article 1292 of the Civil Code on novation further
provides:
Article 1292. In order that an obligation may be
extinguished by another which substitute the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new
obligations be on every point incompatible with
each other.
The cancellation of the old obligation by the new
one is a necessary element of novation which may
be effected either expressly or impliedly. While
there is really no hard and fast rule to determine
what might constitute sufficient change resulting in
novation, the touchstone, however, is
irreconcilable incompatibility between the old and
the new obligations.
7

In Garcia, Jr. v. Court of Appeals,
8
we held that:
In every novation there are four essential requisites:(1)
a previous valid obligation; (2) the agreement of all the
parties to the new contract; (3) the extinguishment of
the old contract; and (4) validity of the new one.
BPI-FSB and Transbuilders only extended the repayment
term of the loan from one year to twenty quarterly
installments at 18% interest per annum. 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. In fact, the intention of the new agreement was
precisely to revive the old obligation after the original
period expired and the loan remained unpaid.
Moreover, under the real estate mortgage executed by
them in favor of BPI-FSB, petitioners undertook to
secure the P15M loan of Transbuilders to BPI-FSB "and
other credit accommodations of whatever nature
obtained by the Borrower/Mortgagor." While this
stipulation proved to be onerous to petitioners, neither
the law nor the courts will extricate a party from an
unwise or undesirable contract entered into with all the
required formalities and with full awareness of its
consequences

Pilipinas Bank v. Ong
Facts:
On April 1991, Baliwag Mahogany Corporation
(BMC), through its president, respondent Alfredo T.
Ong, applied for a domestic commercial letter of
credit with petitioner Pilipinas Bank (hereinafter
referred to as the bank) to finance the purchase of
about 100,000 board feet of "Air Dried, Dark Red
Lauan" sawn lumber.
The bank approved the application and issued
Letter of Credit No. 91/725-HO in the amount of
P3,500,000.00. To secure payment of the amount,
BMC, through respondent Ong, executed two (2)
trust receipts3 providing inter alia that it shall turn
over the proceeds of the goods to the bank, if sold,
or return the goods, if unsold, upon maturity on July
28, 1991 and August 4, 1991.
On due dates, BMC failed to comply with the trust
receipt agreement. On November 22, 1991, it filed
with the Securities and Exchange Commission (SEC)
a Petition for Rehabilitation and for a Declaration in
a State of Suspension of Payments under Section 6
(c) of P.D.
On October 13, 1992, BMC and a consortium of
14 of its creditor banks entered into a
Memorandum of Agreement
6
(MOA)
rescheduling the payment of BMCs existing
debts.
On November 27, 1992, the SEC rendered a
Decision
7
approving the Rehabilitation Plan of
BMC as contained in the MOA and declaring it
in a state of suspension of payments.
However, BMC and respondent Ong defaulted in
the payment of their obligations under the
rescheduled payment scheme provided in the MOA.
Thus, on April 1994, the bank filed with the Makati
City Prosecutors Office a complaint
8
charging
respondents Ong and Leoncia Lim (as president and
treasurer of BMC, respectively) with violation of the
Trust Receipts Law
On July 7, 1994, 3rd Assistant Prosecutor Edgardo E.
Bautista issued a Resolution
10
recommending the
dismissal of the complaint.
On July 5, 1996, the bank filed with this Court a
petition for certiorari and mandamus seeking to
annul the resolution of the DOJ.
, the Court of Appeals reversed itself, holding that
the execution of the MOA constitutes novation
which "places petitioner Bank in estoppel to insist
on the original trust relation and constitutes a bar
to the filing of any criminal information for violation
of the trust receipts law.
Hence, this petition.
Issue:
Whether the MOA novate the trust agreement between
the parties?
Held:
In Quinto vs. People,
25
this Court held that there are two
ways which could indicate the presence of novation,
thereby producing the effect of extinguishing an
obligation by another which substitutes the same. The
first is when novation has been stated and declared in
unequivocal terms. The second is when the old and the
new obligations are incompatible on every point. The
test of incompatibility is whether or not the two obliga
obligations can stand together. If they cannot, they are
incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be
essential in nature and not merely accidental. The
incompatibility must take place in any of the essential
elements of the obligation, such as its object, cause or
principal conditions, otherwise, the change is merely
modificatory in nature and insufficient to extinguish the
original obligation.
Contrary to petitioner's contention, the MOA did not
only reschedule BMCs debts, but more importantly, it
provided principal conditions which are incompatible
with the trust agreement.
Hence, applying the pronouncement in Quinto, we can
safely conclude that the MOA novated and effectively
extinguished BMC's obligations under the trust receipt
agreement.







Ajax Marketing v. CA
Facts:
Ylang-Ylang Merchandising Company, a partnership
between Angelita Rodriguez and Antonio Tan,
obtained a loan in the amount of P250,000.00 from
the MetropolitanBank and Trust Company, and to
secure payment of the same, spouses Marcial See
and Lilian Tan constituted a real estate mortgage in
favor of said bank over their property in the District
of Paco, Manila.
Subsequently, after the partnership had changed its
name to Ajax Marketing Company albeit without
changing its composition, it obtained a loan in the
sum of P150,000.00 from Metropolitan Bank and
Trust Company. Again to secure the loan, spouses
Marcial See and Lilian Tan executed in favor of said
bank a second real estate mortgage over the same
property.
On February 19, 1979, the partnership (Ajax
Marketing Company) was converted into a
corporation denominated as Ajax Marketing and
Development Corporation,
Ajax Marketing and Development Corporation
obtained from Metropolitan Bank and Trust
Company a loan of P600,000.00, the payment of
which was secured by another real estate mortgage
executed by spouses Marcial See and Lilian Tan in
favor of said bank over the same realty located in
the District of Paco, Manila
In December 1980, the three (3) loans with an
aggregate amount of P1,000,000.00 were re-
structured and consolidated into one (1) loan
Issue:
Whether the consolidation of the 3 loans resulted in a
novation?
Held:
None. The attendant facts herein do not make a case of
novation. There is nothing in the records to show the
unequivocal intent of the parties to novate the three
loan agreements through the execution of PN No. BDS-
3065. The provisions of PN No. BDS-3065 yield no
indication of the extinguishment of, or an
incompatibility with, the three loan agreements secured
by the real estate mortgages over TCT No. 105233. On
its face, PN No. BDS-3065 has these words typewritten:
"secured by REM" and "9. COLLATERAL. This is
wholly/partly secured by: (x) "real estate", 11 which
strongly negate petitioners' asseveration that the
consolidation of the three loans effected the discharge
of the mortgaged real estate property. Otherwise, there
would be no sense placing these material provisions.
PN No. BDS-3605 merely restructured and renewed the
three previous loans to expediently make the loans
current. There was no change in the object of the prior
obligations. The consolidation of the three loans,
contrary to petitioners' contention, did not release the
mortgaged real estate property from any liability
because the mortgage annotations at the back of TCT
No. 105233, in fact, all remained uncancelled, thus
indicating the continuing subsistence of the real estate
mortgages.
Neither can it be validly contended that there was a
change, or substitution in the persons of either the
creditor (Metrobank) or more specifically the debtors
(petitioners) upon the consolidation of the loans in PN
No. BDS 3605. The bare fact of petitioners' conversion
from a partnership to a corporation, without sufficient
evidence, either testimonial or documentary, that they
were expressly released from their obligations, did not
make petitioner AJAX, with its new corporate a third
person or new debtor within the context of a subjective
novation. If at all, petitioner AJAX only became a co-
debtor or surety. Without express release of the debtor
from the obligation, any third party who may thereafter
assume the obligation shall be considered merely as co-
debtor or surety. Novation arising from a purported
change in the person of the debtor must be clear and
express because, to repeat, it is never presumed.
Clearly then, from the aforediscussed points, neither
objective nor subjective novation occurred here.
Objective novation occurs when there is a change
of the object or principal conditions of an existing
obligation while subjective novation occurs when
there is a change of either the person of the debtor, or
of the creditor in an existing obligation. 5 When the
change of the object or principal conditions of an
obligation occurs at the same time with the change of
either in the person of the debtor or creditor a mixed
novation occurs. 6



Ilo-ilo Traders v. Heirs of Oscar Soriano
Facts:
On 23 October 1979 and 29 February 1980, the
spouses Oscar Soriano and Marta Soriano executed
two promissory notes, secured by real property
mortgages, in favor of petitioner Iloilo Traders
Finance, Inc. (ITF).
When the Sorianos defaulted on the notes, ITF, on
23 June 1981, moved for the extrajudicial
foreclosure of the mortgages.
Evidently, in order to forestall the foreclosure,
respondent spouses filed, on 27 August 1981, a
complaint for "Declaration of a Void Contract,
Injunction and Damages.
On 06 January 1982, the trial court issued a writ of
preliminary injunction to suspend the public sale of
the hypothecated property.
On 16 August 1983, the parties entered into an
"Amicable Settlement" and, after affixing their
signatures thereon, submitted the agreement
before the court.
Parties failed to comply with court orders thus, the
trial court disapproved the amicable settlement and
set the case for pre-trial.
After the lapse of 7 years Soriano couple filed a
motion to submit anew the amicable settlement.
Sorianos filed a case for novation and specific
performance, docketed Civil Case No. 20047, before
the Regional Trial Court, Branch 37, of Iloilo City.
trial court rendered in favor of herein respondents.
On appeal to it, the Court of Appeals affirmed the
judgment of the court a quo.
Issue:
whether or not the amicable settlement entered into
between the parties has novated the original
obligation?
Held:
Novation may either be extinctiv or modificatory,
much being dependent on the nature of the change and
the intention of the parties. Extinctive novation is never
presumed; there must be an express intention to
novate;4 in cases where it is implied, the acts of the
parties must clearly demonstrate their intent to dissolve
the old obligation as the moving consideration for the
emergence of the new one.5 Implied novation
necessitates that the incompatibility between the old
and new obligation be total on every point such that the
old obligation is completely superseded by the new one.
The test of incompatibility is whether they can stand
together, each one having an independent existence; if
they cannot and are irreconcilable, the subsequent
obligation would also extinguish the first.
An extinctive novation would thus have the twin effects
of, first, extinguishing an existing obligation and,
second, creating a new one in its stead. This kind of
novation presupposes a confluence of four essential
requisites: (1) a previous valid obligation, (2) an
agreement of all parties concerned to a new contract,
(3) the extinguishment of the old obligation, and (4) the
birth of a valid new obligation.6 Novation is merely
modificatory where the change brought about by any
subsequent agreement is merely incidental to the main
obligation (e.g., a change in interest rates7 or an
extension of time to pay8); in this instance, the new
agreement will not have the effect of extinguishing the
first but would merely supplement it or supplant some
but not all of its provisions.1wphi1
An amicable settlement or a compromise is a contract
whereby the parties, by making reciprocal concessions,
avoid a litigation or put an end to one already
commenced.9 It may be judicial or extrajudicial; the
absence of court approval notwithstanding,10 the
agreement can become the source of rights and
obligations of the parties.
It would appear that the arrangement reached by the
Soriano spouses and ITF would have the original
obligation of respondent spouses on two promissory
notes for the sums of P150,000.00 and P80,000.00, both
secured by real estate mortgages, impliedly modified.
The amicable settlement contained modificatory
changes. Thus, (1) it increased the indebtedness of the
Soriano spouses, merely due to accruing interest, from
P290,691.00 to P431,200.00; (2) it extended the period
of payment and provided for new terms of payment;
and (3) it provided for a waiver of claims, counterclaims,
attorneys fees or damages that the debtor-spouses
might have against their creditor, but the settlement
neither cancelled, nor materially altered the usual
clauses in, the real estate mortgages, e.g., the
foreclosure of the mortgaged property in case of
default.
Verily, the parties entered into the agreement basically
to put an end to Civil Case No. 14007 then pending
before the Regional Trial Court.
CA decision reversed .
Aquintey v. Tibong
Facts:
On May 6, 1999, petitioner Agrifina Aquintey
filed before the RTC of Baguio City, a complaint
for sum of money and damages against the
respondents, spouses Felicidad and Rico
Tibong.
Agrifina alleged that Felicidad had secured
loans from her on several occasions, at monthly
interest rates of 6% to 7%. Despite demands,
the spouses Tibong failed to pay their
outstanding loan, amounting to P773,000.00
exclusive of interests.
In their Answer with Counterclaim,
6
spouses
Tibong admitted that they had secured loans
from Agrifina. The proceeds of the loan were
then re-lent to other borrowers at higher
interest rates. They, likewise, alleged that they
had executed deeds of assignment in favor of
Agrifina, and that their debtors had executed
promissory notes in Agrifina's favor spouses
Tibong, this resulted in a novation of the
original obligation to Agrifina.
On January 20, 2003, the trial court rendered
its Decision
45
in favor of Agrifina. The trial court
ruled that Felicidad's obligation had not been
novated by the deeds of assignment and the
promissory notes executed by Felicidad's
borrowers. It explained that the documents did
not contain any express agreement to novate
and extinguish Felicidad's obligation
On appeal, the CA affirmed with modification
the decision of the RTC
Issue:
Under Article 1231(b) of the New Civil Code,
novation is enumerated as one of the ways by
which obligations are extinguished. Obligations
may be modified by changing their object or
principal creditor or by substituting the person of
the debtor.
63
The burden to prove the defense that
an obligation has been extinguished by novation
falls on the debtor.
64
The nature of novation was
extensively explained in Iloilo Traders Finance, Inc.
v. Heirs of Sps. Oscar Soriano, Jr.,65 as follows:
Novation may either be extinctive or modificatory,
much being dependent on the nature of the change
and the intention of the parties. Extinctive novation
is never presumed; there must be an express
intention to novate; in cases where it is implied, the
acts of the parties must clearly demonstrate their
intent to dissolve the old obligation as the moving
consideration for the emergence of the new one.
Implied novation necessitates that the
incompatibility between the old and new obligation
be total on every point such that the old obligation
is completely superseded superseded by the new
one. The test of incompatibility is whether they can
stand together, each one having an independent
existence; if they cannot and are irreconciliable,
the subsequent obligation would also extinguish
the first.
An extinctive novation would thus have the twin
effects of, first, extinguishing an existing obligation
and, second, creating a new one in its stead. This
kind of novation presupposes a confluence of four
essential requisites: (1) a previous valid obligation;
(2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old
obligation; and (4) the birth of a valid new
obligation. Novation is merely modificatory where
the change brought about by any subsequent
agreement is merely incidental to the main
obligation (e.g., a change in interest rates or an
extension of time to pay); in this instance, the new
agreement will not have the effect of extinguishing
the first but would merely supplement it or
supplant some but not all of its provisions.
66

(Citations Omitted)
We find in this case that the CA correctly found
that respondents' obligation to pay the balance of
their account with petitioner was extinguished, pro
tanto, by the deeds of assignment of credit
executed by respondent Felicidad in favor of
petitioner.
Petition denied.



California Bus Lines Inc. v. State Investment House Inc.
Facts:
Sometime in 1979, Delta Motors Corporation
M.A.N. Division (Delta) applied for financial
assistance from respondent State Investment
House, Inc. (hereafter SIHI), a domestic corporation
engaged in the business of quasi-banking. SIHI
agreed to extend a credit line to Delta for
P25,000,000.00 in three separate credit agreements
dated May 11, June 19, and August 22, 1979.
On several occasions, Delta availed of the credit
line by discounting with SIHI some of its
receivables, which evidence actual sales of
Deltas vehicles. Delta eventually became
indebted to SIHI to the tune of
P24,010,269.32.
4

Meanwhile, from April 1979 to May 1980,
petitioner California Bus Lines, Inc. (hereafter CBLI),
purchased on installment basis 35 units of M.A.N.
Diesel Buses and two (2) units of M.A.N. Diesel
Conversion Engines from Delta.
To secure the payment of the purchase price of the
35 buses, CBLI and its president, Mr. Dionisio O.
Llamas, executed sixteen (16) promissory notes in
favor of Delta on January 23 and April 25, 1980.
In addition to the notes, CBLI executed chattel
mortgages over the 35 buses in Deltas favor.
When CBLI defaulted on all payments due, it
entered into a restructuring agreement with Delta
on October 7, 1981, to cover its overdue obligations
under the promissory notes.
On December 23, 1981, Delta executed a
Continuing Deed of Assignment of Receivables
7
in
favor of SIHI as security for the payment of its
obligations to SIHI per the credit agreements
In view of Deltas failure to pay, the loan
agreements were restructured under a
Memorandum of Agreement dated March 31, 1982.