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G.R. NO. 118585, SEPTEMBER 14, 1995


Ylang-Ylang Merchandising Company, a partnership between Angelita Rodriquez and Antonio Tan,
obtained a loan of P250,000.00 from Metropolitan Bank and Trust Company, and to secure payment of
the same, spouses Marcial See and Lilian Tan constituted a real estate mortgage in favor of the said bank
over the property in the District of Paco, Manila. The partnership had changed its name to Ajax Marketing
Company without changing its composition and it obtained a loan of P150,000.00 from the same bank
and executed a second real estate mortgage over the same property. As the partnership converted into a
corporation and changed its name into Ajax Marketing and Development Corporation with the original
partners and additional incorporators, another loan was obtained from the same mortgagee of
P600,000.00. In December 1980, the three loans were re-structured into one loan and Ajax Marketing
represented by Antonio Tan and Elisa Tan in their capacity as solidary co-obligor executed a Promissory
Note. The petitioner argue that a novation occurs when their three loans which are all secured by the
same real estate property were consolidated, thereby extinguishing their monetary obligations and
releasing the mortgaged property from liability.


Whether or not there is a novation occurred when the three loans which are all secured by the same real
estate property were consolidated into one single loan under a Promissory Note?


Novation is the extinguishment of an obligation by the substitution or change of the obligation by a

subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or by substituting another in place of the creditor. It is never presumed and will not be allowed
unless it is clearly shown by express agreement, or by acts of equal import. Thus, to effect an objective
novation it is imperative that the new obligation expressly declare that the old obligation is thereby
extinguished, or that the new obligation be on every point incompatible with the new one. There is nothing
in the records to show the unequivocal intent of the parties to novate the three loan agreements, no
indication of the extinguishment of, or an incompatibility with. In addition, the consolidation of the three
loans did not release the mortgaged real estate property from liability because the mortgage annotations,
all remained uncancelled, indicating the subsistence of the real estate mortgage. Neither can it be validly
contended that there was a change or substitution in the persons of either the creditor or the debtor. The
conversation from a partnership to a corporation , without sufficient evidence that they were expressly
released from their obligations, with new corporate personality, a third person or new debtor within the
context of subjective novation. Novation purported change in the third person must be clear and express.
Clearly then, neither objective nor subjective novation occurred.