JOSEPH COCHINGYAN & JOSE VILLANUEVA V. R&B SURETY AND INSURANCE, INC.

June 30, 19787 | Feliciano, J.

Novation
RBA

DOCTRINE: Novation is never presumed, it must be established either by discharge of the old debt by the express terms of the new
agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new
one must be clearly discernible.
CASE SUMMARY: Surety Bond was issued to PAGRICO, which was guaranteed by R&B. CCM entered into a Trust Agreement with
PNB, undertaking to pay for the obligations of R&B under the Surety Bond. The Trust Agreement expressly acknowledged that R&B
would not be released from its obligations under the Surety Bond, hence, there is no novation.

FACTS:
Respondent R&B SURETY AND INSURANCE, INC.
││
Pacific Agricultural Suppliers (PAGRICO) PNB
Petitioners Catholic Church Mart PAGRICO + Jose
(CCM) + Villanueva
Joseph Cochingyan PACOCO + Liu Tua Beh
 Pacific Agricultural Suppliers (PAGRICO) applied and received an increase in its credit line from P400k to P800k, with PNB,
which required PAGRICO to give a bond in the amount of P400k to secure compliance with the terms and conditions of credit
line increase.
o PAGRICO submitted Surety Bond issued by R&B Surety in favor of PNB.
o Terms of Surety Bond: PAGRICO and R&B bound themselves jointly and severally; PNB had the right to proceed directly
against R&B.

 R&B Surety entered into Two Indemnity Agreements ---

o Dec 23 1963  Catholic Church Mart (CCM) and Joseph Cochingyan, who signed as pres, and in his personal/individual
capacity
o Dec 24, 1963  PAGRICO, Jose Villanueva, who signed both as manager of PAGRICO, and in his personal capacity, Pacific
Copra Export, Inc. (PACOCO) and Liu Tua Beh, who signed both as president of PACOCO and in his personal capacity.
o Indemnitors bound themselves solidarily to R&B to pay an annual premium of P5k for compliance with the terms of the
Surety Bond until the latter is cancelled or discharged. It also provided that the indemnities will be paid to R&B as soon as
demand is received from the creditor (PNB) or as soon as it becomes liable to make payment under the terms of the Surety
Bond.

 Now, PAGRICO failed to comply with its Principal Obligation to PNB (to pay for credit incurred under the increased credit line).
 So, PNB demanded from R&B Surety the sum of P400k, which R&B Surety only paid P70k.
 R&B then sent demand letters to Petitioners (Cochingyan, Villanueva) for reimbursement of its payments made to PNB, which
Petitioners failed to heed.

 Thus, R&B Surety sued petitioners in CFI Manila, asking for payment.
 Petitioners’ Defenses:
1. Indemnity Agreements did not express the true intent of parties, because the indemnitors were asked by R&B Surety to
execute them only to make it appear that R&B Surety has complied with requirements of credit line and Insurance Commission;
2. the Surety Bond has already been assumed by CCM by virtue of a Trust Agreement with PNB; their obligation under the
Indemnity Agreement was extinguished by novation arising from the change of debtor under the Principal Obligation.
o Petitioners did not present evidence to support their defenses.
 CFI: rendered judgement in favor of R&B Surety.
 Petitioners appealed to the CA, which certified the case to the SC as raising questions of law.

ISSUE: WoN the Trust Agreement had extinguished by novation the obligation of R&B to PNB, which, in turn, extinguished the
obligations of the petitioners under the Indemnity Agreements - NO
RULING:
Petitioners Cochingyan and Villanueva averred: the Surety Bond has already been assumed by CCM by virtue of a Trust
Agreement with PNB; their obligation under the Indemnity Agreement was extinguished by novation arising from the change of
debtor under the Principal Obligation. (ELAM: So change of debtor from Cochingyan and Villanueva (via Indemnity Agreement with
R&B Surety) > CCM (via Trust Agreement of CCM with PNB)

Court ruled (with R&B Surety): There is no novation x x x

 Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which
terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.
 Novation is never presumed, it must be established either by discharge of the old debt by the express terms of the new
agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the
new one must be clearly discernible.
 If subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the
parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation,
and the third person or new debtor take its place in the new relation.

In this case ---

 The Trust Agreement provides the following:
o Parties are: CCM – Trustor; Tomas Besa, a PNB Official – Trustee; PNB – Beneficiary
o Trustor has guaranteed bonds issued by R&B (400k) and Consolacion Insurance & Surety Co, Inc., (Consolacion) (900k)
in favor of the Beneficiary, in order to secure credit facilities for PAGRICO and PACOCO, respectively.
o PAGRICO and PACOCO have defaulted in the payment of their obligations to the Beneficiary, which has demanded payment
from the surety companies.
o The Trustor agrees to pay the obligations of the defaulting companies.
o The Beneficiary agrees to hold in abeyance any action to enforce its claims against the surety companies.
o “This agreement shall not in any manner release the R&B and Consolacion from their respective liabilities under the bonds
mentioned above.” (ELAM: bonds = surety)
 The Trust Agreement does not expressly terminate the obligation of R&B under the Surety Bond, but it expressly provides that
the Trust Agreement shall not in any manner release R&B from its obligation under the Surety Bond.
 Neither can there be implied novation due to this same acknowledgement in the subsequent agreement. The Trust Agreement
and Surety Bond are not incompatible on all points.
 The effect of the Trust Agreement was merely to bring in another person (the Trustor) to assume the obligation that R&B was
bound to perform under the Surety Bond. It increased the number of persons liable to PNB, and not the extinguishment of the
liability of the first debtor.
 The Trustor, CCM, was already bound to R&B by virtue of the Indemnity Agreement. Under the Trust Agreement, the Trustor
also became directly liable to PNB.

DISPOSITION:
Appeal denied, CFI judgment affirmed.

NOTES:
 This case cites Magdalena Estates v. Rodriguez (no facts given, only doctrine)
 Other issue in the case unrelated to novation:
o Contention of Villanueva that his obligation as indemnitor under the Indemnity Agreement was extinguished
when the PNB agreed in the Trust Agreement to hold in abeyance any action to enforce its claims against R&B
was not taken by the court because this provision did not operate to extend the maturity of R&B’s obligation
under the Surety Bond. Because the obligation of the Surety Bond had matured, petitioners’ obligations under
the Indemnity Agreements have also, in turn, matured. NCC 2079 does not apply.