302. CALIFORNIA BUS LINE INC. v. STATE INVESTMENT HOUSE INC.

FACTS:
Delta Motors Corporation (Delta) applied for financial assistance from respondent State
Investment House, Inc., (SIHI) a domestic corporation engaged in the business of quasi-
banking. SIHI agreed to extend a credit line to Delta in three separate agreements, and
the latter eventually became indebted to the former.Meanwhile, the petitioner (CBLI)
purchased buses from Delta which were secured through 16 promissory notes.
Unfortunately CBLI failed to meet its obligations to Delta. In order to cover the obligations
due, Delta issued a restructuring agreement, stipulating taking over the management and
operations in case of default.

On the other hand, Delta executed a Continuing Deed of Assignment of Receivables in

favor of SIHI as security for the payment of its obligations to SIHI per the credit
agreements.Subsequently, the loan agreements were restructured under a Memorandum
of Agreement in view of Delta’s failure to pay.

CBLI continued to have problems paying its debt to Delta. Delta executed a Deed of
Sale assigning to SIHI five (5) of the sixteen (16) promissory notes from California Bus
Lines, Inc. SIHI sent a demand letter to petitioner requiring remitting payments due on
the promissory notes. Petitioner replied informing respondent of the fact that delta had
taken over its management and operations.

SIHI later filed for an urgent motion for the sale of the 16 buses. The RTC of Manila initially
ruled in favor of CBLI, discharging from liability on the five promissory notes. The trial
court likewise favorably ruled on CBLIs compulsory counterclaim.SIHI appealed the
decision to the Court of Appeals. The decision of the RTC of Manila was reversed stating
that the defendant-appellee CBLI was liable for the value of the five (5) promissory notes
subject of the complaint a quo less the proceeds from the attached sixteen (16) buses.

ISSUE:
Whether the Restructuring Agreement between petitioner CBLI and Delta Motors, Corp.
novated the five promissory notes Delta Motors, Corp assigned to respondent SIHI

HELD:
No. The restructuring agreement between Delta and CBLI shows that the parties did not
expressly stipulate that the restructuring agreement novated the promissory
notes.Absent an unequivocal declaration of extinguishment of the pre-existing obligation,
only a showing of complete incompatibility between the old and the new obligation would
sustain a finding of novation by implication. There was no change in the object of the prior
obligations. The restructuring agreement merely provided for a new schedule of
payments and additional security giving Delta authority to take over the management and
operations of CBLI in case CBLI fails to pay installments equivalent to 60 days. Where
the parties to the new obligation expressly recognize the continuing existence and validity
of the old one, there can be no novation.
Moreover, this Court has ruled that an agreement subsequently executed between a
seller and a buyer that provided for a different schedule and manner of payment, to
restructure the mode of payments by the buyer so that it could settle its outstanding
obligation in spite of its delinquency in payment, is not tantamount to novation.