Republic of the Philippines On March 3, 1979, Francia received a notice of hearing of LRC Case No.
1593-P
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,  amended his complaint on January 24, 1980.
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable grounds to reverse the questioned
decision of the Intermediate Appellate Court, to set aside the auction sale of his
property which took place on December 5, 1977, and to allow him to recover a 203
square meter lot which was, sold at public auction to Ho Fernandez and ordered
titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house
built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City,
Metro Manila. The lot, with an area of about 328 square meters, is described and
covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds
of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was
expropriated by the Republic of the Philippines for the sum of P4,116.00
representing the estimated amount equivalent to the assessed value of the aforesaid
portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City Treasurer of
Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real
Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez
was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that
time helping his uncle ship bananas.
"In re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking
the cancellation of TCT No. 4739 (37795) and the issuance in his name of a new
certificate of title. Upon verification through his lawyer, Francia discovered that a
Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on
December 11, 1978. The auction sale and the final bill of sale were both annotated at
the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later
On April 23, 1981, the lower court rendered a decision, the dispositive portion of
which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing
the amended complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title
in favor of the defendant Ho Fernandez over the parcel of land including the
improvements thereon, subject to whatever encumbrances appearing at the back of
TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's
fees. (p. 30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of
law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A
GRAVE ERROR OF LAW IN NOT HOLDING PETITIONER'S OBLIGATION
TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY
THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO
THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A
GRAVE AND SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS
NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS
PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN
ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER
COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN
NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT
HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S
CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY,
THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's
allegations that his property was sold at public auction without notice to him and
that the price paid for the property was shockingly inadequate, amounting to fraud
and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the
problems raised in his petition upon himself. While we commiserate with him at the
loss of his property, the law and the facts militate against the grant of his petition.
We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by
legal compensation. He claims that the government owed him P4,116.00 when a
portion of his land was expropriated on October 15, 1977. Hence, his tax obligation
had been set-off by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other,
are extinguished (Art. 1278, Civil Code). The circumstances of the case do not
satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he
be at the same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled
that there can be no off-setting of taxes against the claims that the taxpayer may
have against the government. A person cannot refuse to pay a tax on the ground that
the government owes him an amount equal to or greater than the tax being collected.
The collection of a tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled
that Internal Revenue Taxes can not be the subject of set-off or compensation. We
stated that:
A claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the statutes of set-off,
which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state
or municipality to one who is liable to the state or municipality
for taxes. Neither are they a proper subject of recoupment since
they do not arise out of the contract or transaction sued on. ...
(80 C.J.S., 7374). "The general rule based on grounds of public
policy is well-settled that no set-off admissible against demands
for taxes levied for general or local governmental purposes. The
reason on which the general rule is based, is that taxes are not in
the nature of contracts between the party and party but grow out
of duty to, and are the positive acts of the government to the
making and enforcing of which, the personal consent of
individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the
collector because he has a claim against the governmental body not included in the
tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we
stated that: "... internal revenue taxes can not be the subject of compensation:
Reason: government and taxpayer are not mutually creditors and debtors of each
other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was
due to the city government while the expropriation was effected by the national
government. Moreover, the amount of P4,116.00 paid by the national government
for the 125 square meter portion of his lot was deposited with the Philippine
National Bank long before the sale at public auction of his remaining property.
Notice of the deposit dated September 28, 1977 was received by the petitioner on
September 30, 1977. The petitioner admitted in his testimony that he knew about the
P4,116.00 deposited with the bank but he did not withdraw it. It would have been an
easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax
obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be
shown later, he claimed that he pocketed the notice of the auction sale without
reading it.
Petitioner contends that "the auction sale in question was made without complying
with the mandatory provisions of the statute governing tax sale. No evidence, oral or
otherwise, was presented that the procedure outlined by law on sales of property for
tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative
of this issue, the burden of proof therefore rests upon him to show that plaintiff was
duly and properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction
sale, has the burden of proof to show that there was compliance with all the
prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must
be established by proof and the general rule is that the
purchaser of a tax title is bound to take upon himself the burden
of showing the regularity of all proceedings leading up to the
sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results
in depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29
Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This is actually an
exception to the rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal
prerequisites have been complied with, the petitioner can not, however, deny that he
did receive the notice for the auction sale. The records sustain the lower court's
finding that:
[T]he plaintiff claimed that it was illegal and irregular. He
insisted that he was not properly notified of the auction sale.
Surprisingly, however, he admitted in his testimony that he
received the letter dated November 21, 1977 (Exhibit "I") as
shown by his signature (Exhibit "I-A") thereof. He claimed
further that he was not present on December 5, 1977 the date of
the auction sale because he went to Iligan City. As long as there
was substantial compliance with the requirements of the notice,
the validity of the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified
you that the property in question shall be sold at public auction to the highest bidder
on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell the Court whether
you received the original of this letter?
A. I just signed it because I was not able to read the same. It was just sent by mail
carrier.
Q. So you admit that you received the original of Exhibit I and you signed upon
receipt thereof but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his
part when he ignored such notice. By his very own admission that he received the
notice, his now coming to court assailing the validity of the auction sale loses its
force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule,
gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567;
Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v.
Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of
Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not
material when the law gives the owner the right to redeem as when a sale is made at
public auction, upon the theory that the lesser the price, the easier it is for the owner
to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
 ... [R]espondent treasurer now claims that the prices for which
the lands were sold are unconscionable considering the wide
divergence between their assessed values and the amounts for
which they had been actually sold. However, while in ordinary
sales for reasons of equity a transaction may be invalidated on
the ground of inadequacy of price, or when such inadequacy
shocks one's conscience as to justify the courts to interfere, such
does not follow when the law gives to the owner the right to
redeem, as when a sale is made at public auction, upon the
theory that the lesser the price the easier it is for the owner to
effect the redemption. And so it was aptly said: "When there is
the right to redeem, inadequacy of price should not be material,
because the judgment debtor may reacquire the property or also
sell his right to redeem and thus recover the loss he claims to
have suffered by reason of the price obtained at the auction
sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux.
v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
We are inclined to believe the petitioner's claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay
City, which necessitated the expropriation of adjoining areas, real estate values have
gone up in the area. However, the price quoted by the petitioner for a 203 square
meter lot appears quite exaggerated. At any rate, the foregoing reasons which
answer the petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable
grounds, there are no strong considerations of substantial justice in his favor. Mr.
Francia failed to pay his taxes for 14 years from 1963 up to the date of the auction
sale. He claims to have pocketed the notice of sale without reading it which, if true,
is still an act of inexplicable negligence. He did not withdraw from the expropriation
payment deposited with the Philippine National Bank an amount sufficient to pay
for the back taxes. The petitioner did not pay attention to another notice sent by the
City Treasurer on November 3, 1978, during the period of redemption, regarding his
tax delinquency. There is furthermore no showing of bad faith or collusion in the
purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke
equity in his attempt to regain the property by belatedly asking for the annulment of
the sale.

If mere inadequacy of price is held to be a valid objection to a WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is
sale for taxes, the collection of taxes in this manner would be DISMISSED. The decision of the respondent court is affirmed.
greatly embarrassed, if not rendered altogether impracticable. In
Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as SO ORDERED.
follows: "where land is sold for taxes, the inadequacy of the
price given is not a valid objection to the sale." This rule arises
from necessity, for, if a fair price for the land were essential to
the sale, it would be useless to offer the property. Indeed, it is
notorious that the prices habitually paid by purchasers at tax
sales are grossly out of proportion to the value of the land.
(Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean,
et al. (267 P. 555):

Like most cases of this character there is here a certain element

of hardship from which we would be glad to relieve, but do so
would unsettle long-established rules and lead to uncertainty and
difficulty in the collection of taxes which are the life blood of
the state. We are convinced that the present rules are just, and
that they bring hardship only to those who have invited it by
their own neglect.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-69560 June 30, 1988
THE INTERNATIONAL CORPORATE BANK INC., petitioner,  amount, private respondent is still indebted in the amount of P6.81 million.
vs.
THE IMMEDIATE APPELLATE COURT, HON. ZOILO AGUINALDO, as
presiding Judge of the Regional Trial Court of Makati, Branch 143,
NATIVIDAD M. FAJARDO, and SILVINO R. PASTRANA, as Deputy and
Special Sheriff, respondents.
PARAS, J.:
This is a petition for review on certiorari of the Decision of the Court of Appeals
dated October 31, 1984 in AC-G.R. SP No. 02912 entitled "THE
INTERNATIONAL CORPORATE BANK, INC. v. Hon. ZOILO AGUINALDO, et
al.," dismissing petitioner's petition for certiorari against the Regional Trial Court of
Makati (Branch 143) for lack of merit, and of its Resolution dated January 7, 1985,
denying petitioner's motion for reconsideration of the aforementioned Decision.
Petitioner also prays that upon filing of the petition, a restraining order be issued ex-
parte, enjoining respondents or any person acting in their behalf, from enforcing or
in any manner implementing the Order of the respondent trial court dated February
13 and March 9, 1984, and January 10 and January 11, 1985.
The facts of this case, as found by the trial court and subsequently adopted by the
Court of Appeals, are as follows:
In the early part of 1980, private respondent secured from petitioner's predecessors-
in-interest, the then Investment and Underwriting Corp. of the Philippines and
Atrium Capital Corp., a loan in the amount of P50,000,000.00. To secure this loan,
private respondent mortgaged her real properties in Quiapo, Manila and in San
Rafael, Bulacan, which she claimed have a total market value of P110,000,000.00.
Of this loan, only the amount of P20,000,000.00 was approved for release. The same
amount was applied to pay her other obligations to petitioner, bank charges and fees.
Thus, private respondent's claim that she did not receive anything from the approved
loan.
On September 11, 1980, private respondent made a money market placement with
ATRIUM in the amount of P1,046,253.77 at 17% interest per annum for a period of
32 days or until October 13, 1980, its maturity date. Meanwhile, private respondent
allegedly failed to pay her mortgaged indebtedness to the bank so that the latter
refused to pay the proceeds of the money market placement on maturity but applied
the amount instead to the deficiency in the proceeds of the auction sale of the
mortgaged properties. With Atrium being the only bidder, said properties were sold
in its favor for only P20,000,000.00. Petitioner claims that after deducting this
On November 17, 1982, private respondent filed a complaint with the trial court
against petitioner for annulment of the sheriff's sale of the mortgaged properties, for
the release to her of the balance of her loan from petitioner in the amount of
P30,000,000,00, and for recovery of P1,062,063.83 representing the proceeds of her
money market investment and for damages. She alleges in her complaint, which was
subsequently amended, that the mortgage is not yet due and demandable and
accordingly the foreclosure was illegal; that per her loan agreement with petitioner
she is entitled to the release to her of the balance of the loan in the amount of
P30,000,000.00; that petitioner refused to pay her the proceeds of her money market
placement notwithstanding the fact that it has long become due and payable; and
that she suffered damages as a consequence of petitioner's illegal acts.
In its answer, petitioner denies private respondent's allegations and asserts among
others, that it has the right to apply or set off private respondent's money market
claim of P1,062,063.83. Petitioner thus interposes counterclaims for the recovery of
P5,763,741.23, representing the balance of its deficiency claim after deducting the
proceeds of the money market placement, and for damages.
The trial court subsequently dismissed private respondent's cause of action
concerning the annulment of the foreclosure sale, for lack of jurisdiction, but left the
other causes of action to be resolved after trial. Private respondent then filed
separate complaints in Manila and in Bulacan for annulment of the foreclosure sale
of the properties in Manila and in Bulacan, respectively.
On December 15, 1983, private respondent filed a motion to order petitioner to
release in her favor the sum of P1,062,063.83, representing the proceeds of the
money market placement, at the time when she had already given her direct
testimony on the merits of the case and was being cross-examined by counsel. On
December 24, 1983, petitioner filed an opposition thereto, claiming that the proceeds
of the money market investment had already been applied to partly satisfy its
deficiency claim, and that to grant the motion would be to render judgment in her
favor without trial and make the proceedings moot and academic. However, at the
hearing on February 9, 1984, counsel for petitioner and private respondent jointly
manifested that they were submitting for resolution said motion as well as the
opposition thereto on the basis of the pleadings and of the evidence which private
respondent had already presented.
On February 13, 1984, respondent judge issued an order granting the motion, as
follows:
IN VIEW OF THE FOREGOING, the defendant International
Corporate Bank is hereby ordered to deliver to the plaintiff
Natividad M. Pajardo the amount of P1,062,063.83 covered by
the repurchase agreement with Serial No. AOY-14822 (Exhibit
"A'), this amount represented the principal of P1,046,253.77
which the plaintiff held including its interest as of October 13,
1980, conditioned upon the plaintiff filing a bond amount to
P1,062,063.83 to answer for all damages which the said
defendant bank may suffer in the event that the Court should
finally decide that the plaintiff was not entitled to the said
amount.
Petitioner filed a motion for reconsideration to the aforesaid order, asserting among
other things that said motion is not verified, and therefore a mere scrap of paper.
Private respondent however manifested that since she testified in open court and was
cross-examined by counsel for petitioner on the motion for release of the proceeds
of the money market placement, the defect had already been cured. On March 9,
1984, the respondent judge issued an order denying petitioner's motion for
reconsideration. (CA Decision, Rollo, pp. 109-111).
On March 13, 1984, petitioner filed a special civil action for certiorari and
prohibition with preliminary injunction with the Court of Appeals, (a) for the setting
aside and annulment of the Orders dated February 13, 1984 and March 9,1984,
issued by the respondent trial court, and (b) for an order commanding or directing
the respondent trial judge to desist from enforcing and/or implementing and/or
executing the aforesaid Orders. The temporary restraining order prayed for was
issued by respondent Court of Appeals on March 22, 1984. (Please see CA Decision,
Rollo, p. 114, last paragraph).
In a decision rendered on October 31, 1984 (Rollo, pp. 109-14), the Court of
Appeals dismissed said petition finding—(a) that while the Motion for the release of
the proceeds of the money market investment in favor of private respondent was not
verified by her, that defect was cured when she testified under oath to substantiate
her allegations therein: (b) that, petitioner cannot validly claim it was denied due
process for the reason that it was given ample time to be heard, as it was in fact
heard when it filed an Opposition to the motion and a motion for reconsideration; (c)
that the circumstances of this case prevent legal compensation from taking place
because the question of whether private respondent is indebted to petitioner in the
amount of 6.81 million representing the deficiency balance after the foreclosure of
the mortgage executed to secure the loan extended to her, is vigorously disputed; (d)
that the release of the proceeds of the money market investment for private
respondent will not make the causes of action of the case pending before the trial
court moot and academic nor will it cause irreparable damage to petitioner, private
respondent having filed her bond in the amount of P1,062,063.83 to answer for all
damages which the former may suffer in the event that the court should finally
decide that private respondent is not entitled to the return of said amount (CA
Decision, Rello, pp. 112-114).
The dispositive portion of the aforementioned Decision reads:
... We hold that the respondent court cannot be successfully
charged with grave abuse of discretion amounting to lack of
jurisdiction when it issued its Orders of February 13, 1984 and
March 9, 1984, based as they are on a correct appreciation of the
import of the parties' evidence and the applicable law.
IN VIEW WHEREOF, the petition is dismissed for lack of merit
and the temporary restraining order issued by this Court on
March 22, 1984 is lifted. (Ibid., p. 114).
Petitioner moved for the reconsideration of the above decision (Annex "S", Rollo,
pp. 116-124), but for the reason that the same failed to raise any issue that had not
been considered and passed upon by the respondent Court of Appeals, it was denied
in a Resolution dated January 7, 1985 (CA Resolution, Rollo, p. 126).
Having been affirmed by the Court of Appeals, the trial court issued a Writ of
Execution to implement its Order of February 13, 1984 (Annex "BB", Rollo, p. 188)
and by virtue thereof, a levy was made on petitioner's personal property consisting
of 20 motor vehicles (Annex "U", Rollo, p. 127).
On January 9, 1985, herein private respondent (then plaintiff) filed in the trial court
an ex-parte motion praying that the four branches of the petitioner such as: Baclaran
Branch, Paranaque, Metro Manila; Ylaya Branch, Divisoria, Metro Manila; Cubao
Branch, Quezon City and Binondo Branch, Sta. Cruz, Manila, be ordered to pay the
amount of P250,000.00 each, and the main office of the petitioner bank at Paseo de
Roxas, Makati, Metro Manila, be ordered to pay the amount of P62,063.83 in order
to answer for the claim of private respondent amounting to P1,062,063.83.
Thereupon, on January 10, 1985, the trial court issued an Order (Annex "V", Rollo,
p. 129) granting the above-mentioned prayers.
Acting on the ex-parte motion by the plaintiff (now private respondent), the trial
court, on January 11, 1984, ordered the President of defendant International
Corporate Bank (now petitioner) and all its employees and officials concemed to
deliver to the sheriff the 20 motor vehicles levied by virtue of the Writ of Execution
dated December 12, 1984 (Annex "W", Rollo, p. 131).
The petitioner having failed to comply with the above-cited Order, the respondent
trial court issued two (2) more Orders: the January 16, 1985 (Annex "CC," Rollo, p.
190) and January 21, 1985 Orders (Annex "DD", Rollo, p. 191), directing several
employees mentioned therein to show cause wily they should not be cited in
contempt.
Hence, this petition for review on certiorari with prayer for a restraining order and
for a writ of preliminary injunction.
Three days after this petition was filed, or specifically on January 18, 1985,
petitioner filed an urgent motion reiterating its prayer for the issuance of an ex-
parte restraining order (Rollo, p. 132).
Simultaneous with the filing of the present petition, petitioner, as defendant, filed
with the trial court an ex-partemotion to suspend the implementation of any and all
orders and writs issued pursuant to Civil Case No. 884 (Annex "A", Rollo, p. 135).
This Court's resolution dated January 21, 1985, without giving due course to the
petition, resolved (a) to require the respondents to comment: (b) to issue, effective
immediately and until further orders from this Court, a Temporary Restraining Order
enjoining the respondents from enforcing or in any manner implementing the
questioned Orders dated February 13, 1984, March 9, 1984, January 10, 1985 and
January 11 and 16, 1985, issued in Civil Case No. 884.
The corresponding writ was issued on the same day (Rollo, pp. 139-140).
As required, the Comment of private respondent was filed on January 28, 1985
(Rollo, pp. 141- 150).
Thereafter, petitioner moved for leave to file a supplemental petition on the ground
that after it had filed this present petition, petitioner discovered that the bond filed
with, and approved by, the respondent lower court showed numerous material
erasures, alterations and/or additions (Rollo, p. 151), which the issuing insurance
company certified as having been done without its authority or consent (Annex "Z",
Rollo, p. 178).
The Supplemental Petition was actually filed on February 1, 1985 (Rollo, pp. 154-
171). It pointed out the erasures, alterations and/or additions in the bond as follows:
a. below "Civil Case No. 884" after the words, "Plaintiff's
Bond," the phrase "For Levying of Attachment" was erased or
deleted;
b. in lines 2 and 3 after the word "order," the phrase "approving
plaintiff's motion dated Dec. 15, 1983, was inserted or added;
c. in line 3, the phrases "Of attachment" and "ordered that a writ
of attachment issue' were erased or deleted;
d also in line 3 after the words "the court has" the phrase
"approved the Motion was likewise inserted or added;
e. in line 9, the phrase "and of the levying of said attachment"
was also erased or deleted;
f. in line 13, the word "attachment" was likewise erased or
deleted;
g. also in line 13 after the deletion of word "attachment" the
phrase "release of the P1,062,063.83 to the plaintiff was
similarly inserted or added."
Petitioner contended therein that in view of the foregoing facts, the genuineness, due
execution and authenticity as well as the validity and enforceability of the bond
(Rello, p. 174) is now placed in issue and consequently, the bond may successfully
be repudiated as falsified and, therefore, without any force and effect and the
bonding company may thereby insist that it has been released from any hability
thereunder.
Also, petitioner pointed as error the respondent trial court's motu
proprio transferring Civil Case No. 884 to the Manila Branch of the same Court
arguing that improper venue, as a ground for, and unless raised in, a Motion to
Dismiss, may be waived by the parties and the court may not pre-empt the right of
the parties to agree between or among themselves as to the venue of their choice in
litigating their justiciable controversy (Supplemental Petition, Rollo, p. 160).
On being required to comment thereon, (Rollo, p. 192) private respondent countered
(Rollo, pp. 193-198) that bond forms are ready-prepared forms and the bonding
company used the form for "Levying of Attachment" because the company has no
ready-prepared form for the kind of bond called for or required in Civil Case 884.
Whatever deletions or additions appear on the bond were made by the Afisco
Insurance Corporation itself for the purpose of accomplishing what was required or
intended.
Nonetheless, on May 7, 1985, private respondent filed "Plaintiffs Bond" in the
respondent trial court in the amount of P1,062,063.83 a xerox copy of which was
furnished this Court (Rollo, p. 219), and noted in the Court's Resolution dated May
29,1985 (Rollo, p. 225).
On March 11, 1985, petitioner was required to file a Consolidated Reply (Rollo, p.
199) which was filed on April 10, 1985 (Rollo, p. 201).
Thereafter, a Rejoinder (Rollo, p. 238) was filed by private respondent on
September 18, 1985 after Atty. Advincula, counsel for private respondents was
required by this Court to show cause why he should not be disciplinarily dealt with
or held in contempt for his failure to comply on time (Rollo, p. 226) and on August
19, 1985 said lawyer was finally admonished (Rollo, p. 229) for his failure to
promptly apprise the Court of his alleged non-receipt of copy of petitioner's reply,
which alleged non-receipt was vehemently denied by petitioner in its Counter
Manifestation (Rollo, p. 230) filed on August 5, 1985.
Finally, on October 7, 1985, this petition was given due course and both parties were
required to submit simultaneous memoranda (Rollo, p. 249) but before the same
were filed, petitioner moved for leave to file sur-rejoinder (Rollo, p. 250), the sur-
rejoinder was filed on October 14,1985 (Rollo, pp. 252-254).
Petitioner's memorandum was filed on December 28, 1985 (Rollo, pp. 264-292)
while that of private respondent was submitted on January 10, 1986 (Rollo, pp. 295-
304).
Petitioner again moved for leave to file a Reply Memorandum (Rollo, p. 307) which,
despite permission from this Court, was not filed and on August 22, 1986, private
respondent prayed for early resolution of the petition (Rollo, p. 311).
In a resolution dated October 13, 1986 (Rollo, p. 314) this case was transferred to
the Second Division of this Court, the same being assigned to a member of that
Division.
The crucial issue to be resolved in this case is whether or not there can be legal
compensation in the case at bar.
Petitioner contends that after foreclosing the mortgage, there is still due from private
respondent as deficiency the amount of P6.81 million against which it has the right
to apply or set off private respondent's money market claim of P1,062,063.83.
The argument is without merit.
As correctly pointed out by the respondent Court of Appeals —
Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other. (Art. 1278, Civil
Code). "When all the requisites mentioned in Art. 1279 of the
Civil Code are present, compensation takes effect by operation
of law, even without the consent or knowledge of the debtors."
(Art. 1290, Civil Code). Article 1279 of the Civil Code requires
among others, that in order that legal compensation shall take
place, "the two debts be due" and "they be liquidated and
demandable." Compensation is not proper where the claim of
the person asserting the set-off against the other is not clear nor
liquidated; compensation cannot extend to unliquidated,
disputed claim arising from breach of contract. (Compañia
General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo
& Martinez vs. Herrero, 17 Phil. 29).
There can be no doubt that petitioner is indebted to private
respondent in the amount of P1,062,063.83 representing the
proceeds of her money market investment. This is admitted. But
whether private respondent is indebted to petitioner in the
amount of P6.81 million representing the deficiency balance
after the foreclosure of the mortgage executed to secure the loan
extended to her, is vigorously disputed. This circumstance
 prevents legal compensation from taking place. (CA Decision,
Rollo, pp. 112-113).
It must be noted that Civil Case No. 83-19717 is still pending consideration at the
RTC Manila, for annulment of Sheriffs sale on extra-judicial foreclosure of private
respondent's property from which the alleged deficiency arose. (Annex "AA", Rollo,
pp. 181-189). Therefore, the validity of the extrajudicial foreclosure sale and
petitioner's claim for deficiency are still in question, so much so that it is evident,
that the requirement of Article 1279 that the debts must be liquidated and
demandable has not yet been met. For this reason, legal compensation cannot take
place under Article 1290 of the Civil Code.
Petitioner now assails the motion of the plaintiff (now private respondent) filed in
the trial court for the release of the proceeds of the money market investment,
arguing that it is deficient in form, the same being unverified (petitioner's
Memorandum, Rollo, p. 266). On this score, it has been held that "as enjoined by the
Rules of Court and the controlling jurisprudence, a liberal construction of the rules
and the pleadings is the controlling principle to effect substantial justice." (Maturan
v. Araula, 111 SCRA 615 [1982]).
Finally, the filing of insufficient or defective bond does not dissolve absolutely and
unconditionally the injunction issued. Whatever defect the bond possessed was
cured when private respondent filed another bond in the trial court. PREMISES
CONSIDERED, the questioned Decision and Resolution of the respondent Court of
Appeals are hereby AFFIRMED. SO ORDERED.
THIRD DIVISION
G.R. No. 174882 : January 21, 2013
MONDRAGON PERSONAL SALES, INC., Petitioner, v. VICTORIANO S.
SOLA, JR., Respondent.
DECISION
PERALTA, J.:
Before us is a petition for review on certiorari seeking to set aside the
Decision1 dated February 10, 2006 and the Resolution2 dated September 6, 2006
issued by the Court of Appeals (CA) in CA-G.R. CV No. 71690.
Petitioner Mondragon Personal Sales Inc., a company engaged in the business of
selling various consumer products through a network of sales representatives,
entered into a Contract of Services3 with respondent Victoriano S. Sola, Jr. for a
period of three years commencing on October 2, 1994 up to October 1, 1997. Under
the said contract, respondent, as service contractor, would provide service facilities,
i.e., bodega cum office, to petitioner's products, sales force and customers in General
Santos City and as such, he was entitled to commission or service fee as
follows:cralawlibrary
MONTHLY SALES SERVICE FEE
(net of vat)
P50,000.00 to 2,500,000.00 Five percent (5%)
P2,500,001.00 to 3,000.000.00 P125,000.00
P3,000,001.00 to 3,500,000.00 150,000.00
P3,500,001.00 UP 200,000.004
The agreement then came into effect when petitioner's goods were delivered to
respondent's bodega and were sold by petitioner's employees. Prior to the execution
of the contract, however, respondents wife, Lina Sola, had an existing obligation
with petitioner arising from her Franchise Distributorship Agreement with the latter.
On January 26, 1995, respondent wrote a letter 5 addressed to Renato G. de Leon,
petitioner's Vice-President for Finance, wherein he acknowledged and confirmed his
wifes indebtedness to petitioner in the amount of P1,973,154.73 (the other
accountability in the sum of P1,490,091.15 was still subject to reconciliation) and,
together with his wife, bound himself to pay on installment basis the said debt.
Consequently, petitioner withheld the payment of respondent's service fees from
February to April 1995 and applied the same as partial payments to the debt which
he obligated to pay. On April 29, 1995, respondent closed and suspended operation
of his office cum bodega where petitioner's products were stored and customers
were being dealt with.
On May 24, 1995, respondent filed with the Regional Trial Court (RTC) of Davao, a
Complaint6 for accounting and rescission against petitioner alleging that petitioner
withheld portions of his service fees covering the months from October 1994 to
January 1995 and his whole service fees for the succeeding months of February to
April 1995, the total amount of which was P222,202.84; that petitioner's act grossly
hampered, if not paralyzed, his business operation, thus left with no other recourse,
he suspended operations to minimize losses. He prayed for the rescission of the
contract of services and for petitioner to render an accounting of his service fees.
In its Answer with Counterclaim7 filed on June 14, 1995, petitioner contended that
respondents letter dated January 26, 1995 addressed to petitioner's Vice-President
for Finance, confirmed and obligated himself to pay on installment basis the
accountability of his wife with petitioner, thus respondent's service fees/commission
earned for the period of February to April 1995 amounting to P125,040.01 was
applied by way of compensation to the amounts owing to it; that all the service fees
earned by respondent prior to February 1995 were fully paid to him. By way of
counterclaim, petitioner asked for the payment of the amount of P1,547,892.55
which respondent obligated to pay plus interest; the delivery of petitioner's products
padlocked in respondent's office cum bodega, the payment for the loss of income in
the amount of P833,600.00 as well as the remaining balance of P45,728.30 from
the P100,000.00 given by petitioner to respondent as advance money for the
purchase of office equipment and the renovation of the bodega cum office.
In his Reply and Answer 8 to petitioner's counterclaim, respondent averred that he
was made to believe that the sales commission contained in petitioner's
memorandum dated July 5, 1994 would be applicable to him; that it was improper
for petitioner to confuse respondent's transaction with that of his wife as it was
divergent in nature and terms.
Pending trial, petitioner moved for the issuance of a preliminary attachment and
replevin which the RTC granted in its Order dated June 19, 1995 upon the filing of
bonds.9 Respondent filed a Motion to Quash the Writ of Attachment, which the RTC
denied in an Order dated July 24, 1995. 10 As respondent's motion for reconsideration
was also denied, he filed with us a petition for certiorari, docketed as G.R. No.
126427, assailing the RTC orders which we dismissed in a Resolution 11 dated
November 11, 1996 on procedural matters.
Trial thereafter ensued.
On July 6, 2000, the RTC rendered its Decision, 12 the dispositive portion of which
reads:cralawlibrary
FOR THE FOREGOING, judgment is hereby rendered in favor of defendant and
against plaintiff, ordering the latter to pay the former:cralawlibrary
1) the sum of P1,543,643.96 representing the principal balance of plaintiff's account
with defendant, plus legal interest from the time of filing of the complaint until fully
paid, at the rate of 6% per annum;
2) attorney's fees in the amount of P25,000.00
3) costs of the suit.13?r?l1 ???ñr?bl?š ??r†??l l?? l?br?rÿ
In so ruling, the RTC found that in computing the service fees/commissions due
respondent, the rate as provided in the contract of service dated January 27, 1995
was controlling, since respondent was a party thereto duly affixing his signature
therein; that petitioner's computation of respondent's service fees for the months of
February to April 1995 in the total amount of P125,040.01 which was based on the
said contract deserved credence. The RTC ruled that while Article 1381 of the Civil
Code provides for the grounds for which a contract may be rescinded, none of these
grounds existed in this case; that there was no showing of fraud which petitioner
employed when it entered into the contract with respondent nor did respondent agree
to such a contract without knowing its content, thus the contract was not rescissible.
As regards to petitioner's counterclaim that respondent confirmed and assumed the
payment of his wife's account with petitioner, the RTC found that respondent
obligated himself to pay his wife's account as evidenced by his letter dated January
26, 1995; that after deducting from the confirmed amount of P1,668,683.97 the
respondent's service commission for the period from February 1995 to April 1995,
which was in the total amount of P125,040.01, the amount owing to petitioner would
still be P1,543,643.96. The RTC dismissed the other counterclaims, since they were
not substantiated but found petitioner entitled to attorney's fees due to the amount of
money involved and the time spent in pursuing the case.
Respondent filed his appeal to the CA to which petitioner filed its appellee's brief.
On February 10, 2006, the CA rendered its assailed decision, the dispositive portion
of which reads as follows:cralawlibrary
WHEREFORE, in the light of the foregoing premises, herein appeal is GRANTED.
Accordingly, the Contract of Services is hereby RESCINDED. Let the case be
REMANDED to the court a quo for the proper determination of the amount of
service fees unlawfully withheld from the appellant.
Furthermore, Appellee is hereby ordered to pay the Appellant attorneys fees in the
amount of twenty-five thousand pesos (P25,000.00).14?r?l1
The CA found that under Article 1191 of the Civil Code, respondent was entitled to
rescind the contract of services as it was petitioner who breached the same by
withholding the service fees lawfully due to the former; that petitioner's act of
unlawfully withholding the service fees due respondent constituted a willful and
deliberate infringement on contractual obligations which would justify rescission
under Article 1191. The CA declared that the contract of services entered into by the
parties did not fall under any of the rescissible contracts enumerated under Article
1381 of the Civil Code but under Article 1191 which pertains to rescission of
reciprocal obligations as in the instant case.
The CA ruled that respondent did not assume his wife's obligation as he did not
substitute himself in the shoes of his wife regarding the payment of the latter's
liability; that there can be no novation as novation was never presumed. Petitioner's
act of withholding respondent's service fee and thereafter applying them to the
obligation of his wife was unlawful, considering that respondent never assumed his
wife's obligation with petitioner; that there could be no legal compensation, since it
was respondent's wife who was principally indebted to petitioner owing from the
franchise distributorship agreement she earlier entered into with petitioner; that
granting the debt redounded to the benefit of the family and incurred with the
consent of respondent, and the spouse, as joint administrators of the community
property are solidarily liable with their separate properties for debts incurred,
however, such liability is only subsidiary, when the community property is not
sufficient to pay for all liabilities, however, in this case, there was no showing that
the community property of the spouses was insufficient to pay the debt.
The CA ordered the deletion of attorney's fees as it was respondent who was entitled
to such award, since he was compelled to litigate to protect his interest for the
unjustified act of petitioner.
Petitioner's motion for reconsideration was denied in a Resolution dated September
6, 2006.
Hence, this petition where petitioner alleges that the CA erred:cralawlibrary
1. In finding that petitioner breached its contract with respondent and that there is no
compensation in accordance to Article 1279 of the Civil Code;
2. In finding that respondent did not assume the obligation of his wife;
3. In remanding the case to the court a quo for proper determination of service fee
withheld when the same has been determined;
4. In obliterating the award of petitioner's counterclaim when respondent admitted
his obligation to petitioner.15?r?l1 ???ñr?bl?š ??r†??l l?? l?br?rÿ
The CA found that petitioner's act of withholding respondent's service fees and
thereafter applying them as partial payment to the obligation of respondent's wife
with petitioner was unlawful, considering that respondent never assumed his wifes
obligation, thus, there can be no legal compensation under Article 1279 of the Civil
Code.
We do not agree.
In his letter dated January 26, 1995 addressed to Mr. Renato G. De Leon, petitioner's
Vice-President for Finance, respondent wrote, and which we quote in
full:cralawlibrary
Gentlemen:cralawlibrary
This refers to the account of my wife, Lina (Beng) Sola, with Mondragon Personal
Sales, Inc. in the amount of P3,463,173.88. Of this total amount, we are initially
confirming the total amount of P1,973,154.73 as due from Lina (Beng) Sola, while
the remaining balance of P1,490,091.15 will be subject to a reconciliation on or
before February 5, 1995.
In recognition of Lina (Beng) Sola's account, we undertake to pay P100,000.00 on
or before February 01, 1995 and the balance of P1,873,154.73 plus interest of 18%
per annum and 2% administrative charge per month on the diminishing balance will
be covered by postdated checks of not less than P100,000.00 per month starting
February 28, 1995 and every end of the month thereafter but not to exceed eighteen
(18) months or July 31, 1996.
With regards to the remaining balance of P1,490,019.15, we agree that upon final
verification of these accounts, we will issue additional postdated checks subject to
the same terms and conditions as stated above.
We further agree that all subsequent orders that will be released to us will be
covered by postdated checks.
I fully understand and voluntarily agree to the above undertaking with full
knowledge of the consequences which may arise therefrom.
Very truly yours,
(signed)
Victoriano S. Sola16?r?l1 ???ñr?bl?š ??r†??l l?? l?br?rÿ
A reading of the letter shows that respondent becomes a co-debtor of his wife's
accountabilities with petitioner. Notably, the last paragraph of his letter which states
"I fully understand and voluntarily agree to the above undertaking with full
knowledge of the consequences which may arise therefrom" and which was signed
by respondent alone, shows that he solidarily bound himself to pay such debt. Based
on the letter, respondent's wife had an account with petitioner in the amount
of P3,463,173.88, out of which only the amount of P1,973,154.73 was confirmed
while the remaining amount of P1,490,019.15 would still be subject to
reconciliation. As respondent bound himself to pay the amount of P1,973,154.73, he
becomes petitioner's principal debtor to such amount.
On the other hand, respondent, as petitioner's service contractor, was entitled to a
payment of service fees as provided in their contract of services dated January 26,
1995. We note that respondent never refuted the amount of monthly sales recorded
but only assailed in the RTC the rate of the service fees which he was entitled to.
However, we find that there could be no other computation of the rate of the service
fees other than what was provided in the contract of services dated January 26, 1995
signed by respondent and petitioner. Thus, we give credence to petitioner's
computation of respondent's service fees for the months of February to April 1995 in
the total amount of P125,040.01. Since respondent promised petitioner in his letter
dated January 26, 1995, to monthly pay a certain amount to cover the indebtedness
to petitioner which he failed to do, the latter withheld the payment of respondent's
service fees and applied the same as partial payments of the debt by way of
compensation.
We find that petitioner's act of withholding respondent's service fees/commissions
and applying them to the latter's outstanding obligation with the former is merely an
acknowledgment of the legal compensation that occurred by operation of law
between the parties. 17 Compensation is a mode of extinguishing to the concurrent
amount the obligations of persons who in their own right and as principals are
reciprocally debtors and creditors of each other. Legal compensation takes place by
operation of law when all the requisites are present, as opposed to conventional
compensation which takes place when the parties agree to compensate their mutual
obligations even in the absence of some requisites. 18 Legal compensation requires
the concurrence of the following conditions:cralawlibrary
(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor. 19?r?l1 ???ñr?bl?š ??r†??
l l?? l?br?rÿ
We find the presence of all the requisites for legal compensation. Petitioner and
respondent are both principal obligors and creditors of each other. Their debts to
each other consist in a sum of money. Respondent acknowledged and bound himself
to pay petitioner the amount of P1,973,154.73 which was already due, while the
service fees owing to respondent by petitioner become due every month.
Respondent's debt is liquidated and demandable, and petitioner's payments of
service fees are liquidated and demandable every month as they fall due. Finally,
there is no retention or controversy commenced by third persons over either of the
debts. Thus, compensation is proper up to the concurrent amount where petitioner
owes respondent P125,040.01 for service fees, while respondent owes
petitioner P1,973,154.73.
As legal compensation took place in this case, there is no basis for respondent to ask
for rescission since he was the first to breach their contract when, on April 29, 1995,
he suddenly closed and padlocked his bodega cum office in General Santos City
occupied by petitioner.
Petitioner claims that the CA erred in obliterating the RTCs award of its
counterclaim which it had alleged and proved during trial and which respondent
even admitted.
We agree.
In his letter dated January 6, 1995, respondent confirmed the amount
of P1,973,154.73 owing to petitioner. On September 29, 1997, petitioner wrote
another letter20 to petitioner's Credit and Collection Manager, Rudy Machanco,
wherein he again confirmed the indebtedness in the amount of P1,973,154.73. In the
same letter, he showed the payments he had already made and after deducting the
same from the confirmed indebtedness, the total balance remained to be
at P1,668,683.97. As we have said earlier, respondent's service fees from February
to April 1995 which was in the total amount of P125,040.01 was not assailed at all
by respondent in his appeal with the CA, thus he is bound by such computation.
Hence, the amount of P125,040.01 which petitioner owes respondent shall be offset
against the P1,973,154.73 which respondent owes petitioner, and therefore leaving a
balance of P1,543,643.96 which respondent must pay.
WHEREFORE, the petition for review is GRANTED. The Decision dated February
10, 2006 and the Resolution dated September 6, 2006 of the Court of Appeals are
hereby REVERSED and SET ASIDE. Respondent is hereby ordered to pay
petitioner the amount of P1,543,643.96 with 6% percent per annum from June 14, Supreme Court
1995 until finality of this Decision and 12% percent per annum thereafter until full Manila
payment.  
FIRST DIVISION
SO ORDERED.  
JESUS M. MONTEMAYOR,   G.R. No. 168251
Petitioner,    
     
    Present:
     
  CORONA, C.J., Chairperson,
- versus - LEONARDO-DE CASTRO
  BERSAMIN,
  DEL CASTILLO, and
  VILLARAMA, JR., JJ.
     
VICENTE D. MILLORA,   Promulgated:
Respondent.   July 27, 2011
x-------------------------------------------------------------------
x
 
DECISION
 
DEL CASTILLO, J.:
 
When the dispositive portion of a judgment is clear and unequivocal, it must be executed
strictly according to its tenor.
 
This Petition for Review on Certiorari[1] assails the Decision[2] dated May 19, 2005
of the Court of Appeals (CA) in CA-G.R. SP No. 81075, which dismissed the petition
forcertiorari seeking to annul and set aside the Orders dated September 6, 2002[3] and October
2, 2003[4] of the Regional Trial Court (RTC) of Quezon City, Branch 98 in Civil Case No. Q-
93-17255.
 
Factual Antecedents
 
On July 24, 1990, respondent Atty. Vicente D. Millora (Vicente) obtained a
loan of P400,000.00 from petitioner Dr. Jesus M. Montemayor (Jesus) as evidenced by a
promissory note[5] executed by Vicente. On August 10, 1990, the parties executed a loan
contract[6]wherein it was provided that the loan has a stipulated monthly interest of 2% and that
Vicente had already paid the amount of P100,000.00 as well as the P8,000.00 representing the
interest for the period July 24 to August 23, 1990.
 
Subsequently and with Vicentes consent, the interest rate was increased to 3.5% or P10,500.00
Republic of the Philippines a month. From March 24, 1991 to July 23, 1991, or for a period of four months, Vicente was
supposed to pay P42,000.00 as interest but was able to pay only P24,000.00. This was the last
payment Vicente made. Jesus made several demands[7] for Vicente to settle his obligation but
to no avail.
 
Thus, on August 17, 1993, Jesus filed before the RTC of Quezon City a Complaint[8] for Sum
of Money against Vicente which was docketed as Civil Case No. Q-93-17255. On October
19, 1993, Vicente filed his Answer[9] interposing a counterclaim for attorneys fees of not less
than P500,000.00. Vicente claimed that he handled several cases for Jesus but he was
summarily dismissed from handling them when the instant complaint for sum of money was
filed.
 
Ruling of the Regional Trial Court
 
In its Decision[10] dated October 27, 1999, the RTC ordered Vicente to pay Jesus his
monetary obligation amounting to P300,000.00 plus interest of 12% from the time of the filing
of the complaint on August 17, 1993 until fully paid. At the same time, the trial court found
merit in Vicentes counterclaim and thus ordered Jesus to pay Vicente his attorneys fees which
is equivalent to the amount of Vicentes monetary liability, and which shall be set-off with the
amount Vicente is adjudged to pay Jesus, viz:
WHEREFORE, premises above-considered [sic], JUDGMENT is
hereby rendered ordering defendant Vicente D. Millora to pay plaintiff
Jesus M. Montemayor the sum of P300,000.00 with interest at the rate
of 12% per annum counted from the filing of the instant complaint on
August 17, 1993 until fully paid and whatever amount recoverable from
defendant shall be set off by an equivalent amount awarded by the court
on the counterclaim representing attorneys fees of defendant on the basis
of quantum meruit for legal services previously rendered to plaintiff.
 
No pronouncement as to attorneys fees and costs of suit.
SO ORDERED.[11]
 
 
On December 8, 1999, Vicente filed a Motion for Reconsideration [12] to which Jesus filed an
Opposition.[13] On March 15, 2000, Vicente filed a Motion for the Issuance of a Writ of
Execution[14] with respect to the portion of the RTC Decision which awarded him attorneys
fees under his counterclaim. Jesus filed his Urgent Opposition to Defendants Motion for the
Issuance of a Writ of Execution[15] dated May 31, 2000.
 
In an Order[16] dated June 23, 2000, the RTC denied Vicentes Motion for Reconsideration but
granted his Motion for Issuance of a Writ of Execution of the portion of the decision
concerning the award of attorneys fees.
 
Intending to appeal the portion of the RTC Decision which declared him liable to Jesus for the
sum of P300,000.00 with interest at the rate of 12% per annum counted from the filing of the
complaint on August 17, 1993 until fully paid, Vicente filed on July 6, 2000 a Notice of
Appeal.[17] This was however denied by the RTC in an Order [18] dated July 10, 2000 on the
ground that the Decision has already become final and executory on July 1, 2000.[19]
 
Meanwhile, Jesus filed on July 12, 2000 a Motion for Reconsideration and Clarification[20] of
the June 23, 2000 Order granting Vicentes Motion for the Issuance of a Writ of
Execution.Thereafter, Jesus filed on September 22, 2000 his Motion for the Issuance of a Writ
of Execution.[21] After the hearing on the said motions, the RTC issued an Order [22] dated
September 6, 2002 denying both motions for lack of merit. The Motion for Reconsideration
and Clarification was denied for violating Section 5,[23] Rule 15 of the Rules of Court and
likewise the Motion for the Issuance of a Writ of Execution, for violating Section 6, [24] Rule 15
of the same Rules.
 
Jesus filed his Motion for Reconsideration [25] thereto on October 10, 2002 but this was
eventually denied by the trial court through its Order[26] dated October 2, 2003.
 
Ruling of the Court of Appeals
Jesus went to the CA via a Petition for Certiorari[27] under Rule 65 of the
Rules of Court.
 
On May 19, 2005, the CA issued its Decision the dispositive portion of which
provides:
 
WHEREFORE, the foregoing considered, the petition for
certiorari is DENIED and the assailed Orders
are AFFIRMED in toto. No costs.
SO ORDERED.[28]
 
Not satisfied, Jesus is now before this Court via a Petition for Review on Certiorari under
Rule 45 of the Rules of Court.
 
Issue
 
NOTWITHSTANDING THE FINALITY OF THE TRIAL COURTS
DECISION OF OCTOBER 27, 1999, AS WELL AS THE ORDERS
OF SEPTEMBER 6, 2002 AND OCTOBER 2, 2003, THE LEGAL
ISSUE TO BE RESOLVED IN THIS CASE IS WHETHER X X X
[DESPITE] THE ABSENCE OF A SPECIFIC AMOUNT IN THE
DECISION REPRESENTING RESPONDENTS
COUNTERCLAIM, THE SAME COULD BE VALIDLY [OFFSET]
 AGAINST THE SPECIFIC AMOUNT OF AWARD MENTIONED
IN THE DECISION IN FAVOR OF THE PETITIONER.[29]
 
 
Petitioners Arguments
 
Jesus contends that the trial court grievously erred in ordering the implementation of the RTCs
October 27, 1999 Decision considering that same does fix the amount of attorneys
fees.According to Jesus, such disposition leaves the matter of computation of the attorneys fees
uncertain and, hence, the writ of execution cannot be implemented. In this regard, Jesus points
out that not even the Sheriff who will implement said Decision can compute the judgment
awards. Besides, a sheriff is not clothed with the authority to render judicial functions such as
the computation of specific amounts of judgment awards.
Respondents Arguments
 
Vicente counter-argues that the October 27, 1999 RTC Decision can no longer be
made subject of review, either by way of an appeal or by way of a special civil action
for certiorari because it had already attained finality when after its promulgation, Jesus did not
even file a motion for reconsideration thereof or interpose an appeal thereto. In fact, it was
Vicente who actually filed a motion for reconsideration and a notice of appeal, which was
eventually denied and disapproved by the trial court.
 
Our Ruling
 
The petition lacks merit.
The October 27, 1999
Decision of the RTC is
already final and
executory, hence,
immutable.
 
At the outset, it should be stressed that the October 27, 1999 Decision of the RTC is
already final and executory. Hence, it can no longer be the subject of an appeal. Consequently,
Jesus is bound by the decision and can no longer impugn the same. Indeed, well-settled is the
rule that a decision that has attained finality can no longer be modified even if the modification
is meant to correct erroneous conclusions of fact or law. The doctrine of finality of judgment is
explained in Gallardo-Corro v. Gallardo:[30]
Nothing is more settled in law than that once a judgment
attains finality it thereby becomes immutable and unalterable. It may no
longer be modified in any respect, even if the modification is meant to
correct what is perceived to be an erroneous conclusion of fact or law,
and regardless of whether the modification is attempted to be made by
the court rendering it or by the highest court of the land. Just as the
losing party has the right to file an appeal within the prescribed period,
the winning party also has the correlative right to enjoy the finality of the
resolution of his case. The doctrine of finality of judgment is grounded
on fundamental considerations of public policy and sound practice, and
that, at the risk of occasional errors, the judgments or orders of courts
must become final at some definite time fixed by law; otherwise, there
would be no end to litigations, thus setting to naught the main role of
courts of justice which is to assist in the enforcement of the rule of law
and the maintenance of peace and order by settling justiciable
controversies with finality.[31]
 
To stress, the October 27, 1999 Decision of the RTC has already attained finality.
Such definitive judgment is no longer subject to change, revision, amendment or
reversal. Upon finality of the judgment, the Court loses its jurisdiction to amend, modify or
alter the same. Except for correction of clerical errors or the making of nunc pro tunc entries
which cause no prejudice to any party, or where the judgment is void, the judgment can neither
be amended nor altered after it has become final and executory. This is the principle of
immutability of final judgment.[32]
The amount of attorneys
fees is ascertainable from
the RTC Decision. Thus,
compensation is possible.
 
Jesus contends that offsetting cannot be made because the October 27, 1999 judgment of the
RTC failed to specify the amount of attorneys fees. He maintains that for offsetting to apply,
the two debts must be liquidated or ascertainable. However, the trial court merely awarded to
Vicente attorneys fees based on quantum meruit without specifying the exact amount thereof.
We do not agree.
 
For legal compensation to take place, the requirements set forth in Articles 1278 and 1279 of
the Civil Code, quoted below, must be present.
 
ARTICLE 1278. Compensation shall take place when two
persons, in their own right, are creditors and debtors of each other.
ARTICLE 1279. In order that compensation may be proper, it is
necessary:
 
 (1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other;
 
(2) That both debts consist in a sum of money, or if the things
due are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;
(3) That the two debts be due;
 
(4) That they be liquidated and demandable;
 
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in due
time to the debtor.
 
A debt is liquidated when its existence and amount are determined. It is not
necessary that it be admitted by the debtor. Nor is it necessary that the credit appear in a final
judgment in order that it can be considered as liquidated; it is enough that its exact amount is
known. And a debt is considered liquidated, not only when it is expressed already in definite
figures which do not require verification, but also when the determination of the exact amount
depends only on a simple arithmetical operation x x x.[33]
 
In Lao v. Special Plans, Inc.,[34] we ruled that:
 
When the defendant, who has an unliquidated claim, sets it up by way of
counterclaim, and a judgment is rendered liquidating such claim, it can
be compensated against the plaintiffs claim from the moment it is
liquidated by judgment. We have restated this in Solinap v. Hon. Del
Rosario[35] where we held that compensation takes place only if both
obligations are liquidated.
 
In the instant case, both obligations are liquidated. Vicente has the obligation to pay
his debt due to Jesus in the amount of P300,000.00 with interest at the rate of 12% per annum
counted from the filing of the instant complaint on August 17, 1993 until fully paid. Jesus, on
the other hand, has the obligation to pay attorneys fees which the RTC had already determined
to be equivalent to whatever amount recoverable from Vicente. The said attorneys fees were
awarded by the RTC on the counterclaim of Vicente on the basis of quantum meruit for the
legal services he previously rendered to Jesus.
 
In its Decision, the trial court elucidated on how Vicente had established his entitlement for
attorneys fees based on his counterclaim in this manner:
Defendant, on his counterclaim, has established the existence of a lawyer-client
relationship between him and plaintiff and this was admitted by the
latter. Defendant had represented plaintiff in several court cases which
include the Laguna property case, the various cases filed by Atty.
Romulo Reyes against plaintiff such as the falsification and libel cases
and the disbarment case filed by plaintiff against Atty. Romulo Reyes
before the Commission on Bar Integration. Aside from these cases,
plaintiff had made defendant his consultant on almost everything that
involved legal opinions.
More particularly in the Calamba, Laguna land case alone, plaintiff had
agreed to pay defendant a contingent fee of 25% of the value of the
property for the latters legal services as embodied in the Amended
Complaint signed and verified by plaintiff (Exh. 5). Aside from this
contingent fee, defendant had likewise told plaintiff that his usual
acceptance fee for a case like the Laguna land case is P200,000.00 and
his appearance fee at that time was x x x P2,000.00 per appearance but
still plaintiff paid nothing.
 
The lawyer-client relationship between the parties was severed because of the
instant case. The court is however fully aware of defendants stature in
life a UP law graduate, Bar topnotcher in 1957 bar examination, former
Senior Provincial Board Member, Vice-Governor and Governor of the
province of Pangasinan, later as Assemblyman of the Batasang
Pambansa and is considered a prominent trial lawyer since 1958. For all
his legal services rendered to plaintiff, defendant deserves to be
compensated at least on a quantum meruit basis.[36]
 
The above discussion in the RTC Decision was then immediately followed by the dispositive
portion, viz:
 
WHEREFORE, premises above-considered, JUDGMENT is hereby
rendered ordering defendant Vicente D. Millora to pay plaintiff Jesus M.
Montemayor the sum of P300.000.00 with interest at the rate of 12%
per annum counted from the filing of the instant complaint on August
17, 1993 until fully paid and whatever amount recoverable from
defendant shall be set off by an equivalent amount awarded by the
court on the counterclaim representing attorneys fees of
defendant on the basis of quantum meruit for legal services previously
rendered to plaintiff.
 
No pronouncement as to attorneys fees and costs of suit.
 
SO ORDERED.[37] (Emphasis supplied.)
 
It is therefore clear that in the execution of the RTC Decision, there are two parts to be
executed. The first part is the computation of the amount due to Jesus. This is achieved by
doing a simple arithmetical operation at the time of execution. The principal amount
of P300,000.00 is to be multiplied by the interest rate of 12%. The product is then multiplied
by the number of years that had lapsed from the filing of the complaint on August 17, 1993 up
to the date when the judgment is to be executed. The result thereof plus the principal
of P300,000.00 is the total amount that Vicente must pay Jesus.
 
The second part is the payment of attorneys fees to Vicente. This is achieved by
following the clear wordings of the above fallo of the RTC Decision which provides that
Vicente is entitled to attorneys fees which is equivalent to whatever amount recoverable from
him by Jesus. Therefore, whatever amount due to Jesus as payment of Vicentes debt is
equivalent to the amount awarded to the latter as his attorneys fees. Legal compensation or set-
off then takes place between Jesus and Vicente and both parties are on even terms such that
there is actually nothing left to execute and satisfy in favor of either party.
In fact, the RTC, in addressing Jesus Motion for Reconsideration and Clarification dated July
12, 2000 had already succinctly explained this matter in its Order dated September 6,
2002, viz:
Notwithstanding the tenor of the said portion of the
judgment, still, there is nothing to execute and satisfy in favor of either
of the herein protagonists because the said decision also states clearly
that whatever amount recoverable from defendant shall be SET-
OFF by an equivalent amount awarded by the Court on the
counterclaim representing attorneys fees of defendant on the basis
of quantum meruit for legal services previously rendered to
plaintiff x x x.
 
Said dispositive portion of the decision is free from any
ambiguity. It unequivocably ordered that any amount due in favor of
plaintiff and against defendant is set off by an equivalent amount
awarded to defendant in the form of counterclaims representing
attorneys fees for past legal services he rendered to plaintiff.
 
It will be an exercise in futility and a waste of so precious
time and unnecessary effort to enforce satisfaction of the plaintiffs
claims against defendant, and vice versa because there is in fact a setting
off of each others claims and liabilities under the said judgment which
has long become final.[38] (Emphasis in the original.)
 
 
A reading of the dispositive portion of the RTC Decision would clearly show that no
ambiguity of any kind exists. Furthermore, if indeed there is any ambiguity in the dispositive
portion as claimed by Jesus, the RTC had already clarified it through its Order dated
September 6, 2002 by categorically stating that the attorneys fees awarded in the counterclaim
of Vicente is of an amount equivalent to whatever amount recoverable from him by
Jesus. This clarification is not an amendment, modification, correction or alteration to an
already final decision as it is conceded that such cannot be done anymore. What the RTC
simply did was to state in categorical terms what it obviously meant in its decision. Suffice it to
say that the dispositive portion of the decision is clear and unequivocal such that a reading of it
can lead to no other conclusion, that is, any amount due in favor of Jesus and against Vicente is
set off by an equivalent amount in the form of Vicentes attorneys fees for past legal services he
rendered for Jesus.
 
WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The assailed
Decision of the Court of Appeals dated May 19, 2005 in CA-G.R. SP No. 81075 which
dismissed the petition for certiorari seeking to annul and set aside the Orders dated September
6, 2002 and October 2, 2003 of the Regional Trial Court of Quezon City, Branch 98 in Civil
Case No. Q-93-17255, is hereby AFFIRMED.
SO ORDERED.
FIRST DIVISION
[G.R. No. 149683. June 16, 2003]
ILOILO TRADERS FINANCE INC., petitioner, vs. HEIRS OF OSCAR
SORIANO JR., and MARTA L. SORIANO, respondents.
DECISION
VITUG, J.:
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. Instead of approving forthwith
the amicable settlement, the trial court required the parties to first give some
clarifications on a number of items. The order read in part -
Paragraph 4 of the compromise agreement dated August 16, 1983 states: That the
plaintiffs waive any claims, counterclaims, attorneys fees or damages that they may
have against herein defendants.
Plaintiffs and defendant Iloilo Traders Finance, Inc., are directed to clarify whether
the words herein defendants include defendants Bernadette Castellano and the
provincial sheriff of Iloilo.
If the plaintiffs desire to dismiss the complaint against defendants Castellano and the
provincial sheriff of Iloilo, they should state it categorically and in writing.
Furthermore, the Court wants to know from the plaintiffs and defendant Iloilo
Traders Finance, Inc., if the writ of preliminary injunction issued on January 6, 1982
should be lifted as to all three defendants.
The clarification herein sought after by the Court shall be made in writing and
signed by the parties concerned, assisted by their respective attorneys.
This Order shall be complied with within a period of ten (10) days from notice
hereof.[1]
The parties failed to comply with the court order. Resultantly, the trial court
disapproved the amicable settlement and set the case for pre-trial. Nothing much
could be gleaned from the records about what might have transpired next not until
seven years later when the Soriano couple filed a motion to submit anew the
amicable settlement. The motion was opposed by ITF on the ground that the amount
expressed in the settlement would no longer be accurate considering the lapse of
seven years, implying in a way that it could be amendable thereto if the computation
were to be revised. The trial court denied the Soriano motion. Significantly, while
the order of denial was made on the thesis that the debtor spouses, without the
consent of ITF, could not unilaterally resurrect the amicable settlement, the trial
court, nevertheless, made the following observations -
x x x (T)hat in relation to the disapproved Amicable Settlement, the intention of ITF
to agree and abide by the provisions thereof, as evidenced by the signatures thereto
of its President and counsels, cannot be ignored. That intention pervades to the
present time since the disapproval by the court pertains only to a technicality which
in no way intruded into the substance of the agreement reached by the parties. Such
being the case, the Amicable Settlement had novated the original agreement of that
parties as embodied in the promissory note. The rights and obligations of the parties,
therefore, at this time should be based on the provisions of the amicable settlement,
these should pertain to the principal amount as of that date which the parties pegged
at P431,200.00 and the legal rate of interest thereon.
The foregoing should however be a good issue in another forum, not in the present
case.[2]
Taking cue from the court order, the Sorianos withdrew their complaint and,
on 16 October 1991, filed a case for novation and specific performance, docketed
Civil Case No. 20047, before the Regional Trial Court, Branch 37, of Iloilo City.
The case ultimately concluded with a finding made by the trial court in favor of
herein respondents. On appeal to it, the Court of Appeals affirmed the judgment of
the court a quo.
The parties have submitted that the issue focuses on whether or not the
amicable settlement entered into between the parties has novated the original
obligation and also, as they would correctly suggest in their argument, on whether
the proposed terms of the amicable settlement were carried out or have been
rendered inefficacious.
The amicable settlement read -
COME NOW plaintiffs and defendant Iloilo Traders Finance, Inc., assisted by their
respective undersigned counsels and to this Honorable Court most respectfully
submit the following Amicable Settlement, thus:
1. That the total of the two (2) accounts of plaintiff to herein defendant as of June
30, 1983 is Two Hundred Ninety Thousand Six Hundred Ninety One Pesos
(P290,691.00) of which amount P10,691.00 shall be paid by plaintiffs to herein
defendant at the time of the signing of this Amicable Settlement;
2. That to this amount of P290,691.00 shall be added P151,200.00 by way of interest
for 36 months thus making a total of Four Hundred Thirty One Thousand Two
Hundred Pesos (P431,200.00);
3. That this amount of P431,200.00 shall be paid by plaintiffs to herein defendant in
36 monthly installments as follows, the first installment at P12,005.00 shall be paid
on or before August 16, 1983 and the 2nd to 36th installments at P11,977.00 shall be
paid on the 15th day of each month thereafter until fully paid;
4. That the plaintiffs waive any claims, counterclaims, attorneys fees or damages
that they may have against herein defendants;
5. That should plaintiffs fail to comply with the terms of this Amicable Settlement
the preliminary injunction issued in the case shall be immediately dissolved and the
foreclosure and public auction sale of the properties of the plaintiffs subject of the
mortgage to defendant shall immediately take place and the corresponding writ of
execution shall issue from this Court;
6. That this Amicable Settlement is submitted as the basis for decision in this case.
WHEREFORE, it is respectfully prayed of this Honorable Court that the foregoing
Amicable Settlement be approved.[3]
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 rates[7] or an extension of time to pay [8]); 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.
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. [11] Concededly, the
provisions of the settlement were beneficial to the respondent couple. The
compromise extended the terms of payment and implicitly deferred the extrajudicial
foreclosure of the mortgaged property. It was well to the interest of respondent
spouses to ensure its judicial approval; instead, they went to ignore the order of the
trial court and virtually failed to make any further appearance in court. This conduct
on the part of respondent spouses gave petitioner the correct impression that the
Sorianos did not intend to be bound by the compromise settlement, and its non-
materialization negated the very purpose for which it was executed.
Given the circumstances, the provisions of Article 2041 of the Civil Code
come in point - If one of the parties fails or refuses to abide by the compromise, the
other party may either enforce the compromise or regard it as rescinded and insist
upon his original demand.
As so well put in Diongzon vs. Court of Appeals,[12] a supposed new agreement is
deemed not to have taken effect where a debtor never complied with his
undertaking. In such a case, the other party is given the option to enforce the
provisions of the amicable settlement or to rescind it [13] and may insist upon the
original demand without the necessity for a prior judicial declaration of rescission. [14]
WHEREFORE, the decision of the Court of Appeals in C.A. G.R. CV No.
46910, affirming that of the court a quo, is REVERSED and SET ASIDE, and
another is entered dismissing the complaint in Civil Case No. 20047 before the
Regional Trial Court, Branch 37, of Iloilo City. No costs. SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 118585 September 14, 1995
AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO
TAN, ELISA TAN, TAN YEE, and SPS. MARCIAL SEE and LILIAN
TAN, petitioners, 
vs.
 HON. COURT OF APPEALS, METROPOLITAN BANK AND TRUST
COMPANY, and THE SHERIFF OF MANILA, respondents.
FRANCISCO, J.:
In its March 30, 1994 decision, public respondent Court of Appeals affirmed the
trial court's judgment upholding the validity of the extra-judicial foreclosure of the
real estate property of petitioners — spouses Marcial See and Lilian Tan, located at
Paco District, Manila covered by TCT 105233, by private respondent Metropolitan
Bank and Trust Company (Metrobank). 1 Petitioners' motion for reconsideration was
denied; hence, this petition for review on certiorari raising the following
assignments of errors:
FIRST: The Honorable Court of Appeals erred in holding that
the consolidation of the three (3) loans granted separately to
three entities into a single loan of P1.0 Million was a mere
restructuring and did not effect a novation of the loan as to
extinguish the accessory mortgage contracts.
SECOND: The Honorable Court of Appeals erred in not holding
that the consolidated loan of P1.0 Million was not accompanied
by the execution of a new REM, as was done by the Bank in the
earlier three (3) loans, and hence, was, to all legal
intents/purposes, unsecured.
THIRD: The Honorable Court of Appeals erred in holding that
the inclusion in the extra-judicial foreclosure of the admittedly
unsecured loan of P970,000.00 is a mere error that does not
invalidated said foreclosure, contrary to the pronouncement in C
& C Commercial Corp. vs. PNB, 175 SCRA 1.
FOURTH: The Honorable Court of Appeals erred in not
declaring as null and void the extra-judicial foreclosure
undertaken by Metrobank on the property of Sps. Marcial See
and Lilian Tan.2
The facts as found by public respondent Court of Appeals are as follows:
It is not disputed that Ylang-Ylang Merchandising Company, a
partnership between Angelita Rodriguez and Antonio Tan,
obtained a loan in the amount of P250,000.00 from the
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 said bank over their property in
the District of Paco, Manila, covered by TCT No. 105233 of the
Registry of Deeds of Manila. The mortgage was annotated at the
back of the title.
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.
As in the first instance, the mortgage was duly annotated at the
back of TCT No. 105233.
On February 19, 1979, the partnership (Ajax Marketing
Company) was converted into a corporation denominated as
Ajax Marketing and Development Corporation, with the original
partners (Angelita Rodriguez and Antonio Tan) as incorporators
and three (3) additional incorporators, namely, Elisa Tan, the
wife of Antonio Tan, and Jose San Diego and Tessie San Diego.
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. Again, the third real estate mortgage was
annotated at the back of TCT No. 105233.
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 and Ajax Marketing and Development Corporation,
represented by Antonio Tan as Board Chairman/President and in
his personal capacity as solidary co-obligor, and Elisa Tan as
Vice-President/Treasurer and in her personal capacity as
solidary co-obligor, executed a Promissory Note (PN) No. BDS-
3605.3
In their interrelated first and second assignment of errors, petitioners argue that a
novation occurred when their three (3) loans, which are all secured by the same real
estate property covered by TCT No. 105233 were consolidated into a single loan of
P1 million under Promissory Note No. BDS-3605, thereby extinguishing their
monetary obligations and releasing the mortgaged property from liability.
Basic principles on novation need to be stressed at the outset. 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 debtor, or by
subrogating a third person in the rights of the creditor. 4 Novation, unlike other
modes of extinction of obligations, is a juridical act with a dual function, namely, it
extinguishes an obligation and creates a new one in lieu of the old. It can be
objective, subjective, or mixed. 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
The well settled rule is that novation is never presumed. 7 Novation 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. 8 In the same vein, to
effect a subjective novation by a change in the person of the debtor it is necessary
that the old debtor be released expressly from the obligation, and the third person or
new debtor assumes his place in the relation. 9 There is no novation without such
release as the third person who has assumed the debtor's obligation becomes merely
a co-debtor or surety.10
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",11which 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. Moreover; the real estate
mortgages contained this common provision, to wit:
That for and in consideration of credit accommodations obtained
from the MORTGAGEE (Metropolitan Bank and Trust
Company), by the MORTGAGOR and/or AJAX MKTG. DEV.
CORP./AJAX MARKETING COMPANY/YLANG-YLANG
MERCHANDISING COMPANY detailed as follows:
Nature Date Granted Due Date Amount or
Line
Loans and/or P 600,000.00
Advances in 150,000.00
current account 250,000.00
and to secure the payment of the same and those that may
hereafter be obtained including the renewals or extension
thereof.
xxx xxx xxx
the principal of all of which is hereby fixed at (P600,000.00/
P150,000.00/ P250,000.00) . . .as well as those that the
MORTGAGEE may have previously extended or may later
extend to the MORTGAGOR, including interest and expenses or
any other obligation owing to the MORTGAGEE, whether
direct or indirect, principal or secondary, as appears in the
accounts, books and records of the MORTGAGEE, the
MORTGAGOR hereby transfer and convey by way of mortgage
unto the MORTGAGEE, its successors or assigns, the parcels of
land which are described in the list inserted on page three of this
document and/or appended hereto, together with all the
buildings and improvements now existing or which may
hereafter be erected or constructed thereon, of which the
MORTGAGOR declares that he/it is the absolute owner free
from all liens and encumbrances. However, if the
MORTGAGOR shall pay to the MORTGAGEE, its successors
or assigns, the obligation secured by this mortgage when due,
together with interest, and shall keep and perform all and
singular the covenants and agreements herein contained for the
MORTGAGOR to keep and perform, then the mortgage shall be
void; otherwise, it shall remain in full force and effect. 12
The foregoing shows that petitioners agreed to apply the real estate
property to secure obligations that they may thereafter obtain including
their renewals or extensions with the principals fixed at P600,000.00,
P150,000.00, and P250,000.00 which when added have an aggregate sum
of P1.0 million. 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 personality,
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.
Lastly, petitioners cite as supporting authority C & C Commercial
Corp. v. Philippine National Bank15 where this Court enjoined the foreclosure
proceedings for including unsecured obligations. Petitioners' reliance on the C & C
Commercial Corp. v. Philippine National Bank case is misplaced. In that case, the
foreclosure sale included previously incurred unsecured obligations in favor of PNB
which were not in the contemplation of the mortgage contract, whereas in the instant
case, the mortgages were one in providing that the mortgaged real estate property
shall also secure future advancements or loans, as well as renewals or extensions of
the same.
Prescinding from the above discussions, the fourth assignment of error obviously
needs no further discussion.
WHEREFORE, the decision appealed from is hereby AFFIRMED in toto.

Anent the third assigned error, petitioners posit that the extra-judicial foreclosure is
invalid as it included two unsecured loans: one, the consolidated loan of P1.0
million under PN BDS No. 3605, and two, the P970,000.00 loan under PN BDS No.
3583 subsequently extended by Metrobank.

An action to foreclose a mortgage is usually limited to the amount mentioned in the

mortgage, but where on the four corners of the mortgage contracts, as in this case,
the intent of the contracting parties is manifest that the mortgaged property shall also
answer for future loans or advancements then the same is not improper as it is valid
and binding between the parties.13 For merely consolidating and expediently making
current the three previous loans, the loan of P1.0 million under PN BDS No. 3605,
secured by the real estate property, was correctly included in the foreclosure's bid
price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583,
however, was found to be improper by public respondent which ruling we shall not
disturb for Metrobank's failure to appeal therefrom. Nonetheless, the inclusion of PN
BDS No. 3583 in the bid price did not invalidate the foreclosure proceedings. As
correctly pointed out by the Court of Appeals, the proceeds of the auction sale
should be applied to the obligation pertaining to PN BDS No. 3605 only, plus
interests, expenses and other charges accruing thereto. It is Metrobank's duty as
mortgagee to return the surplus in the selling price to the mortgagors. 14

SECOND DIVISION
[G.R. No. 147950. December 11, 2003]
CALIFORNIA BUS LINES, INC., petitioner, vs. STATE INVESTMENT
HOUSE, INC., respondent.
DECISION
QUISUMBING, J.:
In this petition for review, California Bus Lines, Inc., assails the decision,
[1]
 dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667,
reversing the judgment[2], dated June 3, 1993, of the Regional Trial Court of Manila,
Branch 13, in Civil Case No. 84-28505 entitled State Investment House, Inc. v.
California Bus Lines, Inc., for collection of a sum of money. The Court of Appeals
held petitioner California Bus Lines, Inc., liable for the value of five promissory
notes assigned to respondent State Investment House, Inc.
The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors CorporationM.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.[3] 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.[5] In each promissory note, CBLI promised to pay
Delta or order, P2,314,000 payable in 60 monthly installments starting August 31,
1980, with interest at 14% per annum. CBLI further promised to pay the holder of
the said notes 25% of the amount due on the same as attorneys fees and expenses of
collection, whether actually incurred or not, in case of judicial proceedings to
enforce collection. 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.[6] The restructuring agreement provided for a new schedule of
payments of CBLIs past due installments, extending the period to pay, and
stipulating daily remittance instead of the previously agreed monthly remittance of
payments. In case of default, Delta would have the authority to take over the
management and operations of CBLI until CBLI and/or its president,
Mr. DionisioLlamas, remitted and/or updated CBLIs past due account. CBLI and
Delta also increased the interest rate to 16% p.a. and added a documentation fee of
2% p.a. and a 4% p.a. restructuring fee.
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.[8] Delta
obligated itself to pay a fixed monthly amortization of P400,000 to SIHI and to
discount with SIHI P8,000,000 worth of receivables with the understanding that
SIHI shall apply the proceeds against Deltas overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This
prompted Delta to threaten CBLI with the enforcement of the management takeover
clause. To pre-empt the take-over, CBLI filed on May 3, 1982, a complaint for
injunction[9], docketed as Civil Case No. 0023-P, with the Court of First Instance
of Rizal, Pasay City, (now Regional Trial Court of PasayCity). In due time, Delta
filed its amended answer with applications for the issuance of a writ of preliminary
mandatory injunction to enforce the management takeover clause and a writ of
preliminary attachment over the buses it sold to CBLI. [10] On December 27, 1982,
[11]
 the trial court granted Deltas prayer for issuance of a writ of preliminary
mandatory injunction and preliminary attachment on account of the fraudulent
disposition by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta
executed a Deed of Sale[12] assigning to SIHI five (5) of the sixteen (16) promissory
notes[13] from California Bus Lines, Inc. At the time of assignment, these five
promissory notes, identified and numbered as 80-53, 80-54, 80-55, 80-56, and 80-
57, had a total value of P16,152,819.80 inclusive of interest at 14% per annum.
SIHI subsequently sent a demand letter dated December 13, 1983,[14] to CBLI
requiring CBLI to remit the payments due on the five promissory notes directly to
it. CBLI replied informing SIHI of Civil Case No. 0023-P and of the fact that Delta
had taken over its management and operations. [15]
As regards Deltas remaining obligation to SIHI, Delta offered its available bus
units, valued at P27,067,162.22, as payment in kind. [16] On December 29, 1983, SIHI
accepted Deltas offer, and Delta transferred the ownership of its available buses to
SIHI, which in turn acknowledged full payment of Deltas remaining obligation.
[17]
 When SIHI was unable to take possession of the buses, SIHI filed a petition for
recovery of possession with prayer for issuance of a writ of replevin before the RTC
of Manila, Branch 6, docketed as Civil Case No. 84-23019. The Manila RTC issued
a writ of replevin and SIHI was able to take possession of 17 bus units belonging to
Delta. SIHI applied the proceeds from the sale of the said 17 buses amounting
to P12,870,526.98 to Deltas outstanding obligation. Deltas obligation to SIHI was
thus reduced to P20,061,898.97. On December 5, 1984, Branch 6 of the RTC of
Manila rendered judgment in Civil Case No. 84-23019 ordering Delta to pay SIHI
this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July 24,
1984,[18] in Civil Case No. 0023-P, the injunction case before the RTC
of Pasay. CBLI agreed that Delta would exercise its right to extrajudicially foreclose
on the chattel mortgages over the 35 bus units. The RTC of Pasay approved this
compromise agreement the following day, July 25, 1984.[19] Following this, CBLI
vehemently refused to pay SIHI the value of the five promissory notes, contending
that the compromise agreement was in full settlement of all its obligations to Delta
including its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No.
84-28505, against CBLI in the Regional Trial Court of Manila, Branch 34, to collect
on the five (5) promissory notes with interest at 14% p.a. SIHI also prayed for the
issuance of a writ of preliminary attachment against the properties of CBLI. [20]
On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of
chattel mortgages pursuant to its compromise agreement with CBLI. On January 2,
1985, Delta filed in the RTC of Pasay a motion for execution of the judgment based
on the compromise agreement. [21] The RTC of Pasay granted this motion the
following day.[22]
In view of Deltas petition and motion for execution per the judgment of
compromise, the RTC of Manila granted in Civil Case No. 84-
28505 SIHIs application for preliminary attachment on January 4, 1985.
[23]
 Consequently, SIHI was able to attach and physically take possession of thirty-
two (32) buses belonging to CBLI. [24] However, acting on CBLIs motion to quash
the writ of preliminary attachment, the same court resolved on January 15, 1986,
[25]
 to discharge the writ of preliminary attachment. SIHI assailed the discharge of the
writ before the Intermediate Appellate Court (now Court of Appeals) in a petition
for certiorari and prohibition, docketed as CA-G.R. SP No. 08378. On July 31,
1987, the Court of Appeals granted SIHIspetition in CA-GR SP No. 08378 and ruled
that the writ of preliminary attachment issued by Branch 34 of the RTC Manila in
Civil Case No. 84-28505 should stay.[26] The decision of the Court of Appeals
attained finality on August 22, 1987.[27]
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the
sheriff of Pasay City conducted a public auction and issued a certificate of sheriffs
sale to Delta on April 2, 1987, attesting to the fact that Delta bought 14 of the 35
buses for P3,920,000.[28] On April 7, 1987, the sheriff of Manila, by virtue of the writ
of execution dated March 27, 1987, issued by Branch 6 of the RTC of Manila in
Civil Case No. 84-23019, sold the same 14 buses at public auction in partial
satisfaction of the judgment SIHI obtained against Delta in Civil Case No. 84-
23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of
the RTC of Manila in view of the retirement of the presiding judge of Branch
34. Subsequently, SIHI moved to sell the sixteen (16) buses of CBLI which had
previously been attached by the sheriff in Civil Case No. 84-28505 pursuant to
the January 4, 1985, Order of the RTC of Manila. [29] SIHIsmotion was granted
on December 16, 1987.[30] On November 29, 1988, however, SIHI filed an
urgent ex-parte motion to amend this order claiming that through inadvertence and
excusable negligence of its new counsel, it made a mistake in the list of buses in the
Motion to Sell Attached Properties it had earlier filed. [31] SIHI explained that 14 of
the buses listed had already been sold to Delta on April 2, 1987, by virtue of the
January 3, 1985 Order of the RTC of Pasay, and that two of the buses listed had
been released to third party, claimant Pilipinas Bank, by Order dated September 16,
1987[32] of Branch 13 of the RTC of Manila.
CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3,
1989,[33] Branch 13 of the RTC of Manila denied SIHIs urgent motion to allow the
sale of the 16 buses listed in its motion to amend. The trial court ruled that the best
interest of the parties might be better served by denying further sales of the buses
and to go direct to the trial of the case on the merits. [34]
After trial, judgment was rendered in Civil Case No. 84-28505 on June 3,
1993, discharging CBLI from liability on the five promissory notes. The trial court
likewise favorably ruled on CBLIs compulsory counterclaim. The trial court
directed SIHI to return the 16 buses or to pay CBLI P4,000,000 representing the
value of the seized buses, with interest at 12% p.a. to begin from January 11, 1985,
the date SIHI seized the buses, until payment is made. In ruling against SIHI, the
trial court held that the restructuring agreement dated October 7, 1981, between
Delta and CBLI novated the five promissory notes; hence, at the time Delta assigned
the five promissory notes to SIHI, the notes were already merged in the restructuring
agreement and cannot be enforced against CBLI.
SIHI appealed the decision to the Court of Appeals. The case was docketed as
CA-G.R. CV No. 52667. On April 17, 2001, the Court of Appeals decided CA-G.R.
CV No. 52667 in this manner:
WHEREFORE, based on the foregoing premises and finding the appeal to be
meritorious, We find defendant-appellee CBLI 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. The award of attorneys fees and costs is eliminated. The
appealed decision is hereby REVERSED. No costs.
SO ORDERED.[35]
Hence, this appeal where CBLI contends that
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE
RESTRUCTURING AGREEMENT BETWEEN DELTA AND
THE PETITIONER DID NOT SUBSTANTIALLY NOVATE THE
TERMS OF THE FIVE PROMISSORY NOTES.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE
COMPROMISE AGREEMENT BETWEEN DELTA AND THE
PETITIONER IN THE PASAY CITY CASE DID NOT
SUPERSEDE AND DISCHARGE THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE
CONTINUING VALIDITY OF THE PRELIMINARY
ATTACHMENT AND EXONERATING THE RESPONDENT OF
MALEFACTIONS IN PRESERVING AND ASSERTING ITS
RIGHTS THEREUNDER.[36]
Essentially, the issues are (1) whether the Restructuring Agreement dated
October 7, 1981, between petitioner CBLI and Delta Motors, Corp. novated the five
promissory notes Delta Motors, Corp. assigned to respondent SIHI, and (2) whether
the compromise agreement in Civil Case No. 0023-P superseded and/or discharged
the subject five promissory notes. The issues being interrelated, they shall be jointly
discussed.
CBLI first contends that the Restructuring Agreement did not merely change
the incidental elements of the obligation under all sixteen (16) promissory notes, but
it also increased the obligations of CBLI with the addition of new obligations that
were incompatible with the old obligations in the said notes. [37] CBLI adds that even
if the restructuring agreement did not totally extinguish the obligations under the
sixteen (16) promissory notes, the July 24, 1984, compromise agreement executed in
Civil Case No. 0023-P did.[38] CBLI cites paragraph 5 of the compromise agreement
which states that the agreement between it and CBLI was in full and final
settlement, adjudication and termination of all their rights and obligations as of the
date of (the) agreement, and of the issues in (the) case. According to CBLI,
inasmuch as the five promissory notes were subject matters of the Civil Case No.
0023-P, the decision approving the compromise agreement operated
as res judicata in the present case.[39]
Novation has been 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. [40]
Novation, in its broad concept, may either be extinctive or modificatory.[41] It
is extinctive when an old obligation is terminated by the creation of a new obligation
that takes the place of the former; it is merely modificatory when the old obligation
subsists to the extent it remains compatible with the amendatory agreement. [42] An
extinctive novation results either by changing the object or principal conditions
(objective or real), or by substituting the person of the debtor or subrogating a third
person in the rights of the creditor (subjective or personal). [43] Novationhas two
functions: one to extinguish an existing obligation, the other to substitute a new one
in its place.[44] For novation to take place, four essential requisites have to be met,
namely, (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.[45]
Novation is never presumed,[46] and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts that are
too clear and unequivocal to be mistaken.[47]
The extinguishment of the old obligation by the new one is a necessary
element of novation which may be effected either expressly or impliedly. [48] The
term "expressly" means that the contracting parties incontrovertibly disclose that
their object in executing the new contract is to extinguish the old one. [49] Upon the
other hand, no specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts. [50] While
there is really no hard and fast rule to determine what might constitute to be a
sufficient change that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the old and the new
obligations.
There are two ways which could indicate, in fine, the presence of novation and
thereby produce the effect of extinguishing an obligation by another which
substitutes the same. The first is when novation has been explicitly 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 the two
obligations can stand together, each one having its independent existence. [51] If they
cannot, they are incompatible and the latter obligation novates the first.
[52]
 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 thereof;
otherwise, the change would be merely modificatory in nature and insufficient to
extinguish the original obligation.[53]
 The necessity to prove the foregoing by clear and convincing evidence is
accentuated where the obligation of the debtor invoking the defense of novation has
already matured.[54]
With respect to obligations to pay a sum of money, this Court has consistently
applied the well-settled rule that the obligation is not novated by an instrument that
expressly recognizes the old, changes only the terms of payment, and adds other
obligations not incompatible with the old ones, or where the new contract merely
supplements the old one.[55]
In Inchausti & Co. v. Yulo[56] this Court held that an obligation to pay a sum of
money is not novated in a new instrument wherein the old is ratified, by changing
only the term of payment and adding other obligations not incompatible with the old
one. In Tible v. Aquino[57] and Pascual v. Lacsamana[58] this Court declared that it is
well settled that a mere extension of payment and the addition of another obligation
not incompatible with the old one is not a novation thereof.
WHEREAS, CBL and LLAMAS admit their past due installment on the following
promissory notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 P1,105,353.00
WHEREAS, the parties agreed to restructure the above-mentioned past due
installments under the following terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months

In this case, the attendant facts do not make out a case of novation. The PN Nos. 52 to 57 (24 units) 46 months
restructuring agreement between Delta and CBLI executed on October 7, 1981,
b. Interest Rate: 16% per annum
shows that the parties did not expressly stipulate that the restructuring
agreement novated the promissory notes. Absent an unequivocal declaration of c. Documentation Fee: 2% per annum
extinguishment of the pre-existing obligation, only a showing of complete
incompatibility between the old and the new obligation would sustain a finding d. Penalty previously incurred and Restructuring fee: 4% p.a.
of novation by implication.[59] However, our review of its terms yields no
e. Mode of Payment: Daily Remittance
incompatibility between the promissory notes and the restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on September 13, NOW, THEREFORE, for and in consideration of the foregoing premises, the parties
1983, contained the following common stipulations: hereby agree and covenant as follows:

1. They were payable in 60 monthly installments up to July 31, 1985;
2. Interest: 14% per annum;
3. Failure to pay any of the installments would render the entire
remaining balance due and payable at the option of the holder of
the notes;
1. That the past due installment referred to above plus the current and/or falling due
amortization as of October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57
shall be paid by CBL and/or LLAMAS in accordance with the following schedule of
payments:
Daily payments of P11,000.00 from
October 1 to December 31, 1981

4. In case of judicial collection on the notes, the maker (CBLI) and co- Daily payments of P12,000.00 from
maker (its president, Mr. Dionisio O. Llamas, Jr) January 1, 1982 to March 31, 1982
were solidarily liable of attorneys fees and expenses of 25% of
the amount due in addition to the costs of suit. Daily payments of P13,000.00 from
April 1, 1982 to June 30, 1982
The restructuring agreement, for its part, had the following provisions:
Daily payments of P14,000.00 from
 July 1, 1982 to September 30, 1982
Daily payments of P15,000.00 from
October 1, 1982 to December 31, 1982
Daily payments of P16,000.00 from
January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from
July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily
cash payments due to DMC in accordance with the schedule in paragraph 1. DMC
may send a collector to receive the amount due at CBLs premises. All delayed
remittances shall be charged additional 2% penalty interest per month.
3. All payments shall be applied to amortizations and penalties due in accordance
with paragraph of the restructured past due installments above mentioned and PN
Nos. 16 to 26 and 52 to 57.
4. DMC may at anytime assign and/or send its representatives to monitor the
operations of CBL pertaining to the financial and field operations and service and
maintenance matters of M.A.N. units. Records needed by the DMC representatives
in monitoring said operations shall be made available by CBL and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52
to 57, CBL or LLAMAS shall remit in lump sum whatever balance is left after
deducting all payments made from what is due and payable to DMC in accordance
with paragraph 1 of this agreement and PN Nos. 16 to 26 and 52 to 57.
6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed
upon and the total accumulated unremitted amount has reached and (sic) equivalent
of Sixty (60) days, DMC and Silverio shall exercise any or all of the following
options:
(a) The whole sum remaining then unpaid plus 2% penalty per
month and 16% interest per annum on total past due
installments will immediately become due and payable. In the
event of judicial proceedings to enforce collection, CBL and
LLAMAS will pay to DMC an additional sum equivalent to
25% of the amount due for attorneys fees and expenses of
collection, whether actually incurred or not, in addition to the
cost of suit;
(b) To enforce in accordance with law, their rights under the Chattel
Mortgage over various M.A.N. Diesel bus with Nos. CU 80-
39, 80-40, 80-41, 80-42, 80-43, 80-44 and 80-15, and/or
(c) To take over management and operations of CBL until such time
that CBL and/or LLAMAS have remitted and/or updated their
past due account with DMC.
7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the
M.A.N. Diesel Buses and shall make available to CBL at the price prevailing at the
time of purchase, an inventory of spare parts consisting of at least ninety (90%)
percent of the needs of CBL based on a moving 6-month requirement to be prepared
and submitted by CBL, and acceptable to DMC, within the first week of each
month.
8. Except as otherwise modified in this Agreement, the terms and conditions
stipulated in PN Nos. 16 to 26 and 52 to 57 shall continue to govern the relationship
between the parties and that the Chattel Mortgage over various M.A.N. Diesel Buses
with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and CM No. 80-15 as
well as the Deed of Pledge executed by Mr. Llamas shall continue to secure the
obligation until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to
Notary Public Alberto G. Doller and to instruct him not to proceed with the public
auction sale of the shares of stock of CBL subject-matter of the Deed of Pledge of
Shares. LLAMAS, on the other hand, undertakes to move for the immediate
dismissal of Civil Case No. 9460-P entitled Dionisio O. Llamas vs. Alberto
G. Doller, et al., Court of First Instance of Pasay, Branch XXIX.[60]
It is clear from the foregoing that the restructuring agreement, instead of
containing provisions absolutely incompatible with the obligations of the judgment,
expressly ratifies such obligations in paragraph 8 and contains provisions for
satisfying them. 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 in paragraph 6 (c) 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.
[61]
 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. [62]
The addition of other obligations likewise did not extinguish the promissory
notes. In Young v. CA[63], this Court ruled that a change in the incidental elements of,
or an addition of such element to, an obligation, unless otherwise expressed by the
parties will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory
notes.
Neither is there merit in CBLIs argument that the compromise agreement
dated July 24, 1984, in Civil Case No. 0023-P superseded and/or discharged the five
promissory notes. Both Delta and CBLI cannot deny that the five promissory notes
were no longer subject of Civil Case No. 0023-P when they entered into the
compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no
more right to compromise the same. Deltas limited authority to collect for SIHI
stipulated in the September 13, 1985, Deed of Sale cannot be construed to include
the power to compromise CBLIs obligations in the said promissory notes. An
authority to compromise, by express provision of Article 1878 [64] of the Civil Code,
requires a special power of attorney, which is not present in this case. Incidentally,
Deltas authority to collect in behalf of SIHI was, by express provision of the
Continuing Deed of Assignment,[65] automatically revoked when SIHI opted to
collect directly from CBLI.
As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring
CBLI to remit the payments directly to SIHI effectively revoked Deltas limited right
to collect in behalf of SIHI.This should have dispelled CBLIs erroneous notion that
Delta was acting in behalf of SIHI, with authority to compromise the five
promissory notes.
But more importantly, the compromise agreement itself provided that it
covered the rights and obligations only of Delta and CBLI and that it did not refer
to, nor cover the rights of, SIHI as the new creditor of CBLI in the subject
promissory notes. CBLI and Delta stipulated in paragraph 5 of the agreement that:
5. This COMPROMISE AGREEMENT constitutes the entire understanding by and
between the plaintiffs and the defendants as well as their lawyers, and operates
as full and final settlement, adjudication and termination of all their rights and
obligations as of the date of this agreement, and of the issues in this case. [66]
Even in the absence of such a provision, the compromise agreement still
cannot bind SIHI under the settled rule that a compromise agreement determines the
rights and obligations of only the parties to it. [67] Therefore, we hold that the
compromise agreement covered the rights and obligations only of Delta and CBLI
and only with respect to the eleven (11) other promissory notes that remained with
Delta.
CBLI next maintains that SIHI is estopped from questioning the compromise
agreement because SIHI failed to intervene in Civil Case No. 0023-P after CBLI
informed it of the takeover by Delta of CBLIs management and operations and the
resultant impossibility for CBLI to comply with its obligations in the subject
promissory notes. CBLI also adds that SIHIs failure to intervene in Civil Case No.
0023-P is proof that Delta continued to act in SIHIs behalf in effecting collection
under the notes.
The contention is untenable. As a result of the assignment, Delta relinquished
all its rights to the subject promissory notes in favor of SIHI. This had the effect of
separating the five promissory notes from the 16 promissory notes subject of Civil
Case No. 0023-P. From that time, CBLIs obligations to SIHI embodied in the five
promissory notes became separate and distinct from CBLIs obligations in eleven
(11) other promissory notes that remained with Delta. Thus, any breach of these
independent obligations gives rise to a separate cause of action in favor of SIHI
against CBLI. Considering that Deltas assignment to SIHI of these five promissory
notes had the effect of removing the said notes from Civil Case No. 0023-P, there
was no reason for SIHI to intervene in the said case. SIHI did not have any interest
to protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and permissive.
[68]
 Notably, Section 2,[69] Rule 12 of the then 1988 Revised Rules of Procedure uses
the word may in defining the right to intervene. The present rules maintain the
permissive nature of intervention in Section 1, Rule 19 of the 1997 Rules of Civil
Procedure, which provides as follows:
SEC. 1. Who may intervene.A person who has a legal interest in the matter in
litigation, or in the success of either of the parties, or an interest against both, or is so
situated as to be adversely affected by a distribution or other disposition of property
in the custody of the court or of an officer thereof may, with leave of court, be
allowed to intervene in the action. The court shall consider whether or not the
intervention will unduly delay or prejudice the adjudication of the rights of the
original parties, and whether or not the intervenor's rights may be fully protected in a
separate proceeding.[70]
Also, recall that Delta transferred the five promissory notes to SIHI
on September 13, 1983 while Civil Case No. 0023-P was pending. Then as now, the
rule in case of transfer of interest pendente lite is that the action may be continued
by or against the original party unless the court, upon motion, directs the person to
whom the interest is transferred to be substituted in the action or joined with the
original party.[71] The non-inclusion of a necessary party does not prevent the court
from proceeding in the action, and the judgment rendered therein shall be without
prejudice to the rights of such necessary party. [72]
In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P
in another court does not amount to an estoppel that may prevent SIHI from
instituting a separate and independent action of its own. [73] This is especially so since
it does not appear that a separate proceeding would be inadequate to protect
fully SIHIs rights.[74] Indeed, SIHIs refusal to intervene is precisely because it
considered that its rights would be better protected in a separate and independent
suit.
The judgment on compromise in Civil Case No. 0023-P did not operate
as res judicata to prevent SIHI from prosecuting its claims in the present case. As
previously discussed, the compromise agreement and the judgment on compromise
in Civil Case No. 0023-P covered only Delta and CBLI and their respective rights
under the 11 promissory notes not assigned to SIHI. In contrast, the instant case
involves SIHI and CBLI and the five promissory notes. There being no identity of
parties and subject matter, there is no res judicata.
CBLI maintains, however, that in any event, recovery under the subject
promissory notes is no longer allowed by Article 1484(3) [75] of the Civil Code,
which prohibits a creditor from suing for the deficiency after it has foreclosed on the
chattel mortgages. SIHI, being the successor-in-interest of Delta, is no longer
allowed to recover on the promissory notes given as security for the purchase price
of the 35 buses because Delta had already extrajudicially foreclosed on the chattel
mortgages over the said buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial
foreclosure of the chattel mortgages Delta effected cannot prejudice SIHIs rights. As
stated earlier, the assignment of the five notes operated to create a separate and
independent obligation on the part of CBLI to SIHI, distinct and separate
from CBLIs obligations to Delta. And since there was a previous revocation of
Deltas authority to collect for SIHI, Delta was no longer SIHIs collecting
agent. CBLI, in turn, knew of the assignment and Deltas lack of authority to
compromise the subject notes, yet it readily agreed to the foreclosure. To
sanction CBLIs argument and to apply Article 1484 (3) to this case would work
injustice to SIHI by depriving it of its right to collect against CBLI who has not paid
its obligations.
That SIHI later on levied on execution and acquired in the ensuing public sale
in Civil Case No. 84-23019 the buses Delta earlier extrajudicially foreclosed on
April 2, 1987, in Civil Case No. 0023-P, did not operate to render the compromise
agreement and the foreclosure binding on SIHI. At the time SIHI effected the levy
on execution to satisfy its judgment credit against Delta in Civil Case No. 84-23019,
the said buses already pertained to Delta by virtue of the April 2, 1987 auction
sale. CBLI no longer had any interest in the said buses. Under the circumstances, we
cannot see how SIHIs belated acquisition of the foreclosed buses operates to hold
the compromise agreementand consequently Article 1484(3)applicable to SIHI as
CBLI contends. CBLIs last contention must, therefore, fail. We hold that the writ of
execution to enforce the judgment of compromise in Civil Case No. 0023-P and the
foreclosure sale of April 2, 1987, done pursuant to the said writ of execution
affected only the eleven (11) other promissory notes covered by the compromise
agreement and the judgment on compromise in Civil Case No. 0023-P.
In support of its third assignment of error, CBLI maintains that there was no
basis for SIHIs application for a writ of preliminary attachment. [76] According to
CBLI, it committed no fraud in contracting its obligation under the five promissory
notes because it was financially sound when it issued the said notes on  April 25,
1980.[77] CBLI also asserts that at no time did it falsely represent to SIHI that it
would be able to pay its obligations under the five promissory notes. [78] According to
CBLI, it was not guilty of fraudulent concealment, removal, or disposal, or of
fraudulent intent to conceal, remove, or dispose of its properties to defraud its
creditors;[79] and that SIHIs bare allegations on this matter were insufficient for the
preliminary attachment of CBLIs properties.[80]
The question whether the attachment of the sixteen (16) buses was valid and in
accordance with law, however, has already been resolved with finality by the Court
of Appeals in CA-G.R. SP No. 08376. In its July 31, 1987, decision, the Court of
Appeals upheld the legality of the writ of preliminary attachment SIHI obtained and
ruled that the trial court judge acted with grave abuse of discretion in discharging the
writ of attachment despite the clear presence of a determined scheme on the part of
CBLI to dispose of its property. Considering that the said Court of Appeals decision
has already attained finality on August 22, 1987, there exists no reason to resolve
this question anew. Reasons of public policy, judicial orderliness, economy and
judicial time and the interests of litigants as well as the peace and order of society,
all require that stability be accorded the solemn and final judgments of courts or
tribunals of competent jurisdiction.[81]
Finally, in the light of the justness of SIHIs claim against CBLI, we cannot
sustain CBLIs contention that the Court of Appeals erred in dismissing its
counterclaim for lost income and the value of the 16 buses over which SIHI obtained
a writ of preliminary attachment. Where the party who requested the attachment
acted in good faith and without malice, the claim for damages resulting from the
attachment of property cannot be sustained.[82]
WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in
CA-G.R. CV No. 52667 is AFFIRMED. Petitioner California Bus Lines, Inc.,
is ORDERED to pay respondent State Investment House, Inc., the value of the five
(5) promissory notes subject of the complaint in Civil Case No. 84-28505 less the
proceeds from the sale of the attached sixteen (16) buses. No pronouncement as to
costs.
SO ORDERED. Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 164051               October 3, 2012

PHILIPPINE NATIONAL BANK, Petitioner, 

vs.
LILIAN S. SORIANO, Respondent.

DECISION

PEREZ, J.:

We arc urged in this petition for review on certiorari to reverse and set aside the
Decision of the Court of Appeals in C A-G.R. SP No. 76243 1 finding no grave abuse
of discretion in the ruling of the Secretary of the Department of Justice ( DOJ)
which, in turn, dismissed the criminal complaint for Estafa, i.e., violation of Section
13 of Presidential Decree No. 1 15 (Trust Receipts Law), in relation to Article 315,
paragraph (b) of the Revised Penal Code, filed by petitioner Philippine National
Bank (PNB) against respondent Lilian S. Soriano (Soriano). 2

First, the ostensibly simple facts as found by the Court of Appeals and adopted by
PNB in its petition and memorandum:

On March 20, 1997, [PNB] extended a credit facility in the form of [a] Floor Stock
Line (FSL) in the increased amount of Thirty Million Pesos (₱30 Million) to Lisam
Enterprises, Inc. [LISAM], a family-owned and controlled corporation that
maintains Current Account No. 445830099-8 with petitioner PNB.

x x x. Soriano is the chairman and president of LISAM, she is also the authorized
signatory in all LISAM’s Transactions with [PNB].

On various dates, LISAM made several availments of the FSL in the total amount of
Twenty Nine Million Six Hundred Forty Five Thousand Nine Hundred Forty Four
Pesos and Fifty Five Centavos (₱ 29,645,944.55), the proceeds of which were
credited to its current account with [PNB]. For each availment, LISAM through
[Soriano], executed 52 Trust Receipts (TRs). In addition to the promissory notes,
showing its receipt of the items in trust with the duty to turn-over the proceeds of the
sale thereof to [PNB].
Sometime on January 21-22, 1998, [PNB’s] authorized personnel conducted an
actual physical inventory of LISAM’s motor vehicles and motorcycles and found
that only four (4) units covered by the TRs amounting to One Hundred Forty
Thousand Eight Hundred Pesos (₱158,100.00) (sic) remained unsold.
Out of the Twenty Nine Million Six Hundred Forty Four Thousand Nine Hundred
Forty Four Pesos and Fifty Five Centavos (₱29,644,944.55) as the outstanding
principal balance [of] the total availments on the line covered by TRs, [LISAM]
should have remitted to [PNB], Twenty Nine Million Four Hundred Eighty Seven
Thousand Eight Hundred Forty Four Pesos and Fifty Five Centavos
(₱29,487,844.55). Despite several formal demands, respondent Soriano failed and
refused to turn over the said [amount to] the prejudice of [PNB]. 3
Given the terms of the TRs which read, in pertinent part:
RECEIVED in Trust from the [PNB], Naga Branch, Naga City, Philippines, the
motor vehicles ("Motor Vehicles") specified and described in the Invoice/s issued by
HONDA PHILIPPINES, INC. (HPI) to Lisam Enterprises, Inc., (the "Trustee")
hereto attached as Annex "A" hereof, and in consideration thereof, the trustee hereby
agrees to hold the Motor Vehicles in storage as the property of PNB, with the liberty
to sell the same for cash for the Trustee’s account and to deliver the proceeds thereof
to PNB to be applied against its acceptance on the Trustee’s account. Under the
terms of the Invoices and (sic) the Trustee further agrees to hold the said vehicles
and proceeds of the sale thereof in Trust for the payment of said acceptance and of
any [of] its other indebtedness to PNB.
xxxx
For the purpose of effectively carrying out all the terms and conditions of the Trust
herein created and to insure that the Trustee will comply strictly and faithfully with
all undertakings hereunder, the Trustee hereby agrees and consents to allow and
permit PNB or its representatives to inspect all of the Trustee’s books, especially
those pertaining to its disposition of the Motor Vehicles and/or the proceeds of the
sale hereof, at any time and whenever PNB, at its discretion, may find it necessary to
do so.
The Trustee’s failure to account to PNB for the Motor Vehicles received in Trust
and/or for the proceeds of the sale thereof within thirty (30) days from demand made
by PNB shall constitute prima facie evidence that the Trustee has converted or
misappropriated said vehicles and/or proceeds thereof for its benefit to the detriment
and prejudice of PNB.4
and Soriano’s failure to account for the proceeds of the sale of the motor vehicles,
PNB, as previously adverted to, filed a complaint-affidavit before the Office of the
City Prosecutor of Naga City charging Soriano with fifty two (52) counts of
violation of the Trust Receipts Law, in relation to Article 315, paragraph 1(b) of the
Revised Penal Code.
In refutation, Soriano filed a counter-affidavit asserting that:
1. The obligation of [LISAM] which I represent, and consequently[,] my obligation,
if any, is purely civil in nature. All of the alleged trust receipt agreements were
availments made by the corporation [LISAM] on the PNB credit facility known as
"Floor Stock Line" (FSL), which is just one of the several credit facilities granted to
[LISAM] by PNB. When my husband Leandro A. Soriano, Jr. was still alive,
[LISAM] submitted proposals to PNB for the restructuring of all of [LISAM’s]
credit facilities. After exchanges of several letters and telephone calls, Mr. Josefino
Gamboa, Senior Vice President of PNB on 12 May 1998 wrote [LISAM] informing
PNB’s lack of objection to [LISAM’s] proposal of restructuring all its obligations. x
x x.
2. On September 22, 1998 Mr. Avengoza sent a letter to [LISAM], complete with
attached copy of PNB Board’s minutes of meeting, with the happy information that
the Board of Directors of PNB has approved the conversion of [LISAM’s] existing
credit facilities at PNB, which includes the FSL on which the Trust receipts are
availments, to [an] Omnibus Line (OL) available by way of Revolving Credit Line
(RCL), Discounting Line Against Post-Dated Checks (DLAPC), and Domestic Bills
Purchased Line (DBPL) and with a "Full waiver of penalty charges on RCL, FSL
(which is the Floor Stock Line on which the trust receipts are availments) and Time
Loan. x x x.
3. The [FSL] and the availments thereon allegedly secured by Trust Receipts,
therefore, was (sic) already converted into[,] and included in[,] an Omnibus Line
(OL) of ₱106 million on September 22, 1998, which was actually a Revolving
Credit Line (RCL)[.]5
PNB filed a reply-affidavit maintaining Soriano’s criminal liability under the TRs:
2. x x x. While it is true that said restructuring was approved, the same was never
implemented because [LISAM] failed to comply with the conditions of approval
stated in B/R No. 6, such as the payment of the interest and other charges and the
submission of the title of the 283 sq. m. of vacant residential lot, x x x Tandang
Sora, Quezon City, as among the common conditions stated in paragraph V, of B/R
6. The nonimplementation of the approved restructuring of the account of [LISAM]
has the effect of reverting the account to its original status prior to the said approval.
Consequently, her claim that her liability for violation of the Trust Receipt
Agreement is purely civil does not hold water.6
In a Resolution,7 the City Prosecutor of Naga City found, thus:
WHEREFORE, the undersigned finds prima facie evidence that respondent LILIAN
SORIANO is probably guilty of violation of [the] Trust Receipt Law, in relation to
Article 315 par. 1 (b) of the Revised Penal Code, let therefore 52 counts of ESTAFA
be filed against the respondent.8
Consequently, on 1 August 2001, the same office filed Informations against Soriano
for fifty two (52) counts of Estafa (violation of the Trust Receipts Law), docketed as
Criminal Case Nos. 2001-0641 to 2001-0693, which were raffled to the Regional
Trial Court (RTC), Branch 21, Naga City.
Meanwhile, PNB filed a petition for review of the Naga City Prosecutor’s
Resolution before the Secretary of the DOJ.
In January 2002, the RTC ordered the dismissal of one of the criminal cases against
Soriano, docketed as Criminal Case No. 2001-0671. In March of the same year,
Soriano was arraigned in, and pled not guilty to, the rest of the criminal cases.
Thereafter, on 16 October 2002, the RTC issued an Order resetting the continuation
of the pre-trial on 27 November 2002.
On the other litigation front, the DOJ, in a Resolution 9 dated 25 June 2002, reversed
and set aside the earlier resolution of the Naga City Prosecutor:
WHEREFORE, the questioned resolution is REVERSED and SET ASIDE and
the City Prosecutor of Naga City is hereby directed to move, with leave of court, for
the withdrawal of the informations for estafa against Lilian S. Soriano in Criminal
Case Nos. 2001-0641 to 0693 and to report the action taken thereon within ten (10)
days from receipt thereof.10
On various dates the RTC, through Pairing Judge Novelita Villegas Llaguno, issued
the following Orders:
1. 27 November 200211
When this case was called for continuation of pre-trial, [Soriano’s] counsel
appeared. However, Prosecutor Edgar Imperial failed to appear.
Records show that a copy of the Resolution from the Department of Justice
promulgated on October 28, 2002 was received by this Court, (sic) denying the
Motion for Reconsideration of the Resolution No. 320, series of 2002 reversing that
of the City Prosecutor of Naga City and at the same time directing the latter to move
with leave of court for the withdrawal of the informations for Estafa against Lilian
Soriano.
Accordingly, the prosecution is hereby given fifteen (15) days from receipt hereof
within which to comply with the directive of the Department of Justice.
2. 21 February 200312
Finding the Motion to Withdraw Informations filed by Pros. Edgar Imperial duly
approved by the City Prosecutor of Naga City to be meritorious the same is hereby
granted. As prayed for, the Informations in Crim. Cases Nos. RTC 2001-0641 to
2001-0693 entitled, People of the Philippines vs. Lilian S. Soriano, consisting of
fifty-two (52) cases except for Crim. Case No. RTC 2001-0671 which had been
previously dismissed, are hereby ordered WITHDRAWN.
3. 15 July 200313
The prosecution of the criminal cases herein filed being under the control of the City
Prosecutor, the withdrawal of the said cases by the Prosecution leaves this Court
without authority to re-instate, revive or refile the same.
Wherefore, the Motion for Reconsideration filed by the private complainant is
hereby DENIED.
With the denial of its Motion for Reconsideration of the 25 June 2002 Resolution of
the Secretary of the DOJ, PNB filed a petition for certiorari before the Court of
Appeals alleging that:
A. THE SECRETARY OF THE DOJ COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO WANT OR EXCESS OF JURISDICTION IN
REVERSING AND SETTING ASIDE THE RESOLUTON OF THE CITY
PROSECUTOR OF NAGA CITY FINDING A PRIMA FACIE CASE AGAINST
PRIVATE RESPONDENT [SORIANO], FOR THE SAME HAS NO LEGAL
BASES AND IS NOT IN ACCORD WITH THE JURISPRUDENTIAL RULINGS
ON THE MATTER.14
As stated at the outset, the appellate court did not find grave abuse of discretion in
the questioned resolution of the DOJ, and dismissed PNB’s petition for certiorari.
Hence, this appeal by certiorari.
Before anything else, we note that respondent Soriano, despite several opportunities
to do so, failed to file a Memorandum as required in our Resolution dated 16
January 2008. Thus, on 8 July 2009, we resolved to dispense with the filing of
Soriano’s Memorandum.
In its Memorandum, PNB posits the following issues:
I. Whether or not the Court of Appeals gravely erred in concurring with the finding
of the DOJ that the approval by PNB of [LISAM’s] restructuring proposal of its
account with PNB had changed the status of [LISAM’s] obligations secured by
Trust Receipts to one of an ordinary loan, non-payment of which does not give rise
to a criminal liability.
II. Whether or not the Court of Appeals gravely erred in concluding and concurring
with the June 25, 2002 Resolution of the DOJ directing the withdrawal of the
Information for Estafa against the accused in Criminal Case Nos. 2001-0641 up to
0693 considering the well-established rule that once jurisdiction is vested in court, it
is retained up to the end of the litigation.
III. Whether or not the reinstatement of the 51 counts (Criminal Case No. 2001-0671
was already dismissed) of criminal cases for estafa against Soriano would violate her
constitutional right against double jeopardy.15
Winnowed from the foregoing, we find that the basic question is whether the Court
of Appeals gravely erred in affirming the DOJ’s ruling that the restructuring of
LISAM’s loan secured by trust receipts extinguished Soriano’s criminal liability
therefor.
It has not escaped us that PNB’s second and third issues delve into the three (3)
Orders of the RTC which are not the subject of the petition before us. To clarify, the
instant petition assails the Decision of the appellate court in CA-G.R. SP No. 76243
which, essentially, affirmed the ruling of the DOJ in I.S. Nos. 2000-1123, 2000-
1133 and 2000-1184. As previously narrated, the DOJ Resolution became the basis
of the RTC’s Orders granting the withdrawal of the Informations against Soriano.
From these RTC Orders, the remedy of PNB was to file a petition
for certiorari before the Court of Appeals alleging grave abuse of discretion in the
issuance thereof.
However, for clarity and to obviate confusion, we shall first dispose of the
peripheral issues raised by PNB:
1. Whether the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 against
Soriano as directed by the DOJ violates the well-established rule that once the trial
court acquires jurisdiction over a case, it is retained until termination of litigation.
2. Whether the reinstatement of Criminal Cases Nos. 2001-0641 to 2001-0693
violate the constitutional provision against double jeopardy.
We rule in the negative.
Precisely, the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 was
ordered by the RTC. In particular, the Secretary of the DOJ directed City Prosecutor
of Naga City to move, with leave of court, for the withdrawal of the Informations
for estafa against Soriano. Significantly, the trial court gave the prosecution fifteen
(15) days within which to comply with the DOJ’s directive, and thereupon, readily
granted the motion. Indeed, the withdrawal of the criminal cases did not occur, nay,
could not have occurred, without the trial court’s imprimatur. As such, the DOJ’s
directive for the withdrawal of the criminal cases against Soriano did not divest nor
oust the trial court of its jurisdiction.
Regrettably, a perusal of the RTC’s Orders reveals that the trial court relied solely
on the Resolution of the DOJ Secretary and his determination that the Informations
for estafa against Soriano ought to be withdrawn. The trial court abdicated its
judicial power and refused to perform a positive duty enjoined by law. On one
occasion, we have declared that while the recommendation of the prosecutor or the
ruling of the Secretary of Justice is persuasive, it is not binding on courts. 16 We shall
return to this point shortly.
In the same vein, the reinstatement of the criminal cases against Soriano will not
violate her constitutional right against double jeopardy.
Section 7,17 Rule 117 of the Rules of Court provides for the requisites for double
jeopardy to set in: (1) a first jeopardy attached prior to the second; (2) the first
jeopardy has been validly terminated; and (3) a second jeopardy is for the same
offense as in the first. A first jeopardy attaches only (a) after a valid indictment; (b)
before a competent court; (c) after arraignment; (d) when a valid plea has been
entered; and (e) when the accused has been acquitted or convicted, or the case
dismissed or otherwise terminated without his express consent.18
In the present case, the withdrawal of the criminal cases did not include a categorical
dismissal thereof by the RTC. Double jeopardy had not set in because Soriano was
not acquitted nor was there a valid and legal dismissal or termination of the fifty one
(51) cases against her. It stands to reason therefore that the fifth requisite which
requires conviction or acquittal of the accused, or the dismissal of the case without
the approval of the accused, was not met.
On both issues, the recent case of Cerezo v. People,19 is enlightening. In Cerezo, the
trial court simply followed the prosecution’s lead on how to proceed with the libel
case against the three accused. The prosecution twice changed their mind on
whether there was probable cause to indict the accused for libel. On both occasions,
the trial court granted the prosecutor’s motions. Ultimately, the DOJ Secretary
directed the prosecutor to re-file the Information against the accused which the trial
court forthwith reinstated. Ruling on the same issues raised by PNB in this case, we
emphasized, thus:
x x x. In thus resolving a motion to dismiss a case or to withdraw an Information,
the trial court should not rely solely and merely on the findings of the public
prosecutor or the Secretary of Justice. It is the court’s bounden duty to assess
independently the merits of the motion, and this assessment must be embodied in a
written order disposing of the motion. x x x.
In this case, it is obvious from the March 17, 2004 Order of the RTC, dismissing the
criminal case, that the RTC judge failed to make his own determination of whether
or not there was a prima facie case to hold respondents for trial. He failed to make
an independent evaluation or assessment of the merits of the case. The RTC judge
blindly relied on the manifestation and recommendation of the prosecutor when he
should have been more circumspect and judicious in resolving the Motion to
Dismiss and Withdraw Information especially so when the prosecution appeared to
be uncertain, undecided, and irresolute on whether to indict respondents.
The same holds true with respect to the October 24, 2006 Order, which reinstated
the case. The RTC judge failed to make a separate evaluation and merely awaited
the resolution of the DOJ Secretary. This is evident from the general tenor of the
Order and highlighted in the following portion thereof:
As discussed during the hearing of the Motion for Reconsideration, the Court will
resolve it depending on the outcome of the Petition for Review. Considering the
findings of the Department of Justice reversing the resolution of the City Prosecutor,
the Court gives favorable action to the Motion for Reconsideration.
By relying solely on the manifestation of the public prosecutor and the resolution of
the DOJ Secretary, the trial court abdicated its judicial power and refused to perform
a positive duty enjoined by law. The said Orders were thus stained with grave abuse
of discretion and violated the complainant’s right to due process. They were void,
had no legal standing, and produced no effect whatsoever.
xxxx
It is beyond cavil that double jeopardy did not set in. Double jeopardy exists when
the following requisites are present: (1) a first jeopardy attached prior to the second;
(2) the first jeopardy has been validly terminated; and (3) a second jeopardy is for
the same offense as in the first. A first jeopardy attaches only (a) after a valid
indictment; (b) before a competent court; (c) after arraignment; (d) when a valid plea
has been entered; and (e) when the accused has been acquitted or convicted, or
the case dismissed or otherwise terminated without his express consent.
Since we have held that the March 17, 2004 Order granting the motion to dismiss
was committed with grave abuse of discretion, then respondents were not acquitted
nor was there a valid and legal dismissal or termination of the case. Ergo, the fifth
requisite which requires the conviction and acquittal of the accused, or the dismissal
of the case without the approval of the accused, was not met. Thus, double jeopardy
has not set in.20 (Emphasis supplied)
We now come to the crux of the matter: whether the restructuring of LISAM’s loan
account extinguished Soriano’s criminal liability.
PNB admits that although it had approved LISAM’s restructuring proposal, the
actual restructuring of LISAM’s account consisting of several credit lines was never
reduced into writing. PNB argues that the stipulations therein such as the provisions
on the schedule of payment of the principal obligation, interests, and penalties, must
be in writing to be valid and binding between the parties. PNB further postulates that
assuming the restructuring was reduced into writing, LISAM failed to comply with
the conditions precedent for its effectivity, specifically, the payment of interest and
other charges, and the submission of the titles to the real properties in Tandang Sora,
Quezon City. On the whole, PNB is adamant that the events concerning the
restructuring of LISAM’s loan did not affect the TR security, thus, Soriano’s
criminal liability thereunder subsists.
On the other hand, the appellate court agreed with the ruling of the DOJ Secretary
that the approval of LISAM’s restructuring proposal, even if not reduced into
writing, changed the status of LISAM’s loan from being secured with Trust Receipts
(TR’s) to one of an ordinary loan, non-payment of which does not give rise to
criminal liability. The Court of Appeals declared that there was no breach of trust
constitutive of estafa through misappropriation or conversion where the relationship
between the parties is simply that of creditor and debtor, not as entruster and
entrustee.
We cannot subscribe to the appellate court’s reasoning. The DOJ Secretary’s and the
Court of Appeals holding that, the supposed restructuring novated the loan
agreement between the parties is myopic.
To begin with, the purported restructuring of the loan agreement did not constitute
novation.
Novation is one of the modes of extinguishment of obligations; 21 it is a single
juridical act with a diptych function. The substitution or change of the obligation by
a subsequent one extinguishes the first, resulting in the creation of a new obligation
in lieu of the old.22 It is not a complete obliteration of the obligor-obligee
relationship, but operates as a relative extinction of the original obligation.
Article 1292 of the Civil Code which provides:
Art. 1292. In order that an obligation may be extinguished by another which
substitutes 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.
contemplates two kinds of novation: express or implied. The extinguishment of the
old obligation by the new one is a necessary element of novation, which may be
effected either expressly or impliedly.
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. 23
Novation is never presumed, and the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or by their acts that are too clear
and unmistakable. The contracting parties must incontrovertibly disclose that their
object in executing the new contract is to extinguish the old one. Upon the other
hand, no specific form is required for an implied novation, and all that is prescribed
by law would be an incompatibility between the two contracts. 24 Nonetheless, both
kinds of novation must still be clearly proven.25
In this case, without a written contract stating in unequivocal terms that the parties
were novating the original loan agreement, thus undoubtedly eliminating an express
novation, we look to whether there is an incompatibility between the Floor Stock
Line secured by TR’s and the subsequent restructured Omnibus Line which was
supposedly approved by PNB.
Soriano is confident with her assertion that PNB’s approval of her proposal to
restructure LISAM’s loan novated the loan agreement secured by TR’s. Soriano
relies on the following:
1. x x x. All the alleged trust receipt agreements were availments made by [LISAM]
on the PNB credit facility known as "Floor Stock Line," (FSL) which is just one of
the several credit facilities granted to [LISAM] by PNB. When my husband Leandro
A. Soriano, Jr. was still alive, [LISAM] submitted proposals to PNB for the
restructuring of all of [LISAM’s] credit facilities. After exchanges of several letters
and telephone calls, Mr. Josefino Gamboa, Senior Vice President of PNB on 12 May
1998 wrote [LISAM] informing PNB’s lack of objection to [LISAM’s] proposal of
restructuring all its obligations. x x x.
2. On September 22, 1998, Mr. Avengoza sent a letter to [LISAM], complete with
attached copy of PNB’s Board’s minutes of meeting, with the happy information
that the Board of Directors of PNB has approved the conversion of [LISAM’s]
existing credit facilities at PNB, which includes the FSL on which the trust receipts
are availments, to [an] Omnibus Line (OL) available by way of Revolving Credit
Line (RCL), Discounting Line Against Post-Dated Checks (DLAPC), and Domestic
Bills Purchased Line (DBPL) and with a "Full waiver of penalty charges on RCL,
FSL (which is the Floor Stock Line on which the trust receipts are availments) and
Time Loan. x x x.26
Soriano’s reliance thereon is misplaced. The approval of LISAM’s restructuring
proposal is not the bone of contention in this case. The pith of the issue lies in
whether, assuming a restructuring was effected, it extinguished the criminal liability
on the loan obligation secured by trust receipts, by extinguishing the entruster-
entrustee relationship and substituting it with that of an ordinary creditor-debtor
relationship. Stated differently, we examine whether the Floor Stock Line is
incompatible with the purported restructured Omnibus Line.
The test of incompatibility is whether the two obligations can stand together, each
one having its independent existence. 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 thereof; otherwise, the change would be merely modificatory in
nature and insufficient to extinguish the original obligation. 27
We have scoured the records and found no incompatibility between the Floor Stock
Line and the purported restructured Omnibus Line. While the restructuring was
approved in principle, the effectivity thereof was subject to conditions precedent
such as the payment of interest and other charges, and the submission of the titles to
the real properties in Tandang Sora, Quezon City. These conditions precedent
imposed on the restructured Omnibus Line were never refuted by Soriano who,
oddly enough, failed to file a Memorandum. To our mind, Soriano’s bare assertion
that the restructuring was approved by PNB cannot equate to a finding of an implied
novation which extinguished Soriano’s obligation as entrustee under the TR’s.
Moreover, as asserted by Soriano in her counter-affidavit, the waiver pertains to
penalty charges on the Floor Stock Line. There is no showing that the waiver
extinguished Soriano’s obligation to "sell the [merchandise] for cash for [LISAM’s]
account and to deliver the proceeds thereof to PNB to be applied against its
acceptance on [LISAM’s] account." Soriano further agreed to hold the "vehicles and
proceeds of the sale thereof in Trust for the payment of said acceptance and of any
of its other indebtedness to PNB." Well-settled is the rule that, with respect to
obligations to pay a sum of money, the obligation is not novated by an instrument
that expressly recognizes the old, changes only the terms of payment, adds other
obligations not incompatible with the old ones, or the new contract merely
supplements the old one.28 Besides, novation does not extinguish criminal
liability.29 It stands to reason therefore, that Soriano’s criminal liability under the
TR’s subsists considering that the civil obligations under the Floor Stock Line
secured by TR’s were not extinguished by the purported restructured Omnibus Line.
In Transpacific Battery Corporation v. Security Bank and Trust Company,30 we held
that the restructuring of a loan agreement secured by a TR does not per se novate or
extinguish the criminal liability incurred thereunder:
x x x Neither is there an implied novation since the restructuring agreement is not
incompatible with the trust receipt transactions.
Indeed, the restructuring agreement recognizes the obligation due under the trust
receipts when it required "payment of all interest and other charges prior to
restructuring." With respect to Michael, there was even a proviso under the
agreement that the amount due is subject to "the joint and solidary liability of
Spouses Miguel and Mary Say and Michael Go Say." While the names of Melchor
and Josephine do not appear on the restructuring agreement, it cannot be presumed
that they have been relieved from the obligation. The old obligation continues to
subsist subject to the modifications agreed upon by the parties.
The circumstance that motivated the parties to enter into a restructuring agreement
was the failure of petitioners to account for the goods received in trust and/or deliver
the proceeds thereof. To remedy the situation, the parties executed an agreement to
restructure Transpacific's obligations.
The Bank only extended the repayment term of the trust receipts from 90 days to
one year with monthly installment at 5% per annum over prime rate or 30% per
annum whichever is higher. Furthermore, the interest rates were flexible in that they
are subject to review every amortization due. Whether the terms appeared to be
more onerous or not is immaterial.1âwphi1 Courts are not authorized to extricate
parties from the necessary consequences of their acts. The parties will not be
relieved from their obligations as there was absolutely no intention by the parties to
supersede or abrogate the trust receipt transactions. The intention of the new
agreement was precisely to revive the old obligation after the original period expired
and the loan remained unpaid. Well-settled is the rule that, with respect to
obligations to pay a sum of money, the obligation is not novated by an instrument
that expressly recognizes the old, changes only the terms of payment, adds other
obligations not incompatible with the old ones, or the new contract merely
supplements the old one.31
Based on all the foregoing, we find grave error in the Court of Appeals dismissal of
PNB’s petition for certiorari. Certainly, while the determination of probable cause
to indict a respondent for a crime lies with the prosecutor, the discretion must not be
exercised in a whimsical or despotic manner tantamount to grave abuse of
discretion.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals
in CA-G.R. SP No. 76243 finding no grave abuse of discretion on the part of the
Secretary of Justice is REVERSED and SET ASIDE.
The Resolution of the Secretary of Justice dated 25 June 2002, directing the City
Prosecutor of Naga City to move for the withdrawal of the Informations for estafa in
relation to the Trust Receipts Law against respondent Lilian S. Soriano, and his 29
October 2002 Resolution, denying petitioner's Motion for Reconsideration,
are ANNULLED and SET ASIDE for having been issued with grave abuse of
discretion; and the Resolution or the Naga City Prosecutor's Office dated 19 March
2001, finding probable cause against herein respondent,
is REINSTATED. Consequently, the Orders of the Regional Trial Court, Branch 21
of Naga City in Criminal Cases Nos. 2001-0641 to 2001-0693, except Criminal Case
No. 2001-0671, dated 27 November 2002, 21 February 2003 and 15 July 2003
are SET ASIDE and its Order of 16 October 2002 resetting the continuation or the
pre-trial is REINSTATED. The RTC is further ordered to conduct the pretrial with
dispatch.

SO ORDERED.

FIRST DIVISION

G.R. No. 183804, September 11, 2013

S.C. MEGAWORLD CONSTRUCTION AND DEVELOPMENT

CORPORATION, Petitioner, v. ENGR. LUIS U. PARADA, REPRESENTED
BY ENGR. LEONARDO A. PARADA OF GENLITE INDUSTRIES,
Respondent.

DECISION
REYES, J.:
Before us on appeal by certiorari1 is the Decision2 dated April 30, 2008 of the Court
of Appeals (CA) in CA-G.R. CV No. 83811 which upheld the Decision3 dated May
28, 2004 of the Regional Trial Court (RTC) of Quezon City, Branch 100, in Civil
Case No. Q-01-45212.
Factual Antecedents
S.C. Megaworld Construction and Development Corporation (petitioner) bought
electrical lighting materials from Genlite Industries, a sole proprietorship owned by
Engineer Luis U. Parada (respondent), for its Read-Rite project in Canlubang,
Laguna. The petitioner was unable to pay for the above purchase on due date, but
blamed it on its failure to collect under its sub-contract with the Enviro Kleen
Technologies, Inc. (Enviro Kleen). It was however able to persuade Enviro Kleen to
agree to settle its above purchase, but after paying the respondent P250,000.00 on
June 2, 1999,4 Enviro Kleen stopped making further payments, leaving an
outstanding balance of P816,627.00. It also ignored the various demands of the
respondent, who then filed a suit in the RTC, docketed as Civil Case No. Q-01-
45212, to collect from the petitioner the said balance, plus damages, costs and
expenses, as summarized in the RTC’s decision, as follows:chanrobles virtua1aw
1ibrary
According to the statement of account prepared by the [respondent], the total
obligation due to the [petitioner] is [P]816,627.00 as of 31 January 2001 (Exh[s]. E
& E-1). Despite several demands made by the [respondent] (Exhs. F & G, inclusive
of their submarkings), the [petitioner’s] obligation remain[s] unpaid. [The
respondent] was constrained to file the instant action in which it is claiming the
unpaid balance of [P]816,627.00, two (2) percent thereof as monthly interest,
twenty-five (25) percent of the amount due as attorney’s fees (Exhs. C-8 to C-15),
[P]100,000.00 as litigation expenses and [P]100,000.00 as exemplary damages. 5
The petitioner in its answer denied liability, claiming that it was released from its
indebtedness to the respondent by reason of the novation of their contract, which, it
reasoned, took place when the latter accepted the partial payment of Enviro Kleen in
its behalf, and thereby acquiesced to the substitution of Enviro Kleen as the new
debtor in the petitioner’s place.
After trial, the RTC rendered judgment6 on May 28, 2004 in favor of the respondent,
the fallo of which reads, as follows:chanrobles virtua1aw 1ibrary
WHEREFORE, judgment is hereby rendered for the [respondent].
[The petitioner] is hereby ordered to pay the [respondent] the following:
1. A. the sum of [P]816,627.00 representing the principal obligation due;
2. B. the sum equivalent to twenty percent (20%) per month of the
principal obligation due from date of judicial demand until fully paid as
and for interest; and
3. C. the sum equivalent to twenty[-]five [percent] (25%) of the principal
sum due as and for attorney’s fees and other costs of suits.
The compulsory counterclaim interposed by the [petitioner] is hereby ordered
dismissed for lack of merit.
SO ORDERED.7 (Emphasis supplied)
On appeal to the CA, the petitioner maintained that the trial court erred in ruling that
no novation of the contract took place through the substitution of Enviro Kleen as
the new debtor. But for the first time, it further argued that the trial court should
have dismissed the complaint for failure of the respondent to implead Genlite
Industries as “a proper party in interest”, as provided in Section 2 of Rule 3 of the
1997 Rules of Civil Procedure. The said section provides:chanrobles virtua1aw
1ibrary
SEC. 2. Parties in interest. — A real party in interest is the party who stands to be
benefited or injured by the judgment in the suit, or the party entitled to the avails of
the suit. Unless otherwise authorized by law or these Rules, every action must be
prosecuted or defended in the name of the real party in interest.
In Section 1(g) of Rule 16 of the Rules of Court, it is also provided that the
defendant may move to dismiss the suit on the ground that it was not brought in the
name of or against the real party in interest, with the effect that the complaint is then
deemed to state no cause of action.
In dismissing the appeal, the CA noted that the petitioner in its answer below raised
only the defense of novation, and that at no stage in the proceedings did it raise the
question of whether the suit was brought in the name of the real party in interest.
Moreover, the appellate court found from the sales invoices and receipts that the
respondent is the sole proprietor of Genlite Industries, and therefore the real party-
plaintiff. Said the CA:chanrobles virtua1aw 1ibrary
Settled is the rule that litigants cannot raise an issue for the first time on appeal as
this would contravene the basic rules of fair play and justice.
In any event, there is no question that [respondent] Engr. Luis U. Parada is the
proprietor of Genlite Industries, as shown on the sales invoice and delivery receipts.
There is also no question that a special power of attorney was executed by
[respondent] Engr. Luis U. Parada in favor of Engr. Leonardo A. Parada authorizing
the latter to file a complaint against [the petitioner]. 8 (Citations omitted)
The petitioner also contended that a binding novation of the purchase contract
between the parties took place when the respondent accepted the partial payment of
Enviro Kleen of P250,000.00 in its behalf, and thus acquiesced to the substitution by
Enviro Kleen of the petitioner as the new debtor. But the CA noted that there is
nothing in the two (2) letters of the respondent to Enviro Kleen, dated April 14,
1999 and June 16, 1999, which would imply that he consented to the alleged
novation, and, particularly, that he intended to release the petitioner from its primary
obligation to pay him for its purchase of lighting materials. The appellate court cited
the RTC’s finding9 that the respondent informed Enviro Kleen in his first letter that
he had served notice to the petitioner that he would take legal action against it for its
overdue account, and that he retained his option to pull out the lighting materials and
charge the petitioner for any damage they might sustain during the pull-
out:chanrobles virtua1aw 1ibrary
[Respondent] x x x has served notice to the [petitioner] that unless the overdue
account is paid, the matter will be referred to its lawyers and there may be a pull-out
of the delivered lighting fixtures. It was likewise stated therein that incidental
damages that may result to the structure in the course of the pull-out will be to the
account of the [petitioner].10
The CA concurred with the RTC that by retaining his option to seek satisfaction
from the petitioner, any acquiescence which the respondent had made was limited to
merely accepting Enviro Kleen as an additional debtor from whom he could demand
payment, but without releasing the petitioner as the principal debtor from its debt to
him.
On motion for reconsideration,11 the petitioner raised for the first time the issue of
the validity of the verification and certification of non-forum shopping attached to
the complaint. On July 18, 2008, the CA denied the said motion for lack of
merit.12cralaw virtualaw library
Petition for Review in the Supreme Court
In this petition, the petitioner insists, firstly, that the complaint should have been
dismissed outright by the trial court for an invalid non-forum shopping certification;
and, secondly, that the appellate court erred in not declaring that there was a
novation of the contract between the parties through substitution of the debtor,
which resulted in the release of the petitioner from its obligation to pay the
respondent the amount of its purchase.13cralaw virtualaw library
Our Ruling
The petition is devoid of merit.
The verification and certification of non-forum shopping in the complaint is not
a jurisdictional but a formal requirement, and any objection as to non-
compliance therewith should be raised in the proceedings below and not for the
first time on appeal.
“It is well-settled that no question will be entertained on appeal unless it has been
raised in the proceedings below. Points of law, theories, issues and arguments not
brought to the attention of the lower court, administrative agency or quasi-judicial
body, need not be considered by a reviewing court, as they cannot be raised for the
first time at that late stage. Basic considerations of fairness and due process impel
this rule. Any issue raised for the first time on appeal is barred by estoppel.”14cralaw
virtualaw library
Through a Special Power of Attorney (SPA), the respondent authorized Engr.
Leonardo A. Parada (Leonardo), the eldest of his three children, to perform the
following acts in his behalf: a) to file a complaint against the petitioner for sum of
money with damages; and b) to testify in the trial thereof and sign all papers and
documents related thereto, with full powers to enter into stipulation and
compromise.15 Incidentally, the respondent, a widower, died of cardio-pulmonary
arrest on January 21, 2009,16 survived by his legitimate children, namely, Leonardo,
Luis, Jr., and Lalaine, all surnamed Parada. They have since substituted him in this
petition, per the Resolution of the Supreme Court dated September 2, 2009. 17 Also,
on July 23, 2009, Luis, Jr. and Lalaine Parada executed an SPA authorizing their
brother Leonardo to represent them in the instant petition. 18cralaw virtualaw library
In the verification and certification of non-forum shopping attached to the complaint
in Civil Case No. Q01-45212, Leonardo as attorney-in-fact of his father
acknowledged as follows:chanrobles virtua1aw 1ibrary
xxxx
That I/we am/are the Plaintiff in the above-captioned case;
That I/we have caused the preparation of this Complaint;
That I/we have read the same and that all the allegations therein are true and correct
to the best of my/our knowledge;
x x x x.19
In this petition, the petitioner reiterates its argument before the CA that the above
verification is invalid, since the SPA executed by the respondent did not specifically
include an authority for Leonardo to sign the verification and certification of non-
forum shopping, thus rendering the complaint defective for violation of Sections 4
and 5 of Rule 7. The said sections provide, as follows:chanrobles virtua1aw 1ibrary
Sec. 4. Verification. — A pleading is verified by an affidavit that the affiant has read
the pleading and that the allegations therein are true and correct of his personal
knowledge or based on authentic records.
Sec. 5. Certification against forum shopping. –– The plaintiff or principal party shall
certify under oath in the complaint or other initiatory pleading asserting a claim for
relief, or in a sworn certification annexed thereto and simultaneously filed therewith:
(a) that he has not theretofore commenced any action or filed any claim involving
the same issues in any court, [or] tribunal x x x and, to the best of his knowledge, no
such other action or claim is pending therein; (b) if there is such other pending
action or claim, a complete statement of the present status thereof; and (c) if he
should thereafter learn that the same or similar action or claim has been filed or is
pending, he shall report that fact x x x to the court wherein his aforesaid complaint
or initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere
amendment of the complaint or other initiatory pleading but shall be cause for the
dismissal of the case without prejudice, unless otherwise provided, upon motion and
after hearing.
The petitioner’s argument is untenable. The petitioner failed to reckon that any
objection as to compliance with the requirement of verification in the complaint
should have been raised in the proceedings below, and not in the appellate court for
the first time.20 In KILUSAN-OLALIA v. CA,21 it was held that verification is a
formal, not a jurisdictional requisite:chanrobles virtua1aw 1ibrary
We have emphasized, time and again, that verification is a formal, not a
jurisdictional requisite, as it is mainly intended to secure an assurance that the
allegations therein made are done in good faith or are true and correct and not mere
speculation. The Court may order the correction of the pleading, if not verified, or
act on the unverified pleading if the attending circumstances are such that a strict
compliance with the rule may be dispensed with in order that the ends of justice may
be served.
Further, in rendering justice, courts have always been, as they ought to be,
conscientiously guided by the norm that on the balance, technicalities take a
backseat vis-à-vissubstantive rights, and not the other way around. x x x. 22 (Citations
omitted)
In Young v. John Keng Seng,23 it was also held that the question of forum shopping
cannot be raised in the CA and in the Supreme Court, since such an issue must be
raised at the earliest opportunity in a motion to dismiss or a similar pleading. The
high court even warned that “[i]nvoking it in the later stages of the proceedings or
on appeal may result in the dismissal of the action x x x.” 24cralaw virtualaw library
Moreover, granting that Leonardo has no personal knowledge of the transaction
subject of the complaint below, Section 4 of Rule 7 provides that the verification
need not be based on the verifier’s personal knowledge but even only on authentic
records. Sales invoices, statements of accounts, receipts and collection letters for the
balance of the amount still due to the respondent from the petitioner are such
records. There is clearly substantial compliance by the respondent’s attorney-in-fact
with the requirement of verification.
Lastly, it is well-settled that a strict compliance with the rules may be dispensed
with in order that the ends of substantial justice may be served. 25 It is clear that the
present controversy must be resolved on its merits, lest for a technical oversight the
respondent should be deprived of what is justly due him.
A sole proprietorship has no juridical personality separate and distinct from
that of its owner, and need not be impleaded as a party-plaintiff in a civil case.
On the question of whether Genlite Industries should have been impleaded as a
party-plaintiff, Section 1 of Rule 3 of the Rules of Court provides that only natural
or juridical persons or entities authorized by law may be parties in a civil case.
Article 44 of the New Civil Code enumerates who are juridical persons:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or purpose, created
by law; their personality begins as soon as they have been constituted according to
law;
(3) Corporations, partnerships and associations for private interest or purpose to
which the law grants a juridical personality, separate and distinct from that of each
shareholder, partner or member.
Genlite Industries is merely the DTI-registered trade name or style of the respondent
by which he conducted his business. As such, it does not exist as a separate entity
apart from its owner, and therefore it has no separate juridical personality to sue or
be sued.26 As the sole proprietor of Genlite Industries, there is no question that the
respondent is the real party in interest who stood to be directly benefited or injured
by the judgment in the complaint below. There is then no necessity for Genlite
Industries to be impleaded as a party-plaintiff, since the complaint was already filed
in the name of its proprietor, Engr. Luis U. Parada. To heed the petitioner’s sophistic
reasoning is to permit a dubious technicality to frustrate the ends of substantial
justice.
Novation is never presumed but must be clearly and unequivocally shown.     
Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. 27 It is “the substitution of a
new contract, debt, or obligation for an existing one between the same or different
parties.”28 Article 1293 of the Civil Code defines novation as follows:chanr
Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor gives
him rights mentioned in Articles 1236 and 1237.
Thus, in order to change the person of the debtor, the former debtor must be
expressly released from the obligation, and the third person or new debtor must
assume the former’s place in the contractual relation. 29 Article 1293 speaks of
substitution of the debtor, which may either be in the form
of expromision or delegacion, as seems to be the case here. In both cases, the old
debtor must be released from the obligation, otherwise, there is no valid novation.
As explained in Garcia30:chanrobles virtua1aw 1ibrar
In general, there are two modes of substituting the person of the debtor:
(1) expromisionand (2) delegacion. In expromision, the initiative for the change does
not come from—and may even be made without the knowledge of—the debtor,
since it consists of a third person’s assumption of the obligation. As such, it logically
requires the consent of the third person and the creditor. In delegacion, the debtor
offers, and the creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are necessary. Both
modes of substitution by the debtor require the consent of the creditor. 31 (Citations
omitted)
From the circumstances obtaining below, we can infer no clear and unequivocal
consent by the respondent to the release of the petitioner from the obligation to pay
the cost of the lighting materials. In fact, from the letters of the respondent to Enviro
Kleen, it can be said that he retained his option to go after the petitioner if Enviro
Kleen failed to settle the petitioner’s debt. As the trial court held:chanrobles
virtua1aw 1ibrary
The fact that Enviro Kleen Technologies, Inc. made payments to the [respondent]
and the latter accepted it does not ipso facto result in novation. Novation to be given
its legal effect requires that the creditor should consent to the substitution of a new
debtor and the old debtor be released from its obligation (Art. 1293, New Civil
Code). A reading of the letters dated 14 April 1999 (Exh. 1) and dated 16 June 1999
(Exh[s]. 4 & 4-a) sent by the [respondent] to Enviro Kleen Technologies, Inc.
clearly shows that there was nothing therein that would evince that the [respondent]
has consented to the exchange of the person of the debtor from the [petitioner] to
Enviro Kleen Technologies, Inc.
x x x x
Notably in Exh. 1, albeit addressed to Enviro Kleen Technologies, Inc., the
[respondent] expressly stated that it has served notice to the [petitioner] that unless
the overdue account is paid, the matter will be referred to its lawyers and there may
be a pull-out of the delivered lighting fixtures. It was likewise stated therein that
incident damages that may result to the structure in the course of the pull-out will be
to the account of the [petitioner].
It is evident from the two (2) aforesaid letters that there is no indication of the
[respondent’s] intention to release the [petitioner] from its obligation to pay and to
transfer it to Enviro Kleen Technologies, Inc. The acquiescence of Enviro Kleen
Technologies, Inc. to assume the obligation of the [petitioner] to pay the unpaid
balance of [P]816,627.00 to the [respondent] when there is clearly no agreement to
release the [petitioner] will result merely to the addition of debtors and not novation.
Hence, the creditor can still enforce the obligation against the original debtor x x x.
A fact which points strongly to the conclusion that the [respondent] did not assent to
the substitution of Enviro Kleen Technologies, Inc. as the new debtor is the present
action instituted by [the respondent] against the [petitioner] for the fulfilment of its
obligation. A mere recital that the [respondent] has agreed or consented to the
substitution of the debtor is not sufficient to establish the fact that there was a
novation. x x x.32
The settled rule is that novation is never presumed, 33 but must be clearly and
unequivocally shown.34 In order for a new agreement to supersede the old one, the
parties to a contract must expressly agree that they are abrogating their old contract
in favor of a new one.35 Thus, the mere substitution of debtors will not result in
novation,36 and the fact that the creditor accepts payments from a third person, who
has assumed the obligation, will result merely in the addition of debtors and not
novation, and the creditor may enforce the obligation against both debtors. 37 If there
is no agreement as to solidarity, the first and new debtors are considered obligated
jointly.38 As explained in Reyes v. CA39:chanrobles vitua1aw 1ibrary
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. 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, when there is clearly no agreement to release petitioner
from her responsibility, does not constitute novation. At most, it only creates a
juridical relation of co-debtorship or suretyship on the part of respondent Eleazar to
the contractual obligation of petitioner to AFP-MBAI and the latter can still enforce
the obligation against the petitioner. In Ajax Marketing and Development
Corporation vs. Court of Appeals which is relevant in the instant case, we stated that
— have been the intention of the trial court, not to mention that it is way beyond what
“In the same vein, to effect a subjective novation by a change in the person of the
debtor, it is necessary that the old debtor be released expressly from the obligation,
and the third person or new debtor assumes his place in the relation. There is no
novation without such release as the third person who has assumed the debtor’s
obligation becomes merely a co-debtor or surety. xxx. Novation arising from a
purported change in the person of the debtor must be clear and express xxx.”
In the civil law setting, novatio is literally construed as to make new. So it is deeply
rooted in the Roman Law jurisprudence, the principle – novatio non praesumitur —
that novation is never presumed. At bottom, for novation to be a jural reality,
its animus must be ever present, debitum pro debito — basically extinguishing the
old obligation for the new one.40(Citation omitted)
The trial court found that the respondent never agreed to release the petitioner from
its obligation, and this conclusion was upheld by the CA. We generally accord
utmost respect and great weight to factual findings of the trial court and the CA,
unless there appears in the record some fact or circumstance of weight and influence
which has been overlooked, or the significance of which has been misinterpreted,
that if considered would have affected the result of the case. 41 We find no such
oversight in the appreciation of the facts below, nor such a misinterpretation thereof,
as would otherwise provide a clear and unequivocal showing that a novation has
occurred in the contract between the parties resulting in the release of the petitioner.
Pursuant to Article 2209 of the Civil Code, except as provided under Central
Bank Circular No. 905, and now under Bangko Sentral ng Pilipinas Circular
No. 799, which took effect on July 1, 2013, the respondent may be awarded
interest of six percent (6%) of the judgment amount by way of actual and
compensatory damages.
It appears from the recital of facts in the trial court’s decision that the respondent
demanded interest of two percent (2%) per month upon the balance of the purchase
price of P816,627.00, from judicial demand until full payment. There is then an
obvious clerical error committed in the fallo of the trial court’s decision, for it
incorrectly ordered the defendant therein to pay “the sum equivalent to twenty
percent (20%) per month of the principal obligation due from date of judicial
demand until fully paid as and for interest.” 42cralaw virtualaw library
A clerical mistake is one which is visible to the eyes or obvious to the
understanding; an error made by a clerk or a transcriber; a mistake in copying or
writing.43 The Latin maxims Error placitandi aequitatem non tollit (“A clerical error
does not take away equity”), and Error scribentis nocere non debit (“An error made
by a clerk ought not to injure; a clerical error may be corrected”) are apt in this
case.44 Viewed against the landmark case of Medel v. CA45, an award of interest of
20% per month on the amount due is clearly excessive and iniquitous. It could not
the plaintiff had prayed for below.
It is settled that other than in the case of judgments which are void  ab initio for lack
of jurisdiction, or which are null and void per se, and thus may be questioned at any
time, when a decision is final, even the court which issued it can no longer alter or
modify it, except to correct clerical errors or mistakes. 46cralaw virtualaw library
The foregoing notwithstanding, of more important consideration in the case before
us is the fact that it is nowhere stated in the trial court’s decision that the parties had
in fact stipulated an interest on the amount due to the respondent. Even granting that
there was such an agreement, there is no finding by the trial court that the parties
stipulated that the outstanding debt of the petitioner would be subject to two percent
(2%) monthly interest. The most that the decision discloses is that the respondent
demanded a monthly interest of 2% on the amount outstanding.
Article 2209 of the Civil Code provides that “[i]f the obligation consists in the
payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six
percent per annum.” Pursuant to the said provision, then, since there is no finding of
a stipulation by the parties as to the imposition of interest, only the amount of
12% per annum47 may be awarded by the court by way of damages in its discretion,
not two percent (2%) per month, following the guidelines laid down in the landmark
case of Eastern Shipping Lines v. Court of Appeals,48 to wit:cha
nrobles virtua1aw 1ibrary
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be on the amount
finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.49 (Citations omitted)
As further clarified in the case of Sunga-Chan v. CA,50 a loan or forbearance of
money, goods or credit describes a contractual obligation whereby a lender or
creditor has refrained during a given period from requiring the borrower or debtor to
repay the loan or debt then due and payable.51 Thus:chanrobles virtua1aw 1ibrary
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per
annum under Central Bank (CB) Circular No. 416 shall be adjudged only in cases
involving the loan or forbearance of money. And for transactions involving payment
of indemnities in the concept of damages arising from default in the performance of
obligations in general and/or for money judgment not involving a loan or
forbearance of money, goods, or credit, the governing provision is Art. 2209 of the
Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently
provides:chanrobles virtua1aw 1ibrary
“Art. 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per annum.”
The term “forbearance,” within the context of usury law, has been described as a
contractual obligation of a lender or creditor to refrain, during a given period of
time, from requiring the borrower or debtor to repay the loan or debt then due and
payable.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if
proper, and the applicable rate, as follows: The 12% per annum rate under CB
Circular No. 416 shall apply only to loans or forbearance of money, goods, or
credits, as well as to judgments involving such loan or forbearance of money, goods,
or credit, while the 6% per annum under Art. 2209 of the Civil Code applies “when
the transaction involves the payment of indemnities in the concept of damage
arising from the breach or a delay in the performance of obligations in
general,” with the application of both rates reckoned “from the time the complaint
was filed until the [adjudged] amount is fully paid.” In either instance, the reckoning
period for the commencement of the running of the legal interest shall be subject to
the condition “that the courts are vested with discretion, depending on the equities of
each case, on
the award of interest.”52 (Citations omitted and emphasis ours)
Pursuant, then, to Central Bank Circular No. 416, issued on July 29, 1974, 53 in the
absence of a written stipulation, the interest rate to be imposed in judgments
involving a forbearance of credit shall be 12% per annum, up from 6% under Article
2209 of the Civil Code. This was reiterated in Central Bank Circular No. 905, which
suspended the effectivity of the Usury Law from January 1, 1983. 54 But if the
judgment refers to payment of interest as damages arising from a breach or delay in
general, the applicable interest rate is 6% per annum, following Article 2209 of the
Civil Code.55 Both interest rates apply from judicial or extrajudicial demand until
finality of the judgment. But from the finality of the judgment awarding a sum of
money until it is satisfied, the award shall be considered a forbearance of credit,
regardless of whether the award in fact pertained to one, and therefore during this
period, the interest rate of 12% per annum for forbearance of money shall
apply.56cralaw virtualaw library
But notice must be taken that in Resolution No. 796 dated May 16, 2013, the
Monetary Board of the Bangko Sentral ng Pilipinas approved the revision of the
interest rate to be imposed for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of an express contract as to
such rate of interest. Thus, under BSP Circular No. 799, issued on June 21, 2013 and
effective on July 1, 2013, the said rate of interest is now back at six percent
(6%), viz:chanrobles virtua1aw 1ibra
Bangko Sentral ng Pilipinas
OFFICE OF THE GOVERNOR
CIRCULAR NO. 799
Series of 2013
Subject: Rate of interest in the absence of stipulation
The monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the
following revisions governing the rate of interest in the absence of stipulation in
loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982:
Section 1. The rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of an express contract as to
such rate of interest, shall be six percent (6%) per annum.
Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations
for Non-Bank Financial Institutions are hereby amended accordingly.
 (6%) per annum until fully paid. The award of attorney’s fees is DELETED. SO
This Circular shall take effect on 1 July 2013. ORDERED.

FOR THE MONETARY BOARD:

DIWA C. GUINIGUNDO
Officer-In-Charge
The award of attorney’s fees is not proper. 

Other than to say that the petitioner “unjustifiably failed and refused to pay the
respondent,” the trial court did not state in the body of its decision the factual or
legal basis for its award of attorney’s fees to the respondent, as required under
Article 2208 of the New Civil Code, for which reason we have resolved to delete the
same. The rule is settled that the trial court must state the factual, legal or equitable
justification for its award of attorney’s fees. 57 Indeed, the matter of attorney’s fees
cannot be stated only in the dispositive portion, but the reasons must be stated in the
body of the court’s decision.58 This failure or oversight of the trial court cannot even
be supplied by the CA. As concisely explained in Frias v. San Diego-
Sison59:chanrobles virtua1aw 1ibrary

Article 2208 of the New Civil Code enumerates the instances where such may be
awarded and, in all cases, it must be reasonable, just and equitable if the same were
to be granted. Attorney’s fees as part of damages are not meant to enrich the
winning party at the expense of the losing litigant. They are not awarded every time
a party prevails in a suit because of the policy that no premium should be placed on
the right to litigate. The award of attorney’s fees is the exception rather than the
general rule. As such, it is necessary for the trial court to make findings of facts and
law that would bring the case within the exception and justify the grant of such
award. The matter of attorney’s fees cannot be mentioned only in the dispositive
portion of the decision. They must be clearly explained and justified by the trial
court in the body of its decision. On appeal, the CA is precluded from
supplementing the bases for awarding attorney’s fees when the trial court failed to
discuss in its Decision the reasons for awarding the same. Consequently, the award
of attorney’s fees should be deleted.60 (Citations omitted)

WHEREFORE, premises considered, the Decision dated April 30, 2008 of the
Court of Appeals in CA-G.R. CV No. 83811
is AFFIRMED with MODIFICATION. Petitioner S.C. Megaworld Construction
and Development Corporation is ordered to pay respondent Engr. Luis A. Parada,
represented by Engr. Leonardo A. Parada, the principal amount due of P816,627.00,
plus interest at twelve percent (12%) per annum, reckoned from judicial demand
until June 30, 2013, and six percent (6%) per annum from July 1, 2013 until finality
hereof, by way of actual and compensatory damages. Thereafter, the principal
amount due as adjusted by interest shall likewise earn interest at six percent