LICAROS VS GATMAITAN

Facts:
Abelardo Licaros, decided to make a fund placement with
Anglo-Asean Bank in the 1980s. Licaros, after having
invested,
encountered
tremendous
and
unexplained
difficulties in retrieving, not only the interest or profits, but
even the very investments he had put in Anglo-Asean.
Confronted with the dire prospect of not getting back any of
his investments, Licaros then decide to seek the counsel of
Antonio P. Gatmaitan. Gatmaitan voluntarily offered to assume
the payment of Anglo-Aseans indebtedness to Licaros. In
order to effectuate and formalize the parties respective
commitments, the two executed a notarized MEMORANDUM
OF AGREEMENT on July 29, 1988.
Thereafter, Gatmaitan presented to Anglo-Asean the
Memorandum of Agreement for the purpose of collecting the
placement thereat of $150,000. No formal response was ever
made by said bank to either Licaros or Gatmaitan. To date,
Anglo-Asean has not acted on Gatmaitans monetary claims.
Evidently, because of his inability to collect from Anglo-Asean,
Gatmaitan did not bother anymore to make good his promise
to pay Licaros the amount stated in his promissory note.
Licaros, however, felt that he had a right to collect on the
basis of the promissory note regardless of the outcome of
Gatmaitans recovery efforts. Thus, Licaros addressed
successive demand letters to Gatmaitan. Gatmaitan, however,
did not accede to these demands.
Issue:
W/N the Memorandum of Agreement between petitioner and
respondent is one of assignment of credit or conventional
subrogation. Conventional subrogation.
Held:
An assignment of credit has been defined as the process of
transferring the right of the assignor to the assignee who
would then have the right to proceed against the debtor. The
assignment may be done gratuitously or onerously, in which
case, the assignment has an effect similar to that of a sale.
On the other hand, subrogation has been defined as the
transfer of all the rights of the creditor to a third person, who
substitutes him in all his rights. It may either be legal or
conventional. Legal subrogation is that which takes place
without agreement but by operation of law because of certain
acts. Conventional subrogation is that which takes place by
agreement of parties.
Conventional subrogation is not identical to assignment of
credit. In the former, the debtors consent is necessary; in the
latter, it is not required. Subrogation extinguishes the
obligation and gives rise to a new one; assignment refers to
the same right which passes from one person to another. The
nullity of an old obligation may be cured by subrogation, such
that a new obligation will be perfectly valid; but the nullity of
an obligation is not remedies by the assignment of the
creditors right to another.
In an assignment of credit, the consent of the debtor is not
necessary in order that the assignment may fully produce
legal effects. What the law requires in an assignment of credit
is not the consent of the debtor but merely notice to him as
the assignment takes effect only from the time he has
knowledge thereof. A creditor, may, therefore, validly assign
his credit and its accessories without the debtors consent. On
the other hand, conventional subrogation requires an
agreement among the 3 parties concerned the original
creditor, the debtor, and the new creditor. It is a new
contractual relation based on the mutual agreement among
all the necessary parties. Thus, Article 1301 of the Civil Code
explicitly states that Conventional subrogation of a third
person requires the consent of the original parties and of the
third person.

The Memorandum of Agreement dated July 29, 1988 was in

the nature of a conventional subrogation which requires the
consent of the debtor, Anglo-Asean Bank, for its validity.
Gatmaitan and Licaros intended their agreement as one of
conventional subrogation as it is plainly borne by a stipulation
in their memorandum, to wit:
WHEREAS, the parties herein have come to an agreement on
the nature, form and extent of their mutual prestations which
they now record herein with the express conformity of the
third parties concerned, which third party is admittedly
Anglo-Asean Bank.
Had the intention been merely to confer on appellant the
status of a mere assignee of appellees credit, there is
simply no sense for them to have stipulated in their
agreement that the same is conditioned on the express
conformity thereto of Anglo-Asean Bank.
It bears stressing that the subject Memorandum of Agreement
expressly requires the consent of Anglo-Asean to the
subrogation. Upon whom the task of securing such consent
devolves, be it on Licaros or Gatmaitan, is of no significance.
What counts most is the hard reality that there has been an
abject failure to get Anglo-Aseans nod of approval over
Gatmaitans being subrogated in the place of Licaros. The
absence of such conformity on the part of Anglo-Asean, which
is thereby made a party to the same Memorandum of
Agreement, prevented the agreement from becoming
effective, much less from being a source of any cause of
action for the signatories thereto.
GARCIA VS LLAMAS
Facts:
On December 23, 1996, petitioner and De Jesus borrowed
P400,00 from respondent. On the same day, they executed a
promissory note wherein they bound themselves jointly and
severally to pay the loan on or before January 23, 1997 with a
5% interest per month.
After the loan has long been overdue and despite repeated
demands, petitioner and De Jesus have failed and refused to
pay it; and by reason of their unjustified refusal, respondent
was compelled to engage the services of a counsel.
Petitioner averred that he assumed no liability under the
promissory note because he signed it merely as an
accommodation party for De Jesus; and alternatively, he is
relieved from any liability from the note inasmuch as the load
had been paid by De Jesus by means of a check dated 17 April
1997 and the respondents acceptance novated or
superseded the note.
Respondent replied that the loan remained unpaid for the
reason that the check issued by De Jesus bounced.
Petitioner seeks to extricate himself from the obligation as
joint and solidary debtor by insisting that novation took place,
either through the substitution of De Jesus as sole debtor or
the replacement of the promissory note by the check.
Issue:
W/N there was novation of the obligation. No.
Held:
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.
In general, there are two modes of substituting the person of
the debtor: (1) expromision and (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 persons 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.

loan; thus he can be released from it only upon its

extinguishment. Respondents acceptance of his check did not
change the person of the debtor, because a joint and solidary
obligor is required to pay the entirety of the obligation.

Novation may also be extinctive or modificatory. It is

extinctive when an old obligation is terminated by the creation
of a new one that takes the place of the former. It is merely
modificatory when the old obligation susbsists to the extent
that it remains compatible with the amendatory agreement.
Whether extinctive or modificatory, novation is made either
by changing the object or principal conditions, referred to as
objective or real novation; or by substituting the person of the
debtor or subrogating a third person to the rights of the
creditor, an act known as subjective or personal novation. For
novation to take place, the following requisites must concur:

Facts:
In 1979, Delta Motors CorporationM.A.N. Division (Delta)
applied for financial assistance from respondent State
Investment House, Inc. (SIHI), a domestic corporation
engaged in the business of quasi-banking for P25,000,000.00
in three separate credit agreements. Delta eventually became
indebted to SIHI in the amount of P24,010,269.32.
From April 1979 to May 1980, petitioner California Bus
Lines, Inc. (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.
o In each promissory note, CBLI promised to pay
Delta or order, P2,314,000 payable in 60 monthly
installments with interest at 14% per annum.
o 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 on October 7, 1981 with Delta to
cover its overdue obligations under the promissory notes.
o 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 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.
Delta executed a Continuing Deed of Assignment of
Receivables in favor of SIHI as security for the payment of its
obligations to SIHI per the credit agreements.
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 a complaint for injunction.
On September 15, 1983, pursuant to the Memorandum of
Agreement, Delta executed a Deed of Sale assigning to SIHI
five (5) of the sixteen (16) promissory notes from California
Bus Lines, Inc. At the time of assignment, these five
promissory notes had a total value of P16,152,819.80
inclusive of interest at 14% per annum.
SIHI subsequently sent a demand letter 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.
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.
Thereafter, Delta and CBLI entered into a compromise
agreement. CBLI agreed that Delta would exercise its right to
extrajudicially foreclose on the chattel mortgages over the 35
bus units.
o CBLI 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.
SIHI filed a complaint against CBLI in the RTC 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.

1. There must be a previous valid obligation.

2. The parties concerned must a agree to a new contract.
3. The old contract must be extinguished.
4. There must be a valid new contract.
Novation may also be express or implied. It is express when
the new obligation declares in unequivocal terms that the old
obligation is extinguished. It is implied when the new
obligation is incompatible with the old one on every point. The
test of incompatibility is whether the two obligations can
stand together, each one with its own independent existence.
In the instant case, no novation took place.
The parties did not unequivocally declare that the old
obligation had been extinguished by the issuance and the
acceptance of the check, or that the check would take the
place of the note. There is no incompatibility between the
promissory note and the check. As the CA correctly observed,
the check had been issued precisely to answer for the
obligation. On the one hand, the note evidences the loan
obligation; and on the other, the check answerws for it. verily,
the two can stand together.
Neither could the payment of interests which, in petitioners
view, also constitutes novation change the terms and
conditions of the obligation. Such payment was already
provided for in the promissory note and, like the check, was
totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation
was novated by the substitution of debtors. In order to change
the person of the debtor, the old one must be expressly
released from the obligation, and the third person or new
debtor must assume the formers place in the relation. Wellsettled is the rule that novation is never presumed.
Consequently, that which arises from a purported change in
the person of the debtor must be clear and express. It is thus
incumbent on petitioner to show clearly and unequivocally
that novation has indeed taken place.
In the present case, petitioner has not shown that he was
expressly released from the obligation, that a third person was
substituted in his place, or that the joint and solidary
obligation was cancelled and substituted by the solitary
undertaking of De Jesus.
Moreover, it must be noted that for novation to be valid and
legal, the law requires that the creditor expressly consent to
the substitution of a new debtor.
De Jesus was not a third person to the obligation. From the
beginning, he was a joint and solidary obligor of the P400,000

CALIFORNIA BUS LINES, INC. vs. STATE INVESTMENT HOUSE,

INC. G.R. No. 147950 December 11, 2003

Issue: 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.
Held: There was no novation in this case. The restructuring
agreement between Delta and CBLI executed on October 7,
1981, shows that the parties did not expressly stipulate that
the restructuring agreement novated the promissory notes.
Absent an unequivocal declaration of extinguishment of the
pre-existing obligation, only a showing of complete
incompatibility between the old and the new obligation would
sustain a finding of novation by implication. However, in
reviewing its terms yields no incompatibility between the
promissory notes and the restructuring agreement.
The restructuring agreement, instead of containing provisions
absolutely incompatible with the obligations of the
judgment, expressly ratifies previous obligations 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 giving Delta authority to take over the
management and operations of CBLI in case CBLI fails to pay
installments equivalent to 60 days. Where the parties to the
new obligation expressly recognize the continuing existence
and validity of the old one, there can be no novation.
Moreover, the 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.
AGRIFINA AQUINTEY vs. SPOUSES FELICIDAD AND RICO
TIBONG G.R. No. 166704 December 20, 2006
Facts:
On May 6, 1999, petitioner Agrifa filed before RTC a
complaint for sum of money and damages against
respondents.
o Agrifina alleged that Felicidad secured loans from
her on several occasions at monthly interest rates of
6% to 7%.
Despite demands, spouses Tibong failed to pay their
outstanding loans of P773,000,00 exclusive of interests.
However, spouses Tiong alleged that they had executed deeds
of assignment in favor of Agrifina amounting to P546,459 and
that their debtors had executed promissory notes in favor of
Agrifina.
Spouses insisted that by virtue of these documents,
Agrifina became the new collector of their debts.
Agrifina was able to collect the total amount of P301,000
from Felicdads debtors. She tried to collect the balance of
Felicidad and when the latter reneged on her promise, Agrifina
filed a complaint in the office of the barangay for the
collection of P773,000.00. There was no settlement.
xxx
Agrifina alleged that Felicidad had secured loans from her
on several occasions, totaling P773,000 but the spouses failed
to pay despite repeated demands.
The spouses, for their part, admitted that they had secured
loans from Agrifina but they assert that the proceeds of the
loan were re-lent to other borrowers at higher interest rates.
They likewise alleged that they had executed deeds of
assignment in favor of petitioner, and that their debtors had
executed promissory notes in Agrifinas favor.
It is now the spouses contention that re-lending the loan
resulted in a novation of the original obligation to Agrifina; as
such, she became the new collector of the debtors, and the
spouses obligation to pay the balance has been extinguished.

The trial court ruled that the deeds of assignment and

promissory notes did not contain any express agreement to
novate and extinguish Felicidads obligation.
The CA affirmed with modification the decision of the RTC
and stated that, the secured loans amount to P637,000, and
not P773,000.
Issue: Whether or not respondents obligation is extinguished
through the assignment of credit
Held:
Novation which consists in substituting a new debtor
(delegado) in the place of the original one (delegante) may be
made even without the knowledge or against the will of the
latter but not without the consent of the creditor. Substitution
of the person of the debtor may be effected by delegacion,
meaning, the debtor offers, and the creditor (delegatario),
accepts a third person who consents to the substitution and
assumes the obligation. Thus, the consent of those three
persons is necessary. In this kind of novation, it is not enough
to extend the juridical relation to a third person; it is
necessary that the old debtor be released from the obligation,
and the third person or new debtor take his place in the
relation. Without such release, there is no novation; the third
person who has assumed the obligation of the debtor merely
becomes a codebtor or a surety. If there is no agreement as to
solidarity, the first and the new debtor are considered
obligated jointly.
The theory of novation is that the new debtor contracts with
the old debtor that he will pay the debt, and also to the same
effect with the creditor, while the latter agrees to accept the
new debtor for the old. Moreover, the agreement must be
based on the consideration of the creditor's agreement to look
to the new debtor instead of the old.
CA correctly found that respondents' obligation to pay the
balance of their account with petitioner was extinguished, pro
tanto, by the deeds of assignment of credit executed by
respondent Felicidad in favor of petitioner.
xx
No. Case law is that, an assignment will, ordinarily, be
interpreted or construed in accordance with the rules of
construction governing contracts generally, the primary object
being always to ascertain and carry out the intention of the
parties. This intention is to be derived from a consideration of
the whole instrument, all parts of which should be given
effect, and is to be sought in the words and language
employed. Indeed, the Court must not go beyond the rational
scope of the words used in construing an assignment, words
should be construed according to their ordinary meaning,
unless something in the assignment indicates that they are
being used in a special sense. So, if the words are free from
ambiguity and expressed plainly the purpose of the
instrument, there is no occasion for interpretation; but where
necessary, words must be interpreted in the light of the
particular subject matter. And surrounding circumstances may
be considered in order to understand more perfectly the
intention of the parties. Thus, the object to be accomplished
through the assignment, and the relations and conduct of the
parties may be considered in construing the document.
Although it has been said that an ambiguous or uncertain
assignment should be construed most strictly against the
assignor, the general rule is that any ambiguity or uncertainty
in the meaning of an assignment will be resolved against the
party who prepared it; hence, if the assignment was prepared
by the assignee, it will be construed most strictly against him
or her. One who chooses the words by which a right is given
ought to be held to the strict interpretation of them, rather
than the other who only accepts them. Considering all the
foregoing, we find that respondents still have a balance on
their account to petitioner in the principal amount of
P33,841.00

RICARZE VS. CA
Facts:
Eduardo G. Ricarze was employed as a collector-messenger by
City Service Corporation, a domestic corporation engaged in
messengerial services. He was assigned to the main office of
Caltex where his primary task was to collect checks payable
to Caltex and deliver them to the cashier. In 1997 Caltex filed
a criminal complaint against Ricarze for estafa through
falsification of commercial documents when Caltex discovered
that several checks were missing and forged and have
subsequently been cleared throught its depositary bank PCIB.
Upon further investigation, it was found out that the cleared
checks were deposited in an account opened by Ricarze.
Meanwhile, the PCIB credited the amount of P581,229.00 to
the account of Caltex without informing the City prosecutor.
Hence 2 informations for estafa were filed against Ricarze
with Caltex Philippines as the private complainant. Ricarze
was then arraigned.
During trial, SRMO Law Office presented evidence in behalf of
PCIB, Ricarze then opposed such pleading contending that the
private complainant is Caltex and not PCIB. SRMO then
contended that when PCIB re-credited the amount to Caltex to
the extent of the indemnity; PCIB had been subrogated to the
rights and interests of Caltex as private complainant.
Petitioner however argues that PCIB cannot be subrogated to
the rights of Caltex, considering that he has no knowledge of
the subrogation much less gave his consent to it.
Issue:
WON There is a valid subrogation between PCIBank and
Caltex.
Ruling:
Petitioners argument on subrogation is misplaced. The Court
agrees with respondent PCIBs comment that petitioner failed
to make a distinction between legal and conventional
subrogation. Subrogation is the transfer of all the rights of the
creditor to a third person, who substitutes him in all his
rights.28 It may either be legal or conventional. Legal
subrogation is that which takes place without agreement but
by operation of law because of certain acts.29 Instances of
legal subrogation are those provided in Article 1302 of the
Civil Code. Conventional subrogation, on the other hand, is
that which takes place by agreement of the parties.31 Thus,
petitioners acquiescence is not necessary for subrogation to
take place because the instant case is one of legal
subrogation that occurs by operation of law, and without need
of the debtors knowledge.
Thus, being subrogated to the right of Caltex, PCIB, through
counsel, has the right to intervene in the proceedings, and
under substantive laws is entitled to restitution of its
properties or funds, reparation, or indemnification.
LEDONIO VS. CAPITOL DEVELOPMENT
Facts:
Ledonio on a certain date obtained from a Ms. Picache two
loans covered by promissory notes. Subsequently, Ms. Picache
executed an Assignment of Credit in favor of Capitol
Development Corporaiton.
When the loans became due however, petitioner failed to
settle his indebtedness despite Capitols demands. Hence,
Capitol instituted a Complaint for the collection of a sum of
money against herein petitioner Edgar Ledonio.
Ledonio on the otherhand sought the dismissal of the
complaint averring that Capitol had no cause of action against
him as he never consented or agreed to the said assignment.
It is his contention that consent of the debtor to the
assignment of credit is a basic/essential element in order for
the assignee to have a cause of action against the debtor.

According to petitioner, the assignment of credit constitutes

conventional subrogation which requires the consent of the
original parties to the loan contract, namely, Ms. Picache (the
creditor) and Ledonio (the debtor); and the third person,
Capitol(the assignee). Since petitioner never gave his consent
to the assignment of credit, then the subrogation of
respondent in the rights of Ms. Picache as creditor by virtue of
said assignment is without force and effect. In support of said
argument, petitioner invokes the following provisions of the
Civil Code
ART. 1300. Subrogation of a third person in the rights of the
creditor is either legal or conventional. The former is not
presumed, except in cases expressly mentioned in this Code;
the latter must be clearly established in order that it may take
effect.
ART. 1301. Conventional subrogation of a third person requires
the consent of the original parties and the third person.
Issue:
WON the consent of Ledonio to the assignment of credit is
essential in order for Capitol to have a cause of action against
Him? No.
Ruling:
The transaction between Ms. Picache and Capitol was an
assignment
of
credit
and
not
conventional
subrogation(novation), and does not require Ledonios consent
asdebtor for its validity and enforceability.
An assignment of credit has been defined as an agreement by
virtue of which the owner of a credit (known as the assignor),
by a legal cause - such as sale, dation in payment or
exchange or donation - and without need of the debtor's
consent, transfers that credit and its accessory rights to
another (known as the assignee), who acquires the power to
enforce it, to the same extent as the assignor could have
enforced it against the debtor.
On the other hand, subrogation, by definition, is the transfer
of all the rights of the creditor to a third person, who
substitutes him in all his rights. It may either be legal or
conventional. Legal subrogation is that which takes place
without agreement but by operation of law because of certain
acts. Conventional subrogation is that which takes place by
agreement of parties.
Although it may be said that the effect of the assignment of
credit is to subrogate the assignee in the rights of the original
creditor, this Court still cannot definitively rule that
assignment of credit and conventional subrogation are one
and the same.
Under our Code, conventional subrogation is not identical to
assignment of credit. In the former, the debtor's consent is
necessary; in the latter, it is not required. Subrogation
extinguishes an obligation and gives rise to a new one; while
assignment refers to the same right which passes from one
person to another. The nullity of an old obligation may be
cured by subrogation, such that the new obligation will be
perfectly valid; but the nullity of an obligation is not remedied
by the assignment of the creditor's right to another.
(Emphasis supplied.)
The Courts has consistently adhered to the foregoing
distinction between an assignment of credit and a
conventional subrogation. Such distinction is crucial because
it would determine the necessity of the debtor's consent. In an
assignment of credit, the consent of the debtor is not
necessary in order that the assignment may fully produce the
legal effects. What the law requires in an assignment of credit
is not the consent of the debtor, but merely notice to him as
the assignment takes effect only from the time he has
knowledge thereof. A creditor may, therefore, validly assign
his credit and its accessories without the debtor's consent. On

the other hand, conventional subrogation requires an

agreement among the parties concerned the original
creditor, the debtor, and the new creditor. It is a new
contractual relation based on the mutual agreement among
all the necessary parties.
VALENZUELA VS. KALAYAAN DEVELOPMENT
Facts:
Kalayaan is the owner of a parcel of land which was being
illegally occupied by petitioner sps. Valenzuela. Upon
discovery of such, Kalayaan demanded the petitioners to
immediately vacate the premises. The petitionrs however
negotiated with Kalayaan to purchase the portion of the lot
that they were already occupying and by virtue of which, the
parties executed a Contract to Sell. Petitioners commenced
the paying of monthly installments, however, upon their
payment of one-half of the purchase price,they manifested
their inability to pay the remaining balance and proposed to
Kalayaan, thate substitution of Juliet Flores Gilon who was
willing to assume the payment of the remaining balance
payable to Kalayaan. Thereafter, Juliet made payments of
10,000 per montht to Kalayaan, which the latter accepted for
and in behalf of Gloria Valenzuela.
Thereafter, Kalayaan demanded that Sps. Valenzuela pay their
outstanding obligation but thesedemands remained unheeded
thus Kalayaan filed a Complaint for Rescission of Contract and
Damages against Sps. Valenzuela.
Petitioners on the otherhand claim that there was already a
valid novation in the present case. They aver that the CA
failed to see that the original contract between the petitioners
and Kalayaan was altered, changed, modified and
restructured, as a consequence of the change in the person of
the principal debtor and the monthly amortization to be paid
for the subject property. When they agreed to a monthly
amortization of P10,000.00 per month, the original contract
was changed; and Kalayaan recognized Juliets capacity to
pay, as well as her designation as the new debtor. The original
contract was novated and the principal obligation to pay for
the remaining half of the subject property was transferred
from petitioners to Juliet. When Kalayaan accepted the
payments made by the new debtor, Juliet, it waived its right to
rescind the previous contract. Thus, the action for rescission
filed by Kalayaan against them, was unfounded, since the
contract sought to be rescinded was no longer in existence.
Issue:
WON there is novation in this case. No.
Ruling:
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.
Article 1292 of the Civil Code provides that "[i]n 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." Novation is never
presumed. Parties to a contract must expressly agree that
they are abrogating their old contract in favor of a new one. In
the absence of an express agreement, novation takes place
only when the old and the new obligations are incompatible
on every point. The test of incompatibility is whether or not
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.
Thus, in order that a novation can take place, the concurrence
of the following requisites are 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.
In the instant case, none of the requisites are present. There
is only one existing and binding contract between the parties,
because Kalayaan never agreed to the creation of a new
contract between them or Juliet. True, petitioners may have
offered that they be substituted by Juliet as the new debtor to
pay for the remaining obligation. Nonetheless, Kalayaan did
not acquiesce to the proposal.
Its acceptance of several payments after it demanded that
petitioners pay their outstanding obligation did not modify
their original contract. Petitioners, admittedly, have been in
default; and Kalayaans acceptance of the late payments is, at
best, an act of tolerance on the part of Kalayaan that could
not have modified the contract.
TOMIMBANG VS. TOMIMBANG
Facts:
Petitioner and respondent are siblings. The petitioner in this
case want3ed to renovate the property their parents has
given him so he entered into a loan agreement with the
respondent witht the agreement that the petitioner will only
start paying after the completion of the renovation. However
due to certain misunderstandings, the parties entered into a
new agreement stating that the petitioner shall start paying
off the loan in a monthly basis and this was initially complied
with by the petitioner. However, when another misunderstand
arouse between the parties, the petitioner stopped paying his
monthly obligations thus prompting respondent to file the
instand case for the payment of the loan plus interest from
date of default.
Petitioner does not deny that she obtained a loan from
respondent. She, however, contends that the loan is not yet
due and demandable because the suspensive condition the
completion of the renovation of the apartment units - has not
yet been fulfilled.
Issue:
WON the petitioner's obligation has already become due and
demandable?Yes.
Ruling:
The evidence on record clearly shows that after renovation of
seven out of the eight apartment units had been completed,
petitioner and respondent agreed that the former shall
already start making monthly payments on the loan even if
renovation on the last unit was still pending.
Evidently, by virtue of the subsequent agreement, the parties
mutually dispensed with the condition that petitioner shall
only begin paying after the completion of all renovations.
There was, in effect, a modificatory or partial novation, of
petitioner's obligation. Article 1291 of the Civil Code provides,
thus:
Art. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
(Emphasis supplied)
In Iloilo Traders Finance, Inc. v. Heirs of Sps. Soriano,10 the
Court expounded on the nature of novation, to wit:
Novation may either be extinctive or modificatory, much
being dependent on the nature of the change and the
intention of the parties. Extinctive novation is never
presumed; there must be an express intention to novate.
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 new valid obligation.
Novation is merely modificatory where the change brought
about by any subsequent agreement is merely incidental to
the main obligation (e.g., a change in interest rates or an
extension of time to pay); in this instance, the new agreement
will not have the effect of extinguishing the first but would
merely supplement it or supplant some but not all of its
provisions.
As can be gleaned from the foregoing, the aforementioned
four essential elements and the requirement that there be
total incompatibility between the old and new obligation,
apply only to extinctive novation. In partial novation, only the
terms and conditions of the obligation are altered, thus, the
main obligation is not changed and it remains in force.
Petitioner stated in her Answer with Counterclaim that she
agreed and complied with respondent's demand for her to
begin paying her loan, since she believed this was in
accordance with her commitment to pay whenever she was
able. Her partial performance of her obligation is
unmistakable proof that indeed the original agreement
between her and respondent had been novated by the
deletion of the condition that payments shall be made only
after completion of renovations. Hence, by her very own
admission and partial performance of her obligation, there can
be no other conclusion but that under the novated agreement,
petitioner's obligation is already due and demandable.
MILLA VS PEOPLE
Facts:
In this case, a criminal case was filed against Milla for having
committed estafa through falsification of the notarized deed
of absolute sale and TCT purportedly issued by the ROD of
Makati. Milla by misrepresenting himself and through
falsification of the said documents was ableto get the total
amount of P2m from Carlo Lopez of Market Pursuits, Inc. When
Lopez discovered Millas scheme however, Lopez demanded
the return of the amount of P2m which Milla acquiesced into
by issuing 2 checks for the said amount. These checks were
later on dishonored and Milla for his part consistently ignored
the demands made by Lopez. This led to the filing of the
present case.
Now Milla contends that his issuance of the 2 checks
reprenting the amount of 2m before the institution of the
criminal complaint against him novated his obligation to MPI,
thereby enabling him to avoid any incipient criminal liability
and converting his obligation into a purely civil one.
Issue:
So the issue in this cse is whether or not the payment of an
obligation before the institution of a criminal complaint, in
itself constitute novation that may prevent criminal liability or
WON there is novation in this case. No.
Ruling:
In Quinto v. People, this Court exhaustively explained the
concept of novation in relation to incipient criminal liability,
viz:
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 unequivocal to be mistaken.
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 or not 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.
In the case at bar, the acceptance by MPI of the Equitable PCI
checks tendered by Milla could not have novated the original
transaction, as the checks were only intended to secure the
return of the P2 million the former had already given him.
Even then, these checks bounced and were thus unable to
satisfy his liability. Moreover, the estafa involved here was not
for simple misappropriation or conversion, but was committed
through Millas falsification of public documents, the liability
for which cannot be extinguished by mere novation. In view of
the foregoing, the petition of Milla was denied.
HEIRS OF SERVANDO FRANCO vs. SPOUSES VERONICA AND
DANILO GONZALES G.R. No. 159709 June 27, 2012
Facts:
On November 7, 1985, Servando Franco and Leticia Medel
obtained a loan from Veronica R. Gonzales, who was engaged
in the money lending business under the name Gonzales
Credit Enterprises, in the amount of P50,000.00, payable in
two months. Veronica gave only the amount of P47,000.00, to
the borrowers, as she retained P3,000.00, as advance interest
for one month at 6% per month. Servado and Leticia executed
a promissory note for P50,000.00, to evidence the loan,
payable on January 7, 1986.
On November 19, 1985, Servando and Leticia obtained
from Veronica another loan in the amount of P90,000.00,
payable in two months, at 6% interest per month. They
executed a promissory note to evidence the loan, maturing on
January 19, 1986. They received only P84,000.00, out of the
proceeds of the loan.
On June 11, 1986, Servando and Leticia secured from
Veronica still another loan in the amount of P300,000.00,
maturing in one month, secured by a real estate mortgage
over a property belonging to Leticia Makalintal Yaptinchay,
who issued a special power of attorney in favor of Leticia
Medel, authorizing her to execute the mortgage. Servando
and Leticia executed a promissory note in favor of Veronica to
pay the sum of P300,000.00, after a month, or on July 11,
1986. However, only the sum of P275,000.00, was given to
them out of the proceeds of the loan.
On July 23, 1986, Servando and Leticia with the latters
husband, consolidated all their previous unpaid loans totaling
P440,000.00, and sought from Veronica another loan in the
amount of P60,000.00, bringing their indebtedness to a total
of P500,000.00, payable on August 23, 1986. They executed a
promissory note.
On maturity of the loan, the borrowers failed to pay the
indebtedness of P500,000.00, plus interests and penalties,
evidenced by the above-quoted promissory note.
Veronica R. Gonzales, joined by her husband filed with the
RTC a complaint for collection of the full amount of the loan
including interests and other charges.
Issue:Whether or not a novation of the August 23, 1986
promissory note when respondent Veronica Gonzales issued
the February 5, 1992 receipt was present.
Held: The Court held that novation did not transpire because
no irreconcilable incompatibility existed between the
promissory note and the receipt. A novation arises when there
is a substitution of an obligation by a subsequent one that
extinguishes the first, either by changing the object or the
principal conditions, or by substituting the person of the
debtor, or by subrogating a third person in the rights of the
creditor.

For a valid novation to take place, there must be, therefore:

(a) a previous valid obligation; (b) an agreement of the parties
to make a new contract; (c) an extinguishment of the old
contract; and (d) a valid new contract. In short, the new
obligation extinguishes the prior agreement only when the
substitution is unequivocally declared, or the old and the new
obligations are incompatible on every point. A compromise of
a final judgment operates as a novation of the judgment
obligation upon compliance with either of these two
conditions.
Novation is not presumed. This means that the parties to a
contract should expressly agree to abrogate the old contract
in favor of a new one. In the absence of the express
agreement, the old and the new obligations must be
incompatible on every point.
There is incompatibility when the two obligations cannot stand
together, each one having its independent existence. If the
two obligations cannot stand together, the latter obligation
novates the first. Changes that breed incompatibility must be
essential in nature and not merely accidental. The
incompatibility must affect any of the essential elements of
the obligation, such as its object, cause or principal conditions
thereof; otherwise, the change is merely modificatory in
nature and insufficient to extinguish the original obligation.
In light of the foregoing, the issuance of the receipt created no
new obligation. Instead, the respondents only thereby
recognized the original obligation by stating in the receipt that
the P400,000.00 was partial payment of loan and by
referring to the promissory note subject of the case in
imposing the interest. The loan mentioned in the receipt was
still the same loan involving the P500,000.00 extended to
Servando. Advertence to the interest stipulated in the
promissory note indicated that the contract still subsisted, not
replaced and extinguished, as the petitioners claim.
G.R. No. 164051

October 3, 2012

PHILIPPINE
NATIONAL
vs.
LILIAN S. SORIANO, Respondent.

BANK, Petitioner,

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.
762431 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. 4458300998 with petitioner PNB.
x x x. Soriano is the chairman and president of LISAM,
she is also the authorized signatory in all LISAMs
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 (P29,645,944.55),
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, [PNBs] authorized
personnel conducted an actual physical inventory of
LISAMs 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 Trustees account and to
deliver the proceeds thereof to PNB to be applied
against its acceptance on the Trustees 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 Trustees 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 Trustees 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 Sorianos failure to account for the proceeds of the sale of the
motor vehicles, PNB, as previously adverted to, filed a complaintaffidavit 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
[LISAMs] 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 PNBs lack of objection to [LISAMs]
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
Boards minutes of meeting, with the happy information
that the Board of Directors of PNB has approved the
conversion of [LISAMs] 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 Sorianos 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 ofEstafa (violation of the Trust
Receipts Law), docketed as Criminal Case Nos. 2001-0641 to 20010693, which were raffled to the Regional Trial Court (RTC), Branch 21,
Naga City.
Meanwhile, PNB filed a petition for review of the Naga City
Prosecutors 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 Resolution9 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,
[Sorianos] 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
PNBs 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 Sorianos 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 [LISAMs] restructuring proposal of its
account with PNB had changed the status of [LISAMs]
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 wellestablished 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 DOJs
ruling that the restructuring of LISAMs loan secured by trust receipts
extinguished Sorianos criminal liability therefor.
It has not escaped us that PNBs 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 RTCs 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 20010693 against Soriano as directed by the DOJ violates the wellestablished 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 20010693 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 DOJs 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
courts imprimatur. As such, the DOJs 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 RTCs 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 prosecutions 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 prosecutors 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
courts 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 faciecase 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 complainants 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
LISAMs loan account extinguished Sorianos criminal liability.
PNB admits that although it had approved LISAMs restructuring
proposal, the actual restructuring of LISAMs 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 LISAMs loan did not affect the TR security, thus,
Sorianos criminal liability thereunder subsists.
On the other hand, the appellate court agreed with the ruling of the
DOJ Secretary that the approval of LISAMs restructuring proposal,
even if not reduced into writing, changed the status of LISAMs loan
from being secured with Trust Receipts (TRs) 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 courts reasoning. The DOJ
Secretarys 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 TRs and
the subsequent restructured Omnibus Line which was supposedly
approved by PNB.
Soriano is confident with her assertion that PNBs approval of her
proposal to restructure LISAMs loan novated the loan agreement
secured by TRs. 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
[LISAMs] 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 PNBs lack of objection to
[LISAMs] 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 PNBs
Boards minutes of meeting, with the happy information
that the Board of Directors of PNB has approved the
conversion of [LISAMs] 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
Sorianos reliance thereon is misplaced. The approval of LISAMs
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, Sorianos
bare assertion that the restructuring was approved by PNB cannot
equate to a finding of an implied novation which extinguished Sorianos
obligation as entrustee under the TRs.
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 Sorianos obligation to "sell the
[merchandise] for cash for [LISAMs] account and to deliver the
proceeds thereof to PNB to be applied against its acceptance on
[LISAMs] 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 Sorianos criminal
liability under the TRs subsists considering that the civil obligations
under the Floor Stock Line secured by TRs 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.1wphi1 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 PNBs 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 ANNULLEDand 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.