Legal Compensation
"When all the
International Corp. Bank vs. IAC
FACTS: 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 amount, private respondent is still indebted in the
amount of P6.81 million.
Trial court ordered International bank to pay P1M for
the damages sustained in the money market
placement, affirmed by CA
ISSUEL: Whether or not the claim of petitioner for
the deficiency of P6.8M can be legally compensated
by the claim of private respondent for the amount of
P1M
RULING: No, it cannot be legally compensated
because the question for the legality of the
foreclosure is still pending
Compensation shall take place when two persons, in
their own right, are creditors and debtors of each
other. (Art. 1278, Civil Code).
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. (Compaia 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.
Francia vs. IAC
FACTS: Engracio Francia was the registered owner
of a house and lot located in Pasay City. A portion of
such property was expropriated by the Republic of
the Philippines in 1977. It appeared that Francia did
not pay his real estate taxes from 1963 to 1977. Thus,
his property was sold in a public auction by the City
Treasurer of Pasay City. Francia filed a complaint to
annual the auction sale. The lower court dismissed
the complaint and the Intermediate Appellate Court
affirmed the decision of the lower court in toto.
Hence, this petition for review. Francia contends that
his tax delinquency of P 2,400 has been extinguished
by legal compensation. He claims that the
government owed him P 4,116 when a portion of his
land was expropriated on October 15, 1977.
ISSUE: Whether or not the taxed due by the tax
payer can be legally compensated with the payment
of just compensation by the government to said
taxpayer
RULING: No, it cannot be done under legal
compensation
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. Internal revenue taxes cannot be the
subject of compensation. The Government and the
taxpayer are not mutually creditors and debtors of
each other under Article 1278 of the Civil Code and a
claim of taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off.
Moreover, the amount of P4,116 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. It would have been an easy matter to
withdraw P 2,400 from the deposit so that he could
pay the tax obligation thus aborting the sale at public
auction. Thus, the petition for review is dismissed.
The taxes assessed are the obligations of the taxpayer
arising from law, while the money judgment against
the government is an obligation arising from contract,
whether express or implied.
Mondragon vs. Sola
FACTS: 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 Services
with respondent Victoriano S. Sola, Jr. for a period of
three years. 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.
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 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 RTC of
Davao, a Complaint 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 Counterclaim, 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. In his Reply and Answer
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.
The RTC rendered its Decision in favor of defendant
and against plaintiff. 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 granting the appeal and rescinded the
Contract of Services. Petitioner's motion for
reconsideration was denied in a Resolution.
ISSUE: Whether or not CA erred in finding that
petitioner breached its contract with respondent and
that there is no compensation in accordance to Article
1279 of the Civil Code
RULING: Yes, CA erred
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:
Gentlemen:
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.
xxxxxxx
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. Sola
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.
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. 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. Legal compensation requires the
concurrence of the following conditions:
(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.
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.
Montemayor vs. Millar
FACTS: Respondent Atty. Vicente D. Millora
(Vicente) obtained a loan of P400, 000.00 from
petitioner Dr. Jesus M. Montemayor (Jesus). The loan
has a 2% interest and by this time, Vicente had
already paid the amount of P108, 000.00 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 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. Jesus made several demands for Vicente to
settle his obligation but to no avail.
Jesus filed before the RTC of Quezon City. Atty.
Vicente filed a COUNTERCLAIM against Jesus
claiming that Atty. Vicente was Jesus lawyer on
several occasions and that in fact, Jesus owes Atty.
Vicente attorneys fees of not less than P500, 000.00.
Vicente claims that he was summarily dismissed from
handling them when the instant complaint for sum of
money was filed.
On October 27, 1999 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 ADDITIONALLY, THERE WAS NO
PRONOUNCMENT ON ATTORNEYS FEES AND
COST OF SUIT. Jesus filed a motion for
reconsideration at the CA but was denied.
Upon appeal to the higher court, 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.
ISSUE: Whether the absence of a specific amount in
the decision representing respondent's counterclaim
the same could be validly offset against the specific
amount of award mentioned in the decision in favor
of the petitioner
RULING: No, it could not be offset
For legal compensation to take place, the
requirements set forth in Articles 1278 and 1279 of
the Civil Code
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. Also, when the determination of the
exact amount depends only on a simple arithmetical
operation. 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.
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.
There are 2 parts to the decision of RTC
FIRST PART - The computation of the amount due to
Jesus which is P300, 000.00 is to be multiplied by the
interest rate of 12%. The result thereof plus the
principal of P300,000.00 is the total amount that
Vicente must pay Jesus.
SECOND PART The computation of attorneys fees
to Vicente. Vicente is entitled to attorneys fees which
is equivalent to whatever amount recoverable from
him by Jesus. 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.
Novation
Iloilo Traders vs. Heirs of Soriano
FACTS: Respondents executed two promissory notes
secured by real property mortgages in favor of
petitioner. The respondents defaulted and petitioner
moved for extra-judicial foreclosure of the
mortgages. Respondent filed a complaint against
petitioner. The parties later entered into amicable
settlement and submitted it to the trial court for
approval. The trial court required the parties to give
some clarifications on several issues that were not
complied. The amicable settlement was disapproved
and the court proceeded. Respondents withdrew the
case and filed a (new) case for novation and specific
performance which was decided favorably for the
respondents. The Court of Appeals affirmed the
judgment.
ISSUE: Whether or not the amicable settlement
entered into between parties has novated the original
obligation.
RULING: NO. The parties entered into the
agreement basically to put an end to Civil Case No.
14007 then pending before the Regional Trial Court.
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.
Ajax Marketing vs. CA
FACTS: 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
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).
ISSUE: Whether or not novation occurred when their
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.
RULING: No, it does not constitute as novation
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.
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.
California Bus Lines vs. State Investment House
FACTS: Delta Motors Corporation applied for
financial assistance from respondent State Investment
House, Inc., a domestic corporation engaged in the
business of quasi-banking. SIHI agreed to extend a
credit line to Delta which eventually became indebted
to SIHI. Meanwhile, petitioner purchased on
installment basis several buses to Delta. To secure the
payment of the obligation petitioner executed
promissory notes in favor of Delta. When petitioner
defaulted on the payments of the debts, it entered into
an agreement with delta to cover its due obligations.
However, petitioner still had trouble meeting its
obligations with delta. Pursuant to the memorandum
of agreement delta executed a deed of sale assigning
to respondent, the promissory notes from petitioner.
Respondent subsequently sent a demand letter to
petitioner requiring remitting payments due on the
promissory notes. Petitioner replied informing
respondent of the fact that delta had taken over its
management and operations.
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,
RULING: No, it does not constitute as novation
The attendant facts do not make out a case of
novation. 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. 59 However, our review of
its terms yields no incompatibility between the
promissory notes and the restructuring agreement.
Real or Objective Novation
PNB vs. Soriano
FACTS: 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 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]
Sorianos 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.
Trial court and CA dismissed the criminal complaint
ISSUE: Whether or not the restructuring of the loan
agreement constitute as novation
RULING: No, it did not constitute as novation
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.
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.
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.
Subjective Novation
SC Megaworld vs. Parada
FACTS: S.C. Megaworld Construction and
Development Corporation (Megaworld) bought
electrical lighting materials from Gentile Industries, a
sole proprietorship owned by Engineer Luis U.
Parada. Megaworld 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
KleenTechnologies, 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 once, Enviro Kleen stopped
making further payments, leaving an outstanding
balance of P816,627.00. It also ignored the various
demands of the Parada, who then filed a suit in the
RTC, to collect from the petitioner the said balance,
plus damages, costs and expenses.
Megaworld denied liability by saying that it was
released from its indebtedness to the Parada due to
the novation of their contract, which. There was
allegedly novation when the Parada accepted the
partial payment of Enviro Kleen in its behalf, and
thereby acquiesced to the substitution of Enviro
Kleen as the new debtor in Megaworlds place.
The Regional Trial Court ruled in favor of Parada.
On appeal, Megaworld 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."
The sales invoices and receipts show that the
respondent is the sole proprietor of Genlite
Industries, and therefore the real party.
On the issue of novation, the Court of Appeals ruled
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.
ISSUE: Whether or not there is novation
RULING: No, there are no novation
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. It is "the substitution of a new contract, debt,
or obligation for an existing one between the same or
different parties."
The settled rule is that novation is never presumed,
but must be clearly and unequivocally shown. 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.
From the circumstances obtaining below, we can
infer no clear and unequivocal consent by Parada to
the release of Megaworld from the obligation to pay
the cost of the lighting materials. In fact, from the
letters of Parada to Enviro Kleen, it can be said that
he retained his option to go after Megaworld if
Enviro Kleen failed to settle the petitioners debt.
As the trial court held: 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
and dated 16 June 1999 sent by Megaworld to Enviro
Kleen clearly shows that there was nothing therein
that would evince that Parada has consented to the
exchange of the person of the debtor from the
petitioner Megaworld to Enviro Kleen Technologies,
Inc.
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 the significance of which has been misinterpreted,
referred to its lawyers and there may be a pull-out of that if considered would have affected the result of
the delivered lighting fixtures. It was likewise stated the case. We find no such oversight in the
therein that incident damages that may result to the appreciation of the facts below, nor such a
structure in the course of the pull-out will be to the misinterpretation thereof, as would otherwise provide
account of the petitioner. a clear and unequivocal showing that a novation has
occurred in the contract between the parties resulting
It is evident from the 2 aforesaid letters that there is in the release of the petitioner.
no indication of respondent Paradas intention to
release Megaworld 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
Parada when there is clearly no agreement to release
Megaworld will result merely to the addition of
debtors and not novation. Hence, the creditor can still
enforce the obligation against the original debtor. 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 fulfillment 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.

The settled rule is that novation is never presumed,

but must be clearly and unequivocally shown. 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. Thus, the mere substitution of debtors will
not result innovation, 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. If
there is no agreement as to solidarity, the first and
new debtors are considered obligated jointly.

The trial court found that respondent Parada never

agreed to release Megaworld 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