CREDIT TRANSACTIONS CASES

LOAN

1. PEOPLE vs. CONCEPCION, 44 Phil. 126FACTS:Venancio Concepcion, President of the Philippine National Bank and a member of the Board thereof, authorized an extension of credit in favor of "Puno y Concepcion, S. en C. to the manager of the Aparri branch of the Philippine National Bank. "Puno y Concepcion, S. en C."was a co-partnership where Concepcion is a partner. Subsequently, Concepcion was charged and found guilty in the Court of First Instance of Cagayan with violation of section 35 of Act No.2747. Section 35 of Act No. 2747 provides that the National Bank shall not, directly or indirectly, grant loans to any of the members of the board of directors of the bank nor to agents of the branch banks. Counsel for the defense argue that the documents of record do not prove that authority to make a loan was given, but only show the concession of a credit. They averred that the granting of a credit to the co-partnership "Puno y Concepcion, S. en C." by VenancioConcepcion, President of the Philippine National Bank, is not a "loan" within the meaning of section 35 of Act No. 2747.ISSUE:Whether or not the granting of a credit of P300,000 to the co-partnership "Puno yConcepcion, S. en C." by Venancio Concepcion, President of the Philippine National Bank, a"loan" within the meaning of section 35 of Act No. 2747.HELD:The Supreme Court ruled in the affirmative. The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust reposed by a lender that he will pay what he may promise. A "loan" means the delivery by one party and the receipt by the other party of a given sum of money, upon an agreement, express or implied, to repay the sum loaned,with or without interest. The concession of a "credit" necessarily involves the granting of "loans"up to the limit of the amount fixed in the "credit,"

2. Bonnevie V. CA (1983)G.R. No. L-49101October 24, 1983

Lessons Applicable: Simple Loan

Facts:December 6, 1966: Spouses Jose M. Lozano and Josefa P. Lozano secured their loan of P75K from Philippine Bank of Commerce (PBC) by mortgaging their property

December 8, 1966: Executed Deed of Sale with Mortgage toHonesto Bonneviewhere P75K is payable to PBC and P25K is payable to Spouses Lanzano.

April 28, 1967 to July 12, 1968:Honesto Bonneviepaid a total ofP18,944.22 to PBC

May 4, 1968: Honesto Bonnevieassigned all his rights under the Deed of Sale with Assumption of Mortgage to his brother, intervenor Raoul Bonnevie

June 10, 1968: PBCapplied for the foreclosure of the mortgage, and notice of sale was published

January 26, 1971:Honesto Bonnevie filed in the CFI of Rizal againstPhilippine Bank of Commerce for the annulment of the Deed of Mortgage dated December 6, 1966as well as the extrajudicial foreclosure made on September 4, 1968.

CFI: Dismissed the complaint with costs against the Bonnevies

CA: Affirmed

ISSUE: W/N the foreclosure on the mortgage is validly executed.

HELD: YES. CA affirmedA contract of loan being a consensual contract is perfected at the same time the contract of mortgage was executed. The promissory note executed on December 12, 1966 is only an evidence of indebtedness and does not indicate lack of consideration of the mortgage at the time of its execution.

Respondent Bank had every right to rely on the certificate of title. It was not bound to go behind the same to look for flaws in the mortgagor's title, the doctrine of innocent purchaser for value being applicable to an innocent mortgagee for value.

Thru certificate of sale in favor of appellee was registered on September 2, 1968 and the one year redemption period expired on September 3, 1969. It was not until September 29, 1969 that Honesto Bonnevie first wrote respondent and offered to redeem the property.

loan matured on December 26, 1967 so when respondent Bank applied for foreclosure, the loan was already six months overdue. Payment of interest on July 12, 1968 does not make the earlier act of PBC iniquitous nor does it ipso facto result in the renewal of the loan. In order that a renewal of a loan may be effected, not only the payment of the accrued interest is necessary but also the payment of interest for the proposed period of renewal as well. Besides, whether or not a loan may be renewed does not solely depend on the debtor but more so on the discretion of the bank.

3. BPI Investment Corp V. CA (2002)G.R. No. 133632February 15, 2002

Lessons Applicable: Simple Loan

Facts:Frank Roa obtained a loan with interest rate of 16 1/4%/annum from Ayala Investment and Development Corporation (AIDC), the predecessor of BPI Investment Corp. (BPIIC), for the construction of a house on his lot in New Alabang Village, Muntinlupa.

He mortgaged the house and lot toAIDCas security for the loan.

1980:Roa sold the house and lot to ALS Management & Development Corp. and Antonio Litonjua for P850K who paid P350K in cash and assumed the P500K indebtedness of ROA with AIDC.AIDC proposed to grant ALS and Litonjua a new loan for P500K with interested rate of 20%/annum and service fee of 1%/annum on the outstanding balance payable within 10 years through equal monthlyamortizationof P9,996.58 and penalty interest of 21%/annum/day from the date theamortizationbecomes due and payable.

March 1981: ALS and Litonjua executed a mortgage deed containing the new stipulation with the provision that the monthly amortization will commence on May 1, 1981

August 13, 1982: ALS and Litonjua paid BPIICP190,601.35 reducing the P500K principal loan to P457,204.90.

September 13, 1982: BPIIC released toALS and LitonjuaP7,146.87, purporting to be what was left of their loan after full payment of Roas loan

June 1984: BPIIC instituted foreclosure proceedings against ALS and Litonjuaon the ground that they failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984 amounting toP475,585.31

August 13, 1984: Notice of sheriff's sale was published

February 28, 1985: ALS and Litonjua filed Civil Case No. 52093 against BPIIC alleging that they are not in arrears and instead they made an over payment as ofJune 30, 1984 since the P500K loan was only released September 13, 1982 which marked the start of the amortization and since onlyP464,351.77 was released applying legal compensation the balance ofP35,648.23 should be applied to the monthly amortizations

RTC:in favor of ALS and Litonjua and against BPIIC that the loan granted by BPI to ALS and Litonjua was only in the principal sum of P464,351.77 and awarding moral damages, exemplary damages and attorneys fees for the publication

CA: Affirmed reasoning that a simple loan is perfected upon delivery of the object of the contract which is on September 13, 1982

ISSUE: W/N the contract of loan was perfected only on September 13, 1982 or the second release of the loan?

HELD: YES.AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and exemplary damages in favor of private respondents is DELETED, but the award to them of attorneys fees in the amount of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private respondents P25,000 as nominal damages. Costs against petitioner.obligation to pay commenced only on October 13, 1982, a month after the perfection of the contract

contract of loan involves a reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of the other. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Consequently, petitioner could only demand for the payment of the monthly amortization after September 13, 1982 for it was only then when it complied with its obligation under the loan contract.

BPIIC was negligent in relying merely on the entries found in the deed of mortgage, without checking and correspondingly adjusting its records on the amount actually released and the date when it was released. Such negligence resulted in damage for which an award of nominal damages should be given

SSS where we awarded attorneys fees because private respondents were compelled to litigate, we sustain the award of P50,000 in favor of private respondents as attorneys fees

4. COLITO T. PAJUYO vs. COURT OF APPEALS, GR. No. 146364, June 3, 2004FACTS:In June 1979, petitioner Colito T. Pajuyo purchased the rights over a property from Pedro Perez. Thereafter, he constructed a house therein and he and his family lived there. Later,Pajuyo agreed to let private respondent Eddie Guevarra to live in the house for free provided that the latter maintain the cleanliness and orderliness of the house. They also agreed that Guevarrashould leave the premises upon demand. Subsequently, when Pajuyo told Guevarra that he needed the house, Guevarra refused, hence an ejectment case was filed. Guevarra claimed thatPajuyo had no valid title or right of possession over the lot where the house stands because the lot is within the 150 hectares set aside for socialized housing. The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by tolerance. Thus, Guevarras refusal to vacate the house on Pajuyos demand made Guevarras continued possession of the house illegal Aggrieved, Guevarra appealed to the Regional Trial Court which only affirmed the MTCdecision. At the CA, the latter reversed the RTC decision. The Court of Appeals ruled that theKasunduan is not a lease contract but a commodatum because the agreement is not for a pricecertain. Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, theappellate court held that Guevarra has a better right over the property under Proclamation No.137. At that time, Guevarra was in physical possession of the property.ISSUE:Whether or not the contract between petitioner and private respondent is one of commodatum.HELD:The Supreme Court held that the contract is not a commodatum. In a contract of commodatum, one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. An essential feature of commodatum is that it is gratuitous Another feature is that the use of the thing belonging to another is for a certain period. Thus, the bailor cannot demand the return of the thing loaned until after the expiration of the period stipulated, or after accomplishment of the use for which the commodatum is constituted. If the bailor should have urgent need of the thing, he may demand its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case the contractual relation is called a precarium. The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the property in good condition. The imposition of this obligation makes the Kasunduan a contract different from a commodatum. The effects of the Kasunduan are also different from that of a commodatum.

5. PRODUCERS BANK OF THE PHILIPPINES vs. COURT OF APPEALS, GR No. 115324

FACTS:Sometime in 1979, private respondent Franklin Vives, upon request of his friend Angeles Sanchez and relying on the assurance that he could withdraw his money within a month's time, issued a check in the amount of Two Hundred Thousand Pesos in favor of SterelaMarketing and Services owned by one Col. Arturo Doronilla. Subsequently, private respondent and his wife found out that Sterela cant be found on the address previously given to then, so they went to petitioner Producers Bank of the Philippines to verify if their money was still intact They were informed that part of the amount had been withdrawn by Doronilla and that the latter instructed the bank to debit from the savings account the amount and deposit it in his currentaccountPrivaterespondent filedanactionfor recoveryofsum ofmoneyagainstDoronilla, Sanchez, Dumagpi and petitioner. The trial court ruled in favor of herein private respondents On appeal of the case, the appellate court affirmed the decision of the RTC. Petitioner contends that the transaction between private respondent and Doronilla is a simple loan (mutuum) since all the elements of a mutuum are present: first, what was delivered byprivate respondent to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was obliged to pay interest. Hence, petitioner argues that it cannot be held liablebecauseitis notprivytothe transactionbetweenthelatterandDoronilla.Private respondent, on the other hand, argues that the transaction between him and Doronilla is not amutuumbutanaccommodation,sincehedidnotactuallypartwiththeownershipofhis P200,000.00 but retained some degree of control over his money through his wife who was made asignatory tothe savings account and inwhose possession the savings account passbookwas given.

ISSUE:Whether or not the contract between Sanchez and Doronilla and Vives is a contract ofcommodatum, thus making petitioner Bank liable.

HELD:Supreme Court held that the contract is commodatum. Although in view of Article 1933of the Civil Code, the object in commodatum is non-consumable, but Article 1936 of the Civil Code provides Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Thus, ifconsumable goods are loaned only for purposes of exhibition or when the intention of the parties is to lend consumable goods and to have the very same goods returned at the end of the period agreed upon, the loan is commodatum and not a mutuum. The evidence shows that private respondent merely "accommodated" Doronilla by lending his money without consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the transaction that the money would not be removed from Sterelas savings account and would be returned to private respondent after thirty (30) days.

MUTUUM

6. Liam Law vs. Olympic Sawmill (GR L-30771, 28 May 1984)Liam Law vs. Olympic SawmillGR L-30771, 28 May 1984First DivisionMelencio-Herrera (J)Facts:On 7 September 1957, Liam Law (plaintiff) loaned P10,000.00, without interest, to Olympic Sawmill Co. and Elino Lee Chi, as the latter?s managing partner (defendants). The loan became ultimately due on 31 January 1960, but was not paid on that date, with the debtors asking for an extension of 3 months, or up to 30 April 1960. On 17 March 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to 30 April 1960,but the obligation was increased by P6,000 which formed part of the principal obligation to answer for attorney?s fees, legal interest, and other cost incident thereto to be paid unto the creditor and his successors in interest upon the termination of this agreement. The defendants again failed to pay their obligation. On 23 September 1960, the plaintiff instituted the collection case before the Court of First Instance of Bulacan. The defendants admitted the P10,000.00 principal obligation, but claimed that the additional P6,000.00 constituted usurious interest. Upon the plaintiff?s application, the Trial Court issued a writ of Attachment on real and personal properties of defendants. After the Writ of Attachment was implemented, proceedings before the Trial Court versed principally in regards to the attachment. On 18 January 1961,an Order was issued by the Trial Court allowing both parties to simultaneously submit a Motion for Summary Judgment. On 26 June 1961, the Trial Court rendered decision ordering defendants to pay the plaintiff the amount of P10,000.00plus the further sum of P6,000.00. The defendants appealed before the then court of Appeals,which endorsed it to the Supreme Court stating that the issue involved was one of law.Issue:Whether the allegation of usury should be made in writing and under oath, pursuant to Section 9 of the Usury Law.Held :Section 9 of the Usury Law provides that the person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property,seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter. It envisages a complaint filed against an entity which has committed usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the allegation of usury, the defendant shall be deemed to have.

7. Medel vs Court of Appeals, 299 SCRA 481; GR No. 131622, November 27, 1998

Facts: Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable in 2 months and executed a promissory note. Plaintiff gave only the amount of P47, 000.00 to the borrowers and retained P3, 000.00 as advance interest for 1 month at 6% per month.

Defendants obtained another loan from Defendant in the amount of P90, 000.00, payable in 2 months, at 6% interest per month. They executed a promissory note to evidence the loan and received only P84, 000.00 out of the proceeds of the loan.

For the third time, Defendants secured from Plaintiff another loan in the amount of P300, 000.00, maturing in 1 month, and secured by a real estate mortgage. They executed a promissory note in favor of the Plaintiff. However, only the sum of P275, 000.00, was given to them out of the proceeds of the loan.

Upon maturity of the three promissory notes, Defendants failed to pay the indebtedness.

Defendants consolidated all their previous unpaid loans totaling P440, 000.00, and sought from Plaintiff another loan in the amount of P60, 000.00, bringing their indebtedness to a total of P50,000.00. They executed another promissory note in favor of Plaintiff to pay the sum of P500, 000.00 with a 5.5% interest per month plus 2% service charge per annum, with an additional amount of 1% per month as penalty charges.

On maturity of the loan, the Defendants failed to pay the indebtedness which prompt the Plaintiffs to file with the RTC a complaint for collection of the full amount of the loan including interests and other charges.

Declaring that the due execution and genuineness of the four promissory notes has been duly proved, the RTC ruled that although the Usury Law had been repealed, the interest charged on the loans was unconscionable and revolting to the conscience and ordered the payment of the amount of the first 3 loans with a 12% interest per annum and 1% per month as penalty.

On appeal, Plaintiff-appellants argued that the promissory note, which consolidated all the unpaid loans of the defendants, is the law that governs the parties.

The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that the Usury Law has become legally in-existent with the promulgation by the Central Bank in 1982 of Circular No. 905, the lender and the borrower could agree on any interest that may be charged on the loan, and ordered the Defendants to pay the Plaintiffs the sum of P500,000, plus 5.5% per month interest and 2& service charge per annum , and 1% per month as penalty charges.

Defendants filed the present case via petition for review on certiorari.

Issue: WON the stipulated 5.5% interest rate per month on the loan in the sum of P500, 000.00 is usurious.

Held: No.

A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is excessive, iniquitous, unconscionable and exorbitant, but it cannot be considered usurious because Central Bank Circular No. 905 has expressly removed the interest ceilings prescribed by the Usury Law and that the Usury Law is now legally in-existent

Doctrine: A CB Circular cannot repeal a law. Only a law can repeal another law.

Jurisprudence provides that CB Circular did not repeal nor in a way amend the Usury Law but simply suspended the latters effectivity (Security Bank and Trust Co vs RTC). Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may agree upon.

Law: Article 2227, Civil Code

The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.

Note: While the Usury Law ceiling on interest rates was lifted by the CB Circular 905, nothing in the said circular could possibly be read as granting carte blanche authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to a hemorrhaging of their assets (Almeda vs. CA, 256 SCRA 292 [1996]).

8. Banco Filipino vs CA, GR No. 129227, 30 May 2000, 332 SCRA241FACTS Elsa and Calvin Arcilla secured, on 3 occasions, loan from petitioner as evidenced by promissory note. REM was also executed. Under said deeds, Banco Filipino may increase rate of interest on said loans, within the limits allowed by law. at that time, under Usury Law, the maximum rate of interest for loans secured by REM was 12% pa. later, the Central bank issued Circular No. 494 providing for the maximum interest of 19%pa. meanwhile, Skyli Builders, thru President Calvin Arcilla secured loans from BPI with FGU Insurance as surety. Banco Filipino issued an account statement with 17% pa as interest. The Arcillas filed for annulment of the loan contracts because the rate of interests charged were usurious.ISSUE Whether or not respondents are entitled to refund of the alleged interest over paymentsHELD Yes. Private respondents aver that they are entitled to the refund inasmuch as the escalation clause incorporated in the loan contracts do not have a corresponding de-escalation clause and is therefore, illegal. In Banco Filipino Savings & Mortgage Bank vs Navarro, the Court ruled that Central Bank Circular 494, although it has the force and effect of law, is not a law and is not the law contemplated by the parties which authorizes the petitioner to unilaterally raise the interest rate of loan. The reliance on the circular was without any legal basis.

EASTERN SHIPPING LINES, INC. vs. CA, GR. No. 97412, July 12, 1994

FACTS:

Two fiber drums of riboflavin were shipped from Yokohama,Japan on board thevessel owned by herein petitioner Eastern Shipping Lines.When it arrives in Manila, it was put untothe custody of Metro Port Service, Inc. The latter excepted to one drum which is said to be in bad order and which damage was unknown to Eastern Shipping Lines. Later, Allied Brokerage Corporation received the shipment from Metro Port Service, Inc. With one drum damaged,Allied Brokerage Corporation made deliveries to the consignee's warehouse. The latter excepted to one drum that is damaged. Eastern Shipping Lines averred that due to the one drum that is damaged and due to the fault and negligence of Metro Port Service, Inc. and Allied Brokerage Corporation, the consignee suffered losses. The two failed and refused to pay the claims fordamages. Consequently, Eastern Shipping Lines was compelled to pay the consignee interrogated to all the rights of action of said consignee against Metro Port Service, Inc. and Allied Brokerage Corporation. Trial ensued and on appeal of the case, the appellate court affirmed the decision of the trial court ordering Metro Port Service and Allied Brokerage to pay Eastern Shipping Lines, jointly and severally, the amount of P19,032.95, with the present legal interest of 12% per annum from the date of filing of the complaints, until fully paid. Metro Port Service and Allied Brokerage opposed especially as to the payment of interest contending that the legal interest on an award for loss or damage should be 6% in view of Article 2209 of the Civil Code.

ISSUE:Whether or not the payment of legal interest on an award for loss or damage is twelvepercent (12%) or six percent (6%).

HELD:Article 2209 of the New Civil Code provides that if the obligation consists in thepayment of a sum of money, and the debtor incurs in delay, the indemnity for damages, therebeing no stipulation to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest which is six percentper annum. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:1.When the obligation is breached, and it consists in the payment of asum of money, the interest due should be that which may have been stipulated in writing.Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded.In the absence of stipulation, the rate of interest shall be 12%per annumto be computed from default under and subject tothe provisions of Article 1169 of the Civil Code.2.When anobligation, not constituting aloan orforbearance ofmoney, is breached,an interest on the amount of damages awarded may be imposed at thediscretion of the court at the rate of 6%per annum.No interest, however, shall be adjudged on unliquidatedclaims or damages except when or until the demand can be established with reasonable certaintyAccordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extra judicially(Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date thejudgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation oflegal interest shall, in any case, be on the amount finally adjudged.3.When the judgment of the court awarding a sum of money becomes finaland executory,the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,shall be 12%per annumfrom such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit

10. Consolidated Bank vs CAGR No. 114286, 19 April 2001356 SCRA 671

FACTSContinental Cement Corp obtained from Consolidated Bank letter of credit used to purchased 500,000 liters of bunker fuel oil. Respondent Corporation made a marginal deposit to petitioner. A trust receipt was executed by respondent corporation, with respondent Gregory Lim as signatory. Claiming that respondents failed to turn over the goods or proceeds, petitioner filed a complaint for sum of money before the RTC of Manila. In their answer, respondents aver that the transaction was a simple loan and not a trust receipt one, and that the amount claimed by petitioner did not take into account payments already made by them. The court dismissed the complaint, CA affirmed the same.

ISSUEWhether or not the marginal deposit should not be deducted outright from the amount of the letter of credit.

HELDNo. petitioner argues that the marginal deposit should be considered only after computing the principal plus accrued interest and other charges. It could be onerous to compute interest and other charges on the face value of the letter of credit which a bank issued, without first crediting or setting off the marginal deposit which the borrower paid to it-compensation is proper and should take effect by operation of law because the requisites in Art. 1279 are present and should extinguish both debts to the concurrent amount.Unjust enrichment.

11. S.C. Megaworld Construction and Development Corporation, petitioner vs.Engr. Luis Parada, represented by Engr. Leonardo Parada of Genlite Industries,respondent

G.R. No. 183804 September 11, 2013DOCTRINE: The settled rule is that novation is never presumed, but must be clearly andunequivocally shown. In order for a new agreement to supersede the old one, the parties to acontract 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 creditoraccepts payments from a third person, who has assumed the obligation, will result merely in theaddition of debtors and not novation, and the creditor may enforce the obligation against bothdebtors. If there is no agreement as to solidarity, the first and new debtors are consideredobligated jointly.

FACTS:1. S.C. Megaworld Construction and Development Corporation (petitioner) boughtelectrical lighting materials from Gentile Industries, a sole proprietorship owned byEngineer Luis Parada (respondent), for its Read-Rite project in Laguna.2. The petitioner Megaworld was unable to pay for the above purchase on the due date, butblamed it on its failure to collect under its sub-contract with the Enviro KleenTechnologies, Inc. (Enviro Kleen).3. Megaworld was however able to persuade Enviro Kleen to agree to settle its purchase,but after paying Parada P250,000.00 on June 2, 1999, Enviro Kleen stopped makingfurther payments, leaving an outstanding balance of P816,627.00.4. Megaworld also ignored the various demands of Parada, who then filed a suit in the RTC,to collect the balance plus damages, costs and expenses.5. Megaworld denied liability, claiming that it was released from its indebtedness to Paradaby reason of the novation of their contract, which, it reasoned, took place when the latteraccepted the partial payment of Enviro Kleen in its behalf, and thereby acquiesced to thesubstitution of Enviro Kleen as the new debtor in Megaworlds place.6. RTC ruled in favor of Parada: No novation has taken place. Megaworld must pay theprincipal obligation due to Parada.7. The CA concurred with the RTC decision that there was no novation. The CA noted thatthere is nothing in the 2 letters of the Parada to Enviro Kleen, dated April 14, 1999 andJune 16, 1999, which would imply that he consented to the alleged novation, and,particularly, that he intended to release Megaworld from its primary obligation to pay himfor its purchase of lighting materials. The CA cited the RTCs finding that Paradainformed Enviro Kleen in his first letter that he had served notice to Megaworld that hewould take legal action against it for its overdue account, and that he retained his optionto pull out the lighting materials and Megaworld for any damage they might sustainduring the pull-out.8. The CA concurred with the RTC that by retaining his option to seek satisfaction fromMegaworld, any acquiescence which Parada had made was limited to merely acceptingEnviro Kleen as an additional debtor from whom he could demand payment, but withoutreleasing Megaworld as the principal debtor from its debt to him.

ISSUE: Whether or not a novation of the contract had taken place when Parada accepted thepartial payment of Enviro Kleen in Megaworlds behalf.

HELD: No.Novation is never presumed but must be clearly and unequivocally shown.Novation is a mode of extinguishing an obligation by changing its objects or principalobligations, by substituting a new debtor in place of the old one, or by subrogating a third personto the rights of the creditor. It is "the substitution of a new contract, debt, or obligation for anexisting one between the same or different parties." Article 1293 of the Civil Code definesnovation as follows: Art. 1293. Novation which consists in substituting a new debtor in the placeof the original one, may be made even without the knowledge or against the will of the latter, butnot without the consent of the creditor. Payment by the new debtor gives him rights mentioned inArticles 1236and 1237.Thus, in order to change the person of the debtor, the former debtor must be expressly releasedfrom the obligation, and the third person or new debtor must assume the formers place in thecontractual relation. Article 1293 speaks of substitution of the debtor, which may either be in theform of expromision or delegacion, as seems to be the case here. In both cases, the old debtormust be released from the obligation, otherwise, there is no valid novation. As explained inGarcia vs. Llamas (2003): In general, there are two modes of substituting the person of thedebtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does notcome fromand may even be made without the knowledge ofthe debtor, since it consists of athird persons assumption of the obligation. As such, it logically requires the consent of the thirdperson and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third personwho consents to the substitution and assumes the obligation; thus, the consent of these threepersons are necessary. Both modes of substitution by the debtor require the consent of thecreditor.

Dario Nacar vs Gallery Frames

Dario Nacar filed a labor case against Gallery Frames and its owner Felipe Bordey, Jr. Nacar alleged that he was dismissed without cause by Gallery Frames on January 24, 1997. On October 15, 1998, the Labor Arbiter (LA) found Gallery Frames guilty of illegal dismissal hence the Arbiter awarded Nacar P158,919.92 in damages consisting of back wages and separation pay.Gallery Frames appealed all the way to the Supreme Court (SC). The Supreme Court affirmed the decision of the Labor Arbiter and the decision became final on May 27, 2002.After the finality of the SC decision, Nacar filed a motion before the LA for recomputation as he alleged that his back wages should be computed from the time of his illegal dismissal (January 24, 1997) until the finality of the SC decision (May 27, 2002) with interest. The LA denied the motion as he ruled that the reckoning point of the computation should only be from the time Nacar was illegally dismissed (January 24, 1997) until the decision of the LA (October 15, 1998). The LA reasoned that the said date should be the reckoning point because Nacar did not appeal hence as to him, that decision became final and executory.ISSUE:Whether or not the Labor Arbiter is correct.HELD:No. There are two parts of a decision when it comes to illegal dismissal cases (referring to cases where the dismissed employee wins, or loses but wins on appeal). The first part is the ruling that the employee was illegally dismissed. This is immediately final even if the employer appeals but will be reversed if employer wins on appeal. The second part is the ruling on the award of back wages and/or separation pay. For back wages, it will be computed from the date of illegal dismissal until the date of the decision of the Labor Arbiter. But if the employer appeals, then the end date shall be extended until the day when the appellate courts decision shall become final. Hence, as a consequence, the liability of the employer, if he loses on appeal, will increase this is just but a risk that the employer cannot avoid when it continued to seek recourses against the Labor Arbiters decision. This is also in accordance with Article 279 of the Labor Code.Anent the issue of award of interest in the form of actual or compensatory damages, the Supreme Court ruled that the old case ofEastern Shipping Lines vs CAis already modified by the promulgation of the Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796 which lowered the legal rate of interest from 12% to 6%. Specifically, the rules on interest are now as follows:1. Monetary Obligations ex. Loans:a. If stipulated in writing:a.1. shall run from date of judicial demand (filing of the case)a.2. rate of interest shall be that amount stipulatedb. If not stipulated in writingb.1. shall run from date of default (either failure to pay upon extra-judicial demand or upon judicial demand whichever is appropriate and subject to the provisions of Article 1169 of the Civil Code)b.2. rate of interest shall be 6% per annum2. Non-Monetary Obligations (such as the case at bar)a. If already liquidated, rate of interest shall be 6% per annum, demandable from date of judicial or extra-judicial demand (Art. 1169, Civil Code)b. If unliquidated, no interestExcept: When later on established with certainty. Interest shall still be 6% per annum demandable from the date of judgment because such on such date, it is already deemed that the amount of damages is already ascertained.3. Compounded Interest This is applicable to both monetary and non-monetary obligations 6% per annum computed against award of damages (interest) granted by the court. To be computed from the date when the courts decision becomes final and executory until the award is fully satisfied by the losing party.4. The 6% per annum rate of legal interest shall be applied prospectively: Final and executory judgments awarding damages prior to July 1, 2013 shall apply the 12% rate; Final and executory judgments awarding damages on or after July 1, 2013 shall apply the 12% rate for unpaid obligations until June 30, 2013; unpaid obligations with respect to said judgments on or after July 1, 2013 shall still incur the 6% rate.

Manol R. Sala SWU School of Law