CALIFORNIA BUS LINE vs. STATE INVESTMENT G.R. No.

147950 | December 11, 2003 | Quisumbing | Petition for Review on certiorari of a decision of the CA FACTS In 1979, Delta Motors Corporation (Delta) applied for financial assistance from respondent State Investment House, Inc. (SIHI), a domestic corporation engaged in the business of quasi-banking. SIHI agreed to extend a credit line to Delta for P25M in 3 separate credit agreements. Delta eventually became indebted to SIHI. In April 1979 to May 1980, petitioner California Bus Lines, Inc. (CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and 2 units of M.A.N. Diesel Conversion Engines from Delta. To secure the payment of the 35 buses, CBLI and its president executed 16 promissory notes in favor of Delta. CBLI [a] promised to pay Delta or order, P2.314M payable in 60 monthly installments with interest at 14% per annum (p.a), [b] promised to pay the holder of the said notes 25% of the amount due on the same as attorneys fees and expenses of collection, [c] executed chattel mortgages over the 35 buses in Deltas favor. When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta in Oct. 1981, to cover its overdue obligations under the promissory notes. 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 remitted and/or updated CBLIs past due account. CBLI and Delta also increased the interest rate to 16%. In Dec. 1981, 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. In view of Deltas failure to pay, the loan agreements were restructured under a Memorandum of Agreement dated March 1982. Delta obligated itself to pay a fixed monthly amortization of P0.4M to SIHI and to discount with SIHI P8M worth of receivables with the understanding that SIHI shall apply the proceeds against Deltas overdue accounts. CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to

threaten CBLI with the enforcement of the management takeover clause. CBLI filed a complaint for injunction at CFI Rizal, Pasay City, (now RTC Pasay City). In due time, Delta filed amended answer with applications for issuance of a writ of preliminary mandatory injunction to enforce the management takeover clause and a writ of preliminary attachment over the buses it sold to CBLI. RTC granted Deltas prayer on account of the fraudulent disposition by CBLI of its assets. In Sept.1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of Sale assigning to SIHI 5 of the 16 promissory notes from CBLI At the time of assignment, these 5 promissory notes had a total value P16.1M inclusive of interest at 14% p.a. SIHI subsequently sent a demand letter to CBLI requiring CBLI to remit the payments due on the 5 promissory notes directly to it. CBLI replied informing SIHI that Delta had taken over its management and operations. Thereafter, Delta and CBLI entered into a compromise agreement in July 1984. CBLI agreed that Delta would exercise its right to extrajudicially foreclose on the chattel mortgages over the 35 bus units. RTC Pasay approved this compromise agreement. Following this, CBLI vehemently refused to pay SIHI the value of the 5 promissory notes, contending that the compromise agreement was in full settlement of all its obligations to Delta including its obligations under the promissory notes. On Dec 26, 1984, SIHI filed a complaint against CBLI in RTC Manila, to collect on the 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. On Dec 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages pursuant to its compromise agreement with CBLI. Delta then filed in the RTC Pasay a motion for execution of the judgment based on the compromise agreement which was granted. In view of Deltas petition and motion for execution per the judgment of compromise, the RTC Manila granted SIHIs application for preliminary attachment on Jan. 4, 1985. Consequently, SIHI was able to attach and physically take possession of 32 buses belonging to CBLI. However, acting on CBLIs motion to quash the writ of preliminary attachment, the same court resolved in Jan. 1986, to discharge the writ of preliminary attachment. SIHI assailed the discharge of the writ before the IAC (now Court of Appeals) CA granted SIHIs petition in and ruled that

the writ of preliminary attachment issued by RTC Manila should stay. Meanwhile, pursuant to the Jan. 3, 1985 Order of RTC of Pasay, the sheriff of Pasay City conducted a public auction and issued a certificate of sheriffs sale to Delta on April 2, 1987, attesting to the fact that Delta bought 14 of the 35 buses for P3.92M. On April 7, 1987, the sheriff of Manila, by virtue of the writ of execution dated March 27, 1987, sold the same 14 buses at public auction in partial satisfaction of the judgment SIHI obtained against Delta. SIHI moved to sell the 16 buses of CBLI which had previously been attached by the sheriff pursuant to the Jan 4, 1985, Order of RTC of Manila. SIHIs motion was granted on Dec. 16, 1987. In Nov. 1988, however, SIHI filed an urgent ex-parte motion to amend this order claiming that its new counsel made a mistake in the list of buses in the Motion to Sell it had earlier filed. SIHI explained that 14 of the buses listed had already been sold to Delta on April 2, 1987, by virtue of the Jan. 3, 1985 Order of the RTC of Pasay, and that 2 of the buses listed had been released to a third party. CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3, 1989, RTC Manila denied SIHIs urgent motion to allow the sale of the 16 buses listed in its motion to amend. RTC ruled that the best interest of the parties might be better served by denying further sales of the buses and to go direct to the trial of the case on the merits. RTC and CA Ruling. Judgment discharged CBLI from liability on the 5 promissory notes. RTC also favorably ruled on CBLIs compulsory counterclaim. It directed SIHI to return the 16 buses or to pay CBLI P4M representing the value of the seized buses, with interest at 12% p.a. RTC held that the restructuring agreement between Delta and CBLI novated the 5 promissory notes; hence, at the time Delta assigned the 5 promissory notes to SIHI, the notes were already merged in the restructuring agreement and cannot be enforced against CBLI. SIHI appealed to the Court of Appeals. CA reversed RTC ruling. Hence this appeal. ISSUES 1. WON the Restructuring Agreement between CBLI and Delta novated the 5 promissory notes Delta assigned to respondent SIHI 2. WON the Compromise Agreement between Delta and CBLI superseded and/or discharged the subject 5 promissory notes

HELD 1. NO Ratio An agreement subsequently executed between a seller and a buyer that provides 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 novation. Reasoning [a] Novation Defined and its Requisites. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or subrogating a third person in the rights of the creditor. Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. For novation to take place, 4 essential requisites have to be met, namely, (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. [b] Express and Implied Novation. There are 2 ways which could indicate the presence of novation and thus produce the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has been explicitly or expressly stated and declared in unequivocal terms. The second is implied novation. when the old and the new obligations are incompatible on every point. The test of incompatibility is whether the 2 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 incidental. 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. [c] In this case, the attendant facts do not make out a case of novation. The restructuring agreement between Delta and CBLI executed 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, our review of its terms yields no incompatibility between the promissory notes and the restructuring agreement. Furthermore, obligation is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, and adds other obligations not incompatible with the old ones, or where the new contract merely supplements the old one 2. NO Ratio A compromise agreement determines the rights and obligations of only the parties to it. Reasoning: [a] Having previously assigned the 5 promissory notes to SIHI, Delta had no more right to compromise the same. Deltas limited authority to collect for SIHI stipulated in the Sept. 13, 1985, Deed of Sale cannot be construed to include the power to compromise CBLIs obligations in the said promissory notes. An authority to compromise, by express provision of Article 1878 of the Civil Code, requires a special power of attorney, which is not present in this case. Furthermore, the compromise agreement itself provided that it covered the rights and obligations only of Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as the new creditor of CBLI in the subject promissory notes. [b] The assignment of the 5 notes operated to create a separate and independent obligation on the part of CBLI to SIHI, distinct and separate from CBLIs obligations to Delta. And since there was a previous revocation of Deltas authority to collect for SIHI, Delta was no longer SIHIs collecting agent. CBLI, in turn, knew of the assignment and Deltas lack of authority to compromise the subject notes, yet it readily agreed to the foreclosure Disposition CA ruling affirmed. CBLI is ordered to pay SIHI the value of the 5 promissory notes less the proceeds from the sale of the attached 16 buses.