G.R. No. L-17725             February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

BARRERA, J.:

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay to plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of the filing of the complaint until fully paid, plus costs, defendant Mambulao Lumber Company interposed the present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a) under the first cause of action, for forest charges covering the period from September 10, 1952 to May 24, 1953, defendants admitted that they have a liability of P587.37, which liability is covered by a bond executed by defendant General Insurance & Surety Corporation for Mambulao Lumber Company, jointly and severally in character, on July 29, 1953, in favor of herein plaintiff; (b) under the second cause of action, both defendants admitted a joint and several liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated November 27, 1953; and (c) under the third cause of action, both defendants admitted a joint and several liability in favor of plaintiff for P3,928.30, also covered by a bond dated July 20, 1954. These three liabilities aggregate to P4,802.37. If the liability of defendants in favor of plaintiff in the amount already mentioned is admitted, then what is the defense interposed by the defendants? The defense presented by the defendants is quite unusual in more ways than one. It appears from Exh. 3 that from July 31, 1948 to December 29, 1956, defendant Mambulao Lumber Company paid to the Republic of the Philippines P8,200.52 for 'reforestation charges' and for the period commencing from April 30, 1947 to June 24, 1948, said defendant paid P927.08 to the Republic of the Philippines for 'reforestation charges'. These reforestation were paid to the plaintiff in pursuance of Section 1 of Republic Act 115 which provides that there shall be collected, in addition to the regular forest charges provided under Section 264 of Commonwealth Act 466 known as the National Internal Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out and removed from any public forest for commercial purposes. The amount collected shall be expended by the director of forestry, with the approval of the secretary of agriculture and commerce, for reforestation and afforestation of watersheds, denuded areas ... and other public forest lands, which upon investigation, are found needing reforestation or afforestation .... The total amount of the reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the contention of the defendant Mambulao Lumber Company that since the Republic of the Philippines has not made use of those reforestation charges collected from it for reforesting the denuded area of the land covered by its license, the Republic of the Philippines should refund said amount, or, if it cannot be refunded, at least it should be compensated with what Mambulao Lumber Company owed the Republic of the Philippines for reforestation charges. In line with this thought, defendant Mambulao Lumber Company wrote the director of forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of which said defendant requested "that our account with your bureau be credited with all the reforestation charges that you have imposed on us from July 1, 1947 to June 14, 1956, amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber Company was answered by the director of forestry on March 12, 1957, marked Exh. 2, in which the director of forestry quoted an opinion of the secretary of justice, to the effect that he has no discretion to extend the time for paying the reforestation charges and also explained why not all denuded areas are being reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-appellant company to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or applied to the

payment of the sum of P4,802.37 as forest charges due and owing from appellant to appellee. It is appellant's contention that said sum of P9,127.50, not having been used in the reforestation of the area covered by its license, the same is refundable to it or may be applied in compensation of said sum of P4,802.37 due from it as forest charges.1äwphï1.ñët

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided for under Section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six, known as the National Internal Revenue Code, the amount of fifty centavos on each cubic meter of timber for the first and second groups and forty centavos for the third and fourth groups cut out and removed from any public forest for commercial purposes. The amount collected shall be expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural Resources (commerce), for reforestation and afforestation of watersheds, denuded areas and cogon and open lands within forest reserves, communal forest, national parks, timber lands, sand dunes, and other public forest lands, which upon investigation, are found needing reforestation or afforestation, or needing to be under forest cover for the growing of economic trees for timber, tanning, oils, gums, and other minor forest products or medicinal plants, or for watersheds protection, or for prevention of erosion and floods and preparation of necessary plans and estimate of costs and for reconnaisance survey of public forest lands and for such other expenses as may be deemed necessary for the proper carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and from the sale of barks, medical plants and other products derived from plantations as herein provided shall constitute a fund to be known as Reforestation Fund, to be expended exclusively in carrying out the purposes provided for under this Act. All provincial or city treasurers and their deputies shall act as agents of the Director of Forestry for the collection of the revenues or incomes derived from the provisions of this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation charges from a timber licenses or concessionaire shall constitute a fund to be known as the Reforestation Fund, and that the same shall be expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural Resources for the reforestation or afforestation, among others, of denuded areas which, upon investigation, are found to be needing reforestation or afforestation. Note that there is nothing in the law which requires that the amount collected as reforestation charges should be used exclusively for the reforestation of the area covered by the license of a licensee or concessionaire, and that if not so used, the same should be refunded to him. Observe too, that the licensee's area may or may not be reforested at all, depending on whether the investigation thereof by the Director of Forestry shows that said area needs reforestation. The conclusion seems to be that the amount paid by a licensee as reforestation charges is in the nature of a tax which forms a part of the Reforestation Fund, payable by him irrespective of whether the area covered by his license is reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out the purposes provided for thereunder, namely, the reforestation or afforestation, among others, of denuded areas needing reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code2 is applicable, such that the sum of P9,127.50 paid by it as reforestation charges may compensate its indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the view we take of this case, appellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on compensation is inapplicable. On this point, the trial court correctly observed: .

Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors and debtors of each other. With respect to the forest charges which the defendant Mambulao Lumber Company has paid to the government, they are in the coffers of the government as taxes collected, and the government does not owe anything, crystal clear that the

Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of each other, because compensation refers to mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal consent of individual taxpayers is not required. ... If the taxpayer can properly refuse to pay his tax when called upon by the Collector, because he has a claim against the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with costs against the defendant-appellant. So ordered.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon and De Leon, JJ., concur.

G.R. No. L-63025 November 29, 1991

RAMON C. ONG, petitioner, vs.COURT OF APPEALS, FRANCISCO BOIX and ARSENIO CAMINO AS DEPUTY SHERIFF OF CAMARINES NORTE, respondents.

 

PARAS, J.:p

The instant petitioner for certiorari seeks are reversal of the decision ** of herein public respondent Court of Appeals dated October 24, 1977 in CA-G.R. No. 47063-R and its resolution dated January 14, 1983 denying herein petitioner's Motion for Reconsideration.

The Court of Appeals narrates the facts thus:

The record shows that on November 16, 1961, Ramon C. Ong filed a complaint against defendants Arsenio Camino as Deputy Sheriff of Camarines Norte and Francisco Boix, to annul the auction sale of a parcel of land, allegedly owners conjugally by plaintiff and his former wife Teodora B. Ong, awarded in favor of Boix, as highest bidder, in an auction sale conducted on October 10, 1958 by the Deputy Sheriff of Camarines Norte, herein defendant Camino, pursuant to a writ of execution dated August 8, 1958 (Exhibits "C", "2-A") issued by the Court of First Instance of Manila, Branch IV, to enforce its decision in Civil Case No. 33396, entitled, "Francisco Boix, Plaintiff vs. Teodora B. Ong and Ramon C. Ong, Defendants" wherein judgment was rendered to wit:

WHEREFORE, judgment is hereby rendered in favor of plaintiff, ordering the defendant Teodora B. Ong to pay to the plaintiff the sum P2,827.83, with interest of 8% per annumon the sum of P1,000.00 from September 5, 1955, on the sum of P827.83 from December 30, 1955 plus 15% on the total amount of P2,827.83 as attorney's fees; and the further amount of P2,503 with interest at 6% per annum from date of the filing of the complaint, and the costs of the suit. (Exhibit "1")

The title to the property, in favor of the execution-creditor Boix was duly registered in the Office of the Register of Deeds of Camarines Norte (Exhibit "4").

It is not disputed that plaintiff's wife, Teodora B. Ong conducted her own logging business in Camarines Sur. In furtherance of her business operation, on August 18, 1955, she secured from Francisco Boix a loan in the amount of P2,827.83. Unfortunately, because of mismanagement, Teodora defaulted in her obligation. This prompted Boix to file a complaint, based on the promissory notes executed by Teodora, to collect the sum legally due plus interest against Teodora and Ramon Ong, the latter being joined as husband of the former. Defendant-spouses were declared in default and judgment was rendered, as aforesaid, in favor of Boix.

After the aforementioned decision became final and executory, Boix moved to execute the judgment. The motion was granted and a corresponding writ of execution, dated August 8, 1958 (Exhibits "C", "2-A"), was issued. Accordingly, the Sheriff of Camarines Norte levied and attached a parcel of land situated at Diego Linan St., Daet, Camarines Norte, declared under Tax No. 05378 in the sole name of Teodora B. Ong, subject-parcel of herein suit. In a notice of levy on Execution dated August 22, 1958 (Exhibit "2-B"), and notice of Public Auction sale dated September 10, 1958 (Exhibit "2-C"), auction sales

was held on October 10, 1958 and as already mentioned, defendant Boix was adjudged highest bidder. A writ of possession was issued to place the execution-creditor in possession of the property levied upon and sold on execution. A corresponding Certificate of Sale (Exhibit "H") was also issued in favor of Boix.

Subsequently, thereafter, Ramon C. Ong filed an Omnibus motion dated October 2, 1961 (Exhibit "D") with the same Court of First Instance of Manila asking to quash the writ of possession, which was denied in an order dated December 6, 1961. A motion for reconsideration dated December 29, 1961 (Exhibit "F") was likewise denied in an order dated February 10, 1962 (Exhibit "G"). (Pp. 1-4, Decision; pp. 11-14 Rollo)

Consequently, petitioner brought the case to the Court of Appeals to annul the auction sale allegedly irregularly executed on the following grounds, namely, that the property was conjugal and thus could not be held liable for personal debts contracted by the wife, and that the there was no valid publication thus making the auction sale void.

The Court of Appeals affirmed the decision of the trial court, prompting petitioner to file a motion for reconsideration thereof. Said motion was denied on January 15, 1983; hence, the present petition.

Petitioner contends that the auction sale of the property in dispute is null and void, having been made on a date different from that reflected in the advertisement thereof, aside from having been published in a newspaper which is not of general circulation in the province where the property is situated. According to the petitioner, respondent court's failure to touch on such a jurisdictional issue constitutes grave abuse of discretion which justifies a reversal of its decision affirming the finding of the trial court which in itself constitutes a misappreciation of facts.

The other argument advanced by the petitioner is that the subject property is really conjugal which the wife in the case at bar could not legally bind, and considering that the indebtedness was contracted by the wife only, the levy of the subject property not owned exclusively by the wife owned jointly with the husband is improper.

Against petitioner's argument that the auction sale is null and void is the trial court's assessment of the validity thereof, that is, that the notice of public auction sale was published in accordance with law. Such a factual finding of the trial court is entitled to great weight and should not be disturbed on appeal. "Factual questions should be resolved by the lower courts and the Supreme Court has no jurisdiction as a rule to reverse the findings of the lower courts except in a clear showing of a grave abuse of discretion" (Korean Air Lines vs. Court of Appeals, 154 SCRA 211). In the instant case, petitioner failed to show any grave abuse of discretion committed, by the lower court in appreciating private respondent's allegation that petitioner was previously notified of the supposed transfer of the date of public auction from September 25, 1958 to October 10, 1958.

Petitioner's other argument is also based on factual considerations. Against the Court of Appeals' finding that the subject property is paraphernal property, in view of the fact that it was "declared, under Tax No. 05378, in the name of Teodora B. Ong while the house erected thereon was declared under Tax No. 06022 in the name of Ramon C. Ong and Teodora B. Ong (Exhibits "B", "2-B", "2-C, "4") (Decision, p. 4) is petitioner's claim that the subject property is conjugal. Petitioner stresses heavily on the fact that since the surname "Ong" (which is the surname of the husband Ramon C. Ong) was carried by Teodora in the aforesaid declaration, that indicates that the subject property was acquired during the marriage. By reason thereof, the property in dispute is presumed to be owned jointly by both spouses.

We disagree. The mere use of the surname of the husband in the tax declaration of the subject property is not sufficient proof that said property was acquired during the marriage and is therefore conjugal. It is undisputed that the subject parcel was declared solely in the wife's name, but the house built thereon was declared in the name of the spouses. Under such circumstances, coupled with a careful scrutiny of the

records of the present case, We hold that the lot in question is paraphernal, and is therefore, liable for the personal debts of the wife.

Thus, it was held in the case of Maramba vs. Lozano, 20 SCRA 474, that

The presumption that property is conjugal (Art. 160, New Civil Code) refers to property acquired during the marriage. When there is no showing as to when the property was acquired by a spouse, the fact that the title is in the spouse's name is an indication that the property belongs exclusively to said spouse.

As correctly pointed out by the respondent Court, the party who invokes the presumption that all property of the marriage belongs to the conjugal partnership (Art. 160, New Civil Code) must first prove that the property was acquired during the marriage. Proof of acquisition during the marriage is a condition sine qua non for the operation of the presumption in favor of the conjugal partnership. (Cobb-Perez, et al. vs. Lantin, et al., 23 SCRA 637; Jose Ponce de Leon vs. Rehabilitation Finance Corp., 36 SCRA 289). In the same manner, the recent case of PNB vs. Court of Appeals, 153 SCRA 435 affirms that:

When the property is registered in the name of the a spouse only and there is no showing as to when the property was acquired by said spouse, this is an indication that the property belongs exclusively to said spouse. And this presumption under Art. 160 of the Civil Code cannot prevail when the title is in the name of only one spouse and the rights of innocent third parties are involved.

Furthermore, even assuming for the sake of argument that the property in dispute is conjugal, the same may still be held liable for the debts of the wife in this case. Under Art. 117 of the Civil Code, the wife may engage in business although the husband may object (but subject to certain conditions). It is clear from the records that the wife was engaged in the logging business with the husband's knowledge and apparently without any objection on his part. The acts of the husband show that he gave his implied consent to the wife's engagement in business. According to Justice Ameurfina-Herrera (then Associate Justice of the Court of Appeals) in her concurring opinion, the rule that should govern in that case is that the wife's paraphernal properties, as well as those of their conjugal partnership, shall be liable for the obligations incurred by the wife in the course of her business (Arts. 117, 140, 172, 203, and 236, Civil Code; Art. 10, Code of Commerce, cited in Commentaries on Phil. Commercial Laws, Martin, T.C. Vol. 1, 1970 Revised Edition, pp. 14-15). After all, whatever profits are earned by the wife from her business go to the conjugal partnership. It would only be just and equitable that the obligations contracted by the wife in connection with her business may also be chargeable not only against her paraphernal property but also against the conjugal property of the spouses.

Let it be noted that due to the length of time that this case has remained pending, private respondents Francisco Boix and Arsenio Camino have allegedly already died in the process. No proper substitution of parties have apparently been made. Nevertheless, despite such supervening events, for failure on the part of petitioner to show any grave abuse of discretion or reversible error committed by respondent appellate court, We deem it wise to affirm the said court's decision. Besides, the decision of the trial court is in accordance with law and the evidence presented.

WHEREFORE, the petition is hereby DISMISSED for lack of merit without pronouncement as to costs.

SO ORDERED.

G.R. No. 129598            August 15, 2001

PNB MADECOR, petitioner, vs.GERARDO C. UY, respondent.

QUISUMBING,J.:

This is a petition for review on certiorari filed by petitioner PNB Management and Development Corporation (PNB MADECOR) seeking to annul the decision of the Court of Appeals dated February 19, 1997, and its resolution dated June 19, 1997 in CA-G.R. CV No. 49693, affirming the order of the Regional Trial Court of Manila, Branch 38, dated August 21, 1995 in Civil Case No. 95-72685. In said order, the RTC directed the garnishment of the credits and receivables of Pantranco North Express, Inc. (PNEI), also known as Philippine National Express, Inc., in the possession of PNB MADECOR, and if these were insufficient to cover the debt of PNB MADECOR to PNEI, to levy upon the assets of PNB MADECOR.

The facts of this case, culled from the decision of the CA,1 are as follows:

Guillermo Uy, doing business under the name G.U. Enterprises, assigned to respondent Gerardo Uy his receivables due from Pantranco North Express Inc. (PNEI) amounting to P4,660,558.00. The deed of assignment included sales invoices containing stipulations regarding payment of interest and attorney's fees.

On January 23, 1995, Gerardo Uy filed with the RTC a collection suit with an application for the issuance of a writ of preliminary attachment against PNEI. He sought to collect from PNEI the amount of P8,397,440.00. He alleged that PNEI was guilty of fraud in contracting the obligation sued upon, hence his prayer for a writ of preliminary attachment.

A writ of preliminary attachment was issued on January 26, 1995, commanding the sheriff "to attach the properties of the defendant, real or personal, and/or (of) any person representing the defendant"2 in such amount as to cover Gerardo Uy's demand.

On January 27, 1995, the sheriff issued a notice of garnishment addressed to the Philippine National Bank (PNB) attaching the "goods, effects, credits, monies and all other personal properties"3 of PNEI in the possession of the bank, and requesting a reply within five days. PNB MADECOR received a similar notice.

On March 1995, the RTC, through the application of Gerardo Uy, issued a subpoena duces tecum for the production of certain documents in the possession of PNB and PNB MADECOR: (1) from PNB, books of account of PNEI regarding trust account nos. T-8461-I, 8461-II, and T-8565; and (2) from PNB MADECOR, contracts showing PNEI's receivables from the National Real Estate Development Corporation (NAREDECO), now PNB MADECOR, from 1981 up to the period when the documents were requested.

At the hearing in connection with the subpoena, PNB moved to be allowed to submit a position paper on its behalf and/or on behalf of PNB MADECOR. In its position paper dated April 3, 1995, PNB MADECOR alleged that it was the owner of the parcel of land located in Quezon City that was leased to PNEI for use as bus terminal. Moreover, PNB MADECOR claimed:

"2. PNEI has not been paying its rentals from October 1990 to March 24, 1994 — when it (PNEI) vacated the property. As of the latter date, PNB MADECOR's receivables against PNEI amounted to P8,784,227.48, representing accumulated rentals, inclusive of interest;

3. On the other hand, PNB MADECOR has payables to PNEI in the amount of P7,884,000.00 as evidenced by a promissory note executed on October 31, 1982 by then NAREDECO in favor of PNEI;

4. Considering that PNB MADECOR is a creditor of PNEI with respect to the P8,784,227.48 and at the same time its debtor with respect to the P7,884,000.00, PNB MADECOR and PNEI are therefore creditors and debtors of each other; and

5. By force of the law on compensation, both obligations of PNB MADECOR and PNEI are already considered extinguished to the concurrent amount or up to P7,884,000.00 so that PNEI is still obligated to pay PNB MADECOR the amount of P900,227.48. x x x ."4

On the other hand, Gerardo Uy filed an omnibus motion controverting PNB MADECOR's claim of compensation. Even if compensation were possible, according to him, PNEI would still have sufficient funds in the hands of PNB MADECOR to fully satisfy his claim. He explained' that:

"The allegation of PNB MADECOR that it owes PNEI only . . . (P7,884,000.00) is not accurate. Apparently, PNB MADECOR only considered the principal amount. In the first place, to be precise, the principal debt amounts to exactly . . . (P7,884,921.10) as clearly indicated in the Promissory Note dated 31 October 1982 . . . In accordance with the stipulations contained in the promissory note, notice of demand was sent by PNEI to PNB MADECOR (then NAREDECO) through a letter dated 28 September 1984 and received by the latter on 1 October 1984 . . . The second paragraph of the subject promissory note states that '[F]ailure to pay the above amount by NAREDECO after due notice has been made by PNEI would entitle PNEI to collect an 18% [interest] per annum from date of notice of demand'. Hence, interest should be computed and start to run from November 1984 until the present in order to come up with the outstanding debt of PNB MADECOR to PNEI. And to be more precise, the outstanding debt of PNB MADECOR to PNEI as of April 1995 amounts to . . . (P75,813,508.26). Hence, even if the alleged debt of PNEI to PNB MADECOR amounting to . . . (P8,784,227.48) shall be compensated and deducted from PNB MADECOR's debt to PNEI, there shall still be a remainder of . . . (P67,029,380.78), largely sufficient enough to cover complainant's claim."5

Also in his omnibus motion, he prayed for an order directing that levy be made upon all goods, credits, deposits, and other personal properties of PNEI under the control of PNB MADECOR, to the extent of his demand.

PNB MADECOR opposed his omnibus motion, particularly the claim that its obligation to PNEI earned an interest of 18 percent annually. It argued that PNEI's letter dated September 28, 1984 was not a demand letter but merely a request for the implementation of the arrangement for set-off of receivables between PNEI and PNB, as provided in adacion en pago executed on July 28, 1983.6 Gerardo Uy again controverted PNB MADECOR's arguments.

Meanwhile, in the main case, the RTC rendered judgment on July 26, 1995 against PNEI. The corresponding writ of execution was issued on August 18, 1995.

As regards the issue between PNEI and PNB MADECOR, the RTC issued the assailed order on August 21, 1995, the decretal portion of which provided:

"WHEREFORE, the Sheriff of this Court is hereby directed to garnish/levy or cause to be garnished/levied the amount stated in the writ of attachment issued by this Court from the credits and receivables/collectibles of PNEI from PNB MADECOR (NAREDECO) and to levy and/or cause to levy upon the assets of the debtor PNB MADECOR should its personal assets be insufficient to cover its debt with PNEI.

Furthermore, Mr. Roger L. Venarosa, Vice-President, Trust Department, Philippine National Bank, and other concerned officials of said bank, is/are hereby directed to submit the books of accounts of Pantranco North Express, Inc./Philippine National Express, Inc. under Trust Account Nos. T-8461-I, T-8461-II, T-8565 with its position paper within five (5) days from notice hereof.

SO ORDERED."

Petitioner appealed said order to the CA which, however, affirmed the RTC in a decision dated February 19, 1997. Petitioner's motion for reconsideration was denied in a resolution dated June 19, 1997.

According to the CA, there could not be any compensation between PNEI's receivables from PNB MADECOR and the latter's obligation to the former because PNB MADECOR's supposed debt to PNEI is the subject of attachment proceedings initiated by a third party, herein respondent Gerardo Uy. This is a controversy that would prevent legal compensation from taking place, per the requirements set forth in Article 1279 of the Civil Code. Moreover, the CA stressed that it was not clear whether, at the time compensation was supposed to have taken place, the rentals being claimed by petitioner were indeed still unpaid. The CA pointed out that petitioner did not present evidence in this regard, apart from a statement of account.

The CA also questioned petitioner's inaction in claiming the unpaid rentals from PNEI, when the latter started defaulting in its payment as early as 1994. This, according to the CA, indicates that the debt was either already settled or not yet demandable and liquidated.

The CA rejected petitioner's contention that Rule 39, Section 43 of the Revised Rules of Court applies to the present case. Said rule sets forth the procedure to follow when a person alleged to have property or to be indebted to a judgment obligor claims an interest in the property or denies the debt. In such a situation, under said Rule the judgment obligee is required to institute a separate action against such person. The CA held that there was no need for a separate action here since petitioner had already become a forced intervenor in the case by virtue of the notice of garnishment served upon it.

Hence, this petition. Petitioner now assigns the following alleged errors for our consideration:

I

THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN THE INTERPRETATION OF THE APPLICABLE LAW HEREIN WHEN IT RULED THAT THE REQUISITES FOR LEGAL COMPENSATION AS SET FORTH UNDER ARTICLES 1278 AND 1279 OF THE CIVIL CODE DO NOT CONCUR IN THE CASE AT BAR.

II

THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR IN INTERPRETING THE PROVISIONS OF SECTION 45, RULE 39 OF THE RULES OF COURT, NOW SECTION 43, RULE 39 OF THE REVISED RULES OF COURT, AS AMENDED ON 1 JULY 1997, BY RULING THAT PETITIONER PNB-MADECOR, UPON BEING CITED FOR AND SERVED WITH A NOTICE OF GARNISHMENT BECAME A FORCED INTERVENOR, HENCE, DENYING THE RIGHT OF HEREIN PETITIONER TO VENTILATE ITS POSITION IN A FULL-BLOWN TRIAL AS PROVIDED FOR UNDER SEC. 10, RULE 57, WHICH REMAINS THE SAME RULE UNDER THE REVISED RULES OF COURT AS AMENDED ON 1 JULY 1997.

III

THE [COURT OF APPEALS] COMMITTED AN ERROR IN FINDING THAT A DEMAND WAS MADE BY PANTRANCO NORTH EXPRESS, INC. TO PNB MADECOR FOR THE PAYMENT OF THE PROMISSORY NOTE DATED 31 OCTOBER 1982.7

After considering these assigned errors carefully insofar as they raise issues of law, we find that the petition lacks merit. We shall now discuss the reasons for our conclusion.

Petitioner admits its indebtedness to PNEI, in the principal sum of P7,884,921.10, per a promissory note dated October 31, 1982 executed by its precursor NAREDECO in favor of PNEI. It also admits that the principal amount should earn an interest of 18 percent per annum under the promissory note, in case NAREDECO fails to pay the principal amount after notice. Petitioner adds that the receivables of PNEI were thereafter conveyed to PNB in payment of PNEI's loan obligation to the latter, in accordance with a dacion en pago agreement executed between PNEI and PNB.

Petitioner, however, maintains that there is nothing now that could be subject of attachment or execution in favor of respondent since compensation had already taken place as between its debt to PNEI and the latter's obligation to it, consistent with Articles 1278, 1279, and 1290 of the Civil Code. Petitioner assails the CA's ratiocination that compensation could not have taken place because the receivables in question were the subject of attachment proceedings commenced by a third party (respondent). This reasoning is contrary to law, according to petitioner.

Petitioner insists that even the Asset Privatization Trust (APT), which now has control over PNEI, recognized the set-off between the subject receivables as indicated in its reply to petitioner's demand for payment of PNEI's unpaid rentals.8 The APT stated in its letter:

"xxx           xxx           xxx

While we have long considered the amount of SEVEN MILLION EIGHT HUNDRED EIGHTY FIVE THOUSAND PESOS (P7,885,000.00) which PNEI had earlier transmitted to you as its share in an aborted project as partial payment for PNEI's unpaid rentals in favor of PNB-Madecor, being a creditor like your goodself of PNEI, we are unable to be of assistance to you regarding your claim for the balance thereof. We trust that you will understand our common predicament.

xxx           xxx           xxx"

Petitioner argues that PNEI's letter dated September 28, 1984 did not contain a demand for payment but only notice of the implementation of thedacion en pago agreement between PNB and PNEI.

Petitioner contends that the CA's statement that PNEI's obligation to petitioner had either been settled or was not yet demandable is highly speculative and conjectural. On the contrary, petitioner asserts that its failure to institute a judicial action against PNEI proved that the receivables of petitioner and PNEI had already been subject to legal compensation.

Petitioner submits that Rule 39, Section 43 of the Revised Rules of Court applies to the present case. It asserts that it stands to lose more than P7 million if not given the opportunity to present its side in a formal proceeding such as that provided under the cited rule. According to petitioner, it was not an original party to this case but only became involved when it was issued a subpoenaduces tecum by the trial court.

For his part, respondent claims that the requisites for legal compensation are not present in this case, contrary to petitioner's assertion. He argues that the better rule should be that compensation cannot take place where one of the obligations sought to be compensated is the subject of a suit between a third party and a party interested in the compensation, as in this case.

Moreover, respondent points out that, while the alleged demand letter sent by PNEI to petitioner was dated September 28, 1984, the unpaid rentals due petitioner from PNEI accrued during the period October 1990 to March 1994, or before petitioner's obligation to PNEI became due. This being so, respondent argues that there can be no compensation since there was as yet no compensable debt in 1984 when PNEI demanded payment from petitioner.

Even granting that there had been compensation, according to respondent, PNEI would still have sufficient funds with petitioner since the PNB MADECOR's obligation to PNEI earned interest.

Respondent echoes the observation of the CA that petitioner failed to file a suit against PNEI at the time when it should have. This failure gave rise to the presumption that PNEI's obligation might have already been settled, waived, or otherwise extinguished, according to him. He contends that petitioner's explanation that it did not sue PNEI because there had been legal compensation is only an afterthought and contrary to logic and reason.

On petitioner's claim that it had been denied due process, respondent avers that he did not have to file a separate action against petitioner since this would only result in multiplicity of suits. Furthermore, he points out that the order of attachment is an interlocutory order that may not be the subject of appeal.

Finally, respondent calls the attention of this Court to the sale by PNB of its shares in PNB MADECOR to the "Dy Group", which in turn assigned its majority interest to the "Atlanta Group". Respondent claims that the Dy Group set aside some P30 million for expenses to be incurred in litigating PNB MADECOR's pending cases, and asks that his "claim over this amount, arising from the instant case,"9 be given preference in case the PNEI properties already garnished prove insufficient to satisfy his claim.

The first and third errors assigned by petitioner are obviously interrelated and must be resolved together.

Worth stressing, compensation is a mode of extinguishing to the concurrent amount the obligations of persons who in their own right and as principals arereciprocally debtors and creditors of each other.10 Legal compensation takes place by operation of law when all the requisites are present,11 as opposed to conventional compensation which takes place when the parties agree to compensate their mutual obligations even in the absence of some requisites.12

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.13

Petitioner insists that legal compensation had taken place such that no amount of money belonging to PNEI remains in its hands, and, consequently, there is nothing that could be garnished by respondent.

We find, however, that legal compensation could not have occurred because of the absence of one requisite in this case: that both debts must be due and demandable.

The CA observed:

"Under the terms of the promissory note, failure on the part of NAREDECO (PNB MADECOR) to pay their value of the instrument 'after due notice has been made by PNEI would entitle PNEI to collect an 18% [interest] per annum from date of notice of demand'."14

Petitioner makes a similar assertion in its petition, that

"x x x It has been stipulated that the promissory note shall earn an interest of 18% per annum in case NAREDECO, after notice, fails to pay the amount stated therein."15

Petitioner's obligation to PNEI appears to be payable on demand, following the above observation made by the CA and the assertion made by petitioner. Petitioner is obligated to pay the amount stated in the promissory note upon receipt of a notice to pay from PNEI. If petitioner fails to pay after such notice, the obligation will earn an interest of 18 percent per annum.

Respondent alleges that PNEI had already demanded payment. The alleged demand letter reads in part:

"We wish to inform you that as of August 31, 1984 your outstanding accounts amounted to P10,376,078.67, inclusive of interest.

In accordance with our previous arrangement, we have conveyed in favor of the Philippine National Bank P7,884,921.10 of said receivables from you. With this conveyance, the unpaid balance of your account will be P2,491,157.57.16

To forestall further accrual of interest, we request that you take up with PNB the implementation of said arrangement. x x x."17

We agree with petitioner that this letter was not one demanding payment, but one that merely informed petitioner of (1) the conveyance of a certain portion of its obligation to PNEI per adacion en pago arrangement between PNEI and PNB, and (2) the unpaid balance of its obligation after deducting the amount conveyed to PNB. The import of this letter is not that PNEI was demanding payment, but that PNEI was advising petitioner to settle the matter of implementing the earlier arrangement with PNB.

Apart from the aforecited letter, no other demand letter appears on record, nor has any of the parties adverted to another demand letter.

Since petitioner's obligation to PNEI is payable on demand, and there being no demand made, it follows that the obligation is not yet due. Therefore, this obligation may not be subject to compensation for lack of a requisite under the law. Without compensation having taken place, petitioner remains obligated to PNEI to the extent stated in the promissory note. This obligation may undoubtedly be garnished in favor of respondent to satisfy PNEI's judgment debt.18

As to respondent's claim that legal compensation could not have taken place due to the existence of a controversy involving one of the mutual obligations, we find this matter no longer controlling. Said controversy was not seasonably communicated to petitioner as required under Article 1279 of the Civil Code.

The controversy,i.e., the action instituted by respondent against PNEI, must have been communicated to PNB MADECOR in due time to prevent compensation from taking place. By "in due time" should be meant the period before legal compensation was supposed to take place, considering that legal compensation operates so long as the requisites concur, even without any conscious intent on the part of the parties.19 A controversy that is communicated to the parties after that time may no longer undo the

compensation that had taken place by force of law, lest the law concerning legal compensation be for naught.

Petitioner had notice of the present controversy when it received the subpoenaduces tecum issued by the trial court. The exact date when petitioner received the subpoena is not on record, but petitioner was allowed to submit a position paper regarding said subpoena per order of the trial court dated March 27, 1995.20 We assume that petitioner had notice of the pending litigation at least no later than this date. Now, was this date before that period when legal compensation would have occurred, assuming all other requisites to be present?

Clearly, it is not. PNB MADECOR's obligation to PNEI was contracted in 1982 and the alleged demand letter was sent by PNEI to petitioner on September 1984. On the other hand, PNEI's obligation to petitioner, the payment of monthly rentals, accrued during the period October 1990 to March 1994 and a demand to pay was sent in 1993. Assuming the other requisites to be present, legal compensation of the mutual obligations would have taken place on March 1994 at the latest. Obviously, this was before petitioner received notice of the pendency of this litigation in 1995. The controversy communicated to petitioner in 1995 could not have affected the legal compensation that would have taken place in 1994.

As regards respondent's averment that there was as yet no compensable debt when PNEI sent petitioner a demand letter on September 1984, since PNEI was not yet indebted to petitioner at that time, the law does not require that the parties' obligations be incurred at the same time. What the law requires only is that the obligations be due and demandable at the same time.

Coming now to the second assigned error, which we reserved as the last for our discussion, petitioner contends that it did not become a forced intervenor in the present case even after being served with a notice of garnishment. Petitioner argues that the correct procedure would have been for respondent to file a separate action against PNB MADECOR, per Section 43 of Rule 39 of the Rules of Court.21 Petitioner insists it was denied its right to ventilate its claims in a separate, full-blown trial when the courtsa quo ruled that the abovementioned rule was inapplicable to the present case.

On this score, we had occasion to rule as early as 1921 inTayabas Land Co. v. Sharruf ,22 as follows:

". . . garnishment . . . consists in the citation of some stranger to the litigation, who is debtor to one of the parties to the action. By this means such debtor stranger becomes a forced intervenor; and the court, having acquired jurisdiction over his person by means of the citation, requires him to pay his debt, not to his former creditor, but to the new creditor, who is creditor in the main litigation. It is merely a case of involuntary novation by the substitution of one creditor for another. Upon principle the remedy is a species of attachment or execution for reaching any property pertaining to a judgment debtor which may be found owing to such debtor by a third person."

Again, inPerla Compania de Seguros, Inc. v. Ramolete,23 we declared:

"Through service of the writ of garnishment, the garnishee becomes a "virtual party" to, or a "forced intervenor" in, the case and the trial court thereby acquires jurisdiction to bind him to compliance with all orders and processes of the trial court with a view to the complete satisfaction of the judgment of the court."

Petitioner here became a forced intervenor by virtue of the notice of garnishment served upon him. It could have presented evidence on its behalf. The CA, in fact, noted that petitioner presented a statement of account purportedly showing that PNEI had not yet settled its obligation to petitioner.24 That petitioner failed to present any more proof of its claim, as observed by the CA, is no longer the fault of the courts.

There is no need for the institution of a separate action under Rule 39, Section 43, contrary to petitioner's claim. This provision contemplates a situation where the person allegedly holding property of (or indebted

to) the judgment debtor claims an adverse interest in the property (or denies the debt). In this case, petitioner expressly admits its obligation to PNEI.25

WHEREFORE, the petition is DENIED. The assailed decision and resolution of the Court of Appeals are AFFIRMED. Costs against petitioner.

SO ORDERED.

VICTORIA D. MIAILHE, MONIQUE M. SICHERE, ELIANE M. DE LENCQUESAING and WILLIAM ALAIN MIAILHE, petitioners,vs.RUFINO P. HALILI, and HON. CONRADO VASQUEZ, in his capacity as Judge of the Court of First Instance of Manila, respondents.

Ross, Selph and Carrascoso for petitioners.Roberto P. Halili for respondents.

Bengzon (Jose), J.:

In this petition for certiorari with preliminary injunction, petitioners pray for annulment of the respondent Judge's orders of November 23, December 2, and December 5, 1959.

In August, 1955, in Case No. 22152 of the Court of First Instance of Manila, above petitioners obtained judgment for the sum of P74,400.00 against above respondent Halili. Pending appeal of such judgment before this Court, petitioners applied for the issuance of a writ of execution. As respondent did not furnish a supersedeas bond, the trial court issued the writ. Consequently, the Manila Sheriff levied on certain properties of said respondent, advertised them for sale at public auction in two newspapers, and sold them in due course.

This Court, on appeal, modified the said judgment by reducing the amount from P74,400.00 to P46,800.00.

Pursuant to such modified decision, petitioners returned to respondent Halili the difference between the sum already collected (through execution pending appeal), the amount allowed by this Court, after deducting the following items:

(a) Sheriff's fees</TD>

P297.00</TD>

</TR>

(b) Cost of publication in two newspapers of the Sheriff's Notice of sale </TD>

1,440.00</TD>

</TR>

(c) Amount retained by petitioners for having secured another judgment against respondent Halili, although respondent Halili appealed from it and the case is pending hearing</TD>

2,004.28</TD>

</TR>

P3,741.28</TD>

</TR>

Wherefore, Halili moved for the return of such sums of money. Herein petitioners opposed, on the following grounds:

(a) Under the law, the Sheriff's fees and the cost of publication in two newspapers of the Sheriff's notice of sale must be borne by the judgment debtor, the respondent Halili;

(b) Although it is true that respondent Halili appealed from the decision of the trial court which sentenced him to pay petitioners the sum of P2,004.28, compensation had taken place, unless and until the Court of Appeals reverses the decision of the trial court, petitioners have the right to retain the said sum of P2,004.28 y0e7EM.

Resolving the issue, respondent judge in his orders November 23, 1959 and December 2, 1959, granted Halili's petition. And in his order of December 5, 1959, he denied the motion to reconsider of petitioners.

Hence this petition for certiorari GkDJDmf.

Disputing the validity of the orders, petitioners submit the following contentions:

(1) Items of P297.00 and P1,440.00 — The writ of execution issued by the trial court pending appeal of Civil Case No. 22152 commanded the sheriff to collect from respondent the amount of the judgment "together with your lawful fees for service of this execution." Under Sections 14, 16 and 18 of Rule 39 of the Rules of Court, the sheriff's fees and cost of publication, which are necessary expenses, should be borne by the judgment debtor i.e., Halili.

It is important to note that this Court affirmed the decision of the trial court, with a modification only as to the amount of recovery pqfsiJgwF1.

(2) Item of P2,004.28 — In another Civil Case (Case No. 28062) between the same parties, petitioners secured judgment against respondent Halili for the sum of P2,004.28. This said judgment is now on appeal. Because petitioners are creditors of this amount of P2,004.28 just as they are debtors of respondent in the amount still due the latter through the modified decision of the Supreme Court in Civil Case No. 22152, compensation should take place as regards this amount j8LGLzMAC8.

After considering the above arguments and respondent's reply thereto, we adjudge as follows:

1. The writ of execution issued (pending appeal of Civil Case No. 22152) expressly commanded the Sheriff to collect from respondent Halili the amount of the judgment of the court "together with your (sheriff's) fees for service of this execution."

Respondent Halili in the decision modified by this Court, remained in the very same position he was in the original decision of the trial court; he was still the judgment debtor. Therefore, he should pay the sheriff's fees.

The "no costs" clause in the decision of this Court merely meant that we did not allow respondent Halili, who was the appellant in the appealed case, any costs in this Court against petitioners, who were then

the appellees.

The doctrine enunciated in the cases of Hilario vs. Hicks1 and Po Pauco vs. Tan Junco2, are not in point to the issue raised in the present case. In the aforesaid cases, the decisions of the trial court were reversed by this Court. In the instant case, the decision of the trial court was affirmed with only a modification as to the amount of recovery. In other words, here, respondent Halili was still adjudged liable for his lease obligations Ns9bHZ.

As to the expense of publication, Section 14 of Rule 39 of the Rules of Court, provides that after the judgment has been satisfied, any excess in the proceeds of the sale (of the property levied upon) over the judgment and accruing costs, must be delivered to the judgment debtor, less otherwise directed by the judgment or order of court BN6lD0Uw1.

Do these "accruing costs" include the expense of application?

Section 16 of Rule 39, imposes upon the sheriff duty to publish in a newspaper, the notice of sale of property levied upon. The publication being a requirement, the expenditures in relation thereto may be deemed as necessary incident of execution. It is reasonable to hold that they form part of the accruing costs.

The above conclusions are strengthened by Section 18 of the same Rule 39 which allows the judgment debtor to prevent the sale provided he pays the amount requested by the execution and "the costs that have been incurred therein." The sheriff's fees and costs of publication having been incurred in connection with the execution, covered by such "costs" clause. The condition provided in this Section 18 that the judgment debtor pays the costs that have been incurred therein is a clear indication that had there been an execution sale, he (the judgment debtor) would have had to bear these expenses. Otherwise, why should he be required to pay the said expenses should he move to prevent the sale?

In pursuance, therefore, of the explicit order of lower court in its writ of execution, and in accordance with the provisions of the Rules of Court, petitioners may charge respondents Halili the sheriff's fees and costs of publication of his notice of sale.

II. On the other hand, petitioners contend that they have a right to retain the sum of P2,004.28 on the theory of compensation. We believe that compensation can take place in this case because petitioners' claim against Halili is still being the subject of court litigation. It is a requirement, for compensation to take place, that the amount involved be certain and liquidated.3

ACCORDINGLY, the part of the order of December 2, 1959 that directed the return of the amounts of P297 and P1,440.00 representing the sheriff's fees and costs of publication, respectively, is revoked; and that part of the said order directing the repayment of the amount of P2,004.28 is affirmed. No costs in this instance.

Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.

G.R. No. 162580             January 27, 2006

ELMAR O. PEREZ, Petitioner, vs.COURT OF APPEALS, Fifth Division, TRISTAN A. CATINDIG and LILY GOMEZ-CATINDIG, Respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

This petition for certiorari and prohibition under Rule 65 of the Rules of Court assails the July 25, 2003 Decision1 of the Court of Appeals in CA-G.R. SP No. 74456 which set aside and declared as null and void the September 30, 2002 Order2 of the Regional Trial Court of Quezon City, Branch 84, granting petitioner’s motion for leave to file intervention and admitting the Complaint-in-Intervention3 in Civil Case No. Q-01-44847; and its January 23, 2004 Resolution4 denying the motion for reconsideration.

Private respondent Tristan A. Catindig married Lily Gomez Catindig5 twice on May 16, 1968. The first marriage ceremony was celebrated at the Central Methodist Church at T.M. Kalaw Street, Ermita, Manila while the second took place at the Lourdes Catholic Church in La Loma, Quezon City. The marriage produced four children.

Several years later, the couple encountered marital problems that they decided to separate from each other. Upon advice of a mutual friend, they decided to obtain a divorce from the Dominican Republic. Thus, on April 27, 1984, Tristan and Lily executed a Special Power of Attorney addressed to the Judge of the First Civil Court of San Cristobal, Dominican Republic, appointing an attorney-in-fact to institute a divorce action under its laws.6

Thereafter, on April 30, 1984, the private respondents filed a joint petition for dissolution of conjugal partnership with the Regional Trial Court of Makati. On June 12, 1984, the civil court in the Dominican Republic ratified the divorce by mutual consent of Tristan and Lily. Subsequently, on June 23, 1984, the Regional Trial Court of Makati City, Branch 133, ordered the complete separation of properties between Tristan and Lily.

On July 14, 1984, Tristan married petitioner Elmar O. Perez in the State of Virginia in the United States7 and both lived as husband and wife until October 2001. Their union produced one offspring.8

During their cohabitation, petitioner learned that the divorce decree issued by the court in the Dominican Republic which "dissolved" the marriage between Tristan and Lily was not recognized in the Philippines and that her marriage to Tristan was deemed void under Philippine law. When she confronted Tristan about this, the latter assured her that he would legalize their union after he obtains an annulment of his marriage with Lily. Tristan further promised the petitioner that he would adopt their son so that he would be entitled to an equal share in his estate as that of each of his children with Lily.9

On August 13, 2001, Tristan filed a petition for the declaration of nullity of his marriage to Lily with the Regional Trial Court of Quezon City, docketed as Case No. Q-01-44847.

Subsequently, petitioner filed a Motion for Leave to File Intervention10 claiming that she has a legal interest in the matter in litigation because she knows certain information which might aid the trial court at a truthful, fair and just adjudication of the annulment case, which the trial court granted on September 30, 2002. Petitioner’s complaint-in-intervention was also ordered admitted.

Tristan filed a petition for certiorari and prohibition with the Court of Appeals seeking to annul the order dated September 30, 2002 of the trial court. The Court of Appeals granted the petition and declared as null and void the September 30, 2002 Order of the trial court granting the motion for leave to file intervention and admitting the complaint-in-intervention.

Petitioner’s motion for reconsideration was denied, hence this petition for certiorari and prohibition filed under Rule 65 of the Rules of Court. Petitioner contends that the Court of Appeals gravely abused its discretion in disregarding her legal interest in the annulment case between Tristan and Lily.

The petition lacks merit.

Ordinarily, the proper recourse of an aggrieved party from a decision of the Court of Appeals is a petition for review on certiorari under Rule 45 of the Rules of Court. However, if the error subject of the recourse is one of jurisdiction, or the act complained of was granted by a court with grave abuse of discretion amounting to lack or excess of jurisdiction, as alleged in this case, the proper remedy is a petition for certiorari under Rule 65 of the said Rules.11 This is based on the premise that in issuing the assailed decision and resolution, the Court of Appeals acted with grave abuse of discretion, amounting to excess of lack of jurisdiction and there is no plain, speedy and adequate remedy in the ordinary course of law. A remedy is considered plain, speedy, and adequate if it will promptly relieve the petitioner from the injurious effect of the judgment and the acts of the lower court.12

It is therefore incumbent upon the petitioner to establish that the Court of Appeals acted with grave abuse of discretion amounting to excess or lack of jurisdiction when it promulgated the assailed decision and resolution.

We have previously ruled that grave abuse of discretion may arise when a lower court or tribunal violates or contravenes the Constitution, the law or existing jurisprudence. By grave abuse of discretion is meant, such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction. The abuse of discretion must be grave as where the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility and must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined by or to act at all in contemplation of law.13 The word "capricious," usually used in tandem with the term "arbitrary," conveys the notion of willful and unreasoning action. Thus, when seeking the corrective hand of certiorari, a clear showing of caprice and arbitrariness in the exercise of discretion is imperative.14

The Rules of Court laid down the parameters before a person, not a party to a case can intervene, thus:

Who may intervene. — A person who has a legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to intervene in the action. The court shall consider whether or not the intervention will unduly delay or prejudice the adjudication of the rights of the original parties, and whether or not the intervenor’s rights may be fully protected in a separate proceeding.15

The requirements for intervention are: [a] legal interest in the matter in litigation; and [b] consideration must be given as to whether the adjudication of the original parties may be delayed or prejudiced, or whether the intervenor’s rights may be protected in a separate proceeding or not.16

Legal interest, which entitles a person to intervene, must be in the matter in litigation and of such direct and immediate character that the intervenor will either gain or lose by direct legal operation and effect of the judgment.17 Such interest must be actual, direct and material, and not simply contingent and expectant.18

Petitioner claims that her status as the wife and companion of Tristan for 17 years vests her with the requisite legal interest required of a would-be intervenor under the Rules of Court.

Petitioner’s claim lacks merit. Under the law, petitioner was never the legal wife of Tristan, hence her claim of legal interest has no basis.

When petitioner and Tristan married on July 14, 1984, Tristan was still lawfully married to Lily. The divorce decree that Tristan and Lily obtained from the Dominican Republic never dissolved the marriage bond between them. It is basic that laws relating to family rights and duties, or to the status, condition and legal capacity of persons are binding upon citizens of the Philippines, even though living abroad.19Regardless of where a citizen of the Philippines might be, he or she will be governed by Philippine laws with respect to his or her family rights and duties, or to his or her status, condition and legal capacity. Hence, if a Filipino regardless of whether he or she was married here or abroad, initiates a petition abroad to obtain an absolute divorce from spouse and eventually becomes successful in getting an absolute divorce decree, the Philippines will not recognize such absolute divorce.20

When Tristan and Lily married on May 18, 1968, their marriage was governed by the provisions of the Civil Code21 which took effect on August 30, 1950. In the case of Tenchavez v. Escano22 we held:

(1) That a foreign divorce between Filipino citizens, sought and decreed after the effectivity of the present Civil Code (Rep. Act No. 386), is not entitled to recognition as valid in this jurisdiction; and neither is the marriage contracted with another party by the divorced consort, subsequently to the foreign decree of divorce, entitled to validity in the country. (Emphasis added)

Thus, petitioner’s claim that she is the wife of Tristan even if their marriage was celebrated abroad lacks merit. Thus, petitioner never acquired the legal interest as a wife upon which her motion for intervention is based.

Since petitioner’s motion for leave to file intervention was bereft of the indispensable requirement of legal interest, the issuance by the trial court of the order granting the same and admitting the complaint-in-intervention was attended with grave abuse of discretion. Consequently, the Court of Appeals correctly set aside and declared as null and void the said order.

WHEREFORE, the petition is DISMISSED. The assailed Decision dated July 25, 2003 and Resolution dated January 23, 2004 of the Court of Appeals in CA-G.R. SP No. 74456 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 89252 May 24, 1993

RAUL SESBREÑO, petitioner, vs.HON. COURT OF APPEALS, DELTA MOTORS CORPORATION AND PILIPINAS BANK, respondents.

.FELICIANO, J.:

On 9 February 1981, petitioner Raul Sesbreño made a money market placement in the amount of P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981, Philfinance, also on 9 February 1981, issued the following documents to petitioner:

(a) the Certificate of Confirmation of Sale, "without recourse," No. 20496 of one (1) Delta Motors Corporation Promissory Note ("DMC PN") No. 2731 for a term of 32 days at 17.0% per annum;

(b) the Certificate of securities Delivery Receipt No. 16587 indicating the sale of DMC PN No. 2731 to petitioner, with the notation that the said security was in custodianship of Pilipinas Bank, as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9 February 1981; and

(c) post-dated checks payable on 13 March 1981 (i.e., the maturity date of petitioner's investment), with petitioner as payee, Philfinance as drawer, and Insular Bank of Asia and America as drawee, in the total amount of P304,533.33.

On 13 March 1981, petitioner sought to encash the postdated checks issued by Philfinance. However, the checks were dishonored for having been drawn against insufficient funds.

On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private respondent Pilipinas Bank ("Pilipinas"). It reads as follows:

February 9, 1981———————VALUE DATO Raul Sesbreño

April 6, 1981————————MATURITY DATE

NO. 1080DENOMINATED CUSTODIAN RECEIPTThis confirms that as a duly Custodian Bank, and upon instruction of PHILIPPINE UNDERWRITES FINANCE CORPORATION, we have in our custody the

following securities to you [sic] the extent herein indicatedWe further certify that these securities may be inspected by you or your duly authorized representative at any time during regular banking hours.

Upon your written instructions we shall undertake physical delivery of the above securities fully assigned to you should this Denominated Custodianship Receipt remain outstanding in your favor thirty (30) days after its maturity.

On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas, Makati Branch, and handed her a demand letter informing the bank that his placement with Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and outstanding, and that he in effect was asking for the physical delivery of the underlying promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found: that the security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it had a face value of P2,300,833.33, with the Philfinance as "payee" and private respondent Delta Motors Corporation ("Delta") as "maker;" and that on face of the promissory note was stamped "NON NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation in respect thereof, to petitioner.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again asking private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731. Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written instructions, as has been supposedly agreed upon in "Securities Custodianship Agreement" between Pilipinas and Philfinance. Philfinance did not provide the appropriate instructions; Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to petitioner.

Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had assigned to him said Note to the extent of P307,933.33. Delta, however, denied any liability to petitioner on the promissory note, and explained in turn that it had previously agreed with Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against Philfinance PN No. 143-A issued in favor of Delta.

In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the Securities and exchange commission ("SEC") and the Central Bank. Pilipinas delivered to the SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4

As petitioner had failed to collect his investment and interest thereon, he filed on 28 September 1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21, against private respondents Delta and Pilipinas. 5 The trial court, in a decision dated 5 August 1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause of action, with costs against petitioner.

Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision dated 21 March 1989, the Court of Appeals denied the appeal and held: 6

Be that as it may, from the evidence on record, if there is anyone that appears liable for the travails of plaintiff-appellant, it is Philfinance. As correctly observed by the trial court:

This act of Philfinance in accepting the investment of plaintiff and charging it against DMC PN No. 2731 when its entire face value was already obligated or earmarked for set-off or compensation is difficult to comprehend and may have been motivated with bad faith. Philfinance, therefore, is solely and legally obligated to return the investment of plaintiff, together with its earnings, and to answer all the damages plaintiff has suffered incident thereto. Unfortunately for plaintiff, Philfinance was not impleaded as one of the defendants in this case at bar; hence, this Court is without jurisdiction to pronounce judgement against it. (p. 11, Decision)

WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby affirmed in toto. Cost against plaintiff-appellant.

Petitioner moved for reconsideration of the above Decision, without success.

Hence, this Petition for Review on Certiorari.

After consideration of the allegations contained and issues raised in the pleadings, the Court resolved to give due course to the petition and required the parties to file their respective memoranda. 7

Petitioner reiterates the assignment of errors he directed at the trial court decision, and contends that respondent court of Appeals gravely erred: (i) in concluding that he cannot recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view of the provisions stipulated in DCR No. 10805 issued in favor r of petitioner, and (iii) in refusing to pierce the veil of corporate entity between Philfinance, and private respondents Delta and Pilipinas, considering that the three (3) entities belong to the "Silverio Group of Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8

There are at least two (2) sets of relationships which we need to address: firstly, the relationship of petitioner vis-a-visDelta; secondly, the relationship of petitioner in respect of Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the person of Philfinance. It is, consequently, not necessary for present purposes to deal with this third relationship, except to the extent it necessarily impinges upon or intersects the first and second relationships.

I.

We consider first the relationship between petitioner and Delta.

The Court of appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse" to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:

Nor could plaintiff-appellant have acquired any right over DMC PN No. 2731 as the same is "non-negotiable" as stamped on its face (Exhibit "6"), negotiation being defined as the transfer of an instrument from one person to another so as to constitute the transferee the holder of the instrument (Sec. 30, Negotiable Instruments Law). A person not a holder cannot sue on the instrument in his own name and cannot demand or receive payment (Section 51, id.) 9

Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that the Note had been validly transferred, in part to him by assignment and that as a result of such transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of that Note assigned to him by the payee Philfinance.

Delta, however, disputes petitioner's contention and argues:

(1) that DMC PN No. 2731 was not intended to be negotiated or otherwise transferred by Philfinance as manifested by the word "non-negotiable" stamp across the face of the Note 10 and because maker Delta and payee Philfinance intended that this Note would be offset against the outstanding obligation of Philfinance represented by Philfinance PN No. 143-A issued to Delta as payee;

(2) that the assignment of DMC PN No. 2731 by Philfinance was without Delta's consent, if not against its instructions; and

(3) assuming (arguendo only) that the partial assignment in favor of petitioner was valid, petitioner took the Note subject to the defenses available to Delta, in particular, the offsetting of DMC PN No. 2731 against Philfinance PN No. 143-A. 11

We consider Delta's arguments seriatim.

Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be distinguished from theassignment or transfer of an instrument whether that be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable instrument may, however, instead of being negotiated, also be assigned or transferred. The legal consequences of negotiation as distinguished from assignment of a negotiable instrument are, of course, different. A non-negotiable instrument may, obviously, not be negotiated; but it may be assigned or transferred, absent an express prohibition against assignment or transfer written in the face of the instrument:

The words "not negotiable," stamped on the face of the bill of lading, did not destroy its assignability, but the sole effect was to exempt the bill from the statutory provisions relative thereto, and a bill, though not negotiable, may be transferred by assignment; the assignee taking subject to the equities between the original parties. 12 (Emphasis added)

DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "non-transferable" or "non-assignable." It contained no stipulation which prohibited Philfinance from assigning or transferring, in whole or in part, that Note.

Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which should be quoted in full:

Philippine Underwriters Finance Corp.Benavidez St., Makati,Metro Manila.

Attention: Mr. Alfredo O. BanariaSVP-Treasurer

GENTLEMEN:

This refers to our outstanding placement of P4,601,666.67 as evidenced by your Promissory Note No. 143-A, dated April 10, 1980, to mature on April 6, 1981.

As agreed upon, we enclose our non-negotiable Promissory Note No. 2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be offsetted [sic] against your PN No. 143-A upon co-terminal maturity.

Please deliver the proceeds of our PNs to our representative, Mr. Eric Castillo.

We find nothing in his "Letter of Agreement" which can be reasonably construed as a prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be invoked against an assignee or transferee of the Note who parted with valuable consideration in good faith and without notice of such prohibition. It is not disputed that petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by the fact that what Philfinance and Delta were doing by their exchange of their promissory notes was this: Delta invested, by making a money market placement with Philfinance, approximately P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.

Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that such consent was not necessary for the validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted conventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventional subrogation, which in the first place is never lightly inferred, 15 must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point. 16 Nothing of the sort is present in the instant case.

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No. 2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments and other securities, and more generally, in money market transactions. In Perez v. Court of Appeals, 17 the Court, speaking through Mme. Justice Herrera, made the following important statement:

There is another aspect to this case. What is involved here is a money market transaction. As defined by Lawrence Smith "the money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle manor a dealer in the open market." It involves "commercial papers" which are instruments "evidencing indebtness of any person or entity. . ., which are issued, endorsed, sold or transferred or in any manner conveyed to another person or entity, with or without recourse". The fundamental function of the money market device in its operation is to match and bring together in a most impersonal manner both the "fund users" and the "fund suppliers." The money market is an "impersonal market", free from personal considerations. "The market mechanism is intended to provide quick mobility of money and securities."

The impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of a commercial paper in the money market necessarily knows in advance that it would be expenditiously transacted and transferred to any

investor/lender without need of notice to said issuer. In practice, no notification is given to the borrower or issuer of commercial paper of the sale or transfer to the investor.

xxx xxx xxx

There is need to individuate a money market transaction, a relatively novel institution in the Philippine commercial scene. It has been intended to facilitate the flow and acquisition of capital on an impersonal basis. And as specifically required by Presidential Decree No. 678, the investing public must be given adequate and effective protection in availing of the credit of a borrower in the commercial paper market. 18 (Citations omitted; emphasis supplied)

We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no compensation had as yet taken place and indeed none could have taken place. The essential requirements of compensation are listed in the Civil Code as follows:

Art. 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 consists 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 are 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. (Emphasis supplied)

On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that the relevant promissory notes were "to be offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."

As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49) days before the "co-terminal maturity" date, that is to say, before any compensation had taken place. Further, the assignment to petitioner would have prevented compensation had taken place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of the assignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors and debtors of each other in their own right to the extent of the amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.

The record shows, however, that petitioner notified Delta of the fact of the assignment to him only on 14 July 1981, 19that is, after the maturity not only of the money market placement made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee after compensation had taken place by operation of law because the offsetting instruments had both reached maturity. It is a firmly settled doctrine that the rights of an assignee are not any greater that the rights of the assignor, since the assignee is merely substituted in the place of the

assignor 20 and that the assignee acquires his rights subject to the equities — i.e., the defenses — which the debtor could have set up against the original assignor before notice of the assignment was given to the debtor. Article 1285 of the Civil Code provides that:

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation.

If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones.

If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (Emphasis supplied)

Article 1626 of the same code states that: "the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation." In Sison v. Yap-Tico, 21 the Court explained that:

[n]o man is bound to remain a debtor; he may pay to him with whom he contacted to pay; and if he pay before notice that his debt has been assigned, the law holds him exonerated, for the reason that it is the duty of the person who has acquired a title by transfer to demand payment of the debt, to give his debt or notice. 22

At the time that Delta was first put to notice of the assignment in petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the assignor Philfinance could not have then compelled payment anew by Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting from Delta the portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the assignment or sale was effected on 9 February 1981. He could have notified Delta as soon as his money market placement matured on 13 March 1981 without payment thereof being made by Philfinance; at that time, compensation had yet to set in and discharge DMC PN No. 2731. Again petitioner could have notified Delta on 26 March 1981 when petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because petitioner failed to do so, and because the record is bare of any indication that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled to uphold the defense of compensation raised by private respondent Delta. Of course, Philfinance remains liable to petitioner under the terms of the assignment made by Philfinance to petitioner.

II.

We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas issued DCR No. 10805 with the following words:

Upon your written instruction, we [Pilipinas] shall undertake physical delivery of the above securities fully assigned to you —. 23

The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in solidum with

Philfinance and Delta under DMC PN No. 2731. We read the DCR as a confirmation on the part of Pilipinas that:

(1) it has in its custody, as duly constituted custodian bank, DMC PN No. 2731 of a certain face value, to mature on 6 April 1981 and payable to the order of Philfinance;

(2) Pilipinas was, from and after said date of the assignment by Philfinance to petitioner (9 February 1981), holding that Note on behalf and for the benefit of petitioner, at least to the extent it had been assigned to petitioner by payee Philfinance; 24

(3) petitioner may inspect the Note either "personally or by authorized representative", at any time during regular bank hours; and

(4) upon written instructions of petitioner, Pilipinas would physically deliver the DMC PN No. 2731 (or a participation therein to the extent of P307,933.33) "should this Denominated Custodianship receipt remain outstanding in [petitioner's] favor thirty (30) days after its maturity."

Thus, we find nothing written in printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or any other time. We note that both in his complaint and in his testimony before the trial court, petitioner referred merely to the obligation of private respondent Pilipinas to effect the physical delivery to him of DMC PN No. 2731. 25 Accordingly, petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount represented by a portion of the Note assigned to him by Philfinance, appears to be a new theory constructed only after the trial court had ruled against him. The solidary liability that petitioner seeks to impute Pilipinas cannot, however, be lightly inferred. Under article 1207 of the Civil Code, "there is a solidary liability only when the law or the nature of the obligation requires solidarity," The record here exhibits no express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner has not pointed to us to any law which imposed such liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship assumed by private respondent Pilipinas necessarily implies solidary liability under the securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect of petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to petitioner Sesbreño.

We believe and so hold that a contract of deposit was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance; the obligation of the depository was owed, however, to petitioner Sesbreño as beneficiary of the custodianship or depository agreement. We do not consider that this is a simple case of a stipulation pour autri. The custodianship or depositary agreement was established as an integral part of the money market transaction entered into by petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing sold would be placed outside the control of the vendor. Indeed, the constituting of the depositary or custodianship agreement was equivalent to constructive delivery of the Note (to the extent it had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship agreements are designed to facilitate transactions in the money market by providing a basis for confidence on the part of the investors or placers that the instruments bought by them are effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their reach, that those instruments will be there available to the placers of funds should they have need of them. The depositary in a contract of deposit is obliged to return the security or the thing deposited upon demand of the depositor (or, in the presented case, of the beneficiary) of the contract, even though a term for such return may have been established in the said contract. 26 Accordingly, any stipulation in the

contract of deposit or custodianship that runs counter to the fundamental purpose of that agreement or which was not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced as against such beneficiary-placer.

We believe that the position taken above is supported by considerations of public policy. If there is any party that needs the equalizing protection of the law in money market transactions, it is the members of the general public whom place their savings in such market for the purpose of generating interest revenues. 27 The custodian bank, if it is not related either in terms of equity ownership or management control to the borrower of the funds, or the commercial paper dealer, is normally a preferred or traditional banker of such borrower or dealer (here, Philfinance). The custodian bank would have every incentive to protect the interest of its client the borrower or dealer as against the placer of funds. The providers of such funds must be safeguarded from the impact of stipulations privately made between the borrowers or dealers and the custodian banks, and disclosed to fund-providers only after trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN No. 143-A had not yet taken place. Instead of complying with the demand of the petitioner, Pilipinas purported to require and await the instructions of Philfinance, in obvious contravention of its undertaking under the DCR to effect physical delivery of the Note upon receipt of "written instructions" from petitioner Sesbreño. The ostensible term written into the DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was not a defense against petitioner's demand for physical surrender of the Note on at least three grounds: firstly, such term was never brought to the attention of petitioner Sesbreño at the time the money market placement with Philfinance was made; secondly, such term runs counter to the very purpose of the custodianship or depositary agreement as an integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured on 13 March 1981 without payment from Philfinance.

We conclude, therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by arising out of its breach of duty. By failing to deliver the Note to the petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefitted from such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present purposes.Prima facie, the damages suffered by petitioner consisted of P304,533.33, the portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge of the Note by compensation, plus legal interest of six percent (6%) per annum containing from 14 March 1981.

The conclusion we have reached is, of course, without prejudice to such right of reimbursement as Pilipinas may havevis-a-vis Philfinance.

III.

The third principal contention of petitioner — that Philfinance and private respondents Delta and Pilipinas should be treated as one corporate entity — need not detain us for long.

In the first place, as already noted, jurisdiction over the person of Philfinance was never acquired either by the trial court nor by the respondent Court of Appeals. Petitioner similarly did not seek to implead Philfinance in the Petition before us.

Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner asks us to pierce their separate corporate entities, but has been able only to cite the presence of a common Director — Mr. Ricardo Silverio, Sr., sitting on the

Board of Directors of all three (3) companies. Petitioner has neither alleged nor proved that one or another of the three (3) concededly related companies used the other two (2) as mere alter egos or that the corporate affairs of the other two (2) were administered and managed for the benefit of one. There is simply not enough evidence of record to justify disregarding the separate corporate personalities of delta and Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to petitioner. 28

WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 march 1989 and 17 July 1989, respectively, are hereby MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas bank is hereby ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No pronouncement as to costs. SO ORDERED

G.R. No. L-62169 February 28, 1983

MINDANAO PORTLAND CEMENT CORPORATION, petitioner, vs.COURT OF APPEALS, PACWELD STEEL CORPORATION and ATTY. CASIANO P. LAQUIHON respondents.

 TEEHANKEE, J.:

The Court of Appeals (now Intermediate Appellate Court) certified petitioner's appeal therein as defendant-appellant, docketed as C.A.-G.R. No. 65102 thereof, to this Court as involving only questions of law in its Resolution of August 31, 1982, reading as follows:

The 'Statement of the Case and the Statement of Facts' contained in appellant's brief follow:

STATEMENT OF FACTS

On January 3, 1978, one Atty. Casiano P. Laquihon, in behalf of third-party defendant Pacweld Steel Corporation (Pacweld for short) as the latter's attorney, filed a pleading addressed to the defendant & Third-Party Plaintiff Mindanao Portland Cement Corporation (MPCC) for short), herein appellant, entitled 'motion to direct payment of attorney's fee to counsel' (himself ), invoking in his motion the fact that in the decision of the court of Sept. 14, 1976, MPCC was adjudged to pay Pacweld the sum of P10,000.00 as attorney's fees (Record on Appeal, pp. 1, 6-9).

On March 14, 1978, MPCC filed an opposition to Atty. Laquihon's motion, stating, as grounds therefor, that said amount is set-off by a like sum of P10,000.00 which it MPCC has collectible in its favor from Pacweld also by way of attorney's fees which MPCC recovered from the same Court of First Instance of Manila (Branch XX) in Civil Case No. 68346, entitled Pacweld Steel Corporation, et al. writ of execution to this effect having been issued by said court (Record on Appeal, pp, 2,10- 14).

On June 26, 1978 the court issued the order appealed from (Record on Appeal, pp. 24-25) and despite MPCCs motion for reconsideration of said order, citing the law applicable and Supreme Court decisions (Record on Appeal, pp. 26-33), denied the same in its order of August 28, 1978 (Record on Appeal, p. 37), also subject matter of this appeal.

The writ of execution referred to above which MPCC has invoked to set- off the amount sought to be collected by Pacweld through the latter's lawyer, Atty. Casiano P. Laquihon, is hereunder quoted in full.

In his brief, appellee comments that the statements in appellant's brief are 'substantially correct,' as follows:

STATEMENT OF THE CASE

This is an appeal from the Order of the Court of First Instance of Manila (Branch X dated June 26, 1978 ordering the appellant (MINDANAO PORTLAND CEMENT CORPORATION) to pay the amount of P10,000.00 attorney's fees directly to Atty. Casiano B. Laquihon (Record on Appeal, pp. 24-25) and from the Order dated August 28, 1978 denying appellant's motion for reconsideration (Record on Appeal, p. 37).

There was no trial or submission of documentary evidence. Against the orders of June 26. 1978, and August 28, 1978, appellant has brought this appeal to this Court, contending that:

The lower court erred in not holding that the two obligations are extinguished reciprocally by operation of law.' (p. 6, Appellant's Brief)

This appeal calls for the application of Arts. 1278, 1279 and 1290 of the Civil Code, as urged by the appellant. Another question is: The judgment in Civil Case No. 75179 being already final at the time the motion under consideration was filed, does not the order of June 26, 1976 constitute a change or alteration of the said judgment, though issued by the very same court that rendered the judgment?

WHEREFORE, since only questions of law are involved and there is no factual issue left for us to determine, let the records of the appeal in this case be certified to the Honorable Supreme Court for determination.

After considering the briefs of the parties in the appellate court and the additional pleadings required of them by this Court, the Court finds merit in the appeal and sets aside the appealed orders of June 26 and August 28, 1978 of the Court of First Instance (now Regional Trial Court) of Manila, Branch XX.

It is clear from the record that both corporations, petitioner Mindanao Portland Cement Corporation (appellant) and respondent Pacweld Steel Corporation (appellee), were creditors and debtors of each other, their debts to each other consisting in final and executory judgments of the Court of First Instance in two (2) separate cases, ordering the payment to each other of the sum of P10,000.00 by way of attorney's fees. The two (2) obligations, therefore, respectively offset each other, compensation having taken effect by operation of law and extinguished both debts to the concurrent amount of P10,000.00, pursuant to the provisions of Arts. 1278, 1279 and 1290 of the Civil Code, since all the requisites provided in Art. 1279 of the said Code for automatic compensation "even though the creditors and debtors are not aware of the compensation" were duly present.**

Necessarily, the appealed order of June 26, 1978 granting Atty. Laquihon's motion for amendment of the judgment of September 14, 1976 against Mindanao Portland Cement Corporation so as to make the award therein of P10,000.00 as attorney's fees payable directly to himself as counsel of Pacweld Steel Corporation instead of payable directly to said corporation as provided in the judgment, which had become final and executory long before the issuance of said "amendatory" order was a void alteration of judgment. It was a substantial change or amendment beyond the trial court's jurisdiction and authority and it could not defeat the compensation or set-off of the two (2) obligations of the corporations to each other which had already extinguished both debts by operation of law.

ACCORDINGLY. the appealed orders are hereby annulled and set aside. No costs.

 

G.R. No. 118585 September 14, 1995

AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO TAN, ELISA TAN, TAN YEE, and SPS. MARCIAL SEE and LILIAN TAN, petitioners, vs.HON. COURT OF APPEALS, METROPOLITAN BANK AND TRUST COMPANY, and THE SHERIFF OF MANILA,respondents.

 

FRANCISCO, J.:

In its March 30, 1994 decision, public respondent Court of Appeals affirmed the trial court's judgment upholding the validity of the extra-judicial foreclosure of the real estate property of petitioners — spouses Marcial See and Lilian Tan, located at Paco District, Manila covered by TCT 105233, by private respondent Metropolitan Bank and Trust Company (Metrobank). 1 Petitioners' motion for reconsideration was denied; hence, this petition for review on certiorari raising the following assignments of errors:

FIRST: The Honorable Court of Appeals erred in holding that the consolidation of the three (3) loans granted separately to three entities into a single loan of P1.0 Million was a mere restructuring and did not effect a novation of the loan as to extinguish the accessory mortgage contracts.

SECOND: The Honorable Court of Appeals erred in not holding that the consolidated loan of P1.0 Million was not accompanied by the execution of a new REM, as was done by the Bank in the earlier three (3) loans, and hence, was, to all legal intents/purposes, unsecured.

THIRD: The Honorable Court of Appeals erred in holding that the inclusion in the extra-judicial foreclosure of the admittedly unsecured loan of P970,000.00 is a mere error that does not invalidated said foreclosure, contrary to the pronouncement in C & C Commercial Corp. vs. PNB, 175 SCRA 1.

FOURTH: The Honorable Court of Appeals erred in not declaring as null and void the extra-judicial foreclosure undertaken by Metrobank on the property of Sps. Marcial See and Lilian Tan. 2

The facts as found by public respondent Court of Appeals are as follows:

It is not disputed that Ylang-Ylang Merchandising Company, a partnership between Angelita Rodriguez and Antonio Tan, obtained a loan in the amount of P250,000.00 from the Metropolitan Bank and Trust Company, and to secure payment of the same, spouses Marcial See and Lilian Tan constituted a real estate mortgage in favor of said bank over their property in the District of Paco, Manila, covered by TCT No. 105233 of the Registry of Deeds of Manila. The mortgage was annotated at the back of the title.

Subsequently, after the partnership had changed its name to Ajax Marketing Company albeit without changing its composition, it obtained a loan in the sum of P150,000.00 from Metropolitan Bank and Trust Company. Again to secure the loan, spouses Marcial See and Lilian Tan executed in favor of said bank a second real estate mortgage over the same property. As in the first instance, the mortgage was duly annotated at the back of TCT No. 105233.

On February 19, 1979, the partnership (Ajax Marketing Company) was converted into a corporation denominated as Ajax Marketing and Development Corporation, with the original partners (Angelita Rodriguez and Antonio Tan) as incorporators and three (3) additional incorporators, namely, Elisa Tan, the wife of Antonio Tan, and Jose San Diego and Tessie San Diego. Ajax Marketing and Development Corporation obtained from Metropolitan Bank and Trust Company a loan of P600,000.00, the payment of which was secured by another real estate mortgage executed by spouses Marcial See and Lilian Tan in favor of said bank over the same realty located in the District of Paco, Manila. Again, the third real estate mortgage was annotated at the back of TCT No. 105233.

In December 1980, the three (3) loans with an aggregate amount of P1,000,000.00 were re-structured and consolidated into one (1) loan and Ajax Marketing and Development Corporation, represented by Antonio Tan as Board Chairman/President and in his personal capacity as solidary co-obligor, and Elisa Tan as Vice-President/Treasurer and in her personal capacity as solidary co-obligor, executed a Promissory Note (PN) No. BDS-3605. 3

In their interrelated first and second assignment of errors, petitioners argue that a novation occurred when their three (3) loans, which are all secured by the same real estate property covered by TCT No. 105233 were consolidated into a single loan of P1 million under Promissory Note No. BDS-3605, thereby extinguishing their monetary obligations and releasing the mortgaged property from liability.

Basic principles on novation need to be stressed at the outset. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. 4 Novation, unlike other modes of extinction of obligations, is a juridical act with a dual function, namely, it extinguishes an obligation and creates a new one in lieu of the old. It can be objective, subjective, or mixed. Objective novation occurs when there is a change of the object or principal conditions of an existing obligation while subjective novation occurs when there is a change of either the person of the debtor, or of the creditor in an existing obligation. 5 When the change of the object or principal conditions of an obligation occurs at the same time with the change of either in the person of the debtor or creditor a mixed novation occurs. 6

The well settled rule is that novation is never presumed. 7 Novation will not be allowed unless it is clearly shown by express agreement, or by acts of equal import. Thus, to effect an objective novation it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the new one. 8 In the same vein, to effect a subjective novation by a change in the person of the debtor it is necessary that the old debtor be released expressly from the obligation, and the third person or new debtor assumes his place in the relation. 9 There is no novation without such release as the third person who has assumed the debtor's obligation becomes merely a co-debtor or surety. 10

The attendant facts herein do not make a case of novation. There is nothing in the records to show the unequivocal intent of the parties to novate the three loan agreements through the execution of PN No. BDS-3065. The provisions of PN No. BDS-3065 yield no indication of the extinguishment of, or an incompatibility with, the three loan agreements secured by the real estate mortgages over TCT No. 105233. On its face, PN No. BDS-3065 has these words typewritten: "secured by REM" and "9. COLLATERAL. This is wholly/partly secured by: (x) "real estate", 11 which strongly negate petitioners' asseveration that the consolidation of the three loans effected the discharge of the mortgaged real estate property. Otherwise, there would be no sense placing these material provisions. Moreover; the real estate mortgages contained this common provision, to wit:

That for and in consideration of credit accommodations obtained from the MORTGAGEE (Metropolitan Bank and Trust Company), by the MORTGAGOR and/or AJAX MKTG. DEV. CORP./AJAX MARKETING COMPANY/YLANG-YLANG MERCHANDISING COMPANY detailed as follows:

Nature Date Granted Due Date Amount or Line

Loans and/or P 600,000.00

Advances in 150,000.00

current account 250,000.00

and to secure the payment of the same and those that may hereafter be obtained including the renewals or extension thereof.

xxx xxx xxx

the principal of all of which is hereby fixed at (P600,000.00/ P150,000.00/ P250,000.00) . . .as well as those that the MORTGAGEE may have previously extended or may later extend to the MORTGAGOR, including interest and expenses or any other obligation owing to the MORTGAGEE, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the MORTGAGEE, the MORTGAGOR hereby transfer and convey by way of mortgage unto the MORTGAGEE, its successors or assigns, the parcels of land which are described in the list inserted on page three of this document and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the MORTGAGOR declares that he/it is the absolute owner free from all liens and encumbrances. However, if the MORTGAGOR shall pay to the MORTGAGEE, its successors or assigns, the obligation secured by this mortgage when due, together with interest, and shall keep and perform all and singular the covenants and agreements herein contained for the MORTGAGOR to keep and perform, then the mortgage shall be void; otherwise, it shall remain in full force and effect. 12

The foregoing shows that petitioners agreed to apply the real estate property to secure obligations that they may thereafter obtain including their renewals or extensions with the principals fixed at P600,000.00, P150,000.00, and P250,000.00 which when added have an aggregate sum of P1.0 million. PN No. BDS-3605 merely restructured and renewed the three previous loans to expediently make the loans current. There was no change in the object of the prior obligations. The consolidation of the three loans, contrary to petitioners' contention, did not release the mortgaged real estate property from any liability because the mortgage annotations at the back of TCT No. 105233, in fact, all remained uncancelled, thus indicating the continuing subsistence of the real estate mortgages.

Neither can it be validly contended that there was a change, or substitution in the persons of either the creditor (Metrobank) or more specifically the debtors (petitioners) upon the consolidation of the loans in PN No. BDS 3605. The bare fact of petitioners' conversion from a partnership to a corporation, without sufficient evidence, either testimonial or documentary, that they were expressly released from their obligations, did not make petitioner AJAX, with its new corporate personality, a third person or new debtor within the context of a subjective novation. If at all, petitioner AJAX only became a co-debtor or surety. Without express release of the debtor from the obligation, any third party who may thereafter assume the obligation shall be considered merely as co-debtor or surety. Novation arising from a purported change in the person of the debtor must be clear and express because, to repeat, it is never presumed. Clearly then, from the aforediscussed points, neither objective nor subjective novation occurred here.

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

An action to foreclose a mortgage is usually limited to the amount mentioned in the mortgage, but where on the four corners of the mortgage contracts, as in this case, the intent of the contracting parties is manifest that the mortgaged property shall also answer for future loans or advancements then the same is not improper as it is valid and binding between the parties. 13 For merely consolidating and expediently making current the three previous loans, the loan of P1.0 million under PN BDS No. 3605, secured by the real estate property, was correctly included in the foreclosure's bid price. The inclusion of the unsecured loan of P970,000.00 under PN BDS NO. 3583, however, was found to be improper by public respondent which ruling we shall not disturb for Metrobank's failure to appeal therefrom. Nonetheless, the inclusion of PN BDS No. 3583 in the bid price did not invalidate the foreclosure proceedings. As correctly pointed out by the Court of Appeals, the proceeds of the auction sale should be applied to the obligation pertaining to PN BDS No. 3605 only, plus interests, expenses and other charges accruing thereto. It is Metrobank's duty as mortgagee to return the surplus in the selling price to the mortgagors.14

Lastly, petitioners cite as supporting authority C & C Commercial Corp. v. Philippine National Bank 15 where this Court enjoined the foreclosure proceedings for including unsecured obligations. Petitioners' reliance on the C & C Commercial Corp. v. Philippine National Bank case is misplaced. In that case, the foreclosure sale included previously incurred unsecured obligations in favor of PNB which were not in the contemplation of the mortgage contract, whereas in the instant case, the mortgages were one in providing that the mortgaged real estate property shall also secure future advancements or loans, as well as renewals or extensions of the same.

Prescinding from the above discussions, the fourth assignment of error obviously needs no further discussion.

WHEREFORE, the decision appealed from is hereby AFFIRMED in toto.

Narvasa, C.J., Regalado, Puno and Mendoza, JJ., concur.

SUPREME COURT

FIRST DIVISION

ANTONIO GARCIA, JR.,

Petitioner,

-versus- G.R. No. 80201

November 20, 1990

COURT OF APPEALS, LASAL

DEVELOPMENT CORPORATION,

Respondents.

x---------------------------------------------------x

D E C I S I O N

CRUZ, J.:

On April 15, 1977, the Western Minolco Corporation (WMC) obtained

from the Philippine Investments Systems Organization (PISO) two

loans for P2,500,000.00 and P1,000,000.00 for which it issued the

corresponding promissory notes payable on May 30, 1977. On the

same date, Antonio Garcia and Ernest Kahn executed a surety

agreement binding themselves jointly and severally for the payment

of the loan of P2,500,000.00 on due date. chanroblespublishingcompany

Upon failure of WMC to pay after repeated demands, demand was

made on Garcia pursuant to the surety agreement. Garcia also failed

to pay. Hence, on April 5, 1983, Lasal Development Corporation (to which the credit had been assigned earlier by PISO) sued Garcia for

recovery of the debt in the Regional Trial Court of Makati. chanroblespublishingcompany

On May 18, 1983, Garcia moved to dismiss on the grounds that: (a)

the complaint stated no cause of action; (b) the suit would result in

unjust enrichment of the plaintiff because he had not received any

consideration from PISO; (c) the surety agreement violated the

doctrine of the limited liability of corporations; and (d) the principal

obligation had been novated. chanroblespublishingcompany

After considering the arguments and evidence of the parties, the trial

court granted the motion and dismissed the complaint on the ground

that the surety agreement was invalid for absence of consideration.

The plaintiff moved for reconsideration and when this was denied

elevated the matter to the Court of Appeals. In a decision dated June

23, 1987, the respondent court reversed Judge Jesus M. Elbinias and

remanded the records of the case for trial on the merits. Garcia then

came to this Court in this petition for review on certiorari, pleading

the same arguments raised in the trial court. chanroblespublishingcompany

The petitioner’s first ground is that, as found by the trial court, the

surety agreement was invalid because no consideration had been paid

to him by PISO for executing the contract and that the amount of the

entire loan had been received and enjoyed by WMC. He cites the

following articles of the Civil Code in support of his contention that

lack of consideration was a personal defense available to him as

surety: chanroblespublishingcompany

Art. 2047. By guaranty a person, called the guarantor, binds

himself to the creditor to fulfill the obligation of the principal

debtor in case the latter should fail to do so. chanroblespublishingcompany

If a person binds himself solidarily with the principal debtor,

the provisions of Section 4, Chapter 3, Title I of this Book shall

be observed. In such case the contract is called a suretyship.

Art. 1222. A solidary debtor may, in action filed by the

creditor, avail himself of all defenses which are derived from the

nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which

personally belong to the others, he may avail himself thereof

only as regards that part of the debt for which the latter are

responsible. chanroblespublishingcompany

The point is not well taken in view of the nature and purpose of

a surety agreement. chanroblespublishingcompany

Suretyship is a contractual relation resulting from an agreement

whereby one person, the surety, engages to be answerable for

the debt, default or miscarriage of another, known as the

principal. The surety’s obligation is not an original and direct

one for the performance of his own act, but merely accessory or

collateral to the obligation contracted by the principal.

Nevertheless, although the contract of a surety is in essence

secondary only to a valid principal obligation, his liability to the

creditor or promisee of the principal is said to be direct,

primary and absolute;

[1]

in other words, he is directly and

equally bound with the principal. The surety therefore becomes

liable for the debt or duty of another although he possesses no

direct or personal interest over the obligations nor does he

receive any benefit therefrom.

[2]

chanroblespublishingcompany

The peculiar nature of a surety agreement is that it is regarded as

valid despite the absence of any direct consideration received by the

surety either from the principal obligor or from the creditor. A

contract of surety, like any other contract, must generally be

supported by a sufficient consideration. However, the consideration

necessary to support a surety obligation need not pass directly to the

surety; a consideration moving to the principal alone will suffice. chanroblespublishingcompany

It has been held that if the delivery of the original contract is

contemporaneous with the delivery of the surety’s obligation, each

contract becomes completed at the same time, and the consideration

which supports the principal contract likewise supports the

subsidiary one.

[3]

And this is the kind of surety contract to which the

rule of strict construction applies as opposed to a compensated surety

contract undertaken by surety corporations which are organized for

the purpose of conducting an indemnity business at established rates

and compensation unlike an ordinary surety agreement where the surety binds his name through motives of friendship and

accommodation.

[4]

chanroblespublishingcompany

It follows from the above principles that Lasal would not be unjustly

enriched if the petitioner were to be held liable for the obligation

contracted by WMC. The creditor would only be recovering the

amount of its loan plus its increments. The petitioner, for his part,

can still go against WMC for the amount he may have to pay Lasal as

assignee of the PISO credit. chanroblespublishingcompany

Regarding the petitioner’s claim that he is liable only as a corporate

officer of WMC, the surety agreement shows that he signed the same

not in representation of WMC or as its president but in his personal

capacity. He is therefore personally bound. There is no law that

prohibits a corporate officer from binding himself personally to

answer for a corporate debt. While the limited liability doctrine is

intended to protect the stockholder by immunizing him from

personal liability for the corporate debts, he may nevertheless divest

himself of this protection by voluntarily binding himself to the

payment of the corporate debts. The petitioner cannot therefore take

refuge in this doctrine that he has by his own acts effectively waived.

Concerning the issue of novation, we note first the following

provisions of the memorandum of agreement supposedly entered into

by WMC and its creditors which the petitioner argues had the effect of

releasing him from the surety agreement: chanroblespublishingcompany

IV. Release of JSS

The CREDITORS expressly agree to release and hereby release

the Joint and Several Signatories (JSS) of MINOLCO’s officers

from any liability whatsoever on the obligations which they

have personally guaranteed or secured. Any action therefore

against all the aforesaid signatories are waived in view of the

promissory notes to be issued by NDC which are fully and

unconditionally guaranteed by the Philippine Government, in

payment of MINOLCO’s obligations to said CREDITORS. x x x

VI. The CREDITORS who have filed cases in court against

MINOLCO and who are signatories to this agreement agree to

dismiss the case with prejudice, accepting the repayment

scheme set forth in paragraph II as a just and equitable

procedure for collecting their credits. chanroblespublishingcompany

Significantly, however, the agreement (Annex 5) was signed only by

Don M. Ferry as chairman of the board of directors of WMC and does

not carry the signature of any of the creditors.

[5]

Hence, it has no

binding force whatsoever on such creditors. chanroblespublishingcompany

The petitioner cites other developments or transactions between the

parties to the original loans that he contends had the effect of

novating the said contracts and consequently extinguished the surety

agreement. Among these are the extension of the original period of

payment and the compounding of the interest on the principal

obligations, both of which operated to the prejudice of the petitioner.

The petitioner invokes Article 2079 of the Civil Code, which provides:

Art. 2079. An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes the guaranty.

The mere failure on the part of the creditor to demand payment

after the debt has become due does not of itself constitute any

extension of time referred to herein. chanroblespublishingcompany

However, Paragraph 5 of the surety agreement clearly stipulated as

follows: chanroblespublishingcompany

The sureties expressly waive all rights to demand payment and

notice of non-payment and protest, and agree that the securities

of every kind, that now or may hereafter be left with the lender,

its successors, endorsees or assigns, as collateral, for the said

loan, or any evidence of debt or obligations, or upon which a

lien may exist may be withdrawn or surrendered at any time,

and the time of payment thereof extended, without notice to or

consent by the sureties, and the liability on this suretyship shall

be solidary, direct and immediate and not contingent upon any pursuit by the lender, its successors, endorsees or assigns, of

whatever remedies the lender may have against the principal or

the securities or liens it may possess. (Emphasis supplied.) chanroblespublishingcompany

Since in the surety contract, the petitioner not only consented to an

extension in the payment of the obligation but even waived his right

to be notified of such extension, he cannot now claim that he has been

released from his undertaking because of the extension granted to the

principal. chanroblespublishingcompany

As for the compounded interest, we apply by analogy the case of Bank

of the Philippine Islands vs. Gooch and Redfern,

[6]

which was

affirmed in the later case of the Bank of the Philippine Islands vs.

Albaladejo & Cia.

[7]

In the said cases, the respective sureties claimed

that since the creditor changed the rate of interest in the principal

obligation without their knowledge or consent, they were relieved

from liability under their contract. It was held, however, that the

change in the rate of interest was merely a collateral agreement

between the creditor bank and the principal debtor that did not affect

the surety. When the debtor promised to pay the extra rate of interest

on demand of the plaintiff, the liability he assumed was his alone and

was separate and apart from the original contract. His agreement to

pay the additional rate of interest was an additional burden upon him

and him only. That obligation in no way affected the original contract

of the surety, whose liability remained unchanged.

[8]

chanroblespublishingcompany

Thus, despite the compounding of the interest, the liability of the

surety remains only up to the original uncompounded interest, as

stipulated in the promissory note, that is, 17% per annum, with a

penalty charge of 2 1/2% per month until full payment. chanroblespublishingcompany

The petitioner cites other supposed agreements in support of his

theory of novation such as the prepayment of the restructured loans

of WMC before the distribution of dividends to the common

stockholders, the proposed sale on installments of its assets to Negros

Occidental Copperfield Mines, and the preference given to other

creditors of WMC over PISO. But we do not think these are material

as, to be so, the alteration must change the legal effects of the original

contract. The alleged alterations do not have that effect. chanroblespublishingcompanyIt is axiomatic, and only fair, that the creditors of a corporation must

be paid first before dividends may be distributed among the

stockholders. Unsecured creditors are given preference in bankruptcy

or insolvency proceedings because secured creditors can after all go

against the security given by the debtor. As for the installment sale of

WMC’s assets to Negros Occidental Copperfield Mines, which might

make it difficult for the petitioner to recover any amount it may have

to pay on the loan of WMC, this was a risk he took when he signed the

surety agreement. As it did not prohibit the alienation of the

properties of the principal debtor, the sale to Negros cannot be

considered a novation of the original agreement. In fact, the proposed

sale was intended precisely to enable WMC to meet its pending

obligations. chanroblespublishingcompany

The most important argument against the alleged novation is the

failure of the petitioner to establish the validity of the new contract,

an essential requisite for the novation of a previous valid obligation.

Petitioner insists that the various communications made by WMC

with DBP, together with the memorandum of agreement (Annexes 1

to 7), are sufficient to establish the new undertaking made by WMC

with all its creditors, including DBP. We do not think so. chanroblespublishingcompany

It is true as a general rule no form of words or writing is necessary to

give effect to a novation.

[9]

Nevertheless, since the parties involved

here are corporations, it must first be proved that the contracts,

assuming they were made, were executed by the persons possessing

the proper authority to bind their respective principals. Annexes 1-4

are a mere exchange of correspondence between the officers of WMC

and DBP. Although they contain the provisions and proposals that,

according to petitioner, should suffice to establish that the original

contract between WMC and PISO has been materially altered, they

cannot be considered per se sufficient to give rise to a valid new

obligation. WMC was in fact directed by Joseph W. Edralin, the

Assistant Executive Officer of the DBP, to communicate with Atty.

Hilario Oraolino of the Office of the Chief Legal Counsel for the

preparation and execution of the necessary legal documents to cover

the approval and confirmation of the several proposals made. No such

documents, as duly signed by the parties, were ever presented in

court. Annexes 5 to 7[10]

are also incomplete documents and not

binding without the signatures of the supposed contracting parties. The argument of subrogation cannot be considered at this stage as it

is being invoked only now. It is settled that an issue not raised in the

court a quo cannot be raised for the first time on appeal because this

would be offensive to the basic rules of fair play.

[11]

chanroblespublishingcompany

As for the alleged substitution of debtors, nowhere in the record can

we find evidence of this claim. The commitment made by DBP to the

creditors of WMC was that, although they had a first mortgage lien

over substantially all the assets of WMC (which if foreclosed would

leave most of its creditors without recourse), they would nevertheless

defer proceedings against those assets and instead allow their sale to

NDC (with better terms) to enable WMC to meet the obligations.

[12]

In

effect, what DBP did was merely to restructure its credit with WMC

and make additional accommodations in the form of investments on

preferred and common shares of stock of WMC. It was clearly an

effort to assist WMC perform its obligations with its creditors. But not

more than that. chanroblespublishingcompany

Concerning the promissory notes supposedly issued by NDC to the

creditors of WMC and with the full and unconditional guaranty of the

Philippine Government as contained in Annex 5, suffice it to repeat

that such Annex 5 (memorandum of agreement between WMC and

DBP), as well as Annex 6 (addendum to Annex 5, making NOCOMIN,

instead of NDC as the buyer) and Annex 7 (contract of sale between

WMC and NOCOMIN), are all not signed by the contracting parties

and therefore have no evidentiary weight or binding force. chanroblespublishingcompany

We approve the following observations made by the Court of Appeals:

Novation of contract cannot be presumed. 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 (Art. 1292, Civil Code). In every

novation there are four essential requisites. (1) a previous valid

obligation; (2) the agreement of all the parties to the new

contract; (3) the extinguishment of the old contract; and (4)

validity of the new one. Novation requires the creation of new

contractual relations as well as the extinguishment of the old. There must be a consent of all the parties to the substitution,

resulting in the extinction of the old obligation and the creation

of a valid new one (Tiu Siuco vs. Habana, 45 Phil. 707). The

acceptance of the promissory note by the plaintiff is not

novation of the contract. The legal doctrine is that an obligation

to pay a sum of money is not novated in a new instrument by

changing the term of payment and adding other obligations not

incompatible with the old one (Inchausti & Co. vs. Yulo, 34 Phil.

978). It is not proper to consider an obligation novated as in the

case at bar by the mere granting of extension of payment which

did not even alter its essence. To sustain novation necessitates

that the same be so declared in unequivocal terms or that there

is complete and substantial incompatibility between the two

obligations (Sandico vs. Paquing, 42 SCRA 322). An obligation

to pay a sum of money is not novated in a new instrument

wherein the old is ratified by changing only the terms of

payment and adding other obligations not incompatible with

the old one or wherein the old contract is merely supplementing

the new one. (Dungo vs. Lopeña, L-19377, Dec. 29, 1962, 6

SCRA 1007; Magdalena Estates, Inc. vs. Rodriguez, 18 SCRA

967; Rizal Commercial Banking Corp. vs. Militante, AC GR CV

04077, Sept. 20, 1985; Investors Finance Corp. vs. Cruz, AC GR

CV 04710, Nov. 27, 1985). chanroblespublishingcompany

WHEREFORE, the petition is DENIED and the challenged

decision of the respondent court AFFIRMED, with costs against the

petitioner. chanroblespublishingcompany

SO ORDERED.

[G.R. No. 138544. October 3, 2000]

SECURITY BANK AND TRUST COMPANY, Inc., Petitioner, vs. RODOLFO M. CUENCA, Respondent.

D E C I S I O N

PANGANIBAN, J.:

Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent thereto. This is especially true where, as in this case, respondent was no longer the principal officer or major stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.

The Case

This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. Petitioner assails the December 22, 1998 Decision[1 of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:

WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to pay any amount stated in the judgment.

Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby DISMISSED for lack of merit.

In all other respect[s], the decision appealed from is AFFIRMED.[2

Also challenged is the April 14, 1999 CA Resolution,[3 which denied petitioners Motion for Reconsideration.

Modified by the CA was the March 6, 1997 Decision[4 of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:

WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff Security Bank & Trust Company the sum of P39,129,124.73 representing the balance of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as attorneys fees and litigation expenses and to pay the costs.

SO ORDERED.

The Facts

The facts are narrated by the Court of Appeals as follows:[5

The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (Sta. Ines) is a corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by the Department of Environment and Natural Resources (DENR).

On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of its logging operations.

The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November 1981:

JOINT CONDITIONS:

1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.

2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the companys duly authorized signatory/ies;

3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection, a Makati account shall be opened prior to availment on lines;

4. Lines shall expire on November 30, 1981; and

5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower. (Emphasis supplied.)

To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit A) over some of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily bound himself with SIMC as follows:

x x x

Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank for the payment, upon demand and without the benefit of excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) x x x .(Emphasis supplied).

On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit C).

Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca. Said shares were bought by Adolfo Angala who was the highest bidder during the public auction.

Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned additional loans against the credit line.

Appellant SIMC, however, encountered difficulty[6 in making the amortization payments on its loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated appellant SIMCs request and signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines the following loans:

a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, et Vol I, pp. 33 to 34) and

b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca, Expediente, at Vol. II, p. 33 to 34).

It should be pointed out that in restructuring defendant-appellant Sta. Ines obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca, Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.

Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:

PROMISSORY NOTE NO. AMOUNT

RL/74/596/88 P8,800,000.00RL/74/597/88 P3,400,000.00-------------------

TOTAL P12,200,000.00

(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).

To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated 31 October 1989 provides:

1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be released in two (2) tranches of P8,800,000.00 for the first tranche (the First Loan) and P3,400,000.00 for the second tranche (the Second Loan) to be applied in the manner and for the purpose stipulated hereinbelow.

1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding indebtedness to the Lender (the indebtedness) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness. (Underscoring supplied.) (cf. p. 1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p. 33)

From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8, 9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)

Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA, the last of which were made through separate letters dated 5 June 1991 (Exhibit K) and 27 June 1991 (Exhibit L), respectively.

Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x x from which [Respondent] Cuenca appealed.

Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines. Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, who was then the Board chairman and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that credit accommodation. It noted that the 1989 Loan Agreement had been executed without notice to, much less consent from, Cuenca who at the time was no longer a stockholder of the corporation.

The appellate court also noted that the Credit Approval Memorandum had specified that the credit accommodation was for a total amount of P8 million, and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and only for an amount not exceeding P8 million.

It further held that the restructuring of Sta. Ines obligation under the 1989 Loan Agreement was tantamount to a grant of an extension of time to the debtor without the consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished the surety.

The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or modify the principal obligation after the expiry date of the credit accommodation.

Hence, this recourse to this Court.[7

The Issues

In its Memorandum, petitioner submits the following for our consideration:[8

A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety under the Indemnity Agreement for the payment of the principal amount of twelve million two hundred thousand pesos (P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other charges due thereon;

i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuencas liability under the Indemnity Agreement covered only availments on SIMCs credit line to the extent of eight million pesos (P8,000,000.00) and made on or before 30 November 1981;

ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8 million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuencas consent, thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;

iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMCs indebtedness under the P8 million credit accommodation constituted a novation of the principal obligation, thus extinguishing Respondent Cuencas liability under the indemnity agreement;

B. Whether or not Respondent Cuencas liability under the Indemnity Agreement was extinguished by the payments made by SIMC;

C. Whether or not petitioners Motion for Reconsideration was pro-forma;

D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure.

Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated the original credit accommodation and Cuencas liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give consent to any substitution, renewal, extension, increase, amendment, conversion or revival of the said credit accommodation. As preliminary matters, the procedural questions raised by respondent will also be addressed.

The Courts Ruling

The Petition has no merit.

Preliminary Matters: Procedural Questions

Motion for Reconsideration Not Pro Forma

Respondent contends that petitioners Motion for Reconsideration of the CA Decision, in merely rehashing the arguments already passed upon by the appellate court, was pro forma; that as such, it did not toll the period for filing the present Petition for Review.[9 Consequently, the Petition was filed out of time.[10

We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon and rejected by the appellate court. The Court has explained that a movant may raise the same arguments, precisely to convince the court that its ruling was erroneous.[11

Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina Valley Development Corporation v. Flojo,[12 the Court explained that a pro forma motion had no other purpose than to gain time and to delay or impede the proceedings. Hence, where the circumstances of a case do not show an intent on the part of the movant merely to delay the proceedings, our Court has refused to characterize the motion as simply pro forma. It held:

We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and substance of the statutory right of appeal, that doctrine should be applied reasonably, rather than literally. The right to appeal, where it exists, is an important and valuable right. Public policy would be better served by according the appellate court an effective opportunity to review the decision of the trial court on the merits, rather than by aborting the right to appeal by a literal application of the procedural rules relating to pro forma motions for reconsideration.

Service by Registered Mail Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:

SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings and other papers shall be done personally. Except with respect to papers emanating from the court, a resort to other modes must be accompanied by a written explanation why the service or filing was not done personally. A violation of this Rule may be cause to consider the paper as not filed.

Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was served by registered mail.

We do not think so. The Court held in Solar Entertainment v. Ricafort[13 that the aforecited rule was mandatory, and that only when personal service or filing is not practicable may resort to other modes be had, which must then be accompanied by a written explanation as to why personal service or filing was not practicable to begin with.

In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca by registered mail in lieu of personal service due to limitations in time and distance.[14 This explanation sufficiently shows that personal service was not practicable. In any event, we find no adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause.

First Issue: Original Obligation Extinguished by Novation

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as follows:

ART. 1292. In order that an obligation may be extinguished by another which substitute 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 of a contract is never presumed. It has been held that [i]n the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.[15 Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract.[16

Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations incurred. It adds that the terms of the 1989 Contract were not more onerous.[17 Since the original credit accomodation was not extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.

We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the obligation[18 obtained under the 1980 credit accomodation. This is evident from its explicit provision to liquidate the principal and the interest of the earlier indebtedness, as the following shows:

1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrowers present total outstanding Indebtedness to the Lender (the Indebtedness) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.[19 (Italics supplied.)

The testimony of an officer[20 of the bank that the proceeds of the 1989 Loan Agreement were used to pay-off the original indebtedness serves to strengthen this ruling.[21

Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8 million,[22 the 1989 Agreement provided that the loan was P12.2 million. The periods for payment were also different.

Likewise, the later contract contained conditions, positive covenants and negative covenants not found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook from time to time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such additional documents and writings as may be necessary or proper to effectively carry out the provisions and purposes of this Loan Agreement.[23 Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or consolidation.[24

Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides:

ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent.

Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8 million original accommodation; it was not a novation.[25

This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to liquidate, not to renew or extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original P8 million credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that [a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x. In an earlier case,[26 the Court explained the rationale of this provision in this wise:

The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the suretys consent would deprive the surety of his right to pay the creditor and to be immediately

subrogated to the creditors remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period.

Binding Nature of the Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the credit accommodation was only for P8 million, and that it was for a period of one year ending on November 30, 1981. Petitioner objects to the appellate courts reliance on that document, contending that it was not a binding agreement because it was not signed by the parties. It adds that it was merely for its internal use.

We disagree. It was petitioner itself which presented the said document to prove the accommodation. Attached to the Complaint as Annex A was a copy thereof evidencing the accommodation.[27 Moreover, in its Petition before this Court, it alluded to the Credit Approval Memorandum in this wise:

4.1 On 10 November 1980, Sta. Ines Melale Corporation (SIMC) was granted by the Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements for its logging operations. For this purpose, the Bank issued a Credit Approval Memorandum dated 10 November 1980.

Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit accommodation as contained in the very document it presented to the courts. Indeed, it cannot take advantage of that document by agreeing to be bound only by those portions that are favorable to it, while denying those that are disadvantageous.

Second Issue: Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca impliedly gave his consent to any modification of the credit accommodation or otherwise waived his right to be notified of, or to give consent to, the same.[28 Respondents consent or waiver thereof is allegedly found in the Indemnity Agreement, in which he held himself liable for the credit accommodation including [its] substitutions, renewals, extensions, increases, amendments, conversions and revival. It explains that the novation of the original credit accommodation by the 1989 Loan Agreement is merely its renewal, which connotes cessation of an old contract and birth of another one x x x.[29

At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latters obligation. As the Court held in National Bank v. Veraguth,[30 [i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability.

In this case, petitioners assertion - that respondent consented to the alterations in the credit accommodation -- finds no support in the text of the Indemnity Agreement, which is reproduced hereunder:

Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit accommodation in the total amount of eight million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK

hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment , upon demand and without benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendment, conversions and revivals of the aforesaid credit accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the BANK, plus interest and expenses arising from any agreement or agreements that may have heretofore been made, or may hereafter be executed by and between the parties thereto, including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit accommodation(s), all of which are incorporated herein and made part hereof by reference.

While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the original credit accommodation, without informing or getting the consent of respondent who was solidarily liable. Taking the banks submission to the extreme, respondent (or his successors) would be liable for loans even amounting to, say, P100 billion obtained 100 years after the expiration of the credit accommodation, on the ground that he consented to all alterations and extensions thereof.

Indeed, it has been held that a contract of surety cannot extend to more than what is stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging the liability of the surety.[31 Likewise, the Court has ruled that it is a well-settled legal principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who caused the ambiguity.[32 In the absence of an unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain petitioners view that there was such a waiver.

It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this condition:

5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.[33

We reject petitioners submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of any modification in the original loan accommodation.[34 Following the banks reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but would still be valid as to respondent to whom no notice need be given. The latters liability would thus be more burdensome than that of the former. Such untenable theory is contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal.[35

The present controversy must be distinguished from Philamgen v. Mutuc,[36 in which the Court sustained a stipulation whereby the surety consented to be bound not only for the specified period, but to any extension thereafter made, an extension x x x that could be had without his having to be notified.

In that case, the surety agreement contained this unequivocal stipulation: It is hereby further agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the Company under the same terms and conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity agreement.

In the present case, there is no such express stipulation. At most, the alleged basis of respondents waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation without the consent of the surety or notice thereto.

Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was no need for respondent to execute another surety contract to secure the 1989 Loan Agreement.

This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the principal obligation inordinately.[37 In Dino v. CA,[38 the Court held that a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof.

To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety only in regard to loans obtained on or before the aforementioned expiry date and not exceeding the total of P8 million.

Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8 million ceiling.

Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the payment of the original one, which was covered by a continuing surety agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically provided that each suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its revocation. Since the bank had not been notified of such revocation, the surety was held liable even for the subsequent obligations of the principal borrower.

No similar provision is found in the present case. On the contrary, respondents liability was confined to the 1980 credit accommodation, the amount and the expiry date of which were set down in the Credit Approval Memorandum.

Special Nature of the JSS

It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate officer, as an additional security for loans granted to corporations. There are at least two reasons for this. First, in case of default, the creditors recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety. Second, such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation.

Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a position then to ensure the payment of the obligation. Neither did he have any reason to bind himself further to a bigger and more onerous obligation.

Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new loan.

In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit investigation would have revealed that respondent was no longer connected with the corporation at the time. As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been secured by a fairly obtained surety. For its defeat in this litigation, the bank has only itself to blame.

In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject petitioners submission that respondent waived his right to be notified of, or to give consent to, any modification or extension of the 1980 credit accommodation.

In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit accommodation has been paid.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

CHEMPHIL EXPORT AND IMPORT CORPORATION, petitioner, vs.THE HON. COURT OF APPEALS (Former Twelfth Division), PHILIPPINE INVESTMENTS SYSTEMS ORGANIZATION (PISO), BANK OF THE PHILIPPINE ISLANDS (BPI), PHILIPPINE COMMERCIAL INDUSTRIAL BANK (PCIB), RIZALCOMMERCIAL BANKING CORPORATION (RCBC) and LAND BANK OF THE PHILIPPINES (LBP), respondents.

 

PARAS, J.:

This is a special civil action for certiorari with preliminary injunction and restraining order, which seeks to annul and set aside the resolutions * dated August 9, 1990 and February 4, 1991 of the Former Twelfth Division of respondent Court of Appeals in CA-G.R. No. 26511 entitled "Dynetics, Inc. and Antonio M. Garcia, Plaintiffs, v. Philippine Investments Systems Organization, Bank of the Philippine Islands, Rizal Commercial Banking Corporation and Land Bank of the Philippines, Defendants-Appellants, Chemphil Export and Import Corporation, Intervenor-Appellee," ordering the consolidation of the said CA-G.R. CV No. 26511 with CA-G.R. No. 20467.

It appears from the records that on September 25, 1984, Dynetics, Inc. and Antonio M. Garcia filed a civil action for declaratory relief and/or injunction with preliminary injunction against Philippine Investments Systems Organization, Bank of the Philippine Islands, Rizal Commercial Banking Corporation, Philippine Commercial and Industrial Bank (PCIB) and Land Bank of the Philippines (LBP), herein referred to as CONSORTIUM for brevity, with the Regional Trial Court, Branch 145, Makati, Metro Manila, docketed as Civil Case No. 8527 (Rollo, pp. 297-298). Thereafter, CONSORTIUM filed their respective answers with compulsory counterclaims. They likewise prayed for the issuance of a writ of preliminary attachment against Dynetics, Inc. and Antonio M. Garcia (Ibid., p. 298).

On July 12, 1985, the trial court issued an order, denying the prayer of Dynetics, Inc. and Antonio M. Garcia for preliminary injunction. Finding sufficient grounds from the evidence presented, however, the trial court ordered the issuance of a consolidated writ of preliminary attachment as prayed for by private respondents (Ibid.). Thus, on July 19, 1985, the sheriff assigned to the trial court garnished various real and personal properties belonging to Dynetics, Inc. and Antonio M. Garcia, including the shares of stock belonging to the latter in Chemical Industries of the Philippines, Inc.(Chemphil, for brevity) (Ibid. p. 199).

On May 20, 1988, the trial court issued an order, dismissing the complaint of Dynetics, Inc. and Antonio M. Garcia, together with the counterclaim of CONSORTIUM. From this order, CONSORTIUM appealed to respondent Court of Appeals, docketed as CA-G.R. CV No. 20467 entitled "Dynetics, Inc. and Antonio M. Garcia, Plaintiffs-Appellees v. Philippine Investments Systems Organization, et al., Defendants-Appellants." This appealed case was assigned to the Ninth Division of respondent Court of Appeals (Ibid., p. 325).

On January 17, 1989 and during the pendency of the appeal in the aforementioned CA-G.R. CV No. 20467, CONSORTIUM and Antonio M, Garcia entered into a compromise agreement, which was approved by the Court of Appeals in a resolution dated May 22, 1989. By reason thereof, Antonio M.

Garcia was dropped as a party to the appeal, leaving the same to proceed but only insofar as Dynetics, Inc. is concerned (Ibid). Antonio M. Garcia, however, failed to comply with the terms of the said compromise agreement, prompting the CONSORTIUM to move for execution of the compromise judgment, which was granted by the trial court in an order dated August 11, 1989 (Ibid., pp. 39, 300).Consequently, several properties of Antonio M. Garcia were levied upon and sold in execution in favor of the CONSORTIUM, among which properties were the Chemphil shares of Antonio M. Garcia. A certificate of sale was issued in favor of the CONSORTIUM, the sheriff's return indicating that the Chemphil shares which were sold in execution were the same shares garnished on July 19, 1985 (Ibid., P, 39).

On August 30, 1989, CONSORTIUM filed with the trial court a motion to order the corporate secretary of Chemphil to enter in the stock and transfer books of Chemphil the sheriff's certificate of sale dated August 22, 1989 and to issue new certificates of stock in the name of the CONSORTIUM (Ibid.).

On September 4, 1989, the trial court issued an order directing the corporate secretary of Chemphil to "a) record and/or register the Certificate of Sale dated August 22, 1989 issued by the Deputy Sheriff Cristobal E. Jabson . . . ; b) to cancel the certificate of stocks of plaintiff Antonio M. Garcia and all those which may have subsequently been issued in replacement thereof; and c) to issue in lieu of said shares new shares of stock in the name of PCIB, BPI, RCBC, LBP and PISO Bank in such proportion as their respective claims would appear in their suit." (Ibid., pp. 39-40).

On September 22, 1989, Chemphil Export and Import Corporation (CEIC, for brevity) filed with the trial court an urgent ex-parte motion for leave to intervene in Civil Case No. 8527, accompanied by an urgent motion which manifested, among others, that it had a preferred right over the disputed Chemphil shares because these shares were assigned to it by Ferro Chemicals, Inc., which purchased the aforementioned shares from Antonio M, Garcia (Ibid., p. 40). The trial court allowed CEIC to intervene in an order dated September 27, 1989. It likewise issued a cease-and-desist order and directed the corporate secretary of Chemphil not to enforce and implement the order of September 4, 1989 in an order dated September 28, 1989 (Ibid.).

After due hearing and submission of pleadings by both CONSORTIUM and CEIC, the trial court, on December 19, 1989, rendered a decision, the dispositive portion of which reads as follows:

WHEREFORE, premises considered, the Urgent Motion dated September 25, 1989, filed by CEIC is hereby granted. Accordingly, the Order of September 4, 1989, is hereby SET ASIDE, and any and all acts of the Corporate Secretary of CHEMPHIL and/or whoever is acting for and in his behalf, as may have already been done, carried out or implemented pursuant to the Order of September 4, 1989, are hereby nullified.

Perforce, the CONSORTIUM's Motions dated October 3, 1989 and October 11, 1989, are both hereby DENIED, for lack of merit.

The Cease and Desist Order dated September 27, 1939, is hereby AFFIRMED and made PERMANENT.

SO ORDERED. (Ibid., p. 305)

Their motion for reconsideration having been denied, the CONSORTIUM appealed from the foregoing decision to the Court of Appeals, docketed as CA-G.R. CV No. 26511 and assigned to the former Twelfth Division of the said appellate court.

On April 4, 1990, CONSORTIUM filed a motion to consolidate CA-G.R. CV No. 26511 with CA-G.R. CV No. 20467 (Ibid., p. 328). CEIC vehemently opposed this motion to consolidate. Nonetheless, respondent Court of Appeals granted the CONSORTIUM's motion to consolidate in a resolution dated August 9, 1990

(Ibid., p. 36). On August 20, 1990, CEIC filed an urgent motion for reconsideration of the aforementioned resolution, alleging, among others, that there is no common question of law or fact or parties in CA-G.R. CV No. 20467 and CA-G.R. CV No. 26511 (Ibid., pp. 329-330).

On February 4, 1991, the Twelfth Division of respondent Court of Appeals issued a resolution, denying CEIC's motion for reconsideration (Ibid., p.43). Hence, this petition.

The sole issue for resolution in this case is whether or not respondent Court of Appeals gravely abused its discretion when it ordered the consolidation of CA-G.R. CV No. 26511 with CA-G.R. CV No. 20467.

It is undisputed that both CA-G.R. CV No. 26511 and CA-G.R. CV No. 20467 find their origin in Civil Case No. 8527. In CA-G.R. CV No. 20467, the CONSORTIUM banks are questioning the order of the trial court in Civil Case No. 8527, dismissing their counterclaims, which, according to CEIC, resulted in the automatic dissolution of attachment levied on the disputed Chemphil shares (Ibid., p. 342). On the other hand, in CA-G.R. CV No. 26511, the primoridal issue revolves around the ownership over the disputed Chemphil shares. Stated differently, both CEIC and the CONSORTIUM banks are contesting ownership over the disputed Chemphil shares that were (a) attached by the CONSORTIUM in Civil Case No. 8527; (b) sold by the same banks on execution to satisfy the judgment based on compromise rendered against Antonio M. Garcia in CA-G.R. CV No. 20467; and (c) claimed by CEIC in ownership during the execution of the judgment based on compromise rendered in CA-G.R. CV No. 20467, the result of which claim led to CA-G.R CV No. 26511 (Ibid., p. 312). Such being the case, CA-G.R. No. 20467 and CA-G.R. CV No. 25611 are intimately and substantially related cases, thereby making their consolidation inevitable to avoid the possibility of conflicting decisions in both cases (Benguet Corporation, Inc. v. Court of Appeals, 165 SCRA 265 [1988]).

That CEIC is not a party in CA-G.R. CV No. 20467 does not militate against the consolidation of the two cases because under the Revised Internal Rules of the Court of Appeals, which was approved by this Court En Banc on October 20, 1988, consolidation may be allowed when the two cases to be consolidated involve the same parties and/or related questions of fact and /or law [Section 7(a)]. In short, for as long as two or more cases involve related questions of fact and/or law, as in the instant case, their consolidation is in order. Accordingly, the consolidation in question being called for, it cannot be justifiably argued, as CEIC does, that respondent Court of Appeals gravely abused its discretion when it ordered the consolidation of CA-G.R. CV No. 26511 with CA-G.R. CV No. 20467.

PREMISES CONSIDERED, this instant petition is DISMISSED for lack of merit.