OBLIGATIONS AND CONTRACTS -2ND EXAM Kristine Confesor

1291-1304- NOVATION

LICAROS V. GATMAITAN1. W/N the MoA between petitioner and respondent is one of assignment of credit or one of conventional subrogation.1. #1 will determine W/N respondent became liable to petitioner under the promissory note considering that its efficacy is dependent on the Memorandum of Agreement, the note being merely an annex to the said memorandum.[6]

An assignment of credit has been defined as the process of transferring the right of the assignor to the assignee who would then have the right to proceed against the debtor.The assignment may be done gratuitously or onerously, in which case, the assignment has an effect similar to that of a sale.[7] On the other hand, subrogation has been defined as the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights.It may either be legal or conventional.Legal subrogation is that which takes place without agreement but by operation of law because of certain acts.Conventional subrogation is that which takes place by agreement of parties.[8]The general tenor of the foregoing definitions of the terms subrogation and assignment of credit may make it seem that they are one and the same which they are not.A noted expert in civil law notes their distinctions thus:Under our Code, however, conventional subrogation is not identical to assignment of credit.In the former, the debtors consent is necessary; in the latter it is not required.Subrogation extinguishes the obligation and gives rise to a new one; assignment refers to the same right which passes from one person to another.The nullity of an old obligation may be cured by subrogation, such that a new obligation will be perfectly valid; but the nullity of an obligation is not remedied by the assignment of the creditors right to another.[9]

For our purposes, the crucial distinction deals with the necessity of the consent of the debtor in the original transaction.In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may fully produce legal effects.[10]What the law requires in an assignment of credit is not the consent of the debtor but merely notice to him as the assignment takes effect only from the time he has knowledge thereof.[11]A creditor may, therefore, validly assign his credit and its accessories without the debtors consent.[12]On the other hand, conventional subrogation requires an agreement among the three parties concerned the original creditor, the debtor, and the new creditor.It is a new contractual relation based on the mutual agreement among all the necessary parties.Thus, Article 1301 of the Civil Code explicitly states that (C)onventional subrogation of a third person requires the consent of the original parties and of the third person.

The Court of Appeals thus ruled that the MoA never came into effect due to the failure of the parties to get the consent of Anglo-Asean Bank to the agreement and, as such, respondent never became liable for the amount stipulated. We agree MoA is a conventional subrogation which requires the consent of the debtor, Anglo-Asean Bank, for its validity. We note with approval the following pronouncement of the CA: Immediately discernible from above is the common feature of contracts involving conventional subrogation, namely, the approval of the debtor to the subrogation of a third person in place of the creditor.That Gatmaitan and Licaros had intended to treat their agreement as one of conventional subrogation is plainly borne by a stipulation in their Memorandum of Agreement, to wit:

WHEREAS, the parties herein have come to an agreement on the nature, form and extent of their mutual prestations which they now record hereinwith the express conformity of the third partiesconcerned (emphasis supplied), which third party is admittedly Anglo-Asean Bank.

Had the intention been merely to confer on appellant the status of a mere assignee of appellees credit, there is simply no sense for them to have stipulated in their agreement that the same is conditioned on the express conformity thereto of Anglo-Asean Bank.That they did so only accentuates their intention to treat the agreement as one of conventional subrogation.And it is basic in the interpretation of contracts that the intention of the parties must be the one pursued (Rule 130, Section 12, Rules of Court).

W/N AGREEMENT WAS PERFECTED.If the same MoA was actually perfected, then it cannot be denied that Gatmaitan still has a subsisting commitment to pay Licaros on the basis of his promissory note.If not, Licaros suit for collection must necessarily fail. Here, it bears stressing that the subject Memorandum of Agreement expressly requires the consent of Anglo-Asean to the subrogation.Upon whom the task of securing such consent devolves, be it on Licaros or Gatmaitan, is of no significance.What counts most is the hard reality that there has been an abject failure to get Anglo-Aseans nod of approval over Gatmaitans being subrogated in the place of Licaros.Doubtless, the absence of such conformity on the part of Anglo-Asean, which is thereby made a party to the same MoA prevented the agreement from becoming effective, much less from being a source of any cause of action for the signatories thereto.[13]

The fact that Anglo-Asean Bank did not give such consent rendered the agreement inoperative considering that, as previously discussed, the consent of the debtor is needed in the subrogation of a third person to the rights of a creditor.

xxxIt is true that conventional subrogation has the effect of extinguishing the old obligation and giving rise to a new one.However, the extinguishment of the old obligation is the effect of the establishment of a contract for conventional subrogation.It is not a requisite without which a contract for conventional subrogation may not be created.As such, it is not determinative of whether or not a contract of conventional subrogation was constituted.Moreover, it is of no moment that the subject of the Memorandum of Agreement was the collection of the obligation of Anglo-Asean Bank to petitioner Licaros under Contract No. 00193.Precisely, if conventional subrogation had taken place with the consent of Anglo-Asean Bank to effect a change in the person of its creditor, there is necessarily created a new obligation whereby Anglo-Asean Bank must now give payment to its new creditor, herein respondent.

1. GARCIA V. LLAMASNovation cannot be presumed.It must be clearly shown either by the express assent of the parties or by the complete incompatibility between the old and the new agreements. Petitioner herein fails to show either requirement convincingly; hence, the summary judgment holding him liable as a joint andsolidarydebtor stands.

Petitioner seeks to extricate himself from his obligation as joint andsolidarydebtor by insisting thatnovationtook place, either through the substitution of De Jesus as sole debtor or the replacement of the promissory note by the check. Alternatively, the former argues that the original obligation was extinguished when the latter, who was his co-obligor, paid the loan with the check.The fallacy of the second (alternative) argument is all too apparent. The check could not have extinguished the obligation, because it bounced upon presentment. By law,[9]the delivery of a check produces the effect of payment only when it isencashed.We now come to the main issue of whethernovationtook place.Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.[10]Article 1293 of the Civil Code definesnovationas follows:Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor.Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.In general, there are two modes of substituting the person of the debtor: (1)expromisionand (2)delegacion.Inexpromision, the initiative for the change does not come from -- and may even be made without the knowledge of -- the debtor, since it consists of a third persons assumption of the obligation.As such, it logically requires the consent of the third person and the creditor.Indelegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary.[11]Both modes of substitution by the debtor require the consent of the creditor.[12]

Novation may also be extinctive ormodificatory. It is extinctive when an old obligation is terminated by the creation of a new one that takes the place of the former.It is merelymodificatorywhen the old obligation subsists to the extent that it remains compatible with the amendatory agreement.[13]Whether extinctive ormodificatory,novationis made either by changing the object or the principal conditions, referred to as objective or realnovation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personalnovation.[14]Fornovationto take place, the following requisites must concur:1)There must be a previous valid obligation.2)The parties concerned must agree to a new contract.3)The old contract must be extinguished.4)There must be a valid new contract.[15]

Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the old obligation is extinguished.It is implied when the new obligation is incompatible with the old one on every point.[16]The test of incompatibility is whether the two obligations can stand together, each one with its own independent existence.[17]

NONOVATIONTOOK PLACE.The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the acceptance of the check, or that the check would take the place of the note.There is no incompatibility between the promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for the obligation.On the one hand, the note evidences the loan obligation; and on the other, the check answers for it.Verily, the two can stand together.Neither could the payment of interests -- which, in petitioners view, also constitutesnovation[18]-- change the terms and conditions of the obligation.Such payment was already provided for in the promissory note and, like the check, was totally in accord with the terms thereof.

Also unmeritorious is petitioners argument that the obligation wasnovatedby the substitution of debtors.In order to change the person of the debtor, the old one must be expressly released from the obligation, and the third person or new debtor must assume theformersplace in the relation.[1

In the present case, petitioner has not shown that he was expressly released from the obligation, that a third person was substituted in his place, or that the joint andsolidaryobligation was cancelled and substituted by the solitary undertaking of De Jesus.

Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the nature of the obligation beingsolidarydue to the fact that the promissory note expressly declared that the liability of appellants thereunder is joint and [solidary.]Reason: under the law, a creditor may demand payment or performance from one of thesolidarydebtors or some or all of them simultaneously, and payment made by one of them extinguishes the obligation.It therefore follows that in case the creditor fails to collect from one of the solidarydebtors, he may still proceed against the other or others.

Moreover, it must be noted that fornovationto be valid and legal, the law requires that the creditor expressly consent to the substitution of a new debtor.[23]Sincenovationimplies a waiver of the right the creditor had before thenovation, such waiver must be express.[24]It cannot be supposed, without clear proof, that the present respondent has done away with his right to exact fulfillment from either of thesolidarydebtors.[25]More important, De Jesus was not a third person to the obligation.From the beginning, he was a joint andsolidaryobligor of theP400,000 loan; thus, he can be released from it only upon its extinguishment.Respondents acceptance of his check did not change the person of the debtor, because a joint andsolidaryobligor is required to pay the entirety of the obligation.It must be noted that in asolidaryobligation, the creditor is entitled to demand the satisfaction of the whole obligation from any or all of the debtors.[26]It is up to the former to determine against whom to enforce collection.[27]Having made himself jointly and severally liable with De Jesus, petitioner is therefore liable[28]for the entire obligation.[29]

1. CALIFORNIA BUS LINES V. STATE INVESTMENTSIn this case, the attendant facts do not make out a case ofnovation.The restructuring agreement between Delta and CBLI executed onOctober 7, 1981, shows that the parties did not expressly stipulate that the restructuring agreementnovatedthe promissory notes.Absent an unequivocal declaration of extinguishment of the pre-existing obligation, only a showing of complete incompatibility between the old and the new obligation would sustain a finding ofnovationby implication.[59]However, our review of its terms yields no incompatibility between the promissory notes and the restructuring agreement.

It is clear from the foregoing that the restructuring agreement, instead of containing provisions absolutely incompatible with the obligations of the judgment, expressly ratifies such obligations in paragraph 8 and contains provisions for satisfying them.8.Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN Nos. 16 to 26 and 52 to 57 shall continue to govern the relationship between the parties and that the Chattel Mortgage over various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas shall continue to secure the obligation until full payment.

There was no change in the object of the prior obligations.The restructuring agreement merely provided for a new schedule of payments and additional security in paragraph 6 (c) giving Delta authority to take over the management and operations of CBLI in case CBLI fails to pay installments equivalent to 60 days.Where the parties to the new obligation expressly recognize the continuing existence and validity of the old one, there can be nonovation.[61]Moreover, this Court has ruled that an agreement subsequently executed between a seller and a buyer that provided for a different schedule and manner of payment, to restructure the mode of payments by the buyer so that it could settle its outstanding obligation in spite of its delinquency in payment, is not tantamount tonovation.

The addition of other obligations likewise did not extinguish the promissory notes.InYoung v. CA[63], this Court ruled that a change in the incidental elements of, or an addition of such element to, an obligation, unless otherwise expressed by the parties will not result in its extinguishment. In fine, the RESTRUCTURING AGREEMENT CAN STAND TOGETHER WITH THE PROMISSORY NOTES.

1. AQUINTEY V. TIBONGFACTS:On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a complaint for sum of money and damages against spouses Felicidad and Rico Tibong. Agrifina alleged that Felicidad had secured loans from her on several occasions but despite demands, the spouses Tibong failed to pay their outstanding loan, amounting to P773,000.00 exclusive of interests.

Spouses Tibong admitted that they had secured loans from Agrifina. The proceeds of the loan were then re-lent to other borrowers at higher interest rates. they had executed deeds of assignment in favor of Agrifina, and that their debtors had executed promissory notes in Agrifina's favor. this resulted in a novation of the original obligation to Agrifina. by virtue of these documents, Agrifina became the new collector of their debtors; and the obligation to pay the balance of their loans had been extinguished.

Denied the material averments in paragraphs 2 and 2.1 of the complaint. While they did not state the total amount of their loans, they declared that they did not receive anything from Agrifina without any written receipt. In their Pre-Trial Brief, the spouses Tibong maintained that they have never obtained any loan from Agrifina without the benefit of a written document.

RTC ISSUES:Whether or not plaintiff is entitled to her claim of P773,000.00;Whether or not plaintiff is entitled to stipulated interests in the promissory notes; andWhether or not the parties are entitled to their claim for damages.9

The trial court ruled that Felicidad's obligation had not been novated by the deeds of assignment and the promissory notes executed by Felicidad's borrowers. It explained that the documents did not contain any express agreement to novate and extinguish Felicidad's obligation. the deeds and notes were separate contracts which could stand alone from the original indebtedness of Felicidad. Considering, however, Agrifina's admission that she was able to collect from Felicidad's debtors the total amount of P301,000.00, this should be deducted from the latter's accountability. Hence, the balance, exclusive of interests, amounted to P472,000.00.

CA affirmed with modification the decision of the RTC other than Agrifina's bare testimony that she had lost the promissory notes and acknowledgment receipts, she failed to present competent documentary evidence to substantiate her claim that Felicidad had, likewise, borrowed the amounts of P100,000.00, P34,000.00, and P2,000.00. Of the P637,000.00 total account, P585,659.00 was covered by the deeds of assignment and promissory notes; hence, the balance of Felicidad's account amounted to only P51,341.00. sustained the trial court's ruling that Felicidad's obligation to Agrifina had not been novated by the deeds of assignment and promissory notes executed in the latter's favor. Although Agrifina was subrogated as a new creditor in lieu of Felicidad, Felicidad's obligation to Agrifina under the loan transaction remained; there was no intention on their part to novate the original obligation. the legal effects of the deeds of assignment could not be totally disregarded. The assignments of credits were onerous, hence, had the effect of payment, pro tanto, of the outstanding obligation. The fact that Agrifina never repudiated or rescinded such assignments only shows that she had accepted and conformed to it. Consequently, she cannot collect both from Felicidad and her individual debtors without running afoul to the principle of unjust enrichment. Agrifina's primary recourse then is against Felicidad's individual debtors on the basis of the deeds of assignment and promissory notes.

deeds of assignment executed by Felicidad had the effect of payment of her outstanding obligation to Agrifina in the amount of P585,659.00. since an assignment of credit is in the nature of a sale, the assignors remained liable for the warranties as they are responsible for the existence and legality of the credit at the time of the assignment.

ISSUE W/N the obligation of respondents to pay the balance of their loans, including interest, was partially extinguished by the execution of the deeds of assignment in favor of petitioner, relative to the loans of Edna Papat-iw, Helen Cabang, Antoinette Manuel, and Fely Cirilo in the total amount of P371,000.00.

HELD:petitioner had no right to collect from respondents the total amount of P301,000.00, which includes more than P178,980.00 which respondent Felicidad collected from Tibong, Dalisay, Morada, Chomacog, Cabang, Casuga, Gelacio, and Manuel. Petitioner cannot again collect the same amount from respondents; otherwise, she would be enriching herself at their expense. Neither can petitioner collect from respondents more than P103,500.00 which she had already collected from Nimo, Cantas, Rivera, Donguis, Fernandez and Ramirez.

There is no longer a need for the Court to still resolve the issue of whether respondents' obligation to pay the balance of their loan account to petitioner was partially extinguished by the promissory notes executed by Juliet Tibong, Corazon Dalisay, Rita Chomacog, Carmelita Casuga, Merlinda Gelacio and Antoinette Manuel because, as admitted by petitioner, she was able to collect the amounts under the notes from said debtors and applied them to respondents' accounts.

Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the ways by which obligations are extinguished. Obligations may be modified by changing their object or principal creditor or by substituting the person of the debtor.

The burden to prove the defense that an obligation has been extinguished by novation falls on the debtor. The nature of novation was extensively explained in Iloilo Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr.,65 as follows:Novation may either be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconciliable, the subsequent obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, extinguishing an existing obligation and, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation; P(2) an agreement of all parties concerned to a new contract; A(3) the extinguishment of the old obligation; and E(4) the birth of a valid new obligation. N

Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay); in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.

Novation which consists in substituting a new debtor (delegado) in the place of the original one (delegante) may be made even without the knowledge or against the will of the latter but not without the consent of the creditor. Substitution of the person of the debtor may be effected by delegacion, meaning, the debtor offers, and the creditor (delegatario), accepts a third person who consents to the substitution and assumes the obligation. Thus, the consent of those three persons is necessary. In this kind of novation, it is NOT enough to extend the juridical relation to a third person; it is necessary that the old debtor be released from the obligation, and the third person or new debtor take his place in the relation. Without such release, there is no novation; the third person who has assumed the obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and the new debtor are considered obligated jointly.

In Di Franco v. Steinbaum, The consideration need not be pecuniary or even beneficial to the person promising. It is sufficient if it be a loss of an inconvenience, such as the relinquishment of a right or the discharge of a debt, the postponement of a remedy, the discontinuance of a suit, or forbearance to sue.

In City National Bank of Huron, S.D. v. Fuller,71 the theory of novation is that the new debtor contracts with the old debtor that he will pay the debt, and also to the same effect with the creditor, while the latter agrees to accept the new debtor for the old. A novation is not made by showing that the substituted debtor agreed to pay the debt; it must appear that he agreed with the creditor to do so. Moreover, the agreement must be based on the consideration of the creditor's agreement to look to the new debtor instead of the old. It is not essential that acceptance of the terms of the novation and release of the debtor be shown by express agreement. Facts and circumstances surrounding the transaction and the subsequent conduct of the parties may show acceptance as clearly as an express agreement, albeit implied.72

We find in this case that the CA correctly found that respondents' obligation to pay the balance of their account with petitioner was extinguished, pro tanto, by the deeds of assignment of credit executed by respondent Felicidad in favor of petitioner.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. It may be in the form of sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person.

In Vda. de Jayme v. Court of Appeals, dacion en pago is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. It is a special mode of payment where the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor's obligation. As such, the essential elements of a contract of sale namely: consent, object certain, and cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale or novation, to have the effect of totally extinguishing the debt or obligation.76

The requisites for DACION EN PAGO are: P-D-A1. there must be a performance of the prestation in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a credit against the third person; 1. there must be some difference between the prestation due and that which is given in substitution (aliud pro alio); and1. there must be an agreement between the creditor and debtor that the obligation is immediately extinguished by reason of the performance of a prestation different from that due.

All the requisites for a valid dation in payment are present in this case. As gleaned from the deeds, respondent Felicidad assigned to petitioner her credits "to make good" the balance of her obligation. Felicidad testified that she executed the deeds to enable her to make partial payments of her account, since she could not comply with petitioner's frenetic demands to pay the account in cash. Petitioner and respondent Felicidad agreed to relieve the latter of her obligation to pay the balance of her account, and for petitioner to collect the same from respondent's debtors.

Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to affix their conformity to the deeds. In an assignment of credit, however, the consent of the debtor is not essential for its perfection; the knowledge thereof or lack of it affecting only the efficaciousness or inefficaciousness of any payment that might have been made. The assignment binds the debtor upon acquiring knowledge of the assignment but he is entitled, even then, to raise against the assignee the same defenses he could set up against the assignor necessary in order that assignment may fully produce legal effects. Thus, the duty to pay does not depend on the consent of the debtor. The purpose of the notice is only to inform that debtor from the date of the assignment. Payment should be made to the assignee and not to the original creditor.

The transfer of rights takes place upon perfection of the contract, and ownership of the right, including all appurtenant accessory rights, is acquired by the assignee who steps into the shoes of the original creditor as subrogee of the latter80 from that amount, the ownership of the right is acquired by the assignee. The law does not require any formal notice to bind the debtor to the assignee, all that the law requires is knowledge of the assignment. Even if the debtor had not been notified, but came to know of the assignment by whatever means, the debtor is bound by it. If the document of assignment is public, it is evidence even against a third person of the facts which gave rise to its execution and of the date of the latter. The transfer of the credit must therefore be held valid and effective from the moment it is made to appear in such instrument, and third persons must recognize it as such, in view of the authenticity of the document, which precludes all suspicion of fraud with respect to the date of the transfer or assignment of the credit.81

As gleaned from the deeds executed by respondent Felicidad relative to the accounts of her other debtors, petitioner was authorized to collect the amounts of P6,000.00 from Cabang, and P63,600.00 from Cirilo. They obliged themselves to pay petitioner. Respondent Felicidad, likewise, unequivocably declared that Cabang and Cirilo no longer had any obligation to her.

Equally significant is the fact that, since 1990, when respondent Felicidad executed the deeds, petitioner no longer attempted to collect from respondents the balance of their accounts. It was only in 1999, or after nine (9) years had elapsed that petitioner attempted to collect from respondents. In the meantime, petitioner had collected from respondents' debtors the amount of P301,000.00.

While it is true that respondent Felicidad likewise authorized petitioner in the deeds to collect the debtors' accounts, and for the latter to pay the same directly, it cannot thereby be considered that respondent merely authorized petitioner to collect the accounts of respondents' debtors and for her to apply her collections in partial payments of their accounts. It bears stressing that petitioner, as assignee, acquired all the rights and remedies passed by Felicidad, as assignee, at the time of the assignment. Such rights and remedies include the right to collect her debtors' obligations to her.

Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that case, the Court ruled that the mere fact that novation does not follow as a matter of course when the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation when there is no agreement that the first debtor would be released from responsibility. Thus, the creditor can still enforce the obligation against the original debtor.

In the present case, petitioner and respondent Felicidad agreed that the amounts due from respondents' debtors were intended to "make good in part" the account of respondents. Case law is that, an assignment will, ordinarily, be interpreted or construed in accordance with the rules of construction governing contracts generally, the primary object being always to ascertain and carry out the intention of the parties. This intention is to be derived from a consideration of the whole instrument, all parts of which should be given effect, and is to be sought in the words and language employed.83

Considering all the foregoing, we find that respondents still have a balance on their account to petitioner in the principal amount of P33,841.00, the difference between their loan of P773,000.00 less P585,659.00, the payment of respondents' other debtors amounting to P103,500.00, and the P50,000.00 payment made by respondents.

1. RICARZE V. CA

Petitioner argues that the substitution of Caltex by PCIB as private complainant at this late stage of the trial is prejudicial to his defense. He argues that the substitution is tantamount to a substantial amendment of the Informations which is prohibited under Section 14, Rule 110 of the Rules of Court.In the case at bar, the substitution of Caltex by PCIB as private complaint is NOT a substantial amendment. The substitution did not alter the basis of the charge in both Informations, nor did it result in any prejudice to petitioner. The documentary evidence in the form of the forged checks remained the same, and all such evidence was available to petitioner well before the trial. Thus, he cannot claim any surprise by virtue of the substitution.Petitioner next argues that in no way was PCIB subrogated to the rights of Caltex, considering that he has no knowledge of the subrogation much less gave his consent to it. Alternatively, he posits that if subrogation was proper, then the charges against him should be dismissed, the two Informations being defective and void due to false allegations.Petitioner was charged of the crime of estafa complex with falsification document. In estafa one of the essential elements to prejudice of another asmandated by article 315 of the Revise Penal Code.The element of to the prejudice of another being as essential element of the felony should be clearly indicated and charged in the information with TRUTHANDLEGAL PRECISION.This is not so in the case of petitioner, the twin information filed against him alleged the felony committed to the damage and prejudice of Caltex. This allegation is UNTRUE and FALSEfor there is no question that as early asMarch 24, 1998or THREE (3) LONG MONTHS before the twin information were filed onJune 29, 1998, the prejudice party is already PCIBank since the latter Re-Credit the value of the checks to Caltex as early asMarch 24, 1998. In effect, assuming there is valid subrogation as the subject decision concluded, the subrogation took place an occurred onMarch 24, 1998THREE (3) MONTHS before the twin information were filed.The phrase to the prejudice to another as element of the felony is limited to the person DEFRAUDED in the very act of embezzlement. It should not be expanded to other persons which the loss may ultimately fall as a result of a contract which contract herein petitioner is total stranger.In this case, there is no question that the very act of commission of the offense ofSeptember 24, 1997andOctober 15, 1997respectively, Caltex was the one defrauded by the act of the felony.In the light of these facts, petitioner submits that the twin information are DEFECTIVEANDVOID due to the FALSE ALLEGATIONS that the offense was committed to the prejudice of Caltex when it truth and in fact the one prejudiced here was PCIBank.The twin information being DEFECTIVEANDVOID, the same should be dismissed without prejudice to the filing of another information which should state the offense was committed to the prejudice of PCIBank if it still legally possible without prejudicing substantial and statutory rights of the petitioner.[27]Petitioners argument on subrogation is misplaced. The Court agrees with respondent PCIBs comment that petitioner failed to make a distinction between legal and conventional subrogation.

Subrogation is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights.[28]It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts.[29]Instances of legal subrogation are those provided in Article 1302[30]of the Civil Code. Conventional subrogation, on the other hand, is that which takes place by agreement of the parties.[31]Thus, petitioners acquiescence isnotnecessary for subrogation to take place because the instant case is one of legal subrogation that occurs by operation of law, and without need of the debtors knowledge.Contrary to petitioners asseverations, the case ofPeople v. Yu Chai Ho[32]relied upon by the appellate courtisin point. The Court declaredWe do not however, think that the fiscal erred in alleging that the commission of the crime resulted to the prejudice of Wm. H. Anderson & Co. It is true that originally the International Banking Corporation was the prejudiced party, but Wm. H. Anderson & Co. compensated it for its loss and thus became subrogated to all its rights against the defendant (article 1839, Civil Code). Wm. H. Anderson & Co., therefore, stood exactly in the shoes of the International Banking Corporation in relation to the defendant's acts, and the commission of the crime resulted to the prejudice of the firm previously to the filing of the information in the case. The loss suffered by the firm was the ultimate result of the defendant's unlawful acts, and we see no valid reason why this fact should not be stated in the information; it stands to reason that, in the crime ofestafa,the damage resulting therefrom need not necessarily occur simultaneously with the acts constituting the other essential elements of the crime.Thus, being subrogated to the right of Caltex, PCIB, through counsel, has the right to intervene in the proceedings, and under substantive laws is entitled to restitution of its properties or funds, reparation, or indemnification.Petitioners gripe that the charges against him should be dismissed because the allegations in both Informations failed to name PCIB as true offended party does not hold water.

1. LEDONIO V. CAPITOL DEVELOPMENTFACTS:Herein respondent Capitol Development Corporation filed a complaint for the collection of a sum of money against herein petitioner EdgarLedonio.CDC alleged that Ledonio obtained from a Ms.Picachetwo loans, with the aggregate principal amount ofP60,000.00, and covered by promissory notes duly signed by petitioner. In the first PN, petitioner promised to pay to the order of Ms.Picachethe principal amount ofP30,000.00, in monthly installments ofP3,000.00, with the first monthly installment due on9 January 1989. In the second promissory note, petitioner again promised to pay to the order of Ms.Picachethe principal amount ofP30,000.00, with 36% interest per annum, on1 December 1988.

On1 April 1989, Ms.Picacheexecuted an Assignment of Credit[7]in favor of CDC, which reads xxx: The foregoing document was signed by two witnesses and duly acknowledged by Ms.Picachebefore a Notary Public also on1 April 1989.Since petitioner did not pay any of the loans covered by the promissory notes when they became due, respondent -- sent petitioner several demand letters.[8]Despite receiving the said demand letters, petitioner still failed and refused to settle his indebtedness, thus, prompting respondent to file the Complaint with the RTC.

Ledonio sought the dismissal of the Complaint averring that respondent had no cause of action against him denied obtaining any loan from Ms.Picacheand questioned the genuineness and due execution of the promissory notes, for they were the result of intimidation and fraud; hence, void. there had been no transaction orprivityof contract between him, on one hand, and Ms.Picache and respondent, on the other. The assignment by Ms.Picacheof the promissory notes to respondent was a mere ploy and simulation to effect the unjust enforcement of the invalid promissory notes and to insulate Ms.Picachefrom any direct counterclaims, and he never consented or agreed to the said assignment.ISSUE:W/N there was an assignment of credit and that there was nonovation/subrogation in the case at bar.

HELD: Petitioner asserts the position that consent of the debtor to the assignment of credit is a basic/essential element in order for the assignee to have a cause of action against the debtor.Without the debtors consent, the recourse of the assignee in case of non-payment of the assignedcredit,is to recover from the assignor. even if there was indeed an assignment of credit, as alleged by the respondent, then there had been anovationof the original loan contracts when the respondent was subrogated in the rights of Ms.Picache, the original creditor.ART. 1300.Subrogation of a third person in the rights of the creditor is either legal or conventional.The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect.ART. 1301.Conventional subrogation of a third person requires the consent of the original parties and the third person.

According to petitioner, the assignment of credit constitutes conventional subrogation which requires the consent of the original parties to the loan contract, namely, Ms.Picache(the creditor) and petitioner (the debtor); and the third person, the respondent (the assignee).Since petitioner never gave his consent to the assignment of credit, then the subrogation of respondent in the rights of Ms.Picacheas creditor by virtue of said assignment is without force and effect.The transaction between Ms.Picacheand respondent was an assignment of credit, NOT conventional subrogation, and does not require petitioners consent as debtor for its validity and enforceability.An assignment of credit has been defined as an agreement by virtue of which the owner of a credit/ (known as the assignor)/by a legal cause - such as sale,dationin payment or exchange or donation/ - and without need of the debtor's consent/, transfers that credit and its accessory rights to another (known as the assignee), /who acquires the power to enforce it/to the same extent as the assignor could have enforced it against the debtor.[20]On the other hand, subrogation, by definition, is the /transfer of all the rights of the creditor to a third person/ who substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which takes place without agreement but by operation of law because of certain acts. Conventional subrogation is that which takes place by agreement of parties.[21]Although it may be said that the effect of the assignment of credit is to subrogate the assignee in the rights of the original creditor, this Court still cannot definitively rule that assignment of credit and conventional subrogation are one and the same.

CONVENTIONAL SUBROGATIONASSIGNMENT OF CREDIT

the debtors consent is necessary; requires an agreement among the parties concerned the original creditor, the debtor, and the new creditor.NOT required; mere notice to debtor; takes effect only from the time debtor has knowledge thereof.

extinguishes an obligation and gives rise to a new oneassignment refers to the same right which passes from one person to another

nullity of an old obligation may be cured by subrogation such that the new obligation will be perfectly valid;but the nullity of an obligation is not remedied by the assignment of the creditors right to another.

Article 1300 of the Civil Code provides that conventional subrogation must be clearly established in order that it may take effect.Since it is petitioner who claims that there is conventional subrogation in this case, the burden of proof rests upon him to establish the same[25]by a preponderance of evidence.[26]InLicarosv.Gatmaitan,[27]this Court ruled that there was conventional subrogation, not just an assignment of credit; thus, consent of the debtor is required for theeffectivityof the subrogation.This Court arrived at such a conclusion in said case based on its following findingsWe agree with the finding of the Court of Appeals that the Memorandum of Agreement datedJuly 29, 1988was in the nature of a conventional subrogation which requires the consent of the debtor, Anglo-AseanBank, for its validity. We note with approval the following pronouncement of the Court of Appeals:"Immediately discernible from above is the common feature of contracts involving conventional subrogation, namely, the approval of the debtor to the subrogation of a third person in place of the creditor. ThatGatmaitanandLicaroshad intended to treat their agreement as one of conventional subrogation is plainly borne by a stipulation in their Memorandum of Agreement, to wit:"WHEREAS, the parties herein have come to an agreement on the nature, form and extent of their mutualprestationswhich they now record hereinwith the express conformity of the third parties concerned" (emphasis supplied),whichthird party is admittedly Anglo-AseanBank.

Had the intention been merely to confer on appellant the status of a mere "assignee" ofappellee'scredit, there is simply no sense for them to have stipulated in their agreement that the same is conditioned on the "express conformity" thereto of Anglo-AseanBank. That they did so only accentuates their intention to treat the agreement as one of conventional subrogation. And it is basic in the interpretation of contracts that the intention of the parties must be the one pursued (Rule 130, Section 12, Rules of Court).xxxxAside for the 'whereas clause" cited by the appellate court in its decision, we likewise note that on the signature page, right under the place reserved for the signatures of petitioner and respondent, there is, typewritten, the words "WITH OUR CONFORME." Under this notation, the words "ANGLO-ASEAN BANK AND TRUST" were written by hand. To our mind, this provision which contemplates the signed conformity of Anglo-AseanBank, taken together with the aforementionedpreambulatoryclause leads to the conclusion that both parties intended that Anglo-AseanBank should signify its agreement and conformity to the contractual arrangement between petitioner and respondent. The fact that Anglo-AseanBank did not give such consent rendered the agreement inoperative considering that, as previously discussed, the consent of the debtor is needed in the subrogation of a third person to the rights of a creditor.

None of the foregoing circumstances are attendant in the present case.The Assignment of Credit, executed by Ms.Picachein favor of respondent, was a simple deed of assignment.There is nothing in the said Assignment of Credit which imparts to this Court, whether literally or deductively, that a conventional subrogation was intended by the parties thereto.The terms of the Assignment of Credit only convey the straightforward intention of Ms.Picacheto sell, assign, transfer, and convey to respondent the debt due her from petitioner, as evidenced by the two promissory notes of the latter, dated 9 November 1988 and 10 November 1988, for the consideration ofP60,000.00.By virtue of the same document, Ms.Picachegave respondent full power to sue for, collect and discharge, or sell and assign the very same debt.The Assignment of Credit was signed solely by Ms.Picache, witnessed by two other persons.No reference was made to securing theconformeof petitioner to the transaction, nor any space provided for his signature on the said document.Perhaps more in point to the case at bar isRodriguez v. Court of Appeals,[28]in which this Court found thatThe basis of the complaint is not a deed of subrogation but an assignment of credit whereby the private respondent became the owner, not thesubrogeeof the credit since the assignment was supported by HK $1.00 and other valuable considerations.xxxxThe petitioner further contends that the consent of the debtor is essential to the subrogation. Since there was no consent on his part, then he allegedly is not bound.Again, we find for the respondent. The questioned deed of assignment is neither one of subrogation nor a power of attorney as the petitioner alleges. The deed of assignment clearly states that the private respondent became an assignee and, therefore, he became the only party entitled to collect the indebtedness. As a result of the Deed of Assignment, the plaintiff acquired all rights of the assignor including the right to sue in his own name as the legal assignee. Moreover, in assignment, the debtor's consent is not essential for the validity of the assignment (Art. 1624 in relation to Art. 1475, Civil Code), his knowledge thereof affecting only the validity of the payment he might make (Article 1626, Civil Code).

Note: the assignment was made in a notarized document; notified through demand letters sent on registered mail, signed by representatives.

1. VALENZUELA V. KALAYAAN

FACTS: Petitioners claim that there was a valid novation in the present case. They aver that the CA failed to see that the original contract between the petitioners and Kalayaan was altered, changed, modified and restructured, as a consequence of the change in the person of the principal debtor and the monthly amortization to be paid for the subject property. When they agreed to a monthly amortization of P10,000.00 per month, the original contract was changed; and Kalayaan recognized Juliets capacity to pay, as well as her designation as the new debtor. The original contract was novated and the principal obligation to pay for the remaining half of the subject property was transferred from petitioners to Juliet. When Kalayaan accepted the payments made by the new debtor, Juliet, it waived its right to rescind the previous contract. Thus, the action for rescission filed by Kalayaan against them, was unfounded, since the contract sought to be rescinded was no longer in existence.

ISSUE: w/n CA failed to apply to the instant case the pertinent provisions of the new civil code regarding the principle of novation as a mode of extinguishing an obligation. HELD:In the present case, the nature and characteristics of a contract to sell is determinative of the propriety of the remedy of rescission and the award of attorneys fees. Under a contract to sell, the seller retains title to the thing to be sold until the purchaser fully pays the agreed purchase price.The full payment is a positive suspensive condition, the non-fulfillment of which is not a breach of contract, but merely an event that prevents the seller from conveying title to the purchaser. The non-payment of the purchase price renders the contract to sell ineffective and without force and effect.[23] Unlike a contract of sale, where the title to the property passes to the vendee upon the delivery of the thing sold, in a contract to sell, ownership is, by agreement, reserved to the vendor and is not to pass to the vendee until full payment of the purchase price. Otherwise stated, in a contract of sale, the vendor loses ownership over the property and cannot recover it until and unless the contract is resolved or rescinded; whereas, in a contract to sell, title is retained by the vendor until full payment of the purchase price. In the latter contract, payment of the price is a positive suspensive condition, failure ofwhich is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective.[24] Since the obligation of respondent did not arise because of the failure of petitioners to fully pay the purchase price, Article 1191[25] of the Civil Code would have no application. Article 1191 of the New Civil Code will not apply because it presupposes an obligation already extant. There can be no rescission of an obligation that is still non-existing, the suspensive condition not having happened. The parties contract to sell explicitly provides that Kalayaan shall execute and deliver the corresponding deed of absolute sale over the subject property to the petitioners upon full payment of the total purchase price. Since petitioners failed to fully pay the purchase price for the entire property, Kalayaans obligation to convey title to the property did not arise. Thus, Kalayaan may validly cancel the contract to sell its land to petitioner, not because it had the power to rescind the contract, but because their obligation thereunder did not arise. Inasmuch as the suspensive condition did not take place, Kalayaan cannot be compelled to transfer ownership of the property to petitioners.

As regards petitioners claim of novation, we do not give credence to petitioners assertion that the contract to sell was novated when Juliet was allegedly designated as the new debtor and substituted the petitioners in paying the balance of the purchase price. 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.[29] Article 1292 of the Civil Code provides that [i]n order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. Novation is never presumed. Parties to a contract must expressly agree that they are abrogating their old contract in favor of a new one. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.[30] The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first.[31] Thus, in order that a novation can take place, the concurrence of the following requisites are indispensable: 1) There must be a previous valid obligation; P 2) There must be an agreement of the parties concerned to a new contract; A3) There must be the extinguishment of the old contract; and E4) There must be the validity of the new contract. N In the instant case, none of the requisites are present. There is only one existing and binding contract between the parties, because Kalayaan never agreed to the creation of a new contract between them or Juliet. True, petitioners may have offered that they be substituted by Juliet as the new debtor to pay for the remaining obligation. Nonetheless, Kalayaan did not acquiesce to the proposal. Its acceptance of several payments after it demanded that petitioners pay their outstanding obligation did not modify their original contract. Petitioners, admittedly, have been in default; and Kalayaans acceptance of the late payments is, at best, an act of tolerance on the part of Kalayaan that could not have modified the contract.As to the partial payments made by petitioners from September 16, 1994 to December 20, 1997, amounting to P788,000.00, this Court resolves that the said amount be returned to the petitioners, there being no provision regarding forfeiture of payments made in the Contract to Sell. To rule otherwise will be unjust enrichment on the part of Kalayaan at the expense of the petitioners. Also, the three percent (3%) penalty interest appearing in the contract is patently iniquitous and unconscionable as to warrant the exercise by this Court of its judicial discretion. Article 2227 of the Civil Code provides that [l]iquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. A perusal of the Contract to Sell reveals that the three percent (3%) penalty interest on unpaid monthly installments (per condition No. 3) would translate to a yearly penalty interest of thirty-six percent (36%). Although this Court on various occasions has eliminated altogether the three percent (3%) penalty interest for being unconscionable,[32] We are not inclined to do the same in the present case. A reduction is more consistent with fairness and equity.We should not lose sight of the fact that Kalayaan remains an unpaid seller and that it has suffered, one way or another, from petitioners non-performance of its contractual obligations. In view of such glaring reality, We invoke the authority granted to us by Article 1229[33] of the Civil Code, and as equity dictates, the penalty interest is accordingly reimposed at a reduced rate of one percent (1%) interest per month, or twelve percent (12%) per annum,[34] to be deducted from the partial payments made by the petitioners.

1. TOMIMBANG V. TOMIMBANGISSUES:1. Whether petitioner's obligation is due and demandable; 1. Whether respondent is entitled to attorney's fees; and 1. Whether interest should be imposed on petitioner's indebtedness and, if in the affirmative, at what rate.Petitioner contends that the loan is not yet due and demandable because the suspensive condition the completion of the renovation of the apartment units - has not yet been fulfilled. Respondent admits that initially, they agreed that payment of the loan shall be made upon completion of the renovations. However, respondent claims that during their meeting with some family members in the house of their brother Genaro sometime in the second quarter of 1997, he and petitioner entered into a new agreement whereby petitioner was to start making monthly payments on her loan, which she did from June to October of 1997.In respondent's view, there was a novation of the original agreement, and under the terms of their new agreement, petitioner's obligation was already due and demandable.Respondent also maintains that when petitioner disappeared from the family compound without leaving information as to where she could be found, making it impossible to continue the renovations, petitioner thereby prevented the fulfillment of said condition.He claims that Article 1186 of the Civil Code, which provides that the condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment, is applicable to this case.In his Comment to the present petition, respondent raised for the first time, the issue that the loan contract between him and petitioner is actually one with a period, not one with a suspensive condition.In his view, when petitioner began to make partial payments on the loan, the latter waived the benefit of the term, making the loan immediately demandable.HELD: NO MERITIt is undisputed that herein parties entered into a valid loan contract.The only question is, has petitioner's obligation become due and demandable? YES.The evidence on record clearly shows that after renovation of 7-8 apartment units had been completed, petitioner and respondent agreed that the former shall already start making monthly payments on the loan even if renovation on the last unit (Unit A) was still pending.Genaro Tomimbang, the younger brother of herein parties, testified that a meeting was held among petitioner, respondent, himself and their eldest sister Maricion, sometime during the first or second quarter of 1997, wherein respondent demanded payment of the loan, and petitioner agreed to pay.Indeed, petitioner began to make monthly payments from June to October of 1997 totallingP93,500.00.[8]In fact, petitioner even admitted in her Answer with Counterclaim that she had started to make payments to plaintiff [herein respondent] as the same was in accord with her commitment to pay whenever she was able;xxx Evidently, by virtue of the subsequent agreement, the parties mutually dispensed with the condition that petitioner shall only begin paying after the completion of all renovations.There was, in effect, a modificatory or partial novation, of petitioner's obligation. Article 1291 of the Civil Code provides, thus:Art. 1291.Obligations may be modified by:(1)Changingtheir object orprincipal conditions;(2)Substituting the person of the debtor;(3)Subrogating a third person in the rights of the creditor. (Emphasis supplied)InIloilo Traders Finance, Inc. v. Heirs of Sps. Soriano,[10]the Court expounded on the nature of novation, to wit:Novation may either be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties.Extinctive novation is never presumed; there must be an express intention to novate;xxx .An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead.This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a new valid obligation.Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g.,a change in interest rates or an extension of time to pay); in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.[11]InOng v. Bogalbal,[12]the Court also stated, thus:xxxthe effect of novation may be partial or total.There is partial novation when there is only a modification or change in some principal conditions of the obligation.It is total, when the obligation is completely extinguished.Also, the term principal conditions in Article 1291 should be construed to include a change in the period to comply with the obligation.Such a change in the period would only be a partial novation since the period merely affects the performance, not the creation of the obligation.[13]As can be gleaned from the foregoing, the aforementioned four essential elementsand the requirement that there be total incompatibility between the old and new obligation, apply only to extinctive novation.In partial novation, only the terms and conditions of the obligation are altered, thus, the main obligation is not changed and it remains in force.Petitioner stated in her Answer with Counterclaim[14]that she agreed and complied with respondent's demand for her to begin paying her loan, since she believed this was in accordance with her commitment to pay whenever she was able.Her partial performance of her obligation is unmistakable proof that indeed the original agreement between her and respondent had been novated by the deletion of the condition that payments shall be made only after completion of renovations.Hence, by her very own admission and partial performance of her obligation, there can be no other conclusion but that under the novated agreement, petitioner's obligation is already due and demandable.1. MILLA V. PEOPLE Facts: Respondent Carlo Lopez (Lopez) was the Financial Officer of private respondent, Market Pursuits, Inc. (MPI). In March 2003, Milla represented himself as a real estate developer from Ines Anderson Development Corporation, which was engaged in selling business properties in Makati, and offered to sell MPI a property therein located. For this purpose, heshowed Lopez a photocopy of (TCT) registered in the name of spouses Farley and Jocelyn Handog (Sps. Handog), as well as a SPA purportedly executed by the spouses in favor of Milla.[3] Lopez verified with the Registry of Deeds of Makati and confirmed that the property was indeed registered under the names of Sps. Handog. Since Lopez was convinced by Millas authority, MPI purchased the property for P2 million, issuing Security Bank and Trust Co. (SBTC) Check in the amount of P1.6 million. After receiving the check, Milla gave Lopez (1)a notarized Deed of Absolute Sale executed by Sps. Handog in favor of MPI and (2)an original Owners Duplicate Copy of TCTMilla then gave Regino Acosta (Acosta), Lopezs partner, a copy of the new TCT No., registered in the name of MPI. Thereafter, it tendered in favor of Milla SBTC Check in the amount ofP400,000 as payment for the balance.[5] Milla turned over TCT No. 218777 to Acosta, but did not furnish the latter with the receipts for the transfer taxes and other costs incurred in the transfer of the property. This failure to turn over the receipts prompted Lopez to check with the Register of Deeds, where he discovered that (1) the Certificate of Title given to them by Milla could not be found therein; (2) there was no transfer of the property from Sps. Handog to MPI; and (3) TCT No. 218777 was registered in the name of a certain Matilde M. Tolentino.[6]Consequently, Lopez demanded the return of the amount of P2 million from Milla, who then issued Equitable PCI Check Nos. in the amount of P1 million each. However, these checks were dishonored for having been drawn against insufficient funds. When Milla ignored the demand letter sent by Lopez, the latter, by virtue of the authority vested in him by the MPI Board of Directors, filed a Complaint against the former on 4 August 2003two Informations for Estafa Thru Falsification of Public Documents were filed against Milla for having committed estafa through the falsification of the notarized Deed of Absolute Sale and TCT No.

ISSUE: W/N the principle of novation can exculpate Milla from criminal liability? No. Held: The principle of novation cannot be applied to the case at bar.Milla contends that his issuance of Equitable PCI Check Nos. 188954 and 188955 before the institution of the criminal complaint against him novated his obligation to MPI, thereby enabling him to avoid any incipient criminal liability and converting his obligation into a purely civil one. This argument does not persuade.The principles of novation cannot apply to the present case as to extinguish his criminal liability. Milla cites People v. Nery[23] to support his contention that his issuance of the Equitable PCI checks prior to the filing of the criminal complaint averted his incipient criminal liability. However, it must be clarified that mere payment of an obligation before the institution of a criminal complaint does not, on its own, constitute novation that may prevent criminal liability. This Courts ruling in Nery in fact warned: It may be observed in this regard that novation is not one of the means recognized by the Penal Code whereby criminal liability can be extinguished; hence, the role of novation may only be to either prevent the rise of criminal liability or to cast doubt on the true nature of the original petition, whether or not it was such that its breach would not give rise to penal responsibility, as when money loaned is made to appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581; Villareal, 27 Phil. 481). Even in Civil Law the acceptance of partial payments, without further change in the original relation between the complainant and the accused, can not produce novation. For the latter to exist, there must be proof of intent to extinguish the original relationship, and such intent can not be inferred from the mere acceptance of payments on account of what is totally due.Much less can it be said that the acceptance of partial satisfaction can effect the nullification of a criminal liability that is fully matured, and already in the process of enforcement. Thus, this Court has ruled that the offended partys acceptance of a promissory note for all or part of the amount misapplied does not obliterate the criminal offense Further, in Quinto v. People,[25] this Court exhaustively explained the concept of novation in relation to incipient criminal liability,viz: Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. The extinguishment of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly. The term expressly means that the contracting parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility between the two contracts. While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations. There are two ways which could indicate, in fine, the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. The first is when novation has been explicitly stated and declared in unequivocal terms. The second is when the old and the new obligations are incompatible on every point. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation. The changes alluded to by petitioner consists only in the manner of payment. There was really no substitution of debtors since private complainant merely acquiesced to the payment but did not give her consent to enter into a new contract. The appellate court observed:xxx xxx xxx The acceptance by complainant of partial payment tendered by the buyer, Leonor Camacho, does not evince the intention of the complainant to have their agreement novated. It was simply necessitated by the fact that, at that time, Camacho had substantial accounts payable to complainant, and because of the fact that appellant made herself scarce to complainant. (TSN, April 15, 1981, 31-32) Thus, to obviate the situation where complainant would end up with nothing, she was forced to receive the tender of Camacho. Moreover, it is to be noted that the aforesaid payment was for the purchase, not of the jewelry subject of this case, but of some other jewelry subject of a previous transaction. (Ibid. June 8, 1981, 10-11) The criminal liability for estafa already committed is then not affected by the subsequent novation of contract, for it is a public offense which must be prosecuted and punished by the State in its own conation. (Emphasis supplied.)[26]In the case at bar, the acceptance by MPI of the Equitable PCI checks tendered by Milla could not have novated the original transaction, as the checks were only intended to secure the return of the P2 million the former had already given him. Even then, these checks bounced and were thus unable to satisfy his liability. Moreover, the estafa involved here was not for simple misappropriation or conversion, but was committed through Millas falsification of public documents, the liability for which cannot be extinguished by mere novation..

1. HEIRS OF SERVANDO V. GONZALESHELD: new obligation extinguishes the prior agreement only when the substitution is unequivocally declared, or the old and the new obligations are incompatible on every point. A compromise of a final judgment operates as a novation of the judgment obligation upon compliance with either of these two conditions.[18] The receipt dated February 5, 1992, excerpted below, did not create a new obligation incompatible with the old one under the promissory note, viz: February 5, 1992 Received from SERVANDO FRANCO BPI Managers Check No. 001700 in the amount of P400,00.00 as partial payment of loan. Balance of P375,000.00 to be paid on or before FEBRUARY 29, 1992. In case of default an interest will be charged as stipulated in the promissory note subject of this case. (Sgd)V. Gonzalez[19] To be clear, novation is not presumed. This means that the parties to a contract should expressly agree to abrogate the old contract in favor of a new one. In the absence of the express agreement, the old and the new obligations must be incompatible on every point.[20] According to California Bus Lines, Inc. v. State Investment House, Inc.:[21]The extinguishment of the old obligation by the new one is a necessary element of novation which may be effected either expressly or impliedly. The term expressly means that the contracting parties incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility between the two contracts. While there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations.

There is incompatibility when the two obligations cannot stand together, each one having its independent existence. If the two obligations cannot stand together, the latter obligation novates the first. Changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must affect any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change is merely modificatory in nature and insufficient to extinguish the original obligation.[23] In light of the foregoing, the issuance of the receipt created no new obligation. Instead, the respondents only thereby recognized the original obligation by stating in the receipt that the P400,000.00 was partial payment of loan and by referring to the promissory note subject of the case in imposing the interest. The loan mentioned in the receipt was still the same loan involving the P500,000.00 extended to Servando. Advertence to the interest stipulated in the promissory note indicated that the contract still subsisted, not replaced and extinguished, as the petitioners claim. The receipt dated February 5, 1992 was only the proof of Servandos payment of his obligation as confirmed by the decision of the RTC. It did not establish the novation of his agreement with the respondents. Indeed, the Court has ruled that an obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, or changes only the terms of payment, or adds other obligations not incompatible with the old ones, or the new contract merely supplements the old one.[24] A new contract that is a mere reiteration, acknowledgment or ratification of the old contract with slight modifications or alterations as to the cause or object or principal conditions can stand together with the former one, and there can be no incompatibility between them.[25]Moreover, a creditors acceptance of payment after demand does not operate as a modification of the original contract.[26] Worth noting is that Servandos liability was joint and solidary with his co-debtors. In a solidary obligation, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously.[27] The choice to determine against whom the collection is enforced belongs to the creditor until the obligation is fully satisfied.[28] Thus, the obligation was being enforced against Servando, who, in order to escape liability, should have presented evidence to prove that his obligation had already been cancelled by the new obligation or that another debtor had assumed his place. In case of change in the person of the debtor, the substitution must be clear and express,[29] and made with the consent of the creditor.[30] Yet, these circumstances did not obtain herein, proving precisely that Servando remained a solidary debtor against whom the entire or part of the obligation might be enforced. Lastly, the extension of the maturity date did not constitute a novation of the previous agreement. It is settled that an extension of the term or period of the maturity date does not result in novation.[31]

1. PNB V. SORIANOFACTS:On March 20, 1997, [PNB] extended a credit facility in the form of [a] Floor Stock Line (FSL) in the increased amount of (30 Million) to Lisam Enterprises, Inc. [LISAM], a family-owned and controlled corporation that maintains Current Account with PNB.

x x x. Soriano is the chairman and president of LISAM, she is also the authorized signatory in all LISAMs Transactions with [PNB].

On various dates, LISAM made several availments of the FSL in the total amount of (P 29,645,944.55), the proceeds of which were credited to its current account with [PNB]. For each availment, LISAM through [Soriano], executed 52 Trust Receipts (TRs). In addition to the promissory notes, showing its receipt of the items in trust with the duty to turn-over the proceeds of the sale thereof to [PNB].

Sometime on January 21-22, 1998, [PNBs] authorized personnel conducted an actual physical inventory of LISAMs motor vehicles and motorcycles and found that only four (4) units covered by the TRs amounting to (158,100.00) (sic) remained unsold.

Out of the (29,644,944.55) as the outstanding principal balance [of] the total availments on the line covered by TRs, [LISAM] should have remitted to [PNB] (29,487,844.55). Despite several formal demands, respondent Soriano failed and refused to turn over the said [amount to] the prejudice of [PNB].3

Given the terms of the TRs which read, in pertinent part:

RECEIVED in Trust from the [PNB], Naga Branch, Naga City, Philippines, the motor vehicles ("Motor Vehicles") specified and described in the Invoice/s issued by HONDA PHILIPPINES, INC. (HPI) to Lisam Enterprises, Inc., (the "Trustee") hereto attached as Annex "A" hereof, and in consideration thereof, the trustee hereby agrees to hold the Motor Vehicles in storage as the property of PNB, with the liberty to sell the same for cash for the Trustees account and to deliver the proceeds thereof to PNB to be applied against its acceptance on the Trustees account. Under the terms of the Invoices and (sic) the Trustee further agrees to hold the said vehicles and proceeds of the sale thereof in Trust for the payment of said acceptance and of any [of] its other indebtedness to PNB.

x x x x

For the purpose of effectively carrying out all the terms and conditions of the Trust herein created and to insure that the Trustee will comply strictly and faithfully with all undertakings hereunder, the Trustee hereby agrees and consents to allow and permit PNB or its representatives to inspect all of the Trustees books, especially those pertaining to its disposition of the Motor Vehicles and/or the proceeds of the sale hereof, at any time and whenever PNB, at its discretion, may find it necessary to do so.

The Trustees failure to account to PNB for the Motor Vehicles received in Trust and/or for the proceeds of the sale thereof within thirty (30) days from demand made by PNB shall constitute prima facie evidence that the Trustee has converted or misappropriated said vehicles and/or proceeds thereof for its benefit to the detriment and prejudice of PNB.4 and Sorianos failure to account for the proceeds of the sale of the motor vehicles, PNB, as previously adverted to, filed a complaint-affidavit before the Office of the City Prosecutor of Naga City charging Soriano with fifty two (52) counts of violation of the Trust Receipts Law, in relation to Article 315, paragraph 1(b) of the Revised Penal Code.

ISSUE:W/N the approval by PNB of [LISAMs] restructuring proposal of its account with PNB had changed the status of [LISAMs] obligations secured by Trust Receipts to one of an ordinary loan, non-payment of which does not give rise to a criminal liability.

HELD: whether the restructuring of LISAMs loan account extinguished Sorianos criminal liability. NO.PNB admits that although it had approved LISAMs restructuring proposal, the actual restructuring of LISAMs account consisting of several credit lines was never reduced into writing. PNB argues that the stipulations therein such as the provisions on the schedule of payment of the principal obligation, interests, and penalties, must be in writing to be valid and binding between the parties. PNB further postulates that assuming the restructuring was reduced into writing, LISAM failed to comply with the conditions precedent for its effectivity, specifically, the payment of interest and other charges, and the submission of the titles to the real properties in Tandang Sora, Quezon City. On the whole, PNB is adamant that the events concerning the restructuring of LISAMs loan did not affect the TR security, thus, Sorianos criminal liability thereunder subsists.

On the other hand, the appellate court agreed with the ruling of the DOJ Secretary that the approval of LISAMs restructuring proposal, even if not reduced into writing, changed the status of LISAMs loan from being secured with Trust Receipts (TRs) to one of an ordinary loan, non-payment of which does not give rise to criminal liability. The Court of Appeals declared that there was no breach of trust constitutive of estafa through misappropriation or conversion where the relationship between the parties is simply that of creditor and debtor, not as entruster and entrustee.

We cannot subscribe to the appellate courts reasoning. The DOJ Secretarys and the Court of Appeals holding that, the supposed restructuring novated the loan agreement between the parties is myopic.

To begin with, the purported restructuring of the loan agreement did not constitute novation.

Novation is one of the modes of extinguishment of obligations; it is a single juridical act with a diptych function. The substitution or change of the obligation by a subsequent one extinguishes the first, resulting in the creation of a new obligation in lieu of the old. It is not a complete obliteration of the obligor-obligee relationship, but operates as a relative extinction of the original obligation.

Article 1292 of the Civil Code which provides:Art. 1292. In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.

contemplates two kinds of novation: express or implied. The extinguishment of the old obligation by the new one is a necessary element of novation, which may be effected either expressly or impliedly.In order for novation to take place, the concurrence of the following requisites is indispensable: PAEN

Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express agreement of the parties, or by their acts that are too clear and unmistakable. The contracting parties must incontrovertibly disclose that their object in executing the new contract is to extinguish the old one. Upon the other hand, no specific form is required for an implied novation, and all that is prescribed by law would be an incompatibility between the two contracts. Nonetheless, both kinds of novation must still be clearly proven.

In this case, without a written contract stating in unequivocal terms that the parties were novating the original loan agreement, thus undoubtedly eliminating an express novation, we look to whether there is an incompatibility between the Floor Stock Line secured by TRs and the subsequent restructured Omnibus Line which was supposedly approved by PNB.

The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Corollarily, changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change would be merely modificatory in nature and insufficient to extinguish the original obligation.

We have scoured the records and found no incompatibility between the Floor Stock Line and the purported restructured Omnibus Line. While the restructuring was approved in principle, the effectivity thereof was subject to conditions precedent such as the payment of interest and other charges, and the submission of the titles to the real properties in Tandang Sora, Quezon City. These conditions precedent imposed on the restructured Omnibus Line were never refuted by Soriano who, oddly enough, failed to file a Memorandum. To our mind, Sorianos bare assertion that the restructuring was approved by PNB cannot equate to a finding of an implied novation which extinguished Sorianos obligation as entrustee under the TRs.

Moreover, as asserted by Soriano in her counter-affidavit, the waiver pertains to penalty charges on the Floor Stock Line. There is no showing that the waiver extinguished Sorianos obligation to "sell the [merchandise] for cash for [LISAMs] account and to deliver the proceeds thereof to PNB to be applied against its acceptance on [LISAMs] account." Soriano further agreed to hold the "vehicles and proceeds of the sale thereof in Trust for the payment of said acceptance and of any of its other indebtedness to PNB." Well-settled is the rule that, with respect to obligations to pay a sum of money, the obligation is not novated by 1. an instrument that expressly recognizes the old, 1. changes only the terms of payment, 1. adds other obligations not incompatible with the old ones, or 1. the new contract merely supplements the old one.

Besides, novation does not extinguish criminal liability. It stands to reason therefore, that Sorianos criminal liability under the TRs subsists considering that the civil obligations under the Floor Stock Line secured by TRs were not extinguished by the purported restructured Omnibus Line. restructuring agreement is not incompatible with the trust receipt transactions. restructuring agreement recognizes the obligation due under the trust receipts when it required "payment of all interest and other charges prior to restructuring."

1. SERFINO V. FAR EAST BANKCASE: determination ofthe obligation of banks to a third party who claims rights over a bank deposit standing in the name of another.HELD: Claim for actual damages not meritorious because there could be no pecuniary loss that should be compensated if there was no assignment of creditThe spouses Serfinos claim for damages against FEBTC is premised on their claim of ownership of the deposit with FEBTC. The deposit consists of Magdalenas retirement benefits, which the spouses Serfino claim to have been assigned to them under the compromise judgment. That the retirement benefits were deposited in Graces savings account with FEBTC supposedly did not divest them of ownership of the amount, as "the money already belongs to the [spouses Serfino] having been absolutely assigned to them and constructively delivered by virtue of the x x x public instrument[.]"11By virtue of theassignment of credit, the spouses Serfino claim ownership of the deposit, and they posit that FEBTC was duty bound to protect their right by preventing the withdrawal of the deposit since the bank had been notified of the assignment and of their claim.We find no basis to support the spouses Serfinos claim of ownership of the deposit."An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale,dationin payment, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. It may be in the form of sale, but at times it may constitute adationin payment, such aswhen a debtor,in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person."12As adationin payment, theassignment of credit operates as a mode of extinguishing the obligation;13the delivery and transmission of ownership of a thing (in this case, the credit due from a third person) by the debtor to the creditor is accepted as the equivalent of the performance of the obligation.14The terms of the compromise judgment, however, did not convey an intent to equate the assignment of Magdalenas retirement benefits (the credit) as the equivalent of the payment of the debt due the spouses Serfino (the obligation). There was actually no assignment of credit; if at all,the compromise judgment merely identified the fund from which payment for the judgment debt would be sourced:(c) That