Bank of the Philippine Islands vs. Amador Domingo

Novation by delegacion requires the creditor's clear and unmistakable consent to release the original debtor; mere knowledge, silence, or acceptance of payments from an assuming third person does not establish such consent, and absent release the third person is merely an additional debtor or surety.

Amador Domingo and his late wife Mercy Maryden Domingo obtained vehicle financing from Makati Auto Center, Inc., which assigned the promissory note and chattel mortgage to Far East Bank and Trust Company; FEBTC later merged into petitioner Bank of the Philippine Islands, which absorbed FEBTC's assets and liabilities. The dispute requires application of Article 1293 of the Civil Code on novation by substitution of the debtor, specifically whether the creditor consented to release the original debtors when the mortgaged vehicle was sold to Carmelita S. Gonzales with an assumption of mortgage.

On September 27, 1993, Amador Domingo and his wife Mercy Maryden Domingo executed a Promissory Note in favor of Makati Auto Center, Inc. for ₱629,856.00, payable in 48 successive monthly installments of ₱13,122.00 each. They simultaneously executed a Deed of Chattel Mortgage over a 1993 Mazda 323 to secure payment. Makati Auto Center, Inc. then assigned, ceded, and transferred all its rights and interests over the Promissory Note and chattel mortgage to Far East Bank and Trust Company (FEBTC). On April 7, 2000, the Securities and Exchange Commission approved the Articles of Merger and Plan of Merger executed on January 20, 2000 between BPI, as surviving corporation, and FEBTC, as absorbed corporation, transferring all FEBTC assets and liabilities to BPI.

The spouses Domingo defaulted when they failed to pay 21 monthly installments that had fallen due consecutively from January 15, 1996 to September 15, 1997. BPI, as surviving corporation, demanded payment of the balance of the Promissory Note including accrued late payment charges and interests, or the return of the subject vehicle for foreclosure under the chattel mortgage. When the spouses still failed to comply, BPI filed on November 14, 2000 a Complaint for Replevin and Damages, or in the alternative for collection of sum of money, interest and other charges, and attorney's fees, before the Metropolitan Trial Court of Manila, Branch 9, docketed as Civil Case No. 168949-CV. BPI included a John Doe as defendant because it knew the vehicle was in the possession of a third person but did not yet know the person's identity. In their Answer, the spouses raised affirmative defenses of no cause of action, lack of jurisdiction, the indispensability of John Doe requiring service by publication, and that Maryden had obtained a car loan from FEBTC but the car was later sold to Carmelita S. Gonzales with the bank's conformity and the buyer subsequently assumed payment of the balance.

During trial, BPI presented Vicente Magpusao, a former FEBTC employee and then Account Analyst of BPI. He testified that the spouses executed the Promissory Note and Chattel Mortgage, that Makati Auto Center assigned the chattel mortgage to FEBTC, that FEBTC merged with BPI, that the spouses defaulted on 21 successive installments, that BPI sent a demand letter to Mercy Domingo, and that based on the Statement of Account dated October 31, 2000, the outstanding balance was ₱275,562.00 exclusive of interest and other charges. On cross-examination, Magpusao said he first handled the account in 1997 and was not employed with the bank in 1993, but knew the transaction from his experience and access to records. He testified that payments were made from October 30, 1993 to September 14, 1994; that the subsidiary ledger showed three bounced checks from the new buyer, with only one photocopy for ₱325,431.60 and two missing; that the check was issued by a certain Miss Gonzales; that anyone could pay the monthly amortization for Maryden Domingo's account; that the bank did not approve the Deed of Sale with Assumption of Mortgage; that they could not include Carmelita Gonzales as a defendant because they had no document executed by her in behalf of FEBTC; and that FEBTC did not turn over all records pertaining to the account to BPI.

Amador Domingo testified for the defense. He stated that his wife Mercy Maryden Domingo died on November 27, 2003. He admitted that his wife bought a car mortgaged to FEBTC and identified the Chattel Mortgage and Promissory Note he executed with her. He recalled that his wife issued 48 checks; 12 checks were cleared and she obtained a discount for prompt payments up to October 1994. While they were still paying, Carmelita Gonzales became interested in buying the car and was willing to assume the mortgage. After furnishing the bank with the notarized Deed of Sale, Carmelita issued a check payable to FEBTC and the remaining postdated checks were returned to them. Based on the application of payment prepared by BPI's witness, Carmelita made payments from November 14, 1995 to December 1995; on May 19, 1997, Carmelita issued a check to FEBTC for ₱385,431.60. In 1996, Amador received a phone call from Marvin Orence asking for assistance to locate the car Carmelita had bought; his lawyer went to the Land Transportation Office for assistance. From the time Carmelita started paying, they never received any demand letter from FEBTC. On February 29, 1997, they received a demand letter from Espino Law Office for FEBTC; his lawyer replied on March 31, 1997 stating that the vehicle had been sold to Carmelita as of July 5, 1994 with the knowledge and approval of FEBTC. After three years, they received another demand letter dated October 31, 2000 from Labaguis Law Office; his lawyer replied on March 7, 2000 and November 24, 2000. Amador sought moral damages of ₱200,000.00, attorney's fees of ₱75,000.00, and appearance fee of ₱5,000.00. On cross-examination, he admitted that his wife and Carmelita directly transacted with FEBTC regarding the sale and assumption of mortgage; that the bank made no objection and returned all the postdated checks; that aside from the Deed of Sale, there was no other document showing the bank's conformity; that they were only verbally assured by Mr. Orence that their papers were in order; and that he was not present when his wife and Carmelita went to the bank.

The MeTC found Amador's bare testimony insufficient to prove that he and his wife had been expressly released from their obligations and that Carmelita had assumed their place as new debtor; if at all, Carmelita became merely a co-debtor or surety. The RTC and the Court of Appeals, by contrast, found that FEBTC had knowledge of the Deed of Sale and Assumption of Mortgage without objecting, returned the postdated checks, accepted Carmelita's payments, and did not demand payment from the spouses for 30 months. The Court of Appeals also found that Carmelita made several payments on the loan, not only the dishonored PNB Check No. 00190322 dated May 19, 1997.

• No Novation: BPI argued that there was no novation of the loan obligation with chattel mortgage, so the spouses Domingo were not released and Carmelita was not substituted as debtor.
• Creditor Consent: BPI maintained that its consent to the substitution of debtors was not given and that the lower courts erred in inferring consent from its alleged knowledge, silence, acceptance of payments, and delay in demanding payment.
• Carmelita's Payment: BPI argued that the only payment made by Carmelita was PNB Check No. 00190322 dated May 19, 1997, which was dishonored due to Account Closed.
• No Obligation to Object: BPI argued that it was not its obligation to interpose objection to the Deed of Sale with Assumption of Mortgage; rather, it was Carmelita who should have secured BPI's approval and consent.
• Damages: BPI argued that the RTC awarded moral and exemplary damages and attorney's fees only in the dispositive portion without any basis in fact and law.

• Novation by Delegacion: Amador maintained that novation by delegacion took place when he and Mercy sold the mortgaged vehicle to Carmelita, who assumed the mortgage, thereby releasing the spouses from the obligation.
• Implied Consent: Amador argued that BPI's consent to the substitution need not be express and could be inferred from FEBTC's acts: it had knowledge of the Deed of Sale and Assumption of Mortgage but did not object; it returned the postdated checks; it accepted Carmelita's payments; and it did not demand payment from the spouses for 30 months.
• Return of Checks and Verbal Assurance: Amador relied on the return of the postdated checks and on verbal assurances from Marvin Orence of FEBTC that the spouses' documents were in order.
• Damages: Amador sought moral damages, attorney's fees, and appearance fee, claiming the complaint triggered his wife's demise.

• Novation: Whether there was a novation of the loan obligation with chattel mortgage such that the spouses Domingo were released from the obligation and Carmelita was substituted as debtor.
• Interest Rate: Whether the stipulated 36% per annum interest is excessive and should be reduced.
• Liability of Heirs: Whether Amador's heirs are personally liable for the debt or only to the extent of the inheritance they received.

• Novation: No. No novation by delegacion occurred because Amador failed to prove BPI's clear and unmistakable consent to release the spouses Domingo; acceptance of payments from Carmelita merely added her as a debtor.
• Interest Rate: Yes. The stipulated 36% per annum interest is excessive, iniquitous, unconscionable, and exorbitant; legal interest of 12% per annum from January 29, 1997 to June 30, 2013 and 6% per annum from July 1, 2013 until fully paid is imposed.
• Liability of Heirs: No. Amador's heirs are not personally liable for his debts; their liability is limited to the value of the estate they inherited from him.

• Novation: Under Article 1293 of the Civil Code, novation by substituting a new debtor may be made even without the knowledge or against the will of the old debtor, but not without the consent of the creditor. There are two forms: expromision and delegacion; both require the creditor's consent. Although the general rule requires express consent because novation implies waiver of a right, jurisprudence allows consent to be inferred from the creditor's acts, provided they are a clear and unmistakable expression of consent. Novation is never presumed, and the burden of proving it lies on the party asserting it. Here, both the RTC and Court of Appeals found novation by delegacion, but the existence of BPI's consent was not established. BPI's possession of a copy of the Deed of Sale and Assumption of Mortgage did not amount to consent; the Deed itself stated that the parties would seek the mortgagee's conformity, and the documents and account remained in the spouses' names, with no new promissory note or chattel mortgage executed with Carmelita. The absence of objection could not be presumed as consent, and Babst vs. Court of Appeals was distinguishable because there the creditor's representative attended a creditors' meeting and had a clear opportunity to object. Acceptance of Carmelita's payments did not constitute novation; it merely added her as a debtor, and the creditor could enforce the obligation against both debtors, as held in Magdalena Estates, Inc. vs. Rodriguez and Quinto vs. People. The 30-month delay in demanding payment from the spouses was therefore insignificant. Finally, there was no sufficient or competent evidence that FEBTC returned the postdated checks or gave verbal assurances that the spouses were released. Amador's testimony on these matters was hearsay because his wife and Carmelita directly transacted with the bank and he had no personal knowledge; the checks were not presented and were allegedly discarded; the identity, position, and authority of Marvin Orence/Oronce were not established; and the March 31, 1997 letter of Atty. Rivera was hearsay. Thus, Amador failed to discharge the burden of proving novation, and he remained a debtor of BPI.
• Interest Rate: The Court found the stipulated 3% per month or 36% per annum interest excessive, iniquitous, unconscionable, and exorbitant. Although the Usury Law has been suspended by Central Bank Circular No. 905, s. 1982, stipulated interest rates remain illegal if unconscionable. Following Ruiz vs. Court of Appeals, which reduced a 36% per annum interest to 12% per annum, and the guidelines in Eastern Shipping Lines, Inc. vs. Court of Appeals and Nacar vs. Gallery Frames, the Court imposed legal interest of 12% per annum from the date of extrajudicial demand on January 29, 1997 until June 30, 2013, and 6% per annum from July 1, 2013 until fully paid.
• Liability of Heirs: Amador died on June 5, 2010 during the pendency of the petition. The Court clarified that his heirs are not personally responsible for his debts; their liability is limited to the value of the estate they inherited from him. The estate or mass of property left by the decedent, rather than the heirs directly, becomes vested and charged with his rights and obligations that survive after death. To rule otherwise would unduly deprive the heirs of their properties.

• Novation by Substitution of Debtor — Under Article 1293 of the Civil Code, novation by substituting a new debtor may be made even without the knowledge or against the will of the old debtor, but not without the consent of the creditor. There are two forms: expromision, where a third person assumes the obligation with the creditor's consent, and delegacion, where the debtor offers and the creditor accepts a third person who assumes the obligation. In both, the creditor's consent is indispensable. Applied: the alleged novation was by delegacion, but BPI's consent was not proven.
• Creditor's Consent to Substitution — The general rule requires express consent because novation implies a waiver of the creditor's right; however, consent may be inferred from the creditor's acts if they constitute a clear and unmistakable expression of consent. Mere absence of objection is not enough. Applied: BPI's knowledge and silence, acceptance of payments, and delay in demand did not show clear consent.
• Novation is Never Presumed — Novation must be clearly shown by express agreement or acts of equal import. For subjective novation, the old debtor must be expressly released and the third person must assume his place; without such release, the third person becomes merely a co-debtor or surety. The burden of proving novation is on the party asserting it. Applied: Amador failed to prove release.
• Acceptance of Payment from an Assuming Third Person — The mere fact that the creditor receives a guaranty or accepts payments from a third person who agreed to assume the obligation, absent an agreement that the first debtor shall be released, does not constitute extinctive novation; it merely adds the third person as a debtor. Applied: Carmelita became an additional debtor, and BPI could still enforce the obligation against the spouses Domingo.
• Hearsay Evidence — Evidence is hearsay when its probative force depends on the competency and credibility of a person other than the witness; a witness can only testify on facts within his personal knowledge. Applied: Amador's testimony on the return of checks and verbal assurances was hearsay because he had no personal knowledge of the transactions between his wife, Carmelita, and the bank.
• Reduction of Unconscionable Interest — While the Usury Law is suspended and parties may agree on interest rates, stipulated rates are illegal if unconscionable. A 36% per annum interest was reduced to 12% per annum. Applied: the Court imposed 12% from January 29, 1997 to June 30, 2013 and 6% from July 1, 2013 until fully paid.
• Liability of Heirs — Heirs are not personally liable for the debts of their predecessor; their liability is limited to the value of the estate they inherited. Applied: Amador's heirs were ordered to pay BPI only to the extent of the inheritance they received.

• "The burden of establishing a novation is on the party who asserts its existence." — This allocates the burden of proof and explains why Amador's failure to prove BPI's consent was fatal to his defense of novation.
• "The absence of objection on the part of BPI (or FEB TC) cannot be presumed as consent. Jurisprudence requires presentation of proof of consent, not mere absence of objection." — This rejects the lower courts' inference of consent from BPI's silence and knowledge of the Deed of Sale and Assumption of Mortgage.
• "The acceptance by a creditor of payments from a third person, who has assumed the obligation, will result merely to the addition of debtors and not novation. The creditor may therefore enforce the obligation against both debtors." — This states the core rule that acceptance of Carmelita's payments did not release the spouses Domingo.
• "To prevent future litigation in the enforcement of the award, the Court clarifies that Amador's heirs are not personally responsible for the debts of their predecessor. The extent of liability of Amador's heirs to BPI is limited to the value of the estate which they inherited from Amador." — This defines the limited liability of Amador's heirs after his death during the pendency of the petition.

• De Cortes vs. Venturanza, 170 Phil. 55 (1977) — Discussed the concept and nature of novation, including expromision and delegacion, and held that the creditor's consent is indispensable in both forms.
• Testate Estate of Lazaro Mota vs. Serra, 47 Phil. 464 (1925) — Stated the general rule that the creditor's consent to substitution must be express because novation implies a waiver of right, under the principle renuntiatio non praesumitur.
• Asia Banking Corporation vs. Elser, 54 Phil. 994 (1929) — Qualified the general rule by holding that the creditor's consent need not be express or simultaneous and may be inferred from acts, provided they are a clear and unmistakable expression of consent.
• Ajax Marketing and Development Corporation vs. Court of Appeals, G.R. No. 118585, September 14, 1995, 248 SCRA 222 — Held that novation is never presumed and that, for subjective novation, the old debtor must be expressly released; otherwise the assuming third person is merely a co-debtor or surety.
• Babst vs. Court of Appeals, 403 Phil. 244 (2001) — Relied upon by the lower courts but distinguished; there, the creditor's representative attended a creditors' meeting and had a clear opportunity to object to the substitution, making silence acquiescence.
• Magdalena Estates, Inc. vs. Rodriguez, 125 Phil. 151 (1966) — Held that acceptance of payments from a third person who agreed to assume the obligation does not constitute novation absent an agreement releasing the original debtor.
• Quinto vs. People, 365 Phil. 259 (1999) — Reiterated that a stranger's assumption of an obligation adds to the number of persons liable but does not necessarily extinguish the first debtor's liability.
• Da Jose vs. Angeles, G.R. No. 187899, October 23, 2013, 708 SCRA 506 — Defined hearsay evidence and held that a witness can only testify on facts within his personal knowledge.
• Ruiz vs. Court of Appeals, 449 Phil. 419 (2003) — Equitably reduced a stipulated 36% per annum interest to 12% per annum as excessive and unconscionable.
• Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78 — Provided guidelines on the imposition of legal interest.
• Nacar vs. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439 — Applied the 6% per annum legal interest after July 1, 2013.
• Planters Development Bank vs. Lopez, G.R. No. 186332, October 23, 2013, 708 SCRA 481 — Held that the estate or mass of property left by the decedent, rather than the heirs directly, becomes vested and charged with the decedent's surviving rights and obligations.

• Article 1293, New Civil Code — Provides that novation substituting a new debtor may be made even without the knowledge or against the will of the old debtor, but not without the consent of the creditor. Applied: BPI's consent to the substitution was not proven, so no novation occurred.
• Rule 45, Rules of Court — Governs petitions for review on certiorari, generally limited to errors of law. Applied: the Court recognized exceptions, including conflicting findings of fact and misapprehension of facts, and reviewed the factual issue of creditor consent.
• Central Bank Circular No. 905, s. 1982 — Suspended the Usury Law and allowed parties to agree on interest rates, but stipulated rates remain illegal if unconscionable. Applied: the 36% per annum interest was reduced to legal rates.
• Section 14, Article VIII, 1987 Constitution — Requires decisions to express clearly and distinctly the facts and law on which they are based. Cited by the Court of Appeals in deleting the RTC's damages awards because they were mentioned only in the dispositive portion; the Supreme Court ultimately reversed the Court of Appeals and reinstated the MeTC judgment, which did not award such damages to Amador.

Maria Lourdes P.A. Sereno (Chief Justice, Chairperson), Lucas P. Bersamin, Jose Portugal Perez, and Estela M. Perlas-Bernabe concurred. No separate concurring opinions are reflected in the text.