Inchausti & Co. vs. Yulo

A subsequent contract with some solidary debtors that reduces the debt and alters payment terms does not novate the original solidary obligation unless the intent to extinguish the old obligation is expressly declared or the old and new obligations are entirely incompatible. The benefits of the reduction inure to all solidary debtors.

Teodoro Yulo, a property owner, had a borrowing arrangement (current account) with the firm Inchausti & Co. for the cultivation of his haciendas. Upon his death, his widow and children (the "Yulos") continued the account, which grew to a substantial balance. To secure the debt, several of the Yulo children executed mortgage contracts acknowledging the debt as a solidary obligation.

• Filed in the Court of First Instance (CFI) of Iloilo.
• The CFI ruled in favor of the defendant, Gregorio Yulo, dismissing the case without prejudice, on the ground that the subsequent contract with other debtors novated the original obligation.
• The plaintiff (Inchausti & Co.) appealed directly to the Supreme Court via a bill of exceptions.

• Inchausti & Co. had a current account with the Yulo family, which resulted in a debt.
• On August 12, 1909, Gregorio Yulo, along with five of his siblings (Pedro, Francisco, Manuel, Carmen, and Concepcion), executed a notarial instrument (Exhibit X) acknowledging a solidary debt of P253,445.42 with 10% annual interest, payable in installments.
• The instrument contained an acceleration clause: failure to pay any installment would make the entire debt due.
• The first installment (due June 30, 1910) was not paid.
• On March 27, 1911, Inchausti & Co. filed a collection suit against Gregorio Yulo alone for the full amount.
• On May 12, 1911, after the suit was filed, Inchausti & Co. entered into a new contract with only three of the solidary debtors: Francisco, Manuel, and Carmen Yulo. This contract:
  • Reduced the debt to P225,000.
  • Reduced the interest to 6% per annum from March 15, 1911.
  • Extended the payment schedule, with the first installment due on June 30, 1912.
  • Stipulated that Inchausti & Co. would continue its lawsuit against Gregorio Yulo and the three signatories would cooperate in that suit.
  • Gregorio Yulo's defense was that this May 1911 contract novated the August 1909 contract, releasing him from the suit.

• The May 1911 contract did not constitute a novation of the August 1909 solidary obligation.
• The creditor retained the right to sue any one of the solidary debtors for the full amount.
• Even if not novation, the reduction of the debt to P225,000 should benefit Gregorio Yulo under Article 1143 of the Civil Code (remission in favor of one solidary debtor benefits all).

• The May 1911 contract novated the August 1909 contract by changing the amount, interest rate, and payment terms.
• This novation released him from the original obligation and the lawsuit.
• The lawsuit was premature because, under the new terms agreed to with his co-debtors, no installment was yet due.

• Procedural Issues: N/A
• Substantive Issues:
  1. Whether the creditor can sue a single solidary debtor when there are other co-debtors.
  2. Whether the May 1911 contract novated the August 1909 solidary obligation.
  3. If not novated, what effect does the May 1911 contract have on the lawsuit against Gregorio Yulo?

• Procedural: N/A
• Substantive:
  1. Yes. The creditor of a solidary obligation may sue any one of the debtors for the entire performance (Civil Code, Articles 1137, 1144).
  2. No novation occurred. The May 1911 contract did not expressly declare it was extinguishing the old obligation, nor were the two contracts entirely incompatible. A change in the term of payment and the addition of new obligations does not, by itself, produce novation.
  3. Effect on the Lawsuit: While the original obligation was not novated, the remission (partial forgiveness) of the debt in the May 1911 contract (from P253,445.42 to P225,000) benefits all solidary debtors, including Gregorio Yulo, per Article 1143 of the Civil Code. Furthermore, Gregorio Yulo can invoke the personal defense of his co-debtors (Francisco, Manuel, and Carmen) regarding the unmatured installments of their portion of the debt. Therefore, he can only be compelled to pay the portion of the reduced debt that corresponds to those debtors whose obligations were already due (i.e., his own share and the shares of Pedro and Concepcion, who were in the same position as him). The portion corresponding to Francisco, Manuel, and Carmen was not yet demandable.

• Solidary Obligation — Each debtor is liable for the entire obligation. The creditor may demand full payment from any one of them. Solidarity is not broken even if debtors are bound under different terms or conditions (Civil Code, Art. 1140).
• Novation — An obligation is extinguished by a new one that substitutes it. This requires either an express declaration of novation or total incompatibility between the old and new obligations (Civil Code, Art. 1204). A mere modification of terms (like payment periods) does not constitute novation.
• Remission in Solidary Obligations — The remission of a part of the debt made by the creditor in favor of one solidary debtor benefits all co-debtors (Civil Code, Art. 1143).
• Personal Defenses in Solidary Obligations — A solidary debtor may utilize defenses that are personal to his co-debtors, but only with regard to the share of the debt for which that co-debtor is liable (Civil Code, Art. 1148). This includes the defense of an unmatured term granted to a co-debtor.

• "In order that an obligation may be extinguished by another which substitutes it, it is necessary that it should be so expressly declared or that the old and the new be incompatible in all points." (Applying Article 1204 of the Civil Code)
• "Solidarity may exist even though the debtors are not bound in the same manner and for the same periods and under the same conditions." (Citing Article 1140 of the Civil Code)
• "The solidary debtor may utilize against the claims of the creditor the defenses arising from the nature of the obligation and those which are personal to him. Those personally pertaining to the others may be employed by him only with regard to the share of the debt for which the latter may be liable." (Citing Article 1148 of the Civil Code)

• Judgments in Cassation of June 28, 1904 and July 8, 1909 (Spanish Jurisprudence) — Cited to support the doctrine that an obligation to pay a sum of money is not novated by a new instrument that ratifies the old one, changes only the term of payment, and adds non-incompatible obligations.

• Civil Code, Article 1137 — Defines conjoint (solidary) obligations.
• Civil Code, Article 1140 — Solidarity exists even if debtors are bound under different terms.
• Civil Code, Article 1143 — Remission of debt in favor of one solidary debtor benefits all.
• Civil Code, Article 1144 — Creditor may proceed against any one of the solidary debtors.
• Civil Code, Article 1145 — Right of reimbursement among solidary debtors.
• Civil Code, Article 1148 — Defenses available to a solidary debtor.
• Civil Code, Article 1204 — Requisites for novation.
• Civil Code, Article 1091 — Obligations arising from contracts have the force of law between the parties.

• Justice Moreland (Dissenting) — Argued the action should be dismissed as premature. He believed the defendant was entitled to all benefits of the May 1911 contract, including the extended payment term (first installment due June 30, 1912). Since nothing was due at the time the suit was filed (March 27, 1911), the creditor's action must fail.