ROMAGO, INC. vs. ASSOCIATED BANK

An obligation is not novated by the substitution of debtors absent the creditor's clear and unmistakable consent to release the original debtor; acceptance of payment from a third party or creditor silence does not suffice to establish such consent. Furthermore, stipulated interest rates that are excessive may be nullified as unconscionable and replaced with the legal rate.

Romago, Inc. obtained loans from Associated Bank evidenced by promissory notes. One note (BD-3714) was later restructured into two new notes (Nos. 9660 and 9661) due to non-payment. Romago claimed it acted only as a "conduit" for Metallor Trading Corporation, which purportedly benefited from the loan and assumed the obligation. The bank sued Romago for the outstanding balance. Romago impleaded Metallor as a third-party defendant, arguing Metallor should be held liable.

• Nature of the Action: Associated Bank filed a complaint to collect on restructured loan obligations evidenced by Promissory Notes Nos. 9660 and 9661, which originated from an earlier loan (PN BD-3714) obtained by Romago.
• Romago's "Conduit" Claim: Romago alleged it procured the loan as a mere accommodation or "conduit" for Metallor, remitting all proceeds to Metallor. It presented letters from Metallor acknowledging the debt and offering to pay or provide collateral.
• Bank's Position: The bank maintained Romago was the sole signatory and obligor. It denied knowledge of or consent to any arrangement where Metallor would replace Romago as debtor.
• Partial Payments: The bank received partial payments on the restructured notes. Romago claimed these were made by Metallor, but this was not conclusively proven.
• Lower Court Findings: The RTC and CA found no evidence of the bank's express consent to release Romago and substitute Metallor. They held Romago primarily liable as the signatory and accommodation party.

• Conduit Loan: Petitioner argued it was a mere conduit for Metallor, the true beneficiary of the loan, and thus should not be held liable.
• Novation by Implied Consent: Petitioner maintained that the bank's failure to object to letters from Metallor assuming the debt, coupled with the bank's acceptance of partial payments (allegedly from Metallor), constituted clear and unmistakable consent to a substitution of debtors, thereby novating the obligation.
• Unjust Enrichment: Petitioner contended that holding it liable would result in Metallor's unjust enrichment, as Metallor received the loan proceeds without repayment.
• Attorney's Fees: Petitioner argued that if liable, Metallor should bear the cost of attorney's fees as the real obligor.

• Primary Liability: The bank countered that Romago, as the signatory to the promissory notes, was the primary obligor. There was no proof the loan was a "conduit" for Metallor.
• No Novation: The bank argued that novation requires the creditor's express or unequivocal consent to release the original debtor. Acceptance of payment from a third party does not imply such consent. The bank's continued demands for payment from Romago negated any intent to release it.
• Third-Party Complaint: Metallor argued Romago had no cause of action against it and that any alleged liability had prescribed. It denied being the true debtor.

• Scope of Review: Whether the Petition raises questions of fact inappropriate for a Rule 45 petition.
• Liability and Novation: Whether petitioner Romago is liable under the loan obligation, which requires determining if novation by substitution of debtor took place.
• Interest Rates: Whether the stipulated interest rates are unconscionable.
• Attorney's Fees: Whether the lower courts properly awarded attorney's fees.

• Scope of Review: The Petition primarily raises questions of fact (e.g., the probative value of letters, whether payments were made by Metallor), which are generally beyond the scope of a Rule 45 review. No exception was proven.
• Liability and Novation: Romago remains liable. Novation by change of debtor did not occur because the creditor bank did not give clear and unmistakable consent to release Romago and accept Metallor as the new debtor. The bank's acceptance of partial payments from a third party does not, by itself, constitute consent to a substitution. Silence or inaction is ambiguous and insufficient, especially in commercial transactions reduced to writing.
• Interest Rates: The stipulated conventional interest (24% p.a.) and compensatory interest (1% per month), compounded monthly, resulting in an effective rate of 36% per annum, are unconscionable. These rates are nullified and replaced with the legal rate of interest (12% per annum from demand until June 30, 2013; 6% per annum thereafter).
• Attorney's Fees: The award of attorney's fees equivalent to 20% of the total outstanding obligation, as stipulated in the promissory notes, is upheld as reasonable.

• Novation by Substitution of Debtor — Novation extinguishes an obligation only when the new contract declares it in unequivocal terms or the old and new obligations are incompatible on every point. For novation through a change of debtor, the creditor's consent must be clear and unmistakable. Such consent may be inferred from the creditor's acts, but those acts must unequivocally show an intent to release the original debtor. Acceptance of payment from a third party or mere silence does not suffice.
• Accommodation Party Liability — An accommodation party (one who signs an instrument without receiving value to lend their name to another) is liable to a holder for value. The accommodation party is treated as a surety, bound equally with the principal, and cannot set up the defense of lack of consideration against a holder for value.
• Unconscionable Interest Rates — Courts have the power to equitably reduce stipulated interest rates (whether conventional or compensatory) that are found to be unconscionable. The standard is whether the rate is "more than twice the prevailing legal rate of interest." If so, the creditor must prove the rate is necessary under market conditions and that the parties were on equal footing. An unconscionable rate is nullified and replaced with the legal rate at the time the contract was executed.

• "Novation must be clear and express. While the creditor's consent to a change in debtor may be derived from clear and unequivocal acts of acceptance, such act must be wholly consistent with the release of the original debtor. Thus, acceptance of payment from a third person will not necessarily release the original debtor from their obligation." (Ponencia, Opening)
• "When the contracts are part of a commercial transaction and reduced to writing, novation cannot be implied simply from a creditor's inaction. Silence is, at best, ambiguous in the presumption that both parties are diligent agents in a commercial transaction." (Ponencia, Opening)
• "That a simple loan of money, which required no active input or value added from respondent bank, could net the lender a return nearly equaling the amount of the principal in such a short span of time reveals the predatory nature of the stipulated rates." (Ponencia, III-B)

• Bank of the Philippine Islands v. Domingo, 757 Phil. 23 (2015) — Cited for the principles on novation and the requirement that creditor consent to a change of debtor must be clear and unmistakable. The Court distinguished the present case from Babst v. Court of Appeals, where creditor conduct at a meeting evinced consent.
• Babst v. Court of Appeals, 403 Phil. 244 (2001) — Distinguished. In Babst, the creditor's participation in a meeting called by the new debtor and its failure to object there constituted clear consent. In this case, the bank's silence in response to letters was not similarly unequivocal.
• Lara’s Gifts & Decors, Inc. v. Midtown Industrial Sales, Inc., G.R. No. 225433 (2022) — Applied for the updated guidelines on the unconscionability of stipulated interest rates and the distinction between conventional and compensatory interest.
• Spouses Abella v. Spouses Abella, 763 Phil. 372 (2015) — Cited for the rule that when a stipulated interest rate is unconscionable, it is replaced by the legal rate prevailing at the time the contract was executed.

• Article 1293, Civil Code — Provides that novation which consists in substituting a new debtor requires the creditor's consent.
• Article 2208, Civil Code — Allows for the stipulation of attorney's fees.
• Article 2212, Civil Code — Provides that interest due shall earn legal interest from the time it is judicially demanded.
• Section 29, Negotiable Instruments Law — Defines and establishes the liability of an accommodation party.

• Justice Henri Jean Paul B. Inting
• Justice Alfredo Benjamin S. Caguioa
• Justice Jhosep Y. Lopez
• Justice Antonio T. Kho, Jr.