Swagman Hotels and Travel, Inc. vs. Court of Appeals

A complaint that lacks a cause of action at the time of its filing cannot be cured by the accrual of a cause of action during the pendency of the case.

In 1996 and 1997, Swagman Hotels and Travel, Inc. obtained loans from Neal B. Christian totaling US$150,000, evidenced by three promissory notes payable after three years with 15% annual interest. Due to the Asian financial crisis in December 1997, the parties renegotiated the terms, leading to the waiver of interest and the acceptance of monthly capital repayments of US$750.

• The Loans: Sometime in 1996 and 1997, Swagman Hotels and Travel, Inc., through its president and vice-president, obtained three loans of US$50,000 each from Neal B. Christian, evidenced by promissory notes dated 7 August 1996, 14 March 1997, and 14 July 1997. The notes stipulated a three-year term and 15% per annum interest payable quarterly.
• The Renegotiation: In December 1997, due to the Asian financial crisis, the parties renegotiated. Swagman alleged that Christian agreed to waive the 15% interest and accept installment payments for the principal based on the state of Swagman's business. Swagman commenced paying US$750 per month from January 1998.
• The Demand and Complaint: On 16 December 1998, Christian sent a letter terminating the loans and demanding US$150,000 in principal plus US$13,500 in unpaid interest. On 2 February 1999, Christian filed a complaint for sum of money and damages, alleging Swagman paid only 6% interest instead of 15% starting January 1998.
• The Payments: Swagman continued paying US$750 monthly even during the pendency of the case. Cash vouchers from January 1998 to September 1999 labeled the payments as "INVESTMENT PAYMENT" and "CAPITAL REPAYMENT," which were signed by Christian or his representatives. Christian applied these payments to the principal loans in a summary of payments submitted to the court.

• Lack of Cause of Action: Petitioner argued that Christian had no cause of action when the complaint was filed because none of the promissory notes were yet due and demandable.
• Novation: Petitioner maintained that the obligations under the promissory notes were novated during the December 1997 renegotiation, wherein Christian agreed to waive interest and accept monthly installment payments of US$750.
• Misjoinder of Appellants: Petitioner contended that the Court of Appeals erred in considering the corporation's president and vice-president as appellants despite their non-appeal from the trial court's decision absolving them of personal liability.

• Delay Tactic: Respondent asserted that the petition was merely a ploy to delay the payment of a just obligation.
• Immaterial Error: Respondent argued that the inclusion of the president and vice-president as appellants by the Court of Appeals was immaterial because they were not affected by the assailed decision.

• Curability of Cause of Action: Whether a complaint that lacks a cause of action at the time of filing can be cured by the accrual of a cause of action during the pendency of the case.
• Novation: Whether the renegotiation of the promissory notes constituted novation.
• Misjoinder of Appellants: Whether the Court of Appeals erred in considering the president and vice-president as appellants despite their non-appeal.

• Curability of Cause of Action: The defect of lack of cause of action at the commencement of the suit cannot be cured by the accrual of a cause of action during the pendency of the case. Section 5, Rule 10 of the 1997 Rules of Civil Procedure applies only when a cause of action in fact exists at the time of filing but the complaint is defective for failure to allege essential facts. A prematurely brought action is a groundless suit, and a person should not be summoned to answer immature complaints.
• Novation: A modificatory novation occurred. The cash vouchers and the summary of payments submitted by Christian himself proved that the payments were applied to the principal, signifying a waiver of interest. Under Article 1253 of the Civil Code, payment of the principal cannot be deemed made until the interest is covered; thus, accepting payments as capital repayment indicates the interest obligation was waived. Since Swagman did not renege on its obligation to pay the monthly installments, no violation occurred to give rise to a cause of action.
• Misjoinder of Appellants: The Court of Appeals erred in referring to the president and vice-president as defendants-appellants, but the error was harmless because the appellate court's ruling was clear that the corporation was solely liable, affirming the trial court's absolution of the individual officers.

• Accrual of Cause of Action — A cause of action must exist at the commencement of the suit. The absence of a cause of action at the time of filing cannot be cured or remedied by the acquisition or accrual of one while the action is pending. A supplemental complaint or an amendment setting up an after-accrued cause of action is not permissible.
• Modificatory Novation — Alterations of the terms and conditions of an obligation generally result in modificatory novation unless the altered terms are considered the essence of the obligation. Under modificatory novation, the old obligation subsists subject to the modifications agreed upon by the parties. The acceptance of partial payments or a reduction in the amount of the obligation does not constitute extinctive novation but merely a modificatory novation or partial remission.

• "unless the plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint or an amendment setting up such after-accrued cause of action is not permissible."
• "That, however, which is no cause of action whatsoever cannot by amendment or supplemental pleading be converted into a cause of action: Nihil de re accrescit ei qui nihil in re quando jus accresceret habet."

• Surigao Mine Exploration Co., Inc. v. Harris, 68 Phil. 113 (1939) — Followed as controlling precedent establishing that a cause of action must exist at the commencement of the suit and cannot be created by amendment if none existed originally.
• Roces v. Jalandoni, 12 Phil. 599 (1909) — Distinguished; the curing of a defective complaint was upheld because a cause of action existed in fact, and the only problem was the insufficiency of the allegations.

• Section 2, Rule 2, 1997 Rules of Civil Procedure — Defines cause of action and its essential elements: (1) a right in favor of the plaintiff; (2) an obligation on the part of the defendant to respect such right; and (3) an act or omission by the defendant violating the plaintiff's right. Applied to determine that no cause of action existed because the third element was absent at the time of filing.
• Section 5, Rule 10, 1997 Rules of Civil Procedure — Governs amendments to conform to or authorize presentation of evidence. Interpreted narrowly; its curing effect applies only if a cause of action exists at the time of filing but the complaint is defectively pleaded, not when no cause of action exists at all.
• Article 1253, Civil Code — Provides that if the debt produces interest, payment of the principal shall not be deemed made until the interest is covered. Applied to support the finding that the private respondent's acceptance of payments as "capital repayment" indicated a waiver of interest.
• Article 1292, Civil Code — Provides that implied novation exists only if the old and new obligations are incompatible on every point. Applied to determine that the renegotiation resulted in modificatory novation rather than extinctive novation.

Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ.