Testate Estate of Lazaro Mota, et al. vs. Salvador Serra

Novation by substitution of a debtor under Article 1205 of the Civil Code requires the creditor's express consent; it cannot be presumed from the new debtor's assumption of the obligation or from the creditor's subsequent dealings with the new debtor. Dissolution of a partnership likewise does not extinguish existing obligations pending winding up.

Salvador Serra and the plaintiffs, including the Testate Estate of Lazaro Mota and Juan J. Vidaurrazaga, formed a partnership for the construction and exploitation of a railroad line connecting the "San Isidro" and "Palma" centrals to "Nandong," with the plaintiffs administering the venture. The governing law included the Civil Code provisions on novation by substitution of debtor, confusion or merger of rights, and the effect of partnership dissolution on existing obligations.

On February 1, 1919, the plaintiffs—the Testate Estate of Lazaro Mota, deceased, Juan J. Vidaurrazaga for himself and in behalf of his brothers Felix and Dionisio Vidaurrazaga—and Salvador Serra entered into a contract of partnership, Exhibit A, for the construction and exploitation of a railroad line from the "San Isidro" and "Palma" centrals to a place known as "Nandong." The original capital was fixed at P150,000, to be paid in equal parts by the parties, and the plaintiffs were entrusted with the partnership's administration. The agreed capital proved insufficient; expenses up to May 15, 1920 reached P226,092.92, according to Exhibit B, a statement presented by the administrator and approved by Serra.

On January 29, 1920, Serra sold to Venancio Concepcion, Phil. C. Whitaker, and Eusebio R. de Luzuriaga the estate and central known as "Palma," together with its running business, improvements, machineries, buildings, real and personal properties, rights, choses in action, and interests, including the sugar plantation for the 1920 to 1921 harvest. The sale, Exhibit 1, was executed before a notary public of Iloilo. Paragraph 5 of Exhibit 1 recited that Serra had a contract with the owners of the "San Isidro" Central for the construction, operation, and exploitation of a railroad line of about 10 kilometers from the "Palma" and "San Isidro" centrals to "Nandong"; that the expenses until its termination would be for the account of the "San Isidro" Central; and that one-half of those expenses would be borne by the "Palma" Central, with the obligation to reimburse the "San Isidro" Central within five years with interest at 10% per annum. The vendee obligated himself to respect that contract and all obligations arising from it. Before delivery of the hacienda to the purchasers, De Luzuriaga renounced all his rights under the January 29, 1920 contract in favor of Concepcion and Whitaker.

On July 17, 1920, Concepcion, Whitaker, and Serra executed before Antonio Sanz, a notary public in Manila, another deed of absolute sale of the "Palma" Estate for P1,695,961.90. Serra received P945,861.90 at the execution of the deed, and the balance was payable in installments as stipulated. The purchasers guaranteed the unpaid balance by a first and special mortgage in Serra's favor over the hacienda and central, with all improvements, buildings, machineries, and appurtenances then existing. Clause 6 of the July 17, 1920 deed stated that Whitaker and Concepcion were aware of Serra's contract with the proprietors of the "San Isidro" Central for the operation and exploitation of the railroad line, and they obligated themselves to respect that contract and to subrogate themselves into the rights and obligations thereunder, as well as to comply with all contracts previously entered into by the vendor with customers, coparceners on shares, and employees.

Afterwards, on January 8, 1921, Concepcion and Whitaker bought from the plaintiffs the one-half of the railroad line pertaining to the latter, executing document Exhibit 5. The price was P237,722.15, excluding any amount Serra might owe the plaintiffs, but only P47,544.43 of that price was paid. In Exhibit 5, the plaintiffs and Concepcion and Whitaker agreed that the partnership "Palma" and "San Isidro," formed by the February 1, 1919 agreement between Serra, Lazaro Mota, and Juan J. Vidaurrazaga for himself and in behalf of his brothers Felix and Dionisio Vidaurrazaga, would be dissolved upon execution of the contract, and that the partnership agreement would be totally cancelled and of no force and effect.

Because Whitaker and Concepcion failed to pay Serra P750,000 of the purchase price, Serra foreclosed the mortgage on the hacienda. The property was adjudicated to him at the public sale held by the sheriff for P500,000, and he was placed in possession, including what was planted at the time and all improvements made by Whitaker and Concepcion. Since Serra failed to pay one-half of the amount expended by the plaintiffs on the construction of the railroad line—P113,046.46—and Whitaker and Concepcion also did not pay, the plaintiffs instituted the present action on October 25, 1922. They prayed that the February 1, 1919 deed be declared valid and binding; that Serra, who had allegedly improved economically and could pay, be ordered to pay the amount owed despite his refusal notwithstanding demands; and that Serra be sentenced to pay P113,046.46 with stipulated interest at 10% per annum from June 4, 1920 until full payment, with costs. Serra set up three special defenses: novation of the contract by substitution of the debtor with the conformity of the creditors; confusion of the rights of creditor and debtor; and extinguishment of the contract, Exhibit A.

• Subrogation: Petitioner argued that the trial court erred in holding that Whitaker and Concepcion, upon purchasing the "Palma" Central, were subrogated in place of Serra in all his rights and obligations under the railroad-line contract and that the plaintiffs agreed to this subrogation.
• Extinguishment of Exhibit A: Petitioner maintained that the trial court erred in holding that Exhibit A of February 1, 1919 had been extinguished in its entirety and made null and void by the agreement Exhibit 5 dated December 16, 1920.
• Absolution and Costs: Petitioner argued that the trial court erred in absolving Serra from the complaint and in sentencing the plaintiffs to pay the costs.
• Award of Principal and Interest: Petitioner maintained that the trial court erred in not sentencing Serra to pay P113,046.46, with legal interest at 10% per annum from June 4, 1920 until full payment, with costs against Serra.

• Novation by Substitution: Respondent set up the defense that the contract was novated by the substitution of the debtor with the conformity of the creditors.
• Confusion of Rights: Respondent argued that the obligation was extinguished by confusion of the rights of creditor and debtor because the debt was transferred to Whitaker and Concepcion by Exhibit 1 and they later acquired the plaintiffs' credit by Exhibit 5.
• Extinguishment of Partnership Contract: Respondent maintained that Exhibit A had been extinguished, so the plaintiffs could not enforce any right arising from the annulled partnership contract.
• Prematurity: Respondent argued that the action was premature because the five-year period from February 1, 1919, within which he could pay his part of the construction cost, had not elapsed by the date of the complaint on October 25, 1922.
• Consent to Substitution: Respondent invoked the Spanish Supreme Court decision of June 16, 1908 and contended that the plaintiffs' acts after the sale of the "Hacienda Palma" to Whitaker and Concepcion constituted evidence of the creditor's consent to the substitution.

• Novation by Substitution of Debtor: Whether the obligation of Salvador Serra to pay one-half of the railroad construction costs was novated by the substitution of Whitaker and Concepcion as debtors with the plaintiffs' consent under Article 1205 of the Civil Code.
• Consent of the Creditor: Whether the plaintiffs expressly consented to the substitution of debtors through their letters, statements of account, and dealings with Whitaker and Concepcion.
• Confusion or Merger: Whether the obligation was extinguished by confusion or merger of the rights of creditor and debtor under Article 1192 of the Civil Code.
• Effect of Partnership Dissolution: Whether the dissolution and cancellation of the partnership contract, Exhibit A, extinguished Serra's existing obligation to pay his share of the construction costs.
• Prematurity: Whether the action was premature because the five-year period stipulated for payment had not yet elapsed.
• Liability and Interest: Whether Serra should be ordered to pay P113,046.46 with 10% interest from June 4, 1920 or from the date of filing of the complaint.

• Novation by Substitution of Debtor: No. Under Article 1205 of the Civil Code, novation by substitution of a debtor requires the creditor's express consent; no such consent was shown.
• Consent of the Creditor: No. The plaintiffs' acts, letters, and dealings with Whitaker and Concepcion did not amount to express consent to release Serra, because a waiver of rights is not presumed.
• Confusion or Merger: No. The plaintiffs sold only one-half of the railroad line; the credit against Serra was not included in Exhibit 5, so no merger under Article 1192 occurred.
• Effect of Partnership Dissolution: No. Dissolution of a partnership does not extinguish existing obligations; the partnership continues for winding up until its juridical relations are dissolved.
• Prematurity: No. The parties dissolved the partnership by mutual consent and cancelled Exhibit A, so the five-year term need not be awaited; Article 113 on pure obligations applies.
• Liability and Interest: Yes. Serra is indebted to the plaintiffs for P113,046.46, with agreed interest at 10% per annum from the date of filing of the complaint.

• Novation by Substitution of Debtor: Article 1205 provides that novation consisting in the substitution of a new debtor in place of the original one may be made without the knowledge of the latter, but not without the consent of the creditor. The consent must be express because novation extinguishes the personality of the first debtor and implies a waiver of the creditor's right; under the principle renuntiatio non praesumitur, waiver cannot be presumed. Whitaker and Concepcion's willingness to assume Serra's obligation was insufficient absent the plaintiffs' express consent. The plaintiffs were not parties to Exhibit 1, and no document in the record contained a stipulation novating Serra's obligation with the creditor's consent. Oral evidence tending to prove novation was insufficient in law, as held in Martinez vs. Cavives. Thus, no novation occurred.
• Consent of the Creditor: The letter Exhibit 6 could not be considered proof of the plaintiffs' consent to substitution. It was written because Serra had told the plaintiffs that after the sale of the "Hacienda Palma" to Whitaker and Concepcion, the purchasers would bear the cost of repairs, maintenance, and necessary additions to the railroad line. In that letter, the plaintiffs submitted a statement of account as of June 30, 1920, noted that Serra had already approved the accounts as of May 15, 1920, and sought the new purchasers' conformity for the period from May 15 to June 30, 1920, as well as their authority for future investments or their objections. The testimony of Julio Infante in connection with Exhibit 7 likewise did not establish consent; the plaintiffs merely asked the new owners whether they would accept the statement of account and continue as co-proprietors of the railroad line. Although the plaintiffs had to deal with the new owners after Serra sold the hacienda, nothing showed the express, manifest, and deliberate intention to exempt Serra from his obligation and transfer it to Whitaker and Concepcion. The Spanish Supreme Court decision of June 16, 1908 was distinguished: there the creditor sued the new debtor, which proved consent to substitution; here the creditor sued the original debtor, showing that no consent to substitution was given. Consent may be given subsequently, but it must be expressly manifested.
• Confusion or Merger: Article 1192 extinguishes an obligation when the rights of creditor and debtor merge in one person. The argument that the debt was transferred to Whitaker and Concepcion by Exhibit 1 and that they acquired the plaintiffs' credit by Exhibit 5 was untenable. Exhibit 5 showed that the plaintiffs sold only their rights and titles over one-half of the railroad line. The purchasers mortgaged to the plaintiffs both what they had bought from the plaintiffs and what they had bought from Serra, indicating that the plaintiffs transferred only their one-half interest. The credit that the plaintiffs held against Serra for one-half of the construction cost was not included in the sale. Therefore, no merger of creditor and debtor occurred.
• Effect of Partnership Dissolution: The contention that the plaintiffs could not enforce rights arising from the dissolved partnership was untenable. The dissolution of a partnership is not to be understood in an absolute and strict sense such that the partnership is extinguished at the termination of its object while incidents and obligations remain pending. The partnership is reputed to exist until the juridical relations arising from the contract are dissolved. The Spanish Supreme Court decision of February 6, 1903 was cited for the rule that a partnership cannot be considered extinguished until all obligations pertaining to it are fulfilled. Dissolution does not relieve members from liability for existing obligations, although it saves them from new obligations not expressly or impliedly assented to; a partnership continues after dissolution for the purpose of winding up its affairs. Serra's existing obligation therefore survived.
• Prematurity: Serra argued that the action was premature because the five years from February 1, 1919 had not elapsed by October 25, 1922. The plaintiffs and Serra's successors in interest, however, by mutual consent dissolved the partnership on June 16, 1920 and cancelled Exhibit A, to which Serra consented as shown by his answer. Because the parties themselves terminated the contract, there was no reason to await the expiration of the five-year term; Article 113, regarding the fulfillment of pure obligations, applied.
• Liability and Interest: Taking as established that Serra was obligated to pay the plaintiffs one-half of the cost of constructing the railroad line under Exhibit A, and finding no novation, merger, or extinguishment of that obligation, the judgment appealed from was reversed. Serra was held indebted to the plaintiffs in the amount of P113,046.46, with agreed interest at 10% per annum from the date of filing of the complaint. No special pronouncement as to costs was made.

• Novation by Substitution of Debtor — Under Article 1205 of the Civil Code, novation by substituting a new debtor in place of the original debtor may be made without the original debtor's knowledge but not without the creditor's consent. The consent must be express; it cannot be presumed. The new debtor's willingness to assume the obligation does not release the original debtor absent the creditor's express consent. In this case, no novation was found because the plaintiffs did not expressly consent to substituting Whitaker and Concepcion for Serra.
• Renuntiatio Non Praesumitur — A waiver of rights is not presumed; it must be indisputably shown by the person holding the right. Because novation by substitution implies a waiver of the creditor's right against the original debtor, the creditor's consent to substitution must be express. The Court applied this principle to reject the claim that the plaintiffs' dealings with the new purchasers implied consent to release Serra.
• Expromission and Delegation — Manresa's commentary, cited by the Court, distinguishes expromission, where a third person assumes the debtor's obligation without the debtor's initiative and requires the consent of the third person and the creditor, from delegation, where the debtor offers and the creditor accepts a third person and the consent of the delegante, delegatario, and delegado is necessary. A mere indication by the debtor that a third person will pay does not operate as novation. The Court used this distinction to explain why the new debtors' assumption did not novate the obligation without the plaintiffs' express consent.
• Confusion or Merger — Under Article 1192 of the Civil Code, an obligation is extinguished when the rights of creditor and debtor merge in one person. The Court found no merger because the plaintiffs sold only their one-half interest in the railroad line; the credit they held against Serra for one-half of the construction cost was not included in the sale to Whitaker and Concepcion.
• Dissolution of Partnership Does Not Extinguish Existing Obligations — The dissolution of a partnership does not relieve its members from liability for existing obligations, although it prevents new obligations from attaching without their express or implied assent. The partnership continues after dissolution for the purpose of winding up its affairs until all juridical relations arising from the contract are dissolved. The Court applied this rule to hold that Serra's obligation to pay his share of the railroad construction cost survived the dissolution and cancellation of Exhibit A.
• Prematurity and Pure Obligations — Where the parties themselves dissolved the partnership and cancelled the contract, the stipulated five-year period for payment need not be awaited. Article 113, regarding the fulfillment of pure obligations, applies. The Court thus rejected Serra's defense that the action filed on October 25, 1922 was premature.
• Parol Evidence Insufficient to Prove Novation — Novation must be express and cannot be established by oral evidence alone. The Court cited Martinez vs. Cavives for the rule that oral evidence tending to prove novation is not sufficient in law.

• "It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor. This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be substituted by new one, it implies on the part of the creditor a waiver of the right that he had before the novation which waiver must be express under the principle that renuntiatio non praesumitur, recognized by the law in declaring that a waiver of right may not be performed unless the will to waive is indisputably shown by him who holds the right." — This passage states the ratio decidendi on the express-consent requirement for novation by substitution of debtor.
• "The fact that Phil. C. Whitaker and Venancio Concepcion were willing to assume the defendant's obligation to the plaintiffs is of no avail, if the latter have not expressly consented to the substitution of the first debtor." — This passage explains why the new debtors' assumption of the obligation did not release Serra.
• "The dissolution of a firm does not relieve any of its members from liability for existing obligations, although it does save them from new obligations to which they have not expressly or impliedly assented, and any of them may be discharged from old obligations by novation of other form of release. It is often said that a partnership continues, even after dissolution, for the purpose of winding up its affairs." — This passage states the doctrine that partnership dissolution does not extinguish existing obligations.
• "Wherefore, we hold that in accordance with article 1205 of the Civil Code, in the instant case, there was no novation of the contract, by the change of the person of the debtor." — This is the Court's direct holding on the novation issue.

• Martinez vs. Cavives, 25 Phil., 581 — Cited for the rule that the consent of the new debtor is essential to novation and that oral evidence tending to prove novation is not sufficient in law.
• E.C. McCullough & Co. vs. Veloso and Serna, 46 Phil., 1 — Cited as controlling precedent holding that novation by substitution of debtor requires the creditor's consent; the creditor did not intervene in the contract between the debtor and the new debtor and did not expressly consent, and novation must be express and cannot be presumed.
• Vaca vs. Kosca, 26 Phil., 388 — Cited for the rule that a new debtor cannot be substituted for the original obligor in the first contract without the creditor's consent.
• Spanish Supreme Court decision of June 16, 1908 — Distinguished by the Court. In that case the creditor sued the new debtor, which was held to be incontrovertible proof of consent to substitution; in the present case the creditor sued the original debtor, showing no consent to substitution.
• Spanish Supreme Court decision of February 6, 1903 — Cited for the rule that a partnership cannot be considered extinguished until all obligations pertaining to it are fulfilled, supporting the holding that dissolution did not extinguish Serra's existing obligation.
• Latiolais, admrx. vs. Citizens' Bank of Louisiana, 33 La. Ann., 1444 — Cited in Martinez vs. Cavives for the rule that novation is never presumed and that mere acceptance of additional debtors does not discharge the original debtor absent express or implied consent.

• Article 1205, Civil Code — Provides that novation consisting in the substitution of a new debtor in place of the original one may be made without the knowledge of the latter, but not without the consent of the creditor. Applied to hold that no novation occurred because the plaintiffs did not expressly consent to substituting Whitaker and Concepcion for Serra.
• Article 1156, Civil Code — Provides that obligations are extinguished by novation, among other causes. The Court noted that if novation had occurred, Serra's obligation would have been extinguished; because no novation was established, the obligation remained.
• Article 1192, Civil Code — Provides that an obligation is extinguished by confusion or merger of the rights of creditor and debtor. Applied to reject Serra's defense because the plaintiffs' credit against him was not included in the sale under Exhibit 5.
• Article 113, Civil Code — Cited as governing the fulfillment of pure obligations. Applied to hold that after the parties dissolved the partnership and cancelled Exhibit A, the action was not premature despite the unexpired five-year term.
• Article 1206, Civil Code — Mentioned in Manresa's commentary as impliedly recognizing the two forms of novation by substitution, expromission and delegation. The Court used this distinction to explain that a mere assumption or indication of payment does not operate as novation without the creditor's express consent.

Johnson, Street, Malcolm, Ostrand, Johns, and Romualdez, JJ., concur.