California Bus Line v. State Investment

G.R. No. 147950, 11 December 2003

FACTS:

Delta Motors Corporation M.A.N. Division (Delta) applied for financial assistance from respondent State Investment House, Inc. (hereafter SIHI) which the latter agreed to extend a credit line to Delta in three separate credit agreements. On several occasions, Delta availed of the credit line by discounting with SIHI some of its receivables, which evidence actual sales of Deltas vehicles. Delta eventually became indebted to SIHI.

Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and two (2) units of M.A.N. Diesel Conversion Engines from Delta. To secure the payment of the purchase price of the 35 buses, CBLI and its president, Mr. Dionisio O. Llamas, executed sixteen (16) promissory notes in favor of Delta payable in 60 monthly installments. When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta to cover its overdue obligations under the promissory notes.

Delta executed a Continuing Deed of Assignment of Receivables[7] in favor of SIHI as security for the payment of its obligations to SIHI per the credit agreements. In view of Deltas failure to pay, the loan agreements were restructured under a Memorandum of Agreement.

CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten CBLI with the enforcement of the management takeover clause. To pre-empt the take-over, CBLI filed a complaint.

ISSUE:

WHETHER OR NOT the Restructuring Agreement between petitioner CBLI and Delta Motors, Corp. novated the five promissory notes Delta Motors, Corp. assigned to respondent SIHI.

RULING:

No.  The restructuring agreement between Delta and CBLI shows that the parties did not expressly stipulate that the restructuring agreement novated the promissory notes. Absent an unequivocal declaration of extinguishment of the pre-existing obligation, only a showing of complete incompatibility between the old and the new obligation would sustain a finding of novation by implication

There was no change in the object of the prior obligations. The restructuring agreement merely provided for a new schedule of payments and additional security giving Delta authority to take over the management and operations of CBLI in case CBLI fails to pay installments equivalent to 60 days. Where the parties to the new obligation expressly recognize the continuing existence and validity of the old one, there can be no novation.

Moreover, this Court has ruled that an agreement subsequently executed between a seller and a buyer that provided for a different schedule and manner of payment, to restructure the mode of payments by the buyer so that it could settle its outstanding obligation in spite of its delinquency in payment, is not tantamount to novation.

* Case digest Prince Dave C. Santiago, LLB-1, Andres Bonifacio Law School, SY 2017-2018

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