Reyes v. Secretary of Justice

G.R. No. 120817,4 November 1996

FACTS:

Reyes is the president of EUROTRUST, a domestic corporation engaged in credit finance, entered into a contract of loan with Eleazar the president of BERMIC, a domestic enterprise engaged in real estate development. Based on their contract EUROTRUST extended financial support for the construction of BERMIC’s Condominium and Business Park. The loan was without collateral but with higher interest rate. BERMIC issued 21 post-dated checks to cover the payments of the loan; however, the said checks were dishonored by the drawee bank, due to stop payment order by Eleazar. Despite notice and repeated demands Eleazar still failed to pay.

Subsequently, Reyes was investigated in the Blue Ribbon Committee and found out that she was involved in large scale scam belonging to IMC, an agency under the department of education, culture and sports. AFP-MBAI invested to EUROTRUST for government securities, conducted its own investigation and found out that after the securities were delivered to AFP-MBAI the said securities were borrowed by EUROTRUST to AFP-MBAI but failed to return the same. And the securities were in turn lent by Reyes to BERMIC.

EUROTRUST and BERMIC agreed that BERMIC will settle its obligation to the real owners of the fund which are the AFP-MBAI and DECS-IMC, this was formalized by two letters. BERMIC the negotiated with AFP-MBAI and DECS-IMC.

ISSUE:

Whether or not there was a novation by substitution of creditor.

RULING:

The Supreme Court ruled that there was no novation by substitution of creditor. In order that novation can take place the following requisites must first be followed:

  1. There must be a previous valid obligation,
  2. There must be an agreement of the parties concerned to a new contract,
  3. There must be the extinguishment of the old contract, and
  4. There must be the validity of the new contract.

In the case according to it, formalized petitioners and respondent Eleazars agreement that BERMIC would directly settle its obligation with the real owners of the funds – the AFP MBAI and DECS IMC. Be that as it may, a cursory reading of these letters, however, clearly and unmistakably shows that there was nothing therein that would evince that respondent AFP-MBAI agreed to substitute for the petitioner as the new creditor of respondent Eleazar in the contract of loan. It is evident that the two letters merely gave respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement between petitioner and respondent Eleazar only. There was no mention whatsoever of AFP-MBAI’s consent to the new agreement between petitioner and respondent Eleazar much less an indication of AFP-MBAI’s intention to be the substitute creditor in the loan contract. Well settled is the rule that novation by substitution of creditor requires an agreement among the three parties concerned – the original creditor, the debtor and the new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties. Hence, there is no novation if no new contract was executed by the parties.

Article 1301 of the Civil Code is explicit, thus:

Conventional subrogation of a third person requires the consent of the original parties and of the third person.

The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted them does not ipso facto result in novation. There must be an express intention to novate – animus novandi. Novation is never presumed.Article 1300 of the Civil Code provides inter alia that conventional subrogation must be clearly established in order that it may take effect.

* Case digest by Lea Caipang, LLB-1, Andres Bonifacio Law School, SY 2017-2018

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