G.R. No. 99398, 26 January 2001

FACTS:

These are consolidated petitions which seek the review of the Decision dated April 29, 1991 of the Court of Appeals in CA-G.R. CV No. 172821 entitled, “Bank of the Philippine Islands, Plaintiff-Appellee versus Elizalde Steel Consolidated, Inc., Pacific Multi-Commercial Corporation, and Chester G. Babst, Defendants-Appellants.”

On June 8, 1973, ELISCON obtained from Commercial Bank and Trust Company a loan in the amount of P 8,015,900.84, with interest at the rate of 14% per annum, evidenced by a promissory note. ELISCON defaulted in its payments, leaving an outstanding indebtedness in the amount of P2,795,240.67 as of October 31, 1982.

The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board of Directors of MULTI adopted on August 31, 1977.

Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a Continuing Suretyship, whereby they bound themselves jointly and severally liable to pay any existing indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each.

Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation (NSC) 3 domestic letters of credit in the amounts of P1,946,805.73, P1,702,869.32 and P200,307.72, respectively, which ELISCON used to purchase tin black plates from NSC.

ELISCON defaulted in its obligation to pay the amounts of the letters of credit, leaving an outstanding account, as of 31 October 1982, in the total amount of P3,963,372.08. On 22 December 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein BPI, as the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC. Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the Development Bank of the Philippines (DBP).

In order to settle its obligations, ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP, as payment for its total indebtedness in the amount of P201,181,833.16. On 28 December 1978, ELISCON and DBP executed a Deed of Cession of Property in Payment of Debt. In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets. In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to BPI.

Thereafter, DBP proposed formulas for the settlement of all of ELISCON’s obligations to its creditors, but BPI expressly rejected the formula submitted to it for not being acceptable. Consequently, on 17 January 1983, BPI, as successor-in-interest of CBTC, instituted with the Regional Trial Court of Makati, Branch 147, a complaint for sum of money against ELISCON, MULTI and Babst (Civil Case 49226).

On 20 February 1987, the trial court rendered its Decision in favor of BPI. In due time, ELISCON, MULTI and Babst filed their respective notices of appeal. On 29 April 1991, the Court of Appeals rendered a Decision modifying the judgment of the trial court. ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was, however, denied in a Resolution dated 9 March 1992. Subsequently, ELISCON filed a petition for review on certiorari (GR. 104625).

Meanwhile, Babst also filed a petition for review with the Court (GR 99398).

ISSUES:

1. Whether or not BPI can institute the present case.
2. Whether or not BPI, the surviving corporation in a merger with CBTC, consented to the assumption by DBP of the obligations of ELISCON.

RULING:

The consolidated petitions were GRANTED. The court REVERSED and SET ASIDE the appealed Decision of the Court of Appeals, which held ELISCON, MULTI and Babst solidarily liable for payment to BPI of the promissory note and letters of credit but BPI’s complaint against ELISCON, MULTI and Babst was DISMISSED.

The merger between BPI and CBTC is valid. It is settled that in the merger of two existing corporations, if one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. BPI therefore has the right to institute the present case.

The court further held that the failure of BPI to register its objection to the take-over by DBP of ELISCON’s assets, at the creditors’ meeting held in June 1981 and thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor.

The authority granted by BPI to its account officer to attend the creditors’ meeting was an authority to represent the bank, such that when he failed to object to the substitution of debtors, he did so on behalf of and for the bank. Even granting arguendo that the said account officer was not so empowered, BPI could have subsequently registered its objection to the substitution, especially after it had already learned that DBP had taken over the assets and assumed the liabilities of ELISCON.

Its failure to do so can only mean an acquiescence in the assumption by DBP of ELISCON’s obligations. As repeatedly pointed out by ELISCON and MULTI, BPI’s objection was to the proposed payment formula, not to the substitution itself. BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve its causes of action and legal recourse against the sureties of ELISCON.

It must be remembered, however, that while a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the principal debtor’s failure or refusal to pay. There was no indication that the principal debtor will default in payment. In fact, DBP, which had stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock was increased by the government.

More importantly, the National Development Company took over the business of ELISCON and undertook to pay ELISCON’s creditors, and earmarked for that purpose the amount of P4,015,534.54 for payment to BPI. Notwithstanding the fact that a reliable institution backed by government funds was offering to pay ELISCON’s debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only to itself, insisted in going after the sureties.

BPI’s conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor. Hence, there was a valid novation which resulted in the release of ELISCON from its obligation to BPI, whose cause of action should be directed against DBP as the new debtor.

*Case Digest by Jelyn C. Ondong, Refresher, Andres Bonifacio College, SY: 2019-2020