Republic of the PhilippinesSUPREME COURTManila

FIRST DIVISION
G.R. No. L-33320 May 30, 1983
RAMON A. GONZALES, petitioner, vs.THE PHILIPPINE NATIONAL BANK,
respondent.
Ramon A. Gonzales in his own behalf.
Juan Diaz for respondent.

VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance
of Manila a special civil action for mandamus against the herein respondent
praying that the latter be ordered to allow him to look into the books and records
of the respondent bank in order to satisfy himself as to the truth of the published
reports that the respondent has guaranteed the obligation of Southern Negros
Development Corporation in the purchase of a US$ 23 million sugar-mill to be
financed by Japanese suppliers and financiers; that the respondent is financing
the construction of the P 21 million Cebu-Mactan Bridge to be constructed by
V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron
Philippines, Inc., as well as to inquire into the validity of Id transactions. The
petitioner has alleged hat his written request for such examination was denied
by the respondent. The trial court having dismissed the petition for mandamus,
the instant appeal to review the said dismissal was filed.
The facts that gave rise to the subject controversy have been set forth by the
trial court in the decision herein sought to be reviewed, as follows:
Briefly stated, the following facts gathered from the stipulation of the parties
served as the backdrop of this proceeding.
Previous to the present action, the petitioner instituted several cases in this
Court questioning different transactions entered into by the Bark with other
parties. First among them is Civil Case No. 69345 filed on April 27, 1967, by
petitioner as a taxpayer versus Sec. Antonio Raquiza of Public Works and
Communications, the Commissioner of Public Highways, the Bank, Continental
Ore Phil., Inc., Continental Ore, Huber Corporation, Allis Chalmers and General

Motors Corporation In the course of the hearing of said case on August 3, 1967,
the personality of herein petitioner to sue the bank and question the letters of
credit it has extended for the importation by the Republic of the Philippines of
public works equipment intended for the massive development program of the
President was raised. In view thereof, he expressed and made known his
intention to acquire one share of stock from Congressman Justiniano Montano
which, on the following day, August 30, 1967, was transferred in his name in the
books of the Bank.
Subsequent to his aforementioned acquisition of one share of stock of the Bank,
petitioner, in his dual capacity as a taxpayer and stockholder, filed the following
cases involving the bank or the members of its Board of Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors of the
Bank; the National Investment and Development Corp., Marubeni Iida Co., Ltd.,
and Agro-Inc. Dev. Co. or Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other
Directors of the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao
Sugar Mill Integrated Farming, Inc., Talog sugar Milling Co., Inc., Safary Central,
Inc., and Batangas Sugar Central Inc.;
3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the
Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a letter to the President of
the Bank (Annex A, Pet.), requesting submission to look into the records of its
transactions covering the purchase of a sugar central by the Southern Negros
Development Corp. to be financed by Japanese suppliers and financiers; its
financing of the Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc. and
the construction of the Passi Sugar Mills in Iloilo. On January 23, 1969, the Asst.
Vice-President and Legal Counsel of the Bank answered petitioner's letter
denying his request for being not germane to his interest as a one-share
stockholder and for the cloud of doubt as to his real intention and purpose in
acquiring said share. (Annex B, Pet.) In view of the Bank's refusal the petitioner
instituted this action.' (Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in
its brief which he characterized as having been "correctly stated." (PetitionerAppellant"s Brief, pp. 57.)
The court a quo denied the prayer of the petitioner that he be allowed to
examine and inspect the books and records of the respondent bank regarding

the transactions mentioned on the grounds that the right of a stockholder to

inspect the record of the business transactions of a corporation granted under
Section 51 of the former Corporation Law (Act No. 1459, as amended) is not
absolute, but is limited to purposes reasonably related to the interest of the
stockholder, must be asked for in good faith for a specific and honest purpose
and not gratify curiosity or for speculative or vicious purposes; that such
examination would violate the confidentiality of the records of the respondent
bank as provided in Section 16 of its charter, Republic Act No. 1300, as
amended; and that the petitioner has not exhausted his administrative remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the
single error to the lower court of having ruled that his alleged improper motive in
asking for an examination of the books and records of the respondent bank
disqualifies him to exercise the right of a stockholder to such inspection under
Section 51 of Act No. 1459, as amended. Said provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the corporation and the
minutes of any meeting shall be open to the inspection of any director, member
or stockholder of the corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the
qualification made by the lower court that the inspection of corporate records
may be denied on the ground that it is intended for an improper motive or
purpose, the law having granted such right to a stockholder in clear and
unconditional terms. He further argues that, assuming that a proper motive or
purpose for the desired examination is necessary for its exercise, there is
nothing improper in his purpose for asking for the examination and inspection
herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act No.
1459, as amended, regarding the right of a stockholder to inspect and examine
the books and records of a corporation. The former Corporation Law (Act No.
1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise
known as the "Corporation Code of the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No.
1459 has been retained, but with some modifications. The second and third
paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following:
The records of all business transactions of the corporation and the minutes of
any meeting shag be open to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business days and he may

demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustee, stockholder or member of the corporation to examine and copy excerpts
from its records or minutes, in accordance with the provisions of this Code, shall
be liable to such director, trustee, stockholder or member for damages, and in
addition, shall be guilty of an offense which shall be punishable under Section
144 of this Code: Provided, That if such refusal is made pursuant to a resolution
or order of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted for such
refusal; and Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any information secured
through any prior examination of the records or minutes of such corporation or
of any other corporation, or was not acting in good faith or for a legitimate
purpose in making his demand.
As may be noted from the above-quoted provisions, among the changes
introduced in the new Code with respect to the right of inspection granted to a
stockholder are the following the records must be kept at the principal office of
the corporation; the inspection must be made on business days; the stockholder
may demand a copy of the excerpts of the records or minutes; and the refusal to
allow such inspection shall subject the erring officer or agent of the corporation
to civil and criminal liabilities. However, while seemingly enlarging the right of
inspection, the new Code has prescribed limitations to the same. It is now
expressly required as a condition for such examination that the one requesting it
must not have been guilty of using improperly any information through a prior
examination, and that the person asking for such examination must be "acting in
good faith and for a legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously contained in
Section 51, Act No. 1459, as amended, no longer holds true under the
provisions of the present law. The argument of the petitioner that the right
granted to him under Section 51 of the former Corporation Law should not be
dependent on the propriety of his motive or purpose in asking for the inspection
of the books of the respondent bank loses whatever validity it might have had
before the amendment of the law. If there is any doubt in the correctness of the
ruling of the trial court that the right of inspection granted under Section 51 of
the old Corporation Law must be dependent on a showing of proper motive on
the part of the stockholder demanding the same, it is now dissipated by the clear
language of the pertinent provision contained in Section 74 of Batas Pambansa

Blg. 68.
Although the petitioner has claimed that he has justifiable motives in seeking the
inspection of the books of the respondent bank, he has not set forth the reasons
and the purposes for which he desires such inspection, except to satisfy himself
as to the truth of published reports regarding certain transactions entered into by
the respondent bank and to inquire into their validity. The circumstances under
which he acquired one share of stock in the respondent bank purposely to
exercise the right of inspection do not argue in favor of his good faith and proper
motivation. Admittedly he sought to be a stockholder in order to pry into
transactions entered into by the respondent bank even before he became a
stockholder. His obvious purpose was to arm himself with materials which he
can use against the respondent bank for acts done by the latter when the
petitioner was a total stranger to the same. He could have been impelled by a
laudable sense of civic consciousness, but it could not be said that his purpose
is germane to his interest as a stockholder.
We also find merit in the contention of the respondent bank that the inspection
sought to be exercised by the petitioner would be violative of the provisions of its
charter. (Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the
said charter provide respectively as follows:
Sec. 15. Inspection by Department of Supervision and Examination of the
Central Bank. The National Bank shall be subject to inspection by the
Department of Supervision and Examination of the Central Bank'
Sec. 16. Confidential information. The Superintendent of Banks and the
Auditor General, or other officers designated by law to inspect or investigate the
condition of the National Bank, shall not reveal to any person other than the
President of the Philippines, the Secretary of Finance, and the Board of
Directors the details of the inspection or investigation, nor shall they give any
information relative to the funds in its custody, its current accounts or deposits
belonging to private individuals, corporations, or any other entity, except by
order of a Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act. Any director,
officer, employee, or agent of the Bank, who violates or permits the violation of
any of the provisions of this Act, or any person aiding or abetting the violations
of any of the provisions of this Act, shall be punished by a fine not to exceed ten
thousand pesos or by imprisonment of not more than five years, or both such
fine and imprisonment.

The Philippine National Bank is not an ordinary corporation. Having a charter of

its own, it is not governed, as a rule, by the Corporation Code of the Philippines.
Section 4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters. Corporations
created by special laws or charters shall be governed primarily by the provisions
of the special law or charter creating them or applicable to them. supplemented
by the provisions of this Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation
Code with respect to the right of a stockholder to demand an inspection or
examination of the books of the corporation may not be reconciled with the
abovequoted provisions of the charter of the respondent bank. It is not correct to
claim, therefore, that the right of inspection under Section 74 of the new
Corporation Code may apply in a supplementary capacity to the charter of the
respondent bank.
WHEREFORE, the petition is hereby DISMISSED, without costs.
Melencio-Herrera, Plana and Gutierrez, Jr., JJ., concur.
Teehankee (Chairman), concurs in the result.
Relova, J., is on leave.

FIRST DIVISION
[G.R. No. 123793. June 29, 1998]

ASSOCIATED BANK, petitioner, vs. COURT OF

APPEALS and LORENZO SARMIENTO JR.,
respondents.
DECISION
PANGANIBAN, J.:

In a merger, does the surviving corporation have a right to enforce

a contract entered into by the absorbed company subsequent to the
date of the merger agreement, but prior to the issuance of a certificate
of merger by the Securities and Exchange Commission?
The Case
This is a petition for review under Rule 45 of the Rules of Court
seeking to set aside the Decision[1] of the Court of Appeals[2] in CAGR CV No. 26465 promulgated on January 30, 1996, which answered
the above question in the negative. The challenged Decision
reversed and set aside the October 17, 1986 Decision[3] in Civil Case
No. 85-32243, promulgated by the Regional Trial Court of Manila,
Branch 48, which disposed of the controversy in favor of herein
petitioner as follows:[4]
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff Associated Bank. The defendant Lorenzo Sarmiento,
Jr. is ordered to pay plaintiff:
1.
The amount of P4,689,413.63 with interest thereon at 14% per
annum until fully paid;
2.

The amount of P200,000.00 as and for attorneys fees; and

3.

The costs of suit.

On the other hand, the Court of Appeals resolved the case in this
wise:[5]
WHEREFORE, premises considered, the decision appealed
from, dated October 17, 1986 is REVERSED and SET ASIDE
and another judgment rendered DISMISSING plaintiffappellees complaint, docketed as Civil Case No. 85-32243.
There is no pronouncement as to costs.
The Facts
The undisputed factual antecedents, as narrated by the trial court
and adopted by public respondent, are as follows:[6]
x x x [O]n or about September 16, 1975 Associated Banking
Corporation and Citizens Bank and Trust Company merged to
form just one banking corporation known as Associated
Citizens Bank, the surviving bank. On or about March 10,
1981, the Associated Citizens Bank changed its corporate
name to Associated Bank by virtue of the Amended Articles of
Incorporation. On September 7, 1977, the defendant executed
in favor of Associated Bank a promissory note whereby the
former undertook to pay the latter the sum of P2,500,000.00
payable on or before March 6, 1978. As per said promissory
note, the defendant agreed to pay interest at 14% per annum,
3% per annum in the form of liquidated damages,
compounded interests, and attorneys fees, in case of litigation
equivalent to 10% of the amount due. The defendant, to date,
still owes plaintiff bank the amount of P2,250,000.00 exclusive
of interest and other charges. Despite repeated demands the
defendant failed to pay the amount due.
xxx xxx

xxx

x x x [T]he defendant denied all the pertinent allegations in the

complaint and alleged as affirmative and[/]or special defenses

that the complaint states no valid cause of action; that the

plaintiff is not the proper party in interest because the
promissory note was executed in favor of Citizens Bank and
Trust Company; that the promissory note does not accurately
reflect the true intention and agreement of the parties; that
terms and conditions of the promissory note are onerous and
must be construed against the creditor-payee bank; that
several partial payments made in the promissory note are not
properly applied; that the present action is premature; that as
compulsory counterclaim the defendant prays for attorneys
fees, moral damages and expenses of litigation.
On May 22, 1986, the defendant was declared as if in default
for failure to appear at the Pre-Trial Conference despite due
notice.
A Motion to Lift Order of Default and/or Reconsideration of
Order dated May 22, 1986 was filed by defendants counsel
which was denied by the Court in [an] order dated September
16, 1986 and the plaintiff was allowed to present its evidence
before the Court ex-parte on October 16, 1986.
At the hearing before the Court ex-parte, Esteban C. Ocampo
testified that x x x he is an accountant of the Loans and
Discount Department of the plaintiff bank; that as such, he
supervises the accounting section of the bank, he
counterchecks all the transactions that transpired during the
day and is responsible for all the accounts and records and
other things that may[ ]be assigned to the Loans and Discount
Department; that he knows the [D]efendant Lorenzo
Sarmiento, Jr. because he has an outstanding loan with them
as per their records; that Lorenzo Sarmiento, Jr. executed a
promissory note No. TL-2649-77 dated September 7, 1977 in
the amount of P2,500,000.00 (Exhibit A); that Associated
Banking Corporation and the Citizens Bank and Trust
Company merged to form one banking corporation known as
the Associated Citizens Bank and is now known as Associated
Bank by virtue of its Amended Articles of Incorporation; that

there were partial payments made but not full; that the
defendant has not paid his obligation as evidenced by the
latest statement of account (Exh. B); that as per statement of
account the outstanding obligation of the defendant is
P5,689,413.63 less P1,000,000.00 or P4,689,413.63 (Exh. B,
B-1); that a demand letter dated June 6, 1985 was sent by the
bank thru its counsel (Exh. C) which was received by the
defendant on November 12, 1985 (Exh. C, C-1, C-2, C-3); that
the defendant paid only P1,000,000.00 which is reflected in
the Exhibit C.
Based on the evidence presented by petitioner, the trial court
ordered Respondent Sarmiento to pay the bank his remaining balance
plus interests and attorneys fees. In his appeal, Sarmiento assigned
to the trial court several errors, namely:[7]
I
The [trial court] erred in denying appellants motion
to dismiss appellee banks complaint on the ground of lack
of cause of action and for being barred by prescription and
laches.
II
The same lower court erred in admitting plaintiffappellee banks amended complaint while defendantappellants motion to dismiss appellee banks original
complaint and using/availing [itself of] the new additional
allegations as bases in denial of said appellants motion
and in the interpretation and application of the agreement
of merger and Section 80 of BP Blg. 68, Corporation Code
of the Philippines.
III
The [trial court] erred and gravely abuse[d] its
discretion in rendering the two as if in default orders dated
May 22, 1986 and September 16, 1986 and in not
reconsidering the same upon technical grounds which in
effect subvert the best primordial interest of substantial
justice and equity.
IV
The court a quo erred in issuing the orders dated
May 22, 1986 and September 16, 1986 declaring

appellant as if in default due to non-appearance of

appellants attending counsel who had resigned from the
law firm and while the parties [were] negotiating for
settlement of the case and after a one million peso
payment had in fact been paid to appellee bank for
appellants account at the start of such negotiation on
February 18, 1986 as act of earnest desire to settle the
obligation in good faith by the interested parties.
V
The lower court erred in according credence to
appellee banks Exhibit B statement of account which had
been merely requested by its counsel during the trial and
bearing date of September 30, 1986.
VI
The lower court erred in accepting and giving
credence to appellee banks 27-year-old witness Esteban
C. Ocampo as of the date he testified on October 16,
1986, and therefore, he was merely an eighteen-year-old
minor when appellant supposedly incurred the foisted
obligation under the subject PN No. TL-2649-77 dated
September 7, 1977, Exhibit A of appellee bank.
VII
The [trial court] erred in adopting appellee banks
Exhibit B dated September 30, 1986 in its decision given
in open court on October 17, 1986 which exacted eighteen
percent (18%) per annum on the foisted principal amount
of P2.5 million when the subject PN, Exhibit A, stipulated
only fourteen percent (14%) per annum and which was
actually prayed for in appellee banks original and
amended complaints.
VIII
The appealed decision of the lower court erred in
not considering at all appellants affirmative defenses that
(1) the subject PN No. TL-2649-77 for P2.5 million dated
September 7, 1977, is merely an accommodation pour
autrui bereft of any actual consideration to appellant
himself and (2) the subject PN is a contract of adhesion,
hence, [it] needs [to] be strictly construed against appellee

bank -- assuming for granted that it has the right to

enforce and seek collection thereof.
IX
The lower court should have at least allowed
appellant the opportunity to present countervailing
evidence considering the huge amounts claimed by
appellee bank (principal sum of P2.5 million which
including accrued interests, penalties and cost of litigation
totaled P4,689,413.63) and appellants affirmative
defenses -- pursuant to substantial justice and equity.
The appellate court, however, found no need to tackle all the
assigned errors and limited itself to the question of whether [herein
petitioner had] established or proven a cause of action against [herein
private respondent]. Accordingly, Respondent Court held that the
Associated Bank had no cause of action against Lorenzo Sarmiento
Jr., since said bank was not privy to the promissory note executed by
Sarmiento in favor of Citizens Bank and Trust Company (CBTC). The
court ruled that the earlier merger between the two banks could not
have vested Associated Bank with any interest arising from the
promissory note executed in favor of CBTC after such merger.
Thus, as earlier stated, Respondent Court set aside the decision
of the trial court and dismissed the complaint. Petitioner now comes
to us for a reversal of this ruling.[8]
Issues
In its petition, petitioner cites the following reasons:[9]
I The Court of Appeals erred in reversing the decision of the
trial court and in declaring that petitioner has no cause of
action against respondent over the promissory note.
II The Court of Appeals also erred in declaring that, since the
promissory note was executed in favor of Citizens Bank and
Trust Company two years after the merger between
Associated Banking Corporation and Citizens Bank and Trust
Company, respondent is not liable to petitioner because there

is no privity of contract between respondent and Associated

Bank.
III The Court of Appeals erred when it ruled that petitioner,
despite the merger between petitioner and Citizens Bank and
Trust Company, is not a real party in interest insofar as the
promissory note executed in favor of the merger.
In a nutshell, the main issue is whether Associated Bank, the
surviving corporation, may enforce the promissory note made by
private respondent in favor of CBTC, the absorbed company, after the
merger agreement had been signed.
The Courts Ruling
The petition is impressed with merit.
The Main Issue:
Associated Bank Assumed
All Rights of CBTC
Ordinarily, in the merger of two or more existing corporations, one
of the combining corporations survives and continues the combined
business, while the rest are dissolved and all their rights, properties
and liabilities are acquired by the surviving corporation. [10] Although
there is a dissolution of the absorbed corporations, there is no winding
up of their affairs or liquidation of their assets, because the surviving
corporation automatically acquires all their rights, privileges and
powers, as well as their liabilities.[11]
The merger, however, does not become effective upon the mere
agreement of the constituent corporations. The procedure to be
followed is prescribed under the Corporation Code.[12] Section 79 of
said Code requires the approval by the Securities and Exchange
Commission (SEC) of the articles of merger which, in turn, must have
been duly approved by a majority of the respective stockholders of
the constituent corporations. The same provision further states that
the merger shall be effective only upon the issuance by the SEC of a

certificate of merger. The effectivity date of the merger is crucial for

determining when the merged or absorbed corporation ceases to
exist; and when its rights, privileges, properties as well as liabilities
pass on to the surviving corporation.
Consistent with the aforementioned Section 79, the September
16, 1975 Agreement of Merger,[13] which Associated Banking
Corporation (ABC) and Citizens Bank and Trust Company (CBTC)
entered into, provided that its effectivity shall, for all intents and
purposes, be the date when the necessary papers to carry out this
[m]erger shall have been approved by the Securities and Exchange
Commission.[14] As to the transfer of the properties of CBTC to ABC,
the agreement provides:
10. Upon effective date of the Merger, all rights,
privileges, powers, immunities, franchises, assets
and property of [CBTC], whether real, personal or
mixed, and including [CBTCs] goodwill and
tradename, and all debts due to [CBTC] on whatever
act, and all other things in action belonging to [CBTC]
as of the effective date of the [m]erger shall be
vested in [ABC], the SURVIVING BANK, without
need of further act or deed, unless by express
requirements of law or of a government agency, any
separate or specific deed of conveyance to legally
effect the transfer or assignment of any kind of
property [or] asset is required, in which case such
document or deed shall be executed accordingly; and
all property, rights, privileges, powers, immunities,
franchises and all appointments, designations and
nominations, and all other rights and interests of
[CBTC] as trustee, executor, administrator, registrar
of stocks and bonds, guardian of estates, assignee,
receiver, trustee of estates of persons mentally ill and
in every other fiduciary capacity, and all and every
other interest of [CBTC] shall thereafter be effectually
the property of [ABC] as they were of [CBTC], and

title to any real estate, whether by deed or otherwise,

vested in [CBTC] shall not revert or be in any way
impaired by reason thereof; provided, however, that
all rights of creditors and all liens upon any property
of [CBTC] shall be preserved and unimpaired and all
debts, liabilities, obligations, duties and undertakings
of [CBTC], whether contractual or otherwise,
expressed or implied, actual or contingent, shall
henceforth attach to [ABC] which shall be responsible
therefor and may be enforced against [ABC] to the
same extent as if the same debts, liabilities,
obligations, duties and undertakings have been
originally incurred or contracted by [ABC], subject,
however, to all rights, privileges, defenses, set-offs
and counterclaims which [CBTC] has or might have
and which shall pertain to [ABC].[15]
The records do not show when the SEC approved the merger.
Private respondents theory is that it took effect on the date of the
execution of the agreement itself, which was September 16, 1975.
Private respondent contends that, since he issued the promissory
note to CBTC on September 7, 1977 -- two years after the merger
agreement had been executed -- CBTC could not have conveyed or
transferred to petitioner its interest in the said note, which was not yet
in existence at the time of the merger. Therefore, petitioner, the
surviving bank, has no right to enforce the promissory note on private
respondent; such right properly pertains only to CBTC.
Assuming that the effectivity date of the merger was the date of its
execution, we still cannot agree that petitioner no longer has any
interest in the promissory note. A closer perusal of the merger
agreement leads to a different conclusion. The provision quoted
earlier has this other clause:
Upon the effective date of the [m]erger, all references to
[CBTC] in any deed, documents, or other papers of whatever
kind or nature and wherever found shall be deemed for all
intents and purposes, references to [ABC], the SURVIVING

BANK, as if such references were direct references to [ABC].

x x x[16] (Underscoring supplied)
Thus, the fact that the promissory note was executed after the
effectivity date of the merger does not militate against petitioner. The
agreement itself clearly provides that all contracts -- irrespective of the
date of execution -- entered into in the name of CBTC shall be
understood as pertaining to the surviving bank, herein petitioner.
Since, in contrast to the earlier aforequoted provision, the latter clause
no longer specifically refers only to contracts existing at the time of the
merger, no distinction should be made. The clause must have been
deliberately included in the agreement in order to protect the interests
of the combining banks; specifically, to avoid giving the merger
agreement a farcical interpretation aimed at evading fulfillment of a
due obligation.
Thus, although the subject promissory note names CBTC as the
payee, the reference to CBTC in the note shall be construed, under
the very provisions of the merger agreement, as a reference to
petitioner bank, as if such reference [was a] direct reference to the
latter for all intents and purposes.
No other construction can be given to the unequivocal stipulation.
Being clear, plain and free of ambiguity, the provision must be given
its literal meaning[17] and applied without a convoluted interpretation.
Verba legis non est recedendum.[18]
In light of the foregoing, the Court holds that petitioner has a valid
cause of action against private respondent. Clearly, the failure of
private respondent to honor his obligation under the promissory note
constitutes a violation of petitioners right to collect the proceeds of the
loan it extended to the former.
Secondary Issues:
Prescription, Laches, Contract
Pour Autrui, Lack of Consideration
No Prescription

or Laches
Private respondents claim that the action has prescribed,
pursuant to Article 1149 of the Civil Code, is legally untenable.
Petitioners suit for collection of a sum of money was based on a
written contract and prescribes after ten years from the time its right of
action arose.[19] Sarmientos obligation under the promissory note
became due and demandable on March 6, 1978. Petitioners
complaint was instituted on August 22, 1985, before the lapse of the
ten-year prescriptive period. Definitely, petitioner still had every right
to commence suit against the payor/obligor, the private respondent
herein.
Neither is petitioners action barred by laches. The principle of
laches is a creation of equity, which is applied not to penalize neglect
or failure to assert a right within a reasonable time, but rather to avoid
recognizing a right when to do so would result in a clearly inequitable
situation[20] or in an injustice.[21] To require private respondent to pay
the remaining balance of his loan is certainly not inequitable or unjust.
What would be manifestly unjust and inequitable is his contention that
CBTC is the proper party to proceed against him despite the fact,
which he himself asserts, that CBTCs corporate personality has been
dissolved by virtue of its merger with petitioner. To hold that no
payee/obligee exists and to let private respondent enjoy the fruits of
his loan without liability is surely most unfair and unconscionable,
amounting to unjust enrichment at the expense of petitioner. Besides,
this Court has held that the doctrine of laches is inapplicable where
the claim was filed within the prescriptive period set forth under the
law.[22]
No Contract
Pour Autrui
Private respondent, while not denying that he executed the
promissory note in the amount of P2,500,000 in favor of CBTC, offers
the alternative defense that said note was a contract pour autrui.

A stipulation pour autrui is one in favor of a third person who may

demand its fulfillment, provided he communicated his acceptance to
the obligor before its revocation. An incidental benefit or interest,
which another person gains, is not sufficient. The contracting parties
must have clearly and deliberately conferred a favor upon a third
person.[23]
Florentino vs. Encarnacion Sr.[24] enumerates the requisites for
such contract: (1) the stipulation in favor of a third person must be a
part of the contract, and not the contract itself; (2) the favorable
stipulation should not be conditioned or compensated by any kind of
obligation; and (3) neither of the contracting parties bears the legal
representation or authorization of the third party. The fairest test in
determining whether the third persons interest in a contract is a
stipulation pour autrui or merely an incidental interest is to examine
the intention of the parties as disclosed by their contract.[25]
We carefully and thoroughly perused the promissory note, but
found no stipulation at all that would even resemble a provision in
consideration of a third person. The instrument itself does not
disclose the purpose of the loan contract. It merely lays down the
terms of payment and the penalties incurred for failure to pay upon
maturity. It is patently devoid of any indication that a benefit or
interest was thereby created in favor of a person other than the
contracting parties. In fact, in no part of the instrument is there any
mention of a third party at all. Except for his barefaced statement, no
evidence was proffered by private respondent to support his
argument. Accordingly, his contention cannot be sustained. At any
rate, if indeed the loan actually benefited a third person who
undertook to repay the bank, private respondent could have availed
himself of the legal remedy of a third-party complaint. [26] That he
made no effort to implead such third person proves the hollowness of
his arguments.
Consideration
Private respondent also claims that he received no consideration

for the promissory note and, in support thereof, cites petitioners

failure to submit any proof of his loan application and of his actual
receipt of the amount loaned. These arguments deserve no merit.
Res ipsa loquitur. The instrument, bearing the signature of private
respondent, speaks for itself. Respondent Sarmiento has not
questioned the genuineness and due execution thereof. No further
proof is necessary to show that he undertook to pay P2,500,000, plus
interest, to petitioner bank on or before March 6, 1978. This he failed
to do, as testified to by petitioners accountant. The latter presented
before the trial court private respondents statement of account [27] as
of September 30, 1986, showing an outstanding balance of
P4,689,413.63 after deducting P1,000,000.00 paid seven months
earlier. Furthermore, such partial payment is equivalent to an express
acknowledgment of his obligation. Private respondent can no longer
backtrack and deny his liability to petitioner bank. A person cannot
accept and reject the same instrument.[28]
WHEREFORE, the petition is GRANTED. The assailed Decision
is SET ASIDE and the Decision of RTC-Manila, Branch 48, in Civil
Case No. 26465 is hereby REINSTATED.
SO ORDERED.
Davide Jr. (Chairman), Bellosillo, Vitug, and Quisumbing, JJ.,
concur.

Republic of the Philippines

Supreme Court
Manila
SECOND DIVISION
MINDANAO SAVINGS G.R. No. 178618
AND LOAN
ASSOCIATION, INC.,
Present:
represented by its
Liquidator, THE
CARPIO, J.,
PHILIPPINE DEPOSIT NACHURA,
INSURANCE
LEONARDO-DE
CORPORATION,
CASTRO,*
PERALTA, and
Petitioner,
MENDOZA, JJ.
- versus EDWARD WILLKOM;
GILDA GO; REMEDIOS
UY; MALAYO
Promulgated:
BANTUAS, in his
capacity as the Deputy
October 11, 2010
Sheriff of Regional
Trial Court, Branch 3,
Iligan City; and the
REGISTER OF DEEDS
of Cagayan de Oro
City,

Respondent.
x-----------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule
45 of the Rules of Court filed by Mindanao Savings and
Loan Association, Inc. (MSLAI), represented by its
liquidator, Philippine Deposit Insurance Corporation
(PDIC), against respondents Edward R. Willkom (Willkom);
Gilda Go (Go); Remedios Uy (Uy); Malayo Bantuas (sheriff
Bantuas), in his capacity as sheriff of the Regional Trial
Court (RTC), Branch 3 of Iligan City; and the Register of
Deeds of Cagayan de Oro City. MSLAI seeks the reversal
and setting aside of the Court of Appeals[1] (CA)
Decision[2] dated March 21, 2007 and Resolution[3] dated
June 1, 2007 in CA-G.R. CV No. 58337.
The controversy stemmed from the following facts:
The First Iligan Savings and Loan Association, Inc.
(FISLAI) and the Davao Savings and Loan Association,
Inc. (DSLAI) are entities duly registered with the Securities
and Exchange Commission (SEC) under Registry Nos.
34869 and 32388, respectively, primarily engaged in the
business of granting loans and receiving deposits from the

general public, and treated as banks.[4]

Sometime in 1985, FISLAI and DSLAI entered into a
merger, with DSLAI as the surviving corporation.[5] The
articles of merger were not registered with the SEC due to
incomplete documentation.[6] On August 12, 1985, DSLAI
changed its corporate name to MSLAI by way of an
amendment to Article 1 of its Articles of Incorporation, but
the amendment was approved by the SEC only on April 3,
1987.[7]
Meanwhile, on May 26, 1986, the Board of Directors
of FISLAI passed and approved Board Resolution No. 86002, assigning its assets in favor of DSLAI which in turn
assumed the formers liabilities.[8]
The business of MSLAI, however, failed. Hence, the
Monetary Board of the Central Bank of the Philippines
ordered its closure and placed it under receivership per
Monetary Board Resolution No. 922 dated August 31,
1990. The Monetary Board found that MSLAIs financial
condition was one of insolvency, and for it to continue in
business would involve probable loss to its depositors and
creditors. On May 24, 1991, the Monetary Board ordered
the liquidation of MSLAI, with PDIC as its liquidator.[9]
It appears that prior to the closure of MSLAI, Uy filed
with the RTC, Branch 3 of Iligan City, an action for
collection of sum of money against FISLAI, docketed as
Civil Case No. 111-697. On October 19, 1989, the RTC

issued a summary decision in favor of Uy, directing

defendants therein (which included FISLAI) to pay the
former the sum of P136,801.70, plus interest until full
payment, 25% as attorneys fees, and the costs of suit. The
decision was modified by the CA by further ordering the
third-party defendant therein to reimburse the payments
that would be made by the defendants. The decision
became final and executory on February 21, 1992. A writ of
execution was thereafter issued.[10]
On April 28, 1993, sheriff Bantuas levied on six (6)
parcels of land owned by FISLAI located in Cagayan de
Oro City, and the notice of sale was subsequently
published. During the public auction on May 17, 1993,
Willkom was the highest bidder. A certificate of sale was
issued and eventually registered with the Register of
Deeds of Cagayan de Oro City. Upon the expiration of the
redemption period, sheriff Bantuas issued the sheriffs
definite deed of sale. New certificates of title covering the
subject properties were issued in favor of Willkom. On
September 20, 1994, Willkom sold one of the subject
parcels of land to Go.[11]
On June 14, 1995, MSLAI, represented by PDIC,
filed before the RTC, Branch 41 of Cagayan de Oro City, a
complaint for Annulment of Sheriffs Sale, Cancellation of
Title and Reconveyance of Properties against respondents.
[12] MSLAI alleged that the sale on execution of the
subject properties was conducted without notice to it and
PDIC; that PDIC only came to know about the sale for the

first time in February 1995 while discharging its mandate of

liquidating MSLAIs assets; that the execution of the RTC
decision in Civil Case No. 111-697 was illegal and contrary
to law and jurisprudence, not only because PDIC was not
notified of the execution sale, but also because the assets
of an institution placed under receivership or liquidation
such as MSLAI should be deemed in custodia legis and
should be exempt from any order of garnishment, levy,
attachment, or execution.[13]
In answer, respondents averred that MSLAI had no
cause of action against them or the right to recover the
subject properties because MSLAI is a separate and
distinct entity from FISLAI. They further contended that the
unofficial merger between FISLAI and DSLAI (now
MSLAI) did not take effect considering that the merging
companies did not comply with the formalities and
procedure for merger or consolidation as prescribed by the
Corporation Code of the Philippines. Finally, they claimed
that FISLAI is still a SEC registered corporation and could
not have been absorbed by petitioner.[14]
On March 13, 1997, the RTC issued a resolution
dismissing the case for lack of jurisdiction. The RTC
declared that it could not annul the decision in Civil Case
No. 111-697, having been rendered by a court of
coordinate jurisdiction.[15]
On appeal, MSLAI failed to obtain a favorable
decision when the CA affirmed the RTC resolution. The

dispositive portion of the assailed CA Decision reads:

WHEREFORE, premises considered, the instant
appeal is DENIED. The decision assailed is AFFIRMED.
We REFER Sheriff Malayo B. Bantuas violation
of the Supreme Court Administrative Circular No. 12 to
the Office of the Court Administrator for appropriate
action. The Division Clerk of Court is hereby DIRECTED
to furnish the Office of the Court Administrator a copy of
this decision.
SO ORDERED.[16]

The appellate court sustained the dismissal of

petitioners complaint not because it had no jurisdiction
over the case, as held by the RTC, but on a different
ground. Citing Associated Bank v. CA,[17] the CA ruled
that there was no merger between FISLAI and MSLAI
(formerly DSLAI) for their failure to follow the procedure
laid down by the Corporation Code for a valid merger or
consolidation. The CA then concluded that the two
corporations retained their separate personalities;
consequently, the claim against FISLAI is warranted, and
the subsequent sale of the levied properties at public
auction is valid. The CA went on to say that even if there
had been a de facto merger between FISLAI and MSLAI
(formerly DSLAI), Willkom, having relied on the clean
certificates of title, was an innocent purchaser for value,
whose right is superior to that of MSLAI. Furthermore, the
alleged assignment of assets and liabilities executed by

FISLAI in favor of MSLAI was not binding on third parties

because it was not registered. Finally, the CA said that the
validity of the auction sale could not be invalidated by the
fact that the sheriff had no authority to conduct the
execution sale.[18]
Petitioners motion for reconsideration was denied in
a Resolution dated June 1, 2007. Hence, the instant
petition anchored on the following grounds:
THE HONORABLE COURT OF APPEALS, CAGAYAN
DE ORO COMMITTED GRAVE AND REVERSIBLE
ERROR WHEN:
(1)
IT PASSED UPON THE EXISTENCE AND STATUS OF
DSLAI (now MSLAI) AS THE SURVIVING ENTITY IN
THE MERGER BETWEEN DSLAI AND FISLAI AS A
DEFENSE IN AN ACTION OTHER THAN IN A QUO
WARRANTO PROCEEDING UPON THE INSTITUTION
OF THE SOLICITOR GENERAL AS MANDATED
UNDER SECTION 20 OF BATAS PAMBANSA BLG. 68.
(2)
IT REFUSED TO RECOGNIZE THE MERGER
BETWEEN F[I]SLAI AND DSLAI WITH DSLAI AS THE
SURVIVING CORPORATION.
(3)
IT HELD THAT THE PROPERTIES SUBJECT OF THE
CASE ARE NOT IN CUSTODIA LEGIS AND

THEREFORE, EXEMPT FROM GARNISHMENT, LEVY,

ATTACHMENT OR EXECUTION.[19]

To resolve this petition, we must address two basic

questions: (1) Was the merger between FISLAI and
DSLAI (now MSLAI) valid and effective; and (2) Was there
novation of the obligation by substituting the person of the
debtor?
We answer both questions in the negative.
Ordinarily, in the merger of two or more existing
corporations, one of the corporations survives and
continues the combined business, while the rest are
dissolved and all their rights, properties, and liabilities are
acquired by the surviving corporation.[20] Although there is
a dissolution of the absorbed or merged corporations, there
is no winding up of their affairs or liquidation of their assets
because the surviving corporation automatically acquires
all their rights, privileges, and powers, as well as their
liabilities.[21]
The merger, however, does not become effective
upon the mere agreement of the constituent corporations.
[22] Since a merger or consolidation involves fundamental
changes in the corporation, as well as in the rights of
stockholders and creditors, there must be an express
provision of law authorizing them.[23]
The steps necessary to accomplish a merger or
consolidation, as provided for in Sections 76,[24] 77,[25]

78,[26] and 79[27] of the Corporation Code, are:

(1) The board of each corporation draws up a
plan of merger or consolidation. Such plan must include
any amendment, if necessary, to the articles of
incorporation of the surviving corporation, or in case of
consolidation, all the statements required in the articles
of incorporation of a corporation.
(2) Submission of plan to stockholders or
members of each corporation for approval. A meeting
must be called and at least two (2) weeks notice must
be sent to all stockholders or members, personally or by
registered mail. A summary of the plan must be attached
to the notice. Vote of two-thirds of the members or of
stockholders representing two-thirds of the outstanding
capital stock will be needed. Appraisal rights, when
proper, must be respected.
(3) Execution of the formal agreement, referred to
as the articles of merger o[r] consolidation, by the
corporate officers of each constituent corporation. These
take the place of the articles of incorporation of the
consolidated corporation, or amend the articles of
incorporation of the surviving corporation.
(4) Submission of said articles of merger or
consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing,
notifying all corporations concerned at least two weeks
before.
(6) Issuance
consolidation.[28]

of

certificate

of

merger

or

Clearly, the merger shall only be effective upon the

issuance of a certificate of merger by the SEC, subject to
its prior determination that the merger is not inconsistent
with the Corporation Code or existing laws.[29] Where a
party to the merger is a special corporation governed by its
own charter, the Code particularly mandates that a
favorable recommendation of the appropriate government
agency should first be obtained.[30]
In this case, it is undisputed that the articles of
merger between FISLAI and DSLAI were not registered
with the SEC due to incomplete documentation.
Consequently, the SEC did not issue the required
certificate of merger. Even if it is true that the Monetary
Board of the Central Bank of the Philippines recognized
such merger, the fact remains that no certificate was
issued by the SEC. Such merger is still incomplete without
the certification.
The issuance of the certificate of merger is crucial
because not only does it bear out SECs approval but it
also marks the moment when the consequences of a
merger take place. By operation of law, upon the effectivity
of the merger, the absorbed corporation ceases to exist but
its rights and properties, as well as liabilities, shall be taken
and deemed transferred to and vested in the surviving
corporation.[31]
The same rule applies to consolidation which
becomes effective not upon mere agreement of the

members but only upon issuance of the certificate of

consolidation by the SEC.[32] When the SEC, upon
processing and examining the articles of consolidation, is
satisfied that the consolidation of the corporations is not
inconsistent with the provisions of the Corporation Code
and existing laws, it issues a certificate of consolidation
which makes the reorganization official.[33] The new
consolidated corporation comes into existence and the
constituent corporations are dissolved and cease to exist.
[34]
There being no merger between FISLAI and DSLAI
(now MSLAI), for third parties such as respondents, the
two corporations shall not be considered as one but two
separate corporations. A corporation is an artificial being
created by operation of law. It possesses the right of
succession and such powers, attributes, and properties
expressly authorized by law or incident to its existence.[35]
It has a personality separate and distinct from the persons
composing it, as well as from any other legal entity to
which it may be related.[36] Being separate entities, the
property of one cannot be considered the property of the
other.
Thus, in the instant case, as far as third parties are
concerned, the assets of FISLAI remain as its assets and
cannot be considered as belonging to DSLAI and MSLAI,
notwithstanding the Deed of Assignment wherein FISLAI
assigned its assets and properties to DSLAI, and the latter
assumed all the liabilities of the former. As provided in

Article 1625 of the Civil Code, an assignment of credit,

right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case
the assignment involves real property. The certificates of
title of the subject properties were clean and contained no
annotation of the fact of assignment. Respondents cannot,
therefore, be faulted for enforcing their claim against
FISLAI on the properties registered under its name.
Accordingly, MSLAI, as the successor-in-interest of DSLAI,
has no legal standing to annul the execution sale over the
properties of FISLAI. With more reason can it not cause
the cancellation of the title to the subject properties of
Willkom and Go.
Petitioner cannot also anchor its right to annul the
execution sale on the principle of novation. While it is true
that DSLAI (now MSLAI) assumed all the liabilities of
FISLAI, such assumption did not result in novation as
would release the latter from liability, thereby exempting its
properties from execution. Novation is the extinguishment
of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal
conditions, by substituting another in place of the debtor, or
by subrogating a third person in the rights of the creditor.
[37]
It is a rule that novation by substitution of debtor must
always be made with the consent of the creditor.[38] Article

1293 of the Civil Code is explicit, thus:

Art. 1293. Novation which consists in substituting
a new debtor in the place of the original one, may be
made even without the knowledge or against the will of
the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights
mentioned in Articles 1236 and 1237.

In this case, there was no showing that Uy, the

creditor, gave her consent to the agreement that DSLAI
(now MSLAI) would assume the liabilities of FISLAI. Such
agreement cannot prejudice Uy. Thus, the assets that
FISLAI transferred to DSLAI remained subject to execution
to satisfy the judgment claim of Uy against FISLAI. The
subsequent sale of the properties by Uy to Willkom, and of
one of the properties by Willkom to Go, cannot, therefore,
be questioned by MSLAI.
The consent of the creditor to a novation by change
of debtor is as indispensable as the creditors consent in
conventional subrogation in order that a novation shall
legally take place.[39] Since novation implies a waiver of
the right which the creditor had before the novation, such
waiver must be express.[40]
WHEREFORE, premises considered, the petition is
DENIED. The Court of Appeals Decision dated March 21,
2007 and Resolution dated June 1, 2007 in CA-G.R. CV
No. 58337 are AFFIRMED.

SO ORDERED.

FIRST DIVISION
[G.R. No. 99398. January 26, 2001]

CHESTER BABST, petitioner, vs. COURT OF APPEALS,

BANK OF THE PHILIPPINE ISLANDS, ELIZALDE
STEEL CONSOLIDATED, INC., and PACIFIC
MULTI-COMMERCIAL
CORPORATION,
respondents.
[G.R. No. 104625. January 26, 2001]

ELIZALDE STEEL CONSOLIDATED, INC., petitioner, vs.

COURT OF APPEALS, BANK OF THE PHILIPPINE
ISLANDS,
PACIFIC
MULTI-COMMERCIAL
CORPORATION
and
CHESTER
BABST,
respondents.
DECISION
YNARES-SANTIAGO, J.:

These consolidated petitions seek the review of the Decision

dated April 29, 1991 of the Court of Appeals in CA-G.R. CV No.
17282[1] entitled, Bank of the Philippine Islands, Plaintiff-Appellee
versus Elizalde Steel Consolidated, Inc., Pacific Multi-Commercial
Corporation, and Chester G. Babst, Defendants-Appellants.
The complaint was commenced principally to enforce payment of
a promissory note and three domestic letters of credit which Elizalde
Steel Consolidated, Inc. (ELISCON) executed and opened with the
Commercial Bank and Trust Company (CBTC).
On June 8, 1973, ELISCON obtained from CBTC a loan in the
amount of P8,015,900.84, with interest at the rate of 14% per annum,

evidenced by a promissory note.[2] ELISCON defaulted in its

payments, leaving an outstanding indebtedness in the amount of
P2,795,240.67 as of October 31, 1982.[3]
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 which
reads:
WHEREAS, at least 90% of the Companys gross sales is generated
by the sale of tin-plates manufactured by Elizalde Steel Consolidated,
Inc.;
WHEREAS, it is to the best interests of the Company to continue
handling said tin-plate line;
WHEREAS, Elizalde Steel Consolidated, Inc. has requested the
assistance of the Company in obtaining credit facilities to enable it to
maintain the present level of its tin-plate manufacturing output and the
Company is willing to extend said requested assistance;
NOW, THEREFORE, for and in consideration of the foregoing
premises --BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the
PRESIDENT & GENERAL MANAGER, ANTONIO ROXAS CHUA, be,
as he is hereby empowered to allow and authorize ELIZALDE STEEL
CONSOLIDATED, INC. to avail and make use of the Credit Line of
PACIFIC MULTI-COMMERCIAL CORPORATION with the
COMMERCIAL BANK & TRUST COMPANY OF THE PHILIPPINES,
Makati, Metro Manila;
RESOLVED, FURTHER, That the Pacific Multi-Commercial
Corporation guarantee, as it does hereby guarantee, solidarily, the
payment of the corresponding Letters of Credit upon maturity of the
same;

RESOLVED, FINALLY, That copies of this resolution be furnished the

Commercial Bank & Trust Company of the Philippines, Makati, Metro
Manila, for their information.[4]
Subsequently, on September 26, 1978, Antonio Roxas Chua and
Chester G. Babst executed a Continuing Suretyship,[5] 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 three (3) domestic letters of credit in the
amounts of P1,946,805.73,[6] P1,702,869.32[7] and P200,307.72,[8]
respectively, which ELISCON used to purchase tin black plates from
National Steel Corporation. ELISCON defaulted in its obligation to
pay the amounts of the letters of credit, leaving an outstanding
account, as of October 31, 1982, in the total amount of
P3,963,372.08.[9]
On December 22, 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.[10]
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 December 28, 1978, ELISCON and DBP
executed a Deed of Cession of Property in Payment of Debt.[11]
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 ELISCONs obligations to its creditors, but
BPI expressly rejected the formula submitted to it for not being
acceptable.[12]

Consequently, on January 17, 1983, BPI, as successor-in-interest

of CBTC, instituted with the Regional Trial Court of Makati, Branch
147, a complaint[13] for sum of money against ELISCON, MULTI and
Babst, which was docketed as Civil Case No. 49226.
ELISCON, in its Answer,[14] argued that the complaint was
premature since DBP had made serious efforts to settle its obligations
with BPI.
Babst also filed his Answer alleging that he signed the Continuing
Suretyship on the understanding that it covers only obligations which
MULTI incurred solely for its benefit and not for any third party liability,
and he had no knowledge or information of any transaction between
MULTI and ELISCON.[15]
MULTI, for its part, denied knowledge of the merger between BPI
and CBTC, and averred that the guaranty under its board resolution
did not cover purchases made by ELISCON in the form of trust
receipts. It set up a cross-claim against ELISCON alleging that the
latter should be held liable for any judgment which the court may
render against it in favor of BPI.[16]
On February 20, 1987, the trial court rendered its Decision, [17] the
dispositive portion of which reads:
WHEREFORE, in view of all the foregoing, the Court hereby renders
judgment in favor of the plaintiff and against all the defendants:
1) Ordering defendant ELISCON to pay the plaintiff the amount of
P2,795,240.67 due on the promissory note, Annex A of the
Complaint as of 31 October 1982 and the amount of P3,963,372.08
due on the three (3) domestic letters of credit, also as of 31 October
1982;
2) Ordering defendant ELISCON to pay the plaintiff interests and
related charges on the principal of said promissory note of
P2,102,232.02 at the rates provided in said note from and after 31
October 1982 until full payment thereof, and on the principal of the
three (3) domestic letters of credit of P3,564,349.25 interests and

related charges at the rates provided in said letters of credit, from and
after 31 October 1982 until full payment;
3) Ordering defendant ELISCON to pay interests at the legal rate on
all interests and related charges but unpaid as of the filing of this
complaint, until full payment thereof;
4) Ordering defendant ELISCON to pay attorneys fees equivalent to
10% of the total amount due under the preceding paragraphs;
5) Ordering defendants Pacific Multi-Commercial Corporation and
defendant Chester Babst to pay, jointly and severally with defendant
ELISCON, the total sum of P3,963,372.08 due on the three (3)
domestic letters of credit as of 31 October 1982 with interests and
related charges on the principal amount of P3,963,372.08 at the rates
provided in said letters of credit from 30 October 1982 until fully paid,
but to the extent of not more than P8,000,000.00 in the case of
defendant Chester Babst;
6) Ordering defendant Pacific Multi-Commercial Corporation and
defendant Chester Babst to pay, jointly and severally plaintiff interests
at the legal rate on all interests and related charges already accrued
but unpaid on said three (3) domestic letters of credit as of the date of
the filing of this Complaint until full payment thereof;
7) Ordering defendant Pacific Multi-Commercial Corporation and
defendant Chester Babst to pay, jointly and severally, attorneys fees
of not less than 10% of the total amount due under paragraphs 5 and
6 hereof. With costs.
SO ORDERED.
In due time, ELISCON, MULTI and Babst filed their respective
notices of appeal.[18]
On April 29, 1991, the Court of Appeals rendered the appealed
Decision as follows:

WHEREFORE, the judgment appealed from is MODIFIED, to now

read (with the underlining to show the principal changes from the
decision of the lower court) thus:
1) Ordering appellant ELISCON to pay the appellee BPI the amount
of P2,731,005.60 due on the promissory note, Annex A of the
Complaint as of 31 October 1982 and the amount of P3,963,372.08
due on the three (3) domestic letters of credit, also as of 31 October
1982;
2) Ordering appellant ELISCON to pay the appellee BPI interests and
related charges on the principal of said promissory note of
P2,102,232.02 at the rates provided in said note from and after 31
October 1982 until full payment thereof, and on the principal of the
three (3) domestic letters of credit of P3,564,349.25 interests and
related charges at the rates provided in said letters of credit, from and
after 31 October 1982 until full payment;
3) Ordering appellant ELISCON to pay appellee BPI interest at the
legal rate on all interests and related charges but unpaid as of the
filing of this complaint, until full payment thereof;
4) Ordering appellant Pacific Multi-Commercial Corporation and
appellant Chester G. Babst to pay appellee BPI, jointly and severally
with appellant ELISCON, the total sum of P3,963,372.08 due on the
three (3) domestic letters of credit as of 31 October 1982 with interest
and related charges on the principal amount of P3,963,372.08 at the
rates provided in said letters of credit from 30 October 1982 until fully
paid, but to the extent of not more than P8,000,000.00 in the case of
defendant Chester Babst;
5) Ordering appellant Pacific Multi-Commercial Corporation and
defendant Chester Babst to pay, jointly and severally, appellee BPI
interests at the legal rate on all interests and related charges already
accrued but unpaid on said three (3) domestic letters of credit as of
the date of the filing of this Complaint until full payment thereof and
the plaintiffs lawyers fees in the nominal amount of P200,000.00;

6) Ordering appellant ELISCON to reimburse appellants Pacific MultiCommercial Corporation and Chester Babst whatever amount they
shall have paid in said Eliscons behalf particularly referring to the
three (3) letters of credit as of 31 October 1982 and other related
charges.
No costs.
SO ORDERED.[19]
ELISCON filed a Motion for Reconsideration of the Decision of the
Court of Appeals which was, however, denied in a Resolution dated
March 9, 1992.[20] Subsequently, ELISCON filed a petition for review
on certiorari, docketed as G.R. No. 104625, on the following grounds:
A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED
TO RECOVER FROM PETITIONER ELISCON THE LATTERS
OBLIGATION WITH COMMERCIAL BANK AND TRUST
COMPANY (CBTC)
B. THERE WAS A VALID NOVATION OF THE CONTRACT
BETWEEN ELISCON AND BPI THERE BEING A PRIOR
CONSENT TO AND APPROVAL BY BPI OF THE
SUBSTITUTION BY DBP AS DEBTOR IN LIEU OF THE
ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING
ELISCON FROM ITS OBLIGATION TO BPI.
C.

PACIFIC MULTI COMMERCIAL CORPORATION AND

CHESTER BABST CANNOT LAWFULLY RECOVER FROM
ELISCON WHATEVER AMOUNT THEY MAY BE REQUIRED
TO PAY TO BPI AS SURETIES OF ELISCONS OBLIGATION
TO BPI; THEIR CAUSE OF ACTION MUST BE DIRECTED
AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN
PLACE OF ELISCON.

D.

THE DBP TAKEOVER OF THE ENTIRE ELISCON

AMOUNTED TO AN ACT OF GOVERNMENT WHICH WAS A
FORTUITOUS EVENT EXCULPATING ELISCON FROM
FURTHER LIABILITIES TO RESPONDENT BPI.

E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO

PAY RESPONDENT BPI THE AMOUNTS STATED IN THE

DISPOSITIVE PORTION OF RESPONDENT COURT OF
APPEALS DECISION.[21]

BPI filed its Comment[22] raising the following arguments, to wit:

1. Respondent BPI is legally entitled to recover from ELISCON,
MULTI and Babst the past due obligations with CBTC prior to the
merger of BPI with CBTC.
2. BPI did not give its consent to the DBP take-over of ELISCON.
Hence, no valid novation has been effected.
3. Express consent of creditor to substitution should be recorded in
the books.
4. Petitioner Chester G. Babst and respondent MULTI are jointly and
solidarily liable to BPI for the unpaid letters of credit of ELISCON.
5. The question of the liability of ELISCON to BPI has been clearly
established.
6. Since MULTI and Chester G. Babst are guarantors of the debts
incurred by ELISCON, they may recover from the latter what they may
have paid for on account of that guaranty.
Chester Babst filed a Comment with Manifestation, [23] wherein he
contends that the suretyship agreement he executed with Antonio
Roxas Chua was in favor of MULTI; and that there is nothing therein
which authorizes MULTI, in turn, to guarantee the obligations of
ELISCON.
In its Comment,[24] MULTI maintained that inasmuch as BPI had
full knowledge of the purpose of the meeting in June 1981, wherein
the takeover by DBP of ELISCON was announced, it was incumbent
upon the said bank to formally communicate its objection to the
assumption of ELISCONs liabilities by DBP in answer to the call for
the meeting. Moreover, there was no showing that the availment by
ELISCON of MULTIs credit facilities with CBTC, which was

supposedly guaranteed by Antonio Roxas Chua, was indeed

authorized by the latter pursuant to the resolution of the Board of
Directors of MULTI.
In compliance with this Courts Resolution dated March 17, 1993,
[25] the parties submitted their respective memoranda.
Meanwhile, in a petition for review filed with this Court, which was
docketed as G.R. No. 99398, Chester Babst alleged that the Court of
Appeals acted without jurisdiction and/or with grave abuse of
discretion when:
1. IT AFFIRMED THE LOWER COURTS HOLDING THAT THERE
WAS NO NOVATION INASMUCH AS RESPONDENT BANK OF THE
PHILIPPINE ISLANDS (OR BPI) HAD PRIOR CONSENT TO AND
APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE
DEVELOPMENT BANK OF THE PHILIPPINES (OR DBP) IN THE
PLACE OF ELIZALDE STEEL CONSOLIDATED, INC. (OR ELISCON)
IN THE LATTERS OBLIGATION TO BPI.
2. IT CONFIRMED THE LOWER COURTS CONCLUSION THAT
THERE WAS NO IMPLIED CONSENT OF THE CREDITOR BANK
OF THE PHILIPPINE ISLANDS TO THE SUBSTITUTION BY
DEVELOPMENT BANK OF THE PHILIPPINES OF THE ORIGINAL
DEBTOR ELIZALDE STEEL CONSOLIDATED, INC.
3. IT AFFIRMED THE LOWER COURTS FINDING OF LACK OF
MERIT OF THE CONTENTION OF ELISCON THAT THE FAILURE
OF THE OFFICER OF BPI, WHO WAS PRESENT DURING THE
MEETING OF ELISCONS CREDITORS IN JUNE 1981 TO VOICE
HIS OBJECTION TO THE ANNOUNCED TAKEOVER BY THE DBP
OF THE ASSETS OF ELISCON AND ASSUMPTION OF ITS
LIABILITIES, CONSTITUTED AN IMPLIED CONSENT TO THE
ASSUMPTION BY DBP OF THE OBLIGATIONS OF ELISCON TO
BPI.
4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER
OF THE ENTIRE ELISCON WAS AN ACT OF GOVERNMENT

CONSTITUTING A FORTUITOUS EVENT EXCULPATING ELISCON

FROM ANY LIABILITY TO BPI.
5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP
AND BPI RELIEVED ELISCON, MULTI AND BABST OF ANY
LIABILITY TO BPI.
6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES
SOLIDARILY WITH ELISCON WITH RESPECT TO THE
OBLIGATION INVOLVED HERE.
7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST
ELISCON ORDERING THE LATTER TO PAY THE AMOUNTS
STATED IN THE DISPOSITIVE PORTION OF THE DECISION; AND
ORDERING PETITIONER AND MULTI TO PAY SAID AMOUNTS
JOINTLY AND SEVERALLY WITH ELISCON.[26]
Petitioner Babst alleged that DBP sold all of ELISCONs assets to
the National Development Company, for the latter to take over and
continue the operation of its business. On September 11, 1981, the
Board of Governors of the DBP adopted Resolution No. 2817 which
states that DBP shall enter into a contractual arrangement with NDC
for the latter to pay ELISCONs creditors, including BPI in the amount
of P4,015,534.54. This was followed by a Memorandum of
Agreement executed on May 4, 1983 by and between DBP and NDC,
wherein they stipulated, inter alia, that NDC shall pay to ELISCONs
creditors, through DBP, the amount of P299,524,700.00. Among the
creditors mentioned in the agreement was BPI, with a listed credit of
P4,015,534.54.
Furthermore, petitioner Babst averred that the assets of ELISCON
which were acquired by the DBP, and later transferred to the NDC,
were placed under the Asset Privatization Trust pursuant to
Proclamation No. 50, issued by then President Corazon C. Aquino on
December 8, 1986.
In its Comment,[27] BPI countered that by virtue of its merger with
CBTC, it acquired all the latters rights and interest including all

receivables; that in order to effect a valid novation by substitution of

debtors, the consent of the creditor must be express; that in addition,
the consent of BPI must appear in its books, it being a private
corporation; that BPI intentionally did not consent to the assumption
by DBP of the obligations of ELISCON because it wanted to preserve
intact its causes of action and legal recourse against Pacific MultiCommercial Corporation and Babst as sureties of ELISCON and not
of DBP; that MULTI expressly bound itself solidarily for ELISCONs
obligations to CBTC in its Resolution wherein it allowed the latter to
use its credit facilities; and that the suretyship agreement executed by
Babst does not exclude liabilities incurred by MULTI on behalf of third
parties, such as ELISCON.
ELISCON likewise filed a Comment,[28] wherein it manifested that
of the seven errors raised by Babst in his petition, six are arguments
which ELISCON itself raised in its previous pleadings. It is only the
sixth assigned error --- that the Court of Appeals erred in finding that
MULTI and Babst bound themselves solidarily with ELISCON --- that
ELISCON takes exception to. More particularly, ELISCON pointed out
the contradictory positions taken by Babst in admitting that he bound
himself to pay the indebtedness of MULTI, while at the same time
completely disavowing and denying any such obligation. It stressed
that should MULTI or Babst be finally adjudged liable under the
suretyship agreement, they cannot lawfully recover from ELISCON,
but from the DBP which had been substituted as the new debtor.
MULTI filed its Comment,[29] admitting the correctness of the
petition and adopting the Comment of ELISCON insofar as it is not
inconsistent with the positions of Babst and MULTI.
At the outset, the preliminary issue of BPIs right of action must
first be addressed. ELISCON and MULTI assail BPIs legal capacity
to recover their obligation to CBTC. However, there is no question
that there was a valid merger between BPI and CBTC. It is settled
that in the merger of two existing corporations, 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.[30] Hence, BPI has a right to institute the case a quo.

We now come to the primordial issue in this case whether or not

BPI consented to the assumption by DBP of the obligations of
ELISCON.
Article 1293 of the Civil Code provides:
Novation which consists in substituting a new debtor in the place of
the original one, may be made even without the knowledge or against
the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in articles
1236 and 1237.
BPI contends that in order to have a valid novation, there must be
an express consent of the creditor. In the case of Testate Estate of
Mota, et al. v. Serra,[31] this Court held:
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 a 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 of renuntiatio non prsumitur,
recognized by the law in declaring that a waiver of right may not be
performed [should read: presumed] unless the will to waive is
indisputably shown by him who holds the right.[32]
The import of the foregoing ruling, however, was explained and
clarified by this Court in the later case of Asia Banking Corporation v.
Elser[33] in this wise:
The aforecited article 1205 [now 1293] of the Civil Code does not
state that the creditors consent to the substitution of the new
debtor for the old be express, or given at the time of the
substitution, and the Supreme Court of Spain, in its judgment of June
16, 1908, construing said article, laid down the doctrine that article
1205 of the Civil Code does not mean or require that the creditors
consent to the change of debtors must be given simultaneously with
the debtors consent to the substitution, its evident purpose being to

preserve the creditors full right, it is sufficient that the latters consent
be given at any time and in any form whatever, while the agreement of
the debtors subsists. The same rule is stated in the Enciclopedia
Jurdica Espaola, volume 23, page 503, which reads: The rule that
this kind of novation, like all others, must be express, is not absolute;
for the existence of the consent may well be inferred from the
acts of the creditor, since volition may as well be expressed by
deeds as by words. The understanding between Henry W. Elser and
the principal director of Yangco, Rosenstock & Co., Inc., with respect
to Luis R. Yangcos stock in said corporation, and the acts of the
board of directors after Henry W. Elser had acquired said shares, in
substituting the latter for Luis R. Yangco, are a clear and unmistakable
expression of its consent. When this court said in the case of
Estate of Mota vs. Serra (47 Phil., 464), that the creditors express
consent is necessary in order that there may be a novation of a
contract by the substitution of debtors, it did not wish to convey
the impression that the word express was to be given an
unqualified meaning, as indicated in the authorities or cases,
both Spanish and American, cited in said decision.[34]
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Ca.,
Inc. v. Albo & Sevilla, Inc., et al.,[35] this Court reiterated the rule that
there can be implied consent of the creditor to the substitution of
debtors.
In the case at bar, Babst, MULTI and ELISCON all maintain that
due to the failure of BPI to register its objection to the take-over by
DBP of ELISCONs 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.
We find merit in the argument. Indeed, there exist clear
indications that BPI was aware of the assumption by DBP of the
obligations of ELISCON. In fact, BPI admits that --the Development Bank of the Philippines (DBP), for a time, had
proposed a formula for the settlement of Eliscons past obligations to
its creditors, including the plaintiff [BPI], but the formula was expressly

rejected by the plaintiff as not acceptable (long before the filing of the
complaint at bar).[36]
The Court of Appeals held that even if the account officer who
attended the June 1981 creditors meeting had expressed consent to
the assumption by DBP of ELISCONs debts, such consent would not
bind BPI for lack of a specific authority therefor. In its petition,
ELISCON counters that the mere presence of the account officer at
the meeting necessarily meant that he was authorized to represent
BPI in that creditors meeting. Moreover, BPI did not object to the
substitution of debtors, although it objected to the payment formula
submitted by DBP.
Indeed, 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 ELISCONs obligations.
As repeatedly pointed out by ELISCON and MULTI, BPIs 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
debtors failure or refusal to pay. A contract of surety is an accessory
promise by which a person binds himself for another already bound,
and agrees with the creditor to satisfy the obligation if the debtor does
not.[37] A surety is an insurer of the debt; he promises to pay the
principals debt if the principal will not pay.[38]
In the case at bar, 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.[39] More importantly, the
National Development Company took over the business of ELISCON
and undertook to pay ELISCONs creditors, and earmarked for that
purpose the amount of P4,015,534.54 for payment to BPI.[40]
Notwithstanding the fact that a reliable institution backed by
government funds was offering to pay ELISCONs debts, not as mere
surety but as substitute principal debtor, BPI, for reasons known only
to itself, insisted in going after the sureties. The course of action
chosen taxes the credulity of this Court. At the very least, suffice it to
state that BPIs actuation in this regard runs counter to the good faith
covenant in contractual relations, provided for by the Civil Code, to
wit:
ART. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
ART. 1159. Obligations arising from contract have the force of law
between the contracting parties and should be complied with in good
faith.
BPIs 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.
Novation, in its broad concept, may either be extinctive or
modificatory. It is extinctive when an old obligation is terminated by
the creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it
remains compatible with the amendatory agreement. An extinctive
novation results either by changing the object or principal conditions
(objective or real), or by substituting the person of the debtor or
subrogating a third person in the rights of the creditor (subjective or
personal). Under this mode, novation would have dual functions

one to extinguish an existing obligation, the other to substitute a new

one in its place requiring a conflux of four essential requisites, (1) a
previous valid obligation; (2) an agreement of all parties concerned to
a new contract; (3) the extinguishment of the old obligation; and (4)
the birth of a valid new obligation.[41]
The original obligation having been extinguished, the contracts of
suretyship executed separately by Babst and MULTI, being accessory
obligations, are likewise extinguished.[42]
Hence, BPI should enforce its cause of action against DBP. It
should be stressed that notwithstanding the lapse of time within which
these cases have remained pending, the prescriptive period for BPI to
file its action was interrupted when it filed Civil Case No. 49226.[43]
WHEREFORE, the consolidated petitions are GRANTED. 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, is REVERSED and SET ASIDE. BPIs
complaint against ELISCON, MULTI and Babst is DISMISSED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ.,
concur.