ST.

JAMES COLLEGE OF PARANAQUE V EQUITABLE PCI BANK

The Facts
Petitioners-spouses Jaime (now deceased) and Myrna
Torres owned and operated St. James College of Paraaque[3] (St.
James College), a sole proprietorship educational institution. in
1995, the Philippine Commercial and International Bank (PCIB)
granted the Torres spouses and/or St. James College a credit line
facility of up to PhP 25,000,000, secured by a real estate mortgage[4]
(REM) over a parcel of land situated in Paraaque, in the name of St.
James College,
The credit line underwent several annual renewals, As
petitioners had defaulted in the payment of the loan obtained from the
secured credit accommodation, their total unpaid loan obligation, as of
September 2001, stood at PhP 18,300,000.
EPCIB proposed a restructuring package with a soft
payment scheme for the outstanding loan balance of PhP 18,300,000.
Under the counter-proposal, the bank would book the accumulated
past due loans to current status and charge interest at a fixed rate of
13.375% per annum, payable in either options: Petitioner Jaime
Torres chose and agreed to the second option, i.e., the equal annual
amortizations of PhP 6,100,000 payable every May.
May 2003 came, but petitioners failed to pay the stipulated
annual amortization of PhP 6,100,000 agreed upon.. On June 23,
2003, petitioners tendered, and EPCIB accepted, a partial payment of
PhP 2,521,609.62,
EPCIB made it abundantly clear on the OR that: THE
RECEIPT OF PAYMENT IS WITHOUT PREJUDICE TO THE BANKS
RIGHT AND CLAIMS ARISING FROM THE FACT THE ACCOUNT IS

OVERDUE. NOR SHALL IT RENDER THE BANK LIABLE FOR ANY

DAMAGE BY ITS ACCEPTANCE OF PAYMENT. EPCIB, through
counsel, reminded and made it clear to petitioners that their first
partial payment did not detract from the past due character of their
outstanding loan for which reason it is demanding the remaining PhP
5,100,000 to complete the first PhP 6,100,000 principal payment.
EPCIB proposed a new repayment scheme to which
petitioners were not amenable.
On November 6, 2003, petitioners issued a Stop Payment
Order[12] for their PhP 921,535.42 check. On November 10, 2003,
EPCIB, through counsel, demanded full settlement of petitioners loan
obligation in the total amount of PhP 24,719,461.48.
EPCIB filed before the Office of the Clerk of Court and ExOfficio Sheriff of the RTC in Paraaque City its Petition for Sale[14] to
extra-judicially foreclose the mortgaged property covered
On the very day of the scheduled foreclosure sale, January
9, 2004, the Pasig City RTC issued a TRO,[16] enjoining EPCIB from
proceeding with the scheduled foreclosure sale, and set a date for the
hearing on the application for a writ of preliminary injunction.
On March 10, 2004, the RTC issued an Order granting a
writ of preliminary injunction in favor of petitioners,
ISSUE:
whether there was indeed a novation of the contract
between the parties
The Courts Ruling

3)

The old contract must be extinguished.

The petition is unmeritorious.

4)
No Novation of Contract
As a civil law concept, novation is the extinguishment of an
obligation by the substitution or change of the obligation by a
subsequent one which terminates it, either by changing its objects or
principal conditions, or by substituting a new debtor in place of the old
one, or by subrogating a third person to the rights of the creditor.[24]
Novation may be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new one that takes the
place of the former; it is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory
agreement.[25] Novation may either be express, when the new
obligation declares in unequivocal terms that the old obligation is
extinguished, or implied, when the new obligation is on every point
incompatible with the old one.[26] The test of incompatibility lies on
whether the two obligations can stand together, each one with its own
independent existence.[27]
For novation, as a mode of extinguishing or modifying an
obligation, to apply, the following requisites must concur:
1)
There must be a previous valid
obligation.
2)
The parties concerned must agree to a
new contract.

There must be a valid new

contract.[28]

The parties did not unequivocally declare, let alone agree,

that the obligation had been modified as to the terms of payment by
the partial payments of the obligation.. The following acts of EPCIB
readily argue against the idea of its having agreed to a modification in
the stipulated terms of payment: (a) its letter-reply to petitioners June
23, 2003 letter; (b) the August 27, 2003 demand-letter of EPCIB for
the full principal balance of PhP 5,100,000 from petitioners; (c) the
September 17, 2003 letter of EPCIB denying petitioners request for a
partial payment; (d) the OR dated June 30, 2003 EPCIB issued where
the following entries were written: THE RECEIPT OF PAYMENT IS
WITHOUT PREJUDICE TO THE BANKS RIGHTS AND CLAIMS
ARISING FROM THE FACT THE ACCOUNT IS OVERDUE. NOR
SHALL IT RENDER THE BANK LIABLE FOR ANY DAMAGE BY ITS
ACCEPTANCE OF PAYMENT;
the notion of novation foisted by petitioners on the Court
cannot be plausibly deduced from EPCIBs acceptance of such lesser
amount.
there is clearly no incompatibility between EPCIBs receipt
of the partial payments of the principal amounts and what was due in
May 2003. As it were, EPCIB accepted the partial payments remitted,
but demanded, at the same time, the full payment of what was
otherwise due in May 2003.

Novatio non praesumitur, or novation is never presumed,[29] is a wellsettled principle. Consequently, that which arises from a purported
modification in the terms and conditions of the obligation must be
clear and express., the acts of EPCIB before, simultaneously to, and
after its acceptance of payments from petitioners argue against the
idea of its having acceded or acquiesced to petitioners request for a
change of the terms of payments of the secured loan. Thus, a
novation through an alleged implied consent by EPCIB, as proffered
and argued by petitioners, cannot be given

HERNANDEZ- NIEVERA V HERNANDEZ

Project Movers Realty & Development Corporation
(PMRDC), one of the respondents herein, is a duly organized
domestic corporation engaged in real estate development. in 1995, it
entered through its president, respondent Mario Villamor (Villamor),
into various agreements with co-respondents Home Insurance &
Guaranty Corporation (HIGC)[5] and Land Bank of the Philippines
(LBP), in connection with the construction of the Isabel Homes
housing project in Batangas and of the Monumento Plaza commercial
and recreation complex in Caloocan City. In its Asset Pool Formation
Agreement, PMRDC conveyed to HIGC the constituent assets of the
two projects,[6] whereas LBP agreed to act as trustee of the resulting
Asset Pool[7] for a consideration.[8] The execution of the projects
would be funded largely through securitization, whereby LBP would
act as the nominal issuer of such certificates with the Asset Pool itself
acting as the real issuer.[10] HIGC, in turn, would provide guaranty
coverage to these participation certificates in accordance with its

Contract of Guaranty with PMRDC and LBP. [11]

On November 13, 1997, PMRDC entered into a
Memorandum of Agreement (MOA) whereby it was given the option to
buy pieces of land owned by petitioners Carolina Hernandez-Nievera
(Carolina), Margarita H. Malvar (Margarita) and Demetrio P.
Hernandez, Jr. (Demetrio). Demetrio, under authority of a Special
Power of Attorney to Sell or Mortgage,[12] signed the MOA also in
behalf of Carolina and Margarita. The MOA materially provides:
1.
THAT, the VENDEE shall have
the option to purchase the above-described
parcels of land within a period of twelve (12)
months from the date of this instrument and
that the VENDEE shall pay the vendor option
money
should the VENDEE fail to exercise its
option to purchase the said described
parcels of land within the stipulated period,
the option money shall be forfeited in favor
of the VENDOR and that the VENDEE shall
return to the VENDOR all the Transfer
Certificates of Title covering the said
described parcels of land
the VENDOR, at the request of the VENDEE,
shall agree to convey the parcels of land to any
bank or financial institution by way of mortgage
or to a Trustee by way of a Trust Agreement at
any time from the date of this instrument,

PROVIDED, HOWEVER, that the VENDOR is

not liable for any mortgage or loans or
obligations that will be incurred by way of
mortgage of Trust Agreement that the VENDEE
might enter into;
As an implementation of the MOA, the lands within Area I
were then mortgaged to Solid Bank for which petitioners received
consideration from PMRDC.[14]
PMRDC saw the need to convey additional properties to
and augment the value of its Asset Pool to support the
collateralization of additional participation certificates to be issued.
[15] Thus, on March 23, 1998, it entered with LBP and Demetrio the
latter purportedly acting under authority of the same special power of
attorney as in the MOA into a Deed of Assignment and Conveyance
whereby the lands within Area II were transferred and assigned to the
Asset Pool in exchange for a number of shares of stock which
supposedly had already been issued in the name and in favor of
Demetrio.
, petitioners instituted an action before the RTC of San
Pablo City, Laguna, Branch 32 for the rescission of the MOA,
RTC rendered decision in favor petitioners. On appeal, CA
reversed the ruling of RTC. Hence this petiotion.
Issue: won there was novation.
Ruling:

This seems to suggest that with the execution of the DAC,

PMRDC has already entered into the exercise of its option except that
its obligation to deliver the option money has, by subsequent
agreement embodied in the DAC, been substituted instead by the
obligation to issue participation certificates in Demetrios name but
which, likewise, has not yet been performed by PMRDC.
It is in the context of this vesture of power that Demetrio,
representing his shared interest with Carolina and Margarita, entered
into the MOA with PMRDC. It is likewise within this same context that
Demetrio later on entered into the DAC and accordingly extinguished
the previously subsisting obligation of PMRDC to deliver the stipulated
option money and replaced said obligation with the delivery instead of
participation certificates in favor of Demetrio.
the power conferred on Demetrio to sell for such price or
amount[46] is broad enough to cover the exchange contemplated in
the DAC between the properties and the corresponding corporate
shares in PMRDC, with the latter replacing the cash equivalent of the
option money initially agreed to be paid by PMRDC under the MOA
Thus, it becomes clear that Demetrios special power of
attorney to sell is sufficient to enable him to make a binding
commitment under the DAC in behalf of Carolina and Margarita. In
particular, it does include the authority to extinguish PMRDCs
obligation under the MOA to deliver option money and agree to a
more flexible term by agreeing instead to receive shares of stock in
lieu thereof and in consideration of the assignment and conveyance of
the properties to the Asset Pool. Indeed, the terms of his special
power of attorney allow much leeway to accommodate not only the
terms of the MOA but also those of the subsequent agreement in the

DAC which, in this case, necessarily and consequently has resulted in

a novation of PMRDCs integral obligations
There are two ways which could
indicate, in fine, the presence of novation and
thereby produce the effect of extinguishing an
obligation by another which substitutes the
same. The first is when novation has been
explicitly stated and declared in unequivocal
terms. The second is when the old and the new
obligations are incompatible on every point.
The test of incompatibility is whether the two
obligations can stand together, each one having
its independent existence. If they cannot, they
are incompatible, and the latter obligation
novates the first. Corollarily, changes that
breed incompatibility must be essential in nature
and not merely accidental. The incompatibility
must take place in any of the essential elements
of the obligation such as its object, cause or
principal conditions thereof; otherwise, the
change would be merely modificatory in nature
and insufficient to extinguish the original
obligation.[49]

G.R. No. L-29280 August 11, 1988

PEOPLE'S BANK AND TRUST COMPANY, plaintiff-appellee, vs.
SYVEL'S INCORPORATED, ANTONIO Y. SYYAP and ANGEL Y
SYYAP, defendants-appellants.
This is an action for foreclosure of chattel mortgage executed in favor
of the plaintiff by the defendant Syvel's Incorporated on its stocks of
goods, personal properties and other materials owned by it and
located at its stores or warehouses The chattel mortgage was in
connection with a credit commercial line in the amount of P900,000.00
granted the said defendant corporation, the expiry date of which was
May 20, 1966. On May 20, 1965, defendants Antonio V. Syyap and
Angel Y. Syyap executed an undertaking in favor of the plaintiff
whereby they both agreed to guarantee absolutely and unconditionally
and without the benefit of excussion the full and prompt payment of
any indebtedness to be incurred on account of the said credit line.
Against the credit line granted the defendant Syvel's Incorporated the
latter drew advances in the form of promissory notes. In view of the
failure of the defendant corporation to make payment in accordance
with the terms and conditions agreed upon in the Commercial Credit
Agreement the plaintiff started to foreclose extrajudicially the chattel
mortgage.
After the filing of this case and during its pendency, Syyap proposed
to have the case settled. Mr. Syyap offered to execute a real estate
mortgage on his real property located in Bacoor, Cavite. Mr. De las
Alas consented, and so the Real Estate Mortgage was executed by
the defendant Antonio V. Syyap and his wife Margarita Bengco Syyap
on June 22, 1967. In that deed of mortgage, defendant Syyap
admitted that as of June 16, 1967, the indebtedness of Syvel's

Incorporated was P601,633.01.

No part of the amount has been paid by either of the defendants.
Hence their liabilities cannot be questioned

ISSUE: WON the obligation secured by the Chattel Mortgage sought

to be foreclosed was novated by the subsequent execution by Syyap
of a real estate mortgage as additional collateral to the obligation
secured by said chattel mortgage.
HELD:
Novation takes place when the object or principal condition of an
obligation is changed or altered. It is elementary that novation is never
presumed; it must be explicitly stated or there must be manifest
incompatibility between the old and the new obligations in every
aspect.
In the case at bar, there is nothing in the Real Estate Mortgage which
supports appellants'submission. The contract on its face does not
show the existence of an explicit novation nor incompatibility on every
point between the "old and the "new" agreements as the second
contract evidently indicates that the same was executed as new
additional security to the chattel mortgage previously entered into by
the parties.

Moreover, appellants agreed that the chattel mortgage "shall remain in

full force and shall not be impaired by this (real estate) mortgage."
It is clear, therefore, that a novation was not intended. The real estate
mortgage was evidently taken as additional security for the
performance of the contract.

SPOUSES JOSE T. VALENZUELA and GLORIA VALENZUELA,

Petitioners,
vs.
KALAYAAN DEVELOPMENT & INDUSTRIAL CORPORATION,
Respondent.
G.R. No. 163244

June 22, 2009

Facts: Kalayaan Development & Industrial Corporation discovered

that Spouses Jose and Gloria Valenzuela had occupied and built a
house on a parcel of land it owned, and demanded that they vacate
said property. Upon negotiation, however, petitioners and Kalayaan
entered a Contract to Sell wherein the petitioners would purchase 236
square meters of the subject property for P1,416,000 in twelve equal
monthly installments. The contract further stated that upon failure to
pay any of said installments, petitioners would be liable for liquidated
penalty at 3% a month compounded monthly until fully paid. Kalayaan
would also execute the deed of absolute sale only upon full payment.
Petitioners were only able to pay monthly installments amounting to a
total of P208, 000.00. They then requested Kalayaan to issue a deed
of sale for 118 square meters of the lot where their house stood,
arguing that since they had paid half the purchase price, or a total of

P708,000.00 representing 118 square meters of the property.

Kalayaan, on the other hand, sent two demand letters asking
petitioners to pay their outstanding obligation including agreed
penalties.
Gloria Valenzuelas sister, Juliet Giron, assumed the remaining
balance for the 118 square meters of the subject property at
P10,000.00 per month to Kalayaan, which the latter accepted for and
in behalf of Gloria. Thereafter, Kalayaan demanded that petitioners
pay their outstanding obligation, but were unheeded. Kalyaan then
filed a Complaint fot the Rescission of Contract and Damages against
petitioners. The RTC of Caloocan rendered a Decision in favor of
Kalayaan, rescinding the contract between the parties and ordering
petitioners to vacate the premises.
Petitioners sought recourse from the CA. They aver that the CA failed
to see that the original contract between petitioners and Kalayaan was
altered, changed, modified and restricted as a consequence of the
change in the person of the principal debtor (Sps. Valenzuela to
Juliet). When Kalayaan agreed to a monthly amortization of
P10,000.00 per month the original contract was changed, and that the
same recognized Juliets capacity to pay and her designation as the
new debtor. Nevertheless, the CA affirmed the RTC ruling.
Issue: If the original contract was novated and the principal obligation
to pay for the remaining half of the subject property was transferred
from petitioners to Juliet.
Held: No. Novation is never presumed. 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, or by
substituting another in place of the debtor, or by subrogating a third

person in the rights of the creditor. Parties to a contract must

expressly agree that they are abrogating their old contract in favor of a
new one. In absence of an express agreement, novation takes place
only when the old and new obligations are incompatible on every
point.
These are the indispensable requisites of novation:
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 instant case, none of the aforementioned requisites are present,
as Kalayaan never agreed to the creation of a new contract between
them or Juliet. Kalayaans acceptance of the late payments made by
Juliet is, at best, an act of tolerance on part of Kalayaan that could not
have modified the contract.
The non-fulfillment by petitioners of their obligation to pay, which is a
suspensive condition for the obligation of Kalayaan to sell and deliver
the title to the property, rendered the Contract to Sell ineffective and
without force and effect. The parties stand as if the conditional
obligation had never existed; Kalayaan cannot be compelled to
transfer ownership of the property to petitioners.

PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF

APPEALS and RAMON LAPEZ,[1] doing business
under the name and style SAPPHIRE SHIPPING,
respondents.

The Facts
"'(a) The defendant applied/appropriated the amounts of $2,627.11
and P34,340.38 from remittances of the plaintiff's principals (sic)
abroad.
"'(b) The first remittance was made by the NCB of Jeddah for the
benefit of the plaintiff, to be credited to his account at Citibank,
Greenhills Branch; the second was from Libya, and was intended to
be deposited at the plaintiff's account with the defendant, No. 8302410;
(c) The plaintiff made a written demand upon the defendant for
remittance of the equivalent of $2,627.11 by means of a letter dated
December 4, 1986 .
"'(d) There were indeed two instances in the past, one in November
1980 and the other in January 1981 when the plaintiff's account No.
830-2410 was doubly credited with the equivalents of $5,679.23 and
$5,885.38, respectively, which amounted to an aggregate amount of
P87,380.44.

"'(e) Defendant PNB made a demand upon the plaintiff for refund of
the double or duplicated credits erroneously made on plaintiff's
account, by means of a letter dated October 23, 1986 or 5 years and
11 months from November 1980, and 5 years and 9 months from
January 1981.
"'(f) The deduction of P34,340.38 was made by the defendant not
without the knowledge and consent of the plaintiff, who was issued a
receipt.
ISSUES:
whether the herein petitioner was legally justified in making the
compensation or set-off against the two remittances coursed through
it in favor of private respondent to recover on the double credits it
erroneously made in 1980 and 1981, based on the principle of solutio
indebiti
HELD:
"'Article 1279 of the Civil Code provides:
"'In order that compensation may prosper, it is necessary:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor
of the other;
(2) That both debts consists in a sum of money, or if the
things due are consumable, they be of the same
kind, and also of the same quality if the latter has
been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;
(5) That over neither of them there by any retention or
controversy, commenced by third persons and
communicated in due time to the debtor."'

What the petitioner bank is effectively saying is that since the

respondent Court of Appeals ruled that petitioner bank could not do a
shortcut and simply intercept funds being coursed through it, for
transmittal to another bank, and eventually to be deposited to the
account of an individual who happens to owe some amount of money
to the petitioner, and because respondent Court ordered petitioner
bank to return the intercepted amount to said individual, who in turn
was found by the appellate Court to be indebted to petitioner bank,
THEREFORE, there must now be legal compensation of the amounts
each owes the other, and hence, there is no need for petitioner bank
to actually return the amount, and finally, that petitioner bank ends up
in exactly the same position as when it first took the improper and
unwarranted shortcut by intercepting the said money transfer,
notwithstanding the assailed Decision saying that this could not be
done!
We see in this petition a clever ploy to

use this Court to validate or legalize an improper act of the

petitioner bank, with the not impossible intention of using this case as
a precedent for similar acts of interception in the future. This piratical
attitude of the nation's premier bank deserves a warning that it should
not abuse the justice system in its collection efforts, particularly since
we are aware that if the petitioner bank had been in good faith, it
could have easily disposed of this controversy in ten minutes flat by
means of an exchange of checks with private respondent for the same
amount. The litigation could have ended there, but it did not. Instead,
this plainly unmeritorious case had to clog our docket and take up the
valuable time of this Court.
SOUTH AFRICAN AIRWAYS V. COMMISSIONER OF INTERNAL
REVENUE
G.R. No. 180356
February 16, 2010
The Facts
Petitioner South African Airways is a foreign corporation
organized and existing under and by virtue of the laws of the Republic
of South Africa. Its principal office is located at Airways Park, Jones
Road, Johannesburg International Airport, South Africa. In the
Philippines, it is an internal air carrier having no landing rights in the
country. Petitioner has a general sales agent in the Philippines,
Aerotel Limited Corporation (Aerotel). Aerotel sells passage
documents for compensation or commission for petitioners off-line
flights for the carriage of passengers and cargo between ports or
points outside the territorial jurisdiction of the Philippines. Petitioner is
not registered with the Securities and Exchange Commission as a
corporation, branch office, or partnership. It is not licensed to do

business in the Philippines.

For the taxable year 2000, petitioner filed separate quarterly
and annual income tax returns for its off-line flights.

If an international air carrier maintains flights to and from the

Philippines, it shall be taxed at the rate of 2 1/2% of its Gross
Philippine Billings, while international air carriers that do not have
flights to and from the Philippines ome.

On February 5, 2003, petitioner filed with the Bureau of Internal

Revenue, a claim for the refund of the amount of PhP 1,727,766.38 as
erroneously paid tax on Gross Philippine Billings (GPB) for the taxable
year 2000. Such claim was unheeded.

Article 1279 of the Civil Code contains the elements of

legal compensation, to wit:

The CTA ruled that petitioner is a resident foreign corporation

engaged in trade or business in the PhilippinesThe CTA stated that
petitioner is liable to pay a tax of 32% on its income derived from the
sales of passage documents in the Philippines. On this ground, the
CTA denied petitioners claim for a refund.
The Issue:
WON such offsetting of their liability under sec.28 (a)(1) by the refund
they are asking is in the nature of legal compensation.
The Courts Ruling

Petitioner Is Subject to Income Tax

at the Rate of 32% of Its Taxable Income
Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign
corporations are liable for 32% tax on all income from sources within
the Philippines. Sec. 28(A)(3) is an exception to this general rule.

Art.
1279.
In
order
that
compensation may be proper, it is necessary:
(1) That each one of the
obligors be bound principally, and
that he be at the same time a
principal creditor of the other;
(2) That both debts
consist in a sum of money, or if the
things due are consumable, they be
of the same kind, and also of the
same quality if the latter has been
stated;
(3) That the two debts be
due;
(4) That they be liquidated
and demandable;
(5) That over neither of
them there be any retention or
controversy, commenced by third
persons and communicated in due
time to the debtor.

In several instances prior to the

instant case, the court have already made the
pronouncement that taxes cannot be subject to
compensation for the simple reason that the
government and the taxpayer are not creditors
and debtors of each other. There is a material
distinction between a tax and debt. Debts are
due to the Government in its corporate capacity,
while taxes are due to the Government in its
sovereign capacity.
Verily, petitioners argument is correct that the offsetting of
its tax refund with its alleged tax deficiency is unavailing under Art.
1279 of the Civil Code.
Be that as it may, this Court is unable to affirm the assailed
decision and resolution of the CTA En Banc on the outright denial of
petitioners claim for a refund. Even though petitioner is not entitled to
a refund due to the question on the propriety of petitioners tax return
subject of the instant controversy, it would not be proper to deny such
claim without making a determination of petitioners liability under Sec.
28(A)(1).
It must be remembered that the tax under Sec. 28(A)(3)(a)
is based on GPB, while Sec. 28(A)(1) is based on taxable income,
that is, gross income less deductions and exemptions, if any
WHEREFORE, the assailed July 19, 2007 Decision and
October 30, 2007 Resolution of the CTA En Banc in CTA E.B. Case
No. 210 are SET ASIDE. The instant case is REMANDED.