Nothing to change

Novation is one of the modes of extinguishing an obligation through its substitution or change 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. Obviously, it contemplates two obligations, the old and the new. This is illustrated in this case of Fred.

Fred was the chairman, president and CEO of AF, a duly organized corporation engaged in the development, exploitation, production, manufacturing, promotion, marketing and sale of natural and organic minerals for the promotion of food production. In 1982, Fred and AF applied for a loan with a credit company (CMI) to finance its participation in a food production program. CMI endorsed the application to its sister company, a savings bank (SBM). So the Board of Directors of AF authorized Fred to borrow from SBM in an amount not exceeding P2.2 million.

SBM approved the loan application for P2 million to be released in three tranches: P1.4 million to be used in payment of a loan of Fred with another bank so as to release the mortgage of his house and lot which in turn would be used as collateral for the loan with SBM; and P300,000 each to be released at 90 days interval. For all releases, Fred signed Promissory Notes (PN Nos. 2491, 2510 and 2669) payable in one year.

The AF project however collapsed resulting in failure to pay the loan and the extrajudicial foreclosure of mortgage of Fred’s residence. Fred believed that SBM was to blame. So Fred and his company (AF) sued SBM in the Regional Trial Court asking that the promissory notes and real estate mortgage be declared novated, invalid and unenforceable and praying that SBM pay them for actual damages amounting to P5 million. They alleged in their complaint, as amended based on the testimony of the SBM’s own witness, that SBM’s acts in unilaterally reducing the agreed amount of P4 million to P2 million and in unreasonably delaying the release of the P300,000 novated the PN’s and the Real Estate Mortgage.

Were they correct?

No.

In the first place, there is no new obligation that supposedly novated the PNs or the real estate mortgage. In fact, there is only one agreement between the parties in this case, i.e. AF and Fred’s P2 million loan with SBM as evidenced by the three PNs 2491, 2510 and 2669, and the real estate mortgage. What transpired was an application filed by Fred and his company AF with CMI in an amount greater than the P2 million eventually granted. This loan application was endorsed to SBM, processed by the latter and eventually approved by it in the amount of P2 million. It cannot be said that the loan application of Fred and AF or their initial representations with CMI was already in itself a binding original contract that was later "novated" by SBM.

Only upon the bank’s approval of the loan application in the amount and under such terms it deems viable and acceptable, that a binding and effective loan agreement comes into existence. Without any such first or original "loan agreement" as approved in the amount and under the specified terms by the bank, there can be nothing whatsoever that can be subsequently novated. Even the Board Resolution of AF authorized Fred to borrow from SBM sums of money in an amount not exceeding P2.2 million.

The PNs signed by Fred were SBM’s PNs and the real estate mortgage were likewise SBM’s standard real estate mortgage form. Obviously this case is an attempt by Fred and AF to extricate themselves from their obligations; but they cannot be allowed to have their cake and eat it too (Azolla Farms et. al. vs. Court of Appeals et. al. G. R. L-138085, November 11, 2004).

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