Heirs of Franco v Gonzales

CONTRACTS: NOVATION Case Name: Heirs of Servando Franco vs. Spouses Veronica and Danilo Gonzales G.R. No.: G.R. No. 159709 Date: June 27, 2012 Petitioner: Heirs of Servando Franco Respondents: Spouses Veronica and Danilo Gonzales FACTS: Defendants Servando Franco and Leticia Mendel obtained loans from Veronica Gonzales for the latter was engaged in the business of financing under the company Gonzales Credit Enterprises. There were three loans which the Servando and Leticia secured with the respondent, which was not paid on maturity. The third loan was secured by a property was owned by one Leticia Makalintal Yapintchay, who issued a special power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage. The fourth loan was engaged with Dr. Rafael Mendel, the husband of Leticia Mendel of P 60,000 by executing a promissory note which consolidates the other previous loans which totals to P 500,000. Upon maturity of the new promissory note, the defendants failed to pay their obligation. So, the plaintiffs filed a complaint for the collection of the full amount of the loan, plus interests and other charges. Servando contended that he did not obtain any loan from the respondents, he was not benefited from its proceed and he signed the promissory note as a witness. With the various appeals and motion for reconsideration with the RTC and CA, it was decided that the parties should be liable for the loans. Servando opposed that he and the respondents had agreed to fix the entire obligation at P775,000.00. According to Servando, their agreement, which was allegedly embodied in a receipt dated February 5, 1992, whereby he made an initial payment of P400,000.00 and promised to pay the balance of P375,000.00 on February 29, 1992, superseded the July 23, 1986 promissory note. But the RTC ruled over Servando’s opposition and moved to the execution of the judgment for it is final and executory. Then, Servando’s heirs, on account of his intervening death, appealed that there was novation is the judgment that transpired upon the decision of the court on December 9, 1991 and February 5, 1992.

ISSUE: Whether or not there is novation between the judgments rendered by the courts? HELD: No, the court rule that there is no novation when there is no irreconcilable incompatibility between the old and the new obligations. There is no novation in case of only slight modifications; hence, the old obligation prevails. Extinguishment of the old obligation is an necessary element for novation and the new one will arise from such.

Novation arises when there is a substitution of an obligation by a subsequent one that extinguishes the first, either by changing the object or the principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor. For a valid novation to take place, there must be, therefore: (a) a previous valid obligation; (b) an agreement of the parties to make a new contract; (c) an extinguishment of the old contract; and (d) a valid new contract. In short, the new obligation extinguishes the prior agreement only when the substitution is unequivocally declared, or the old and the new obligations are incompatible on every point. A compromise of a final judgment operates as a novation of the judgment obligation upon compliance with either of these two conditions.

On the receipt of February 5, 1992 did not create a new obligation incompatible with the old one under the promissory note that was issued. It was only a payment of the obligation of Servando and did not establish a new obligation. The Court ruled that the payment of the obligation does not novate the instrument that only expressly recognize the old obligation, or changes only the terms of the payment, or adds other obligation that is not incompatible with the old ones, or the new contract merely supplements the old one. The new contract that is a mere reiteration, acknowledgement or ratification of the old contract with slight modifications or alterations as to the cause or object or principal conditions can stand together with the former one, and there can be no incompatibility between them. Moreover, a creditor’s acceptance of payment after demand does not operate as a modification of the original contract. Novation is not presumed by the parties, there should be an expressed agreement that would abrogate the old one in favor of the new one. In the absence of the express agreement, the old and the new obligation should be incompatible on every point. The incompatibility of the obligation is that the two obligations cannot stand together, each one having independence from each other. Thus, the court affirms the decision of the CA promulgated on March 19, 2003.