MAJAYJAY MEMORIAL PARK, INC., SPS. ALEXANDER & EVANGELINE ESTEBAL, AND SPS. PERCIVAL & SONIA ESTEBAL, PETITIONERS, VS. THE HON. ALBERTO F. SERRANO AS THE PRESIDING JUDGE OF THE …

Majayjay Memorial Park versus Serrano

The Case

This is a petition for certiorari under Rule 65 of the Rules of Court brought by Majayjay Memorial Park, Incorporated and the spouses Alexander and Evangeline Estabal and Percival and Sonia Estabal against Judge Alberto Serrano, in his capacity as presiding judge of the Regional Trial Court of Calamba City, Branch 92. The petitioners ask the Supreme Court to annul two orders of the trial court: the order denying their motion to dismiss and granting the substitution of Opal Portfolio Investments as party plaintiff in place of Philippine National Bank, and the later order denying their motion for reconsideration. The case matters because it draws the line between an assignment of credit, which merely changes the person of the creditor, and extinctive novation, which extinguishes the obligation. It is a staple for questions on whether a debtor's consent is needed for a valid assignment, and on when substitution of parties is proper.

Procedural History

Philippine National Bank sued the petitioners for a sum of money before the Regional Trial Court of Calamba City, Branch 92. While the case was pending, the bank sold and assigned its rights over the loan account to Golden Dragon Star Equities, Incorporated and Opal Portfolio Investments, Incorporated, and Golden Dragon later assigned its interest to Opal. The bank and Opal then filed a joint motion for substitution of party, praying that Opal be substituted as plaintiff in lieu of the bank. The petitioners opposed the motion and moved to dismiss the complaint, arguing that the assignment produced novation and extinguished their obligation. In its order dated October 27, 2008, the trial court denied the motion to dismiss for lack of merit and granted the motion for substitution, declaring Opal substituted as party plaintiff in lieu of Philippine National Bank. The petitioners' motion for reconsideration was denied in the order dated February 25, 2009. The petitioners then went directly to the Supreme Court by petition for certiorari under Rule 65, alleging grave abuse of discretion amounting to lack or excess of jurisdiction.

Facts

On January 17, 1995, Philippine National Bank granted Majayjay Memorial Park, Incorporated a five year loan accommodation of 4,000,000 pesos. The corporation availed of the accommodation on separate occasions in various amounts, totaling 4,000,000 pesos. Pursuant to the credit agreement, the spouses Alexander and Percival Estabal executed a joint and solidary agreement and bound themselves solidarily liable with the corporation. The petitioners eventually failed to pay when the obligation fell due and demandable, and the bank filed an action for sum of money.

In their defense, the petitioners averred that the bank failed to discharge its duties and responsibilities under its charter to give all necessary assistance to its small time borrowers, and that this was the reason they failed to pay on time.

On April 25, 2007, the bank sold, assigned, and conveyed all its rights, title, and interests in, and all obligations arising out of or in connection with, the account of Majayjay Memorial Park to Golden Dragon Star Equities, Incorporated and Opal Portfolio Investments, Incorporated. Golden Dragon later assigned all its rights, title, and interest in the account to Opal. The bank and Opal then filed the joint motion for substitution, which the trial court granted, prompting the present petition.

Issues

• Whether or not the sale, assignment, and conveyance by Philippine National Bank of its rights, title, and interests in, and all obligations arising out of or in connection with, the account of Majayjay Memorial Park to Golden Dragon Star Equities, Incorporated and Opal Portfolio Investments, Incorporated resulted in novation and the extinguishment of the petitioners' obligation to the bank.
• Whether or not the trial court committed grave abuse of discretion amounting to lack or excess of jurisdiction in denying the motion to dismiss and granting the substitution of parties.

Applicable Provisions

Paragraph 3 of Article 1291 of the Civil Code provides:

Obligations may be modified by changing their object or principal conditions, by substituting the person of the debtor, or by subrogating a third person in the right of the creditor.

The petitioners invoked this provision to argue that subrogating a third person in the right of the creditor modified and thereby extinguished their obligation, but the Court held that a change in the person of the creditor does not extinguish the debt where the old obligation subsists.

Article 1296 of the Civil Code provides:

When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent.

This provision applies only where the principal obligation is actually extinguished by novation, which the Court found did not happen here.

Section 19 of Rule 3 of the Rules of Court provides:

A party may transfer his interest to another person who may continue the action.

The Court used this provision to show that the transfer of the bank's interest to Opal is precisely the situation the Rules contemplate, and that this rule is incompatible with the theory of extinctive novation as a ground for dismissing the case.

Ruling

On the first issue, the Court held that no novation took place. The burden to prove that an obligation has been extinguished by novation falls on the debtor, and the petitioners failed to discharge it. 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. Extinctive novation requires four essential requisites: a previous valid obligation, an agreement of all the parties concerned to a new contract, the extinguishment of the old obligation, and the birth of a valid new obligation. None of these was shown.

What took place, the Court said, was an assignment of credit: an agreement by virtue of which the owner of a credit, the assignor, by a legal cause such as sale, transfers his credit and accessory rights to another, the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the debtor. The consent of the debtor is not essential for its perfection; knowledge of the assignment affects only the efficacy of any payment that might have been made. The duty to pay does not depend on the debtor's consent. The law requires no formal notice to bind the debtor; all that the law requires is knowledge of the assignment, and even without notice the debtor who comes to know of it by whatever means is bound. The transfer of rights takes place upon perfection of the contract, and the assignee steps into the shoes of the original creditor as subrogee. Hence, the assignment did not extinguish the petitioners' obligation, and Opal, having acquired all the rights of the bank, including appurtenant accessory rights, was rightly substituted as party plaintiff.

On the second issue, the Court found no grave abuse of discretion. Grave abuse of discretion exists when there is an evasion of a positive duty or a virtual refusal to perform a duty enjoined by law, or to act in contemplation of law, as when the judgment rendered is not based on law and evidence but on caprice, whim, and despotism. That was wanting here, and the trial court had squarely addressed the question of novation in its order.

Doctrine

An assignment of credit is not novation. It changes only the person of the creditor and leaves the obligation intact, so the debtor's consent is not required for its perfection, and knowledge of the assignment merely governs the efficacy of payment. Extinctive novation, by contrast, requires a previous valid obligation, an agreement of all parties concerned to a new contract, the extinguishment of the old obligation, and the birth of a valid new obligation, and the burden of proving it rests on the debtor who asserts it. Because the assignee acquires all the rights and accessory rights of the assignor and steps into the shoes of the original creditor as subrogee, the assignee may be substituted as party plaintiff under Section 19 of Rule 3 of the Rules of Court, and the rule on transfer of interest is incompatible with the theory of extinctive novation as a ground for dismissal.

Disposition

The petition was dismissed, and the orders of the trial court denying the motion to dismiss and granting the substitution of Opal Portfolio Investments as party plaintiff in lieu of Philippine National Bank were sustained.

Remember This

Memorize this line: an assignment of credit changes only the person of the creditor and does not extinguish the obligation, so no consent of the debtor is needed. Examiners use this case to test the distinction between extinctive and modificatory novation, the four requisites of extinctive novation, and the propriety of substitution of parties when a credit is assigned during the pendency of a suit.