EUSEBIO S. MILLAR, PETITIONER, VS. THE HON. COURT OF APPEALS AND ANTONIO P. GABRIEL, RESPONDENTS.

On February 11, 1956, Eusebio S. Millar
(hereinafter referred to as the petitioner) obtained a favorable judgment from
the Court of First Instance of Manila, in civil case 27116, condemning Antonio
P. Gabriel (hereinafter referred to as the respondent) to pay him the sum of
P1,746.98 with interest at 12% per annum from the date of the filing of the
complaint, the sum of P400 as attorney’s fees, and the costs of suit.  From the said judgment, the respondent
appealed to the Court of Appeals which, however, dismissed the appeal on
January 11, 1957.

Subsequently, on February
15, 1957, after remand by the Court of Appeals of the case, the
petitioner moved ex parte in the court
of origin for the issuance of the corresponding writ of execution to enforce
the judgment.  Acting upon the motion,
the lower court issued the writ of execution applied for, on the basis of which
the sheriff of Manila seized the
respondent’s Willy’s Ford jeep (with motor no. B-192297 and plate no. 7225, Manila,
1956).

The respondent, however, pleaded with the petitioner to release
the jeep under an arrangement whereby the respondent, to secure the payment of
the judgment debt, agreed to mortgage the vehicle in favor of the
petitioner.  The petitioner agreed to the
arrangement; thus, the parties, on February
22, 1957, executed a chattel mortgage on the jeep, stipulating, inter
alia, that

“This mortgage is given as security for the payment to the
said EUSEBIO S. MILLAR, mortgagee, of the judgment and other incidental expenses
in Civil Case No. 27116 of the Court of First Instance of Manila against
Antonio P. Gabriel, MORTGAGOR, in the amount of ONE THOUSAND SEVEN HUNDRED
(P1,700.00) PESOS, Philippine currency, which MORTGAGOR agrees to pay as
follows:

“March 31, 1957 – EIGHT HUNDRED FIFTY (P850.00) PESOS;

“April 30, 1957 – EIGHT HUNDRED FIFTY (P850.00) PESOS.”

Upon failure of the respondent to pay the first installment due
on March 31, 1957, the
petitioner obtained an alias writ of execution.  This writ which the sheriff served on the
respondent only on May 30, 1957
– after the lapse of the entire period stipulated in the chattel mortgage for
the respondent to comply with his obligation – was returned unsatisfied.

So on July 17, 1957
and on various dates thereafter, the lower court, at the instance of the
petitioner, issued several alias writs, which writs the sheriff also
returned unsatisfied.  On September 20, 1961, the petitioner
obtained a fifth alias writ of execution.  Pursuant to this last writ, the sheriff
levied on certain personal properties belonging to the respondent, and then
scheduled them for execution sale.

However, on November
10, 1961, the respondent filed an urgent motion for the suspension
of the execution sale on the ground of payment of the judgment obligation.  The lower court, on November 11, 1961, ordered the suspension of the
execution sale to afford the respondent the opportunity to prove his allegation
of payment of the judgment debt, and set the matter for hearing on November 25, 1961.  After hearing, the lower court, on January 25 1962, issued an order the dispositive portion of which reads:

“IN VIEW WHEREOF, execution reiterated for P1,700.00 plus
costs of execution.”

The lower court ruled that no novation had taken place, and that the parties had executed
the chattel mortgage only ‘to secure or get better security for the
judgment.”

The respondent duly appealed the aforesaid order to the Court of
Appeals, which set aside the order of execution in a decision rendered on
October 17, 1968, holding that the subsequent agreement of the parties
impliedly novated the judgment obligation in civil
case 27116.

The appellate court stated that the following circumstances
sufficiently demonstrate the incompatibility between the judgment debt and the
obligation embodied in the deed of chattel mortgage, warranting a conclusion of
implied novation:

1.  Whereas the judgment
orders the respondent to pay the petitioner the sum of P1,746.98 with interest
at 12% per annum from the filing of the complaint, plus the amount of P400 and
the costs of suit, the deed of chattel mortgage limits the principal obligation
of the respondent to P1,700;

2.  Whereas the judgment
mentions no specific mode of payment of the amount due to the petitioner, the
deed of chattel mortgage stipulates payment of the sum of P1,700 in two equal
installments;

3.  Whereas the judgment
makes no mention of damages, the deed of chattel mortgage obligates the
respondent to pay liquidated damages in the amount of P300 in case of default
on his part; and

4.  Whereas the judgment debt
was unsecured, the chattel mortgage, which may be foreclosed extrajudicially in case of default, secured the obligation.

On November 26, 1968,
the petitioner moved for reconsideration of the appellate court’s decision,
which motion the Court of Appeals denied in its resolution of December 7, 1968.  Hence, the present petition for certiorari to review the decision of the
Court of Appeals, seeking reversal of the appellate court’s decision and affirmance of the order of the lower court.

Resolution of the controversy posed by the petition at bar hinges
entirely on a determination of whether or not the subsequent agreement of the
parties as embodied in the deed of chattel mortgage impliedly novated the judgment obligation in civil case 27116.  The Court of Appeals, in arriving at the
conclusion that implied novation has taken place,
took into account the four circumstances heretofore already adverted to as
indicative of the incompatibility between the judgment debt and the principal
obligation under the deed of chattel mortgage.

1.  Anent the first
circumstance, the petitioner argues that this does not constitute a
circumstance in implying novation of the judgment
debt, stating that in the interim – from the time of the rendition of
the judgment in civil case 27116 to the time of the execution of the deed of
chattel mortgage – the respondent made partial payments, necessarily resulting
in the lesser sum stated in the deed of chattel mortgage.  He adds that on record appears the admission
by both parties of the partial payments made before the execution of the deed
of chattel mortgage.  The erroneous
conclusion arrived at by the Court of Appeals, the petitioner argues, creates
the wrong impression that the execution of the deed of chattel mortgage
provided the consideration or the reason for the reduced judgment indebtedness.

Where the new obligation merely reiterates or ratifies the old
obligation, although the former effects but minor alterations or slight
modifications with respect to the cause or object or conditions of the latter,
such changes do not effectuate any substantial incompatibility between the two
obligations.  Only those essential and
principal changes introduced by the new obligation producing an alteration or
modification of the essence of the old obligation result in implied novation.  In the
case at bar, the mere reduction of the amount due in no sense constitutes a
sufficient indicium of incompatibility,
especially in the light of (a) the explanation by the petitioner that the
reduced indebtedness was the result of the partial payments made by the respondent
before the execution of the chattel mortgage agreement and the latter’s
admissions bearing thereon.

At best, the deed of chattel mortgage simply specified exactly
how much the respondent still owed the petitioner by virtue of the judgment in
civil case 27116.  The parties,
apparently in their desire to avoid any future confusion as to the amounts
already paid and as to the sum still due, decided to state with specificity in
the deed of chattel mortgage only the balance of the judgment debt properly
collectible from the respondent.  All
told, therefore, the first circumstance fails to satisfy the test of
substantial and complete incompatibility between the judgment debt and the
pecuniary liability of the respondent under the chattel in mortgage agreement.

2.  The petitioner also
alleges that the third circumstance, considered by the Court of Appeals as
indicative of incompatibility, is directly contrary to the admissions of the
respondent and is without any factual basis. 
The appellate court pointed out that while the judgment made no mention
of payment of damages, the deed of chattel mortgage stipulated the payment of
liquidated damages in the amount of P300 in case of default on the part of the
respondent.

However, the petitioner contends that the respondent himself in
his brief filed with the Court of Appeals admitted his obligation, under the
deed of chattel mortgage, to pay the amount of P300 by way of attorney’s fees
and not as liquidated damages. 
Similarly, the judgment makes mention of the payment of the sum of P400
as attorney’s fees and omits any reference to liquidated damages.

The discrepancy between the amount of P400 and the sum of P300
fixed as attorney’s fees in the judgment and the deed of chattel mortgage
respectively, is explained by the petitioner, thus:  the partial payments made by the respondent
before the execution of the chattel mortgage agreement were applied in satisfaction
of part of the judgment debt and of part of the attorney’s fees fixed in the
judgment, thereby reducing both amounts.

At all events, in the absence of clear and convincing proof
showing that the parties, in stipulating the payment of 300 as attorney’s fees
in the deed of chattel mortgage, intended the same as an obligation for the
payment of liquidated damages in case of default on the part of the respondent,
we find it difficult to agree with the conclusion reached by the Court of
Appeals.

3.  As to the second and
fourth circumstances relied upon by the Court of Appeals in holding that the
mortgage obligation superseded, through implied novation,
the judgment debt, the petitioner points out that the appellate court
considered said circumstances in a way not in accordance with law or accepted
jurisprudence.  The appellate court stated
that while the judgment specified no mode for the payment of the judgment debt,
the deed of chattel mortgage provided for the payment of the amount fixed
therein in two equal installments.

On this point, we see no substantial incompatibility between the
mortgage obligation and the judgment liability of the respondent sufficient to
justify a conclusion of implied novation.  The stipulation for the payment of the
obligation under the terms of the deed of chattel mortgage serves only to
provide an express and specific method for its extinguishment – payment in two
equal installments.  The chattel mortgage
simply gave the respondent a method and more time to enable him to fully
satisfy the judgment indebtedness.^[1]
The chattel mortgage agreement in no manner introduced any substantial
modification or alteration of the judgment. 
Instead of extinguishing the obligation of the respondent arising from
the judgment, the deed of chattel mortgage expressly ratified and confirmed the
existence of the same, amplifying only the mode and period for compliance by
the respondent.

The Court of Appeals also considered the terms of the deed of
chattel mortgage incompatible with the judgment because the chattel mortgage
secured the obligation under the deed, whereas the obligation under the
judgment was unsecured.  The petitioner
argues that the deed of chattel agreement clearly shows that the parties agreed
upon the chattel mortgage solely to secure, not the payment of the reduced
amount as fixed in the aforesaid deed, but the payment of the judgment
obligation and other incidental expenses in civil case 27116.

The unmistakable terms of the deed of chattel mortgage reveal
that the parties constituted the chattel mortgage purposely to secure the
satisfaction of the then existing liability of the respondent arising from the
judgment against him in civil case 27116. 
As a security for the payment of the judgment obligation, the chattel
mortgage agreement effectuated no substantial alteration in the liability of
the respondent.

The defense of implied novation
requires clear and convincing proof of complete incompatibility between the two
obligations.^[2]
The law requires no specific form for an effective novation
by implication.  The test is whether the
two obligations can stand together.  If
they cannot, incompatibility arises, and the second obligation novates the first. 
If they can stand together, no incompatibility results and novation does not take place.

We do not see any substantial incompatibility between the two
obligations as to warrant a finding of an implied novation.  Nor do we find satisfactory proof showing
that the parties, by explicit terms, intended the full discharge of the
respondent’s liability under the judgment by the obligation assumed under the
terms of the deed of chattel mortgage so as to justify a finding of express novation.

ACCORDINGLY, the decision of the Court of Appeals of October 17, 1968 is set aside, and
the order of the Court of First Instance of Manila of January 25, 1962 is affirmed at respondent Antonio
Gabriel’s cost.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando, and Makasiar, JJ., concur.

Teehankee, J., concurs in the separate opinion of Justice Barredo.

Barredo, J., concurs and adds considerations in separate opinion.

Villamor, J., abstains.

^[1] Zapanta v. De Rotaeche, 21
Phil. 154.

^[2]
Magdalena Estates, Inc. v. Rodriguez and Rodriguez, L-18411, Dec. 17,
1966, 18 SCRA 967; Guerrero v. Court of Appeals and Alto Surety &
Insurance Co., Inc., L-22366, Oct. 30, 1969, 29 SCRA 791.

Clean
Clean

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