MANILA BANKING CORPORATION, PETITIONER, VS. DRI-MULMAC DEVELOPMENT CORPORATION (FORMERLY MULMAC INDUSTRIAL CONSTRUCTION), RICARDO L. PENSON, ENRIQUE B. LAGDAMEO, ERNESTO LAGDAME…

Manila Banking versus DRI-Mulmac Development Corporation

The Case

This is a collection suit for a sum of money. Manila Banking Corporation sued DRI-Mulmac Development Corporation, formerly Mulmac Industrial Construction, together with Ricardo Penson, Enrique Lagdameo, Ernesto Lagdameo Junior, and Charles Mulvaney, to collect on two promissory notes. The case matters because the Supreme Court uses it to fix two rules every civil law and remedial law candidate must know: when a written extrajudicial demand interrupts prescription, and why novation by substitution of debtor is never presumed and requires the creditor's express consent.

Procedural History

Manila Banking filed its complaint for collection with the Regional Trial Court of Makati City. Enrique Lagdameo moved to dismiss on two grounds: that the claim against him had prescribed, and that it was extinguished by novation. DRI-Mulmac and Penson filed their own motion to dismiss on grounds of prescription, laches, and failure to state a cause of action. The trial court issued a resolution dismissing the case against Lagdameo on the grounds of prescription and want of a cause of action, but denied the motion to dismiss filed by DRI-Mulmac and Penson. Both sides moved for partial reconsideration, and the trial court denied both motions.

Manila Banking then went directly to the Supreme Court by a petition for review on certiorari under Rule 45, raising pure questions of law. The Third Division referred the petition to the Court en banc under Section 6 of Rule 56. The Court granted the petition.

Facts

On June 30, 1982, Manila Banking granted a twenty million peso loan to Mulmac Industrial Construction Corporation. The officers Ernesto Lagdameo Junior, Charles Mulvaney, and Enrique Lagdameo executed Promissory Note Number 11194 for the corporation and personally for themselves. The note was payable on or before June 30, 1989. On January 20, 1983, Mulmac obtained a second loan of two million four hundred ninety-one thousand pesos under Promissory Note Number 11724, executed in the same capacities by Mulvaney and Lagdameo, likewise payable on or before June 30, 1989. Both notes carried an acceleration clause: any default in the payment of an installment would render the entire obligation, including interest, due and demandable.

Manila Banking was placed under receivership by the Central Bank in May 1987. Sometime in March 1994, Defense Resources Incorporated took over certain assets of Mulmac, and a new corporation, DRI-Mulmac Industrial Corporation, was formed, assuming the obligations of Mulmac in exchange for what were ceded.

Both notes matured on June 30, 1989 without payment of principal and accumulated interest. On January 25, 2000, Manila Banking filed its collection suit. Lagdameo argued that the first installments were never paid, so the causes of action accrued in 1983 and 1984, and the ten-year period had long expired. Manila Banking countered that several demand letters, one dated May 16, 1990 and served on Lagdameo on May 18, 1990, interrupted prescription. On novation, Manila Banking insisted it never intended to release Lagdameo, and that its dealings with DRI-Mulmac and Penson amounted only to acceptance of partial payment.

Issues

• Whether or not the trial court erred in dismissing the complaint against Enrique Lagdameo on the ground of prescription.
• Whether or not the trial court erred in dismissing the complaint against Enrique Lagdameo on the ground of want of a cause of action, that is, whether the obligation was extinguished by novation.

Applicable Provisions

Article 1144 of the Civil Code provides:

Actions upon a written contract, an obligation created by law, and a judgment must be brought within ten years from the time the right of action accrues.

This fixes the ten-year period for Manila Banking's action on the promissory notes.

Article 1155 of the Civil Code provides:

The prescription of actions is interrupted when they are filed before the court, when there is a written extrajudicial demand by the creditors, and when there is any written acknowledgment of the debt by the debtor.

This is the provision on which the ruling on prescription turns.

Article 1293 of the Civil Code provides:

Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor.

This is the provision that defeats the claim of novation by substitution of debtor.

Ruling

On the first issue, the Court ruled that the action had not prescribed. The action is upon a written contract and prescribes in ten years. Assuming the causes of action accrued when the first installments went unpaid, the periods would have expired on June 30, 1993 and January 20, 1994. But under Article 1155, a written extrajudicial demand interrupts prescription, and the period begins to run anew from receipt of the demand. The complaint and its annexes showed demand letters sent within the ten-year period, one dated May 16, 1990 and served on Lagdameo on May 18, 1990. The period therefore ran afresh, and the complaint filed on January 25, 2000 was well within the renewed period. The Court added that Lagdameo's denial of receipt is factual and evidentiary, best resolved at trial, and that prescription may be used in a motion to dismiss only when the complaint on its face shows the action has prescribed.

On the second issue, the Court ruled that no novation had taken place. Novation is never presumed; the intent to novate must appear by express agreement or by acts too clear and unequivocal to be mistaken. The exchange of communications between Manila Banking and DRI-Mulmac and Penson showed only acceptance of an offer of partial payment, without any express agreement to release Lagdameo. To change the person of the debtor, the old debtor must be expressly released and the new debtor must assume his place. The Court quoted Article 1293 and stressed that the creditor's consent to substitution is indispensable, because novation implies a waiver of the creditor's right, and that waiver must be express.

Doctrine

First, an action upon a written contract prescribes in ten years under Article 1144, but a written extrajudicial demand interrupts prescription under Article 1155, and the period commences anew from the debtor's receipt of the demand. Second, prescription and laches are evidentiary matters that cannot be resolved on a motion to dismiss unless the complaint on its face shows the action has prescribed. Third, novation is never presumed; the intent to novate must be express or shown by acts too clear and unequivocal to be mistaken. Fourth, novation by substitution of debtor requires the creditor's express consent under Article 1293, and mere acceptance of partial payment from a new debtor, without an express release of the old, creates at most a relation of co-debtorship or suretyship and does not extinguish the original obligation.

Disposition

The petition was granted, and the trial court's resolution was reversed and set aside insofar as it dismissed the complaint against Enrique Lagdameo.

Remember This

Memorize the line that novation is never presumed, and that a written extrajudicial demand restarts the prescriptive period from receipt. Examiners use this case to test Article 1155 interruption and Article 1293 consent in substitution of debtor, often through a motion to dismiss that improperly resolves evidentiary matters.