G.R. No. 25920 , November 17, 1926
M. W. STRAIGHT, Plaintiff-Appellant, vs. A. D. HASKELL, THE MAGDALENA COCONUT CO., INC., and A. S. HEYWARD, Defendants-Appellees.

FACTS

Plaintiff M.W. Straight extended two loans to defendant A.D. Haskell, secured by real estate mortgages on a parcel of land in Laguna. The first mortgage was for P20,000, and the second for P12,200, both bearing 12% annual interest and containing a stipulation for 10% attorney’s fees in case of suit. Subsequently, Haskell sold the mortgaged property to defendant Magdalena Coconut Co., Inc., which assumed the obligation to pay the two mortgages. The Coconut Co. later mortgaged the same property (along with others) to defendant A.S. Heyward. All mortgages were duly registered. After the Coconut Co. paid interest only up to April 30, 1924, Straight filed an action for foreclosure against Haskell and the Coconut Co. The trial court held only the Coconut Co. liable, absolving Haskell, and reduced the attorney’s fees to P1,000. Straight appealed.

ISSUES:
1. Whether the assumption of the mortgage debt by the Magdalena Coconut Co., Inc., with the creditor’s (Straight’s) knowledge and acceptance of interest payments, operated as a substitution of debtors, thereby releasing the original debtor (Haskell) from liability.
2. Whether the stipulated 10% attorney’s fee should be enforced.
3. Whether the plaintiff’s mortgages are superior to the subsequent mortgage in favor of Heyward.
4. Whether the redemption period granted by the trial court (six months) was proper.

RULING

1. No, there was no substitution of debtors. The mere knowledge and acceptance of interest payments from the new debtor (Coconut Co.) by the creditor (Straight) does not constitute a novation or release of the original debtor (Haskell). There was no clear and convincing evidence, oral or written, that Straight intended to release Haskell from his direct obligation under the mortgages. The assumption agreement between Haskell and the Coconut Co. was for their benefit but did not extinguish Haskell’s liability to Straight. Therefore, Haskell and the Coconut Co. are jointly and severally liable to Straight.

2. Yes, the stipulated 10% attorney’s fee is reasonable and enforceable. The contract expressly provided for 10% attorney’s fees in case of suit. Since the case was litigated in the trial court and appealed to the Supreme Court, the stipulated rate is deemed reasonable and should be awarded.

3. The issue of priority over Heyward’s mortgage was not expressly ruled upon in the dispositive portion, as the decision focused on the liability of Haskell and the Coconut Co. However, the factual recital notes that all mortgages were registered in chronological order, implying the plaintiff’s mortgages, being earlier, would have priority.

4. The redemption period is reduced to four months. Given that no payments had been made for about two and a half years, the Supreme Court found the six-month period granted by the trial court excessive and reduced it to four months from the finality of judgment.

DISPOSITIVE PORTION:
The judgment of the lower court is modified. A new judgment is rendered holding defendants Haskell and Magdalena Coconut Co., Inc., jointly and severally liable for the full amount of the mortgage debts with 12% interest and 10% attorney’s fees. The stay of execution is limited to four months. Costs against Haskell on appeal.