GR 104625; (January, 2001) (Digest)
G.R. No. 99398 & 104625 January 26, 2001
CHESTER BABST, petitioner, vs. COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, ELIZALDE STEEL CONSOLIDATED, INC., and PACIFIC MULTI-COMMERCIAL CORPORATION, respondents. (Consolidated with ELIZALDE STEEL CONSOLIDATED, INC., petitioner, vs. COURT OF APPEALS, et al.)
FACTS
Elizalde Steel Consolidated, Inc. (ELISCON) obtained a loan and opened letters of credit with Commercial Bank and Trust Company (CBTC). Pacific Multi-Commercial Corporation (MULTI), through a board resolution, authorized ELISCON to use its credit line with CBTC and guaranteed payment solidarily. Chester Babst later executed a Continuing Suretyship, binding himself solidarily for MULTI’s obligations up to P8,000,000. ELISCON defaulted on its payments. Subsequently, CBTC merged with Bank of the Philippine Islands (BPI), which assumed CBTC’s rights.
Meanwhile, due to financial distress, ELISCON conveyed its assets to the Development Bank of the Philippines (DBP) by way of dacion en pago to settle its total indebtedness, which included the obligations to BPI. DBP formally took over ELISCON’s assets and proposed settlement formulas to creditors, including BPI, which rejected the proposal. BPI then filed a complaint for sum of money against ELISCON, MULTI, and Babst to collect the unpaid obligations.
ISSUE
Whether the dacion en pago executed between ELISCON and DBP novated the original obligations, thereby extinguishing the solidary liability of MULTI and the suretyship of Babst.
RULING
Yes. The Supreme Court ruled that the dacion en pago constituted a novation that extinguished the original obligations. Novation requires a previous valid obligation, an agreement to a new contract, the extinguishment of the old obligation, and the birth of a new valid obligation. The Deed of Cession of Property in Payment of Debt between ELISCON and DBP was a dacion en pago, which is a special form of payment where property is alienated to the creditor in satisfaction of a debt. This act created a new obligation, substituting DBP as the new debtor for ELISCON’s original debt to BPI.
The consent of the original creditor, BPI, to this substitution was established. BPI’s knowledge and acceptance of the DBP takeover were evident from its participation in creditors’ meetings and its subsequent rejection of DBP’s specific settlement proposal, which was a rejection of the manner of fulfillment, not the identity of the new debtor. Consequently, the original obligations of ELISCON were extinguished by novation. Since the principal obligations were extinguished, the accessory contracts of suretyship executed by MULTI and Babst were likewise extinguished pursuant to Article 1296 of the Civil Code. BPI’s recourse lies against DBP, not against the original debtors and sureties. The complaint was dismissed.