GR 129368; (August, 2003) (Digest)
G.R. No. 129368; August 25, 2003
LAND BANK OF THE PHILIPPINES, Petitioner, vs. THE HON. COURT OF APPEALS, MAMERTA B. RODRIGUEZ, et al., Respondents.
FACTS
Private respondents invested funds with Manotoc Securities, Inc. (MSI) under investment agreements where MSI undertook to invest in securities and return the funds with income upon maturity. As security, MSI delivered securities to the Insular Bank of Asia and America (IBAA) under a custodianship agreement, appointing IBAA as custodian bank with authority to sell the securities portfolio in case of MSI’s default and apply the proceeds to pay the investors. MSI executed deeds of assignment of the securities to IBAA for the investors’ benefit. On December 12, 1979, MSI and petitioner Land Bank of the Philippines (LBP) executed a “Substitution of Trustee with Assumption of Liabilities,” whereby LBP substituted IBAA as the custodian bank, assuming all its duties and liabilities under the original agreement.
MSI subsequently defaulted. The private respondents filed petitions with the Regional Trial Court (RTC) for the delivery of the securities or their proceeds, impleading both LBP and IBAA. The RTC dismissed the petitions, ruling that the substitution agreement was a novation that extinguished IBAA’s obligation and that LBP, as the new trustee, was solely liable. The Court of Appeals reversed this, holding that the substitution did not effect a novation and that both LBP and IBAA could be held jointly and severally liable.
ISSUE
Whether the “Substitution of Trustee with Assumption of Liabilities” constituted a novation that released the original custodian, IBAA, from its obligations to the investor-beneficiaries.
RULING
The Supreme Court denied the petition and affirmed the Court of Appeals. The substitution agreement did not constitute novation. Novation requires a clear intent to extinguish the old obligation, which is not present here. The agreement explicitly stated that LBP was “substituting and succeeding” IBAA and “assuming all the duties, responsibilities, and liabilities” of IBAA under the original custodianship agreement. This language indicates an assumption of liability, not an extinction of the original obligor’s duty.
The Court explained that for novation to occur, the change must involve the object, cause, or principal conditions of the obligation, or substitute the person of the debtor with the consent of the creditor. In this case, the original obligation of the custodian bank to hold the securities for the benefit of the investors remained unchanged; only the person performing the custodial function was replaced, with the new trustee assuming the identical role and responsibilities. Since the substitution was for the benefit of the investors and did not alter the essence of the obligation, IBAA’s release was not implied. Consequently, both IBAA and LBP could be held liable to the beneficiaries for the proper execution of the trust. The RTC thus erred in dismissing the petitions against IBAA.