G.R. No. 135046, August 17, 1999
Spouses Florante and Laarni Bautista, petitioners, vs. Pilar Development Corporation, respondent.

FACTS

In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and lot and obtained a loan from Apex Mortgage & Loan Corporation (Apex) for P100,180.00. They executed a promissory note on December 22, 1978, agreeing to pay with 12% interest and a 3% service charge over 240 months, with a penalty for late payments and an authorization for Apex to increase rates if laws or regulations so provided. They failed to pay several installments. On September 20, 1982, they executed a second promissory note in favor of Apex for P142,326.43 at an increased interest rate of 21% per annum, with a penalty for late payments but no service charge, payable over 196 months. This second note contained a clause authorizing Apex to increase/decrease the interest rate based on law or Central Bank regulation and expressly stated it cancelled the first promissory note. Petitioners again defaulted in November 1983. On June 6, 1984, Apex assigned the second promissory note to respondent Pilar Development Corporation without notice to petitioners. Respondent filed a collection case seeking the unpaid balance with interest at 21% and additional interest under Central Bank Circular No. 905, plus attorney’s fees. Petitioners contended the escalation clause in the second note was void for lack of a de-escalation clause. The trial court ordered payment with 12% interest. The Court of Appeals reversed, applying the 21% interest rate and awarding attorney’s fees, later reducing the principal amount.

ISSUE

The main issue is the applicable rate of interest on the loan: whether it is 12% per annum under the first promissory note or 21% per annum under the second promissory note.

RULING

The Supreme Court ruled that the applicable interest rate is 21% per annum as stipulated in the second promissory note. The two promissory notes did not constitute a single transaction; the second note expressly cancelled and novated the first. The second note contained all the requisites of novation: a previous valid obligation, agreement of all parties to a new contract, extinguishment of the old contract, and validity of the new one. The changes in principal amount, interest rate, and payment period were substantial, and the express statement of cancellation in the second note demonstrated an unequivocal intention to novate. The escalation clause in the second note authorizing rate increases based on law or Central Bank regulation was valid. The award of attorney’s fees was proper. The claim for moral and exemplary damages was denied. The assignment of credit did not require notice to the debtor for validity. The decision of the Court of Appeals was affirmed.