G.R. Nos. 149840-41. March 31, 2006. SPS. FRANCISCO AND RUBY REYES, Petitioners, vs. BPI FAMILY SAVINGS BANK, INC., and MAGDALENA L. LOMETILLO, in her capacity as ex-officio Provincial Sheriff for Iloilo, Respondents.
FACTS

Petitioners, the Reyes spouses, executed a real estate mortgage on their property in favor of respondent BPI Family Savings Bank, Inc. (BPI-FSB) on March 24, 1995, to secure a P15,000,000 loan obtained by Transbuilders Resources and Development Corporation. The mortgage contract stipulated that it secured the stated loan “and other credit accommodations of whatever nature obtained by the Borrower/Mortgagor.” When Transbuilders defaulted, BPI-FSB restructured the loan through a new promissory note dated June 28, 1996, which provided for a new payment schedule and interest rate. Petitioners claimed they were not informed of this restructuring.
Upon learning of the new agreement, petitioners demanded the cancellation of their mortgage and the return of their title, arguing that the restructuring novated the original 1995 loan agreement. They contended that this novation, effected without their knowledge and consent, extinguished their obligation under the mortgage. BPI-FSB refused and initiated extrajudicial foreclosure proceedings after Transbuilders defaulted on the restructured loan. Petitioners filed separate petitions for mandamus and prohibition, which were dismissed by the trial courts and the Court of Appeals.

ISSUE

Whether the restructuring of the principal loan novated the original mortgage contract, thereby extinguishing the petitioners’ liability as mortgagors.

RULING

The Supreme Court denied the petition, ruling that no novation occurred. Novation, which extinguishes an obligation by substituting it with a new one, is never presumed and must be clearly established. For novation to take place, there must be: (1) a previous valid obligation; (2) agreement of all parties to the new contract; (3) extinguishment of the old obligation; and (4) validity of the new obligation. The Court found no clear intent, either express or implied, to extinguish the original mortgage. The restructuring merely modified the terms of payment of the same principal loan; it did not create an obligation wholly incompatible with the old one.
Critically, the mortgage contract itself was expansive, securing not only the specific P15M loan but also “other credit accommodations.” The restructured loan fell within this stipulated coverage. The Court emphasized that parties are bound by the terms of their voluntary agreements. The fact that the mortgage was a contract of adhesion and proved onerous to the petitioners did not invalidate it, as contracts of adhesion are binding unless shown to be unconscionable or contrary to law. Consequently, the mortgage remained valid and enforceable, justifying the foreclosure proceedings.