G.R. No. 169407 , March 25, 2015
BANK OF THE PHILIPPINE ISLANDS, Petitioner, vs. AMADOR DOMINGO, Respondent.

FACTS

On September 27, 1993, spouses Amador Domingo and Mercy Maryden Domingo executed a Promissory Note in favor of Makati Auto Center, Inc. for ₱629,856.00, payable in 48 monthly installments, and a Deed of Chattel Mortgage over a 1993 Mazda 323 to secure the note. Makati Auto Center assigned its rights to Far East Bank and Trust Company (FEBTC). FEBTC later merged with and was absorbed by petitioner Bank of the Philippine Islands (BPI).
The spouses defaulted, failing to pay 21 consecutive monthly installments from January 15, 1996, to September 15, 1997. BPI demanded payment or the return of the vehicle. Upon continued non-compliance, BPI filed a Complaint for Replevin and Damages (or, alternatively, for sum of money) before the Metropolitan Trial Court (MeTC) of Manila.
In their Answer, the spouses Domingo raised affirmative defenses, including lack of cause of action and jurisdiction, and claimed that the vehicle had been sold to Carmelita S. Gonzales with the bank’s conformity, with Gonzales assuming the loan balance.
During trial, BPI presented Vicente Magpusao, an account analyst, who testified on the existence of the loan, the assignment, the merger, and the default. He stated that based on records, the spouses had an outstanding balance and that the bank did not approve any deed of sale with assumption of mortgage. Respondent Amador Domingo testified that his wife (who died during the pendency of the case) had sold the car to Carmelita Gonzales, who assumed the mortgage, and that they submitted a notarized Deed of Sale to the bank, which returned their postdated checks and accepted payments from Gonzales without objection.
The MeTC ruled in favor of BPI, finding that novation was not proven, as there was no express release of the original debtors. It ordered Amador Domingo to pay the outstanding balance plus interest and attorney’s fees. The Regional Trial Court (RTC) affirmed the MeTC decision. The Court of Appeals (CA) reversed the RTC, dismissing the complaint. The CA found that BPI failed to prove the spouses Domingo were still the debtors, noting that the bank accepted payments from Gonzales and retained the vehicle’s certificate of registration endorsed to Gonzales, thereby ratifying the sale and assumption. BPI filed a Petition for Review before the Supreme Court.

ISSUE

Whether the Court of Appeals erred in ruling that the sale of the mortgaged vehicle to Carmelita Gonzales and her assumption of the mortgage obligation, allegedly with the bank’s conformity, novated the original loan agreement, thereby releasing the spouses Domingo from their obligation to BPI.

RULING

Yes, the Court of Appeals erred. The Supreme Court granted the petition, reversed the CA Decision, and reinstated the MeTC and RTC Decisions ordering Amador Domingo to pay BPI.
The Supreme Court held that novation, particularly subjective novation by changing the debtor, is never presumed and must be clearly proven by express agreement or acts of unequivocal import. For novation to extinguish the original obligation, there must be a clear intent to dissolve the old obligation and replace it with a new one. A mere assumption of debt, without the express release of the original debtor, does not constitute novation; the assuming party merely becomes a co-debtor or surety.
In this case, respondent Amador Domingo failed to prove by clear and convincing evidence that BPI (or FEBTC) expressly released the spouses Domingo from their obligation. His testimony alone, without supporting documentary evidence like a written release or assumption agreement approved by the bank, was insufficient to establish novation. The alleged acts of the bank—accepting payments from Gonzales and holding the certificate of registration endorsed to her—did not unequivocally demonstrate an agreement to release the original debtors. Acceptance of payments from a third party does not necessarily imply consent to a substitution of debtors; the creditor may simply be applying payments for the account of the original debtor. The bank’s consistent demand letters to the spouses Domingo also contradicted any intent to release them.
Therefore, the original obligation of the spouses Domingo under the Promissory Note and Chattel Mortgage remained valid and enforceable. As the surviving spouse, Amador Domingo was liable for the outstanding balance, interests, and attorney’s fees as awarded by the MeTC.