GR 169647; (August, 2007) (Digest)
G.R. No. 169647; August 31, 2007
ANTONIO CHIENG, substituted by WILLIAM CHIENG, Petitioner, vs. Spouses EULOGIO and TERESITA SANTOS, Respondents.
FACTS
Petitioner Antonio Chieng extended a loan to respondent spouses, secured by a Real Estate Mortgage stating the principal as ₱600,000. Respondents later issued checks, some dishonored, leading to criminal cases for violation of B.P. 22. During pre-trial for those cases, the parties entered into a compromise agreement, approved by the court (Branch 72), stipulating that the total indebtedness as of July 15, 1991, was ₱200,000. Respondents failed to comply with this new agreement.
Petitioner subsequently filed an action for foreclosure of mortgage (Civil Case No. 239-0-93) before the RTC, Branch 74, seeking to recover the original ₱600,000 loan. Respondents moved for dismissal, arguing the mortgage amount was inflated and that the compromise agreement in the criminal case had novated their obligation to ₱200,000. The RTC initially ruled for petitioner but later set aside its decision. Upon reconsideration, it ultimately ordered foreclosure based on the ₱600,000 debt, disregarding the compromise agreement.
ISSUE
Whether the compromise agreement entered into and approved by the court in the criminal cases novated or superseded the original loan obligation of ₱600,000 stated in the Real Estate Mortgage.
RULING
Yes, the compromise agreement novated the original obligation. The Supreme Court ruled that a compromise agreement, once approved by the court, has the force of res judicata and is immediately executory. The agreement in the criminal case, which fixed the total indebtedness at ₱200,000, was a valid and enforceable contract that modified the original terms of the loan. By virtue of this judicial compromise, the old obligation (₱600,000) was extinguished and replaced by the new one (₱200,000). Consequently, the mortgage, being an accessory contract, subsisted only to secure this new ₱200,000 obligation. The petitioner could not revert to and foreclose based on the superseded ₱600,000 debt. The Court of Appeals decision, which recognized the novatory effect of the compromise and limited the foreclosure to the ₱200,000 obligation, was affirmed. The legal logic rests on the principles of novation and the binding, conclusive nature of a judicially approved compromise.