Bank of the Philippine Islands v. Amador Domingo
REITERATIONFacts
The Antecedents: Spouses Amador and Mercy Domingo executed a Promissory Note and a Deed of Chattel Mortgage over a vehicle to secure a loan from Makati Auto Center, Inc. The loan was subsequently assigned to Far East Bank and Trust Company (FEBTC). BPI, through a merger, absorbed FEBTC. The spouses Domingo defaulted on 21 monthly installments. BPI filed a complaint for Replevin and Damages. Procedural History: The Metropolitan Trial Court (MeTC) ruled in favor of BPI, ordering Amador Domingo to pay the outstanding balance, attorney's fees, and costs, finding no novation. The Regional Trial Court (RTC) reversed the MeTC decision, finding implied consent of the creditor to a novation based on BPI's knowledge of the Deed of Sale with Assumption of Mortgage, return of checks, and acceptance of payments from Carmelita Gonzales, thus dismissing BPI's complaint and awarding damages to Amador. The Court of Appeals affirmed the RTC's finding of novation but deleted the damages awarded to Amador. The Petition: BPI filed a Petition for Review on Certiorari with the Supreme Court, questioning whether a novation of the loan obligation occurred, thereby releasing the spouses Domingo from their obligation and substituting Carmelita Gonzales as the debtor.
Issue(s)
Whether there was a novation of the loan obligation through the substitution of Carmelita Gonzales as the debtor, thereby releasing the spouses Domingo from their obligation, and whether the Court of Appeals erred in affirming the RTC's finding of novation despite the lack of clear and unmistakable consent from the creditor (BPI/FEBTC). Whether Amador Domingo's testimony regarding the bank's alleged verbal assurances and the return of postdated checks constitutes hearsay evidence. Whether the interest rate of 36% per annum is excessive and unconscionable, and the extent of liability of the heirs of Amador Domingo.
Ruling
The Supreme Court granted the petition, reversed the Court of Appeals' decision, and reinstated the MeTC judgment with modifications. It held that no novation occurred, and Amador Domingo (through his heirs) remained liable for the outstanding balance, with modified interest rates and attorney's fees.
Ratio Decidendi
On the issue of Novation: The Court held that novation, particularly by substitution of a debtor (delegacion), requires the consent of the creditor. While consent need not always be express and can be inferred from acts, such acts must be a clear and unmistakable expression of consent. The Court found that the inferences made by the RTC and Court of Appeals from BPI's possession of the Deed of Sale, acceptance of payments from Carmelita, and delay in demanding payment from the spouses Domingo were insufficient to establish novation. The Court emphasized that the burden of proving novation rests on the party asserting it, and Amador failed to discharge this burden. The Court noted that the loan documents remained in the name of the spouses Domingo, no new promissory note or chattel mortgage was executed with Carmelita, and the verbal assurances from a bank representative were unsubstantiated hearsay. The acceptance of payments from a third party without an express agreement to release the original debtor merely adds a co-debtor or surety, it does not extinguish the original obligation. On the issue of Hearsay Evidence: The Court found Amador's testimony regarding the bank's alleged verbal assurances and the return of postdated checks to be hearsay. Amador did not have personal knowledge of the transactions between his wife, Carmelita, and the bank. His testimony lacked details about how the checks were returned and to whom, and the checks themselves were not presented as evidence, having been discarded. The Court reiterated that hearsay evidence, lacking probative force, cannot establish the truth of a disputed fact, especially when the witness lacks personal knowledge. On the issue of Excessive Interest Rate and liability of Heirs: The Court found the stipulated interest rate of 36% per annum to be excessive, iniquitous, unconscionable, and exorbitant, citing jurisprudence that has reduced similar high interest rates. Following established guidelines, the Court imposed legal interest rates: 12% per annum from January 29, 1997, to June 30, 2013, and 6% per annum from July 1, 2013, until fully paid. The Court also reinstated the MeTC's award of 10% attorney's fees and costs of suit. The Court clarified that the heirs of Amador Domingo are not personally liable for his debts. Their liability is limited to the value of the estate they inherited from the deceased, as the estate itself is charged with the decedent's surviving obligations.
Main Doctrine
Novation by substitution of a debtor requires the express or implied consent of the creditor. The mere acceptance of payments from a third party or the absence of objection to a deed of sale with assumption of mortgage does not automatically constitute consent to release the original debtor, especially when the creditor's acts are not a clear and unmistakable expression of such consent. The burden of proving novation rests on the party asserting it.