Garcia v. Khu Yek Chiong
REITERATIONFacts
The Antecedents: Khu Yek Chiong obtained a credit from the Mercantile Bank of China (MBC) amounting to P115,294.41. The co-partnership Ang Gioc Chim-M. Escolar & Co. (AGCM&E), composed of Ang Gioc Chim and M. Escolar, also obtained a credit from MBC amounting to P18,805.08. Khu Yek Chiong jointly and severally guaranteed the obligations of AGCM&E. On October 22, 1932, Khu Yek Chiong delivered 1,500 shares of Cu Unjieng & Co., Ltd. to MBC as security for his own obligations and those of AGCM&E. Procedural History: The MBC instituted a case to recover the P115,294.41 from Khu Yek Chiong and the P18,805.08 from Khu Yek Chiong and AGCM&E, jointly and severally. The trial court ordered Khu Yek Chiong to pay P115,294.41 with interest, and ordered Khu Yek Chiong, Ang Gioc Chim, and M. Escolar to pay P18,806.08 with interest. The court also ordered the sale of the stock certificates held as security, with any balance to be refunded to Khu Yek Chiong. The Appeal: Ang Gioc Chim appealed the judgment. The appellant argued that the contract between MBC and AGCM&E, with Khu Yek Chiong as solidary guarantor, was novated, with Khu Yek Chiong assuming all obligations as the sole debtor. This was based on letters (Exhibits 1, 2, and 3) where Ang Gioc Chim informed MBC of the transfer of the partnership to Khu Yek Chiong, MBC inquired about this assumption, and Khu Yek Chiong confirmed his assumption. The appellant also contended that the acceptance of the Cu Unjieng shares by MBC paid the obligation of AGCM&E.
Issue(s)
Whether the letters exchanged between Ang Gioc Chim, Khu Yek Chiong, and the Mercantile Bank of China constituted a novation of the obligation of Ang Gioc Chim-M. Escolar & Co., thereby releasing Ang Gioc Chim from his solidary liability. Whether the acceptance of the Cu Unjieng shares by the Mercantile Bank of China served as payment for the obligation of Ang Gioc Chim-M. Escolar & Co.
Ruling
The Supreme Court affirmed the appealed judgment. It held that the alleged novation was not proven and that the acceptance of shares as security did not extinguish the obligation.
Ratio Decidendi
On Issue 1: The Court ruled that the alleged novation, wherein Khu Yek Chiong supposedly assumed the obligations of Ang Gioc Chim-M. Escolar & Co. as the sole debtor, was not proven. Article 1205 of the Civil Code requires that novation must be expressly declared or that the old and new obligations be incompatible in every respect. The letters presented (Exhibits 1, 2, and 3) did not demonstrate the express consent of the creditor, Mercantile Bank of China, to such a novation. Moreover, the letters merely indicated Khu Yek Chiong's willingness to assume the obligations, which did not alter the extent of his existing solidary surety obligation. The fact that Ang Gioc Chim and M. Escolar continued to transact with the bank in the name of the partnership after the supposed transfer further contradicted the claim of novation. Therefore, Ang Gioc Chim remained liable as a solidary guarantor. On Issue 2: The Court held that the shares of Cu Unjieng & Co., Ltd., delivered by Khu Yek Chiong, were accepted not as payment for the obligation of Ang Gioc Chim-M. Escolar & Co., but merely as additional security. The acceptance of collateral does not extinguish the principal obligation unless there is an express agreement to that effect. Since the shares were explicitly given and accepted as security, they did not serve to pay off the debt owed by the partnership. Consequently, the obligation of Ang Gioc Chim-M. Escolar & Co. remained outstanding and enforceable.
Main Doctrine
The Supreme Court reiterated that for an obligation to be extinguished by another which substitutes it (novation), it must be expressly declared or the old and new obligations must be incompatible in every respect. Furthermore, collateral delivered as security for an obligation does not constitute payment unless expressly agreed upon as such.