The Supreme Court has ruled that a creditor’s consent to the substitution of debtors must be clear and express, not merely implied. This decision protects banks and other creditors by ensuring they are not bound by debt assumptions without explicit agreement. It clarifies that accepting payments from a new party or possessing a debt assumption agreement does not automatically release the original debtor from their obligations.

Car Loan Chaos: Did a Bank’s Actions Free Original Debtors?

In this case, Bank of the Philippine Islands (BPI) sought to recover an unpaid balance on a promissory note from Amador Domingo, whose wife, Mercy, had previously entered into a Deed of Sale with Assumption of Mortgage with a third party, Carmelita Gonzales. The central question was whether BPI, through its predecessor Far East Bank and Trust Company (FEBTC), had consented to the substitution of Carmelita as the new debtor, thereby releasing the Domingos from their obligation. The lower courts found that BPI’s actions implied consent, but the Supreme Court disagreed, emphasizing the need for explicit consent for novation to occur.

The heart of the matter revolved around the concept of novation, specifically delegacion, where a new debtor is substituted for an old one with the creditor’s consent. The Supreme Court underscored that this consent must be express, given that novation involves waiving the creditor’s original rights. This waiver cannot be presumed; it must be unequivocally demonstrated. The Court referred to De Cortes v. Venturanza, emphasizing that:

“Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor.”

The Court distinguished between express and implied consent, acknowledging that while express consent is generally required, implied consent may be inferred from a creditor’s actions. However, those actions must unequivocally demonstrate consent to the substitution. The key issue was whether BPI’s (or FEBTC’s) actions constituted such clear consent.

The Regional Trial Court (RTC) and the Court of Appeals (CA) had both inferred BPI’s consent from several factors. First, BPI possessed a copy of the Deed of Sale and Assumption of Mortgage, suggesting knowledge and tacit approval. Second, BPI (through FEBTC) had returned the Domingos’ checks and accepted payments from Carmelita. Third, BPI delayed demanding payment from the Domingos for 30 months after Carmelita began making payments. However, the Supreme Court found these inferences insufficient to establish clear consent.

The Court emphasized that the mere possession of the Deed of Sale and Assumption of Mortgage did not equate to consent. The Deed itself indicated that the parties intended to seek FEBTC’s conformity. The Court found that the absence of a formal agreement or document explicitly releasing the Domingos from their obligation was critical. Simply put, documentation of a debt transfer isn’t enough. The bank must sign off on it.

Moreover, the Supreme Court reasoned that accepting payments from Carmelita did not automatically imply consent to the novation. It cited Magdalena Estates, Inc. v. Rodriguez, stating that:

“[T]he mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor.”

In essence, accepting payments from a third party merely adds another debtor to the equation; it does not release the original debtor unless there is explicit agreement. The Court highlighted that the burden of proving novation rests on the party asserting it, in this case, Amador Domingo.

Furthermore, the Court found that the evidence presented to support the claim of novation was lacking. Amador Domingo’s testimony about the return of the checks and the verbal assurances from a FEBTC representative was deemed insufficient and, in part, hearsay. The Court emphasized that solid evidence, not just unsubstantiated claims, is necessary to prove novation. Hearsay evidence, which relies on statements made outside of court, cannot be used as proof of a key element in a case.

The Supreme Court then discussed the legal interest applicable to the unpaid balance. Referring to Ruiz v. Court of Appeals, the Court found the stipulated interest rate of 36% per annum to be excessive and unconscionable. Instead, the Court applied the legal interest rates as prescribed in Eastern Shipping Lines, Inc. v. Court of Appeals and Nacar v. Gallery Frames, which included a 12% per annum interest from the date of extrajudicial demand until June 30, 2013, and 6% per annum from July 1, 2013, until fully paid.

In conclusion, the Supreme Court reversed the CA and RTC decisions, reinstating the MeTC judgment with modifications. The Court ordered Amador Domingo’s heirs to pay BPI the outstanding balance, with the adjusted legal interest rates, attorney’s fees, and costs of suit. However, the Court clarified that the liability of Domingo’s heirs was limited to the value of the inheritance they received. This ruling serves as a significant reminder that novation requires explicit creditor consent and that the burden of proving such consent rests on the party claiming it.

FAQs

What was the key issue in this case?	The key issue was whether the Bank of the Philippine Islands (BPI) consented to the substitution of debtors, releasing Amador Domingo from his loan obligation after a third party assumed the mortgage.
What is novation, and why is it important in this case?	Novation is the extinguishment of an old obligation and the creation of a new one. In this case, it determines whether Domingo was released from his debt and whether the third party became solely responsible.
What did the lower courts decide?	The lower courts ruled that BPI had impliedly consented to the substitution of debtors based on its actions, such as possessing the debt assumption agreement and accepting payments from the third party.
How did the Supreme Court rule, and why?	The Supreme Court reversed the lower courts, stating that consent to novation must be express and cannot be merely implied. The court found that BPI’s actions did not demonstrate clear consent to release Domingo from his obligations.
What evidence did Domingo present to prove novation?	Domingo presented evidence that BPI had a copy of the Deed of Sale and Assumption of Mortgage, accepted payments from the third party, and delayed demanding payment from him. He also claimed that his checks were returned.
Why did the Supreme Court find Domingo’s evidence insufficient?	The Court found that possessing the deed didn’t mean consent, accepting payments didn’t release Domingo without explicit agreement, and there was insufficient evidence of the checks being returned.
What does this case mean for creditors like banks?	This case reinforces that creditors must explicitly consent to the substitution of debtors to be bound by it. This protects creditors from unintended releases of original debtors.
What was the final order of the Supreme Court?	The Supreme Court ordered Domingo’s heirs to pay BPI the outstanding balance of the loan, with legal interest, attorney’s fees, and costs of suit, limited to the value of the inheritance they received.
What is the significance of verbal assurance in debt assumption?	The Supreme Court did not consider verbal assurance as the clear and unmistakable consent from the bank.

This case underscores the importance of clear and express consent in novation, particularly in debt assumption scenarios. Creditors must take proactive steps to document their consent to the substitution of debtors. The ruling protects the rights of creditors and reinforces the need for parties to clearly establish their agreements in writing.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Bank of the Philippine Islands v. Amador Domingo, G.R. No. 169407, March 25, 2015