TOPIC Art.

2126 - REM
CASE NO. G.R. No. 21455
CASE NAME McCullough & Co., Inc. v. Veloso
MEMBER Kobe Veneracion

DOCTRINE
1. The mortgage is merely an encumbrance upon the property and does not extinguish the title of the
debtor, who does not, therefore, lose his principal attribute as owner, that is, the right to dispose.
The fact that the plaintiff recognized the efficaciousness of that sale cannot prejudice him, which
sale the defendant had the right to make and the plaintiff cannot oppose and which, at all events,
could not affect the mortgage, as the latter follows the property whoever the possessor may be.

RECIT-READY DIGEST
Plaintiff corporation, McCullough sold to Veloso property consisting of a land and building for P700,000.
Veloso agreed to insure the property and to pay all legal taxes. The contract also had an acceleration clause.
To secure payment, Veloso mortgaged the property he bought. Veloso then sold the property for P100,000
to Serna who agreed to assume Veloso's obligation to pay McCullough the balance due. They eventually
failed to pay the balance and so the entire obligation became due. Plaintiff brings this action to recover of
the defendant the sum due. Trial Court sentenced defendant to pay and in the event of failure, the property
mortgaged shall be sold at public auction to the highest bidder and the proceeds shall be applied on the
payment of the judgment.

Veloso contends that having sold the property to Serna, and the latter having assumed the obligation to pay
the plaintiff the unpaid balance of the price secured by the mortgage upon the property, he was relieved
from this obligation and it then devolved upon Serna to pay the plaintiff. He alleges that the contract
between him and plaintiff was novated by substitution of Serna as debtor.

SC held that novation must be express and is never presumed. The fact that the plaintiff did not oppose the
sale subsequently made by the defendant to Serna of the mortgaged property does not mean anything. The
mortgage is merely an encumbrance upon the property and does not extinguish the title of the debtor,
who does not, therefore, lose his principal attribute as owner, that is, the right to dispose. The fact that
the plaintiff recognized the efficaciousness of that sale cannot prejudice him, which sale the defendant had
the right to make and the plaintiff cannot oppose and which, at all events, could not affect the mortgage,
as the latter follows the property whoever the possessor may be. The SC also held that the fact that the
plaintiff has received payments from Serna is of no importance, for this is, at most, a payment by a third
person, which, while it may create a juridical relation between Serna and Veloso, cannot affect the relation
between the Veloso and the plaintiff, except that the obligation thus paid is discharged.

FACTS
• Plaintiff corporation, E. C. McCullough & Co., Inc., sold to Mariano Veloso the property known
as "McCullough Building," consisting of a land, with the building for the price of P700,000. Veloso
paid P50,000 at the execution of the contract and the balance to be paid in installments.
• Veloso agreed to pay 10% of the amount of the debt, as attorney's fee, in the event that a judicial
action should be necessary for the collection of the whole or a part of the debt. Veloso assumed
also the obligation to insure the property as well as to pay all legal taxes that might be imposed
upon the property, and if he fails to do so and the plaintiff should pay said taxes, plaintiff will have
the right to recover of him the amounts thus paid, with interest at 7% per year. The contract also
had an acceleration clause.
• To secure the payment of these amounts, Veloso mortgaged the property purchased, this
encumbrance having been noted on the certificate of the title No. 13274.

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 • Then, Veloso sold the property with the improvements for P100,000 to Joaquin Serna, who agreed
to respect the mortgage in favor of the plaintiff and to assume Veloso's obligation to pay the plaintiff
the balance due of the estate on the respective dates when payments should be made.
• Veloso paid P50,000 of the balance, and Serna P250,000. Subsequently neither of them paid and
such the whole obligation became due and Veloso lost the right to the installments. Accountants
pegged the debt of Veloso at P510,047.34.
• Thus, plaintiff brings this action to recover of the defendant the sum due of P510,047.34 plus 10%
as attorney's fee.
o Trial Court: Sentenced defendant to pay plaintiff sum claimed. The judgment also provided
that the payment of these amounts should be made within 3 months, and that, in the event
of failure to do so, the property mortgaged, shall be sold at public auction to the highest
bidder and in the manner prescribed by law, the proceeds of the sale to be applied on the
payment of the judgment, and in case the total amount of the judgment is not covered, a
writ of execution shall be issued against other properties of the defendant Mariano Veloso
until the whole amount of the judgment is covered.

Defendant's Contentions
• Having sold the property to Serna, and the latter having assumed the obligation to pay the plaintiff
the unpaid balance of the price secured by the mortgage upon the property, he was relieved from
this obligation and it then devolved upon Serna to pay the plaintiff.
• The contract between the him and the plaintiff was novated by the substitution of Serna as a new
debtor.

ISSUE/S and HELD

1. W/N Veloso is liable to the plaintiff corporation - YES

RATIO
1. On the issue of Veloso's liability:
• In order that this novation may take place, the law requires the consent of the creditor (art. 1205
of the Old Civil Code). The plaintiff did not intervene in the contract between Veloso and Serna
and did not expressly give his consent to this substitution. Novation must be express, and
cannot be presumed.
• The fact that the plaintiff did not oppose the sale subsequently made by the defendant to Serna
of the mortgaged property does not mean anything. The mortgage is merely an encumbrance
upon the property and does not extinguish the title of the debtor, who does not, therefore,
lose his principal attribute as owner, that is, the right to dispose.
• The fact that the plaintiff recognized the efficaciousness of that sale cannot prejudice him,
which sale the defendant had the right to make and the plaintiff cannot oppose and which, at
all events, could not affect the mortgage, as the latter follows the property whoever the
possessor may be.
• According to Art. 1879 of the Old Civil Code, the creditor may demand of the third person in
possession of the property mortgaged payment of such part of the debt, as is secured by the
property in his possession, in the manner and form established by law. The Mortgage Law at
that time provided that the debtor should not pay the debt upon its maturity after a judicial or
notarial demand for payment has been made by the creditor upon him.
o According to this, the obligation of the new possessor to pay the debt originated only from
the right of the creditor to demand payment of him, it being necessary that a demand for
payment should have previously been made upon the debtor and the latter should have
failed to pay.

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 • This clearly shows that the spirit of the Civil Code is to let the obligation of the debtor to pay
the debt stand although the property mortgaged to secure the payment of said debt may have
been transferred to a third person.
• Finally, the fact that the plaintiff has received payments from Serna on account of Veloso's
debt is of no importance, for this is, at most, a payment by a third person, which, while it may
create a juridical relation between Serna and Veloso, cannot affect the relation between the
Veloso and the plaintiff, except that the obligation thus paid is discharged.

DISPOSTIVE PORTION
Wherefore the judgment appealed from is affirmed as to defendant's appeal, and modified as to plaintiff's,
who is allowed P15,000 instead of P2,000 awarded by the trial court, without special finding as to costs. So
ordered.

SEPARATE OPINION/S
[All dissenting/concurring opinions were about the attorney's fees issue but I'll put it na lang just in case!]

DISSENTING, JOHNSON
The question here is not one of the reasonableness of attorney's fees under section 29 of Act No. 190,
between attorney and client. The contract simply provided for a certain amount to cover expenses of
collection, in case the defendant failed to comply with his contract. If the defendant believed that the amount
was unreasonable or unconscionable, that question should have been settled at the time the contract was
executed and delivered, or during the trial of the cause in the court below.

DISSENTING & CONCURRING, STREET

Considering the unusually large amount involved in the litigation and the nature of the service rendered,
the amount allowed by this court is extremely conservative. The fee allowed should, in my opinion, have
been not less than P20,000.

DISSENTING & CONCURRING, OSTRAND

The contract here in question is not one between attorney and client; here the parties were presumably of
equal intelligence and have dealt with each other at arm's length and on equal terms. The allowance of fees
provided for in the contract may seem rather high, but considering that the amount involved in the case is
nearly a half a million pesos and that every step in the foreclosure proceedings has been tenaciously
contested, it can hardly be said that the agreement is so unconscionable per se as to justify the court in
setting it aside without due process of law.