FIRST DIVISION

March 25, 2015

G.R. No. 169407

BANK OF THE PHILIPPINE ISLANDS, Petitioner,

vs.

AMADOR DOMINGO, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, filed by
petitioner Bank of the Philippine Islands (BPI), seeking the reversal and setting aside of the Decision1
dated July 11, 2005 and Resolution2 dated August 19, 2005 of the Court of Appeals in CAG.R. SP No.
88836.

The Petition arose from the following facts:

On September 27, 1993, respondent Amador Domingo (Amador) and his wife, the late Mercy Maryden
Domingo (Mercy),3 (collectively referred to as the spouses Domingo) executed a Promissory Note4 in
favor of Makati Auto Center, Inc. in the sum of ₱629,856.00, payable in 48 successive monthly
installments in the amount of ₱13,122.00 each. They simultaneously executed a Deed of Chattel
Mortgage5 over a 1993 Mazda 323 (subject vehicle) to secure the payment of their Promissory Note.
Makati Auto Center, Inc. then assigned, ceded, and transferred all its rights and interests over the said
Promissory Note and chattel mortgage to Far East Bank and Trust Company (FEBTC).

On April 7, 2000, the Securities and Exchange Commission (SEC) approved and issued the Certificate of
Filing of the Articles of Merger and Plan-· of Merger executed on January 20, 2000 by and between BPI,
the surviving corporation, and FEBTC, the absorbed corporation. By virtue of said merger, all the assets
and liabilities of FEBTC were transferred to and absorbed by BPI.6

The spouses Domingo defaulted when they failed to pay 21 monthly installments that had fallen due
consecutively from January 15, 1996 to September 15, 1997. BPI, being the surviving corporation after
the merger, demanded that the spouses Domingo pay the balance of the Promissory Note including
accrued late payment charges/interests or to return the possession of the subject vehicle for the
purpose of foreclosure in accordance with the undertaking stated in the chattel mortgage. When the
spouses Domingo still failed to comply with its demands, BPI filed on November 14, 2000 a Complaint7
for Replevin and Damages (or in the alternative, for the collection of sum of money, interest and other
charges, and attorney's fees) which was raffled to the Metropolitan Trial Court (MeTC) of Manila, Branch
9, and docketed as Civil Case No. 168949-CV. BPI included a John Doe as defendant because at the time
of filing of the Complaint, BPI was already aware that the subject vehicle was in the possession of a third
person but did not yet know the identity of said person.

In their Answer,8 the spouses Domingo raised the following affirmative defenses:

4. [BPI] has no cause of action against the [spouses Domingo].

5. The Honorable Court has no jurisdiction over this case,

6. As per the allegations in the complaint, JOHN DOE is an indispensable party to this case so with his
whereabouts unknown, service by publication should first be made before proceeding with the trial of
this case;

7. Defendant Maryden Domingo once obtained a car loan from Far East Bank and Trust Company but
the car was later sold to Carmelita S. Gonzales with the bank's conformity and the buyer subsequently
assumed payment of the balance of the mortgaged loan.

During trial, the prosecution presented as witness Vicente Magpusao, a former employee of FEBTC and
now an Account Analyst of BPI. His testimony was summed up by the MeTC as follows:

Vicente Magpusao, [BPI's] Account Analyst and formerly connected with Far East Bank and Trust
Company testified that on September 27, 1993, [the spouses Domingo] for consideration executed and
delivered to Makati Auto Center, Inc. a Promissory Note in the sum of ₱629,856.00 payable in monthly
installments in accordance with the schedule of payment indicated in said Promissory Note. In order to
secure the payment of the obligation, the [spouses Domingo] executed in favor of said Makati Auto
Center, Inc. on the same date a Chattel Mortgage over one (1) unit of 1993 Mazda (323) with Motor No.
B6-270146 and with Serial No. BG1062M9100287. With notice to [the spouses Domingo], said Makati
Auto Center, Inc. assigned to Far East Bank and Trust Co. the Chattel Mortgage as shown by the Deed of
Assignment executed by [Makati Auto Center, Inc.]. Far East Bank and Trust Co. on the other hand, has
been merged with and/or absorbed by herein plaintiff [BPI]. The [spouses Domingo] defaulted in
complying with the terms and conditions of the Promissory Note with Chattel Mortgage by failing to pay
twenty[-one] (21) successive installments which fell due on January 15, 1996 up to September 15, 1997.
[BPI] sent a demand letter [to] defendant Mercy Domingo thru registered mail demanding payment of
the whole balance of the Promissory Note plus the stipulated interest and other charges or return to
[BPI] the possession of the above-described motor vehicle. There were some negotiations made by the
[spouses Domingo] to their In-House Legal Assistant but the same did not materialize. Based on the
Statement of Account dated October 31, 2000, [the spouses Domingo have] an outstanding balance of
₱275,562.00 exclusive of interest and other charges.

On cross-examination, the witness explained that the first time he came to handle [the spouses
Domingo's] account was in 1997. Despite the fact that he was not yet employed with the bank in 1993,
he knew exactly what happened in this particular transaction because of his experience in auto
financing. He also has an access [to] the Promissory Note, Chattel Mortgage and other records of
payment made by the bank. Based on the records, the [spouses Domingo] issued several postdated
checks but not for the entire term. There were payments made from October 30, 199[3] up to
September 14, 1994. He was not the one who received payments for the auto finance. If there were
receipts issued, they will only ride for the account of Mrs. Domingo. He was not sure if these receipts are
kept in the warehouse or probably disposed of by the bank since the transaction was made in 1997.
They already have a computer records of all payments made by their client. Based on the subsidiary
ledger, there were three (3) checks that bounced and these are payments from the new buyer. They
only have one (1) photocopy of these checks in the amount of ₱325,431.60 while the other two (2) are
missing. He was not aware who owns Cargo and Hardware Corporation but the check was issued by a
certain Miss Gonzales. The witness further testified that anyone can pay the monthly amortization as
long as the payment is for the account of Maryden Domingo. They cannot include Carmelita Gonzales as
one of the defendants in this case because they don't have a document executed by the latter in behalf
of Far East Bank and Trust Co. The bank did not approve the Deed of Sale with Assumption of Mortgage.

Witness further testified that he found the photocopy of the Deed of Sale in the records of Maryden
Domingo. The Promissory Note and Chattel Mortgage were executed by the defendants Maryden and
Amador Domingo. There was no assumption of obligation of the [spouses Domingo]. Witness however
admitted that Far East Bank did not tum over to [BPI] all the records pertaining to the account of the
[spouses Domingo ].9 (Citations omitted.) Amador himself testified for the defense. The MeTC provided
the following summary of Amador's testimony:
For his defense, defendant Amador Domingo testified that his wife and co-defendant Mercy Maryden
Domingo died on November 27, 2003. He admitted that his wife bought a car and was mortgaged to Far
East Bank and Trust Company. He identified the Chattel Mortgage and the Promissory Note he executed
together with his wife. In connection with the execution of this Promissory Note, he recalled that his
wife issued forty-eight (48) checks. The twelve (12) checks were cleared by the bank and his wife was
able to obtain a discount for prompt payments up to October 1994. While they were still paying for the
car, Carmelita Gonzales got interested to buy the car and is willing to assume the mortgage. After
furnishing the bank [with] the Deed of Sale duly notarized, Carmelita Gonzales subsequently issued a
check payable to Far East Bank and Trust Company and the remaining postdated checks were returned
to them. Based on the application of payment prepared by [BPI's] witness, Carmelita Gonzales made
payments from November 14, 1995 to December 1995. Aside from these payments on May 19, 1997,
Carmelita Gonzales issued a check to Far East Bank in the amount of ₱385,431.60. In 1996, he received a
phone call from a certain Marvin Orence asking for their assistance to locate the car which Carmelita
Gonzales bought from them. His lawyer went to Land Transportation Office for assistance. From the
time Ms. Gonzales started to pay, they never received any demand letter from Far East Bank. Thereafter,
on February 29, 1997, they received a demand letter from Espino Law Office [on] behalf of [FEBTC]. His
lawyer made a reply on March 31, 1997 stating therein that the motor vehicle for which the loan was
obtained had been sold to Carmelita Gonzales as of July 5, 1994 with the knowledge and approval of
their client. After three years, they received another demand letter dated October 31, 2000 from
Labaguis Law Office. His lawyer made the same reply on March 7, 2000 and another letter on November
24, 2000. Witness further testified that this malicious complaint probably triggered the early demise of
his wife who has a high blood pressure. His wife died of aneurism. As damages, he is asking for the
amount of ₱200,000.00 as moral damages, ₱75,000.00 as attorney's fees and ₱5,000.00 appearance fee.

On cross-examination, witness elaborates that when his wife presented to Far East Bank the Deed of
Sale with Assumption of Mortgage, the bank made no objection and returned all their postdated checks.
His wife was the one who deal[t] with Carmelita Gonzales but he always provide[d] assistance with
respect to paper works. Aside from the aforesaid Deed of Sale, there is no other document which shows
the conformity of the bank. They were only verbally assured by Mr. Orence that their papers are in
order.10

On June 10, 2004, the Me TC rendered a Decision in favor of BPI as the bank was able to establish by
preponderance of evidence a valid cause of action against the spouses Domingo. According to the MeTC,
novation is never presumed and must be clearly shown by express agreement or by acts of equal import.
To effect a subjective novation by a change in the person of the debtor, it is necessary that the old
debtor be released expressly from the obligation and the third person or new debtor assumes his place.
Without such release, there is no novation and the third person who assumes the debtor's obligation
merely becomes a co-debtor or surety. The MeTC found Amador' s bare testimony as insufficient
evidence to prove that he and his wife Mercy had been expressly released from their obligations and
that Carmelita Gonzales (Carmelita) assumed their place as the new debtor within the context of
subjective novation; and if at all, Carmelita only became the spouses Domingo's co-debtor or surety.
While finding that BPI was entitled to the reliefs prayed for, the MeTC made no adjudication as to the
entitlement of the bank to the Writ of Replevin, and instead awarded monetary reliefs as were just and
equitable. The dispositive portion of the MeTC decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of [BPI], ordering defendant
Amador Domingo:

1. To pay [BPI] the sum of ₱275,562.00 plus interest thereon at the rate of 36% per annum from
November 15, 2000 until fully paid;

2. To pay [BPI] the sum equivalent to 25% of the total amount due as attorney's fees; and

3. To pay the costs of suit.11

Acting on Amador's Motion for Reconsideration, the MeTC issued an Order12 dated September 6, 2004
affirming its earlier judgment but reducing the attorney's fees awarded, thus: WHEREFORE, premises
considered the Decision of this Court dated June 10, 2014 stands, subject to the modification that the
attorney's fees of twenty-five percent (25%) is ordered reduced to ten percent (10%) of the total
amount due.13

Dissatisfied, Amador appealed his case before the Regional Trial Court (RTC) of Manila, Branch 26,
wherein it was docketed as Civil Case No. 04-111100. In its Decision dated February 10, 2005, the RTC
held that in novation, consent of the creditor to the substitution of the debtor need not be by express
agreement, it can be merely implied. The consent is not required to be in any specific or particular form;
the only requirement being that it must be given by the creditor in one way or another. To the RTC, the
following circumstances demonstrated the implied consent of BPI to the novation: ( 1) BPI had
knowledge of the Deed of Sale and Assumption of Mortgage executed between Mercy and Carmelita,
but did not interpose any objection to the same; and (2) BPI (through FEBTC) returned the personal
checks of the spouses Domingo and accepted the payments made by Carmelita. The R TC also noted that
BPI made a demand for payment upon the spouses Domingo only after 30 months from the time
Carmelita assumed payments for the installments due. The R TC reasoned that if the spouses Domingo
truly remained as debtors, BPI would not have wasted time m demanding payments from them.
Ultimately, the RTC decreed:

WHEREFORE, premises considered, the judgment appealed from is hereby reversed. The complaint filed
by [BPI] before [MeTC] Branch 9, Manila, is hereby DISMISSED and ordering [BPI] to pay
defendant/appellant Amador Domingo the following, to wit:
a) One Hundred Thousand (₱100,000.00) Pesos as moral damages;

b) Fifty Thousand (₱50,000.00) Pesos as exemplary damages;

c) Fifty Thousand (₱50,000.00) Pesos as attorney's fees;

d) Twenty-Five Thousand (₱25,000.00) [Pesos] as litigation expenses;

e) Costs of this suit.14

Aggrieved by the foregoing RTC judgment, BPI filed a Petition for Review with the Court of Appeals,
docketed as CA-G.R. SP No. 88836. The Court of Appeals promulgated its Decision on July 11, 2005,
affirming the finding of the R TC that novation took place. The Court of Appeals, relying on the
declaration in Babst v. Court of Appeals15 that consent of the creditor to the substitution of debtors
need not always be express and may be inferred from the acts of the creditor, ruled that:

In this case, there is no doubt that FEBTC had the intention to release private respondent [Amador] and
his wife from the obligation when the latter sold the subject vehicle to [Carmelita]. This intention can be
inferred from the following acts of FEBTC: 1) it returned the postdated checks issued by private
respondent [Amador's] wife in favor of FEBTC; 2) it accepted the payments made by [Carmelita]; 3) it did
not interpose any objection despite knowledge of the existence of the Deed of Sale with Assumption of
Mortgage; and 4) it did not demand payment from private respondent [Amador] and his wife for thirty
(30) long months.

xxxx

As correctly found by the R TC, the testimony of private respondent [Amador] as regards the return of
the said checks to them by FEBTC was not rebutted by petitioner BPI.

If indeed the said checks were not returned to private respondent [Amador' s] wife, the least thing that
petitioner BPI or FEB TC could have done was to deposit them. Should the checks thereafter bounce,
then petitioner BPI or FEBTC could have filed a separate case against private respondent [Amador's]
wife. This was never done by petitioner BPI or FEBTC. Hence, it is safe to conclude that the said checks
were indeed returned to private respondent [Amador's] wife.16

The Court of Appeals rejected the other arguments of BPI:

Petitioner BPI further argues that as regards the payment made by the alleged new debtor, Carmelita
Gonzales, it appears that the only payment made by her was a PNB Check No. 00190322 dated May 19,
1997 which was dishonored due to Account Closed.

Careful scrutiny of the records of the case reveals otherwise. As found by the Me TC in its decision dated
June 10, 2004, Carmelita Gonzales made several payments on the said loan obligation, as testified to by
witness Vicente Magpusao, petitioner BPI's Account Analyst, thus:

x x x. Based on the subsidiary leger, (Exhibit "2"), there were three (3) checks that bounced and these
are payments from the new buyer. They only have one (1) photocopy of these checks in the amount of
P.325,431.60 (Exhibit 4) while the other two are missing. He was not aware who owns Cargo and
Hardware Corporation but the check was issued by a certain Miss Gonzales. x x x.

xxxx

Petitioner BPI further argues that it was not its obligation to interpose any objection to the Deed of Sale
with Assumption of Mortgage. Rather it should be the vendee, [Carmelita], who should secure the
approval and consent of petitioner BPI to the Deed of Sale.

This argument is untenable.

The Deed of Sale with Assumption of Mortgage between private respondent [Amador's] wife and
[Carmelita] was executed way back on July 5, 1994. The check that was issued by [Carmelita] was dated
May 19, 1997. The position of petitioner BPI is not possible because when the Deed of Sale with
Assumption of Mortgage was executed and the said check was issued, private respondent [Amador's]
wife and [Carmelita] were still dealing with FEBTC, considering the fact that the merger of petitioner BPI
and FEBTC was formalized on April 10, 2000.
Nevertheless, FEBTC interposed no objection to the Deed of Sale with Assumption of Mortgage, hence,
it consented to it.

From the foregoing, it is clear that novation took place so that private respondent Domingo is no longer
the debtor of petitioner BPI.17 (Citations omitted.)

The Court of Appeals, however, deleted the damages awarded to Amador for the following reasons:

As to the second issue, petitioner BPI argues that the RTC awarded moral and exemplary damages and
attorney's fees to respondent [Amador] only in the dispositive portion of the assailed decision without
any basis in fact and in law.

This Court finds the argument tenable.

In the case of Solid Homes, Inc. vs. Court of Appeals, it was held that:

"It is basic that the claim for actual, moral and punitive damages as well as exemplary damages and
attorney's fees must each be independently identified and justified."

Furthermore, Section 14, paragraph 1 of Article VIII, of the 1987 Constitution lays down the standard in
rendering decisions, to wit: it must be express therein clearly and distinctly the facts and law on which it
is based.

Perusal of the assailed decision reveals that the award of moral and exemplary damages as well as
attorney's fees and litigation expenses were only touched in the dispositive portion, which is in clear
disregard of the established rules laid down by the Constitution and existing jurisprudence. Therefore,
their deletion is in order.

As regards the award of litigation expenses and costs of the suit, the same should also be deleted
considering that "no premium should be placed on the right to litigate."18 (Citations omitted.)

The Court of Appeals ultimately adjudged:

WHEREFORE, premises considered, the assailed decision dated February 10, 2005 of the Regional Trial
Court, Branch 26, Manila in Civil Case No. 04-111100 is hereby AFFIRMED with MODIFICATION in that
the award of moral and exemplary damages as well as attorney's fees, litigation expenses and costs of
suit, is hereby deleted.19

In its Resolution dated August 19, 2005, the Court of Appeals denied the Motion for Partial
Reconsideration of BPI.

BPI comes to this Court via the present Petition for Review/ Appeal by Certiorari raising the sole issue of
whether or not there had been a novation of the loan obligation with chattel mortgage of the spouses
Domingo to BPI so that the spouses Domingo were released from said obligation and Carmelita was
substituted as debtor.

The Court answers in the negative and grants the Petition.

In De Cortes v. Venturanza,20 the Court discussed some principles and jurisprudence underlying the
concept and nature of novation as a mode of extinguishing obligations:

According to Manresa, novation is the extinguishment of an obligation by the substitution or change of

the obligation by a subsequent one which extinguishes or modifies the first, either by changing the
object or principal conditions, or by substituting the person of the debtor, or by subrogating a third
person to the rights of the creditor (8 Manresa 428, cited in IV Civil Code of the Philippines by Tolentino
1962 ed., p. 352). Unlike other modes of extinction of obligations, novation is a juridical act with a dual
function - it extinguishes an obligation and creates a new one in lieu of the old.

Article 1293 of the New Civil Code provides:

"N ovation 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." (emphasis supplied)

Under this provision, there are two forms of novation by substituting the person of the debtor, and they
are: (1) expromision and (2) delegacion. In the former, the initiative for the change does not come from
the debtor and may even be made without his knowledge, since it consists in a third person assuming
the obligation. As such, it logically requires the consent of the third person and the creditor. In the latter,
the debtor offers and the creditor accepts a third person who consents to the substitution and assumes
the obligation, so that the intervention and the consent of these three persons are necessary (8
Manresa 436-437, cited in IV Civil Code of the Philippines by Tolentino, 1962 ed., p. 360). In these two
modes of substitution, the consent of the creditor is an indispensable requirement (Garcia vs. Khu Yek
Chiong, 65 Phil. 466, 468). (Emphases supplied.)

The Court also emphasized in De Cortes the indispensability of the creditor's consent to the novation,
whether expromision or delegacion, given that the "[s]ubstitution of one debtor for another may delay
or prevent the fulfillment of the obligation by reason of the financial inability or insolvency of the new
debtor; hence, the creditor should agree to accept the substitution in order that it may be binding on
him."21

Both the R TC and the Court of Appeals found that there was novation by delegacion in the case at bar.
The Deed of Sale with Assumption of Mortgage was executed between Mercy (representing herself and
her husband Amador) and Carmelita, thus, their consent to the substitution as debtors and third person,
respectively, are deemed undisputed. It is the existence of the consent of BPI (or its absorbed
corporation FEB TC) as creditor that is being challenged herein.

As a general rule, since novation implies a waiver of the right the creditor had before the novation, such
waiver must be express.22 The Court explained the rationale for the rule in Testate Estate of Lazaro
Mota v. Serra23:

It should be noted that in order to give novation its legal effect, the law requires that the creditor should
consent to the substitution of a new debtor. This consent must be given expressly for the reason that,
since novation extinguishes the personality of the first debtor who is to be substituted by a new one, it
implies on the part of the creditor a waiver of the right that he had before the novation, which waiver
must be express under the principle that renuntiatio non praesumitor, recognized by the law in
declaring that a waiver of right may not be performed unless the will to waive is indisputably shown by
him who holds the right.

However, in Asia Banking Corporation v. Elser,24 the Court qualified thus:

The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditor's consent to the
substitution of the new debtor for the old be express, or given at the time of the substitution, and the
Supreme Court of Spain, in its judgment of June 16, 1908, construing said article, laid down the doctrine
that "article 1205 of the Civil Code does not mean or require that the creditor's consent to the change of
debtors must be given simultaneously with the debtor's consent to the substitution; its evident purpose
being to preserve the creditor's full right, it is sufficient that the latter's consent be given at any time and
in any form whatever, while the agreement of the debtors subsists." The same rule is stated in the
Enciclopedia Juridica Espanola, volume 23, page 503, which reads: "The rule that this kind of novation,
like all others, must be express, is not absolute; for the existence of the consent may well be inferred
from the acts of the creditor, since volition may as well be expressed by deeds as by words." The
understanding between Henry W. Elser and the principal director of Yangco, Rosenstock & Co., Inc., with
respect to Luis R. Y angco' s stock in said corporation, and the acts of the board of directors after Henry
W. Elser had acquired said shares, in substituting the latter for Luis R. Y angco, are a clear and
unmistakable expression of its consent. When this court said in the case of Estate of Mota vs. Serra (47
Phil., 464), that the creditor's express consent is necessary in order that there may be a novation of a
contract by the substitution of debtors, it did not wish to convey the impression that the word "express"
was to be given an unqualified meaning, as indicated in the authorities or cases, both Spanish and
American, cited in said decision.

Hence, based on the aforequoted ruling in Asia Banking, the existence of the creditor's consent may also
be inferred from the creditor's acts, but such acts still need to be "a clear and unmistakable expression
of [the creditor's] consent. "25

In Ajax Marketing and Development Corporation v. Court of Appeals,26 the Court further clarified that:

The well settled rule is that novation is never presumed. Novation will not be allowed unless it is clearly
shown by express agreement, or by acts of equal import. Thus, to effect an objective novation it is
imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or
that the new obligation be on every point incompatible with the new one. In the same vein, to effect a
subjective novation by a change in the person of the debtor it is necessary that the old debtor be
released expressly from the obligation, and the third person or new debtor assumes his place in the
relation. There is no novation without such release as the third person who has assumed the debtor's
obligation becomes merely a co-debtor or surety. (Citations omitted.)

The determination of the existence of the consent of BPI to the substitution of debtors, in accordance
with the standards set in the preceding jurisprudence, is a question of fact because it requires the Court
to review the evidence on record. It is an established rule that the jurisdiction of the Court in cases
brought before it from the Court of Appeals via a petition for review on certiorari under Rule 45 of the
Rules of Court is generally limited to reviewing errors of law as the former is not a trier of facts. Thus,
the findings of fact of the Court of Appeals are conclusive and binding upon the Court in the latter's
exercise of its power to review for it is not the function of the Court to analyze or weigh evidence all
over again.27 However, several of the recognized exceptions28 to this rule are present in the instant
case that justify a factual review, i.e., the inference is manifestly mistaken, the judgment is based on
misapprehension of facts, and the findings of the Court of Appeals and the RTC are contrary to those of
the MeTC.
The burden of establishing a novation is on the party who asserts its existence.29 Contrary to the
findings of the Court of Appeals and the RTC, Amador failed to discharge such burden as he was unable
to present proof of the clear and unmistakable consent of BPI to the substitution of debtors.

Irrefragably, there is no express consent of BPI to the substitution of debtors. The Court of Appeals and
the RTC inferred the consent of BPI from the following facts: (1) BPI had a copy of the Deed of Sale and
Assumption of Mortgage executed between Mercy and Carmelita in its file, indicating its knowledge of
said agreement, and still it did not interpose any objection to the same; (2) BPI (through FEBTC)
returned the spouses Domingo's checks and accepted Carmelita's payments; and (3) BPI did not demand
any payment from the spouses Domingo not until 3 0 months after Carmelita assumed the payment of
balance on the Promissory Note.

The Court disagrees with the inferences made by the Court of Appeals and the RTC.

First, that BPI (or FEB TC) had a copy of the Deed of Sale and Assumption of Mortgage executed between
Mercy and Carmelita in its file does not mean that it had consented to the same. The very Deed itself
states:

That the VENDEE [Carmelita] assumes as he/she had assumed to pay the aforecited mortgage in
accordance with the original terms and conditions of said mortgage, and the parties hereto [Mercy and
Carmelita] have agreed to seek the conformity of the MORTGAGEE [FEBTC].30 This brings the Court back
to the original question of whether there is proof of the conformity of BPI.

The Court notes that the documents of BPI concerning the car loan and chattel mortgage are still in the
name of the spouses Domingo. No new promissory note or chattel mortgage had been executed
between BPI (or FEBTC) and Carmelita. Even the account itself is still in the names of the spouses
Domingo.

The absence of objection on the part of BPI (or FEB TC) cannot be presumed as consent. Jurisprudence
requires presentation of proof of consent, not mere absence of objection. Amador cannot rely on Babst
which involved a different factual milieu. Relevant portions of the Court's ruling in Babst are reproduced
below:
In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register its
objection to the take-over by DBP of ELISCON's assets, at the creditors' meeting held in June 1981 and
thereafter, it is deemed to have consented to the substitution of DBP for

ELISCON as debtor.

We find merit in the argument. Indeed, there exist clear indications that BPI was aware of the
assumption by DBP of the obligations of ELISCON. In fact, BPI admits that –

"[T]he Development Bank of the Philippines (DBP), for a time, had proposed a formula for the
settlement of Eliscon's past obligations to its creditors, including the plaintiff [BPI], but the formula was
expressly rejected by the plaintiff as not acceptable (long before the filing of the complaint at bar)."

The Court of Appeals held that even if the account officer who attended the June 1981 creditors'
meeting had expressed consent to the assumption by DBP of ELISCON's debts, such consent would not
bind BPI for lack of a specific authority therefor. In its petition, ELISCON counters that the mere presence
of the account officer at the meeting necessarily meant that he was authorized to represent BPI in that
creditors' meeting. Moreover, BPI did not object to the substitution of debtors, although it objected to
the payment formula submitted by DBP.

Indeed, the authority granted by BPI to its account officer to attend the creditors' meeting was an
authority to represent the bank, such that when he failed to object to the substitution of debtors, he did
so on behalf of and for the bank. Even granting arguendo that the said account officer was not so
empowered, BPI could have subsequently registered its objection to the substitution, especially after it
had already learned that DBP had taken over the assets and assumed the liabilities of ELISCON. Its
failure to do so can only mean an acquiescence in the assumption by DBP of ELISCON's obligations. As
repeatedly pointed out by ELISCON and MULTI, BPI's objection was to the proposed payment formula,
not to the substitution itself.31 In Babst, there was a clear opportunity for BPI, as creditor therein, to
object to the substitution of debtors given that its representative attended a creditor's meeting, during
which, said representative already objected to the proposed payment formula made by DBP, as the new
debtor. Hence, the silence of BPI during the same meeting as to the matter of substitution of debtors
could already be interpreted as its acquiescence to the same. In contrast, there was no clear opportunity
for BPI (or FEB TC) to have expressed its objection to the substitution of debtors in the case at bar.

Second, the consent of BPI to the substitution of debtors cannot be deduced from its acceptance of
payments from Carmelita, absent proof of its clear and unmistakable consent to release the spouses
Domingo from their obligation. Since the spouses Domingo remained as debtors of BPI, together with
Carmelita, the fact that BPI demanded payment from the spouses Domingo 30 months after accepting
payment from Carmelita is insignificant.

The acceptance by a creditor of payments from a third person, who has assumed the obligation, will
result merely to the addition of debtors and not novation. The creditor may therefore enforce the
obligation against both debtors.32 As the Court pronounced in Magdalena Estates, Inc. v. Rodriguez,33
"[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." The Court reiterated in Quinto v. People34 that "[n]ot too uncommon is
when a stranger to a contract agrees to assume an obligation; and while this may have the effect of
adding to the number of persons liable, it does not necessarily imply the extinguishment of the liability
of the first debtor. Neither would the fact alone that the creditor receives guaranty or accepts payments
from a third person who has agreed to assume the obligation, constitute an extinctive novation absent
an agreement that the first debtor shall be released from responsibility."

Absent proof that BPI gave its clear and unmistakable consent to release the spouses Domingo from the
obligation to pay the car loan, Carmelita is simply considered an additional debtor. Consequently, BPI
can still enforce the obligation against the spouses Domingo even 30 months after it had started
accepting payments from Carmelita.

And third, there is no sufficient or competent evidence to establish the return of the checks to the
spouses Domingo and the assurance made by FEBTC that the spouses Domingo were already released
from their obligation.

During his direct examination, Amador testified as follows:

Atty. Rivera:

1. Q. Do you remember who was this person who became interested to buy this car?

A. Carmelita S. Gonzales, Sir.

2. Q. What did you tell Mrs. Gonzales when she expressed interest in buying this car, this Mazda vehicle?
A. We told her that the car was mortgaged and she told us that she is willing to assume the mortgage,
Sir.

3. Q. With that willingness, what happened next on the part of Mrs. Gonzales to assume the mortgage?

A. My wife and Mrs. Gonzales went to Far East Bank and Trust Company and she informed the bank that
somebody is interested in buying the car and assume the mortgage and the bank informed her that the
bank is agreeable and with no objection.

Atty. Ganitano: Objection, your Honor. May we object to the answer of the witness, it would be hearsay.
The witness testified that it was his wife and the would be buyer who went to the bank.

Atty. Rivera: Then, we are just offering it as part of the narration not necessarily to prove the truth of the
statement, your Honor.

Court: The witness may continue.

Atty. Rivera: So, after that meeting with the bank occurred, what happened next in connection with this
intention of Mrs. Gonzales to purchase the car?

Witness: After furnishing the bank with the Deed of Absolute Sale duly notarized, [Ms.] Carmelita
Gonzales subsequently issued a check payable to Far East Bank and Trust Company, Sir.

Atty. Rivera:

1. Q. How about the postdated checks that your wife issued to Far East Bank and Trust Company?

A. The remaining postdated checks were returned to us, Sir.

2. Q. Do you remember what were those postdated checks that were returned by the bank?
A. Those were the checks we issued in advance, Sir.

3. Q. What were the dates of these checks?

A. October 30, 1994 to 1997, Sir.

xxxx

Atty. Rivera:

1. Q. Aside from this evidence that you have enumerated, were you able to talk to any representative
from Far East Bank relative to the approval of the change in the personality of the debtor from your wife
to ...

A. As I remember, sometime in 1996, I received a call from a certain Marvin Orence asking for our
assistance to locate the car that Mrs. Carmelita Gonzales bought from us and informed us that we have
nothing to worry except that we provide them assistance to locate the car and I informed our lawyer,
Atty. Rivera, about this and Atty. Rivera went to the Land Transportation Office for assistance.35

Amador continued to testify on cross-examination, thus:

CROSS EXAMINATION BY ATTY. GANITANO

1. Q. You testified that out of the 48 checks you paid to Far East Bank & Trust Company, only 12 checks
were made good. What happened to the 3 6 checks?

A. When my wife brought the transaction to Far East Bank and presented the Deed of Absolute Sale, the
bank have no objection to the sale of the car and afterwards, the bank returned all the postdated checks
prepared by my wife that was in the possession of the bank, Sir.

1. Q. Do you have with you those 36 checks that were allegedly returned by Far East Bank?
A. These checks have already been discarded, Sir.

2. Q. So, you cannot present those 36 checks anymore?

A. No, Sir.

3. Q. Who was the alleged buyer of the mortgaged car again?

Witness: Carmelita S. Gonzales, Sir.

Atty. Ganitano:

1. Q. To whom did this Carmelita Gonzales transacted with respect to the sale of mortgaged vehicle?

A. To my wife, Mercy Maryden Domingo, Sir.

2. Q. Not with you, Mr. Witness?

A. Well, I always provide assistance to my wife with regards to paper works, Sir.

3. Q. When was this Deed of Sale executed, was it before when your wife and the buyer went to the
bank or after they went to the bank?

A. I think it was simultaneous, Sir.

4. Q. When you say "simultaneous", Mr. Witness, I'm showing to you this Deed of Sale with Assumption
of Mortgage and you said it was with the conformity of the bank. Will you please tell us in this Deed of
Sale with Assumption of Mortgage if you could find any entry which indicate that the bank agreed to the
sale with assumption of mortgage?
Witness: None, Sir.

Atty. Ganitano: Aside from this Deed of Sale with Assumption of Mortgage, do you have any document
which shows that the bank indeed conformed to the sale of the mortgaged vehicle with assumption of
mortgage?

Witness: We were verbally assured that our papers are in order, Sir.

Atty. Ganitano: So, there is no document, Mr. Witness, it was only made orally?

Witness: Yes, Sir, we were verbally assured that our papers are in order.

Atty. Ganitano:

1. Q. Were you present when your wife and the would-be buyer went to the bank?

A. No, Sir.

2. Q. How did you know that there was an assurance from the bank?

A. I received a phone call from Mr. Oronce. I asked about the transaction and he told me that there is
nothing to worry because our documents or papers were in order, Sir.

3. Q. Do I get you right, Mr. Witness, that the confirmation was only through phone call?

A. It was Mr. Oronce who called me, Sir.

4. Q. I'm just asking what was the means of communication, was it only thru phone call?

A. Yes, Sir, thru phone call. I think twice or three times.

Atty. Rivera: We would like to manifest, your Honor, as early as 1997, just to stress this point, as early as
March 1997, the name of Marvin Oronce ...

Atty. Ganitano: The witness is under cross, your Honor.

Court: You just ask that in re-direct, counsel.

Atty. Rivera: Yes, you Honor.36

Amador admitted that it was his wife Mercy, together with Carmelita, who directly transacted with
FEBTC regarding the sale of the subject vehicle to and assumption of mortgage by Carmelita. Amador
had no personal knowledge of what had happened when Mercy and Carmelita went to the bank so his
testimony on the matter was hearsay, which, if not excluded, deserves no credence.

The Court explained in Da Jose v. Angeles37 that:

Evidence is hearsay when its probative force depends on the competency and credibility of some
persons other than the witness by whom it is sought to be produced. The exclusion of hearsay evidence
is anchored on three reasons: (1) absence of cross-examination; (2) absence of demeanor evidence; and
(3) absence of oath. Basic under the rules of evidence is that a witness can only testify on facts within his
or her personal knowledge. This personal knowledge is a substantive prerequisite in accepting
testimonial evidence establishing the truth of a disputed fact. xx x. (Citations omitted.)

The Court of Appeals and the RTC substantively based their finding that BPI (or FEB TC) consented to the
substitution of debtors on the return of the checks to the spouses Domingo, but the proof of the
issuance of the checks, their delivery to the bank, and the return of the checks flimsily consists of
Amador's unsubstantiated testimony. Amador recounted that the postdated checks which he and Mercy
executed in favor of FEBTC were returned to them, however, he failed to provide the details
surrounding the return. Amador only stated that when Mercy provided FEBTC with a copy of the Deed
of Sale and Assumption of Mortgage, the bank returned the checks to them "subsequently" or
"afterwards." Amador did not say how the checks were returned and to whom. The checks were not
presented during the trial since according to Amador, they were already "discarded," although once
more, any other detail surrounding the discarding of the checks is sorely lacking. Aside from Amador's
bare testimony, no other supporting evidence of the return of the checks to the spouses Domingo was
submitted during trial. For the foregoing reasons, the Court accords little weight and credence to
Amador' s testimony on the return of the checks.

It is worthy to stress that Amador, as the party asserting novation, bears the burden of proving its
existence.1âwphi1 Amador cannot simply rely on the failure of BPI to produce the checks if these were
not actually returned to the spouses Domingo. There is simply not enough evidence to establish the
prima facie existence of novation to shift the burden of evidence to BPI to controvert the same.

The verbal assurances purportedly given by a Mr. Marvin Orence or Oronce (Orence/Oronce) of FEBTC
to Amador over the telephone that the spouses Domingo's documents were in order do not constitute
the clear and unmistakable consent of the bank to the substitution of debtors. Once again, except for
Amador's bare testimony, there is no other evidence of such telephone conversations taking place and
the subject of such telephone conversations. In addition, Mr. Orence/Oronce's identity, position at
FEBTC, and authority to represent and bind the bank, were not even clearly established.

The letter dated March 31, 1997 of Atty. Ricardo J.M. Rivera (Rivera), counsel for the spouses Domingo,
addressed to Atty. Cresenciano L. Espino, counsel for FEBTC, does not serve as supporting evidence for
Amador' s testimony regarding the return of the checks and the verbal assurances given by Mr.
Orence/Oronce. The contents of such letter are mere hearsay because the events stated therein did not
personally happen to Atty. Rivera or in his presence, and he merely relied on what his clients, the
spouses Domingo, told him.

The Court is therefore convinced that there is no novation by delegacion in this case and Amador
remains a debtor of BPI. The Court reinstates the MeTC judgment ordering Amador to pay for the
₱275,562.00 balance on the Promissory Note, 10% attorney's fees, and costs of suit; but modifies the
rate of interest imposed and the date when such interest began to run.

In Ruiz v. Court of Appeals,38 the Court equitably reduced the interest rate of 3% per month or 36% per
annum stipulated in the promissory notes therein to 1% per month or 12% per annum, based on the
following ratiocination:

We affirm the ruling of the appellate court, striking down as invalid the 10% compounded monthly
interest, the 10% surcharge per month stipulated in the promissory notes dated May 23, 1995 and
December 1, 1995, and the 1% compounded monthly interest stipulated in the promissory note dated
April 21, 1995. The legal rate of interest of 12% per annum shall apply after the maturity dates of the
notes until full payment of the entire amount due. Also, the only permissible rate of surcharge is 1% per
month, without compounding. We also uphold the award of the appellate court of attorney's fees, the
amount of which having been reasonably reduced from the stipulated 25% (in the March 22, 1995
promissory note) and 10% (in the other three promissory notes) of the entire amount due, to a fixed
amount of ₱50,000.00. However, we equitably reduce the 3% per month or 36% per annum interest
present in all four (4) promissory notes to 1 % per month or 12% per annum interest.

The foregoing rates of interests and surcharges are in accord with Medel vs. Court of Appeals, Garcia vs.
Court of Appeals, Bautista vs. Pilar Development Corporation, and the recent case of Spouses Solangon
vs. Salazar. This Court invalidated a stipulated 5.5% per month or 66% per annum interest on a
₱500,000.00 loan in Medel and a 6% per month or 72% per annum interest on a ₱60,000.00 loan in
Solangon for being excessive, iniquitous, unconscionable and exorbitant. In both cases, we reduced the
interest rate to 12% per annum. We held that while the Usury Law has been suspended by Central Bank
Circular No. 905, s. 1982, effective on January 1, 1983, and parties to a loan agreement have been given
wide latitude to agree on any interest rate, still stipulated interest rates are illegal if they are
unconscionable. Nothing in the said circular grants lenders carte blanche authority to raise interest rates
to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. On the
other hand, in Bautista vs. Pilar Development Corp., this Court upheld the validity of a 21% per annum
interest on a ₱142,326.43 loan, and in Garcia vs. Court of Appeals, sustained the agreement of the
parties to a 24% per annum interest on an ₱8,649,250.00 loan. It is on the basis of these cases that we
reduce the 36% per annum interest to 12%. An interest of 12% per annum is deemed fair and
reasonable. While it is true that this Court invalidated a much higher interest rate of 66% per annum in
Medel and 72% in Solangon it has sustained the validity of a much lower interest rate of 21 % in Bautista
and 24% in Garcia. We still find the 36% per annum interest rate in the case at bar to be substantially
greater than those upheld by this Court in the two (2) aforecited cases. (Citations omitted.)

On the strength of the foregoing jurisprudence, the Court likewise finds the interest rate of 3% per
month or 36% per annum stipulated in the Promissory Note herein for the balance of ₱275,562.00 as
excessive, iniquitous, unconscionable, and exorbitant. Following the guidelines set forth in Eastern
Shipping Lines, Inc. v. Court of Appeals39 and Nacar v. Gallery Frames,40 the Court imposes instead legal
interest in the following rates: (1) legal interest of 12% per annum from date of extrajudicial demand on
January 29, 1997 until June 30, 2013; and (2) legal interest of 6o/o per annum from July 1, 2013 until
fully paid.

Incidentally, Amador passed away on June 5, 2010 during the pendency of the instant petition, and is
survived by his children, namely: Joann D. Moya, Annabelle G. Domingo, Cristina G. Domingo, Amador G.
Domingo, Jr., Gloria Maryden D. Macatangay, Dante Amador G. Domingo, Gregory Amador A. Domingo,
and Ina Joy A. Domingo.41 To prevent future litigation in the enforcement of the award, the Court
clarifies that Amador's heirs are not personally responsible for the debts of their predecessor. The
extent of liability of Amador's heirs to BPI is limited to the value of the estate which they inherited from
Amador. In this jurisdiction, "it is the estate or mass of the property left by the decedent, instead of the
heirs directly, that becomes vested and charged with his rights and obligations which survive after his
death."42 To rule otherwise would unduly deprive Amador' s heirs of their properties.
WHEREFORE, in view of the foregoing, the Petition is GRANTED. The Decision dated July 11, 2005 and
Resolution dated August 19, 2005 of the Court of Appeals in CA-G.R. SP No. 88836, affirming with
modification the Decision dated February 10, 2005 of the RTC of Manila, Branch 26 in Civil Case No. 04-
111100, is REVERSED and SET ASIDE. The Decision dated June 10, 2004 and Order dated September 6,
2004 of the Me TC of Manila, Branch 9 in Civil Case No. 168949-CV, is REINSTATED with
MODIFICATIONS. The heirs of respondent Amador Domingo are ORDERED to pay petitioner Bank of the
Philippine Islands the following:

(1) the ₱275,562.00 balance on the Promissory Note, plus legal interest of 12% from January 29, 1997 to
June 30, 2013 and 6% from July 1, 2013 until fully paid; (2) attorney's fees of 10%; and (3) costs of suit.
However, the liability of Amador Domingo's heirs is limited to the value of the inheritance they received
from the deceased.

SO ORDERED.

TERESITA J. LEONARDO-DE CASTRO

Associate Justice

WE CONCUR:

MARIA LOURDES P.A. SERENO

Chief Justice

Chairperson

LUCAS P. BERSAMIN

Associate Justice JOSE PORTUGAL PEREZ

Associate Justice

ESTELA M. PERLAS-BERNABE

Associate Justice

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the opinion of
the Court's Division.

MARIA LOURDES P.A. SERENO

Chief Justice