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ROMEO C. GARCIA v. DIONISIO V. LLAMAS

FACTS:

The case involves a complaint filed by Dionisio Llamas against Romeo Garcia and Eduardo de Jesus for the collection of a loan amounting to P400,000. Garcia and de Jesus executed a promissory note for the loan, which was supposed to be paid by January 23, 1997, with a 5% monthly interest. Despite repeated demands, the loan remained unpaid. Garcia claimed that he signed the promissory note as an accommodation party for de Jesus and alleged that the loan was already paid through a check. On the other hand, de Jesus argued that he only received a portion of the loan and had difficulty paying it. During the pre-trial conference, de Jesus and his lawyer did not appear while Garcia's counsel declared that he would no longer present evidence. The trial court allowed Llamas to present evidence against de Jesus ex parte and directed him to file a motion for judgment on the pleadings against Garcia. Ultimately, the trial court rendered judgment on the pleadings, holding both Garcia and de Jesus jointly and severally liable for the outstanding loan.

In a separate case, Llamas filed a complaint against Rafael Escudero and Eduardo de Jesus for the collection of a loan. Llamas claimed that Escudero and de Jesus jointly and severally borrowed P400,000, with only Escudero executing a promissory note for the loan. Llamas presented a bounced check issued by de Jesus as partial payment for the loan. De Jesus failed to file an answer, resulting in a judgment on the pleadings against him. On the other hand, Escudero denied the allegations in the complaint and asserted that he was an accommodation party. The trial court ruled in favor of Llamas and ordered Escudero to pay the outstanding balance of the loan, attorney's fees, and costs of the suit. Escudero appealed to the Court of Appeals (CA).

The CA held that the trial court erred in rendering a judgment on the pleadings against de Jesus as his answer raised genuine issues. The case against de Jesus was remanded to the trial court for the presentation of his evidence ex parte. The CA treated Escudero's case as a summary judgment because his answer failed to raise any genuine issues of material fact. It concluded that no novation occurred when Llamas accepted the bounced check from de Jesus, and Escudero's defense as an accommodation party lacked basis. Escudero filed a Petition for Review before the Supreme Court, challenging the novation of the obligation, the basis for his defense as an accommodation party, and the propriety of the judgment against him.

ISSUES:

  1. Whether novation took place either through the substitution of a new debtor or the replacement of the promissory note by a check.

  2. Whether the payment of interests constitutes novation.

  3. Whether the petitioner is liable for the entire obligation as a joint and solidary obligor.

  4. Whether the petitioner, as an accommodation party, is released from the obligation.

  5. Whether the summary judgment rendered by the trial court was proper.

  6. Whether the Court of Appeals (CA) correctly considered the summary judgment issued by the trial court against the petitioner.

RULING:

  1. No novation took place. The issuance and acceptance of the check did not unequivocally declare that the old obligation had been extinguished or that the check would take the place of the promissory note. There is no incompatibility between the two. Additionally, there was no clear and express release of the original debtor and substitution by a new debtor.

  2. The payment of interests does not change the terms and conditions of the obligation as it was already provided for in the promissory note.

  3. The petitioner is liable for the entire obligation as a joint and solidary obligor. In a solidary obligation, the creditor has the right to demand the fulfillment of the whole obligation from any or all of the debtors. As the petitioner made himself jointly and severally liable with another party, he is therefore liable for the entire obligation.

  4. The petitioner, as an accommodation party, is not released from the obligation. The promissory note in this case is not a negotiable instrument. The petitioner cannot avail himself of the provisions of the Negotiable Instruments Law (NIL) on the liabilities and defenses of an accommodation party. Even if the NIL were applicable, an accommodation party is liable for the instrument to a holder for value, regardless of whether the latter knew the former to be only an accommodation party. The relationship between an accommodation party and the party accommodated is one of principal and surety, and the accommodation party is bound equally and absolutely with the principal.

  5. The summary judgment rendered by the trial court was proper. The petitioner's answer raised issues regarding his status as an accommodation party and the extinguishment of the obligation. However, the court found that these issues were not valid based on the promissory note and the dishonor of a check allegedly used for payment. The court treated the judgment as a summary judgment rather than a judgment on the pleadings because there were factual issues raised by the petitioner's answer, but these issues did not require trial.

  6. The Court denied the petition and affirmed the decision of the CA.

PRINCIPLES:

  • Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.

  • Novation may be expromision (third person's assumption of the obligation) or delegacion (debtor offers a third person who assumes the obligation), and requires the consent of the creditor.

  • Novation may be extinctive (old obligation is terminated and replaced by a new one) or modificatory (old obligation subsists to the extent compatible with the amendatory agreement), and can be objective (changing the object or principal conditions) or subjective (substituting the person of the debtor or subrogating a third person to the rights of the creditor).

  • Express novation is when the new obligation declares in unequivocal terms that the old obligation is extinguished, while implied novation is when the new obligation is incompatible with the old one on every point.

  • Novation is never presumed and must be clear and express. The creditor's express consent is required for the substitution of a new debtor.

  • In a solidary obligation, the creditor is entitled to demand the fulfillment of the whole obligation from any or all of the debtors.

  • An accommodation party is liable for the instrument to a holder for value, regardless of whether the latter knew the former to be only an accommodation party.

  • A summary judgment may be rendered if the pleadings, supporting affidavits, depositions, and admissions show that there is no genuine issue regarding any material fact and the moving party is entitled to judgment as a matter of law.

  • A judgment on the pleadings is proper when an answer fails to render an issue or otherwise admits the material allegations of the adverse party's pleading.

  • Summary judgment may be rendered without further evidence if the allegations and admissions of the parties are sufficient.