by Nil Jay Perolina
CHAPTER 4 – EXTINGUISHMENT OF OBLIGATIONS
Article 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor's insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the original debtor. (n)
What is the Article all about?
This article is about the effect of insolvency of new debtor in novation by expromision done without the knowledge or against the will of the debtor.
What is the meaning of Article?
Article 1294 pertains to novation by expromision wherein it states that there is no liability for the new debtor’s insolvency can be enforced against the old debtor, because the latter did not have the initiative in making the change, which might have been made even without his knowledge.
What is reason behind the article?
The literal wording of the law should yield to its obvious intention which is to exempt the old debtor from future liability when he did not propose the new debtor.
What is the effect of expromision done without the knowledge or against the will of the debtor?
As a general rule, the old debtor is generally released from any further liability to the creditor in passive subjective (debtor is change, subjective- obligation is real) novation by expromision.
In effect, the new debtor/third party to the obligation who assumed the debtor’s obligation is entitled to reimbursement only up to the extent that the payment has been beneficial to the old debtor. On the other hand, he will not be entitled to the right of subrogation.
Subrogation: It is defined as the transfer of all rights of the creditor to a third person, who substitutes him in all his rights.
What is the exemption to the general rule?
If the old debtor had knowledge of the substitution, or had consented thereto, the exemption from liability provided in this article does not apply.
Illustrations/Examples
In an obligation where A is the old debtor and B is creditor, A is indebted to B for P20,000. Without A’s knowledge, X as new debtor commits to pay the indebtedness of A when it is due. B can still claim from A because there was no intention to release A from the obligation.
o Releasing A from the obligation must be express.
o However, if X agrees to extinguish A’s obligation, even if X just makes a payment of P10,000, B cannot run after A.
o X can request a reimbursement from A of the amount benefiting her.
o If X paid the full amount, he can recover the same from A.
o If the debt was secured by a mortgage, X cannot ask B to subrogate her rights.
Article 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when the delegated his debt. (1206a)
What is the article all about?
This is about the effect of insolvency of the new debtor in case of novation by delegacion.
What is the meaning of Article 1295?
In case of insolvency of the new debtor, this article permits the creditor to sue the old debtor only when insolvency was prior to the delegation and publicly known, or when the old debtor knew of such insolvency at the time he delegated the obligation
What is the reason behind the article?
This aims to protect the old debtor from future liability in case of novation by delegacion which is accepted by the creditor in cases when such insolvency of new debtor is not existing or not of public knowledge or not known to the debtor at the time of delegation of obligation.
What is the effect of insolvency of new debtor in case of novation by delegacion?
As a general rule, if the old debtor proposes to the creditor that he be substituted by a new debtor and the creditor allows it, the creditor cannot go against the old debtor.
What are the exceptions to the general rule?
The exceptions to this article include following cases:
1. When the insolvency of the new debtor has already been existing and of public knowledge when the old debtor delegated the debt;
2. When the insolvency of the new debtor is known to the old debtor when he delegates the debt.
• In this situations of exception, the creditor can go after the old debtor.
• In both cases, the creditor must not have knowledge of the insolvency of the new debtor and the insolvency must have existed during the delegation.
•If he knew, the creditor would be in estoppel. (Creditor already knew such insolvency of new debtor however still allowed such novation of new debtor, creditor done in bad faith, should be estoppel.)
Illustrations/Examples
D old debtor owes C creditor P1,000.00. D proposed to C that X new debtor would substitute him as old debtor. C agreed to the proposal.
If, at the time of the delegacion, X was already insolvent but his insolvency was neither of public knowledge nor known to D , then D is not liable. Neither is D liable if the insolvency of X took place after he delegated his debt. It is believed that D is also not liable if C had knowledge that X was insolvent at the time the debt was delegated to him.
Case Digest from Original Case
Citation:
INTERPORT vs SECURITIES SPECIALIST, INC., AND R.C. LEE SECURITIES INC.
Case Docket:
G.R. No. 154069
Date:
June 06, 2016
Petitioners:
INTERPORT RESOURCES CORPORATION
Respondents:
SECURITIES SPECIALIST, INC., AND R.C. LEE SECURITIES INC.
Ponente:
BERSAMIN, J.
FACTS:
In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic) entered into a subscription agreement with R.C. Lee, a domestic corporation engaged in the trading of stocks and other securities, covering 5,000,000 of its shares with par value of P0.01 per share, for a total of P50,000.00. Thereupon, R.C. Lee paid 25% of the subscription, leaving 75% unpaid. Consequently, Oceanic issued Subscription Agreements Nos. 1805, 1808, 1809, 1810, and 1811 to R.C. Lee.
On July 28, 1978, Oceanic merged with Interport, with the latter as the surviving corporation. Interport was a publicly-listed domestic corporation whose shares of stocks were traded in the stock exchange. Under the terms of the merger, each share of Oceanic was exchanged for a share of Interport.
On July 28, 1978, Oceanic merged with Interport, with the latter as the surviving corporation. Interport was a publicly-listed domestic corporation whose shares of stocks were traded in the stock exchange. Under the terms of the merger, each share of Oceanic was exchanged for a share of Interport.
On April 16, 1979 and April 18, 1979, SSI, a domestic corporation registered as a dealer in securities, received in the ordinary course of business Oceanic Subscription Agreements Nos. 1805, 1808 to 1811, all outstanding in the name of R.C. Lee, and Oceanic official receipts showing that 25% of the subscriptions had been paid. The Oceanic subscription agreements were duly delivered to SSI through stock assignments indorsed in blank by R.C. Lee.
Later on, R.C. Lee requested Interport for a list of subscription agreements and stock certificates issued in the name of R.C. Lee and other individuals named in the request. In response, Atty. Rhodora B. Morales, Interport’s Corporate Secretary, provided the requested list of all subscription agreements of Interport and Oceanic, as well as the requested stock certificates of Interport. Upon finding no record showing any transfer or assignment of the Oceanic subscription agreements and stock certificates of Interport as contained in the list, R.C. Lee paid its unpaid subscriptions and was accordingly issued stock certificates corresponding thereto.
On February 8, 1989, Interport issued a call for the full payment of subscription receivables, setting March 15, 1989 as the deadline. SSI tendered payment prior to the deadline through two stockbrokers of the Manila Stock Exchange. However, the stockbrokers reported to SSI that Interport refused to honor the Oceanic subscriptions.
Still on the date of the deadline, SSI directly tendered payment to Interport for the balance of the 5,000,000 shares covered by the Oceanic subscription agreements, some of which were in the name of R.C. Lee and indorsed in blank. Interport originally rejected the tender of payment for all unpaid subscriptions on the ground that the Oceanic subscription agreements should have been previously converted to shares in Interport.
SSI then required Interport to furnish it with a copy of any notice requiring the conversion of Oceanic shares to Interport shares. However, Interport failed to show any proof of the notice. Thus, through a letter dated March 30, 1989, SSI asked the SEC for a copy of Interport's board resolution requiring said conversion. The SEC, through Atty. Fe Eloisa C. Gloria, Director of Brokers and Exchange Department, informed SSI that the SEC had no record of any such resolution.
ISSUES:
(a) whether or not Interport was liable to deliver to SSI the Oceanic shares of stock, or the value thereof, under Subscriptions Agreement No. 1805, and Nos. 1808 to 1811 to SSI; and
(b)whether or not SSI was entitled to exemplary damages and attorney's fees.
RULING:
The appeal is meritorious.
1. Interport was liable to deliver the Oceanic shares of stock, or the value thereof, under Subscription Agreements Nos. 1805, and 1808 to 1811 to SSI
Interport's claim cannot be upheld. It should be stressed that novation extinguished an obligation between two parties. We have stated in that respect that:
Novation may:
[E]ither be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation. Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay; in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.
2. Interport and R.C. Lee were not liable to pay exemplary damages and attorney's fees.
We delete the attorney's fees for lack of legal basis.
In this case, the Court finds that Interport's act of refusing to accept SSI's tender of payment for the 75% balance of the subscription price was not performed in a wanton, fraudulent, oppressive or malevolent manner. In doing so, Interport merely relied on its records which did not show that an assignment of the shares had already been made between R.C. Lee and SSI as early as 1979. R.C. Lee, on the other hand, persisted in paying the 75% balance on the subscription price simply on the basis of Interport's representation that no transfer has yet been made in connection with Subscription Agreement Nos. 1805, and 1808 to 1811. Although Interport and R.C. Lee might have acted in bad faith35 in refusing to recognize the assignment of the subscription agreements in favor of SSI, their acts certainly did not fall within the ambit of being performed in a wanton, fraudulent, oppressive or malevolent manner as to entitle SSI to an award for exemplary damages.
The Court PARTIALLY GRANTS the petition for review on certiorari; and AFFIRMS the decision promulgated on February 11, 2002 subject to the following MODIFICATIONS, namely:
1. ORDERING Interport Resources Corporation: (a) To accept the tender of payment of Securities Specialist, Inc. corresponding to the 75% unpaid balance of the total subscription price under Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811; (b) To deliver 5,000,000 shares of stock and to issue the corresponding stock certificates to Securities Specialist, Inc. upon receipt of the payment of the latter under Item No. (a); (c) To cancel the stock certificates issued to R.C. Lee Securities, Inc. corresponding to the 5,000,000 shares of stock covered by Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811; (d) To reimburse R.C. Lee Securities, Inc. the amounts it paid representing the 75% unpaid balance of the total subscription price of Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811; and (e) In the alternative, if the foregoing is no longer possible, Interport Resources Corporation shall pay Securities Specialist, Inc. the market value of the 5,000,000 shares of stock covered by Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811 at the time of the promulgation of this decision; and
2. DELETING the award for exemplary damages and attorney's fees for lack of merit.
No pronouncement on costs of suit.
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