||| (Gonzales v. PNB, G.R. No.

L-33320, [May 30, 1983], 207 PHIL 425-433)

1. COMMERCIAL LAW; CORPORATION CODE;LIMITATIONS OF RIGHT OF
INSPECTION UNDER THE NEW CODE (B.P. BLG. 68). As may be noted, among
the changes introduced in the new Code with respect to the right of inspection granted
to a stockholder are the following: the records must be kept at the principal office of the
corporation; the inspection must be made on business days; the stockholder may
demand a copy of the excerpts of the records or minutes; and the refusal to allow such
inspection shall subject the erring officer or agent of the corporation to civil and criminal
liabilities. However, while seemingly enlarging the right of inspection, the new Code has
prescribed limitations to the same. It is now expressly required as a condition for such
examination that the one requesting it must not have been guilty of using improperly
any information secured through a prior examination, and that the person asking for
such examinations must be "acting in good faith and for a legitimate purpose in making
his demand."
2. ID.; ID.; ID.; UNQUALIFIED PROVISION UNDER THE PREVIOUS LAW, NOW
DISSIPATED BY THE CLEAR PROVISION OF SECTION 74 OF B.P. BLG. 68. The
unqualified provision on the right of inspection previously contained in Section 51, Act
No. 1459, as amended, no longer holds true under the provisions of the present law.
The argument of the petitioner that the right granted to him under Section 51 of the
former Corporation law should not be dependent on the propriety of his motive or
purpose in asking for the inspection of the books of the respondent bank loses
whatever validity it might have had before the amendment of the law. If there is any
doubt in the correctness of the ruling of the trial court that the right of inspection granted
under Section 51 of the old Corporation Law must be dependent on a showing of
proper motive on the part of the stockholder demanding the same, it now dissipated by
the clear language of the pertinent provision contained in Section 74 of Batas
Pambansa Blg. 68.
3. ID.; ID.; ID.; MODE OF ACQUISITION OF ONE SHARE OF STOCK, AS EVIDENCE
OF BAD FAITH AND ULTERIOR MOTIVE. Although the petitioner has claimed that
he has justifiable motives in seeking the inspection of the books of the respondent
bank, he has not set forth the reasons and the purposes for which be desires such
inspection, except to satisfy himself as to the truth of published reports regarding
certain transactions entered into by the respondent bank and to inquire into their
validity. The circumstances under which he acquired one share of stock in the
respondent bank purposely to exercise the right of inspection do not argue in favor of
his good faith and proper motivation. Admittedly he sought to be a stockholder in order
to pry into transactions entered into by the respondent bank even before he became a
stockholder. His obvious purpose was to arm himself with materials which he can use
against the respondent bank for acts done by the latter when the petitioner was a total
stranger to the same. He could have been impelled by a laudable sense of civil
consciousness, but it could not be said that his purpose is germane to his interest as a
stockholder.
4. ID.; ID.; PROVIDES THAT CORPORATIONS CREATED BY CHARTERS SHALL BE
GOVERNED PRIMARILY BY SAID CHARTERS; RESPONDENT BANK WITH A
CHARTER OF ITS OWN IS NOT GOVERNED BY THE CORPORATION CODE. The
Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is
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not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code
provides: "SEC. 4. Corporations created by special laws or charters. Corporations
created by special laws or charters shall be governed primarily by the provisions of the special
law or charter creating them or applicable to them, supplemented by the provisions of this
Code, insofar as they are applicable." The provision of Section 74 of Batas Pambansa Blg. 68
of the new Corporation Code with respect to the right of a stockholder to demand an inspection
or examination of the books of the corporation may not be reconciled with the above-quoted
provisions of the charter of the bank. It is not correct to claim, therefore, that the right of
inspection under Section 74 of the new Corporation Code may apply in a supplementary
capacity to the charter of the respondent bank.
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a
special civil action for mandamus against the herein respondent praying that the latter be
ordered to allow him to look into the books and records of the respondent bank in order to
satisfy himself as to the truth of the published reports that the respondent has guaranteed the
obligation of Southern Negros Development Corporation in the purchase of a US$23 million
sugar-mill to be financed by Japanese suppliers and financiers; that the respondent is
financing the construction of the P21 million Cebu-Mactan Bridge to be constructed by V.C.
Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc.,
as well as to inquire into the validity of said transactions. The petitioner has alleged had his
written request for such examination was denied by the respondent. The trial court having
dismissed the petition for mandamus, the instant appeal to review the said dismissal was filed.
LLjur
The facts that gave rise to the subject controversy have been set forth by the trial court in the
decision herein sought to be reviewed, as follows:
"'Briefly stated, the following facts gathered from the stipulation of the parties served as the
backdrop of this proceeding.
'Previous to the present action, the petitioner instituted several cases in this Court questioning
different transactions entered into by the Bank with other parties. First among them is Civil
Case No. 69345 filed on April 27, 1967, by petitioner as a taxpayer versus Sec. Antonio
Raquiza of Public Works and Communications, the Commissioner of Public Highways, the
Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation, Allis Chalmers and
General Motors Corporation. In the course of the hearing of said case on August 3, 1967, the
personality of herein petitioner to sue the bank and question the letters of credit it has
extended for the importation by the Republic of the Philippines of public works equipment
intended for the massive development program of the President was raised. In view thereof,
he expressed and made known his intention to acquire one share of stock from Congressman
Justiniano Montano which, on the following day, August 30, 1967, was transferred in his name
in the books of the Bank.
'Subsequent to his aforementioned acquisition of one share of stock of the Bank, petitioner, in
his dual capacity as a taxpayer and stockholder, filed the following cases involving the bank or
the members of its Board of Directors to wit:
1

'1. On October 18, 1967, Civil Case No. 71044 versus the Board of Directors of the "Sec. 51. . . . The record of all business transactions of the corporation and the minutes of any
Bank; the National Investment and Development Corp., Marubeni Iida Co., Ltd., and meeting shall be open to the inspection of any director, member or stockholder of the
Agro-Inc. Dev. Co. or Saravia;
corporation at reasonable hours."
'2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other
Directors of the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill
Integrated Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and
Batangas Sugar Central Inc.;

Petitioner maintains that the above-quoted provision does not justify the qualification made by
the lower court that the inspection of corporate records may be denied on the ground that it is
intended for an improper motive or purpose, the law having granted such right to a stockholder
in clear and unconditional terms. He further argues that, assuming that a proper motive or
purpose for the desired examination is necessary for its exercise, there is nothing improper in
'3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the Directors his purpose for asking for the examination and inspection herein involved.
of both the PNB and DBP;
Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as
'On January 11, 1969, however, petitioner addressed a letter to the President of the amended, regarding the right of a stockholder to inspect and examine the books and records
Bank (Annex A, Pet.), requesting submission to look into the records of its transactions of a corporation. The former Corporation Law (Act No. 1459, as amended) has been replaced
covering the purchase of a sugar central by the Southern Negros Development Corp. to by Batas Pambansa Blg. 68, otherwise known as the "Corporation Code of the Philippines."
be financed by Japanese suppliers and financiers; its financing of the Cebu-Mactan The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been
Bridge to be constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar retained, but with some modifications. The second and third paragraphs of Section 74 of Batas
Mills in Iloilo. On January 23, 1969, the Asst. Vice President and Legal Counsel of the Pambansa Blg. 68 provide the following:
Bank answered petitioner's letter denying his request for being not germane to his
interest as a one share stockholder and for the cloud of doubt as to his real intention "The records of all business transactions of the corporation and the minutes of any meeting
and purpose in acquiring said share. (Annex B, Pet.) In view of the Bank's refusal, the shall be open to inspection by any director, trustee, stockholder or member of the corporation
petitioner instituted this action.'" (Rollo, pp. 16-18.)
at reasonable hours on business days and he may demand, in writing, for a copy of excerpts
from said records or minutes, at his expense.
The petitioner has adopted the above finding of facts made by the trial court in its brief
which he characterized as having been "correctly stated." (Petitioner-Appellant's Brief, Any officer or agent of the corporation who shall refuse to allow any director, trustee,
pp. 5-7.) LLjur
stockholder or member of the corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code, shall be liable to such director,
The court a quo denied the prayer of the petitioner that he be allowed to examine and trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
inspect the books and records of the respondent bank regarding the transactions which shall be punishable under Section 144 of this Code: Provided, That if such refusal is
mentioned on the grounds that the right of a stockholder to inspect the record of the made pursuant to a resolution or order of the board of directors or trustees, the liability under
business transactions of a corporation granted under Section 51 of the former this section for such action shall be imposed upon the directors or trustees who voted for such
Corporation Law (Act No. 1459, as amended) is not absolute, but is limited to purposes refusal: and Provided, further, That it shall be a defense to any action under this section that
reasonably related to the interest of the stockholder, must be asked for in good faith for the person demanding to examine and copy excerpts from the corporation's records and
a specific and honest purpose and not gratify curiosity or for speculative or vicious minutes has improperly used any information secured through any prior examination of the
purposes; that such examination would violate the confidentiality of the records of the records or minutes of such corporation or of any other corporation, or was not acting in good
respondent bank as provided in Section 16 of its charter, Republic Act No. 1300, as faith or for a legitimate purpose in making his demand."
amended; and that the petitioner has not exhausted his administrative remedies.
As may be noted from the above-quoted provisions, among the changes introduced in the new
Assailing the conclusions of the lower court, the petitioner has assigned the single error Code with respect to the right of inspection granted to a stockholder are the following the
to the lower court of having ruled that his alleged improper motive in asking for an records must be kept at the principal office of the corporation; the inspection must be made on
examination of the books and records of the respondent bank disqualifies him to business days; the stockholder may demand a copy of the excerpts of the records or minutes;
exercise the right of a stockholder to such inspection under Section 51 of Act No. 1459, and the refusal to allow such inspection shall subject the erring officer or agent of the
as amended. Said provision reads in part as follows:
corporation to civil and criminal liabilities. However, while seemingly enlarging the right of
inspection, the new Code has prescribed limitations to the same. It is now expressly required
as a condition for such examination that the one requesting it must not have been guilty of
using improperly any information secured through a prior examination, and that the person
LEX BELLUM

asking for such examination must be "acting in good faith and for a legitimate purpose 'Sec. 30. Penalties for violation of the provisions of this Act. Any director, officer, employee,
in making his demand."
or agent of the Bank, who violates or permits the violation of any of the provisions of this Act,
or any person aiding or abetting the violations of any of the provisions of this Act, shall be
The unqualified provision on the right of inspection previously contained in Section 51, punished by a fine not to exceed ten thousand pesos or by imprisonment of not more than five
Act No. 1459, as amended, no longer holds true under the provisions of the present years, or both such fine and imprisonment.'"
law. The argument of the petitioner that the right granted to him under Section 51 of the
former Corporation Law should not be dependent on the propriety of his motive or The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is
purpose in asking for the inspection of the books of the respondent bank loses not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code
whatever validity it might have had before the amendment of the law. If there is any provides:
doubt in the correctness of the ruling of the trial court that the right of inspection granted
under Section 51 of the old Corporation Law must be dependent on a showing of "SEC. 4. Corporations created by special laws or charters. Corporations created by special
proper motive on the part of the stockholder demanding the same, it is now dissipated laws or charters shall be governed primarily by the provisions of the special law or charter
by the clear language of the pertinent provision contained in Section 74 of Batas creating them or applicable to them, supplemented by the provisions of this Code, insofar as
Pambansa Blg 68.
they are applicable."
Although the petitioner has claimed that he has justifiable motives in seeking the
inspection of the books of the respondent bank, he has not set forth the reasons and
the purposes for which he desires such inspection, except to satisfy himself as to the
truth of published reports regarding certain transactions entered into by the respondent
bank and to inquire into their validity. The circumstances under which he acquired one
share of stock in the respondent bank purposely to exercise the right of inspection do
not argue in favor of his good faith and proper motivation. Admittedly he sought to be a
stockholder in order to pry into transactions entered into by the respondent bank even
before he became a stockholder. His obvious purpose was to arm himself with
materials which he can use against the respondent bank for acts done by the latter
when the petitioner was a total stranger to the same. He could have been impelled by a
laudable sense of civic consciousness, but it could not be said that his purpose is
germane to his interest as a stockholder.
We also find merit in the contention of the respondent bank that the inspection sought
to be exercised by the petitioner would be violative of the provisions of its charter.
(Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the said charter
provide respectively as follows:
"'Sec. 15. Inspection by Department of Supervision and Examination of the Central
Bank. The National Bank shall be subject to inspection by the Department of
Supervision and Examination of the Central Bank.'

The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with
respect to the right of a stockholder to demand an inspection or examination of the books of
the corporation may not be reconciled with the above quoted provisions of the charter of the
respondent bank. It is not correct to claim, therefore, that the right of inspection under Section
74 of the new Corporation Code may apply in a supplementary capacity to the charter of the
respondent bank. cdrep
WHEREFORE, the petition is hereby DISMISSED, without costs.
(Associated Bank v. Court of Appeals, G.R. No. 123793, [June 29, 1998], 353 PHIL 702-720)
SYNOPSIS
After the merger of Associated Banking Corporation (ABC) and Citizens Bank and Trust
Company (CBTC), the private respondent executed in favor of Associated Bank a promissory
note whereby respondent undertook to pay the bank the sum of P2,500,000.00. The merger
agreement provided that all references to CBTC shall be deemed for all intents and purposes
references to the surviving bank, ABC, as if such references were direct references to ABC.
When private respondent failed to pay the remaining balance, Associated Bank, the surviving
corporation, sued for collection. Private respondent denied the pertinent allegations in the
complaint and alleged that the complaint states no cause of action because the promissory
note was executed in favor of CBTC, not the Associated Bank. Private respondent was
declared as in default for failure to appear at the pre-trial conference and petitioner presented
its evidence ex-parte. Thereafter, the trial court rendered judgment ordering private respondent
to pay the bank his remaining balance plus interests and attorney's fees. On appeal, the Court
of Appeals held that petitioner, which was not privy to the transaction, had no cause of action
against private respondent and that the earlier merger between the two banks could not have
vested petitioner with any interest arising from the promissory note executed in favor of CBTC
after such merger. Hence, this recourse.

'Sec. 16. Confidential information. The Superintendent of Banks and the Auditor
General, or other officers designated by law to inspect or investigate the condition of
the National Bank, shall not reveal to any person other than the President of the
Philippines, the Secretary of Finance, and the Board of Directors the details of the
inspection or investigation, nor shall they give any information relative to the funds in its
custody, its current accounts or deposits belonging to private individuals, corporations,
or any other entity, except by order of a Court of competent jurisdiction.'
The Supreme Court held that the fact that the promissory note was executed after the
effectivity of the merger does not militate against the petitioner where the agreement clearly
provides that all contracts entered into in the name of CBTC shall be understood as pertaining
LEX BELLUM

to the surviving bank; that the merger provision being clear, plain and free of ambiguity,
the same must be given its literal meaning; and that to let the private respondent enjoy
the fruits of his loan without liability is unfair and unsconscionable, amounting to unjust
enrichment.
SYLLABUS
1. MERCANTILE LAW; CORPORATIONS; MERGER; EFFECT. Ordinarily, in the
merger of two or more existing corporations, one of the combining corporations
survives and continues the combined business, while the rest are dissolved and all their
rights, properties and liabilities are acquired by the surviving corporation. Although
there is a dissolution of the absorbed corporations, there is no winding up of their affairs
or liquidation of their assets, because the surviving corporation automatically acquires
all their rights, privileges and powers, as well as their liabilities. ACSaHc
2. ID.; ID.; ID., EFFECTIVITY THEREOF DETERMINED BY DATE OF SEC'S
ISSUANCE OF CERTIFICATE OF MERGER. The merger, however, does not
become effective upon the mere agreement of the constituent corporations. The
procedure to be followed is prescribed under the Corporation Code. Section 79 of said
Code requires the approval by the Securities and Exchange Commission (SEC) of the
articles of merger which, in turn, must have been duly approved by a majority of the
respective stockholders of the constituent corporations. The same provision further
states that the merger shall be effective only upon the issuance by the SEC of a
certificate of merger.
3. ID.; ID.; ID.; AGREEMENT PROVIDING THAT ALL CONTRACTS, IRRESPECTIVE
OF DATE OF EXECUTION, ENTERED INTO BY ABSORBED BANK, SHALL PERTAIN
TO SURVIVING BANK EMPOWERS SERVING BANK TO COLLECT OBLIGATIONS
DUE TO ABSORBED BANK; CASE AT BAR. The fact that the promissory note was
executed after the effectivity date of the merger does not militate against petitioner. The
agreement itself clearly provides that all contracts irrespective of the date of
execution entered into in the name of CBTC shall be understood as pertaining to the
surviving bank, herein petitioner. Since, in contrast to the earlier aforequoted provision,
the latter clause no longer specifically refers only to contracts existing at the time of the
merger, no distinction clause must have been deliberately included in the agreement in
order to protect the interests of the combining banks; specifically, to avoid giving the
merger agreement a farcical interpretation aimed at evading fulfillment of a due
obligation. Thus, although the subject promissory note names CBTC as the payee, the
reference to CBTC in the note shall be construed, under the very provisions of the
merger agreement, as a reference to petitioner bank, as if such reference [was a] direct
reference to the latter for all intents and purposes. No other construction can be given
to the unequivocal stipulation. Being clear, plain and free of ambiguity, the provision
must be given its literal meaning and applied without a convoluted interpretation. Verba
legis non est recedendum. In light of the foregoing, the Court holds that petitioner has a
valid cause of action against private respondent. Clearly, the failure of private
respondent to honor his obligation under the promissory note constitutes a violation of
petitioners right to collect the proceeds of the loan it extended to the former.

BAR. Petitioner's suit for collection of a sum of money was based on a written contract and
prescribes after ten years from the time its right of action arose. Sarmiento's obligation under
the promissory note became due and demandable on March 6, 1978. Petitioner's complaint
was instituted on August 22, 1985, before the lapse of the ten-year prescriptive period.
Definitely, petitioner still had every right to commence suit against the payor/obligor, the private
respondent herein.
5. REMEDIAL LAW; ACTIONS; LACHES; APPLIED TO AVOID INEQUITABLE SITUATION OR
INJUSTICE; INAPPLICABLE WHERE CLAIM WAS FILED WITHIN PRESCRIPTIVE PERIOD.
Neither is petitioner's action barred by laches. The principle of laches is a creation of equity,
which is applied not to penalize neglect or failure to assert a right within a reasonable time, but
rather to avoid recognizing a right when to do so would result in a clearly inequitable situation
or in an injustice. To require private respondent to pay the remaining balance of his loan is
certainly not inequitable or unjust. What would be manifestly unjust and inequitable is his
contention that CBTC is the proper party to proceed against him despite the fact, which he
himself asserts, that CBTC's corporate personality has been dissolved by virtue of its merger
with petitioner. To hold that no payee/obligee exists and to let private respondent enjoy the
fruits of his loan without liability is surely most unfair and unconscionable, amounting to unjust
enrichment at the expense of petitioner. Besides, this Court has held that the doctrine of
laches is inapplicable where the claim was filed within the prescriptive period set forth under
the law.
6. CIVIL LAW; OBLIGATIONS AND CONTRACTS; STIPULATION POUR AUTRUI;
CONSTRUED. A stipulation pour autruiis one in favor of a third person who may demand its
fulfillment, provided he communicated his acceptance to the obligor before its revocation. An
incidental benefit or interest, which another person gains, is not sufficient. The contracting
parties must have clearly and deliberately conferred a favor upon a third person.
7. ID.; ID.; ID.; REQUISITES. Florentino vs. Encarnacion, Sr. enumerates the requisites for
such contract: (1) the stipulation in favor of a third person must be a part of the contract, and
not the contract itself; (2) the favorable stipulation should not be conditioned or compensated
by any kind of obligation; and (3) neither of the contracting parties bears the legal
representation or authorization of the third party. The "fairest test" in determining whether the
third person's interest in a contract is a stipulation pour autrui or merely an incidental interest is
to examine the intention of the parties as disclosed by their contract.
8. REMEDIAL LAW; EVIDENCE; RES IPSA LOQUITUR BAR. Private respondent also
claims that he received no consideration for the promissory note and, in support thereof, cites
petitioner's failure to submit any proof of his loan application and of his actual receipt of the
amount loaned. These arguments deserve no merit. Res ipsa loquitur. The instrument, bearing
the signature of private respondent, speaks for itself. Respondent Sarmiento has not
questioned the genuineness and due execution thereof. No further proof is necessary to show
that he undertook to pay P2,500.000, plus interest, to petitioner bank on or before March 6,
1978. This he failed to do, as testified to by petitioner's accountant. The latter presented before
the trial court private respondent's statement of account as of September 30, 1986, showing
an outstanding balance of P4,689,413.63 after deducting P1,000,000.00 paid seven months
earlier.

9. ID.; ID.; PARTIAL PAYMENT, AN EXPRESS ACKNOWLEDGMENT OF OBLIGATION.

4. CIVIL LAW; PRESCRIPTION OF ACTIONS; COLLECTION OF SUM OF MONEY Furthermore such partial payment is equivalent to an express acknowledgment of his
BASED ON WRITTEN CONTRACT PRESCRIBES IN TEN (10) YEARS; CASE AT
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obligation. Private respondent can no longer backtrack and deny his liability to
petitioner bank. A person cannot accept and reject the same instrument. TCaAHI
. . . [T]he defendant denied all the pertinent allegations in the complaint and alleged as
affirmative and[/]or special defenses that the complaint states no valid cause of action; that the
In a merger, does the surviving corporation have a right to enforce a contract entered plaintiff is not the proper party in interest because the promissory note was executed in favor
into by the absorbed company subsequent to the date of the merger agreement, but of Citizens Bank and Trust Company; that the promissory note does not accurately reflect the
prior to the issuance of a certificate of merger by the Securities and Exchange true intention and agreement of the parties; that terms and conditions of the promissory note
Commission? dctai
are onerous and must be construed against the creditor-payee bank; that several partial
payments made in the promissory note are not properly applied; that the present action is
The Case
premature; that as compulsory counterclaim the defendant prays for attorney's fees, moral
This is a petition for review under Rule 45 of the Rules of Court, seeking to set aside damages and expenses of litigation.
the Decision 1 of the Court of Appeals 2 in CA-GR CV No. 26465 promulgated on
January 30, 1996, which answered the above question in the negative. The challenged On May 22, 1986, the defendant was declared as if in default for failure to appear at the PreDecision reversed and set aside the October 17, 1986 Decision 3 in Civil Case No. 85- Trial Conference despite due notice.
32243, promulgated by the Regional Trial Court of Manila, Branch 48, which disposed
of the controversy in favor of herein petitioner as follows: 4
A Motion to Lift Order of Default and/or Reconsideration of Order dated May 22, 1986 was filed
by defendant's counsel which was denied by the Court in [an] order dated September 16, 1986
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff Associated Bank. and the plaintiff was allowed to present its evidence before the Court ex-parte on October 16,
The defendant Lorenzo Sarmiento, Jr. is ordered to pay plaintiff:
1986.
1. The amount of P4,689,413.63 with interest thereon at 14% per annum until fully paid;
2. The amount of P200,000.00 as and for attorney's fees; and
At the hearing before the Court ex-parte, Esteban C. Ocampo testified that . . . he is an
3. The costs of suit."
accountant of the Loans and Discount Department of the plaintiff bank; that as such, he
supervises the accounting section of the bank, he counterchecks all the transactions that
On the other hand, the Court of Appeals resolved the case in this wise: 5
transpired during the day and is responsible for all the accounts and records and other things
that may[ ]be assigned to the Loans and Discount Department; that he knows the [D]efendant
"WHEREFORE, premises considered, the decision appealed from, dated October 17, Lorenzo Sarmiento, Jr. because he has an outstanding loan with them as per their records;
1986 is REVERSED and SET ASIDE and another judgment rendered DISMISSING that Lorenzo Sarmiento, Jr. executed a promissory note No. TL-2649-77 dated September 7,
plaintiff-appellee's complaint, docketed as Civil Case No. 85-32243. There is no 1977 in the amount of P2,500,000.00 (Exhibit A); that Associated Banking Corporation and the
pronouncement as to costs."
Citizens Bank and Trust Company merged to form one banking corporation known as the
Associated Citizens Bank and is now known as Associated Bank by virtue of its Amended
The Facts
Articles of Incorporation; that there were partial payments made but not full; that the defendant
The undisputed factual antecedents, as narrated by the trial court and adopted by has not paid his obligation as evidenced by the latest statement of account (Exh. B); that as
public respondent, are as follows: 6
per statement of account the outstanding obligation of the defendant is P5,689,413.63 less
P1,000,000.00 or P4,689,413.63 (Exh. B, B-1); that a demand letter dated June 6, 1985 was
". . . [O]n or about September 16, 1975 Associated Banking Corporation and Citizens sent by the bank thru its counsel (Exh. C) which was received by the defendant on November
Bank and Trust Company merged to form just one banking corporation known as 12, 1985 (Exh. C, C-1, C-2, C-3); that the defendant paid only P1,000,000.00 which is
Associated Citizens Bank, the surviving bank. On or about March 10, 1981, the reflected in the Exhibit C."
Associated Citizens Bank changed its corporate name to Associated Bank by virtue of
the Amended Articles of Incorporation. On September 7, 1977, the defendant executed Based on the evidence presented by petitioner, the trial court ordered Respondent Sarmiento
in favor of Associated Bank a promissory note whereby the former undertook to pay the to pay the bank his remaining balance plus interests and attorney's fees. In his appeal,
latter the sum of P2,500,000.00 payable on or before March 6, 1978. As per said Sarmiento assigned to the trial court several errors, namely: 7
promissory note, the defendant agreed to pay interest at 14% per annum, 3% per
annum in the form of liquidated damages, compounded interests, and attorney's fees, "I The [trial court] erred in denying appellant's motion to dismiss appellee bank's complaint on
in case of litigation equivalent to 10% of the amount due. The defendant, to date, still the ground of lack of cause of action and for being barred by prescription and laches.
owes plaintiff bank the amount of P2,250,000.00 exclusive of interest and other II The same lower court erred in admitting plaintiff-appellee bank's amended complaint while
charges. Despite repeated demands the defendant failed to pay the amount due.
defendant-appellant's motion to dismiss appellee bank's original complaint and using/availing
[itself of] the new additional allegations as bases in denial of said appellant's motion and in the
xxx xxx xxx
LEX BELLUM

interpretation and application of the agreement of merger and Section 80 of BP Blg. 68, held that the Associated Bank had no cause of action against Lorenzo Sarmiento Jr., since
Corporation Code of the Philippines.
said bank was not privy to the promissory note executed by Sarmiento in favor of Citizens
Bank and Trust Company (CBTC). The court ruled that the earlier merger between the two
III The [trial court] erred and gravely abuse[d] its discretion in rendering the two as if in banks could not have vested Associated Bank with any interest arising from the promissory
default orders dated May 22, 1986 and September 16, 1986 and in not reconsidering note executed in favor of CBTC after such merger.
the same upon technical grounds which in effect subvert the best primordial interest of
substantial justice and equity.
Thus, as earlier stated, Respondent Court set aside the decision of the trial court and
dismissed the complaint. Petitioner now comes to us for a reversal of this ruling. 8
IV The court a quo erred in issuing the orders dated May 22, 1986 and September 16,
1986 declaring appellant as if in default due to non-appearance of appellant's attending Issues
counsel who had resigned from the law firm and while the parties [were] negotiating for In its petition, petitioner cites the following "reasons": 9
settlement of the case and after a one million peso payment had in fact been paid to
appellee bank for appellant's account at the start of such negotiation on February 18, "I The Court of Appeals erred in reversing the decision of the trial court and in declaring that
1986 as act of earnest desire to settle the obligation in good faith by the interested petitioner has no cause of action against respondent over the promissory note.
parties.
II The Court of Appeals also erred in declaring that, since the promissory note was executed in
V The lower court erred in according credence to appellee bank's Exhibit B statement favor of Citizens Bank and Trust Company two years after the merger between Associated
of account which had been merely requested by its counsel during the trial and bearing Banking Corporation and Citizens Bank and Trust Company, respondent is not liable to
date of September 30, 1986.
petitioner because there is no privity of contract between respondent and Associated Bank.
LLjur
VI The lower court erred in accepting and giving credence to appellee bank's 27-yearold witness Esteban C. Ocampo as of the date he testified on October 16, 1986, and III The Court of Appeals erred when it ruled that petitioner, despite the merger between
therefore, he was merely an eighteen-year-old minor when appellant supposedly petitioner and Citizens Bank and Trust Company, is not a real party in interest insofar as the
incurred the foisted obligation under the subject PN No. TL-2649-77 dated September promissory note executed in favor of the merger."
7, 1977, Exhibit A of appellee bank.
In a nutshell, the main issue is whether Associated Bank, the surviving corporation, may
VII The [trial court] erred in adopting appellee bank's Exhibit B dated September 30, enforce the promissory note made by private respondent in favor of CBTC, the absorbed
1986 in its decision given in open court on October 17, 1986 which exacted eighteen company, after the merger agreement had been signed.
percent (18%) per annum on the foisted principal amount of P2.5 million when the
subject PN, Exhibit A, stipulated only fourteen percent (14%) per annum and which was The Court's Ruling: The petition is impressed with merit.
actually prayed for in appellee bank's original and amended complaints.
The Main Issue:
VIII The appealed decision of the lower court erred in not considering at all appellant's Associated Bank Assumed
affirmative defenses that (1) the subject PN No. TL-2649-77 for P2.5 million dated
September 7, 1977, is merely an accommodation pour autrui bereft of any actual All Rights of CBTC
consideration to appellant himself and (2) the subject PN is a contract of adhesion,
hence, [it] needs [to] be strictly construed against appellee bank assuming for Ordinarily, in the merger of two or more existing corporations, one of the combining
granted that it has the right to enforce and seek collection thereof.
corporations survives and continues the combined business, while the rest are dissolved and
all their rights, properties and liabilities are acquired by the surviving corporation. 10 Although
IX The lower court should have at least allowed appellant the opportunity to present there is a dissolution of the absorbed corporations, there is no winding up of their affairs or
countervailing evidence considering the huge amounts claimed by appellee bank liquidation of their assets, because the surviving corporation automatically acquires all their
(principal sum of P2.5 million which including accrued interests, penalties and cost of rights, privileges and powers, as well as their liabilities. 11
litigation totaled P4,689,413.63) and appellant's affirmative defenses pursuant to
substantial justice and equity."
The merger, however, does not become effective upon the mere agreement of the constituent
The appellate court, however, found no need to tackle all the assigned errors and corporations. The procedure to be followed is prescribed under the Corporation Code. 12 12a
limited itself to the question of "whether [herein petitioner had] established or proven a 12b Section 79 of said Code requires the approval by the Securities and Exchange
cause of action against [herein private respondent]." Accordingly, Respondent Court Commission (SEC) of the articles of merger which, in turn, must have been duly approved by a
LEX BELLUM

majority of the respective stockholders of the constituent corporations. The same

provision further states that the merger shall be effective only upon the issuance by the
SEC of a certificate of merger. The effectivity date of the merger is crucial for
determining when the merged or absorbed corporation ceases to exist; and when its
rights, privileges, properties as well as liabilities pass on to the surviving corporation.
Consistent with the aforementioned Section 79, the September 16, 1975 Agreement of
Merger, 13 which Associated Banking Corporation (ABC) and Citizens Bank and Trust
Company (CBTC) entered into, provided that its effectivity "shall, for all intents and
purposes, be the date when the necessary papers to carry out this [m]erger shall have
been approved by the Securities and Exchange Commission." 14 As to the transfer of
the properties of CBTC to ABC, the agreement provides:
"10. Upon effective date of the Merger, all rights, privileges, powers, immunities,
franchises, assets and property of [CBTC], whether real, personal or mixed, and
including [CBTC's] goodwill and tradename, and all debts due to [CBTC] on whatever
act, and all other things in action belonging to [CBTC] as of the effective date of the
[m]erger shall be vested in [ABC], the SURVIVING BANK, without need of further act or
deed, unless by express requirements of law or of a government agency, any separate
or specific deed of conveyance to legally effect the transfer or assignment of any kind of
property [or] asset is required, in which case such document or deed shall be executed
accordingly; and all property, rights, privileges, powers, immunities, franchises and all
appointments, designations and nominations, and all other rights and interests of
[CBTC] as trustee, executor, administrator, registrar of stocks and bonds, guardian of
estates, assignee, receiver, trustee of estates of persons mentally ill and in every other
fiduciary capacity, and all and every other interest of [CBTC] shall thereafter be
effectually the property of [ABC] as they were of [CBTC], and title to any real estate,
whether by deed or otherwise, vested in [CBTC] shall not revert or be in any way
impaired by reason thereof; provided, however, that all rights of creditors and all liens
upon any property of [CBTC] shall be preserved and unimpaired and all debts,
liabilities, obligations, duties and undertakings of [CBTC], whether contractual or
otherwise, expressed or implied, actual or contingent, shall henceforth attach to [ABC]
which shall be responsible therefor and may be enforced against [ABC] to the same
extent as if the same debts liabilities, obligations, duties and undertakings have been
originally incurred or contracted by [ABC], subject, however, to all rights, privileges,
defenses, set-offs and counterclaims which [CBTC] has or might have and which shall
pertain to [ABC]." 15
The records do not show when the SEC approved the merger. Private respondent's
theory is that it took effect on the date of the execution of the agreement itself, which
was September 16, 1975. Private respondent contends that, since he issued the
promissory note to CBTC on September 7, 1977 two years after the merger
agreement had been executed CBTC could not have conveyed or transferred to
petitioner its interest in the said note, which was not yet in existence at the time of the
merger. Therefore, petitioner, the surviving bank, has no right to enforce the promissory
note on private respondent; such right properly pertains only to CBTC.
LEX BELLUM

Assuming that the effectivity date of the merger was the date of its execution, we still cannot
agree that petitioner no longer has any interest in the promissory note. A closer perusal of the
merger agreement leads to a different conclusion. The provision quoted earlier has this other
clause:
"Upon the effective date of the [m]erger, all references to [CBTC] in any deed, documents, or
other papers of whatever kind or nature and wherever found shall be deemed for all intents
and purposes, references to [ABC], the SURVIVING BANK, as if such references were direct
references to [ABC]. . . ." 16 (Emphasis supplied)
Thus, the fact that the promissory note was executed after the effectivity date of the merger
does not militate against petitioner. The agreement itself clearly provides that all contracts
irrespective of the date of execution entered into in the name of CBTC shall be understood
as pertaining to the surviving bank, herein petitioner. Since, in contrast to the earlier
aforequoted provision, the latter clause no longer specifically refers only to contracts existing
at the time of the merger, no distinction should be made. The clause must have been
deliberately included in the agreement in order to protect the interests of the combining banks;
specifically, to avoid giving the merger agreement a farcical interpretation aimed at evading
fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the reference to
CBTC in the note shall be construed, under the very provisions of the merger agreement, as a
reference to petitioner bank, "as if such reference [was a] direct reference to" the latter "for all
intents and purposes."
No other construction can be given to the unequivocal stipulation. Being clear, plain and free of
ambiguity, the provision must be given its literal meaning 17 and applied without a convoluted
interpretation. Verba legis non est recedendum. 18
In light of the foregoing, the Court holds that petitioner has a valid cause of action against
private respondent. Clearly, the failure of private respondent to honor his obligation under the
promissory note constitutes a violation of petitioner's right to collect the proceeds of the loan it
extended to the former.
Secondary Issues:
Prescription Laches, Contract
Pour Autrui, Lack of Consideration
No Prescription or Laches
Private respondent's claim that the action has prescribed, pursuant to Article 1149 of the Civil
Code, is legally untenable. Petitioner's suit for collection of a sum of money was based on a
written contract and prescribes after ten years from the time its right of action arose. 19
Sarmiento's obligation under the promissory note became due and demandable on March 6,
1978. Petitioner's complaint was instituted on August 22, 1985, before the lapse of the tenyear prescriptive period. Definitely, petitioner still had every right to commence suit against the
payor/obligor, the private respondent herein.
7

Neither is petitioner's action barred by laches. The principle of laches is a creation of

equity, which is applied not to penalize neglect or failure to assert a right within a
reasonable time, but rather to avoid recognizing a right when to do so would result in a
clearly inequitable situation 20 or in an injustice. 21 To require private respondent to
pay the remaining balance of his loan is certainly not inequitable or unjust. What would
be manifestly unjust and inequitable is his contention that CBTC is the proper party to
proceed against him despite the fact, which he himself asserts, that CBTC's corporate
personality has been dissolved by virtue of its merger with petitioner. To hold that no
payee/obligee exists and to let private respondent enjoy the fruits of his loan without
liability is surely most unfair and unconscionable, amounting to unjust enrichment at the
expense of petitioner. Besides, this Court has held that the doctrine of laches is
inapplicable where the claim was filed within the prescriptive period set forth under the
law. 22
No Contract
Pour Autrui

legal remedy of a third-party complaint. 26 That he made no effort to implead such third person
proves the hollowness of his arguments. cdrep
Consideration
Private respondent also claims that he received no consideration for the promissory note and,
in support thereof, cites petitioner's failure to submit any proof of his loan application and of his
actual receipt of the amount loaned. These arguments deserve no merit. Res ipsa loquitur. The
instrument, bearing the signature of private respondent, speaks for itself. Respondent
Sarmiento has not questioned the genuineness and due execution thereof. No further proof is
necessary to show that he undertook to pay P2,500,000, plus interest, to petitioner bank on or
before March 6, 1978. This he failed to do, as testified to by petitioner's accountant. The latter
presented before the trial court private respondent's statement of account 27 as of September
30, 1986, showing an outstanding balance of P4,689,413.63 after deducting P1,000,000.00
paid seven months earlier. Furthermore, such partial payment is equivalent to an express
acknowledgment of his obligation. Private respondent can no longer backtrack and deny his
liability to petitioner bank. "A person cannot accept and reject the same instrument." 28

Private respondent, while not denying that he executed the promissory note in the
amount of P2,500,000 in favor of CBTC, offers the alternative defense that said note WHEREFORE, the petition is GRANTED. The assailed Decision is SET ASIDE and the
was a contract Pour autrui.
Decision of RTC-Manila, Branch 48, in Civil Case No. 26465 is hereby REINSTATED.
A stipulation pour autrui is one in favor of a third person who may demand its fulfillment,
provided he communicated his acceptance to the obligor before its revocation. An
incidental benefit or interest, which another person gains, is not sufficient. The
contracting parties must have clearly and deliberately conferred a favor upon a third
person. 23

(Mindanao Savings and Loan Ass'n, Inc. v. Willkom, G.R. No. 178618, [October 20, 2010], 648
PHIL 505-519)
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Mindanao
Savings and Loan Association, Inc. (MSLAI), represented by its liquidator, Philippine Deposit
Insurance Corporation (PDIC), against respondents Edward R. Willkom (Willkom); Gilda Go
(Go); Remedios Uy (Uy); Malayo Bantuas (sheriff Bantuas), in his capacity as sheriff of the
Regional Trial Court (RTC), Branch 3 of Iligan City; and the Register of Deeds of Cagayan de
Oro City. MSLAI seeks the reversal and setting aside of the Court of Appeals 1 (CA) Decision
2 dated March 21, 2007 and Resolution 3 dated June 1, 2007 in CA-G.R. CV No. 58337.
SEIcAD

Florentino vs. Encarnacion Sr. 24 enumerates the requisites for such contract: (1) the
stipulation in favor of a third person must be a part of the contract, and not the contract
itself; (2) the favorable stipulation should not be conditioned or compensated by any
kind of obligation; and (3) neither of the contracting parties bears the legal
representation or authorization of the third party. The "fairest test" in determining
whether the third person's interest in a contract is a stipulation pour autrui or merely an
incidental interest is to examine the intention of the parties as disclosed by their The controversy stemmed from the following facts:
contract. 25
The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan
We carefully and thoroughly perused the promissory note, but found no stipulation at all Association, Inc. (DSLAI) are entities duly registered with the Securities and Exchange
that would even resemble a provision in consideration of a third person. The instrument Commission (SEC) under Registry Nos. 34869 and 32388, respectively, primarily engaged in
itself does not disclose the purpose of the loan contract. It merely lays down the terms the business of granting loans and receiving deposits from the general public, and treated as
of payment and the penalties incurred for failure to pay upon maturity. It is patently banks. 4
devoid of any indication that a benefit or interest was thereby created in favor of a
person other than the contracting parties. In fact, in no part of the instrument is there Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving
any mention of a third party at all. Except for his barefaced statement, no evidence was corporation. 5 The articles of merger were not registered with the SEC due to incomplete
proffered by private respondent to support his argument. Accordingly, his contention documentation. 6 On August 12, 1985, DSLAI changed its corporate name to MSLAI by way of
cannot be sustained. At any rate, if indeed the loan actually benefited a third person an amendment to Article 1 of its Articles of Incorporation, but the amendment was approved by
who undertook to repay the bank, private respondent could have availed himself of the the SEC only on April 3, 1987. 7
LEX BELLUM

Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and approved the Corporation Code of the Philippines. Finally, they claimed that FISLAI is still a SEC
Board Resolution No. 86-002, assigning its assets in favor of DSLAI which in turn registered corporation and could not have been absorbed by petitioner. 14
assumed the former's liabilities. 8
On March 13, 1997, the RTC issued a resolution dismissing the case for lack of jurisdiction.
The business of MSLAI, however, failed. Hence, the Monetary Board of the Central The RTC declared that it could not annul the decision in Civil Case No. 111-697, having been
Bank of the Philippines ordered its closure and placed it under receivership per rendered by a court of coordinate jurisdiction. 15
Monetary Board Resolution No. 922 dated August 31, 1990. The Monetary Board found
that MSLAI's financial condition was one of insolvency, and for it to continue in business On appeal, MSLAI failed to obtain a favorable decision when the CA affirmed the RTC
would involve probable loss to its depositors and creditors. On May 24, 1991, the resolution. The dispositive portion of the assailed CA Decision reads:
Monetary Board ordered the liquidation of MSLAI, with PDIC as its liquidator. 9
WHEREFORE, premises considered, the instant appeal is DENIED. The decision assailed is
It appears that prior to the closure of MSLAI, Uy filed with the RTC, Branch 3 of Iligan AFFIRMED.
City, an action for collection of sum of money against FISLAI, docketed as Civil Case
No. 111-697. On October 19, 1989, the RTC issued a summary decision in favor of Uy, We REFER Sheriff Malayo B. Bantuas' violation of the Supreme Court Administrative Circular
directing defendants therein (which included FISLAI) to pay the former the sum of No. 12 to the Office of the Court Administrator for appropriate action. The Division Clerk of
P136,801.70, plus interest until full payment, 25% as attorney's fees, and the costs of Court is hereby DIRECTED to furnish the Office of the Court Administrator a copy of this
suit. The decision was modified by the CA by further ordering the third-party defendant decision.
therein to reimburse the payments that would be made by the defendants. The decision
became final and executory on February 21, 1992. A writ of execution was thereafter SO ORDERED. 16
issued. 10
The appellate court sustained the dismissal of petitioner's complaint not because it had no
On April 28, 1993, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI jurisdiction over the case, as held by the RTC, but on a different ground. Citing Associated
located in Cagayan de Oro City, and the notice of sale was subsequently published. Bank v. CA, 17 the CA ruled that there was no merger between FISLAI and MSLAI (formerly
During the public auction on May 17, 1993, Willkom was the highest bidder. A certificate DSLAI) for their failure to follow the procedure laid down by the Corporation Code for a valid
of sale was issued and eventually registered with the Register of Deeds of Cagayan de merger or consolidation. The CA then concluded that the two corporations retained their
Oro City. Upon the expiration of the redemption period, sheriff Bantuas issued the separate personalities; consequently, the claim against FISLAI is warranted, and the
sheriff's definite deed of sale. New certificates of title covering the subject properties subsequent sale of the levied properties at public auction is valid. The CA went on to say that
were issued in favor of Willkom. On September 20, 1994, Willkom sold one of the even if there had been a de facto merger between FISLAI and MSLAI (formerly DSLAI),
subject parcels of land to Go. 11
Willkom, having relied on the clean certificates of title, was an innocent purchaser for value,
whose right is superior to that of MSLAI. Furthermore, the alleged assignment of assets and
On June 14, 1995, MSLAI, represented by PDIC, filed before the RTC, Branch 41 of liabilities executed by FISLAI in favor of MSLAI was not binding on third parties because it was
Cagayan de Oro City, a complaint for Annulment of Sheriff's Sale, Cancellation of Title not registered. Finally, the CA said that the validity of the auction sale could not be invalidated
and Reconveyance of Properties against respondents. 12 MSLAI alleged that the sale by the fact that the sheriff had no authority to conduct the execution sale. 18
on execution of the subject properties was conducted without notice to it and PDIC; that
PDIC only came to know about the sale for the first time in February 1995 while Petitioner's motion for reconsideration was denied in a Resolution dated June 1, 2007. Hence,
discharging its mandate of liquidating MSLAI's assets; that the execution of the RTC the instant petition anchored on the following grounds:
decision in Civil Case No. 111-697 was illegal and contrary to law and jurisprudence,
not only because PDIC was not notified of the execution sale, but also because the THE HONORABLE COURT OF APPEALS, CAGAYAN DE ORO COMMITTED GRAVE AND
assets of an institution placed under receivership or liquidation such as MSLAI should REVERSIBLE ERROR WHEN:
be deemed in custodia legis and should be exempt from any order of garnishment, levy, (1) IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now MSLAI) AS THE
attachment, or execution. 13 SEIDAC
SURVIVING ENTITY IN THE MERGER BETWEEN DSLAI AND FISLAI AS A DEFENSE IN AN
ACTION OTHER THAN IN A QUO WARRANTO PROCEEDING UPON THE INSTITUTION OF
In answer, respondents averred that MSLAI had no cause of action against them or the THE SOLICITOR GENERAL AS MANDATED UNDER SECTION 20 OF BATAS PAMBANSA
right to recover the subject properties because MSLAI is a separate and distinct entity BLG. 68.
from FISLAI. They further contended that the "unofficial merger" between FISLAI and (2) IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI AND DSLAI WITH
DSLAI (now MSLAI) did not take effect considering that the merging companies did not DSLAI AS THE SURVIVING CORPORATION.
comply with the formalities and procedure for merger or consolidation as prescribed by
LEX BELLUM

(3) IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE NOT IN corporation governed by its own charter, the Code particularly mandates that a favorable
CUSTODIA LEGIS AND THEREFORE, EXEMPT FROM GARNISHMENT, LEVY, recommendation of the appropriate government agency should first be obtained. 30
ATTACHMENT OR EXECUTION. 19
In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not
To resolve this petition, we must address two basic questions: (1) Was the merger registered with the SEC due to incomplete documentation. Consequently, the SEC did not
between FISLAI and DSLAI (now MSLAI) valid and effective; and (2) Was there issue the required certificate of merger. Even if it is true that the Monetary Board of the Central
novation of the obligation by substituting the person of the debtor?
Bank of the Philippines recognized such merger, the fact remains that no certificate was issued
by the SEC. Such merger is still incomplete without the certification.
We answer both questions in the negative.
The issuance of the certificate of merger is crucial because not only does it bear out SEC's
Ordinarily, in the merger of two or more existing corporations, one of the corporations approval but it also marks the moment when the consequences of a merger take place. By
survives and continues the combined business, while the rest are dissolved and all their operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist
rights, properties, and liabilities are acquired by the surviving corporation. 20 Although but its rights and properties, as well as liabilities, shall be taken and deemed transferred to and
there is a dissolution of the absorbed or merged corporations, there is no winding up of vested in the surviving corporation. 31
their affairs or liquidation of their assets because the surviving corporation automatically
acquires all their rights, privileges, and powers, as well as their liabilities. 21
The same rule applies to consolidation which becomes effective not upon mere agreement of
the members but only upon issuance of the certificate of consolidation by the SEC. 32 When
The merger, however, does not become effective upon the mere agreement of the the SEC, upon processing and examining the articles of consolidation, is satisfied that the
constituent corporations. 22 Since a merger or consolidation involves fundamental consolidation of the corporations is not inconsistent with the provisions of the Corporation
changes in the corporation, as well as in the rights of stockholders and creditors, there Code and existing laws, it issues a certificate of consolidation which makes the reorganization
must be an express provision of law authorizing them. 23
official. 33 The new consolidated corporation comes into existence and the constituent
corporations are dissolved and cease to exist. 34
The steps necessary to accomplish a merger or consolidation, as provided for in
Sections 76, 24 77, 25 78, 26 and 79 27 of the Corporation Code, are:
There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as
respondents, the two corporations shall not be considered as one but two separate
(1) The board of each corporation draws up a plan of merger or consolidation. Such corporations. A corporation is an artificial being created by operation of law. It possesses the
plan must include any amendment, if necessary, to the articles of incorporation of the right of succession and such powers, attributes, and properties expressly authorized by law or
surviving corporation, or in case of consolidation, all the statements required in the incident to its existence. 35 It has a personality separate and distinct from the persons
articles of incorporation of a corporation.
composing it, as well as from any other legal entity to which it may be related. 36 Being
(2) Submission of plan to stockholders or members of each corporation for approval. A separate entities, the property of one cannot be considered the property of the other.
meeting must be called and at least two (2) weeks' notice must be sent to all
stockholders or members, personally or by registered mail. A summary of the plan must Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as
be attached to the notice. Vote of two-thirds of the members or of stockholders its assets and cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the
representing two-thirds of the outstanding capital stock will be needed. Appraisal rights, Deed of Assignment wherein FISLAI assigned its assets and properties to DSLAI, and the
when proper, must be respected.
latter assumed all the liabilities of the former. As provided in Article 1625 of the Civil Code, "an
(3) Execution of the formal agreement, referred to as the articles of merger o[r] assignment of credit, right or action shall produce no effect as against third persons, unless it
consolidation, by the corporate officers of each constituent corporation. These take the appears in a public instrument, or the instrument is recorded in the Registry of Property in case
place of the articles of incorporation of the consolidated corporation, or amend the the assignment involves real property." The certificates of title of the subject properties were
articles of incorporation of the surviving corporation.
clean and contained no annotation of the fact of assignment. Respondents cannot, therefore,
(4) Submission of said articles of merger or consolidation to the SEC for approval.
be faulted for enforcing their claim against FISLAI on the properties registered under its name.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the
least two weeks before. EACTSH
execution sale over the properties of FISLAI. With more reason can it not cause the
(6) Issuance of certificate of merger or consolidation. 28
cancellation of the title to the subject properties of Willkom and Go. CScTDE
Clearly, the merger shall only be effective upon the issuance of a certificate of merger
by the SEC, subject to its prior determination that the merger is not inconsistent with Petitioner cannot also anchor its right to annul the execution sale on the principle of novation.
the Corporation Code or existing laws. 29 Where a party to the merger is a special While it is true that DSLAI (now MSLAI) assumed all the liabilities of FISLAI, such assumption
did not result in novation as would release the latter from liability, thereby exempting its
LEX BELLUM

10

properties from execution. 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, by substituting
another in place of the debtor, or by subrogating a third person in the rights of the
creditor. 37

with defendant Eliscon all the charges awarded against Eliscon. In due time, Eliscon, Multi and
Babst filed their respective notices of appeal. On April 29, 1991, the Court of Appeals rendered
a decision modifying the appealed decision by ordering appellant Eliscon to pay the amount
awarded to the BPI. Additionally, the appellate court ordered Eliscon to reimburse appellants
Multi and Babst whatever amount they shall have paid in said Eliscon's behalf particularly
referring to the 3 letters of credit and other related charges. Hence, these consolidated
It is a rule that novation by substitution of debtor must always be made with the consent petitions seeking the review of the decision of the Court of Appeals.
of the creditor. 38 Article 1293 of the Civil Code is explicit, thus:
The Court found the petitions meritorious. The Court ruled that there exists a clear indication
Art. 1293. Novation which consists in substituting a new debtor in the place of the that BPI was aware of the assumption by DBP of the obligations of Eliscon. The authority
original one, may be made even without the knowledge or against the will of the latter, granted by BPI to its account officer to attend the creditors' meeting was an authority to
but not without the consent of the creditor. Payment by the new debtor gives him the represent the bank. When the court officer failed to object to the substitution of debtors, he did
rights mentioned in Articles 1236 and 1237.
so in behalf of and for the bank. Even granting arguendo that the account officer was not so
empowered, BPI could have subsequently registered its objection to the substitution,
In this case, there was no showing that Uy, the creditor, gave her consent to the especially after it had already learned that DBP had taken over the assets and assumed the
agreement that DSLAI (now MSLAI) would assume the liabilities of FISLAI. Such liabilities of Eliscon. Its failure to do so can only mean an acquiescence in the assumption by
agreement cannot prejudice Uy. Thus, the assets that FISLAI transferred to DSLAI DBP of Eliscon's obligation. BPI's conduct evinced a clear and unmistakable consent to the
remained subject to execution to satisfy the judgment claim of Uy against FISLAI. The substitution of DBP for Eliscon as debtor. Hence, there was a valid novation, which resulted in
subsequent sale of the properties by Uy to Willkom, and of one of the properties by the release of Eliscon from its obligation to BPI, whose cause of action should be directed
Willkom to Go, cannot, therefore, be questioned by MSLAI.
against DBP as the new debtor. The original obligation having been extinguished, the contract
of suretyship executed separately by Babst and Multi, being accessory obligations, are
The consent of the creditor to a novation by change of debtor is as indispensable as the likewise extinguished.
creditor's consent in conventional subrogation in order that a novation shall legally take
place. 39 Since novation implies a waiver of the right which the creditor had before the SYLLABUS
novation, such waiver must be express. 40
1. COMMERCIAL LAW; CORPORATION LAW; MERGER; IN THE MERGER OF TWO
WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals EXISTING CORPORATIONS, ONE OF THE CORPORATIONS SURVIVES AND CONTINUES
Decision dated March 21, 2007 and Resolution dated June 1, 2007 in CA-G.R. CV No. THE BUSINESS WHILE THE OTHER IS DISSOLVED AND ALL ITS RIGHTS, PROPERTIES
58337 are AFFIRMED.
AND LIABILITIES ARE ACQUIRED BY THE SURVIVING CORPORATION. At the outset,
the preliminary issue of BPI's right of action must first be addressed. ELISCON and MULTI
(Babst v. Court of Appeals, G.R. No. 99398, 104625, [January 26, 2001], 403 PHIL 244- assail BPI's legal capacity to recover their obligation to CBTC. However, there is no question
263)
that there was a valid merger between BPI and CBTC. It is settled that in the merger of two
existing corporations, one of the corporations survives and continues the business, while the
SYNOPSIS
other is dissolved and all its rights, properties and liabilities are acquired by the surviving
corporation. Hence, BPI has a right to institute the case a quo. TCSEcI
On January 17, 1983, Bank of the Philippine Islands, as successor-in-interest of
Commercial Bank and Trust Company (CBTC), instituted with the Regional Trial Court 2. CIVIL LAW; CONTRACTS; SURETYSHIP; WHILE THE SURETY IS SOLIDARILY LIABLE
of Makati City a complaint for sum of money docketed as Civil Case No. 49226 against WITH THE PRINCIPAL DEBTOR, HIS OBLIGATION TO PAY ARISES ONLY UPON THE
Eliscon, Multi and Babst to enforce payment of a promissory note and three domestic PRINCIPAL DEBTOR'S FAILURE OR REFUSAL TO PAY; CASE AT BAR. BPI gives no
letters of credit which Elizalde Steel Consolidated, Inc. executed and opened with the cogent reason in withholding its consent to the substitution, other than its desire to preserve its
CBTC. After the defendants filed their respective answers, trial on the merits ensued. causes of action and legal recourse against the sureties of ELISCON. It must be remembered,
On February 20, 1987, the trial court rendered its decision in favor of the plaintiff and however, that while a surety is solidarily liable with the principal debtor, his obligation to pay
ordered herein defendant Eliscon to pay the amount of P2,795,240.67 due on the only arises upon the principal debtor's failure or refusal to pay. A contract of surety is an
promissory note dated October 31, 1982; P3,963,322.08 due on three domestic letters accessory promise by which a person binds himself for another already bound, and agrees
of credit as of October 31, 1982; interest and related charges on the principal with the creditor to satisfy the obligation if the debtor does not. A surety is an insurer of the
amounting to P2,102,232.02; attorney's fees. Likewise, the trial court ordered the debt; he promises to pay the principal's debt if the principal will not pay. In the case at bar,
defendants Pacific Multi-Commercial Corporation and Babst to pay jointly and severally there was no indication that the principal debtor will default in payment. In fact, DBP, which had
LEX BELLUM

11

stepped into the shoes of ELISCON, was capable of payment. Its authorized capital
stock was increased by the government. More importantly, the National Development
Company took over the business of ELISCON and undertook to pay ELISCON's
creditors, and earmarked for that purpose the amount of P4,015,534.54 for payment to
BPI.
3. ID.; ID.; NOVATION; KINDS; IF THE ORIGINAL OBLIGATION IS EXTINGUISHED,
THE CONTRACT OF SURETYSHIP IS LIKEWISE EXTINGUISHED. BPI's conduct
evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as
debtor. Hence, there was a valid novation which resulted in the release of ELISCON
from its obligation to BPI, whose cause of action should be directed against DBP as the
new debtor. Novation, in its broad concept, may either be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new obligation that
takes the place of the former; it is merely modificatory when the old obligation subsists
to the extent it remains compatible with the amendatory agreement. An extinctive
novation results either by changing the object or principal conditions (objective or real),
or by substituting the person of the debtor or subrogating a third person in the rights of
the creditor (subjective or personal). Under this mode, novation would have dual
functions one to extinguish an existing obligation, the other to substitute a new one
in its place requiring a conflux 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. The
original obligation having been extinguished, the contracts of suretyship executed
separately by Babst and MULTI, being accessory obligations, are likewise extinguished.

WHEREAS, it is to the best interests of the Company to continue handling said tin-plate line;
WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of the Company in
obtaining credit facilities to enable it to maintain the present level of its tin-plate manufacturing
output and the Company is willing to extend said requested assistance;
NOW, THEREFORE, for and in consideration of the foregoing premises
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT & GENERAL
MANAGER, ANTONIO ROXAS CHUA, be, as he is hereby empowered to allow and authorize
ELIZALDE STEEL CONSOLIDATED, INC. to avail and make use of the Credit Line of
PACIFIC MULTI-COMMERCIAL CORPORATION with the COMMERCIAL BANK & TRUST
COMPANY OF THE PHILIPPINES, Makati, Metro Manila;
RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation guarantee, as it does
hereby guarantee, solidarily, the payment of the corresponding Letters of Credit upon maturity
of the same;
RESOLVED, FINALLY, That copies of this resolution be furnished the Commercial Bank &
Trust Company of the Philippines, Makati, Metro Manila, for their information. 4
Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a
Continuing Suretyship, 5 whereby they bound themselves jointly and severally liable to pay
any existing indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each.

Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation
three (3) domestic letters of credit in the amounts of P1,946,805.73, 6 P1,702,869.32 7 and
P200,307.72, 8 respectively, which ELISCON used to purchase tin black plates from National
Steel Corporation. ELISCON defaulted in its obligation to pay the amounts of the letters of
These consolidated petitions seek the review of the Decision dated April 29, 1991 of the credit, leaving an outstanding account, as of October 31, 1982, in the total amount of
Court of Appeals in CA-G.R. CV No. 17282 1 entitled, "Bank of the Philippine Islands, P3,963,372.08. 9
Plaintiff-Appellee versus Elizalde Steel Consolidated, Inc., Pacific Multi-Commercial
Corporation, and Chester G. Babst, Defendants-Appellants." AaCcST
On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a
merger, wherein BPI, as the surviving corporation, acquired all the assets and assumed all the
The complaint was commenced principally to enforce payment of a promissory note liabilities of CBTC. 10
and three domestic letters of credit which Elizalde Steel Consolidated, Inc. (ELISCON)
executed and opened with the Commercial Bank and Trust Company (CBTC).
Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the
Development Bank of the Philippines (DBP). In order to settle its obligations, ELISCON
On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of proposed to convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP,
P8,015,900.84, with interest at the rate of 14% per annum, evidenced by a promissory as payment for its total indebtedness in the amount of P201,181,833.16. On December 28,
note. 2 ELISCON defaulted in its payments, leaving an outstanding indebtedness in the 1978, ELISCON and DBP executed a Deed of Cession of Property in Payment of Debt. 11
amount of P2,795,240.67 as of October 31, 1982. 3
In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of
The letters of credit, on the other hand, were opened for ELISCON by CBTC using the its assets.
credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank,
pursuant to the Resolution of the Board of Directors of MULTI adopted on August 31, In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to
1977 which reads:
BPI. Thereafter, DBP proposed formulas for the settlement of all of ELISCON's obligations to
its creditors, but BPI expressly rejected the formula submitted to it for not being acceptable. 12
WHEREAS, at least 90% of the Company's gross sales is generated by the sale of tinplates manufactured by Elizalde Steel Consolidated, Inc.;
LEX BELLUM

12

Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted related charges already accrued but unpaid on said three (3) domestic letters of credit as of
with the Regional Trial Court of Makati, Branch 147, a complaint 13 for sum of money the date of the filing of this Complaint until full payment thereof; DHCSTa
against ELISCON, MULTI and Babst, which was docketed as Civil Case No. 49226.
7) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to
pay, jointly and severally, attorney's fees of not less than 10% of the total amount due under
ELISCON, in its Answer, 14 argued that the complaint was premature since DBP had paragraphs 5 and 6 hereof. With costs.
made serious efforts to settle its obligations with BPI. TDEASC
SO ORDERED.
Babst also filed his Answer alleging that he signed the Continuing Suretyship on the
understanding that it covers only obligations which MULTI incurred solely for its benefit In due time, ELISCON, MULTI and Babst filed their respective notices of appeal. 18
and not for any third party liability, and he had no knowledge or information of any
transaction between MULTI and ELISCON. 15
On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:
MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and
averred that the guaranty under its board resolution did not cover purchases made by
ELISCON in the form of trust receipts. It set up a cross-claim against ELISCON alleging
that the latter should be held liable for any judgment which the court may render
against it in favor of BPI. 16
On February 20, 1987, the trial court rendered its Decision, 17 the dispositive portion of
which reads:
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor
of the plaintiff and against all the defendants:
1) Ordering defendant ELISCON to pay the plaintiff the amount of P2,795,240.67 due
on the promissory note, Annex "A" of the Complaint as of 31 October 1982 and the
amount of P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31
October 1982;
2) Ordering defendant ELISCON to pay the plaintiff interests and related charges on the
principal of said promissory note of P2,102,232.02 at the rates provided in said note
from and after 31 October 1982 until full payment thereof, and on the principal of the
three (3) domestic letters of credit of P3,564,349.25 interests and related charges at the
rates provided in said letters of credit, from and after 31 October 1982 until full
payment;
3) Ordering defendant ELISCON to pay interests at the legal rate on all interests and
related charges but unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering defendant ELISCON to pay attorney's fees equivalent to 10% of the total
amount due under the preceding paragraphs;
5) Ordering defendants Pacific Multi-Commercial Corporation and defendant Chester
Babst to pay, jointly and severally with defendant ELISCON, the total sum of
P3,963,372.08 due on the three (3) domestic letters of credit as of 31 October 1982
with interests and related charges on the principal amount of P3,963,372.08 at the
rates provided in said letters of credit from 30 October 1982 until fully paid, but to the
extent of not more than P8,000,000.00 in the case of defendant Chester Babst;
6) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester
Babst to pay, jointly and severally plaintiff interests at the legal rate on all interests and
LEX BELLUM

WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the underlining to
show the principal changes from the decision of the lower court) thus:
1) Ordering appellant ELISCON to pay the appellee BPI the amount of P2,731,005.60 due on
the promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of
P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;
2) Ordering appellant ELISCON to pay the appellee BPI interests and related charges on the
principal of said promissory note of P2,102,232.02 at the rates provided in said note from and
after 31 October 1982 until full payment thereof, and on the principal of the three (3) domestic
letters of credit of P3,564,349.25 interests and related charges at the rates provided in said
letters of credit, from and after 31 October 1982 until full payment;
3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on all interests
and related charges but unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering appellant Pacific Multi-Commercial Corporation and appellant Chester G. Babst to
pay appellee BPI, jointly and severally with appellant ELISCON, the total sum of
P3,963,372.08 due on the three (3) domestic letters of credit as of 31 October 1982 with
interest and related charges on the principal amount of P3,963,372.08 at the rates provided in
said letters of credit from 30 October 1982 until fully paid, but to the extent of not more than
P8,000,000.00 in the case of defendant Chester Babst;
) Ordering appellant Pacific Multi-Commercial Corporation and defendant Chester Babst to
pay, jointly and severally, appellee BPI interests at the legal rate on all interests and related
charges already accrued but unpaid on said three (3) domestic letters of credit as of the date
of the filing of this Complaint until full payment thereof and the plaintiff's lawyer's fees in the
nominal amount of P200,000.00;
6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-Commercial Corporation
and Chester Babst whatever amount they shall have paid in said Eliscon's behalf particularly
referring to three (3) letters of credit as of 31 October 1982 and other related charges. ICESTA
No costs. SO ORDERED. 19
ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which
was, however, denied in a Resolution dated March 9, 1992. 20 Subsequently, ELISCON filed a
petition for review on certiorari, docketed as G.R. No. 104625, on the following grounds:

13

A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO RECOVER facilities with CBTC, which was supposedly guaranteed by Antonio Roxas Chua, was indeed
FROM PETITIONER ELISCON THE LATTER'S OBLIGATION WITH COMMERCIAL authorized by the latter pursuant to the resolution of the Board of Directors of MULTI.
BANK AND TRUST COMPANY (CBTC)
In compliance with this Court's Resolution dated March 17, 1993, 25 the parties submitted
B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN ELISCON AND their respective memoranda.
BPI THERE BEING A PRIOR CONSENT TO AND APPROVAL BY BPI OF THE
SUBSTITUTION BY DBP AS DEBTOR IN LIEU OF THE ORIGINAL DEBTOR, Meanwhile, in a petition for review filed with this Court, which was docketed as G.R. No.
ELISCON, THEREBY RELEASING ELISCON FROM ITS OBLIGATION TO BPI.
99398, Chester Babst alleged that the Court of Appeals acted without jurisdiction and/or with
grave abuse of discretion when:
C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST CANNOT
LAWFULLY RECOVER FROM ELISCON WHATEVER AMOUNT THEY MAY BE 1. IT AFFIRMED THE LOWER COURT'S HOLDING THAT THERE WAS NO NOVATION
REQUIRED TO PAY TO BPI AS SURETIES OF ELISCON'S OBLIGATION TO BPI; INASMUCH AS RESPONDENT BANK OF THE PHILIPPINE ISLANDS (OR BPI) HAD PRIOR
THEIR CAUSE OF ACTION MUST BE DIRECTED AGAINST DBP AS THE NEWLY CONSENT TO AND APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE
SUBSTITUTED DEBTOR IN PLACE OF ELISCON.
DEVELOPMENT BANK OF THE PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE
STEEL CONSOLIDATED, INC. (OR ELISCON) IN THE LATTER'S OBLIGATION TO BPI.
D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT OF 2. IT CONFIRMED THE LOWER COURT'S CONCLUSION THAT THERE WAS NO IMPLIED
GOVERNMENT WHICH WAS A FORTUITOUS EVENT EXCULPATING ELISCON CONSENT OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS TO THE
FROM FURTHER LIABILITIES TO RESPONDENT BPI.
SUBSTITUTION BY DEVELOPMENT BANK OF THE PHILIPPINES OF THE ORIGINAL
DEBTOR ELIZALDE STEEL CONSOLIDATED, INC.
E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY RESPONDENT 3. IT AFFIRMED THE LOWER COURT'S FINDING OF LACK OF MERIT OF THE
BPI THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF RESPONDENT CONTENTION OF ELISCON THAT THE FAILURE OF THE OFFICER OF BPI, WHO WAS
COURT OF APPEALS' DECISION. 21
PRESENT DURING THE MEETING OF ELISCON'S CREDITORS IN JUNE 1981 TO VOICE
BPI filed its Comment 22 raising the following arguments, to wit:
HIS OBJECTION TO THE ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF
ELISCON AND ASSUMPTION OF ITS LIABILITIES, CONSTITUTED AN IMPLIED CONSENT
1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and Babst the TO THE ASSUMPTION BY DBP OF THE OBLIGATIONS OF ELISCON TO BPI.
past due obligations with CBTC prior to the merger of BPI with CBTC.
4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE ENTIRE
2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no valid ELISCON WAS AN ACT OF GOVERNMENT CONSTITUTING A FORTUITOUS EVENT
novation has been effected.
EXCULPATING ELISCON FROM ANY LIABILITY TO BPI.
3. Express consent of creditor to substitution should be recorded in the books.
5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI RELIEVED
4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily liable to ELISCON, MULTI AND BABST OF ANY LIABILITY TO BPI.
BPI for the unpaid letters of credit of ELISCON.
6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY WITH
5. The question of the liability of ELISCON to BPI has been clearly established.
ELISCON WITH RESPECT TO THE OBLIGATION INVOLVED HERE. CASaEc
6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by 7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON ORDERING
ELISCON, they may recover from the latter what they may have paid for on account of THE LATTER TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF THE
that guaranty. aATEDS
DECISION; AND ORDERING PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY
AND SEVERALLY WITH ELISCON. 26
Chester Babst filed a Comment with Manifestation, 23 wherein he contends that the
suretyship agreement he executed with Antonio Roxas Chua was in favor of MULTI; Petitioner Babst alleged that DBP sold all of ELISCON's assets to the National Development
and that there is nothing therein which authorizes MULTI, in turn, to guarantee the Company, for the latter to take over and continue the operation of its business. On September
obligations of ELISCON.
11, 1981, the Board of Governors of the DBP adopted Resolution No. 2817 which states that
DBP shall enter into a contractual arrangement with NDC for the latter to pay ELISCON's
In its Comment, 24 MULTI maintained that inasmuch as BPI had full knowledge of the creditors, including BPI in the amount of P4,015,534.54. This was followed by a Memorandum
purpose of the meeting in June 1981, wherein the takeover by DBP of ELISCON was of Agreement executed on May 4, 1983 by and between DBP and NDC, wherein they
announced, it was incumbent upon the said bank to formally communicate its objection stipulated, inter alia, that NDC shall pay to ELISCON's creditors, through DBP, the amount of
to the assumption of ELISCON's liabilities by DBP in answer to the call for the meeting. P299,524,700.00. Among the creditors mentioned in the agreement was BPI, with a listed
Moreover, there was no showing that the availment by ELISCON of MULTI's credit credit of P4,015,534.54.
LEX BELLUM

14

Furthermore, petitioner Babst averred that the assets of ELISCON which were acquired without the consent of the creditor. Payment by the new debtor gives him the rights mentioned
by the DBP, and later transferred to the NDC, were placed under the Asset Privatization in articles 1236 and 1237.
Trust pursuant to Proclamation No. 50, issued by then President Corazon C. Aquino on
December 8, 1986.
BPI contends that in order to have a valid novation, there must be an express consent of the
creditor. In the case of Testate Estate of Mota, et al. v. Serra, 31 this Court held:
In its Comment, 27 BPI countered that by virtue of its merger with CBTC, it acquired all
the latter's rights and interest including all receivables; that in order to effect a valid It should be noted that in order to give novation its legal effect, the law requires that the
novation by substitution of debtors, the consent of the creditor must be express; that in creditor should consent to the substitution of a new debtor. This consent must be given
addition, the consent of BPI must appear in its books, it being a private corporation; that expressly for the reason that, since novation extinguishes the personality of the first debtor
BPI intentionally did not consent to the assumption by DBP of the obligations of who is to be substituted by a new one, it implies on the part of the creditor a waiver of the right
ELISCON because it wanted to preserve intact its causes of action and legal recourse that he had before the novation, which waiver must be express under the principle of
against Pacific Multi-Commercial Corporation and Babst as sureties of ELISCON and renuntiatio non prsumitur, recognized by the law in declaring that a waiver of right may not
not of DBP; that MULTI expressly bound itself solidarily for ELISCON's obligations to be performed [should read: presumed] unless the will to waive is indisputably shown by him
CBTC in its Resolution wherein it allowed the latter to use its credit facilities; and that who holds the right. 32
the suretyship agreement executed by Babst does not exclude liabilities incurred by
MULTI on behalf of third parties, such as ELISCON.
The import of the foregoing ruling, however, was explained and clarified by this Court in the
later case of Asia Banking Corporation v. Elser 33 in this wise:
ELISCON likewise filed a Comment, 28 wherein it manifested that of the seven errors
raised by Babst in his petition, six are arguments which ELISCON itself raised in its The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditor's
previous pleadings. It is only the sixth assigned error that the Court of Appeals erred consent to the substitution of the new debtor for the old be express, or given at the time of the
in finding that MULTI and Babst bound themselves solidarily with ELISCON that substitution, and the Supreme Court of Spain, in its judgment of June 16, 1908, construing
ELISCON takes exception to. More particularly, ELISCON pointed out the contradictory said article, laid down the doctrine that "article 1205 of the Civil Code does not mean or require
positions taken by Babst in admitting that he bound himself to pay the indebtedness of that the creditor's consent to the change of debtors must be given simultaneously with the
MULTI, while at the same time completely disavowing and denying any such obligation. debtor's consent to the substitution, its evident purpose being to preserve the creditor's full
It stressed that should MULTI or Babst be finally adjudged liable under the suretyship right, it is sufficient that the latter's consent be given at any time and in any form whatever,
agreement, they cannot lawfully recover from ELISCON, but from the DBP which had while the agreement of the debtors subsists." The same rule is stated in the Enciclopedia
been substituted as the new debtor.
Juridica Espaola, 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
MULTI filed its Comment, 29 admitting the correctness of the petition and adopting the inferred from the acts of the creditor, since volition may as well be expressed by deeds as by
Comment of ELISCON insofar as it is not inconsistent with the positions of Babst and words." The understanding between Henry W. Elser and the principal director of Yangco,
MULTI.
Rosenstock & Co., Inc., with respect to Luis R. Yangco's stock in said corporation, and the acts
of the board of directors after Henry W. Elser had acquired said shares, in substituting the
At the outset, the preliminary issue of BPI's right of action must first be addressed. latter for Luis R. Yangco, are a clear and unmistakable expression of its consent. When this
ELISCON and MULTI assail BPI's legal capacity to recover their obligation to CBTC. court said in the case of Estate of Mota vs. Serra (47 Phil., 464), that the creditor's express
However, there is no question that there was a valid merger between BPI and CBTC. It consent is necessary in order that there may be a novation of a contract by the substitution of
is settled that in the merger of two existing corporations, one of the corporations debtors, it did not wish to convey the impression that the word "express" was to be given an
survives and continues the business, while the other is dissolved and all its rights, unqualified meaning, as indicated in the authorities or cases, both Spanish and American,
properties and liabilities are acquired by the surviving corporation. 30 Hence, BPI has a cited in said decision. 34
right to institute the case a quo.
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Cia., Inc. v. Albo & Sevilla, Inc., et
We now come to the primordial issue in this case whether or not BPI consented to al., 35 this Court reiterated the rule that there can be implied consent of the creditor to the
the assumption by DBP of the obligations of ELISCON. aEDCSI
substitution of debtors.
Article 1293 of the Civil Code provides:

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
Novation which consists in substituting a new debtor in the place of the original one, held in June 1981 and thereafter, it is deemed to have consented to the substitution of DBP for
may be made even without the knowledge or against the will of the latter, but not ELISCON as debtor. SDTaHc
LEX BELLUM

15

BPI's actuation in this regard runs counter to the good faith covenant in contractual relations,
We find merit in the argument. Indeed, there exist clear indications that BPI was aware provided for by the Civil Code, to wit:
of the assumption by DBP of the obligations of ELISCON. In fact, BPI admits that
ARTICLE 19. Every person must, in the exercise of his rights and in the performance of his
"the Development Bank of the Philippines (DBP), for a time, had proposed a formula for duties, act with justice, give everyone his due, and observe honesty and good faith. HcTEaA
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 ARTICLE 1159. Obligations arising from contract have the force of law between the
the filing of the complaint at bar)." 36
contracting parties and should be complied with in good faith.
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.

BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for
ELISCON as debtor. Hence, there was a valid novation which resulted in the release of
ELISCON from its obligation to BPI, whose cause of action should be directed against DBP as
the new debtor.
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement. An extinctive novation results either by changing
the object or principal conditions (objective or real), or by substituting the person of the debtor
or subrogating a third person in the rights of the creditor (subjective or personal). Under this
mode, novation would have dual functions one to extinguish an existing obligation, the other
to substitute a new one in its place requiring a conflux 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. 41

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.
The original obligation having been extinguished, the contracts of suretyship executed
separately by Babst and MULTI, being accessory obligations, are likewise extinguished. 42
BPI gives no cogent reason in withholding its consent to the substitution, other than its
desire to preserve its causes of action and legal recourse against the sureties of Hence, BPI should enforce its cause of action against DBP. It should be stressed that
ELISCON. It must be remembered, however, that while a surety is solidarily liable with notwithstanding the lapse of time within which these cases have remained pending, the
the principal debtor, his obligation to pay only arises upon the principal debtor's failure prescriptive period for BPI to file its action was interrupted when it filed Civil Case No. 49226.
or refusal to pay. A contract of surety is an accessory promise by which a person binds 43
himself for another already bound, and agrees with the creditor to satisfy the obligation
if the debtor does not. 37 A surety is an insurer of the debt; he promises to pay the WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of the Court
principal's debt if the principal will not pay. 38
of Appeals, which held ELISCON, MULTI and Babst solidarily liable for payment to BPI of the
promissory note and letters of credit, is REVERSED and SET ASIDE. BPI's complaint against
In the case at bar, there was no indication that the principal debtor will default in ELISCON, MULTI and Babst is DISMISSED.
payment. In fact, DBP, which had stepped into the shoes of ELISCON, was capable of
payment. Its authorized capital stock was increased by the government. 39 More
importantly, the National Development Company took over the business of ELISCON
and undertook to pay ELISCON's creditors, and earmarked for that purpose the amount
of P4,015,534.54 for payment to BPI. 40
Notwithstanding the fact that a reliable institution backed by government funds was
offering to pay ELISCON's debts, not as mere surety but as substitute principal debtor,
BPI, for reasons known only to itself, insisted in going after the sureties. The course of
action chosen taxes the credulity of this Court. At the very least, suffice it to state that
LEX BELLUM

16