Swagman Hotel, Inc.

vs Court of Appeals
GR 161135 Apr 8 2005

Facts:

Swagman Hotel, Inc., through its representatives, obtained from Neal a loan which is payable after 3
years and with interest per annum payable every 3 months. After a year, Swagman suffered business
reverses prompting it to renegotiate the terms of the loan with Neal. It was agreed that Neal waives the
payment of interests and that the principal loan shall be paid every month instead of quarterly. After the
renegotiation, the cash vouchers or receipts acknowledged by the parties state that the payments
therein represent Capital Investment and Capital Repayment.

Barely 2 years after however, Neal sent a letter informing the corporation that he is terminating the
loans and demanding that the total amount of the loan and unpaid interests be paid. Subsequently, Neal
filed a complaint for sum of money and damages. Swagman answered that the complaint is dismissible
for lack of cause of action since the loan is not yet due and demandable and that there was novation in
the contract. But the RTC held in favor of Neal, rationating that although there was no cause of action at
the filing of the complaint, the debt has already matured during the days the hearings were held, thus
making it due as of date.

Issue 1: W/N a complaint that lacks a cause of action at the time it was filed be cured by the accrual of a
cause of action during the pendency of the case

No. Jurisprudence states that unless the plaintiff has a valid and subsisting cause of action at the time
his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one
while the action is pending, and a supplemental complaint or an amendment setting up such after-
accrued cause of action is not permissible. (Surigao Mines vs Harris, 1935)

Issue 2: W/N there was novation in the terms of the promissory notes

Yes. Under Article 1253 of the Civil Code, it is presumed that if the debt produces interest, payments
were applied first to the interest before the principal. But in this case, the receipts describing the
payments as capital repayment show that obligation to pay the interest was no longer subsisting. The
receipts prove that the payments were for the principal loans and that the interests were waived by
Neal. There was therefore a novation of the terms of the loan.

The resulting novation in this case was of the modificatory type, not the extinctive type, since the
obligation to pay a sum of money remains in force. Thus, since Swagman did not renege on its obligation
to pay the monthly installments conformably with their new agreement and even continued paying
during the pendency of the case, Neal had no cause of action to file the complaint. It is only upon
debtors default in the payment of the monthly amortizations that a cause of action would arise and give
the creditor a right to maintain an action against the petitioner.