234 Babst vs.

CA AUTHOR: Valera
350 SCRA 341 NOTE: Consolidated petitions
Sale of Substantially of all Assets:Mergers & Acquisitions
Grady, J.
FACTS:
 The case was commenced principally to enforce payment of a promissory note and 3 domestic letters of credit which
Elizalde Steel Consolidated Inc. (ELISCON) executed and opened with the Commercial Bank and Trust Company
(CBTC)
 In June 1973, ELISCON obtained from CBTC a loan worth 8million evidenced by a promissory note, ELISCON
defaulted and left a balance of 2.7 million.
 The letters of credit, were opened for ELISCON by CBTC using the credit facilities of Pacific Multi Commercial
Corporation (MULTI)
 In Sept 1978, Chua and Babst executed a Continuing Suretyship agreement wherein they bound themselves to pay
any existing indebtedness of MULTI to CBTC to the extent of 8million each
 In Oct 1978, CBTC opened for ELISCON in favor of National Steel Corporation, 3 letters domestic letters of credit in
the following amounts: 1.9 million, 1.7 million and 200 thousand, which ELISCON used to purchase tin plates from
National Steel Corporation, ELISCON defaulted in the payment of the letters of credit laving a balance of 3.9 million.
 In Dec 1980, BPI and CBTC entered into a merger wherein BPI was the surviving corporation, acquired all the assets
and assumed all the liabilities of CBTC,
 ELISCON had financial difficulties and became heavily indebted to the DBP. ELISCON proposed to DBP by way of
Dacion en pago all its fixed assets mortgaged with DBP, as payments for its total indebtedness n the amount 201
million. ELISCON and DBP executed a deed of Cession of property in Payment of Debt on Dec 1978,
 In June 1981, ELISCON called its creditors to a meeting to announce the takeover of DBP of its Assets, and on Oct of
the same year, DBP formally took over the assets of ELISCON including its indebtedness to BPI, after which, DBP
proposed formulas to settle ELISCONS obligations to its creditors which BPI expressly rejected it for not being
acceptable.
 In Jan 1983, BPI as the successor in interest of CBTC instituted in the RTC a complaint for a sum of money against
ELISCON, MULTI and BABST:
 ELISCON in its answer, argued that the complaint was premature since DBP had made serious efforts to settle its
obligations with BPI.
 BABST in his answers stated that he signed the continuing suretyship on the understanding that it only covers
obligations which MULTI incurred solely for its benefit and not for any third party lability and he had no
knowledge of any transaction between MULTI and ELISCON,
 MULTI in its answer, denied knowledge of the merger between BPI and CBTC and averred that the guaranty did
not cover purchases made by ELISCON in the form trust receipts. It set up a cross claim against ELISCON
alleging that they should be held liable for any judgement which may render against them in favor of BPI.
 The trial court ruled in favor of BPI and ordered:
 Ordering ELISCON to pay BPI 2million on the promissory note and 3.9 million on the 3 domestic letters of
credit.
 Ordering ELISCON to pay the interest in relation to the promissory note and the domestic letters of credit.
 Ordering MULTI and BABST to pay jointly and severally with ELISCON the total sum of 3.9 million on the 3
domestic letters of credit.
 The CA, in appeal affirmed the trial court decision however, modifying the amounts due.
 In appeal to the SC:
1.) ELISCON’s petition for review on certiorari
a.) grounds:
- BPI is not entitled to recover from ELISCON from their obligation with CBTC
- There was a valid novation of the contract between ELISCON and BPI, there being prior consent and
approval by BPI of the substitution by DBBP as debtor, thereby releasing ELISCON from its obligation to
BPI.
- MULTI and BABST cannot lawfully recover from ELISCON whatever amount they may be required to
pay to BPI as sureties of ELISCON’s obligation to BPI; that their cause of Action must be directed TO
DBP as the newly substituted debtor
- The DBP take over of ELISCON amounted to an act of the government which was a fortuitous event
releasing ELISCON from liabilities to BPII
- ELISCON should not be held liable to pay BPI
 b.) BPI’s comment:
- BPI is entitled to recover from ELISCON, MULTI and BABST the past obligations with CBTC
- BPI did not give its consent to the DBP take over of ELISCON, thus, no Novation has been effected
- Express consent of creditor to substitution should be recoded in the books
- BABST and MULTI are jointly and solidarily liable to BP for the unpaid letters of credit of ELISCON
- The question of liability of Eliscon has been clearly established
- Since MULTI and BABST are guarantors of the debts incurred by ELISCON, they may recover from
them.
c.) Babsts comment with manifestation:
- Contends that the suretyship agreement with Cua was in favor of MULTI and that there is nothing which
authorizes MULTI in turn to guarantee the obligations of Eliscon
d.) MULTI’s Comment:
- Maintained that inasmuch as BPI had full knowledge of the purpose of the meeting in June 1981, wherein
n the takeover by DBP of ELISCON, it was incumbent upon BPI to formally communicate its objection to
the assumption of ELISCON’s liabilities by DBP in answer to the call for the meeting
- There was no showing that the availment by ELISCON of MULTI’s credit facilities with CBTC whch was
supposedly guaranteed by Chua and babst was indeed authorized by the latter pursuant to the resolution of
the BoD of MULTI.

ISSUE(S):
1.) WON BPI consented to the assumption by DBP of the obligations of ELISCON

HELD:
1.) YES.

RATIO:
 Art 1293, of the Civil code provides: Novation which consists n substitution a new debtor in the place of the
original one , may be made even without the knowledge or against the will of the latter, but not without the consent
of the creditor.xxx.
 In the case at bar BABST, MULTI and ELSISCON all maintain that the due failure of BPI to register its objection
to the takeover of DBP of ELISCON’s assets at the creditors meeting is deemed to have consented to the
substitution of DBP for ELSCON as debtor.
- The court finds merit in the argument. Indeed there exist clear indications that BPI was aware of the
assumption by DBP of the obligations of ELISCON. In fact, BPI admits that”DBP for a time had proposed
a formula for the settlement of ELISCON’s obligations to its creditors but the formula was rejected.”
- The CA held that even if the account officer who attended the creditors meeting had expressed consent to
the assumption by DBP of ELISCONS’s debts, such consent would not bind BPI for lack of specific
authority thefore ELISCON countered that the mere presence of the account officer at the meeting
necessarily meant that he was authorize to represent BPI in the creditors meeting, BPI did not object to the
substitution of indebtedness although it objected to the formula of payment.
- Indeed the authority 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
BPI, even granting arguendo, that the said account officer was not so empowered, BPI could have
subsequently registered its objects 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.
 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 ELISCON. It must be remembered , however, that while a
surety is solidarity liable with the principal debtor, his obligation to pay arises upon the principal debtors failure or
refusal to pay. A contract of surety is an accessory promise by which a person binds himself for another already
bound and agrees with the creditor to satisfy the obligation if the debtor does not A surety is an insurer of the debt;
he promises to the principal’s debt f the principal will not pay.
- In the case at bar there as no indication that the principal debtor will default in payment, in fact DBP
which had stepped into the shoes of ELISCON was capable of payment. Its authorized capital stock was
increased by the govt. 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 4
million for payment to BPI.
 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 to against DBP as the new debtor

CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):