HEIRS OF FRANCO v SPS.

GONZALES
GR No. 159709
JUNE 27, 2012

BERSAMIN, J.

FACTS:
Servando Franco and Leticia Medel have obtained loans from Veronica Gonzales on
Nov. 7, 1985, P50,000 payable in 2 months. 2 promissory notes were executed by Servando
and Leticia as evidence to the loans on Nov 19, 1985, P90,000 payable in 2 months. When the
promissory notes matured, they failed to pay their debts. On June 11, 1986, Servando and
Leticia secured another loan from Veronica amounting to P300,000 secured by real estate
mortgage. They executed promissory notes and still failed to pay the third loan.
On July 23, 1986, the borrowers together with Leticia’s husband, consolidated all
their previous unpaid loans amounting to P440,000 and had another loan from Veronica
amounting to P500,000 payable on August 23, 1986. They executed another promissory
note and, still, they failed to pay their indebtedness of P500,000 plus interest and penalties.
This prompted Veronica to file an action before the RTC a complaint for the collection
of the full amount of the loan including the interest and other charges. Servando contends
that he and Gonzales had agreed to fix the entire obligation at P775,000 which was allegedly
put in a receipt dated Feb 5, 1992 whereby he made and initial payment of P400,000 and
promised to pay the balance of P375,000 on Feb 29, 1992 and superseded the July 23, 1986
promissory note.
The RTC ruled in favor of Veronica and the CA affirmed the decision.

ISSUE:
Is there a novation of the Aug 23, 1986 promissory note when Veronica issued the
Feb. 5, 1992 receipt?

RULING:
There was no novation that transpired since there existed no irreconcilable
incompatibility between the promissory note and the receipt.
 A novation arises when there is a substitution of an obligation by a subsequent one
that extinguishes the first, either by changing the object or the principal conditions, or by
substituting the person of the debtor, or by subrogating a third person in the rights of the
creditor. For a valid novation to take place, there must be, therefore: (a) a previous valid
obligation; (b) an agreement of the parties to make a new contract; (c) an extinguishment of
the old contract; and (d) a valid new contract. In short, the new obligation extinguishes the
prior agreement only when the substitution is unequivocally declared, or the old and the
new obligations are incompatible one very point.
The issuance of the receipt created no new obligation. Instead, the respondents only
thereby recognized the original obligation by stating in the receipt that the P400,000.00
was partial payment of loan and by referring to the promissory note subject of the case in
imposing the interest. Thus, the loan mentioned in the receipt was still the same. The
contract still subsisted and was not replaced nor extinguished.