Babst vs CA Jan 26 2001

DOCTRINE:

It is settled that in the merger of two existing corporations, one of the corporations survives and
continues the business, while the other is dissolved and all its rights, properties and liabilities are
acquired by the surviving corporation. The surviving corporation therefore has a right to institute a
collection suit on accounts of one of one of the constituent corporations. Babst v. CA, 350 SCRA
341 (2001).

FACTS:

On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P8,015,900.84, with interest
at the rate of 14% per annum, evidenced by a promissory note. ELISCON defaulted in its payments,
leaving an outstanding indebtedness in the amount of P2,795,240.67 as of October 31, 1982.

The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities
of Pacific Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of
the Board of Directors of MULTI.

Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a
Continuing Suretyship, 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, P1,702,869.32 and P200,307.72,
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 credit, leaving an amount of
P3,963,372.08.
On December 22, 1980, BPI and CBTC entered into a merger, wherein BPI, as the surviving
corporation, acquired all the assets and assumed all the liabilities of 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 proposed to
convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP, as payment for its
total indebtedness.

ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets.

In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to BPI.
Thereafter, DBP proposed formulas for the settlement of all of ELISCONs obligations to its creditors,
but BPI expressly rejected the formula submitted to it for not being acceptable.

BPI, as successor-in-interest of CBTC, instituted with the Regional Trial Court of Makati, Branch 147,
a complaint for sum of money against ELISCON, MULTI and Babst, which was docketed as Civil
Case No. 49226.

ELISCON, in its Answer, argued that the complaint was premature since DBP had made serious
efforts to settle its obligations with BPI.

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 and not for any third party
liability, and he had no knowledge or information of any transaction between MULTI and ELISCON.
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.

The trial court rendered its Decision in favor of the plaintiff and against all the defendants.

Petitioner Babst alleged that DBP sold all of ELISCONs assets to the National Development
Company, for the latter to take over and continue the operation of its business.

Furthermore, Babst averred that the assets of ELISCON which were acquired by the DBP, and later
transferred to the NDC, were placed under the Asset Privatization Trust.

BPI countered that by virtue of its merger with CBTC, it acquired all the latters rights and interest
including all receivables; that in order to effect a valid novation by substitution of debtors, the consent
of the creditor must be express; that BPI intentionally did not consent to the assumption by DBP of
the obligations of ELISCON.

ISSUE:

Whether or not BPI consented to the assumption by DBP of the obligations of ELISCON

HELD:

Yes, there was consent from BPI. There is a valid takeover by DBP of ELISCONs assets. Complaint
against ELISCON and Babst must be dismissed.

Article 1293 of the Civil Code provides:

Novation which consists in substituting 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.
Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.

BPI contends that in order to have a valid novation, there must be an express consent of the creditor.

In the case of Vda. e Hijos de Pio Barretto y Ca., Inc. v. Albo & Sevilla, Inc., et al., this Court reiterated
the rule that there can be implied consent of the creditor to the substitution of debtors.

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 ELISCONs assets, at the creditors meeting held in June
1981 and thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as
debtor.

There exist clear indications that BPI was aware of the assumption by DBP of the obligations of
ELISCON.

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 solidarily liable with the principal debtor, his obligation
to pay only 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 pay the principals debt if the principal will not pay.

In the case at bar, there was 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 government. More importantly, the National Development Company took
over the business of ELISCON and undertook to pay ELISCONs creditors, and earmarked for that
purpose the amount of P4,015,534.54 for payment to BPI.

Notwithstanding the fact that a reliable institution backed by government funds was offering to pay
ELISCONs 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 BPIs actuation in this regard runs counter to the good
faith covenant in contractual relations, provided for by the Civil Code.

BPIs 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).

The original obligation having been extinguished, the contracts of suretyship executed separately by
Babst and MULTI, being accessory obligations, are likewise extinguished.

BPI should enforce its cause of action against DBP.

Hence, Court of Appeals decision, 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. BPIs
complaint against ELISCON, MULTI and Babst is DISMISSED.