20) Mindanao Savings and Loan
Association, Inc. (MSLAI) vs. Willkom
GR No. 178618
Ponente: Nachura
Digest Author: Quintos
DORCTINE: A merger does not become
effective upon the mere agreement of the
corporations. There must be an express
provision of law authorizing them. There is
a procedure to be followed as stated in the
Corporation Code.
FACTS:
 The First Iligan Savings and Loan
Association, Inc. (FISLAI) and the
Davao Savings and Loan Association,
Inc. (DSLAI) are entities duly
registered with the Securities and
Exchange Commission, primarily
engaged in the business of granting
loans and receiving deposits from
the general public, and treated as
banks.
 In 1985, FISLAI and DSLAI entered
into a merger, DSLAI being the
surviving corporation.
o The articles of merger were
not registered with the SEC
due to incomplete
documentation.
o DSLAI changed its corporate
name to MSLAI.
 On May 26, 1986, The Board of
Directors of FSLAI approved the
assignment of assets in favor of
DSLAI, which assumed FISLAI's
liabilities (the novation in question)
 MSLAI's business failed and the
Monetary Board of the Central Bank
of the Philippines ordered its
closure.
o The Monetary Board found
that MSLAI was insolvent and
to continue business would
involve probable loss to its
depositors and creditors.
o The Monetary Board ordered
the liquidation of MSLAI with
PDIC as its liquidator.
 Prior to MSLAI's closure, Uy filed an
action for collection of sum of
money against FISLAI.
 RTC rendered a decision in favor of
Uy and ordered defendants
(including FISLAI) to pay the sum of
P136,801.70 plus interest, 25%
attorney's fees and the costs of suit.
 CA modified the decision by
ordering the third party defendant
to reimburse the payments that
would be made by defendants.
 On April 28, 1993, sheriff Bantuas
levied on 6 parcels of land of FSLAI
in Cagayan de Oro, and during the
public auction, Willkom was the
highest bidder.
o A certificate of sale was
issued, and was registered
with the Register of Deeds.
o On September 20, 1994,
Willkom sold one of the
parcels of land to Go.
 On June 14, 1995, MSLAI,
represented by PDIC, filed a
complaint for the Annulment of the
Sale, Cancellation of Title and
Reconveyance of the properties,
stating that the sale was conducted
without notice given to them and
PDIC. PDIC came to know about the
sale, almost two years after, while
liquidating MSLAI's assets. MSLAI
stated that the sale was illegal not
only due to lack of notice, but also
because the assets under liquidation
should be deemed in custodia legis
 and exempt from garnishment, levy,
attachment or execution.
 Respondents stated that MSLAI had
no cause of action; MSLAI is a
separate entity from FSLAI, further
stating that the merger was
unofficial and did not comply with
formalities and procedure.
 RTC: dismissed the case for a
supposed lack of jurisdiction.
 CA affirmed the dismissal but stated
that according to Associated Bank vs
CA, there was no merger between
FISLAI and MSLAI for failure to
follow procedure for a valid merger,
but even if there was a de facto
merger, Willkom was an innocent
purchaser and had a superior
right. The assignment of assets and
liabilities was not binding on third
parties because it wasn't registered.
The validity of the auction sale could
not be invalidated by the fact that
the sheriff had no authority to
conduct the sale.
ISSUES:
1. Whether the merger between FISLAI and
DSLAI valid and effective; and
2. Whether there was novation of the
obligation by substituting the person of the
debtor.
RULING:
1. No. A merger does not become effective
upon the mere agreement of the
corporations. There must be an express
provision of law authorizing them. There is
a procedure to be followed as stated in the
Corporation Code. The board of each
corporation draws up a plan of merger and
is submitted to stockholders or members
for approval. The formal agreement is
executed (the articles of merger) and is
submitted to the SEC for approval. If
approved, the SEC issues a certificate of
merger.
The merger shall only be effective upon the
issuance of the certificate. (An exception
would be if a party to a merger is a special
corporation governed by its own charter,
then a favorable recommendation of the
appropriate government agency should first
be obtained.)In this case, no certificate was
issued and such merger is incomplete
without it.
The certificate is important because it bears
the approval of the SEC and it marks the
moment when the consequences of a
merger take place. Since there is no valid
merger, FISLAI and MSLAI are still
considered as two separate corporations.
As far as third parties are concerned,
FISLAI's assets still belongs to them, not
MSLAI.
2. No. The assumption by MSLAI of FISLAI's
liabilities did not result in novation."
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."
Novation must always be done with the
consent of the creditor as stated in Article
1293 of the Civil Code. In this case, it was
not shown that Uy consented to the
agreement between FISLAI and MSLAI.
MSLAI cannot question the levy, and
subsequent sale of the properties of FISLAI.
Since novation implies a waiver of right
which the creditor had before novation,
such waiver must be express.