Civil Law

Spouses Florante and Laarni Bautista vs Pilar Development

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G.R. No. 135046 – 312 SCRA 611 (110 SCAD 964) – Civil Law – Obligations and Contracts – Interest – Extinction of Obligations; Novation – CB Circular 905

In 1978, Spouses Laarni and Florante Bautista, acquired a loan (abt. P100k) from Apex Corp. The spouses executed a promissory note (PN) which provides: that interest rate is at 12% per annum; that interest rate may be increased/decreased by Apex if authorized by law; that there is a 10% penalty of the amount due in case of litigation; that no notice is needed in case Apex will assign the credit to another.

In 1982, the spouses were already behind in payment. They were allowed to restructure the loan so they executed another promissory note in favor of Apex. The balance then was at P140k. Apex increased the interest rate to 21% pursuant to Central Bank Circular No. 705 which allowed the maximum 21%. There is a de-escalation clause this time around. The 2nd PN expressly cancelled the 1st PN. In 1983, Central Bank Circular No. 905 was issued. In same year, Bautista failed to make payments.

In 1984, Apex assigned the credit to Pilar Development w/o notice to Bautista. Pilar sued Bautista. Bautista now claims that the 2nd PN is one and the same as the 1st; that interest rate should be at 12%; that CB Circ. 905 does not allow escalation of rate in the absence of a de-escalation clause.

ISSUE: Whether or not to follow the 1st promissory note.

HELD: No. The 2nd promissory note novated the 1st PN. This was expressly agreed upon by both parties. Hence, the 2nd PN is distinct and separate from the 1st. Therefore, the imposition of the 21% rate is valid as it was agreed upon. This is regardless of the absence of a de-escalation clause. The operative law was CB Circ. 705 which was in effect when the 2nd PN was signed in 1982. Also, the assignment of credit is valid even if it was w/o notice to Bautista because the same was agreed upon.

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NOTE: What are the elements of novation?

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