Millar vs CA (Civil Law)

EUSEBIO S. MILLAR
vs.
CA, and ANTONIO P. GABRIEL

 --- The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. The law requires no specific form for an effective novation by implication. The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together, no incompatibility results and novation does not take place.

G.R. No. L-29981; April 30, 1971; Castro, J.

On February 11, 1956, petitioner Millar obtained a favorable judgment from the CFI Manila, condemning respondent Gabriel to pay him the sum of P1,746.98 with interest at 12% per annum from the date of the filing of the complaint. Respondent appealed to the CA which dismissed the appeal, and remanded the case to the CFI on January 1957. Subsequently, petitioner moved ex parte in the CFI for the issuance of the corresponding writ of execution to enforce the judgment. The Writ was issued, and on the basis of which the sheriff of Manila seized the respondent's Willy's Ford jeep.

The respondent, however, pleaded with the petitioner to release the jeep under an arrangement whereby the respondent, to secure the payment of the judgment debt, agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties, on February 22, 1957, executed a chattel mortgage on the jeep, stipulating, inter alia, that

This mortgage is given as security for the payment ... of the judgment and other incidental expenses in Civil Case No. 27116 ... against Antonio P. Gabriel, MORTGAGOR, in the amount of P1,700, which MORTGAGOR agrees to pay as follows:

March 31, 1957 - (P850) PESOS;

April 30, 1957 - (P850) PESOS.

Upon failure of the respondent to pay the first installment due, petitioner obtained an alias writ of execution. This writ which the sheriff served on the respondent only on May 30, 1957 - after the lapse of the entire period stipulated in the chattel mortgage for the respondent to comply with his obligation - was returned unsatisfied. Several alias writs were also returned unsatisfied, and pursuant to 5^th and writ, the sheriff levied on certain personal properties belonging to the respondent, and then scheduled them for execution sale.

Respondent filed an urgent motion for the suspension of the execution sale on the ground of payment of the judgment obligation. The CFI granted the same, and allowed respondent to prove his allegation of payment. After hearing, the CFI ruled that novation had taken place since the parties executed a chattel mortgage.

Respondent appealed to the CA, which ruled that the ff. circumstances demonstrated incompatibility between the judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a conclusion of implied novation:

1. The judgment orders the respondent to pay the petitioner the sum of P1,746.98 with interest at 12% per annum from the filing of the complaint, while the deed of chattel mortgage limits the principal obligation of the respondent to P1,700;

2. The judgment mentions no specific mode of payment of the amount due to the petitioner, the deed of chattel mortgage stipulates payment of the sum of P1,700 in two equal installments;

3. The judgment makes no mention of damages, the deed of chattel mortgage obligates the respondent to pay liquidated damages in the amount of P300 in case of default on his part; and

4. The judgment debt was unsecured, the chattel mortgage, which may be foreclosed extrajudicially in case of default, secured the obligation.

Millar appealed to the SC contending that the 1^st circumstance does not constitute an implied novation because in the interim, respondent made partial payments of the judgment obligation as to the 2^nd circumstance, necessarily resulting in the lesser fixed sum of P1,700 stated in the deed of chattel mortgage. As to the 3rd circumstance, petitioner argues that it is directly contrary to the admissions of the respondent and is without any factual basis. To the 2^nd and 4^th circumstances, petitioner points out that the appellate court considered said circumstances in a way not in accordance with law or accepted jurisprudence. Petitioner argues what is being secured by the chattel agreement is the payment of the judgment obligation and other incidental expenses in civil case, and not the payment of the reduced amount as fixed in the aforesaid deed.

ISSUE: WON there was substantial incompatibility between the judgment and the deed of chattel mortgage that may warrant an implied novation

HELD: NONE. There was no implied nor express novation. Thus, the judment obligation is still not extinguished.

1. Anent the first circumstance and petitioner’s corresponding argument:

Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor alterations or slight modifications with respect to the cause or object or conditions of he latter, such changes do not effectuate any substantial incompatibility between the two obligations. Only those essential and principal changes introduced by the new obligation producing an alteration or modification of the essence of the old obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no sense constitutes a sufficient indictum of incompatibility, especially in the light of (a) the explanation by the petitioner that the reduced indebtedness was the result of the partial payments made by the respondent before the execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon.

At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the petitioner by virtue of the judgment in civil case 27116. All told, therefore, the first circumstance fails to satisfy the test of substantial and complete incompatibility between the judgment debt an the pecuniary liability of the respondent under the chattel mortgage agreement.

2. At all events, in the absence of clear and convincing proof showing that the parties, in stipulating the payment of P300 as attorney's fees in the deed of chattel mortgage, intended the same as an obligation for the payment of liquidated damages in case of default on the part of the respondent, we find it difficult to agree with the conclusion reached by the Court of Appeals.

3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that the montage obligation superseded, through implied novation, the judgment debt. On this point, we see no substantial incompatibility between the mortgage obligation and the judgment liability of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the obligation under the terms of the deed of chattel mortgage serves only to provide an express and specific method for its extinguishment - payment in two equal installments. The chattel mortgage agreement in no manner introduced any substantial modification or alteration of the judgment. Instead of extinguishing the obligation of the respondent arising from the judgment, the deed of chattel mortgage expressly ratified and confirmed the existence of the same, amplifying only the mode and period for compliance by the respondent.

4. Petitioner’s argument is correct. The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel mortgage purposely to secure the satisfaction of the then existing liability of the respondent arising from the judgment against him in civil case 27116. As a security for the payment of the judgment obligation, the chattel mortgage agreement effectuated no substantial alteration in the liability of the respondent.

We do not see any substantial incompatibility between the two obligations as to warrant a finding of an implied novation. Nor do we find satisfactory proof showing that the parties, by explicit terms, intended the full discharge of the respondent's liability under the judgment by the obligation assumed under the terms of the deed of chattel mortgage so as to justify a finding of express novation.