PNB vs.

PINEDA
G.R. No. L-46658, May 13, 1991
FACTS: In 1963, Ignacio and Lourdes Arroyo (spouses Arroyo) obtained a loan of P580,000.00 from PNB
to purchase 60% of the subscribed capital stock, and thereby acquire the controlling interest of private
respondent Tayabas Cement Company, Inc. (TCC). Spouses Arroyo executed a real estate mortgage
over a parcel of land (La Vista property) as security for the said loan.
Thereafter, TCC filed with PNB an application and agreement for the establishment of an 8 year deferred
letter of credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the
importation of a cement plant machinery and equipment.
Upon approval of said application and opening of an L/C by PNB in favor of Toyo Menka Kaisha, Ltd. for
the account of TCC, the Arroyo spouses executed documents (Surety Agreement and Covenant) to
secure the loan accommodation.
The imported cement plant machinery and equipment arrived from Japan and were released to TCC
under a trust receipt agreement. Toyo Menka Kaisha made the corresponding drawings against the L/C
as scheduled. TCC, however, failed to remit and/or pay the amount covered by the drawings. Thus, PNB
notified TCC of its intention to repossess the imported machinery and equipment for failure of TCC to
settle its obligations under the L/C.
In the meantime, the personal accounts of the spouses Arroyo, which included another loan of
P160,000.00 secured by a real estate mortgage over Hacienda Bacon located in Isabela, Negros
Occidental, had likewise become due. The spouses Arroyo failed to satisfy their obligations with PNB and
the latter decided to foreclose the real estate mortgages.
At the auction sale of the La Vista Property, PNB was the highest bidder with a bid price of
P1,000,001.00. However, when said property was about to be awarded to PNB, the representative of the
mortgagor-spouses objected and demanded from the PNB the difference between the bid price of
P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo spouses on their personal account. It
was the contention of the spouses Arroyo's representative that the foreclosure proceedings referred only
to the personal account of the mortgagor spouses without reference to the account of TCC.
To remedy the situation, PNB filed a supplemental petition requesting the Sheriff's Office to proceed with
the sale of the subject real properties to satisfy not only the amount of P499,060.25 owed by the spouses
Arroyos on their personal account but also the amount of P35,019,901.49 owed by said spouses as
sureties of TCC. Said petition was opposed by the spouses Arroyo and the other bidder Araneta.
PNB filed a petition for mandamus to compel the sheriff to proceed with the foreclosure sale of the
mortgaged properties and the petition was granted. However, TCC filed a complaint against PNB to
restrain the foreclosure of the mortgages over the said properties as well as a declaration that its
obligation with PNB had been fully paid by reason of the latter's repossession of the imported machinery
and equipment.
ISSUE: Whether or not TCC's liability has been extinguished by the repossession of PNB of the imported
cement plant machinery and equipment and whether or not the repossession amounts to dacion en pago.
HELD: No. It must be remembered that PNB took possession of the imported cement plant machinery
and equipment pursuant to the trust receipt agreement executed by PNB and TCC giving the former the
unqualified right to the possession and disposal of all property shipped under the Letter of Credit until
such time as all the liabilities and obligations under said letter had been discharged.
PNB's possession of the subject machinery and equipment being precisely as a form of security for the
advances given to TCC under the Letter of Credit, said possession by itself cannot be considered
payment of the loan secured thereby. Payment would legally result only after PNB had foreclosed on said

securities, sold the same and applied the proceeds thereof to TCC's loan obligation. Mere possession
does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to
terminate the rights of the mortgagor on the property and includes the sale itself.
Neither can said repossession amount to dacion en pago. Dation in payment takes place when
property is alienated to the creditor in satisfaction of a debt in money and the same is governed
by sales. Dation in payment is the delivery and transmission of ownership of a thing by the debtor
to the creditor as an accepted equivalent of the performance of the obligation. As aforesaid, the
repossession of the machinery and equipment in question was merely to secure the payment of
TCC's loan obligation and not for the purpose of transferring ownership thereof to PNB in
satisfaction of said loan. Thus, no dacion en pago was ever accomplished.
Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses
Arroyo as sureties of TCC. A surety is considered in law as being the same party as the debtor in relation
to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be
inseparable. As sureties, the Arroyo spouses are primarily liable as original promissors and are bound
immediately to pay the creditor the amount outstanding.

LO VS. KJS
G.R. No. 149420, October 8, 2003
FACTS: Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of
steel scaffoldings, while petitioner Sonny L. Lo, doing business under Sans Enterprises, is a building
contractor. Lo ordered scaffolding equipment from KJS worth P540,425.80. He paid a down payment in
the amount of P150,000.00. The balance was made payable in ten monthly instalments.
KJS delivered the scaffoldings to Lo. Lo was able to pay the first two monthly instalments. His business,
however, encountered financial difficulties and he was unable to settle his obligation to KJS despite oral
and written demands made against him.
Lo and KJS executed a Deed of Assignment whereby Lo assigned to KJS his receivables in the amount
of P335,462.14 from Jomero Realty Corporation.
However, when KJS tried to collect the said credit from Jomero Realty Corporation, the latter refused to
honor the Deed of Assignment because it claimed that Lo was also indebted to it. Subsequently, KJS sent
a letter to Lo demanding payment of his obligation, but he refused to pay claiming that his obligation had
been extinguished when they executed the Deed of Assignment.
Consequently, KJS filed an action for recovery of a sum of money against Lo before the RTC. Lo argued
that his obligation was extinguished with the execution of the Deed of Assignment of credit. KJS, for its
part, presented the testimony of its employee, Almeda Baaga, who testified that Jomero Realty refused to
honor the assignment of credit because it claimed that Lo had an outstanding indebtedness to it.
RTC dismissed the complaint on the ground that the assignment of credit extinguished the obligation. CA
reversed the decision. In finding that the Deed of Assignment did not extinguish the obligation of the
petitioner to the respondent, the CA held that (1) petitioner failed to comply with his warranty under the
Deed; (2) the object of the Deed did not exist at the time of the transaction, rendering it void pursuant to
Article 1409 of the Civil Code; and (3) petitioner violated the terms of the Deed of Assignment when he
failed to execute and do all acts and deeds as shall be necessary to effectually enable the respondent to
recover the collectibles.
ISSUE: Whether or not the deed of assignment extinguished Los obligations.

HELD: No. An assignment of credit is an agreement by virtue of which the owner of a credit, known as the
assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent
of the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires
the power to enforce it to the same extent as the assignor could enforce it against the debtor.
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt. In order that there be a valid
dation in payment, the following are the requisites:
(1) There must be the performance of the prestation in lieu of payment (animo solvendi) which may
consist in the delivery of a corporeal thing or a real right or a credit against the third person;
(2) There must be some difference between the prestation due and that which is given in substitution
(aliud pro alio)
(3) There must be an agreement between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that due.
The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the
thing or property of the debtor, payment for which is to be charged against the debtors debt. As such, the
vendor in good faith shall be responsible, for the existence and legality of the credit at the time of the sale
but not for the solvency of the debtor, in specified circumstances.
Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property,
produced the effects of a dation in payment which may extinguish the obligation. However, as in any other
contract of sale, the vendor or assignor is bound by certain warranties. More specifically, the first
paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the
sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has
been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and legality
of the credit at the time of the sale or assignment. When Jomero Realty claimed that it was no longer
indebted to Lo since the latter also had an unpaid obligation to it, it essentially meant that its obligation to
Lo has been extinguished by compensation. In other words, KJS alleged the non-existence of the credit
and asserted its claim to Los warranty under the assignment. Therefore, it behooved on Lo to make good
its warranty and paid the obligation.
Furthermore, we find that Lo breached his obligation under the Deed of Assignment. Indeed, by
warranting the existence of the credit, petitioner should be deemed to have ensured the performance
thereof in case the same is later found to be inexistent. He should be held liable to pay to respondent the
amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the sum of
P335,462.14 with legal interest thereon.