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Atty. Lydia C. Galas

Midterm Case Digests

Article 1226 OBLIGATION WITH A PENAL CLAUSE would suffice. On 16 November 1998, petitioners filed an
omnibus motion for reconsideration and to admit newly
LIGUTAN vs CA discovered evidence,[6] alleging that while the case was
-By Ming Vales pending before the trial court, petitioner TolomeoLigutan
and his wife BienvenidaLigutan executed a real estate
FACTS : Petitioners TolomeoLigutan and Leonidas dela mortgage on 18 January 1984 to secure the existing
Llana obtained on 11 May 1981 a loan in the amount of indebtedness of petitioners Ligutan and dela Llana with
P120,000.00 from respondent Security Bank and Trust the bank. Petitioners contended that the execution of the
Company. Petitioners executed a promissory note binding real estate mortgage had the effect of novating the
themselves, jointly and severally, to pay the sum contract between them and the bank. Petitioners further
borrowed with an interest of 15.189% per annum upon averred that the mortgage was extrajudicially foreclosed
maturity and to pay a penalty of 5% every month on on 26 August 1986, that they were not informed about
the outstanding principal and interest in case of default. it, and the bank did not credit them with the proceeds
In addition, petitioners agreed to pay 10% of the total of the sale. The appellate court denied the omnibus
amount due by way of attorneys fees if the matter were motion for reconsideration and to admit newly discovered
indorsed to a lawyer for collection or if a suit were evidence.
instituted to enforce payment. The obligation matured on
8 September 1981; the bank, however, granted an ISSUE: Whether the interest and penalty charge imposed
extension but only up until 29 December 1981. Despite by private respondent bank on petitioners loan are
several demands from the bank, petitioners failed to manifestly exorbitant, iniquitous and unconscionable?
settle the debt which, as of 20 May 1982, amounted to
P114,416.10. On 30 September 1982, the bank sent a HELD: Respondent bank, which did not take an appeal,
final demand letter to petitioners informing them that would, however, have it that the penalty sought to be
they had five days within which to make full payment. deleted by petitioners was even insufficient to fully cover
Since petitioners still defaulted on their obligation, the and compensate for the cost of money brought about by
bank filed on 3 November 1982, with the Regional Trial the radical devaluation and decrease in the purchasing
Court a complaint for recovery of the due amount. Two years power of the peso, particularly vis-a-vis the U.S. dollar,
later, or on 23 October 1987, petitioners filed a motion taking into account the time frame of its occurrence. The
for reconsideration of the order of the trial court Bank would stress that only the amount of P5,584.00 had
declaring them as having waived their right to present been remitted out of the entire loan of P120,000.00. A
evidence and prayed that they be allowed to prove their penalty clause, expressly recognized by law, is an
case. The court a quo denied the motion in an order, accessory undertaking to assume greater liability on the
dated 5 September 1988, and on 20 October 1989, it part of an obligor in case of breach of an obligation. It
rendered its decision. Petitioners interposed an appeal with functions to strengthen the coercive force of the
the Court of Appeals, questioning the rejection by the obligation and to provide, in effect, for what could be the
trial court of their motion to present evidence and liquidated damages resulting from such a breach. The
assailing the imposition of the 2% service charge, the 5% obligor would then be bound to pay the stipulated
per month penalty charge and 10% attorney's fees. In its indemnity without the necessity of proof on the existence
decision of 7 March 1996, the appellate court affirmed and on the measure of damages caused by the breach.
the judgment of the trial court except on the matter of Although a court may not at liberty ignore the freedom
the 2% service charge which was deleted pursuant to of the parties to agree on such terms and conditions as
Central Bank Circular No. 783. Not fully satisfied with the they see fit that contravene neither law nor morals, good
decision of the appellate court, both parties filed their customs, public order or public policy, a stipulated
respective motions for reconsideration. Petitioners prayed penalty, nevertheless, may be equitably reduced by the
for the reduction of the 5% stipulated penalty for being courts if it is iniquitous or unconscionable or if the
unconscionable. The bank, on the other hand, asked that principal obligation has been partly or irregularly complied
the payment of interest and penalty be commenced not with. The question of whether a penalty is reasonable or
from the date of filing of complaint but from the time of iniquitous can be partly subjective and partly objective.
default as so stipulated in the contract of the parties. On 28 Its resolution would depend on such factors as, but not
October 1998, the Court of Appeals resolved the two necessarily confined to, the type, extent and purpose of
motions thusly: We find merit in plaintiff-appellees claim the penalty, the nature of the obligation, the mode of
that the principal sum of P114,416.00 with interest breach and its consequences, the supervening realities,
thereon must commence not on the date of filing of the the standing and relationship of the parties, and the like,
complaint as we have previously held in our decision but on the application of which, by and large, is addressed to the
the date when the obligation became due. Default generally sound discretion of the court. In Rizal Commercial Banking
begins from the moment the creditor demands the Corp. vs. Court of Appeals, just an example, the Court
performance of the obligation. However, demand is not has tempered the penalty charges after taking into
necessary to render the obligor in default when the account the debtors pitiful situation and its offer to
obligation or the law so provides. In the case at bar, settle the entire obligation with the creditor bank. The
defendants-appellants executed a promissory note where stipulated penalty mightlikewise be reduced when a
they undertook to pay the obligation on its maturity date partial or irregular performance is made by the debtor.
'without necessity of demand.' They also agreed to pay the The stipulated penalty might even be deleted such as
interest in case of non-payment from the date of default. 1 when there has been substantial performance in good
Property of : Bea Reyes Considering that defendants- faith by the obligor, when the penalty clause itself suffers
appellants partially complied with their obligation under from fatal infirmity, or when exceptional circumstances so
the promissory note by the reduction of the original exist as to warrant it. The Court of Appeals, exercising its
amount of P120,000.00 to P114,416.00 and in order that good judgment in the instant case, has reduced the
they will finally settle their obligation, it is our view and penalty interest from 5% a month to 3% a month which
we so hold that in the interest of justice and public petitioner still disputes. Given the circumstances, not to
policy, a penalty of 3% per month or 36% per annum mention the repeated acts of breach by petitioners of

Page 1 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

their contractual obligation, the Court sees no cogent The penalty may be enforced only when it is
ground to modify the ruling of the appellate court. demandable in accordance with the provisions of this
Code. (1152a)
Art. 1229. The judge shall equitably reduce the penalty
when the principal obligation has been partly or irregularly
FACTS: PAGCOR set up a casino in Pryce Plaza Hotel for a
complied with by the debtor. Even if there has been no
period of 3 years. However, there has been interruptions in
performance, the penalty may also be reduced by the courts if
the operations which ultimately caused the operations to
it is iniquitous or unconscionable.
cease prematurely upon order of the Office of the President.
Art. 2227. Liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are
(1) Whether or not Pryce is entitled to future rentals as
iniquitous or unconscionable.
provided in the contract even if PAGCOR contends, as the CA
ruled, that Article 1659 of the Civil Code governs; hence, PPC
HELD: (1) Pryce is entitled to future rentals as the provisions
is allegedly no longer entitled to future rentals, because it
are not contrary to law, morals, public order, or public policy.
chose to rescind the Contract.
(2) Whether or not PAGCOR should be exempt from complying
The above provisions leave no doubt that the parties have
with its contractual obligations due to fortuitous events
covenanted 1) to give PPC the right to terminate and cancel
(3) Whether or not the future rentals constitute a penalty
the Contract in the event of a default or breach by the lessee;
and 2) to make PAGCOR fully liable for rentals for the
remaining term of the lease, despite the exercise of such right
CA: The CA ruled that the PAGCOR'S pretermination of the
to terminate. Plainly, the parties have voluntarily bound
Contract of Lease was unjustified. The appellate court
themselves to require strict compliance with the provisions of
explained that public demonstrations and rallies could not be
the Contract by stipulating that a default or breach, among
considered as fortuitous events that would exempt the
others, shall give the lessee the termination option, coupled
gaming corporation from complying with the latter's
with the lessor's liability for rentals for the remaining term of
contractual obligations. Therefore, the Contract continued to
the lease. Article XX (c) provides that, aside from the payment
be effective until PPC elected to terminate it on November 25,
of the rentals corresponding to the remaining term of the
lease, the lessee shall also be liable "for any and all damages,
actual or consequential, resulting from such default and
Regarding the contentions of PPC, the CA held that under
termination of this contract." Having entered into the Contract
Article 1659 of the Civil Code, PPC had the right to ask for (1)
voluntarily and with full knowledge of its provisions, PAGCOR
rescission of the Contract and indemnification for damages; or
must be held bound to its obligations. It cannot evade further
(2) only indemnification plus the continuation of the Contract.
liability for liquidated damages.
These two remedies were alternative, not cumulative, ruled
the CA.
(2) PAGCOR is not exempt from complying with the provisions
as rallies and demonstrations are not considered fortuitous
As PAGCOR had admitted its failure to pay the rentals for
September to November 1993, PPC correctly exercised the
option to terminate the lease agreement.
In this case, PAGCOR's breach was occasioned by events that,
although not fortuitous in law, were in fact real and pressing.
APPLICABLE LAW/S: Art. 1659. If the lessor or the lessee
From the CA's factual findings, which are not contested by
should not comply with the obligations set forth in Articles
either party, we find that PAGCOR conducted a series of
1654 and 1657, the aggrieved party may ask for the
negotiations and consultations before entering into the
rescission of the contract and indemnification for damages, or
Contract. It did so not only with the PPC, but also with local
only the latter, allowing the contract to remain in force. (1556)
government officials, who assured it that the problems were
surmountable. Likewise, PAGCOR took pains to contest the
ordinances before the courts, which consequently declared
Art. 1654. The lessor is obliged: (1) To deliver the thing
them unconstitutional. On top of these developments, the
which is the object of the contract in such a condition as to
gaming corporation was advised by the Office of the President
render it fit for the use intended; (2) To make on the same
to stop the games in Cagayan de Oro City, prompting the
during the lease all the necessary repairs in order to keep it
former to cease operations prior to September 1993.
suitable for the use to which it has been devoted, unless there
is a stipulation to the contrary; (3) To maintain the lessee in
Also worth mentioning is the CA's finding that PAGCOR's
the peaceful and adequate enjoyment of the lease for the
casino operations had to be suspended for days on end since
entire duration of the contract. (1554a)
their start in December 1992; and indefinitely from July 15,
1993, upon the advice of the Office of President, until the
Art. 1159. Obligations arising from contracts have the force
formal cessation of operations in September 1993. Needless
of law between the contracting parties and should be
to say, these interruptions and stoppages meant that PAGCOR
complied with in good faith. (1091a)
suffered a tremendous loss of expected revenues, not to
mention the fact that it had fully operated under the Contract
Art. 1226. In obligations with a penal clause, the
only for a limited time.
penalty shall substitute the indemnity for damages
and the payment of interests in case of
(3) Pryce's right to penalty is affirmed but proved iniquitous.
noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the
While petitioner's right to a stipulated penalty is affirmed, we
obligor refuses to pay the penalty or is guilty of fraud
consider the claim for future rentals to the tune of
in the fulfillment of the obligation.
P7,037,835.40 to be highly iniquitous. The amount should be
equitably reduced. Under the circumstances, the advanced

Page 2 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

rental deposits in the sum of P687,289.50 should be sufficient declaration of its cancellation in the same way that before a
penalty for respondent's breach. lessee is ejected under a lease contract, he has to fulfill his
obligations thereunder that had accrued prior to his
Accordingly, respondent is ordered to pay petitioner the ejectment. However, termination of a contract need not
additional amount of P687,289.50 as penalty, which may be undergo judicial intervention.
set off or applied against the former's advanced rental "end in time or existence; a close, cessation or conclusion."
deposits. With respect to a lease or contract, it means an ending,
usually before the end of the anticipated term of such lease or
OTHER NOTES: contract, that may be effected by mutual agreement or by
In legal contemplation, the termination of a contract is not one party exercising one of its remedies as a consequence of
equivalent to its rescission. When an agreement is the default of the other
terminated, it is deemed valid at inception. Prior to
termination, the contract binds the parties, who are thus RCBC VS CA
obliged to observe its provisions. However, when it is -By Khely Peroy
rescinded, it is deemed inexistent, and the parties are
returned to their status quo ante. Hence, there is mutual GOYU applied for credit facilities & accommodations with
restitution of benefits received. The consequences of RCBC, which was subsequently granted in the amount of
termination may be anticipated and provided for by the P117 million. And as security, GOYU executed 2 real estate
contract. As long as the terms of the contract are not contrary mortgages & 2 chattel mortgages in favor of RCBC. Under
to law, morals, good customs, public order or public policy, each of these 4 mortgage contracts, GOYU committed itself to
they shall be respected by courts. The judiciary is not insure the mortgaged property with an insurance company, &
authorized to make or modify contracts; neither may it rescue subsequently to endorse & deliver the insurance policies to
parties from disadvantageous stipulations. Courts, however, RCBC.
are empowered to reduce iniquitous or unconscionable
liquidated damages, indemnities and penalties agreed upon One of GOYUs factory buildings was gutted by fire, which
by the parties. subsequently led to GOYU submitting a claim for indemnity on
account of the loss insured against MICO. MICO denied the
DIFFERENCE BETWEEN RESCISSION & TERMINATION claim on the ground that the insurance policies were either
RESCISSION (OR RESOLUTION) attached pursuant to writs of attachments/garnishments
issued or that the insurance proceeds were also claimed by
Art. 1191. The power to rescind obligations is implied in other creditors of GOYU.
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him. RCBC also filed with MICO its formal claim over the proceeds
of the insurance policies, but said claims were denied for
The injured party may choose between the fulfillment and the similar reasons.
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has RTC rendered judgment in favor of GOYU, ordering MICO to
chosen fulfillment, if the latter should become impossible. pay its fire loss claims.
CA sustained findings of the RTC with regards to liabilities of
The court shall decree the rescission claimed, unless there be MICO & RCBC, and ordered GOYU to pay its loan obligation to
just cause authorizing the fixing of a period. RCBC in the amount of P68,785,069.04 without any interest,
surcharges and penalties.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with RCBC & MICO now sought the review & reversal of the CA
Articles 1385 and 1388 and the Mortgage Law. (1124) decision.
Art. 1659. If the lessor or the lessee should not comply with RULING: Court is constrained to rule in favor of RCBC, who, in
the obligations set forth in Articles 1654 and 1657, the good faith, relied upon the endorsement documents sent to it
aggrieved party may ask for the rescission of the contract and as this was pursuant to the stipulation in the mortgage
indemnification for damages, or only the latter, allowing the contracts.
contract to remain in force. (1556)
The 8 policies cannot be attached by GOYUs other creditors
To rescind is to declare a contract void in its inception and to up to the extent of GOYUs outstanding obligations to RCBC.
put an end to it as though it never were. It is not merely to GOYUs interest in the policies had been transferred to RCBC
terminate it and release parties from further obligations to effective as of the time of the endorsement.
each other but to abrogate it from the beginning and restore
the parties to relative positions which they would have Regarding the payment of additional interest, penalties, and
occupied had no contract ever been made. charges, the Court ruled that the essence for the payment of
interest is separate & distinct from that of surcharges &
Rescission has likewise been defined as the "unmaking of a penalties. What may justify a court in not allowing the creditor
contract, or its undoing from the beginning, and not merely its to charge surcharges & penalties despite express stipulation
termination." Rescission may be effected by both parties by may not equally justify non-payment of interest. The charging
mutual agreement; or unilaterally by one of them declaring a of interest for loans forms a very essential & fundamental
rescission of contract without the consent of the other, if a element of the banking business. It is inconceivable for a bank
legally sufficient ground exists or if a decree of rescission is to grant loans for which it will not charge any interest at all.
applied for before the courts
The following rules of thumb shall apply regarding the
TERMINATION (OR CANCELLATION) computation of the interest due:
The termination or cancellation of a contract would
necessarily entail enforcement of its terms prior to the

Page 3 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

1. when an obligation, regardless of its source, is breached, 2002, likewise assigned the same to respondent BPI Family
the contravenor can be held liable for damages. The Savings Bank, Inc.
provisions under Title XVIII (18) Damages of the CC govern
such. For failure to pay four successive installments from May 15,
2002 to August 15, 2002, respondent, through counsel, sent
2. With regard particularly to an award of interest in the to petitioners a demand letter dated August 29, 2002,
concept of actual & compensatory damages, the rate of declaring the entire obligation as due and demandable and
interest, as well as the accrual thereof, is imposed as follows: requiring to pay Php576,664.04, or surrender the mortgaged
vehicle immediately upon receiving the letter. As the demand
When the obligation is breached, & it consists in the was left unheeded, respondent filed on October 4, 2002 an
payment of a sum of money, interest due should be action for Replevin and Damages before the Manila Regional
that which may have been stipulated in writing. The Trial Court (RTC).
interest due shall itself earn legal interest from the
tie it is judicially demanded. In the absence of A writ of replevin was issued. Despite this, the subject vehicle
stipulation, the rate of interest shall be 12% per was not seized. On August 11, 2005, the RTC ruled for the
annum to be computed from default. respondent and ordered petitioners to jointly and severally
When an obligation, not constituting a loan or pay the amount of Php576,664.04 plus interest at the rate of
forbearance of money, is breached, an interest on 72% per annum from August 20, 2002 until fully paid, and the
the amount of damages awarded may be imposed at costs of suit.
the discretion of the court at the rate of 6% per
annum. No interest shall be adjudged on unliquidated Petitioners appealed the decision to the Court of Appeals (CA),
claims or damages except when or until the demand but the CA affirmed the lower courts decision.
can be established with reasonable certainty.Where
the demand is established with reasonable certainty, ISSUE: (1) Whether or not petitioners cannot be considered to
the interest shall begin to run from the time the have defaulted in payment for lack of competent proof that
claim is made judicially or extrajudicially, but when they received the demand letter
such certainty cannot be reasonably established at (2) Whether or not respondents remedy of resorting to both
the time demand is made, interest shall begin to run actions of replevin and collection of sum of money is proper
only from the date of the judgment of the court is
made. The actual base for the computation of legal HELD: The contentions are untenable.
intrest shall, in any case, be on the amount finally
adjudged. Records bear that both verbal and written demands were in
When the judgment of the court awarding a sum of fact made by respondent prior to the institution of the case
money becomes final & executry, the rate of legal against petitioners. Even assuming, for arguments sake, that
interest shall be 12& per annum from such finality no demand letter was sent by respondent, there is really no
until its satisfaction, this interim period being need for it because petitioners legally waived the
deemed to be by then an equivalent to a forbearance necessity of notice or demand in the Promissory Note
of credit. with Chattel Mortgage, which they voluntarily and
knowingly signed in favor of respondents
There being written stipulations as to the rate of interest predecessor-in-interest. Said contract expressly
owing on each specific promissory note, such agreed interest stipulates:
rates must be followed.
In case of my/our failure to pay when due and payable,
Surcharges & penalties agreed to be paid by the debtor shall any sum which I/We are obliged to pay under this note and/or
be determined by the Court whether such would be iniquitous any other obligation which I/We or any of us may now or in
& unconscionable. Given the circumstances under which the future owe to the holder of this note or to any other party
GOYU found itself after the occurrence of the fire, the Court whether as principal or guarantor x x x then the entire sum
rules the surcharge rate ranging from 9%-27% plus penalty of outstanding under this note shall, without prior notice
36% to be iniquitous & unconscionable. In light of GOYUs or demand, immediately become due and payable.
offer to pay the amount to RCBC, which RCBC refused, the (Emphasis and underscoring supplied)
Court finds it more in keeping with justice & equity for RCBC
not to charge additional interest, surcharges & penalties. A provision on waiver of notice or demand has been
recognized as legal and valid in Bank of the Philippine Islands
v. Court of Appeals, wherein We held:
-By Bea Reyes The Civil Code in Article 1169 provides that one incurs in
delay or is in default from the time the obligor demands the
FACTS: On February 15, 2001, petitioners spouses Deo Agner fulfillment of the obligation from the obligee. However, the
and Maricon Agner executed a Promissory Note with Chattel law expressly provides that demand is not necessary under
Mortgage in favor of Citimotors, Inc. The contract provides, certain circumstances, and one of these circumstances is
among others, that: for receiving the amount of Php834, when the parties expressly waive demand. Hence, since the
768.00, petitioners shall pay Php 17,391.00 every 15th day of co-signors expressly waived demand in the promissory notes,
each succeeding month until fully paid; the loan is secured by demand was unnecessary for them to be in default.
a 2001 Mitsubishi Adventure Super Sport; and an interest of
6% per month shall be imposed for failure to pay each Further, the Court even ruled in Navarro v. Escobido that prior
installment on or before the stated due date. demand is not a condition precedent to an action for a writ of
replevin, since there is nothing in Section 2, Rule 60 of the
On the same day, Citimotors, Inc. assigned all its rights, title Rules of Court that requires the applicant to make a demand
and interests in the Promissory Note with Chattel Mortgage to on the possessor of the property before an action for a writ of
ABN AMRO Savings Bank, Inc. (ABN AMRO), which, on May 31, replevin could be filed.

Page 4 of 30
Ateneo de Davao Univeristy
College of Law
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Atty. Lydia C. Galas
Midterm Case Digests

one percent (1%) per month or twelve percent (12%) per

Also, petitioners representation that they have not received a annum, to be reckoned from May 16, 2002 until full payment
demand letter is completely inconsequential as the mere act and with the remaining outstanding balance of their car loan
of sending it would suffice. Again, We look into the Promissory as of May 15, 2002 as the base amount.
Note with Chattel Mortgage, which provides:
Settled is the principle which this Court has affirmed in a
All correspondence relative to this mortgage, including number of cases that stipulated interest rates of three percent
demand letters, summonses, subpoenas, or notifications of (3%) per month and higher are excessive, iniquitous,
any judicial or extrajudicial action shall be sent to the unconscionable, and exorbitant. While Central Bank Circular
MORTGAGOR at the address indicated on this promissory note No. 905-82, which took effect on January 1, 1983, effectively
with chattel mortgage or at the address that may hereafter be removed the ceiling on interest rates for both secured and
given in writing by the MORTGAGOR to the MORTGAGEE or unsecured loans, regardless of maturity, nothing in the said
his/its assignee. The mere act of sending any correspondence circular could possibly be read as granting carte blanche
by mail or by personal delivery to the said address shall be authority to lenders to raise interest rates to levels which
valid and effective notice to the mortgagor for all legal would either enslave their borrowers or lead to a
purposes and the fact that any communication is not actually hemorrhaging of their assets. Since the stipulation on the
received by the MORTGAGOR or that it has been returned interest rate is void for being contrary to morals, if not against
unclaimed to the MORTGAGEE or that no person was found at the law, it is as if there was no express contract on said
the address given, or that the address is fictitious or cannot interest rate; thus, the interest rate may be reduced as reason
be located shall not excuse or relieve the MORTGAGOR from and equity demand.
the effects of such notice. (Emphasis and underscoring
Petitioner, v. RUEL MARTINEZ, Respondent.
The Court cannot yield to petitioners denial in receiving -by Jessalyn Puerin
respondents demand letter. To note, their postal address
evidently remained unchanged from the time they executed The Facts
the Promissory Note with Chattel Mortgage up to time the
case was filed against them. Thus, the presumption that "a Respondent Ruel Martinez (respondent) was the Operations
letter duly directed and mailed was received in the regular Manager of petitioner.Respondent applied for and was
course of the mail" stands in the absence of satisfactory proof granted a car loan amounting to P648,288.00. Both parties
to the contrary. agreed that the loan was payable through deductions from
respondent's bonuses or commissions, if any. Further, if
Jurisprudence abounds that, in civil cases, one who pleads respondent would be terminated for any cause before the end
payment has the burden of proving it; the burden rests on the of the term of the loan obligation, the unpaid balance would
defendant to prove payment, rather than on the plaintiff to be immediately due and demandable without need of
prove non-payment.20 When the creditor is in possession of demand.
the document of credit, proof of non-payment is not needed
for it is presumed.21 Respondent's possession of the In a letter dated January 22, 1999, petitioner terminated
Promissory Note with Chattel Mortgage strongly buttresses its respondent for cause effective immediately and demanded
claim that the obligation has not been extinguished. As held in that respondent pay his outstanding loan of P418,012.78 and
Bank of the Philippine Islands v. Spouses Royeca:22 surrender the car to petitioner within three days from receipt.
Despite this, respondent failed to pay the outstanding
x x x The creditor's possession of the evidence of debt is proof balance.
that the debt has not been discharged by payment. A
promissory note in the hands of the creditor is a proof of On July 12, 1999, petitioner filed a complaint with the
indebtedness rather than proof of payment. In an action for Regional Trial Court of Makati City, praying that respondent be
replevin by a mortgagee, it is prima facie evidence that the ordered to pay his outstanding obligation of P418,012.78 plus
promissory note has not been paid. Likewise, an uncanceled interest, and that respondent be held liable for exemplary
mortgage in the possession of the mortgagee gives rise to the damages, attorney's fees and costs of the suit.
presumption that the mortgage debt is unpaid.23
Respondent alleged that he already paid his loan through
Indeed, when the existence of a debt is fully established by deductions made from his compensation/salaries, bonuses
the evidence contained in the record, the burden of proving and commissions. During trial, respondent presented a
that it has been extinguished by payment devolves upon the certification dated September 10, 1996 issued by petitioner's
debtor who offers such defense to the claim of the creditor.24 president, Helen Dy (Dy), stating that respondent already paid
The debtor has the burden of showing with legal certainty that the amount of P337,650.00 as of the said date.
the obligation has been discharged by payment.
The Issues
Moreover, the vehicle subject matter of this case was never
recovered and delivered to respondent despite the issuance of Whether the certification dated September 10, 1996 should
a writ of replevin. As there was no seizure that transpired, it be admitted as basis for respondent's payment of his loan
cannot be said that petitioners were deprived of the use and with petitioner?
enjoyment of the mortgaged vehicle or that respondent
pursued, commenced or concluded its actual foreclosure. The Whether respondent has fulfilled his obligation with
trial court, therefore, rightfully granted the alternative prayer petitioner?
for sum of money, which is equivalent to the remedy of
"exacting fulfillment of the obligation." Certainly, there is no
double recovery or unjust enrichment30 to speak of. SC Ruling
All the foregoing notwithstanding, We are of the opinion that
the interest of 6% per month should be equitably reduced to The petition is partly meritorious.

Page 5 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

finality of this judgment. The total amount shall thereafter

Admissibility of the earn interest at the rate of six percent (6%) per annum72 until
certification dated fully paid. The trial court's Decision dated November 22, 2002
September 10, 1996 is AFFIRMED in all other respects.

The documents containing the signature of Dy which have EFFECT OF DEATH

been submitted by petitioner as authentic are the following:
(1) letter dated November 11, 1998;47 (2) termination letter STRONGHOLD INSURANCE CO. VS REPUBLIC-ASAHI
dated January 22, 1999;48 (3) promissory note dated June 17, -by Joe Van De Gala
1994;49 and (4) chattel mortgage signed on June 27, 1994.50
Examining and analyzing the signatures in these documents FACTS:
with Dy's signature in the certification, we find no substantial
reason to doubt the latter's authenticity. In May 1989, Rep-Asahi (respondent) entered a contract with
Jose D. Santos, the sole proprietor of JDS Construction, for a
Dy never testified that any forgery or fraud attended the construction of drainage and roadway system to be completed
certification. In fact, she did not deny the authenticity of her within 240 days. To guaranty the performance of the contract,
signature but actually admitted that the signature therein JDS put a performance bond of Php795,000 with Stronghold
looks like hers. Additionally, Valle, who is familiar with the Insurance (SICI) (petitioner) which them joint severally liable.
signature of Dy because of the requirements of her job, also
positively testified that the signature in the certification looks Several times prior to November of 1989, the engineers of
like that of Dy's. Rep-Asahi called the attention of JDS for the slow progress of
the construction. They feared that the project will not be
For having established the due execution and authentication finished within the time stipulated in the contract. However,
of the certification dated September 10, 1996, the these reminders went unheeded. On November 24 1989,
certification should be admitted in evidence to prove that dissatisfied with the progress of work, Rep-Asahi
respondent partially paid the car loan in the amount extrajudicially rescinded the contract and send a notice to JDS
ofP337,650.00. informing such recission. Such recissionper their contract shall
not be construed as a waiver of Rep-Asahis rights to claim
Insufficient evidence to prove damages to JDS and the latters sureties. Due to the recission,
full payment of loan Rep-Asahi hired another contractor to finish the project which
they incurred additional expenses.
It must be emphasized that both parties have not presented
any written agreement or contract governing respondent's During the proceeding, Jose D. Santos died and the
obligation. Nevertheless, it has been established that whereabouts of JDS was unknown. SICI contended that
respondent obtained a car loan amounting to P648,288.00 money claims against them has extinguished due to the death
from petitioner. Thus, the burden is now on respondent to of Mr. Santos. Even if this were not the case, they were
prove that the obligation has already been extinguished by released from their liability because there was no proper
payment. liquidation as to the ascertainment of the liabilities.
Liquidation in that case is impossible due to the death of Mr.
Although not exclusive, a receipt of payment is the best Santos.
evidence of the fact of payment. We held that the fact of
payment may be established not only by documentary ISSUE:
evidence but also by parol evidence.
Whether the liability of SICI under the performance bond
Except for respondent's bare allegations that he has fully paid extinguished by the death of Mr. Santos.
the P648,288.00 car loan, there is nothing in the records
which shows that full payment has indeed been made. HELD:
Respondent did not present any receipt other than the
certification dated September 10, 1996 which only proves that The Supreme Court stated that as a rule, death of either the
respondent has already paid P337,650.00 of the car loan. A debtor or the creditor does not extinguish the obligation for it
balance of P310,638.00 still remained. is transmissible. Transmission of the obligation is not
permitted if it is prevented by law, by the stipulation of the
Respondent also alleged that although deductions were made contract, or by the nature of the obligation. Monetary
from his salaries, bonuses and commissions, his payslips do obligations, such as in this case, is transferrable. Hence, the
not reflect such deductions because "there is no such car loan death of Mr. Santos does not extinguish the obligation.
field" in the accounting program for the payroll. Respondent
admitted in his testimony that he only presumed that the With regards to the liability of SICI, as a surety, is solidarily
deductions were being made from his salaries, bonuses and liable with Santos. The suretys obligation, even though
commissionS. merely an accessory or collateral to the obligation of the
principal, its liability to the creditor is direct, primary, and
Thus, having only proven payment to the extent of absolute. As provided in Art. 1216 of the Civil Code, a creditor
P337,650.00, respondent is obligated to pay petitioner the may go against any, some, or all the solidary debtors
balance of P310,638.00 with interest. simultaneously. The demand made against one of the debtors
shall not be an obstacle to those which may subsequently be
WHEREFORE, the instant petition is PARTIALLY GRANTED. The directed against the others, so long as the debt has not been
Court of Appeals' Decision dated October 18, 2006 in CA G.R. fully collected. If a person binds himself solidarily with the
CV No. 82686 is SET ASIDE. The respondent is ORDERED to principal debtor, the contract is called as Suretyship.
pay petitioner the balance of the car loan in the amount of
P310,638.00 plus interest at the rate of six percent (6%) per
annum computed from January 23, 199971 until the date of TO WHOM PAYMENT SHALL BE MADE

Page 6 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF Section 2, Rule 130 of the Rules of Court states that:(a) When
APPEALS and LORETO TAN,respondents. the original has been lost, destroyed, or cannot be produced
-by Kyneth Agunod in court;Section 4, Rule 130 of the Rules of Court allows the
presentation of secondary evidence when the original is lost
Facts:Private respondent Loreto Tan (Tan) is the owner of a or destroyed, thus:
parcel of land abutting the national highway in Mandalagan,
Bacolod City. Expropriation proceedings were instituted by the SEC. 4. Secondary evidence when original is lost or
government against private respondent Tan and other destroyed. - When the original writing has been lost or
property owners. destroyed, or cannot be produced in court, upon proof of its
execution and loss or destruction, or unavailability,
Tan filed a motion dated requesting issuance of an order for
the release to him of the expropriation price of P32,480.00. its contents may be proved by a copy, or by a recital of its
And On May 22, 1978, petitioner PNB (Bacolod Branch) was contents in some authentic document, or by the recollection
required by the trial court to release to Tan the amount of of witnesses.
P32,480.00 deposited with it by the government.
Considering that the contents of the SPA are also in issue
On May 24, 1978, petitioner, through its Assistant Branch here, the best evidence rule applies. Hence, only the original
Manager Juan Tagamolila, issued a managers check for document (which has not been presented at all) is the best
P32,480.00 and delivered the same to one Sonia Gonzaga evidence of the fact as to whether or not private respondent
without Tans knowledge, consent or authority. Sonia Gonzaga indeed authorized Sonia Gonzaga to receive the check from
deposited it in her account with Far East Bank and Trust Co. petitioner. In the absence of such document, petitioners
(FEBTC) and later on withdrew the said amount. arguments regarding due payment must fail.

When he failed to recover the amount from PNB, private Best evidence rule: when the subject of inquiry is the
respondent filed a motion with the court to require PNB to pay contents of a document, no evidence shall be
the same to him. admissible other than the original document itself.

Arguments of Petitioner: PNB contends that the existence CULABA VS SAN MIG. CORP.
of the SPA need not be proved by it under the best evidence -by Dokie Francris Talon
rule because it already proved the existence of the SPA from
the testimonies of its witnesses and by the certification issued TO WHOM PAYMENT SHALL BE MADE
by the Far East Bank andTrust Company that it allowed Sonia (A story of happy ever after)
Gonzaga to encash Tans check on the basis of the SPA.
Petitioner are owners of a store engaged in sale and
Issue: Whether there is payment to a person in whose favor distribution of SMC products. SMC sold the spouses beer
the obligation has been constituted, or his successor-in- products amounting to 28,650. Petitioner only made a partial
interest, or any person authorized to receive it. (Article 1240) payment of 3,740. Then they defaulted on the remaining
balance despite repeated demands.
Held:There is no question that no payment had ever been
SMC: We will file for a collection of a sum of money before the
made to private respondent as the check was never delivered
to him. When the court ordered petitioner to pay private
Culaba: Hey! We already paid the remaining balance. Look at
respondent the amount of P32,480.00, it had the obligation to
these four temporary charge slips (TCS)
deliver the same to him. Under Art. 1233 of the Civil Code, a
SMC: But we never received your payment.
debt shall not be understood to have been paid unless the
Culaba:Its impossible. An SMC supervisor (seemed to forget
thing or service in which the obligation consists has been
his name) who came in an SMC van came here and collected
completely delivered or rendered, as the case may be.
the payments.
SMC: Wait a minute. The TCS you just showed are among
The burden of proof of such payment lies with the debtor. In those that were reportedly lost as seen in our notice of loss
the instant case, neither the SPA nor the check issued by last July 9, 1983.You should pay us!
petitioner was ever presented in court.
The RTC ruled in favor of SMC.
The testimonies of petitioners own witnesses regarding the
check were conflicting. Tagamolila testified that the check was RTC: You know Culaba, it is unusual for you to forget the
issued to the order of Sonia Gonzaga as attorney-in-fact of name of the collector and did not even require the collector to
Loreto Tan,4while Elvira Tibon, assistant cashier of PNB print his name on the receipt.
(Bacolod Branch), stated that the check was issued to the Culaba: *stares*
order of Loreto Tan. RTC: And look at your TCs, it did not appear to have been
issued in their natural sequence
Furthermore, contrary to petitioners contention that all that is Culaba: *looks at the TCS and was shocked*
needed to be proved is the existence of the SPA, it is also
necessary for evidence to be presented regarding the nature Culaba made an appeal to the CA but the decision of the RTC
and extent of the alleged powers and authority granted to was affirmed. Then he went to the Supreme Court.
Sonia Gonzaga; more specifically, to determine whether the
document indeed authorized her to receive payment intended Culaba: Hey SC! I paid all my dues. An SMC van came here
for private respondent. However, no such evidence was ever and collected the payments. When I received the receipt, it
presented. was the similar to what I used to receive from SMC. And the
agents look like a real SMC agent that is why I never doubted

Page 7 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

SC: *looks down at Culaba in a blank face* check, which reads: "All prior endorsements and/or lack of
Culaba: The payment I made is in good faith! endorsement guaranteed."
SMC: But remember SC, the burden of proving payment is
with the debtor and he would not just pay to someone whom III
he saw for the first time without even asking his name. Thats Upon the presentment of the check, Allied funded the
incredible! check even without checking the authenticity of Lim Sio Wans
Culaba: Shut up SMC! I have paid my dues already! purported endorsement. On December 9, 1983, Lim Sio Wan
SMC: No! You shut up! Pay me! Pay me! deposited with Allied a second money market placement to
Culaba: No!!! mature on January 9, 1984. On December 14, 1983, upon the
maturity date of the first money market placement, Lim Sio
SC became irritated of the rantings of the two. Then in an Wan went to Allied to withdraw it. She was then informed that
instant, he made his decision the placement had been pre-terminated upon her instructions
in which she denied the allegation. Lim Sio Wan filed with the
SC: Enough! Enough you both! Regional Trial Court against Allied to recover the proceeds of
SMC and Culaba: *freezes in silence* her first money market placement. Allied filed a third party
SC: Payment is a mode of extinguishing an obligation. complaint against Metrobank and Santos. Metrobank filed a
Article 1240 of the Civil Code provides that payment shall be fourth party complain against FCC. FCC for its part filed a fifth
made to the person in whose favor the obligation has been party complaint against Producers Bank. Summonses were
constituted, or his successor-in-interest, or any person duly served upon all the parties except for Santos, who was
authorized to receive it.In this case, the payments were no longer connected with Producers Bank
purportedly made to a supervisor of the private respondent,
who was clad in an SMC uniform and drove an SMC van. He IV
appeared to be authorized to accept payments as he showed On May 15, 1984, Allied informed
a list of customers accountabilities and even issued SMC Metrobank that the signature on the check was
liquidation receipts which looked genuine. Unfortunately for forged. Metrobank withheld the amount represented
petitioner Francisco Culaba, he did not ascertain the identity by the check from FCC. Metrobank agreed to release
and authority of the said supervisor, nor did he ask to be the amount to FCC after the FCC executed an
shown any identification to prove that the latter was, indeed, undertaking, promising to indemnify Metrobank in
an SMC supervisor. The petitioners relied solely on the mans case it was made to reimburse the amount. Lim Sio
representation that he was collecting payments for SMC. Thus, Wan thereafter filed an amended complaint to
the payments the petitioners claimed they made were not the include Metrobank as a party-defendant, along with
payments that discharged their obligation to the private Allied.
Culaba: No! That cant be! The Regional Trial Court ruled that:
SMC: Just accept it! Payment is mine! Hahaha (Evil laugh) 1.) Allied Bank should pay Lim Sio Wan plus damages and
Atty. Fees.
And they lived happily evil after. 2.) Allied Banks cross-claim against Metrobank is DISMISSED.
The end. 3.) Metrobanks third-party complaint as against Filipinas
Allied Banking Corp. V. Lim Sio Wan Cement Corporation is DISMISSED
-by JV Milana 4.) Filipinas Cement Corporations fourth-party complaint
against Producers Bank is DISMISSED
I The Court of Appeals modified RTC's decision that Allied
On September 21, 1983, FCC had deposited a money Banking Corporation should pay 60% and Metropolitan Bank
market placement for P2,000,000.00 with Producers Bank. and Trust Company 40%
Santos was the money market trader assigned to handle
FCCs account. Such deposit is evidenced by Official Receipt ISSUE: W/N Allied should be solely liable to Lim Sio Wan.
and a Letter. When the placement matured, FCC demanded
the payment of the proceeds of the placement. HELD: The Supreme Court affirmed CA's decision with
modifications that Producers Bank should reimburse Allied and
II Metrobank.
On November 14, 1983, Lim Sio Wan deposited with
Allied Banking Corporation a money market placement of P A money market is a market dealing in
1,152,597.35 for a term of 31 days. December 5, 1983, a standardized short-term credit instruments (involving large
person claiming to be Lim Sio Wan called up Cristina So, an amounts) where lenders and borrowers do not deal directly
officer of Allied, and instructed the latter to pre-terminate Lim with each other but through a middle man or dealer in open
Sio Wans money market placement, to issue a managers market. In a money market transaction, the investor is a
check representing the proceeds of the placement, and to lender who loans his money to a borrower through a
give the check to Deborah Dee Santos who would pick up the middleman or dealer.
check. The person claiming to be Lim Sio Wan, described the
appearance of Santos so that she could easily identify her. Article 1240 of the New Civil Code provides that:
Santos arrived at the bank and signed the application form for
a managers check to be issued. The bank issued Managers
Check representing the proceeds of Lim Sio Wans money Payment shall be made to the person
market placement in the name of Lim Sio Wan, as payee, in whose favor the obligation has
cross-checked "For Payees Account Only" and given to been constituted, or his successor in
Santos. Allied managers check was deposited in the account interest, or any person authorized
of Filipinas Cement Corporation (FCC) at Metropolitan Bank to receive it.
and Trust Co. (Metrobank), with the forged signature of Lim
Sio Wan as endorser. Metrobank stamped a guaranty on the

Page 8 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

Lim Sio Wan, as creditor of the bank for her money for the rental fees and expropriation indemnity due for the
market placement, is entitled to payment upon her request, or
subject land. Article 1242 of the Civil Code reads:
upon maturity of the placement, or until the bank is released isanexceptiontotherulethata
Payment made in good faith to any person in possession of
from its obligation as debtor. Allied, being negligent in issuing the credit shall release the debtor.
the managers check and in transmitting it to Santos without valid payment of an obligation
even a written authorization. Allied did not even ask for the
certificate evidencing the money market placement or call up canonlybemadetothepersonto
*It contemplates a situation where a debtor pays a:
Lim Sio Wan at her residence or office to confirm her possessor of credit i.e.,- someone who is not the
instructions. Allieds negligence must be considered as the real whomsuchobligationisrightfully
creditor but appears, under the circumstances, to be the
proximate cause of the resulting loss. When Metrobank real owed.
endorsed the check without verifying the authenticity of Lim In such scenario, the law considers the payment to the
Sio Wans endorsement and when it accepted the check possessor of credit - valid even as against the real
despite the fact that it was cross-checked payable to payees creditor taking into account the good faith of the debtor.
account only contributed to the easier release of Lim Sio
Wans money and perpetuation of the fraud. Given the XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
relative participation of Allied and Metrobank to the instant
case, both banks cannot be adjudged as equally liable. CASE BACKGROUND:
Hence, the 60:40 ratio of the liabilities of Allied and Metrobank -The subject property was under the name of Magondato
respectively, as ruled by the CA, must be upheld. FCC, having -1978, a portion was possessed by NAPOCOR for the Agus 1
no participation in the negotiation of the check and in the plant
forgery of Lim Sio Wans endorsement, can raise the real -1979, Mangondato discovered such occupation and began
defense of forgery as against both banks. Producers Bank was demanding compensation for the subject land from petitioner.
unjustly enriched at the expense of Lim Sio Wan. Producers -Magondato sent a letter detailing the origin of the land.
Bank should reimburse Allied and Metrobank for the amounts -NPC first rejected the claim of ownership but later acquiesced
ordered to pay Lim Sio Wan and acknowledged Magondatos right.
-they tried to settle the amount for compensation but failed
then a civil case ensued.
-RTC; decision upheld petitioners right to expropriate the
subject land: it denied Mangondatos claim for reconveyance
and decreed the subject land condemned in favor of the
-by Franklin Flores
petitioner, effective July of 1992, subject to payment by the
latter of just compensation in the amount of
P21,995,000.00. Anent petitioners occupation of the subject
land from 1978 to July of 1992, on the other hand, the
Bad Faith-A finding of bad faith usually assumes the
decision required the former to pay rentals therefor at the rate
presence of two
of P15,000.00 per month with 12% interest per annum. (final
and executory)
(2) elements: -During the pendency of the case:
The Ibrahims and Maruhoms asseverate that they are the real
1.) that the actor knew or should have known that a owners of the lands; they being the lawful heirs of the
particular course of action is wrong or illegal. late Datu Magayo-ong Maruhom, who was the original
2.) that despite such actual or imputable knowledge, proprietor of the said lands. They also claimed that
the actor, voluntarily, consciously and out of his own Mangondato actually holds no claim or right over the lands
free will, proceeds with such course of action. except that of a trustee who merely holds the said lands in
trust for them.
Verily, the clear denominator in all of the foregoing judicial -in the same complaint aside from specific action, TRO was
pronouncements is that the essence of bad faith consists granted and a writ of preliminary injunction.
in the deliberate commission of a wrong. -NPC appealed but denied.
-Magondato, in view of the finality of this Courts decision, he
Indeed, the concept has often been equated with malicious or filed a motion for execution of the decision in Civil Case No.
fraudulent motives, yet distinguished from the mere 605-92 and Civil Case No. 610-92.24 Against this motion,
unintentional wrongs resulting from mere simple negligence however, petitioner filed an opposition.
or oversight. -RTC found no merit in NPCs opposition
*Only with the concurrence of these two elements can -The court held that Ibrahims and Maruhoms are the real
we begin to consider that the wrong committed had owners, but could no longer be reconveyed back to them, thus
been done deliberately and, thus, in bad faith. they are the righhtful recipients of whatever rental fees and
indemnity that may be due for the subject land as a result of
POSSESSOR OF CREDIT it expropriation. Also held NPC and Mangondato solidarily
- The law considers the payment to the possessor of credit liable to them.
as valid even as against the real creditor taking into -NPC contested the matter to CA, but denied.
account the good faith of the debtor.Should the
Ibrahims and Maruhoms turn out to be the real owners of the SUPREME COURT
subject land, petitioners previous payment to Mangondato Issue:
pursuant to Civil Case No. 605-92 and Civil Case No. 610-92 Whether it is correct, in view of the facts and circumstances in
given the absence of bad faith on petitioners part as this case, to hold petitioner liable in favor of the Ibrahims and
previously discussed may nonetheless be considered Maruhoms for the rental fees and expropriation indemnity
as akin to a payment made in good faith to a person adjudged due for the subject land.
in possession of credit per Article 1242 of the Civil -according to the lower courts, there was bad faith on the
Code that, just the same, extinguishes its obligation to pay following basis:

Page 9 of 30
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Atty. Lydia C. Galas
Midterm Case Digests

1. Petitioner allowed payment to Mangondato despite its Maruhoms would not even be entitled to receive anything
prior knowledge, which dates back as early as 28 September from anyone for the
1981, by virtue of Mangondatos letter of even date, that the subject land. Hence, petitioner cannot be held liable to the
subject land was owned by a certain Datu Magayo-ong Ibrahims and Maruhoms.
Maruhom and not by Mangondato; and 2.) Should the Ibrahims and Maruhoms turn out to be
2. Petitioner allowed such payment despite the issuance the real owners of the subject land, petitioners
of a TRO and a writ of preliminary injunction in Civil Case No. previous payment to Mangondato pursuant to Civil
967-93 that precisely enjoins it from doing so. Case No. 605-92 and Civil Case No. 610-92 given
the absence of bad faith on petitioners part as
RULING: previously discussed may nonetheless be
-There was no bad faith. considered as akin to a payment made in good
-Case law provides: BAD FAITH is faith to a person in possession of credit per
*a breach of a known duty through some motive of interest or Article 1242 of the Civil Code that, just the same,
ill will. extinguishes its obligation to pay for the rental fees
*a state of mind affirmatively operating with furtive design or and expropriation indemnity due for the subject land.
with some motive of self-interest or will or for ulterior purpose. Article 1242 of the Civil Code reads:
*bad faith does not simply connote bad judgment or Payment made in good faith to any person in possession of
negligence; it imports a dishonest purpose or some moral the credit shall release the debtor.
obliquity and conscious doing of wrong. It means breach of a
known duty thru some motive or interest of ill will; it partakes Article 1242 of the Civil Code is an exception to the rule that a
of the nature of fraud. valid payment of an obligation can only be made to the
*Malice or bad faith implies a conscious and intentional design person to whom such obligation is rightfully owed. 64 It
to do a wrongful act for a dishonest purpose or moral obliquity contemplates a situation where a debtor pays a possessor of
-the clear denominator in all of the foregoing judicial credit i.e., someone who is not the real creditor but appears,
pronouncements is that the essence of bad faith consists in under the circumstances, to be the real creditor. 65In such
the deliberate commission of a wrong. Indeed, the scenario, the law considers the payment to the possessor of
concept has often been equated with malicious or credit as valid even as against the real creditor taking into
fraudulent motives, yet distinguished from the mere account the good faith of the debtor.
unintentional wrongs resulting from mere simple negligence
or oversight. * being the judgment creditor and the registered owner of
the subject land at the time he is considered as a
Bad Faith-A finding of bad faith usually assumes the possessor of credit with respect to the rental fees and
presence of two expropriation indemnity adjudged due for the subject land in
the two cases, if the Ibrahims and Maruhoms turn out to be
the real owners of the subject land. Hence, petitioners
(2) elements: payment to Mangondato of the fees and indemnity due for the
subject land as a consequence of the execution of Civil Case
1. that the actor knew or should have known that a could still validly extinguish its obligation to pay for the same
particular course of action is wrong or illegal. even as against the Ibrahims and Maruhoms.
2. that despite such actual or imputable knowledge,
the actor, voluntarily, consciously and out of his own Effect of Extinguishment of
free will, proceeds with such course of action. Petitioners Obligation
-In the case at bar, petitioners payment to Mangondato - If Mangondato turns out to be the real owner of the subject
of the rental fees and expropriation indemnity was land, the Ibrahims and Maruhoms would not be entitled to
required by the final and executory decision in the said recover anything from anyone for the subject land. As a result,
two cases and was compelled thru a writ of garnishment of Mangondatos moneys in the possession of the
garnishment issued by the court that rendered such SSS in the amount of P2,700,000.00 in favor of the Ibrahims
decision. In other words, the payment to Mangondato and Maruhoms, becomes improper and unjustified. In this
was not a product of a deliberate choice on the part of event, therefore, the Ibrahims and Maruhoms may be ordered
the petitioner but was made only in compliance to the lawful to return the amount so garnished to Mangondato.
orders of a court with jurisdiction. - Otherwise, i.e., if the Ibrahims and Maruhoms really are the
- no bad faith can be taken against it, even assuming that true owners of the subject land, they may only recover the
petitioner may have had prior knowledge about the claims of rental fees and expropriation indemnity due the subject land
the Ibrahims and Maruhoms upon the subject land and the against Mangondato but only up to whatever payments the
TRO issued. latter had previously received from petitioner.
- Without Bad Faith, Petitioner cannot be held Liable to the - At any rate, the extinguishment of petitioners obligation to
Ibrahims and Maruhoms. pay for the rental fees and expropriation indemnity due the
- regardless of who between Mangondato, on one subject land negates whatever cause of action the Ibrahims
hand, and the Ibrahims and Maruhoms, on the other, and Maruhoms might have had against the former. Hence,
turns out to be the real owner of the subject land.Either regardless of who between Mangondato, on one
way, petitioner cannot be made liable to the Ibrahims and hand, and the Ibrahims and Maruhoms, on the other,
Maruhoms. turns out to be the real owner of the subject land, the
1.) If Mangondato is the real owner of the subject dismissal of the case against NPC is concerned is
land, then the obligation by petitioner to pay for the rental called for.
fees and expropriation indemnity due the subject land is
already deemed extinguished by the latters previous
payment under the final judgment in Civil Case No. 605-92 Article 1245: DATION IN PAYMENT
and Civil Case No. 610-92. This would be a simple case of an
obligation being extinguished through payment by the debtor Estanislao vs Eastwest Banking
to its creditor. Under this scenario, the Ibrahims and -by Ian Lasaca

Page 10 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

ISSUE: Whether or not the deed of assignment which

Facts: expressly provides that the transfer and conveyance to
July 24, 1997, petitioners obtained a loan from the respondent respondent of the three units of heavy equipment, and its
in the amount of P3,925,000.00 evidenced by a promissory acceptance thereof, shall be in full payment of the
note and secured by two deeds of chattel mortgage petitioners total outstanding obligation to the latter operate to
dated July 10, 1997: one covering two dump trucks and a extinguish petitioners debt to respondent, such that the
bulldozer to secure the loan amount of P2,375,000.00, and replevin suit could no longer prosper?
another covering bulldozer and a wheel loader to secure the In short: Whether or not the delivery of the 3 heavy
loan amount of P1,550,000.00. Petitioners defaulted in the equipment to the respondent serves as a full payment
amortizations and the entire obligation became due and and will extinguish the obligation of the petitioners?
demandable. Ruling:
April 10, 2000, respondent bank filed a suit for replevin with Yes, the nature of the obligation is dation in payment
damages, praying that the equipment covered by the first whereby property is alienated to the creditor in satisfaction of
deed of chattel mortgage be seized and delivered to it. In the a debt in money. Such transaction is governed by the law on
alternative, respondent prayed that petitioners be ordered to sales.
pay the outstanding principal amount of P3,846,127.73 with Question: Is the signature of the representative of the
19.5% interest per annum reckoned from judicial demand until respondent necessary for the agreement?
fully paid, exemplary damages of P50,000.00, attorneys fees No, signature is not necessary because at the first delivery of
equivalent to 20% of the total amount due, other expenses the heavy equipments to respondent, they have accepted it
and costs of suit. without questioning. Even if we were to consider the
RTC agreement as a compromise agreement, there was no need
Respondent moved for suspension of the proceedings on for respondents signature on the same, because with the
account of an earnest attempt to arrive at an amicable delivery of the heavy equipment which the latter
settlement of the case. The trial court suspended the accepted, the agreement was consummated.
proceedings, and during the course of negotiations, a deed of Respondents approval may be inferred from its
assignment dated August 16, 2000 was drafted by the unqualified acceptance of the heavy equipment.
respondent, which provides in part, that: Consent to contracts is manifested by the meeting of the offer
the ASSIGNOR is indebted to the ASSIGNEE in the aggregate and the acceptance of the thing and the cause which are to
sum of SEVEN MILLION THREE HUNDRED FIVE THOUSAND constitute the contract; the offer must be certain and the
FOUR HUNDRED FIFTY NINE PESOS and FIFTY TWO CENTAVOS acceptance absolute. The acceptance of an offer must be
(P7,305,459.52), Philippine currency, inclusive of accrued made known to the offeror, and unless the offeror knows of
interests and penalties as of August 16, 2000, and in full the acceptance, there is no meeting of the minds of the
payment thereof, the ASSIGNOR does hereby ASSIGN, parties, no real concurrence of offer and acceptance.[8] Upon
TRANSFER and CONVEY unto the ASSIGNEE those motor due acceptance, the contract is perfected, and from that
vehicles, with all their tools and accessories, more particularly moment the parties are bound not only to the fulfillment of
described as follows: what has been expressly stipulated but also to all the
Make : Isuzu Dump Truck consequences which, according to their nature, may be in
xxx keeping with good faith, usage and law.
Make : Isuzu Dump Truck With its years of banking experience, resources and
xxx manpower, respondent bank is presumed to be familiar
Make : x x x Caterpillar Bulldozer x x x with the implications of entering into the deed of
That the ASSIGNEE hereby accepts the assignment in full assignment, whose terms are categorical and left
payment of the above-mentioned debt x x x. (Emphasis nothing for interpretation. The alleged non-inclusion in
supplied) Petitioners affixed their signatures on the deed of the deed of certain units of heavy equipment due to
assignment. However, for some unknown reason, respondent inadvertence, plain oversight or mistake, is
banks duly authorized representative failed to sign the deed. tantamount to inexcusable manifest negligence, which
On October 6, 2000 and March 8, 2001, respectively, should not invalidate the juridical tie that was created.
petitioners completed the delivery of the heavy Respondent is presumed to have maintained a high level of
equipment mentioned in the deed of assignment two meticulousness in its dealings with petitioners. The business
dump trucks and a bulldozer to respondent, which of a bank is affected with public interest; thus, it makes a
accepted the same without protest or objection. sworn profession of diligence and meticulousness in giving
Respondent filed a manifestation and motion to admit an irreproachable service.
amended complaint for the seizure and delivery of two Respondents protestations of mistake and plain
more heavy equipment the bulldozer and wheel loader oversight are self-serving. The evidence show that from
which are covered under the second deed of chattel August 16, 2000 (date of the deed of assignment) up to March
mortgage. Respondent claimed that its representative 8, 2001 (the date of delivery of the last unit of heavy
inadvertently failed to include the second deed of equipment covered under the deed), respondent did not
chattel mortgage among the documents forwarded to raise any objections nor make any move to question,
its counsel when the original complaint was being invalidate or rescind the deed of assignment. It was not
drafted. Respondent likewise claimed that petitioners were until June 20, 2001 that respondent raised the issue of its
given a chance to submit a refinancing scheme that would alleged mistake by filing an amended complaint for replevin
allow them to keep the remaining two heavy equipment, but involving different chattels, although founded on the same
they failed to come up with such a scheme despite repeated principal obligation.
promises to do so. Petitioners outstanding indebtedness as of
June 14, 2001 stood at P4,275,919.61 which is more or less ONG v. ROBAN LENDING
equal to the aggregate value of the additional units of heavy -by Stacey Otaza
equipment sought to be recovered.
CA Reversed the decision in favor of the respondent bank
conveying that the Estanislao spouses should deliver the two Facts: petitioner-spouses Wilfredo N. Ong and Edna
heavy equipment or pay the amount in cash. Sheila Paguio-Ong obtained several loans from Roban Lending

Page 11 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

Corporation (respondent) in the total amount Payment, petitioners had to execute a promissory note
of P4,000,000.00. These loans were secured by a real estate for P5,916,117.50 which they were to pay within one year.
mortgage on petitioners parcels of land .
On February 12, 2001, petitioners and respondent executed Respecting the charges on the loans, courts may reduce
an Amendment to Amended Real Estate Mortgage interest rates, penalty charges, and attorneys fees if they are
consolidating their loans inclusive of charges thereon which iniquitous or unconscionable.
totaled P5, 916,117.50. On even date, the parties executed a
Dacion in Payment. Wherein petitioners assigned the This Court, based on existing jurisprudence, finds the monthly
properties covered by TCT No. 297840 to respondent in interest rate of 3.5%, or 42% per annum unconscionable and
settlement of their total obligation thus reduces it to 12% per annum. This Court finds too the
In April 2002 , petitioners filed a Complaint, declaration of penalty fee at the monthly rate of 5% (60% per annum) of the
mortgage contract as abandoned, annulment of deeds, illegal total amount due and demandable principal plus interest, with
exaction, unjust enrichment, accounting, and damages, interest not paid when due added to and becoming part of the
alleging that the Memorandum of Agreement and the Dacion principal and likewise bearing interest at the same rate,
in Payment executed are void for being pactum compounded monthly unconscionable and reduces it to a
commissorium. Petitioners also alleged that the loans yearly rate of 12% of the amount due, to be computed from
extended to them from July 14, 1999 to March 20, 2000 were the time of demand. This Court finds the attorneys fees of
founded on several uniform promissory notes, which provided 25% of the principal, interests and interests thereon, and the
for 3.5% monthly interest rates, 5% penalty per month on the penalty fees unconscionable, and thus reduces the attorneys
total amount due and demandable, and a further sum of 25% fees to 25% of the principal amount only.
attorneys fees thereon, and in addition, respondent exacted
certain sums denominated as EVAT/AR. Petitioners decried Tan Shuy vs spouses Guillermo Maulawin and Paring
these additional charges as illegal, iniquitous, unconscionable, Carino Maulawin
and revolting to the conscience as they hardly allow any -by Emmanuel E. Monteroyo
borrower any chance of survival in case of default.

Isuue: whether the Memorandum of Agreement and Dacion in

Payment are Void for it constituting Pactum commissorium?
Petitioner and Respondent are both engage in the business of
Held: The petition is meritorious.
buying and selling copra and corn.
Reason: This Court finds that the Memorandum of Agreement
and Dacion in Payment constitute pactum commissorium, Vicente, petitioners son who helps in their business,
which is prohibited under Article 2088 of the Civil Code which explained that whenever they are to buy copra or corn from
provides: crop sellers they would prepare and issue them a pessada.
A pessada is a document that contains details of the
The creditor cannot appropriate transaction, he further explained that whenever the said
the things given by way of pledge or pessadas contains the annotation pd on the total amount of the
mortgage, or dispose of them. Any purchase price that would mean that the said crop deliveries
stipulation to the contrary is null and had already been paid by the petitioner.
void. July 10,1997. Herein petitioner extended a loan to the
respondent for the amount of P420,000. In return, herein
The elements of pactum commissorium, which enables the respondent obligated himself to pay the said loan and to sell
mortgagee to acquire ownership of the mortgaged property copras to the petitioner.
without the need of any foreclosure proceedings, ]are: (1) Petitioner allege that despite repeated demands, herein
there should be a property mortgaged by way of security for respondent only remitted a total amount of 28,500 which
the payment of the principal obligation, and (2) there should leaves an outstanding balance of 391,500.
be a stipulation for automatic appropriation by the creditor of Petitioner filed a complaint in the regional trial court.
the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.[31] Defense of Guillermo: Respondent countered that he had
already paid the subject amount in full amounting to
In the case at bar, the Memorandum of Agreement and the 420,537.68. According to him, he continuously delivered and
Dacion in Payment contain no provisions for foreclosure sold copras to petitioner and that he had a subsequent oral
proceedings nor redemption. Under the Memorandum of arrangement with petitioner that the net proceeds for the said
Agreement, the failure by the petitioners to pay their debt
copra deliveries would be applied as installment payment for
within the one-year period gives respondent the right to
his loan.
enforce the Dacion in Payment transferring to it ownership of
To bolster his defense. Respondent presented copies of the
the properties covered by TCT No. 297840. Respondent, in
pessada issued by Elena, daughter of the respondent and of
effect, automatically acquires ownership of the properties
upon petitioners failure to pay their debt within the stipulated Vicente. He pointed out that the said do not contain the
period. notation pd which means that he did not receive the net
proceeds of the copra deliveries but instead they were applied
Respondent argues that the law recognizes dacion en pago as as installment payment for the loan.
a special form of payment whereby the debtor alienates
property to the creditor in satisfaction of a monetary RTC and CA: Ruled that the net proceeds for the copra
obligation. This does not persuade. In a true dacion en pago, deliveries should be applied as installment payment. CA
the assignment of the property extinguishes the monetary affirmed the decision of the RTC.
debt. In the case at bar, the alienation of the properties was
by way of security, and not by way of satisfying the debt. The ISSUE:
Dacion in Payment did not extinguish petitioners obligation to WON the delivery of the copras amounted to installment
respondent. On the contrary, under the Memorandum of payments for the loan obtained by the respondent from the
Agreement executed on the same day as the Dacion in petitioner. YES!

Page 12 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

"An assignment of credit is an agreement by virtue of

RULING: which the owner of a credit, known as the assignor, by
Article 1254 provided for a social form of payment called a legal cause, such as sale, dation in payment,
dation in payment, where property is alienated to the creditor exchange or donation, and without the consent of the
to satisfy a debt in money.The subsequent arrangement debtor, transfers his credit and accessory rights to
between the petitioner and the respondent is in the nature of another, known as the assignee, who acquires the
Dation in Payment. There was partial payment whenever power to enforce it to the same extent as the assignor
Guillermo delivers copras and chose not to collect the net could enforce it against the debtor. It may be in the form
proceeds but instead apply them as installment payments of of sale, but at times it may constitute a dation in payment,
the loan. such as when a debtor, in order to obtain a release from his
debt, assigns to his creditor a credit he has against a third
However, the court did not credit the net proceeds from person." As a dation in payment, the assignment of credit
12 pesadas, as they were deliveries for corn and not copra. operates as a mode of extinguishing the obligation; the
According to the RTC and CA as affirmed by the SC, Guillermo delivery and transmission of ownership of a thing (in this case,
himself testified that it was the net proceeds from the copra the credit due from a third person) by the debtor to the
deliveries that were to be applied as installment payments creditor is accepted as the equivalent of the performance of
for the loan. the obligation.
The terms of the compromise judgment, however, did not
Thus, it ruled that the total amount of 41,585.25, which convey an intent to equate the assignment of Magdalenas
corresponded to the net proceeds from corn deliveries, retirement benefits (the credit) as the equivalent of the
should be deducted from the amount of 420,537.68 claimed payment of the debt due the spouses Serfino (the obligation).
by Guillermo to be the total value of his copra deliveries. We There was actually no assignment of credit; if at all, the
compromise judgment merely identified the fund from which
therefore uphold the findings of the trial court, as affirmed by
payment for the judgment debt would be sourced.
the CA, that the net proceeds from Guillermos copra
deliveries amounted to 378,952.43. With this partial
In the present case, the judgment debt was not extinguished
payment, respondent remains liable for the balance totaling by the mere designation in the compromise judgment of
41,047.57. Magdalenas retirement benefits as the fund from which
payment shall be sourced. That the compromise agreement
Wherefore, the petition is denied and the resolution of authorizes recourse in case of default on other executable
the CA is affirmed. properties of the spouses Cortez, to satisfy the judgment debt,
further supports our conclusion that there was no assignment
SERFINO V FAR EAST BANK of Magdalenas credit with the GSIS that would have
-by Erianne Du extinguished the obligation.
The compromise judgment in this case also did not give the
Facts: supposed assignees, the spouses Serfino, the power to
Spouses Serifno herein instituted an action for the collection enforce Magdalenas credit against the GSIS. In fact, the
of a sum of money against spouses Cortez. Both parties then spouses Serfino are prohibited from enforcing their claim until
by way of an amicable settlement executed a compromise after the lapse of one (1) week from Magdalenas receipt of
agreement in which it was provided for in said agreement that her retirement benefits
the full payment of the judgment debt shall be taken out of
the retirement benefits of Magdalena Cortez, the full payment Since no valid assignment of credit took place, the spouses
of which shall be made one week after she has obtained said Serfino cannot validly claim ownership of the retirement
retirement benefits from the GSIS. benefits that were deposited with FEBTC. Without ownership
rights over the amount, they suffered no pecuniary loss that
Spouses Cortez however failed to pay the debt and it was has to be compensated by actual damages. The grant of
even further discovered by Godfrey Serfino that the actual damages presupposes that the claimant suffered a duly
retirement benefits had been deposited into the savings proven pecuniary loss
account of Grace Cortez with the respondent bank Far East
Bank. The Serfinos then sent letters to Far East Bank telling PEN VS. JULIAN
them to withhold delivery of the deposit to Grace Cortez -Iris Monacano
claiming that they had acquired ownership over said deposit
by virtue of the compromise agreement which they claimed FACTS:
had transferred the ownership of the credit (which is the April 1986 Julians(appellees) obtained 60k loan from Adelaida
retirement benefits) in their favor. Pen. May 22 & 27 they were again extended loans worth 50k
and 10k. Two promissory notes were executed by Julians in
The RTC had ruled that Cortez spouses were indeed be liable favour of Pen payable on June 15 and July 22. As security,
for fraudulently diverting the retirement benefits to the they executed a real estate mortgage over their property.
savings account of Grace Cortez, however it had ruled that Apellants version:
respondent bank should be absolved of any liability since it Linda Julian were unable to pay despite several demands.
was not made a party to the compromise agreement and that Adelaida prompted to institute foreclosure proceedings.
there was no court order authorizing Far East Bank to withhold But this was prevailed upon by Linda because of the cost of
delivery of said deposit, hence this instant petition in which litigation and the embarrassment it would cause her since the
Serfinos assailed the decision of the RTC in absolving Far East proceedings would be announced in the City Hall. Instead,
Bank of any liability. Linda offered their mortgaged property aspayment in
kind. Upon ocular inspection, the property was agreed to ba
Issue: Whether or not there was indeed a valid transfer of the valued at 70k. A deed of sale was executed on Oct. 22.
credit in favor of the spouses Serfino. July 1989, Linda offered to repurchase the property. Adelaida
agreed for 436k payable on July 31, 1989. Linda failed to pay.
Ruling: Feb. 1990, Linda offered to repurchase again but failed to pay.

Page 13 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

On June 28, 1990, she offered 100k to Pen but this was FACTS:
rejected. Upon agreement of the parties, the 100k was 1. May 1, 1997: Bathala Marketing (respondent), as
deducted from the debt. Instead of paying the remaining lessee, represented by its president Ramon Garcia,
balance, appellee filed an adverse claim. RENEWED ITS CONTRACT OF LEASE with Ponciano
Appellees version: Almeda, as lessor, husband and father of petitioners.
Upon execution of the mortgage, they were required by Pen to Under the said Contract, Ponciano agreed to lease a
sign a document purportedly an Absolute deed of sale. portion of the Almeda compound to respondent,
The said document does not contain any consideration,
consisting of 7,348.25 sq.m., for a monthly rental of
it was undated, unfilled and unnotarized. Their last
PhP 1,107,348.69 for a term of four (4) years from
payment was on June 28 (100k). Their total payments were
115k. May 1, 1997.
Dec. 1992, she offered to pay 150k but this was rejected by
2. The Contract of Lease contained the following
Pen and demanded 250k instead. Unable to meet the
demand, Linda desisted and requested the land title be shown provision which later on gave rise to the instant case:
to her to which the latter refused. Upon verification from the
Registry of Deeds, she found out that the property was
DEVALUATION of the Philippine currency should
already registered under Pens name. Linda filed and Adverse
supervene, the value of the Philippine Peso at the
Claim. Furthermore she discovered Pen obtained several
time of the establishment of the obligation shall be
Declarations of Real Property and a Deed of Sale executed on
the basis of payment.
Oct.22. She filed Cancellation of Sale, Cancellation of Tile,
3. January 26, 1998: In lieu of Ponciano (in view of his
Recovery of Possession and Damages. She allege that through
bad faith, Pen maliciously typed, unilaterally filled up death), the petitioners sent a letter to the respondent
and caused the notarization of the deed of sale. She informing the latter that the former will increase the
used this spurious deed of sale to cause the transfer of monthly rental rates by 73%, pursuant to the
the parcel of land to her name. SEVENTH CONDITION of the Contract of Lease and
RTC AND CA: Favored respondents. Both declared that Art. 1250 of the Civil Code.
the deed of Sale was null and void.
COURTS RULING: Court adopted CAs conclusion that Respondent refused to pay the additional rentals
the Deed of Sale is a prohibited pactumcommissorium. contending that there was no extraordinary inflation
Elements of PACTUM COMMISSORIUM: to warrant the application of Art. 1250. In spite of
1- There must be a thing pledged/mortgaged by way of this, the respondent still continued to pay the
security for the payment of the prin. Obli. petitioners the monthly rentals based on the
This element is present in this case when stipulated rental rates in the contract.
respondents mortgaged their property in favour of ISSUE:
2- There should be stipulation of the automatic INFLATION/DEVALUATION.
appropriation of the creditor of the thing
pledged/mortgaged in the event of non-payment of SC RULING:
the principal obli. No.
The authorization of Adelaide to appropriate the
property was implied through Lindas act of signing Article 1250 of the Civil Code states:
the blank document.

Art. 2088 of CC prohibits creditor from In case an extraordinary inflation or deflation of the
appropriating the thing pledge or mortgage. currency stipulated should supervene, the value of
The eventual transfer of the property in a manner the currency at the time of the establishment of the
not in a valid dacion en pago confirmed the obligation shall be the basis of payment, unless there
nature of the transaction as is an agreement to the contrary.
Elements of Dacion en pago: Inflation has been defined as the sharp increase of
1- There is a money obligation money or credit, or both, without a corresponding increase in
2- The alienation of the creditor to the business transaction. There is inflation when there is an
property of the debtor with consent increase in the volume of money and credit relative to
3- The satisfaction of the money obligation available goods, resulting in a substantial and continuing rise
in the general price level. In a number of cases, this Court had
Therefore, in order for a valid dacion to provided a discourse on what constitutes extraordinary
transpire, the alienation of the property should inflation, thus:
fully extinguish the debt of the debtor. In the
case at bar, the debt of the respondents
subsisted despite the transfer of the property in [E]xtraordinary inflation exists when there is a
favour of Adelaida. In light of this, the deed of decrease or increase in the purchasing power of the
sale was void. Petitioners are ordered to Philippine currency which is unusual or beyond the
reconvey the title of the property to defendants. common fluctuation in the value of said currency,
and such increase or decrease could not have been
reasonably foreseen or was manifestly beyond the
ART. 1250
contemplation of the parties at the time of the
establishment of the obligation.
-by LA Pizarro

Page 14 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

The factual circumstances obtaining in the present

case do not make out a case of extraordinary inflation or Art. 1252 grants the right to the debtor to choose wo which of
devaluation as would justify the application of Article 1250 of several obligation to apply a particular payment that he
the Civil Code. We would like to stress that the erosion of the tenders to the creditor. However, it is likewise granted the
value of the Philippine peso in the past three or four decades, right of the creditor to apply such payment in case the debtor
starting in the mid-sixties, is characteristic of most currencies. fails to direct its application.
And while the Court may take judicial notice of the decline in
the purchasing power of the Philippine currency in that span WAIVER Debtors right to apply payment can be waived and
of time, such downward trend of the peso cannot be even granted to the creditor fi the debtor so agrees. A
considered as the extraordinary phenomenon contemplated limitation is when there is an agreement as to the debt
by Article 1250 of the Civil Code. Furthermore, absent an which are to be paid first, the debtor cannot vary this
official pronouncement or declaration by competent agreement.
authorities of the existence of extraordinary inflation during a
given period, the effects of extraordinary inflation are not to In the case at bar, respondent expressly agreed to grant
be applied. petitioner the authority to apply any and all of central suretys
Premiere Development Bank vs. Central SuretyK
WAIVER OF DEMAND -There was no waiver on the part of
-by Frances Mana-ay
petitioner. The loan of 6M and the pledge of wackwack was
past the due and demand stage. Petitioner had the right to
FACTS: Aug 20, 1999, respondent Central Surety and
declare them immediately due and demandable without need
Insurance Company obtained loans from petitioner Premiere
of presentment, demand, protest or notice of any kind.
Demand made was merely a superfluity, not a waiver of the
right to demand payment.
P6M (PN No. 714-Y) secured by a Deed of
Assignment with Pledge covering Central Suretys
Membership Fee Certificate representing its property
positively demonstrated since a waiver by implication is not
share in Wack Wack Golf and Country Club.
normally countenanced. It must not only voluntary but also:
Made knowingly
P40.898M- (PN no. 376-X) secured by a real estate
mortgage over a condo certificate of title, availed
thru a renewal of respondets prior loan, then covered With sufficient awareness of the relevant
by PN No. 367-Z circumstances and likely consequences
In the present case, any inference of waiver of petitioner, right
Aug 22, 2000 Premiere Bank sent a letter demanding to apply payments is eschewed by the express provision of
payment of the 6M loan. Central Surety answered that they the PN that no failure on the part of premiere bank to
intend to settle the account by the end of Sept; exercise, and no delay in execirisng any right hereunder shall
operate as waiver thereof.
Sept. 20,2000 - Central Surety issued a check in the amount
of 6M. However, for undisclosed reasons, Premier Bank In PN 367-Z (40.898K loan)- contains that in any event that
returned the check to Central Surety and in its letter dated respondent will fail to pay on any other obligation already
Sept. 28, demanded from the latter not just the payment of due, the bank shall be entitled to declare the PN 367-Z to be
6M loan, but also the 40.898k loan. Premiere Bank threatened immediately due and demandable. By virtue of which, it
foreclosure of the loans respective securities should they fail follows that the obligation under PN 367-Z had become part
to pay these withinten days from date. due and demandable with further notice expressly waived
when Central Surety defaulted on its 6M loan.
The next day, respondent again retendered payment of the
check worth P6M, also a separate check was tendered to Petitioner cannot be faulted for exercising the authority
petitioner as payment for (P2.6M) for spouses Castanedas granted to it under the PNs and applying payment to the
personal loan secured by Manila Polo Club Inc. Membership obligations as it deemed fit. Corollary thereto, the tendered
shares. amount of 6M by respondent and the encashment of the
check did not totally extinguish the debt covered by PN 714-Y
October 13, 2000- petitioner finally accepted respondents
checks. Payment was applied to: SURETY OF WACK2- cannot be released
It stood as security for both the 6M loan and 40.898 loan.
PN 714-Y (6M loan)
From the transactions that transpired between the parties it is
PN 367-Z (40.898k loan)
apparent that when the parties executed the Deed of
Commercial loan of Casent Realty and Devp Corp.
Assignment with pledge of the wack2 membership, the intent
Commercial loan of spouses Castaneda of the parties was for the wackwack to serve as security also
for future advancements.
Respondent objected the application of payment and
insisted that the two checks were for the spues castanedas
personal loan and the 6M loan. They asked that the wack YULIM vs. INTL. BANK
wack membership pledged as security for the 6M loan be -by Jennica Delfin
released. Petitioner refused. Respondent file a complaint
for damages and release of security collateral Facts:
1. To declare 6M loan as fully paid On June 2, 2000, iBank, a commercial bank, granted Yulim, a
2. Release wack2 membership cert. of shares domestic partnership, a credit facility in the form of an
3. To pay damages Omnibus Loan Line for P5,000,000.00, as evidenced by a
4. To pay cost of suit Credit Agreement which was secured by a Chattel
Mortgage over Yulims inventories in its merchandise
COURST RULING: warehouse at 106 4th Street, 9th Avenue, Caloocan City. As

Page 15 of 30
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Atty. Lydia C. Galas
Midterm Case Digests

further guarantee, the partners, namely, James, Jonathan and Pet. obtained another loan from the respondent for
Almerick, executed a Continuing Surety Agreement in favor of P55,000.00 as evidenced by a promissory note and cash
iBank. Yulim defaulted on the said note. On April 5, 2002, voucherboth dated on June 15, 1992. The
iBank sent demand letters to Yulim, through its President, promissorycontained exactly the same Terms and Conditions
James, and through Almerick, but without success. iBank then as the first loan.
filed a Complaint for Sum of Money with Replevin against When the 2nd loan matured on Dec. 15, 1992, pet.
Yulim and its sureties. On October 2, 2002, the petitioners had only paid P29,560.00 and a balance of P25,040.00. Due to
moved to dismiss the complaint insisting that their loan had liquidity problems, pet. asked resp. if he could pay in daily
been fully paid after they assigned to iBank their installments until the second loan is paid granted. Thus, as
Condominium Unit No. 141, with parking space, at 20 of September 1994 or 21 months after the 2 nd loans maturity,
Landsbergh Place in Tomas Morato Avenue, Quezon City. RTC the petitioner had already paid a total of P56,440.00, an
ruled that Yulim is to pay Ibank 4, 246, 310.00 with interest at amount greater than the principal.
16.5% per annum until fully paid. Petitioners moved for
reconsideration but was denied. Petitioners appealed in the Despite the receipt of more than the amount of the
CA but it ruled that petitioners failed to prove that they have principal, the resp. filed a complaint for judicial foreclosure of
already paid their obligations to Ibank further stating that the the chattel mortgage because the petitioner allegedly failed
so called assignment by Yulim of its condominium unit to to settle the balance of the second loan despite demand. He
Ibank was nothing but a mere temporary arrangement to further alleged that pursuant to the terms of the promissory
provide security pending the subsequent execution of a real note, the pet.s failure to fully pay upon maturity triggered the
estate mortgage. imposition of the 10% monthly penalty and 25% attorneys
fees. And further prayed for the payment of the balance of the
Issue: Whether there is Dation in payment in the assignment second loan plus accrued penalties and interest.
of the condominium unit Before the pet. could file an answer, the resp. applied
for the issuance of a writ of replevin which was granted by the
Held: MTC the motor vehicle was seized and delivered to resp.

No. The Court ruled that Yulims loan had not been
extinguished by the execution of a Deed of Assignment. ISSUE
Further, nowhere can it be remotely construed that the letter Did the resp. act lawfully when it credited the daily
even intimates an understanding by iBank that the Deed of payments against the interest instead of the principal?
Assignment would serve to extinguish the petitioners loan.
Otherwise, there would have been no need for iBank to
mention therein the three collaterals or supports provided RULING
by the petitioners, namely, the Deed of Assignment, the Yes. But before going to the courts reasoning, we
Chattel Mortgage and the Continuing Surety Agreement first harmonize Art. 1176 and Art. 1253.
executed by the individual petitioners. In fact, Section 2.01 of Article 1176 provides that:
the Deed of Assignment expressly acknowledges that it is a
The receipt of the principal by the creditor,
mere interim security for the repayment of any loan granted
without reservation with respect to the interest,
and those that may be granted in the future by the BANK to
shall give rise to the presumption that said
the ASSIGNOR and/or the BORROWER, for compliance with the
interest has been paid.x x x.
terms and conditions of the relevant credit and/or loan
documents thereof. To stress, the assignment being in its On the other hand, Article 1253 states:
essence a mortgage, it was but a security and not a If the debt produces interest, payment of the
satisfaction of the petitioners indebtedness. Art. 1255 principal shall not be deemed to have been made
invoked by the petitioners contemplates the existence of two until the interests have been covered.
or more creditors and involves the assignment of the entire
The presumption under Article 1176 does not
debtors property and not a Dation in payment.
resolve the question of whether the amount received by the
The condominium unit, then, is a mere temporary security,
creditor is a payment for the principal or interest. Under this
not a payment to settle their promissory notes.
article the amount received by the creditor is the payment for
the principal, but a doubt arises on whether or not the interest
MARQUEZ v. ELISAN CREDIT is waived because the creditor accepts the payment for the
principal without reservation with respect to the interest.
-by Angel Jakosalem,
Article 1176 resolves this doubt by presuming that the
creditor waives the payment of interest because he accepts
Art. 1253 Application of Payment; Receipts by the creditor payment for the principal without any reservation.
are silent; Interests On the other hand, the presumption under Article
1253 resolves doubts involving payment of interest-bearing
debts. It is a given under this Article that the debt produces
interest. The doubt pertains to the application of payment; the
Nunelon Marquez (petitioner) obtained a loan from uncertainty is on whether the amount received by the creditor
Elisan Credit Corp. (respondent) for P53,000.00 payable within is payment for the principal or the interest. Article 1253
180 days. Pet. signed a promissory note that it is payable in resolves this doubt by providing a hierarchy: payments shall
weekly installments, subject to 26% annual interest, 10% first be applied to the interest; payment shall then be applied
monthly interest for non-payment, and 25% of such amount to the principal only after the interest has been fully paid.
for attorneys fees. Pet. also secured the payment of loan with
Correlating the two provisions, the rule under Article
a chattel mortgageover a motor vehicle as security of the
1253 that payments shall first be applied to the interest and
loan. Both parties acknowledged the full payment of the first
not to the principal shall govern if two facts exist: (1) the
debt produces interest (e.g., the payment of interest is

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expressly stipulated) and (2) the principal remains through his messenger;[6] while the second one was on August
unpaid. 8, 1994,[7] when he sent via DHL Worldwide Services, the
The exception is a situation covered under Article managers check attached to a letter dated August 5, 1994.
1176, i.e., when the creditor waives payment of the interest
On August 11, 1994, petitioner wrote a letter to respondent
despite the presence of (1) and (2) above. In such case, the saying that he is consigning the amount tendered with the
payments shall obviously be credited to the principal. Regional Trial Court of Makati City.[9] On August 15, 1994,
petitioner filed a complaint for consignation.[10]
Since the doubt in the present case pertains to the
application of the daily payments, Article 1253 shall apply. Respondents counsel, on the other hand, admitted that his
Only when there is a waiver of interest shall Article 1176 office received petitioners letter dated August 5, 1994, but
become relevant. claimed that no check was appended thereto.[11] He averred
Under this analysis, we rule that the respondent that there was no valid tender of payment because no check
properly credited the daily payments to the interest was tendered and the computation of the amount to be
and not to the principal because: (1) the debt produces tendered was insufficient,[12] because petitioner verbally
interest, i.e., the promissory note securing the second loan promised to pay 3% monthly interest and 25% attorneys fees
provided for payment of interest; (2) a portion of the second as penalty for default, in addition to the interest of 18% per
loan remained unpaid upon maturity; and (3) the respondent annum on the P600,000.00 option/reservation fee.[13]
did not waive the payment of interest.
Also, there was no waiver of interest.The fact On November 29, 1996, the trial court rendered a decision
that the official receipts did not indicate whether the declaring the consignation invalid for failure to prove that
payments were made for the principal or the interest does not petitioner tendered payment to respondent and that the latter
prove that the respondent waived the interest. It was not refused to receive the same.
proven that the respondent accepted the payment of the Petitioner appealed the decision to the Court of
principal. The silence of the receipts on whether the daily Appeals. Meanwhile, his counsel, Atty. Wilhelmina V. Joven,
payments were credited against the unpaid balance of the died and she was substituted by Atty. Salvador P. De Guzman,
principal or the accrued interest does not mean that the Jr.[15] On December 20, 2001, petitioner executed a Deed of
respondent waived the payment of interest. There is no Assignment[16] assigning in favor of Atty. De Guzman, Jr., part
presumption of waiver of interest without any evidence of the P672, 900.00 consigned with the trial court as partial
showing that the respondent accepted the daily installments payment of the latters attorneys fees. [17] Thereafter, on
as payments for the principal. January 7, 2002, petitioner filed an Ex Parte Motion to
Withdraw Consigned Money.[18] This was followed by a Motion
to Intervene filed by Atty. De Guzman, Jr., praying that the
ART. 1256 amount consigned be released to him by virtue of the Deed of
TEDDY G. PABUGAIS, petitioner, vs. DAVE P. Petitioners motion to withdraw the amount consigned
SAHIJWANI, respondent. was denied by the Court of Appeals and the decision of the
-by Jem Penas trial court was affirmed with modification as to the amount of
moral damages and attorneys fees.[20]
Pursuant to an Agreement and Undertaking[4] dated December On a motion for reconsideration, the Court of Appeals
3, 1993, petitioner Teddy G. Pabugais, in consideration of the declared the consignation as valid in an Amended Decision
amount of P15, 487,500.00, agreed to sell to respondent Dave dated January 16, 2003. It held that the validity of the
P. Sahijwani a lot containing 1,239 square meters located at consignation had the effect of extinguishing petitioners
Jacaranda Street, North Forbes Park, Makati, Metro obligation to return the option/reservation fee to
Manila. Respondent paid petitioner the amount of P600, respondent. Hence, petitioner can no longer withdraw the
000.00 as option/reservation fee and the balance of P14, same.
887,500.00 to be paid within 60 days from the execution of The resolution of the case at bar hinges on the following
the contract, simultaneous with delivery of the owners issues: (1) Was there a valid consignation? and (2) Can
duplicate Transfer Certificate of Title in respondents name the petitioner withdraw the amount consigned as a matter of
Deed of Absolute Sale; the Certificate of Non-Tax Delinquency right?
on real estate taxes and Clearance on Payment of Association As testified by the counsel for respondent, the reasons
Dues. The parties further agreed that failure on the part of why his client did not accept petitioners tender of payment
respondent to pay the balance of the purchase price entitles were (1) the check mentioned in the August 5, 1994 letter of
petitioner to forfeit the P600, 000.00 option/reservation fee; petitioner manifesting that he is settling the obligation was
while non-delivery by the latter of the necessary documents not attached to the said letter; and (2) the amount tendered
obliges him to return to respondent the said was insufficient to cover the obligation. It is obvious that the
option/reservation fee with interest at 18% per annum, thus reason for respondents non-acceptance of the tender of
payment was the alleged insufficiency thereof and not
Petitioner failed to deliver the required documents. In because the said check was not tendered to respondent, or
compliance with their agreement, he returned to respondent because it was in the form of managers check. While it is true
the latters P600, 000.00 option/reservation fee by way of Far that in general, a managers check is not legal tender, the
East Bank & Trust Company Check No. 25AO54252P, which creditor has the option of refusing or accepting it. [24] Payment
was, however, dishonored. in check by the debtor may be acceptable as valid, if no
prompt objection to said payment is made.[25]
Petitioner claimed that he twice tendered to respondent, Anent the sufficiency of the amount tendered, it
through his counsel, the amount of P672, 900.00 appears that only the interest of 18% per annum on the
(representing the P600, 000.00 option/reservation fee plus P600,000.00 option/reservation fee stated in the default
18% interest per annum computed from December 3, 1993 to clause of the Agreement And Undertaking was agreed upon
August 3, 1994) in the form of Far East Bank & Trust Company by the parties.
Managers Check No. 088498, dated August 3, 1994, but said The managers check in the amount of P672,900.00
counsel refused to accept the same. His first attempt to (representing the P600,000.00 option/reservation fee plus
tender payment was allegedly made on August 3, 1994

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18% interest per annum computed from December 3, 1993 to 1. Ordering each of the defendants to vacate the portion of
August 3, 1994) which was tendered but refused by the land in question they respectively occupy and to restore
respondent, and thereafter consigned with the court, was the possession thereof to the plaintiff and her co-owners;
enough to satisfy the obligation. 2. Ordering each of the defendants to pay to the plaintiff the
There being a valid tender of payment in an amount amount of P300.00 per month from January 17, 1997 until
sufficient to extinguish the obligation, the consignation is they vacate the land in question as the reasonable
valid. compensation for the use and occupation of the premises;
As regards petitioners right to withdraw the amount 3. Ordering the defendants to pay proportionately the amount
consigned, reliance on Article 1260 of the Civil Code is of P10,000.00 as attorneys fee and P2,000.00 as litigation
misplaced. The said Article provides expenses, and to pay the cost of suit.
Art. 1260. Once the consignation has been duly made, the On petitioners appeal to the RTC of Dagupan City, Branch 41
debtor may ask the judge to order the cancellation of the thereof, in its decision of August 7, 1998, affirmed the
obligation. foregoing judgment.
Before the creditor has accepted the consignation, or before a Therefrom, petitioners went to the CA whereat their recourse
judicial confirmation that the consignation has been properly was docketed as CA-G.R. SP. No. 48918. As stated at the
made, the debtor may withdraw the thing or the sum threshold hereof, the CA, in its Decision of June 30, 1999,
deposited, allowing the obligation to remain in force. affirmed that of the RTC. The CA denied their motion for
The amount consigned with the trial court can no longer reconsideration.
be withdrawn by petitioner because respondents prayer in his Thus the petiton.
answer that the amount consigned be awarded to him is
equivalent to an acceptance of the consignation, which has Issue:
the effect of extinguishing petitioners obligation. Whether petitioners possession of the subject property is
WHEREFORE, in view of all the foregoing, the instant founded on contract or not.
petition for review is DENIED. The January 16, 2003 Amended
Decision of the Court of Appeals in CA-G.R. CV No. 55740, Ruling:
which declared the consignation by the petitioner in favor of This factual issue was resolved by the three (3) courts below
respondent of the amount of P672,900.00 with the Clerk of in favor of respondent. As tersely put by the CA in its assailed
Court of the Regional Trial Court of Makati City valid, and decision of June 30, 1999:
which declared petitioners obligation to respondent under Petitioners failed to present any written memorandum of the
paragraph 5 of the Agreement And Undertaking as having alleged lease arrangements between them and Gualberto De
been extinguished, is AFFIRMED. No costs. Venecia. The receipts claimed to have been issued by the
SO ORDERED. owner were not presented on the excuse that the March 19,
1996 fire burned the same. Simply put, there is a dearth of
evidence to substantiate the averred lessor-lessee
relationship. x x x.3
-by Gerard Tinampay
Consistent with this Courts long-standing policy, when the
three courts below have consistently and unanimously ruled
on a factual issue, such ruling is deemed final and conclusive
Subject of the controversy is a 1,849 square-meter parcel of
upon this Court, especially in the absence of any cogent
land, covered by Transfer Certificate of Title No. 9042.
reason to depart therefrom.
Respondent Josefina V. Fernandez, as one of the registered co-
From the absence of proof of any contractual basis for
owners of the land, served a written demand letter upon
petitioners possession of the subject premises, the only legal
petitioners Spouses Llobrera, et al., to vacate the premises
implication is that their possession thereof is by mere
within fifteen (15) days from notice. Receipt of the demand
tolerance. In Roxas vs. Court of Appeals,4 we ruled:
letter notwithstanding, petitioners refused to vacate,
A person who occupies the land of another at the latters
necessitating the filing by the respondent of a formal
tolerance or permission, without any contract between them,
complaint against them before the Barangay Captain of
is necessarily bound by an implied promise that he will vacate
Barangay 11, Dagupan City. Upon failure of the parties to
upon demand, failing which, a summary action for ejectment
reach any settlement, the Barangay Captain issued the
is the proper remedy against him.
necessary certification to file action.
The judgment favoring the ejectment of petitioners being
Respondent then filed a verified Complaint for ejectment and
consistent with law and jurisprudence can only be affirmed.
damages against the petitioners before the MTCC of Dagupan
The alleged consignation of the P20.00 monthly rental to a
City, which complaint was raffled to Branch 2 thereof.
bank account in respondents name cannot save the day for
By way of defense, petitioners alleged in their Answer that
the petitioners simply because of the absence of any
they had been occupying the property in question beginning
contractual basis for their claim to rightful possession of the
the year 1945 onwards, when their predecessors-in-interest,
subject property. Consignation based on Article 1256 of the
with the permission of Gualberto de Venecia, one of the other
Civil Code indispensably requires a creditor-debtor relationship
co-owners of said land, developed and occupied the same on
between the parties, in the absence of which, the legal effects
condition that they will pay their monthly rental of P20.00
thereof cannot be availed of.
each. From then on, they have continuously paid their
Article 1256 pertinently provides:
monthly rentals to Gualberto de Venecia or Rosita de Venecia
Art. 1256. If the creditor to whom tender of payment has been
or their representatives, such payments being duly
made refuses without just cause to accept it, the debtor shall
acknowledged by receipts. Beginning sometime June 1996,
be released from responsibility by the consignation of the
however, the representative of Gualberto de Venecia refused
thing or sum due.
to accept their rentals, prompting them to consign the same
Unless there is an unjust refusal by a creditor to accept
to Banco San Juan, which bank deposit they continued to
payment from a debtor, Article 1256 cannot apply. In the
maintain and update with their monthly rental payments.
present case, the possession of the property by the
In a decision dated February 18, 1998, the MTCC rendered
petitioners being by mere tolerance as they failed to establish
judgment for the respondent:
through competent evidence the existence of any contractual
relations between them and the respondent, the latter has no

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obligation to receive any payment from them. Since incapacitated to receive payment when it is due, (3) when
respondent is not a creditor to petitioners as far as the alleged there are two or more creditors claiming the same
P20.00 monthly rental payment is concerned, respondent right to collect, (4) when the creditor unjustly refuses to
cannot be compelled to receive such payment even through issue a receipt, and (5) when the title of the obligation has
consignation under Article 1256. The bank deposit made by been lost.
the petitioners intended as consignation has no legal effect The SC said that the case falls on the first and third
insofar as the respondent is concerned. exemption. Clearly, the allegations in the Complaint present a
situation where the creditor is unknown, or that two or more
entities appear to possess the same right to collect from
petitioners. Whatever transpired between the Rural Bank or
-by Jairus Dapitan
PDIC and AFPMBAI in respect of petitioners loan account, if
any, such that AFPMBAI came into possession of the loan
documents and TCT No. 37017, it appears that petitioners
1. Petitioner is a member of the AFPMBAI, an
were not informed thereof, nor made privy thereto.
organization engaged in the business of developing
Petitioners were allowed to consign the full payment.
low-cost housing projects for the personnel of AFP,
2. Petitioner applied for an application with the ART. 1267
respondent to purchase a piece of property from the
respondent. PHIL. NATL. CORP VS. CA
3. Petitioner acquired a loan and mortgage agreement -by Jell Vie Gualberto
with RBST under the auspices of PAG-IBIG.
4. RBST sent respondent a letter of guaranty informing PNCC and the Raymundo's entered into a contract of lease.
them that the proceeds of the approved loan in the The lease contract, executed on 18 November 1985, pertinent
amount of P77,418 shall be released after the title is data of the contract are as follows:
executed in favor of the petitioners and after the
registration and annotation of the loan and mortgage 1. TERM OF LEASE - This lease shall be for a period of
agreement. five (5) years, commencing on the date of issuance
5. RBST closed and was placed under receivership by of the industrial clearance by the Ministry of Human
PDIC. For some unknown reason, respondents got a Settlements at the option of the LESSEE under the
hold of the loan documents and the title of the house same terms and conditions.
and lot. Respondents made oral and written demands
to the petitioners for the loan amount.
6. In quandary, petitioners filed a complaint for 2. RATE OF RENT - LESSEE shall pay to the LESSOR rent
consignation of loan payment, recovery of title and at the monthly rate of TWENTY THOUSAND PESOS
cancellation of mortgage annotation. They argued (P20,000.00), Philippine Currency, in the manner set
that they were confused where to pay their loan forth in Paragraph 3 below.This rate shall be
obligation because it was supposed to be paid to increased yearly by Five Percent (5%) based on the
RBST which is now under receivership by PDIC, but agreed monthly rate of P20,000.00.
the respondents are the ones demanding because of
their possession of the loan documents and title. 3. TERMS OF PAYMENT - The rent stipulated in Paragraph
7. Respondents argued that this is supposed to be 2 above shall be paid yearly in advance by the
under the jurisdiction of the HLURB because it LESSEE. The first annual rent in the amount of TWO
concerns of the purchase of a subdivision lot. HUNDRED FORTY THOUSAND PESOS (P240,000.00),
shall be due and payable upon the execution of this
Issues: Agreement.
1. W/N jurisdiction falls with the court.
2. W/N consignation without prior tender of payment is
proper. 4. USE OF LEASED PROPERTY - It is understood that the
Property shall be used by the LESSEE as the site,
Ruling: grounds and premises of a rock crushing plant and
On the first issue, the SC ruled that since field office, sleeping quarters and canteen/mess
consignation is necessarily judicial, it falls under the hall. The LESSORS hereby grant to the LESSEE the
jurisdiction of the Courts citing article 1258 of the Civil Code: right to erect on the Leased Property such
Consignation shall be made by structure(s) and/or improvement(s) necessary for or
depositing the things due at the incidental to the LESSEE's purposes.
disposal of judicial authority, before
whom tender of payment shall be 11. TERMINATION OF LEASE - This Agreement may be
proved, in a proper case, and the terminated by mutual agreement of the parties. Upon
announcement of the consignation in the termination or expiration of the period of lease
other cases. without the same being renewed, the LESSEE shall
The provision clearly precludes consignation in vacate the Leased Property at its expense.
venues other than the courts. Elsewhere, what may be made
is a valid tender of payment, but not consignation.
On 7 January 1986, petitioner obtained from the Ministry
On the second issue, the SC ruled that the of Human Settlements a Temporary Use Permit [2] for the
consignation is proper without prior tender of payment. The proposed rock crushing project
petitioners are in quandary on where to pay their loan
obligations. Under Article 1256, prior tender of payment is not On 16 January 1986, private respondents wrote
necessary for consignation in cases (1) where the creditor petitioner requesting payment of the first annual rental in the
is unknown or absent, (2) when the creditor is

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amount of P240,000 which was due and payable upon the Notice of Termination was served on your clients.
execution of the contract. [11]
(Underscoring Supplied).

In its reply-letter, petitioner argued that under

paragraph 1 of the lease contract, payment of rental would The "Industrial Permit" mentioned in the said letter
commence on the date of the issuance of an industrial could only refer to the Temporary Use Permit issued by the
clearance by the Ministry of Human Settlements, and not from Ministry of Human Settlements on 7 January 1986. And it can
the date of signing of the contract. It then expressed its be gleaned from this letter that petitioner has considered the
intention to terminate the contract due to financial, as well as permit as industrial clearance; otherwise, petitioner could
technical, difficulties.[4]Private respondents refused to accede have simply told the private respondents that its obligation to
to petitioner's request for the pretermination of the lease pay rentals has not yet arisen because the Temporary Use
contract. Permit is not the industrial clearance contemplated by them.

Petitioner objected to the claim of the private

With regards to the Suspensive Condition, It can be
respondents and argued that it was "only obligated to pay ...
deduced from this letter that the suspensive condition -
the amount of P20,000.00 as rental payments for the one-
issuance of industrial clearance - has already been fulfilled
month period of lease, counted from 07 January 1986 when
and that the lease contract has become operative. Otherwise,
the Industrial Permit was issued by the Ministry of Human
petitioner did not have to solicit the conformity of the private
Settlements up to 07 February 1986 when the Notice of
respondents to the termination of the contract for the simple
Termination was served"[6]on private respondents.
reason that no juridical relation was created because of the
On 19 May 1986, the private respondents instituted with non-fulfillment of the condition. Moreover, the reason of
the Regional Trial Court of Pasig an action against petitioner petitioner in discontinuing with its project and in consequently
for Specific Performance with Damages. cancelling the lease contract was financial as well as technical
difficulties, not the alleged insufficiency of the Temporary Use
What transpired next was..... Permit.
During my report gibara ko ni Mam kay abtan daw isa ka 2. Second. Invoking Article 1266 and the principle
tuig hahaha. Basta ang nahitabo is that, sige request ang of rebus sic stantibus, petitioner asserts that it should
defense sa petitioner ug move s hearing, kesyo undisposed be released from the obligatory force of the contract of
daw or naay sore eyes ug nagchange ug counsel. Always lease because the purpose of the contract did not
materialize due to unforeseen events and causes
gina-grant sa RTC ang prayer even if ordered beyond its control, i.e., due to abrupt change in
"intransferrable" ang schedule. On tha day of the hearing, political climate after the EDSA Revolution
absent ang counsel for petitioner. RTC deemed it and financial difficulties.
SC: Petitioner cannot, however, successfully take refuge
in the said article, since it is applicable only to obligations "to
On 12 April 1989, the trial court rendered a decision do", and not to obligations "to give".[14] An obligation "to do"
ordering petitioner to pay the private respondents the amount includes all kinds of work or service; while an obligation "to
of P492,000 which represented the rentals for two years, with give" is a prestation which consists in the delivery of a
legal interest from 7 January 1986 until the amount was fully movable or an immovable thing in order to create a real right,
paid, plus attorney's fees in the amount of P20,000 and costs. or for the use of the recipient, or for its simple possession, or
in order to return it to its owner.[15]

Petitioner then appealed to the Court of Appeals alleging The obligation to pay rentals [16] or deliver the thing in a
that the trial court erred in ordering it to pay the private contract of lease[17] falls within the prestation to give; hence, it
respondent the amount of P492,000 and in denying it the is not covered within the scope of Article 1266. At any rate,
right to be heard. However, Court of Appeals affirmed the trial the unforeseen event and causes mentioned by petitioner are
court's decision and denied motion for reconsideration. not the legal or physical impossibilities contemplated in said
article. Besides, petitioner failed to state specifically the
Petitioner then filed petition for certiorari to the Supreme circumstances brought about by the abrupt change in the
Court invoking the following issues: political climate in the country except the alleged prevailing
uncertainties in government policies on infrastructure
1. Focusing on paragraph 1of the lease contract,
petitioner contends that issuance of the Industrial
Clearance is a Suspensive condition, without which the The principle of rebus sic stantibus[18] neither fits in with
rights under the contract would not be acquired. TUP the facts of the case. Under this theory, the parties stipulate
(Temporary Use Permit) is not the Industrial Clearance in the light of certain prevailing conditions, and once these
referred in the 1st paragraph of the contract. conditions cease to exist the contract also ceases to exist
SC: Petitioner is estopped from claiming that the This Court cannot subscribe to this argument. As pointed
Temporary Use Permit was not the industrial clearance out by private respondents
contemplated in the contract. In its letter dated 24 April 1986,
petitioner states: Anent petitioners alleged poor financial condition, the
same will neither release petitioner from the binding effect of
the contract of lease. As held in Central Bank v. Court of
We wish to reiterate PNCC Management's previous stand
Appeals,[22]cited by the private respondents, mere pecuniary
that it is only obligated to pay your clients the amount
inability to fulfill an engagement does not discharge a
of P20,000.00 as rental payments for the one-month
contractual obligation, nor does it constitute a defense to an
period of the lease, counted from 07 January 1986 when
action for specific performance.
the Industrial Permit was issued by the Ministry of
Human Settlements up to 07 February 1986 when the

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3. Third. According to petitioner, the award to look into the matter. He also verbally authorized them to
of P492,000 representing the rent for two years is debit the amount on the US Treasury Warrant from his account
excessive, considering that it did not benefit from the with his wife. The bank then debited the amount on the same
property. Besides, the temporary permit, conformably day. On February 1991 Reyes went to the bank and demanded
with the express provision therein, was deemed restitution of the debited amount and filed a suit for damages.
automatically revoked for failure of petitioner to use BPI contested the complaint and counterclaimed for moral and
the same within one year from the issuance exemplary damages. The Trial Court dismissed Reyes
thereof. Hence, the rent payable should only be for one complaint for lack of cause of action. Reyes moved the case to
year. the CA where the trial courts decision was set aside and BPI
was ordered to credit the respondent 10,556.00 plus interest
SC: Petitioner cannot be heard to complain that the at applicable rates hence, this petition.
award is excessive. The temporary permit was valid for two
years but was automatically revoked because of its non-use Issue:
within one year from its issuance. The non-use of the permit Whether legal compensation is applicable.
and the non-entry into the property subject of the lease
contract were both imputable to petitioner and cannot, Held:
therefore, be taken advantage of in order to evade or lessen Yes. The verbal authorization was proved by preponderance of
petitioners monetary obligation. The damage or prejudice to evidence (corroborated testimonies of the branch manager
private respondents is beyond dispute. They unquestionably [Grace Romero] and assistant manager [Bernardo]). More
suffered pecuniary losses because of their inability to use the importantly,Article 1290 of the Civil Code provides that when
leased premises. Thus, in accordance with Article 1659 of the all the requisites mentioned in Article 1279 are present,
Civil Code,[25] they are entitled to indemnification for damages; compensation takes effect by operation of law, and
and the award of P492,000 is fair and just under the extinguishes both debts to the concurrent amount, even
circumstances of the case. though the creditors and debtors are not aware of the
compensation. Legal compensation operates even against
4. Finally, petitioner submits that the trial court
the will of the interested parties and even without the consent
gravely abused its discretion in denying petitioner the
of them. All the elements of legal compensation is present in
right to be heard.
the case at bar. The presence of Reyes wife does not negate
SC: We disagree. The trial court was in fact liberal in the element of mutuality of parties, i.e., that they must be
granting several postponements[26] to petitioner before it creditors and debtors of each other on their own right. Reyes
deemed terminated and waived the presentation of evidence wife is not a party in the case since she never asserted any
in petitioners behalf. right to the debited US Treasury Warrant.

From the foregoing narration of procedural antecedents, PNB vs CA & Ramon Lapez
it cannot be said that the petitioner was deprived of its day in -by Aeyresc Sayadi
court. The essence of due process is simply an opportunity to
be heard.[42] To be heard does not only mean oral arguments Facts: PNB commits a double entry in favor of Ramon Lapez
in court; one may be heard also through pleadings. Where account at PNB totaling to P87,380.44 Ramon Lapez had a
opportunity to be heard, either through oral arguments or transaction with National Commercial Bank of Jeddah(NCB-
pleadings, is accorded, there is no denial of procedural due Jeddah). Wherein NCB-Jeddah sent a remittance amounting to
process. $2,627.11 to PNB and for PNB to remit it to Citibank-Greenhills
for the account of Ramon Lapez. However, PNB did not remit
the said remittance to the Citibank-Greenhills.
The Second remittance of P34, 340.38 was from Libya which
ART. 1278 was deposited at a bank in Libya to be remitted to PNB and to
be credited to the account of Lapez at PNB. The two
Bank of the Philippine Islands and Grace Romero vs remittances were seized by PNB and applied it to the
Court of Appeals and Edvin Reyes indebtedness of Ramon Lapez by way of compensation.
-by Escobido, HF
Issue:Whether there is a valid compensation that took place
Facts: or whether PNB may validly apply the two remittances to the
Private respondent Ervin Reyes opened two joint accounts in indebtedness of Ramon Lapez with the PNB?
BPI Cubao branch. The first joint account opened on 1985 was
with her wife Sonia Reyes while the second account opened Held: There is no valid compensation on the 1st remittance,
on 1986 was with his grandmother Emeteria Fernandez. Reyes PNB holds the money in favor of Citibank. An implied trust was
regularly deposited in the joint account with his grandmother created between NCB-Jeddah and PNB. PNB is considered
the US Treasury Warrants payable to the order of Emeteria debtor to Citibank and not to Ramon Lapez. Such transactions
Fernandez as her monthly pension. On December 28, 1989 between NCB-Jeddah and PNB may be treated as stipulation
Emeteria died without the knowledge of the US Treasury pour autri. For compensation to apply, Article 1279 Civil
Department. On January 1, 1990 she was still sent a US Code provides: In order that compensation may prosper, it is
Treasury Warrant worth $377 (10,556.00). On January 4, 1990 necessary:
the said Warrrant was deposited in the joint account with (1) That each one of the obligors be bound principally, and
Reyes grandmother. Two months later Reyes closed the said that he be at the same time a principal creditor of the other;
account and transferred the funds amounting to P13,112.91 to (2) That both debts consist in a sum of money, or if the things
his joint account with his wife. On January 1991 the US due are consumable, they be of the same kind, and also of the
Treasury Warrant issued on January 1, 1990 was dishonored as same quality if the latter has been stated;
it was discovered the Emeteria died three days prior to its (3) That the two debts be due;
issuance. The US Treasury Department then requested BPI for (4) That they be liquidated and demandable;
a refund. This was communicated to Reyes through a
telegram on whichhe replied that he would drop by the bank

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(5) That over neither of them there be any retention or and cannot be raised belatedly for the first time in the
controversy, commenced by third persons and communicated execution stage -PTC appealed to the SC
in due time to the debtor.
Stipulation pour autri is an agreement in favor of a 3rd party.
In the case at bar, PNB and Ramon Lapez is not principal ISSUE
debtor and principal creditor to each other.
On the 2 PNB and Lapez 2nd remittance, PNB holds the money W/N Legal Compensation applies over a judgement debt
in favor Ramon Lapez. Hence, Both PNB and Ramon Lapez is (decision rendering you liable for damages) against an
principal debtor and principal creditor to each other. Legal existing and outstanding debt.
compensation may properly take place between the parties.

PTC argues that it did not raise the defense of compensation

in the Answer and before the trial stage (in the RTC of
BATAAN) because the debt was not yet due at the time the
-by Hannah Leuterio
answer was filed

SpousesRoxas argue that legal compensation is not applicable

because both the demandability of the loan as well as the
exact amount due is still being contested in a different case

Spouses Roxas procured loans from Philippines Trust Company RULING OF THE SUPREME COURT
(PTC) in the amount of 2,523,520.00 to finance their real
estate business. These loan were secured by real estate SC: -We agree with the Court of Appeals that it was too late
mortgages of Spouses Roxas real properties. for PTC to set up legal compensation as a defense because
the Main Case had already reached the execution stage. The
rule is that once a decision becomes final and executory,
On April 10, 1979 PTC, Spouses Roxas and Roben Construction
execution shall issue as a matter of right, and the issuance of
and Furnishing Group Inc. entered into a contract of building
a writ of execution is the court's ministerial duty, compellable
construction under which PTC granted additional loan of
by mandamus. -The Bataan R TC and the Court of Appeals also
900,000 to Spouses Roxas to enable them to finish their
correctly ruled that PTC should have raised the argument on
housing projects. This was superseded by a new contract
legal compensation at the trial stage. Although legal
executed by PTC, Spouses Roxas and Rosendo Dominguez
compensation takes place by operation of law, it must be
substituted RobenConsruction as contractor under the same
alleged and proved as a defense by the debtor who claims its
terms and conditions of the contract dated April 10, 1979
benefits. Only after it is proved will its effects retroact to the
moment when all the requisites under Article 1279 of the Civil
Due to financial difficulties, Spouses Roxas missed Code have concurred -PTC's contention that it could not have
amortization payments in their loans with PTC and did not raised legal compensation as a defense because it was not
finish their housing project. yet a debtor of the Spouses Roxas when it filed its answer is
unconvincing. Under Rule 8, Section 2 of the 1964 Rules of
On March 28, 1980 Dominguez filed a complaint against PTC Court, "[a] party may set forth two or more statements of a
and Spouses Roxas for breach of contract of building claim or defense alternatively or hypothetically, either in one
construction. When Spouses Roxas filed their answer they cause of action or defense or in separate causes of action or
included cross claim against PTC. In Response, PTC filed a defenses." -Thus, the defense of compensation would have
counterclaim against the Spouses Roxas on their unpaid loan been proper and allowed under the rules even if PTC
obligation amounting to 3,053,738.50 plus interest, and the disclaimed any liability at the time it filed its answer. Hence,
amount of 245.720 as attorneys fee and in default of such there can be no other conclusion than that PTC is already
payments, foreclosure of the real estate mortgages executed estopped from raising the issue of legal compensation.
by Spouses Roxas in favor of PTC. Trial court rendered its
decision in favor of Dominguez. PTC and SpusesRoxas Even if we assume that legal compensation was not waived
appealed to the Court of Appeals. To this date, the same and was otherwise timely raised, we find that not all requisites
remains pending. of legal compensation are present in this case. Under Article
1279, in order for legal compensation to take place, the
On August 31, 1981 PTC filed with the provincial sheriff of following requisites must concur: (a) that each one of the
Bataan a petition for extrajudicial foreclosure of the real obligors be bound principally, and that he be at the same time
estate mortgages. the SpousesRoxas countered with an a principal creditor of the other; (b) that both debts consist in
injunction and damages with the RTC of Bataan which ruled a sum of money, or if the things due are consumable, they be
in favor of SpousesRoxasand issued a permanent injunction of the same kind, and also of the same quality if the latter has
perpetually enjoining the extrajudicial foreclosure of the been stated; (c) that the two debts be due; (d) that they be
mortgage properties, with damages. The CA affirmed the liquidated and demandable; and ( e) that over neither of them
decision of the RTC and when the decision became final, the there be any retention or controversy, commenced by third
SpousesRoxas moved for execution thereof. persons and communicated in due time to the debtor.

PTC FILED AN OPPOSITION TO THE MOTION FOR EXECUTION, Here, the fourth requisite is absent. A debt is liquidated when
CLAIMING LEGAL COMPENSATION TO OFFSET THE JUDGEMENT its existence and amount are determined. Compensation can
DEBT (DAMAGES) DUE TO THE SPOUSES ROXAS - RTC denied only take place between certain and liquidated debts; it
the opposition and said that PTC is deemed to have waived cannot extend to unliquidated, disputed claims. Since the loan
said defense when it failed/omitted to invoke it in its obligation, including its amount and demandability, is still
Answer(pleading in the regular trial) -PTC filed a case with the being disputed, PTC's credit cannot be considered liquidated
CA (assailing the decision of the RTC) - CA said that NOT ALL as of yet. Consequently, no legal compensation could have
the requisites of legal compensation under 1279 are present

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taken place between PTC's loan credit and the Spouses Roxas' Whether extinctive or modificatory, novation is made either
judgment credit. by changing the object or the principal conditions, referred to
as objective or real novation; or by substituting the person of
the debtor or subrogating a third person to the rights of the
creditor, an act known as subjective or personal novation. For
novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
-by Sandra Castres
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.
On 23 December 1996, petitioner and de Jesus
Novation may also be express or implied. It is
borrowed P400,000.00 from respondent. They executed a
express when the new obligation declares in unequivocal
promissory note wherein they bound themselves jointly and
terms that the old obligation is extinguished. It is implied
severally to pay the loan on or before 23 January 1997 with a
when the new obligation is incompatible with the old one on
5% interest per month. When the loan has long been overdue
every point. The test of incompatibility is whether the two
and petitioner and de Jesus have failed and refused to pay it,
obligations can stand together, each one with its own
respondent brought a complaint for sum of money and
independent existence.
Applying the foregoing to the instant case, the Court
Petitioner averred that he assumed no liability under
held that no novation took place.
the promissory note because he signed it merely as an
The parties did not unequivocally declare that the old
accommodation party for de Jesus; and, alternatively, that he
obligation had been extinguished by the issuance and the
is relieved from any liability arising from the note inasmuch as
acceptance of the check, or that the check would take the
the loan had been paid by de Jesus by means of a check dated
place of the note. There is no incompatibility between the
17 April 1997; and that, in any event, the issuance of the
promissory note and the check. The check had been issued
check and respondents acceptance thereof novated or
precisely to answer for the obligation. On the one hand, the
superseded the note.
note evidences the loan obligation; and on the other, the
Respondent asserted that the loan remained unpaid
check answers for it. Verily, the two can stand together.
for the reason that the check issued by de Jesus bounced.
Neither could the payment of interestswhich, in
For his part, de Jesus contended that out of the
petitioners view, also constitutes novationchange the terms
supposed P400,000.00 loan, he received only P360,000.00,
and conditions of the obligation. Such payment was already
the P40,000.00 having been advance interest thereon for two
provided for in the promissory note and, like the check, was
months; and that he paid the sum of P120,000.00 by way of
totally in accord with the terms thereof.
interests the sum of P40,000.00, representing the peso
Also unmeritorious is petitioners argument that the
equivalent of his accumulated leave credits, another
obligation was novated by the substitution of debtors. In order
P40,000.00 as advance interest, and still another P40,000.00
to change the person of the debtor, the old one must be
as interest for the months of March and April 1997.
expressly released from the obligation, and the third person or
new debtor must assume the formers place in the relation.
Whether or not there was novation of the obligation.
Well-settled is the rule that novation is never presumed.
Consequently, that which arises from a purported change in
1. NO
the person of the debtor must be clear and express. It is thus
Petitioners argument that the obligation was
incumbent on petitioner to show clearly and unequivocally
extinguished when de Jesus paid the loan with the check is
that novation has indeed taken place.
unmeritorious. The check could not have extinguished the
In the present case, petitioner has not shown that he
obligation because it bounced upon presentment. By law, the
was expressly released from the obligation, that a third person
delivery of a check produces the effect of payment only when
was substituted in his place, or that the joint and solidary
it is encashed.
obligation was cancelled and substituted by the solitary
Novation is a mode of extinguishing an obligation by
undertaking of De Jesus. The CA aptly held:
changing its objects or principal obligations, by substituting a
x xx. Plaintiff s acceptance of the bum check did not result in
new debtor in place of the old one, or by subrogating a third
substitution by de Jesus either, the nature of the obligation
person to the rights of the creditor. Article 1293 of the Civil
being solidary due to the fact that the promissory note
Code defines novation as follows:
expressly declared that the liability of appellants thereunder is
Art. 1293. Novation which consists in substituting a new
joint and solidary. Reason: under the law, a creditor may
debtor in the place of the original one, may be made even
demand payment or performance from one of the solidary
without the knowledge or against the will of the latter, but not
debtors or some or all of them simultaneously, and payment
without the consent of the creditor. Payment by the new
made by one of them extinguishes the obligation. It therefore
debtor gives him rights mentioned in articles 1236 and 1237.
follows that in case the creditor fails to collect from one of the
In general, there are two modes of substituting the
solidary debtors, he may still proceed against the other or
person of the debtor: (1) expromision and (2) delegacion. In
others. x xx
expromision, the initiative for the change does not come from
Moreover, it must be noted that for novation to be
and may even be made without the knowledge ofthe
valid and legal, the law requires that the creditor expressly
debtor, since it consists of a third persons assumption of the
consent to the substitution of a new debtor. Since novation
obligation. As such, it logically requires the consent of the
implies a waiver of the right the creditor had before the
third person and the creditor. In delegacion, the debtor offers,
novation, such waiver must be express. It cannot be
and the creditor accepts, a third person who consents to the
supposed, without clear proof, that the present respondent
substitution and assumes the obligation; thus, the consent of
has done away with his right to exact fulfilment from either of
these three persons are necessary.
the solidary debtors.
Novation may also be extinctive or modificatory. It is
More important, De Jesus was not a third person to
extinctive when an old obligation is terminated by the creation
the obligation. From the beginning, he was a joint and solidary
of a new one that takes the place of the former. It is merely
obligor of the P400,000 loan; thus, he can be released from it
modificatory when the old obligation subsists to the extent
only upon its extinguishment. Respondents acceptance of his
that it remains compatible with the amendatory agreement.

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check did not change the person of the debtor, because a new and old obligation on every point be incompatible with
joint and solidary obligor is required to pay the entirety of the one another. Further, court cited the case of Iloilo Traders v
obligation. Heirs of Soriano in which it discussed the two types of
It must be noted that in a solidary obligation, the novation: extinctive and modificatory. Under an extinctive
creditor is entitled to demand the satisfaction of the whole novation, there is a complete extinguishment of the original
obligation from any or all of the debtors. It is up to the former obligation which shall be effected upon concurrence of these
to determine against whom to enforce collection. Having four requisites: 1.) that there is a previous valid obligation, 2.)
made himself jointly and severally liable with De Jesus, that there is agreement of all the parties concerned to a new
petitioner is therefore liable for the entire obligation. contract 3.) that there is extinguishment of the old obligation,
and 4.) that there is birth of a new valid obligation.
On the other hand, a modificatory novation is one in which the
-by Erianne Du
subsequent change in the agreement is incidental to the main
obligation such as a change in the rate of interest or the
extension of time to pay.
Respondent Tibong executed several loan transaction with a
monthly interes rate of 6% to 7% with petitioner Aquintey
Court then further cited art. 1293 which provides for novation
from May 1989 to July 1989. Such loans then amounted to
by virtue of delegacion. Said article states that novation which
P773,000.00 however Tibong was only able to pay loans
consists in substituting a new debtor in the place of the
amounting to P122,600.00
original one may be made even without the knowledge of the
latter, but not without the consent of the creditor. Further
A year later, Aquintey then found out that Tibong had actually
citing the case of City National Bank v Fuller, court herein
re-loaned the amounts to her borrowers. Aquintey
stated that in delegacion, the new debtor contracts with the
subsequently was then advised by her counsel one Atty. Torres
old debtor that he will pay the debt while the creditor agrees
to require Tibong to execute deeds of assignment in her favor
to accept the new debtor for the old. Hence, for there to be
and for her to require Tibongs debtors to execute promissory
extinguishment of the old obligation by delegacion, it is
notes in Aquinteys favor as well. Such deeds of assignment
necessary that the old debtor is relieved of the obligation and
had assigned to Agrifina a total amount of P546,459.00 due
that third person or new debtor takes his place.
from Tibongs debtors.
However, as mentioned before, Court finds that in this case
Aquintey then proceeded to collect the amounts from Tibongs
what transpired between the parties was an assignment of
debtors however she was only able to collect P301,000.00
credit which was executed by Tibong in favor of Aquintey.
instead of the P546, 459.00. She then tried to collect the
remaining balance from Tibong instead who was then unable
An assignment of credit is an agreement by virtue of which
to pay, hence Aquintey then filed a complaint with the Office
the owner of a credit, known as the assignor, by a legal cause,
of the Barangay Captain. No settlement was arrived at, hence
such as sale, dation in payment, exchange or donation, and
Auintey filed a complaint for a sum of money against
without the consent of the debtor, transfers his credit and
respondents herein with the RTC of Baguio City.
accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the
The trial court held that the execution of the deeds of
assignor could enforce it against the debtor. It may be in the
assignment and promissory notes failed to show any express
form of sale, but at times it may constitute a dation in
agreement to novate Tibongs obligation. In addition, the RTC
payment, such as when a debtor, in order to obtain a release
further held that the deeds of assignment and the promissory
from his debt, assigns to his creditor a credit he has against a
notes were separate contracts and could stand alone from
third person.
Tibongs original indebtedness. Since Aquintey was already
able to collect P301,000.00 from the debtors of Tibong, such
In a dation, the undertaking is in the nature of a sale which
amount would then have to be deducted from Tibongs
means that the creditor is really buying the property of the
debtor to be charged against debtors obligation. The
requisites of a valid dacion are: 1.) that there is the
The CA only affirmed the decision of the RTC, ruling that
performance of the prestation in lieu of the payment, 2.) that
although Aquintey was subrogated as a new creditor in lieu of
there is a difference between the prestation due and the one
Tibong, Tibongs obligation under the loan transaction
substituting it, and 3.) that the parties (debtor and creditor)
remained. However, the CA held that instead of a novation,
had agreed that the performance of the prestation would
rather what had transpired was an assignment of credit and
serve to extinguish the obligation
that such assignment had the effect of payment which is in
the nature of a sale, hence the assignor which is respondent
In this case, it was founded by the court that all the requisites
Tibong herein remains liable for the warranties.
for a dacion were present. Tibong had executed the deeds of
assignment in order to make good the balance of her
Issue: Whether or not there was novation by virtue of a
obligation since she was not able to comply with the payment.
delegacion thereby extinguishing the respondents obligation
Tibong and Aquintey also agreed to relieve Tibong of the
obligation to pay the balance and for Aquintey to collect the
same from the debtors of Tibong.
The court herein held that there was no novation.
In addition, Aquintey since 1990 when deeds were executed
never once attempted to collect from Tibong and that it was
Court proceeded to differentiate novation from dacion in
only 9 years later that Aquintey had attempted to collect from
payment which is one of the legal causes to which an
Tibong when all the while Aquintey had already collected
assignment of credit may be effected. Court referred to art.
301,000 from Tibongs debtors.
1292 which proves that in order for an obligation to be
extinguished by another which substitutes the same, it is
There being no novation, court ruled that Tibong is still liable
imperative that it be declared in unequivocal terms or that the

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for the balance on their account to Aquintey in the amount of ASSIGNMENT OF CREDIT CONVENTIONAL
P33, 841 deducted already were the amounts which were SUBROGATION
collected from Tibongs debtors and the partial payment of An agreement by virtue of Transfer of all the rights of
50,000 already made beforehand by Tibong. which the owner of the the creditor to a third person,
credit (assignor) by legal who substitutes him in all his
LEDONIO vs. CAPITOL cause and without the right
- by Dokie Francris Talon debtors consent, transfers = Legal subrogation: by
the credit and its accessory operation of law
Facts: rights to another = Conventional subrogation:
Petitioner obtained two loans totaling 60,000 pesos (assignee), who acquires takes place by agreement of
from Ms. Picache, for which he executed promissory the power to enforce it the parties
notes (No extinguishment of Extinguishes and obligation
Petitioner failed to pay any of the said loans obligation) Refers to the and gives rise to a new one
same right which passes
Ms. Picache then executed and Assignment of credit
covering petitioners loans in favor of the respondent Creditor may validly assign Requires an agreement
his credit without the among the parties (original
Petitioner had knowledge of the credit
debtors consent creditor, the debtor, new
Petitioner still failed to pay his indebtedness despite
repeated demands by respondents and its counsels
In defense, petitioner asserted that
In the case at bar:
o He never acquired any loans from Ms.
It was a simple deed of assignment
There is nothing in the said Assignment of Credit that
o He signed the promissory notes under
a conventional subrogation was intended by the
o There was no transaction or privity between
o It only conveys a straightforward intention
him, Ms. Picache and the respondents
of Ms. Picache to sell, assign, transfer, and
convey to respondent the debt
RTC:Ruled in favor of the respondents
o Signed solely by Ms. Picache and two
It is incredulous that a businessman and a holder
of a degree in Bachelor of Science in Chemical
o No reference was made to secure the
Engineering would simply sign blank promissory
conforme or signature of the petitioner
The respondents acquired all rights to sue in his own
The Assignment of Credit is valid and
name the petitioner
enforceable as there was meeting of m8inds
between the assignor (Ms. Picache) and her In assignment, debtors consent is not essential for
assignee (respondent) upon the things which is the validity of the assignment
the object of the contract without the necessity o Otherwise, all creditors would be prevented
of the consent of the debtor (petitioner does not from assigning their credits because of the
deny of being notified) possibility of debtors refusal to give
CA: Affirmed the ruling of RTC There is a necessity for the notice to the debtor in
order that assignment may fully produce its legal
Petitioners Argument on appeal before the SC: effect
CA erred in ruling that there was an assignment of o It refers to a notice and not a petition for the
credit and the there was no novation/subrogation consent of the debtor
The consent of the debtor to the assignment of credit Since consent it immaterial, the only matter that the
is a basic/essential element in order for the assignee court will determine is whether petitioner had
to have cause of action against the debtor knowledge of the assignment
He cited Art. 1301 of the Civil Code on Conventional o Yes
Subrogation o Petitioner received the letters send by Ms.
Picache and the return cards were signed by
Issue: WON there a conventional subrogation when Ms. his agent
Picache assigned the debt to the respondent and that without o He never questioned why the respondent is
the consent of the debtor, said subrogation should be deemed seeking the payment of loans and not the
without force and effect original creditor


-by Emmanuel E. Monteroyo

ACE Foods is a domestic corporation engaged in the trading
and distribution of consumer goods in wholesale and retail
bases, while MTCL is one engaged in the supply of computer
Ruling: hardware and equipment.
No On September 26, 2001, MTCL sent a letter-proposal for the
The transaction between Ms. Picache and respondent delivery and sale of the subject products to be installed at
was an assignment of credit, not conventional various offices of ACE Foods. Aside from the itemization of the
subrogation, and does not require petitioners products offered for sale, the said proposal further provides
consent for some terms.

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ACE Foods accepted MTCLs proposal and accordingly issued A contract is what the law defines it to be, taking into
a Purchase Order for the subject products amounting to consideration its essential elements, and not what the
P646,464.00 (purchase price). contracting parties call it.33 The real nature of a contract may
MTCL delivered the said products to ACE Foods as in the be determined from the express terms of the written
invoice receipt. The fine print of the invoice states, inter alia, agreement and from the contemporaneous and subsequent
that "[t]itle to sold property is reserved in MICROPACIFIC acts of the contracting parties. However, in the construction
TECHNOLOGIES CO., LTD. until full compliance of the terms or interpretation of an instrument, the intention of the
and conditions of above and payment of the price" (title parties is primordial and is to be pursued.
reservation stipulation).
After delivery, the subject products were then installed and In this case, the Court concurs with the CA that the parties
configured in ACE Foodss premises. MTCLs demands against have agreed to a contract of sale and not to a contract to sell
ACE Foods to pay the purchase price, however, it remained as adjudged by the RTC. Bearing in mind its consensual
unheeded. nature, a contract of sale had been perfected at the precise
Instead of paying the purchase price, ACE Foods sent MTCL a moment ACE Foods, as evinced by its act of sending MTCL the
Letter stating that it "ha[s] been returning the [subject Purchase Order, accepted the latters proposal to sell the
products] to [MTCL] thru [its] sales representative Mr. Mark subject products in consideration of the purchase price
Anteola who has agreed to pull out the said [products]but had of P646,464.00. From that point in time, the reciprocal
failed to do so up to now." obligations of the parties i.e., on the one hand, of MTCL to
ACE Foods lodged a Complaint against MTCL before the RTC, deliver the said products to ACE Foods, and, on the other
praying that the latter pull out from its premises the subject hand, of ACE Foods to pay the purchase price therefor within
products since MTCL breached its "after delivery services" thirty (30) days from delivery already arose and
obligations to it, particularly, to: consequently may be demanded.
(a) install and configure the subject products;
(b) submit a cost benefit study to justify the purchase of the
subject products; and On the issue of NOVATION
(c) train ACE Foodss technicians on how to use and maintain The Court must dispel the notion that the stipulation
the subject products. anent MTCLs reservation of ownership of the subject products
ACE Foods likewise claimed that the subject products MTCL as reflected in the Invoice Receipt, i.e., the title reservation
delivered are defective and not working. stipulation, changed the complexion of the transaction from a
contract of sale into a contract to sell. Records are bereft of
Defense of MTCL: In its Answer with Counterclaim, any showing that the said stipulation novated the contract of
MTCL maintained that it had duly complied with its obligations sale between the parties which, to repeat, already existed at
to ACE Foods. MTCL, however, alleged that there was actually the precise moment ACE Foods accepted MTCLs proposal. To
no agreement as to the purported "after delivery services." be sure, novation, in its broad concept, may either be
Further, MTCL posited that ACE Foods refused and failed to extinctive or modificatory. Novation is never presumed, and
pay the purchase price for the subject products despite the the animus novandi, whether totally or partially, must appear
latters use of the same for a period of nine (9) months. As by express agreement of the parties, or by their acts that are
such, MTCL prayed that ACE Foods be compelled to pay the too clear and unequivocal to be mistaken.
purchase price, as well as damages related to the transaction.
In the present case, it has not been shown that the title
RTC: Agreement between ACE Foods and MTCL is in the reservation stipulation appearing in the Invoice Receipt had
nature of a contract to sell. the prospective seller explicitly been included or had subsequently modified or superseded
reserves the transfer of title to the prospective buyer, and the original agreement of the parties.
said transfer is conditioned upon the full payment of the
purchase price The fact that the Invoice Receipt was signed by a
representative of ACE Foods does not, by and of itself,
Dissatisfied, MTCL elevated the matter on appeal prove animus novandi since: (a) it was not shown that the
signatory was authorized by ACE Foods (the actual party to
CA: CA reversed and set aside the RTCs ruling, ordering ACE the transaction) to novate the original agreement; (b) the
Foods to pay MTCL the amount of P646,464.00, plus legal signature only proves that the Invoice Receipt was received by
interest at the rate of 6% per annum to be computed from a representative of ACE Foods to show the fact of delivery;
April 4, 2002. It found that the agreement between the parties and (c) as matter of judicial notice, invoices are generally
is in the nature of a contract of sale, observing that the said issued at the consummation stage of the contract and not its
contract had been perfected from the time ACE Foods sent the perfection, and have been even treated as documents which
Purchase Order to MTCL which, in turn, delivered the subject are not actionable per se, although they may prove sufficient
products covered by the Invoice Receipt and subsequently delivery. Thus, absent any clear indication that the title
installed and configured them in ACE Foodss premises reservation stipulation was actually agreed upon, the Court
must deem the same to be a mere unilateral imposition on
Aggrieved, ACE Foods moved for reconsideration which was, the part of MTCL which has no effect on the nature of the
however, denied. Hence this petition. parties original agreement as a contract of sale. ACE Foodss
obligation to pay the purchase price as well as to accept
ISSUE: the delivery of the goods, remain enforceable and
Whether ACE Foods should pay MTCL the purchase price subsisting.
for the subject products. YES!
WHEREFORE, petition is DENIED. CA decision is
Whether there was novation. NO! affirmed.


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-by Gerard Tinampay Domingo] defaulted in complying with the terms and
conditions of the Promissory Note with Chattel Mortgage by
FACTS: failing to pay twenty[-one] (21) successive installments which
On September 27, 1993, respondent Amador Domingo and fell due on January 15, 1996 up to September 15, 1997. [BPI]
his wife, the late Mercy Maryden Domingo, executed a sent a demand letter [to] defendant Mercy Domingo thru
Promissory Note in favor of Makati Auto Center, Inc. in the registered mail demanding payment of the whole balance of
sum of P629,856.00, payable in 48 successive monthly the Promissory Note plus the stipulated interest and other
installments in the amount of P13,122.00 each. They charges or return to [BPI] the possession of the above-
simultaneously executed a Deed of Chattel Mortgage over a described motor vehicle. There were some negotiations made
1993 Mazda 323 (subject vehicle) to secure the payment of by the [spouses Domingo] to their In-House Legal Assistant
their Promissory Note. Makati Auto Center, Inc. then assigned, but the same did not materialize. Based on the Statement of
ceded, and transferred all its rights and interests over the said Account dated October 31, 2000, [the spouses Domingo have]
Promissory Note and chattel mortgage to Far East Bank and an outstanding balance of P275,562.00 exclusive of interest
Trust Company (FEBTC). and other charges.
On April 7, 2000, the Securities and Exchange Commission On cross-examination, the witness explained that the first
(SEC) approved and issued the Certificate of Filing of the time he came to handle [the spouses Domingo's] account was
Articles of Merger and Plan- of Merger executed on January in 1997. Despite the fact that he was not yet employed with
20, 2000 by and between BPI, the surviving corporation, and the bank in 1993, he knew exactly what happened in this
FEBTC, the absorbed corporation. By virtue of said merger, all particular transaction because of his experience in auto
the assets and liabilities of FEBTC were transferred to and financing. He also has an access [to] the Promissory Note,
absorbed by BPI. Chattel Mortgage and other records of payment made by the
The spouses Domingo defaulted when they failed to pay 21 bank. Based on the records, the [spouses Domingo] issued
monthly installments that had fallen due consecutively from several postdated checks but not for the entire term. There
January 15, 1996 to September 15, 1997. BPI, being the were payments made from October 30, 199[3] up to
surviving corporation after the merger, demanded that the September 14, 1994. He was not the one who received
spouses Domingo pay the balance of the Promissory Note payments for the auto finance. If there were receipts issued,
including accrued late payment charges/interests or to return they will only ride for the account of Mrs. Domingo. He was
the possession of the subject vehicle for the purpose of not sure if these receipts are kept in the warehouse or
foreclosure in accordance with the undertaking stated in the probably disposed of by the bank since the transaction was
chattel mortgage. When the spouses Domingo still failed to made in 1997. They already have a computer records of all
comply with its demands, BPI filed on November 14, 2000 a payments made by their client. Based on the subsidiary
Complaint for Replevin and Damages (or in the alternative, for ledger, there were three (3) checks that bounced and these
the collection of sum of money, interest and other charges, are payments from the new buyer. They only have one (1)
and attorney's fees. BPI included a John Doe as defendant photocopy of these checks in the amount of P325,431.60
because at the time of filing of the Complaint, BPI was already while the other two (2) are missing. He was not aware who
aware that the subject vehicle was in the possession of a third owns Cargo and Hardware Corporation but the check was
person but did not yet know the identity of said person. issued by a certain Miss Gonzales. The witness further
the spouses Domingo raised the following affirmative testified that anyone can pay the monthly amortization as
defenses: long as the payment is for the account of Maryden Domingo.
4. [BPI] has no cause of action against the [spouses Domingo]. They cannot include Carmelita Gonzales as one of the
5. The Honorable Court has no jurisdiction over this case, defendants in this case because they don't have a document
6. As per the allegations in the complaint, JOHN DOE is an executed by the latter in behalf of Far East Bank and Trust Co.
indispensable party to this case so with his whereabouts The bank did not approve the Deed of Sale with Assumption of
unknown, service by publication should first be made before Mortgage.
proceeding with the trial of this case; Witness further testified that he found the photocopy of the
7. Defendant Maryden Domingo once obtained a car loan from Deed of Sale in the records of Maryden Domingo. The
Far East Bank and Trust Company but the car was later sold to Promissory Note and Chattel Mortgage were executed by the
Carmelita S. Gonzales with the bank's conformity and the defendants Maryden and Amador Domingo. There was no
buyer subsequently assumed payment of the balance of the assumption of obligation of the [spouses Domingo]. Witness
mortgaged loan. however admitted that Far East Bank did not tum over to [BPI]
the prosecution presented as witness Vicente Magpusao, a all the records pertaining to the account of the [spouses
former employee of FEBTC and now an Account Analyst of BPI. Domingo ]
His testimony was summed up by the MeTC as follows: For his defense, defendant Amador Domingo testified that his
Vicente Magpusao, [BPI's] Account Analyst and formerly wife and co-defendant Mercy Maryden Domingo died on
connected with Far East Bank and Trust Company testified November 27, 2003. He admitted that his wife bought a car
that on September 27, 1993, [the spouses Domingo] for and was mortgaged to Far East Bank and Trust Company. He
consideration executed and delivered to Makati Auto Center, identified the Chattel Mortgage and the Promissory Note he
Inc. a Promissory Note in the sum of P629,856.00 payable in executed together with his wife. In connection with the
monthly installments in accordance with the schedule of execution of this Promissory Note, he recalled that his wife
payment indicated in said Promissory Note. In order to secure issued forty-eight (48) checks. The twelve (12) checks were
the payment of the obligation, the [spouses Domingo] cleared by the bank and his wife was able to obtain a discount
executed in favor of said Makati Auto Center, Inc. on the same for prompt payments up to October 1994. While they were
date a Chattel Mortgage over one (1) unit of 1993 Mazda still paying for the car, Carmelita Gonzales got interested to
(323) with Motor No. B6-270146 and with Serial No. buy the car and is willing to assume the mortgage. After
BG1062M9100287. With notice to [the spouses Domingo], furnishing the bank [with] the Deed of Sale duly notarized,
said Makati Auto Center, Inc. assigned to Far East Bank and Carmelita Gonzales subsequently issued a check payable to
Trust Co. the Chattel Mortgage as shown by the Deed of Far East Bank and Trust Company and the remaining
Assignment executed by [Makati Auto Center, Inc.]. Far East postdated checks were returned to them. Based on the
Bank and Trust Co. on the other hand, has been merged with application of payment prepared by [BPI's] witness, Carmelita
and/or absorbed by herein plaintiff [BPI]. The [spouses Gonzales made payments from November 14, 1995 to

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Ateneo de Davao Univeristy
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Atty. Lydia C. Galas
Midterm Case Digests

December 1995. Aside from these payments on May 19, 1997, delegacion, given that the "[s]ubstitution of one debtor for
Carmelita Gonzales issued a check to Far East Bank in the another may delay or prevent the fulfillment of the obligation
amount of P385,431.60. In 1996, he received a phone call by reason of the financial inability or insolvency of the new
from a certain Marvin Orence asking for their assistance to debtor; hence, the creditor should agree to accept the
locate the car which Carmelita Gonzales bought from them. substitution in order that it may be binding on him."
His lawyer went to Land Transportation Office for assistance. Both the R TC and the Court of Appeals found that there was
From the time Ms. Gonzales started to pay, they never novation by delegacion in the case at bar. The Deed of Sale
received any demand letter from Far East Bank. Thereafter, on with Assumption of Mortgage was executed between Mercy
February 29, 1997, they received a demand letter from Espino and Carmelita, thus, their consent to the substitution as
Law Office [on] behalf of [FEBTC]. His lawyer made a reply on debtors and third person, respectively, are deemed
March 31, 1997 stating therein that the motor vehicle for undisputed. It is the existence of the consent of BPI as creditor
which the loan was obtained had been sold to Carmelita that is being challenged herein.
Gonzales as of July 5, 1994 with the knowledge and approval As a general rule, since novation implies a waiver of the right
of their client. After three years, they received another the creditor had before the novation, such waiver must be
demand letter dated October 31, 2000 from Labaguis Law express. The Court explained the rationale for the rule in
Office. His lawyer made the same reply on March 7, 2000 and Testate Estate of Lazaro Mota v. Serra:
another letter on November 24, 2000. Witness further It should be noted that in order to give novation its legal
testified that this malicious complaint probably triggered the effect, the law requires that the creditor should consent to the
early demise of his wife who has a high blood pressure. His substitution of a new debtor. This consent must be given
wife died of aneurism. As damages, he is asking for the expressly for the reason that, since novation extinguishes the
amount of P200,000.00 as moral damages, P75,000.00 as personality of the first debtor who is to be substituted by a
attorney's fees and P5,000.00 appearance fee. new one, it implies on the part of the creditor a waiver of the
On cross-examination, witness elaborates that when his wife right that he had before the novation, which waiver must be
presented to Far East Bank the Deed of Sale with Assumption express under the principle that renuntiatio non praesumitor,
of Mortgage, the bank made no objection and returned all recognized by the law in declaring that a waiver of right may
their postdated checks. His wife was the one who deal[t] with not be performed unless the will to waive is indisputably
Carmelita Gonzales but he always provide[d] assistance with shown by him who holds the right.
respect to paper works. Aside from the aforesaid Deed of Sale, However, in Asia Banking Corporation v. Elser, the Court
there is no other document which shows the conformity of the qualified thus:
bank. They were only verbally assured by Mr. Orence that The aforecited article 1205 [now 1293] of the Civil Code does
their papers are in order. not state that the creditor's consent to the substitution of the
ISSUE: new debtor for the old be express, or given at the time of the
Whether or not there had been a novation of the loan substitution, and the Supreme Court of Spain, in its judgment
obligation with chattel mortgage of the spouses Domingo to of June 16, 1908, construing said article, laid down the
BPI so that the spouses Domingo were released from said doctrine that "article 1205 of the Civil Code does not mean or
obligation and Carmelita was substituted as debtor. require that the creditor's consent to the change of debtors
HELD: must be given simultaneously with the debtor's consent to the
The Court answers in the negative and grants the Petition. substitution; its evident purpose being to preserve the
In De Cortes v. Venturanza, the Court discussed some creditor's full right, it is sufficient that the latter's consent be
principles and jurisprudence underlying the concept and given at any time and in any form whatever, while the
nature of novation as a mode of extinguishing obligations: agreement of the debtors subsists." The same rule is stated in
According to Manresa, novation is the extinguishment of an the EnciclopediaJuridica Espanola, volume 23, page 503,
obligation by the substitution or change of the obligation by a which reads: "The rule that this kind of novation, like all
subsequent one which extinguishes or modifies the first, others, must be express, is not absolute; for the existence of
either by changing the object or principal conditions, or by the consent may well be inferred from the acts of the creditor,
substituting the person of the debtor, or by subrogating a since volition may as well be expressed by deeds as by
third person to the rights of the creditor (8 Manresa 428, cited words." The understanding between Henry W. Elser and the
in IV Civil Code of the Philippines by Tolentino 1962 ed., p. principal director of Yangco, Rosenstock& Co., Inc., with
352). Unlike other modes of extinction of obligations, novation respect to Luis R. Y angco' s stock in said corporation, and the
is a juridical act with a dual function - it extinguishes an acts of the board of directors after Henry W. Elser had
obligation and creates a new one in lieu of the old. acquired said shares, in substituting the latter for Luis R. Y
Article 1293 of the New Civil Code provides: angco, are a clear and unmistakable expression of its consent.
"Novation which consists in substituting a new debtor in the When this court said in the case of Estate of Mota vs. Serra,
place of the original one, may be made even without the that the creditor's express consent is necessary in order that
knowledge or against the will of the latter, but not without the there may be a novation of a contract by the substitution of
consent of the creditor." debtors, it did not wish to convey the impression that the
Under this provision, there are two forms of novation by word "express" was to be given an unqualified meaning, as
substituting the person of the debtor, and they are: (1) indicated in the authorities or cases, both Spanish and
expromision and (2) delegacion. In the former, the initiative American, cited in said decision.
for the change does not come from the debtor and may even Hence, based on the aforequoted ruling in Asia Banking, the
be made without his knowledge, since it consists in a third existence of the creditor's consent may also be inferred from
person assuming the obligation. As such, it logically requires the creditor's acts, but such acts still need to be "a clear and
the consent of the third person and the creditor. In the latter, unmistakable expression of [the creditor's] consent.
the debtor offers and the creditor accepts a third person who In Ajax Marketing and Development Corporation v. Court of
consents to the substitution and assumes the obligation, so Appeals, the Court further clarified that:
that the intervention and the consent of these three persons The well settled rule is that novation is never presumed.
are necessary. In these two modes of substitution, the consent Novation will not be allowed unless it is clearly shown by
of the creditor is an indispensable requirement. express agreement, or by acts of equal import. Thus, to effect
The Court also emphasized in De Cortes the indispensability of an objective novation it is imperative that the new obligation
the creditor's consent to the novation, whether expromision or expressly declare that the old obligation is thereby

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Atty. Lydia C. Galas
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extinguished, or that the new obligation be on every point substitution of debtors, although it objected to the payment
incompatible with the new one. In the same vein, to effect a formula submitted by DBP.
subjective novation by a change in the person of the debtor it Indeed, the authority granted by BPI to its account officer to
is necessary that the old debtor be released expressly from attend the creditors' meeting was an authority to represent
the obligation, and the third person or new debtor assumes the bank, such that when he failed to object to the
his place in the relation. There is no novation without such substitution of debtors, he did so on behalf of and for the
release as the third person who has assumed the debtor's bank. Even granting arguendo that the said account officer
obligation becomes merely a co-debtor or surety. was not so empowered, BPI could have subsequently
The burden of establishing a novation is on the party who registered its objection to the substitution, especially after it
asserts its existence. Contrary to the findings of the Court of had already learned that DBP had taken over the assets and
Appeals and the RTC, Amador failed to discharge such burden assumed the liabilities of ELISCON. Its failure to do so can only
as he was unable to present proof of the clear and mean an acquiescence in the assumption by DBP of
unmistakable consent of BPI to the substitution of debtors. ELISCON's obligations. As repeatedly pointed out by ELISCON
Irrefragably, there is no express consent of BPI to the and MULTI, BPI's objection was to the proposed payment
substitution of debtors. The Court of Appeals and the RTC formula, not to the substitution itself. In Babst, there was a
inferred the consent of BPI from the following facts: (1) BPI clear opportunity for BPI, as creditor therein, to object to the
had a copy of the Deed of Sale and Assumption of Mortgage substitution of debtors given that its representative attended
executed between Mercy and Carmelita in its file, indicating a creditor's meeting, during which, said representative
its knowledge of said agreement, and still it did not interpose already objected to the proposed payment formula made by
any objection to the same; (2) BPI (through FEBTC) returned DBP, as the new debtor. Hence, the silence of BPI during the
the spouses Domingo's checks and accepted Carmelita's same meeting as to the matter of substitution of debtors
payments; and (3) BPI did not demand any payment from the could already be interpreted as its acquiescence to the same.
spouses Domingo not until 3 0 months after Carmelita In contrast, there was no clear opportunity for BPI (or FEB TC)
assumed the payment of balance on the Promissory Note. to have expressed its objection to the substitution of debtors
The Court disagrees with the inferences made by the Court of in the case at bar.
Appeals and the RTC. Second, the consent of BPI to the substitution of debtors
First, that BPI (or FEB TC) had a copy of the Deed of Sale and cannot be deduced from its acceptance of payments from
Assumption of Mortgage executed between Mercy and Carmelita, absent proof of its clear and unmistakable consent
Carmelita in its file does not mean that it had consented to to release the spouses Domingo from their obligation. Since
the same. The very Deed itself states: the spouses Domingo remained as debtors of BPI, together
That the VENDEE [Carmelita] assumes as he/she had assumed with Carmelita, the fact that BPI demanded payment from the
to pay the aforecited mortgage in accordance with the original spouses Domingo 30 months after accepting payment from
terms and conditions of said mortgage, and the parties hereto Carmelita is insignificant.
[Mercy and Carmelita] have agreed to seek the conformity of The acceptance by a creditor of payments from a third person,
the MORTGAGEE [FEBTC]. This brings the Court back to the who has assumed the obligation, will result merely to the
original question of whether there is proof of the conformity of addition of debtors and not novation. The creditor may
BPI. therefore enforce the obligation against both debtors. As the
The Court notes that the documents of BPI concerning the car Court pronounced in Magdalena Estates, Inc. v. Rodriguez,
loan and chattel mortgage are still in the name of the spouses "[t]he mere fact that the creditor receives a guaranty or
Domingo. No new promissory note or chattel mortgage had accepts payments from a third person who has agreed to
been executed between BPI (or FEBTC) and Carmelita. Even assume the obligation, when there is no agreement that the
the account itself is still in the names of the spouses Domingo. first debtor shall be released from responsibility, does not
The absence of objection on the part of BPI (or FEB TC) cannot constitute a novation, and the creditor can still enforce the
be presumed as consent. Jurisprudence requires presentation obligation against the original debtor." The Court reiterated in
of proof of consent, not mere absence of objection. Amador Quinto v. People that "[n]ot too uncommon is when a stranger
cannot rely on Babst which involved a different factual milieu. to a contract agrees to assume an obligation; and while this
Relevant portions of the Court's ruling in Babst are reproduced may have the effect of adding to the number of persons liable,
below: it does not necessarily imply the extinguishment of the
In the case at bar, Babst, MULTI and ELISCON all maintain that liability of the first debtor. Neither would the fact alone that
due to the failure of BPI to register its objection to the take- the creditor receives guaranty or accepts payments from a
over by DBP of ELISCON's assets, at the creditors' meeting third person who has agreed to assume the obligation,
held in June 1981 and thereafter, it is deemed to have constitute an extinctive novation absent an agreement that
consented to the substitution of DBP for ELISCON as debtor. the first debtor shall be released from responsibility."
We find merit in the argument. Indeed, there exist clear Absent proof that BPI gave its clear and unmistakable consent
indications that BPI was aware of the assumption by DBP of to release the spouses Domingo from the obligation to pay the
the obligations of ELISCON. In fact, BPI admits that car loan, Carmelita is simply considered an additional debtor.
"[T]he Development Bank of the Philippines (DBP), for a time, Consequently, BPI can still enforce the obligation against the
had proposed a formula for the settlement of Eliscon's past spouses Domingo even 30 months after it had started
obligations to its creditors, including the plaintiff [BPI], but the accepting payments from Carmelita.
formula was expressly rejected by the plaintiff as not And third, there is no sufficient or competent evidence to
acceptable (long before the filing of the complaint at bar)." establish the return of the checks to the spouses Domingo
and the assurance made by FEBTC that the spouses Domingo
The Court of Appeals held that even if the account officer who were already released from their obligation.
attended the June 1981 creditors' meeting had expressed Amador admitted that it was his wife Mercy, together with
consent to the assumption by DBP of ELISCON's debts, such Carmelita, who directly transacted with FEBTC regarding the
consent would not bind BPI for lack of a specific authority sale of the subject vehicle to and assumption of mortgage by
therefor. In its petition, ELISCON counters that the mere Carmelita. Amador had no personal knowledge of what had
presence of the account officer at the meeting necessarily happened when Mercy and Carmelita went to the bank so his
meant that he was authorized to represent BPI in that testimony on the matter was hearsay, which, if not excluded,
creditors' meeting. Moreover, BPI did not object to the deserves no credence.

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Atty. Lydia C. Galas
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The Court explained in Da Jose v. Angeles that:

Evidence is hearsay when its probative force depends on the
competency and credibility of some persons other than the
witness by whom it is sought to be produced. The exclusion of
hearsay evidence is anchored on three reasons: (1) absence
of cross-examination; (2) absence of demeanor evidence; and
(3) absence of oath. Basic under the rules of evidence is that
a witness can only testify on facts within his or her personal
knowledge. This personal knowledge is a substantive
prerequisite in accepting testimonial evidence establishing
the truth of a disputed fact. xx x.
The Court of Appeals and the RTC substantively based their
finding that BPI (or FEB TC) consented to the substitution of
debtors on the return of the checks to the spouses Domingo,
but the proof of the issuance of the checks, their delivery to
the bank, and the return of the checks flimsily consists of
Amador's unsubstantiated testimony. Amador recounted that
the postdated checks which he and Mercy executed in favor of
FEBTC were returned to them, however, he failed to provide
the details surrounding the return. Amador only stated that
when Mercy provided FEBTC with a copy of the Deed of Sale
and Assumption of Mortgage, the bank returned the checks to
them "subsequently" or "afterwards." Amador did not say how
the checks were returned and to whom. The checks were not
presented during the trial since according to Amador, they
were already "discarded," although once more, any other
detail surrounding the discarding of the checks is sorely
lacking. Aside from Amador's bare testimony, no other
supporting evidence of the return of the checks to the
spouses Domingo was submitted during trial. For the
foregoing reasons, the Court accords little weight and
credence to Amador' s testimony on the return of the checks.
It is worthy to stress that Amador, as the party asserting
novation, bears the burden of proving its existence. Amador
cannot simply rely on the failure of BPI to produce the checks
if these were not actually returned to the spouses Domingo.
There is simply not enough evidence to establish the prima
facie existence of novation to shift the burden of evidence to
BPI to controvert the same.
The verbal assurances purportedly given by a Mr. Marvin
Orence or Oronce (Orence/Oronce) of FEBTC to Amador over
the telephone that the spouses Domingo's documents were in
order do not constitute the clear and unmistakable consent of
the bank to the substitution of debtors. Once again, except for
Amador's bare testimony, there is no other evidence of such
telephone conversations taking place and the subject of such
telephone conversations. In addition, Mr. Orence/Oronce's
identity, position at FEBTC, and authority to represent and
bind the bank, were not even clearly established.
The letter dated March 31, 1997 of Atty. Ricardo J.M. Rivera
(Rivera), counsel for the spouses Domingo, addressed to Atty.
Cresenciano L. Espino, counsel for FEBTC, does not serve as
supporting evidence for Amador' s testimony regarding the
return of the checks and the verbal assurances given by Mr.
Orence/Oronce. The contents of such letter are mere hearsay
because the events stated therein did not personally happen
to Atty. Rivera or in his presence, and he merely relied on
what his clients, the spouses Domingo, told him.
The Court is therefore convinced that there is no novation by
delegacion in this case and Amador remains a debtor of BPI.
The Court reinstates the MeTC judgment ordering Amador to
pay for the P275,562.00 balance on the Promissory Note, 10%
attorney's fees, and costs of suit; but modifies the rate of
interest imposed and the date when such interest began to

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