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OBLIGATIONS and CONTRACTS

Atty. Lydia C. Galas


Midterm Case Digests

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

Page 1 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

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

Page 2 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

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

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

The following rules of thumb shall apply regarding the computation


of the interest due: On the same day, Citimotors, Inc. assigned all its rights, title and
interests in the Promissory Note with Chattel Mortgage to ABN
1. when an obligation, regardless of its source, is breached, the AMRO Savings Bank, Inc. (ABN AMRO), which, on May 31, 2002,
contravenor can be held liable for damages. The provisions under likewise assigned the same to respondent BPI Family Savings Bank,
Title XVIII (18) Damages of the CC govern such. Inc.

2. With regard particularly to an award of interest in the concept of For failure to pay four successive installments from May 15, 2002 to
actual & compensatory damages, the rate of interest, as well as the August 15, 2002, respondent, through counsel, sent to petitioners a
accrual thereof, is imposed as follows: demand letter dated August 29, 2002, declaring the entire obligation
as due and demandable and requiring to pay Php576,664.04, or
When the obligation is breached, & it consists in the surrender the mortgaged vehicle immediately upon receiving the
payment of a sum of money, interest due should be that letter. As the demand was left unheeded, respondent filed on October
which may have been stipulated in writing. The interest due 4, 2002 an action for Replevin and Damages before the Manila
shall itself earn legal interest from the tie it is judicially Regional Trial Court (RTC).
demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default. A writ of replevin was issued. Despite this, the subject vehicle was
When an obligation, not constituting a loan or forbearance not seized. On August 11, 2005, the RTC ruled for the respondent and
of money, is breached, an interest on the amount of ordered petitioners to jointly and severally pay the amount of
damages awarded may be imposed at the discretion of the Php576,664.04 plus interest at the rate of 72% per annum from
court at the rate of 6% per annum. No interest shall be August 20, 2002 until fully paid, and the costs of suit.
adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable Petitioners appealed the decision to the Court of Appeals (CA), but
certainty.Where the demand is established with reasonable the CA affirmed the lower courts decision.
certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially, but when such ISSUE: (1) Whether or not petitioners cannot be considered to have
certainty cannot be reasonably established at the time defaulted in payment for lack of competent proof that they received
demand is made, interest shall begin to run only from the the demand letter
date of the judgment of the court is made. The actual base (2) Whether or not respondents remedy of resorting to both actions
for the computation of legal intrest shall, in any case, be on of replevin and collection of sum of money is proper
the amount finally adjudged.
When the judgment of the court awarding a sum of money HELD: The contentions are untenable.
becomes final & executry, the rate of legal interest shall be
12& per annum from such finality until its satisfaction, this Records bear that both verbal and written demands were in fact
interim period being deemed to be by then an equivalent to made by respondent prior to the institution of the case against
a forbearance of credit. petitioners. Even assuming, for arguments sake, that no demand
letter was sent by respondent, there is really no need for it because
There being written stipulations as to the rate of interest owing on petitioners legally waived the necessity of notice or demand in the
each specific promissory note, such agreed interest rates must be Promissory Note with Chattel Mortgage, which they voluntarily
followed. and knowingly signed in favor of respondents predecessor-in-
interest. Said contract expressly stipulates:
Surcharges & penalties agreed to be paid by the debtor shall be
determined by the Court whether such would be iniquitous & In case of my/our failure to pay when due and payable, any sum
unconscionable. Given the circumstances under which GOYU found which I/We are obliged to pay under this note and/or any other
itself after the occurrence of the fire, the Court rules the surcharge obligation which I/We or any of us may now or in the future owe to
rate ranging from 9%-27% plus penalty of 36% to be iniquitous & the holder of this note or to any other party whether as principal or
unconscionable. In light of GOYUs offer to pay the amount to guarantor x x x then the entire sum outstanding under this note
RCBC, which RCBC refused, the Court finds it more in keeping with shall, without prior notice or demand, immediately become due and
justice & equity for RCBC not to charge additional interest, payable. (Emphasis and underscoring supplied)
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,
AGNER vs BPI SAVINGS wherein We held:
-By Bea Reyes
The Civil Code in Article 1169 provides that one incurs in delay or is
FACTS: On February 15, 2001, petitioners spouses Deo Agner and in default from the time the obligor demands the fulfillment of the
Maricon Agner executed a Promissory Note with Chattel Mortgage in obligation from the obligee. However, the law expressly provides that
favor of Citimotors, Inc. The contract provides, among others, that: demand is not necessary under certain circumstances, and one of
for receiving the amount of Php834, 768.00, petitioners shall pay Php these circumstances is when the parties expressly waive demand.
17,391.00 every 15th day of each succeeding month until fully paid; Hence, since the co-signors expressly waived demand in the
the loan is secured by a 2001 Mitsubishi Adventure Super Sport; and promissory notes, demand was unnecessary for them to be in default.
an interest of 6% per month shall be imposed for failure to pay each
installment on or before the stated due date.

Page 4 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

Further, the Court even ruled in Navarro v. Escobido that prior actual foreclosure. The trial court, therefore, rightfully granted the
demand is not a condition precedent to an action for a writ of alternative prayer for sum of money, which is equivalent to the
replevin, since there is nothing in Section 2, Rule 60 of the Rules of remedy of "exacting fulfillment of the obligation." Certainly, there is
Court that requires the applicant to make a demand on the possessor no double recovery or unjust enrichment30 to speak of.
of the property before an action for a writ of replevin could be filed. All the foregoing notwithstanding, We are of the opinion that the
interest of 6% per month should be equitably reduced to one percent
Also, petitioners representation that they have not received a (1%) per month or twelve percent (12%) per annum, to be reckoned
demand letter is completely inconsequential as the mere act of from May 16, 2002 until full payment and with the remaining
sending it would suffice. Again, We look into the Promissory Note outstanding balance of their car loan as of May 15, 2002 as the base
with Chattel Mortgage, which provides: amount.

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

Page 5 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

Whether the certification dated September 10, 1996 should be


admitted as basis for respondent's payment of his loan with Thus, having only proven payment to the extent of P337,650.00,
petitioner? respondent is obligated to pay petitioner the balance of P310,638.00
with interest.
Whether respondent has fulfilled his obligation with petitioner?
WHEREFORE, the instant petition is PARTIALLY GRANTED. The
Court of Appeals' Decision dated October 18, 2006 in CA G.R. CV
SC Ruling No. 82686 is SET ASIDE. The respondent is ORDERED to pay
petitioner the balance of the car loan in the amount of P310,638.00
The petition is partly meritorious. plus interest at the rate of six percent (6%) per annum computed from
January 23, 199971 until the date of finality of this judgment. The
Admissibility of the total amount shall thereafter earn interest at the rate of six percent
certification dated (6%) per annum72 until fully paid. The trial court's Decision dated
September 10, 1996 November 22, 2002 is AFFIRMED in all other respects.

The documents containing the signature of Dy which have been EFFECT OF DEATH
submitted by petitioner as authentic are the following: (1) letter dated
November 11, 1998;47 (2) termination letter dated January 22, STRONGHOLD INSURANCE CO. VS REPUBLIC-ASAHI
1999;48 (3) promissory note dated June 17, 1994;49 and (4) chattel -by Joe Van De Gala
mortgage signed on June 27, 1994.50 Examining and analyzing the
signatures in these documents with Dy's signature in the certification, FACTS:
we find no substantial reason to doubt the latter's authenticity.
In May 1989, Rep-Asahi (respondent) entered a contract with Jose D.
Dy never testified that any forgery or fraud attended the certification. Santos, the sole proprietor of JDS Construction, for a construction of
In fact, she did not deny the authenticity of her signature but actually drainage and roadway system to be completed within 240 days. To
admitted that the signature therein looks like hers. Additionally, Valle, guaranty the performance of the contract, JDS put a performance
who is familiar with the signature of Dy because of the requirements bond of Php795,000 with Stronghold Insurance (SICI) (petitioner)
of her job, also positively testified that the signature in the which them joint severally liable.
certification looks like that of Dy's.
Several times prior to November of 1989, the engineers of Rep-Asahi
For having established the due execution and authentication of the called the attention of JDS for the slow progress of the construction.
certification dated September 10, 1996, the certification should be They feared that the project will not be finished within the time
admitted in evidence to prove that respondent partially paid the car stipulated in the contract. However, these reminders went unheeded.
loan in the amount ofP337,650.00. On November 24 1989, dissatisfied with the progress of work, Rep-
Asahi extrajudicially rescinded the contract and send a notice to JDS
Insufficient evidence to prove informing such recission. Such recissionper their contract shall not be
full payment of loan construed as a waiver of Rep-Asahis rights to claim damages to JDS
and the latters sureties. Due to the recission, Rep-Asahi hired
It must be emphasized that both parties have not presented any another contractor to finish the project which they incurred additional
written agreement or contract governing respondent's obligation. expenses.
Nevertheless, it has been established that respondent obtained a car
loan amounting to P648,288.00 from petitioner. Thus, the burden is During the proceeding, Jose D. Santos died and the whereabouts of
now on respondent to prove that the obligation has already been JDS was unknown. SICI contended that money claims against them
extinguished by payment. has extinguished due to the death of Mr. Santos. Even if this were not
the case, they were released from their liability because there was no
Although not exclusive, a receipt of payment is the best evidence of proper liquidation as to the ascertainment of the liabilities.
the fact of payment. We held that the fact of payment may be Liquidation in that case is impossible due to the death of Mr. Santos.
established not only by documentary evidence but also by parol
evidence. ISSUE:
Except for respondent's bare allegations that he has fully paid the Whether the liability of SICI under the performance bond
P648,288.00 car loan, there is nothing in the records which shows extinguished by the death of Mr. Santos.
that full payment has indeed been made. Respondent did not present
any receipt other than the certification dated September 10, 1996 HELD:
which only proves that respondent has already paid P337,650.00 of
the car loan. A balance of P310,638.00 still remained. The Supreme Court stated that as a rule, death of either the debtor or
the creditor does not extinguish the obligation for it is transmissible.
Respondent also alleged that although deductions were made from Transmission of the obligation is not permitted if it is prevented by
his salaries, bonuses and commissions, his payslips do not reflect law, by the stipulation of the contract, or by the nature of the
such deductions because "there is no such car loan field" in the obligation. Monetary obligations, such as in this case, is transferrable.
accounting program for the payroll. Respondent admitted in his Hence, the death of Mr. Santos does not extinguish the obligation.
testimony that he only presumed that the deductions were being made
from his salaries, bonuses and commissionS.

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With regards to the liability of SICI, as a surety, is solidarily liable her to receive payment intended for private respondent. However, no
with Santos. The suretys obligation, even though merely an such evidence was ever presented.
accessory or collateral to the obligation of the principal, its liability to Section 2, Rule 130 of the Rules of Court states that:(a) When the
the creditor is direct, primary, and absolute. As provided in Art. 1216 original has been lost, destroyed, or cannot be produced in
of the Civil Code, a creditor may go against any, some, or all the court;Section 4, Rule 130 of the Rules of Court allows the
solidary debtors simultaneously. The demand made against one of the presentation of secondary evidence when the original is lost or
debtors shall not be an obstacle to those which may subsequently be destroyed, thus:
directed against the others, so long as the debt has not been fully SEC. 4. Secondary evidence when original is lost or destroyed. -
collected. If a person binds himself solidarily with the principal When the original writing has been lost or destroyed, or cannot be
debtor, the contract is called as Suretyship. produced in court, upon proof of its execution and loss or destruction,
or unavailability,
TO WHOM PAYMENT SHALL BE MADE its contents may be proved by a copy, or by a recital of its contents in
some authentic document, or by the recollection of witnesses.
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF Considering that the contents of the SPA are also in issue here, the
APPEALS and LORETO TAN,respondents. best evidence rule applies. Hence, only the original document (which
-by Kyneth Agunod has not been presented at all) is the best evidence of the fact as to
Facts:Private respondent Loreto Tan (Tan) is the owner of a parcel of whether or not private respondent indeed authorized Sonia Gonzaga
land abutting the national highway in Mandalagan, Bacolod City. to receive the check from petitioner. In the absence of such
Expropriation proceedings were instituted by the government against document, petitioners arguments regarding due payment must fail.
private respondent Tan and other property owners. Best evidence rule: when the subject of inquiry is the contents of
Tan filed a motion dated requesting issuance of an order for the a document, no evidence shall be admissible other than the
release to him of the expropriation price of P32,480.00. And On May original document itself.
22, 1978, petitioner PNB (Bacolod Branch) was required by the trial
court to release to Tan the amount of P32,480.00 deposited with it by CULABA VS SAN MIG. CORP.
the government. -by Dokie Francris Talon
On May 24, 1978, petitioner, through its Assistant Branch Manager
Juan Tagamolila, issued a managers check for P32,480.00 and TO WHOM PAYMENT SHALL BE MADE
delivered the same to one Sonia Gonzaga without Tans knowledge, (A story of happy ever after)
consent or authority. Sonia Gonzaga deposited it in her account with
Far East Bank and Trust Co. (FEBTC) and later on withdrew the said Petitioner are owners of a store engaged in sale and distribution of
amount. SMC products. SMC sold the spouses beer products amounting to
When he failed to recover the amount from PNB, private respondent 28,650. Petitioner only made a partial payment of 3,740. Then they
filed a motion with the court to require PNB to pay the same to him. defaulted on the remaining balance despite repeated demands.
Arguments of Petitioner: PNB contends that the existence of the
SPA need not be proved by it under the best evidence rule because it SMC: We will file for a collection of a sum of money before the
already proved the existence of the SPA from the testimonies of its RTC.
witnesses and by the certification issued by the Far East Bank Culaba: Hey! We already paid the remaining balance. Look at these
andTrust Company that it allowed Sonia Gonzaga to encash Tans four temporary charge slips (TCS)
check on the basis of the SPA. SMC: But we never received your payment.
Issue: Whether there is payment to a person in whose favor the Culaba:Its impossible. An SMC supervisor (seemed to forget his
obligation has been constituted, or his successor-in-interest, or any name) who came in an SMC van came here and collected the
person authorized to receive it. (Article 1240) payments.
Held:There is no question that no payment had ever been made to SMC: Wait a minute. The TCS you just showed are among those that
private respondent as the check was never delivered to him. When the were reportedly lost as seen in our notice of loss last July 9, 1983.You
court ordered petitioner to pay private respondent the amount of should pay us!
P32,480.00, it had the obligation to deliver the same to him. Under
Art. 1233 of the Civil Code, a debt shall not be understood to have The RTC ruled in favor of SMC.
been paid unless the thing or service in which the obligation consists
has been completely delivered or rendered, as the case may be. RTC: You know Culaba, it is unusual for you to forget the name of
The burden of proof of such payment lies with the debtor. In the the collector and did not even require the collector to print his name
instant case, neither the SPA nor the check issued by petitioner was on the receipt.
ever presented in court. Culaba: *stares*
The testimonies of petitioners own witnesses regarding the check RTC: And look at your TCs, it did not appear to have been issued in
were conflicting. Tagamolila testified that the check was issued to the their natural sequence
order of Sonia Gonzaga as attorney-in-fact of Loreto Tan,4while Culaba: *looks at the TCS and was shocked*
Elvira Tibon, assistant cashier of PNB (Bacolod Branch), stated that
the check was issued to the order of Loreto Tan. Culaba made an appeal to the CA but the decision of the RTC was
Furthermore, contrary to petitioners contention that all that is needed affirmed. Then he went to the Supreme Court.
to be proved is the existence of the SPA, it is also necessary for
evidence to be presented regarding the nature and extent of the Culaba: Hey SC! I paid all my dues. An SMC van came here and
alleged powers and authority granted to Sonia Gonzaga; more collected the payments. When I received the receipt, it was the
specifically, to determine whether the document indeed authorized

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Midterm Case Digests

similar to what I used to receive from SMC. And the agents look like of Lim Sio Wan, as payee, cross-checked "For Payees Account
a real SMC agent that is why I never doubted him. Only" and given to Santos. Allied managers check was deposited in
SC: *looks down at Culaba in a blank face* the account of Filipinas Cement Corporation (FCC) at Metropolitan
Culaba: The payment I made is in good faith! Bank and Trust Co. (Metrobank), with the forged signature of Lim
SMC: But remember SC, the burden of proving payment is with the Sio Wan as endorser. Metrobank stamped a guaranty on the check,
debtor and he would not just pay to someone whom he saw for the which reads: "All prior endorsements and/or lack of endorsement
first time without even asking his name. Thats incredible! guaranteed."
Culaba: Shut up SMC! I have paid my dues already!
SMC: No! You shut up! Pay me! Pay me! III
Culaba: No!!! Upon the presentment of the check, Allied funded the check
even without checking the authenticity of Lim Sio Wans purported
SC became irritated of the rantings of the two. Then in an instant, he endorsement. On December 9, 1983, Lim Sio Wan deposited with
made his decision Allied a second money market placement to mature on January 9,
1984. On December 14, 1983, upon the maturity date of the first
SC: Enough! Enough you both! money market placement, Lim Sio Wan went to Allied to withdraw it.
SMC and Culaba: *freezes in silence* She was then informed that the placement had been pre-terminated
SC: Payment is a mode of extinguishing an obligation. upon her instructions in which she denied the allegation. Lim Sio
Article 1240 of the Civil Code provides that payment shall be made Wan filed with the Regional Trial Court against Allied to recover the
to the person in whose favor the obligation has been constituted, or proceeds of her first money market placement. Allied filed a third
his successor-in-interest, or any person authorized to receive it.In this party complaint against Metrobank and Santos. Metrobank filed a
case, the payments were purportedly made to a supervisor of the fourth party complain against FCC. FCC for its part filed a fifth party
private respondent, who was clad in an SMC uniform and drove an complaint against Producers Bank. Summonses were duly served
SMC van. He appeared to be authorized to accept payments as he upon all the parties except for Santos, who was no longer connected
showed a list of customers accountabilities and even issued SMC with Producers Bank
liquidation receipts which looked genuine. Unfortunately for
petitioner Francisco Culaba, he did not ascertain the identity and IV
authority of the said supervisor, nor did he ask to be shown any On May 15, 1984, Allied informed
identification to prove that the latter was, indeed, an SMC supervisor. Metrobank that the signature on the check was forged.
The petitioners relied solely on the mans representation that he was Metrobank withheld the amount represented by the check
collecting payments for SMC. Thus, the payments the petitioners from FCC. Metrobank agreed to release the amount to FCC
claimed they made were not the payments that discharged their after the FCC executed an undertaking, promising to
obligation to the private respondent. indemnify Metrobank in case it was made to reimburse the
Culaba: No! That cant be! amount. Lim Sio Wan thereafter filed an amended
SMC: Just accept it! Payment is mine! Hahaha (Evil laugh) complaint to include Metrobank as a party-defendant, along
with Allied.
And they lived happily evil after.
The end. The Regional Trial Court ruled that:
Allied Banking Corp. V. Lim Sio Wan 1.) Allied Bank should pay Lim Sio Wan plus damages and Atty.
-by JV Milana Fees.
2.) Allied Banks cross-claim against Metrobank is DISMISSED.
FACTS: 3.) Metrobanks third-party complaint as against Filipinas Cement
I Corporation is DISMISSED
On September 21, 1983, FCC had deposited a money market 4.) Filipinas Cement Corporations fourth-party complaint against
placement for P2,000,000.00 with Producers Bank. Santos was the Producers Bank is DISMISSED
money market trader assigned to handle FCCs account. Such deposit
is evidenced by Official Receipt and a Letter. When the placement The Court of Appeals modified RTC's decision that Allied Banking
matured, FCC demanded the payment of the proceeds of the Corporation should pay 60% and Metropolitan Bank and Trust
placement. Company 40%

II ISSUE: W/N Allied should be solely liable to Lim Sio Wan.


On November 14, 1983, Lim Sio Wan deposited with Allied
Banking Corporation a money market placement of P 1,152,597.35 HELD: The Supreme Court affirmed CA's decision with
for a term of 31 days. December 5, 1983, a person claiming to be Lim modifications that Producers Bank should reimburse Allied and
Sio Wan called up Cristina So, an officer of Allied, and instructed the Metrobank.
latter to pre-terminate Lim Sio Wans money market placement, to
issue a managers check representing the proceeds of the placement, A money market is a market dealing in
and to give the check to Deborah Dee Santos who would pick up the standardized short-term credit instruments (involving large amounts)
check. The person claiming to be Lim Sio Wan, described the where lenders and borrowers do not deal directly with each other but
appearance of Santos so that she could easily identify her. Santos through a middle man or dealer in open market. In a money market
arrived at the bank and signed the application form for a managers transaction, the investor is a lender who loans his money to a
check to be issued. The bank issued Managers Check representing borrower through a middleman or dealer.
the proceeds of Lim Sio Wans money market placement in the name
Article 1240 of the New Civil Code provides that:

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

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-The court held that Ibrahims and Maruhoms are the real owners, but petitioner but was made only in compliance to the lawful orders of a
could no longer be reconveyed back to them, thus they are the court with jurisdiction.
righhtful recipients of whatever rental fees and indemnity that may be
due for the subject land as a result of it expropriation. Also held NPC - no bad faith can be taken against it, even assuming that petitioner
and Mangondato solidarily liable to them. may have had prior knowledge about the claims of the Ibrahims and
-NPC contested the matter to CA, but denied. Maruhoms upon the subject land and the TRO issued.
- Without Bad Faith, Petitioner cannot be held Liable to the Ibrahims
SUPREME COURT and Maruhoms.
Issue: - regardless of who between Mangondato, on one hand, and the
Whether it is correct, in view of the facts and circumstances in this Ibrahims and Maruhoms, on the other, turns out to be the real
case, to hold petitioner liable in favor of the Ibrahims and Maruhoms owner of the subject land.Either way, petitioner cannot be made
for the rental fees and expropriation indemnity adjudged due for the liable to the Ibrahims and Maruhoms.
subject land. 1.) If Mangondato is the real owner of the subject land,
-according to the lower courts, there was bad faith on the following then the obligation by petitioner to pay for the rental fees and
basis: expropriation indemnity due the subject land is already deemed
extinguished by the latters previous payment under the final
1. Petitioner allowed payment to Mangondato despite its prior judgment in Civil Case No. 605-92 and Civil Case No. 610-92. This
knowledge, which dates back as early as 28 September 1981, by would be a simple case of an obligation being extinguished through
virtue of Mangondatos letter of even date, that the subject land was payment by the debtor to its creditor. Under this scenario, the
owned by a certain Datu Magayo-ong Maruhom and not by Ibrahims and Maruhoms would not even be entitled to receive
Mangondato; and anything from anyone for the
2. Petitioner allowed such payment despite the issuance of a subject land. Hence, petitioner cannot be held liable to the Ibrahims
TRO and a writ of preliminary injunction in Civil Case No. 967-93 and Maruhoms.
that precisely enjoins it from doing so. 2.) Should the Ibrahims and Maruhoms turn out to be the real
owners of the subject land, petitioners previous payment to
Mangondato pursuant to Civil Case No. 605-92 and Civil
RULING: Case No. 610-92 given the absence of bad faith on
-There was no bad faith. petitioners part as previously discussed may
-Case law provides: BAD FAITH is nonetheless be considered as akin to a payment made in
*a breach of a known duty through some motive of interest or good faith to a person in possession of credit per
ill will. Article 1242 of the Civil Code that, just the same,
*a state of mind affirmatively operating with furtive design or with extinguishes its obligation to pay for the rental fees and
some motive of self-interest or will or for ulterior purpose. expropriation indemnity due for the subject land. Article
*bad faith does not simply connote bad judgment or negligence; it 1242 of the Civil Code reads:
imports a dishonest purpose or some moral obliquity and conscious
doing of wrong. It means breach of a known duty thru some motive Payment made in good faith to any person in possession of the credit
or interest of ill will; it partakes of the nature of fraud. shall release the debtor.
*Malice or bad faith implies a conscious and intentional design to do
a wrongful act for a dishonest purpose or moral obliquity
-the clear denominator in all of the foregoing judicial Article 1242 of the Civil Code is an exception to the rule that a valid
pronouncements is that the essence of bad faith consists in payment of an obligation can only be made to the person to whom
the deliberate commission of a wrong. Indeed, the concept has often such obligation is rightfully owed. 64 It contemplates a situation where
been equated with malicious or fraudulent motives, yet a debtor pays a possessor of credit i.e., someone who is not the real
distinguished from the mere unintentional wrongs resulting from creditor but appears, under the circumstances, to be the real
mere simple negligence or oversight. creditor.65In such scenario, the law considers the payment to the
possessor of credit as valid even as against the real creditor taking
Bad Faith-A finding of bad faith usually assumes the presence of two into account the good faith of the debtor.

(2) elements: * being the judgment creditor and the registered owner of the
subject land at the time he is considered as a possessor of credit
1. that the actor knew or should have known that a particular with respect to the rental fees and expropriation indemnity adjudged
course of action is wrong or illegal. due for the subject land in the two cases, if the Ibrahims and
2. that despite such actual or imputable knowledge, the actor, Maruhoms turn out to be the real owners of the subject land. Hence,
voluntarily, consciously and out of his own free will, petitioners payment to Mangondato of the fees and indemnity due
proceeds with such course of action. for the subject land as a consequence of the execution of Civil Case
could still validly extinguish its obligation to pay for the same even
-In the case at bar, petitioners payment to Mangondato of the as against the Ibrahims and Maruhoms.
rental fees and expropriation indemnity was required by the
final and executory decision in the said two cases and was
compelled thru a writ of garnishment issued by the court that
rendered such decision. In other words, the payment to Mangondato
was not a product of a deliberate choice on the part of the

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Effect of Extinguishment of Make : Isuzu Dump Truck


Petitioners Obligation xxx
Make : Isuzu Dump Truck
xxx
Make : x x x Caterpillar Bulldozer x x x
That the ASSIGNEE hereby accepts the assignment in full payment
- If Mangondato turns out to be the real owner of the subject land, of the above-mentioned debt x x x. (Emphasis supplied) Petitioners
the Ibrahims and Maruhoms would not be entitled to recover affixed their signatures on the deed of assignment. However, for
anything from anyone for the subject land. As a result, garnishment some unknown reason, respondent banks duly authorized
of Mangondatos moneys in the possession of the SSS in the amount representative failed to sign the deed. On October 6, 2000 and March
of P2,700,000.00 in favor of the Ibrahims and Maruhoms, becomes 8, 2001, respectively, petitioners completed the delivery of the
improper and unjustified. In this event, therefore, the Ibrahims and heavy equipment mentioned in the deed of assignment two dump
Maruhoms may be ordered to return the amount so garnished to trucks and a bulldozer to respondent, which accepted the same
Mangondato. without protest or objection.
- Otherwise, i.e., if the Ibrahims and Maruhoms really are the true Respondent filed a manifestation and motion to admit an amended
owners of the subject land, they may only recover the rental fees and complaint for the seizure and delivery of two more heavy
expropriation indemnity due the subject land against Mangondato but equipment the bulldozer and wheel loader which are covered
only up to whatever payments the latter had previously received from under the second deed of chattel mortgage. Respondent claimed
petitioner. that its representative inadvertently failed to include the second
- At any rate, the extinguishment of petitioners obligation to pay for deed of chattel mortgage among the documents forwarded to its
the rental fees and expropriation indemnity due the subject land counsel when the original complaint was being
negates whatever cause of action the Ibrahims and Maruhoms might drafted. Respondent likewise claimed that petitioners were given a
have had against the former. Hence, regardless of who between chance to submit a refinancing scheme that would allow them to keep
Mangondato, on one hand, and the Ibrahims and Maruhoms, on the remaining two heavy equipment, but they failed to come up with
the other, turns out to be the real owner of the subject land, the such a scheme despite repeated promises to do so. Petitioners
dismissal of the case against NPC is concerned is called for. outstanding indebtedness as of June 14, 2001 stood at P4,275,919.61
which is more or less equal to the aggregate value of the additional
Article 1245: DATION IN PAYMENT units of heavy equipment sought to be recovered.
CA Reversed the decision in favor of the respondent bank conveying
Estanislao vs Eastwest Banking that the Estanislao spouses should deliver the two heavy equipment
-by Ian Lasaca or pay the amount in cash.
ISSUE: Whether or not the deed of assignment which expressly
Facts: provides that the transfer and conveyance to respondent of the three
July 24, 1997, petitioners obtained a loan from the respondent in the units of heavy equipment, and its acceptance thereof, shall be in full
amount of P3,925,000.00 evidenced by a promissory note and payment of the petitioners total outstanding obligation to the latter
secured by two deeds of chattel mortgage dated July 10, 1997: one operate to extinguish petitioners debt to respondent, such that the
covering two dump trucks and a bulldozer to secure the loan amount replevin suit could no longer prosper?
of P2,375,000.00, and another covering bulldozer and a wheel loader In short: Whether or not the delivery of the 3 heavy equipment to
to secure the loan amount of P1,550,000.00. Petitioners defaulted in the respondent serves as a full payment and will extinguish the
the amortizations and the entire obligation became due and 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 whereby
damages, praying that the equipment covered by the first deed of property is alienated to the creditor in satisfaction of a debt in money.
chattel mortgage be seized and delivered to it. In the alternative, Such transaction is governed by the law on sales.
respondent prayed that petitioners be ordered to pay the outstanding Question: Is the signature of the representative of the respondent
principal amount of P3,846,127.73 with 19.5% interest per annum necessary for the agreement?
reckoned from judicial demand until fully paid, exemplary damages No, signature is not necessary because at the first delivery of the
of P50,000.00, attorneys fees equivalent to 20% of the total amount heavy equipments to respondent, they have accepted it without
due, other expenses and costs of suit. questioning. Even if we were to consider the agreement as a
RTC compromise agreement, there was no need for respondents signature
Respondent moved for suspension of the proceedings on account of on the same, because with the delivery of the heavy equipment
an earnest attempt to arrive at an amicable settlement of the case. The which the latter accepted, the agreement was consummated.
trial court suspended the proceedings, and during the course of Respondents approval may be inferred from its unqualified
negotiations, a deed of assignment dated August 16, 2000 was drafted acceptance of the heavy equipment.
by the respondent, which provides in part, that: Consent to contracts is manifested by the meeting of the offer and the
the ASSIGNOR is indebted to the ASSIGNEE in the aggregate sum acceptance of the thing and the cause which are to constitute the
of SEVEN MILLION THREE HUNDRED FIVE THOUSAND contract; the offer must be certain and the acceptance absolute. The
FOUR HUNDRED FIFTY NINE PESOS and FIFTY TWO acceptance of an offer must be made known to the offeror, and unless
CENTAVOS (P7,305,459.52), Philippine currency, inclusive of the offeror knows of the acceptance, there is no meeting of the minds
accrued interests and penalties as of August 16, 2000, and in full of the parties, no real concurrence of offer and acceptance.[8] Upon
payment thereof, the ASSIGNOR does hereby ASSIGN, TRANSFER due acceptance, the contract is perfected, and from that moment the
and CONVEY unto the ASSIGNEE those motor vehicles, with all parties are bound not only to the fulfillment of what has been
their tools and accessories, more particularly described as follows:

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expressly stipulated but also to all the consequences which, according or dispose of them. Any stipulation to the
to their nature, may be in keeping with good faith, usage and law. contrary is null and void.
With its years of banking experience, resources and manpower,
respondent bank is presumed to be familiar with the implications The elements of pactum commissorium, which enables the mortgagee
of entering into the deed of assignment, whose terms are to acquire ownership of the mortgaged property without the need of
categorical and left nothing for interpretation. The alleged non- any foreclosure proceedings, ]are: (1) there should be a property
inclusion in the deed of certain units of heavy equipment due to mortgaged by way of security for the payment of the principal
inadvertence, plain oversight or mistake, is tantamount to obligation, and (2) there should be a stipulation for automatic
inexcusable manifest negligence, which should not invalidate the appropriation by the creditor of the thing mortgaged in case of non-
juridical tie that was created. Respondent is presumed to have payment of the principal obligation within the stipulated period. [31]
maintained a high level of meticulousness in its dealings with
petitioners. The business of a bank is affected with public interest; In the case at bar, the Memorandum of Agreement and the Dacion in
thus, it makes a sworn profession of diligence and meticulousness in Payment contain no provisions for foreclosure proceedings nor
giving irreproachable service. redemption. Under the Memorandum of Agreement, the failure by the
Respondents protestations of mistake and plain oversight are petitioners to pay their debt within the one-year period gives
self-serving. The evidence show that from August 16, 2000 (date of respondent the right to enforce the Dacion in Payment transferring to
the deed of assignment) up to March 8, 2001 (the date of delivery of it ownership of the properties covered by TCT No. 297840.
the last unit of heavy equipment covered under the deed), respondent Respondent, in effect, automatically acquires ownership of the
did not raise any objections nor make any move to question, properties upon petitioners failure to pay their debt within the
invalidate or rescind the deed of assignment. It was not until June stipulated period.
20, 2001 that respondent raised the issue of its alleged mistake by
filing an amended complaint for replevin involving different chattels, Respondent argues that the law recognizes dacion en pago as a
although founded on the same principal obligation. special form of payment whereby the debtor alienates property to the
creditor in satisfaction of a monetary obligation. This does not
ONG v. ROBAN LENDING persuade. In a true dacion en pago, the assignment of the property
-by Stacey Otaza extinguishes the monetary 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 Dacion in Payment did not extinguish petitioners
Facts: petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio- obligation to respondent. On the contrary, under the Memorandum of
Ong obtained several loans from Roban Lending Corporation Agreement executed on the same day as the Dacion in Payment,
(respondent) in the total amount of P4,000,000.00. These loans were petitioners had to execute a promissory note for P5,916,117.50 which
secured by a real estate mortgage on petitioners parcels of land . they were to pay within one year.
On February 12, 2001, petitioners and respondent executed an
Amendment to Amended Real Estate Mortgage consolidating their Respecting the charges on the loans, courts may reduce interest rates,
loans inclusive of charges thereon which totaled P5, 916,117.50. On penalty charges, and attorneys fees if they are iniquitous or
even date, the parties executed a Dacion in Payment. Wherein unconscionable.
petitioners assigned the properties covered by TCT No. 297840 to
respondent in settlement of their total obligation This Court, based on existing jurisprudence, finds the monthly
In April 2002 , petitioners filed a Complaint, declaration of mortgage interest rate of 3.5%, or 42% per annum unconscionable and thus
contract as abandoned, annulment of deeds, illegal exaction, unjust reduces it to 12% per annum. This Court finds too the penalty fee at
enrichment, accounting, and damages, alleging that the Memorandum the monthly rate of 5% (60% per annum) of the total amount due and
of Agreement and the Dacion in Payment executed are void for demandable principal plus interest, with interest not paid when due
being pactum commissorium. Petitioners also alleged that the loans added to and becoming part of the principal and likewise bearing
extended to them from July 14, 1999 to March 20, 2000 were interest at the same rate, compounded monthly unconscionable and
founded on several uniform promissory notes, which provided for reduces it to a yearly rate of 12% of the amount due, to be computed
3.5% monthly interest rates, 5% penalty per month on the total from the time of demand. This Court finds the attorneys fees of 25%
amount due and demandable, and a further sum of 25% attorneys fees of the principal, interests and interests thereon, and the penalty fees
thereon, and in addition, respondent exacted certain sums unconscionable, and thus reduces the attorneys fees to 25% of the
denominated as EVAT/AR. Petitioners decried these additional principal amount only.
charges as illegal, iniquitous, unconscionable, and revolting to the
conscience as they hardly allow any borrower any chance of survival
in case of default. Tan Shuy vs spouses Guillermo Maulawin and Paring Carino
Maulawin
Isuue: whether the Memorandum of Agreement and Dacion in -by Emmanuel E. Monteroyo
Payment are Void for it constituting Pactum commissorium?
Held: The petition is meritorious. FACTS:
Reason: This Court finds that the Memorandum of Agreement and Petitioner and Respondent are both engage in the business of buying
Dacion in Payment constitute pactum commissorium, which is and selling copra and corn.
prohibited under Article 2088 of the Civil Code which provides: Vicente, petitioners son who helps in their business, explained that
whenever they are to buy copra or corn from crop sellers they would
The creditor cannot appropriate the prepare and issue them a pessada.
things given by way of pledge or mortgage, A pessada is a document that contains details of the transaction, he
further explained that whenever the said pessadas contains the

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annotation pd on the total amount of the purchase price that would Facts:
mean that the said crop deliveries had already been paid by the Spouses Serifno herein instituted an action for the collection of a sum
petitioner. of money against spouses Cortez. Both parties then by way of an
July 10,1997. Herein petitioner extended a loan to the respondent for amicable settlement executed a compromise agreement in which it
the amount of P420,000. In return, herein respondent obligated himself was provided for in said agreement that the full payment of the
to pay the said loan and to sell copras to the petitioner. judgment debt shall be taken out of the retirement benefits of
Petitioner allege that despite repeated demands, herein respondent Magdalena Cortez, the full payment of which shall be made one week
only remitted a total amount of 28,500 which leaves an outstanding after she has obtained said retirement benefits from the GSIS.
balance of 391,500.
Petitioner filed a complaint in the regional trial court. Spouses Cortez however failed to pay the debt and it was even further
discovered by Godfrey Serfino that the retirement benefits had been
Defense of Guillermo: Respondent countered that he had already paid deposited into the savings account of Grace Cortez with the
the subject amount in full amounting to 420,537.68. According to respondent bank Far East Bank. The Serfinos then sent letters to Far
him, he continuously delivered and sold copras to petitioner and that East Bank telling them to withhold delivery of the deposit to Grace
he had a subsequent oral arrangement with petitioner that the net Cortez claiming that they had acquired ownership over said deposit
proceeds for the said copra deliveries would be applied as installment by virtue of the compromise agreement which they claimed had
payment for his loan. transferred the ownership of the credit (which is the retirement
To bolster his defense. Respondent presented copies of the pessada benefits) in their favor.
issued by Elena, daughter of the respondent and of Vicente. He pointed
out that the said do not contain the notation pd which means that he The RTC had ruled that Cortez spouses were indeed be liable for
did not receive the net proceeds of the copra deliveries but instead they fraudulently diverting the retirement benefits to the savings account
were applied as installment payment for the loan. of Grace Cortez, however it had ruled that respondent bank should be
absolved of any liability since it was not made a party to the
RTC and CA: Ruled that the net proceeds for the copra deliveries compromise agreement and that there was no court order authorizing
should be applied as installment payment. CA affirmed the decision of Far East Bank to withhold delivery of said deposit, hence this instant
the RTC. petition in which Serfinos assailed the decision of the RTC in
absolving Far East Bank of any liability.
ISSUE:
WON the delivery of the copras amounted to installment payments Issue: Whether or not there was indeed a valid transfer of the credit
for the loan obtained by the respondent from the petitioner. YES! in favor of the spouses Serfino.

RULING: Ruling:
Article 1254 provided for a social form of payment called dation in "An assignment of credit is an agreement by virtue of which the
payment, where property is alienated to the creditor to satisfy a debt in owner of a credit, known as the assignor, by a legal cause, such as
money.The subsequent arrangement between the petitioner and the sale, dation in payment, exchange or donation, and without the
respondent is in the nature of Dation in Payment. There was partial consent of the debtor, transfers his credit and accessory rights to
payment whenever Guillermo delivers copras and chose not to collect another, known as the assignee, who acquires the power to
the net proceeds but instead apply them as installment payments of the enforce it to the same extent as the assignor could enforce it
loan. against the debtor. It may be in the form of sale, but at times it may
constitute a dation in payment, such as when a debtor, in order to
However, the court did not credit the net proceeds from obtain a release from his debt, assigns to his creditor a credit he has
12 pesadas, as they were deliveries for corn and not copra. against a third person." As a dation in payment, the assignment of
According to the RTC and CA as affirmed by the SC, Guillermo credit operates as a mode of extinguishing the obligation; the delivery
himself testified that it was the net proceeds from the copra and transmission of ownership of a thing (in this case, the credit due
deliveries that were to be applied as installment payments for the from a third person) by the debtor to the creditor is accepted as the
loan. equivalent of the performance of the obligation.
The terms of the compromise judgment, however, did not convey an
Thus, it ruled that the total amount of 41,585.25, which intent to equate the assignment of Magdalenas retirement benefits
corresponded to the net proceeds from corn deliveries, should be (the credit) as the equivalent of the payment of the debt due the
deducted from the amount of 420,537.68 claimed by Guillermo to spouses Serfino (the obligation). There was actually no assignment of
be the total value of his copra deliveries. We therefore uphold the credit; if at all, the compromise judgment merely identified the fund
findings of the trial court, as affirmed by the CA, that the net from which payment for the judgment debt would be sourced.
proceeds from Guillermos copra deliveries amounted to
378,952.43. With this partial payment, respondent remains liable In the present case, the judgment debt was not extinguished by the
for the balance totaling 41,047.57. mere designation in the compromise judgment of Magdalenas
retirement benefits as the fund from which payment shall be sourced.
Wherefore, the petition is denied and the resolution of the CA is That the compromise agreement authorizes recourse in case of
affirmed. default on other executable properties of the spouses Cortez, to
satisfy the judgment debt, further supports our conclusion that there
SERFINO V FAR EAST BANK was no assignment of Magdalenas credit with the GSIS that would
-by Erianne Du have extinguished the obligation.
The compromise judgment in this case also did not give the supposed
assignees, the spouses Serfino, the power to enforce Magdalenas

Page 13 of 31
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credit against the GSIS. In fact, the spouses Serfino are prohibited
from enforcing their claim until after the lapse of one (1) week from 2- There should be stipulation of the automatic appropriation
Magdalenas receipt of her retirement benefits of the creditor of the thing pledged/mortgaged in the event
of non-payment of the principal obli.
Since no valid assignment of credit took place, the spouses Serfino The authorization of Adelaide to appropriate the property
cannot validly claim ownership of the retirement benefits that were was implied through Lindas act of signing the blank
deposited with FEBTC. Without ownership rights over the amount, document.
they suffered no pecuniary loss that has to be compensated by actual
damages. The grant of actual damages presupposes that the claimant Art. 2088 of CC prohibits creditor from appropriating
suffered a duly proven pecuniary loss the thing pledge or mortgage.
The eventual transfer of the property in a manner not in a
PEN VS. JULIAN valid dacion en pago confirmed the nature of the
-Iris Monacano transaction as pactumcommissorium.
Elements of Dacion en pago:
FACTS: 1- There is a money obligation
April 1986 Julians(appellees) obtained 60k loan from Adelaida Pen. 2- The alienation of the creditor to the property of the
May 22 & 27 they were again extended loans worth 50k and 10k. debtor with consent
Two promissory notes were executed by Julians in favour of Pen 3- The satisfaction of the money obligation
payable on June 15 and July 22. As security, they executed a real
estate mortgage over their property. Therefore, in order for a valid dacion to transpire, the
Apellants version: alienation of the property should fully extinguish the
Linda Julian were unable to pay despite several demands. Adelaida debt of the debtor. In the case at bar, the debt of the
prompted to institute foreclosure proceedings. But this was respondents subsisted despite the transfer of the
prevailed upon by Linda because of the cost of litigation and the property in favour of Adelaida. In light of this, the
embarrassment it would cause her since the proceedings would be deed of sale was void. Petitioners are ordered to
announced in the City Hall. Instead, Linda offered their mortgaged reconvey the title of the property to defendants.
property aspayment in kind. Upon ocular inspection, the property
was agreed to ba valued at 70k. A deed of sale was executed on Oct. ART. 1250
22.
July 1989, Linda offered to repurchase the property. Adelaida agreed ALMEDA v. BATHALA MARKETING INDUSTRIES, INC.
for 436k payable on July 31, 1989. Linda failed to pay. Feb. 1990, -by LA Pizarro
Linda offered to repurchase again but failed to pay. On June 28, 1990,
she offered 100k to Pen but this was rejected. Upon agreement of the FACTS:
parties, the 100k was deducted from the debt. Instead of paying the 1. May 1, 1997: Bathala Marketing (respondent), as lessee,
remaining balance, appellee filed an adverse claim. represented by its president Ramon Garcia, RENEWED
Appellees version: ITS CONTRACT OF LEASE with Ponciano Almeda, as
Upon execution of the mortgage, they were required by Pen to sign a lessor, husband and father of petitioners. Under the said
document purportedly an Absolute deed of sale. The said Contract, Ponciano agreed to lease a portion of the Almeda
document does not contain any consideration, it was undated, compound to respondent, consisting of 7,348.25 sq.m., for
unfilled and unnotarized. Their last payment was on June 28 a monthly rental of PhP 1,107,348.69 for a term of four (4)
(100k). Their total payments were 115k. years from May 1, 1997.
Dec. 1992, she offered to pay 150k but this was rejected by Pen and 2. The Contract of Lease contained the following provision
demanded 250k instead. Unable to meet the demand, Linda desisted which later on gave rise to the instant case:
and requested the land title be shown to her to which the latter SEVENTH. In case EXTRAORDINARY INFLATION OR
refused. Upon verification from the Registry of Deeds, she found out DEVALUATION of the Philippine currency should
that the property was already registered under Pens name. Linda supervene, the value of the Philippine Peso at the time of
filed and Adverse Claim. Furthermore she discovered Pen obtained the establishment of the obligation shall be the basis of
several Declarations of Real Property and a Deed of Sale executed on payment.
Oct.22. She filed Cancellation of Sale, Cancellation of Tile, Recovery 3. January 26, 1998: In lieu of Ponciano (in view of his
of Possession and Damages. She allege that through bad faith, Pen death), the petitioners sent a letter to the respondent
maliciously typed, unilaterally filled up and caused the informing the latter that the former will increase the
notarization of the deed of sale. She used this spurious deed of monthly rental rates by 73%, pursuant to the SEVENTH
sale to cause the transfer of the parcel of land to her name. CONDITION of the Contract of Lease and Art. 1250 of the
RTC AND CA: Favored respondents. Both declared that the deed Civil Code.
of Sale was null and void. Respondent refused to pay the additional rentals contending
COURTS RULING: Court adopted CAs conclusion that the that there was no extraordinary inflation to warrant the
Deed of Sale is a prohibited pactumcommissorium. application of Art. 1250. In spite of this, the respondent still
Elements of PACTUM COMMISSORIUM: continued to pay the petitioners the monthly rentals based
1- There must be a thing pledged/mortgaged by way of on the stipulated rental rates in the contract.
security for the payment of the prin. Obli. ISSUE:
This element is present in this case when respondents
mortgaged their property in favour of Pen.

Page 14 of 31
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WHETHER THE AMOUNT OF RENTALS DUE THE Sept. 20,2000 - Central Surety issued a check in the amount of 6M.
PETITIONERS SHOULD BE ADJUSTED BY REASON OF However, for undisclosed reasons, Premier Bank returned the check
EXTRAORDINARY INFLATION/DEVALUATION. to Central Surety and in its letter dated Sept. 28, demanded from the
latter not just the payment of 6M loan, but also the 40.898k loan.
SC RULING: Premiere Bank threatened foreclosure of the loans respective
No. securities should they fail to pay these withinten days from date.

Article 1250 of the Civil Code states: The next day, respondent again retendered payment of the check
In case an extraordinary inflation or deflation of the worth P6M, also a separate check was tendered to petitioner as
currency stipulated should supervene, the value of the payment for (P2.6M) for spouses Castanedas personal loan secured
currency at the time of the establishment of the obligation by Manila Polo Club Inc. Membership shares.
shall be the basis of payment, unless there is an agreement
to the contrary. October 13, 2000- petitioner finally accepted respondents checks.
Inflation has been defined as the sharp increase of money Payment was applied to:
or credit, or both, without a corresponding increase in business PN 714-Y (6M loan)
transaction. There is inflation when there is an increase in the volume PN 367-Z (40.898k loan)
of money and credit relative to available goods, resulting in a Commercial loan of Casent Realty and Devp Corp.
substantial and continuing rise in the general price level. In a number Commercial loan of spouses Castaneda
of cases, this Court had provided a discourse on what constitutes
extraordinary inflation, thus: Respondent objected the application of payment and insisted that
[E]xtraordinary inflation exists when there is a decrease or the two checks were for the spues castanedas personal loan and the
increase in the purchasing power of the Philippine currency 6M loan. They asked that the wack wack membership pledged as
which is unusual or beyond the common fluctuation in the security for the 6M loan be released. Petitioner refused. Respondent
value of said currency, and such increase or decrease could file a complaint for damages and release of security collateral
not have been reasonably foreseen or was manifestly 1. To declare 6M loan as fully paid
beyond the contemplation of the parties at the time of the 2. Release wack2 membership cert. of shares
establishment of the obligation. 3. To pay damages
The factual circumstances obtaining in the present case do 4. To pay cost of suit
not make out a case of extraordinary inflation or devaluation as
would justify the application of Article 1250 of the Civil Code. We COURST RULING:
would like to stress that the erosion of the value of the Philippine
peso in the past three or four decades, starting in the mid-sixties, is Art. 1252 grants the right to the debtor to choose wo which of several
characteristic of most currencies. And while the Court may take obligation to apply a particular payment that he tenders to the
judicial notice of the decline in the purchasing power of the creditor. However, it is likewise granted the right of the creditor to
Philippine currency in that span of time, such downward trend of the apply such payment in case the debtor fails to direct its application.
peso cannot be considered as the extraordinary phenomenon
contemplated by Article 1250 of the Civil Code. Furthermore, absent WAIVER Debtors right to apply payment can be waived and even
an official pronouncement or declaration by competent authorities of granted to the creditor fi the debtor so agrees. A limitation is when
the existence of extraordinary inflation during a given period, the there is an agreement as to the debt which are to be paid first, the
effects of extraordinary inflation are not to be applied. debtor cannot vary this agreement.

In the case at bar, respondent expressly agreed to grant petitioner the


authority to apply any and all of central suretys payments.
Premiere Development Bank vs. Central SuretyK
-by Frances Mana-ay
WAIVER OF DEMAND -There was no waiver on the part of
petitioner. The loan of 6M and the pledge of wackwack was past the
FACTS: Aug 20, 1999, respondent Central Surety and Insurance
due and demand stage. Petitioner had the right to declare them
Company obtained loans from petitioner Premiere Bank.
immediately due and demandable without need of presentment,
demand, protest or notice of any kind. Demand made was merely a
P6M (PN No. 714-Y) secured by a Deed of Assignment superfluity, not a waiver of the right to demand payment.
with Pledge covering Central Suretys Membership Fee
Certificate representing its property share in Wack Wack WAIVER OF RIGHT TO APPLY PAYMENTS- waiver must be
Golf and Country Club. positively demonstrated since a waiver by implication is not normally
countenanced. It must not only voluntary but also:
P40.898M- (PN no. 376-X) secured by a real estate Made knowingly
mortgage over a condo certificate of title, availed thru a Intelligently
renewal of respondets prior loan, then covered by PN No.
With sufficient awareness of the relevant circumstances and
367-Z
likely consequences
Aug 22, 2000 Premiere Bank sent a letter demanding payment of In the present case, any inference of waiver of petitioner, right to
the 6M loan. Central Surety answered that they intend to settle the apply payments is eschewed by the express provision of the PN that
account by the end of Sept; no failure on the part of premiere bank to exercise, and no delay in
execirisng any right hereunder shall operate as waiver thereof.

Page 15 of 31
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Chattel Mortgage and the Continuing Surety Agreement executed by


In PN 367-Z (40.898K loan)- contains that in any event that the individual petitioners. In fact, Section 2.01 of the Deed of
respondent will fail to pay on any other obligation already due, the Assignment expressly acknowledges that it is a mere interim
bank shall be entitled to declare the PN 367-Z to be immediately due security for the repayment of any loan granted and those that may be
and demandable. By virtue of which, it follows that the obligation granted in the future by the BANK to the ASSIGNOR and/or the
under PN 367-Z had become part due and demandable with further BORROWER, for compliance with the terms and conditions of the
notice expressly waived when Central Surety defaulted on its 6M relevant credit and/or loan documents thereof. To stress, the
loan. assignment being in its essence a mortgage, it was but a security and
not a satisfaction of the petitioners indebtedness. Art. 1255 invoked
Petitioner cannot be faulted for exercising the authority granted to it by the petitioners contemplates the existence of two or more creditors
under the PNs and applying payment to the obligations as it deemed and involves the assignment of the entire debtors property and not a
fit. Corollary thereto, the tendered amount of 6M by respondent and Dation in payment.
the encashment of the check did not totally extinguish the debt The condominium unit, then, is a mere temporary security, not a
covered by PN 714-Y payment to settle their promissory notes.

SURETY OF WACK2- cannot be released MARQUEZ v. ELISAN CREDIT


It stood as security for both the 6M loan and 40.898 loan. From the -by Angel Jakosalem,
transactions that transpired between the parties it is apparent that
when the parties executed the Deed of Assignment with pledge of the Art. 1253 Application of Payment; Receipts by the creditor are
wack2 membership, the intent of the parties was for the wackwack to silent; Interests
serve as security also for future advancements.
FACTS
YULIM vs. INTL. BANK Nunelon Marquez (petitioner) obtained a loan from Elisan
-by Jennica Delfin Credit Corp. (respondent) for P53,000.00 payable within 180 days.
Pet. signed a promissory note that it is payable in weekly
Facts: installments, subject to 26% annual interest, 10% monthly interest for
On June 2, 2000, iBank, a commercial bank, granted Yulim, a non-payment, and 25% of such amount for attorneys fees. Pet. also
domestic partnership, a credit facility in the form of an Omnibus secured the payment of loan with a chattel mortgageover a motor
Loan Line for P5,000,000.00, as evidenced by a Credit vehicle as security of the loan. Both parties acknowledged the full
Agreement which was secured by a Chattel Mortgage over Yulims payment of the first loan.
inventories in its merchandise warehouse at 106 4th Street, 9th Pet. obtained another loan from the respondent for
Avenue, Caloocan City. As further guarantee, the partners, namely, P55,000.00 as evidenced by a promissory note and cash
James, Jonathan and Almerick, executed a Continuing Surety voucherboth dated on June 15, 1992. The promissorycontained
Agreement in favor of iBank. Yulim defaulted on the said note. On exactly the same Terms and Conditions as the first loan.
April 5, 2002, iBank sent demand letters to Yulim, through its When the 2nd loan matured on Dec. 15, 1992, pet. had only
President, James, and through Almerick, but without success. iBank paid P29,560.00 and a balance of P25,040.00. Due to liquidity
then filed a Complaint for Sum of Money with Replevin against problems, pet. asked resp. if he could pay in daily installments until
Yulim and its sureties. On October 2, 2002, the petitioners moved to the second loan is paid granted. Thus, as of September 1994 or 21
dismiss the complaint insisting that their loan had been fully paid months after the 2nd loans maturity, the petitioner had already paid a
after they assigned to iBank their Condominium Unit No. 141, with total of P56,440.00, an amount greater than the principal.
parking space, at 20 Landsbergh Place in Tomas Morato Avenue, Despite the receipt of more than the amount of the
Quezon City. RTC ruled that Yulim is to pay Ibank 4, 246, 310.00 principal, the resp. filed a complaint for judicial foreclosure of the
with interest at 16.5% per annum until fully paid. Petitioners moved chattel mortgage because the petitioner allegedly failed to settle the
for reconsideration but was denied. Petitioners appealed in the CA balance of the second loan despite demand. He further alleged that
but it ruled that petitioners failed to prove that they have already paid pursuant to the terms of the promissory note, the pet.s failure to fully
their obligations to Ibank further stating that the so called assignment pay upon maturity triggered the imposition of the 10% monthly
by Yulim of its condominium unit to Ibank was nothing but a mere penalty and 25% attorneys fees. And further prayed for the payment
temporary arrangement to provide security pending the subsequent of the balance of the second loan plus accrued penalties and interest.
execution of a real estate mortgage. Before the pet. could file an answer, the resp. applied for
the issuance of a writ of replevin which was granted by the MTC
Issue: Whether there is Dation in payment in the assignment of the the motor vehicle was seized and delivered to resp.
condominium unit
ISSUE
Held: Did the resp. act lawfully when it credited the daily
payments against the interest instead of the principal?
No. The Court ruled that Yulims loan had not been extinguished by
the execution of a Deed of Assignment. Further, nowhere can it be RULING
remotely construed that the letter even intimates an understanding by Yes. But before going to the courts reasoning, we first
iBank that the Deed of Assignment would serve to extinguish the harmonize Art. 1176 and Art. 1253.
petitioners loan. Otherwise, there would have been no need for Article 1176 provides that:
iBank to mention therein the three collaterals or supports
provided by the petitioners, namely, the Deed of Assignment, the

Page 16 of 31
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Midterm Case Digests

The receipt of the principal by the creditor, without Pursuant to an Agreement and Undertaking[4] dated December 3,
reservation with respect to the interest, shall give rise to the 1993, petitioner Teddy G. Pabugais, in consideration of the amount of
presumption that said interest has been paid.x x x. P15, 487,500.00, agreed to sell to respondent Dave P. Sahijwani a lot
On the other hand, Article 1253 states: containing 1,239 square meters located at Jacaranda Street, North
If the debt produces interest, payment of the principal shall Forbes Park, Makati, Metro Manila. Respondent paid petitioner the
not be deemed to have been made until the interests have amount of P600, 000.00 as option/reservation fee and the balance of
been covered. P14, 887,500.00 to be paid within 60 days from the execution of the
The presumption under Article 1176 does not resolve the contract, simultaneous with delivery of the owners duplicate Transfer
question of whether the amount received by the creditor is a payment Certificate of Title in respondents name the Deed of Absolute Sale;
for the principal or interest. Under this article the amount received by the Certificate of Non-Tax Delinquency on real estate taxes and
the creditor is the payment for the principal, but a doubt arises on Clearance on Payment of Association Dues. The parties further
whether or not the interest is waived because the creditor accepts the agreed that failure on the part of respondent to pay the balance of the
payment for the principal without reservation with respect to the purchase price entitles petitioner to forfeit the P600, 000.00
interest. Article 1176 resolves this doubt by presuming that the option/reservation fee; while non-delivery by the latter of the
creditor waives the payment of interest because he accepts payment necessary documents obliges him to return to respondent the said
for the principal without any reservation. option/reservation fee with interest at 18% per annum, thus
On the other hand, the presumption under Article 1253
resolves doubts involving payment of interest-bearing debts. It is a Petitioner failed to deliver the required documents. In compliance
given under this Article that the debt produces interest. The doubt with their agreement, he returned to respondent the latters P600,
pertains to the application of payment; the uncertainty is on whether 000.00 option/reservation fee by way of Far East Bank & Trust
the amount received by the creditor is payment for the principal or Company Check No. 25AO54252P, which was, however, dishonored.
the interest. Article 1253 resolves this doubt by providing a
hierarchy: payments shall first be applied to the interest; payment Petitioner claimed that he twice tendered to respondent, through his
shall then be applied to the principal only after the interest has been counsel, the amount of P672, 900.00 (representing the P600, 000.00
fully paid. option/reservation fee plus 18% interest per annum computed from
Correlating the two provisions, the rule under Article 1253 December 3, 1993 to August 3, 1994) in the form of Far East Bank &
that payments shall first be applied to the interest and not to the Trust Company Managers Check No. 088498, dated August 3, 1994,
principal shall govern if two facts exist: (1) the debt produces but said counsel refused to accept the same. His first attempt to
interest (e.g., the payment of interest is expressly stipulated) and tender payment was allegedly made on August 3, 1994 through his
(2) the principal remains unpaid. messenger;[6] while the second one was on August 8, 1994,[7] when he
The exception is a situation covered under Article 1176, sent via DHL Worldwide Services, the managers check attached to a
i.e., when the creditor waives payment of the interest despite the letter dated August 5, 1994.[8] On August 11, 1994, petitioner wrote a
presence of (1) and (2) above. In such case, the payments shall letter to respondent saying that he is consigning the amount tendered
obviously be credited to the principal. with the Regional Trial Court of Makati City.[9] On August 15, 1994,
Since the doubt in the present case pertains to the petitioner filed a complaint for consignation. [10]
application of the daily payments, Article 1253 shall apply. Only
when there is a waiver of interest shall Article 1176 become relevant. Respondents counsel, on the other hand, admitted that his office
Under this analysis, we rule that the respondent properly received petitioners letter dated August 5, 1994, but claimed that no
credited the daily payments to the interest and not to the check was appended thereto.[11] He averred that there was no valid
principal because: (1) the debt produces interest, i.e., the promissory tender of payment because no check was tendered and the
note securing the second loan provided for payment of interest; (2) a computation of the amount to be tendered was insufficient, [12] because
portion of the second loan remained unpaid upon maturity; and (3) petitioner verbally promised to pay 3% monthly interest and 25%
the respondent did not waive the payment of interest. attorneys fees as penalty for default, in addition to the interest of 18%
Also, there was no waiver of interest.The fact that the per annum on the P600,000.00 option/reservation fee.[13]
official receipts did not indicate whether the payments were made for
the principal or the interest does not prove that the respondent waived On November 29, 1996, the trial court rendered a decision declaring
the interest. It was not proven that the respondent accepted the the consignation invalid for failure to prove that petitioner tendered
payment of the principal. The silence of the receipts on whether the payment to respondent and that the latter refused to receive the same.
daily payments were credited against the unpaid balance of the Petitioner appealed the decision to the Court of Appeals. Meanwhile,
principal or the accrued interest does not mean that the respondent his counsel, Atty. Wilhelmina V. Joven, died and she was substituted
waived the payment of interest. There is no presumption of waiver of by Atty. Salvador P. De Guzman, Jr.[15] On December 20, 2001,
interest without any evidence showing that the respondent accepted petitioner executed a Deed of Assignment [16] assigning in favor of
the daily installments as payments for the principal. Atty. De Guzman, Jr., part of the P672, 900.00 consigned with the
trial court as partial payment of the latters attorneys fees.
[17]
ART. 1256 Thereafter, on 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 amount
consigned be released to him by virtue of the Deed of Assignment. [19]

TEDDY G. PABUGAIS, petitioner, vs. DAVE P. Petitioners motion to withdraw the amount consigned was
SAHIJWANI, respondent. denied by the Court of Appeals and the decision of the trial court was
-by Jem Penas affirmed with modification as to the amount of moral damages and
attorneys fees.[20]

Page 17 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

On a motion for reconsideration, the Court of Appeals declared LLOBRERA VS FERNANDEZ (2006)
the consignation as valid in an Amended Decision dated January 16, -by Gerard Tinampay
2003. It held that the validity of the consignation had the effect of
extinguishing petitioners obligation to return the option/reservation Facts:
fee to respondent. Hence, petitioner can no longer withdraw the Subject of the controversy is a 1,849 square-meter parcel of land,
same. covered by Transfer Certificate of Title No. 9042. Respondent
The resolution of the case at bar hinges on the following issues: Josefina V. Fernandez, as one of the registered co-owners of the land,
(1) Was there a valid consignation? and (2) Can petitioner withdraw served a written demand letter upon petitioners Spouses Llobrera, et
the amount consigned as a matter of right? al., to vacate the premises within fifteen (15) days from notice.
As testified by the counsel for respondent, the reasons why his Receipt of the demand letter notwithstanding, petitioners refused to
client did not accept petitioners tender of payment were (1) the check vacate, necessitating the filing by the respondent of a formal
mentioned in the August 5, 1994 letter of petitioner manifesting that complaint against them before the Barangay Captain of Barangay 11,
he is settling the obligation was not attached to the said letter; and (2) Dagupan City. Upon failure of the parties to reach any settlement, the
the amount tendered was insufficient to cover the obligation. It is Barangay Captain issued the necessary certification to file action.
obvious that the reason for respondents non-acceptance of the tender Respondent then filed a verified Complaint for ejectment and
of payment was the alleged insufficiency thereof and not because the damages against the petitioners before the MTCC of Dagupan City,
said check was not tendered to respondent, or because it was in the which complaint was raffled to Branch 2 thereof.
form of managers check. While it is true that in general, a managers By way of defense, petitioners alleged in their Answer that they had
check is not legal tender, the creditor has the option of refusing or been occupying the property in question beginning the year 1945
accepting it.[24] Payment in check by the debtor may be acceptable as onwards, when their predecessors-in-interest, with the permission of
valid, if no prompt objection to said payment is made. [25] Gualberto de Venecia, one of the other co-owners of said land,
Anent the sufficiency of the amount tendered, it appears that developed and occupied the same on condition that they will pay
only the interest of 18% per annum on the P600,000.00 their monthly rental of P20.00 each. From then on, they have
option/reservation fee stated in the default clause of the Agreement continuously paid their monthly rentals to Gualberto de Venecia or
And Undertaking was agreed upon by the parties. Rosita de Venecia or their representatives, such payments being duly
The managers check in the amount of P672,900.00 acknowledged by receipts. Beginning sometime June 1996, however,
(representing the P600,000.00 option/reservation fee plus 18% the representative of Gualberto de Venecia refused to accept their
interest per annum computed from December 3, 1993 to August 3, rentals, prompting them to consign the same to Banco San Juan,
1994) which was tendered but refused by respondent, and thereafter which bank deposit they continued to maintain and update with their
consigned with the court, was enough to satisfy the obligation. monthly rental payments.
There being a valid tender of payment in an amount sufficient In a decision dated February 18, 1998, the MTCC rendered judgment
to extinguish the obligation, the consignation is valid. for the respondent:
As regards petitioners right to withdraw the amount consigned, 1. Ordering each of the defendants to vacate the portion of the land in
reliance on Article 1260 of the Civil Code is misplaced. The said question they respectively occupy and to restore the possession
Article provides thereof to the plaintiff and her co-owners;
2. Ordering each of the defendants to pay to the plaintiff the amount
Art. 1260. Once the consignation has been duly made, the debtor may of P300.00 per month from January 17, 1997 until they vacate the
ask the judge to order the cancellation of the obligation. land in question as the reasonable compensation for the use and
Before the creditor has accepted the consignation, or before a judicial occupation of the premises;
confirmation that the consignation has been properly made, the 3. Ordering the defendants to pay proportionately the amount of
debtor may withdraw the thing or the sum deposited, allowing the P10,000.00 as attorneys fee and P2,000.00 as litigation expenses,
obligation to remain in force. and to pay the cost of suit.
On petitioners appeal to the RTC of Dagupan City, Branch 41
thereof, in its decision of August 7, 1998, affirmed the foregoing
The amount consigned with the trial court can no longer be judgment.
withdrawn by petitioner because respondents prayer in his answer Therefrom, petitioners went to the CA whereat their recourse was
that the amount consigned be awarded to him is equivalent to an docketed as CA-G.R. SP. No. 48918. As stated at the threshold
acceptance of the consignation, which has the effect of extinguishing hereof, the CA, in its Decision of June 30, 1999, affirmed that of the
petitioners obligation. RTC. The CA denied their motion for reconsideration.
WHEREFORE, in view of all the foregoing, the instant petition Thus the petiton.
for review is DENIED. The January 16, 2003 Amended Decision of
the Court of Appeals in CA-G.R. CV No. 55740, which declared the Issue:
consignation by the petitioner in favor of respondent of the amount of Whether petitioners possession of the subject property is founded on
P672,900.00 with the Clerk of Court of the Regional Trial Court of contract or not.
Makati City valid, and which declared petitioners obligation to
respondent under paragraph 5 of the Agreement And Undertaking as Ruling:
having been extinguished, is AFFIRMED. No costs. This factual issue was resolved by the three (3) courts below in favor
of respondent. As tersely put by the CA in its assailed decision of
SO ORDERED. June 30, 1999:
Petitioners failed to present any written memorandum of the alleged
lease arrangements between them and Gualberto De Venecia. The
receipts claimed to have been issued by the owner were not presented
on the excuse that the March 19, 1996 fire burned the same. Simply

Page 18 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

put, there is a dearth of evidence to substantiate the averred lessor- loan documents and the title of the house and lot.
lessee relationship. x x x.3 Respondents made oral and written demands to the
Consistent with this Courts long-standing policy, when the three petitioners for the loan amount.
courts below have consistently and unanimously ruled on a factual 6. In quandary, petitioners filed a complaint for consignation
issue, such ruling is deemed final and conclusive upon this Court, of loan payment, recovery of title and cancellation of
especially in the absence of any cogent reason to depart therefrom. mortgage annotation. They argued that they were confused
From the absence of proof of any contractual basis for petitioners where to pay their loan obligation because it was supposed
possession of the subject premises, the only legal implication is that to be paid to RBST which is now under receivership by
their possession thereof is by mere tolerance. In Roxas vs. Court of PDIC, but the respondents are the ones demanding because
Appeals,4 we ruled: of their possession of the loan documents and title.
A person who occupies the land of another at the latters tolerance or 7. Respondents argued that this is supposed to be under the
permission, without any contract between them, is necessarily bound jurisdiction of the HLURB because it concerns of the
by an implied promise that he will vacate upon demand, failing purchase of a subdivision lot.
which, a summary action for ejectment is the proper remedy against
him. Issues:
The judgment favoring the ejectment of petitioners being consistent 1. W/N jurisdiction falls with the court.
with law and jurisprudence can only be affirmed. The alleged 2. W/N consignation without prior tender of payment is
consignation of the P20.00 monthly rental to a bank account in proper.
respondents name cannot save the day for the petitioners simply
because of the absence of any contractual basis for their claim to Ruling:
rightful possession of the subject property. Consignation based on On the first issue, the SC ruled that since consignation is
Article 1256 of the Civil Code indispensably requires a creditor- necessarily judicial, it falls under the jurisdiction of the Courts citing
debtor relationship between the parties, in the absence of which, the article 1258 of the Civil Code:
legal effects thereof cannot be availed of. Consignation shall be made by
Article 1256 pertinently provides: depositing the things due at the disposal of
Art. 1256. If the creditor to whom tender of payment has been made judicial authority, before whom tender of
refuses without just cause to accept it, the debtor shall be released payment shall be proved, in a proper case,
from responsibility by the consignation of the thing or sum due. and the announcement of the consignation
Unless there is an unjust refusal by a creditor to accept payment from in other cases.
a debtor, Article 1256 cannot apply. In the present case, the The provision clearly precludes consignation in venues
possession of the property by the petitioners being by mere tolerance other than the courts. Elsewhere, what may be made is a valid tender
as they failed to establish through competent evidence the existence of payment, but not consignation.
of any contractual relations between them and the respondent, the
latter has no obligation to receive any payment from them. Since On the second issue, the SC ruled that the consignation is
respondent is not a creditor to petitioners as far as the alleged P20.00 proper without prior tender of payment. The petitioners are in
monthly rental payment is concerned, respondent cannot be quandary on where to pay their loan obligations. Under Article 1256,
compelled to receive such payment even through consignation under prior tender of payment is not necessary for consignation in cases (1)
Article 1256. The bank deposit made by the petitioners intended as where the creditor is unknown or absent, (2) when the creditor is
consignation has no legal effect insofar as the respondent is incapacitated to receive payment when it is due, (3) when there are
concerned. two or more creditors claiming the same right to collect, (4) when
the creditor unjustly refuses to issue a receipt, and (5) when the title
of the obligation has been lost.
The SC said that the case falls on the first and third
exemption. Clearly, the allegations in the Complaint present a
CACAYORIN VS. ARMED FORCES situation where the creditor is unknown, or that two or more entities
-by Jairus Dapitan appear to possess the same right to collect from petitioners. Whatever
transpired between the Rural Bank or PDIC and AFPMBAI in respect
Facts: of petitioners loan account, if any, such that AFPMBAI came into
1. Petitioner is a member of the AFPMBAI, an organization possession of the loan documents and TCT No. 37017, it appears that
engaged in the business of developing low-cost housing petitioners were not informed thereof, nor made privy thereto.
projects for the personnel of AFP, PNP, BFP, BJMP, and Petitioners were allowed to consign the full payment.
PCG.
2. Petitioner applied for an application with the respondent to
purchase a piece of property from the respondent.
3. Petitioner acquired a loan and mortgage agreement with ART. 1267
RBST under the auspices of PAG-IBIG.
4. RBST sent respondent a letter of guaranty informing them
that the proceeds of the approved loan in the amount of PHIL. NATL. CORP VS. CA
P77,418 shall be released after the title is executed in favor -by Jell Vie Gualberto
of the petitioners and after the registration and annotation PNCC and the Raymundo's entered into a contract of lease. The lease
of the loan and mortgage agreement. contract, executed on 18 November 1985, pertinent data of the
5. RBST closed and was placed under receivership by PDIC. contract are as follows:
For some unknown reason, respondents got a hold of the

Page 19 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

1. TERM OF LEASE - This lease shall be for a period of five Petitioner then appealed to the Court of Appeals alleging that
(5) years, commencing on the date of issuance of the the trial court erred in ordering it to pay the private respondent the
industrial clearance by the Ministry of Human Settlements amount of P492,000 and in denying it the right to be heard. However,
at the option of the LESSEE under the same terms and Court of Appeals affirmed the trial court's decision and denied motion
conditions. for reconsideration.
2. RATE OF RENT - LESSEE shall pay to the LESSOR rent at Petitioner then filed petition for certiorari to the Supreme Court
the monthly rate of TWENTY THOUSAND PESOS invoking the following issues:
(P20,000.00), Philippine Currency, in the manner set forth 1. Focusing on paragraph 1of the lease contract, petitioner
in Paragraph 3 below.This rate shall be increased yearly contends that issuance of the Industrial Clearance is a Suspensive
by Five Percent (5%) based on the agreed monthly rate condition, without which the rights under the contract would not
of P20,000.00. be acquired. TUP (Temporary Use Permit) is not the Industrial
3. TERMS OF PAYMENT - The rent stipulated in Paragraph 2 Clearance referred in the 1st paragraph of the contract.
above shall be paid yearly in advance by the LESSEE. The SC: Petitioner is estopped from claiming that the
first annual rent in the amount of TWO HUNDRED Temporary Use Permit was not the industrial clearance contemplated
FORTY THOUSAND PESOS (P240,000.00), shall be due in the contract. In its letter dated 24 April 1986, petitioner states:
and payable upon the execution of this Agreement. We wish to reiterate PNCC Management's previous stand that
4. USE OF LEASED PROPERTY - It is understood that the it is only obligated to pay your clients the amount
Property shall be used by the LESSEE as the site, grounds of P20,000.00 as rental payments for the one-month period of
and premises of a rock crushing plant and field office, the lease, counted from 07 January 1986 when the Industrial
sleeping quarters and canteen/mess hall. The LESSORS Permit was issued by the Ministry of Human Settlements up to
hereby grant to the LESSEE the right to erect on the Leased 07 February 1986 when the Notice of Termination was served
Property such structure(s) and/or improvement(s) necessary on your clients.[11] (Underscoring Supplied).
for or incidental to the LESSEE's purposes. The "Industrial Permit" mentioned in the said letter could
11. TERMINATION OF LEASE - This Agreement may be only refer to the Temporary Use Permit issued by the Ministry of
terminated by mutual agreement of the parties. Upon the Human Settlements on 7 January 1986. And it can be gleaned from
termination or expiration of the period of lease without the this letter that petitioner has considered the permit as industrial
same being renewed, the LESSEE shall vacate the Leased clearance; otherwise, petitioner could have simply told the private
Property at its expense. respondents that its obligation to pay rentals has not yet arisen
On 7 January 1986, petitioner obtained from the Ministry of because the Temporary Use Permit is not the industrial clearance
Human Settlements a Temporary Use Permit [2] for the proposed rock contemplated by them.
crushing project With regards to the Suspensive Condition, It can be
On 16 January 1986, private respondents wrote petitioner deduced from this letter that the suspensive condition - issuance of
requesting payment of the first annual rental in the amount industrial clearance - has already been fulfilled and that the lease
of P240,000 which was due and payable upon the execution of the contract has become operative. Otherwise, petitioner did not have to
contract. solicit the conformity of the private respondents to the termination of
In its reply-letter, petitioner argued that under paragraph 1 of the contract for the simple reason that no juridical relation was
the lease contract, payment of rental would commence on the date of created because of the non-fulfillment of the condition. Moreover, the
the issuance of an industrial clearance by the Ministry of Human reason of petitioner in discontinuing with its project and in
Settlements, and not from the date of signing of the contract. It then consequently cancelling the lease contract was financial as well as
expressed its intention to terminate the contract due to financial, as technical difficulties, not the alleged insufficiency of the Temporary
well as technical, difficulties.[4]Private respondents refused to accede Use Permit.
to petitioner's request for the pretermination of the lease contract. 2. Second. Invoking Article 1266 and the principle of rebus
Petitioner objected to the claim of the private respondents and sic stantibus, petitioner asserts that it should be released from the
argued that it was "only obligated to pay ... the amount of P20,000.00 obligatory force of the contract of lease because the purpose of
as rental payments for the one-month period of lease, counted from the contract did not materialize due to unforeseen events and
07 January 1986 when the Industrial Permit was issued by the causes beyond its control, i.e., due to abrupt change in political
Ministry of Human Settlements up to 07 February 1986 when the climate after the EDSA Revolution and financial difficulties.
Notice of Termination was served"[6]on private respondents. SC: Petitioner cannot, however, successfully take refuge in the
On 19 May 1986, the private respondents instituted with the said article, since it is applicable only to obligations "to do", and not
Regional Trial Court of Pasig an action against petitioner for Specific to obligations "to give".[14] An obligation "to do" includes all kinds of
Performance with Damages. work or service; while an obligation "to give" is a prestation which
What transpired next was..... consists in the delivery of a movable or an immovable thing in order
to create a real right, or for the use of the recipient, or for its simple
During my report gibara ko ni Mam kay
possession, or in order to return it to its owner.[15]
abtan daw isa ka tuig hahaha. Basta ang
The obligation to pay rentals[16] or deliver the thing in a contract
nahitabo is that, sige request ang defense
of lease[17] falls within the prestation to give; hence, it is not covered
sa petitioner ug move s hearing, kesyo
within the scope of Article 1266. At any rate, the unforeseen event
undisposed daw or naay sore eyes ug
and causes mentioned by petitioner are not the legal or physical
nagchange ug counsel. Always gina-grant
On 12 April 1989, the trial court rendered a decision ordering impossibilities contemplated in said article. Besides, petitioner failed
petitionersatoRTC
payang
the prayer even if ordered
private respondents the amount of P492,000 to state specifically the circumstances brought about by the abrupt
"intransferrable" ang
which represented the rentals for two schedule.
years, withOn tha
legal day from 7
interest change in the political climate in the country except the alleged
of the hearing, absent ang counsel for
January 1986 until the amount was fully paid, plus attorney's fees in prevailing uncertainties in government policies on infrastructure
petitioner.
the amount of P20,000RTC
and deemed
costs.[9] it abandoned. projects.

Page 20 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

The principle of rebus sic stantibus[18] neither fits in with the said Warrrant was deposited in the joint account with Reyes
facts of the case. Under this theory, the parties stipulate in the light of grandmother. Two months later Reyes closed the said account and
certain prevailing conditions, and once these conditions cease to exist transferred the funds amounting to P13,112.91 to his joint account
the contract also ceases to exist with his wife. On January 1991 the US Treasury Warrant issued on
This Court cannot subscribe to this argument. As pointed out January 1, 1990 was dishonored as it was discovered the Emeteria
by private respondents died three days prior to its issuance. The US Treasury Department
Anent petitioners alleged poor financial condition, the same then requested BPI for a refund. This was communicated to Reyes
will neither release petitioner from the binding effect of the contract through a telegram on whichhe replied that he would drop by the
of lease. As held in Central Bank v. Court of Appeals, [22]cited by the bank to look into the matter. He also verbally authorized them to
private respondents, mere pecuniary inability to fulfill an engagement debit the amount on the US Treasury Warrant from his account with
does not discharge a contractual obligation, nor does it constitute a his wife. The bank then debited the amount on the same day. On
defense to an action for specific performance. February 1991 Reyes went to the bank and demanded restitution of
3. Third. According to petitioner, the award of P492,000 the debited amount and filed a suit for damages. BPI contested the
representing the rent for two years is excessive, considering that complaint and counterclaimed for moral and exemplary damages.
it did not benefit from the property. Besides, the temporary The Trial Court dismissed Reyes complaint for lack of cause of
permit, conformably with the express provision therein, was action. Reyes moved the case to the CA where the trial courts
deemed automatically revoked for failure of petitioner to use the decision was set aside and BPI was ordered to credit the respondent
same within one year from the issuance thereof. Hence, the rent 10,556.00 plus interest at applicable rates hence, this petition.
payable should only be for one year.
SC: Petitioner cannot be heard to complain that the award is Issue:
excessive. The temporary permit was valid for two years but was Whether legal compensation is applicable.
automatically revoked because of its non-use within one year from its
issuance. The non-use of the permit and the non-entry into the Held:
property subject of the lease contract were both imputable to Yes. The verbal authorization was proved by preponderance of
petitioner and cannot, therefore, be taken advantage of in order to evidence (corroborated testimonies of the branch manager [Grace
evade or lessen petitioners monetary obligation. The damage or Romero] and assistant manager [Bernardo]). More
prejudice to private respondents is beyond dispute. They importantly,Article 1290 of the Civil Code provides that when all
unquestionably suffered pecuniary losses because of their inability to the requisites mentioned in Article 1279 are present, compensation
use the leased premises. Thus, in accordance with Article 1659 of the takes effect by operation of law, and extinguishes both debts to the
Civil Code,[25] they are entitled to indemnification for damages; and concurrent amount, even though the creditors and debtors are not
the award of P492,000 is fair and just under the circumstances of the aware of the compensation. Legal compensation operates even
case. against the will of the interested parties and even without the consent
4. Finally, petitioner submits that the trial court gravely of them. All the elements of legal compensation is present in the case
abused its discretion in denying petitioner the right to be heard. at bar. The presence of Reyes wife does not negate the element of
SC: We disagree. The trial court was in fact liberal in granting mutuality of parties, i.e., that they must be creditors and debtors of
several postponements[26] to petitioner before it deemed terminated each other on their own right. Reyes wife is not a party in the case
and waived the presentation of evidence in petitioners behalf. since she never asserted any right to the debited US Treasury
From the foregoing narration of procedural antecedents, it Warrant.
cannot be said that the petitioner was deprived of its day in court. The
essence of due process is simply an opportunity to be heard. [42] To be PNB vs CA & Ramon Lapez
heard does not only mean oral arguments in court; one may be heard -by Aeyresc Sayadi
also through pleadings. Where opportunity to be heard, either through
oral arguments or pleadings, is accorded, there is no denial of Facts: PNB commits a double entry in favor of Ramon Lapez
procedural due process. account at PNB totaling to P87,380.44 Ramon Lapez had a
PETITIONER DENIED transaction with National Commercial Bank of Jeddah(NCB-Jeddah).
Wherein NCB-Jeddah sent a remittance amounting to $2,627.11 to
ART. 1278 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
Bank of the Philippine Islands and Grace Romero vs Court of Citibank-Greenhills.
Appeals and Edvin Reyes The Second remittance of P34, 340.38 was from Libya which was
-by Escobido, HF deposited at a bank in Libya to be remitted to PNB and to be credited
to the account of Lapez at PNB. The two remittances were seized by
Facts: PNB and applied it to the indebtedness of Ramon Lapez by way of
Private respondent Ervin Reyes opened two joint accounts in BPI compensation.
Cubao branch. The first joint account opened on 1985 was with her
wife Sonia Reyes while the second account opened on 1986 was with Issue:Whether there is a valid compensation that took place or
his grandmother Emeteria Fernandez. Reyes regularly deposited in whether PNB may validly apply the two remittances to the
the joint account with his grandmother the US Treasury Warrants indebtedness of Ramon Lapez with the PNB?
payable to the order of Emeteria Fernandez as her monthly pension.
On December 28, 1989 Emeteria died without the knowledge of the Held: There is no valid compensation on the 1st remittance, PNB
US Treasury Department. On January 1, 1990 she was still sent a US holds the money in favor of Citibank. An implied trust was created
Treasury Warrant worth $377 (10,556.00). On January 4, 1990 the between NCB-Jeddah and PNB. PNB is considered debtor to

Page 21 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

Citibank and not to Ramon Lapez. Such transactions between NCB- SpousesRoxas countered with an injunction and damages with the
Jeddah and PNB may be treated as stipulation pour autri. For RTC of Bataan which ruled in favor of SpousesRoxasand issued a
compensation to apply, Article 1279 Civil Code provides: In order permanent injunction perpetually enjoining the extrajudicial
that compensation may prosper, it is necessary: foreclosure of the mortgage properties, with damages. The CA
(1) That each one of the obligors be bound principally, and that he be affirmed the decision of the RTC and when the decision became final,
at the same time a principal creditor of the other; the SpousesRoxas moved for execution thereof.
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if PTC FILED AN OPPOSITION TO THE MOTION FOR
the latter has been stated; EXECUTION, CLAIMING LEGAL COMPENSATION TO
(3) That the two debts be due; OFFSET THE JUDGEMENT DEBT (DAMAGES) DUE TO THE
(4) That they be liquidated and demandable; SPOUSES ROXAS - RTC denied the opposition and said that PTC is
(5) That over neither of them there be any retention or controversy, deemed to have waived said defense when it failed/omitted to invoke
commenced by third persons and communicated in due time to the it in its Answer(pleading in the regular trial) -PTC filed a case with
debtor. the CA (assailing the decision of the RTC) - CA said that NOT ALL
Stipulation pour autri is an agreement in favor of a 3rd party. the requisites of legal compensation under 1279 are present and
In the case at bar, PNB and Ramon Lapez is not principal debtor and cannot be raised belatedly for the first time in the execution stage
principal creditor to each other. -PTC appealed to the SC
On the 2 PNB and Lapez 2nd remittance, PNB holds the money in
favor Ramon Lapez. Hence, Both PNB and Ramon Lapez is principal
debtor and principal creditor to each other. Legal compensation may ISSUE
properly take place between the parties.
W/N Legal Compensation applies over a judgement debt (decision
rendering you liable for damages) against an existing and outstanding
PHILIPPINE TRUST COMPANY VS ROXAS debt.
-by Hannah Leuterio
PTC argues that it did not raise the defense of compensation in the
ARTICLE 1278 LEGAL COMPENSATION Answer and before the trial stage (in the RTC of BATAAN) because
the debt was not yet due at the time the answer was filed
FACTS:
SpousesRoxas argue that legal compensation is not applicable
Spouses Roxas procured loans from Philippines Trust Company because both the demandability of the loan as well as the exact
(PTC) in the amount of 2,523,520.00 to finance their real estate amount due is still being contested in a different case
business. These loan were secured by real estate mortgages of
Spouses Roxas real properties. RULING OF THE SUPREME COURT

On April 10, 1979 PTC, Spouses Roxas and Roben Construction and SC: -We agree with the Court of Appeals that it was too late for PTC
Furnishing Group Inc. entered into a contract of building construction to set up legal compensation as a defense because the Main Case had
under which PTC granted additional loan of 900,000 to Spouses already reached the execution stage. The rule is that once a decision
Roxas to enable them to finish their housing projects. This was becomes final and executory, execution shall issue as a matter of
superseded by a new contract executed by PTC, Spouses Roxas and right, and the issuance of a writ of execution is the court's ministerial
Rosendo Dominguez substituted RobenConsruction as contractor duty, compellable by mandamus. -The Bataan R TC and the Court of
under the same terms and conditions of the contract dated April 10, Appeals also correctly ruled that PTC should have raised the
1979 argument on legal compensation at the trial stage. Although legal
compensation takes place by operation of law, it must be alleged and
proved as a defense by the debtor who claims its benefits. Only after
Due to financial difficulties, Spouses Roxas missed amortization it is proved will its effects retroact to the moment when all the
payments in their loans with PTC and did not finish their housing requisites under Article 1279 of the Civil Code have concurred
project. -PTC's contention that it could not have raised legal compensation as
a defense because it was not yet a debtor of the Spouses Roxas when
On March 28, 1980 Dominguez filed a complaint against PTC and it filed its answer is unconvincing. Under Rule 8, Section 2 of the
Spouses Roxas for breach of contract of building construction. When 1964 Rules of Court, "[a] party may set forth two or more statements
Spouses Roxas filed their answer they included cross claim against of a claim or defense alternatively or hypothetically, either in one
PTC. In Response, PTC filed a counterclaim against the Spouses cause of action or defense or in separate causes of action or
Roxas on their unpaid loan obligation amounting to 3,053,738.50 defenses." -Thus, the defense of compensation would have been
plus interest, and the amount of 245.720 as attorneys fee and in proper and allowed under the rules even if PTC disclaimed any
default of such payments, foreclosure of the real estate mortgages liability at the time it filed its answer. Hence, there can be no other
executed by Spouses Roxas in favor of PTC. Trial court rendered its conclusion than that PTC is already estopped from raising the issue
decision in favor of Dominguez. PTC and SpusesRoxas appealed to of legal compensation.
the Court of Appeals. To this date, the same remains pending.
Even if we assume that legal compensation was not waived and was
On August 31, 1981 PTC filed with the provincial sheriff of Bataan a otherwise timely raised, we find that not all requisites of legal
petition for extrajudicial foreclosure of the real estate mortgages. the compensation are present in this case. Under Article 1279, in order

Page 22 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

for legal compensation to take place, the following requisites must rights of the creditor. Article 1293 of the Civil Code defines novation
concur: (a) that each one of the obligors be bound principally, and as follows:
that he be at the same time a principal creditor of the other; (b) that Art. 1293. Novation which consists in substituting a new debtor in
both debts consist in a sum of money, or if the things due are the place of the original one, may be made even without the
consumable, they be of the same kind, and also of the same quality if knowledge or against the will of the latter, but not without the
the latter has been stated; (c) that the two debts be due; (d) that they consent of the creditor. Payment by the new debtor gives him rights
be liquidated and demandable; and ( e) that over neither of them there mentioned in articles 1236 and 1237.
be any retention or controversy, commenced by third persons and In general, there are two modes of substituting the person
communicated in due time to the debtor. of the debtor: (1) expromision and (2) delegacion. In expromision,
the initiative for the change does not come fromand may even be
Here, the fourth requisite is absent. A debt is liquidated when its made without the knowledge ofthe debtor, since it consists of a
existence and amount are determined. Compensation can only take third persons assumption of the obligation. As such, it logically
place between certain and liquidated debts; it cannot extend to requires the consent of the third person and the creditor. In
unliquidated, disputed claims. Since the loan obligation, including its delegacion, the debtor offers, and the creditor accepts, a third person
amount and demandability, is still being disputed, PTC's credit cannot who consents to the substitution and assumes the obligation; thus, the
be considered liquidated as of yet. Consequently, no legal consent of these three persons are necessary.
compensation could have taken place between PTC's loan credit and Novation may also be extinctive or modificatory. It is
the Spouses Roxas' judgment credit. extinctive when an old obligation is terminated by the creation of a
new one that takes the place of the former. It is merely modificatory
ART. 1291- NOVATION when the old obligation subsists to the extent that it remains
compatible with the amendatory agreement. Whether extinctive or
GARCIA vs. LLAMAS modificatory, novation is made either by changing the object or the
-by Sandra Castres principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to
FACTS: the rights of the creditor, an act known as subjective or personal
On 23 December 1996, petitioner and de Jesus borrowed novation. For novation to take place, the following requisites must
P400,000.00 from respondent. They executed a promissory note concur:
wherein they bound themselves jointly and severally to pay the loan 1) There must be a previous valid obligation.
on or before 23 January 1997 with a 5% interest per month. When the 2) The parties concerned must agree to a new contract.
loan has long been overdue and petitioner and de Jesus have failed 3) The old contract must be extinguished.
and refused to pay it, respondent brought a complaint for sum of 4) There must be a valid new contract.
money and damages. Novation may also be express or implied. It is express
Petitioner averred that he assumed no liability under the when the new obligation declares in unequivocal terms that the old
promissory note because he signed it merely as an accommodation obligation is extinguished. It is implied when the new obligation is
party for de Jesus; and, alternatively, that he is relieved from any incompatible with the old one on every point. The test of
liability arising from the note inasmuch as the loan had been paid by incompatibility is whether the two obligations can stand together,
de Jesus by means of a check dated 17 April 1997; and that, in any each one with its own independent existence.
event, the issuance of the check and respondents acceptance thereof Applying the foregoing to the instant case, the Court held
novated or superseded the note. that no novation took place.
Respondent asserted that the loan remained unpaid for the The parties did not unequivocally declare that the old
reason that the check issued by de Jesus bounced. obligation had been extinguished by the issuance and the acceptance
For his part, de Jesus contended that out of the supposed of the check, or that the check would take the place of the note. There
P400,000.00 loan, he received only P360,000.00, the P40,000.00 is no incompatibility between the promissory note and the check. The
having been advance interest thereon for two months; and that he check had been issued precisely to answer for the obligation. On the
paid the sum of P120,000.00 by way of interests the sum of one hand, the note evidences the loan obligation; and on the other, the
P40,000.00, representing the peso equivalent of his accumulated check answers for it. Verily, the two can stand together.
leave credits, another P40,000.00 as advance interest, and still Neither could the payment of interestswhich, in
another P40,000.00 as interest for the months of March and April petitioners view, also constitutes novationchange the terms and
1997. conditions of the obligation. Such payment was already provided for
ISSUE: in the promissory note and, like the check, was totally in accord with
Whether or not there was novation of the obligation. the terms thereof.
RULING: Also unmeritorious is petitioners argument that the
1. NO obligation was novated by the substitution of debtors. In order to
Petitioners argument that the obligation was extinguished change the person of the debtor, the old one must be expressly
when de Jesus paid the loan with the check is unmeritorious. The released from the obligation, and the third person or new debtor must
check could not have extinguished the obligation because it bounced assume the formers place in the relation. Well-settled is the rule that
upon presentment. By law, the delivery of a check produces the effect novation is never presumed. Consequently, that which arises from a
of payment only when it is encashed. purported change in the person of the debtor must be clear and
Novation is a mode of extinguishing an obligation by express. It is thus incumbent on petitioner to show clearly and
changing its objects or principal obligations, by substituting a new unequivocally that novation has indeed taken place.
debtor in place of the old one, or by subrogating a third person to the In the present case, petitioner has not shown that he was
expressly released from the obligation, that a third person was
substituted in his place, or that the joint and solidary obligation was

Page 23 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

cancelled and substituted by the solitary undertaking of De Jesus. The Aquintey was already able to collect P301,000.00 from the debtors of
CA aptly held: Tibong, such amount would then have to be deducted from Tibongs
x xx. Plaintiff s acceptance of the bum check did not result in accountability.
substitution by de Jesus either, the nature of the obligation being
solidary due to the fact that the promissory note expressly declared The CA only affirmed the decision of the RTC, ruling that although
that the liability of appellants thereunder is joint and solidary. Aquintey was subrogated as a new creditor in lieu of Tibong,
Reason: under the law, a creditor may demand payment or Tibongs obligation under the loan transaction remained. However,
performance from one of the solidary debtors or some or all of them the CA held that instead of a novation, rather what had transpired was
simultaneously, and payment made by one of them extinguishes the an assignment of credit and that such assignment had the effect of
obligation. It therefore follows that in case the creditor fails to collect payment which is in the nature of a sale, hence the assignor which is
from one of the solidary debtors, he may still proceed against the respondent Tibong herein remains liable for the warranties.
other or others. x xx
Moreover, it must be noted that for novation to be valid and Issue: Whether or not there was novation by virtue of a delegacion
legal, the law requires that the creditor expressly consent to the thereby extinguishing the respondents obligation
substitution of a new debtor. Since novation implies a waiver of the
right the creditor had before the novation, such waiver must be Ruling:
express. It cannot be supposed, without clear proof, that the present
respondent has done away with his right to exact fulfilment from The court herein held that there was no novation.
either of the solidary debtors.
More important, De Jesus was not a third person to the Court proceeded to differentiate novation from dacion in payment
obligation. From the beginning, he was a joint and solidary obligor of which is one of the legal causes to which an assignment of credit may
the P400,000 loan; thus, he can be released from it only upon its be effected. Court referred to art. 1292 which proves that in order for
extinguishment. Respondents acceptance of his check did not change an obligation to be extinguished by another which substitutes the
the person of the debtor, because a joint and solidary obligor is same, it is imperative that it be declared in unequivocal terms or that
required to pay the entirety of the obligation. the new and old obligation on every point be incompatible with one
It must be noted that in a solidary obligation, the creditor is another. Further, court cited the case of Iloilo Traders v Heirs of
entitled to demand the satisfaction of the whole obligation from any Soriano in which it discussed the two types of novation: extinctive
or all of the debtors. It is up to the former to determine against whom and modificatory. Under an extinctive novation, there is a complete
to enforce collection. Having made himself jointly and severally extinguishment of the original obligation which shall be effected
liable with De Jesus, petitioner is therefore liable for the entire upon concurrence of these four requisites: 1.) that there is a previous
obligation. valid obligation, 2.) that there is agreement of all the parties
concerned to a new contract 3.) that there is extinguishment of the old
AQUINTEY V TIBONG obligation, and 4.) that there is birth of a new valid obligation.
-by Erianne Du
On the other hand, a modificatory novation is one in which the
Facts: subsequent change in the agreement is incidental to the main
Respondent Tibong executed several loan transaction with a monthly obligation such as a change in the rate of interest or the extension of
interes rate of 6% to 7% with petitioner Aquintey from May 1989 to time to pay.
July 1989. Such loans then amounted to P773,000.00 however
Tibong was only able to pay loans amounting to P122,600.00 Court then further cited art. 1293 which provides for novation by
virtue of delegacion. Said article states that novation which consists
A year later, Aquintey then found out that Tibong had actually re- in substituting a new debtor in the place of the original one may be
loaned the amounts to her borrowers. Aquintey subsequently was made even without the knowledge of the latter, but not without the
then advised by her counsel one Atty. Torres to require Tibong to consent of the creditor. Further citing the case of City National Bank
execute deeds of assignment in her favor and for her to require v Fuller, court herein stated that in delegacion, the new debtor
Tibongs debtors to execute promissory notes in Aquinteys favor as contracts with the old debtor that he will pay the debt while the
well. Such deeds of assignment had assigned to Agrifina a total creditor agrees to accept the new debtor for the old. Hence, for there
amount of P546,459.00 due from Tibongs debtors. to be extinguishment of the old obligation by delegacion, it is
necessary that the old debtor is relieved of the obligation and that
Aquintey then proceeded to collect the amounts from Tibongs third person or new debtor takes his place.
debtors however she was only able to collect P301,000.00 instead of
the P546, 459.00. She then tried to collect the remaining balance However, as mentioned before, Court finds that in this case what
from Tibong instead who was then unable to pay, hence Aquintey transpired between the parties was an assignment of credit which was
then filed a complaint with the Office of the Barangay Captain. No executed by Tibong in favor of Aquintey.
settlement was arrived at, hence Auintey filed a complaint for a sum
of money against respondents herein with the RTC of Baguio City. An assignment of credit is an agreement by virtue of which the owner
of a credit, known as the assignor, by a legal cause, such as sale,
The trial court held that the execution of the deeds of assignment and dation in payment, exchange or donation, and without the consent of
promissory notes failed to show any express agreement to novate the debtor, transfers his credit and accessory rights to another, known
Tibongs obligation. In addition, the RTC further held that the deeds as the assignee, who acquires the power to enforce it to the same
of assignment and the promissory notes were separate contracts and extent as the assignor could enforce it against the debtor. It may be in
could stand alone from Tibongs original indebtedness. Since the form of sale, but at times it may constitute a dation in payment,

Page 24 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

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 person. Petitioners Argument on appeal before the SC:
CA erred in ruling that there was an assignment of credit
In a dation, the undertaking is in the nature of a sale which means and the there was no novation/subrogation
that the creditor is really buying the property of the debtor to be The consent of the debtor to the assignment of credit is a
charged against debtors obligation. The requisites of a valid dacion basic/essential element in order for the assignee to have
are: 1.) that there is the performance of the prestation in lieu of the cause of action against the debtor
payment, 2.) that there is a difference between the prestation due and He cited Art. 1301 of the Civil Code on Conventional
the one substituting it, and 3.) that the parties (debtor and creditor) Subrogation
had agreed that the performance of the prestation would serve to
extinguish the obligation Issue: WON there a conventional subrogation when Ms. Picache
assigned the debt to the respondent and that without the consent of
In this case, it was founded by the court that all the requisites for a the debtor, said subrogation should be deemed without force and
dacion were present. Tibong had executed the deeds of assignment in effect
order to make good the balance of her obligation since she was not
able to comply with the payment. 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.

In addition, Aquintey since 1990 when deeds were executed never


once attempted to collect from Tibong and that it was only 9 years
later that Aquintey had attempted to collect from Tibong when all the
while Aquintey had already collected 301,000 from Tibongs debtors.
Ruling:
There being no novation, court ruled that Tibong is still liable for the
No
balance on their account to Aquintey in the amount of P33, 841
deducted already were the amounts which were collected from The transaction between Ms. Picache and respondent was
Tibongs debtors and the partial payment of 50,000 already made an assignment of credit, not conventional subrogation, and
beforehand by Tibong. does not require petitioners consent
ASSIGNMENT OF CONVENTIONAL
CREDIT SUBROGATION
LEDONIO vs. CAPITOL An agreement by virtue of Transfer of all the rights of the
- by Dokie Francris Talon which the owner of the credit creditor to a third person, who
(assignor) by legal cause and substitutes him in all his right
Facts: without the debtors consent, = Legal subrogation: by
Petitioner obtained two loans totaling 60,000 pesos from transfers the credit and its operation of law
Ms. Picache, for which he executed promissory notes accessory rights to another = Conventional subrogation:
Petitioner failed to pay any of the said loans (assignee), who acquires the takes place by agreement of the
Ms. Picache then executed and Assignment of credit power to enforce it parties
covering petitioners loans in favor of the respondent (No extinguishment of Extinguishes and obligation and
Petitioner had knowledge of the credit obligation) Refers to the same gives rise to a new one
Petitioner still failed to pay his indebtedness despite right which passes
repeated demands by respondents and its counsels Creditor may validly assign Requires an agreement among
In defense, petitioner asserted that his credit without the debtors the parties (original creditor, the
o He never acquired any loans from Ms. Picache consent debtor, new creditor)
o He signed the promissory notes under duress
o There was no transaction or privity between him, In the case at bar:
It was a simple deed of assignment
Ms. Picache and the respondents
There is nothing in the said Assignment of Credit that a
RTC:Ruled in favor of the respondents conventional subrogation was intended by the parties
It is incredulous that a businessman and a holder of a o It only conveys a straightforward intention of Ms.
degree in Bachelor of Science in Chemical Picache to sell, assign, transfer, and convey to
Engineering would simply sign blank promissory respondent the debt
notes o Signed solely by Ms. Picache and two witnesses
The Assignment of Credit is valid and enforceable as o No reference was made to secure the conforme or
there was meeting of m8inds between the assignor signature of the petitioner
(Ms. Picache) and her assignee (respondent) upon the The respondents acquired all rights to sue in his own name
things which is the object of the contract without the the petitioner
necessity of the consent of the debtor (petitioner does In assignment, debtors consent is not essential for the
not deny of being notified) validity of the assignment

CA: Affirmed the ruling of RTC

Page 25 of 31
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

o Otherwise, all creditors would be prevented from ACE Foods. MTCL, however, alleged that there was actually no
assigning their credits because of the possibility agreement as to the purported "after delivery services." Further,
of debtors refusal to give consent MTCL posited that ACE Foods refused and failed to pay the purchase
There is a necessity for the notice to the debtor in order that price for the subject products despite the latters use of the same for a
assignment may fully produce its legal effect period of nine (9) months. As such, MTCL prayed that ACE Foods be
o It refers to a notice and not a petition for the compelled to pay the purchase price, as well as damages related to
consent of the debtor the transaction.
Since consent it immaterial, the only matter that the court
will determine is whether petitioner had knowledge of the RTC: Agreement between ACE Foods and MTCL is in the nature of
assignment a contract to sell. the prospective seller explicitly reserves the transfer
o Yes of title to the prospective buyer, and said transfer is conditioned upon
the full payment of the purchase price
o Petitioner received the letters send by Ms.
Picache and the return cards were signed by his
Dissatisfied, MTCL elevated the matter on appeal
agent
o He never questioned why the respondent is
CA: CA reversed and set aside the RTCs ruling, ordering ACE
seeking the payment of loans and not the original Foods to pay MTCL the amount of P646,464.00, plus legal interest at
creditor the rate of 6% per annum to be computed from April 4, 2002. It found
that the agreement between the parties is in the nature of a contract of
ACE FOODS, INC., vs. MICRO PACIFIC TECHNOLOGIES sale, observing that the said contract had been perfected from the
CO., LTD. time ACE Foods sent the Purchase Order to MTCL which, in turn,
-by Emmanuel E. Monteroyo delivered the subject products covered by the Invoice Receipt and
subsequently installed and configured them in ACE Foodss premises
FACTS:
ACE Foods is a domestic corporation engaged in the trading and Aggrieved, ACE Foods moved for reconsideration which was,
distribution of consumer goods in wholesale and retail bases, while however, denied. Hence this petition.
MTCL is one engaged in the supply of computer hardware and
equipment.
On September 26, 2001, MTCL sent a letter-proposal for the ISSUE:
delivery and sale of the subject products to be installed at various Whether ACE Foods should pay MTCL the purchase price for
offices of ACE Foods. Aside from the itemization of the products the subject products. YES!
offered for sale, the said proposal further provides for some terms. Whether there was novation. NO!
ACE Foods accepted MTCLs proposal and accordingly issued a RULING:
Purchase Order for the subject products amounting to P646,464.00 A contract is what the law defines it to be, taking into
(purchase price). consideration its essential elements, and not what the contracting
MTCL delivered the said products to ACE Foods as in the invoice parties call it.33 The real nature of a contract may be determined from
receipt. The fine print of the invoice states, inter alia, that "[t]itle to the express terms of the written agreement and from the
sold property is reserved in MICROPACIFIC TECHNOLOGIES contemporaneous and subsequent acts of the contracting parties.
CO., LTD. until full compliance of the terms and conditions of above However, in the construction or interpretation of an instrument, the
and payment of the price" (title reservation stipulation). intention of the parties is primordial and is to be pursued.
After delivery, the subject products were then installed and In this case, the Court concurs with the CA that the parties have
configured in ACE Foodss premises. MTCLs demands against ACE agreed to a contract of sale and not to a contract to sell as adjudged
Foods to pay the purchase price, however, it remained unheeded. by the RTC. Bearing in mind its consensual nature, a contract of sale
Instead of paying the purchase price, ACE Foods sent MTCL a had been perfected at the precise moment ACE Foods, as evinced by
Letter stating that it "ha[s] been returning the [subject products] to its act of sending MTCL the Purchase Order, accepted the latters
[MTCL] thru [its] sales representative Mr. Mark Anteola who has proposal to sell the subject products in consideration of the purchase
agreed to pull out the said [products]but had failed to do so up to price of P646,464.00. From that point in time, the reciprocal
now." obligations of the parties i.e., on the one hand, of MTCL to deliver
ACE Foods lodged a Complaint against MTCL before the RTC, the said products to ACE Foods, and, on the other hand, of ACE
praying that the latter pull out from its premises the subject products Foods to pay the purchase price therefor within thirty (30) days from
since MTCL breached its "after delivery services" obligations to it, delivery already arose and consequently may be demanded.
particularly, to: On the issue of NOVATION
(a) install and configure the subject products; The Court must dispel the notion that the stipulation anent
(b) submit a cost benefit study to justify the purchase of the subject MTCLs reservation of ownership of the subject products as reflected
products; and in the Invoice Receipt, i.e., the title reservation stipulation, changed
(c) train ACE Foodss technicians on how to use and maintain the the complexion of the transaction from a contract of sale into a
subject products. contract to sell. Records are bereft of any showing that the said
ACE Foods likewise claimed that the subject products MTCL stipulation novated the contract of sale between the parties which, to
delivered are defective and not working. repeat, already existed at the precise moment ACE Foods accepted
MTCLs proposal. To be sure, novation, in its broad concept, may
Defense of MTCL: In its Answer with Counterclaim, either be extinctive or modificatory. Novation is never presumed, and
MTCL maintained that it had duly complied with its obligations to the animus novandi, whether totally or partially, must appear by

Page 26 of 31
Ateneo de Davao Univeristy
College of Law
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OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

express agreement of the parties, or by their acts that are too clear and 6. As per the allegations in the complaint, JOHN DOE is an
unequivocal to be mistaken. indispensable party to this case so with his whereabouts unknown,
service by publication should first be made before proceeding with
In the present case, it has not been shown that the title reservation the trial of this case;
stipulation appearing in the Invoice Receipt had been included or had 7. Defendant Maryden Domingo once obtained a car loan from Far
subsequently modified or superseded the original agreement of the East Bank and Trust Company but the car was later sold to Carmelita
parties. S. Gonzales with the bank's conformity and the buyer subsequently
The fact that the Invoice Receipt was signed by a representative assumed payment of the balance of the mortgaged loan.
of ACE Foods does not, by and of itself, prove animus novandi since: the prosecution presented as witness Vicente Magpusao, a former
(a) it was not shown that the signatory was authorized by ACE Foods employee of FEBTC and now an Account Analyst of BPI. His
(the actual party to the transaction) to novate the original agreement; testimony was summed up by the MeTC as follows:
(b) the signature only proves that the Invoice Receipt was received by Vicente Magpusao, [BPI's] Account Analyst and formerly connected
a representative of ACE Foods to show the fact of delivery; and (c) as with Far East Bank and Trust Company testified that on September
matter of judicial notice, invoices are generally issued at the 27, 1993, [the spouses Domingo] for consideration executed and
consummation stage of the contract and not its perfection, and have delivered to Makati Auto Center, Inc. a Promissory Note in the sum
been even treated as documents which are not actionable per se, of P629,856.00 payable in monthly installments in accordance with
although they may prove sufficient delivery. Thus, absent any clear the schedule of payment indicated in said Promissory Note. In order
indication that the title reservation stipulation was actually agreed to secure the payment of the obligation, the [spouses Domingo]
upon, the Court must deem the same to be a mere unilateral executed in favor of said Makati Auto Center, Inc. on the same date a
imposition on the part of MTCL which has no effect on the nature of Chattel Mortgage over one (1) unit of 1993 Mazda (323) with Motor
the parties original agreement as a contract of sale. ACE Foodss No. B6-270146 and with Serial No. BG1062M9100287. With notice
obligation to pay the purchase price as well as to accept the to [the spouses Domingo], said Makati Auto Center, Inc. assigned to
delivery of the goods, remain enforceable and subsisting. Far East Bank and Trust Co. the Chattel Mortgage as shown by the
WHEREFORE, petition is DENIED. CA decision is affirmed. Deed of Assignment executed by [Makati Auto Center, Inc.]. Far East
Bank and Trust Co. on the other hand, has been merged with and/or
absorbed by herein plaintiff [BPI]. The [spouses Domingo] defaulted
BPI VS DOMINGO in complying with the terms and conditions of the Promissory Note
-by Gerard Tinampay with Chattel Mortgage by failing to pay twenty[-one] (21) successive
installments which fell due on January 15, 1996 up to September 15,
FACTS: 1997. [BPI] sent a demand letter [to] defendant Mercy Domingo thru
On September 27, 1993, respondent Amador Domingo and his wife, registered mail demanding payment of the whole balance of the
the late Mercy Maryden Domingo, executed a Promissory Note in Promissory Note plus the stipulated interest and other charges or
favor of Makati Auto Center, Inc. in the sum of P629,856.00, payable return to [BPI] the possession of the above-described motor vehicle.
in 48 successive monthly installments in the amount of P13,122.00 There were some negotiations made by the [spouses Domingo] to
each. They simultaneously executed a Deed of Chattel Mortgage over their In-House Legal Assistant but the same did not materialize.
a 1993 Mazda 323 (subject vehicle) to secure the payment of their Based on the Statement of Account dated October 31, 2000, [the
Promissory Note. Makati Auto Center, Inc. then assigned, ceded, and spouses Domingo have] an outstanding balance of P275,562.00
transferred all its rights and interests over the said Promissory Note exclusive of interest and other charges.
and chattel mortgage to Far East Bank and Trust Company (FEBTC). On cross-examination, the witness explained that the first time he
On April 7, 2000, the Securities and Exchange Commission (SEC) came to handle [the spouses Domingo's] account was in 1997.
approved and issued the Certificate of Filing of the Articles of Despite the fact that he was not yet employed with the bank in 1993,
Merger and Plan- of Merger executed on January 20, 2000 by and he knew exactly what happened in this particular transaction because
between BPI, the surviving corporation, and FEBTC, the absorbed of his experience in auto financing. He also has an access [to] the
corporation. By virtue of said merger, all the assets and liabilities of Promissory Note, Chattel Mortgage and other records of payment
FEBTC were transferred to and absorbed by BPI. made by the bank. Based on the records, the [spouses Domingo]
The spouses Domingo defaulted when they failed to pay 21 monthly issued several postdated checks but not for the entire term. There
installments that had fallen due consecutively from January 15, 1996 were payments made from October 30, 199[3] up to September 14,
to September 15, 1997. BPI, being the surviving corporation after the 1994. He was not the one who received payments for the auto
merger, demanded that the spouses Domingo pay the balance of the finance. If there were receipts issued, they will only ride for the
Promissory Note including accrued late payment charges/interests or account of Mrs. Domingo. He was not sure if these receipts are kept
to return the possession of the subject vehicle for the purpose of in the warehouse or probably disposed of by the bank since the
foreclosure in accordance with the undertaking stated in the chattel transaction was made in 1997. They already have a computer records
mortgage. When the spouses Domingo still failed to comply with its of all payments made by their client. Based on the subsidiary ledger,
demands, BPI filed on November 14, 2000 a Complaint for Replevin there were three (3) checks that bounced and these are payments from
and Damages (or in the alternative, for the collection of sum of the new buyer. They only have one (1) photocopy of these checks in
money, interest and other charges, and attorney's fees. BPI included a the amount of P325,431.60 while the other two (2) are missing. He
John Doe as defendant because at the time of filing of the Complaint, was not aware who owns Cargo and Hardware Corporation but the
BPI was already aware that the subject vehicle was in the possession check was issued by a certain Miss Gonzales. The witness further
of a third person but did not yet know the identity of said person. testified that anyone can pay the monthly amortization as long as the
the spouses Domingo raised the following affirmative defenses: payment is for the account of Maryden Domingo. They cannot
4. [BPI] has no cause of action against the [spouses Domingo]. include Carmelita Gonzales as one of the defendants in this case
5. The Honorable Court has no jurisdiction over this case, because they don't have a document executed by the latter in behalf

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Atty. Lydia C. Galas
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of Far East Bank and Trust Co. The bank did not approve the Deed of According to Manresa, novation is the extinguishment of an
Sale with Assumption of Mortgage. obligation by the substitution or change of the obligation by a
Witness further testified that he found the photocopy of the Deed of subsequent one which extinguishes or modifies the first, either by
Sale in the records of Maryden Domingo. The Promissory Note and changing the object or principal conditions, or by substituting the
Chattel Mortgage were executed by the defendants Maryden and person of the debtor, or by subrogating a third person to the rights of
Amador Domingo. There was no assumption of obligation of the the creditor (8 Manresa 428, cited in IV Civil Code of the Philippines
[spouses Domingo]. Witness however admitted that Far East Bank by Tolentino 1962 ed., p. 352). Unlike other modes of extinction of
did not tum over to [BPI] all the records pertaining to the account of obligations, novation is a juridical act with a dual function - it
the [spouses Domingo ] extinguishes an obligation and creates a new one in lieu of the old.
For his defense, defendant Amador Domingo testified that his wife Article 1293 of the New Civil Code provides:
and co-defendant Mercy Maryden Domingo died on November 27, "Novation which consists in substituting a new debtor in the place of
2003. He admitted that his wife bought a car and was mortgaged to the original one, may be made even without the knowledge or against
Far East Bank and Trust Company. He identified the Chattel the will of the latter, but not without the consent of the creditor."
Mortgage and the Promissory Note he executed together with his Under this provision, there are two forms of novation by substituting
wife. In connection with the execution of this Promissory Note, he the person of the debtor, and they are: (1) expromision and (2)
recalled that his wife issued forty-eight (48) checks. The twelve (12) delegacion. In the former, the initiative for the change does not come
checks were cleared by the bank and his wife was able to obtain a from the debtor and may even be made without his knowledge, since
discount for prompt payments up to October 1994. While they were it consists in a third person assuming the obligation. As such, it
still paying for the car, Carmelita Gonzales got interested to buy the logically requires the consent of the third person and the creditor. In
car and is willing to assume the mortgage. After furnishing the bank the latter, the debtor offers and the creditor accepts a third person
[with] the Deed of Sale duly notarized, Carmelita Gonzales who consents to the substitution and assumes the obligation, so that
subsequently issued a check payable to Far East Bank and Trust the intervention and the consent of these three persons are necessary.
Company and the remaining postdated checks were returned to them. In these two modes of substitution, the consent of the creditor is an
Based on the application of payment prepared by [BPI's] witness, indispensable requirement.
Carmelita Gonzales made payments from November 14, 1995 to The Court also emphasized in De Cortes the indispensability of the
December 1995. Aside from these payments on May 19, 1997, creditor's consent to the novation, whether expromision or
Carmelita Gonzales issued a check to Far East Bank in the amount of delegacion, given that the "[s]ubstitution of one debtor for another
P385,431.60. In 1996, he received a phone call from a certain Marvin may delay or prevent the fulfillment of the obligation by reason of the
Orence asking for their assistance to locate the car which Carmelita financial inability or insolvency of the new debtor; hence, the creditor
Gonzales bought from them. His lawyer went to Land Transportation should agree to accept the substitution in order that it may be binding
Office for assistance. From the time Ms. Gonzales started to pay, they on him."
never received any demand letter from Far East Bank. Thereafter, on Both the R TC and the Court of Appeals found that there was
February 29, 1997, they received a demand letter from Espino Law novation by delegacion in the case at bar. The Deed of Sale with
Office [on] behalf of [FEBTC]. His lawyer made a reply on March Assumption of Mortgage was executed between Mercy and
31, 1997 stating therein that the motor vehicle for which the loan was Carmelita, thus, their consent to the substitution as debtors and third
obtained had been sold to Carmelita Gonzales as of July 5, 1994 with person, respectively, are deemed undisputed. It is the existence of the
the knowledge and approval of their client. After three years, they consent of BPI as creditor that is being challenged herein.
received another demand letter dated October 31, 2000 from As a general rule, since novation implies a waiver of the right the
Labaguis Law Office. His lawyer made the same reply on March 7, creditor had before the novation, such waiver must be express. The
2000 and another letter on November 24, 2000. Witness further Court explained the rationale for the rule in Testate Estate of Lazaro
testified that this malicious complaint probably triggered the early Mota v. Serra:
demise of his wife who has a high blood pressure. His wife died of It should be noted that in order to give novation its legal effect, the
aneurism. As damages, he is asking for the amount of P200,000.00 as law requires that the creditor should consent to the substitution of a
moral damages, P75,000.00 as attorney's fees and P5,000.00 new debtor. This consent must be given expressly for the reason that,
appearance fee. since novation extinguishes the personality of the first debtor who is
On cross-examination, witness elaborates that when his wife to be substituted by a new one, it implies on the part of the creditor a
presented to Far East Bank the Deed of Sale with Assumption of waiver of the right that he had before the novation, which waiver
Mortgage, the bank made no objection and returned all their must be express under the principle that renuntiatio non praesumitor,
postdated checks. His wife was the one who deal[t] with Carmelita recognized by the law in declaring that a waiver of right may not be
Gonzales but he always provide[d] assistance with respect to paper performed unless the will to waive is indisputably shown by him who
works. Aside from the aforesaid Deed of Sale, there is no other holds the right.
document which shows the conformity of the bank. They were only However, in Asia Banking Corporation v. Elser, the Court qualified
verbally assured by Mr. Orence that their papers are in order. thus:
ISSUE: The aforecited article 1205 [now 1293] of the Civil Code does not
Whether or not there had been a novation of the loan obligation with state that the creditor's consent to the substitution of the new debtor
chattel mortgage of the spouses Domingo to BPI so that the spouses for the old be express, or given at the time of the substitution, and the
Domingo were released from said obligation and Carmelita was Supreme Court of Spain, in its judgment of June 16, 1908, construing
substituted as debtor. said article, laid down the doctrine that "article 1205 of the Civil
HELD: Code does not mean or require that the creditor's consent to the
The Court answers in the negative and grants the Petition. change of debtors must be given simultaneously with the debtor's
In De Cortes v. Venturanza, the Court discussed some principles and consent to the substitution; its evident purpose being to preserve the
jurisprudence underlying the concept and nature of novation as a creditor's full right, it is sufficient that the latter's consent be given at
mode of extinguishing obligations: any time and in any form whatever, while the agreement of the

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OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
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debtors subsists." The same rule is stated in the EnciclopediaJuridica The Court notes that the documents of BPI concerning the car loan
Espanola, volume 23, page 503, which reads: "The rule that this kind and chattel mortgage are still in the name of the spouses Domingo.
of novation, like all others, must be express, is not absolute; for the No new promissory note or chattel mortgage had been executed
existence of the consent may well be inferred from the acts of the between BPI (or FEBTC) and Carmelita. Even the account itself is
creditor, since volition may as well be expressed by deeds as by still in the names of the spouses Domingo.
words." The understanding between Henry W. Elser and the principal The absence of objection on the part of BPI (or FEB TC) cannot be
director of Yangco, Rosenstock& Co., Inc., with respect to Luis R. Y presumed as consent. Jurisprudence requires presentation of proof of
angco' s stock in said corporation, and the acts of the board of consent, not mere absence of objection. Amador cannot rely on Babst
directors after Henry W. Elser had acquired said shares, in which involved a different factual milieu. Relevant portions of the
substituting the latter for Luis R. Y angco, are a clear and Court's ruling in Babst are reproduced below:
unmistakable expression of its consent. When this court said in the In the case at bar, Babst, MULTI and ELISCON all maintain that due
case of Estate of Mota vs. Serra, that the creditor's express consent is to the failure of BPI to register its objection to the take-over by DBP
necessary in order that there may be a novation of a contract by the of ELISCON's assets, at the creditors' meeting held in June 1981 and
substitution of debtors, it did not wish to convey the impression that thereafter, it is deemed to have consented to the substitution of DBP
the word "express" was to be given an unqualified meaning, as for ELISCON as debtor.
indicated in the authorities or cases, both Spanish and American, We find merit in the argument. Indeed, there exist clear indications
cited in said decision. that BPI was aware of the assumption by DBP of the obligations of
Hence, based on the aforequoted ruling in Asia Banking, the ELISCON. In fact, BPI admits that
existence of the creditor's consent may also be inferred from the "[T]he Development Bank of the Philippines (DBP), for a time, had
creditor's acts, but such acts still need to be "a clear and unmistakable proposed a formula for the settlement of Eliscon's past obligations to
expression of [the creditor's] consent. its creditors, including the plaintiff [BPI], but the formula was
In Ajax Marketing and Development Corporation v. Court of expressly rejected by the plaintiff as not acceptable (long before the
Appeals, the Court further clarified that: filing of the complaint at bar)."
The well settled rule is that novation is never presumed. Novation
will not be allowed unless it is clearly shown by express agreement, The Court of Appeals held that even if the account officer who
or by acts of equal import. Thus, to effect an objective novation it is attended the June 1981 creditors' meeting had expressed consent to
imperative that the new obligation expressly declare that the old the assumption by DBP of ELISCON's debts, such consent would not
obligation is thereby extinguished, or that the new obligation be on bind BPI for lack of a specific authority therefor. In its petition,
every point incompatible with the new one. In the same vein, to effect ELISCON counters that the mere presence of the account officer at
a subjective novation by a change in the person of the debtor it is the meeting necessarily meant that he was authorized to represent
necessary that the old debtor be released expressly from the BPI in that creditors' meeting. Moreover, BPI did not object to the
obligation, and the third person or new debtor assumes his place in substitution of debtors, although it objected to the payment formula
the relation. There is no novation without such release as the third submitted by DBP.
person who has assumed the debtor's obligation becomes merely a Indeed, the authority granted by BPI to its account officer to attend
co-debtor or surety. the creditors' meeting was an authority to represent the bank, such
The burden of establishing a novation is on the party who asserts its that when he failed to object to the substitution of debtors, he did so
existence. Contrary to the findings of the Court of Appeals and the on behalf of and for the bank. Even granting arguendo that the said
RTC, Amador failed to discharge such burden as he was unable to account officer was not so empowered, BPI could have subsequently
present proof of the clear and unmistakable consent of BPI to the registered its objection to the substitution, especially after it had
substitution of debtors. already learned that DBP had taken over the assets and assumed the
Irrefragably, there is no express consent of BPI to the substitution of liabilities of ELISCON. Its failure to do so can only mean an
debtors. The Court of Appeals and the RTC inferred the consent of acquiescence in the assumption by DBP of ELISCON's obligations.
BPI from the following facts: (1) BPI had a copy of the Deed of Sale As repeatedly pointed out by ELISCON and MULTI, BPI's objection
and Assumption of Mortgage executed between Mercy and Carmelita was to the proposed payment formula, not to the substitution itself. In
in its file, indicating its knowledge of said agreement, and still it did Babst, there was a clear opportunity for BPI, as creditor therein, to
not interpose any objection to the same; (2) BPI (through FEBTC) object to the substitution of debtors given that its representative
returned the spouses Domingo's checks and accepted Carmelita's attended a creditor's meeting, during which, said representative
payments; and (3) BPI did not demand any payment from the spouses already objected to the proposed payment formula made by DBP, as
Domingo not until 3 0 months after Carmelita assumed the payment the new debtor. Hence, the silence of BPI during the same meeting as
of balance on the Promissory Note. to the matter of substitution of debtors could already be interpreted as
The Court disagrees with the inferences made by the Court of its acquiescence to the same. In contrast, there was no clear
Appeals and the RTC. opportunity for BPI (or FEB TC) to have expressed its objection to
First, that BPI (or FEB TC) had a copy of the Deed of Sale and the substitution of debtors in the case at bar.
Assumption of Mortgage executed between Mercy and Carmelita in Second, the consent of BPI to the substitution of debtors cannot be
its file does not mean that it had consented to the same. The very deduced from its acceptance of payments from Carmelita, absent
Deed itself states: proof of its clear and unmistakable consent to release the spouses
That the VENDEE [Carmelita] assumes as he/she had assumed to pay Domingo from their obligation. Since the spouses Domingo remained
the aforecited mortgage in accordance with the original terms and as debtors of BPI, together with Carmelita, the fact that BPI
conditions of said mortgage, and the parties hereto [Mercy and demanded payment from the spouses Domingo 30 months after
Carmelita] have agreed to seek the conformity of the MORTGAGEE accepting payment from Carmelita is insignificant.
[FEBTC]. This brings the Court back to the original question of The acceptance by a creditor of payments from a third person, who
whether there is proof of the conformity of BPI. has assumed the obligation, will result merely to the addition of
debtors and not novation. The creditor may therefore enforce the

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Atty. Lydia C. Galas
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obligation against both debtors. As the Court pronounced in returned to the spouses Domingo. There is simply not enough
Magdalena Estates, Inc. v. Rodriguez, "[t]he mere fact that the evidence to establish the prima facie existence of novation to shift the
creditor receives a guaranty or accepts payments from a third person burden of evidence to BPI to controvert the same.
who has agreed to assume the obligation, when there is no agreement The verbal assurances purportedly given by a Mr. Marvin Orence or
that the first debtor shall be released from responsibility, does not Oronce (Orence/Oronce) of FEBTC to Amador over the telephone
constitute a novation, and the creditor can still enforce the obligation that the spouses Domingo's documents were in order do not
against the original debtor." The Court reiterated in Quinto v. People constitute the clear and unmistakable consent of the bank to the
that "[n]ot too uncommon is when a stranger to a contract agrees to substitution of debtors. Once again, except for Amador's bare
assume an obligation; and while this may have the effect of adding to testimony, there is no other evidence of such telephone conversations
the number of persons liable, it does not necessarily imply the taking place and the subject of such telephone conversations. In
extinguishment of the liability of the first debtor. Neither would the addition, Mr. Orence/Oronce's identity, position at FEBTC, and
fact alone that the creditor receives guaranty or accepts payments authority to represent and bind the bank, were not even clearly
from a third person who has agreed to assume the obligation, established.
constitute an extinctive novation absent an agreement that the first The letter dated March 31, 1997 of Atty. Ricardo J.M. Rivera
debtor shall be released from responsibility." (Rivera), counsel for the spouses Domingo, addressed to Atty.
Absent proof that BPI gave its clear and unmistakable consent to Cresenciano L. Espino, counsel for FEBTC, does not serve as
release the spouses Domingo from the obligation to pay the car loan, supporting evidence for Amador' s testimony regarding the return of
Carmelita is simply considered an additional debtor. Consequently, the checks and the verbal assurances given by Mr. Orence/Oronce.
BPI can still enforce the obligation against the spouses Domingo The contents of such letter are mere hearsay because the events stated
even 30 months after it had started accepting payments from therein did not personally happen to Atty. Rivera or in his presence,
Carmelita. and he merely relied on what his clients, the spouses Domingo, told
And third, there is no sufficient or competent evidence to establish him.
the return of the checks to the spouses Domingo and the assurance The Court is therefore convinced that there is no novation by
made by FEBTC that the spouses Domingo were already released delegacion in this case and Amador remains a debtor of BPI. The
from their obligation. Court reinstates the MeTC judgment ordering Amador to pay for the
Amador admitted that it was his wife Mercy, together with Carmelita, P275,562.00 balance on the Promissory Note, 10% attorney's fees,
who directly transacted with FEBTC regarding the sale of the subject and costs of suit; but modifies the rate of interest imposed and the
vehicle to and assumption of mortgage by Carmelita. Amador had no date when such interest began to run.
personal knowledge of what had happened when Mercy and
Carmelita went to the bank so his testimony on the matter was
hearsay, which, if not excluded, deserves no credence.
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

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Midterm Case Digests

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