Extinguishment of Obligations

Problem The debtor owes his creditor several debts, all of them due, to wit: (1) an unsecured debt;
(2) a debt secured with a mortgage of the debtors property; (3) a debt bearing interest; (4) a debt in
which the debtor is solidarily liable with another. Partial payment was made by the debtor. Assuming
that the debtor had not specified the debts to which the payment should be applied and, on the other
hand, the creditor had not specified in the receipt he issued the application of payment, state the order
in which the payment should be applied and your reasons therefore. (1982 Bar Problem)

Answer In this case, according to the Civil Code, the debt, which is most onerous to the debtor,
among those due, shall be deemed satisfied. Analyzing the four debts stated in the problem, the most
onerous is No. 4, the second most onerous is No. 2, the third most onerous is No. 3, and the least
onerous is No. 1. Consequently, the payment should be applied in that order.

(Note: The above answer is based on Art. 1254 of the Civil Code, and on decided cases and
commentaries of recognized commentators.)

Problem B borrowed from C P1,000.00 payable in one year. When C was in the province, Cs
17-year-old son borrowed P500.00 from B for his school tuition. However, the son spent it instead
nightclubing. When the debt to C fell due, B tendered only P500.00, claiming compensation on the
P500.00 borrowed by Cs son.

Question No. 1 Is there legal compensation? Why? (1981 Bar Problem)

Answer There is no legal compensation. Under the Civil Code, in order that there will be a valid and
effective compensation, it is essential that there must be two parties, who in their own right, are
principal creditors and principal debtors of each other. In the instant case, C cannot be considered as a
party to the act of his 17-year-old son in borrowing P500.00 from B. Consequently, he did not become
a principal debtor of B; neither did B become a principal creditor of C. Therefore, there can be no
partial compensation of the P1,000.00 borrowed by B from C. (Note: The above answer is based on
Arts. 1278 and 1279, No. 1, of the Civil Code and on decided cases.)

Question No. 2 Suppose the minor son actually used the money for school tuition, would the answer
be different?

Reasons. (1981 Bar Problem)

Answer There would be no difference in my answer. There will still be no legal compensation. The fact
that Cs son actually used the P500.00 for his school tuition did not make C a party to the contract
between his son and B. Therefore, C is not the principal debtor of B with respect to said amount.
(Note: The above answer is based on Arts. 1278 and 1279, 1, Civil Code.)

Problem Suppose that under the judgment obligation, the liability of the judgment debtor is for the
amount of P6,000, but both judgment debtor and judgment creditor subsequently entered into a
contract reducing the liability of the former to only P4,000, is there an implied novation which will have
the effect of extinguishing the judgment obligation and creating a modified obligatory relation? Reasons.

Answer There is no implied novation in this case. We see no valid objection to the judgment debtor
and the judgment creditor in entering into an agreement regarding the monetary obligation of the
former under the judgment referred to. The payment by the judgment debtor of the lesser amount of
P4,000, accepted by the creditor without any protest or objection and acknowledged by the latter as in
full satisfaction of the money judgment, completely extinguished the judgment debt and released the
debtor from his pecuniary liability.

Problem ABC Trading Co., a domestic corporation engaged in the sale of automobile spare parts,
opened with X Bank a letter of credit up to the extent of $450,000.00 for a period of one year. To
secure payment thereof, it executed a chattel mortgage over its stock-in-trade valued at P500,000.00. On
May 15 and June 15, 1981, Y, president and general manager of ABC Trading, drew against this letter of
credit by means of promissory notes in the total amount of P430,000.00, payable within 30 days from
the respective dates of the promissory notes with interest of 10%. Upon maturity of said notes, ABC
Trading failed to pay, but was able to negotiate for an extension of six (6) months within which to pay
said amount, in return for the additional security posted by Mr. Y consisting of a real estate mortgage
over his land in Manila. At the end of 6 months, ABC Trading Co. failed to pay the amount due despite
repeated demands by X Bank. Y Bank fi led an action for foreclosure of the chattel mortgage
executed by ABC. Trading ABC Trading opposed said action contending that the chattel mortgage has
been novated by the real estate mortgage executed by X Bank. Is the contention of ABC Trading Co.
tenable? Reasons.

Answer The contention of ABC Trading Co. that the chattel mortgage has been novated by the real
estate mortgage executed by Mr. R in favor of X Bank is untenable. Wel lsettled is the rule that in
order that there will be a novation there must be complete incompatibility between the two obligations.
And the test of incompatibility is simple. The test is whether the two obligations can stand together. If
they can stand together, then there is no incompatibility. If there is incompatibility, then there is
novation. Applying the test to the instant case, it is clear that the two obligations can stand together.
Therefore, there is no novation.

Problem A obtained a favorable judgment against B from the Court of First Instance of Manila for the
sum of P2,000. Subsequently, a writ of execution was issued and a jeep belonging to the latter was
seized by the sheriff. However, the two (A and B) arrived at an arrangement by virtue of which B
executed a chattel mortgage on the jeep stipulating, inter alia that B shall satisfy the judgment in two
equal installments payable at designated periods. B failed to pay the first installment, and as a result, A
obtained an alias writ of execution and levied upon certain personal properties of B. The latter fi led an
urgent motion for suspension of the execution sale on the ground of payment of the judgment
obligation. He maintains that the execution of the deed of chattel mortgage has extinguished the
judgment debt because of implied novation. Is this correct? Reasons.

Answer The contention of B that the mortgage obligation has extinguished the judgment obligation
because of implied novation is not correct. The defense of implied novation requires clear and
convincing proof of complete incompatibility between the two obligations. The law requires no specific
form for an effective novation by implication. The test is whether the two obligations can stand together.
If they cannot, incompatibility arises, and the second obligation novates the fi rst. If they can stand
together, no incompatibility results and novation does not take place.

Applying this test, we see no substantial incompatibility between the mortgage obligation and the
judgment obligation sufficient to justify a conclusion of implied novation. The stipulation for the payment
of the obligation under the terms of the deed of chattel mortgage serves only to provide an express and
specific method for its extinguishment payment in two equal installments. The chattel mortgage
simply gave the judgment debtor a method and more time to enable him to fully satisfy the judgment
indebtedness. (Millar vs. Court of Appeals, 38 SCRA 642.)

Problem No. 1 A owed B a certain sum of money. C wrote B a letter stating that he would be
the one to take care of As debt as soon as A had made a shipment of logs to Japan. A never made
such shipment. C did not pay B. Is C liable to B? Explain. (1975 Bar Problem)

Answer C is not liable to B. In the first place, in order that C may be held liable to B, there
should have been a substitution of debtor through expromision within the meaning of Art. 1291, No. 2,
and Art. 1293 of the Civil Code resulting in novation of the obligation. Here, there was none. C merely
wrote a letter to the creditor B stating that he would take care of As debt. The problem does not
even say that B gave his assent or consent to Cs statement. In the second place, even assuming that
there was a substitution of debtor, Cs liability depends upon a suspensive condition, that he would
take care of As debt as soon as A had made a shipment of logs to Japan. A never made such
shipment. Therefore, Cs liability never became effective. (Villanueva vs. Girged, 110 Phil. 478.)

Problem No. 2 A borrowed from B the sum of P3,000.00. Three days after, A in a letter
authorized the Philippine National Bank to pay his debt to B out of whatever crop loan might be
granted to him by said Bank. On the same day, the Bank agreed but the Bank paid B only P2,000.00.
On the date of maturity, B sued the Bank and A for the remaining P1,000.00. Is the Bank liable to
B? (1975 Bar Problem.)

Answer The Bank is not liable to B for the remaining P1,000.00. Even assuming that B gave his
consent to As proposal that the Bank shall pay his indebtedness of P3,000.00, in reality, there was no
substitution of debtor by delegacion within the meaning of Arts. 1291, No. 2, and 1293 of the Civil Code
resulting in a novation of the obligation. The Bank never assumed payment of the obligation. There was
merely an authorization, which was accepted by the Bank, that the latter shall pay As debt out of
whatever crop loan would be granted to him by the Bank. As it turned out, the Bank agreed to lend A
only P2,000.00, and said amount was paid directly to B in accordance with the Banks promise. Beyond
that amount, the Bank cannot be held liable. (Hodges vs. Rey, 111 Phil. 219.)

Problem No. 1 A owed B a certain sum of money. C wrote B a letter stating that he would be
the one to take care of As debt as soon as A had made a shipment of logs to Japan. A never made
such shipment. C did not pay B. Is C liable to B? Explain. (1975 Bar Problem)

Answer C is not liable to B. In the fi rst place, in order that C may be held liable to B, there
should have been a substitution of debtor through expromision within the meaning of Art. 1291, No. 2,
and Art. 1293 of the Civil Code resulting in novation of the obligation. Here, there was none. C merely
wrote a letter to the creditor B stating that he would take care of As debt. The problem does not
even say that B gave his assent or consent to Cs statement. In the second place, even assuming that
there was a substitution of debtor, Cs liability depends upon a suspensive condition, that he would
take care of As debt as soon as A had made a shipment of logs to Japan.

A never made such shipment. Therefore, Cs liability never became effective. (Villanueva vs. Girged,
110 Phil. 478.)
Problem No. 2 A borrowed from B the sum of P3,000.00. Three days after, A in a letter
authorized the Philippine National Bank to pay his debt to B out of whatever crop loan might be
granted to him by said Bank. On the same day, the Bank agreed but the Bank paid B only P2,000.00.
On the date of maturity, B sued the Bank and A for the remaining P1,000.00. Is the Bank liable to
B? (1975 Bar Problem.)

Answer The Bank is not liable to B for the remaining P1,000.00. Even assuming that B gave his
consent to As proposal that the Bank shall pay his indebtedness of P3,000.00, in reality, there was no
substitution of debtor by delegacion within the meaning of Arts. 1291, No. 2, and 1293 of the Civil Code
resulting in a novation of the obligation. The Bank never assumed payment of the obligation. There was
merely an authorization, which was accepted by the Bank, that the latter shall pay As debt out of
whatever crop loan would be granted to him by the Bank. As it turned out, the Bank agreed to lend A
only P2,000.00, and said amount was paid directly to B in accordance with the Banks promise. Beyond
that amount, the Bank cannot be held liable. (Hodges vs. Rey, 111 Phil. 219.)