Loan

1. Samuel borrowed P300,000.00 housing loan from the bank at 18% per annum interest.
However, the promissory note contained a proviso that the bank "reserves the right to
increase interest within the limits allowed by law," By virtue of such proviso, over the
objections of Samuel, the bank increased the interest rate periodically until it reached 48%
per annum. Finally, Samuel filed an action questioning the right of the bank to increase the
interest rate up to 48%. The bank raised the defense that the Central Bank of the Philippines
had already suspended the Usury Law. Will the action prosper or not? Why?

A: The action will prosper. While it is true that the interest ceilings set by the Usury Law
are no longer in force, it has been held that PD No. 1684 and CB Circular No. 905
merely allow contracting parties to stipulate freely on any adjustment in the interest rate
on a loan or forbearance of money but do not authorize a unilateral increase of the
interest rate by one party without the other’s
consent (PNB v. CA, 238 SCRA 2O [1994]). To say otherwise will violate the principle
of mutuality of contracts under Article 1308 of the Civil Code. To be valid, therefore, any
change of interest must be mutually agreed upon by the
parties (Dizon v. Magsaysay, 57 SCRA 25O [1974]). In the present problem, the debtor
not having given his consent to the increase in interest, the increase is void.

2. Carlos sues Dino for (a) collection on a promissory note for a loan, with no agreement on
interest, on which Dino defaulted, and (b) damages caused by Dino on his (Carlos’) priceless
Michaelangelo painting on which Dino is liable on the promissory note and awards damages
to Carlos for the damaged painting, with interests for both awards. What rates of interest may
the court impose with respect to both awards? Explain. (5%)

A: With respect to the collection of money or promissory note, it being a forbearance of

money, the legal rate of interest for having defaulted on the payment of 12% will apply.
With respect to the damages to the painting, it is 6% from the time of the final demand up
to the time of finality of judgment until judgment credit is fully paid. The court considers
the latter as a forbearance of money. (Eastern Shipping Lines, Inc. v. CA. 234 SCRA
78 [1994]; Art. 2210 and 2211, CC)

3. Siga-an granted a loan to Villanueva in the amount of P 540,000.00. Such agreement was not
reduced to writing. Siga-an demanded interest which was paid by Villanueva in cash and
checks. The total amount Villanueva paid accumulated to P1,200,000.00. Upon advice of her
lawyer, Villanueva demanded for the return of the excess amount of P 660, 000.00 which was
ignored by Siga-an. Is the payment of interest valid? Is solutio indebiti applicable?
 A: No. Under Art 1956, no interest shall be due unless it has been expressly stipulated in
writing. In this case, the agreement was not reduced to writing. Therefore, no interest
is due.

Yes, Solutio Indebiti is applicable because Villanueva Overpaid by P600,000.00

representing interest payment which is not due. He can, therefore, demand its return.

Deposit and Warehouse Receipt Law

4. Q: A deposited 10,000 with X Bank, which was later declared insolvent. A intervened during
the insolvency proceeding claiming that the 10,000 is not part of the bank assets because he
is still the owner thereof. Is A correct?

Supposed it has been placed in a box and found in vaults of the bank, the answer would
be different.

A: No, A is not correct. Art. 1980 states that, “Fixed, savings, and current deposits of
money in banks and similar institutions shall be governed by the provisions
concerning simple loan.” Therefore, bank deposits are irregular deposits and
ownership was transferred to the Bank when the money was deposited there by A.
They are really loans because they earn interest. Failure of the Bank to honor the
deposit is failure to pay its obligation as a debtor and not a breach of trust arising
from a depository's failure to return the subject matter of the deposit.

Yes, my answer would be different. In that case, the money was deposited there for
safekeeping and the Bank had the obligation of returning the same money deposited
therein.

5. Due to the continuous heavy rainfall, the major streets in Manila became flooded. This
compelled Cris to check-in at Square One Hotel. As soon as Cris got off from his Toyota
Altis, the hotel’s parking attendant got the key of his car and gave him a valet parking
customer’s claim stub. The attendant parked his car at the basement of the hotel. Early in
the morning, Cris was informed by the hotel manager that his car was carnapped.

a. What contract, if any was perfected between Cris and the Hotel when Cris surrendered
the key of his car to the hotel’s parking attendant?

b. What is the liability, if any of the hotel for the loss of Cris’ car?

A:
a) The contract between Cris and Square One Hotel is one of necessary deposit. Deposit of
effects made by travelers or guests in hotels or inns is considered a necessary deposit. This
includes not only the personal effects brought inside the hotel premises but also vehicles or
animals and articles which have been introduced or placed in the annexes of the hotel.

b) In the case of Durban Apartments vs. Pioneer Insurance, the Supreme Court held the hotel is
liable for the loss of the vehicle of the guest after its valet parking attendant parked the vehicle in
front of a bank near the hotel premises. The court ruled that the bank’s parking area became an
annex of the hotel when the management of the bank allowed the hotel to park vehicles there on
the night in question. The contract of deposit was perfected when the guest surrendered the keys
to his vehicle to the parking attendant and the hotel is under obligation of safely keeping and
returning it. Ultimately, Square One Hotel is liable for the loss of the vehicle.

6. Safe Warehouse, Inc. (Safe) issued on various dates negotiable warehouse receipts to Peter,
Paul, and Mary covering certain goods deposited by the latter with the former. Peter, Paul,
and Mary then negotiated and endorsed the warehouse receipts to Cyrus, Magnus, and
Charles upon payment by the latter of valuable consideration for the warehouse receipts.
Cyrus, Magnus, and Charles were not aware of, nor were they parties to any irregularity or
infirmity affecting the title or the face of the warehouse receipts.

On due dates of the warehouse recipes, Cyrus, Magnus, and Charles demanded that Safe
surrender the goods to them. Safe refused because its warehouseman’s claim must first be
paid. Cyrus, Magnus, and Charles refused to pay, and insisted that such claim was the
liability of Peter, Paul, and Mary.

a. What is a warehouseman’s claim? (3%)

b. Is Safe’s refusal to surrender the goods to Cyrus, Magnus, and Charles legally justified?
Explain your answer. (3%)

A:

A. 1. Charges for storage and Preservation of the goods (insurance and others may be included as
long as it is stipulated)

2. Money advanced, interest, insurance, transportation, labor, weighing, coopering and other
charges and expenses in relation to such goods

3. Charges and expenses for notice, and Advertisements of sale, and for sale of the goods where
default had been made in satisfying the warehouseman’s lien. (WHRLaw, Sec. 27).

SUGGESTED ANSWER 2:
Warehouseman’s claim is composed of the unpaid storage charge and other fees. For as long
as the claim or lien is unpaid, the warehouseman can validly withhold delivery.

B. SUGGESTED ANSWER 1:
 The warehouseman, by issuing the warehouse receipt, acknowledges that the goods are in
possession, but he can refuse to deliver the goods to the holder of the warehouse receipt covering
the goods if the lien of the warehouseman is not satisfied.

SUGGESTED ANSWER 2:
Yes, the warehouseman’s lien is possessory in nature such that it follows the property wherever it
goes.

Trust Receipts Law and Letters of Credit

7. Maine Den, Inc. opened an irrevocable letter of credit with Fair Bank, in connection with
Maine Den, Inc.' s importation of spare parts for its textile mills. The imported parts were
released to Maine Den, Inc. after it executed a trust receipt in favor of Fair Bank. When
Maine Den, Inc. was unable to pay its obligation under the trust receipt, Fair Bank sued
Maine Den, Inc. for estafa under the Trust Receipts Law. The court, however, dismissed the
suit. Was the dismissal justified? Why or why not?

A: SUGGESTED ANSWER:
The dismissal of the complaint for estafa is justified. Under recent jurisprudence, the Supreme
Court held that transactions referred to in relation to trust receipts mainly involved sales and if
the entruster knew even before the execution of the alleged trust receipt agreement that the goods
subject of the trust receipt were never intended by the entrustee for resale or for the manufacture
of items to be sold, the agreement is not a trust receipt transaction but a simple loan,
notwithstanding the label.

In this case, the object of the trust receipt, spare parts for textile mills, were for the use of the
entrustee and never intended for sale. As such, the transaction is a simple loan.

When both parties enter into an agreement knowing fully well that the return of the goods
subject of the trust receipt is not possible even without any fault on the part of the trustee,
it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in relation to Art. 315,
par. 1 (b) of the RPC, as the only obligation actually agreed upon by the parties would be
the return of the proceeds of the sale transaction. This transaction becomes a mere loan,
where the borrower is obligated to pay the bank the amount spent for the purchase of the
goods.

8. Does the rule "res perit domino" apply in trust receipt transactions? Explain.

A: No. This is because the loss of the goods, documents or instruments which are the subject of a
trust receipt pending their disposition, irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not extinguish the entrustee’s obligation to the entruster for the
value thereof.

Also, while the entruster is made to appear as owner of the goods covered by the trust receipt,
such ownership is only a legal fiction to enhance the entruster’s security interest over the goods.
9. AAA Carmakers opened an irrevocable Letter of Credit with BBB Banking Corporation with
CCC Cars Corporation as beneficiary. The, irrevocable Letter of Credit was opened to pay
for the importation of ten (10) units of Mercedes Benz S class. Upon arrival of the cars, AAA
Carmakers found out that the cars were all not in running condition and some parts were
missing. As a consequence, AAA Carmakers instructed BBB Banking Corporation not to
allow drawdown on the Letter of Credit. Is this legally possible?

A: No, because under the “Independence Principle” conditions for the drawdown on the
Letters of Credit are based only on documents, like shipping documents, and not with the
condition of the goods subject of the importation.

A bank, in determining compliance with the terms of a Letter of Credit is required to

examine only the shipping document presented by the seller and is precluded from
determining whether the main contract is actually accomplished or not. This arrangement
assures the seller of prompt payment, independent of any breach of sales contract. (This
is the Independence Principle)

Guaranty and Suretyship

10. Kevin signed a loan agreement with ABC Bank. To secure payment, Kevin requested his
girlfriend Rosella to execute a document entitled "Continuing Guaranty Agreement" whereby
she expressly agreed to be solidarily liable for the obligation of Kevin.

Can ABC Bank proceed directly against Rosella upon Kevin's default even without
proceeding against Kevin first? Explain your answer.

A: Yes, ABC Bank may proceed directly against Rosella upon Kevin’s default even without
proceeding against Kevin first because Rosella is a surety after she bound herself solidarily
with the principal debtor.

Notwithstanding the use of the word “guaranty” circumstances may be shown which
convert the contract into one of suretyship. Under the Civil Code, when the guarantor binds
himself solidarily with the principal debtor, the contract becomes one of suretyship and not
of guaranty proper. In a contract of suretyship, the liability of the surety is direct, primary
and absolute. He is directly and equally bound with the principal debtor. Such being the
case, a creditor can go directly against the surety although the principal debtor is solvent
and is able to pay or no prior demand is made on the principal debtor.

In this case, since Rosella is a surety, ABC Bank can go directly against her even without
proceeding against the principal debtor because the surety insures the debt, regardless of whether
or not the principal debtor is financially capable to fulfill his obligation.
PLEDGE, CHATTEL MORTGAGE & ANTICHRESIS

11. Rosario obtained a loan of P100,000.00 from Jennifer, and pledged her diamond ring. The
contract signed by the parties stipulated that if Rosario is unable to redeem the ring on due
date, she will execute a document in favor of Jennifer providing that the ring shall
automatically be considered full payment of the loan. Is the contract valid?

A: Yes the stipulation is valid. The Supreme Court has held that there is no pacto comisorio
if the pledgor still has to perform another act to transfer title to the pledgee. [Uy v. CA, 21
May 1988] Here the pledgor Rosario still has to perform another act, that is, to execute a
document in order to transfer title to the pledgee Jennifer. Hence the stipulation is valid.

12. Will your answer to be the same if the contract stipulates that upon failure of Rosario to
redeem the ring on due date, Jennifer may immediately sell the ring and appropriate the
entire proceeds thereof for herself as full payment of the loan?

A: No, my answer will not be the same. If that were the case, the automatic appropriation by
Jennifer of the ring in case of failure of Rosario to redeem the ring on due date will constitue
Pactum Commisorium, which has the ff requisites:

a. There is a contract of mortgage, pledge or antichresis over property as security for a debt
b. There is in the contract a stipulation providing for automatic appropriation of the property
in case of non-payment of the obligation on due date.

13. ABC loaned to MNO P40,000 for which the latter pledged 400 shares of stock in XYZ Inc. It
was agreed that if the pledgor failed to pay the loan with 10% yearly interest within four
years, the pledgee is authorized to foreclose on the shares of stock. As required, MNO
delivered possession of the shares to ABC with the understanding that the shares would be
returned to MNO upon the payment of the loan. However, the loan was not paid on time. A
month after 4 years, may the shares of stock pledged be deemed owned by ABC or not?

A: The shares of stock cannot be deemed owned by ABC upon default of MNO. They have to be
foreclosed. Under Article 2088 of the Civil Code, the creditor cannot appropriate the things given
by way of pledge. And even if the parties have stipulated that ABC becomes the owner of the
shares in case MNO defaults on the loan, such stipulation is void for being a pactum
commissorium.

14. To secure the payment of an earlier loan of P20,000 as well as subsequent loans which her
friend Noreen, would extend to her, Karen executed in favor of Noreen a chattel mortgage
over her (Karen) car. Is the mortgage valid?
A: A chattel mortgage cannot effectively secure after-incurred obligations. While a stipulation to
include after-incurred obligations in a chattel mortgage is itself not invalid, the obligation
cannot, however, be deemed automatically secured by that mortgage until after a new chattel
mortgage or an addendum to the original chattel mortgage is executed to cover the
obligation after it has been actually incurred. Accordingly, unless such supplements are made, the
chattel mortgage in the problem given would be deemed to secure only the loan of P20,000.

15. Armando, a resident of Manila, borrowed P3-million from Bernardo, offering as security his
500 shares of stock worth P1.5-million in Xerxes Corporation, and his 2007 BMW sedan,
valued at P2-million. The mortgage on the shares of stock was registered in the Office of the
Register of Deeds of Makati City where Xerxes Corporation has its principal office. The
mortgage on the car was registered in the Office of the Register of Deeds of Manila.
Armando executed a single Affidavit of Good Faith, covering both mortgages.

Armando defaulted on the payment of his obligation; thus, Bernardo foreclosed on the two
chattel mortgages. Armando filed suit to nullify the foreclosure and the mortgages, raising
the following issues:

a) The execution of only one Affidavit of Good Faith for both mortgages invalidated the two
mortgages

b) The mortgage on the shares of stocks should have been registered in the office of the
Register of Deeds of Manila where he resides, as well as in the stock and transfer book of
Xerxes Corporation.

A:
A. No, according to the case of Lilius v. Manila Railroad Company, 62 Phil. 56, the
execution of only one Affidavit of Good Faith for both mortgages is not a ground to
nullify the said mortgages and the foreclosure thereof. Said mortgages are valid as
between immediate parties although they cannot bind third parties as to the case of
Philippine Refining v. Jarque, 61 Phil. 229.

B. Yes, according to Section 4 of Act No. 1508, the mortgage on the shares of stock
should be registered in the chattel mortgage registry in the Register of Deeds of Makati
City where the corporation has its principal office and also in the Register of Deeds of
Manila where the mortgagor resides. Registration of chattel mortgage in the stock and
transfer book is not required to make the chattel mortgage valid. Registration of dealings
in the stock and transfer book under Section 63 of the Corporation Code applies only to
sale or disposition of shares, and has no application to mortgages and other forms of
encumbrances.

16. c) Assume that Bernardo extrajudicially foreclosed on the mortgages, and both the car and
the shares of stocks were sold at public auction. If the proceeds from such public sale should
 be 1-million short of Armando’s total obligation, can Bernardo recover the deficiency? Why
or why not?

A: Yes. Bernardo can recover the deficiency. Chattels are given as mere security, and not as
payment or pledge.

17. On January 1, 2008, Al obtained a loan of P10,000 from Bob to be paid on January 30, 2008,
secured by a chattel mortgage on a Toyota motor car. On February 1, 2008, Al obtained
another loan of P10,000 from Bob to be paid on February 15, 2008. He secured this by
executing a chattel mortgage on a Honda motorcycle. On the due date of the first loan Al
failed to pay. Bob foreclosed the chattel mortgage but the car was bidded for P6,000 only. Al
also failed to pay the second loan due on February 15, 2008. Bob filed an action for
collection of sum of money. Al filed a motion to dismiss claiming that Bob should first
foreclose the mortgage on The Honda motorcycle before he can file the action for sum of
money. Decide with reasons.

A: The motion to dismiss must be denied. Under the Chattel Mortgage Law, the mortgagee
has two remedies in case of default. He may file a collection suit or he may foreclose the
chattel mortgage with right to recover any deficiency. These remedies are alternative and
neither one is a condition sine qua non of the other. In the given case, Bob chose to file an
action for collection of sum of money. The law itself provides for this remedy to the
mortgagee and nothing in its language suggests that before such a remedy is availed of, there
must first be foreclosure. Hence, all premises considered, the motion to dismiss is without
merit because foreclosure is not necessary for an action for collection of sum of money.

18. Finding a 24-month payment plan attractive, Anjo purchased a Tamaraw FX from Toyota
QC. He paid a down-payment of P100th and obtained financing for the balance from IOU
Co. He executed a chattel mortgage over the vehicle in favor of IOU. When Anjo defaulted,
IOU foreclosed the chattel mortgage, and sought to recover the deficiency. May IOU still
recover the deficiency? Explain.

A: IOU may no longer recover the deficiency. Under Art 1484 of the NCC, in a contract of
sale of personal property the price of which is payable in installments, the vendor may,
among several options, foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendee’s failure to pay cover two or more installments.

In such case, however, the vendor shall have no further action against the purchaser to
recover any unpaid balance of the price and any agreement to the contrary is void. While the
given facts did not explicitly state that Anjo’s failure to pay covered 2 or more installments,
this may safely be presumed because the right of IOU Co to foreclose the chattel mortgage
under the circumstances is premised on Anjo’s failure to pay 2 or more installments. The
foreclosure would not have been valid if it were not so.
 (The given facts did not also state explicitly whether Anjo’s default was a payment default or
a default arising from a breach of a negative pledge or breach of a warranty. In such case,
however, IOU Company would not have been able to foreclose the chattel mortgage validly
as such foreclosure, under the circumstances contemplated by the law, could only be effected
for a payment default covering two or more installments.

REAL ESTATE MORTGAGE

19. X obtained a Php10Million loan from BBB Banking Corporation. The loan is secured by
Real Estate Mortgage on his vacation house in Tagaytay City. The original Deed of Real
Estate Mortgage for the Php10Million was duly registered. The Deed of Real Estate
Mortgage also provides that "The mortgagor also agrees that this mortgage will secure the
payment of additional loans or credit accommodations that may be granted by the
mortgagee ... " Subsequently, because he needed more funds, he obtained another
Php5Million loan. On due dates of both loans, X failed to pay the Php5Million but fully paid
the Php10Million. BBB Banking Corporation instituted extrajudicial foreclosure
proceedings.

(A) Will the extrajudicial foreclosure prosper considering that the additional Php5Million was
not covered by the registration?
(B) What is the meaning of a "dragnet clause" in a Deed of Real Estate Mortgage? Under
what circumstances will the "dragnet clause" be applicable?

A: Yes. X executed a real estate mortgage containing a “blanket mortgage clause.” Mortgages
given to secure future advancements are valid and legal contracts, and the amounts named as
consideration in said contracts do not limit the amount for which the mortgage may stand as
security if from the four corners of the instrument the intent to secure future and other
indebtedness can be gathered.

B. Generally, a dragnet clause is a clause in a deed of real estate mortgage stating that the
mortgage secures all the loans and advances that the mortgagor may at any time owe to the
mortgagee. The word “dragnet” is a reference to a net drawn through a river or across ground to
trap fish or game. It is also known in American jurisprudence as a “blanket mortgage clause” or
an “anaconda clause.”

A mortgage with a dragnet clause enables the parties to provide continuous dealings, the nature
or extent of which may not be known or anticipated at the time, and they avoid the expense and
inconvenience of executing a new security on each new transaction. It operates as a convenience
and accommodation to the borrower as it makes available additional funds to him without his
having to execute additional security documents, thereby saving time, travel, cost of extra legal
services, recording fees, etc.
The “dragnet clause” may not apply to other loans extended by the mortgagee to the mortgagor
for which other securities were given. In the case of Prudential Bank v. Alviar, the Supreme
Court adopted the “reliance on the security test” to the effect that “when the mortgagor takes
another loan [from the mortgage] for which another security was given, it could not be inferred
that such loan was made in reliance solely on the original security with the “dragnet clause,” but,
rather, on the new security given.” This means that the existence of the new security must be
respected and the foreclosure of the old security should only be for the other loans not separately
collateralized and for any amount not covered by the new security for the new loan.

20. A real estate mortgage may be foreclosed judicially or extrajudicially. In what instance may a
mortgagee extrajudicially foreclose a real estate mortgage?

A: A mortgagee may extrajudicially foreclose a real estate mortgage when the right
to forecloseextrajudicially has been expressly stipulated in the deed of mortgage or there is a
specialpower in the real estate mortgage authorizing it. (Section 1, Act 3135)

21. X obtained a loan for Php50Million from SSS Bank. The collateral is his vacation house in
Baguio City under a real estate mortgage. X needed more funds for his business so he again
borrowed another Php10Million, this time from BBB Bank, another bank, using the same
collateral. The loan secured from SSS Bank fell due and X defaulted.

(A) If SSS Bank forecloses the real estate mortgage, what rights, if any, are left with 888
Bank as mortgagee?
(B) If the value of the Baguio property is less than the amount of loan, what would be the
recourse of SSS Bank? BBB Bank?
(C) If the value of the property is more that the amount of the loan, who will benefit from the
excess value of the property?

A:
1. BBB bank, as a junior encumbrancer, can exercise the mortgagor’s right to equity of redemption and raise
his rights to that of a senior encumbrancer of the property.

BBB Bank, as junior mortgagee, would have a right to redeem the foreclosed property, together with X, his
successors in interest, any judicial or judgement creditor of X, or any other person or entity having a lien on the
vacation house subsequent to the real estate mortgage in favour of SSS Bank (i.e., other junior mortgagees, if any)

2. SSS bank may recover the deficiency from the mortgagor. The mortgage is merely a security and not a
payment of a debt. As such, the mortgagee has the right to maintain an action to recover the deficiency.
The BBB Bank may exercise the mortgagor’s right to equity of redemption in order to raise his status to a
senior encumbrancer.
In case of a deficiency, SSS bank could file suit to claim for the deficiency. BBB Bank could file an ordinary action to
collect its loan from X. if it does so, it would be deemed to have waived its mortgage lien. If the judgement in the
action to collect is favorable to BBB Bank, and it becomes final and executory , BBB Bank could enforce the said
judgement by execution. It could even levy execution on the same mortgaged property, but it would not have
priority over the latter.
 3. The excess value of the property will inure to the benefit of the junior encumbrancer who likewise has a
lien over the mortgaged property.

If the value of the property is more that the amount of the loan, the excess could benefit and be claimed by BBB
Bank, any judicial or judgement creditor of X, any other junior mortgagee, and X.

22. (D) If X defaulted with its loan in favor of BBB Bank but fully paid his loan with SSS Bank, can BBB Bank
foreclose the real mortgage executed in its favor?

(E) Does X have any legal remedy after the foreclosure in the event that later on he has the money to pay for
the loan?

(F) If SSS Bank and BBB Bank abandon their rights under the real estate mortgage, is there any legal recourse
available to them?

A:
d. Yes. BBB bank already foreclose the real estate mortgage provided that SSS Bank already released X from his
encumbrance over the property thereby raising the BBB Bank into a senior mortgagee.
e. Yes. He may exercise his equity of redemption or his right of redemption in case of an extrajudicial sale provided
that he will exercise said rights in accordance with the period provided by law.
f. Yes. SSS and BBB Bank may waive their lien over the mortgaged property and instead file a collection suit against
the mortgagor-obligor.

23. X & Co obtained a loan from a local bank in the amount of P500th, mortgaging as security therefore its real
property. Subsequently, the company applied with the same bank for a Letter of Credit (LC) for $200th in
favor of a foreign bank to cover the importation of machinery. To guarantee payment of the obligation under
the LC, the company and its President and Treasurer executed a surety agreement in the local bank’s favor.

The machinery arrived and was released to the company under a trust receipt agreement. As
the company defaulted in the payment of its obligations, the bank took possession of the
imported machinery. At the same time, it sought to foreclose the mortgaged property and to
hold the company as well as its President and Treasurer, liable under the Surety Agreement.

Did the taking of possession of the machinery by the bank result in the 1) full payment of the
obligations of the company and its officers, and 2) foreclosure of the mortgage?

A: The taking of possession of the machinery by the bank did not result in full payment of the obligations owing from
the company and its officers. The taking of such possession must be considered merely as a measure in order to protect
or further safeguard the bank’s security interest. Dacion en pago can only be considered as having taken place when a
creditor accepts and appropriates the ownership of goods in payment of a due obligation.

The mere taking of possession of mortgaged assets does not amount to foreclosure. Foreclosure requires a sale at
public auction. The foreclosure, therefore, has not yet been effected.