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

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

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OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests
rental deposits in the sum of P687,289.50 should be sufficient
penalty for respondent's breach.
Accordingly, respondent is ordered to pay petitioner the
additional amount of P687,289.50 as penalty, which may be
set off or applied against the former's advanced rental
deposits.
OTHER NOTES:
In legal contemplation, the termination of a contract is not
equivalent to its rescission. When an agreement is
terminated, it is deemed valid at inception. Prior to
termination, the contract binds the parties, who are thus
obliged to observe its provisions. However, when it is
rescinded, it is deemed inexistent, and the parties are
returned to their status quo ante. Hence, there is mutual
restitution of benefits received. The consequences of
termination may be anticipated and provided for by the
contract. As long as the terms of the contract are not contrary
to law, morals, good customs, public order or public policy,
they shall be respected by courts. The judiciary is not
authorized to make or modify contracts; neither may it rescue
parties from disadvantageous stipulations. Courts, however,
are empowered to reduce iniquitous or unconscionable
liquidated damages, indemnities and penalties agreed upon
by the parties.
DIFFERENCE BETWEEN RESCISSION & TERMINATION
RESCISSION (OR RESOLUTION)
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in
either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be
just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third
persons who have acquired the thing, in accordance with
Articles 1385 and 1388 and the Mortgage Law. (1124)
Art. 1659. If the lessor or the lessee should not comply with
the obligations set forth in Articles 1654 and 1657, the
aggrieved party may ask for the rescission of the contract and
indemnification for damages, or only the latter, allowing the
contract to remain in force. (1556)
To rescind is to declare a contract void in its inception and to
put an end to it as though it never were. It is not merely to
terminate it and release parties from further obligations to
each other but to abrogate it from the beginning and restore
the parties to relative positions which they would have
occupied had no contract ever been made.
Rescission has likewise been defined as the "unmaking of a
contract, or its undoing from the beginning, and not merely its
termination." Rescission may be effected by both parties by
mutual agreement; or unilaterally by one of them declaring a
rescission of contract without the consent of the other, if a
legally sufficient ground exists or if a decree of rescission is
applied for before the courts
TERMINATION (OR CANCELLATION)
The termination or cancellation of a contract would
necessarily entail enforcement of its terms prior to the
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declaration of its cancellation in the same way that before a
lessee is ejected under a lease contract, he has to fulfill his
obligations thereunder that had accrued prior to his
ejectment. However, termination of a contract need not
undergo judicial intervention.
"end in time or existence; a close, cessation or conclusion."
With respect to a lease or contract, it means an ending,
usually before the end of the anticipated term of such lease or
contract, that may be effected by mutual agreement or by
one party exercising one of its remedies as a consequence of
the default of the other
RCBC VS CA
-By Khely Peroy
GOYU applied for credit facilities & accommodations with
RCBC, which was subsequently granted in the amount of
P117 million. And as security, GOYU executed 2 real estate
mortgages & 2 chattel mortgages in favor of RCBC. Under
each of these 4 mortgage contracts, GOYU committed itself to
insure the mortgaged property with an insurance company, &
subsequently to endorse & deliver the insurance policies to
RCBC.
One of GOYUs factory buildings was gutted by fire, which
subsequently led to GOYU submitting a claim for indemnity on
account of the loss insured against MICO. MICO denied the
claim on the ground that the insurance policies were either
attached pursuant to writs of attachments/garnishments
issued or that the insurance proceeds were also claimed by
other creditors of GOYU.
RCBC also filed with MICO its formal claim over the proceeds
of the insurance policies, but said claims were denied for
similar reasons.
RTC rendered judgment in favor of GOYU, ordering MICO to
pay its fire loss claims.
CA sustained findings of the RTC with regards to liabilities of
MICO & RCBC, and ordered GOYU to pay its loan obligation to
RCBC in the amount of P68,785,069.04 without any interest,
surcharges and penalties.
RCBC & MICO now sought the review & reversal of the CA
decision.
RULING: Court is constrained to rule in favor of RCBC, who, in
good faith, relied upon the endorsement documents sent to it
as this was pursuant to the stipulation in the mortgage
contracts.
The 8 policies cannot be attached by GOYUs other creditors
up to the extent of GOYUs outstanding obligations to RCBC.
GOYUs interest in the policies had been transferred to RCBC
effective as of the time of the endorsement.
Regarding the payment of additional interest, penalties, and
charges, the Court ruled that the essence for the payment of
interest is separate & distinct from that of surcharges &
penalties. What may justify a court in not allowing the creditor
to charge surcharges & penalties despite express stipulation
may not equally justify non-payment of interest. The charging
of interest for loans forms a very essential & fundamental
element of the banking business. It is inconceivable for a bank
to grant loans for which it will not charge any interest at all.
The following rules of thumb shall apply regarding the
computation of the interest due:
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OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests
1. when an obligation, regardless of its source, is breached,
the contravenor can be held liable for damages. The
provisions under Title XVIII (18) Damages of the CC govern
such.
2. With regard particularly to an award of interest in the
concept of actual & compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed as follows:
When the obligation is breached, & it consists in the
payment of a sum of money, interest due should be
that which may have been stipulated in writing. The
interest due shall itself earn legal interest from the
tie it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per
annum to be computed from default.
When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per
annum. No interest shall be adjudged on unliquidated
claims or damages except when or until the demand
can be established with reasonable certainty.Where
the demand is established with reasonable certainty,
the interest shall begin to run from the time the
claim is made judicially or extrajudicially, but when
such certainty cannot be reasonably established at
the time demand is made, interest shall begin to run
only from the date of the judgment of the court is
made. The actual base for the computation of legal
intrest shall, in any case, be on the amount finally
adjudged.
When the judgment of the court awarding a sum of
money becomes final & executry, the rate of legal
interest shall be 12& per annum from such finality
until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance
of credit.
There being written stipulations as to the rate of interest
owing on each specific promissory note, such agreed interest
rates must be followed.
Surcharges & penalties agreed to be paid by the debtor shall
be determined by the Court whether such would be iniquitous
& unconscionable. Given the circumstances under which
GOYU found itself after the occurrence of the fire, the Court
rules the surcharge rate ranging from 9%-27% plus penalty of
36% to be iniquitous & unconscionable. In light of GOYUs
offer to pay the amount to RCBC, which RCBC refused, the
Court finds it more in keeping with justice & equity for RCBC
not to charge additional interest, surcharges & penalties.
AGNER vs BPI SAVINGS
-By Bea Reyes
FACTS: On February 15, 2001, petitioners spouses Deo Agner
and Maricon Agner executed a Promissory Note with Chattel
Mortgage in favor of Citimotors, Inc. The contract provides,
among others, that: for receiving the amount of Php834,
768.00, petitioners shall pay Php 17,391.00 every 15th day of
each succeeding month until fully paid; the loan is secured by
a 2001 Mitsubishi Adventure Super Sport; and an interest of
6% per month shall be imposed for failure to pay each
installment on or before the stated due date.
On the same day, Citimotors, Inc. assigned all its rights, title
and interests in the Promissory Note with Chattel Mortgage to
ABN AMRO Savings Bank, Inc. (ABN AMRO), which, on May 31,
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2002, likewise assigned the same to respondent BPI Family
Savings Bank, Inc.
For failure to pay four successive installments from May 15,
2002 to August 15, 2002, respondent, through counsel, sent
to petitioners a demand letter dated August 29, 2002,
declaring the entire obligation as due and demandable and
requiring to pay Php576,664.04, or surrender the mortgaged
vehicle immediately upon receiving the letter. As the demand
was left unheeded, respondent filed on October 4, 2002 an
action for Replevin and Damages before the Manila Regional
Trial Court (RTC).
A writ of replevin was issued. Despite this, the subject vehicle
was not seized. On August 11, 2005, the RTC ruled for the
respondent and ordered petitioners to jointly and severally
pay the amount of Php576,664.04 plus interest at the rate of
72% per annum from August 20, 2002 until fully paid, and the
costs of suit.
Petitioners appealed the decision to the Court of Appeals (CA),
but the CA affirmed the lower courts decision.
ISSUE: (1) Whether or not petitioners cannot be considered to
have defaulted in payment for lack of competent proof that
they received the demand letter
(2) Whether or not respondents remedy of resorting to both
actions of replevin and collection of sum of money is proper
HELD: The contentions are untenable.
Records bear that both verbal and written demands were in
fact made by respondent prior to the institution of the case
against petitioners. Even assuming, for arguments sake, that
no demand letter was sent by respondent, there is really no
need for it because petitioners legally waived the
necessity of notice or demand in the Promissory Note
with Chattel Mortgage, which they voluntarily and
knowingly signed in favor of respondents
predecessor-in-interest. Said contract expressly
stipulates:
In case of my/our failure to pay when due and payable,
any sum which I/We are obliged to pay under this note and/or
any other obligation which I/We or any of us may now or in
the future owe to the holder of this note or to any other party
whether as principal or guarantor x x x then the entire sum
outstanding under this note shall, without prior notice
or demand, immediately become due and payable.
(Emphasis and underscoring supplied)
A provision on waiver of notice or demand has been
recognized as legal and valid in Bank of the Philippine Islands
v. Court of Appeals, wherein We held:
The Civil Code in Article 1169 provides that one incurs in
delay or is in default from the time the obligor demands the
fulfillment of the obligation from the obligee. However, the
law expressly provides that demand is not necessary under
certain circumstances, and one of these circumstances is
when the parties expressly waive demand. Hence, since the
co-signors expressly waived demand in the promissory notes,
demand was unnecessary for them to be in default.
Further, the Court even ruled in Navarro v. Escobido that prior
demand is not a condition precedent to an action for a writ of
replevin, since there is nothing in Section 2, Rule 60 of the
Rules of Court that requires the applicant to make a demand
on the possessor of the property before an action for a writ of
replevin could be filed.
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OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests
Also, petitioners representation that they have not received a
demand letter is completely inconsequential as the mere act
of sending it would suffice. Again, We look into the Promissory
Note with Chattel Mortgage, which provides:
All correspondence relative to this mortgage, including
demand letters, summonses, subpoenas, or notifications of
any judicial or extrajudicial action shall be sent to the
MORTGAGOR at the address indicated on this promissory note
with chattel mortgage or at the address that may hereafter be
given in writing by the MORTGAGOR to the MORTGAGEE or
his/its assignee. The mere act of sending any correspondence
by mail or by personal delivery to the said address shall be
valid and effective notice to the mortgagor for all legal
purposes and the fact that any communication is not actually
received by the MORTGAGOR or that it has been returned
unclaimed to the MORTGAGEE or that no person was found at
the address given, or that the address is fictitious or cannot
be located shall not excuse or relieve the MORTGAGOR from
the effects of such notice. (Emphasis and underscoring
supplied)
The Court cannot yield to petitioners denial in receiving
respondents demand letter. To note, their postal address
evidently remained unchanged from the time they executed
the Promissory Note with Chattel Mortgage up to time the
case was filed against them. Thus, the presumption that "a
letter duly directed and mailed was received in the regular
course of the mail" stands in the absence of satisfactory proof
to the contrary.
Jurisprudence abounds that, in civil cases, one who pleads
payment has the burden of proving it; the burden rests on the
defendant to prove payment, rather than on the plaintiff to
prove non-payment.20 When the creditor is in possession of
the document of credit, proof of non-payment is not needed
for it is presumed.21 Respondent's possession of the
Promissory Note with Chattel Mortgage strongly buttresses its
claim that the obligation has not been extinguished. As held in
Bank of the Philippine Islands v. Spouses Royeca:22
x x x The creditor's possession of the evidence of debt is proof
that the debt has not been discharged by payment. A
promissory note in 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 evidence that the
promissory note has not been paid. Likewise, an uncanceled
mortgage in the possession of the mortgagee gives rise to the
presumption that the mortgage debt is unpaid.23
Indeed, when the existence of a debt is fully established by
the evidence contained in the record, the burden of proving
that it has been extinguished by payment devolves upon the
debtor who offers such defense to the claim of the creditor.24
The debtor has the burden of showing with legal certainty that
the obligation has been discharged by payment.
Moreover, the vehicle subject matter of this case was never
recovered and delivered to respondent despite the issuance of
a writ of replevin. 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 actual foreclosure. The
trial court, therefore, rightfully granted the alternative prayer
for sum of money, which is equivalent to the remedy of
"exacting fulfillment of the obligation." Certainly, there is no
double recovery or unjust enrichment30 to speak of.
All the foregoing notwithstanding, We are of the opinion that
the interest of 6% per month should be equitably reduced to
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one percent (1%) per month or twelve percent (12%) per
annum, to be reckoned from May 16, 2002 until full payment
and with the remaining outstanding balance of their car loan
as of May 15, 2002 as the base amount.
Settled is the principle which this Court has affirmed in a
number of cases that stipulated interest rates of three percent
(3%) per month and higher are excessive, iniquitous,
unconscionable, and exorbitant. While Central Bank Circular
No. 905-82, which took effect on January 1, 1983, effectively
removed the ceiling on interest rates for both secured and
unsecured loans, regardless of maturity, nothing in the said
circular could possibly be read as granting carte blanche
authority to lenders to raise interest rates to levels which
would either enslave their borrowers or lead to a
hemorrhaging of their assets. Since the stipulation on the
interest rate is void for being contrary to morals, if not against
the law, it is as if there was no express contract on said
interest rate; thus, the interest rate may be reduced as reason
and equity demand.
MULTI-INTERNATIONAL BUSINESS DATA SYSTEM, INC.,
Petitioner, v. RUEL MARTINEZ, Respondent.
-by Jessalyn Puerin
The Facts
Respondent Ruel Martinez (respondent) was the Operations
Manager of petitioner.Respondent applied for and was
granted a car loan amounting to P648,288.00. Both parties
agreed that the loan was payable through deductions from
respondent's bonuses or commissions, if any. Further, if
respondent would be terminated for any cause before the end
of the term of the loan obligation, the unpaid balance would
be immediately due and demandable without need of
demand.
In a letter dated January 22, 1999, petitioner terminated
respondent for cause effective immediately and demanded
that respondent pay his outstanding loan of P418,012.78 and
surrender the car to petitioner within three days from receipt.
Despite this, respondent failed to pay the outstanding
balance.
On July 12, 1999, petitioner filed a complaint with the
Regional Trial Court of Makati City, praying that respondent be
ordered to pay his outstanding obligation of P418,012.78 plus
interest, and that respondent be held liable for exemplary
damages, attorney's fees and costs of the suit.
Respondent alleged that he already paid his loan through
deductions made from his compensation/salaries, bonuses
and commissions. During trial, respondent presented a
certification dated September 10, 1996 issued by petitioner's
president, Helen Dy (Dy), stating that respondent already paid
the amount of P337,650.00 as of the said date.
The Issues
Whether the certification dated September 10, 1996 should
be admitted as basis for respondent's payment of his loan
with petitioner?
Whether respondent has fulfilled his obligation with
petitioner?
SC Ruling
The petition is partly meritorious.
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Midterm Case Digests
Admissibility of the
certification dated
September 10, 1996
The documents containing the signature of Dy which have
been submitted by petitioner as authentic are the following:
(1) letter dated November 11, 1998;47 (2) termination letter
dated January 22, 1999;48 (3) promissory note dated June 17,
1994;49 and (4) chattel mortgage signed on June 27, 1994.50
Examining and analyzing the signatures in these documents
with Dy's signature in the certification, we find no substantial
reason to doubt the latter's authenticity.
Dy never testified that any forgery or fraud attended the
certification. In fact, she did not deny the authenticity of her
signature but actually admitted that the signature therein
looks like hers. Additionally, Valle, who is familiar with the
signature of Dy because of the requirements of her job, also
positively testified that the signature in the certification looks
like that of Dy's.
For having established the due execution and authentication
of the certification dated September 10, 1996, the
certification should be admitted in evidence to prove that
respondent partially paid the car loan in the amount
ofP337,650.00.
Insufficient evidence to prove
full payment of loan
It must be emphasized that both parties have not presented
any written agreement or contract governing respondent's
obligation. Nevertheless, it has been established that
respondent obtained a car loan amounting to P648,288.00
from petitioner. Thus, the burden is now on respondent to
prove that the obligation has already been extinguished by
payment.
Although not exclusive, a receipt of payment is the best
evidence of the fact of payment. We held that the fact of
payment may be established not only by documentary
evidence but also by parol evidence.
Except for respondent's bare allegations that he has fully paid
the P648,288.00 car loan, there is nothing in the records
which shows that full payment has indeed been made.
Respondent did not present any receipt other than the
certification dated September 10, 1996 which only proves that
respondent has already paid P337,650.00 of the car loan. A
balance of P310,638.00 still remained.
Respondent also alleged that although deductions were made
from his salaries, bonuses and commissions, his payslips do
not reflect such deductions because "there is no such car loan
field" in the accounting program for the payroll. Respondent
admitted in his testimony that he only presumed that the
deductions were being made from his salaries, bonuses and
commissionS.
Thus, having only proven payment to the extent of
P337,650.00, respondent is obligated to pay petitioner the
balance of P310,638.00 with interest.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The
Court of Appeals' Decision dated October 18, 2006 in CA G.R.
CV 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 plus interest at the rate of six percent (6%) per
annum computed from January 23, 199971 until the date of
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finality of this judgment. The total amount shall thereafter
earn interest at the rate of six percent (6%) per annum72 until
fully paid. The trial court's Decision dated November 22, 2002
is AFFIRMED in all other respects.
EFFECT OF DEATH
STRONGHOLD INSURANCE CO. VS REPUBLIC-ASAHI
-by Joe Van De Gala
FACTS:
In May 1989, Rep-Asahi (respondent) entered a contract with
Jose D. Santos, the sole proprietor of JDS Construction, for a
construction of drainage and roadway system to be completed
within 240 days. To guaranty the performance of the contract,
JDS put a performance bond of Php795,000 with Stronghold
Insurance (SICI) (petitioner) which them joint severally liable.
Several times prior to November of 1989, the engineers of
Rep-Asahi called the attention of JDS for the slow progress of
the construction. They feared that the project will not be
finished within the time stipulated in the contract. However,
these reminders went unheeded. On November 24 1989,
dissatisfied with the progress of work, Rep-Asahi
extrajudicially rescinded the contract and send a notice to JDS
informing such recission. Such recissionper their contract shall
not be construed as a waiver of Rep-Asahis rights to claim
damages to JDS and the latters sureties. Due to the recission,
Rep-Asahi hired another contractor to finish the project which
they incurred additional expenses.
During the proceeding, Jose D. Santos died and the
whereabouts of JDS was unknown. SICI contended that
money claims against them 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 proper
liquidation as to the ascertainment of the liabilities.
Liquidation in that case is impossible due to the death of Mr.
Santos.
ISSUE:
Whether the liability of SICI under the performance bond
extinguished by the death of Mr. Santos.
HELD:
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. Transmission of the obligation is not
permitted if it is prevented by law, by the stipulation of the
contract, or by the nature of the obligation. Monetary
obligations, such as in this case, is transferrable. Hence, the
death of Mr. Santos does not extinguish the obligation.
With regards to the liability of SICI, as a surety, is solidarily
liable with Santos. The suretys obligation, even though
merely an accessory or collateral to the obligation of the
principal, its liability to the creditor is direct, primary, and
absolute. As provided in Art. 1216 of the Civil Code, a creditor
may go against any, some, or all the solidary debtors
simultaneously. The demand made against one of the debtors
shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been
fully collected. If a person binds himself solidarily with the
principal debtor, the contract is called as Suretyship.
TO WHOM PAYMENT SHALL BE MADE
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Midterm Case Digests
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF
APPEALS and LORETO TAN,respondents.
-by Kyneth Agunod
Facts:Private respondent Loreto Tan (Tan) is the owner of a
parcel of land abutting the national highway in Mandalagan,
Bacolod City. Expropriation proceedings were instituted by the
government against private respondent Tan and other
property owners.
Tan filed a motion dated requesting issuance of an order for
the release to him of the expropriation price of P32,480.00.
And On May 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 the government.
On May 24, 1978, petitioner, through its Assistant Branch
Manager Juan Tagamolila, issued a managers check for
P32,480.00 and delivered the same to one Sonia Gonzaga
without Tans knowledge, consent or authority. Sonia Gonzaga
deposited it in her account with Far East Bank and Trust Co.
(FEBTC) and later on withdrew the said amount.
When he failed to recover the amount from PNB, private
respondent filed a motion with the court to require PNB to pay
the same to him.
Arguments of Petitioner: PNB contends that the existence
of the SPA need not be proved by it under the best evidence
rule because it already proved the existence of the SPA from
the testimonies of its witnesses and by the certification issued
by the Far East Bank andTrust Company that it allowed Sonia
Gonzaga to encash Tans check on the basis of the SPA.
Issue: Whether there is payment to a person in whose favor
the obligation has been constituted, or his successor-in-
interest, or any person authorized to receive it. (Article 1240)
Held:There is no question that no payment had ever been
made to private respondent as the check was never delivered
to him. When the court ordered petitioner to pay private
respondent the amount of 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 been paid unless the
thing or service in which the obligation consists has been
completely delivered or rendered, as the case may be.
The burden of proof of such payment lies with the debtor. In
the instant case, neither the SPA nor the check issued by
petitioner was ever presented in court.
The testimonies of petitioners own witnesses regarding the
check were conflicting. Tagamolila testified that the check was
issued to the order of Sonia Gonzaga as attorney-in-fact of
Loreto Tan,4while Elvira Tibon, assistant cashier of PNB
(Bacolod Branch), stated that the check was issued to the
order of Loreto Tan.
Furthermore, contrary to petitioners contention that all that is
needed 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 alleged powers and authority granted to
Sonia Gonzaga; more specifically, to determine whether the
document indeed authorized her to receive payment intended
for private respondent. However, no such evidence was ever
presented.
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Section 2, Rule 130 of the Rules of Court states that:(a) When
the original has been lost, destroyed, or cannot be produced
in court;Section 4, Rule 130 of the Rules of Court allows the
presentation of secondary evidence when the original is lost
or destroyed, thus:
SEC. 4. Secondary evidence when original is lost or
destroyed. - When the original writing has been lost or
destroyed, or cannot be produced in court, upon proof of its
execution and loss or destruction, or unavailability,
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.
Considering that the contents of the SPA are also in issue
here, the best evidence rule applies. Hence, only the original
document (which has not been presented at all) is the best
evidence of the fact as to whether or not private respondent
indeed authorized Sonia Gonzaga to receive the check from
petitioner. In the absence of such document, petitioners
arguments regarding due payment must fail.
Best evidence rule: when the subject of inquiry is the
contents of a document, no evidence shall be
admissible other than the original document itself.
CULABA VS SAN MIG. CORP.
-by Dokie Francris Talon
TO WHOM PAYMENT SHALL BE MADE
(A story of happy ever after)
Petitioner are owners of a store engaged in sale and
distribution of SMC products. SMC sold the spouses beer
products amounting to 28,650. Petitioner only made a partial
payment of 3,740. Then they defaulted on the remaining
balance despite repeated demands.
SMC: We will file for a collection of a sum of money before the
RTC.
Culaba: Hey! We already paid the remaining balance. Look at
these four temporary charge slips (TCS)
SMC: But we never received your payment.
Culaba:Its impossible. An SMC supervisor (seemed to forget
his name) who came in an SMC van came here and collected
the payments.
SMC: Wait a minute. The TCS you just showed are among
those that were reportedly lost as seen in our notice of loss
last July 9, 1983.You should pay us!
The RTC ruled in favor of SMC.
RTC: You know Culaba, it is unusual for you to forget the
name of the collector and did not even require the collector to
print his name on the receipt.
Culaba: *stares*
RTC: And look at your TCs, it did not appear to have been
issued in their natural sequence
Culaba: *looks at the TCS and was shocked*
Culaba made an appeal to the CA but the decision of the RTC
was affirmed. Then he went to the Supreme Court.
Culaba: Hey SC! I paid all my dues. An SMC van came here
and collected the payments. When I received the receipt, it
was the similar to what I used to receive from SMC. And the
agents look like a real SMC agent that is why I never doubted
him.
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Atty. Lydia C. Galas
Midterm Case Digests
SC: *looks down at Culaba in a blank face*
Culaba: The payment I made is in good faith!
SMC: But remember SC, the burden of proving payment is
with the debtor and he would not just pay to someone whom
he saw for the first time without even asking his name. Thats
incredible!
Culaba: Shut up SMC! I have paid my dues already!
SMC: No! You shut up! Pay me! Pay me!
Culaba: No!!!
SC became irritated of the rantings of the two. Then in an
instant, he made his decision
SC: Enough! Enough you both!
SMC and Culaba: *freezes in silence*
SC: Payment is a mode of extinguishing an obligation.
Article 1240 of the Civil Code provides that payment shall be
made to the person in whose favor the obligation has been
constituted, or his successor-in-interest, or any person
authorized to receive it.In this case, the payments were
purportedly made to a supervisor of the private respondent,
who was clad in an SMC uniform and drove an SMC van. He
appeared to be authorized to accept payments as he showed
a list of customers accountabilities and even issued SMC
liquidation receipts which looked genuine. Unfortunately for
petitioner Francisco Culaba, he did not ascertain the identity
and authority of the said supervisor, nor did he ask to be
shown any identification to prove that the latter was, indeed,
an SMC supervisor. The petitioners relied solely on the mans
representation that he was collecting payments for SMC. Thus,
the payments the petitioners claimed they made were not the
payments that discharged their obligation to the private
respondent.
Culaba: No! That cant be!
SMC: Just accept it! Payment is mine! Hahaha (Evil laugh)
And they lived happily evil after.
The end.
Allied Banking Corp. V. Lim Sio Wan
-by JV Milana
FACTS:
I The Court of Appeals modified RTC's decision that Allied
On September 21, 1983, FCC had deposited a money
market placement for P2,000,000.00 with Producers Bank.
Santos was the money market trader assigned to handle
FCCs account. Such deposit is evidenced by Official Receipt
and a Letter. When the placement matured, FCC demanded
the payment of the proceeds of the placement.
II
On November 14, 1983, Lim Sio Wan deposited with
Allied Banking Corporation a money market placement of P
1,152,597.35 for a term of 31 days. December 5, 1983, a
person claiming to be Lim Sio Wan called up Cristina So, an
officer of Allied, and instructed the latter to pre-terminate Lim
Sio Wans money market placement, to issue a managers
check representing the proceeds of the placement, and to
give the check to Deborah Dee Santos who would pick up the
check. The person claiming to be Lim Sio Wan, described the
appearance of Santos so that she could easily identify her.
Santos arrived at the bank and signed the application form for
a managers check to be issued. The bank issued Managers
Check representing the proceeds of Lim Sio Wans money
market placement in the name of Lim Sio Wan, as payee,
cross-checked "For Payees Account Only" and given to
Santos. Allied managers check was deposited in the account
of Filipinas Cement Corporation (FCC) at Metropolitan Bank
and Trust Co. (Metrobank), with the forged signature of Lim
Sio Wan as endorser. Metrobank stamped a guaranty on the
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check, which reads: "All prior endorsements and/or lack of
endorsement guaranteed."
III
Upon the presentment of the check, Allied funded the
check even without checking the authenticity of Lim Sio Wans
purported endorsement. On December 9, 1983, Lim Sio Wan
deposited with Allied a second money market placement to
mature on January 9, 1984. On December 14, 1983, upon the
maturity date of the first money market placement, Lim Sio
Wan went to Allied to withdraw it. She was then informed that
the placement had been pre-terminated upon her instructions
in which she denied the allegation. Lim Sio Wan filed with the
Regional Trial Court against Allied to recover the proceeds of
her first money market placement. Allied filed a third party
complaint against Metrobank and Santos. Metrobank filed a
fourth party complain against FCC. FCC for its part filed a fifth
party complaint against Producers Bank. Summonses were
duly served upon all the parties except for Santos, who was
no longer connected with Producers Bank
IV
On May 15, 1984, Allied informed
Metrobank that the signature on the check was
forged. Metrobank withheld the amount represented
by the check from FCC. Metrobank agreed to release
the amount to FCC after the FCC executed an
undertaking, promising to indemnify Metrobank in
case it was made to reimburse the amount. Lim Sio
Wan thereafter filed an amended complaint to
include Metrobank as a party-defendant, along with
Allied.
The Regional Trial Court ruled that:
1.) Allied Bank should pay Lim Sio Wan plus damages and
Atty. Fees.
2.) Allied Banks cross-claim against Metrobank is DISMISSED.
3.) Metrobanks third-party complaint as against Filipinas
Cement Corporation is DISMISSED
4.) Filipinas Cement Corporations fourth-party complaint
against Producers Bank is DISMISSED
Banking Corporation should pay 60% and Metropolitan Bank
and Trust Company 40%
ISSUE: W/N Allied should be solely liable to Lim Sio Wan.
HELD: The Supreme Court affirmed CA's decision with
modifications that Producers Bank should reimburse Allied and
Metrobank.
A money market is a market dealing in
standardized short-term credit instruments (involving large
amounts) where lenders and borrowers do not deal directly
with each other but through a middle man or dealer in open
market. In a money market transaction, the investor is a
lender who loans his money to a borrower through a
middleman or dealer.
Article 1240 of the New Civil Code provides that:
Payment shall be made to the person
in whose favor the obligation has
been constituted, or his successor in
interest, or any person authorized
to receive it.
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Atty. Lydia C. Galas
Midterm Case Digests
Lim Sio Wan, as creditor of the bank for her money
market placement, is entitled to payment upon her request, or
upon maturity of the placement, or until the bank is released
from its obligation as debtor. Allied, being negligent in issuing
the managers check and in 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 confirm her
instructions. Allieds negligence must be considered as 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 easier release of Lim Sio
Wans money and perpetuation of the fraud. Given the
relative participation of Allied and Metrobank to the instant
case, both banks cannot be adjudged as equally liable.
Hence, the 60:40 ratio of the liabilities of Allied and Metrobank
respectively, as ruled by the CA, must be upheld. FCC, having
no participation in the negotiation of the check and in the
forgery of Lim Sio Wans endorsement, can raise the real
defense of forgery as against both banks. Producers Bank was
unjustly enriched at the expense of Lim Sio Wan. Producers
Bank should reimburse Allied and Metrobank for the amounts
ordered to pay Lim Sio Wan
ART.1242
NAPOCOR vs IBRAHIM
-by Franklin Flores
GIST OF THE CASE:
Bad Faith-A finding of bad faith usually assumes the
presence of two
(2) elements:
1.) that the actor knew or should have known that a
particular course of action is wrong or illegal.
2.) that despite such actual or imputable knowledge,
the actor, voluntarily, consciously and out of his own
free will, proceeds with such course of action.
Verily, the clear denominator in all of the foregoing judicial
pronouncements is that the essence of bad faith consists
in the deliberate commission of a wrong.
Indeed, the concept has often been equated with malicious or
fraudulent motives, yet distinguished from the mere
unintentional wrongs resulting from mere simple negligence
or oversight.
*Only with the concurrence of these two elements can
we begin to consider that the wrong committed had
been done deliberately and, thus, in bad faith.
POSSESSOR OF CREDIT
- The law considers the payment to the possessor of credit
as valid even as against the real creditor taking into
account the good faith of the debtor.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 Case No. 610-92
given the absence of bad faith on petitioners part as
previously discussed may nonetheless be considered
as akin to a payment made in good faith to a person
in possession of credit per Article 1242 of the Civil
Code that, just the same, extinguishes its obligation to pay
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for the rental fees and expropriation indemnity due for the
Article1242oftheCivilCode
subject land. Article 1242 of the Civil Code reads:
isanexceptiontotherulethata
Payment made in good faith to any person in possession of
the credit shall release the debtor.
valid payment of an obligation
canonlybemadetothepersonto
*It contemplates a situation where a debtor pays a:
possessor of credit i.e.,- someone who is not the
real whomsuchobligationisrightfully
creditor but appears, under the circumstances, to be the
real owed.
creditor.
In such scenario, the law considers the payment to the
possessor of credit - valid even as against the real
creditor taking into account the good faith of the debtor.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
CASE BACKGROUND:
-The subject property was under the name of Magondato
-1978, a portion was possessed by NAPOCOR for the Agus 1
plant
-1979, Mangondato discovered such occupation and began
demanding compensation for the subject land from petitioner.
-Magondato sent a letter detailing the origin of the land.
-NPC first rejected the claim of ownership but later acquiesced
and acknowledged Magondatos right.
-they tried to settle the amount for compensation but failed
then a civil case ensued.
-RTC; decision upheld petitioners right to expropriate the
subject land: it denied Mangondatos claim for reconveyance
and decreed the subject land condemned in favor of the
petitioner, effective July of 1992, subject to payment by the
latter of just compensation in the amount of
P21,995,000.00. Anent petitioners occupation of the subject
land from 1978 to July of 1992, on the other hand, the
decision required the former to pay rentals therefor at the rate
of P15,000.00 per month with 12% interest per annum. (final
and executory)
-During the pendency of the case:
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 Maruhom, who was the original
proprietor of the said lands. They also claimed that
Mangondato actually holds no claim or right over the lands
except that of a trustee who merely holds the said lands in
trust for them.
-in the same complaint aside from specific action, TRO was
granted and a writ of preliminary injunction.
-NPC appealed but denied.
-Magondato, in view of the finality of this Courts decision, he
filed a motion for execution of the decision in Civil Case No.
605-92 and Civil Case No. 610-92.24 Against this motion,
however, petitioner filed an opposition.
-RTC found no merit in NPCs opposition
-The court held that Ibrahims and Maruhoms are the real
owners, but could no longer be reconveyed back to them, thus
they are the 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 and Mangondato solidarily
liable to them.
-NPC contested the matter to CA, but denied.
SUPREME COURT
Issue:
Whether it is correct, in view of the facts and circumstances in
this case, to hold petitioner liable in favor of the Ibrahims and
Maruhoms for the rental fees and expropriation indemnity
adjudged due for the subject land.
-according to the lower courts, there was bad faith on the
following basis:
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Midterm Case Digests
1. Petitioner allowed payment to Mangondato despite its
prior knowledge, which dates back as early as 28 September
1981, by virtue of Mangondatos letter of even date, that the
subject land was owned by a certain Datu Magayo-ong
Maruhom and not by Mangondato; and
2. Petitioner allowed such payment despite the issuance
of a TRO and a writ of preliminary injunction in Civil Case No.
967-93 that precisely enjoins it from doing so.
RULING:
-There was no bad faith.
-Case law provides: BAD FAITH is
*a breach of a known duty through some motive of interest or
ill will.
*a state of mind affirmatively operating with furtive design or
with some motive of self-interest or will or for ulterior purpose.
*bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral
obliquity and conscious doing of wrong. It means breach of a
known duty thru some motive or interest of ill will; it partakes
of the nature of fraud.
*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
pronouncements is that the essence of bad faith consists in
the deliberate commission of a wrong. Indeed, the
concept has often been equated with malicious or
fraudulent motives, yet distinguished from the mere
unintentional wrongs resulting from mere simple negligence
or oversight.
Bad Faith-A finding of bad faith usually assumes the
presence of two
(2) elements:
1. that the actor knew or should have known that a
particular course of action is wrong or illegal.
2. that despite such actual or imputable knowledge,
the actor, voluntarily, consciously and out of his own
free will, proceeds with such course of action.
-In the case at bar, petitioners payment to Mangondato
of the 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 petitioner but was made only in compliance to the lawful
orders of a court with jurisdiction.
- no bad faith can be taken against it, even assuming that
petitioner may have had prior knowledge about the claims of
the Ibrahims and Maruhoms upon the subject land and the
TRO issued.
- Without Bad Faith, Petitioner cannot be held Liable to the
Ibrahims and Maruhoms.
- regardless of who between Mangondato, on one
hand, and the Ibrahims and Maruhoms, on the other,
turns out to be the real owner of the subject land.Either
way, petitioner cannot be made liable to the Ibrahims and
Maruhoms.
1.) If Mangondato is the real owner of the subject
land, then the obligation by petitioner to pay for the rental
fees and expropriation indemnity due the subject land is
already deemed extinguished by the latters previous
payment under the final judgment in Civil Case No. 605-92
and Civil Case No. 610-92. This would be a simple case of an
obligation being extinguished through payment by the debtor
to its creditor. Under this scenario, the Ibrahims and
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Maruhoms would not even be entitled to receive anything
from anyone for the
subject land. Hence, petitioner cannot be held liable to the
Ibrahims and Maruhoms.
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 Case No. 610-92 given
the absence of bad faith on petitioners part as
previously discussed may nonetheless be
considered as akin to a payment made in good
faith to a person in possession of credit per
Article 1242 of the Civil Code that, just the same,
extinguishes its obligation to pay for the rental fees
and expropriation indemnity due for the subject land.
Article 1242 of the Civil Code reads:
Payment made in good faith to any person in possession of
the credit shall release the debtor.
Article 1242 of the Civil Code is an exception to the rule that a
valid payment of an obligation can only be made to the
person to whom such obligation is rightfully owed. 64 It
contemplates a situation where a debtor pays a possessor of
credit i.e., someone who is not the real creditor but appears,
under the circumstances, to be the real creditor. 65In such
scenario, the law considers the payment to the possessor of
credit as valid even as against the real creditor taking into
account the good faith of the debtor.
* being the judgment creditor and the registered owner of
the subject land at the time he is considered as a
possessor of credit with respect to the rental fees and
expropriation indemnity adjudged due for the subject land in
the two cases, if the Ibrahims and Maruhoms turn out to be
the real owners of the subject land. Hence, petitioners
payment to Mangondato of the fees and indemnity due 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 as against the Ibrahims and Maruhoms.
Effect of Extinguishment of
Petitioners Obligation
- If Mangondato turns out to be the real owner of the subject
land, the Ibrahims and Maruhoms would not be entitled to
recover anything from anyone for the subject land. As a result,
garnishment of Mangondatos moneys in the possession of the
SSS in the amount of P2,700,000.00 in favor of the Ibrahims
and Maruhoms, becomes improper and unjustified. In this
event, therefore, the Ibrahims and Maruhoms may be ordered
to return the amount so garnished to Mangondato.
- Otherwise, i.e., if the Ibrahims and Maruhoms really are the
true owners of the subject land, they may only recover the
rental fees and expropriation indemnity due the subject land
against Mangondato but only up to whatever payments the
latter had previously received from petitioner.
- At any rate, the extinguishment of petitioners obligation to
pay for the rental fees and expropriation indemnity due the
subject land negates whatever cause of action the Ibrahims
and Maruhoms might have had against the former. Hence,
regardless of who between Mangondato, on one
hand, and the Ibrahims and Maruhoms, on the other,
turns out to be the real owner of the subject land, the
dismissal of the case against NPC is concerned is
called for.
Article 1245: DATION IN PAYMENT
Estanislao vs Eastwest Banking
-by Ian Lasaca
Page 10 of 30
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests
Facts:
July 24, 1997, petitioners obtained a loan from the respondent
in the amount of P3,925,000.00 evidenced by a promissory
note and secured by two deeds of chattel mortgage
dated July 10, 1997: one covering two dump trucks and a
bulldozer to secure the loan amount of P2,375,000.00, and
another covering bulldozer and a wheel loader to secure the
loan amount of P1,550,000.00. Petitioners defaulted in the
amortizations and the entire obligation became due and
demandable.
April 10, 2000, respondent bank filed a suit for replevin with
damages, praying that the equipment covered by the first
deed of chattel mortgage be seized and delivered to it. In the
alternative, respondent prayed that petitioners be ordered to
pay the outstanding principal amount of P3,846,127.73 with
19.5% interest per annum reckoned from judicial demand until
fully paid, exemplary damages of P50,000.00, attorneys fees
equivalent to 20% of the total amount due, other expenses
and costs of suit.
RTC
Respondent moved for suspension of the proceedings on
account of an earnest attempt to arrive at an amicable
settlement of the case. The trial court suspended the
proceedings, and during the course of negotiations, a deed of
assignment dated August 16, 2000 was drafted by the
respondent, which provides in part, that:
the ASSIGNOR is indebted to the ASSIGNEE in the aggregate
sum of SEVEN MILLION THREE HUNDRED FIVE THOUSAND
FOUR HUNDRED FIFTY NINE PESOS and FIFTY TWO CENTAVOS
(P7,305,459.52), Philippine currency, inclusive of accrued
interests and penalties as of August 16, 2000, and in full
payment thereof, the ASSIGNOR does hereby ASSIGN,
TRANSFER and CONVEY unto the ASSIGNEE those motor
vehicles, with all their tools and accessories, more particularly
described as follows:
Make : Isuzu Dump Truck
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 of the above-mentioned debt x x x. (Emphasis
supplied) Petitioners affixed their signatures on the deed of
assignment. However, for some unknown reason, respondent
banks duly authorized representative failed to sign the deed.
On October 6, 2000 and March 8, 2001, respectively,
petitioners completed the delivery of the heavy
equipment mentioned in the deed of assignment two
dump trucks and a bulldozer to respondent, which
accepted the same without protest or objection.
Respondent filed a manifestation and motion to admit an
amended complaint for the seizure and delivery of two
more heavy equipment the bulldozer and wheel loader
which are covered under the second deed of chattel
mortgage. Respondent claimed that its representative
inadvertently failed to include the second deed of
chattel mortgage among the documents forwarded to
its counsel when the original complaint was being
drafted. Respondent likewise claimed that petitioners were
given a chance to submit a refinancing scheme that would
allow them to keep the remaining two heavy equipment, but
they failed to come up with such a scheme despite repeated
promises to do so. Petitioners 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 units of heavy
equipment sought to be recovered.
CA Reversed the decision in favor of the respondent bank
conveying that the Estanislao spouses should deliver the two
heavy equipment or pay the amount in cash.
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
ISSUE: Whether or not the deed of assignment which
expressly provides that the transfer and conveyance to
respondent of the three units of heavy equipment, and its
acceptance thereof, shall be in full payment of the
petitioners total outstanding obligation to the latter operate to
extinguish petitioners debt to respondent, such that the
replevin suit could no longer prosper?
In short: Whether or not the delivery of the 3 heavy
equipment to the respondent serves as a full payment
and will extinguish the obligation of the petitioners?
Ruling:
Yes, the nature of the obligation is dation in payment
whereby property is alienated to the creditor in satisfaction of
a debt in money. Such transaction is governed by the law on
sales.
Question: Is the signature of the representative of the
respondent necessary for the agreement?
No, signature is not necessary because at the first delivery of
the heavy equipments to respondent, they have accepted it
without questioning. Even if we were to consider the
agreement as a compromise agreement, there was no need
for respondents signature on the same, because with the
delivery of the heavy equipment which the latter
accepted, the agreement was consummated.
Respondents approval may be inferred from its
unqualified acceptance of the heavy equipment.
Consent to contracts is manifested by the meeting of the offer
and the acceptance of the thing and the cause which are to
constitute the contract; the offer must be certain and the
acceptance absolute. The acceptance of an offer must be
made known to the offeror, and unless the offeror knows of
the acceptance, there is no meeting of the minds of the
parties, no real concurrence of offer and acceptance.[8] Upon
due acceptance, the contract is perfected, and from that
moment the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in
keeping with good faith, usage and law.
With its years of banking experience, resources and
manpower, respondent bank is presumed to be familiar
with the implications of entering into the deed of
assignment, whose terms are categorical and left
nothing for interpretation. The alleged non-inclusion in
the deed of certain units of heavy equipment due to
inadvertence, plain oversight or mistake, is
tantamount to inexcusable manifest negligence, which
should not invalidate the juridical tie that was created.
Respondent is presumed to have maintained a high level of
meticulousness in its dealings with petitioners. The business
of a bank is affected with public interest; thus, it makes a
sworn profession of diligence and meticulousness in giving
irreproachable service.
Respondents protestations of mistake and plain
oversight are self-serving. The evidence show that from
August 16, 2000 (date of the deed of assignment) up to March
8, 2001 (the date of delivery of the last unit of heavy
equipment covered under the deed), respondent did not
raise any objections nor make any move to question,
invalidate or rescind the deed of assignment. It was not
until June 20, 2001 that respondent raised the issue of its
alleged mistake by filing an amended complaint for replevin
involving different chattels, although founded on the same
principal obligation.
ONG v. ROBAN LENDING
-by Stacey Otaza
Facts: petitioner-spouses Wilfredo N. Ong and Edna
Sheila Paguio-Ong obtained several loans from Roban Lending
Page 11 of 30
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests
Corporation (respondent) in the total amount
of P4,000,000.00. These loans were secured by a real estate
mortgage on petitioners parcels of land .
On February 12, 2001, petitioners and respondent executed
an Amendment to Amended Real Estate Mortgage
consolidating their loans inclusive of charges thereon which
totaled P5, 916,117.50. On even date, the parties executed a
Dacion in Payment. Wherein petitioners assigned the
properties covered by TCT No. 297840 to respondent in
settlement of their total obligation
In April 2002 , petitioners filed a Complaint, declaration of
mortgage contract as abandoned, annulment of deeds, illegal
exaction, unjust enrichment, accounting, and damages,
alleging that the Memorandum of Agreement and the Dacion
in Payment executed are void for being pactum
commissorium. Petitioners also alleged that the loans
extended to them from July 14, 1999 to March 20, 2000 were
founded on several uniform promissory notes, which provided
for 3.5% monthly interest rates, 5% penalty per month on the
total amount due and demandable, and a further sum of 25%
attorneys fees thereon, and in addition, respondent exacted
certain sums denominated as EVAT/AR. Petitioners decried
these additional charges as illegal, iniquitous, unconscionable,
and revolting to the conscience as they hardly allow any
borrower any chance of survival in case of default.
Isuue: whether the Memorandum of Agreement and Dacion in
Payment are Void for it constituting Pactum commissorium?
Held: The petition is meritorious.
Reason: This Court finds that the Memorandum of Agreement
and Dacion in Payment constitute pactum commissorium,
which is prohibited under Article 2088 of the Civil Code which
provides:
The creditor cannot appropriate
the things given by way of pledge or
mortgage, or dispose of them. Any
stipulation to the contrary is null and
void.
The elements of pactum commissorium, which enables the
mortgagee to acquire ownership of the mortgaged property
without the need of any foreclosure proceedings, ]are: (1)
there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should
be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.[31]
In the case at bar, the Memorandum of Agreement and the
Dacion in Payment contain no provisions for foreclosure
proceedings nor redemption. Under the Memorandum of
Agreement, the failure by the petitioners to pay their debt
within the one-year period gives respondent the right to
enforce the Dacion in Payment transferring to it ownership of
the properties covered by TCT No. 297840. Respondent, in
effect, automatically acquires ownership of the properties
upon petitioners failure to pay their debt within the stipulated
period.
Respondent argues that the law recognizes dacion en pago as
a special form of payment whereby the debtor alienates
property to the creditor in satisfaction of a monetary
obligation. This does not persuade. In a true dacion en pago,
the assignment of the property 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 obligation to
respondent. On the contrary, under the Memorandum of
Agreement executed on the same day as the Dacion in
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Payment, petitioners had to execute a promissory note
for P5,916,117.50 which they were to pay within one year.
Respecting the charges on the loans, courts may reduce
interest rates, penalty charges, and attorneys fees if they are
iniquitous or unconscionable.
This Court, based on existing jurisprudence, finds the monthly
interest rate of 3.5%, or 42% per annum unconscionable and
thus reduces it to 12% per annum. This Court finds too the
penalty fee at the monthly rate of 5% (60% per annum) of the
total amount due and demandable principal plus interest, with
interest not paid when due added to and becoming part of the
principal and likewise bearing interest at the same rate,
compounded monthly unconscionable and reduces it to a
yearly rate of 12% of the amount due, to be computed from
the time of demand. This Court finds the attorneys fees of
25% of the principal, interests and interests thereon, and the
penalty fees unconscionable, and thus reduces the attorneys
fees to 25% of the principal amount only.
Tan Shuy vs spouses Guillermo Maulawin and Paring
Carino Maulawin
-by Emmanuel E. Monteroyo
FACTS:
Petitioner and Respondent are both engage in the business of
buying and selling copra and corn.
Vicente, petitioners son who helps in their business,
explained that whenever they are to buy copra or corn from
crop sellers they would prepare and issue them a pessada.
A pessada is a document that contains details of the
transaction, he further explained that whenever the said
pessadas contains the annotation pd on the total amount of the
purchase price that would mean that the said crop deliveries
had already been paid by the petitioner.
July 10,1997. Herein petitioner extended a loan to the
respondent for the amount of P420,000. In return, herein
respondent obligated himself to pay the said loan and to sell
copras to the petitioner.
Petitioner allege that despite repeated demands, herein
respondent only remitted a total amount of 28,500 which
leaves an outstanding balance of 391,500.
Petitioner filed a complaint in the regional trial court.
Defense of Guillermo: Respondent countered that he had
already paid the subject amount in full amounting to
420,537.68. According to him, he continuously delivered and
sold copras to petitioner and that he had a subsequent oral
arrangement with petitioner that the net proceeds for the said
copra deliveries would be applied as installment payment for
his loan.
To bolster his defense. Respondent presented copies of the
pessada 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 did not receive the net
proceeds of the copra deliveries but instead they were applied
as installment payment for the loan.
RTC and CA: Ruled that the net proceeds for the copra
deliveries should be applied as installment payment. CA
affirmed the decision of the RTC.
ISSUE:
WON the delivery of the copras amounted to installment
payments for the loan obtained by the respondent from the
petitioner. YES!
Page 12 of 30
 OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests
RULING:
Article 1254 provided for a social form of payment called
dation in payment, where property is alienated to the creditor
to satisfy a debt in money.The subsequent arrangement
between the petitioner and the respondent is in the nature of
Dation in Payment. There was partial payment whenever
Guillermo delivers copras and chose not to collect the net
proceeds but instead apply them as installment payments of
the loan.
However, the court did not credit the net proceeds from
12 pesadas, as they were deliveries for corn and not copra.
According to the RTC and CA as affirmed by the SC, Guillermo
himself testified that it was the net proceeds from the copra
deliveries that were to be applied as installment payments
for the loan.
Thus, it ruled that the total amount of 41,585.25, which
corresponded to the net proceeds from corn deliveries,
should be deducted from the amount of 420,537.68 claimed
by Guillermo to be the total value of his copra deliveries. We
therefore uphold the findings of the trial court, as affirmed by
the CA, that the net proceeds from Guillermos copra
deliveries amounted to 378,952.43. With this partial
payment, respondent remains liable for the balance totaling
41,047.57.
Wherefore, the petition is denied and the resolution of
the CA is affirmed.
SERFINO V FAR EAST BANK
-by Erianne Du
Facts:
Spouses Serifno herein instituted an action for the collection
of a sum of money against spouses Cortez. Both parties then
by way of an amicable settlement executed a compromise
agreement in which it was provided for in said agreement that
the full payment of the judgment debt shall be taken out of
the retirement benefits of Magdalena Cortez, the full payment
of which shall be made one week after she has obtained said
retirement benefits from the GSIS.
Spouses Cortez however failed to pay the debt and it was
even further discovered by Godfrey Serfino that the
retirement benefits had been deposited into the savings
account of Grace Cortez with the respondent bank Far East
Bank. The Serfinos then sent letters to Far East Bank telling
them to withhold delivery of the deposit to Grace Cortez
claiming that they had acquired ownership over said deposit
by virtue of the compromise agreement which they claimed
had transferred the ownership of the credit (which is the
retirement benefits) in their favor.
The RTC had ruled that Cortez spouses were indeed be liable
for fraudulently diverting the retirement benefits to the
savings account 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 compromise agreement and that
there was no court order authorizing Far East Bank to withhold
delivery of said deposit, hence this instant petition in which
Serfinos assailed the decision of the RTC in absolving Far East
Bank of any liability.
Issue: Whether or not there was indeed a valid transfer of the
credit in favor of the spouses Serfino.
Ruling:
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
"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, dation in payment,
exchange or donation, and without the consent of the
debtor, transfers his credit and accessory rights to
another, known as the assignee, who acquires the
power to enforce it to the same extent as the assignor
could enforce it against the debtor. 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 obtain a release from his
debt, assigns to his creditor a credit he has against a third
person." As a dation in payment, the assignment of credit
operates as a mode of extinguishing the obligation; the
delivery and transmission of ownership of a thing (in this case,
the credit due from a third person) by the debtor to the
creditor is accepted as the equivalent of the performance of
the obligation.
The terms of the compromise judgment, however, did not
convey an intent to equate the assignment of Magdalenas
retirement benefits (the credit) as the equivalent of the
payment of the debt due the spouses Serfino (the obligation).
There was actually no assignment of credit; if at all, the
compromise judgment merely identified the fund from which
payment for the judgment debt would be sourced.
In the present case, the judgment debt was not extinguished
by the mere designation in the compromise judgment of
Magdalenas retirement benefits as the fund from which
payment shall be sourced. That the compromise agreement
authorizes recourse in case of default on other executable
properties of the spouses Cortez, to satisfy the judgment debt,
further supports our conclusion that there was no assignment
of Magdalenas credit with the GSIS that would 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 credit against the GSIS. In fact, the
spouses Serfino are prohibited from enforcing their claim until
after the lapse of one (1) week from Magdalenas receipt of
her retirement benefits
Since no valid assignment of credit took place, the spouses
Serfino cannot validly claim ownership of the retirement
benefits that were deposited with FEBTC. Without ownership
rights over the amount, they suffered no pecuniary loss that
has to be compensated by actual damages. The grant of
actual damages presupposes that the claimant suffered a duly
proven pecuniary loss
PEN VS. JULIAN
-Iris Monacano
FACTS:
April 1986 Julians(appellees) obtained 60k loan from Adelaida
Pen. May 22 & 27 they were again extended loans worth 50k
and 10k. Two promissory notes were executed by Julians in
favour of Pen payable on June 15 and July 22. As security,
they executed a real estate mortgage over their property.
Apellants version:
Linda Julian were unable to pay despite several demands.
Adelaida prompted to institute foreclosure proceedings.
But this was prevailed upon by Linda because of the cost of
litigation and the embarrassment it would cause her since the
proceedings would be announced in the City Hall. Instead,
Linda offered their mortgaged property aspayment in
kind. Upon ocular inspection, the property was agreed to ba
valued at 70k. A deed of sale was executed on Oct. 22.
July 1989, Linda offered to repurchase the property. Adelaida
agreed for 436k payable on July 31, 1989. Linda failed to pay.
Feb. 1990, Linda offered to repurchase again but failed to pay.
Page 13 of 30
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests
On June 28, 1990, she offered 100k to Pen but this was
rejected. Upon agreement of the parties, the 100k was
deducted from the debt. Instead of paying the remaining
balance, appellee filed an adverse claim.
Appellees version:
Upon execution of the mortgage, they were required by Pen to
sign a document purportedly an Absolute deed of sale.
The said document does not contain any consideration,
it was undated, unfilled and unnotarized. Their last
payment was on June 28 (100k). Their total payments were
115k.
Dec. 1992, she offered to pay 150k but this was rejected by
Pen and demanded 250k instead. Unable to meet the
demand, Linda desisted and requested the land title be shown
to her to which the latter refused. Upon verification from the
Registry of Deeds, she found out that the property was
already registered under Pens name. Linda filed and Adverse
Claim. Furthermore she discovered Pen obtained several
Declarations of Real Property and a Deed of Sale executed on
Oct.22. She filed Cancellation of Sale, Cancellation of Tile,
Recovery of Possession and Damages. She allege that through
bad faith, Pen maliciously typed, unilaterally filled up
and caused the notarization of the deed of sale. She
used this spurious deed of sale to cause the transfer of
the parcel of land to her name.
RTC AND CA: Favored respondents. Both declared that
the deed of Sale was null and void.
COURTS RULING: Court adopted CAs conclusion that
the Deed of Sale is a prohibited pactumcommissorium.
Elements of PACTUM COMMISSORIUM:
1- There must be a thing pledged/mortgaged by way of
security for the payment of the prin. Obli.
This element is present in this case when
respondents mortgaged their property in favour of
Pen.
2- There should be stipulation of the automatic
appropriation of the creditor of the thing
pledged/mortgaged in the event of non-payment of
the principal obli.
The authorization of Adelaide to appropriate the
property was implied through Lindas act of signing
the blank document.
Art. 2088 of CC prohibits creditor from
appropriating the thing pledge or mortgage.
The eventual transfer of the property in a manner
not in a valid dacion en pago confirmed the
nature of the transaction as
pactumcommissorium.
Elements of Dacion en pago:
1- There is a money obligation
2- The alienation of the creditor to the
property of the debtor with consent
3- The satisfaction of the money obligation
Therefore, in order for a valid dacion to
transpire, the alienation of the property should
fully extinguish the debt of the debtor. In the
case at bar, the debt of the respondents
subsisted despite the transfer of the property in
favour of Adelaida. In light of this, the deed of
sale was void. Petitioners are ordered to
reconvey the title of the property to defendants.
ART. 1250
ALMEDA v. BATHALA MARKETING INDUSTRIES, INC.
-by LA Pizarro
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
FACTS:
1. May 1, 1997: Bathala Marketing (respondent), as
lessee, represented by its president Ramon Garcia,
RENEWED ITS CONTRACT OF LEASE with Ponciano
Almeda, as lessor, husband and father of petitioners.
Under the said Contract, Ponciano agreed to lease a
portion of the Almeda compound to respondent,
consisting of 7,348.25 sq.m., for a monthly rental of
PhP 1,107,348.69 for a term of four (4) years from
May 1, 1997.
2. The Contract of Lease contained the following
provision which later on gave rise to the instant case:
SEVENTH. In case EXTRAORDINARY INFLATION OR
DEVALUATION of the Philippine currency should
supervene, the value of the Philippine Peso at the
time of the establishment of the obligation shall be
the basis of payment.
3. January 26, 1998: In lieu of Ponciano (in view of his
death), the petitioners sent a letter to the respondent
informing the latter that the former will increase the
monthly rental rates by 73%, pursuant to the
SEVENTH CONDITION of the Contract of Lease and
Art. 1250 of the Civil Code.
Respondent refused to pay the additional rentals
contending that there was no extraordinary inflation
to warrant the application of Art. 1250. In spite of
this, the respondent still continued to pay the
petitioners the monthly rentals based on the
stipulated rental rates in the contract.
ISSUE:
WHETHER THE AMOUNT OF RENTALS DUE THE PETITIONERS
SHOULD BE ADJUSTED BY REASON OF EXTRAORDINARY
INFLATION/DEVALUATION.
SC RULING:
No.
Article 1250 of the Civil Code states:
In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of
the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there
is an agreement to the contrary.
Inflation has been defined as the sharp increase of
money or credit, or both, without a corresponding increase in
business transaction. There is inflation when there is an
increase in the volume of money and credit relative to
available goods, resulting in a substantial and continuing rise
in the general price level. In a number of cases, this Court had
provided a discourse on what constitutes extraordinary
inflation, thus:
[E]xtraordinary inflation exists when there is a
decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the
common fluctuation in the value of said currency,
and such increase or decrease could not have been
reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the
establishment of the obligation.
Page 14 of 30
OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests
The factual circumstances obtaining in the present
case do not make out a case of extraordinary inflation or
devaluation as would justify the application of Article 1250 of
the Civil Code. We 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 characteristic of most currencies.
And while the Court may take judicial notice of the decline in
the purchasing power of the Philippine currency in that span
of time, such downward trend of the peso cannot be
considered as the extraordinary phenomenon contemplated
by Article 1250 of the Civil Code. Furthermore, absent an
official pronouncement or declaration by competent
authorities of the existence of extraordinary inflation during a
given period, the effects of extraordinary inflation are not to
be applied.
Premiere Development Bank vs. Central SuretyK
-by Frances Mana-ay
FACTS: Aug 20, 1999, respondent Central Surety and
Insurance Company obtained loans from petitioner Premiere
Bank.
P6M (PN No. 714-Y) secured by a Deed of
Assignment with Pledge covering Central Suretys
Membership Fee Certificate representing its property
share in Wack Wack Golf and Country Club.
P40.898M- (PN no. 376-X) secured by a real estate
mortgage over a condo certificate of title, availed
thru a renewal of respondets prior loan, then covered
by PN No. 367-Z
Aug 22, 2000 Premiere Bank sent a letter demanding
payment of the 6M loan. Central Surety answered that they
intend to settle the account by the end of Sept;
Sept. 20,2000 - Central Surety issued a check in the amount
of 6M. However, for undisclosed reasons, Premier Bank
returned the check 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. Premiere Bank threatened
foreclosure of the loans respective securities should they fail
to pay these withinten days from date.
The next day, respondent again retendered payment of the
check worth P6M, also a separate check was tendered to
petitioner as payment for (P2.6M) for spouses Castanedas
personal loan secured by Manila Polo Club Inc. Membership
shares.
October 13, 2000- petitioner finally accepted respondents
checks. Payment was applied to:
PN 714-Y (6M loan)
PN 367-Z (40.898k loan)
Commercial loan of Casent Realty and Devp Corp.
Commercial loan of spouses Castaneda
Respondent objected the application of payment and
insisted that the two checks were for the spues castanedas
personal loan and the 6M loan. They asked that the wack
wack membership pledged as security for the 6M loan be
released. Petitioner refused. Respondent file a complaint
for damages and release of security collateral
1. To declare 6M loan as fully paid
2. Release wack2 membership cert. of shares
3. To pay damages
4. To pay cost of suit
COURST RULING:
Ateneo de Davao Univeristy
College of Law
1 - Estrellado (2017)
Art. 1252 grants the right to the debtor to choose wo which of
several obligation to apply a particular payment that he
tenders to the creditor. However, it is likewise granted the
right of the creditor to apply such payment in case the debtor
fails to direct its application.
WAIVER Debtors right to apply payment can be waived and
even granted to the creditor fi the debtor so agrees. A
limitation is when there is an agreement as to the debt
which are to be paid first, the 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.
WAIVER OF DEMAND -There was no waiver on the part of
petitioner. The loan of 6M and the pledge of wackwack was
past the due and demand stage. Petitioner had the right to
declare them immediately due and demandable without need
of presentment, demand, protest or notice of any kind.
Demand made was merely a superfluity, not a waiver of the
right to demand payment.
WAIVER OF RIGHT TO APPLY PAYMENTS- waiver must be
positively demonstrated since a waiver by implication is not
normally countenanced. It must not only voluntary but also:
Made knowingly
Intelligently
With sufficient awareness of the relevant
circumstances and likely consequences
In the present case, any inference of waiver of petitioner, right
to apply payments is eschewed by the express provision of
the PN that no failure on the part of premiere bank to
exercise, and no delay in execirisng any right hereunder shall
operate as waiver thereof.
In PN 367-Z (40.898K loan)- contains that in any event that
respondent will fail to pay on any other obligation already
due, the bank shall be entitled to declare the PN 367-Z to be
immediately due and demandable. By virtue of which, it
follows that the obligation under PN 367-Z had become part
due and demandable with further notice expressly waived
when Central Surety defaulted on its 6M loan.
Petitioner cannot be faulted for exercising the authority
granted to it under the PNs and applying payment to the
obligations as it deemed fit. Corollary thereto, the tendered
amount of 6M by respondent and the encashment of the
check did not totally extinguish the debt covered by PN 714-Y
SURETY OF WACK2- cannot be released
It stood as security for both the 6M loan and 40.898 loan.
From the transactions that transpired between the parties it is
apparent that when the parties executed the Deed of
Assignment with pledge of the wack2 membership, the intent
of the parties was for the wackwack to serve as security also
for future advancements.
YULIM vs. INTL. BANK
-by Jennica Delfin
Facts:
On June 2, 2000, iBank, a commercial bank, granted Yulim, a
domestic partnership, a credit facility in the form of an
Omnibus Loan Line for P5,000,000.00, as evidenced by a
Credit Agreement which was secured by a Chattel
Mortgage over Yulims inventories in its merchandise
warehouse at 106 4th Street, 9th Avenue, Caloocan City. As
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further guarantee, the partners, namely, James, Jonathan and
Almerick, executed a Continuing Surety Agreement in favor of
iBank. Yulim defaulted on the said note. On April 5, 2002,
iBank sent demand letters to Yulim, through its President,
James, and through Almerick, but without success. iBank then
filed a Complaint for Sum of Money with Replevin against
Yulim and its sureties. On October 2, 2002, the petitioners
moved to dismiss the complaint insisting that their loan had
been fully paid after they assigned to iBank their
Condominium Unit No. 141, with parking space, at 20
Landsbergh Place in Tomas Morato Avenue, Quezon City. RTC
ruled that Yulim is to pay Ibank 4, 246, 310.00 with interest at
16.5% per annum until fully paid. Petitioners moved for
reconsideration but was denied. Petitioners appealed in the
CA but it ruled that petitioners failed to prove that they have
already paid their obligations to Ibank further stating that the
so called assignment by Yulim of its condominium unit to
Ibank was nothing but a mere temporary arrangement to
provide security pending the subsequent execution of a real
estate mortgage.
Issue: Whether there is Dation in payment in the assignment
of the condominium unit
Held:
Pet. obtained another loan from the respondent for
P55,000.00 as evidenced by a promissory note and cash
voucherboth dated on June 15, 1992. The
promissorycontained exactly the same Terms and Conditions
as the first loan.
When the 2nd loan matured on Dec. 15, 1992, pet.
had only paid P29,560.00 and a balance of P25,040.00. Due to
liquidity problems, pet. asked resp. if he could pay in daily
installments until the second loan is paid granted. Thus, as
of September 1994 or 21 months after the 2 nd loans maturity,
the petitioner had already paid a total of P56,440.00, an
amount greater than the principal.
Despite the receipt of more than the amount of the
principal, the resp. filed a complaint for judicial foreclosure of
the chattel mortgage because the petitioner allegedly failed
to settle the balance of the second loan despite demand. He
further alleged that pursuant to the terms of the promissory
note, the pet.s failure to fully pay upon maturity triggered the
imposition of the 10% monthly penalty and 25% attorneys
fees. And further prayed for the payment of the balance of the
second loan plus accrued penalties and interest.
Before the pet. could file an answer, the resp. applied
for the issuance of a writ of replevin which was granted by the
MTC the motor vehicle was seized and delivered to resp.

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

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expressly stipulated) and (2) the principal remains
unpaid.
The exception is a situation covered under Article
1176, i.e., when the creditor waives payment of the interest
despite the presence of (1) and (2) above. In such case, the
payments shall obviously be credited to the principal.
Since the doubt in the present case pertains to the
application of the daily payments, Article 1253 shall apply.
Only when there is a waiver of interest shall Article 1176
become relevant.
Under this analysis, we rule that the respondent
properly credited the daily payments to the interest
and not to the principal because: (1) the debt produces
interest, i.e., the promissory note securing the second loan
provided for payment of interest; (2) a portion of the second
loan remained unpaid upon maturity; and (3) the respondent
did not waive the payment of interest.
Also, there was no waiver of interest.The fact
that the official receipts did not indicate whether the
payments were made for the principal or the interest does not
prove that the respondent waived the interest. It was not
proven that the respondent accepted the payment of the
principal. The silence of the receipts on whether the daily
payments were credited against the unpaid balance of the
principal or the accrued interest does not mean that the
respondent waived the payment of interest. There is no
presumption of waiver of interest without any evidence
showing that the respondent accepted the daily installments
as payments for the principal.
ART. 1256
TEDDY G. PABUGAIS, petitioner, vs. DAVE P.
SAHIJWANI, respondent.
-by Jem Penas
Pursuant to an Agreement and Undertaking[4] dated December
3, 1993, petitioner Teddy G. Pabugais, in consideration of the
amount of P15, 487,500.00, agreed to sell to respondent Dave
P. Sahijwani a lot containing 1,239 square meters located at
Jacaranda Street, North Forbes Park, Makati, Metro
Manila. Respondent paid petitioner the amount of P600,
000.00 as option/reservation fee and the balance of P14,
887,500.00 to be paid within 60 days from the execution of
the contract, simultaneous with delivery of the owners
duplicate Transfer Certificate of Title in respondents name the
Deed of Absolute Sale; the Certificate of Non-Tax Delinquency
on real estate taxes and Clearance on Payment of Association
Dues. The parties further agreed that failure on the part of
respondent to pay the balance of the purchase price entitles
petitioner to forfeit the P600, 000.00 option/reservation fee;
while non-delivery by the latter of the necessary documents
obliges him to return to respondent the said
option/reservation fee with interest at 18% per annum, thus
Petitioner failed to deliver the required documents. In
compliance with their agreement, he returned to respondent
the latters P600, 000.00 option/reservation fee by way of Far
East Bank & Trust Company Check No. 25AO54252P, which
was, however, dishonored.
Petitioner claimed that he twice tendered to respondent,
through his counsel, the amount of P672, 900.00
(representing the P600, 000.00 option/reservation fee plus
18% interest per annum computed from December 3, 1993 to
August 3, 1994) in the form of Far East Bank & Trust Company
Managers Check No. 088498, dated August 3, 1994, but said
counsel refused to accept the same. His first attempt to
tender payment was allegedly made on August 3, 1994
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through his messenger;[6] while the second one was on August
8, 1994,[7] when he sent via DHL Worldwide Services, the
managers check attached to a letter dated August 5, 1994.
[8]
On August 11, 1994, petitioner wrote a letter to respondent
saying that he is consigning the amount tendered with the
Regional Trial Court of Makati City.[9] On August 15, 1994,
petitioner filed a complaint for consignation.[10]
Respondents counsel, on the other hand, admitted that his
office received petitioners letter dated August 5, 1994, but
claimed that no check was appended thereto.[11] He averred
that there was no valid tender of payment because no check
was tendered and the computation of the amount to be
tendered was insufficient,[12] because petitioner verbally
promised to pay 3% monthly interest and 25% attorneys fees
as penalty for default, in addition to the interest of 18% per
annum on the P600,000.00 option/reservation fee.[13]
On November 29, 1996, the trial court rendered a decision
declaring the consignation invalid for failure to prove that
petitioner tendered payment to respondent and that the latter
refused to receive the same.
Petitioner appealed the decision to the Court of
Appeals. Meanwhile, his counsel, Atty. Wilhelmina V. Joven,
died and she was substituted by Atty. Salvador P. De Guzman,
Jr.[15] On December 20, 2001, petitioner executed a Deed of
Assignment[16] assigning in favor of Atty. De Guzman, Jr., part
of the P672, 900.00 consigned with the trial court as partial
payment of the latters attorneys fees. [17] 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]
Petitioners motion to withdraw the amount consigned
was denied by the Court of Appeals and the decision of the
trial court was affirmed with modification as to the amount of
moral damages and attorneys fees.[20]
On a motion for reconsideration, the Court of Appeals
declared the consignation as valid in an Amended Decision
dated January 16, 2003. It held that the validity of the
consignation had the effect of extinguishing petitioners
obligation to return the option/reservation fee to
respondent. Hence, petitioner can no longer withdraw the
same.
The resolution of the case at bar hinges on the following
issues: (1) Was there a valid consignation? and (2) Can
petitioner withdraw the amount consigned as a matter of
right?
As testified by the counsel for respondent, the reasons
why his client did not accept petitioners tender of payment
were (1) the check mentioned in the August 5, 1994 letter of
petitioner manifesting that he is settling the obligation was
not attached to the said letter; and (2) the amount tendered
was insufficient to cover the obligation. It is obvious that the
reason for respondents non-acceptance of the tender of
payment was the alleged insufficiency thereof and not
because the said check was not tendered to respondent, or
because it was in the form of managers check. While it is true
that in general, a managers check is not legal tender, the
creditor has the option of refusing or accepting it. [24] Payment
in check by the debtor may be acceptable as valid, if no
prompt objection to said payment is made.[25]
Anent the sufficiency of the amount tendered, it
appears that only the interest of 18% per annum on the
P600,000.00 option/reservation fee stated in the default
clause of the Agreement And Undertaking was agreed upon
by the parties.
The managers check in the amount of P672,900.00
(representing the P600,000.00 option/reservation fee plus
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18% interest per annum computed from December 3, 1993 to
August 3, 1994) which was tendered but refused by
respondent, and thereafter consigned with the court, was
enough to satisfy the obligation.
There being a valid tender of payment in an amount
sufficient to extinguish the obligation, the consignation is
valid.
As regards petitioners right to withdraw the amount
consigned, reliance on Article 1260 of the Civil Code is
misplaced. The said Article provides
Art. 1260. Once the consignation has been duly made, the
debtor may ask the judge to order the cancellation of the
obligation.
Before the creditor has accepted the consignation, or before a
judicial confirmation that the consignation has been properly
made, the debtor may withdraw the thing or the sum
deposited, allowing the obligation to remain in force.
The amount consigned with the trial court can no longer
be withdrawn by petitioner because respondents prayer in his
answer that the amount consigned be awarded to him is
equivalent to an acceptance of the consignation, which has
the effect of extinguishing petitioners obligation.
WHEREFORE, in view of all the foregoing, the instant
petition 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 consignation by the petitioner in favor of
respondent of the amount of P672,900.00 with the Clerk of
Court of the Regional Trial Court of Makati City valid, and
which declared petitioners obligation to respondent under
paragraph 5 of the Agreement And Undertaking as having
been extinguished, is AFFIRMED. No costs.
SO ORDERED.
LLOBRERA VS FERNANDEZ (2006)
-by Gerard Tinampay
Facts:
Subject of the controversy is a 1,849 square-meter parcel of
land, covered by Transfer Certificate of Title No. 9042.
Respondent Josefina V. Fernandez, as one of the registered co-
owners of the land, served a written demand letter upon
petitioners Spouses Llobrera, et al., to vacate the premises
within fifteen (15) days from notice. Receipt of the demand
letter notwithstanding, petitioners refused to vacate,
necessitating the filing by the respondent of a formal
complaint against them before the Barangay Captain of
Barangay 11, Dagupan City. Upon failure of the parties to
reach any settlement, the Barangay Captain issued the
necessary certification to file action.
Respondent then filed a verified Complaint for ejectment and
damages against the petitioners before the MTCC of Dagupan
City, which complaint was raffled to Branch 2 thereof.
By way of defense, petitioners alleged in their Answer that
they had been occupying the property in question beginning
the year 1945 onwards, when their predecessors-in-interest,
with the permission of Gualberto de Venecia, one of the other
co-owners of said land, developed and occupied the same on
condition that they will pay their monthly rental of P20.00
each. From then on, they have continuously paid their
monthly rentals to Gualberto de Venecia or Rosita de Venecia
or their representatives, such payments being duly
acknowledged by receipts. Beginning sometime June 1996,
however, the representative of Gualberto de Venecia refused
to accept their rentals, prompting them to consign the same
to Banco San Juan, which bank deposit they continued to
maintain and update with their monthly rental payments.
In a decision dated February 18, 1998, the MTCC rendered
judgment for the respondent:
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1. Ordering each of the defendants to vacate the portion of
the land in question they respectively occupy and to restore
the possession thereof to the plaintiff and her co-owners;
2. Ordering each of the defendants to pay to the plaintiff the
amount of P300.00 per month from January 17, 1997 until
they vacate the land in question as the reasonable
compensation for the use and occupation of the premises;
3. Ordering the defendants to pay proportionately the amount
of P10,000.00 as attorneys fee and P2,000.00 as litigation
expenses, 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 judgment.
Therefrom, petitioners went to the CA whereat their recourse
was docketed as CA-G.R. SP. No. 48918. As stated at the
threshold hereof, the CA, in its Decision of June 30, 1999,
affirmed that of the RTC. The CA denied their motion for
reconsideration.
Thus the petiton.
Issue:
Whether petitioners possession of the subject property is
founded on contract or not.
Ruling:
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 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 put, there is a dearth of
evidence to substantiate the averred lessor-lessee
relationship. x x x.3
Consistent with this Courts long-standing policy, when the
three courts below have consistently and unanimously ruled
on a factual issue, such ruling is deemed final and conclusive
upon this Court, especially in the absence of any cogent
reason to depart therefrom.
From the absence of proof of any contractual basis for
petitioners possession of the subject premises, the only legal
implication is that their possession thereof is by mere
tolerance. In Roxas vs. Court of Appeals,4 we ruled:
A person who occupies the land of another at the latters
tolerance or permission, without any contract between them,
is necessarily bound by an implied promise that he will vacate
upon demand, failing which, a summary action for ejectment
is the proper remedy against him.
The judgment favoring the ejectment of petitioners being
consistent with law and jurisprudence can only be affirmed.
The alleged consignation of the P20.00 monthly rental to a
bank account in respondents name cannot save the day for
the petitioners simply because of the absence of any
contractual basis for their claim to rightful possession of the
subject property. Consignation based on Article 1256 of the
Civil Code indispensably requires a creditor-debtor relationship
between the parties, in the absence of which, the legal effects
thereof cannot be availed of.
Article 1256 pertinently provides:
Art. 1256. If the creditor to whom tender of payment has been
made refuses without just cause to accept it, the debtor shall
be released from responsibility by the consignation of the
thing or sum due.
Unless there is an unjust refusal by a creditor to accept
payment from a debtor, Article 1256 cannot apply. In the
present case, the possession of the property by the
petitioners being by mere tolerance as they failed to establish
through competent evidence the existence of any contractual
relations between them and the respondent, the latter has no
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obligation to receive any payment from them. Since
respondent is not a creditor to petitioners as far as the alleged
P20.00 monthly rental payment is concerned, respondent
cannot be compelled to receive such payment even through
consignation under Article 1256. The bank deposit made by
the petitioners intended as consignation has no legal effect
insofar as the respondent is concerned.
CACAYORIN VS. ARMED FORCES
-by Jairus Dapitan
Facts:
1. Petitioner is a member of the AFPMBAI, an
organization engaged in the business of developing
low-cost housing projects for the personnel of AFP,
PNP, BFP, BJMP, and 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 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 P77,418 shall be released after the title is
executed in favor of the petitioners and after the
registration and annotation of the loan and mortgage
agreement.
5. RBST closed and was placed under receivership by
PDIC. For some unknown reason, respondents got a
hold of the loan documents and the title of the house
and lot. Respondents made oral and written demands
to the petitioners for the loan amount.
6. In quandary, petitioners filed a complaint for
consignation of loan payment, recovery of title and
cancellation of mortgage annotation. They argued
that they were confused where to pay their loan
obligation because it was supposed to be paid to
RBST which is now under receivership by PDIC, but
the respondents are the ones demanding because of
their possession of the loan documents and title.
7. Respondents argued that this is supposed to be
under the jurisdiction of the HLURB because it
concerns of the purchase of a subdivision lot.
Issues:
1. W/N jurisdiction falls with the court.
2. W/N consignation without prior tender of payment is
proper.
Ruling:
On the first issue, the SC ruled that since
consignation is necessarily judicial, it falls under the
jurisdiction of the Courts citing article 1258 of the Civil Code:
Consignation shall be made by
depositing the things due at the
disposal of judicial authority, before
whom tender of payment shall be
proved, in a proper case, and the
announcement of the consignation in
other cases.
The provision clearly precludes consignation in
venues other than the courts. Elsewhere, what may be made
is a valid tender of payment, but not consignation.
On the second issue, the SC ruled that the
consignation is proper without prior tender of payment. The
petitioners are in quandary on where to pay their loan
obligations. Under Article 1256, prior tender of payment is not
necessary for consignation in cases (1) where the creditor
is unknown or absent, (2) when the creditor is
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incapacitated to receive payment when it is due, (3) when
there are 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
situation where the creditor is unknown, or that two or more
entities appear to possess the same right to collect from
petitioners. Whatever transpired between the Rural Bank or
PDIC and AFPMBAI in respect of petitioners loan account, if
any, such that AFPMBAI came into possession of the loan
documents and TCT No. 37017, it appears that petitioners
were not informed thereof, nor made privy thereto.
Petitioners were allowed to consign the full payment.
ART. 1267
PHIL. NATL. CORP VS. CA
-by Jell Vie Gualberto
PNCC and the Raymundo's entered into a contract of lease.
The lease contract, executed on 18 November 1985, pertinent
data of the contract are as follows:
1. TERM OF LEASE - This lease shall be for a period of
five (5) years, commencing on the date of issuance
of the industrial clearance by the Ministry of Human
Settlements at the option of the LESSEE under the
same terms and conditions.
2. RATE OF RENT - LESSEE shall pay to the LESSOR rent
at the monthly rate of TWENTY THOUSAND PESOS
(P20,000.00), Philippine Currency, in the manner set
forth in Paragraph 3 below.This rate shall be
increased yearly by Five Percent (5%) based on the
agreed monthly rate of P20,000.00.
3. TERMS OF PAYMENT - The rent stipulated in Paragraph
2 above shall be paid yearly in advance by the
LESSEE. The first annual rent in the amount of TWO
HUNDRED FORTY THOUSAND PESOS (P240,000.00),
shall be due and payable upon the execution of this
Agreement.
4. USE OF LEASED PROPERTY - It is understood that the
Property shall be used by the LESSEE as the site,
grounds and premises of a rock crushing plant and
field office, sleeping quarters and canteen/mess
hall. The LESSORS hereby grant to the LESSEE the
right to erect on the Leased Property such
structure(s) and/or improvement(s) necessary for or
incidental to the LESSEE's purposes.
11. TERMINATION OF LEASE - This Agreement may be
terminated by mutual agreement of the parties. Upon
the termination or expiration of the period of lease
without the same being renewed, the LESSEE shall
vacate the Leased Property at its expense.
On 7 January 1986, petitioner obtained from the Ministry
of Human Settlements a Temporary Use Permit [2] for the
proposed rock crushing project
On 16 January 1986, private respondents wrote
petitioner requesting payment of the first annual rental in the
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amount of P240,000 which was due and payable upon the
execution of the contract.
In its reply-letter, petitioner argued that under
paragraph 1 of the lease contract, payment of rental would
commence on the date of the issuance of an industrial
clearance by the Ministry of Human Settlements, and not from
the date of signing of the contract. It then expressed its
intention to terminate the contract due to financial, as well as
technical, difficulties.[4]Private respondents refused to accede
to petitioner's request for the pretermination of the lease
contract.
Petitioner objected to the claim of the private
respondents and argued that it was "only obligated to pay ...
the amount of P20,000.00 as rental payments for the one-
month period of lease, counted from 07 January 1986 when
the Industrial Permit was issued by the Ministry of Human
Settlements up to 07 February 1986 when the Notice of
Termination was served"[6]on private respondents.
On 19 May 1986, the private respondents instituted with
the Regional Trial Court of Pasig an action against petitioner
for Specific Performance with Damages.
What transpired next was.....
During my report gibara ko ni Mam kay abtan daw isa ka
tuig hahaha. Basta ang nahitabo is that, sige request ang
defense sa petitioner ug move s hearing, kesyo undisposed
daw or naay sore eyes ug nagchange ug counsel. Always
gina-grant sa RTC ang prayer even if ordered
"intransferrable" ang schedule. On tha day of the hearing,
absent ang counsel for petitioner. RTC deemed it
abandoned.
On 12 April 1989, the trial court rendered a decision
ordering petitioner to pay the private respondents the amount
of P492,000 which represented the rentals for two years, with
legal interest from 7 January 1986 until the amount was fully
paid, plus attorney's fees in the amount of P20,000 and costs.
[9]
Petitioner then appealed to the Court of Appeals alleging
that the trial court erred in ordering it to pay the private
respondent the amount of P492,000 and in denying it the
right to be heard. However, Court of Appeals affirmed the trial
court's decision and denied motion for reconsideration.
Petitioner then filed petition for certiorari to the Supreme
Court invoking the following issues:
1. Focusing on paragraph 1of the lease contract,
petitioner contends that issuance of the Industrial
Clearance is a Suspensive condition, without which the
rights under the contract would not be acquired. TUP
(Temporary Use Permit) is not the Industrial Clearance
referred in the 1st paragraph of the contract.
SC: Petitioner is estopped from claiming that the
Temporary Use Permit was not the industrial clearance
contemplated in the contract. In its letter dated 24 April 1986,
petitioner states:
We wish to reiterate PNCC Management's previous stand
that it is only obligated to pay your clients the amount
of P20,000.00 as rental payments for the one-month
period of the lease, counted from 07 January 1986 when
the Industrial Permit was issued by the Ministry of
Human Settlements up to 07 February 1986 when the
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Notice of Termination was served on your clients.
[11]
(Underscoring Supplied).
The "Industrial Permit" mentioned in the said letter
could only refer to the Temporary Use Permit issued by the
Ministry of Human Settlements on 7 January 1986. And it can
be gleaned from this letter that petitioner has considered the
permit as industrial clearance; otherwise, petitioner could
have simply told the private respondents that its obligation to
pay rentals has not yet arisen because the Temporary Use
Permit is not the industrial clearance contemplated by them.
With regards to the Suspensive Condition, It can be
deduced from this letter that the suspensive condition -
issuance of industrial clearance - has already been fulfilled
and that the lease contract has become operative. Otherwise,
petitioner did not have to solicit the conformity of the private
respondents to the termination of the contract for the simple
reason that no juridical relation was created because of the
non-fulfillment of the condition. Moreover, the reason of
petitioner in discontinuing with its project and in consequently
cancelling the lease contract was financial as well as technical
difficulties, not the alleged insufficiency of the Temporary Use
Permit.
2. Second. Invoking Article 1266 and the principle
of rebus sic stantibus, petitioner asserts that it should
be released from the obligatory force of the contract of
lease because the purpose of the contract did not
materialize due to unforeseen events and causes
beyond its control, i.e., due to abrupt change in
political climate after the EDSA Revolution
and financial difficulties.
SC: Petitioner cannot, however, successfully take refuge
in the said article, since it is applicable only to obligations "to
do", and not to obligations "to give".[14] An obligation "to do"
includes all kinds of work or service; while an obligation "to
give" is a prestation which 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 possession, or
in order to return it to its owner.[15]
The obligation to pay rentals [16] or deliver the thing in a
contract of lease[17] falls within the prestation to give; hence, it
is not covered within the scope of Article 1266. At any rate,
the unforeseen event and causes mentioned by petitioner are
not the legal or physical impossibilities contemplated in said
article. Besides, petitioner failed to state specifically the
circumstances brought about by the abrupt change in the
political climate in the country except the alleged prevailing
uncertainties in government policies on infrastructure
projects.
The principle of rebus sic stantibus[18] neither fits in with
the facts of the case. Under this theory, the parties stipulate
in the light of certain prevailing conditions, and once these
conditions cease to exist the contract also ceases to exist
This Court cannot subscribe to this argument. As pointed
out by private respondents
Anent petitioners alleged poor financial condition, the
same will neither release petitioner from the binding effect of
the contract of lease. As held in Central Bank v. Court of
Appeals,[22]cited by the private respondents, mere pecuniary
inability to fulfill an engagement does not discharge a
contractual obligation, nor does it constitute a defense to an
action for specific performance.
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3. Third. According to petitioner, the award
of P492,000 representing the rent for two years is
excessive, considering that it did not benefit from the
property. Besides, the temporary permit, conformably
with the express provision therein, was deemed
automatically revoked for failure of petitioner to use
the same within one year from the issuance
thereof. Hence, the rent payable should only be for one
year.
SC: Petitioner cannot be heard to complain that the
award is excessive. The temporary permit was valid for two
years but was 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 property subject of the lease
contract were both imputable to petitioner and cannot,
therefore, be taken advantage of in order to evade or lessen
petitioners monetary obligation. The damage or prejudice to
private respondents is beyond dispute. They unquestionably
suffered pecuniary losses because of their inability to use the
leased premises. Thus, in accordance with Article 1659 of the
Civil Code,[25] they are entitled to indemnification for damages;
and the award of P492,000 is fair and just under the
circumstances of the case.
4. Finally, petitioner submits that the trial court
gravely abused its discretion in denying petitioner the
right to be heard.
SC: We disagree. The trial court was in fact liberal in
granting several postponements[26] to petitioner before it
deemed terminated and waived the presentation of evidence
in petitioners behalf.
From the foregoing narration of procedural antecedents,
it 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 heard does not only mean oral arguments
in court; one may be heard also through pleadings. Where
opportunity to be heard, either through oral arguments or
pleadings, is accorded, there is no denial of procedural due
process.
PETITIONER DENIED
ART. 1278
Bank of the Philippine Islands and Grace Romero vs
Court of Appeals and Edvin Reyes
-by Escobido, HF
Facts:
Private respondent Ervin Reyes opened two joint accounts in
BPI Cubao branch. The first joint account opened on 1985 was
with her wife Sonia Reyes while the second account opened
on 1986 was with his grandmother Emeteria Fernandez. Reyes
regularly deposited in the joint account with his grandmother
the US Treasury Warrants payable to the order of Emeteria
Fernandez as her monthly pension. On December 28, 1989
Emeteria died without the knowledge of the US Treasury
Department. On January 1, 1990 she was still sent a US
Treasury Warrant worth $377 (10,556.00). On January 4, 1990
the said Warrrant was deposited in the joint account with
Reyes grandmother. Two months later Reyes closed the said
account and transferred the funds amounting to P13,112.91 to
his joint account with his wife. On January 1991 the US
Treasury Warrant issued on January 1, 1990 was dishonored as
it was discovered the Emeteria died three days prior to its
issuance. The US Treasury Department then requested BPI for
a refund. This was communicated to Reyes through a
telegram on whichhe replied that he would drop by the bank
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to look into the matter. He also verbally authorized them to
debit the amount on the US Treasury Warrant from his account
with his wife. The bank then debited the amount on the same
day. On February 1991 Reyes went to the bank and demanded
restitution of the debited amount and filed a suit for damages.
BPI contested the complaint and counterclaimed for moral and
exemplary damages. The Trial Court dismissed Reyes
complaint for lack of cause of action. Reyes moved the case to
the CA where the trial courts decision was set aside and BPI
was ordered to credit the respondent 10,556.00 plus interest
at applicable rates hence, this petition.
Issue:
Whether legal compensation is applicable.
Held:
Yes. The verbal authorization was proved by preponderance of
evidence (corroborated testimonies of the branch manager
[Grace Romero] and assistant manager [Bernardo]). More
importantly,Article 1290 of the Civil Code provides that when
all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even
though the creditors and debtors are not aware of the
compensation. Legal compensation operates even against
the will of the interested parties and even without the consent
of them. All the elements of legal compensation is present in
the case at bar. The presence of Reyes wife does not negate
the element of mutuality of parties, i.e., that they must be
creditors and debtors of each other on their own right. Reyes
wife is not a party in the case since she never asserted any
right to the debited US Treasury Warrant.
PNB vs CA & Ramon Lapez
-by Aeyresc Sayadi
Facts: PNB commits a double entry in favor of Ramon Lapez
account at PNB totaling to P87,380.44 Ramon Lapez had a
transaction with National Commercial Bank of Jeddah(NCB-
Jeddah). Wherein NCB-Jeddah sent a remittance amounting to
$2,627.11 to PNB and for PNB to remit it to Citibank-Greenhills
for the account of Ramon Lapez. However, PNB did not remit
the said remittance to the Citibank-Greenhills.
The Second remittance of P34, 340.38 was from Libya which
was deposited at a bank in Libya to be remitted to PNB and to
be credited to the account of Lapez at PNB. The two
remittances were seized by PNB and applied it to the
indebtedness of Ramon Lapez by way of compensation.
Issue:Whether there is a valid compensation that took place
or whether PNB may validly apply the two remittances to the
indebtedness of Ramon Lapez with the PNB?
Held: There is no valid compensation on the 1st remittance,
PNB holds the money in favor of Citibank. An implied trust was
created between NCB-Jeddah and PNB. PNB is considered
debtor to Citibank and not to Ramon Lapez. Such transactions
between NCB-Jeddah and PNB may be treated as stipulation
pour autri. For compensation to apply, Article 1279 Civil
Code provides: In order that compensation may prosper, it is
necessary:
(1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other;
(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 the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
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(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated
in due time to the debtor.
Stipulation pour autri is an agreement in favor of a 3rd party.
In the case at bar, PNB and Ramon Lapez is not principal
debtor and principal creditor to each other.
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 properly take place between the parties.
PHILIPPINE TRUST COMPANY VS ROXAS
-by Hannah Leuterio
ARTICLE 1278 LEGAL COMPENSATION
FACTS:
Spouses Roxas procured loans from Philippines Trust Company
(PTC) in the amount of 2,523,520.00 to finance their real
estate business. These loan were secured by real estate
mortgages of Spouses Roxas real properties.
On April 10, 1979 PTC, Spouses Roxas and Roben Construction
and Furnishing Group Inc. entered into a contract of building
construction under which PTC granted additional loan of
900,000 to Spouses Roxas to enable them to finish their
housing projects. This was superseded by a new contract
executed by PTC, Spouses Roxas and Rosendo Dominguez
substituted RobenConsruction as contractor under the same
terms and conditions of the contract dated April 10, 1979
Due to financial difficulties, Spouses Roxas missed
amortization payments in their loans with PTC and did not
finish their housing project.
On March 28, 1980 Dominguez filed a complaint against PTC
and Spouses Roxas for breach of contract of building
construction. When Spouses Roxas filed their answer they
included cross claim against PTC. In Response, PTC filed a
counterclaim against the Spouses Roxas on their unpaid loan
obligation amounting to 3,053,738.50 plus interest, and the
amount of 245.720 as attorneys fee and in default of such
payments, foreclosure of the real estate mortgages executed
by Spouses Roxas in favor of PTC. Trial court rendered its
decision in favor of Dominguez. PTC and SpusesRoxas
appealed to the Court of Appeals. To this date, the same
remains pending.
On August 31, 1981 PTC filed with the provincial sheriff of
Bataan a petition for extrajudicial foreclosure of the real
estate mortgages. the SpousesRoxas countered with an
injunction and damages with the RTC of Bataan which ruled
in favor of SpousesRoxasand issued a permanent injunction
perpetually enjoining the extrajudicial foreclosure of the
mortgage properties, with damages. The CA affirmed the
decision of the RTC and when the decision became final, the
SpousesRoxas moved for execution thereof.
PTC FILED AN OPPOSITION TO THE MOTION FOR EXECUTION,
CLAIMING LEGAL COMPENSATION TO OFFSET THE JUDGEMENT
DEBT (DAMAGES) DUE TO THE SPOUSES ROXAS - RTC denied
the opposition and said that PTC is deemed to have waived
said defense when it failed/omitted to invoke it in its
Answer(pleading in the regular trial) -PTC filed a case with the
CA (assailing the decision of the RTC) - CA said that NOT ALL
the requisites of legal compensation under 1279 are present
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and cannot be raised belatedly for the first time in the
execution stage -PTC appealed to the SC
ISSUE
W/N Legal Compensation applies over a judgement debt
(decision rendering you liable for damages) against an
existing and outstanding debt.
PTC argues that it did not raise the defense of compensation
in the Answer and before the trial stage (in the RTC of
BATAAN) because the debt was not yet due at the time the
answer was filed
SpousesRoxas argue that legal compensation is not applicable
because both the demandability of the loan as well as the
exact amount due is still being contested in a different case
RULING OF THE SUPREME COURT
SC: -We agree with the Court of Appeals that it was too late
for PTC to set up legal compensation as a defense because
the Main Case had already reached the execution stage. The
rule is that once a decision becomes final and executory,
execution shall issue as a matter of right, and the issuance of
a writ of execution is the court's ministerial duty, compellable
by mandamus. -The Bataan R TC and the Court of Appeals also
correctly ruled that PTC should have raised the 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 it is proved will its effects retroact to the
moment when all the requisites under Article 1279 of the Civil
Code have concurred -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 it filed its answer is
unconvincing. Under Rule 8, Section 2 of the 1964 Rules of
Court, "[a] party may set forth two or more statements of a
claim or defense alternatively or hypothetically, either in one
cause of action or defense or in separate causes of action or
defenses." -Thus, the defense of compensation would have
been proper and allowed under the rules even if PTC
disclaimed any liability at the time it filed its answer. Hence,
there can be no other conclusion than that PTC is already
estopped from raising the issue of legal compensation.
Even if we assume that legal compensation was not waived
and was otherwise timely raised, we find that not all requisites
of legal compensation are present in this case. Under Article
1279, in order for legal compensation to take place, the
following requisites must concur: (a) that each one of the
obligors be bound principally, and that he be at the same time
a principal creditor of the other; (b) 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 the latter has
been stated; (c) that the two debts be due; (d) that they be
liquidated and demandable; and ( e) that over neither of them
there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
Here, the fourth requisite is absent. A debt is liquidated when
its existence and amount are determined. Compensation can
only take place between certain and liquidated debts; it
cannot extend to unliquidated, disputed claims. Since the loan
obligation, including its amount and demandability, is still
being disputed, PTC's credit cannot be considered liquidated
as of yet. Consequently, no legal compensation could have
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taken place between PTC's loan credit and the Spouses Roxas' Whether extinctive or modificatory, novation is made either
judgment credit. by changing the object or the principal conditions, referred to
as objective or real novation; or by substituting the person of
the debtor or subrogating a third person to the rights of the
ART. 1291- NOVATION
creditor, an act known as subjective or personal novation. For
novation to take place, the following requisites must concur:
GARCIA vs. LLAMAS
1) There must be a previous valid obligation.
-by Sandra Castres
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
FACTS:
4) There must be a valid new contract.
On 23 December 1996, petitioner and de Jesus
Novation may also be express or implied. It is
borrowed P400,000.00 from respondent. They executed a
express when the new obligation declares in unequivocal
promissory note wherein they bound themselves jointly and
terms that the old obligation is extinguished. It is implied
severally to pay the loan on or before 23 January 1997 with a
when the new obligation is incompatible with the old one on
5% interest per month. When the loan has long been overdue
every point. The test of incompatibility is whether the two
and petitioner and de Jesus have failed and refused to pay it,
obligations can stand together, each one with its own
respondent brought a complaint for sum of money and
independent existence.
damages.
Applying the foregoing to the instant case, the Court
Petitioner averred that he assumed no liability under
held that no novation took place.
the promissory note because he signed it merely as an
The parties did not unequivocally declare that the old
accommodation party for de Jesus; and, alternatively, that he
obligation had been extinguished by the issuance and the
is relieved from any liability arising from the note inasmuch as
acceptance of the check, or that the check would take the
the loan had been paid by de Jesus by means of a check dated
place of the note. There is no incompatibility between the
17 April 1997; and that, in any event, the issuance of the
promissory note and the check. The check had been issued
check and respondents acceptance thereof novated or
precisely to answer for the obligation. On the one hand, the
superseded the note.
note evidences the loan obligation; and on the other, the
Respondent asserted that the loan remained unpaid
check answers for it. Verily, the two can stand together.
for the reason that the check issued by de Jesus bounced.
Neither could the payment of interestswhich, in
For his part, de Jesus contended that out of the
petitioners view, also constitutes novationchange the terms
supposed P400,000.00 loan, he received only P360,000.00,
and conditions of the obligation. Such payment was already
the P40,000.00 having been advance interest thereon for two
provided for in the promissory note and, like the check, was
months; and that he paid the sum of P120,000.00 by way of
totally in accord with the terms thereof.
interests the sum of P40,000.00, representing the peso
Also unmeritorious is petitioners argument that the
equivalent of his accumulated leave credits, another
obligation was novated by the substitution of debtors. In order
P40,000.00 as advance interest, and still another P40,000.00
to change the person of the debtor, the old one must be
as interest for the months of March and April 1997.
expressly released from the obligation, and the third person or
ISSUE:
new debtor must assume the formers place in the relation.
Whether or not there was novation of the obligation.
Well-settled is the rule that novation is never presumed.
RULING:
Consequently, that which arises from a purported change in
1. NO
the person of the debtor must be clear and express. It is thus
Petitioners argument that the obligation was
incumbent on petitioner to show clearly and unequivocally
extinguished when de Jesus paid the loan with the check is
that novation has indeed taken place.
unmeritorious. The check could not have extinguished the
In the present case, petitioner has not shown that he
obligation because it bounced upon presentment. By law, the
was expressly released from the obligation, that a third person
delivery of a check produces the effect of payment only when
was substituted in his place, or that the joint and solidary
it is encashed.
obligation was cancelled and substituted by the solitary
Novation is a mode of extinguishing an obligation by
undertaking of De Jesus. The CA aptly held:
changing its objects or principal obligations, by substituting a
x xx. Plaintiff s acceptance of the bum check did not result in
new debtor in place of the old one, or by subrogating a third
substitution by de Jesus either, the nature of the obligation
person to the rights of the creditor. Article 1293 of the Civil
being solidary due to the fact that the promissory note
Code defines novation as follows:
expressly declared that the liability of appellants thereunder is
Art. 1293. Novation which consists in substituting a new
joint and solidary. Reason: under the law, a creditor may
debtor in the place of the original one, may be made even
demand payment or performance from one of the solidary
without the knowledge or against the will of the latter, but not
debtors or some or all of them simultaneously, and payment
without the consent of the creditor. Payment by the new
made by one of them extinguishes the obligation. It therefore
debtor gives him rights mentioned in articles 1236 and 1237.
follows that in case the creditor fails to collect from one of the
In general, there are two modes of substituting the
solidary debtors, he may still proceed against the other or
person of the debtor: (1) expromision and (2) delegacion. In
others. x xx
expromision, the initiative for the change does not come from
Moreover, it must be noted that for novation to be
and may even be made without the knowledge ofthe
valid and legal, the law requires that the creditor expressly
debtor, since it consists of a third persons assumption of the
consent to the substitution of a new debtor. Since novation
obligation. As such, it logically requires the consent of the
implies a waiver of the right the creditor had before the
third person and the creditor. In delegacion, the debtor offers,
novation, such waiver must be express. It cannot be
and the creditor accepts, a third person who consents to the
supposed, without clear proof, that the present respondent
substitution and assumes the obligation; thus, the consent of
has done away with his right to exact fulfilment from either of
these three persons are necessary.
the solidary debtors.
Novation may also be extinctive or modificatory. It is
More important, De Jesus was not a third person to
extinctive when an old obligation is terminated by the creation
the obligation. From the beginning, he was a joint and solidary
of a new one that takes the place of the former. It is merely
obligor of the P400,000 loan; thus, he can be released from it
modificatory when the old obligation subsists to the extent
only upon its extinguishment. Respondents acceptance of his
that it remains compatible with the amendatory agreement.

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

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OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

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

ACE FOODS, INC., vs. MICRO PACIFIC TECHNOLOGIES

CO., LTD.
-by Emmanuel E. Monteroyo

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

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OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests
ACE Foods accepted MTCLs proposal and accordingly issued
a Purchase Order for the subject products amounting to
P646,464.00 (purchase price).
MTCL delivered the said products to ACE Foods as in the
invoice receipt. The fine print of the invoice states, inter alia,
that "[t]itle to sold property is reserved in MICROPACIFIC
TECHNOLOGIES CO., LTD. until full compliance of the terms
and conditions of above and payment of the price" (title
reservation stipulation).
After delivery, the subject products were then installed and
configured in ACE Foodss premises. MTCLs demands against
ACE Foods to pay the purchase price, however, it remained
unheeded.
Instead of paying the purchase price, ACE Foods sent MTCL a
Letter stating that it "ha[s] been returning the [subject
products] to [MTCL] thru [its] sales representative Mr. Mark
Anteola who has agreed to pull out the said [products]but had
failed to do so up to now."
ACE Foods lodged a Complaint against MTCL before the RTC,
praying that the latter pull out from its premises the subject
products since MTCL breached its "after delivery services"
obligations to it, particularly, to:
(a) install and configure the subject products;
(b) submit a cost benefit study to justify the purchase of the
subject products; and
(c) train ACE Foodss technicians on how to use and maintain
the subject products.
ACE Foods likewise claimed that the subject products MTCL
delivered are defective and not working.
Defense of MTCL: In its Answer with Counterclaim,
MTCL maintained that it had duly complied with its obligations
to ACE Foods. MTCL, however, alleged that there was actually
no agreement as to the purported "after delivery services."
Further, MTCL posited that ACE Foods refused and failed to
pay the purchase price for the subject products despite the
latters use of the same for a period of nine (9) months. As
such, MTCL prayed that ACE Foods be compelled to pay the
purchase price, as well as damages related to the transaction.
RTC: Agreement between ACE Foods and MTCL is in the
nature of a contract to sell. the prospective seller explicitly
reserves the transfer of title to the prospective buyer, and
said transfer is conditioned upon the full payment of the
purchase price
Dissatisfied, MTCL elevated the matter on appeal
CA: CA reversed and set aside the RTCs ruling, ordering ACE
Foods to pay MTCL the amount of P646,464.00, plus legal
interest at 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 sale, observing that the said
contract had been perfected from the time ACE Foods sent the
Purchase Order to MTCL which, in turn, delivered the subject
products covered by the Invoice Receipt and subsequently
installed and configured them in ACE Foodss premises
Aggrieved, ACE Foods moved for reconsideration which was,
however, denied. Hence this petition.
ISSUE:
Whether ACE Foods should pay MTCL the purchase price
for the subject products. YES!
Whether there was novation. NO!
RULING:
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A contract is what the law defines it to be, taking into
consideration its essential elements, and not what the
contracting parties call it.33 The real nature of a contract may
be determined from the express terms of the written
agreement and from the contemporaneous and subsequent
acts of the contracting parties. However, in the construction
or interpretation of an instrument, the intention of the
parties is primordial and is to be pursued.
In this case, the Court concurs with the CA that the parties
have agreed to a contract of sale and not to a contract to sell
as adjudged by the RTC. Bearing in mind its consensual
nature, a contract of sale had been perfected at the precise
moment ACE Foods, as evinced by its act of sending MTCL the
Purchase Order, accepted the latters proposal to sell the
subject products in consideration of the purchase price
of P646,464.00. From that point in time, the reciprocal
obligations of the parties i.e., on the one hand, of MTCL to
deliver the said products to ACE Foods, and, on the other
hand, of ACE Foods to pay the purchase price therefor within
thirty (30) days from delivery already arose and
consequently may be demanded.
On the issue of NOVATION
The Court must dispel the notion that the stipulation
anent MTCLs reservation of ownership of the subject products
as reflected in the Invoice Receipt, i.e., the title reservation
stipulation, changed the complexion of the transaction from a
contract of sale into a contract to sell. Records are bereft of
any showing that the said stipulation novated the contract of
sale between the parties which, to repeat, already existed at
the precise moment ACE Foods accepted MTCLs proposal. To
be sure, novation, in its broad concept, may either be
extinctive or modificatory. Novation is never presumed, and
the animus novandi, whether totally or partially, must appear
by express agreement of the parties, or by their acts that are
too clear and unequivocal to be mistaken.
In the present case, it has not been shown that the title
reservation stipulation appearing in the Invoice Receipt had
been included or had subsequently modified or superseded
the original agreement of the parties.
The fact that the Invoice Receipt was signed by a
representative of ACE Foods does not, by and of itself,
prove animus novandi since: (a) it was not shown that the
signatory was authorized by ACE Foods (the actual party to
the transaction) to novate the original agreement; (b) the
signature only proves that the Invoice Receipt was received by
a representative of ACE Foods to show the fact of delivery;
and (c) as matter of judicial notice, invoices are generally
issued at the consummation stage of the contract and not its
perfection, and have been even treated as documents which
are not actionable per se, although they may prove sufficient
delivery. Thus, absent any clear indication that the title
reservation stipulation was actually agreed upon, the Court
must deem the same to be a mere unilateral imposition on
the part of MTCL which has no effect on the nature of the
parties original agreement as a contract of sale. ACE Foodss
obligation to pay the purchase price as well as to accept
the delivery of the goods, remain enforceable and
subsisting.
WHEREFORE, petition is DENIED. CA decision is
affirmed.
BPI VS DOMINGO
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Midterm Case Digests
-by Gerard Tinampay
FACTS:
On September 27, 1993, respondent Amador Domingo and
his wife, the late Mercy Maryden Domingo, executed a
Promissory Note in favor of Makati Auto Center, Inc. in the
sum of P629,856.00, payable in 48 successive monthly
installments in the amount of P13,122.00 each. They
simultaneously executed a Deed of Chattel Mortgage over a
1993 Mazda 323 (subject vehicle) to secure the payment of
their Promissory Note. Makati Auto Center, Inc. then assigned,
ceded, and transferred all its rights and interests over the said
Promissory Note and chattel mortgage to Far East Bank and
Trust Company (FEBTC).
On April 7, 2000, the Securities and Exchange Commission
(SEC) approved and issued the Certificate of Filing of the
Articles of Merger and Plan- of Merger executed on January
20, 2000 by and between BPI, the surviving corporation, and
FEBTC, the absorbed corporation. By virtue of said merger, all
the assets and liabilities of FEBTC were transferred to and
absorbed by BPI.
The spouses Domingo defaulted when they failed to pay 21
monthly installments that had fallen due consecutively from
January 15, 1996 to September 15, 1997. BPI, being the
surviving corporation after the merger, demanded that the
spouses Domingo pay the balance of the Promissory Note
including accrued late payment charges/interests or to return
the possession of the subject vehicle for the purpose of
foreclosure in accordance with the undertaking stated in the
chattel mortgage. When the spouses Domingo still failed to
comply with its demands, BPI filed on November 14, 2000 a
Complaint for Replevin and Damages (or in the alternative, for
the collection of sum of money, interest and other charges,
and attorney's fees. BPI included a John Doe as defendant
because at the time of filing of the Complaint, BPI was already
aware that the subject vehicle was in the possession of a third
person but did not yet know the identity of said person.
the spouses Domingo raised the following affirmative
defenses:
4. [BPI] has no cause of action against the [spouses Domingo].
5. The Honorable Court has no jurisdiction over this case,
6. As per the allegations in the complaint, JOHN DOE is an
indispensable party to this case so with his whereabouts
unknown, service by publication should first be made before
proceeding with the trial of this case;
7. Defendant Maryden Domingo once obtained a car loan from
Far East Bank and Trust Company but the car was later sold to
Carmelita S. Gonzales with the bank's conformity and the
buyer subsequently assumed payment of the balance of the
mortgaged loan.
the prosecution presented as witness Vicente Magpusao, a
former employee of FEBTC and now an Account Analyst of BPI.
His testimony was summed up by the MeTC as follows:
Vicente Magpusao, [BPI's] Account Analyst and formerly
connected with Far East Bank and Trust Company testified
that on September 27, 1993, [the spouses Domingo] for
consideration executed and delivered to Makati Auto Center,
Inc. a Promissory Note in the sum of P629,856.00 payable in
monthly installments in accordance with the schedule of
payment indicated in said Promissory Note. In order to secure
the payment of the obligation, the [spouses Domingo]
executed in favor of said Makati Auto Center, Inc. on the same
date a Chattel Mortgage over one (1) unit of 1993 Mazda
(323) with Motor No. B6-270146 and with Serial No.
BG1062M9100287. With notice to [the spouses Domingo],
said Makati Auto Center, Inc. assigned to Far East Bank and
Trust Co. the Chattel Mortgage as shown by the 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
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Domingo] defaulted in complying with the terms and
conditions of the Promissory Note with Chattel Mortgage by
failing to pay twenty[-one] (21) successive installments which
fell due on January 15, 1996 up to September 15, 1997. [BPI]
sent a demand letter [to] defendant Mercy Domingo thru
registered mail demanding payment of the whole balance of
the Promissory Note plus the stipulated interest and other
charges or return to [BPI] the possession of the above-
described motor vehicle. There were some negotiations made
by the [spouses Domingo] to their In-House Legal Assistant
but the same did not materialize. Based on the Statement of
Account dated October 31, 2000, [the spouses Domingo have]
an outstanding balance of P275,562.00 exclusive of interest
and other charges.
On cross-examination, the witness explained that the first
time he came to handle [the spouses Domingo's] account was
in 1997. Despite the fact that he was not yet employed with
the bank in 1993, he knew exactly what happened in this
particular transaction because of his experience in auto
financing. He also has an access [to] the Promissory Note,
Chattel Mortgage and other records of payment made by the
bank. Based on the records, the [spouses Domingo] issued
several postdated checks but not for the entire term. There
were payments made from October 30, 199[3] up to
September 14, 1994. He was not the one who received
payments for the auto finance. If there were receipts issued,
they will only ride for the account of Mrs. Domingo. He was
not sure if these receipts are kept in the warehouse or
probably disposed of by the bank since the transaction was
made in 1997. They already have a computer records of all
payments made by their client. Based on the subsidiary
ledger, there were three (3) checks that bounced and these
are payments from the new buyer. They only have one (1)
photocopy of these checks in the amount of P325,431.60
while the other two (2) are missing. He was not aware who
owns Cargo and Hardware Corporation but the check was
issued by a certain Miss Gonzales. The witness further
testified that anyone can pay the monthly amortization as
long as the payment is for the account of Maryden Domingo.
They cannot include Carmelita Gonzales as one of the
defendants in this case because they don't have a document
executed by the latter in behalf of Far East Bank and Trust Co.
The bank did not approve the Deed of Sale with Assumption of
Mortgage.
Witness further testified that he found the photocopy of the
Deed of Sale in the records of Maryden Domingo. The
Promissory Note and Chattel Mortgage were executed by the
defendants Maryden and Amador Domingo. There was no
assumption of obligation of the [spouses Domingo]. Witness
however admitted that Far East Bank did not tum over to [BPI]
all the records pertaining to the account of the [spouses
Domingo ]
For his defense, defendant Amador Domingo testified that his
wife and co-defendant Mercy Maryden Domingo died on
November 27, 2003. He admitted that his wife bought a car
and was mortgaged to Far East Bank and Trust Company. He
identified the Chattel Mortgage and the Promissory Note he
executed together with his wife. In connection with the
execution of this Promissory Note, he recalled that his wife
issued forty-eight (48) checks. The twelve (12) checks were
cleared by the bank and his wife was able to obtain a discount
for prompt payments up to October 1994. While they were
still paying for the car, Carmelita Gonzales got interested to
buy the car and is willing to assume the mortgage. After
furnishing the bank [with] the Deed of Sale duly notarized,
Carmelita Gonzales subsequently issued a check payable to
Far East Bank and Trust Company and the remaining
postdated checks were returned to them. Based on the
application of payment prepared by [BPI's] witness, Carmelita
Gonzales made payments from November 14, 1995 to
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Atty. Lydia C. Galas
Midterm Case Digests
December 1995. Aside from these payments on May 19, 1997,
Carmelita Gonzales issued a check to Far East Bank in the
amount of P385,431.60. In 1996, he received a phone call
from a certain Marvin Orence asking for their assistance to
locate the car which Carmelita Gonzales bought from them.
His lawyer went to Land Transportation Office for assistance.
From the time Ms. Gonzales started to pay, they never
received any demand letter from Far East Bank. Thereafter, on
February 29, 1997, they received a demand letter from Espino
Law Office [on] behalf of [FEBTC]. His lawyer made a reply on
March 31, 1997 stating therein that the motor vehicle for
which the loan was obtained had been sold to Carmelita
Gonzales as of July 5, 1994 with the knowledge and approval
of their client. After three years, they received another
demand letter dated October 31, 2000 from Labaguis Law
Office. His lawyer made the same reply on March 7, 2000 and
another letter on November 24, 2000. Witness further
testified that this malicious complaint probably triggered the
early demise of his wife who has a high blood pressure. His
wife died of aneurism. As damages, he is asking for the
amount of P200,000.00 as moral damages, P75,000.00 as
attorney's fees and P5,000.00 appearance fee.
On cross-examination, witness elaborates that when his wife
presented to Far East Bank the Deed of Sale with Assumption
of Mortgage, the bank made no objection and returned all
their postdated checks. His wife was the one who deal[t] with
Carmelita Gonzales but he always provide[d] assistance with
respect to paper works. Aside from the aforesaid Deed of Sale,
there is no other document which shows the conformity of the
bank. They were only verbally assured by Mr. Orence that
their papers are in order.
ISSUE:
Whether or not there had been a novation of the loan
obligation with chattel mortgage of the spouses Domingo to
BPI so that the spouses Domingo were released from said
obligation and Carmelita was substituted as debtor.
HELD:
The Court answers in the negative and grants the Petition.
In De Cortes v. Venturanza, the Court discussed some
principles and jurisprudence underlying the concept and
nature of novation as a mode of extinguishing obligations:
According to Manresa, novation is the extinguishment of an
obligation by the substitution or change of the obligation by a
subsequent one which extinguishes or modifies the first,
either by changing the object or principal conditions, or by
substituting the person of the debtor, or by subrogating a
third person to the rights of the creditor (8 Manresa 428, cited
in IV Civil Code of the Philippines by Tolentino 1962 ed., p.
352). Unlike other modes of extinction of obligations, novation
is a juridical act with a dual function - it extinguishes an
obligation and creates a new one in lieu of the old.
Article 1293 of the New Civil Code provides:
"Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor."
Under this provision, there are two forms of novation by
substituting the person of the debtor, and they are: (1)
expromision and (2) delegacion. In the former, the initiative
for the change does not come from the debtor and may even
be made without his knowledge, since it consists in a third
person assuming the obligation. As such, it logically requires
the consent of the third person and the creditor. In the latter,
the debtor offers and the creditor accepts a third person who
consents to the substitution and assumes the obligation, so
that the intervention and the consent of these three persons
are necessary. In these two modes of substitution, the consent
of the creditor is an indispensable requirement.
The Court also emphasized in De Cortes the indispensability of
the creditor's consent to the novation, whether expromision or
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delegacion, given that the "[s]ubstitution of one debtor for
another may delay or prevent the fulfillment of the obligation
by reason of the financial inability or insolvency of the new
debtor; hence, the creditor should agree to accept the
substitution in order that it may be binding on him."
Both the R TC and the Court of Appeals found that there was
novation by delegacion in the case at bar. The Deed of Sale
with Assumption of Mortgage was executed between Mercy
and Carmelita, thus, their consent to the substitution as
debtors and third person, respectively, are deemed
undisputed. It is the existence of the consent of BPI as creditor
that is being challenged herein.
As a general rule, since novation implies a waiver of the right
the creditor had before the novation, such waiver must be
express. The Court explained the rationale for the rule in
Testate Estate of Lazaro Mota v. Serra:
It should be noted that in order to give novation its legal
effect, the law requires that the creditor should consent to the
substitution of a new debtor. This consent must be given
expressly for the reason that, since novation extinguishes the
personality of the first debtor who is to be substituted by a
new one, it implies on the part of the creditor a waiver of the
right that he had before the novation, which waiver must be
express under the principle that renuntiatio non praesumitor,
recognized by the law in declaring that a waiver of right may
not be performed unless the will to waive is indisputably
shown by him who holds the right.
However, in Asia Banking Corporation v. Elser, the Court
qualified thus:
The aforecited article 1205 [now 1293] of the Civil Code does
not state that the creditor's consent to the substitution of the
new debtor for the old be express, or given at the time of the
substitution, and the Supreme Court of Spain, in its judgment
of June 16, 1908, construing said article, laid down the
doctrine that "article 1205 of the Civil Code does not mean or
require that the creditor's consent to the change of debtors
must be given simultaneously with the debtor's consent to the
substitution; its evident purpose being to preserve the
creditor's full right, it is sufficient that the latter's consent be
given at any time and in any form whatever, while the
agreement of the debtors subsists." The same rule is stated in
the EnciclopediaJuridica Espanola, volume 23, page 503,
which reads: "The rule that this kind of novation, like all
others, must be express, is not absolute; for the existence of
the consent may well be inferred from the acts of the creditor,
since volition may as well be expressed by deeds as by
words." The understanding between Henry W. Elser and the
principal director of Yangco, Rosenstock& Co., Inc., with
respect to Luis R. Y angco' s stock in said corporation, and the
acts of the board of directors after Henry W. Elser had
acquired said shares, in substituting the latter for Luis R. Y
angco, are a clear and unmistakable expression of its consent.
When this court said in the case of Estate of Mota vs. Serra,
that the creditor's express consent is necessary in order that
there may be a novation of a contract by the substitution of
debtors, it did not wish to convey the impression that the
word "express" was to be given an unqualified meaning, as
indicated in the authorities or cases, both Spanish and
American, cited in said decision.
Hence, based on the aforequoted ruling in Asia Banking, the
existence of the creditor's consent may also be inferred from
the creditor's acts, but such acts still need to be "a clear and
unmistakable expression of [the creditor's] consent.
In Ajax Marketing and Development Corporation v. Court of
Appeals, the Court further clarified that:
The well settled rule is that novation is never presumed.
Novation will not be allowed unless it is clearly shown by
express agreement, or by acts of equal import. Thus, to effect
an objective novation it is imperative that the new obligation
expressly declare that the old obligation is thereby
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Atty. Lydia C. Galas
Midterm Case Digests
extinguished, or that the new obligation be on every point
incompatible with the new one. In the same vein, to effect a
subjective novation by a change in the person of the debtor it
is necessary that the old debtor be released expressly from
the obligation, and the third person or new debtor assumes
his place in the relation. There is no novation without such
release as the third person who has assumed the debtor's
obligation becomes merely a co-debtor or surety.
The burden of establishing a novation is on the party who
asserts its existence. Contrary to the findings of the Court of
Appeals and the RTC, Amador failed to discharge such burden
as he was unable to present proof of the clear and
unmistakable consent of BPI to the substitution of debtors.
Irrefragably, there is no express consent of BPI to the
substitution of debtors. The Court of Appeals and the RTC
inferred the consent of BPI from the following facts: (1) BPI
had a copy of the Deed of Sale and Assumption of Mortgage
executed between Mercy and Carmelita in its file, indicating
its knowledge of said agreement, and still it did not interpose
any objection to the same; (2) BPI (through FEBTC) returned
the spouses Domingo's checks and accepted Carmelita's
payments; and (3) BPI did not demand any payment from the
spouses Domingo not until 3 0 months after Carmelita
assumed the payment of balance on the Promissory Note.
The Court disagrees with the inferences made by the Court of
Appeals and the RTC.
First, that BPI (or FEB TC) had a copy of the Deed of Sale and
Assumption of Mortgage executed between Mercy and
Carmelita in its file does not mean that it had consented to
the same. The very Deed itself states:
That the VENDEE [Carmelita] assumes as he/she had assumed
to pay the aforecited mortgage in accordance with the original
terms and conditions of said mortgage, and the parties hereto
[Mercy and Carmelita] have agreed to seek the conformity of
the MORTGAGEE [FEBTC]. This brings the Court back to the
original question of whether there is proof of the conformity of
BPI.
The Court notes that the documents of BPI concerning the car
loan and chattel mortgage are still in the name of the spouses
Domingo. No new promissory note or chattel mortgage had
been executed between BPI (or FEBTC) and Carmelita. Even
the account itself is still in the names of the spouses Domingo.
The absence of objection on the part of BPI (or FEB TC) cannot
be presumed as consent. Jurisprudence requires presentation
of proof of consent, not mere absence of objection. Amador
cannot rely on Babst which involved a different factual milieu.
Relevant portions of the Court's ruling in Babst are reproduced
below:
In the case at bar, Babst, MULTI and ELISCON all maintain that
due to the failure of BPI to register its objection to the take-
over by DBP of ELISCON's assets, at the creditors' meeting
held in June 1981 and thereafter, it is deemed to have
consented to the substitution of DBP for ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear
indications that BPI was aware of the assumption by DBP of
the obligations of ELISCON. In fact, BPI admits that
"[T]he Development Bank of the Philippines (DBP), for a time,
had proposed a formula for the settlement of Eliscon's past
obligations to its creditors, including the plaintiff [BPI], but the
formula was expressly rejected by the plaintiff as not
acceptable (long before the filing of the complaint at bar)."
The Court of Appeals held that even if the account officer who
attended the June 1981 creditors' meeting had expressed
consent to the assumption by DBP of ELISCON's debts, such
consent would not bind BPI for lack of a specific authority
therefor. In its petition, ELISCON counters that the mere
presence of the account officer at the meeting necessarily
meant that he was authorized to represent BPI in that
creditors' meeting. Moreover, BPI did not object to the
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substitution of debtors, although it objected to the payment
formula submitted by DBP.
Indeed, the authority granted by BPI to its account officer to
attend the creditors' meeting was an authority to represent
the bank, such that when he failed to object to the
substitution of debtors, he did so on behalf of and for the
bank. Even granting arguendo that the said account officer
was not so empowered, BPI could have subsequently
registered its objection to the substitution, especially after it
had already learned that DBP had taken over the assets and
assumed the liabilities of ELISCON. Its failure to do so can only
mean an acquiescence in the assumption by DBP of
ELISCON's obligations. As repeatedly pointed out by ELISCON
and MULTI, BPI's objection was to the proposed payment
formula, not to the substitution itself. In Babst, there was a
clear opportunity for BPI, as creditor therein, to object to the
substitution of debtors given that its representative attended
a creditor's meeting, during which, said representative
already objected to the proposed payment formula made by
DBP, as the new debtor. Hence, the silence of BPI during the
same meeting as to the matter of substitution of debtors
could already be interpreted as its acquiescence to the same.
In contrast, there was no clear opportunity for BPI (or FEB TC)
to have expressed its objection to the substitution of debtors
in the case at bar.
Second, the consent of BPI to the substitution of debtors
cannot be deduced from its acceptance of payments from
Carmelita, absent proof of its clear and unmistakable consent
to release the spouses Domingo from their obligation. Since
the spouses Domingo remained as debtors of BPI, together
with Carmelita, the fact that BPI demanded payment from the
spouses Domingo 30 months after accepting payment from
Carmelita is insignificant.
The acceptance by a creditor of payments from a third person,
who has assumed the obligation, will result merely to the
addition of debtors and not novation. The creditor may
therefore enforce the obligation against both debtors. As the
Court pronounced in Magdalena Estates, Inc. v. Rodriguez,
"[t]he mere fact that the creditor receives a guaranty or
accepts payments from a third person who has agreed to
assume the obligation, when there is no agreement that the
first debtor shall be released from responsibility, does not
constitute a novation, and the creditor can still enforce the
obligation against the original debtor." The Court reiterated in
Quinto v. People that "[n]ot too uncommon is when a stranger
to a contract agrees to assume an obligation; and while this
may have the effect of adding to the number of persons liable,
it does not necessarily imply the extinguishment of the
liability of the first debtor. Neither would the fact alone that
the creditor receives guaranty or accepts payments from a
third person who has agreed to assume the obligation,
constitute an extinctive novation absent an agreement that
the first debtor shall be released from responsibility."
Absent proof that BPI gave its clear and unmistakable consent
to release the spouses Domingo from the obligation to pay the
car loan, Carmelita is simply considered an additional debtor.
Consequently, BPI can still enforce the obligation against the
spouses Domingo even 30 months after it had started
accepting payments from Carmelita.
And third, there is no sufficient or competent evidence to
establish the return of the checks to the spouses Domingo
and the assurance made by FEBTC that the spouses Domingo
were already released from their obligation.
Amador admitted that it was his wife Mercy, together with
Carmelita, who directly transacted with FEBTC regarding the
sale of the subject vehicle to and assumption of mortgage by
Carmelita. Amador had no 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.
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OBLIGATIONS and CONTRACTS
Atty. Lydia C. Galas
Midterm Case Digests

The Court explained in Da Jose v. Angeles that:

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

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