oblicon 2nd exam case digests

8/13/2019 Oblicon 2nd Exam Case Digests

1/34

DEATH OF A DEBTOR

STRONGHOLD INSURANCE VS REPUBLIC ASAHI

Facts:On May 24, 1989, respondent Republic Asahi GlassCorporation entered into a contract with Jose D. Santos, Jr.,the proprietor of JDS Construction (JDS), for the constructionof roadways and a drainage system in Republic Asahis

compound, where respondent was to pay JDS P5,300,000 forsaid construction, which was supposed to be completedwithin a period of 240 days beginning May 8, 1989. In orderto guarantee the faithful and satisfactory performance of itsundertakings, JDS, shall post a performance bond ofP795,000.00. JDS executed jointly and severally withpetitioner Stronghold Insurance Co. Inc. (SICI) theperformance bond.

Two progress billings dated August 14, 1989 and September15, 1989 were submitted by JDS to respondent. According torespondent, the two progress billings accounted for only7.301% of the work supposed to be undertaken by JDS underthe terms of the contract.Several timers prior to November of 1989, respondentsengineers called the attention of JDS to the alleged alarminglyslow pace of the construction, but said reminder wereunheeded by JDS.On November 24, 1989, dissatisfied with the workundertaken by JDS, Republic Asahi extrajudicially rescindedthe contract pursuant to Article XIII of said contract.

Respondent alleged that, as a result of JDSs failure to complywith the provisions of the contract, it had to hire anothercontractor to finish the project, for which it incurred an

additional expense of P3,256,874.00.Respondent then sent two letters to SICI filing its claim underthe bond for not less than P795,000.00, which letters wereboth unheeded.

Respondent then filed a complaint against JDS and SICI.Summons were duly served by the Sheriff on SICI. However,Jose D. Santos, Jr. died on 1990 and JDS Construction was nolonger at its address and its whereabouts were unknown.

Petitioner contends that the death of Santos, the bondprincipal, extinguished his liability under the surety bond, andis automatically released from any liability under the bond.

Issue:W/N the petitioners liability under the performance bondwas automatically extinguished by the death of Santos, theprincipal. No.

Held:As a general rule, the death of either the creditor or thedebtor does not extinguish the obligation. Obligations aretransmissible to the heirs, except when the transmission isprevented by the law, the stipulations of the parties, or the

nature of the obligation. Only obligations that are personal orare identified with the persons themselves are extinguishedby death. A su rety companys liability under the performancebond it issues is solidary. The death of the principal obligor,does not, as a rule, extinguish the obligation and the solidarynature of that liability.

In the present case, whatever monetary liabilities orobligations Santos had under his contracts with respondent

were not intransmissible by their nature, by stipulation, or byprovision of law. Hence, his death did not result in theextinguishment of those obligations or liabilities, whichmerely passed on to his estate. Death is not a defense that heor his estate can set up to wipe out the obligations under theperformance bond.Consequently, petitioner as surety cannot use his death toescape its monetary obligation under its performance bond.

The liability of petitioner is contractual in nature, because itexecuted a performance bond.

Petitioner is solidarily liable with Santos in accordance withthe Civil Code, which provides:

Art 1216. The creditor may proceed against any one of thesolidary debtors or some or all of them simultaneously. Thedemand made against one of them shall not be an obstacle tothose which may subsequently be directed against theothers, so long as the debt has not been fully collected.

In Garcia vs CA, the court stated:The suretys obligation is not an original and direct one forthe performance of his own act, but merely accessory orcollateral to the obligation contracted by the principal.

Nevertheless, although the contract of a surety is in essencesecondary only to a valid principal obligation, his liability tothe creditor or promise of the principal is said to be direct,primary and absolute; in other words, he is directly andequally bound with the principal.


2/34

ARTICLE 1240 TO WHOM PAYMENT SHALL BE MADE

PNB VS CA AND TAN

Facts:Private respondent Loreto Tan is the owner of a parcel of landabutting the national highway in Mandalangan, Bacolod City.Expropriation proceedings were instituted by the governmentagainst private respondent Tan and other property owners

before the CFI of Negros Occidental.

Tan then filed a motion requesting the issuance of an orderfor the release to him of the expropriation price ofP32,480.00.

On May 22, 1978, petitioner PNB was required by the trialcourt to release to Tan the said amount.On May 24, 1978, petitioner, through its Assistant BranchManager Juan Tagamolilia, issued a managers check forP32,480.00 and delivered the same to one Sonia Gonzagawithout Tans knowledge, consent or authority. SoniaGonzaga deposited it in her account with Far East Bank andTrust Co. (FEBTC) and later on withdrew the said amount.Private respondent Tan subsequently demanded payment ofthe amount from petitioner, but the same was refused on theground that petitioner had already paid and delivered theamount to Sonia Gonzaga on the strength of a Special Powerof Attorney (SPA) allegedly executed in her favor by Tan.

Tan then executed an affidavit stating that he had neverexecuted an SPA in favor of Sonia Gonzaga and he had neverauthorized her to receive the sum from petitioner.After failing to recover the amount from PNB, privaterespondent filed a motion with the court to require PNB to

pay the same to him.

Held:There is no question that no payment had ever been made toprivate respondent as the check was never delivered to him.When the court ordered petitioner to pay private respondentthe amount of P32,480.00, it had the obligation to deliver thesame to him. Under Art. 1233 of the Civil Code, a debt shallnot be understood to have been paid unless the thing orservice in which the obligation consists has been completelydelivered or rendered, as the case may be.

The burden of proof of such payment lies with the debtor. Inthe instant case, neither the SPA nor the check issued bypetitioner was ever presented in court.The testimonies of petitioners own witnesses regarding thecheck were conflicting. Tagamolila testified that the checkwas issued to the order of Sonia Gonzaga as attorney -in-factof Loreto Tan, while Elvira Tibon, assistant cash ier of PNB(Bacolod Branch), stated that the check was issued to theorder of Loreto Tan.

Furthermore, contrary to petitioners contention that all thatis needed to be proved is the existence of the SPA, it is also

necessary for evidence to be presented regarding the natureand extent of the alleged powers and authority granted toSonia Gonzaga; more specifically, to determine whether thedocument indeed authorized her to receive paymentintended for private respondent. However, no such evidencewas ever presented.


3/34

CULABA VS CA

Facts:The spouses Francisco and Demetria Culaba were engaged inthe sale and distribution of San Miguel Corporations (SMC)beer products. SMC sold beer products on credit to theCulaba spouses in the amount of P28,650.00. thereafter, theCulaba spouses made a partial payment of P3,740.00, leavingan unpaid balance of P24,910.00. As they failed to pay

despite repeated demands, SMC filed an action for collectionof a sum of money against them before the RTC.

The defendant-spouses denied any liability, claiming that theyhad already paid the plaintiff in full on four separateoccasions. To substantiate this claim, the defendantspresented 4 Temporary Charge Sales (TCS) LiquidationReceipts: 27331, 27318, 27339, 27346. Defendant FranciscoCulaba testified that he made payments to an SMC supervisorwho came in an SMC van. The defendant, in good faith, thenpaid to the said supervisor, and he was, in turn, issuedgenuine SMC liquidation receipts.

SMC, for its part, submitted a publishers affidavit to provethat the entire booklet of TCSL Receipts bearing Nos. 27301-27350 were reported lost by it, and that it caused thepublication of the notice of loss.

Issue:W/N petitioners obligation is extinguished. No

Held:Payment is a mode of extinguishing an obligation. Article1240 of the Civil Code provides that payment shall be madeto the person in whose favor the obligation has been

constituted, or his successor-in-interest, or any personauthorized to receive it. In this case, the payments werepurportedly made to a supervisor of the privaterespondent, who was clan in an SMC uniform and drove anSMC van. He appeared to be authorized to accept payment ashe showed a list of customers accountabilities and issuedSMC liquidation receipts which looked genuine.Unfortunately for petitioner Francisco Culaba, he did notascertain the identity and authority of the said supervisor,nor did he ask to be shown any identification to prove thatthe latter was, indeed, an SMC supervisor. The petitionersrelied solely on the mans representation that he wascollecting payments for SMC. Thus, the payments thepetitioners claimed they made were not the payments thatdischarged their obligation to private respondents.

The basis of agency is representation. A person dealing withan agent is put upon an inquiry and must discover upon hisperil the authority of the agent. In the instant case, thepetitioners loss could have been avoided if they had simplyexercised due diligence in ascertaining the identity of theperson to whom they allegedly made the payments. The factthat they were parting with valuable consideration shouldhave made them more circumspect in handling their business

transactions. Persons dealing with an assumed agent arebound at their peril to ascertain not only the fact agency butalso the nature and extent of authority, and in case either iscontroverted, the burden of proof is upon them to establishit. the petitioners in this case failed to discharge this burden,considering that the private respondent vehemently deniedthat the payments were accepted by it, and were made to itsauthorized representative.


4/34

ALLIED BANKING VS LIM SIO WAN

Facts:On November 14, 1983, respondent Lim Sio Wan depositedwith petitioner Allied Banking Corporation (Allied) a moneymarket placement of P1,152,597.35 for a term of 31 days tomature on December 15, 1983.

On December 5, 1983, a person claiming to be Lim Sio Wan

called up Cristina So, an officer of Allied, and instructed thelatter to pre- terminate Lim Sio Wans money marketplacement, to issue a managers check representing theproceeds of the placement, and to give the check to oneDeborah Dee Santos who would pick up the check. Later,Santos arrived at the bank and signed the application formfor a managers check to be issued. The Bank issued amanagers check and it was deposited in the accountofFilipinas Cement Corporation (FCC) at respondentMetropolitan Bank and Trust Co. (Metrobank), with theforged signature of Lim Sio Wan as indorser.

To clear the check and in compliance with the requirementsof the Philippines Clearing House Corporation (PCHC) Rulesand Regulations, Metrobank stamped a guaranty on thecheck, which reads: All prior endorsements and/or lack ofendorsement guaranteed.The check was then sent to Allied and upon presentment, itfunded the check without even checking the authenticity ofLim Sio Wans purported indorsement. The amoun t on thecheck was credited to the account of FCC.

On December 14, 1983, upon the maturity date of the moneymarket placement, Lim Sio Wan went to withdraw it. She wasthen informed that the placement had been pre-terminated

upon her instructions. She denied giving any instructions andreceiving the proceeds thereof. She desisted from furthercomplaints when she was assured by the banks manager that her money would be recovered. On January 24, 1984, Lim SioWan, realizing that the promise that her money would berecovered would not materialize, sent a demand letter toAllied asking for payment. Allied refused to pay, claiming thatshe had authorized the pre-termination of the placement andits subsequent release to Santos.

Consequently, Lim Sio Wan filed a complaint for the recoveryof the proceeds of her money placement.

Issue:W/N the obligation of Allied to Lim Sio Wan was extinguished.No.

Held:Allied is liable to Lim Sio Wan. Fundamental and familiar isthe doctrine that the relationship between a bank and aclient is one of debtor-creditor.

In a line of cases, the Court ruled that a bank deposit is in thenature of a simple loan or mutuum. In Citibank vs Sabeniano,

the Court ruled that a money market placement is a simpleloan or mutuum. Further, a money market is defined in CebuInternational Finance Corporation vs Court of Appeals as:

A money market is a market dealing in standardized short-term credit instruments (involving large amounts) wherelenders and borrowers do not deal directly with each otherbut through a middle man or dealer in open market. In amoney market transaction, the investor is a lender who loans

his money to a borrower through a middleman or dealer.

In the case at bar, the money market transaction betweenthe petitioner and the private respondent is in the nature of aloan.

Lim Sio Wan, as creditor of the bank for her money marketplacement, is entitled to payment upon her request, or uponmaturity of the placement, or until the bank is released fromits obligation as debtor. Until any such event, the obligationof Allied to Lim Sio Wan remains unextinguished.

Art. 1231 of the Civil Code enumerates the instances whenobligations are considered extinguished, thus:

Art. 1231. Obligations are extinguished:(1) By payment or performance ;(2) By the loss of the thing due;(3) By the condonation or remission of the debt;(4) By the confusion or merger of the rights of creditor anddebtor;(5) By compensation;(6) By novation.

From the factual findings of the trial and appellate courts that

Lim Sio Wan did not authorize the release of her moneymarket placement to Santos and the bank had been negligentin so doing, there is no question that the obligation of Alliedto pay Lim Sio Wan had not been extinguished. Art. 1240 ofthe Code states that payment shall be made to th e person inwhose favor the obligation has been constituted, or hissuccessor in interest, or any person authorized to receive it.

As commented by Arturo Tolentino:Payment made by the debtor to a wrong party does notextinguish the obligation as to the creditor, if there is no faultor negligence which can be imputed to the latter. Even whenthe debtor acted in utmost good faith and by mistake as tothe person of his creditor, or through error induced by thefraud of a third person, the payment to one who is not in facthis creditor, or authorized to receive such payment, is void,except as provided in Article 1241. Such payment does notprejudice the creditor, and accrual of interest is notsuspended by it.

Since there was no effective payment of Lim Sio Wansmoney market placement, the bank still has an obligation topay her at 6% interest from March 16, 1984 until thepayment thereof.


5/34

ARTICLE 1245 DATION IN PAYMENT

ESTANISLAO VS EAST WEST BANK

Facts:On July 24, 1987, petitioners obtained a loan from therespondent in the amount of P3,925,000.00 evidenced by apromissory note and secured by 2 deeds of chattel mortgage:one covering 2 dump trucks and a bulldozer to secure the

loan amount of P2,375,000.00, and another coveringbulldozer and a wheel loader to secure the loan amount ofP1,550,000.00. Petitioners defaulted in the amortizations andthe entire obligation became due and demandable.

On April 10, 2000, respondent bank filed a suit for replevinwith damages praying that the equipment covered by thefirst deed of chattel mortgage be seized and delivered to it.

After the trial court suspended the proceedings, on a movedby the respondent, a deed of assignment date August 16,2000 was drafted by the respondent which provides in part:

ASSIGNOR does hereby ASSIGN, TRANSFER and CONVEY untothe ASIGNEE those motor vehicles, with all their tools andaccessories.

That the ASSIGNEE hereby accepts the assignment in fullpayment of the above-mentioned debt.

Petitioners affixed their signatures on the deed ofassignment. However, for some unknown reason, respondentbanks duly authorized representative failed to sign the deed.

On October 6, 2000 and March 8, 2001, petitioner completed

the delivery of the heavy equipment mentioned in the deedof assignment to respondent, which accepted the samewithout protest or objection.

However, on June 20, 2001, respondent filed a manifestationand motion to admit an amended complaint for the seizureand delivery of two more heavy equipment which arecovered under the 2nd deed of chattel mortgage. Respondentclaimed that its representative inadvertently failed to includethe 2nd deed of chattel mortgage among the documentsforwarded to its counsel when the original complaint wasbeing drafted.

Petitioners sought to dismiss the amended complaint. Theyalleged that their previous payment on loan amortizations,the execution of the deed of assignment on August 16, 200,and respondents acceptance of the 3 units of heavyequipment, had the effect of full payment or satisfaction oftheir total outstanding obligation which is a bar onrespondent bank from recovering any more amounts fromthem.

Issue:W/N the deed of assignment which expressly provides thatthe transfer and conveyance to respondent of the 3 units ofheavy equipment, and its acceptance thereof, shall be in fullpayment of the petitioners total outstanding obligation tothe latter op erate to extinguish petitioners debt torespondent such that the replevin suit could no longerprosper. Yes.

Held:The deed of assignment was a perfected agreement whichextinguished petitioners total outstanding obligation to therespondent. The deed explicitly provides that the assignor(petitioners), in full payment of its obligation shall deliverthe 3 units of heavy equipment to the assignee (respondent),which accepts the assignment in full payment of the abovementioned debt. This could only mean that shouldpetitioners complete the delivery of the 3 units of heavyequipment covered by the deed, respondents credit wouldhave been satisfied in full, and petitioners aggregateindebtedness would then be considered to have been paid infull as well.

The nature of the assignment was a dation in payment,whereby property is alienated to the creditor in satisfactionof a debt in money. Such transaction is governed by the lawon sales. Even if we were to consider the agreement as acompromise agre ement, there was no need for respondentssignature on the same, because with the delivery of theheavy equipment which the latter accepted, the agreementwas consummated. Respondents approval may be inferredfrom its unqualified acceptance of the heavy equipment.With years of banking experience, resources and manpower,respondent bank is presumed to be familiar with the

implications of entering into the deed of assignment, whoseterms are categorical and left nothing for interpretation. Thealleged non-inclusion in the deed of certain units of heavyequipment due to inadvertence, plain oversight or mistake, istantamount to inexcusable manifest negligence, which shouldnot invalidate the juridical tie that was created.

Since the agreement was consummated by the delivery onMarch 8, 2001 of the last unit of heavy equipment under thedeed, petitioners are deemed to have been released from alltheir obligations to respondent.

Since there is no more credit to collect, no principalobligation to speak of, then there is no more 2nd deed ofchattel mortgage that may susbsist. A chattel mortgagecannot exist as an independent contract since itsconsideration is the same as that of the principal contract.Being a mere accessory contract, its validity would depend onthe validity of the loan secured by it. this being so, theamended complaint for replevin should be dismissed,because the chattel mortgage agreement upon which it isbased had been rendered ineffectual.


6/34

ONG VS ROBAN LENDING

Facts:On different dates from July 14, 1999 to March 20, 2000,petitioner-spouses Ong obtained several loans from RobanLending Corporation (respondent). These loans were securedby a real estate mortgage on petitioners parcels of land.

On February 12, 2001, petitioners and respondent executed

an Amendment to Amended Real Estate Mortgageconsolidating their loans. On even date, the parties executeda Dacion in Payment Agreement wherein petitioners assignedtheir properties to respondent in settlement of their totalobligation and a Memorandum of Agreement reading:

With a promise to pay the FIRST PARTY in full within one yearfrom the date of the consolidation and restructuring,otherwise the SECOND PARTY agree to have their DACION INPAYMENT agreement, whic h they have executed and signedtoday in favor of the FIRST PARTY be enforced.

In April 2002, petitioners filed a complaint alleging that theMemorandum of Agreement and the Dacion in Paymentexecuted are void for being pactum commissorium.

Respondent maintained its legality alleging that if thevoluntary execution of the Memorandum of Agreement andDacion in Payment Agreement novated the Real EstateMortgage then the allegation of Pactum Commissorium hasno more legal leg to stand on.

Issue:W/N the Memorandum of Agreement and the Dacion in Pagoconstitutes pactum commissorium. Yes.

Held:The Court finds that the Memorandum of Agreement andDacion in Payment constitute pactum commissorium, whichis prohibited under Article 2088 of the Civil Code whichprovides:

The creditor cannot appropriate the things given by way ofpledge or mortgage, or dispose of them. Any stipulation tothe contrary is null and void.

The elements of pactum commissorium which enables themortgagee to acquire ownership of the mortgaged propertywithout the need of any foreclosure proceedings, are: (1)there should be a property mortgaged by way of security forthe payment of the principal obligation, and (2) there shouldbe a stipulation for automatic appropriation by the creditor ofthe thing mortgaged in case of non-payment of the principalobligation within the stipulated period.In the case at bar, the Memorandum of Agreement and theDacion in Payment contain no provisions for foreclosureproceedings nor redemption. Under the Memorandum ofAgreement, the failure by the petitioners to pay their debtwithin the one-year period gives respondent the right to

enforce the Dacion in Payment transferring to it ownership ofthe properties. Respondent, in effect, automatically acquiresownership of the properties upon petitioners failure to paytheir debt within the stipulated period.

Respondent argues that the law recognizes dacion en pago asa special form of payment whereby the debtor alienatesproperty to the creditor in satisfaction of a monetaryobligation. This does not persuade. In a true dacion en pago,

the assignment of the property extinguishes the monetarydebt. In the case at bar, the alienation of the properties wasby way of security, and not by way of satisfying the debt. TheDacion in Payment did not extinguish petitioners obligationto respondent. On the contrary, under the Memorandum ofAgreement executed on the same day as Dacion in Payment,petitioners had to execute a promissory note, which theywere to pay within one year.


7/34

ROCKVILLE VS CULLA

Facts:The spouses Culla are the registered owners of a parcel ofland. They mortgaged this property to PS Bank to secure aloan of P1,400,000.00

Sometime in 1993, a notice of sale for the extrajudicialforeclosure of the property was issued. To prevent the

foreclosure, Oligation approached Rockville represented byits president and chairman, Diana Young for financialassistance. Rockville accom modated Oligarios request andextended him a loan of P1,400,000.00. This amount wasincreased for cash advances for a total loan amount ofP2,000,000.00.

According to Rockville, when Oligarion failed to pay the loanafter repeated demands and promises to pay, the Sps. Cullaagreed to pay their indebtedness by selling to Rockvilledanother property the spouses owned.

Rockville accepted the offer for a dacion en pago; on June 25,1994, Rockvilled and Oligario executed a Deed of AbsoluteSale over the property. While the property was a conjugalproperty, only Oligario signed the deed.Bernardita continued to refuse to sign the Deed of AbsoluteSale. Rockville then cause the annotation of an adverse claimon the TCT. Furthermore, Rockville tried to transfer the titleof the property in its name but the Registry of Deeds refusedto carry out the transfer, given the absence of Bernarditassignature in the Deed of Absolute Sale.

Rockville then filed a complaint for Specific Performance andDamages.

In their Answer, the Sps. Culla alleged that the purportedDeed of Absolute Sale failed to reflect their true intentions, asthe deed was meant only to guarantee the debt to Young, notto Rockville. When neither Rockvilled nor Young paid, the Sps.Culla volunteered to pay and opted to rescind the sale.

Rockville mainly contends that the Sps. Culla sold theirproperty to pay their due and demandable debt; thetransaction therefore is a dacion en pago.

Issue:W/N the parites agreement is an absolute sale or anequitable mortgage of real property. Equitable Mortgage.

Held:Dacion en pago is the delivery and transmission of ownershipof a thing by the debtor to the creditor as an acceptedequivalent of the performance of an existing obligation. It is aspecial mode of payment where the debtor offers anotherthing to the creditor who accepts it as equivalent to thepayment of an outstanding debt. For dacion en pago to exist,the following elements must concur: (a) existence of a moneyobligation; (b) the alientation to the creditor of a property by

the debtor with the consent of the former; and (c)satisfaction of the money obligation of the debtor.

Rockvilles arguments would have been telling and convincingwere it not for the undisputed fact that even after theexecution of the Deed of Absolute Sale, Rockville still grantedOligario time to repat his P2,000,000.00 indebtedness. In fact,as Young admitted in her testimony, Rockville gave Oligariothe chance to pay off the loan on the same day that the deed

was executed.

If the parties had truly intended a dacion en pago transactionto extinguish the Sps. Cullas P2,000,000.00 loan and Oligariohad sold the property in payment for his debt, it made nosense for him to continue to ask for extensions of the time topay the loan. More importantly, Rockville would not havegranted the requested extensions to Oligario if paymentthrough a dacion en pago had taken place. That Rockvillegranted the extensions simply belied its contention that theyhad intended a dacion en pago. An equitable mortgage hasbeen defined as one which although lacking in someformality, or form or words or other requisites demanded bya statute, nevertheless reveals the intention of the parties tocharge real property as security for a debt, there being noimpossibility nor anything contrary to law in this intent.


8/34

TYPINGCO VS LIM

Facts:Sometime between December 1996 and February 1997,respondent spouses Lina and Johnson borrowed frompetitioner Typingco the sum of US$600,000 which was laterrestructured, payable on or before December 31, 1997, undera promissory note executed by the spouses and co-signed bytheir children co-respondents Jerry and Jackson as sureties.

Following their default in payment, Lina, Jerry and Jacksonconveyed on January 29, 1998 to Typingco via dacion en pagotheir house and lot.

Because of Typingcos repeate d demands for the delivery ofthe owners duplicate copy of the title having unheeded, hefiled a complaint for specific performance and recovery of thetitle against the respondent.

Respondents Sychinghos averred that it was FEBTC that wasunlawfully wi thholding delivery of the owners duplicate copyof the title despite the full payment of the mortgage loanwith it.

FEBTC contended that spouses Lina and Johnson hadunsettled obligations as sureties.

At the pre-trial, the parties clarified that the subject matter ofthe case was only 1/3 inchoate portion of the subjectproperty or that pertaining to Lina as co-owner as the 2/3belongs to her sons Jerry and Jackson.

Issue:W/N the Sychingcos had the right to sell or convey title to the

subject property at the time of the dacion en pago. Yes.

Held:Dacion en pago is the delivery and transmission of ownershipof another thing by the debtor to the creditor as an acceptedequivalent of performance of an obligation. It partakes of thenature of a contract of sale, where the thing offered by thedebtor is the object of the contract, while the debt is theconsideration or purchase price.

There having been no previous foreclosure of the Real EstateMortgage on the subject property, respondent Sychingcosownership thereof remained intact. Indeed, a mortgage doesnot affect the ownership of the property as it is nothing morethan a lien thereon serving as security for the debt. Themortgagee does not acquire title to the mortgaged realestate unless he purchases it at a public auction, and it is notredeemed within the period provided for by the Rules ofCourt. This applies a fortiori to the present case where only1/3, not the whole, of the subject property was actuallyencumbered to FEBTC. Since petitioner agreed to the fullextinguishment of respondent spouses then outstandingobligation in view of the unconditional conveyance to him ofthe subject property, there is a perfected and enforceable

dacion en pago. He should thus enjoy full entitlement to thesubject property.

Surrender of the certificate of title will not impair any existingmortgage on the subject property. It is an elementaryprinciple in civil law that a real estate mortgage subsistsnotwithstanding changes in ownership, and all subsequentpurchasers of the property must respect the mortgage.


9/34

TAN SHUY VS MAULAWIN

Facts:Petitioner Tan Shuy is engaged in the business of buyingcopra and corn. Whenever he would buy copra from sellers,he would prepare and issue a pesada in their favor. A pesadais a document containing details of the transaction, includingthe date of sale, the weight of the crop delivered, thetrucking cost, and the net price of the crop. He then

explained that when a pesada contained the annotation pdon the total amount of the purchase price, it meant that thecrop delivered had already been paid for by petitioner.

Guillermo Maulawin, respondent, is a farmer-businessmanengaged in the buying and selling of copra and corn. On 10July 1997, Tan Shuy extended a loan to Guillermo in theamountof P420,000. In consideration thereof, Guillermoobligated himself to pay the loan and to sell lucad or copra topetitioner.

Petitioner alleged that despite repeated demands, Guillermoremitted only P23,000 in August 1998 and P5,500 in October1998, or a total of P28,500. He claimed that respondent hadan outstanding balance of P391,500. Thus, convinced thatGuillermo no longer had the intention to pay the loan,petitioner brought the controversy to the LuponTagapamayapa. When no settlement was reached, petitionerfiled a complaint before the RTC.

Respondent Guillermo countered that he had already paidthe subject loan in full. He continuously delivered and soldcopra to petitioner. He said that they had an oralarrangement that the net proceeds thereof shall be appliedas installment payments for the loan.

Petitioner argues that since their written agreement did notspecifically provide for the application of the net proceedsfrom the deliveries of the copra for the loan, he cannot becompelled to accept copra as payment for the loan.

Issue:W/N the delivery of copra amounted to installment paymentsfor the loan obtained by respondent from petitioner. Yes.

Held:The pesadas served as proof that the net proceeds from thecopra deliveries were used as installment payments for thedebts of respondents.

Pursuant to Article 1232 of the Civil Code, an obligation isextinguished by payment or performance. There is paymentwhen there is delivery of money or performance of anobligation. Article 1245 provides for a special mode ofpayment called dation in payment. There is dation inpayment when property is alienated to the creditor insatisfaction of a debt in money. Here, the debtor deliveresand transmits to the creditor the formers ownership over athing as an accepted equivalent of the payment orperformance of an outstanding debt. In such cases, Article

1245 provides that the law on sales shall apply since theundertaking really partakes in one sense of the nature ofsale; that is, the creditor is really buying the thing or propertyof the debtor, the payment for which is to be charged againstthe debtors obligation. Dation in payment extinguishes theobligation to the extent of the value of the thing delivered,either as agreed upon by the parties or as may be proved,unless the parties by agreement express or implied, or bytheir silence consider the thing as equivalent to the

obligation, in which ase the obligation is totally extinguished.

But not all amounts should be applied as payments to thesubject loan since several of which clearly indi cated maisdeliveries on the part of defendant-appelle Guillermo insteadof copras.

The subsequent arrangement between Tan Shuy andGuillermo can thus be considered as one in the nature ofdation in payment. There was partial payment every timeGuillermo delivered copra to petitioner, chose not to collectthe net proceeds of his copra deliveries, and instead appliedthe collectible as installment payments for his loan from TanShuy.


10/34

ARTICLE 1250EXTRAORDINARY INFLATION/DEFLATION

EQUITABLE PCI VS NG SHEU NGOR

Facts:On October 7, 2001, respondents Ng Sheung Ngor filed anaction for annulment and/or reformation of documents andcontracts against petitioner Equitable PCI and its employees.

They claimed that Equitable induced them to avail of its pesoand dollar credit facilities by offering low interest rates sothey accepted Equitables proposal and signed the banks pre -printed promissory notes. They, however, were unaware thatthe documents contained indentical escalation clausesgranting Equitable authority to increase interest rateswithout their consent.

Equitable asserted that respondents knowingly accepted allthe terms and conditions contained in the promissory notes.In fact, they continuously availed of and benefited fromEquitables credit facilities for 5 years.

After trial, the RTC upheld the validity of the promissorynotes. It took judicial notice of the steep depreciation of thepeso during the intervening period and declared theexistence of extraordinary deflation. Consequently, it orderedthe use of the 1996 dollar exchange rate in computingrespondents dollar denominated loans.

Issue:W/N there was extraordinary deflation. No.

Held:Extraordinary inflation exists when there is an unusual

decrease in the purchasing power of currency and suchdecrease could not be reasonably foreseen or was manifestlybeyond the contemplation of the parties at the time of theobligation. Extraordinary deflation, on the other hand,involves as inverse situation.

Article 1250. In case an extraordinary inflation or deflation ofthe currency stipulated should intervene, the value of thecurrency at the time of the establishment of the obligationshall be the basis of payment, unless there is an agreement tothe contrary.

For extraordinary inflation (or deflation) to affect anobligation, the following requisites must be proven:

1. That there was an official declaration of extraordinaryinflation or deflation from the Bangko Sentral ng Pilipinas(BSP);

2. That the obligation was contractual in nature; and

3. That the parties expressly agreed to consider the effects ofthe extraordinary inflation or deflation.

Despite the devaluation of the peso, the BSP never declared asituation of extraordinary inflation. Moreover, although theobligation in this instance arose out of a contract, the partiesdid not agree to recognize the effects of extraordinaryinflation (or deflation). The RTC never mentioned that therewas such a stipulation either in the promissory note or loanagreement. Therefore, respondents should pay their dollar-denominated loan at the exchange rate fixed by the BSP onthe date of maturity.


11/34


12/34

ARTICLE 1252 APPLICATION OF PAYMENTS

PREMIERE DEVELOPMENT BANK VS CENTRAL SURETY

Facts:

Issue:

Held:Creditor given the right to apply payments

Article 1252. He who has various debts of the same kind infavor of one and the same creditor, may declare at the timeof making the payment, to which of them the same must be

applied. Unless the parties so stipulate, or when theapplication of payment is made by the party for whosebenefit the term has been constituted, application shall notbe made as to debts which are not yet due.

If the debtor accepts from the creditor a receipt in which anapplication of the payment is made, the former cannotcomplain of the same, unless there is a cause for invalidatingthe contract.

The debtors right to apply payment is not mandatory. This isclear from the use of the word may rather than the wordshall.

Article 1252 gives the right to the debtor to choose to whichof several obligations to apply a particular payment that hetenders to the creditor. But likewise granted in the sameprovision is the right of the creditor to apply such payment incase the debtor fails to direct its application. This is obvious inArt. 1252, par. 2, viz.: If the debtor accepts from the creditora receipt in which an application of payment is made, theformer cannot complain of the same. It is the directorynature of this right and the subsidiary right of the creditor to

apply payments when the debtor does not elect to do so thatmake this right waivable.

A debtor, in making a voluntary payment, may at the time ofpayment direct an application of it to whatever account hechooses, unless he has assigned or waived that right. If thedebtor does not do so, the right passes to the creditor, whomay make such application as he chooses. But if neither partyhas exercised its option, the court will apply the payment

according to the justice and equity of the case, taking intoconsideration all its circumstances.

The following are some limitations on the right of the debtorto apply his payment:

5.) when there is an agreement as to the debts which are tobe paid first, the debtor cannot vary this agreement.

In the case at bench, the records show that Premiere Bankand Central Surety entered into several contracts of loan,securities by way of pledges, and suretyship agreements. In atleast 2 promissory notes between the parties, Central Suretyexpressly agreed to grant Premiere Bank the authority toapply any and all of Central Suretys payments, thus:

In case I/We have several obligations with Premiere Bank,I/We hereby empower Premiere Bank to apply whithoutnotice and in any manner it sees fit, any or all of my/ourdeposits and payments to any of my/our obligations whetherdue or not. Any such application of deposits or paymentsshall be conclusive and binding upon us.

This proviso is representative of all other Promissory Notesinvolved in this case. It is in the exercise of this express

authority under the Promissory Notes, and following BangkoSentral ng Pilipinas Regulations, that Premiere Bank appliedpayments made by Central Surety, as it deemed fit, to theseveral debts of the latter.

All debts were due, There was no waiver on the part ofpetitioner.

Undoubtedly, at the time of conflict between the partiesmaterial to this case, the Promissory Note in the amount ofP6,000,000 and secured by the pledge of the Wack Wackmembership was past due and demand stage. By its terms,Premiere Bank was entitled to declare said Note and all sumspayable thereunder immediately due and payable, withoutneed of presentment, demand, protest or notice of anykind. The subsequent demand made by Premiere Bank was,therefore, merely a superfluity, which cannot be equatedwith a waiver of the right to demand payment of all thematured obligations of Central surety to Premiere Bank.Any inference of a waiver of Premiere Bank, as creditor, rightto apply payments is eschewed by the express provision ofthe Promissory Note that: no failure on the part of PremiereBank to exercise, and no delay in exercising any righthereunder, shall operate as a waiver thereof.


13/34

ARTICLE 1256 TO 1261TENDER OF PAYMENT AND CONSIGNATION

PABUGAIS VS SAHJWANI

Facts:Pursuant to an Agreement and Undertaking datedDecember 3, 1993, petitioner Teddy G. Pabugais, inconsideration of the amount P15,487,500, agreed to sell to

respondent Dave P. Sahijwani a lot. Respondent paidpetitioner the amount of P600,000 as option/reservation feeand the balance of P14,887,500 to be paid within 60 daysfrom the execution of the contract, simultaneous withdelivery of the owners duplicate Transfer Certificate of Titlein respondents name. The parties further agreed that failureon the part of respondent to pay the balance of the purchaseprice entities petitioner to forfeit the P600,000option/reservation fee; while non-delivery by the latter of thenecessary documents obliges him to return to respondent thesaid option/reservation fee with interest at 18% per annum.

Petitioner failed to deliver the required documents. Incompliance with their agreement, he returned to respondentthe latters P600,000 option/reservation fee by way of FarEast Bank & Trust Company Check, which was dishonored.

Petitioner claimed that he twice tendered to respondent,through his counsel, but said counsel refused to accept thesame. His first attempt to tender payment was allegedlymade on August 3, 1994 through his messenger; while thesecond one was on August 8, 1994, when he sent via DHLWorldwide Services, the man agers check attached to a letterdate August 5, 1994. On August 11, 1994, petitioner wrote aletter to respondent saying that he is consigning the amount

tendered with the RTC. On August 15, 1994, petitioner filed acomplaint for consignation.

Responden ts counsel averred that there was no valid tenderof payment because no check was tendered and thecomputation of the amount to be tendered was insufficient.The trial court rendered a decision declaring the consignationinvalid for failure to prove that petitioner tendered paymentto respondent and that the latter refused to receive thesame.

On appeal to the CA, petitioner then filed a motion towithdraw the amount consigned but was denied by the Courtof Appeals.

Petitioner now contends that he can withdraw the amountdeposited with the trial court as a matter of right because atthe time he moved for the withdrawal thereof, the CA has yetto rule on the consignations validity and the respondent hadnot yet accepted the same.

Issue/s:W/N there was a valid consignation. Yes.

W/N petitioner can withdraw the amount consigned as amatter of right. No.

Held:Consignation is the act of depositing the thing due with thecourt or judicial authorities whenever the creditor cannotaccept or refuses to accept payment and it generally requiresa prior tender of payment. In order that consignation may beeffective, the debtor must show that: (1) there was a debt

due; (2) the consignation of the obligation had been madebecause the creditor to whom tender of payment was maderefused to accept it, or because he was absent orincapacitated, or because several persons claimed to beentitled to receive the amount due or because the title to theobligation has been lost; (3) previous notice of theconsignation had been given to the person interested in theperformance of the obligation; (4) the amount due wasplaced at the disposal of the court; and (5) after theconsignation had been made the person interested wasnotified thereof. Failure in any of these requirements isenough ground to render a consignation ineffective.

The issues to be resolved in the instant case concerns one ofthe important requisites of consignation, i.e, the existence ofa valid tender of payment. As testified by the counsel forrespondent, the reasons why his client did not acceptpetitioners tend er of payment were (1) the checkmentioned in the August 5, 1994 letter of petitionermanifesting that he is settling the obligation was not attachedto the said letter; and (2) the amount tendered wasinsufficient to cover the obligation. It is obvious that thereason for respondents non -acceptance of the tender ofpayment was the alleged insufficiency thereof and notbecause the said check was not tendered to respondent, or

because it was in form of managers check. While it is truethat in general, a managers check is not a legal tender, thecreditor has the option of refusing or accepting it. Payment incheck by the debtor may be acceptable as valid, if no promptobjection to said payment is made. Consequently, petitionerstender of payment in the form of managers check is valid.

The managers check in the amount of P672,900 which wastendered but refused by respondent and thereafterconsigned with the court, was enough to satisfy theobligation.

There being a valid tender of payment in an amount sufficientto extinguish the obligation, the consignation is valid.

As regards petitioners right to withdraw the amountconsigned, reliance on Article 1260 is misplaced. The amountconsigned with the trial court can no longer be withdrawn bypetitio ner because respondents prayer in his answer that theamount consigned be awarded to him is equivalent to anacceptance of the consignation, which has the effect ofextinguishing petitioners obligation.


14/34

LLOBRERA VS FERNANDEZ

Facts:Respondent Josefina V. Fernandez, who is one of theregistered co-owners of a parcel of land, served a writtendemand letter upon petitioners Spouses Llobrera, et al., tovacate the premises within fifteen (15) days from notice.Notwithstanding the receipt of the demand letter, petitionersrefused to vacate, which led to the filing by the respondent of

a formal complaint against them before the BarangayCaptain. Upon failure of the parties to reach any settlement,the Barangay Captain issued the necessary certification to fileaction.

Respondent then filed a complaint for ejectment anddamages the petitioners before the MTCC of Dagupan City.

Petitioners alleged in their answer that they had beenoccupying the property in question beginning the year 1945onwards, when their predecessors-in-interest, with thepermission of Gualberto de Venecia, one of the other co-owners of said land, developed and occupied the same on thecondition that they will pay their monthly rental of P20.00each. From then on, they have continuously paid theirmonthly rentals to de Venecia or their representatives, suchpayments being duly acknowledged by receipts.

But sometime in June 1996, the representatives of de Veneciarefused to accept their rentals, prompting them to consignthe same to Banco San Juan, which bank deposit theycontinued to maintain and update with their monthly rentalpayments.

Issue:

W/N petitioners possession of the subject property isfounded on contract. No.

Held:Petitioners failed to present any written memorandum of thealleged lease arrangements between them and Gualberto DeVenecia.

From the absence of proof of any contractual basis forpetitioners possession of the subject premises, the only legalimplication is that their possession thereof is by meretolerance.

In Roxas vs CA, the court ruled:A person who occupies the land of another at the latterstolerance or permission, without any contract between them,is necessarily bound by an implied promise that he will vacateupon demand, failing which, a summary action for ejectmentis the proper remedy against him.

The judgment favoring the ejectment of petitioners beingconsistent with law and jurisprudence can only be affirmed.The alleged consignation of the P20.00 monthly rental to abank account in respondents name cannot save the day for

petitioners simply because of the absence of any contractualbasis for their claim to rightful possession of the subjectproperty. Consignation based on Article 1256 of the CivilCode indispensably requires a creditor-debtor relationshipbetween the parties, in the absence of which, the legaleffects thereof cannot be availed of.

Art. 1256. If the creditor to whom tender of payment hasbeen made refuses without just cause to accept it, the debtor

shall be released from responsibility by the consignation ofthe thing or sum due.

Unless there is unjust refusal by a creditor to accept payment,Article 1256 cannot apply. In the present case, the possessionof the property by the petitioners being by mere tolerance asthey failed establish through competent evidence theexistence of any contractual relations between them and therespondent, the latter has no obligation to receive anypayment from them. Since respondent is not a creditor topetitioners as far as the alleged P20.00 monthly rentalpayment is concerned, respondent cannot be compelled toreceive such payment even through consignation and suchhas no legal effect insofar as the respondent is concerned.


15/34

B.E. SAN DIEGO VS ALZUL

Facts:On February 10, 1975 respondent Rosario Alzul purchasedfrom petitioner B.E. San Diego 4 subdivision lots. These lotswere bought through installment under Contract to Sell.

On July 25, 1977, respondent signed a Conditional Deed ofAssignment and Transf er of Rights which assigned to a

certain Wilson P. Yu her rights under the Contract to Sell.Due to Yus failure to pay the amounts due, respondentcommenced an action for rescission and caused theannotation of notices of lis pendens on the titles covering thesubject lots.

The trial court ruled in favor of respondent.

On April 28, 1989, the subject lots were sold to Sps. Venturawho were allegedly surprise to find the annotation in theirowners duplicate title.

The spouses filed an action for Quieting of Title in the RTC.The RTC ruled in favor of the spouses. On appeal to the CA, itwas reversed and it declared null and void the title of thespouses and ownership was reinstated in the name ofpetitioner B.E. San Diego.

On appeal to the SC, it ordered that respondent should begiven a non-extendible period of 30 days to make fullpayment for the properties.

In an attempt to comply with the Supreme Court directive,respondent tried to serve payment upon petitioner on August29, 1996, August 30, 1996 and September 28, 1996. On all

these dates, petitioner allegedly refused to accept payment.

Petitioner now stresses the fact that respondent Alzul did notcomply with the Courts resolution which gave a non -extendible period of 30 days within which to make fullpayment for the subject properties. After 3 unsuccesfultenders, it was only on March 12, 1998 or about a year andhalf later that respondent offered to consign said amount inaction for consignment before the HLURB.

Issue:W/N there was a valid consignation. No.

Held:It must be borne in mind that a mere tender of payment isnot enough to extinguish an obligation.

Consignation is the act of depositing the thing due with thecourt or judicial authorities whenever the creditor cannotaccept or refuses to accept payment, and it generally requiresa prior tender of payment. It should be distinguished fromtender of payment. Tender is the antecedent of consignation,that is, an act preparatory to the consignation, which is theprincipal, and from which are derived the immediate

consequences which the debtor desire or seeks to obtain.Tender of payment may be extrajudicial, while consignation isnecessarily judicial, and the priority of the first is the attemptto make a private settlement before proceeding to thesolemnities of consignation. Tender and consignation, wherevalidly made, produces the effect of payment andextinguishes the obligation. There is no dispute that a validtender of payment had been made by respondent. Absenthowever a valid consignation, mere tender will not suffice to

extinguish her obligation and consummate the acquisition ofthe subject properties.

In St. Dominic Corporation, the court held that a validconsignation is made when the amount is consigned with thecourt within the required period or within a reasonable timethereafter.

In the case at bar, in respondents complaint for consignationand specific performance, respondent only prayed that shebe allowed to make the consignation without placing ordepositing that amount due at the disposal of the court oforigin. Verily, respondent made no valid consignation.


16/34

SOLID HOMES VS LASERNA

Facts:Respondents entered into a contract to sell with petitioner.When the respondents had allegedly paid 90% of thepurchase price, they demanded the execution and delivery ofthe Deed of Sale and TCT of the subject property upon thefinal payment of the balance. But the petitioner did notcomply with the demands of respondents.

In view of the said non-payment, the petitioner consideredthe Contract to Sell abandoned by the respondents andrescinded in accordance with the provisions of the samecontract.

Issue:W/N there was a valid tender of payment. No

Held:Based on the records of the case, respondents have tenderedpayment of the balance of the purchase price of the subjectproperty. However, the petitioner, without any justifiablereason, refused to accept the same. In Ramos vs Sarao, theCourt held that tender of payment is the manifestation by thedebtors of their desire to comply with or to pay theirobligation. If the creditor refuses the tender of paymentwithout just cause, the debtors are discharged from theobligation by the consignation of the sum due. In the case atbar, after the petitioner refused to accept the tender ofpayment made by the respondents, the latter failed to makeany consignation of the sum due. Consequently, there was novalid tender of payment and the respondents are not yetdischarged from the obligation to pay the outstandingbalance of the purchase price of the subject property.

Since petitioner did not rescind the Contract to Sell itexecuted with the respondents by a notarial act, the saidContract still stands. Both parties must comply with theirobligations.


17/34

ARTICLE 1267 DOCTINE OF UNFORESEEN EVENTS

PHIL. NATIONAL CONSTRUCTION VS CA

Facts:Subject in this case is the parcel of land owned by privaterespondents. They executed then a lease contract.

On January 7, 1986, petitioner obtained from the Ministry of

Human Settlements a Temporary Use Permit for theproposed rock crushing project.

On January 16, 1986, private respondents wrote petitionerrequesting payment of the first annual rental which was dueand payable upon the execution of the contract.

In its reply, petitioner argued that under paragraph 1 of thelease contract, payment of rental would commence on thedate of the issuance of an industrial clearance by the Ministryof Human Settlements, and not from the date of signing ofthe contract. It then expressed its intention to terminate thecontract, as it had decided to cancel or discontinue with therock crushing project due to financial, as well as technicaldifficulties.

Private respondents refused to accede to petitioners requestfor the pretermination of the lease contract. They insisted onthe performance of petitioners obligation and reiteratedtheir demand for the payment of the first annual rental.

Invoking Article 1266 and the principle of rebus sic stantibus,petitioner asserts that is should be released from theobligatory force of the contract of lease because the purposeof the contract did not materialize due to unforeseen events

and causes beyond its control, i.e, due to the abrupt changein political climate after EDSA Revolution and financialdifficulties.

Issue:W/N petitioner should be released from the obligatory forceof the contract. No.

Held:It is a fundamental rule that contracts, once perfected, bindboth contracting parties, and obligations arising therefromhave the force of law between the parties and should becomplied with in good faith. But the law recognizesexceptions to the principle of the obligatory force of thecontracts. One exception is laid down in Article 1266 of theCivil Code, which reads: The debtor in obligations to do shallalso be released when the prestation becomes legally orphysically impossible without the fault of the obligor.

Petitioner cannot, however, successfully take refuge in thesaid article, since it is applicable only to obligations to do,and not to obligations to give. An obligation to doincludes all kinds of work or service; while an obligatio n togive 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, orin order to return it to its owner.

The obligation to pay rentals or deliver the thing in a contractof lease falls within the prestation to give; hence, it is notcovered within the scope of Article 1266. At any rate, theunforeseen event and causes mentioned by petitioner are notthe legal or physical impossibilities contemplated in the said

article. Besides, petitioner failed to state specifically thecircumstances brought about by the abrupt change in thepolitical climate in the country except the alleged prevailinguncertainties in government policies on infrastructureprojects.

The principle of rebus sic stantibus neither firs in with thefacts of the case. Under this theory, the parties stipulate inthe light of certain prevailing conditions, and once theseconditions cease to exist, the contract also ceases to exist.This theory is said to be the basis of Article 1267 of the CivilCode.

Article 1267, which enunciates the doctrine of unforeseenevents, is not, however, an absolute application of theprinciple of rebus sic stantibus, which would endanger thesecurity of contractual relations. The parties to the contractmust be presumed to have assumed the risks of unfavorabledevelopments. It is therefore only in absolutely exceptionalchanges of circumstances that equity demands assistance forthe debtor.

In this case, the petitioner wants the Court to believe that theabrupt change in the political climate of the country after theEDSA Revolution and its poor financial condition rendered

the performance of the lease contract impractical andinimical to the corporate survival of the petitioner.

The Court cannot subscribe to the argument. As pointed outby private respondents:

It is a matter of record that petitioner PNCC entered into acontract with private respondents on November 18, 1985.Prior thereto, it is of judicial notice that after theassassination of Senator Aquino on August 21, 1983, thecountry has experience political upheavals, turmoils, almostdaily mass demonstrations, unprecedented inflation, peaceand order deterioration, the Aquino trial and many otherthings that brought about the hatred of people even againstcrony corporations.

On November 18, 1985, petitioner PNCC entered into thecontract of lease with private respondents with open eyes ofthe deteriorating conditions of the country.

Anent petit ioners alleged poor financial condition, the samewill neither release petitioner from the binding effect of thecontract of lease. As held in Central Bank vs CA, merepecuniary inability to fulfill an engagement does not


18/34

discharge a contractual obligation, nor does it constitute adefense to an action for specific performance.

With regard to the non- materialization of petitionersparticular purpose in entering into the contract of lease, i.e,to use the leased premises as a site of a rock crushing plant,the same will not invalidate the contract. The cause oressential purpose in a contract of lease is the use orenjoyment of a thing. As a general principle, the motive or

particular purpose of a party in entering into a contract doesnot affect the validity nor existence of the contract; anexception is when the realization of such motive or particularpurpose has been made a condition upon which the contractis made to depend. The exception does not apply here.


19/34

SO VS FOOD FEST LAND

Facts: Food Fest Land entered into a Contract of Lease with DanielSo over a commercial space for a period of 3 years (1999-2002).

Before forging the lease contract, the parties entered into apreliminary agreement dated July 1, 1999.

While Food Fest was able to secure the necessary licensesand permits for the year 1999, it failed to commence businessoperations. For the year 2000, Food Fests application forrenewal of barangay business clearance was held in abeyanceuntil further study of its kitchen facilities.

Fearing business losses, Food Fest communicated its intent toterminate the lease contract to So who, however, did notaccede and instead offered to help Food Fest.

In August 2000, Food Fest, for the second time, informed Soof its intent to terminate the lease, and in fact stopped payingrent.

So demanded payment of the rentals. Food Fest, however,denied any liability, and started to remove its fixtures andequipment from the premises.

Food Fest invokes the principle of rebus sic stantibus asenunciated in Article 1267 to render the lease contractfunctus officio, and consequently release it fromresponsibility to pay rentals. It claims that its failure to securethe necessary business permits and licenses rendered theimpossibility and non-materialization of its purpose in

entering into the contract of lease.

Held:The Court is not persuaded.

Article 1267, which enunciates the doctrine of unforeseenevents, is not an absolute application of the principle of rebussic stantibus, which would endanger the security ofcontractual relations. The parties to the contract must bepresumed to have assumed the risks of unfavorabledevelopments. It is, therefore, only in absolutely exceptionalchanges of circumstances that equity demands assistance forthe debtor.

The cause or essential purpose in a contract of lease is theuse or enjoyment of a thing. A partys motive or particularpurpose in entering into a contract does not affect thevalidity or existence of the contract; an exception is when therealization of such motive or particular purpose has beenmade a condition upon which the contract is made todepend. The exception does not apply here.

It is clear that the condition set forth in the preliminaryagreement pertains to the initial application of Food fest for

the permits, licenses and authority to operate. It should notbe construed to apply to Food Fests subsequent applications.Food Fest was able to secure the permits, licenses andauthority to operate when the lease contract was executed.Its failure to renew these permits, licenses and authority forthe succeeding year does not suffice to declare the leasefunctus officio nor can it be construed as an unforeseen eventto warrant the application of Article 1267.


20/34

ARTICLE 1278 TO 1290 COMPENSATION

BPI VS CA

Facts:On September 25, 1985, private respondent Edvin Reyesopened a joint savings account with his wife Sonia Reyes atpetitioner Bank of the Philippines Islands (BPI).

Private respondent also held a joint savings account with hisgrandmother, Emeteria Fernandez, on February 11, 1986 atthe same BPI branch. He regularly deposited in this accountthe U.S. Treasury Warrants payable to the order of EmeteriaFernandez as her monthly pension.

Emeteria Fernandez died on December 28, 1989 without theknowledge of the US Treasury Department. She was still sentUS Treasury warrant. On January 4, 1990, private respondentdeposited the said US treasury check of Fernandez in theirsavings account.

2 months after, private respondent closed the Savingsaccount with her mother and transferred its funds to the jointaccount with his wife.

On January 16, 1991, a US Treasury Warrant was dishonoredas it was discovered that Fernandez died. The US Departmentof Treasury requested petitioner bank for a refund. For thefirst time, petitioner bank came to know of the death ofFernandez.

On February 19, 1991, private respondent received atelegram from petitioner bank requesting him to contactthem. When he called up the bank, he was informed of

treasury check. He then verbally authorized the petitioners todebit from his other account the amount stated in thedishonored US Treasury Warrant. On the same day, petitionerbank debited the amoun t from private respondents Savingsaccount.

On February 21, 1991, private respondent visited thepetitioner bank and surprisingly demanded restitution of thedebited amount.

Issue:W/N petitioner bank has legal right to apply the deposit ofrespondent Reyes to his outstanding obligation to petitionerbank brought about by the return of the US Treasury Warranthe earlier deposited under the principle of LegalCompensation. Yes.

Held:Compensation shall take place when two persons, in theirown right, are creditors and debtors of each other. Article1290 of the Civil Code provides that when all the requisitesmentioned in Article 1279 are present, compensation takeseffect by operation of law, and extinguishes both debts to theconcurrent amount, even though the creditors and debtors

are not aware of the compensation. Legal compensationoperates even against the will of the interested parties andeven without the consent of them. Since this compensationtakes place ipso jure, its effects arise on the very day onwhich all its requisites concur. When used as a defense, itretroacts to the date when its requisites are fulfilled.

The elements of legal compensation are all present in thecase at bar. The obligors bound principally are at the same

time creditors of each other. Petitioner bank stands as adebtor of the private respondent, a depositor. At the sametime, said bank is the creditor of the private respondent withrespect to the dishonored US Treasury Warrant which thelatter illegally transferred to his joint account. The debtsinvolved consist of a sum of money. They are due, liquidated,and demandable. They are not claimed by a third person.

It is true that the joint account of private respondent and hiswife was debited in the case at bar. We hold that thepresence of private respondents wife does not negate theelement of mutuality of parties, i.e., that they must becreditors and debtors of each other in their own right. Thewife of private respondent is not a party in the case at bar.She never asserted any right to the debited US TreasuryWarrant.


21/34

PNB VS CAFacts:

The petitioner applied/appropriated the amounts of$2,627.11 and P34,340.38 from remittances of the privaterespondents principal abroad, NCB of Jeddah.

There were 2 instances in the past, in 1980 and 1981 whenthe private respondents account was doubly credited.

Issue:W/N the petitioner was legally justified in making thecompensation or set-off against the two remittances coursedthrough it in favor of private respondent to recover on thedouble credits it erroneously made in 1980 and 1981, basedon the principle of solution indebiti. No.

Held:The parties were not bound principally and were not a debtorand creditor of the other at the same time.

With respect to the private respondent being a depositor ofpetitioner bank, they are creditor and debtor respectively. Asto the relationship created by the telexed fund transfers fromabroad: A contract between a foreign bank and local bankasking the latter to pay an amount to a beneficiary is astipulation pour atrui. A stipulation pour atrui is a stipulationin favor of a third person. Thus, between petitioner bank andthe plaintiff as beneficiary, there is created an implied trust.

Therefore, as mat ters stand, the parties obligations are notsubject to compensation or set-off under Article 1279 if theCivil Code, for the reason that the defendant is not a principaldebtor nor is the plaintiff a principal creditor insofar as the

amount $2,627.11 is concerned. They are debtor and creditoronly with respect to the double payments; but are trustee-beneficiary as to the fund transfer.


22/34

EGV REALTY VS CA

Facts:Petitioner EGV is the owner of a 7-storey condominiumknown as Cristina Condominium. Cristina CondominiumCorporation holds title to all common areas of CristinaCondominium and is in charge of managing and providing forthe buildings security.

Respondent Unisphere is the owner of Unit 301 of saidcondominium.

On several occasions, respondent was allegedly robbedbringing the total value of items lost at P12,295.00.

Respondent then demanded compensation andreimbursement from petitioner for the losses incurred as aresult of the robbery.

Petitioner denied any liability for the losses stating that thegoods lost belonged to Amtrade, a third party.

As a consequence of the denial, respondent withheldpayment of its monthly dues.

Respondent then received a letter from petitioner demandingpayment of past dues.

Petitioner then executed a Deed of Absolute Sale over Unit301 in favor of respondent. Thereafter, a condominiumcertificate was issued in respondents name bearing theannotation of a lien in favor of petitioner for the unpaidcondominium dues in the amount of P13,142.67.

Petitioners then filed a petition with SEC for the collection ofunpaid monthly dues against respondents.

In its answer, respondent alleged that it could not be deemedin default of said unpaid dues because its tardiness wasoccasioned by petitioners failure to comply with what isincumbent upon them.

On appeal to the CA, it declared that the amount ofP13,142.67, the unpaid monthly dues of respondent shouldbe offset by the losses it suffered in the amount ofP12,295.00.

Petitioner now asserts that the ruling of the CA to offset thealleged losses in unfounded because respondent is not theowner of the goods lost, but a third party, Amtrade.

Issue:W/N compensation is proper. No.

Held:Compensation or offset under the New Civil Code takes placeonly when two persons or entities in their own rights, arecreditors and debtors of each other.

A distinction must be made between a debt and a mereclaim. A debt is an amount actually ascertained. It is a claimwhich has been formally passed upon by the courts or quasi-

judicial bodies to which it can in law be submitted and hasbeen declared to be a debt. A claim, on the other hand, is adebt in embryo. It is mere evidence of debt and must passthru the process prescribed by law before it develops intowhat is properly called a debt. Absent, however, any suchcategorical admission by an obligor or final adjudication, no

compensation or off-set can take place. Unless admitted bythe a debtor himself, the conclusion that he is in truthindebted to another cannot be definitely and finallypronounce, no matter how convinced he may be from theexamination of the pertinent records of the validity of thatconclusion the indebtedness must be one that is admitted bythe alleged debtor or pronounced by final judgment of acompetent court or in this case by the Commission.

It appears quite clear that the offsetting of debts does notextend to unliquidated, disputed claims arising from tort orbreach of contract.

While respondent Unisphere does not deny any liability for itsunpaid dues to petitioners, the latter do not admit anyresponsibility for the loss suffered by the former occasionedby the burglary. At best, what respondent Unisphere hasagainst petitioners is just a claim, not a debt. Such being thecase, it is not enforceable in court. It is only the debts that areenforceable in court, there being no apparent defensesinherent in them. Respondent Unispheres claim for its losseshas not been passed upon by any legal authority so as toelevate it to the level of a debt.


23/34

TRINIDAD VS ACAPULCO

Facts:Sometime in February 1991, a certain Primitivo Caneterequested respondent Estrella Acapulco to sell a MercedesBenz for P580,000. Canete also said that if respondent herselfwill buy the car, Canete was willing to sell it for P500,000.Petitioner Hermenegildo Trinidad borrowed the car fromrespondent but instead of returning it, petitioner told

respondent to buy the car from Canete and that petitionerwould pay respondent after petitioner returns from Davao.Respondent thereafter executed a deed of sale in favor ofpetitioner. When petitioner returned from Davao, he refusedto pay respondent. Respondent then prayed that the deed ofsale be declared null and void and that the car be returned toher.

In their pre-trial briefs, petitioner raised as issue whether ornot there was a valid dation in payment while respondent putforth the questions: whether or not she is indebted topetitioner in the amount of P566,000, and whether the carwas ceded by her to petitioner in order to partially pay off herobligation of P566,000 to petitioner as dation in payment.

The RTC rendered a decision finding that no dacion en pago ispresent as common consent was not proven.

Petitioner argues that legal compensation should beappreciated, though not expressly stated in his Answer to theComplaint before the trial court, as his allegations thereinand the facts proven at the trial show the presence of legalcompensation. He further argues that, in any case, legalcompensation takes place by operation of law even withoutthe consent of the interested parties.

Respondent counters that Article 1279 of the Civil Code alsostates that for legal compensation to be proper both debtsshould consist of sum of money; in this case, one of theobligations does not entail payment of money but delivery ofcar.

Issue:W/N compensation took place. Yes.

Held:While it is true that petitioner failed to raise the issue of legalcompensation at the earliest opportunity, this should notpreclude the courts from appreciating the same especially inthis case, where ignoring the same would only result tounnecessary and circuitous filing of cases.

Compensation takes effect by operation of law even withoutthe consent or knowledge of the parties concerned when allthe requisites mentioned in Article 1279 are present. This is inconsonance with Article 1290 of the Civil Code.

Since it takes place ipso jure when used as a defense, itretroacts to the date when all its requisites are fulfilled.

Here, petitioners stance is that legal compensation has takenplace and operates even against the will of the partiesbecause: (a) respondent and petitioner were personally bothcreditor and debtor of each other; (b) the monetaryobligation of respondent was P566,000.00 and that of thepetitioner was P500,000.00 showing that both indebtednesswere monetary obligations the amount of which were alsoboth known and liquidated; (c) both monetary obligationshad become due and demandable petitioners obligation as

shown in the deed of sale and respondents indebtedness asshown in the dishonored checks; and (d) neither of the debtsor obligations are subject of a controversy commenced by athird person.

While the proceedings in the RTC focused on ascertaining thepresence of the elements of dacion en pago , it was likewiseproven that petitioner owed respondent the amount ofP500,000.00 while respondent owed petitionerP566,000.00;that both debts are due, liquidated and demandable, and;that neither of the debts or obligations are subject of acontroversy commenced by a third person.

Respondent in her cross-examination categorically admittedthat she is indebted to petitioner.

Compensations aim is to prevent unnecessary suits andpayments through the mutual extinction of concurring debtsby operation of law.

The claim of respondent that there could be no legalcompensation in this case as one of the obligations consists ofdelivery of a car and not a sum of money must also fail.Respondent sold the car to petitioner on March 4, 1991 forP500,000.00 while she filed her complaint for nullification of

the sale only on May 6, 1991. As legal compensation takesplace ipso jure , and retroacts to the date when its requisitesare fulfilled, legal compensation has already taken place atthe time of the sale. At such time, petitioner owedrespondent the sum of P500,000.00 which is the price of thevehicle.


24/34

PHILIPPINE COMMERCIAL BANK INTERNATIONAL BANK VSBALMACEDA

Facts:PCIB alleged that between 1991 and 1993, Balamaceda, bytaking advantage of his position as bank manager,fraudulently obtained and encashed Managers check in thetotal amount o P10,782,150.

PCIB then filed an action for recovery of sum of moneyagainst Balamaceda. It also impleaded Ramos as one of therecipients of a portion of the proceeds from Balmacedasallege fraud.

PCIB maintains that it had the right to freeze and debit theamount of P251,910.96 from Ramos bank account, evenwithout his consent, since legal compensation had takenplace between them by operation of law. PCIB debitedRamos bank account, believing in good faith that Ramos wasnot entitled to the proceeds of the Managers checks and wasactually privy to the fraud perpetrated by Balmaceda.

Issue:W/N PCIB had the right to freeze and debit Ramos assets.No.

Held:Ramos participation in Balmacedas scheme not proven.

There is no merit in PCIBs claim that legal compensation tookplace between it and Ramos, thereby warranting theautomatic deduction from Ramos bank account. For legalcompensation to take place, two persons, in their own right,must first be creditors and debtors of each other. While PCIB,

as the depositary bank, is Ramos debtor in the amount of hisdeposits , Ramos is not PCIBs debtor under the evidence thePCIB adduced. PCIB thus had no basis, in fact or in law, toautomatically debit from Ramos bank account.


25/34

ARTICLE 1291 TO 1304 NOVATION

LICAROS VS GATMAITAN

Facts:Abelardo Licaros, decided to make a fund placement withAnglo-Asean Bank in the 1980s. Licaros, after havinginvested, encountered tremendous and unexplaineddifficulties in retrieving, not only the interest or profits, but

even the very investments he had put in Anglo-Asean.

Confronted with the dire prospect of not getting back any ofhis investments, Licaros then decide to seek the counsel ofAntonio P. Gatmaitan. Gatmaitan voluntarily offered toassume the payment of Anglo- Aseans indebtedness toLicaros. In order to effectuate and formalize the partiesrespective commitments, the two executed a notarizedMEMORANDUM OF AGREEMENT on July 29, 1988.

Thereafter, Gatmaitan presented to Anglo-Asean theMemorandum of Agreement for the purpose of collecting theplacement thereat of $150,000. No formal response was evermade by said bank to either Licaros or Gatmaitan. To date,Anglo-Asean has not acted on Gatmaitans monetary claims.

Evidently, because of his inability to collect from Anglo-Asean, Gatmaitan did not bother anymore to make good hispromise to pay Licaros the amount stated in his promissorynote. Licaros, however, felt that he had a right to collect onthe basis of the promissory note regardless of the outcome ofGatmaitans recovery efforts. Thus, Licaros addressedsuccessive demand letters to Gatmaitan. Gatmaitan,however, did not accede to these demands.

Issue:W/N the Memorandum of Agreement between petitionerand respondent is one of assignment of credit orconventional subrogation. Conventional subrogation.

Held:An assignment of credit has been defined as the process oftransferring the right of the assignor to the assignee whowould then have the right to proceed against the debtor. Theassignment may be done gratuitously or onerously, in whichcase, the assignment has an effect similar to that of a sale.

On the other hand, subrogation has been defined as thetransfer of all the rights of the creditor to a third person, whosubstitutes him in all his rights. It may either be legal orconventional. Legal subrogation is that which takes placewithout agreement but by operation of law because ofcertain acts. Conventional subrogation is that which takesplace by agreement of parties.

Conventional subrogation is not identical to assignment ofcredit. In the former, the debtors consent is necessary; in thelatter, it is not required. Subrogation extinguishes theobligation and gives rise to a new one; assignment refers to

the same right which passes from one person to another. Thenullity of an old obligation may be cured by subrogation, suchthat a new obligation will be perfectly valid; but the nullity ofan obligation is not remedies by the assignment of thecreditors right to another.

In an assignment of credit, the consent of the debtor is notnecessary in order that the assignment may fully producelegal effects. What the law requires in an assignment of credit

is not the consent of the debtor but merely notice to him asthe assignment takes effect only from the time he hasknowledge thereof. A creditor, may, therefore, validly assignhis credit and its accessories without the debtors consent.On the other hand, conventional subrogation requires anagreement among the 3 parties concerned the originalcreditor, the debtor, and the new creditor. It is a newcontractual relation based on the mutual agreement amongall the necessary parties. Thus, Article 1301 of the Civil Codeexplicitly states that Conventional subrogation of a thirdperson requires the consent of the original parties and of thethird person.

The Memorandum of Agreement dated July 29, 1988 was inthe nature of a conventional subrogation which requires theconsent of the debtor, Anglo-Asean Bank, for its validity.

Gatmaitan and Licaros intended their agreement as one ofconventional subrogation as it is plainly borne by a stipulationin their memorandum, to wit:

WHEREAS, the parti es herein have come to an agreement onthe nature, form and extent of their mutual prestations whichthey now record herein with the express conformity of thethird parties concerned, which third party is admittedly

Anglo-Asean Bank.

Had the intention been merely to confer on appellant thestatus of a mere assignee of appellees credit, there issimply no sense for them to have stipulated in theiragreement that the same is conditioned on the expressconformity thereto of Anglo -Asean Bank.

It bears stressing that the subject Memorandum ofAgreement expressly requires the consent of Anglo-Asean tothe subrogation. Upon whom the task of securing suchconsent devolves, be it on Licaros or Gatmaitan, is of nosignificance. What counts most is the hard reality that therehas been an abject failure to get Anglo- Aseans nod ofapproval over Gatmaitans being subrogated in the place ofLicaros. The absence of such conformity on the part of Anglo-Asean, which is thereby made a party to the sameMemorandum of Agreement, prevented the agreement frombecoming effective, much less from being a source of anycause of action for the signatories thereto.


26/34

GARCIA VS LLAMAS

Facts:On December 23, 1996, petitioner and De Jesus borrowedP400,00 from respondent. On the same day, they executed apromissory note wherein they bound themselves jointly andseverally to pay the loan on or before January 23, 1997 with a5% interest per month.

After the loan has long been overdue and despite repeateddemands, petitioner and De Jesus have failed and refused topay it; and by reason of their unjustified refusal, respondentwas compelled to engage the services of a counsel.

Petitioner averred that he assumed no liability under thepromissory note because he signed it merely as anaccommodation party for De Jesus; and alternatively, he isrelieved from any liability from the note inasmuch as the loadhad been paid by De Jesus by means of a check dated 17 April1997 and the respondents acceptance novated orsuperseded the note.

Respondent replied that the loan remained unpaid for thereason that the check issued by De Jesus bounced.

Petitioner seeks to extricate himself from the obligation as joint and solidary debtor by insisting that novation took place,either through the substitution of De Jesus as sole debtor orthe replacement of the promissory note by the check.

Issue:W/N there was novation of the obligation. No.

Held:

Novation is a mode of extinguishing an obligation by changingits objects or principal obligations, by substituting a newdebtor in place of the old one, or by subrogating a thirdperson to the rights of the creditor.

In general, there are two modes of substituting the person ofthe debtor: (1) expromision and (2) delegacion. Inexpromision, the initiative for the change does not comefrom and may even be made without the knowledge of thedebtor, since it consists of a third persons assumption of theobligation. As such, it logically requires the consent of thethird person and the creditor. In delegacion, the debtoroffers, and the creditor accepts, a third person who consentsto the substitution and assumes the obligation; thus, theconsent of these three persons are necessary. Both modes ofsubstitution by the debtor require the consent of thecreditor.

Novation may also be extinctive or modificatory. It isextinctive when an old obligation is terminated by thecreation of a new one that takes the place of the former. It ismerely modificatory when the old obligation susbsists to theextent that it remains compatible with the amendatoryagreement. Whether extinctive or modificatory, novation is

made either by changing the object or principal conditions,referred to as objective or real novation; or by substitutingthe person of the debtor or subrogating a third person to therights of the creditor, an act known as subjective or personalnovation. For novation to take place, the following requisitesmust concur:

1. There must be a previous valid obligation.

2. The parties concerned must a agree to a new contract.

3. The old contract must be extinguished.

4. There must be a valid new contract.

Novation may also be express or implied. It is express whenthe new obligation declares in unequivocal terms that the oldobligation is extinguished. It is implied when the newobligation is incompatible with the old one on every point.The test of incompatibility is whether the two obligations canstand together, each one with its own independent existence.

In the instant case, no novation took place.

The parties did not unequivocally declare that the oldobligation had been extinguished by the issuance and theacceptance of the check, or that the check would take theplace of the note. There is no i

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