Super Digest 2

Saura Import & Export Co., Inc. vs. Development Bank of the Phil.
G.R. No. L-24968 | April 27, 1972
MAKALINTAL, J.
TOPIC: Extinguishment of Obligations
THESIS STATEMENT
This is a petition for review on certiorari of the decision of the Court of Appeals
FACTS
Saura, Inc. applied to the Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for
an industrial loan
LOWER COURT DECISION
ARGUMENTS/DEFENSES


ISSUE/S
Whether or not the contract was extinguished.
RULING
The Court held that there was indeed a perfected consensual contract, as recognized in Article 1934 of
the Civil Code, which provides: “ART. 1954. An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall
not be perfected until the delivery of the object of the contract.”
However, It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption
that the factory to be constructed would utilize locally grown raw materials, principally kenaf.
when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to the original
amount of P500,000.00, it imposed two conditions, to wit: “(1) that the raw materials needed by the
borrower-corporation to carry out its operation are available in the immediate vicinity; and (2) that
there is prospect of increased production thereof to provide adequately for the requirements of the
factory.”
The imposition of those conditions was not a deviation from the terms of the agreement, but rather a
step in its implementation.
There was nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145,
passed on January 7, 1954, namely—“that the proceeds of the loan shall be utilized exclusively for the
following purposes: for construction of factory building— P250,000.00; for payment of the balance of
purchase price of machinery and equipment—P240,900.00; for working capital—P9,100.00
Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter stating
that local jute “will not be available in sufficient quantity this year or probably next year,” and asking
that out of the loan agreed upon the sum of P67,586.09 be released “for raw materials and labor.” This
was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract,
implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed
upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been
going on for the implementation of the agreement reached an impasse. Saura, Inc, obviously was in no
position to comply with RFC’s conditions. So instead of doing so and insisting that the loan be released
as agreed upon, Saura, Inc. asked that the mortgage be cancelled
The action thus taken by both parties was in the nature of mutual desistance which is a mode of
extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can
create a contract, mutual disagreement by the parties can cause its extinguishment.
It did not protest against any alleged breach of contract by RFC, or even point out that the latter’s stand
was legally unjustified. Its request for cancellation of the mortgage carried no reservation of whatever
rights it believed it might have against RFC for the latter’s noncompliance. In 1962 it even applied with
OBLICON – Case Digests Page 1

DBP for another loan to finance a rice and corn project, which application was disapproved. It was only
in 1964, nine years after the loan agreement had been cancelled at its own request, that Saura, Inc.
brought this action for damages. All these circumstances demonstrate beyond doubt that the said
agreement had been extinguished by mutual desistance—and that on the initiative of the plaintiff-
appellee itself.
RATIO

National Power Corporation vs. Ibrahim
G.R. No. 175863 | February 18, 2015
PEREZ, J.
TOPIC: Extinguishment of Obligations – Payment or Performance
THESIS STATEMENT
FACTS
petitioner took possession of the subject land for the purpose of building thereon a hydroelectric
power plant pursuant to its Agus 1 project
The subject land, while in truth a portion of a private estate registered in the name of herein
respondent Macapanton K. Mangondato (Mangondato), was occupied by petitioner under the
mistaken belief that such land is part of the vast tract of public land reserved for its use by the
government
Mangondato first discovered petitioner’s occupation of the subject land in 1979 — the year that
petitioner started its construction of the Agus 1 plant. Shortly after such discovery, Mangondato
began demanding compensation for the subject land from petitioner. In support of his demand
for compensation, Mangondato sent to petitioner a letter
after more than a decade, petitioner finally acquiesced to the fact that the subject land is private
land and consequently acknowledged Mangondato’s right, as registered owner, to receive
compensation therefor.
Thus, petitioner and Mangondato partook in a series of communications aimed at settling the
amount of compensation that the former ought to pay the latter in exchange for the subject land.
Ultimately, however, the communications failed to yield a genuine consensus between
petitioner and Mangondato as to the fair market value of the subject land.
Mangondato filed a complaint for reconveyance against petitioner before the Regional Trial
Court for the recovery of the subject land and the payment by petitioner of a monthly rental
from 1978 until the return of such land.
For its part, petitioner filed an expropriation complaint before the RTC
The decision upheld petitioner’s right to expropriate the subject land: it denied Mangondato’s
claim for reconveyance and decreed the subject land condemned in favor of the petitioner
Disagreeing with the amount of just compensation that it was adjudged to pay under the said
decision, petitioner filed an appeal with the Court of Appeals
During the pendency of the appeal, respondents the Ibrahims and Maruhoms filed before the
RTC of Marawi City a complaint against Mangondato and petitioner. the Ibrahims and
Maruhoms disputed Mangondato’s ownership of the lands covered by TCT No. 378-A,
including the subject land.
The CA denied the appeal of petitioner and affirming in toto

The Supreme Court upheld the Court of Appeals’ denial of petitioner’s appeal.
Mangondato filed a motion for execution of the decision, however, petitioner filed an
opposition.
RTC rendered a Resolution27 dated 4 June 1996 ordering the issuance of a writ of execution in
favor of Mangondato
the amount thereby garnished was paid to Mangondato in full satisfaction of petitioner’s
judgment debt
Upon the other hand, RTC made the following relevant findings:

1. The Ibrahims and Maruhoms — not Mangondato — are the true owners of the lands in
question
RTC thus required payment of all the rental fees and expropriation indemnity due for the
subject land,
Notable in the trial court’s decision, however, was that it held both Mangondato and the
petitioner solidarily liable to the Ibrahims and Maruhoms for the rental fees and expropriation
indemnity. In addition, Mangondato and petitioner were also decreed solidarily liable to the
Ibrahims and Maruhoms for attorney’s fees
Petitioner appealed the decision in Civil Case No. 967-93 with the Court of Appeals: contesting
mainly the holding in the said decision that it ought to be solidarily liable with Mangondato to
pay to the Ibrahims and Maruhoms the rental fees and expropriation indemnity adjudged due
for the subject land.
While pending, the Ibrahims and Maruhoms were able to secure with the court a quo a writ of
execution pending appeal
The enforcement of such writ led to the garnishment of Mangondato’s moneys in the possession
of the Social Security System (SSS)
ARGUMENTS/DEFENSES


ISSUE/S
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.
RULING
No Bad Faith on the Part of Petitioner
the clear denominator in judicial pronouncements is that the essence of bad faith consists in the
deliberate commission of a wrong.
A finding of bad faith, thus, usually assumes the presence of two (2) elements: first, that the
actor knew or should have known that a particular course of action is wrong or illegal, and
second, 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 this case, both Branch 10 of the Marawi City RTC and the Court of Appeals held that
petitioner was in bad faith when it paid to Mangondato the rental fees and expropriation
indemnity due the subject land. The two tribunals, in substance, fault petitioner when it
“allowed” such payment to take place despite the latter’s alleged knowledge of the
existing claim of the Ibrahims and Maruhoms upon the subject land and the issuance of
a TRO in Civil Case No. 967-93. Hence, the two tribunals claim that petitioner’s payment
to Mangondato is ineffective as to the Ibrahims and Maruhoms, whom they found to be
the real owners of the subject land.
NO. they have overlooked the utter significance of one important fact: that petitioner’s payment
to Mangondato was required by the final and executory decision 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.
Sans Bad Faith, Petitioner cannot be held Liable to the Ibrahims and Maruhoms
petitioner’s previous payment to Mangondato of the rental fees and expropriation indemnity
due the subject land may be considered to have extinguished the former’s obligation 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.
 First. 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 latter’s previous payment. 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 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.
 Second. We, however, can reach the same conclusion even if the Ibrahims and
Maruhoms turn out to be the real owners of the subject land. Should the Ibrahims and
Maruhoms turn out to be the real owners of the subject land, petitioner’s previous
payment to Mangondato given the absence of bad faith on petitioner’s 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.”
Effect of Extinguishment of Petitioner’s Obligation

 First. 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.
Consequently, the partial execution of the decision that had led to the garnishment of
Mangondato’s moneys in the possession of the Social Security System (SSS) in favor of
the Ibrahims and Maruhoms, becomes improper and unjustified. 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
 Second. At any rate, the extinguishment of petitioner’s 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 in Civil Case No. 967-
93. 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 Civil Case No. 967-93 insofar as petitioner is concerned is called for.
RATIO
“Malice or bad faith implies a conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity; x x x.”
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. 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. 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.

Siguan vs. Lim
G.R. No. 190755 | November 24, 2010
VELASCO, JR., J.
THESIS STATEMENT
FACTS
spouses Johnson and Evangeline Sy secured a loan from Land Bank secured by three (3)
residential lots, five (5) cargo trucks, and a warehouse.
The Notice of Loan Approval dated February 22, 1996 contained an acceleration clause wherein
any default in payment of amortizations or other charges would accelerate the maturity of the
loan.
however, the Spouses Sy found they could no longer pay their loan. they sold three (3) of their
mortgaged parcels of land for PhP 150,000 to Angelina Gloria Ong, Evangeline’s mother, under
a Deed of Sale with Assumption of Mortgage.
Evangeline’s father, petitioner Alfredo Ong, later went to Land Bank to inform it about the sale
and assumption of mortgage.
Atty. Edna Hingco, the Bank Branch Head, told Alfredo and his counsel for the assumption of
mortgage. They were also told that Alfredo should pay part of the principal which was
computed at PhP 750,000 and to update due or accrued interests on the promissory notes so that
Atty. Hingco could easily approve the assumption of mortgage.
Two weeks later, Alfredo issued a check for PhP 750,000 and personally gave it to Atty. Hingco.
A receipt was issued for his payment. He also submitted the other documents required by Land
Bank, such as financial statements. Atty. Hingco then informed Alfredo that the certificate of
title of the Spouses Sy would be transferred in his name but this never materialized. No notice
of transfer was sent to him.
Alfredo later found out that his application for assumption of mortgage was not approved by
Land Bank. The bank learned from its credit investigation report that the Ongs had a real estate
mortgage in the amount of PhP 18,300,000 with another bank that was past due. Alfredo
claimed that this was fully paid later on. Nonetheless, Land Bank foreclosed the mortgage of the
Spouses Sy after several months. Alfredo only learned of the foreclosure when he saw the
subject mortgage properties included in a Notice of Foreclosure of Mortgage and Auction Sale
Alfredo’s other counsel, Atty. Madrilejos, subsequently talked to Land Bank’s lawyer and was
told that the PhP 750,000 he paid would be returned to him.
Alfredo initiated an action for recovery of sum of money with damages against Land Bank

The RTC held that the contract approving the assumption of mortgage was not perfected as a
result of the credit investigation conducted on Alfredo. It noted that Alfredo was not even
informed of the disapproval of the assumption of mortgage but was just told that the accounts
of the spouses Sy had matured and gone unpaid. It ruled that under the principle of equity and
justice, the bank should return the amount Alfredo had paid with interest at 12% per annum
computed from the filing of the complaint.
The CA affirmed the RTC Decision. According to the appellate court, the payment of PhP
750,000 was for the approval of his assumption of mortgage and not for payment of arrears
incurred by the Sy spouses. As such, it ruled that it would be incorrect to consider Alfredo a
third person with no interest in the fulfillment of the obligation under Article 1236 of the Civil

Code. Although Land Bank was not bound by the Deed between Alfredo and the Spouses Sy,
the appellate court found that Alfredo and Land Bank’s active preparations for Alfredo’s
assumption of mortgage essentially novated the agreement.
ARGUMENTS/DEFENSES
 Alfredo maintained that Land Bank’s foreclosure without informing him of the denial of
his assumption of the mortgage was done in bad faith. He argued that he was lured into
believing that his payment of PhP 750,000 would cause Land Bank to approve his
assumption of the loan of the Spouses Sy and the transfer of the mortgaged properties in
his and his wife’s name.
 Atty. Hingco claimed during trial that as branch manager she had no authority to
approve loans and could not assure anybody that their assumption of mortgage would
be approved. According to Atty. Hingco, the bank processes an assumption of mortgage
as a new loan, since the new borrower is considered a new client. They used character,
capacity, capital, collateral, and conditions in determining who can qualify to assume a
loan. Alfredo’s proposal to assume the loan, she explained, was referred to a separate
office, the Lending Center.
 She admitted that Alfredo demanded the return of the PhP 750,000 but said that there
was no written demand before the case against the bank was filed in court. She said that
Alfredo had made the payment of PhP 750,000 even before he applied for the
assumption of mortgage and that the bank received the said amount because the
subject account was past due and demandable
ISSUE/S
RULING
Recourse is against Land Bank
Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo should have
sought recourse against the Spouses Sy instead of Land Bank. Art. 1236 provides (See RATIO)
Land Bank was not bound to accept Alfredo’s payment, since as far as the former was
concerned, he did not have an interest in the payment of the loan of the Spouses Sy. However,
in the context of the second part of said paragraph, Alfredo was not making payment to fulfill
the obligation of the Spouses Sy. Alfredo made a conditional payment so that the properties
subject of the Deed of Sale with Assumption of Mortgage would be titled in his name.
Alfredo, as a third person, did not have an interest in the fulfillment of the obligation of the
Spouses Sy, since his interest hinged on Land Bank’s approval of his application, which was
denied. So the second paragraph of Art. 1236 does not apply. As Alfredo made the payment for
his own interest and not on behalf of the Spouses Sy, recourse is not against the latter. And as
Alfredo was not paying for another, he cannot demand from the debtors, the Spouses Sy, what
he has paid.
Novation of the loan agreement

Art. 1293 of the Civil Code states: “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. Payment by the new debtor gives him rights
mentioned in articles 1236 and 1237.”
We do not agree, then, with the CA in holding that there was a novation in the contract between
the parties. Not all the elements of novation were present. Novation must be expressly
consented to.
Unjust enrichment
We rule that Land Bank is still liable for the return of the PhP 750,000 based on the principle of
unjust enrichment. Land Bank is correct in arguing that it has no obligation as creditor to
recognize Alfredo as a person with interest in the fulfillment of the obligation. But while Land

Bank is not bound to accept the substitution of debtors in the subject real estate mortgage, it is
estopped by its action of accepting Alfredo’s payment from arguing that it does not have to
recognize Alfredo as the new debtor.
We turn then on the principle upon which Land Bank must return Alfredo’s payment. Unjust
enrichment exists “when a person unjustly retains a benefit to the loss of another, or when a
person retains money or property of another against the fundamental principles of justice,
equity and good conscience.”18 There is unjust enrichment under Art. 22 of the Civil Code
when (1) a person is unjustly benefited, and (2) such benefit is derived at the expense of or with
damages to another.
Another claim made by Land Bank is the presumption of regularity it enjoys and that it was in
good faith when it accepted Alfredo’s tender of PhP 750,000. The defense of good faith fails to
convince given Land Bank’s actions. Alfredo was not treated as a mere prospective borrower.
After he had paid PhP 750,000, he was made to sign bank documents including a promissory
note and real estate mortgage. He was assured by Atty. Hingco that the titles to the properties
covered by the Spouses Sy’s real estate mortgage would be transferred in his name, and upon
payment of the PhP 750,000, the account would be considered current and renewed in his
name.2
RATIO
Art. 1236 provides: “The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the
contrary. Whoever pays for another may demand from the debtor what he has paid, except that
if he paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor.”
“Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when
an old obligation is terminated by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement. An extinctive novation results either by changing
the object or principal conditions (objective or real), or by substituting the person of the debtor
or subrogating a third person in the rights of the creditor (subjective or personal). Under this
mode, novation would have dual functions—one to extinguish an existing obligation, the other
to substitute a new one in its place— requiring a conflux of four essential requisites:
(1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract;
(3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.
x x x
In order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other. The test of incompatibility is whether or not the
two obligations can stand together, each one having its independent existence. x x x”

Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court
G.R. No. 72110 | November 16, 1990.
SARMIENTO, J.
THESIS STATEMENT
FACTS
The property subject matter of the contract issued and registered in the name of the petitioner
which it sold to the private respondent for and in consideration of P123,930.00
The crux of the instant controversy lies in the compliance or non-compliance by the private
respondent with the provision for payment to the petitioner of the principal balance of
P100,000.00 and the accrued interest of P24,000.00 within the grace period.
The contract likewise provides for cancellation, forfeiture of previous payments, and
reconveyance of the land in question in case the private respondent would fail to complete
payment within the said period.
admittedly after the expiration of the stipulated period for payment, the same Atty. Francisco
wrote the petitioner a formal request 7 that her company be allowed to pay the principal
amount of P100,000.00 in three (3) equal installments of six (6) months each with the first
installment and the accrued interest to be paid immediately upon approval of the said request.
the petitioner, through its counsel, Atty. Carmelo Fernandez, formally denied the said request
of the private respondent, but granted the latter a grace period of five (5) days from the receipt
of the denial 8 to pay otherwise, the provisions of the contract regarding cancellation, forfeiture,
and reconveyance would be implemented.
the private respondent, through its president, Atty. Francisco, wrote 9 the counsel of the
petitioner requesting an extension of 30 days from said date to fully settle its account. The
counsel for the petitioner, Atty. Fernandez, received the said letter on the same day.
the private respondent’s president, wrote a letter directly addressed to the petitioner, protesting
the alleged refusal of the latter to accept tender of payment on the last day of the grace period.
In the same letter received on the following day by the petitioner, the private respondent
demanded the execution of a deed of absolute sale over the land in question and after which it
would pay its account in full, otherwise, judicial action would be resorted to.
the petitioner’s counsel, Atty. Fernandez, wrote a reply 12 to the private respondent stating the
refusal of his client to execute the deed of absolute sale due to its (private respondent’s) failure
to pay its full obligation. Moreover, the petitioner denied that the private respondent had made
any tender of payment whatsoever within the grace period. In view of this alleged breach of
contract, the petitioner cancelled the contract and considered all previous payments forfeited
and the land as ipso facto reconveyed.
the trial court rendered a decision in favor of the petitioner,
respondent court, in reversing the decision of the trial court, the respondent court, finding that
the private respondent had sufficient available funds, ipso facto concluded that the latter had
tendered payment.
ARGUMENTS/DEFENSES


ISSUE/S
(1) Is a finding that private respondent had sufficient available funds on or before the grace

period for the payment of its obligation proof that it (private respondent) did tender of
(sic) payment for its said obligation within said period?
(2) Is it the legal obligation of the petitioner (as vendor) to execute a deed of absolute sale in
favor of the private respondent (as vendee) before the latter has actually paid the
complete consideration of the sale—where the contract between and executed by the
parties stipulates—
(3) Is an offer of a check a valid tender of payment of an obligation under a contract which
stipulates that the consideration of the sale is in Philippine Currency?
RULING
With respect to the first issue, we agree with the petitioner that a finding that the private
respondent had sufficient available funds on or before the grace period for the payment of its
obligation does not constitute proof of tender of payment by the latter for its obligation within
the said period. Tender of payment involves a positive and unconditional act by the obligor of
offering legal tender currency as payment to the obligee for the former’s obligation and
demanding that the latter accept the same. Thus, tender of payment cannot be presumed by a
mere inference from surrounding circumstances. At most, sufficiency of available funds is only
affirmative of the capacity or ability of the obligor to fulfill his part of the bargain. But whether
or not the obligor avails himself of such funds to settle his outstanding account remains to be
proven by independent and credible evidence. Tender of payment presupposes not only that
the obligor is able, ready, and willing, but more so, in the act of performing his obligation.
the second issue raised, although admittedly the documents for the deed of absolute sale had
not been prepared, the subject contract clearly provides that the full payment by the private
respondent is an a priori condition for the execution of the said documents by the petitioner.
 That upon complete payment of the agreed consideration by the herein VENDEE, the
VENDOR shall cause the execution of a Deed of Absolute Sale in favor of the VENDEE.
The private respondent is therefore in estoppel to claim
With regard to the third issue, granting arguendo that we would rule affirmatively on the two
preceding issues, the case of the private respondent still cannot succeed in view of the fact that
the latter used a certified personal check which is not legal tender nor the currency stipulated,
and therefore, cannot constitute valid tender of payment. The first paragraph of Art. 1249 of the
Civil Code provides that “the payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the currency which is legal
tender in the Philippines.
Where the tender of payment by the private respondent was not valid for failure to comply with
the requisite payment in legal tender or currency stipulated within the grace period and as
such, was validly refused receipt by the petitioner, the subsequent consignation did not operate
to discharge the former from its obligation to the latter.
the petitioner in the legitimate exercise of its rights pursuant to the subject contract, did validly
order therefore the cancellation of the said contract, the forfeiture of the previous payment, and
the reconveyance ipso facto of the land in question.
RATIO
Art. 1159 of the Civil Code of the Philippines provides that “obligations arising from contracts
have the force of law between the contracting parties and should be complied with in good
faith.”
Since a negotiable instrument is only a substitute for money and not money, the delivery of
such an instrument does not, by itself, operate as payment (

Tibajia, Jr. vs. Court of Appeals
G.R. No. 100290 | June 4, 1993
PADILLA, J.
THESIS STATEMENT
FACTS
a suit for collection of a sum of money was filed by Eden Tan against the Tibajia spouses. A writ
of attachment was issued by the trial court and the Deputy Sheriff filed a return stating that a
deposit made by the Tibajia spouses in the Regional Trial Court in another case, had been
garnished by him. the Regional Trial Court rendered its decision in favor of the plaintiff Eden
Tan, ordering the Tibajia spouses to pay her, On appeal, the Court of Appeals modified the
decision by reducing the award of moral and exemplary damages. The decision having become
final, Eden Tan filed the corresponding motion for execution and thereafter, the garnished
funds which by then were on deposit with the cashier of the Regional Trial Court were levied
upon.
the Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment.
Cashier’s Check --P262,750.00
Cash ----------------- 135,733.70
Total -----------------P398,483.70
Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and
instead insisted that the garnished funds deposited with the cashier of the Regional Trial Court
be withdrawn to satisfy the judgment obligation.
(petitioners) filed a motion to lift the writ of execution on the ground that the judgment debt
had already been paid.
the motion was denied by the trial court on the ground that payment in cashier’s check is not
payment in legal tender and that payment was made by a third party other than the defendant.
The appellate court dismissed the petition on 24 April 1991 holding that payment by cashier’s
check is not payment in legal tender as required by Republic Act No. 529
ARGUMENTS/DEFENSES
 It is contended by the petitioners that the check, which was a cashier’s check of the Bank
of the Philippine Islands, undoubtedly a bank of good standing and reputation, and
which was a crossed check marked “For Payee’s Account Only” and payable to private
respondent Eden Tan, is considered legal tender, payment with which operates to
discharge their monetary obligation.

ISSUE/S
whether or not payment by means of check (even by cashier’s check) is considered payment in
legal tender as required by the Civil Code, Republic Act No. 529, and the Central Bank Act.
RULING
The provisions of law applicable to the case at bar are the following: Article 1249 of the Civil
Code, Section 1 of Republic Act No. 529, as amended, Section 63 of Republic Act No. 265, as
amended (Central Bank Act).
From the aforequoted provisions of law, it is clear that this petition must fail.
a check is not legal tender and that a creditor may validly refuse payment by check, whether
it be a manager’s, cashier’s or personal check.

Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case 6
to support their cause. The dissenting opinion however does not in any way support the
contention that a check is legal tender but, on the contrary, states that “If the PAL checks in
question had not been encashed by Sheriff Reyes, there would be no payment by PAL and,
consequently, no discharge or satisfaction of its judgment obligation.”
In the more recent case of Fortunado vs. Court of Appeals, 8 this Court stressed that, “We are
not, by this decision, sanctioning the use of a check for the payment of obligations over the
objection of the creditor.”
RATIO
The provisions of law applicable to the case at bar are the following:
a. Article 1249 of the Civil Code which provides:
“Article 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired. In the
meantime, the action derived from the original obligation shall be held in abeyance.”;
b. Section 1 of Republic Act No. 529, as amended, which provides:
“Section 1. Every provision contained in, or made with respect to, any obligation which
purports to give the obligee the right to require payment in gold or in any particular
kind of coin or currency other than Philippine currency or in an amount of money of the
Philippines measured thereby, shall be as it is hereby declared against public policy null
and void, and of no effect, and no such provision shall be contained in, or made with
respect to, any obligation thereafter incurred. Every obligation heretofore and hereafter
incurred, whether or not any such provision as to payment is contained therein or made
with respect thereto, shall be discharged upon payment in any coin or currency which at
the time of payment is legal tender for public and private debts.”
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides:
“Section 63. Legal character—Checks representing deposit money do not have legal
tender power and their acceptance in the payment of debts, both public and private, is at
the option of the creditor: Provided, however, that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a delivery to the creditor of
cash in an amount equal to the amount credited to his account.”
a check is not legal tender and that a creditor may validly refuse payment by check, whether
it be a manager’s, cashier’s or personal check.

Bognot vs. RRI Lending Corporation
G.R. No. 180144 | September 24, 2014
BRION, J.
THESIS STATEMENT
FACTS
The petitioner and his younger brother, Rolando A. Bognot (collectively referred to as the
“Bognot siblings”), applied for and obtained a loan from the respondent, payable on November
30, 1996.4 The loan was evidenced by a promissory note and was secured by a postdated check
dated November 30, 1996.
Evidence on record shows that the petitioner renewed the loan several times on a monthly
basis. He paid a renewal fee of P54,600.00 for each renewal, issued a new postdated check as
security, and executed and/or renewed the promissory note previously issued. The respondent
on the other hand, cancelled and returned to the petitioner the postdated checks issued prior to
their renewal.
the petitioner applied for another loan renewal. He again executed as principal and signed
Promissory Note No. 97-0356 payable on April 1, 1997; his comaker was again Rolando. As
security for the loan, the petitioner also issued BPI Check
Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997) and the
Disclosure Statement dated May 30, 1997 duly signed by Bernardez. The petitioner purportedly
paid the renewal fees and issued a postdated check dated June 30, 1997 as security. As had been
done in the past, the respondent superimposed the date “June 30, 1997” on the upper right
portion of Promissory Note No. 97-035 to make it appear that it would mature on the said date.
before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. Bognot), went to the
respondent’s office and applied for another renewal of the loan. She issued in favor of the
respondent Promissory Note No. 97- 051, and International Bank Exchange (IBE) Check
On the excuse that she needs to bring home the loan documents for the Bognot siblings’
signatures and replacement, Mrs. Bognot asked the respondent’s clerk to release to her the
promissory note, the disclosure statement, and the check dated July 30, 1997. Mrs. Bognot,
however, never returned these documents nor issued a new postdated check. Consequently, the
respondent sent the petitioner follow-up letters demanding payment of the loan, plus interest
and penalty charges. These demands went unheeded.
the respondent, through Bernardez, filed a complaint for sum of money before the Regional
Trial Court (RTC) against the Bognot siblings.
 the RTC ruled in the respondent’s favor and ordered the Bognot siblings to pay the
amount of the loan, plus interest and penalty charges.
 It considered the wordings of the promissory note and found that the loan they
contracted was joint and solidary.
 It brushed the petitioner’s defense of full payment aside, ruling that the respondent had
successfully proven, by preponderance of evidence, the nonpayment of the loan.
the CA affirmed the RTC’s findings. It found the petitioner’s defense of payment untenable and
unsupported by clear and convincing evidence.
ARGUMENTS/DEFENSES

 the petitioner claimed that the complaint states no cause of action because the
respondent’s claim had been paid, waived, abandoned or otherwise extinguished. He
denied being a party to any loan application and/or renewal
 He also denied having issued the BPI check postdated to June 30, 1997, as well as the
promissory note dated June 30, 1997, claiming that this note had been tampered. He
claimed that the one (1) month loan contracted by Rolando and his wife in November
1996 which was lastly renewed in March 1997 had already been fully paid and
extinguished in April 1997

ISSUE/S
The petitioner submits that the CA erred in holding him solidarily liable with Rolando and his
wife. He claimed that based on the legal presumption provided by Article 1271 of the Civil
Code,13 his obligation had been discharged by virtue of his possession of the postdated check
(stamped “CANCELLED”) that evidenced his indebtedness. He argued that it was Mrs. Bognot
who subsequently assumed the obligation by renewing the loan, paying the fees and charges,
and issuing a check. Thus, there is an entirely new obligation whose payment is her sole
responsibility.
1. Whether the CA committed a reversible error in holding the petitioner solidarily liable with
Rolando;
2. Whether the petitioner is relieved from liability by reason of the material alteration in the
promissory note; and
3. Whether the parties’ obligation was extinguished by: (i) payment; and (ii) novation by
substitution of debtors.
RULING
No Evidence Was Presented to Establish the Fact of Payment
the petitioner failed to satisfactorily prove that his obligation had already been extinguished by
payment. As the CA correctly noted, the petitioner failed to present any evidence that the
respondent had in fact encashed his check and applied the proceeds to the payment of the loan.
Neither did he present official receipts evidencing payment, nor any proof that the check had
been dishonored.
the petitioner merely relied on the respondent’s cancellation and return to him
 Article 1249, paragraph 2 of the Civil Code provides:
x x x x The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.
Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of
action (in cases where a private document evidencing a credit was voluntarily returned by the
creditor to the debtor), this presumption is merely prima facie and is not conclusive; the
presumption loses efficacy when faced with evidence to the contrary
Moreover, the cited provision merely raises a presumption, not of payment, but of the
renunciation of the credit where more convincing evidence would be required than what
normally would be called for to prove payment.
The Alteration of the Promissory Note Did Not Relieve the Petitioner From Liability
Although the respondent did not dispute the fact of alteration, he nevertheless denied that the
alteration was done without the petitioner’s consent.
the respondent also admitted in the Pre-Trial Order that part of its company practice is to
rubber stamp, or make a superimposition through a rubber stamp, the old promissory note
which has been renewed to make it appear that there is a new loan obligation. The petitioner
did not rebut this statement.
Even assuming that the note had indeed been tampered without the petitioner’s consent, the
latter cannot totally avoid payment of his obligation to the respondent based on the contract of

loan.
The Petitioner’s Belated Claim of Novation by Substitution May no Longer be Entertained

It is a settled principle of law that no issue may be raised on appeal unless it has been brought
before the lower tribunal for its consideration. no merit in the defense of novation
Novation cannot be presumed and must be clearly and unequivocably proven.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor.
To give novation legal effect, the original debtor must be expressly released from the obligation,
and the new debtor must assume the original debtor’s place in the contractual relationship.
Depending on who took the initiative, novation by substitution of debtor has two forms —
substitution by expromision and substitution by delegacion.(SEE RATIO)
In both cases, the original debtor must be released from the obligation; otherwise, there can be
no valid novation. Furthermore, novation by substitution of debtor must always be made with
the consent of the creditor.
Mrs. Bognot did not substitute the petitioner as debtor. She merely attempted to renew the
original loan by executing a new promissory note and check. The purported one month renewal
of the loan, however, did not push through, as Mrs. Bognot did not return the documents or
issue a new postdated check. Since the loan was not renewed for another month, the original
due date, June 30, 1997, continued to stand.
the respondent never agreed to release the petitioner from his obligation.
In order to give novation legal effect, the creditor should consent to the substitution of a new
debtor. Novation must be clearly and unequivocally shown, and cannot be presumed.
Since the petitioner failed to show that the respondent assented to the substitution, no valid
novation took place with the effect of releasing the petitioner from his obligation to the
respondent. Moreover, in the absence of showing that Mrs. Bognot and the respondent had
agreed to release the petitioner, the respondent can still enforce the payment of the obligation
against the original debtor.
The Nature of the Petitioner’s Liability

the CA erred in holding the petitioner solidarily liable with Rolando.
when the obligor undertakes to be “jointly and severally” liable, the obligation is solidary. In
this case, both the RTC and the CA found the petitioner solidarily liable with Rolando based on
Promissory Note
 I/WE, jointly and severally
Although the phrase “jointly and severally” in the promissory note clearly and unmistakably
provided for the solidary liability of the parties, we note and stress that the promissory note is
merely a photocopy of the original, which was never produced.
Under the best evidence rule, when the subject of inquiry is the contents of a document, no
evidence is admissible other than the original document itself except in the instances
mentioned in Section 3, Rule 130 of the Revised Rules of Court.
Since the respondent never produced the original of the promissory note, much less offered to
produce it, the photocopy of the promissory note cannot be admitted as evidence. Other than
the promissory note in question, the respondent has not presented any other evidence to
support a finding of solidary liability. As we earlier noted, both lower courts completely relied
on the note when they found the Bognot siblings solidarily liable. The well-entrenched rule is
that solidary obligation cannot be inferred lightly. It must be positively and clearly expressed
and cannot be presumed.
in the absence of evidence showing that the petitioner had bound himself solidarily with
Rolando for the payment of the loan, we cannot but conclude that the obligation to pay is only
joint.

RATIO
The obligation is not extinguished and remains suspended until the payment by commercial
document is actually realized.
“Art. 1293. 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. Payment by the new debtor gives him rights mentioned in Articles
1236 and 1237.”
In expromision, the initiative for the change does not come from — and may even be made
without the knowledge of — the debtor, since it consists of a third person’s assumption of the
obligation. As such, it logically requires the consent of the third person and the creditor.
In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these three persons are necessary.

PNB v. DEE, Antipoloi Properties Inc., (now Prime East Properties, Inc.)
G.R. No. 182128 | February 19, 2014
REYES, J.
TOPIC: Extinguishment of Obligations – Special Forms of Payment
THESIS STATEMENT
FACTS
respondent Teresita Tan Dee (Dee) bought from respondent Prime East Properties Inc.[5] (PEPI)
on an installment basis a residential lot
Subsequently, PEPI assigned its rights over a property to respondent Armed Forces of the
Philippines-Retirement and Separation Benefits System, Inc. (AFP-RSBS), which included the
property purchased by Dee.
Thereafter, PEPI obtained a loan from petitioner Philippine National Bank (petitioner), secured
by a mortgage over several properties, including Dee’s property. The mortgage was cleared by
the Housing and Land Use Regulatory Board (HLURB)
After Dee’s full payment of the purchase price, a deed of sale was executed by respondents
PEPI and AFP-RSBS in Dee’s favor.
Consequently, Dee sought from the petitioner the delivery of the owner’s duplicate title over
the property, to no avail. Thus, she filed with the HLURB a complaint for specific performance
to compel delivery of TCT No. 619608 by the petitioner, PEPI and AFP-RSBS, among others. the
HLURB ruled in favor of Dee
ARGUMENTS/DEFENSES
 The petitioner claims that it has a valid mortgage over Dee’s property, which was part of
the property mortgaged by PEPI to it to secure its loan obligation, and that Dee and
PEPI are bound by such mortgage. The petitioner also argues that it is not privy to the
transactions between the subdivision project buyers and PEPI, and has no obligation to
perform any of their respective undertakings under their contract. The petitioner also
maintains that Presidential Decree (P.D.) No. 957[15] cannot nullify the subsisting
agreement between it and PEPI, and that the petitioner’s rights over the mortgaged
properties are protected by Act 3135.[16] If at all, the petitioner can be compelled to
release or cancel the mortgage only after the provisions of P.D. No. 957 on redemption of
the mortgage by the owner/developer (Section 25) are complied with.
 Respondent AFP-RSBS, meanwhile, contends that it cannot be compelled to pay or settle
the obligation under the mortgage contract between PEPI and the petitioner as it is
merely an investor in the subdivision project and is not privy to the mortgage.
ISSUE/S
RULING
The petitioner is correct in arguing that it is not obliged to perform any of the undertaking of
respondent PEPI and AFP-RSBS in its transactions with Dee because it is not a privy thereto.
The petitioner, however, is not being tasked to undertake the obligations of PEPI and AFP-
RSBS. In this case, there are two phases involved in the transactions between respondents PEPI
and Dee — the first phase is the contract to sell, which eventually became the second phase, the
absolute sale, after Dee’s full payment of the purchase price. In a contract of sale, the parties’
obligations are plain and simple. The law obliges the vendor to transfer the ownership of and to
deliver the thing that is the object of sale.[26] On the other hand, the principal obligation of a
vendee is to pay the full purchase price at the agreed time.

Based on the final contract of sale between them, the obligation of PEPI, as owners and vendors
is to transfer the ownership of and to deliver to Dee, who, in turn, shall pay, and has in fact
paid, the full purchase price of the property.
There is nothing in the decision of the HLURB, as affirmed by the OP and the CA, which shows
that the petitioner is being ordered to assume the obligation of any of the respondents. There is
also nothing in the HLURB decision, which validates the petitioner’s claim that the mortgage
has been nullified. The order of cancellation/release of the mortgage is simply a consequence of
Dee’s full payment of the purchase price
It must be stressed that the mortgage contract between PEPI and the petitioner is merely an
accessory contract to the principal three-year loan takeout from the petitioner by PEPI for its
expansion project. It need not be belaboured that “[a] mortgage is an accessory undertaking to
secure the fulfillment of a principal obligation,”[28] and it does not affect the ownership of the
property as it is nothing more than a lien thereon serving as security for a debt
Note that at the time PEPI mortgaged the property to the petitioner, the prevailing contract
between respondents PEPI and Dee was still the Contract to Sell, as Dee was yet to fully pay
the purchase price of the property. On this point, PEPI was acting fully well within its right
when it mortgaged the property to the petitioner, for in a contract to sell, ownership is retained
by the seller and is not to pass until full payment of the purchase price.[30] In other words, at
the time of the mortgage, PEPI was still the owner of the property.
Nevertheless, despite the apparent validity of the mortgage between the petitioner and PEPI,
the former is still bound to respect the transactions between respondents PEPI and Dee. The
petitioner was well aware that the properties mortgaged by PEPI were also the subject of
existing contracts to sell with other buyers. While it may be that the petitioner is protected by
Act No. 3135, as amended, it cannot claim any superior right as against the installment buyers.
This is because the contract between the respondents is protected by P.D. No. 957, a social
justice measure enacted primarily to protect innocent lot buyers.
More so in this case where the contract to sell has already ripened into a contract of absolute
sale.
PEPI brought to the attention of the Court the subsequent execution of a Memorandum of
Agreement by PEPI and the petitioner. pursuant to an Order by the Regional Trial Court, a
petition for Rehabilitation under the Interim Rules of Procedure on Corporate Rehabilitation
filed by PEPI. The RTC order approved PEPI’s modified Rehabilitation Plan, which included the
settlement of the latter’s unpaid obligations to its creditors by way of dacion of real properties.
the RTC also incorporated certain measures that were not included in PEPI’s plan, one of which
is that “[t]itles to the lots which have been fully paid shall be released to the purchasers within
90 days after the dacion to the secured creditors has been completed.”[37] Consequently, the
agreement stipulated that as partial settlement of PEPI’s obligation with the petitioner, the
former absolutely and irrevocably conveys by way of “dacion en pago” the properties listed
therein,[38] which included the lot purchased by Dee.
There is nothing on record showing that the Memorandum of Agreement has been nullified or
is the subject of pending litigation; hence, it carries with it the presumption of validity.
Consequently, the execution of the dation in payment effectively extinguished respondent
PEPI’s loan obligation to the petitioner insofar as it covers the value of the property purchased
by Dee.
RATIO
Thus, in Luzon Development Bank v. Enriquez, [34] the Court reiterated the rule that a bank
dealing with a property that is already subject of a contract to sell and is protected by the
provisions of P.D. No. 957, is bound by the contract to sell.
Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing

by the debtor to the creditor as an accepted equivalent of the performance of the obligation.[40]
It is a mode of extinguishing an existing obligation[41] and partakes the nature of sale as the
creditor is really buying the thing or property of the debtor, the payment for which is to be
charged against the debtor’s debt.[42] Dation in payment extinguishes the obligation 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 by their silence — consider
the thing as equivalent to the obligation, in which case the obligation is totally extinguished.

Del Carmen vs. Sps. Sabordo
G.R. No. 181723 | August 11, 2014.
PERALTA, J.
TOPIC: Extinguishment of Obligations – Special Forms of Payment
THESIS STATEMENT
FACTS
Suico spouses along with several business partners, entered into a business venture As part of
their capital, they obtained a loan from the Development Bank of the Philippines (DBP), and to
secure the said loan, four parcels of land owned by the Suico spouses, and another lot owned by
their business partner, Juliana Del Rosario, were mortgaged.
Subsequently, the Suico spouses and their business partners failed to pay their loan obligations
forcing DBP to foreclose the mortgage.
They failed to redeem the foreclosed properties
Nonetheless, DBP later allowed the Suico spouses and (Flores spouses), as substitutes for
Juliana Del Rosario, to repurchase the subject lots by way of a conditional sale
The Suico and Flores spouses were able to pay the down payment and the first monthly
amortization, but no monthly installments were made thereafter. Threatened with the
cancellation of the conditional sale, the Suico and Flores spouses sold their rights over the said
properties to spouses Sabordo subject to the condition that the latter shall pay the balance of the
sale price.
Respondents and the Suico and Flores spouses executed a supplemental agreement whereby
they affirmed that what was actually sold to respondents were Lots 512 and 513, while Lots 506
and 514 were given to them as usufructuaries. DBP approved the sale of rights of the Suico and
Flores spouses in favor of herein respondents. Subsequently, respondents were able to
repurchase the foreclosed properties
Restituto Sabordo filed with the then Court of First Instance an original action for declaratory
relief with damages and prayer for a writ of preliminary injunction raising the issue of whether
or not the Suico spouses have the right to recover from respondents Lots 506 and 514.
DECISION the Regional Trial Court (RTC) ruled in favor of the Suico spouses directing that
the latter have until August 31, 1987 within which to redeem or buy back from respondents Lots
506 and 514.
On appeal, the CA, modified the RTC decision by giving the Suico spouses until October 31,
1990 within which to exercise their option to purchase or redeem the subject lots from
respondents by paying. the CA granted the Suico spouses an additional period of 90 days from
notice within which to exercise their option to purchase or redeem the disputed lots.
Toribio Suico (Toribio) died leaving his widow, Eufrocina, and several others, including herein
petitioner, as legal heirs. Later, they discovered that respondents mortgaged Lots 506 and 514
with Republic Planters Bank (RPB) as security for a loan which, subsequently, became
delinquent.

Thereafter, claiming that they are ready with the payment of P127,500.00, but alleging that they
cannot determine as to whom such payment shall be made, petitioner and her coheirs filed a
Complaint with the RTC of San Carlos City, Negros Occidental seeking to compel herein
respondents and RPB to interplead and litigate between themselves their respective interests on
the above mentioned sum of money.
Respondents filed their Answer with Counterclaim praying for the dismissal of the above
Complaint on the grounds that (1) the action for interpleader was improper since RPB is not
laying any claim on the sum of P127,500.00; (2) that the period within which the complainants
are allowed to purchase Lots 506 and 514 had already expired; (3) that there was no valid
consignation, and (4) that the case is barred by litis pendencia or res judicata.
the RTC rendered judgment, dismissing the Complaint of petitioner and her coheirs for lack of
merit. Respondents’ Counterclaim was likewise dismissed.
Petitioner and her coheirs filed an appeal with the CA contending that the judicial deposit or
consignation of the amount of P127,500.00 was valid and binding and produced the effect of
payment of the purchase price of the subject lots.
ARGUMENTS/DEFENSES


ISSUE/S
Whether or not Petitioner’s consignation which she and her co-heirs made was a judicial
deposit based on a final judgment and, as such, does not require compliance with the
requirements of Articles 1256 and 1257 of the Civil Code.
RULING
NO.
In the instant case petitioner and her coheirs, upon making the deposit with the RTC, did not
ask the trial court that respondents be notified to receive the amount that they have deposited.
In fact, there was no tender of payment. Instead, what petitioner and her coheirs prayed for is
that respondents and RPB be directed to interplead with one another to determine their alleged
respective rights over the consigned amount; that respondents be likewise directed to substitute
the subject lots with other real properties as collateral for their loan with RPB and that RPB be
also directed to accept the substitute real properties as collateral for the said loan. Nonetheless,
the trial court correctly ruled that interpleader is not the proper remedy because RPB did not
make any claim whatsoever over the amount consigned by petitioner and her coheirs with the
court.
In the instant case, the Court finds no cogent reason to depart from the findings of the CA and
the RTC that petitioner and her coheirs failed to make a prior valid tender of payment to
respondents.
It is settled that compliance with the requisites of a valid consignation is mandatory. Failure to
comply strictly with any of the requisites will render the consignation void. One of these
requisites is a valid prior tender of payment.
Under Article 1256, the only instances where prior tender of payment is excused are:
(1) when the creditor is absent or unknown, or does not appear at the place of payment;
(2) when the creditor is incapacitated to receive the payment at the time it is due;
(3) when, without just cause, the creditor refuses to give a receipt;
(4) when two or more persons claim the same right to collect; and
(5) when the title of the obligation has been lost.

None of these instances are present in the instant case. Hence, the fact that the subject lots are in
danger of being foreclosed does not excuse petitioner and her co-heirs from tendering payment
to respondents, as directed by the court
RATIO
Consignation [is] the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment, and it generally requires a
prior tender of payment.
It should be distinguished from tender of payment which is the manifestation by the debtor to
the creditor of his desire to comply with his obligation, with the offer of immediate
performance.
Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which
is the principal, and from which are derived the immediate consequences which the debtor
desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is
necessarily judicial, and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. Tender and consignation, where validly
made, produces the effect of payment and extinguishes the obligation.
In the cases of Del Rosario v. Sandico and Salvante v. Cruz, likewise cited as authority by
petitioner, this Court held that, for a consignation or deposit with the court of an amount due
on a judgment to be considered as payment, there must be prior tender to the judgment creditor
who refuses to accept it.
tender of payment involves a positive and unconditional act by the obligor of offering legal
tender currency as payment to the obligee for the former’s obligation and demanding that the
latter accept the same.

People vs. Franklin
39 SCRA 363 | June 7, 1971
DlZON, J.
TOPIC: Extinguishment of Obligations – Loss of the thing due or Impossibility of Performance
THESIS STATEMENT
FACTS
Natividad Franklin was charged with estafa. Upon a bail bond posted by the Asian Sure ty &
Insurance Company, Inc. in the amount of P2,000.00, she was released from custody
the Justice of the Peace Court elevated it to the Court of First Instance and set her arraignment
chich she failed to appear. but the court postponed the arraignment upon motion of counsel for
the surety company.
The accused failed to appear again, for which reason the court ordered her arrest and required
the surety company to show cause why the bail bond posted by it should not be forfeited.
the surety company failed to produce the accused, the court had no other alternative but to
render the judgment of forfeiture of bail bond.
the surety company filed a motion for a reduction of bail alleging that the reason for its inability
to produce and surrender the accused to the court was the fact that the Philippine Government
had allowed her to leave the country and proceed to the United States. the motion for reduction
of bail was denied.
ARGUMENTS/DEFENSES
 Appellant now contends that the lower court should have released it from all liability
under the bail bond posted by it because its failure to produce and surrender the
accused was due to the negligence of the Philippine Government itself in issuing a
passport to said accused, thereby enabling her to leave the country. In support of this
contention the provisions of Article 1266 of the New Civil Code are invoked.

ISSUE/S
Whether or not Article 1266 is applicable to bail bonds.
RULING
NO.
The abovementioned legal provision does not apply to its case, because the same speaks of the
relation between a debtor and a creditor, which does not exist in the case of a surety upon a bail
bond, on the one hand, and the State, on the other.
in the eyes of the law a surety becomes the legal custodian and jailer of the accused, thereby
assuming the obligation to keep the latter at all times under his surveillance, and to produce
and surrender him to the court upon the latter's demand.
That the accused in this case was able to secure a Philippine ,passport which enabled her to go
to the United States was, in fact, due to the surety company's fault because it was its duty to do
everything and take all steps necessary to prevent that departure. This could have been
accomplished by seasonably informing the Department of Foreign Affairs and other agencies of
the government of the fact that the accused for whose provisional liberty it had posted a bail
bond was facing a criminal charge in a particular court of the country. Had the surety company
done this, there can be no doubt that no Philippine passport would have been issued to
Natividad Franklin.
RATIO

Bail bond; Article 1266, New Civil Code, does not apply to a, surety upon a, bail bond.—Art.
1266, New Civil Code, does not apply to a surety upon a bail bond, as said Article speaks of a
relation between a debtor and creditor, which does not exist in the case of a surety upon a bail
bond, on one hand, and the State, on the other. For while sureties upon a bail bond (or
recognizance) can discharge themselves from liability by surrendering their principal, sureties
on ordinary bonds or commercial contracts, as a general rule, can only be released by payment
of the debt or performance of the act stipulated.

Laguna Tayabas Bus Company vs. Manabat
G.R. No. L-23546 | August 29, 1974
MAKASIAR, J.
THESIS STATEMENT
FACTS
a contract was executed whereby the Biñan Transportation Company leased to the Laguna-
Tayabas Bus Company
its certificates of public convenience over the lines known as Manila-Biñan, Manila-Canlubang
and Sta. Rosa-Manila, and to the Batangas Transportation Company its certificate of public
convenience over the line known as Manila-Batangas Wharf, together with one ‘lnternational”
truck, for a period of five years, renewable for another similar period, to commence from the
approval of the lease contract by the Public Service Commission.
On the same date the Public Service Commission provisionally approved the lease contract on
condition that the lessees should operate on the leased lines in accordance with the prescribed
time schedule and that such approval was subject to modification or cancellation and to
whatever decision that in due time might be rendered in the case.
Sometime after the execution of the lease contract, Biñan Transportation Company was declared
insolvent and Francisco C. Manabat was appointed as its assignee.
From time to time, the defendants paid the lease rentals up to December, 1957, with the
exception of the rental for August 1957, from which there was deducted the sum of P1,836.92
without the consent of the plaintiff. (This deduction was based on the ground that the
employees of the defendants on the leased lines went on strike and caused a loss)
judgment was rendered in favor of defendant Batangas Transportation Company against the
Biñan Transportation Company
The assignee of the plaintiff objected to such deduction, claiming that the contract of lease
would be suspended only if the defendants could not operate the leased lines due to the action
of the officers, employees or laborers of the lessor but not of the lessees.
The defendants neither refunded the deductions nor paid the rentals beginning January, 1958,
notwithstanding demands therefor made from time to time.
the Batangas Transportation Company and Laguna-Tayabas Bus Company separately filed with
the Public Service Commission a petition for authority to suspend the operation on the lines
covered by the certificates of public convenience leased to each of them by the Biñan
Transportation Company. The defendants alleged as reasons the reduction in the amount of
dollars allowed by the Monetary Board of the Central Bank of the Philippines for the purchase
of spare parts needed in the operation of their trucks, the alleged difficulty encountered in
securing said parts, and their procurement at exorbitant costs, thus rendering the operation of
the leased lines prohibitive. The defendants further alleged that the high cost of operation,
coupled with the lack of passenger traffic on the leased lines resulted in financial losses. For
these reasons they asked permission to suspend the operation of the leased lines until such time
as the operating expenses were restored to normal levels so as to allow the lessees to realize a

reasonable margin of profit from their operation.
Plaintiff s assignee opposed the petition
the Public Service Commission overruled all oppositions filed by the assignee and other
creditors of the insolvent
While proceedings before the Public Service Commission were thus going on, as a consequence
of the continuing failure of the lessees to fulfill their earlier promise to pay the accruing rentals
on the leased certificates,
The Court of Appeals, rendered judgment in favor of plaintiff, ordering the defendants jointly
and severally to pay to the former of the rentals without reduction.
ARGUMENTS/DEFENSES


ISSUE/S
Whether or not the reduction of rentals should be granted.
RULING
petitioners invoke article 1680 of the Civil Code which grants lessees of rural lands a right to a
reduction of rentals whenever the harvest on the land leased is considerably damaged by an
extraordinary fortuitous event.
however, are not applicable to the case at bar. Article 1680 of the Civil Code (SEE RATIO).
Article 1680, it will be observed is a special provision for leases of rural lands. No other legal
provision makes it applicable to ordinary leases.
It is a provision of social justice designed to relieve poor farmers from the harsh consequences
of their contracts with rich landowners. And taken in that light, the article provides no refuge to
lessees whose financial standing or social position is equal to, or even better than, the lessor as
in the case at bar.
Even if the cited article were a general rule on lease, its provisions nevertheless do not extend
to petitioners. One of its requisites is that the cause of loss of the fruits of the leased property
must be an “extraordinary and unforeseen fortuitous event.” The circumstances of the instant
case fail to satisfy such requisite.
the alleged causes for the suspension of operations on the lines leased, namely, the high prices
of spare parts and gasoline and the reduction of the dollar allocations, “already existed when
the contract of lease was executed”
Performance is not excused by subsequent inability to perform, by unforeseen difficulties, by
unusual or unexpected expenses, by danger, by inevitable accident, by the breaking of
machinery, by strikes, by sickness, by failure to a party to avail himself of the benefits to be had
under the contract, by weather conditions, by financial stringency, or by stagnation of business.
Neither is performance excused by the fact that the contract turns out to be hard and
improvident, unprofitable or impracticable, ill-advised, or even foolish, or less profitable, or
unexpectedly burdensome.
The cause of petitioners’ inability to operate on the lines cannot, therefore, be ascribed to
fortuitous events or circumstances beyond their control, but to their own voluntary desistance.
no reduction can be sustained on the ground that the operation of the leased lines was
suspended upon the mere speculation that it would yield no substantial profit for the lessee bus
company. Petitioners’ profits may be reduced due to increase operating costs; but the volume of
passenger traffic along the leased lines not only remains the same but may even increase as the
tempo of the movement of population is intensified by the industrial development of the areas
covered or connected by the leased routes.
even if the lessee would not actually make use of the lessor’s certificates over the leased lines,
the contractual commitment of the lessor not to operate on the lines would sufficiently insure
added profit to the lessees on account of the lease contract. "(S)ince, by the lease, the lessee was

to have the advantage of casual profits of the leased premises, he should run the hazard of
casual losses during the term and not lay the whole burden upon the lessor.”
Militating further against a grant of reduction of the rentals to the petitioners is the petitioners’
conduct which is not in accord with the rules of fair play and justice.
RATIO
“Art. 1680. The lessee shall have no right to a reduction of the rent on account of the sterility of
the land leased, or by reason of the loss of fruits due to ordinary fortuitous events; but he shall
have such right in case of the loss of more than one-half of the fruits through extraordinary and
unforeseen fortuitous events, save always when there is a specific stipulation to the contrary.
“Extraordinary fortuitous events are understood to be: fire, war, pestilence, unusual flood,
locusts, earthquake, or others which are uncommon, and which the contracting parties could
not have reasonably foreseen.”

Occena vs. Jabson
G.R. No. L-443349| October 29, 1976
TEEHANKEE, J.
THESIS STATEMENT
FACTS
Tropical Homes, Inc. filed a complaint for modification of the terms and conditions of its
subdivision contract with petitioners
Under the subdivision contract, respondent “guaranteed (petitioners as landowners) as the
latter’s fixed and sole share and participation an amount equivalent to forty (40%) per cent ofall
cash receipts from the sale of the subdivision lots”.
It prayed in the court of first instance that “after due trial, this Honorable Court render
judgment modifying the terms and conditions of the contract x x x by fixing the proper shares
that should pertain to the herein parties out of the gross proceeds from the sales of subdivided
lots of subject subdivision”.
Respondent court (CFI) set aside the preliminary injunction previously issued by it and
dismissed petition on the ground that under Article 1267 of the Civil Code.
ARGUMENTS/DEFENSES


ISSUE/S
Whether or not worldwide increase in prices does not constitute a sufficient cause of action for
modification of the subdivision contract.
RULING
Yes.
“The general rule is that impossibility of performance releases the obligor. However, it is
submitted that when the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the court should be authorized to release the obligor in whole or in part.
The intention of the parties should govern and if it appears that the service turns out to be so
difficult as have been beyond their contemplation, it would be doing violence to that intention
to hold the obligor still responsible. x x x,”
If respondent’s complaint were to be released from having to comply with the subdivision
contract, assuming it could show at the trial that the service undertaken contractually by it had
“become so difficult as to be manifestly beyond the contemplation of the parties”, then
respondent court’s upholding of respondent’s complaint and dismissal of the petition would be
justifiable under the cited codal article.
But respondent’s complaint seeks not release from the subdivision contract but that the court
“render judgment modifying the terms and conditions of the contract . , . by fixing the proper
shares that should pertain to the herein parties out of the gross proceeds from the sales of
subdivided lots of subject subdivision”. The cited article does not grant the courts this authority
to remake, modify or revise the contract or to fix the division of shares between the parties as
contractually stipulated with the force of law between the parties, so as to substitute its own
terms for those covenanted by the parties themselves. Respondent’s complaint for modification
of contract manifestly has no basis in law and therefore states no cause of action.
RATIO
The Civil Code authorizes the release of an obligor when the service has become so difficult as

to be manifestly beyond the contemplation of the parties but does not authorize the courts to
modify or revise the subdivision contract between the parties or fix a different sharing ratio
from that contractually stipulated with the force of law between the parties.
“ART. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part.”

Gan Tion vs. Court of Appeals
G.R. No. L- 22490| May 21, 1969
MAKALINTAL, J.
TOPIC: Extinguishment of Obligations – Compensation
THESIS STATEMENT
FACTS
Ong Wan Sieng was a tenant in certain premises owned by Gan Tion who filed an ejectment
case against him, alleging non-payment of rents
He denied the allegation and said that the agreed monthly rental was only P160, which he had
offered to but was refused by Gan Tion
The plaintiff obtained a favorable judgment in the municipal court (of Manila), but upon appeal
the Court of First Instance, on July 2, 1962, reversed the judgment and dismissed the complaint,
and ordered the plaintiff to pay the defendant. That judgment became final.
Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a month and
at the same time demanded the rents in arrears at the old rate
Ong Wan Sieng was able to obtain a writ of execution of the judgment for attorney's fees in his
favor. Gan Tion went on certiorari to the Court of Appeals, where he pleaded legal
compensation, claiming that Ong Wan Sieng was indebted to him for unpaid rents.
The appellate court accepted the petition but eventually decided for the respondent, holding
that although "respondent Ong is indebted to the petitioner for unpaid rentals the sum of P500
could not be the subject of legal compensation, it being a "trust fund for the benefit of the
lawyer, which would have to be turned over by the client to his counsel."
ARGUMENTS/DEFENSES


ISSUE/S
whether or not there has been legal compensation between petitioner Gan Tion and respondent
Ong Wan Sieng.
RULING
YES.
In the opinion of said Court, the requisites of legal compensation, namely, that the parties must
be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each
one of them must be bound principally and at the same time be a principal creditor of the other
(Art. 1279), are not present in the instant case, since the real creditor with respect to the sum of
P500 was the defendant's counsel.
This is not an accurate statement of the nature of an award for attorney's fees. The award is
made in favor of the litigant, not of his counsel, and is justified by way of indemnity for
damages recoverable by the former in the cases enumerated in Article 2208 of the Civil Code. It
is the litigant, not his counsel, who is the judgment creditor and who may enforce the judgment
by execution. Such credit, therefore, may properly be the subject of legal compensation. Quite
obviously it would be unjust to compel petitioner to pay his debt f or P500 when admittedly his
creditor is indebted to him for more than P4,000.
RATIO

Philippine National Bank vs. Vda. de Ong Acero
G.R. No. L- 69255 | February 27,1987
NARVASA, J.
THESIS STATEMENT
FACTS
A savings account opened with PNB by the ISABELA Wood construction and development
corp. is the subject of two (2) conflicting claims,
One claim is asserted by the ACEROS—judgment creditors of ISABELA—who seek to enforce
against said savings account the final and executory judgment rendered in their favor by the
Court of First Instance.
The other claim has been put forth by the Philippine National Bank which claims that since
ISABELA was at some point in time both its debtor and creditor—ISABELA's deposit being
deemed a loan to it (PNB)—there had occurred a mutual set-off between them, which effectively
precluded the ACEROS' recourse to that deposit.
The ACEROS' claim to the bank deposit is more specifically founded upon the garnishment
thereof by the sheriff, effected in execution of the partial judgment rendered by the CFI in their
favor.
On the other hand, PNB's claim to the two-million-peso deposit in question is made to rest on
an agreement between it and ISABELA in virtue of which, according to PNB: (1) the deposit
was made by ISABELA as "collateral" in connection with its indebtedness to PNB as to which it
(ISABELA) had assumed certain contractual undertakings; and (2) in the event of ISABELA's
failure to fulfill those undertakings, PNB was empowered to apply the deposit to the payment
of that indebtedness.
pursuant to paragraph 4 of the Credit Agreement, quoted above, PNB thru its International
Department opened the savings account in question, under Account No. 01058768-D, with an
initial deposit of P2,000,000.00, proceeds of a treasury warrant delivered to PNB
 '4. The CLIENT shall assign to the BANK the proceeds of its contract with the
Department of Public Works for the construction of Nagapit Suspension Bridge
(Substructure) in Cagayan.'
 Since defendant corporation failed to deliver to PNB by way of mortgage its Parañaque
property, neither was defendant corporation able to secure from Metropolitan Bank and
Home Owners Savings and Loan Association its consent to allow PNB a second
mortgage, and considering that the obligation of defendant corporation to PNB have
been due and unsettled, PNB applied the amount of P2,102804.11 in defendant's savings
account of PNB."
ARGUMENTS/DEFENSES
 PNB's main thesis is that when it opened a savings account for ISABELA on March 9,
1979 in the amount of P2M, it (PNB) became indebted to ISABELA in that amount. 11 So
that when ISABELA itself subsequently came to be indebted to it on account of
ISABELA's breach of the terms of the Credit Agreement of October 13, 1977, and
therefore ISABELA and PNB became at the same time creditors and debtors of each
other, compensation automatically took place between them, in accordance with Article
1278 of the Civil Code. The amounts due from each other were, in its view, applied by
operation of law to satisfy and extinguish their respective credits. More specifically, the
P2M owed by PNB to ISABELA was automatically applied in payment and

extinguishment of PNB's own credit against ISABELA. This having taken place, that
amount of P2M could no longer be levied on by any other creditor of ISABELA, as the
ACEROS attempted to do in the case at bar, in order to satisfy their judgment against
ISABELA.

ISSUE/S
Whether or not there is a compensation between parties.
RULING
Article 1278 of the Civil Code does indeed provide that "Compensation shall take when two
persons, in their own right, are creditors and debtors of each other." Also true is that
compensation may transpire by operation of law, as when all the requisites therefor, set out in
Article 1279, are present. Nonetheless, these legal provisions cannot apply to PNB's advantage
under the circumstances of the case at bar.
PNB has not proven by competent evidence that it is a creditor of ISABELA. The only evidence
present by PNB towards this end consists of two (2) documents marked in its behalf but these
documents do not prove any indebtedness of ISABELA to PNB.
the most persuasive evidence of these facts—i.e., ISABELA's availment of the credit, as well as
the actual delivery of the goods covered by and shipped pursuant to the letter of credit—
assuming these facts to have occurred, would naturally and logically have been in PNB's
possession and could have been readily submitted to the Court. PNB did not at all lack want for
opportunity to produce these documents, if it does indeed have them.
Moreover, PNB never even attempted to offer or exhibit such evidence, in the course of the
appellate proceedings before the IAC, which is a certain indication, in that Court's view, that
PNB does not really have these proof s at all.
In the first place, there being no indebtedness to PNB on ISABELA's part, there is in
consequence no occasion to speak of any mutual set-off, or compensation, whether it be legal,
i.e. ., which automatically occurs by operation of law, or voluntary, i.e., which can only take
place by agreement of the paries.
In the second place, the documents indicated by PNB as constitutive of the claimed assignment
do not in truth make out any such transaction.
One final factor precludes according validity to PNB's arguments. On the assumption that the
P2M deposit was in truth assigned as some sort of "collateral" to PNB— although as PNB
insists, it was not in the form of a pledge —the agreement postulated by PNB that it had been
authorized to assume ownership of the fund upon the coming into being of ISABELA's
indebtedness is void ab initio, it being in the nature of a pactum commisorium, proscribed as
contrary to public policy.
RATIO

Francia vs. Intermediate Appellate Court
G.R. No. L- 67649 | June 28, 1988
GUTIERREZ, JR., J.
THESIS STATEMENT
The petitioner invokes legal and equitable grounds to reverse the questioned decision of the
Intermediate Appellate Court, to set aside the auction sale of his property which took place on
December 5, 1977, and to allow him to recover a 203 square meter lot which was sold at public
auction to Ho Fernandez and ordered titled in the latter’s name.
FACTS
Engracio Francia is the registered owner of a residential lot and a two-story house
portion of Francia’s property was expropriated by the Republic of the Philippines
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5,
1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to
Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to
satisfy a tax delinquency
Ho Fernandez was the highest bidder for the property.
Francia was not present during the auction sale
Francia received a notice of hearing of LRC. In re: Petition for Entry of New Certificate of Title”
filed by Ho Fernandez
Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had been
issued in favor of Ho Fernandez
Francia filed a complaint to annul the auction sale.
the lower court dismissed the complaint
Affirmed by the IAC in toto.
ARGUMENTS/DEFENSES


ISSUE/S
Whether or not Francia’s tax delinquency has been extinguished by legal compensation through
the government’s expropriation of a portion of his lot.
RULING
NO.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of
law.
 There is no legal basis for the contention. By legal compensation, obligations of persons,
who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279:
 “(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other; xxx xxx xxx “(3) that the two debts be due.
This principal contention of the petitioner has no merit. We have consistently ruled that there
can be no off-setting of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax being collected

Further, The tax was due to the city government while the expropriation was effected by the
national government. the amount of P4,116.00 paid by the national government was deposited
with the Philippine National Bank long before the sale at public auction of his remaining
property. Notice of the deposit dated September 28, 1977 was received by the petitioner on
September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it to pay his taxes.
Petitioner had one year within which to redeem his property although, as well be shown later,
he claimed that he pocketed the notice of the auction sale without reading it.
Petitioner contends that “the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was
followed. x x x Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof
therefore rests upon him to show that plaintiff was duly and properly notified x x x.”
We agree with the petitioner’s claim that Ho Fernandez, the purchaser at the auction sale, has
the burden of proof to show that there was compliance with all the prescribed requisites for a
tax sale.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have
been complied with, the petitioner cannot, however, deny that he did receive the notice for the
auction sale. As long as there was substantial compliance with the requirements of the notice,
the validity of the auction sale cannot be assailed.
It was negligence on his part when he ignored such notice. By his very own admission that he
received the notice, his now coming to court assailing the validity of the auction sale loses its
force.
Finally, as a general rule, gross inadequacy of price is not material

RATIO

Republic vs. De los Angeles
G.R. No. L- 30187| June 25, 1980
CONCEPCION JR., J.
THESIS STATEMENT
FACTS
Spouses Farin obtained a loan from the Marcelo Steel Corporation and as security they
constituted, in favor of the said corporation, a real estate mortgage upon their parcel of land
Almost a year later, the mortgagee wrote the Sheriff of Quezon City requesting the extra-
judicial foreclosure of the aforesaid mortgage.
the mortgagors filed a petition for prohibition with injunction and damages against the sherrif
and Marcelo Steel Corporation.
While the case was pending, Petra Farin leased portions of the ‘Dona Petra Building”, situated
on the mortgaged premises, to the Rice and Corn Administration
the Marcelo Steel Corporation, invoking paragraph 5 of the mortgage contract, filed a motion
praying that an order be issued directing and/or authorizing the Rice and Corn Administration
(RCA) and all other business concerns holding offices at the Dona Petra Building to channel or
pay directly to it the rents for the use of the building
The CFI rendered a decision in favor of the corporation.
The RCA filed a motion for the reconsideration of said order, praying that it be excluded
therefrom, for the reasons that (a) the rents due Petra Farin had been assigned by her, with the
conformity with the RCA, to Vidal A. Tan;
(b) Petra Farin has an outstanding obligation with the RCA, representing rice shortages
incurred by her as a bonded warehouseman under contract with the RCA, which should be
compensated with the rents due and may be due; and
(c) RCA was never given an opportunity to be heard on these matters.
Upon denial, the RCA filed a second motion for reconsideration, insisting that the claim of
Marcelo Steel Corporation for rents has no legal basis because even a mortgagee who has
successfully foreclosed a mortgage is not entitled to the fruits and rents of the property during
the one-year redemption period, and that Marcelo Steel Corporation, after it had chosen to
foreclose the mortgage, cannot resort to the provision of the mortgage contract authorizing the
mortgagee to collect and receive rents and to apply said amounts to the payment of the
principal obligation and the interests thereon; and that no rents are due Petra Farin because she
has an accountability with the RCA which amount should be compensated with the rents due.
No action appears to have been taken on this motion
Petra Farin filed an urgent ex parte motion to authorize the RCA to release the rentals as to
enable her to make the necessary repairs on the air conditioning system of the Dona Petra
Building, stating, among others, that “That RCA is ready, willing and able to release to the
petitioners the rentals mentioned above.” The respondent Judge granted the motion
the RCA filed a motion to set aside the said order, claiming that the allegations contained in the
motion that “The RCA is ready, willing and able to release to the petitioners the rentals
mentioned above” is unauthorized and gratuitous, and the delivery of the withheld rentals to
Petra R. Farin would defeat its claim without giving the corporation its day in court. The trial
court denied its motion.
the RCA filed a motion to vacate the orders directing the RCA to pay rentals to Marcelo Steel

Corporation. It has remained unacted upon.
the RCA emphasized
 that it is not a party to the case;
 that it had been denied due process for lack of notice and the right to be heard; that
compensation took place by operation of law pursuant to Art. 1286 of the Civil Code
without the need of filing a case against Petra R. Farin, or a decision rendered against
her for the payment of such obligation; and
 that the provisions of the Rules of Court permitting a judgment creditor to reach money
or property in the hands of third persons like the RCA, all presuppose a Anal judgment,
and not a mere interlocutory order.
The motion was denied
ARGUMENTS/DEFENSES


ISSUE/S
Whether or not
RULING
Insofar as it recognized the right of Marcelo Steel Corporation, to collect and receive rentals
from the lessees of the Doña Petra Building, the order was within the competence of the
respondent Judge, since Petra Farin, had empowered the said corporation to collect and receive
any interest, dividend, rents, profits or other income or benefit produced by or derived from the
mortgaged property under the terms of the real estate mortgage contract executed by them.
But, the respondent Judge exceeded his jurisdiction in ordering or compelling the lessees of the
said building, the RCA among others, to pay the rentals to the respondent Corporation, without
giving the lessees an opportunity to be heard. The said lessees are not parties to the case
between the lessor and the Marcelo Steel Corporation. The RCA, in particular, was not
furnished with a copy of the motion of the respondent Corporation praying that an order be
issued directing and/or authorizing the RCA and other lessees to channel or pay directly to the
said corporation the rents for the use of the Doña Petra Building, so that the RCA was deprived
of its day in court and precluded it from presenting the defenses that it has against the lessor.
The said order clearly violated the constitutional provision against depriving a person of his
property without due process of law.
While there may be rents due the lessor for the use of portions of the Doña Petra Building,
otherwise there would be no claim of compensation, the collection of said rents should not be
done in an arbitrary and illegal manner. Certain rules should be observed and justice accorded
the parties whose property rights would be adversely affected thereby.
Since the order was issued in excess of jurisdiction, the said order is null and void and of no
legal effect.
The respondent Judge also erred in denying the claim of the RCA that compensation of debts
had taken place allegedly because “The records does not show any proof that the plaintiff is
indebted to the aforesaid movant, RCA, as alleged in the said motion and assuming that the
herein plaintiff is really indebted to the RCA, the records further does not show that a case has
been filed against her, or a decision has been rendered against her for the payment of such
obligation.” Proof of the liquidation of a claim, in order that there be compensation of debts, is
proper if such claim is disputed. But, if the claim is undisputed, as in the case at bar, the
statement is sufficient and no other proof may be required. In the instant case, the claim of the
RCA that Petra R. Farin has an outstanding obligation to the RCA which should be

compensated against the rents already due or may be due, was raised by the RCA in its motion
for the reconsideration of the order.
Petra R. Farin did not dispute nor deny such claim. Neither did the Marcelo Steel Corporation
dispute such claim of compensation in its opposition.
The silence of Petra R. Farin, although the declaration is such as naturally one to call for action
or comment if not true, could be taken as an admission of the existence and validity of such a
claim. Therefore, since the claim of the RCA is undisputed, proof of its liquidation is not
necessary.
RATIO

Solinap vs. Del Rosario
G.R. No. L- 50638 | July 25, 1983
ESCOLIN, J.
THESIS STATEMENT
FACTS
the spouses Tiburcio Lutero and Asuncion Magalona, owners of the Hacienda Tambal, leased
the said hacienda to petitioner Loreto Solinap for a period of ten [10] years for the stipulated
rental of P50,000.00 a year.
It was further agreed in the lease contract that out of the aforesaid annual rental, the sum of
P25,000.00 should be paid by Solinap to the Philippine National Bank to amortize the
indebtedness of the spouses Lutero with the said bank.
Tiburcio Lutero died on January 21, 1971. Soon after, his heirs instituted the testate estate
proceedings of the deceased,
In the course of the proceedings, the respondent judge, upon being apprized of the mounting
interest on the unpaid account of the estate, issued an order, stating, among others, “that in
order to protect the estate, the administrator, Judge Nicolas Lutero, is hereby authorized to
scout among the testamentary heirs who is financially in a position to pay all the unpaid
obligations of the estate, including interest, with the right of subrogation in accordance with
existing laws.”
On the basis of this order, respondents Juanito Lutero [grandson and heir of the late Tiburcio]
and his wife Hardivi R. Lutero paid the Philippine National Bank as partial settlement of the
deceased’s obligations. Whereupon the respondents Lutero filed a motion in the testate court
for reimbursement from the petitioner of the amount thus paid. They argued that the said
amount should have been paid by petitioner to the PNB, as stipulated in the lease contract he
had entered into with the deceased Tiburcio Lutero; and that such reimbursement to them was
proper, they being subrogees of the PNB.
Before the motion could be resolved by the court, petitioner filed a separate action against the spouses
Juanito Lutero and Hardivi R. Lutero for collection of sum alleging that defendants Lutero borrowed
from him the sum of P45,000.00 for which they executed a deed of real estate mortgage; that on July 2,
1974, defendants obtained an additional loan of P3,000.00, evidenced by a receipt issued by them; that
defendants are further liable to him for the sum of P23,000.00, representing the value of certain
dishonored checks issued by them to the plaintiff; and that defendants refused and failed to settle said
accounts despite demands.
They further pleaded a counterclaim against petitioners for the total sum of P125,000.00 representing
unpaid rentals on Hacienda Tambal. Basis of the counterclaim is the allegation that they had purchased
one-half [½] of Hacienda Tambal, which their predecessors, the spouses Tiburcio Lutero and Asuncion
Magalona, leased to the plaintiff for a rental of P50,000.00 a year; and that plaintiffs had failed to pay
said rentals despite demands.
Respondent Judge granted the respondent Lutero’s motion for reimbursement from petitioner of the
sum of P25,000.00 plus interest,
ARGUMENTS/DEFENSES
 Petitioner contends that respondent judge gravely abused her discretion in not declaring the
mutual obligations of the parties extinguished to the extent of their respective amounts. He
relies on Article 1278 of the Civil Code to the effect that compensation shall take place when
two persons, in their own right, are creditors and debtors of each other. The argument fails to

consider Article 1279 of the Civil Code which provides that compensation can take place only if
both obligations are liquidated.

ISSUE/S
whether or not the obligation of petitioners to private respondents may be compensated or set-
off against the amount sought to be recovered in an action for a sum of money filed by the
former against the latter.
RULING
In the case at bar, the petitioner’s claim against the respondent Luteros in Civil Case No. 12379 is still
pending determination by the court. it appears that the claim asserted therein is disputed by the Luteros
on both factual and legal grounds. More, the counterclaim interposed by them, if ultimately found to be
meritorious, can defeat petitioner’s demand. Upon this premise, his claim in that case cannot be
categorized as liquidated credit which may properly be set-off against his obligation. As this Court ruled
in Mialhe vs. Halili, 2 “compensation cannot take place where one’s claim against the other is still the
subject of court litigation. It is a requirement, for compensation to take place, that the amount involved
be certain and liquidated.”
RATIO
Compensation, not a case of; For compensation to take place, both obligations must be certain and
liquidated; Mutual obligations of parties, not extinguished

Sycip vs. Court of Appeals
G.R. No. L- 38711 | January 31, 1985
RELOVA, J.
THESIS STATEMENT
FACTS
Jose K. Lapuz received from Albert Smith in Manila 2,000 shares of stock of the Republic Flour Mills, Inc.
in the name of Dwight Dill who had left for Honolulu. Jose K. Lapuz ‘was supposed to sell his (the shares)
at present market value out of which I (he) was supposed to get certain commission.’
According to Jose K. Lapuz, the accused-appellant approached him and told him that he had good
connections in the Stock Exchange, assuring him that he could sell them at a good price.
Before accepting the offer of the accused-appellant to sell the shares of stock, Jose K. Lapuz made it
clear to him that the shares of stock did not belong to him and were only entrusted to him for sale. He
then gave the shares of stock to the accusedappellant who put them in the market.
Lapuz received a letter from the accusedappellant, informing him that ‘1,758 shares has been sold ’ but
that the transaction could not be concluded until they received the Power of Attorney duly executed by
Dwight Dill
Lapuz declared that he ‘was able to secure a power of attorney of Dr. Dwight Dill and gave it to the
accused-appellant.’ The power of attorney authorized the sale of 1,758 shares only; the difference of
242 shares were given back to Biochemical Research Laboratory, Inc.
Lapuz received a letter from the accused-appellant informing him that ‘although the deal has been
closed, actual delivery has been withheld pending receipt of payment
Lapuz wrote a letter to the accused-appellant (, stating therein, ‘that he authorized accused-appellant to
sell 1,000 shares of Republic Flour Mills.’
Later, the accused-appellant wrote a letter to Jose K. Lapuz that date that ‘500 shares out of the 1,000
shares of the Republic Flour x x x has been sold,’ and stating further that ‘pending receipt of the
payment, expected next week, we are enclosing herewith our draft to cover the full value of 500 shares.’
“The accused-appellant sold and paid for the other 500 shares of stock, for the payment of which Jose K.
Lapuz issued in his favor a receipt
The draft for P8,000.00, ‘the full value of the 500 shares’ mentioned in the letter of the accused-
appellant was dishonored by the bank, for lack of funds. Jose K. Lapuz then ‘discovered from the
bookkeeper that he got the money and he pocketed it already, so I (he) started hunting for Mr. Sycip’
(accused-appellant). When he found the accused-appellant, the latter gave him a check in the amount of
P5,000.00, issued by his daughter. This also was dishonored by the bank for lack of sufficient funds to
cover it.
When Jose K. Lapuz sent a wire to him, telling him that he would ‘file estafa case (in the) fiscals office x x
x against him’ unless he raise [the] balance [of] eight thousand’ (Exhibit ‘L’), the accused-appellant
answered him by sending a wire, ‘P5,000 remitted ask boy check Equitable (Exhibit ‘M’). But ‘the check
was never made good,’ so Jose K. Lapuz testified. He had to pay Albert Smith the value of the 500 shares
of stock.”
the then Court of First Instance of Manila rendered a decision convicting the herein petitioner Francisco
Sycip of the crime of estafa and sentencing him to an indeterminate penalty of three (3) months of
arresto mayor, as minimum, to one (1) year and eight (8) months of prision correccional, as maximum;
to indemnify complainant Jose K. Lapuz the sum of P5,000.00, with subsidiary imprisonment in case of
insolvency; and to pay the costs. The then Court of Appeals affirmed the trial court’s decision but
deleted that part of the sentence imposing subsidiary imprisonment.
ARGUMENTS/DEFENSES



ISSUE/S
Whether or not the appellate court erred in refusing to uphold the provisions on compensation,
Articles 1278 and 1279, Civil Code;
RULING
NO.
Compensation cannot take place in this case since the evidence shows that Jose K. Lapuz is only an
agent of Albert Smith and/or Dr. Dwight Dill. Compensation takes place only when two persons in their
own right are creditors and debtors of each other, and that each one of the obligors is bound principally
and is at the same time a principal creditor of the other. Moreover, as correctly pointed out by the trial
court, Lapuz did not consent to the off-setting of his obligation with petitioner’s obligation to pay for the
500 shares.
RATIO
Same; Obligations and Contracts; Criminal Law; Compensation cannot take place where, with respect to
the money involved in the estafa case, the complainant was merely acting as agent of another. In set-off
the two persons must in their own right be creditor and debtor of each other

Compañia Maritima vs. Court of Appeals
G.R. No. L- 50900 | April 9, 1985
MELENCIO-HERRERA, J.
THESIS STATEMENT
FACTS
Fernando A. Froilan purchased from the Shipping Administration a boat described as MV/FS-197 for the
sum of P200,000.00, with a down payment of P50,000.00. To secure payment of the unpaid balance of
the purchase price, a mortgage was constituted on the vessel in favor of the Shipping Administration
Froilan appeared to have defaulted in spite of demands, not only in the payment of the first installment
on the unpaid balance of the purchase price and the interest thereon when they fell due, but also failed
in his express undertaking to pay the premiums on the insurance coverage of the vessel, obliging the
Shipping Administration to advance such payment to the insurance company, x x x”
Subsequently, FROILAN appeared to have still incurred a series of defaults notwithstanding
reconsiderations granted
the General Manager (of the Shipping Administration) directed its officers x x x to take immediate
possession of the vessel and to suspend the unloading of all cargoes on the same until the owners
thereof made the corresponding arrangement with the Shipping Administration. Pursuant to these
instructions, the boat was, not only actually repossessed, but the title thereto was registered again in
the name of the Shipping Administration, thereby re-transferring the ownership thereof to the
government.
Pan Oriental, offered to charter said vessel FS-197 for a monthly rent of P3,000.00. Because the
government was then spending for the guarding of the boat and subsistence of the crewmembers since
repossession, the Shipping Administration on April 1, 1949, accepted Pan Oriental’s offer “in principle”
subject to the condition that the latter shall cause the repair of the vessel, advancing the cost of labor
and drydocking thereof, and the Shipping Administration to furnish the necessary spare parts. In
accordance with this charter contract, the vessel was delivered to the possession of Pan Oriental
“In the meantime, Froilan tried to explain his failure to comply with the obligations he assumed and
asked that he be given another extension to file the necessary bond. Froilan offered to pay all his
overdue accounts. However, as he failed to fulfill even these offers made by him in these two
communications, the Shipping Administration denied his petition for reconsideration.
Froilan protested to the President against the charter of the vessel
the Shipping Administration and the Pan Oriental formalized the charter agreement and signed a
bareboat contract with option to purchase
the formal bareboat charter with option to purchase filed in favor of the Pan Oriental was returned to
the General Manager of the Shipping Administration without action (not disapproval), only because of
the Cabinet resolution restoring Froilan to his rights under the conditions set forth therein, namely, the
payment of P10,000.00 to settle partially his overdue accounts and the filing of a bond to guarantee the
reimbursement of the expenses incurred by the Pan Oriental in the drydocking and repair of the vessel.
But Froilan again failed to comply with these conditions.
And so the Cabinet, considering Froilan’s consistent failure to comply with his obligations, including
those imposed in the resolution, resolved to reconsider said previous resolution restoring him to his
previous rights. And, in a letter the Executive Secretary authorized the Administration to continue its
charter contract with Pan Oriental in respect to FS-197 and enforce whatever rights it may still have
under the original contract with Froilan
the Cabinet resolved once more to restore Froilan to his rights under the original contract of sale. Pan
Oriental protested to this restoration of Froilan’s rights under the contract of sale, for the reason that
when the vessel was delivered to it, the Shipping Administration had authority to dispose of the said
property, Froilan having already relinquished whatever rights he may have thereon.
Froilan paid the required cash of P10,000.00, and as Pan Oriental refused to surrender possession of the

vessel, he filed an action for replevin in the Court of First Instance to recover possession thereof and to
have him declared the rightful owner of said property.
Upon plaintiff s filing a bond of P400,000.00, the court ordered the seizure of the vessel from Pan
Oriental and its delivery to the plaintiff. Pan Oriental tried to question the validity of this order in a
petition for certiorari filed in this Court
Subsequently, Compañia Maritima, as purchaser of the vessel from Froilan, was allowed to intervene in
the proceedings (in the lower court), said intervenor taking common cause with the plaintiff Froilan.
the lower court rendered a decision upholding Froilan’s (and Compañia Maritima’s) right to the
ownership and possession of the vessel
SUPREME COURT:
“In the circumstances of this case, therefore, the resulting situation is that neither Froilan nor the Pan
Oriental holds a valid contract over the vessel. However, since the intervenor Shipping Administration,
representing the government practically ratified its proposed contract with Froilan by receiving the full
consideration of the sale to the latter, for which reason the complaint in intervention was dismissed as
to Froilan, and since Pan Oriental has no capacity to question this actuation of the Shipping
Administration because it had no valid contract in its favor, the decision of the lower court adjudicating
the vessel to Froilan and its successor Compañia Maritima, must be sustained. since it is not disputed
that said appellant made useful and necessary expenses on the vessel, appellant is entitled to the refund
of such expenses with the right to retain the vessel until he has been reimbursed therefor (Art. 546, Civil
Code). As it is by the concerted acts of defendants and intervenor Republic of the Philippines that
appellant was deprived of the possession of the vessel over which appellant had a lien for his expenses,
appellees Froilan, Compañia Maritima, and the Republic of the Philippines are declared liable for the
reimbursement to appellant of its legitimate expenses, as allowed by law, with legal interest from the
time of disbursement
ARGUMENTS/DEFENSES


ISSUE/S
Whether or not
RULING
the legal interest payable from February 3, 1951 on the sum of P40,797.54, representing useful
expenses incurred by PAN-ORIENTAL, is also still unliquidated 8 since interest does not stop accruing
“until the expenses are fully paid." Thus, we find without basis REPUBLIC’s allegation that PAN-
ORIENTAL’s claim in the amount of P40,797.54 was extinguished by compensation since the rentals
payable by P ANORIENTAL amount to P59,500.00 while the expenses reach only P40,797.54. Deducting
the latter amount from the former, REPUBLIC claims that P18,702.46 would still be owing by PAN-
ORIENTAL to REPUBLIC. That argument loses sight of the fact that to the sum of P40,797.54 will still have
to be added the legal rate of interest “from February 3, 1951 until fully paid”
But although compensation by operation of law cannot take place as between REPUBLIC and PAN-
ORIENTAL, by specific pronouncement of this Court in its Resolution of November 23, 1968, supra, the
rentals payable by PANORIENTAL in the amount of P59,500.00 should be deducted from the sum of
useful expenses plus legal interest due, assuming that the latter amount would still be greater.
Otherwise, the corresponding adjustments can be made depending on the totality of the respective
amounts,
RATIO
Obligations; Compensation cannot take place where one of the debts is not liquidated as when there is a
running interest still to be paid thereon.

International Corporate Bank, Inc. vs. IAC
G.R. No. L- 69560 | June 30,1988
PARAS, J.
THESIS STATEMENT
FACTS
private respondent secured from petitioner's predecessors-in-interest, the then Investment and
Underwriting Corp. of the Philippines and Atrium Capital Corp., a loan in the amount of P50,000,000.00.
To secure this loan, private respondent mortgaged her real properties which she claimed have a total
market value of P110,000,000.00. Of this loan, only the amount of P20,000,000.00 was approved for
release. The same amount was applied to pay her other obligations to petitioner, bank charges and fees.
Thus, private respondent's claim that she did not receive anything from the approved loan.
private respondent made a money market placement with ATRIUM in the amount ofPl,046,253.77 at
17% interest per annum for a period of 32 days or until October 13, 1980, its maturity date. Meanwhile,
private respondent allegedly failed to pay her mortgaged indebtedness to the bank so that the latter
refused to pay the proceeds of the money market placement on maturity but applied the amount
instead to the deficiency in the proceeds of the auction sale of the mortgaged properties. With Atrium
being the only bidder, said properties were sold in its favor for only P20,000,000.00. Petitioner claims
that after deducting this amount, private respondent is still indebted in the amount of P6.81 million.
private respondent filed a complaint with the trial court against petitioner for annulment of the sheriffs
sale of the mortgaged properties, for the release to her of the balance of her loan from petitioner in the
amount of P30,000,000,00, and for recovery of Pl,062, 063.83 representing the proceeds of her money
market investment and for damages.
 that the mortgage is not yet due and demandable and accordingly the foreclosure was illegal;
 that per her loan agreement with petitioner she is entitled to the release to her of the balance
of the loan in the amount of P30,000,000.00;
 that petitioner refused to pay her the proceeds of her money market placement
notwithstanding the fact that it has long become due and payable; and
 that she suffered damages as a consequence of petitioner's illegal acts.
The trial court subsequently dismissed private respondent's cause of action concerning the annulment
of the foreclosure sale, for lack of jurisdiction, but left the other causes of action to be resolved after
trial.
private respondent filed a motion to order petitioner to release in her favor the sum representing the
proceeds of the money market placement,
respondent judge issued an order granting the motion,
Petitioner filed a motion for reconsideration to the aforesaid order, asserting among other things that
said motion is not verified, and therefore a mere scrap of paper. petitioner filed a special civil action for
certiorari and prohibition with preliminary injunction with the Court of Appeals. the Court of Appeals
dismissed said petition
Having been affirmed by the Court of Appeals, the trial court issued a Writ of Execution to implement its
Order
private respondent (then plaintiff) filed in the trial court an ex-parte motion praying that the four
branches of the petitioner be ordered to pay the amount of P250,000.00 each, and the main office of
the petitioner bank be ordered to pay the amount of P62,063.83 in order to answer for the claim of
private respondent. the trial court issued an Order granting the abovementioned prayers.
Acting on the ex-parte motion by the plaintiff (now private respondent), the trial court ordered the
President of defendant International Gorporate Bank (now petitioner) and all its employees and officials
concerned to deliver to the sheriff the 20 motor vehicles levied by virtue of the Writ of Execution
The petitioner having failed to comply with the abovecited Order, the respondent trial court issued two
(2) more Orders

ARGUMENTS/DEFENSES


ISSUE/S
whether or not there can be legal compensation in the case at bar.
RULING
Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as
deficiency the amount of P6.81 million against which it has the right to apply or set off private
respondent's money market claim of-Pl,062,063.83. NO.
"There can be no doubt that petitioner is indebted to private respondent in the amount ofPl,062,063.83
representing the proceeds of her money market investment. This is admitted. But whether private
respondent is indebted to petitioner in the amount of P6.81 million representing the deficiency balance
after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously
disputed. This circumstance prevents legal compensation from taking place."
It must be noted that Civil Case No. 83-19717 is still pending consideration at the RTC Manila, for
annulmeht of SherifFs sale on extra-judicial foreclosure of private respondent's property from which the
alleged deficiency arose. Therefore, the validity of the extrajudicial foreclosure sale and petitioner's
claim for deficiency are still in question, so much so that it is evident, that the requirement of Article
1279 that the debts must be liquidated and demandable has not yet been met. For this reason, legal
compensation cannot take place under Article 1290 of the Civil Code.
RATIO
"Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other. (Art. 1278, Civil Code). 'When all the requisites mentioned in Art. 1279 of the Civil Code are
present, compensation takes effect by operation of law, even without the consent or knowledge of the
debtors.' (Art. 1290, Civil Code). Article 1279 of the Civil Code requires among others, that in order that
legal compensation shall take place, 'the two debts be due' and 'they be liquidated and demandable.'
Compensation is not proper where the claim of the person asserting the set-off against the other is not
clear nor liquidated; compensation cannot extend to unliquidated, disputed claim arising from breach of
contract

Mindanao Portland Cement Corp. vs. Court of Appeals
G.R. No. L- 62169 | February 28, 1983
TEEHANKEE, J.
THESIS STATEMENT
FACTS
Atty. Casiano P. Laquihon, in behalf of thirdparty defendant Pacweld Steel Corporation as the latter’s
attorney, filed a pleading addressed to the defendant & Third-Party Plaintiff Mindanao Portland Cement
Corporation (MPCC) for short), herein appellant, entitled ‘motion to direct payment of attorney’s fee to
counsel’ (himself), invoking in his motion the fact that in the decision of the court of Sept. 14, 1976,
MPCC was adjudged to pay Pacweld the sum of P10,000.00 as attorney’s fees
MPCC filed an opposition to Atty. Laquihon’s motion, stating, as grounds therefor, that said amount is
set-off by a like sum of P10,000.00 which it (MPCC) has collectible in its favor from Pacweld also by way
of attorney’s fees which MPCC recovered from the same Court of First Instance of Manila (Branch XX) in
Civil Case No. 68346, entitled ‘Pacweld Steel Corporation, et al.,’ a writ of execution to this effect having
been issued by said court
the court issued the order appealed from (Record on Appeal, pp. 24-25) and despite MPCC’s motion for
reconsideration of said order, citing the law applicable and Supreme Court decisions (Record on Appeal,
pp. 26-33), denied the same in its order
There was no trial or submission of documentary evidence. Against the orders

ARGUMENTS/DEFENSES


ISSUE/S
The judgment in Civil Case No. 75179 being already final at the time the motion under consideration was
filed, does not the order of June 26, 1976 constitute a change or alteration of the said judgment, though
issued by the very same court that rendered the judgment?
RULING
It is clear from the record that both corporations, petitioner Mindanao Portland Cement Corporation
(appellant) and respondent Pacweld Steel Corporation (appellee), were creditors and debtors of each
other, their debts to each other consisting in final and executory judgments of the Court of First Instance
in two (2) separate cases, ordering the payment to each other of the sum of P10,000.00 by way of
attorney’s fees. The two (2) obligations, therefore, respectively offset each other, compensation having
taken effect by operation of law and extinguished both debts to the concurrent amount of P10,000.00,
pursuant to the provisions of Arts. 1278, 1279 and 1290 of the Civil Code, since all the requisites
provided in Art. 1279 of the said Code for automatic compensation “even though the creditors and
debtors are not aware of the compensation” were duly present
Necessarily, the appealed order of June 26, 1978 granting Atty. Laquihon’s motion for amendment of
the judgment of September 14, 1976 against Mindanao Portland Cement Corporation so as to make the
award therein of P10,000.00 as attorney’s fees payable directly to himself as counsel of Pacweld Steel
Corporation instead of payable directly to said corporation as provided in the judgment, which had
become final and executory long before the issuance of said “amendatory” order was a void alteration
of judgment. It was a substantial change or amendment beyond the trial court’s jurisdiction and
authority and it could not defeat the compensation or setoff of the two (2) obligations of the
corporations to each other which had already extinguished both debts by operation of law.
RATIO

Compensation; Automatic compensation, requisites of, present; Extinguishment of two debts arising
from final and executory judgments due to compensation by operation of law; Case at bar

Bank of the Philippine Islands vs. Court of Appeals
G.R. No. 136202 | January 25, 2007
AZCUNA, J.
THESIS STATEMENT
FACTS
Annabelle A. Salazar substituted A.A. Salazar Construction and Engineering Services which filed an action
for a sum of money with damages against herein petitioner Bank of the Philippine Islands (BPI)
She prayed for the recovery of the amount debited by petitioner BPI from her account.
BPI, alleged that, Julio R. Templonuevo, third-party defendant, demanded from them payment an
amount representing the aggregate value of three (3) checks, which were allegedly payable to him, but
which were deposited with the petitioner bank to private respondent Salazar’s account without his
knowledge and corresponding endorsement.
BPI then froze the account of A.A. Salazar and Construction and Engineering Services, instead of the
account where the checks were deposited, since this account was already closed by private respondent
Salazar or had an insufficient balance.
Salazar and Templonuevo did not arrive to any settlement.

Then BPI decided to debit an amount paid to Templonuevo and bank charges
RTC: in favor of the plaintiff [private respondent Salazar] and against the defendant [petitioner BPI]
Court of Appeals (CA) affirmed the decision of the RTC and held that respondent Salazar was entitled to
the proceeds of the three (3) checks notwithstanding the lack of endorsement thereon by the payee
ARGUMENTS/DEFENSES


ISSUE/S
does a collecting bank, over the objections of its depositor, have the authority to withdraw unilaterally
from such depositor’s account the amount it had previously paid upon certain unendorsed order
instruments deposited by the depositor to another account that she later closed?
The CA should have applied the Civil Code provisions on legal compensation because in deducting the
subject amount from Salazar’s account, petitioner was merely rectifying the undue payment it made
upon the checks and exercising its prerogative to alter or modify an erroneous credit entry in the regular
course of its business.
RULING
In the present case, the records do not support the finding made by the CA and the trial court that a
prior arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the
checks. This fact is crucial as Salazar’s entitlement to the value of the instruments is based on the
assumption that she is a transferee within the contemplation of Section 49 of the Negotiable
Instruments Law.
Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or indorsee
delivers a negotiable instrument for value without indorsing it, thus:
 “Transfer without indorsement; effect of.—Where the holder of an instrument payable to his
order transfers it for value without indorsing it, the transfer vests in the transferee such title as
the transferor had therein, and the transferee acquires in addition, the right to have the
indorsement of the transferor. But for the purpose of determining whether the transferee is a
holder in due course, the negotiation takes effect as of the time when the indorsement is
actually made.”
something more than mere possession by persons who are not payees or indorsers of the instrument is
necessary to authorize payment to them in the absence of any other facts from which the authority to

receive payment may be inferred.
The CA and the trial court surmised that the subject checks belonged to private respondent Salazar
based on the pre-trial stipulation. even if the delay in the demand for reimbursement is taken in
conjunction with Salazar’s possession of the checks, it cannot be said that the presumption of ownership
in Templonuevo’s favor as the designated payee therein was sufficiently overcome. This is consistent
with the principle that if instruments payable to named payees or to their order have not been indorsed
in blank, only such payees or their indorsees can be holders and entitled to receive payment in their
own right.
Negotiable instruments are negotiated by “transfer to one person or another in such a manner as to
constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery. If payable
to order it is negotiated by the indorsement completed by delivery.” 22 The present case involves
checks payable to order. Not being a payee or indorsee of the checks, private respondent Salazar could
not be a holder thereof.
It is an exception to the general rule for a payee of an order instrument to transfer the instrument
without indorsement. It is but fair to the maker and to prior holders to require possessors to prove
without the aid of an initial presumption in their favor, that they came into possession by virtue of a
legitimate transaction with the last holder. Salazar failed to discharge this burden, and the return of the
check proceeds to Templonuevo was therefore warranted under the circumstances despite the fact that
Templonuevo may not have clearly demonstrated that he never authorized Salazar to deposit the checks
or to encash the same. Noteworthy also is the fact that petitioner stamped on the back of the checks the
words: “All prior endorsements and/or lack of endorsements guaranteed,” thereby making the
assurance that it had ascertained the genuineness of all prior endorsements. Having assumed the
liability of a general indorser, petitioner’s liability to the designated payee cannot be denied.
Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account for the value of
the checks it previously credited in her favor. It is of no moment that the account debited by petitioner
was different from the original account to which the proceeds of the check were credited because both
admittedly belonged to Salazar, the former being the account of the sole proprietorship which had no
separate and distinct personality from her, and the latter being her personal account.
the relationship between banks and depositors has been held to be that of creditor and debtor. Thus,
legal compensation under Article 1278 of the Civil Code may take place “when all the requisites
mentioned in Article 1279 are present,” as follows:
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;
5. That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.”
RATIO
Article 1980 of the Civil Code provides that “[f]ixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple loan.”

Union Bank vs. Development Bank of the Philippines
G.R. No. 191555 | January 20, 2014
PERLAS-BERNABE, J.
THESIS STATEMENT
FACTS
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Bank’s predecessor-in-interest,
Bancom Development Corporation (Bancom), and to DBP.
FI and DBP, among others, entered into a Deed of Cession of Property In Payment of Debt (dacion en
pago) whereby the former ceded in favor of the latter certain properties (including a processing plant in
Marilao, Bulacan [processing plant]) in consideration of the following:
 (a) the full and complete satisfaction of FI’s loan obligations to DBP; and
 (b) the direct assumption by DBP of FI’s obligations to Bancom in the amount of
P17,000,000.00 (assumed obligations).
On the same day, DBP, as the new owner of the processing plant, leased back for 20 years the said
property to FI (Lease Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP
and Bancom.
DBP also entered into a separate agreement10 with Bancom (Assumption Agreement) whereby the
former:
 (a) confirmed its assumption of FI’s obligations to Bancom; and
 (b) undertook to remit up to 30% of any and all rentals due from FI to Bancom (subject rentals)
which would serve as payment of the assumed obligations, to be paid in monthly installments.
portions of the Assumption Agreement:
1. DBP has agreed and firmly committed in favor of Bancom that the above obligations to Bancom
which DBP has assumed shall be settled, paid and/or liquidated by DBP out of a portion of the
lease rentals or part of the proceeds of sale
2. DBP hereby covenants and undertakes that the amount up to 30% of any and all rentals due
from the Lessee pursuant to the Lease Agreement shall be remitted by DBP to Bancom at the
latter’s offices at Pasay Road, Makati, Metro Manila within five (5) days from due dates thereof,
and applied in payment of the Assumed Obligations. Likewise, the amount up to 30% of the
proceeds from any sale of the Leased Properties shall within the same period above, be remitted
by DBP to Bancom and applied in payment or prepayment of the Assumed Obligations. x x x.
Any balance of the Assumed Obligations after application of the entire rentals and or the
entire sales proceeds actually received by Bancom on the Leased Properties shall be paid by
DBP to Bancom not later than December 29, 1998.
Meanwhile, FI assigned its leasehold rights under the Lease Agreement to Foodmasters Worldwide, Inc.
(FW), while Bancom conveyed all its receivables, including, among others, DBP’s assumed obligations, to
Union Bank.
Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union Bank
filed a collection case against DBP before the RTC,
In opposition, DBP countered, among others, that the obligations it assumed were payable only out of
the rental payments made by FI. Thus, since FI had yet to pay the same, DBP’s obligation to Union Bank
had not arisen. In addition, DBP sought to implead FW as third party-defendant in its capacity as FI’s
assignee and, thus, should be held liable to Union Bank.
Finding the complaint to be meritorious, the RTC, ordered: (a) DBP to pay Union Bank
the CA set aside the RTC’s ruling, and consequently ordered:

(a) FW to pay DBP the amount of P32,441,401.85 representing the total rental debt incurred under the
Lease Agreement
(b) DBP, after having been paid by FW its unpaid rentals, to remit 30% thereof (i.e., the subject rentals)
to Union Bank.

SC:
First, it upheld the CA’s finding that while DBP directly assumed FI’s obligations to Union Bank, DBP was
only obliged to remit to the latter 30% of the lease rentals collected from FW
the Court agreed with the CA that the denial of DBP’s motion to dismiss was proper since substitution of
parties, in case of transfers pendente lite, is merely discretionary on the part of the court, adding further
that the proposed substitution of APT will amount to a novation of debtor which cannot be done
without the consent of the creditor.
Union Bank filed a motion for execution28 before the RTC, praying that DBP be directed to pay
DBP filed its own motion for execution against FW, citing the same CA decision as its basis
the RTC granted both motions for execution.
Union Bank filed a Manifestation and Motion to Affirm Legal Compensation,43 praying that the RTC
apply legal compensation between itself and DBP in order to offset the return of the funds it previously
received from DBP.
RTC: DENIED
CA: Affirmed RTC
ARGUMENTS/DEFENSES


ISSUE/S
Whether or not the CA correctly upheld the denial of Union Bank’s motion to affirm legal
compensation.
RULING
The rule on legal compensation is stated in Article 1290 of the Civil Code which provides that “[w]hen 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.”
In this case, legal compensation could not have taken place between these debts for the apparent
reason that requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since DBP’s assumed
obligations to Union Bank for remittance of the lease payments are “contingent on the prior payment
thereof by [FW] to DBP,” it cannot be said that both debts are due (requisite 3 of Article 1279 of the Civil
Code).
Also, in the same ruling, the Court observed that any deficiency that DBP had to make up (by December
29, 1998 as per the Assumption Agreement) for the full satisfaction of the assumed obligations “cannot
be determined until after the satisfaction of Foodmasters’ obligation to DBP.” In this regard, it cannot be
concluded that the same debt had already been liquidated, and thereby became demandable (requisite
4 of Article 1279 of the Civil Code).
RATIO
Compensation is defined as a mode of extinguishing obligations whereby two persons in their capacity
as principals are mutual debtors and creditors of each other with respect to equally liquidated and
demandable obligations to which no retention or controversy has been timely commenced and
communicated by third parties.
Article 1279 of the Civil Code:

In order that compensation may be proper, 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;
(5) That over neither of them there be any retention or controversy, commenced by third persons and

communicated in due time to the debtor.

Japan Airlines vs. Simangan
G.R. No. 170141 | April 22, 2008
REYES, R.T., J.
TOPIC: Extinguishment of Obligations – Novation
THESIS STATEMENT
FACTS
ARGUMENTS/DEFENSES


ISSUE/S
RULING
RATIO

Salazar vs. J.Y. Brothers Marketing Corporation
G.R. No. 171998 | October 20, 2010
PERALTA, J.
THESIS STATEMENT
FACTS
Anamer Salazar accompanied Isagani Calleja and Jess Kallos to J.Y. Brothers Marketing (a corporation
engaged in the business of selling sugar, rice and other commodities.)
Salazar with Calleja and Kallos procured from J. Y. Bros. 300 cavans of rice
As payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank Check issued by Nena Jaucian
Timario (with the assurance that the check is good as cash)
On that assurance, J.Y. Bros. parted with 300 cavans of rice to Salazar. However, upon presentment, the
check was dishonored due to “closed account.”
Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement cross Solid Bank Check again issued by
Nena Jaucian Timario but which, just the same, bounced due to insufficient funds. When despite the
demand letter Salazar failed to settle the amount due J.Y. Bros., the latter charged Salazar and Timario
with the crime of estafa before the Regional Trial Court
Anamer D. Salazar was ACQUITTED of the crime charged but held liable for the value of the 300 bags of
rice.
accused attempted a reconsideration on the civil aspect of the order. It was granted when it reached the
Supreme Court

the RTC rendered its Decision, DISMISSING as against Anamer D. Salazar the civil aspect of the case.
 The RTC concluded that the absence of negotiability rendered nuga tory the obligation arising
from the technical act of indorsing a check and, thus, had the effect of novation; and that the
ultimate effect of such substitution was to extinguish the obligation arising from the issuance of
the Prudential Bank check.
CA reversed this decision
ARGUMENTS/DEFENSES


ISSUE/S
Whether or not the issuance of the Solid Bank check and the acceptance thereof by the
respondent, in replacement of the dishonored Prudential Bank check, amounted to novation
that discharged the latter check
RULING
NO.
SECTION 119. Instrument; how discharged.—A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is made or accepted
for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own
right.
And, under Article 1231 of the Civil Code, obligations are extinguished: x x x x

(6) By novation.
respondent’s acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank check,
did not result to novation as there was no express agreement to establish that petitioner was already
discharged from his liability to pay respondent
novation is never presumed, there must be an express intention to novate.
Among the different types of checks issued by a drawer is the crossed check.
the effect of crossing a check relates to the mode of payment, meaning that the drawer had intended
the check for deposit only by the rightful person
The change in the mode of paying the obligation was not a change in any of the objects or principal
condition of the contract for novation to take place.
Considering that when the Solid Bank check, which replaced the Prudential Bank check, was presented
for payment, the same was again dishonored; thus, the obligation which was secured by the Prudential
Bank check was not extinguished and the Prudential Bank check was not discharged.
RATIO
Novation is done by the substitution or change of the obligation by a subsequent one which extinguishes
the first, either by changing the object or principal conditions, or by substituting the person of the
debtor, or by subrogating a third person in the rights of the creditor. Novation may: [E]ither be
extinctive or modificatory, much being dependent on the nature of the change and the intention of the
parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases
where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old
obligation as the moving consideration for the emergence of the new one. Implied novation necessitates
that the incompatibility between the old and new obligation be total on every point such that the old
obligation is completely superceded by the new one. The test of incompatibility is whether they can
stand together, each one having an independent existence; if they cannot and are irreconcilable, the
subsequent obligation would also extinguish the first. An extinctive novation would thus have the twin
effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This
kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2)
an agreement of all parties concerned to a new contract, (3) the extinguishment of the old obligation,
and (4) the birth of a valid new obligation. Novation is merely modificatory where the change brought
about by any subsequent agreement is merely incidental to the main obligation
There are only two ways which indicate the presence of novation and thereby produce the effect of
extinguishing an obligation by another which substitutes the same. First, novation must be explicitly
stated and declared in unequivocal terms as novation is never presumed. Secondly, the old and the new
obligations must be incompatible on every point. The test of incompatibility is whether or not the two
obligations can stand together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first.

Metropolitan Bank and Trust Company vs. Rural Bank of Gerona, Inc.
G.R. No. 159097 | July 5, 2010
BRION, J.
THESIS STATEMENT
FACTS
ARGUMENTS/DEFENSES


ISSUE/S
RULING
RATIO

Odiamar vs. Valencia
G.R. No. 213582 | June 28, 2016
PERLAS-BERNABE, J.
THESIS STATEMENT
FACTS
ARGUMENTS/DEFENSES


ISSUE/S
RULING
RATIO

Rodriguez vs. Reyes
37 SCRA 195 | January 30, 1971
REYES, J.B.L., J.
THESIS STATEMENT
FACTS
ARGUMENTS/DEFENSES


ISSUE/S
RULING
RATIO

People’s Bank and Trust Co. vs. Syvel’s Incorporated
G.R. No. L- 29280 | August 11, 1988
PARAS, J.
THESIS STATEMENT
FACTS
ARGUMENTS/DEFENSES


ISSUE/S
Whether or not there was a novation
RULING
Novation takes place when the object or principal condition of an obligation is changed or altered. It is
elementary that novation is never presumed; it must be explicitly stated or there must be manifest
incompatibility between the old and the new obligations in every aspect
In the case at bar, there is nothing in the Real Estate Mortgage which supports appellants’ submission.
The contract on its face does not show the existence of an explicit novation nor incompatibility on every
point between the “old and the “new” agreements as the second contract evidently indicates that the
same was executed as new additional security to the chattel mortgage previously entered into by the
parties.
Moreover, records show that in the real estate mortgage, appellants agreed that the chattel mortgage
“shall remain in full force and shall not be impaired by this (real estate) mort-gage.”
It is clear, therefore, that a novation was not intended. The real estate mortgage was evidently taken as
additional security for the performance of the contract
RATIO

Cochingyan, Jr. vs. R&B Surety and Insurance Co., Inc
G.R. No. L- 47369 | June 30, 1987
FELICIANO, J.
TOPIC: Extinguishment of Obsligations – Novation
THESIS STATEMENT
FACTS
ARGUMENTS/DEFENSES


ISSUE/S
RULING
RATIO

Integrated Construction Services, Inc. vs. Relova
G.R. No. L- 41117 | December 29, 1986
PARAS, J.
THESIS STATEMENT
FACTS
Petitioners sued the respondent Metropolitan Waterworks and Sewerage System (MWSS), formerly
NAWASA.
The Arbitration Board ordered MWSS to pay petitioners
Subsequently, however, petitioners agreed to give MWSS some discounts in consideration of an early
payment of the award.
MWSS adopted Board Resolutio, embodying the terms and conditions of their agreement
MWSS sent a letteragreement to petitioners, quoting Board Resolution granting MWSS some discounts
from the amount payable under the decision award provided that MWSS would pay the judgment, less
the said discounts, within fifteen days therefrom.
Upon MWSS' request, the petitioners signed their "Conforme" to the said letter-agreement
MWSS, however, paid two months late.
Three years thereafter, after the last balance of the trust fund had been released and used to satisfy
creditors' claims, the petitioners filed a motion for execution in said civil case against MWSS for the
balance due under the decision-award. Respondent MWSS opposed execution setting forth the defenses
of payment
respondent judge denied the motion for execution on the ground that the parties had novated the
award by their subsequent letter-agreement.
ARGUMENTS/DEFENSES
 MWSS asserted new matters, (p. 186, Rollo) arguing that: the delay in effecting payment was
caused by an unforeseen circumstance—the declaration of martial law, thus, placing MWSS
under the management of the Secretary of National Defense, which impelled MWSS to refer the
matter of payment to the Auditor General and/or the Secretary of National Defense; and that
the 15-day period was merely intended to pressure MWSS officials to process the voucher.

ISSUE/S
Whether or not the contract novated
RULING
While the tenor of the subsequent letter-agreement in a sense novates the judgment award there being
a shortening of the period within which to pay the suspensive and conditional nature of the said
agreement (making the novation conditional) is expressly acknowledged and stipulated in the 14th
whereas clause of MWSS' Resolution
 WHEREAS, all the foregoing benefits and advantages secured by the MWSS out of said
conferences were accepted by the Joint Venture provided that the remaining net amount
payable to the Joint Venture will be paid by the MWSS within fifteen (15) days after the official
release of this resolution and a written CONFORME to be signed by the Joint Venture;"
MWSS' failure to pay within the stipulated period removed the very cause and reason for the
agreement, rendering some ineffective. Petitioners, therefore, were remitted to their original rights
under the judgment award.
The placing of MWSS under the control and management of the Secretary of National Defense thru
Letter of Instruction was not an unforeseen supervening factor
RATIO

National Power Corp. vs. Dayrit
G.R. No. L-62845-46| November 25, 1983.
ABAD SANTOS, J.
THESIS STATEMENT
FACTS
DANIEL E. ROXAS, doing business under the name and style of United Veterans Security Agency and
Foreign Boats Watchmen, sued the NATIONAL POWER CORPORATION (NPC) and two of its officers in
Iligan City to compel the NPC to restore the contract of Roxas for security services which the former had
terminated.
the litigants entered into a Compromise Agreement asked the Court to approve it.
the NPC executed another contract for security services with Josette L. Roxas whose relationship to
Daniel is not shown. Daniel has owned the contract. But NPC refused to implement the new contract so
Daniel filed a Motion for Execution which was granted.
The NPC assails the Order on the ground that it directs execution of a contract which had been novated.
ARGUMENTS/DEFENSES
 Roxas claims that said contract was executed precisely to implement the compromise
agreement for which reason there was no novation.

ISSUE/S
Whether or not the contract has been novated.
RULING
novation is never presumed; it must be explicitly stated or there must be manifest incompatibility
between the old and the new obligations in every aspect. Thus the Civil Code provides:
“Art. 1292. In order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other.”
In the case at bar there is nothing in the May 14, 1982, agreement which supports the petitioner’s
contention. There is neither explicit novation nor incompatibility on every point between the “old” and
the “new” agreements.
RATIO

Sandico, Sr. vs. Piguing
G.R. No. L- 26115 | November 29, 1971
CASTRO, J.
THESIS STATEMENT
FACTS
ARGUMENTS/DEFENSES


ISSUE/S
RULING
RATIO

Millar vs. Court of Appeals
G.R. No. L- 29981 | April 30, 1971
CASTRO, J.
THESIS STATEMENT
FACTS
Eusebio S. Millar obtained a favorable judgment from the CFI in a civil case condemning Antonio P.
Gabriel to pay him.
respondent appealed to the Court of Appeals which, however, dismissed it.
Millar moved ex parte in the court of origin for the issuance of the corresponding writ of execution to
enforce the judgment
the lower court issued the writ of execution applied for, on the basis of which the sheriff of Manila
seized the respondent’s Willy’s Ford jeep
Gabriel pleaded with the Millar to release the jeep under an arrangement whereby Gabriel, to secure
the payment of the judgement debt, agreed to mortgage the vehicle in favor of Millar. Millar agreed to
the arrangement; thus, the parties executed a chattel mortgage on the jeep,
Upon failure of Gabriel to pay the first installment Millar obtained an alias writ of execution. This writ
which the sheriff served on Gabriel only after the lapse of the entire period stipulated in the chattel
mortgage for him to comply with his obligation—was returned unsatisfied.
Several attempts were also unsatisfied.
Millar obtained a fifth alias writ of execution. Pursuant to this last writ, the sheriff levied on certain
personal properties belonging to the respondent, and then scheduled them for execution sale.
Gabriel filed an urgent motion for the suspension of the execution sale on the ground of payment of the
judgment obligation. The lower court granted it

Trial Court ruled that novation had taken place, and that the parties had executed the chattel mortgage
only “to secure or get better security for the judgment.”
The CA held that the subsequent agreement of the parties impliedly novated the judgment obligation
ARGUMENTS/DEFENSES


ISSUE/S
whether or not the subsequent agreement of the parties as embodied in the deed of chattel mortgage
impliedly novated the judgment obligation
RULING
The Court of Appeals, in arriving at the conclusion that implied novation has taken place, took into
account the four circumstances heretofore already adverted to as indicative of the incompatibility
between the judgment debt and the principal obligation under the deed of chattel mortgage.
1. Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with
interest at 12% per annum from the filing of the complaint, plus the amount of P400 and the
costs of suit, the deed of chattel mortgage limits the principal obligation of the respondent to
P1,700;
2. Whereas the judgment mentions no specific mode of payment of the amount due to the
petitioner, the deed of chattel mortgage stipulates payment of the sum of P1,700 in two equal
installments;
3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates
the respondent to pay liquidated damages in the amount of P300 in case of default on his part;

and
4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed
extrajudicially in case of default, secured the obligation.
1. Anent the first circumstance, Where the new obligation merely reiterates or ratifies the old
obligation, although the former effects but minor alterations or slight modifications with respect
to the cause or object or conditions of the latter, such changes do not effectuate any substantial
incompatibility between the two obligations. Only those essential and principal changes
introduced by the new obligation producing an alteration or modification of the essence of the
old obligation result in implied novation. In the case at bar, the mere reduction of the amount
due in no sense constitutes a sufficient indicium of incompatibility, especially in the light of (a)
the explanation by the petitioner that the reduced indebtedness was the result of the partial
payments made by the respondent before the execution of the chattel mortgage agreement and
(b) the latter’s admissions bearing thereon.
The first circumstance fails to satisfy the test of substantial and complete incompatibility
between the judgment debt and the pecuniary liability of the respondent under the chattel
mortgage agreement.
2. the first circumstance fails to satisfy the test of substantial and complete incompatibility
between the judgment debt and the pecuniary liability of the respondent under the chattel
mortgage agreement.
3. As to the second and fourth circumstances, we sec no substantial incompatibility between the
mortgage obligation and the judgment liability of the respondent sufficient to justify a
conclusion of implied novation. The stipulation for the payment of the obligation under the
terms of the deed of chattel mortgage serves only to provide an express and specific method for
its extinguishment—payment in two equal installments. The chattel mortgage simply gave the
respondent a method and more time to enable him to fully satisfy the judgment indebtedness. 1
The chattel mortgage agreement in no manner introduced any substantial modification or
alteration of the judgment.
Instead of extinguishing the obligation of the respondent arising from the judgment, the deed of
chattel mortgage expressly ratified and confirmed the existence of the same, amplifying only the
mode and period for compliance by the respondent.
The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the
chattel mortgage purposely to secure the satisfaction of the then existing liability of the
respondent arising from the judgment against him in civil case 27116. As a security for the
payment of the judgment obligation, the chattel mortgage agreement effectuated no substantial
alteration in the liability of the respondent.
RATIO

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Saura Import & Export Co., Inc. vs. Development Bank of the Phil.

G.R. No. L-24968 | April 27, 1972

TOPIC: Extinguishment of Obligations

OBLICON – Case Digests Page 1

OBLICON – Case Digests Page 2

G.R. No. 175863 | February 18, 2015

TOPIC: Extinguishment of Obligations – Payment or Performance

The CA denied the appeal of petitioner and affirming in toto

OBLICON – Case Digests Page 3

OBLICON – Case Digests Page 4

Effect of Extinguishment of Petitioner’s Obligation

OBLICON – Case Digests Page 5

G.R. No. 190755 | November 24, 2010

TOPIC: Extinguishment of Obligations – Payment or Performance

LOWER COURT DECISION

OBLICON – Case Digests Page 6

Novation of the loan agreement

OBLICON – Case Digests Page 7

OBLICON – Case Digests Page 8

G.R. No. 72110 | November 16, 1990.

TOPIC: Extinguishment of Obligations – Payment or Performance

OBLICON – Case Digests Page 9

OBLICON – Case Digests Page 10

G.R. No. 100290 | June 4, 1993

TOPIC: Extinguishment of Obligations – Payment or Performance

OBLICON – Case Digests Page 11

OBLICON – Case Digests Page 12

G.R. No. 180144 | September 24, 2014

TOPIC: Extinguishment of Obligations – Payment or Performance

OBLICON – Case Digests Page 13

OBLICON – Case Digests Page 14

The Petitioner’s Belated Claim of Novation by Substitution May no Longer be Entertained

The Nature of the Petitioner’s Liability

OBLICON – Case Digests Page 15

OBLICON – Case Digests Page 16

G.R. No. 182128 | February 19, 2014

TOPIC: Extinguishment of Obligations – Special Forms of Payment

OBLICON – Case Digests Page 17

OBLICON – Case Digests Page 18

OBLICON – Case Digests Page 19

G.R. No. 181723 | August 11, 2014.

TOPIC: Extinguishment of Obligations – Special Forms of Payment

They failed to redeem the foreclosed properties

OBLICON – Case Digests Page 20

OBLICON – Case Digests Page 21

OBLICON – Case Digests Page 22

39 SCRA 363 | June 7, 1971

TOPIC: Extinguishment of Obligations – Loss of the thing due or Impossibility of Performance

OBLICON – Case Digests Page 23

OBLICON – Case Digests Page 24

G.R. No. L-23546 | August 29, 1974

TOPIC: Extinguishment of Obligations – Loss of the thing due or Impossibility of Performance

OBLICON – Case Digests Page 25

OBLICON – Case Digests Page 26

OBLICON – Case Digests Page 27

G.R. No. L-443349| October 29, 1976

TOPIC: Extinguishment of Obligations – Loss of the thing due or Impossibility of Performance

OBLICON – Case Digests Page 28

OBLICON – Case Digests Page 29