CREDITS

2D

Warehouse receipts law: Validity of stipulations excusing

warehouseman from negligence (2000)

S stored hardware materials in the bonded warehouse of W, a

licensed warehouseman under the General Bonded Warehouse Law (Act
3893 as amended). W issued the corresponding warehouse receipt in the
form he ordinarily uses for such purpose in the course of his business.
All the essential terms required under Section 2 of the Warehouse
Receipts Law (Act 2137 as amended) are embodied in the form. In
addition, the receipt issued to S contains a stipulation that W would not
be responsible for the loss of all or any portion of the hardware materials
covered by the receipt even if such loss is caused by the negligence of W
or his representatives or employees. S endorsed and negotiated the
warehouse receipt to B, who demanded delivery of the goods. W could
not deliver because the goods were nowhere to be found in his
warehouse. He claims he is not liable because of the free-from-liability
clause stipulated in the receipt. Do you agree with W‘s contention?
Explain. (5%)

SUGGESTED ANSWER:

No. I do not agree with the contention of W.

The stipulation that W would not be responsible for the loss of all
or any portion of the hardware materials covered by the receipt even if
such loss is caused by the negligence of W or his representative or
employees is void. The law requires that a warehouseman should
exercise due diligence in the care and custody of the things deposited in
his warehouse.
 Mutuum; Interests (2001)

Samuel borrowed P300,000.00 housing loan from the bank at 18%

per annum interest. However, the promissory note contained a proviso
that the bank "reserves the right to increase interest within the limits
allowed by law," By virtue of such proviso, over the objections of Samuel,
the bank increased the interest rate periodically until it reached 48% per
annum. Finally, Samuel filed an action questioning the right of the bank
to increase the interest rate up to 48%. The bank raised the defense that
the Central Bank of the Philippines had already suspended the Usury
Law. Will the action prosper or not? Why? (5%)

SUGGESTED ANSWER:

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by the Usury Law are no longer in force, it has been held that PD No.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

Mutuum; Interests (2002)

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

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

Mortgage vs. Levy (2003)

To pay for her loan obtained from Stela, Liza constituted in Stela’s
favor a chattel mortgage over an electric generator. Cecil, a creditor of
Liza, levied on attachment the generator. Stela filed a third party claim.
Cecil opposed the claim. Rule on their conflicting claims.

SUGGESTED ANSWER: Not available

Mortgage; Foreclosure

II

May the sale at public auction by a bank of a property mortgaged

to it be nullified because the price was extremely low? Why?

SUGGESTED ANSWER: Not available

Mortgage; Foreclosure

III

Because of failure of Janette and Jeanne to pay their loan to X

Bank, the latter foreclosed in the mortgage constituted on their property
which was put up by them as security for the payment of the loan. The
price paid for the property at the foreclosure sale was not enough to
liquidate the obligation. The sued for deficiency. In their answer, Janette
and Jeanne did not deny the existence of the loan nor the fact of their
default. They, however, interposed the defenses that the price at the
auction was extremely low and that their loan, despite the loan
documents, was a long term loan which had not yet matured. If you were
the judge, how would you rule on the case? Why?
SUGGESTED ANSWER: Not available

Mortgage; Remedies

IV

Carmaker, Inc., sold a motor vehicle on installment basis to Chari

Paredes. The transaction was reflected on a promissory note executed by
Chari in favor of Carmakers. The note was secured by a mortgage over
the car. Contemporaneous with the execution of the note and the
mortgage deed, Carmakers, Inc., assigned the instruments sans recourse
to Adelantado Finance Corporation. Chari defaulted in her obligations.
Could Adelantado Finance Corporation take action against both
Carmakers Inc., and Chari? Why?

Mutuum vs. Commodatum (2004)

Distinguish briefly but clearly between Mutuum and commodatum.

SUGGESTED ANSWER:

In MUTUUM, the object borrowed must be a consumable thing the

ownership of which is transferred to the borrower who incurs the
obligation to return the same consumable to the lender in an equal
amount, and of the same kind and quality. In COMMODATUM, the
object borrowed is usually a non-consumable thing the ownership of
which is not transferred to the borrower who incurs the obligation to
return the very thing to the lender.

Mutuum; Interests

II

The parties in a contract of loan of money agreed that the yearly

interest rate is 12% and it can be increased if there is a law that would
authorize the increase of interest rates. Suppose OB, the lender, would
increase by 5% the rate of interest to be paid by TY, the borrower,
without a law authorizing such increase, would OB’s action be just and
valid? Why? Has TY a remedy against the imposition of the rate increase?
Explain. (5%)

SUGGESTED ANSWER:

OB's action is not just and valid. The debtor cannot be required to
pay the increase in interest there being no law authorizing it, as
stipulated in the contract. Increasing the rate in the absence of such law
violates the principle of mutuality of contracts.

ALTERNATIVE ANSWER:

Even if there was a law authorizing the increase in interest rate,

the stipulation is still void because there is no corresponding stipulation
to decrease the interest due when the law reduces the rate of interest.

Pledge

III

Pledge ABC loaned to MNO P40,000 for which the latter pledged
400 shares of stock in XYZ Inc. It was agreed that if the pledgor failed to
pay the loan with 10% yearly interest within four years, the pledgee is
authorized to foreclose on the shares of stock. As required, MNO
delivered possession of the shares to ABC with the understanding that
the shares would be returned to MNO upon the time. A month after 4
years, may the shares of stock pledged be deemed owned by ABC or not?
Reason. (5%)

SUGGESTED ANSWER:

The shares of stock cannot be deemed owned by ABC upon default

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

QUASI-CONTRACT

Quasi-Contracts; Solutio Indebiti

IV

DPO went to a store to buy a pack of cigarettes worth P225.00

only. He gave the vendor, RRA, a P500-peso bill. The vendor gave him the
pack plus P375.00 change. Was there a discount, an oversight, or an
error in the amount given? What would be DPO’s duty, if any, in case of
an excess in the amount of change given by the vendor? How is this
situational relationship between DPO and RRA denominated? Explain.
(5%)

SUGGESTED ANSWER:

There was error in the amount of change given by RRA. This is a

case of solutio indebiti in that DPO received something that is not due
him. He has the obligation to return the P100.00; otherwise, he will
unjustly enrich himself at the expense of RRA. (Art. 2154, Civil Code)

ALTERNATIVE ANSWER:

DPO has the duty to return to RRA the excess P100 as trustee
under Article 1456 of the Civil Code which provides: If property is
acquired through mistake or fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust for the benefit of the person
from whom the property comes. There is, in this case, an implied or
constructive trust in favor of RRA.

Liability; Airline Company; Non-Performance of an Obligation

V
 DT and MT were prominent members of the frequent travelers’ club
of FX Airlines. In Hongkong, the couple was assigned seats in Business
Class for which they had bought tickets. On checking in, however, they
were told they were upgraded by computer to First Class for the flight to
Manila because the Business Section was overbooked.

Both refused to transfer despite better seats, food, beverage and

other services in First Class. They said they had guests in Business
Class they should attend to. They felt humiliated, embarrassed and
vexed, however, when the stewardess allegedly threatened to offload
them if they did not avail of the upgrade. Thus they gave in, but during
the transfer of luggage DT suffered pain in his arm and wrist. After
arrival in Manila, they demanded an apology from FX’s management as
well as indemnity payment. When none was forthcoming, they sued the
airline for a million pesos in damages. Is theairline liable for actual and
moral damages? Why or why not?

Explain briefly. (5%)

SUGGESTED ANSWER:

FX Airlines committed breach of contract when it upgraded DT and

MT, over their objections, to First Class because they had contracted for
Business Class passage. However, although there is a breach of contract,
DT and MT are entitled to actual damages only for such pecuniary losses
suffered by them as a result of such breach. There seems to be no
showing that they incurred such pecuniary loss. There is no showing
that the pain in DT's arm and wrist resulted directly from the carrier's
acts complained of. Hence, they are not entitled to actual damages.
Moreover, DT could have avoided the alleged injury by requesting the
airline staff to do the luggage transfer as a matter of duty on their part.
There is also no basis to award moral damages for such breach of
contract because the facts of the problem do not show bad faith or fraud
on the part of the airline. (Cathay Pacific v. Vazquez, 399 SCRA 207
[2003]). However, they may recover moral damages if the cause of action
is based on Article 21 of the Civil Code for the humiliation and
embarrassment they felt when the stewardess threatened to offload them
if they did not avail of the upgrade.

ALTERNATIVE ANSWER:
 If it can be proved that DT's pain in his arm and wrist occasioned
by the transfer of luggage was caused by fault or negligence on the part
of the airline's stewardess, actual damages may be recovered.

The airline may be liable for moral damages pursuant to Art. 2219 (10) if
the cause of action is based on Article 21 or an act contrary to morals in
view of the humiliation suffered by DT and MT when they were separated
from their guests and were threatened to be offloaded.

Vicarious Liability

VI

OJ was employed as professional driver of MM Transit bus owned

by Mr. BT. In the course of his work, OJ hit a pedestrian who was
seriously injured and later died in the hospital as a result of the
accident. The victim’s heirs sued the driver and the owner of the bus for
damages. Is there a presumption in this case that Mr. BT, the owner,
had been negligent? If so, is the presumption absolute or not? Explain.
(5%)

SUGGESTED ANSWER:

Yes, there is a presumption of negligence on the part of the

employer. However, such presumption is rebuttable. The liability of the
employer shall cease when they prove that they observed the diligence of
a good father of a family to prevent damage (Article 2180, Civil Code).

When the employee causes damage due to his own negligence

while performing his own duties, there arises the juris tantum
presumption that the employer is negligent, rebuttable only by proof of
observance of the diligence of a good father of a family (Metro Manila
Transit v. CA, 223 SCRA 521 [1993]; Delsan Transport Lines v, C&tA
Construction, 412 SCRA 524 2003).

Likewise, if the driver is charged and convicted in a criminal case

for criminal negligence, BT is subsidiarily liable for the damages arising
from the criminal act.
 Commodatum (2005)

Before he left for Riyadh to work as a mechanic, Pedro left his

Adventure van with Tito, with the understanding that the latter could
use it for one year for his personal or family use while Pedro works in
Riyadh. He did not tell Tito that the brakes of the van were faulty. Tito
had the van tuned up and the brakes repaired. He spent a total amount
of P15,000.00. After using the vehicle for two weeks, Tito discovered that
it consumed too much fuel. To make up for the expenses, he leased it to
Annabelle.

Two months later, Pedro returned to the Philippines and asked Tito
to return the van. Unfortunately, while being driven by Tito, the van was
accidentally damaged by a cargo truck without his fault.

a) Who shall bear the P15,000.00 spent for the repair of the van?
Explain. (2%)

ALTERNATIVE ANSWER:

Tito must bear the P15,000.00 expenses for the van. Generally,
extraordinary expenses for the preservation of the thing loaned are paid
by the bailor, he being the owner of the thing loaned. In this case
however, Tito should bear the expenses because he incurred the
expenses without first informing Pedro about it. Neither was the repair
shown to be urgent. Under Article 1949 of the Civil Code, bailor generally
bears the extraordinary expenses for the preservation of the thing and
should refund the said expenses if made by the bailee; Provided, The
bailee brings the same to the attention of the bailor before incurring
them, except only if the repair is urgent that reply cannot be awaited.

ALTERNATIVE ANSWER:

The P15,000.00 spent for the repair of the van should be borne by
Pedro. Where the bailor delivers to the bailee a non-consummable thing
so that the latter may use it for a certain time and return the identical
thing, the contract perfected is a Contract of Commodatum. (Art. 1933,
Civil Code) The bailor shall refund the extraordinary expenses during the
contract for the preservation of the thing loaned provided the bailee
brings the same to the knowledge of the bailor before incurring the same,
except when they are so urgent that the reply to the notification cannot
be awaited without danger. (Art. 1949 of the Civil Code)

II

In the given problem, Pedro left his Adventure van with Tito so
that the latter could use it for one year while he was in Riyadh. There
was no mention of a consideration. Thus, the contract perfected was
commodatum. The amount of P15,000.00 was spent by Tito to tune up
the van and to repair its brakes. Such expenses are extra-ordinary
expenses because they are necessary for the preservation of the van
Thus, the same should be borne by the bailor, Pedro.

b) Who shall bear the costs for the van's fuel, oil and other materials
while it was with Tito? Explain. (2%)

SUGGESTED ANSWER:

III

Tito must also pay for the ordinary expenses for the use and
preservation of the thing loaned. He must pay for the gasoline, oil,
greasing and spraying. He cannot ask for reimbursement because he has
the obligation to return the identical thing to the bailor. Under Article
1941 of the Civil Code, the bailee is obliged to pay for the ordinary
expenses for the use and preservation of the thing loaned.

c) Does Pedro have the right to retrieve the van even before the lapse of
one year? Explain. (2%)

SUGGESTED ANSWER:

No, Pedro does not have the right to retrieve the van before the
lapse of one year. The parties are mutually bound by the terms of the
contract. Under the Civil Code, there are only 3 instances when the
bailor could validly ask for the return of the thing loaned even before the
expiration of the period. These are when: (1) a precarium contract was
entered (Article 1947); (2) if the bailor urgently needs the thing (Article
1946); and (3) if the bailee commits acts of ingratitude (Article 1948). Not
one of the situations is present in this case.

The fact that Tito had leased the thing loaned to Annabelle would
not justify the demand for the return of the thing loaned before
expiration of the period. Under Article 1942 of the Civil Code, leasing of
the thing loaned to a third person not member of the household of the
bailee, will only entitle bailor to hold bailee liable for the loss of the thing
loaned.

ALTERNATIVE ANSWER:

As a rule, Pedro does not have the right to retrieve the van before
the lapse of one year. Article 1946 of the Code provides that "the bailor
cannot demand the return of the thing loaned till after the expiration of
the period stipulated, or after the accomplishment of the use for which
the commodatum has been constituted. However, if in the meantime, he
should have urgent need of the thing, he may demand its return or
temporary use." In the given problem, Pedro allowed Tito to use the van
for one year. Thus, he should be bound by the said agreement and he
cannot ask for the return of the car before the expiration of the one year
period. However, if Pedro has urgent need of the van, he may demand for
its return or temporary use.

d)Who shall bear the expenses for the accidental damage caused by the
cargo truck, granting that the truck driver and truck owner are
insolvent? Explain. (2%)

SUGGESTED ANSWER:

Generally, extraordinary expenses arising on the occasion of the

actual use of the thing loaned by the bailee, even if incurred without
fault of the bailee, shall be shouldered equally by the bailor and the
bailee. (Art. 1949 of the Civil Code). However, if Pedro had an urgent
need for the vehicle, Tito would be in delay for failure to immediately
return the same, then Tito would be held liable for the extraordinary
expenses.

Mortgage; Extrajudicial Foreclose (2006)

 I

A real estate mortgage may be foreclosed judicially or

extrajudicially. In what instance may a mortgagee extrajudicially
foreclose a real estate mortgage? (5%)

SUGGESTED ANSWER:

When a sale is made under a special power inserted or attached to

any real-estate mortgage, thereafter given as security for the payment of
money or the fulfillment of any other obligation, then the mortgagee may
extrajudicially foreclose the real estate mortgage (Sec. 1, Act No. 3135, as
amended).

(2007)

(2008)

(2009)

TRUE or FALSE. Answer TRUE if the statement is true, or FALSE if the

statement is false. Explain your answer in not more than two (2)
sentences. (5%)

e. A bank under receivership can still grant new loans and accept new
deposits.

SUGGESTED ANSWER:
False. During the receivership, the assets and properties of the
corporation are being gathered for conversion into cash in preparation
for distribution to creditors. Granting new loans and accepting new
deposits would constitute doing business for the bank in the ordinary
course of business which is contrary to the purpose and nature of a
receivership proceeding

II

Armando, a resident of Manila, borrowed P3-million from

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

Armando defaulted on the payment of his obligation; thus,

Bernardo foreclosed on the two chattel mortgages. Armando filed suit to
nullify the foreclosure and the mortgages, raising the following issues:

a. The execution of only one Affidavit of Good Faith for both

mortgages invalidated the two mortgages; (2%)

SUGGESTED ANSWER:

The execution of only one Affidavit of Good Faith for both

mortgages is not aground to nullify the said mortgages and the
foreclosure thereof. Said mortgages are valid as between immediate
parties (Lilius v. Manila Railroad Company, 62Phil. 56 (1935)), although
they cannot bind third parties (Philippine Refining v. Jarque, 61 Phil.
229 (1935)).

b. The mortgage on the shares of stocks should have been registered

in the Office of the Register of Deeds of Manila where he resides, as well
as in the stock and transfer book of Xerxes Corporation. (3%) Rule on the
foregoing issues with reasons.

SUGGESTED ANSWER:

The mortgage on the shares of stock should be registered in the

chattel mortgage registry in the Register of Deeds of Makati City where
the corporation has its principal office and also in the Register of Deeds
of Manila where the mortgagor resides (Chua Guan v. Samahang
Magsasaka, Inc., 62 Phil. 472 (1935)). Registration of chattel mortgage in
the stock and transfer book is not required to make the chattel mortgage
valid. Registration of dealings in the stock and transfer book under
Section 63 of the Corporation Code applies only to sale or disposition of
shares, and has no application to mortgages and other forms of
encumbrances (Monserrat v. Ceron, 58 Phil. 469 (1933)).

c. Assume that Bernardo extrajudicially foreclosed on the mortgages,

and both the car and the shares of stock were sold at public auction. If
the proceeds from such public sale should be P1-million short of
Armando’s total obligation, can Bernardo recover the deficiency? Why or
why not? (2%)

SUGGESTED ANSWER:

Yes. Bernardo can recover the deficiency. Chattels are given as

mere security, and not as payment or pledge (CuH ada v. Drilon, 432
SCRA 618 (2004))

III

Maharlikang Pilipino Banking Corporation (MPBC) operates several

branches of Maharlikang Pilipino Rural Bank in Eastern Visayas. Almost
all the branch managers are close relatives of the members of the Board
of Directors of the corporation. Many undeserving relatives of the branch
managers were granted loans. In time, the branches could not settle their
obligations to depositors and creditors.
 Receiving reports of these irregularities, the Supervising and
Examining Department (SED) of the Monetary Board prepared a detailed
report (SED Report) specifying the facts and the chronology of events
relative to the problems that beset MPBC rural bank branches. The
report concluded that the bank branches were unable to pay their
liabilities as they fell due, and could not possibly continue in business
without incurring substantial losses to its depositors and creditors.

a. May the Monetary Board order the closure of the MPBC rural
banks relying only on the SED Report, without need of an examination?
Explain. (3%)

SUGGESTED ANSWER:

Yes. Upon receipt of the report of the SED, the Monetary Board is
authorized to take any of the actions enumerated under Sec. 30,
Republic Act No. 7653, otherwise known as the New Central Bank Act,
leading to the receivership and liquidation of a bank or quasi-bank.
There is no requirement that an examination be first conducted before a
banking institution may be placed under receivership (Rural Bank of
Buhi v. Court of Appeals, 162 SCRA 288 (1988)).

b. If MPBC hires you as lawyer because the Monetary Board has

forbidden it from carrying on its business due to its imminent insolvency,
what action will you institute to question the Monetary Board’s order?
Explain. (3%)

SUGGESTED ANSWER:

The order of the Monetary Board may be questioned on a petition

for certiorari on the ground that the action taken was in excess of
jurisdiction or with grave abuse of discretion amounting to lack or excess
of jurisdiction. The petition of certiorari may only be filed by the
stockholders of record representing the majority of the capital stock
within ten (10) days from receipt by the board of directors of MPBC of the
order directing receivership, liquidation or conservatorship (Sec. 30, par.
(2), R.A. No. 7653).
 IV

TRUE or FALSE. Answer TRUE if the statement is true, or FALSE if the

statement is false. Explain your answer in not more than two (2)
sentences. (5%)

a. A loan agreement which provides that the debtor shall pay

interest at the rate determined by the bank’s branch manager
violates the disclosure requirement of the Truth in Lending Act.

SUGGESTED ANSWER:

True. This contrary to the duty of the creditor to disclose in detail

the interests, charges and other figures indicating in detail the cost of the
credit granted to the debtor (United Coconut Planters Bank v. Beluso,
530 SCRA 567 (2007)).

b. The Howey Test states that there is an investment contract when a

person invests money in a common enterprise and is led to expect profits
primarily from the efforts of others.

SUGGESTED ANSWER:

True. A lien is dependent on possession. When a warehouseman

surrenders possession, he thereby loses his lien on the goods over which
he no longer has possession (Sec.29 (a), Warehouse Receipts Law).

VI

Gaudencio, a store owner, obtained a P1-million loan from Bathala

Financing Corporation (BFC). As security, Gaudencio executed a "Deed of
Assignment of Receivables," assigning 15 checks received from various
customers who bought merchandise from his store. The checks were
duly indorsed by Gaudencio’s customers.

The Deed of Assignment contains the following stipulation:

 "If, for any reason, the receivables or any part thereof cannot be
paid by the obligors, the ASSIGNOR unconditionally and irrevocably
agrees to pay the same, assuming the liability to pay, by way of penalty,
three percent (3%) of the total amount unpaid, for the period of delay
until the same is fully paid."

When the checks became due, BFC deposited them for collection,
but the drawee banks dishonored all the checks for one of the following
reasons: "account closed," "payment stopped," "account under
garnishment," or "insufficiency of funds." BFC wrote Gaudencio notifying
him of the dishonored checks, and demanding payment of the loan.
Because Gaudencio did not pay, BFC filed a collection suit.

In his defense, Gaudencio contended that [a] BFC did not give
timely notice of dishonor (of the checks); and [b] considering that the
checks were duly indorsed, BFC should proceed against the drawers and
the indorsers of the checks.

Are Gaudencio’s defenses tenable? Explain. (5%)

SUGGESTED ANSWER:

No. Gaudencio’s defenses are untenable.

The cause of action of BFC was really on the contract of loan, with
the checks merely serving as collateral to secure the payment of the loan.
By virtue of the Deed of Assignment which he signed, Gaudencio
undertook to pay for the receivables if for any reason they cannot be paid
by the obligors (Velasquez v. Solid Bank Corporation, 550 SCRA 119
(2008).

VI

On September 15, 2007, XYZ Corporation issued to Paterno 800

preferred shares with the following terms:

"The Preferred Shares shall have the following rights, preferences,

qualifications, and limitations, to wit:
1. The right to receive a quarterly dividend of One Per Centum (1%),
cumulative and participating;

2. These shares may be redeemed, by drawing of lots, at any time

after two (2) years from date of issue, at the option of the Corporation; x
x x."

Today, Paterno sues XYZ Corporation for specific performance, for

the payment of dividends on, and to compel the redemption of, the
preferred shares, under the terms and conditions provided in the stock
certificates. Will the suit prosper? Explain. (3%)

SUGGESTED ANSWER:

No. the suit will not prosper. Paterno cannot compel XYZ
Corporation to pay dividends, which have to be declared by the Board of
Directors and the latter cannot do so, unless there are sufficient
unrestricted retained earnings. Otherwise, the corporation will be forced
to use its capital to make said payments in violation of the trust fund
doctrine. Likewise, redemption of shares cannot be compelled. While the
certificate allws such redemption, the option and discretion to do so are
clearly vested in the corporation (Republic Planters Bank v. Agana, 269
SCRA 1 [1997]).

VII

Philippine Palaces Realty (PPR) had been representing itself as a

registered broker of securities, duly authorized by the Securities and
Exchange Commission (SEC). On October 6, 1996, PPR sold to spouses
Leon and Carina one (1) timeshare of Palacio del Boracay for
US$7,500.00. However, its Registration Statement became effective only
on February 11, 1998 after the SEC issued a resolution declaring that
PPR was authorized to sell securities, including timeshares.

On March 30, 1998, Leon and Carina wrote PPR rescinding their
purchase agreement and demanding the refund of the amount they paid,
because the Palacio del Boracay timeshare was sold to them by PPR
without the requisite license or authority from the SEC. PPR contended
that the grant of the SEC authority had the effect of ratifying the
purchase agreement (with Leon and Carina) of October 6, 1996.

Is the contention of PPR correct? Explain. (3%)

SUGGESTED ANSWER:

The contention of PPR is not correct. It is settled that no securities

shall be sold or offered for sale or distribution in the Philippines without
a registration duly filed and approved by the Commission. Corporate
registration is one of the requirements under Sec. 8of Batas Pambansa
Blg. 178 (timeshare Realty Corporation v. Lao, 544 SCRA 254 (2008).

ALTERNATIVE ANSWER:

No. Such contention is not correct. Sale or offer to sell securities

which are not exempt securities or which do not arise out of exempt
transactions, and, therefore, requiring registration, is unlawful as such
act is violative of the Securities Regulation Cod. Subsequent grant of
authority by the SEC does not retroact to past sales or offers to sell.

Credit Transaction (Foreclosure) (2010)

Ozamis Paper Corporation secured loans from ABC Universal Bank

in the aggregate principal amount of P100 million, evidenced by several
promissory notes, and secured by a continuing guaranty of its principal
stockholder Menandro Marquez; a pledge of Marquez’s shares in the
corporation valued at P45 million; and areal estate mortgage over certain
parcels of land owned by Marquez. The corporation defaulted and the
bank extra-judicially foreclosed on the real estate mortgage. The bank
which was the sole bidder for P75 million, won the award.(A) Can the
bank sue Marquez for the Deficiency of P25 million? Explain. (2%)

SUGGESTED ANSWER:
 Yes, the bank can sue Marquez for the deficiency of P25million. In
extrajudicialforeclosure of a real estate mortgage, ifthe proceeds of the
sale are insufficientto pay the debt, the mortgagee has theright to sue for
the deficiency (SuicoRattan and Buri Interiors, Inc. v. Courtof Appeals,
490 SCRA 560 (2006)

Credit Transactions (2011)

I.

B borrowed Php1 million from L and offered to him his BMW car
worth Php1 Million as collateral. B then executed a promissory note that
reads: "I, B, promise to pay L or bearer the amount of Php1 Million and
to keep my BMW car (loan collateral) free from any other encumbrance.
Signed, B." Is this note negotiable?

(A) Yes, since it is payable to bearer.

(B) Yes, since it contains an unconditional promise to pay a sum

certain in money.

(C) No, since the promise to just pay a sum of money is unclear.

(D) No, since it contains a promise to do an act in addition to the

payment of money.

(2012)

ABC Company filed a Petition for Rehabilitation with the Court. An

Order was issued by the Court, (1) staying enforcement of all claims,
whether money or otherwise against ABC Company, its guarantors and
sureties not solidarily liable with the company; and (2) prohibiting ABC
Company from making payments of its liabilities, outstanding as of the
date of the filing of the Petition. XYC Company is a holder of an
irrevocable Standby Letter of Credit which was previously procured by
ABC Company in favor of XYC Company to secure performance of certain
obligations. In the light of the Order issued by the Court.
a. Can XYC Company still be able to draw on their irrevocable
Standby Letter of Credit when due? Explain your answer. (5%)

b. Explain the nature of Letters of Credit as a financial devise. (5%)

SUGGESTED ANSWER.

A letter of credit is a financial device developed by merchants as a

convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interest of a seller, who refuse to part
with his goods before he is paid, and a buyer who wants to have control
of the goods before paying. To break the impasse, the buyer may be
required to contact a bank to issue a letter of credit in favor of the seller
so that by virtue of the letter of credit, the issuing bank can authorize
the seller to draw drafts and engage to pay them upon their presentment
simultaneously with the tender of document required by the letter of
credit. The buyer and the seller agree on what documents are to be
presented for payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the buyer. Once
the credit is established, the seller ships the goods to the buyer and in
the process secures the required shipping documents of title. To get paid,
the seller executes a draft and presents it together with the required
documents to the issuing banks. The issuing bank redeems draft and
pays cast to the seller if it finds that the documents submitted by the
seller conform to what the letter of credit requires. The bank then obtains
possession of the documents upon paying the seller. The transaction is
completed when the buyer reimburse the issuing bank and acquires the
document entitling him to the goods. Under this arrangement, the seller
gets paid only if he delivers the document of title over the goods, while
the buyer acquires the said document and control over the goods only
after reimbursing the bank. (Bank of America NT and SA v. CA, et al., GR
no. 105395, December, 1993)

However, letters of credits are also used in non-sale settings where

they serve to reduce the risk of Non-performance. Generally, letters of
credit in non-sale setting have come to be known as stand by letters of
credit. (TPI v. Luzon Hydro Corp. et al,. GR no. 146717, November 22,
2004.)

MORTGAGE (2013)

Lito obtained a loan of P1,000,000 from Ferdie, payable within one

year. To secure payment, Lito executed a chattel mortgage on a Toyota
Avanza and a real estate mortgage on a 200-square meter piece of
property.

(A) Would it be legally significant - from the point of view of validity

and enforceability - if the loan and the mortgages were in public
or private instruments? (6%)

SUGGESTED ANSWER:

With respect to the loan, the same is both valid and enforceable
regardless of whether it is in a private or public document because as a
rule, contracts shall be obligatory in whatever form they may have been
entered into provided all the essential requisites for their validity are
present. A loan is a contract which the law does not require to be in a
particular form in order that it may be valid or enforceable.

However, with regard to the chattel mortgage, since the law (Act
1508) requires an affidavit of good faith stating that the chattel mortgage
is supposed to stand as security for the loan, it is submitted that for
validity of the chattel mortgage, it must be in a public document. A real
estate mortgage under the provisions of Article 2125 requires that in
order that a mortgage may be validly constituted that the document in
which it appears must be recorded. If it is not recorded, the mortgage is
nevertheless valid and binding between the parties. Hence, for validity
both chattel and real estate mortgages must be in a public document.
But for purposes of enforceability, it is submitted that the form of the
contract whether in a public or private document would be immaterial.
(Mobil Oil vs. Diocares 29 SCRA 656).
 MULTIPLE CHOICE QUESTION

EFFECTS OF GUARANTY

Amador obtained a loan of P300,000 from Basilio payable on

March25, 2012. As security for the payment of his loan, Amador
constituted a mortgage on his residential house and lot in Basilio's favor.
Cacho, a good friend of Amador, guaranteed and obligated himself to pay
Basilio, in case Amador fails to pay his loan at maturity.

1) If Amador fails to pay Basilio his loan on March 25, 2012, can Basilio
compel Cacho to pay? (1%)

(A) No, Basilio cannot compel Cacho to pay because as guarantor,

Cacho can invoke the principle of excussion, i.e., all the assets of
Basilio must first be exhausted.

(B) No, Basilio cannot compel Cacho to pay because Basilio has not
exhausted the available remedies against Amador.

(C) Yes, Basilio can compel Cacho to pay because the nature of
Cacho's undertaking indicates that he has bound himself solidarily
with Amador.

(D) Yes, Basilio can compel Cacho who bound himself to

unconditionally pay in case Amador fails to pay; thus the benefit of
excussion will not apply.

ANSWER: B – Basilio has in his favor a REM and he should exhaust his
legal remedies against Amador. (Art. 2058)

Article 2058. The guarantor cannot be compelled to pay the

creditor unless the latter has exhausted all the property of the debtor,
and has resorted to all the legal remedies against the debtor.
2) If Amador sells his residential house and lot to Diego, can Basilio
foreclose the real estate mortgage? (1%)

(A) Yes, Basilio can foreclose the real estate mortgage because real
estate mortgage creates a real right that attaches to the property.

(B) Yes, Basilio can foreclose the real estate mortgage. It is binding
upon Diego as the mortgage is embodied in a public instrument.

(C) No, Basilio cannot foreclose the real estate mortgage. The sale
confers ownership on the buyer, Diego, who must therefore
consent.

(D) No, Basilio cannot foreclose the real estate mortgage. To deprive
the new owner of ownership and possession is unjust and
inequitable.

ANSWER: A- Art. 2126 The mortgage directly and immediately subjects

the property upon which it is imposed, whoever the possessor may be to
the fulfillment of the obligation for whose security it was constituted.

COMMODATUM

Cruz lent Jose his car until Jose finished his Bar exams. Soon
after Cruz delivered the car, Jose brought it to Mitsubishi Cubao for
maintenance checkup and incurred costs of P8,000. Seeing the car's
peeling and faded paint, Jose also had the car repainted for P10,000.
Answer the two questions below based on these common facts.

After the bar exams, Cruz asked for the return of his car. Jose said
he would return it as soon as Cruz has reimbursed him for the car
maintenance and repainting costs of P 18,000.
 Is Jose's refusal justified? (1%)

(A) No, Jose's refusal is not justified. In this kind of contract, Jose
is obliged to pay for all the expenses incurred for the preservation
of the thing loaned.

(B) Yes, Jose's refusal is justified. He is obliged to pay forall the

ordinary and extraordinary expenses, but subject to
reimbursement from Cruz.

(C) Yes, Jose's refusal is justified. The principle of unjust

enrichment warrants the reimbursement of Jose's expenses.

(D) No, Jose's refusal is not justified. The expenses he incurred are
useful for the preservation of the thing loaned. It is Jose's
obligation to shoulder these useful expenses.

ANSWER: NO CORRECT CHOICE – in commodatum, the bailee has no

right of retention Article 1944 the bailee (Jose) has no right of retention
even if it may be by reason of expenses, Article 1951 he can only retain if
he suffers damage by reason of a flaw or defect in the thing

II

During the bar exam month, Jose lent the car to his girlfriend,
Jolie, who parked the car at the Mall of Asia's open parking lot, with the
ignition key inside the car. Car thieves broke into and took the car.

Is Jose liable to Cruz for the loss of the car due to Jolie's
negligence? (1%)

(A) No, Jose is not liable to Cruz as the loss was not due to his
fault or negligence.
 (B) No, Jose is not liable to Cruz. In the absence of any prohibition,
Jose could lend the car to Jolie. Since the loss was due to force
majeure, neither Jose nor Jolie is liable.

(C) Yes, Jose is liable to Cruz. Since Jose lent the car to Jolie
without Cruz's consent, Jose must bear the consequent loss of the
car.

(D) Yes, Jose is liable to Cruz. The contract between them is

personal in nature. Jose can neither lend nor lease the car to a
third person.

ANSWER: D – Commodatum is purely personal in nature (Article 1939)

the bailee can neither lend nor lease the object of the contract to a third
person.

(2014)

PA Assurance (PA) was incorporated in 1980 toengage in the sale of

pre-need educational plans. It sold open-ended educational plans which
guaranteed the payment of tuition and other fees to planholders
irrespective of the cost at the time of availment. Italso engaged in the sale
of fixed value plans which guaranteed the payment of a pre-determined
amount to planholders. In 1982, PAwas among the country’s top
corporations. However, it subsequently suffered financial difficulties.

On September 8, 2005, PA filed a Petition for Corporate

Rehabilitation before the Regional Trial Court (RTC) of Makati City. On
October 17, 2005, ten (10) plan holders filed an Opposition and Motion
to Exclude Planholders from Stay Order on the ground that planholders
are not creditors as they (planholders) have a trust relationship with PA.
Are the planholders correct? (4%)

SUGGESTED ANSWER: Not Available

 II

Paul George Pua (Pua) filed a complaint for a sum of money against
the spouses Benito and Caroline James (Spouses James). In the
complaint, Pua prayed that the defendants pay Pua the amount of
P8,500,000.00, covered by a check. Pua asserts that defendants owed
him a sum of money way back in 1988 for which the Spouses James
gave him several checks. These checks, however, had all been
dishonored and Pua has not been paid the amount of the loan plus the
agreed interest. In 1996, the Spouses James approached Pua to get the
computation of their liability including the 2% compounded interest.
After bargaining to lower the amount of their liability, the Spouses James
gave Puaa postdated check bearing the discounted amount of
P8,500,000.00. Like the 1988 checks, the drawee bank likewise
dishonored this check. To prove his allegations, Pua submitted the
original copies of the 17 checks issued by Caroline in 1988 and the
check issued in 1996, Manila trust Check No. 750. The Spouses James,
on the other hand, completely denied the existence of the debt asserting
that they had never approached Pua to borrow money in 1988 or in
1996. They assert, instead, that Pua is simply acting at the instance of
his sister, Lilian, to file a false charge against them using a check left to
fund a gambling business previously operated by Lilian and Caroline.
Decide. (5%)

SUGGESTED ANSWER: Not Available

III

DMP Corporation (DMP) obtained a loan of P20 million from

National Bank (NB) secured by a real estate mortgage over a 63,380-
square-meter land situated in Cabanatuan City. Due to the Asian
Economic Crisis, DMP experienced liquidity problems disenabling it from
paying its loan on time. For that reason, NB sought the extra judicial
foreclosure of the said mortgage by filing a petition for sale on June 30,
2003. On September 4, 2003, the mortgaged property was sold at public
auction, which was eventually awarded to NBas the highest bidder. That
same day, the Sheriff executed a Certificate of Sale in favor of NB.
 On October 21, 2003, DMP filed a Petition for Rehabilitation before
the Regional Trial Court (RTC). Pursuant to this, a Stay Order was issued
by the RTC on October 27, 2003.

On the other hand, NB caused the recording of the Sheriff’s

Certificate of Sale on December 3, 2003 with the Register of Deeds of
Cabanatuan City. NB executed an Affidavit of Consolidation of
Ownership and had the same annotated on the title of DMP.
Consequently, the Register of Deeds cancelled DMP’s title and issued a
new title in the name of NB on December 10, 2003.

NB also filed on March 17, 2004 an Ex-Parte Petition for Issuance

of Writ of Possession before the RTC of Cabanatuan City. After hearing,
the RTC issued on September 6, 2004 an Order directing the Issuance of
the Writ of Possession, which was issued on October 4, 2004.

DMP claims that all subsequent actions pertaining to the

Cabanatuan property should have been held in abeyance after the Stay
Order was issued by the rehabilitation court. Is DMP correct? (4%)

SUGGESTED ANSWER: Not Available

(2015)

Donna pledged a set of diamond ring and earrings to Jane for

P200,000.00 She was made to sign an agreement that if she cannot pay
her debt within six months, Jane could immediately appropriate the
jewelry for herself. After six months, Donna failed to pay. Jane then
displayed the earrings and ring set in her jewelry shop located in a mall.
A buyer, Juana, bought the jewelry set for P300,000.00.

a) Was the agreement which Donna signed with Jane valid? Explain
with legal basis. (2%)

b) Can Donna redeem the jewelry set from Juana by paying the
amount she owed Jane to Juana? Explain with legal basis. (2%)
c) Give an example of a pledge created by operation of law. (2%)

SUGGESTED ANSWER:

a) Appropriate the jewelry upon default of Donna is considered

pactum commissorium and it is considered void by law. ( Article 2088)

b) No, Donna cannot redeem it from Juana because the pledge

contract is between her and Jane. Juana is not a party to the pledge
contract. (Article 1311, Civil Code)

c) One example of a pledge created by operation of law is the right of

the depositary to retain the thing deposited until the depositor shall have
paid him whatever may be due to the depositary by reason of the deposit.
(1994) Another is the right of the agent to retain the thing which is the
object of the agency until the principal reimburses him the expenses
incurred in the execution of the agency. (Article 1914, Civil Code)

II

Maine Den, Inc. opened an irrevocable letter of credit with Fair /

Bank, in connection with Maine Den, Inc.’s importation of spare parts for
its textile mills. The imported parts were released to Maine Den, Inc. after
it executed a trust receipt in favor of Fair Bank. When Maine Den, Inc.
was unable to pay its obligation under the trust receipt, Fair Bank sued
Maine Den, Inc. for estafa under the Trust Receipts Law. The court, how
dismissed the suit. Was the dismissal justified? Why or why not? (3%)

ANSWER: The dismissal of the complaint for estafa is justified. Under

recent jurisprudence, the Supreme Court held that transactions referred
to in relation to trust receipts mainly involved sales and if the entruster
knew even before the execution of the alleged trust receipt agreement
that the goods subject of the trust receipt were never intended by the
entrustee for resale or for the manufacture of items to be sold, the
agreement is not a trust receipt transaction but a simple loan,
notwithstanding the label. In this case, the object of the trust receipt,
spare parts for textile mills , were for the use of the entrustee and never
intended for sale. As such, the transaction is a simple loan. Ng vs People
of the Philippines, GR No. 173905, April 23, 2010; Land Bank vs Perez,
GR No. 166884, June 13, 2012 and Hur Ting Yang vs People of the
Philippines, GR Nio. 195117, August 14, 2013

A. Will the principle of res perit domino apply in trust receipt

transaction ?

ANSWER: No. This is because the loss of the goods, documents or

instruments which are the subject of a trust receipt pending their
disposition, irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not extinguish the entrustee’s
obligation to the entruster for the value thereof. Also, while the entruster
is made to appear as owner of the goods covered by the trust receipt,
such ownership is only a legal fiction to enhance the entruster’s security
interest over the goods. Section 10 of PD 115; Rosario Textile Mills Corp
vs. Home Bankers Savings and Trust Company, 462 SCRA 88.

III

A standby letter of credit was issued by ABC Bank to secure the

obligation of X Company to Y Company. Under the standby letter of
credit, if there is failure on the part of X Company to perform its
obligation, then Y Company will submit to ABC Bank a certificate of
default (in the form prescribed under the standby letter of credit) and
ABC Bank will have to pay Y Company the defaulted amount.
Subsequently, Y Company submitted to ABC Bank a certificate of default
notwithstanding the fact that X Company was not in default. Can ABC
Bank refuse to honor the certificate of default? Explain. (3%)

ANSWER: No. Under the doctrine of independence in a letter of credit,

the obligation of the issuing bank to pay the beneficiary is distinct and
independent from the main and originating contract underlying the letter
of credit. Such obligation to pay does not depend on the fulfillment or
non-fulfillment of the originating contract. It arises upon tender of the
stipulated documents under the letter of credit. In the present case, the
tender of the certificate of default entitles Y to payment under the
standby letter of credit notwithstanding the fact that X Company was not
in default. This is without prejudice to the right of X Company to proceed
against Y Company under the law on contracts and damages. Insular
Bank of Asia and America vs Intermediate Appelate Court 167 SCRA
450.

ALTERNATIVE ANSWER

Under the fraud exception principle, the beneficiary may be

enjoined from collecting on the letter of credit in case of fraudulent abuse
of credit. The issuance of a certificate of default despite the fact that X
company is not in default constitutes fraudulent abuse of credit.
Transfield Philippines vs Luzon Hydro Corporation, 443 SCRA 307.

B. Is the Uniform Customs and Practice for Documentary Credits of

the International Chamber of Commerce applicable to commercial letters
of credit issued by a domestic bank even if not expressly mentioned in
such letters of credit? What is the basis for your answer? (3%)

ANSWER: Yes, the Supreme Court held that the observance of the
Uniform Customs and Practice in the Philippines is justified by Article 2
of the Code of Commerce which enunciates that in the absence of any
particular provision in the Code of Commerce, commercial transaction
shall be governed by usage and customs generally observed. Bank of the
Philippine Islands vs De Reny Fabric Industries, Inc. 35 SCRA 253

IV

Able Corporation sold securities to 21 non-qualified buyers during

a 15- month period, without registering the securities with the Securities
and Exchange Commission. Did Able Corporation violate the Securities
Regulation Code? Explain. (2%)

ANSWER: Yes, because under the SRC securities shall not be sold or
offered to be sold to the public within the Philippines unless the
securities are registered with and approved by the Securities and
Exchange Commission. Public means 20 or more inventors. The fact that
the securities were sold during a 15 month period is immaterial.
However, the sale of securities to less than 20 investors if done during a
12 month period is an exempt transaction under the Securities
Regulation Code.

Securities issued by the Philippine government are “exempt

securities” and, therefore, need not be registered with the Securities and
Exchange Commission prior to their sale or offering to the public in the
Philippines. What is the rationale behind this exemption? (2%)

ANSWER: The rationale for the exemption is that the public is amply
protected even without the registration of the securities to be issued by
the government since the government is presumed to be always solvent.

Why is the Securities Regulation Code called a “truth in securities law”?

(2%)

ANSWER: The Securities Regulation Code is called a “ truth in securities

law “ because it requires the issuer to make full and fair disclosure of
information about securities being sold or offered to be sold within the
Philippines and penalizes manipulative and fraudulent acts, devices and
schemes.

VI

Mr. and Mrs. Reyes invested their hard-earned savings in

securities issued by LEAD Bank. After discovering that the securities
sold to them were not registered with the SEC in violation of the
Securities Regulation Code, the spouses Reyes filed a complaint for
nullity of contract and for recovery of a sum of money with the RTC.
LEAD Bank moved to dismiss the case on the ground that it is the SEC
that has primary jurisdiction over actions involving violations of the
Securities Regulation Code. If you were the judge, how would you rule on
the motion to dismiss? (3%)

ANSWER: The motion should be denied. Civil suits falling under the
SRC ( like liability for selling unregistered securities ) are under the
exclusive original jurisdiction of the RTC and hence, need not be first
filed before the SEC unlike criminal cases, wherein the latter body
exercises primary jurisdiction. Pua vs Citibank, GR no. 180064,
September 16, 2013

(2016)

PJ Corporation (PJ) obtained a loan from ABC Bank (ABC) in the

amount of Pl 0 million for the purchase of 100 pieces of ecodoors.
Thereafter, a Letter of Credit was obtained by P J against such loan. The
beneficiary of the Letter of Credit is Scrap Metal Corp. (Scrap Metal) in
Beijing, China. Upon arrival of 100 pieces of ecodoors, P J executed a
Trust Receipt in favor of ABC to cover for the value of the ecodoors for its
release to PJ. The terms of the Trust Receipt is that any proceeds from
the sale of the ecodoors will be delivered to ABC as payment. After the
ecodoors were sold, PJ, instead of paying ABC, used the proceeds of the
sale to order from Scrap Metal another I 00 pieces of ecodoors but using
another bank to issue a new Letter of Credit fully covered by such
proceeds. PJ refused to pay the proceeds of the sale of the first set of
ecodoors to ABC, claiming that the ecodoors that were delivered were
defective. It then instructed ABC not to negotiate the Letter of Credit that
was issued in favor of Scrap Metal.

[a] Explain what is a "Letter of Credit" as a financial device and a

"Trust Receipt" as a security to the Letter of Credit. (2.5%)

[b] As counsel of ABC, you are asked for advice on whether or not
to grant the instruction of PJ. What will be your advice? (2.5%)

II

B Bank, a large universal bank, regularly extends revolving credit

lines to business establishments under what it terms as socially
responsible banking and private business partnership relations. All loans
that are extended to clients have a common "Escalation Clause," to wit:
"B Bank hereby reserves its right to make successive increases in
interest rates in accordance with the bank's adopted policies as approved
by the Monetary Board; Provided that each successive increase shall be
with the written assent of the depositor."
 [a] X, a regular client of the bank, contends that the "Escalation
Clause" is unfair, unconscionable and contrary to law, morals, public
policy and customs. Rule on the issue and explain. (2.5%)

[b) Suppose that the "Escalation Clause" instead reads: "B Bank
hereby reserves the right to make reasonable increases in interest rates
in accordance with bank policies as approved by the Monetary Board;
Provided, there shall be corresponding reasonable decreases in interest
rates as approved by the Monetary Board." Would this be valid? Explain.
(2.5%)

III

Butch got a loan from Hagibis Corporation (Hagibis) but he

defaulted in the payment. A case for collection of a sum of money was
filed against him. As a defense, Butch claims that there was already an
arrangement with Hagibis on the payment of the loan. To implement the
same, Butch already surrendered five (5) service utility vehicles (SUV s)
to the company for it to sell and the proceeds to be credited to the loan
as payment. Was the obligation of Butch extinguished by reason of
dacion en pago upon the surrender of the SUVs? Decide and explain.
(5%)