Article 1245.

Dation in payment, whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law of sales.

Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of an existing obligation. It is a special
mode of payment where the debtor offers another thing to the creditor who accepts it as
equivalent to the payment of an outstanding debt.

For dacion en pago to exist, the following elements must concur:

1. existence of a money obligation.
2. the alienation to the creditor of a property by the debtor with the consent of the former;
3. satisfaction of the money obligation of the debtor.

xxx

Philippine Law Bus Co v CA

[G.R. No. 164641. December 20, 2007]
(Sale distinguished from other transactions)

Petitioner Philippine Lawin Bus Co. and Travel Corps, Marciano Tan, Isidro Tan,
Esteban Tan, Henry Tan
Respondent CA, Advance Capital Corporation

Doctrine Article 1245 of the Civil Code provides that the law on sales shall
govern an agreement of dacion en pago. A contract of sale is perfected
at the moment there is a meeting of the minds of the parties thereto
upon the thing which is the object of the contract and upon the price.
Like sales, there is transfer of ownership, however, the cause of action
is for extinguishment of a pre-existing loan, unlike sales where there is
not there is no loan to consider for transfer of ownership.

PARDO, J p:
Facts - Advance Capital Corporation extended a loan to Philippine Lawin Bus Company
amounting to P10,000,000 secured by a mortgage of 9 bus units of the later.

• Exhibit B - P8M due in one year

• Exhibit J - P2M additional
• Exhibit K - renewal of promissory notes due on February 1991

Out of the 8M, 1.8M was paid, then after, the debtor defaulted in payment for the
remaining balance for the remaining loans. LAWIN was granted a debt-re-structuring1 for
two (2) months to mature on 31 July 1991. Still, LAWIN defaulted in payment. A suit filed
against LAWIN for the remaining balance of P16.4M and for damages.
LAWIN contends that there was already an arrangement as to the full settlement of the
loan obligation, two options were provided:
• By way of sale of the 9 units of bus, proceeds will be used to settle the obligation as
full payment; or
• Advance Capital Corporation will shoulder the cost of the bus rehabilitation with
the amount as additional loan to the existing one, and will operate these busses
with the earnings to be deducted from the total obligation.

The agreement was evidenced by receipts of 2 buses which were delivered to the
respondent's representative, Exec VP Mariano Tan. LAWIN contends that the bus units
were used to settle the obligation and by approving the foreclosure of the units would
violate the agreement.

RTC CA SC
Dismissed. Reversed. Affirmed CA. There was no transfer
of ownership, the contract was not
perfected.

Issue: Was there a dacion en pago between the parties upon surrender of the bus units,
thus, extinguishing the obligation?

Ruling: There was none pursuant to Article 1251. It provides that the contract of sales
shall govern an agreement of dacion en pago where the transfer of ownership of the
debtor's proprieties are used to settle the obligation of the latter, provided that the
creditor accedes to it.

Based on foregoing, the delivery of the bus evidenced by the receipts provided does not
show any transfer of ownership. In fact, the delivery was made for the purpose of selling
the 2 bus units whereby the proceeds are applied in payment of the remaining balance of
the LAWIN'S debt. Advance Capital only acted as an agent to sell the units and did not
acquire ownership of the buses to use as settlement of the obligation. Thus, there was no
consent nor cause of action pertaining to the contract of sale governing dacion en pago on
the bus units.

Definitions
1
Loan restructuring - a method used by entities or individuals wherein they proposed to
the creditors to decrease the interest and rates so as not to default in payment.
 Yuson v. Vitan, 496 SCRA 540 (2007)
(Sale distinguished from other transactions)

Petitioner Mar Yuson

Respondent Atty. Jeremias R. Vitan

Facts -
• Complainant Mar Yuson was a taxi driver with eight children. He received a sum of
money by way of inheritance. He and his wife intended to use the money to
purchase a taxi, repair their dilapidated house, and hold a debut party for their
daughter.
• They were able to purchase a secondhand taxi, and Atty. Vitan helped him with all
the legal matters concerning this purchase. Their other plans were put on hold
because the lawyer borrowed P100,000 from them. It was agreed that the loan
would be repaid before the end of the following year.
• To guarantee payment, respondent executed in favor of complainant several
postdated checks to cover the loaned amount. However, those checks turned out
to be worthless because they had been drawn against the lawyer's closed account
in the Bank of Commerce. The amounts covered by the dishonored checks
remained unpaid.
• When the date passed without any payment, complainant demanded a collateral
to secure the loan. Thus, Atty. Vitan executed a document denominated as a Deed
of Absolute Sale, covering the latter's parcel of land located in Bulacan.
• According to complainant, their intention was to transfer the title of the property
to him temporarily, so that he could either sell or mortgage it. It was further
agreed that, if it was mortgaged, respondent would redeem it as partial or full
payment of the loan. Curiously, the parties executed a second Deed of Absolute
Sale, this time in favor of Atty. Vitan, with complainant as vendor. The purpose of
this particular document was not explained by either party.
• Complainant was able to mortgage the property for P30,000. Contrary to their
earlier agreement, respondent did not redeem it from the mortgagee and promised
to pay. As this promise was not fulfilled, the mortgagee demanded payment from
complainant and thereby allegedly exposed the latter to shame and ridicule.

Report of the Investigating Commissioner

Commissioner San Juan recommended that Atty. Vitan be suspended until his restitution
of the amount he had borrowed. She held that respondent, having taken advantage of
complainant and thus shown dishonesty and untrustworthiness, did not deserve to retain
his membership in the bar.

Contention of Respondent
Atty. Vitan contends that his obligation was already extinguished, because he had
allegedly sold his Bulacan property to complainant. Basically, he is asserting that what had
transpired was a dation in payment.

Issue- Whether Atty. Vitan’s obligation was extinguished by way of executing the Deed
of Absolute Sale.
 Ruling - No. Governed by the law on sales, dation in payment is a transaction that
takes place when a piece of property is alienated to the creditor in satisfaction of a debt in
money. It involves delivery and transmission of ownership of a thing - - by the debtor to
the creditor - - as an accepted equivalent of the performance of the obligation.
In this case, the records reveal that respondent Atty. Vitan did not really intend to sell and
relinquish ownership over his property in Sta. Maria, Bulacan, notwithstanding the
execution of a Deed of Absolute Sale in favor of complainant. The second Deed of
Absolute Sale, which reconveyed the property to respondent, is proof that he had no such
intention. This second Deed, which he referred to as his "safety net," betrays his intention
to counteract the effects of the first one. The second Deed of Absolute Sale returned the
parties right back where they started, as if there were no sale in favor of complainant to
begin with. In effect, on the basis of the second Deed of Sale, respondent took back and
asserted his ownership over the property despite having allegedly sold it. Thus, he fails to
convince that there was a bona fide dation in payment or sale that took place between the
parties; that is, that there was an extinguishment of obligation.
It appears that the true intention of the parties was to use the Bulacan property to
facilitate payment. They only made it appear that the title had been transferred to
complainant to authorize him to sell or mortgage the property. Atty. Vitan himself
admitted in his letter that their intention was to convert the property into cash, so that
payment could be obtained by complainant and the excess returned to respondent.
 BPI v SEC
[G.R. No. 164641. December 20, 2007]
(Sale distinguished from other transactions)

Petitioner Social Security System

Respondent Atlantic Gulf and Pacific Company of Manila, Inc. and Semirara Coal
Corporation

TINGA , J p:
Facts - Private respondent, Atlantic Gulf and Pacific Company of Manila, Inc. (AG & P)
had an outstanding obligation to SSS in the amount of P7.3 Million. AG&P chose to settle
its obligation under the second option given by SSS, that is through dacion en pago of its
5,999 sq. m. property situated in Baguio City. However, the amount of the private
respondent’s obligation appearing in the approved Deed of Assignment has ballooned
from P29,261,902.45 to P40,846,610.64 allegedly because of the additional interests and
penalty charges. AG&P demanded for the waiver and deletion of the additional interests
for the delay was attributable to the petitioner. Defendant, however, refused to accept the
payment through dacion en pago, unless plaintiffs also pay the additional interests and
penalties being charged. Thus, they filed a complaint for specific performance and
damages against SSS based on the contract of dation of payment they entered into. RTC
dismissed the case reasoning that it had no jurisdiction over the subject matter because
the dispute concerns the payment of the premium and loan amortization delinquencies
which is cognizable by the Commission. According to the trial court, dation in payment
was not yet perfected because it will produce effect only upon acceptance by the offeree
and the observance and compliance of the required formalities by the parties. Meaning to
say, the specific performance will not hold because there was no contract to lie its action
on. The appellate court however held that the subject of the complaint is no longer the
payment of the premium and loan amortization delinquencies, as well as the penalties
appurtenant thereto, but the enforcement of the dacion en pago.

Issue: Whether the RTC or the Commission has jurisdiction to entertain a controversy
arising from the non-implementation of a dacion en pago agreed upon by the parties as a
means of settlement of private respondents’ liabilities?

Ruling - According to Section 5(a) of the SSS act, the Commission has jurisdiction over
"disputes arising under this Act with respect to coverage, benefits, contributions and
penalties thereon or any matter related thereto..." In the case at bar, it readily appears that
there is no longer any dispute with respect to respondents’ accountability to the SSS.
Respondents had, in fact, admitted their delinquency and offered to settle them by way of
dacion en pago subsequently approved by the SSS in their Resolution which stated that
"the dacion en pago proposal of AG&P Co. of Manila and Semirara Coals Corporation to
pay their liabilities in the total amount of P30,652,710.71 as of 31 March 2001 by offering
their 5.8 ha. Property located in San Pascual, Batangas, be, as it is hereby, approved." This
statement unequivocally evinces its consent to the dacion en pago
Other notes:
Comment from Villanueva: the court here did not categorically rule that a mere
agreement to effect a dacion which has not been implemented can successfully be the
subject of an action for specific performance, since the ruling only centered on which
tribunal had jurisdiction on the cause of action.
 Technogas Phils Mfg. Corp v PNB (2008)
[Sales distinguished from dacion en pago]

Petitioner Technogas Philippines Manufacturing Corporation

Respondents Philippine National Bank

Doctrine Law on sales is applied to dacion en pago, where its perfection is based on
consent of the parties on the offer of properties in lieu of the obligation.
Absence of which, there is no dacion en pago.

QUISUMBING, J p:

Facts- In 1991, the Technogas obtained from PNB an Ombinus Line of P35miliion and a 5-
year term loan of P14M, secured by a parcel of land located in Parañaque City, executed by
a Real Estate Mortgage (REM). The mortgage will stand as security for any and all other
loans contracted by Technogas, whether it before, during or after the constitution of the
mortgage.

Additional loans were contracted which increased the total amount of indebtedness of
Technogas. When PNB sent letters for collection to the company, the latter replied with a
proposed settlement of obligation by way of dacion en pago conveying the land in
Parañaque City, which should be equivalent to the total amount due of P205,025,743.59,
inclusive of interest and penalties.

The bank filed an extrajudicial foreclosure of the parcel of land which was schedule in a
later date. Technogas contends that there was no need for foreclosure, since the debt was
satisfied by dacion en pago of the parcel of land in Parañaque City.

PNB counters that the proposal to pay by way of dacion en pago did not extinguish
Tecnogas’ obligation; thus, the extrajudicial foreclosure sale was proper.

RTC CA SC
Affirmed payment of the loan. Reversed. No consent as to the dacion en Affirmed.
pago.

Issue - Was the dacion en pago effected against the outstanding loans?

Ruling - No. Dacion en pago is a special mode of payment whereby the debtor offers
another thing to the creditor who accepts it as the equivalent to payment of an
outstanding obligation. The undertaking is really one of sale, that is, the creditor is really
buying the thing or property of the debtor, payment for which is to be charged against the
debtor’s debt. As such, the essential elements of a contract of sale, namely, consent, object
certain, and cause or consideration must be present. It is only when the thing offered as
an equivalent is accepted by the creditor that novation takes place, thereby, totally
extinguishing the deb
t.
In the instant case, Tecnogas has no clear legal right to injunctive relief because its
proposal to pay by way of dacion en pago did not extinguish its obligation. Undeniably,
Tecnogas’ proposal to pay by way of dacion en pago was not accepted by PNB. Thus, the
unaccepted proposal neither novates the parties’ mortgage contract nor suspends its
execution as there was no meeting of the minds between the parties on whether the loan
will be extinguished by way of dacion en pago. Necessarily, upon Tecnogas’ default in its
obligations, the foreclosure of the Real Estate Mortgage becomes a matter of right on the
part of PNB, for such is the purpose of requiring security for the loans.
Other Notes:
• A writ of preliminary injunction may be issued only upon clear showing by the
applicant of the existence of the following:
1. a right in esse or a clear and unmistakable right to be protected.
2. a violation of that right; and
3. an urgent and paramount necessity for the writ to prevent serious damage.

In the absence of a clear legal right, the issuance of the injunctive writ constitutes
grave abuse of discretion.

• By disallowing Tecnogas’ prayer for injunctive relief, the Court of Appeals did not
preempt the resolution of the main case for annulment of the extrajudicial
foreclosure sale. In the said case, the trial court still needs to resolve the issues of
whether Tecnogas observed the procedures prescribed for extrajudicial foreclosure
of REM, and whether it suffered damage because of PNB’s acts. These issues are
still unresolved questions that must be passed upon by the trial court after hearing
the evidence of both parties so that an adjudication of the rights of the parties can
be had.

• The holding of the extrajudicial foreclosure sale did not render this case moot. A
case becomes moot only when there is no more actual controversy between the
parties, or when no useful purpose can be served in passing upon the merits. In
this case, the decision of the Court of Appeals annulling the grant of a preliminary
injunction in favor of Tecnogas has not yet become final. The preliminary
injunction, therefore, issued by the trial court remains valid until the decision of
the Court of Appeals annulling the same attains finality, and violation thereof
constitutes indirect contempt which, however, requires either a formal charge or a
verified petition.
 Lo v KJS Eco-Formwork System Phil
[Sales distinguished from dacion en pago]

Petitioner Sonny Lo
Respondent KJS Eco-formwork System Phil., Inc.

Doctrine In dacion en pago, as a special mode of payment, the debtor offers another
thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. In order that there be a valid dation in payment, the
following are the requisites:

1. There must be the performance of the prestation in lieu of payment

(animo solvendi) which may consist in the delivery of a corporeal
thing or a real right or a credit against the third person;
2. There must be some difference between the prestation due and that
which is given in substitution (aliud pro alio);
3. There must be an agreement between the creditor and debtor that
the obligation is immediately extinguished by reason of the
performance of a prestation different from that due.
As in any other contract of sale, the vendor or assignor is bound by
certain warranties. More specifically, the first paragraph of Article 1628 of
the Civil Code provides:

The vendor in good faith shall be responsible for the existence

and legality of the credit at the time of the sale, unless it should
have been sold as doubtful; but not for the solvency of the debtor,
unless it has been so expressly stipulated or unless the insolvency
was prior to the sale and of common knowledge.

YNARES-SANTIAGO, J p:

Facts - KJS corporation engaged in the sale of steel scaffoldings, while petitioner Sonny L.
Lo, doing business under the name and style San’s Enterprises, is a building contractor.
Petitioner ordered scaffolding equipment from respondent worth P540,425.80. He paid a
down payment in the amount of P150,000.00. The balance was made payable in ten
monthly installments. Respondent delivered and petitioner was able to pay the first 2
monthly installment. But he was not able to settle despite the oral and written demands
against him.

They executed a Deed of Assignment whereby Lo assigned KJS his receivables of

P335,462.14 from Jomero Realty Corp.

KJS tried to collect from Jomero Realty but it refused to honor to Deed of Assignment
because it claimed that petitioner was also indebted to it.
KJS sent a letter demanding payment to Lo but Lo refused claiming that his obligation was
extinguished when they executed the Deed of Assignment.

RTC Makati CA
Dismiss the Reverses.Order Lo to pay KJS w/ 6%
complaint on the interest per annum and atty’s fee
ground that the equivalent to 10% of the amount due
assignment and costs of the suit.
extinguished the Reasons:
obligation. (1) petitioner failed to comply with
his warranty under the Deed;
(2) the object of the Deed did not
exist at the time of the transaction,
rendering it void pursuant to Article
1409 of the Civil Code; and
(3) petitioner violated the terms of
the Deed of Assignment when he
failed to execute and do all acts and
deeds as shall be necessary to
effectually enable the respondent to
recover the collectibles.
SC
Hence, we affirm the
decision of the Court of
Appeals ordering petitioner
to pay respondent the sum
of P335,46214 with legal
interest thereon. However,
we find that the award by
the Court of Appeals of
attorney’s fees is without
factual basis. No evidence
or testimony was presented
to substantiate this claim.
Attorney’s fees, being in the
nature of actual damages,
must be duly substantiated
by competent proof.

Issue - Was Lo’s obligation extinguished when they executed the Deed of Assignment?

Ruling- No, the petitioner’s obligation was not extinguished with the execution of the
deed of assignment.

An assignment of credit is an agreement by virtue of which the owner of a credit, known

as the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and
without the consent of the debtor, transfers his credit and accessory rights to another,
known as the assignee, who acquires the power to enforce it to the same extent as the
assignor could enforce it against the debtor.

In dacion en pago, as a special mode of payment, the debtor offers another thing to the
creditor who accepts it as equivalent of payment of an outstanding debt. In order that
there be a valid dation in payment, the following are the requisites: (1) There must be the
performance of the prestation in lieu of payment (animo solvendi) which may consist in
the delivery of a corporeal thing or a real right or a credit against the third person; (2)
There must be some difference between the prestation due and that which is given in
substitution (aliud pro alio); (3) There must be an agreement between the creditor and
debtor that the obligation is immediately extinguished by reason of the performance of a
prestation different from that due. The undertaking really partakes in one sense of the
nature of sale, that is, the creditor is really buying the thing or property of the debtor,
payment for which is to be charged against the debtor’s debt. As such, the vendor in good
faith shall be responsible, for the existence and legality of the credit at the time of the sale
but not for the solvency of the debtor, in specified circumstances.
Hence, it may well be that the assignment of credit, which is in the nature of a sale of
personal property, produced the effects of a dation in payment which may extinguish the
obligation. However, as in any other contract of sale, the vendor or assignor is bound by
certain warranties. More specifically, the first paragraph of Article 1628 of the Civil Code
provides:

The vendor in good faith shall be responsible for the existence and legality of
the credit at the time of the sale, unless it should have been sold as doubtful; but
not for the solvency of the debtor, unless it has been so expressly stipulated or
unless the insolvency was prior to the sale and of common knowledge.

From the above provision, petitioner, as vendor or assignor, is bound to warrant the
existence and legality of the credit at the time of the sale or assignment. When Jomero
claimed that it was no longer indebted to petitioner since the latter also had an unpaid
obligation to it, it essentially meant that its obligation to petitioner has been extinguished
by compensation. In other words, respondent alleged the non-existence of the credit and
asserted its claim to petitioner’s warranty under the assignment. Therefore, it necessary
for the petitioner to make good its warranty and pay the obligation.

Furthermore, the petitioner breached his obligation under the Deed of Assignment, to
execute and do all such further acts and deeds as shall be reasonably necessary to
effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in
accordance with the true intent and meaning of these presents.

Indeed, by warranting the existence of the credit, petitioner should be deemed to have
ensured the performance thereof in case the same is later found to be inexistent. He
should be held liable to pay to respondent the amount of his indebtedness.
 Acquintey v Tibong (2006)
[Sales distinguished from dation in payment]

Petitioner Agrifina Aquintey

Respondents Spouses Felicidad and Rico Tibong

CALLEJO, SR., J p:

Facts - Petitioner Agrifina filed a complaint for sum of money and damages against the
respondents. She alleged that despite demands, the spouses Tibong failed to pay their
outstanding loan, amounting to P773,000.00 exclusive of interests. Tibong admitted that
they had secured loans from Agrifina. The proceeds of the loan were then re-lent to other
borrowers at higher interest rates. They also alleged that they executed deeds of
assignment in favor of Agrifina for a total amount of P546,459.00 due from her debtors
and that their debtors had executed promissory notes in Agrifina's favor. The execution of
the deeds of assignment to Agrifina was made with consultation with Atty. Torres G. A-
ayo and with the consent of Agrifina. According to the spouses Tibong, this resulted in a
novation of the original obligation to Agrifina. They insisted that by virtue of these
documents, Agrifina became the new collector of their debtors; and the obligation to pay
the balance of their loans had been extinguished. The trial court ruled that Felicidad's
obligation to Agrifina had not been novated by the deeds of assignment and promissory
notes executed in the latter's favor because the deeds and notes were separate contracts
which could stand alone from the original indebtedness of Felicidad. The CA affirmed the
trial court’s decision pertaining to the novation but differed from the RTC in holding that
the deeds of assignment executed by Felicidad had the effect of payment of her
outstanding obligation to Agrifina in the amount of P585,659.00 since an assignment of
credit is in the nature of a sale. Petitioner Agrifina argued before the supreme court that
the deeds of assignment in favor of petitioner does not have the effect of payment of the
original obligation because the deeds and notes were separate contracts. In short, she can
therefore collect from the private respondents and their debtors

Issue - whether the obligation of respondents to pay the balance of their loans, including
interest, was partially extinguished by the execution of the deeds of assignment in favor of
petitioner

Held: Yes because the execution of deeds of assignment here is in the nature of dation in
payment. An assignment of credit may be in the nature of dation in payment such as when
a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has
against a third person which is what happened in this case.
The requisites for dacion en pago are:
(1) there must be a performance of the prestation in lieu of payment (animo solvendi)
which may consist in the delivery of a corporeal thing or a real right or a credit against the
third person;
(2) there must be some difference between the prestation due and that which is given in
substitution (aliud pro alio); and
(3) there must be an agreement between the creditor and debtor that the obligation is
immediately extinguished by reason of the performance of a prestation different from that
due
 Philippine Bank v Pineda (1991)
(Sale distinguished from other transactions)

Petitioner Philippine National Bank

Respondents Hon. Gregorio G. Pineda, in his capacity as presiding judge of the
CIF, Tayabas Cement Company, Inc.

Doctrine Mere possession of machinery and equipment is not considered as

payment, but a security.
Dation in payment takes place when property is alienated to the
creditor in money and the same is governed by sales. 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.

FERNAN, C.J p:

Facts- Arroyo spouses obtained the following personal loans:

1. P580,000 to purchase 60% of the subscribed capital stock, and thereby acquire the
controlling interest of private respondent Tayabas Cement Company, Inc. (TCC). It
was secured by a real estate mortgage over a parcel of land covered by Transfer
Certificate of Title No. 55323 of the Register of Deeds of Quezon City known as the
La Vista property.

2. P160,000 in their personal capacity secured by a real estate mortgage over parcels
of agricultural land known as Hacienda Bacon located in Isabela, Negros
Occidental.

TCC, on the other hand, filed with the petitioner bank an application and agreement for
the establishment of an eight (8) year deferred letter of credit (L/C) for $7,000,000.00 in
favor of Toyo Menka Kaisha, Ltd. of Tokyo, Japan, to cover the importation of a cement
plant machinery and equipment.

The imported cement plant machinery and equipment arrived from Japan and were
released to TCC under a trust receipt agreement. Subsequently, Toyo Menka Kaisha, Ltd.
made the corresponding drawings against the L/C as scheduled. TCC, however, failed to
remit and/or pay the corresponding amount covered by the drawings.

In 1968, pursuant to the trust receipt agreement, PNB informed TCC of its intention to
repossess the machinery and equipment for its failure to settle its dues. In the meantime,
the personal loans have also become due. Due to its failure to pay off the loans, PNB
decided to foreclose the real estate mortgages executed in its favor.
Dungca, together with the Provincial Sheriff of Negros Occidental and Ex-Officio Sheriff
of Bacolod City posit that there is no need to foreclose the 2 parcels of land since the
obligation has already been settled in lieu of the repossessed machinery and equipment.

Issue- Whether the repossession of PNB of the imported machinery and equipment
constitute as dacion en pago

Ruling- No. The Court held that the repossession did not amount dacion en pago. Dation
in payment takes place when property is alienated to the creditor in satisfaction of a debt
in money and the same is governed by sales. Dation in payment is the delivery a
transmission of ownership of a thin by the debtor to the creditor as an accepted equivalent
of the performance of the obligation. The repossession of the said items was merely to
secure the payment of TCC's loan obligation and not for the purpose of transferring
ownership to PNB in satisfaction of said loan. Thus, no dacion en pago was ever
accomplished.

Payment would legally result only after PNB had foreclosed on said securities, sold the
same and applied the proceeds to TCC's loan obligation. Proceeding from this finding,
PNB has the right to foreclose the mortgages executed by the spouses Arroyo as sureties of
TCC. As sureties, the Arroyo spouses are primarily liable as original promisors and are
bound immediately to pay the creditor the amount outstanding.
 Bank of Philippine Islands v. SEC
[G.R. No. 164641. December 20, 2007]
(Sale distinguished from other transactions)

Petitioner Bank of the Philippine Islands, as successor to Far East Bank and Trust
Company
Respondent SEC, Rehabilitation Receiver, ASB Holdings, Inc., ASB Development
Corporation, ASB Land, Inc., ASB Finance, Inc., Makati Hope Christian
School, Inc., Bel-Air Holdings Corp, Winchester Trading, Inc. VYL
Development Corp., Gerrick Hldings Corp., Neighborhood Holdings,
Inc., and CA

Dacion en pago Sales

There is a preexisting loan None
Extinguishes obligations Creates obligation
Price ceiling - preexisting obligation. Freedom to fix price

TINGA, J p:
Facts - BPI extended credit accommodations1 to ASB Group of Companies (ASB Group)
with an outstanding total principal of P86,800,000 secured by 2 real estate properties
located in Greenhills, San Juan.

In May 2000, ASB Group filed a petition before the SEC for rehabilitation2 and suspension
of payments. The rehabilitation plan includes dacion en pago of one of the mortgage
properties for P84,000,000 against the total amount of the Group due to BPI.
Consequently, the Group asked to release the said properties from being mortgaged to BPI
and be included to its asset3 pool.

BPI contends that the rehabilitation plan is violative of its right to contract as it compelled
the latter to agree on the dacion en pago agreement with the Group.

SEC CA SC
Issued an Dismissed. BPI has the right to refuse the Affirmed. CA.
order approving ASB rehabilitation plan and inform them of
Group's proposed its preferred right for the liquidation and
rehabilitation distribution of the Group's assets.

BPI's appeal was also denied.

Issue: Is rehabilitation plan containing the dacion en pago proposal violative of BPI's
contractual right?
 Ruling: No, it did not violate its contractual right. Dacion en pago is a mode of payment
where the debtor offers its properties as payment to the loan due to the creditor who
accepts it as equivalent to the debt. It is by nature of sale where the creditor is buying the
properties in consideration of the outstanding debt. Consequently, consent is required,
thus, there is no approved dacion en pago if one of the parties to the contract does not
agree to it, in this case, the creditor.

The Court held that dacion en pago would require mutual agreement between the two
parties. If BPI would not agree to the proposal, it may assert its preferred right in settling
the loan. Being a secured creditor, it has preferential right over the unsecured ones.
Instead of dacion en pago, it may opt for settling the liabilities at its equivalent selling
price or asset its right in the liquidation and distribution of the assets.

xxx
1
Credit accommodations - advanced working capital in form of a debt.
2
Rehabilitation plan - corporate plan to revive the company's operation and solvency
provided that the company shows that it can continue as a going concern rather than be
immediately liquidated.
3
asset - resource with economic value that an individual, corporation or country owns or
controls with the expectations that it will provide in the future, returns to the company,
e.g.; inventory, equipment.
 Estanislao v. East West Banking Corp
[G.R. No. 164641. December 20, 2007]
(Sale distinguished from other transactions)

Petitioner SPS Rafael P. Estanislao and Zenaida Estanislao

Respondent East West Banking Corporation

Doctrine The nature of the assignment was a dation in payment, whereby

property is alienated to the creditor in satisfaction of a debt in money.
Such transaction is governed by the law on sales. Even if we were to
consider the agreement as a compromise agreement, there was no
need for respondent’s signature on the same, because with the delivery
of the heavy equipment which the latter accepted, the agreement was
consummated. Respondent’s approval may be inferred from its
unqualified acceptance of the heavy equipment.

TINGA, J p:
Facts - In 1997, the petitioners obtained the following loans from the respondent:

1. P3,975,000 evidenced by a promissory note, secured by two chattel mortgage - two

(2) dump trucks;
2. P2,375,000 secured by a chattel mortgage on a bulldozer
3. P1,550,000 secured by a chattel mortgage on a wheel loader

Total obligation amounted to 7,900,000. The petitioners defaulted in payment, now the
bank filed a suit for replevin and damages, praying for the 2 dump trucks be seized and
delivered. The respondent also prayed for settlement of the first loan's principal amount
with 19.5% interest per annum reckoned from the judicial demand until fully paid, plus
damages.

Respondent moved for suspension of the proceedings on account for an amicable

settlement with the bank. Negotiations were made, a deed of assignment which provides
that the petitioners obligates themselves to transfer and convey the 2 dump trucks and
caterpillar bulldozer to the bank in full payment of the remaining balance plus interest. In
2000, the petitioners completed the delivery and by next year, the respondents accepted
without protect the proposal for settlement of the obligation, but did not sign the deed.

3 months after, the respondent filed a motion to amend the complaint for seizure and
delivery of the 2 additional equipment covered by the 2nd chattel mortgage, since the
petitioners failed to include this in their deed assignment. Bank posits that the
respondents further negotiated for refinancing scheme in order to keep the remaining
equipment. The bank alleges that the petitioners still have approx. P4.28M balance
remaining from the loan which can be settled in lieu of the 2 heavy equipment. However,
petitioners contends that the transfer of ownership of 3 equipment in the deed of
assignment constitutes payment of the total obligation.
RTC CA SC
Decided in favor of the Reversed. The deed was not Affirmed.
petitioners. It held that the signed, it cannot the bank to the Obligation was
deed of assignment and the contract. extinguished by
petitioners' delivery of the dacion en pago.
heavy equipment effectively
extinguished petitioners' total
loan obligation.

Issue: Was there a perfected contract between the two parties to extinguish the
obligation through dation in payment?

Ruling: Yes, the contract was already perfected. Dation in payment is a mode of payment
to transfer ownership of properties to the creditor in full payment of the outstanding loan.
Governed by the law on sales, it requires the that the 3 elements are present - consent,
object and consideration. The deed specified the transfer of ownership of the 3 equipment;
2 dump trucks and bulldozer, in consideration of an amount in form of an outstanding
loan of P7.9M plus interest. Likewise, consent was given when the bank accepted the 3
equipment without protest. There is a presumption that the bank is familiar with the
implications of agreeing to the deed of assignment, whose terms and conditions are clear,
requiring no further interpretation. Provided that all elements are present, the contract is
pefected. Dation in payment was made to extinguish the outstanding loan.

Definitions:
• Replevin - action of court to enable a person to recover personal property taken
wrongfully and unlawfully and obtain award for damages for the resulting loss.
 First Global Realty v San Agustin (2002)
(Sale distinguished from other transactions)

Petitioner First Global Realty and Development Corporation

Respondent Christopher San Agustin

Doctrine In a dacion en pago is a mode of payment for an outstanding loan,

therefore, one of its elements require an existing loan to be settle in lieu of
the properties as payment.

PANGANIBAN, J p:

Facts - In 1994, Spouses bought a house and lot in Makati from Christopher Agustin for
P2.5M. A P100,000- down payment was made upon the execution of the deed of absolute
sale in favor of the Spouses. The remaining balance would be paid once the title of the
property is transferred to them, pursuant to an agreement that the property will be used
as a collateral for the P2.4million balance.

In 1994, spouses obtained a loan from First Global Realty and Development Corporation
for P1,190,000, with the house and lot as the collateral. Agustin received the 1.190M and
then after, demanded payment of the latter. Spouses defaulted in payment which
prompted Agustin to file a case for estafa which did not prosper as they were no where to
be found.

FGDRDC demanded payment but the spouses defaulted as well. The latter filed a civil suit
for foreclosure of the property for which the court decided in their favor. In 1997, the
order was executed and the ownership of the property was transferred the company by
way of dacion en pago. Consequently, company demanded rentals from Agustin as they
were still in possession of the property since the deed of sale was executed.

Agustin filed a MC based on the irregularities of the dacion en pago:

1. It was executed in 1994 when the spouses have yet to contract a loan;
2. The debt amount is less than the price of the property, 1.190 against 2.5M; and
3. It was registered in 1997 in lieu of the foreclosure of the property.

RTC CA Supreme Court

Decided in favor of the Reversed and set aside Affirmed.
Company

Issue - Was there a valid dacion en pago?

Ruling - No. Pursuant to Article 1245, the following are the elements of dacion en pago:

1. existence of a money obligation.

 2. the alienation to the creditor of a property by the debtor with the consent of the
former.
3. satisfaction of the money obligation of the debtor

In the case at bar, element 1 is lacking, existence of an outstanding debt. Records show
that the dacion en pago was executed in 1994 prior to the approval of the loan, thus, there
was no pre-existing obligation to settle. The contract here presupposes a sale where the
spouses’ obligation themselves to deliver the house and lot in consideration of a price
certain in form of a loan.
 Vda de Jayme v CA (2002)
(Sales distinguished from dacion en pago)

Petitioner Mamerte Vda De Jayme, her children (heirs of late husband, Graciao
Jayme):
1. Wilfredo Jayme
2. Marcial Jayme
3. Manel Jayme
4. Antonio Jayme
Heirs of Dominador Jayme - Supreme (wife) and his children:
1. Armando Jayme
2. Nicano Jayme
3. Zenaida Jayme
4. Catherin Jayme
5. Rosaline Jayme
6. Doris Jayme
7. Vicky Jayme
8. Marilyn Jayme
Heirs of Nilie Jayme Sanchez - Inocensio Sanchez (surviving spouse) and
children:
1. Elsa Sanchez
2. Concepcion Sanchez
3. Cleofe Sanchez
4. Alejandro Sanchez
5. Efren Sanchez
6. Macrina Sanchez
Flora Jayme, assisted by husband Cesar Ravanes
Respondents CA, Cebu Asiancars Inc., George Neri, Connie Neri, William Leon Koc
Lee,Eduardo James Lee, Roberto Uy Kim, Charles Uy Kim, Metropolitan
Bank and Trust Company, Rene Natividad, Maximo Perez

Doctrine What actually takes place in dacion en pago is an objective novation of

the obligation where the thing offered as unaccepted equivalent of the
performance of an obligation is considered as an object of the contract of
sale while the debt is considered as the purchase price; that is why the
elements sale must be present, including clear agreement that the things
offered in accepted for the extinguishment of the debt. (Villanueva,
Tiansay)

QUISUMBING, J p:

Facts - Graciano and Mamerte Jayme spouses, owner of a parcel of land, lot 2800, located
in Mandaue City. The said lot was leased by George Neri, president of Cebu Asiancars Inc.
Terms and conditions of the lease includes that the parcel of land shall be used a collateral
for a loan for which the proceeds shall be used to build a building, subject to transfer
ownership of the building to the lessors upon termination of the lease contract.
First loan P300,000 obtained from General Bank Trust and Company was duly paid. Then
after a second loan from MTBC forP6,000,000 was obtained, where the spouses, assisted
by their children and attorney, signed the deed of Real Estate Mortgage. To assure the
spouses of their lot 2700, the officers of the company executed an undertaking and signed
the same, where they promised their personal capacities and/or in representation of Cebu
Asiancars, Inc., "to compensate Mr. & Mrs. Graciano Jayme for any and all or whatever
damage they may sustain or suffer by virtue and arising out of the mortgage to MBTC of
the aforestated parcel of land.

Asiancars defaulted in payment, as a result, MTBC foreclosed the property in 1981. A year
after, surviving spouse, Mamerte, together with her children, filed a suit against the
company for the redemption of the property foreclosed by the bank. They invoke that
there was defect in consent whereby the officers employed fraud in getting spouses'
consent. Their intention was to be bound to the loan merely as guarantors and not
mortgagers.

As to the undertaking, both RTC and CA found it valid and binding by way dacion en
pago.

RTC
Decided in favor of Metrobank.
Contract of the spouses as
mortgagors and the undertaking of
the Cebu Asiancars Inc. officers are
valid and binding. Jaymes are
allowed to redeem the property.
CA Supreme
Court
Affirmed with modifications, whereby Affirmed.
the Jaymes can no longer redeem the
property. Period for redemption
expired in February 1992 without the
plaintiffs redeeming it.
Declaring valid the dacion en pago
undetaking of the company.

Issue - Is the dacion en pago valid and binding between parties despite the provision in
the lease that the ownership of the building shall be transferred to the spouses?

Ruling - Yes, it was valid and binding between parties. Dacion en pago in a mode of
payment where the debtor and creditor agrees to use the properties of the latter to exact
payment of the outstanding debt. Accordingly, dacion en pago is governed by law on sales
where the essential elements to a contract are present - consent, object and consideration.
The elements were present whereby the personal properties of the officers of the
company are for the consideration of the damages that the spouses may sustain from the
mortgage to MTBC. The same was signed by both parties to the contract, no fraud was
employed. The spouses cannot feign ignorance of the matter since based on facts, they
were duly accompanied by an attorney and their children upon contracting the mortgage.
Despite being illiterate, they knew of the nature of the undertaking.

To wit, the objective of dacion en pago is novation of the obligation, whereby the parties to
the contract agrees to substitute the old obligation with a new one. In this present case,
instead of paying the damages through monetary consideration, they agreed to settle it in
exchange of the personal properties of the officers.

Other issues

(2) Did the spouses lost their right to redeem the property?

• Yes, the heirs lost their right to redeem property. Under Section 78 of the General
Banking Act then in force, the mortgagor or debtor whose real property has been
foreclosed and sold at public auction, has the right to redeem the property within one
year from the sale of the real estate as a result of the foreclosure. The reckoning date in
the case of a registered land is from the date of registration of the certificate of sale. If
no redemption is timely made, the buyer in a foreclosure sale becomes the absolute
owner of the property purchased. In this case, the certificate of sale was registered on
February 23, 1981, giving petitioners until February 23, 1982 to redeem the property.
This they failed to do, hence, ownership of the property already vested in the
purchaser, private respondent MBTC.

MBTC as a purchaser in good faith. MBTC had no knowledge of the stipulation in the
lease contract. Although the same lease was registered and duly annotated on the
certificate of title of Lot 2700, MBTC was charged with constructive knowledge only of
the fact of lease of the land and not of the specific provision stipulating transfer of
ownership of the building to the Jaymes upon termination of the lease. There was no
annotation on the title of any encumbrance.30 While the alienation was in violation of
the stipulation in the lease contract between the Jaymes and Asiancars, MBTC’s own
rights could not be prejudiced by Asiancars’ actions unbeknownst to MBTC. Thus, the
transfer of the building in favor of MBTC was properly held valid and binding by
respondent Court of Appeals.