UNIVERSITY OF SAN CARLOS COLLEGE OF LAW FIRST YEAR SECOND SEMESTER

COURSE Obligations and Contracts

MODULE NO. E TOPIC Extinguishment of Obligations

Articles 1231-1251
1. Payment or Performance

CASE TITLE FEBTC vs. Diaz Realty Inc., GR No. 138588, Aug. 23, 2001

DIGESTED BY Danica Tiu

PARTIES TO THE CASE

(who are the petitioners, respondents, etc.)

FAR EAST BANK & TRUST COMPANY, petitioner,

vs.
DIAZ REALTY INC., respondent. |||

FACTS OF THE CASE

(include relevant facts, and rulings from lower courts, if applicable.)

The case involves a dispute over a loan and real estate mortgage between Far East Bank & Trust
Company (FEBTC) and Diaz Realty Inc.

Diaz and Company obtained a loan from Pacific Banking Corporation (PaBC) in 1973, which was
secured by a real estate mortgage on two parcels of land owned by Diaz Realty Inc.

In 1981, Allied Banking Corporation rented an office space in the building constructed on the
mortgaged properties, and the monthly rentals were to be paid directly to PaBC for the lessor's
account to partly or fully pay off the mortgage indebtedness.

In 1985, PaBC was closed by the Central Bank and placed under receivership.

In 1986, FEBTC purchased the credit of Diaz and Company in favor of PaBC, but Diaz Realty Inc.
was only informed about it in 1988.

Diaz Realty Inc. tendered a check to FEBTC in the amount of P1,450,000 as full payment of its
Pacific Bank account, but FEBTC did not accept the check as payment and instead asked Diaz
Realty Inc. to deposit the amount with its Davao City Branch Office.

The check was subsequently cleared and honored by Interbank.

Diaz Realty Inc. also requested a reduction in the interest rate from 20% to 12% per annum, but
FEBTC did not reply.

Diaz Realty Inc. filed a case with the Regional Trial Court of Davao City when there was no news
from FEBTC regarding the acceptance of the tender of payment.

The court ruled that there was a valid tender of payment made by Diaz Realty Inc. and ordered
FEBTC to accept the payment and cancel the mortgage.

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FEBTC appealed the decision to the Court of Appeals, but the decision was affirmed.

ISSUE/S

WON there was a valid tender of payment to extinguish the obligation of Diaz Realty.

RULING

YES. There was valid tender of payment to extinguish the obligation of Diaz Realty. Although
jurisprudence tells us that a check is not a legal tender and a creditor may validly refuse it, this
dictum does not prevent the creditor from accepting a check as payment. In other words, the
creditor has the option and the discretion of refusing or accepting it. In the present case, FEBTC
did not refuse Diaz Realty’s check, instead, it accepted the check which, it insisted, was a
deposit.

RATIO DECIDENDI (Reason)

A tender of payment is the definitive act of offering the creditor what is due him or her, together
with the demand that he accepts it. More important is that there must be a concurrence of
intent, ability and capability to make a good such offer, and must be absolute and must cover
the amount due.

Here, after learning that its loan balance was P1,447,142.03, Diaz Realty presented to FEBTC a
check in the amount of P1,450,000, with the specific notation that it was for full payment of its
PaBC account that had been purchased by FEBTC. The latter accepted the check, even if it
insisted that it was considered the same as a mere deposit. The check was sufficiently funded,
as in fact it was honored by the drawee bank. When FEBTC refused to release the mortgage,
Diaz Realty instituted the present case to compel FEBTC to acknowledge the tender of
payment, accept payment and cancel the mortgage. These acts demonstrate Diaz Realty’s
intent, ability and capability to fully settle and extinguish its obligation to FEBTC. Hence, there
was a valid tender of payment to extinguish the obligation of Diaz Realty.

OTHER IMPORTANT NOTES (if applicable)

(Discussion on Principles in relation to the topic, notes from Concurring or Dissenting opinions, etc.)

What is the case all about?

A dispute over a loan and real estate mortgage between Far East Bank & Trust Company
(FEBTC) and Diaz Realty Inc. leads to a court ruling that FEBTC should have accepted the valid
tender of payment made by Diaz Realty Inc. and cancel the mortgage, with the interest rate to
be reduced as requested by Diaz Realty Inc.

Extinguishment of Obligations - Payment or performance

For a valid tender of payment, it is necessary that there be a fusion of intent, ability and
capability to make good such offer, which must be absolute and must cover the amount due.

DISCLAIMER: STILL READ THE FULL CASE. DO NOT RELY ON THE DIGESTS ALONE. WHEN PASTING THE LINK OF YOUR DOCS TO
THE DIGEST GOOGLE SHEETS, ALLOW ‘COMMENT’ PERMISSIONS.
Though a check is not legal tender, and a creditor may validly refuse to accept it if tendered as
payment, one who in fact accepted a fully' funded check after the debtor's manifestation that
it had been given to settle an obligation is estopped from later on denouncing the efficacy of
such tender of payment.

DISCLAIMER: STILL READ THE FULL CASE. DO NOT RELY ON THE DIGESTS ALONE. WHEN PASTING THE LINK OF YOUR DOCS TO
THE DIGEST GOOGLE SHEETS, ALLOW ‘COMMENT’ PERMISSIONS.
DISCLAIMER: STILL READ THE FULL CASE. DO NOT RELY ON THE DIGESTS ALONE. WHEN PASTING THE LINK OF
YOUR DOCS TO THE DIGEST GOOGLE SHEETS, ALLOW ‘COMMENT’ PERMISSIONS.