DEFINITION OF TERMS

Cession or assignment in favor of creditors = it is the process by which a debtor transfers all the properties not
subject to execution in favor of his creditors so that the latter may sell them, and thus apply the proceeds to
their credits.

Consignation = the act of depositing the thing due with the court or judicial authorities whenever the creditor
cannot accept or refuses to accept payment.

Dation in payment = it is that mode of extinguishing an obligation whereby the debtor alienates in favor of the
creditor, property for the satisfaction of monetary debt; datio in solutom or adjudicacion en pago

Garnishment = the proceeding by which a debtor’s creditor is subjected to the payment of his own debt to another.

Indebtedness = has been defined as an unconditional and legally enforceable obligation for the payment of money.

Injunction = It is a judicial process by virtue of which a person is generally ordered to refrain from doing something.

Interpleader = It is a technical name of the action in which a certain person in possession of certain property wants
claimants to litigate among themselves for the same.

Legal tender = It is that which a debtor may compel a creditor to accept in payment of the debt (whether public or
private).

Application of payment = is the designation of the debt to which the payment must be applied when the debtor has
several obligation of the same kind in favor of the same creditor; it is the phrase applied to show which debt,
out of two or more debts owing the same creditor, is being paid.

Subrogation = means the act of putting somebody into the shoes of the creditor, hence, enabling the former to
exercise all the rights and actions that could have been exercised by the latter.

Tender of payment = the act of offering the creditor what is due him together with a demand that the creditor
accepts the same.

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ENUMERATIONS

Some Rights Which May be Exercised by the Person Subrogated in the Place of the Creditor

The rights arising from:

a) A mortgage;

b) A guaranty;

c) A penalty or penal clause.

Requisites of Payment Made in Good Faith to a Person in Possession of the Credit (Art. 1242)
 a) Payment by payor must be made in good faith (this is presumed) (but payee may be in good or bad faith)

b) The payment must be in possession of the credit itself (not merely the document evidencing the credit)

(Note: when one possesses the credit, there is color of title to it)

Conditions or Requisites for a Valid Dation in Payment

(CON-PRE-INS)
a) Consent of the creditor (for sales presupposes consent of both parties);

b) It must not be prejudicial to the other creditor;

c) If the debtor is not judicially declared insolvent.

Requisites for Application of Payment to Be Made Use of (Art. 1252)

(SE-KI-OW DU-EX)
a) There must be two or more debts (severalty of debt);

b) The debts must be of the same kind;

c) The debts are owed by the same debtor in favor of the same creditor;

d) All the debts must be due; and

e) The payment is not enough to extinguish all the debts.

Requisites for Voluntary Assignment (Art. 1255)

(D-C IN-AB-AC)
a) More than one debt;

b) More than one creditor;

c) Complete or partial insolvency of debtor;

d) Abandonment of all debtor’s property not exempt from execution (unless exemption is validly waived by the
debtor) in favor of creditors;

e) Acceptance or consent on the part of the creditors (for it cannot be imposed on an unwilling creditor).

When Creditor is Justified in Refusing Tender of Payment (Art. 1256)

(LE-IN UN-DU)
a) It must be in legal tender;

b) It must include whatever interest is due;

c) Generally, it must be unconditional;

d) The obligation must already be due.

Essential Requisites for Consignation (Art. 1257)

(DE-TE-CO3)
a) Existence of a valid debt;

b) Valid prior tender, unless tender is excused;

c) Prior notice of consignation (before deposit);

d) Actual consignation (deposit);

e) Subsequent notice of consignation.

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RULES

Payment by an Incapacitated Person

(NO-CO-RE)

General Rule: If person paying has no capacity to give:

a) Payment is not valid – if accepted;

b) Creditor cannot even be compelled to accept it;

c) The remedy of consignation would not be proper.

Exception: (as provided in Art. 1427, Civil Code)

“When a minor between eighteen and twenty-one years of age, who has entered into a contract without the
consent of the parents or guardian voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the
obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith.”

A minor between 18 and 21 years of age who has entered into a contract without the consent of the parents
or the guardians who voluntarily pays a sum of money or delivers a fungible thing in order to fulfill the obligation
cannot recover what he has paid or delivered when the creditor has consumed it in good faith?

Preferential Right of Debtor (to whom does the right to make an application of payment belong?) Art. 1252

As a general rule, the right to make an application of payment belongs to the debtor.

This right is not absolute, however. For example:

(A-P)

a) If there was a valid prior but contrary agreement, the debtor cannot choose;

b) The debtor cannot choose to pay part of the principal ahead of the interest (Art. 1253)

Rule when debts are not yet due (if the debts are not yet due, may there be application of payment?) (Art. 1252)

Yes, but only:

(STI-BEN)

a) If the parties so stipulate; or

b) When the application of payment is made by the party (which may either be the debtor or the creditor) for
whose benefit the term has been constituted (Art. 1252).

Rule if a debtor accepts from the creditor a receipt in which an application of payment is made (Art. 1252)

The law provides that if the debtor accepts from the creditor a receipt in which an application of payment is
made, the former cannot complain of the same, unless there is a cause for invalidating the contract (Art. 1252, par.
2)

Rule of the debt producing interest (Art. 1253)

If the debt produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered (Art. 1253).

Rule in Case No Application of Payment Has Been Voluntarily Made (Art. 1254)

a) Apply it to the most onerous (in case the due and demandable debts are of different natures).

b) If the debts are of the same nature and burden, application shall be made to all proportionately.

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QUESTIONS

How are the causes of extinguishment of obligations classified according to Civil Code?

ORDINARILY BY:

a) Payment of performance
b) Loss of the things due
c) Condonation or remission of the debt or waiver
d) Confusion or merger of the rights of creditor and debtor
e) Compensation
f) Novation (Art. 1231)
OTHER CAUSES IN ARTICLE 1231 BUT GOVERNED BY OTHER CHAPTERS

a) Annulment
b) Rescission
c) Fulfillment of resolutory condition
d) Prescription

STILL OTHER CAUSES:

a) Death of a party in case the obligation is personal

b) Resolutory term
c) Change in civil status
d) Compromises
e) Mutual dissent
f) Impossibility of fulfillment
g) Fortuitous event

Define payment.

Payment is a mode of extinguishing obligations which consists of:

a) The delivery of money; or

b) The performance in any other manner of an obligation (Art. 1232)

What are the requisites for a valid payment? (Art. 1233)

(VERY-FULL)

a) The very thing or service contemplated must be paid

b) Fulfillment must be complete. (Ramos v. Ledesma, 12 Phil. 656)

What is the effect of substantial performance in good faith? (Art. 1234)

[If the obligation has been substantially performed in good faith], the obligor may recover as though there
had been a strict and complete fulfillment, less damages suffered by the obligee.

What is the effect if the obligee accepts performance knowing its incompleteness or irregularity?

When the obligee accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied with. (Art. 1235)

There is waiver and estoppel here.

What is the right of creditor to refuse payment by third person?

The creditor can refuse payment by a stranger (3 rd person) except:

(STI-INT)
 a) If there is a stipulation allowing this;

b) Or if said third person has an interest in the fulfillment of the obligation (co-debtor, guarantor, even a joint
debtor)

If a third person pays an obligation, what are the rights which are available to him?

If a third person pays the obligation with the knowledge and consent of the debtor, there are two rights
available to him:

a) He can recover from the debtor the entire amount which he has paid (Art. 1236, par. 2) (REIMBURSEMENT);

b) He is subrogated to all of the rights of the creditor (Art. 1302, No. 2) (SUBROGATION).

However, if the payment is made without the knowledge or against the will of the debtor, there is only one right
which is available to him:

a) He can recover only insofar as the payment has been beneficial to the said debtor (Art. 1236, par. 2)
(BENEFICIAL REIMBURSEMENT)

If there is default in the performance of one’s obligation, what is the effect of the acceptance of delayed
payment?

Rescission is impliedly waived. Failure to exercise the right to rescission after the debtor defaulted
constitutes a waiver of such right. The continued acceptance of payments after the default places the debtor in
estoppel.

What is the effect if a third person pays on behalf of the debtor without his knowledge or against his consent?

Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel
the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (Art. 1237)

How is subrogation distinguished from reimbursement?

(RE-EX-PE)

a) In subrogation, recourse can be had to the mortgage or guaranty or pledge; in reimbursement, there is no
such recourse;

b) In subrogation, the debt is extinguished in one sense, but a new creditor, with exactly the same rights as the
old one, appears on the scene. In reimbursement, the new creditor has different rights, so it is as if there has
been an extinguishment of the obligation;

c) In subrogation, there is something more than a personal action for recovery; in reimbursement, there is only
a personal action to recover the amount.

(Note, however, that in both reimbursement and subrogation, there can be recovery of what the stranger has paid
(Art. 1236)

When is payment by a stranger deemed a donation?

Payment by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation,
which requires the debtor’s consent. [But the payment is in any case valid as to the creditor who has accepted it.]
(Art. 1238)

What is the effect of payment by an incapacitated person?

In obligations to give, payment made by one who does not have the free disposal of the thing due and
capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the Title on
“Natural Obligations (Art. 1239); thus:

If a person has no capacity to give: (NO-CO-RE)

a) Payment is not valid if accepted;

b) Creditor cannot be compelled to accept it;
c) The remedy of consignation is not proper.

Exceptions (as provided for in Article 1427)

To whom must payment be made?

Payment must be made, as a general rule, to:

a) The person in whose favor the obligation has been constituted (the creditor), or
b) His successor-in-interest (like the heirs);
c) Any person authorized to receive it (Art. 1240).

What is the effect if payment is made to a person other than those enumerated in Article 1240?

The payment shall not be valid, except:

a) Payment made to a third person provided that it has redounded to the benefit of the creditor;

b) Payment made to the possessor of the credit provided that it was made in good faith (Art. 1241, par. 2 and
1242)

What is the effect of payment made to a person incapacitated to manage or administer his property?

Payment to a person who is incapacitated to administer his property shall be valid only:

a) If he has kept the thing delivered; or

b) Insofar as the payment has been beneficial to him (Art. 1241, par. 1)

What is the effect of payment made to an unauthorized third person?

Payment made to a third person shall be valid insofar as it has redounded to the benefit of the creditor (Art.
1241, par. 2)

Must the benefit to the creditor proven (if payment is made to an unauthorized third person)?

Such benefit to the creditor need not be proved in the following cases:
(A-R-C)
1) If after the payment, the third person acquires the creditor’s rights;

2) If the creditor ratifies the payment to the third person;

3) If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive
the payment (Art. 1241).

What is the effect of payment made to the creditor by the debtor after the latter has been judicially ordered to
retain the debt?

Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt
shall not be valid (Art. 1243).

(The judicial order in this case may have been prompted by an order of attachment, injunction or garnishment)

Can the debtor of a thing compel the creditor to receive a different one?

The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of
the same value, or more valuable than that which is due (Art. 1244, par. 1).

In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance
against the obligee’s will (Art. 1244, par. 2).

Under what circumstances may a debtor compel the creditor to accept a thing different from that which was
agreed upon?

(F-A-W)
a) In case of facultative obligations;

b) In case there is another agreement resulting in either:

a. Dation in payment (Art. 1245); or

b. Novation (Art. 1291)

c) In case of waiver by the creditor (expressly or impliedly)

What must be delivered in obligations to give indeterminate or generic things?

When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and
circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor
deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into
consideration (Art. 1246).

Who pays for the extrajudicial expenses required by the payment?

The extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to
judicial costs, the Rules of Court shall govern.

Exception: when there is stipulation to the contrary (Art. 1247).

May a creditor be compelled to partially receive the prestations constituting the obligation?

The creditor cannot be compelled partially to receive the prestations in which the obligation consists.
Neither may the debtor be required to make partial payments (Article 1248).

EXCEPTIONS:

(STI-DIF-LIQ JO-SO-CO-WO)
a) When there is stipulation to this effect;

b) When the different prestations are subject to different conditions or different terms;

c) When the debt is in part liquidated and in part unliquidated, [performance of the liquidated part may be
insisted upon either by the debtor or creditor];

d) When a joint debtor pays his share or the creditor demands the same;

e) When a solidary debtor pays only the part demandable because the rest are not yet demandable on
account of their being subject to different terms and conditions;

f) In case of compensation, when one debt is larger than the other, it follows that a balance is left;

g) When work is to be done by parts.

Where must payment be made?

Rules: (DE-NO-DO CP)

a) Payment shall be made in the place designated in the obligation.

b) There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall
be made wherever the thing might be at the moment the obligation was constituted.

c) In any other case the place of payment shall be the domicile of the debtor.

d) If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall
be borne by him.

e) These provisions are without prejudice to venue under the Rules of Court (Art. 1251).

Application of Payments

What are the special forms of payment?

A-D-A-T
a) Application (or “imputation) of payments (Art. 1252)

b) Dation in payment (Art. 1245)

c) Assignment in favor of creditors (“cession”) (Art. 1255)

d) Tender of payment and consignation (Art. 1256-1261)

How is application made?

a) The debtor makes the designation (Art. 1252, par. 1);

b) If not, the creditor makes it, by so stating in the receipt that he issues (Art. 1251, par. 2);

c) If neither the debtor nor the creditor has made the application, or if the application is not valid, the
application is made by operation of law (Arts. 1253 & 1254).

Once an application of payments is made, may it be revoked?

No, unless both parties agree. Even if both parties agree, however, still the revocation or change in the
application will not be allowed if third persons would be prejudiced.

What is meant by legal application of payment? (What is the rule if the payment cannot be applied in accordance
with the preceding rules, or if application can not be inferred from other circumstances?)

a) The debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied.

b) If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately (Art. 1254)

Examples: (OL-IN-2-MO P-A-M-E)

a) Older ones in case of running accounts

b) Interest-bearing debts even if the non-interest bearing debt is older

c) Of two interest-bearing debts, that which charges the higher interest is more burdensome

d) Debts secured by mortgage or by pledge

e) Debts with a penalty clause

f) Advances for subsistence are more onerous than cash advances

g) A debt where the debtor is in mora is more onerous than one where he is not

h) An exclusive debt (not solidary) is more onerous than a solidary debt.

What are the effects of voluntary assignment?

(O-R-C)
1) The creditors do not become the owners; they are merely assignees with authority to sell (if ownership is
transferred, this becomes a datio in solutum).

2) The debtor is released up to the amount of the net proceeds of the sale unless there is a stipulation to the
contrary (Art. 1255, 2nd sentence). The balance remains collectible.

3) Creditors will collect credits in order of preference agreed upon, or in default of agreement, in the order
ordinarily established by law.
Distinguish between Dation in payment and payment by cession.

(P-P-S SO-OW-NO)

Dacion en pago CESSION

Does not affect all the properties
Does not require plurality of creditors
Only specific or concerned creditor’s consent is
required
May take place during the solvency of the debtor
Transfers ownership upon delivery
This is really an act of novation
In general, affects all the properties of the debtor
Requires more than one creditor
Requires the consent of all the creditors
Requires full or partial insolvency
Does not transfer ownership
Not an act of novation

Distinguish between tender of payment and consignation

1) Tender of payment is the antecedent of consignation; in other words, while the first is the preparatory act,
the second is the principal act which will produce the effects of payment. [The priority of tender of payment
is the attempt to make a private settlement before proceeding to the solemnities of consignation.]

2) Tender of payment is by its very nature extrajudicial in character, while consignation is judicial.

State the rationale for consignation

The rationale for consignation is to avoid the performance of an obligation becoming more onerous to the
debtor by reason of cause imputable to him.

What is the effect of tender without consignation?

Tender of payment without consignation does not extinguish the debt; consignation must follow.

What are the exceptions to the rule that before consignation shall produce the effects of payment, it is essential
that there must be a previous tender of payment?

Consignation alone shall produce the same effect in the following cases: (A-I-R 2-T)

1) When the creditor is absent or unknown, or does not appear at the place of payment;

2) When he is incapacitated to receive the payment at the time it is due;

3) When, without just cause, he refuses to give a receipt;

4) When two or more persons claim the same right to collect;

5) When the title of the obligation has been lost (Art. 1256).

When must the special requisites of a valid and effective consignation be proved?

Under the law, after the consignation has been made, it is required that the debtor shall notify the creditor
and all of the persons interested in the fulfillment of the obligation of such fact (Art. 1258). It is at this stage that
three possible situations may arise:

1. The creditor may accept the thing or amount deposited. In such a case, the question of payment is settled
 altogether. The question as to whether the consignation is valid or not becomes moot.

2. The creditor may refuse to accept the thing or amount deposited. In such a case, the debtor shall then bring
an action against him in order to compel him to accept said thing or amount. In order that such action shall
prosper, all of the requisites of a valid and effective consignation must be proved.

3. The creditor may neither accept nor impugn the consignation because he is not interested, or he is not
known, or he is absent. In such a case, the debtor shall then file a motion in court asking for the cancellation
of the obligation (Art.1260). [In order that such motion shall be granted, all of the requisites of a valid and
effective consignation must be proved.]

Who bears the expenses of the consignation?

The expenses of consignation, when properly made, shall be charged against the creditor (Art. 1259).

What are the effects of consignation duly made?

1. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the
obligation (Art. 1260).

2. The running of interest is suspended.

When may the debtor withdraw the thing or sum consigned?

As a matter of right:

Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has
been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in
force (Art. 1260).

As a matter of privilege:

If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he
shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be
released (Art. 1261)

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SITUATIONAL CASES (refer to Situational Cases Articles 1231 to 1261)