[1] PHILIPPINE NATIONAL BANK VS PINEDA

(Dacion En Pago)
GR No. L-46658, May 13, 1991
Justice Fernan, C.

FACTS: In 1963, Ignacio and Lourdes Arroyo (Spouses) got a loan of P580,000.00 from PNB to
purchase 60% of the subscribed capital stock of Tayabas Cement Company Inc (TCC). The
Spouses mortgaged a parcel of land known as the La Vista Property. TCC filed with the
Petitioner Bank (PNB) for the establishment of an 8 year deferred letter of credit (L/C) for $7M
in favor of Toyo Menka Kaisha, Ltd (TMK) for the importation of a cement plant machinery and
equipment (M&E). The Spouses executed a surety agreement and covenant upon approval of the
L/C for the account of TCC.

The M&E arrived and were released to TCC under a trust receipt agreement. Subsequently,
TMK made the corresponding drawings against the L/C as scheduled. TCC failed to remit the
corresponding amount covered by the drawings. PNB notified TCC of its intention to repossess
the M&E pursuant to the trust receipt agreement. PNB also foreclosed the real estate mortgages
over Hacienda Bacon executed by the Spouses in TCC’s favor when they failed to satisfy their
obligations from their personal accounts.

PNB contends that the sale of La Vista was to satisfy both the personal obligations of the spouses
as well as their liabilities as sureties of TCC. The Spouses then opposed saying primarily that
repossession of the M&E by PN amounted to dacion en pago that extinguished their obligation
as surety to TCC.

ISSUE: WON the repossession amounts to dacion en pago.

RULING: NO. The repossession did not amount to dacion en pago. Article 1245 of the Civil
Code provides that, “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 and transmission of ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation.

PNB’s possession of the subject machinery and equipment being precisely as a form of security
for the advances given to TCC under the Letter of Credit, said possession by itself cannot be
considered payment of the loan secured thereby. Payment would legally result only after PNB
had foreclosed on said securities, sold the same and applied the proceeds thereof to TCC’s loan
obligation. Mere possession does not amount to foreclosure for foreclosure denotes the
procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and
includes the sale itself.

As aforesaid, the repossession of the machinery and equipment in question was merely to secure
the payment of TCC’s loan obligation and not for the purpose of transferring ownership thereof
to PNB in satisfaction of said loan. Thus, no dacion en pago was ever accomplished.