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 (SUVs) 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%)
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No, Butch's obligation was not extinguished by dacion en pago upon the mere surrender of the SUVs. Under Article 1245 of the Civil Code, dacion en pago requires the alienation of property
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Quick check
Under Article 1245 of the Civil Code, how is dacion en pago defined?
Dacion en pago is a special mode of payment where property is alienated to the creditor to satisfy a monetary debt.
What is required for dacion en pago to extinguish a debtor's monetary obligation?
Dacion en pago requires mutual consent that the transferred property immediately extinguishes the debt as full payment.
What is the legal effect when a debtor surrenders SUVs to a creditor for the company to sell and apply the proceeds to a loan?
Surrendering property merely to be sold and credited to a debt does not transfer ownership or extinguish the loan.
Which law governs dacion en pago in terms of the transfer of ownership of property?
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Why was Butch's loan obligation to Hagibis Corporation not extinguished upon the surrender of the five SUVs?
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Learn more about these topics
1. Dacion en Pago
Under Article 1245 of the Civil Code, dation in payment, or dacion en pago, is a special mode of payment whereby property is alienated to the creditor in satisfaction of a debt in money. It is governed by the law of sales and requires the consent of both debtor and creditor. For dacion en pago to validly extinguish an obligation, there must be a clear agreement that the ownership of the delivered property is transferred to the creditor as the full equivalent and immediate satisfaction of the monetary obligation.
2. Dacion vs Assignment
Dacion en pago differs fundamentally from an assignment of property for the benefit of creditors, or payment by cession under Article 1255 of the Civil Code. In dacion en pago, ownership of the property is transferred to the creditor in full satisfaction of the debt. In contrast, an assignment or surrender of property merely authorizes the creditor to sell the items and apply the net proceeds toward the obligation. Surrendering property for sale does not transfer ownership or extinguish the underlying debt until the proceeds are actually realized and applied.
3. Requisites of Dacion
To establish dacion en pago, three essential elements must concur: consent of the contracting parties, an object certain which is the subject matter of the contract, and the cause or consideration, which is the extinguishment of the pre-existing debt. Where a debtor surrenders vehicles to a creditor with instructions to sell them and credit the proceeds to the outstanding loan, the transaction constitutes a mere agency to sell or authorization for payment. Without an express agreement accepting the property itself as complete discharge, the obligation remains effective.