Dao Heng Bank, Inc. vs. Sps. Lilia and Reynaldo Laigo

A verbal agreement for dacion en pago remains unenforceable under the Statute of Frauds absent common consent, even if the properties were appraised and titles delivered, where such acts do not unequivocally indicate acceptance of the dacion but are merely incidents of the existing mortgage.

Spouses Lilia and Reynaldo Laigo obtained a P11 Million loan from Dao Heng Bank, secured by three real estate mortgages over two parcels of land. Upon defaulting in 2000, the spouses verbally offered to cede one of the mortgaged lots via dacion en pago. The bank commissioned an appraiser to value the properties, with both parties sharing the appraisal fee, but no further action was taken toward formalizing the dacion. The bank subsequently demanded payment, foreclosed the mortgages, and sold the properties at public auction to Banco de Oro, which had merged with Dao Heng.

• The Mortgages and Default: Spouses Laigo obtained a P11 Million loan from Dao Heng Bank in 1996-1997, executing three real estate mortgages over two Quezon City parcels registered in the name of respondent Lilia D. Laigo, married to Reynaldo Laigo. The loans became due within 12 months but remained unpaid as of 2000.
• The Dacion Proposal: Respondents verbally offered to cede one lot via dacion en pago. Dao Heng commissioned an appraiser, with fees shouldered by both parties, but no agreement materialized from the proposal.
• Foreclosure and Auction: Dao Heng demanded payment on August 18, 2000. Upon non-payment, the bank filed a foreclosure application in September 2000. The properties were sold at auction on December 20, 2000, to Banco de Oro (the highest bidder) for P10,776,242.
• Redemption Negotiations: Respondents negotiated for redemption. Petitioner set conditions in a June 29, 2001 letter, requiring staggered payments and post-dated checks. Respondents did not conform, prompting petitioner to advise them on December 26, 2001, that it would consolidate titles upon the expiration of the redemption period on January 2, 2002.
• Filing of Complaint: On December 27, 2001, six days before the redemption period expired, respondents filed a complaint for Annulment and Injunction with a prayer for a TRO, seeking to annul the foreclosure and enforce the verbal dacion en pago.

• No Perfected Contract: Petitioner argued that there was no meeting of the minds on the dacion en pago; only proposals and negotiations occurred, which never matured into a binding contract.
• Statute of Frauds: Petitioner maintained that the alleged verbal dacion en pago is unenforceable under the Statute of Frauds due to the absence of a written agreement.
• No Cause of Action: Petitioner contended that the complaint states no cause of action because the claim is founded on an unenforceable contract and the creditor has the sole prerogative to foreclose.

• Verbal Agreement: Respondent countered that Dao Heng verbally agreed to the full settlement of the mortgage obligation via the assignment of one of the mortgaged properties.
• Partial Performance: Respondent argued that the appraisal of the properties and the delivery of the titles constituted partial performance, taking the verbal agreement out of the coverage of the Statute of Frauds.

• Cause of Action: Whether the complaint states a sufficient cause of action despite the absence of a perfected dacion en pago contract.
• Statute of Frauds: Whether the alleged dacion en pago is unenforceable under the Statute of Frauds absent a written contract.
• Partial Performance: Whether the appraisal of the properties and delivery of titles constitute partial performance to take the verbal dacion en pago out of the Statute of Frauds.

• Cause of Action: The complaint was correctly dismissed for insufficiency of cause of action. While the presence of a cause of action is generally determined from the complaint's allegations, a motion to dismiss may be granted if evidence disclosed in the proceedings—such as the bank's opposition to the TRO explicitly denying a meeting of the minds—reveals facts sufficient to defeat the claim.
• Statute of Frauds: The verbal dacion en pago is unenforceable under Article 1403(2)(e) of the Civil Code because it involves an agreement for the sale of real property or an interest therein, requiring a written memorandum subscribed by the party charged.
• Partial Performance: Partial performance was not established. The appraisal of the properties did not unequivocally prove the bank's acceptance of the dacion proposal. The delivery of titles was a usual condition sine qua non for the execution and registration of the existing mortgage, not an act of partial performance of the dacion. Furthermore, respondents' subsequent attempt to negotiate for the redemption of the properties contradicted the existence of a perfected dacion en pago.

• Dacion en Pago — A special mode of payment where the debtor offers another thing to the creditor who accepts it as the equivalent of performance of an outstanding debt. It partakes of the nature of sale, requiring the elements of a contract of sale:
  • Consent of the contracting parties
  • Object certain
  • Cause or consideration As an objective novation of the obligation, common consent is an essential prerequisite to totally extinguish the debt. The creditor cannot be compelled to receive a different thing than what is due.
• Partial Performance Exception to the Statute of Frauds — The partial execution of a contract of sale takes the transaction out of the provisions of the Statute of Frauds provided the essential requisites of consent, object, and cause concur and are clearly established to be present. Acts merely incidental to an existing mortgage do not constitute partial performance of a proposed dacion en pago.

• "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. 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 elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered the purchase price. In any case, common consent is an essential prerequisite, be it sale or novation, to have the effect of totally extinguishing the debt or obligation."

• Filinvest Credit Association v. Philippine Acetylene Co., 197 Phil. 394 (1982) — Followed. Established that dacion en pago is an objective novation requiring common consent and partakes of the nature of sale.
• Vda. de Jomoc v. Court of Appeals, G.R. No. 92871, August 2, 1991 — Followed. Provided that partial execution of a contract of sale takes it out of the Statute of Frauds if consent, object, and cause are present.
• Palmares v. Court of Appeals, 288 SCRA 422 (1998) — Cited. Stated that the obligee is entitled to demand fulfillment of the obligation as stipulated; a debtor cannot compel the creditor to receive a different thing.
• Rural Bank of San Mateo, Inc. vs. Intermediate Appellate Court, 146 SCRA 205 (1986) — Cited. Affirmed that the power to decide whether to foreclose on a mortgage is the sole prerogative of the mortgagee.

• Article 1244, Civil Code — Provides that 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. Applied to show the bank could not be compelled to accept the dacion en pago without its consent.
• Article 1245, Civil Code — States that dacion en pago shall be governed by the law on sales. Applied to subject the verbal dacion to the rules on contracts of sale, including the Statute of Frauds.
• Article 1403(2)(e), Civil Code — Statute of Frauds provision rendering unenforceable an agreement for the sale of real property or an interest therein unless in writing and subscribed by the party charged. Applied to bar the enforcement of the verbal dacion en pago.

Leonardo A. Quisumbing, Dante O. Tinga, Presbitero J. Velasco, Jr., Arturo D. Brion.