Manila Banking Corp. vs. Teodoro, Jr.

An assignment of receivables that functions as continuing security for present and future indebtedness constitutes a pledge, not a dation in payment, and does not extinguish the assignor’s liability on subsequently executed promissory notes, even where the assignment uses language of absolute conveyance. The creditor need not first exhaust the assigned receivables before suing the debtor-pledgors on the principal obligation.

Anastacio Teodoro, Jr. executed a Deed of Assignment of Receivables in favor of Manila Banking Corporation on January 24, 1964, covering P44,635.00 in receivables from the Emergency Employment Administration (EEA). The assignment was stated to be in consideration of existing and future credit accommodations extended by the bank and as security for payment of those sums. Over two years later, in April, May, and June 1966, the Teodoros—father Anastacio, Sr. and son Anastacio, Jr., and the son’s wife Grace Anna—obtained loans from the bank evidenced by three promissory notes. The loans were extended on the strength of contracts the Teodoros had with the EEA for the fabrication of fishing boats. The EEA was abolished and succeeded by the Philippine Fisheries Commission, which failed to pay the Teodoros despite their compliance with the contracts. The bank’s president attempted to collect from the Commission, but no payment was made. The promissory notes fell due and remained unpaid.

• The Promissory Notes: On April 25, 1966, defendants Anastacio Teodoro, Jr. and Grace Anna Teodoro, together with Anastacio Teodoro, Sr., jointly and severally executed Promissory Note No. 11487 in favor of plaintiff Manila Banking Corporation for P10,420.00, payable in 120 days at 12% interest per annum. On May 3, 1966 and June 20, 1966, Anastacio Teodoro, Sr. and Anastacio Teodoro, Jr. executed Promissory Notes Nos. 11515 (P8,000.00) and 11699 (P1,000.00) on the same terms. The notes stipulated that unpaid interest would be added to the principal and bear interest at 12% per annum, and that in case of collection through an attorney, the makers would pay 10% of the amount due as attorney’s fees, with a minimum of P200.00. Partial payment was made only on Note No. 11515. As of September 30, 1969, the unpaid balance on Note No. 11487 stood at P15,037.11 (principal, accrued interest, and service charge), while the combined balance on Notes Nos. 11515 and 11699 was P8,934.74.

• The Deed of Assignment of Receivables: On January 24, 1964—more than two years before the promissory notes were executed—Anastacio Teodoro, Jr. executed a Deed of Assignment in favor of the bank, transferring his receivables from the Emergency Employment Administration (EEA) in the sum of P44,635.00. The deed stated it was “for and in consideration of certain credits, loans, overdrafts and other credit accommodations extended to defendants as security for the payment of said sum and the interest thereon.” The assignor “remise[d], release[d] and quitclaim[ed]” all rights, title, and interest in the receivables. It further provided that title and right of possession remained in the assignee, who could collect directly from the debtor; the assignor guaranteed the existence, legality, and punctual payment of the receivables; and the assignment would “stand as a continuing guaranty for any and all whatsoever there is or in the future there will be justly owing from the Assignor to the Assignee.”

• Non-Payment and Demand: The parties stipulated that the bank extended the loans on the basis of the defendants’ contracts with EEA for the fabrication of fishing boats, that the Philippine Fisheries Commission succeeded EEA, and that the Commission failed to pay the defendants despite the latter’s compliance. The bank president took steps to collect from the Commission, but no collection was effected. Demands on the defendants for payment of the notes went unheeded, prompting the bank to file the collection suit.

• Judicial Remaking of Contract: Appellants argued that the trial court’s decision amounted to a judicial remaking of the contract between the parties in violation of law, tantamount to lack or excess of jurisdiction. They contended that the Deed of Assignment was a quitclaim in consideration of their indebtedness, not a mere guaranty, pointing to the language “remise, release and quit-claim” and the clause that title and right of possession remained in the assignee, who was to collect directly from the debtor with the assignor acting only as agent and representative.

• Exhaustion of Remedies: Appellants maintained that the bank should have first exhausted all legal remedies against the Philippine Fisheries Commission before proceeding against them, as the assignment transferred full ownership of the receivables to the bank.

• Nature of the Assignment: Appellee bank countered that the assignment was intended as collateral security for present and future loans—a continuing guaranty—and not as an absolute conveyance in payment. The clause providing that the assignment would stand as a continuing guaranty for whatever sums would be owing, and the fact that the promissory notes were executed long after the assignment, demonstrated that the parties did not intend a dation in payment.

• Exhaustion Not Required: Appellee asserted that because the assignment served merely as security, the defendants remained principal debtors on the notes. The bank had attempted collection from the Commission through the Office of the President, but the receivable had become virtually worthless. Requiring further exhaustion against a defunct agency would be futile, and suit directly against the debtors was proper.

• Effect of the Deed of Assignment: Whether the assignment of receivables executed by appellants operated as payment extinguishing their obligations under the subsequently issued promissory notes.

• Exhaustion of Security: Whether appellee bank was required to exhaust all legal remedies against the Philippine Fisheries Commission before suing appellants on the promissory notes.

• Effect of the Deed of Assignment: The assignment of receivables did not transfer ownership to the bank and did not extinguish appellants’ liability on the promissory notes. The character of the transaction was determined by the parties’ intention, not by the language of absolute conveyance. Stipulation No. 9 of the deed expressly made the assignment a continuing guaranty for any and all sums justly owing from the assignor to the assignee. At the time the deed was executed in 1964, the promissory notes sued upon did not yet exist; an obligation cannot be extinguished by an assignment that predates the obligation by over two years. For a substituted obligation to extinguish a prior one, it must be declared in unequivocal terms or the old and new obligations must be incompatible on every point, as required by Article 1292 of the Civil Code. In case of doubt, the presumption is in favor of pledge as the lesser transmission of rights and interests. An assignment to guarantee an obligation is in effect a mortgage, not an absolute conveyance of title.

• Exhaustion of Security: The bank was not required to exhaust remedies against the Commission before suing appellants. Because the assignment was merely a security arrangement, appellants remained the principal debtors, not mere guarantors. Article 2058 of the Civil Code, which requires a creditor to exhaust the debtor’s property before proceeding against a guarantor, did not apply. Under Article 2087, when the principal obligation becomes due, the things given in pledge or mortgage may be alienated for payment to the creditor. Appellants were both the principal debtors and the pledgors; resort to one was resort to the other. The bank had attempted to collect on the pledged receivables, but the EEA had been abolished and the Office of the President disapproved collection, rendering the receivables virtually worthless. Further collection efforts against a defunct office would have been futile.

• Assignment of Credit as Security Constitutes Pledge or Mortgage — An assignment of receivables that is intended to secure the payment of a principal obligation constitutes a pledge or mortgage, not an absolute conveyance of title. The assignee acquires the power to enforce the credit to the same extent as the assignor, but title is transferred for the limited purpose of security; the assignee must apply the proceeds to the principal obligation and return any surplus. Language ordinarily importing absolute ownership will not be given that effect if the transaction, viewed with contemporaneous terms, was intended as a security arrangement.

• Character of Transaction Determined by Intention, Not Form — The character of a transaction is determined by the parties’ intention as gathered from the entire document and surrounding circumstances, regardless of the language used or the form of the transfer. If the debt continues in existence and is not discharged by the transfer, the transaction is a pledge. This doctrine was applied in Lopez v. Court of Appeals (114 SCRA 671), which the Court followed.

• Presumption in Favor of Pledge — In case of doubt whether a transaction is a pledge or a dation in payment, the presumption favors pledge as the lesser transmission of rights and interests.

• No Exhaustion Required When Debtor Is Also Pledgor — Article 2058 on the exhaustion of the debtor’s property applies only to a pure guarantor, not to a debtor who is simultaneously the pledgor or mortgagor of the security. Where the debtor and the pledgor are the same person, the creditor may elect to sue directly on the principal obligation without first foreclosing the pledge, especially when the pledged property has become worthless.

• Validity of Assignment as Security Device to Avoid Pactum Commissorium (Concurring Opinion) — A deed of assignment that is absolute in form but intended as security avoids the prohibition on pactum commissorium (Article 2088, Civil Code) by placing the sale of the collateral “up front.” The assignee is burdened with the obligation to apply the proceeds to the debt and to return any surplus, consistent with the defeasible nature of the title transferred.

• “Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the need of the consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. … It may be in the form of a sale, but at times it may constitute a dation in payment … or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without transmitting ownership.” (Quoting Tolentino, Civil Code Commentaries, Vol. 5)

• “The characters of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge.” (Quoting Lopez v. Court of Appeals)

• “In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests.”

• Lopez v. Court of Appeals, 114 SCRA 671 (1982) — Followed. The Supreme Court applied the rule that the character of a transaction is determined by the parties’ intention, and that a transfer intended to secure payment of money is a pledge, not an absolute conveyance, even if the document uses terms of absolute ownership.

• People’s Bank & Trust Co. v. Odom, 64 Phil. 126 (1937) — Followed. An assignment of rights, title, and interest to secure overdrafts was held to be a mortgage, not an absolute conveyance of title, establishing that assignments to guarantee an obligation are in effect mortgage contracts.

• Article 1292, New Civil Code — Applied in holding that for a new obligation to substitute and extinguish an earlier one, the substitution must be declared in unequivocal terms or the obligations must be incompatible on every point. The assignment executed in 1964 could not have extinguished loan obligations that did not exist until 1966.

• Article 2058, New Civil Code — Distinguished. This provision, which prohibits a creditor from suing a guarantor without first exhausting the debtor’s property, was held inapplicable because the appellants were principal debtors, not mere guarantors.

• Article 2087, New Civil Code — Applied. The essence of a pledge or mortgage is that the pledged property may be alienated for payment to the creditor when the principal obligation becomes due. The bank was entitled to proceed against the debtors directly.

• Article 2088, New Civil Code (Pactum Commissorium Prohibition) — Discussed in the concurring opinion. An assignment absolute in form but intended as a security device avoids pactum commissorium by placing the sale upfront, shifting the prohibition against a creditor simply appropriating collateral without foreclosure.

Chief Justice Fernan and Justices Gutierrez, Jr. and Cortes concurred. Justice Feliciano filed a separate concurring opinion, agreeing with the result but emphasizing that the parties’ intention is determined principally by the language of the document itself. The deed’s form of absolute conveyance was qualified by provisions showing an intent that title pass only for the limited purpose of securing a principal obligation—a defeasible title designed to collateralize the debt, which in commercial banking practice avoids the public sale requirement under the pactum commissorium rule.