ADA MAE D. ABELLERA 1-SANCHEZ ROMAN OBLICONCHAPTER 4 1231. Obligations are extinguished: 1. 2. 3. 4. 5. 6.

6. By payment or performance; By the loss of the thing due; By the condonation or remission of the debt; By the confusion or merger of rights of the creditor and the debtor; By compensation; By novation Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition and prescription, are governed elsewhere in this Code. MUTUO DISENSO It is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. May consist of not only in the delivery of money but also the giving of a thing, the doing of an act, or not doing of an act It is the fulfillment of the prestation due, a fulfillment that extinguishes the obligation by the realization of the purposes for which it was constituted Juridical act w/c is voluntary, licit, and made w/ the intent to extinguish an obligation Identical to fulfillment

ELEMENTS OF PAYMENT 1. 2. 3. 4. 5. 6. 7. Persons, who may pay and to whom payment may be made; Thing or object in w/c payment must consist The cause thereof Mode or form thereof Place and time in w/c it must be made Imputation of expenses occasioned by it Special parts w/c may modify the same and the effects they generally produce

BURDEN OF PROVING PAYMENT GENERAL RULE:

DEATH General Rule: Death of either the creditor or the debtor does not extinguish the obligation; obligations, actively and passively, are transmissible to the heirs, except when the law, the stipulations of the parties or nature of the obligation prevents such transmission WANT OF INTEREST OF THE CREDITOR DISPUTABLE PRESUMPTION: Does not extinguish the obligation Money paid by one to another was due to the latter INSOLVENCY REQUISITES OF PAYMENT Does not extinguish an obligation unless it has been judicially declared and a discharge has been given to him. 1. 2. 3. 4. 5. Capacity of the person paying Capacity of the person receiving the payment Delivery of the full amount or the full performance of the prestation Propriety of time, place and the manner of payment Acceptance of the payment by the creditor It devolve supon the debtor who pleads payment or offers such defense to the claim of the creditor rather than on the latter to prove non-payment RECEIPT OF PAYMENT Deemed to be the best evidence of payment (not exclusive)

CLASSIFICATION OF MODES OF EXTINGUISHMENT 1. VOLUNTARY a) PERFORMANCE: i. Payment ii. Consignation b) SUBSTITUTION i. Dacion en pago (conveyance for payment) ii. Novation c) By release agreement i. Agreement subsequent to the constitution of the obligation: Mutual waiver Unilateral waivr Remission ii. Agreement simultaneous to the constitution of the obligation: Resolutory condition Extinctive period INVOLUNTARY a) By reason of subject: i. Confusion ii. Death of the contracting parties in personal obligations b) By reason of the object: i. Loss of the thing due or impossibility of performance c) By failure to exercise i. Extinctive prescription

KINDS OF PAYMENT 1. NORMAL When the debtor voluntarily performs the prestation stipulated ABNORMAL When he is forced by means of judicial proceeding, either to comply w/ the prestation or to pay indemnity

2.

1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. DEBT May refer to an obligation to deliver money, to deliver a thing other than money, to do an act or not to do an act.

2.

WHEN DEBT IS CONSIDERED PAID 1. IDENTITY Means that the very thing or service due must be delivered or performed Means that the prestation must be fulfilled completely Partial or irregular performance will not produce the extinguishment of an obligation as a general rule

Section 1. PAYMENT OR PERFORMANCE 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. CONCEPT OF PAYMENT

GENERAL RULE:

ADA MAE D. ABELLERA 1-SANCHEZ ROMAN There is no payment if there is no complete delivery or performance of the service EXCEPTIONS:

Whoever pays for another may demand from the debtor what he has paid, except that if he paid w/o the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. REASON:

Articles 1234 and 1235 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been strict and complete fulfillment, less damages suffered by the oblige.

Because whenever a 3rd person pays there is a modification of the prestation that is due

PERSONS FROM WHOM THE CREDITOR MUST ACCEPT PAYMENT: First exception to the rule in article 1233 REASON: because in substantial performance, the oblige is benefited The last condition affords a just compensation for the relative breach committed by the obligor 1. 2. 3. Debtor Any person who has an interest in the obligation (ex. Guarantor) A 3rd person who ha sno interest in the obligation when there is stipulation that he can make payment

(Relative Breach) REQUISITES FOR THE APPLICATION OF THE ARTICLE: 1. 2. There must be substantial performance The obligor must be in good faith

EFFECT OF PAYMENT BY A 3RD PERSON 1. IF MADE W/O THE KNOWLEDGE OR AGaINST THE WILL OF DEBTOR The recovery is only up to the extent or amount of the debt at the time of the payment. 3rd person is not subrogated to the rights of the creditor If made with the knowledge of the debtor and consent Payer shall have the rights to reimbursement and subrogation

2.

SUBSTANTIAL PERFORMANCE There must have been an attempt in good faith to perform w/o any willful or intentional departure therefrom. Deviation from the obligation must be slight Omission or defect must be technical and unimportant Must not pervade the whole or be so material that the object w/c the parties intended to accomplish in a particular manner is not attained

RIGHT OF A 3RD PERSON May recover from the debtor the sum so paid out, at least to the extent in w/c the payment may have been beneficial to the debtor

1235. When the obligee accepts the performance, knowing its incompleteness and irregularity, and w/o expressing any protest or objection, the obligation is deemed fully complied with. To constitute a waiver, there must be an intentional relinquishment of a known right. ACCEPT Means to take as satisfactory or sufficient, or agree to an incomplete or irregular performance. Mere receipt of partial payment is not equivalent to the required acceptance of performance as would extinguish the whole obligation; to imply that the creditor accepts partial payment as complete performance, acceptance must be made under circumstances that indicate his intention to consider the performance complete and to renounce claim arising from defect Founded on the principle of estoppel

3rd PERSON; AMOUNT OF RECOVERY General Rule: The 3rd person may recover the full amount he had paid Exception: The law limits the recovery to the amount by which the debtor has been benefited, if the debtor has no knowledge of, or has expressed his opposition to such payment 1237. Whoever pays on behalf of the debtor w/o the knowledge or against the will of the latter, cannot compel the creditor to subrogate him his rights, such as those arising from a mortgage, guaranty and penalty. SUBROGATION Can be availed if the payment is with the consent of the debtor Takes place by virtue of the payment of the credit Payor actually steps into the shoes of the creditor and becomes entitled not only to recover what he has paid, but also o exercise all the rights w/c the creditor could have exercised. Change in the active subject and not a real extinguishment of obligation.

ACCEPTANCE The law considers that then creditor waives his rights; the whole obligation is extinguished

REQUISITES FOR THE APPLICATION OF THE ARTICLE: 1. 2. The oblige knows that the performance is incomplete or irregular He accepts the performance w/o protest or objection

SUBROGATION VS. REIMBURSEMENT SUBROGATION Person who pays for the creditor is put into the shoes of the creditor acquiring not only the right to be reimbursed but also all the rights w/c the creditor could have exercised pertaining to the credit No real extinction of the obligation; only a change of creditor REIMBURSEMENT 3r person entitled by reason of payment has merely the bare right to be refunded w/o the right and guarantees and securities of the original obligation

ESTOPPEL OF CREDITOR Barred from further action for claims A creditor cannot object because of defects in performance resulting from his own acts or directions

1236. The creditor is not bound to accept payment or performance by a 3 rd person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.

ADA MAE D. ABELLERA 1-SANCHEZ ROMAN 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, insofar as the payment has been beneficial to him. NB: If the 3rd persons pays the obligation w/ the KNOWLEDGE and CONSENT of the debtor If the debtor knows that the 3rd person is making the payment but he did not object or did not repudiate the same act at anytime w/ knowledge but does not say anything Payor is entitled for the full reimbursement. If payment was made w/o the knowledge or w/o the consent of the debtor w/ knowledge but w/o consent Reimbursement shall only up to the extent by w/c the debtor was benefited (BENEFICIAL REIMBURSEMENT) Payment made to a 3rd person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: 1. 2. 3. If after the payment, the 3rd person acquires the creditors right; If the creditor ratifies the payment to the 3rd person; If by the creditors conduct, the debtor has been led to believe that the 3rd person had authority to receive the payment.

General Rule: PAYMENT TO A PERSON INCAPACITATED TO ADMINISTER HIS PROPERTY IS NOT VALID. Exception: 1. 2. Such person has kept the thing paid or delivered Such person was benefited by the payment

1238. Payment made by a 3rd person who does not intend to be reimbursed by the debtor is deemed to be a donation, w/c requires the debtors consent. But the payment is in any case valid as to the creditor who has accepted it. There is a valid payment if the creditor accepts even the debtor did not give his consent to the donation

When the creditor is incapacitated to receive payment, this must be made to his legal representative if there is one If there be none, then the debtor may relieve himself of the responsibility by delivering the thing to the court in consignation, by virtue of article 1256. If payment is made to the creditor who is incapacitated, it shall be valid only insofar as it accrued to his benefit. In the absence of this benefit, the debtor maybe made to pay again the by the incapacitated himself when he attains capacity, or his legal representatives during his incapacity. Par.2 GENERAL RULE: Payment to a 3rd person shall be valid insofar as it has redounded to the benefit of the creditormust be proved EXCEPT: 1. 2. 3. Subrogation of the payer in creditors right Ratification by the creditor Estoppels on the part of the creditor

1239. In obligation 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, w/o prejudice to the provisions of article 1427 under the Title on Natural Obligations. FREE DISPOSAL OF THE THING DUE Means that the thing to be delivered must not be subject to any claim or lien or encumbrance of a 3rd peson

CAPACITY TO ALIENATE Means that the person is not incapacitated to enter into contracts and to make disposition of the thing due.

GENERAL RULE: In obligations to give, payment by one who does not have the free disposition of the thing due or capacity to alienate it is not valid. (thing paid can be recovered) 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to received it TO WHOM PAYMENT SHALL BE MADE 1. 2. 3. To the person in whose favor the obligation is constituted (CREDITOR) His successor in interest Any person authorized to receive it Person authorized by the creditor or a person authorized by law to receive the payment Article 1242. Payment in good faith to any person in possession of the credit is valid although such person may not be authorized to receive the payment.

In addition to those enumerated, payment to a 3rd person releases the debtor: 1. 2. When, w/o notice of assignment of the credit, he pays to the original creditor When in good faith he pays to one in possession of the credit

Creditor cannot demand payment anew, if the mistake of the debtor was due to the fault of the creditor. FORMS OF BENEFIT: must be proved a) b) c) Financial Moral Intellectual advantages

When payment is made to the wrong party, the obligation is not extinguished as to the creditor who is w/o fault or negligence even if the debtor acted in outmost good faith AUTHORITY

1242. Payment made in good faith to any person in possession of the credit shall release the debtor. POSSESSION OF CREDIT Possession of credit itself and not merely of the document evidencing the credit. Exception to the rule that the credit must be made to the creditor or his authorized representative

a) b)

Legal-conferred by law Conventional-has beeb given by the creditor himself

ADA MAE D. ABELLERA 1-SANCHEZ ROMAN The person in possession of the credit is neither the creditor nor one authorized by him to received payment but appears to be the creditor Mere holding of a document will not be sufficient Payment to the possessor of the document or title does not necessarily extinguish the credit REQUISITES OF THE ARTICLE: 1. 2. Possession of the credit be legal Payment be in good faith

Presupposes an existing debt w/c is extinguished to the extent of the value of the thing delivered or totally if such is the intention of the parties. The law of sale governs because it may be considered a specie of sale in w/c the amount of money debt becomes the price of the thing alienated. Requires the delivery and transmission of ownership of a thing to the creditor who accepts it as equivalent of payment of an outstanding debt.

REQUISITES OF DATION IN PAYMENT 1. There must be performance of the prestation lieu of payment (animo solvendi) w/c may consist in the delivery of a corporeal thing or a real right or a credit against a 3rd person There must be some difference b/w the prestation due and that w/c is given in substitution (aliud pro alio) There must be an agreement b/w the creditor and debtor that the obligation is immediately extinguished by reason of the performance of a prestation different from that due

1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. Can only be invoked by the creditor who secures the order of retention.

2. 3.

EFFECT OF GARNISHMENT Void as to the party who obtained the attachment or garnishment, to the extent of the amount of the judgment in creditors favor.

CONCEPT OF DATION IN PAYMENT 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 Property given may consist not only of a thing but also of a real right, such as a usufruct or of a credit against a third person It is an onerous contract of alienation because the object is given in exchange of the credit. The provisons on sales regarding warranty against eviction and hidden defects of the thing, are therefore applicable, the debtor being considered as the the vendor (WARRANTIES OF DEBTOR) If the creditor is evicted from the thing given in dation in payment, the original obligation is not revived; but he is entitled o recovery as buyer for breach of warranty (1555)

GARNISHMENT The proceeding for the purpose of subjecting a debtors credit to the payment of his debt to another Takes place when the debtor of the debtor is ordered not to pay the latter so that preference would be given to the latters creditor. It is in the nature of involuntary novation by the substitution of one creditor for another.

1244. The creditor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that w/c is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligees will. 1st paragraph
nd

DATION IN PAYMENT VALID 1. 2. 3. If the creditor consents If it will not prejudice the other creditors If debtor is not judicially declared insolvent

Where debt is in money, the law on sales shall govern DATION ON PAYMENT; EFFECT ON OBLIGATION It extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement consider the thing as equivalent to the obligation, in w/c case the obligation is totally extinguished. No dation in payment where there is no obligation to be extinguished

Refers to real obligation to deliver a specific thing

2 paragraph Refers to personal obligations

EXCEPTIONS: a) b) In case of facultative obligation In case there is another agreement resulting in: -dation in payment(1245) -novation (1291) In case of waiver by the creditor/ when he consents

SALE VS. DATION IN PAYMENT( no absolute confusion in between) In the latter, the obligor who delivers the thing does so for the purpose of releasing himself from the obligation and not as a vendor EFFECTS: If the debtor later proves that he paid by mistake, he can recover not the price by which the thing was apparently conveyed nut the thing itself because the person who received it is solely a creditor. DATION IN PAYMEMT There is pre-existing credit Obligations are extinguished Cause is the Extinguishment of debt or the acquisition of the object in lieu of the credit Less freedom The payment is received before the contract is perfected w/c is to be charged against the debtors debt

a)

1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. SPECIAL FORMS OF PAYMENT 1. 2. 3. 4. Dation in payment Application of payments Payment by cession Tender of payment and consignation

DATION IN PAYMENT The conveyance of ownership of a thing by the debtor to creditor as an accepted equivalent of performance of a monetary obligation. Debt in money is satisfied not by payment of money but by the transmission of ownership of a thing by the debtor to the creditor.

SALE No pre-existing credit Obligations are created Cause/consideration is the price paid or acquisition of the thing More freedom in fixing the price Buyer has still to pay the price

ADA MAE D. ABELLERA 1-SANCHEZ ROMAN Parties deliver and receive the thing Parties deliver and receive the thing as seller and buyer as debtor and creditor

The statutory amounts allowed to a party to an action for his expenses incurred in the action

DATION IN PAYMENT VS. ASSIGNMENT IN ARTICLE 1255 Bothe are substitute forms of performance of an obligation ASSIGNMENT Involves plurality of creditors, and the whole of the property of the debtor

1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in w/c the obligation consists. Neither may the debtor be required to make partial payments. However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former w/o waiting for the liquidation of the latter. The creditor who refuses to accept partial prestations does not incur in delay (mora accipiendi) except when there is abuse of right or if good faith requires acceptance The article does not apply to obligations where there are several subjects or where the various parties are bound under different terms and conditions Joint obligation-one debtor may pay only his share of the obligation and the debtor cannot refuse the partial payment Solidary obligation-any debtor may offer to pay only the portion of the obligation not suspended by the terms or conditions.

DATION IN PAYMENT Does not involve plurality of creditors, nor the whole of the property of the debtor Does not suppose a situation of financial difficulties Merely involves a change of the object of the obligation by agreement of the parties and at the same time fulfilling the same voluntarily.

PLEDGE The transaction is pledge and not dation in payment in case where personal property is delivered to the creditor unless this is clearly the intention of the parties. In case of doubt, the presumption is in favor of pledge, w/c involves a lesser transmission of rights.

GENERAL RULE: Payment shall be complete Exceptions: 1. 2. 3. 4. 5. 6. 7. When there is express stipulation to that effect When the debt is in part liquidated and in part unliquidated When different prestations are subject to different conditions or terms When a joint debtor pays his share or the creditor demands the same When a solidary debtor pays only the part demandable When the parties know that the obligation is to be performed in parts When there is abuse of right or if good faith requires acceptance.

1246. 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. Principle of equity; it supplies justice in cases where there is lack of precise declaration in the obligation of the quality or kind of the thing to be delivered. Maybe waived by the creditor by accepting a thing of inferior quality and by the debtor by delivering a thing of superior quality.

RULE OF THE MEDIUM QUALITY General rule: If the obligation consists in the delivery of a specific thing, the very thing due must be delivered If Generic: The purpose of the obligation and other circumstances shall be taken into consideration to determine the quality or kind of thing to be delivered. If there is disagreement b/w the debtor and the creditor as to the quality of the thing delivered, the court should decide whether it complies with the obligation, taking into consideration the purpose and other circumstances of the obligation. Creditor and debtor may waive the benefit of this article unless the price to be paid is dependent upon quality When the kind and quality cannot be determined w/o a need of a new agreement, the contract is void.

1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency w/c is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action delivered from the original obligation shall be held in abeyance. Deals w/ a mode of extinction of debts Applicable not only to those instruments executed by 3rd persons but also to a note executed by the debtor himself and delivered to the creditor.

CURRENCY STIPULATED Refers to money different from that w/c is the legal tender or legally current in the Philippines

1247. Unless it is otherwise stipulated, the extra judicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the rules of court shall govern. Does not apply to expenses incurred by the creditor in going to the debtors domicile to collect.

RA 529 RA 8183 Repealed RA 529. There is no longer any legal impediment to having obligations or transactions paid in a foreign currency as long as the parties agree to such arrangement.

REASON: Extra-judicial expenses required by the payment shall be borne by the debtor, in the absence of stipulation, because the payment is his duty and inures to his benefit in that he is discharged from the burden of the obligation. JUDICIAL COSTS

LEGAL TENDER

ADA MAE D. ABELLERA 1-SANCHEZ ROMAN Currency w/c a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount. (Blacks Dictionary) Means such currency w/c in a given jurisdiction can be used for the payment of debts, public and private, and in w/c cannot be refused by the creditor. LEGAL TENDER IN THE PHILIPPINES: All coins and notes issued by the BAngko Sentral ng Pilipinas constitute legal tender for all debts, both public or private. Unless otherwise fixed by its monetary board, coins are legal tender for amounts not exceeding P50.00 for denominations of P.25 and above, and in amounts not exceeding P20.00, for denominations of P.10 or less. All coins and bills above P1.00 are valid legal tenders for any amount.

DECREASE OF VALUE OF THE CURENCY DEVALUATION Involves an official reduction in the value of one currency from an officially fixed level imposed by monetary authorities

DEPRECIATION Refers to the downward change in the value of one currency in terms of the currencies of other nations w/c occurs as a result of market forces in the foreign exchange market. Payment shall be made in the place designated in the obligation

1251.

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. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are w/o prejudice to venue under the Rules of court. PLACE WHERE OBLIGATION SHALL BE PAID 1. 2. 3. If there is a stipulation In the place designated No stipulation and the thing to be delivered is specific At the place where the thing was, at the perfection of the contract No stipulation and the thing to be delivered is generic Domicile of the debtor Creditor bears the expenses in going to the debtors place to accept payment

PAYMENT BY MEANS OF INSTRUMENTS OF CREDITS CHECK Not a legal tender EXCEPT IF THE CREDITOR CHOOSES TO ACCEPT. In the mean =time, demandability is suspended until the payment is in cashed. Creditor may refuse to accept unless expressly stipulated

Payment by means of mercantile document does not extinguish the obligation except: 1. 2. They have been cashed They have been impaired through the fault of the creditor.

1250. In case an extraordinary inflation or deflation of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. Applies only when a contract or agreement is involved Does no t apply where the obligation arises from law, independent of contracts like the taking of the private property by the government in the exercise of its power of eminent domain. Applies to cases where extraordinary deflation or inflation f the stipulated currency takes place.

DOMICILE Place of a persons habitual residence

SUBSECTION 1. APPLICATION OF PAYMENTS 1252. He who has various debts of the same kind in favor of one of the same creditor, may declare at the time of making the payment, to w/c of them the same must be applied. Unles the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts w/c are not yet due. If the debtor accepts from the creditor a receipt in w/c an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. APPLICATION OF PAYMENTS The designation of the debt to w/c should be applied the payment made by a debtor who has various debts of the same kind in favor of one and the same creditor.

EXTRAORDINARY INFALTION OR DEFLATION That w/c is unusual or beyond the common fluctuations in the value of the currency, w/c the parties could not have reasonably forseen or w/c was manifestly beyond their contemplation at the time when the obligation was constituted.

INFLATION Sharp sudden increase of money or credit or both w/o a corresponding increase in business transactions. Causes a drop in the value of money, resultin in rise of the general price level There is inflation when there is an increase in the volume of money and credit relative to available goods resulting in the substantial and continuing rise in the general price level.

DEFLATION Reduction in volume and circulation of the available money or credit, resulting in a decline of the general price level; it is the opposite of inflation.

REQUISITES; 1. 2. 3. 4. 5. There must be one debtor and one creditor There must be 2 or more debts Debts must be of the same kind Debts to w/c payment made by the debtor has been applied must be due The payment made must not be sufficient to cover all the debts.

REQUISITES FOR THE APPLICATION OF THE ARTICLE 1. 2. 3. There is an official declaration of extraordinary inflation or deflation from Bangko Sentral ng Pilipinas (BSP) The obligation is contractual in nature Parties expressly agreed to consider the effects of the extraordinary inflation or deflation

APPLICATIONS AS TO DEBTS NOT DUE General rule: It cannot be made.

ADA MAE D. ABELLERA 1-SANCHEZ ROMAN Exceptions: 1. 2. There is a stipulation that the debtor may so apply It is made by the debtor or creditor, as the case may be, for whose benefit the period has been constituted.

1. 2. 3. 4. 5.

RULES ON APPLICATION OF PAYMENTS 1. 2. 3. Debtor has the 1st choice; must indicate at the time of the payment and not afterwards w/c particular debt is being paid Right to make application once exercised is irrevocable unless the creditor consents to the change. Right to apply payment is not mandatory but merely directory; if the debtor does not apply payment, creditor has the subsidiary right to make the designation by specifying in the receipt w/c debt is being paid. If both have not made the application, debt, w/c is most onerous to the debtor among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. If neither party has exercised its option and there is disagreement as to debts to w/c payment must be applied, the court will apply the payment according to justice and equity of the case taking all te circumstances in consideration.

6. 7. 8.

4.

An interest bearing debt is more onerous A debt as a sole debtor is more onerous than as a solidary debtor All things being equal, older debts are more onerous Debts secured by a mortgage or by pledge are more onerous than unsecured debts Unpaid rentals due from the purchaser of property occupied by him were held more onerous than the balance of the price of the property the provisional sale of which was cancelled by the seller for non-payment of the installments Of two interest-bearing debts, the one w/ a higher rate is more onerous An obligation w/ a penalty clause is more burdensome than one w/o penalty clause. If the debts are subject to different burdens that it cannot be definitely determined w/c debt is most onerous to the debtor, the payment should be applied to all of them proportionately.

SUBSECTION 2. - Payment by Cession

5. 6.

Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws. (1175a) Refers to voluntary or contractual assignment w/c requires the consent of all the creditors as distinguished from legal or judicial assignment w/c is governed by the Insolvency Law. It merely involves a change of the object of the obligation by agreement of the parties and at the same time fulfilling the same voluntarily.

1252-1254 Apply to a person owing several debts of the same kind to a single creditor.

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. (1173) INTEREST EARNED PAID AHEAD OF PRINCIPAL Rule is mandatory Debtor cannot choose to credit his principal before the interest is paid If the rule is subject to any agreement b/w the parties or to waiver by the creditor, it merely directory

PAYMENT BY CESSION It is the assignment or abandonment of all the properties of the debtor for the benefit of his creditors in order that the latter may sell the same and apply the proceeds thereof to the satisfaction of their credits.

REQUISITES OF PAYMENT BY CESSION 1. 2. 3. 4. There must be 2 or more creditors The debtor must be partially insolvent The assignment must involve all the properties of the debtor The cession must be accepted by the creditors

INTEREST TO BE PAID a) b) Interest by way of compensation Interest by way of damages by wy of default

EFFECT OF PAYMENT BY CESSION Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application can not be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (1174a) The assignment does not make the creditors the owners of the property of the debtor and the debtor is released from his obligation only up to the net proceeds of the sale of the property assigned. The debtor is still liable if there is balance

EXCEPTION: There is a stipulation to the contrary

In case no application of payment has been made by the debtor and the creditor Payment shall be made to the most onerous debt, and if the debts are the same nature and burden, to all of them proportionately. DATION IN PAYMENT VS. CESSION DATION IN PAYMENT There is usually only one creditor Does not presuppose the insolvency of the debtor or a situation of financial difficulties Does not involve all the property of the debtor The creditor becomes the owner of the thing given by the debtor An act of novation CESSION There are several creditors Debtor is insolvent at the time of the assignment Extends to all the property of the debtor subject to execution Creditors only acquire the right to sell the thing and apply the proceeds to their credits pro rata Not an act of novation

MORE ONEROUS DEBT When it is more burdensome to the debtor. Does not apply if the debtor has used application of payment.

GUIDES TO DETERMINE WHETHER ONE DEBT IS MORE BURDENSOME THAN THE ANOTHER

ADA MAE D. ABELLERA 1-SANCHEZ ROMAN Only the specific creditors consent All creditors consent is needed Extinguish the obligation and Extinguishes only the credits to the releases the debtor extent of the amount realized from the properties assigned, unless otherwise provided

3.

Must be actually made

PROOF OF TENDER OF PAYMENT Must be proved by the debtor in proper case When tender is not required, only prior notice to interested persons of the consignation need be proved.

Both are substitute forms of payment or performance and governed by the law on sales. SUBSECTION 3. - Tender of Payment and Consignation

WHEN TENDER OF PAYMENT NOT REQUIRED 1. 2. creditor does not accept payment w/o legal justification if it is useless to offer or tender payment

Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases: (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. (1176a) TENDER OF PAYMENT It is the act on the part of the debtor, of offering to the creditor the thing or amount due. The debtor must show that he has in his possession the thing or money to be delivered at the time of the offer. An act preparatory to consignation, w/c is the principal, and from w/c are derived the immediate consequences w/c the debtor desires or seeks to obtain.

Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (1177) PRIOR NOTICE TO PERSONS INTERESTED REQUIRED in the absence of such, the consignation, as payment, shall be void. PURPOSE: to give the creditor a chance to reflect on his previous refusal to accept payment considering that the expenses of consignation shall be charged against him and that in case of loss of the thing consigned, he shall bear the risk thereof

CONSIGNATION MUST COMPLY WITH PROVISIONS ON PAYMENT 1. one of the rules is that payment should be made in legal tender

In case of refusl of tender of payment of a judgment, the court may direct the money to be paid into court, and after this payment is done, order satisfaction of judgment to be entered. Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. (1178) CONSIGNATION MUST BE MADE W/ PROPER JUDICIAL AUTHORITY AND NOT ELSEWHERE. CONSIGNATION AHS RETROACTIVE EFFECT the payment is deemed to have been made at the time of the deposit of the thing in court or when it was placed at the disposal of the judicial authority. RATIONALE: to avoid making the performance of an obligation more onerous o the debtor by reason of causes not imputable to him After the consignation has been made, the interested parties must also be notified thereof Perpose of the 2nd notice is to enable the creditor to w/draw the thing or sum deposited or take possession in case he accepts the consignation Is an incident to an action to compel acceptance by the creditor of payment of a debt

CONSIGNATION It is the act of depositing the thing or amount due w/ the proper court when the creditor does not desire, or refuses to accept payment, or cannot receive it, after complying with the formalities required by law. It is always judicial and it generally requires a prior tender of payment w/c is by its very nature extrajudicial. A facultative remedy w/c the debto may or may not avail of Produces the effect of payment and extinguishes an obligation; to avoid the performance of an obligation more onerous o the debtor by reason of causes not imputable to him.

REQUISITES OF VALID CONSIGNATION 1. 2. 3. 4. 5. Existence of a valid debt w/c is due Tender of payment by the debtor and refusal w/o justifiable reason by the creditor to accept it Previous notice of consignation to persons interested in the fulfillment of the obligation Consignation of the thing or sum due Subsequent notice of consignation made to the interested parties

Absence of any of the requisites is enough ground to render consignation ineffective. Compliance w/ the requirements is mandatory EXISTENCE OF VALID DEBT A creditor-debtor relationship must exist between the parties otherwise the legal effects thereof cannot be availed of.

PROPERTY DEPOSITED W/ COURT EXEMPT FROM ATTACHMENT It is a well-established doctrine in practically every jurisdiction that money deposited w/ a clerk of court is exempt from attachment and not subject to execution. It is said to be in custodial egis and cannot be w/drawn w/o an express order of the court.

REQUIREMENTS FOR VALID TENDER OF PAYMENT 1. 2. Must comply w/ the rules on payment Must be unconditional and for the whole amount

Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1178)

ADA MAE D. ABELLERA 1-SANCHEZ ROMAN REASON: The consignation is made necessary because of the fault or unjust refusal of the creditor Except: If the consignation is not properly made; debtor shall be the one liable CONSIGNATION DEEMED PRPERLY MADE 2. 3. When the creditor accepts the thing or sum deposited, w/o objection, as payment of the obligation When the creditor questions the validity of the consignation, and the court, after hearing, declares that it has been properly made When the creditor neither accepts nor questions the validity of the consignation, and the court after hearing, orders the cancellation of the obligation

SECTION 2. - Loss of the Thing Due

Art. 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (1182a) WHEN A THING CONSIDERED LOST 1. 2. 3. When it perishes Goes out of commerce Disappears in such a way that its existence is unknown or it cannot be recovered

4.

LOSS OF A DETERMINATE THING The creditor may accept the consignation w/ reservation or qualification; therefore, he is not barred from raising the claims he reserved against the debtor. Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. 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. (1180) The observance of all the requisites of consignation operates as a valid payment; hence, the debtor can move for the cancellation of the obligation by the court The debtor may w/draw: 1. 2. Before the creditor has accepted the consignation Before a judicial declaration that the consignation has been properly made, as he is still the owner of the same. 1. 2. 3. 4. When the law so provides When the stipulation so provides When the nature of the obligation requires the assumption of risk When the obligation to deliver a specific thing arises from a crime Is the equivalent of impossibility of performance in obligations to do referred to in 1266

LOSS OF THE THING DUE Extends to both obligations to give and obligations to do.

WHEN LOSS OF THING WILL EXTINGUISH AN OBLIGATION TO GIVE; REQUISITES 1. 2. 3. The obligation is to deliver a specific or determinate thing The loss of the thing occurs w/o the fault of the debtor The debtor is not guilty of delay

WHEN LOSS OF THE THING WILL NOT EXTINGUISH LIABILITY

Obligation shall continue to remain in force. All expenses are paid by the debtor. The depositor, however, cannot recover the thing or sum w/o express order of restitution. Where all the requisites for a valid consignation have been complied w/, the loss of the thing or amount consigned occurring w/o the fault of the debtor before the acceptane of the consignation by the creditor or its approval by the court is for the account of the creditor Art. 1261. 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. (1181a) EFFECT OF W/DRAWAL W/ AUTHORITY OF CREDITOR Since consignation is for the benefit of the creditor, he may authorize the debtor to w/draw the deposit after he has accepted the same or after the court has issued an order cancelling the obligation. As far as the debtor and the creditor are concerned, their relations will remain as they were before acceptance or cancellation Creditor shall lose every preference w/c he may have over the thing, and the co- debtors, guarantors and sureties, shall be released Solidary debtors are released only from their solidary liability, but not from their shares of the obligation (they are also principal debtors)

Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. (n) EFFECT OF LOSS OF A GENERIC THING The debtor can still be compelled to deliver a thing of the same kind. The creditor, however, cannot demand a thing of superior quality and neither can the debtor deliver a thing of inferior quality

Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (n) EFFECT OF PARTIAL LOSS OF SPECIFIC THING The court is given the discretion, in case of disagreement b/w the parties, to determine whether under the circumstances it is so important in relation to the whole as to extinguish the obligation. The court will decide whether the partial loss is such as to be equivalent to a complete or total loss.

There is a partial loss when only a portion of the thing is lost or destroyed or when it suffers depreciation or deterioration. Partial loss is the equivalent of difficulty of performance in obligations to do. Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity. (1183a)

ADA MAE D. ABELLERA 1-SANCHEZ ROMAN PRESUMPTION OF FAULT IN CASE OF LOSS OF THING IN POSSESSION OF THE DEBTOR REASON: Because the debtor who has the custody and care of the thing can easily explain the circumstances of the loss. The creditor has no duty to show that the debtor was at fault. It is the debtor who must prove that he was not at fault. The obligor who is not at fault is still liable in case he is guilty of delay or has promised to deliver the same thing to 2 or more persons who do not have the same interest. EXCEPTIONS: In case of natural calamitie Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. (1184a) Exception to the obligatory force of contract. It refers to a case when, w/o the obligors fault, an obligation to do becomes legally or physically impossible.

Authorizes a total or partial release from an obligation, not a modification or revision of the terms and conditions of the contract b/w the parties The court shall either release or not release a party from a contract, but it cannot modify the terms thereof and orede the paries to comply w/ the contract as modified by it.

Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185) EFFECT OF FORTUITOUS EVENT WHERE OBLIGATION PROCEEDS FROM A CRIMINAL OFFENSE Does not exempt the debtor from liability The obligation subsists except when the creditor refused to accept the thing, w/o justification, after it had been offered to him (mora accipiendi) Consignation is not necessary; debtor however , must still exercise due diligence. He is liable for damages if the loss is due to his fault.

EFFECT OF IMPOSSIBILITY OF PERFORMANCE The supervening impossibility of performance will result in the extinction of the debtors obligation after restitution of what he may have received, if any, in advance from the other contracting party. The debtor incurs no liability for his inability to perform.

Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. (1186) RIGHT OF CREDITOR TO PROCEED AGAINST 3RD PERSONS Creditor is given the right to proceed against the 3rd person responsible for the loss There is no need for the assignment by the debtor The rights of action of the debtor are transferred to the creditor from the moment the obligation is extinguished, by operation of law to protect the interest of the latter by reason of the loss.

KINDS OF IMPOSSIBILITY 1. 2. Physical impossibility Legal impossibility

NATURAL IMPOSSIBILITY AND IMPOSSIBILITY IN FACT DISTINGUISHED NATURAL IMPOSSIBILITY Must consist in the nature of the thing to be done and not in the inability of the party to do so; it must appear that the thing to be done cannot by any means be accomplished Goes to the consideration and renders the contract void IMPOSSIBILITY IN FACT In the absence of inherent impossibility in the nature of the thing stipulated to be performed, w/c is only improbable or out of the power of the obligor. It does not

SECTION 3. - Condonation or Remission of the Debt

Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187) CONDONATION OR REMISSION Is the gratuitous renunciation by the creditor of his right against the debtor resulting in the extinguishment of the latters obligation in its entirety or in that part of the same to w/c the renunciation refers A form of donation Bilateral act; requires the acceptance by the debtor. REASON: if the creditor is authorized to impose upon the debtor favors, the remission may be converted into an act of humiliation Creditor may renounce his credit even if it is against the will of the debtor rights may be waived unless the waiver is contrary to law, punlic order, public policy, morals or good customs, or prejudicial to a 3rd person w/ a right recognized by law.

Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (n) GENERAL RULE: Impossibility of performance releases the obligor. Article 1267 is another exception to the obligatory force of a valid and enforceable contract. EFFECT OF DIFFICULTY OF PERFORMANCE The court is authorized to release the obligor in whole or in part. It would be doing violence to the intention of the parties to hold the obligor still responsible. There is an element of the fortuitous event in the situation covered by the article The remedy of the obligor is not annulment but to be released from his obligation, in whole or in aprt Article does not distinguish b/w an active personal obligation to do and a passive personal obligation not to do Also applies to areal obligation to give or deliver a thing

REQUISITES OF CONDONATION OR REMISSION 1. It must be gratuitous It is essential characteristic of remission that it be gratuitous because from the moment it exists, the nature of the act is changed, and becomes: a) Dation in payment, if a thing is received by the creditor instead of the amount due b) Cession, if the assignment of property is fro the benefit of creditors c) Novation, if the object or circumstances of the obligation are changed

10

ADA MAE D. ABELLERA 1-SANCHEZ ROMAN d) Compromise, if what is renounced is a doubtful or litigious right in exchange of other concessions obtained by the creditor. 2. It must be accepted by the obligor 3. The parties must have capacity 4. It must not be inofficious 5. If made expressly, it must comply w/ the forms of donation It is also clear that remission, properly speaking, presupposes that the obligation is and continues to be, demandable at the time of the remission KINDS OF REMISSION 1. As to its extent; a) Complete-covers the entire obligation b) Partial-it does not cover the entire obligation As to its forms: a) Express-made either verbally or in writing b) Implied-can only be inferred from conduct As to its date of effectivity: a) Inter vivos-when it will atke effect during the lifetime of the donor b) Mortis causa-when it will become effective upon the death of the donor. It must comply w/ the formalities of a will

*Debtor or his heirs may prove that the delivery of the document was really made in virtue of payment of the debt and not of remission Art. 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (1189) PRESUMPTION IN CASE DOCUMENT FOUND IN POSSESSION OF DEBTOR That it was voluntarily delivered by the creditor It gives rise to the presumption of remission Give rise to the presumption of payment and only when it is known that indeed there is no payment should there be presumption of remission

2.

Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. (1190) EFFECT OF RENUNCIATION OF PRINCIPAL DEBT ON ACCESSORY OBLIGATION Follows the rule that the accessory folloes the principal

3.

EFFECT OF INOFFICIOUS REMISSION Testamentary dispositions w/c impair the legitime shal be reduced on petition of the heirs insofar as they are inofficios or excessive.

Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. (1191a) General rule: Thing pledged be placed I the possession of the creditor, or of a 3rd person by common agreement. PRESUMPTION IN CASE THING PLEDGED FOUND IN POSSESSION OF DEBTOR

LEGITIME that part of the testators property w/c he cannot dispose of because the law has reserved it for compulsory heirs

Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter. If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (1188) PRESUMPTION OF IMPLIED REMISSION In order that the presumption may be applicable, it is necessary that the delivery of the private document be a voluntary act of the creditor. If the debt is not yet paid, the creditor would need the document to enforce payment. In case he voluntarily delivers it to the debtor, the only logical inference is that he is renouncing his right

Only the accessory obligation of pledge is presumed remitted, not the obligation itself. Debtor shall continue to be indebted but he does not have to return the thing pledged. Presumption yields to contrary evidence

SECTION 4. - Confusion or Merger of Rights

Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (1192a) CONFUSION/MERGER The meeting in one person of the qualities of creditor and debtor w/ respect to the same obligation

REASON/BASIS 4. The law treats confusion or merger as a mode of extinguishing obligations because if a debtor is his own creditor, enforcement of the obligation becomes absurd since a person cannot claim payment from himself. When there is a confusion of rights, the purposes for w/c the obligation may have been created are deemed realized.

EXCEPTION: Contrary evidence EXTENT OF REMISSION If the obligation is joint, the presumption of remission, when applicable, pertains only to the share of the debtor who is in possession of the document; if solidary, to the total obligation Applicable only to private document *The renunciation of the action w/c the creditor had against the debtor may be nullified by a showing that the waiver is inofficious. *The remission becomes null and void upon proof that it is inofficious. 5.

REQUISITES OF CONFUSION 1. 2. It must take place b/w the principl debtor and creditor It must be complete and definite

EXTINCTION OF REAL RIGHTS BY CONFUSION When any of such rights is merged w/ ownership w/c is most comprehensive real right. Merger results in what is denominated as consolidation of ownership.

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ADA MAE D. ABELLERA 1-SANCHEZ ROMAN Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193) EFFECT OF MERGER IN THE PERSON OF PRINCIPAL DEBTOR OR CREDITOR. Extinguishes the obligation

There is only one person who is a creditor and debtor himself There is one obligation There is impossibility of payment

There are 2 persons involved, each of whom is a debtor and a creditor of the other There are 2 obligations There is indirect payment There may be compensation in joint and solidary obligations

EFFECT OF MERGER IN THE PERSON OF GUARANTOR While it extinguishes the guaranty, it leaves the principal obligation in force.

COMPENSATION AND PAYMENT DISTIGUISHED COMPENSATION Takes effect by operation o law It is not required that the parties have the capacityto give or to receive, as the case maybe The law permits partial extinguishment of the obligation PAYMENT Takes effect by act of the parties Parties must have the free disposal of the thing due and capacity to alienate it and to receive payment, as the case maybe. It is necessary that it be complete and indivisible

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (1194) CONFUSION IN A JOINT OBLIGATION The confusion will extinguish only the share corresponding to the creditor or debtor in whom the 2 characters concur.

COMPENSATION AND COU NTERCLIM DISTINGUISHED COMPENSATION Takes place by mere operation of law and extinguishes reciprocally the 2 debts as soon as they exist simultaneously, to the amount of their respective sums Requires that both debts consist in money or if the things due are consumable, the be of the same kind and quality Requires that the 2 debts must e liquidated CONTERCLAIM Must be pleade to be effectual

CONFUSION IN A SOLIDARY OBLIGATION Merger in the person of one of the solidary debtors shall extinguish the entire obligatiuon because it is also a merger in the other solidary debtors. There is only one obligation and every debtor is individually responsible for the payment of the whole obligation.

Such requirement is not provided

SECTION 5. - Compensation

There is no such requirement

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195) COMPENSATION The extinguishment to the concurrent amount of the debts of two persons who, in their own right, are reciprocally principal debtors and creditors of each other. Involves the simultaneous balancing of 2 obligations in order to totally extinguish them if they are of the same amount or to the extent in w/c the amount of one is covered by that of the other, if of different amounts.

KINDS OF COMPENSATION 1. By its effect or extent: a) Total-both obligations are of the same amount and are entirely extinguished b) Partial-2 obligations are of different amounts and a balance remains; extinctive effect of compensation will be partial only as regards the larger debt. By its cause or origin: a) Legal-by operation of law when all requisites are present even w/o knowledge of the parties b) Conventional or voluntary-by agreement of the parties c) Judicial-by order from a court in a litigation; merely a form of legal or voluntary compensation when declared by courts by virtue of an action by one of the parties, who refuses to admit it, and by the defense of the other who invokes it d) Facultative-by one of the parties

2.

OBJECT AND IMPORTANCE OF COMPENSATION OBJECT OF COMPENSATION The prevention of unnecessary suits and payments thru the mutual extinction by operation of law of concurring debts. Specie of abbreviated paymet w/c gives to each of the paries a double advantage: a) Facility of payment-avoids the employment of enumeration b) Guaranty for the effectiveness of credit-if one of the parties pays w/o waiting to be paid by the other Supposes a more convenient and less expensive realization of 2 payments, meriting, therefore, the name of simplified payment by w/c it is often called Increasing in its application because the extension and importance of credit and the rapid circulation of credit documents make normal and frequent the situation where 2 persons become reciprocally creditors and debtors. The economic utility of compensation are such that they have induced the creation of special establishments carrying its name, such as clearing house or chamber de compensation Serves as a guaranty against fraud assuring the enforcement of some credits w/c otherwise may not be enforced

Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196) REQUISITES OF LEGAL COMPENSATION 1. The parties are principal creditors and principal debtors of each other

COMPENSATION ND CONFUSION DISTINGUISHED CONFUSION COMPENSATION

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ADA MAE D. ABELLERA 1-SANCHEZ ROMAN 2. Both debts consist in a sum of money or of consumable things of the same kind and quality 3. That the 2 debts are due or demandable 4. The two debts are liquidated 5. No retention or controversy has been commenced by a 3rd person. Absent any showing that all these requisites are present, compensation may not take place Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. (1197) COMPENSATION BENEFITS GUARANTOR The article is an exception to the general rule that only the principal debtor can set up against his creditor what the latter owes him Although the guarantor is only subsidiary, not principally bound, he is given the right to set up compensation

Valid until they are judicially rescinded or avoided. Prior to rescission or annulment, debts may be compensated against each other.

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (1198a) WHERE COMPENSATION HAS TAKEN PLACE BEFORE ASSIGNMENT Debts are extinguished to the concurrent amount If subsequently, the extinguished debt is assigned by the creditor to a 3rd person, the debtor can raise the defense of compensation w/ respect to the debt. Remedy of the assignee is against the assignor Right to compensation may be waived by the debtor before or after the assignment

REASON: Extinguishment of the principal obligation as a consequence of compensation carries w/ it the accessory obligations such as guaranty.

Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. (n) TOTAL AND PARTIAL COMPENSATIONS TOTAL Applies when the 2 debts are of the same amount; if they are of different amounts, compensation is total as regards the smaller debt, and partial only w/ respect to the larger debt. 1. 2. 3. Where the assignment is made w/ the consent of the debtor The assignment is made w/o the consent but w/ the knowledge of the debtor The assignment is w/o the knowledge of the debtor Applies to all the different kinds of compensation WHERE COMPENSATION HAS TAKEN PLACE AFTER ASSIGNMENT 3 cases of compensation after an assignment of rights made by the creditor

Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n) VOLUNTARY COMPENSATION Exception to the general rule that only debts w/c are due and demandable can be compensated Includes any compensation w/c takes place by agreement of the parties even if all the requisites for legal compensation are not present It is sufficient that the contract of the parties is valid.

Art. 1286. Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. (1199a) COMPENSATION WHERE DEBTS PAYABLE AT DIFFERENT PLACES Applies to legal compensation The indemnity does not refer to the difference in the value of the things in their respective places but to the expenses of monetary exchange and expenses of transportation

ONLY REQUISITES: 1. 2. Each of the parties has the right to dispose of the credit he seeks to compensate They agree to the mutual extinguishment of their credits.

FOREIGN EXCHANGE The conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another

Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. (n) JUDICIAL COMPENSATION When so declared by a final judgment of a court in a suit. Both parties must proved their respective claims, otherwise, offsetting is improper

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a) Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (n) INSTANCES WHEN LEGAL COMPENSATION NOT ALLOWED 1. Where one of the debts arises from a depositum Deposit is constituted from the moment a person receives a thing belonging to another w/ the obligation of safely keeping it and of returning the same

Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (n) COMPENSATION OF RESCISSIBLE OR VOIDABLE DEBTS RESCISSIBLE AND VOIDABLE OBLIGATIONS

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ADA MAE D. ABELLERA 1-SANCHEZ ROMAN DEPOSITUM- a loan w/c creates the relationship of the debtor and creditor 2. Where one of the debts arises from a commodatum Commodatum is a gratuitous contract whereby one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. Where one of the debts arises from a claim for support due by gratuitous title Support comprises everything that is indispensable for sustenance, dwelling, clothing, medical attendance, education and transportation, in keeping w/ the financial capacity of the family. Where one of the debts consists in civil liability arising from a penal offense

3.

It is the substitution or change of an obligation by another, w/c extinguishes or modifies the first, either by changing its object or principal conditions, or by substituting another in the place of the debtor, or by subrogating a 3rd person in the rights of the creditor. Juridical act w/ dual function. It does not operate as an absolute extinction in the sense that it ends w/ the extinguishment of an obligation but only as a relative extinction because it creates a new one in place of the old w/c is thus only modified.

DUAL FUNCTION/PURPOSE OF NOVATION 1. Dependent on the nature of the change and the intention of the parties EXTINCTIVE When an old obligation is terminated by the creation of a new obligation that takes the place of the former because of the total incompatibility b/w the 2 obligations. TWIN EFFECTS: first, extinguishing an existing obligation ; 2nd,creating a new one in its stead. MODIFICATORY The new agreement will not have the effect of extinguishing but merely supplement it or supplant some but not all of its provisions Obligation subsists to the extent it remains compatible w/ the amendatory agreement.

4.

Art. 1289. If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation. (1201) RULES ON APPLICATION OF PAYMENTS APPLICABLE TO ORDER OF COMPENSATION 2. COMPENSATION is similar to payment. If a debtor has various debts w/c are susceptible of compensation, he must inform the creditor w/c of them shall be the object of compensation. In case he fails to do so, then the compensation shall eb applied to the most onerous obligation. Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (1202a) CONSENT OF PARTIES NOT REQUIRED IN LEGAL COMPENSATION 1. Compensation occurs automatically by mere operation of law. Even in the absence of agreement b/w the parties and even against their will Extinguishes reciprocally both debts as soon as they exist simultaneously, to the amount of their respective sums. Takes place ipso jure from the day all the necessary requisites concur, w/o need of any conscious intent on the part of the parties and even w/o their knowledge, at the time of the co-existence of such cross debts. Passage of a subsequent law will not forestall legal compensation that had taken place before its effectivity. Takes place even against the will of the interested parties. Full legal capacity of parties not required On the other hand, in order that there may be a valid payment, the parties must have the valid disposal of the thing due and capacity to alienate it and to receive payment as the case maybe.

KINDS OF NOVATION 1. According to origin: a) Legal-by operation of law b) Conventional-by agreement of the parties According to how its constituted: a) Express-declared in unequivocal terms b) Implied-the old and the new obligations are essentially incompatible w/ each other According to the extent or effect: a) Total/extinctive-old obligation is completely extinguished b) Partial/modificatory-old obligation is merely modified According to the subject: a) Real or object object or principal conditions of the obligation are changed b) Personal or subjective-person of the debtor is substituted and/ or when a 3rd person is subrogated in the rihts of the creditor c) Mixed-object or principal condition of the obligation and the debtor or the creditor or both of the parties, are changed. It is a combination of a real and personal novations

2.

3.

4.

2.

COMPENSATION, MATTER OF DEFENSE SECTION 6.NOVATION Art. 1291. Obligations may be modified by: (1) Changing their object or principal conditions; (2) Substituting the person of the debtor; (3) Subrogating a third person in the rights of the creditor. (1203)

Art. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (1204) REQUISITES OF NOVATION 1. 2. 3. 4. The existence of a previous valid obligation; The intention or agreement and capacity of the parties to extinguish or modify the obligation; The extinguishment or modification of the obligation; and The creation or birth of a valid new obligation

NOVATION The total or partial extinction of an obligation through the creation of a new one w/c substitutes it.

There can be novation unless 2 distinct and successive binding contracts take place. b/w the same parties w/ the 2nd designed to replace the preceding convention

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ADA MAE D. ABELLERA 1-SANCHEZ ROMAN NOVATION OF JUDGMENT The novation of a contract or judgment maybe subject to a suspensive condition. NOVATION W/ RESPECT TO CRIMINAL LIABILITY Novation is not a mode of extinguishing criminal liability. It may prevent the rise of criminal liability as long as it occurs prior to the filing of Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a) KINDS OF PERSONAL NOVATION 1. 2. the criminal information in court. In other words, novation does not extinguish criminal liability but may only prevent its rise. NOVATION NOT PRESUMED 1. Genrule: No form of words or writing is necessary to give effect to a novation but it must be clearly and unmistakably established by express agreement or by the acts of the parties, as novation is never presumed. Even if novation were sufficiently shown, the presumptive rule is that the conditions attaced to the old obligation also attach to the new obligation. 2 WAYS OF EFFECTING CONVENTIONAL NOVATION 1. 2. By the express agreement of the parties or acts of equal or equivalent import By the irreconcilable incompatibility of the 2 obligations w/each other in every material respect. 2. EXPROMISSION That w/c takes place when a 3rd person of his own initiative and w/o the knowledge or against the will of the original debtor assumes the latters obligation w/ the consent of the creditor. It logically requires the consent of the 3rd person and the creditor. It is essential that the old debtor be released from his obligation; otherwise, there is no expromision DELEGACION That w/c takes place when the creditor accepts a 3rd person to take the place of the debtor at the instance of the latter. The creditor may w/hold approval. In delegacion, all the parties, the old debtor, the new debtor and the creditor must agree Substitution when the person o the debtor is substituted Subrogation when a 3rd person is subrogated in the rights of the creditor

KINDS OF SUBSTITUTION

Thus, to effect an objective novation, it is imperative that the new obligation expressly declares that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible w/ the new one. To effect a subjective novation by a change in the person of the debtor, it is necessary that the old debtor be released expressly from the obligation and the 3rd person or new debtor assumes his place in the relation. There is no novation w/o such release as the 3rd person who assumed the debtors obligation becomes merely a co-debtor or surety. There could be novation if the parties in the new contract are not the same parties in the old contract. BURDEN OF SHOWING NOVATION The burden lies on the party who asserts its existence INCOMPATIBILITY B/W 2 OBIGATIONS OR CONTRACTS Changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in any of the essential elements of the obligation, such as its object, cause or principal conditions; otherwise, the change is merely modificatory and insufficient to extinguish the original obligation. EFFECTS OF MODIFICATIONS OF ORIGINAL OBLIGATION 1. Slight modifications and variations When made w/ the consent of the parties, they do not abrogate the entire contract and the rights and obligations of the parties thereto, but the original contract continues in force except as the altered terms and conditions of the obligation are considered to be the essence of the obligation itself. This is esp. true where the originl contract expressly provides that such modifications and alterations may be made. Material deviation or changes Where the original contract is deviated from in material respects so that the object or principal condition cannot reasonably be recognized as that originally contracted for, the original contract should be treated as abandoned.

In either of the 2 modes of substitution, the consent of the creditor is an indispensable requirement. RIGHT OF NEW DEBTOR WHO PAYS 1. 2. In expromision, the payment by the new debtor gives him the right to beneficial reimbursement(1236) If the payment was made w/ the consent of the original debtor or on his own initiative, the new debtor is entitled to reimbursement and subrogation (1237)

ACCEPTANCE BY CREDITOR OF PAYMENT FROM A 3RD PERSON It does not imply the extinguishment of the liability of the 1st debtor. Novation is never presumed; thus, the mere fact that the creditor receives a guaranty or accepts payment from a 3rd person who has agreed to assume the obligation, when there is no agreement that the 1st debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. This rule applies to a surety bond w/c is not a new and separate contract but an accessory of the principal obligation. CONSENT OF CREDITOR NECESSARY TO SUBSTITUTION 1. 2. Substitution implies waiver by creditor of his credit Substitution may be prejudicial to creditor Based on simple consideration of justice since the consequence of the substitution may be prejudicial to the creditor and such prejudice may take the from of delay in the fulfillment of the obligation or contravention of its tenor or non-performance thereof by the new debtor by reason of his financial inability or insolvency Creditor has right to refuse payment by 3rd person w/o interest in obligation Consistent w/ the rule that a creditor cannot be compelled to accept payment or performance by a 3rd person who has no interest in the fulfillment of the obligation. The creditor, however, may accept, if he so wishes, payment from a 3rd party. Mere acceptance of payments for the benefit of a debtor whose obligation the 3rd party has assumed, in the absence of facts unmistakably showing an intention to make the 3rd party alone liable, does not constitute a novation

3.

2.

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ADA MAE D. ABELLERA 1-SANCHEZ ROMAN consisting in the substitution of a new debtor in lieu of the old one. 4. Involuntary novation by substitution of debtor By means of garnishment w/c is a species of attachment. The remedy is merely a case of involunatary novation by the substitution of one creditor for another. SUBSTITUTE MUST BE PLACED IN THE SAME POSITION OF ORIGINAL DEBTOR Article 1293 means that it is not enough to extend the juridical relation to that other person, but it is necessary to place the latter in the same position occupied by the original debtor who is released from the obligations.

GENREAL RULE: The extinguishment of the principal obligation carries w/ it that of the accessory obligations EXCEPTION: In the case of an accessory obligation created in favor of a 3rd person w/c remains in force unless said 3rd person gives his conset to the novation. This is so bec. A person should not be prejudiced by the act of another w/o his consent. Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. (n) EFFECT WHERE THE NEW OBLIGATION VOID Article 1297 stresses one of the essential requirements of a novation, to wit: the new obligation must be valid.

Consequently, the obligation contracted by a 3rd person to anwer fro the debtor, as in the case of suretyship, in the last analysis, does not work as a true novation, bec. The 3rd person is not put in the same position as the debtor-the latter continues in his same place and w/ the same obligation w/c is guaranteed by the former. Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor's insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the original debtor. (n) Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when the delegated his debt. (1206a) EFFECT OF NEW DEBTORS INSOLVENCY OR NON-FULFILLMENT OF OBLIGATION. 1. In expromision Under 194, the new debtors insolvency or nonfulfillment of the obligation will not revive the action of the creditor against the old debtor whose obligation is extinguished by the assumption of the debt by the new debtor. Remember that in expromision, the replacement of the old debtor is not made at his own initiative Even if the substitution is w/ the knowledge or consent of the original debtor, he is no longer liable. Article 1295 applies if the new debtor has been proposed by the original debtor and accepted by the creditor. In delegacion Article 1295 refers to delegaciob. It must be noted that the article speaks only of insolvency. If the nonfulfillment of the obligation is due to other causes, the old debtor is not liable.

General rule: There is no novation if the new obligation is void and therefore, the original one shall subsist for the reason that the 2nd obligation being inexistent, it cannot extinguish or modify the first. Exception: Where the parties intended that the old obligation should be extinguished in any event. EFFECT WHERE THE NEW OBLIGATION VOIDABLE If the new obligation is only voidable, novation can take place. But the moment it is annulled, the novation must be considered as not having taken place, and the original one can be enforced, unless the intention of the parties is otherwise. Art. 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor or when ratification validates acts which are voidable. (1208a) EFFECT WHERE THE OLD OBLIGATIO VOID OR VOIDABLE A void obligation cannot be novated because there is nothing to novate. However, if the original obligation is only voidable, the novation is valid Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (n) PRESUMPTION WHERE ORIGINAL OBLIGATION SUBJECT TO A CONDITION If the first obligation is subject to asuspensive or resolutory condition, the 2nd obligation is deemed subject to the same condition unless he contrary is stipulated by the parties in their contract. REASON: The efficacy of the new obligation depends upon whether the condition w/c affects the old obligation is complied w/ or not. If the condition is suspensive, and it is not complied with, no obligation arises; and if it is resolutory and it is complied with, the old obligation is extinguished. In either case, one requisite of novation would be wanting. Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. (1209a) SUBROGATION

2.

GENERAL RULE: The old debtor is not liable to the creditor in case of the insolvency of the new debtor. EXCEPTIONS: a) b) The said insolvency was already existing and of public knowledge at the time of the delegacion The insolvency was already existing and known to the debtor at the time of delegacion

The exceptions are intended to prevent fraud on the part of the old debtor. Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. (1207) EFFECT OF NOVATION ON ACCESSORY OBLIGATIONS The substitution of one person in the place of another with reference to a lawful clim or right, so that he who is substituted succeeds to the right of the other in relation to a debt or claim, including its remedies and securities.

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ADA MAE D. ABELLERA 1-SANCHEZ ROMAN It contemplates full substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means w/c the creditor could employ to enforce payment A subrogee cannot succeed to a right not possessed by the subrogor. KINDS OF SUBROGATION

Subrogation takes place by operation of law even w/o the consent of the parties. Subrogation is produced from payment w/c may be w/ or w/o the debtors knowledge or approval. 1. 2. 3. When a creditor pays another creditor who is preffered When a 3rd person w/o interest in the obligation pays w/ the approval of the debtor When a 3rd person w/ interest in the obligation pays even w/o the knowledge of the debtor.

1.

2.

CONVENTIONAL By express agreement of the original parties and the 3rd person Must be clearly established inorder that it my take place Legal w/o agreement but by operation of law not presumed except in the cases expressly provided by law

Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a) EFFECT OF LEGAL SUBROGATION To transfer to the new creditor the credit and all the rights and actions that could have been exercised by the former creditor either against the the debtor or against 3rd persons, be they guarantors or mortgagors. EXCEPT only for the change in the person of the creditor, the obligation subsists in all respects as before the novation Effect of legal subrogation may not be modified by agreement Effects of the conventional subrogation are subject to the stipulation of the parties. There are distinctions b/w the right to be subrogated and the right to reimbursement.

Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. (n) CONSENT OF ALL THE PARTIES IN CONVENTIONAL SUBROGATION 1. 2. 3. DEBTOR-because he becomes liable under the new obligation to a new creditor OLD OR ORIGINAL CREDITOR-because his right against the debtor is extinguished NEW CREDITOR-because he may dislike or distrust the debtor

CONVENTIONAL SUBROGATION AND ASSIGNMENT DISTINGUISHED Articles 1300 and 1301 do noexclude the power of the creditor to transmit his rights w/o the consent of the debtor to another who would then have the right to proceed against the debtor. In this case, there is assignment of credit but no subrogation. ASSIGNMENT OF CREDIT The process of transferring the right of the assignor to the assignee who would then have the right to proceed against the debtor. The assignment may be done gratuitously or onerously in w/c case, it has an effect similar to that of a sale. ASSIGNMENT OF CREDIT There is a transfer of same credit w/c belonged to another and w/c upon being transferred, is not extinguished It does not produce legal effects, his knowledge thereof affecting only th validity of the payment he might make (requirement: mere notice to the debtor) The effects w/ respect to the debtor begin from the date of notification The nullty or defects of the obligation are no remedied because only the correlative right of the obligation is transmitted.

Art. 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. (1213)

EFFECT OF PARTIAL SUBROGATION The creditor to whom partial payment has been made by the new creditor remains a creditor to the extent of the balance of the debt. In case of insolvency of the debtor, he is given a preferential right under the above article to recover the remainder against the new creditor NATURE OF ORIGINAL CREDITORS RIGHT OF PREFERENCE Preference creates simply a right of one creditor to be paid first the proceeds of the sale of the property against another creditor

CONVENTIONAL A credit is extinguished and another appears, w/c the new creditor claims as his own The consent of the debtor is required so that it may fully produce legal effects

The effects begin from the moment all the parties have given their consent The nullity or defects of the previous obligation may be cured by the novation

Art. 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. (1210a) CASES OF LEGAL SUBROGATION

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