Dacion en Pago Without Consent Cannot Nullify Debt Settlement

In a significant ruling on property settlement agreements, the Supreme Court has clarified that a dacion en pago—a mode of payment where a debtor offers property to a creditor to settle an outstanding debt—requires the mutual consent of both parties. The Court's decision in Dao Heng Bank, Inc. v. Spouses Laigo (G.R. No. 173856, November 20, 2008) underscores that without a perfected agreement, a debtor cannot compel a creditor to accept property as payment, nor can a verbal proposal alone nullify a subsequent foreclosure sale.

The Facts of the Case

The Spouses Lilia and Reynaldo Laigo obtained loans from Dao Heng Bank totaling P11 Million, secured by three Real Estate Mortgages over two parcels of land in Quezon City. When the spouses failed to settle their obligation by 2000, they verbally offered to cede one of the mortgaged lots to the bank by way of dacion en pago. The bank commissioned an appraiser to value the properties, with both parties sharing the appraisal fees. However, no further action was taken after the appraisal.

The bank later demanded payment of the outstanding obligation of P10,385,109.92. When the spouses failed to respond, the bank foreclosed on the mortgages, and the properties were sold at public auction to Banco de Oro Universal Bank, the highest bidder.

The spouses then negotiated for redemption of the foreclosed properties, but they never signed the bank's proposed redemption agreement. When the bank moved to consolidate title after the redemption period expired, the spouses filed a complaint seeking to annul the foreclosure and to compel the bank to accept one of the properties via dacion en pago as full payment of their obligation.

The Legal Issue

The central question before the Supreme Court was whether a verbal agreement to settle an obligation through dacion en pago—supported only by an appraisal of the properties—constituted a perfected contract that would bar the bank from foreclosing on the mortgaged properties.

The Court's Ruling

The Supreme Court reversed the Court of Appeals' decision and reinstated the trial court's dismissal of the spouses' complaint. The Court held that dacion en pago requires the mutual consent of both parties to be valid and enforceable.

The Court explained that dacion en pago partakes of the nature of a sale, where the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. As such, the essential elements of a contract of sale—consent, object certain, and cause or consideration—must all be present. The Court emphasized that "common consent is an essential prerequisite, be it sale or novation, to have the effect of totally extinguishing the debt or obligation."

In this case, the Court found no concrete showing that the bank approved the spouses' proposal to settle their obligation via dacion en pago after the appraisal. The delivery of the property titles to the bank was not evidence of partial performance of a dacion agreement, but rather a usual condition for the execution of the mortgage itself—both for security and registration purposes.

The Court also noted that the spouses' subsequent attempt to redeem the foreclosed properties contradicted their claim that a dacion en pago had already been perfected. If a dacion en pago had truly been agreed upon, there would have been no need to negotiate for redemption.

The Role of the Statute of Frauds

The Court also addressed the spouses' argument that partial performance took the agreement out of the Statute of Frauds under Article 1403 of the Civil Code. While partial execution of a contract of sale can take a transaction out of the Statute of Frauds, this exception applies only when the essential requisites of consent, object, and cause are clearly established.

Here, the appraisal of the properties and the sharing of appraisal fees did not amount to partial performance of a perfected dacion en pago. These acts were merely preparatory steps in the negotiation process, not evidence that the parties had reached a meeting of the minds on the terms of the settlement.

Practical Takeaways

• Dacion en pago is not a unilateral right. A debtor cannot compel a creditor to accept property as payment for a debt. The creditor must freely consent to the arrangement.
• A proposal is not a contract. Negotiations, appraisals, and even partial steps toward a dacion en pago do not create a binding obligation unless the parties have agreed on all essential terms.
• Get it in writing. Under the Statute of Frauds, agreements for the sale of real property or an interest therein must be in writing to be enforceable. A written agreement protects both parties and clarifies their intentions.
• Foreclosure is the mortgagee's prerogative. Unless a valid dacion en pago has been perfected, the mortgagee retains the right to foreclose on the property to recover the debt.
• Consistency matters in litigation. A debtor's subsequent attempts to redeem foreclosed property can undermine a claim that a dacion en pago had already extinguished the obligation.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.