Dacion en Pago: When It Extinguishes a Loan and When It Does Not

The Supreme Court, in Casent Realty Development Corp. v. Philbanking Corporation (G.R. No. 150731, September 14, 2007), clarified the scope of a dacion en pago—a mode of extinguishing an obligation by delivering a property to the creditor in full satisfaction of a debt. The case also settled important rules on judicial admissions and demurrers to evidence. For lenders and borrowers alike, the ruling is a reminder that a dacion only covers what the parties clearly intended, and that the rules on pleadings can determine the outcome of a case.

The Facts of the Case

In 1984, Casent Realty executed two promissory notes in favor of Rare Realty Corporation: one for PhP 300,000 with 36% interest per annum, and another for PhP 681,500 with 18% interest per annum. Both carried a 12% penalty for late payment. On August 8, 1986, Rare Realty assigned these notes to Philbanking Corporation through a Deed of Assignment, making Philbanking Casent's creditor.

On August 27, 1986, Casent and Philbanking executed a Dacion en Pago, conveying a Casent property in Iloilo City to the bank "in full satisfaction of its outstanding indebtedness in the amount of P3,921,750.00." Philbanking later issued a Confirmation Statement stating Casent had no loans with the bank as of December 31, 1988.

In 1989, Rare Realty defaulted on its own obligation to Philbanking. The bank then enforced the Deed of Assignment and demanded payment from Casent on the promissory notes. When Casent refused, Philbanking sued for collection.

The Issue

The central question was whether the Dacion en Pago extinguished Casent's liability on the two promissory notes assigned by Rare Realty, or only Casent's direct loan of PhP 3,921,750 from the bank.

A related procedural issue arose: Casent raised the Dacion and Confirmation Statement as defenses in its Answer. Philbanking failed to file a Reply. Under the Rules of Court, when a defense is founded on a written instrument, the adverse party must deny its genuineness and due execution under oath; otherwise, these are deemed admitted.

The Ruling

The Supreme Court held that Philbanking's failure to file a Reply constituted a judicial admission of the genuineness and due execution of the Dacion and Confirmation Statement. These documents should have been considered by the trial court in resolving the demurrer to evidence.

However, the Court clarified that admitting the genuineness and due execution of a document is not the same as admitting the truth of all allegations in the pleading. The admission merely means the signatures are not forged and the document was signed by authorized persons. It does not prevent a party from showing that the document does not cover the obligation in dispute.

Reading the Dacion's plain language, the Court found it "unequivocal": the property was conveyed "in full satisfaction of its outstanding indebtedness in the amount of P3,921,750.00"—referring to Casent's own direct loan from the bank, not the assigned promissory notes. The promissory notes were given as security for Rare Realty's loan from Philbanking. Through the Deed of Assignment, Philbanking merely stepped into the shoes of Rare Realty as Casent's creditor on those notes.

Thus, the Dacion did not extinguish Casent's liability on the two promissory notes. Casent remained liable for PhP 300,000 with 36% interest and 12% penalty, and PhP 681,500 with 18% interest and 12% penalty, plus attorney's fees as stipulated.

Practical Takeaways

• A dacion en pago is a special mode of payment. It extinguishes an obligation only to the extent of what the parties clearly intended. Read the document's language carefully—if it specifies a particular debt, it will not be interpreted to cover other obligations.

• Genuineness and due execution are not admissions of substance. When a party fails to deny a document's genuineness under oath, it only admits that the document is authentic. It does not admit the legal conclusions or defenses pleaded in the answer.

• Demurrers to evidence are decided on the merits. Courts must consider judicial admissions, stipulations, and documents whose genuineness is deemed admitted—not just the plaintiff's evidence—in resolving a demurrer.

• For lenders: When enforcing assigned promissory notes, ensure the assignment documents clearly describe the notes as security. A separate dacion with the debtor on a different loan will not automatically cover the assigned notes.

• For borrowers: If a dacion is intended to cover all obligations, say so explicitly in the document. A general reference to "outstanding indebtedness" may be read narrowly by the courts.

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