GR 53955; (January, 1989) (Digest)
G.R. No. 53955 January 13, 1989
THE MANILA BANKING CORPORATION, plaintiff-appellee, vs. ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.
FACTS
The Manila Banking Corporation filed a collection suit based on three promissory notes executed by defendants Anastacio Teodoro, Jr. and Grace Anna Teodoro. The first note was jointly executed by the defendants and Anastacio Teodoro, Sr., while the latter two notes were executed by the father and son. The defendants failed to pay the obligations despite demands. The non-payment was attributed to the failure of the Philippine Fisheries Commission, successor to the Emergency Employment Administration (EEA), to pay the defendants for completed contracts to fabricate fishing boats.
The defendants contended that the plaintiff’s claim was already paid or extinguished by virtue of a Deed of Assignment of Receivables executed by Anastacio Teodoro, Jr. in favor of the bank. This deed assigned to the bank the receivables from the EEA as security for the loans. They argued that the bank, having accepted the assignment, should directly collect from the Commission, and its failure to do so should discharge the defendants’ obligation.
ISSUE
The primary issue is whether the Deed of Assignment of Receivables constituted an absolute conveyance that extinguished the promissory notes, or merely a security arrangement that did not release the defendants from their primary liability.
RULING
The Supreme Court ruled against the defendants-appellants, affirming the trial court’s decision. The legal logic centers on the interpretation of the Deed of Assignment. The Court held that the deed was not an absolute conveyance or a dacion en pago that would extinguish the principal obligation. Instead, it was a security arrangement, essentially an assignment by way of guarantee.
The deed’s language explicitly indicated its purpose as security. It stated it was for the consideration of “certain credits, loans, overdrafts and other credit accommodations” and functioned as a “continuing guarantee” for all sums owing. Operationally, title to the receivables passed to the bank defeasibly, only to collateralize the loan. The bank’s right to collect the receivables was designed to apply the proceeds to the loan obligation, with any surplus to be returned to the assignor. This structure avoids the prohibition on a pactum commisorium, allowing the creditor to apply the security without a public foreclosure sale. Since the assignment was for security only, the defendants’ primary liability on the promissory notes remained. The bank’s failure to collect from the Commission did not discharge the defendants; the risk of collection from the assigned accounts ultimately remained with the assignor-debtor as per the terms of the deed guaranteeing the receivables’ collectibility. Therefore, the defendants were still liable for the unpaid amounts on the notes.