G.R. No. L-33157 June 29, 1982
BENITO H. LOPEZ, petitioner, vs. THE COURT OF APPEALS and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents.

FACTS

Petitioner Benito H. Lopez obtained a loan from Prudential Bank, executing a promissory note and Surety Bond No. 14164 with respondent Philippine American General Insurance Co., Inc. (Philamgen) as surety. Concurrently, Lopez executed an indemnity agreement in favor of Philamgen and a “Stock Assignment Separate from Certificate,” assigning 4,000 shares of Baguio Military Institute stock to Philamgen. He endorsed and delivered the stock certificate to Philamgen. The understanding, per Lopez, was that if he defaulted, Emilio Abello of Philamgen and Pio Pedrosa of the bank would purchase the shares to settle the loan.
Upon Lopez’s default, the bank sued both Lopez and Philamgen. Acting on Abello’s instruction, Philamgen had the shares transferred to its name, with Abello committing that he and Pedrosa would buy them, enabling Philamgen to pay the bank. This purchase did not materialize. After the first suit was dismissed, the bank filed another complaint. Philamgen then paid the bank P27,785.89 and was subrogated to the bank’s rights. Philamgen subsequently sued Lopez under the indemnity agreement for reimbursement.

ISSUE

Whether the transaction involving the stock assignment constituted an absolute transfer (dacion en pago) extinguishing the obligation, or merely a pledge securing the surety’s contingent liability.

RULING

The Supreme Court affirmed the Court of Appeals, ruling that the transaction was a pledge, not a dacion en pago. The legal logic hinges on the nature of the documents and the parties’ intent. The stock assignment was executed as consideration for Philamgen undertaking the surety bond, not as payment for the loan itself. The indemnity agreement explicitly obligated Lopez to reimburse Philamgen for any payment made on the bond. These documents must be read together, revealing a clear security arrangement.
The Court emphasized that a pledge requires the delivery of a movable thing to secure the fulfillment of a principal obligation. Here, the shares were delivered to the surety to secure its potential liability under the bond and its right to reimbursement under the indemnity agreement. The subsequent transfer of the stock certificate to Philamgen’s name was merely a nominal act to perfect the pledge and did not alter its essential character as security. Since there was no clear agreement that the transfer of shares would extinguish the monetary obligation, dacion en pago did not occur. Consequently, Philamgen’s payment to the bank activated Lopez’s duty to indemnify. The pledge remained as security for this reimbursement claim, and Lopez was entitled to the shares’ return upon settling his debt to Philamgen.