Understanding Dacion en Pago: Ensuring Full Loan Extinguishment

G.R. No. 244247, November 10, 2021

Imagine a scenario where a company, burdened by massive debts, agrees to transfer properties to its creditor to settle the outstanding amount. This is the essence of dacion en pago, a concept deeply rooted in Philippine law. However, what happens when disputes arise regarding the valuation of these properties and whether the debt has been fully extinguished? The Supreme Court case of United Coconut Planters Bank, Inc. vs. E. Ganzon, Inc. provides critical insights into this complex issue, clarifying the obligations of both debtors and creditors in such agreements.

The Legal Framework of Dacion en Pago

Dacion en pago, as defined in jurisprudence, is a special form of payment where the debtor alienates property to the creditor in satisfaction of a monetary debt. It is governed by the law on sales, specifically Article 1245 of the Civil Code, which states, “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.”

This means that the transfer of ownership of the property effectively extinguishes the debt to the extent of the value of the property as agreed upon by the parties. However, disputes often arise regarding the valuation of the property, the intent of the parties, and whether the debt has been fully satisfied.

Consider this hypothetical: A small business owes a bank PHP 5 million. Unable to pay in cash, the business offers a commercial lot valued at PHP 6 million as dacion en pago. The bank accepts. If both parties agree that the transfer of the lot fully satisfies the debt, the PHP 5 million obligation is extinguished. However, if the agreement stipulates that the business must transfer all of its properties, regardless of their value, to fully settle the debt, the nature of the obligation changes significantly.

Case Breakdown: UCPB vs. E. Ganzon, Inc.

E. Ganzon, Inc. (EGI) obtained multiple loans from United Coconut Planters Bank (UCPB) totaling PHP 775 million between 1995 and 1998. By December 1998, EGI defaulted, leading to a restructuring agreement. Eventually, the parties entered into a Memorandum of Agreement (MOA) in 1999, fixing EGI’s total obligation at PHP 915,838,822.50. EGI agreed to transfer properties, including 485 condominium units and land parcels, to UCPB to extinguish the debt.

Acknowledging valuation inaccuracies, they amended the agreement, adjusting the aggregate appraised value of the properties to PHP 1,419,913,861.00.

• UCPB foreclosed on 193 properties valued at PHP 904,491,052.00 but credited EGI with only PHP 723,592,000.00 (80% of the appraised value).
• UCPB claimed EGI still owed PHP 226,963,905.50 and requested additional properties.
• EGI provided 135 more condominium units, executing dacion en pago contracts for 107 units worth PHP 166,127,386.50.
• UCPB then demanded more properties, leading EGI to suspect fraudulent overcharging.

EGI discovered an internal UCPB memo with conflicting loan balances labeled “ACTUAL” and “DISCLOSED TO EGI.” This prompted EGI to file a case for annulment of foreclosure, annulment of dacion en pago, and damages.

The Supreme Court, in its decision, emphasized the importance of interpreting the MOA based on the intent of the parties. The Court stated:

“The true intent of the parties was for EGI to convey all the 485 listed properties with the agreed value of P1,419,913,861.00 and that the total existing obligation of P915,838,822.50 would only be extinguished once these properties had been fully conveyed to UCPB.”

However, the Court also found that UCPB acted improperly by requesting additional properties with a value grossly disproportionate to the remaining debt. The Court further stated:

“Though the obligation to give in the MOA is indivisible and not susceptible of partial performance, the fact that the parties entered into several dacion en pago transactions now precludes them from denying the divisible nature with respect to the securities to be assigned.”

Practical Implications for Businesses and Individuals

This case offers several key lessons for businesses and individuals entering into dacion en pago agreements:

• Clearly Define the Scope of the Agreement: Ensure the MOA explicitly states whether the transfer of property fully extinguishes the debt or if additional obligations exist.
• Accurate Valuation: Agree on a fair and accurate valuation of the properties being transferred. This valuation should be documented and transparent.
• Proportionality: The value of the properties transferred should be reasonably proportionate to the outstanding debt. Avoid situations where the creditor demands assets far exceeding the debt amount.
• Good Faith: Both parties must act in good faith and avoid fraudulent or oppressive practices.

Key Lessons

• Intent Matters: The court will look to the intent of the parties when interpreting a dacion en pago agreement.
• Good Faith is Required: Both parties must act in good faith and avoid overreaching.
• Proportionality is Key: The value of the transferred assets should be proportionate to the debt.

The Supreme Court ultimately ruled that EGI had made an excess payment of PHP 82,708,157.72 after deducting transaction costs. The Court also ordered UCPB to release the mortgage over the remaining properties of EGI and instructed EGI to establish a condominium corporation for the management of the EGI Rufino Plaza.

Frequently Asked Questions (FAQ)

Q: What is dacion en pago?

A: Dacion en pago is a special form of payment where a debtor transfers property to a creditor to satisfy a debt in money.

Q: How is dacion en pago different from a regular sale?

A: In a regular sale, the buyer pays money for the property. In dacion en pago, the property is transferred to extinguish an existing debt.

Q: What happens if the value of the property is higher than the debt?

A: If agreed upon, the debt is extinguished. The creditor is not obligated to return the excess unless stipulated in the agreement.

Q: Can a creditor demand additional properties even after a dacion en pago agreement?

A: Yes, if the agreement requires the transfer of all properties regardless of value to fully settle the debt. However, the value of additional properties requested must be proportionate to any remaining debt.

Q: What should I do if I suspect the creditor is overcharging me in a dacion en pago agreement?

A: Seek legal advice immediately. Gather all relevant documents, including the MOA, valuation reports, and any communication with the creditor.

Q: Is it possible to challenge a dacion en pago agreement in court?

A: Yes, particularly if there is evidence of fraud, misrepresentation, or a significant disparity in value.

Q: Who pays for the transaction costs in a dacion en pago agreement?

A: The agreement should specify who bears the transaction costs. Typically, the debtor (transferor) is responsible, but this can be negotiated.

Q: What is a Memorandum of Agreement (MOA) in the context of dacion en pago?

A: A MOA is a contract outlining the terms and conditions of the dacion en pago, including the properties to be transferred, their agreed value, and the extent to which the debt is extinguished.

Q: What role does good faith play in dacion en pago agreements?

A: Good faith is essential. Both parties must act honestly and fairly in their dealings, avoiding any fraudulent or oppressive practices.

ASG Law specializes in real estate law and debt restructuring. Contact us or email hello@asglawpartners.com to schedule a consultation.