ANSWER THE FOLLOWING

Scenario: Alissa owes Bianca P5,000. Ciel, a friend of Alissa's, pays Bianca the P5,000
without Alissa's knowledge or consent. Alissa later learns of the payment and is
unhappy, but Bianca has already accepted the money. Can Ciel compel Alissa to
reimburse her?
ALAC Analysis:
 Assertion: Ciel can only compel Alissa to reimburse her for the payment up to
the amount that was beneficial to Alissa.
 Law: Article 1236 provides that the creditor is not bound to accept payment by a
third person who has no interest in the fulfillment of the obligation, unless there is
a stipulation to the contrary. However, whoever pays for another, even without
the debtor's knowledge or against their will, can recover what has been paid, but
only to the extent that the payment has been beneficial to the debtor.
 Application: Ciel is a third person with no interest in the obligation. She paid
without Alissa's knowledge. While Bianca accepted the payment, Ciel's right to
reimbursement from Alissa is limited. The payment was clearly beneficial to
Alissa since her debt was extinguished.
 Conclusion: Ciel can compel Alissa to reimburse her for the full P5,000 because
the payment was beneficial to Alissa, who is no longer indebted to Bianca.

Case 3: Dation in Payment

Scenario: Eduardo owes Francisco P100,000. Eduardo, unable to pay in cash, offers to
give Francisco his car, which is valued at P100,000, to settle the debt. Francisco
agrees.
ALAC Analysis:
 Assertion: The obligation is extinguished by dation in payment.
 Law: Article 1245 defines dation in payment (dacion en pago) as the alienation of
property by the debtor to the creditor in satisfaction of a debt in money. The law
on sales shall govern this special form of payment.
 Application: Eduardo, the debtor, transfers ownership of his car to Francisco,
the creditor, to extinguish his monetary debt. The creditor accepts this different
prestation (the car) as fulfillment of the obligation.
 Conclusion: The obligation is extinguished because the parties have agreed to
a valid dation in payment, which substitutes the original monetary debt with the
delivery of property.

Case 4: Condonation or Remission

Scenario: Georgia owes Henry P20,000. Henry, feeling generous, tells Georgia that
she no longer has to pay the debt and he tears up the promissory note in front of her.
ALAC Analysis:
 Assertion: Georgia's obligation to Henry is extinguished by condonation or
remission.
  Law: Article 1270 states that condonation or remission is essentially gratuitous
and requires the acceptance by the obligor. It may be express or implied. The
voluntary delivery of a private document evidencing a credit by the creditor to the
debtor implies a remission of the debt.
 Application: Henry's act of telling Georgia she doesn't have to pay and tearing
up the promissory note constitutes an express and implied condonation.
Georgia's acceptance of this act signifies her acceptance of the remission. The
tearing of the note serves as a physical manifestation of the creditor's intent to
renounce the debt.
 Conclusion: The obligation is extinguished by condonation, as all the requisites
are met, including the gratuitous nature of the act and the creditor's voluntary
renunciation of the debt.

Case 5: Confusion or Merger

Scenario: Ian owes a significant amount of money to his brother, Javier, who owns a
small lending company. Javier passes away and, in his will, he leaves all his assets,
including the lending company and all outstanding credits, to Ian.
ALAC Analysis:
 Assertion: Ian's debt to Javier is extinguished by confusion or merger of rights.
 Law: According to Article 1275, the obligation is extinguished from the time the
characters of creditor and debtor are merged in the same person. This is known
as confusion or merger of rights.
 Application: When Javier dies, his credits, including the debt owed by Ian, are
transferred to Ian as the heir. Ian thus becomes both the creditor (as the new
owner of the credit) and the debtor (as the original obligor) of the same debt.
 Conclusion: The obligation is extinguished by confusion because the roles of
creditor and debtor have been merged into the same person, Ian.

Case 6: Legal Compensation

Scenario: Karen owes Luis P10,000. At the same time, Luis owes Karen P10,000. Both
debts are due and payable, and both are in the form of cash.
ALAC Analysis:
 Assertion: Both debts are extinguished by legal compensation.
 Law: Article 1279 outlines the requisites for legal compensation, which include
that each of the obligors be bound principally, that both debts consist in a sum of
money, that the two debts are due, that they are liquidated and demandable, and
that there be no controversy over the debts.
 Application: The scenario meets all the requisites for legal compensation. Both
Karen and Luis are principal debtors and creditors to each other. Both debts are
in money, and they are both due, liquidated, and demandable. There is no
dispute over the debts.
 Conclusion: The obligations are extinguished by legal compensation, which
takes effect by operation of law once all the requisites are present.
Case 7: Novation (Substituion of Debtor)
Scenario: Mia owes Nico P50,000. Oscar agrees to take on Mia's debt, with the explicit
consent of Nico. Mia is then released from the obligation.
ALAC Analysis:
 Assertion: Mia's obligation is extinguished by novation.
 Law: Novation, as per Article 1291, is the extinguishment of an obligation by the
creation of a new one which substitutes it. This can be accomplished by
substituting the person of the debtor. Article 1293 clarifies that the consent of the
creditor is necessary for the substitution of the debtor. This form of novation is
called delegacion.
 Application: A new obligation is created where Oscar is the new debtor. The old
obligation, where Mia was the debtor, is extinguished. This is a form of novation
by substitution of the debtor. The explicit consent of the creditor, Nico, is present.
 Conclusion: The obligation is extinguished by novation through the substitution
of the debtor.

Case 8: Loss of a Specific Thing

Scenario: Pedro is obligated to deliver a specific, one-of-a-kind painting to Quin on a
certain date. Before the delivery date, a fire, caused by a lightning strike, burns down
Pedro's studio, destroying the painting.
ALAC Analysis:
 Assertion: Pedro's obligation to deliver the painting is extinguished.
 Law: According to Article 1262, an obligation to deliver a specific thing is
extinguished if the thing is lost or destroyed without the fault of the debtor and
before he has incurred in delay. The law presumes the loss is due to the debtor's
fault if the thing is in their possession, but this presumption is overcome by proof
of a fortuitous event.
 Application: The painting is a specific thing. The fire, caused by a lightning
strike, is a fortuitous event (an act of God) and not Pedro's fault. The painting
was destroyed before the delivery date, so Pedro had not yet incurred in delay.
The presumption of fault in Article 1265 is overcome by the fact that the loss was
due to a fortuitous event.
 Conclusion: The obligation is extinguished because the specific thing due was
lost due to a fortuitous event and without the debtor's fault or delay.

Case 9: Tender of Payment and Consignation

Scenario: Rachel owes Steven P10,000, which is due on September 15. On
September 15, Rachel goes to Steven's house to pay, but Steven refuses to accept the
payment without a valid reason. Rachel, wanting to be released from her obligation,
deposits the P10,000 in a bank account in Steven's name and notifies him of the
deposit.
ALAC Analysis:
 Assertion: Rachel's obligation is not yet extinguished.
  Law: Article 1256 states that if the creditor to whom tender of payment has been
made refuses without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due. The consignation must
be made with the proper judicial authority.
 Application: While Rachel made a valid tender of payment, she did not follow
the proper procedure for consignation. She should have deposited the money
with the court or a proper judicial authority, not in a personal bank account. She
must also give notice to Steven of the consignation with the court.
 Conclusion: The obligation is not extinguished because Rachel did not properly
follow the requirements for a valid consignation.

Case 10: Payment to a Third Person

Scenario: Theresa owes Uriel P20,000. Theresa mistakenly pays the P20,000 to Victor,
who is Uriel's brother but has no authority to receive payment on Uriel's behalf. Uriel
later finds out and demands payment from Theresa. Can Uriel compel Theresa to pay
again?
ALAC Analysis:
 Assertion: Theresa's payment is not valid, and she must still pay Uriel.
 Law: According to Article 1240, payment must be made to the person in whose
favor the obligation has been constituted, or to his successor in interest, or to any
person authorized to receive it. Payment made to a third person is valid only to
the extent that it has redounded to the benefit of the creditor.
 Application: Theresa paid a third person (Victor) who was not authorized to
receive the payment. There is no indication that the payment redounded to the
benefit of Uriel. Therefore, the payment is not valid in extinguishing the
obligation.
 Conclusion: Theresa's obligation to Uriel is not extinguished because she paid
an unauthorized third person and cannot prove that the payment was beneficial
to the creditor. She must pay Uriel again, and she may have the right to seek
reimbursement from Victor.

Understood. Here are 10 new case problems with "Yes" or "No" questions, followed by
an ALAC analysis for each.

Case 1: Payment to an Incapacitated Person

Scenario: Alex, a 17-year-old high school student, owes a debt of P2,000 to Beatrice, a
16-year-old. Alex pays Beatrice the full amount in cash. Beatrice, being a minor, loses
the money shortly after. Can Alex's father be compelled to pay Beatrice's father the
P2,000 again?
 Question: Is the obligation extinguished by the payment? No.
 ALAC Analysis:
 o Assertion: The obligation is not extinguished, and Alex's father can be
compelled to pay again.
o Law: Payment to an incapacitated person is not valid unless the payment
has redounded to the incapacitated person's benefit.
o Application: Beatrice is a minor and therefore incapacitated. She lost the
money, so the payment did not redound to her benefit.
o Conclusion: Since the payment did not benefit the incapacitated creditor,
it is not a valid payment, and the obligation is not extinguished.

Case 2: Incomplete Performance and Waiver

Scenario: Carlo is obligated to deliver 100 sacks of rice to Donna. He only delivers 90
sacks. Donna accepts the 90 sacks without any protest or reservation. Can Donna later
demand the remaining 10 sacks?
 Question: Can Donna later demand the remaining 10 sacks? No.
 ALAC Analysis:
o Assertion: Donna cannot demand the remaining 10 sacks.
o Law: When an incomplete or irregular performance is accepted by the
creditor without protest or reservation, it is considered a waiver, and the
obligation is deemed completely performed.
o Application: Carlo's performance was incomplete, as he only delivered
90 sacks instead of 100. However, Donna accepted the incomplete
delivery without any protest or objection. Her silence signifies her waiver
of the incomplete performance.
o Conclusion: The obligation is extinguished because Donna's acceptance
of the incomplete performance, without protest, constitutes a waiver.

Case 3: Legal Tender

Scenario: Edgar owes Fred P10,000. He offers to pay Fred with a check for P10,000.
Fred refuses to accept the check and demands cash. Is Fred justified in refusing the
payment?
 Question: Is Fred justified in refusing the payment? Yes.
 ALAC Analysis:
o Assertion: Fred is justified in refusing the check.
o Law: Payment by means of commercial documents, such as checks, does
not extinguish the obligation unless the creditor accepts them, or they
have been cashed. The debtor must pay in legal tender. In the Philippines,
a check is not considered legal tender.
o Application: Edgar is attempting to pay with a check, which is a mere
promise of money and not legal tender. Fred has the right to refuse a form
of payment that is not cash.
o Conclusion: The obligation is not extinguished because the payment was
not made in legal tender, and the creditor is not compelled to accept a
check.
Case 4: Loss of a Generic Thing
Scenario: George is obligated to deliver 100 kilos of sugar to Helen. Before the
delivery, a fire destroys all the sugar in George's warehouse. Is George's obligation to
deliver the sugar extinguished?
 Question: Is George's obligation extinguished? No.
 ALAC Analysis:
o Assertion: George's obligation is not extinguished.
o Law: The loss of a generic thing does not extinguish an obligation. The
principle is "genus nunquam perit," or "the genus never perishes".
o Application: Sugar is a generic thing. Even though the sugar in George's
warehouse was destroyed, he can still acquire 100 kilos of sugar from
another source to fulfill the obligation.
o Conclusion: The obligation is not extinguished because the object of the
prestation is a generic thing, and the loss of a generic thing does not
extinguish the obligation.

Case 5: Condonation
Scenario: Irene owes an outstanding debt to Jacob. In a private conversation, Jacob
tells Irene, "Don't worry about that debt; I'm remitting it." There is no written document.
Is the debt extinguished?
 Question: Is the debt extinguished? Yes.
 ALAC Analysis:
o Assertion: The debt is extinguished.
o Law: Condonation can be made expressly or impliedly. The remission of
debt, as a gift, must be accepted by the debtor, and since it is an act of
liberality, it should not be inofficious.
o Application: Jacob's statement is an express condonation. By not
protesting the remission, Irene's silence can be considered as her
acceptance of the gratuitous act.
o Conclusion: The obligation is extinguished by express condonation.

Case 6: Confusion or Merger

Scenario: Karen is a tenant who owes rent to her landlord, Liam. Karen decides to buy
the building she is renting from Liam. During the sale, is her obligation to pay the rent
extinguished?
 Question: Is Karen's obligation to pay the rent extinguished? Yes.
 ALAC Analysis:
o Assertion: The obligation is extinguished.
o Law: Confusion or merger of rights extinguishes an obligation from the
time the characters of creditor and debtor are merged in the same person.
 o Application: Initially, Karen is the debtor (for rent) and Liam is the
creditor. After the sale, Karen becomes the new owner of the building,
making her both the debtor (of her previous rent) and the creditor (as the
new landlord).
o Conclusion: The obligation is extinguished by confusion because the
roles of creditor and debtor for the rent debt have been merged into the
same person.

Case 7: Novation (Insolvency of New Debtor)

Scenario: Marco owes Nina P50,000. Oscar agrees to take on Marco's debt, with
Nina's consent. Marco is released from the obligation. Three months later, Oscar is
declared insolvent. Can Nina still sue Marco to recover the P50,000?
 Question: Can Nina still sue Marco? No.
 ALAC Analysis:
o Assertion: Nina cannot sue Marco.
o Law: In a novation by substitution of the debtor through delegacion, the
original debtor is not liable in case of the new debtor's insolvency unless
the insolvency was already existing and of public knowledge at the time of
the novation, or was known to the original debtor.
o Application: The scenario is a delegacion, as Marco, the original debtor,
is released with the creditor's consent. There is no mention that Oscar's
insolvency was either existing or publicly known at the time of the
novation.
o Conclusion: The original obligation is extinguished, and Nina cannot hold
Marco liable for Oscar's insolvency.

Case 8: Tender of Payment and Consignation

Scenario: Paul owes Queena P5,000. He mails a money order to Queena's address.
The money order is returned to him because Queena has moved without notifying him.
Can Paul immediately consign the payment with the court to extinguish the obligation?
 Question: Can Paul immediately consign the payment? No.
 ALAC Analysis:
o Assertion: Paul cannot immediately consign the payment.
o Law: Consignation is only valid if there has been a valid tender of
payment, and the creditor has refused to accept it without a just cause.
Tender of payment requires an offer of payment to the creditor or their
authorized representative. The debtor must show a definite intention to
pay and have the means to do so.
o Application: Paul's act of mailing the money order and it being returned
to him does not constitute a valid tender of payment. He did not make a
direct offer to Queena and therefore did not receive a refusal.
Consignation is the last resort after a valid tender has been refused.
 o Conclusion: Paul's attempt to pay was not a valid tender of payment, and
thus he cannot proceed with consignation.

Case 9: Place of Payment

Scenario: Roland owes Samantha a debt. The contract does not specify a place of
payment. Roland prepares the money at his home, but Samantha demands that the
payment be made at her office. Is Samantha's demand valid?
 Question: Is Samantha's demand valid? No.
 ALAC Analysis:
o Assertion: Samantha's demand is not valid.
o Law: If the obligation does not specify a place of payment, payment
should be made at the domicile of the debtor.
o Application: The contract between Roland and Samantha does not have
a designated place for payment. Therefore, by law, the payment should be
made at Roland's (the debtor's) domicile.
o Conclusion: Samantha's demand for payment at her office is not valid
because the law states that in the absence of a stipulation, payment
should be made at the debtor's domicile.

Case 10: Extrajudicial Expenses

Scenario: A debtor and creditor agree to a settlement, but the debtor incurs legal
expenses in drafting the settlement agreement. Who should pay for these extrajudicial
expenses?
 Question: Should the creditor be made to pay for the expenses? No.
 ALAC Analysis:
o Assertion: The debtor should pay for the extrajudicial expenses.
o Law: The debtor is responsible for paying all extrajudicial expenses
required for the payment.
o Application: The legal expenses for drafting the settlement agreement
are considered extrajudicial expenses. The law explicitly places this
burden on the debtor.
o Conclusion: The debtor is legally responsible for the extrajudicial
expenses related to the payment and cannot compel the creditor to pay for
them.
I. Problems - Extinguishment of Obligation

1. Payment by a third person

 Answer:
o Yes, C can legally refuse payment from T.
o No, C cannot legally refuse payment from G.
 Legal Basis:
o Article 1236 of the Civil Code states that the creditor is not bound to
accept payment or performance by a third person who has no interest in
the fulfillment of the obligation, unless there is a stipulation to the contrary.
o A guarantor, like G, has an interest in the extinguishment of the obligation
as they are subsidiarily liable for the debt.
 Application to the problem:
o For T: T is a third person with no apparent interest in the fulfillment of the
obligation between D and C. Therefore, C has the legal right to refuse T's
offer of payment.
o For G: G is the guarantor. As a guarantor, G has a direct interest in the
fulfillment of the obligation to avoid being held liable for D's debt. Thus, C
cannot refuse G's offer of payment.
 Conclusion: C can refuse payment from T, but not from G.

2. Payment to an unauthorized person

 Answer: No, M is not justified in paying T.
 Legal Basis:
 o Article 1240 of the Civil Code states that payment must be made to the
person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it.
o Article 1242 states that payment made in good faith to any person in
possession of the credit shall release the debtor. However, this article
applies to situations where the debtor is unaware of the loss of the credit
instrument and pays the possessor in good faith.
 Application to the problem:
o M knows that the payee is P. While T found the note, T is not the person
in whose favor the obligation was constituted. P is the legitimate payee.
o For M to be justified, the payment must be to the rightful creditor, or to
someone with a clear authorization to receive payment, such as a
successor or a person in "possession of the credit" in good faith. T, who
simply found the note, does not have a legal right to the credit. M should
have sought clarification from P.
 Conclusion: M is not justified in paying T, because T is not the rightful creditor
or an authorized party to receive payment. M's payment to T does not extinguish
the obligation to P.

3. Rights of a third person who pays the debt

 Answer:
o (a) When D is liable to T: D is liable to reimburse T when T paid the
obligation with the consent or knowledge of D. In this case, T has the right
to reimbursement for the full amount paid, and to subrogation to C's rights.
o (b) When D is not liable to T: D is not liable to T if T paid the obligation
without D's knowledge or consent, and T's payment was not beneficial to
D. In this case, T cannot demand reimbursement from D.
o (c) When D is liable for less than P10,000 to T: This happens when T
pays without the knowledge or consent of D, and D has already made a
prior payment to C, or has a counterclaim or other defense against C. In
this case, D is only liable to reimburse T for the amount that was beneficial
to D. For example, if D already paid C P2,000, D is only liable to T for
P8,000.
o (d) May D be liable to T for P12,000 if that was the amount paid by
him to C? No. D's liability is limited to the amount of the original debt,
which is P10,000, unless there was an agreement for a higher amount. T
can only be reimbursed for the amount that D would have otherwise been
liable for. The additional P2,000 paid by T is a voluntary payment that T
cannot recover from D.

4. Payment to a third person in good faith

 Answer: No, D is not required to prove that the payment has been received by
C.
  Legal Basis: Article 1241 of the Civil Code states that payment made to a third
person shall release the debtor to the extent that it has redounded to the benefit
of the creditor. Such benefit need not be proved in the following cases:1
1. If after the payment, the third person acquires the creditor’s rights. 2
2. If the creditor ratifies the payment to the third person.3
3. If by the creditor's conduct, the debtor has been led to believe that the
third person had authority to receive the pay4ment.
 Application to the problem: The problem states that D, in good faith, paid T.
Since it is stipulated that the payment was made in good faith, and without the
knowledge of C, D is not required to prove that the payment redounded to C's
benefit. D is only released from liability if the payment did in fact benefit C. The
burden of proof to show that the payment did not benefit C lies with C.
 Conclusion: D is released from liability if the payment to T redounded to C's
benefit. D is not required to prove this, as payment in good faith to a third person
is valid to the extent of the benefit.

5. Payment by check
 Answer: Yes, D is justified in rejecting the demand of C.
 Legal Basis: Article 1249 of the Civil Code states that a check is not legal tender
and the creditor is not bound to accept it. However, once accepted, its effects as
payment are governed by the law on commercial documents. Payment by check
extinguishes the obligation only when the check has been cashed or when
through the fault of the creditor, they have been impaired.
 Application to the problem: C accepted the check from D. By accepting the
check, C is bound by the terms of the transaction. C cannot later insist on cash
payment unless the check is dishonored. The law states that payment by check
only extinguishes the obligation when the check is encashed, but it is implied that
the acceptance of the check creates a new agreement.
 Conclusion: D is justified in rejecting C's demand because C already accepted
the check as a form of payment. C cannot unilaterally change the agreed-upon
method of payment.

II. Problems - Loss of the thing due

1. Loss of a specific thing without negligence

 Answer: No, X is not liable to Y.
 Legal Basis: Article 1262 of the Civil Code states that an obligation which
consists in the delivery of a determinate thing shall be extinguished if the thing is
lost or destroyed without the fault of the debtor, and before he has incurred in
delay.
 Application to the problem: The carabao is a specific thing. Its death on July
25, before the due date of July 31, is considered a loss. The problem states that
Y has no proof that X was negligent. Since the loss occurred due to a fortuitous
 event (the death of the animal) and without proof of X's negligence, the obligation
to deliver the carabao is extinguished.
 Conclusion: X is not liable for the death of the carabao and is therefore released
from the obligation.

2. Effect of loss without fault

 Answer: Yes, X is exempt from liability.
 Legal Basis: Article 1262 of the Civil Code states that an obligation which
consists in the delivery of a determinate thing shall be extinguished if the thing is
lost or destroyed without the fault of the debtor, and before he has incurred in
delay. The "without his fault" and "before he has incurred in delay" are the
crucial conditions.
 Application to the problem: The problem states that the thing was lost by X
without his fault and before he had incurred in delay. This directly fits the
conditions for extinguishment of an obligation as per Article 1262.
 Conclusion: X's obligation to deliver the specific thing is extinguished, and he is
exempt from liability.

3. Loss through the fault of a third person

 Answer: The effect of the loss is as follows:
o X (debtor): X's obligation to Y is extinguished. Since the loss was due to
the fault of a third person (Z), X is not liable to Y. However, according to
Article 1269, X has the right to demand payment from Z for the damages
caused.
o Y (creditor): Y's right to receive the specific thing from X is extinguished.
However, Y can now pursue a legal action against Z for damages. If X has
already received indemnity from Z, Y can demand it from X.
o Z (third person): Z is the one at fault. Z is liable for damages to X or Y. Z
must indemnify the person who suffered the loss for the value of the thing
and other damages.
 Legal Basis: Article 1269 states that the creditor shall have all the rights of
action which the debtor may have against third persons by reason of the loss.
 Application to the problem: The loss was due to Z's fault. This means that
while X is no longer liable to Y, both X and Y have a right to seek damages from
Z.
 Conclusion: The obligation between X and Y is extinguished, but X and Y now
have a right of action against Z, the party at fault.

III. Problems - Remission or Condonation

1. Presumption of remission
 Answer:
o (a) What presumption arises if:
1. The promissory note is voluntarily given by C to D? A
presumption of remission arises. Article 1271 of the Civil Code
states that the voluntary delivery of a private document evidencing
a credit by the creditor to the debtor implies the remission of the
debt.
2. It is found in the possession of D? A presumption that C
voluntarily delivered it to D arises. Article 1272 states that
whenever the private document in which the debt appears is found
in the possession of the debtor, it shall be presumed that the
creditor delivered it voluntarily, unless the contrary is proved.
o (b) When will the presumption of remission arise? The presumption of
remission arises when the private document evidencing the debt is found
in the possession of the debtor, or is voluntarily delivered by the creditor to
the debtor.
 Legal Basis: Articles 1271 and 1272 of the Civil Code.
 Application to the problem: The voluntary delivery or possession of the
promissory note by D creates a presumption that the debt has been remitted or
condoned by C.
 Conclusion: The possession of the promissory note by D is strong evidence of
condonation unless C can prove otherwise.

2. Remission and accessory obligations

 Answer:
o (a) What presumption arises if the debt of D is condoned by C? The
presumption is that the accessory obligations, such as the pledge and the
guaranty, are also extinguished. Article 1273 of the Civil Code states that
the renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force.
o (b) What presumption arises if the certificate is later found in the
possession of D? A presumption of the remission of the accessory
obligation of the pledge arises. Article 1274 states that it is presumed that
the accessory obligation of pledge has been remitted when the thing
pledged, after its delivery to the creditor, is found in the possession of the
debtor, or of a third person who owns the th5ing.
 Legal Basis: Articles 1273 and 1274 of the Civil Code.
 Application to the problem:
o The condonation of the principal debt automatically extinguishes the
pledge and the guaranty.
o The possession of the pledged certificate by D creates a presumption that
the pledge itself has been remitted. This does not, however, mean that the
principal debt is remitted.
  Conclusion: The remission of the principal debt also extinguishes the accessory
obligations of the guaranty and pledge. The possession of the pledged item by
the debtor creates a separate presumption that the pledge was remitted.

IV. Problems - Confusion or Merger of Rights

1. Joint Obligation
 Answer: The effect is that the obligation is partially extinguished.
 Legal Basis: Article 1275 of the Civil Code states that the obligation is
extinguished from the time the characters of the creditor and debtor are merged
in the same person. Article 1276 adds that merger which takes place in the
person of the principal debtor or of the principal creditor benefits the co-
guarantors. Merger in the person of the guarantor does not extinguish the
obligation.
 Application to the problem: The liability of A, B, and C is joint. This means
their debt is divided equally, with each liable for P5,000. When D assigns the
credit to C, C becomes both a debtor and a creditor for her share. Therefore, her
share of the debt (P5,000) is extinguished by confusion. A and B remain liable for
their respective shares of P5,000 each.
 Conclusion: C's share of the debt (P5,000) is extinguished by confusion, and A
and B remain liable for their P5,000 shares.

2. Solidary Obligation
 Answer: The effect is that the entire obligation is extinguished.
 Legal Basis: Article 1275 of the Civil Code states that the obligation is
extinguished from the time the characters of the creditor and debtor are merged
in the same person. In a solidary obligation, any of the debtors is liable for the
entire debt.
 Application to the problem: Since A, B, and C are solidary debtors, D can
demand the full P15,000 from any of them. When C acquires the credit, she
becomes a creditor of all three and a debtor for the whole amount. The merger of
the creditor and debtor characters in C extinguishes the entire debt. C can then
demand reimbursement from her co-debtors, A and B, for their respective shares
(P5,000 each).
 Conclusion: The entire P15,000 debt is extinguished by confusion, and C has
the right to demand reimbursement from A and B for their shares.

V. Problems - Compensation
1. Bank's right to apply deposit
 Answer: Yes, the bank has the right to apply D's deposit to the payment of D's
debt.
 Legal Basis: Article 1278 of the Civil Code states that compensation shall take
place when two persons, in their own right, are creditors and debtors of each
other. A bank has a right to set off the debt of a depositor against the money in
their savings account. The bank is a creditor for the loan and a debtor for the
deposit. The requirements for legal compensation are met: both debts are due,
liquidated, and in a sum of money.
 Application to the problem: D owes the bank P50,000, and the bank owes D
P40,000 (the deposit). Both are principal debtors and creditors to each other. The
debts are both due and liquidated. Therefore, the bank can apply the deposit to
the loan, reducing D's outstanding debt to P10,000.
 Conclusion: The bank can legally apply the deposit to the loan via legal
compensation.

2. Debts with different due dates

 Answer: Yes, compensation can take place, but not immediately.
 Legal Basis: Article 1279 of the Civil Code states that for legal compensation to
take place, the two debts must be due.
 Application to the problem: C's debt to D is payable on October 20, while D's
debt to C is payable on November 20. Compensation can take place on or after
November 20, when both debts become due. It cannot take place on October 20,
because D's debt to C is not yet due.
 Conclusion: Compensation will take place on November 20, when both debts
have become due and demandable.

3. Facultative Compensation
 Answer: Facultative compensation is a type of compensation that can be set up
only by one of the parties, specifically the one who has a right to oppose a
compensation but chooses not to. An example is an obligation arising from a
deposit or a contract of commodatum. If a depositor owes the depositary money,
the depositary cannot refuse to return the deposit by claiming compensation
because the obligation to return the deposit is not subject to compensation.
However, the depositor can claim compensation if the depositary owes them
money.
 Application to the problem: A owes B P10,000 for a deposit, and B owes A
P10,000 for a loan. A, the depositor, can set up the compensation, but B, the
depositary, cannot.
 Conclusion: Compensation can be set up by the party who has the right to
oppose it but chooses to waive that right.
4. Compensation of a fraudulent debt
 Answer:
o May the two debts be compensated against each other? No, the debts
cannot be compensated. Article 1287 provides that compensation shall
not be proper when one of the debts arises from a crime, such as fraud.
o What is the effect if the debt of C is later annulled in court at the
instance of D? If C's debt is annulled, it is as if the debt never existed.
Therefore, there is no debt on the part of C to be compensated with D's
debt. D remains liable for the original P10,000 debt to C.
 Legal Basis: Article 1287 of the Civil Code.
 Application to the problem: D's debt to C is valid. However, C's debt to D was
created through fraud. Therefore, C cannot claim compensation for the debt
caused by the fraud. If the court annuls C's debt, there is no debt for which
compensation can take place, and D's obligation remains in force.
 Conclusion: The two debts cannot be compensated due to the fraudulent nature
of one of them. If the fraudulent debt is annulled, D's original obligation remains.