Banks: Collateral Security

MERCANTILE LAW QUESTION 2002

Andrew is engaged in the business of building low-cost housing units under contracts with real estate developers. He applied for a loan of P3 Million from Ready Credit Bank (the Bank), which required Andrew to provide collateral security for it. Andrew offered to assign to the Bank his receivables amounting to P4 million from Home Builders Development Corporation (the Obligor). The Bank accepted the offer. Accordingly, Andrew obtained the loan and he executed a promissory note undertaking to pay the loan in full in one lump sum on September 1, 2002, together with interest thereon at the rate of 20% per annum. At the same time, Andrew executed a Deed of Assignment in favor of the Bank assigning to the Bank his receivables from the Obligor. The deed of assignment read:

 “I, Andrew Lee, hereby assign, transfer and convey, absolutely and unconditionally, to Ready Credit Bank (hereinafter called the Bank) all of my right, title and interest in and to my accounts receivable from Home Builders Development Corporation (hereinafter called the Obligor) arising from delivery of housing units with a total contract price of P4,000,000.00, the description and contract value of which are attached hereto as Annex A (hereinafter called the Receivables).”

“In the event that I shall be unable to pay my outstanding indebtedness owned to the Bank, the Bank shall have the right, without any further formality or act on its part, to collect the Receivables from the Obligor and to apply the proceeds thereof toward payment of my said indebtedness.”

Andrew failed to pay the loan on its due date on September 1, 2002. When the Bank attempted to collect from the Obligor, the Bank discovered that the latter had already closed operations and liquidated all its assets. The Bank sued Andrew for collection, but Andrew moved to dismiss the complaint on the ground that the debt had already been paid by reason of his execution of the aforesaid Deed of Assignment which, being absolute and unconditional, was in essence a dacion en pago. The Bank opposed the motion, contending that the Deed of Assignment was only  a security for a loan. If you were the Judge, how would you resolve the motion to dismiss filed by Andrew? Explain 

SUGGESTED ANSWER:

(Since the question is outside the scope of the Bar Examination, it is recommended that the candidate be given full credit of 5%, whatever may be his answer, and he be given a bonus if he made an answer in the following manner:)

The motion to dismiss should be granted. The simple absolute and unconditional conveyance embodied in the deed of assignment would be operative, and the assignment would constitute essentially a mode of payment or dacion en pago.