Question B.18, 2019 Legal Ethics Bar Exam


(Question B.18, Civil Law, 2019 Bar Exam)

In light of a new business venture, Mr. A entered into a lease contract with Mr. B involving one of the latter’s warehouses. One day, Mr. B, who was then encountering financial difficulties, approached Mr. A and sought for a loan, which Mr. A readily granted to him. In order to secure the loan obligation, Mr. B mortgaged the leased warehouse in favor of Mr. A. In addition, Mr. B executed a promissory note in favor of A, wherein prior demand was waived by him.

When Mr. B defaulted on his loan obligation, Mr. A simply stopped paying rentals due to Mr. B on the ground that legal compensation had already set in up to the concurrent amount. Furthermore, since there was still a balance due on the promissory note, Mr. A foreclosed the real estate mortgage over Mr. B’s property, without any prior demand furnished to Mr. B.

Aggrieved, Mr. B opposed the foreclosure due to the lack of prior demand, contending that the waiver of prior demand was stipulated in the promissory note and not in the mortgage instrument. Mr. B likewise argued that when Mr. A invoked legal compensation between the unpaid rentals and the loan arrearages, it amounted to a novation that resulted in the extinguishment of the loan contract between them. As such, the real estate mortgage, being a mere accessory contract to the principal loan, was necessarily extinguished.

(a) May Mr. A validly claim legal compensation? Explain. (2%)

(b) May Mr. A validly foreclose on the real estate mortgage even without prior demand to Mr. B? Explain. (2%)

(c) Is Mr. B’s claim of novation correct? Explain. (2%)

Suggested Answer:

(a) No. Answer

Under the Civil Code, the requisites for a valid legal compensation are:

1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

3) That the two debts be due;

4) That they be liquidated and demandable;

5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. Rule

In the case at bar, Mr. A and Mr. B are not mutual creditors and debtors to each other. For the lease contract, Mr. A is a lessee while Mr. B is a lessor. For the loan, Mr. A is a creditor while Mr. B is a debtor. For the security, Mr. A is a mortgagee while Mr. B is a mortgagor. Apply

Thus, Mr. A may not validly claim legal compensation. Conclusion

(b) Yes. Answer

Under Civil Code, demand is not necessary if the obligation so declare. Further, under jurisprudence, a mortgage is an accessor contract dependent on the principal obligation. Rule

In the case at bar, the principal obligation was the loan, to which the parties stipulated on the waiver of demand. When Mr. B defaulted, the loan obligation became due and demandable resulting in the foreclosure of the mortgage, which is only an accessory contract to the principal obligation. Apply

Thus, Mr. A may validly foreclose on the real estate mortgage even without prior demand to Mr. B. Conclusion

(c) No. Answer

Under the Civil Code, novation may done via any of the following:

1) Changing the object or principal conditions;

2) Substituting the person of the debtor;

3) Subrogating a third person in the rights of the creditor.. Rule

In the case at bar, neither one of the above-mentioned happened. There was no change in the object or principal obligation, nor any substitution of the debtor, nor any subrogation of a third person in the rights of the creditor. Apply

Thus, Mr. B’s claim of novation was not correct. Conclusion


(Notice: The suggested answers simulate those that a bar examinee may provide, and thus specific citations are not provided. Notwithstanding, in the reviewers, the bar exam question is answered under the appropriate topic which discusses the concepts and principles, as well as provide for specific citations. Accordingly, please refer to it on the reviewer or in the Library.)


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