Dear PAO,

I am writing to seek your guidance on a matter related to the sale of my house and lot, which is currently mortgaged to a bank. A buyer has offered to purchase the property and has proposed an unconventional payment arrangement that I would like to verify with your office. The buyer, a Filipino citizen currently residing in the United States of America, has offered to pay in full my outstanding bank loan for the same properties. He intends to settle the loan directly with the bank using United States dollar (USD). I would like to confirm whether this payment arrangement is acceptable to the bank and if there are any specific requirements or procedures that need to be followed. I would appreciate any clarification or additional information you can provide regarding this matter.

Edgar

Dear Edgar,

The answer to your question can be found in Article 1303 of the New Civil Code of the Philippines, which states:

“Article 1303. Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation.”

The law permits conventional subrogation, which involves creating a new contractual relationship based on mutual agreement among the necessary parties. By definition, it is the transfer of all the rights of the creditor to a third person, who substitutes and assumes the rights and obligations against the debtor. This allows for a structured and consensual transfer of rights, effectively extinguishing the existing obligation through novation and giving rise to a new one.

According to Article 1301 of the same Code, this agreement must be expressly consented to by the original parties and the third person. The importance of express consent in conventional subrogation is further underscored by the Supreme Court in the case of Licaros v. Gatmaitan, GR 142838, Aug. 9, 2001, which was reiterated in its decision in the case of Ledonio v. Capitol Development Corporation, GR 149040, July 4, 2007, penned by Associate Justice Minerva Gonzaga-Reyes, which affirms that a lack of debtor consent nullifies any supposed subrogation by contract.

In your case, since the buyer of your property (the third party) offers to pay in full your outstanding loan from the bank (the creditor), you (the debtor) must consent to the substitution. Moreover, the creditor bank must likewise consent to the substitution of your buyer. If all parties consent, your existing contract with the bank will be extinguished, and in its place, a new contract will rise where your buyer takes over your obligation to the bank.

With respect to the payment of your buyer using US dollars (USD), foreign currency transactions are generally permitted in the Philippines, with the legal basis rooted in the Bangko Sentral ng Pilipinas (BSP) regulations and principle of free flow of capital. However, the bank must first approve the payment arrangement and agree to accept the USD payment. Settled is the rule that payment must be made in legal tender. (Bognot v. RRI Lending Corporation, GR 180144, Sept. 24, 2014, Ponente: Associate Justice Arturo Brion) Legal tender refers to notes and coins issued by the Bangko Sentral ng Pilipinas (Sec. 52, RA 7653). Hence, the creditor bank has the option whether to accept payment in USD or demand payment of the obligation in Philippine currency, which is the legal tender. Additionally, there may also be tax implications on the buyer’s mode of payment due to foreign currency gains or losses, if any.

We hope that we were able to answer your queries. This advice was based solely on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated.

Thank you for your continued trust and support.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to [email protected]