Eduardo was granted a loan by XYZ Bank for the purpose of improving a building which XYZ leased from him. Eduardo, executed the promissory note ("PN") in favor of the bank, with his friend Ricardo as co-signatory. In the PN, they both acknowledged that they are "individually and collectively" liable and waived the need for prior demand. To secure the PN, Ricardo executed a real estate mortgage on his own property. When Eduardo defaulted on the PN, XYZ stopped payment of rentals on the building on the ground that legal compensation had set in. Since there was still a balance due on the PN after applying the rentals, XYZ foreclosed the real estate mortgage over Ricardo's property. Ricardo opposed the foreclosure on the ground that he is only a co-signatory; that no demand was made upon him for payment, and assuming he is liable, his liability should not go beyond half the balance of the loan. Further, Ricardo said that when the bank invoked compensation between the rentals and the amount of the loan, it amounted to a new contract or novation, and had the effect of extinguishing the security since he did not give his consent (as owner of the property under the real estate mortgage) thereto. (A). Can XYZ Bank validly assert legal compensation? (B). Can Recardo's property be foreclosed to pay the full balance of the loan? (C). Does Ricardo have basis under the Civil Code for claiming that the original contract was novated?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Eduardo was granted a loan by XYZ Bank for the purpose of improving a building which XYZ leased from him. Eduardo, executed the promissory note ("PN") in favor of the bank, with his friend Ricardo as co-signatory. In the PN, they both acknowledged that they are "individually and collectively" liable and waived the need for prior demand. To secure the PN, Ricardo executed a real estate mortgage on his own property. When Eduardo defaulted on the PN, XYZ stopped payment of rentals on the building on the ground that legal compensation had set in. Since there was still a balance due on the PN after applying the rentals, XYZ foreclosed the real estate mortgage over Ricardo's property. Ricardo opposed the foreclosure on the ground that he is only a co-signatory; that no demand was made upon him for payment, and assuming he is liable, his liability should not go beyond half the balance of the loan. Further, Ricardo said that when the bank invoked compensation between the rentals and the amount of the loan, it amounted to a new contract or novation, and had the effect of extinguishing the security since he did not give his consent (as owner of the property under the real estate mortgage) thereto. (A). Can XYZ Bank validly assert legal compensation? (B). Can Recardo's property be foreclosed to pay the full balance of the loan? (C). Does Ricardo have basis under the Civil Code for claiming that the original contract was novated?

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