In 1962, Company XYZ, a domestic corporation engaged in the marketing of named brand hardware items, extended a credit line up to P20, 000 to Company ABC. Company ABC was a medium-sized corporation based in Davao which had been in business for the past 15 years. To secure the credit line, Company ABC offered, and Company XYZ accepted, a pledge of PW & ED bonds worth P25,000 owned by Mr. B, a majority stockholder of Company ABC. Once the credit line was established, Company ABC started purchasing hardware items from Company XYZ. At the start, the 30-day credit term was faithfully complied with. As a matter of fact, there were times when credit extensions exceeded the P20,000 credit limit but the account were paid in good order.

However, in 1965, several business reverses forced Company ABC to renege on its credit commitments. The payments that usually came within 30-day credit term began to falter. There were times when accounts would be outstanding up to 60 days, and sometimes even 90 days. Anyway, the accounts was still moving until late 1966 Company ABC could no longer keep up its payments and thus Company XYZ suspended credit.

Meantime, Mr. B, through his emissary, made representations with Company XYZ to withdraw the PW & ED bonds for purpose of having them replaced with a new series which yielded a better rate of interest. Because of the intimacy of MR. B with Company XYZ, the PW & ED bonds were released to him upon the latter giving a receipt which simply stated: "RECEIVED PW &ED BOND NO. 123 AND 345 WITH FACE VALUE OF 25,000 TO BE EXCHANGED UPON CONVERSION TO 7% NEW BONDS."

Shortly thereafter, Company ABC filed voluntary insolvency proceedings. An earlier with civil case for collection filed by Company XYZ to recover the outstanding obligation of Company ABC amounting P19,000 proved no avail. The writ of execution was returned was returned unsatisfied for the reason that Company ABC had no more assets to satisfy the same.

Thereupon, Company XYZ turned to Mr. B who, after one year, has not complied with his commitment to replace the release PW & ED bonds. To its dismay, Company XYZ verified from the Central Bank that the bond has been encased. Forthwith, Company XYZ sued Mr. B for damages claiming that had he not fail with commitments to replace the bonds, he would not have suffered the loss corresponding to the unpaid obligation of the Company ABC. In his defense, Mr. B cited article 2110 of the Civil Cade which provides:

"If the thing pledged is returned by the pledge to the pledgor or the owner, the pledge is extinguished. Any stipulation to the Contrary shall be void."

Company XYZ countered by saying that the return of the bond to Mr. B was not the return contemplated by Article 2110 as it was made for a specific and determinate purpose: - For Exchanged with higher yielding bonds.

After the trials, the lower court rendered judgment in favor of Company XYZ and against Mr. B. It ruled that the return of bonds was the return contemplated under Article 2110 of the Civil Code. Further it ruled that Mr. B acted in bad faith in having encashed the bonds contrary to his commitments to the replace the same and to submit the new bonds Company YZ. Mr. B appealed the decision.

Question

What might be the lapses of Company XYZ that Mr. B could use to his advantage? Explain each lapses.