CASE NO.

5 UNION BANK VS DBP

G.R. NO. 191555 JANUARY 20, 2014

DOCTRINE: Legal Compensation takes place ipso jure (by operation of law) when ALL THE REQUISITES OF
LAW ARE PRESENT, as opposed to conventional or voluntary compensation which occurs when the
parties agree to the mutual extinguishment of their credits or to compensate their mutual obligations
even in the absence of some of the legal requisites. – Articles 1279 and 1290

FACTS: Foodmasters Inc (FI) had loan obligations to both Union Bank’s (UBP) predecessor-in-interest
Bancom Dev’t Corp (Bancom) and DBP. May 1979, FI availed “Dation in Payment” in favor of DBP where
FI obligations to DBP are extinguished and also, DBP will assume all obligations of FI to UBP.

DBP leased an acquired property to FI, where FI thereafter assigned leasehold rights to Foodmasters
Worldwide Inc (FW).

DBP also entered into agreement with UBP, whereby 30% of the rental fees from FI/FW will be remitted
to UBP as payment for the assumed obligations. Any balance after application of the 30% from rental
fees collected shall be paid by DBP to UBP not later than Dec 29, 1998.

June 1984, UBP filed a collection case against DBP. May 1990 RTC favored UBP and ordered DBP to pay.
May 1994 CA reversed RTC ruling ordering FW to pay DBP, and after which, DBP to pay UBP the
equivalent 30% as agreed. Reason: It was clear in the agreement that payment to UBP shall be after
payment of FI/FW. Dec 1995, SC upheld CA’s ruling.

May 2001, UBP filed motion for execution for DBP to pay. DBP argued payment of FW as pre-requisite
and also filed motion for execution against FW. RTC granted UBP motion for execution against DBP on
reason that payment is already demandable under agreement where UBP have to pay not later than
Dec. 29, 1998. DBP’s deposits were garnished in favor of UBP. RTC also granted DBP motion for
execution against FW. CA affirmed RTC decisions. SC reversed and ordered UBP to return the amount
received through garnishment on reason that BDP’s obligation is contingent on FW’s prior payment to
DBP.

Sept 2005, UBP filed a motion to affirm legal compensation. UBP Contentions: (1) On Dec 29, 1998,
BDP’s assumed obligations became due and demandable; (2) considering that FW became non-
operational and non-existent, DBP became primarily liable to the balance of its assumed obligation. RTC
denied the motion, CA affirmed.
ISSUE: W/N legal compensation is applicable.

W/N the CA correctly upheld the denial of Union Bank’s motion to affirm legal compensation.

Ruling:

Yes. The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations
whereby two persons in their capacity as principals are mutual debtors and creditors of each other with
respect to equally liquidated and demandable obligations to which no retention or controversy has been
timely commenced and communicated by third parties. The requisites therefor are provided under
Article 1279 of the Civil Code which reads as follows:

Art. 1279. In order that compensation may be proper, it is necessary:

(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.

The rule on legal compensation is stated in Article 1290 of the Civil Code which provides that "when all
the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law,
and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not
aware of the compensation."

Therefore, compensation could not have taken place between these debts for the apparent reason that
requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since DBP’s assumed obligations
to Union Bank for remittance of the lease payments are – in the Court’s words – "contingent on the
prior payment thereof by FW to DBP," it cannot be said that both debts are due (requisite 3 of Article
1279 of the Civil Code). Also, the Court observed that any deficiency that DBP had to make up for the full
satisfaction of the assumed obligations "cannot be determined until after the satisfaction of FW’s
obligation to DBP." In this regard, it cannot be concluded that the same debt had already been
liquidated, and thereby became demandable (requisite 4 of Article 1279 of the Civil Code). Thus, CA
correctly upheld the denial of Union Bank’s motion to affirm legal compensation