UNION BANK OF THE PHILIPPINES vs.

DEVELOPMENT BANK OF THE PHILIPPINES

G.R. No. 191555
January 20, 2014

Facts:

Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Banks
predecessor-in-interest, Bancom Development Corporation (Bancom), and to
Development Bank of the Philippines (DBP).
FI and DBP entered into a Deed of Cession of Property In Payment of Debt
(dacion en pago) whereby the former ceded in favor of the latter certain
properties (including a processing plant) in consideration of the following:
(a) The full and complete satisfaction of FIs loan obligations to DBP;
and
(b) The direct assumption by DBP of FIs obligations to Bancom in the
amount of P17,000,000.00 (Assumed Obligations).

DBP, as the new owner of the processing plant, leased back for 20 years the
said property to FI (Lease Agreement) which was, in turn, obliged to pay
monthly rentals to be shared by DBP and Bancom.

DBP also entered into a separate agreement with Bancom (Assumption

Agreement) whereby the former:
(a) Confirmed its assumption of FIs obligations to Bancom; and
(b) Undertook to remit up to 30% of any and all rentals due from FI to
Bancom which would serve as payment of the assumed obligations, to
be paid in monthly installments.

On May 23, 1979, FI assigned its leasehold rights under the Lease Agreement
to Foodmasters Worldwide, Inc. (FW)

On May 9, 1984, Bancom conveyed all its receivables, including DBPs

assumed obligations, to Union Bank.

Claiming that the subject rentals have not been duly remitted despite its
repeated demands, Union Bank filed a collection case against DBP
before the RTC.

DBP countered that the obligations it assumed were payable only out of the
rental payments made by FI. Since, FI had yet to pay the same, DBPs
obligation to Union Bank had not arisen.

RTC: Finding the complaint to be meritorious, RTC ordered:

(a) DBP to pay Union Bank the sum of P4,019,033.59, representing the
amount of the subject rentals (which constitutes 30% of FIs [now
FWs] total rental debt), including interest until fully paid; and
(b) FW, as third-party defendant, to indemnify DBP, as third- party
plaintiff, for its payments of the subject rentals to Union Bank.

RTC ruled that when DBP failed to remit the subject rentals to Union Bank, it
defaulted on its assumed obligations.

CA: On May 27, 1994, CA Set aside the RTCs ruling, and consequently
ordered:
(a) FW to pay DBP the amount of P32,441,401.85 representing the
total rental debt incurred under the Lease Agreement, and
(b) DBP, after having been paid by FW its unpaid rentals, to remit 30%
thereof to Union Bank.

CA ruled that DBP did not default in its obligations to remit the subject rentals
to Union Bank precisely because it had yet to receive the rental payments of
FW.

Union Bank and DBP filed separate petitions for review on certiorari
before the Supreme Court.

SC: Denied both petitions in a Resolution. SC upheld the CAs finding that
while DBP directly assumed FIs obligations to Union Bank, DBP was only
obliged to remit to the latter 30% of the lease rentals collected from FW, from
which any deficiency was to be settled by DBP not later than December 29,
1998.

On May 16, 2001, Union Bank filed a motion for execution before the
RTC, praying that DBP be directed to pay the amount of P9,732,420.555
which represents the amount of the subject rentals (i.e., 30% of the FWs
total rental debt in the amount of P32,441,401.85). DBP opposed Union
Banks motion.

On September 12, 2001, DBP filed its own motion for execution against
FW.

RTC: Granted both motions for execution of Union Bank and DBP on
October 15, 2001 (Order of Execution). As a result, a notice of
garnishment against DBP were issued.

DBP filed a motion for reconsideration averring that the RTC prematurely
ordered DBP to pay the assumed obligations to Union Bank before FWs
payment. The motion was denied. Thus, DBPs deposits were eventually
garnished. DBP then filed a petition for certiorari before the CA.

CA: Dismissed DBPs petition, finding that the RTC did not abuse its
discretion when it issued the October 15, 2001 Writ of Execution. DBP
appealed the CAs ruling before the SC.

SC: On January 13, 2004, SC granted DBPs appeal, and thereby reversed
and set aside the CAs ruling. SC acknowledged that DBPs obligation to
Union Bank for remittance of the lease payments is contingent on FWs prior
payment to DBP, and that any deficiency DBP had to pay by December 29,
1998 as per the Assumption Agreement cannot be determined until after the
satisfaction of FWs own rental obligations to DBP.

Accordingly, the SC:

(a) nullified the October 15, 2001 Writ of Execution and all related
issuances thereto; and;
(b) ordered Union Bank to return to DBP the amounts it received pursuant
to the said writ.

Union Bank moved for reconsideration which was denied by the SC.

DBP moved for the execution of the said decision before the RTC. The RTC
then issued a writ of execution (September 6, 2005 Writ of Execution),
ordering Union Bank to return to DBP all funds it received pursuant to the
October 15, 2001 Writ of Execution.

On September 13, 2005, Union Bank filed a Manifestation and Motion

to Affirm Legal Compensation to the RTC, praying that the RTC apply
legal compensation between itself and DBP in order to offset the return of the
funds it previously received from DBP.

Union Bank anchored its motion on two grounds, namely:

(a) on December 29, 1998, DBPs assumed obligations became due
and demandable; and
(b) considering that FW became non-operational and non-existent, DBP
became primarily liable to the balance of its assumed obligation, which
as of Union Banks computation after its claimed set-off, amounted
to P1,849,391.87.

RTC: Denied the above-mentioned motion for lack of merit. With Union
Banks motion for reconsideration having been denied, Union Bank filed a
petition for certiorari with the CA.

Pending resolution, Union Bank issued a Managers Check amounting to

P52,427,250.00 in favor of DBP, in satisfaction of the Writ of Execution dated
September 6, 2005.

CA: Dismissed Union Banks petition, finding no grave abuse of discretion

on the RTCs part. CA affirmed the denial of its motion to affirm legal
compensation considering that:
(a) the RTC only implemented the Supreme Courts January 13, 2004
Decision which by then had already attained finality;
(b) DBP is not a debtor of Union Bank; and
(c) there is neither a demandable nor liquidated debt from DBP to
Union Bank.

Union Bank moved for reconsideration which was denied in a Resolution

dated February 26, 2010; hence, the instant petition.

Issue:

W/N the CA correctly upheld the denial of Union Banks 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 DBPs assumed obligations to Union Bank for remittance of the lease
payments are in the Courts 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 FWs 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 Banks motion to affirm legal compensation