Union Bank v. Development Bank
REITERATIONFacts
The Antecedents: Foodmasters, Inc. (FI) had loan obligations to Bancom Development Corporation (Bancom) and Development Bank of the Philippines (DBP). FI entered into a Deed of Cession of Property in Payment of Debt with DBP, ceding properties in consideration of DBP satisfying FI's obligations to Bancom (assumed obligations) and directly assuming FI's obligations to Bancom amounting to ₱17,000,000.00. DBP also entered into a Lease Agreement with FI for the ceded property, with monthly rentals to be shared by DBP and Bancom. DBP and Bancom executed an Assumption Agreement, wherein DBP confirmed its assumption of FI's obligations to Bancom and undertook to remit up to 30% of any rentals from FI to Bancom as payment for the assumed obligations. FI later assigned its leasehold rights to Foodmasters Worldwide, Inc. (FW). Bancom conveyed its receivables, including DBP's assumed obligations, to Union Bank of the Philippines (Union Bank). Procedural History: Union Bank filed a collection case against DBP for alleged non-remittance of subject rentals. DBP countered that its obligation was payable only from FI's rental payments, which had not yet been made. DBP sought to implead FW as a third-party defendant. DBP's motion to dismiss due to transfer of interests to Asset Privatization Trust (APT) was denied. The Regional Trial Court (RTC) ruled in favor of Union Bank, ordering DBP to pay the subject rentals. The Court of Appeals (CA) reversed the RTC, ordering FW to pay DBP the total rental debt and DBP, after payment by FW, to remit 30% to Union Bank. The Supreme Court denied petitions for review, affirming the CA's ruling that DBP's obligation was contingent on FW's payment and that the denial of the motion to dismiss was proper. Subsequently, Union Bank filed a motion for execution, which the RTC granted, ordering DBP to pay. DBP filed a petition for certiorari, which the CA dismissed. The Supreme Court, in G.R. No. 155838, granted DBP's appeal, nullified the writ of execution, and ordered Union Bank to return garnished funds to DBP, finding variance between the CA's decision and the RTC's execution order. Union Bank then filed a motion to affirm legal compensation, praying to offset its obligation to return funds with DBP's assumed obligations. The RTC denied this motion, holding that the grounds were already addressed by the Supreme Court. The CA affirmed the RTC's denial. Union Bank paid DBP a substantial amount but claimed a remaining balance owed by DBP. The Petition: Union Bank assails the CA's affirmation of the RTC's denial of its motion to affirm legal compensation, arguing that the CA correctly upheld the denial.
Issue(s)
Whether the Court of Appeals correctly upheld the denial of Union Bank's motion to affirm legal compensation. Whether the requisites for legal compensation under Article 1279 of the Civil Code were present.
Ruling
The petition is bereft of merit. The Court of Appeals correctly upheld the denial of Union Bank's motion to affirm legal compensation. WHEREFORE, the petition is DENIED. The Decision dated November 3, 2009 and Resolution dated February 26, 2010 of the Court of Appeals in CA-G.R. SP No. 93833 are hereby AFFIRMED.
Ratio Decidendi
On the issue of whether the Court of Appeals correctly upheld the denial of Union Bank's motion to affirm legal compensation: The Court held that legal compensation could not have taken place because the requisites under Article 1279 of the Civil Code were not met. Specifically, the debts were neither due nor demandable. The Supreme Court, in its January 13, 2004 Decision in G.R. No. 155838, had already established that DBP's obligation to Union Bank for the remittance of lease payments was contingent on the prior payment by Foodmasters Worldwide, Inc. (FW) to DBP. Therefore, the debt was not yet due. Furthermore, any deficiency that DBP had to pay by December 29, 1998, could not be determined until after FW had satisfied its own rental obligations to DBP. This meant the debt was not liquidated and thus not demandable. The doctrine of conclusiveness of judgment bars the relitigation of these facts and issues, as they were actually and directly resolved in the prior Supreme Court decision. On the requisites for legal compensation under Article 1279 of the Civil Code: The Court reiterated the requisites for legal compensation, which include that each obligor be principally bound and be a principal creditor of the other, that both debts consist in a sum of money, that both debts be due, that they be liquidated and demandable, and that there be no retention or controversy commenced by third persons. In this case, requisites (3) that both debts be due and (4) that they be liquidated and demandable were not met. The obligation of DBP to Union Bank was contingent on FW's payment to DBP, making it not yet due. The amount DBP would have to pay as a deficiency was also not yet determined, rendering it unliquidated and not demandable. Consequently, compensation could not take effect by operation of law under Article 1290 of the Civil Code.
Main Doctrine
Legal compensation cannot take effect if the debts are not due and demandable, as required by Article 1279 of the Civil Code. A debt that is contingent on the prior payment by a third party, and whose deficiency cannot be determined until after the satisfaction of that third party's obligation, is neither due nor demandable.