UNION BANK OF THE PHILIPPINES vs.

DEVELOPMENT BANK OF THE PHILIPPINES

G.R. No. 191555 January 20, 2014

FACTS:
Foodmasters, Inc (FI) Bancom Development Corporation (Bancom) = predecessor-in-
interest
Union Bank = successor-in-interest to Bancom = petitioner
Development Bank of Philippines (DBP) = respondent
Foodmasters Worldwide (FW)
 Foodmasters, Inc. (FI) had loan obligations to both Union Bank’s predecessor-in-interest, Bancom Dev’t Corp
(Bancom), and to Dev’t Bank of the Phils (DBP).

 FI and DBP entered into a Deed of Cession of Property In Payment of Debt (dacion en pago) whereby FI ceded certain
properties (including a processing plant) in consideration of ff:
(a) Complete satisfaction of FI’s loan obligations to DBP; and
(b) Assumption by DBP of FI’s obligations to Bancom in the amount of P17M (Assumed Obligations)

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

 DBP also entered into a separate agreement with Bancom (Assumption Agreement) whereby the DBP:
(a) Undertook to remit up to 30% of rentals due from FI to Bancom which is to serve as payment of the assumed
obligations.

 Then, FI assigned its leasehold rights under the Lease Agreement to Foodmasters Worldwide, Inc. (FW)
 Bancom conveyed all its receivables, including DBP’s assumed obligations, to Union Bank.

 Union Bank filed collection case against DBP, claiming that rentals have not been remitted despite its
repeated demands
 DBP countered that the assumed obligations were payable only out of rental payments made by FI. Since, FI had yet to
pay the same, DBP’s obligation to pay Union Bank had not arisen.
 RTC: ruled in favour of Union Bank; ordered --
(a) DBP to pay Union Bank P4,019,033.59, the amount of the subject rentals
(b) FW, as third-party defendant, to indemnify DBP for its payments of rentals to Union Bank.
 CA: set aside RTC’s ruling, and ordered:
(a) FW to pay DBP P32,441,401.85, total rental debt incurred, 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 because it had yet to receive the rental payments of FW.
 Union Bank AND DBP filed separate petitions for review on certiorari before SC.
 SC: denied both petitions; upheld CA’s finding that while DBP directly assumed FI’s obligations to Union Bank, DBP
was only obliged to remit 30% of lease rentals collected.

 (Same Case) Later, Union Bank filed a Motion for Execution before the RTC, praying that DBP pay P9,732,420
(30% of the FW’s total debt of P32,441,401.85). This was opposed by DBP.
 Then, DBP also filed its own Motion for execution against FW.
 RTC: Granted both motions for execution by Union Bank and DBP.
 Notice of garnishment against DBP was issued. DBP’s deposits were eventually garnished.
 CA: dismissed DBP’s petition for certiorari
 SC: granted DBP’s appeal; DBP’s obligation to Union Bank is contingent on FW’s prior payment to DBP; ordered Union
Bank to return to DBP the amounts it received pursuant to the said writ.

 (Same Case) DBP field Motion for Execution of said decision before RTC.
 RTC: issued a writ of execution ordering Union Bank to return to DBP all funds it received pursuant to previous Writ
of Execution.

 (Same Case) Union Bank filed Motion to Affirm Legal Compensation praying that RTC apply legal compensation
between itself and DBP in order to offset the return of funds it previously received from DBP; anchored motion on 2
grounds --
(a) On December 29, 1998, DBP’s assumed obligations became due and demandable; and
 (b) Considering FW became non-operational/ non-existent, DBP became primarily liable to balance of its assumed
obligation, which after its claimed set-off, amounted to P1,849,391.87.
(ELAM: IOW – Union Bank debt which is to return amount garnished from DBP -- is to be compensated with DBPs
debt from the deficiency to Union Bank w/c has become due; Union Bank is saying hindi na sila magbabayad)
Pending resolution, Union Bank issued a Manager’s Check for P52,427,250.00 for DBP, in satisfaction of Writ of
Execution
 CA: dismissed Union Bank’s motion to affirm legal compensation; ruled --
(a) RTC only implemented SC’s 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 elevated case with SC. (Whew!)

ISSUE: WoN Union Bank’s motion to affirm legal compensation should be denied. --YES

RULING:
Union Bank averred: Legal compensation is applicable.
Court ruled (with DBP): Legal compensation not applicable.
 Petition by Union Bank 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 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.”

 In this case, compensation could not have taken place between these debts for the apparent reason that requisites 3 and 4
under Article 1279 are not present.
o 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).
o 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." Therefore, it cannot be
concluded that the same debt had already been liquidated, and thereby became demandable (requisite 4 of Article
1279).
o Therefore, CA correctly upheld the denial of Union Bank’s motion to affirm legal compensation

DISPOSITION:
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. SO ORDERED.