Foodmasters, Inc.

(FI) had outstanding loan obligations to both Union Banks

predecessor-in-interest, Bancom Development Corporation (Bancom), and to DBP.
In satisfaction of these obligations, FI ceded certain properties including a
processing plant in favor of DBP (dacion en pago). DBP also directly assumed FIs
obligations to Bancom. As the new owner of the processing plant, DBP leased the
property to FI which was, in turn, obliged to pay monthly rentals to be shared by
DBP and Bancom.
A few years later, FI assigned its leasehold rights to Foodmasters Worldwide, Inc.
(FW) while Bancom conveyed all its receivables, including DBPs assumed
obligations, to Union Bank.
Claiming that the rentals have not been duly remitted despite its repeated
demands, Union Bank filed a collection case against DBP before the RTC which ruled
in favor of Union Bank and issued a writ of execution against DBP.
When the matter reached the Supreme Court, it nullified the Writ of Execution and
ordered Union Bank to return to DBP the amounts it received pursuant to the said
writ. It ruled that DBPs obligation to Union Bank is contingent on FWs prior
payment to DBP, and that any deficiency DBP had to pay cannot be determined
until after the satisfaction of FWs own rental obligations to DBP.
As a way to offset the return of the funds it previously received from DBP, the Union
Bank filed a motion to affirm legal compensation.
Can legal compensation take place in the case at bar?
NO. The rule on legal compensation states that 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.
In this case, however, legal compensation could not have taken place because
requisites 3 and 4 under Article 1279 are not present. Since DBPs obligation to
Union Bank for remittance of the lease payments is contingent on the prior payment
thereof by Foodmasters to DBP, it cannot be said that both debts are due. Moreover,
any deficiency that DBP had to make up for the full satisfaction of the assumed
obligations cannot be determined until after the satisfaction of Foodmasters
obligation to DBP. In this regard, it cannot be concluded that the same debt had

already been liquidated, and thereby became demandable. Hence, no legal

compensation could have taken place.