THIRD DIVISION

[G.R. No. 116896. May 5, 1997]

PHILIPPINE NATIONAL CONSTRUCTION CORPORATION petitioner, vs. COURT OF
APPEALS, MA. TERESA S. RAYMUNDO-ABARRA, JOSE S. RAYMUNDO, ANTONIO S.
RAYMUNDO, RENE S. RAYMUNDO, and AMADOR S. RAYMUNDO, respondents.
DECISION
DAVIDE, JR., J.:
This petition for review on certiorari has its roots in Civil Case No. 53444, which was
sparked by the petitioner's refusal to pay the rentals as stipulated in the contract of
lease[1] on an undivided portion of 30,000 square meters of a parcel of land owned
by the private respondents.
The lease contract, executed on 18 November 1985, reads in part as follows:
1. TERM OF LEASE - This lease shall be for a period of five (5) years, commencing on
the date of issuance of the industrial clearance by the Ministry of Human
Settlements, renewable for a like or other period at the option of the LESSEE under
the same terms and conditions.
2. RATE OF RENT - LESSEE shall pay to the LESSOR rent at the monthly rate of
TWENTY THOUSAND PESOS (P20,000.00), Philippine Currency, in the manner set
forth in Paragraph 3 below. This rate shall be increased yearly by Five Percent (5%)
based on the agreed monthly rate of P20,000.00 as follows:

On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a

Temporary Use Permit[2] for the proposed rock crushing project. The permit was to
be valid for two years unless sooner revoked by the Ministry.
On 16 January 1986, private respondents wrote petitioner requesting payment of the
first annual rental in the amount of P240,000 which was due and payable upon the
execution of the contract. They also assured the latter that they had already
stopped considering the proposals of other aggregates plants to lease the property
because of the existing contract with petitioner.[3]
In its reply-letter, petitioner argued that under paragraph 1 of the lease contract,
payment of rental would commence on the date of the issuance of an industrial
clearance by the Ministry of Human Settlements, and not from the date of signing of
the contract. It then expressed its intention to terminate the contract, as it had
decided to cancel or discontinue with the rock crushing project "due to financial, as
well as technical, difficulties."[4]
The private respondents refused to accede to petitioner's request for the
pretermination of the lease contract. They insisted on the performance of
petitioner's obligation and reiterated their demand for the payment of the first
annual rental.[5]
Petitioner objected to the claim of the private respondents and argued that it was
"only obligated to pay ... the amount of P20,000.00 as rental payments for the onemonth period of lease, counted from 07 January 1986 when the Industrial Permit was
issued by the Ministry of Human Settlements up to 07 February 1986 when the
Notice of Termination was served"[6] on private respondents.

Monthly Rate

Period Applicable

P21,000.00

Starting on the 2nd year

P22,000.00

Starting on the 3rd year

P23,000.00

Starting on the 4th year

On 19 May 1986, the private respondents instituted with the Regional Trial Court of
Pasig an action against petitioner for Specific Performance with Damages.[7] The
case was docketed as Civil Case No. 53444 at Branch 160 of the said court. After
the filing by petitioner of its Answer with Counterclaim, the case was set for trial on
the merits.

P24,000.00

Starting on the 5th year

What transpired next was summarized by the trial court in this wise:

3. TERMS OF PAYMENT - The rent stipulated in Paragraph 2 above shall be paid

yearly in advance by the LESSEE. The first annual rent in the amount of TWO
HUNDRED FORTY THOUSAND PESOS (P240,000.00), Philippine currency, shall be due
and payable upon the execution of this Agreement and the succeeding annual rents
shall be payable every twelve (12) months thereafter during the effectivity of this
Agreement.
4. USE OF LEASED PROPERTY - It is understood that the Property shall be used by
the LESSEE as the site, grounds and premises of a rock crushing plant and field
office, sleeping quarters and canteen/mess hall. The LESSORS hereby grant to the
LESSEE the right to erect on the Leased Property such structure(s) and/or
improvement(s) necessary for or incidental to the LESSEE's purposes.
...
11. TERMINATION OF LEASE - This Agreement may be terminated by mutual
agreement of the parties. Upon the termination or expiration of the period of lease
without the same being renewed, the LESSEE shall vacate the Leased Property at its
expense.

Plaintiffs rested their case on September 7, 1987 (p. 87 rec.). Defendant asked for
postponement of the reception of its evidence scheduled on August 10, 1988 and as
prayed for, was reset to August 25, 1988 (p. 91 rec.) Counsel for defendant again
asked for postponement, through representative, as he was presently indisposed.
The case was reset, intransferable to September 15 and 26, 1988 (p. 94 rec.) On
September 2, 1988, the office of the Government Corporate Counsel entered its
appearance for defendant (p. 95, rec.) and the original counsel later withdrew his
appearance. On September 15, 1988 the Government Corporate Counsel asked for
postponement, represented by Atty. Elpidio de Vega, and with his conformity in open
court, the hearing was reset, intransferable to September 26 and October 17, 1988.
(p. 98, rec.) On September 26, 1988 during the hearing, defendant's counsel filed a
motion for postponement (urgent) as he had "sore eyes", a medical certificate
attached.
Counsel for plaintiffs objected to the postponement and the court considered the
evidence of the government terminated or waived. The case was deemed submitted
for decision upon the filing of the memorandum. Plaintiffs filed their memorandum
on October 26, 1988. (p. 111, rec.).
On October 18, 1988 in the meantime, the defendant filed a motion for
reconsideration of the order of the court on September 26, 1988 (p. 107, rec.) The

motion was not asked to be set for hearing (p. 110 rec.) There was also no proof of
notice and service to counsel for plaintiff. The court in the interest of justice set the
hearing on the motion on November 29, 1988. (p. 120, rec.) but despite notice,
again defendant's counsel was absent (p. 120-A, dorsal side, rec.) without reason.
The court reset the motion to December 16, 1988, in the interest of justice. The
motion for reconsideration was denied by the court. A second motion for
reconsideration was filed and counsel set for hearing the motion on January 19,
1989. During the hearing, counsel for the government was absent. The motion was
deemed abandoned but the court at any rate, after a review of the incidents and the
grounds relied upon in the earlier motion of defendant, found no reason to disturb its
previous order.[8]

Also worth noting is the earlier letter of petitioner; thus:

[P]lease be advised of PNCC Management's decision to cancel or discontinue with
the rock crushing project due to financial as well as technical difficulties. In view
thereof, we would like to terminate our Lease Contract dated 18 November, 1985.
Should you agree to the mutual termination of our Lease Contract, kindly indicate
your conformity hereto by affixing your signature on the space provided below. May
we likewise request Messrs. Rene, Jose and Antonio, all surnamed Raymundo and
Mrs. Socorro A. Raymundo as Attorney-in-Fact of Amador S. Raymundo to sign on the
spaces indicated below.[12]

On 12 April 1989, the trial court rendered a decision ordering petitioner to pay the
private respondents the amount of P492,000 which represented the rentals for two
years, with legal interest from 7 January 1986 until the amount was fully paid, plus
attorney's fees in the amount of P20,000 and costs.[9]

It can be deduced from this letter that the suspensive condition - issuance of
industrial clearance - has already been fulfilled and that the lease contract has
become operative. Otherwise, petitioner did not have to solicit the conformity of the
private respondents to the termination of the contract for the simple reason that no
juridical relation was created because of the non-fulfillment of the condition.

Petitioner then appealed to the Court of Appeals alleging that the trial court erred in
ordering it to pay the private respondent the amount of P492,000 and in denying it
the right to be heard.

Moreover, the reason of petitioner in discontinuing with its project and in

consequently cancelling the lease contract was financial as well as technical
difficulties, not the alleged insufficiency of the Temporary Use Permit.

Upon the affirmance of the trial court's decision[10] and the denial of its motion for
reconsideration, petitioner came to this Court ascribing to the respondent Court of
Appeals the same alleged errors and reiterating their arguments.

Second. Invoking Article 1266 and the principle of rebus sic stantibus, petitioner
asserts that it should be released from the obligatory force of the contract of lease
because the purpose of the contract did not materialize due to unforeseen events
and causes beyond its control, i.e., due to abrupt change in political climate after the
EDSA Revolution and financial difficulties.

First. Petitioner invites the attention of this Court to paragraph 1 of the lease
contract, which reads: "This lease shall be for a period of five (5) years, commencing
on the date of issuance of the industrial clearance by the Ministry of Human
Settlements...." It then submits that the issuance of an industrial clearance is a
suspensive condition without which the rights under the contract would not be
acquired. The Temporary Use Permit is not the industrial clearance referred to in the
contract; for the said permit requires that a clearance from the National Production
Control Commission be first secured, and besides, there is a finding in the permit
that the proposed project does not conform to the Zoning Ordinance of Rodriguez,
(formerly Montalban), Rizal, where the leased property is located. Without the
industrial clearance the lease contract could not become effective and petitioner
could not be compelled to perform its obligation under the contract.
Petitioner is now estopped from claiming that the Temporary Use Permit was not the
industrial clearance contemplated in the contract. In its letter dated 24 April 1986,
petitioner states:
We wish to reiterate PNCC Management's previous stand that it is only obligated to
pay your clients the amount of P20,000.00 as rental payments for the one-month
period of the lease, counted from 07 January 1986 when the Industrial Permit was
issued by the Ministry of Human Settlements up to 07 February 1986 when the
Notice of Termination was served on your clients.[11] (Underscoring Supplied).
The "Industrial Permit" mentioned in the said letter could only refer to the Temporary
Use Permit issued by the Ministry of Human Settlements on 7 January 1986. And it
can be gleaned from this letter that petitioner has considered the permit as
industrial clearance; otherwise, petitioner could have simply told the private
respondents that its obligation to pay rentals has not yet arisen because the
Temporary Use Permit is not the industrial clearance contemplated by them.
Instead, petitioner recognized its obligation to pay rental counted from the date the
permit was issued.

It is a fundamental rule that contracts, once perfected, bind both contracting

parties, and obligations arising therefrom have the force of law between the parties
and should be complied with in good faith.[13] But the law recognizes exceptions to
the principle of the obligatory force of contracts. One exception is laid down in
Article 1266 of the Civil Code, which reads: "The debtor in obligations to do shall
also be released when the prestation becomes legally or physically impossible
without the fault of the obligor."
Petitioner cannot, however, successfully take refuge in the said article, since it is
applicable only to obligations "to do", and not to obligations "to give".[14] An
obligation "to do" includes all kinds of work or service; while an obligation "to give"
is a prestation which consists in the delivery of a movable or an immovable thing in
order to create a real right, or for the use of the recipient, or for its simple
possession, or in order to return it to its owner.[15]
The obligation to pay rentals[16] or deliver the thing in a contract of lease[17] falls
within the prestation to give; hence, it is not covered within the scope of Article
1266. At any rate, the unforeseen event and causes mentioned by petitioner are not
the legal or physical impossibilities contemplated in said article. Besides, petitioner
failed to state specifically the circumstances brought about by the abrupt change in
the political climate in the country except the alleged prevailing uncertainties in
government policies on infrastructure projects.
The principle of rebus sic stantibus[18] neither fits in with the facts of the case.
Under this theory, the parties stipulate in the light of certain prevailing conditions,
and once these conditions cease to exist the contract also ceases to exist.[19] This
theory is said to be the basis of Article 1267 of the Civil Code, which provides:

ART. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or
in part.
This article, which enunciates the doctrine of unforeseen events, is not, however, an
absolute application of the principle of rebus sic stantibus, which would endanger
the security of contractual relations. The parties to the contract must be presumed
to have assumed the risks of unfavorable developments. It is therefore only in
absolutely exceptional changes of circumstances that equity demands assistance for
the debtor.[20]
In this case, petitioner wants this Court to believe that the abrupt change in the
political climate of the country after the EDSA Revolution and its poor financial
condition rendered the performance of the lease contract impractical and inimical
to the corporate survival of the petitioner.
This Court cannot subscribe to this argument. As pointed out by private
respondents:[21]
It is a matter of record that petitioner PNCC entered into a contract with private
respondents on November 18, 1985. Prior thereto, it is of judicial notice that after
the assassination of Senator Aquino on August 21, 1983, the country has
experienced political upheavals, turmoils, almost daily mass demonstrations,
unprecedented, inflation, peace and order deterioration, the Aquino trial and many
other things that brought about the hatred of people even against crony
corporations. On November 3, 1985, Pres. Marcos, being interviewed live on U.S.
television announced that there would be a snap election scheduled for February 7,
1986.
On November 18, 1985, notwithstanding the above, petitioner PNCC entered into the
contract of lease with private respondents with open eyes of the deteriorating
conditions of the country.
Anent petitioners alleged poor financial condition, the same will neither release
petitioner from the binding effect of the contract of lease. As held in Central Bank v.
Court of Appeals,[22] cited by the private respondents, mere pecuniary inability to
fulfill an engagement does not discharge a contractual obligation, nor does it
constitute a defense to an action for specific performance.
With regard to the non-materialization of petitioners particular purpose in entering
into the contract of lease, i.e., to use the leased premises as a site of a rock crushing
plant, the same will not invalidate the contract. The cause or essential purpose in a
contract of lease is the use or enjoyment of a thing.[23] As a general principle, the
motive or particular purpose of a party in entering into a contract does not affect the
validity or existence of the contract; an exception is when the realization of such
motive or particular purpose has been made a condition upon which the contract is
made to depend.[24] The exception is not apply here.
Third. According to petitioner, the award of P492,000 representing the rent for two
years is excessive, considering that it did not benefit from the property. Besides, the
temporary permit, conformably with the express provision therein, was deemed
automatically revoked for failure of petitioner to use the same within one year from
the issuance thereof. Hence, the rent payable should only be for one year.
Petitioner cannot be heard to complain that the award is excessive. The temporary
permit was valid for two years but was automatically revoked because of its non-use
within one year from its issuance. The non-use of the permit and the non-entry into

the property subject of the lease contract were both imputable to petitioner and
cannot, therefore, be taken advantage of in order to evade or lessen petitioners
monetary obligation. The damage or prejudice to private respondents is beyond
dispute. They unquestionably suffered pecuniary losses because of their inability to
use the leased premises. Thus, in accordance with Article 1659 of the Civil Code,
[25] they are entitled to indemnification for damages; and the award of P492,000 is
fair and just under the circumstances of the case.
Finally, petitioner submits that the trial court gravely abused its discretion in
denying petitioner the right to be heard.
We disagree. The trial court was in fact liberal in granting several
postponements[26] to petitioner before it deemed terminated and waived the
presentation of evidence in petitioners behalf.
It must be recalled that private respondents rested their case on 7 September 1987
yet.[27] Almost a year after, or on 10 August 1988 when it was petitioners turn to
present evidence, petitioners counsel asked for postponement of the hearing to 25
August 1988 due to conflict of schedules,[28] and this was granted.[29] At the
rescheduled hearing, petitioners counsel, through a representative, moved anew for
postponement, as he was allegedly indisposed.[30] The case was then reset
intransferable to September 15 and 26, 1988.[31] On 2 September 1988, the
Office of the Government Corporate Counsel, through Atty. Elpidio J. Vega, entered
its appearance for the petitioner,[32] and later the original counsel withdrew his
appearance.[33] On 15 September 1988, Atty. Vega requested for postponement to
enable him to go over the records of the case.[34] With his conformity, the hearing
was reset intransferable to September 26 and October 17, 1988.[35] In the
morning of 26 September 1988, the court received Atty. Vegas Urgent Motion for
Postponement on the ground that he was afflicted with conjunctivitis or sore eyes.
[36] This time, private respondents objected; and upon their motion, the court
deemed terminated and waived the presentation of evidence for the petitioner.[37]
Nevertheless, before the court considered the case submitted for decision, it
required the parties to submit their respective memoranda within thirty days.[38]
But petitioner failed to file one.
Likewise, the court was liberal in respect to petitioners motion for reconsideration.
Notwithstanding the lack of request for hearing and proof of notice and service to
private respondents, the court set the hearing of the said motion on 29 November
1988.[39] Upon the denial of the said motion for lack of merit,[40] petitioner filed a
second motion for reconsideration. But during the hearing of the motion on a date
selected by him, Atty. Vega was absent for no reason at all, despite due notice.[41]
From the foregoing narration of procedural antecedents, it cannot be said that the
petitioner was deprived of its day in court. The essence of due process is simply an
opportunity to be heard.[42] To be heard does not only mean oral arguments in
court; one may be heard also through pleadings. Where opportunity to be heard,
either through oral arguments or pleadings, is accorded, there is no denial of
procedural due process.[43]
WHEREFORE, the instant petition is DENIED and the challenged decision of the Court
of Appeals is AFFIRMED in toto.
No pronouncements as to costs.
SO ORDERED.
Republic of the Philippines

SUPREME COURT
Manila

The appellant was also ordered to pay the sum equivalent to 10% of the amount due
as attorney's fees and costs.

EN BANC

The appellant appealed directly to this Court. During the pendency of this appeal the
appellant Jose Grijaldo died. Upon motion by the Solicitor General this Court, in a
resolution of May 13, 1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben
Lagtapon and Anita L. Aguilar, who are the legal heirs of Jose Grijaldo to appear and
be substituted as appellants in accordance with Section 17 of Rule 3 of the Rules of
Court.

G.R. No. L-20240

December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
JOSE GRIJALDO, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
Isabelo P. Samson for defendant-appellant.
ZALDIVAR, J.:
In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of
the Bank of Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest
at the rate of 6% per annum, compounded quarterly. These loans are evidenced by
five promissory notes executed by the appellant in favor of the Bank of Taiwan, Ltd.,
as follows: On June 1, 1943, P600.00; on June 3, 1943, P159.11; on June 18, 1943,
P22.86; on August 9, 1943,P300.00; on August 13, 1943, P200.00, all notes without
due dates, but because the loans were due one year after they were incurred. To
secure the payment of the loans the appellant executed a chattel mortgage on the
standing crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran,
Negros Occidental.
By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority
provided for in the Trading with the Enemy Act, as amended, the assets in the
Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United
States. Pursuant to the Philippine Property Act of 1946 of the United States, these
assets, including the loans in question, were subsequently transferred to the
Republic of the Philippines by the Government of the United States under Transfer
Agreement dated July 20, 1954. These assets were among the properties that were
placed under the administration of the Board of Liquidators created under Executive
Order No. 372, dated November 24, 1950, and in accordance with Republic Acts Nos.
8 and 477 and other pertinent laws.
On September 29, 1954 the appellee, Republic of the Philippines, represented by the
Chairman of the Board of Liquidators, made a written extrajudicial demand upon the
appellant for the payment of the account in question. The record shows that the
appellant had actually received the written demand for payment, but he failed to
pay.
The aggregate amount due as principal of the five loans in question, computed
under the Ballantyne scale of values as of the time that the loans were incurred in
1943, was P889.64; and the interest due thereon at the rate of 6% per annum
compounded quarterly, computed as of December 31, 1959 was P2,377.23.
On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court
of Hinigaran, Negros Occidental, to collect from the appellant the unpaid account in
question. The Justice of the Peace Of Hinigaran, after hearing, dismissed the case on
the ground that the action had prescribed. The appellee appealed to the Court of
First Instance of Negros Occidental and on March 26, 1962 the court a quo rendered
a decision ordering the appellant to pay the appellee the sum of P2,377.23 as of
December 31, 1959, plus interest at the rate of 6% per annum compounded
quarterly from the date of the filing of the complaint until full payment was made.

In the present appeal the appellant contends: (1) that the appellee has no cause of
action against the appellant; (2) that if the appellee has a cause of action at all, that
action had prescribed; and (3) that the lower court erred in ordering the appellant to
pay the amount of P2,377.23.
In discussing the first point of contention, the appellant maintains that the appellee
has no privity of contract with the appellant. It is claimed that the transaction
between the Taiwan Bank, Ltd. and the appellant, so that the appellee, Republic of
the Philippines, could not legally bring action against the appellant for the
enforcement of the obligation involved in said transaction. This contention has no
merit. It is true that the Bank of Taiwan, Ltd. was the original creditor and the
transaction between the appellant and the Bank of Taiwan was a private contract of
loan. However, pursuant to the Trading with the Enemy Act, as amended, and
Executive Order No. 9095 of the United States; and under Vesting Order No. P-4,
dated January 21, 1946, the properties of the Bank of Taiwan, Ltd., an entity which
was declared to be under the jurisdiction of the enemy country (Japan), were vested
in the United States Government and the Republic of the Philippines, the assets of
the Bank of Taiwan, Ltd. were transferred to and vested in the Republic of the
Philippines. The successive transfer of the rights over the loans in question from the
Bank of Taiwan, Ltd. to the United States Government, and from the United States
Government to the government of the Republic of the Philippines, made the Republic
of the Philippines the successor of the rights, title and interest in said loans, thereby
creating a privity of contract between the appellee and the appellant. In defining the
word "privy" this Court, in a case, said:
The word "privy" denotes the idea of succession ... hence an assignee of a credit,
and one subrogated to it, etc. will be privies; in short, he who by succession is
placed in the position of one of those who contracted the judicial relation and
executed the private document and appears to be substituting him in the personal
rights and obligation is a privy (Alpurto vs. Perez, 38 Phil. 785, 790).
The United States of America acting as a belligerent sovereign power seized the
assets of the Bank of Taiwan, Ltd. which belonged to an enemy country. The
confiscation of the assets of the Bank of Taiwan, Ltd. being an involuntary act of war,
and sanctioned by international law, the United States succeeded to the rights and
interests of said Bank of Taiwan, Ltd. over the assets of said bank. As successor in
interest in, and transferee of, the property rights of the United States of America
over the loans in question, the Republic of the Philippines had thereby become a
privy to the original contracts of loan between the Bank of Taiwan, Ltd. and the
appellant. It follows, therefore, that the Republic of the Philippines has a legal right
to bring the present action against the appellant Jose Grijaldo.
The appellant likewise maintains, in support of his contention that the appellee has
no cause of action, that because the loans were secured by a chattel mortgage on
the standing crops on a land owned by him and these crops were lost or destroyed
through enemy action his obligation to pay the loans was thereby extinguished. This
argument is untenable. The terms of the promissory notes and the chattel mortgage

that the appellant executed in favor of the Bank of Taiwan, Ltd. do not support the
claim of appellant. The obligation of the appellant under the five promissory notes
was not to deliver a determinate thing namely, the crops to be harvested from his
land, or the value of the crops that would be harvested from his land. Rather, his
obligation was to pay a generic thing the amount of money representing the total
sum of the five loans, with interest. The transaction between the appellant and the
Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of money.
"By a contract of (simple) loan, one of the parties delivers to another ... money or
other consumable thing upon the condition that the same amount of the same kind
and quality shall be paid." (Article 1933, Civil Code) The obligation of the appellant
under the five promissory notes evidencing the loans in questions is to pay the value
thereof; that is, to deliver a sum of money a clear case of an obligation to deliver,
a generic thing. Article 1263 of the Civil Code provides:
In an obligation to deliver a generic thing, the loss or destruction of anything of the
same kind does not extinguish the obligation.
The chattel mortgage on the crops growing on appellant's land simply stood as a
security for the fulfillment of appellant's obligation covered by the five promissory
notes, and the loss of the crops did not extinguish his obligation to pay, because the
account could still be paid from other sources aside from the mortgaged crops.
In his second point of contention, the appellant maintains that the action of the
appellee had prescribed. The appellant points out that the loans became due on
June 1, 1944; and when the complaint was filed on January 17,1961 a period of more
than 16 years had already elapsed far beyond the period of ten years when an
action based on a written contract should be brought to court.
This contention of the appellant has no merit. Firstly, it should be considered that
the complaint in the present case was brought by the Republic of the Philippines not
as a nominal party but in the exercise of its sovereign functions, to protect the
interests of the State over a public property. Under paragraph 4 of Article 1108 of
the Civil Code prescription, both acquisitive and extinctive, does not run against the
State. This Court has held that the statute of limitations does not run against the
right of action of the Government of the Philippines (Government of the Philippine
Islands vs. Monte de Piedad, etc., 35 Phil. 738-751).Secondly, the running of the
period of prescription of the action to collect the loan from the appellant was
interrupted by the moratorium laws (Executive Orders No. 25, dated November 18,
1944; Executive Order No. 32. dated March 10, 1945; and Republic Act No. 342,
approved on July 26, 1948). The loan in question, as evidenced by the five
promissory notes, were incurred in the year 1943, or during the period of Japanese
occupation of the Philippines. This case is squarely covered by Executive Order No.
25, which became effective on November 18, 1944, providing for the suspension of
payments of debts incurred after December 31, 1941. The period of prescription
was, therefore, suspended beginning November 18, 1944. This Court, in the case of
Rutter vs. Esteban (L-3708, May 18, 1953, 93 Phil. 68), declared on May 18, 1953
that the Moratorium Laws, R.A. No. 342 and Executive Orders Nos. 25 and 32, are
unconstitutional; but in that case this Court ruled that the moratorium laws had
suspended the prescriptive period until May 18, 1953. This ruling was categorically
reiterated in the decision in the case of Manila Motors vs. Flores, L-9396, August 16,
1956. It follows, therefore, that the prescriptive period in the case now before US
was suspended from November 18,1944, when Executive Orders Nos. 25 and 32
were declared unconstitutional by this Court. Computed accordingly, the prescriptive
period was suspended for 8 years and 6 months. By the appellant's own admission,
the cause of action on the five promissory notes in question arose on June 1, 1944.
The complaint in the present case was filed on January 17, 1961, or after a period of
16 years, 6 months and 16 days when the cause of action arose. If the prescriptive

period was not interrupted by the moratorium laws, the action would have
prescribed already; but, as We have stated, the prescriptive period was suspended
by the moratorium laws for a period of 8 years and 6 months. If we deduct the
period of suspension (8 years and 6 months) from the period that elapsed from the
time the cause of action arose to the time when the complaint was filed (16 years, 6
months and 16 days) there remains a period of 8 years and 16 days. In other words,
the prescriptive period ran for only 8 years and 16 days. There still remained a
period of one year, 11 months and 14 days of the prescriptive period when the
complaint was filed.
In his third point of contention the appellant maintains that the lower court erred in
ordering him to pay the amount of P2,377.23. It is claimed by the appellant that it
was error on the part of the lower court to apply the Ballantyne Scale of values in
evaluating the Japanese war notes as of June 1943 when the loans were incurred,
because what should be done is to evaluate the loans on the basis of the Ballantyne
Scale as of the time the loans became due, and that was in June 1944. This
contention of the appellant is also without merit.
The decision of the court a quo ordered the appellant to pay the sum of P2,377.23 as
of December 31, 1959, plus interest rate of 6% per annum compounded quarterly
from the date of the filing of the complaint. The sum total of the five loans obtained
by the appellant from the Bank of Taiwan, Ltd. was P1,281.97 in Japanese war notes.
Computed under the Ballantyne Scale of values as of June 1943, this sum of
P1,281.97 in Japanese war notes in June 1943 is equivalent to P889.64 in genuine
Philippine currency which was considered the aggregate amount due as principal of
the five loans, and the amount of P2,377.23 as of December 31, 1959 was arrived at
after computing the interest on the principal sum of P889.64 compounded quarterly
from the time the obligations were incurred in 1943.
It is the stand of the appellee that the Ballantyne scale of values should be applied
as of the time the obligation was incurred, and that was in June 1943. This stand of
the appellee was upheld by the lower court; and the decision of the lower court is
supported by the ruling of this Court in the case of Hilado vs. De la Costa (G.R. No. L150, April 30, 1949; 46 O.G. 5472), which states:
... Contracts stipulating for payments presumably in Japanese war notes may be
enforced in our Courts after the liberation to the extent of the just obligation of the
contracting parties and, as said notes have become worthless, in order that justice
may be done and the party entitled to be paid can recover their actual value in
Philippine Currency, what the debtor or defendant bank should return or pay is the
value of the Japanese military notes in relation to the peso in Philippine Currency
obtaining on the date when and at the place where the obligation was incurred
unless the parties had agreed otherwise. ... . (italics supplied)
IN VIEW OF THE FOREGOING, the decision appealed from is affirmed, with costs
against the appellant. Inasmuch as the appellant Jose Grijaldo died during the
pendency of this appeal, his estate must answer in the execution of the judgment in
the present case.
Bengzon, C.J., Concepcion, Barrera, Regala, Bautista Angelo, Reyes, J.B.L., Makalintal
and Bengzon, J.P., JJ., concur.
SECOND DIVISION
[G.R. No. 104726. February 11, 1999]

VICTOR YAM & YEK SUN LENT, doing business under the name and style of Philippine
Printing Works, petitioners, vs. THE COURT OF APPEALS and MANPHIL INVESTMENT
CORPORATION, respondents.
DECISION
MENDOZA, J.:
This is a petition for review of the decision[1] of the Court of Appeals affirming in
toto the decision of the Regional Trial Court of Manila (Branch 149), ordering
petitioners to pay private respondent the amount of P266,146.88 plus interest,
service charge, penalty fees, and attorneys fees and the costs, otherwise the
chattel mortgage given to secure payment of the loan would be foreclosed.
The following are the facts:
On May 10, 1979, the parties in this case entered into a Loan Agreement with
Assumption of Solidary Liability whereby petitioners were given a loan of
P500,000.00 by private respondent. The contract provided for the payment of 12%
annual interest, 2% monthly penalty, 1 1/2% monthly service charge, and 10%
attorneys fees.[2] Denominated the first Industrial Guarantee and Loan Fund (IGLF),
the loan was secured by a chattel mortgage on the printing machinery in petitioners
establishment.[3]
Petitioners subsequently obtained a second IGLF loan of P300,000.00 evidenced by
two promissory notes, dated July 3, 1981 and September 30, 1981. For this purpose,
a new loan agreement[4] was entered into by the parties containing identical
provisions as the first one, except as to the annual interest which was increased to
14% and the service charge which was reduced to 1% per annum. The deed of
chattel mortgage was amended correspondingly.[5]
By April 2, 1985, petitioners had paid their first loan of P500,000.00. On November
4, 1985, private respondent was placed under receivership by the Central Bank and
Ricardo Lirio and Cristina Destajo were appointed as receiver and in-house
examiner, respectively.
On May 17, 1986, petitioners made a partial payment of P50,000.00 on the second
loan. They later wrote private respondent a letter, dated June 18, 1986, proposing to
settle their obligation. On July 2, 1986, private respondent, through its counsel,
replied with a counter-offer, namely, that it would reduce the penalty charges up to
P140,000.00, provided petitioners can pay their obligation on or before July 30,
1986.[6]
As of July 31, 1986, petitioners total liability to private respondent was P727,001.35,
broken down as follows:[7]
Principal

P295,469.47

Interest

165,385.00

Penalties

254,820.55

Service Charges

11,326.33

TOTAL

P 727,001.35

On this date, petitioners paid P410,854.47 by means of a Pilipinas Bank check,

receipt of which was acknowledged by Destajo.[8] The corresponding voucher for
the check bears the following notation: full payment of IGLF LOAN.[9]

The amount of P410,854.47 was the sum of the principal (P295,469.47) and the
interest (P165,385.00) less the partial payment of P50,000.00. The private
respondent sent two demand letters to petitioners, dated September 4, 1986 and
September 25, 1986, seeking payment of the balance of P266,146.88. As petitioners
did not respond, private respondent filed this case in the Regional Trial Court of
Metro Manila for the collection of P266,146.88 plus interests, penalties, and service
charges or, in the alternative, for the foreclosure of the mortgaged machineries.
In their Answer, petitioners claimed that they had fully paid their obligation to
private respondent. They contended that some time after receiving private
respondents letter of July 2, 1986 (concerning the conditional offer to reduce their
penalty charges), petitioner Victor Yam and his wife, Elena Yam, met with Carlos
Sobrepeas, president of respondent corporation, during which the latter agreed to
waive the penalties and service charges, provided petitioners paid the principal and
interest, computed as of July 31, 1986, less the earlier payment of P50,000.00. This
is the reason why according to them they only paid P410,854.47. Petitioners added
that this fact of full payment is reflected in the voucher accompanying the Pilipinas
Bank check they issued, which bore the notation full payment of IGLF loan.
On April 30, 1990, the lower court rendered a decision, the dispositive portion of
which reads:
WHEREFORE, in view of the foregoing, the defendants Victor Yam and Yek Sun Lent
are hereby ordered to pay jointly and severally, the principal loan balance of
P266,146.88 as of September 4, 1986 plus interest at 14% per annum, service
charge at 1% per annum and penalty fees at 2% per month and to pay plaintiff
attorneys fees equivalent to 10% of the amount to be recovered, and to pay the
costs of suit, failing in which, the chattel mortgage instituted on the printing
machineries and equipment described in the Deed of Chattel Mortgage dated May
10, 1979, as amended, is hereby declared foreclosed and the subject thereof sold in
accordance with law to satisfy the judgment herein rendered.
SO ORDERED.[10]
On appeal, the Court of Appeals affirmed the decision of the trial court in toto.
Hence, this petition. Petitioners reiterate the same assignment of errors made by
them before the Court of Appeals, to wit:[11]
FIRST ASSIGNED ERROR
THAT THE LOWER COURT GRIEVOUSLY ERRED IN FAILING TO GIVE CREDENCE TO THE
DOCUMENTARY AS WELL AS TESTIMONIAL EVIDENCE OF THE PETITIONERS RELATIVE
TO THE PAYMENT TO THE RESPONDENT OF THE ADDITIONAL LOAN UNDER THE
AMENDMENT OF DEED OF CHATTEL MORTGAGE (EXHIBIT K, RESPONDENT) AND AS
AGAINST THE TESTIMONY OF RESPONDENTS WITNESS, CRISTINA L. DESTAJO.
SECOND ASSIGNED ERROR
THAT THE COURT BELOW ERRED IN NOT TOTALLY DISREGARDING EXHIBITS E AND F
OF THE RESPONDENTS
The question is whether petitioners are liable for the payment of the penalties and
service charges on their loan which, as of July 31, 1986, amounted to P266,146.88.
The answer is in the affirmative. Art. 1270, par. 2 of the Civil Code provides that
express condonation must comply with the forms of donation.[12] Art. 748, par. 3

provides that the donation and acceptance of a movable, the value of which exceeds
P5,000.00, must be made in writing, otherwise the same shall be void. In this
connection, under Art. 417, par. 1, obligations, actually referring to credits,[13] are
considered movable property. In the case at bar, it is undisputed that the alleged
agreement to condone P266,146.88 of the second IGLF loan was not reduced in
writing.[14]

MANILA FASHIONS, INC., petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION,

NONITO ZAMORA and NAGKAKAISANG MANGGAGAWA NG MANILA FASHIONS, INC.,
respondents.
DECISION

Nonetheless, petitioners insist that the voucher covering the Pilipinas Bank check for
P410,854.47, containing the notation that the amount is in full payment of IGLF
loan, constitutes documentary evidence of such oral agreement. This contention is
without merit. The notation in full payment of IGLF loan merely states petitioners
intention in making the payment, but in no way does it bind private respondent. It
would have been a different matter if the notation appeared in a receipt issued by
respondent corporation, through its receiver, because then it would be an admission
against interest. Indeed, if private respondent really condoned the amount in
question, petitioners should have asked for a certificate of full payment from
respondent corporation, as they did in the case of their first IGLF loan of
P500,000.00.[15]

On 15 March 1993 respondent Nagkakaisang Manggagawa ng Manila Fashions, Inc.,

through its president, respondent Nonito Zamora, filed a complaint before the Labor
Arbiter on behalf of its one hundred and fifty (150) members who were regular
employees of petitioner Manila Fashions, Inc. The complaint charged petitioner with
non-compliance with Wage Order No. NCR-02 and 02-A mandating a P12 increase
in wages effective 8 January 1991. As a result, complainants basic pay, 13th month
pay, service incentive leave pay, legal holiday pay, night shift differential and
overtime pay were all underpaid.

Petitioners, however, contend that the Central Bank examiner assigned to

respondent corporation, Cristina Destajo, signed the voucher in question. Destajo
claimed that, when she signed the voucher, she failed to notice the statement that
the amount of P410,854.47 was being given in full payment of IGLF Loan. She
said she merely took note of the amount and the check number indicated therein.
[16] In any event, Destajo, by countersigning the voucher, did no more than
acknowledge receipt of the payment. She cannot be held to have ascented thereby
to the payment in full of petitioners indebtedness to private respondent. It was
obvious she had no authority to condone any indebtedness, her duties being limited
to issuing official receipts, preparing check vouchers and documentation.[17]
Moreover, it is to be noted that the alleged agreement to condone the amount in
question was supposedly entered into by the parties sometime in July 1986, that is,
after respondent corporation had been placed under receivership on November 4,
1985. As held in Villanueva v. Court of Appeals[18] the appointment of a receiver
operates to suspend the authority of a [corporation] and of its directors and officers
over its property and effects, such authority being reposed in the receiver.[19]
Thus, Sobrepeas had no authority to condone the debt.
Indeed, Mrs. Yam herself testified that when she and her husband sought the release
of the chattel mortgage over their property, they were told that only the Central
Bank would authorize the same because [the CB] is the receiver.[20] Considering
this, petitioners cannot feign ignorance and plead good faith.
The second assignment of error pertains to the petitioners allegation that they did
not receive the two letters of demand sent by private respondent on September 4
and September 25, 1986. Both the lower court and the Court of Appeals found
otherwise. We have no reason to disturb this factual finding. It is settled that
findings of fact of trial courts, adopted and confirmed by the Court of Appeals, are
final and conclusive and, as a rule, will not be reviewed on appeal.[21]
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
FIRST DIVISION
[G.R. No. 117878. November 13, 1996]

BELLOSILLO, J.:

Petitioner countered that the failure to comply with the pertinent Wage Order was
brought about by the tremendous losses suffered by it which were aggravated when
the workers staged a strike on account of the non-adjustment of their basic pay. To
forestall continuous suspension/closure of business operations, which petitioner did
for three (3) months, the strikers sent a notice that they were willing to condone the
implementation of the increase. The condonation was distinctly stated in Sec. 3, Art.
VIII, of the Collective Bargaining Agreement (CBA) dated 4 February 1992, which was
voluntarily entered into by the parties and represents a reasonable settlement
Sec. 3. The Union realizes the companys closeness to insolvency and, as such,
sympathizes with the companys financial condition. Therefore, the Union has
agreed, as it hereby agrees, to condone the implementation of Wage Order No. NCR02 and 02-A.
The complainants admitted the existence of the aforementioned provision in the
CBA; however they denied the validity thereof inasmuch as it was not reached after
due consultation with the members.
The Labor Arbiter sustained the claim that the subject provision of the CBA was void
but based its conclusion on a different ground
x x x x While it is true that both union officers/members and (petitioner) signed the
agreement, however, the same is not enforceable since said agreement is null and
void, it being contrary to law. It is only the Tripartite Wage Productivity Board of (the)
Department of Labor and Employment (DOLE) that could approve exemption (of) an
establishment from coverage of (a) Wage Order x x x x[1]
Thus on 30 June 1993 petitioner was adjudged liable to each of the complainants for
underpayment of salary, 13th month pay, vacation leave pay and legal holiday pay
in the total amount of P900,012.00. All other claims were dismissed for lack of merit.
[2]
Both parties were unsatisfied with the decision, prompting them to seek relief from
respondent National Labor Relations Commission (NLRC). The basis of petitioners
appeal was that the ruling was not in accordance with the facts and the law. On the
part of the private respondents, they assailed the computation of the award as
erroneous.
Respondent NLRC was not persuaded by petitioner. On the other hand, the appeal of
private respondents was no longer considered as it was filed beyond the
reglementary period. Thus on 31 May 1994 the disputed decision was affirmed.[3]

Was the condonation of the implementation of Wage Order No. NCR-02 and 02-A
contained in Sec. 3, Art. VIII, of the CBA valid?
Petitioner maintains that the condonation is valid. In support thereof, it invokes
cases decided by this Court applying the rule that if the agreement was voluntarily
entered into and represents a reasonable settlement it is binding on the parties and
may not be disowned simply because of a change of mind.[4] Granting the CBA
provision is indeed void, petitioner offers the alternative argument that the
computation of the award was erroneous and arbitrary.
We sustain the decision of the Labor Arbiter as affirmed by respondent NLRC that
the condonation appearing in Sec. 3, Art. VIII, of the CBA did not exempt petitioner
from compliance with Wage Order No. NCR-02 and 02-A.
A Collective Bargaining Agreement refers to the negotiated contract between a
legitimate labor organization and the employer concerning wages, hours of work and
all other terms and conditions of employment in a bargaining unit, including
mandatory provisions for grievances and arbitration machineries.[5] As in all other
contracts, the parties in a CBA may establish such stipulations, clauses, terms and
conditions as they may deem convenient provided they are not contrary to law,
morals, good customs, public order or public policy.[6] Section 3, Art. VIII, of the CBA
is a void provision because by agreeing to condone the implementation of the Wage
Order the parties thereby contravened its mandate on wage increase of P12.00
effective 8 January 1991. Also, as stated by the Labor Arbiter, it is only the Tripartite
Wage Productivity Board of the DOLE that could approve exemption of an
establishment from coverage of a Wage Order.
If petitioner is a financially distressed company then it should have applied for a
wage exemption so that it could meet its labor costs without endangering its
viability or its very existence upon which both management and labor depend for a
living.[7] The Office of the Solicitor General emphasizes the point that parties to a
CBA may not, by themselves, set a wage lower than the minimum wage. To do so
would render nugatory the purpose of a wage exemption, not to mention the
possibility that employees may be duped or be unwittingly put in a position to
accept a lower wage.[8]
The cases that petitioner relies on are simply inapplicable because, unlike the
present case which involves a stipulation in the CBA in contravention of law, they
are concerned with compromise settlements as a means to end labor disputes
recognized by Art. 227 of the Labor Code and considered not against public policy by
doctrinal rules established by this Court.[9]
As regards the alternative argument of petitioner that the computation of the award
was erroneous and arbitrary, it must be rejected outright as it was apparently never
brought to the attention of respondent NLRC. Consequently, it cannot be raised for
the first time before this Court since that would be offensive to the basic rule of fair
play, justice and due process.[10] Moreover, the original and exclusive jurisdiction of
this Court to review a decision of respondent NLRC in a petition for certiorari under
Rule 65 does not normally include an inquiry into the correctness of its evaluation of
the evidence but confined merely to issues of jurisdiction or grave abuse of
discretion.[11]
WHEREFORE, the petition is DISMISSED. The order of respondent National Labor
Relations Commission which affirmed the decision of the Labor Arbiter awarding the
total amount of P900,012.00 to the complainants is likewise AFFIRMED.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 109172 August 19, 1994

TRANS-PACIFIC INDUSTRIAL SUPPLIES, INC., petitioner,
vs.
The COURT OF APPEALS and ASSOCIATED BANK, respondents.
Gancayco Law Offices for petitioners.
Jose A. Soluta, Jr. & Associates for private respondent.

BIDIN, J.:
In this petition for review on certiorari, petitioner Trans-Pacific Industrial Supplies,
Inc. seeks the reversal of the decision of respondent court, the decretal portion of
which reads:
WHEREFORE, the decision of June 11, 1991 is SET ASIDE and NULLIFIED; the
complaint is dismissed, and on the counterclaim, Transpacific is ordered to pay
Associated attorney's fees of P15,000.00.
Costs against Transpacific.
SO ORDERED. (Rollo, p. 47)
Sometime in 1979, petitioner applied for and was granted several financial
accommodations amounting to P1,300,000.00 by respondent Associated Bank. The
loans were evidenced and secured by four (4) promissory notes, a real estate
mortgage covering three parcels of land and a chattel mortgage over petitioner's
stock and inventories.
Unable to settle its obligation in full, petitioner requested for, and was granted by
respondent bank, a restructuring of the remaining indebtedness which then
amounted to P1,057,500.00, as all the previous payments made were applied to
penalties and interests.
To secure the re-structured loan of P1,213,400.00, three new promissory notes were
executed by Trans-Pacific as follows: (1) Promissory Note No. TL-9077-82 for the
amount of P1,050,000.00 denominated as working capital; (2) Promissory Note No.
TL-9078-82 for the amount of P121,166.00 denominated as restructured interest; (3)
Promissory Note No. TL-9079-82 for the amount of P42,234.00 denominated
similarly as restructured interest (Rollo. pp. 113-115).
The mortgaged parcels of land were substituted by another mortgage covering two
other parcels of land and a chattel mortgage on petitioner's stock inventory. The
released parcels of land were then sold and the proceeds amounting to

P1,386,614.20, according to petitioner, were turned over to the bank and applied to
Trans-Pacific's restructured loan. Subsequently, respondent bank returned the
duplicate original copies of the three promissory notes to Trans-Pacific with the word
"PAID" stamped thereon.
Despite the return of the notes, or on December 12, 1985, Associated Bank
demanded from Trans-Pacific payment of the amount of P492,100.00 representing
accrued interest on PN No. TL-9077-82. According to the bank, the promissory notes
were erroneously released.
Initially, Trans-Pacific expressed its willingness to pay the amount demanded by
respondent bank. Later, it had a change of heart and instead initiated an action
before the Regional Trial Court of Makati, Br. 146, for specific performance and
damages. There it prayed that the mortgage over the two parcels of land be
released and its stock inventory be lifted and that its obligation to the bank be
declared as having been fully paid.
After trial, the court a quo rendered judgment in favor of Trans-Pacific, to wit:
WHEREFORE, premises considered and upon a clear preponderance of evidence in
support of the stated causes of action, the Court finds for the plaintiffs and against
defendant, and
(a)

declares plaintiff's obligations to defendant to have been already fully paid;

(b)
orders defendant to execute and deliver to plaintiffs a release on the i
September 11, 1981 mortgage over TCT (50858)
S-10086 and TCT (50859) S-109087, and ii December 20, 1983 chattel mortgage,
within fifteen (15) days from the finality hereof;
(c)
orders defendant to pay plaintiffs Romeo Javier and Romana Bataclan-Javier
the sum of P50,000.00 as and for moral damages; and
(d)
orders defendant to pay plaintiffs the sum of P30,000.00 as attorney's fees,
plus expenses of the suit.
Defendant's counterclaims are dismissed for lack of merit.
With costs against defendant.
SO ORDERED. (Rollo, p. 101)
Respondent bank elevated the case to the appellate court which, as aforesaid,
reversed the decision of the trial court. In this appeal, petitioner raises four errors
allegedly committed by the respondent court, namely:
I
RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT THE ACCRUED INTEREST
IN THE AMOUNT OF 492,100.00 HAS NOT BEEN PAID WHEN ARTICLE 1176 OF THE
CIVIL CODE PROVIDES THAT SUCH CLAIM FOR INTEREST UPON RECEIPT OF PAYMENT
OF THE PRINCIPAL MUST BE RESERVED OTHERWISE IT IS DEEMED PAID.
II
RESPONDENT APPELLATE COURT ERRED IN HOLDING THAT WITH THE DELIVERY OF
THE DOCUMENTS EVIDENCING THE PRINCIPAL OBLIGATION, THE ANCILLARY

OBLIGATION OF PAYING INTEREST WAS NOT RENOUNCED CONTRARY TO THE

PROVISIONS OF ART. 1273 OF THE CIVIL CODE AND THE UNDISPUTED EVIDENCE ON
RECORD.
III
RESPONDENT APPELLATE COURT ERRED IN NOT HOLDING THAT PETITIONER HAS
FULLY PAID ITS OBLIGATION CONFORMABLY WITH ARTICLE 1234 OF THE CIVIL CODE.
IV
RESPONDENT APPELLATE COURT ERRED IN AWARDING ATTORNEY'S FEES IN FAVOR
OF ASSOCIATED BANK (Rollo, p. 15).
The first three assigned errors will be treated jointly since their resolution border on
the common issue, i.e., whether or not petitioner has indeed paid in full its
obligation to respondent bank.
Applying the legal presumption provided by Art. 1271 of the Civil Code, the trial
court ruled that petitioner has fully discharged its obligation by virtue of its
possession of the documents (stamped "PAID") evidencing its indebtedness.
Respondent court disagreed and held, among others, that the documents found in
possession of Trans-Pacific are mere duplicates and cannot be the basis of
petitioner's claim that its obligation has been fully paid. Accordingly, since the
promissory notes submitted by petitioner were duplicates and not the originals, the
delivery thereof by respondent bank to the petitioner does not merit the application
of Article 1271 (1st par.) of the Civil Code which reads:
Art. 1271.
The delivery of a private document evidencing a credit, made
voluntarily by the creditor to the debtor, implies the renunciation of the action which
the former had against the latter.
Respondent court is of the view that the above provision must be construed to mean
the original copy of the document evidencing the credit and not its duplicate, thus:
. . . [W]hen the law speaks of the delivery of the private document evidencing a
credit, it must be construed as referring to the original. In this case, appellees
(Trans-Pacific) presented, not the originals but the duplicates of the three promissory
notes." (Rollo, p. 42)
The above pronouncement of respondent court is manifestly groundless. It is
undisputed that the documents presented were duplicate originals and are therefore
admissible as evidence. Further, it must be noted that respondent bank itself did not
bother to challenge the authenticity of the duplicate copies submitted by petitioner.
In People vs. Tan, (105 Phil. 1242 [1959]), we said:
When carbon sheets are inserted between two or more sheets of writing paper so
that the writing of a contract upon the outside sheet, including the signature of the
party to be charged thereby, produces a facsimile upon the sheets beneath, such
signature being thus reproduced by the same stroke of pen which made the surface
or exposed impression, all of the sheets so written on are regarded as duplicate
originals and either of them may be introduced in evidence as such without
accounting for the nonproduction of the others.
A duplicate copy of the original may be admitted in evidence when the original is in
the possession of the party against whom the evidence is offered, and the latter fails

to produce it after reasonable notice (Sec. 2[b], Rule 130), as in the case of
respondent bank.

normally retain a copy. It would thus be absurd if Article 1271 were to be applied
differently.

This notwithstanding, we find no reversible error committed by the respondent court

in disposing of the appealed decision. As gleaned from the decision of the court a
quo, judgment was rendered in favor of petitioner on the basis of presumptions, to
wit:

While it has been consistently held that findings of facts are not reviewable by this
Court, this rule does not find application where both the trial and the appellate
courts differ thereon (Asia Brewery, Inc. v. CA, 224 SCRA 437 [1993]).

The surrender and return to plaintiffs of the promissory notes evidencing the
consolidated obligation as restructured, produces a legal presumption that
Associated had thereby renounced its actionable claim against plaintiffs (Art. 1271,
NCC). The presumption is fortified by a showing that said promissory notes all bear
the stamp "PAID", and has not been otherwise overcome. Upon a clear perception
that Associated's record keeping has been less than exemplary . . ., a proffer of bank
copies of the promissory notes without the "PAID" stamps thereon does not impress
the Court as sufficient to overcome presumed remission of the obligation vis-a-vis
the return of said promissory notes. Indeed, applicable law is supportive of a finding
that in interest bearing obligations-as is the case here, payment of principal (sic)
shall not be deemed to have been made until the interests have been covered (Art.
1253, NCC). Conversely, competent showing that the principal has been paid,
militates against postured entitlement to unpaid interests.
In fine. the Court is satisfied that plaintiffs must be found to have settled their
obligations in full.
As corollary, a finding is accordingly compelled that plaintiffs (sic) accessory
obligations under the real estate mortgage over two (2) substituted lots as well as
the chattel mortgage, have been extinguished by the renunciation of the principal
debt (Art. 1273, NCC), following the time-honored axiom that the accessory follows
the principal. There is, therefore, compelling warrant (sic) to find in favor of plaintiffs
insofar as specific performance for the release of the mortgages on the substituted
lots and chattel is concerned. (Rollo, p. 100)
premised by:
Records show that Associated's Salvador M. Mesina is on record as having testified
that all three (3) December 8, 1990 promissory notes for the consolidated principal
obligation, interest and penalties had been fully paid (TSN, July 18, 1990, p. 18). It is,
moreover, admitted that said promissory notes were accordingly returned to Romeo
Javier. (Ibid.)
The above disquisition finds no factual support, however, per review of the records.
The presumption created by the Art. 1271 of the Civil Code is not conclusive but
merely prima facie. If there be no evidence to the contrary, the presumption stands.
Conversely, the presumption loses its legal efficacy in the face of proof or evidence
to the contrary. In the case before us, we find sufficient justification to overthrow the
presumption of payment generated by the delivery of the documents evidencing
petitioners indebtedness.
It may not be amiss to add that Article 1271 of the Civil Code raises a presumption,
not of payment, but of the renunciation of the credit where more convincing
evidence would be required than what normally would be called for to prove
payment. The rationale for allowing the presumption of renunciation in the delivery
of a private instrument is that, unlike that of a public instrument, there could be just
one copy of the evidence of credit. Where several originals are made out of a private
document, the intendment of the law would thus be to refer to the delivery only of
the original original rather than to the original duplicate of which the debtor would

Petitioner maintains that the findings of the trial court should be sustained because
of its advantage in observing the demeanor of the witnesses while testifying (citing
Crisostomo v. Court of Appeals, 197 SCRA 833) more so where it is supported by the
records (Roman Catholic Bishop of Malolos v. Court of Appeals, 192 SCRA 169).
This case, however, does not concern itself with the demeanor of witnesses. As for
the records, there is actually none submitted by petitioner to prove that the
contested amount, i.e., the interest, has been paid in full. In civil cases, the party
that alleges a fact has the burden of proving it (Imperial Victory Shipping Agency v.
NLRC 200 SCRA 178 [1991]). Petitioner could have easily adduced the receipts
corresponding to the amounts paid inclusive of the interest to prove that it has fully
discharged its obligation but it did not.
There is likewise nothing on the records relied upon by the trial court to support its
claim, by empirical evidence, that the amount corresponding to the interest has
indeed been paid. The trial court totally relied on a disputable presumption that the
obligation of petitioner as regards interest has been fully liquidated by the
respondent's act of delivering the instrument evidencing the principal obligation.
Rebuttable as they are, the court a quo chose to ignore an earlier testimony of Mr.
Mesina anent the outstanding balance pertaining to interest, as follows:
Court:
Q
Notwithstanding, let us go now specifically to promissory note No. 9077-82
in the amount of consolidated principal of P1,050,000.00. Does the Court get it
correctly that this consolidated balance has been fully paid?
A

Yes, the principal, yes, sir.

Fully settled?

A
Fully settled, but the interest of that promissory note has not been paid,
Your Honor.
Q

In other words, you are saying, fully settled but not truly fully settled?

The interest was not paid.

Not fully settled?

A
The interest was not paid, but the principal obligation was removed from
our books, Your Honor.
Q

And you returned the promissory note?

We returned the promissory note. (TSN, July 18, 1990, p. 22)

That petitioner has not fully liquidated its financial obligation to the Associated Bank
finds more than ample confirmation and self-defeating posture in its letter dated
December 16, 1985, addressed to respondent bank, viz.:

. . . that because of the prevailing unhealthy economic conditions, the business is

unable to generate sufficient resources for debt servicing.
Fundamentally on account of this, we propose that you permit us to fully liquidate
the remaining obligations to you of P492,100 through a payment in kind (dacion en
pago) arrangement by way of the equipments (sic) and spare parts under chattel
mortgage to you to the extent of their latest appraised values." (Rollo, pp. 153-154;
Emphasis supplied)
Followed by its August 20, 1986 letter which reads:
We have had a series of communications with your bank regarding our proposal for
the eventual settlement of our remaining obligations . . .
As you may be able to glean from these letters and from your credit files, we have
always been conscious of our obligation to you which had not been faithfully
serviced on account of unfortunate business reverses. Notwithstanding these
however, total payments thus far remitted to you already exceede (sic) the original
principal amount of our obligation. But because of interest and other charges, we
find ourselves still obligated to you by P492,100.00. . . .
. . . We continue to find ourselves in a very fluid (sic) situation in as much as the
overall outlook of the industry has not substantially improved. Principally for this
reason, we had proposed to settle our remaining obligations to you by way of dacion
en pago of the equipments (sic) and spare parts mortgaged to you to (the) extent of
their applicable loan values. (Rollo, p. 155; Emphasis supplied)
Petitioner claims that the above offer of settlement or compromise is not an
admission that anything is due and is inadmissible against the party making the
offer (Sec. 24, Rule 130, Rules of Court). Unfortunately, this is not an iron-clad rule.
To determine the admissibility or non-admissibility of an offer to compromise, the
circumstances of the case and the intent of the party making the offer should be
considered. Thus, if a party denies the existence of a debt but offers to pay the
same for the purpose of buying peace and avoiding litigation, the offer of settlement
is inadmissible. If in the course thereof, the party making the offer admits the
existence of an indebtedness combined with a proposal to settle the claim amicably,
then, the admission is admissible to prove such indebtedness (Moran, Comments on
the Rules of Court, Vol. 5, p. 233 [1980 ed.); Francisco, Rules of Court, Vol. VII, p. 325
[1973 ed.] citing McNiel v. Holbrook, 12 Pac. (US) 84, 9 L.ed. 1009). Indeed, an offer
of settlement is an effective admission of a borrower's loan balance (L.M. Handicraft
Manufacturing Corp. v. Court of Appeals, 186 SCRA 640 [1990]). Exactly, this is what
petitioner did in the case before us for review.
Finally, respondent court is faulted in awarding attorney's fees in favor of Associated
Bank. True, attorney's fees may be awarded in a case of clearly unfounded civil
action (Art. 2208 [4], CC). However, petitioner claims that it was compelled to file
the suit for damages in the honest belief that it has fully discharged its obligations in
favor of respondent bank and therefore not unfounded.
We believe otherwise. As petitioner would rather vehemently deny, undisputed is
the fact of its admission regarding the unpaid balance of P492,100.00 representing
interests. It cannot also be denied that petitioner opted to sue for specific
performance and damages after consultation with a lawyer (Rollo, p. 99) who
advised that not even the claim for interests could be recovered; hence, petitioner's
attempt to seek refuge under Art. 1271 (CC). As previously discussed, the

presumption generated by Art. 1271 is not conclusive and was successfully rebutted
by private respondent. Under the circumstances, i.e., outright and honest letters of
admission vis-a-vis counsel-induced recalcitrance, there could hardly be honest
belief. In this regard, we quote with approval respondent court's observation:
The countervailing evidence against the claim of full payment emanated from
Transpacific itself. It cannot profess ignorance of the existence of the two letters,
Exhs. 3 & 4, or of the import of what they contain. Notwithstanding the letters,
Transpacific opted to file suit and insist(ed) that its liabilities had already been paid.
There was thus an
ill-advised attempt on the part of Transpacific to capitalize on the delivery of the
duplicates of the promissory notes, in complete disregard of what its own records
show. In the circumstances, Art. 2208 (4) and (11) justify the award of attorney's
fees. The sum of P15,000.00 is fair and equitable. (Rollo, pp. 46-47)
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned
decision of the Intermediate Appellate Court, to set aside the auction sale of his
property which took place on December 5, 1977, and to allow him to recover a 203
square meter lot which was, sold at public auction to Ho Fernandez and ordered
titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house
built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro
Manila. The lot, with an area of about 328 square meters, is described and covered
by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay
City.
On October 15, 1977, a 125 square meter portion of Francia's property was
expropriated by the Republic of the Philippines for the sum of P4,116.00
representing the estimated amount equivalent to the assessed value of the
aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City Treasurer of
Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real

Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez

was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that
time helping his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In
re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the
cancellation of TCT No. 4739 (37795) and the issuance in his name of a new
certificate of title. Upon verification through his lawyer, Francia discovered that a
Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on
December 11, 1978. The auction sale and the final bill of sale were both annotated
at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later
amended his complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of
which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the
amended complaint and ordering:
(a)
The Register of Deeds of Pasay City to issue a new Transfer Certificate of
Title in favor of the defendant Ho Fernandez over the parcel of land including the
improvements thereon, subject to whatever encumbrances appearing at the back of
TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled.

TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF

PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION
SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's
allegations that his property was sold at public auction without notice to him and
that the price paid for the property was shockingly inadequate, amounting to fraud
and deprivation without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the
problems raised in his petition upon himself. While we commiserate with him at the
loss of his property, the law and the facts militate against the grant of his petition.
We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by
legal compensation. He claims that the government owed him P4,116.00 when a
portion of his land was expropriated on October 15, 1977. Hence, his tax obligation
had been set-off by operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other,
are extinguished (Art. 1278, Civil Code). The circumstances of the case do not
satisfy the requirements provided by Article 1279, to wit:
(1)
that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;
xxx

xxx

(b)
The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as
attorney's fees. (p. 30, Record on Appeal)

(3)

that the two debts be due.

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

xxx

xxx

Hence, this petition for review.

This principal contention of the petitioner has no merit. We have consistently ruled
that there can be no off-setting of taxes against the claims that the taxpayer may
have against the government. A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a lawsuit against the
government.

Francia prefaced his arguments with the following assignments of grave errors of
law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF
LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED
TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE
GOVERNMENT IS INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS
ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED
THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5,
1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS
ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF
P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS

xxx

xxx

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that
Internal Revenue Taxes can not be the subject of set-off or compensation. We stated
that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off under the statutes of set-off, which are construed uniformly, in the light of
public policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are
they a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of
public policy is well-settled that no set-off admissible against demands for taxes
levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and
party but grow out of duty to, and are the positive acts of the government to the
making and enforcing of which, the personal consent of individual taxpayers is not
required. ..."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the
collector because he has a claim against the governmental body not included in the
tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we
stated that: "... internal revenue taxes can not be the subject of compensation:
Reason: government and taxpayer are not mutually creditors and debtors of each
other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was
due to the city government while the expropriation was effected by the national
government. Moreover, the amount of P4,116.00 paid by the national government
for the 125 square meter portion of his lot was deposited with the Philippine National
Bank long before the sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the petitioner on September 30,
1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy
matter to withdraw P2,400.00 from the deposit so that he could pay the tax
obligation thus aborting the sale at public auction.

testimony that he received the letter dated November 21, 1977 (Exhibit "I") as
shown by his signature (Exhibit "I-A") thereof. He claimed further that he was not
present on December 5, 1977 the date of the auction sale because he went to Iligan
City. As long as there was substantial compliance with the requirements of the
notice, the validity of the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q.
My question to you is this letter marked as Exhibit I for Ho Fernandez
notified you that the property in question shall be sold at public auction to the
highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell the
Court whether you received the original of this letter?
A.
I just signed it because I was not able to read the same. It was just sent by
mail carrier.
Q.
So you admit that you received the original of Exhibit I and you signed upon
receipt thereof but you did not read the contents of it?
A.

Yes, sir, as I was in a hurry.

Petitioner had one year within which to redeem his property although, as well be
shown later, he claimed that he pocketed the notice of the auction sale without
reading it.

Q.

After you received that original where did you place it?

A.

I placed it in the usual place where I place my mails.

Petitioner contends that "the auction sale in question was made without complying
with the mandatory provisions of the statute governing tax sale. No evidence, oral or
otherwise, was presented that the procedure outlined by law on sales of property for
tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative
of this issue, the burden of proof therefore rests upon him to show that plaintiff was
duly and properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)

Petitioner, therefore, was notified about the auction sale. It was negligence on his
part when he ignored such notice. By his very own admission that he received the
notice, his now coming to court assailing the validity of the auction sale loses its
force.

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction
sale, has the burden of proof to show that there was compliance with all the
prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx

xxx

xxx

... [D]ue process of law to be followed in tax proceedings must be established by

proof and the general rule is that the purchaser of a tax title is bound to take upon
himself the burden of showing the regularity of all proceedings leading up to the
sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results
in depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29
Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception
to the rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal
prerequisites have been complied with, the petitioner can not, however, deny that
he did receive the notice for the auction sale. The records sustain the lower court's
finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not
properly notified of the auction sale. Surprisingly, however, he admitted in his

Petitioner's third assignment of grave error likewise lacks merit. As a general rule,
gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce
de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91
Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA
388) we held that "alleged gross inadequacy of price is not material when the law
gives the owner the right to redeem as when a sale is made at public auction, upon
the theory that the lesser the price, the easier it is for the owner to effect
redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands were sold
are unconscionable considering the wide divergence between their assessed values
and the amounts for which they had been actually sold. However, while in ordinary
sales for reasons of equity a transaction may be invalidated on the ground of
inadequacy of price, or when such inadequacy shocks one's conscience as to justify
the courts to interfere, such does not follow when the law gives to the owner the
right to redeem, as when a sale is made at public auction, upon the theory that the
lesser the price the easier it is for the owner to effect the redemption. And so it was
aptly said: "When there is the right to redeem, inadequacy of price should not be
material, because the judgment debtor may reacquire the property or also sell his
right to redeem and thus recover the loss he claims to have suffered by reason of
the price obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v.
De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not rendered

altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is
stated as follows: "where land is sold for taxes, the inadequacy of the price given is
not a valid objection to the sale." This rule arises from necessity, for, if a fair price
for the land were essential to the sale, it would be useless to offer the property.
Indeed, it is notorious that the prices habitually paid by purchasers at tax sales are
grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32
Wash. 307, 73 P. 367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean,
et al. (267 P. 555):
Like most cases of this character there is here a certain element of hardship from
which we would be glad to relieve, but do so would unsettle long-established rules
and lead to uncertainty and difficulty in the collection of taxes which are the life
blood of the state. We are convinced that the present rules are just, and that they
bring hardship only to those who have invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay
City, which necessitated the expropriation of adjoining areas, real estate values
have gone up in the area. However, the price quoted by the petitioner for a 203
square meter lot appears quite exaggerated. At any rate, the foregoing reasons
which answer the petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable
grounds, there are no strong considerations of substantial justice in his favor. Mr.
Francia failed to pay his taxes for 14 years from 1963 up to the date of the auction
sale. He claims to have pocketed the notice of sale without reading it which, if true,
is still an act of inexplicable negligence. He did not withdraw from the expropriation
payment deposited with the Philippine National Bank an amount sufficient to pay for
the back taxes. The petitioner did not pay attention to another notice sent by the
City Treasurer on November 3, 1978, during the period of redemption, regarding his
tax delinquency. There is furthermore no showing of bad faith or collusion in the
purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke
equity in his attempt to regain the property by belatedly asking for the annulment of
the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The
decision of the respondent court is affirmed.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-69560 June 30, 1988
THE INTERNATIONAL CORPORATE BANK INC., petitioner,
vs.
THE IMMEDIATE APPELLATE COURT, HON. ZOILO AGUINALDO, as presiding Judge of
the Regional Trial Court of Makati, Branch 143, NATIVIDAD M. FAJARDO, and SILVINO
R. PASTRANA, as Deputy and Special Sheriff, respondents.

PARAS, J.:
This is a petition for review on certiorari of the Decision of the Court of Appeals
dated October 31, 1984 in AC-G.R. SP No. 02912 entitled "THE INTERNATIONAL
CORPORATE BANK, INC. v. Hon. ZOILO AGUINALDO, et al.," dismissing petitioner's
petition for certiorari against the Regional Trial Court of Makati (Branch 143) for lack
of merit, and of its Resolution dated January 7, 1985, denying petitioner's motion for
reconsideration of the aforementioned Decision.
Petitioner also prays that upon filing of the petition, a restraining order be issued exparte, enjoining respondents or any person acting in their behalf, from enforcing or
in any manner implementing the Order of the respondent trial court dated February
13 and March 9, 1984, and January 10 and January 11, 1985.
The facts of this case, as found by the trial court and subsequently adopted by the
Court of Appeals, are as follows:
In the early part of 1980, private respondent secured from petitioner's predecessorsin-interest, the then Investment and Underwriting Corp. of the Philippines and Atrium
Capital Corp., a loan in the amount of P50,000,000.00. To secure this loan, private
respondent mortgaged her real properties in Quiapo, Manila and in San Rafael,
Bulacan, which she claimed have a total market value of P110,000,000.00. Of this
loan, only the amount of P20,000,000.00 was approved for release. The same
amount was applied to pay her other obligations to petitioner, bank charges and
fees. Thus, private respondent's claim that she did not receive anything from the
approved loan.
On September 11, 1980, private respondent made a money market placement with
ATRIUM in the amount of P1,046,253.77 at 17% interest per annum for a period of
32 days or until October 13, 1980, its maturity date. Meanwhile, private respondent
allegedly failed to pay her mortgaged indebtedness to the bank so that the latter
refused to pay the proceeds of the money market placement on maturity but applied
the amount instead to the deficiency in the proceeds of the auction sale of the
mortgaged properties. With Atrium being the only bidder, said properties were sold
in its favor for only P20,000,000.00. Petitioner claims that after deducting this
amount, private respondent is still indebted in the amount of P6.81 million.
On November 17, 1982, private respondent filed a complaint with the trial court
against petitioner for annulment of the sheriff's sale of the mortgaged properties, for
the release to her of the balance of her loan from petitioner in the amount of
P30,000,000,00, and for recovery of P1,062,063.83 representing the proceeds of her
money market investment and for damages. She alleges in her complaint, which
was subsequently amended, that the mortgage is not yet due and demandable and
accordingly the foreclosure was illegal; that per her loan agreement with petitioner
she is entitled to the release to her of the balance of the loan in the amount of
P30,000,000.00; that petitioner refused to pay her the proceeds of her money
market placement notwithstanding the fact that it has long become due and
payable; and that she suffered damages as a consequence of petitioner's illegal
acts.
In its answer, petitioner denies private respondent's allegations and asserts among
others, that it has the right to apply or set off private respondent's money market
claim of P1,062,063.83. Petitioner thus interposes counterclaims for the recovery of
P5,763,741.23, representing the balance of its deficiency claim after deducting the
proceeds of the money market placement, and for damages.

The trial court subsequently dismissed private respondent's cause of action

concerning the annulment of the foreclosure sale, for lack of jurisdiction, but left the
other causes of action to be resolved after trial. Private respondent then filed
separate complaints in Manila and in Bulacan for annulment of the foreclosure sale
of the properties in Manila and in Bulacan, respectively.
On December 15, 1983, private respondent filed a motion to order petitioner to
release in her favor the sum of P1,062,063.83, representing the proceeds of the
money market placement, at the time when she had already given her direct
testimony on the merits of the case and was being cross-examined by counsel. On
December 24, 1983, petitioner filed an opposition thereto, claiming that the
proceeds of the money market investment had already been applied to partly satisfy
its deficiency claim, and that to grant the motion would be to render judgment in her
favor without trial and make the proceedings moot and academic. However, at the
hearing on February 9, 1984, counsel for petitioner and private respondent jointly
manifested that they were submitting for resolution said motion as well as the
opposition thereto on the basis of the pleadings and of the evidence which private
respondent had already presented.
On February 13, 1984, respondent judge issued an order granting the motion, as
follows:
IN VIEW OF THE FOREGOING, the defendant International Corporate Bank is hereby
ordered to deliver to the plaintiff Natividad M. Pajardo the amount of P1,062,063.83
covered by the repurchase agreement with Serial No. AOY-14822 (Exhibit "A'), this
amount represented the principal of P1,046,253.77 which the plaintiff held including
its interest as of October 13, 1980, conditioned upon the plaintiff filing a bond
amount to P1,062,063.83 to answer for all damages which the said defendant bank
may suffer in the event that the Court should finally decide that the plaintiff was not
entitled to the said amount.
Petitioner filed a motion for reconsideration to the aforesaid order, asserting among
other things that said motion is not verified, and therefore a mere scrap of paper.
Private respondent however manifested that since she testified in open court and
was cross-examined by counsel for petitioner on the motion for release of the
proceeds of the money market placement, the defect had already been cured. On
March 9, 1984, the respondent judge issued an order denying petitioner's motion for
reconsideration. (CA Decision, Rollo, pp. 109-111).
On March 13, 1984, petitioner filed a special civil action for certiorari and prohibition
with preliminary injunction with the Court of Appeals, (a) for the setting aside and
annulment of the Orders dated February 13, 1984 and March 9,1984, issued by the
respondent trial court, and (b) for an order commanding or directing the respondent
trial judge to desist from enforcing and/or implementing and/or executing the
aforesaid Orders. The temporary restraining order prayed for was issued by
respondent Court of Appeals on March 22, 1984. (Please see CA Decision, Rollo, p.
114, last paragraph).
In a decision rendered on October 31, 1984 (Rollo, pp. 109-14), the Court of Appeals
dismissed said petition finding(a) that while the Motion for the release of the
proceeds of the money market investment in favor of private respondent was not
verified by her, that defect was cured when she testified under oath to substantiate
her allegations therein: (b) that, petitioner cannot validly claim it was denied due
process for the reason that it was given ample time to be heard, as it was in fact
heard when it filed an Opposition to the motion and a motion for reconsideration; (c)
that the circumstances of this case prevent legal compensation from taking place
because the question of whether private respondent is indebted to petitioner in the

amount of 6.81 million representing the deficiency balance after the foreclosure of
the mortgage executed to secure the loan extended to her, is vigorously disputed;
(d) that the release of the proceeds of the money market investment for private
respondent will not make the causes of action of the case pending before the trial
court moot and academic nor will it cause irreparable damage to petitioner, private
respondent having filed her bond in the amount of P1,062,063.83 to answer for all
damages which the former may suffer in the event that the court should finally
decide that private respondent is not entitled to the return of said amount (CA
Decision, Rello, pp. 112-114).
The dispositive portion of the aforementioned Decision reads:
... We hold that the respondent court cannot be successfully charged with grave
abuse of discretion amounting to lack of jurisdiction when it issued its Orders of
February 13, 1984 and March 9, 1984, based as they are on a correct appreciation of
the import of the parties' evidence and the applicable law.
IN VIEW WHEREOF, the petition is dismissed for lack of merit and the temporary
restraining order issued by this Court on March 22, 1984 is lifted. (Ibid., p. 114).
Petitioner moved for the reconsideration of the above decision (Annex "S", Rollo, pp.
116-124), but for the reason that the same failed to raise any issue that had not
been considered and passed upon by the respondent Court of Appeals, it was denied
in a Resolution dated January 7, 1985 (CA Resolution, Rollo, p. 126).
Having been affirmed by the Court of Appeals, the trial court issued a Writ of
Execution to implement its Order of February 13, 1984 (Annex "BB", Rollo, p. 188)
and by virtue thereof, a levy was made on petitioner's personal property consisting
of 20 motor vehicles (Annex "U", Rollo, p. 127).
On January 9, 1985, herein private respondent (then plaintiff) filed in the trial court
an ex-parte motion praying that the four branches of the petitioner such as:
Baclaran Branch, Paranaque, Metro Manila; Ylaya Branch, Divisoria, Metro Manila;
Cubao Branch, Quezon City and Binondo Branch, Sta. Cruz, Manila, be ordered to
pay the amount of P250,000.00 each, and the main office of the petitioner bank at
Paseo de Roxas, Makati, Metro Manila, be ordered to pay the amount of P62,063.83
in order to answer for the claim of private respondent amounting to P1,062,063.83.
Thereupon, on January 10, 1985, the trial court issued an Order (Annex "V", Rollo, p.
129) granting the above-mentioned prayers.
Acting on the ex-parte motion by the plaintiff (now private respondent), the trial
court, on January 11, 1984, ordered the President of defendant International
Corporate Bank (now petitioner) and all its employees and officials concemed to
deliver to the sheriff the 20 motor vehicles levied by virtue of the Writ of Execution
dated December 12, 1984 (Annex "W", Rollo, p. 131).
The petitioner having failed to comply with the above-cited Order, the respondent
trial court issued two (2) more Orders: the January 16, 1985 (Annex "CC," Rollo, p.
190) and January 21, 1985 Orders (Annex "DD", Rollo, p. 191), directing several
employees mentioned therein to show cause wily they should not be cited in
contempt.
Hence, this petition for review on certiorari with prayer for a restraining order and
for a writ of preliminary injunction.

Three days after this petition was filed, or specifically on January 18, 1985, petitioner
filed an urgent motion reiterating its prayer for the issuance of an ex-parte
restraining order (Rollo, p. 132).
Simultaneous with the filing of the present petition, petitioner, as defendant, filed
with the trial court an ex-parte motion to suspend the implementation of any and all
orders and writs issued pursuant to Civil Case No. 884 (Annex "A", Rollo, p. 135).
This Court's resolution dated January 21, 1985, without giving due course to the
petition, resolved (a) to require the respondents to comment: (b) to issue, effective
immediately and until further orders from this Court, a Temporary Restraining Order
enjoining the respondents from enforcing or in any manner implementing the
questioned Orders dated February 13, 1984, March 9, 1984, January 10, 1985 and
January 11 and 16, 1985, issued in Civil Case No. 884.
The corresponding writ was issued on the same day (Rollo, pp. 139-140).
As required, the Comment of private respondent was filed on January 28, 1985
(Rollo, pp. 141- 150).
Thereafter, petitioner moved for leave to file a supplemental petition on the ground
that after it had filed this present petition, petitioner discovered that the bond filed
with, and approved by, the respondent lower court showed numerous material
erasures, alterations and/or additions (Rollo, p. 151), which the issuing insurance
company certified as having been done without its authority or consent (Annex "Z",
Rollo, p. 178).
The Supplemental Petition was actually filed on February 1, 1985 (Rollo, pp. 154171). It pointed out the erasures, alterations and/or additions in the bond as follows:
a.
below "Civil Case No. 884" after the words, "Plaintiff's Bond," the phrase
"For Levying of Attachment" was erased or deleted;
b. in lines 2 and 3 after the word "order," the phrase "approving plaintiff's motion
dated Dec. 15, 1983, was inserted or added;
c. in line 3, the phrases "Of attachment" and "ordered that a writ of attachment
issue' were erased or deleted;
d also in line 3 after the words "the court has" the phrase "approved the Motion was
likewise inserted or added;
e. in line 9, the phrase "and of the levying of said attachment" was also erased or
deleted;
f.

in line 13, the word "attachment" was likewise erased or deleted;

g.
also in line 13 after the deletion of word "attachment" the phrase "release
of the P1,062,063.83 to the plaintiff was similarly inserted or added."
Petitioner contended therein that in view of the foregoing facts, the genuineness,
due execution and authenticity as well as the validity and enforceability of the bond
(Rello, p. 174) is now placed in issue and consequently, the bond may successfully
be repudiated as falsified and, therefore, without any force and effect and the
bonding company may thereby insist that it has been released from any hability
thereunder.

Also, petitioner pointed as error the respondent trial court's motu proprio
transferring Civil Case No. 884 to the Manila Branch of the same Court arguing that
improper venue, as a ground for, and unless raised in, a Motion to Dismiss, may be
waived by the parties and the court may not pre-empt the right of the parties to
agree between or among themselves as to the venue of their choice in litigating
their justiciable controversy (Supplemental Petition, Rollo, p. 160).
On being required to comment thereon, (Rollo, p. 192) private respondent countered
(Rollo, pp. 193-198) that bond forms are ready-prepared forms and the bonding
company used the form for "Levying of Attachment" because the company has no
ready-prepared form for the kind of bond called for or required in Civil Case 884.
Whatever deletions or additions appear on the bond were made by the Afisco
Insurance Corporation itself for the purpose of accomplishing what was required or
intended.
Nonetheless, on May 7, 1985, private respondent filed "Plaintiffs Bond" in the
respondent trial court in the amount of P1,062,063.83 a xerox copy of which was
furnished this Court (Rollo, p. 219), and noted in the Court's Resolution dated May
29,1985 (Rollo, p. 225).
On March 11, 1985, petitioner was required to file a Consolidated Reply (Rollo, p.
199) which was filed on April 10, 1985 (Rollo, p. 201).
Thereafter, a Rejoinder (Rollo, p. 238) was filed by private respondent on September
18, 1985 after Atty. Advincula, counsel for private respondents was required by this
Court to show cause why he should not be disciplinarily dealt with or held in
contempt for his failure to comply on time (Rollo, p. 226) and on August 19, 1985
said lawyer was finally admonished (Rollo, p. 229) for his failure to promptly apprise
the Court of his alleged non-receipt of copy of petitioner's reply, which alleged nonreceipt was vehemently denied by petitioner in its Counter Manifestation (Rollo, p.
230) filed on August 5, 1985.
Finally, on October 7, 1985, this petition was given due course and both parties were
required to submit simultaneous memoranda (Rollo, p. 249) but before the same
were filed, petitioner moved for leave to file sur-rejoinder (Rollo, p. 250), the surrejoinder was filed on October 14,1985 (Rollo, pp. 252-254).
Petitioner's memorandum was filed on December 28, 1985 (Rollo, pp. 264-292)
while that of private respondent was submitted on January 10, 1986 (Rollo, pp. 295304).
Petitioner again moved for leave to file a Reply Memorandum (Rollo, p. 307) which,
despite permission from this Court, was not filed and on August 22, 1986, private
respondent prayed for early resolution of the petition (Rollo, p. 311).
In a resolution dated October 13, 1986 (Rollo, p. 314) this case was transferred to
the Second Division of this Court, the same being assigned to a member of that
Division.
The crucial issue to be resolved in this case is whether or not there can be legal
compensation in the case at bar.
Petitioner contends that after foreclosing the mortgage, there is still due from
private respondent as deficiency the amount of P6.81 million against which it has
the right to apply or set off private respondent's money market claim of
P1,062,063.83.

The argument is without merit.

As correctly pointed out by the respondent Court of Appeals
Compensation shall take place when two persons, in their own right, are creditors
and debtors of each other. (Art. 1278, Civil Code). "When all the requisites
mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by
operation of law, even without the consent or knowledge of the debtors." (Art. 1290,
Civil Code). Article 1279 of the Civil Code requires among others, that in order that
legal compensation shall take place, "the two debts be due" and "they be liquidated
and demandable." Compensation is not proper where the claim of the person
asserting the set-off against the other is not clear nor liquidated; compensation
cannot extend to unliquidated, disputed claim arising from breach of contract.
(Compaia General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo &
Martinez vs. Herrero, 17 Phil. 29).
There can be no doubt that petitioner is indebted to private respondent in the
amount of P1,062,063.83 representing the proceeds of her money market
investment. This is admitted. But whether private respondent is indebted to
petitioner in the amount of P6.81 million representing the deficiency balance after
the foreclosure of the mortgage executed to secure the loan extended to her, is
vigorously disputed. This circumstance prevents legal compensation from taking
place. (CA Decision, Rollo, pp. 112-113).
It must be noted that Civil Case No. 83-19717 is still pending consideration at the
RTC Manila, for annulment of Sheriffs sale on extra-judicial foreclosure of private
respondent's property from which the alleged deficiency arose. (Annex "AA", Rollo,
pp. 181-189). Therefore, the validity of the extrajudicial foreclosure sale and
petitioner's claim for deficiency are still in question, so much so that it is evident,
that the requirement of Article 1279 that the debts must be liquidated and
demandable has not yet been met. For this reason, legal compensation cannot take
place under Article 1290 of the Civil Code.
Petitioner now assails the motion of the plaintiff (now private respondent) filed in the
trial court for the release of the proceeds of the money market investment, arguing
that it is deficient in form, the same being unverified (petitioner's Memorandum,
Rollo, p. 266). On this score, it has been held that "as enjoined by the Rules of Court
and the controlling jurisprudence, a liberal construction of the rules and the
pleadings is the controlling principle to effect substantial justice." (Maturan v. Araula,
111 SCRA 615 [1982]).
Finally, the filing of insufficient or defective bond does not dissolve absolutely and
unconditionally the injunction issued. Whatever defect the bond possessed was
cured when private respondent filed another bond in the trial court.
PREMISES CONSIDERED, the questioned Decision and Resolution of the respondent
Court of Appeals are hereby AFFIRMED.
SO ORDERED.
Yap, C.J., Melencio-Herrera and Padilla, JJ., concur.

SECOND DIVISION
G.R. No. 191555, January 20, 2014
UNION BANK OF THE PHILIPPINES, Petitioner, v. DEVELOPMENT BANK OF THE
PHILIPPINES, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on Certiorari1 are the Decision2 dated November
3, 2009 and Resolution3 dated February 26, 2010 of the Court of Appeals (CA) in CAG.R. SP No. 93833 which affirmed the Orders4 dated November 9, 2005 and January
30, 2006 of the Regional Trial Court of Makati, Branch 585 (RTC) in Civil Case No.
7648 denying the motion to affirm legal compensation6 filed by petitioner Union
Bank of the Philippines (Union Bank) against respondent Development Bank of the
Philippines (DBP).
The Facts
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Banks
predecessor-in-interest, Bancom Development Corporation (Bancom), and to DBP.
On May 21, 1979, FI and DBP, among others, entered into a Deed of Cession of
Property In Payment of Debt7 (dacion en pago) whereby the former ceded in favor of
the latter certain properties (including a processing plant in Marilao, Bulacan
[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).8
On the same day, DBP, as the new owner of the processing plant, leased back9 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 agreement10 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 (subject rentals) which would serve as payment of the assumed obligations,
to be paid in monthly installments. The pertinent portions of the Assumption
Agreement reads as follows:
WHEREAS, DBP has agreed and firmly committed in favor of Bancom that the above
obligations to Bancom which DBP has assumed shall be settled, paid and/or
liquidated by DBP out of a portion of the lease rentals or part of the proceeds of sale

of those properties of the Assignors conveyed to DBP pursuant to the [Deed of

Cession of Property in Payment of Debt dated May 21, 1979] and which are the
subject of [the Lease Agreement] made and executed by and between DBP and [FI],
the last hereafter referred to as the "Lessee" to be effective as of July 31, 1978.

P32,441,401.85 representing the total rental debt incurred under the Lease
Agreement, including P10,000.00 as attorneys fees; and (b) DBP, after having been
paid by FW its unpaid rentals, to remit 30% thereof (i.e., the subject rentals) to
Union Bank.20

xxx

It rejected Union Banks claim that DBP has the direct obligation to remit the subject
rentals not only from FWs rental payments but also out of its own resources since
said claim contravened the "plain meaning" of the Assumption Agreement which
specifies that the payment of the assumed obligations shall be made "out of the
portion of the lease rentals or part of the proceeds of the sale of those properties of
[FI] conveyed to DBP."21 It also construed the phrase under the Assumption
Agreement that DBP is obligated to "pay any balance of the Assumed Obligations
after application of the entire rentals and/or the entire sales proceeds actually
received by [Union Bank] on the Leased Properties . . . not later than December 29,
1998" to mean that the lease rentals must first be applied to the payment of the
assumed obligations in the amount of P17,000,000.00, and that DBP would have to
pay out of its own money only in case the lease rentals were insufficient, having only
until December 29, 1998 to do so. Nevertheless, the monthly installments in
satisfaction of the assumed obligations would still have to be first sourced from said
lease rentals as stipulated in the assumption agreement.22 In view of the foregoing,
the 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.23

4. DBP hereby covenants and undertakes that the amount up to 30% of any and all
rentals due from the Lessee pursuant to the Lease Agreement shall be remitted by
DBP to Bancom at the latters offices at Pasay Road, Makati, Metro Manila within five
(5) days from due dates thereof, and applied in payment of the Assumed
Obligations. Likewise, the amount up to 30% of the proceeds from any sale of the
Leased Properties shall within the same period above, be remitted by DBP to
Bancom and applied in payment or prepayment of the Assumed Obligations. x x x.
Any balance of the Assumed Obligations after application of the entire rentals and or
the entire sales proceeds actually received by Bancom on the Leased Properties
shall be paid by DBP to Bancom not later than December 29, 1998. (Emphases
supplied)
Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the Lease
Agreement to Foodmasters Worldwide, Inc. (FW);11 while on May 9, 1984, Bancom
conveyed all its receivables, including, among others, DBPs assumed obligations, to
Union Bank.12
Claiming that the subject rentals have not been duly remitted despite its repeated
demands, Union Bank filed, on June 20, 1984, a collection case against DBP before
the RTC, docketed as Civil Case No. 7648.13 In opposition, DBP countered, among
others, that the obligations it assumed were payable only out of the rental payments
made by FI. Thus, since FI had yet to pay the same, DBPs obligation to Union Bank
had not arisen.14 In addition, DBP sought to implead FW as third party-defendant in
its capacity as FIs assignee and, thus, should be held liable to Union Bank.15
In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the ground that it
had ceased to be a real-party-in-interest due to the supervening transfer of its
rights, title and interests over the subject matter to the Asset Privatization Trust
(APT). Said motion was, however, denied by the RTC in an Order dated May 27,
1988.16
The RTC Ruling in Civil Case No. 7648
Finding the complaint to be meritorious, the RTC, in a Decision17 dated May 8, 1990,
ordered: (a) DBP to pay Union Bank the sum of P4,019,033.59, representing the
amount of the subject rentals (which, again, 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. It ruled that there lies no evidence which would show that DBPs receipt
of the rental payments from FW is a condition precedent to the formers obligation
to remit the subject rentals under the Lease Agreement. Thus, when DBP failed to
remit the subject rentals to Union Bank, it defaulted on its assumed obligations.18
DBP then elevated the case on appeal before the CA, docketed as CA-G.R. CV No.
35866.
The CA Ruling in CA-G.R. CV No. 35866
In a Decision19 dated May 27, 1994 (May 27, 1994 Decision), the CA set aside the
RTCs ruling, and consequently ordered: (a) FW to pay DBP the amount of

Separately, the CA upheld the RTCs denial of DBPs motion to dismiss for the reason
that the transfer of its rights, title and interests over the subject matter to the APT
occurred pendente lite, and, as such, the substitution of parties is largely
discretionary on the part of the court.
At odds with the CAs ruling, Union Bank and DBP filed separate petitions for review
on certiorari before the Court, respectively docketed as G.R. Nos. 115963 and
119112, which were thereafter consolidated.
The Courts Ruling in G.R. Nos. 115963 & 119112
The Court denied both petitions in a Resolution24 dated December 13, 1995. First, it
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, 1998.25 Similarly, the Court agreed with the CA that the denial of
DBPs motion to dismiss was proper since substitution of parties, in case of transfers
pendente lite, is merely discretionary on the part of the court, adding further that
the proposed substitution of APT will amount to a novation of debtor which cannot
be done without the consent of the creditor.26
On August 2, 2000, the Courts resolution became final and executory.27
The RTC Execution Proceedings
On May 16, 2001, Union Bank filed a motion for execution28 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 opposed29 Union Banks motion, contending that it sought
to effectively vary the dispositive portion of the CAs May 27, 1994 Decision in CAG.R. CV No. 35866. Also, on September 12, 2001, DBP filed its own motion for
execution against FW, citing the same CA decision as its basis.

In a Consolidated Order30 dated October 15, 2001 (Order of Execution), the RTC
granted both motions for execution. Anent Union Banks motion, the RTC opined that
the CAs ruling that DBPs payment to Union Bank shall be demandable only upon
payment of FW must be viewed in light of the date when the same was rendered. It
noted that the CA decision was promulgated only on May 27, 1994, which was
before the December 29, 1998 due date within which DBP had to fully pay its
obligation to Union Bank under the Assumption Agreement. Since the latter period
had already lapsed, "[i]t would, thus, be too strained to argue that payment by DBP
of its assumed obligation[s] shall be dependent on [FWs] ability, if not availability,
to pay."31 In similar regard, the RTC granted DBPs motion for execution against FW
since its liability to Union Bank and DBP remained undisputed.

On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal
Compensation,43 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 which were allegedly not in existence prior
to or during trial, namely: (a) on December 29, 1998, DBPs assumed obligations
became due and demandable;44 and (b) considering that FWI became nonoperational 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 P1,849,391.87.45

As a result, a writ of execution32 dated October 15, 2001 (October 15, 2001 Writ of
Execution) and, thereafter, a notice of garnishment33 against DBP were issued.
Records, however, do not show that the same writ was implemented against FW.

On November 9, 2005, the RTC issued an Order46 denying the above-mentioned

motion for lack of merit, holding that Union Banks stated grounds were already
addressed by the Court in the January 13, 2004 Decision in G.R. No. 155838. With
Union Banks motion for reconsideration therefrom having been denied, it filed a
petition for certiorari47 with the CA, docketed as CA-G.R. SP No. 93833.

DBP filed a motion for reconsideration34 from the Execution Order, averring that the
latter issuance varied the import of the CAs May 27, 1994 Decision in CA-G.R. CV
No. 35866 in that it prematurely ordered DBP to pay the assumed obligations to
Union Bank before FWs payment. The motion was, however, denied on December 5,
2001.35 Thus, DBPs deposits were eventually garnished.36 Aggrieved, DBP filed a
petition for certiorari37 before the CA, docketed as CA-G.R. SP No. 68300.

Pending resolution, Union Bank issued Managers Check48 No. 099-0003192363

dated April 21, 2006 amounting to P52,427,250.00 in favor of DBP, in satisfaction of
the Writ of Execution dated September 6, 2005 Writ of Execution. DBP, however,
averred that Union Bank still has a balance of P756,372.39 representing a portion of
the garnished funds of DBP,49 which means that said obligation had not been
completely extinguished.

The CA Ruling in CA-G.R. SP No. 68300

The CA Ruling in CA-G.R. SP No. 93833

In a Decision38 dated July 26, 2002, the CA dismissed DBPs petition, finding that
the RTC did not abuse its discretion when it issued the October 15, 2001 Writ of
Execution. It upheld the RTCs observation that there was "nothing wrong in the
manner how [said writ] was implemented," as well as "in the zealousness and
promptitude exhibited by Union Bank" in moving for the same. DBP appealed the
CAs ruling before the Court, which was docketed as G.R. No. 155838.

In a Decision50 dated November 3, 2009, the CA dismissed Union Banks petition,

finding no grave abuse of discretion on the RTCs part. It affirmed the denial of its
motion to affirm legal compensation considering that: (a) the RTC only implemented
the Courts January 13, 2004 Decision in G.R. No. 155838 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.51

The Courts Ruling in G.R. No. 155838

Undaunted, Union Bank moved for reconsideration which was, however, denied in a
Resolution52 dated February 26, 2010; hence, the instant petition.

In a Decision39 dated January 13, 2004 (January 13, 2004 Decision), the Court
granted DBPs appeal, and thereby reversed and set aside the CAs ruling in CA-G.R.
SP No. 68300. It found significant points of variance between the CAs May 27, 1994
Decision in CA-G.R. CV No. 35866, and the RTCs Order of Execution/October 15,
2001 Writ of Execution. It ruled that both the body and the dispositive portion of the
same decision 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 Court: (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.40 Dissatisfied, Union Bank moved for
reconsideration which was, however, denied by the Court in a Resolution dated
March 24, 2004 with finality. Thus, the January 13, 2004 Decision attained finality on
April 30, 2004.41 Thereafter, DBP moved for the execution of the said decision
before the RTC. After numerous efforts on the part of Union Bank proved futile, the
RTC 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.42
Union Banks Motion to Affirm Legal Compensation

The Issue Before the Court

The sole issue for the Courts resolution is whether or not the CA correctly upheld
the denial of Union Banks motion to affirm legal compensation.
The Courts Ruling
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.53 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;

xxx

(4) That they be liquidated and demandable;

Since, as already stated, the monthly installments for the payment of the P17 million
debt are to be funded from the lease rentals, it follows that if the lease rentals are
not paid, there is nothing for DBP to remit to [Union Bank], and thus [DBP] should
not be considered in default. It is noteworthy that, as stated in the appealed
decision, "as regards plaintiffs claim for damages against defendant for its alleged
negligence in failing and refusing to enforce a lessors remedies against
Foodmasters Worldwide, Inc., the Court finds no competent and reliable evidence of
such claim."

(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor. (Emphases and
underscoring supplied)
The rule on legal54 compensation is stated in Article 1290 of the Civil Code which
provides that "[w]hen 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, Union Bank filed a motion to seek affirmation that legal compensation
had taken place in order to effectively offset (a) its own obligation to return the
funds it previously received from DBP as directed under the September 6, 2005 Writ
of Execution with (b) DBPs assumed obligations under the Assumption Agreement.
However, legal 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 arein the Courts words in its Decision dated January 13, 2004 in
G.R. No. 155838" 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, in the same ruling, the Court observed that any deficiency that DBP had to
make up (by December 29, 1998 as per the Assumption Agreement) 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 (requisite 4 of Article 1279 of the Civil Code).
The aforementioned Court decision had already attained finality on April 30, 200455
and, hence, pursuant to the doctrine of conclusiveness of judgment, the facts and
issues actually and directly resolved therein may not be raised in any future case
between the same parties, even if the latter suit may involve a different cause of
action.56 Its pertinent portions are hereunder quoted for ready reference:57
Both the body and the dispositive portion of the [CAs May 27, 1994 Decision in CAG.R. CV No. 35866] correctly construed the nature of DBPs liability for the lease
payments under the various contracts, to wit:
x x x Construing these three contracts, especially the "Agreement" x x x between
DBP and Bancom as providing for the payment of DBPs assumed obligation out of
the rentals to be paid to it does not mean negating DBPs assumption "for its own
account" of the P17.0 million debt x x x. It only means that they provide a
mechanism for discharging [DBPs] liability. This liability subsists, since under the
"Agreement" x x x, DBP is obligated to pay "any balance of the Assumed Obligations
after application of the entire rentals and or the entire sales proceeds actually
received by [Union Bank] on the Leased Propertiesnot later than December 29,
1998." x x x It only means that the lease rentals must first be applied to the
payment of the P17 million debt and that [DBP] would have to pay out of its money
only in case of insufficiency of the lease rentals having until December 29, 1998 to
do so. In this sense, it is correct to say that the means of repayment of the assumed
obligation is not limited to the lease rentals. The monthly installments, however,
would still have to come from the lease rentals since this was stipulated in the
"Agreement."

xxx
WHEREFORE, the decision appealed from is SET ASIDE and another one is
RENDERED,
(i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc. to pay
defendant and third-party plaintiff-appellant Development Bank of the Philippines
the sum of P32,441,401.85, representing the unpaid rentals from August 1981 to
June 30, 1987, as well as P10,000.00 for attorneys fees; and
(ii) Ordering defendant and third-party plaintiff-appellant Development Bank of the
Philippines after having been paid by third-party defendant-appellee the sum of
P32,441,401.85, to remit 30% thereof to plaintiff-appellee Union Bank of the
Philippines.
SO ORDERED.
In other words, both the body and the dispositive portion of the aforequoted decision
acknowledged that DBPs obligation to Union Bank for remittance of the lease
payments is contingent on the prior payment thereof by Foodmasters to DBP.
A careful reading of the decision shows that the Court of Appeals, which was
affirmed by the Supreme Court, found that only the balance or the deficiency of the
P17 million principal obligation, if any, would be due and demandable as of
December 29, 1998. Naturally, this deficiency cannot be determined until after the
satisfaction of Foodmasters obligation to DBP, for remittance to Union Bank in the
proportion set out in the 1994 Decision. (Emphases and underscoring supplied;
citations omitted)
xxx
In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not concurred
in this case, no legal compensation could have taken place between the abovestated debts pursuant to Article 1290 of the Civil Code. Perforce, the petition must
be denied, and the denial of Union Bank s motion to affirm legal compensation
sustained.
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.
Republic of the Philippines
Supreme Court
Baguio City

THIRD DIVISION
INSULAR INVESTMENT AND TRUST CORPORATION,
Petitioner,
- versus CAPITAL ONE EQUITIES CORP. (now known as CAPITAL ONE HOLDINGS CORP.) and
PLANTERS DEVELOPMENT BANK,
Respondents.
G.R. No. 183308
Promulgated:
April 25, 2012
DECISION
MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Revised Rules of
Civil Procedure assailing the June 6, 2008 Decision[1] of the Court of Appeals (CA) in
C.A.-G.R. CV No. 79320 entitled Insular Investment and Trust Corporation v. Capital
One Equities Corporation (now known as Capital One Holdings Corporation) and
Planters Development Bank.
THE FACTS
Based on the records of the case and on the September 2, 1999 Partial Stipulation of
Facts and Documents[2] (the Partial Stipulation) agreed upon by the parties, the
facts are as follows:
Petitioner Insular Investment and Trust Corporation (IITC) and respondents Capital
One Equities Corporation (COEC) and Planters Development Bank (PDB) are
regularly engaged in the trading, sale and purchase of Philippine treasury bills.
On various dates in 1994, IITC purchased from COEC treasury bills with an aggregate
face value of P260,683,392.51 (the IITC T-Bills), as evidenced by the confirmations of
purchase issued by IITC. The purchase price for the said treasury bills were fully
paid by IITC to COEC which was able to deliver P121,050,000.00 worth of treasury
bills to IITC.
On May 2, 1994, COEC purchased treasury bills with a face value of P186,774,739.49
(the COEC T-Bills). IITC issued confirmations of sale in favor of COEC covering the
said transaction. COEC paid the purchase price by issuing the following checks:
Check No.
Payee
Amount
(1) City Trust Managers Check No. 001180
Planters Development Bank
P154,802,341.59
(2) UCPB-Ayala Managers Check No. AYLO43841
Planters Development Bank
P16,975,883.89

(3) UCPB-Ayala Managers Check No. AYLO43840

Planters Development Bank
P10,413,043.78
(4) UCPB-Ayala Check No. AYL213346
Insular Investment and Trust Corporation
P24,116.11
Both IITC and PDB received the proceeds of the checks.
On May 2, 1994, PDB issued confirmations of sale in favor of IITC for the sale of
treasury bills and IITC, in turn, issued confirmations of purchase in favor of PDB over
treasury bills with a total face value of P186,790,000.00.
Thereafter, PDB sent a letter[3] dated May 4, 1994 to IITC undertaking to deliver
treasury bills worth P186,790,000.00, which IITC purchased from PDB on May 2,
1994, as soon as they would be available.
On May 10, 1994, COEC wrote a letter to IITC demanding the physical delivery of the
treasury bills which the former purchased from the latter on May 2, 1994.
In its May 18, 1994 Letter[4] to PDB, IITC requested, on behalf of COEC, the delivery
to IITC of treasury bills worth P186,790,000.00 which had been paid in full by COEC.
COEC was furnished with a copy of the said letter.
On May 30, 1994, COEC protested the tenor of IITCs letter to PDB and took
exception to IITCs assertion that it merely acted as a facilitator with regard to the
sale of the treasury bills.

IITC sent COEC a letter[5] dated June 3, 1994, demanding that COEC deliver to it
(IITC) the P139,833,392.00 worth of treasury bills or return the full purchase price.
In either case, it also demanded that COEC (1) pay IITC the amount of P1,729,069.50
representing business opportunity lost due to the non-delivery of the treasury bills,
and (2) deliver treasury bills worth P121,050,000 with the same maturity dates
originally purchased by IITC.
COEC sent a letter-reply[6] dated June 9, 1994 to IITC in which it acknowledged its
obligation to deliver the treasury bills worth P139,833,392.00[7] which it sold to IITC
and formally demanded the delivery of the treasury bills worth P186,774,739.49
which it purchased from IITC. COEC also demanded the payment of lost profits in
the amount of P3,253,250.00. Considering that COEC and IITC both have claims
against each other for the delivery of treasury bills, COEC proposed that a legal setoff be effected, which would result in IITC owing COEC the difference of
P46,941,446.49.
In its June 13, 1994 letter to COEC, IITC rejected the suggestion for a legal setting-off
of obligations, alleging that it merely acted as a facilitator between PDB and COEC.
On June 27, 1994, COEC replied to IITCs letter, reiterating its demand and its
position stated in its June 9, 1994 letter.

On July 1, 1994, IITC, COEC and PDB entered into a Tripartite Agreement[8] (the
Tripartite Agreement) wherein PDB assigned to IITC, which in turn assigned to COEC,
Central Bank Bills with a total face value of P50,000,000.00. These assignments
were made in consideration of (a) IITC relinquishing all its rights to claim delivery
under the confirmation of sale issued by PDB to IITC to the extent of P50,000,000.00
(face value) and (b) COEC relinquishing all its rights to claim delivery of the COEC TBills under the IITC confirmations of sale to COEC to the extent of P50,000,000.00
(face value).
On the same day, COEC and IITC entered into an Agreement[9] (the COEC-IITC
Agreement) whereby COEC reassigned to IITC the Central Bank bills subject of the
Tripartite Agreement to the extent of P20,000,000.00 in consideration of which IITC
relinquished all its rights to claim from COEC the IITC T-Bills covered by the COEC
confirmation of sale to the extent of an aggregate P20,000,000.00 face value.
Despite repeated demands, however, PDB failed to deliver the balance of
P136,790,000.00 worth of treasury bills which IITC purchased from PDB allegedly for
COEC. COEC was likewise unable to deliver the remaining IITC T-Bills amounting to
P119,633,392.00. Neither PDB and COEC returned the purchase price for the duly
paid treasury bills.[10]
This prompted IITC to file the Amended Complaint[11] dated March 20, 1995 before
the Regional Trial Court, Branch 138, Makati City (RTC), praying that COEC be
ordered to deliver treasury bills worth P119,633,392.00 to IITC or pay the monetary
equivalent plus legal interests; and, in the alternative, that PDB be ordered to
comply with its obligations under the conduit transaction involving treasury bills
worth P136,790,000.00 by delivering the treasury bills to IITC, in addition to actual
and exemplary damages and attorneys fees.
COEC filed its Answer to Amended Complaint[12] dated April 10, 1995,
admitting that it owed IITC treasury bills worth P119,633,392.00. It countered,
however, that IITC had an outstanding obligation to deliver to COEC treasury bills
worth P136,774,739.49.[13] COEC prayed that IITC be required to deliver
P17,141,347.49 (the amount IITC still owed COEC after a legal off-setting of their
debts against each other) to COEC in addition to moral and exemplary damages and
attorneys fees.[14]

of 6% from June 10, 1994 until full payment and (b) PDB to pay IITC
P136,790,000.00 with interest at the rate of 6% from March 21, 1995 until full
payment.
Aggrieved, all parties appealed to the CA which promulgated its decision on
June 6, 2008. The CA affirmed the RTC finding that IITC was not a mere conduit but
rather a direct seller to COEC of the treasury bills.[17] The CA, however, absolved
PDB from any liability, ruling that because PDB was not involved in the transactions
between IITC and COEC, IITC should have alleged and proved that PDB sold treasury
bills to IITC.[18] Moreover, PDB only undertook to deliver treasury bills worth
P186,790,000.00 to IITC as soon as they are available.[19] But, the said treasury
bills did not become available. Neither did IITC remit payment to PDB. As such, PDB
incurred no obligation to deliver P186,790,000.00 worth of treasury bills to IITC.
Hence, this petition.
THE ISSUES
IITC raises the following grounds for the grant of its petition:
A. The petition is not dismissible. The issue of whether IITC acted as a conduit is a
question of law. Assuming for the sake of argument that the petition involves
questions of fact, the Supreme Court may take cognizance of the petition under
exceptional circumstances.

B. The Court of Appeals gravely erred and acted contrary to law and jurisprudence
and the evidence on record in holding that IITC did not act as a conduit of Capital
One and Plantersbank in the 2 May 1994 sale of COEC T-bills.

C. The Court of Appeals erred and acted contrary to law and the evidence on record
in ruling that Plantersbank did not have any obligation to delivery the COEC T-Bills to
IITC under IITCs alternative cause of action.

PDB, for its part, insisted in its Answer Ad Cautelam[15] that it had no knowledge or
participation in the sale by IITC of treasury bills to COEC. It admitted that it sent a
letter dated May 4, 1994 to IITC, undertaking to deliver treasury bills worth
P186,790,000.00 which IITC purchased from PDB. PDB posited, however, that IITC
was not entitled to the delivery of the said treasury bills because IITC did not remit
payment to PDB. Neither did the subject securities become available to PDB.

D. The Court of Appeals erred and acted contrary to law in holding that Capital One
could validly set off its claims for the undelivered COEC T-Bills against the fully paid
IITC T-Bills.

In its Judgment[16] dated June 16, 2003, the RTC found that COEC still owed IITC
P119,633,392.00 worth of treasury bills, pursuant to their transaction in early 1994.
As regards the sale of treasury bills by IITC to COEC, however, the RTC determined
that IITC was not merely a conduit in the purchase a sale of treasury bills between
PDB and COEC. Rather, IITC acted as a principal in two transactions: as a buyer of
treasury bills from PDB and as a seller to COEC. Taking into consideration the
Tripartite Agreement, IITC was still liable to pay COEC the sum of P136,790,000.00.
Since IITC and COEC were both debtors and creditors of each other, the RTC off-set
their debts, resulting in a difference of 17,056,608.00 in favor of COEC. As to PDBs
liability, it ruled that PDB had the obligation to pay P136,790,000.00 to IITC. Thus,
the trial court ordered (a) IITC to pay COEC P17,056,608.00 with interest at the rate

F. The Court of Appeals violated IITCs right to due process in affirming, without citing
any basis whatsoever, the erroneous holding of the trial court that there was
insufficient evidence to prove the actual and consequential damages sustained by
IITC.[20]

E. The Court of Appeals further erred and acted contrary to law in holding that
Capital One and Plantersbank were not guilty of fraud.

COEC puts forth the following issues:

Whether the Court of Appeals correctly held that IITC did not act as a conduit of
Capital One and Plantersbank in the May 2, 1994 sale of the COEC T-Bills by IITC to
Capital One.
Whether the Court of Appeals correctly held that Capital One may validly set off its
claim for the undelivered COEC T-Bills against the balance of the IITC T-Bills.
Whether the Court of Appeals correctly affirmed the holding of the trial court that
Capital One and Plantersbank are not guilty of fraud.
Whether the Petition raises questions of fact, and whether it is defective.
Whether Capital One is entitled to the correction of the mathematical error in the
computation of the money judgment in its favor.[21]

For its part, PDB identifies the principal issue to be whether it was obliged to deliver
to petitioner Insular the treasury bills which the latter sold, as principal, to Capital
One, and/or pay the value thereof.[22] The following are stated as corollary issues:
Whether petitioner Insular was acting as facilitator or conduit in the May 2, 1994
sales of the treasury bills;
Whether petitioner Insular may raise in this petition the issue of it being merely as
facilitator or conduit after the Trial Court and Court of Appeals found that
petitioner Insular was not a facilitator or conduit.
Whether respondents Plantersbank and Capital One were guilty of fraud in their
transactions with petitioner Insular.
Whether petitioner Insular was entitled to actual and consequential damages.[23]

documents, the facts are no longer at issue; rather, the court must now determine
the applicable law based on the admitted facts, thereby making it a question of law.
Even assuming that the determination of IITCs role in the two transactions is a pure
question of fact, it falls under the exceptions when the Court may decide to review a
question of fact.[24]
Respondent COEC, on the other hand, argues that IITC raises questions of fact.
An issue is one of fact when: (a) there is a doubt or difference as to the truth or
falsehood of the alleged facts, (b) the issues raised invite a calibration, assessment,
re-examination and re-evaluation of the evidence presented, (c) it questions the
probative value of evidence presented or the proofs presented by one party are
clear, convincing and adequate. Because the question of whether IITC was merely a
conduit satisfies all the conditions enumerated, then it is a question of fact which
this Court cannot pass upon. In addition, COEC calls attention to the principle that
findings of fact of the trial court, especially when approved by the Court of Appeals,
are binding and conclusive on the Supreme Court.[25]
PDB also maintains that the finding of the RTC that IITC did not act as a
conduit between PDB and COEC was supported by substantial evidence and was
sustained by the CA. Thus, it is already binding and conclusive upon this Court,
whose jurisdiction is limited to reviewing only errors of law and not of fact.[26]
Respondents are correct.
The issue raised by IITC is factual in nature as it requires the Court to delve into the
records and review the evidence presented by the parties to determine the validity
of the findings of both the RTC and the CA as to IITCs role in the transactions in
question. These are purely factual issues which this Court cannot review.[27] Wellestablished is the principle that factual findings of the trial court, when adopted and
confirmed by the Court of Appeals, are binding and conclusive on this Court and will
generally not be reviewed on appeal.[28]
As discussed in The Insular Life Assurance Company, Ltd. v. Court of Appeals:

The numerous issues can be simplified as follows:

[29]

(1)

It is a settled rule that in the exercise of the Supreme Courts power of review, the
Court is not a trier of facts and does not normally undertake the re-examination of
the evidence presented by the contending parties during the trial of the case
considering that the findings of facts of the CA are conclusive and binding on the
Court. However, the Court had recognized several exceptions to this rule, to wit: (1)
when the findings are grounded entirely on speculation, surmises or conjectures; (2)
when the inference made is manifestly mistaken, absurd or impossible; (3) when
there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in
making its findings the Court of Appeals went beyond the issues of the case, or its
findings are contrary to the admissions of both the appellant and the appellee; (7)
when the findings are contrary to the trial court; (8) when the findings are
conclusions without citation of specific evidence on which they are based; (9) when
the facts set forth in the petition as well as in the petitioners main and reply briefs
are not disputed by the respondent; (10) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence on record; and
(11) when the Court of Appeals manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly considered, would justify a different
conclusion.[30]

Whether IITC acted as a conduit in the transaction between COEC and PDB;

(2)
Whether COEC can set-off its obligation to IITC as against the latters
obligation to it; and
(3)

Whether PDB has the obligation to deliver treasury bills to IITC.

THE COURTS RULING

The petition is partly meritorious.
Question of fact;
IITC did not act as conduit
Petitioner IITC insists that the issue of whether it acted as a conduit is a
question of law which can properly be the subject of a petition for review before this
Court. Because the parties already entered into a stipulation of facts and

Contrary to IITCs claim, the circumstances surrounding the case at bench do

not justify the application of any of the exceptions. At any rate, even if the Court
would be willing to disregard this time-honored principle, the inevitable conclusion
would be the same as that made by the RTC and the CA that IITC did not act as a
conduit but rather as a principal in two separate transactions, one as the purchaser
of treasury bills from PDB and, in another, as the seller of treasury bills to COEC.
The evidence against IITC cannot be denied.
The confirmations of sale issued by IITC to COEC unmistakably show that the
former, as principal, sold the treasury bills to the latter:[31]
Gentlemen:
As principal, we confirm having sold to you on a without recourse basis the following
securities against which you shall pay us clearing funds on value date.

IITCs confirmations of purchase to PDB likewise reflect that it acted as the principal
in the transaction:[32]
Gentlemen:
As principal, we confirm having purchased from you on a without recourse basis the
following securities against which we shall pay you clearing funds on value date.

There is nothing in these documents which mentions that IITC merely acted as
a conduit in the sale and purchase of treasury bills between PDB and COEC. On the
contrary, the confirmations of sale and of purchase all clearly and expressly indicate
that IITC acted as a principal seller to COEC and as a principal buyer from PDB.
IITC then tries to shift the blame to PDB and COEC by alleging that it was the
two parties which conceptualized the two-step or conduit transaction and dictated
the documents to be used. As such, they cannot be allowed to take advantage of
the ambiguity created by the documentation which it, in conspiracy with
Plantersbank, concocted to render IITC, an innocent party, liable.[33]
This argument is far-fetched and borders on the incredible. At the outset, it
should be pointed out that there is no ambiguity whatsoever in the language of the
documents used. The confirmations of sale and purchase unequivocally state that
IITC acted as a principal buyer and seller of treasury bills. The language used is as
clear as day and cannot be more explicit. Thus, because the words of the
documents in question are clear and readily understandable by any ordinary reader,
there is no need for the interpretation or construction thereof.[34] This was
emphasized in the case of Pichel v. Alonzo:[35]
Xxx. To begin with, We agree with petitioner that construction or interpretation of
the document in question is not called for. A perusal of the deed fails to disclose any
ambiguity or obscurity in its provisions, nor is there doubt as to the real intention of
the contracting parties. The terms of the agreement are clear and unequivocal,

hence the literal and plain meaning thereof should be observed. Such is the
mandate of the Civil Code of the Philippines which provides that:
Art. 1370. If the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulation shall
control
Pursuant to the aforequoted legal provision, the first and fundamental duty of the
courts is the application of the contract according to its express terms, interpretation
being resorted to only when such literal application is impossible.[36] (Emphases
supplied)
COEC and PDB did not take advantage of any vagueness in the documents in
question. They only seek to enforce the intention of the parties, in accordance with
the terms of the confirmations of sale and purchase voluntarily entered into by the
parties.
The Court also finds it hard to believe that an entity would carelessly and
imprudently expose itself to liability in the amount of millions of pesos by failing to
ensure that the documents used in the transaction would be a faithful account of its
true nature. It is important to note that the confirmations of sale were issued by IITC
itself using its own documents. Therefore, it defies imagination how COEC and PDB
could have foisted off these forms on IITC against its will.
In addition, a comparison of the confirmations of sale issued by IITC in favor of COEC
as against the confirmations of sale issued by PDB in favor of IITC indicates that
there is a difference in the interest rates of the treasury bills and in the face values:
PDB Confirmations of Sale to IITC[37]
Maturity Date
Yield
Face Value
Total Price
July 13, 1994
17.150%
P44,170,000.00
P42,998,169.00
July 6, 1994
17.150%
142,620,000.00
139,193,100.56

P186,790,000.00
P182,191,269.56

IITC Confirmations of Sale to COEC[38]

Maturity Date
Yield
Face Value

Total Price
July 13, 1994
17.0%
P 44,161,700.44
P 43,000,000.00
July 6, 1994
17.0%
142,613,039.05
139,215,385.70

entries were no payment required; COEC to pay PDB directly or this is a conduit
transaction; servicing to be done by COEC or COEC to pay PDB directly.[40]

P186,774,739.49
P182,215,385.70

The Court cannot sustain that view. There is nothing to prove that the amount of
P24,116.11 received by IITC from COEC was a facilitation fee. As explained by
COEC, the amount could easily have been the margin or spread earned by IITC in the
buy-and-sell transaction.[42] This is, however, not for the Court to determine. As
such, the Court relies on the findings of the RTC on this matter:

IITC offered a lower interest rate of 17% to COEC, in contrast to the 17.15% interest
rate given to it by PDB. There is also a notable difference in the face value of the
treasury bills and in the total price paid for each set. If, as IITC insists, it only acted
as a conduit to the sale between PDB and COEC, then there should be no disparity in
the terms (the interest rate, the face value and the total price) of the sale of the
treasury bills. Obviously, this is not the case. The figures lead to no other
conclusion but that there were two separate transactions in both of which IITC
played a principal role as a buyer from PDB of treasury bills with an aggregate face
value of P186,790,000.00 at an interest rate of 17.15% and as a seller to COEC of
treasury bills with an aggregate face value of P186,774,739.49 at an interest rate of
17%.
Again, IITC attempts to hold PDB and COEC responsible for this questionable
variation, alleging that it was PDB and COEC which dictated the details of the
purchase and sale of the treasury bills. IITC heavily relies on the fact that COEC
directly paid PDB the amount of P182,191,269.26 representing the amount covered
in the confirmations of sale issued by PDB to strengthen its position that it merely
acted as a conduit between PDB and COEC.[39] This was further supported by the
internal trading sheets of IITC where the following handwritten notations were made:
(1) in Purchase Trading Sheet No. 10856 covering the purchase of treasury bills by
IITC from PDB: dont prepare any check; payment will come from Capital One (See
STS 10811), and (2) in Sale Trading Sheet No. 10811 covering the sale of treasury
bills by IITC to COEC: for STS 10810 and 10811 will receive 2 checks payable to the
ff: 1. Planters Devt Bank - P182,191,269.59 2. IITC - 24,116.11
The Court is not convinced. That COEC directly paid PDB is of no moment and does
not necessarily mean that COEC recognized IITCs conduit role in the transaction.
Neither does it disprove the findings of both the RTC and the CA that IITC acted as
principal in the two transactions the purchase of treasury bills from PDB and the
subsequent sale thereof to COEC. The Court agrees with the explanation of the RTC:
The Court is aware that in the trading business, agreements are concluded even
before the goods being traded are received by the would be seller. Buyers in turn
conclude their transactions even before they are paid. For this reason, the mere fact
that in document for internal use, the instruction that payment will come from
Capital One will not, by itself, prove that plaintiff was a mere conduit. Neither could
it be considered as circumstantial to establish the fact in issue. At most, the
instructions merely identified the source of funds but whether those funds are to be
received by the plaintiff as purchase price or for remittance to whoever is entitled to
it, none was indicated. The Court may look at the instruction differently if the

IITC also insists that the fact that the P24,116.11 which it claims to be a facilitation
fee is exactly the difference between the principal amounts of the treasury bills
purchased from PDB and the treasury bills sold to COEC constitutes the smoking
gun or the veritable elephant in the living room.[41] To IITC, it is apparent that the
amount is a facilitation fee, adding credence to its contention that it only acted as a
conduit.

Plaintiffs other evidence to prove its conduit role was the delivery to it by COEC by
way of its corporate check of P24,116.11 in payment of plaintiffs conduit fee. The
Court is hesitant to give probative value to this proof because nowhere does it
appear in the trading sheets or any other document that it was collected by plaintiff
and received by it from COEC in that concept. Business practice is to issue an
official receipt because it is an income, but none was presented. The testimonial
evidence was refuted. COEC presented controverting evidence on the original mode
of payment which was requested to be changed by witness Bombaes. COEC
presented the unsigned check and voucher. The latter was duly accomplished and
bears the signatures or initials of the approving officers. On this particular issue,
COECs evidence deserves more weight.[43]

Finally, as correctly observed by the RTC, the actions of IITC after the
transaction were not those of a conduit but of a principal:
The Court notes with particular interest the events which transpired on May 4, 1994,
two (2) days after plaintiff through witness Mendoza learned of the non-delivery by
PDB of the treasury bills. Witness Mendoza went to the office of PDB and secured
the letter, Exhibit E, which contains the undertaking of PDB to deliver the treasury
bills. This was procured by plaintiff and addressed to the plaintiff. The language
used by PDB was purchase[d] from us and plaintiff accepted it.
Plaintiff failed to explain the reason for demanding delivery of the treasury bills
when it was not the buyer as it so claims. It also failed to object to the use by PDB
of the words purchase[d] from us, something which it could easily do or should do
considering the amount involved.
The conduct of the plaintiff after concluding the May 2, 1994 transaction [was] [that]
of a buyer.[44]

From the foregoing, it is clear that IITC acted as principal purchaser from PDB
and principal seller to COEC, and not simply as a conduit between PDB and COEC.
Set-off allowed

IITC argues that the RTC and the CA erred in holding that COEC can validly set off its
claims for the undelivered IITC T-Bills against the COEC T-Bills.[45] IITC reiterates
that COEC did not become a creditor of IITC because the former did not pay the
latter for the purchased treasury bills. Rather, it was PDB which received the
proceeds of the payment from COEC.[46] In addition, their obligations do not
consist of a sum or money. Neither are they of the same kind because the
obligations call for the delivery of specific determinate things treasury bills with
specific maturity dates and various interest rates. Thus, legal compensation cannot
take place.[47]
COEC, on the other hand, points out that it has already unquestionably proven
that IITC acted as a principal, and not as a conduit, in the sale of treasury bills to
COEC.[48] Furthermore, it asserts that the treasury bills in question are generic in
nature because the confirmations of sale and purchase do not mention specific
treasury bills with serial numbers.[49] The securities were sold as indeterminate
objects which have a monetary equivalent, as acknowledged by the parties in the
Tripartite Agreement.[50] As such, because both IITC and COEC are principal
creditors of the other over debts which consist of consumable things or a sum of
money, the RTC correctly ruled that COEC may validly set-off its claims for
undelivered treasury bills against that of IITCs claims.[51]
The Court finds in favor of respondent COEC.
The applicable provisions of law are Articles 1278, 1279 and 1290 of the Civil Code
of the Philippines:
Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
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.
xxx
Art. 1290. 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.

Based on the foregoing, in order for compensation to be valid, the five

requisites mentioned in the abovequoted Article 1279 should be present, as in the
case at bench. The lower courts have already determined, to which this Court
concurs, that IITC acted as a principal in the purchase of treasury bills from PDB and
in the subsequent sale to COEC of the COEC T-Bills. Thus, COEC and IITC are
principal creditors of each other in relation to the sale of the COEC T-Bills and IITC TBills, respectively.
IITC also claims that the COEC T-Bills cannot be set-off against the IITC T-Bills
because the latter are specific determinate things which consist of treasury bills with
specific maturity dates and various interest rates.[52] IITCs actions belie its own
assertion. The fact that IITC accepted the assignment by COEC of Central Bank Bills
with an aggregate face value of P20,000,000.00 as payment of part of the IITC T-Bills
is evidence of IITCs willingness to accept other forms of security as satisfaction of
COECs obligation. It should be noted that the second requisite only requires that
the thing be of the same kind and quality. The COEC T-Bills and the IITC T-Bills are
both government securities which, while having differing interest rates and dates of
maturity, have each been assigned a certain face value to determine their monetary
equivalent. In fact, in the Tripartite Agreement, the COEC-IITC Agreement and in the
memoranda of the parties, the parties recognized the monetary value of the
treasury bills in question, and, in some instances, treated them as sums of money.
[53] Thus, they are of the same kind and are capable of being subject to
compensation.
The third, fourth and fifth requirements are clearly present and are not denied
by the parties. Both debts are due and demandable because both remain
unsatisfied, despite payment made by IITC for the IITC T-Bills and by COEC for the
COEC T-Bills. Moreover, COEC readily admits that it has an outstanding balance in
favor of IITC.[54] Conversely, IITC has been found by the lower courts to be liable,
as principal seller, for the delivery of the COEC T-Bills.[55] The debts are also
liquidated because their existence and amount are determined.[56] Finally, there
exists no retention or controversy over the COEC T-Bills and the IITC T-Bills.
Because all the stipulations under Article 1279 are present in this case,
compensation can take place. COEC is allowed to set-off its obligation to deliver the
IITC T-Bills against IITCs obligation to deliver the COEC T-Bills.
Correction of the amount due
Having established that compensation or set-off is allowed between COEC and IITC,
the Court will now delve into the proper amount of the award and the applicable
interest rates.
The RTC, in its Judgment, ordered IITC to pay COEC the amount of P17,056,608 with
interest at the rate of 6% per annum until full payment. In arriving at the said
amount, the trial court used, as its basis, COECs claim against IITC for P186,790,000
worth of treasury bills less P50,000,000 which it received under the Tripartite
Agreement. Then it deducted from this the P139,633,392.00 face value of the
undelivered treasury bills by COEC to IITC less the P20,000,000 which COEC
assigned to IITC pursuant to the COEC-IITC Agreement.[57]
As correctly pointed out by COEC, there was a mistake in the arithmetic subtraction
made by the RTC. Using the figures provided by the lower court, the correct result
should have been P17,156,608.00, P100,000.00 more than what was adjudged in
favor of COEC. To illustrate:

The trial courts computation

Amount reassigned by COEC to IITC

(20,000,000.00)
Subtotal

COECs counterclaim against IITC

P186,790,000.00
Amount assigned by IITC to COEC
(50,000,000.00)
Subtotal
P136,790,000.00
IITCs claim against COEC
P139,633,392.00
Amount reassigned by COEC to IITC
(20,000,000.00)
Subtotal
P119,633,392.00
TOTAL
P17,156,608.00
Aside from the error in the RTCs mathematical computation, a review of the records,
particularly the March 20, 1995 Amended Complaint filed by IITC, the April 10, 1995
Answer to Amended Complaint (With Counterclaim) filed by COEC and the
September 2, 1999 Partial Stipulation of Facts and Documents submitted by IITC,
COEC and PDB to the trial court, reveals that there was some confusion as to the
correct basis to be used for calculating the amount due to COEC. In COECs Answer
and in the Partial Stipulation, it explicitly stated that it purchased from IITC treasury
bills with a face value of P186,774,739.49, as evidenced by the Confirmations of
Sale issued by IITC. If this figure is used in computing COECs award, the resulting
amount would be P17,141,347.49, which is consistent with COECs counterclaim.
The revised computation

COECs counterclaim against IITC

P186,774,739.49
Amount assigned by IITC to COEC
(50,000,000.00)

P119,633,392.00
TOTAL
P17,141,347.49
Lastly, as regards the legal interest which should be imposed on the award, the
Court directs the attention of the parties to the case of Eastern Shipping Lines v.
Court of Appeals,[58]
1. When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached,
an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.[59] (Emphases supplied)

Because the obligation arose from a contract of sale and purchase of

government securities, and not from a loan or forbearance of money, the applicable
interest rate is 6% from June 10, 1994, when IITC received the demand letter from
COEC.[60] After the judgment becomes final and executory, the legal interest rate
increases to 12% until the obligation is satisfied.

Subtotal
P136,774,739.49
IITCs claim against COEC
P139,633,392.00

In sum, the Court finds that after compensation is effected, IITC still owes
COEC P17,141,347.49 worth of treasury bills, subject to the interest rate of 6% per
annum from June 10, 1994, then subsequently to the increased interest rate of 12%
from the date of finality of this decision until full payment.

PDB has an obligation to deliver

the treasury bills to IITC
The CA, in absolving PDB from all liability, reasoned that: (1) PDB was not
involved in the transactions for the purchase and sale of treasury bills between IITC
and COEC; (2) IITC failed to allege in its Amended Complaint and prove during the
trial that PDB directly and principally sold to IITC P186,790,000 worth of treasury
bills; (3) while PDB undertook, in its May 4, 1994 letter to deliver to IITC the said
treasury bills, the obligation did not ripen because the bills did not become available
to PDB and IITC did not remit any payment to PDB; (4) IITC did not demand delivery
of the treasury bills; (5) IITC merely sued PDB as an alternative defendant, implying
that IITC did not have a principal and direct cause of action against PDB on the
treasury bills; and (6) there was nothing in the records to support the trial courts
finding that PDB owed IITC P186,790,000 worth of treasury bills.[61]
PDB essentially echoes the reasons set forth by the CA and reiterated that
because IITC did not pay for the treasury bills subject of its (PDB) May 4 undertaking,
then IITC had no right to demand delivery of the said securities from PDB. Moreover,
the check payments made by COEC to PDB were not in payment of the treasury bills
purchased by IITC from PDB, but for COECs other obligations with PDB. The total
amount of the checks P182,191,269.26 did not correspond to the treasury bills worth
P186,790,000 which COEC allegedly purchased from PDB with IITC acting as conduit.
PDB also points out that COEC did not interpose a cross-claim against it precisely
because COEC was aware that it had no claim against PDB.[62] Also, the checks
clearly indicated that they were made in payment for the account of COEC.[63]
IITC insists that it alleged in its Amended Complaint (by way of alternative cause of
action) that PDB directly and principally sold to IITC treasury bills worth
P186,790,000.00. By suing PDB as an alternative defendant, IITC did not
acknowledge that PDB could not be held principally liable. On the contrary, by
bringing suit against PDB under an alternative cause of action, IITC set forth a claim
against PDB as the principal seller of the treasury bills. In addition, IITC categorically
refuted PDBs allegation that the former did not pay for the treasury bills purchased
from the latter. The judicial admissions of PDB during the course of the trial and in
the Partial Stipulation, that PDB received the proceeds of the managers checks
issued by COEC as payment for COECs purchase of treasury bills from IITC,
contradict PDBs defense that no payment was made by IITC for the said treasury
bills. Payment by COEC to PDB, upon IITCs instructions, should be treated as a
payment by a third person with the knowledge of the debtor, under Article 1236 of
the Civil Code. Thus, when PDB accepted COECs checks, it became duty bound to
deliver the treasury bills sold to IITC as the principal buyer.[64]
Lastly, IITC points out the absurdity of the CA decision in allowing COEC to offset its
liability to IITC against its liability to deliver the treasury bills purchased by COEC.
The parties do not deny that COEC paid for the purchase price of the subject
treasury bills by issuing managers checks in the name of PDB and IITC. As such,
unless COECs payment to PDB is credited as payment by IITC to PDB for the
securities purchased by IITC, under that theory that IITC acted as a principal buyer,
there would be no obligation on the part of IITC against which a set-off can be
effected by COEC.[65]
On this point, the Court agrees with IITC.
First, while it is true that PDB was not involved in the sale of the COEC T-Bills,
it is irrelevant to the issue because it is IITC which interposed a claim, albeit an

alternative one, against PDB for having sold to IITC treasury bills worth
P186,790,000.00. This was alleged in IITCs Amended Complaint and was deemed
by the RTC to have been successfully proven.[66] The findings of the RTC are
supported by the confirmations of sale issued by PDB in favor of IITC and PDBs
letter dated May 4, 1994 undertaking to deliver the treasury bills worth
P186,790,000.00 to IITC.[67] The due execution and the veracity of the contents of
the aforesaid documents have been admitted by the parties.[68]
Second, it is erroneous to say that IITC never made any demand upon PDB.
IITCs letter dated May 18, 1994 addressed to PDB confirms that it demanded
delivery by PDB of the treasury bills covered by the confirmations of sale issued by
PDB in its favor. Although the demand was made on behalf of COEC, which allegedly
purchased the treasury bills from PDB, consistent with IITCs assertion that it only
facilitated the sale, it was nevertheless a demand for delivery. Even if this were to
be considered an invalid demand because it was not made by IITC as the principal
party to the transaction with PDB, the filing of the Amended Complaint by IITC is
equivalent to demand, in keeping with the rule that the filing of a complaint
constitutes judicial demand.[69]
Third, the CA ruling that IITC impliedly did not have a principal cause of action
because it merely sued PDB as an alternative defendant is an extremely flawed and
baseless supposition which runs counter to established law and jurisprudence. The
filing of a suit against an alternative defendant and under an alternative cause of
action should not be taken against IITC. Section 13, Rule 3 and Section 2, Rule 8 of
the Rules of Civil Procedure explicitly allows such filing:
Rule 13, Section 13: Alternative defendants. Where the plaintiff is uncertain
against who of several persons he is entitled to relief, he may join any or all of them
as defendants in the alternative, although a right to relief against one may be
inconsistent with a right of relief against the other. (13a)
Rule 8, Section 2: Alternative causes of action or defenses. A party may set forth
two or more statements of a claim or defense alternatively or hypothetically, either
in one cause of action or defense or in separate causes of action or defenses. When
two or more statements are made in the alternative and one of them if made
independently would be sufficient, the pleading is not made insufficient by the
insufficiency of one or more of the alternative statements.
As discussed earlier, the Court is not granting IITCs primary cause of action
against COEC because IITC acted, not as a mere conduit for the sale of shares by
PDB to COEC as alleged by IITC, but rather as a principal purchaser of securities from
PDB and then later as a principal seller to COEC. By reason of this determination,
COEC is allowed to offset its outstanding obligation to deliver the remaining IITC TBills against the latters obligation to deliver the COEC T-Bills. Consequently, IITCs
alternative action against the alternative defendant PDB should be considered in
order for IITC to be able to recover from PDB the P186,790,000.00 worth of treasury
bills which had already been fully paid for.
To ascertain whether IITC was able to adequately state an alternative cause of action
against PDB in its Amended Complaint, the Court refers to Perpetual Savings Bank v.
Fajardo[70] where the test for determining the existence of a cause of action was
extensively discussed:
The familiar test for determining whether a complaint did or did not state a cause of
action against the defendants is whether or not, admitting hypothetically the truth of

the allegations of fact made in the complaint, a judge may validly grant the relief
demanded in the complaint. In Rava Development Corporation v. Court of Appeals,
the Court elaborated on this established standard in the following manner:
The rule is that a defendant moving to dismiss a complaint on the ground of lack of
cause of action is regarded as having hypothetically admitted all the averments
thereof. The test of the sufficiency of the facts found in a petition as constituting a
cause of action is whether or not, admitting the facts alleged, the court can render a
valid judgment upon the same in accordance with the prayer thereof (Consolidated
Bank and Trust Corp. v. Court of Appeals, 197 SCRA 663 [1991]).
In determining the existence of a cause of action, only the statements in the
complaint may properly be considered. It is error for the court to take cognizance of
external facts or hold preliminary hearings to determine their existence. If the
allegation in a complaint furnish sufficient basis by which the complaint may be
maintained, the same should not be dismissed regardless of the defenses that may
be assessed by the defendants (supra).
A careful review of the records of this case reveals that the allegations set forth in
the complaint sufficiently establish a cause of action. The following are the
requisites for the existence of a cause of action: (1) a right in favor of the plaintiff by
whatever means and under whatever law it arises or is created; (2) an obligation on
the part of the named defendant to respect, or not to violate such right; and (3) an
act or omission on the part of the said defendants constituting a violation of the
plaintiff's right or a breach of the obligation of the defendant to the plaintiff (Heirs of
Ildefonso Coscolluela, Sr., Inc. v. Rico General Insurance Corporation, 179 SCRA 511
[1989]).[71] (Emphases supplied)
Following the disquisition above, IITCs Amended Complaint, while not a model of
superb draftsmanship in its struggle to maintain IITCs conduit theory, adequately
sets forth a cause of action against PDB. Under its claim against PDB as alternative
defendant, IITC alleged that, even if it acted as a direct buyer from PDB, (1) IITC is
entitled to the delivery of the treasury bills worth P186,790,000.00 covered by the
confirmations of sale issued by PDB, (2) PDB has an obligation to deliver the same to
IITC, and (3) PDB failed to deliver the said securities to IITC.[72]
It would be the height of injustice to hold IITC accountable for the delivery of the
COEC T-Bills to COEC without similarly holding PDB liable for the release of the
treasury bills worth P186,790,000.00 to IITC, which cannot be accomplished without
allowing IITCs alternative cause of action against PDB to prosper.
The Court now tackles the main argument of PDB for sustaining the ruling of
the CA absolving it from liability that IITC allegedly failed to make the required
payment for the purchase. PDB claims that the managers checks which it received
from COEC were payment by the latter for its other obligations to the former.
Conspicuously, PDB failed to elaborate on the supposed obligations of COEC.
This flimsy allegation is patently untrue. In its Memorandum,[73] COEC
denied that the checks were payment for an account which it had with PDB, as PDB
so desperately alleges. COEC clarified that the managers checks payable to PDB
were issued by COEC upon the instructions of IITC in payment for the COEC T-Bills.
PDBs theory was negated by COEC itself as the issuer of the checks. Moreover, PDB
already judicially admitted, through the Partial Stipulation, that the checks were
given by COEC as payment for the COEC T-Bills. Section 4, Rule 129 of the Revised
Rules of Evidence provides that:

Sec. 4. Judicial admissions. An admission, verbal or written, made by a party in the

course of the proceedings in the same case, does not require proof. The admission
may be contradicted only by showing that it was made through palpable mistake or
that no such admission was made.
As such, PDB cannot now gainsay itself by claiming that the checks were payment
by COEC for certain unidentified obligations to PDB. It is well-settled that judicial
admissions cannot be contradicted by the admitter who is the party himself and
binds the person who makes the same, and absent any showing that this was made
thru palpable mistake, no amount of rationalization can offset it.[74]
Since it has been sufficiently established that it was IITC which instructed that
payment be made to PDB, it is apparent that the said checks were delivered to PDB
in consideration of a transaction between PDB and IITC. On May 2, 1994, the same
date the checks were issued, IITC purchased treasury bills with a combined face
value of P186,790,000.00 from PDB for the total price of P182,191,269.56. The
Court notes that the P182,191,269.26 aggregate amount of the checks issued by
COEC to PDB is almost exactly equal to the total price of the treasury bills which IITC
purchased from PDB.[75] The payment by COEC on behalf of IITC can be considered
as payment made by a third-party to the transaction between IITC and PDB which is
allowed under Article 1236 of the Civil Code of the Philippines.[76]
The Court finds no logical reason either for PDB to execute the May 4, 1994
Letter to IITC undertaking to deliver treasury bills worth P186,790,000.00 if it had
not received the payment from IITC. Especially so because there is nothing in the
letter to indicate that PDB was still awaiting payment for the said securities. There
is no other reasonable conclusion but that PDB received payment, in the form of
three managers checks issued by COEC, for the treasury bills purchased by IITC,
and that having failed to promptly deliver the treasury bills despite having encashed
the checks, PDB then executed the foregoing letter of undertaking.
Also telling is PDBs participation in the Tripartite Agreement with IITC and
COEC where it assigned P50,000,000 worth of Central Bank Bills to IITC, in
consideration of which, IITC relinquished its right to claim delivery under the
confirmations of sale issued by PDB to the extent of P50,000,000. While the
agreement stipulated that it was not in any way an admission of any liability by any
one of them against another, the fact that PDB agreed to execute such an
agreement is indicative of the existence of its obligation to IITC. In its Answer Ad
Cautelam filed before the RTC, PDB explained that it gave up P50,000,000 worth of
Central Bank Bills simply to assist COEC and IITC meet their financial difficulties.
The Court finds this allegation highly inconceivable, preposterous and even ludicrous
because no company in its right mind would willingly part with such a huge amount
of bank bills for no consideration whatsoever except for solely altruistic reasons.
Finally, PDBs argument that it had no obligation to deliver the treasury bills
purchased by IITC because the same did not become available to PDB is evidently a
frantic last ditch attempt to evade liability. That the subject securities did not
become available to PDB should not be the concern of IITC. For as long as payment
was made, PDB was obliged to deliver the securities subject of its confirmations of
sale.
PDBs adroit maneuvering coupled with IITCs poorly conceived conduit theory
led the CA to reach an erroneous conclusion. This Court, however, will not be
similarly blinded. There is simply an incongruity in the CA decision. Accordingly,

this Court rules that PDB should be liable for the delivery of P186,790,000.00 worth
of treasury bills to IITC, or payment of the same, reduced by P50,000,000.00 which
the former assigned to the latter under the Tripartite Agreement. The total liability
of PDB is P136,790,000.00, computed as follows:
PDBs Liability
Amount of treasury bills purchased by IITC
P186,790,000.00
Amount assigned by PDB to IITC
50,000,000.00
TOTAL
P136,790,000.00

This shall be subject to interest at the rate of 6% per annum from the date of the
filing of the Amended Complaint on March 21, 1995, considered as the date of
judicial demand, then to 12% per annum from the date of finality of this decision
until full payment.
To rule otherwise would be to allow unjust enrichment on the part of PDB to the
detriment of IITC. Article 22 of the Civil Code of the Philippines provides that:
Art. 22. Every person who through an act of performance by another, or any other
means, acquires or comes into possession of something at the expense of the latter
without just or legal ground, shall return the same to him.
In the recent case of Flores v. Spouses Lindo,[77] this Court expounded on the
subject matter:
There is unjust enrichment when a person unjustly retains a benefit to the loss of
another, or when a person retains money or property of another against the
fundamental principles of justice, equity and good conscience. The principle of
unjust enrichment requires two conditions: (1) that a person is benefited without a
valid basis or justification, and (2) that such benefit is derived at the expense of
another.

The main objective of the principle against unjust enrichment is to prevent one from
enriching himself at the expense of another without just cause or consideration.[78]

The Court cannot condone a decision which is manifestly partial. Neither shall
the Court be a party to the perpetration of injustice. As the last bastion of justice,
this Court shall always rule pursuant to the precepts of fairness and equity in order
to dispel any doubt in the integrity and competence of the Judiciary.
WHEREFORE, the petition is PARTIALLY GRANTED. The June 6, 2008 Decision of the
Court of Appeals in C.A.-G.R. CV No. 79320 is SET ASIDE. Accordingly, the June 16,
2003 RTC Decision is REINSTATED though MODIFIED to read as follows:

FOR THE REASONS GIVEN, judgment is hereby rendered a] ordering Planters Development Bank to pay plaintiff 136,790,000.00 with
interest at the rate of six (6%) percent per annum from March 21, 1995 until full
payment;
b] ordering Insular and Trust Investment Corporation to pay Capital One Equities
Corporation 17,156,608.00 with legal interest at the rate of six (6%) percent per
annum from June 10, 1994 until full payment; and
c] dismissing the counterclaim of Planters Development Bank.
Any amount not paid upon the finality of this decision shall be subject to
interest at the increased rate of twelve (12%) percent per annum reckoned from the
date of finality of this decision until full payment thereof.
No pronouncement as to costs.
SO ORDERED.