UNION BANK OF THE PHILIPPINES, Petitioner, vs.

DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.

G.R. No. 191555
January 20, 2014
FACTS:
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Banks predecessor-in-interest,
Bancom Development Corporation (Bancom), and to Development Bank of the Philippines (DBP).
FI and DBP entered into a Deed of Cession of Property In Payment of Debt (dacion en pago) whereby the
former ceded in favor of the latter certain properties (including a processing plant) in consideration of
the following:
(a) The full and complete satisfaction of FIs loan obligations to DBP; and
(b) The direct assumption by DBP of FIs obligations to Bancom in the amount of P17,000,000.00
(Assumed Obligations).
DBP, as the new owner of the processing plant, leased back for 20 years the said property to FI (Lease
Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP and Bancom.
DBP also entered into a separate agreement with Bancom (Assumption Agreement) whereby the former:
(a) Confirmed its assumption of FIs obligations to Bancom; and
(b) Undertook to remit up to 30% of any and all rentals due from FI to Bancom which would serve
as payment of the assumed obligations, to be paid in monthly installments.
On May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to Foodmasters Worldwide,
Inc. (FW)
On May 9, 1984, Bancom conveyed all its receivables, including DBPs assumed obligations, to Union
Bank.
Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union Bank
filed a collection case against DBP before the RTC.
DBP countered that the obligations it assumed were payable only out of the rental payments made by
FI. Since, FI had yet to pay the same, DBPs obligation to Union Bank had not arisen.
RTC: Finding the complaint to be meritorious, RTC ordered:
(a) DBP to pay Union Bank the sum of P4,019,033.59, representing the amount of the subject
rentals (which constitutes 30% of FIs [now FWs] total rental debt), including interest until fully
paid; and
(b) FW, as third-party defendant, to indemnify DBP, as third- party plaintiff, for its payments of
the subject rentals to Union Bank.
RTC ruled that when DBP failed to remit the subject rentals to Union Bank, it defaulted on its assumed
obligations.
CA: On May 27, 1994, CA Set aside the RTCs ruling, and consequently ordered:
(a) FW to pay DBP the amount of P32,441,401.85 representing the total rental debt incurred
under the Lease Agreement, and
(b) DBP, after having been paid by FW its unpaid rentals, to remit 30% thereof to Union Bank.
CA ruled that DBP did not default in its obligations to remit the subject rentals to Union Bank precisely
because it had yet to receive the rental payments of FW.
Union Bank and DBP filed separate petitions for review on certiorari before the Supreme Court.
SC: Denied both petitions in a Resolution. SC upheld the CAs finding that while DBP directly assumed
FIs obligations to Union Bank, DBP was only obliged to remit to the latter 30% of the lease rentals
collected from FW, from which any deficiency was to be settled by DBP not later than December 29,
1998.

On May 16, 2001, Union Bank filed a motion for execution before the RTC, praying that DBP be directed
to pay the amount of P9,732,420.555 which represents the amount of the subject rentals (i.e., 30% of
the FWs total rental debt in the amount of P32,441,401.85). DBP opposed Union Banks motion.
On September 12, 2001, DBP filed its own motion for execution against FW.
RTC: Granted both motions for execution of Union Bank and DBP on October 15, 2001 (Order of
Execution). As a result, a notice of garnishment against DBP were issued.
DBP filed a motion for reconsideration averring that the RTC prematurely ordered DBP to pay the
assumed obligations to Union Bank before FWs payment. The motion was denied. Thus, DBPs deposits
were eventually garnished. DBP then filed a petition for certiorari before the CA.
CA: Dismissed DBPs petition, finding that the RTC did not abuse its discretion when it issued the October
15, 2001 Writ of Execution. DBP appealed the CAs ruling before the SC.
SC: On January 13, 2004, SC granted DBPs appeal, and thereby reversed and set aside the CAs ruling.
SC acknowledged that DBPs obligation to Union Bank for remittance of the lease payments is contingent
on FWs prior payment to DBP, and that any deficiency DBP had to pay by December 29, 1998 as per the
Assumption Agreement cannot be determined until after the satisfaction of FWs own rental obligations
to DBP.
Accordingly, the SC:
(a) nullified the October 15, 2001 Writ of Execution and all related issuances thereto; and;
(b) ordered Union Bank to return to DBP the amounts it received pursuant to the said writ.
Union Bank moved for reconsideration which was denied by the SC.
DBP moved for the execution of the said decision before the RTC. The RTC then issued a writ of
execution (September 6, 2005 Writ of Execution), ordering Union Bank to return to DBP all funds it
received pursuant to the October 15, 2001 Writ of Execution.
On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal Compensation
to the RTC, praying that the RTC apply legal compensation between itself and DBP in order to offset the
return of the funds it previously received from DBP.
Union Bank anchored its motion on two grounds, namely:
(a) on December 29, 1998, DBPs assumed obligations became due and demandable; and
(b) considering that FW became non-operational and non-existent, DBP became primarily liable
to the balance of its assumed obligation, which as of Union Banks computation after its claimed
set-off, amounted to P1,849,391.87.
RTC: Denied the above-mentioned motion for lack of merit. With Union Banks motion for
reconsideration having been denied, Union Bank filed a petition for certiorari with the CA.
Pending resolution, Union Bank issued a Managers Check amounting to P52,427,250.00 in favor of DBP,
in satisfaction of the Writ of Execution dated September 6, 2005.
CA: Dismissed Union Banks petition, finding no grave abuse of discretion on the RTCs part. CA affirmed
the denial of its motion to affirm legal compensation considering that:
(a) the RTC only implemented the Supreme Courts January 13, 2004 Decision which by then had
already attained finality;
(b) DBP is not a debtor of Union Bank; and
(c) there is neither a demandable nor liquidated debt from DBP to Union Bank.
Union Bank moved for reconsideration which was denied in a Resolution dated February 26, 2010;
hence, the instant petition.

ISSUE:
Whether or not the CA correctly upheld the denial of Union Banks motion to affirm legal compensation.

HELD:
Yes. The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby
two persons in their capacity as principals are mutual debtors and creditors of each other with respect to equally
liquidated and demandable obligations to which no retention or controversy has been timely commenced and
communicated by third parties. The requisites therefor are provided under Article 1279 of the Civil Code which
reads as follows:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
The rule on legal compensation is stated in Article 1290 of the Civil Code which provides that "when all the
requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the
compensation."
Therefore, compensation could not have taken place between these debts for the apparent reason that
requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since DBPs assumed obligations to Union
Bank for remittance of the lease payments are in the Courts words contingent on the prior payment thereof
by FW to DBP," it cannot be said that both debts are due (requisite 3 of Article 1279 of the Civil Code). Also, the
Court observed that any deficiency that DBP had to make up for the full satisfaction of the assumed obligations
"cannot be determined until after the satisfaction of FWs obligation to DBP." In this regard, it cannot be
concluded that the same debt had already been liquidated, and thereby became demandable (requisite 4 of
Article 1279 of the Civil Code). Thus, CA correctly upheld the denial of Union Banks motion to affirm legal
compensation