Philippine Commercial International Bank vs.

Franco
G.R. No. 180069 March 5, 2014
THIRD DIVISION
Peralta, J.

DOCTRINE: The creditor's possession of the evidence of debt is proof that the debt has
not been discharged by payment. The general rule is that the burden rests on the
defendant to prove payment, rather than on the plaintiff to prove non-payment.

FACTS:

Arturo Franco secured from defendant PCIB Trust Indenture Certificates. That despite
demands, defendants refused and still refuses to return to plaintiff the trust amounts, plus
the stipulated interest. In several times, Arturo had visited the defendant bank to request
for a status on his investments, bank officers would normally pull out his ledger card and
show plaintiff the updated amount due him. Later, to his surprise, he received a letter
signed by defendant’s counsel, in effect denying plaintiff’s request for payment by stating
that due to the conversion of all outstanding PCIBank trust indenture accounts into
common trust certificates, all such PCIBank trust indenture certificates have been
rendered "null and void." Arturo prays for the payment of the amounts under the Trust
Indenture Certificates, plus interest, moral and exemplary damages and attorney’s fees.

ISSUE:

Whether or not the obligation was extinguished through payment.

RULING:

Jurisprudence abounds that, in civil cases, one who pleads payment has the burden of
proving it. Even where the plaintiff must allege non-payment, the general rule is that the
burden rests on the defendant to prove payment, rather than on the plaintiff to prove non-
payment. When the creditor is in possession of the document of credit, he need not prove
non-payment for it is presumed. The creditor's possession of the evidence of debt is proof
that the debt has not been discharged by payment.

Respondent's possession of the original copies of the subject TICs strongly supports his
claim that petitioner Bank's obligation to return the principal plus interest of the money
placement has not been extinguished. The TICs in the hands of respondent is a proof of
indebtedness and a prima facie evidence that they have not been paid. Petitioner Bank
could have easily presented documentary evidence to dispute the claim, but it did not. In
its omission, it may be reasonably deduced that no evidence to that effect really exist.

Bognot vs RRI Lending Corporation

G.R No. 180144, September 234, 2014
SECOND DIVISION
Brion, J.:

DOCTRINE: Novation is a mode of extinguishing an obligation by changing its objects

or principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor.

FACTS:

Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot
applied for and obtained a loan of Five Hundred Thousand Pesos (P500,000.00) from the
respondent, payable on November 30, 1996.The loan was evidenced by a promissory
note and was secured by a post-dated check dated November 30, 1996.

Evidence on record shows that the petitioner renewed the loan several times on a monthly
basis. He paid a renewal fee of P54,600.00 for each renewal, issued a new post-dated
check as security, and executed and/or renewed the promissory note previously
issued. The respondent on the other hand, cancelled and returned to the petitioner the
post-dated checks issued prior to their renewal.

Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot , went to the
respondent’s office and applied for another renewal of the loan. She issued in favor of the
respondent Promissory Note No. 97-051, and International Bank Exchange (IBE) Check
No. 00012522, dated July 30, 1997, in the amount of P54,600.00 as renewal fee.

On the excuse that she needs to bring home the loan documents for the Bognot siblings’
signatures and replacement, Mrs. Bognot asked the respondent’s clerk to release to her
the promissory note, the disclosure statement, and the check dated July 30, 1997. Mrs.
Bognot, however, never returned these documents nor issued a new post-dated check.
Consequently, the respondent sent the petitioner follow-up letters demanding payment of
the loan, plus interest and penalty charges. These demands went unheeded.

ISSUE:

Whether or not the parties’ obligation was extinguished by: (i) payment; and (ii) novation
by substitution of debtors.

RULING:

Novation is a mode of extinguishing an obligation by changing its objects or principal

obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor. Art. 1293 states that novation which consists in
substituting a new debtor in the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the consent of the creditor.
To give novation legal effect, the original debtor must be expressly released from the
obligation, and the new debtor must assume the original debtor’s place in the contractual
relationship. Depending on who took the initiative, novation by substitution of debtor has
two forms – substitution by expromision and substitution bydelegacion. In both cases, the
original debtor must be released from the obligation; otherwise, there can be no valid
novation. Furthermore, novation by substitution of debtor must always be made with the
consent of the creditor.

The respondent never agreed to release the petitioner from his obligation. That the
respondent initially allowed Mrs. Bognot to bring home the promissory note, disclosure
statement and the petitioner’s previous check dated June 30, 1997, does not ipso facto
result in novation. Neither will this acquiescence constitute an implied acceptance of the
substitution of the debtor. In order to give novation legal effect, the creditor should
consent to the substitution of a new debtor. Novation must be clearly and unequivocally
shown.

Evangelista vs. Screenex, Inc.

G.R. No. 211564, November 20, 2017
FIFTH DIVISION
Sereno, C.J.:

DOCTRINE: The delivery of the check produces the effect of payment when through the
fault of the creditor they have been impaired.

FACTS:

Sometime in 1991, [Evangelista] obtained a loan from respondent Screenex, Inc. which
issued two (2) checks to [Evangelista]. The first check was UCPB Check No. 275345 for
P1,000,000 and the other one is China Banking Corporation Check No. BDO 8159110
for P500,000. There were also vouchers of Screenex that were signed by the accused
evidencing that he received the 2 checks in acceptance of the loan granted to him.
As security for the payment of the loan, [Evangelista] gave two (2) open dated checks:
UCPB Check Nos. 616656 and 616657, both pay to the order of Screenex, Inc. From the
time the checks were issued by [Evangelista], they were held in safe keeping together
with the other documents and papers of the company by Philip Gotuaco, Sr., father-in-
law of respondent Alexander Yu, until the former's death on 19 November 2004.
Before the checks were deposited, there was a personal demand from the family for
[Evangelista] to settle the loan and likewise a demand letter sent by the family lawyer.

ISSUE: Whether or not payment was effected and the obligation was discharged.

RULING:

It is a settled rule that the creditor's possession of the evidence of debt is proof that the
debt has not been discharged by payment. It is likewise an established tenet that a
negotiable instrument is only a substitute for money and not money, and the delivery of
such an instrument does not, by itself, operate as payment. However, payment is deemed
effected and the obligation for which the check was given as conditional payment is
treated discharged, if a period of 10 years or more has elapsed from the date indicated on
the check until the date of encashment or presentment for payment. The failure to encash
the checks within a reasonable time after issue, or more than 1 0 years in this instance,
not only results in the checks becoming stale but also in the obligation to pay being
deemed fulfilled by operation of law.

Desiderio Dalisay Investments, Inc. vs. Social Security System

G.R. No. 231053, April 04, 2018
THIRD DIVISION
Velasco Jr., J.:

DOCTRINE: Among other modes, an obligation is extinguished by payment or

performance. There is payment when there is delivery of money or performance of an
obligation. Corollary thereto, Article 1245 of the Civil Code provides for a special mode
of payment called dacion in payment (dacion en pago).

FACTS:

Sometime in the year 1976, respondent Social Security System (SSS) filed a case before
the Social Security Commission (SSC) against the Dalisay Group of Companies (DGC)
for the collection of unremitted SSS premium contributions of the latter's employees.
Desiderio Dalisay, then President of petitioner Desiderio Dalisay Investments, Inc.
(DDII), sent a Letter to SSS offering the subject land and building to offset DGC's
liabilities subject of the aforementioned cases at P3,500,000.

The SSC then informed DDII of its acceptance of the proposed dacion in payment and
formally demanding the certificates of title over the properties subject of the dacion.
DDII issued a Letter to SSS proposing the offset of SSS obligations with back rentals on
occupied land and building of the obligor.

ISSUE: Whether or not there was a perfected dacion en pago.

RULING:
In dacion en pago, property is alienated to the creditor in satisfaction of a debt in
money. The debtor delivers and transmits to the creditor the former's ownership over a
thing as an accepted equivalent of the payment or performance of an outstanding debt.
As a mode of payment, dacion en pago extinguishes the obligation to the extent of the
value of the thing delivered, either as agreed upon by the parties or as may be proved,
unless the parties by agreement—express or implied, or by their silence—consider the
thing as equivalent to the obligation, in which case the obligation is totally
extinguished. It requires delivery and transmission of ownership of a thing owned by the
debtor to the creditor as an accepted equivalent of the performance of the obligation.
There is no dacion in payment when there is no transfer of ownership in the creditor's
favor, as when the possession of the thing is merely given to the creditor by way of
security.

The turnover of the properties to SSS was tantamount to delivery or "tradition" which
effectively transferred the real right of ownership over the properties from DDII to SSS.
Even after a review of the records of the case, this Court is unable to find any indication
that when they turned over the properties to SSS, the company reserved its ownership
over the property and only transferred the jus possidendi thereon to SSS.

Delivery has been described as a composite act, a thing in which both parties must join
and the minds of both parties concur. It is an act by which one party parts with the title to
and the possession of the property, and the other acquires the right to and the possession
of the same. In its natural sense, delivery means something in addition to the delivery of
property or title; it means transfer of possession. SSS has validly and in good faith
acquired title to the property subject of the dispute.

Villarica Pawnshop, Inc. vs. Social Security Commission

G.R. No. 228087, January 24, 2018
THIRD DIVISION
Gesmundo, J.:

DOCTRINE: Condonation statutes—being an act of liberality on the part of the State—

are strictly construed against the applicants unless the laws themselves clearly state a
contrary rule of interpretation.
FACTS:

In 2009, petitioners paid their delinquent contributions and accrued penalties with the
different branches of the SSS.

On January 7, 2010, Congress enacted R.A. No. 9903, otherwise known as the Social
Security Condonation Law of 2009, which took effect on February 1, 2010. The said law
offered delinquent employers the opportunity to settle, without penalty, their
accountabilities or overdue contributions within six (6) months from the date of its
effectivity. Consequently, petitioners thru its President and General Manager Atty. Henry
P. Villarica, sent separate Letters, all dated July 26, 2010, to the different branches of the
SSS seeking reimbursement of the accrued penalties, which they have paid in 2009.

Invoking Section 4 of R.A. No. 9903 and Section 2 (f) of the SSC Circular No. 2010-004
or the Implementing Rules and Regulations of R.A. No. 9903 (IRR), petitioners claimed
that the benefits of the condonation program extend to all employers who have settled
their arrears or unpaid contributions even prior to the effectivity of the law.

Petitioner HRV Villarica Pawnshop, Inc. was informed that its application for the refund
of the accrued penalty had been denied because R.A. No. 9903 does not cover
accountabilities settled prior to its effectivity.

ISSUE:

Whether or not condonation of penalties applies to those already paid prior to the
effectivity of condonation law.

RULING:
Accordingly, R.A. No. 9903 covers those employers who (1) have existing delinquent
contributions and/or (2) have accrued penalties at the time of its effectivity. Evidently,
there is nothing in R.A. No. 9903, particularly Section 4 thereof, that benefits an
employer who has settled their delinquent contributions and/or their accrued
penalties prior to the effectivity of the law. Once an employer pays all his delinquent
contributions and accrued penalties before the effectivity of R.A. No. 9903, it cannot
avail of the condonation program because there is no existing obligation anymore. It is
the clear intent of the law to limit the benefit of the condonation program to the
delinquent employers.

The Court finds that employers who have paid their unremitted contributions and already
settled their delinquent contributions as well as their corresponding penalties before R.A.
No. 9903's effectivity do not have a right to be refunded of the penalties already paid.

Cacayorin vs. Armed Forces and Police Mutual Benefit Associations, Inc.
G.R. No. 171298, April 15, 2013
SECOND DIVISION
Del Castillo, J.:

DOCTRINE: Consignation is necessarily judicial. Article 1258 of the Civil Code

specifically provides that consignation shall be made by depositing the thing or things
due at the disposal of judicial authority. The said provision clearly precludes consignation
in venues other than the courts.

FACTS:

Oscar Cacayorin filed an application with AFPMBAI to purchase a property which the
latter owned through a loan facility. Oscar and his wife, Thelma, and the Rural Bank of
San Teodoro executed a Loan and Mortgage Agreement with the former as borrowers
and the Rural Bank as lender, under the auspices of PAG-IBIG. On the basis of the Rural
Bank's letter of guaranty, AFPMBAI executed in petitioners' favor a Deed of Absolute
Sale, and a new title was issued in their name. Then, the PAG-IBIG loan facility did not
push through and the Rural Bank closed. Meanwhile, AFPMBAI somehow was able to
take possession of petitioners' loan documents and the TCT, while petitioners were
unable to pay the loan for the property. AFPMBAI made written demands for petitioners
to pay the loan for the property. Then, petitioners filed with the RTC a complaint for
consignation of loan payment, recovery of title and cancellation of mortgage annotation
against AFPMBAI, PDIC and the Register of Deeds of Puerto Princesa City. AFPMBAI
filed a motion to dismiss claiming that petitioners' Complaint falls within the jurisdiction
of the Housing and Land Use Regulatory Board (HLURB), as it was filed by petitioners
in their capacity as buyers of a subdivision lot and it prays for specific performance of
contractual and legal obligations decreed under Presidential Decree No. 957(PD 957). It
added that since no prior valid tender of payment was made by petitioners, the
consignation case was fatally defective and susceptible to dismissal.
.

ISSUE: Whether or not a valid tender of payment was made.

RULING:

Under Article 1256 of the Civil Code, the debtor shall be released from responsibility by
the consignation of the thing or sum due, without need of prior tender of payment, when
the creditor is absent or unknown, or when he is incapacitated to receive the payment at
the time it is due, or when two or more persons claim the same right to collect, or when
the title to the obligation has been lost.

Consignation is necessarily judicial; hence, jurisdiction lies with the RTC, not with the
HLURB. Art. 1258. Consignation shall be made by depositing the things due at the
disposal of judicial authority, before whom the tender of payment shall be proved, in a
proper case, and the announcement of the consignation in other cases.
.
Tender of payment must be distinguished from consignation. Tender is the antecedent of
consignation, that is, an act preparatory to the consignation, which is the principal, and
from which are derived the immediate consequences which the debtor desires or seeks to
obtain. Tender of payment may be extrajudicial, while consignation is necessarily
judicial, and the priority of the first is the attempt to make a private settlement before
proceeding to the solemnities of consignation.

Spouses Nameal and Lourdes Bonrostro vs. Spouses Juan and Constancia Luna
G.R. No. 172346, July 24, 2013
SECOND DIVISION
Del Castillo, J.:

DOCTRINE: Tender of payment, without more, produces no effect. To have the effect of
payment and the consequent extinguishment of the obligation to pay, the law requires the
companion acts of tender of payment and consignation.

FACTS:
In 1992, respondent Constancia Luna (Constancia), as buyer, entered into a Contract to
Sell with Bliss Development Corporation (Bliss) involving a house and lot identified as
Lot 19, Block 26 of New Capitol Estates in Diliman, Quezon City. Barely a year after,
Constancia, this time as the seller, entered into another Contract to Sell with petitioner
Lourdes Bonrostro (Lourdes) concerning the same property on installment basis.
Immediately after the execution of the said second contract, the spouses Bonrostro took
possession of the property. However, except for the ₱200,000.00 down payment, Lourdes
failed to pay any of the stipulated subsequent amortization payments.
ISSUE:

Whether or not there was a valid tender of payment and consignation.

RULING:

Tender of payment is the manifestation by the debtor of a desire to comply with or pay an
obligation. If refused without just cause, the tender of payment will discharge the debtor
of the obligation to pay but only after a valid consignation of the sum due shall have been
made with the proper court. Consignation is the deposit of the proper amount with a
judicial authority in accordance with rules prescribed by law, after the tender of payment
has been refused or because of circumstances which render direct payment to the creditor
impossible or inadvisable.

When a tender of payment is made in such a form that the creditor could have
immediately realized payment if he had accepted the tender, followed by a prompt
attempt of the debtor to deposit the means of payment in court by way of consignation,
the accrual of interest on the obligation will be suspended from the date of such tender.
But when the tender of payment is not accompanied by the means of payment, and the
debtor did not take any immediate step to make a consignation, then interest is not
suspended from the time of such tender.

The spouses Bonrostro took no further steps to effect payment. They did not resort to
consignation of the payment with the proper court despite knowledge that under the
contract, non-payment of the installments on the agreed date would make them liable for
interest thereon.

Del Carmen vs. Sabordo

G.R. No. 181723, August 11, 2014
THIRD DIVISION
Peralta, J.:

DOCTRINE: For a consignation or deposit with the court of an amount due on a

judgment to be considered as payment, there must be prior tender to the judgment
creditor who refuses to accept it.

FACTS:

Sometime in 1961, the spouses Toribio and Eufrocina Suico (Suico spouses), along with
several business partners, entered into a business venture by establishing a rice and com
mill at Mandaue City, Cebu. As part of their capital, they obtained a loan from the
Development Bank of the Philippines (DBP), and to secure the said loan, four parcels of
land owned by the Suico spouses, denominated as Lots 506, 512, 513 and 514, and
another lot owned by their business partner, Juliana Del Rosario, were mortgaged.
Subsequently, the Suico spouses and their business partners failed to pay their loan
obligations forcing DBP to foreclose the mortgage. After the Suico spouses and their
partners failed to redeem the foreclosed properties, DBP consolidated its ownership over
the same. Nonetheless, DBP later allowed the Suico spouses and Reginald and Beatriz
Flores (Flores spouses), as substitutes for Juliana Del Rosario, to repurchase the subject
lots by way of a conditional sale for the sum of ₱240,571.00. The Suico and Flores
spouses were able to pay the downpayment and the first monthly amortization, but no
monthly installments were made thereafter. Threatened with the cancellation of the
conditional sale, the Suico and Flores spouses sold their rights over the said properties to
herein respondents Restituto and Mima Sabordo, subject to the condition that the latter
shall pay the balance of the sale price. DBP approved the sale of rights of the Suico and
Flores spouses in favor of herein respondents. Subsequently, respondents were able to
repurchase the foreclosed properties of the Suico and Flores spouses.
The Regional Trial Court (RTC) of San Carlos City, Negros Occidental, ruled in favor of
the Suico spouses directing that the latter have until August 31, 1987 within which to
redeem or buy back from respondents.

ISSUE:

Whether or not the judicial deposit of P127, 500.00 made by the Suicos with Clerk of
Court of the RTC, San Carlos City was valid.

RULING:

Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment, and it generally
requires a prior tender of payment. It should be distinguished from tender of payment
which is the manifestation by the debtor to the creditor of his desire to comply with his
obligation, with the offer of immediate performance. Tender is the antecedent of
consignation, that is, an act preparatory to the consignation, which is the principal, and
from which are derived the immediate consequences which the debtor desires or seeks to
obtain. Tender of payment may be extrajudicial, while consignation is necessarily
judicial, and the priority of the first is the attempt to make a private settlement before
proceeding to the solemnities of consignation. Tender and consignation, where validly
made, produces the effect of payment and extinguishes the obligation.

In the instant case, however, petitioner and her co-heirs, upon making the deposit with
the RTC, did not ask the trial court that respondents be notified to receive the amount that
they have deposited. In fact, there was no tender of payment.

It is settled that compliance with the requisites of a valid consignation is mandatory.

Failure to comply strictly with any of the requisites will render the consignation void.
One of these requisites is a valid prior tender of payment.
 Philippine National Bank vs. Chan
G.R. No. 206037, March 13, 2017
FIRST DIVISION
Del Castillo, J.:

DOCTRINE: Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept payment. It generally
requires a prior tender of payment."

FACTS:

Respondent Lilibeth S. Chan owns a three-story commercial building located along A.

Linao Street, Paco, Manila covered by Transfer Certificate of Title (TCT) No. 208782.
On May 10, 2000, she leased said commercial building to petitioner Philippine National
Bank (PNB) for a period of five years from December 15, 1999 to December 14, 2004,
with a monthly rental of ₱76,160.00. When the lease expired, PNB continued to occupy
the property on a month-to-month basis with a monthly rental of ₱116,788.44. PNB
vacated the premises on March 23, 2006.

Meanwhile, on January 22, 2002, respondent obtained a ₱l,500,000.00 loan from PNB
which was secured by a Real Estate Mortgage constituted over the leased property. In
addition, respondent executed a Deed of Assignment over the rental payments in favor of
PNB.

On August 26, 2005, respondent filed a Complaint for Unlawful Detainer before the
Metropolitan Trial Court (MeTC), Branch 7, Manila against PNB, alleging that the latter
failed to pay its monthly rentals from October 2004 until August 2005:
In its defense, PNB claimed that it applied the rental proceeds from October 2004 to
January 15, 2005 as payment for respondent's outstanding loan which became due and
demandable in October 2004. As for the monthly rentals from January 16, 2005 to
February 2006, PNB explained that it received a demand letter from a certain Lamberto
Chua (Chua) who claimed to be the new owner of the leased property and requested that
the rentals be paid directly to him, reckoned from January 15, 2005 until PNB decides to
vacate the premises or a new lease contract with Chua is executed. PNB thus deposited
the rentals in a separate non-drawing savings account for the benefit of the rightful party.

ISSUE:

Whether or not PNB properly consigned the disputed rental payments in the amount of
₱l,348,643.92 with the Office of the Clerk of Court of the MeTC of Manila.

RULING:

For consignation to be valid, the debtor must comply with the following requirements
under the law:
1) there was a debt due;
2) valid prior tender of payment, unless the consignation was made because of some legal
cause provided in Article 1256;
3) previous notice of the consignation has been given to the persons interested in the
performance of the obligation;
4) the amount or thing due was placed at the disposal of the court; and,
5) after the consignation had been made, the persons interested were notified thereof.

Failure in any of the requirements is enough ground to render a consignation ineffective.

PNB's deposit of the subject monthly rentals in a non-drawing savings account is not the
consignation contemplated by law, precisely because it does not place the same at the
disposal of the court. Consignation is necessarily judicial; it is not allowed in venues
other than the courts. Consequently, PNB's obligation to pay rent for the period of
January 16, 2005 up to March 23, 2006 remained subsisting, as the deposit of the rentals
cannot be considered to have the effect of payment.

Comglasco Corporation vs. Santos Car Check Center Corporation

G.R. No. 202989, March 5, 2015
THIRD DIVISION

Reyes, J.:

DOCTRINE: 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.

FACTS:

On August 16, 2000, respondent Santos Car Check Center Corporation (Santos), owner
of a showroom located at 75 Delgado Street, in Iloilo City, leased out the said space to
petitioner Comglasco Corporation (Comglasco), an entity engaged in the sale,
replacement and repair of automobile windshields, for a period of five years at a monthly
rental of P60,000.00 for the first year, P66,000.00 on the second year, and P72,600.00 on
the third through fifth years.

On October 4, 2001, Comglasco advised Santos through a letter that it was pre-
terminating their lease contract effective December 1, 2001. Santos refused to accede to
the pre-termination, reminding Comglasco that their contract was for five years.

ISSUE:
Whether or not the petitioner’s contractual obligation was discharged due to impossibility
of performance.

RULING:

The obligation to pay rentals or deliver the thing in a contract of lease 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.

Petitioner’s alleged poor financial condition will neither release petitioner from the
binding effect of the contract of lease. 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.

Soriano vs. People of the Philippines

G.R. No. 181692, August 14, 2013
FIRST DIVISION
Villarama, Jr., J.:

DOCTRINE: Compensation is a mode of extinguishing to the concurrent amount, the

debts of persons who in their own right are creditors and debtors of each other

FACTS:
On February 18, 1994, Evelyn Alagao (Evelyn), daughter of private complainant
Consolacion Alagao (Alagao), as borrower-mortgagor, executed a "Contract of Loan
Secured by Real Estate Mortgage with Special Power to Sell Mortgage Property without
Judicial Proceedings" in favor of petitioner as lender-mortgagee. The instrument provides
for a ₱40,000 loan secured by a parcel of land covered by Original Certificate of Title
No. P-6254, located in OId.Nongnongan, Don Carlos, Bukidnon, registered in Evelyn’s
name. It likewise provides that the loan was to be paid two years from the date of
execution of the contract, or on February 18, 1996, and that Evelyn agrees to give
petitioner ¼ of every harvest from her corn land until the full amount of the loan has been
paid, starting from the first harvest. Based on Alagao’s testimony, the first harvest was
made only in September 1994. Petitioner on the other hand claims that from the time the
loan was obtained until September 1994, there were already four harvests. During pre-
trial, it was admitted by Alagao that she did not only receive ₱40,000 as provided in the
contract of loan but ₱51,730 in the form of fertilizers and cash advances.

On September 9, 1994, Alagao and some companions delivered 398 sacks of corn grains
to petitioner. Petitioner prepared a voucher indicating that Alagao had received the
amount of ₱85,607 as full payment for the 398 sacks of corn grains. Alagao signed said
voucher even if she only received ₱3,000. According to Alagao, 64 of the 398 sacks will
serve as partial payment of her ₱40,000 loan with petitioner while the remaining balance
will come from the ₱85,607 cash she was supposed to receive as payment for the corn
grains delivered so she can redeem her daughter’s land title.

Petitioner argues that while the CA found her indebted to Alagao in the sum of ₱85,607,
it only offset ₱40,000 instead of ₱51,730 which was the amount stipulated during pre-
trial. Thus, deducting Alagao’s indebtedness of ₱43,930 from petitioner’s indebtedness
amounting to ₱74,807, petitioner’s remaining indebtedness should only be ₱30,877.
Respondent on the other hand contends that the amount of loan extended to Alagao was
₱40,000 and not ₱51,730 as claimed by petitioner. Moreover, the entire value of the 398
sacks of corn grains should not be set off with Alagao’s loan since (1) the loan was not
yet due and demandable at the time of delivery of the 398 sacks of corn grains in
September 1994; and (2) only 154 of the 398 sacks of corn grains belong to Alagao.
Respondent also claims that ₱13,765.9517 should be considered as the correct value of
the 64 sacks intended by Alagao as partial payment for the loan and not ₱7,800 as found
by the CA.

ISSUE:

Whether or not the CA in applying compensation, erroneously placed private

complainant's indebtedness to petitioner at P40,000.00 instead of P51,730.00 as found by
it and as stipulated during pre-trial.

RULING:

Compensation is a mode of extinguishing to the concurrent amount, the debts of persons

who in their own right are creditors and debtors of each other. The object of
compensation is the prevention of unnecessary suits and payments through the mutual
extinction by operation of law of concurring debts. Article 1279 of the Civil Code
provides for the requisites for compensation to take effect:
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.
With the presence of all the requisites mentioned in Article 1279, legal compensation
took effect by operation of law as provided in Article 1290 of the Civil Code, to wit:
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.

Mondragon Personal Sevices, Inc., vs. Victoriano S. Sola, Jr.

G.R. No. 174882, January 21, 2013
THIRD DIVISION
Peralta, J.:

DOCTRINE: Legal compensation takes place by operation of law when all the requisites
are present, as opposed to conventional compensation which takes place when the parties
agree to compensate their mutual obligations even in the absence of some requisites.

FACTS:

Petitioner Mondragon Personal Sales Inc., a company engaged in the business of selling
various consumer products through a network of sales representatives, entered into a
Contract of Services with respondent Victoriano S. Sola, Jr. for a period of three years
commencing on October 2, 1994 up to October 1, 1997. Under the said contract,
respondent, as service contractor, would provide service facilities, i.e., bodega cum
office, to petitioner's products, sales force and customers in General Santos City.
The agreement then came into effect when petitioner's goods were delivered to
respondent's bodega and were sold by petitioner's employees. Prior to the execution of
the contract, however, respondent’s wife, Lina Sola, had an existing obligation with
petitioner arising from her Franchise Distributorship Agreement with the latter. On
January 26, 1995, respondent wrote a letter addressed to Renato G. de Leon, petitioner's
Vice-President for Finance, wherein he acknowledged and confirmed his wife’s
indebtedness to petitioner in the amount of ₱1,973,154.73 (the other accountability in the
sum of ₱1,490,091.15 was still subject to reconciliation) and, together with his wife,
bound himself to pay on installment basis the said debt. Consequently, petitioner
withheld the payment of respondent's service fees from February to April 1995 and
applied the same as partial payments to the debt which he obligated to pay. On April 29,
1995, respondent closed and suspended operation of his office cum bodega where
petitioner's products were stored and customers were being dealt with.

ISSUE:

Whether or not that petitioner's act of withholding respondent's service fees and thereafter
applying them as partial payment to the obligation of respondent's wife with petitioner
was unlawful.

RULING:

The respondent became a co-debtor of his wife's accountabilities with petitioner by

recognizing the latter’s indebtedness. Hence, the petitioner's act of withholding
respondent's service fees/commissions and applying them to the latter's outstanding
obligation with the former is merely an acknowledgment of the legal compensation that
occurred by operation of law between the parties. Compensation is a mode of
extinguishing to the concurrent amount the obligations of persons who in their own right
and as principals are reciprocally debtors and creditors of each other. Legal compensation
takes place by operation of law when all the requisites are present, as opposed to
conventional compensation which takes place when the parties agree to compensate their
mutual obligations even in the absence of some requisites. Legal compensation requires
the concurrence of the following conditions:
(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.

First United Constructors Corporation vs. Bayanihan Automotive Corporation

G.R. No. 164985, January 15, 2014
FIRST DIVISION
Bersamin, J.:

DOCTRINE: Before a claim could be the subject of legal compensation or set-off, the
debts should be liquidated and demandable.

FACTS:

Petitioner First United Constructors Corporation (FUCC) and petitioner Blue Star
Construction Corporation (Blue Star) were associate construction firms sharing financial
resources, equipment and technical personnel on a case-to-case basis. From May 27,
1992 to July 8, 1992, they ordered six units of dump trucks from the respondent, a
domestic corporation engaged in the business of importing and reconditioning used
Japan-made trucks, and of selling the trucks to interested buyers who were mostly
engaged in the construction business. The parties established a good business
relationship, with the respondent extending service and repair work to the units purchased
by the petitioners. The respondent also practiced liberality towards the petitioners in the
latter’s manner of payment by later on agreeing to payment on terms for subsequent
purchases.

On September 19, 1992, FUCC ordered from the respondent one unit of Hino Prime
Mover that the respondent delivered on the same date. On September 29, 1992, FUCC
again ordered from the respondent one unit of Isuzu Transit Mixer that was also delivered
to the petitioners. For the two purchases, FUCC partially paid in cash, and the balance
through post-dated checks.

Upon presentment of the checks for payment, the respondent learned that FUCC had
ordered the payment stopped. The respondent immediately demanded the full settlement
of their obligation from the petitioners, but to no avail. Instead, the petitioners informed
the respondent that they were withholding payment of the checks due to the breakdown
of one of the dump trucks they had earlier purchased from respondent, specifically the
second dump truck delivered on May 27, 1992.

ISSUE:

Whether or not petitioners can avail of legal compensation.

RULING:

Legal compensation was permissible. Legal compensation takes place when the
requirements set forth in Article 1278 and Article 1279 of the Civil Code are present, to
wit:
Article 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consists 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.

A debt is liquidated when its existence and amount are determined. Accordingly, an
unliquidated claim set up as a counterclaim by a defendant can be set off against the
plaintiff’s claim from the moment it is liquidated by judgment. Article 1290 of the Civil
Code provides that when all the requisites mentioned in Article 1279 of the Civil Code
are present, compensation takes effect by operation of law, and extinguishes both debts to
the concurrent amount. With petitioners’ expenses for the repair of the dump truck being
already established and determined with certainty by the lower courts, it follows that
legal compensation could take place because all the requirements were present. Hence,
the amount of ₱71,350.00 should be set off against petitioners’ unpaid obligation of
₱735,000.00, leaving a balance of ₱663,650.00, the amount petitioners still owed to
respondent.

Areza vs. Express Saving Banks, Inc.

G.R. No. 176697, September 10, 2014
FIRST DIVISION

Perez, J.:

DOCTRINE: In order that compensation may be proper, it is necessary that each one of
the obligors be bound principally, and that he be at the same time a principal creditor of
the other.

FACTS:
Petitioners were engaged in the business of "buy and sell" of brand new and second-hand
motor vehicles. On 2 May 2000, they received an order from a certain Gerry Mambuay
(Mambuay) for the purchase of a second-hand Mitsubishi Pajero and a brand-new Honda
CRV.
The buyer, Mambuay, paid petitioners with nine (9) Philippine Veterans Affairs Office
(PVAO) checks payable to different payees and drawn against the Philippine Veterans
Bank (drawee), each valued at Two Hundred Thousand Pesos (₱200,000.00) for a total of
One Million Eight Hundred Thousand Pesos (₱1,800,000.00).

On 3 May 2000, petitioners deposited the said checks in their savings account with the
Express Saving Bank. The Bank, in turn, deposited the checks with its depositary bank,
Equitable-PCI Bank, in Biñan,Laguna. Equitable-PCI Bank presented the checks to the
drawee, the Philippine Veterans Bank, which honored the checks.

Sometime in July 2000, the subject checks were returned by PVAO to the drawee on the
ground that the amount on the face of the checks was altered from the original amount of
₱4,000.00 to ₱200,000.00. The drawee returned the checks to Equitable-PCI Bank by
way of Special Clearing Receipts. In August 2000, the Bank was informed by Equitable-
PCI Bank that the drawee dishonored the checks on the ground of material alterations.

The Bank insisted that they informed petitioners of said development in August 2000 by
furnishing them copies of the documents given by its depositary bank. On the other hand,
petitioners maintained that the Bank never informed them of these developments.
On 9 March 2001, petitioners issued a check in the amount of ₱500,000.00. Said check
was dishonored by the Bank for the reason "Deposit Under Hold." According to
petitioners, the Bank unilaterally and unlawfully put their account with the Bank on hold.
On 22 March 2001, petitioners’ counsel sent a demand letter asking the Bank to honor
their check. The Bank refused to heed their request and instead, closed the Special
Savings Account of the petitioners with a balance of ₱1,179,659.69 and transferred said
amount to their savings account. The Bank then withdrew the amount of ₱1,800,000.00
representing the returned checks from petitioners’ savings account.
ISSUE:

Whether or not legal compensation was proper.

RULING:

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.

Petitioners are not liable for the deposit of the altered checks. The Bank, as the depositary
and collecting bank ultimately bears the loss. Thus, there being no indebtedness to the
Bank on the part of petitioners, legal compensation cannot take place.

California Manufacturing Company, Inc. vs. Advanced Technology System, Inc.

G.R. No. 202454, April 25, 2017
FIRST DIVISION

SERENO, J.:

DOCTRINE: In legal compensation, the debts must be liquidated and demandable.

FACTS:
Petitioner CMCI is a domestic corporation engaged in the food and beverage
manufacturing business. Respondent ATSI is also a domestic corporation that fabricates
and distributes food processing machinery and equipment, spare parts, and its allied
products.

In August 2001, CMCI leased from ATSI a Prodopak machine which was used to pack
products in 20-ml. pouches. The parties agreed to a monthly rental of ₱98,000 exclusive
of tax. Upon receipt of an open purchase order on 6 August 2001, ATSI delivered the
machine to CMCI's plant at Gateway Industrial Park, General Trias, Cavite on 8 August
2001.

In November 2003, ATSI filed a Complaint for Sum of Money against CMCI to collect
unpaid rentals for the months of June, July, August, and September 2003. ATSI alleged
that CMCI was consistently paying the rents until June 2003 when the latter defaulted on
its obligation without just cause. CMCI moved for the dismissal of the complaint on the
ground of extinguishment of obligation through legal compensation.

CMCI averred that ATSI was one and the same with Processing Partners and Packaging
Corporation (PPPC), which was a toll packer of CMCI products. CMCI alleged that in
2000, PPPC agreed to transfer the processing of CMCI's product line from its factory in
Meycauayan to Malolos, Bulacan. Upon the request of PPPC, through its Executive Vice
President Felicisima Celones, CMCI advanced ₱4 million as mobilization fund. PPPC
President and Chief Executive Officer Francis Celones allegedly committed to pay the
amount in 12 equal instalments deductible from PPPC's monthly invoice to CMCI
beginning in October 2000. CMCI likewise claims that in a letter dated 30 July 2001,
Felicisima proposed to set off PPPC's obligation to pay the mobilization fund with the
rentals for the Prodopak machine.

ISSUE:
Whether or not legal compensation between ATSI's claim against CMCI on one hand,
and the latter's claim against PPPC on the other hand, has set in.

RULING:

The law requires that the debts be liquidated and demandable. Liquidated debts are those
whose exact amounts have already been determined.

CMCI has not presented any credible proof, or even just an exact computation, of the
supposed debt of PPPC. It claims that the mobilization fund that it had advanced to PPPC
was in the amount of ₱4 million. Yet, Felicisima's proposal to conduct offsetting in her
letter dated 30 July 2001 pertained to a ₱3.2 million debt of PPPC to CMCI. Meanwhile,
in its Answer to ATSI's complaint, CMCI sought to set off its unpaid rentals against the
alleged ₱10 million debt of PPPC. The uncertainty in the supposed debt of PPPC to
CMCI negates the latter's invocation of legal compensation as justification for its non-
payment of the rentals for the subject Prodopak machine.