Philippine Trust Company vs. Roxas

A defense of legal compensation must be pleaded at the trial stage and cannot be raised for the first time at the execution stage of a final judgment, as it is deemed waived under Section 2 of Rule 9 of the 1964 Rules of Court; moreover, compensation cannot apply where the debt sought to be offset is unliquidated and subject of pending litigation in another case.

PTC granted loans to the Spouses Roxas secured by real estate mortgages to finance housing projects in Bataan. When the Spouses Roxas defaulted due to project failure, PTC initiated extrajudicial foreclosure proceedings. The Spouses Roxas sued in Bataan to enjoin the foreclosure and claim damages for breach of a building construction contract. Meanwhile, in a separate Manila case involving the same housing project, PTC had counterclaimed for collection of the unpaid loans. The Bataan court enjoined the foreclosure and awarded damages to the Spouses Roxas, which PTC allowed to become final while pursuing its counterclaim in Manila.

• The Loan Transactions: The Spouses Roxas obtained loans from PTC totaling Php 2,523,200 secured by real estate mortgages. On April 10, 1979, PTC granted an additional Php 900,000 loan for housing projects in Cabcaben, Mariveles, Bataan, with the condition that releases would be made only upon request of contractor Rosendo P. Dominguez, Jr. and with the conformity of the Spouses Roxas, and upon submission of invoices covering materials previously purchased.
• Unauthorized Release: PTC released Php 870,000 to Dominguez despite the Spouses Roxas having agreed only to a Php 450,000 release as evidenced by a promissory note dated April 11, 1979.
• Project Failure and Default: The housing projects remained unfinished due to financial difficulties, depriving the Spouses Roxas of rental income and resulting in missed amortization payments to PTC.
• The Manila Case (Civil Case No. 130783/130892): Dominguez sued PTC and Spouses Roxas for breach of the construction contract. The Spouses Roxas filed a separate case against Dominguez and his surety, later consolidated. The Spouses Roxas included a cross-claim against PTC. PTC counterclaimed for Php 3,053,738.50 plus interest and attorney's fees, seeking foreclosure of the mortgages. The trial court ruled for Dominguez, denied PTC's counterclaim without prejudice to filing a separate collection suit. Both parties appealed to the Court of Appeals (CA-G.R. CV No. 30340), which remained pending.
• The Bataan Case (Civil Case No. 4809 - Main Case): While Civil Case No. 130783 was pending, PTC petitioned for extrajudicial foreclosure in Bataan. The Spouses Roxas sued to enjoin the foreclosure and claim damages. On December 26, 1988, the Bataan RTC enjoined the foreclosure permanently and awarded damages: Php 100,000 (ordinary), Php 300,000 (moral), Php 50,000 (exemplary), and Php 50,000 (attorney's fees).
• Execution Proceedings and Compensation Claim: The Court of Appeals affirmed the Bataan decision, which became final. The Spouses Roxas moved for execution. PTC opposed, raising legal compensation for the first time to offset the judgment debt against the Spouses Roxas' loan obligation. The trial court denied the opposition, holding the defense waived. PTC filed motions for reconsideration which were denied.

• Timeliness of Defense: PTC maintained that it could not have raised legal compensation earlier because the judgment debt was not yet due when it filed its answer in the Main Case, and it had already set up the loan obligation as a compulsory counterclaim in Civil Case No. 130783.
• Change in Situation: PTC argued that the denial of its counterclaim in Civil Case No. 130783 constituted a supervening event rendering execution inequitable, as there was a change in the situation of the parties.
• Requisites of Legal Compensation: PTC contended that all requisites under Article 1279 of the Civil Code were present to allow compensation between its judgment debt and the Spouses Roxas' loan obligation.

• Waiver of Defense: The Spouses Roxas argued that PTC waived the defense of legal compensation by failing to raise it in a motion to dismiss or as an affirmative defense in its answer to the Main Case.
• Right to Execution: Execution should issue as a matter of right once a judgment becomes final, and the denial of PTC's counterclaim in the Manila case was not a supervening event warranting stay of execution.
• Unliquidated Debt: The loan obligation was not liquidated because both its demandability and exact amount were put in issue in the pending appeal of Civil Case No. 130783 (CA-G.R. CV No. 30340).
• Lack of Grave Abuse of Discretion: PTC failed to prove grave abuse of discretion in the Bataan RTC's orders since it challenged them via Rule 65.

• Waiver of Defense: Whether PTC waived the defense of legal compensation by raising it for the first time at the execution stage.
• Timeliness and Propriety: Whether the defense of legal compensation was timely and properly raised despite the finality of the judgment.
• Requisites of Compensation: Whether all requisites for legal compensation under Article 1279 of the Civil Code were present.
• Forum Shopping: Whether PTC engaged in forum shopping by seeking compensation in the Main Case while pursuing collection of the same loan in Civil Case No. 130783.

• Waiver of Defense: The defense was deemed waived. Under Section 2 of Rule 9 of the 1964 Rules of Court, defenses not pleaded in a motion to dismiss or answer are deemed waived. Although legal compensation takes place by operation of law, it must be alleged and proved as a defense; only after proof do its effects retroact to the moment when requisites concurred. PTC could have pleaded this defense alternatively or hypothetically under Rule 8, Section 2, but chose not to.
• Election of Remedies: PTC's failure to raise the defense in the Main Case constituted an informed choice to rely on its counterclaim in Civil Case No. 130783. Following the doctrine of election of remedies, PTC's choice to set up the unpaid loan as a counterclaim in the Manila case—which had gone to judgment but remained pending appeal—precludes it from raising compensation to oppose execution in the Main Case. The doctrine rests on the premise that parties must be held responsible for their choices to prevent double redress for a single wrong.
• Unliquidated Debt: Even if not waived, legal compensation was inapplicable because the fourth requisite of Article 1279 was absent. Compensation requires that debts be liquidated and demandable. A debt is liquidated only when its existence and amount are determined. Since the loan obligation, including its amount and demandability, remained disputed in the pending appeal of CA-G.R. CV No. 30340, PTC's credit was not liquidated.
• Forum Shopping: PTC engaged in forum shopping. The elements of litis pendentia were present: identity of parties (PTC and Spouses Roxas), identity of rights asserted (extinguishment of the loan obligation), and identity of subject matter (the unpaid loan). PTC sought the same relief in both cases—the extinguishment of the Spouses Roxas' loan obligation—either through payment in the Manila case or compensation in the Bataan case. This constituted splitting of causes of action and trifling with court processes.

• Legal Compensation (Article 1279, Civil Code): Requires concurrence of: (a) each obligor bound principally and simultaneously principal creditor of the other; (b) both debts consist in sum of money or consumables of same kind and quality; (c) both debts due; (d) debts liquidated and demandable; and (e) no retention or controversy commenced by third persons communicated to debtor. Compensation can only take place between certain and liquidated debts; it cannot extend to unliquidated, disputed claims.
• Waiver of Defenses (1964 Rules of Court, Rule 9, Section 2): Defenses and objections not pleaded in a motion to dismiss or answer are deemed waived, except failure to state cause of action or lack of jurisdiction. Although legal compensation operates by law, it must be alleged and proved as a defense by the debtor claiming its benefits.
• Election of Remedies: When a party having knowledge of the facts makes an election between inconsistent remedies, the election is final and bars any inconsistent action, absent fraud. The doctrine prevents double redress for a single wrong and holds parties responsible for their strategic choices.
• Immutability of Final Judgments: A judgment that has become final and executory is immutable and unalterable, and may no longer be modified in any respect. Execution shall issue as a matter of right, and issuance is a ministerial duty. Exceptions include supervening events rendering execution inequitable or unjust.
• Forum Shopping: Exists when a party institutes two or more suits in different courts, simultaneously or successively, to rule on the same or related causes or grant the same reliefs. Elements of litis pendentia (identity of parties, rights asserted, and subject matter) establish forum shopping. Willful forum shopping is ground for summary dismissal and constitutes direct contempt.

• "Although legal compensation takes place by operation of law, it must be alleged and proved as a defense by the debtor who claims its benefits. Only after it is proved will its effects retroact to the moment when all the requisites under Article 1279 of the Civil Code have concurred."
• "Following the doctrine of election of remedies, PTC's choice of setting up the Spouses Roxas' unpaid loan obligation as a counterclaim in Civil Case No. 130873, which has gone to judgment on the merits but is pending appeal, precludes it from raising compensation of the same loan obligation for the purpose of opposing the writ of execution in the Main Case."
• "Compensation can only take place between certain and liquidated debts; it cannot extend to unliquidated, disputed claims."
• "Forum shopping is an act of malpractice that is prohibited and condemned because it trifles with the courts and abuses their processes, and degrades the administration of justice and adds to the already congested court dockets."

• Marquez v. Valencia, 99 Phil. 740 (1956): Cited for the rule that when a defendant fails to set up alternative defenses and chooses to rely on one only, the overruling thereof bars subsequent action based on unpleaded defenses, following the proscription against splitting causes of action.
• D.M. Consunji, Inc. v. Court of Appeals, G.R. No. 137873, April 20, 2001: Applied for the doctrine of election of remedies, stating that when a party makes an election between inconsistent remedies with knowledge of the facts, the election is final and bars inconsistent actions absent fraud.
• First United Constructors Corporation v. Bayanihan Automotive Corporation, G.R. No. 164985, January 15, 2014: Cited for the definition of liquidated debt as one whose existence and amount are determined.
• Silahis Marketing Corp. v. Intermediate Appellate Court, G.R. No. 74027, December 7, 1989: Cited for the principle that compensation cannot extend to unliquidated, disputed claims.
• Young v. Ken Seng, G.R. No. 143464, March 5, 2003: Cited for the definition of forum shopping and its elements.
• Ayala Land, Inc. v. Valisno, G.R. No. 135899, February 2, 2000: Cited for the elements of litis pendentia as basis for forum shopping.

• Article 1279, Civil Code: Enumerates the requisites for legal compensation to take place.
• Article 1231, Civil Code: Lists payment and compensation as modes of extinguishing obligations.
• Rule 9, Section 2, 1964 Rules of Court: Provided that defenses not pleaded in motion to dismiss or answer are deemed waived (now reflected in 1997 Rules, Rule 9, Section 1).
• Rule 8, Section 2, 1964 Rules of Court: Allowed parties to set forth two or more statements of claim or defense alternatively or hypothetically (now Rule 8, Section 2, 1997 Rules).
• Rule 39, Section 1, Rules of Court: Execution shall issue as a matter of right upon finality of judgment.

Presbitero J. Velasco, Jr. (Chief Justice, Chairperson), Martin S. Villarama, Jose Catral Mendoza, Estela M. Perlas-Bernabe.