Union Bank of the Philippines vs. Development Bank of the Philippines

Legal compensation requires that both debts be due, liquidated, and demandable; where one obligation is expressly conditioned on the prior payment by a third party and the exact amount of the deficiency cannot be ascertained until that condition is fulfilled, the requisites of compensation are not satisfied, and any attempt to compel set-off constitutes a collateral attack on a final and executory judgment.

Foodmasters, Inc. (FI) owed substantial debts to both Bancom Development Corporation (Bancom) and the Development Bank of the Philippines (DBP). To satisfy these obligations, FI executed a dacion en pago with DBP on May 21, 1979, transferring specific properties including a processing plant in exchange for the extinguishment of its DBP loan and DBP's assumption of FI's ₱17,000,000.00 debt to Bancom. Concurrently, DBP leased the property back to FI for twenty years, with Bancom's successor-in-interest, Union Bank of the Philippines (Union Bank), entitled to receive up to 30% of the monthly rentals as payment toward the assumed obligation. Any balance remaining after the application of rentals or sales proceeds was to be paid by DBP not later than December 29, 1998. FI subsequently assigned its leasehold rights to Foodmasters Worldwide, Inc. (FW).

• The Assumption Agreement: On May 21, 1979, DBP entered into an agreement with Bancom (Union Bank's predecessor-in-interest) wherein DBP assumed FI's ₱17,000,000.00 obligation to Bancom. DBP undertook to remit up to 30% of lease rentals from FI (later FW) to Bancom, with any balance to be paid by DBP not later than December 29, 1998.
• Assignment of Rights: On May 23, 1979, FI assigned its leasehold rights to Foodmasters Worldwide, Inc. (FW). On May 9, 1984, Bancom conveyed all its receivables, including the assumed obligations, to Union Bank.
• Collection Suit: Union Bank filed a collection case against DBP on June 20, 1984, claiming DBP failed to remit the 30% share of rentals despite repeated demands. DBP countered that its obligation had not arisen because FW had not paid the rentals.
• Prior Judicial Determinations: The RTC initially ruled for Union Bank, but the CA reversed, holding that DBP's obligation was contingent on FW's prior payment. The Supreme Court upheld the CA's interpretation in G.R. Nos. 115963 & 119112 (1995) and later in G.R. No. 155838 (2004), definitively ruling that DBP's obligation to remit was contingent and that any deficiency could only be determined after FW's satisfaction of its rental obligations.
• Execution and Garnishment: Following the finality of the January 13, 2004 Decision in G.R. No. 155838, the RTC issued a writ of execution ordering Union Bank to return garnished funds to DBP. Union Bank complied by issuing a manager's check for ₱52,427,250.00 on April 21, 2006, though DBP claimed a remaining balance of ₱756,372.39.
• Motion for Legal Compensation: On September 13, 2005, Union Bank filed a motion seeking to affirm legal compensation, arguing that since the December 29, 1998 deadline had passed and FW was non-operational, DBP became primarily liable for the balance of ₱1,849,391.87, which should be offset against Union Bank's obligation to return the garnished funds.

• Satisfaction of Requisites for Legal Compensation: Union Bank maintained that legal compensation under Articles 1279 and 1290 of the Civil Code had taken place because: (a) both parties were mutual debtors and creditors; (b) both obligations consisted of sums of money; (c) both debts were due, liquidated, and demandable; and (d) no retention or controversy existed. It argued that DBP's assumed obligation became due and demandable on December 29, 1998, and that FW's non-operational status rendered DBP primarily liable for the balance.
• Supervening Events: Petitioner contended that the grounds for compensation were based on supervening events (the passage of the December 29, 1998 deadline and FW's cessation of operations) that were not in existence during the prior trials, thereby distinguishing the present claim from the previously adjudicated issues.

• Lack of Requisites for Compensation: DBP countered that the requisites for legal compensation were absent because DBP was not a debtor of Union Bank in the manner contemplated by Article 1279. It argued that its obligation to remit remained contingent on FW's prior payment of rentals, which contingency had not been fulfilled.
• Conclusiveness of Judgment: Respondent maintained that the issue of whether DBP's obligation was due and liquidated had already been conclusively resolved in G.R. No. 155838, and Union Bank's motion constituted an impermissible collateral attack on that final judgment.
• Non-Liquidated Debt: DBP asserted that any deficiency could not be determined until FW satisfied its rental obligations, rendering the debt unliquidated and not demandable.

• Legal Compensation: Whether the Court of Appeals correctly upheld the Regional Trial Court's denial of Union Bank's motion to affirm legal compensation in light of the contingent nature of DBP's obligation and the finality of prior judgments.

• Legal Compensation: The petition was denied. Legal compensation requires, inter alia, that both debts be due and liquidated under Article 1279 of the Civil Code. DBP's assumed obligation to remit lease payments was expressly contingent on the prior payment thereof by FW to DBP, as conclusively established in the final and executory January 13, 2004 Decision in G.R. No. 155838. Consequently, the debt was not "due" within the meaning of Article 1279. Furthermore, the deficiency amount, if any, could not be determined until after FW's satisfaction of its own rental obligations to DBP, meaning the debt was neither liquidated nor demandable. The doctrine of conclusiveness of judgment precluded Union Bank from relitigating these settled facts and issues.

• Legal Compensation (Articles 1279 and 1290, Civil Code) — Legal compensation is 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 are: (1) each obligor is bound principally and is at the same time a principal creditor of the other; (2) both debts consist in a sum of money or consumables of the same kind and quality; (3) both debts are due; (4) both debts are liquidated and demandable; and (5) neither debt is subject to retention or controversy commenced by third parties. Compensation takes effect by operation of law when all requisites are present, even without the parties' awareness.
• Contingent Obligations and Compensation — An obligation that is contingent or conditional upon the happening of a future event, such as the prior payment by a third party, cannot be subject to legal compensation until the condition is fulfilled and the debt becomes due and demandable.
• Doctrine of Conclusiveness of Judgment — Facts and issues actually and directly resolved in a final judgment may not be raised in any future case between the same parties, even if the latter suit involves a different cause of action.

• "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."
• "Since DBP's assumed obligations to Union Bank for remittance of the lease payments are... '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)."
• "Any deficiency that DBP had to make up... '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 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."

• DBP v. Union Bank, G.R. No. 155838, January 13, 2004, 464 Phil. 161 — Controlling precedent establishing that DBP's obligation was contingent on FW's prior payment and that deficiency could not be determined until FW's satisfaction of its obligations; applied to determine that the debt was not due or liquidated.
• Tan v. Court of Appeals, 415 Phil. 675 (2001) — Cited for the principle of conclusiveness of judgment, preventing the relitigation of facts and issues already resolved in prior final judgments.
• Mavest (U.S.A.), Inc. v. Sampaguita Garment Corporation, G.R. No. 127454, September 21, 2005, 470 SCRA 440 — Cited for the definition of legal compensation and the distinction between legal and conventional compensation.

• Article 1279, Civil Code — Enumerates the five requisites for legal compensation: (1) mutual principal debtor-creditor relationship; (2) debts consist of money or consumables of same kind/quality; (3) both debts are due; (4) both debts are liquidated and demandable; and (5) no retention or controversy by third parties. Applied to hold that DBP's contingent and unliquidated obligation failed requisites 3 and 4.
• Article 1290, Civil Code — Provides that legal compensation takes effect by operation of law when all requisites in Article 1279 are present, extinguishing both debts to the concurrent amount even without the parties' awareness.

Antonio T. Carpio (Chairperson), Arturo D. Brion, Mariano C. Del Castillo, Jose Portugal Perez.