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UNION BANK OF PHILIPPINES v. DEVELOPMENT BANK OF PHILIPPINES

FACTS:

The case revolves around a dispute between Union Bank of the Philippines (Union Bank) and the Development Bank of the Philippines (DBP) regarding the remittance of rental payments made by Foodmasters, Inc. (FI). FI had outstanding loan obligations to both Union Bank's predecessor-in-interest, Bancom Development Corporation (Bancom), and DBP. To address these obligations, on May 21, 1979, FI entered into a Deed of Cession of Property In Payment of Debt with DBP, where FI transferred certain properties to DBP in exchange for the satisfaction of its loan obligations and the assumption of its obligations to Bancom by DBP.

As part of the Deed of Cession, DBP leased back the property to FI under a Lease Agreement and undertook to remit up to 30% of the rental payments due from FI to Bancom as payment of the assumed obligations. However, DBP also sought to implead Foodmasters Worldwide, Inc. (FW) as a third-party defendant in the case.

Union Bank filed a collection case against DBP when the rental payments were allegedly not remitted. The Regional Trial Court (RTC) ruled in favor of Union Bank. Dissatisfied with the decision, DBP appealed to the Court of Appeals (CA). The CA set aside the RTC's ruling and ordered FW to pay DBP the entire rental debt, with DBP being responsible for remitting 30% of the rental payments to Union Bank.

Both Union Bank and DBP separately filed petitions for review on certiorari before the Supreme Court, and their petitions were consolidated.

ISSUES:

  1. Whether the RTC erred in granting both Union Bank's motion for execution and DBP's motion for execution.

  2. Whether the RTC erred in denying DBP's motion for reconsideration from the Execution Order.

  3. Whether the CA erred in dismissing DBP's petition for certiorari.

  4. Whether the Court erred in granting DBP's appeal and nullifying the October 15, 2001 Writ of Execution.

  5. Whether the Court of Appeals (CA) correctly upheld the denial of Union Bank's motion to affirm legal compensation.

  6. Whether DBP should be considered in default for failing to remit lease rentals to Union Bank.

  7. Whether DBP is liable for damages for its alleged negligence in enforcing lessor's remedies against Foodmasters Worldwide, Inc.

RULING:

  1. The RTC did not err in granting both Union Bank's motion for execution and DBP's motion for execution.

  2. The RTC did not err in denying DBP's motion for reconsideration from the Execution Order.

  3. The CA did not err in dismissing DBP's petition for certiorari.

  4. The Court did not err in granting DBP's appeal and nullifying the October 15, 2001 Writ of Execution.

  5. The petition is bereft of merit. The CA correctly upheld the denial of Union Bank's motion to affirm legal compensation. 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. The requisites for compensation are: (1) each obligor must be bound principally and be a principal creditor of the other; (2) both debts must consist of a sum of money or consumable things of the same kind and quality; (3) the debts must be due and liquidated; (4) there must be no retention or controversy commenced by third persons and communicated in due time to the debtor. In this case, the debts between Union Bank and DBP do not meet the requisites for legal compensation, specifically the debts are not due and liquidated. Therefore, Union Bank's motion for legal compensation was rightfully denied.

  6. DBP should not be considered in default since the monthly installments for the payment of the debt are to be funded from the lease rentals, and if the lease rentals are not paid, there is nothing for DBP to remit to Union Bank.

  7. DBP is not liable for damages as there is no competent and reliable evidence to support the claim of negligence in enforcing lessor's remedies.

PRINCIPLES:

  • Substitution of parties, in case of transfers pendente lite, is merely discretionary on the part of the court.

  • Novation of debtor cannot be done without the consent of the creditor.

  • The obligation to remit lease payments is contingent on the prior payment of the debtor.

  • Legal compensation can be applied to offset obligations between parties.

  • Compensation is a mode of extinguishing obligations wherein two persons in their capacity as principals are mutual debtors and creditors of each other with respect to equally liquidated and demandable obligations.

  • The requisites for compensation are: (1) each obligor must be bound principally and be a principal creditor of the other; (2) both debts must consist of a sum of money or consumable things of the same kind and quality; (3) the debts must be due and liquidated; (4) there must be no retention or controversy commenced by third persons and communicated in due time to the debtor.

  • Legal 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.

  • The doctrine of conclusiveness of judgment states that the 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.

  • The obligation to remit lease payments is contingent on the prior payment thereof by the lessee.

  • Legal compensation cannot take place if the requisites under Article 1279 of the Civil Code have not concurred.