COMPENSATION

BANK OF THE PHILIPPINE ISLANDS vs. COURT OF APPEALS 255 SCRA 573 FACTS: Private respondent Edvin Reyes opened Savings Account at petitioner BPI. It is a joint account with his wife. He also held a joint Savings Account with his grandmother Emeteria Fernandez at the same BPI branch. He regularly deposited in this account the U.S. Treasury Warrants payable to the order of Emeteria Fernandez as her monthly pension. Emetria Fernandez died without the knowledge of the U.S. Treasury Department and was still sent U.S. Treasury Warrant in the amount of $377.00 or P 10,556.00. Private respondent deposited the said U.S. treasury check of Fernandez in their joint savings account. The check was cleared and sent to the US for further clearing. Two months after, private respondent closed savings account and transferred its funds amounting to P13,122.91 to joint savings account with his wife. The U.S. treasury was dishonored as it was discovered that Fernandez died three days prior to its issuance. The U.S. treasury department requested petitioner bank for a refund. For the first time petitioner bank came to know of the death of Fernandez. Private respondent received an urgent telegram from petitioner bank requesting him to contact the manager of the bank. When he called up the bank, he was informed that the treasury check was subject to claim. He assured petitioners that he would drop by the bank to look into the matter and he also verbally authorized them to debit from his other joint account the amount stated in the dishonored US treasury warrant. On the same day, petitioner debited the amount from the savings account of the private respondent. Private respondent demanded from the petitioner bank restitution of the debit amount and claimed that because of the debit he failed to withdraw his money when he need them. Petitioner contested the complaint and averred that private respondent gave them his express verbal authorization to debit the questioned amount. ISSUE: Whether or not private respondent verbally authorized petitioner bank to debit his joint account with his wife for the amount of the returned US Treasury Warrant. HELD: The court held that the petitioners were able to prove his verbal authority by preponderance of evidence. The testimonies of the bank manager and assistant manager deserve credence. The court did not believe to the private respondents allegation that he did not give any verbal authorization. His past and fraudulent conduct is evidence against him. Concealing from the petitioner the death of his grandmother and knew that he is not entitled to receive any pension. To pre-empt the refund he closed such account and transferred it to his joint account to his wife. Worse, he declared under the penalties of perjury in the withdrawal slip that his co-depositor Fernandez is still living. Legal Compensation is proper. Compensation takes effect when to persons in there own right are creditors and debtors of each other. When all the requisites in Art. 1279 are present compensation takes effect by operation of law and extinguishes both debts to the concurrent amount

even though the debtors and creditors are not aware of the compensation. Legal compensation operates even against the will of the interested parties and even without the consent of them. The elements of legal compensation are present in the case at bar. The obligors bound principally are the same time creditors and debtors of each other. Petitioner bank stands as a debtor of the private respondent, a depositor. At the same time the band is the creditor of the private respondent with respect to the dishonored treasury warrant which the latter illegally transferred to his joint account. Indeed, the right of the petitioner bank to make the debit is valid. MIRASOL vs. COURT OF APPEALS 351 SCRA 44 FACTS: Mirasols are sugarland owners and planters. They produced 70, 501.08 piculs of sugar, 25,662.36 of which were assigned for export. Private respondent PNB financed the Mirasols sugar production venture for crop years 1973-1974 and 1974-1975 under a crop loan financing scheme. Under the said scheme, the Mirasols signed Credit Agreements, a Chattel Mortgage on the Standing Crops and a Real Estate Mortgage in favor of PNB. The Chattel Mortgage empowered the PNB as the petitioners attorney-in-fact to negotiate and to sell the latters sugar both in domestic and export markets and to apply the proceeds to the payment of their obligation. Under the martial law Pres. Marcos issued P.D. no. 579 authorized private respondent PHILEX to purchase sugar allocated to export to the United States and their foreign markets. The decree further authorized PNB to finance PHILEX purchases. Finally the decree directed that whatever profit PHILEX might realize from sales of sugar abroad was to be remitted to a special fund of the national government. PNB continued to finance sugar production of the Mirasols for crop years 1975-1977. These crop loans and similar obligations were secured by real estate over several properties of Mirasols and chattel mortgage over standing crops. Believing that the proceeds of the sugar sales to PNB, if properly accounted for were more than enough to pay their obligations. Petitioners asked PNB for an accounting of the proceeds of the sale but the PNB ignored the request. PNB asked the petitioners to settle their due and demandable accounts. As a result of these demands for payment petitioners conveyed to PNB real properties valued at P 1,410,466.00 by way of dacion en pago leaving an unpaid overdrawn account of P1,513,347.78. Despite demands Mirasols failed to settle said due and demandable accounts. PNB then proceeded to extrajudicially foreclose the mortgaged properties. After applying the proceeds of the auction sale of the mortgaged realities, PNB still had a deficiencyclaim of P 12,551,252.93. Petitioners continued to ask PNB to account for the proceeds of the sale of their export sugar for crop years insiting that said proceeds, if properly liquidated could offset their outstanding obligations with the bank. MIrasols filed a suit for accounting specific performance and damages against PNB. ISSUE: Whether the Court of Appeals committed manifest error in upholding the validity of forclosure on petitoners property and in upholding the validity of dacion en pago. HELD: The Court held that in the present case, compensation cannot take place between the parties because neither the parties are mutually creditors and debtors of each other. Under PD no. 579, neither PNB nor PHILEX could retain any difference claimed by the Mirasols in the price of sugar

sold by the two firms. There was nothing with which PNB was supposed to have offset Mirasols admitted indebtedness. Compensation cannot take place where one claim as in the instant case is still the subject of litigation as the same cannot be deemed liquidated. With respect to the duress allegedly employed by PNB which impugned petitioners consent to the dacion en pago both the trial court and the Court of Appeals found that there was no evidence to support the claim. Wherefore the court declared dacion en pago and the foreclosure of the mortgaged properties valid.

NOVATION
MILLAR vs. COURT OF APPEALS 38 SCRA 642 FACTS: Eusebio Millar condemning Antonio Gabriel to pay him the sum of P 1,746.98 with interest at 12% per annum from the date of the filing of the complaint the sum of P 400 as attorneys fees and the cost of suit. The lower court issued the writ of execution applied for the basis of which the sheriff of Manila seized the respondents Willy Ford Jeep. Respondent pleaded with the petitioner to release the jeep under an arrangement whereby the respondent, to secure the payment of the judgment debt, agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the arrangement thus the parties executed a chattel mortgage on the jeep where payment will be in installments: 1st 850,000- march 31,1957; 2nd 850,000- april 30,1957. Upon failure of the respondent to pay first installment due March 31,1957, the petitioner obtained an alias writ of execution. Pursuant to the last writ the sheriff levied on certain personal properties belonging to the respondent and then scheduled them for execution of sale. The respondent filed an urgent motion for suspension of the execution sale on the ground of payment of the judgment obligation. The lower court ordered the suspension of the execution sale to afford the respondent the opportunity to prove his allegation of payment of the judgment debt. The lower court ruled that novation had taken place and that the parties had executed the chattel mortgage only to secure or get better security for the judgment. The respondent appealed the order to the Court of Appeals, which set aside the order of execution in a decision holding that the subsequent agreement of the parties impliedly novated the judgment obligation. The appellate court stated that the following circumstances sufficiently demonstrate the incompatibility between the judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a conclusion of implied novation: 1. Whereas the judgment orders the respondent to pay the petitioner the

sum of P 1,746.98 with interest at the 12% per annum from the filing of the complainant plus amount of P400 and the cost of suit. 2. Whereas the judgment mentions no specific mode of payment of the amount due to the petitioner, the deed of chattel mortgage stipulates payment of the sum P 1,700 in two equal installments; 3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates the respondent to pay liquidated damages in the amount of P 300 in case of default on his part; 4. Whereas the judgment was unsecured, the chattel mortgage, which may be foreclosed extrajudicially in case of default, secured the obligation. ISSUE: Whether or not the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the judgment obligation. HELD: The court held that there was no substantial incompatibility between the mortgage obligation and the judgment liability of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the obligation under terms of the deed of chattel mortgages serves only to provide an express and specific method of extinguishment- payment in two equal installments. The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. The law requires no specific form for an effective novation by implication. The test is whether the two obligations can stand together if not incompatibility arises and the second obligation novates the first. There is no substantial incompatibility between the two obligations as to warrant a finding of implied novation.

MAGDALENA ESTATES vs. RODRIGUEZ 18 SCRA 967 FACTS: Appellants bought from the appellee a parcel of land. In view of an unpaid balance of P 5,000.00 on account of the purchase price of the lot, the appellants executed a promissory note. On the same date appellants and the Luzon Surety Co., Inc. executed a bond in favor of the appellee to comply with the obligation to pay the amount of P 5000 representing balance of the purchase price of a parcel of land. When the obligation of the appellants became due and demandable the Luzon Surety Co., Inc. paid to the appelle the sum of P 5,000. The appelle demanded from the appellants the payment of P655. 89 which was the interest on the principal of P 5,000. Due to the refusal of the appellants to pay to the said interest, the appellee started the suit. The court rendered a judgement in favor of the appellee against the appellant ordering the latter to pay solidarily the appelle the sum of P 655.89 with interest at the legal rate. The appellants appealed to the Court of First Instance. Appellants claim that the pleadings do not show that there was a demand made by the appellee for the payment of the accrued interest and what could be deduced therefrom was merely that the appelle demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the obligation of the appellants and the said appellee accepted unqualifiedly the amount of P 5,000.00 as performance by the obligor and obligors of the obligation in its favor.

ISSUE: Whether or not the obligation extinguished by novation? HELD: The Court held that novation has never been favored. To be sustained it needs to be established that the old and new contracts are incompatible in all points or that the will to novate appears express agreement of the parties or in acts of similar import. An obligation to pay a sum of money is not novated, in a new instrument wherein old is ratified by changing only the terms of payment and adding other obligations not incompatible with the old one. The mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation when there is no agreement that the first debtor shall be released from responsibility does not constitute a novation and the creditor can still enforce the obligation against the original debtor. Wherefore the judgement affirmed with cost against appellants.

DORMITORIO vs. FERNANDEZ 72 SCRA 388 FACTS: Serafin Lazalita bought from the Municipality of Victorias a house and lot payable in installment at 1.00 per square meter and upon full payment by the plaintiff Lazalita of the purchase of price of the land, a deed of definite sale. Plaintiff had in full possession of the land and introduced permanent and valuable improvements. The spouses Dormitorio purchased a land also from the defendant and have not taken actual possession of the land. Spouses brought a suit against the plaintiff Lazalita for ejectment and the conflict between them was made known to the office of the Municipal Mayor who tried and settle the matter between the parties. A surveyor was hired for investigation and found out that the lot sold by the Municipality of Victorias to the plaintiff was converted into a municipal road known as Jover Street and that the lot presently occupied by him is supposed to be the lot no.2 bought by the spouses. Ordering Lazalita to vacate the land and pay a monthly rental of P20.00. The judgement is rendered in accordance of Agreed Stipulation of Facts. It was agreed by the defendant spouses Dormitorio who are the plaintiffs that the defendant Serafin Lazalita should be reimbursed for his expenses in transferring his house to another lot to be assigned by him by the Municipality of Victorias and that the civil case shall not be enforced and executed anymore. That by means of fraud, misrepresentation, and concealment of the true facts of the case, the plaintiffs were able to mislead the court to issue by mistake an order for issuance of Writ of Execution by making the court believe that it is still enforceable and executory. As the result of a compromise between the same parties, evidenced by the agreed stipulation of facts was clear proof of an animus novandi and thus

superseded the previous judgment which is a result of an ex parte motion was mistakenly ordered executed. ISSUE: Whether the decision based on a compromise agreement has the effect of res juridicata. HELD: The case was a result of a compromise agreement and had an effect of res judicata. There was an element of bad faith when petitioners did try to evade its terms. The compromise agreement is a final and executory judgment of a trial court may be novated by subsequent agreement of the parties.

REYES vs. COURT OF APPEALS 264 SCRA 35 FACTS: Elsa Reyes is the President of Eurotrust Capital Corporation, a domestic corporation engaged in credit financing. Graciela Eleazar, private respondent is the president of B.E. Ritz Mansion International Corporation (BERMIC), a domestic enterprise in real estate development. The other respondent, Armed Forces of the Mutual Benefit Asso., Inc. (AFP-MBAI), is a corporation duly organized primarily to perform welfare services for the AFP. Elsa Reyes entered into a loan agreement. Pursuant to the said contract, Eurotrust extended to Bermic P 216,053,126.80 to finance the construction of the latters Ritz Condominium and Gold Business Park. The loan was without collateral but with higher interest rates than those allowed by the banks. In turn, Bermic issued 21 postdated checks were presented for payment, the same were dishonored by the drawee bank, RCBC due to stop payment order made by Eleazar. Despite Eurotrusts notices and repeated demands to pay Eleazar failed to make good the dishonored checks, prompting Reyes to file against her several criminal complaints for violation of B.P. 22 and estafa under Article 315 of the RPC. Eurotrust extended to Bermic several loan packages amounting to P 190,336,388.86. For its part, Bermic issued several postdated checks to cover payments of the principal and interest of evey loan packages involved. When

Eleazar came to know that the funds originally loaned by Eurotrust to Bermic belonged to AFP-MBAI, she requested a meeting with Eurotrust. However, Eleazar later learned that Reyes continued to collect on the postdated checks issued by her contrary to their agreement. Eleazar had the payment stopped hence, her checks issued infavor of Eurotrust dishonored. The prosecutor issued a resolution dismissing the complaints filed by Reyes against Eleazar on the ground that when the latter assumed obligation of Reyes to AFP-MBAI it constituted novation, extinguishing any criminal liability on the part of Eleazar. ISSUE: Whether the obligation was extinguished by novation. HELD: The Court held that there is no novation if no new contract was executed by the parties. It is essentially an agreement between petitioner and respondent Eleazar only. There was no mention of AFP-MBAIs consent to the new agreement between petitioner and respondent Eleazar much less an indication of AFP-MBAIs intention to be the substitute creditor in the loan contract. The rule is novation by substitution of creditor requires an agreement among the three parties concerned the original creditor, debtor and the new creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties.

COCHINGYAN, JR. vs. R&B SURETY AND INSURANCE CO,, INC. 151 SCRA 339 FACTS: Pacific Agricultural Suppliers Inc. (PAGRICO) applied for and was granted an increase in its line credit from P 400,000 to P 800,000 with the PNB. To secure PNBs approval, PAGRICO had to give a good and sufficient in its line of credit, to secure its faithful compliance with the terms and conditions under which its line credit increased. In compliance with the requirement, PAGRICO submitted surety bond issued by respondent R & B Surety Insurance in the specified amount in favor of PNB. Under the terms and conditions specified that PAGRICO and R&B bound themselves jointly and severally to comply with the terms of the advance credit line and PNB had the right under the surety to proceed directly against R&B without the necessity of first extinguishing the assets of the principal obligor, PAGRICO. In consideration of R&B Suretys issuance of Surety Bond entered into indemnity agreements first with petitioner Cochingyan and to Villanueva. Under the indemnity agreements the indemnitors bound themselves jointly and

severally to R&B to pay annual premium of P 5,103.05 and for the faithful compliance of the terms and conditions of the Surety Bond until it is cancelled or discharged. PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from the R&B the full amount of the Principal Obligations. R&B made a series of payments to PNB by virtue of that demand totaling P 70,000 evidenced by detailed vouchers and receipts. R&B sent a demand letters to Cochingyan and Villanueva for reimbursement of payments made by it to the PNB and for discharge of liability to the PNB under the Surety Bond. Petitioners failed to heed the demands, R&B brought suit against the petitioners. They contended the allegations pertaining to them however they did not present evidence to support their defenses. ISSUE: Whether the Trust Agreeement had extinguished by novation, the obligation of R&B Surety to the PNB under the Surety Bond which in turn extinguished the obligations of the petitioners under Indemnity Agreements. HELD: The court held that the Trust Agreement does not expressly terminate the obligation of R&B under the Surety Bond. The Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that the trust agreement shall not in any manner release R&B Surety from its obligation under the Surety Bond. Novation extinguishes the obligation by substitution or change of the obligation by a subsequent one which terminates it either by changing its object or principal conditions or by substituting a new debtor in place of the old one or by subrogating a third person to the rights of the creditor. In the case at bar, the parties to the new obligation expressly recognize the continuing existence and validity of the old one where in other words the parties expressly negated the lapsing of the old obligation, there can be no novation.