1278-1290 COMPENSATION

BANK OF THE PHILIPPINE ISLANDS and GRACE ROMERO, petitioners, vs. COURT OF APPEALS and EDVIN
F. REYES,respondents.
DECISION
PUNO, J.:
Petitioners seek a review of the Decision1 of respondent Court of Appeals in CA-G.R. CV No. 41543 reversing
the Decision2 of the Regional Trial Court of Quezon City, Branch 79, and ordering petitioners to credit private
respondents Savings
Account No. 3185-0172-56 with P10,556.00 plus interest.
The facts reveal that on September 25, 1985, private respondent Edvin F. Reyes opened Savings Account No. 3
185-0172-56 at petitioner Bank of the Philippine Islands (BPI) Cubao, Shopping Center Branch. It is a joint
AND/OR account with his wife, Sonia S. Reyes.
Private respondent also held a joint AND/OR Savings Account No. 3185-0128-82 with his
grandmother, Emeteria M. Fernandez, opened3on February 11, 1986 at the same BPI branch. He regularly
deposited in this account the U.S. Treasury Warrants payable to the order of Emeteria M. Fernandez as her monthly
pension.
Emeteria M. Fernandez died on December 28, 1989 without the knowledge of the U.S. Treasury
Department. She was still sent U.S. Treasury Warrant No. 21667302 dated January 1, 1990 in the amount of U.S.
$377.003 or P10,556.00. On January 4, 1990, private respondent deposited the said U.S. treasury check of
Fernandez in Savings Account No. 3 185-0128-82. The U.S. Veterans Administration Office in Manila conditionally
cleared the check.4 The check was then sent to the United States for further clearing.5
Two months after or on March 8, 1990, private respondent closed Savings Account No. 3 185-0128-82 and
transferred its funds amounting to P13,112.91 to Savings Account No. 3 185-0172-56, the joint account with his
wife.
On January 16, 1991, U.S. Treasury Warrant No. 21667302 was dishonored as it was discovered that Fernandez
died three (3) days prior to its issuance. The U.S. Department of Treasury requested petitioner bank for a
refund.6 For the first time petitioner bank came to know of the death of Fernandez.
On February 19, 1991, private respondent received a PT & T urgent telegram from petitioner bank requesting
him to contact Manager Grace S. Romero or Assistant Manager Carmen Bernardo. When he called up the bank, he
was informed that the treasury check was the subject of a claim by Citibank NA, correspondent of petitioner
bank. He assured petitioners that he would drop by the bank to look into the matter. He also verbally authorized
them to debit from his other joint account the amount stated in the dishonored U.S. Treasury Warrant. 7 On the
same day, petitioner bank debited the amount of P10,556.00 from private respondents Savings Account No. 31850172-56.
On February 21, 1991, private respondent with his lawyer Humphrey Tumaneng visited the petitioner bank and
the refund documents were shown to them. Surprisingly, private respondent demanded from petitioner bank
restitution of the debited amount. He claimed that because of the debit, he failed to withdraw his money when he
needed them. He then filed a suit for Damages8 against petitioners before the Regional Trial Court of Quezon City,
Branch 79.
Petitioners contested the complaint and counter-claimed for moral and exemplary damages. By way of
Special and Affirmative Defense, they averred that private respondent gave them
his express verbal authorization to debit the questioned amount. They claimed that private respondent later
refused to execute a written authority.9
In a Decision dated January 20, 1993, the trial court dismissed the complaint of private respondent for lack of
cause of action.10
Private respondent appealed to the respondent Court of Appeals. On August 16, 1994, the Sixteenth Division
of respondent court in AC-G.R. CV No. 41543 reversed the impugned decision, viz:
WHEREFORE, the judgment appealed from is set aside, and another one entered ordering defendant (petitioner) to
credit plaintiffs (private respondents) S.A. No. 3 185-0172-56 with P10,556.00 plus interest at the applicable rates
for express teller savings accounts from February 19,1991, until compliance herewith. The claim and counterclaim
for damages are dismissed for lack of merit.
SO ORDERED.11
Petitioners now contend that respondent Court of Appeals erred:
I
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT RESPONDENT REYES GAVE EXPRESS
AUTHORITY TO PETITIONER BANK TO DEBIT HIS JOINT ACCOUNT WITH HIS WIFE FOR THE VALUE OF THE
RETURNED U.S. TREASURY WARRANT.
II

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT PETITIONER BANK HAS LEGAL RIGHT TO
APPLY THE DEPOSIT OF RESPONDENT REYES TO HIS OUTSTANDING OBLIGATION TO PETITIONER BANK BROUGHT
ABOUT BY THE RETURN OF THE U.S.TREASURY WARRANT HE EARLIER DEPOSITED UNDER THE PRINCIPLE OF LEGAL
COMPENSATION.
III
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPLYING CORRECTLY THE PRINCIPLES ENUNCIATED BY
THE SUPREME COURT IN THE CASE OF GULLAS V. PNB, 62 PHIL. 519.
IV
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN NOT APPRECIATING THE FACT THAT THE MONEY DEBITED BY
PETITIONER BANK WAS THE SAME MONEY TRANSFERRED BY RESPONDENT REYES FROM HIS JOINT AND/OR
ACCOUNT WITH HIS GRANDMOTHER TO HIS JOINT AND/OR ACCOUNT WITH HIS WIFE. 12
We find merit in the petition.
The first issue for resolution is whether private respondent verbally authorized petitioner bank to debit his
joint account with his wife for the amount of the returned U.S. Treasury Warrant. We find that petitioners were
able to prove this verbal authority by preponderance of evidence. The testimonies of Bernardo and Romero
deserve credence. Bernardo testified:
xxx

xxx

Q: After that, what

A:

xxx

happened?

x xxDr. Reyes called me up and I informed him about the return of the U.S. Treasury Warrant and we
are requested to reimburse for the amount.

Q: What was his response if any?

A:
xxx

Dont you worry about it, there is no personal problem.

xxx

xxx

Q: And so what was his response?

A:
xxx

He said that dont you worry about it.

xxx

xxx

Q: You said that you asked him the advice and he did not answer, what advice are you referring to?
A:

In our conversation, he promised me that he will give me written confirmation or

authorization.13

The conversation was promptly relayed to Romero who testified:

xxx

xxx

xxx

Q: x xxWas there any opportunity wherein said Mrs. Bernardo was able to convey to you the contents of
their conversation?
A:

This was immediately relayed to me as manager of the Bank of the Philippine Islands, sir.

Q: What, if any was the content of her conversation, if you know?

A:

xxx

Mr. Reyes instructed Mrs. Bernardo to debit his account with the bank. His account was
maintained jointly with his wife then he promised to drop by to give us a written
confirmation, sir.
xxx

xxx

Q:

You said that you authorized the debiting of the account on February 19, 1991, is that correct?

A:

I did not authorize, we merely followed the instruction of Mr. Reyes, sir. 14

We are not disposed to believe private respondents allegation that he did not give any verbal authorization.
His testimony is uncorroborated. Nor does he inspire credence. His past and fraudulent conduct is an evidence
against him.15 He concealed from petitioner bank the death of Fernandez on December 28, 1989.16 As of that
date, he knew that Fernandez was no longer entitled to receive any pension. Nonetheless, he still received the U.S.
Treasury Warrant of Fernandez, and on January 4, 1990 deposited the same in Savings Account No. 3185-012882. To pre-empt a refund, private respondent closed his joint account with Fernandez (Savings Account No. 31-850128-82) on March 8, 1990 and transferred its balance to his joint account with his wife (Savings Account No. 3
185-0172-56). Worse, private respondent declared in the withdrawal slip 17 dated March 8, 1990 that his codepositor, Fernandez, is still living. This is under the penalties of perjury. By his acts, private respondent has
stripped himself of credibility.
More importantly, the respondent court erred when it failed to rule that legal compensation is
proper. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other.18 Article 1290 of the Civil Code provides that when all the requisites mentioned inArticle 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. Legal
compensation operates even against the will of the interested parties and even without the consent of

them.19 Since this compensation takes place ipso jure, its effects arise on the very day on which all its requisites
concur.20 When used as a defense, it retroacts to the date when its requisites are fulfilled. 21
Article 1279 states that 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.
The elements of legal compensation are all present in the case at bar. The obligors bound principally are at the
same time creditors of each other. Petitioner bank stands as a debtor of the private respondent, a depositor. At the
same time, said bank is the creditor of the private respondent with respect to the dishonored U.S. Treasury Warrant
which the latter illegally transferred to his joint account. The debts involved consist of a sum of money. They are
due, liquidated, and demandable. They are not claimed by a third person.
It is true that the joint account of private respondent and his wife was debited in the case at bar. We hold
that the presence of private respondents wife does not negate the element of mutuality of parties, i.e., that they
must be creditors and debtors of each other in their own right. The wife of private respondent is not a party in the
case at bar. She never asserted any right to the debited U.S. Treasury Warrant. Indeed, the right of the petitioner
bank to make the debit is clear and cannot be doubted. To frustrate the application of legal compensation on the
ground that the parties are not all mutually obligated would result in unjust enrichment on the part of the private
respondent and his wife who herself out of honesty has not objected to the debit.
The rule as to mutuality is strictly applied at law. But not in equity, where to allow the same
would defeat a clear right or permit irremediable injustice.22
IN VIEW HEREOF, the Decision of respondent Court of Appeals in CA-G.R. CV No. 41543 dated August
16,1994 is ANNULLED and SET ASIDE and the Decision of the trial court in Civil Case No. Q-91-8451 dated January
20, 1993 is REINSTATED. Costs against private respondent.
SO ORDERED.
PHILIPPINE NATIONAL BANK, petitioner, vs. THE COURT OF APPEALS and RAMON LAPEZ,[1] doing
business under the name and style SAPPHIRE SHIPPING, respondents.
DECISION
PANGANIBAN, J.:
Does a local bank, while acting as local correspondent bank, have the right to intercept funds being coursed
through it by its foreign counterpart for transmittal and deposit to the account of an individual with another local
bank, and apply the said funds to certain obligations owed to it by the said individual?
Assailed in this petition is the Decision of respondent Court of Appeals [2] in CA-G.R. CV No. 27926 rendered on
June 16, 1992 affirming the decision of the Regional Trial Court, Branch 107 of Quezon City, the dispositive portion
of which read:[3]
"WHEREFORE, judgment is hereby rendered:
1) In the main complaint, ordering the defendant (herein petitioner PNB) to pay the plaintiff (private respondent
herein) the sum of US$2,627.11 or its equivalent in Philippine currency with interest at the legal rate from January
13, 1987, the date of judicial demand;
2) The plaintiff's supplemental complaint is hereby dfismissed (sic);
3) The defendant's counterclaims are likewise dismissed.
The Facts
The factual antecedents as quoted by the respondent Court are reproduced hereinbelow, the same being
undisputed by the parties:[4]
"The body of the decision reads:
"'After a close scrutiny and analysis of the pleadings as well as the evidence of both parties, the Court makes the
following conclusions:
"'(a) The defendant applied/appropriated the amounts of $2,627.11 and P34,340.38 from remittances of the
plaintiff's principals (sic) abroad. These were admitted by the defendant, subject to the affirmative defenses of
compensation for what is owing to it on the principle of solution (sic) indebiti;
"'(b) The first remittance was made by the NCB of Jeddah for the benefit of the plaintiff, to be credited to his
account at Citibank, Greenhills Branch; the second was from Libya, and was intended to be deposited at the
plaintiff's account with the defendant, No. 830-2410;

(c) The plaintiff made a written demand upon the defendant for remittance of the equivalent of P2,627.11 by
means of a letter dated December 4, 1986 (Exh. D). This was answered by the defendant on December 22, 1986
(Exh. 13), inviting the plaintiff to come for a conference;
"'(d) There were indeed two instances in the past, one in November 1980 and the other in January 1981 when the
plaintiff's account No. 830-2410 was doubly credited with the equivalents of $5,679.23 and $5,885.38, respectively,
which amounted to an aggregate amount of P87,380.44. The defendant's evidence on this point (Exhs. 1 thru 11,
14 and 15; see also Annexes C and E to defendant's Answer), were never refuted nor impugned by the plaintiff. He
claims, however, that plaintiffs claim has prescribed.
"'(e) Defendant PNB made a demand upon the plaintiff for refund of the double or duplicated credits erroneously
made on plaintiff's account, by means of a letter (Exh. 12) dated October 23, 1986 or 5 years and 11 months from
November 1980, and 5 years and 9 months from January 1981. Such letter was answered by the plaintiff on
December 2, 1986 (Annex C, Complaint). This plaintiff's letter was likewise replied to by the defendant through
Exh. 13;
"'(f) The deduction of P34,340.38 was made by the defendant not without the knowledge and consent of the
plaintiff, who was issued a receipt No. 857576 dated February 18, 1987 (Exh. E) by the defendant.
"'There is no question that the two erroneous double payments made to plaintiff's accounts in 1980 and 1981
created an extra-contractual obligation on the part of the plaintiff in favor of the defendant, under the principle
of solutioindebiti, as follows:
"'If something is received when there is no right to demand it, and it was unduly delivered throughg (sic) mistake,
the obligation to return it arises."' (Article 2154, Civil Code of the Phil.)
Two issues were raised before the trial court, namely, first, whether the herein petitioner was legally justified
in making the compensation or set-off against the two remittances coursed through it in favor of private respondent
to recover on the double credits it erroneously made in 1980 and 1981, based on the principle of solutioindebiti,
and second, whether or not petitioner's claim is barred by the statute of limitations. The trial court's ratiocination,
as quoted by the appellate Court, follows:[5]
"'Article 1279 of the Civil Code provides:
"'In order that compensation may prosper, 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 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 by any retention or controversy, commenced by third persons and
communicated in due time to the debtor."'
"'In the case of the $2,627.11, requisites Nos. 2 through 5 are apparently present, for both debts consist in a sum of
money, are both due, liquidated and demandable, and over neither of them is there a retention or controversy
commenced by third persons and communicated in due time to the debtor. The question, however, is, where both
of the obligors bound principally, and was each one of them a debtor and creditor of the other at the same time?
"'Analyzing now the relationship between the parties, it appears that:
"'(a) With respect to the plaintiff's being a depositor of the defendant bank, they are creditor and debtor
respectively (Guingona, et al. vs. City Fiscal, et al., 128 SCRA 577);
"'(b) As to the relationship created by the telexed fund transfers from abroad: A contract between a foreign bank
and local bank asking the latter to pay an amount to a beneficiary is a stipulation pour autrui. (Bank of America NT
& SA vs. IAC, 145 SCRA 419).
"'A stipulation pour autrui is a stipulation in favor of a third person (Florentino vs. Encarnacion, 79 SCRA 193;
Bonifacio Brothers vs. Mora, 20 SCRA 261; UyTamvs. Leonard, 30 Phils. 475).
"'Thus between the defendant bank (as the local correspondent of the National Commercial Bank of Jeddah) and the
plaintiff as beneficiary, there is created an implied trust pursuant to Art. 1453 of the Civil Code, quoted as follows:
"'When the property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to
another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated (sic).
"'c) By the principle of solutioindebiti (Art. 2154, Civil Code), the plaintiff who unduly received something (sic) by
mistake (i.e., the 2 double credits, although he had no right to demand it), became obligated to the defendant to
return what he unduly received. Thus, there was created between them a relationship of obligor and obligee, or of
debtor and creditor under a quasi-contract.
"In view of the foregoing, the Court is of the opinion that the parties are not both principally bound with respect to
the $2,627.11 from Jeddah neither are they at the same time principal creditor of the other. Therefore, as matters
stand, the parties' obligations are not subject to compensation or set off under Art. 1279 of the Civil Code, for the
reason that the defendant is not a principal debtor nor is the plaintiff a principal creditor insofar as the amount of

$2,627.11 is concerned. They are debtor and creditor only with respect to the double payments; but are trusteebeneficiary as to the fund transfer of $2,627.11.
"'Only the plaintiff is principally bound as a debtor of the defendant to the extent of the double credits. On the
other hand, the defendant was an implied trustee, who was obliged to deliver to the Citibank for the benefit of the
plaintiff the sum of $2,627.11.
"'Thus while it may be concluded that the plaintiff owes the defendant the equivalent of the sums of $5,179.23 and
$5,885.38 erroneously doubly credited to his account, the defendant's actuation in intercepting the amount of
$2,627.11 supposed to be remitted to another bank is not only improper; it will also erode the trust and confidence
of the international banking community in the banking system of the country, something we can ill afford at this
time when we need to attract and invite deposits of foreign currencies."'
"It would have been different has the telex advice from NCB of Jeddah been for deposit of $2,627.11 to plaintiffs
account No. 830-2410 with the defendant bank. However, the defendant alleged this for the first time in its
Memorandum (Pls. see par. 16, p. 6 of defendant's Memorandum). There was neither any allegation thereof in its
pleadings, nor was there any evidence to prove such fact. On the contrary, the defendant admitted that the telex
advice was for credit of the amount of $2,627.11 to plaintiffs account with Citibank, Greenhills, San Juan,
MetroManila (Pls. see par. of defendant's Answer with Compulsory Counterclaim, in relation to plaintiff's
Complaint). Hence, it is submitted that the set-off or compensation of $2,627.11 against the double payments to
plaintiff's account is not in accordance with law.
"'On this point, the Court finds the plaintiff's theory of agency to be untenable. For one thing, there was no express
contract of agency. On the other hand, were we to infer that there was an implied agency, the same would not be
between the plaintiff and defendant, but rather, between the National Commercial Bank of Jeddah as principal on
the one hand, and the defendant as agent on the other. Thus, in case of violation of the agency, the cause of action
would accrue to the NCB and not to the plaintiff.
"'The P34,340.38 subject of the supplemental complaint is quite another thing. The plaintiff's Exh. "E", which is a
receipt issued to the plaintiff by the defendant for the amount of P34,340.00 in "full settlement of accounts
receivables with RICB Fund Transfer Department, PNB-Escolta base on Legal Department Memo dated February 28,
1987" seems to uphold the defendant's theory that the said amount was voluntarily delivered by the plaintiff to the
defendant as alleged in the last paragraph of defendant's memorandum. The same is in accordance with the
defendant's answer, as follows:
"The retention and application of the amount of P34,340.38 was done in a manner consonant with basic due
process considering that
plaintiff was not only furnisheddocumented proof of the cause but was also given the opportunity to con(tro)vert su
ch Proof.
"Moreover, plaintiff, through counsel, communicated his unequivocal and unconditional consent to the retention an
d application of the amount in question." (Pls. see paragraphs 8-9, defendant's Answer with Compulsory
Counterclaim to Plaintiff's Supplemental Complaint)."
This conclusion is borne by the fact that the receipt is in the hands of the plaintiff, indicating that such receipt was
handed over to the plaintiff when he "paid" or allowed the deduction from the amount of $28,392.38 from Libya.
"'At any rate, the plaintiff in his Memorandum, stated that the subsequent fund transfer from Brega Petroleum
Marketing Company of Libya (from where the P34,340.38 was deducted) was intended for credit and deposit in
plaintiff's account at the defendant's Bank CA No. 830-2410 (per par. 1, page 2, Memorandum for the
plaintiff). Such being the case, the Court believes that insofar as the amount of P34,340.38 is concerned, all the
requirements of Art. 1279 of the Civil Code are present, and the said amount may properly be the subject of
compensation or set-off. And since all the requisites of Art. 1279 of the Civil Code are present (insofar as the
amount of P34,392.38 is concerned), compensation takes place by operation of law (Art. 1286, Ibid.), albeit only
partial with respect to plaintiff's indebtedness of P7,380.44.
"Now, on the question of prescription, the Court believes that Art. 1149 as cited by the plaintiff is not applicable in
this case. Rather, the applicable law is Art. 1145, which fixes the prescriptive period for actions upon a quasicontract (such as solutioindebiti) at six years.
In the dispositive portion of its decision, the trial court ruled that the herein petitioner was obligated to pay
private respondent the amount of US$2,627.11 or its peso equivalent, with interest at the legal rate. The court
dismissed all other claims and counterclaims.
On appeal to the respondent Court, petitioner bank continued to insist that it validly retained the US$2,627.11
in payment of the private respondent's indebtedness by way of compensation or set-off, as provided under Art.
1279 of the Civil Code.
The respondent Court of Appeals rejected such argument, saying:
"The telegraphic money transfer was sent by the IBN, plaintiff's principal in Jeddah, Saudi Arabia, thru the National
Commercial Bank of Jeddah, Saudi Arabia (NCB, for short), for the credit/account of Plaintiff with the Citibank,
Greenhills Branch, San Juan, Metro Manila, coursed thru the PNB's head office, the NCB's corresponden(t) bank in
the Philippines.

"The credit account, or simply account means

that the amount stated in the telegraphic money transfer is to be credited in the account of plaintiff with the Citiban
k,and, in that sense, presupposes a creditor-debtor relationship between the plaintiff, as creditor and the Citibank, a
s debtor. Withal the telegraphic money transfer, nosuch creditor-debtor relationship could have been created betw
een the plaintiff and defendant.
"The telegraphic money transfer, or simply telegraphic transfer(,) was purchased by the IBN from the NCB in Saudi
Arabia, and since the PNB is the NCB's corresponden(t) bank in the Philippines, there is created between the two
banks a sort of communication exchange for the corresponden(t) bank to transmit and/or remit and/or pay the
value of the telegraphic transfer in accordance with the dictate of the correspondence exchange. Some such
responsibility of the corresponden(t) bank is akin to Section 7 of the Rules and Regulations Implementing E.O. 857,
as amended by E.O. 925, "x xx to take charge of the prompt payment" of the telegraphic transfer, that is,
by transmitting the telegraphic money transfer to the Citibank so that the amount can be promptly credited to the a
ccount of the plaintiffwith the said bank. That is all that the PNB can do under the remittance arrangement that it h
as with the NCB. With its responsibility as defined as well as by the nature of its banking business and the
responsibility attached to it, and through which the industry, trade and commerce of all countries and communities
are carried on, the PNB's liability as corresponden(t) bank continues until it has completgely (sic) performed and
discharged it(s) obligation thereunder." (underscoring ours)
Hence, the respondent Court affirmed the trial court's holding in toto.
Dissatisfied, petitioner bank comes before this Court seeking a review of the assailed Decision.
The Issue
Petitioner's arguments revolve around one single issue: [6]
"WHILE THE RESPONDENT COURT CORRECTLY FOUND PRIVATE RESPONDENT LEGALLY BOUND (UNDER THE
PRINCIPLE OF SOLUTIO INDEBITI) TO RETURN TO PNB THE SUM OF US$2,627.11, IT ERRED IN NOT RULING THAT
LEGAL COMPENSATION HAS TAKEN PLACE WHEN PNB WAS ORDERED BY THE TRIAL COURT TO RETURN TO PRIVATE
RESPONDENT THE SAME AMOUNT. SUCH COURSE OF ACTION IS IN CONSONANCE WITH SPEEDY AND SUBSTANTIAL
JUSTICE, AND WOULD PREVENT THE UNNECESSARY FILING OF A SUBSEQUENT SUIT BY PNB FOR THE COLLECTION
OF THE SAME AMOUNT FROM PRIVATE RESPONDENT."
The Court's Ruling
We note that in framing the issue in the manner aforecited, the petitioner implicitly admits the correctness
of the respondent Court's affirmance of the trial court's ruling finding herein petitioner liable to private respondent
for the sum of US$2,627.11 or its peso equivalent. And it could not have done otherwise. After a careful scrutiny of
both the decision of the trial court and that of the appellate court, we find no reversible error whatsoever in either
ruling, and see no need to add to the extensive discussions already made regarding the non-existence of all the
requisites for legal compensation to take place.
But petitioner has adopted a novel theory, contending that since respondent Court found that private
respondent is "an obligor of PNB and the latter, as aforesaid, has become an obligor of private respondent (resulting
in legal compensation), the (h)onorable respondent court should have ordered private respondent to pay PNB what
the latter is bound by the trial court's decision to return the former. [7]
By this simplistic approach, petitioner in effect seeks to render nugatory the decisions of the trial court and
the appellate Court, and have this Court validate its original misdeed, thereby making a mockery of the entire
judicial process of this country. What the petitioner bank is effectively saying is that since the respondent Court of
Appeals ruled that petitioner bank could not do a shortcut and simply intercept funds being coursed through it, for
transmittal to another bank, and eventually to be deposited to the account of an individual who happens to owe
some amount of money to the petitioner, and because respondent Court ordered petitioner bank to return the
intercepted amount to said individual, who in turn was found by the appellate Court to be indebted to petitioner
bank, THEREFORE, there must now be legal compensation of the amounts each owes the other, and hence, there
is no need for petitioner bank to actually return the amount, and finally, that petitioner bank ends up in exactly the
same position as when it first took the improper and unwarranted shortcut by intercepting the said money transfer,
notwithstanding the assailed Decision saying that this could not be done!
We see in this petition a clever ploy to use this Court to validate or legalize an improper act of the petitioner
bank, with the not impossible intention of using this case as a precedent for similar acts of interception in the
future. This piratical attitude of the nation's premier bank deserves a warning that it should not abuse the justice
system in its collection efforts, particularly since we are aware that if the petitioner bank had been in good faith, it
could have easily disposed of this controversy in ten minutes flat by means of an exchange of checks with private
respondent for the same amount. The litigation could have ended there, but it did not. Instead, this plainly
unmeritorious case had to clog our docket and take up the valuable time of this Court.
WHEREFORE, the instant petition is herewith DENIED for being plainly unmeritorious, and the assailed
Decision is AFFIRMED in toto. Costs against petitioner.
SO ORDERED.
E.G.V. REALTY DEVELOPMENT CORPORATION and CRISTINA CONDOMINIUM CORPORATION, petitioners,
vs. COURT OF APPEALS and UNISHPERE INTERNATIONAL, INC. respondents.

DECISION
KAPUNAN, J.:
This petition for review on certiorari seeks to set aside the decision and resolution of the Court of Appeals
rendered on February 17, 1995 and on May 15, 1995, respectively, in CA-G.R. SP No. 22735 reversing the order of
the Securities and Exchange Commission (SEC) in SEC-AC No. 271 issued on August 21, 1990.
The following facts are not disputed:
Petitioner E.G.V. Realty Development Corporation (hereinafter referred to as E.G.V. Realty) is the
owner/developer of a seven-storey condominium building known as Cristina Condominium. Cristina Condominium
Corporation (hereinafter referred to as CCC) holds title to all common areas of Cristina Condominium and is in
charge of managing, maintaining and administering the condominiums common areas and providing for the
buildings security.
Respondent Unisphere International, Inc. (hereinafter referred to as Unisphere) is the owner/occupant of Unit
301 of said condominium.
On November 28, 1981, respondent Unispheres Unit 301 was allegedly robbed of various items valued
at P6,165.00. The incident was reported to petitioner CCC.
On July 25, 1982, another robbery allegedly occurred at Unit 301 where the items carted away were valued
at P6,130.00, bringing the total value of items lost to P12,295.00. This incident was likewise reported to petitioner
CCC.
On October 5, 1982, respondent Unisphere demanded compensation and reimbursement from petitioner CCC
for the losses incurred as a result of the robbery.
Petitioner CCC denied any liability for the losses claimed to have been incurred by respondent Unisphere,
stating that the goods lost belonged to Amtrade, a third party.
As a consequence of the denial, respondent Unisphere withheld payment of its monthly dues starting
November 1982.
On September 13, 1983, respondent Unisphere received a letter from petitioner CCC demanding payment of
past dues.
On December 5, 1984, petitioner E.G.V. Realty executed a Deed of Absolute Sale over Unit 301 in favor of
respondent Unisphere. Thereafter, Condominium Certificate of Title No. 7010 was issued in respondent Unispheres
name bearing the annotation of a lien in favor of petitioner E.G.V. Realty for the unpaid condominium dues in the
amount of P13,142.67.
On January 28, 1987, petitioners E.G.V. Realty and CCC jointly filed a petition with the Securities and Exchange
Commission (SEC) for the collection of the unpaid monthly dues in the amount of P13,142.67 against respondent
Unisphere.
In its answer, respondent Unisphere alleged that it could not be deemed in default in the payment of said
unpaid dues because its tardiness was occasioned by the petitioners' failure to comply with what was incumbent
upon them, that is, to provide security for the building premises in order to prevent, if not to stop, the robberies
taking place therein. It asserted as counterclaim that the amount of P12,295.00 representing the total value of its
loss due to the two robberies be awarded to it by way of damages for the latters failure to secure the premises.
On January 11, 1989, SEC Hearing Officer Antero F.L. Villaflor, Jr. rendered a decision which dispositively read
as follows:
WHEREFORE, respondent is hereby ordered to pay petitioner the sum of P13,142.67 within fifteen (15) days from
receipt of this Decision. Further, petitioner is hereby ordered to pay respondent within fifteen (15) days from
receipt of this Decision, the sum of P12,295.00.
Let copy of this Decision be furnished the Register of Deeds of Makati, Metro Manila for the purpose of cancellation
of the lien in favor of Cristina Condominium found at the back of Title for unpaid monthly dues in the sum
of P13,142.67, upon full payment of respondent of said amount unto petitioner.
SO ORDERED.[1]
Both parties filed their respective motions for reconsideration.
On July 17, 1989, the decision of Hearing Officer Villaflor was modified and amended by Hearing Officer
Enrique L. Flores, Jr. to read as follows:
WHEREFORE, respondents motion for reconsideration should be, as it is, hereby DENIED and the petitioners motion
for reconsideration is hereby GRANTED.
Accordingly, the decision dated January 11, 1989, is partially reconsidered to the effect that petitioners are not
made liable for the value of the items/articles burglarized from respondents condominium unit.
SO ORDERED.[2]
On July 18, 1989, respondent Unisphere filed a notice of appeal with the SEC en banc questioning the abovementioned decision.

On August 15, 1989, it filed a motion for an extension of thirty (30) days to file its memorandum on appeal
thirty (30) days from the stated deadline of August 18, 1989.
Said motion was granted on August 17, 1989.
On September 18, 1989, respondent Unisphere filed a second motion for extension of time to file its
memorandum on appeal for another twenty (20) days.
The motion was likewise granted on September 26, 1989.
On October 9, 1989, respondent Unisphere filed its memorandum on appeal.
After the petitioners filed their reply thereto, the SEC en banc issued the Order dated February 23, 1990 which
is quoted hereunder:
Before this Commission en banc is an appeal from the Order dated July 17, 1989 of the Hearing Officer in SEC Case
No. 3119 entitled E.G.V. Realty Development Corporation and Cristina Condominium Corporation vs.
UnisphereInternational , Inc.
The records of the case show that respondent-appellant received a copy of the above order on July 18, 1989 and
filed its Notice of Appeal on July 21, 1989. On August 15, 1989, respondent asked for an extension of thirty (30)
days to file its Memorandum on Appeal which was granted on August 17, 1989.
On September 18, 1989, respondent asked for an additional period of twenty (20) days until October 8, 1989 to file
his Appeal which was also granted.
Respondent filed his Memorandum on October 13, 1989, five days after the due date.
The penultimate paragraph of Section 6 of Presidential Decree no. 902-A (as amended) clearly provides:
x xx The decision, ruling or order of any such Commissioner, bodies, boards, committees, and/or officer as may be
appealed to the Commission sitting en banc within thirty (30) days after receipt by the appellant of notice of such
decision, ruling or order. The Commission shall promulgate rules or procedure to govern the proceedings, hearings
and appeals of cases falling within its jurisdiction.
Pursuant to the above provision, the Commission promulgated the Revised Rules of Procedure of the Securities and
Exchange Commisison, Section 3, Rule XVI of said Rules reiterates the thirty (30)-day period provided for under the
above provision:
Appeal may be taken by filing with the Hearing Officer who promulgated the decision, order or ruling within thirty
(30) days from notice thereof, and serving upon the adverse party, a notice of appeal and a memorandum on
appeal and paying the corresponding docket fee therefor. The appeal shall be considered perfected upon the filing
of the memorandum on appeal and payment of the docket fee within the period hereinabove fixed.
The Commission en banc notes that respondent had, extensions included, a total of eighty (80) days to file its
Appeal memorandum but failed to do so.
WHEREFORE, premises considered, the instant appeal is hereby dismissed for having been filed out of time.
SO ORDERED.[3]
Respondent Unisphere moved for a reconsideration of the above-quoted order but the same was denied, and
so was it its second motion for reconsideration.
On September 6, 1990, respondent Unisphere filed a notice of appeal to the SEC en banc in order to question
the latters ruling to the Court of Appeals pursuant to Rule 43 of the Rules of Court, as amended by Republic Act No.
5434.
On September 10, 1990, it filed a notice of appeal to the Court of Appeals.
The Court of Appeals reversed the SEC en bancs Order of August 21, 1990 in its Decision dated February 17,
1995 which dispositively reads as follows:
WHEREFORE, the instant petition is GRANTED and the assailed Order dated August 21, 1989 is hereby REVERSED
and SET ASIDE. Another judgment is entered declaring that the appeal memorandum before the SEC (en banc) of
appellant Unisphere was filed on time and that the amount of P13,142.67, the unpaid monthly dues of Unisphere to
the Corporation should be offset by the losses suffered by the Unisphere in the amount of P12,295.00. Unisphere is
hereby ordered to pay the Cristina Condominium Corporation the amount of P847.67 representing the balance after
offsetting the amount of P12,295.00 against the said P13,142.67, with 12% interest per annum from January 28,
1987 when the Joint Petition of the petitioners-appellees was filed before the SEC (for collection and damages) until
fully paid.
No pronouncement as to costs.
SO ORDERED.[4]
Petitioners moved for reconsideration of the said decision but the same was denied by the appellate court on
May 15, 1995.
Hence, the instant petition for review interposed by petitioners E.G.V. Realty and CCC challenging the decision
of the Court of Appeals on the following grounds: (a) the Court of Appeals did not acquire jurisdiction over
respondent Unispheres appeal because the latter failed to comply with the prescribed mode of appeal; (b) even if

the jurisdictional infirmity is brushed aside, the SEC en banc Order dated February 23, 1990 has already attained
finality; and (c) the ruling of the Court of Appeals on the offsetting of the parties claims is unfounded.
A perusal of the foregoing issues readily reveals that petitioners raise two (2) aspects of the case for
consideration, that is, the procedural aspect and the substantive aspect.
We will discuss the procedural aspect first. Petitioners contend that (a) the Court of Appeals did not acquire
jurisdiction over the appeal because respondent failed to comply with the prescribed mode of appeal; and (b)
assuming that the Court of Appeals has jurisdiction, the assailed SEC en banc Order of February 23, 1990 had
already become final and executory.
Anent the first contention, petitioners claim that respondent Unisphere erred in merely filing a notice of appeal
as in ordinary civil cases from the regular courts instead of a petition for review with the Court of Appeals.
Contrary to petitioners contention, respondent Unisphere complied with the prescribed mode of appeal. At
the time the appeal was elevated to the Court of Appeals in 1990, the rule governing recourse to the Court of
Appeals from the decision, resolution or final order of a quasi-judicial body was Rule 43 of the Revised Rules of
Court, as amended by Republic Act No. 5434 as embodied in Batas PambansaBlg. 129 and its Interim Rules and
Guidelines.[5] The rule provided for a uniform procedure for appeals from the specified administrative tribunals, SEC
included, to the Court of Appeals by filing a notice of appeal with the appellate court and with the court, officer,
board, commission or agency that made or rendered the assailed ruling within fifteen (15) days from notice
thereof. Records bear out that respondent Unisphere complied with the foregoing rules when it filed a notice of
appeal with the SEC en banc on September 6, 1990 and with the Court of Appeals on September 10, 1990. Clearly
therefore, respondent Unisphere complied with the proper mode of appeal as mandated by the rules.
With respect to the second contention, petitioners asseverate that the February 23, 1990 order of the SEC en
banc has already become final and unappealable, therefore can no longer be reversed, amended or modified. They
maintain that respondent Unisphere received a copy of said order on February 26, 1990 and that ten (10) days
thereafter, it filed its motion for reconsideration. Said motion was denied by the SEC on May 14, 1990 which was
received by respondent Unisphere on May 15, 1990. Consequently, they assert that respondent Unisphere had only
the remaining five (5) days or on May 20, 1990 within which to file a notice of appeal. However, instead of
appealing therefrom, respondent Unisphere filed a second motion for reconsideration on May 25, 1990 with the
SEC en banc. Petitioners contend that no second motion for reconsideration is allowed by SEC Rules unless with
express prior to leave of the hearing officer. Said second motion for reconsideration was likewise denied on August
21, 1990. Fifteen (15) days later or on September 5, 1990, respondent Unisphere filed its notice of appeal.
Section 8, Rule XII of the Revised Rules of Procedure of the SEC provides that:
SEC. 8. Reconsideration.-- Within thirty (30) days from receipt of the order or decision of the Hearing Officer, the
aggrieved party may file a motion for reconsideration of such order or decision together with proof of service
thereof upon the adverse party. No more than one motion for reconsideration shall be allowed unless with the
express prior leave of the Hearing Officer.
Respondent Unispheres non-observance of the foregoing rule rendered the February 23, 1990 and the May 14,
1990 orders of the SEC en banc final and unappealable. Its failure to perfect its appeal in the manner and within
the period fixed by law rendered the decision sought to be appealed final, with the result that no court can exercise
appellate jurisdiction to review the decision.[6] Contrary to petitioners view, the appeal to the Court of Appeals in
this case should have been perfected within fifteen (15) days from receipt of the order denying the motion for
reconsideration on May 15, 1990. But instead of appealing, respondent Unisphere filed a prohibited second motion
for reconsideration without express prior leave of the hearing officer. Consequently, when it subsequently filed its
notice of appeal on September 6, 1990, it was already eighty-two (82) days late. Therefore, the appeal before the
Court of Appeals could have been dismissed outright for being time-barred. Rules of procedure are intended to
ensure the proper administration of justice and the protection of substantive rights in judicial and quasi-judicial
proceedings. Blatant violation of such rules smacks of a dilatory tactic which we simply cannot countenance.
Now, we go to the substantive aspect.
It is petitioners assertion that the ruling of the Court of Appeals to offset the alleged losses as a result of the
robberies in the amount of P12,295.00 from the unpaid monthly dues of P13,142.67 is unfounded because
respondent Unisphere is not the owner of the goods lost but a third party, Amtrade. Respondent Unisphere, on its
part, claims that this issue is factual, hence, not a proper issue to raise before this Court.
Actually, the issue for our consideration is whether or not set-off or compensation has taken place in the
instant case. The Court of Appeals dissertation on the matter is commendably instructive, but, lamentably, it
reached a different conclusion. We quote pertinent portions of the assailed decision:
Compensation or offset under the New Civil Code takes place only when two persons or entities in their own rights,
are creditors and debtors of each other. (Art. 1278). xxx
A distinction must be made between a debt and a mere claim. A debt is an amount actually ascertained. It is a
claim which has been formally passed upon by the courts or quasi-judicial bodies to which it can in law be
submitted and has been declared to be a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence
of a debt and must pass thru the process prescribed by law before it develops into what is properly called a
debt. (Vallarta vs. CA, 163 SCRA 587). Absent, however, any such categorical admission by an obligor or final

adjudication, no compensation or off-set can take place. Unless admitted by a debtor himself, the conclusion that
he is in truth indebted to another cannot be definitely and finally pronounced, no matter how convinced he may be
from the examination of the pertinent records of the validity of that conclusion the indebtedness must be one that
is admitted by the alleged debtor or pronounced by final judgment of a competent court or in this case by the
Commission (Villanueva vs. Tantuico, 182 SCRA 263).
There can be no doubt that Unisphere is indebted to the Corporation for its unpaid monthly dues in the amount
of P13,142.67. This is admitted. But whether the Corporation is indebted to Unisphere is vigorously disputed by
the former.
It appears quite clear that the offsetting of debts does not extend to unliquidated, disputed claims arising from tort
or breach of contract. (Compania General de Tobacos vs. French and Unson, 39 Phil. 34; Lorenzo and Martinez vs.
herrero, 17 Phil. 29).
It must be noted that Unisphere just stopped paying its monthly dues to the Corporation on September 23, 1983
without notifying the latter. It was only on February 24, 1984, or five months after, that it informed the corporation
of its suspension of payment of the condominium dues to offset the losses it suffered because of the robberies.
In resisting the finding which underscores their negligence, E.G.V. Realty and Cristina condominium corporation,
would have this Court appreciate in their favor the admission of Mr.Alfonso Zamora of Unisphere that there was no
such agreement among the unit owners that any member who incurred losses will be indemnified from the common
contribution. (TSN, July 7, 1987, p. 60).
The herein appellees further argue that the cause of action for reimbursement of the value of the items lost
because of the robberies should be against the security agency and not the Corporation.
On the other hand, Unisphere invokes ART. 1170 of the Civil Code which provides:
ART. 1170.- Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those
who in any manner contravene the tenor thereof, are liable for damages.
There is weight in the initial factual findings of the SEC Hearing Officer with respect to the losses suffered by
Unisphere in the amount of P12,295.00:
Plaintiff likewise does not dispute the fact of robbery that occurred on November 28, 1981 and July 26, 1982 inside
301 Cristina Condominium.
Plaintiff admits that it had secured the services of Jimenez Protective and Security Agency to safeguard the
Condominium premises under its instructions and supervision, but which failed to detect the robbery incidents that
occurred twice at Unit 301 of respondent, canting (sic) away bulk items.
xxx xxx

xxx

From the undisputed facts, plaintiff was remissed (sic) within its obligation to provide safety to respondent inside its
unit. This was demonstrated by the fact that two robbery incidents befell respondents under the negligent eye of
plaintiffs hired security guards. It can be safely pronounced that plaintiff has not complied with what was
incumbent upon it to do in a proper manner.
Since it has been determined and proven by the evidence presented before the hearing office of respondent SEC
that Unisphere indeed suffered losses because of the robbery incidents and since it (Unisphere) did not refute its
liability to the corporation for the unpaid monthly dues in the amount of P13,142. 67, this amount should be set-off
against the aforestated losses of Unisphere.[7]
We fully agree with the appellate courts dissertation on the nature and character of a set-off or
compensation. However, we cannot subscribe to its conclusion that a set-off or compensation took place in this
case.
In Article 1278 of the Civil Code, compensation is said to take place when two persons, in their own right, are
creditors and debtors of each other. Compensation is a mode of extinguishing to the concurrent amount, the
obligations of those persons who in their own right are reciprocally debtors an creditors of each other and the
offsetting of two obligations which are reciprocally extinguished if they are of equal value, or extinguished to the
concurrent amount if of different values.[8] Article 1279 of the same Code provides:
Article 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.
Absent any showing that all of these requisites exist, compensation may not take place.

While respondent Unisphere does not deny its liability for its unpaid dues to petitioners, the latter do not admit
any responsibility for the loss suffered by the former occasioned by the burglary. At best, what respondent
Unisphere has against petitioners is just a claim, not a debt. Such being the case, it is not enforceable in court. It is
only the debts that are enforceable in court, there being no apparent defenses inherent in them. [9] Respondent
Unispheres claim for its loss has not been passed upon by any legal authority so as to elevate it to the level of a
debt. So we held in Alfonso Vallarta v. Court of Appeals, et al.,[10] that:
Compensation or offset takes place by operation of law when two (2) persons, in their own right, are creditor and
debtor of each other. For compensation to take place, a distinction must be made between a debt and a mere
claim. A debt is a claim which has been formally passed upon by the highest authority to which it can in law be
submitted and has been declared to be a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence
of a debt and must pass thru the process prescribed by law before it develops into what is properly called a debt. [11]
Tested by the foregoing yardstick, it has not been sufficiently established that compensation or set-off is
proper here as there is lack of evidence to show that petitioners E.G.V. Realty and CCC and respondent Unisphere
are mutually debtors and creditors to each other.
Considering the foregoing disquisition, therefore, we find that respondent Court of Appeals committed
reversible error in ruling that compensation or set-off is proper in the instant case.
WHEREFORE, for all the foregoing , the instant petition is hereby GRANTED. The Decision of the Court of
Appeals dated February 17, 1995 is REVERSED and SET ASIDE. The Order of the Securities and Exchange
Commission dated August 21, 1990 reiterating the Hearing Officers Decision dated January 11, 1989, as amended
by the Order of July 17, 1989, is hereby REINSTATED.
SO ORDERED.
METROPOLITAN BANK and TRUST COMPANY, petitioner, vs. JOAQUIN TONDA and MA. CRISTINA
TONDA,respondents.
DECISION
GONZAGA_REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the
Decision[1] of the Court of Appeals[2] dated June 29, 1998 in CA-G.R. SP No. 38113 which: (1) reversed Resolution No.
417, s. 1994,[3] dated June 1, 1994 of the Department of Justice [4]directing to file the appropriate Information against
herein respondents Joaquin P. Tonda and Ma. Cristina V. Tonda for violation of P.D. 115 in relation to Article 315 (1)
(b) of the Revised Penal Code; and (2) effectively set aside the Resolutions dated April 7, 1995 [5] and July 12
1995[6] of the Department of Justice denying the motions for reconsideration.
Spouses Joaquin G. Tonda and Ma. Cristina U. Tonda, hereinafter referred to as the TONDAS, applied for and
were granted commercial letters of credit by petitioner Metropolitan Bank and Trust Company, hereinafter referred
to as METROBANK for a period of eight (8) months beginning June 14, 1990 to February 1, 1991 in connection with
the importation of raw textile materials to be used in the manufacturing of garments. The TONDAS acting both in
their capacity as officers of Honey Tree Apparel Corporation (HTAC) and in their personal capacities, executed
eleven (11) trust receipts to secure the release of the raw materials to HTAC. The imported fabrics with a principal
value of P2,803,000.00 were withdrawn by HTAC under the 11 trust receipts executed by the TONDAS. Due to their
failure to settle their obligations under the trust receipts upon maturity, METROBANK through counsel, sent a letter
dated August 10, 1992, making its final demand upon the TONDAS to settle their past due TR/LC accounts on or
before August 15, 1992. They were informed that by said date, the obligations would amount to
P4,870,499.13. Despite repeated demands therefor, the TONDAS failed to comply with their obligations stated in
the trust receipts agreements, i.e. the TONDAS failed to account to METROBANK the goods and/or proceeds of sale
of the merchandise, subject of the trust receipts.
Consequently, on November 9, 1992, Metrobank, through its account officer EligioLabog, Jr., filed with the
Provincial Prosecutor of Rizal a complaint/affidavit against the TONDAS for violation of P.D. No. 115 (Trust Receipts
Law) in relation to Article 315 (1) (b) of the Revised Penal Code. On February 12, 1993, the assigned Assistant
Prosecutor of Rizal submitted a Memorandum to the Provincial Prosecutor recommending that the complaint in I.S.
No. 92-8703 be dismissed on the ground that the complainants had failed to establish the existence of the
essential elements of Estafa as charged. The recommendation was approved by Rizal Provincial Prosecutor Mauro
Castro on May 18, 1993.
METROBANK then appealed to the Department of Justice (DOJ). On June 1, 1994, Undersecretary Ramon. S.
Esguerra reversed the findings of the Provincial Prosecutor of Rizal and ordered the latter to file the appropriate
information against the TONDAS as charged in the complaint.
The TONDAS immediately sought a reconsideration of the DOJ Resolution but their motion was denied by the
then acting Justice Secretary Demetrio G. Demetria in a Letter-Resolution dated April 7, 1995. A second motion for
reconsideration by the TONDAS was likewise denied by then Justice Secretary TeofistoGuingona on July 12, 1995.
Subsequently, the TONDAS filed with the Court of Appeals a special civil action for certiorari and prohibition
with application for a temporary restraining order or a writ of preliminary injunction, [7] which was docketed as CAG.R. SP No. 38113. They contended therein that the Secretary of Justice acted without or in excess of jurisdiction in
issuing the aforementioned Resolution dated July 12, 1995 denying with finality their motion for the reconsideration

of the Resolution dated April 7, 1995 of the Acting Secretary of Justice, which in turn denied their motion for the
reconsideration of Resolution No. 417, s. 94, dated June 1, 1994, directing to file the appropriate Information against
the TONDAS.
The Court of Appeals granted the TONDAS' petition and ordered the criminal complaint against them
dismissed. The Court of Appeals held that METROBANK had failed to show a prima facie case that the TONDAS
violated the Trust Receipts Law in relation to Art. 315 (1) (b) of the Revised Penal Code in the face of convincing
proof that "that the amount of P2.8 Million representing the outstanding obligation of the TONDAS under the trust
receipts account had already been settled by them in compliance with the loan restructuring proposal; and that in
the absence of a loan restructuring agreement, METROBANK could still validly apply the amount as payment
thereof." The relevant portions of the Court of Appeals decision are quoted as follows:
"Petitioners admitted that in 1991 their company, the Honey Tree Apparel Corporation (HTAC), had some financial
reversals making it difficult for them to comply with their loan obligations with Metrobank. They were then
constrained to propose a loan restructuring agreement with the private respondent to enable them to finally settle
all outstanding obligations with the latter. In a letter dated 23 September 1991, petitioner Joaquin Tonda submitted
a proposed Loan Restructuring Scheme to Metrobank. In said letter, petitioner Tonda proposed to immediately pay
in full the outstanding principal charges under the trust receipts account and the remaining obligations under a
separate schedule of payment. Petitioners attached with said letter an itemized proposal (Attachment "A"), part of
which reads:
1. Trust Receipts - The new management and. Mr. Joaquin G. Tonda will pay immediately the entire
principal of the outstanding Trust Receipts amounting to P2,803,097.14. While the interest accrued
up to September 13, 1991 amounting to P409,601.57 plus the additional interest shall be restructured together with item no. 2 below. A joint sharing account in the name of Joaquin G. Tonda
and Wang Tien En equal to Trust Receipt amount of 1.8 Million will be opened at Metrobank
Makati. (emphasis supplied)
It would appear that the aforestated amount of 1.8 Million was erroneously written since the intention of the
petitioners was to open an account of P2.8 Million to pay the entire principal of the outstanding trust receipts
account. In fact, also on 23 September 1991, petitioner Joaquin Tonda and Wang Tien En deposited four different
checks with a total amount of P2,800,000.00 with Metrobank. The checks were received by a certain Flor C.
Naanep. Notably, the petitioners had obtained a written acknowledgement of receipt of the checks totaling P2.8
Million from the Metrobank officer in order to show proof of compliance with the loan restructuring proposal. If the
petitioners had intended it to be a simple deposit, then a deposit slip with a machine validation by the private
respondent bank would have otherwise been sufficient.
In a letter dated 22 October 1991, Metrobank wrote to the petitioners informing them that the bank had accepted
their proposal subject to certain conditions, the first of which referred to the immediate payment of the amount of
P2.8 Million, representing the outstanding trust receipts account. The petitioners appeared to have offered a
counter proposal such that no final agreement had yet been reached.
However, the succeeding negotiations between petitioners and Metrobank, after the initial offer of 23 September
1991 was made, dealt with the other outstanding obligations while the matter regarding the trust receipts account
remained unchanged; therefore, it was settled between the parties that the amount of P2.8 Million should be paid to
cover all outstanding obligations under the trust receipts account. Despite the inability of both parties to reach a
mutually agreeable loan restructured agreement, the amount of P2.8 Million which was deposited on 23 September
1991 by the petitioners appears to remain intact and untouched as Metrobank had failed to show evidence that the
money has been withdrawn from the savings account of the petitioners.
Moreover, the deposit made by the petitioners was made known to Metrobank clearly as a compliance with the
proposed loan restructuring agreement. As shown in the correspondence made by the petitioners on 28 February
1992 to Metrobank, after the latter had made a formal demand for payment of all outstanding obligations, the
deposit was mentioned, to wit:
"May we emphasize that to show sincerity and financial capability, soon after we received your letter dated October
22, 1991 informing us of your approval of the restructuring and consolidation of our firm's obligations, a personal
account was opened by two (2) of our stockholders in the amount equivalent to the TR/LC, Account of about P2.8
Million which deposit is still maintained with your bank, free from any lien or encumbrance, and may be applied
anytime to the payment of the TR/LC Account upon the implementation by the parties of the terms of
restructuring.""(emphasis supplied)
The contention of Metrobank that the money had not been actually applied as payment for petitioners' outstanding
obligation under the trust receipts account is absolutely devoid of merit, considering that the petitioners were still in
the process of negotiating for a reasonable loan restructuring arrangement with Metrobank when the latter abruptly
abandoned all efforts to negotiate and instantly demanded from the petitioners the fulfillment of all their
outstanding obligations.
In the case of Tan Tiong Tick vs. American Apothecaries, 65 Phil. 414, the Supreme Court had held that:
When a depositor is indebted to a bank, and the debts are mutual - that is, between the same parties and in the,
same right - the bank may apply the deposit, or such portion thereof as may be necessary, to the payment of the

debt due it by the depositor, provided there is no express agreement to the contrary and the deposit is not
specifically applicable to some other particular purpose.
Applying the above-mentioned ruling in this case, if the parties therefore fail to reach an agreement regarding the
restructuring of HTAC's loan, Metrobank can validly apply the amount deposited by the petitioners as payment of
the principal obligation under the trust receipts account.
On the basis of all the evidence before Us, this Court is convinced that the amount of P2.8 Million representing the
outstanding obligation of the petitioners under the trust receipts account had already been settled by the
petitioners. The money remains deposited under the savings account of the petitioners awaiting a final agreement
with Metrobank regarding the loan restructuring arrangement. Meanwhile, Metrobank has the right to use the
deposited amount in connection with any of its banking business.
With convincing proof that the amount of P2.8 Million deposited under petitioners' savings account with Metrobank
was indeed intended to be applied as payment for the outstanding obligations of HTAC under the trust receipts,
Metrobank, therefore, had failed to show a prima facie case that the petitioners had violated the Trust Receipts Law
(P.D. No. 115) in relation to Art. 315 of the Revised Penal Code. Besides, there is absolutely no evidence suggesting
that Metrobank has been damaged by the proposal and the deposit made by the petitioners. As noted by the
prosecutor:
It is clear from the evidence that complainant bank had, all the while, been informed of the steps undertaken by
the respondents relative to the trust receipts and other financial obligations vis-a-vis HTAC's financial
difficulties. Hardly therefore, could it be said that respondents were unfaithfully, deceptively, deceitfully and
fraudulently dealing with complainant bank to warrant an indictment for Estafa. [8]
Hence, this recourse to this Court where petitioner submits for the consideration of this Court the following
issues:
I.
WHETHER METROBANK HAS SHOWN A PRIMA FACIE VIOLATION OF THE TRUST RECEIPTS LAW IN RELATION TO
ART. 315 OF THE REVISED PENAL CODE
II.
WHETHER AN AGREEMENT WAS FORGED BETWEEN THE PARTIES THAT THE 2.8 MILLION DEPOSITED IN THE
JOINT ACCOUNT OF JOAGUIN G. TONDA AND WANG TIEN EN WOULD BE CONSIDERED AS PAYMENT FOR THE
OUTSTANDING OBLIGATIONS OF THE SPOUSES TONDA UNDER THE TRUST RECEIPTS
III.
WHETHER INSPITE OF THE FAILURE OF THE PARTIES TO AGREE UPON A RESTRUCTURING AGREEMENT,
METROBANK CAN STILL APPLY THE P2.8 MILLION DEPOSIT AS PAYMENT TO THE PRINCIPAL AMOUNT COVERED
BY THE TRUST RECEIPTS
IV.
WHETHER DAMAGE HAS BEEN CAUSED TO METROBANK BECAUSE OF THE PROPOSAL AND OF THE DEPOSIT
V.
WHETHER METROBANK HAS THE STANDING TO PROSECUTE THE CASE A QUO
VI.
WHETHER THE ASSIGNED ERRORS IN THE PETITION FOR CERTIORARI FILED WITH THIS HONORABLE COURT
RAISES PURELY QUESTIONS OF FACTS[9]
In response to the foregoing, the TONDAS maintain that METROBANK has no legal standing to file the present
petition without the conformity or authority of the prosecutor as it deals solely with the criminal aspect of the case,
a separate action to recover civil liability having already been instituted; that the issues raised in the present
petition are purely factual; and that the subject trust receipts obligations have been extinguished by payment or
legal compensation.
We find for petitioner bank.
Preliminarily, we shall resolve the issues raised by the TONDAS regarding the standing of METROBANK to file
the instant petition and whether the same raises questions of law.
The general rule is that it is only the Solicitor General who is authorized to bring or defend actions on behalf of
the People or the Republic of the Philippines once the case is brought before this Court or the Court of
Appeals. However, an exception has been made that "if there appears to be grave error committed by the judge or
lack of due process, the petition will be deemed filed by the private complainants therein as if it were filed by the
Solicitor General."[10] In that case, the Court gave due course to the petition and allowed the petitioners to argue
their case in lieu of the Solicitor General. We accord the same treatment to the instant petition on account of the
grave errors committed by the Court of Appeals. We add that no information having been filed yet in court, there is,
strictly speaking, no case yet for the People or the Republic of the Philippines. In answer to the second issue raised
by the TONDAS, while the jurisdiction of the Supreme Court in a petition for review on certiorari under Rule 45 of
the Revised Rules of Court is limited to reviewing only errors of law, not of fact, one exception to the rule is when

the factual findings complained of are devoid of support by the evidence on record or the assailed judgment is
based on misappreciation of facts[11], as will be shown to have happened in the instant case.
In the main, the issue is whether or not the dismissal by the Court of Appeals of the charge for violation of the
Trust Receipts Law in relation to Art. 315(1) (b) of the Revised Penal Code against the TONDAS is warranted by the
evidence at hand and by law.
The Court of Appeals gravely erred in reversing the Department of Justice on the finding of probable cause to
hold the TONDAS for trial. The documentary evidence presented during the preliminary investigation clearly show
that there was probable cause to warrant a criminal prosecution for violation of the Trust Receipts Law.
The relevant penal provision of P.D. 115 provides:
SEC. 13. Penalty Clause. - The failure of an entrustee to turn over the proceeds of the sale of the goods, documents
or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the
trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance
with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article
Three Hundred and Fifteen, Paragraph One (b), of Act Numbered Three Thousand Eight Hundred and Fifteen, as
amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation,
partnership, association or other judicial entities, the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to
the civil liabilities arising from the criminal offense.
Section 1 (b), Article 315 of the Revised Penal Code under which the violation is made to fall, states:
"x xxSwindling (estafa). - Any person who shall defraud another by any of the mans mentioned herein below x x x:
x xx

xxx

xxx

b. By misappropriating or converting, to the prejudice of another, money, goods, or any other personal
property received by the offender in trust or on commission, or for administration, or under any other
obligation involving the duty to make delivery of or to return the same, even though such obligation
be totally or partially guaranteed by a bond; or by denying having received such money, goods, or
other property.
Based on the foregoing, it is plain to see that the Trust Receipts Law declares the failure to turn over the goods
or the proceeds realized from the sale thereof, as a criminal offense punishable under Article 315 (1) (b) of the
Revised Penal Code. The law is violated whenever the entrustee or the person to whom the trust receipts were
issued in favor of fails to: (1) return the goods covered by the trust receipts; or (2) return the proceeds of the sale
of the said goods. The foregoing acts constitute estafa punishable under Article 315 (1) (b) of the Revised Penal
Code. Given that various trust receipts were executed by the TONDAS and that as entrustees, they did not return
the proceeds from the goods sold nor the goods themselves to METROBANK, there is no dispute that that the
TONDAS failed to comply with the obligations under the trust receipts despite several demands from METROBANK.
Finding favorably for the TONDAS, however, and ordering the dismissal of the complaint against them, the
Court of Appeals held that: (1) the TONDAS opened a savings account of P2.8 Million to pay the entire principal of
the outstanding trust receipts account; (2) the TONDAS obtained from a METROBANK officer [12] a written
acknowledgement of receipt of checks totaling P2.8 Million in order to show proof of compliance with the loan
restructuring proposal; (3) it was settled between the parties that the amount of 2.8 Million should be paid to cover
all outstanding obligations under the trust receipts account; (4) the money remains deposited under the savings
account of petitioners awaiting a final agreement with METROBANK regarding the loan restructuring arrangement;
and that (5) there is no evidence suggesting that METROBANK has been damaged by the proposal and the deposit
or that the TONDAS employed fraud and deceit in their dealings with the bank.
The foregoing findings and conclusions are palpably erroneous.
First, the amount of P2.8 million was not directly paid to METROBANK to settle the trust receipt accounts, but
deposited in a joint account of Joaquin G. Tonda and a certain Wang Tien En. In a letter dated February 28, 1992,
signed by HTAC's Vice President for Finance, METROBANK was informed that the amount "may be applied anytime
to the payment of the trust receipts account upon implementation of the parties of the terms of the
restructuring."[13] The parties failed to agree on the terms of the loan restructuring agreement as the offer by the
TONDAS to restructure the loan was followed by a series of counter-offers which yielded nothing. It is axiomatic
that acceptance of an offer must be unqualified and absolute[14] to perfect a contract. The alleged payment of the
trust receipts accounts never became effectual on account of the failure of the parties to finalize a loan
restructuring arrangement.
Second, the handwritten note by the METROBANK officer acknowledging receipt of the checks amounting to
P2.8 Million made no reference to the TONDAS' trust receipt obligations, and we cannot presume that it was
anything more than an ordinary bank deposit. The Court of Appeals citing the case of Tan Tiong Tick vs. American
Apothecories[15] implied that in making the deposit, the TONDAS are entitled to set off, by way of compensation,
their obligations to METROBANK. However, Article 1288 of the Civil Code provides that "compensation shall not be
proper when one of the debts consists in civil liability arising from a penal offense" as in the case at bar. The raison
d'etre for this is that, "if one of the debts consists in civil liability arising from a penal offense, compensation would
be improper and inadvisable because the satisfaction of such obligation is imperative." [16]

Third, reliance on the negotiations for the settlement of the trust receipts obligations between the TONDAS
and METROBANK is simply misplaced. The negotiations pertain and affect only the civil aspect of the case but does
not preclude prosecution for the offense already committed. It has been held that "[a]ny compromise relating to the
civil liability arising from an offense does not automatically terminate the criminal proceeding against or extinguish
the criminal liability of the malefactor."[17] All told, the P2.8 Million deposit could not be considered as having settled
the trust receipts obligations of the TONDAS to the end of extinguishing any incipient criminal culpability arising
therefrom.
Hence, it has been held in Office of the Court Administrator vs. Soriano[18] that:
xxx it is too well-settled for any serious argument that whether in malversation of public funds or estafa, payment,
indemnification, or reimbursement of, or compromise as to, the amounts or funds malversed or misappropriated,
after the commission of the crime, affects only the civil liability of the offender but does not extinguish his criminal
liability or relieve him from the penalty prescribed by law for the offense committed, because both crimes are public
offenses against the people that must be prosecuted and penalized by the Government on its own motion, though
complete reparation should have been made of the damage suffered by the offended parties. xxx."
As to the statement of the Court of Appeals that there is no evidence that METROBANK has been damaged by
the proposal and the deposit, it must be clarified that the damage can be traced from the non-fulfillment of an
entrustee's obligation under the trust receipts. The nature of trust receipt agreements and the damage caused to
trade circles and the banking community in case of violation thereof was explained in Vintola vs. IBAA[19] and
echoed in People vs. Nitafan[20], as follows:
"[t]rust receipt arrangements do not involve a simple loan transaction between a creditor and a debtorimporter. Apart from a loan feature, the trust receipt arrangement has a security feature that is covered by the
trust receipt itself. The second feature is what provides the much needed financial assistance to traders in the
importation or purchase of goods or merchandise through the use of those goods or merchandise as collateral for
the advancements made by the bank. The title of the bank to the security is the one sought to be protected and
not the loan which is a separate and distinct agreement."
xxx xxx

xxx.

"Trust receipts are indispensable contracts in international and domestic business transactions. The prevalent use
of trust receipts, the danger of their misuse and/or misappropriation of the goods or proceeds realized from the sale
of goods, documents or instruments held in trust for entruster-banks, and the need for regulation of trust receipt
transactions to safeguard the rights and enforce the obligations of the parties involved are the main thrusts of P.D.
115. As correctly observed by the Solicitor General, P.D. 115, like Bata PambansaBlg. 22, punishes the act "not as
an offense against property, but as an offense against public order. x xxThe misuse of trust receipts therefore
should be deterred to prevent any possible havoc in trade circles and the banking community. (citing Lozano vs.
Martinez, 146 SCRA 323 [1986]; Rollo, p. 57) It is in the context of upholding public interest that the law now
specifically designates a breach of a trust receipt agreement to be an act that "shall" make one liable foeestafa."
The finding that there was no fraud and deceit is likewise misplaced Considering that the offense is punished
as a malumprohibitum regardless of the existence of intent or malice. A mere failure to deliver the proceeds of the
sale or the goods if not sold, constitutes a criminal offense that causes prejudice not only to another, but more to
the public interest.[21]
Finally, it is worthy of mention that a preliminary investigation proper - whether or not there is reasonable
ground to believe that the accused is guilty of the offense and therefore, whether or not he should be subjected to
the expense, rigors and embarrassment of trial - is the function of the prosecutor. [22] Preliminary investigation is an
executive, not a judicial function.[23] Such investigation is not part of the trial, hence, a full and exhaustive
presentation of the parties' evidence is not required, but only such as may engender a well-grounded belief that an
offense has been committed and that the accused is probably guilty thereof. [24]
Section 4, Rule 112 of the Rules of Court recognizes the authority of the Secretary of Justice to reverse the
resolution of the provincial or city prosecutor or chief state prosecutor upon petition by a proper party. [25] Judicial
review of the resolution of the Secretary of Justice is limited to a determination of whether there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction considering that the full discretionary authority has
been delegated to the executive branch in the determination of probable cause during a preliminary
investigation. Courts are not empowered to substitute their judgment for that of the executive branch; it may,
however, look into the question of whether such exercise has been made in grave abuse of discretion. [26]
Verily, there was no grave abuse of discretion on the part of the Secretary of Justice in directing the filing of
the Information against the TONDAS, end the Court of Appeals overstepped its boundaries in reversing the same
without basis in law and in evidence. We emphasize that for purposes of preliminary investigation, it is enough that
there is evidence showing that a crime has been committed and that the accused is probably guilty thereof. [27] By
reason of the abbreviated nature of preliminary investigations, a dismissal of the charges as a result thereof is not
equivalent to a judicial pronouncement of acquittal,[28] a converso, the finding of a prima facie case to hold the
accused for trial is not equivalent to a finding of guilt.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision is REVERSED and SET ASIDE.
SO ORDERED.

HERMENEGILDO M. TRINIDAD, Petitioner,

vs.
ESTRELLA ACAPULCO, Respondent
DECISION
AUSTRIA-MARTINEZ, J.:
Before this Court is a Petition for Review under Rule 45 of the Rules of Court assailing the Decision 1 of the Court of
Appeals (CA) in CA-G.R. CV No. 42518 promulgated on February 16, 2001, which affirmed the Decision 2 of the
Regional Trial Court (RTC) Cebu City, Branch 6 dated March 23, 1992.
The facts are as follows:
On May 6, 1991, respondent Estrella Acapulco filed a Complaint before the RTC seeking the nullification of a sale
she made in favor of petitioner Hermenegildo M. Trinidad. She alleged: Sometime in February 1991, a certain
PrimitivoCaete requested her to sell a Mercedes Benz for P580,000.00. Caete also said that if respondent herself
will buy the car, Caete was willing to sell it for P500,000.00. Petitioner borrowed the car from respondent for two
days but instead of returning the car as promised, petitioner told respondent to buy the car from Caete
forP500,000.00 and that petitioner would pay respondent after petitioner returns from Davao. Following petitioners
instructions, respondent requested Caete to execute a deed of sale covering the car in respondents favor
forP500,000.00 for which respondent issued three checks in favor of Caete. Respondent thereafter executed a
deed of sale in favor of petitioner even though petitioner did not pay her any consideration for the sale. When
petitioner returned from Davao, he refused to pay respondent the amount of P500,000.00 saying that said amount
would just be deducted from whatever outstanding obligation respondent had with petitioner. Due to petitioners
failure to pay respondent, the checks that respondent issued in favor of Caete bounced, thus criminal charges
were filed against her.3 Respondent then prayed that the deed of sale between her and petitioner be declared null
and void; that the car be returned to her; and that petitioner be ordered to pay damages. 4
In his Answer petitioner contended that: it is not true that he borrowed the car and that any demand was made to
return it; he also did not give any instructions to respondent to buy the car from Caete because as early as
September 28, 1990, Caete has already sold the car to respondent for P500,000.00; at the time respondent
executed the deed of sale in his favor on March 4, 1991, respondent was already in possession of the deed of sale
from Caete; the amount of P500,000.00 was fully paid by way of dation in payment to partially extinguish
respondents obligation with petitioner; the contract entered into was a true sale of a motor vehicle and the mode
of payment was that of dation in payment agreed upon at the time of the sale. 5
The parties filed their respective pre-trial briefs. Petitioner raised as issue: whether or not there is valid dation in
payment;6 while respondent put forth the questions: whether or not she is indebted to petitioner in the amount
ofP566,000.00, and whether the car was ceded by her to petitioner in order to partially pay off her obligation
ofP566,000.00 to petitioner as dation in payment. 7
On September 6, 1991, the trial court came out with its Pre-Trial Order limiting the issue to whether there is dacion
en pago between petitioner and respondent.8
Trial ensued and on March 23, 1992, the RTC rendered its Decision finding that no dacion en pago is present in this
case as common consent was not proven. 9 The fallo of said decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff (Acapulco) and against the defendant (Trinidad),
to wit:
1. Declaring the deed of sale executed by plaintiff in favor of defendant as null and void for being fictitious
and/or simulated;
2. The defendant is ordered to return the Mercedes Benz car in question to plaintiff in the same condition
when it was delivered to him by plaintiff;
3. Defendant is ordered to pay plaintiff the amount of P100,000.00 as moral damages; P20,000.00 as
exemplary damages and attorneys fees of P20,000.00 as well as litigation expenses in the amount
ofP5,000.00 and costs.
SO ORDERED.10
Petitioner filed a Motion for Reconsideration arguing that contrary to the findings of the trial court that there was no
common consent, the offer to deliver the car to him actually came from respondent after petitioner told her that he
was going to file estafa cases against her for her failure to pay her debt to petitioner. 11
Petitioner also filed a Supplemental Motion and for the first time averred that assuming that respondent did not
agree to having the purchase price charged against the P566,000.00 she owed petitioner, nonetheless, with or
without her consent and/or knowledge, the obligations parties owed to each other were extinguished by operation
of law or through legal compensation in the amount of P500,000.00.12
The RTC issued an Order dated October 18, 1992 denying the Motion for Reconsideration and Supplemental Motion
of petitioner stating that the claim of dacion en pago is inexistent in this case and the defense of legal
compensation was not alleged or pleaded in petitioners Answer. 13
Petitioner appealed to the CA which affirmed the Decision of the trial court, finding that the issue of legal
compensation was filed too late as it was brought up only in the supplemental motion for reconsideration; that the

parties agreed that the issue to be tried was whether or not there was dacion en pago; that dacion en pago
however is not present in this case as the parties did not give their consent thereto; that there can also be no legal
compensation as one of the obligations of this case did not entail payment of a monetary debt but the delivery of a
car; and that the admission of petitioner that the sale price of the car was not paid entitled respondent to file the
action for rescission of sale.14
Petitioner now comes before this Court claiming that:
>1. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT THE ANSWER DID NOT ALLEGE FACTS
AMOUNTING TO EXTINGUISHMENT OF OBLIGATION BY LEGAL COMPENSATION;
>2. THE HONORABLE APPELLATE COURT ERRED IN GIVING UNDUE RELIANCE TO PETITIONERS CONCLUSION IN HIS
ANSWER THAT HIS OBLIGATION WAS DEEMED EXTINGUISHED BECAUSE OF DATION IN PAYMENT INSTEAD OF
DISREGARDING SAID CONCLUSION AND SIMPLY APPRECIATING THE FACTS ALLEGED AND PROVED AND DRAWING
FOR ITSELF THE JURIDICAL IMPLICATION OF SAID FACTS;
>3. ASSUMING THAT LEGAL COMPENSATION HAD NOT BEEN ALLEGED IN THE ANSWER, STILL THE HONORABLE
APPELLATE COURT ERRED IN HOLDING THAT LEGAL COMPENSATION AS A MANNER OF EFFECTING PAYMENT HAD TO
BE SPECIFICALLY ALLEGED, THE SAME BEING ONLY EVIDENTIARY;
>4. ASSUMING THAT LEGAL COMPENSATION HAD TO BE ALLEGED AND THAT THE ANSWER FAILED TO DO SO,
NEVERTHELESS THE HONORABLE APPELLATE COURT ERRED IN IGNORING THE EVIDENCE PRESENTED WITHOUT
OBJECTION FROM RESPONDENT SHOWING THAT PARITES(SIC) MUTUAL MONETARY OBLIGATIONS TO EACH OTHER
HAD BEEN EXTINGUISHED TO THE CONCURRENT AMOUNT OF P500,00.00;
>5. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT LEGAL COMPENSATION COULD BE EFFECTED
ONLY THROUGH THE CONSENT OF THE PARTIES;
>6. THE HONORABLE APPELLATE COURT ERRED IN HOLDING THAT NON-PAYMENT OF THE PURCHASE PRICE MADE
THE CONTRACT OF SALE FICTITIOUS, HENCE NULL AND VOID;
>7. IN VIEW OF THE RESPONDENTS ADMISSION THAT SHE OWED PETITIONER P566,000.00, THE HONORABLE
APPELLATE COURT ERRED IN NOT ORDERING RESPONDENT TO PAY THE SAME WITH LEGAL INTEREST;
>8. THE HONORABLE APPELLATE COURT ERRED IN ASSESSING DAMAGES AGAINST THE PETITIONER. 15
Petitioner argues that: the purchase price of the car had been automatically offset by respondents own monetary
obligation of P566,000.00, even if he and respondent had not agreed to offsetting following Article 1290 16 of the
Civil Code; Bank of the Philippine Islands v. Court of Appeals 17 also held that compensation shall take place when
two persons, in their own right, are creditors and debtors of each other; legal compensation takes place by
operation of law and may be taken up even though it is not raised in the pleadings or during trial; it is the duty of
courts to grant the relief to which the parties are entitled as shown by the allegations and the facts proven at the
trial; here, while petitioner claimed dation in payment, there was more than enough testimony and admissions to
prove elements of legal compensation; failure to pay the agreed purchase price does not make the contract of sale
fictitious and null and void; the CA erred in not ordering respondent to pay petitioner the balance of her partially
extinguished indebtedness and in assessing damages against him as there was no basis therefor. 18
In her Comment, respondent counters that: it was only in the Supplemental Motion for Reconsideration of the
decision of the trial court that petitioner changed his theory and started claiming legal compensation as a defense;
the CA did not commit any error in rejecting the belated new defense of petitioner as it would be offensive to the
basic rule of fair play, justice and due process; Article 1279 of the Civil Code also states that for legal compensation
to be proper both debts should consist of sum of money; in this case, one of the obligations does not entail
payment of money but delivery of a car.19
Petitioner merely reiterated his arguments in his Memorandum,20 while respondent in hers, further averred that: she
is not the owner of the car, but was only in possession thereof in order to sell it at a price of P580,000.00
withP80,000.00 going to her; both the trial court and the CA failed to make a finding as to the exact amount
respondent owed petitioners.21
Stripped to its basics, what petitioner is contending is that legal compensation should be appreciated, though not
expressly stated in his Answer to the Complaint before the trial court, as his allegations therein and the facts proven
at the trial show the presence of legal compensation. He further argues that, in any case, legal compensation takes
place by operation of law even without the consent of the interested parties.
The Court resolves to grant the petition.
Our rules recognize the broad discretionary power of an appellate court to waive the lack of proper assignment of
errors and to consider errors not assigned. 22 The interest of justice dictates that the Court consider and resolve
issues even though not particularly raised if it is necessary for the complete adjudication of the rights and
obligations of the parties and it falls within the issues already found by them. 23 While it is true that petitioner failed
to raise the issue of legal compensation at the earliest opportunity, this should not preclude the courts from
appreciating the same especially in this case, where ignoring the same would only result to unnecessary and
circuitous filing of cases.

Indeed, the doctrine that higher courts are precluded from entertaining matters neither alleged in the pleadings nor
raised during the proceedings below but ventilated for the first time only in a motion for reconsideration or on
appeal, is subject to exceptions, such as when:
(a) grounds not assigned as errors but affecting jurisdiction over the subject matter; (b) matters not assigned as
errors on appeal but are evidently plain or clerical errors within contemplation of law; (c) matters not assigned as
errors on appeal but consideration of which is necessary in arriving at a just decision and complete resolution of the
case or to serve the interests of justice or to avoid dispensing piecemeal justice; (d) matters not specifically
assigned as errors on appeal but raised in the trial court and are matters of record having some bearing on the
issue submitted which the parties failed to raise or which the lower court ignored; (e) matters not assigned as errors
on appeal but closely related to an error assigned; and (f) matters not assigned as errors on appeal but upon which
the determination of a question properly assigned, is dependent.24
In this case, petitioner raised the issue of dacion en pago in his Answer to respondents Complaint. The trial court
thus focused on ascertaining whether the elements of dacion en pago are present in the case at bar, i.e.: whether
there is consent, object certain and cause or consideration, with common consent as an essential prerequisite to
have the effect of totally extinguishing the debt or obligation. 25 As respondents consent was not adequately proven
by petitioner, the trial court held that there could be no dacion en pago. Petitioner thereafter filed a Motion for
Reconsideration and a Supplemental Motion for Reconsideration where, for the first time, he raised the issue of
legal compensation. In striking down petitioners claim of legal compensation, the trial court reasoned that it was
raised too late. This was affirmed by the CA.
This Court holds otherwise.
Compensation takes effect by operation of law even without the consent or knowledge of the parties concerned
when all the requisites mentioned in Article 1279 of the Civil Code are present. 26 This is in consonance with Article
1290 of the Civil Code which provides that:
Article 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.
Since it takes place ipso jure,27 when used as a defense, it retroacts to the date when all its requisites are fulfilled. 28
Article 1279 provides that 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.
Here, petitioners stance is that legal compensation has taken place and operates even against the will of the
parties because: (a) respondent and petitioner were personally both creditor and debtor of each other; (b) the
monetary obligation of respondent was P566,000.00 and that of the petitioner was P500,000.00 showing that both
indebtedness were monetary obligations the amount of which were also both known and liquidated; (c) both
monetary obligations had become due and demandablepetitioners obligation as shown in the deed of sale and
respondents indebtedness as shown in the dishonored checks; and (d) neither of the debts or obligations are
subject of a controversy commenced by a third person.
While the proceedings in the RTC focused on ascertaining the presence of the elements of dacion en pago, it was
likewise proven that petitioner owed respondent the amount of P500,000.00 while respondent owed
petitionerP566,000.00; that both debts are due, liquidated and demandable, and; that neither of the debts or
obligations are subject of a controversy commenced by a third person.
Respondent in her cross-examination categorically admitted that she is indebted to petitioner as follows:
Q But you will admit that you have borrowed several times from Mr. Trinidad some money?
A Yes.
Q And in fact the total amount of money that you have borrowed from Mr. Trinidad reaches to P566,000.00, right?
A Yes.
Q And in fact you have issued checks to cover for this account?
A Yes.
Q There were several checks you have issued, right?
A Yes.
Q And all of these checks bounced?
A Yes.29

x xxx
Q x xx It is now very clear, Mrs. Acapulco, that at the time you executed a deed of absolute sale of the car in favor
of Hermenegildo Trinidad you have an outstanding account with him in the amount of P566,000.00?
A Yes.30
Ignoring this admission would only result in added burden to petitioner as well as the courts as petitioner will be
forced to file a separate case for collection of sum of money just so he could enforce his right to collect from
respondent. This is precisely what compensation seeks to avoid as its aim is to prevent unnecessary suits and
payments through the mutual extinction of concurring debts by operation of law. 31
The claim of respondent that there could be no legal compensation in this case as one of the obligations consists of
delivery of a car and not a sum of money must also fail. Respondent sold the car to petitioner on March 4, 1991
forP500,000.00 while she filed her complaint for nullification of the sale only on May 6, 1991. As legal compensation
takes place ipso jure, and retroacts to the date when its requisites are fulfilled, legal compensation has already
taken place at the time of the sale. At such time, petitioner owed respondent the sum of P500,000.00 which is the
price of the vehicle.
Consequently, by operation of law, the P500,000.00 which petitioner owed respondent is off-set against
theP566,000.00 owed by respondent to petitioner, leaving a balance of P66,000.00, which respondent should pay
with 12% interest per annum from date of judicial or extrajudicial deed. 32 Since there was no extrajudicial deed in
this case, the interest shall be resolved from the date petitioner filed its Supplemental Motion for Reconsideration
invoking for the first time legal compensation, that is, May 20, 1992. 33
Finally, the Court agrees with petitioner that the trial court erred in awarding damages in favor of respondent.
In order that moral damages may be awarded, there must be pleading and proof of moral suffering, mental anguish,
fright and the like, and while no proof of pecuniary loss is necessary in order that moral damages may be awarded,
it is nevertheless essential that the claimant should satisfactorily show the existence of the factual basis of
damages and its causal connection to defendants acts.34 Claims must be substantiated by clear and convincing
proof35 and there must be clear testimony on the anguish and other forms of mental sufferings as mere allegations
will not suffice.36 Allegations of besmirched reputation, embarrassment and sleepless nights are insufficient for it
must be shown that the proximate cause thereof was the unlawful act or omission of the opposing party. 37
Indeed, for a court to arrive upon a judicious approximation of emotional or moral injury, competent and substantial
proof of the suffering experienced must be laid before it.38 There must be definite findings as to what the supposed
moral damages suffered consisted of.39 The award of moral damages must be solidly anchored on a definite showing
that the claiming party actually experienced emotional and mental sufferings. 40
In this case, respondent merely testified that after petitioner refused the payment of the car as well as its return,
she was very much worried, which if converted into monetary amount is equivalent to P200,000.00.41 We deem
such testimony insufficient to warrant the award of moral damages.
Similarly, in order that exemplary damages may be awarded, it must be shown that the wrongful act was
accompanied by bad faith or done in a wanton, fraudulent, reckless or malevolent manner. 42 Exemplary damages
are also allowed only in addition to moral damages such that no exemplary damage can be awarded unless the
claimant first establishes his clear right to moral damages.43 As moral damages are improper in the present case, so
is the award of exemplary damages.
The decision of the trial court also does not mention the reason for the award of attorneys fees and the award was
simply contained in the dispositive portion of the decision. Again, the trial court erred on this score as it must
explicitly state in the body of its decision and not only in the dispositive portion thereof the legal reason for the
award of attorneys fees.44
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated February 16, 2001 is REVERSED
and SET ASIDE. The P500,000.00 which Hermenegildo M. Trinidad owed Estrella Acapulco is offset against
the P566,000.00 which Acapulco owed Trinidad. Acapulco is ordered to pay Trinidad the amount ofP66,000.00 plus
interest at 12% per annum from May 20, 1992 until full payment.
SO ORDERED.
INSULAR INVESTMENT AND TRUST CORPORATION, Petitioner,
vs.
CAPITAL ONE EQUITIES CORP. (now known as CAPITAL ONE HOLDINGS CORP.) and PLANTERS
DEVELOPMENT BANK, Respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Revised Rules of Civil Procedure assailing the
June 6, 2008 Decision1 of the Court of Appeals (CA) in C.A.-G.R. CV No. 79320 entitled "Insular Investment and Trust
Corporation v. Capital One Equities Corporation (now known as Capital One Holdings Corporation) and Planters
Development Bank."
THE FACTS

Based on the records of the case and on the September 2, 1999 Partial Stipulation of Facts and Documents 2 (the
Partial Stipulation) agreed upon by the parties, the facts are as follows:
Petitioner Insular Investment and Trust Corporation (IITC) and respondents Capital One Equities
Corporation(COEC) and Planters Development Bank (PDB) are regularly engaged in the trading, sale and purchase
of Philippine treasury bills.
On various dates in 1994, IITC purchased from COEC treasury bills with an aggregate face value
ofP260,683,392.51 (the IITC T-Bills), as evidenced by the confirmations of purchase issued by IITC. The purchase
price for the said treasury bills were fully paid by IITC to COEC which was able to deliver P121,050,000.00 worth of
treasury bills to IITC.
On May 2, 1994, COEC purchased treasury bills with a face value of P186,774,739.49 (the COEC T-Bills). IITC issued
confirmations of sale in favor of COEC covering the said transaction. COEC paid the purchase price by issuing the
following checks:
Check No.

Payee

Amount

(1) City Trust Managers

Check No. 001180

Planters Development Bank

P154,802,341.59

(2) UCPB-Ayala Managers

Check No. AYLO43841

Planters Development Bank

P16,975,883.89

(3) UCPB-Ayala Managers

Check No. AYLO43840

Planters Development Bank

P10,413,043.78

(4) UCPB-Ayala
Check No. AYL213346

Insular Investment and Trust Corporation

P24,116.11

Both IITC and PDB received the proceeds of the checks.

On May 2, 1994, PDB issued confirmations of sale in favor of IITC for the sale of treasury bills and IITC, in turn,
issued confirmations of purchase in favor of PDB over treasury bills with a total face value of P186,790,000.00.
Thereafter, PDB sent a letter3 dated May 4, 1994 to IITC undertaking to deliver treasury bills worthP186,790,000.00,
which IITC purchased from PDB on May 2, 1994, as soon as they would be available.
On May 10, 1994, COEC wrote a letter to IITC demanding the physical delivery of the treasury bills which the former
purchased from the latter on May 2, 1994.
In its May 18, 1994 Letter4 to PDB, IITC requested, on behalf of COEC, the delivery to IITC of treasury bills
worthP186,790,000.00 which had been paid in full by COEC. COEC was furnished with a copy of the said letter.
On May 30, 1994, COEC protested the tenor of IITCs letter to PDB and took exception to IITCs assertion that it
merely acted as a facilitator with regard to the sale of the treasury bills.
IITC sent COEC a letter5 dated June 3, 1994, demanding that COEC deliver to it (IITC) the P139,833,392.00 worth of
treasury bills or return the full purchase price. In either case, it also demanded that COEC (1) pay IITC the amount
of P1,729,069.50 representing business opportunity lost due to the non-delivery of the treasury bills, and (2) deliver
treasury bills worth P121,050,000 with the same maturity dates originally purchased by IITC.
COEC sent a letter-reply6 dated June 9, 1994 to IITC in which it acknowledged its obligation to deliver the treasury
bills worth P139,833,392.007 which it sold to IITC and formally demanded the delivery of the treasury bills
worthP186,774,739.49 which it purchased from IITC. COEC also demanded the payment of lost profits in the amount
ofP3,253,250.00. Considering that COEC and IITC both have claims against each other for the delivery of treasury
bills, COEC proposed that a legal set-off be effected, which would result in IITC owing COEC the difference
ofP46,941,446.49.
In its June 13, 1994 letter to COEC, IITC rejected the suggestion for a legal setting-off of obligations, alleging that it
merely acted as a facilitator between PDB and COEC.
On June 27, 1994, COEC replied to IITCs letter, reiterating its demand and its position stated in its June 9, 1994
letter.
On July 1, 1994, IITC, COEC and PDB entered into a Tripartite Agreement 8 (the Tripartite Agreement) wherein PDB
assigned to IITC, which in turn assigned to COEC, Central Bank Bills with a total face value of P50,000,000.00. These
assignments were made in consideration of (a) IITC relinquishing all its rights to claim delivery under the
confirmation of sale issued by PDB to IITC to the extent of P50,000,000.00 (face value) and (b) COEC relinquishing
all its rights to claim delivery of the COEC T-Bills under the IITC confirmations of sale to COEC to the extent
ofP50,000,000.00 (face value).
On the same day, COEC and IITC entered into an Agreement9 (the COEC-IITC Agreement) whereby COEC reassigned
to IITC the Central Bank bills subject of the Tripartite Agreement to the extent of P20,000,000.00 in consideration of
which IITC relinquished all its rights to claim from COEC the IITC T-Bills covered by the COEC confirmation of sale to
the extent of an aggregate P20,000,000.00 face value.
Despite repeated demands, however, PDB failed to deliver the balance of P136,790,000.00 worth of treasury bills
which IITC purchased from PDB allegedly for COEC. COEC was likewise unable to deliver the remaining IITC T-Bills
amounting to P119,633,392.00. Neither PDB and COEC returned the purchase price for the duly paid treasury bills. 10

This prompted IITC to file the Amended Complaint11 dated March 20, 1995 before the Regional Trial Court, Branch
138, Makati City (RTC), praying that COEC be ordered to deliver treasury bills worth P119,633,392.00 to IITC or pay
the monetary equivalent plus legal interests; and, in the alternative, that PDB be ordered to comply with its
obligations under the conduit transaction involving treasury bills worth P136,790,000.00 by delivering the treasury
bills to IITC, in addition to actual and exemplary damages and attorneys fees.
COEC filed its Answer to Amended Complaint12 dated April 10, 1995, admitting that it owed IITC treasury bills
worthP119,633,392.00. It countered, however, that IITC had an outstanding obligation to deliver to COEC treasury
bills worth P136,774,739.49.13 COEC prayed that IITC be required to deliver P17,141,347.49 (the amount IITC still
owed COEC after a legal off-setting of their debts against each other) to COEC in addition to moral and exemplary
damages and attorneys fees.14
PDB, for its part, insisted in its Answer Ad Cautelam15 that it had no knowledge or participation in the sale by IITC of
treasury bills to COEC. It admitted that it sent a letter dated May 4, 1994 to IITC, undertaking to deliver treasury
bills worth P186,790,000.00 which IITC purchased from PDB. PDB posited, however, that IITC was not entitled to the
delivery of the said treasury bills because IITC did not remit payment to PDB. Neither did the subject securities
become available to PDB.
In its Judgment16 dated June 16, 2003, the RTC found that COEC still owed IITC P119,633,392.00 worth of treasury
bills, pursuant to their transaction in early 1994. As regards the sale of treasury bills by IITC to COEC, however, the
RTC determined that IITC was not merely a conduit in the purchase a sale of treasury bills between PDB and COEC.
Rather, IITC acted as a principal in two transactions: as a buyer of treasury bills from PDB and as a seller to COEC.
Taking into consideration the Tripartite Agreement, IITC was still liable to pay COEC the sum ofP136,790,000.00.
Since IITC and COEC were both debtors and creditors of each other, the RTC off-set their debts, resulting in a
difference of P 17,056,608.00 in favor of COEC. As to PDBs liability, it ruled that PDB had the obligation to
pay P136,790,000.00 to IITC. Thus, the trial court ordered (a) IITC to pay COEC P17,056,608.00 with interest at the
rate of 6% from June 10, 1994 until full payment and (b) PDB to pay IITC P136,790,000.00 with interest at the rate
of 6% from March 21, 1995 until full payment.
Aggrieved, all parties appealed to the CA which promulgated its decision on June 6, 2008. The CA affirmed the RTC
finding that IITC was not a mere conduit but rather a direct seller to COEC of the treasury bills. 17 The CA, however,
absolved PDB from any liability, ruling that because PDB was not involved in the transactions between IITC and
COEC, IITC should have alleged and proved that PDB sold treasury bills to IITC. 18 Moreover, PDB only undertook to
deliver treasury bills worth P186,790,000.00 to IITC "as soon as they are available." 19 But, the said treasury bills did
not become available. Neither did IITC remit payment to PDB. As such, PDB incurred no obligation to
deliverP186,790,000.00 worth of treasury bills to IITC.
Hence, this petition.
THE ISSUES
IITC raises the following grounds for the grant of its petition:
A. The petition is not dismissible. The issue of whether IITC acted as a conduit is a question of law.
Assuming for the sake of argument that the petition involves questions of fact, the Supreme Court may
take cognizance of the petition under exceptional circumstances.
B. The Court of Appeals gravely erred and acted contrary to law and jurisprudence and the evidence on
record in holding that IITC did not act as a conduit of Capital One and Plantersbank in the 2 May 1994 sale
of COEC T-bills.
C. The Court of Appeals erred and acted contrary to law and the evidence on record in ruling that
Plantersbank did not have any obligation to delivery the COEC T-Bills to IITC under IITCs alternative cause
of action.
D. The Court of Appeals erred and acted contrary to law in holding that Capital One could validly set off its
claims for the undelivered COEC T-Bills against the fully paid IITC T-Bills.
E. The Court of Appeals further erred and acted contrary to law in holding that Capital One and
Plantersbank were not guilty of fraud.
F. The Court of Appeals violated IITCs right to due process in affirming, without citing any basis
whatsoever, the erroneous holding of the trial court that there was insufficient evidence to prove the actual
and consequential damages sustained by IITC. 20
COEC puts forth the following issues:
Whether the Court of Appeals correctly held that IITC did not act as a conduit of Capital One and Plantersbank in the
May 2, 1994 sale of the COEC T-Bills by IITC to Capital One.
Whether the Court of Appeals correctly held that Capital One may validly set off its claim for the undelivered COEC
T-Bills against the balance of the IITC T-Bills.
Whether the Court of Appeals correctly affirmed the holding of the trial court that Capital One and Plantersbank are
not guilty of fraud.
Whether the Petition raises questions of fact, and whether it is defective.
Whether Capital One is entitled to the correction of the mathematical error in the computation of the money
judgment in its favor.21
For its part, PDB identifies the principal issue to be "whether it was obliged to deliver to petitioner Insular the
treasury bills which the latter sold, as principal, to Capital One, and/or pay the value thereof." 22 The following are
stated as corollary issues:

Whether petitioner Insular was acting as "facilitator" or "conduit" in the May 2, 1994 sales of the treasury bills;
Whether petitioner Insular may raise in this petition the issue of it being merely as "facilitator" or "conduit" after the
Trial Court and Court of Appeals found that petitioner Insular was not a "facilitator" or "conduit."
Whether respondents Plantersbank and Capital One were guilty of fraud in their transactions with petitioner Insular.
Whether petitioner Insular was entitled to actual and consequential damages. 23
The numerous issues can be simplified as follows:
(1) Whether IITC acted as a conduit in the transaction between COEC and PDB;
(2) Whether COEC can set-off its obligation to IITC as against the latters obligation to it; and
(3) Whether PDB has the obligation to deliver treasury bills to IITC.
THE COURTS RULING
The petition is partly meritorious.
Question of fact;
IITC did not act as conduit
Petitioner IITC insists that the issue of whether it acted as a conduit is a question of law which can properly be the
subject of a petition for review before this Court. Because the parties already entered into a stipulation of facts and
documents, the facts are no longer at issue; rather, the court must now determine the applicable law based on the
admitted facts, thereby making it a question of law. Even assuming that the determination of IITCs role in the two
transactions is a pure question of fact, it falls under the exceptions when the Court may decide to review a question
of fact.24
Respondent COEC, on the other hand, argues that IITC raises questions of fact. An issue is one of fact when: (a)
there is a doubt or difference as to the truth or falsehood of the alleged facts, (b) the issues raised invite a
calibration, assessment, re-examination and re-evaluation of the evidence presented, (c) it questions the probative
value of evidence presented or the proofs presented by one party are clear, convincing and adequate. Because the
question of whether IITC was merely a conduit satisfies all the conditions enumerated, then it is a question of fact
which this Court cannot pass upon. In addition, COEC calls attention to the principle that findings of fact of the trial
court, especially when approved by the Court of Appeals, are binding and conclusive on the Supreme Court. 25
PDB also maintains that the finding of the RTC that IITC did not act as a conduit between PDB and COEC was
supported by substantial evidence and was sustained by the CA. Thus, it is already binding and conclusive upon this
Court, whose jurisdiction is limited to reviewing only errors of law and not of fact. 26
Respondents are correct.
The issue raised by IITC is factual in nature as it requires the Court to delve into the records and review the
evidence presented by the parties to determine the validity of the findings of both the RTC and the CA as to IITCs
role in the transactions in question. These are purely factual issues which this Court cannot review. 27 Wellestablished is the principle that factual findings of the trial court, when adopted and confirmed by the Court of
Appeals, are binding and conclusive on this Court and will generally not be reviewed on appeal. 28
As discussed in The Insular Life Assurance Company, Ltd. v. Court of Appeals:29
It is a settled rule that in the exercise of the Supreme Courts power of review, the Court is not a trier of facts and
does not normally undertake the re-examination of the evidence presented by the contending parties during the
trial of the case considering that the findings of facts of the CA are conclusive and binding on the Court. However,
the Court had recognized several exceptions to this rule, to wit: (1) when the findings are grounded entirely on
speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3)
when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when
the findings of facts are conflicting; (6) when in making its findings the Court of Appeals went beyond the issues of
the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings
are contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence on which
they are based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not
disputed by the respondent; (10) when the findings of fact are premised on the supposed absence of evidence and
contradicted by the evidence on record; and (11) when the Court of Appeals manifestly overlooked certain relevant
facts not disputed by the parties, which, if properly considered, would justify a different conclusion. 30
Contrary to IITCs claim, the circumstances surrounding the case at bench do not justify the application of any of the
exceptions. At any rate, even if the Court would be willing to disregard this time-honored principle, the inevitable
conclusion would be the same as that made by the RTC and the CA that IITC did not act as a conduit but rather as
a principal in two separate transactions, one as the purchaser of treasury bills from PDB and, in another, as the
seller of treasury bills to COEC.
The evidence against IITC cannot be denied.
The confirmations of sale issued by IITC to COEC unmistakably show that the former, as principal, sold the treasury
bills to the latter:31
Gentlemen:
As principal, we confirm having sold to you on a without recourse basis the following securities against which
you shall pay us clearing funds on value date.
IITCs confirmations of purchase to PDB likewise reflect that it acted as the principal in the transaction: 32
Gentlemen:

As principal, we confirm having purchased from you on a without recourse basis the following securities against
which we shall pay you clearing funds on value date.
There is nothing in these documents which mentions that IITC merely acted as a conduit in the sale and purchase of
treasury bills between PDB and COEC. On the contrary, the confirmations of sale and of purchase all clearly and
expressly indicate that IITC acted as a principal seller to COEC and as a principal buyer from PDB.
IITC then tries to shift the blame to PDB and COEC by alleging that it was the two parties which conceptualized the
two-step or conduit transaction and dictated the documents to be used. As such, they cannot be allowed to "take
advantage of the ambiguity created by the documentation which it, in conspiracy with Plantersbank, concocted to
render IITC, an innocent party, liable."33
This argument is far-fetched and borders on the incredible. At the outset, it should be pointed out that there is no
ambiguity whatsoever in the language of the documents used. The confirmations of sale and purchase
unequivocally state that IITC acted as a principal buyer and seller of treasury bills. The language used is as clear as
day and cannot be more explicit. Thus, because the words of the documents in question are clear and readily
understandable by any ordinary reader, there is no need for the interpretation or construction thereof. 34 This was
emphasized in the case of Pichel v. Alonzo:35
Xxx. To begin with, We agree with petitioner that construction or interpretation of the document in question is not
called for. A perusal of the deed fails to disclose any ambiguity or obscurity in its provisions, nor is
there doubt as to the real intention of the contracting parties. The terms of the agreement are clear
and unequivocal, hence the literal and plain meaning thereof should be observed. Such is the mandate of
the Civil Code of the Philippines which provides that:
"Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the
literal meaning of its stipulation shall control"
Pursuant to the aforequoted legal provision, the first and fundamental duty of the courts is the
application of the contract according to its express terms, interpretation being resorted to only when
such literal application is impossible. 36 (Emphases supplied)
COEC and PDB did not take advantage of any vagueness in the documents in question. They only seek to enforce
the intention of the parties, in accordance with the terms of the confirmations of sale and purchase voluntarily
entered into by the parties.
The Court also finds it hard to believe that an entity would carelessly and imprudently expose itself to liability in the
amount of millions of pesos by failing to ensure that the documents used in the transaction would be a faithful
account of its true nature. It is important to note that the confirmations of sale were issued by IITC itself using its
own documents. Therefore, it defies imagination how COEC and PDB could have foisted off these forms on IITC
against its will.
In addition, a comparison of the confirmations of sale issued by IITC in favor of COEC as against the confirmations of
sale issued by PDB in favor of IITC indicates that there is a difference in the interest rates of the treasury bills and in
the face values:
PDB Confirmations of Sale to IITC37
Maturity Date

Yield

Face Value

Total Price

July 13, 1994

17.150%

P44,170,000.00

P42,998,169.00

July 6, 1994

17.150%

142,620,000.00

139,193,100.56

P186,790,000.00

P182,191,269.56

IITC Confirmations of Sale to COEC

38

Maturity Date

Yield

Face Value

Total Price

July 13, 1994

17.0%

P 44,161,700.44

P 43,000,000.00

July 6, 1994

17.0%

142,613,039.05

139,215,385.70

P186,774,739.49

P182,215,385.70

IITC offered a lower interest rate of 17% to COEC, in contrast to the 17.15% interest rate given to it by PDB. There is
also a notable difference in the face value of the treasury bills and in the total price paid for each set. If, as IITC
insists, it only acted as a conduit to the sale between PDB and COEC, then there should be no disparity in the terms
(the interest rate, the face value and the total price) of the sale of the treasury bills. Obviously, this is not the case.
The figures lead to no other conclusion but that there were two separate transactions in both of which IITC played a
principal role as a buyer from PDB of treasury bills with an aggregate face value of P186,790,000.00 at an interest
rate of 17.15% and as a seller to COEC of treasury bills with an aggregate face value of P186,774,739.49 at an
interest rate of 17%.
Again, IITC attempts to hold PDB and COEC responsible for this questionable variation, alleging that it was PDB and
COEC which dictated the details of the purchase and sale of the treasury bills. IITC heavily relies on the fact that
COEC directly paid PDB the amount of P182,191,269.26 representing the amount covered in the confirmations of
sale issued by PDB to strengthen its position that it merely acted as a conduit between PDB and COEC. 39 This was

further supported by the internal trading sheets of IITC where the following handwritten notations were made: (1) in
Purchase Trading Sheet No. 10856 covering the purchase of treasury bills by IITC from PDB: "dont prepare any
check; payment will come from Capital One (See STS 10811)", and (2) in Sale Trading Sheet No. 10811 covering the
sale of treasury bills by IITC to COEC: "for STS 10810 and 10811 will receive 2 checks payable to the ff: 1. Planters
Devt Bank - P182,191,269.59 2. IITC - 24,116.11"
The Court is not convinced. That COEC directly paid PDB is of no moment and does not necessarily mean that COEC
recognized IITCs conduit role in the transaction. Neither does it disprove the findings of both the RTC and the CA
that IITC acted as principal in the two transactions the purchase of treasury bills from PDB and the subsequent
sale thereof to COEC. The Court agrees with the explanation of the RTC:
The Court is aware that in the trading business, agreements are concluded even before the goods being traded are
received by the "would be seller." Buyers in turn conclude their transactions even before they are paid. For this
reason, the mere fact that in document for internal use, the instruction that "payment will come from Capital One"
will not, by itself, prove that plaintiff was a mere conduit. Neither could it be considered as circumstantial to
establish the fact in issue. At most, the instructions merely identified the source of funds but whether those funds
are to be received by the plaintiff as purchase price or for remittance to whoever is entitled to it, none was
indicated. The Court may look at the instruction differently if the entries were "no payment required; COEC to pay
PDB directly" or "this is a conduit transaction; servicing to be done by COEC" or "COEC to pay PDB directly." 40
IITC also insists that the fact that the P24,116.11 which it claims to be a facilitation fee is exactly the difference
between the principal amounts of the treasury bills purchased from PDB and the treasury bills sold to COEC
constitutes "the smoking gun or the veritable elephant in the living room." 41 To IITC, it is apparent that the amount is
a facilitation fee, adding credence to its contention that it only acted as a conduit.
The Court cannot sustain that view. There is nothing to prove that the amount of P24,116.11 received by IITC from
COEC was a facilitation fee. As explained by COEC, the amount could easily have been the margin or spread earned
by IITC in the buy-and-sell transaction.42 This is, however, not for the Court to determine. As such, the Court relies
on the findings of the RTC on this matter:
Plaintiffs other evidence to prove its conduit role was the delivery to it by COEC by way of its corporate check
ofP24,116.11 in payment of plaintiffs conduit fee. The Court is hesitant to give probative value to this proof
because nowhere does it appear in the trading sheets or any other document that it was collected by plaintiff and
received by it from COEC in that concept. Business practice is to issue an official receipt because it is an income,
but none was presented. The testimonial evidence was refuted. COEC presented controverting evidence on the
original mode of payment which was requested to be changed by witness Bombaes. COEC presented the unsigned
check and voucher. The latter was duly accomplished and bears the signatures or initials of the approving officers.
On this particular issue, COECs evidence deserves more weight. 43
Finally, as correctly observed by the RTC, the actions of IITC after the transaction were not those of a conduit but of
a principal:
The Court notes with particular interest the events which transpired on May 4, 1994, two (2) days after plaintiff
through witness Mendoza learned of the non-delivery by PDB of the treasury bills. Witness Mendoza went to the
office of PDB and secured the letter, Exhibit E, which contains the undertaking of PDB to deliver the treasury bills.
This was procured by plaintiff and addressed to the plaintiff. The language used by PDB was "purchase[d] from us"
and plaintiff accepted it.
Plaintiff failed to explain the reason for demanding delivery of the treasury bills when it was not the buyer as it so
claims. It also failed to object to the use by PDB of the words "purchase[d] from us," something which it could easily
do or should do considering the amount involved.
The conduct of the plaintiff after concluding the May 2, 1994 transaction [was] [that] of a buyer. 44
From the foregoing, it is clear that IITC acted as principal purchaser from PDB and principal seller to COEC, and not
simply as a conduit between PDB and COEC.
Set-off allowed
IITC argues that the RTC and the CA erred in holding that COEC can validly set off its claims for the undelivered IITC
T-Bills against the COEC T-Bills.45 IITC reiterates that COEC did not become a creditor of IITC because the former did
not pay the latter for the purchased treasury bills. Rather, it was PDB which received the proceeds of the payment
from COEC.46 In addition, their obligations do not consist of a sum or money. Neither are they of the same kind
because the obligations call for the delivery of specific determinate things treasury bills with specific maturity
dates and various interest rates. Thus, legal compensation cannot take place. 47
COEC, on the other hand, points out that it has already unquestionably proven that IITC acted as a principal, and
not as a conduit, in the sale of treasury bills to COEC.48 Furthermore, it asserts that the treasury bills in question are
generic in nature because the confirmations of sale and purchase do not mention specific treasury bills with serial
numbers.49 The securities were sold as indeterminate objects which have a monetary equivalent, as acknowledged
by the parties in the Tripartite Agreement.50 As such, because both IITC and COEC are principal creditors of the other
over debts which consist of consumable things or a sum of money, the RTC correctly ruled that COEC may validly
set-off its claims for undelivered treasury bills against that of IITCs claims. 51
The Court finds in favor of respondent COEC.
The applicable provisions of law are Articles 1278, 1279 and 1290 of the Civil Code of the Philippines:
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each
other.

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.
xxx
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.
Based on the foregoing, in order for compensation to be valid, the five requisites mentioned in the abovequoted
Article 1279 should be present, as in the case at bench. The lower courts have already determined, to which this
Court concurs, that IITC acted as a principal in the purchase of treasury bills from PDB and in the subsequent sale to
COEC of the COEC T-Bills. Thus, COEC and IITC are principal creditors of each other in relation to the sale of the
COEC T-Bills and IITC T-Bills, respectively.
IITC also claims that the COEC T-Bills cannot be set-off against the IITC T-Bills because the latter are specific
determinate things which consist of treasury bills with specific maturity dates and various interest rates. 52 IITCs
actions belie its own assertion. The fact that IITC accepted the assignment by COEC of Central Bank Bills with an
aggregate face value of P20,000,000.00 as payment of part of the IITC T-Bills is evidence of IITCs willingness to
accept other forms of security as satisfaction of COECs obligation. It should be noted that the second requisite only
requires that the thing be of the same kind and quality. The COEC T-Bills and the IITC T-Bills are both government
securities which, while having differing interest rates and dates of maturity, have each been assigned a certain face
value to determine their monetary equivalent. In fact, in the Tripartite Agreement, the COEC-IITC Agreement and in
the memoranda of the parties, the parties recognized the monetary value of the treasury bills in question, and, in
some instances, treated them as sums of money. 53 Thus, they are of the same kind and are capable of being subject
to compensation.
The third, fourth and fifth requirements are clearly present and are not denied by the parties. Both debts are due
and demandable because both remain unsatisfied, despite payment made by IITC for the IITC T-Bills and by COEC
for the COEC T-Bills. Moreover, COEC readily admits that it has an outstanding balance in favor of IITC. 54 Conversely,
IITC has been found by the lower courts to be liable, as principal seller, for the delivery of the COEC T-Bills. 55 The
debts are also liquidated because their existence and amount are determined. 56 Finally, there exists no retention or
controversy over the COEC T-Bills and the IITC T-Bills.
Because all the stipulations under Article 1279 are present in this case, compensation can take place. COEC is
allowed to set-off its obligation to deliver the IITC T-Bills against IITCs obligation to deliver the COEC T-Bills.
Correction of the amount due
Having established that compensation or set-off is allowed between COEC and IITC, the Court will now delve into the
proper amount of the award and the applicable interest rates.
The RTC, in its Judgment, ordered IITC to pay COEC the amount of P17,056,608 with interest at the rate of 6% per
annum until full payment. In arriving at the said amount, the trial court used, as its basis, COECs claim against IITC
for P186,790,000 worth of treasury bills less P50,000,000 which it received under the Tripartite Agreement. Then it
deducted from this the P139,633,392.00 face value of the undelivered treasury bills by COEC to IITC less
theP20,000,000 which COEC assigned to IITC pursuant to the COEC-IITC Agreement. 57
As correctly pointed out by COEC, there was a mistake in the arithmetic subtraction made by the RTC. Using the
figures provided by the lower court, the correct result should have been P17,156,608.00, P100,000.00 more than
what was adjudged in favor of COEC. To illustrate:
The trial courts computation
COECs counterclaim against IITC

P186,790,000.00

Amount assigned by IITC to COEC

(50,000,000.00)

Subtotal

P136,790,000.00

IITCs claim against COEC

P139,633,392.00

Amount reassigned by COEC to IITC

(20,000,000.00)

Subtotal

P119,633,392.00

TOTAL

P17,156,608.00

Aside from the error in the RTCs mathematical computation, a review of the records, particularly the March 20,
1995 Amended Complaint filed by IITC, the April 10, 1995 Answer to Amended Complaint (With Counterclaim) filed

by COEC and the September 2, 1999 Partial Stipulation of Facts and Documents submitted by IITC, COEC and PDB to
the trial court, reveals that there was some confusion as to the correct basis to be used for calculating the amount
due to COEC. In COECs Answer and in the Partial Stipulation, it explicitly stated that it purchased from IITC treasury
bills with a face value of P186,774,739.49, as evidenced by the Confirmations of Sale issued by IITC. If this figure is
used in computing COECs award, the resulting amount would be P17,141,347.49, which is consistent with COECs
counterclaim.
The revised computation
COECs counterclaim against IITC

P186,774,739.49

Amount assigned by IITC to COEC

(50,000,000.00)

Subtotal

P136,774,739.49

IITCs claim against COEC

P139,633,392.00

Amount reassigned by COEC to IITC

(20,000,000.00)

Subtotal

P119,633,392.00

TOTAL

P17,141,347.49

Lastly, as regards the legal interest which should be imposed on the award, the Court directs the attention of the
parties to the case of Eastern Shipping Lines v. Court of Appeals,58
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit. 59 (Emphases supplied)
Because the obligation arose from a contract of sale and purchase of government securities, and not from a loan or
forbearance of money, the applicable interest rate is 6% from June 10, 1994, when IITC received the demand letter
from COEC.60 After the judgment becomes final and executory, the legal interest rate increases to 12% until the
obligation is satisfied.
In sum, the Court finds that after compensation is effected, IITC still owes COEC P17,141,347.49 worth of treasury
bills, subject to the interest rate of 6% per annum from June 10, 1994, then subsequently to the increased interest
rate of 12% from the date of finality of this decision until full payment.
PDB has an obligation to deliver
the treasury bills to IITC
The CA, in absolving PDB from all liability, reasoned that: (1) PDB was not involved in the transactions for the
purchase and sale of treasury bills between IITC and COEC; (2) IITC failed to allege in its Amended Complaint and
prove during the trial that PDB directly and principally sold to IITC P186,790,000 worth of treasury bills; (3) while
PDB undertook, in its May 4, 1994 letter to deliver to IITC the said treasury bills, the obligation did not ripen
because the bills did not become available to PDB and IITC did not remit any payment to PDB; (4) IITC did not
demand delivery of the treasury bills; (5) IITC merely sued PDB as an alternative defendant, implying that IITC did
not have a principal and direct cause of action against PDB on the treasury bills; and (6) there was nothing in the
records to support the trial courts finding that PDB owed IITC P186,790,000 worth of treasury bills.61
PDB essentially echoes the reasons set forth by the CA and reiterated that because IITC did not pay for the treasury
bills subject of its (PDB) May 4 undertaking, then IITC had no right to demand delivery of the said securities from
PDB. Moreover, the check payments made by COEC to PDB were not in payment of the treasury bills purchased by
IITC from PDB, but for COECs other obligations with PDB. The total amount of the checks P182,191,269.26 did not
correspond to the treasury bills worth P186,790,000 which COEC allegedly purchased from PDB with IITC acting as
conduit. PDB also points out that COEC did not interpose a cross-claim against it precisely because COEC was aware
that it had no claim against PDB.62 Also, the checks clearly indicated that they were made in payment for the
account of COEC.63

IITC insists that it alleged in its Amended Complaint (by way of alternative cause of action) that PDB directly and
principally sold to IITC treasury bills worth P186,790,000.00. By suing PDB as an alternative defendant, IITC did not
acknowledge that PDB could not be held principally liable. On the contrary, by bringing suit against PDB under an
alternative cause of action, IITC set forth a claim against PDB as the principal seller of the treasury bills. In addition,
IITC categorically refuted PDBs allegation that the former did not pay for the treasury bills purchased from the
latter. The judicial admissions of PDB during the course of the trial and in the Partial Stipulation, that PDB received
the proceeds of the managers checks issued by COEC as payment for COECs purchase of treasury bills from IITC,
contradict PDBs defense that no payment was made by IITC for the said treasury bills. Payment by COEC to PDB,
upon IITCs instructions, should be treated as a payment by a third person with the knowledge of the debtor, under
Article 1236 of the Civil Code. Thus, when PDB accepted COECs checks, it became duty bound to deliver the
treasury bills sold to IITC as the principal buyer. 64
Lastly, IITC points out the absurdity of the CA decision in allowing COEC to offset its liability to IITC against its
liability to deliver the treasury bills purchased by COEC. The parties do not deny that COEC paid for the purchase
price of the subject treasury bills by issuing managers checks in the name of PDB and IITC. As such, unless COECs
payment to PDB is credited as payment by IITC to PDB for the securities purchased by IITC, under that theory that
IITC acted as a principal buyer, there would be no obligation on the part of IITC against which a set-off can be
effected by COEC.65
On this point, the Court agrees with IITC.
First, while it is true that PDB was not involved in the sale of the COEC T-Bills, it is irrelevant to the issue because it
is IITC which interposed a claim, albeit an alternative one, against PDB for having sold to IITC treasury bills
worthP186,790,000.00. This was alleged in IITCs Amended Complaint and was deemed by the RTC to have been
successfully proven.66 The findings of the RTC are supported by the confirmations of sale issued by PDB in favor of
IITC and PDBs letter dated May 4, 1994 undertaking to deliver the treasury bills worth P186,790,000.00 to
IITC.67The due execution and the veracity of the contents of the aforesaid documents have been admitted by the
parties.68
Second, it is erroneous to say that IITC never made any demand upon PDB. IITCs letter dated May 18, 1994
addressed to PDB confirms that it demanded delivery by PDB of the treasury bills covered by the confirmations of
sale issued by PDB in its favor. Although the demand was made on behalf of COEC, which allegedly purchased the
treasury bills from PDB, consistent with IITCs assertion that it only facilitated the sale, it was nevertheless a
demand for delivery. Even if this were to be considered an invalid demand because it was not made by IITC as the
principal party to the transaction with PDB, the filing of the Amended Complaint by IITC is equivalent to demand, in
keeping with the rule that the filing of a complaint constitutes judicial demand. 69
Third, the CA ruling that IITC impliedly did not have a principal cause of action because it merely sued PDB as an
alternative defendant is an extremely flawed and baseless supposition which runs counter to established law and
jurisprudence. The filing of a suit against an alternative defendant and under an alternative cause of action should
not be taken against IITC. Section 13, Rule 3 and Section 2, Rule 8 of the Rules of Civil Procedure explicitly allows
such filing:
Rule 13, Section 13: Alternative defendants. Where the plaintiff is uncertain against who of several persons he is
entitled to relief, he may join any or all of them as defendants in the alternative, although a right to relief against
one may be inconsistent with a right of relief against the other. (13a)
Rule 8, Section 2: Alternative causes of action or defenses. A party may set forth two or more statements of a
claim or defense alternatively or hypothetically, either in one cause of action or defense or in separate causes of
action or defenses. When two or more statements are made in the alternative and one of them if made
independently would be sufficient, the pleading is not made insufficient by the insufficiency of one or more of the
alternative statements.
As discussed earlier, the Court is not granting IITCs primary cause of action against COEC because IITC acted, not
as a mere conduit for the sale of shares by PDB to COEC as alleged by IITC, but rather as a principal purchaser of
securities from PDB and then later as a principal seller to COEC. By reason of this determination, COEC is allowed to
offset its outstanding obligation to deliver the remaining IITC T-Bills against the latters obligation to deliver the
COEC T-Bills. Consequently, IITCs alternative action against the alternative defendant PDB should be considered in
order for IITC to be able to recover from PDB the P186,790,000.00 worth of treasury bills which had already been
fully paid for.
To ascertain whether IITC was able to adequately state an alternative cause of action against PDB in its Amended
Complaint, the Court refers to Perpetual Savings Bank v. Fajardo70 where the test for determining the existence of a
cause of action was extensively discussed:
The familiar test for determining whether a complaint did or did not state a cause of action against the
defendants is whether or not, admitting hypothetically the truth of the allegations of fact made in the
complaint, a judge may validly grant the relief demanded in the complaint. InRava Development
Corporation v. Court of Appeals, the Court elaborated on this established standard in the following manner:
"The rule is that a defendant moving to dismiss a complaint on the ground of lack of cause of action is regarded as
having hypothetically admitted all the averments thereof. The test of the sufficiency of the facts found in a petition
as constituting a cause of action is whether or not, admitting the facts alleged, the court can render a valid
judgment upon the same in accordance with the prayer thereof (Consolidated Bank and Trust Corp. v. Court of
Appeals, 197 SCRA 663 [1991]).1wphi1
In determining the existence of a cause of action, only the statements in the complaint may properly
be considered. It is error for the court to take cognizance of external facts or hold preliminary hearings to

determine their existence. If the allegation in a complaint furnish sufficient basis by which the complaint may be
maintained, the same should not be dismissed regardless of the defenses that may be assessed by the defendants
(supra).
A careful review of the records of this case reveals that the allegations set forth in the complaint sufficiently
establish a cause of action. The following are the requisites for the existence of a cause of action: (1) a
right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an
obligation on the part of the named defendant to respect, or not to violate such right; and (3) an act
or omission on the part of the said defendants constituting a violation of the plaintiff's right or a
breach of the obligation of the defendant to the plaintiff (Heirs of Ildefonso Coscolluela, Sr., Inc. v. Rico
General Insurance Corporation, 179 SCRA 511 [1989])."71(Emphases supplied)
Following the disquisition above, IITCs Amended Complaint, while not a model of superb draftsmanship in its
struggle to maintain IITCs conduit theory, adequately sets forth a cause of action against PDB. Under its claim
against PDB as alternative defendant, IITC alleged that, even if it acted as a direct buyer from PDB, (1) IITC is
entitled to the delivery of the treasury bills worth P186,790,000.00 covered by the confirmations of sale issued by
PDB, (2) PDB has an obligation to deliver the same to IITC, and (3) PDB failed to deliver the said securities to IITC. 72
It would be the height of injustice to hold IITC accountable for the delivery of the COEC T-Bills to COEC without
similarly holding PDB liable for the release of the treasury bills worth P186,790,000.00 to IITC, which cannot be
accomplished without allowing IITCs alternative cause of action against PDB to prosper.
The Court now tackles the main argument of PDB for sustaining the ruling of the CA absolving it from liability that
IITC allegedly failed to make the required payment for the purchase. PDB claims that the managers checks which it
received from COEC were payment by the latter for its other obligations to the former. Conspicuously, PDB failed to
elaborate on the supposed obligations of COEC.
This flimsy allegation is patently untrue. In its Memorandum,73 COEC denied that the checks were payment for an
account which it had with PDB, as PDB so desperately alleges. COEC clarified that the managers checks payable to
PDB were issued by COEC upon the instructions of IITC in payment for the COEC T-Bills. PDBs theory was negated
by COEC itself as the issuer of the checks. Moreover, PDB already judicially admitted, through the Partial Stipulation,
that the checks were given by COEC as payment for the COEC T-Bills. Section 4, Rule 129 of the Revised Rules of
Evidence provides that:
Sec. 4. Judicial admissions. An admission, verbal or written, made by a party in the course of the proceedings in
the same case, does not require proof. The admission may be contradicted only by showing that it was made
through palpable mistake or that no such admission was made.
As such, PDB cannot now gainsay itself by claiming that the checks were payment by COEC for certain unidentified
obligations to PDB. "It is well-settled that judicial admissions cannot be contradicted by the admitter who is the
party himself and binds the person who makes the same, and absent any showing that this was made thru palpable
mistake, no amount of rationalization can offset it."74
Since it has been sufficiently established that it was IITC which instructed that payment be made to PDB, it is
apparent that the said checks were delivered to PDB in consideration of a transaction between PDB and IITC. On
May 2, 1994, the same date the checks were issued, IITC purchased treasury bills with a combined face value
ofP186,790,000.00 from PDB for the total price of P182,191,269.56. The Court notes that the P182,191,269.26
aggregate amount of the checks issued by COEC to PDB is almost exactly equal to the total price of the treasury
bills which IITC purchased from PDB.75 The payment by COEC on behalf of IITC can be considered as payment made
by a third-party to the transaction between IITC and PDB which is allowed under Article 1236 of the Civil Code of the
Philippines.76
The Court finds no logical reason either for PDB to execute the May 4, 1994 Letter to IITC undertaking to deliver
treasury bills worth P186,790,000.00 if it had not received the payment from IITC. Especially so because there is
nothing in the letter to indicate that PDB was still awaiting payment for the said securities. There is no other
reasonable conclusion but that PDB received payment, in the form of three managers checks issued by COEC, for
the treasury bills purchased by IITC, and that having failed to promptly deliver the treasury bills despite having
encashed the checks, PDB then executed the foregoing letter of undertaking.
Also telling is PDBs participation in the Tripartite Agreement with IITC and COEC where it assigned P50,000,000
worth of Central Bank Bills to IITC, in consideration of which, IITC relinquished its right to claim delivery under the
confirmations of sale issued by PDB to the extent of P50,000,000. While the agreement stipulated that it was not in
any way an admission of any liability by any one of them against another, the fact that PDB agreed to execute such
an agreement is indicative of the existence of its obligation to IITC. In its Answer Ad Cautelam filed before the RTC,
PDB explained that it gave up P50,000,000 worth of Central Bank Bills simply to assist COEC and IITC meet their
financial difficulties. The Court finds this allegation highly inconceivable, preposterous and even ludicrous because
no company in its right mind would willingly part with such a huge amount of bank bills for no consideration
whatsoever except for solely altruistic reasons.
Finally, PDBs argument that it had no obligation to deliver the treasury bills purchased by IITC because the same
did not become available to PDB is evidently a frantic last ditch attempt to evade liability. That the subject
securities did not become available to PDB should not be the concern of IITC. For as long as payment was made,
PDB was obliged to deliver the securities subject of its confirmations of sale.
PDBs adroit maneuvering coupled with IITCs poorly conceived conduit theory led the CA to reach an erroneous
conclusion. This Court, however, will not be similarly blinded. There is simply an incongruity in the CA decision.
Accordingly, this Court rules that PDB should be liable for the delivery of P186,790,000.00 worth of treasury bills to

IITC, or payment of the same, reduced by P50,000,000.00 which the former assigned to the latter under the
Tripartite Agreement. The total liability of PDB is P136,790,000.00, computed as follows:
PDBs Liability
Amount of treasury bills purchased by IITC

P186,790,000.00

Amount assigned by PDB to IITC

50,000,000.00

TOTAL

P136,790,000.00

This shall be subject to interest at the rate of 6% per annum from the date of the filing of the Amended Complaint
on March 21, 1995, considered as the date of judicial demand, then to 12% per annum from the date of finality of
this decision until full payment.
To rule otherwise would be to allow unjust enrichment on the part of PDB to the detriment of IITC. Article 22 of the
Civil Code of the Philippines provides that:
Art. 22. Every person who through an act of performance by another, or any other means, acquires or comes into
possession of something at the expense of the latter without just or legal ground, shall return the same to him.
In the recent case of Flores v. Spouses Lindo,77 this Court expounded on the subject matter:
There is unjust enrichment "when a person unjustly retains a benefit to the loss of another, or when a person
retains money or property of another against the fundamental principles of justice, equity and good conscience."
The principle of unjust enrichment requires two conditions: (1) that a person is benefited without a valid basis or
justification, and (2) that such benefit is derived at the expense of another.
The main objective of the principle against unjust enrichment is to prevent one from enriching himself at the
expense of another without just cause or consideration. 78
The Court cannot condone a decision which is manifestly partial. Neither shall the Court be a party to the
perpetration of injustice. As the last bastion of justice, this Court shall always rule pursuant to the precepts of
fairness and equity in order to dispel any doubt in the integrity and competence of the Judiciary.
WHEREFORE, the petition is PARTIALLY GRANTED. The June 6, 2008 Decision of the Court of Appeals in C.A.-G.R. CV
No. 79320 is SET ASIDE. Accordingly, the June 16, 2003 RTC Decision is REINSTATED thoughMODIFIED to read as
follows:
FOR THE REASONS GIVEN, judgment is hereby rendered a] ordering Planters Development Bank to pay plaintiff P 136,790,000.00 with interest at the rate of six
(6%) percent per annum from March 21, 1995 until full payment;
b] ordering Insular and Trust Investment Corporation to pay Capital One Equities
Corporation P17,156,608.00 with legal interest at the rate of six (6%) percent per annum from June 10,
1994 until full payment; and
c] dismissing the counterclaim of Planters Development Bank.
Any amount not paid upon the finality of this decision shall be subject to interest at the increased rate of twelve
(12%) percent per annum reckoned from the date of finality of this decision until full payment thereof.
No pronouncement as to costs.
SO ORDERED.
FIRST UNITED CONSTRUCTORS CORPORATION AND BLUE STAR CONSTRUCTION
CORPORATION,Petitioners, v. BAYANIHAN AUTOMOTIVE CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
This case concerns the applicability of the legal principles of recoupment and compensation.
The Case
Under review is the decision promulgated on July 26, 2004,1 whereby the Court of Appeals (CA) affirmed the
judgment rendered on May 14, 1996 by the Regional Trial Court, Branch 107, in Quezon City adjudging the
petitioners (defendants) liable to pay to the respondent (plaintiff) various sums of money and damages. 2
Antecedents
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, to wit:
UNIT

TO WHOM DELIVERED

DATE OF DELIVERY

Isuzu Dump Truck

FUCC

27 May 1992

Isuzu Dump Truck

FUCC

27 May 1992

Isuzu Dump Truck

FUCC

10 June 1992

Isuzu Dump Truck

FUCC

18 June 1992

Isuzu Dump Truck

Blue Star

4 July 1992

Isuzu Cargo Truck

FUCC

8 July 1992

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 latters
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, as follows:
BANK/CHECK NO.

DATE

AMOUNT

Pilipinas Bank 18027379

23 November 1992

P360,000.00

Pilipinas Bank 18027384

1 December 1992

P375,000.00

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.
Due to the refusal to pay, the respondent commenced this action for collection on April 29, 1993, seeking payment
of the unpaid balance in the amount of P735,000.00 represented by the two checks.
In their answer, the petitioners averred that they had stopped the payment on the two checks worth P735,000.00
because of the respondents refusal to repair the second dump truck; and that they had informed the respondent of
the defects in that unit but the respondent had refused to comply with its warranty, compelling them to incur
expenses for the repair and spare parts. They prayed that the respondent return the price of the defective dump
truck worth P830,000.00 minus the amounts of their two checks worth P735,000.00, with 12% per annum interest
on the difference of P90,000.00 from May 1993 until the same is fully paid; that the respondent should also
reimburse them the sum of P247,950.00 as their expenses for the repair of the dump truck, with 12% per
annum interest from December 16, 1992, the date of demand, until fully paid; and that the respondent pay
exemplary damages as determined to be just and reasonable but not less than P500,000, and attorneys fees of
P50,000 plus P1,000.00 per court appearance and other litigation expenses.
It was the position of the respondent that the petitioners were not legally justified in withholding payment of the
unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer due the alleged defects in
second dump truck because the purchase of the two units was an entirely different transaction from the sale of the
dump trucks, the warranties for which having long expired.
Judgment of the RTC
On May 14, 1996, the RTC rendered its judgment,3 finding the petitioners liable to pay for the unpaid balance of the
purchase price of the Hino Prime Mover and the Isuzu Transit Mixer totaling P735,000.00 with legal interest and
attorneys fees; and declaring the respondent liable to pay to the petitioners the sum of P71,350.00 as costs of the
repairs incurred by the petitioners. The RTC held that the petitioners could not avail themselves of legal
compensation because the claims they had set up in the counterclaim were not liquidated and demandable.
The fallo of the judgment states:
WHEREFORE, judgment is hereby rendered:
1. Ordering defendants, jointly and severally to pay plaintiff the sum of P360,000.00 and
P375,000.00 with interest at the legal rate of 12% per annum computed from February 11, 1993,
which is the date of the first extrajudicial demand, until fully paid;
2. Ordering the defendants, jointly and severally, to pay plaintiff the sum equivalent to 10% of the
principal amount due, for attorneys fees;
3.

On the counterclaim, ordering plaintiff to pay defendants the sum of P71,350.00 with interest at
the legal rate of 12% per annum computed from the date of this decision until fully paid;

4.

Ordering plaintiff to pay the defendants attorneys fees equivalent to 10% of the amount due;

5.

No pronouncement as to costs.

SO ORDERED.4
Decision of the CA

The petitioners appealed, stating that they could justifiably stop the payment of the checks in the exercise of their
right of recoupment because of the respondents refusal to settle their claim for breach of warranty as to the
purchase of the second dump truck.
In its decision promulgated on July 26, 2004, 5 however, the CA affirmed the judgment of the RTC. It held that the
remedy of recoupment could not be properly invoked by the petitioners because the transactions were different;
that the expenses incurred for the repair and spare parts of the second dump truck were not a proper subject of
recoupment because they did not arise out of the purchase of the Hino Prime Mover and the Isuzu Transit Mixer; and
that the petitioners claim could not also be the subject of legal compensation or set-off, because the debts in a setoff should be liquidated and demandable.
Issues
The petitioners are now before the Court asserting in their petition for review on certiorari that the CA erred in:
I
x xx NOT UPHOLDING THE RIGHT OF PETITIONER[S] TO RECOUPMENT UNDER PAR. (1) OF ART. 1599 OF THE CIVIL
CODE, WHICH PROVIDES [FOR] THE RIGHTS AND REMEDIES AVAILABLE TO A BUYER AGAINST A SELLERS BREACH
OF WARRANTY.
II
x xx RULING THAT PETITIONERS CANNOT AVAIL OF COMPENSATION ALLEGEDLY BECAUSE THEIR CLAIMS AGAINST
RESPONDENT ARE NOT LIQUIDATED AND DEMANDABLE.
III
x xx NOT HOLDING RESPONDENT LIABLE TO PETITIONERS FOR LEGAL INTEREST COMPUTED FROM THE FIRST
EXTRAJUDICIAL DEMAND, AND FOR ACTUAL EXEMPLARY DAMAGES. 6
The petitioners submit that they were justified in stopping the payment of the two checks due to the respondents
breach of warranty by refusing to repair or replace the defective second dump truck earlier purchased; that the
withholding of payments was an effective exercise of their right of recoupment as allowed by Article 1599(1) of
the Civil Code; due to the sellers breach of warranty that the CAs interpretation (that recoupment in diminution or
extinction of price in case of breach of warranty by the seller should refer to the reduction or extinction of the price
of the same item or unit sold and not to a different transaction or contract of sale) was not supported by
jurisprudence; that recoupment should not be restrictively interpreted but should include the concept of
compensation or set-off between two parties who had claims arising from different transactions; and that the series
of purchases and the obligations arising therefrom, being inter-related, could be considered as a single and ongoing
transaction for all intents and purposes.
The respondent counters that the petitioners could not refuse to pay the balance of the purchase price of the Hino
Prime Mover and the Isuzu Transit Mixer on the basis of the right of recoupment under Article 1599 of the Civil
Code; that the buyers remedy of recoupment related only to the same transaction; and that compensation was not
proper because the claims of the petitioners as alleged in their counterclaim were not liquidated and demandable.
There is no longer any question that the petitioners were liable to the respondent for the unpaid balance of the
purchase price of the Hino Prime Mover and the Isuzu Transit Mixer. What remain to be resolved are strictly legal,
namely: one, whether or not the petitioners validly exercised the right of recoupment through the withholding of
payment of the unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer; and, two,
whether or not the costs of the repairs and spare parts for the second dump truck delivered to FUCC on May 27,
1992 could be offset for the petitioners obligations to the respondent.
Ruling
We affirm the decision of the CA with modification.
1.
Petitioners could not validly resort to recoupment against respondent
Recoupment (reconvencion) is the act of rebating or recouping a part of a claim upon which one is sued by means
of a legal or equitable right resulting from a counterclaim arising out of the same transaction. 7 It is the setting up of
a demand arising from the same transaction as the plaintiffs claim, to abate or reduce that claim.
The legal basis for recoupment by the buyer is the first paragraph of Article 1599 of the Civil Code, viz:
Article 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:
(1) Accept or keep the goods and set up against the seller, the breach of warranty by way of
recoupment in diminution or extinction of the price;
(2) Accept or keep the goods and maintain an action against the seller for damages for the breach of warranty;
(3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of warranty;
(4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been received, return
them or offer to return them to the seller and recover the price or any part thereof which has been paid.
When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can thereafter
be granted, without prejudice to the provisions of the second paragraph of article 1191. (Emphasis supplied)
x xxx
In its decision, the CA applied the first paragraph of Article 1599 of the Civil Code to this case, explaining thusly:
Paragraph (1) of Article 1599 of the Civil Code which provides for the remedy of recoupment in diminution or
extinction of price in case of breach of warranty by the seller should therefore be interpreted as referring to the

reduction or extinction of the price of the same item or unit sold and not to a different transaction or contract of
sale. This is more logical interpretation of the said article considering that it talks of breach of warranty with respect
to a particular item sold by the seller. Necessarily, therefore, the buyers remedy should relate to the same
transaction and not to another.
Defendants-appellants act of ordering the payment on the prime mover and transit mixer stopped was improper
considering that the said sale was a different contract from that of the dump trucks earlier purchased by
defendants-appellants.
The claim of defendants-appellants for breach of warranty, i.e. the expenses paid for the repair and spare parts of
dump truck no. 2 is therefore not a proper subject of recoupment since it does not arise out of the contract or
transaction sued on or the claim of plaintiff-appellee for unpaid balances on the last two (2) purchases, i. e. the
prime mover and the transit mixer.8
The CA was correct. It was improper for petitioners to set up their claim for repair expenses and other spare parts of
the dump truck against their remaining balance on the price of the prime mover and the transit mixer they owed to
respondent. Recoupment must arise out of the contract or transaction upon which the plaintiffs claim is
founded.9 To be entitled to recoupment, therefore, the claim must arise from the same transaction, i.e., the
purchase of the prime mover and the transit mixer and not to a previous contract involving the purchase of the
dump truck. That there was a series of purchases made by petitioners could not be considered as a single
transaction, for the records show that the earlier purchase of the six dump trucks was a separate and distinct
transaction from the subsequent purchase of the Hino Prime Mover and the Isuzu Transit Mixer. Consequently, the
breakdown of one of the dump trucks did not grant to petitioners the right to stop and withhold payment of their
remaining balance on the last two purchases.
2.
Legal compensation was permissible
Legal compensation takes place when the requirements set forth in Article 1278 and Article 1279 of theCivil
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.
As to whether petitioners could avail themselves of compensation, both the RTC and CA ruled that they could not
because the claims of petitioners against respondent were not liquidated and demandable.
The Court cannot uphold the CA and the RTC.
The RTC already found that petitioners were entitled to the amount of P71,350.00 stated in their counterclaim, and
the CA concurred in the finding, stating thusly:
It is noteworthy that in the letter of December 16, 1992 (Exh. 1) defendants were charging plaintiff only for the
following items of repair:
1. Cost of repair and spare parts 2. Cost of repair and spare parts -

P46,800.00
24,550.00
P71,350.00

Said amounts may be considered to have been spent for repairs covered by the warranty period of three (3)
months. While the invoices (Exhs. 2-B and 3-A) dated September 26, 1992 and September 18, 1992, this delay
in repairs is attributable to the fact that when defects were brought to the attention of the plaintiff in the letter of
August 14, 1992 (Exh. 8) which was within the warranty period, the plaintiff did not respond with the required
repairs and actual repairs were undertaken by defendants. Thereafter, the spare parts covered by Exhibits 2-B
and 3-A pertain to the engine, which was covered by the warranty.
x xx. Defendants in their letter of August 14, 1992 (Exhb. 8) demanded correction of defects. In their letter of
August 22, 1992 (Exh. 9) they demanded replacement. In their letter of August 27, 1992 (Exh. 10), they
demanded replacement/repair. In September, 1992, they undertook repairs themselves (Exhs. 2-B and 3-A)
and demanded payment for the expenses in their letter of December 16, 1992 (Exh. 1). All other items of
expenses connected with subsequent breakdowns are no longer chargeable to plaintiff which granted only a 3month warranty. x x x10
Considering that preponderant evidence showing that petitioners had spent the amount of P71,350.00 for the
repairs and spare parts of the second dump truck within the warranty period of three months supported the finding
of the two lower courts, the Court accepts their finding. Verily, factual findings of the trial court, when affirmed by
the CA, are conclusive on the Court when supported by the evidence on record. 11

A debt is liquidated when its existence and amount are determined. 12 Accordingly, an unliquidated claim set up as a
counterclaim by a defendant can be set off against the plaintiffs claim from the moment it is liquidated by
judgment.13 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 P71,350.00 should be set off against petitioners unpaid obligation of P735,000.00,
leaving a balance of P663,650.00, the amount petitioners still owed to respondent.
We deem it necessary to modify the interest rate imposed by the trial and appellate courts. The legal interest rate
to be imposed from February 11, 1993, the time of the extrajudicial demand by respondent, should be 6% per
annum in the absence of any stipulation in writing in accordance with Article 2209 of theCivil Code, which provides:
Article 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the
indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.
WHEREFORE, the Court AFFIRMS the decision promulgated on July 26, 2004 in all respects subject to
the MODIFICATION that petitioners are ordered, jointly and severally, to pay to respondent the sum of
P663,650.00, plus interest of 6% per annum computed from February 11, 1993, the date of the first extrajudicial
demand, until fully paid; and ORDERS the petitioners to pay the costs of suit.
SO ORDERED.