TITLE FACTS ISSUE HELD DOCTRINE

UNION BANK VS Foodmasters, Inc. (FI) had outstanding loan obligations to W/N the CA correctly upheld YES! NO LEGAL COMPENSATION! Compensation is defined as a mode
DBP both Union Banks predecessor-in-interest, Bancom the denial of Union Banks of extinguishing obligations whereby
Development Corporation (Bancom), and to Development motion to affirm legal - Compensation is defined as a mode of extinguishing two persons in their capacity as
LEGAL Bank of the Philippines (DBP). compensation obligations whereby two persons in their capacity as principals are mutual debtors and
COMPENSATION FI and DBP entered into a Deed of Cession of Property In principals are mutual debtors and creditors of each other creditors of each other with respect to
Payment of Debt (dacion en pago) whereby the former ceded (IN SHORT, W/N there is with respect to equally liquidated and demandable equally liquidated and demandable
REQUISITE 3 & 4 = X in favor of the latter certain properties (including a processing legal compensation) obligations to which no retention or controversy has obligations to which no retention or
PRESENT = NO plant) in consideration of the following: been timely commenced and communicated by third controversy has been timely
LEGAL (a) The full and complete satisfaction of FIs loan parties. commenced and communicated by
COMPENSATION obligations to DBP; and - The requisites therefor are provided under Article 1279 third parties
(b) The direct assumption by DBP of FIs obligations to of the Civil Code which reads as follows:
NOTE: Yung naka- Bancom in the amount of P17,000,000.00 (Assumed o Art. 1279. In order that compensation may be Requisites of compensation
italicize di masyado Obligations). proper, it is necessary: (1) That each one of the obligors
impt na yun pero just (1) That each one of the obligors be bound be bound principally, and that
in case gusto nyo principally, and that he be at the same he be at the same time a
malaman nangyari DBP, as the new owner of the processing plant, leased time a principal creditor of the other; principal creditor of the other;
back for 20 years the said property to FI (Lease Agreement) (2) That both debts consist in a sum of (2) That both debts consist in a
which was, in turn, obliged to pay monthly rentals to be shared money, or if the things due are sum of money, or if the things
by DBP and Bancom. consumable, they be of the same kind, due are consumable, they be of
and also of the same quality if the latter the same kind, and also of the
has been stated; same quality if the latter has
DBP also entered into a separate agreement with Bancom (3) That the two debts be due; been stated;
(Assumption Agreement) whereby the former: (4) That they be liquidated and (3) That the two debts be due;
demandable; (4) That they be liquidated and
(5) That over neither of them there be any demandable;
(a) Confirmed its assumption of FIs obligations to retention or controversy, commenced (5) That over neither of them there
Bancom; and by third persons and communicated in be any retention or controversy,
due time to the debtor. commenced by third persons
- The rule on legal compensation is stated in Article 1290 and communicated in due time
(b) Undertook to remit up to 30% of any and all rentals
of the Civil Code which provides that "when all the to the debtor.
due from FI to Bancom which would serve as payment of
requisites mentioned in Article 1279 are present,
the assumed obligations, to be paid in monthly
installments. 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
On May 23, 1979, FI assigned its leasehold rights under the compensation."
Lease Agreement to Foodmasters Worldwide, Inc. (FW) - Therefore, compensation could not have taken place
between these debts for the apparent reason that
requisites 3 and 4 under Article 1279 of the Civil
On May 9, 1984, Bancom conveyed all its receivables, Code are not present.
including DBPs assumed obligations, to Union Bank. - 3rd requisite not present - Since DBPs assumed
obligations to Union Bank for remittance of the lease
payments are in the Courts words "contingent on
Claiming that the subject rentals have not been duly remitted the prior payment thereof by FW to DBP," it cannot be
despite its repeated demands, Union Bank filed a collection said that both debts are due.
case against DBP before the RTC. - 4th requisite not present - Also, the Court observed that
any deficiency that DBP had to make up for the full
satisfaction of the assumed obligations "cannot be
DBP countered that the obligations it assumed were payable determined until after the satisfaction of FWs obligation
only out of the rental payments made by FI. Since, FI had yet to DBP." In this regard, it cannot be concluded that the
to pay the same, DBPs obligation to Union Bank had not same debt had already been liquidated, and thereby
arisen. became demandable
- Thus, CA correctly upheld the denial of Union Banks
motion to affirm legal compensation
 RTC: Finding the complaint to be meritorious, RTC ordered:

(a) DBP to pay Union Bank the sum of P4,019,033.59,

representing the amount of the subject rentals (which
constitutes 30% of FIs [now FWs] total rental debt),
including interest until fully paid; and

(b) FW, as third-party defendant, to indemnify DBP, as

third- party plaintiff, for its payments of the subject
rentals to Union Bank.

RTC ruled that when DBP failed to remit the subject rentals to
Union Bank, it defaulted on its assumed obligations.

CA: On May 27, 1994, CA Set aside the RTCs ruling, and
consequently ordered:

(a) FW to pay DBP the amount of P32,441,401.85

representing the total rental debt incurred under
the Lease Agreement, and

(b) DBP, after having been paid by FW its unpaid

rentals, to remit 30% thereof to Union Bank.

CA ruled that DBP did not default in its obligations to remit the
subject rentals to Union Bank precisely because it had yet to
receive the rental payments of FW.

Union Bank and DBP filed separate petitions for review on

certiorari before the Supreme Court.

SC: Denied both petitions in a Resolution.

On May 16, 2001, Union Bank filed a motion for

execution before the RTC, DBP opposed Union Banks
motion.

On September 12, 2001, DBP filed its own motion for

execution against FW.

RTC: Granted both motions for execution

DBP filed a motion for reconsideration. The motion was

 denied. Thus, DBPs deposits were eventually garnished. DBP
then filed a petition for certiorari before the CA.

CA: Dismissed DBPs petition. DBP appealed the CAs ruling

before the SC.

SC: On January 13, 2004, SC granted DBPs appeal, and

thereby reversed and set aside the CAs ruling. SC
acknowledged that DBPs obligation to Union Bank for
remittance of the lease payments is contingent on FWs prior
payment to DBP, and that any deficiency DBP had to pay by
December 29, 1998 as per the Assumption Agreement cannot
be determined until after the satisfaction of FWs own rental
obligations to DBP.

Accordingly, the SC:

(a) nullified the October 15, 2001 Writ of Execution and

all related issuances thereto; and;

(b) ordered Union Bank to return to DBP the amounts it

received pursuant to the said writ.

Union Bank moved for reconsideration which was denied by

the SC.

DBP moved for the execution of the said decision before the
RTC. The RTC then issued a writ of execution.

On September 13, 2005, Union Bank filed a Manifestation

and Motion to Affirm Legal Compensation to the RTC,
praying that the RTC apply legal compensation between
itself and DBP in order to offset the return of the funds it
previously received from DBP.

Union Bank anchored its motion on two grounds, namely:

(a) on December 29, 1998, DBPs assumed

obligations became due and demandable; and

(b) considering that FW became non-operational

and non-existent, DBP became primarily liable to
the balance of its assumed obligation, which as of
Union Banks computation after its claimed set-off,
 amounted to P1,849,391.87.

RTC: Denied the above-mentioned motion Union Bank filed a

petition for certiorari with the CA.

CA: Dismissed Union Banks petition, finding no GAD on the

RTCs part. CA affirmed the denial of its motion to affirm legal
compensation considering that:

(a) the RTC only implemented the Supreme

Courts January 13, 2004 Decision which by then
had already attained finality;

(b) DBP is not a debtor of Union Bank; and

(c) there is neither a demandable nor liquidated

debt from DBP to Union Bank.

Union Bank moved for reconsideration which was denied in a

Resolution dated February 26, 2010; hence, the instant
petition.

AJAX MARKETING - Ylang-Ylang Merchandising Company, a partnership between W/N there was NOVATION NONE! NO NOVATION! - Novation is the extinguishment
CORP ET AL VS CA Rodruiguez and Tan, obtain a loan in the amount of of an obligation by the
P250,000.00 from the Metropolitan Bank and Trust Company, - Novation is the extinguishment of an obligation by the substitution or change of the
3 LOANS SECURED and to secure payment of the same, spouses Marcial See and substitution or change of the obligation by a subsequent obligation by a subsequent one
BY REM Lilian Tan constituted a real estate mortgage in favor of said one which extinguishes or modifies the first, either by which extinguishes or modifies
bank over their property in the District of Paco, Manila changing the object or principal conditions, or by the first, either by changing the
- Subsequently, after the partnership had changed its name to substituting another in place of the debtor, or by object or principal conditions, or
Ajax Marketing Company, it obtained a loan in the sum of subrogating a third person in the rights of the creditor. by substituting another in place
P150,000.00 from Metropolitan Bank and Trust Company. - The well settled rule is that novation is never of the debtor, or by subrogating
Again to secure the loan, spouses Marcial See and Lilian Tan presumed. Novation will not be allowed unless it is
executed in favor of said bank a second real estate a third person in the rights of the
clearly shown by express agreement, or by acts of equal creditor. Novation, unlike other
mortgage over the same property.
import modes of extinction of
- On February 19, 1979, the partnership (Ajax Marketing
- There is nothing in the records to show the unequivocal obligations, is a juridical act with
Company) was converted into a corporation denominated as
Ajax Marketing and Development Corporation, with the intent of the parties to novate the three loan agreements a dual function, namely, it
original partners (Angelita Rodriguez and Antonio Tan) as through the execution of the promissory note. The extinguishes an obligation and
incorporators and three (3) additional incorporators, namely, provisions of the promissory note yield no indication of creates a new one in lieu of the
Elisa Tan, the wife of Antonio Tan, and Jose San Diego and the extinguishment of, or an incompatibility with, the old. It can be objective,
Tessie San Diego. Ajax Marketing and Development three loan agreements secured by the real estate subjective, or mixed.
Corporation obtained from Metropolitan Bank and Trust mortgages. - Objective novation occurs
Company a loan of P600,000.00, the payment of which was - On its face, the promissory note has these words when there is a change of the
secured by another real estate mortgage executed by typewritten: "secured by REM" and "9. COLLATERAL. object or principal conditions of
spouses Marcial See and Lilian Tan in favor of said bank over This is wholly/partly secured by: (x) real estate," which an existing obligation
the same realty located in the District of Paco, Manila. strongly negate petitioners' asseveration that the - Subjective novation occurs
- In December 1980, the three (3) loans with an aggregate consolidation of the three loans effected the discharge of when there is a change of either
 amount of P1,000,000.00 were re-structured and consolidated
into one (1) loan and Ajax Marketing and Development
Corporation, represented by Antonio Tan as Board
Chairman/President and in his personal capacity as solidary
co-obligor, and Elisa Tan as Vice-President/Treasurer and in
her personal capacity as solidary co- obligor, executed a
Promissory Note.
- In their interrelated first and second assignment of errors,
petitioners argue that a novation occurred when their three (3)
loans which are all secured by the same real estate property
were consolidated into a single loan of P1.0 million under a
Promissory Note, thereby extinguishing their monetary
obligations and releasing the mortgaged property from
liability.
the mortgaged real estate property. Otherwise, there the person of the debtor, or of
would be no sense placing these material provisions. the creditor in an existing
- Petitioners agreed to apply the real estate property to obligation.
secure obligations that they may thereafter obtain - When the change of the object
including their renewals or extensions with the principals or principal conditions of an
fixed at P600,000.00, P150,000.00, and P250,000.00 obligation occurs at the same
which when added have an aggregate sum of P1.0 time with the change of either in
million. the person of the debtor or
- The promissory note merely restructured and renewed creditor a mixed novation
the three previous loans to expediently make the loans
occurs.
current. There was no change in the object of the prior
obligations.
- The consolidation of the three loans, contrary to
The well settled rule is that
petitioners' contention, did not release the
novation is never presumed.
mortgaged real estate property from any liability
Novation will not be allowed unless it
because the mortgage annotations at the back of
is clearly shown by express
TCT No. 105233, in fact, all remained uncancelled,
agreement, or by acts of equal import.
thus indicating the continuing subsistence of the
Thus, to effect an objective novation it
real estate mortgages.
is imperative that the new obligation
- Neither can it be validly contended that there was a
expressly declare that the old
change or substitution in the persons of either the
obligation is thereby extinguished, or
creditor (Metrobank) or more specifically the debtors
that the new obligation be on every
(petitioners) upon the consolidation of the loans in the
point incompatible with the new one.
promissory note.
In the same vein, to effect a
- The bare fact of petitioner's conversion from a
subjective novation by a change in
partnership to a corporation, without sufficient evidence,
the person of the debtor it is
either testimonial or documentary, that they were
necessary that the old debtor be
expressly released from their obligations, did not make
released expressly from the
petitioner AJAX, with its new corporate personality, a
obligation, and the third person or
third person or new debtor within the context of a
new debtor assumes his place in the
subjective novation. If at all, petitioner AJAX only
relation. There is no novation without
became a co-debtor or surety.
such release as the third person who
- Without express release of the debtor from the
has assumed the debtor's obligation
obligation, any third party who may thereafter
becomes merely a co-debtor or
assume the obligation shall be considered merely as
surety.
co-debtor or surety. Novation arising from a
purported change in the person of the debtor must
Without express release of the debtor
be clear and express because, to repeat, it is never
from the obligation, any third party
presumed.
who may thereafter assume the
- Clearly then, from the aforediscussedpoints, neither
obligation shall be considered merely
objective nor subjective novation occurred here.
as co-debtor or surety. Novation
arising from a purported change in the
person of the debtor must be clear
and express because, to repeat, it is
never presumed.