TRADERS ROYAL BANK v CASTANARES

GR No. 172020
Dec. 6, 2010

VILLARAMA, J.

FACTS:
Spouses Castanares are exporters of shell crafts and handicrafts. They obtained loans
and credit accommodations from Traders Royal Bank to sustain their business. They also
mortgaged their real estates. Traders Royal Bank released only the amount of 35,000
although the mortgage deeds indicated principal amounts as 86,000 and 60,000. Castanares
were granted additional funds on various dates under promissory notes they executed in
favor of the petitioner.
Traders Royal transferred the amount of 1,150 from respondents’ current account to
their savings account. The loans began to mature and the letters of credit against which the
packing advances were granted started to expire. Traders Royal applied to the payment of
respondents’ outstanding obligations the sum of 30,930.49 without notifying them, and was
remitted to the respondents through telegraphic transfer from AMROBANK, Amsterdam.
For failure of the respondents to pay their outstanding loans with petitioner, the
latter proceeded with the extrajudicial foreclosure of the real estate mortgages. Thereafter,
a Certificate of Sale covering all the mortgaged properties was issued by in favor of
petitioner as the only bidder.
Traders Royal filed a Civil Case for deficiency judgment claiming that after applying
the proceeds of the foreclosure sale to the total unpaid obligations of respondents, the
latter were still indebted to Traders Royal the sum of 83, 397. Castanares filed a Civil Case for
the recovery of the sum debited from their savings account passbook and the equivalent
amount of telegraphic transfer, and in addition, the damage suffered by the respondents
from letters of credit left unnegotiated. The RTC ruled in favor of Traders Royal but the
Court of Appeals reversed such judgment.

ISSUE:
Is the payment made by the bank by way of compensation valid?

RULING:
 Agreements for compensation of debts or any obligations when the parties are
mutually creditors and debtors are allowed under Art. 1282 of the Civil Code even when the
requisites are not totally complete. Voluntary or conventional compensation is not limited to
obligations which are not yet due. The only requirements fro conventional compensation
are: a) that each of the parties can fuly dispose of the credit he seeks to compensate, and b)
that they agree to the extinguishment of their mutual credits.
No error was committed by the trial court in holding that petitioner validly applied, by
way of compensation, the telegraphic transfer of the amount remitted by the respondents’s
foreign client through the petitioner.