International Corporate Bank vs IAC (CIvil Law)

THE INTERNATIONAL CORPORATE BANK INC.,
vs.
IAC, HON. ZOILO AGUINALDO (Judge, RTC Makati) NATIVIDAD M. FAJARDO, and SILVINO R. PASTRANA, as Deputy and Special Sheriff

--- Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim arising from breach of contract.

G.R. No. L-69560 June 30, 1988; PARAS, J.

In 1980, private respondent Fajardo secured from petitioner's predecessors-in-interest, (the then Investment and Underwriting Corp, and ATRIUM Capital Corp), a loan in the amount of P50 Million. To secure this loan, Fajardo mortgaged her real properties in Manila and in Bulacan, which she claimed have a total market value of P110 Million. Of this loan, only the amount of P20 Million was approved for release, which was applied to pay her other obligations to petitioner, bank charges and fees. Thus, Fajardo claims that she did not receive anything from the approved loan.

Thereafter, Fajardo made a money market placement with ATRIUM in the amount of P1,046,253.77 at 17% interest per annum for a period of 32 days or until October 13, 1980, its maturity date. Meanwhile, private respondent allegedly failed to pay her mortgaged indebtedness to ATRIUM, so the latter refused to pay the proceeds of the money market placement on maturity but applied the amount instead to the deficiency in the proceeds of the auction sale of the mortgaged properties. With Atrium being the only bidder, said properties were sold in its favor for only P20 Million. Petitioner claims that after deducting this amount, private respondent is still indebted in the amount of P6.81 million.

In 1982, Fajardo filed a complaint with the trial court against petitioner for annulment of the sheriff's sale of the mortgaged properties, for the release to her of the balance of her loan from petitioner in the amount of P30 Million, and for recovery of P1,062,063.83 representing the proceeds of her money market investment and for damages. She alleges that the mortgage is not yet due and demandable, and accordingly the foreclosure was illegal; that per her loan agreement with petitioner she is entitled to the release to her of the balance of the loan in the amount of P30 Million; that petitioner refused to pay her the proceeds of her money market placement notwithstanding the fact that it has long become due and payable; and that she suffered damages as a consequence of petitioner's illegal acts.

Petitioner denied Fajardo's allegations and asserted that it has the right to apply or set off private respondent's money market claim of P1,062,063.83. Petitioner thus interposes counterclaims for the recovery of P5,763,741.23, representing the balance of its deficiency claim after deducting the proceeds of the money market placement, and for damages.

The TC subsequently dismissed Fajardo’s cause of action concerning the annulment of the foreclosure sale, for lack of jurisdiction, but left the other causes of action to be resolved after trial. Private respondent then filed separate complaints in Manila and in Bulacan for annulment of the foreclosure sale of the properties in Manila and in Bulacan, respectively.

In 1983, private respondent filed a motion to order petitioner to release in her favor the proceeds of the money market placement. Petitioner filed an opposition thereto, claiming that the proceeds of the money market investment had already been applied to partly satisfy its deficiency claim, and that to grant the motion would be to render judgment in her favor without trial and make the proceedings moot and academic.

On February 13, 1984, respondent judge granted Fajardo’s motion, ordering petitioner ICB to deliver the said amount  conditioned on private respondent’s filing of a bond to answer for damages which ICB may suffer in the event that the Court finally decided that Fajardo was not entitled to said amount. 

Petitioner filed an MR with the RTC, and subsequently a petition for certiorari to the CA, which the latter dismissed. A part of its Resolution reads:

(c) that the circumstances of this case prevent legal compensation from taking place because the question of whether private respondent is indebted to petitioner in the amount of 6.81 million representing the deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously disputed;

Having been affirmed by the CA, the trial court issued a Writ of Execution to implement its Order of February 13, 1984 and by virtue thereof, a levy was made on petitioner's personal property consisting of 20 motor vehicles.

On January 9, 1985, Fajardo filed in the trial court an ex-parte motion praying that the four branches of the petitioner be ordered to pay the amount of P250k each, and the main office of the petitioner bank at Paseo de Roxas, Makati, Metro Manila, be ordered to pay the amount of P62,063.83 in order to answer for the claim of private respondent amounting to P1,062,063.83.

The TC granted the motion, and issued another Writ of Execution.

Petitioner having failed to comply with the above-cited Writs, the TC ordered several employees of petitioner ICB to show cause wily they should not be cited in contempt.

Hence, this petition for review on certiorari with prayer for a restraining order and for a writ of preliminary injunction. Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as deficiency the amount of P6.81 million against which it has the right to apply or set off private respondent's money market claim of P1,062,063.83.

ISSUE: WON there can be legal compensation in the case at bar

HELD: NO

The argument is without merit. As correctly pointed out by the CA —

Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (Art. 1278, Civil Code). "When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by operation of law, even without the consent or knowledge of the debtors." (Art. 1290, Civil Code). Article 1279 of the Civil Code requires among others, that in order that legal compensation shall take place, "the two debts be due" and "they be liquidated and demandable." Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim arising from breach of contract. (Compañia General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo & Martinez vs. Herrero, 17 Phil. 29).

There can be no doubt that petitioner is indebted to private respondent in the amount of P1,062,063.83 representing the proceeds of her money market investment. This is admitted. But whether private respondent is indebted to petitioner in the amount of P6.81 million representing the deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents legal compensation from taking place.

It must be noted that Civil Case No. 83-19717 is still pending consideration at the RTC Manila, for annulment of Sheriffs sale on extra-judicial foreclosure of private respondent's property from which the alleged deficiency arose. Therefore, the validity of the extrajudicial foreclosure sale and petitioner's claim for deficiency are still in question, so much so that it is evident, that the requirement of Article 1279 that the debts must be liquidated and demandable has not yet been met. For this reason, legal compensation cannot take place under Article 1290 of the Civil Code.