FEB.

21 CASES Petitioners defaulted on the repayment of the promissory

notes.
Agro Conglomerates v. CA, G.R. No. 117660,
December 18, 2000 The bank, through its counsel, pursued collection on the
basis of these notes.
FACTS:
The respondent bank initiated three separate complaints
On July 17, 1982, Agro Conglomerates, Inc. sold two
in the Regional Trial Court of Manila for the recovery of
parcels of land to Wonderland Food Industries, Inc. for
specific sums.
P5,000,000.00, with the following payment terms under
The petitioners invoked a defense of novation.
their MOA:
The trial court ruled against petitioners based on the
1. P1,000,000.00 paid in cash upon signing.
failure of Wonderland to fulfill its part of the addendum,
2. P2,000,000.00 paid in common shares of particularly the sale of the land, effectively invalidating
Wonderland Food Industries, Inc. any claim by petitioners that the debtor’s responsibility
had been shifted.
3. P2,000,000.00 to be paid in four equal
installments, starting 180 days after signing and Petitioners’ defense rested on the theory of novation and
every six months thereafter, with 18% interest substitution of debtor, claiming that the addendum
per annum, advanced by the vendee upon relieved them of liability by substituting Wonderland as
signing. the debtor.

On July 19, 1982, Agro Conglomerates, Inc. (vendor), Petitioners appealed the trial court’s decision to the
Wonderland Food Industries, Inc. (vendee), and Regent Court of Appeals.
Savings & Loan Bank (formerly Summa Savings &
The appellate court affirmed the trial court’s judgment in
Loan Association) executed an Addendum modifying the
toto, upholding the liability of the petitioners for the
payment terms of the P1,000,000.00 initial cash payment
promissory notes.
and the P360,000.00 prepaid interest (18% of
P2,000,000.00). Whether the addendum signed by the petitioners, the
respondent bank, and Wonderland Food Industries,
Key revisions:
Inc. constituted a valid novation by substitution of
1. Instead of the vendee paying P1,360,000.00 in debtor, thereby exempting the petitioners from
cash, the vendor was authorized to obtain a loan liability on the promissory notes.
from Summa Savings & Loan Association in the
RULING: No. The SC held that the petitioners’
same amount.
obligation to pay the promissory notes was not novated
2. The loan was in the vendor’s name, but the by substitution of a new debtor.
vendee assumed full liability for its repayment,
Novation is the extinguishment of an obligation by the
including interest and other charges.
substitution or change of the obligation by a subsequent
3. The loan proceeds were to be paid directly to the one which extinguishes or modifies the first, either by
vendor. changing the object or principal conditions, or by
substituting another in place of the debtor, or by
4. The terms of the loan would be as agreed upon subrogating a third person in the rights of the creditor.
by the vendee and the financier (bank).
Novation requires a prior valid obligation, a new
This Addendum was not notarized. contract, the extinguishment of the old contract, and the
Subsequently, petitioner Mario Soriano signed several validity of the new contract.
promissory notes payable to Regent Savings & Loan In the instant case, the first requisite for a valid novation
Bank reflecting the secured loan. is lacking. There was no novation by "substitution" of
The bank, in financial distress and under Central Bank debtor because there was no prior obligation which was
supervision, issued the loan proceeds to petitioners. substituted by a new contract. The promissory notes
were executed after the addendum.
Despite several extensions and opportunities to pay:
Instead, the petitioners became accommodation parties, After settling the repair costs, Earnshaw Docks &
making them directly and primarily liable for the debt. Honolulu Iron Works assigned its credit against A.
The rescission of the contract of sale did not extinguish Yusingco Hermanos to Vicente Madrigal by executing an
their obligation, as they had received and benefited instrument (Exhibit 5) duly registered with the Bureau of
from the loan proceeds. Under Section 22 of the Civil Customs.
Code, they were obligated to return the amount to the
Vicente Madrigal filed a separate civil case (No. 41654)
bank. Therefore, the Supreme Court affirmed their
against Pelagio Yusingco and A. Yusingco Hermanos
liability and denied their petition.
demanding reimbursement.
The lower court awarded him:
Yek Ton Lin vs. Yusingco, 46 Phil. 473
P3,269.66 plus interest at 9% per annum from February
Facts: 27, 1930.
Parties and Procedural Background An additional P4,975 plus interest from May 6, 1931.
Plaintiff and Appellant: Yek Tong Lin Fire & Marine The judgment provided for the issuance of a writ of
Insurance Co., Ltd. execution if the Yusingcos failed to comply.
Defendants and Appellants: Prior to the execution of the writ and the auctioning of
the steamship, the plaintiff filed a third-party claim
Pelagio Yusingco – owner of the steamship Yusingco.
against the defendant sheriff, asserting its mortgage
Vicente Madrigal – judgment creditor and guarantor for interest in the vessel.
repairs.
The defendant sheriff, after receiving an indemnity bond
Pelagio Yusingco, owner of the steamship Yusingco, from Vicente Madrigal as required by section 451 of Act
executed a power of attorney on November 19, 1927, No. 190, informed him that such bond was mandatory to
authorizing Yu Seguioc to manage, lease, mortgage, and proceed with the execution.
sell his properties, including his vessels.
A writ of preliminary injunction was issued on August
Acting under this authority, Yu Seguioc mortgaged the 19, 1932, though later dissolved due to Madrigal’s filing
steamship Yusingco to Yek Tong Lin Fire & Marine of a bond of P5,000, which left the injunction effective
Insurance Co., Ltd., with approval from the Bureau of regarding the auction.
Customs.
The steamship Yusingco was sold at public auction on
The mortgage secured: a promissory note of P45,000; a September 19, 1932, where:
guaranty of P20,000 from the defendant, following the
The plaintiff, being the highest bidder, acquired the
Chattel Mortgage Law.
vessel with a winning bid of P12,000.
Payments by the plaintiff on account of the mortgage
The defendant sheriff turned over P10,195 to Vicente
debt amounted to P16,190.83 plus an insurance premium
Madrigal as part of the distribution of the auction
of P700, notes that are still less than what was
proceeds (see Exhibit 9).
adjudicated by the lower court.
Contentions of the Parties
In February 1930 and April 1931, the steamship required
repairs performed by Earnshaw Docks & Honolulu Iron Vicente Madrigal argued:
Works.
The mortgage claim of the plaintiff should be
Repairs were made at the request of A. Yusingco subordinated to his preferred claim as assignee of the
Hermanos, a co-owner of Pelagio Yusingco’s properties. repair credit.
Costs of repair amounted to P8,244.66. The order compelling him to surrender the proceeds
received from the sheriff was erroneous.
On March 9, 1932, Vicente Madrigal, acting as
guarantor, was eventually compelled to pay, with He also objected to the denial of his motion for a new
accrued interest at 9% per annum, amounting to trial, alleging the decision was contrary to law and
P8,777.60. evidence.
The plaintiff contended: Facts:
That as a mortgagee, it had a superior claim on the Parties and Property
steamship.
CKH Industrial and Development Corporation (CKH) is
The repair credit, in which Madrigal had preferred the owner of two parcels of land located in Karuhatan,
rights, was not entitled to preferential treatment under Valenzuela, covered by Transfer Certificates of Title
Article 580 of the Code of Commerce. Nos. 8710 and 8711.
The plaintiff maintained that its remedy was limited to CKH was established under Philippine law by the late
recovering its mortgage credit from the purchaser, not Cheng Kim Heng, whose family structure became
from Madrigal. complicated with two families after his remarriage to
Rubi Saw.
Issue: Whether the credit of Yek Tong Lin Fire &
Marine Insurance Co., Ltd., as a mortgage creditor, is Control and management of CKH shifted with the
superior to Madrigal's judgment credit. involvement of Rubi Saw and the extensive participation
of Cheng Kim Heng’s children from his previous
Ruling: The Supreme Court ruled that Madrigal's
marriage.
judgment credit is superior to the mortgage credit of Yek
Tong Lin Fire & Marine Insurance Co., Ltd. This The Deed of Absolute Sale and Transaction Context
determination was based on Articles 1922 and 1926 of
On May 8, 1988, Rubi Saw executed a Deed of Absolute
the Civil Code, which establish that certain types of
Sale on behalf of CKH, selling the subject properties to
credits can take precedence over others depending on
Century-Well Philippine Corporation, represented by
their nature and the circumstances surrounding them.
Lourdes Chong.
The court found that since the mortgage was not secured
by a pledge but by a mortgage, Madrigal’s rights as a The deed stipulated a purchase price of P800,000.00, to
judgment creditor were prioritized. be paid by means of a Manager’s Check—notably a cash
payment.
Issue: Whether Madrigal should turn over the money
received from the auction sale to Yek Tong Lin Fire & Due to the alleged nonpayment despite several demands,
Marine Insurance Co., Ltd. petitioners CKH and Rubi Saw filed the instant
complaint on May 23, 1988 with the RTC against
Ruling: The Supreme Court reversed the lower court's
Century-Well, Lourdes Chong, Chong Tak Kei and Uy
decision that required Madrigal to turn over the auction
Chi Kim.
proceeds to Yek Tong Lin Fire & Marine Insurance Co.,
Ltd. The court concluded that Madrigal, as the holder of Petitioners prayed for the annulment/rescission of the
a superior credit, rightfully retained the funds from the Deed of Absolute Sale, and in the meantime, for the
auction sale. The ruling emphasized that the mortgagee's issuance of a writ of preliminary injunction restraining
rights were secondary, and therefore, they were not the Register of Deeds of Valenzuela from registering the
entitled to the proceeds from the auction, which Certificates of Title over the subject properties in the
rightfully belonged to Madrigal. name of the private respondent Century-Well.
Issue: The legality of the lower court's absolution of During the trial, defendant vendees contended that:
the provincial sheriff of Surigao from the complaint.
“…the consideration for the two parcels of land was paid
Ruling: The Supreme Court affirmed the lower court's
by means of off-setting or legal compensation in the
decision to absolve the provincial sheriff from the
amount of P700,000 thru alleged promissory notes
complaint. The court found that the sheriff acted within
executed by Cheng Kim Heng in favor of his sons Choi
the legal bounds of his duties when conducting the
and Keik, and payment of P 100,000.00 in cash. They
auction sale. There was no evidence of wrongdoing or
claim that the Deed of Sale does not express the true
negligence on the part of the sheriff, and thus, he was
agreement of the parties, specifically with regard to the
rightly discharged from any liability regarding the
mode of payment and that it was a culmination of
distribution of the auction proceeds.
mediateion of dispute of the first and second families of
Cheng Kim Heng. They alleged that during the operation
of plaintiff CKH, the latter borrowed from Choi Kei the
total sum of P 700,000.00.
The Court noted that Choi and Kei were merely
Uy Chi Kim, on the other hand, answered on his behalf,
stockholders of Century-Well and had no legal
that his only participation in the transaction was as a
personality separate from the corporation in the context
mediator, he being one of the closest friends of Cheng
of the transaction. The Court reaffirmed the doctrine of
Kim Heng
separate corporate personality, stating that Century-Well,
as a corporation, was distinct from its individual
After trial, the RTC rendered its Decision finding that
stockholders. There was no basis to pierce the corporate
the annulment of the Deed of Absolute Sale was merited,
veil, as there was no showing that the corporate entity
as there was no payment of the stipulated consideration
was being used to perpetrate fraud or injustice.
for the sale of the real properties involved to Rubi Saw.

Court of Appeals reversed the findings and

pronouncements of the trial court and found that there The Supreme Court emphasized that the Deed of
was indeed payment of the purchase price, partially in Absolute Sale explicitly stated that the vendor received
cash for P100,000.00 and partially by compensation by the full purchase price of PHP 800,000.00. Under the
off-setting the debt of Cheng Kim Heng to his sons Choi parol evidence rule (Section 9, Rule 130 of the Rules of
and Kei for P500,000.00 and P200,000.00 respectively, Court), when the terms of an agreement have been put
against the remainder of the stipulated price. Such mode into writing, they are considered to express the full and
of payment is recognized under Article 1249 of the Civil final agreement of the parties.
Code. Since the Deed of Absolute Sale was uncontested in its
was there a valid compensation of the obligations of authenticity, it bound the parties to its terms.
Cheng Kim Heng to his sons with the purchase price The vendor, Rubi Saw, having signed the deed, could not
of the sale? later claim she had not received payment unless an
The Supreme Court ruled that there was no valid exception to the parol evidence rule applied.
compensation of Cheng Kim Heng’s (CKH) obligations However, while the deed acknowledged receipt of the
to his sons with the purchase price of the sale. purchase price, the Court found that payment did not
Under Article 1279 of the Civil Code, compensation actually occur in a valid manner, leading to rescission.
requires that the parties be mutual creditors and debtors
in their own right. Specifically, it states that for
compensation to be valid: Because there was no valid compensation, CKH's
alleged debts to his sons could not be used as payment
 Each party must be principally bound as both for the sale. Since Century-Well never actually paid the
creditor and debtor to the other. purchase price, there was a failure of consideration,
 The debts must be in the same sum of money or making the contract of sale unenforceable. Under Article
consumable goods of the same kind and quality. 1231 of the Civil Code, an obligation may be
 Both debts must be liquidated and demandable. extinguished through various means, including payment,
 Neither debt must be subject to retention or compensation, or novation. Since none of these were
controversy involving a third party. properly established, Century-Well failed to fulfill its
The Court found that these conditions were not met in obligation to pay the purchase price.
the present case.
The promissory notes submitted as evidence showed that Final Ruling and Reversal of the Court of Appeals’
CKH’s debts were owed to his sons, Choi and Kei, in Decision –
their personal capacity, and not to Century-Well, the
vendee in the Deed of Absolute Sale. Therefore, CKH
was not a debtor to Century-Well, and Century-Well was
The Supreme Court reversed the Court of Appeals’
not a creditor of CKH. Since there was no direct
ruling and reinstated the decision of the Regional Trial
creditor-debtor relationship between CKH and Century-
Court of Valenzuela, Branch 173, which had rescinded
Well, no valid compensation could take place.
the sale due to failure of consideration.
However, the Supreme Court deleted the award of moral Due to the refusal to pay, the respondent filed an action
damages, attorney’s fees, and costs previously granted to for the collection of P735,000.00 represented by the 2
Rubi Saw. post-dated checks.
The Court ordered the parties to bear their respective In their defense, the petitioners justified stopping
costs. payment, claiming that one of the dump trucks they
previously purchased was defective and that the
Conclusion
respondent refused to honor its warranty.
The Supreme Court ruled that no valid compensation
The respondent countered that the unpaid balance was
took place because CKH’s debts were owed to his sons
for a separate transaction involving a Hino Prime Mover
personally, not to Century-Well, and Century-Well had
and an Isuzu Transit Mixer, which had nothing to do
not actually paid the purchase price. The Court applied
with the allegedly defective dump truck. It also argued
the rules on compensation, the parol evidence rule, and
that the warranties for the dump trucks had long expired,
the doctrine of separate corporate personality, ultimately
making the petitioners' refusal to pay legally unjustified.
rescinding the sale for failure of consideration.
The RTC found the petitioner liable. The RTC held that
the petitioners could not avail themselves of legal
First United v. Bayanihan Automotive, G.R. No. compensation because the claims they had set up in the
164985 counterclaim were not liquidated and demandable. The
CA affirmed the judgment of the RTC.
FACTS:
ISSUES: whether or not the petitioners validly exercised
Petitioner FUCC and petitioner Blue Star Construction the right of recoupment through the withholding of
Corp. were associate construction firms sharing financial payment of the unpaid balance of the purchase price of
resources, equipment, and technical personnel on a case- the Hino Prime Mover and the Isuzu Transit Mixer.
to-case basis.
Whether the petitioners cannot avail of compensation
From May 27, 1992 to July 8, 1992, they ordered six allegedly because their claims against respondent are not
units of dump trucks from the respondent, a domestic liquidated and demandable.
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
1. The Supreme Court ruled that petitioners could not
in the construction business.
validly resort to recoupment because their claim for
On September 19, 1992, FUCC ordered from the repair expenses and spare parts of the dump truck arose
respondent one unit of Hino Prime Mover that the from a separate and distinct transaction from their
respondent delivered on the same date. obligation to pay for the prime mover and transit mixer.

On September 29, 1992, FUCC again ordered from the Under Article 1599(1) of the Civil Code, recoupment (or
respondent one unit of Isuzu Transit Mixer that was also setting off a claim due to breach of warranty) is only
delivered to the petitioners. valid if it pertains to the same transaction as the
plaintiff’s claim.
For the 2 purchases, FUCC partially paid in cash, and
the balance through post-dated checks. The purchase of the dump trucks and the purchase of the
prime mover and transit mixer were two different
Upon presentment of the checks for payment, the contracts. Since the petitioners’ claim of breach of
respondent learned that the FUCC had ordered the warranty related to the dump truck, it could not be used
payment stopped. to offset their debt for the later purchases.
The respondent immediately demanded the full Because the contracts were separate, the petitioners had
settlement of their obligation from the petitioners, but to no right to stop payment for the prime mover and transit
no avail. Instead, the petitioners informed the respondent mixer due to issues with a previously purchased dump
that they were withholding payment of the checks due to truck.
the breakdown of one of the dump trucks they had
earlier purchased from respondent, specifically the The Supreme Court affirmed the decision of the Court of
second dump truck delivered on May 27, 1992. Appeals, holding that the petitioners' act of stopping
payment was improper. Since their claim did not arise resulting in the Bank restructuring the obligation to
from the same transaction as their debt, they could not P3,082,029.00 with specific terms.
use recoupment to reduce or extinguish their obligation.
Despite the restructuring agreement, petitioners did not
2. The Supreme Court ruled that legal compensation was fulfill their obligations, leading the Bank to file a
permissible because all the requirements under Articles complaint for recovery of the unpaid balance.
1278 and 1279 of the Civil Code were met. While both
Petitioners argued that the restructuring agreement
the Regional Trial Court (RTC) and the Court of Appeals
novated the original obligation and that they should not
(CA) initially denied the petitioners' claim for legal
be held liable.
compensation, stating that their counterclaim was not yet
liquidated and demandable, the Supreme Court found
otherwise. The Court determined that the amount of
P71,350.00 spent by the petitioners on repairs and spare
parts for the dump truck during the warranty period was
already established and determined with certainty by the
lower courts based on preponderant evidence. Since a
debt is considered liquidated when its existence and
amount are determined, the Court held that
compensation took effect by operation of law under
Article 1290 of the Civil Code, which states that when
all requisites under Article 1279 are met, compensation
automatically extinguishes both debts to the concurrent
amount. As a result, the petitioners’ total unpaid
obligation to the respondent was reduced from
P735,000.00 to P663,650.00, after deducting the
P71,350.00 for repairs. Additionally, the Court modified
the interest rate imposed by the lower courts, ruling that
a 6% per annum legal interest should be applied from
February 11, 1993—the date of the first extrajudicial
demand—until full payment, in accordance with Article
2209 of the Civil Code. Ultimately, the Supreme Court
affirmed the CA’s decision with these modifications and
ordered the petitioners to pay the remaining balance
along with the applicable interest.

Transpacific v. Security Bank, G.R. No. 173565, May 8,

2009
FACTS:
Transpacific Battery Corporation and its officers,
including Michael G. Say and Josephine G. Say, entered
into a Credit Line Agreement with Security Bank &
Trust Company.
Transpacific applied for nine letters of credit (LCs) to
import merchandise and executed trust receipts for the
release of these goods, binding themselves solidarily
liable to the Bank.
Petitioners failed to account for and deliver proceeds
from the sale of the goods covered by the trust receipts,