G.R. No. 111890 May 7, 1997
CKH INDUSTRIAL AND DEVELOPMENT CORPORATION and RUBI SAW, petitioners, vs. THE COURT OF APPEALS, THE REGISTER OF DEEDS OF METRO MANILA — DISTRICT III (VALENZUELA), CENTURY-WELL PHIL. CORPORATION, LOURDES CHONG, CHONG TAK KEI and UY CHI KIM, respondents.

FACTS

Petitioner CKH Industrial and Development Corporation, represented by Rubi Saw, sold two parcels of land to respondent Century-Well Phil. Corporation, represented by Lourdes Chong, for P800,000.00 as evidenced by a Deed of Absolute Sale. CKH later filed a complaint for rescission and/or annulment of the sale before the Regional Trial Court (RTC), alleging that Century-Well failed to pay the stipulated purchase price. The RTC ruled in favor of CKH, ordering the rescission of the sale, the cancellation of Century-Well’s titles, and the award of moral damages and attorney’s fees to CKH. On appeal, the Court of Appeals reversed the RTC decision. The appellate court dismissed the complaint and instead ordered CKH and Rubi Saw to pay moral damages and attorney’s fees to the respondents. The CA found that there was payment of the consideration through compensation, as CKH allegedly owed a debt to the family of the deceased first husband of Rubi Saw.

ISSUE

Whether the Court of Appeals erred in ruling that the obligation to pay the purchase price was extinguished by compensation.

RULING

Yes, the Supreme Court reversed the Court of Appeals and reinstated the RTC decision with modification. The legal logic centers on the requisites for legal compensation under Article 1278 of the Civil Code. For compensation to extinguish an obligation, the parties must be mutually debtors and creditors in their own right, and the debts must be due, liquidated, and demandable. The Court found that the alleged debt claimed by Century-Well—an obligation from CKH or Rubi Saw to the heirs of Cheng Kim Heng—did not meet these requisites. First, the debt was not liquidated or ascertained. Second, and more critically, the parties to the alleged compensation were not the same. The obligation to pay the purchase price was owed by Century-Well (the vendee-corporation) to CKH (the vendor-corporation). In contrast, the claimed debt was allegedly owed by CKH or Rubi Saw to the individual heirs of Cheng Kim Heng. Century-Well, as a separate corporate entity, could not assert a debt owed to its individual stockholders as compensation for its own corporate obligation. The Court emphasized the separate juridical personality of corporations, which cannot be disregarded absent evidence that the corporate fiction was used to justify a wrong. Since compensation did not validly take place, the failure of Century-Well to pay the purchase price constituted a failure of consideration, warranting the rescission of the sale under Article 1191. The Supreme Court thus granted rescission but deleted the RTC’s award of moral damages and attorney’s fees to Rubi Saw.