G.R. No. 183308 ; April 25, 2012
Insular Investment and Trust Corporation, Petitioner, vs. Capital One Equities Corp. (now known as Capital One Holdings Corp.) and Planters Development Bank, Respondents.

FACTS

Petitioner Insular Investment and Trust Corporation (IITC) and respondent Capital One Equities Corporation (COEC) were engaged in reciprocal sales of treasury bills in 1994. IITC purchased bills from COEC worth ₱260,683,392.51, for which it fully paid, but COEC delivered only ₱121,050,000.00 worth, leaving a deficiency. Separately, COEC purchased bills from IITC worth ₱186,774,739.49 and paid via manager’s checks payable to co-respondent Planters Development Bank (PDB), which IITC received. PDB then issued confirmations of sale to IITC for bills worth ₱186,790,000.00 but failed to fully deliver them. Both parties made mutual demands for delivery. They subsequently entered into a Tripartite Agreement and a separate COEC-IITC Agreement, involving reassignments of Central Bank Bills, which partially settled some obligations but left balances undelivered by both COEC and PDB.
IITC filed a complaint seeking delivery of the undelivered treasury bills from COEC or, alternatively, from PDB. COEC admitted its outstanding delivery obligation to IITC but counterclaimed, asserting that IITC likewise had an obligation to deliver bills to it. COEC argued for a legal compensation or set-off of their mutual debts. The Regional Trial Court ruled in favor of IITC, ordering COEC to deliver the balance or pay its value. The Court of Appeals reversed, applying legal compensation and dismissing IITC’s complaint, while also dismissing COEC’s counterclaim.

ISSUE

Whether legal compensation under Article 1279 of the Civil Code properly extinguished the reciprocal monetary obligations between IITC and COEC.

RULING

No, legal compensation did not apply. The Supreme Court reversed the Court of Appeals and reinstated the RTC decision with modification. For legal compensation to operate, all requisites under Article 1279 must concur, including that each obligation must consist in a sum of money, or be fungible, and be liquidated and demandable. The Court found the obligations here were not both liquidated. COEC’s obligation to IITC was liquidated, as its value was determined from the face value of the undelivered treasury bills. However, IITC’s alleged obligation to COEC was not liquidated. IITC’s role in the transaction where COEC paid PDB was that of a mere facilitator or agent. The confirmation of sale IITC issued to COEC was for bills to be sourced from PDB. Since PDB failed to deliver to IITC, IITC never came into possession of the bills and thus had no corresponding liquidated obligation to deliver them to COEC. The payment made by COEC to PDB did not create a direct liquidated debt from IITC to COEC. Consequently, with one obligation unliquidated, legal compensation could not extinguish COEC’s debt to IITC. COEC remained liable to IITC for the value of the undelivered treasury bills.