Facts: In 1974, the petitioner United Planters Sugar Milling Co., Inc.

,
(UPSUMCO) who engaged in milling sugar business, obtained a “takeoff loans”
from the respondent Philippine National Bank (PNB) for their construction of
milling sugar plant conducted in Credit Agreement. The said was thrice
restructured through Restructuring Agreement dated June 24, 1982, December 10,
1982, May 9, 1984. The loans were secured by real estate mortgage over two
parcels of land (milling plant stood and chattel mortgage over certain machineries
and equipment). Also it includes in the condition of the loan that the petitioner
agreed to “open and/or maintain a deposit account to the bank where they were
authorized to apply to payment of unpaid obligation of their client.

From 1984 to 1987, petitioner contracted another loan from PNB, as

“operational loans” and secured by pledge contract (assigned the PNB all its sugar
produce for selling and applying its proceeds to unpaid obligation)

In 1987, Asset Privatization Trust (APT) waived the right to collect on an

outstanding indebtedness from the petitioner by virtue of an “uncontested” or
friendly foreclosure agreement” (in exchange for waiver of its right of
redemption). PNB assigned APT its rights, interest, title over UPSUMCO among
several assets through Deed of Transfer under the compliance of PD No. 50. On
July 28, 1987 PNB and APT was seeking to foreclose on the real estate mortgage
and chattel mortgage in the takeoff loans. Conducted by foreclose sale on Aug 27,
1987 where respondent APT purchased it amounting to P450M.

On September 3, 1987, UPSUMCO executed a Deed of Assignment to APT it

rights to redeem the foreclosed properties in consideration of APT “condoning any
deficiency amount it may be entitled to recover from UPSUMCO under the Credit
Agreement and Restructuring Agreement.

UPSUMCO filed a complaint on March 10, 1989 for the sum of money and
damages against PNB and APT despite the said deed before RTC. They alleged
that: 1) withdrawals made from bank accounts; 2) application of proceeds from the
sale of sugar by petitioners; and 3) payments from their funds with PNB for the
operating expenses. RTC rendered in favor for the UPSUMCO but CA reversed
and set aside the decision of RTC. They ruled that only the “take off loans” and not
operational loans were condoned by the Deed of Assignment. The Court (Third
Div) reversed the decision of CA and referred in to Court En Banc which reversing
the decision of the Court Third Div.
Issue: Whether or not there was legal compensation of UPSUMCO.

Ruling: The Right of RNB to set off payments from UPSUMCO arose out of
conventional compensation rather than legal compensation, even though all of
requisites for legal compensation were present as between those parties. The
determinative factor is the mutual agreement between PNB and UPSUMCO to set
off payments. Even without an express agreement stipulating compensation, they
would have been entitled to set-off of payments, as the legal requisites for the
compensation under Article 1279 were present. Article 1279 states that: In order
that compensation may be proper, it is necessary:(1) That each one of the obligors
be bound principally, and that he be at the same time a principal creditor of the
other; (2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter has
been stated; (3) That the two debts be due; (4) That they be liquidated and
demandable; and (5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time to the
debtor.

As soon as PNB assigned its credit to APT, the mutual creditor-debtor relation
between PNB and UPSUMCO ceased to exit. However, PNB and UPSUMCO had
agreed to a conventional compensation, a relationship which does not require the
presence of all the requisites under Article 1279. And PNB too had assigned all its
rights as creditor to APT, including its rights under conventional compensation.
The absence of the mutual creditor-debtor relationship between the new creditor
APT and UPSUMCO cannot negate the conventional compensation. Hence, APT,
as assignee of the credit of PNB, had the right to set-off the outstanding obligations
of UPSUMCO based on conventional compensation before the condonation took
effect on September 3, 1987.