In Philippine Trust Company v. Floro Roxas and Eufemia Roxas, the Supreme Court clarified that legal compensation—the offsetting of mutual debts—cannot be invoked during the execution stage of a case if it was not raised as a defense earlier. The Court emphasized that final judgments must be executed without delay and that all requirements for legal compensation, including the debt being liquidated and demandable, must be met. This ruling underscores the importance of raising all relevant defenses promptly and adhering to procedural rules.

Delayed Defense, Denied Relief: The Roxas Mortgage Dispute and the Compensation Claim

This case revolves around a long-standing dispute between Philippine Trust Company (PTC) and Spouses Floro and Eufemia Roxas. The Spouses Roxas obtained loans from PTC, secured by real estate mortgages, to finance their real estate business. A subsequent contract involved PTC granting an additional loan for a housing project, with rentals intended to liquidate the debt. However, due to financial difficulties, the project failed, leading to missed loan payments.

Litigation ensued, including a case filed by a contractor, Dominguez, against PTC and the Spouses Roxas, and a separate case initiated by the Spouses Roxas against Dominguez. PTC, in turn, filed a counterclaim against the Spouses Roxas for their unpaid loan obligation. While this case was pending, PTC initiated extrajudicial foreclosure proceedings, prompting the Spouses Roxas to file a separate action to enjoin the foreclosure. The Bataan Regional Trial Court (RTC) ruled in favor of the Spouses Roxas, awarding damages and permanently enjoining the foreclosure. When the Spouses Roxas sought execution of the judgment, PTC raised legal compensation for the first time, attempting to offset the judgment debt with the Spouses Roxas’ loan obligation.

The Supreme Court affirmed the Court of Appeals’ decision, holding that PTC’s attempt to invoke legal compensation at the execution stage was untimely. The Court reiterated the principle of immutability of final judgments, stating that once a decision becomes final and executory, it is immutable and unalterable. The Court noted an exception exists where a supervening event renders the execution inequitable, but found that such an event was not present in this case.

The Court explained that allowing PTC to offset its judgment debt would be unjust, as the Spouses Roxas’ unpaid loan obligation was already the subject of a separate pending case. Allowing the offset would effectively result in double recovery for PTC, violating the principle against unjust enrichment. Furthermore, the Court emphasized that delaying the execution of a final judgment would undermine the role of courts in resolving disputes with finality. Allowing PTC’s argument would be unfair to the Spouses Roxas and would contradict the policy behind the immutability of final judgments.

The Court also agreed with the lower courts that PTC should have raised the argument of legal compensation during the trial stage. The 1964 Rules of Court, which were in effect when the case was filed, required defenses and objections to be pleaded in a motion to dismiss or in the answer; failure to do so results in a waiver of those defenses. The applicable rule states:

RULE 9. Effect of Pleadings

Sec. 2. Defenses and objections not pleaded deemed waived.— Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived;  except the failure to state a cause of action which may be alleged in a later pleading, if one is permitted, or by motion for judgment on the pleadings, or at the trial on the merits; but in the last instance, the motion shall be disposed of as provided in section 5 of Rule 10 in the light of any evidence which may have been received. Whenever it appears that the court has no jurisdiction over the subject-matter, it shall dismiss the action.

The Court noted that, despite legal compensation taking place by operation of law, it must be alleged and proven as a defense. PTC could have raised legal compensation as an alternative or hypothetical defense, even if it disclaimed liability at the time of filing its answer. By failing to raise this defense, PTC was deemed to have waived it.

Even if PTC was excused from pleading compensation as a defense initially, the Court pointed out that it still failed to raise this defense in its motion for reconsideration or subsequent appeal. This further supports the conclusion that PTC was estopped from raising the issue of legal compensation. The Court inferred that PTC deliberately chose not to raise legal compensation because it was hoping for a favorable ruling on its counterclaim in the other case. Having made this strategic choice, PTC could not change its defense at the execution stage. This falls under the doctrine of election of remedies, which prevents a party from seeking double redress for a single wrong.

Moreover, the Court found that not all requisites of legal compensation were present. Specifically, the debts must be liquidated and demandable. Article 1279 of the Civil Code provides the requirements for legal compensation:

Under Article 1279, in order for legal compensation to take place, the following requisites must concur: (a) that each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (b) 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; (c) that the two debts be due; (d) that they be liquidated and demandable; and (e) that over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

A debt is liquidated when its existence and amount are determined. Because the loan obligation was still being disputed in a separate case, PTC’s credit could not be considered liquidated, and legal compensation could not take place.

Finally, the Court observed that PTC appeared to have engaged in forum shopping. Forum shopping occurs when a party seeks another opinion in another court after receiving an adverse judgment, instead of appealing the decision. The elements of litis pendentia, which indicate forum shopping, were present. The Court emphasized that payment and compensation are modes of extinguishing an obligation. By seeking compensation in the execution proceedings while simultaneously pursuing the loan obligation in another case, PTC was essentially seeking the same relief in both cases, leading to a splitting of causes of action. Forum shopping is prohibited and can result in the dismissal of the case and administrative sanctions.

FAQs

What was the key issue in this case?	The key issue was whether Philippine Trust Company (PTC) could invoke legal compensation to offset a judgment debt owed to Spouses Roxas with the Spouses’ unpaid loan obligation, particularly at the execution stage of the case. The court determined that it could not.
What is legal compensation?	Legal compensation is the extinguishment of two debts up to the amount of the smaller one, when two persons are reciprocally debtors and creditors of each other. For it to occur, certain requirements must be met as provided by law.
Why was PTC’s attempt to invoke legal compensation rejected?	PTC’s attempt was rejected because it was raised too late in the proceedings (at the execution stage) and because the debt was not yet liquidated, meaning its exact amount was still being disputed in another pending case. Moreover, PTC failed to raise compensation as a defense in its initial pleadings.
What does it mean for a debt to be liquidated?	A debt is liquidated when its existence and amount are determined or are certain. This means there is no dispute regarding the amount owed.
What is the doctrine of immutability of final judgments?	The doctrine of immutability of final judgments states that a judgment that has become final and executory can no longer be modified, even if the modification is intended to correct an error of fact or law. This doctrine ensures that there is an end to litigation.
What is forum shopping, and why is it prohibited?	Forum shopping is when a party files multiple lawsuits in different courts, either simultaneously or successively, to obtain a favorable ruling. It is prohibited because it abuses court processes, degrades the administration of justice, and contributes to court congestion.
What are the elements of litis pendentia?	The elements of litis pendentia are: (1) identity of parties, (2) identity of rights asserted and relief prayed for, and (3) such identity in the two preceding particulars that any judgment rendered in one action will amount to res judicata in the other. These elements indicate that two pending cases involve the same issues and parties.
What is the doctrine of election of remedies?	The doctrine of election of remedies prevents a party from seeking double redress for a single wrong. It states that when a party has knowledge of the facts and chooses between inconsistent remedies, the election is final and bars any action inconsistent with the remedy chosen.

This case highlights the importance of raising all available defenses in a timely manner and adhering to procedural rules. It also serves as a reminder of the consequences of forum shopping and attempting to circumvent final judgments.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Philippine Trust Company vs. Floro Roxas and Eufemia Roxas, G.R. No. 171897, October 14, 2015