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GAN TION vs. CA, G.R. No. L-22490 May 21, 1969
The sole issue here is whether or not there has been legal compensation
between petitioner Gan Tion and respondent Ong Wan Sieng.
Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In
1961 the latter filed an ejectment case against the former, alleging non-
payment of rents for August and September of that year, at P180 a month,
or P360 altogether. The defendant denied the allegation and said that the
agreed monthly rental was only P160, which he had offered to but was
refused by the plaintiff. The plaintiff obtained a favorable judgment in the
municipal court (of Manila), but upon appeal the Court of First Instance, on
July 2, 1962, reversed the judgment and dismissed the complaint, and
ordered the plaintiff to pay the defendant the sum of P500 as attorney's fees.
That judgment became final.
On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he
was increasing the rent to P180 a month, effective November 1st, and at the
same time demanded the rents in arrears at the old rate in the aggregate
amount of P4,320.00, corresponding to a period from August 1961 to
October 1963.lwphi1.et
In the meantime, over Gan Tion's opposition, Ong Wan Sieng was able to
obtain a writ of execution of the judgment for attorney's fees in his favor.
Gan Tion went on certiorari to the Court of Appeals, where he pleaded
legal compensation, claiming that Ong Wan Sieng was indebted to him in
the sum of P4,320 for unpaid rents. The appellate court accepted the
petition but eventually decided for the respondent, holding that although
"respondent Ong is indebted to the petitioner for unpaid rentals in an
amount of more than P4,000.00," the sum of P500 could not be the subject
of legal compensation, it being a "trust fund for the benefit of the lawyer,
which would have to be turned over by the client to his counsel." In the
opinion of said court, the requisites of legal compensation, namely, that the
parties must be creditors and debtors of each other in their own right (Art.
1278, Civil Code) and that each one of them must be bound principally and
at the same time be a principal creditor of the other (Art. 1279), are not
present in the instant case, since the real creditor with respect to the sum of
P500 was the defendant's counsel.
This is not an accurate statement of the nature of an award for attorney's
fee's. The award is made in favor of the litigant, not of his counsel, and is
justified by way of indemnity for damages recoverable by the former in the
cases enumerated in Article 2208 of the Civil Code.1 It is the litigant, not
his counsel, who is the judgment creditor and who may enforce the
judgment by execution. Such credit, therefore, may properly be the subject
of legal compensation. Quite obviously it would be unjust to compel
petitioner to pay his debt for P500 when admittedly his creditor is indebted
to him for more than P4,000.
WHEREFORE, the judgment of the Court of Appeals is reversed, and the
writ of execution issued by the Court of First Instance of Manila in its Civil
Case No. 49535 is set aside. Costs against respondent.

G.R. No. L-69255 (148 SCRA 166) February 27, 1987

FACTS: Isabela Wood Construction & Development
Corporation opened with the Philippine National Bank a savings account in
the amount of P2 million is the subject of two (2) conflicting claims. One
claim was asserted by the Aceros -- Gloria G. Vda. de Ong Acero, Arnolfo
Ong Acero and Soledad Ong Acero-Chua, judgment creditors of the
depositor (ISABELA) who seek to enforce against said savings account
the final and executory judgment rendered in their favor by the Court of
First Instance of Rizal QC. The other claim has been put forth by the
Philippine National Bank (PNB) which claims that since ISABELA was at
some point in time both its debtor and creditor-ISABELA's deposit being
deemed a loan to it (PNB)-there have occurred a mutual set-off between
them, which effectively precluded the Aceros' recourse to that deposit. The
controversy was decided by the Intermediate Appellate Court adversely to
the PNB. On the other hand, PNB's claim to the two-million-peso deposit in
question is made to rest on an agreement between it and ISABELA in
virtue of which, according to PNB: (1) the deposit was made by ISABELA
as "collateral" in connection with its indebtedness to PNB as to which it
(ISABELA) had assumed certain contractual undertakings; and (2) in the
event of ISABELA's failure to fulfill those undertakings, PNB was
empowered to apply the deposit to the payment of that indebtedness.
Its theory thereon based on a mutual set-off, or compensation,
between it and ISABELA in accordance with Articles 1278 et al. of the
Civil Code that PNB intervened in the action between the ACEROS and
ISABELA on or about February 28, 1980 and moved for reconsideration of
the Order of February 15, 1980 but their motion was met with no success
and a motion for reconsideration of that order was also denied. Due to
PNBs persistence, the court set aside the orders and set for hearing of
latters motion for reconsideration and few months after, the Order of
February 15, 1980 was itself also struck down. The Lower Court opining
that under the circumstances, there had been a valid assignment by
ISABELA to PNB of the amount deposited, which effectively placed that
amount beyond the reach of the Aceros.
It was the ACEROS' turn to move for reconsideration, which they did as
regards this Order of October 1, 1982; but by Order promulgated on
December 14, 1982, the Court declined to modify its resolution. The
Aceros then appealed to the Intermediate Appellate Court which, after due
proceedings, sustained them. When ISABELA itself subsequently came to
be indebted to it on account of ISABELA's breach of the terms of the Credit
Agreement of October 13, 1977, and therefore ISABELA and PNB became
at the same time creditors and debtors of each other, compensation
automatically took place between them, in accordance with Article 1278 of
the Civil Code. The amounts due from each other were, in its view, applied
by operation of law to satisfy and extinguish their respective credits.
ISSUE: Whether or not PNB and ISABELA had
extinguished their obligation by way of compensation.
HELD: In the first place, there being no indebtedness to PNB
on ISABELA's part, there is in consequence no occasion to speak of any
mutual set-off, or compensation, whether it be legal, i.e., which
automatically occurs by operation of law, or voluntary, i.e., which can only
take place by agreement of the parties which ISABELA did not agree upon
which was attested by lack of evidence.
The "most telling argument" against it, in fact, in the line of the
Appellate Court-and that is, that PNB itself, through its International
Department, deposited the whole amount of ?2 million, not in its name, but
in the name of ISABELA, 20 without any accompanying statement even
remotely intimating that it (PNB) was the owner of the deposit, or that an
assignment thereof was intended, or that some condition or lien was meant
to burden it.
Even if it be assumed that such an assignment had indeed been made, and
PNB had been really authorized to apply the P2M deposit to the satisfaction
of ISABELA's indebtedness to it, nevertheless, since the record reveals that
the application was attempted to be made by PNB only on February 26,
1980, that essayed application was ineffectual and futile because at that
time, the deposit was already in custodia legis, notice of garnishment
thereof having been served on PNB on January 9, 1980 (pursuant to the
writ of execution issued by the Court of First Instance on December 23,
1979 for the enforcement of the partial judgment in the Aceros' favor
rendered on November 18,1979).
One final factor precludes according validity to PNB's arguments. On the
assumption that the P 2M deposit was in truth assigned as some sort of
"collateral" to PNB although as PNB insists, it was not in the form of a
pledge the agreement postulated by PNB that it had been authorized to
assume ownership of the fund upon the coming into being of ISABELA s
indebtedness is void ab initio, it being in the nature of a pactum
commisorium proscribed as contrary to public policy.
WHEREFORE, the judgment of the Intermediate Appellate Court subject
of the instant appeal, being fully in accord with the facts and the law, is
hereby affirmed in toto. Costs against petitioner.

Engracio Francia was the owner of a 328 square meter land in Pasay City.
In October 1977, a portion of his land (125 square meter) was expropriated
by the government for P4,116.00. The expropriation was made to give way
to the expansion of a nearby road.
It also appears that Francia failed to pay his real estate taxes since 1963
amounting to P2,400.00. So in December 1977, the remaining 203 square
meters of his land was sold at a public auction (after due notice was given
him). The highest bidder was a certain Ho Fernandez who paid the
purchase price of P2,400.00 (which was lesser than the price of the portion
of his land that was expropriated).
Later, Francia filed a complaint to annul the auction sale on the ground that
the selling price was grossly inadequate. He further argued that his land
should have never been auctioned because the P2,400.00 he owed the
government in taxes should have been set-off by the debt the government
owed him (legal compensation). He alleged that he was not paid by the
government for the expropriated portion of his land because though he
knew that the payment therefor was deposited in the Philippine National
Bank, he never withdrew it.
ISSUE: Whether or not the tax owed by Francia should be set-off by the
debt owed him by the government.
HELD: No. As a rule, set-off of taxes is not allowed. There is no legal basis
for the contention. By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). This is not applicable in taxes. There
can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a lawsuit
against the government.
The Supreme Court emphasized: A claim for taxes is not such a debt,
demand, contract or judgment as is allowed to be set-off under the statutes
of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes.
Neither are they a proper subject of recoupment since they do not arise out
of the contract or transaction sued on.
Further, the government already Francia. All he has to do was to withdraw
the money. Had he done that, he could have paid his tax obligations even
before the auction sale or could have exercised his right to redeem which
he did not do.
Anent the issue that the selling price of P2,400.00 was grossly inadequate,
the same is not tenable. The Supreme Court said: alleged gross inadequacy
of price is not material when the law gives the owner the right to redeem as
when a sale is made at public auction, upon the theory that the lesser the
price, the easier it is for the owner to effect redemption. If mere
inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not
rendered altogether impracticable. Where land is sold for taxes, the
inadequacy of the price given is not a valid objection to the sale. This rule
arises from necessity, for, if a fair price for the land were essential to the
sale, it would be useless to offer the property. Indeed, it is notorious that the
prices habitually paid by purchasers at tax sales are grossly out of
proportion to the value of the land.


Solinap vs. Hon. Del Rosario, et al. [GRN 50638 July 25, 1983] ESCOLIN,
FACTS: The spouses Tiburcio Lutero and Asuncion Magalona, owners of
the Hacienda Tambal, leased the said hacienda to petitioner Loreto Solinap
for 10 years for the stipulated rental of P50,000.00 a year. It was further
agreed in the lease contract that P25,000.00 from the rental should be paid
by Solinap to the PNB to amortize the indebtedness of the spouses Lutero.
When Tiburcio Lutero died, his heirs instituted the testate estate
proceedings. On the basis of an order, respondents Juanito Lutero
[grandson and heir of the late Tiburcio] and his wife Hardivi R. Lutero paid
the PNB the sum of P25,000.00 as partial settlement of the deceased's
obligations. Spouses Lutero filed a motion seeking reimbursement from the
petitioner. They argued that the said amount should have been paid by
petitioner to the PNB, as stipulated in the lease contract. Before the motion
could be resolved, petitioner a separate action against the spouses for
collection of P71,000.00 they borrowed from the petitioner. The spouses
answered and pleaded a counterclaim against petitioner for P125,000.00
representing unpaid rentals on Hacienda Tambal and that petitioners
purchased one-half of Hacienda Tambal. The respondent judge issued an
order granting the spouses motion for reimbursement from petitioner of the
sum of P25,000.00, plus interest. Petitioner filed a petition for certiorari
before this Court, assailing the above order. Acting on the petition, the
P25,000.00 to be paid by the petitioner to the private respondent Luteros
may well be taken up in the final liquidation of the account between
petitioner as lessee and the subject estate as lessor. Thereafter the
respondent Luteros filed with the respondent court a motion raising that the
amount payable to private respondents should be compensated against the
latter's indebtedness to him amounting to P7 1,000.00. This motion was
denied by respondent judge on the ground that "the claim of Loreto Solinap
against spouses was yet to be liquidated and determined, such that the
requirement in Article 1279 of the New Civil Code that both debts are
liquidated for compensation to take place has not been established by the
oppositor Loreto Solinap. Petitioner filed a motion for reconsideration of
this order, but the same was denied. Hence, this petition.

ISSUE: whether or not the obligation of petitioner to private respondents
may be compensated or set-off against the amount sought to be recovered
in an action for a sum of money filed by the former against the latter

HELD: The petition is devoid of merit. In the case at bar, the petitioner's
claim against the spouses was still pending determination by the court.
Petitioners claim in the case could not be categorized as liquidated credit
which may properly be set-off against his obligation. As this Court ruled in
Mialhe vs. Halili "compensation cannot take place where one's claim
against the other is still the subject of court litigation. It is a requirement,
for compensation to take place, that the amount involved be certain and
liquidated." The petition was dismissed.