G.R. No.

172020 December 6, 2010

TRADERS ROYAL BANK, Petitioner, vs.
NORBERTO CASTAÑARES and MILAGROS CASTAÑARES, Respondents.

FACTS
Spouses Castanares are exporters of shell crafts and handicrafts. To sustain their business, they obtained
loans and credit accommodations from Traders Royal Bank, mortgaging their real estates (REMs). As
evidenced by a promissory note, petitioner released only the amount of P35,000.00 although the mortgage
deeds indicated the principal amounts as P86,000.00 and P60,000.00. Respondents were further granted
additional funds on various dates under promissory notes they executed in favor of the petitioner.

Petitioner transferred the amount of P1,150.00 from respondents current account to their savings account.
The loans began to mature and the letters of credit against which the packing advances were granted
started to expire. Petitioner, without notifying the respondents, applied to the payment of respondents
outstanding obligations the sum of P30,930.49 which was remitted to the respondents thru telegraphic
transfer from AMROBANK, Amsterdam.

For failure of the respondents to pay their outstanding loans with petitioner, the latter proceeded with the
extrajudicial foreclosure of the real estate mortgages. Thereafter, a Certificate of Sale covering all the
mortgaged properties was issued by in favor of petitioner as the lone bidder.

Petitioner instituted a Civil Case for deficiency judgment, claiming that after applying the proceeds of
foreclosure sale to the total unpaid obligations of respondents (P200,397.78), respondents were still
indebted to petitioner for the sum ofP83,397.68. Respondents filed a Civil Case for the recovery of the sum
debited from their savings account passbook and the equivalent amount of telegraphic transfer, and in
addition, the damage suffered by the respondents from letters of credit left un-negotiated. The RTC
consolidated the cases and ruled in favor of the petitioner but was overturned by the CA.

ISSUE:
Whether or not the payment of $4,220.00 by the Bank by way of compensation is valid.

HELD:
Yes. Agreements for compensation of debts or any obligations when the parties are mutually creditors and
debtors are allowed under Art. 1282 of the Civil Code even though not all the legal requisites for legal
compensation are present. Voluntary or conventional compensation is not limited to obligations which are
not yet due. The only requirements for conventional compensation are (1) that each of the parties can fully
dispose of the credit he seeks to compensate, and (2) that they agree to the extinguishment of their mutual
credits. Consequently, no error was committed by the trial court in holding that petitioner validly applied, by
way of compensation, the $4,220.00 telegraphic transfer remitted by respondents’ foreign client through
the petitioner.