Garcia vs. Lim Chu Sing, 59 Phil. 562, G.R. No. L-39427, February 24, 1934

Subject: Obligations and Contracts

FACTS

The defendant Lim Chu Sing executed a promissory note for P19,605.17 with the Mercantile Bank of China, payable in monthly installments with interest at 6% per annum. The note stipulated that default in the payment of any monthly installment would make the entire amount due and payable. The defendant defaulted on several installments, leaving an unpaid balance of P9,105.17. The defendant alleged that the debt was not his but that of Lim Cuan Sy, who had an account with the plaintiff bank and had guaranteed it with chattel mortgage securities. The plaintiff bank foreclosed the mortgage without the defendant's knowledge or consent and required the defendant to sign the promissory note as surety. The defendant filed a motion to include Lim Cuan Sy as a party defendant, which was denied by the presiding judge without objection from the defendant. The defendant is the owner of shares of stock in the plaintiff bank, which is now under liquidation.

ISSUE

Whether or not it is proper to compensate the defendant-appellant's indebtedness of P9,105.17, which is claimed in the complaint, with the sum of P10,000 representing the value of his shares of stock with the plaintiff entity, the Mercantile Bank of China.

RULING

No, a share of stock or the certificate of Mr. Lim Chu Sing is not an indebtedness to the owner nor evidence of indebtedness.

According to the provisions of the New Civil Code, in order that compensation may be proper, it is necessary 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.

In the case, the defendant-appellant Lim Chu Sing being the stockholder of the corporation is not being a creditor of the Mercantile Bank of China because the capital stock of a corporation is a trust fund to be used more particularly for the security of creditors of the corporation, who presumably deal with it on the credit of its capital stock. Therefore, the defendant-appellant Lim Chu Sing not being a creditor of the Mercantile Bank of China, although the latter is a creditor of the former, there is no sufficient ground to justify a compensation.