2. Conditions for Compensation

Action of compensation from funds

An action civil in character, which may be in the form of an ordinary complaint for damages.

The person bringing the action for damages against the Fund must meet the requirements of Section 95 of P.D. No. 1529; eligibility is not limited to registered owners, holders of transfer certificates of title, or innocent purchasers for value (La Urbana v. Bernardo, 62 Phil. 790, 1936)

This remedy is not available when the party seeking compensation was negligent, as when there were circumstances which should have put him on guard and prompted him to investigate the property involved (Torres v. CA, 186 SCRA 679, 1990)

Who may file (Requisites)

• A person who sustained loss or damage, or is deprived of the land or any estate or interest therein;
• Such loss, damage or deprivation was occasioned by the bringing of the land under the operation of the Torrens system or arose after the original registration of the land;
• The loss, damage or deprivation was due to: fraud, or any error, omission, mistake, or misdescription in any certificate of title or in any entry or memorandum in the registration book. (Loss or damage should not be due to breach of trust or mistake in resurvey resulting in expansion of area in certificate of title.);
• The aggrieved party was not negligent;
• He is barred under the provisions of P.D. 1529 or under the provisions of any law from recovering such land;
• The action has not prescribed.

Compensation and Execution (Secs. 97,99 P.D. 1529)

Compensation cannot be more than the fair market value of land at time of loss.

Amount to be recovered is not limited to P500,000 which is maintained as standing fund. If fund is not sufficient, National Treasurer is authorized to make up for deficiency from other funds available to Treasury not otherwise appropriated.

Execution is first sought against the person responsible for fraud; if he is insolvent, against the National Treasury. Thereafter, the Government shall be subrogated to the rights of plaintiff to go against other parties or securities.

The Assurance Fund is only liable in the last resort, as suggested under Section 97 of Presidential Decree No. 1529. The person causing the fraud or the error should be liable first. However, if the judgment cannot be executed, the Assurance Fund is the insurance to the innocent purchaser for value who relied on the validity of the real property’s certificate of title. The Assurance Fund answers only as a last resort when judgment cannot be executed against the person responsible or that person’s estate. The claimant must still comply with Section 95 of Presidential Decree No. 1529’s requisites for recovery from the Fund. (The Register of Deeds of Negros Occidental v. Anglo, Sr., G.R. No. 171804, August 5, 2015)

Requisites of compensation

For the compensation to be proper, it is necessary that (NCC, Art. 1279):

• Each one of the obligors must be bound principally, and that he be at the same time a principal creditor of the other except guarantor who may set up compensation as regards what the creditor may owe the principal (NCC, Articles. 1279-1280);
• Both debts consist in 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;
• Both debts are due;
• Both debts are liquidated and demandable;
• Over neither debt must there be any retention or controversy commenced by third persons and communicated in due time to the debtor (NCC, Art. 1279); and
• Compensation must not be prohibited by law. (NCC, Arts. 1287–1288)

NOTE: When all the requisites mentioned in Art. 1279 of the CC are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (NCC, Art. 1290)

Effectivity of conventional compensation

For compensation to become effective:

GR: The mutual debts must be both due. (NCC, Art. 1279)

XPN: The parties may agree that their mutual debts be compensated even if the same are not yet due. (NCC, Art. 1282)

Judicial compensation

If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof (NCC, Art. 1283).

NOTE : For judicial set-off to apply, the amount of damages or the claim sought to be compensated must be duly proven. (Fermin Ong v. CA, G.R. No. 75819, September 8, 1989)

All the requisites mentioned in Art. 1279 must be present, except that at the time of filing the pleading, the claim need not be liquidated. The liquidation must be made in the proceedings.