G.R. No. 202454 - California Manufacturing Co., Inc. vs. Advanced Technology System, Inc.

In August 2001, California Manufacturing Company, Inc. (CMCI), a food and beverage manufacturer, entered into a lease with Advanced Technology Systems, Inc. (ATSI), a fabricator and distributor of food-processing machinery, for a Prodopak pouch-packing machine at a monthly rental of ₱98,000 (exclusive of tax). ATSI delivered the machine to CMCI’s plant on 8 August 2001.
CMCI consistently paid rent until June 2003, when it defaulted on rentals for June, July, August, and September 2003 without just cause and ignored billing statements and demands.

In November 2003, ATSI filed a Complaint for Sum of Money in RTC Pasig City (Civil Case No. 69735) seeking ₱443,729.39 for unpaid rentals, plus legal interest from extra-judicial demand (13 October 2003), 30% of the judgment award as attorney’s fees, and litigation costs.
CMCI moved to dismiss for extinguishment of obligation by legal compensation (with its claim against Processing Partners and Packaging Corporation, PPPC), but the RTC denied the motion for lack of ripe factual issues and ordered CMCI to answer.

CMCI alleged that ATSI and PPPC were one and the same: exponents included shared incorporators, interlocking directors, and common majority stockholders (the Spouses Celones). CMCI claimed it advanced PPPC a ₱4 million mobilization fund in 2000, repayable in twelve installments deducted from PPPC’s monthly invoices.
CMCI relied on a 30 July 2001 letter from Felicisima Celones proposing to set off PPPC’s obligation (P3.2 million) against ATSI’s rental claim, and a 16 September 2003 letter reaffirming offset authority. CMCI contended PPPC’s debt had grown to ₱10,766,272.24 by the time ATSI sued.

The RTC held that legal compensation did not apply due to lack of mutuality: ATSI was distinct from PPPC and the Spouses Celones, and Felicisima’s letters were unauthorized by corporate resolutions.
The RTC rendered judgment ordering CMCI to pay ATSI ₱443,729.39 plus legal interest, 30% of the award as attorney’s fees, and costs of litigation.

The CA affirmed the RTC’s ruling denying compensation and refusing to pierce the corporate veil for lack of clear and convincing proof of fraud or alter ego misuse.
The CA deleted the award of attorney’s fees and costs, finding no factual or legal basis discussed in the RTC Decision, and ordered CMCI to pay litigation costs. A subsequent motion for reconsideration was denied.

Whether the Court of Appeals erred in affirming the RTC’s finding that legal compensation between ATSI’s claim against CMCI and CMCI’s claim against PPPC did not set in.