PNB MANAGEMENT AND DEVELOPMENT CORP. (PNB MADECOR), PETITIONER, VS. R&R METAL CASTING AND FABRICATING, INC., RESPONDENT.

PNB Management and Development Corporation versus R and R Metal Casting and Fabricating

The Case

This is a petition for review on certiorari brought by PNB Management and Development Corporation, known as PNB MADECOR, against R and R Metal Casting and Fabricating, Incorporated. R and R had won a money judgment against Pantranco North Express, Incorporated, and when execution proved fruitless, it sought to reach money that PNB MADECOR owed to Pantranco. The case matters because it settles, in one clean stroke, three things a reviewee must know: what proof is needed before a judgment debtor's debtor may be examined, when legal compensation does not arise, and why a garnishee is a forced intervenor who cannot demand a separate trial.

Procedural History

R and R obtained a judgment in its favor against Pantranco North Express, Incorporated. The writ of execution was returned unsatisfied because the sheriff found no property of Pantranco in the registries of deeds of the cities of Metro Manila, and no reply came to the notice of garnishment sent to PNB Escolta. R and R then moved for subpoenas requiring PNB MADECOR to produce documents and testify on its transactions with Pantranco. On the basis of that testimony, R and R moved for the application of Pantranco's funds in the hands of PNB MADECOR. The Regional Trial Court of Manila, Branch 7, granted the motion and ordered the garnishment. PNB MADECOR appealed to the Court of Appeals, which affirmed the order in a decision dated September 22, 1997, and denied reconsideration on December 29, 1997. Hence this petition for review on certiorari before the Supreme Court.

Facts

On November 19, 1993, R and R obtained a judgment against Pantranco North Express, Incorporated, ordering Pantranco to pay actual damages of 213,050 pesos plus interest, exemplary damages of 50,000 pesos, attorney's fees of 25 percent of the total amount payable, and the costs of suit. Execution failed. The sheriff found no property of Pantranco in the registries of deeds, and the notice of garnishment sent to PNB Escolta drew no reply.

R and R then asked the trial court to subpoena PNB MADECOR. From the testimony of its representative, it emerged that NAREDECO, PNB MADECOR's forerunner, had executed a promissory note in favor of Pantranco for 7.8 million pesos, and that PNB MADECOR also owed Pantranco more than 7.5 million pesos in unpaid rentals. R and R moved to apply these funds to the judgment.

PNB MADECOR opposed on four grounds: no sheriff's return was presented; the promissory note was not yet due and demandable; any obligation was extinguished by legal compensation since Pantranco owed it unpaid rentals; and it had an adverse claim over the funds under Section 45, Rule 39 of the Rules of Court. The trial court nonetheless ordered the garnishment on May 22, 1995. The Court of Appeals affirmed, and the case reached this Court.

Issues

• Whether or not an affidavit stating that the judgment has not been satisfied is a condition precedent to the examination of a person indebted to the judgment debtor under Section 39, Rule 39 of the Rules of Court.
• Whether or not Pantranco made a demand on PNB MADECOR for payment of the promissory note.
• Whether or not the requisites of legal compensation under Articles 1277 and 1278 of the Civil Code concur in this case.
• Whether or not PNB MADECOR became a forced intervenor upon service of the notice of garnishment, such that it was denied the right to ventilate its position in a full-blown trial.

Applicable Provisions

Section 39, Rule 39 of the Rules of Court, prior to its amendment in 1997, provides:

Section 39. Examination of debtor of judgment debtor. After an execution against the property of a judgment debtor has been returned unsatisfied in whole or in part, and upon proof, by affidavit of a party or otherwise, to the satisfaction of the judge, that a person, corporation, or other legal entity has property of such judgment debtor, or is indebted to him, the judge may, by an order, require such person, corporation, or other legal entity, or any officer or member thereof, to appear before the judge, or a commissioner appointed by him, at a time and place within the province in which the order is served, to answer concerning the same. The service of the order shall bind all credits due the judgment debtor and all money and property of the judgment debtor in the possession or in the control of such person, corporation, or legal entity from the time of service; and the judge may also require notice of such proceedings to be given to any party to the action in such manner as he may deem proper.

This is the provision under which the trial court examined PNB MADECOR and bound the credits in its hands.

Section 43, Rule 39 of the Rules of Court provides:

Section 43. Proceedings when indebtedness denied or another person claims the property. If it appears that a person or corporation, alleged to have property of the judgment obligor or to be indebted to him, claims an interest in the property adverse to him or denies the debt, the court may authorize, by an order made to that effect, the judgment obligee to institute an action against such person or corporation for the recovery of such interest or debt, forbid a transfer or other disposition of such interest or debt within one hundred twenty days from notice of the order, and may punish disobedience of such order as for contempt. Such order may be modified or vacated at any time by the court, which issued it, or by the court, in which the action is brought, upon such terms as may be just.

This is the separate action PNB MADECOR insisted on, but the Court held it applies only where the garnishee claims an adverse interest or denies the debt.

Ruling

On the first issue, the Court held that no affidavit of unsatisfied judgment is required. The rule speaks of proof, by affidavit of a party or otherwise, that a third person is indebted to the judgment debtor, not of a sheriff's return. The Court refused to read into the rule what simply is not there, and noted that the 1997 Revised Rules require only proof to the satisfaction of the court.

On the second issue, the Court held that no demand was made. The letter invoked by R and R merely informed PNB MADECOR of the conveyance of part of its obligation to the Philippine National Bank and of the unpaid balance. A second letter, dated January 24, 1990, requested offsetting of accounts, but Pantranco's own Assistant General Manager for Finance testified that it was not a demand letter.

On the third issue, the Court held that legal compensation did not arise. The obligation under the promissory note was payable on demand, and absent demand it was not yet due. The Court quoted the appellate court's observation:

Since petitioner's obligation to PNEI is payable on demand, and there being no demand made, it follows that the obligation is not yet due. Therefore, this obligation may not be subject to compensation for lack of a requisite under the law.

On the fourth issue, the Court held that PNB MADECOR became a forced intervenor upon service of the notice of garnishment. It quoted its 1921 ruling in Tayabas Land Company versus Sharruf:

By this means such debtor stranger becomes a forced intervenor; and the court, having acquired jurisdiction over his person by means of citation, requires him to pay his debt, not to his former creditor, but to the new creditor, who is creditor in the main litigation.

No separate action was needed, because PNB MADECOR expressly admitted its obligation to Pantranco. It had in fact appeared at hearings, examined witnesses, and filed pleadings, so it could not claim denial of a full-blown trial.

Doctrine

First, under Section 39, Rule 39, the examination of a judgment debtor's debtor requires only proof, by affidavit or otherwise, to the satisfaction of the judge, that the third person is indebted to the judgment debtor. A sheriff's return of unsatisfied execution is not the affidavit contemplated, and no such affidavit is a condition precedent.

Second, legal compensation requires that both debts be due and demandable. Where the obligation is payable on demand and no demand has been made, the debt is not yet due, and compensation cannot arise.

Third, service of a notice of garnishment makes the garnishee a forced intervenor, and the court acquires jurisdiction to bind him to its orders. The separate action under Section 43, Rule 39 lies only where the garnishee claims an adverse interest or denies the debt.

Disposition

The petition was denied, and the decision and resolution of the Court of Appeals were affirmed. R and R prevailed, and the garnishment of PNB MADECOR's debt to Pantranco stood.

Remember This

Memorize this line: a garnishee served with notice becomes a forced intervenor, and the court may compel him to pay his debt not to his former creditor but to the judgment creditor. Examiners use this case on the requisites of legal compensation, on the proof needed to examine a judgment debtor's debtor, and on why a garnishee cannot insist on a separate action when he admits the debt.