PHILIPPINE NATIONAL BANK, PETITIONER, VS. GLORIA G. VDA. DE ONG ACERO, ARNOLFO ONG ACERO & SOLEDAD ONG ACERO CHUA, RESPONDENTS.

Philippine National Bank versus Vda. de Ong Acero

The Case

This is a contest between two claimants to a single fund: a two million peso savings account opened with the Philippine National Bank in the name of Isabela Wood Construction and Development Corporation. On one side stand the Aceros, Gloria, Arnolfo, and Soledad, judgment creditors of the depositor, who caused the deposit to be garnished to satisfy a final judgment in their favor. On the other side stands the bank itself, which insists that the deposit was really a loan it owed the depositor, and that a mutual set-off between them had already extinguished that debt before the garnishment. The case matters because it fixes the rules on legal compensation, on the proof required to establish a credit, and on the moment a garnished deposit passes into the custody of the law.

Procedural History

The Aceros sued Isabela Wood before the Court of First Instance of Rizal, Quezon City Branch Sixteen, and obtained a partial judgment in November 1979 ordering payment of one million five hundred thirty-two thousand pesos and seven centavos. A writ of execution issued in December 1979, and notice of garnishment was served on the bank in January 1980. The trial court then ordered the bank to turn over that amount to the sheriff. The bank intervened, moved for reconsideration, and was refused. After repeated motions, the trial court, now presided over by Judge Solano, set aside its earlier orders and ruled in October 1982 that there had been a valid assignment of the deposit to the bank. The Aceros moved for reconsideration, were refused in December 1982, and appealed to the Intermediate Appellate Court. That court reversed the trial court in September 1984, reinstated the order of February 1980, and later modified its judgment to require the bank to deliver the balance of the deposit as well. The bank then came to the Supreme Court by appeal by certiorari.

Facts

In October 1977, Isabela Wood entered into a credit agreement with the bank for a deferred letter of credit covering the purchase of thirty-five trucks from a German supplier. Among the collateral undertakings, the corporation agreed to assign to the bank the proceeds of its contract with the Department of Public Works for the construction of the Nagapit Suspension Bridge in Cagayan. In February 1979, its president wrote the bank confirming an arrangement that the treasury warrant of about two million seven hundred four thousand pesos would be placed in a savings account with the bank to the extent of two million pesos, and that the amount would remain there until the corporation could deliver and register a mortgage over its Parañaque property and secure consent for a second mortgage.

In March 1979, the bank opened the savings account in the name of the corporation with an initial deposit of two million pesos, proceeds of the treasury warrant. The corporation failed to deliver the mortgage and failed to obtain the consent. The bank then applied the amount of two million one hundred two thousand eight hundred four pesos and eleven centavos from the savings account to the corporation's supposed obligations.

Meanwhile, the Aceros had obtained judgment against the corporation, and notice of garnishment was served on the bank in January 1980. The bank's attempted application of the deposit was made only in February 1980, after the fund was already under garnishment. The bank produced only two exhibits to prove the corporation's indebtedness, and never presented the documents of availment of the letter of credit, the shipping and receipt of the trucks, the trust receipts, or the demands.

Issues

• Whether or not legal compensation took place between the bank and the depositor so as to extinguish the deposit and remove it from the reach of the depositor's judgment creditors.
• Whether or not the bank proved by competent evidence that it was a creditor of the depositor.
• Whether or not the deposit had been validly assigned to the bank as collateral, or the bank validly authorized to apply it to the depositor's debt.
• Whether or not the bank could apply the deposit after notice of garnishment had been served on it.

Applicable Provisions

Article 1278 of the Civil Code provides:

Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

This is the provision on which the bank built its whole theory of automatic set-off, and which the Court found inapplicable for want of a proven credit.

Article 1279 of the Civil Code, referred to by the Court as setting out the requisites of compensation, provides:

In order that compensation may be proper, it is necessary: 1. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; 2. 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 agreed upon; 3. That the two debts be due; 4. That they be liquidated and demandable; 5. That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

The fifth requisite is decisive here, because the garnishment communicated to the bank placed the deposit under a controversy commenced by third persons.

Article 2088 of the Civil Code provides:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

This is the prohibition against the pactum commisorium, the agreement allowing the creditor to take ownership of the security, which the Court invoked to void the bank's claimed authority to assume ownership of the fund.

Ruling

On the first issue, the Court held that compensation could not arise. The bank's premise was that the deposit made it a debtor of the depositor, and that the depositor's later default made them mutual debtors and creditors. But the Court held that the provisions on compensation cannot apply to the bank's advantage, because the bank had not shown that it was in fact a creditor.

On the second issue, the Court held that the factual finding of the appellate court bound it: the bank failed to prove by competent evidence that it was a creditor of the depositor. Its two exhibits proved only that a letter of credit might have been opened, not that it was availed of or that the goods were shipped and received. The most persuasive documents would naturally have been in the bank's own possession, and the trial court had even given it the occasion to present them. Its explanation that the documents had merely been shown to opposing counsel drew the appellate court's rebuke that one does not prove a fact in issue by showing evidence to the opposing counsel, but by submitting it to the proper court. The failure was fatal.

On the third issue, the Court held that no assignment was made out. The credit agreement expressed only an intention to assign the contract proceeds, and the later letter of the corporation's president indicated the abandonment of that intention, since it spoke of placing and keeping the amount in a savings account until specified commitments were met. The most telling circumstance was that the bank itself deposited the whole amount in the name of the corporation, without any statement that the bank owned the deposit or that a lien burdened it. Even assuming an assignment and an authority to apply the fund, the Court held that the agreement allowing the bank to assume ownership of the fund upon the depositor's indebtedness is void from the beginning, being in the nature of a pactum commisorium, an agreement for the creditor to take the security as his own, proscribed as contrary to public policy.

On the fourth issue, the Court held that the attempted application in February 1980 was ineffectual and futile, because by then the deposit was already in custodia legis, in the custody of the law, notice of garnishment having been served on the bank in January 1980.

Doctrine

Legal compensation requires, among its requisites, that the two debts be due, liquidated, and demandable, and that over neither of them there be any retention or controversy commenced by third persons and communicated in due time to the debtor. A bank claiming compensation against a depositor must first prove its credit by competent evidence; the deposit is presumed to belong to the depositor in whose name it stands. Once notice of garnishment is served, the garnished fund is in custodia legis, and any subsequent application of it by the garnishee is void. An agreement authorizing a creditor to appropriate the security to himself is a void pactum commisorium under Article 2088.

Disposition

The Supreme Court affirmed the judgment of the Intermediate Appellate Court in full, and ordered the bank to pay the costs.

Remember This

Memorize the line that a garnished deposit is in the custody of the law, so that any set-off attempted afterward is futile. Examiners use this case to test the requisites of legal compensation, the burden of proving a credit, and the prohibition against the pactum commisorium.