PNB vs Ong Acero (Civil Law)

PHILIPPINE NATIONAL BANK
vs.
GLORIA G. VDA. DE ONG ACERO, ARNOLFO ONG ACERO & SOLEDAD ONG ACERO CHUA

--- For compensation to automatically apply by law, it must be proved by competent evidence that the parties are the creditors and debtors of each other.

--- Property already in custodia legis cannot be the subject of a set-off.

G.R. No. L-69255; February 27, 1987; NARVASA, J.

Isabela Wood Construction & Dvpt Corp (ISABELA) has a savings account with PNB in the amount of P2 Million. Said account is the subject of two conflicting claims. One claim is asserted by the Aceros (respondents), and the other is by PNB.

Aceros’ claim to the bank deposit was founded upon the garnishment thereof by the sheriff, effected in execution of the partial judgment (in the amount of P1.5 M) rendered by the CFI in their favor. Notice of garnishment was served on PNB, followed by a CFI order (Feb. 15, 1980) directing the latter to hand over the P1.5M to the sheriff for delivery to the ACEROs. A second judgment was rendered ordering ISABELLA to pay compensatory damages and atty.’s fees all amounting to almost P600k.

On the other hand, PNB's claim is based on a Credit Agreement between it and ISABELA in virtue of which: (1) the deposit was made by ISABELA as "collateral" in connection with its indebtedness to PNB as to which it (ISABELA) had assumed certain contractual undertakings (such as to deliver a property as mortgage, obtain the consent of Metrobank to secure a second mortgage in favor of PNB); and (2) in the event of ISABELA's failure to fulfill those undertakings, PNB was empowered to apply the deposit to the payment of that indebtedness.

It was upon this version of the facts, and its theory thereon based on a mutual set-off, or compensation, between it and ISABELA — in accordance with Articles 1278 et al. of the Civil Code — that PNB intervened in the action between the ACEROS and ISABELA on or about February 28, 1980 and moved for reconsideration of the Order of February 15, 1980 (requiring it to turn over to the sheriff the sum of P1,532,000. The CFI denied the motion. PNB again filed an MR, this time of another Order, and also pleaded for suspension in the meantime of the enforcement of the Orders of February 15, and May 14, 1980. Its persistence seemingly paid off.

The RTC set aside the Orders, and set for hearing PNB’s first MR. Subsequently, the RTC reversed its decision, ruling that there had been a valid assignment by ISABELA to PNB of the amount deposited. The ACEROS appealed to the IAC which ruled in their favor. PNB appealed to the SC.

PNB's main thesis is that when it opened a savings account for ISABELA on March 9, 1979 in the amount of P 2M, it (PNB) became indebted to ISABELA in that amount. So that when ISABELA itself subsequently came to be indebted to PNB on account of ISABELA's breach of the terms of the Credit Agreement, ISABELA and PNB became at the same time creditors and debtors of each other, compensation automatically took place between them, in accordance with Article 1278 of the Civil Code.

PNB’s alternative theory: which is that the P2M deposit had been assigned to it by ISABELA as "collateral," although not by way of pledge; that ISABELA had explicitly authorized it to apply the P2M deposit in payment of its indebtedness; and that PNB had in fact applied the deposit to the payment of ISABELA's debt on February 26, 1980, in concept of voluntary compensation.

ISSUE:

WON PNB’s contentions are correct, and that compensation automatically took place between the parties thus preventing the Aceros’ garnishment thereof

HELD: NO.

Article 1278 of the Civil Code does indeed provide that "Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. " Also true is that compensation may transpire by operation of law, as when all the requisites therefor, set out in Article 1279, are present. Nonetheless, these legal provisions cannot apply to PNB’s advantage under the circumstances of the case at bar. The insuperable obstacle to the success of PNB's cause is the factual finding of the IAC, that it has not proven by competent evidence that it is a creditor of ISABELA. All that the documents presented by PNB prove is that a letter of credit might have been opened for ISABELA by PNB, but not that the credit was ever availed of (by ISABELA's foreign correspondent MAN, or that the goods thereby covered were in fact shipped, and received by ISABELA. It bears stressing that PNB did not at all lack want for opportunity to produce these documents, if it does indeed have them.

PNB’s alternative theory, is as untenable as the first. First, there being no indebtedness to PNB on ISABELA's part, there is in consequence no occasion to speak of any mutual set-off, or compensation, whether it be legal, i.e., which automatically occurs by operation of law, or voluntary, i.e., which can only take place by agreement of the parties.  In the second place, the documents indicated by PNB as constitutive of the claimed assignment do not in truth make out any such transaction. While the Credit Agreement declares it to be ISABELA's intention to "assign to the BANK the proceeds of its contract with the Department of Public Works” it does not appear that that intention was adhered to, much less carried out.

Even if it be assumed that such an assignment had indeed been made, and PNB had been really authorized to apply the P2M deposit to the satisfaction of ISABELA's indebtedness to it, nevertheless, since the record reveals that the application was attempted to be made by PNB only on February 26, 1980, that essayed application was ineffectual and futile because at that time, the deposit was already in custodia legis, notice of garnishment thereof having been served on PNB on January 9, 1980 (pursuant to the writ of execution issued by the CFI for the enforcement of the partial judgment in the ACEROS' favor).

One final factor precludes according validity to PNB's arguments. On the assumption that the P 2M deposit was in truth assigned as some sort of "collateral" to PNB — although as PNB insists, it was not in the form of a pledge — the agreement postulated by PNB that it had been authorized to assume ownership of the fund upon the coming into being of ISABELA s indebtedness is void ab initio, it being in the nature of a pactum commisoruim proscribed as contrary to public policy.