Facts:

This case involves a petition for review on certiorari filed by Banco de Oro Unibank, Inc. (now BDO Unibank, Inc.), the petitioner, against Edgardo C. Ypil, Sr., Cebu Sureway Trading Corporation (CSTC), and Leopoldo Kho, the respondents. The events leading to this case commenced on August 20, 2002, when Kho, acting for CSTC, proposed to Ypil to invest P300,000.00 in the Prudentialife Plan - Millionaires in Business scheme. Following this agreement, Ypil transmitted the requested funds but later sought a refund through a letter dated February 11, 2003, after CSTC failed to respond to his demand. After multiple unsuccessful attempts to retrieve his money, Ypil initiated a civil suit against CSTC and Kho in the Regional Trial Court (RTC) of Cebu City, docketed as Civil Case No. CEB-29462. The RTC granted Ypil a writ of preliminary attachment concerning CSTC's assets, resulting in a Notice of Garnishment issued on February 4, 2004, to the petitioner bank. The bank, having receiv

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Facts:

Investment and Debt Origin

• In August 2002, Leopoldo Kho, representing Cebu Sureway Trading Corporation (CSTC), proposed that Edgardo C. Ypil, Sr. invest in the “Prudentialife Plan - Millionaires in Business” scheme by contributing P300,000.00.
• Ypil agreed to invest; however, after making the payment, he later sought a refund by manifesting his intent in a letter dated February 11, 2003, to which CSTC (or Kho) did not respond.
• Several follow-up oral and written demands, including a demand letter on May 19, 2003 sent by Ypil’s lawyer, went unanswered.

Filing of the Specific Performance Case

• Ypil filed a Complaint for Specific Performance with Attachment, Damages, and Attorney’s Fees against CSTC and Kho before the Regional Trial Court (RTC) of Cebu City (Civil Case No. CEB-29462).
• Ypil claimed the principal sum of P300,000.00, along with interest at two percent per month, a compounded monthly collection fee at two percent, and associated damages and attorney’s fees.

Attachment and Garnishment Proceedings

• On October 15, 2003, the RTC granted Ypil’s ex-parte application for the issuance of an attachment order, later executing a Writ of Preliminary Attachment on October 29, 2003.
• A Notice of Garnishment was subsequently issued on February 4, 2004 by Sheriff Pascual M. Guaren against the accounts of CSTC and/or Kho, directing the petitioner Bank (Banco de Oro Unibank, Inc.—now BDO Unibank, Inc.) to withhold P300,000.00 plus lawful expenses.
• The Bank, via its North Mandaue Branch, responded on February 10, 2004, stating that there were no available garnishable funds.

Trial Court Proceedings and Bank’s Conduct

• Following the Notice of Garnishment, procedural delays occurred, including the failure of the Bank’s representative, Head Cyrus M. Polloso, to appear during pre-trial conferences.
• The RTC discovered that the Bank had already debited amounts from CSTC’s accounts to offset CSTC’s outstanding obligations under a loan agreement.
• On May 9, 2008, the RTC ordered the Bank, through Polloso, to show cause for debiting the funds, which were preserved under custodia legis.
• The RTC later absolved Polloso from a charge of indirect contempt but compelled the Bank to hold the garnished funds for the court.

Intervention of the Bank and Subsequent Motions

• The Bank filed a Compliance/Explanation on June 16, 2008, arguing that CSTC’s default on its obligations automatically triggered legal compensation by operation of law.
• CSTC and Kho countered that legal compensation, as a set-off, should not affect third parties or judicial processes such as garnishment since their loan was not yet due and demandable.
• Ypil further asserted that once the Bank received the Notice of Garnishment, it became a forced intervenor, and funds immediately entered custodia legis, preventing any unilateral debit by the Bank.

Compromise Agreement and Later Developments

• On November 23, 2012, a Compromise Agreement was entered between Ypil and Kho (on behalf of CSTC), wherein Kho agreed to pay P300,000.00 as full settlement of CSTC’s obligation, with both parties waiving additional claims.
• The RTC approved the Compromise Agreement and ordered the Bank to release the garnished amount to Ypil.
• The Bank contested the agreement, asserting that the funds were subject to its claim via legal compensation and alleging bad faith by the respondents for including the disputed deposit in the Compromise Agreement.

Court of Appeals and Further Petitions

• The Court of Appeals (CA), in its January 15, 2014 Decision and March 26, 2014 Resolution, affirmed the RTC’s rulings, holding that the Bank’s reliance on legal compensation was flawed due to the lack of evidence regarding the due and liquidated nature of CSTC’s debt.
• The CA emphasized that the timely service of the Notice of Garnishment placed CSTC’s funds under custodia legis, precluding the retroactive application of legal compensation.
• Dissatisfied with the outcome, the Bank filed a Petition for Review on Certiorari before the Supreme Court, arguing that legal compensation had taken place ipso jure and that respondents acted in bad faith by incorporating the deposit into their Compromise Agreement.

Issue:

Whether legal compensation occurred ipso jure between the Bank and CSTC.

• Did the requisites under Article 1279 of the Civil Code—specifically the due and liquidated nature of the debt—occur, thereby granting the Bank the right to offset CSTC’s funds?
• Whether the Bank’s assertion that CSTC defaulted (triggering immediate demandability under the Promissory Note) was sufficiently proven.

The impact of the Notice of Garnishment on the application of legal compensation.

• Whether the service and receipt of the Notice of Garnishment effectively placed CSTC’s deposits under custodia legis.
• Whether such placement precluded the Bank from later unilaterally debiting the funds via legal compensation.

The propriety of including the disputed deposit in the Compromise Agreement.

• Whether CSTC and Kho acted in bad faith by incorporating the deposit into their settlement with Ypil.
• The implication of the Compromise Agreement on the Bank’s claim of legal compensation.

Ruling:

• (Subscriber-Only)

Ratio:

• (Subscriber-Only)

Doctrine:

• (Subscriber-Only)