G.R. No. L-69255 - Philippine National Bank vs. Vda. de Ong Acero

Case Digest (G.R. No. L-69255)
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Facts:

Background of the case

On March 9, 1979, Isabela Wood Construction & Development Corporation (hereafter ISABELA) opened Savings Account No. 010-5878868-D at Philippine National Bank (PNB) with a deposit of P2 million.
The account became the subject of conflicting claims between judgment creditors Gloria G. Vda. de Ong Acero, Arnolfo Ong Acero, and Soledad Ong Acero Chua (collectively the ACEROS) and PNB.
The ACEROS sought to enforce a final judgment by the Court of First Instance (CFI) ordering ISABELA to pay them P1,532,000.07 plus additional damages and attorney's fees.
PNB claimed a mutual set-off between it and ISABELA, arguing that because ISABELA was indebted to PNB and the deposit was collateral for ISABELA’s debt, PNB had applied the deposit to ISABELA’s debt, foreclosing ACEROS’ claim.

The ACEROS’ claim and proceedings

ACEROS obtained a partial judgment against ISABELA on November 18, 1979, ordering payment of P1,532,000.07.
A writ of execution was issued on December 23, 1979, and notice of garnishment to PNB was served on January 9, 1980.
On February 15, 1980, the CFI ordered PNB to release P1,532,000.07 to the sheriff for ACEROS.
On April 8, 1980, a final judgment was rendered in favor of ACEROS, confirming the principal amount and adding compensatory damages of P207,148.00 and attorney’s fees of P383,000.00, all with interest.

PNB's claim of set-off and collateral assignment

PNB relied on a Credit Agreement dated October 13, 1977, between it and ISABELA, under which a deferred letter of credit was opened in ISABELA’s favor for DM 4,695,947.00 to purchase MAN trucks from Germany.
ISABELA agreed as collateral, among other things, to assign to PNB the proceeds from its contract with the Department of Public Works for the Nagapit Suspension Bridge construction.
ISABELA’s president confirmed in a letter dated February 21, 1979, that a treasury warrant of P2.704 million would be placed in a savings account with PNB as collateral pending registration of a mortgage over ISABELA's Paranaque property.
Pursuant to this arrangement, PNB opened the subject savings account with the treasury warrant proceeds amounting to P2 million on March 9, 1979.
ISABELA failed to register the mortgage and secure consent for a second mortgage, resulting in PNB’s claim to apply the deposit to ISABELA's indebtedness.
PNB moved for reconsideration of the February 15, 1980 order directing turnover of funds but was denied by the trial court on May 14 and August 11, 1980.
On October 9, 1980, the trial court set aside prior denying orders and scheduled hearing on PNB’s reconsideration.
On October 1, 1982, the trial court struck down the February 15, 1980 order and ruled that the P2 million deposit was validly assigned by ISABELA to PNB as collateral and thus beyond ACEROS' reach.
ACEROS moved for reconsideration, denied on December 14, 1982.
ACEROS appealed to the Intermediate Appellate Court (IAC), which reversed and reinstated the February 15, 1980 order on September 14, 1984, requiring PNB to deliver the amount with interest and pay attorney’s fees and costs.
The IAC further modified the order on November 8, 1984, requiring PNB to deliver the balance of the deposit after deducting the partial judgment sum.

PNB’s legal theory

PNB argued it became a debtor to ISABELA for P2 million when the savings account was opened.
ISABELA allegedly became indebted to PNB on the breach of the Credit Agreement, making them mutually creditor and debtor.
Accordingly, compensation under Articles 1278 et seq. of the Civil Code occurred automatically, applying the deposit to extinguish ISABELA’s debt to PNB, excluding ACEROS' execution on the deposit.

Failure of PNB to prove indebtedness and assignment validity

IAC found PNB failed to prove by competent evidence that ISABELA was indebted to it, noting PNB presented only two documents which did not establish indebtedness or actual availment of the letter of credit.
PNB did not present critical documents such as availment papers, bills of lading, trust receipts, or mortgage instruments that would prove the transaction or indebtedness.
PNB admitted showing these documents to ACEROS' counsel was insufficient to prove the fact before the court.
The IAC also found that the assignment of the deposit as collateral was at best intended but never perfected, shown by the letter from ISABELA’s president which indicated the amount was to remain in the savings account pending compliance with conditions.
The deposit was placed in ISABELA’s name, without any notice of assignment to PNB or lien, evidencing that PNB did not hold ownership.
Even if an assignment had been made, PNB’s attempted application of the deposit on February 26, 1980 was ineffective because the deposit was already under court custody since January 9, 1980 upon garnishment.
Also, the agreement purporting that PNB could take ownership of the deposit upon ISABELA’s indebtedness was declared void as pactum commissorium, contrary to public policy (Art. 2088, Civil Code).

Issues:

Whether PNB is entitled to set off the P2 million deposit against ISABELA’s indebtedness, thus excluding the deposit from ACEROS’ execution.
Whether the assignment of ISABELA’s deposit to PNB as collateral was valid and enforceable against the ACEROS.
Whether the application of the deposit by PNB in payment of ISABELA’s debt was effective and binding despite the garnishment and court orders.

Ruling:

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Ratio:

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Doctrine:

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