G.R. No. 156132 - Citibank, N.A. vs. Sabeniano

Case Summary (G.R. No. 156132)

Petitioner and Respondent Positions

Petitioners asserted authority to apply respondent’s deposits and placements (including Geneva dollar accounts) against her Philippine loans by virtue of promissory note provisions and an alleged Declaration of Pledge; alternatively, they argued that branches form one entity permitting compensation. Respondent denied indebtedness or notice of setoff, contested signature/authenticity of the Declaration of Pledge, and sought recovery of her deposits and damages.

Key Dates and Procedural Posture

Loans became due and demandable by May 1979.
Trial at RTC (Civil Case No. 11336) culminated in an RTC decision dated 24 August 1995.
Court of Appeals decision promulgated 26 March 2002 (modified by CA resolution dated 20 November 2002).
Supreme Court decision promulgated 16 October 2006 (subject of petitioners’ Motion for Partial Reconsideration filed 6 November 2006 and respondent’s Motion to Clarify filed 20 October 2006). (The 1987 Constitution is the operative constitutional framework applicable to the decision.)

Applicable Law and Authorities Relied Upon

Civil Code provisions on compensation/ set-off (Articles 1278–1279 and Article 1286) and Article 1250 (extraordinary inflation/deflation).
General Banking Law (Republic Act No. 8791) and Foreign Banks Liberalization Law (RA No. 7721) provisions on bank branches, head office guarantee, and treatment of branches.
United States Federal Reserve Act, Section 25 (as invoked to show that foreign branches’ accounts are kept separately).
Evidentiary rules, including best evidence principle (Rule 130, Section 3) and jurisprudential authorities cited in the decision (e.g., Pan‑American Bank v. National City Bank; McGrath; Sokoloff) as persuasive in addressing the legal personality and accounting of foreign branches.

Facts Determined by the Courts

Respondent maintained savings, money market placements and dollar accounts (Citibank-Geneva) with petitioners while owing principal loans aggregating P1,920,000.00 (becoming due by May 1979). Citibank-Manila, after repeated demands, allegedly applied respondent’s local and foreign deposits and placements to liquidate the loan obligation such that, by the valuation dates, proceeds from placements and deposits were asserted to fully offset the indebtedness. Respondent denied authorization, receipt of proper notice, and the existence/validity of documentary authorization (Declaration of Pledge).

RTC Ruling

The RTC declared the Geneva set-off of US$149,632.99 illegal and ordered refund with legal interest (12% p.a., compounded yearly from 31 October 1979) or peso equivalent; it found respondent indebted to Citibank in P1,069,847.40 as of 5 September 1979 but ordered no interest/penalty from 31 October 1979 due to the illegal setoff; other claims/counterclaims were dismissed.

Court of Appeals Ruling

The Court of Appeals largely affirmed the RTC and, by its March 2002 decision (later partially modified by a November 2002 resolution), declared various money market placements and bank instruments subject to return (including specific NNPNs and FNCB placements), annulled the P1,069,847.40 set‑off for lack of competent evidence, and awarded P500,000 moral damages, P500,000 exemplary damages, and P100,000 attorney’s fees.

Supreme Court Disposition (16 October 2006)

The Supreme Court partly granted the petition but affirmed with modification the CA decision: it declared certain PNs subsisting and outstanding and ordered Citibank to return specified principal amounts on two PNs (P318,897.34 and P203,150.00) with stipulated interest (14.5% p.a.) from 17 March 1977; it declared the remittance of US$149,632.99 from Citibank-Geneva to Citibank-Manila and its application to respondent’s loans illegal, ordering refund (or peso equivalent at time of payment) plus stipulated interest for fiduciary placements and current accounts beginning 26 October 1979; it ordered moral damages of P300,000, exemplary damages of P250,000, and attorney’s fees of P200,000 to respondent; and it ordered respondent to pay petitioner Citibank the balance of outstanding loans computed as P1,069,847.40 (inclusive of interest to 5 September 1979), which would continue to earn interest at the PN rates from 5 September 1979 until paid.

Legal Analysis on Off-setting/Compensation of Geneva Deposits

The Court applied Article 1278–1279 and Article 1286 of the Civil Code to conclude that legal compensation requires that each obligor be primarily (principally) bound and simultaneously be the principal creditor of the other. The Court found that Citibank-Manila and Citibank-Geneva were separate operating entities for purposes relevant to compensation: respondent was creditor of Citibank-Geneva (dollar deposits) while Citibank-Manila was creditor of respondent (loans); the parties were not principal creditors of each other, hence Article 1279’s requirements for compensation were not satisfied. The Court rejected petitioners’ contention that PN boilerplate language referencing “CITIBANK, N.A.” extended authority to apply deposits from any global branch because, on the evidence and as a matter of operational practice and applicable law, that reference could not reasonably be taken to embrace all worldwide branches absent express showing respondent understood and agreed to such broad application.

Treatment of Bank Branches and Reliance on Domestic and Foreign Law

The Court examined RA 8791 and RA 7721 and recognized that while Philippine law treats Philippine branches of a bank as a single unit for certain purposes (and provides for head office guarantees for Philippine branches of foreign banks), that statutory framework does not automatically render foreign branches (e.g., Geneva) and Philippine branches a single, unitary legal entity for all purposes. The Court also referred to Section 25 of the U.S. Federal Reserve Act and U.S. decisions to underscore that foreign branches ordinarily maintain separate accounts and operating records, supporting the conclusion that the Geneva branch’s liabilities and accounts could not be treated as interchangeable with those of the Manila branch for purposes of automatic legal compensation.

Declaration of Pledge: Authenticity, Production and Evidentiary Consequences

The Court rejected petitioners’ reliance on an alleged Declaration of Pledge because: (1) the original pledge was not produced (original was in Citibank-Geneva’s possession), and the photocopy lacked probative value under the best evidence rule, particularly where forgery was alleged; (2) the copy certified by Citibank-Geneva bore the date 24 September 1979, but respondent proved by passport and plane tickets she was out of the country on that date; (3) the pledge form was irregularly filled out (the pledgor field was typewritten with petitioner Citibank’s own name, rendering the instrument nonsensical as pledgor and pledgee); (4) the pledge was not notarized while other related documents were; and (5) the pattern of nonproduction and failure to explain the refusal of Citibank-Geneva to surrender the original led to the presumption that the suppressed evidence would be adverse to petitioners. Given these defects and the applicability of the best evidence rule when forgery is alleged, the Court found the pledge insufficient to authorize the Geneva remittance and application.

Contract of Adhesion and Interpretation of PNs

The Court treated the promissory notes as standard form contracts (contracts of adhesion) prepared by the bank. Under principles constraining adhesion contracts, ambiguous or unclear stipulations are construed strictly against the drafting party. Because the PN clause used the term “CITIBANK, N.A.” without an express, informed assent by respondent that it would encompass foreign branches’ accounts, the Court declined to interpret the clause as a blanket authorization to apply deposits from Citibank-Geneva against Philippines‑domicil

Case Syllabus (G.R. No. 156132)

Procedural History

Petition before the Supreme Court: Petitioners (Citibank, N.A. and Investors' Finance Corporation doing business as FNCB Finance) filed a Petition for Review on Certiorari under Rule 45 after the Court of Appeals decision dated 26 March 2002 (CA-G.R. CV No. 51930) and its Resolution dated 20 November 2002, which were principally in favor of respondent Modesta R. Sabeniano.
Supreme Court Decision promulgated 16 October 2006: The Court partly granted the petition and issued a modified affirmation of the CA decision; dispositive portion summarized and modified the appellate ruling (details below).
Post-decision motions: Respondent filed an Urgent Motion to Clarify and/or Confirm Decision with Notice of Judgment on 20 October 2006; petitioners filed a Motion for Partial Reconsideration on 6 November 2006.
Resolution on the motions: On 6 February 2007, the Court issued a Resolution (Third Division) denying both the petitioners’ Motion for Partial Reconsideration and respondent’s Motion to have the decision declared final and executory, for lack of merit.

Parties and Roles

Petitioners:
- Citibank, N.A. (formerly First National City Bank), referred to in the Decision as "petitioner Citibank"; the term "Manila" is used descriptively to mean any of Citibank’s Philippine branches (respondent actually dealt with the Makati branch).
- Investors’ Finance Corporation, doing business as FNCB Finance (now by merger part of BPI Finance Corporation), referred to as FNCB Finance.
Respondent:
- Modesta R. Sabeniano — bank client who maintained various deposits and placements and who was the alleged borrower on loans from Citibank-Manila.

Undisputed and Core Facts

Relationship and accounts:
- Respondent was a client of petitioners with multiple banking relationships: savings account with Citibank-Manila (local branch), money market placements with FNCB Finance, and dollar accounts with Citibank-Geneva (dollar accounts abroad).
Loans:
- Respondent incurred loans with Citibank-Manila; the principal amounts aggregated to P1,920,000.00 and had become due and demandable by May 1979.
- Despite repeated demands, respondent failed to pay these outstanding loans.
Off-setting by petitioner:
- Petitioner Citibank used respondent’s deposits and money market placements to offset and liquidate respondent’s obligations, resulting in the computation (as of 26 October 1979) that the respondent’s outstanding obligation of P2,156,940.58 was fully covered by:
  - Proceeds from respondent’s money market placements with FNCB Finance (principal and interest as of 5 September 1979): P1,022,916.66
  - Deposits in respondent’s Citibank accounts: P31,079.14
  - Proceeds of respondent’s money market placements and dollar accounts with Citibank-Geneva (peso equivalent as of 26 October 1979): P1,102,944.78
  - Resulting balance: P0.00
Respondent's position:
- Denied having any outstanding loans with Citibank.
- Denied being informed of the set-off/compensation actions.
- Sought recovery of deposits and money market placements through suit for "Accounting, Sum of Money and Damages" (Civil Case No. 11336, RTC Makati).

Trial Court (RTC) Findings and Judgment (24 August 1995)

Decision summary:
- Declared illegal and void the setoff by Citibank of respondent’s dollar deposit in Citibank-Switzerland (US$149,632.99); ordered Citibank to refund that amount with legal interest at 12% per annum, compounded yearly, from 31 October 1979 until paid, or its peso equivalent at time of payment.
- Declared respondent indebted to Citibank in the amount of P1,069,847.40 as of 5 September 1979 and ordered respondent to pay said amount; held there shall be no interest and penalty charges from the time the illegal setoff was effected on 31 October 1979.
- Dismissed all other claims and counterclaims.
- Costs against defendant bank (Citibank).
Trial duration: Trial proper lasted approximately a decade before the RTC rendered decision.

Court of Appeals Decision (26 March 2002) and Subsequent Partial Modification (20 November 2002)

CA ruling (26 March 2002) – primary holdings in favor of respondent:
- Declared illegal set-off of respondent’s Citibank-Switzerland deposit (US$149,632.99); ordered refund with legal interest at 12% per annum compounded yearly from 31 October 1979, or peso equivalent at time of payment.
- Declared that Citibank failed to establish by competent evidence the alleged indebtedness of respondent; set-off of P1,069,847.40 was declared without legal and factual basis.
- Ordered return of specific money market placements, savings and current accounts as evidenced by certificates of investments:
  - Citibank NNPN Serial No. 023356 (Cancels and supersedes NNPN No. 22526) issued 17 March 1977 — P318,897.34 at 14.50% p.a.
  - Citibank NNPN Serial No. 23357 (Cancels and supersedes NNPN No. 22528) issued 17 March 1977 — P203,150.00 at 14.50% p.a.
  - FNCB NNPN Serial No. 05757 issued 2 June 1977 — P500,000.00 at 17% p.a.
  - FNCB NNPN Serial No. 05758 issued 2 June 1977 — P500,000.00 at 17% p.a.
  - Ayala Investment & Development Corporation money market placements — P2,000,000.00 with legal interest at 12% p.a., compounded yearly, from 30 September 1976 until paid.
- Awarded damages and fees: P500,000.00 moral damages; P500,000.00 exemplary damages; P100,000.00 attorney's fees.
CA Resolution (20 November 2002) — partial modification:
- Partially granted petitioners’ Motion for Reconsideration by deleting sub-paragraph (V) paragraph 3 of the dispositive portion; otherwise affirmed with modification.

Issues Presented to the Supreme Court on Review

Legality of Citibank’s off-setting or compensation of respondent’s outstanding loans using respondent’s dollar deposits in Citibank-Geneva:
- Whether Citibank-Manila could lawfully demand remittance of respondent’s Geneva dollar accounts and apply them to loans without a Declaration of Pledge and in view of branch separateness.
- Whether the promissory notes’ general pledge clause (“on the books of CITIBANK, N.A.”) authorized application of deposits in Citibank-Geneva to loans taken at Citibank-Manila.
- Whether all branches of Citibank worldwide should be treated as a single juridical entity enabling legal compensation under Article 1278 et seq. of the Civil Code and Article 1286 permitting compensation across different places of payment (with indemnity for exchange/transportation).
Authenticity and admissibility of the alleged Declaration of Pledge executed by respondent over her Geneva accounts:
- Whether the Declaration of Pledge was authentic, properly executed, and available for presentation and expert comparison.
Appropriate monetary reliefs, interest computation dates and rates, and damages.
Petitioners’ plea to adjust nominal values for currency devaluation under Article 1250 (extraordinary inflation/deflation) due to the 1997 Asian currency crisis.

Supreme Court Disposition (Decision promulgated 16 October 2006; Resolution denying reconsideration Feb. 6, 2007)

Final disposition (as stated in the dispositive paragraph summarized in the Resolution):
- The Petition is PARTLY GRANTED; the Court of Appeals Decision, as modified by its own Resolution dated 20 November 2002, is AFFIRMED WITH MODIFICATION as follows:
  - PNs No. 23356 and 23357 are DECLARED subsisting and outstanding.
  - Petitioner Citibank is ORDERED to return to respondent the principal amounts of said PNs: P318,897.34 and P203,150.00 respectively, plus stipulated interest of 14.5% per annum, beginning 17 March 1977.
  - The remittance of US$149,632.99 from respondent’s Citibank-Geneva accounts to Citibank-Manila, and the application of the same against respondent’s outstanding loans, is DECLARED illegal, null and void.
  - Petitioner Citibank is ORDERED to refund the said amount (US$149,632.99), or its equivalent in Philippine currency using the exchange rate at the time of payment, plus the stipulated interest for each of the fiduciary placements and current accounts involved, beginning 26 October 1979.
  - Petitioner Citibank is ORDERED to pay respondent moral damages of P300,000.00; exemplary damages of P250,000.00; and attorney’s fees of P200,000.00.
  - Respondent is ORDERED to pay petitioner Citibank the balance of her outstanding loans, which, from the respective dates of their maturity to 5 September 1979, was computed to be P1,069,847.40, inclusive of interest. These outstanding loans shall continue to earn interest, at the rates stipulated in the corresponding PNs, from 5 September 1979 until payment thereof.
Motions after the Decision:
- Respondent’s Urgent Motion to Clarify and/or Confirm Decision (filed 20 Oct 2006) and petitioners’ Motion for Partial Reconsideration (filed 6 Nov 2006) were both denied for lack of merit in the Court’s February 6, 2007 Resolution.
- The Court clarified that its affirmation of the Court of Appeals decision was limited: the Supreme Court made its own determinations of petitioners’ liabilities and respondent’s liabilities and that execution should refer to the dispositive portion of the Supreme Court’s Decision once final and executory.

Rationale on Off-setting / Compensation and Branches Doctrine

Fundamental holding:
- Citibank-Manila could not lawfully effect legal compensation by taking respondent’s dollar deposits in Citibank-Geneva to offset loans at Citibank-Manila in the absence of an express authorization (Declaration of Pledge) and because the parties in the respective transactions were not principal creditors of one another.
PJ/statutory context and its limits:
- The General Banking Law of 2000 (RA No. 8791) provisions cited:
  - Sec. 20: treats a bank and its branches as one unit but applies expressly to universal or commercial banks organized as Philippine corporations and that provision does not categorically apply to foreign banks and their foreign branches.
  - Sec. 74: in case of a foreign bank with more than one branch in the Philippines, Philippine branches shall be treated as one unit.
  - Sec. 75: head of
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