Title
National Sugar Trading vs. Philippine National Bank
Case
G.R. No. 151218
Decision Date
Jan 28, 2003
PNB validly applied NASUTRA's sugar export remittances to offset debts under promissory notes, upheld by courts despite trustee-beneficiary claims.

Case Summary (G.R. No. 231765)

NASUTRA’s substitution for PHILEXCHANGE and unresolved quedan obligations

In July 1977 NASUTRA replaced PHILEXCHANGE as PHILSUCOM’s marketing agent. PHILEXCHANGE transferred quedans to NASUTRA without making a physical inventory. NASUTRA and PHILSUCOM were not required to immediately pay PHILEXCHANGE, yet they nonetheless failed to remit proceeds due PHILEXCHANGE; by June 30, 1984, the unpaid sum was P498,828,845.03, contributing to PHILEXCHANGE’s inability to pay PNB.

NASUTRA’s PNB credit line and promissory-note arrangements

NASUTRA obtained a P408 million revolving credit line from PNB in 1981, and each drawdown was evidenced by promissory notes executed by Jose Unson. PHILSUCOM circulated measures in 1985 (e.g., Circular Letter No. EC-4-85) treating crop year 1984–1985 sugar as domestic, and PHILSUCOM’s chairman proposed a liquidation scheme in May 1985 that envisioned PNB crediting producers’ loan accounts upon receipt of quedans, with NASUTRA absorbing accruing interest for a specified period. PNB approved the liquidation proposal by Resolution No. 353 (May 20, 1985).

NASUTRA’s failures under the liquidation scheme and dissolution

Despite the liquidation scheme and PNB’s approval, NASUTRA/PHILSUCOM failed to remit interest payments amounting to P65,412,245.84 in 1986. PD 2005 dissolved NASUTRA effective January 31, 1986; NASUTRA’s records were destroyed during the 1986 revolution. Executive Order No. 18 (May 28, 1986) created the SRA, abolished PHILSUCOM, and transferred PHILSUCOM’s assets and records (including beneficial interests in NASUTRA assets) to SRA.

Trusteeship, foreign remittances, and PNB’s applications

NASUTRA established a trusteeship for winding up on January 24, 1989, but still defaulted on loans to PNB amounting to P389,246,324.60 (principal and accrued interest). PNB received foreign-bank remittances totaling US$36,564,558.90 (P696,281,405.09) representing proceeds of NASUTRA’s sugar exports. PNB applied most of these remittances to NASUTRA’s and related accounts: P389,246,324.60 to NASUTRA’s PNB account; P65,412,245.84 to various PNB-branch claims for interest on unpaid CY 1984–85 sugar proceeds; and P206,070,172.57 charged to PHILSUCOM’s account as carried in PHILEXCHANGE’s books. After these applications, an unapplied balance of P19,688,763.29 was later applied through book transfers to PHILSUCOM/PHILEXCHANGE accounts.

NASUTRA’s demand for accounting and DOJ arbitration decision

NASUTRA sought explanations and documentary accounting from PNB regarding the disposition and application of remittances. Dissatisfied, NASUTRA and SRA filed for arbitration with the Department of Justice on August 13, 1991. The Secretary of Justice rendered a decision that: (a) upheld PNB’s valid application of P389,246,324.60 to NASUTRA’s PNB account and P65,412,245.84 to branch claims for interest (totaling P454,658,570.44); and (b) ordered PNB to pay NASUTRA P206,070,172.57 (amount applied to PHILSUCOM’s account in PHILEXCHANGE’s books) and P15,863,898.79 (applied to claims of various CAB planters), plus legal interest from the date of filing. Costs were to be shared equally.

Office of the President’s review and modification

Both parties appealed to the Office of the President. On September 17, 1999, the Office of the President affirmed the Secretary of Justice’s decision but modified it by declaring legal and valid PNB’s application of P225,758,935.86 and P15,863,898.79 as payments for PHILSUCOM’s account (as carried in PHILEXCHANGE’s books) and CAB planters’ claims, respectively. A motion for reconsideration filed by petitioners was denied.

Court of Appeals dismissal and question presented to the Supreme Court

NASUTRA and SRA sought judicial review in the Court of Appeals, contending that the Office of the President erred by relying on PNB’s documents without compelling an accounting, that no creditor–debtor relationship existed (they characterized the relationship as trustee–beneficiary), that PHILEXCHANGE’s separate corporate personality barred application of remittances to its accounts and that PHILEXCHANGE’s account had prescribed, and that PNB had not proved the existence of the P408 million credit line or validly applied remittances to the alleged CAB Planters Account. The Court of Appeals dismissed their petition on August 10, 2001. The petitioners raised, as the lone issue to the Supreme Court, that the CA gravely abused its discretion in upholding offsets given the absence of creditor–debtor relations with respect to the remittances.

Parties’ principal contentions before the Supreme Court

  • Petitioners (NASUTRA/SRA): argued that compensation/off-setting could not operate because the relationship was trustee–beneficiary (not creditor–debtor); that PHILEXCHANGE’s separate corporate identity precluded applying remittances received by PNB to PHILEXCHANGE accounts; that PHILEXCHANGE’s claim was prescribed; that PNB failed to prove the credit line and the CAB Planters Account; and that the CAB Planters Account was unliquidated and required recomputation under RA 7202.
  • Respondent (PNB): asserted authority to apply foreign remittances to NASUTRA’s long-overdue obligations and argued such transactions were undertaken with national-government support and in furtherance of national policy, pointing to a Letter of Intent to the IMF referencing immediate payment of NASUTRA/PHILSUCOM obligations to PNB.

Supreme Court’s contractual analysis and enforceability of promissory-note stipulation

The Court applied Article 1306 of the Civil Code (freedom to stipulate conditions) and found ample evidence in the record that NASUTRA applied for and was approved a P408 million credit line and in fact drew P389,246,324.60. Each drawdown was secured by promissory notes containing an express stipulation authorizing PNB, if the note were unpaid at maturity, to apply any and all moneys, securities or things of value in PNB’s hands to the payment of the note, and to act as attorney-in-fact to negotiate, sell or transfer such assets for that purpose. The Court concluded that, even if legal compensation under Articles 1278–1279 could not be invoked for lack of elements, PNB’s application of remittances was authorized by the parties’ express contractual stipulation in the promissory notes and related banking resolutions. The contractual authorization treated remittance proceeds in PNB’s hands as funds eligible to be applied against the notes.

Agency coupled with interest, irrevocability, and good-faith obligations

The Court characterized the relationship—by virtue of the promissory-note authorization and consistent dealings—as an agency coupled with interest, not a mere revocable agency. By executing the irrevocable promissory notes and authorizations, NASUTRA effectively assigned and surrendered rights to PNB in consideration of financing. The Court emphasized the covenant of good faith (Article 1159): obligations arising from contract have the force of law between the parties and must be complied with in good faith; NASUTRA’s subsequent claim for refund was inconsistent

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