G.R. No. 129598; August 15, 2001
PNB MADECOR, petitioner, vs. GERARDO C. UY, respondent.

FACTS

Respondent Gerardo Uy, as assignee of receivables from Pantranco North Express Inc. (PNEI), filed a collection suit with an application for a writ of preliminary attachment against PNEI. A writ was issued, and the sheriff served a notice of garnishment on petitioner PNB MADECOR, attaching PNEI’s credits in its possession. PNB MADECOR claimed that it and PNEI were mutual debtors and creditors: PNEI owed it P8,784,227.48 for unpaid rentals, and it owed PNEI P7,884,000.00 per a promissory note. PNB MADECOR argued that by legal compensation, these obligations were extinguished to the concurrent amount, leaving PNEI with a net debt to it of P900,227.48. Gerardo Uy contested this, arguing that PNB MADECOR’s debt to PNEI should include 18% annual interest per the promissory note, making the debt much larger and leaving sufficient credits to satisfy his claim after any compensation. The Regional Trial Court (RTC) issued an order directing the garnishment of PNEI’s credits/receivables from PNB MADECOR and, if insufficient, to levy upon PNB MADECOR’s assets. The Court of Appeals affirmed the RTC order. The CA held that legal compensation could not take place because the debt owed by PNB MADECOR to PNEI was under attachment by a third party (Gerardo Uy), creating a controversy that prevented compensation. It also found the rentals claimed by PNB MADECOR were not clearly liquidated and demandable, and noted PNB MADECOR’s inaction in collecting them. The CA further ruled that PNB MADECOR, having been served with the notice of garnishment, became a forced intervenor, making a separate action under Rule 39, Section 43 of the Rules of Court unnecessary.

ISSUE

The primary issue is whether legal compensation under Articles 1278 and 1279 of the Civil Code had extinguished the mutual obligations between PNB MADECOR and PNEI, thereby precluding garnishment of PNB MADECOR’s debt to PNEI by respondent Gerardo Uy. A related issue is the proper procedure under Rule 39, Section 43 of the Rules of Court when a garnishee denies the debt.

RULING

The Supreme Court denied the petition and affirmed the decisions of the lower courts. The Court held that legal compensation did not occur. For legal compensation to operate, all requisites under Article 1279 must concur, including that the debts be liquidated and demandable. PNB MADECOR’s claim for unpaid rentals from PNEI was not proven to be liquidated and demandable, as it presented only a statement of account without evidence like demands or judicial claims. Its inaction for years suggested the debt was not yet enforceable. Furthermore, the garnishment by Gerardo Uy created a controversy over the debt PNB MADECOR owed to PNEI, which also prevents legal compensation from taking effect automatically. The Court also ruled that the proper remedy for PNB MADECOR, as a garnishee claiming its debt to the judgment obligor (PNEI) had been extinguished by compensation, was to invoke Rule 39, Section 43 of the Rules of Court. This rule requires the judgment obligee (Gerardo Uy) to institute a separate action against the garnishee to assert its claim. The CA erred in stating PNB MADECOR was a forced intervenor; the correct procedure was for a separate action to determine the validity of PNB MADECOR’s claim of compensation. However, this procedural error did not warrant reversal because PNB MADECOR was able to fully present its position before the RTC, and more importantly, its substantive claim of compensation lacked merit.