G.R. No. 212024 , October 12, 2020
BANCO DE ORO UNIBANK, INC. (NOW BDO UNIBANK, INC.), PETITIONER, VS. EDGARDO C. YPIL, SR., CEBU SUREWAY TRADING CORPORATION, AND LEOPOLDO KHO, RESPONDENTS.

FACTS

Respondent Edgardo Ypil filed a complaint for specific performance and damages against respondents Cebu Sureway Trading Corporation (CSTC) and Leopoldo Kho. The Regional Trial Court (RTC) granted a writ of preliminary attachment. Sheriff Guaren served a Notice of Garnishment on petitioner BDO Unibank, Inc., directing it to hold P300,000.00 from CSTC’s accounts. BDO replied that CSTC had no garnishable funds. The RTC later discovered that after receiving the garnishment notice, BDO had debited amounts from CSTC’s savings and current accounts to offset CSTC’s outstanding loan obligations under a Credit Agreement and Promissory Note. The RTC ordered BDO to show cause why it should not be held in contempt for debiting funds under custodia legis.
BDO, as a forced intervenor, argued that legal compensation under Article 1278 of the Civil Code took effect ipso jure upon CSTC’s loan default, thereby extinguishing its obligation to CSTC and nullifying any garnishable deposit. The RTC absolved the bank officer from contempt but ordered BDO to make the garnished amount available, ruling that BDO could not unilaterally debit accounts under court custody and should have filed a proper intervention to assert its claim. The Court of Appeals affirmed the RTC’s orders.

ISSUE

Whether the bank’s right of legal compensation can be validly set up against a writ of garnishment served upon it, thereby extinguishing its obligation to hold the debtor’s deposits.

RULING

No. The Supreme Court denied BDO’s petition and affirmed the lower courts’ rulings. The Court held that while legal compensation under Article 1279 of the Civil Code extinguishes obligations by operation of law when all requisites concur, the garnishment of the bank deposits altered the legal situation. Upon service of the Notice of Garnishment, the deposits were placed under custodia legis—in the custody of the law. The bank was transformed into a “forced depositary” for the court, holding the funds for the benefit of the prevailing creditor. From that moment, the bank’s possession was that of an agent of the court, and the funds were deemed in the court’s possession for the purposes of the attachment.
Consequently, the third requisite for legal compensation—that the debts be liquidated and demandable—was not met. The garnishment created a “retention or controversy commenced by third persons” concerning the funds, which, under Article 1279(5) of the Civil Code, prevents legal compensation from taking effect. The bank’s remedy was not to unilaterally apply compensation but to file a proper third-party claim or intervention in the pending case to assert its right to set-off, subject to judicial determination. The bank’s act of debiting the account after garnishment was a violation of its duty as a depositary for the court.