Citibank, N.A. & Investor Finance Corporation v.

Sabeninano
Facts:
This is a case involving Citibank, N.A., a banking corporation duly
registered under US Laws and is licensed to do commercial
banking and trust functions in the Philippines and Investor's
Finance Corporation (aka FNCB Finance), and affiliate company of
Citibank, mainly handling money market placements(MMPs
are short term debt instruments that give the owner an
unconditional right to receive a stated, fixed sum of money
on a specified date). Modesta R. Sabeniano was a client of both
petitioners Citibank and FNCB Finance. Unfortunately,
the business relations among the parties subsequently
went awry. Subsequently, Sabeniano filed a complaint with
the RTC against petitioners as she claims to have substantial
deposits and money market placements with the petitioners and
other investment companies, the proceeds of which were
supposedly deposited automatically and directly to her account
with Citibank. Sabeniano alleged that Citibank et al refused to
return her deposits and the proceeds of her money market
placements despite her repeated demands, thus, the civil case
for "Accounting, Sum of Money and Damages. In their reply,
Citibank et al admitted that Sabeniano had deposits and money
market placements with them, including dollar accounts in other
Citibank branches. However, they also alleged that respondent
later obtained several loans from Citibank, executed through
Promissory Notes and secured by a pledge on her dollar
accounts, and a deed of assignment against her MMPS with
FNCB Finance. When Sabeniano defaulted, Citibank exercised its
right to off-set or compensate respondent's outstanding loans
with her deposits and money market placements, pursuant to
securities she executed. Citibank supposedly informed Sabeniano
of the foregoing compensation through letters, thus, Citibank et
al were surprised when six years later, Sabeniano and her
counsel made repeated requests for the withdrawal of
respondents deposits and MMPs with Citibank, including her
dollar accounts with Citibank-Geneva and her money market
placements with petitioner FNCB Finance. Thus, petitioners
prayed for the dismissal of the Complaint and for the award of
actual, moral, and exemplary damages, and attorney's fees.
RTC: The case was eventually decided after 10 years with the
Judge declaring the offsetting done as illegal and the return of the

amount with legal interest, while Sabeniano was ordered to pay

her loans to Citibank. The ruling was then appealed. The CA
modified the decision but only to the extent of Sabenianos loans,
which it ruled, that Citibank failed to establish the indebtedness
and is also without legal and factual basis. The case was thus
appealed to the SC.
Issue:
Whether or not there was a valid off setting/compensation of loan
vis a vis the
a.)Deposits and b.) MMPs.
Held:
General Requirement of Compensation:
Art. 1278. Compensation shall take place when two persons, in
their own right, are creditors and debtors of each other.
Art. 1279. In order that compensation may be proper, it is
necessary;
(1) That each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things
due are consumable, they be of the same kind, and also of
the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated
in due time to the debtor.
1. Yes. As already found by this Court, petitioner Citibank was the
creditor of respondent for her outstanding loans. At the same
time, respondent was the creditor of petitioner Citibank, as far as
her deposit account was concerned, since bank deposits,
whether fixed, savings, or current, should be considered as
simple loan or mutuum by the depositor to the banking
institution.
Both debts consist in sums of money. By June 1979, all of
respondent's PNs in the second set had matured and became
demandable, while respondent's savings account was
demandable anytime. Neither was there any retention or
controversy over the PNs and the deposit account commenced
by a third person and communicated in due time to the debtor
concerned. Compensation takes place by operation of law.
2. Yes, but technically speaking Citibank did not effect a legal
compensation or off-set under Article 1278of the Civil Code, but

rather, it partly extinguished respondent's obligations through the

application of the security given by the respondent for her loans.
Respondent's money market placements were with petitioner
FNCB Finance, and after several roll-overs, they were ultimately
covered by PNs No. 20138 and 20139, which, by 3 September
1979, the date the check for the proceeds of the said PNs were
issued, amounted to P1,022,916.66, inclusive of the principal
amounts and interests.
As to these money market placements, respondent
was the creditor and petitioner FNCB Finance the
debtor (thereby implying that money market
placement is a simple loan or mutuum); while, as to
the outstanding loans, petitioner Citibank was the
creditor and respondent the debtor.
Consequently, legal compensation, under Article 1278 of the
Civil Code, would not apply since the first requirement for a valid
compensation, that each one of the obligors be bound principally,
and that he be at the same time a principal creditor of the
other, was not met. What petitioner Citibank actually did was
to exercise its rights to the proceeds of respondent's money
market placements with petitioner FNCB Finance by virtue of the
Deeds of Assignment executed by respondent in its favor.
Petitioner Citibank was only acting upon the authority granted to
it under the foregoing Deeds when it finally used the proceeds of
PNs No. 20138 and 20139, paid by petitioner FNCB Finance, to
partly pay for respondent's outstanding loans. Strictly speaking, it
did not effect a legal compensation or off-set under Article 1278
of the Civil Code, but rather, it partly extinguished respondent's
obligations through the application of the security given by the
respondent for her loans. Although the pertinent documents
were entitled Deeds of Assignment, they were, in reality, more of
a pledge by respondent to petitioner Citibank of her credit
due from petitioner FNCB Finance by virtue of her money
market placements with the latter. According to Article 2118 of
the Civil Code

ART. 2118. If a credit has been pledged becomes due before it is

redeemed, the pledgee may collect and receive the amount due.
He shall apply the same to the payment of his claim, and deliver
the surplus, should there be any, to the pledgor.

PARAY v. RODRIGUEZ, ET AL., G.R. No. 132287

(JANUARY 24, 2006)
FACTS:
Respondents were the owners of shares of stock in
Quirino-Leonor-Rodriguez
Realty
Inc.
In
1979
to
1980,respondents secured by way of pledge of some of
their shares of stock to petitioners Bonifacio and Faustina
Paray (Parays) the payment of certain loan obligations.
When the Parays attempted to foreclose the pledges on
account of respondents failure to pay their loans,
respondents filed complaints with RTC of Cebu City. The
actions sought the declaration of nullity of the pledge
agreements, among others. However the RTC dismissed
the complaint and gave due course to the foreclosure and
sale at public auction of the various pledges. This decision
attained finality after the Court of Appeals and the
Supreme Court affirmed it. Respondents then received
Notices of Sale which indicated that the pledged shares
were to be sold at public auction. However, before the
scheduled date of auction, all of respondents caused the
consignation with the RTC Clerk of Court of various

amounts. It was claimed that respondents had attempted

to tender payments to the Parays ,but had been rejected.
Notwithstanding the consignations, the public auction took
place as scheduled, with petitioner Vidal Espeleta
successfully bidding for all of the pledged shares. None of
respondents participated or appeared at the auction.
Respondents instead filed a complaint with the RTC
seeking the declaration of nullity of the concluded public
auction.
Respondents argument:
Respondents argued that their tender of payment and
subsequent consignations served to extinguish their loan
obligations and discharged the pledge contracts.
Petitioners argument:
Petitioners countered that the auction sale was conducted
pursuant to a final and executory judgment and that the
tender of payment and consignations were made long
after their obligations had fallen due. They pointed out
that the amounts consigned could not extinguish the
principal loan obligations of respondents since they were
not sufficient to cover the interests due on the debt. They
likewise argued that the essential procedural requisites for
the auction sale had been satisfied.
Ruling of RTC:
The RTC dismissed the complaint, expressing agreement
with the position of the Parays. It held that respondents
had failed to tender or consign payments within a
reasonable
period
after
default
and
that
the
proper remedy of respondents was to have participated in
the auction sale.
Ruling of CA:
The Court of Appeals however reversed the RTC on appeal,
ruling that the consignations extinguished theloan
obligations and the subject pledge contracts; and the
auction sale as null and void. It (CA) chose to uphold the
sufficiency of the consignations owing to an imputed
policy of the law that favored redemption and mandated a
liberal construction to redemption laws. The attempts at
payment by respondents were characterized as made in
the exercise of the right of redemption.CA likewise found
fault with the auction sale, holding that there was a need

to individually sell the various shares of stock as they

had belonged to different pledgors.
ISSUES:
1. WON right of redemption exists over personal
properties (such as the subject pledged shares).
2. WON the consignations made by respondents prior to
the auction sale are sufficient to extinguish the loan
obligations and the subject pledged contracts.
3. WON the act of respondents in consigning the
payments should be deemed done in the exercise of their
right of redemption owing to an imputed policy of the law
that favored redemption and mandated a liberal
construction to redemption laws.
4. WON a buyer at a public auction ipso facto becomes the
owner of the pledged shares pending the lapse of the oneyear redemptive period
5.WON there is a need to individually sell the various
shares of stock as they had belonged to different pledgors.
HELD:
1. No. No law or jurisprudence establishes or affirms such
right. Indeed, no such right exists. The right of redemption
over mortgaged real property sold extrajudicially is
established by Act No. 3135, as amended. The said law
does not extend the same benefit to personal property. In
fact, there is no law in our statute books which vests the
right of redemption over personal property. Act No. 1508,
or the Chattel Mortgage Law, ostensibly could have served
as the vehicle for any legislative intent to bestow a right of
redemption over personal property, since that law governs
the extrajudicial sale of mortgaged personal property, but
the statute is definitely silent on the point. The right of
redemption as affirmed under Rule 39 of the Rules of
Court applies only to execution sales, more precisely
execution sales of real property.It must be clarified that
the subject sale of pledged shares was an extrajudicial
sale, specifically a notarial sale, as distinguished from a
judicial sale as typified by an execution sale. Under the
Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the
creditor needs to do, if the credit has not been satisfied in
due time, is to proceed before a Notary Public to the sale
of the thing pledged. In this case, petitioners attempted to

proceed extrajudicially with the sale of the pledged shares

by public auction. However, extrajudicial sale was stayed
with the filing of Civil Cases which sought to annul the
pledge contracts. The final and executory judgment in
those cases affirmed the pledge contracts and disposed
them. Said judgment did not direct the sale by public
auction of the pledged shares, but instead upheld the right
of the Parays to conduct such sale at their own volition.
2. No.There is no doubt that if the principal obligation is
satisfied, the pledges should be terminated as well.
Article2098 of the Civil Code provides that the right of the
creditor to retain possession of the pledged item exists
only until the debt is paid. Article 2105 of the Civil Code
further clarifies that the debtor cannot ask for the return
of the thing pledged against the will of the creditor, unless
and until he has paid the debt and its interest. At the same
time, the right of the pledgee to foreclose the pledge is
also established under the Civil Code. When the credit has
not been satisfied in due time, the creditor may proceed
with the sale by public auction under the procedure
provided under Article 2112 of the Code. In order that the
consignation could have the effect of extinguishing the
pledge contracts, such amounts should cover not just
the principal loans, but also the monthly interests
thereon.In the case at bar, while the amounts consigned
by respondents could answer for their respective principal
loan obligations, they were not sufficient to cover the
interests due on these loans, which were pegged at the
rate of 5%per month or 60% per annum.
3. No. The pledged shares in this case are not subject to
redemption. Thus, the consigned payments should notbe
treated with liberality, or somehow construed as having
been made in the exercise of the right of redemption.
4. Yes. Obviously, since there is no right to redeem
personal property, the rights of ownership vested unto the
purchaser at the foreclosure sale are not entangled in any
suspensive condition that is implicit in a redemptive
period.
5. No. This concern is obviously rendered a non-issue by
the fact that there can be no right to redemption in the
first place. Rule 39 of the Rules of Court does provide for
instances when properties foreclosed at the same time

must be sold separately, such as in the case of lot sales

for real property under Section 19. However, these
instances again pertain to execution sales and not
extrajudicial sales. No provision in the Rules of Court or in
any law requires that pledged properties sold at auction
be sold separately. On the other hand, under the Civil
Code, it is the pledgee, and not the pledgor, who is given
the right to choose which of the items should be sold if
two or more things are pledged. No similar option is given
to pledgers under the Civil Code. Moreover, there is
nothing in the Civil Code provisions governing the
extrajudicial sale of pledged properties that prohibits the
pledgee of several different pledge contracts from
auctioning all of the pledged properties on a single
occasion, or from the buyer at the auction sale in
purchasing all the pledged properties with asingle
purchase price. The relative insignificance of ascertaining
the definite apportionments of the sale price to the
individual shares lies in the fact that once a pledged item
is sold at auction, neither the pledgee nor the pledgor can
recover whatever deficiency or excess there may be
between the purchase price and the amount of the
principal obligation.
RULING:
Decision of the Court of Appeals is SET ASIDE and the
decision of the RTC Cebu City is REINSTATED.