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
respondent's 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.
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 Sabeniano’s 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
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.122 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 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.
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.