128 Supreme Court Reports Annotated: PNB Madecor vs. Uy

5/1/2020 SUPREME COURT REPORTS ANNOTATED VOLUME 363
128 SUPREME COURT REPORTS ANNOTATED

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

respondent.
Obligations and Contracts; Compensation; Words and

Phrases; “Le-gal Compensation” and “Conventional
Compensation,” Distinguished; Compensation is a mode of
extinguishing to the concurrent amount the obligations of persons
who in their own right and as principals are reciprocally debtors
and creditors of each other.—Worth stressing, compensation is a
mode of extinguishing to the concurrent amount the obligations of
persons who in their own right and as principals are reciprocally
debtors and creditors of each other. Legal compensation takes
place by operation of law when all the requisites are present, as
opposed to conventional
________________
* SECOND DIVISION.
129
VOL. 363, AUGUST 15, 2001 129
PNB MADECOR vs. Uy
compensation which takes place when the parties agree to

compensate their mutual obligations even in the absence of some
requisites.
Same; Same; Legal Compensation; Requisites.—Legal
compensation requires the concurrence of the following
conditions: (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
www.central.com.ph/sfsreader/session/00000171d03e732bcf507039003600fb002c009e/t/?o=False 1/19
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.
Same; Same; A letter advising a debtor to settle the matter of
implementing an earlier arrangement with the assignee-bank is
not demand letter for payment.—We agree with petitioner that
this letter was not one demanding payment, but one that merely
informed petitioner of (1) the conveyance of a certain portion of its
obligation to PNEI per a dacion en pago arrangement between
PNEI and PNB, and (2) the unpaid balance of its obligation after
deducting the amount conveyed to PNB. The import of this letter
is not that PNEI was demanding payment, but that PNEI was
advising petitioner to settle the matter of implementing the
earlier arrangement with PNB.
Same; Same; Where a debtor’s obligation is payable on
demand and no demand was made, it follows that the obligation is
not yet due, and the obligation may not be subject to compensation
for lack of a requisite under the law.—Since petitioner’s obligation
to PNEI is payable on demand, and there being no demand made,
it follows that the obligation is not yet due. Therefore, this
obligation may not be subject to compensation for lack of a
requisite under the law. Without compensation having taken
place, petitioner remains obligated to PNEI to the extent stated in
the promissory note. This obligation may undoubtedly be
garnished in favor of respondent to satisfy PNEI’s judgment debt.
Same; Same; Words and Phrases; The controversy involving
one of the mutual obligations, in order to prevent compensation
from taking place, must be communicated in due time, and by “in
due time” is meant the period before legal compensation was
supposed to take place, considering that legal compensation
operates so long as the requisites concur, even without any
conscious intent on the part of the parties.—As to respondent’s
claim that legal compensation could not have taken place due to
the existence of a controversy involving one of the mutual
obligations, we find this
130
PNB MADECOR vs. Uy
matter no longer controlling. Said controversy was not seasonably

communicated to petitioner as required under Article 1279 of the
Civil Code. The controversy, i.e., the action instituted by

respondent against PNEI, must have been communicated to PNB
MADECOR in due time to prevent compensation from taking
place. By “in due time” should be meant the period before legal
compensation was supposed to take place, considering that legal
compensation operates so long as the requisites concur, even
without any conscious intent on the part of the parties. A
controversy that is communicated to the parties after that time
may no longer undo the compensation that had taken place by
force of law, lest the law concerning legal compensation be for
naught.
Same; Same; The law does not require that the parties’
obligations be incurred at the same time—what the law requires
only is that the obligations be due and demandable at the same
time.—As regards respondent’s averment that there was as yet no
compensable debt when PNEI sent petitioner a demand letter on
September 1984, since PNEI was not yet indebted to petitioner at
that time, the law does not require that the parties’ obligations be
incurred at the same time. What the law requires only is that the
obligations be due and demandable at the same time.
Same; Same; Actions; Garnishment; Words and Phrases;
Garnishment consists in the citation of some stranger to the
litigation, who is debtor to one of the parties to the action, such
debtor stranger becoming a forced intervenor.—We had occasion to
rule as early as 1921 in Tayabas Land Co. v. Sharruf, as follows:
“. . . garnishment . . . consists in the citation of some stranger to
the litigation, who is debtor to one of the parties to the action. By
this means such debtor stranger becomes a forced intervenor; and
the court, having acquired jurisdiction over his person by means
of the citation, requires him to pay his debt, not to his former
creditor, but to the new creditor, who is creditor in the main
litigation. It is merely a case of involuntary novation by the
substitution of one creditor for another. Upon principle the
remedy is a species of attachment or execution for reaching any
property pertaining to a judgment debtor which may be found
owing to such debtor by a third person.”
PETITION for review on certiorari of a decision of the

Court of Appeals.
The facts are stated in the opinion of the Court.

Santiago, Sarte & Associates for petitioner.
131
VOL. 363, AUGUST 15, 2001 131

PNB MADECOR vs. Uy
Gutierrez, Sundiam & Villanueva and Jorge Roito N.

Hirang, Jr. for private respondent.
Acosta & Villanueva Law Office collaborating counsel
for private respondent.
QUISUMBING, J.:
This is a petition for review on certiorari filed by petitioner

PNB Management and Development Corporation (PNB
MADECOR) seeking to annul the decision of the Court of
Appeals dated February 19, 1997, and its resolution dated
June 19, 1997 in CA-G.R. CV No. 49693, affirming the
order of the Regional Trial Court of Manila, Branch 38,
dated August 21, 1995 in Civil Case No. 95-72685. In said
order, the RTC directed the garnishment of the credits and
receivables of Pantranco North Express, Inc. (PNEI), also
known as Philippine National Express, Inc., in the
possession of PNB MADECOR, and if these were
insufficient to cover the debt of PNB MADECOR to PNEI,
to levy upon the assets of PNB MADECOR.
The
1
facts of this case, culled from the decision of the
CA, are as follows:
Guillermo Uy, doing business under the name G.U.
Enterprises, assigned to respondent Gerardo Uy his
receivables due from Pantranco North Express Inc. (PNEI)
amounting to P4,660,558.00. The deed of assignment
included sales invoices containing stipulations regarding
payment of interest and attorney’s fees.
On January 23, 1995, Gerardo Uy filed with the RTC a
collection suit with an application for the issuance of a writ
of preliminary attachment against PNEI. He sought to
collect from PNEI the amount of P8,397,440.00. He alleged
that PNEI was guilty of fraud in contracting the obligation
sued upon, hence his prayer for a writ of preliminary
attachment.
A writ of preliminary attachment was issued on January
26, 1995, commanding the sheriff “to attach the properties
of the de-
_________________
1 Rollo, pp. 28-42.
132

PNB MADECOR vs. Uy
fendant, real or personal, 2

and/or (of) any person
representing the defendant” in such amount as to cover
Gerardo Uy’s demand.
On January 27, 1995, the sheriff issued a notice of
garnishment addressed to the Philippine National Bank
(PNB) attaching the “goods,
3
effects, credits, monies and all
other personal properties” of PNEI in the possession of the
bank, and requesting a reply within five days. PNB
MADECOR received a similar notice.
On March 1995, the RTC, through the application of
Gerardo Uy, issued a subpoena duces tecum for the
production of certain documents in the possession of PNB
and PNB MADECOR: (1) from PNB, books of account of
PNEI regarding trust account nos. T-8461-I, 8461-II, and
T-8565; and (2) from PNB MADECOR, contracts showing
PNEI’s receivables from the National Real Estate
Development Corporation (NAREDECO), now PNB
MADECOR, from 1981 up to the period when the
documents were requested.
At the hearing in connection with the subpoena, PNB
moved to be allowed to submit a position paper on its
behalf and/or on behalf of PNB MADECOR. In its position
paper dated April 3, 1995, PNB MADECOR alleged that it
was the owner of the parcel of land located in Quezon City
that was leased to PNEI for use as bus terminal. Moreover,
PNB MADECOR claimed:
“2. PNEI has not been paying its rentals from October
1990 to March 24, 1994—when it (PNEI) vacated
the property. As of the latter date, PNB
MADECOR’s receivables against PNEI amounted
to P8,784,227.48, representing accumulated rentals,
inclusive of interest;
3. On the other hand, PNB MADECOR has payables
to PNEI in the amount of P7,884,000.00 as
evidenced by a promissory note executed on October
31, 1982 by then NAREDECO in favor of PNEI;
4. Considering that PNB MADECOR is a creditor of
PNEI with respect to the P8,784,227.48 and at the
same time its debtor with respect to the
P7,884,000.00, PNB MADECOR and PNEI are
therefore creditors and debtors of each other; and
5. By force of the law on compensation, both
obligations of PNB MADECOR and PNEI are
already considered extinguished to the concur-
________________
2 Id. at 29.
3 Ibid.
133
VOL. 363, AUGUST 15, 2001 133

PNB MADECOR vs. Uy
rent amount or up to P7,884,000.00 so that PNEI is

still obligated to pay 4 PNB MADECOR the amount
of P900,227.48. x x x”
On the other hand, Gerardo Uy filed an omnibus motion

controverting PNB MADECOR’s claim of compensation.
Even if compensation were possible, according to him,
PNEI would still have sufficient funds in the hands of PNB
MADECOR to fully satisfy his claim. He explained that:
“The allegation of PNB MADECOR that it owes PNEI only x x x

(P7,884,000.00) is not accurate. Apparently, PNB MADECOR only
considered the principal amount. In the first place, to be precise,
the principal debt amounts to exactly x x x (P7,884,921.10) as
clearly indicated in the Promissory Note dated 31 October 1982 x
x x. In accordance with the stipulations contained in the
promissory note, notice of demand was sent by PNEI to PNB
MADECOR (then NAREDECO) through a letter dated 28
September 1984 and received by the latter on 1 October 1984 x x
x. The second paragraph of the subject promissory note states
that ‘[F]ailure to pay the above amount by NAREDECO after due
notice has been made by PNEI would entitle PNEI to collect an
18% [interest] per annum from date of notice of demand.’ Hence,
interest should be computed and start to run from November 1984
until the present in order to come up with the outstanding debt of
PNB MADECOR to PNEI. And to be more precise, the
outstanding debt of PNB MADECOR to PNEI as of April 1995
amounts to x x x (P75,813,508.26). Hence, even if the alleged debt
of PNEI to PNB MADECOR amounting to x x x (P8,784,227.48)
shall be compensated and deducted from PNB MADECOR’s debt
to PNEI, there shall still be a remainder of x x x P67,029,380.78),
5
largely sufficient enough to cover complainant’s claim.”
Also in his omnibus motion, he prayed for an order

directing that levy be made upon all goods, credits,
deposits, and other personal properties of PNEI under the
control of PNB MADECOR, to the extent of his demand.
PNB MADECOR opposed his omnibus motion,
particularly the claim that its obligation to PNEI earned an
interest of 18 percent annually. It argued that PNEI’s

letter dated September 28, 1984
_______________
4 Id. at 30-31.
5 Id. at 31-32.
134

PNB MADECOR vs. Uy
was not a demand letter but merely a request for the

implementation of the arrangement for set-off of
receivables between PNEI and PNB, as provided 6
in a
dacion en pago executed on July 28, 1983. Gerardo Uy
again controverted PNB MADECOR’s arguments.
Meanwhile, in the main case, the RTC rendered
judgment on July 26, 1995 against PNEI. The
corresponding writ of execution was issued on August 18,
1995.
As regards the issue between PNEI and PNB
MADECOR, the RTC issued the assailed order on August
21, 1995, the decretal portion of which provided:
“WHEREFORE, the Sheriff of this Court is hereby directed to

garnish/levy or cause to be garnished/levied the amount stated in
the writ of attachment issued by this Court from the credits and
receivables/collectibles of PNEI from PNB MADECOR
(NAREDECO) and to levy and/or cause to levy upon the assets of
the debtor PNB MADECOR should its personal assets be
insufficient to cover its debt with PNEI.
Furthermore, Mr. Roger L. Venarosa, Vice-President, Trust
Department, Philippine National Bank, and other concerned
officials of said bank, is/are hereby directed to submit the books of
accounts of Pantranco North Express, Inc./Philippine National
Express, Inc. under Trust Account Nos. T-8461-I, T-8461-II, T-
8565 with its position paper within five (5) days from notice
hereof.
SO ORDERED.”
Petitioner appealed said order to the CA which, however,

affirmed the RTC in a decision dated February 19, 1997.
Petitioner’s motion for reconsideration was denied in a
resolution dated June 19, 1997.
According to the CA, there could not be any
compensation between PNEI’s receivables from PNB
MADECOR and the latter’s obligation to the former

because PNB MADECOR’s supposed debt to PNEI is the
subject of attachment proceedings initiated by a third
party, herein respondent Gerardo Uy. This is a controversy
that would prevent legal compensation from taking place,
per the
__________________
6 CA Rollo, pp. 58-61.
135
VOL. 363, AUGUST 15, 2001 135

PNB MADECOR vs. Uy
requirements set forth in Article 1279 of the Civil Code.

Moreover, the CA stressed that it was not clear whether, at
the time compensation was supposed to have taken place,
the rentals being claimed by petitioner were indeed still
unpaid. The CA pointed out that petitioner did not present
evidence in this regard, apart from a statement of account.
The CA also questioned petitioner’s inaction in claiming
the unpaid rentals from PNEI, when the latter started
defaulting in its payment as early as 1994. This, according
to the CA, indicates that the debt was either already
settled or not yet demandable and liquidated.
The CA rejected petitioner’s contention that Rule 39,
Section 43 of the Revised Rules of Court applies to the
present case. Said rule sets forth the procedure to follow
when a person alleged to have property or to be indebted to
a judgment obligor claims an interest in the property or
denies the debt. In such a situation, under said Rule the
judgment obligee is required to institute a separate action
against such person. The CA held that there was no need
for a separate action here since petitioner had already
become a forced intervenor in the case by virtue of the
notice of garnishment served upon it.
Hence, this petition. Petitioner now assigns the
following alleged errors for our consideration:
THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR

IN THE INTERPRETATION OF THE APPLICABLE LAW
HEREIN WHEN IT RULED THAT THE REQUISITES FOR
LEGAL COMPENSATION AS SET FORTH UNDER ARTICLES
1278 AND 1279 OF THE CIVIL CODE DO NOT CONCUR IN

THE CASE AT BAR.
II
THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR

IN INTERPRETING THE PROVISIONS OF SECTION 45, RULE
39 OF THE RULES OF COURT, NOW SECTION 43, RULE 39
OF THE REVISED RULES OF COURT, AS AMENDED ON 1
JULY 1997, BY RULING THAT PETITIONER PNB-MADECOR,
UPON BEING CITED FOR AND SERVED WITH A NOTICE OF
GARNISHMENT BECAME A
136

PNB MADECOR vs. Uy
FORCED INTERVENOR, HENCE, DENYING THE RIGHT OF

HEREIN PETITIONER TO VENTILATE ITS POSITION IN A
FULLBLOWN TRIAL AS PROVIDED FOR UNDER SEC. 10,
RULE 57, WHICH REMAINS THE SAME RULE UNDER THE
REVISED RULES OF COURT AS AMENDED ON 1 JULY 1997.
III
THE [COURT OF APPEALS] COMMITTED AN ERROR IN

FINDING THAT A DEMAND WAS MADE BY PANTRANCO
NORTH EXPRESS, INC. TO PNB MADECOR FOR THE
PAYMENT OF 7 THE PROMISSORY NOTE DATED 31
OCTOBER 1982.
After considering these assigned errors carefully insofar as

they raise issues of law, we find that the petition lacks
merit. We shall now discuss the reasons for our conclusion.
Petitioner admits its indebtedness to PNEI, in the
principal sum of P7,884,921.10, per a promissory note
dated October 31, 1982 executed by its precursor
NAREDECO in favor of PNEI. It also admits that the
principal amount should earn an interest of 18 percent per
annum under the promissory note, in case NAREDECO
fails to pay the principal amount after notice. Petitioner
adds that the receivables of PNEI were thereafter conveyed
to PNB in payment of PNEI’s loan obligation to the latter,
in accordance with a dacion en pago agreement executed
between PNEI and PNB.
Petitioner, however, maintains that there is nothing
now that could be subject of attachment or execution in
favor of respondent since compensation had already taken
place as between its debt to PNEI and the latter’s

obligation to it, consistent with Articles 1278, 1279, and
1290 of the Civil Code. Petitioner assails the CA’s
ratiocination that compensation could not have taken place
because the receivables in question were the subject of
attachment proceedings commenced by a third party
(respondent). This reasoning is contrary to law, according
to petitioner.
Petitioner insists that even the Asset Privatization
Trust (APT), which now has control over PNEI, recognized
the set-off between
__________________
7 Rollo, pp. 11-12.
137
VOL. 363, AUGUST 15, 2001 137

PNB MADECOR vs. Uy
the subject receivables as indicated in its reply to8

petitioner’s demand for payment of PNEI’s unpaid rentals.
The APT stated in its letter:
“x x x
While we have long considered the amount of SEVEN
MILLION EIGHT HUNDRED EIGHTY FIVE THOUSAND
PESOS (P7,885,000.00) which PNEI had earlier transmitted to
you as its share in an aborted project as partial payment for
PNEI’s unpaid rentals in favor of PNB-Madecor, being a creditor
like your goodself of PNEI, we are unable to be of assistance to
you regarding your claim for the balance thereof. We trust that
you will understand our common predicament.
x x x”
Petitioner argues that PNEI’s letter dated September 28,

1984 did not contain a demand for payment but only notice
of the implementation of the dacion en pago agreement
between PNB and PNEI.
Petitioner contends that the CA’s statement that PNEI’s
obligation to petitioner had either been settled or was not
yet demandable is highly speculative and conjectural. On
the contrary, petitioner asserts that its failure to institute
a judicial action against PNEI proved that the receivables
of petitioner and PNEI had already been subject to legal
compensation.
Petitioner submits that Rule 39, Section 43 of the

Revised Rules of Court applies to the present case. It
asserts that it stands to lose more than P7 million if not
given the opportunity to present its side in a formal
proceeding such as that provided under the cited rule.
According to petitioner, it was not an original party to this
case but only became involved when it was issued a
subpoena duces tecum by the trial court.
For his part, respondent claims that the requisites for
legal compensation are not present in this case, contrary to
petitioner’s assertion. He argues that the better rule should
be that compensation cannot take place where one of the
obligations sought to be
_________________
8 Id. at 16, 124-125.
138

PNB MADECOR vs. Uy
compensated is the subject of a suit between a third party

and a party interested in the compensation, as in this case.
Moreover, respondent points out that, while the alleged
demand letter sent by PNEI to petitioner was dated
September 28, 1984, the unpaid rentals due petitioner from
PNEI accrued during the period October 1990 to March
1994, or before petitioner’s obligation to PNEI became due.
This being so, respondent argues that there can be no
compensation since there was as yet no compensable debt
in 1984 when PNEI demanded payment from petitioner.
Even granting that there had been compensation,
according to respondent, PNEI would still have sufficient
funds with petitioner since the PNB MADECOR’s
obligation to PNEI earned interest.
Respondent echoes the observation of the CA that
petitioner failed to file a suit against PNEI at the time
when it should have. This failure gave rise to the
presumption that PNEI’s obligation might have already
been settled, waived, or otherwise extinguished, according
to him. He contends that petitioner’s explanation that it
did not sue PNEI because there had been legal
compensation is only an afterthought and contrary to logic
and reason.
On petitioner’s claim that it had been denied due
process, respondent avers that he did not have to file a
separate action against petitioner since this would only

result in multiplicity of suits. Furthermore, he points out
that the order of attachment is an interlocutory order that
may not be the subject of appeal.
Finally, respondent calls the attention of this Court to
the sale by PNB of its shares in PNB MADECOR to the “Dy
Group,” which in turn assigned its majority interest to the
“Atlanta Group.” Respondent claims that the Dy Group set
aside some P30 million for expenses to be incurred in
litigating PNB MADECOR’s pending cases, and asks that9
his “claim over this amount, arising from the instant case,”
be given preference in case the PNEI properties already
garnished prove insufficient to satisfy his claim.
The first and third errors assigned by petitioner are
obviously interrelated and must be resolved together.
_________________
9 Id. at 156.
139
VOL. 363, AUGUST 15, 2001 139

PNB MADECOR vs. Uy
Worth stressing, compensation is a mode of extinguishing

to the concurrent amount the obligations of persons who in
their own right and as principals
10
are reciprocally debtors
and creditors of each other. Legal compensation takes
place by11 operation of law when all the requisites are
present, as opposed to conventional compensation which
takes place when the parties agree to compensate their 12
mutual obligations even in the absence of some requisites.
Legal compensation requires the concurrence of the
following conditions:
(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
13
13
communicated in due time to the debtor.
Petitioner insists that legal compensation had taken place

such that no amount of money belonging to PNEI remains
in its hands, and, consequently, there is nothing that could
be garnished by respondent.
We find, however, that legal compensation could not
have occurred because of the absence of one requisite in
this case: that both debts must be due and demandable.
The CA observed:
_______________
10 IV A.M. TOLENTINO, COMMENTARIES AND JURISPRUDENCE

ON THE CIVIL CODE OF THE PHILIPPINES 366, 369 (1995). Stress
supplied.”
11 CIVIL CODE, Article 1290.
12 Supra, note 10 at 367.
13 CIVIL CODE OF THE PHILIPPINES, Article 1279.
140

PNB MADECOR vs. Uy
“Under the terms of the promissory note, failure on the part of

NAREDECO (PNB MADECOR) to pay the value of the
instrument ‘after due notice has been made by PNEI would entitle
PNEI to collect
14
an 18% [interest] per annum from date of notice of
demand.’ ”
Petitioner makes a similar assertion in its petition, that
“x x x It has been stipulated that the promissory note shall earn

an interest of 18% per annum in case 15NAREDECO, after notice,
fails to pay the amount stated therein.”
Petitioner’s obligation to PNEI appears to be payable on

demand, following the above observation made by the CA
and the assertion made by petitioner. Petitioner is
obligated to pay the amount stated in the promissory note
upon receipt of a notice to pay from PNEI. If petitioner fails
to pay after such notice, the obligation will earn an interest
of 18 percent per annum.
Respondent alleges that PNEI had already demanded
payment. The alleged demand letter reads in part:
“We wish to inform you that as of August 31, 1984 your

outstanding accounts amounted to P10,376,078.67, inclusive of
interest.
In accordance with our previous arrangement, we have
conveyed in favor of the Philippine National Bank P7,884,921.10
of said receivables from you. With this conveyance,
16
the unpaid
balance of your account will be P2,491,157.57.
To forestall further accrual of interest, we request that you
take
17
up with PNB the implementation of said arrangement, x x
x”
We agree with petitioner that this letter was not one

demanding payment, but one that merely informed
petitioner of (1) the conveyance of a certain portion of its
obligation to PNEI per a dacion en pago arrangement
between PNEI and PNB, and (2) the unpaid balance of its
obligation after deducting the amount conveyed to
____________________
14 Rollo, p. 37.
15 Id. at 12.
16 The second sentence of this paragraph was omitted in the CA
decision but included in the petition. See rollo, p. 13.
17 Rollo, p. 38.
141
VOL. 363, AUGUST 15, 2001 141

PNB MADECOR vs. Uy
PNB. The import of this letter is not that PNEI was

demanding payment, but that PNEI was advising
petitioner to settle the matter of implementing the earlier
arrangement with PNB.
Apart from the aforecited letter, no other demand letter
appears on record, nor has any of the parties adverted to
another demand letter.
Since petitioner’s obligation to PNEI is payable on
demand, and there being no demand made, it follows that
the obligation is not yet due. Therefore, this obligation may
not be subject to compensation for lack of a requisite under
the law. Without compensation having taken place,
petitioner remains obligated to PNEI to the extent stated
in the promissory note. This obligation may undoubtedly be
garnished in 18favor of respondent to satisfy PNEI’s
judgment debt.
As to respondent’s claim that legal compensation could
not have taken place due to the existence of a controversy
involving one of the mutual obligations, we find this matter
no longer controlling. Said controversy was not seasonably

communicated to petitioner as required under Article 1279
of the Civil Code.
The controversy, i.e., the action instituted by respondent
against PNEI, must have been communicated to PNB
MADECOR in due time to prevent compensation from
taking place. By “in due time” should be meant the period
before legal compensation was supposed to take place,
considering that legal compensation operates
___________________
18 RULES OF COURT, Rule 39, Section 9 (c) provides:
SEC. 9. Execution of judgments for money, how enforced.—x x x

(c) Garnishment of debts and credits.—The officer may levy on debts due the
judgment obligor and other credits, including bank deposits, financial interests,
royalties, commissions and other personal property not capable of manual delivery
in the possession or control of third parties. Levy shall be made by serving notice
upon the person owing such debts or having in his possession or control such
credits to which the judgment obligor is entitled. The garnishment shall cover only
such amount as will satisfy the judgment and all lawful fees.
xxx
142

PNB MADECOR vs. Uy
so long as the requisites concur, even19 without any

conscious intent on the part of the parties. A controversy
that is communicated to the parties after that time may no
longer undo the compensation that had taken place by force
of law, lest the law concerning legal compensation be for
naught.
Petitioner had notice of the present controversy when it
received the subpoena duces tecum issued by the trial
court. The exact date when petitioner received the
subpoena is not on record, but petitioner was allowed to
submit a position paper regarding said subpoena
20
per order
of the trial court dated March 27, 1995. We assume that
petitioner had notice of the pending litigation at least no
later than this date. Now, was this date before that period
when legal compensation would have occurred, assuming
all other requisites to be present?
Clearly, it is not. PNB MADECOR’s obligation to PNEI
was contracted in 1982 and the alleged demand letter was
sent by PNEI to petitioner on September 1984. On the
other hand, PNEI’s obligation to petitioner, the payment of

monthly rentals, accrued during the period October 1990 to
March 1994 and a demand to pay was sent in 1993.
Assuming the other requisites to be present, legal
compensation of the mutual obligations would have taken
place on March 1994 at the latest. Obviously, this was
before petitioner received notice of the pendency of this
litigation in 1995. The controversy communicated to
petitioner in 1995 could not have affected the legal
compensation that would have taken place in 1994.
As regards respondent’s averment that there was as yet
no compensable debt when PNEI sent petitioner a demand
letter on September 1984, since PNEI was not yet indebted
to petitioner at that time, the law does not require that the
parties’ obligations be incurred at the same time. What the
law requires only is that the obligations be due and
demandable at the same time.
__________________
19 CIVIL CODE, Article 1290; Bank of the Philippine Islands v. Court of

Appeals, 255 SCRA 571, 577 (1996).
20 Rollo, p. 30.
143
VOL. 363, AUGUST 15, 2001 143

PNB MADECOR vs. Uy
Coming now to the second assigned error, which we

reserved as the last for our discussion, petitioner contends
that it did not become a forced intervenor in the present
case even after being served with a notice of garnishment.
Petitioner argues that the correct procedure would have
been for respondent to file a separate action against PNB
MADECOR,
21
per Section 43 of Rule 39 of the Rules of
Court. Petitioner insists it was denied its right to
ventilate its claims in a separate, full-blown trial when the
courts a quo ruled that the abovementioned rule was
inapplicable to the present case.
On this score, we had occasion
22
to rule as early as 1921 in
Tayabas Land Co. v. Sharruf, as follows:
“. . . garnishment . . . consists in the citation of some stranger to

the litigation, who is debtor to one of the parties to the action. By
this means such debtor stranger becomes a forced intervenor; and
the court, having acquired jurisdiction over his person by means
of the citation, requires him to pay his debt, not to his former
creditor, but to the new creditor, who is creditor in the main

litigation. It is merely a case of involuntary novation by the
substitution of one creditor for another. Upon principle the
remedy is a species of attachment or execution for reaching any
property pertaining to a judgment debtor which may be found
owing to such debtor by a third person.”
_________________
21 SEC. 43. Proceedings when indebtedness denied or another person

claims the property.—If it appears that a person or corporation, alleged to
have property of the judgment obligor or to be indebted to him, claims an
interest in the property adverse to him or denies the debt, the court may
authorize, by an order made to that effect, the judgment obligee to
institute an action against such person or corporation for the recovery of
such interest or debt, forbid a transfer or other disposition of such interest
or debt within one hundred twenty (120) days from notice of the order,
and may punish disobedience of such order as for contempt. Such order
may be modified or vacated at any time by the court, which issued it, or by
the court in which the action is brought, upon such terms as may be just.
22 41 Phil. 382, 387 (1921). This was reiterated in Bautista v. Barredo,
13 SCRA 744, 746 (1965).
144

PNB MADECOR vs. Uy
23
Again, in Perla Compania de Seguros, Inc. v. Ramolete, we
declared:
“Through service of the writ of garnishment, the garnishee

becomes a ‘virtual party’ to, or a ‘forced intervenor’ in, the case
and the trial court thereby acquires jurisdiction to bind him to
compliance with all orders and processes of the trial court with a
view to the complete satisfaction of the judgment of the court.”
Petitioner here became a forced intervenor by virtue of the

notice of garnishment served upon him. It could have
presented evidence on its behalf. The CA, in fact, noted
that petitioner presented a statement of account
purportedly showing that 24
PNEI had not yet settled its
obligation to petitioner. That petitioner failed to present
any more proof of its claim, as observed by the CA, is no
longer the fault of the courts.
There is no need for the institution of a separate action
under Rule 39, Section 43, contrary to petitioner’s claim.
This provision contemplates a situation where the person
allegedly holding property of (or indebted to) the judgment

debtor claims an adverse interest in the property (or denies
the debt). In this 25 case, petitioner expressly admits its
obligation to PNEI.
WHEREFORE, the petition is DENIED. The assailed
decision and resolution of the Court of Appeals are
AFFIRMED. Costs against petitioner.
SO ORDERED.
Bellosillo (Chairman), Mendoza, Buena and De

Leon, Jr., JJ., concur.
Petition denied, judgment affirmed.
Notes.—Garnishment is considered as a species of

attachment for reaching credits belonging to the judgment
debtor owing to him
_________________
23 203 SCRA 487, 492 (1991).

24 Appended to its opposition to respondent’s omnibus motion before the
trial court. Rollo, p. 36.
25 Rollo, pp. 12, 234.
145
VOL. 363, AUGUST 15, 2001 145

Ong Ching Kian Chuan vs. Court of Appeals
from a stranger to the litigation. (De la Victoria vs. Burgos,

245 SCRA 374 [1995])
The garnishment of a property to satisfy a writ of
execution operates as an attachment and fastens upon the
property a lien by which the property is brought under the
control of the court issuing the writ. (Seven Brothers
Shipping Corporation vs. Court of Appeals, 246 SCRA 33
[1995])
A notice of garnishment served on the secretary of the
president binds the corporation. (Chemphil Export &
Import Corporation [CEIC] vs. Court of Appeals, 251 SCRA
257 [1995])
——o0o——
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128 Supreme Court Reports Annotated: PNB Madecor vs. Uy

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5/1/2020 SUPREME COURT REPORTS ANNOTATED VOLUME 363

128 SUPREME COURT REPORTS ANNOTATED

PNB MADECOR, petitioner, vs. GERARDO C. UY,

Obligations and Contracts; Compensation; Words and

VOL. 363, AUGUST 15, 2001 129

PNB MADECOR vs. Uy

compensation which takes place when the parties agree to

130 SUPREME COURT REPORTS ANNOTATED

PNB MADECOR vs. Uy

matter no longer controlling. Said controversy was not seasonably

Civil Code. The controversy, i.e., the action instituted by

PETITION for review on certiorari of a decision of the

The facts are stated in the opinion of the Court.

VOL. 363, AUGUST 15, 2001 131

Gutierrez, Sundiam & Villanueva and Jorge Roito N.

This is a petition for review on certiorari filed by petitioner

1 Rollo, pp. 28-42.

132 SUPREME COURT REPORTS ANNOTATED

fendant, real or personal, 2

VOL. 363, AUGUST 15, 2001 133

rent amount or up to P7,884,000.00 so that PNEI is

On the other hand, Gerardo Uy filed an omnibus motion

“The allegation of PNB MADECOR that it owes PNEI only x x x

Also in his omnibus motion, he prayed for an order

interest of 18 percent annually. It argued that PNEI’s

134 SUPREME COURT REPORTS ANNOTATED

was not a demand letter but merely a request for the

“WHEREFORE, the Sheriff of this Court is hereby directed to

Petitioner appealed said order to the CA which, however,

MADECOR and the latter’s obligation to the former

6 CA Rollo, pp. 58-61.

VOL. 363, AUGUST 15, 2001 135

requirements set forth in Article 1279 of the Civil Code.

THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR

1278 AND 1279 OF THE CIVIL CODE DO NOT CONCUR IN

THE [COURT OF APPEALS] COMMITTED A CLEAR ERROR

136 SUPREME COURT REPORTS ANNOTATED

FORCED INTERVENOR, HENCE, DENYING THE RIGHT OF

THE [COURT OF APPEALS] COMMITTED AN ERROR IN

After considering these assigned errors carefully insofar as

place as between its debt to PNEI and the latter’s

7 Rollo, pp. 11-12.

VOL. 363, AUGUST 15, 2001 137

the subject receivables as indicated in its reply to8

Petitioner argues that PNEI’s letter dated September 28,

Petitioner submits that Rule 39, Section 43 of the

8 Id. at 16, 124-125.

138 SUPREME COURT REPORTS ANNOTATED

compensated is the subject of a suit between a third party

separate action against petitioner since this would only

VOL. 363, AUGUST 15, 2001 139

Worth stressing, compensation is a mode of extinguishing

(1) that each one of the obligors be bound principally,

Petitioner insists that legal compensation had taken place

10 IV A.M. TOLENTINO, COMMENTARIES AND JURISPRUDENCE

140 SUPREME COURT REPORTS ANNOTATED

“Under the terms of the promissory note, failure on the part of

Petitioner makes a similar assertion in its petition, that

“x x x It has been stipulated that the promissory note shall earn