CITIBANK VS SABENIANO

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CITIBANK, N.A. (Formerly FirstNational City Bank) and INVESTORS FINANCE
CORPORATION, doing business under the name and style of FNCB Finance
- versusMODESTA R. SABENIANO
G.R. No. 156132 February 6, 2007 THIRD DIVISION, CHICO-NAZARIO, J.
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TOPIC:
Mutuum; Deposit; Compensation; Article 1980 --- Fixed, savings, and current deposits
of money in banks and similar institutions shall be governed by the provisions concerning
simple loan.
FACTS:
Citibank, N.A. (Citibank), is a banking corporation duly registered under US
Laws and is licensed to do commercial banking and trust functions in the Philippines. On
the other hand, Investor's Finance Corporation (FNCB Finance), an affiliate company of
Citibank, is a corporation which mainly handles money market placements (MMP - short
term debt instruments that give the owner an unconditional right to receive a stated, fixed
sum of money on a specified date).
Modesta Sabeniano (Sabeniano) was a client of petitioners. She had several
deposits and market placements with petitioners, among which were her savings account
with the local branch of Citibank (Citibank-Manila); money market placements with
FNCB Finance; and dollar accounts with the Geneva branch of Citibank (CitibankGeneva). At the same time, respondent had outstanding loans with Citibank, incurred at
Citibank-Manila, the principal amounts aggregating to P1,920,000.00, all of which had
become due and demandable by May 1979. Despite repeated demands by Citibank,
Sabeniano failed to pay her outstanding loans. Thus, Citibank used Sabenianos deposits

in Citibank-Geneva and money market placements to off-set and liquidate her

outstanding obligations amounting to P 2,156,940.58, as of October 1979.
Sabeninao instituted a complaint against Citibank and FNCB Finance for
Accounting, Sum of Money and Damages before the Regional Trial Court (RTC) of
Makati City, alleging that Citibank and FNCB Finance refused to return her deposits and
MMPs despite repeated demands. Citibank, in its reply, 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
MMP, pursuant to the securities she executed. Sabeninao however, denied having any

outstanding loans with Citibank and denied that she was duly informed of the off-setting
or compensation thereof made by Citibank using her deposits and MMPs.
After trial proper, which lasted for 10 years, the RTC rendered a Decision on 24
August 1995, declaring the set off effected by Citibank as illegal, null and void. The court
ordered the bank to return the amount used in the set off plus 12% legal interest per
annum, compounded yearly. Moreover, Sabeniano was found indebted to the bank, and
hence, ordered to pay the debt without interest.
All the parties appealed the afore-mentioned RTC Decision to the Court of
Appeals. On 26 March 2002, the appellate court promulgated its Decision, ruling entirely
in favor of Sabeniano. Citibank filed a motion for partial reconsideration before the
Court of Appeals (CA). Thereafter, the CA issued a Resolution, dated 20 November
2002, granting Citibanks motion and modifying its earlier Decision. Following said
Resolution, Citibank filed an instant Petition for Review on Certiorari under Rule 45 of
the Revised Rules of Court. After giving due course to the instant Petition, this Court
promulgated on 16 October 2006 its Decision, declaring the off-setting effected by
Citibank upon Sabenianos obligations as illegal, null and void. Moreover, this court also
ordered Citibank to return the amount used to set off said obligation to Sabeniano plus the

stipulated 14.5% interest per annum. On the part of Sabeniano, this court ordered the
respondednt to pay the outstanding obligations with Citibank including the stipulated
inetrest rate therein.
Subsequent thereto, Sabeniano filed an Urgent Motion to Clarify and/or Confirm
Decision with Notice of Judgment on 20 October 2006; while, petitioners Citibank, N.A.
and FNCB Finance filed their Motion for Partial Reconsideration of the foregoing
Decision on 6 November 2006.
ISSUE:
WON there was a valid off-setting or compensation of the respondents outstanding loan
balance with her dollar deposits in Citibank-Geneva.
HELD:
No, there was no valid off-setting or compensation effected in this case since neither
the parties were principal creditor of each other.
Without the Declaration of Pledge, petitioner Citibank had no authority to demand the
remittance of respondents dollar accounts with Citibank-Geneva and to apply them to her
outstanding loans. It cannot effect legal compensation under Article 1278 of the Civil
Code since, petitioner Citibank itself admitted that Citibank-Geneva is a distinct and
separate entity. As for the dollar accounts, respondent was the creditor and CitibankGeneva is the debtor since under Article 1980, bank deposits, whether fixed, savings or
curent should be considered as simple loan or mutuum by the depositor to the banking
institution; and as for the outstanding loans, petitioner Citibank was the creditor and
respondent was the debtor. The parties in these transactions were evidently not the
principal creditor of each other.

Pertinent Civil code Provisions:

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;
1. 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;
1. That the two debts be due;
1. 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.
Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan.

SIDE NOTE:
Although under the General Banking Law of 2000, banking institutions under the same
company name are considered as one with its head office, however, under US Federal
reserve Act, when it comes to transactions entered into by foreign branches of an
American Bank shall be deemed as seperate and independent from other branches.
Hence, the accounts of an obligee in a foreign branch cannot be used by a domestic
branch to off set the obligees outstanding loans or obligations in the domestic branch
without the express consent or authorization of the obligee, who is the lawful owner of
said accounts.