Republic of the Philippines Supreme Court Manila EN BANC RUBEN REYNA and LLOYD SORIA, Petitioners, G.R. No.

167219 Present: CORONA, C.J., CARPIO, CARPIO MORALES, VELASCO, JR., * NACHURA, LEONARDO-DE CASTRO, BRION, PERALTA, BERSAMIN, DEL CASTILLO, ABAD, VILLARAMA, JR., PEREZ, MENDOZA, and SERENO, JJ. Promulgated: Respondent. February 8, 2011 x-----------------------------------------------------------------------------------------x

- versus -

COMMISSION ON AUDIT,

DECISION PERALTA, J.:

[1]

Before this Court is a Petition for certiorari, aside Resolution No. 2004-046,
[2]

under Rule 64 of the Rules of Court, seeking to set

dated December 7, 2004, of the Commission on Audit (COA).

The facts of the case are as follows:

The Land Bank of the Philippines (Land Bank) was engaged in a cattle-financing program wherein loans were granted to various cooperatives. Pursuant thereto, Land Banks Ipil, Zamboanga del Sur Branch (Ipil Branch) went into a massive information campaign offering the program to cooperatives.

Cooperatives who wish to avail of a loan under the program must fill up a Credit Facility Proposal (CFP) which will be reviewed by the Ipil Branch. As alleged by Emmanuel B. Bartocillo, Department Manager of the Ipil Branch, the CFP is a standard and prepared form provided by the Land Bank main

office to be used in the loan application as mandated by the Field Operations Manual.

[3]

One of the

conditions stipulated in the CFP is that prior to the release of the loan, a Memorandum of Agreement (MOA) between the supplier of the cattle, Remad Livestock Corporation (REMAD), and the cooperative, shall have been signed providing the level of inventory of stocks to be delivered, specifications as to breed, condition of health, age, color, and weight. The MOA shall further provide for a buy-back agreement, technology, transfer, provisions for biologics requirement and technical visits and replacement of sterile, unproductive stocks.
[4]

Allegedly contained in the contracts was a stipulation that

[5]

the release of the loan shall be made sixty (60) days prior to the delivery of the stocks.

The Ipil Branch approved the applications of four cooperatives. R.T. Lim Rubber Marketing Cooperative (RT Lim RMC) and Buluan Agrarian Reform Beneficiaries MPC (BARBEMCO) were each granted two loans. Tungawan Paglaum Multi-Purpose Cooperative (Tungawan PFMPC) and Siay Farmers Multi-Purpose Cooperative (SIFAMCO) were each granted one loan. Pursuant to the terms of the CFP, the cooperatives individually entered into a contract with REMAD, denominated as a CattleBreeding and Buy-Back Marketing Agreement.
[6]

In December 1993, the Ipil Branch granted six loans to the four cooperative borrowers in the following amounts: Date Name Amount Amount of Amount Paid of of of Livestock to Cattle Release Borrower Loan Insurance Supplier (REMAD) 12-10-93 RTLim RMC P 795,305 P 62,305 P 733,000 12-10-93 BARBEMCO 482,825 37,825 445,000 12-16-93 Tungawan PFMPC 482,825 37,825 445,000 12-22-93 SIFAMCO 983,010 77,010 906,000 12-22-93 RTLim RMC 187,705 14,705 173,000 12-2293 BARBEMCO 448,105 35,105 413,000 [7] L P3,375,775 264,775 3,115,000

TOTA

As alleged by petitioners, the terms of the CFP allowed for pre-payments or advancement of the payments prior to the delivery of the cattle by the supplier REMAD. This Court notes, however, that copies of the CFPs were not attached to the records of the case at bar. More importantly, the very contract entered into by the cooperatives and REMAD, or the Cattle -Breeding and Buy-Back Marketing Agreement
[8]

did not contain a provision authorizing prepayment.

Three checks were issued by the Ipil Branch to REMAD to serve as advanced payment for the cattle. REMAD, however, failed to supply the cattle on the dates agreed upon.

In post audit, the Land Bank Auditor disallowed the amount of P3,115,000.00 under CSB No. 95005 dated December 27, 1996 and Notices of Disallowance Nos. 96-014 to 96-019 in view of the nondelivery of the cattle.
[9]

Also made as the basis of the disallowance was the fact that advanced payment

was made in violation of bank policies and COA rules and regulations. Specifically, the auditor found deficiencies in the CFPs, to wit: The Auditor commented that the failure of such loan projects deprived the farmer-beneficiaries the opportunity to improve their economic condition. From the Credit Facilities Proposals (CFP), the Auditor noted the following deficiencies. xxxx 4. No. 1 of the loan terms and conditions allowed prepayments without taking into consideration the interest of the Bank. Nowhere in the documents reviewed disclosed about prepayment scheme with REMAD, the supplier/dealer. There was no justification for the prepayment scheme. Such is a clear deviation from existing procedures on asset financing under which the Bank will first issue a letter guarantee for the account of the borrower. Payment thereof will only be effected upon delivery of asset, inspection and acceptance of the same by the borrower. The prepayment arrangement also violates Section 88 of Presidential Decree (PD) No. 1445, to quote: Prohibition against advance payment on government Except with the prior approval of the President (Prime Minister), the government shall not be obliged to make an advance payment for services not yet rendered or for supplies and materials not yet delivered under any contract therefor. No payment, partial or final shall be made on any such contract except upon a certification by the head of the agency concerned to have effect that the services or supplies and materials have been delivered in accordance with the terms of the contract and have been duly inspected and accepted. Moreover, the Manual on FOG Lending Operations (page 35) provides the systems and procedures for releasing loans, to quote: Loan Proceeds Released Directly to the Supplier/Dealer Proceeds of loans granted for the acquisition of farm machinery equipment; and sub-loan components for the purchase of construction materials, farm inputs, etc. shall be released directly to the accredited dealers/suppliers. Payment to the dealer shall be made after presentation of reimbursement documents (delivery/ official receipts/ purchase orders) acknowledged by the authorized LBP representative that same has been delivered. In cases where supplier requires Cash on Delivery (COD), the checks may be issued and the cooperative and a LBP representative shall release the check to the [10] supplier and then take delivery of the object of financing.

The persons found liable by the Auditor for the amount of P3,115,000.00 which was advanced to REMAD were the following employees of the Ipil Branch: 1. 2. 3. 4. 5. 6. Emmanuel B. Bartocillo Department Manager II George G. Hebrona Chief, Loans and Discounts Division Petitioner Ruben A. Reyna Senior Field Operations Specialist Petitioner Lloyd V. Soria Loans and Credit Analyst II [11] Mary Jane T. Cunting Cash Clerk IV [12] Leona O. Cabanatan Bookkeeper III/Acting Accountant.

The same employees, including petitioners, were also made respondents in a Complaint filed by the COA Regional Office No. IX, Zamboanga City, before the Office of the Ombudsman for Gross Negligence, Violation of Reasonable Office Rules and Regulations, Conduct Prejudicial to the Interest of the Bank and Giving Unwarranted Benefits to persons, causing undue injury in violation of Section 3(e) of Republic Act (R.A.) No. 3019, otherwise known as the Anti-Graft and Corrupt Practices Act.
[13]

On January 28, 1997, petitioners filed a Joint Motion for Reconsideration claiming that the issuance of the Notice of Disallowance was premature in view of the pending case in the Office of the Ombudsman. The Motion was denied by the Auditor. Unfazed, petitioners filed an appeal with the Director of COA Regional Office No. IX, Zamboanga City. On August 29, 1997, the COA Regional Office issued Decision No. 97-001 affirming the findings of the Auditor. On February 4, 1998, petitioners filed a Motion for Reconsideration, which was denied by the Regional Office in Decision No. 98-005 on February 18, 1998.
[14]

issued

Petitioners did not file a Petition for Review or a Notice of Appeal from the COA Regional Office Decision as required under Section 3, Rule VI
[16] [15]

of the 1997 Revised Rules of Procedure of the

COA. Thus, the Decision of the Director of COA Regional Office No. IX became final and executory pursuant to Section 51 of the Government Auditing Code of the Philippines. Consequently, on April 12,
[17]

1999, the Director of the COA Regional Office No. IX issued a Memorandum to the Auditor directing him to require the accountant of the Ipil Branch to record in their books of account the said disallowance.

On July 12, 1999, the Auditor sent a letter to the Land Bank Branch Manager requiring him to record the disallowance in their books of account. On August 10, 1999, petitioners sent a letter
[19] [18]

to COA

Regional Office No. IX, seeking to have the booking of the disallowance set aside, on the grounds that they were absolved by the Ombudsman in a February 23, 1999 Resolution, Sentral ng Pilipinas had approved the writing off of the subject loans. and that the Bangko

The February 23, 1999 Resolution of the Ombudsman was approved by Margarito P. Gervacio, Jr. the Deputy Ombudsman for Mindanao, the dispositive portion of which reads:

WHERFORE, premises considered, the instant complaint is hereby dismissed for lack of sufficient evidence. SO ORDERED.
[20]

COA Regional Office No. IX endorsed to the Commission proper the matter raised by the petitioners in their
[21]

August 10, 1999 letter. This

is

contained in its

February 28, 2000

letter/endorsement,

wherein the Director of COA Regional Office No. IX maintained his stand that the

time for filing of a petition for review had already lapsed. The Regional Director affirmed the disallowance of the transactions since the same were irregular and disadvantageous to the government, notwithstanding the Ombudsman resolution absolving petitioners from fault.
[22]

In a Notice

dated June 29, 2000, the COA requested petitioners to submit a reply in response

to the letter/endorsement of the Regional Office Director. On August 10, 2000, petitioners submitted their Compliance/ Reply
[23]

, wherein they argued that the Ombudsman Resolution is a supervening event and

is a sufficient ground for exemption from the requirement to submit a Petition for Review or a Notice of Appeal to the Commission proper. Petitioners also argued that by invoking the jurisdiction of the Commission proper, the Regional Director had waived the fact that the case had already been resolved for failure to submit the required Petition for Review.
[24]

On July 17, 2003, the COA rendered Decision No. 2003-107 and the Regional Office, to wit:

affirming the rulings of the Auditor

WHEREFORE, foregoing premises considered, this Commission hereby affirms both the subject disallowance amounting to P3,115,000 and the Order of the Director, COA Regional Office No. IX, Zamboanga City, directing the recording of subject disallowance in the LBP books of accounts. This is, however, without prejudice to the right of herein appellants to run after the supplier for reimbursement of the advance [25] payment for the cattle.

In denying petitioners request for the lifting of the booking of the disallowance, the COA ruled that after a circumspect evaluation of the facts and circumstances, the dismissal by the Office of the Ombudsman of the complaint did not affect the validity and propriety of the disallowance which had become final and executory.
[26]

On August 22, 2003, petitioners filed a Motion for Reconsideration, which was, however, denied by the COA in a Resolution
[27]

dated December 7, 2004.

Hence, herein petition, with petitioners raising the following grounds in support of the petition, to wit:

RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN DECLARING THE PREPAYMENT STIPULATION IN THE CONTRACT BETWEEN THE BANK AND REMAD PROSCRIBED BY SECTION 103 OF P.D. NO. 1445, OTHERWISE KNOWN AS THE STATE AUDIT CODE OF THE PHILIPPINES.

RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION FOR HOLDING THE PETITIONERS ADMINISTRATIVELY LIABLE FOR HAVING PROCESSED THE LOANS OF THE BORROWING COOPERATIVES IN ACCORDANCE W ITH THE BANKS MANUAL (FOG) LENDING OPERATIONS. RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION WHEN IT HELD THE PETITIONERS LIABLE AND, THEREFORE, IN EFFECT LIKEWISE OBLIGATED TO REFUND THE DISALLOWED AMOUNT EVEN AS AMONG OTHER THINGS THEY ACTED IN EVIDENT GOOD FAITH. MORE SO, AS THE COLLECTIBLES HAVE BEEN ALREADY [28] EFFECTIVELY WRITTEN-OFF.

The petition is not meritorious.

I. Anent the first issue raised by petitioners, the same is without merit. Petitioners argue said issue on three points: first, the COA is estopped from declaring the prepayment stipulation as invalid; the prepayment clause in the Land Bank-REMAD contract is valid;
[30] [29]

second,

and third, it is a matter of judicial

[31]

knowledge that is not unusual for winning bidders involving public works to enter into contracts with the government providing for partial prepayment of the contract price in the form of mobilization funds.

As to their contention that the COA is estopped from declaring the prepayment stipulation as invalid, petitioners argue in the wise:

xxxx The CATTLE BREEDING AND BUY BACK MARKETING AGREEMENT sample of which is attached as Annex I was a Contract prepared by the bank and REMAD, it was agreed

to by the cooperatives. It was a standard Contract used in twenty two (22) Land Bank branches throughout the country. It provided in part: 6.1 That the release of the loan shall be made directly to the supplier 60 days prior to the delivery of stocks per prepayment term of REMAD LIVESTOCK COPORATION (supplier). Inspection shall be th done before the 60 day/delivery of the stocks. Again, these Contracts were standard bank forms from Land Bank head office. [32] None of the Petitioners participated in the drafting of the same.

In the absence of grave abuse of discretion, questions of fact cannot be raised in a petition for certiorari, under Rule 64 of the Rules of Court. The office of the petition for certiorari is not to correct simple errors of judgment; any resort to the said petition under Rule 64, in relation to Rule 65, of the 1997 Rules of Civil Procedure is limited to the resolution of jurisdictional issues.
[33]

Accordingly, since the validity

of the prepayment scheme is inherently a question of fact, the same should no longer be looked into by this Court.

In any case, even assuming that factual questions may be entertained, the facts do not help petitioners' cause for the following reasons: first, the supposed Annex I does not contain a stipulation authorizing a pre-payment scheme; and second, petitioners clearly violated the procedure of releasing loans contained in the Bank's Manual on Field Office Guidelines on Lending Operations (Manual on Lending Operations).
[34]

A perusal of the aforementioned Annex I,

the Cattle-Breeding and Buy-Back Marketing

Agreement, would show that stipulation 6.1 which allegedly authorizes prepayment does not exist. To make matters problematic is that nowhere in the records of the petition can one find a document which embodies such a stipulation. It bears stressing that the Auditor noted in his report that, nowhere in the documents reviewed disclosed about prepayment scheme with REMAD, the supplier/dealer. Moreover, it is surprising that one of petitioners defense is that they processed the cooperatives' applications in accordance with their individual job descriptions as provided in the Banks Manual on Field Office Guidelines on Lending Operations
[35]

when, on the contrary, petitioners seem to be oblivious of the

fact that they clearly violated the procedure in releasing loans which is embodied in the very same Manual on Lending Operations, to wit: Loan Proceeds Released Directly to the Supplier/Dealer Proceeds of loans granted for the acquisition of farm machinery equipment; and sub-loan components for the purchase of construction materials, farm inputs, etc. shall be released directly to the accredited dealers/suppliers. Payment to the dealer shall be made after presentation of reimbursement documents (delivery/ official receipts/ purchase orders) acknowledged by [36] the authorized LBP representative that same has been delivered.

However, this Court is not unmindful of the fact that petitioners contend that the Legal Department of Land Bank supposedly passed upon the issue of application of Section 88 of PD 1445. Petitioners argue that in an alleged August 22, 1996 Memorandum issued by the Land Bank, it opined that Section 88 of PD 1445 is not applicable.
[37]

Be that as it may, this Court is again constrained by the fact that

petitioners did not offer in evidence the alleged August 22, 1996 Land Bank Memorandum. Therefore, the supposed tenor of the said document deserves scant consideration. In any case, even assuming arguendo that petitioners are correct in their claim, they still cannot hide from the fact that they violated the procedure in releasing loans embodied in the Manual on Lending Operations as previously discussed. To emphasize, the Auditor noted that nowhere in the documents reviewed disclosed about prepayment scheme with REMAD. It is well settled that findings of fact of quasi-judicial agencies, such as the COA, are generally accorded respect and even finality by this Court, if supported by substantial evidence, in recognition of their expertise on the specific matters under their jurisdiction.
[38]

If the

prepayment scheme was in fact authorized, petitioners should have produced the document to prove such fact as alleged by them in the present petition. However, as stated before, even this Court is at a loss as to whether the prepayment scheme was authorized as a review of Annex I, the document to which petitioners base their authority to make advance payments, does not contain such a stipulation or provision. Highlighted also is the fact that petitioners clearly violated the procedure in releasing loans

found in the Manual on Lending Operations which provides that payments to the dealer shall only be made after presentation of reimbursement documents acknowledged by the authorized LBP representative that the same has been delivered.

In addition, this Court notes that much reliance is made by petitioners on their allegation that the terms of the CFP allowed for prepayments or advancement of the payments prior to the delivery of the cattle by the supplier REMAD. It appears, however, that a CFP, even if admittedly a pro forma contract and emanating from the Land Bank main office, is merely a facility proposal and not the contract of loan between Land Bank and the cooperatives. It is in the loan contract that the parties embody the terms and conditions of a transaction. If there is any agreement to release the loan in advance to REMAD as a form of prepayment scheme, such a stipulation should exist in the loan contract. There is, nevertheless, no proof of such stipulation as petitioners had failed to attach the CFPs or the loan contracts relating to the present petition.

Based on the foregoing, the COA should, therefore, not be faulted for finding that petitioners facilitated the commission of the irregular transaction. The evidence they presented before the COA was insufficient to prove their case. So also, even this Court is at a loss as to the truthfulness and veracity of petitioners' allegations as they did not even present before this Court the documents that would serve as the basis for their claims.

II. Anent the second ground raised by petitioners, the same is again without merit. Petitioners impute on the COA grave abuse of discretion when it held petitioners administratively liable for having processed the loans of the borrowing cooperatives. This Court stresses, however, that petitioners cannot rely on their supposed observance of the procedure outlined in the Manual on Lending Operations when clearly the same provides that payment to the dealer shall be made after presentation of reimbursement documents (delivery/official receipts/purchase orders) acknowledged by the authorized LBP representative that the same has been delivered. Petitioners have not made a case to dispute the COA's finding that they violated the foregoing provision. Any presumption, therefore, that public officials are in the regular performance of their public functions must necessarily fail in the presence of an explicit rule that was violated.

There is no grave abuse of discretion on the part of the COA as petitioners were given all the opportunity to argue their case and present any supporting evidence with the COA Regional Director. Moreover, it bears to point out that even if petitioners' period to appeal had already lapsed, the COA Commission Proper even resolved their August 10, 1999 letter where they raised in issue the favorable ruling of the Ombudsman.

III. Anent, the last issue raised by petitioners, the same is without merit.

Petitioners contend that respondents Order, requiring them to refund the

disallowed transaction, is functus officio, the amount having been legally written-off.

[39]

A perusal of the records would show that Land Bank Vice-President Conrado B. Roxas sent a Memorandum
[40]

dated August 5, 1998 to the Head of the Ipil Branch, advising them that the accounts

subject of the present petition have been written-off, to wit: We are pleased to inform you that Bangko Sentral ng Pilipinas (BSP) in its letter dated July 20, 1998 has approved the write-off of your recommended Agrarian Reform Loan Accounts and Commercial Loan Accounts as covered by LBP Board Resolution [41] Nos. 98-291 and 98-292, respectively, both dated June 18, 1998 x x x.

The Schedule of Accounts for Write-Off

[42]

attached to the August 5, 1998 Memorandum shows

that the same covered the two loans given to BARBEMCO, the two loans given to RTLim RMC, and the only loan given
[43]

to

Tungawan

PFPMC.

The

total

amount

approved

for

write-off

was P2,209,000.00.

Moreover, petitioners contend that the last loan given to SIFAMCO was also the

subject of a write-off in a similar advice given to the Buug Branch. The total approved write-off in the second Memorandum
[44]

was for P906,000.00.

[45]

In

its

Comment,

the

COA

argues

that

the

fact

that

the

audit

disallowance was allegedly written-off is of no moment. Respondent

maintains that Section 66 of PD 1445 liabilities of the government.

[47]

[46]

expressly granted unto it the right to compromise monetary

[48]

The COA, thus, theorizes that without its approval, the alleged write-off is

ineffectual. The same argument was reiterated by the COA in its Memorandum.

The COAs argument deserves scant consideration.

A write-off is a financial accounting concept that allows for the reduction in value of an asset or earnings by the amount of an expense or loss. It is a means of removing bad debts from the financial records of the business.
[49]

In Land Bank of the Philippines v. Commission on Audit, the power and authority to write-off loans, to wit:

this Court ruled that Land Bank has

LBP was created as a body corporate and government instrumentality to provide timely and adequate financial support in all phases involved in the execution of needed agrarian reform (Rep. Act No. 3844, as amended, Sec. 74). Section 75 of its Charter vests in LBP specific powers normally exercised by banking institutions, such as the authority to grant short, medium and long-term loans and advances against security of real estate and/or other acceptable assets; to guarantee acceptance(s), credits, loans, transactions or obligations; and to borrow from, or rediscount notes, bills of exchange and other commercial papers with the Central Bank. In addition to the enumeration of specific powers granted to LBP, Section 75 of its Charter also authorizes it: 12. To exercise the general powers mentioned in the Corporation Law and the General Banking Act, as amended, insofar as they are not inconsistent or incompatible with this Decree. One of the general powers mentioned in the General Banking Act is that provided for in Section 84 thereof, reading: xxxx Writing-off loans and advances with an outstanding amount of one hundred thousand pesos or more shall require the prior approval of the Monetary Board (As amended by PD 71). It will, thus, be seen that LBP is a unique and specialized banking institution, not an ordinary "government agency" within the scope of Section 36 of Pres. Decree No. 1445. As a bank, it is specifically placed under the supervision and regulation of the Central Bank of the Philippines pursuant to its Charter (Sec. 97, Rep. Act No. 3844, as amended by Pres. Decree No. 251). In so far as loans and advances are concerned, therefore, it should be deemed primarily governed by Central Bank Circular No. 958, Series of 1983, which vests the determination of the frequency of writing-off loans in the Board of Directors of a bank provided that the loans written-off do not exceed a certain aggregate amount . The pertinent portion of that Circular reads: b. Frequency/ceiling of write-off. The frequency for writingoff loans and advances shall be left to the discretion of the Board of

Directors of the bank concerned. Provided, that the aggregate amount of loans and advances which may be written-off during the year, shall in no case exceed 3% of total loans and investments; Provided, further, that charge-offs are made against allowance for possible losses, [50] earnings during the year and/or retained earnings .

While the power to write-off is not expressly granted in the charter of the Land Bank, it can be logically implied, however, from the Land Bank's authority to exercise the general powers vested in banking institutions as provided in the General Banking Act (Republic Act 337). The clear intendment of its charter is for the Land Bank to be clothed not only with the express powers granted to it, but also with those implied, incidental and necessary for the exercise of those express powers.
[51]

In the case at bar, it is thus clear that the writing-off of the loans involved was a valid act of the Land Bank. In writing-off the loans, the only requirement for the Land Bank was that the same be in accordance with the applicable Bangko Sentral circulars, it being under the supervision and regulation thereof. The Land Bank recommended for write-off all six loans granted to the cooperatives, and it is worthy to note that the Bangko Sentral granted the same. The write-offs being clearly in accordance with law, the COA should, therefore, adhere to the same, unless under its general audit jurisdiction under PD 1445, it finds that under Section 25(1) the fiscal responsibility that rests directly with the head of the government agency has not been properly and effectively discharged.

On this note, the reliance of respondent on Section 66 of PD 1445 is baseless as a reading thereof would show that the same does not pertain to the COAs power to compr omise claims. Probably, what respondent wanted to refer to was Section 36 which provides: Section 36. Power to compromise claims. 1. When the interest of the government so requires, the Commission may compromise or release in whole or in part, any claim or settled liability to any government agency not exceeding ten thousand pesos and with the written approval of the Prime Minister, it may likewise compromise or release any similar claim or liability not exceeding one hundred thousand pesos, the application for relief therefrom shall be submitted, through the Commission and the Prime Minister, with their recommendations, to the National Assembly. 2. The respective governing bodies of government-owned or controlled corporations, and self-governing boards, commissions or agencies of the government shall have the exclusive power to compromise or release any similar claim or liability when expressly authorized by their charters and if in their judgment, the interest of their respective corporations or agencies so requires. When the charters do not so provide, the power to compromise shall be exercised by the Commission in accordance with the preceding paragraph. xxxx
[52]

Under Section 36, the use of the word may shows that the power of the COA to compromise claims is only permissive, and not mandatory. Further, the second paragraph of Section 36 clearly states that respective governing bodies of government-owned or controlled corporations, and self-governing boards, commissions or agencies of the government shall have the exclusive power to compromise or release any similar claim or liability when expressly authorized by their charters. Nowhere in Section 36 does it state that the COA must approve a compromise made by a government agency; the only requirement is that it be authorized by its charter. It, therefore, bears to stress that the COA does not have the exclusive prerogative to settle and compromise liabilities to the Government. The foregoing pronouncements notwithstanding, this Court rules that writing-off a loan does not equate to a condonation or release of a debt by the creditor. As an accounting strategy, the use of write-off is a task that can help a company maintain a more accurate inventory of the worth of its current assets. In general banking practice, the write-off method is used when an account is determined to be uncollectible and an uncollectible expense is recorded in the books of account. If in the future, the debt appears to be collectible, as when the debtor becomes solvent, then the books will be adjusted to reflect the amount to be collected as an asset. In turn, income will be credited by the same amount of increase in the accounts receivable.
[53]

Write-off is not one of the legal grounds for extinguishing an obligation under the Civil Code.
[54]

It

is not a compromise of liability. Neither is it a condonation, since in condonation gratuity on the part of the obligee and acceptance by the obligor are required. In making the write-off, only the creditor takes

action by removing the uncollectible account from its books even without the approval or participation of the debtor.

Furthermore, write-off cannot be likened to a novation, since the obligations of both parties have not been modified.
[55]

When a write-off occurs, the actual worth of the asset is reflected in the books of

accounts of the creditor, but the legal relationship between the creditor and the debtor still remains the same the debtor continues to be liable to the creditor for the full extent of the unpaid debt.

Based on the foregoing, as creditor, Land Bank may write-off in its books of account the advance payment released to REMAD in the interest of accounting accuracy given that the loans were already uncollectible. Such write-off, however, as previously discussed, does not equate to a release from liability of petitioners.

Accordingly, the Land Bank Ipil Branch must be required to record in its books of account the Php3,115,000.00 disallowance, and petitioners, together with their four co-employees,
[56]

should be

personally liable for the said amount. Such liability, is, however, without prejudice to petitioners right to run after REMAD, to whom they illegally disbursed the loan, for the full reimbursement of the advance payment for the cattle as correctly ruled by the COA in its July 17, 2003 Decision.
[57]

On a final note, it bears to point out that a cursory reading of the Ombudsman's resolution will show that the complaint against petitioners was dismissed not because of a finding of good faith but because of a finding of lack of sufficient evidence. While the evidence presented before the Ombudsman may not have been sufficient to overcome the burden in criminal cases of proof beyond reasonable doubt,
[58]

it

does not, however, necessarily follow, that the administrative proceedings will suffer the same fate as only substantial evidence is required, or that amount of relevant evidence which a reasonable mind might accept as adequate to justify a conclusion.
[59]

An absolution from a criminal charge is not a bar to an administrative prosecution or vice versa.
[60]

The criminal case filed before the Office of the Ombudsman is distinct and separate from the

proceedings on the disallowance before the COA. So also, the dismissal by Margarito P. Gervacio, Jr., Deputy Ombudsman for Mindanao, of the criminal charges against petitioners does not necessarily foreclose the matter of their possible liability as warranted by the findings of the COA.

In addition, this Court notes that the Ombudsman's Resolution relied on an alleged April 6, 1992 Memorandum of the Field Loans Review Department which supposedly authorized the Field Offices to undertake a prepayment scheme. On the other hand, the same Ombudsman's Resolution also made reference to a January 19, 1994 Memorandum of EVP Diaz and a May 31, 1994 Memorandum of VP FSD which tackled the prohibition on advance payment to suppliers. All these documents, however, were again not attached to the records of the case at bar. Particularly, the supposed April 6, 1992

Memorandum of the Field Loans Review Department was not even mentioned nor raised by petitioners as a defense in herein petition.

The decisions and resolutions emanating from the COA did not tackle the supposed April 6, 1992 Memorandum of the Field Loans Review Department which allegedly authorized the Field Offices to undertake a pre-payment scheme. While it is possible that such document would have shown that petitioners were in good faith, the same should have been presented by them in the proceedings before the Commission proper - an act which they were not able to do because of their own negligence in allowing the period to file an appeal to lapse. The April 6, 1992 Memorandum of the Field Loans Review Department would have been the best evidence to free petitioners from their liability. It appears, however, that they did not present the same before the COA and it is already too late in the day for them to present such document before this Court.

Petitioners' allegation of grave abuse of discretion by the COA implies such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction or, in other words, the exercise of the power in an arbitrary manner by reason of passion, prejudice, or personal hostility; and it must be so patent or gross as to amount to an evasion of a positive duty or to a virtual refusal to perform the duty enjoined or to act at all in contemplation of law.
[61]

It is imperative for petitioners to show caprice and

arbitrariness on the part of the COA whose exercise of discretion is being assailed. Proof of such grave abuse of discretion, however, is wanting in this case.

WHEREFORE, premises considered, the petition is DENIED. Decision No. 2003-107 dated July 17, 2003 and Resolution No. 2004-046 dated December 7, 2004, of the Commission on Audit, are hereby AFFIRMED. SO ORDERED.

G.R. No. L-25350 October 4, 1988 WILLIAM A. CHITTICK, petitioner, vs. HONORABLE COURT OF APPEALS and LAURENCE F. DE PRIDA PATRICIA CHITTICK, LANE, WILLIAM A. CHITTICK, JR., DAGMAR CHITTICK GILDERSLEEVE and MARY CHITTICK LYMAN, as alleged substituted parties for MURIEL M. CHITTICK original party plaintiff, respondents. Gonzalo W. Gonzales & Associates for petitioner. David Guevarra for respondent Laurence F. de Prida.

BIDIN, J.: This is a petition for review on certiorari of the decision * of respondent Court of Appeals promulgated on July 31, 1965 in CA-G.R. No. 31327-R, affirming in all respect the decision ** of the Court of First Instance of Manila, Branch II in Civil Case No. 6405 entitled Muriel M. Chittick vs. William A. Chittick. The dispositive portion of the decision which was affirmed by respondent Court, reads as follows: In view of the foregoing, judgment is hereby rendered in favor of the plaintiff and against the defendant by way of support in arrears for the sum of P21,145.42 or its present equivalent in dollar at the option of the plaintiff, with interest at the legal rate from January 12, 1951; and under the second cause of action for the sum of P9,000.00 with interest at the rate of 6% from April 29, 1940, plus attorney's fees in the amount of P900.00, and the costs of the suit. (R.A. p. 110) The facts of the case, taken from the decision of the trial court is as follows: The plaintiff and the defendant, both American citizens, were married in Washington, U.S.A. on February 12, 1923. They came to the Philippines in 1924 and made the City of Manila their permanent residence. Four children were born of the marriage, namely, Patricia, who was born, on September 12, 1924; William, Jr., on January 8, 1926; Dagmar, on October 6, 1931, and Mary, on January 12, 1933. According to the defendant, due to plaintiffs infidelity, their marital relation became strained and they entered into an agreement of separation, Exhibit A, on May 8, 1937. The document, Exhibit A, was drawn by Atty. Benjamin S. Ohmick, an American lawyer, and was duly acknowledged before a notary public. The pertinent stipulations which are the bases of plaintiffs two causes of action are found in paragraphs 2 and 3, and read as follows: 2. The husband agrees that he will pay or cause to be paid to said wife monthly the sum of FIVE HUNDRED FIFTY PESOS (P550.00), Philippine Currency, or its present equivalent in United States Currency, at the election of the wife, for the care, maintainance and support of the said wife and the said minor children. Said payment shall continue until such time as the youngest of said minor children

arrives at the age of eighteen (18) years, provided however, that the said wife in the meantime does not remarry. Should such marriage take place, it is understood and agreed that payments aforesaid shall be reduced by twenty percent (20%). 3. It is mutually agreed that the community or conjugal assets of the parties, consisting of share of stock in various corporations, together with cash, have a net realizable value of P22,500.00 which the husband agrees to divide equally with the wife and deliver same to her whenever the said wife secures a final decree of divorce as is contemplated by her it being understood that the husband, at his option, may deliver to the wife the sum of P11,250.00 in full and complete discharge. The plaintiff thereafter went to Nevada, U.S.A., and alleging desertion on the part of her husband, the defendant herein, the plaintiff obtained a divorce, Exhibit B, on August 30, 1937. Plaintiff stayed in the United States until December 1937, after which she returned to the Philippines. The defendant complied faithfully with the payment of the monthly support of P550.00 until the war broke out in December 1941. With the outbreak of the war, the spouses and their children were interred in the Sto. Tomas University concentration camp by the Japanese from January 1942 to March 3, 1944. Nevertheless, the defendant during the period of interment, paid to the plaintiff a total of P4,716.00 which according to the defendant, was extended as a loan to the plaintiff and which was obtained by borrowing from his friends. After the liberation in March 1945, plaintiff and defendant and their children were among the first to be sent back to the United States for medical treatment, arriving in San Francisco on May 9, 1945. From the arrival of the parties in San Francisco in May 9, 1945 to January 12, 1951 when Mary, the youngest, reached the age of 18, and when according to paragraph 2 of Exhibit A, the payment of support should cease, the defendant paid a total of $8,145.00. The total amount due to the plaintiff by way of support, in accordance with paragraph 2 of Exhibit A, from May 9, 1945 to January 12, 1951 is $18,717.71, thereby, leaving a balance in favor of the plaintiff in the amount of $10,572.7l. (Record on Appeal, pp. 84-88). On October 2, 1948, private respondent commenced an action to recover from petitioner support in arrears and her share in the conjugal partnership, in Civil Case No. 6405 of the Court of First Instance of Manila, Branch II, praying that judgment be rendered in her favor and against defendant, under the first cause of action, for the sum of $3,442.90, United States currency, or P6,885.80, Philippine Currency, and the further sum of $110.00 or P220.00 per month from March 1, 1948, both with legal interest from the date of filing of the complaint until paid and, under the second cause of action, for the sum of P11,250.00, with legal interest from the date of the filing of this complaint, until paid, plus the sum of P1,000.00 for attorney's fees, with costs against defendant. (Record on Appeal, pp. 1-11). As aforesaid, the trial court rendered a decision in favor of the plaintiff. On appeal, respondent Court of Appeals on July 31, 1965, affirmed the decision of the trial court in all respects (Rollo, pp. 82-116). August 5, 1965, counsel for plaintiff-appellee, private respondent herein, filed a motion with respondent court for substitution of party plaintiff-appellee, who died in Los Angeles, California, United States of America on April 25, 1964, by her heirs, her surviving spouse, Laurence F. de Prida and the legitimate children of the parties (Rollo, p. 143). The motion was opposed by petitioner herein on the ground that since the relation between attorney and client

ceased with the death of plaintiff-appellee, counsel cannot present any motion for and in behalf of the children of the deceased client, unless authorized by the said children and/or heirs. (Rollo, p. 144). On November 3, 1965, the respondent Court issued its resolution granting the motion for substitution (Rollo, p. 209). A motion for reconsideration of the decision of respondent court dated July 31, 1965 was filed by petitioner on August 20, 1965 (Rollo, pp. 154-199.) It was denied by respondent court in another resolution also dated November 3, 1965 (Rollo, p. 210.) Hence, this petition filed with this Court on November 26, 1965 (Rollo, p.1.) In a resolution dated January 7, 1966, the Court resolved to dismiss the petition for lack of merit (Rollo, p. 215-A.) On January 27, 1966, petitioner tiled a motion for reconsideration of the Court's resolution of January 7, 1966 (Rollo, p. 217) in view of which the Court required respondents to answer within ten days from notice, in its resolution of February 17, 1966 (Rollo, p. 242.) Private respondent Laurence F. de Prida filed his answer on April 4,1966 (Rollo, p. 247.) On April 18, 1966, the Court resolved to give due course to the petition (Rollo, p. 276.) The brief for the petitioner was filed on June 14, 1966 (Reno, p. 279); the brief for the respondent was filed on August 25, 1966 (Rollo, p. 288.) The reply brief was filed on November 3, 1966 (Rollo, p. 308.) On January 18, 1967, petitioner filed a manifestation that the Court take cognizance of two letters of his son William, Jr. stating that the case will filed by Larry de Prida (his mother's alleged second husband), without his consent and expressing a desire not to be made a party to the case against his father (Rollo, p. 309.). Acting on the manifestation the Court required private respondent to comment thereon, (Rollo, p. 315) which was filed on February 16, 1967 (Rollo, p. 316). A counter manifestation with reference to the comment of private respondent was filed by petitioner on February 2&, 1967 (Rollo, p. 318.) Petitioner raised several assignments of errors but the principal conflict in this case centers on whether or not the decision of respondent Court was rendered nugatory by the death of plaintiffappellee Muziel M. Chittick (private respondent herein) more than one year before its issuance and before a substitution of heirs could be effected. The answer is in the affirmative. Section 16, Rule 3 of the Rules of Court states: Duty of attorney upon death, incapacity, or incompetency of party.Whenever a party to a pending case dies, becomes incapacitated or incompetent, it shall be the duty of his attorney to inform the court promptly of such death, incapacity or incompetency, and to give the name and residence of his executor, administrator, guardian on other legal representative. Section 17 of the same Rule likewise, states: Death of a party.After a party dies and the claim is not thereby extinguished, the court shall order, upon proper notice, the legal representative of the deceased to appear and to be substituted for the deceased, within a period of thirty (30) days, or within such time as may be granted. If the legal representative fails to appear within said time, the court may order the opposing party to procure the appointment of a

legal representative of the deceased within a time to be specified by the court, and the representative shall immediately appear for and on behalf of the interest of the deceased. The court charges involved in procuring such appointment, if defrayed by the opposing party, may be recovered as costs. The heirs of the deceased may be allowed to be substituted for the deceased, without requiring the appointment of an executor or administrator and the court may appoint guardianad litem for the minor heirs. Private respondent Muriel M. Chittick died in Los Angeles, California, United States of America, on April 25,1964 while the case was pending with respondent Court of Appeals. It was only on August 5, 1965, however, that counsel for private respondent filed a motion for substitution of party plaintiffappellee (Rollo, p. 143) five days after respondent court promulgated its decision of July 31, 1965, despite Section 16, Rule 3 of the Rules of Court which clearly provides for a prompt notice of such death to be given to the Court by the attorney of the deceased. In fact said counsel himself admitted his lapse in memory, alleging however, that he thought all the while that he had already complied with the aforementioned sections of Rule 3 and that he discovered his neglect when he went over the records of the case upon receipt of the decision promulgated by the Court of Appeals (Rollo, p. 148). There is no question that this duty applies in this case where a party dies after filing of the complaint and during the pendency of the case (Doel v. Teves, 136 SCRA 196 [1985], nor is there any argument against the rule that counsel's inexcusable negligence is binding on his client. (Llantero v. Court of Appeals, 105 SCRA 609 [1981], Pulido v. Court of Appeals, 122 SCRA 63 [1983]). More than that, apart from the fact that there appears to be no compliance with the procedure laid down in Rule 3, Sections 16 and 17 of the Rules of Court, in order that a valid substitution maybe effected, all of the Chittick children who claim that they have no knowledge of such substitution, expressly and vehemently objected to their being included as plaintiffs against petitioner, their father (Brief for Petitioner, pp. 33-36). Consequently, it is evident that the motion for substitution filed by the counsel for the deceased and which was subsequently approved by the Court of Appeals is null and void because the party in whose name it was presented was dead, and therefore, the authority of the attorney to represent her had ceased (Moran, Vol. I, p. 218,1979 ed.). Furthermore, the said motion was unauthorized by the plaintiffs in question (private respondents herein) with the exception of Laurence F. de Prida, the alleged second husband of the deceased, whose heirship is however also in question. As correctly stated by petitioner, there should first be a prior determination as to whether or not de Prida is an heir of the deceased before he can be properly substituted as such (Brief for Petitioner, pp. 3640). Under similar circumstances, this Court ruled as follows: In the present case, there had been no court order for the legal representative of the deceased to appear, nor had any such legal representative ever appeared in court to be substituted for the deceased; neither had the complainant ever procured the appointment of such legal representative of the deceased, nor had the heirs of the deceased, including appellant, ever asked to be allowed to be substituted for the deceased. As a result, no valid substitution was effected, consequently, the court never acquired jurisdiction over appellant for the purpose of making her a party to the case and making the decision binding upon her, either personally or as legal representative of the estate of her deceased mother. (Ferreria, et al. v. Vda. de Gonzales, et al., 104 Phil. 143).

Going back to the case at bar, it is without question that there was no valid substitution made and as a consequence, the Court of Appeals never acquired jurisdiction over the Chittick children nor over the alleged second husband whose status as heir has still to be determined. Still further, on November 29, 1977, counsel for petitioner filed with this Court a Notice of Death of the latter on April 13, 1977 in Makati, Metro Manila (Rollo, p. 322). Accordingly, even assuming that there was a valid substitution still this case as a money claim against the defendant petitioner cannot survive under Sec. 5, Rule 86 of the Rules of Court and should have been filed against the decedent's estate which is mandatory (De Bautista v. De Guzman, 125 SCRA 682 [1983]). Nevertheless, since the Chittick children as heirs of respondent-creditor are also the heirs of petitioner-debtor, the obligation sued upon had been extinguished by the merger in their persons of the character of creditor and debtor of the same obligation (Art. 1275, Civil Code). WHEREFORE, the appealed decision of the Court of Appeals is hereby Reversed and Set Aside and the complaint filed against defendant-petitioner is Dismissed. No costs. SO ORDERED.

G.R. No. 40908

September 8, 1934

NATALIO A. ENRIQUEZ, SUSANA GALA, MOISES A. GALA and AVELINA ELEAZAR, plaintiffsappellants, vs. COSME RAOLA, administrator of the estate of the deceased Fructuosa Cadiz, defendantappellee. PEDRO HERRERA and MARTIN MENDOZA, intervenors-appellants. Azada and Veluz for plaintiffs-appellants. Godofredo Reyes for intervenors-appellants. BUTTE, J.: The appellants as plaintiffs on September 29, 1932, filed suit in the Court of First Instance of Tayabas against Cosme Raola as administrator of the estate of Fructuosa Cadiz Praying for a personal judgment for P30,000 with interest and the foreclosure of a mortgage securing said debt. This mortgage was a first lien on a parcel of land with improvements described in certificate of title No. 878 of Tayabas and containing an area of 809,609 square meters assessed at P28,150. It is alleged that neither Fructuosa Cadiz in her life time nor her representative since her death has paid the said past due loan or the interest thereon since June 27, 1930, although due demand was made. The answer of the defendant administrator of the late Fructuosa Cadiz admits all of the allegations of the petitioner but prays to be relieved of the payment of attorney's fees and costs. On January 18, 1933, by permission of the court, Pedro Herrera and Martin Mendoza filed a petition of intervention in which it is alleged that the intervenor Herrera has an interest in said land under and by virtue of his purchase thereof at a sheriff's sale which is noted on the back of the said certificate of title No. 878. The intervenor Mendoza claims an interest in said land alleging that the said Fructuosa Cadiz in her life time on January 20, 1930, transferred to the said Mendoza by sale with pacto de retro a portion of said land containing 400 coconut trees for the sum of P3,500.

The intervenors further allege that in 1931 the defendant administrator delivered possession of the said mortgaged property to the plaintiffs by way of antichresis for the remaining portion of the fiveyear period stated in the original contract of mortgage with the understanding that the plaintiffs should apply the products of the land to the payment of the mortgage debt and interest; that by virtue of said agreement of antichresis there has been a novation of the obligation and the plaintiffs cannot foreclose the mortgage executed by Fructuosa Cadiz before the expiration of five years from the date of the said mortgage, that is to say, June 27, 1935, and hence the action of the plaintiffs is premature. They pray that the contract of mortgage be declared novated by the subsequent contract of antichresis, that the plaintiffs be required to render an account; that the petition of the plaintiffs be dismissed with costs. On March 7, 1933, the plaintiffs filed their answer to the petition of intervention in which they allege that the plaintiffs are the owners of the land described in said certificate of title No. 878 by virtue of the fact that they purchased the same from Francisco Paulino who in his turn purchased the same at a sheriff's sale under an execution upon a judgment against said Fructuosa Cadiz in case No. 2807 which sale and purchase is registered in the office of the register of deeds and noted on the back of said certificate No. 878. The answer denies that the intervenors acquired any right under their alleged purchases. As stated, the defendant administrator of the estate of Fructuosa Cadiz makes no defense to the plaintiffs' demand. Only the intervenors and the plaintiffs have appealed. The plaintiffs except to that portion of the decision of the trial court which denied the prayer of the plaintiffs for a personal judgment for P30,000 with interest on the debt secured by the mortgage aforesaid. The trial court held that when the plaintiffs acquired through Francisco Paulino the equity of Fructuosa Cadiz in the very same lands conveyed to them as mortgagees, a merger of rights (confusion de derechos) took place which had the effect of extinguishing the debt of Fructuosa Cadiz in favor of the plaintiffs, under the provisions of articles 1156 and 1159 of the Civil Code. If that were not true, the plaintiffs would acquire the legal and equitable title to lands assessed at P28,150 for the sum of P857.31 paid by them to Francisco Paulino without giving Fructuosa Cadiz or her estate credit for anything, leaving the said estate still owing the plaintiffs the P30,000, plus interest, for which the lands stood security. This extinction of the obligation and merger of rights by which the plaintiffs became owners of the land, occurred when they acquired the rights of Francisco Paulino, that is to say, on February 24, 1931. Subsequent thereto, that is to say, on August 31, 1931, the intervenor Herrera at a sheriff's sale purchased all the rights, title and interest that remained in Fructuosa Cadiz in the said land, which, as correctly held by the trial court, were in fact exhausted by the prior conveyances. As to the intervenor Martin Mendoza, it appears from his Exhibit 1 that Fructuosa Cadiz, on January 20, 1930, executed in his favor a document entitled venta con pacto de retro affecting a portion of the land embraced in said certificate of title No. 878; but said document was never registered or noted on the certificate of title in conformity with section 50 of Act No. 496. Hence it could not affect these plaintiffs. Although he appealed, we do not find in the brief for the intervenors any argument challenging the conclusion of the court in this respect. The intervenors' appeal rests essentially upon the proposition that novation of the contract of mortgage occurred when the plaintiffs agreed that they should take possession of the land before the maturity of the mortgage, and credit the products thereof to the payment of the principal and interest of the debt, thus converting the mortgage to a contract of antichresis. The evidence fails entirely to establish said alleged agreement. The defendant administrator, the widower of the deceased Fructuosa Cadiz, makes no such claim. The plaintiffs contend that they did not take

possession until after they became owners by virtue of the conveyance from Francisco Paulino, that is to say, toward the end of the month of February, 1932, which was after the year for redemption of Francisco Paulino's purchase by the judgment debtor had expired. The intervenors in their brief take grave exception to the orders of the trial court suspending the final effect of the judgment in this case in favor of the appellants until they obtained a certificate of title. On October 30, 1933, the plaintiffs notified the court that they had obtained certificate of title No. 7465 upon cancellation, of certificate of title No. 878, thus complying with the order of the court of August 21, 1933. Whatever apparent irregularities of procedure there may have been in this connection, we are convinced that the intervenors have not been deprived of any substantial rights by the final decision of the court. The judgment is affirmed with costs to be divided equally between the plaintiffs-appellants and the intervenors-appellants.

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

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 facts of this case, culled from the decision of the CA,[1] 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 attorneys 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 defendant, real or personal, and/or (of) any person representing the defendant[2] in such amount as to cover Gerardo Uys demand. On January 27, 1995, the sheriff issued a notice of garnishment addressed to the Philippine National Bank (PNB) attaching the goods, effects, credits, monies and all other personal properties[3] 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 PNEIs 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 MADECORs 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 concurrent amount or up to P7,884,000.00 so that PNEI is still obligated to pay PNB MADECOR the amount of P900,227.48. xxx[4]

On the other hand, Gerardo Uy filed an omnibus motion controverting PNB MADECORs 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 MADECORs debt to PNEI, there shall still be a remainder of x x x (P67,029,380.78), largely sufficient enough to cover complainants claim.
[5]

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 PNEIs letter dated September 28, 1984 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 in a dacion en pago executed on July 28, 1983.[6] Gerardo Uy again controverted PNB MADECORs 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. Petitioners motion for reconsideration was denied in a resolution dated June 19, 1997. According to the CA, there could not be any compensation between PNEIs receivables from PNB MADECOR and the latters obligation to the former because PNB MADECORs 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 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 petitioners 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 petitioners 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:
I

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 FORCED INTERVENOR, HENCE, DENYING THE RIGHT OF HEREIN PETITIONER TO VENTILATE ITS POSITION IN A FULL-BLOWN 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 THE PROMISSORY NOTE DATED 31 OCTOBER 1982.
[7]

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 PNEIs 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 latters obligation to it, consistent with Articles 1278, 1279, and 1290 of the Civil Code. Petitioner assails the CAs 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 the subject receivables as indicated in its reply to petitioners demand for payment of PNEIs unpaid rentals.[8] The APT stated in its letter: xxx

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 PNEIs 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.
xxx Petitioner argues that PNEIs 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 CAs statement that PNEIs 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 petitioners assertion. He argues that the better rule should be that

compensation cannot take place where one of the obligations sought to be 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 petitioners 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 MADECORs 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 PNEIs obligation might have already been settled, waived, or otherwise extinguished, according to him. He contends that petitioners explanation that it did not sue PNEI because there had been legal compensation is only an afterthought and contrary to logic and reason. On petitioners 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 MADECORs pending cases, and asks that his claim over this amount, arising from the instant case,[9] 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. Worth stressing, compensation is a mode of extinguishing to the concurrent amount the obligations of persons who in their own right and as principals arereciprocally debtors and creditors of each other.[10] Legal compensation takes place by operation of law when all the requisites are present,[11] as opposed to conventional compensation which takes place when the parties agree to compensate their mutual obligations even in the absence of some requisites.[12] 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 communicated in due time to the debtor.
[13]

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:

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 an 18% [interest] per annum from date of notice of demand.
[14]

Petitioner makes a similar assertion in its petition, that

xxx It has been stipulated that the promissory note shall earn an interest of 18% per annum in case NAREDECO, after notice, fails to pay the amount stated therein.
[15]

Petitioners 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, the unpaid balance of your account will be P2,491,157.57.
[16]

To forestall further accrual of interest, we request that you take up with PNB the implementation of said arrangement. xxx[17] 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. Apart from the aforecited letter, no other demand letter appears on record, nor has any of the parties adverted to another demand letter. Since petitioners 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 PNEIs judgment debt.[18] As to respondents 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 so long as the requisites concur, even without any conscious intent on the part of the parties.[19] 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 per order of the trial court dated March 27, 1995.[20]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 MADECORs 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, PNEIs 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 respondents 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. 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, per Section 43 of Rule 39 of the Rules of Court.[21] 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 to rule as early as 1921 in Tayabas Land Co. v. Sharruf,[22] 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.
Again, in Perla Compania de Seguros, Inc. v. Ramolete,[23] 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 PNEI had not yet settled its obligation to petitioner.[24] 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 petitioners 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 case, petitioner expressly admits its obligation to PNEI.[25] WHEREFORE, the petition is DENIED. The assailed decision and resolution of the Court of Appeals are AFFIRMED. Costs against petitioner. SO ORDERED.