Citibank vs. Sabeniano

G.R. No 156132. October 12, 2006

MAIN TOPIC Extinguishment of Obligations – Compensation


Modesta R. Sabeniano was a client of both petitioners Citibank and FNCB Finance. Unfortunately, the business relations among the parties subsequently went awry. In 1985, Sabeniano filed a civil case for “Accounting, Sum of Money and Damages”, alleging that petitioners refused to return her deposits and the proceeds of her money market placements despite her repeated demands. Petitioners admitted that respondent had deposits and money market placements with them, including dollar accounts. However, they also alleged that the respondent obtained several loans aggregating to ₱1,920,000.00, for which she executed Promissory Notes and secured by a pledge on her dollar accounts and money market placements. That despite of the repeated demands, respondent failed to pay her outstanding loans. Thus, petitioner Citibank used respondent’s deposits and money market placements to off set and liquidate her outstanding obligations. RTC declared this illegal, null and void and to pay Sabeniano with legal interest, while Sabeniano was ordered to pay her loans.


Whether or not there right of petitioner Citibank to compensate respondent’s outstanding
loans with her deposit account.


Yes. Petitioner Citibank was the creditor of respondent for her outstanding loans. At the same time, respondent was the creditor of petitioner Citibank, as far as her deposit account was concerned, since bank deposits, whether fixed, savings, or current, should be considered as simple loan or mutuum by the depositor to the banking institution. Both debts consist in sums of money. Compensation takes place by operation of law, therefore, even in the absence of an expressed authority from respondent, petitioner Citibank had the right to effect, the partial compensation or off-set of respondent’s outstanding loans with her deposit.


Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.

Article 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196)


Compensation is the extinguishment to the concurrent amount of the debts of two persons who, in their own right, are reciprocally principal debtors and creditors of each other. It involves the simultaneous balancing of two obligations in order to totally extinguish them if they are of the same amount or to the extent in which the amount of one is covered by that of the other, if of different amounts.

Article 1270 enumerates the requirements or requisites for legal compensation. Absent any showing that all of these requisites are present, compensation may not take place. In the case the parties are mutually creditors and debtors of each other. Both debts consists of sum of money. Some of the promissory notes had matured and become demandable, while the deposits of the respondent is demandable anytime. Neither there was a controversy. Thus, Compensation takes place by operation of law.