Bank of the Philippines Islands vs. Court of Appeals

A bank may debit a depositor's account to cover a loss arising from a dishonored check deposited by the depositor, where the depositor gave verbal authorization for the debit, and where the requisites for legal compensation under Article 1279 of the Civil Code are present, even if the debited account is a joint account with a third party who does not assert a conflicting right.

Private respondent Edvin F. Reyes maintained two joint "AND/OR" savings accounts with petitioner Bank of the Philippine Islands (BPI): one with his wife, Sonia S. Reyes, and another with his grandmother, Emeteria M. Fernandez. After Fernandez's death, a U.S. Treasury Warrant issued in her name as a pension was deposited by Reyes into the joint account with Fernandez. The check was later dishonored after U.S. authorities discovered the payee's death prior to its issuance. BPI debited the amount from Reyes's other joint account with his wife, leading Reyes to file a suit for damages.

• Nature of Accounts: Private respondent Edvin F. Reyes held a joint "AND/OR" Savings Account (No. 3185-0172-56) with his wife, Sonia S. Reyes, and another joint "AND/OR" Savings Account (No. 3185-0128-82) with his grandmother, Emeteria M. Fernandez, both at BPI.
• Deposit of Treasury Warrant: After Fernandez's death on December 28, 1989, a U.S. Treasury Warrant dated January 1, 1990, payable to her, was received. On January 4, 1990, Reyes deposited this warrant into the joint account with Fernandez.
• Transfer of Funds: On March 8, 1990, Reyes closed the joint account with Fernandez and transferred its balance to his joint account with his wife. In the withdrawal slip, he declared under penalty of perjury that Fernandez was still living.
• Dishonor and Debit: In January 1991, the U.S. Treasury Warrant was dishonored after the U.S. Department of Treasury discovered Fernandez's death prior to its issuance. BPI was requested to refund the amount. On February 19, 1991, after contacting Reyes, BPI debited P10,556.00 from the joint account with his wife.
• Suit for Damages: Reyes subsequently filed a complaint for damages against BPI and its manager, Grace Romero, alleging the debit was unauthorized and caused him financial loss.

• Verbal Authorization: Petitioners maintained that private respondent gave express verbal authorization to debit his joint account with his wife for the value of the returned treasury warrant during a phone conversation with the bank's assistant manager.
• Legal Compensation: Petitioners argued that legal compensation applied, as the bank was a debtor to Reyes (as a depositor) and simultaneously his creditor (due to the obligation to refund the dishonored check), extinguishing the debts to the concurrent amount.
• Applicability of Gullas v. PNB: Petitioners contended that the principle from Gullas v. PNB, which allows a bank to apply a deposit to an outstanding obligation of the depositor, was controlling.
• Source of Funds: Petitioners emphasized that the money debited was the same funds originally transferred from the joint account with the grandmother, to which the bank had a rightful claim.

• Lack of Authorization: Respondent Reyes countered that he did not give any verbal authorization to debit his account and that the bank acted without his consent.
• Improper Debit from Joint Account: Implicitly, respondent argued that the debit from an account held jointly with a third party (his wife) was improper, as the bank's claim was solely against him.

• Authorization: Whether private respondent gave verbal authorization to petitioner bank to debit his joint account.
• Legal Compensation: Whether the principle of legal compensation justified the bank's debit of private respondent's account.

• Authorization: The petition was granted. The testimonies of the bank's assistant manager and manager were found credible, establishing that private respondent gave verbal authorization to debit his account. Private respondent's uncorroborated denial was rejected, especially in light of his fraudulent conduct in concealing the payee's death and making a false declaration in the withdrawal slip.
• Legal Compensation: The requisites for legal compensation under Article 1279 of the Civil Code were present. The bank was a debtor of private respondent (as depositor) and simultaneously his creditor (due to the obligation arising from the dishonored check). The debts were sums of money, due, liquidated, demandable, and not subject to controversy by third persons. The fact that the debited account was a joint account with the wife did not negate mutuality, as she never asserted any right to the funds and allowing the objection would lead to unjust enrichment.

• Legal Compensation (Ipso Jure) — Compensation takes place by operation of law when two persons, in their own right, are creditors and debtors of each other, and all requisites under Article 1279 of the Civil Code are present. It extinguishes both debts to the concurrent amount, even without the knowledge or consent of the parties. In this case, the bank's obligation to honor the depositor's credit balance was offset by the depositor's obligation to refund the amount of the dishonored check he deposited.
• Bank's Right to Apply Deposits (from Gullas v. PNB) — A bank has a right to apply a depositor's balance to an outstanding obligation owed by the depositor to the bank. This right was recognized as analogous to the right of compensation.

• "Private respondent's past and fraudulent conduct is an evidence against him. He concealed from petitioner bank the death of Fernandez... Worse, private respondent declared under the penalties of perjury in the withdrawal slip dated March 8, 1990 that his co-depositor, Fernandez, is still living. By his acts, private respondent has stripped himself of credibility."
• "The rule as to mutuality is strictly applied at law. But not in equity, where to allow the same would defeat a clear right or permit irremediable injustice." — This passage justifies applying compensation despite the joint account structure, invoking equitable principles to prevent unjust enrichment.

• Gullas v. Philippine National Bank, 62 Phil. 519 — Cited by petitioners for the principle that a bank may apply a depositor's funds to an obligation owed by the depositor to the bank. The Supreme Court implicitly relied on this principle in upholding the bank's right to debit the account.

• Article 1278, Civil Code — Compensation takes place when two persons, in their own right, are creditors and debtors of each other.
• Article 1279, Civil Code — Enumerates the requisites for legal compensation: (1) mutual obligation as principal obligor and creditor; (2) debts consist of money or consumable things of the same kind/quality; (3) debts are due; (4) debts are liquidated and demandable; (5) no retention or controversy by third persons.
• Article 1290, Civil Code — When all requisites are present, compensation takes effect by operation of law and extinguishes both debts to the concurrent amount.

• Justice Flerida Ruth P. Romero
• Justice Jose A. R. Melo
• Justice Artemio V. Mendoza (Justice Vicente V. Mendoza)
• Justice Justo P. Torres, Jr. was on leave.