In Bank of the Philippine Islands v. Carlito Lee, the Supreme Court clarified that a surviving corporation in a merger assumes the liabilities of the absorbed corporation, including obligations arising from garnished deposits. This means BPI, as the surviving entity after merging with Citytrust, is responsible for fulfilling Citytrust’s obligation to maintain and deliver garnished funds, even if BPI claims to have lost the records. The decision emphasizes the enduring nature of corporate obligations following a merger, protecting the rights of creditors.
Merger’s Mandate: Can BPI Evade Citytrust’s Garnishment Duty?
This case arose from a complaint filed by Carlito Lee against Trendline Resources & Commodities Exponent, Inc. (Trendline) and Leonarda Buelva, seeking to recover his investment of P5.8 million. Lee alleged that he was induced to invest his money with Trendline based on Buelva’s misrepresentation. Consequently, the Regional Trial Court (RTC) issued a writ of preliminary attachment, garnishing Trendline’s accounts with Citytrust. Eventually, the RTC ruled in favor of Lee, holding the defendants jointly and severally liable for the full amount of his investment. This decision was later affirmed by the Court of Appeals (CA), becoming final and executory.
Subsequently, Citytrust and BPI merged, with BPI as the surviving corporation. The Articles of Merger stipulated that BPI would assume all liabilities and obligations of Citytrust. When Lee sought to execute the judgment against Trendline’s garnished deposits, BPI denied having possession or control of the funds, claiming it could not locate Trendline’s bank records with Citytrust. The RTC initially denied Lee’s motion for execution against BPI, but the CA reversed this decision, holding BPI liable for the garnished bank deposit. This ruling led to BPI’s petition to the Supreme Court, questioning whether it could be held accountable for Citytrust’s obligations.
BPI argued that the CA erred in considering it a party to the case simply because of its merger with Citytrust, and that Lee should have pursued a separate action under Section 43, Rule 39 of the Revised Rules of Court, arguing that it was a third party denying possession of the property. BPI also contended that a motion for execution was not the proper remedy where a third party was involved. BPI maintained that it should not be held accountable for the amount of P700,962.10, representing Trendline’s garnished deposit, since it claimed no records of it existed.
The Supreme Court, however, was unpersuaded by BPI’s arguments. The Court emphasized the nature of the CA’s decision, clarifying it was interlocutory and thus certiorari under Rule 65 was the correct remedy. The Court cited Section 1, Rule 41 of the Revised Rules of Court, which stipulates that an interlocutory order cannot be appealed, but that an aggrieved party may file a special civil action under Rule 65. The denial of the Motion for Execution and/or Enforcement of Garnishment was deemed an interlocutory order, as it pertained only to the enforcement of garnishment and did not dispose of the case entirely.
Furthermore, the Court addressed the issue of BPI’s status as a party to the case. It cited Section 5, Rule 65 of the Revised Rules of Court, stating that persons interested in sustaining the proceedings must be impleaded as private respondents. The Court highlighted that upon the merger of Citytrust and BPI, BPI assumed all liabilities of Citytrust, becoming a party interested in sustaining the proceedings. Citing Perla Compania de Seguros, Inc. v. Ramolete, the Court explained that upon service of the writ of garnishment, Citytrust became a “virtual party” or “forced intervenor” in the case.
In order that the trial court may validly acquire jurisdiction to bind the person of the garnishee, it is not necessary that summons be served upon him. The garnishee need not be impleaded as a party to the case. All that is necessary for the trial court lawfully to bind the person of the garnishee or any person who has in his possession credits belonging to the judgment debtor is service upon him of the writ of garnishment.
The Supreme Court underscored the legal effects of a corporate merger, as outlined in Section 80 of the Corporation Code:
- The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation;
- The separate existence of the constituent corporation shall cease, except that of the surviving or the consolidated corporation;
- The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;
- The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and
- The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation.
The Court highlighted that BPI, as the surviving corporation, inherited all the liabilities and obligations of Citytrust. This included the obligation to honor the garnished deposits of Trendline. The court dismissed BPI’s contention that Lee should have filed a separate action under Section 43, Rule 39 of the Revised Rules of Court. The Court clarified that a separate action is only required when the garnishee claims an interest in the property adverse to the judgment debtor or denies the debt. In this case, Citytrust had already admitted to possessing the deposit accounts of Trendline, negating the need for a separate action.
The Supreme Court addressed BPI’s argument that it could not locate the bank records, stating this was not a valid ground to dissolve the garnishment. Once a writ of garnishment is issued, the deposits are placed under the custodia legis of the court, meaning the bank holds the funds subject to the court’s orders. The bank is obligated to maintain the deposit and deliver it to the proper officer of the court. The Court stated that the RTC is not permitted to dissolve a preliminary attachment or garnishment except on grounds specifically provided in the Revised Rules of Court, none of which applied in this case.
In conclusion, the Supreme Court affirmed that BPI was liable for the garnished deposits of Trendline, and that the amount of the garnished deposit was P700,962.10. The Court found that the bank cannot avoid its obligation attached to the writ of garnishment by claiming the fund was not transferred to it. The Articles of Merger clearly stipulated that BPI would assume all liabilities and obligations of Citytrust. Thus, the Supreme Court denied BPI’s petition and affirmed the Court of Appeals’ decision.
FAQs
| What was the central issue in this case? | The central issue was whether BPI, as the surviving corporation after merging with Citytrust, was liable for Citytrust’s obligation to maintain and deliver garnished funds. |
| What is garnishment? | Garnishment is a legal process where a creditor seeks to obtain funds or property of a debtor that is held by a third party (the garnishee). It’s a way to enforce a judgment by seizing assets held by someone other than the debtor. |
| What happens when two corporations merge? | When corporations merge, the surviving corporation assumes all the rights, privileges, immunities, and powers of the merged corporation, as well as all its liabilities and obligations. This is legally mandated to protect the rights of creditors. |
| What is a writ of preliminary attachment? | A writ of preliminary attachment is a court order that allows a plaintiff to seize a defendant’s property at the beginning of a lawsuit to secure a potential judgment. The property is held in custodia legis pending the outcome of the case. |
| What does custodia legis mean? | Custodia legis refers to the property being under the custody of the law. When property is in custodia legis, it is under the control and protection of the court. |
| Can a bank refuse to honor a writ of garnishment if it can’t find the records? | No, a bank cannot refuse to honor a writ of garnishment simply because it claims to have lost the records. The obligation to satisfy the writ remains, and the bank must find a way to comply with the court order. |
| What is an interlocutory order? | An interlocutory order is a court order that does not fully resolve the case but addresses preliminary matters. It does not end the court’s task of adjudicating the parties’ contentions and determining their rights and liabilities. |
| What recourse does a party have against an interlocutory order? | An interlocutory order cannot be appealed directly. The proper remedy is to file a special civil action for certiorari under Rule 65 of the Revised Rules of Court, questioning the order’s legality. |
The Supreme Court’s decision in this case reinforces the principle that corporate mergers do not extinguish pre-existing liabilities. This ensures that creditors’ rights are protected and that surviving corporations cannot evade obligations by claiming ignorance of past liabilities. This ruling provides clarity on the responsibilities of surviving corporations in mergers and consolidations.
For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.
Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: BANK OF THE PHILIPPINE ISLANDS VS. CARLITO LEE, G.R. No. 190144, August 01, 2012