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Issue: Whether or not Allied Bank may unilaterally debit the amount it credited to Marphil’s
account?
Held: Allied bank, the collecting bank, has a right to debit Marphil’s account for the value
of a dishonored check it previously credited by virtue of the principle of legal
compensation. Since
the relationship between banks and depositors is that of creditor and debtor in a simple
loan,
legal compensation may take place when the conditions in Article 1279 of the Civil Code
are
present: (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; and (5)
that
over neither of them there be any retention or controversy, commenced by third persons
and
communicated in due time to the debtor. When Allied Bank credited Marphil's account, it
became the debtor of Marphil. However, once Nanyang Bank dishonored the export
documents, Marphil became the debtor of Allied Bank for the amount by virtue of its
obligation to reimburse the bank under the Letter Agreement. This obligation consisting of
sum of money became demandable upon notice of the dishonor by Nanyang Bank. Thus,
legal compensation may take place between the two debts. Allied Bank properly exercised
its right to set off. Firstly, having signed the Letter Agreement, Marphil expressly undertook
that in case of dishonor of the draft for the letter of the credit, it will refund to Allied Bank
whatever the latter has credited in its favor. Secondly, prior to debiting the amount, Allied
Bank informed Marphil twice of Nanyang Bank's refusal to honor. Thirdly, it immediately
informed Marphil that it was debiting the amount of the dishonored draft from the credit
line.