FACTS:

Petitioner Raul Sesbreño entered into a money market placement with Philfinance and received various documents, including a Certificate of Confirmation of Sale and post-dated checks. When Sesbreño attempted to encash the checks, they were dishonored. Philfinance later provided Sesbreño with a Denominated Custodian Receipt but failed to deliver the underlying promissory note upon demand. Delta Motors Corporation, the maker of the promissory note, denied liability and claimed to have offset the note against another obligation of Philfinance. Sesbreño filed a complaint for damages against Delta and Pilipinas. The trial court dismissed the complaint, stating that Philfinance should be held liable.

The case involves a dispute over the assignment or transfer of a promissory note between Delta and petitioner Biagan, the assignee of Philfinance. The Court of Appeals held that the petitioner acquired no rights over the promissory note as it was marked "non-negotiable." The petitioner argues that there was a valid transfer through assignment and that Delta was obligated to pay the assigned portion. Delta argues that the note was not intended to be transferred and that the assignment was without their consent. The court explains that a non-negotiable instrument can still be assigned or transferred unless there is an explicit prohibition. The promissory note in question was marked "non-negotiable" but not "non-transferable" or "non-assignable." Delta presented a letter of agreement with Philfinance, but it did not contain any prohibition against assignment or transfer.

The case involves a money market transaction between Philfinance and Delta. Philfinance had an outstanding placement with Delta and sent non-negotiable promissory notes to offset the Delta promissory note upon maturity. The court found that there was no prohibition preventing Philfinance from assigning or transferring part of Delta's promissory note before its maturity. Even if there had been a prohibition, it could not be invoked against a good faith assignee like Biagan. The court also noted that the transaction was part of a money market transaction involving buying and selling debt instruments and securities, citing a definition by Lawrence Smith. Delta's claim that the partial assignment was invalid without its consent was rejected by the court.

ISSUES:

1. Whether the partial assignment of DMC PN No. 2731 by Philfinance to petitioner was valid without the consent of Delta.

2. Whether there was compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A.

3. Whether the defense of compensation raised by respondent Delta is valid.

4. Whether private respondent Pilipinas assumed solidary liability with Philfinance and Delta.

5. Is Pilipinas solidarily liable with Philfinance and Delta under DMC PN No. 2731?

6. Did Pilipinas breach its undertaking under the depositary agreement?

7. Is Pilipinas liable for damages for unlawfully depriving petitioner of the deposited note?

8. Whether Pilipinas Bank should be held liable for the damages claimed by the petitioner.

9. Whether Philfinance, Delta, and Pilipinas Bank should be treated as one corporate entity.

RULING:

1. The partial assignment of DMC PN No. 2731 by Philfinance to petitioner was valid without the consent of Delta. The consent of Delta was not necessary for the validity and enforceability of the assignment. Conventional subrogation, which would require Delta's consent, was not present in this case. The assignment was within the normal course of business as Philfinance, engaged in the business of buying and selling debt instruments, assigned its rights to petitioner.

2. There was no compensation or offsetting between DMC PN No. 2731 and Philfinance PN No. 143-A. At the time of the assignment, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due. Compensation requires that both debts be due. The assignment to petitioner prevented compensation from taking place between Philfinance and Delta. The assignment was valid to the extent of the portion assigned.

3. The defense of compensation raised by respondent Delta is valid. The assignee (petitioner) acquires his rights subject to the defenses which the debtor (Delta) could have set up against the original assignor (Philfinance) before notice of the assignment was given to the debtor. Since Delta was already discharged from its obligation to Philfinance through compensation at the time Delta was put to notice of the assignment in petitioner's favor, petitioner is disabled from collecting the portion of the note assigned to him.

4. Private respondent Pilipinas did not assume solidary liability with Philfinance and Delta. There is nothing in the Denominated Custodianship Receipt (DCR) that establishes an obligation on the part of Pilipinas to pay petitioner the amount represented by the assigned portion of the note. The DCR merely confirms that Pilipinas is holding the assigned note on behalf and for the benefit of petitioner, and that Pilipinas will physically deliver the note to petitioner upon written instructions. There is no express assumption of solidary liability in the DCR, and petitioner has not shown any law that imposes such liability on Pilipinas.

5. Pilipinas is not solidarily liable with Philfinance and Delta under DMC PN No. 2731. There is no law that imposes such liability and the nature of the custodianship assumed by Pilipinas does not imply solidary liability.

6. Pilipinas breached its undertaking under the depositary agreement. By refusing to deliver the security deposited with it when petitioner demanded physical delivery, Pilipinas contravened its obligation to effect physical delivery upon receipt of written instructions from petitioner.

7. Pilipinas is liable for damages for unlawfully depriving petitioner of the deposited note. The damages suffered by petitioner amount to the portion of the note assigned to him but lost due to discharge by compensation, plus legal interest of six percent per annum from the date of maturity.

8. Pilipinas Bank is held liable for the damages claimed by the petitioner. The Decision and Resolution of the Court of Appeals in C.A.-G.R. CV No. 15195 dated 21 March 1989 and 17 July 1989 are modified and set aside to the extent that they dismissed the petitioner's complaint against Pilipinas Bank. Pilipinas Bank is ordered to indemnify the petitioner for damages in the amount of P304,533.33, plus legal interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. The Decision and Resolution of the Court of Appeals are affirmed with the modification.

PRINCIPLES:

• Conventional subrogation must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point.

• In money market transactions, the impersonal character of the market overlooks the individuals or entities concerned. The issuer of a commercial paper in the money market is aware that it would be expeditiously transacted and transferred without notice to the issuer.

• Compensation requires that both debts be due.

• The rights of an assignee are not greater than the rights of the assignor, and the assignee acquires his rights subject to the defenses which the debtor could have set up against the assignor before notice of the assignment was given. (Article 1285 of the Civil Code)

• The debtor who pays his creditor before having knowledge of the assignment is released from the obligation. (Article 1626 of the Civil Code)

• Solidary liability exists only when the obligation expressly states so or when the law or the nature of the obligation requires solidarity. (Article 1207 of the Civil Code)

• A custodianship agreement is an integral part of a money market transaction and creates a contract of deposit between the depositor and the depositary bank.

• Stipulations in the custodianship agreement that run counter to its fundamental purpose or were not brought to the attention of the beneficiary cannot be enforced.

• The custodian bank has a duty to protect the interest of the depositor and cannot prioritize the interest of the borrower or dealer.

• The depositor is entitled to demand physical delivery of the deposited security upon maturity of the money market placement.

• The depositary bank is liable for damages for breaching its duty to deliver the deposited security to the depositor.

• Jurisdiction over the person of a party must be acquired for a court to be able to render a valid judgment against that party.

• The separate corporate personalities of related entities may not be disregarded without sufficient evidence of their use as alter egos or the administration and management of one entity for the benefit of another.