Corporate Merger and Garnishment: Surviving Corporation's Liability for Pre-Existing Obligations

The Supreme Court, in Bank of the Philippine Islands v. Lee (G.R. No. 190144, August 1, 2012), settled a critical question for creditors and corporations alike: when two corporations merge, does the surviving corporation inherit the obligation to honor a garnishment levied on the absorbed corporation's assets before the merger? The Court answered in the affirmative, affirming that a surviving corporation steps into the shoes of the absorbed entity for all liabilities, including those arising from a prior writ of garnishment.

The Dispute

Carlito Lee invested P5.8 million with Trendline Resources & Commodities Exponent, Inc. based on the misrepresentations of Leonarda Buelva, who claimed to be a licensed investment consultant. When his investments were lost, Lee sued both parties in 1988. The trial court issued a writ of preliminary attachment, and the sheriff garnished Trendline's deposit accounts with Citytrust Banking Corporation in the amount of P700,962.10.

In 1989, the trial court ruled in Lee's favor, holding Trendline and Buelva jointly and severally liable. The judgment became final and executory in 1999. When Lee moved to enforce the garnishment, he discovered that Citytrust had merged with the Bank of the Philippine Islands (BPI) in 1996, with BPI as the surviving corporation.

BPI claimed it could not locate Trendline's bank records and denied liability, arguing it was not a party to the case. The trial court denied Lee's motion, prompting him to elevate the matter to the Court of Appeals, which ruled in his favor. BPI then appealed to the Supreme Court.

The Issues

The case presented three main questions: (1) whether certiorari was the proper remedy for Lee; (2) whether BPI became a party-in-interest by virtue of the merger; and (3) whether BPI should be held accountable for the garnished amount.

The Ruling

The Supreme Court denied BPI's petition and affirmed the Court of Appeals' decision. The Court addressed each issue in turn.

On the propriety of certiorari. The Court held that the trial court's order denying Lee's motion for execution and/or enforcement of garnishment was interlocutory—it did not finally dispose of the case. Under Section 1, Rule 41 of the Rules of Court, no appeal may be taken from an interlocutory order; the proper remedy is a petition for certiorari under Rule 65. Lee's recourse was therefore correct.

On BPI's status as a party-in-interest. The Court explained that upon service of a writ of garnishment, the garnishee becomes a "virtual party" or "forced intervenor" to the case, and the trial court acquires jurisdiction to bind the garnishee to comply with its orders. Citytrust became such a virtual party when it acknowledged possession of the deposits. When Citytrust and BPI merged, BPI, as the surviving corporation, effectively became the garnishee.

The Court cited Section 80 of the Corporation Code, which provides that the surviving corporation possesses all rights and is subject to all duties and liabilities of the constituent corporations. Significantly, the law states that the surviving corporation shall be responsible for all liabilities and obligations of the absorbed corporation "in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations." Moreover, the rights of creditors or liens upon the property of the constituent corporations shall not be impaired by the merger.

On the appropriate remedy. BPI argued that Lee should have filed a separate action under Section 43, Rule 39 of the Rules of Court, which applies when a third person claims an interest in the property adverse to the judgment debtor or denies the debt. The Court rejected this argument. Neither situation existed here: Citytrust never claimed an interest in the deposits nor denied their existence—it had admitted possession in a letter dated June 28, 1988.

On BPI's liability. The Court held that by virtue of the writ of garnishment, the deposits were placed in custodia legis—under the sole control of the court. Citytrust, and thereafter BPI, was obliged to keep the deposit intact and deliver it to the proper officer upon order of the court. Significantly, the Court noted that the loss of bank records is not a ground for dissolving a garnishment. The grounds for discharge are limited to those specified in Rule 57 of the Rules of Court, such as posting a counter-bond or showing the attachment was improperly issued.

Practical Takeaways

• Surviving corporations inherit all liabilities. When a corporation merges with another, the surviving entity assumes all obligations of the absorbed corporation, including those arising from pending litigation and garnishment orders.

• Garnishment creates a court-controlled lien. Once a writ of garnishment is served, the garnished property is placed under the court's control. The garnishee holds it subject to court orders until the attachment is discharged or the judgment is satisfied.

• Loss of records is no defense. A garnishee cannot avoid liability by claiming it lost the relevant records. The obligation to honor the writ stands regardless of record-keeping failures.

• Certiorari, not appeal, for interlocutory orders. When a court denies a motion relating to execution or enforcement of a judgment, the order is interlocutory. The proper remedy is a petition for certiorari under Rule 65, not an appeal.

• Merger does not impair creditor rights. The Corporation Code explicitly protects creditors' rights and liens upon the property of constituent corporations. A merger cannot be used to defeat a valid garnishment.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.