Escrow Funds and Execution of Judgments: Rights of Third-Party Banks Clarified

The Supreme Court has clarified the limits of a trial court's power to reach escrow funds when executing a money judgment, offering important guidance for banks and other third parties holding property for judgment debtors. In Metropolitan Bank and Trust Co. v. Radio Philippines Network, Inc. (G.R. No. 190517, July 27, 2022), the Court ruled that while a final judgment must be enforced, courts must follow the exact procedure prescribed by the Rules of Court—and cannot simply order execution against an escrow fund without first observing the proper steps.

The Facts of the Case

The case traces back to a 1995 Regional Trial Court (RTC) decision ordering Traders Royal Bank (Traders Royal) to pay damages and attorney's fees to Radio Philippines Network, Intercontinental Broadcasting Corporation, and Banahaw Broadcasting Corporation. The judgment became final and executory in 2003.

Meanwhile, Traders Royal had entered into a Purchase and Sale Agreement with Bank of Commerce (BankCom). As a condition for regulatory approval, the parties established a P50-million escrow fund with Metrobank, to be kept for fifteen years.

When the judgment creditors sought to enforce the award, the RTC issued orders compelling Metrobank to report on the escrow fund's status and produce withdrawal documents. Eventually, the RTC ordered a writ of execution against "any and all assets of TRB" including the escrow fund held by Metrobank. Metrobank objected, arguing it was not a party to the case and that the court had no jurisdiction over it.

The Issue

The central question was whether the RTC could validly order execution against the escrow fund held by Metrobank, a third party not impleaded in the case, without first following the garnishment procedure under the Rules of Court.

The Ruling

The Supreme Court held that the RTC erred in issuing execution against the escrow fund directly. The Court emphasized that once a judgment becomes final, the only action left is to execute it—but execution must follow the manner prescribed by the Rules.

Under Section 9, Rule 39 of the Revised Rules of Court, a money judgment is enforced in a specific sequence:

1. Immediate payment on demand. The sheriff must first demand payment from the judgment debtor in cash, certified bank check, or another acceptable mode.
2. Levy on properties. Only if the debtor cannot pay may the sheriff levy on the debtor's properties.
3. Garnishment of debts and credits. The sheriff may garnish credits belonging to the judgment debtor that are in the possession of third parties—including bank deposits and escrow funds.

The Court clarified that the trial court acquires jurisdiction over a third-party garnishee only through service of the writ of garnishment. Citing National Power Corp. v. Philippine Commercial and Industrial Bank, the Court explained that through service of the writ, the garnishee becomes a "virtual party" to the case, and only then may the court bind the garnishee to comply with its orders.

In this case, the RTC prematurely issued subpoenas and assumed jurisdiction over Metrobank as escrow agent without first issuing a writ of execution and serving a notice of garnishment. This procedural shortcut was impermissible.

Why the Procedure Matters

The Court stressed that while expeditious execution is commendable, it must never be done by departing from the rules. The garnishment procedure exists precisely to protect third parties who hold property belonging to judgment debtors. The rules require the garnishee to file a written report within five days of receiving notice, stating whether the debtor has sufficient funds—this serves the same purpose as the documents the RTC tried to obtain through subpoenas.

The Court also reminded litigants that a final judgment must not become an "empty triumph." However, the remedy lies in following the correct procedure, not bypassing it.

Practical Takeaways

• Banks holding escrow funds are not automatically subject to a trial court's jurisdiction merely because the funds relate to a judgment debtor. The court must first issue a writ of execution and serve a notice of garnishment.
• The proper way to reach escrow funds is through garnishment under Section 9(c), Rule 39, not through subpoenas or direct orders against the third-party bank.
• A garnishee becomes a "virtual party" only upon service of the writ of garnishment, at which point it must comply with court orders and submit a written report within five days.
• Courts must follow the sequential procedure for executing money judgments: demand payment from the debtor first, then levy on properties, and only then resort to garnishment of credits held by third parties.
• For judgment creditors, patience with the prescribed process is essential—cutting procedural corners can delay satisfaction of the judgment even further.

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