Valid Consignation Demands Strict Compliance With Legal Requirements

The Supreme Court recently reminded debtors that consignation—the act of depositing money due with the court—is a strictly regulated procedure. Simply setting aside rental payments in a bank account does not amount to valid consignation and will not relieve a debtor from liability for delay. The case of Philippine National Bank v. Chan (G.R. No. 206037, March 13, 2017) clarifies the requirements for a valid consignation and the consequences of failing to comply with them.

The Dispute: Unpaid Rent and a Claim of Consignation

Lilibeth S. Chan leased her commercial building in Manila to Philippine National Bank (PNB). After the lease expired, PNB stayed on a month-to-month basis at a monthly rent of P116,788.44. PNB vacated the property on March 23, 2006, but failed to pay rent from January 16, 2005 to February 2006, totaling P1,348,643.92.

PNB claimed that a certain Lamberto Chua had demanded payment of the rent, asserting he was the new owner. In response, PNB deposited the rental amounts in a non-drawing savings account at its own branch. Later, on May 31, 2006, PNB consigned the amount with the Metropolitan Trial Court (MeTC). Chan sued for unlawful detainer, and the case eventually reached the Supreme Court.

The Law on Consignation

Under Article 1256 of the Civil Code, consignation is the deposit of the thing due with the court when the creditor cannot or refuses to accept payment. Generally, a prior tender of payment is required. However, tender may be dispensed with in specific cases, such as when the creditor is absent or unknown, or when two or more persons claim the same right to collect.

For a consignation to be valid, the debtor must comply with all of these requirements:

1. There was a debt due;
2. There was a valid prior tender of payment, unless a legal cause under Article 1256 exists;
3. Previous notice of the consignation was given to the persons interested in the obligation;
4. The amount or thing due was placed at the disposal of the court; and
5. After the consignation, the persons interested were notified.

The Court stressed that failure in any of these requirements is enough to render a consignation ineffective.

Why PNB's Deposit Was Not Valid Consignation

The Supreme Court ruled that PNB's deposit of the rentals in a savings account was not the consignation contemplated by law. Consignation is necessarily judicial—it is not allowed in venues other than the courts. Depositing money in a bank account does not place the amount at the disposal of the court. Therefore, PNB's obligation to pay rent remained subsisting.

The Court also noted that even if consignation has a retroactive effect, payment is deemed made only at the time of the deposit with the court. Since PNB consigned the amount only on May 31, 2006, its payment was considered made not earlier than that date. The rentals were due from January 16, 2005, so PNB was in delay for that entire period.

Liability for Interest and the Deficiency Claim

Because PNB defaulted in paying the monthly rentals, it became liable for legal interest under Article 2209 of the Civil Code. In the absence of a stipulated interest rate, the legal interest is 6% per annum. The Court held PNB liable for interest from January 16, 2005 up to May 30, 2006.

On the issue of whether PNB could apply the rental proceeds to cover an alleged deficiency after foreclosing on Chan's property, the Court found insufficient evidence. PNB's statement of account was unsupported by corroborating evidence and was even illegible in the records. The Court also corrected the lower court's error in assuming that the bid price at the foreclosure sale covered the deficiency, without actually computing Chan's total indebtedness as of the date of the sale. The case was remanded for proper reception of evidence to determine if a deficiency existed.

Practical Takeaways

• Consignation must be done in court. Depositing money in a bank account, even a separate one, is not valid consignation and does not extinguish the obligation.
• Strict compliance is required. All legal requirements for consignation must be met, including prior tender of payment (unless exempted) and proper notice to interested parties.
• Timing matters. Consignation is deemed to have the effect of payment only at the time of deposit with the court, not at the time the debtor set aside the funds.
• Delay triggers interest. A debtor who fails to pay on time is liable for legal interest at 6% per annum under Article 2209 of the Civil Code, unless a different rate was stipulated.
• Claims must be proven. A party asserting a deficiency after foreclosure must present clear and convincing evidence; unsupported statements of account will not suffice.

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