Mindanao Terminal v. Phoenix Assurance,
It was then discovered upon discharge that
G.R. No. 162467, May 8, 2009
DECISION
TINGA, J.:
Before us is a petition for review on certiorari[1] under Rule 45 of the
1997 Rules of Civil Procedure of the 29 October 2003[2]Decision of the
Court of Appeals and the 26 February 2004 Resolution[3] of the same
court denying petitioners motion for reconsideration.
The facts of the case are not disputed.
Del Monte Philippines, Inc. (Del Monte) contracted petitioner
Mindanao Terminal and Brokerage Service, Inc. (Mindanao Terminal),
a stevedoring company, to load and stow a shipment of 146,288
cartons of fresh green Philippine bananas and 15,202 cartons of fresh
pineapples belonging to Del Monte Fresh Produce International, Inc.
(Del Monte Produce) into the cargo hold of the vessel M/V Mistrau.
The vessel was docked at the port of Davao City and the goods were to
be transported by it to the port of Inchon, Korea in favor of consignee
Taegu Industries, Inc. Del Monte Produce insured the shipment under
an open cargo policy with private respondent Phoenix Assurance
Company of New York (Phoenix), a non-life insurance company, and
private respondent McGee & Co. Inc. (McGee), the underwriting
manager/agent of Phoenix.[4]
Mindanao Terminal loaded and stowed the cargoes aboard the M/V
Mistrau. The vessel set sail from the port of Davao City and arrived at
Page 1 of 72
the port of Inchon, Korea.
some of the cargo was in bad condition. The Marine Cargo Damage
Surveyor of Incok Loss and Average Adjuster of Korea, through its
representative Byeong Yong Ahn (Byeong), surveyed the extent of the
damage of the shipment. In a survey report, it was stated that 16,069
cartons of the banana shipment and 2,185 cartons of the pineapple
shipment were so damaged that they no longer had commercial
value.[5]
Del Monte Produce filed a claim under the open cargo policy for the
damages to its shipment. McGees Marine Claims Insurance Adjuster
evaluated the claim and recommended that payment in the amount of
$210,266.43 be made. A check for the recommended amount was sent
to Del Monte Produce; the latter then issued a subrogation
receipt[6] to Phoenix and McGee.
Phoenix and McGee instituted an action for damages[7] against
Mindanao Terminal in the Regional Trial Court (RTC) of Davao City,
Branch 12. After trial, the RTC,[8] in a decision dated 20 October 1999,
held that the only participation of Mindanao Terminal was to load the
cargoes on board the M/V Mistrau under the direction and supervision
of the ships officers, who would not have accepted the cargoes on
board the vessel and signed the foremans report unless they were
properly arranged and tightly secured to withstand voyage across the
open seas. Accordingly, Mindanao Terminal cannot be held liable for
whatever happened to the cargoes after it had loaded and stowed
them. Moreover, citing the survey report, it was found by the RTC that
the cargoes were damaged on account of a typhoon which M/V
Mistrau had encountered during the voyage. It was further held
that Phoenix and McGee had no cause of action against Mindanao
Terminal because the latter, whose services were contracted by Del
Monte, a distinct corporation from Del Monte Produce, had no
contract with the assured Del Monte Produce. The RTC dismissed the
complaint and awarded the counterclaim of Mindanao Terminal in the
amount of P83,945.80 as actual damages and P100,000.00 as
attorneys fees.[9] The actual damages were awarded as reimbursement
for the expenses incurred by Mindanao Terminals lawyer in attending
the hearings in the case wherein he had to travel all the way from
Metro Manila to Davao City.
Phoenix and McGee appealed to the Court of Appeals. The appellate
court reversed and set aside[10] the decision of the RTC in its 29
October 2003 decision. The same court ordered Mindanao Terminal to
pay Phoenix and McGee the total amount of $210,265.45 plus legal
interest from the filing of the complaint until fully paid and attorneys
fees of 20% of the claim.[11] It sustained Phoenixs and McGees
argument that the damage in the cargoes was the result of improper
stowage by Mindanao Terminal. It imposed on Mindanao Terminal, as
the stevedore of the cargo, the duty to exercise extraordinary diligence
in loading and stowing the cargoes. It further held that even with the
absence of a contractual relationship between Mindanao Terminal and
Del Monte Produce, the cause of action of Phoenix and McGee could be
based on quasi-delict under Article 2176 of the Civil Code.[12]
Mindanao Terminal filed a motion for reconsideration,[13] which the
Court of Appeals denied in its 26 February 2004[14]resolution. Hence,
the present petition for review.
Page 2 of 72
Mindanao Terminal raises two issues in the case at bar, namely:
whether it was careless and negligent in the loading and stowage of
the cargoes onboard M/V Mistrau making it liable for damages; and,
whether Phoenix and McGee has a cause of action against Mindanao
Terminal under Article 2176 of the Civil Code on quasi-delict. To
resolve the petition, three questions have to be answered: first,
whether Phoenix and McGee have a cause of action against Mindanao
Terminal; second, whether Mindanao Terminal, as a stevedoring
company, is under obligation to observe the same extraordinary
degree of diligence in the conduct of its business as required by law
for common carriers[15] and warehousemen;[16] and third, whether
Mindanao Terminal observed the degree of diligence required by law
of a stevedoring company.
We agree with the Court of Appeals that the complaint filed
by Phoenix and McGee against Mindanao Terminal, from which the
present case has arisen, states a cause of action. The present action is
based on quasi-delict, arising from the negligent and careless loading
and stowing of the cargoes belonging to Del Monte Produce. Even
assuming that both Phoenix and McGee have only been subrogated in
the rights of Del Monte Produce, who is not a party to the contract of
service between Mindanao Terminal and Del Monte, still the insurance
carriers may have a cause of action in light of the Courts consistent
ruling that the act that breaks the contract may be also a tort.[17] In
fine, a liability for tort may arise even under a contract, where tort is
that which breaches the contract[18]. In the present case, Phoenix and
McGee are not suing for damages for injuries arising from the breach
of the contract of service but from the alleged negligent manner by
which Mindanao Terminal handled the cargoes belonging to Del
Monte Produce. Despite the absence of contractual relationship
between Del Monte Produce and Mindanao Terminal, the allegation of
negligence on the part of the defendant should be sufficient to
establish a cause of action arising from quasi-delict.[19]
The resolution of the two remaining issues is determinative of the
ultimate result of this case.
Article 1173 of the Civil Code is very clear that if the law or contract
does not state the degree of diligence which is to be observed in the
performance of an obligation then that which is expected of a good
father of a family or ordinary diligence shall be required. Mindanao
Terminal, a stevedoring company which was charged with the loading
and stowing the cargoes of Del Monte Produce aboard M/V Mistrau,
had acted merely as a labor provider in the case at bar. There is no
specific provision of law that imposes a higher degree of diligence
than ordinary diligence for a stevedoring company or one who is
charged only with the loading and stowing of cargoes. It was neither
alleged nor proven by Phoenix and McGee that Mindanao Terminal
was bound by contractual stipulation to observe a higher degree of
diligence than that required of a good father of a family. We therefore
conclude that following Article 1173, Mindanao Terminal was
required to observe ordinary diligence only in loading and stowing the
cargoes of Del Monte Produce aboard M/V Mistrau.
The Court of Appeals erred when it cited the case of Summa Insurance
Corporation v. CA and Port Service Inc.[20] in imposing a higher degree
of diligence,[21] on Mindanao Terminal in loading and stowing the
cargoes. The case of Summa Insurance Corporation v. CA, which
involved the issue of whether an arrastre operator is legally liable for
the loss of a shipment in its custody and the extent of its liability, is
Page 3 of 72
inapplicable to the factual circumstances of the case at bar. Therein, a
vessel owned by the National Galleon Shipping Corporation (NGSC)
arrived at Pier 3, South Harbor, Manila, carrying a shipment consigned
to the order of Caterpillar Far East Ltd. with Semirara Coal
Corporation (Semirara) as "notify party." The shipment, including a
bundle of PC 8 U blades, was discharged from the vessel to the custody
of the private respondent, the exclusive arrastre operator at
the South Harbor.Accordingly, three good-order cargo receipts were
issued by NGSC, duly signed by the ship's checker and a representative
of private respondent. When Semirara inspected the shipment at
house, it discovered that the bundle of PC8U blades was missing. From
those facts, the Court observed:
x x x The relationship therefore between the consignee and the
arrastre operator must be examined. This relationship is much akin
to that existing between the consignee or owner of shipped goods and
the common carrier, or that between a depositor and a
warehouseman[[22]]. In the performance of its obligations, an arrastre
operator should observe the same degree of diligence as that
required of a common carrier and a warehouseman as enunciated
under Article 1733 of the Civil Code and Section 3(b) of the
Warehouse Receipts Law, respectively. Being the custodian of the
goods discharged from a vessel, an arrastre operator's duty is to
take good care of the goods and to turn them over to the party
entitled to their possession. (Emphasis supplied)[23]
There is a distinction between an arrastre and a
stevedore.[24] Arrastre, a Spanish word which refers to hauling of
cargo, comprehends the handling of cargo on the wharf or between
the establishment of the consignee or shipper and the ship's tackle.
The responsibility of the arrastre operator lasts until the delivery of
the cargo to the consignee. The service is usually performed by
longshoremen. On the other hand, stevedoring refers to the handling
of the cargo in the holds of the vessel or between the ship's tackle and
the holds of the vessel. The responsibility of the stevedore ends upon
the loading and stowing of the cargo in the vessel.
It is not disputed that Mindanao Terminal was performing purely
stevedoring function while the private respondent in the Summa case
was performing arrastre function. In the present case, Mindanao
Terminal, as a stevedore, was only charged with the loading and
stowing of the cargoes from the pier to the ships cargo hold; it was
never the custodian of the shipment of Del Monte Produce. A
stevedore is not a common carrier for it does not transport goods or
passengers; it is not akin to a warehouseman for it does not store
goods for profit. The loading and stowing of cargoes would not have a
far reaching public ramification as that of a common carrier and a
warehouseman; the public is adequately protected by our laws on
contract and on quasi-delict. The public policy considerations in
legally imposing upon a common carrier or a warehouseman a higher
degree of diligence is not present in a stevedoring outfit which mainly
provides labor in loading and stowing of cargoes for its clients.
In the third issue, Phoenix and McGee failed to prove by
preponderance of evidence[25] that Mindanao Terminal had acted
negligently. Where the evidence on an issue of fact is in equipoise or
there is any doubt on which side the evidence preponderates the party
having the burden of proof fails upon that issue. That is to say, if the
Page 4 of 72
evidence touching a disputed fact is equally balanced, or if it does not
produce a just, rational belief of its existence, or if it leaves the mind in
a state of perplexity, the party holding the affirmative as to such fact
must fail.[26]
We adopt the findings[27] of the RTC,[28] which are not disputed
by Phoenix and McGee. The Court of Appeals did not make any new
findings of fact when it reversed the decision of the trial court. The
only participation of Mindanao Terminal was to load the cargoes on
board M/V Mistrau.[29] It was not disputed by Phoenix and McGee that
the materials, such as ropes, pallets, and cardboards, used in lashing
and rigging the cargoes were all provided by M/V Mistrau and these
materials meets industry standard.[30]
It was further established that Mindanao Terminal loaded and stowed
the cargoes of Del Monte Produce aboard the M/V Mistrau in
accordance with the stowage plan, a guide for the area assignments of
the goods in the vessels hold, prepared by Del Monte Produce and the
officers of M/V Mistrau.[31] The loading and stowing was done under
the direction and supervision of the ship officers. The vessels officer
would order the closing of the hatches only if the loading was done
correctly after a final inspection.[32] The said ship officers would not
have accepted the cargoes on board the vessel if they were not
properly arranged and tightly secured to withstand the voyage in
open seas. They would order the stevedore to rectify any error in its
loading and stowing. A foremans report, as proof of work done on
board the vessel, was prepared by the checkers of Mindanao Terminal
and concurred in by the Chief Officer of M/V Mistrau after they were
satisfied that the cargoes were properly loaded.[33]
Phoenix and McGee relied heavily on the deposition of Byeong Yong
Ahn[34] and on the survey report[35] of the damage to the cargoes.
Byeong, whose testimony was refreshed by the survey As it is clear that Mindanao Terminal had duly exercised the required
report,[36] found that the cause of the damage was improper degree of diligence in loading and stowing the cargoes, which is the
stowage[37] due to the manner the cargoes were arranged such that ordinary diligence of a good father of a family, the grant of the petition
there were no spaces between cartons, the use of cardboards as is in order.
support system, and the use of small rope to tie the cartons together
However, the Court finds no basis for the award of attorneys fees in
but not by the negligent conduct of Mindanao Terminal in loading and
favor of petitioner. None of the circumstances enumerated in Article
stowing the cargoes. As admitted by Phoenix and McGee in their
2208 of the Civil Code exists. The present case is clearly not an
Comment[38] before us, the latter is merely a stevedoring company
unfounded civil action against the plaintiff as there is no showing that
which was tasked by Del Monte to load and stow the shipments of
it was instituted for the mere purpose of vexation or injury. It is not
fresh banana and pineapple of Del Monte Produce aboard the M/V
sound public policy to set a premium to the right to litigate where
Mistrau. How and where it should load and stow a shipment in a
such right is exercised in good faith, even if erroneously.[41] Likewise,
vessel is wholly dependent on the shipper and the officers of the
the RTC erred in awarding P83,945.80 actual damages to Mindanao
vessel. In other words, the work of the stevedore was under the
Terminal. Although actual expenses were incurred by Mindanao
supervision of the shipper and officers of the vessel. Even the
Terminal in relation to the trial of this case in Davao City, the lawyer of
materials used for stowage, such as ropes, pallets, and cardboards, are
Mindanao Terminal incurred expenses for plane fare, hotel
provided for by the vessel. Even the survey report found that it was
accommodations and food, as well as other miscellaneous expenses, as
because of the boisterous stormy weather due to the typhoon Seth, as
he attended the trials coming all the way from Manila. But there is no
encountered by M/V Mistrau during its voyage, which caused the
showing that Phoenix and McGee made a false claim against Mindanao
shipments in the cargo hold to collapse, shift and bruise in extensive
Terminal resulting in the protracted trial of the case necessitating the
extent.[39] Even the deposition of Byeong was not supported by the
incurrence of expenditures.[42]
conclusion in the survey report that:
WHEREFORE, the petition is GRANTED. The decision of the Court of
CAUSE OF DAMAGE
Appeals in CA-G.R. CV No. 66121 is SET ASIDE and the decision of
xxx the Regional Trial Court of Davao City, Branch 12 in Civil Case No.
25,311.97 is hereby REINSTATED MINUS the awards of P100,000.00
From the above facts and our survey results, we are of the opinion that
as attorneys fees and P83,945.80 as actual damages.
damage occurred aboard the carrying vessel during sea transit, being
caused by ships heavy rolling and pitching under boisterous weather SO ORDERED.
while proceeding from 1600 hrs on 7th October to 0700 hrs
on 12thOctober, 1994 as described in the sea protest.[40]

Page 5 of 72

Dolores Macaslang v. Renato Zamora, G.R.
No. 156375, May 30, 2011
DECISION
BERSAMIN, J.:
The Regional Trial Court (RTC) is not limited in its review of the
decision of the Municipal Trial Court (MTC) to the issues assigned by
the appellant, but can decide on the basis of the entire records of the
proceedings of the trial court and such memoranda or briefs as may be
submitted by the parties or required by the RTC.
The petitioner appeals the decision promulgated on July 3,
2002,[1] whereby the Court of Appeals (CA) reversedfor having no
basis in fact and in law the decision rendered on May 18, 2000[2] by
the Regional Trial Court, Branch 25, in Danao City (RTC) thathad
dismissed the respondents action
for ejectment against the petitioner, andreinstated the decision
dated September 13, 1999 of the Municipal Trial Court in Cities
(MTCC) of DanaoCity (ordering the petitioner as defendant to vacate
the premises and to pay attorneys fees of P10,000.00 and monthly
rental of P5,000.00 starting December 1997 until they vacated the
premises).[3]
We grant the petition for review and rule that contrary to the CAs
conclusion, the RTCas an appellate court properly considered and
resolved issues even if not raised in the appeal from the
decisionrendered in an ejectment case by the MTCC.
Page 6 of 72
ANTECEDENTS
On March 10, 1999, the respondents filed a complaint for unlawful
detainer in the MTCC, alleging that the [petitioner] sold to
[respondents] a residential land located in Sabang, DanaoCity and that
the [petitioner] requested to be allowed to live in the house with a
promise to vacate as soon as she would be able to find a new
residence. They further alleged thatdespitetheir demand after a year,
the petitioner failed or refused to vacate the premises.
Despite the due service of the summons and copy of the complaint, the
petitioner did not file heranswer. The MTCC declared her in
defaultupon the respondents motion to declare her in default, and
proceeded to receivethe respondentsoral testimony and documentary
evidence. Thereafter, on September 13, 1999, the MTCC rendered
judgment against her, disposing:
WHEREFORE, considering the foregoing, Judgment is hereby rendered
in favor [of] plaintiffs (sic) spouses Renato Zamora and Melba Zamora
and against defendant Dolores AdoraMacaslang, ordering defendant to
vacate the properties in question, to pay to plaintiffs Attorneys Fees in
the sum of P10,000.00 and monthly rental of P5,000.00 starting
December, 1997 until the time the defendant shall have vacated the
properties in question.
SO ORDERED.[4]
The petitioner appealed to the RTC, averring the following as
reversible errors, namely:
The respondents appealed to the CA, assailing the RTCs decision for
disregarding the allegations in the complaint in determining the
existence or non-existence of a cause of action.
1. Extrinsic Fraud was practiced upon defendant-appellant which
ordinary prudence could not have guarded against and by reason of
which she has been impaired of her rights.
On July 3, 2002, the CA reversed and set aside the RTCs decision and
reinstated the MTCCs decision in favor of the respondents, disposing:
2. Defendant-Appellant has a meritorious defense in that there was
no actual sale considering that the absolute deed of sale relied upon by
WHEREFORE,foregoing premises considered, the Petition is hereby
the plaintiff-appell[ees] is a patent-nullity as her signature therein was
GIVEN DUE COURSE. Resultantly, the impugned decision of the
procured through fraud and trickery.[5] and praying through her
Regional Trial Court is hereby REVERSED and SET ASIDE for having
appeal memorandum as follows:
no basis in fact and in law, and the Decision of the Municipal Trial
Wherefore, in view of the foregoing, it is most respectfully prayed for Court in Cities REINSTATED and AFFIRMED. No costs.
that judgment be rendered in favor of defendant-appellant ordering
that this case be remanded back to the Court of Origin, Municipal Trial
Court of Danao City, for further proceedings to allow the defendant to SO ORDERED.[8]
present her evidence, and thereafter, to render a judgment anew.[6]
On May 18, 2000, the RTC resolved the appeal, to wit:[7]
The petitionersmotion for reconsideration was denied onNovember
WHEREFORE,judgment is hereby rendered dismissing the complaint 19, 2002.
for failure to state a cause of action.
The same may, however, be refiled in the same Court, by alleging
plaintiffs cause of action, if any. ISSUES

Plaintiffs Motion for Execution of Judgment of the lower court is

rendered moot by this judgment.

Hence, the petitioner appeals the CAs adverse decision, submitting

SO ORDERED. legal issues, as follows:

Page 7 of 72
 2. Whether or not the CA correctly found that the complaint stated a
valid cause of action;
1. Whether or not the Regional Trial Court in the exercise of its
Appellate Jurisdiction is limited to the assigned errors in the
Memorandum or brief filed before it or whether it can decide the case
3. Whether or not the CA erred in finding that there was a valid
based on the entire records of the case, as provided for in Rule 40, Sec.
demand to vacate made by the respondents on the petitioner; and
7. This is a novel issue which, we respectfully submit, deserves a
definitive ruling by this Honorable Supreme Court since it involves the
application of a new provision, specifically underlined now under the
1997 Revised Rules on Civil procedure. 4. Whether or not the petitioners defense of ownership was
meritorious.

2. Whether or not in an action for unlawful detainer, where there

was no prior demand to vacate and comply with the conditions of the RULING
lease made, a valid cause of action exists? We grant the petition for review.
A.
3. Whether or not in reversing the Regional Trial Court Decision As an appellate court, RTC may rule
and reinstating and affirming the decision of the Municipal Circuit
Trial Court, which was tried and decided by the MCTC in violation of upon an issue notraised on appeal
the Rules on Summary Procedure, the Court of Appeals sanctioned a
gross departure from the usual course of judicial proceedings?[9]
In its decision, the CA ruled that the RTC could not resolve issues that
The issues that this Court has to resolve are stated thuswise:
were not assigned by the petitioner in her appeal memorandum,
explaining:

1. Whether or not the CA correctly found that the RTC committed

reversible error in ruling on issues not raised by the petitioner in her
Indeed(,) We are rather perplexed why the Regional Trial Court, in
appeal;
arriving at its decision, discussed and ruled on issues or grounds
which were never raised, assigned, or argued on by the Defendant-
appellee in her appeal to the former. A careful reading of the
Defendant-appellees appeal memorandum clearly shows that it only

Page 8 of 72
raised two (2) grounds, namely (a) alleged extrinsic fraud, (b)
meritorious defenses based on nullity of the Deed of Sale Instrument.
And yet the Trial Court, in its decision, ruled on issues not raised such
as lack of cause of action and no prior demand to vacate having been
made.
Only errors assigned and properly argued on the brief and those
necessarily related thereto, may be considered by the appellate court
in resolving an appeal in a civil case. Based on said clear
jurisprudence, the court a quo committed grave abuse of discretion
amounting to lack of jurisdiction when it resolved Defendant-
appellees appeal based on grounds or issues not raised before it, much
less assigned by Defendant-appellee as an error.
Not only that. It is settled that an issue which was not raised during
the Trial in the court below would not be raised for the first time on
appeal as to do so would be offensive to the basic rules of fair play,
justice and due process (Victorias Milling Co., Inc. vs. CA, 333 SCRA
663). We can therefore appreciate Plaintiffs-appellants dismay caused
by the Regional Trial Courts blatant disregard of a basic and
fundamental right to due process.[10]
The petitioner disagrees with the CA and contends that the RTC as an
appellate courtcould rule on the failure of the complaint to state a
cause of action and the lack of demand to vacate even if not assigned
in the appeal.
Page 9 of 72
We concur with the petitioners contention.
The CA might have been correct had the appeal been a first appeal
from the RTC to the CA or another proper superior court, in which
instance Section 8 of Rule 51, which applies to appeals from the RTC
to the CA,imposesthe express limitation of the review to only those
specified in the assignment of errorsor closely related to or dependent
on an assigned error and properly argued in the appellants brief, viz:
Section 8. Questions that may be decided. No error which does not
affect the jurisdiction over the subject matter or the validity of the
judgment appealed from or the proceeding therein will be
considered unless stated in the assignment of errors, or closely
related to or dependent on an assigned error and properly
argued in the brief, save as the court may pass upon plain errors and
clerical errors.
Butthe petitioners appeal herein,being taken from the decision of the
MTCC to the RTC, was governed by a different rule, specifically Section
18 of Rule 70 of the Rules of Court, to wit:
Section 18. xxx
xxx
The judgment or final order shall be appealable to the
appropriate Regional Trial Court which shall decide the same on
the basis of the entire record of the proceedings had in the court
of origin and such memoranda and/or briefs as may be submitted determination thereof without regard to technical rules, the Court
by the parties or required by the Regional Trial Court. (7a) promulgated the 1991 Revised Rules on Summary Procedure, whereby
it institutionalized the summary procedure for all the first level courts.
As such,the RTC, in exercising appellate jurisdiction,was not limited to
Section 21 of the 1991 Revised Rules on Summary Procedurespecifically
the errors assigned in the petitioners appeal memorandum, but
stated:
coulddecide on the basis of the entire record of the proceedingshad in
the trial court and such memoranda and/or briefs as may
be submitted by the parties or required by the RTC.
Section 21. Appeal. Thejudgment or final order shall be appealable
to the appropriate Regional Trial Court which shall decide the
same in accordance with Section 22 of Batas PambansaBlg. 129.
The difference between the procedures for deciding on review is
The decision of the Regional Trial Court in civil cases governed by this
traceable to Section 22 of Batas PambansaBlg. 129,[11]which provides:
Rule, including forcible entry and unlawful detainer shall be
immediately executory, without prejudice to a further appeal that may
be taken therefrom. Section 10 of Rule 70 shall be deemed repealed.
Section 22. Appellate Jurisdiction. Regional Trial Courts shall exercise
appellate jurisdiction over all cases decided by Metropolitan Trial
Courts, Municipal Trial Courts, and Municipal Circuit Trial Courts in
Later on, the Court promulgated the 1997 Rules of Civil Procedure,
their respective territorial jurisdictions.Such cases shall be decided
effective on July 1, 1997, and incorporated in Section 7 of Rule 40
on the basis of the entire record of the proceedings had in the
thereof the directive to the RTC to decide appealed caseson the basis
court of origin [and] such memoranda and/or briefs as may be
of the entire record of the proceedings had in the court of origin and
submitted by the parties or required by the Regional Trial
such memoranda as are filed,viz:
Courts. The decision of the Regional Trial Courts in such cases shall be
appealable by petition for review to the Court of Appeals which may
give it due course only when the petition shows prima facie that the
lower court has committed an error of fact or law that will warrant a
reversal or modification of the decision or judgment sought to be Section 7. Procedure in the Regional Trial Court.
reviewed.[12]

(a) Upon receipt of the complete record or the record on appeal, the
As its compliance with the requirement of Section 36 of Batas clerk of court of the Regional Trial Court shall notify the parties of
PambansaBlg. 129to adopt special rules or procedures applicable to such fact.
such cases in order to achieve an expeditious and inexpensive

Page 10 of 72
 (a) When the question affectsjurisdiction over the subject matter;
(b) Within fifteen (15) days from such notice, it shall be the duty of the
appellant to submit a memorandum which shall briefly discuss the
(b) Matters that are evidently plain or clerical errors within
errors imputed to the lower court, a copy of which shall be furnished
contemplation of law;
by him to the adverse party. Within fifteen (15) days from receipt of
the appellants memorandum, the appellee may file his memorandum.
Failure of the appellant to file a memorandum shall be a ground for
dismissal of the appeal. (c) Matters whose consideration is necessary in arriving at a just
decision and complete resolution of the case or in serving the interests
of justice or avoiding dispensing piecemeal justice;
(c) Upon the filing of the memorandum of the appellee, or the
expiration of the period to do so, the case shall be considered
submitted for decision. The Regional Trial Court shall decide the (d) Matters raised in the trial court and are of record having some
case on the basis of the entire record of the proceedings had in bearing on the issue submitted that the parties failed to raise or that
the court of origin and such memoranda as are filed. (n) the lower court ignored;

As a result, the RTC presently decides all appeals from the MTC based
on the entire record of the proceedings had in the court of origin and
such memoranda or briefs as are filed in the RTC.
Yet, even withoutthe differentiation in the procedures of deciding
appeals, thelimitation of the review to onlythe errors assigned and
properly argued in the appeal brief or memorandum and the errors
necessarily related to such assigned errorsought not to have
obstructed the CA from resolving the unassigned issues by virtue of
their coming under one or several of the following recognized
exceptions to the limitation, namely:
(e) Matters closely related to an error assigned; and
(f) Matters upon which the determination of a question properly
assigned is dependent.[13]
Consequently, the CA improperly disallowed the consideration and
resolution of the two errors despite their being: (a)necessary in
arriving at a just decision and acomplete resolution of the case; and
(b) matters of record having some bearing on the issues submitted
that the lower court ignored.

Page 11 of 72
B.
CA correctly delved into and determined
whether or not complaint stateda cause of action
The RTC opined that the complaint failed to state a cause of action
because the evidence showed that there was no demand to vacate
made upon the petitioner.
The CA disagreed, observingin its appealed decision:
But what is worse is that a careful reading of Plaintiffs-appellants
Complaint would readily reveal that they have sufficiently established
(sic) a cause of action against Defendant-appellee. It is undisputed that
as alleged in the complaint and testified to by Plaintiffs-appellants, a
demand to vacate was made before the action for unlawful detainer
was instituted.
A complaint for unlawful detainer is sufficient if it alleges that the
withholding of possession or the refusal is unlawful without
necessarily employing the terminology of the law (Jimenez vs. Patricia,
Inc., 340 SCRA 525). In the case at bench, par. 4 of the Complaint
alleges, thus:
Page 12 of 72
4. After a period of one (1) year living in the aforementioned house,
Plaintiff demanded upon defendant to vacate but she failed and
refused;
From the foregoing allegation, it cannot be disputed that a demand to
vacate has not only been made but that the same was alleged in the
complaint. How the Regional Trial Court came to the questionable
conclusion that Plaintiffs-appellants had no cause of action is beyond
Us.[14]
We concur with the CA.
A complaint sufficiently alleges a cause of action for unlawful detainer
if it states the following:
(a)Initially, the possession of the property by the defendant was by
contract with or by tolerance of the plaintiff;
(b)Eventually, such possession became illegal upon notice by the
plaintiff to the defendant about the termination of the latters right of
possession;
(c)Thereafter, the defendant remained in possession of the property
and deprived the plaintiff of its enjoyment; and
(d)Within one year from the making of the last demand to vacate the
propertyon the defendant, the plaintiff instituted the complaint for
ejectment.[15]
In resolving whether the complaint states a cause of actionor not, only
the facts alleged in the complaint are considered. The test is whether
the court can render a valid judgment on the complaint based on the
facts alleged and the prayer asked for.[16] Only ultimate facts, not legal
conclusions or evidentiary facts, are considered for purposes of
applying the test.[17]
To resolve the issue, therefore, a look at the respondents complaint is
helpful:
2. On September 10, 1997, defendant sold to plaintiffs a residential
land located in Sabang, Danao City, covered by Tax Dec.0312417 RB
with an area of 400 square meters, including a residential house
where defendant was then living covered by Tax Dec. 0312417 RB, a
copy of the deed of absolute [sale] of these properties is hereto
attached as Annex A;
3. After the sale, defendant requested to be allowed to live in the
house which plaintiff granted on reliance of defendants promise to
vacate as soon as she would be able to find a new residence;
Page 13 of 72
4. After a period of one (1) year living in the aforementioned
house, plaintiffs demanded upon defendant to vacate but she
failed or refused.
5. Plaintiffs sought the aid of the barangay Lupon of Sabang, Danao
City for arbitration but no settlement was reached as shown by a
certification to file action hereto attached as Annex B;
6. Plaintiffs were compelled to file this action and hire counsel
for P10,000 by way of attorneys fee;
7. Defendant agreed to pay plaintiffs a monthly rental of P5,000 for the
period of time that the former continued to live in the said house in
question.
WHEREFORE, it is respectfully prayed of this Honorable Court to
render judgment ordering the defendant to vacate the properties in
question, ordering the defendant to pay plaintiffs attorneys fees in the
sum of P10,000, ordering the defendant to pay the plaintiffs a monthly
rental of P5,000 starting in October 1997, until the time that
defendant vacates the properties in question. Plaintiffs pray for such
other refiefs consistent with justice and equity.[18]
Based on its allegations, the complaintsufficiently stated a cause of
action for unlawful detainer. Firstly, it averred that the petitioner
possessed the property by the mere tolerance of the respondents.
Secondly, the respondents demanded that the petitioner vacate the
property, thereby rendering her possession illegal. Thirdly,she
remained in possession of the property despite the demand to vacate.
And, fourthly, the respondents instituted the complaint on March 10,
1999,which was well within a year after the demand to vacate was
made around September of 1998 or later.
Yet, even as we rule that the respondents complaint stated a cause of
action, we must find and hold that both the RTC and the CA
erroneously appreciatedthe real issue to be about the complaints
failure to state a cause of action. It certainly was not so, butthe
respondents lack of cause of action. Their erroneous
appreciationexpectedly prevented the correct resolution of the action.
Failure to state a cause of action and lack of cause of action are really
different from each other.On the one hand, failure to state a cause of
actionrefers to the insufficiency of the pleading, and is a ground for
dismissal under Rule 16 of the Rules of Court. On the other hand, lack
of cause action refers to a situation where the evidence does not prove
the cause of action alleged in the pleading. Justice Regalado, a
recognized commentator on remedial law, has explained the
distinction:[19]
xxx What is contemplated, therefore, is a failure to state a cause of
action which is provided in Sec. 1(g) of Rule 16. This is a matter of
insufficiency of the pleading. Sec. 5 of Rule 10, which was also included
as the last mode for raising the issue to the court, refers to the
situation where the evidence does not prove a cause of action. This is,
therefore, a matter of insufficiency of evidence. Failure to state a cause
Page 14 of 72
of action is different from failure to prove a cause of action. The
remedy in the first is to move for dismissal of the pleading, while the
remedy in the second is to demur to the evidence, hence reference to
Sec. 5 of Rule 10 has been eliminated in this section. The procedure
would consequently be to require the pleading to state a cause of
action, by timely objection to its deficiency; or, at the trial, to file a
demurrer to evidence, if such motion is warranted.
A complaint states a cause of action if it avers the existence of the
three essential elements of a cause of action, namely:
(a) The legal right of the plaintiff;
(b) The correlative obligation of the defendant; and
(c) The act or omission of the defendant in violation of said legal right.
If the allegations of the complaint do not aver the concurrence of these
elements, the complaint becomes vulnerable to a motion to dismiss on
the ground of failure to state a cause of action.Evidently, it is not the
lack or absence of a cause of action that is a ground for the dismissal of
the complaint but the fact that the complaint states no cause of
action.Failure to state a cause of action may be raised at the earliest
stages of an action through a motion to dismiss, but lack of cause of
action may be raised at any time after the questions of fact have been
resolved on the basis of the stipulations, admissions, or evidence
presented.[20]
Exhibit D, despite not explicitly using the wordvacate, relayed to the
petitionerthe respondents desire to take over the possession of the
property by givingher no alternative exceptto vacate.The
Having found that neither Exhibit C nor Exhibit E was a proper
word vacate,according toGolden Gate Realty Corporation v.
demand to vacate,[21] considering that Exhibit C (the respondents
Intermediate Appellate Court,[23]is not a talismanic word that must be
letter dated February 11, 1998)demanded the payment
employed in all notices to vacate.The tenantsin Golden Gate Realty
of P1,101,089.90, and Exhibit E (theirletter dated January 21, 1999)
Corporationhad defaulted in the payment of rents, leading
demandedthe payment of P1,600,000.00, the RTC concluded that the
theirlessorto notify them to pay with a warning that a case of
demand alleged in the complaint did not constitute a demand to pay
ejectment would be filed against themshould they not do so. The Court
rent and to vacate the premises necessary in an action for unlawful
held that the lessor had thereby given strong notice that you either
detainer. It was this conclusion that caused the RTC to confuse the
pay your unpaid rentals or I will file a court case to have you thrown
defect as failure of the complaint to state a cause of action for unlawful
out of my property,for therewas no other interpretation of the import
detainer.
of the notice due to the alternatives being clear cut, in that the tenants
must pay rentals that had been fixed and had become payable in the
past, failing in which they must move out.[24]
The RTCerred even in that regard.
Also, the demand not being to pay rent and to vacate did not render
the cause of action deficient. Based on the complaint, the petitioners
To begin with, it was undeniable that Exhibit D (the respondents letter possession was allegedly based on the respondents tolerance, not on
dated April 28, 1998) constitutedthedemand to vacate that validly any contract between them. Hence, thedemand to vacate sufficed.
supported their action for unlawful detainer, because of its
unmistakable tenor as a demand to vacate, which the following
portion indicates:[22] C.
Ejectment was not proper due
to defense of ownership being established

This is to give notice that since the mortgage to your property has long
expired and that since the property is already in my name, I will be
taking over the occupancy of said property two (2) months from
date of this letter.

Page 15 of 72
The respondents cause of action for unlawful detainer was based on admission clearly shows that the house and lot of the defendant was
their supposed right to possession resulting from their having not sold but mortgaged.
acquired it through sale.
The RTCdismissed the complaint based on its following findings, to
Again, for purposes of emphasis and clarity, a portion of the letter
wit:
(Exhibit D) reads:
In the case at bench, there is conflict between the allegation of the
complaint and the document attached thereto.
This is to give notice that since the mortgage to your property has long
Simply stated, plaintiff alleged that she bought the house of the
expired and that since the property is already in my name, I will be
defendant for P100,000.00 on September 10, 1997 as stated in an
taking over the occupancy of said property two (2) months from date
alleged Deed of Absolute Sale marked as Exhibit A to the complaint.
of this letter.
Insofar as plaintiff is concerned, the best evidence is the said Deed of
Absolute Sale.

The Court is surprised why in plaintiffs letter dated February 11,
1998, marked as Exhibit C and attached to the same complaint, she
demanded from the defendant the whooping sum of P1,101,089.90. It
must be remembered that this letter was written five (5) months after
the deed of absolute sale was executed.
The same letter (Exhibit C) is not a letter of demand as contemplated
by law and jurisprudence. The plaintiff simply said that she will
appreciate payment per notarized document. There is no explanation
what this document is.
x xxx
Exhibit E, which is a letter dated January 21, 1999, shows the real
transaction between the parties in their case. To reiterate, the
consideration in the deed of sale (Exhibit A) is P100,000.00 but in
their letter (Exhibit E) she is already demanding the sum
of P1,600,000.00 because somebody was going to buy it
for P2,000,000.00.
There are indications that point out that the real transaction between
the parties is one of equitable mortgage and not sale.[25]

Plaintiffs letter dated April 28, 1998 (Exhibit D) contradicts her

allegation that she purchased the house and lot mentioned in the
complaint. Exhibit D, which is part of the pleading and a judicial

Page 16 of 72
Despite holding herein that the respondents demand to vacate
sufficed, we uphold the result of the RTC decision in favor of the
petitioner. This we do,because therespondents Exhibit Cand Exhibit E,
by demandingpayment from the petitioner,
respectively,of P1,101,089.90 and P1,600,000.00, revealedthe true
nature of the transaction involving the property in question as one of
equitable mortgage, not a sale.
Our upholding of the result reached by the RTC rests on the following
circumstancesthat tended to show that the petitioner had not really
sold the property to the respondents, contrary to the latters
averments, namely:
(a)The petitioner, as the vendor, was paid the amount of
only P100,000.00,[26] a price too inadequate in comparison with the
sum of P1,600,000.00 demanded in Exhibit E;[27]
(b) The petitioner retained possession of the property despite the
supposed sale; and
(c) The deed of sale wasexecuted as a result or by reason of the loan
the respondents extended to the petitioner,because they still allowed
the petitioner to redeem the property by paying her obligation under
the loan.[28]
Page 17 of 72
Submissions of the petitioner further supported the findings of the
RTCon the equitable mortgage. Firstly, there was the earlier dated
instrument (deed of pactode retro)involving the same property, albeit
the consideration was only P480,000.00, executed between the
petitioner as vendor a retro and the respondent Renato Zamora as
vendee a retro.[29] Secondly, there were two receipts for the payments
the petitioner had made to the
respondentstotaling P300,000.00.[30] And, thirdly, the former
secretary of respondent Melba Zamora executed an affidavit
acknowledging that the petitioner had already paid a total
of P500,000.00 to the respondents.[31] All these confirmed the
petitioners claim that she remained the owner of the property and
was still entitled to its possession.
Article 1602 of the Civil Codeenumerates the instances when a
contract, regardless of its nomenclature, may be presumed to be an
equitable mortgage, namely:
(a) When the price of a sale with right to repurchase is unusually
inadequate;
(b) When the vendor remains in possession as lessee or otherwise;
(c) When upon or after the expiration of the right to repurchase
another instrument extending the period of redemption or granting a
new period is executed;
(d)When the purchaser retains for himself a part of the purchase
price;
(e)When the vendor binds himself to pay the taxes on the thing sold;
and,
(f) In any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.
The circumstances earlier mentioned were, indeed, badges of an
equitable mortgage within the context ofArticle 1602 of the Civil Code.
Nonetheless, the findingsfavorable to the petitioners ownership are
neitherfinally determinative of the title in the property, nor conclusive
in any other proceeding where ownership of the property involved
herein may be more fittingly adjudicated.Verily, where the cause of
action in an ejectment suit is based on ownership of the property, the
defense that the defendantretainedtitle or ownership is a proper
subject for determination by the MTC but only for the purpose of
adjudicating the rightful possessor of the property.[32]This is based on
Rule 70 of the Rules of Court, viz:
Section 16. Resolving defense of ownership. When the defendant raises
the defense of ownership in his pleadings and the question of
possession cannot be resolved without deciding the issue of
Page 18 of 72
ownership, the issue of ownership shall be resolved only to determine
the issue of possession.(4a)
D.
MTC committed procedural lapses
that must be noted and corrected
The Court seizes theopportunity to note and to
correctseveralnoticeable procedural lapses on the part of the MTCC, to
avoid the impression that the Court condones or tolerates the lapses.
The first lapse wasthe MTCCs granting of the respondents motion to
declare the petitioner in default following her failure to file an answer.
The proper procedurewas not for the plaintiffs to move for the
declaration in default of the defendant who failed to file the answer.
Such a motion to declare in default has been expressly prohibited
under Section 13, Rule 70 of
theRules of Court.[33]Instead, the trial court, either motuproprio or on
motion of the plaintiff, should render judgment as the facts alleged in
the complaint might warrant.[34]In other words, the defendants failure
to file an answer under Rule 70 of the Rules of Courtmight result to a
judgment by default, not to a declaration of default.
The second lapse wasthe MTCCsreception of the oral testimony of
respondent Melba Zamora. Rule 70 of the Rules of Courthas envisioned
the submission only of affidavits of the witnesses (not oral testimony)
and other proofs on the factual issues defined in the order issued
within five days from the termination of the preliminary
WHEREFORE,we grant the petition for review on certiorari; set aside
conference;[35]and has permittedthe trial court, should it find the need
the decision promulgated on July 3, 2002 by the Court of Appeals; and
to clarify material facts, to thereafterissue an order during the 30-day
dismiss the complaint for unlawful detainer for lack of a cause of
period from submission of the affidavits and other proofs specifying
action.
the matters to be clarified, and requiring the parties to submit
affidavits or other evidence upon such matters within ten days from
receipt of the order.[36]
The respondents shall pay the costs of suit.

The procedural lapses committed in this case are beyond

comprehension.The MTCC judge could not have been unfamiliar with SO ORDERED.
the prevailing procedure, considering that therevised version of Rule
70, although taking effect only on July 1, 1997,was derived from
the 1991 Revised Rule on Summary Procedure, in effect since November
15, 1991. It was not likely, therefore, that the MTCC judge committed
the lapses out of his unfamiliarity with the relevant rule. We discern
thatthe cause of the lapses was his lack of enthusiasm in
implementingcorrect procedures in this case. If that was the true
reason, the Court can only be alarmed and concerned, for a judge
should not lack enthusiasm in applying the rules of procedure lest the
worthy objectives of their promulgation be unwarrantedly sacrificed
and brushed aside. The MTCC judge should not forget that the rules of
procedure were always meant to be implemented deliberately, not
casually, and their non-compliance should only be excused in the
higher interest of the administration of justice.

It is timely, therefore, to remind all MTC judges to display full and

enthusiastic compliance with all the rules of procedure, especially
those intended for expediting proceedings.

Page 19 of 72
Philip Turner, et al. v. Lorenzo Shipping
Corporation, G.R. No. 157479, November 24,
2010
DECISION
BERSAMIN, J.:
This case concerns the right of dissenting stockholders to demand
payment of the value of their shareholdings.
In the stockholders suit to recover the value of their shareholdings
from the corporation, the Regional Trial Court (RTC) upheld the
dissenting stockholders, herein petitioners, and ordered the
corporation, herein respondent, to pay. Execution was partially
carried out against the respondent. On the respondents petition
for certiorari, however, the Court of Appeals (CA) corrected the RTC
and dismissed the petitioners suit on the ground that their cause of
action for collection had not yet accrued due to the lack of unrestricted
retained earnings in the books of the respondent.
Thus, the petitioners are now before the Court to challenge the CAs
decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156
entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his
capacity as Presiding Judge of Branch 46 of the Regional Trial Court of
Manila, et al.[1]
Page 20 of 72
Antecedents
The petitioners held 1,010,000 shares of stock of the respondent, a
domestic corporation engaged primarily in cargo shipping
activities. In June 1999, the respondent decided to amend its articles
of incorporation to remove the stockholders pre-emptive rights to
newly issued shares of stock. Feeling that the corporate move would
be prejudicial to their interest as stockholders, the petitioners voted
against the amendment and demanded payment of their shares at the
rate of P2.276/share based on the book value of the shares, or a total
of P2,298,760.00.
The respondent found the fair value of the shares demanded by the
petitioners unacceptable. It insisted that the market value on the date
before the action to remove the pre-emptive right was taken should be
the value, or P0.41/share (or a total of P414,100.00), considering that
its shares were listed in the Philippine Stock Exchange, and that the
payment could be made only if the respondent had unrestricted
retained earnings in its books to cover the value of the shares, which
was not the case.
The disagreement on the valuation of the shares led the parties to
constitute an appraisal committee pursuant to Section 82 of
the Corporation Code, each of them nominating a representative, who
together then nominated the third member who would be chairman of
the appraisal committee. Thus, the appraisal committee came to be
made up of Reynaldo Yatco, the petitioners nominee; Atty. Antonio
Acyatan, the respondents nominee; and Leo Anoche of the Asian
Appraisal Company, Inc., the third member/chairman.
On October 27, 2000, the appraisal committee reported its valuation
of P2.54/share, for an aggregate value of P2,565,400.00 for the
petitioners.[2]
Subsequently, the petitioners demanded payment based on the
valuation of the appraisal committee, plus 2%/month penalty from
the date of their original demand for payment, as well as the
reimbursement of the amounts advanced as professional fees to the
appraisers.[3]
In its letter to the petitioners dated January 2, 2001,[4] the respondent
refused the petitioners demand, explaining that pursuant to
theCorporation Code, the dissenting stockholders exercising their
appraisal rights could be paid only when the corporation had
unrestricted retained earnings to cover the fair value of the shares, but
that it had no retained earnings at the time of the petitioners demand,
as borne out by its Financial Statements for Fiscal Year 1999 showing
a deficit of P72,973,114.00 as of December 31, 1999.
Upon the respondents refusal to pay, the petitioners sued the
respondent for collection and damages in the RTC
in Makati City on January 22, 2001. The case, docketed as Civil Case
No. 01-086, was initially assigned to Branch 132.[5]
On June 26, 2002, the petitioners filed their motion for partial
summary judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained
earnings of ELEVEN MILLION NINE HUNDRED SEVENTY FIVE
Page 21 of 72
THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of the
Quarter Ending March 31, 2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by the
Appraisal Committee is final, that the same cannot be disputed xxx
9) xxx there is no genuine issue to material fact and therefore, the
plaintiffs are entitled, as a matter of right, to a summary judgment.
xxx[6]
The respondent opposed the motion for partial summary judgment,
stating that the determination of the unrestricted retained earnings
should be made at the end of the fiscal year of the respondent, and
that the petitioners did not have a cause of action against the
respondent.
During the pendency of the motion for partial summary judgment,
however, the Presiding Judge of Branch 133 transmitted the records
to the Clerk of Court for re-raffling to any of the RTCs special
commercial courts in Makati City due to the case being an intra-
corporate dispute. Hence, Civil Case No. 01-086 was re-raffled to
Branch 142.
Nevertheless, because the principal office of the respondent was in
Manila, Civil Case No. 01-086 was ultimately transferred to Branch 46
of the RTC in Manila, presided by Judge Artemio Tipon,[7] pursuant to
the Interim Rules of Procedure on Intra-Corporate
Controversies (Interim Rules) requiring intra-corporate cases to be
brought in the RTC exercising jurisdiction over the place where the
principal office of the corporation was found.
After the conference in Civil Case No. 01-086 set on October 23, 2002,
which the petitioners counsel did not attend, Judge Tipon issued an
order,[8] granting the petitioners motion for partial summary judgment,
stating:
As to the motion for partial summary judgment, there is no question
that the 3-man committee mandated to appraise the shareholdings of
plaintiff submitted its recommendation on October 27, 2000 fixing the
fair value of the shares of stocks of the plaintiff at P2.54 per share.
Under Section 82 of the Corporation Code:
The findings of the majority of the appraisers shall be final, and the
award shall be paid by the corporation within thirty (30) days after
the award is made.
The only restriction imposed by the Corporation Code is
That no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earning in its books to cover
such payment.
Page 22 of 72
The evidence submitted by plaintiffs shows that in its quarterly
financial statement it submitted to the Securities and Exchange
Commission, the defendant has retained earnings of P11,975,490 as
of March 21, 2002. This is not disputed by the defendant. Its only
argument against paying is that there must be unrestricted retained
earning at the time the demand for payment is made.
This certainly is a very narrow concept of the appraisal right of a
stockholder. The law does not say that the unrestricted retained
earnings must exist at the time of the demand. Even if there are no
retained earnings at the time the demand is made if there are retained
earnings later, the fair value of such stocks must be paid. The only
restriction is that there must be sufficient funds to cover the creditors
after the dissenting stockholder is paid. No such allegations have been
made by the defendant.[9]
On November 12, 2002, the respondent filed a motion for
reconsideration.
On the scheduled hearing of the motion for
reconsideration on November 22, 2002, the petitioners filed a motion
for immediate execution and a motion to strike out motion for
reconsideration. In the latter motion, they pointed out that the motion
for reconsideration was prohibited by Section 8 of the Interim
Rules. Thus, also on November 22, 2002, Judge Tipon denied
the motion for reconsideration and granted the petitioners motion for
immediate execution.[10]
Subsequently, on November 28, 2002, the RTC issued a writ of
execution.[11]
Aggrieved, the respondent commenced a special civil action
for certiorari in the CA to challenge the two aforecited orders of Judge
Tipon, claiming that:
A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING
SUMMARY JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT THE
TIME THE COMPLAINT WAS FILED, LSC HAD NO RETAINED
EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND NOT
VIOLATING ANY RIGHTS OF THE SPOUSES TURNER, WHEN IT
REFUSED TO PAY THEM THE VALUE OF THEIR LSC SHARES. ANY
RETAINED EARNINGS MADE A YEAR AFTER THE COMPLAINT WAS
FILED ARE IRRELEVANT TO THE SPOUSES TURNERS RIGHT TO
RECOVER UNDER THE COMPLAINT, BECAUSE THE WELL-SETTLED
RULE, REPEATEDLY BROUGHT TO JUDGE TIPONS ATTENTION, IS IF
NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED
THE SUIT CANNOT BE MAINTAINED, ALTHOUGH SUCH RIGHT OF
ACTION MAY HAVE ACCRUED THEREAFTER.
B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS
GRAVELY ABUSED HIS DISCRETION, WHEN HE GRANTED AND
ISSUED THE QUESTIONED WRIT OF EXECUTION DIRECTING THE
EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN FAVOR OF
THE SPOUSES TURNER, BECAUSE THAT JUDGMENT IS NOT A FINAL
JUDGMENT UNDER SECTION 1 OF RULE 39 OF THE RULES OF COURT
Page 23 of 72
AND THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE
SUPREME COURTS CATEGORICAL HOLDING IN PROVINCE OF
PANGASINAN VS. COURT OF APPEALS.
Upon the respondents application, the CA issued a temporary
restraining order (TRO), enjoining the petitioners, and their agents
and representatives from enforcing the writ of execution. By then,
however, the writ of execution had been partially enforced.
The TRO lapsed without the CA issuing a writ of preliminary
injunction to prevent the execution. Thereupon, the sheriff resumed
the enforcement of the writ of execution.
The CA promulgated its assailed decision on March 4,
2003,[12] pertinently holding:
However, it is clear from the foregoing that the Turners appraisal right
is subject to the legal condition that no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover such payment. Thus, the
Supreme Court held that:
The requirement of unrestricted retained earnings to cover the shares
is based on the trust fund doctrine which means that the capital stock,
property and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. The reason is that
creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution of assets
among the stockholders without first paying corporate creditors.
Hence, any disposition of corporate funds to the prejudice of creditors
is null and void. Creditors of a corporation have the right to assume
that so long as there are outstanding debts and liabilities, the board of
directors will not use the assets of the corporation to purchase its own
stock.
In the instant case, it was established that there were no unrestricted
retained earnings when the Turners filed their Complaint. In a letter
dated 20 August 2000, petitioner informed the Turners that payment
of their shares could only be made if it had unrestricted earnings in its
books to cover the same. Petitioner reiterated this in a letter dated 2
January 2001 which further informed the Turners that its Financial
Statement for fiscal year 1999 shows that its retained earnings ending
December 31, 1999 was at a deficit in the amount of P72,973,114.00, a
matter which has not been disputed by private respondents. Hence, in
accordance with the second paragraph of sec. 82, BP 68 supra, the
Turners right to payment had not yet accrued when they filed their
Complaint on January 22, 2001, albeit their appraisal right already
existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc.,
the Supreme Court declared that:
Now, before an action can properly be commenced all the essential
elements of the cause of action must be in existence, that is, the cause
of action must be complete. All valid conditions precedent to the
institution of the particular action, whether prescribed by statute,
fixed by agreement of the parties or implied by law must be
performed or complied with before commencing the action, unless the
Page 24 of 72
conduct of the adverse party has been such as to prevent or waive
performance or excuse non-performance of the condition.
It bears restating that a right of action is the right to presently enforce
a cause of action, while a cause of action consists of the operative facts
which give rise to such right of action. The right of action does not
arise until the performance of all conditions precedent to the
actionand may be taken away by the running of the statute of
limitations, through estoppel, or by other circumstances which do not
affect the cause of action. Performance or fulfillment of all conditions
precedent upon which a right of action depends must be sufficiently
alleged, considering that the burden of proof to show that a party has
a right of action is upon the person initiating the suit.
The Turners right of action arose only when petitioner had already
retained earnings in the amount of P11,975,490.00 on March 21,
2002; such right of action was inexistent on January 22, 2001 when
they filed the Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris,
the Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided by
law, an action commenced before the cause of action has accrued is
prematurely brought and should be dismissed. The fact that the cause
of action accrues after the action is commenced and while it is pending
is of no moment. It is a rule of law to which there is, perhaps, no
exception, either at law or in equity, that to recover at all there must
be some cause of action at the commencement of the suit. There are
reasons of public policy why there should be no needless haste in
bringing up litigation, and why people who are in no default and
against whom there is as yet no cause of action should not be
summoned before the public tribunals to answer complaints which
are groundless. An action prematurely brought is a groundless
suit. Unless the plaintiff has a valid and subsisting cause of action at
the time his action is commenced, the defect cannot be cured or
remedied by the acquisition or accrual of one while the action is
pending, and a supplemental complaint or an amendment setting up
such after-accrued cause of action is not permissible.
The afore-quoted ruling was reiterated in Young vs Court of Appeals
and Lao vs. Court of Appeals.
The Turners apprehension that their claim for payment may prescribe
if they wait for the petitioner to have unrestricted retained earnings is
misplaced. It is the legal possibility of bringing the action that
determines the starting point for the computation of the period of
prescription. Stated otherwise, the prescriptive period is to be
reckoned from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its jurisdiction
when it entertained the herein Complaint and issued the assailed
Orders.Excess of jurisdiction is the state of being beyond or outside
the limits of jurisdiction, and as distinguished from the entire absence
of jurisdiction, means that the act although within the general power
of the judge, is not authorized and therefore void, with respect to the
Page 25 of 72
particular case, because the conditions which authorize the exercise of
his general power in that particular case are wanting, and hence, the
judicial power is not in fact lawfully invoked.
We find no necessity to discuss the second ground raised in this
petition.
WHEREFORE, upon the premises, the petition is GRANTED. The
assailed Orders and the corresponding Writs of Garnishment
are NULLIFIED. Civil Case No. 02-104692 is hereby
ordered DISMISSED without prejudice to refiling by the private
respondents of the action for enforcement of their right to payment as
withdrawing stockholders.
SO ORDERED.
The petitioners now come to the Court for a review on certiorari of the
CAs decision, submitting that:
I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW
WHEN IT GRANTED THE PETITION FOR CERTIORARI WHEN THE
REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS
JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN GRANTING
THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND IN
GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF A.
JUDGMENT;
Stockholders Right of Appraisal, In General

II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW
WHEN IT ORDERED THE DISMISSAL OF THE CASE, WHEN THE
PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF
THE ORDER GRANTING THE MOTION FOR PARTIAL SUMMARY
JUDGMENT AND OF THE ORDER GRANTING THE MOTION FOR
IMMEDIATE EXECUTION OF THE JUDGMENT;
III.
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF
SUBSTANCE NOT THEREFORE DETERMINED BY THIS HONORABLE
COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH LAW
OR WITH JURISPRUDENCE.
Ruling
The petition fails.
A stockholder who dissents from certain corporate actions has the
right to demand payment of the fair value of his or her shares. This
right, known as the right of appraisal, is expressly recognized in
Section 81 of the Corporation Code, to wit:
Section 81. Instances of appraisal right. - Any stockholder of a
corporation shall have the right to dissent and demand payment of the
fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or shortening
the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and
assets as provided in the Code; and

The CA correctly concluded that the RTC had exceeded its jurisdiction
3. In case of merger or consolidation. (n)
in entertaining the petitioners complaint in Civil Case No. 01-086, and
in rendering the summary judgment and issuing writ of execution.

Page 26 of 72
Clearly, the right of appraisal may be exercised when there is a
fundamental change in the charter or articles of incorporation
substantially prejudicing the rights of the stockholders. It does not
vest unless objectionable corporate action is taken.[13] It serves the
purpose of enabling the dissenting stockholder to have his interests
purchased and to retire from the corporation.[14]
Section 41. Power to acquire own shares. - A stock corporation shall
have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares to be purchased or
acquired:

Under the common law, there were originally conflicting views on 1. To eliminate fractional shares arising out of stock dividends;
whether a corporation had the power to acquire or purchase its own
stocks. In England, it was held invalid for a corporation to purchase its
issued stocks because such purchase was an indirect method of 2. To collect or compromise an indebtedness to the corporation,
reducing capital (which was statutorily restricted), aside from being arising out of unpaid subscription, in a delinquency sale, and to
inconsistent with the privilege of limited liability to creditors.[15] Only purchase delinquent shares sold during said sale; and
a few American jurisdictions adopted by decision or statute the strict
English rule forbidding a corporation from purchasing its own shares.
In some American states where the English rule used to be adopted, 3. To pay dissenting or withdrawing stockholders entitled to payment
statutes granting authority to purchase out of surplus funds were for their shares under the provisions of this Code. (n)
enacted, while in others, shares might be purchased even out of capital
provided the rights of creditors were not prejudiced.[16] The reason
underlying the limitation of share purchases sprang from the
The Corporation Code defines how the right of appraisal is exercised,
necessity of imposing safeguards against the depletion by a
as well as the implications of the right of appraisal, as follows:
corporation of its assets and against the impairment of its capital
needed for the protection of creditors.[17]

1. The appraisal right is exercised by any stockholder who has voted

against the proposed corporate action by making a written demand on
Now, however, a corporation can purchase its own
the corporation within 30 days after the date on which the vote was
shares, provided payment is made out of surplus profits and the
taken for the payment of the fair value of his shares. The failure to
acquisition is for a legitimate corporate purpose.[18] In the Philippines,
make the demand within the period is deemed a waiver of the
this new rule is embodied in Section 41 of the Corporation Code, to wit:
appraisal right.[19]

Page 27 of 72
2. If the withdrawing stockholder and the corporation cannot agree
on the fair value of the shares within a period of 60 days from the date
the stockholders approved the corporate action, the fair value shall be
determined and appraised by three disinterested persons, one of
whom shall be named by the stockholder, another by the corporation,
and the third by the two thus chosen. The findings and award of the
majority of the appraisers shall be final, and the corporation shall pay
their award within 30 days after the award is made. Upon payment by
the corporation of the agreed or awarded price, the stockholder shall
forthwith transfer his or her shares to the corporation.[20]
3. All rights accruing to the withdrawing stockholders shares,
including voting and dividend rights, shall be suspended from the time
of demand for the payment of the fair value of the shares until either
the abandonment of the corporate action involved or the purchase of
the shares by the corporation, except the right of such stockholder to
receive payment of the fair value of the shares.[21]
4. Within 10 days after demanding payment for his or her shares, a
dissenting stockholder shall submit to the corporation the certificates
of stock representing his shares for notation thereon that such shares
are dissenting shares. A failure to do so shall, at the option of the
corporation, terminate his rights under this Title X of the Corporation
Code. If shares represented by the certificates bearing such notation
are transferred, and the certificates are consequently canceled, the
rights of the transferor as a dissenting stockholder under this Title
shall cease and the transferee shall have all the rights of a regular
stockholder; and all dividend distributions that would have accrued
on such shares shall be paid to the transferee.[22]
5. If the proposed corporate action is implemented or effected, the
corporation shall pay to such stockholder, upon the surrender of the
certificates of stock representing his shares, the fair value thereof as of
the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate
action.[23]
Notwithstanding the foregoing, no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover the payment. In case the
corporation has no available unrestricted retained earnings in its
books, Section 83 of the Corporation Code provides that if the
dissenting stockholder is not paid the value of his shares within 30
days after the award, his voting and dividend rights shall immediately
be restored.
The trust fund doctrine backstops the requirement of unrestricted
retained earnings to fund the payment of the shares of stocks of the
withdrawing stockholders. Under the doctrine, the capital stock,
property, and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors, who are preferred in the
distribution of corporate assets.[24] The creditors of a corporation have
the right to assume that the board of directors will not use the assets
of the corporation to purchase its own stock for as long as the
corporation has outstanding debts and liabilities.[25] There can be no
distribution of assets among the stockholders without first paying
corporate debts. Thus, any disposition of corporate funds and assets
to the prejudice of creditors is null and void.[26]

Page 28 of 72
B.
Petitioners cause of action was premature
That the respondent had indisputably no unrestricted retained
earnings in its books at the time the petitioners commenced Civil Case
No. 01-086 on January 22, 2001 proved that the respondents legal
obligation to pay the value of the petitioners shares did not yet
arise. Thus, the CA did not err in holding that the petitioners had no
cause of action, and in ruling that the RTC did not validly render the
partial summary judgment.
A cause of action is the act or omission by which a party violates a
right of another.[27] The essential elements of a cause of action are: (a)
the existence of a legal right in favor of the plaintiff; (b) a correlative
legal duty of the defendant to respect such right; and (c) an act or
omission by such defendant in violation of the right of the plaintiff
with a resulting injury or damage to the plaintiff for which the latter
may maintain an action for the recovery of relief from the
defendant.[28] Although the first two elements may exist, a cause of
action arises only upon the occurrence of the last element, giving the
plaintiff the right to maintain an action in court for recovery of
damages or other appropriate relief.[29]
Section 1, Rule 2, of the Rules of Court requires that every ordinary
civil action must be based on a cause of action. Accordingly, Civil Case
No. 01-086 was dismissible from the beginning for being without any
cause of action.
The RTC concluded that the respondents obligation to pay had
accrued by its having the unrestricted retained earnings after the
Page 29 of 72
making of the demand by the petitioners. It based its conclusion on the
fact that the Corporation Code did not provide that the unrestricted
retained earnings must already exist at the time of the demand.
The RTCs construal of the Corporation Code was unsustainable,
because it did not take into account the petitioners lack of a cause of
action against the respondent. In order to give rise to any obligation to
pay on the part of the respondent, the petitioners should first make a
valid demand that the respondent refused to pay despite having
unrestricted retained earnings. Otherwise, the respondent could not
be said to be guilty of any actionable omission that could sustain their
action to collect.
Neither did the subsequent existence of unrestricted retained
earnings after the filing of the complaint cure the lack of cause of
action in Civil Case No. 01-086. The petitioners right of action could
only spring from an existing cause of action. Thus, a complaint whose
cause of action has not yet accrued cannot be cured by an amended or
supplemental pleading alleging the existence or accrual of a cause of
action during the pendency of the action.[30] For, only when there is an
invasion of primary rights, not before, does the adjective or remedial
law become operative.[31] Verily, a premature invocation of the courts
intervention renders the complaint without a cause of action and
dismissible on such ground.[32] In short, Civil Case No. 01-086, being
a groundless suit, should be dismissed.
Even the fact that the respondent already had unrestricted retained
earnings more than sufficient to cover the petitioners claims on June
26, 2002 (when they filed their motion for partial summary
judgment) did not rectify the absence of the cause of action at the time
of the commencement of Civil Case No. 01-086. The motion for partial
summary judgment, being a mere application for relief other than by a
pleading,[33] was not the same as the complaint in Civil Case No. 01-
086. Thereby, the petitioners did not meet the requirement of
the Rules of Court that a cause of action must exist at the
commencement of an action, which is commenced by the filing of the
original complaint in court.[34]
The petitioners claim that the respondents petition
for certiorari sought only the annulment of the assailed orders of the
RTC (i.e., granting the motion for partial summary judgment and
the motion for immediate execution); hence, the CA had no right to
direct the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.
Although the respondents petition for certiorari targeted only the
RTCs orders granting the motion for partial summary judgmentand
the motion for immediate execution, the CAs directive for the dismissal
of Civil Case No. 01-086 was not an abuse of discretion, least of all
grave, because such dismissal was the only proper thing to be done
under the circumstances. According to Surigao Mine Exploration Co.,
Inc. v. Harris:[35]
Subject to certain qualification, and except as otherwise provided by
law, an action commenced before the cause of action has accrued
is prematurely brought and should be dismissed. The fact that the
cause of action accrues after the action is commenced and while the
case is pending is of no moment. It is a rule of law to which there is,
perhaps no exception, either in law or in equity, that to recover at all
there must be some cause of action at the commencement of the suit.
Page 30 of 72
There are reasons of public policy why there should be no needless
haste in bringing up litigation, and why people who are in no default
and against whom there is as yet no cause of action should not be
summoned before the public tribunals to answer complaints which
are groundless. An action prematurely brought is a groundless
suit. Unless the plaintiff has a valid and subsisting cause of action
at the time his action is commenced, the defect cannot be cured
or remedied by the acquisition or accrual of one while the action
is pending, and a supplemental complaint or an amendment setting
up such after-accrued cause of action is not permissible.
Lastly, the petitioners argue that the respondents recourse of a special
action for certiorari was the wrong remedy, in view of the fact that the
granting of the motion for partial summary judgment constituted only
an error of law correctible by appeal, not of jurisdiction.
The argument of the petitioners is baseless. The RTC was guilty of an
error of jurisdiction, for it exceeded its jurisdiction by taking
cognizance of the complaint that was not based on an existing cause of
action.
WHEREFORE, the petition for review on certiorari is denied for lack of
merit.
We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP
No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S.
Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional
Trial Court of Manila, et al.
Costs of suit to be paid by the petitioners.
SO ORDERED.
FIDEL O. CHUA and FILIDEN REALTY AND DEVELOPMENT
CORPORATION,
- versus -
METROPOLITAN BANK & TRUST COMPANY, ATTY.
ROMUALDO CELESTRA, ATTY. ANTONIO V. VIRAY, ATTY.
RAMON MIRANDA and ATTY. POMPEYO MAYNIGO,
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court, assailing the Decision,[1] dated 31 January 2008, later upheld
in a Resolution[2] dated 28 March 2008, both rendered by the Court of
Appeals in CA-G.R. CV No. 88087. The Court of Appeals, in its assailed
Decision, affirmed the Order[3] dated 3 July 2006 of Branch 258 of the
Regional Trial Court of Paraaque City (RTC-Branch 258), dismissing
the action for damages, docketed as Civil Case No. CV-05-0402, filed by
petitioners Fidel O. Chua (Chua) and Filiden Realty and Development
Corporation (Filiden), on the ground of forum shopping.
Petitioner Chua is president of co-petitioner Filiden, a domestic
corporation, engaged in the realty business.[4] Respondent
Metropolitan Bank and Trust Co. (respondent Metrobank) is a
domestic corporation and a duly licensed banking institution.[5]
Sometime in 1988, petitioners obtained from respondent Metrobank a
loan of P4,000,000.00, which was secured by a real estate mortgage
(REM) on parcels of land covered by Transfer Certificates of Title
(TCTs) No. (108020)1148, No. 93919, and No. 125185, registered in
petitioner Chuas name (subject properties).[6] Since the value of the
collateral was more than the loan, petitioners were given an open
Page 31 of 72
credit line for future loans. On 18 September 1995, 17 January
1996, 31 July 1996, 21 January 1997, and 12 October 1998, petitioners
obtained other loans from respondent Metrobank, and the real estate
mortgages were repeatedly amended in accordance with the increase
in petitioners liabilities.[7]
Having failed to fully pay their obligations, petitioners entered into a
Debt Settlement Agreement[8] with respondent Metrobank on 13
January 2000, whereby the loan obligations of the former were
restructured. The debt consisted of a total principal amount
of P79,650,000.00, plus unpaid interest of P7,898,309.02, and penalty
charges of P552,784.96. Amortization payments were to be made in
accordance with the schedule attached to the agreement.
In a letter[9] dated 28 February 2001, the lawyers of respondent
Metrobank demanded that petitioners fully pay and settle their
liabilities, including interest and penalties, in the total amount
of P103,450,391 as of 16 January 2001, as well as the stipulated
attorneys fees, within three days from receipt of said letter.
When petitioners still failed to pay their loans, respondent Metrobank
sought to extra-judicially foreclose the REM constituted on the subject
properties. Upon a verified Petition for Foreclosure filed by
respondent Metrobank on 25 April 2001, respondent Atty. Romualdo
Celestra (Atty. Celestra) issued a Notice of Sale dated 26 April 2001,
wherein the mortgage debt was set at P88,101,093.98, excluding
unpaid interest and penalties (to be computed from 14 September
1999), attorneys fees, legal fees, and other expenses for the
foreclosure and sale. The auction sale was scheduled on 31 May
2001.[10] On 4 May 2001, petitioners received a copy of the Notice of falsified document since there was no actual sale that took place on 8
Sale.[11] November 2001. And, even if an auction sale was conducted, the
Certificate of Sale would still be void because the auction sale was
done in disobedience to a lawful order of RTC-Branch 257. Relevant
On 28 May 2001, petitioner Chua, in his personal capacity and acting portions of the Amended Complaint of petitioners read:
on behalf of petitioner Filiden, filed before Branch 257 of the Regional
Trial Court of Paraaque (RTC-Branch 257), a Complaint for Injunction
with Prayer for Issuance of Temporary Restraining Order (TRO), 12-E. There was actually no auction sale conducted by [herein
Preliminary Injunction and Damages,[12] against respondents Atty. respondent] Atty. Celestra on November 8, 2001 and the
Celestra, docketed as Civil Case No. CV-01-0207. Upon the motion of CERTIFICATE OF SALE (Annex K-2) is therefore a FALSIFIED
petitioners, RTC-Branch 257 issued a TRO enjoining respondents DOCUMENT and for which the appropriate criminal complaint for
Metrobank and Atty. Celestra from conducting the auction sale of the falsification of official/public document will be filed against the said
mortgaged properties on 31 May 2001.[13] [respondent] Celestra and the responsible officers of [herein
respondent] Metrobank, in due time;
After the expiration of the TRO on 18 June 2001, and no injunction
having been issued by RTC-Branch 257, respondent Atty. Celestra
reset the auction sale on 8 November 2001. On 8 November 2001, the
12-F. But even granting that an auction sale was actually conducted
rescheduled date of the auction sale, RTC-Branch 257 issued an Order
and that the said Certificate of Sale is not a falsified document, the
directing that the said sale be reset anew after 8 November 2001. The
same document is a NULLITY simply because the auction sale was
Order was served on 8 November 2001, on respondent Atty. Celestras
done in disobedience to a lawful order of this Court and that therefore
daughter, Arlene Celestra, at a coffee shop owned by the formers other
the auction sale proceeding is NULL AND VOID AB INITIO.[17]
daughter, Grace Celestra Aguirre. The auction sale, however,
proceeded on 8 November 2001, and a Certificate of Sale was
accordingly issued to respondent Metrobank as the highest bidder of
the foreclosed properties. [14] Petitioners additionally prayed in their Amended Complaint for the
award of damages given the abuse of power of respondent Metrobank
in the preparation, execution, and implementation of the Debt
Settlement Agreement with petitioners; the bad faith of respondent
On 13 February 2002, petitioners filed with RTC-Branch 257 a Motion
Metrobank in offering the subject properties at a price much lower
to Admit Amended Complaint[15] in Civil Case No. CV-01-0207. The
than its assessed fair market value; and the gross violation by
Amended Verified Complaint,[16] attached to the said Motion,
respondents Metrobank and Atty. Celestra of the injunction.
impleaded as additional defendant the incumbent Register of Deeds of
Paraaque City. Petitioners alleged that the Certificate of Sale was a

Page 32 of 72
Petitioners also sought, in their Amended Complaint, the issuance of a
TRO or a writ of preliminary injunction to enjoin respondent Atty.
On 28 October 2005, petitioners filed with Branch 195 of the Regional
Celestra and all other persons from proceeding with the foreclosure
Trial Court of Paraaque (RTC-Branch 195) a Verified Complaint for
sale, on the premise that no auction sale was actually held on 8
Damages against respondents Metrobank, Atty. Celestra, and three
November 2001.
Metrobank lawyers, namely, Atty. Antonio Viray, Atty. Ramon Miranda
and Atty. Pompeyo Maynigo. The Complaint was docketed as Civil
Case No. CV-05-0402. Petitioners sought in their Complaint the
In an Order dated 6 March 2002, RTC-Branch 257 denied petitioners
award of actual, moral, and exemplary damages against the
application for injunction on the ground that the sale of the foreclosed
respondents for making it appear that an auction sale of the subject
properties rendered the same moot and academic. The auction sale,
properties took place, as a result of which, the prospective buyers of
which was conducted by respondents Metrobank and Atty. Celestra,
the said properties lost their interest and petitioner Chua was
after the expiration of the TRO, and without knowledge of the Order
prevented from realizing a profit of P70,000,000.00 from the intended
dated 8 November 2001 of RTC-Branch 257, was considered as proper
sale.[21]
and valid.[18]

Petitioners filed with RTC-Branch 195 a Motion to

Petitioners filed a Motion for Reconsideration of the 6 March
Consolidate[22] dated 27 December 2005, seeking the consolidation of
2002 Order of RTC-Branch 257. When RTC-Branch 257 failed to take
Civil Case No. CV-05-0402, the action for damages pending before said
any action on said Motion, petitioners filed with the Court of Appeals a
court, with Civil Case No. CV-01-0207, the injunction case that was
Petition for Certiorari, docketed as CA-G.R. No. 70208. In a Decision
being heard before RTC-Branch 258, based on the following grounds:
dated 26 July 2002, the Court of Appeals reversed the 6 March
2002 Order of RTC-Branch 257 and remanded the case for further
proceedings. The Supreme Court dismissed the appeal of respondents
2. The above-captioned case is a complaint for damages as a result of
with finality. Thus, on 27 September 2005, RTC-Branch 257 set the
the [herein respondents] conspiracy to make it appear as if there was
hearing for the presentation of evidence by respondent Metrobank for
an auction sale conducted on November 8, 2001 when in fact there
the application for preliminary injunction on 9 November 2005.[19]
was none. The properties subject of the said auction sale are the same
properties subject of Civil Case No. 01-0207.
On 2 November 2005, petitioners sought the inhibition of Acting
Executive Judge Rolando How of RTC-Branch 257, who presided over
3. Since the subject matter of both cases are the same properties and
Civil Case No. CV-01-0207. Their motion was granted and the case was
the parties of both cases are almost the same, and both cases have the
re-raffled to RTC-Branch 258.[20]

Page 33 of 72
same central issue of whether there was an auction sale, then
necessarily, both cases should be consolidated.
It is, therefore, the honest belief of the Court that since there is
identity of parties and the rights asserted, the allegations of the
defendant are found meritorious and with legal basis, hence, the
motion is GRANTED and this case is DISMISSED due to forum
shopping.

On 3 January 2006, respondents filed with RTC-Branch 195 an

Opposition to Motion to Consolidate with Prayer for Sanctions,
As regards the second motion, the same has already been mooted by
praying for the dismissal of the Complaint for Damages in Civil Case
the dismissal of this case.
No. CV-05-0402, on the ground of forum shopping.[23]

WHEREFORE, premises considered, the Motion for Reconsideration

In an Order dated 23 January 2006, RTC-Branch 195 granted the
filed by the defendants whereby this case is DISMISSED due to forum
Motion to Consolidate, and ordered that Civil Case No. CV-05-0402 be
shopping and the Manifestation and Motion likewise filed by the
transferred to RTC-Branch 258, which was hearing Civil Case No. 01-
defendants has already been MOOTED by the said dismissal.
0207.[24]

From the foregoing Order of RTC-Branch 258, petitioners filed a

After the two cases were consolidated, respondents filed two motions
Petition for Review on Certiorari with the Court of Appeals, docketed
before RTC-Branch 258: (1) Motion for Reconsideration of the Order
as CA-G.R. CV No. 88087.
dated 23 January 2006 of RTC-Branch 195, which granted the Motion
to Consolidate of petitioners; and (2) Manifestation and Motion raising
the ground of forum shopping, among the affirmative defenses of
In a Decision dated 31 January 2008, the Court of Appeals affirmed
respondents.[25] RTC-Branch 258 issued an Order on 3 July 2006,
the 3 July 2006 Order of RTC-Branch 258. The appellate court
granting the first Motion of respondents, thus, dismissing Civil Case
observed that although the defendants in the two cases were not
No. CV-05-0402 on the ground of forum shopping,[26] and
identical, they represented a community of interest. It also declared
consequently, rendering the second Motion of respondents moot. RTC-
that the cause of action of the two cases, upon which the recovery of
Branch 258 declared that the facts or claims submitted by petitioners,
damages was based, was the same, i.e., the feigned auction sale, such
the rights asserted, and the principal parties in the two cases were the
that the nullification of the foreclosure of the subject properties, which
same. RTC-Branch 258 held in its 3 July 2006 Order[27] that:
petitioners sought in Civil Case No. CV-01-0207, would render proper
the award for damages, claimed by petitioners in Civil Case No. CV-05-

Page 34 of 72
0402. Thus, judgment in either case would result in res judicata. The
Court of Appeals additionally noted that petitioners admitted in their
Motion for Consolidation that Civil Case No. CV-01-0207 and Civil Case
No. CV-05-0402 involved the same parties, central issue, and subject
properties.[28]In its Decision,[29] the appellate court decreed:
All told, the dismissal by the RTC-Br. 258 of the second case, Civil Case
No. CV-05-0402, on the ground of forum shopping should be upheld as
it is supported by law and jurisprudence.
WHEREFORE, the assailed order is AFFIRMED. Costs against the
[herein petitioners].
Petitioners filed a Motion for Reconsideration of the afore-mentioned
Decision, which the Court of Appeals denied in a Resolution dated 28
March 2008.[30]
Hence, the present Petition, in which the following issues are raised:
I
WHETHER OR NOT THE FIRST AND THE SECOND CASES HAVE THE
SAME ULTIMATE OBJECTIVE, I.E., TO HAVE THE AUCTION SALE BE
DECLARED AS NULL AND VOID.
II
WHETHER OR NOT THE OUTCOME OF THE FIRST CASE WOULD
AFFECT THE SECOND CASE.
Page 35 of 72
The only issue that needs to be determined in this case is whether or
not successively filing Civil Case No. CV-01-0207 and Civil Case No. CV-
05-0402 amounts to forum shopping.
The Court answers in the affirmative.
The proscription against forum shopping is found in Section 5, Rule 7
of the 1997 Rules of Court, which provides that:
SEC. 5. Certification against forum shopping.The plaintiff or principal
party shall certify under oath in the complaint or other initiatory
pleading asserting a claim for relief, or in a sworn certification
annexed thereto and simultaneously filed therewith: (a) that he has
not theretofore commenced any action or filed any claim involving the
same issues in any court, tribunal or quasi-judicial agency and, to the
best of his knowledge, no such other action or claim is pending
therein; (b) if there is such other pending action or claim, a complete
statement of the present status thereof; and (c) if he should thereafter
learn that the same or similar action or claim has been filed or is
pending, he shall report that fact within five (5) days therefrom to the
court wherein his aforesaid complaint or initiatory pleading has been
filed.
Failure to comply with the foregoing requirements shall not be
curable by mere amendment of the complaint or other initiatory
pleading but shall be cause for the dismissal of the case without
prejudice, unless otherwise provided, upon motion and after
hearing. The submission of a false certification or non-compliance
with any of the undertakings therein shall constitute indirect
contempt of court, without prejudice to the corresponding
administrative and criminal actions. If the acts of the party or his
counsel clearly constitutes willful and deliberate forum shopping, the
same shall be ground for summary dismissal with prejudice and shall
constitute direct contempt, as well as a cause for administrative
sanctions.
Forum shopping exists when a party repeatedly avails himself of
several judicial remedies in different courts, simultaneously or
successively, all substantially founded on the same transactions and
the same essential facts and circumstances, and all raising
substantially the same issues either pending in or already resolved
adversely by some other court.[32]
Ultimately, what is truly important in determining whether forum
shopping exists or not is the vexation caused the courts and party-
litigant by a party who asks different courts to rule on the same or
related causes and/or to grant the same or substantially the same
reliefs, in the process creating the possibility of conflicting decisions
being rendered by the different fora upon the same issue.[33]
Forum shopping can be committed in three ways: (1) filing multiple
cases based on the same cause of action and with the same prayer, the
previous case not having been resolved yet (where the ground for
dismissal is litis pendentia); (2) filing multiple cases based on the same
cause of action and the same prayer, the previous case having been
finally resolved (where the ground for dismissal is res judicata); and
Page 36 of 72
(3) filing multiple cases based on the same cause of action, but with
different prayers (splitting of causes of action, where the ground for
dismissal is also either litis pendentia or res judicata).[34]
In the present case, there is no dispute that petitioners failed to state
in the Certificate of Non-Forum Shopping, attached to their Verified
Complaint in Civil Case No. CV-05-0402 before RTC-Branch 195, the
existence of Civil Case No. CV-01-0207 pending before RTC-Branch
258. Nevertheless, petitioners insist that they are not guilty of forum
shopping, since (1) the two cases do not have the same ultimate
objective Civil Case No. CV-01-0207 seeks the annulment of the 8
November 2001 public auction and certificate of sale issued therein,
while Civil Case No. CV-05-0402 prays for the award of actual and
compensatory damages for respondents tortuous act of making it
appear that an auction sale actually took place on 8 November 2001;
and (2) the judgment in Civil Case No. CV-01-0207, on the annulment
of the foreclosure sale, would not affect the outcome of Civil Case No.
CV-05-0402, on the entitlement of petitioners to damages. The Court,
however, finds these arguments refuted by the allegations made by
petitioners themselves in their Complaints in both cases.
Petitioners committed forum shopping by filing multiple cases based
on the same cause of action, although with different prayers.
Sections 3 and 4, Rule 2 of the Rules of Court proscribe the splitting of
a single cause of action:
Section 3. A party may not institute more than one suit for a single
cause of action.
Section 4. Splitting a single cause of action; effect of.If two or more
suits are instituted on the basis of the same cause of action, the filing
of one or a judgment upon the merits in any one is available as a
ground for the dismissal of the others.
Forum shopping occurs although the actions seem to be different,
when it can be seen that there is a splitting of a cause of action. [35] A
cause of action is understood to be the delict or wrongful act or
omission committed by the defendant in violation of the primary
rights of the plaintiff. It is true that a single act or omission can violate
various rights at the same time, as when the act constitutes juridically
a violation of several separate and distinct legal obligations. However,
where there is only one delict or wrong, there is but a single cause of
action regardless of the number of rights that may have been violated
belonging to one person.[36]
Petitioners would like to make it appear that Civil Case No. CV-01-
0207 was solely concerned with the nullification of the auction sale
and certification of sale, while Civil Case No. CV-05-0402 was a totally
separate claim for damages. Yet, a review of the records reveals that
petitioners also included an explicit claim for damages in their
Amended Complaint[37] in Civil Case No. CV-01-0207, to wit:
Page 37 of 72
20-A. The abovementioned acts of [herein respondents] Metrobank
and Atty. Celestra are in gross violation of the injunction made under
Article 19 of the Civil Code, thereby entitling the [herein
petitioners] to recover damages from the said [respondents] in such
amount as may be awarded by the Court. (Emphasis ours.)
The abovementioned acts on which petitioners anchored their claim
to recover damages were described in the immediately preceding
paragraph in the same Amended Complaint, as follows [38]:
20. To reiterate, the [herein respondent] is fully aware that the
assessed fair market value of the real properties they seek to foreclose
and sell at public auction yet they have knowingly offered the said
properties for sale at the amount of EIGHTY EIGHT MILLION ONE
HUNDRED ONE THOUSAND NINETY THREE PESOS AND 98/100
(PhP88,101,093.98), obviously because they know that the
[petitioners] or any other third person would not be able to
seasonably raise the said amount and that said [respondent] Bank
would be the winner by default at the said sale at public auction.
Petitioners averred in their Amended Complaint in Civil Case No. CV-
01-0207 that the assessed fair market value of the subject properties
was P176,117,000.00.[39]
The Court observes that the damages being claimed by petitioners in
their Complaint in Civil Case No. CV-05-0402 were also occasioned by
the supposedly fictitious 8 November 2001 foreclosure sale, thus [40]:

24. The acts of [herein respondents] in making it appear that there
was an auction sale conducted on 8 November 2001 and the
subsequent execution of the fictitious Certificate of Sale is TORTIOUS,
which entitles the [herein petitioners] to file this instant action under
the principles of Human Relations, more particularly Articles 19, 20
and 21 of the Civil Code which provide that:
xxxx
25. As a result of the aforesaid acts of the [respondents], [petitioners]
buyers of the mortgaged properties had lost their interest anymore
(sic) in buying the said mortgaged properties for not less
than P175,000,000.00 as per appraisal report of the Philippine
Appraisal Co., Inc., a copy of which is hereto attached as Annex R and
made an integral part hereof;
26. The aborted sale of the [petitioners] mortgaged properties for the
said amount of not less than P175,000,000.00 could have paid off
[petitioners] loan obligation with [respondent] Metrobank for the
principal amount of P79,650,000.00 or even the contested
restructured amount of P103,450,391.84 (as stated in the petition for
foreclosure), which would have thus enabled the plaintiff to realize a
net amount of not less than SEVENTY MILLION PESOS, more or less;
27. By reason of the aforesaid acts of [respondents], [petitioners]
suffered and will continue to suffer actual or compensatory, moral and
Page 38 of 72
exemplary or corrective damages, the nature, extent and amount of
compensation of which will (sic) proven during the trial but not less
than SEVENTY MILLION PESOS.
There is no question that the claims of petitioners for damages in Civil
Case No. CV-01-0207 and Civil Case No. CV-05-0402 are premised on
the same cause of action, i.e., the purportedly wrongful conduct of
respondents in connection with the foreclosure sale of the subject
properties.
At first glance, said claims for damages may appear different. In Civil
Case No. CV-01-0207, the damages purportedly arose from the bad
faith of respondents in offering the subject properties at the auction
sale at a price much lower than the assessed fair market value of the
said properties, said to be P176,117,000.00. On the other hand, the
damages in Civil Case No. CV-05-0402, allegedly resulted from the
backing out of prospective buyers, who had initially offered to buy the
subject properties for not less than P175,000,000.00, because
respondents made it appear that the said properties were already sold
at the auction sale. Yet, it is worthy to note that petitioners quoted
closely similar values for the subject properties in both cases, against
which they measured the damages they supposedly
suffered. Evidently, this is due to the fact that petitioners actually
based the said values on the single appraisal report of the Philippine
Appraisal Company on the subject properties. Even though petitioners
did not specify in their Amended Complaint in Civil Case No. CV-01-
0207 the exact amount of damages they were seeking to recover,
leaving the same to the determination of the trial court, and
petitioners expressly prayed that they be awarded damages of not less
than P70,000,000.00 in their Complaint in Civil Case No. CV-05-0402,
3. Since the subject matter of both cases are the same properties and
petitioners cannot deny that all their claims for damages arose from
the parties of both cases are almost the same, and both cases have the
what they averred was a fictitious public auction sale of the subject
same central issue of whether there was an auction sale, then
properties.
necessarily, both cases should be consolidated.

Petitioners contention that the outcome of Civil Case No. CV-01-0207

will not determine that of Civil Case No. CV-05-0402 does not justify
the filing of separate cases. Even if it were assumed that the two cases
contain two separate remedies that are both available to petitioners,
these two remedies that arose from one wrongful act cannot be
pursued in two different cases. The rule against splitting a cause of
action is intended to prevent repeated litigation between the same
parties in regard to the same subject of controversy, to protect the
defendant from unnecessary vexation; and to avoid the costs and
expenses incident to numerous suits. It comes from the old
maxim nemo debet bis vexari, pro una et eadem causa (no man shall be
twice vexed for one and the same cause).[41]
Moreover, petitioners admitted in their Motion to
Consolidate[42] dated 27 December 2005 before RTC-Branch 195 that
both cases shared the same parties, the same central issue, and the
same subject property, viz:
2. The above-captioned case is a complaint for damages as a result of
the [herein respondents] conspiracy to make it appear as if there was
an auction sale conducted on November 8, 2001 when in fact there
was none. The properties subject of the said auction sale are the same
properties subject of Civil Case No. 01-0207.
If the forum shopping is not considered willful and deliberate, the
subsequent case shall be dismissed without prejudice, on the ground
of either litis pendentia or res judicata. However, if the forum shopping
is willful and deliberate, both (or all, if there are more than two)
actions shall be dismissed with prejudice..[43] In this case, petitioners
did not deliberately file Civil Case No. CV-05-0402 for the purpose
of seeking a favorable decision in another forum. Otherwise, they
would not have moved for the consolidation of both cases. Thus,
only Civil Case No. CV-05-0402 is dismissed and the hearing of Civil
Case No. CV-01-0207 before RTC-Branch 258 will be continued.
IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The
Decision dated 31 January 2008 and Resolution dated 28 March
2008 of the Court of Appeals in CA-G.R. CV No. 88087, affirming
the Order dated 3 July 2006 of Branch 258 of
the Regional Trial Court of Paraaque City, dismissing Civil Case No. CV-
05-0402, is AFFIRMED, without prejudice to the proceedings in Civil
Case No. CV-01-0207. Costs against petitioners.
SO ORDERED.

Page 39 of 72
Catalina Chu, et al. v. Spouses Fernando and
Trinidad Cunanan, G.R. No. 156185,
September 12, 2011
DECISION
BERSAMIN, J.:
If two or more suits are instituted on the basis of the same cause of
action, the filing of one or a judgment upon the merits in any one is
available as a ground for the dismissal of the others.[1]
We review the decision promulgated on November 19,
2002,[2] whereby the Court of Appeals (CA) dismissed the petitioners
amended complaint in Civil Case No. 12251 of the Regional Trial
Court, Branch 41, in San Fernando City, Pampanga (RTC) for being
barred by res judicata.
Antecedents
On September 30, 1986, Spouses Manuel and Catalina Chu (Chus)
executed a deed of sale with assumption of mortgage[3]involving their
five parcels of land situated in Saguin, San Fernando City, Pampanga,
registered under Transfer Certificate of Title (TCT) No. 198470-R, TCT
No. 198471-R, TCT No. 198472-R, TCT No. 198473-R, and TCT No.
199556-R, all of the Office of the Registry of Deeds of the Province of
Pampanga, in favor of Trinidad N. Cunanan (Cunanan) for the
consideration ofP5,161,090.00. They also executed a so-called side
Page 40 of 72
agreement, whereby they clarified that Cunanan had paid
only P1,000,000.00 to the Chus despite the Chus, as vendors, having
acknowledged receiving P5,161,090.00; that the amount
of P1,600,000.00 was to be paid directly to Benito Co and to Security
Bank and Trust Company (SBTC) in whose favor the five lots had been
mortgaged;and that Cunanan would pay the balance of P2,561.90.00
within three months, with a grace period of one month subject to
3%/month interest on any remaining unpaid amount. The parties
further stipulated that the ownership of the lots would remain with
the Chus as the vendors and would be transferred to Cunanan only
upon complete payment of the total consideration and compliance
with the terms of the deed of sale with assumption of mortgage.[4]
Thereafter, the Chus executed a special power of attorney authorizing
Cunanan to borrow P5,161,090.00 from any banking institution and to
mortgage the five lots as security, and then to deliver the proceeds to
the Chus net of the balance of the mortgage obligation and the
downpayment.[5]
Cunanan was able to transfer the title of the five lots to her name
without the knowledge of the Chus, and to borrow money with the lots
as security without paying the balance of the purchase price to the
Chus. She later transferred two of the lots to Spouses Amado and
Gloria Carlos (Carloses) on July 29, 1987. As a result, on March 18,
1988, the Chus caused the annotation of an unpaid vendors lien on
three of the lots. Nonetheless, Cunanan still assigned the remaining
three lots to Cool Town Realty on May 25, 1989 despite the
annotation.[6]
In February 1988, the Chus commenced Civil Case No. G-1936 in the
RTC to recover the unpaid balance from Spouses Fernando and
Trinidad Cunanan (Cunanans). Five years later, on April 19, 1993, the
Chus amended the complaint to seek the annulment of the deed of sale
with assumption of mortgage and of the TCTs issued pursuant to the
deed, and to recover damages. They impleaded Cool Town Realty and
Development Corporation (Cool Town Realty), and the Office of the
Registry of Deeds of Pampanga as defendants in addition to the
Cunanans.[7]
Considering that the Carloses had meanwhile sold the two lots to
Benelda Estate Development Corporation (Benelda Estate) in 1995,
the Chus further amended the complaint in Civil Case No. G-1936 to
implead Benelda Estate as additional defendant. In due course,
Benelda Estate filed its answer with a motion to dismiss, claiming,
among others, that the amended complaint stated no cause of action
because it had acted in good faith in buying the affected lots, exerting
all efforts to verify the authenticity of the titles, and had found no
defect in them. After the RTC denied its motion to dismiss, Benelda
Estate assailed the denial on certiorari in the CA, which annulled the
RTCs denial for being tainted with grave abuse of discretion and
dismissed Civil Case No. G-1936 as against Benelda Estate. On March
1, 2001, the Court upheld the dismissal of Civil Case No. G-1936 in G.R.
No. 142313 entitled Chu, Sr. v. Benelda Estate Development
Corporation.[8]
On December 2, 1999, the Chus, the Cunanans, and Cool Town Realty
entered into a compromise agreement,[9] whereby the Cunanans
transferred to the Chus their 50% share in all the parcels of
land situated in Saguin, San Fernando, Pampanga registered in the
Page 41 of 72
name of Cool Town Realty for and in consideration of the full
settlement of their case. The RTC approved the compromise
agreement in a partial decision dated January 25, 2000.[10]
Thereafter, on April 30, 2001, the petitioners herein (i.e., Catalina Chu
and her children) brought another suit, Civil Case No. 12251, against
the Carloses and Benelda Estate,[11] seeking the cancellation of the
TCTs of the two lots in the name of Benelda Estate, and the issuance of
new TCTs in their favor, plus damages.
The petitioners amended their complaint in Civil Case No. 12251 on
February 4, 2002 to implead the Cunanans as additional
defendants.[12]
The Cunanans moved to dismiss the amended complaint based on two
grounds, namely: (a) bar by prior judgment, and (b) the claim or
demand had been paid, waived, and abandoned. Benelda Estate
likewise moved to dismiss the amended complaint, citing as grounds:
(a) forum shopping; (b) bar by prior judgment, and (c) failure to state
a cause of action. On their part, the Carloses raised affirmative
defenses in their answer, namely: (a) the failure to state a cause of
action; (b) res judicata or bar by prior judgment; and (c) bar by statute
of limitations.
On April 25, 2002, the RTC denied both motions to dismiss,[13] holding
that the amended complaint stated a cause of action against all the
defendants; that the action was not barred by res judicata because
there was no identity of parties and subject matter between Civil Case
No.12251 and Civil Case No. G-1936; and that the Cunanans did not
establish that the petitioners had waived and abandoned their claim ASIDE and a new one is hereby rendered DISMISSING the Amended
or that their claim had been paid by virtue of the compromise Complaint in Civil Case No. 12251.
agreement, pointing out that the compromise agreement involved only
the three parcels of land registered in the name of Cool Town
Realty.[14] No costs.
The Cunanans sought reconsideration, but their motion was denied on
May 31, 2002.[15]
SO ORDERED.[18]

On September 2, 2002, the Cunanans filed a petition for certiorari in

the CA (SP-72558), assailing the RTCs denial of their motion to Hence, this appeal.
dismiss and motion for reconsideration.[16] Issue

On November 19, 2002, the CA promulgated its decision,[17] granting Was Civil Case No. 12251 barred by res judicata although
the petition for certiorari and nullifying the challenged orders of the the compromise agreement did not expressly include Benelda Estate as
RTC. The CA ruled that the compromise agreement had ended the legal a party and although the compromise agreement made no reference to
controversy between the parties with respect to the cause of action the lots now registered in Benelda Estates name?
arising from the deed of sale with assumption of mortgage covering all
the five parcels of land; that Civil Case No. G-1936 and Civil Case
No.12251 involved the violation by the Cunanans of the same legal
Ruling
right under the deed of sale with assumption of mortgage; and that the
filing of Civil Case No.12251 contravened the rule against splitting of a
cause of action, and rendered Civil Case No.12251 subject of a motion
We deny the petition for review.
to dismiss based on bar by res judicata. The CA disposed thusly:
I
The petitioners contend that the compromise agreement did not apply
WHEREFORE, premises considered, the present petition for certiorari
or extend to the Carloses and Benelda Estate; hence, their Civil Case
is hereby GIVEN DUE COURSE and the writ prayed for, accordingly
No. 12251 was not barred by res judicata.
GRANTED. Consequently, the challenged Orders of the respondent
court denying the motions to dismiss are hereby ANNULLED and SET

Page 42 of 72
We disagree.
A compromise agreement is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one already
commenced.[19] It encompasses the objects specifically stated therein,
although it may include other objects by necessary implication,[20] and
is binding on the contracting parties, being expressly acknowledged as
a juridical agreement between them.[21] It has the effect and authority
of res judicata upon the parties.[22]
In the construction or interpretation of a compromise agreement, the
intention of the parties is to be ascertained from the agreement itself,
and effect should be given to that intention.[23] Thus, the compromise
agreement must be read as a whole.
The following pertinent portions of the compromise
agreement indicate that the parties intended to thereby settle all their
claims against each other, to wit:
1. That the defendants SPOUSES TRINIDAD N.CUNANAN and
FERNANDO C.CUNANAN for and in consideration of the full
settlement of their case in the above-entitled case, hereby
TRANSFER, DELIVER, and CONVEY unto the plaintiffs all their rights,
interest, benefits, participation, possession and ownership which
consists of FIFTY (50%) percent share on all the parcels of land
situated in Saguin, San Fernando Pampanga now registered in the
name of defendant, COOL TOWN REALTY & DEVELOPMENT
Page 43 of 72
CORPORATION, as particularly evidenced by the corresponding
Transfer Certificates of Titles xxx
xxxx
6. That the plaintiffs and the defendant herein are waiving,
abandoning, surrendering, quitclaiming, releasing, relinquishing any
and all their respective claims against each other as alleged in the
pleadings they respectively filed in connection with this
case.[24] (bold emphasis supplied)
The intent of the parties to settle all their claims against each other is
expressed in the phrase any and all their respective claims against each
other as alleged in the pleadings they respectively filed in connection
with this case, which was broad enough to cover whatever claims the
petitioners might assert based on the deed of sale with assumption of
mortgage.
There is no question that the deed of sale with assumption of
mortgage covered all the five lots, to wit:
WHEREAS, the VENDORS are willing to sell the above-described
properties and the VENDEE is willing to buy the same at FIFTY FIVE
(P55.00) PESOS, Philippine Currency, per square meter, or a total
consideration of FIVE MILLION ONE HUNDRED SIXTY ONE
THOUSAND and NINETY (P5,161,090.00) PESOS, Philippine
Currency.[25]
To limit the compromise agreement only to the three lots mentioned
therein would contravene the avowed objective of Civil Case No. G-
1936 to enforce or to rescind the entire deed of sale with assumption of
mortgage. Such interpretation is akin to saying that the
Cunanans separately sold the five lots, which is not the truth. For
one, Civil Case No. G-1936 did not demand separate amounts for each
of the purchased lots. Also, the compromise agreement did not state
that the value being thereby transferred to the petitioners by the
Cunanans corresponded only to that of the three lots.
Apparently, the petitioners were guilty of splitting their single cause of
action to enforce or rescind the deed of sale with assumption of
mortgage. Splitting a single cause of action is the act of dividing a
single or indivisible cause of action into several parts or claims and
instituting two or more actions upon them.[26] A single cause of action
or entire claim or demand cannot be split up or divided in order to be
made the subject of two or more different actions.[27] Thus, Section 4,
Rule 2 of the Rules of Courtexpressly prohibits splitting of a single
cause of action, viz:
Section 4. Splitting a single cause of action; effect of. If two or more
suits are instituted on the basis of the same cause of action, the filing
of one or a judgment upon the merits in any one is available as a
ground for the dismissal of the others. (4a)
The petitioners were not at liberty to split their demand to enforce or
rescind the deed of sale with assumption of mortgage and to prosecute
piecemeal or present only a portion of the grounds upon which a
special relief was sought under the deed of sale with assumption of
Page 44 of 72
mortgage, and then to leave the rest to be presented in another suit;
otherwise, there would be no end to litigation.[28]Their splitting
violated the policy against multiplicity of suits, whose primary
objective was to avoid unduly burdening the dockets of the courts.
Their contravention of the policy merited the dismissal of Civil Case
No. 12251 on the ground of bar by res judicata.
Res judicata means a matter adjudged, a thing judicially acted upon or
decided; a thing or matter settled by judgment.[29] The doctrine of res
judicata is an old axiom of law, dictated by wisdom and sanctified by
age, and founded on the broad principle that it is to the interest of the
public that there should be an end to litigation by the same parties
over a subject once fully and fairly adjudicated. It has been
appropriately said that the doctrine is a rule pervading every well-
regulated system of jurisprudence, and is put upon two grounds
embodied in various maxims of the common law: the one, public
policy and necessity, which makes it to the interest of the State that
there should be an end to litigation interest reipublicae ut sit finis
litium; the other, the hardship on the individual that he should be
vexed twice for one and the same cause nemo debet bis vexari pro una
et eadem causa. A contrary doctrine would subject the public peace
and quiet to the will and neglect of individuals and prefer the
gratification of the litigious disposition on the part of suitors to the
preservation of the public tranquillity and happiness.[30]
Under the doctrine of res judicata, a final judgment or decree on the
merits rendered by a court of competent jurisdiction is conclusive of
the rights of the parties or their privies in all later suits and on all
points and matters determined in the previous suit.[31]The foundation
principle upon which the doctrine rests is that the parties ought not to
be permitted to litigate the same issue more than once; that when a
right or fact has been judicially tried and determined by a court of
competent jurisdiction, so long as it remains unreversed, should be
conclusive upon the parties and those in privity with them in law or
estate.[32]
Yet, in order that res judicata may bar the institution of a subsequent
action, the following requisites must concur: (a) the former judgment
must be final; (b) it must have been rendered by a court having
jurisdiction of the subject matter and the parties; (c) it must be a
judgment on the merits; and (d) there must be between the first and
second actions (i) identity of parties, (ii) identity of the subject matter,
and (iii) identity of cause of action.[33]
The first requisite was attendant. Civil Case No. G-1936 was already
terminated under the compromise agreement, for the judgment, being
upon a compromise, was immediately final and unappealable. As to
the second requisite, the RTC had jurisdiction over the cause of action
in Civil Case No. G-1936 for the enforcement or rescission of the deed
of sale with assumption of mortgage, which was an action whose
subject matter was not capable of pecuniary estimation. That
the compromise agreement explicitly settled the entirety of Civil Case
No. G-1936 by resolving all the claims of the parties against each
other indicated that the third requisite was also satisfied.[34]
But was there an identity of parties, of subject matter, and of causes of
action between Civil Case No.G-1936 and Civil Case No. 12251?
Page 45 of 72
There is identity of parties when the parties in both actions are the
same, or there is privity between them, or they are successors-in-
interest by title subsequent to the commencement of the action
litigating for the same thing and under the same title and in the same
capacity.[35] The requirement of the identity of parties was fully met,
because the Chus, on the one hand, and the Cunanans, on the other
hand, were the parties in both cases along with their respective privies.
The fact that the Carloses and Benelda Estate, defendants in Civil Case
No. 12251, were not parties in the compromise agreement was
inconsequential, for they were also the privies of the Cunanans as
transferees and successors-in-interest. It is settled that the absolute
identity of parties was not a condition sine qua non for res judicata to
apply, because a shared identity of interest sufficed.[36] Mere
substantial identity of parties, or even community of interests
between parties in the prior and subsequent cases, even if the latter
were not impleaded in the first case, was sufficient.[37]
As to identity of the subject matter, both actions dealt with the
properties involved in the deed of sale with assumption of mortgage.
Identity of the causes of action was also met, because Case No. G-1936
and Civil Case No. 12251 were rooted in one and the same cause of
action the failure of Cunanan to pay in full the purchase price of the
five lots subject of the deed of sale with assumption of mortgage. In
other words, Civil Case No. 12251 reprised Civil Case No. G-1936, the
only difference between them being that the petitioners alleged in the
former that Benelda Estate was not also a purchaser for value and in
good faith.[38]
In fine, the rights and obligations of the parties vis--vis the five lots
were all defined and governed by the deed of sale with assumption of
mortgage, the only contract between them. That contract was single
and indivisible, as far as they were concerned. Consequently, the Chus
could not properly proceed against the respondents in Civil Case No.
12251, despite the silence of the compromise agreement as to the
Carloses and Benelda Estate, because there can only be one action
where the contract is entire, and the breach total, and the petitioners
must therein recover all their claims and damages.[39] The Chus could
not be permitted to split up a single cause of action and make that
single cause of action the basis of several suits.[40]
WHEREFORE, we deny the petition for review on certiorari, and
affirm the decision promulgated in CA-G.R. SP No. 72558.
The petitioners shall pay the costs of suit.
SO ORDERED.
NM Rothschild & Sons (AUSTRALIA) Limited,
v. Lepanto Consolidated Mining Company, G.R.
No. 175799, November 28, 2011
DECISION
LEONARDO-DE CASTRO, J.:
Page 46 of 72
This is a Petition for Review on Certiorari assailing the Decision[1] of
the Court of Appeals dated September 8, 2006 in CA-G.R. SP No. 94382
and its Resolution[2] dated December 12, 2006, denying the Motion for
Reconsideration.
On August 30, 2005, respondent Lepanto Consolidated Mining
Company filed with the Regional Trial Court (RTC) of Makati City a
Complaint[3] against petitioner NM Rothschild & Sons (Australia)
Limited praying for a judgment declaring the loan and hedging
contracts between the parties void for being contrary to Article
2018[4] of the Civil Code of the Philippines and for damages. The
Complaint was docketed as Civil Case No. 05-782, and was raffled to
Branch 150. Upon respondents (plaintiffs) motion, the trial court
authorized respondents counsel to personally bring the summons and
Complaint to the Philippine Consulate General in Sydney, Australia for
the latter office to effect service of summons on petitioner
(defendant).
On October 20, 2005, petitioner filed a Special Appearance With
Motion to Dismiss[5] praying for the dismissal of the Complaint on the
following grounds: (a) the court has not acquired jurisdiction over the
person of petitioner due to the defective and improper service of
summons; (b) the Complaint failed to state a cause of action and
respondent does not have any against petitioner; (c) the action is
barred by estoppel; and (d) respondent did not come to court with
clean hands.
On November 29, 2005, petitioner filed two Motions: (1) a Motion for
Leave to take the deposition of Mr. Paul Murray (Director, Risk
Management of petitioner) before the Philippine Consul General; and
(2) a Motion for Leave to Serve Interrogatories on respondent.
On December 9, 2005, the trial court issued an Order[6] denying the
Motion to Dismiss. According to the trial court, there was a proper
service of summons through the Department of Foreign Affairs (DFA)
on account of the fact that the defendant has neither applied for a
license to do business in the Philippines, nor filed with the Securities
and Exchange Commission (SEC) a Written Power of Attorney
designating some person on whom summons and other legal
processes maybe served. The trial court also held that the Complaint
sufficiently stated a cause of action. The other allegations in the
Motion to Dismiss were brushed aside as matters of defense which can
best be ventilated during the trial.
On December 27, 2005, petitioner filed a Motion for
Reconsideration.[7] On March 6, 2006, the trial court issued an Order
denying the December 27, 2005 Motion for Reconsideration and
disallowed the twin Motions for Leave to take deposition and serve
written interrogatories.[8]
order, it cannot be the subject of a Petition for Certiorari, and may only
be reviewed in the ordinary course of law by an appeal from the
judgment after trial. On December 12, 2006, the Court of Appeals
rendered the assailed Resolution denying the petitioners Motion for
Reconsideration.
Meanwhile, on December 28, 2006, the trial court issued an Order
directing respondent to answer some of the questions in petitioners
Interrogatories to Plaintiff dated September 7, 2006.
Notwithstanding the foregoing, petitioner filed the present petition
assailing the September 8, 2006 Decision and the December 12, 2006
Resolution of the Court of Appeals. Arguing against the ruling of the
appellate court, petitioner insists that (a) an order denying a motion
to dismiss may be the proper subject of a petition for certiorari; and
(b) the trial court committed grave abuse of discretion in not finding
that it had not validly acquired jurisdiction over petitioner and that
the plaintiff had no cause of action.

Respondent, on the other hand, posits that: (a) the present Petition
On April 3, 2006, petitioner sought redress via a Petition
should be dismissed for not being filed by a real party in interest and
for Certiorari[9] with the Court of Appeals, alleging that the trial court
for lack of a proper verification and certificate of non-forum shopping;
committed grave abuse of discretion in denying its Motion to
(b) the Court of Appeals correctly ruled that certiorariwas not the
Dismiss. The Petition was docketed as CA-G.R. SP No. 94382.
proper remedy; and (c) the trial court correctly denied petitioners
motion to dismiss.
On September 8, 2006, the Court of Appeals rendered the assailed
Decision dismissing the Petition for Certiorari. The Court of Appeals
Our discussion of the issues raised by the parties follows:
ruled that since the denial of a Motion to Dismiss is an interlocutory

Page 47 of 72
Whether petitioner is a real party in interest
Respondent argues that the present Petition should be dismissed on
the ground that petitioner no longer existed as a corporation at the
time said Petition was filed on February 1, 2007. Respondent points
out that as of the date of the filing of the Petition, there is no such
corporation that goes by the name NM Rothschild and Sons (Australia)
Limited. Thus, according to respondent, the present Petition was not
filed by a real party in interest, citing our ruling in Philips Export B.V. v.
Court of Appeals,[10] wherein we held:
A name is peculiarly important as necessary to the very existence of a
corporation (American Steel Foundries vs. Robertson, 269 US 372, 70
L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42;
First National Bank vs. Huntington Distilling Co., 40 W Va 530, 23 SE
792). Its name is one of its attributes, an element of its existence, and
essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general
rule as to corporations is that each corporation must have a name by
which it is to sue and be sued and do all legal acts. The name of a
corporation in this respect designates the corporation in the same
manner as the name of an individual designates the person (Cincinnati
Cooperage Co. vs. Bate, 96 Ky 356, 26 SW 538; Newport Mechanics
Mfg. Co. vs. Starbird, 10 NH 123); and the right to use its corporate
name is as much a part of the corporate franchise as any other
privilege granted (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or
375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial
Association, 18 RI 165, 26 A 36).[11]
Page 48 of 72
In its Memorandum[12] before this Court, petitioner started to refer to
itself as Investec Australia Limited (formerly NM Rothschild & Sons
[Australia] Limited) and captioned said Memorandum
accordingly. Petitioner claims that NM Rothschild and Sons (Australia)
Limited still exists as a corporation under the laws of Australia under
said new name. It presented before us documents evidencing the
process in the Australian Securities & Investment Commission on the
change of petitioners company name from NM Rothschild and Sons
(Australia) Limited to Investec Australia Limited.[13]
We find the submissions of petitioner on the change of its corporate
name satisfactory and resolve not to dismiss the present Petition for
Review on the ground of not being prosecuted under the name of the
real party in interest. While we stand by our pronouncement in Philips
Export on the importance of the corporate name to the very existence
of corporations and the significance thereof in the corporations right
to sue, we shall not go so far as to dismiss a case filed by the proper
party using its former name when adequate identification is
presented. A real party in interest is the party who stands to be
benefited or injured by the judgment in the suit, or the party entitled
to the avails of the suit.[14] There is no doubt in our minds that the
party who filed the present Petition, having presented sufficient
evidence of its identity and being represented by the same counsel as
that of the defendant in the case sought to be dismissed, is the entity
that will be benefited if this Court grants the dismissal prayed for.
Since the main objection of respondent to the verification and
certification against forum shopping likewise depends on the
supposed inexistence of the corporation named therein, we give no
credit to said objection in light of the foregoing discussion.
Propriety of the Resort to a Petition for Certiorari with the Court
of Appeals
The resolution of the present Petition therefore entails an inquiry into
whether the Court of Appeals correctly ruled that the trial court did
not commit grave abuse of discretion in its denial of petitioners
Motion to Dismiss. A mere error in judgment on the part of the trial
court would undeniably be inadequate for us to reverse the
disposition by the Court of Appeals.

We have held time and again that an order denying a Motion to Issues more properly ventilated during the trial of the case
Dismiss is an interlocutory order which neither terminates nor finally
As previously stated, petitioner seeks the dismissal of Civil Case No.
disposes of a case as it leaves something to be done by the court
05-782 on the following grounds: (a) lack of jurisdiction over the
before the case is finally decided on the merits. The general rule,
person of petitioner due to the defective and improper service of
therefore, is that the denial of a Motion to Dismiss cannot be
summons; (b) failure of the Complaint to state a cause of action and
questioned in a special civil action for Certiorari which is a remedy
absence of a cause of action; (c) the action is barred by estoppel; and
designed to correct errors of jurisdiction and not errors of
(d) respondent did not come to court with clean hands.
judgment.[15] However, we have likewise held that when the denial of
the Motion to Dismiss is tainted with grave abuse of discretion, the
grant of the extraordinary remedy of Certiorari may be justified. By
As correctly ruled by both the trial court and the Court of Appeals, the
grave abuse of discretion is meant:
alleged absence of a cause of action (as opposed to the failure to state
a cause of action), the alleged estoppel on the part of petitioner, and
the argument that respondent is in pari delicto in the execution of the
[S]uch capricious and whimsical exercise of judgment that is
challenged contracts, are not grounds in a Motion to Dismiss as
equivalent to lack of jurisdiction. The abuse of discretion must be
enumerated in Section 1, Rule 16[17] of the Rules of Court. Rather, such
grave as where the power is exercised in an arbitrary or despotic
defenses raise evidentiary issues closely related to the validity and/or
manner by reason of passion or personal hostility, and must be so
existence of respondents alleged cause of action and should therefore
patent and gross as to amount to an evasion of positive duty or to a
be threshed out during the trial.
virtual refusal to perform the duty enjoined by or to act all in
contemplation of law.[16]
As regards the allegation of failure to state a cause of action, while the
same is usually available as a ground in a Motion to Dismiss, said

Page 49 of 72
ground cannot be ruled upon in the present Petition without going
into the very merits of the main case.
It is basic that [a] cause of action is the act or omission by which a
party violates a right of another.[18] Its elements are the following: (1)
a right existing in favor of the plaintiff, (2) a duty on the part of the
defendant to respect the plaintiff's right, and (3) an act or omission of
the defendant in violation of such right.[19] We have held that to
sustain a Motion to Dismiss for lack of cause of action, the complaint
must show that the claim for relief does not exist and not only that the
claim was defectively stated or is ambiguous, indefinite or
uncertain.[20]
The trial court held that the Complaint in the case at bar contains all
the three elements of a cause of action, i.e., it alleges that: (1) plaintiff
has the right to ask for the declaration of nullity of the Hedging
Contracts for being null and void and contrary to Article 2018 of the
Civil Code of the Philippines; (2) defendant has the corresponding
obligation not to enforce the Hedging Contracts because they are in
the nature of wagering or gambling agreements and therefore the
transactions implementing those contracts are null and void under
Philippine laws; and (3) defendant ignored the advice and intends to
enforce the Hedging Contracts by demanding financial payments due
therefrom.[21]
The rule is that in a Motion to Dismiss, a defendant hypothetically
admits the truth of the material allegations of the ultimate facts
contained in the plaintiff's complaint.[22] However, this principle of
Page 50 of 72
hypothetical admission admits of exceptions. Thus, in Tan v. Court of
Appeals, [23] we held:
The flaw in this conclusion is that, while conveniently echoing the
general rule that averments in the complaint are deemed
hypothetically admitted upon the filing of a motion to dismiss
grounded on the failure to state a cause of action, it did not take into
account the equally established limitations to such rule, i.e., that a
motion to dismiss does not admit the truth of mere epithets of
fraud; nor allegations of legal conclusions; nor an erroneous
statement of law; nor mere inferences or conclusions from facts not
stated; nor mere conclusions of law; nor allegations of fact the falsity
of which is subject to judicial notice; nor matters of evidence; nor
surplusage and irrelevant matter; nor scandalous matter inserted
merely to insult the opposing party; nor to legally impossible facts;
nor to facts which appear unfounded by a record incorporated in the
pleading, or by a document referred to; and, nor to general averments
contradicted by more specific averments. A more judicious resolution
of a motion to dismiss, therefore, necessitates that the court be not
restricted to the consideration of the facts alleged in the complaint
and inferences fairly deducible therefrom. Courts may consider other
facts within the range of judicial notice as well as relevant laws and
jurisprudence which the courts are bound to take into account,
and they are also fairly entitled to examine records/documents
duly incorporated into the complaint by the pleader himself in
ruling on the demurrer to the complaint.[24] (Emphases supplied.)
In the case at bar, respondent asserts in the Complaint that the
Hedging Contracts are void for being contrary to Article 2018[25] of the
Having come to the conclusion that the complaint states a valid cause
Civil Code. Respondent claims that under the Hedging Contracts,
of action for breach of the right of first refusal and that the trial court
despite the express stipulation for deliveries of gold, the intention of
should thus not have dismissed the complaint, we find no more need
the parties was allegedly merely to compel each other to pay the
to pass upon the question of whether the complaint states a cause of
difference between the value of the gold at the forward price stated in
action for damages or whether the complaint is barred by
the contract and its market price at the supposed time of delivery.
estoppel or laches. As these matters require presentation and/or
determination of facts, they can be best resolved after trial on the
merits.[28] (Emphases supplied.)
Whether such an agreement is void is a mere allegation of a
conclusion of law, which therefore cannot be hypothetically
admitted. Quite properly, the relevant portions of the contracts sought
On the proposition in the Motion to Dismiss that respondent has come
to be nullified, as well as a copy of the contract itself, are incorporated
to court with unclean hands, suffice it to state that the determination
in the Complaint. The determination of whether or not the Complaint
of whether one acted in bad faith and whether damages may be
stated a cause of action would therefore involve an inquiry into
awarded is evidentiary in nature. Thus, we have previously held that
whether or not the assailed contracts are void under Philippine
[a]s a matter of defense, it can be best passed upon after a full-blown
laws. This is, precisely, the very issue to be determined in Civil Case
trial on the merits.[29]
No. 05-782. Indeed, petitioners defense against the charge of nullity of
the Hedging Contracts is the purported intent of the parties that actual
deliveries of gold be made pursuant thereto. Such a defense requires
the presentation of evidence on the merits of the case. An issue that Jurisdiction over the person of petitioner
requires the contravention of the allegations of the complaint, as well
as the full ventilation, in effect, of the main merits of the case, should
not be within the province of a mere Motion to Dismiss.[26] The trial Petitioner alleges that the RTC has not acquired jurisdiction over its
court, therefore, correctly denied the Motion to Dismiss on this person on account of the improper service of summons.Summons was
ground. served on petitioner through the DFA, with respondents counsel
personally bringing the summons and Complaint to the Philippine
Consulate General in Sydney, Australia.
It is also settled in jurisprudence that allegations of estoppel and bad
faith require proof. Thus, in Paraaque Kings Enterprises, Inc. v. Court of
Appeals,[27] we ruled: In the pleadings filed by the parties before this Court, the parties
entered into a lengthy debate as to whether or not petitioner is doing

Page 51 of 72
business in the Philippines. However, such discussion is completely
irrelevant in the case at bar, for two reasons. Firstly, since the
Complaint was filed on August 30, 2005, the provisions of the 1997
Rules of Civil Procedure govern the service of summons.Section 12,
Rule 14 of said rules provides:
Sec. 12. Service upon foreign private juridical entity. When the
defendant is a foreign private juridical entity which has transacted
business in the Philippines, service may be made on its resident
agent designated in accordance with law for that purpose, or, if there
be no such agent, on the government official designated by law to that
effect, or on any of its officers or agents within the Philippines.
(Emphasis supplied.)
This is a significant amendment of the former Section 14 of said rule
which previously provided:
Sec. 14. Service upon private foreign corporations. If the defendant is a
foreign corporation, or a nonresident joint stock company or
association, doing business in the Philippines, service may be made
on its resident agent designated in accordance with law for that
purpose, or if there be no such agent, on the government official
designated by law to that effect, or on any of its officers or agents
within the Philippines. (Emphasis supplied.)
Page 52 of 72
The coverage of the present rule is thus broader.[30] Secondly, the
service of summons to petitioner through the DFA by the conveyance
of the summons to the Philippine Consulate General in Sydney,
Australia was clearly made not through the above-quoted Section 12,
but pursuant to Section 15 of the same rule which provides:
Sec. 15. Extraterritorial service. When the defendant does not reside
and is not found in the Philippines, and the action affects the personal
status of the plaintiff or relates to, or the subject of which is property
within the Philippines, in which the defendant has or claims a lien or
interest, actual or contingent, or in which the relief demanded
consists, wholly or in part, in excluding the defendant from any
interest therein, or the property of the defendant has been attached
within the Philippines, service may, by leave of court, be effected out
of the Philippines by personal service as under section 6; or by
publication in a newspaper of general circulation in such places and
for such time as the court may order, in which case a copy of the
summons and order of the court shall be sent by registered mail to the
last known address of the defendant, or in any other manner the court
may deem sufficient. Any order granting such leave shall specify a
reasonable time, which shall not be less than sixty (60) days after
notice, within which the defendant must answer.
Respondent argues[31] that extraterritorial service of summons upon
foreign private juridical entities is not proscribed under the Rules of
Court, and is in fact within the authority of the trial court to adopt, in
accordance with Section 6, Rule 135:
Sec. 6. Means to carry jurisdiction into effect. When by law jurisdiction
is conferred on a court or judicial officer, all auxiliary writs, processes
and other means necessary to carry it into effect may be employed by
such court or officer; and if the procedure to be followed in the
exercise of such jurisdiction is not specifically pointed out by law or by
these rules, any suitable process or mode of proceeding may be
adopted which appears comformable to the spirit of said law or rules.
Section 15, Rule 14, however, is the specific provision dealing
precisely with the service of summons on a defendant which does not
reside and is not found in the Philippines, while Rule 135 (which is in
Part V of the Rules of Court entitled Legal Ethics) concerns the general
powers and duties of courts and judicial officers.
Breaking down Section 15, Rule 14, it is apparent that there are only
four instances wherein a defendant who is a non-resident and is not
found in the country may be served with summons by extraterritorial
service, to wit: (1) when the action affects the personal status of the
plaintiffs; (2) when the action relates to, or the subject of which is
property, within the Philippines, in which the defendant claims a lien
or an interest, actual or contingent; (3) when the relief demanded in
such action consists, wholly or in part, in excluding the defendant from
any interest in property located in the Philippines; and (4) when the
defendant non-resident's property has been attached within the
Philippines. In these instances, service of summons may be effected by
(a) personal service out of the country, with leave of court; (b)
publication, also with leave of court; or (c) any other manner the court
may deem sufficient.[32]
Page 53 of 72
Proceeding from this enumeration, we held in Perkin Elmer Singapore
Pte Ltd. v. Dakila Trading Corporation[33] that:
Undoubtedly, extraterritorial service of summons applies only
where the action is in rem or quasi in rem, but not if an action is in
personam.
When the case instituted is an action in rem or quasi in rem, Philippine
courts already have jurisdiction to hear and decide the case because,
in actions in rem and quasi in rem, jurisdiction over the person of the
defendant is not a prerequisite to confer jurisdiction on the court,
provided that the court acquires jurisdiction over the res. Thus, in
such instance, extraterritorial service of summons can be made upon
the defendant. The said extraterritorial service of summons is not for
the purpose of vesting the court with jurisdiction, but for complying
with the requirements of fair play or due process, so that the
defendant will be informed of the pendency of the action against him
and the possibility that property in the Philippines belonging to him or
in which he has an interest may be subjected to a judgment in favor of
the plaintiff, and he can thereby take steps to protect his interest if he
is so minded. On the other hand, when the defendant or
respondent does not reside and is not found in the Philippines,
and the action involved is in personam, Philippine courts cannot
try any case against him because of the impossibility of acquiring
jurisdiction over his person unless he voluntarily appears in
court.[34] (Emphases supplied.)
In Domagas v. Jensen,[35] we held that:
[T]he aim and object of an action determine its character. Whether a
proceeding is in rem, or in personam, or quasi in rem for that matter, is
determined by its nature and purpose, and by these only. A
proceeding in personam is a proceeding to enforce personal rights and
obligations brought against the person and is based on the jurisdiction
of the person, although it may involve his right to, or the exercise of
ownership of, specific property, or seek to compel him to control or
dispose of it in accordance with the mandate of the court. The purpose
of a proceeding in personam is to impose, through the judgment of a
court, some responsibility or liability directly upon the person of the
defendant. Of this character are suits to compel a defendant to
specifically perform some act or actions to fasten a pecuniary liability
on him.[36]
It is likewise settled that [a]n action in personam is lodged against a
person based on personal liability; an action in rem is directed against
the thing itself instead of the person; while an action quasi in
rem names a person as defendant, but its object is to subject that
persons interest in a property to a corresponding lien or obligation.[37]
The Complaint in the case at bar is an action to declare the loan and
Hedging Contracts between the parties void with a prayer for
damages. It is a suit in which the plaintiff seeks to be freed from its
obligations to the defendant under a contract and to hold said
defendant pecuniarily liable to the plaintiff for entering into such
contract. It is therefore an action in personam, unless and until the
plaintiff attaches a property within the Philippines belonging to the
Page 54 of 72
defendant, in which case the action will be converted to one quasi in
rem.
Since the action involved in the case at bar is in personam and since
the defendant, petitioner Rothschild/Investec, does not reside and is
not found in the Philippines, the Philippine courts cannot try any case
against it because of the impossibility of acquiring jurisdiction over its
person unless it voluntarily appears in court.[38]
In this regard, respondent vigorously argues that petitioner should be
held to have voluntarily appeared before the trial court when it
prayed for, and was actually afforded, specific reliefs from the trial
court.[39] Respondent points out that while petitioners Motion to
Dismiss was still pending, petitioner prayed for and was able to avail
of modes of discovery against respondent, such as written
interrogatories, requests for admission, deposition, and motions for
production of documents.[40]
Petitioner counters that under this Courts ruling in the leading case
of La Naval Drug Corporation v. Court of Appeals,[41] a party may file a
Motion to Dismiss on the ground of lack of jurisdiction over its person,
and at the same time raise affirmative defenses and pray for
affirmative relief, without waiving its objection to the acquisition of
jurisdiction over its person.[42]
It appears, however, that petitioner misunderstood our ruling in La
Naval. A close reading of La Naval reveals that the Court intended a
distinction between the raising of affirmative defenses in an Answer
(which would not amount to acceptance of the jurisdiction of the
court) and the prayer for affirmative reliefs (which would be
considered acquiescence to the jurisdiction of the court):
In the same manner that a plaintiff may assert two or more
causes of action in a court suit, a defendant is likewise expressly
allowed, under Section 2, Rule 8, of the Rules of Court, to put up
his own defenses alternatively or even hypothetically. Indeed,
under Section 2, Rule 9, of the Rules of Court, defenses and objections
not pleaded either in a motion to dismiss or in an answer, except for
the failure to state a cause of action, are deemed waived. We take this
to mean that a defendant may, in fact, feel enjoined to set up, along
with his objection to the court's jurisdiction over his person, all other
possible defenses. It thus appears that it is not the invocation of any of
such defenses, but the failure to so raise them, that can result in
waiver or estoppel. By defenses, of course, we refer to the grounds
provided for in Rule 16 of the Rules of Court that must be
asserted in a motion to dismiss or by way of affirmative defenses
in an answer.
Mindful of the foregoing, in Signetics Corporation vs. Court of
Appeals and Freuhauf Electronics Phils., Inc. (225 SCRA 737, 738),
we lately ruled:
This is not to say, however, that the petitioner's right to question
the jurisdiction of the court over its person is now to be deemed a
foreclosed matter. If it is true, as Signetics claims, that its only
involvement in the Philippines was through a passive investment in
Page 55 of 72
Sigfil, which it even later disposed of, and that TEAM Pacific is not its
agent, then it cannot really be said to be doing business in the
Philippines. It is a defense, however, that requires the contravention of
the allegations of the complaint, as well as a full ventilation, in effect,
of the main merits of the case, which should not thus be within the
province of a mere motion to dismiss. So, also, the issue posed by the
petitioner as to whether a foreign corporation which has done
business in the country, but which has ceased to do business at the
time of the filing of a complaint, can still be made to answer for a cause
of action which accrued while it was doing business, is another matter
that would yet have to await the reception and admission of
evidence. Since these points have seasonably been raised by the
petitioner, there should be no real cause for what may
understandably be its apprehension, i.e., that by its participation
during the trial on the merits, it may, absent an invocation of
separate or independent reliefs of its own, be considered to have
voluntarily submitted itself to the court's
jurisdiction.[43] (Emphases supplied.)
In order to conform to the ruling in La Naval, which was decided by
this Court in 1994, the former Section 23, Rule 14[44]concerning
voluntary appearance was amended to include a second sentence in
its equivalent provision in the 1997 Rules of Civil Procedure:
SEC. 20. Voluntary appearance. The defendant's voluntary appearance
in the action shall be equivalent to service of summons. The inclusion
in a motion to dismiss of other grounds aside from lack of
jurisdiction over the person of the defendant shall not be deemed
a voluntary appearance. (Emphasis supplied.)
 In view of the above, we therefore rule that petitioner, by seeking
affirmative reliefs from the trial court, is deemed to have voluntarily
The new second sentence, it can be observed, merely mentions other
submitted to the jurisdiction of said court. A party cannot invoke the
grounds in a Motion to Dismiss aside from lack of jurisdiction over the
jurisdiction of a court to secure affirmative relief against his opponent
person of the defendant. This clearly refers to affirmative defenses,
and after obtaining or failing to obtain such relief, repudiate or
rather than affirmative reliefs.
question that same jurisdiction.[48]Consequently, the trial court cannot
be considered to have committed grave abuse of discretion amounting
to lack or excess of jurisdiction in the denial of the Motion to Dismiss
Thus, while mindful of our ruling in La Naval and the new Section 20, on account of failure to acquire jurisdiction over the person of the
Rule 20, this Court, in several cases, ruled that seeking affirmative defendant.
relief in a court is tantamount to voluntary appearance
therein.[45] Thus, in Philippine Commercial International Bank v. Dy
Hong Pi,[46] wherein defendants filed a Motion for Inhibition without
WHEREFORE, the Petition for Review on Certiorari is DENIED. The
submitting themselves to the jurisdiction of this Honorable Court
Decision of the Court of Appeals dated September 8, 2006 and its
subsequent to their filing of a Motion to Dismiss (for Lack of
Resolution dated December 12, 2006 in CA-G.R. SP No. 94382 are
Jurisdiction), we held:
hereby AFFIRMED.

Besides, any lingering doubts on the issue of voluntary appearance

No pronouncement as to costs.
dissipate when the respondents' motion for inhibition is considered.
This motion seeks a sole relief: inhibition of Judge Napoleon Inoturan
from further hearing the case. Evidently, by seeking affirmative
SO ORDERED.
relief other than dismissal of the case, respondents manifested
their voluntary submission to the court's jurisdiction. It is well-
settled that the active participation of a party in the proceedings is
tantamount to an invocation of the court's jurisdiction and a
willingness to abide by the resolution of the case, and will bar said
party from later on impugning the court's jurisdiction.[47] (Emphasis
supplied.)

Page 56 of 72
G.R. No. 180064 September 16, 2013
JOSE U. PUA and BENJAMIN HANBEN U. PUA, Petitioners,
vs.
CITIBANK, N. A., Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the
Decision2 dated May 21, 2007 and Resolution3 dated October 16, 2007
of the Court of Appeals (CA) in CA-G.R. SP No. 79297, which reversed
and set aside the Orders dated May 14, 20034 and July 16, 20035 of the
Regional Trial Court of Cauayan City, Isabela, Branch 19 (RTC),
dismissing petitioners Jose(Jose) and Benjamin Hanben U. Pua's
(petitioners) complaint against respondent Citibank, N. A.
(respondent).
The Facts
On December 2, 2002, petitioners filed before the RTC a
Complaint6 for declaration of nullity of contract and sums of money
with damages against respondent,7 docketed as Civil Case No. 19-
1159.8 In their complaint, petitioners alleged that they had been
depositors of Citibank Binondo Branch (Citibank Binondo) since 1996.
Sometime in 1999, Guada Ang, Citibank Binondo’s Branch Manager,
invited Jose to a dinner party at the Manila Hotel where he was
introduced to several officers and employees of Citibank Hongkong
Branch (Citibank Hongkong).9 A few months after, Chingyee Yau (Yau),
Vice-President of Citibank Hongkong, came to the Philippines to sell
securities to Jose. They averred that Yau required Jose to open an
account with Citibank Hongkong as it is one of the conditions for the
sale of the aforementioned securities.10 After opening such account,
Yau offered and sold to petitioners numerous securities11 issued by
Page 57 of 72
various public limited companies established in Jersey, Channel I
sands. The offer, sale, and signing of the subscription agreements of
said securities were all made and perfected at Citibank Binondo in the
presence of its officers and employees.12 Later on, petitioners
discovered that the securities sold to them were not registered with
the Securities and Exchange Commission (SEC)and that the terms and
conditions covering the subscription were not likewise submitted to
the SEC for evaluation, approval, and registration.13 Asserting that
respondent’s actions are in violation of Republic Act No.8799, entitled
the "Securities Regulation Code" (SRC), they assailed the validity of the
subscription agreements and the terms and conditions thereof for
being contrary to law and/or public policy.14
For its part, respondent filed a motion to dismiss15 alleging, inter alia,
that petitioners’ complaint should be dismissed outright for violation
of the doctrine of primary jurisdiction. It pointed out that the merits of
the case would largely depend on the issue of whether or not there
was a violation of the SRC, in particular, whether or not there was a
sale of unregistered securities. In this regard, respondent contended
that the SRC conferred upon the SEC jurisdiction to investigate
compliance with its provisions and thus, petitioners’ complaint should
be first filed with the SEC and not directly before the RTC.16
Petitioners opposed17 respondent’s motion to dismiss, maintaining
that the RTC has jurisdiction over their complaint. They asserted that
Section 63of the SRC expressly provides that the RTC has exclusive
jurisdiction to hear and decide all suits to recover damages pursuant
to Sections 56 to 61 of the same law.18
The RTC Ruling
In an Order19 dated May 14, 2003, the RTC denied respondent’s
motion to dismiss. It noted that petitioners’ complaint is for
declaration of nullity of contract and sums of money with damages
and, as such, it has jurisdiction to hear and decide upon the case even
if it involves the alleged sale of securities. It ratiocinated that the legal
questions or issues arising from petitioners’ causes of action against
respondent are more appropriate for the judiciary than for an
administrative agency to resolve.20
Respondent filed an omnibus motion21 praying, among others, for
there consideration of the aforesaid ruling, which petitioners, in turn,
opposed.22 In an Order23 dated July 16, 2003, the RTC denied
respondent’s omnibus motion with respect to its prayer for
reconsideration. Dissatisfied, respondent filed a petition for certiorari
before the CA.24
The CA Ruling
In a Decision25 dated May 21, 2007, the CA reversed and set aside the
RTC’s Orders and dismissed petitioners’ complaint for violation of the
doctrine of primary jurisdiction. The CA agreed with respondent’s
contention that since the case would largely depend on the issue of
whether or not the latter violated the provisions of the SRC, the matter
is within the special competence or knowledge of the SEC. Citing the
case of Baviera v. Paglinawan26(Baviera), the CA opined that all
complaints involving violations of the SRC should be first filed before
the SEC.27
Aggrieved, petitioners moved for reconsideration,28 which was,
however, denied by the CA in a Resolution29dated October 16,
2007.Hence, this petition.
The Issue Before the Court
The essential issue in this case is whether or not petitioners’ action
falls within the primary jurisdiction of the SEC.
Page 58 of 72
Petitioners reiterate their original position that the SRC itself provides
that civil cases for damages arising from violations of the same law fall
within the exclusive jurisdiction of the regional trial courts.30
On the contrary, respondent maintains that since petitioners’
complaint would necessarily touch on the issue of whether or not the
former violated certain provisions of the SRC, then the said complaint
should have been first filed with the SEC which has the technical
competence to resolve such dispute.31
The Court’s Ruling
The petition is meritorious.
At the outset, the Court observes that respondent erroneously relied
on the Baviera ruling to support its position that all complaints
involving purported violations of the SRC should be first referred to
the SEC. A careful reading of the Baviera case would reveal that the
same involves a criminal prosecution of a purported violator of the
SRC, and not a civil suit such as the case at bar. The pertinent portions
of the Baviera ruling thus read:
A criminal charge for violation of the Securities Regulation Code is a
specialized dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e., the SEC. Under the
doctrine of primary jurisdiction, courts will not determine a
controversy involving a question within the jurisdiction of the
administrative tribunal, where the question demands the exercise of
sound administrative discretion requiring the specialized knowledge
and expertise of said administrative tribunal to determine technical
and intricate matters of fact. The Securities Regulation Code is a
special law. Its enforcement is particularly vested in the SEC.
Hence, all complaints for any violation of the Code and its
implementing rules and regulations should be filed with the SEC.
Where the complaint is criminal in nature, the SEC shall indorse the
complaint to the DOJ for preliminary investigation and prosecution as
provided in Section 53.1 earlier quoted.
We thus agree with the Court of Appeals that petitioner committed a
fatal procedural lapse when he filed his criminal complaint directly
with the DOJ. Verily, no grave abuse of discretion can be ascribed to
the DOJ in dismissing petitioner’s complaint.32 (Emphases and
underscoring supplied)
Records show that petitioners’ complaint constitutes a civil suit for
declaration of nullity of contract and sums of money with damages,
which stemmed from respondent’s alleged sale of unregistered
securities, in violation of the various provisions of the SRC and not a
criminal case such as that involved in Baviera.
In this light, when the Court ruled in Baviera that "all complaints for
any violation of the [SRC] x x x should be filed with the SEC,"33 it
should be construed as to apply only to criminal and not to civil suits
such as petitioners’ complaint.
Moreover, it is a fundamental rule in procedural law that jurisdiction
is conferred by law;34 it cannot be inferred but must be explicitly
stated therein. Thus, when Congress confers exclusive jurisdiction to a
judicial or quasi-judicial entity over certain matters by law, this,
absent any other indication to the contrary, evinces its intent to
exclude other bodies from exercising the same.
It is apparent that the SRC provisions governing criminal suits are
separate and distinct from those which pertain to civil suits. On the
one hand, Section 53 of the SRC governs criminal suits involving
violations of the said law, viz.:
SEC. 53. Investigations, Injunctions and Prosecution of Offenses. –
Page 59 of 72
53.1. The Commission may, in its discretion, make such investigations
as it deems necessary to determine whether any person has violated
or is about to violate any provision of this Code, any rule, regulation or
order thereunder, or any rule of an Exchange, registered securities
association, clearing agency, other self-regulatory organization, and
may require or permit any person to file with it a statement in writing,
under oath or otherwise, as the Commission shall determine, as to all
facts and circumstances concerning the matter to be investigated. The
Commission may publish information concerning any such violations,
and to investigate any fact, condition, practice or matter which it may
deem necessary or proper to aid in the enforcement of the provisions
of this Code, in the prescribing of rules and regulations thereunder, or
in securing information to serve as a basis for recommending further
legislation concerning the matters to which this Code relates:
Provided, however, That any person requested or subpoenaed to
produce documents or testify in any investigation shall
simultaneously be notified in writing of the purpose of such
investigation: Provided, further, That all criminal complaints for
violations of this Code, and the implementing rules and regulations
enforced or administered by the Commission shall be referred to the
Department of Justice for preliminary investigation and prosecution
before the proper court:
Provided, furthermore, That in instances where the law allows
independent civil or criminal proceedings of violations arising from
the same act, the Commission shall take appropriate action to
implement the same: Provided, finally, That the investigation,
prosecution, and trial of such cases shall be given priority.
On the other hand, Sections 56, 57, 58, 59, 60, 61, 62, and 63 of the
SRC pertain to civil suits involving violations of the same law. Among
these, the applicable provisions to this case are Sections 57.1 and 63.1
of the SRC which provide:
SEC. 57. Civil Liabilities Arising in Connection With Prospectus,
Communications and Reports.
– 57.1. Any person who:
(a) Offers to sell or sells a security in violation of Chapter III;
or
(b) Offers to sell or sells a security, whether or not exempted by the
provisions of this Code, by the use of any means or instruments of
transportation or communication, by means of a prospectus or other
written or oral communication, which includes an untrue statement of
a material fact or omits to state a material fact necessary in order to
make the statements, in the light of the circumstances under which
they were made, not misleading (the purchaser not knowing of such
untruth or omission), and who shall fail in the burden of proof that he
did not know, and in the exercise of reasonable care could not have
known, of such untruth or omission, shall be liable to the person
purchasing such security from him, who may sue to recover the
consideration paid for such security with interest thereon, less the
amount of any income received thereon, upon the tender of such
security, or for damages if he no longer owns the security.
xxxx
SEC. 63. Amount of Damages to be Awarded. – 63.1. All suits to recover
damages pursuant to Sections 56, 57, 58, 59, 60 and 61 shall be
brought before the Regional Trial Court which shall have exclusive
jurisdiction to hear and decide such suits. The Court is hereby
authorized to award damages in an amount not exceeding triple the
amount of the transaction plus actual damages.
x x x x (Emphases and underscoring supplied)
Page 60 of 72
Based on the foregoing, it is clear that cases falling under Section 57of
the SRC, which pertain to civil liabilities arising from violations of the
requirements for offers to sell or the sale of securities, as well as other
civil suits under Sections 56, 58, 59, 60, and 61 of the SRC shall be
exclusively brought before the regional trial courts. It is a well-settled
rule in statutory construction that the term "shall" is a word of
command, and one which has always or which must be given a
compulsory meaning, and it is generally imperative or
mandatory.35 Likewise, it is equally revelatory that no SRC provision of
similar import is found in its sections governing criminal suits; quite
the contrary, the SRC states that criminal cases arising from violations
of its provisions should be first referred to the SEC.1âwphi1
Therefore, based on these considerations, it stands to reason that civil
suits falling under the SRC are under the exclusive original jurisdiction
of the regional trial courts and hence, need not be first filed before the
SEC, unlike criminal cases wherein the latter body exercises primary
jurisdiction.
All told, petitioners' filing of a civil suit against respondent for
purported violations of the SRC was properly filed directly before the
RTC.
WHEREFORE, the petition is GRANTED. Accordingly, the Court of
Appeals' Decision dated May 21, 2007 and Resolution dated October
16,2007 in CA-G.R. SP No. 79297 are hereby REVERSED and SET
ASIDE. Let Civil Case No. 19-1159 be REINSTATED and REMANDED to
the Regional Trial Court of Cauayan City, Isabela, Branch 19 for further
proceedings.
SO ORDERED.
Aquino et al. v. Quiazon et al., G.R. No. 201248, March 11, 2015
DECISION
MENDOZA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of
the Rules of Court assailing the March 13, 2012 Decision1 of the Court
of Appeals (CA), in CA-G.R. CV No. 92887, which affirmed the
Orders2 of the Regional Trial Court (RTC), Angeles City, Branch 59, in
SP Civil Case No. 05-076, dismissing the complaint for quieting of title
filed by the petitioners.
The Facts
On December 16, 2005, a complaint3 for Annulment and Quieting of
Title was filed before the RTC-Branch59 by the petitioners, namely,
Leticia Naguit Aquino, Melvin Naguit, Rommel Naguit, Elma Naguit
Tayag, Yssel L. Naguit, Rosalina Naguit Aumentado, Rizel Naguit
Cunanan, Caridad Naguit Parajas, Millie Naguit Florendo, Marnel
Naguit, Eduardo Naguit, Jose Naguit, Zoilo Naguit, and AmeliaNaguit
Dizon, represented by Yssel L. Naguit (petitioners). They alleged that
they were the heirs of the late Epifanio Makam and Severina Bautista,
who acquired a house and lot situated in Magalang, Pampanga,
consisting of 557 square meters, by virtue of a Deed of Sale, dated
April 20, 1894; that since then, they and their predecessors-in-interest
had been in open, continuous, adverse, and notorious possession for
more than a hundred years, constructing houses and paying real
estate taxes on the property;that sometime in June 2005, they
received various demand letters from the respondents, namely, Cesar
B. Quiazon, Amanda Quiazon, Jose B. Quiazon, and Reynaldo B.
Quiazon, represented by Jaime B. Quiazon (respondents), claiming
ownership over the subject property and demanding that they vacate
the same; that upon inquiry with the Register of Deeds of San
Page 61 of 72
Fernando, Pampanga, they confirmed that the property had been titled
in the name of respondents under Transfer Certificate of Title (TCT)
No. 213777-R; that the said title was invalid, ineffective, voidable or
unenforceable; and that they were the true owners of the property.
Hence, they prayed that the title be cancelled and a new title be issued
in their favor.
In their Answer,4 respondents asserted that they were the absolute
owners of the subject land as per TCT No. 213777-R; that they had
inherited the same from their predecessor-in-interest, Fausta Baluyut,
one of the registered owners under Original Certificate of Title (OCT)
No. RO-1138 (11376), as per the Project of Partition and Deed of
Agreement, dated January 2, 1974; and that petitioners had been
occupying the property by mere tolerance. They denied the allegations
in the complaint and proffered affirmative defenses with
counterclaims.
They argued that: First, the petitioners "have no valid, legal and
sufficient cause of action"5 against them, because their deed of sale
was spurious and could not prevail over Land Registration Decree No.
122511 issued on June 28, 1919 in Land Registration Case No. 5, LRC
Records No. 128, by the Court of First Instance of Pampanga, in favor
of their predecessor-in-interest. The predecessors-in-interest of
petitioners were among the oppositors in the land registration
proceeding but, nevertheless, after the trial, the subject lot was
awarded, decreed and titled in favor of respondents’ predecessor-in-
interest, as per OCT No. RO-1138 (11376) of the Registry of Deeds of
Pampanga. Second, the action was barred by prescription and that
petitioners were guilty of laches in asserting their interest over the
subject lot, considering that Land Registration Decree No. 122511 was
issued on June 28, 1919 and OCT No. RO-1138 (11376) was issued on
May 12, 1922. Hence, it was much too late for petitioners to institute
the action after more than 80 years. They also raised the settled rule
that a title registered under the Torrens system could not be defeated
by adverse, open and notorious possession, or by prescription. Third,
the action was also barred by res judicata and violated the prohibition
against forum shopping, considering that petitioners had earlier filed a
similar case for quieting of title against respondents, docketed as Civil
Case No. 5487, which the RTC-Br. 56 dismissed. Petitioners filed their
Comment to Defendant’s Affirmative Defenses.6Anent the alleged lack
of cause of action due to the spurious deed of sale, petitioners argued
that this contention was a matter of evidence which might only be
resolved in a full-blown trial. They insisted that the deed of sale was
genuine and authentic and was issued and certified by the Deputy
Clerk of Court of the RTC. They added that the settled rule was that to
determine the sufficiency of the cause of action, only the facts alleged
in the complaint should be considered, and that the allegations in their
complaint sufficiently stated a cause of action.
As regards the allegation of prescription, the petitioners countered
that an action to quiet title did not prescribe if the plaintiffs were in
possession of the property in question. They argued that they were
neither guilty of laches nor were they in possession of the property by
mere tolerance, their possession being in the concept of owner for
more than a hundred years.
Lastly, regarding the argument on res judicata, petitioners explained
that they were not the same plaintiffs in Civil Case No. 5487 and that
the case was dismissed without prejudice.
The RTC set a preliminary hearing on the affirmative defenses.
Respondents presented Atty. Charlemagne Tiqui Calilung, RTC Clerk of
Court of San Fernando, Pampanga, who presented the record of
Cadastral Case No. 5, dated June 28, 1919, as well as Decree No.
122511. They also presented Luis Samuel Ragodon, the Registration
Page 62 of 72
Examiner of the Registry of Deeds of San Fernando, Pampanga, who
presented the original copy of OCT No. 11376, reconstituted as RO-
1138, and testified that the title was derived from Decree No. 122511.
He further testified that the original title had been cancelled pursuant
to a project of partition, which was registered on December 17, 1984,
and in lieu thereof, TCT Nos. 213775, 213776, 213777, 213778,
213779, 213780, and 213781 were issued. He presented the original
copy of TCT No. 213777-R issued in the names of respondents.
Henry Y. Bituin, the court interpreter who translated the June 28,
1919 decision of the Court of First Instance of Pampanga in Land
Registration Case No. 5 from Spanish to English, also testified.
Petitioners manifested that they were opting to submit the incident
for resolution without presenting evidence, relying on their position
that only the facts alleged in the complaint should be considered.
In their formal offer of evidence,7 respondents offered the following
documents: (1) the June 28, 1919 Decision and its English translation;
(2) Transmittal Letter, dated May 6, 1922; (3) Decree No. 122511; (4)
OCT No. RO-1138; (5) TCT No. 213777-R; (6) the petition, dated July
29, 1988, and its annexes in Civil Case No. 5487;(7) the September 7,
1990 Order dismissing Civil Case No. 5487, without prejudice; and (8)
the July 29, 1916 Decision in Expediente No. 132, G.L.R.O. Record No.
11958 and its English translation.
In their comment/opposition8 to the formal offer of evidence,
petitioners argued (1) that the claims of Epifanio Makam and Severina
Bautista, their predecessors-in-interest, were not adjudicated in the
June 28, 1919 decision and, thus, res judicata was inapplicable; (2)
that Civil Case No. 5487 was dismissed without prejudice and that
they were not the plaintiffs therein; (3) that the allegedly spurious
nature of the deed of sale and the supposed in defeasibility of
respondents’ title were matters of evidence to be resolved in a full-
blown trial and the trial court was only confined to the allegations in
the complaint; (4) that their action was not barred by prescription
because an action toquiet title did not prescribe if the plaintiffs were
in possession of the subject property and that they had been in
possession in the concept of owner for more than 100 years; and (5)
that respondents were guilty of laches having taken more than 80
years to attempt to enforce their claimed title to the property.
Ruling of the RTC
On July 14, 2008, the RTC-Br. 59 issued the Order dismissing
petitioners’ complaint. It found that based on the decision, dated June
28, 1919, in Cadastral Case No. 5, the Baluyut siblings, respondents’
predecessors-in-interest, were declared the absolute owners of the
subject property, over the claim of Jose Makam, the predecessor-in-
interest of petitioners, who was one of the oppositors in the said case.
From this decision, OCT No. RO-1138 (11376) was derived, which
later became the subject of a project of partition and deed of
agreement among the Baluyut siblings, dated January 2, 1972, which,
in turn, was annotated on the OCT as Entry No. 8132. TCT No. 213777-
R, covering the subject lot, was later derived from the partition. The
RTC-Br. 59 also noted that it was stated in the said decision that in
1907, a warehouse was constructed on the subject lot by virtue of an
agreement between the Chairman of Magalang and Enrique Baluyut,
with no objection from the Makams. It was further noted that the deed
of sale being asserted by petitioners was not mentioned in the 1919
decision despite the claim of their predecessors-in-interest.
The RTC-Br. 59, thus, ruled that the deed of sale had become invalid by
virtue of the June 28, 1919 decision. It held that although the deed of
sale dated, April 20, 1894, was never challenged, it was nevertheless
unenforceable by virtue of the June 28, 1919 decision. It found that
petitioners had lost whatever right they had on the property from the
Page 63 of 72
moment the said decision was rendered and an OCT was issued.
Finding that petitioners were not holders of any legal title over the
property and were bereft of any equitable claim thereon, the RTC-
Branch 59 stated that the first requisite of an action to quiet title was
miserably wanting. It also found the second requisite to be wanting
because respondents had proved that the TCT registered in their
names was valid.
Anent petitioners’ argument that only the complaint may be
considered in determining the sufficiency of the cause of action, the
RTC Br. 59 ruled that under Section 2 in relation to Section 6, Rule 16
of the Rules of Court, a preliminary hearing on the affirmative defense
in the answer might be had at the discretion of the court, during which
the parties could present their arguments and their evidence.
On December 22, 2008, the RTC-Br. 59 denied petitioners’ motion for
reconsideration. It stated that the court may consider evidence
presented in hearings related to the case, which was an exception to
the general rule that only the complaint should be taken into
consideration. It stated that petitioners were without legal or
equitable title to the subject property, thus, lacking the legal
personality to file an action for quieting of title and, therefore, "the
complaint was properly dismissed for failing to state a cause of
action."9
Ruling of the CA
In the assailed Decision, dated March 13, 2012, the CA dismissed
petitioners’ appeal. It explained that under Section 6, Rule 16 of the
Rules of Court, a court is allowed to conduct a preliminary hearing,
motu proprio, on the defendant’s affirmative defenses, including the
ground of "lack of cause of action or failure to state a cause of
action."10 It gave the reason that because the rule spoke in general
terms, its manifest intention was to apply it to all grounds for a motion
to dismiss under the rules which were pleaded as affirmative defenses
in the responsive pleading. Thus, it held that the trial court might
consider other evidence aside from the averments in the complaint in
determining the sufficiency of the cause of action. The CA explained:
But as shown in the foregoing rule, the holding of a preliminary
hearing on any of the grounds for a motion to dismiss which is
pleaded as an affirmative defense is within the full discretion of the
trial court. The rule speaks of affirmative defenses that are grounds
for a motion to dismiss. Indubitably, lack of cause of action or failure
to state a cause of action, being one of the grounds for a motion to
dismiss, is included thereby.
Since the rule allows the trial court to conduct a preliminary hearing
on this kind of an affirmative defense, it follows then that evidence
could be submitted and received during the proceedings which the
court may consider in forming its decision. It would be plain absurdity
if the evidence already presented therein would not be allowed to be
considered in resolving whether the case should be dismissed or not.
To rule otherwise would render nugatory the provision of Section 6,
Rule 16 and would make the holding of a preliminary hearing a plain
exercise in futility. No well-meaning judge would hold a preliminary
hearing and receive evidence only to disregard later the evidence
gathered in the course thereof. If the intention of the rule is for the
trial court to confine itself to the allegations in the complaint in
determining the sufficiency of the cause of action, as the plaintiffs-
appellants would want to impress upon this Court, then it should have
been so expressly stated by barring the court from conducting a
preliminary hearing based on the said ground. The fact, however, that
the said rule speaks in general terms, it is its manifest intention to
apply it in all grounds for a motion to dismiss under the rules which
are pleaded as an affirmative defense in the responsive pleading. Thus,
we find that that trial court did not err in considering the evidence
Page 64 of 72
already presented and in not confining itself to the allegations in the
plaintiffs-appeallants’ complaint.11
The CA gave credence to the evidence presented by respondents and
noted that, except for petitioners’ bare allegation that respondents’
title was invalid, there was nothing more to support the same. It
further noted that the deed of sale was written in a local dialect
without the translation and with no ascertainable reference to the
area of the property being conveyed. The CA, therefore, found that
petitioners did not have the title required to avail of the remedy of
quieting of title, while respondents had sufficiently proven the validity
of their Torrens title. Hence, the subject petition.
ISSUE
Whether the CA erred in affirming the dismissal of
petitioners’ complaint on the ground of lack of cause of
action or failure to state a cause of action.
Petitioners argue that the CA gravely erred in considering external
factors beyond the allegations in the petition. They aver that it is a
settled rule that to determine the sufficiency of a cause of action, only
facts alleged in the complaint shall be considered, and it is error for
the court to take cognizance of external facts or hold a preliminary
hearing to determine their existence. Respondents, on the other hand,
echo the ruling of the CA that it was within the disrection of the trial
court to conduct a preliminary hearing on the affirmative defense of
lack of cause of action or failure to state a cause of action, where both
parties were given the chance to submit arguments and evidence for
or against the dismissal of the complaint. Furthermore, they argue that
the Court has previously upheld cases where the court took into
account external factors in the dismissal of the complaint on the
ground of lack of cause of action. They assert that since petitioners
were given reasonable opportunity to present evidence to prove their
cause of action, they are now estopped from invoking the rule that
only allegations in the complaint should be considered.12
Petitioners reiterate that they have been in possession of the property
in the concept of owner for more than 119 years, where they built
their houses, reared their families, and paid realty taxes thereon. They
point out that their possession was never disputed by respondents,
and that respondents had only attempted to enforce their supposed
rights over the property in 2005, or 86 years after the purported
decree awarding the property to them. Petitioners argue that
respondents had abandoned their right to the subject property which,
thus, rendered invalid whatever title they might have had. They argue
that it has been held that a registered owner’s right to recover
possession and title to property may be converted into a stale demand
by virtue of laches. They also claim that the allegations contained in
their complaint sufficiently state a cause of action, and that it was an
error for the trial court to declare it unenforceable considering that
the deed of sale should be considered hypothetically admitted when
determining whether the complaint sufficiently states a cause of
action.13
Ruling of the Court
Preliminary matters
The Court notes that respondents raised the affirmative defense in
their Answer that petitioners "have no valid, legal and sufficient cause
of action," raising factual matters,14 which is effectively the ground of
"lack of cause of action." Respondents’ arguments made no assertion
that the complaint failed to state a cause of action. The ground of "lack
of cause of action" has been frequently confused with the ground of
"failure to state a cause of action," and this is the situation prevailing
Page 65 of 72
in the present case. The terms were, in fact, used interchangeably by
both the respondents and the lower courts.
The distinction between the grounds of "failure to state a cause of
action" and "lack of cause of action" was aptly discussed in Dabuco vs.
Court of Appeals, to wit:
As a preliminary matter, we wish to stress the distinction between the
two grounds for dismissal of an action: failure to state a cause of
action, on the one hand, and lack of cause of action, on the other hand.
The former refers to the insufficiency of allegation in the pleading, the
latter to the insufficiency of factual basis for the action. Failure to state
a cause may be raised in a Motion to Dismiss under Rule 16, while lack
of cause may be raised any time. Dismissal for failure to state a cause
can be made at the earliest stages of an action. Dismissal for lack of
cause is usually made after questions of fact have been resolved on the
basis of stipulations, admissions or evidence presented.15
Although the two grounds were used interchangeably, it can be
gleaned from the decisions of both the trial court and the CA that
respondents’ defense of "lack of cause of action" was actually treated
as a "failure to state a cause of action," which is a ground for a motion
to dismiss under Rule 16. This is apparent from their reliance on
Section 6 of Rule 16, which pertains to grounds of a motion to dismiss
raised as affirmative defenses; as well as the doctrines cited in
resolving the case. The CA even referred to both as one and the same
ground for a motion to dismiss when it stated that: "Indubitably, lack
of cause of action or failure to state a cause of action, being one of the
grounds for a motion to dismiss, is included thereby."16
Also confused, respondents, on their part, asserted that "it is within
the discretion of the Court a quo to conduct a preliminary hearing on
the affirmative defense of lack of cause of action or failure to state a
cause of action,"17 the very basis of their argument being hinged on the
application of Section 6. They also insisted on the applicability of the
exceptions to the general rule that only averments in the complaint
must be considered, which pertains to the ground of "failure to state a
cause of action."
The trial court held a preliminary hearing resolving the ground of
"lack of cause of action" pursuant to Section 6 of Rule 16, which allows
the court to hold a preliminary hearing on grounds for dismissal
provided in the same rule that have been raised as an affirmative
defense in the answer.18 The ground of "lack of cause of action," as
already explained, however, is not one of the grounds for a motion to
dismiss under Rule 16, and hence, not proper for resolution during a
preliminary hearing held pursuant to Section 6. On this point alone,
the trial court clearly erred in receiving evidence on the ground of
"lack of cause of action" during the preliminary hearing. The factual
matters raised by respondents in their affirmative defense arguing the
non-existence of a cause of action, should have been duly resolved
during a trial on the merits of the case.
In any case, even if the Court were to treat respondents’ argument as a
"failure to state a cause of action," their defense would still fail. Court
limited to averments in the complaint
Rule 16 of the Rules of Court enumerates the grounds for a motion to
dismiss. The pertinent ground is found under Section 1(g), which
reads as follows:
xxxx
(g) That the pleading asserting the claim states no cause of action;
xxxx (Emphasis supplied) The test for determining the existence of a
cause of action was amply discussed in Insular Investment and Trust
Corporation v. Capital One Equities Corporation,19 citing Perpetual
Savings Bank v. Fajardo,20 to wit:
Page 66 of 72
The familiar test for determining whether a complaint did or did not
state a cause of action against the defendants is whether or not,
admitting hypothetically the truth of the allegations of fact made in the
complaint, a judge may validly grant the relief demanded in the
complaint. In Rava Development Corporation v. Court of Appeals, the
Court elaborated on this established standard in the following
manner:
"The rule is that a defendant moving to dismiss a complaint on the
ground of lack of cause of action is regarded as having hypothetically
admitted all the averments thereof. The test of the sufficiency of the
facts found in a petition as constituting a cause of action is whether or
not, admitting the facts alleged, the court can render a valid judgment
upon the same in accordance with the prayer thereof (Consolidated
Bank and Trust Corp. v. Court of Appeals, 197 SCRA 663 [1991]).
In determining the existence of a cause of action, only the statements
in the complaint may properly be considered. It is error for the court
to take cognizance of external facts or hold preliminary hearings to
determine their existence. If the allegation in a complaint furnish
sufficient basis by which the complaint may be maintained, the same
should not be dismissed regardless of the defenses that may be
assessed by the defendants (supra).21
Thus, in determining the existence of a cause of action, only the
allegations in the complaint may properly be considered. For the court
to do otherwise would be a procedural error and a denial of the
plaintiff’s right to due process.22
In the case at bench, petitioners’ cause of action relates to an action to
quiet title under Article 476 of the Civil Code, which provides:
Article 476. Whenever there is a cloud on title to real property or any
interest therein, by reason of any instrument, record, claim,
encumbrance or proceeding which is apparently valid or effective but
is in truth and in fact invalid, ineffective, voidable, or unenforceable,
and may be prejudicial to said title, an action may be brought to
remove such cloud or to quiet title.
An action may also be brought to prevent a cloud from being cast upon
title to real property or any interest therein.
A "cloud on title" is an outstanding instrument, record, claim,
encumbrance or proceeding which is actually invalid or inoperative,
but which may nevertheless impair or affect injuriously the title to
property. The matter complained of must have a prima facie
appearance of validity or legal efficacy. The cloud on title is a
semblance of title which appears in some legal form but which is in
fact unfounded. The invalidity or in operativeness of the instrument is
not apparent on the face of such instrument, and it has to be proved by
extrinsic evidence.23
In order that an action for quieting of title may prosper, two requisites
must concur: (1) the plaintiff or complainant has a legal or equitable
title or interest in the real property subject of the action; and (2) the
deed, claim, encumbrance, or proceeding claimed to be casting cloud
on his title must be shown to be in fact invalid or inoperative despite
its prima facie appearance of validity or legal efficacy.24
Turning then to petitioners’ complaint, the relevant allegations as to
the cause of action for quieting of title read as follows:
3. Plaintiffs are the heirs of the late Epifanio Makam and Severina
Bautista who acquired a house and lot on 20 April 1894 situated in
Magalang, Pampanga, consisting of Five Hundred Seventy Seven (577)
square meters more or less, by virtue of a Deed of Sale, hereby quoted
for ready reference:
xxx
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4. From 1894 and up to the present, plaintiffs and through their
predecessors-in-interest have been in open, continuous, adverse and
notorious possession for more than a hundred years of the piece of
property mentioned above, constructed their houses thereon and
dutifully and faithfully paid the real estate taxes on the said property;
5. That sometime in June 2005, plaintiffs received various demand
letters from defendants demanding plaintiffs to vacate the premises,
claiming ownership of the subject property;
6. That when plaintiffs inquired from the Office of the Register of
Deeds of San Fernando, Pampanga, they were able to confirm that
their property had been titled in the name of herein defendants under
TCT No. 213777-R;
7. That the said title is in fact invalid, ineffective, voidable or
unenforceable, the existence of which is pre-judicial to the ownership
and possession of plaintiffs who are the true owners and actual
possessors of the above described real property;
8. That equity demands that the said title be surrendered by
defendants and cancelled as it is a cloud upon the legal or equitable
title to or interest of plaintiffs over the subject property.25
It is readily apparent from the complaint that petitioners alleged that
(1) they had an interest over the subject property by virtue of a Deed
of Sale, dated April 20, 1894; and that (2) the title of respondents
under TCT No. 213777-R was invalid, ineffective, voidable or
unenforceable. Hypothetically admitting these allegations as true, as is
required in determining whether a complaint fails to state a cause of
action, petitioners may be granted their claim. Clearly, the complaint
sufficiently stated a cause of action. In resolving whether or not the
complaint stated a cause of action, the trial court should have limited
itself to examining the sufficiency of the allegations in the complaint. It
was proscribed from inquiring into the truth of the allegations in the
complaint or the authenticity of any of the documents referred or
attached to the complaint, as these were deemed hypothetically
admitted by the respondents.26
Evangelista v. Santiago elucidates:
The affirmative defense that the Complaint stated no cause of action,
similar to a motion to dismiss based on the same ground, requires a
hypothetical admission of the facts alleged in the Complaint. In the
case of Garcon v. Redemptorist Fathers, this Court laid down the rules
as far as this ground for dismissal of an action or affirmative defense is
concerned:
It is already well-settled that in a motion to dismiss a complaint based
on lack of cause of action, the question submitted to the court for
determination is the sufficiency of the allegations of fact made in the
complaint to constitute a cause of action, and not on whether these
allegations of fact are true, for said motion must hypothetically admit
the truth of the facts alleged in the complaint; that the test of the
sufficiency of the facts alleged in the complaint is whether or not,
admitting the facts alleged, the court could render a valid judgment
upon the same in accordance with the prayer of said
complaint.1âwphi1 Stated otherwise, the insufficiency of the cause of
action must appear in the face of the complaint in order to sustain a
dismissal on this ground, for in the determination of whether or not a
complaint states a cause of action, only the facts alleged therein and no
other matter may be considered, and the court may not inquire into
the truth of the allegations, and find them to be false before a hearing
is had on the merits of the case; and it is improper to inject in the
allegations of the complaint facts not alleged or proved, and use these
as basis for said motion.27 (Emphasis and underscoring supplied)
Exceptions and Section 6 of Rule 16 not applicable
Page 68 of 72
The Court does not discount, however, that there are exceptions to the
general rule that allegations are hypothetically admitted as true and
inquiry is confined to the face of the complaint. First, there is no
hypothetical admission of (a) the veracity of allegations if their falsity
is subject to judicial notice; (b) allegations that are legally impossible;
(c) facts inadmissible in evidence; and (d) facts which appear, by
record or document included in the pleadings, to be
unfounded.28 Second, inquiry is not confined to the complaint if culled
(a) from annexes and other pleadings submitted by the parties;29 (b)
from documentary evidence admitted by stipulation which disclose
facts sufficient to defeat the claim; or (c) from evidence admitted in
the course of hearings related to the case.30
Pointing to the exception that inquiry was not confined to the
complaint if evidence had been presented in the course of hearings
related to the case, the CA ruled that it was within the trial court’s
discretion to receive and consider other evidence aside from the
allegations in the complaint in resolving a party’s affirmative defense.
It held that this discretion was recognized under Section 6 of Rule 16
of the Rules of Court, which allowed the court to conduct a
preliminary hearing, motu proprio, on the defendant’s affirmative
defense if no corresponding motion to dismiss was filed. This section
reads in part:
Section 6. Pleading grounds as affirmative defenses. – If no motion to
dismiss has been filed, any of the grounds for dismissal provided for in
this Rule may be pleaded as an affirmative defense in the answer and,
in the discretion of the court, a preliminary hearing may be had
thereon as if a motion to dismiss had been filed.
In their answer, respondents raised the affirmative defenses of "lack
of cause of action, prescription, and res judicata,"31 stated in the
following manner:
xxxx
6. Plaintiffs have no valid, legal and sufficient cause of action against
the defendants. The alleged "deed of sale" (Annex "B" – Amended
Complaint) is spurious and the same cannot prevail over the Land
Registration Decree No. 122511 issued on June 28, 1919 in Land
Registration Case No. 5, LRC Record No. 128, by the Court of First
Instance of Pampanga, in favor of defendants’ predecessor-in-interest.
In fact, plaintiffs’ predecessors-in-interest were among the oppositors
in that land registration proceeding but after trial the lot in question
was awarded, decreed and titled in favor and in the names of
defendants’ predecessors-in-interest, as per Original Certificate of
Title No. RO-1138 (11376) of the Registry of Deeds of Pampanga;
7. The instant action, which is actually an action of reconveyance, is
already barred by prescription. Moreover, plaintiffs are guilty of
laches in asserting their alleged title or interest over the subject lot.
Said Land Registration Decree No. 122511 was issued on June 28,
1919 and OCT No. RO 1138 (11376) was issued on May 12, 1922.
Clearly, it is much too late for the plaintiffs, after more than eighty
(80) long years to institute this action against the defendants;
xxxx
9. The present action is also barred by res judicata and violates the
prohibition against forum shopping. There was already a prior similar
case for quieting of title filed by plaintiffs’ predecessor-in-interest
against defendant Jaime Quiazon and his co-owners, before Branch 56
of this Honorable Court, docketed as Civil Case No. 5487, which was
dismissed;32 x x x x (Emphases supplied)
A review of the first ground under paragraph 6 of the answer reveals
that respondents alleged that "[p]laintiffs have no valid, legal and
sufficient cause of action against the defendants." It is at this point that
Page 69 of 72
it must again be emphasized that it is not "lack or absence of cause of
action" that is a ground for dismissal of the complaint under Rule 16,
but rather, that "the complaint states no cause of action."33 The issue
submitted to the court was, therefore, the determination of the
sufficiency of the allegations in the complaint to constitute a cause of
action and not whether those allegations of fact were true, as there
was a hypothetical admission of facts alleged in the complaint.34 An
affirmative defense, raising the ground that there is no cause of action
as against the defendants poses a question of fact that should be
resolved after the conduct of the trial on the merits.35 A reading of
respondents’ arguments in support of this ground readily reveals that
the arguments relate not to the failure to state a cause of action, but to
the existence of the cause of action, which goes into the very crux of
the controversy and is a matter of evidence for resolution after a full-
blown hearing.
The trial court may indeed elect to hold a preliminary hearing on
affirmative defenses as raised in the answer under Section 6 of Rules
16 of the Rules of Court. It has been held, however, that such a hearing
is not necessary when the affirmative defense is failure to state a
cause of action,36 and that it is, in fact, error for the court to hold a
preliminary hearing to determine the existence of external facts
outside the complaint.37 The reception and the consideration of
evidence on the ground that the complaint fails to state a cause of
action, has been held to be improper and impermissible.38 Thus, in a
preliminary hearing on a motion to dismiss or on the affirmative
defenses raised in an answer, the parties are allowed to present
evidence except when the motion is based on the ground of
insufficiency of the statement of the cause of action which must be
determined on the basis only of the facts alleged in the complaint and
no other.39 Section 6, therefore, does not apply to the ground that the
complaint fails to state a cause of action. The trial court, thus, erred in
receiving and considering evidence in connection with this ground.
The lower courts also relied on the exception that external evidence
may be considered when received "in the course of hearings related to
the case," which is rooted in the case of Tan v. Director of Forestry
(Tan).40 In said case, a hearing was conducted on the prayer for
preliminary injunction where evidence was submitted by the parties.
In the meantime, a motion to dismiss was filed by the defendant, citing
as one of the grounds that the petition did not state a cause of action.
The trial court resolved the prayer for the issuance of a writ of
preliminary injunction simultaneously with the motion to dismiss. It
dismissed the petition for failure to state a cause of action on the basis
of the evidence presented during the hearing for preliminary
injuction. On appeal, this Court ruled that the trial court was correct in
considering the evidence already presented and in not confining itself
to the allegations in the petition.
Tan, however, is not on all fours with the present case. First, the trial
court therein considered evidence presented during a preliminary
hearing on an injunction and not during a hearing on a motion to
dismiss. As discussed, a preliminary hearing on a motion to dismiss is
proscribed when the ground is failure to state a cause of action. The
exception of "hearings related to the case," therefore, pertains to
hearings other than the hearing on a motion to dismiss on the ground
of failure to state a cause of action. To reiterate, the ground that the
complaint fails to state a cause of action should be tested only on the
allegations of facts contained in the complaint, and no other. If the
allegations show a cause of action, or furnish sufficient basis by which
the complaint can be maintained, the complaint should not be
dismissed regardless of the defenses averred by the defendants.41 The
trial court may not inquire into the truth of the allegations, and find
them to be false before a hearing is conducted on the merits of the
Page 70 of 72
case.42 If the court finds the allegations to be sufficient but doubts
their veracity, the veracity of the assertions could be asserted during
the trial on the merits.43
Second, Tan noted that the plaintiff had readily availed of his
opportunity to introduce evidence during the hearing and, as a result,
was estopped from arguing that the court is limited to the allegations
in the complaint.44 This is in contrast to the present case, where
petitioners steadfastly argued from the beginning that the trial court
was limited to the allegations in the complaint. Petitioners maintained
their stance during the preliminary hearing on the affirmative
defenses, opting not to file rebuttal evidence and opposing
respondents’ formal offer of evidence on the same ground. Having
been consistent in their position from the start, petitioners cannot be
estopped from arguing that the trial court was precluded from
considering external evidence in resolving the motion to dismiss.
Third, it was noted in Tan that the documentary evidence given
credence by the trial court had effectively been admitted by
stipulation during the hearing,45 and another had been an annex to the
complaint,46 both of which are exceptions to the general rule that
external facts cannot be considered. Neither of the said exceptions is
availing in the present case. The Court notes that only the OCT of
respondents was attached as an annex to their answer. The June 28,
1919 Decision in the Cadastral case, which was given considerable
weight by the trial court, was not attached and was only presented
during the preliminary hearing.
Fourth, Tanruled that the rigid application of the rules could not be
countenanced considering the overriding public interest involved,
namely, the welfare of the inhabitants of the province whose lives and
properties would be directly and immediately imperilled by forest
denudation.47 There appears to be no overriding public interest in the ASIDE. The case is ordered REMANDED to the Regional Trial Court for
present case to justify a similar relaxation of the rules. trial on the merits of the case.
It is of note that although the trial court might not have erred in SO ORDERED.
holding a preliminary hearing on the affirmative defenses of
prescription and res judicata, it is readily apparent from the decisions
of the lower courts that no disquisition whatsoever was made on
these grounds. It cannot be denied that evidence in support of the
ground of "lack of cause of action" was received and given great
weight by the trial court. In fact, all the evidence given credence by the
trial court were only in support of the ground of "lack of cause of
action." This all the more highlights that the trial court erred in
receiving evidence to determine whether the complaint failed to state
a cause of action.
Although neither the RTC or the CA ruled on the affirmative defenses
of prescription and res judicata, it appears that this case could not
have been dismissed on these grounds. First, an action to quiet title is
imprescriptible if the plaintiffs are in possession of the
property,48 which is the situation prevailing in the present case.
Second, there appears to be no res judicata nor a violation of the
prohibition against forum shopping considering that Civil Case No.
5487 had been dismissed, without prejudice, years before petitioners
initiated their complaint for quieting of title.
In sum, the trial court erred in dismissing the complaint on the ground
of failure to state a cause of action. Evidence should have been
received not during a preliminary hearing under Section 6 of Rule 16,
but should have been presented during the course of the trial. The
case should, thus, be remanded to the RTC-Br. 59 for trial on the
merits.
WHEREFORE, the petition is GRANTED. The March 13, 2012 Decision
of the Court of Appeals, in CA-G.R. CV No. 92887 is REVERSED and SET

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 RULE 2
CAUSE OF ACTION CASES

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