AGRIFINA AQUINTEY, petitioner,

vs.
SPOUSES FELICIDAD AND RICO TIBONG, respondents.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review under Rule 45 of the Revised Rules on Civil Procedure of
the Decision1 of the Court of Appeals in CA-G.R. CV No. 78075, which affirmed with
modification the Decision2 of the Regional Trial Court (RTC), Branch 61, Baguio City, and the
Resolution3 of the appellate court denying reconsideration thereof.

The Antecedents

On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a complaint
for sum of money and damages against the respondents, spouses Felicidad and Rico
Tibong. Agrifina alleged that Felicidad had secured loans from her on several occasions, at
monthly interest rates of 6% to 7%. Despite demands, the spouses Tibong failed to pay their
outstanding loan, amounting to P773,000.00 exclusive of interests. The complaint contained
the following prayer:

WHEREFORE, premises considered, it is most respectfully prayed of this Honorable

Court, after due notice and hearing, to render judgment ordering defendants to pay
plaintiff the following:

a). SEVEN HUNDRED SEVENTY-THREE THOUSAND PESOS

(P773,000.00) representing the principal obligation of the defendants with the
stipulated interests of six (6%) percent per month from May 11, 1999 to date
and or those that are stipulated on the contracts as mentioned from
paragraph two (2) of the complaint.

b). FIFTEEN PERCENT (15%) of the total accumulated obligations as

attorney's fees.

c). Actual expenses representing the filing fee and other charges and
expenses to be incurred during the prosecution of this case.

Further prays for such other relief and remedies just and equitable under the
premises.4

Agrifina appended a copy of the Counter-Affidavit executed by Felicidad in I.S. No. 93-334,
as well as copies of the promissory notes and acknowledgment receipts executed by
Felicidad covering the loaned amounts.5
In their Answer with Counterclaim,6 spouses Tibong admitted that they had secured loans
from Agrifina. The proceeds of the loan were then re-lent to other borrowers at higher
interest rates. They, likewise, alleged that they had executed deeds of assignment in favor of
Agrifina, and that their debtors had executed promissory notes in Agrifina's favor. According
to the spouses Tibong, this resulted in a novation of the original obligation to Agrifina. They
insisted that by virtue of these documents, Agrifina became the new collector of their
debtors; and the obligation to pay the balance of their loans had been extinguished.

The spouses Tibong specifically denied the material averments in paragraphs 2 and 2.1 of
the complaint. While they did not state the total amount of their loans, they declared that they
did not receive anything from Agrifina without any written receipt.7 They prayed for that the
complaint be dismissed.

In their Pre-Trial Brief, the spouses Tibong maintained that they have never obtained any
loan from Agrifina without the benefit of a written document.8

On August 17, 2000, the trial court issued a Pre-Trial Order where the following issues of the
case were defined:

Whether or not plaintiff is entitled to her claim of P773,000.00;

Whether or not plaintiff is entitled to stipulated interests in the promissory notes; and

Whether or not the parties are entitled to their claim for damages.9

The Case for Petitioner

Agrifina and Felicidad were classmates at the University of Pangasinan. Felicidad's husband,
Rico, also happened to be a distant relative of Agrifina. Upon Felicidad's prodding, Agrifina
agreed to lend money to Felicidad. According to Felicidad, Agrifina would be earning
interests higher than those given by the bank for her money. Felicidad told Agrifina that since
she (Felicidad) was engaged in the sale of dry goods at the GP Shopping Arcade, she would
use the money to buy bonnels and thread.10 Thus, Agrifina lent a total sum of P773,000.00 to
Felicidad, and each loan transaction was covered by either a promissory note or an
acknowledgment receipt.11 Agrifina stated that she had lost the receipts signed by Felicidad
for the following amounts: P100,000.00, P34,000.00 and P2,000.00.12 The particulars of the
transactions are as follows:

Amount Date Obtained Interest Per Mo. Due Date

P 100,000.00 May 11, 1989 6% August 11, 1989
4,000.00 June 8, 1989 - -
50,000.00 June 13, 1989 6% On demand
60,000.00 Aug. 16, 1989 7% January 1990
205,000.00 Oct. 13, 1989 7% January 1990
128,000.00 Oct. 19, 1989 7% January 1990
2,000.00 Nov. 12, 1989 6% April 28, 1990
10,000.00 June 13, 1990 - -
80,000.00 Jan. 4, 1990 - -
 34,000.00 - 6% October 19, 1989
100,000.00 July 14, 1989 5% October 198913

According to Agrifina, Felicidad was able to pay only her loans amounting to P122,600.00.14

In July 1990, Felicidad gave to Agrifina City Trust Bank Check No. 126804 dated August 25,
1990 in the amount of P50,000.00 as partial payment.15 However, the check was dishonored
for having been drawn against insufficient funds.16 Agrifina then filed a criminal case against
Felicidad in the Office of the City Prosecutor. An Information for violation of Batas Pambansa
Bilang 22 was filed against Felicidad, docketed as Criminal Case No. 11181-R. After trial, the
court ordered Felicidad to pay P50,000.00. Felicidad complied and paid the face value of the
check.17

In the meantime, Agrifina learned that Felicidad had re-loaned the amounts to other
borrowers.18 Agrifina sought the assistance of Atty. Torres G. A-ayo who advised her to
require Felicidad to execute deeds of assignment over Felicidad's debtors. The lawyer also
suggested that Felicidad's debtors execute promissory notes in Agrifina's favor, to "turn over"
their loans from Felicidad. This arrangement would facilitate collection of Felicidad's account.
Agrifina agreed to the proposal.19 Agrifina, Felicidad, and the latter's debtors had a
conference20 where Atty. A-ayo explained that Agrifina could apply her collections as
payments of Felicidad's account.21

From August 7, 1990 to October, 1990, Felicidad executed deeds of assignment of credits
(obligations)22 duly notarized by Atty. A-ayo, in which Felicidad transferred and assigned to
Agrifina the total amount of P546,459.00 due from her debtors.23 In the said deeds, Felicidad
confirmed that her debtors were no longer indebted to her for their respective loans. For her
part, Agrifina conformed to the deeds of assignment relative to the loans of Virginia Morada
and Corazon Dalisay.24 She was furnished copies of the deeds as well as the promissory
notes.25

The following debtors of Felicidad executed promissory notes where they obliged themselves
to pay directly to Agrifina:

Debtors Account Date of Instrument

Juliet & Tommy Tibong P50,000.00 August 7, 1990 November 4, 19
Corazon Dalisay 8,000.00 August 7, 1990 No date
Rita Chomacog 4,480.00 August 8, 1990 September 23,
Antoinette Manuel 12,000.00 October 19, 1990 March 30, 1991
Rosemarie Bandas 8,000.00 August 8, 1990 February 3, 199
Fely Cirilo 63,600.00 September 13, 1990 No date
Virginia Morada 62,379.00 August 9, 1990 February 9, 199
Carmelita Casuga 59,000.00 August 28, 1990 February 28, 19
Merlinda Gelacio 17,200.00 August 29, 1990 November 29, 1
Total P284,659.00

Agrifina narrated that Felicidad showed to her the way to the debtors' houses to enable her
to collect from them. One of the debtors, Helen Cabang, did not execute any promissory note
but conformed to the Deed of Assignment of Credit which Felicidad executed in favor of
Agrifina.27 Eliza Abance conformed to the deed of assignment for and in behalf of her sister,
Fely Cirilo.28 Edna Papat-iw was not able to affix her signature on the deed of assignment
nor sign the promissory note because she was in Taipei, Taiwan.29

Following the execution of the deeds of assignment and promissory notes, Agrifina was able
to collect the total amount of P301,000.00 from Felicidad's debtors.30 In April 1990, she tried
to collect the balance of Felicidad's account, but the latter told her to wait until her debtors
had money.31 When Felicidad reneged on her promise, Agrifina filed a complaint in the Office
of the Barangay Captain for the collection of P773,000.00. However, no settlement was
arrived at.32

The Case for Respondents

Felicidad testified that she and her friend Agrifina had been engaged in the money-lending
business.33 Agrifina would lend her money with monthly interest,34 and she, in turn, would re-
lend the money to borrowers at a higher interest rate. Their business relationship turned sour
when Agrifina started complaining that she (Felicidad) was actually earning more than
Agrifina.35 Before the respective maturity dates of her debtors' loans, Agrifina asked her to
pay her account since Agrifina needed money to buy a house and lot in Manila. However,
she told Agrifina that she could not pay yet, as her debtors' loan payments were not yet
due.36 Agrifina then came to her store every afternoon to collect from her, and persuaded her
to go to Atty. Torres G. A-ayo for legal advice.37 The lawyer suggested that she indorse the
accounts of her debtors to Agrifina so that the latter would be the one to collect from her
debtors and she would no longer have any obligation to Agrifina.38 She then executed deeds
of assignment in favor of Agrifina covering the sums of money due from her debtors. She
signed the deeds prepared by Atty. A-ayo in the presence of Agrifina.39 Some of the debtors
signed the promissory notes which were likewise prepared by the lawyer. Thereafter, Agrifina
personally collected from Felicidad's debtors.40 Felicidad further narrated that she
received P250,000.00 from one of her debtors, Rey Rivera, and remitted the payment to
Agrifina.41

Agrifina testified, on rebuttal, that she did not enter into a re-lending business with Felicidad.
When she asked Felicidad to consolidate her loans in one document, the latter told her to
seek the assistance of Atty. A-ayo.42 The lawyer suggested that Felicidad assign her credits
in order to help her collect her loans.43 She agreed to the deeds of assignment to help
Felicidad collect from the debtors.44

On January 20, 2003, the trial court rendered its Decision45 in favor of Agrifina. The fallo of
the decision reads:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the

defendants ordering the latter to pay the plaintiffs (sic) the following amounts:

1. P472,000 as actual obligation with the stipulated interest of 6% per month from
May 11, 1999 until the said obligation is fully paid. However, the amount of P50,000
shall be deducted from the total accumulated interest for the same was already paid
by the defendant as admitted by the plaintiff in her complaint,

2. P25,000 as attorney's fees,

3. [T]o pay the costs.

 SO ORDERED.46

The trial court ruled that Felicidad's obligation had not been novated by the deeds of
assignment and the promissory notes executed by Felicidad's borrowers. It explained that
the documents did not contain any express agreement to novate and extinguish Felicidad's
obligation. It declared that the deeds and notes were separate contracts which could stand
alone from the original indebtedness of Felicidad. Considering, however, Agrifina's
admission that she was able to collect from Felicidad's debtors the total amount
of P301,000.00, this should be deducted from the latter's accountability.47 Hence, the
balance, exclusive of interests, amounted to P472,000.00.

On appeal, the CA affirmed with modification the decision of the RTC and stated that, based
on the promissory notes and acknowledgment receipts signed by Felicidad, the appellants
secured loans from the appellee in the total principal amount of only P637,000.00,
not P773,000.00 as declared by the trial court. The CA found that, other than Agrifina's bare
testimony that she had lost the promissory notes and acknowledgment receipts, she failed to
present competent documentary evidence to substantiate her claim that Felicidad had,
likewise, borrowed the amounts of P100,000.00, P34,000.00, and P2,000.00. Of
the P637,000.00 total account, P585,659.00 was covered by the deeds of assignment and
promissory notes; hence, the balance of Felicidad's account amounted to only P51,341.00.
The fallo of the decision reads:

WHEREFORE, in view of the foregoing, the decision dated January 20, 2003 of the
RTC, Baguio City, Branch 61 in Civil Case No. 4370-R is hereby MODIFIED.
Defendants-appellants are hereby ordered to pay the balance of the total
indebtedness in the amount of P51,341.00 plus the stipulated interest of 6% per
month from May 11, 1999 until the finality of this decision.

SO ORDERED.48

The appellate court sustained the trial court's ruling that Felicidad's obligation to Agrifina had
not been novated by the deeds of assignment and promissory notes executed in the latter's
favor. Although Agrifina was subrogated as a new creditor in lieu of Felicidad, Felicidad's
obligation to Agrifina under the loan transaction remained; there was no intention on their
part to novate the original obligation. Nonetheless, the appellate court held that the legal
effects of the deeds of assignment could not be totally disregarded. The assignments of
credits were onerous, hence, had the effect of payment, pro tanto, of the outstanding
obligation. The fact that Agrifina never repudiated or rescinded such assignments only shows
that she had accepted and conformed to it. Consequently, she cannot collect both from
Felicidad and her individual debtors without running afoul to the principle of unjust
enrichment. Agrifina's primary recourse then is against Felicidad's individual debtors on the
basis of the deeds of assignment and promissory notes.

The CA further declared that the deeds of assignment executed by Felicidad had the effect
of payment of her outstanding obligation to Agrifina in the amount of P585,659.00. It ruled
that, since an assignment of credit is in the nature of a sale, the assignors remained liable for
the warranties as they are responsible for the existence and legality of the credit at the time
of the assignment.

Both parties moved to have the decision reconsidered,49 but the appellate court denied both
motions on December 21, 2004.50
Agrifina, now petitioner, filed the instant petition, contending that

1. The Honorable Court of Appeals erred in ruling that the deeds of assignment in
favor of petitioner has the effect of payment of the original obligation even as it ruled
out that the original obligation and the assigned credit are distinct and separate and
can stand independently from each other;

2. The Honorable Court of Appeals erred in passing upon issues raised for the first
time on appeal; and

3. The Honorable Court of Appeals erred in resolving fact not in issue.51

Petitioner avers that the appellate court erred in ruling that respondents' original obligation
amounted to only P637,000.00 (instead of P773,000.00) simply because she lost the
promissory notes/receipts which evidenced the loans executed by respondent Felicidad
Tibong. She insists that the issue of whether Felicidad owed her less than P773,000.00 was
not raised by respondents during pre-trial and in their appellate brief; the appellate court was
thus proscribed from taking cognizance of the issue.

Petitioner avers that respondents failed to deny, in their verified answer, that they had
secured the P773,000.00 loan; hence, respondents are deemed to have admitted the
allegation in the complaint that the loans secured by respondent from her amounted
to P773,000.00. As gleaned from the trial court's pre-trial order, the main issue is whether or
not she should be made to pay this amount.

Petitioner further maintains that the CA erred in deducting the total amount of P585,659.00
covered by the deeds of assignment executed by Felicidad and the promissory notes
executed by the latter's debtors, and that the balance of respondents' account was
only P51,341.00. Moreover, the appellate court's ruling that there was no novation runs
counter to its holding that the primary recourse was against Felicidad's debtors. Petitioner
avers that of the 11 deeds of assignment and promissory notes, only two bore her
signature.52 She insists that she is not bound by the deeds which she did not sign. By
assigning the obligation to pay petitioner their loan accounts, Felicidad's debtors merely
assumed the latter's obligation and became co-debtors to petitioner. Respondents were not
released from their obligation under their loan transactions, and she had the option to
demand payment from them or their debtors. Citing the ruling of this Court in Magdalena
Estates, Inc. v. Rodriguez,53 petitioner insists that the first debtor is not released from
responsibility upon reaching an agreement with the creditor. The payment by a third person
of the first debtor's obligation does not constitute novation, and the creditor can still enforce
the obligation against the original debtor. Petitioner also cites the ruling of this Court
in Guerrero v. Court of Appeals.54

In their Comment on the petition, respondents aver that by virtue of respondent Felicidad's
execution of the deeds of assignment, and the original debtors' execution of the promissory
notes (along with their conformity to the deeds of assignment with petitioner's consent), their
loan accounts with petitioner amounting to P585,659.00 had been effectively extinguished.
Respondents point out that this is in accordance with Article 1291, paragraph 2, of the Civil
Code. Thus, the original debtors of respondents had been substituted as petitioner's new
debtors.

Respondents counter that petitioner had been subrogated to their right to collect the loan
accounts of their debtors. In fact, petitioner, as the new creditor of respondents' former
debtors had been able to collect the latter's loan accounts which amounted to P301,000.00.
The sums received by respondents' debtors were the same loans which they obliged to pay
to petitioner under the promissory notes executed in petitioner's favor.

Respondents aver that their obligation to petitioner cannot stand or exist separately from the
original debtors' obligation to petitioner as the new creditor. If allowed to collect from them as
well as from their original debtors, petitioner would be enriching herself at the expense of
respondents. Thus, despite the fact that petitioner had collected P172,600.00 from
respondents and P301,000.00 from the original debtors, petitioner still sought to
collect P773,000.00 from them in the RTC. Under the deeds of assignment executed by
Felicidad and the original debtors' promissory notes, the original debtors' accounts were
assigned to petitioner who would be the new creditor. In fine, respondents are no longer
liable to petitioner for the balance of their loan account inclusive of interests. Respondents
also insist that petitioner failed to prove that she (petitioner) was merely authorized to collect
the accounts of the original debtors so as to to facilitate the payment of respondents' loan
obligation.

The Issues

The threshold issues are: (1) whether respondent Felicidad Tibong borrowed P773,000.00
from petitioner; and (2) whether the obligation of respondents to pay the balance of their
loans, including interest, was partially extinguished by the execution of the deeds of
assignment in favor of petitioner, relative to the loans of Edna Papat-iw, Helen Cabang,
Antoinette Manuel, and Fely Cirilo in the total amount of P371,000.00.

The Ruling of the Court

We have carefully reviewed the brief of respondents as appellants in the CA, and find that,
indeed, they had raised the issue of whether they received P773,000.00 by way of loans
from petitioner. They averred that, as gleaned from the documentary evidence of petitioner in
the RTC, the total amount they borrowed was only P673,000.00. They asserted that
petitioner failed to adduce concrete evidence that they received P773,000.00 from her.55

We agree, however, with petitioner that the appellate court erred in reversing the finding of
the RTC simply because petitioner failed to present any document or receipt signed by
Felicidad.

Section 10, Rule 8 of the Rules of Civil Procedure requires a defendant to "specify each
material allegation of fact the truth of which he does not admit and, whenever practicable, x x
x set forth the substance of the matters upon which he relies to support his denial.56

Section 11, Rule 8 of the same Rules provides that allegations of the complaint not
specifically denied are deemed admitted.57

The purpose of requiring the defendant to make a specific denial is to make him disclose the
matters alleged in the complaint which he succinctly intends to disprove at the trial, together
with the matter which he relied upon to support the denial. The parties are compelled to lay
their cards on the table.58

A denial is not made specific simply because it is so qualified by the defendant. A general
denial does not become specific by the use of the word "specifically." When matters of
whether the defendant alleges having no knowledge or information sufficient to form a belief
are plainly and necessarily within the defendant's knowledge, an alleged "ignorance or lack
of information" will not be considered as a specific denial. Section 11, Rule 8 of the Rules
also provides that material averments in the complaint other than those as to the amount of
unliquidated damages shall be deemed admitted when not specifically denied.59 Thus, the
answer should be so definite and certain in its allegations that the pleader's adversary should
not be left in doubt as to what is admitted, what is denied, and what is covered by denials of
knowledge as sufficient to form a belief.60

In the present case, petitioner alleged the following in her complaint:

2. That defendants are indebted to the plaintiff in the principal amount of SEVEN
HUNDRED SEVENTY-THREE THOUSAND PESOS (P773,000.00) Philippine
Currency with a stipulated interest which are broken down as follows. The said
principal amounts was admitted by the defendants in their counter-affidavit submitted
before the court. Such affidavit is hereby attached as Annex "A;"61

xxxx

H) The sum of THIRTY FOUR THOUSAND PESOS (P34,000.00) with interest at six
(6%) per cent per month and payable on October 19, 1989, however[,] the receipt for
the meantime cannot be recovered as it was misplaced by the plaintiff but the letter
of defendant FELICIDAD TIBONG is hereby attached as Annex "H" for the
appreciation of the Honorable court;

I) The sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) with interest at

five (5%) percent per month, obtained on July 14, 1989 and payable on October 14,
1989. Such receipt was lost but admitted by the defendants in their counter-affidavit
as attached [to] this complaint and marked as Annex "A" mentioned in paragraph one
(1); x x x62

In their Answer, respondents admitted that they had secured loans from petitioner. While the
allegations in paragraph 2 of the complaint were specifically denied, respondents merely
averred that petitioner and respondent Felicidad entered into an agreement for the lending of
money to interested borrowers at a higher interest rate. Respondents failed to declare the
exact amount of the loans they had secured from petitioner. They also failed to deny the
allegation in paragraph 2 of the complaint that respondent Felicidad signed and submitted a
counter-affidavit in I.S. No. 93-334 where she admitted having secured loans from petitioner
in the amount of P773,000.00. Respondents, likewise, failed to deny the allegation in
paragraph 2(h) of the complaint that respondents had secured a P34,000.00 loan payable on
October 19, 1989, evidenced by a receipt which petitioner had misplaced. Although
respondents specifically denied in paragraph 2.11 of their Answer the allegations in
paragraph 2(I) of the complaint, they merely alleged that "they have not received sums of
money from the plaintiff without any receipt therefor."

Respondents, likewise, failed to specifically deny another allegation in the complaint that
they had secured a P100,000.00 loan from petitioner on July 14, 1989; that the loan was
payable on October 14, 1989; and evidenced by a receipt which petitioner claimed to have
lost. Neither did respondents deny the allegation that respondents admitted their loan
of P100,000.00 in the counter-affidavit of respondent Felicidad, which was appended to the
complaint as Annex "A." In fine, respondents had admitted the existence of
their P773,000.00 loan from petitioner.
We agree with the finding of the CA that petitioner had no right to collect from respondents
the total amount of P301,000.00, which includes more than P178,980.00 which respondent
Felicidad collected from Tibong, Dalisay, Morada, Chomacog, Cabang, Casuga, Gelacio,
and Manuel. Petitioner cannot again collect the same amount from respondents; otherwise,
she would be enriching herself at their expense. Neither can petitioner collect from
respondents more than P103,500.00 which she had already collected from Nimo, Cantas,
Rivera, Donguis, Fernandez and Ramirez.

There is no longer a need for the Court to still resolve the issue of whether respondents'
obligation to pay the balance of their loan account to petitioner was partially extinguished by
the promissory notes executed by Juliet Tibong, Corazon Dalisay, Rita Chomacog, Carmelita
Casuga, Merlinda Gelacio and Antoinette Manuel because, as admitted by petitioner, she
was able to collect the amounts under the notes from said debtors and applied them to
respondents' accounts.

Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the ways by
which obligations are extinguished. Obligations may be modified by changing their object or
principal creditor or by substituting the person of the debtor.63 The burden to prove the
defense that an obligation has been extinguished by novation falls on the debtor.64 The
nature of novation was extensively explained in Iloilo Traders Finance, Inc. v. Heirs of Sps.
Oscar Soriano, Jr.,65 as follows:

Novation may either be extinctive or modificatory, much being dependent on the

nature of the change and the intention of the parties. Extinctive novation is never
presumed; there must be an express intention to novate; in cases where it is implied,
the acts of the parties must clearly demonstrate their intent to dissolve the old
obligation as the moving consideration for the emergence of the new one. Implied
novation necessitates that the incompatibility between the old and new obligation be
total on every point such that the old obligation is completely superseded by the new
one. The test of incompatibility is whether they can stand together, each one having
an independent existence; if they cannot and are irreconciliable, the subsequent
obligation would also extinguish the first.

An extinctive novation would thus have the twin effects of, first, extinguishing an
existing obligation and, second, creating a new one in its stead. This kind of novation
presupposes a confluence of four essential requisites: (1) a previous valid obligation;
(2) an agreement of all parties concerned to a new contract; (3) the extinguishment
of the old obligation; and (4) the birth of a valid new obligation. Novation is merely
modificatory where the change brought about by any subsequent agreement is
merely incidental to the main obligation (e.g., a change in interest rates or an
extension of time to pay); in this instance, the new agreement will not have the effect
of extinguishing the first but would merely supplement it or supplant some but not all
of its provisions.66 (Citations Omitted)

Novation which consists in substituting a new debtor (delegado) in the place of the original
one (delegante) may be made even without the knowledge or against the will of the latter but
not without the consent of the creditor. Substitution of the person of the debtor may be
effected by delegacion, meaning, the debtor offers, and the creditor (delegatario), accepts a
third person who consents to the substitution and assumes the obligation. Thus, the consent
of those three persons is necessary.67 In this kind of novation, it is not enough to extend the
juridical relation to a third person; it is necessary that the old debtor be released from the
obligation, and the third person or new debtor take his place in the relation.68 Without such
release, there is no novation; the third person who has assumed the obligation of the debtor
merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first
and the new debtor are considered obligated jointly.69

In Di Franco v. Steinbaum,70 the appellate court ruled that as to the consideration necessary
to support a contract of novation, the rule is the same as in other contracts. The
consideration need not be pecuniary or even beneficial to the person promising. It is
sufficient if it be a loss of an inconvenience, such as the relinquishment of a right or the
discharge of a debt, the postponement of a remedy, the discontinuance of a suit, or
forbearance to sue.

In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court of Appeals ruled that the
theory of novation is that the new debtor contracts with the old debtor that he will pay
the debt, and also to the same effect with the creditor, while the latter agrees to accept
the new debtor for the old. A novation is not made by showing that the substituted debtor
agreed to pay the debt; it must appear that he agreed with the creditor to do so. Moreover,
the agreement must be based on the consideration of the creditor's agreement to look
to the new debtor instead of the old. It is not essential that acceptance of the terms of the
novation and release of the debtor be shown by express agreement. Facts and
circumstances surrounding the transaction and the subsequent conduct of the parties may
show acceptance as clearly as an express agreement, albeit implied.72

We find in this case that the CA correctly found that respondents' obligation to pay the
balance of their account with petitioner was extinguished, pro tanto, by the deeds of
assignment of credit executed by respondent Felicidad in favor of petitioner.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as

the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and
without the consent of the debtor, transfers his credit and accessory rights to another, known
as the assignee, who acquires the power to enforce it to the same extent as the assignor
could enforce it against the debtor.73 It may be in the form of sale, but at times it may
constitute a dation in payment, such as when a debtor, in order to obtain a release from his
debt, assigns to his creditor a credit he has against a third person.74

In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion en pago is the delivery
and transmission of ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation. It is a special mode of payment where the
debtor offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is,
the creditor is really buying the thing or property of the debtor, payment for which is to be
charged against the debtor's obligation. As such, the essential elements of a contract of sale,
namely, consent, object certain, and cause or consideration must be present. In its modern
concept, what actually takes place in dacion en pago is an objective novation of the
obligation where the thing offered as an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale, while the debt is considered as
the purchase price. In any case, common consent is an essential prerequisite, be it sale or
novation, to have the effect of totally extinguishing the debt or obligation.76

The requisites for dacion en pago are: (1) there must be a performance of the prestation in
lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a
real right or a credit against the third person; (2) there must be some difference between the
prestation due and that which is given in substitution (aliud pro alio); and (3) there must be
an agreement between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that due.77

All the requisites for a valid dation in payment are present in this case. As gleaned from the
deeds, respondent Felicidad assigned to petitioner her credits "to make good" the balance of
her obligation. Felicidad testified that she executed the deeds to enable her to make partial
payments of her account, since she could not comply with petitioner's frenetic demands to
pay the account in cash. Petitioner and respondent Felicidad agreed to relieve the latter of
her obligation to pay the balance of her account, and for petitioner to collect the same from
respondent's debtors.

Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to affix their
conformity to the deeds. In an assignment of credit, however, the consent of the debtor is not
essential for its perfection; the knowledge thereof or lack of it affecting only the
efficaciousness or inefficaciousness of any payment that might have been made. The
assignment binds the debtor upon acquiring knowledge of the assignment but he is entitled,
even then, to raise against the assignee the same defenses he could set up against the
assignor78 necessary in order that assignment may fully produce legal effects. Thus, the duty
to pay does not depend on the consent of the debtor. The purpose of the notice is only to
inform that debtor from the date of the assignment. Payment should be made to the assignee
and not to the original creditor.

The transfer of rights takes place upon perfection of the contract, and ownership of the right,
including all appurtenant accessory rights, is acquired by the assignee79 who steps into the
shoes of the original creditor as subrogee of the latter80 from that amount, the ownership of
the right is acquired by the assignee. The law does not require any formal notice to bind the
debtor to the assignee, all that the law requires is knowledge of the assignment. Even if the
debtor had not been notified, but came to know of the assignment by whatever means, the
debtor is bound by it. If the document of assignment is public, it is evidence even against a
third person of the facts which gave rise to its execution and of the date of the latter. The
transfer of the credit must therefore be held valid and effective from the moment it is made to
appear in such instrument, and third persons must recognize it as such, in view of the
authenticity of the document, which precludes all suspicion of fraud with respect to the date
of the transfer or assignment of the credit.81

As gleaned from the deeds executed by respondent Felicidad relative to the accounts of her
other debtors, petitioner was authorized to collect the amounts of P6,000.00 from Cabang,
and P63,600.00 from Cirilo. They obliged themselves to pay petitioner. Respondent
Felicidad, likewise, unequivocably declared that Cabang and Cirilo no longer had any
obligation to her.

Equally significant is the fact that, since 1990, when respondent Felicidad executed the
deeds, petitioner no longer attempted to collect from respondents the balance of their
accounts. It was only in 1999, or after nine (9) years had elapsed that petitioner attempted to
collect from respondents. In the meantime, petitioner had collected from respondents'
debtors the amount of P301,000.00.

While it is true that respondent Felicidad likewise authorized petitioner in the deeds to collect
the debtors' accounts, and for the latter to pay the same directly, it cannot thereby be
considered that respondent merely authorized petitioner to collect the accounts of
respondents' debtors and for her to apply her collections in partial payments of their
accounts. It bears stressing that petitioner, as assignee, acquired all the rights and remedies
passed by Felicidad, as assignee, at the time of the assignment.82 Such rights and remedies
include the right to collect her debtors' obligations to her.

Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that case, the
Court ruled that the mere fact that novation does not follow as a matter of course when the
creditor receives a guaranty or accepts payments from a third person who has agreed to
assume the obligation when there is no agreement that the first debtor would be released
from responsibility. Thus, the creditor can still enforce the obligation against the original
debtor.

In the present case, petitioner and respondent Felicidad agreed that the amounts due from
respondents' debtors were intended to "make good in part" the account of respondents.
Case law is that, an assignment will, ordinarily, be interpreted or construed in accordance
with the rules of construction governing contracts generally, the primary object being always
to ascertain and carry out the intention of the parties. This intention is to be derived from a
consideration of the whole instrument, all parts of which should be given effect, and is to be
sought in the words and language employed.83

Indeed, the Court must not go beyond the rational scope of the words used in construing an
assignment, words should be construed according to their ordinary meaning, unless
something in the assignment indicates that they are being used in a special sense. So, if the
words are free from ambiguity and expressed plainly the purpose of the instrument, there is
no occasion for interpretation; but where necessary, words must be interpreted in the light of
the particular subject matter.84 And surrounding circumstances may be considered in order to
understand more perfectly the intention of the parties. Thus, the object to be accomplished
through the assignment, and the relations and conduct of the parties may be considered in
construing the document.

Although it has been said that an ambiguous or uncertain assignment should be construed
most strictly against the assignor, the general rule is that any ambiguity or uncertainty in the
meaning of an assignment will be resolved against the party who prepared it; hence, if the
assignment was prepared by the assignee, it will be construed most strictly against him or
her.85 One who chooses the words by which a right is given ought to be held to the strict
interpretation of them, rather than the other who only accepts them.86

Considering all the foregoing, we find that respondents still have a balance on their account
to petitioner in the principal amount of P33,841.00, the difference between their loan
of P773,000.00 less P585,659.00, the payment of respondents' other debtors amounting
to P103,500.00, and the P50,000.00 payment made by respondents.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The Decision and Resolution
of the Court of Appeals are AFFIRMED with MODIFICATION in that the balance of the
principal account of the respondents to the petitioner is P33,841.00. No costs.

SO ORDERED.

Austria-Martinez, and Chico-Nazario, JJ., concur.

Panganiban, C.J., retired as of December 7, 2006.
Ynares-Santiago, J., working Chairperson.
G.R. NO. 140608 September 23, 2004

PERMANENT SAVINGS AND LOAN BANK, petitioner,

vs.
MARIANO VELARDE, respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

In a complaint for sum of money filed before the Regional Trial Court of Manila (Branch 37),
docketed as Civil Case No. 94-71639, petitioner Permanent Savings and Loan Bank sought
to recover from respondent Mariano Velarde, the sum of ₱1,000,000.00 plus accrued
interests and penalties, based on a loan obtained by respondent from petitioner bank,
evidenced by the following: (1) promissory note dated September 28, 1983;1 (2) loan release
sheet dated September 28, 1983;2 and (3) loan disclosure statement dated September 28,
1983.3 Petitioner bank, represented by its Deputy Liquidator after it was placed under
liquidation, sent a letter of demand to respondent on July 27, 1988, demanding full payment
of the loan.4 Despite receipt of said demand letter,5 respondent failed to settle his account.
Another letter of demand was sent on February 22, 1994,6 and this time, respondent’s
counsel replied, stating that the obligation "is not actually existing but covered by
contemporaneous or subsequent agreement between the parties …"7

In his Answer, respondent disclaims any liability on the instrument, thus:

2. The allegations in par. 2, Complaint, on the existence of the alleged loan of ₱1-
Million, and the purported documents evidencing the same, only the signature
appearing at the back of the promissory note, Annex "A" seems to be that of herein
defendant. However, as to any liability arising therefrom, the receipt of the said
amount of P1-Million shows that the amount was received by another person, not the
herein defendant. Hence, no liability attaches and as further stated in the special and
affirmative defenses that, assuming the promissory note exists, it does not bind much
less is there the intention by the parties to bind the herein defendant. In other words,
the documents relative to the loan do not express the true intention of the parties.8

Respondent’s Answer also contained a denial under oath, which reads:

I, MARIANO Z. VELARDE, of age, am the defendant in this case, that I caused the
preparation of the complaint and that all the allegations thereat are true and correct;
that the promissory note sued upon, assuming that it exists and bears the genuine
signature of herein defendant, the same does not bind him and that it did not truly
express the real intention of the parties as stated in the defenses; …9

During pre-trial, the issues were defined as follows:

1. Whether or not the defendant has an outstanding loan obligation granted by the
plaintiff;

2. Whether or not the defendant is obligated to pay the loan including interests and
attorney’s fees;
 3. Whether or not the defendant has really executed the Promissory Note
considering the doubt as to the genuineness of the signature and as well as the non-
receipt of the said amount;

4. Whether or not the obligation has prescribed on account of the lapse of time from
date of execution and demand for enforcement; and

5. Whether or not the defendant is entitled to his counterclaim and other damages.10

On September 6, 1995, petitioner bank presented its sole witness, Antonio Marquez, the
Assistant Department Manager of the Philippine Deposit Insurance Corporation (PDIC) and
the designated Deputy Liquidator for petitioner bank, who identified the Promissory
Note11 dated September 28, 1983, the Loan Release Sheet12 dated September 28, 1983, and
the Disclosure Statement of Loan Credit Transaction.13

After petitioner bank rested its case, respondent, instead of presenting evidence, filed with
leave of court his demurrer to evidence, alleging the grounds that:

(a) PLAINTIFF FAILED TO PROVE ITS CASE BY PREPONDERANCE OF

EVIDENCE.

(b) THE CAUSE OF ACTION, CONCLUDING ARGUENTI THAT IT EXISTS, IS

BARRED BY PRESCRIPTION AND/OR LACHES.14

The trial court, in its Decision dated January 26, 1996, found merit in respondent’s demurrer
to evidence and dismissed the complaint including respondent’s counterclaims, without
pronouncement as to costs.15

On appeal, the Court of Appeals agreed with the trial court and affirmed the dismissal of the
complaint in its Decision16 dated October 27, 1999.17 The appellate court found that petitioner
failed to present any evidence to prove the existence of respondent’s alleged loan
obligations, considering that respondent denied petitioner’s allegations in its complaint. It
also found that petitioner bank’s cause of action is already barred by prescription.18

Hence, the present petition for review on certiorari under Rule 45 of the Rules Court, with the
following assignment of errors:

4.1

THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER FAILED TO

ESTABLISH THE GENUINENESS, DUE EXECUTION AND AUTHENTICITY OF
THE SUBJECT LOAN DOCUMENTS.

4.2

THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER’S CAUSE OF

ACTION IS ALREADY BARRED BY PRESCRIPTION AND OR LACHES.19

Before going into the merits of the petition, the Court finds it necessary to reiterate the well-
settled rule that only questions of law may be raised in a petition for review
on certiorari under Rule 45 of the Rules of Court, as "the Supreme Court is not a trier of
facts."20 It is not our function to review, examine and evaluate or weigh the probative value of
the evidence presented.21

There are, however, exceptions to the rule, e.g., when the factual inferences of the appellate
court are manifestly mistaken; the judgment is based on a misapprehension of facts; or the
CA manifestly overlooked certain relevant and undisputed facts that, if properly considered,
would justify a different legal conclusion.22 This case falls under said exceptions.

The pertinent rule on actionable documents is found in Rule 8, Section 7 of the Rules of
Court which provides that when the cause of action is anchored on a document, the
genuineness or due execution of the instrument shall be deemed impliedly admitted unless
the defendant, under oath, specifically denies them, and sets forth what he claims to be the
facts.

It was the trial court’s opinion that:

The mere presentation of supposed documents regarding the loan, but absent the
testimony of a competent witness to the transaction and the documentary evidence,
coupled with the denial of liability by the defendant does not suffice to meet the
requisite preponderance of evidence in civil cases. The documents, standing alone,
unsupported by independent evidence of their existence, have no legal basis to
stand on. They are not competent evidence. Such failure leaves this Court without
ample basis to sustain the plaintiff’s cause of action and other reliefs prayed for. The
loan document being challenged. (sic) Plaintiff did not exert additional effort to
strengthen its case by the required preponderance of evidence. On this score, the
suit must be dismissed.23

The Court of Appeals concurred with the trial court’s finding and affirmed the dismissal of the
complaint, viz.:

… The bank should have presented at least a single witness qualified to testify on
the existence and execution of the documents it relied upon to prove the disputed
loan obligations of Velarde. … This falls short of the requirement that (B)efore any
private writing may be received in evidence, its due execution and authenticity must
be proved either: (a) By anyone who saw the writing executed; (b) By evidence of the
genuineness of the handwriting of the maker; or (c) By a subscribing witness. (Rule
132, Sec. 21, Rules of Court) …

It is not true, as the Bank claims, that there is no need to prove the loan and its
supporting papers as Velarde has already admitted these. Velarde had in fact denied
these in his responsive pleading. And consistent with his denial, he objected to the
presentation of Marquez as a witness to identify the Exhibits of the Bank, and
objected to their admission when these were offered as evidence. Though these
were grudgingly admitted anyway, still admissibility of evidence should not be
equated with weight of evidence. …24

A reading of respondent’s Answer, however, shows that respondent did not

specifically deny that he signed the loan documents. What he merely stated in his
Answer was that the signature appearing at the back of the promissory note seems
to be his. Respondent also denied any liability on the promissory note as he allegedly
did not receive the amount stated therein, and the loan documents do not express
the true intention of the parties.25 Respondent reiterated these allegations in his
 "denial under oath," stating that "the promissory note sued upon, assuming that it
exists and bears the genuine signature of herein defendant, the same does not bind
him and that it did not truly express the real intention of the parties as stated in the
defenses …"26

Respondent’s denials do not constitute an effective specific denial as contemplated by law.

In the early case of Songco vs. Sellner,27 the Court expounded on how to deny the
genuineness and due execution of an actionable document, viz.:

… This means that the defendant must declare under oath that he did not sign the
document or that it is otherwise false or fabricated. Neither does the statement of the
answer to the effect that the instrument was procured by fraudulent representation
raise any issue as to its genuineness or due execution. On the contrary such a plea
is an admission both of the genuineness and due execution thereof, since it seeks to
avoid the instrument upon a ground not affecting either.

In fact, respondent’s allegations amount to an implied admission of the due execution and
genuineness of the promissory note. The admission of the genuineness and due execution
of a document means that the party whose signature it bears admits that he voluntarily
signed the document or it was signed by another for him and with his authority; that at the
time it was signed it was in words and figures exactly as set out in the pleading of the party
relying upon it; that the document was delivered; and that any formalities required by law,
such as a seal, an acknowledgment, or revenue stamp, which it lacks, are waived by
him.28 Also, it effectively eliminated any defense relating to the authenticity and due
execution of the document, e.g., that the document was spurious, counterfeit, or of different
import on its face as the one executed by the parties; or that the signatures appearing
thereon were forgeries; or that the signatures were unauthorized.29

Clearly, both the trial court and the Court of Appeals erred in concluding that respondent
specifically denied petitioner’s allegations regarding the loan documents, as respondent’s
Answer shows that he failed to specifically deny under oath the genuineness and due
execution of the promissory note and its concomitant documents. Therefore, respondent is
deemed to have admitted the loan documents and acknowledged his obligation with
petitioner; and with respondent’s implied admission, it was not necessary for petitioner to
present further evidence to establish the due execution and authenticity of the loan
documents sued upon.

While Section 22, Rule 132 of the Rules of Court requires that private documents be proved
of their due execution and authenticity before they can be received in
evidence, i.e., presentation and examination of witnesses to testify on this fact; in the present
case, there is no need for proof of execution and authenticity with respect to the loan
documents because of respondent’s implied admission thereof.30

Respondent claims that he did not receive the net proceeds in the amount of ₱988,333.00 as
stated in the Loan Release Sheet dated September 23, 1983.31 The document, however,
bears respondent’s signature as borrower.32Res ipsa loquitur.33 The document speaks for
itself. Respondent has already impliedly admitted the genuineness and due execution of the
loan documents. No further proof is necessary to show that he undertook the obligation with
petitioner. "A person cannot accept and reject the same instrument."34

The Court also finds that petitioner’s claim is not barred by prescription.
Petitioner’s action for collection of a sum of money was based on a written contract and
prescribes after ten years from the time its right of action arose.35 The prescriptive period
is interrupted when there is a written extrajudicial demand by the creditors.36 The interruption
of the prescriptive period by written extrajudicial demand means that the said period would
commence anew from the receipt of the demand.37

Thus, in the case of The Overseas Bank of Manila vs. Geraldez,38 the Court categorically
stated that the correct meaning of interruption as distinguished from
mere suspension or tolling of the prescriptive period is that said period would commence
anew from the receipt of the demand. In said case, the respondents Valenton and Juan, on
February 16, 1966, obtained a credit accommodation from the Overseas Bank of Manila in
the amount of ₱150,000.00. Written extrajudicial demands dated February 9, March 1 and
27, 1968, November 13 and December 8, 1975 and February 7 and August 27, 1976 were
made upon the respondents but they refused to pay. When the bank filed a case for the
recovery of said amount, the trial court dismissed the same on the ground of prescription as
the bank's cause of action accrued on February 16, 1966 (the date of the manager's check
for ₱150,000.00 issued by the plaintiff bank to the Republic Bank) and the complaint was
filed only on October 22, 1976. Reversing the ruling of the trial court, the Court ruled:

An action upon a written contract must be brought within ten years from the time the
right of action accrues (Art. 1144[1], Civil Code). "The prescription of actions is
interrupted when they are filed before the court, when there is a written extrajudicial
demand by the creditors, and when there is any written acknowledgment of the debt
by the debtor" (Art. 1155, Ibid, applied in Gonzalo Puyat & Sons, Inc. vs. City of
Manila, 117 Phil. 985, 993; Philippine National Bank vs. Fernandez, L-20086, July
10, 1967, 20 SCRA 645, 648; Harden vs. Harden, L-22174, July 21, 1967, 20 SCRA
706, 711).

A written extrajudicial demand wipes out the period that has already elapsed and
starts anew the prescriptive period. Giorgi says: "La interrupcion difiere de la
suspension porque borra el tiempo transcurrido anteriormente y obliga a la
prescripcion a comenzar de nuevo" (9 Teoria de las Obligaciones, 2nd Ed., p. 222).
"La interrupcion . . . quita toda eficacia al tiempo pasado y abre camino a un
computo totalmente nuevo, que parte del ultimo momento del acto interruptivo,
precisamente, como si en aquel momento y no antes hubiese nacido el credito" (8
Giorgi, ibid pp. 390-2).

That same view as to the meaning of interruption was adopted in Florendo vs.
Organo, 90 Phil. 483, 488, where it ruled that the interruption of the ten-year
prescriptive period through a judicial demand means that "the full period of
prescription commenced to run anew upon the cessation of the suspension". "When
prescription is interrupted by a judicial demand, the full time for the prescription must
be reckoned from the cessation of the interruption" (Spring vs. Barr, 120 So. 256
cited in 54 C.J.S. 293, note 27). That rule was followed in Nator and Talon vs. CIR,
114 Phil. 661, Sagucio vs. Bulos, 115 Phil. 786 and Fulton Insurance Co. vs. Manila
Railroad Company, L-24263, November 18, 1967, 21 SCRA 974, 981.

…
 Interruption of the prescriptive period as meaning renewal of the original term seems
to be the basis of the ruling in Ramos vs. Condez, L-22072, August 30, 1967, 20
SCRA 1146, 1151. In that case the cause of action accrued on June 25, 1952. There
was a written acknowledgment by the vendors on November 10, 1956 of the validity
of the deed of sale.

In National Marketing Corporation vs. Marquez, L-25553, January 31, 1969, 26 SCRA 722, it
appears that Gabino Marquez executed on June 24, 1950 a promissory note wherein he
bound himself to pay to the Namarco ₱12,000 in installments within the one-year period
starting on June 24, 1951 and ending on June 25, 1952. After making partial payments on
July 7, 1951 and February 23, 1952, Marquez defaulted.

His total obligation, including interest, as of October 31, 1964, amounted to ₱19,990.91.
Written demands for the payment of the obligation were made upon Marquez and his surety
on March 22, 1956, February 16, 1963, June 10, September 18 and October 13, 1964.
Marquez did not make any further payment.

The Namarco sued Marquez and his surety on December 16, 1964. They contended that the
action had prescribed because the ten-year period for suing on the note expired on June 25,
1962. That contention was not sustained. It was held that the prescriptive period was
interrupted by the written demands, copies of which were furnished the surety.

Respondent’s obligation under the promissory note became due and demandable on
October 13, 1983. On July 27, 1988, petitioner’s counsel made a written demand for
petitioner to settle his obligation. From the time respondent’s obligation became due and
demandable on October 13, 1983, up to the time the demand was made, only 4 years, 9
months and 14 days had elapsed. The prescriptive period then commenced anew when
respondent received the demand letter on August 5, 1988.39 Thus, when petitioner sent
another demand letter on February 22, 1994,40 the action still had not yet prescribed as only
5 years, 6 months and 17 days had lapsed. While the records do not show when respondent
received the second demand letter, nevertheless, it is still apparent that petitioner had the
right to institute the complaint on September 14, 1994, as it was filed before the lapse of the
ten-year prescriptive period.

Lastly, if a demurrer to evidence is granted but on appeal the order of dismissal is reversed,
the movant shall be deemed to have waived the right to present evidence.41 The movant who
presents a demurrer to the plaintiff’s evidence retains the right to present their own evidence,
if the trial court disagrees with them; if the trial court agrees with them, but on appeal, the
appellate court disagrees with both of them and reverses the dismissal order, the defendants
lose the right to present their own evidence. The appellate court shall, in addition, resolve the
case and render judgment on the merits, inasmuch as a demurrer aims to discourage
prolonged litigations.42 Thus, respondent may no longer offer proof to establish that he has
no liability under the loan documents sued upon by petitioner.

The promissory note signed and admitted by respondent provides for the loan amount of
₱1,000,000.00, to mature on October 13, 1983, with interest at the rate of 25% per annum.
The note also provides for a penalty charge of 24% per annum of the amount due and
unpaid, and 25% attorney’s fees. Hence, respondent should be held liable for these sums.
WHEREFORE, the petition is GRANTED. The Decisions of the Regional Trial Court of
Manila (Branch 37) dated January 26, 1996, and the Court of Appeals dated October 27,
1999 are SET ASIDE. Respondent is ordered to pay One Million Pesos (₱1,000,000.00) plus
25% interest and 24% penalty charge per annum beginning October 13, 1983 until fully paid,
and 25% of the amount due as attorney’s fees.

Costs against respondent.

SO ORDERED.

Puno, Callejo, Sr., Tinga, and Chico-Nazario*, JJ., concur.

Footnotes
KOREA EXCHANGE BANK, petitioner, vs. HON. ROGELIO C.
GONZALES, in his capacity as Presiding Judge of Branch
50 of the Regional Trial Court of Pampanga, PHI-HAN
DEVELOPMENT, INC., LOURDES DE MESA MENDOZA,
MENELEO MENDOZA, ANTUSA DE MESA MAGNO,
FRANCISCO MAGNO, TEODORO DE MESA, FIRMO DE
MESA and MERCEDES DE MESA, respondents.

DECISION
CALLEJO, SR., J.:

For review in these consolidated petitions is the Joint Decision[1] of

the Court of Appeals (CA) in CA-G.R. SP Nos. 46194 and 46436, as
well as its Order[2] dated February 28, 2000 denying the motion for
reconsideration thereof.

The Antecedents

The Phi-Han Development, Inc. (PHDI) is a domestic corporation

organized primarily for the purpose of engaging in the real estate
business.[3] Teodoro de Mesa and his siblings, namely, Antusa de Mesa
Magno and Lourdes de Mesa Mendoza, were among its original
incorporators and members of its board of directors. Jae Il Aum, a
Korean national, was the president of the corporation, while Lourdes
Mendoza served as its corporate secretary and treasurer.[4]
On September 5, 1996, or barely a year after its operations began,
the PHDI, together with Teodoro de Mesa, Antusa Magno and Lourdes
Mendoza, filed a complaint in the Regional Trial Court (RTC) of
Guagua, Pampanga, against Jae Il Aum and the Korea Exchange Bank
(KEB), a foreign banking corporation licensed to do business in the
Philippines.
The plaintiffs alleged therein that through the machination of Jae Il
Aum, KEB granted a loan to the PHDI in the amount of US$500,000.00,
with the condition that the said loan be deposited with the KEB in the
name of PHDI. Thereafter, the plaintiffs executed a real estate mortgage
over their properties located in Lubao, Pampanga. As security for the
said loan, PHDI deposited the said amount under its name with the KEB
in two accounts, namely, Dollar Account No. 5311000486 and Peso
Account No. 5311000487. Per Resolution No. 12-10-95 of the PHDI
Board of Directors, the only authorized signatories to all applications for
withdrawals from the said accounts were Jae Il Aum and Lourdes
Mendoza. Jae Il Aum withdrew US$160,000.00 from the said account
on February 15, 1996 by forging the signature of Lourdes Mendoza. He
was again able to withdraw from the separate accounts, leaving
US$163,000.00 as the balance thereof. It was further alleged that Jae Il
Aum could not have withdrawn the said deposits without the connivance
of the KEB. Moreover, the defendants failure to heed demands for an
accounting of the said withdrawals and for the restitution of the said
amounts constituted large scale estafafor which they are liable for
exemplary and moral damages.[5] The case was docketed as Civil Case
No. G-3012 and raffled to Branch 49 of the court.
On September 13, 1996, the KEB filed a Motion to Dismiss[6] the
complaint on the ground,[7]among others, that the case was within the
exclusive jurisdiction of the Securities and Exchange Commission
(SEC). On December 5, 1996, the trial court issued an Order denying
the motion. The KEB filed a motion for reconsideration of the courts
decision which was, however, denied.
The KEB filed a petition for certiorari and prohibition with the CA for
the nullification of the orders of the RTC. The case was docketed as
CA-G.R. SP No. 43363.[8] On March 17, 1999, the CA dismissed the
petition. The KEB filed a motion for reconsideration, which was denied
by the appellate court on July 22, 1999. It then filed a petition for review
on certiorari in this Court, docketed as G.R. No. 139460.[9]
Meanwhile, on April 2, 1997, the KEB filed a Complaint[10] against
Lourdes Mendoza, Meneleo Mendoza, Antusa Magno, Francisco
Magno, Teodoro de Mesa, Firmo de Mesa, Mercedes de Mesa Magno
and the PHDI (PHDI, et al.) before the RTC of Guagua, Pampanga, for
sum of money and reformation of real estate mortgage executed by
PHDI in its favor. The case was docketed as Civil Case No. G-3119 and
was raffled to Branch 50 of the court.
The KEB alleged therein that on January 15, 1996, it extended a
loan to the PHDI in the sum of US$500,000.00, payable within one year,
with interest at 3 months London Interbank Offering Rate (LIBOR) + 2%
per annum, evidenced by a promissory note executed by Jae Il Aum
and Lourdes Mendoza, president and treasurer, respectively, for and in
behalf of the PHDI, with Antusa Magno and Teodoro de Mesa acting as
witnesses. Jae Il Aum and Lourdes Mendoza were authorized by
resolution of the Board of Directors of PHDI to sign documents and
other papers and mortgage corporate assets. To secure the payment of
the said loan, Lourdes Mendoza and her siblings, Antusa de Mesa
Magno, Firmo de Mesa, Meneleo Mendoza and Mercedes de Mesa,
executed a real estate mortgage over 14 parcels of land they owned in
common, under a Special Power of Attorney executed by them in favor
of Teodoro, Lourdes and Antusa. However, the real estate mortgage
failed to express the true intent and agreement of the parties therein
because the debtors appearing therein were Lourdes de Mesa
Mendoza, Antusa de Mesa Magno, Mercedes de Mesa and Firmo de
Mesa, whereas the true agreement was to bind only PHDI as the
debtor. It was further alleged that PHDI, et al. had not paid the loan of
US$500,000.00 and the increment thereof despite demands therefor.
The KEB prayed that, after due proceedings, judgment be rendered
in its favor, ordering the reformation of the said real estate mortgage by
designating the PHDI as the debtor; ordering PHDI, et al., jointly and
severally, to pay US$500,000.00, with interest thereon at the rate of the
LIBOR for a three-month loan plus 2%, compounded monthly; 10% of
the total amount due as interest as withholding tax on the interest; 20%
of the total amount due as attorneys fees; and costs of suit. The KEB,
likewise, prayed that the properties mortgaged be foreclosed and sold in
case of failure to pay the said loan and its increment within 90 days from
notice of the judgment.[11] The KEB appended to its complaint a copy of
the real estate mortgage and the secretarys certificate containing the
resolution of the Board of Directors.
The PHDI, et al. filed a motion to dismiss[12] the complaint on the
ground of forum shopping, asserting that the KEB should have filed its
counterclaim for the reformation of the real estate mortgage and the
collection of US$500,000.00, including increment and damages in Civil
Case No. G-3012. They averred that since the KEB sought the
collection of the US$500,000.00 loan which was referred to in
paragraphs 2 and 3 of their complaint in Civil Case No. G-3012, the
essential elements of litis pendentia were present; hence, the trial court
should dismiss the complaint.
The KEB opposed[13] the motion, contending that the complaint in
Civil Case No. G-3012 involved corporate fraud; hence, the RTC had no
jurisdiction over the action in the said case, and as such, could not
interpose any counterclaims therein. The KEB, likewise, averred
that litis pendentia may be involved only when the RTC had jurisdiction
over the action in Civil Case No. G-3012. Moreover, the actions in Civil
Case Nos. G-3012 and G-3119 were unrelated.
On July 23, 1997, the RTC issued an Order[14] denying the motion to
dismiss, holding that the essential requirements of litis pendentia were
not present, and that the grounds invoked therein were not indubitable.
Thereafter, PHDI, et al. filed, in due course, their answer[15] with
counterclaims in Civil Case No. G-3119 where they denied being
indebted to the KEB. By way of special and affirmative defenses, they
alleged that they were deceived by Jae Il Aum, in connivance with the
KEB, into agreeing to secure a loan of US$500,000.00 from the latter
with their properties as security therefor to be used for the development
of their properties into a housing project; the US$500,000.00 loan of the
PHDI was deposited in Account No. 5311000487 and Account No.
5311000486 with the KEB. Jae Il Aum was able to withdraw the amount
of US$160,000.00 from the dollar account of PHDI based on an
application for withdrawal bearing the forged signature of Lourdes
Mendoza. Believing that Jae Il Aum could not validly withdraw from the
said account without her presence, Lourdes de Mesa Mendoza signed
applications for the withdrawals from the said accounts, authorizing Jae
Il Aum to make the said withdrawals. Jae Il Aum was then able to
withdraw the rest of the deposits of the PHDI. It was thus alleged that
the acts of the plaintiff and Jae Il Aum constituted large scale estafa,
and that he had been charged with large scale estafa in Criminal Case
Nos. 4085 and 4092 in the RTC of Pampanga. The aforementioned
unauthorized withdrawals could not have been made possible without
the indispensable cooperation of the authorized and/or responsible
officer/s of the KEB.[16] Moreover, the loan of the PHDI should be
extinguished under the principle of set-off or compensation. By way of
counterclaims, PHDI, et al., repleaded by reference all the allegations in
their special and affirmative defenses as part thereof, and alleged that
by reason of the foregoing acts of the KEB and Jae Il Aum, they
suffered shame and humiliation.
The PHDI, et al., prayed that the complaint be dismissed and, by
way of counterclaim, that the KEB be ordered to pay P500,000.00 as
moral damages, P500,000.00 as exemplary damages to deter like-
minded foreigners from victimizing Filipinos, and P100,000.00 as
attorneys fees, plus the cost of suit.[17]
On September 12, 1997, the KEB filed two motions: (1) a motion in
Civil Case No. G-3119 to dismiss the counterclaims of the PHDI, et
al. for their failure to attach in their answer with counterclaims a
certification of non-forum shopping as mandated by Supreme Court
Administrative Circular No. 04-94 (now Section 5, Rule 7 of the Rules of
Court);[18] and (2) a motion in Civil Case No. G-3012 to dismiss the
complaint for forum shopping.[19]
In its motion to dismiss the counterclaims in Civil Case No. G-3119,
the KEB alleged that the causes of action of the PHDI, et al. as plaintiffs
in Civil Case No. G-3012 for the collection of US$160,000.00 and
damages, and their claim in Civil Case No. G-3119 for the set-off of the
said amount against its claim of US$500,000.00 were identical; hence,
their counterclaims should be dismissed for forum shopping and,
consequently, their complaint in Civil Case No. G-3012 should likewise
be dismissed.
The PHDI, et al. opposed the motion to dismiss their complaint in
Civil Case No. G-3012 alleging that the KEB failed to include forum
shopping as a ground in its motion to dismiss their complaint; hence, is
bound by the omnibus motion rule. They further alleged that their
complaint could not be dismissed on the ground of forum shopping
based on their counterclaims in their answer to the complaint, since they
filed their answer and counterclaim after filing their complaint in Civil
Case No. G-3012.[20] Besides, the trial court had already denied their
motion to dismiss the complaint in Civil Case No. G-3119 on its finding
that there was no litis pendentia.
The PHDI, et al. also opposed the motion to dismiss[21] their
counterclaims in Civil Case No. G-3119, on the ground that the causes
of action in Civil Case No. G-3012 and their counterclaims in Civil Case
No. G-3119 were unrelated. They asserted that the subject matter,
causes of action and the issues in the two cases were different.
On October 14, 1997, the trial court issued an Order[22] in Civil Case
No. G-3012 denying the KEBs motion to dismiss the complaint, on its
finding that the causes of action of the PHDI in Civil Case No. G-3012
were different from those in their counterclaim in Civil Case No. G-3119.
The trial court also denied the motion (in Civil Case No. G-3119) to
dismiss the counterclaims of the PHDI, et al., on its finding that the
reliefs prayed for by the latter did not include the collection of
US$160,000.00 from the KEB; hence, there was no forum shopping.
The KEBs respective motions for reconsideration of the orders of
dismissal in Civil Case Nos. G-3119 and G-3012 were denied by the
trial courts, per the Orders dated October 24, 1997[23] and November 14,
1997.[24]
The KEB filed a petition for certiorari, prohibition and mandamus
against the PHDI, et al., in the CA, assailing the October 13 and 24,
1997 Orders of the trial court in Civil Case No. G-3119. The case was
docketed as CA-G.R. SP No. 46194.
The KEB also filed a petition for certiorari, prohibition and
mandamus with the CA on January 6, 1998, assailing the RTCs Orders
dated October 24 and November 14, 1997 in Civil Case No. G-3012.
The case was docketed as CA-G.R. SP No. 46436. The two petitions
were consolidated.
Meanwhile, the KEB filed its answer to the counterclaims of the
PHDI, et al., in Civil Case No. G-3119 for moral and exemplary
damages.[25] It alleged, inter alia, that only the consent of the PHDI,
through its signatories, was required for any withdrawal, and that all
such withdrawals were made with the knowledge and consent of
Lourdes de Mesa Mendoza, with her genuine signatures;[26] that the trial
court had no jurisdiction over the counterclaims for moral and exemplary
damages since the controversy involved corporate fraud which, under
Subsection (a), Section 5 of Presidential Decree No. 902-A, was within
the exclusive jurisdiction of the SEC; and that the counterclaims for
moral and exemplary damages should be dismissed because of the
pendency of Civil Case No. G-3012 which involved the same parties,
the same rights, the same reliefs, the same issues, and the same
causes of action, insofar as the complaint in Civil Case No. G-3012 and
the counterclaim in this case were concerned. Moreover, there was no
certification against forum shopping as required by Section 3, Rule 7 of
the Rules of Court. They further insisted that all the withdrawals were
authorized and made on the basis of genuine signatures; that PHDI,
being a corporation and an artificial person, had no feelings, and, as
such, moral damages could not be recovered from it; that it had all
along acted in good faith; and that if PHDI, et al., hired the services of
counsel, the attorneys fees should be for their own account, since they
unjustifiably refused to pay.[27]
On January 27, 2000, the CA rendered a Joint Decision [28] in CA-
G.R. SP Nos. 46194 and 46436. The CA affirmed the assailed orders of
the RTC in Civil Case No. G-3012, dismissing the petition in CA-G.R.
SP No. 46436 but partially giving due course to and granting the petition
in CA-G.R. SP No. 46194, by dismissing the counterclaims of the
respondents for moral and exemplary damages in Civil Case No. G-
3119 on the ground of forum shopping. The CA declared that the
counterclaims of the PHDI, et al., for moral and exemplary damages in
Civil Case No. G-3119, were merely permissive; hence, they were
mandated to append thereto a certification of non-forum shopping.
The CA anchored its decision on the rulings of this Court in Santo
Tomas University Hospital v. Surla[29] and Valencia v. Court of
Appeals.[30] However, the CA did not order the dismissal of the
complaint in Civil Case No. G-3012, on its finding that the RTC did not
commit grave abuse of its discretion in not ordering the dismissal of the
same. Besides, the trial court had already dismissed the counterclaims
of the PHDI, et al., for moral and exemplary damages in Civil Case No.
G-3119.[31]
Following the denial of its motion for reconsideration, the KEB, now
the petitioner, filed with this Court, a consolidated petition for review
on certiorari against PHDI, et al., the respondents, alleging that the CA
erred (a) in not ordering the dismissal of the counterclaim of the latter in
Civil Case No. G-3119 for their failure to append a certificate of non-
forum shopping, and (b) in not dismissing the complaint in Civil Case
No. G-3012 for forum shopping.[32]
As the issues in this case are interrelated, the Court shall delve into
and resolve them simultaneously.
The petitioner avers that the respondents are guilty of forum
shopping because they sought to recover US$160,000.00 by way of set-
off in their counterclaims in Civil Case No. G-3119, pending in Branch
50 of the RTC of Guagua, Pampanga, the same amount they sought to
recover in their complaint in Civil Case No. G-3012 pending in Branch
49 of the said court. The petitioner asserts that the respondents also
sought to recover P500,000.00 in moral damages, and P500,000.00 as
exemplary damages in Civil Case No. G-3012, which are the same
amounts the respondents sought to collect from the petitioner in their
counterclaims in Civil Case No. G-3119. The petitioner notes that
although the respondents alleged set-off of the US$160,000.00 in their
special and affirmative defenses, they, however, repleaded and
incorporated, by way of reference, the said allegations in their
counterclaims for moral and exemplary damages and attorneys fees;
hence, the claim of set-off or compensation of the respondents was a
counterclaim. The respondents were, thus, mandated to append a
certificate of non-forum shopping to their counterclaims as mandated by
Section 5, Rule 7 of the Rules of Court, but failed to do so. The
petitioner avers that there is identity of causes of action, issues and
reliefs prayed for in the complaint of the respondents in Civil Case No.
G-3012, and their counterclaims for set-off or compensation of the
US$160,000.00, moral damages of P500,000.00 and P500,000.00 as
exemplary damages in Civil Case No. G-3119. As such, the petitioner
insists that the respondents were guilty of forum shopping, for which
reason their complaint in Civil Case No. G-3012 should be dismissed.
The respondents, for their part, refute the contentions of the
petitioner and maintain that their claim for set-off or compensation[33] in
Civil Case No. G-3119 is a counterclaim but is compulsory in nature;
hence, there was no need for them to append a certificate of non-forum
shopping. The respondents also allege that the petitioner itself is guilty
of forum shopping because instead of filing counterclaims against them
in Civil Case No. G-3012, it filed a complaint for reformation of the real
estate mortgage and for the collection of US$500,000.00 and, in case of
refusal or failure of the respondents to pay the said amount of
US$500,000.00 for the judicial foreclosure of the real estate mortgage,
docketed as Civil Case No. G-3119. The respondents assert that, by
praying for the dismissal of their complaint in Civil Case No. G-3012 and
their counterclaims in Civil Case No. G-3119, the petitioner could win in
both instances without due process of law.

The Courts Ruling

A counterclaim, as now used and understood, includes both set-off

and recoupment and is broader than both; it includes equitable
demands and secures to the defendant full relief which is a separate
action at law and would have secured him on the same state of facts
being substantially a cross-action by the defendant against the
plaintiff.[34]
A set-off (compensacion) is a money demand by the defendant
against the plaintiff arising upon contract and constituting a debt
independent of and unconnected with the cause of actions set forth in
the complaint, and may be used to offset a plaintiffs claim but not to
recover affirmatively. As in the case with recoupment, set-off may be
used to offset a plaintiffs claim but not to recover affirmatively. This is
similar to the English rule which was first authorized by an English
statute in 1729.
 A recoupment (reconvencion) differs from a counterclaim
(contrarreclamacion) in that, under a counterclaim, the defendant may
have an affirmative judgment where he is able to prove a demand in
excess of the plaintiffs demand, whereas in the case of recoupment,
whatever the damages proved by the defendant, they can go only to
reduce or extinguish the claim against him. Recoupment must arise out
of the contract or transaction upon which the plaintiffs claim is founded.
Recoupment is of French origin and means the cutting back of the
plaintiffs claim by the defendant. It thus implies an admission of the
plaintiffs claim.
In Lopez v. Gloria and Sheriff of Leyte,[35] the Court ruled that for set-
off or recoupment to be considered as a counterclaim, the following
must concur: (1) the same be essentially a genuine action of the
defendant against the plaintiff; (2) the same should have as its object to
neutralize, wholly or partially, that which the plaintiff is trying to obtain;
(3) the same does not have for its object to destroy directly the action of
the plaintiff; and (4) the same ought not to pray for a positive remedy
distinct from the payment of money.
The Court explained that under the first requisite, independent of
any other consideration, a genuine action is constituted by the
defendant which could be employed separately against the plaintiff. On
the second requisite, the Court declared that the defendant admits the
facts upon which the action of the plaintiff is based. The second
requisite is absent if the defendant bases his claim on facts which
directly destroy the action or cause of action of the plaintiff. In such a
case, the claim of the defendant would only be a special defense.[36] On
the third requisite, set-off or recoupment may be merely a defense and
not a counterclaim if it only tends to oppose or to destroy the action of
the plaintiff.
After consideration of the material allegations of the answer of the
respondents in Civil Case No. G-3119, we believe that the respondents
claim of set-off or compensation of the US$160,000.00 against the claim
of US$500,000.00 of the petitioner against the respondents is a
counterclaim. The respondents admit in their complaint in Civil Case No.
G-3012 and in their answer in Civil Case No. G-3119 that they secured
a loan from the petitioner in the amount of US$500,000.00, but maintain
that they are not liable for the payment of the said loan because the
petitioner, in connivance with Jae Il Aum, had withdrawn not only
US$160,000.00 but the entire deposit of US$500,000.00 from the peso
and dollar accounts of respondent PHDI without the consent of the
respondents. The latter did not seek to recover affirmatively from the
petitioner.
However, we do not agree with the contention of the respondents
that their counterclaims are compulsory in nature. Section 7, Rule 5 of
the Rules of Court reads:

Sec. 7. Compulsory counterclaim. A compulsory counterclaim is one which,

being cognizable by the regular courts of justice, arises out of or is connected
with the transaction or occurrence constituting the subject matter of the
opposing partys claim and does not require for its adjudication the presence of
third parties of whom the court cannot acquire jurisdiction. Such a counterclaim
must be within the jurisdiction of the court both as to the amount and the nature
thereof, except that in an original action before the Regional Trial Court, the
counterclaim may be considered compulsory regardless of the amount.

As correctly held by the CA, the counterclaim of the respondents for

moral and exemplary damages against the petitioner is permissive. So
is the respondents claim of a set-off or compensation of the
US$160,000.00 which they sought in Civil Case No. G-3012 against the
US$500,000.00 claimed by the petitioner against the respondents in
Civil Case No. G-3119.
As the Court held in Yulienco v. Court of Appeals:[37]

A counterclaim is defined as any claim for money or other relief which a

defending party may have against an opposing party. A counterclaim is
compulsory if (a) it arises out of, or is necessarily connected with, the
transaction or occurrence which is the subject matter of the opposing partys
claim; (b) it does not require for its adjudication the presence of third parties of
whom the court cannot acquire jurisdiction; and (c) the court has jurisdiction to
entertain the claim. In other words, a compulsory counterclaim cannot be made
the subject of a separate action but should be asserted in the same suit involving
the same transaction or occurrence giving rise to it.

The criteria or tests by which the compulsory or permissive nature of specific

counterclaims can be determined are as follows:

(1) Are the issues of fact and law raised by the claim and counterclaim largely
the same?

(2) Would res judicata bar a subsequent suit on defendants claim absent the
compulsory counterclaim rule?
(3) Will substantially the same evidence support or refute plaintiffs claim as
well as defendants counterclaim?

(4) Is there any logical relation between the claim and the counterclaim? [38]

In the present case, the issues of fact and law raised by the
petitioner in its complaint in Civil Case No. G-3119, and in the
counterclaims of the respondents for the set-off of not only the
US$160,000.00 but the entirety of the deposits of the respondent PHDI
of US$500,000.00, and for moral and exemplary damages, are not
identical or even largely the same. In the complaint of the petitioner in
Civil Case No. G-3119, the issue is whether the loan of US$500,000.00
was secured by respondent PHDI from the petitioner, and whether the
respondents failed to pay the same and its increment despite the
petitioners demands. On the other hand, the issues in the respondents
counterclaims for set-off of the amount of US$160,000.00 are the
following: whether the signature of respondent Lourdes Mendoza
appearing on the said withdrawal application was forged; whether the
petitioner connived with Jae Il Aum when the latter withdrew the said
amount from the accounts of respondent PHDI; whether the petitioner
and Jae Il Aum are obliged to pay the said amount to the respondent
PHDI; and whether the obligations of the respondent to pay their loan of
US$500,000.00 is extrajudicial pro tanto. Any judgment of the court on
the complaint of the petitioner in Civil Case No. G-3119 would not bar
any suit on the respondents counterclaim. The evidence of the petitioner
on its claim in its complaint, and that of the respondents on their
counterclaims are thus different. There is, likewise, no logical relation
between the claim of the petitioner and the counterclaim of the
respondents. Hence, the counterclaim of the respondents is an initiatory
pleading, which requires the respondents to append thereto a certificate
of non-forum shopping. Their failure to do so results to the dismissal of
their counterclaim without prejudice.[39]
The general rule is that compliance with the certificate of forum
shopping is separate from and independent of the avoidance of the act
of forum shopping itself. Forum shopping is a ground for summary
dismissal of both initiatory pleadings without prejudice to the taking of
appropriate action against the counsel or party concerned.[40]
Case law has it that there is forum shopping when, between an
action pending before the court and another one, there exist:
(a) identity of parties, or at least such parties as represent the same interests in
both actions; (b) identity of rights asserted and relief prayed for, the relief being
founded on the same facts; and (c) the identity of the two preceding particulars
is such that any judgment rendered in the other action will, regardless of which
party is successful, amount to res judicata in the action under consideration. [41]

Otherwise stated, there is forum shopping where a litigant sues the

same party against whom another action or actions for the alleged
violation of the same right and the enforcement of the same relief is/are
still pending. The defense of litis pendentia in one case is a bar to the
other/others; and, a final judgment is one that would constitute res
judicata and thus would cause the dismissal of the rest. Absolute
identity of parties is not required. It is enough that there is substantial
identity of parties.[42] It is enough that the party against whom the
estoppel is set up is actually a party to the former case.[43] There is
identity of causes of action if the same evidence will sustain the second
action. The principle applies even if the relief sought in the two cases
may be different.[44] Forum shopping consists of filing multiple suits
involving the same parties for the same cause of action, either
simultaneously or successively, for the purpose of obtaining a favorable
judgment.[45]
What is truly important to consider, the Court ruled in Golangco v.
Court of Appeals,[46] is the vexation caused the courts and parties-
litigants who ask different courts and/or administrative agencies to rule
on the same or restated causes and/or grant the same or substantially
the same reliefs, in the process creating the possibility of conflicting
decisions being rendered by the different courts upon the same issues.
In Yupangco Cotton Mills, Inc. v. Court of Appeals,[47] the Court ruled
that for forum shopping to exist, both actions must involve the same
transactions, the same circumstances; and the actions must also raise
identical causes of actions, subject matter and issues. Forum shopping
is an act of malpractice that is prohibited and considered as trifling with
the court. It is an improper conduct which tends to degrade the
administration of justice. But there is no forum shopping where two
different orders or questions, two different causes of action and issues
are raised, and two objectives are sought.[48]
In this case, in interposing their counterclaim for set-off of the
US$160,000.00 against their loan of US$500,000.00 in Civil Case No.
G-3119, as well as the counterclaims for P500,000.00 as moral
damages, and P500,000.00 as exemplary damages, the respondents
thereby engaged in forum shopping. As gleaned from the material
averments of their complaint in Civil Case No. G-3012, the respondents,
who are the plaintiffs therein, claimed that Jae Il Aum, who was the
president of respondent PHDI, withdrew US$160,000.00 from the
deposit accounts of the said respondent with the petitioner; that such
withdrawal application bore the forged signature of respondent Lourdes
Mendoza; and that the authorized office/officers of the petitioner
connived with Jae Il Aum in consummating the withdrawal. The
respondents prayed that the petitioner and Jae Il Aum be ordered to
pay, jointly and severally, the said amount, plus P500,000.00 as moral
damages and P500,000.00 as exemplary damages based on their claim
that the petitioner, a corporation incorporated in Korea, and Jae Il Aum,
a Korean national, victimized the respondents, who are Filipinos. The
respondents merely restated and repleaded the same allegations in
their counterclaims in Civil Case No. G-3119, and prayed that the
aforesaid amount of US$160,000.00 be set-off against their loan of
US$500,000.00 which was being claimed by the petitioner in the said
case, in addition to awards for P500,000.00 as moral damages,
and P500,000.00 as exemplary damages against the petitioner for
allegedly victimizing Filipinos in their country. The threshold issues
common to and decisive of the complaint in Civil Case No. G-3012 and
the counterclaim for set-off in Civil Case No. G-3119 are whether the
signature of respondent Lourdes Mendoza on the application for
withdrawal of US$160,000.00 was forged, and whether the petitioner
connived with Jae Il Aum in the alleged fraudulent withdrawal of the said
amount. The evidence of the respondents as plaintiffs in Civil Case No.
G-3012 is the same evidence that they will have to adduce as plaintiffs
on their counterclaim for set-off in Civil Case No. G-3119. Any judgment
of the RTC of Guagua, Pampanga, Branch 49, in Civil Case No. G-3012
will, likewise, resolve the threshold issue in the respondents
counterclaim for set-off in Civil Case No. G-3119. That Jae Il Aum is not
a party in Civil Case No. G-3119 is not important; that the respondents
did not pray in their counterclaim that the petitioner pay to them the
US$160,000.00 withdrawn by Jae Il Aum is, likewise, not a bar to the
application of the principle of litis pendentia.
It must be stressed, however, that the dismissal of the complaint of
the respondents against the petitioner in Civil Case No. G-3012 is
without prejudice to the continuation of the case against Jae Il Aum.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED.
The complaint of the respondents against the petitioner in Civil Case
No. G-3012 is DISMISSED without prejudice to the continuation thereof
against the defendant Jae Il Aum. No costs.
AIDA PADILLA, Petitioner,
vs.
GLOBE ASIATIQUE REALTY HOLDINGS CORPORATION, FILMAL REALTY
CORPORATION, DELFIN S. LEE and DEXTER L. LEE, Respondents.

DECISION

VILLARAMA, JR., J.:

Assailed in this petition for review under Rule 45 are the Orders1 dated November 12, 2012
denying the motion to set the counterclaim for pre-trial and May 8, 2013 denying petitioner's
motion for reconsideration, issued by the Regional Trial Court (RTC) of Pasig City, Branch
155 in Civil Case No. 73132.

Factual Antecedents

From the years 2005 to 2008, Philippine National Bank (PNB) entered into several Contracts
to Sell (CTS) Facility Agreements2 with respondents Globe Asiatique Realty Holdings
Corporation (Globe Asiatique) and Filmal Realty Corporation (Filmal) represented by Delfin
S. Lee and Dexter L. Lee, President and Vice-President, respectively, of the two
corporations. PNB thereby agreed to make available toGlobe Asiatique and Filmal CTS
Facility in the amount not exceeding Two Hundred Million Pesos (₱200,000,000.00) to
finance the purchase of certain Accounts Receivables or the in-house installment receivables
of respondents arising from the sale of subdivision houses in their real estate/housing
projects as evidenced by contracts to sell. These availments werelater increased to a total
amount of One Billion Two Hundred Million Pesos (₱1,200,000,000.00).3

Pursuant to and as a condition for the CTS Facility availments, respondents executed in
favor of PNB several Deeds of Assignment4 covering accounts receivables in the aggregate
amount of One Billion One Hundred Ninety-Five Million Nine Hundred Twenty-Six Thousand
Three Hundred Ninety Pesos and Seventy-two centavos (₱1,195,926,390.72). In the said
instruments, respondents acknowledged the total amount of One Billion Three Hundred
Ninety FiveMillion Six Hundred Sixty-Five Thousand Five Hundred Sixty-FourPesos and
Sixty-nine centavos (₱1,395,665,564.69) released to themby PNB in consideration of the
aforesaid accounts receivables.5

Sometime in the first quarter of 2010, respondents defaulted in the payment of their
outstanding balance and delivery to PNB of transfer certificates of title corresponding to the
assigned accounts receivables, for which PNB declared them in default under the CTS
Facility Agreements. Subsequently, respondents made partial payments and made
proposals for paying in full its obligation to PNB as shown in the exchange of
correspondence between respondents and PNB.

In a letter dated August 5, 2010,6 PNB made a formal and final demand upon respondents to
pay/settle the total amount of ₱974,377,159.10 representing their outstanding obligation.In
the course of credit monitoring and verification, PNB claimed it discovered 231 out of 240
Contracts to Sell to have either inexistent addresses ofbuyers or the names of the buyers are
non-existent or both.

Thereafter, PNB instituted Civil Case No. R-PSY-10-04228-CV (Philippine National Bank v.
Globe Asiatique Realty Holdings Corporation, Filmal Realty Corporation, Delfin S. Lee and
Dexter L. Lee) for recovery of sum of money and damages with prayerfor writ of preliminary
attachment before the RTC of Pasay City.

In their complaint, PNB alleged in detail the fraudulent acts and misrepresentations
committed by respondents in obtaining PNB’s conformity to the CTS Facility Agreements and
the release of various sums to respondents in the total amountof ₱974,377,159.10. PNB
accused respondents of falsely representing that they have valid and subsisting contracts to
sell, which evidently showed they had no intention to pay their loan obligations. The
Verification and Certification of Non-Forum Shopping attached to the complaint was signed
byPNB’s Senior Vice-president of the Remedial Management Group, Aida Padilla, who
likewise executed an "Affidavit in Support of the Application for the Issuance of the Writ of
Preliminary Attachment."

Proceedings in the Pasay

City RTC (Civil Case No.
R-PSY-10-04228-CV)

On August 25, 2010, the Pasay City RTC issued an Order7 granting PNB’s application for
issuance of preliminary attachment after finding that defendants Globe Asiatique and Filmal
"through the active participation or connivance/conspiracy of defendants Delfin and Dexter
Lee from the revealing evidence presented by plaintiff are guilty of fraud in contracting their
outstanding loan applications to plaintiff Philippine National Bank (PNB)."8 The writ of
preliminary attachment was accordingly issued on August 27, 2010 after PNB complied
withthe posting of attachment bond as ordered by the court.9

Defendants Delfin Lee and DexterLee filed their Answer with Counterclaim with motion to
dismiss,arguing that PNB has no cause of action against them as there is nothing in the CTS
Facility Agreements that suggest they are personally liable or serve as guarantors for Globe
Asiatique and Filmal, and that they were just sued as signatories of the CTS Facility
Agreements. They likewise filed a motion to discharge preliminary attachment.10

Defendants Globe Asiatique and Filmalalso filed their Answer with Counterclaim denying
PNB’s allegationsof fraud and misrepresentation particularly after PNB had accepted
payments from the corporations. In their motion to discharge preliminary attachment, Globe
Asiatique and Filmal asserted that the allegations of fraud in the complaint are without basis
and no proof was presented by plaintiff on the existence of preconceived fraud and lack of
intention to pay their obligations, citing their timely payments made to PNB. They further
assailed the affidavit executed by Aida Padilla who they claimed has no personal knowledge
of the subject transactions and there being no allegation of threat or possibility that
defendant corporations will dispose oftheir properties in fraud of their creditors.11

In its Order12 dated April 29, 2011, the Pasay City RTC denied defendants’ motion to dismiss,
motions to discharge preliminary attachment and to expunge or suspend proceedings, as
well as PNB’s motion to expunge.

In succession, the parties in Civil Case No. R-PSY-10-04228-CV filed the following motions:

1) Defendants’ Motion for Reconsideration of the Order dated April 29, 2011 filed on
May 27, 2011;

2) Plaintiff’s Motion to Set Case for Pre-trial Conference filed on June 8, 2011;
 3) Plaintiff’s Motion for Summary Judgment filed on June 28, 2011;

4) Defendants’ Motion for Leave to Admit Attached Amended Answer with

Compulsory Counterclaim filed on July 12, 2011;

5) Defendants’ Omnibus Motion (a) to discharge the writ of attachment on the ground
of newly discovered evidence; (b) set preliminary hearing on affirmative defenses
pleaded in the amended answer; (c) issue preliminary attachment against plaintiff on
account of fraud in incurring the obligation as alleged in the amended answer; and
(d) render partial summary judgment on the compulsory counterclaim, filed on July
26, 2011;

6) Defendants’ Motion for Reconsideration of the Order dated July 29, 2011, with
Motion to Continue with the Proceedings Involving Defendants’ Omnibus Motion,
filed on August 31, 2011; 7) Defendants’ Motion to Set for Hearing their earlier
motion to discharge the writ of attachment filed on January 24, 2012; and

8) Plaintiff’s Motion to Expunge defendants’ Reply (on defendants’ motion to set

hearing) filed on April 30, 2012.

Meanwhile, and before the Pasay City RTC could act upon the foregoing motions,
defendants Globe Asiatique, Filmal, Delfin S. Lee and Dexter L. Lee filed on August 10, 2011
a complaint13 for Damages in the RTC of Pasig City, Branch 155 docketed as Civil Case No.
73132.

On May 18, 2012, the Pasay City RTC issued an Order14 resolving the pending motions, as
follows:

WHEREFORE, the motion for reconsideration of the Order dated 27 May 2011 is denied
insofar as the prayer to reconsider denial of the motion to dismiss. However, the prayer to
expunge the Manifestation filed on 26 November 2010 is granted thus, the Manifestation is
expunged.

The motion for leave and to admit amended answer is denied. The motion for
reconsideration of the Order dated 29 July 2011 is likewise denied. The other prayers in the
omnibus motion to set preliminary hearing of affirmative defenses in the amended answer,
issuance of preliminary attachment based thereon and for partial summary judgment on the
compulsory counterclaims in the amended answer are denied. Plaintiff’s motion to expunge
defendants’ reply is likewise denied.

Hearing on plaintiff’s motion for summary judgment is set on 19 June 2012 at 8:30 a.m.,
while hearing on defendants’ motion to discharge the writ of preliminary attachmentis set on
26 June 2012 at 8:30 a.m.

Action on plaintiff’s motion to set the case for pre-trial is deferred until after resolution of the
motion for summary judgment.

SO ORDERED.15

Pasig City RTC Case

(Civil Case No. 73132)
In their Complaint against Judge Pedro De Leon Gutierrez and Aida Padilla (both sued in
their personal capacity), respondents claimed that Globe Asiatique and Filmal are well-
known and successful real estate developers whose projects were "being continuously
supported by various banks and other financial institutions prior to the malicious and
devastating unfounded civil action" filed by AidaPadilla (petitioner) which wrought havoc to
their businesses and lives. As to the CTS Facility Agreements with PNB, respondents
alleged that these were already novated by the parties who agreed upon a term loan starting
May 31, 2010 and to expire on April 30, 2012. But despite her knowledge of such novation
and that the obligation was not yet due and demandable, petitioner with malice and evident
bad faith still executed a "perjured" Affidavit in support of the application for writ of
preliminary attachment before the Pasay City RTC. Respondents likewise sought to hold
Judge Gutierrez personally liable for issuing the writ of preliminary attachment in favor of
PNB notwithstanding that the obligation subject of PNB’s complaint was sufficiently secured
by the value of realproperties sold to it by virtue of the CTS Facility Agreements and deeds
ofassignment of accounts receivables.

They further contended that Judge Gutierrez blindly approved the attachment bond offered
by PNB’s sister company, PNB General Insurers Company, Inc. despite the fact that from its
submitted documents, said insurer’s authorized capital stock isonly ₱400 million while its
paid-up capital is only ₱312.6 million, which is way below the ₱974,377,159.10 attachment
bond it issued.

Respondents thus prayed for a judgment ordering petitioner and Judge Gutierrez to pay
moral damages, exemplary damages, litigation expenses, attorney’s fees and cost of suit.

Judge Gutierrez moved to dismiss16 the complaint against him on the following grounds: (1)
respondents haveno cause of action against him; and (2) the Pasig City court has no
jurisdiction over the case and his person, movant being of co-equal and concurrent
jurisdiction.

Petitioner filed her Answer With Compulsory Counterclaims,17 praying for the dismissal of
respondents’ complaint on the following grounds: (1) submission of a false certification of
non-forum shopping by respondents and their blatant commission of willful, deliberate and
contumacious forum shopping (respondents failed to disclose a criminal complaint entitled
"Tbram Cuyugan v. Aida Padilla and Members of the Board of Directors of PNB", docketed
as I.S. No. XV-13-INV-11-H-01208 pending before the office of the CityProsecutor of Pasay
City); (2) litis pendentia; (3) respondents’ failure to attach the alleged actionable document,
i.e.the supposed "new term loan", inviolation of Section 7, Rule 8 of the Rules of Court; (4)
failure to state a cause of action against petitioner; and (5) petitioner cannot be held
personally liable for her official acts done for and in behalf of PNB.

On January 5, 2012, petitioner filed a motion for preliminary hearing on affirmative defenses,
contending that respondents are parroting the very same arguments raised and relying on
the same evidence they presented before the Pasay City RTC to establish the alleged
novation and purported insufficiency of the attachment bond,which issues are still pending in
the said court. It was thus stressed that respondents are evidently guilty of forum shopping.18

Respondents filed their Comment/Opposition,19 arguing that there is nothing in their

complaint that would slightly suggest they are asking the Pasig City RTC to issue any
injunction or otherwise issue an order setting aside the writ of preliminary attachmentissued
by the Pasay City RTC, and neither did they ask for a ruling on whether said writ is illegal or
whether Judge Gutierrez committed a grave abuse of discretion.They asserted that what
they seek from the Pasig City RTC is to allow them to recover damages from Judge De Leon
for his tortious action in approving PNB’s attachment bond. They also insisted that forum
shopping and litis pendentiaare absent in this case, contrary to petitioner’s claims.
Respondents likewise opposed20 the motion to dismiss filed by Judge Gutierrez, citing this
Court’s ruling in J. King & Sons Company, Inc. v. JudgeAgapito L. Hontanosas, Jr.21 in
support of their position that the separate complaint before another forum against the judge
for his actionable wrong in a pending case before him can proceed independently without
necessarily interfering with the court’s jurisdiction, as what happened in the said case where
the judge was merely penalized for gross misconduct and gross ignorance of the law without
actually invalidating the judge’s order approving the counter-bond without reviewing the
documents presented.

In her Reply,22 petitioner reiterated her previous arguments and additionally contended that in
any event, there is no basis for respondents’ claim for damages arising from the issuance of
the writ of preliminary attachment before the Pasay City RTC considering that PNBGEN
Bond No. SU-JC14-HO-10-0000001-00 is valid and sufficient to secure and answer for
whatever damages respondents may have suffered by reason of such issuance should it be
finally decided that PNB was not entitled to the said bond.

On April 2, 2012, the RTC of Pasig City issued an Order23 dismissing Civil Case No. 73132
for lack of jurisdiction.

On May 7, 2012, petitioner filed a Motion to Set Counterclaims for Pre-Trial Conference.24

On October 22, 2012, the Pasig CityRTC denied respondents’ motion for reconsideration of
the April 2, 2012 Order dismissing their complaint.25 Respondents filed a Notice of
Appeal26 under Section 1(a), Rule 41 of the Rules of Court.

On November 12, 2012, the Pasig City RTC issued the first questioned Order, which reads:

xxxx

Records show that this Court, through then Acting Presiding Judge Amorfina Cerrado-Cezar,
issued an Order dated April 2, 2012, dismissing the case on the ground that issues involved
in this case already impinge upon the validity of the Order dated August 25, 2010 and Writ of
Attachment dated August 27, 2010 issued by the Regional Trial Court, Branch 119, Pasay
City, a court of concurrent and coordinate jurisdiction, in Civil Case No. R-PSY-10-04228
entitled "Philippine National Bank vs. Globe Asiatique Realty Holdings Corp. et al." The ruling
in said Order dated April 2, 2012, was affirmed by this Court per its Order dated October 22,
2012, whereby it reiterated that acting on the plaintiffs’ Complaint is a brazen violation of the
principle of judicial stability, which essentially states that the judgment or order of a court of
competent jurisdiction may not be interfered with by any court of concurrent jurisdiction for
the simple reason that the power to open, modify or vacate the said order is not only
possessed but is restricted to the court in which the judgment or order is rendered or issued.
(Cojuangco vs. Villegas, 184 SCRA 374)

The foregoing principles are equally applicable to the counterclaims of Aida Padilla. Indeed,
to hear the counterclaims of defendant Aida Padilla will open the door, so to speak, for the
plaintiffs to interpose as ostensibledefenses its claims regarding the alleged illegality of the
aforesaid orders and writ of attachment issued by the RTC of Pasay City. In effect this Court
will be forced to dwell upon issues involving the pending civil case in the RTC Branch 199,
Pasay City, thereby interfering, albeit indirectly, with said issues.This is precisely the very evil
which the Court sought to avoid when it dismissed the plaintiffs’ complaint. Therefore,
upholding once more the principle of judicial stability, this Court is impelled to refuse to hear
the counterclaims of defendant Padilla.

WHEREFORE, premises considered, the instant Motion filed by defendant Aida Padilla is
DENIED without prejudice to the re-filing of defendant Aida Padilla’s causes of action against
herein plaintiffs after final resolution of Civil Case No. R-PSY-10-04228 entitled "Philippine
National Bank vs. Globe Asiatique Realty Holdings Corp, et al."

SO ORDERED. (Emphasis supplied.)

Petitioner’s motion for reconsideration was likewise denied under the second assailed
Order27 dated May 8, 2013, as follows:

xxxx

Defendant Padilla argues that this Court has jurisdictional competence and authority to
resolve her counterclaims notwithstanding the dismissal of the Complaint dated August 10,
2011 for violation of the principle of judicial stability. The resolution of her compulsory
counterclaims will not require this Court to look into or pass upon the validity of the acts of
the Regional Trial Court of Pasay City, Branch 119 in issuing the Writ of Attachment dated
August 27, 2010. Defendant Padilla’s counterclaims arose directly from the malicious filing
by the plaintiffs of the Complaint and are compulsory counterclaims which must be raised
and resolved in the same action as the Complaint.

The Court remains unpersuaded of the propriety of proceeding to hear defendant Padilla’s
counterclaims.

As movant herself stated, the grant of her counterclaim calls for the determination of the
issue of whether or not herein plaintiffs had maliciously filed the above-entitled Complaint
against defendants. Necessarily, the Court in threshing out such issue would be constrained
to rule on whether the plaintiffs filed their complaint with a sinister design knowing fully
wellthat their cause of action was baseless. Thus, the Court would have to pass upon the
veracity or genuineness of plaintiffs’ claims thatthey were unjustly injured by the orders and
processes issued by RTC Branch 119, Pasay City, in Civil Case No. R-PSY-10-
04228entitled "Philippine National Bank vs. Globe Asiatique Realty Holdings Corp. et al."
Hence, whatever ruling this Court may arrive at on said issues would inevitably impinge upon
matters already pending before the RTC Branch 119, Pasay City.

Once more, under the principle of juridical stability, the Court is constrained to refuse to hear
defendant Padilla’s counterclaims. Verily, this Court cannot allow itself to interfere – either
directly, as desired by plaintiff, or indirectly, as defendant Padilla would have it – with the
acts of a co-equal court.

WHEREFORE, premises considered, the instant Motion for Reconsideration filed by

defendant Aida Padilla is hereby DENIED without prejudice to the re-filing of defendant Aida
Padilla’s causes of action against herein plaintiffs after resolution of Civil Case No. R-PSY-
10-04228 entitled "Philippine National Bank vs. Globe Asiatique Realty Holdings Corp. et al."

SO ORDERED. (Emphasis supplied.)

The Petition

Petitioner came directly to this Court raising the primordial legal issue of whether or not a
court can take cognizance of a compulsory counterclaim despite the fact that the
corresponding complaint was dismissed for lack of jurisdiction.

The present petition was de-consolidated from seven other petitions involving respondents
and their transactions with Home Development Mutual Fund, as well as the pending criminal
complaints arising therefrom.28

The Court’s Ruling

Before we resolve the legal question presented, we first address the issue of propriety of
petitioner’s resort to Rule 45.

Respondents are incorrect in arguing that petitioner adopted the wrong mode of appeal,
stating that the remedy from the dismissal of her counterclaims without prejudice is a petition
for certiorari under Rule 65 and not an appeal under Rule 45.

There is no dispute with respect to the fact that when an appeal raises only pure questions of
law, this Court has jurisdiction to entertain the same.29 Section 1, Rule 45 of the 1997 Rules
of Civil Procedure, as amended, provides:

SECTION 1. Filing of petition with Supreme Court. – A party desiring to appeal by certiorari
from a judgment or final order or resolution of the Court of Appeals,the Sandiganbayan, the
Regional Trial Court or other courts whenever authorized by law, may file with the Supreme
Court a verified petition for review on certiorari. The petition shall raise only questions of law
which must be distinctly set forth.

In Republic v. Sunvar Realty Development Corporation,30 this Court held:

Respondent Sunvar argued that petitioners’ resort to a Rule 45 Petition for Review on
Certioraribefore this Court is an improper mode of review of the assailed RTC Decision.
Allegedly, petitioners should have availed themselves of a Rule 65 Petition instead, since the
RTC Decision was an order of dismissal of the Complaint, from which no appeal can be
taken except by a certiorari petition.

The Court is unconvinced of the arguments of respondent Sunvar and holds that the resortby
petitioners to the present Rule 45 Petition is perfectly within the bounds of our procedural
rules.

As respondent Sunvar explained, noappeal may be taken from an order of the RTC
dismissing an action without prejudice, but the aggrieved party may file a certiorari petition
under Rule 65. Nevertheless, the Rules do not prohibit any of the parties fromfiling a Rule 45
Petition with this Court, in case only questions of law are raised or involved. This latter
situation was one that petitioners found themselves in when they filed the instant Petition to
raise only questions of law. In Republic v. Malabanan, the Court clarified the three modes of
appeal from decisions of the RTC, to wit: (1) by ordinary appeal or appeal by writ of error
under Rule 41, whereby judgment was rendered in a civil or criminal action by the RTC in the
exercise of its original jurisdiction; (2) by a petition for review under Rule 42, whereby
judgment was rendered by the RTC in the exercise of its appellate jurisdiction; and (3) by a
petition for review on certioraribefore the Supreme Court under Rule 45. "The first mode of
appeal istaken to the [Court of Appeals] on questions of fact or mixed questions of fact and
law. The second mode of appeal is brought to the CA on questions of fact, of law, or mixed
questions of fact and law. The third mode of appeal is elevated to the Supreme Court only on
questions of law." (Emphasis supplied.)

There is a question of law when the issue does not call for an examination of the probative
value of the evidence presented or of the truth or falsehood of the facts being admitted, and
the doubt concerns the correct application of law and jurisprudence on the matter. The
resolution of the issue must rest solely on what the law provides on the given set of
circumstances.

In the instant case, petitioners raise only questions of law with respect to the jurisdiction of
the RTC to entertain a certioraripetition filed against the interlocutory order of the MeTC in an
unlawful detainer suit. At issue in the present case is the correct application of the Rules on
Summary Procedure; or, more specifically, whether the RTC violated the Rules when it took
cognizance and granted the certioraripetition against the denial by the MeTC of the Motion to
Dismiss filed by respondent Sunvar. This is clearly a question of law that involves the proper
interpretation of the Rules on Summary Procedure. Therefore, the instant Rule 45 Petition
has been properly lodged with this Court.

In this case, petitioner raises the lone issue of whether the Pasig City RTC was correct in
refusing to hear her counterclaims after the dismissal of respondents’ complaint for lack of
jurisdiction. Said issue involves the proper interpretation of the 1997 Rules of Civil
Procedure, as amended, specifically on whether the dismissal of the complaint automatically
results in the dismissal of counterclaims pleaded by the defendant. Since this is clearly a
question of law, petitioner appropriately filed in thisCourt a Rule 45 petition.

On the lone issue raised in the petition, we rule for the petitioner.

A counterclaim is any claim which a defending party may have against an opposing party.31 It
is in the nature of a cross-complaint; a distinct and independent cause of action which,
though alleged in the answer, is not part of the answer.32

Counterclaims may be either compulsory or permissive. Section 7, Rule 6 of the 1997 Rules
of Civil Procedure provides:

SEC. 7. Compulsory counterclaim.– A compulsory counterclaim is one which, being

cognizable by the regular courts of justice, arises out of or is connected with the transaction
or occurrence constituting the subject matter of the opposing party’s claim and does not
require for its adjudication the presence of third parties of whom the court cannot acquire
jurisdiction. Such a counterclaim must be within the jurisdiction of the court both as to the
amount and the nature thereof, except that in an original action before the Regional Trial
Court, the counterclaim may be considered compulsory regardless of the amount.

In this case, petitioner’s counterclaim for damages raised in her answer before the Pasig City
RTC iscompulsory, alleging suffering and injury caused to her as a consequence of the
unwarranted filing of the baseless complaint filed byrespondents. Said court, however,
dismissed her counterclaim upon the same ground of lackof jurisdiction as its resolution
supposedly would entail passing upon the validity of orders and processes still pending
before the Pasay City RTC. In Metals Engineering Resources Corp. v. Court of Appeals,33 we
reversed the trial court’s order allowing private respondent to proceed with the presentation
of his evidence in support of his counterclaim after the complaint was dismissed for not
paying the correct docket fee and hence the trial court did not acquire jurisdiction over the
case. We held that if the court does not have jurisdiction to entertain the main action of the
case and dismisses the same, then the compulsorycounterclaim, being ancillary to the
principal controversy, must likewise be dismissed since no jurisdiction remained for any grant
of relief under the counterclaim.34

Under the 1997 Rules of Civil Procedure, it is now explicitly provided that the dismissal of the
complaint due tofailure of the plaintiff to prosecute his case is "without prejudice to the rightof
the defendant to prosecute his counterclaim in the same or in a separate action."35 The effect
of this amendment on previous rulings on whether the dismissal of a complaint carries with it
the dismissal of the counterclaims as well, was discussed in the case of Pinga v. The Heirs
of German Santiago,36 thus:

Similarly, Justice Feria notes that "the present rule reaffirms the right of the defendant to
move for the dismissal of the complaint and to prosecute his counterclaim, as stated in the
separate opinion [of Justice Regalado in BA Finance.] Retired Court of Appeals Justice
Herrera pronounces that the amendment to Section 3, Rule 17 settles that "nagging
question" whether the dismissal of the complaint carries with it the dismissal of the
counterclaim, and opines that by reason of the amendments, the rulings in Metals
Engineering, International Container, and BA Finance"may be deemed abandoned." On the
effect of amendment to Section 3, Rule 17, the commentators are in general agreement,
although there is less unanimity of views insofar as Section 2, Rule 17 is concerned.

To be certain, when the Court promulgated the 1997 Rules of Civil Procedure, including the
amended Rule 17, those previous jural doctrines that were inconsistent with the new rules
incorporated in the 1997 Rules of Civil Procedure were implicitly abandoned insofar as
incidents arising after the effectivity of the new procedural rules on 1 July 1997. BA Finance,
or even the doctrine that a counterclaim may be necessarily dismissed along with the
complaint, clearly conflicts with the 1997 Rules of Civil Procedure. The abandonment of BA
Financeas doctrine extends as far back as 1997, when the Court adopted the new Rules of
Civil Procedure. … we thus rule that the dismissal of a complaint due to fault of the plaintiff is
without prejudice to the right of the defendant to prosecute any pending counterclaims
ofwhatever nature in the same or separate action. We confirm that BA Financeand all
previous rulings of the Court that are inconsistent with this present holding are now
abandoned. (Emphasis supplied.)

Subsequently, in Perkin Elmer Singapore Pte Ltd. v. Dakila Trading Corporation37 this Court
held that while the declaration in Pinga refers to instances covered by Section 3, Rule 17 on
dismissal of complaints due to the fault of plaintiff, it does not preclude the application of the
same rule when the dismissal was upon the instance of defendant who correctly argued lack
of jurisdiction over its person.Further, in stark departure from Metals Engineering, we
declared that the court’s jurisdiction over respondent’s complaint is not to be confusedwith
jurisdiction over petitioner’s counterclaim, viz:

….Petitioner seeks to recover damages and attorney’s fees as a consequence of the

unfounded suitfiled by respondent against it. Thus, petitioner’s compulsory counterclaim
isonly consistent with its position that the respondent wrongfully filed a case against it and
the RTC erroneously exercised jurisdiction over its person.

Distinction must be made in Civil Case No. MC99-605 as to the jurisdiction of the RTC over
respondent’s complaint and over petitioner’s counterclaim – while it may have no jurisdiction
over the former, it may exercise jurisdiction over the latter. The compulsory counterclaim
attached to petitioner’s Answer ad cautelamcan be treated as a separate action, wherein
petitioner is the plaintiff while respondent is the defendant. Petitioner could have instituted a
separate action for the very same claims but, for the sake of expediency and to avoid
multiplicity of suits, it chose to demand the samein Civil Case No. MC99-605. Jurisdiction of
the RTC over the subject matter and the parties in the counterclaim must thus be determined
separately and independently from the jurisdiction of the samecourt in the same case over
the subject matter and the parties in respondent’s complaint.38 (Emphasis supplied.)

Still anchored on the pronouncement in Pinga, we then categorically ruled that a

counterclaim arising from the unfounded suit may proceed despite the dismissal of the
complaint for lack of jurisdiction over the person of defendant-counterclaimant, thus:

Also in the case of Pinga v. Heirs of German Santiago, the Court discussed the situation
wherein the very filing of the complaint by the plaintiff against the defendant caused the
violation of the latter’s rights. As to whether the dismissal of such a complaint should also
include the dismissal of the counterclaim, the Court acknowledged that said matter is still
debatable, viz:

Whatever the nature of the counterclaim, it bears the same integral characteristics as a
complaint; namely a cause (or causes) of action constituting an act or omission by which a
party violates the right of another. The main difference lies in that the cause of action in the
counterclaim is maintained bythe defendant against the plaintiff, while the converse holds
true with the complaint. Yet, as with a complaint, a counterclaim without a cause of action
cannot survive.

x x x if the dismissal of the complaint somehow eliminates the cause(s) of the counterclaim,
then the counterclaim cannot survive. Yet that hardly is the case, especially as a general
rule. More often than not, the allegations that form the counterclaim are rooted in an act or
omission of the plaintiff other than the plaintiff’s very act of filing the complaint. Moreover,
such acts or omissions imputed to the plaintiff are often claimed to have occurred prior to the
filing of the complaint itself.The only apparent exception to thiscircumstance is if it is alleged
in the counterclaim that the very act of the plaintiff in filing the complaint precisely causes the
violation of the defendant’s rights. Yet even in such an instance, it remains debatable
whether the dismissal or withdrawal of the complaint is sufficient to obviate the pending
cause of action maintained by the defendant against the plaintiff.

Based on the aforequoted ruling of the Court, if the dismissal of the complaint somehow
eliminates the cause of the counterclaim, then the counterclaim cannot survive. Conversely,
if the counterclaim itself states sufficient cause of action then it should stand independently
of and survive the dismissal of the complaint. Now, having been directly confronted with the
problem of whether the compulsory counterclaim by reason of the unfounded suit may
prosper even if the maincomplaint had been dismissed, we rule in the affirmative.

It bears to emphasize that petitioner’s counterclaim against respondent is for damages and
attorney’s fees arising from the unfounded suit. While respondent’s Complaint against
petitioner is already dismissed, petitioner may have very well already incurred damages and
litigation expenses such as attorney’s fees since it was forced to engage legal representation
in the Philippines to protect its rights and to assert lack of jurisdiction of the courts over its
person by virtue of the improper service of summons upon it. Hence, the cause of action of
petitioner’s counterclaim is not eliminated by the mere dismissal of respondent’s complaint.
It may also do well to rememberthat it is this Court which mandated that claims for damages
and attorney’s fees based on unfounded suit constitute compulsory counterclaim which must
be pleaded in the same action or, otherwise, it shall be barred. It will then be iniquitous and
the height of injustice to require the petitioner to make the counterclaim in the present action,
under threat of losing his right to claim the same ever again in any other court, yet make his
right totally dependent on the fate of the respondent’s complaint.

If indeed the Court dismisses petitioner’s counterclaim solely on the basis of the dismissal of
respondent’s Complaint, then what remedy is left for the petitioner? It can be said that he can
still file a separate action to recover the damages and attorney’s fees based on the
unfounded suit for he cannot be barred from doing so since he did file the compulsory
counterclaim in the present action, only that it was dismissed when respondent’s Complaint
was dismissed. However, this reasoning is highly flawed and irrational considering that
petitioner, already burdened by the damages and attorney’s fees itmay have incurred in the
present case, must again incur more damages and attorney’s fees in pursuing a separate
action, when, in the first place, it should not have been involved in any case at all.

Since petitioner’s counterclaim iscompulsory in nature and its cause of action survives that of
the dismissal of respondent’s complaint, then it should be resolved based on its own merits
and evidentiary support.39 (Additional emphasis supplied.)

The above ruling was applied in Rizal Commercial Banking Corporation v. Royal Cargo
Corporation40 where we granted petitioner’s prayer for attorney’s fees under its Compulsory
Counterclaim notwithstanding the dismissal of the complaint.

In the present case, the RTC of Pasig City should have allowed petitioner’s counterclaim to
proceed notwithstanding the dismissal of respondents’ complaint, the same being
compulsory in nature and with its cause not eliminated by such dismissal.It bears stressing
that petitioner was hailed to a separate court (Pasig City RTC) even while the dispute
between PNB and respondents was still being litigated, and she already incurred expenses
defending herself, having beensued by respondents in her personal capacity. The
accusations hurled against her were serious (perjury and misrepresentation in executing the
affidavit in support of the application for writ of attachment before the Pasay City RTC) – with
hints at possible criminal prosecution apart from that criminal complaint already lodged in the
Pasig City Prosecutor’s Office. The Pasig City RTC clearly erred in refusing to hear the
counterclaims upon the same ground for dismissal of the complaint, i.e.,lack of jurisdiction in
strictobservance of the policy against interference with the proceedings of a co-equal court.

Respondents contend that if petitioner is allowed to prove her counterclaims before the
Pasay City RTC, they have no choice but to justify their action in filing their case beforethe
Pasig City RTC by going back to the allegations in their complaint that they are merely
vindicating themselves against the perjured affidavit executed by petitioner which led to the
issuance of the illegal orders of the Pasay City RTC that resulted to the damage and injury
sustained by respondents. Obviously, respondents are invoking the same principle of
judicialstability which we find inapplicable insofar as petitioner’s counterclaim arising from
respondents’ unfounded suit. As petitioner set forth in her Compulsory Counterclaim, there is
actually no necessity for the Pasig City RTC, in ruling on the merits of the counterclaim, to
pass upon the validity ofthe writ of attachment and related orders issued by the Pasay City
RTC. Precisely, petitioner faulted the respondents in prematurely, and in a contumacious act
of forum shopping, filing a separate damage suit when there is no final judicial determination
yet of any irregularity in the attachment proceedings before the Pasay City RTC.
5.95. In this regard, it must be noted that in filing the present suit, plaintiffs’ goal is to have
the Honorable Court reexamine and review the pronouncements made by defendant
JudgeGutierrez in the Pasay case.

With all due respect, the Honorable Court certainly has no such power over the Pasay Court
which is a co-equal court. While the power to determine whether or not a judgment or order
is unjust is a judicial function, the hierarchy of courts should be respected:

"To belabor the obvious, the determination of whether or not a judgment or order is unjust –
or was (or was not) rendered within the scope of the issuing judge’s authority, or that the
judge had exceeded his jurisdiction and powers or maliciously delayed the disposition of a
case – is an essentially judicial function, lodged by existing law and immemorial practice in a
hierarchy of courts and ultimately in the highest court of the land. To repeat, no other entity
or official of the Government, not the prosecution or investigation service or any other
branch, nor any functionary thereof, has competence to review a judicial order or decision –
whether final and executory or not – and pronounce it erroneous soas to lay the basis for a
criminal or administrative complaint for rendering an unjust judgment or order. That
prerogative belongs to the courts alone." [Emphasis supplied]

5.96. Accordingly, since there is no "final judicial pronouncement" yet on whether the filing of
the PNB Complaintand the issuance of the writ of preliminary attachment violate any law,
neither is there any basis for defendant Padilla to be held liable for damages on account of
her official acts as Head of the Remedial Management Group of PNB. 1âwphi1

5.97. Clearly, the filing of this baseless, if not contemptuous, suit is nothing but a
continuation of plaintiffs’ fraudulent attempt to evade the payment of undeniably due and
demandable obligations. Accordingly, the complaint against defendant Padilla should be
dismissed for utter lack of merit.41 (Emphasis supplied.)

Ironically, while it is the respondents who erroneously and maliciously asked the Pasig City
RTC to pass upon these issues still pending in a co-equal court, for which reason the said
court dismissed their complaint, petitioner was notallowed to prove her counterclaim by
reason of the unfounded suit in the same case aspurportedly it will entail verifying
respondents’ claim that they were prejudiced by the orders and processes in the Pasay City
RTC. This situation exemplifies the rationale in Perkin Elmer Singapore Pte Ltd.42 on
requiring the petitioner to make the counterclaim in the present action, under threat of losing
such right to claim the same ever again any other court, yet make such right of the petitioner
totally dependent on the fate of the respondents’ complaint.

As fittingly expressed by petitioner in her Reply:

Pertinently, it is relevant to note that respondents never denied in their Commentthat the
institution of the case a quowas premature and violated the principle of judicial stability.
Stated otherwise, respondents admit that they are the ones who have invited the court a quo
to interfere with the rulings of the Pasay Court, which fortunately, the former refused to do
so. To allow the respondents to cite their own unlawful actions as a shield against the harm
that they have inflicted upon petitioner Padilla would indubitably allow the respondents to
profit from their own misdeeds. With due respect, this cannot be countenanced by the
Honorable Court.43 WHEREFORE, the petition is GRANTED. The Orders dated November
12, 2012 and May 8, 2013 of the Regional Trial Court of Pasig City, Branch 155 in Civil Case
No. 73132 are hereby REVERSED and SET ASIDE. Said court is hereby directed to proceed
with the presentation of evidence in support of the compulsory counterclaim of petitioner
Aida Padilla.
G.R. No. 86956 October 1, 1990

SHOEMART, INC., petitioner,

vs
THE HONORABLE COURT OF APPEALS and ANSON EMPORIUM
CORPORATION, respondents.

Ismael M. Estella for petitioner.

Cesar C. Cruz & Partners for private respondent.

BIDIN, J.:

This is a petition for review on certiorari of the decision ** of the Court of Appeals promulgated on November 2, 1988 in CA-GR SP
No. 13346, reinstating with modification the decision *** of the Regional Trial Court of Makati, Branch 61, in Civil Case No. 14163
entitled Shoemart, Inc. v. Anson Emporium Corporation.

The facts, as found by respondent court, are as follows:

On August 1, 1971, Anson Emporium Corporation (Anson) leased from

Shoemart, Inc. (Shoemart) a portion of the building known as the Makati
Arcade consisting of 374 square meters of store area at its ground floor and
678 square meters at its second floor, for a period of two (2) years starting
said date at a monthly rental of P18,842.00. It was stipulated in the lease that
—

after termination of the lease for any reason whatsoever, if

the Owner shall permit the tenant to remain in possession of
the leased premises, it is expressly understood and agreed
that the lease shall be on a month to month basis in the
absence of a written agreement to the contrary.

Anson remained in possession after the two year period but on an increased
rental of P34,622.00. Four years later, or on August 1, 1977, Shoemart
terminated the month to month lease and gave notice to Anson to vacate not
later than August 31, 1977. Notwithstanding the notice and demand, Anson
continued to stay on, thus the complaint for ejectment filed with the then
Municipal Court of Makati, Civil Case No. 16896.

In its answer, Anson raised the defenses that (1) the lease did not express
the true intention and real agreement of the parties, the true one being that
its stay was guaranteed by Shoemart for a maximum period of twenty-four
(24) years and (2) assuming that the lease had expired, it still cannot be
ejected until a longer term is fixed in accordance with Article 1673 in relation
to Article 1687 of the Civil Code.

After proceedings (sic) were on their way, Shoemart asked for and was
granted leave to file supplemental complaint which alleged that the rental of
all the tenants of the premises had been increased effective January 1, 1979
 to P45,142.00 which Anson refused to pay. The supplemental complaint
became an issue in a petition for certiorari in the Court of First Instance of
Rizal which upheld the admission, then in the Intermediate Appellate Court
which sustained the Court of First Instance and finally in the Supreme Court
where the matter was laid to rest with the High Court giving the final
imprimatur to the admission.

In its answer to the supplemental complaint, Anson raised the defenses that
Shoemart's claim for increased rentals has been barred by estoppel,
novation, statute of frauds/limitations condonation, release and/or laches and
in any event, the increase was inequitable, unconscionable and arbitrary.

The trial court ruled for Anson and dismissed the complaint in a decision
dated January 2, 1987. The decision was appealed to the Regional Trial
Court of Makati as Civil Case No. 16530, where respondent Judge entered a
judgment of reversal (dated October 2, 1987) with this dispositive tenor —

"WHEREFORE, premises above considered, the decision of

the Metropolitan Trial Court of January 2, 1987 dismissing the
case is hereby REVERSED AND SET ASIDE in this appeal
and a new judgment in its stead is hereby rendered for
plaintiff/appellant SHOEMART as against defendant/appellee
ANSON, which is hereby ORDERED, as follows:

"1. To vacate the premises situated at the 1st and 2nd Floors (Store No. 12,
13, 14 and 15) MAKATI ARCADE, Makati, Metro Manila together with all
persons claiming rights under it and to turn over its possession to
plaintiff/appellant SHOEMART;

"2. To pay SHOEMART damages in the form of reasonable compensation for

the use and occupation of the subject premises during the period of unlawful
detainer in the amount of P34,622.00 a month from September 1, 1977 up to
and including December 31, 1978; and then the amount of P45,142.00 a
month from January 1, 1979 until defendant/ appellee ANSON finally vacates
the subject premises and turn over its possession to plaintiff/appellant
SHOEMART; the amount of damages shall bear interest at the rate of one
(1%) a month starting October 1, 1977 until fully paid.

"3. To reimburse to SHOEMART the amount of P313,493.25 representing

cost of electricity as of March 1986 and such amount representing electricity
consumed by ANSON computed monthly as based on electrical billings from
April 1986 and every month thereafter up to the time ANSON finally vacates
the subject premises;

"4. To pay the amount of P5,000.00 for and as attorney's fees; and

"5. To pay the costs of the proceedings." (Rollo, pp. 35-37)

Petitioner filed a motion for reconsideration on the ground that the amount of damages
awarded in the form of reasonable compensation for the use and occupation of the subject
premises is less than what is really due. Private respondent likewise filed its motion for
reconsideration seeking the affirmance of the court a quo's appealed decision.
On November 10, 1987, the Regional Trial Court issued an Order denying private
respondent's motion for reconsideration but petitioner's motion was granted and the decision
dated October 2, 1987 was amended to read as follows:

xxx xxx xxx

the award of damages in No. 2 of the dispositive portion of the Decision of

October 2, 1987 is hereby adjusted accordingly to include the computation of
increases from 1980 to 1985 and should read as follows:

"2. To pay SHOEMART damages in the form of reasonable compensation for

the use and occupation of the subject premises during the period of unlawful
detainer, minus payments made by ANSON, as follows:

"For the period from September 1, 1977 to December 1978

covering 16 months at the rate of P34,622.00 per month;

"For the period from January, 1979 to September, 1980

covering 11 months at the rate of P45,142.00 per month;

"For the period from October, 1980 to February 15, 1983

covering 18 months and 15 days at the rate of P59,402 per
month;

"For the period from February 16, 1983 to February 28, 1985
covering 24 months and 15 days at the rate of P74,340.00
per month;

"For the period from March, 1985 to present — November,

1987 covering 33 months at the rate of P99,120 per month

and the sum of P99,120 a month starting December, 1987 until defendant
fully vacates the premises.

It is understood that the above amount shall bear interest at the rate of one
(1%) percent a month starting October 1, 1977 until fully paid. (Rollo, pp.
134-135)

On appeal, respondent court issued the assailed judgment dated November 2, 1988, which
while affirming the ejectment of private respondent from the premises, reduced the amount
of damages awarded as reasonable compensation for the use and occupation of the
premises. The decretal portion of the said decision reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, the decision dated

October 2, 1987 is reinstated except for the portion (1) awarding
SHOEMART interests of one (1%) percent a month starting October 1, 1987
and (2) awarding SHOEMART for reimbursement for cost of electricity,
REVERSING and SETTING ASIDE in the process the order dated November
10, 1987 insofar as it increased the award for reasonable compensation for
the use and occupation of the premises, insofar as it awarded interest and
insofar as items therein that are inconsistent with this decision. (Rollo, p. 46)
Both parties filed their respective motions for reconsideration. Private respondent sought the
correction of the clerical error regarding date of the effectivity of the one (1%) percent
interest from October 1, 1987, to October 1, 1977. Said motion was granted by respondent
court. Petitioner's motion for reconsideration seeking the reinstatement of the Regional Trial
Court's decision dated November 10, 1987 was denied. Hence, this instant petition.

Petitioner assigns the following errors:

1. THE HONORABLE COURT OF APPEALS ERRED AS A MATTER OF

LAW IN LIMITING ANSON TO PAY ONLY THE SUM OF P45,142.00
MONTHLY STARTING JANUARY 1, 1979 UNTIL IT VACATES THE
PREMISES DESPITE THE FACT THAT THERE WERE FOUR (4) RENTAL
INCREASES EFFECTED ON THE SUBJECT PREMISES DURING THE
UNLAWFUL DETAINER PERIOD AND DURING PENDENCY OF THE
INSTANT CASE WHICH INCREASES WERE PROVEN DURING THE
TRIAL.

2. THE HONORABLE COURT OF APPEALS ERRED IN AS A MATTER OF

LAW IN ELIMINATING THE ONE (1%) PERCENT INTEREST ON THE
UNPAID DAMAGES EFFECTIVE OCTOBER 1, 1977.

3. THE HONORABLE COURT OF APPEALS ERRED AS A MATTER OF

LAW IN ELIMINATING THE AWARD FOR REIMBURSEMENT FOR COST
OF ELECTRICITY CONSUMED BY ANSON ON THE SUBJECT
PREMISES. (Rollo, pp. 14-15).

In support of its first assignment of error, petitioner contends that there were four rental
increases effected during the period of unlawful detainer and during the pendency of the
case, which increases were duly proven during the trial. However, according to respondent
court, petitioner failed to present evidence on other approved and accepted rental increases
and since the supplemental complaint limited itself only to P45,142.00, the award of
damages cannot go beyond the said amount.

We note, however, that respondent court conceded the existence of other evidence showing
that other tenants of petitioner occupying the Makati Arcade paid rentals over and above the
last figure or rental increase subject of the supplemental complaint. Nevertheless, it held that
the imposition of higher damages cannot be made because of the limit set by petitioner's
supplemental complaint and the absence of evidence regarding the rental increases
approved by its board of directors and their acceptance by private respondent (Rollo, p. 48).

Contrary to the conclusion of respondent court, petitioner's recovery is not limited by the
amount of P45,142.00 prayed for in the supplemental complaint as increased rental effective
January 1, 1979. This is not a case of a complaint subsequently amended, the effect of
which is to render the original complaint abandoned or inexistent and let the amendment
take form as the sole substitute upon which the case stands for trial. On the other hand, a
supplemental complaint or pleading supplies deficiencies in aid of an original pleading, not to
entirely substitute the latter. A perusal of the original complaint shows that it prayed, among
others, that the defendant (private respondent) be ordered to pay plaintiff (petitioner) the
monthly rental of P34,622.00 "and all other rentals and charges that may be due until such
time that defendant . . . shall have vacated the premises" (Rollo, p. 52). Petitioner, therefore,
did not foreclose its right to demand increased rentals that may be recovered expressed in
terms of the fair rental value or the reasonable compensation for the use and occupation of
the real property (Felisilda v. Villanueva, 139 SCRA 431 [1985]; citing Sparrevohn v. Fisher,
2 Phil. 676; Castuares v. Bayona, 106 Phil. 340). This is so because, unlike in an amended
complaint, the original complaint exists side by side with the supplemental complaint. In the
case at bar, the supplemental pleading merely served to aver supervening facts which were
then not ripe for judicial relief when the original pleading was filed. As aforesaid,
supplemental pleadings are meant to supply deficiencies in aid of the original pleading, and
not to dispense with the latter (Pasay City Government v. CFI of Manila, Br. X, 132 SCRA
156 [1984]; British Traders' Insurance Co., Ltd. v. Commissioner of Internal Revenue, 13
SCRA 719 (1965]).

Furthermore, failure of petitioner in the case at bar to amend its complaint or file additional
supplemental pleadings to allege subsequent rental increases is of no moment. Records
indicate that during the trial, petitioner presented evidence, without objection of private
respondent, showing that during the pendency of this case, there were four (4) rental
increases effected on the subject premises as follows:

1. The sum of P45,142.00 a month from January 1979 to September 1980

(Exh. "F-1");

2. The sum of P59,402.00 a month from October 1980 to February 15, 1983
(Exh. "F-2");

3. The sum of P74,340.00 a month from February 16, 1983 to February

28,1985 (Exh. "F-3"); and

4. The sum of P99,040.00 a month from March, 1985 to the present (Exh. "F-
4"); Actually, up to January 31, 1989 when private respondent vacated
vacated the leased premises.

In view of the failure of private respondent to object to the presentation of evidence showing
that there were four (4) rental increases on the subject premises although three (3) of said
increases are not alleged in the pleadings, judgment may be rendered validly as regards the
said increases or issues which shall be considered as if they have been raised in the
pleadings (I Moran, p. 377, 1979 ed.). Thus, section 5, Rule 10 provides:

When issues not raised by the pleadings are tried by express or implied
consent of the parties, they shall be treated in all respects, as if they had
been raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these
issues may be made upon motion of any party at any time, even after
judgment; but failure to so amend does not affect the result of the trial of
these issues. . . .

Private respondent contends, however, that since petitioner failed to present any resolution
of its board of directors authorizing the imposition of higher rentals over the premises and
their acceptance by private respondent, the award of damages was properly limited by
respondent court to P45,142.00 monthly rental.

The argument is untenable. An examination of respondent's answer to the complaint made

no reference to the alleged board resolution which is now being insisted upon to escape the
payment of the increased rentals. Having failed to raise the board resolution as a defense
before the trial court, private respondent is deemed likewise to have waived the same (Sec.
2, Rule 9). But this is not all. As found by the Regional Trial Court, private respondent did not
controvert the evidence submitted by petitioner in determining the fair rental value of the
premises including those imposed on all other tenants of petitioner occupying the Makati
Arcade (Rollo, p. 133). It is only when the rental demanded is clearly exorbitant would the
courts interfere as a matter of equity. If, indeed, the rental increases were unconscionable,
respondent should have at least presented evidence to substantiate its claim. This is
because the burden of proof to show that the rental demanded is unconscionable or
exorbitant rests upon private respondent as the lessee (Vda. de Roxas v. CA, 63 SCRA 302
[1975]). Private respondent failed to discharge its burden when it omitted to present any
evidence at all on what it considers is the fair rental value other than what were submitted by
petitioner. As a matter of fact, all the other tenants of petitioner in the Makati Arcade did not
question the reasonableness of the rental increases and paid the same.

As regards the imposition of one (1%) percent interest on unpaid rentals, respondent court
committed no error in eliminating the same not only because it was not prayed for in the
complaint but also because Art. 1956 (Civil Code) so provides — "(n)o interest shall be due
unless it has been expressly stipulated in writing". While the one (1%) percent interest on
delayed payment of rentals may have been provided in the original written contract of lease,
it must be noted that said contract has already been terminated as of August 1, 1973. By the
time petitioner filed its complaint for ejectment in 1977, there was no longer any written
contract to speak of, much less a written stipulation on payment of interest.

Finally, petitioner Shoemart assails the decision of the Court of Appeals excluding the award
of cost of electricity consumed in the premises on the ground that the claim for
reimbursement may be filed in another action before the proper forum. In Felisilda vs.
Villanueva (139 SCRA 431 [1985]), we have repeatedly held that the only damage that can
be recovered in an ejectment suit is the fair rental value or the reasonable compensation for
the use and occupation of the real property. Other damages must be claimed in an ordinary
action.

WHEREFORE, the decision of the Court of Appeals dated November 2, 1988 is REVERSED
and SET ASIDE. The decision of the Regional Trial Court dated November 10, 1987 is
Reinstated with the modification that the award of 1% interest starting October 1, 1977 and
the reimbursement of cost of electrical consumption is excluded without prejudice to the
institution of the proper collection case to enforce recovery and/or reimbursement of such
cost for electrical consumption.