THE NET, INC., PLAINTIFF-APPELLEE, VS. EQUATORIAL REALTY DEVELOPMENT, INC. AND MAYFAIR THEATER, INC., DEFENDANTS. EQUATORIAL REALTY DEVELOPMENT, INC., DEFENDANT-APPELLANT.

The Net versus Equatorial Realty Development

The Case

This is the case of The Net versus Equatorial Realty Development. The Net, a lessee, filed an action for interpleader in the Regional Trial Court of Manila, asking the court to decide who between two rival claimants, Equatorial Realty Development and Mayfair Theater, was entitled to the monthly rentals on a leased portion of the ground floor of the CARBA Building on Recto Avenue in Manila. The case matters because it shows how a compromise agreement, a final judgment of the Supreme Court, and the rules on interpleader and consignation fit together, and because it teaches that a judgment based on compromise may be rendered even before the defendant files an answer and even without pre-trial or trial.

Procedural History

The Net filed its complaint for interpleader in the Regional Trial Court of Manila, Branch 5, against Mayfair Theater and Equatorial Realty Development. Mayfair moved to dismiss. The Net and Mayfair then executed a compromise agreement, and on the strength of that agreement and of the Supreme Court's earlier decision in the mother case, the trial court issued an order on November 27, 1998 approving the compromise, denying Equatorial's application for a temporary restraining order and preliminary injunction, and dismissing Equatorial's counterclaim and cross-claim. Equatorial moved for reconsideration, which was denied. Equatorial then filed a notice of appeal. The trial court later issued an omnibus order dated December 15, 1999, releasing the rental deposit to Mayfair upon posting of a bond, denying Mayfair's motion for execution pending appeal, and approving Equatorial's notice of appeal. The case went up to the Court of Appeals, and from there to the Supreme Court, which decided the appeal through the decision we now study.

Facts

The CARBA Building stands on four lots registered in the name of Equatorial Realty Development under transfer certificates of title. The Net leased a 138 square meter portion of the ground floor from Equatorial for three years beginning July 1, 1996, at a monthly rental of 63,000 pesos. In November 1997, The Net filed an action for interpleader, because both Equatorial and Mayfair Theater were demanding payment of the rentals, each claiming to own the building and the lots on which it stands.

The Net deposited with the Clerk of Court of the Regional Trial Court of Manila various amounts totaling 436,590 pesos, representing rentals from September 1997 to February 1998. Equatorial answered, insisting that it remained the owner under its still subsisting certificates of title, and that the Supreme Court's earlier decision in the mother case did not vest title in Carmelo and Bauermann nor annul the sale to Equatorial, since that sale was deemed rescinded only upon restitution of the purchase price. Equatorial set up a counterclaim and a cross-claim against Mayfair.

Mayfair moved to dismiss, claiming that new certificates of title had been issued in its name. Then, in March 1998, The Net and Mayfair executed a compromise agreement in which The Net recognized Mayfair as the true owner and undertook to pay it the rentals. They asked the trial court to approve the compromise, dismiss the complaint as mooted, and release the rental deposit to Mayfair. The trial court approved the compromise, dismissed Equatorial's counterclaim and cross-claim, and later ordered the release of the deposit to Mayfair upon posting of a bond. Equatorial appealed.

Issues

• Whether or not the trial court erred in deciding the case without an answer having been filed by Mayfair, and without pre-trial and trial having been conducted.
• Whether or not the trial court erred in ordering the release of the rental deposit to Mayfair, which Equatorial claims amounted to execution pending appeal.
• Whether or not Equatorial was deprived of property without due process of law, and whether it should have been awarded the rentals.

Applicable Provisions

Article 2028 of the Civil Code defines a compromise:

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced.

This is the foundation of the trial court's judgment, which was rendered upon the compromise between The Net and Mayfair.

Article 1260 of the Civil Code governs consignation and withdrawal of the deposit:

Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been duly made, the debtor may withdraw the sum deposited, or allow the creditor to do so.

This provision explains why the release of the rental deposit to Mayfair was not execution pending appeal.

Section 1 of Rule 16 of the 1997 Rules of Civil Procedure fixes the time to move to dismiss:

Within the time for but before filing the answer to the complaint or pleading asserting a claim, a motion to dismiss may be made.

This provision answers Equatorial's claim that Mayfair's motion to dismiss was filed out of time.

Ruling

On the first issue, the Court held that the order of November 27, 1998 was a judgment based on compromise. Since a compromise is meant to put an end to litigation, there was no need for Mayfair to file an answer, and no need for pre-trial or trial. The Court cited its earlier ruling in Manacop versus Court of Appeals, where a judgment based on a compromise entered into before the defendant could file an answer was sustained as immediately executory even if rendered before joinder of issues. The Court also noted that a motion to dismiss may be filed within the time for but before filing the answer, and that Mayfair filed its motion within the extended period.

On the second issue, the Court held that the release of the rental deposit was not execution pending appeal. At any time before the consignation is judicially approved, the debtor may withdraw the sum deposited, and may allow the creditor to do so. The inconsistency Equatorial saw between the release of the deposit and the denial of execution pending appeal was, in the Court's words, more apparent than real.

On the third issue, the Court held that Equatorial was not deprived of property without due process. The purchase price deposited by Mayfair during the execution of the mother case had already been released to Equatorial, which rendered the issues moot and academic. The Court further relied on its later decision in the mother case, where it ruled that Equatorial never became owner of the disputed properties due to a failure of delivery, and that even assuming a valid delivery, its bad faith negated its entitlement to the civil fruits of ownership, like interest and rentals.

Doctrine

A judgment based on compromise may be rendered even before the defendant files an answer and even without pre-trial or trial, because a compromise under Article 2028 of the Civil Code is a contract by which the parties, through reciprocal concessions, put an end to a litigation already commenced. Courts are not prohibited from rendering judgment on a compromise before joinder of issues. A motion to dismiss under Section 1 of Rule 16 of the 1997 Rules of Civil Procedure may be filed within the time for but before filing the answer. Before the consignation is judicially approved, the debtor may withdraw the sum deposited or allow the creditor to do so, so the release of a consigned deposit is not execution pending appeal. A party who never became owner due to a failure of delivery, and who acted in bad faith, is not entitled to the civil fruits of ownership, such as rentals.

Disposition

The Supreme Court affirmed the appealed order of the Regional Trial Court of Manila, Branch 5, in its entirety, and the rentals were payable to Mayfair Theater.

Remember This

Remember the single line: a compromise may end a case even before an answer is filed, and the release of a consigned deposit before judicial approval of the consignation is not execution pending appeal. Examiners like to use this case on compromise judgments, interpleader, consignation under Article 1260, and the rule that a party in bad faith who never received delivery earns no rentals.