PACIFIC MILLS, INC., PETITIONER, VS. HON. ZENAIDA R. DAGUNA, PRESIDING JUDGE OF BR. 19 OF THE RTC OF MANILA, AND THE REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE BUREAU OF CU…

Pacific Mills versus Daguna

The Case

This is a special civil action for certiorari brought by Pacific Mills, Incorporated against the presiding judge of a branch of the Regional Trial Court of Manila and against the Republic of the Philippines, represented by the Bureau of Customs. Pacific Mills asks the Supreme Court to annul two orders of the trial court that denied its motion to dismiss a complaint for collection of taxes and duties. The case matters because it gathers, in one decision, the working rules on three recurring procedural defenses: forum shopping, failure to state a cause of action, and failure to implead indispensable parties. It also teaches a quiet but important lesson: a taxpayer who wants the transferors of allegedly spurious tax credit certificates brought into the case must implead them himself, by third-party complaint, and cannot use their absence as a shield against the government's collection suit.

Procedural History

The Republic, through the Bureau of Customs, filed a complaint for collection of taxes and duties against Pacific Mills before the Regional Trial Court of Manila. Pacific Mills moved to dismiss on three grounds: violation of the rule against forum shopping, failure to state a cause of action, and failure to implead the transferors of the tax credit certificates as indispensable parties. The trial court denied the motion to dismiss. Pacific Mills moved for reconsideration, and the trial court denied that motion as well. While the motion to dismiss was pending, Pacific Mills filed an answer ad cautelam, that is, a defensive answer filed under protest, reiterating the same defenses. The case was then set for pre-trial. It was at this point that Pacific Mills came to the Supreme Court by petition for certiorari, alleging grave abuse of discretion on the part of the trial judge in issuing the two orders.

Facts

Pacific Mills is a domestic corporation that has manufactured clothes since 1951, with plants in Balintawak, Quezon City. It imports its raw materials and supplies, and it pays taxes and duties on those importations. A certain Arnold Velasco offered to transfer tax credit certificates to Pacific Mills at a discounted rate of eighteen percent. These certificates had been issued by the Board of Investments under the Omnibus Investments Code. After a due diligence check, Pacific Mills found the certificates to be genuine, and the transfer went through. Certificates originally issued to Filipino Way Industries, Integrated Multi-Cotton Mills, Incorporated, and Scope Industries, Incorporated were assigned to Pacific Mills, which used them to pay customs duties and taxes on its importations.

On November 30, 1997, a fire destroyed two buildings of Pacific Mills, including the equipment, machinery, raw materials, and finished products stored inside. Pacific Mills stopped operations and closed shop, and it surrendered its licenses, permits, and registrations for cancellation.

Sometime in 2002, the Bureau of Customs demanded payment of around thirty-two million pesos from Pacific Mills for unpaid taxes and duties. Pacific Mills refused, insisting that it had already paid with the tax credit certificates. In October 2002, the Republic sued Pacific Mills for collection of thirty-two million, four hundred seventy-seven thousand, and fifty pesos, on the ground that the certificates used for payment turned out to be fake and spurious. Earlier, the Republic had filed separate collection cases against Dragon Textile Mills, Incorporated and Filysn Corporation, whose certificates also came from the same three assignor companies. In the present complaint, Pacific Mills raised its three defenses, and the trial court denied them, leading to this petition.

Issues

• Whether or not the trial judge acted with grave abuse of discretion in ruling that the Republic did not commit forum shopping.
• Whether or not the trial judge acted with grave abuse of discretion in ruling that the complaint states a cause of action.
• Whether or not the trial judge acted with grave abuse of discretion in not applying the rule that failure to implead indispensable parties deprives the court of jurisdiction.

Applicable Provisions

The decision does not quote any statutory provision. It applies procedural doctrine on forum shopping, litis pendentia, cause of action, and indispensable parties, and it cites the following rules as its framework.

The elements of litis pendentia are: (1) identity of parties or representation on both cases; (2) identity of rights asserted and relief prayed for; (3) the relief must be founded on the same fact and the same bases; and, (4) the identity of the preceding particulars should be such that any judgment which may be rendered in the other action, will, regardless of which party is successful, amount to res judicata on the action in consideration.

This test governs the forum shopping issue, because forum shopping is present only when litis pendentia or res judicata exists between the actions.

For a cause of action to exist, the elements are: (1) the legal right of plaintiff; (2) the correlative obligation of the defendant; and (3) the act or omission of the defendant in violation of said legal right.

This test governs the second issue, because a complaint states a cause of action when it alleges these three elements.

Ruling

On the first issue, the Court held that there was no forum shopping. The deciding factor is whether the elements of litis pendentia are present, or whether a final judgment in one case will be res judicata in another. The Court found no identity of parties or community of interest among the three taxpayers, because each has a distinct and separate tax liability. Payment by Pacific Mills would neither benefit nor exonerate the other two defendants, and the certificates in each case bear different numbers. Whatever judgment is rendered in the earlier cases will therefore not bar the present one.

On the second issue, the Court held that the complaint states a cause of action. The Republic has the legal right to demand payment of taxes and customs duties; Pacific Mills has the correlative obligation to pay; and its failure or refusal to pay is the omission that violates the Republic's right. The Court agreed that the primary cause of action is the collection of taxes, not the validity of the certificates. It is therefore not necessary for the Republic to allege with particularity the fraudulent character of certificates already cancelled by the Department of Finance.

On the third issue, the Court held that there was no need to implead the assignors. The complaint is primarily between the Republic and Pacific Mills as taxpayer, and resolving it requires no other party. If Pacific Mills wants the assignors brought in, it should have filed a third-party complaint against them.

Doctrine

Forum shopping requires the presence of litis pendentia or res judicata. There is no identity of parties or community of interest among taxpayers who each owe distinct and separate tax liabilities, even if their tax credit certificates came from the same assignors. A cause of action exists when the complaint alleges the plaintiff's legal right, the defendant's correlative obligation, and the defendant's act or omission violating that right. Failure to implead indispensable parties is not a ground to dismiss when the complaint can be fully resolved between the original parties; the proper remedy is a third-party complaint.

Disposition

The petition was denied for lack of merit, and the assailed orders of the trial judge were affirmed in toto. The Republic prevailed.

Remember This

Memorize this line: the taxpayer who wants the assignors of spurious tax credit certificates brought into a collection suit must file a third-party complaint, not a motion to dismiss. Examiners use this case to test forum shopping and litis pendentia in tax collection, the elements of a cause of action, and the rule on indispensable parties.