M. B. FLORENTINO & CO., LTD., PETITIONER, VS. JOHNLO TRADING COMPANY AND LIPSETT PACIFIC CORPORATION, RESPONDENTS.

Florentino versus Johnlo Trading

The Case

This is a petition for review by certiorari of a decision of the Court of Appeals, brought by M. B. Florentino and Company, Limited, the plaintiff below, against Johnlo Trading Company and Lipsett Pacific Corporation, both foreign corporations doing business in the Philippines. The action began as a complaint in the Court of First Instance of La Union: on a first cause of action, Florentino sought to recover unpaid charges for loading, hauling, and stevedoring services rendered to Johnlo; on a second cause of action, it sought the rescission of a deed by which Johnlo had conveyed all its Philippine properties and equipment to its sister corporation, Lipsett, for the sum of 100 pesos, on the charge that the transfer was executed to defraud Johnlo's creditors. The case matters because it fixes the procedural consequences of a declaration of default: the defaulting defendant loses his standing to be heard and to appeal, and the judgment against him becomes final and may not be disturbed by an appellate court even on the appeal of his co-defendant, save only in the narrow situation where the judgment against the co-defendant rests entirely on the liability of the one who appealed.

Procedural History

In the Court of First Instance of La Union, Lipsett timely answered, denying the allegations of both causes of action. Johnlo was served summons through Charles T. Balcoff and, having failed to file an answer, was declared in default upon the plaintiff's motion. Johnlo's motion to lift the order of default was denied. The regularity and sufficiency of that service of summons was then raised before the Supreme Court in a separate petition for certiorari, and in a decision rendered in May 1951 the Court held that service upon Balcoff, who had previously acted for the foreign corporation in a representative capacity, may be considered sufficient under Section 14, Rule 7 of the Rules of Court. Johnlo thereafter filed a motion for relief from the order of default, which the lower court denied in July 1951.

After trial, the lower court rendered judgment in September 1952. It ordered Johnlo, under the first cause of action, to pay the sum of 14,304 pesos and 19 centavos with legal interest from August 1949, plus 8,000 pesos in damages and 2,000 pesos as attorney's fees. It declared the deed of sale of October 1949, executed by Johnlo in favor of Lipsett, fraudulent for lack of adequate consideration and hence null and void, directed the attachment of 25,000 pesos considered the exclusive property of Johnlo from Lipsett's bank deposit, and required Lipsett to pay 5,000 pesos in damages. Both defendants gave notice of appeal. On the plaintiff's motion, the lower court dismissed Johnlo's appeal on the ground that, having been declared in default and having failed to have that order lifted, Johnlo had no personality to appeal from the decision on the merits; the appeal was disapproved by orders of November 1952 and February 1953, which became final.

Only Lipsett's appeal proceeded to the Court of Appeals. That court ruled that Exhibit C, the evidence on which the trial court based its finding that the plaintiff had been underpaid by 1,490.84 long tons amounting to 15,578 pesos and 88 centavos, was incompetent for being hearsay. It accordingly modified the judgment, holding Johnlo liable only for 3,108 pesos and 74 centavos for services in connection with 19.63 long tons shipped by a vessel, plus 3,000 pesos in damages, and declaring the contract between Johnlo and Lipsett invalid only to the extent of the properties necessary to cover those amounts. Florentino then came to the Supreme Court by the present petition for certiorari.

Facts

Florentino rendered loading, hauling, and stevedoring services for Johnlo under contracts entered into in June, July, and November 1948. Its charges went unpaid, and it computed the unpaid balance at 14,304 pesos and 19 centavos, with interest from August 1949. In October 1949, Johnlo sold, transferred, and conveyed all its properties and equipment in the Philippines to Lipsett, its sister corporation, for a consideration of 100 pesos. Florentino charged that this conveyance was executed to defraud Johnlo's creditors, and sued both corporations in the Court of First Instance of La Union.

Lipsett answered and contested both causes of action. Johnlo did not answer. Summons had been served on it through Charles T. Balcoff, who disclaimed being its representative or agent in the Philippines, but the Supreme Court in a separate proceeding upheld the service as sufficient, and Johnlo was declared in default. Its motion for relief from the order of default was denied, and its appeal from the judgment on the merits was later disapproved and became final.

After trial, the lower court found for the plaintiff on both causes of action, holding Johnlo liable for the unpaid services with interest, damages, and attorney's fees, and annulling the transfer to Lipsett as fraudulent for lack of adequate consideration. On Lipsett's lone appeal, the Court of Appeals discarded Exhibit C as hearsay, reduced Johnlo's liability, and limited the invalidity of the transfer to the properties needed to cover the reduced amount. Florentino asked the Supreme Court to review that decision.

Issues

• Whether or not the Court of Appeals erred in modifying the judgment of the trial court insofar as that judgment affected and bound Johnlo, a defendant who did not appeal and who, by reason of its default, was barred from interposing an appeal.
• Whether or not the Court of Appeals erred in modifying the judgment of the trial court on the basis of its finding that the petitioner's Exhibit C is incompetent and inadmissible hearsay evidence.

Applicable Provisions

Section 14, Rule 7 of the Rules of Court, as applied in the earlier ruling on the service of summons, provides:

Service upon a foreign corporation may be made upon its resident agent or upon any person who, at the time of service, is acting as its representative or agent in the Philippines.

That provision bears on the case because it supplied the basis for holding that service on Charles T. Balcoff was sufficient, which in turn led to the order of default against Johnlo.

Section 6, Rule 35 of the Rules of Court, cited by the Court on the protection owed a defaulting party, provides:

If the defendant fails to answer, the court shall proceed to receive the plaintiff's evidence and render judgment granting him such relief as the complaint and the evidence may warrant.

That provision bears on the case because it explains why the plaintiff still had to prove its claim despite Johnlo's absence, but the Court held it cannot override the rule on finality of judgments.

Section 2, Rule 35 of the Rules of Court, which the Court calls the cardinal principle regarding finality of judgment, provides:

A judgment or order becomes final and executory thirty days after notice thereof to the party affected, unless an appeal is perfected within that period.

That provision bears on the case because it is the ground on which the Court refused to let the appellate court reopen the judgment against the non-appealing, defaulting defendant.

Ruling

On the first issue, the Court held that the Court of Appeals exceeded its authority. The rule is well settled that a defendant declared in default loses not only his right to be heard in court but also the right to appeal from the judgment on the merits. Since the defaulting defendant cannot appeal, the decision as to him becomes final and executory upon the expiration of the period to appeal and, even in case of appeal by the other defendants, shall remain undisturbed. The Court acknowledged an exception: if the judgment can only be sustained upon the liability of the one who appeals, and the liability of the other co-judgment debtors depends solely upon whether the appellant is liable, then a reversal as to the appellant inures to the benefit of all. That exception does not obtain here. The first cause of action rested on contracts between the plaintiff and Johnlo, in which Lipsett had no interest or participation; Lipsett was impleaded under the second cause of action only because it was a party to the transfer alleged to be fraudulent. The evidence of Johnlo's liability and the evidence on the transfer to Lipsett are different and independent of each other. A judgment against Johnlo cannot affect Lipsett if the transfer is valid, and a judgment for or against Lipsett has no bearing on Johnlo's liability. The only connecting link is that the first cause of action establishes the plaintiff as a creditor of Johnlo, which qualifies it to seek relief under the second. Had Johnlo itself appealed, any reversal would necessarily benefit Lipsett, because if the claim against Johnlo could not be established, the second cause of action would fail. But Johnlo did not appeal.

The Court also rejected the argument that the Court of Appeals could review the evidence as between the plaintiff and Johnlo because the trial court had allowed Lipsett to present proof on Johnlo's liability and because Lipsett had appealed from the entire decision. The admission of that evidence, presumably over the plaintiff's objection, did not make Lipsett a party under the first cause of action, nor did it lift the order of default and restore Johnlo's standing; in fact, the trial court disregarded that evidence in its final decision. While the law gives a defaulting party a degree of protection, so that the plaintiff must still substantiate its allegations, that rule cannot override the cardinal principle of finality of judgment. Even granting that the trial court erred in appreciating the evidence or overlooked proofs in favor of the defaulting defendant, that did not justify the appellate court in setting aside and modifying a judgment against him which had become final and executory after the lapse of thirty days from notice.

On the second issue, it followed that the Court of Appeals could not, on Lipsett's appeal alone, re-examine Exhibit C and reduce the amount of Johnlo's liability. That determination belonged to the judgment against Johnlo, which had already passed beyond review.

Doctrine

A defendant declared in default loses not only his right to be heard in court but also his right to appeal from the judgment on the merits. The judgment as to him becomes final and executory upon the expiration of the period to appeal and, even in case of an appeal by the other defendants, shall remain undisturbed. The exception is narrow: where the judgment can only be sustained upon the liability of the one who appeals, and the liability of the other co-judgment debtors depends solely upon whether the appellant is liable, a reversal as to the appellant inures to the benefit of all. The defaulting party retains the protection that the plaintiff must still substantiate its allegations and the court must grant relief only as proved, but that protection cannot override the cardinal principle of finality of judgment under Section 2, Rule 35.

Disposition

The Supreme Court set aside the decision of the Court of Appeals insofar as it reduced the liability of Johnlo and reinstated the judgment of the trial court on that matter, affirming the appealed decision in all other respects, with costs against the respondent.

Remember This

The line worth memorizing is that a defendant in default loses both the right to be heard and the right to appeal, so the judgment against him becomes final and cannot be disturbed even on his co-defendant's appeal. Examiners use this case to test the finality of judgments against defaulting defendants and the precise limits of the exception that a reversal in favor of the appealing co-defendant inures to the benefit of all.