UY HOO & CO., INC., PETITIONER, VS. JUDGE BIENVENIDO A. TAN, ETC., ET AL., RESPONDENTS.

Uy Hoo and Company versus Judge Tan

The Case

This is a petition for certiorari brought by Uy Hoo and Company, Incorporated against Judge Bienvenido Tan and Joaquin Yuseco. The creditor corporation asks the Supreme Court to annul a trial court order that struck out its amended answer with a counterclaim to collect and foreclose a mortgage debt. The case matters because it fixes the rule on the liberality of amendments to pleadings, and because it shows how a compulsory counterclaim — one that is barred forever if not set up — interacts with that liberality and with the equitable doctrine of laches.

Procedural History

Joaquin Yuseco sued Uy Hoo and Company in the Court of First Instance of Manila to annul a deed of mortgage, pleading a valid prior tender of payment that the creditor had refused. The creditor answered, denying the validity of the tender. Years later, before any evidence was presented, the creditor sought leave to file an amended answer adding, for the first time, a counterclaim to collect and foreclose the mortgage. The trial judge admitted the amended answer by order. On Yuseco's motion for reconsideration, however, the same judge set aside that order and ordered the amended answer stricken from the record. After failing to secure a reversal, Uy Hoo and Company filed this petition for certiorari in the Supreme Court, alleging grave abuse of discretion.

Facts

On December 23, 1943, Yuseco obtained from Uy Hoo and Company a loan of 70,000 pesos in Japanese currency and executed a deed of mortgage on his real property in Manila. The deed stipulated that the loan could not be paid within two years from its date, but had to be paid after that period and not later than December 24, 1946, a condition neither party could waive.

Before September 25, 1944, Yuseco offered to pay the 70,000 pesos plus interest for the entire period, but the creditor refused, invoking the two-year stipulation. Yuseco then sued to annul the mortgage, and the creditor answered that the tender was invalid precisely because it violated the stipulation. When the two-year period lapsed, the creditor itself sued to collect the debt and foreclose the mortgage. That foreclosure complaint was dismissed upon Yuseco's invocation of the Moratorium Law, and the dismissal was affirmed on appeal.

With the foreclosure case gone, the annulment case was repeatedly set for hearing. On July 29, 1955, before any evidence was offered, the creditor asked permission to file an amended answer including, for the first time, a counterclaim to collect and foreclose the mortgage. The judge admitted it, then set that order aside on reconsideration, holding that laches barred so substantial an amendment after ten years and noting that the amendment dropped a paragraph of the original answer that Yuseco claimed supported his theory. Hence this petition.

Issues

• Whether or not the trial judge gravely abused his discretion in refusing to admit the amended answer with counterclaim on the ground of laches.
• Whether or not the elimination of a paragraph of the original answer that allegedly favored the plaintiff justified rejection of the amendment.
• Whether or not the abuse of discretion, if any, was serious enough to warrant the extraordinary remedy of certiorari.

Applicable Provisions

Section 1 of Rule 10 defines a counterclaim:

Any claim, whether for money or otherwise, which a party may have against the opposing party.

This is the provision under which the creditor's demand for payment of the mortgage debt qualifies as a proper counterclaim in the annulment action.

Section 6 of Rule 10 governs the compulsory counterclaim:

A counterclaim which arises out of the transaction or occurrence that is the subject matter of the opposing party's claim is a compulsory counterclaim, and if not set up, is barred.

This is the provision that made the amendment urgent: unless the counterclaim was admitted, the creditor would forever lose its right to collect the debt.

Section 2 of Rule 17 governs amendment of pleadings:

Amendments to pleadings may be made at any stage of an action, to the end that the real matter in dispute and all matters in the action in dispute between the parties may, so far as possible, be completely determined in a single proceeding.

This is the provision the Court read liberally in favor of the creditor.

Ruling

On the first issue, the Court held that the trial judge abused his discretion. The delay was largely excusable: the mortgage debt was not yet payable when the original answer was filed, and the creditor had pursued a separate foreclosure suit that the Moratorium Law suspended until that law was invalidated in May 1953. The only delay attributable to the creditor ran from May 1953 to July 1955, and even that was reduced by the period when Yuseco's own motion to dismiss the annulment case was pending. The Court found no case treating a delay of less than two years as laches. Since the Rules allow amendment at any stage of an action, the judge should have exercised his discretion liberally, amendments to pleadings being favored.

On the second issue, the Court held that the dropped paragraph did not justify rejection. Reading it as a whole, the paragraph contradicted, rather than supported, the claim of a verbal agreement allowing early payment. Besides, the original answer remained in the record, and the plaintiff could always refer to it or introduce it as evidence. The Court added that if every allegation favoring the adverse party could never be withdrawn, amended pleadings might as well be abolished.

On the third issue, the Court held that the abuse was serious enough for certiorari, because if the counterclaim were not allowed, the creditor might forever be barred from collecting its credit under Section 6 of Rule 10.

Doctrine

Amendments to pleadings are favored and should be liberally allowed at any stage of an action, so that the real matter in dispute may be completely determined in a single proceeding. This liberality, however, stops short of permitting a substantial change of the cause of action or defense, or an alteration of the theory of the case. A compulsory counterclaim — one arising out of the same transaction or occurrence as the opposing party's claim — is barred if not set up, so its belated assertion may be allowed where the delay is explained and does not amount to laches. Mere delay of less than two years, especially when caused by the opposing party's own motions, is not laches.

Disposition

The petition was granted, and the Supreme Court annulled the respondent judge's order of September 28, 1955, without costs.

Remember This

The one line to memorize: amendments to pleadings are liberally allowed at any stage of an action, but never to change the cause of action or the theory of the case. Examiners use this case to test the compulsory counterclaim rule and the limits of liberality in amendments.