SALUD S. PAPA, PLAINTIFF AND APPELLANT, VS. GERVACIO S. BANAAG, DEFENDANT AND APPELLEE.

Papa versus Banaag

The Case

This is the case of Papa versus Banaag, decided by the Supreme Court in August 1966. Salud Papa lent money to Gervacio Banaag, who secured the debt with a chattel mortgage on his piano. When Banaag failed to pay, Mrs. Papa sought to foreclose the mortgage out of court, and Banaag rushed to court to stop her. After that first suit was dismissed, Mrs. Papa sued to collect the loan and to recover damages. The case matters because it draws the line between what a creditor must raise as a compulsory counterclaim and what she may still pursue in a separate action, and it teaches that a debtor cannot defeat a creditor's substantive remedy by his own obstinate acts.

Procedural History

Banaag first filed a civil case in the Court of First Instance of Rizal against Mrs. Papa and the sheriff to prevent the extrajudicial foreclosure of the mortgage and to recover damages. That case was dismissed, without special pronouncement as to costs. Mrs. Papa then filed a separate action in the Court of First Instance of Manila to collect the loan and to recover damages. Banaag moved to dismiss on the grounds of lack of cause of action and release, but the motion was denied. After the pleadings were joined, the trial judge, upon learning of the earlier Rizal case, directed the parties to submit memoranda on res judicata. The Manila court then dismissed the complaint, holding that the earlier decision was conclusive between the parties and that Mrs. Papa's claims were compulsory counterclaims barred by that decision, and it ordered her to pay 500 pesos as attorney's fees and the costs. Mrs. Papa appealed directly to the Supreme Court.

Facts

On December 9, 1960, Banaag obtained from Mrs. Papa a loan of 400 pesos, payable with interest within 60 days. To guarantee payment, Banaag executed in her favor a deed of chattel mortgage on a piano belonging to him, and the deed was duly recorded in the office of the register of deeds.

Claiming that Banaag had defaulted, Mrs. Papa asked the sheriff of Quezon City sometime in May 1961 to foreclose the mortgage extrajudicially. Banaag then filed a civil case in Rizal to prevent the foreclosure and recover damages, alleging that Mrs. Papa had given him unlimited time to pay. Mrs. Papa denied any extension and set up counterclaims for damages for the malicious filing of that complaint. The Rizal court dismissed Banaag's case.

On December 3, 1962, Mrs. Papa sued Banaag in Manila to recover the principal and interest of 456 pesos, actual and compensatory damages of 4,590 pesos, moral damages of 10,000 pesos, exemplary damages of 1,000 pesos, and attorney's fees of 2,000 pesos. She alleged that the extrajudicial foreclosure could not proceed because Banaag obstinately refused to surrender the mortgaged piano to the sheriff. The trial court dismissed her complaint on the ground of res judicata, and she appealed.

Issues

• Whether or not the creditor's right to collect the loan is a compulsory counterclaim barred by the dismissal of the debtor's earlier action to stop the extrajudicial foreclosure.
• Whether or not the creditor, having first chosen extrajudicial foreclosure, may still enforce the debt judicially when the debtor by his own acts prevented that foreclosure.
• Whether or not the creditor's claims for actual, moral, and exemplary damages arising from the earlier case are barred as compulsory counterclaims.

Applicable Provisions

Section 4 of Rule 9 of the Revised Rules of Court provides:

A counterclaim is compulsory if it arises out of or is necessarily connected with the transaction or occurrence that is 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.

This is the rule the trial court used to bar Mrs. Papa's claims, and the Court applies it to separate the barred damages from the surviving claim on the loan.

Section 16 of the Chattel Mortgage Law provides:

The mortgagee may, after the condition broken, cause the mortgaged property to be sold at public auction by a public officer, either at the place where the property is situated or at the place where the mortgagor resides, after giving notice of the time, place, and purpose of such sale.

This is the substantive right of extrajudicial foreclosure that the Court refuses to let the procedural rule on counterclaims abrogate.

Article 1205 of the Civil Code provides:

When the choice has been expressly given to the debtor, the obligation shall cease to be alternative from the day when the selection has been communicated to the creditor.

The Court uses the law on alternative obligations by analogy, holding that when one remedy becomes impossible through the debtor's fault, the creditor may claim the subsisting alternative.

Ruling

On the first issue, the Court acknowledged that Mrs. Papa's right to demand payment arose from the very transaction that was the subject matter of the earlier case, and that in principle it partook of the nature of a compulsory counterclaim. But the Court held that the Chattel Mortgage Law grants the creditor the right to foreclose extrajudicially, and that the rule on compulsory counterclaims should not be construed to repeal or abrogate this substantive right. Despite the rule, Mrs. Papa was entitled to invoke and assert her right to extrajudicial foreclosure.

On the second issue, the Court asked whether she could still enforce her rights judicially after choosing the extrajudicial remedy. It answered yes, because Banaag, who is a lawyer, succeeded through his acts and omissions in preventing the foreclosure by obstinately refusing to surrender the piano to the sheriff. The Court held that the defendant may not be permitted to limit the plaintiff's rights to a mode of redress whose effectivity he himself had defeated. The relation between the parties, the Court said, may be likened to an alternative obligation, in that the debt may be enforced either against the mortgaged piano exclusively or against the general mass of the debtor's assets, at the creditor's option. Since one option had in effect been denied or become impossible through the debtor's fault, the creditor may claim the subsisting alternative. The Court also noted that the trial judge had misapprehended an important fact, believing that the mortgage had actually been foreclosed when the complaint alleged otherwise and the defendant admitted it.

On the third issue, the Court held that the claims for actual and compensatory damages, moral damages, and exemplary damages, all arising from acts performed by Banaag in connection with the earlier case, were necessarily connected with that case and were barred by it under Section 4 of Rule 9.

Doctrine

First, the procedural rule on compulsory counterclaims must not be construed to repeal or abrogate a creditor's substantive right under the Chattel Mortgage Law to foreclose the mortgage extrajudicially. Second, a debtor may not defeat the creditor's remedy by his own acts and omissions; where one alternative remedy becomes impossible through the debtor's fault, the creditor may claim the subsisting alternative, by analogy to Article 1205 of the Civil Code. Third, claims for damages arising from acts performed in an earlier case are necessarily connected with that case and are barred as compulsory counterclaims under Section 4 of Rule 9.

Disposition

The Court affirmed the dismissal as to the second, third, and fourth causes of action, set aside the decision in all other respects, and remanded the case to the lower court for further proceedings, so that Mrs. Papa may judicially collect the loan.

Remember This

The one line to memorize: rules of procedure cannot abrogate the creditor's substantive right of extrajudicial foreclosure, and a debtor cannot profit from defeating the remedy he himself obstructed. Examiners use this case on compulsory counterclaims, on the Chattel Mortgage Law, and on alternative obligations by analogy to Article 1205.