MIGUELITO B. LIMACO, ROGELIO LIMACO, JR., AND ISIDRO LIMACO, PETITIONERS, VS. SHONAN GAKUEN CHILDREN’S HOUSE PHILIPPINES, INC., RESPONDENT.

Limaco versus Shonan Gakuen Children's House Philippines

The Case

This is a petition for review brought by the Limaco brothers, Miguelito, Rogelio Jr., and Isidro, the registered owners of three agricultural lots in Bay, Laguna, against Shonan Gakuen Children's House Philippines, Inc., a domestic corporation that contracted to buy those lots. The Limacos sued for specific performance after the buyer refused to pay its installments; the buyer, in turn, sought rescission and the return of its down payment. The case matters because it settles two things a reviewee must know: first, that a plaintiff cannot walk away from a compulsory counterclaim by simply withdrawing his complaint, and second, that when a sale of private agricultural land is void for failure to comply with the registration requirement of the agrarian reform law, the buyer may recover what he paid under the principle that no one should enrich himself at the expense of another.

Procedural History

The buyer first filed a complaint for rescission with damages before the Regional Trial Court of Makati, but that complaint was dismissed to give way to the present action. The Limacos and the tenant farmers then filed a complaint for specific performance with the Regional Trial Court of Laguna, Branch 25. During trial, the tenant farmers were dropped as plaintiffs, and the trial court proceeded against the Limacos. On January 26, 1998, the trial court rendered judgment ordering the Limacos to pay the buyer the balance of 113,000 pesos, with legal interest. The trial court held the contract of sale void under the agrarian reform law, found both parties in pari delicto, meaning equally at fault, but enforced what it called an equitable arrangement between them.

The buyer appealed to the Court of Appeals, which found the appeal partially meritorious. The appellate court held that the trial court erred in voiding the contract under the constitutional policy on agrarian reform, since that provision is not self-executing, but it agreed that the contract was void under the agrarian reform statute for lack of proof of registration. It disagreed, however, that the parties were equally at fault, and applying the principle against unjust enrichment, it ordered the Limacos to return the balance of the down payment in the amount of 713,000 pesos, with legal interest, while denying exemplary damages and attorney's fees. The Limacos moved for reconsideration, which was denied. Hence, this petition for review before the Supreme Court.

Facts

The Limacos owned three parcels of agricultural land in Bay, Laguna, with a total area of 313,293 square meters. On May 19, 1988, they entered into a Contract of Sale with Shonan Gakuen Children's House Philippines, Inc. for 12,531,720 pesos. The buyer was to pay 1,200,000 pesos upon signing and the balance of 11,331,720 pesos in seven equal installments. The parties stipulated that if the sale could not be effected in whole or in part, all amounts paid would be applied to another similar property owned by the vendors in substitution.

The buyer paid the down payment but refused to remit any installment because the Limacos had failed to obtain a clearance or approval of the sale from the Department of Agrarian Reform. The Limacos proposed a scheme under a Department opinion, whereby the tenant farmers would donate the land to the municipality, which would in turn donate it to the buyer. The buyer rejected the scheme as far from acceptable and asked that the property be substituted with untenanted land. When the Limacos did not respond, the buyer demanded the return of its down payment. When the Limacos refused, the buyer filed its complaint for rescission, and the Limacos countered with an action for specific performance.

During trial, the parties reached a compromise under which the Limacos would return only half of the down payment, or 600,000 pesos, but the Limacos remitted only 487,000 pesos, leaving a balance of 113,000 pesos. The Limacos then moved to withdraw their complaint, arguing that the buyer's counterclaim could not stand alone. The trial court denied the motion, and trial proceeded, resulting in the judgment that led to this petition.

Issues

• Whether or not the respondent's compulsory counterclaim should be dismissed upon the petitioners' withdrawal of their complaint.
• Whether or not the petitioners are liable to the respondent for the return of the down payment.
• Whether or not, if liable, the extent of their liability is the amount of 713,000 pesos.

Applicable Provisions

Section 2 of Rule 17 of the old Rules of Court provides:

Section 2. Dismissal by order of the court. Except as provided in the preceding section, an action shall not be dismissed at the plaintiff's instance save upon order of the court and upon such terms and conditions as the court deems proper. If a counterclaim has been pleaded by a defendant prior to the service upon him of the plaintiff's motion to dismiss, the action shall not be dismissed against the defendant's objection unless the counterclaim can remain pending for independent adjudication by the court. Unless otherwise specified in the order, a dismissal under this paragraph shall be without prejudice.

This provision governs whether the Limacos could dismiss their complaint over the buyer's objection, and it protects a compulsory counterclaim from being extinguished with the complaint.

Ruling

On the first issue, the Court held that the counterclaim could not be dismissed. There are two ways to dismiss an action at the plaintiff's instance: dismissal is a matter of right when a notice of dismissal is filed before the defendant serves his answer or a motion for summary judgment, and dismissal is discretionary with the court when the motion is filed at any later stage. Here, the Limacos filed their motion to withdraw only after the buyer had already filed its answer with counterclaim, and the trial court sustained the buyer's objection. The Court stressed the language of the rule:

If a counterclaim has been pleaded by a defendant prior to the service upon him of the plaintiff's motion to dismiss, the action shall not be dismissed against the defendant's objection unless the counterclaim can remain pending for independent adjudication by the court.

What may remain for independent adjudication, the Court explained, are permissive counterclaims, not compulsory ones, which generally require simultaneous adjudication with the complaint. The buyer's counterclaim was compulsory, so it could not stand alone, and the complaint could not be withdrawn over its objection.

On the second issue, the Court held the Limacos liable. Both lower courts found that the buyer remitted the 1,200,000 peso down payment to the Limacos as landowners, and this finding was supported by the contract itself, which applied all paid-in amounts to a substitute property owned by the vendors. The Limacos' claim that the money went entirely to the tenant farmers rested only on the testimony of Rogelio Jr., drawn out by a misleading question on cross-examination, and they had no receipts to prove payment to the tenants. The Court found it hard to believe that a family of lawyers would fail to demand proof of payment for so substantial an amount.

On the third issue, the Court fixed the liability at 713,000 pesos. Since the contract was void, its substitution clause could not be enforced, and the principle against unjust enrichment required restitution. The compromise agreement was cancelled because the Limacos reneged on remitting the balance, and it was not binding because they never signed it. From the 1,200,000 peso down payment, the 487,000 pesos already returned must be deducted, leaving 713,000 pesos.

Doctrine

First, a complaint cannot be dismissed at the plaintiff's instance over the defendant's objection where a compulsory counterclaim has already been pleaded, because under Section 2 of Rule 17 of the old Rules of Court the action shall not be dismissed unless the counterclaim can remain pending for independent adjudication, and a compulsory counterclaim cannot. Second, where a sale of private agricultural land is void for failure to comply with the registration requirement of the agrarian reform law, the buyer may recover the down payment under the principle that no one should enrich himself at the expense of another, less any amount already returned. Third, a compromise agreement not signed by a party and abandoned by non-compliance does not bind.

Disposition

The petition was denied, and the decision and resolution of the Court of Appeals were affirmed, with costs against the petitioners.

Remember This

Memorize this line: a compulsory counterclaim cannot remain for independent adjudication, so the complaint cannot be withdrawn over the defendant's objection. Examiners use this case in civil procedure on the dismissal of actions under Rule 17, and in civil law on unjust enrichment and the void sale of agricultural land.