THE MANILA BANKING CORPORATION, PETITIONER, VS. UNIVERSITY OF BAGUIO, INC. AND GROUP DEVELOPERS, INC., RESPONDENTS.

Manila Banking Corporation versus University of Baguio

The Case

This is a petition for review of a trial court order dismissing a complaint for a sum of money. The Manila Banking Corporation sued the University of Baguio, its former vice chairman, and later Group Developers, Incorporated, to collect an unpaid loan. The trial court dismissed the case before trial on the ground that the loan had already been paid through a dacion en pago, a deed of payment by dation in which property is ceded to satisfy a debt. The case matters because it draws the sharp line between a motion to dismiss for failure of the complaint to state a cause of action, which is decided on the face of the pleading alone, and a demurrer to evidence, which comes only after the plaintiff has rested. It is a procedural case with a heavy practical bite.

Procedural History

The bank filed its complaint for a sum of money with application for preliminary attachment before the Regional Trial Court of Makati City. It later amended the complaint to implead Group Developers, Incorporated as an additional defendant. The university answered and filed a cross claim and a third party complaint. In an Omnibus Order, the trial court dismissed the third party complaint against the heirs of Vicente Puyat as premature, dismissed the case against Fernando Bautista, Junior and his wife upon his death, and declared several motions moot in light of the dacion en pago. The university then moved to dismiss the amended complaint, and the trial court denied that motion in an Order dated August 17, 1999, holding that the matters relied upon were evidentiary in nature. Later, the trial court expunged the deed of dacion en pago from the record and reinstated the motions to dismiss. On April 11, 2002, the trial court granted the university's motion and dismissed the amended complaint, and it denied reconsideration on June 27, 2003. The bank appealed directly to the Supreme Court on a pure question of law under Section 2, Rule 41 of the Rules of Court.

Facts

On November 26, 1981, the Manila Banking Corporation granted the University of Baguio a fourteen million peso credit line for the construction of additional buildings and the purchase of new equipment. On the university's behalf, its then vice chairman, Fernando Bautista, Junior, signed four promissory notes and executed a continuing suretyship agreement. Instead of the loan being applied to the university's purposes, Bautista diverted the net proceeds. He endorsed and delivered the four checks representing those proceeds to Group Developers, Incorporated. The loan was never paid.

On February 12, 1990, the bank sued the university, Bautista and his wife before the Regional Trial Court of Makati City. Five years later, the bank amended its complaint and impleaded Group Developers as an additional defendant, alleging that it did not approve the diversion and that Group Developers connived with the university and Bautista in fraudulently contracting the debt. The university answered that the diversion had been approved, that the bank's own president and the president of Group Developers had assured it in writing that it would be relieved of liability, and that the bank did not demand payment until February 8, 1989, long after the loan fell due.

On December 14, 1995, the bank and Group Developers executed a deed of dacion en pago. Group Developers, as attorney in fact of Batulao Bio Loop Farms, Incorporated, ceded to the bank a parcel of land of two hundred ten thousand square meters in Nasugbu, Batangas, for a consideration of seventy eight million pesos, in full settlement of the loan under the four promissory notes. The trial court's rulings on this deed were inconsistent: at one point it treated the deed as having settled the case, at another it called payment evidentiary, then it expunged the deed from the record, and finally it dismissed the complaint on the strength of that same expunged deed.

Issues

• Whether or not the trial court erred in dismissing the amended complaint, without trial, upon motion of the university.
• Whether or not a motion to dismiss based on lack of cause of action, grounded on a deed of dacion en pago not alleged in the complaint and already expunged from the record, may be granted before the plaintiff has presented evidence.

Applicable Provisions

Section 1, paragraph g, of Rule 16 of the Rules of Court provides:

That the pleading asserting the claim states no cause of action.

This is the ground for a motion to dismiss that is decided on the face of the initiatory pleading alone, before the answer is filed.

Section 1 of Rule 33 of the Rules of Court provides:

After the plaintiff has completed the presentation of his evidence, the defendant may move for dismissal on the ground that upon the facts and the law the plaintiff has shown no right to relief. If his motion is denied, he shall have the right to present evidence. If the motion is granted but on appeal the order of dismissal is reversed he shall be deemed to have waived the right to present evidence.

This is the demurrer to evidence, which comes only after the plaintiff has rested, and it is the proper vehicle for a claim that the evidence does not sustain the cause of action alleged.

Ruling

On the first issue, the Court held that the trial court erred. The university's motion to dismiss was improper under Rule 16 because it was filed after the university had already filed its responsive pleading, its Answer. Its merit could not be determined from the allegations of the amended complaint alone, since the motion rested on the deed of dacion en pago, a matter outside the pleading. And because that deed had been expunged from the record, the trial court erred in finding payment and lack of cause of action based upon it.

On the second issue, the Court distinguished the two motions in the words of its earlier ruling in Domondon versus Lopez:

The first is raised in a motion to dismiss under Rule 16 before a responsive pleading is filed and can be determined only from the allegations in the initiatory pleading and not from evidentiary or other matters aliunde. The second is raised in a demurrer to evidence under Rule 33 after the plaintiff has rested his case and can be resolved only on the basis of the evidence he has presented in support of his claim.

Following that distinction, the Court held that a motion alleging that the plaintiff has no more cause of action is in the nature of a demurrer to evidence and is proper only after the plaintiff has presented evidence and rested. Here no evidence had been presented and the bank had not rested. The August 17, 1999 Order denying the motion was therefore correct. The Court also stressed that if there was fraud, given the uncollateralized loan, its diversion, nonpayment, the absence of demand although overdue, and a dacion en pago where title to the property could not be transferred, that fraud should be uncovered at trial to determine who is liable. It reminded courts that procedural rules must be followed strictly, and that their misapplication here produced inconsistent rulings, confusion and delay.

Doctrine

A motion to dismiss for failure of the complaint to state a cause of action under Rule 16 is determined solely from the allegations of the initiatory pleading, is filed before the responsive pleading, and cannot rest on evidentiary matters outside the complaint. A claim that the evidence does not sustain the cause of action alleged is a demurrer to evidence under Rule 33, available only after the plaintiff has completed the presentation of his evidence. A motion grounded on lack of cause of action, filed after the answer and resting on a document not alleged in the complaint and already expunged from the record, is improper under either rule and must be denied.

Disposition

The Court granted the petition, set aside the trial court's April 11, 2002 and June 27, 2003 Orders, and ordered the trial court to proceed with pre-trial and hear the case with dispatch, without pronouncement as to costs.

Remember This

Memorize the line: failure to state a cause of action is read from the complaint alone under Rule 16, while lack of cause of action is tested by demurrer to evidence under Rule 33 after the plaintiff rests. Examiners use this case to test whether you can classify a motion to dismiss by its timing and its evidentiary basis, and to catch a trial court that dismisses on an expunged document.