VIRGINIA S. DIO AND H.S. EQUITIES, LTD., PETITIONERS, VS. SUBIC BAY MARINE EXPLORATORIUM, INC., REPRESENTED BY ITS CHAIRMAN AND CHIEF EXECUTIVE OFFICER, TIMOTHY DESMOND, RESPOND…

Dio versus Subic Bay Marine Exploratorium

The Case

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court, filed by Virginia S. Dio and H.S. Equities, Ltd. against Subic Bay Marine Exploratorium, Inc. and its chief executive officer, Timothy Desmond. The petitioners ask the Supreme Court to reverse two orders of the Regional Trial Court of Balanga City, Bataan, which refused to set their compulsory counterclaims for hearing after the main complaint had already been dismissed with finality. The case matters because it settles a procedural question every litigator must know: when the plaintiff's complaint is dismissed through the plaintiff's own fault, does the defendant's counterclaim die with it? The Court answers no, and in doing so confirms the abandonment of the old rule that a compulsory counterclaim is merely ancillary and cannot survive the dismissal of the principal action.

Procedural History

Subic Bay Marine Exploratorium filed an intra-corporate complaint against Dio and H.S. Equities before the Regional Trial Court of Balanga City, Bataan. Before the petitioners could answer, the respondent impleaded its corporate secretary as an additional defendant. The petitioners filed their answer with compulsory counterclaim. Instead of setting the case for pre-trial, the trial court motu proprio dismissed the complaint on the ground that the certificate of non-forum shopping was signed by Desmond without specific authority from the board of directors. The respondents moved for reconsideration, attaching a board resolution, but the trial court denied the motion and affirmed the dismissal.

The respondents elevated the matter to the Court of Appeals by petition for review. For failure to file their appellants' brief, the Court of Appeals dismissed the appeal, and the dismissal became final and executory, as shown by an entry of judgment. With the main case closed, the petitioners returned to the trial court and moved to set their counterclaims for hearing. The trial court denied the motion, holding that it had lost jurisdiction over the counterclaim because the compulsory counterclaim is merely ancillary to the principal controversy. The trial court likewise refused reconsideration. The petitioners then filed this petition for review on certiorari on a pure question of law, directly with the Supreme Court.

Facts

H.S. Equities, a foreign corporation organized under the laws of the British Virgin Islands, agreed in 2002 to invest two million five hundred thousand United States dollars in Subic Bay Marine Exploratorium by purchasing seven hundred fifty thousand common shares from an increase in authorized capital stock. The agreement was reduced to writing and afforded H.S. Equities minority protection rights, including the right to appoint a member of the board and the right to veto certain board resolutions. After initially paying two hundred thousand dollars, H.S. Equities refused to lay out more money, citing alleged mismanagement of corporate funds.

Subic Bay Marine Exploratorium then filed an intra-corporate complaint against the petitioners, essentially alleging that they unjustly refused to pay the balance of their unpaid subscription and that Dio tried to dissuade local investors and financial institutions from putting capital into the company. The petitioners answered, denying the claims and setting up compulsory counterclaims for moral damages, litigation expenses, exemplary damages, and the recovery of their investment, alleging that their reputation was tarnished by the filing of the complaint.

The trial court dismissed the complaint outright because the certificate of non-forum shopping was signed by Desmond without authority from the board. The Court of Appeals later dismissed the respondents' appeal for failure to file their appellants' brief, and that dismissal became final. When the petitioners sought to prosecute their counterclaims, the trial court refused, reasoning that the compulsory counterclaim derived its jurisdictional support from the complaint, which no longer existed.

Issues

• Whether or not the petitioners properly availed themselves of a petition for review on certiorari directly before the Supreme Court, instead of first going to the Court of Appeals.
• Whether or not the trial court erred in dismissing the petitioners' compulsory counterclaims on the ground that it had lost jurisdiction over them after the main complaint was dismissed with finality.

Applicable Provisions

Section 6 of Rule 16 of the Revised Rules of Court provides:

Section 6. Pleading grounds as affirmative defenses. If no motion to dismiss has been filed, any of the grounds for dismissal provided for in this Rule may be pleaded as an affirmative defense in the answer and, in the discretion of the court, a preliminary hearing may be had thereon as if a motion to dismiss had been filed. The dismissal of the complaint under this section shall be without prejudice to the prosecution in the same or separate action of the counterclaim pleaded in the answer.

This provision is the textual anchor of the ruling: a dismissal of the complaint does not carry with it the dismissal of the counterclaim pleaded in the answer.

Section 2 of Rule 41 of the Revised Rules of Court provides:

Section 2. Modes of Appeal. (c) Appeal by certiorari. In all cases where only questions of law are raised or involved, the appeal shall be to the Supreme Court by petition for review on certiorari in accordance with Rule 45.

This provision justifies the petitioners' direct recourse to the Supreme Court, because their petition raises only a question of law.

Ruling

On the first issue, the Court held that the petition was the proper remedy. The rule on judicial hierarchy is not iron-clad, and strict application is unnecessary when the case involves not factual but purely legal questions. A question of law exists when the doubt concerns the correct application of law to a certain set of facts, and the court can resolve the issue without reviewing or evaluating the evidence. The petitioners raised only the legal question of whether the dismissal of their counterclaim was proper, so their remedy lay directly with the Supreme Court under Rule 45.

On the second issue, the Court ruled in favor of the petitioners. The dismissal of the complaint resulted from the respondents' own failure to append a board resolution authorizing Desmond to sign the certificate of non-forum shopping. The trial court's premise, that the dismissal of the main action stripped it of jurisdiction over the counterclaim, rests on the old doctrine of Metals Engineering and BA Finance, which the Court had already abandoned in Pinga versus Heirs of German Santiago. The Court quoted its ruling in Pinga:

We thus rule that the dismissal of a complaint due to fault of the plaintiff is without prejudice to the right of the defendant to prosecute any pending counterclaims of whatever nature in the same or separate action.

The Court explained that the dismissal of the complaint does not ipso jure result in the dismissal of the counterclaim, and the latter may remain for independent adjudication, provided that the counterclaim states a sufficient cause of action and does not labor under any infirmity warranting its outright dismissal. The jurisdiction of the court over a counterclaim valid on its face is not abated by the dismissal of the main action. Following Perkin Elmer Singapore versus Dakila Trading Corporation, the Court held that where the counterclaim is for damages and attorney's fees arising from an unfounded suit, the cause of action is not eliminated by the mere dismissal of the complaint.

Doctrine

A Bar candidate should retain these rules. First, the dismissal of a complaint due to the fault of the plaintiff is without prejudice to the right of the defendant to prosecute any pending counterclaim, of whatever nature, in the same or separate action. Second, the dismissal of the complaint does not ipso jure result in the dismissal of the counterclaim; the counterclaim may remain for independent adjudication provided it states a sufficient cause of action and does not labor under an infirmity that warrants its outright dismissal. Third, the court's jurisdiction over a counterclaim valid on its face, including the grant of relief thereunder, is not abated by the dismissal of the main action. Fourth, a petition for review on certiorari may be filed directly with the Supreme Court where only questions of law are raised, as Section 2 of Rule 41 allows.

Disposition

The petition was granted; the trial court orders of 3 April 2009 and 26 August 2009 were reversed and set aside, and the case was remanded to the Regional Trial Court of Balanga City, Bataan for further proceedings on the counterclaims of Dio and H.S. Equities, with no pronouncement as to costs.

Remember This

The line worth memorizing is that the dismissal of a complaint due to the fault of the plaintiff is without prejudice to the defendant's right to prosecute any pending counterclaim in the same or separate action. Examiners use this case to test the survival of a compulsory counterclaim after the dismissal of the main complaint, and to test when a direct appeal to the Supreme Court on a pure question of law is allowed.