PACIFIC BANKING CORPORATION, PETITIONER, VS. HON. RAFAEL T. MENDOZA AND J. ANTONIO C. LEVISTE, RESPONDENTS.

Pacific Banking versus Mendoza

The Case

This is a petition for certiorari brought by Pacific Banking Corporation against Judge Rafael T. Mendoza and J. Antonio C. Leviste. The bank asks the Supreme Court to reverse the trial judge's refusal to dismiss a complaint for damages filed by Leviste, the bank insisting that the earlier dismissal of Leviste's counterclaim in the city court already barred the second action under the principle of res judicata, the rule that a final judgment ends the matter. The case matters because it teaches when a dismissed counterclaim does not bar a later suit, and how a permissive counterclaim may be withdrawn and reasserted elsewhere.

Procedural History

The story begins in the city court of Manila, where the bank sued Jose M. Guevarra and impleaded Leviste as alleged guarantor. Leviste denied signing any guaranty and set up a counterclaim for damages. The city court dismissed that counterclaim for lack of jurisdiction while absolving Leviste from liability under the complaint. No appeal was taken from that dismissal.

Leviste then filed a complaint for damages against the bank before the regional trial court of Makati. The bank moved to dismiss on the ground of res judicata, arguing that the city court's dismissal of the counterclaim was a decision on the merits that had become final. The respondent judge denied the motion, and denied reconsideration as well. The bank came to the Supreme Court on certiorari, and the Court issued a temporary restraining order staying the proceedings below. The Supreme Court denied the petition.

Facts

On November 8, 1976, the bank filed a complaint for recovery of a sum of money against Jose M. Guevarra, with Leviste impleaded as his alleged guarantor. Guevarra was never served with summons. Leviste answered that he had never signed a guaranty for Guevarra and, claiming injury to his prestige, filed a counterclaim for damages. He did not specify the amount, leaving it to the court's sound discretion.

Leviste later testified that his damages would be not less than a million pesos. His counsel immediately reserved the right to file a separate action for those damages. On the basis of that statement, the city court dismissed the counterclaim for lack of jurisdiction, at the same time absolving Leviste from any liability under the complaint.

On August 2, 1984, Leviste filed a complaint for damages against the bank before the regional trial court of Makati. The bank moved to dismiss, contending that the dismissal of the counterclaim was a decision on the merits which, not having been appealed, now barred the second action. The respondent judge denied the motion, and the bank elevated the matter to the Supreme Court.

Issues

• Whether or not the dismissal of Leviste's counterclaim by the city court bars the institution of his separate complaint for damages under the principle of res judicata.
• Whether or not the counterclaim could be validly withdrawn by Leviste and reasserted in the regional trial court.

Applicable Provisions

Section 5 of Rule 10 of the Rules of Court, on amendment of pleadings to conform to the evidence, provides:

Section 5. Amendment to conform to or authorize presentation of evidence. When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects, as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment, but failure to amend does not affect the result of the trial of these issues.

This provision bears on the case because Leviste's testimony that his damages were not less than a million pesos was received without objection, and so was deemed raised in the pleadings, placing his claim beyond the city court's jurisdictional limit.

Ruling

On the first issue, the Court held that res judicata did not bar the second action. For a prior judgment to bar a subsequent case, four requisites must concur: it must be a final judgment or order; the court rendering it must have jurisdiction over the subject matter and the parties; it must be a judgment on the merits; and there must be identity of parties, subject matter, and causes of action. The bank argued that all four were present, since the city court actually had jurisdiction and its erroneous dismissal became final for lack of appeal.

The Court found the bank's argument telling standing alone, but held that it disregarded Leviste's later declaration on the extent of his injury. Because no timely objection was made to his testimony that his damages were not less than a million pesos, that claim was deemed raised in the pleadings under Section 5 of Rule 10. The Court treated Leviste's assessment, together with his counsel's reservation of the right to file an independent suit and request that the city court not pass judgment on the counterclaim, as a withdrawal of the counterclaim without objection from the bank. By assessing his injury at not less than a million pesos, Leviste reversed whatever implied submission he might have made to the city court's limited jurisdiction.

On the second issue, the Court ruled that the counterclaim could be validly withdrawn because it was merely permissive. A counterclaim is compulsory only 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; if it does not require for its adjudication the presence of third parties over whom the court cannot acquire jurisdiction; and if the court has jurisdiction to entertain the claim. Since Leviste's counterclaim exceeded ten thousand pesos, jurisdiction over it was vested not in the city court but in the regional trial court. Hence it could be validly reasserted in the separate complaint pending before the respondent judge.

Doctrine

For a prior judgment to constitute a bar to a subsequent case, four requisites must concur: a final judgment or order; jurisdiction over the subject matter and the parties; a judgment on the merits; and identity of parties, subject matter, and causes of action. A counterclaim is compulsory only when it arises out of or is necessarily connected with the transaction or occurrence that is the subject matter of the opposing party's claim, does not require the presence of third parties over whom the court cannot acquire jurisdiction, and is within the court's jurisdiction. A permissive counterclaim may be withdrawn and reasserted in a separate action. Under Section 5 of Rule 10, evidence received without objection on an issue not raised in the pleadings is treated as if raised therein.

Disposition

The Supreme Court denied the petition, with costs against the bank, and lifted the temporary restraining order, leaving Leviste free to pursue his complaint for damages before the regional trial court.

Remember This

The one line to memorize: a permissive counterclaim, being outside the court's jurisdiction, may be withdrawn and reasserted in a separate action, so its dismissal does not bar the later suit under res judicata. Examiners use this case to test the requisites of res judicata and the distinction between compulsory and permissive counterclaims.