G.R. No. 169576 - Mercado vs. Court of Appeals

Petitioner: Leonides Mercado, who had been distributing San Miguel Corporation’s (SMC’s) beer products in Quiapo, Manila since 1967.
Respondents:

Following Leonides Mercado’s death, his heirs (Racquel D. Mercado, Jimmy D. Mercado, Henry D. Mercado, Louricar D. Mercado, and Virgilio D. Mercado) substituted as petitioners.

In 1991, SMC extended a credit line of P7.5 million to Mercado, enabling him to withdraw beer products on credit.
To secure his credit purchases, Mercado undertook the following measures:

Assigned three China Banking Corporation (CBC) certificates of deposit totaling P5 million to SMC.
Executed a continuing hold-out agreement stipulating that any demand by SMC to CBC, alleging a default by Mercado, would enable CBC to encash the certificates—irrespective of an actual default—with any factual default being resolved solely between Mercado and SMC.
Submitted three surety bonds from Eastern Assurance and Surety Corporation (EASCO) amounting to P2.6 million.

On February 10, 1992, SMC notified CBC that Mercado had failed to pay for the goods withdrawn on credit.
Invoking the continuing hold-out agreement, SMC requested CBC to release the proceeds of the assigned CBC certificates of deposit, a request which CBC executed and duly informed Mercado about.

On March 2, 1992, Mercado filed an action in the Regional Trial Court (RTC) of Manila, Branch 55, to annul both the continuing hold-out agreement and the deed of assignment.

He argued that the continuing hold-out agreement permitted forfeiture without the benefit of the foreclosure process, rendering it void under Article 2088 of the Civil Code.
He further contended that while he had settled recent credit purchases, SMC had erroneously applied those payments to earlier accounts exempt from the hold-out agreement.

On March 18, 1992, SMC filed its answer with a counterclaim against Mercado, asserting:

Mercado delivered only two certificates of deposit (amounting to P4.5 million) instead of three.
The continuing hold-out agreement and the deed of assignment were valid as a recognized business practice.
SMC sought payment for goods withdrawn on credit computed at P7,468,153.75, based on outstanding purchases, bounced checks, and adjustments for the proceeds received and interest income.

On April 23, 1992, SMC initiated a third-party complaint against EASCO to collect the surety bond proceeds.
On September 14, 1994, Mercado sought the dismissal of the third-party complaint, but the RTC denied the motion and set the case for pre-trial, leading to trial proceedings.
During trial, Mercado conceded the correctness of SMC’s computation of his outstanding liability as of August 15, 1991.

Consequently, the RTC dismissed Mercado’s complaint and ordered him and EASCO to jointly and severally pay SMC the computed amount of P7,468,153.75.

Mercado and EASCO appealed to the Court of Appeals (CA), which on December 14, 2004, affirmed the RTC’s decision in its entirety.
Their motions for reconsideration were denied.
EASCO later filed a petition for review on certiorari before the Supreme Court but eventually settled its liability with SMC, leading to the petition’s termination on September 19, 2007.
Subsequently, Mercado passed away, prompting his substitution by his heirs who later filed a petition challenging the CA’s affirmation, particularly contending that the counterclaim was permissive in nature and void due to the alleged lack of payment of docket fees.

Whether the RTC properly acquired jurisdiction over SMC’s counterclaim despite the alleged nonpayment of docket fees.
Whether the counterclaim, which sought to collect payment for goods withdrawn on credit, was compulsory or merely permissive.

Whether the continuing hold-out agreement—which allowed for the unconditional encashment of CBC certificates upon a demand from SMC—is valid or void under Article 2088 of the Civil Code.
The implications of enforcing an agreement that permits forfeiture without recourse to foreclosure, as claimed by Mercado.

Whether Mercado’s contention that his recent credit payments had been wrongly applied to older, non-covered accounts is legally tenable.
Whether SMC’s computation of Mercado’s outstanding obligations, which included the proceeds from the certificates and interest income adjustments, was correct.

Whether the evidence used to support Mercado’s claim regarding the invalidity of the accessory contracts would also substantiate SMC’s counterclaim for the outstanding balance.
The necessity of addressing both issues in a single proceeding to avoid duplicative litigation and inefficient judicial proceedings.