G.R. No. 203371 - Republic vs. Felix

On December 9, 1960, defendant Gervacio S. Banaag secured a P400.00 loan from plaintiff Salud S. Papa, which was to be repaid with interest within 60 days.
To guarantee the payment of this loan, Banaag executed a deed of chattel mortgage in favor of Mrs. Papa on his piano—a deed duly recorded with the proper register of deeds.

Alleging default in payment as of May 1961, Mrs. Papa initiated remedial action by asking the sheriff of Quezon City to foreclose the chattel mortgage extra-judicially.
This foreclosure action was set against the backdrop of the secured loan, with the piano being the subject-matter collateral.

In response to the attempted foreclosure, defendant Banaag filed Civil Case No. Q-6004 in Rizal, asserting that Mrs. Papa had granted him an unlimited extension for repayment.
Mrs. Papa, in her answer, denied ever extending such time. She also counterclaimed for damages comprising P8,000.00 for moral damages, P200.00 for actual expenses, and P200.00 for attorney’s fees, in addition to costs, alleging the malicious filing of the complaint.
On August 27, 1962, the complaint in Case No. Q-6004 was dismissed without special pronouncement on costs.

Shortly after the dismissal of Case Q-6004, Mrs. Papa instituted a new action on December 3, 1962, in the Court of First Instance of Manila (Civil Case No. 52464) seeking:

P456.00 for the principal and accrued interest due on the loan.
P4,590.00 for actual and compensatory damages resulting from the filing of Case Q-6004.
P10,000.00 for moral damages arising from the allegedly false imputations made by Banaag in Case Q-6004.
P1,000.00 for exemplary damages for defendant’s bad faith.
P2,000.00 for attorney’s fees.

Defendant, upon being summoned, moved to dismiss the complaint on the grounds of lack of cause of action and release.
After the denial of the motion to dismiss, defendant filed an answer admitting several allegations while denying others, and raised special defenses including res judicata (due to the prior dismissal in Case Q-6004), lack of cause of action, and release. Additionally, defendant set up counterclaims for damages totaling P4,400.00 and P500.00 as attorney’s fees.

When the case was called for a hearing on the merits, the trial judge, inquiring into the issues between the parties, was informed about Case Q-6004 and its dismissal.
Both parties were ordered to submit memoranda specifically on the issue of res judicata.
The trial court eventually dismissed Mrs. Papa’s complaint on the theory that the decision in Case Q-6004 was conclusive on the issues, particularly with respect to the principal, interest, and damages claims which were deemed to be compulsory counterclaims that should have been raised in the earlier case.

Notwithstanding the dismissal of Case Q-6004, Mrs. Papa maintained her right to enforce her extrajudicial foreclosure under the special provisions of the Chattel Mortgage Law (Sec. 16, Art. No. 1508).
Mrs. Papa argued that defendant Banaag, by refusing to surrender the mortgaged piano to the sheriff, had effectively thwarted the extrajudicial foreclosure process, thus denying her the full exercise of her rights.
The dispute, therefore, centered on whether Mrs. Papa could still judicially enforce her right to foreclose on the chattel mortgage despite procedural bar imposed by the earlier case.

Whether the decision in Civil Case No. Q-6004, dismissing claims for payment of the loan and associated damages as compulsory counterclaims, precludes (as res judicata) the judicial enforcement of the extrajudicial foreclosure remedy under the Chattel Mortgage Law.
Whether the plaintiff, having availed herself initially of the extrajudicial remedy, may later shift to a judicial remedy to enforce foreclosure when the defendant’s actions (i.e., his refusal to surrender the mortgaged piano) rendered the extrajudicial process ineffective.
Whether the distinction between substantive and procedural rights allows the plaintiff’s extrajudicial foreclosure claim to survive notwithstanding the application of Section 4, Rule 9 of the Revised Rules of Court, which generally bars compulsory counterclaims in subsequent actions.