G.R. No. L-47544 - Velasco vs. Court of Appeals

Case Summary (G.R. No. L-47544)

Petitioner and Respondents

Petitioners: Heirs of Leonides Mercado (substituted).
Respondents: Court of Appeals (as respondent in the petition for review) and San Miguel Corporation (SMC). Eastern Assurance and Surety Corporation (EASCO) was a third‑party defendant and co‑appellant in earlier stages.

Key Dates and Procedural Timeline

Mercado distributed SMC products since 1967.
In 1991 SMC extended a P7.5 million credit line to Mercado.
On March 2, 1992, Mercado filed a complaint in the Regional Trial Court (RTC), Branch 55, Manila, to annul the continuing hold‑out agreement and deed of assignment.
RTC rendered decision on April 13, 1998.
Court of Appeals affirmed on December 14, 2004.
EASCO filed a separate petition to the Supreme Court on October 28, 2005 but later settled; its petition was terminated September 19, 2007.
The Supreme Court resolved the Mercado heirs’ petition by resolution dated October 17, 2008. (1987 Constitution is the governing constitutional law for this decision.)

Facts and Contracts at Issue

SMC extended a P7.5 million credit line to Mercado and took as security: (a) an assignment of three China Banking Corporation (CBC) certificates of deposit (CDs) totaling P5,000,000 (Mercado’s claim: CD Nos. 23406 P500,000; 23407 P4,100,000; 23408 P400,000); (b) a continuing hold‑out agreement containing a clause that any demand by SMC on CBC claiming default shall be conclusive on CBC and authorize encashment of the assigned CDs whether or not Mercado had actually defaulted, with factual default to be litigated solely between Mercado and SMC; and (c) three surety bonds from EASCO totaling P2,600,000. SMC claimed Mercado defaulted, notified CBC on February 10, 1992, and obtained release of assigned CD proceeds. SMC asserted Mercado purchased goods on credit and owed an outstanding balance.

Petitioners’ Claims (RTC Complaint)

Mercado sought annulment of the continuing hold‑out agreement and deed of assignment on grounds that the hold‑out clause effectively permitted forfeiture without foreclosure (invoking Civil Code Article 2088, which prohibits a creditor from appropriating pledged or mortgaged things and declares stipulations to the contrary void). Mercado also contended he had paid his recent purchases and that SMC had misapplied payments to older accounts not covered by the security agreements.

SMC’s Counterclaim and Third‑Party Complaint

SMC answered and filed a counterclaim seeking P7,468,153.75 as the net amount due after applying proceeds of the assigned CDs and interest. SMC asserted business practice recognition for the hold‑out agreement and claimed Mercado admitted outstanding liabilities. SMC also filed a third‑party complaint against EASCO to collect under the surety bonds.

Trial and RTC Disposition

At trial Mercado acknowledged the correctness of SMC’s computation of his outstanding liability as of August 15, 1991. The RTC denied Mercado’s motion to dismiss (filed after Mercado attempted to withdraw his annulment claim), proceeded to trial, and ultimately dismissed Mercado’s complaint. The RTC ordered Mercado and EASCO (to the extent of P2.6 million) to pay SMC the amount of P7,468,153.75.

Appellate Proceedings and Substitution

Mercado and EASCO appealed to the Court of Appeals, which affirmed the RTC decision in toto on December 14, 2004. Subsequent motions for reconsideration were denied. EASCO separately petitioned the Supreme Court but later settled with SMC and terminated its petition; Mercado had died and his heirs were substituted and pursued the petition that resulted in the present resolution.

Legal Issue Presented to the Supreme Court

The principal legal issue before the Supreme Court was whether SMC’s counterclaim was permissive (requiring payment of docket fees for the RTC to acquire jurisdiction) or compulsory (so that failure to pay docket fees would not deprive the RTC of jurisdiction over the counterclaim). Petitioners argued the counterclaim was permissive and that the RTC therefore lacked jurisdiction because SMC allegedly failed to pay docket fees for its counterclaim.

Applicable Law and Constitutional Basis

The Court applied the 1987 Philippine Constitution as the governing constitution for this 2008 decision. Relevant statutory provisions and authorities invoked included Civil Code Article 2088 (prohibiting creditor appropriation of pledged or mortgaged things) and the Rules of Court, Rule 6, Sections 6 and 7 (defining counterclaims and the compulsory counterclaim rule). The Court relied on established tests from prior doctrine (as summarized in Financial Building Corporation v. Forbes Park Association, Inc., and other cited authorities) for determining whether a counterclaim is compulsory.

Court’s Analysis: Compulsory Counterclaim Factors Applied

The Court applied the four‑part test for compulsory counterclaims:

Whether the issues of fact or law raised by the claim and counterclaim are largely the same;
Whether res judicata would bar a subsequent suit absent the compulsory counterclaim rule;
Whether substantially the same evidence would support or refute both the plaintiff’s claim and the defendant’s counterclaim; and
Whether there is a logical relation between the claim and the counterclaim.
The Court found that Mercad

Case Syllabus (G.R. No. L-47544)

Citation and Panel

Reported at 590 Phil. 524; First Division, G.R. No. 169576; decision dated October 17, 2008.
Decision authored by Justice Corona, with Chief Justice Puno (Chairperson), and Justices Carpio, Azcuna and Leonardo‑De Castro concurring.

Parties and Standing

Petitioner: Leonides Mercado, later substituted by his heirs: Racquel D. Mercado, Jimmy D. Mercado, Henry D. Mercado, Louricar D. Mercado and Virgilio D. Mercado.
Respondents: Court of Appeals and San Miguel Corporation (SMC).
Third party (in trial court): Eastern Assurance and Surety Corporation (EASCO), issuer of surety bonds submitted by Mercado.

Factual Background

Leonides Mercado distributed SMC’s beer products in Quiapo, Manila beginning in 1967.
In 1991, SMC extended to Mercado a P7.5 million credit line allowing withdrawal of goods on credit.
To secure credit purchases, Mercado:
- Assigned China Banking Corporation (CBC) certificates of deposit to SMC; the record contains differing accounts of the number/value delivered:
  - Mercado’s asserted delivery (per record): three CBC certificates of deposit totaling P5,000,000, specifically:
    - CD No. 23406 — P500,000
    - CD No. 23407 — P4,100,000
    - CD No. 23408 — P400,000
  - SMC’s assertion: Mercado delivered only two CDs, Nos. 23407 and 23408, totaling P4,500,000.
- Executed a continuing hold-out agreement containing the following provision:
  - "Any demand made by [SMC] on [CBC], claiming default on my/our part shall be conclusive on [CBC] and shall serve as absolute authority for [CBC] to encash the [CBC certificates of deposit] in accordance with the third paragraph of this Hold-Out Agreement, whether or not I/we have in fact defaulted on any of my/our obligations with [SMC], it being understood that the issue of whether or not there was factual default must be threshed out solely between me/us and [SMC]."
- Submitted three surety bonds from Eastern Assurance and Surety Corporation (EASCO) totaling P2,600,000, specifically:
  - Bond No. B-41210 — P1,300,000 (September 24, 1990 to September 24, 1991)
  - Bond No. B-41269 — P400,000 (October 11, 1990 to October 11, 1991)
  - Bond No. B-42085 — P900,000 (May 10, 1991 to May 10, 1992)

Notice, Encashment, and Initial Dispute

On February 10, 1992, SMC notified CBC that Mercado allegedly failed to pay for goods withdrawn on credit and requested CBC to release proceeds of the assigned CDs pursuant to the continuing hold-out agreement.
CBC approved SMC’s request and informed Mercado of the encashment action.

Trial Court Filing and Causes of Action

March 2, 1992: Mercado filed an action in the Regional Trial Court (RTC) of Manila, Branch 55 (docketed Civil Case No. 92-60462) to annul the continuing hold-out agreement and the deed of assignment.
- Mercado’s principal legal contention:
  - The continuing hold-out agreement allowed forfeiture without the benefit of foreclosure and was therefore void under Article 2088 of the Civil Code.
  - Mercado also asserted he had settled his recent credit purchases, but SMC erroneously applied those payments to older accounts not covered by the continuing hold-out agreement (i.e., purchases made prior to the extension of the credit line).
March 18, 1992: SMC filed its answer and counterclaim against Mercado.
- SMC’s principal contentions:
  - Mercado delivered only two CBC CDs (Nos. 23407 and 23408).
  - The continuing hold-out agreement and deed of assignment were recognized business practices and valid.
  - Mercado admitted outstanding liabilities; SMC sought payment for goods withdrawn/purchased on credit.
  - SMC’s counterclaim computation (as presented in the record):
    - Unpaid purchases as of January 31, 1992: P6,929,333.47
    - Bounced checks issued January 8–22, 1992: P5,147,720.28
    - Total amount due: P12,077,053.75
    - Less proceeds of assigned certificates of deposit and interest:
      - CD No. 23408: P4,100,000
      - CD No. 23407: P400,000
      - Interest income: P108,900
      - Total deducted: P4,608,900.00
    - TOTAL COUNTERCLAIM asserted by SMC: P7,468,153.75
April 23, 1992: SMC filed a third‑party complaint against EASCO to collect proceeds of the surety bonds.

Procedural Developments in the RTC

September 14, 1994: Mercado filed an urgent manifestation and motion seeking dismissal of his complaint, asserting he no longer wished to annul the continuing hold-out agreement and deed of assignment; the RTC denied this motion.
- Order denying motion dated December 23, 1992, issued by Judge Hermogenes R. Liwag (record cites).
Pre-trial and trial proceedings followed.
During trial, Mercado acknowledged the accuracy of SMC’s computation of his outstanding liability as of August 15, 1991.
RTC Decision dated April 13, 1998 (Judge Hermogenes R. Liwag):
- Dismissed Mercado’s complaint to annul the continuing hold-out agreement and deed of assignment.
- Ordered Mercado and EASCO (to the ex