G.R. No. 148980 - PCI Leasing and Fice, Inc. vs. Spouses Dai

Case Summary (G.R. No. 148980)

Factual Background

On June 16, 1994, PCI Leasing & Finance, Inc. extended a loan to Spouses George M. Dai and Divina Dai evidenced by a promissory note for P3,352,892 payable in monthly installments of P152,265 commencing July 16, 1994. The loan partly financed the purchase of the fishing vessel named F/B Sea Doll and was secured by a chattel mortgage over the vessel in favor of the petitioner. Both the promissory note and the chattel mortgage contained an acceleration clause making the whole balance due upon default in paying any installment or interest.

Defaults and Initial Litigation

Respondents defaulted on the second and third monthly installments due August 16, 1994 and September 16, 1994. Thereafter, petitioner filed a complaint for replevin and damages on October 27, 1994 before the RTC of Cebu City, docketed as Civil Case No. CEB-16691, praying for issuance of a writ of replevin ordering seizure and delivery of the vessel, and alternatively, if manual delivery could not be effected, for judgment directing respondents to pay P3,502,095.00 plus interest and penalty, together with attorneys fees and liquidated damages of P1,225,733.25.

Respondents' Answer and Allegation of Surrender

In their Answer to the replevin complaint, Spouses Dai asserted, inter alia, that possession of the vessel and its registration certificate had been surrendered to petitioner prior to the filing of the complaint. Respondents also filed a counterclaim seeking damages and attorneys fees.

Extrajudicial Foreclosure and Sale

While the replevin case was pending, petitioner proceeded to foreclose the chattel mortgage extrajudicially and purchased the vessel at a public auction on January 13, 1995 for P2,000,000. A Certificate of Sale in favor of petitioner was issued on January 16, 1995.

Pretrial and Narrowing of Issues

The pretrial conference in the replevin action was held on September 29, 1995, more than eight months after the foreclosure and sale. The parties agreed that the issues to be resolved were limited to whether petitioner was entitled to recover damages from respondents and whether respondents were entitled to recover damages on their counterclaim.

RTC Decision in CEB-16691

By Decision dated February 3, 1997, Branch 58 of the RTC resolved both issues negatively. The trial court found that respondents failed to pay their obligation due to damage to their fishing area and vessel and that they acted in good faith. The court concluded that petitioner sustained no substantial damage because it already possessed the registration certificate and had foreclosed the chattel mortgage; hence the claim for attorneys fees and liquidated damages was denied. The court also found respondents’ counterclaim for moral and exemplary damages and attorneys fees unsubstantiated and dismissed it. The decision became final and executory for lack of appeal.

Filing of Deficiency Suit

On August 26, 1998, petitioner filed a separate action for deficiency judgment and collection of sum of money before the RTC, docketed as Civil Case No. CEB-22585. Petitioner alleged that after applying the P2,000,000 proceeds of the foreclosure sale, respondents still owed P961,000 as of January 16, 1995, exclusive of interest, and claimed additional sums for attorneys fees and liquidated damages amounting to P336,350. Petitioner prayed for recovery of these amounts together with costs of suit and collection expenses.

Respondents' Defenses in CEB-22585

In their Answer to the deficiency complaint, respondents pleaded bar by prior judgment and invoked Article 1484, Civil Code, which provides that in a contract of sale of personal property payable in installments and secured by a chattel mortgage, the vendor who forecloses shall have no further action against the purchaser to recover any unpaid balance, and that any clause to the contrary is void.

RTC Dismissal of Deficiency Suit

By Decision dated November 22, 1999, the same Branch 58 of the RTC dismissed the deficiency suit. The trial court reasoned that the present action was barred by the prior judgment in CEB-16691 because the parties and the cause of action were the same and because petitioner had elected foreclosure in the earlier case and could not thereafter pursue the alternative relief. The court observed that petitioner had obtained a Certificate of Sale before pretrial in CEB-16691 but did not seek amendment of the pretrial order to raise the deficiency issue. The trial court cited Section 1(f), Rule 16, 1997 Rules of Civil Procedure in dismissing the suit.

Court of Appeals Decision

On appeal, the Court of Appeals rejected respondents' reliance on Article 1484, Civil Code, as inapplicable because that provision concerns sales payable in installments secured by a chattel mortgage between vendor and vendee, citing Bicol Savings & Loan Association v. Guinhawa. Nevertheless, the appellate court affirmed the RTC decision on the ground of res judicata. The Court of Appeals held that the deficiency claim could have been adjudicated in the replevin case since petitioner had foreclosed and obtained proceeds from the sale and because petitioner had already sought attorneys fees and liquidated damages in the earlier action. The appellate court emphasized that changing the form of the action did not evade res judicata and endorsed the public policy against multiplicity of suits.

Issue Presented to the Supreme Court

In this petition for review, petitioner raised whether a judgment in a replevin case and/or the delivery of personal property would bar a subsequent action for a deficiency judgment. The dispositive legal question therefore concerned the applicability of res judicata to bar the second action and whether the judgment rendered in the replevin proceeding encompassed or could have encompassed a deficiency claim.

Supreme Court's Legal Framework for Res Judicata

The Court recited the four requisites of res judicata: finality of the former judgment; judgment on the merits; jurisdiction over subject matter and parties; and identity of parties, subject matter, and cause of action, as stated in Development Bank of the Philippines v. Court of Appeals. The Court also reviewed the character of replevin as a mixed action that is in rem with respect to recovery of specific property and in personam with respect to damages, and noted that the replevin statute, Section 9 of Rule 60, authorizes the court to determine the right of possession and the value of the property and to render judgment alternatively for delivery or for value, and for such damages as either party may prove.

Supreme Court's Analysis and Reasoni

Case Syllabus (G.R. No. 148980)

Parties and Procedural Posture

PCI Leasing & Finance, Inc. was the petitioner and mortgagee seeking recovery of a loan and related remedies.
Spouses George M. Dai and Divina Dai were the respondents and mortgagors who purchased a fishing vessel with loan proceeds.
The case originated with a complaint for replevin and damages filed by petitioner in the Regional Trial Court of Cebu City as Civil Case No. CEB-16691.
After a final decision in CEB-16691, petitioner instituted a separate action for deficiency judgment in the same RTC as Civil Case No. CEB-22585.
The RTC dismissed CEB-22585 on res judicata grounds, the Court of Appeals affirmed, and petitioner filed the present petition for review raising the preclusive effect of the prior replevin judgment.

Key Factual Allegations

The respondents obtained a loan on June 16, 1994 evidenced by a promissory note for P 3,352,892 payable in monthly installments of P 152,265 beginning July 16, 1994.
Proceeds of the loan partly financed the purchase of the vessel named F/B Sea Doll, which was subject to a chattel mortgage in favor of petitioner.
Both the promissory note and the chattel mortgage contained an acceleration clause declaring the unpaid balance immediately due upon default.
Respondents defaulted by failing to pay the second and third installments due on August 16, 1994 and September 16, 1994.
Petitioner sought a writ of replevin, alternative monetary recovery of P 3,502,095.00 plus interest and penalties, and attorneys fees and liquidated damages of P 1,225,733.25 in CEB-16691.
Petitioner extrajudicially foreclosed the chattel mortgage and purchased the vessel at public auction on January 13, 1995 for P 2,000,000, with a Certificate of Sale issued January 16, 1995.
The pre-trial in CEB-16691, held on September 29, 1995, limited the issues to whether petitioner was entitled to recover damages and whether respondents were entitled to recover damages on their counterclaim.

Trial Court Disposition

Branch 58, RTC of Cebu City rendered a decision on February 3, 1997 in Civil Case No. CEB-16691 dismissing both parties' claims for damages and attorneys fees.
The trial court found respondents had no bad faith in default due to calamities affecting their fishing business and noted that petitioner had the vessel's certificate of registration and had foreclosed the mortgage.
The trial court reasoned that petitioner sustained no substantial damage and therefore denied its claim for attorneys fees and liquidated damages.
Respondents' counterclaim for moral and exemplary damages and attorneys fees failed for lack of sufficient evidence.
The decision in CEB-16691 became final and executory for lack of appeal.

Deficiency Action Pleadings

Petitioner filed Civil Case No. CEB-22585 on August 26, 1998 seeking a deficiency judgment of P 961,000.00 net of the P 2,000,000.00 foreclosure proceeds, plus P 336,350.00 as attorneys fees and liquidated damages, and costs.
Petitioner expressly relied on contractual provisions in the promissory note providing for attorneys fees and liquidated damages in case of collection.
Respondents answered asserting bar by prior judgment and invoking Article 1484 of the Civil Code which, in their v