G.R. No. L-25836-37 - Philippine Bank of Commerce vs. Aruego

Case Summary (G.R. No. L-25836-37)

Key Dates

Complaint filed: December 1, 1959.
Summons and complaint received by defendant: December 2, 1959.
Motion to dismiss filed (last day to answer): December 17, 1959; order dismissing complaint dated December 22, 1959 (copy received December 24, 1959).
Plaintiff’s motion for reconsideration: January 13, 1960.
Order setting aside dismissal: March 7, 1960 (copy received by defendant March 11, 1960 at 5:00 p.m.).
Answer filed: March 12, 1960.
Plaintiff’s ex parte motion to declare defendant in default: March 15, 1960.
Order declaring default: March 19, 1960 (defendant learned March 21, 1960).
Motion to set aside order of default: filed March 22, 1960; denied March 25, 1960.
Judgment by default: May 6, 1960.
Appeals to Court of Appeals consolidated and later certified to the Supreme Court: consolidated record permitted July 25, 1960; CA certified appeal to the Supreme Court March 1, 1966.
Supreme Court decision date: January 31, 1981.

Applicable Law and Authorities

Applicable Constitution (by decision date): 1973 Philippine Constitution.
Statutory provisions and authorities applied by the Court: Negotiable Instruments Law — Section 20 (signature in representative capacity), Section 29 (liability of accommodation party), Section 126 (definition of bill of exchange). The Court also referenced the established rule requiring a showing of a meritorious defense to obtain relief from default (citing Bank of Philippine Islands v. de Coster) and analogous provisions in Section 3, Rule 18 of the New Rules of Court. The Court cited Ferrer v. Yang Sepeng regarding the futility of granting a new trial when the defense is ineffectual.

Procedural Posture and Issues Presented

The bank sued to recover approximately P35,000 plus interest, commissions, attorney’s fees and costs, asserting twenty-two causes of action arising from drafts drawn by Encal Press and Photo-Engraving and accepted by Aruego, supported by trust receipts. Aruego contended initial dismissal was improper and later sought relief after being declared in default and after judgment by default. He raised three principal assignments of error on appeal: (I) that he was not in default; (II) that the trial court improperly entertained a motion to declare him in default although an answer was already on file; and (III) that the trial court erred in denying his motions to set aside the order of default and the default judgment.

Facts Material to the Default Determination

The bank advanced payments to the printer (drawer), which drew drafts payable to the bank and purportedly sent to Aruego for acceptance as drawee; Aruego had executed trust receipts and was asked to accept drafts. After initial dismissal of the complaint, the trial court set aside dismissal following plaintiff’s motion for reconsideration. The copy of the order setting aside dismissal was served at 5:00 p.m. on the last day for filing an answer; Aruego filed his answer the next day. The trial court declared him in default for filing the answer one day late; defendant moved to set aside the order of default and later to set aside the default judgment, alleging excusable neglect and asserting defenses.

Standard for Relief from Default

The Court reiterated the established two-pronged standard for relief from a judgment or default taken against a party by reason of mistake, inadvertence, surprise or excusable neglect: the movant must (1) show that the failure to act was due to fraud, accident, mistake or excusable negligence; and (2) demonstrate that he has a meritorious defense. This standard corresponds substantially with the provisions later embodied in Section 3, Rule 18 of the New Rules of Court.

Court’s Analysis: Excusable Neglect

The Supreme Court accepted that Aruego’s failure to file his answer on the last day was excusable. The court found credible the deputy sheriff’s affidavit showing service of the order setting aside the dismissal at 5:00 p.m. on the last day for pleading. Because courts then kept office only until 5:00 p.m., it was impossible to reasonably expect the defendant to file within office hours on that day; Aruego filed his answer promptly the following morning. On that basis the Court concluded the omission to file on the last day constituted excusable neglect.

Court’s Analysis: Absence of Meritorious Defense

Although excusable neglect was established, the Court held that Aruego failed the second indispensable requirement: he did not demonstrate a meritorious defense. The Court examined each defense he proffered and rejected them on legal grounds grounded in the Negotiable Instruments Law and controlling principles:

Representative capacity (Section 20): Aruego claimed he signed in a representative capacity as President of the Philippine Education Foundation. Under Section 20, a person who signs indicating he acts for a principal is not personally liable only if duly authorized and the principal is disclosed. The documents accepted by Aruego did not disclose any principal; his signature merely read “JOSE ARUEGO (Acceptor) (SGD) JOSE ARUEGO.” Because he failed to disclose the principal, he remained personally liable on the accepted drafts.
Accommodation party (Section 29) and nature of liability: Aruego contended he signed only as an accommodation party and thus should be secondarily liable. The Court observed that an accommodation party, who lends

Case Syllabus (G.R. No. L-25836-37)

Case Caption, Citation and Court

Reported at 190 Phil. 459, First Division.
G.R. Nos. L-25836-37, decided January 31, 1981.
Decision authored by Justice Fernandez; concurrence by Teehankee (Chairman), Makasiar, Guerrero, and Melencio-Herrera, JJ.
Case originated in Civil Case No. 42066, Court of First Instance of Manila, Branch XIII.
Two related appeals to the Court of Appeals: CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R, later consolidated and certified to the Supreme Court on questions of law.

Parties

Plaintiff-Appellee: The Philippine Bank of Commerce.
Defendant-Appellant: Jose M. Aruego.
Drawer/printer involved in transactions: Encal Press and Photo-Engraving.
Publication involved: "World Current Events" (periodical published by defendant) and reference to "Decision Law Journal" in context of the Philippine Education Foundation.

Nature of the Action and Relief Sought

Complaint filed December 1, 1959 seeking recovery of approximately P35,000.00, with daily interest from November 17, 1959 until paid, commission equivalent to 3/8% every thirty days or fraction thereof, attorney’s fees equivalent to 10% of the total amount due, and costs.
Complaint comprised twenty-two (22) causes of action corresponding to twenty-two transactions between plaintiff and defendant occurring from August 28, 1950 to March 14, 1951.
The amounts sought represented printing costs for "World Current Events" advanced to the printer; drafts drawn by the printer were paid by the bank to drawer and later sent to defendant for acceptance.
Plaintiff required defendant to execute a trust receipt to hold periodicals in trust and to remit proceeds to plaintiff to secure payment of obligations arising from the drafts.

Procedural Chronology — Key Dates and Steps

December 1, 1959: Complaint instituted (Civil Case No. 42066).
December 2, 1959: Defendant received copy of complaint and summons.
December 14, 1959: Defendant filed an urgent motion for extension of time to plead; hearing set for December 16, 1959.
December 16, 1959: Motion for extension denied.
December 17, 1959: Defendant filed a motion to dismiss (last day for filing answer per record).
December 22, 1959: Trial court dismissed the complaint (order received by defendant December 24, 1959).
January 13, 1960: Plaintiff filed motion for reconsideration.
March 7, 1960: Trial court set aside dismissal and scheduled hearing for March 15, 1960 at 8:00 AM.
March 11, 1960 at 5:00 PM: Deputy sheriff Mamerto de la Cruz served copy of March 7 order on defendant (per affidavit).
March 12, 1960: Defendant filed motion to postpone trial and filed his answer to complaint.
March 15, 1960: Plaintiff filed ex parte motion to declare defendant in default, alleging answer should have been filed March 11, 1960.
March 19, 1960: Trial court declared defendant in default.
March 21, 1960: Defendant learned of default order.
March 22, 1960: Defendant filed motion to set aside order of default, alleging excusable neglect and asserting he had a good and substantial defense; attached affidavits of deputy sheriff and defendant.
March 25, 1960: Trial court denied defendant’s motion to set aside default order.
May 6, 1960: Trial court rendered judgment by default ordering defendant to pay P35,444.35 (total obligation as of November 15, 1957) and P10,000.00 attorney’s fees.
May 9, 1960: Defendant filed notice of appeal from March 25 order, appeal bond P60.00, and record on appeal.
May 14, 1960: Lower court dismissed defendant’s appeal from March 25 order (later reconsidered).
May 19–21, 1960: Defendant filed motion for reconsideration; plaintiff opposed; trial court reconsidered and approved defendant’s record on appeal.
May 26, 1960 notice (received May 30, 1960): Clerk of Court forwarded record on appeal to Clerk of Court of the Court of Appeals.
June 1, 1960: Defendant filed motion to set aside judgment rendered after default reiterating prior grounds.
June 3, 1960: Plaintiff filed opposition to motion to set aside judgment.
June 11, 1960: Trial court denied defendant’s motion to set aside judgment by default.
June 20, 1960: Defendant filed notice of appeal from June 11 order, appeal bond, and record on appeal; record approved June 25, 1960.
July 25, 1960: Court of Appeals allowed consolidated record on appeal for the two CA appeals.
March 1, 1966: Court of Appeals, First Division, certified consolidated appeal to the Supreme Court on ground that only questions of law are involved.

Motions and Relief Sought by Defendant (Defenses and Procedural Requests)

Urgent motion for extension of time to plead (Dec 14, 1959) — denied.
Motion to dismiss complaint (Dec 17, 1959) asserting:
- a) When drafts were presented to defendant for acceptance, plaintiff had already paid drawer (Encal Press) without defendant’s knowledge or consent.
- b) As drawee on bills of exchange, defendant was an accommodating party and liable only if the accommodating party (drawer) failed to pay its obligation to plaintiff.
Motion to postpone trial (Mar 12, 1960) contending no issues joined because no answer was yet on file.
Answer filed March 12, 1960 raising:
- He signed documents in capacity as President of the Philippine Education Foundation (representative capacity).
- Liability is only secondary.
- He believed he signed only as an accommodation party.
Motion to set aside order declaring him in default (Mar 22, 1960) alleging:
- Receipt of order on March 11 at 5:00 PM made it unreasonable to file answer the same day within office hours; counsel became aware only on March 12 early hours.
- He has a good and substantial (meritorious) defense; attached deputy sheriff’s affidavit and his own affidavit.
Motion to set aside judgment by default (June 1, 1960) reiterating same grounds.

Trial Court Orders and Rulings

December 22, 1959: Complaint dismissed (order later set aside on motion for reconsideration).
March 7, 1960: Trial court set aside its dismissal; set hearing for March 15, 1960.
March 19, 1960: Trial court declared defendant in default for failure to file answer by March 11, 1960.
March 25, 1960: Trial court denied defendant’s motion to set aside order of default.
May 6, 1960: Trial court rendered judgment by default ordering payment of P35,444.35 and P10,000.00 attorney’s fees.
May 14, 1960: Trial court initially dismissed appeal from March 25 order; reconsidered May 21, 1960 and approved record on appeal.
June