Chan vs. Court of Appeals

A compulsory counterclaim for ejectment, arising from the same lease contract that is the subject of a consignation complaint, is properly interposed in the answer and falls within the jurisdiction of the court trying the consignation case, provided that court has jurisdiction over the ejectment action. The Court of Appeals may not motu proprio dismiss a complaint on a ground not assigned as error in the appeal.

Felisa Chan (lessor) and Grace Cu (lessee) entered into a series of written one-year lease contracts for residential premises, which expired in 1986. The lessee continued occupancy on a month-to-month basis. A dispute arose in 1989 over whether the lease included a rooftop. The lessor terminated the lease and refused to accept the December 1989 rent. The lessee then filed a complaint for consignation. The lessor, in her answer, interposed a counterclaim for ejectment.

• Nature of the Action: The case originated from a complaint for consignation filed by the lessee, Grace Cu, which was met with a counterclaim for ejectment by the lessor, Felisa Chan.
• The Lease and Dispute: The parties had a written lease contract renewed annually until 1986. Thereafter, the lessee continued occupancy on a month-to-month basis. In November 1989, a dispute arose over the lessee's use of a rooftop. The lessor terminated the lease and refused to accept the December 1989 rental payment.
• Consignation and Counterclaim: On January 15, 1990, the lessee filed a complaint for consignation. The lessor, in her answer, set up a counterclaim for unlawful detainer (ejectment).
• Lower Court Rulings: The MTC found the consignation valid, declared the rooftop part of the leased premises, and exercised its authority under Article 1687 of the Civil Code to extend the lease term until June 30, 1992. The RTC affirmed this decision.
• Court of Appeals Ruling: The CA, on the lessee's petition, reversed the lower courts. It dismissed the consignation complaint, finding the lessor's refusal to accept rent was with just cause. It also held that the ejectment counterclaim was improperly included, as an ejectment action must be initiated by a verified complaint, not a counterclaim.
• Supreme Court Intervention: The lessor appealed to the Supreme Court, arguing the CA erred on both points.

• Scope of Appeal: Petitioner (Felisa Chan) argued that the Court of Appeals erred in ruling on the validity of the consignation and the propriety of the counterclaim, as these issues were not raised in the lessee's petition for review before the CA. The only error assigned there was the length of the lease extension.
• Propriety of Counterclaim: Petitioner maintained that her counterclaim for ejectment was compulsory, arising from the same lease contract that was the subject of the consignation complaint. She contended that the MTC had jurisdiction over it, and its adjudication was proper to avoid multiplicity of suits.
• Inapplicability of Precedent: Petitioner argued that the CA's reliance on Ching Pue vs. Gonzales was misplaced, as that case involved a consignation filed with the Court of First Instance, which lacked jurisdiction over ejectment, unlike the MTC in this case.

• Validity of Consignation: Respondent (Grace Cu) supported the CA's finding that the lessor's refusal to accept rent was justified, thus rendering the consignation improper under Article 1256 of the Civil Code.
• Impropriety of Counterclaim: Respondent countered that an ejectment action must be commenced by a verified complaint, not a counterclaim. She cited Metals Engineering Resources Corp. vs. Court of Appeals to argue that if the main action (consignation) is dismissed, the compulsory counterclaim must also fall.

• Scope of Appellate Review: Whether the Court of Appeals may dismiss a complaint on a ground not assigned as an error in the appellant's petition.
• Compulsory Counterclaim: Whether a counterclaim for ejectment is proper in an answer to a complaint for consignation when both arise from the same lease contract and the court has jurisdiction over both actions.

• Scope of Appellate Review: The Court of Appeals committed grave abuse of discretion. The validity of the consignation was not raised as an error in the lessee's petition before the CA. Pursuant to Section 7, Rule 51 of the Rules of Court, an appellate court is generally limited to errors assigned, and the CA should not have motu proprio dismissed the consignation complaint.
• Compulsory Counterclaim: The ejectment counterclaim was compulsory. It arose from the same lease contract that was the subject matter of the consignation complaint. As a compulsory counterclaim, it must be set up in the answer under pain of being barred. The MTC, having jurisdiction over the consignation case, also had jurisdiction over the counterclaim for ejectment, which was within its exclusive original jurisdiction under the Rules on Summary Procedure. The CA erred in holding it was improperly included.

• Compulsory Counterclaim — A compulsory counterclaim is any claim for money or other relief that a defending party has against an opposing party, which arises out of or is necessarily connected with the transaction or occurrence that is the subject matter of the opposing party's claim. It must be set up in the answer, or it is barred. The court has jurisdiction to entertain it if it has jurisdiction over the main action and the counterclaim does not require the presence of third parties over whom the court cannot acquire jurisdiction.
• Appellate Court Jurisdiction — Under Section 7, Rule 51 of the Revised Rules of Court, an appellate court is generally limited to reviewing errors of law or fact that are specifically assigned as errors in the appeal, except when it opts to notice plain errors or clerical errors.

• "A counterclaim 'is in itself a distinct and independent cause of action, so that when properly stated as such, the defendant becomes, in respect to the matter stated by him, an actor, and there are two simultaneous actions pending between the same parties, wherein each is at the same time both a plaintiff and a defendant.'" — This passage underscores the independent yet ancillary nature of a counterclaim.
• "The Court of Appeals therefore should have confined itself to the principal error raised in Cu's petition in CA-G.R. SP No. 28870, viz., the duration of the extended term of the lease..." — This highlights the principle of limited appellate review.

• Ching Pue vs. Gonzales, 87 Phil. 81 (1950) — Cited by the Court of Appeals but distinguished by the Supreme Court. The Supreme Court held it was inapplicable because in Ching Pue, the consignation was filed with the Court of First Instance, which lacked jurisdiction over ejectment, whereas here the MTC had jurisdiction.
• Metals Engineering Resources Corp. vs. Court of Appeals, 203 SCRA 273 (1991) — Cited by the private respondent to argue that a compulsory counterclaim must be dismissed if the main action is dismissed for lack of jurisdiction. The Supreme Court implicitly found this case inapplicable, as the dismissal of the consignation by the CA was itself erroneous.

• Article 1687, Civil Code — Provides that if the period of lease has not been fixed, it is understood to be from month-to-month if rent is monthly. It further grants courts the authority to fix a longer term for the lease after the lessee has occupied the premises for over one year. The MTC relied on this to extend the lease term.
• Section 7, Rule 51, Revised Rules of Court — States that no error which does not affect jurisdiction will be considered unless stated in the assignment of errors and properly argued in the brief, save for plain or clerical errors. The Supreme Court found the CA violated this rule.
• Section 8, Rule 6; Section 4, Rule 9, Revised Rules of Court — These provisions govern counterclaims. Section 8 allows a counterclaim in an answer if the court has jurisdiction. Section 4 bars a compulsory counterclaim if not set up. The Supreme Court applied these to find the ejectment counterclaim compulsory and properly pleaded.

• Justice Cruz
• Justice Bellosillo
• Justice Quiason
• Justice Kapunan