Dela Cruz vs. Metrobank

A judgment by default may be annulled and the case remanded for further proceedings where the trial court's over-strict adherence to technical rules deprived a party of due process, notwithstanding that the party's counsel's negligence does not amount to extrinsic fraud. The general rule that a client is bound by the negligence or mistake of counsel admits exceptions where the purposes of justice require it, and rules of procedure should be liberally applied to afford every party-litigant the amplest opportunity for the proper and just determination of his cause.

Petitioner Guillermo Dela Cruz filed a Complaint for Accounting, Sum of Money and Damages against respondent Metropolitan Bank & Trust Co. (Metrobank) before the Regional Trial Court of Dagupan City, Branch 40, seeking the return of ₱730,000.00 deposited with the bank under Certificates of Time Deposit Nos. 4900683 and 490891. The dispute arose from the bank's alleged release of the deposited amount through Cashier's Check No. 7448 without the petitioner's knowledge or consent, after new certificates of time deposit were issued in lieu of the originals that had been declared lost.

On March 19, 1998, petitioner Guillermo Dela Cruz filed with the Regional Trial Court of Dagupan City (Branch 40) a Complaint for Accounting, Sum of Money and Damages against respondent Metropolitan Bank & Trust Co. (Metrobank), docketed as Civil Case No. 98-02227-D. Petitioner sought the return of ₱730,000.00, representing the amount he deposited with the bank together with Adelina Dela Cruz, as covered by Certificates of Time Deposit Nos. 4900683 and 490891. He also prayed for ₱1,000,000.00 as moral damages, ₱50,000.00 as attorney's fees, ₱30,000.00 as litigation expenses, ₱200,000.00 as exemplary damages, and costs of suit. In his Complaint, petitioner alleged that after several efforts to determine the status of his deposits, he learned that the certificates had been declared lost by Adelina Dela Cruz and that Certificates of Time Deposit Nos. 7532 and 7531 were issued on July 7, 1986 in lieu thereof. The amount was then withdrawn on August 11, 1986 through Cashier's Check No. 7448 without his knowledge or consent.

Summons was served on respondent bank on April 2, 1998, and two days later the bank filed a motion for extension of time to file answer. On April 28, 1998, respondent bank filed its Answer denying any liability, claiming that the sum had already been withdrawn by Adelina Dela Cruz, the principal holder of the accounts. The bank averred that new certificates of time deposit were allowed to be issued after it had made diligent inquiries regarding Adelina Dela Cruz's claim that these were lost. It also claimed that on August 11, 1986, petitioner and Adelina Dela Cruz procured a loan from the bank in the amount of ₱730,000.00, payable on November 10, 1986, secured by an assignment of their rights to the deposit covered by Certificates of Time Deposit Nos. 7532 and 7531 under a Deed of Assignment dated August 11, 1986. The loan proceeds were released through Cashier's Check No. 7448, and the loan was covered by several promissory notes with several extensions of payment.

Petitioner thereafter filed a motion to declare respondent bank in default on the ground that the Answer was filed beyond the reglementary period. The trial court granted the motion in its Order dated June 10, 1998, and petitioner was allowed to present his evidence ex parte. Respondent bank filed a motion for reconsideration, which the trial court denied per Order dated October 28, 1998. On November 5, 1998, the trial court rendered a decision in favor of petitioner, ordering the bank to pay ₱730,000.00 plus interest from 1986, ₱1,000,000.00 as moral damages, ₱200,000.00 as exemplary damages, ₱50,000.00 as attorney's fees, and ₱30,000.00 as litigation expenses.

Without appealing from the trial court's decision, respondent bank filed a motion for inhibition on November 26, 1998, and a petition for relief from judgment on December 7, 1998. Petitioner then filed a motion for execution, which was granted by the trial court on December 11, 1998. Respondent bank filed a motion to quash the writ of execution with prayer for the issuance of a writ of preliminary injunction, arguing that it had a meritorious defense and that the motion for inhibition and petition for relief from judgment were yet to be resolved. On December 23, 1998, the trial court denied the motion for inhibition, and on December 28, 1998, it denied the motion to quash the writ of execution. The trial court also denied the bank's motion to cancel notice of levy in its Order dated January 11, 1998. Respondent bank filed separate motions for reconsideration of the Orders dated December 23 and December 28, 1998, and petitioner filed a motion to proceed with the auction sale of the levied property.

Pending these incidents, respondent bank filed before the Court of Appeals a petition for annulment of judgment with prayer for the issuance of a temporary restraining order and/or writ of preliminary injunction, on the grounds of extrinsic fraud and denial of due process. The bank alleged that its previous counsel's negligence in handling the case constituted extrinsic fraud, and that the trial court's denial of its motion for reconsideration of the default order, deciding the case without due process, not considering the petition for relief as an adequate remedy, and granting the motion for execution and denying the petition for relief from judgment without the three-day prior notice rule, substantially deprived the bank of due process and resulted in a miscarriage of justice. Finding prima facie merit in the petition, the CA granted the bank's prayer for a writ of preliminary injunction enjoining the trial court from enforcing the decision and writ of execution.

The Court of Appeals issued the assailed Decision in favor of respondent bank, annulling and setting aside the RTC decision and ordering the trial court to admit the bank's Answer and to try the case as if a timely motion for new trial had been granted. The CA noted that the trial court should have liberally applied the rules of procedure and admitted the Answer even if filed one day late, given the substantial defenses alleged in the Answer and the large amounts involved. Petitioner filed a motion for reconsideration, which was denied by the CA in the assailed Resolution dated March 17, 2000.

• Extrinsic Fraud: Petitioner argued that respondent bank cannot avail of its former counsel's negligence as a ground for annulling the trial court's judgment because it does not amount to extrinsic fraud. Petitioner contended that the bank never cited any instance where petitioner committed acts, fraudulent or otherwise, which prevented the bank from presenting its side.
• Bank's Knowledge and Resources: Petitioner argued that the bank could not feign innocence and ignorance about the pleading being filed by its counsel, especially since it has a battery of in-house counsels and numerous retained counsels. The bank was never prevented from filing the appropriate pleadings and could have availed of procedural remedies upon receiving a copy of the decision.
• Delay and Bad Faith: Petitioner contended that the bank decided to allow the decision to become final and wait in ambush until the decision was being implemented before taking its move to nullify the decision, clearly intending to derail justice to the grave prejudice of the prevailing party.

• One-Day Delay: Respondent bank contended that the one-day delay in filing its Answer did not cause any substantial damage or prejudice upon petitioner or to the speedy administration of justice. It pointed out that petitioner took more than a month to file the motion to declare it in default, and at that time, its Answer was already on record.
• Counsel's Negligence as Extrinsic Fraud: Respondent bank blamed its former counsel for its failure to take proper recourse or remedy during the proceedings before the trial court, summarizing the counsel's errors as: (1) failure to file a second motion for extension of time to file Answer; (2) failure to appear at the hearing on the motion to declare defendant in default despite receipt of notice, and filing an opposition a day after the hearing; (3) failure to file a motion for leave to admit late Answer; (4) failure to file a motion to lift order of default; (5) filing a motion for inhibition and petition for relief from judgment instead of a notice of appeal; (6) failure to file a notice of appeal after receipt of the order denying the petition for relief from judgment and granting the motion for execution; (7) failure to file a petition for certiorari and prohibition; and (8) setting for hearing the motions he filed twenty days or more despite urgency. All these, the bank argued, constitute a denial of effective, adequate and competent legal representation amounting to extrinsic fraud.
• Meritorious Defense: Respondent bank contended that the trial court should have admitted its Answer as the delay in filing was only one day, and considering that it has a meritorious defense in that petitioner very well knew what happened to the amount sought to be recovered and he just now wants to claim it a second time.

• Extrinsic Fraud: Whether the negligence of respondent bank's former counsel in handling the case constitutes extrinsic fraud sufficient to annul the trial court's judgment.
• Liberal Application of Rules: Whether the Court of Appeals erred in annulling the trial court's decision and ordering the admission of respondent bank's Answer filed one day late, on the ground of liberal application of the rules of procedure.

• Extrinsic Fraud: No. The complained actions or omissions of the former counsel of respondent bank do not amount to gross or reckless negligence constituting extrinsic fraud. A client is generally bound by the negligence or mistake of his counsel, and while there are cases where gross or reckless negligence of counsel amounts to extrinsic fraud, this is the exception rather than the general rule.
• Liberal Application of Rules: No. The Court of Appeals did not commit any error in annulling the trial court's decision, ordering the latter to admit the Answer, and to try the case. The case falls within the instances where the rules of procedure should be liberally applied to achieve the substantial ends of justice, as it involves deprivation of respondent bank's property, its Answer introduces a valid defense against petitioner's cause of action, and the filing of the Answer will not unjustly prejudice or delay the case.

• Extrinsic Fraud: The Court did not agree with respondent bank that its former counsel's mishandling of the case amounts to extrinsic fraud, as a client is bound by the negligence or mistake of his counsel. While there are cases when the Court declared that gross or reckless negligence of counsel amounts to extrinsic fraud, this is the exception rather than the general rule. Not all negligence of counsel qualifies as extrinsic fraud, and each case must be considered under its own set of particular circumstances in ascertaining whether a counsel's negligence may provide sufficient basis to annul an otherwise final and executory judgment. Citing Elcee Farms, Inc. vs. Semillano, the Court stated that as a general rule, the negligence or mistake of counsel binds the client, for otherwise there would never be an end to a suit so long as a new counsel could be employed who could allege and show that the former counsel had not been sufficiently diligent, experienced, or learned. However, if under the circumstances of the case, the rule deserts its proper office as an aid to justice and becomes a great hindrance and chief enemy, its rigors must be relaxed to admit exceptions thereto and to prevent a miscarriage of justice. The Court has the power to except a particular case from the operation of the rule whenever the purposes of justice require it. What should guide judicial action is that a party is given the fullest opportunity to establish the merits of his action or defense rather than for him to lose life, honor or property on mere technicalities. In this case, the complained actions or omissions of the former counsel of respondent bank do not amount to gross or reckless negligence constituting extrinsic fraud.

• Liberal Application of Rules: Despite the foregoing, the Court agreed with the CA that the case should be remanded to the trial court for further proceedings and reception of respondent bank's evidence. The CA aptly noted that a reading of the bank's Answer shows that it has alleged substantial defenses which, if proven, can bar petitioner's claims. However, because of a technicality of its having been filed one day late without a motion to admit the same, a decision was rendered against the bank, ordering it to pay ₱730,000.00 with interest from 1986 until fully paid, ₱1,000,000.00 as moral damages, ₱200,000.00 as exemplary damages, ₱50,000.00 as attorney's fees and ₱30,000.00 as litigation expenses. The CA found it inequitable that the bank was held liable to pay so much without an opportunity to present its evidence, just because its answer was filed one day late. Because of the big amounts prayed for in the complaint, the respondent Judge should not have been too strict in applying the rule on the period for filing an answer. The respondent Judge was also deficient in observing the Rules by not acting on the bank's motion for extension of time to file its answer. The respondent Judge's over-strict adherence to a technical rule resulted in the bank's being deprived of due process of law. Admittance of the bank's Answer would have been the more prudent recourse. The Court reckoned it wise to liberally apply the rules of procedure in order to achieve the substantial ends of justice in the following instances: (1) matters of life, liberty, honor or property; (2) counsel's negligence without any participatory negligence on the part of the client; (3) the existence of special or compelling circumstances; (4) the merits of the case; (5) a cause not entirely attributable to the fault or negligence of the party favored by the suspension of the rules; (6) a lack of any showing that the review sought is merely frivolous and dilatory; and (7) the other party will not be unjustly prejudiced thereby. Since the case below squarely falls within the abovementioned instances, in that it involves deprivation of respondent bank's property, not to mention that its Answer introduces a valid defense against petitioner's cause of action, and that the filing of the Answer will not unjustly prejudice or delay the case, the CA therefore did not commit any error in annulling the trial court's decision, ordering the latter to admit the Answer, and to try the case. Rules of procedure are mere tools intended to facilitate the attainment of justice, rather than frustrate it. A strict and rigid application of the rules must always be eschewed when it would subvert the primary objective of the rules, that is, to enhance fair trials and expedite justice. Technicalities should never be used to defeat the substantive rights of the other party. Every party-litigant must be afforded the amplest opportunity for the proper and just determination of his cause, free from the constraints of technicalities.

• Negligence of Counsel Binds the Client; Exception for Gross or Reckless Negligence — As a general rule, the negligence or mistake of counsel binds the client, for otherwise there would never be an end to a suit so long as a new counsel could be employed who could allege and show that the former counsel had not been sufficiently diligent, experienced, or learned. However, gross or reckless negligence of counsel may amount to extrinsic fraud, which is an exception to the general rule. Not all negligence of counsel qualifies as extrinsic fraud, and each case must be considered under its own set of particular circumstances. In this case, the Court found that the former counsel's errors did not amount to gross or reckless negligence constituting extrinsic fraud, yet the judgment was still annulled on the ground of liberal application of the rules to prevent a miscarriage of justice.

• Liberal Application of Rules of Procedure — Rules of procedure are mere tools intended to facilitate the attainment of justice, rather than frustrate it. A strict and rigid application of the rules must always be eschewed when it would subvert the primary objective of the rules, that is, to enhance fair trials and expedite justice. Technicalities should never be used to defeat the substantive rights of the other party. The Court enumerated instances where liberal application is warranted: (1) matters of life, liberty, honor or property; (2) counsel's negligence without any participatory negligence on the part of the client; (3) the existence of special or compelling circumstances; (4) the merits of the case; (5) a cause not entirely attributable to the fault or negligence of the party favored by the suspension of the rules; (6) a lack of any showing that the review sought is merely frivolous and dilatory; and (7) the other party will not be unjustly prejudiced thereby. The Court applied this doctrine to affirm the CA's annulment of the default judgment, as the bank's Answer was filed only one day late, it raised substantial defenses, and the amounts involved were large.

• "As a general rule, the negligence or mistake of counsel binds the client, for otherwise there would never be an end to a suit so long as a new counsel could be employed who could allege and show that the former counsel had not been sufficiently diligent, experienced, or learned. If under the circumstances of the case, the rule deserts its proper office as an aid to justice and becomes a great hindrance and chief enemy, its rigors must be relaxed to admit exceptions thereto and to prevent a miscarriage of justice." — This passage, quoted from Elcee Farms, Inc. vs. Semillano, articulates the general rule on counsel's negligence and its exception, forming the basis of the Court's analysis of whether the bank's former counsel's errors constituted extrinsic fraud.

• "Rules of procedure are mere tools intended to facilitate the attainment of justice, rather than frustrate it. A strict and rigid application of the rules must always be eschewed when it would subvert the primary objective of the rules, that is, to enhance fair trials and expedite justice. Technicalities should never be used to defeat the substantive rights of the other party. Every party-litigant must be afforded the amplest opportunity for the proper and just determination of his cause, free from the constraints of technicalities." — This passage states the Court's rationale for affirming the CA's decision to annul the default judgment and remand the case, emphasizing the primacy of substantive justice over technical rules.

• "We find it inequitable that petitioner was held liable to pay so much without an opportunity to present it evidence, just because its answer was filed one (1) day late. Because of the big amounts prayed for in the complaint, the respondent Judge should not have been too strict in applying the rule on the period for filing an answer." — This passage, quoted from the CA's decision, highlights the inequity of the default judgment and the trial court's over-strict adherence to technical rules, which the Supreme Court adopted in affirming the annulment.

• Elcee Farms, Inc. vs. Semillano, G.R. No. 150286, October 17, 2003, 413 SCRA 669 — Cited for the general rule that the negligence or mistake of counsel binds the client, and the exception where the rule's rigors must be relaxed to prevent a miscarriage of justice. The Court quoted this case extensively in its analysis of whether the bank's former counsel's negligence constituted extrinsic fraud.

• Salonga vs. Court of Appeals, 269 SCRA 534 — Cited by respondent bank in support of its argument that its former counsel's negligence constituted a denial of effective, adequate and competent legal representation amounting to extrinsic fraud.

• Legarda vs. Court of Appeals, 195 SCRA 418 — Cited by respondent bank in support of its argument on extrinsic fraud.

• Amil vs. Court of Appeals, 316 SCRA 317 — Cited by respondent bank in support of its argument on extrinsic fraud.

• Fraile vs. Domingo, G.R. No. 138518, December 15, 2000, 348 SCRA 414, 422 — Cited for the proposition that a client is bound by the negligence or mistake of his counsel.

• GSIS vs. Bengson Commercial Buildings, Inc., G.R. Nos. 137448 and 141454, January 31, 2002, 375 SCRA 431 — Cited in Elcee Farms for the principle that the Court has the power to except a particular case from the operation of the rule on counsel's negligence whenever the purposes of justice require it.

• Quirao vs. Quirao, G.R. No. 148120, October 24, 2003, 414 SCRA 430, 435 — Cited for the proposition that admittance of the Answer would have been the more prudent recourse.

• Reyes vs. Court of Appeals, G.R. No. 149580, March 16, 2005 — Cited for the enumeration of instances where the Court reckoned it wise to liberally apply the rules of procedure in order to achieve the substantial ends of justice.

• Al-Amanah Islamic Investment Bank of the Phils. vs. Celebrity Travel and Tours, Inc., G.R. No. 155524, August 12, 2004, 436 SCRA 356 — Cited for the principle that rules of procedure are mere tools intended to facilitate the attainment of justice, rather than frustrate it.

• Development Bank of the Phils. vs. Court of Appeals, G.R. No. 139034, June 6, 2001, 358 SCRA 501 — Cited in Al-Amanah for the same principle on liberal application of rules of procedure.

• Section 13, Article VIII, 1987 Constitution — Cited in the Certification portion of the decision, certifying that the conclusions in the Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

• Justice Reynato S. Puno (Chairman, Second Division)
• Justice Romeo J. Callejo, Sr.
• Justice Dante O. Tinga
• Justice Minita V. Chico-Nazario