Indiana Aerospace University vs. CHED

A defendant who has already filed an Answer before being declared in default is improvidently declared in default, and the order of default may be annulled via certiorari; moreover, a writ of preliminary injunction cannot issue to protect a party's nonexistent right to use the term "university" without complying with statutory requirements, but a motion to dismiss for failure to state a cause of action must be resolved solely on the complaint's allegations, and denial thereof is not grave abuse of discretion warranting dismissal of the complaint in certiorari.

Indiana Aerospace University was originally incorporated with the Securities and Exchange Commission (SEC) as "Indiana School of Aeronautics, Inc." It subsequently adopted the name "Indiana Aerospace University," purportedly on the basis of a DECS indorsement and an SEC certificate of registration. The Commission on Higher Education (CHED), the government agency tasked with regulating tertiary education, issued CHED Memorandum Order No. 48, series of 1996, prescribing the requirements an educational institution must satisfy before it may be designated a university. CHED's regulatory authority over the conferment of university status stands in tension with the SEC's corporate registration function, creating the jurisdictional backdrop against which the dispute arose.

Sometime in October 1996, the Chairman of the Technical Panel for Engineering, Architecture, and Maritime Education (TPRAM) of CHED received a letter from the Chairman of the Board of Aeronautical Engineering of the Professional Regulatory Commission (PRC), inquiring whether petitioner had already acquired university status, given that it had advertised itself as "Indiana Aerospace University" in the Manila Bulletin. CHED referred the matter to its Regional Director in Cebu City for investigation. The resulting report, submitted in January 1997, noted that as early as May 1996, the regional office had verbally advised petitioner's president not to use the term "university," since the institution had not complied with the basic requirements prescribed in CHED Memorandum Order No. 48, series of 1996.

On February 3, 1997, CHED formally directed petitioner to desist from using the term "university," including in any of its alleged branches. In the course of its investigation, CHED verified with the SEC whether petitioner had amended its corporate name from "Indiana School of Aeronautics" to "Indiana Aerospace University." SEC Chairman Perfecto R. Yasay, Jr. wrote to CHED Chairman Angel C. Alcala, stating that SEC records showed no amended articles of incorporation changing petitioner's corporate name to include the term "university." Petitioner's chairman and founder, Jovenal Toring, wrote to CHED appealing for reconsideration, promising to comply with CMO No. 48, and warning of financial difficulties and mass student dislocation if the order were enforced. CHED rejected the appeal in its decision dated July 30, 1998, and reiterated the cease and desist directive.

Prior to that ruling, on April 2, 1998, petitioner filed a Complaint for Damages with prayer for a writ of preliminary and mandatory injunction and temporary restraining order against CHED, docketed as Civil Case No. 98-811 before the RTC of Makati City, Branch 136. CHED filed a Special Appearance with Motion to Dismiss on April 7, 1998, citing improper venue, lack of authority of the person instituting the action, and lack of cause of action. After briefing and hearing, the RTC denied the motion on August 14, 1998, and simultaneously issued a writ of preliminary injunction enjoining CHED from enforcing its cease and desist order, from publishing announcements regarding the order, and from withholding yearly school permits and special orders to graduates, upon petitioner's posting of a ₱100,000 injunction bond. The RTC directed CHED to file its Answer within fifteen days from receipt of the order.

CHED received the August 14, 1998 Order on August 15, 1998, but did not file its Answer within the fifteen-day period. On September 22, 1998, petitioner moved to declare CHED in default; on the same date, CHED filed a Motion for Extension of Time to file its Answer. CHED ultimately filed its Answer on November 17, 1998. Petitioner nevertheless pressed its Motion to Expunge the Answer, and on December 9, 1998, the RTC granted the motion and declared CHED in default, directing petitioner to present its evidence ex parte. CHED received this default order on January 13, 1999, and on February 23, 1999, filed a Petition for Certiorari with the Court of Appeals, assailing the RTC's denial of its motion to dismiss, the issuance of the writ of preliminary injunction, and the default declaration.

The Court of Appeals ruled that petitioner had no cause of action, having failed to show that it had been granted university status by CHED; that neither the Corporation Code nor the SEC Charter vested the SEC with authority to confer university status; and that SEC records affirmatively showed no amended articles of incorporation. The CA further held that the writ of preliminary injunction had been improvidently issued, since petitioner's doubtful right was subordinate to the public interest in protecting students from misrepresentation, and that CHED should not have been declared in default because its Answer had been filed before the default order was issued, its delay being due to excusable negligence. The CA directed the RTC to cease and desist from proceeding with the case and to dismiss the complaint.

• Timeliness of Certiorari: Petitioner argued that CHED's Petition for Certiorari was filed beyond the sixty-day reglementary period under Section 4, Rule 65, because the August 14, 1998 Order was served on August 15, 1998, and the Answer was filed only after 180 days, which could not be considered a reasonable period.
• Failure to File Motion for Reconsideration: Petitioner contended that certiorari could not prosper because CHED did not file a motion for reconsideration before resorting to the appellate court, nor did it file a motion to set aside the order of default pursuant to Section 3(b), Rule 9 of the Rules of Court.
• Validity of Default Order: Petitioner maintained that the RTC was justified in declaring CHED in default, because the fifteen-day period for filing an Answer had expired on August 30, 1998, and CHED could only file a Motion for Extension of Time as late as October 30, 1998.
• Validity of Preliminary Injunction: Petitioner asserted that the RTC validly issued the writ of preliminary injunction, arguing that CHED's actions adversely affected petitioner's interests, faculty, and students, and that the very existence of petitioner as a business concern would have been jeopardized had its proprietary rights not been protected.
• Dismissal of the Complaint: Petitioner claimed that the CA exceeded its jurisdiction under Rule 65 when it dismissed the complaint on the ground of failure to state a cause of action, since the RTC had yet to conduct trial and the CA's factual determination regarding petitioner's acquisition of university status was not permitted in certiorari proceedings.

• Timeliness and Nullity: Respondent, through the Office of the Solicitor General, argued that the default order was null and void and could be assailed at any time, and that the sixty-day period should be counted from receipt of the December 9, 1998 default order, not the August 14, 1998 interlocutory order.
• Dispensation with Motion for Reconsideration: Respondent countered that a motion for reconsideration should be dispensed with because the December 9, 1998 Order was a patent nullity.
• Improvident Default: Respondent averred that certiorari was the only plain, speedy, and adequate remedy, because the default order had been improvidently issued—its Answer had been filed on November 17, 1998, before the December 9, 1998 default declaration—and its delay was due to excusable negligence, namely the forced relinquishment and subsequent reinstatement of its Legal Affairs Services director.
• No Right to Injunction: Respondent maintained that petitioner had no vested right to use the term "university" and that CHED's cease and desist order merely required reversion to its authorized name, not closure, and thus did not violate petitioner's proprietary rights.

• Timeliness of Certiorari: Whether CHED's Petition for Certiorari was filed within the reglementary period prescribed by Section 4, Rule 65 of the Rules of Court.
• Exhaustion of Remedies: Whether CHED's failure to file a motion for reconsideration before resorting to certiorari barred its petition.
• Validity of the Default Order: Whether the RTC gravely abused its discretion in declaring CHED in default despite the latter having filed its Answer.
• Validity of the Preliminary Injunction: Whether the RTC validly issued the writ of preliminary injunction in favor of petitioner.
• Dismissal of the Complaint: Whether the CA correctly ordered the dismissal of the complaint for failure to state a cause of action.

• Timeliness of Certiorari: Yes. The petition was seasonably filed, the sixty-day period being counted from receipt of the December 9, 1998 default order on January 13, 1999, with filing on February 23, 1999—well within the reglementary period. The August 14, 1998 Order was merely interlocutory and not a proper subject of certiorari.
• Exhaustion of Remedies: No motion for reconsideration was required. The regulation of educational institutions is invested with public interest, falling within recognized exceptions to the exhaustion-of-remedies rule.
• Validity of the Default Order: No. The RTC gravely abused its discretion in declaring CHED in default, because CHED's Answer had been filed on November 17, 1998—twenty-two days before the December 9, 1998 default order—and no prejudice was caused to petitioner.
• Validity of the Preliminary Injunction: No. The writ was improvidently issued, petitioner having no clear right to represent itself as a university, and CHED's order merely requiring reversion to its authorized name rather than closure.
• Dismissal of the Complaint: No. The CA erred in ordering dismissal. The RTC's denial of the motion to dismiss was not grave abuse of discretion, because the complaint's allegations, assumed true for purposes of a motion to dismiss based on lack of cause of action, sufficiently stated a cause of action.

• Timeliness of Certiorari: The sixty-day reglementary period under Section 4, Rule 65 must be computed from receipt of the order being assailed. CHED received the December 9, 1998 default order on January 13, 1999, and filed its petition on February 23, 1999—plainly within sixty days. The August 14, 1998 Order, which denied the motion to dismiss and issued the injunction, was interlocutory in nature and could not be the subject of an independent appeal or certiorari. Because the default order was the operative act that caused CHED to seek extraordinary relief, its receipt of that order was the proper starting point for the prescriptive period.

• Exhaustion of Remedies: The general rule requiring a motion for reconsideration before certiorari and the exhaustion of all available remedies is subject to recognized exceptions, including when public interest is involved. The regulation and administration of educational institutions, particularly at the tertiary level, is manifestly invested with public interest, given the state policy of protecting citizens' right to affordable quality education. The urgency with which the Solicitor General raised the issues before the appellate court was therefore understandable, and prior resort to a motion for reconsideration was properly excused.

• Validity of the Default Order: A defendant validly declared in default irreparably loses the right to participate in the trial and is confined to the remedies outlined in Lina vs. Court of Appeals. A defendant improvidently declared in default, however, may seek annulment of the order of default via certiorari even before judgment is rendered, on the ground that the order is intrinsically void. Here, CHED's Answer was filed on November 17, 1998, yet the RTC declared it in default only on December 9, 1998—twenty-two days later. Petitioner itself was lax, moving to declare CHED in default only on September 22, 1998, when the filing period had expired on August 30, 1998, demonstrating that no prejudice resulted from the delay. CHED's failure to file on time was attributable to excusable negligence: its Legal Affairs Services director had been required to relinquish his position per a July 7, 1998 memorandum directing non-CESO eligibles in non-career positions to vacate, and resumed only on September 25, 1998 upon issuance of CHED Special Order No. 63. Default judgments are generally disfavored and should be resorted to only in clear cases of obstinate refusal or inordinate neglect—neither of which was present here. Judges should avoid issuing default orders that deny litigants the chance to be heard and should instead give every opportunity to resolve controversies on the merits.

• Validity of the Preliminary Injunction: A writ of preliminary injunction requires (1) a right in esse to be protected and (2) an act against which the injunction is directed that violates such right. Petitioner failed to establish a clear right to continue representing itself as a university. The establishment and operation of schools are subject to prior government authorization, and no school may claim university status unless it has complied with the prerequisites in Section 34 of the Manual of Regulations for Private Schools. Section 3, Rule 58 of the Rules of Court limits preliminary injunction to cases where the plaintiff is clearly entitled to the relief prayed for. CHED's cease and desist order merely restrained petitioner from using the term "university" and directed it to revert to its authorized name; it was not ordered to close. An injunction is a remedy in equity and should not be used to perpetuate a falsehood. Petitioner has no vested right to misrepresent itself to the public.

• Dismissal of the Complaint: An order denying a motion to dismiss is interlocutory, and the ordinary remedy is to appeal after a decision on the merits. Certiorari is not intended to correct every controversial interlocutory ruling but only to correct grave abuse of discretion equivalent to lack of jurisdiction. When a motion to dismiss is grounded on failure to state a cause of action, the court must resolve the issue based solely on the facts alleged in the complaint, assuming them to be true; to do otherwise would be a procedural error and a denial of the plaintiff's right to due process. The RTC found that CHED's actions—including publishing announcements that petitioner had no legal existence and that it had been ordered closed for fraud and misrepresentation—undermined public confidence in petitioner as an educational institution. These allegations, assumed true, sufficiently stated a cause of action. The CA erred in going beyond the complaint's allegations and considering evidence regarding petitioner's actual acquisition of university status, which is a factual matter inappropriate for resolution in a certiorari proceeding testing the interlocutory denial of a motion to dismiss. Accordingly, the CA's directive to dismiss the complaint was reversed.

• Improvident Default — A defendant who has already filed an Answer before being declared in default is improvidently declared in default; the order of default is intrinsically void and may be annulled via certiorari even before judgment is rendered. In contrast, a defendant validly declared in default irreparably loses the right to participate in trial and is limited to the remedies outlined in Lina vs. Court of Appeals: (1) motion to set aside the order of default under Section 3(b), Rule 9; (2) motion for new trial under Section 1(a), Rule 37; (3) petition for relief under Rule 38; and (4) appeal from the judgment under Section 1, Rule 41. The Court applied this distinction to hold that CHED, having filed its Answer twenty-two days before the default order, was improvidently declared in default and could properly seek certiorari.

• Disfavor of Default Judgments — Default judgments are generally disfavored; they should be resorted to only in clear cases of obstinate refusal or inordinate neglect in complying with court orders. The Court applied this doctrine to reverse the default order, finding no obstinate refusal or inordinate neglect attributable to CHED, whose delay was caused by excusable negligence.

• Requisites of Preliminary Injunction — A writ of preliminary injunction requires (1) a right in esse to be protected and (2) an act against which the injunction is directed that violates such right. The Court applied this test to dissolve the injunction, holding that petitioner had no clear right to use the term "university" without complying with statutory requirements.

• Motion to Dismiss for Failure to State a Cause of Action — When a motion to dismiss is grounded on failure to state a cause of action, the ruling must be based solely on the facts alleged in the complaint, assumed to be true; considering extrinsic evidence constitutes procedural error and a denial of due process. The Court applied this rule to reverse the CA's dismissal of the complaint, finding that the complaint's allegations sufficiently stated a cause of action and that the CA improperly went beyond those allegations.

• Exceptions to Exhaustion of Remedies — The rule requiring a motion for reconsideration and exhaustion of all available remedies before certiorari is subject to exceptions, including when public interest is involved. The Court held that the regulation of educational institutions is invested with public interest, thereby excusing CHED's failure to file a motion for reconsideration.

• "When the delayed filing of an answer causes no prejudice to the plaintiff, default orders should be avoided." — This opening statement of the decision articulates the guiding principle for the default-order issue and frames the Court's rationale for annulling the RTC's default declaration.

• "An injunction is a remedy in equity and should not be used to perpetuate a falsehood." — This passage encapsulates the Court's reasoning for dissolving the writ of preliminary injunction, emphasizing that equitable relief cannot protect a party's misrepresentation of its status.

• "When a motion to dismiss is grounded on the failure to state a cause of action, a ruling thereon should be based only on the facts alleged in the complaint." — This formulation states the controlling procedural rule that led the Court to reverse the CA's dismissal of the complaint, distinguishing the proper scope of inquiry on a motion to dismiss from the CA's improper factual excursion.

• "Judges, as a rule, should avoid issuing default orders that deny litigants the chance to be heard. Instead, the former should give the latter every opportunity to present their conflicting claims on the merits of the controversy, as much as possible avoiding any resort to procedural technicalities." — This passage articulates the policy disfavoring default orders and favoring adjudication on the merits, which the Court applied to CHED's situation.

• Lina vs. Court of Appeals, 135 SCRA 637 (1985) — Enumerated the four remedies available to a defendant declared in default; the Court relied on this case to distinguish between validly and improvidently declared defaulters and to establish that an improvidently declared defaulter may seek certiorari to annul the default order.
• Akut vs. Court of Appeals, 116 SCRA 213 (1982) — Established that the prohibition on appeals from interlocutory orders does not leave an aggrieved party without remedy when a judge proceeds without or in excess of jurisdiction; cited to support the availability of certiorari against interlocutory orders issued with grave abuse of discretion.
• Trajano vs. Cruz, 80 SCRA 712 (1977) — Articulated the doctrine that default judgments are generally disfavored; cited in support of the ruling that the RTC improvidently declared CHED in default.
• Saulog vs. Court of Appeals, 262 SCRA 51 (1996) — Stated the two requisites for preliminary injunction: a right in esse to be protected and an act violating that right; cited as the controlling test for dissolving the writ.
• Mindanao Realty Corp. vs. Kintanar, 6 SCRA 814 (1962) — Held that a ruling on a motion to dismiss for failure to state a cause of action must be based only on the facts alleged in the complaint; cited as the basis for reversing the CA's dismissal.

• Section 4, Rule 65, Rules of Court — Prescribes the sixty-day reglementary period for filing a petition for certiorari. The Court applied this provision by counting the period from CHED's receipt of the December 9, 1998 default order on January 13, 1999, finding the February 23, 1999 filing timely.
• Section 3(b), Rule 9, Rules of Court — Governs motions to set aside orders of default. The Court discussed this provision in the context of available remedies for a defendant declared in default, distinguishing it as a remedy for validly declared defaulters while holding that improvidently declared defaulters may resort directly to certiorari.
• Section 3, Rule 58, Rules of Court — Limits the grant of preliminary injunction to cases in which the plaintiff is clearly entitled to the relief prayed for. The Court applied this provision to hold that petitioner, lacking a clear right to use the term "university," was not entitled to injunctive relief.
• Section 34, Manual of Regulations for Private Schools — Prescribes the prerequisites an educational institution must satisfy before it may be designated a university. The Court cited this provision to establish that petitioner had not complied with the requirements for university status and therefore had no right to the injunction.
• CHED Memorandum Order No. 48, series of 1996 — Prescribes the basic requirements for acquiring university status. The Court referenced this issuance as the regulatory standard against which petitioner's use of the term "university" was measured.

Melo (Chairman), Vitug, Gonzaga-Reyes, and Sandoval-Gutierrez, JJ., concurred.