Luxuria Homes, Inc. vs. Court of Appeals

In a judgment by default, the plaintiff must still establish by competent evidence all material allegations of the complaint; a mere allegation is not evidence, and the judgment cannot exceed the amount or differ in kind from what was prayed for. Additionally, a corporation's separate personality may be disregarded only when fraud or injustice is clearly and convincingly established, and a contract cannot be compelled absent mutual assent of the parties.

Petitioner Aida M. Posadas co-owned a 1.6-hectare property in Sucat, Muntinlupa with her two minor children; the property was occupied by squatters. Posadas entered into negotiations with private respondent Jaime T. Bravo regarding the development of the property into a residential subdivision, beginning with a written authorization dated May 3, 1989 for Bravo to negotiate the squatters' departure. On December 11, 1989, Posadas and her children assigned the property to petitioner Luxuria Homes, Inc., purportedly for organizational and tax avoidance purposes; Bravo signed as a witness to both the Deed of Assignment and the Articles of Incorporation of Luxuria Homes, which were issued on January 26, 1990. The relationship between Posadas and Bravo later deteriorated when Posadas could not accept the management contracts Bravo proposed, prompting Bravo to demand payment for services rendered.

Petitioner Aida M. Posadas and her two minor children co-owned a 1.6-hectare property in Sucat, Muntinlupa, which was occupied by squatters. Posadas entered into negotiations with private respondent Jaime T. Bravo regarding the development of the property into a residential subdivision. On May 3, 1989, she issued a written authorization enabling Bravo, as representative of "the Managers," to negotiate the ejectment of squatters from the property, with reference to an agreement for the development of the area and construction of housing units to convert the land into a first-class subdivision. Armed with this authorization, Bravo commenced negotiations with the squatters.

Some seven months later, on December 11, 1989, Posadas and her two children, through a Deed of Assignment, assigned the subject property to petitioner Luxuria Homes, Inc., purportedly for organizational and tax avoidance purposes. Bravo signed as one of the witnesses to the execution of the Deed of Assignment and the Articles of Incorporation of Luxuria Homes, which were issued on January 26, 1990. At that time, the relationship between Posadas and Bravo was still amicable.

Sometime in 1992, the relationship soured when Posadas could not accept the management contracts Bravo was proposing for the development of the property. In retaliation, Bravo demanded payment for services rendered in connection with the development of the land. In his statement of account dated August 21, 1991, Bravo demanded P1,708,489.00 for various services, including relocation of squatters, preparation of architectural design and site development plan, survey, and fencing. Posadas refused to pay.

In September 1992, private respondents James Builder Construction and Jaime T. Bravo filed a complaint for specific performance before the RTC of Muntinlupa. They alleged that Posadas asked them to clear the land of squatters for a fee of P1,100,000.00, for which they were partially paid P461,511.50, leaving a balance of P638,488.50; to prepare a site development plan and architectural design for P450,000.00, for which P25,000.00 was paid, leaving P425,000.00; and, in anticipation of a land development contract, to construct a bunkhouse and warehouse (P300,000.00) and a hollow blocks factory (P60,000.00). They also claimed that Posadas agreed they would develop the land into a first-class subdivision through a management contract and that she was unjustly refusing to finalize it. On September 27, 1993, the RTC declared Posadas in default and allowed private respondents to present evidence ex-parte. The trial court thereafter rendered judgment granting substantially all reliefs prayed for, including the execution of the management contract. The CA affirmed with modification, deleting moral damages and reducing exemplary damages. On further review, the Supreme Court initially denied due course but reinstated the petition upon motion for reconsideration.

• Insufficiency of Evidence in Default: Petitioners asserted that private respondents, despite presenting evidence ex-parte, utterly failed to substantiate the allegations in their complaint and therefore were not entitled to the reliefs prayed for.
• Luxuria Homes Not a Party: Petitioners maintained that Luxuria Homes, Inc. was not a party to the transactions entered into between Posadas and private respondents and thus could not be held jointly and severally liable.
• Management Contract Not Compellable: Petitioners argued that they could not be compelled to enter into a management contract with private respondents because the parties never agreed on its stipulations and the contract was never perfected.

• Fraudulent Incorporation: Respondents contended that Posadas surreptitiously formed Luxuria Homes, Inc. and transferred the subject property to it to evade payment and defraud creditors, including private respondents, and that therefore Luxuria Homes should be held solidarily liable.
• Compelling Execution of Management Contract: Respondents urged the court to compel petitioners to execute a management contract on the basis of the authorization letter dated May 3, 1989, which referenced an agreement for the development of the area into a first-class subdivision.

• Sufficiency of Evidence in Default: Whether private respondents were able to present ex-parte sufficient evidence to substantiate the allegations in their complaint and entitle them to their prayers.
• Corporate Liability: Whether petitioner Luxuria Homes, Inc. can be held liable to private respondents for the transactions supposedly entered into between petitioner Posadas and private respondents.
• Compelling Contract Execution: Whether petitioners can be compelled to enter into a management contract with private respondents.

• Sufficiency of Evidence in Default: Partially yes. Only the claims for architectural design, site development plan, and survey were substantiated; claims for squatter relocation, fencing, and actual damages were denied for failure of proof. The award could not exceed the amount prayed for in the complaint.
• Corporate Liability: No. Luxuria Homes, Inc. was not a party to the transactions and its separate juridical personality could not be disregarded absent clear and convincing proof of fraud, especially since Bravo himself witnessed the corporation's formation and the property transfer.
• Compelling Contract Execution: No. The management contract was never perfected because the parties could not agree on its stipulations; the drafts were mere unaccepted offers, and compelling their execution would violate the principle of consensuality of contracts.

• Sufficiency of Evidence in Default: The Court reiterated that the rules do not change even when the defendant is declared in default. After entry of judgment in default, the plaintiff must still establish by competent evidence all material allegations of the complaint. A judgment by default does not imply admission of the plaintiff's facts or causes of action, nor does it automatically entitle the plaintiff to the relief prayed for. The court must ascertain that the evidence presented warrants favorable relief; otherwise, the complaint must be dismissed. Applying this standard, the Court found that vouchers evidenced payments by Posadas to Bravo for squatter relocation, architectural design, survey, and fencing, and that respondents prepared the architectural design, site development plan, and survey in connection with Posadas's HLURB application, which resulted in the issuance of a Development Permit and Locational Clearance in her favor. The contract price for the survey was P140,000.00, with partial payments of P130,000.00, leaving a balance of P10,000.00. For the architectural design and site development plan, Bravo testified to a total contract price of P950,000.00, but his complaint alleged only P450,000.00; the Court could not award more than what was claimed, so the award was P450,000.00 less P25,000.00 partial payment, or P425,000.00. The total balance was thus P435,000.00. As to squatter relocation, Bravo presented no evidence other than his bare testimony that all squatters were ejected; he failed to show how many structures existed before he began. As to fencing, he claimed sixty percent completion but presented no evidence of the area sought to be fenced or the actual area fenced. Actual damages for the bunkhouse, warehouse, hollow-block factory, and materials were not established because no receipts or vouchers were presented. The burden of proof rests on the party asserting the affirmative of an issue, and a mere allegation is not evidence.

• Corporate Liability: The Court found that the lower courts erred in concluding that Luxuria Homes was formed to evade payment. The demand letters were sent on August 21, 1991 and September 14, 1991 — more than a year and a half after the Deed of Assignment on December 11, 1989 and the issuance of the Articles of Incorporation on January 26, 1990. The transfer was made when the relationship between Posadas and Bravo was still harmonious, and Bravo himself signed as witness to both the Deed of Assignment and the Articles of Incorporation. Furthermore, Posadas was not the majority stockholder of Luxuria Homes, owning approximately only thirty-three percent of the capital stock, so she could not be considered an alter ego of the corporation. To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established; it cannot be presumed. Since respondents failed to show that Posadas acted in bad faith or that Luxuria Homes was a party to any of the transactions, only Posadas personally was liable.

• Compelling Contract Execution: The authorization letter dated May 3, 1989 was nothing more than a "to-whom-it-may-concern" letter to negotiate with squatters. Although it referenced an agreement for development, there was no showing that a management contract was ever perfected or finalized. Respondents presented only drafts with Posadas's handwritten marginal notes, but the contract was never put in final form because the parties could not agree on its stipulations — a fact even the trial court found. The drafts were therefore mere unaccepted offers. It is fundamental that there can be no contract in the true sense absent mutual assent. To compel Posadas to execute a management contract under respondents' terms would violate the principle of consensuality of contracts and would, in effect, place her under duress. The parties are bound to fulfill stipulations only upon perfection of the contract; prior to perfection, unaccepted offers remain non-binding and not demandable.

• Judgment by Default Does Not Dispense with Plaintiff's Burden of Proof — A judgment by default against a defendant does not imply a waiver of rights except that of being heard and presenting evidence. It does not imply admission of the plaintiff's facts and causes of action. The plaintiff must still adduce competent evidence in support of all material allegations as an indispensable condition before final judgment may be rendered in his favor. The judgment cannot exceed the amount or differ in kind from what was prayed for in the complaint. Applied in this case to deny respondents' claims for squatter relocation, fencing, and actual damages for failure of proof, and to limit the award for architectural design and site development plan to the amount pleaded in the complaint.

• Piercing the Corporate Veil — The separate juridical personality of a corporation may be disregarded only when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary for the protection of creditors. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Applied in this case to absolve Luxuria Homes, Inc. because the corporation was formed before any demand for payment was made, with the full knowledge and participation of respondent Bravo as witness, and Posadas owned only approximately thirty-three percent of the capital stock.

• Consensuality of Contracts — There can be no contract in the true sense absent the element of agreement or mutual assent of the parties. Unaccepted offers and proposals remain non-binding and not demandable until the contract is perfected. Compelling a party to execute a contract under terms to which she did not assent violates this principle and is tantamount to duress. Applied to deny the prayer for execution of the management contract, which was never perfected because the parties could not agree on its stipulations.

• "A MERE ALLEGATION IS NOT EVIDENCE." — This passage encapsulates the Court's ruling that even in default proceedings, the plaintiff bears the burden of proving every material allegation, and bare testimony without corroborating evidence is insufficient to justify relief.

• "a judgement by default against a defendant does not imply a waiver of rights except that of being heard and of presenting evidence in his favor. It does not imply admission by the defendant of the facts and causes of action of the plaintiff, because the codal section requires the latter to adduce his evidence in support of his allegations as an indispensable condition before final judgment could be given in his favor." — This is the canonical formulation of the default-judgment doctrine as applied in this case, frequently cited in subsequent jurisprudence on the rights of defaulted defendants.

• "To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed." — This states the threshold for piercing the corporate veil, applied here to absolve Luxuria Homes absent proof of fraud in its formation.

• "It is fundamental that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties." — This articulates the consensuality principle that barred the court from compelling execution of the unperfected management contract.

• Lopez vs. Mendezona, 11 Phil. 209 (1908) — Leading case establishing that after entry of default judgment, the plaintiff must establish by competent evidence all material allegations of the complaint before final judgment may be rendered in his favor. Followed and applied.
• De los Santos vs. De la Cruz, 37 SCRA 555 (1971) — Held that a judgment by default does not imply admission of the plaintiff's facts or causes of action. Followed and applied.
• Pascua vs. Florendo, 136 SCRA 208 (1985) — Clarified that defendants in default do not automatically entitle complainants to the relief prayed for; favorable relief may be granted only after the court ascertains that the evidence warrants it. Followed and applied.
• Lim Tanhu vs. Ramolete, 66 SCRA 425 (1975) — Elaborated that a defaulted defendant is not thrown out of court; only legal and competent evidence should be considered against him, and if evidence is insufficient, the complaint must be dismissed. Followed and applied.
• Policarpio vs. RTC of Quezon City, 235 SCRA 314 (1994) — Held that a court is bereft of jurisdiction to award, in a judgment by default, a relief other than that specifically prayed for in the complaint. Followed and applied to limit the award for architectural design and site development plan.
• Bayer-Roxas vs. Court of Appeals, 211 SCRA 470 (1992) — Held that the separate personality of a corporation may be disregarded only when used as a cloak for fraud or illegality. Followed and applied to uphold Luxuria Homes's separate juridical personality.
• Philippine National Bank vs. Court of Appeals, 238 SCRA 20 (1994) — Held that if assent is wanting on the part of one who contracts, his act has no more efficacy than if done under duress or by a person of unsound mind. Followed and applied to deny the prayer for compelled execution of the management contract.

• Rules of Court on Default Judgments — The Court applied the procedural rule that a plaintiff, upon the defendant's default, must still adduce evidence in support of the allegations in the complaint as an indispensable condition before final judgment may be rendered, and that the judgment cannot exceed the amount or differ in kind from what was prayed for.
• Civil Code on the Perfection of Contracts — The Court invoked the principle that a contract is perfected upon mutual assent of the parties to its terms, and that unaccepted offers remain non-binding until perfection. Applied to hold that the management contract was never perfected and thus not demandable.

Davide, Jr., C.J., Melo, Kapunan, and Pardo, JJ., concurred.