Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

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D E C I S I O N

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari assailing the Decision¹ of the Court of Appeals dated 27 September 2005 and its Resolution dated 7 March 2006 in CA-G.R. CV No. 83507 affirming the Decision of the Regional Trial Court (RTC) of Tagaytay City, Branch 18.

The factual and procedural antecedents of this case are as follows:

On 18 October 2000, the spouses James and Maria Rosa Nieves Relova and the spouses Bienvenido and Eufracia Perez, respondents before this Court, filed against Atty. Ana Liza Luna, Clerk of Court of Branch 18 of the RTC of Tagaytay City, and herein petitioner Teresita Monzon an initiatory pleading captioned as a Petition for Injunction. The case, which was filed before the same Branch 18 of the RTC of Tagaytay City, was docketed as Civil Case No. TG-2069.

In their Petition for Injunction, respondents alleged that on 28 December 1998, Monzon executed a promissory note in favor of the spouses Perez for the amount of P600,000.00, with interest of five percent per month, payable on or before 28 December 1999. This was secured by a 300-square meter lot in Barangay Kaybagal, Tagaytay City. Denominated as Lot No. 2A, this lot is a portion of Psu-232001, covered by Tax Declaration No. 98-008-1793. On 31 December 1998, Monzon executed a Deed of Absolute Sale over the said parcel of land in favor of the spouses Perez.

Respondents also claim in their Petition for Injunction that on 29 March 1999, Monzon executed another promissory note, this time in favor of the spouses Relova for the amount of P200,000.00 with interest of five percent per month payable on or before 31 December 1999. This loan was secured by a 200 square meter lot, denominated as Lot No. 2B, another portion of the aforementioned Psu-232001 covered by Tax Declaration No. 98-008-1793. On 27 December 1999, Monzon executed a Deed of Conditional Sale over said parcel of land in favor of the spouses Relova.

On 23 October 1999, the Coastal Lending Corporation extrajudicially foreclosed the entire 9,967-square meter property covered by Psu-232001, including the portions mortgaged and subsequently sold to respondents. According to the Petition for Injunction, Monzon was indebted to the Coastal Lending Corporation in the total amount of P3,398,832.35. The winning bidder in the extrajudicial foreclosure, Addio Properties Inc., paid the amount of P5,001,127.00, thus leaving a P1,602,393.65 residue. According to respondents, this residue amount, which is in the custody of Atty. Luna as Branch Clerk of Court, should be turned over to them pursuant to Section 4, Rule 68 of the Revised Rules of Civil Procedure. Thus, respondents pray in their Petition for Injunction for a judgment (1) finding Monzon liable to the spouses Perez in the amount of P1,215,000.00 and to the spouses Relova in the amount of P385,000.00; (2) ordering Atty. Luna to deliver said amounts to respondents; and (3) restraining Atty. Luna from delivering any amount to Monzon pending such delivery in number (2).

Monzon, in her Answer, claimed that the Petition for Injunction should be dismissed for failure to state a cause of action.

Monzon likewise claimed that respondents could no longer ask for the enforcement of the two promissory notes because she had already performed her obligation to them by dacion en pago as evidenced by the Deed of Conditional Sale and the Deed of Absolute Sale. She claimed that petitioners could still claim the portions sold to them if they would only file the proper civil cases. As regards the fund in the custody of Atty. Luna, respondents cannot acquire the same without a writ of preliminary attachment or a writ of garnishment in accordance with the provisions of Rule 57 and Section 9(c), Rule 39 of the Revised Rules of Civil Procedure.

On 5 December 2001, the RTC, citing the absence of petitioner and her counsel on said hearing date despite due notice, granted an oral Motion by the respondents by issuing an Order allowing the ex parte presentation of evidence by respondents.²

On 1 April 2002, the RTC rendered a Decision in favor of respondents. The pertinent portions of the Decision are as follows:

That [petitioner] Teresita Monzon owes [herein respondents] certain sums of money is indisputable. Even [Monzon] have admitted to this in her Answer. [Respondents] therefore are given every right to get back and collect whatever amount they gave [Monzon] together with the stipulated rate of interest.

Likewise, it has been established that [petitioner] Teresita Monzon has the amount of P1,602,393.65 in the possession of the Clerk of Court, Atty. Ana Liza M. Luna. This amount, as is heretofore stated, represented the balance of the foreclosure sale of [Monzon’s] properties.

By way of this petition, [respondents] would want to get said amount so that the same can be applied as full payment of [petitioner’s] obligation. That the amount should be divided between the [respondents] in the amount they have agreed between themselves; [respondent] spouses Relova to receive the amount of P400.00.00, while the spouses Perez shall get the rest.

WHEREFORE, judgment is hereby rendered ordering the x x x Clerk of Court, Atty. Ana Liza M. Luna, to deliver unto [herein respondents] the amount of P1,602,393.65 plus whatever interest she may received if and when the said amount has been deposited in any banking institution.³

The Decision also mentioned that the Order allowing the ex parte presentation of evidence by respondents was due to the continuous and incessant absences of petitioner and counsel.⁴

On 25 April 2002, Monzon filed a Notice of Appeal, which was approved by the trial court. Monzon claims that the RTC gravely erred in rendering its Decision immediately after respondents presented their evidence ex parte without giving her a chance to present her evidence, thereby violating her right to due process of law.

On 14 June 2002, Addio Properties, Inc. filed before the trial court a Motion for Intervention, which was granted by the same court on 12 July 2002.

On 27 September 2005, the Court of Appeals rendered the assailed Decision dismissing the appeal. According to the Court of Appeals, Monzon showed tepid interest in having the case resolved with dispatch. She, thus, cannot now complain that she was denied due process when she was given ample opportunity to defend and assert her interests in the case. The Court of Appeals reminded Monzon that the essence of due process is reasonable opportunity to be heard and submit evidence in support of one’s defense. What the law proscribes is lack of opportunity to be heard. Monzon’s Motion for Reconsideration was denied in a Resolution dated 7 March 2006.

On 27 March 2006, Monzon filed the instant Petition for Review on Certiorari under Rule 45 of the Rules of Court.

Monzon claims anew that it was a violation of her right to due process of law for the RTC to render its Decision immediately after respondents presented their evidence ex parte without giving her a chance to present her evidence. Monzon stresses that she was never declared in default by the trial court. The trial court should have, thus, set the case for hearing for the reception of the evidence of the defense. She claims that she never waived her right to present evidence.

Monzon argues that had she been given the opportunity to present her evidence, she would have proven that (1) respondents’ Exhibit A (mortgage of land to the spouses Relova) had been novated by respondent’s Exhibit B (sale of the mortgage land to the spouses Relova); (2) respondents’ Exhibit C (mortgage of land to the spouses Perez) had been novated by respondent’s Exhibit B (sale of the mortgage land to the spouses Perez); and (3) having executed Exhibits "B" and "D," Monzon no longer had any obligation towards respondents.

The Order by the trial court which allowed respondents to present their evidence ex parte states:

In view of the absence of [Monzon] as well as her counsel despite due notice, as prayed for by counsel for by [respondents herein], let the reception of [respondent’s] evidence in this case be held ex-parte before a commissioner who is the clerk of court of this Court, with orders upon her to submit her report immediately upon completion thereof.⁵

It can be seen that despite the fact that Monzon was not declared in default by the RTC, the RTC nevertheless applied the effects of a default order upon petitioner under Section 3, Rule 9 of the Rules of Court:

SEC. 3. Default; declaration of.—Ifthe defending party fails to answer within the time allowed therefor, the court shall, upon motion of the claiming party with notice to the defending party, and proof of such failure, declare the defending party in default. Thereupon, the court shall proceed to render judgment granting the claimant such relief as his pleading may warrant, unless the court in its discretion requires the claimant to submit evidence. Such reception of evidence may be delegated to the clerk of court.

(a) Effect of order of default.—Aparty in default shall be entitled to notice of subsequent proceedings but not to take part in the trial.

In his book on remedial law, former Justice Florenz D. Regalado writes that failure to appear in hearings is not a ground for the declaration of a defendant in default:

Failure to file a responsive pleading within the reglementary period, and not failure to appear at the hearing, is the sole ground for an order of default (Rosario, et al. vs. Alonzo, et al., L-17320, June 29, 1963), except the failure to appear at a pre-trial conference wherein the effects of a default on the part of the defendant are followed, that is, the plaintiff shall be allowed to present evidence ex parte and a judgment based thereon may be rendered against the defendant (Section 5, Rule 18).⁶ Also, a default judgment may be rendered, even if the defendant had filed his answer, under the circumstance in Sec. 3(c), Rule 29.⁷

Hence, according to Justice Regalado, the effects of default are followed only in three instances: (1) when there is an actual default for failure to file a responsive pleading; (2) failure to appear in the pre-trial conference; and (3) refusal to comply with modes of discovery under the circumstance in Sec. 3(c), Rule 29.

In Philippine National Bank v. De Leon,⁸ we held:

We have in the past admonished trial judges against issuing precipitate orders of default as these have the effect of denying a litigant the chance to be heard, and increase the burden of needless litigations in the appellate courts where time is needed for more important or complicated cases. While there are instances when a party may be properly defaulted, these should be the exception rather than the rule, and should be allowed only in clear cases of obstinate refusal or inordinate neglect to comply with the orders of the court (Leyte vs. Cusi, Jr., 152 SCRA 496; Tropical Homes, Inc. vs. Hon. Villaluz, et al., G.R. No. L-40628, February 24, 1989).

It is even worse when the court issues an order not denominated as an order of default, but provides for the application of effects of default. Such amounts to the circumvention of the rigid requirements of a default order, to wit: (1) the court must have validly acquired jurisdiction over the person of the defendant either by service of summons or voluntary appearance; (2) the defendant failed to file his answer within the time allowed therefor; and (3) there must be a motion to declare the defendant in default with notice to the latter.⁹ In the case at bar, petitioner had not failed to file her answer. Neither was notice sent to petitioner that she would be defaulted, or that the effects of default shall be imposed upon her. "Mere non-appearance of defendants at an ordinary hearing and to adduce evidence does not constitute default, when they have already filed their answer to the complaint within the reglementary period. It is error to default a defendant after the answer had already been filed. It should be borne in mind that the policy of the law is to have every litigant’s case tried on the merits as much as possible; it is for this reason that judgments by default are frowned upon."¹⁰

Does this mean that defendants can get away with failing to attend hearings despite due notice? No, it will not. We agree with petitioner that such failure to attend, when committed during hearing dates for the presentation of the complainant’s evidence, would amount to the waiver of such defendant’s right to object to the evidence presented during such hearing, and to cross-examine the witnesses presented therein. However, it would not amount to a waiver of the defendant’s right to present evidence during the trial dates scheduled for the reception of evidence for the defense. It would be an entirely different issue if the failure to attend of the defendant was on a hearing date set for the presentation of the evidence of the defense, but such did not occur in the case at bar.

In view of the foregoing, we are, therefore, inclined to remand the case to the trial court for reception of evidence for the defense. Before we do so, however, we need to point out that the trial court had committed another error which we should address to put the remand in its proper perspective. We refer to Monzon’s argument as early as the Answer stage that respondents’ Petition for Injunction had failed to state a cause of action.

Section 4, Rule 68 of the Rules of Court, which is the basis of respondent’s alleged cause of action entitling them to the residue of the amount paid in the foreclosure sale, provides as follows:

SEC. 4. Disposition of proceeds of sale.—Theamount realized from the foreclosure sale of the mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the mortgage, and when there shall be any balance or residue, after paying off the mortgage debt due, the same shall be paid to junior encumbrancers in the order of their priority, to be ascertained by the court, or if there be no such encumbrancers or there be a balance or residue after payment to them, then to the mortgagor or his duly authorized agent, or to the person entitled to it.

However, Rule 68 governs the judicial foreclosure of mortgages. Extra-judicial foreclosure of mortgages, which was what transpired in the case at bar, is governed by Act No. 3135,¹¹ as amended by Act No. 4118,¹² Section 6 of Republic Act No. 7353, Section 18 of Republic Act No. 7906, and Section 47 of Republic Act No. 8791. A.M. No. 99-10-05-0, issued on 14 December 1999, provides for the procedure to be observed in the conduct of an extrajudicial foreclosure sale. Thus, we clarified the different types of sales in Supena v. Dela Rosa, ¹³ to wit:

Any judge, worthy of the robe he dons, or any lawyer, for that matter, worth his salt, ought to know that different laws apply to different kinds of sales under our jurisdiction. We have three different types of sales, namely: an ordinary execution sale, a judicial foreclosure sale, and an extrajudicial foreclosure sale. An ordinary execution sale is governed by the pertinent provisions of Rule 39 of the Rules of Court on Execution, Satisfaction and Effect of Judgments. Rule 68 of the Rules, captioned Foreclosure of Mortgage, governs judicial foreclosure sales. On the other hand, Act No. 3135, as amended by Act No. 4118, otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages," applies in cases of extrajudicial foreclosure sales of real estate mortgages.

Unlike Rule 68, which governs judicial foreclosure sales, neither Act No. 3135 as amended, nor A.M. No. 99-10-05-0 grants to junior encumbrancers the right to receive the balance of the purchase price. The only right given to second mortgagees in said issuances is the right to redeem the foreclosed property pursuant to Section 6 of Act No. 3135, as amended by Act No. 4118, which provides:

Sec. 6. Redemption. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty- six,¹⁴ inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with this Act.

Even if, for the sake of argument, Rule 68 is to be applied to extrajudicial foreclosure of mortgages, such right can only be given to second mortgagees who are made parties to the (judicial) foreclosure. While a second mortgagee is a proper and in a sense even a necessary party to a proceeding to foreclose a first mortgage on real property, he is not an indispensable party, because a valid decree may be made, as between the mortgagor and the first mortgagee, without regard to the second mortgage; but the consequence of a failure to make the second mortgagee a party to the proceeding is that the lien of the second mortgagee on the equity of redemption is not affected by the decree of foreclosure.¹⁵

A cause of action is the act or omission by which a party violates the right of another.¹⁶ A cause of action exists if the following elements are present: (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the right of plaintiff or constituting a breach of the obligation of defendant to the plaintiff for which the latter may maintain an action for recovery of damages.¹⁷ In view of the foregoing discussions, we find that respondents do not have a cause of action against Atty. Ana Liza Luna for the delivery of the subject amounts on the basis of Section 4, Rule 68 of the Rules of Court, for the reason that the foregoing Rule does not apply to extrajudicial foreclosure of mortgages.

In Katon v. Palanca, Jr.,¹⁸ we held that where prescription, lack of jurisdiction or failure to state a cause of action clearly appears from the complaint filed with the trial court, the action may be dismissed motu proprio, even if the case has been elevated for review on different grounds. However, while the case should indeed be dismissed insofar as Atty. Luna is concerned, the same is not necessarily true with respect to Monzon. Other than respondents’ prayer that the amount due to respondents be delivered by Atty. Luna to them, they also pray for a judgment declaring Monzon liable for such amounts. Said prayer, as argued by Monzon herself, may constitute a cause of action for collection of sum of money against Monzon.

The rule is now settled that a mortgage creditor may elect to waive his security and bring, instead, an ordinary action to recover the indebtedness with the right to execute a judgment thereon on all the properties of the debtor including the subject matter of the mortgage, subject to the qualification that if he fails in the remedy elected by him, he cannot pursue further the remedy he has waived.¹⁹

However, due to the fact that construing respondents’ Petition for Injunction to be one for a collection of sum of money would entail a waiver by the respondents of the mortgage executed over the subject properties, we should proceed with caution before making such construction. We, therefore, resolve that upon the remand of this case to the trial court, respondents should be ordered to manifest whether the Petition for Injunction should be treated as a complaint for the collection of a sum of money.

If respondents answer in the affirmative, then the case shall proceed with the presentation of the evidence for the defense. If Monzon would be successful in proving her defense of dacion en pago, there would, in effect, be a double sale of the mortgaged properties: the same properties were sold to both respondents and to herein intervenor Addio Properties, Inc. If, pursuant to the rules on double sales, respondents are entitled to the properties, their remedy is to file the proper action to recover possession. If, pursuant to said rules, Addio Properties, Inc. is entitled to the properties, respondents’ remedy is to file an action for damages against Monzon.

If respondents answer in the negative, the case shall be dismissed, without prejudice to the exercise of respondents’ rights as mortgage creditors. If respondents’ mortgage contract was executed before the execution of the mortgage contract with Addio Properties, Inc., respondents would be the first mortgagors. Pursuant to Article 2126²⁰ of the Civil Code, they would be entitled to foreclose the property as against any subsequent possessor thereof. If respondents’ mortgage contract was executed after the execution of the mortgage contract with Addio Properties, Inc., respondents would be the second mortgagors. As such, they are entitled to a right of redemption pursuant to Section 6 of Act No. 3135, as amended by Act No. 4118.

WHEREFORE, the Decision of the Court of Appeals dated 27 September 2005 and its Resolution dated 7 March 2006 are REVERSED and SET ASIDE. The Petition for Injunction in Civil Case No. TG-2069 is hereby ordered DISMISSED insofar as Atty. Ana Liza Luna is concerned. The Petition for Injunction in Civil Case No. TG-2069, insofar as petitioner Teresita Monzon is concerned, is ordered REMANDED to the Regional Trial Court of Tagaytay City for further proceedings. Upon such remand, the Regional Trial Court of Tagaytay City shall issue an Order to respondents, the spouses James and Maria Rosa Nieves Relova and the spouses Bienvenido and Eufracia Perez, to manifest whether the Petition for Injunction should be treated as a complaint for the collection of a sum of money.

If respondents answer in the affirmative, the Regional Trial Court shall set the case for hearing for the presentation of the evidence for the defense. If respondents answer in the negative, the case shall be dismissed, without prejudice to the exercise of respondents’ rights as mortgage creditors. No costs.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ ANTONIO EDUARDO B. NACHURA
Associate Justice Associate Justice

RUBEN T. REYES
Associate Justice

A T T E S T A T I O N

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

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¹ Penned by Associate Justice Roberto A. Barrios with Associate Justices Mario L. Guariña III and Santiago Javier Ranada concurring; rollo, pp. 17-23.

² Rollo, p. 67.

³ Records p. 71.

⁴ Id. at 69.

⁵ Id. at 67.

⁶ Please take note that this Court has issued a new rule governing pre-trials.

⁷ Regalado, Remedial Law Compendium, Volume I (1999 Edition), p. 169.

⁸ G.R. No. 62370, 30 January 1990, 181 SCRA 583, 587.

⁹ Herrera, Remedial Law, Rules 1-22 (2007 Ed.) pp. 807-808.

¹⁰ Id., citing Cathay Pacific Airways Ltd. v. Romillo, Jr., 225 Phil. 397, 401 (1986); Consiquien v. Court of Appeals, G.R. Nos. 56073 & 58819, 20 August 1990, 188 SCRA 619, 627.

¹¹ AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL-ESTATE MORTGAGES.

¹² AN ACT TO AMEND ACT NUMBERED THIRTY-ONE HUNDRED AND THIRTY-FIVE, ENTITLED "AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL POWERS INSERTED IN OR ANNEXED TO REAL-ESTATE MORTGAGES."

¹³ 334 Phil. 671, 675 (1997).

¹⁴ Now Sections 27, 29 and 34 of Rule 39, Rules of Court.

¹⁵ Feria and Noche, Civil Procedure Annotated, Rules 39-71 (2001 Ed.), p. 569.

¹⁶ Rules of Court, Rule 2, Section 2.

¹⁷ Dulay v. Court of Appeals, 313 Phil. 9, 20 (1995).

¹⁸ G.R. No. 151149, 7 September 2004, 437 SCRA 565.

¹⁹ Korea Exhange Bank v. Filkor Business Integrated, Inc., 430 Phil. 170, 175 (2002).

²⁰ Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.

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