G.R. No. 81788 December 15, 1989
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS, HON. NICOLAS GALING, Presiding Judge of Branch 166, Regional Trial Court, National Capital Judicial Region, Pasig, Metro Manila, VICTORIA FARMS, INC., SPOUSES EDWARD HOWARD LEONG and SOLEDAD M. LEONG, SPOUSES JESUS Q. TAN and EUFROSINA G. TAN, and SPOUSES RAUL ALCANTARA and ANGELITA T. ALCANTARA, respondents.

FACTS

Private respondents Victoria Farms, Inc. and its sureties obtained multi-million peso loans from petitioner NIDC, secured by various mortgage and security agreements. In 1986, the debtors claimed full payment of their obligations and demanded the cancellation of their mortgages. Upon NIDC’s failure to comply, they filed a complaint for rescission of contract and annulment of mortgage. NIDC, then in the process of dissolution with its records in disarray and familiar personnel retired, faced difficulties in preparing a responsive pleading. After being served summons, NIDC’s counsel filed motions for extension of time, citing the need to locate documents and address jurisdictional issues regarding service of summons. The trial court, however, adopted an unduly strict stance. It initially granted a short extension but subsequently denied further reasonable requests, ultimately declaring NIDC in default for failing to file an answer within the court’s computed period. An ex parte proceeding was hastily conducted, resulting in a default judgment declaring the debt fully paid and ordering the surrender of the mortgaged title.

ISSUE

Whether the trial court committed grave abuse of discretion in declaring NIDC in default, thereby depriving it of due process.

RULING

Yes. The Supreme Court granted the petition, annulling the default judgment and the appellate court’s affirmance. The legal logic centers on the abuse of discretion in the denial of due process. While a motion for extension is discretionary, such discretion must be exercised judiciously, considering the circumstances of the case. Here, NIDC, a government financial institution defending a substantial monetary claim, was undergoing dissolution—a fortuitous event that legitimately hampered its ability to promptly answer. Its counsel’s requests for extension were based on valid grounds: the chaotic state of records and the need to properly raise a jurisdictional defense regarding improper service of summons. The trial court’s rigid adherence to technicalities, including an error in computing the reglementary period and its arbitrary denial of a reasonable extension request, was unjustified. This undue haste effectively foreclosed NIDC’s right to be heard on the merits, constituting a denial of fundamental due process. Consequently, the resulting default judgment was a nullity. The Court emphasized that under such exceptional circumstances, liberality is warranted to serve the higher interest of justice, allowing a full hearing on the substantive issues of debt payment and mortgage validity. The case was remanded for trial on the merits.