GR 165767; (November, 2005) (Digest)

G.R. No. 165767 November 29, 2005
SPS. WILLIAM G. FRIEND, MARIA RENEE FRIEND and JOHN DOE, Petitioners, vs. UNION BANK OF THE PHILIPPINES, Respondent.

FACTS

Spouses William and Maria Renee Friend obtained a loan from Union Bank to purchase a Hyundai Starex van, executing a promissory note secured by a chattel mortgage on the vehicle. They subsequently defaulted on their payments. Despite demands, they failed to pay or surrender the vehicle for foreclosure. The bank filed a collection suit with a prayer for a writ of replevin. The writ was issued but could not be implemented as the sheriff found the vehicle was no longer in the spouses’ possession; William Friend admitted to having returned it to the car dealer, Drive Motors, Inc.
The spouses failed to file their answer within the reglementary period. The Regional Trial Court granted Union Bank’s motion to declare them in default, allowed the bank to present evidence ex parte, and subsequently rendered a judgment ordering the spouses to pay the outstanding loan balance, attorney’s fees, and liquidated damages. The spouses, through new counsel, appealed to the Court of Appeals, arguing they were denied due process due to their former counsel’s negligence in not filing an answer and that they should not be held liable under the loan agreement.

ISSUE

The core issues were: (1) whether the petitioners were denied due process and could be relieved from the negligence of their counsel; and (2) whether they remained liable under the promissory note despite having parted with the mortgaged vehicle.

RULING

The Supreme Court denied the petition, affirming the Court of Appeals’ modified decision. On the procedural issue, the Court held that the general rule that a client is bound by the negligence of counsel applies. The exceptions—such as gross negligence depriving due process—were not present. The essence of due process is a reasonable opportunity to be heard. Here, the spouses were afforded this opportunity through their counsel’s seasonable filing of a notice of appeal, which opened the case for comprehensive review by the appellate court where they could raise their defenses. Relaxing the rules here would set a dangerous precedent allowing parties to invalidate adverse decisions simply by alleging counsel’s negligence.
On the substantive issue, the Court ruled that the spouses’ liability under the promissory note remained solid and separate from the chattel mortgage. A chattel mortgage is merely an accessory security. The principal obligation to pay, arising from the promissory note, persists regardless of the disposition of the mortgaged vehicle. Their argument that Drive Motors facilitated payments and the bank was informed of the vehicle’s transfer did not exculpate them. The obligation rested primarily on them as signatories to the note. Their reliance on the dealer, especially after learning of bounced checks, did not absolve them of their direct contractual duty to pay the bank.