G.R. No. 96921 . January 29, 1993.
DEVELOPMENT BANK OF THE PHILIPPINES, NATIONAL DEVELOPMENT COMPANY and NATIONAL STEEL CORPORATION, petitioners, vs. JUDGE AMIR PUNDOGAR, in his capacity as Presiding Judge of the Regional Trial Court of Iligan City, 12th Judicial Region, Branch III, FERNANDO JACINTO, JACINTO STEEL, INC., and ILIGAN INTEGRATED STEEL MILLS, INC., respondents.

FACTS

This is a special civil action for certiorari seeking to annul the Regional Trial Court’s Orders dated August 31, 1990 and December 27, 1990, which denied petitioners’ motion to dismiss and motion for reconsideration, respectively. The case involves the Iligan Integrated Steel Mills, Inc. (IISMI), a corporation established in 1963 with investments from the Jacinto family and government entities (GSIS, SSS, NASSCO) to implement an integrated steel project. IISMI obtained loans from the Development Bank of the Philippines (DBP), secured by mortgages on all its assets. Due to defaults in loan payments, IISMI filed an injunction suit (Civil Case No. 1701) in 1971 against government defendants, alleging that its inability to meet obligations resulted from government violations of commitments. The trial court initially issued a preliminary injunction, but after proceedings ordered by the Supreme Court, the lower court dissolved the injunction on January 10, 1974, finding that IISMI’s financial failure was due to corporate mismanagement and fraudulent practices by the Jacinto-controlled management, including diversion of profits, unjustified pricing schemes, and “window dressing” of financial statements. The court dismissed IISMI’s complaint with prejudice on February 25, 1974, for failure to appear at pre-trial. After the dismissal became final, DBP extrajudicially foreclosed the mortgages on February 26, 1974, and consolidated ownership on March 24, 1975. Fourteen years later, on December 29, 1989, IISMI, Fernando Jacinto, and Jacinto Steel, Inc. filed a new complaint (Civil Case No. 111-1549) seeking to annul the foreclosure and recover the properties. Petitioners moved to dismiss on grounds of lack of jurisdiction, failure to state a cause of action, prescription, laches, and res judicata.

ISSUE

Whether the Regional Trial Court committed grave abuse of discretion in denying the motion to dismiss the complaint, which sought to annul the 1974 foreclosure and recover properties, based on the grounds of prescription, laches, and res judicata.

RULING

Yes, the Regional Trial Court committed grave abuse of discretion. The Supreme Court granted the petition and dismissed the complaint in Civil Case No. 111-1549.
1. On Prescription and Laches: The action to annul the foreclosure sale, filed fourteen years after DBP consolidated ownership in 1975, is barred by prescription. An action to annul a voidable contract prescribes in four years (Article 1391, Civil Code), while an action based on fraud prescribes in four years from discovery (Article 1146, Civil Code). Respondents’ claim of fraud in the foreclosure was discoverable at the time of the sale in 1974. Even if the action were imprescriptible, it is barred by laches due to respondents’ unreasonable delay of fourteen years in asserting their rights, during which petitioners and the government operated and invested in the steel plant, prejudicing third parties like the National Steel Corporation.
2. On Res Judicata: The dismissal with prejudice of Civil Case No. 1701 in 1974 constitutes res judicata. The prior case involved the same parties (IISMI vs. DBP, et al.) and the same cause of action—challenging the validity of the foreclosure based on alleged government violations and mismanagement. The lower court’s 1974 Order, which became final, conclusively determined that IISMI’s defaults were due to its own mismanagement, not government actions, and justified the foreclosure. Respondents cannot relitigate these issues.
3. On Failure to State a Cause of Action: The complaint’s allegations, even if true, do not establish a valid cause of action. Respondents’ claim that the foreclosure was void due to lack of consideration (arguing DBP’s loans were equity investments) is contradicted by the 1974 court findings that the loans were legitimate obligations. The claim of fraud in the foreclosure is barred by prior judgment and prescription.
The Supreme Court emphasized that equity must be applied in favor of the government, which had invested heavily in the steel project and suffered losses due to respondents’ mismanagement. Allowing the suit after fourteen years would undermine stability in property rights and judicial finality.