G.R. No. 106795 November 16, 1999
STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF APPEALS and ALLIED BANKING CORPORATION, respondents.

FACTS

Petitioner State Investment House, Inc. (SIHI) filed a foreclosure of mortgage case (Civil Case No. 59449) against Cheng Ban Yek Co., Inc. (CBY) and others, impleading respondent Allied Banking Corporation (Allied) as a defendant holding a subordinate mortgage interest. Allied filed an Answer containing a permissive counterclaim for damages against SIHI, alleging that SIHI, through its control of CBY’s management, committed irregularities causing substantial losses to CBY and its creditors, including Allied. While the case was pending, SIHI executed a Deed of Assignment transferring all its rights and interests in the subject obligations and mortgages to Fil-Nippon for P33 million. Fil-Nippon then filed a Motion for Substitution to replace SIHI as the party-plaintiff.
Allied opposed the substitution, arguing its counterclaim for damages was directed specifically against SIHI and remained unresolved. The Regional Trial Court granted the substitution and discharged SIHI from the case. Allied successfully challenged this order via a petition for certiorari before the Court of Appeals, which set aside the RTC’s orders, ruling that substitution was improper given the pending counterclaim against SIHI. SIHI elevated the case to the Supreme Court.

ISSUE

Whether the Regional Trial Court correctly allowed the substitution of SIHI by its assignee, Fil-Nippon, as party-plaintiff over the opposition of Allied, which had a pending permissive counterclaim for damages against SIHI.

RULING

The Supreme Court denied SIHI’s petition and affirmed the Court of Appeals. The substitution was improper. A permissive counterclaim is essentially an independent cause of action. Allied’s counterclaim for damages arising from SIHI’s alleged mismanagement of CBY was a distinct claim that survived the assignment of SIHI’s credit. Since this claim was directed against SIHI personally and remained pending, SIHI could not be simply dropped as a party over Allied’s objection. The Court emphasized that Fil-Nippon, as the assignee, was not an indispensable party to the foreclosure suit; it could have been joined as an additional plaintiff or allowed to intervene, but this did not necessitate SIHI’s discharge.
Crucially, the Court applied Article 1293 of the Civil Code on novation. The assignment effectively substituted a new debtor (Fil-Nippon) for the original debtor (SIHI) concerning the counterclaim. Such a substitution requires the consent of the creditor, which in this context was Allied as the claimant. Allied expressly withheld its consent. The fact that the original restructuring agreement among SIHI and other creditors allowed assignments was irrelevant, as Allied was not a party to that agreement and was not bound by its terms. Therefore, SIHI remained the real party-in-interest against whom the counterclaim must be pursued, and the trial court acted with grave abuse of discretion in ordering its discharge from the case.