G.R. No. 172175 ; October 9, 2006
SPS. EXPEDITO ZEPEDA AND ALICE D. ZEPEDA, petitioners, vs. CHINA BANKING CORPORATION, respondent.

FACTS

Spouses Expedito and Alice Zepeda obtained a loan from China Banking Corporation (Chinabank), secured by a real estate mortgage. After encountering payment difficulties, they requested and allegedly were granted a loan restructuring. Despite this, Chinabank extrajudicially foreclosed the mortgaged property in 2001, consolidated ownership after the petitioners failed to redeem it, and was issued a certificate of sale. The spouses filed a complaint for nullification of the foreclosure, alleging that the bank acted in bad faith by foreclosing despite the approved restructuring, that the foreclosure failed to comply with posting and publication requirements, and that they signed the loan documents in blank with unilaterally fixed interest rates.
Chinabank filed a motion to dismiss and, after its denial, an answer with special affirmative defenses. It also submitted written interrogatories to the petitioners. The Regional Trial Court (RTC) issued orders denying Chinabank’s affirmative defenses and motion to expunge the complaint, and directed the case to pre-trial. Chinabank filed a petition for certiorari with the Court of Appeals (CA), which granted the petition. The CA ruled that the RTC gravely abused its discretion, holding that the complaint stated no cause of action and that dismissal was warranted due to the petitioners’ bad faith in ignoring hearings and failure to answer the written interrogatories.

ISSUE

The primary issues are: (1) whether the complaint states a cause of action; and (2) whether the complaint should be dismissed for the petitioners’ failure to answer the respondent’s written interrogatories.

RULING

The Supreme Court granted the petition, reversing the CA. On the first issue, the Court held that the complaint sufficiently states a cause of action. A cause of action exists if, admitting the allegations in the complaint as true, the court can render a valid judgment in accordance with the prayer. The petitioners alleged that the foreclosure was void due to non-compliance with notice requirements and was conducted in bad faith despite an approved restructuring. If proven true, these allegations—that the restructuring modified the original obligation and that the foreclosure lacked proper notice—could justify nullification. The CA erred in concluding that the admission of non-redemption and consolidation of ownership negated a cause of action; these are matters of defense best resolved during a full trial on the merits.
On the second issue, the Court ruled that dismissal for failure to answer interrogatories under Rule 29, Section 3(c) of the Rules of Court is not mandatory but discretionary. The sanction of dismissal is the most severe and should be used only in extreme cases of contumacious refusal to obey court orders. Here, there was no showing of such refusal or that the trial court had issued an order compelling answers. The RTC did not act with grave abuse of discretion in proceeding to pre-trial instead of dismissing the case. The proper remedy for Chinabank was to move for an order to compel answers, not immediate dismissal. The case was remanded to the RTC for further proceedings.