G.R. No. 195592 ; September 5, 2012
MAGDIWANG REALTY CORPORATION, RENATO P. DRAGON and ESPERANZA TOLENTINO, Petitioners, vs. THE MANILA BANKING CORPORATION, substituted by FIRST SOVEREIGN ASSET MANAGEMENT (SPV-AMC), INC., Respondent.

FACTS

The Manila Banking Corporation (TMBC) filed a complaint for sum of money against Magdiwang Realty Corporation and its officers, Renato Dragon and Esperanza Tolentino, for defaulting on five promissory notes executed between 1976 and 1982. Petitioners were served summons via substituted service on September 19, 2000. The Rules required a responsive pleading within 15 days, or by October 4, 2000. Petitioners filed a Motion for Leave to Admit Attached Motion to Dismiss only on October 12, 2000, beyond the reglementary period. The RTC declared petitioners in default, treating their motion as a mere scrap of paper. The CA affirmed this order, and the Supreme Court subsequently denied a petition challenging it. The RTC then proceeded with an ex parte presentation of evidence and rendered a decision in favor of TMBC, ordering petitioners to pay the principal sums, interest, penalty charges, and attorney’s fees.

ISSUE

The core issue is whether the Court of Appeals erred in affirming the RTC’s decision that held petitioners solidarily liable for the debts and awarded attorney’s fees, despite petitioners’ claims of novation and lack of cause of action against the individual defendants.

RULING

The Supreme Court denied the petition and affirmed the CA’s decision. The legal logic proceeds from the consequences of a valid declaration of default. Upon being validly declared in default, petitioners lost their standing in court and forfeited their right to present evidence and to notice of further proceedings. The RTC’s factual findings, derived from the ex parte presentation of evidence, thus became conclusive upon petitioners. On the merits of the awarded obligations, the Court found the promissory notes clearly established the solidary liability of the corporation and the individual signatories, Dragon and Tolentino, as accommodation parties. Their liability is direct and primary, not merely accessory. The defense of novation was correctly rejected as petitioners, being in default, could not introduce this claim, and no evidence of a subsequent agreement extinguishing the original obligations was presented. Finally, the award of attorney’s fees was deemed proper under Article 2208(2) of the Civil Code, as the petitioners’ failure to pay their longstanding debts compelled TMBC to litigate to protect its interest. The default order, having attained finality, barred any relitigation of the factual bases for the money judgment.