G.R. No. L-50087 June 30, 1980
MANUEL S. LAUREL and LILIA H. LAUREL, petitioners, vs. HON. EMETERIO CUI and BA FINANCE CORPORATION, respondents.

FACTS

Petitioners Manuel and Lilia Laurel purchased a Toyota Tamaraw, executing a chattel mortgage and promissory note in favor of Delta Motor Sales Corporation, which assigned the note to respondent BA Finance Corporation. Upon alleged default in monthly installments, BA Finance filed a complaint for replevin or payment of the unpaid balance. Summons was served on February 15, 1978. The Laurels failed to answer, leading the respondent Judge to declare them in default on June 19, 1978, and subsequently render an exparte decision ordering them to pay BA Finance the sum of P15,591.83 plus interest, attorney’s fees, and liquidated damages. The decision contained errors, including an incorrect service date and lacked a date itself.
The Laurels, claiming they received notice of the decision on September 6, 1978, filed an “Answer with Counterclaim” the next day, which the court struck off the records for being filed out of time. They then filed a verified motion for new trial, alleging that BA Finance had secured the judgment through fraud by suppressing evidence of their substantial payments totaling P12,300, which drastically reduced the actual balance owed, and by deceiving them into not answering the complaint with a promise to withdraw it if they updated their account. The respondent Judge denied this motion and a subsequent motion for reconsideration.

ISSUE

Whether the respondent Judge committed grave abuse of discretion in denying the petitioners’ motion for new trial, thereby perpetuating a manifest injustice.

RULING

Yes. The Supreme Court granted the petition for certiorari to prevent a manifest injustice. The Court acknowledged that, strictly speaking, a motion for new trial was an improper remedy for a defendant declared in default, whose correct recourse is a petition for relief under Rule 38. However, the Court emphasized that the respondent Judge leaned on an overly rigid legalistic approach instead of equity. The substance of the verified motion for new trial, filed within the reglementary period from notice of the judgment, contained allegations constitutive of a petition for relief—specifically, fraud (suppression of payment evidence) and a meritorious defense (substantial overstatement of the debt).
During the Supreme Court hearing, BA Finance’s counsel admitted the Laurels had made payments, confirming the balance was less than the judgment award. Denying relief would result in BA Finance’s unjust enrichment. Therefore, the Court ruled the respondent Judge should have treated the motion as a petition for relief under Rule 38. His failure to do so, under the compelling circumstances of fraud and a clear showing of a meritorious defense, constituted grave abuse of discretion. The orders of default, the decision, and subsequent orders were set aside, and the petitioners were granted leave to file their answer.