G.R. No. L-21442; August 31, 1966
SALUD S. PAPA, plaintiff and appellant, vs. GERVACIO S. BANAAG, defendant and appellee.

FACTS

On December 9, 1960, defendant Gervacio S. Banaag obtained a P400.00 loan from plaintiff Salud S. Papa, payable with interest within 60 days, and executed a chattel mortgage on his piano as security. Alleging default, Papa initiated extrajudicial foreclosure in May 1961. Banaag filed Civil Case No. Q-6004 to prevent the foreclosure, claiming Papa had granted him unlimited time to pay. In her answer, Papa denied granting an extension and set up counterclaims for moral damages (P8,000.00), actual expenses (P200.00), and attorney’s fees (P200.00). Case No. Q-6004 was dismissed on August 27, 1962, without costs. On December 3, 1962, Papa filed the present action (Civil Case No. 52464) to recover: 1) P456.00 (principal and interest); 2) P4,590.00 as actual/compensatory damages from Case No. Q-6004; 3) P10,000.00 as moral damages; 4) P1,000.00 as exemplary damages; and 5) P2,000.00 as attorney’s fees. Banaag moved to dismiss, arguing lack of cause of action and release, which was denied. He then filed an answer asserting the defenses of res judicata, lack of cause of action, and release, with counterclaims for damages and attorney’s fees. The trial court, after ordering memoranda on res judicata, dismissed Papa’s complaint, holding the decision in Case No. Q-6004 constituted res judicata and that her claims were compulsory counterclaims barred from being raised anew. It also ordered Papa to pay Banaag P500.00 as attorney’s fees and costs.

ISSUE

Whether the dismissal of Civil Case No. Q-6004 bars the present action for the recovery of the loan and associated damages on the ground of res judicata, particularly regarding compulsory counterclaims.

RULING

The Supreme Court partially affirmed and partially set aside the trial court’s decision. It held that:
1. The claim for the loan principal and interest (the first cause of action) is NOT barred by res judicata. While it arose from the same transaction as Case No. Q-6004 and would ordinarily be a compulsory counterclaim, the Chattel Mortgage Law grants the creditor a substantive right to extrajudicial foreclosure. This right is not repealed by the Rules on compulsory counterclaims. Furthermore, since Banaag (the debtor) prevented the extrajudicial foreclosure by refusing to surrender the piano and by filing the prior case, he cannot now limit Papa to that foreclosed remedy. The obligation is akin to an alternative one under Article 1205 of the Civil Code; since one option (extrajudicial foreclosure) was made impossible by the debtor’s fault, the creditor may pursue the other (judicial action for collection).
2. The claims for actual/compensatory damages, moral damages, and exemplary damages (the second, third, and fourth causes of action) ARE barred by res judicata as compulsory counterclaims. These damages were necessarily connected to and arose from the filing of Case No. Q-6004. Under Section 4, Rule 9 of the Revised Rules of Court, they should have been asserted as compulsory counterclaims in that prior case and are now barred.
The case was remanded to the lower court for further proceedings regarding the first cause of action (collection of the loan).