G.R. No. L-28017 July 15, 1975
PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, ADMINISTRATOR OF THE TESTATE ESTATE OF CHARLES NEWTON HODGES, petitioner-appellant, vs. WILLIAM PFLEIDER, AND THE HONORABLE COURT OF APPEALS, respondent-appellee.

FACTS

On February 6, 1941, William Pfleider, representing the Mustavit Farm Company, executed a deed of sale over two parcels of land and other properties in favor of Charles Newton Hodges for P10,000. The following day, Hodges leased the same properties back to Pfleider. In 1953, Hodges filed an action for recovery of possession and unpaid rentals (Civil Case No. 2860). Pfleider counterclaimed, alleging the transaction was an equitable mortgage, not a sale. While this case was pending, the parties executed a “Contract to Sell” the properties on installment in 1954. Subsequently, Pfleider withdrew his counterclaim, and a decision was rendered in 1954 ordering him to surrender possession and pay rentals and damages to Hodges. This judgment became final.
In 1958, Pfleider filed a new action against Hodges, praying for the declaration of nullity of the original 1941 deed of sale as an iniquitous pact and for reconveyance, or alternatively, for enforcement of the 1954 Contract to Sell. The Court of First Instance dismissed the complaint on grounds of res judicata, but the Supreme Court, in a prior appeal, set aside the dismissal and remanded the case for trial on the amended complaint. After trial, the Court of Appeals affirmed the trial court’s decision declaring the 1941 deed of sale null and void ab initio. Hodges’ estate appealed to the Supreme Court.

ISSUE

Whether the action for the declaration of nullity of the 1941 deed of sale is barred by the prior final judgment in Civil Case No. 2860 on the ground of res judicata.

RULING

Yes, the action is barred by res judicata. The Supreme Court reversed the decision of the Court of Appeals. The legal logic is anchored on the principle that a final judgment on the merits rendered by a court of competent jurisdiction constitutes an absolute bar to a subsequent action involving the same parties, subject matter, and cause of action. All requisites for res judicata are present. First, there was a final former judgment in Civil Case No. 2860. Second, the Court of First Instance had jurisdiction over that case. Third, the 1954 judgment was on the merits, as it ordered specific relief based on the lease contract and the withdrawal of the counterclaim. Fourth, there is identity of parties (Hodges and Pfleider), subject matter (the two parcels of land), and cause of action.
The cause of action in the present case, seeking nullity of the 1941 deed, is the same cause that was litigated and could have been adjudicated in the prior case. Pfleider’s counterclaim in Civil Case No. 2860 explicitly put in issue the true nature of the transaction, asserting it was a loan with mortgage. By voluntarily withdrawing that counterclaim and allowing a judgment for recovery of possession and rentals based on the lease (a contract derivative of the sale) to become final, Pfleider is now estopped from re-litigating the validity of the very sale from which the lease obligations arose. The subsequent 1954 Contract to Sell did not create a new cause of action for nullity; it was a separate executory agreement. Therefore, the finality of the 1954 judgment in Civil Case No. 2860 bars the present action for annulment.