Armed Forces of the Philippines Mutual Benefit Association, Inc. v. Court of Appeals
REITERATIONFacts
The Antecedents: B.E. Ritz Mansion International Corporation (B.E. Ritz) contracted to sell an office building (Building E) and ten condominium units to EBR Realty, Inc. (EBRRI). EBRRI paid substantial amounts but B.E. Ritz failed to complete construction on time. EBRRI filed a complaint for specific performance/rescission before the Housing and Land Use Regulatory Board (HLURB). Subsequently, EBRRI assigned its rights in Building E and the condominium units to Armed Forces of the Philippines Mutual Benefit Association, Inc. (AFPMBAI) by way of security. AFPMBAI later filed a civil case against Eurotrust Capital Corporation and others, amending its complaint to include EBRRI and B.E. Ritz as defendants, and seeking recovery of treasury notes and payment of damages, with a writ of preliminary attachment issued against B.E. Ritz's assets, including Building E and the condominium units. Procedural History: The HLURB declared the contracts to sell for the condominium units rescinded and ordered B.E. Ritz to execute a deed of absolute sale for Building E in favor of EBRRI. In the civil case, the trial court issued a writ of attachment. AFPMBAI and B.E. Ritz entered into a compromise agreement where B.E. Ritz acknowledged borrowing funds from Eurotrust which came from AFPMBAI, and agreed to return the amounts and be absolved from claims related to these funds. B.E. Ritz and its financiers agreed to pay AFPMBAI P20,000,000.00 and to sell Building E, paying P10,000,000.00 from the proceeds. AFPMBAI waived its rights to the condominium units and Building E in favor of B.E. Ritz. AFPMBAI and B.E. Ritz filed a joint motion for approval of the compromise agreement and rendition of a partial judgment. The trial court approved the compromise agreement and lifted the writ of attachment on all properties except Building E. EBRRI, not being furnished a copy of the agreement or notified of the decision, filed a motion to partially set aside the judgment concerning Building E, arguing it violated Article 1381(4) and 1387(2) of the Civil Code as it involved property under litigation and was in fraud of creditors. The trial court denied the motion, holding that Building E was not the subject of the main case, that EBRRI was not a party to the compromise, and that a compromise agreement cannot affect third persons. EBRRI filed a petition for review on certiorari with the Supreme Court, which was referred to the Court of Appeals. The Court of Appeals granted EBRRI's petition, set aside the trial court's order, and partially set aside the compromise agreement concerning Building E, finding the trial court's order final and appealable, and that a non-party prejudiced by a compromise agreement could seek its rescission. AFPMBAI's motion for reconsideration was denied. The Petition: AFPMBAI filed the instant petition for review on certiorari, contending that a petition for review on certiorari was not the proper remedy from the trial court's interlocutory order, that it violated Circular No. 2-90, that its right to due process was violated, and that EBRRI should have filed a separate action for rescission instead of collaterally attacking the compromise agreement.
Issue(s)
Whether a petition for review on certiorari is the proper remedy from an order denying a motion to set aside a partial judgment based on a compromise agreement, and whether a party not privy to a compromise agreement can seek its rescission or modification. Whether the Court of Appeals erred in setting aside the trial court's order and partially setting aside the compromise agreement concerning Building E. Whether the compromise agreement was executed with fraud and in violation of law. Whether AFPMBAI was denied due process.
Ruling
The petition for review on certiorari is DENIED, and the assailed Decision of the Court of Appeals is AFFIRMED. No costs.
Ratio Decidendi
On the propriety of the remedy and the right of a non-party to seek rescission: The Court held that while a compromise agreement, once judicially approved, has the force of a judgment and is generally not appealable, this rule applies to parties bound by it. However, persons not privy to the compromise agreement who are adversely affected or feel prejudiced thereby should not be precluded from invoking relief in the same proceedings. A motion to set aside the judgment to the extent they feel aggrieved is a proper remedy. If this motion is denied, an appeal from the order of denial, either under Rule 45 (petition for review on certiorari) or Rule 65 (certiorari), is permissible, especially considering the finality and susceptibility to execution of a compromise judgment, even if partial. The Court of Appeals correctly treated the trial court's order as final and appealable, and allowed EBRRI, as a non-party prejudiced by the compromise concerning Building E, to seek its rescission. On the nature of a compromise agreement and its effect on third parties: A compromise agreement is a contract that resolves disputes. Once judicially approved, it has the force of res judicata. However, a compromise agreement cannot affect third persons who are not parties to it. The trial court erred in stating that Building E was not the subject of the main case; while it was levied on attachment as B.E. Ritz's property, it was also the subject of litigation before the HLURB, with a decision directing B.E. Ritz to execute a deed of sale in favor of EBRRI. The compromise agreement, by including Building E, potentially prejudiced EBRRI's rights established by the HLURB decision. The Court found no error in EBRRI attacking the compromise agreement collaterally by filing a motion to set aside the judgment within the same proceedings. The compromise was directly related to the case pending before the trial court, which was the proper venue. Adjective law aims to facilitate justice, and it is better to dispose of cases on the merits rather than on technicalities that may result in injustice. Allowing EBRRI to intervene in the same proceedings prevents multiplicity of suits and ensures a full resolution of the case. On the alleged fraud and violation of law: The Court of Appeals correctly noted that the compromise agreement was executed after an adverse decision had been rendered against B.E. Ritz concerning Building E. This fact, coupled with the potential prejudice to EBRRI, gave rise to a presumption that the compromise agreement, insofar as it included Building E, was fraudulent and thus rescissible under Article 1381 of the Civil Code. The inclusion of Building E in the compromise agreement, which was the subject of litigation and a favorable decision for EBRRI, could be considered a contract referring to a thing under litigation entered into by the defendant (B.E. Ritz) without the knowledge and approval of the litigant (EBRRI), making it rescissible. Furthermore, the disposition of Building E could be in fraud of creditors, as EBRRI had a previous judgment in its favor. On the denial of due process: The Court dismissed AFPMBAI's claim of denial of due process. AFPMBAI was given the opportunity to be heard through its motion to dismiss the petition and its subsequent motion for reconsideration of the Court of Appeals' decision. The Court held that a party given the chance to be heard on its motion for reconsideration cannot claim a deprivation of due process.
Main Doctrine
A party not privy to a compromise agreement may seek its rescission or modification if prejudiced by its execution, and a denial of a motion to set aside a partial judgment based on such agreement may be appealed via a petition for review on certiorari or certiorari.