Cosmic Lumber Corp. vs. Court of Appeals

G.R. No. 114311 (November 29, 1996)

Cosmic Lumber Corp. won its case as Supreme Court voided an unauthorized compromise agreement.

Facts:

Cosmic Lumber Corporation, through its General Manager, executed a Special Power of Attorney on January 28, 1985, appointing Paz G. Villamil-Estrada as its attorney-in-fact. The purpose of this appointment was to initiate legal action for the ejectment of squatters from Lots 9127 and 443, covered by Transfer Certificates of Title (TCT) Nos. 37648 and 37649, to allow the corporation to take possession of the properties. On March 11, 1985, Villamil-Estrada filed an ejectment case against Isidro Perez in the Regional Trial Court of Dagupan, which was docketed as Civil Case No. D-7750.

On November 25, 1985, Villamil-Estrada entered into a Compromise Agreement with Perez, which included the following terms: recognition of Perez's possession of a 333 square meter portion of Lot 443, payment of P26,640.00 to Cosmic Lumber Corporation, and the stipulation that Perez would bear the costs of subdivision and registration. The trial court approved this Compromise Agreement on November 27, 1985, and a judgment was rendered accordingly.

Despite the judgment becoming final and executory, it was not executed within the five-year period due to Cosmic Lumber's inability to produce the owner's duplicate copy of TCT No. 37649, which was necessary for the segregation of the sold portion. On January 25, 1993, Perez filed a complaint to revive the judgment, leading Cosmic Lumber to discover the existence of the Compromise Agreement.

Cosmic Lumber contended that the agreement was fraudulent and void because Villamil-Estrada lacked the authority to sell or dispose of the corporation's property. They argued that her authority was limited to filing an ejectment case and that a Board Resolution was required for any sale of corporate property. The Court of Appeals dismissed Cosmic Lumber's complaint for annulment, stating that the alleged lack of authority could be raised as a defense in the execution of the judgment but not as a ground for annulment.

Legal Issues:

  1. Did Villamil-Estrada have the authority to enter into the Compromise Agreement that involved the sale of a portion of Cosmic Lumber's property?
  2. Is the Compromise Agreement and the judgment based on it void due to lack of authority and extrinsic fraud?
  3. Can Cosmic Lumber seek annulment of the judgment based on the void Compromise Agreement?

Arguments:

Petitioner (Cosmic Lumber Corporation):

  • Villamil-Estrada did not have the authority to sell or dispose of the property as her powers were limited to filing an ejectment case.
  • The Compromise Agreement was void because it was not authorized by a Board Resolution, which is required for corporate property transactions.
  • The agreement was entered into in bad faith, and the corporation was deceived, constituting extrinsic fraud.
  • The judgment based on the Compromise Agreement is null and void ab initio, as the trial court lacked jurisdiction to render a decision based on a void agreement.

Respondent (Court of Appeals and Isidro Perez):

  • The Court of Appeals found that the grounds for annulment (lack of jurisdiction, fraud, or illegality) were not established.
  • The alleged nullity of the Compromise Agreement could be raised as a defense in the execution of the judgment but not as a basis for annulment.
  • The trial court had jurisdiction over the case, and the judgment was valid despite the claims of lack of authority.

Court's Decision and Legal Reasoning:

The Supreme Court granted the petition, nullifying the decisions of the Court of Appeals and the Regional Trial Court. The Court held that Villamil-Estrada acted without authority in entering into the Compromise Agreement, which was not merely a procedural issue but a fundamental lack of authority that rendered the agreement void. The Court emphasized that a special power of attorney is required for the sale of real property, and such authority must be explicitly stated.

The Court further reasoned that the fraudulent actions of Villamil-Estrada constituted extrinsic fraud, as they prevented Cosmic Lumber from contesting the agreement. The Court cited previous jurisprudence establishing that a judgment based on a compromise entered into by an attorney without specific authority is void and can be challenged in any proceeding.

The ruling clarified that the lack of authority to sell the property impaired the trial court's jurisdiction, making the judgment based on the Compromise Agreement void. The Court also noted that the principal is not bound by the actions of an agent who is acting in bad faith or for personal gain.

Significant Legal Principles Established:

  • A special power of attorney is required for the sale of real property, and such authority must be explicitly stated.
  • A judgment based on a compromise agreement entered into by an attorney without specific authority is void and can be annulled.
  • Extrinsic fraud occurs when a party is prevented from fully presenting their case due to deceptive practices by the opposing party.