G.R. No.

L-29972 January 26, 1976

ROSARIO CARBONELL, petitioner,

vs.
HONORABLE COURT OF APPEALS, JOSE PONCIO, EMMA INFANTE and RAMON INFANTE, respondents.

MAKASIAR, J.

Petitioner seeks a review of the resolution of the Court of Appeals (Special Division of Five) dated
October 30, 1968, reversing its decision of November 2, 1967 (Fifth Division), and its resolution of
December 6, 1968 denying petitioner's motion for reconsideration.

The dispositive part of the challenged resolution reads:

Wherefore, the motion for reconsideration filed on behalf of appellee Emma Infante, is hereby granted
and the decision of November 2, 1967, is hereby annulled and set aside. Another judgement shall be
entered affirming in toto that of the court a quo, dated January 20, 1965, which dismisses the plaintiff's
complaint and defendant's counterclaim.

Without costs.

The facts of the case as follows:

Prior to January 27, 1955, respondent Jose Poncio, a native of the Batanes Islands, was the owner of the
parcel of land herein involve with improvements situated at 179 V. Agan St., San Juan, Rizal, having an
area of some one hundred ninety-five (195) square meters, more or less, covered by TCT No. 5040 and
subject to mortgage in favor of the Republic Savings Bank for the sum of P1,500.00. Petitioner Rosario
Carbonell, a cousin and adjacent neighbor of respondent Poncio, and also from the Batanes Islands, lived
in the adjoining lot at 177 V. Agan Street.

Both petitioners Rosario Carbonell and respondent Emma Infante offered to buy the said lot from Poncio
(Poncio's Answer, p. 38, rec. on appeal).

Respondent Poncio, unable to keep up with the installments due on the mortgage, approached
petitioner one day and offered to sell to the latter the said lot, excluding the house wherein respondent
lived. Petitioner accepted the offer and proposed the price of P9.50 per square meter. Respondent
Poncio, after having secured the consent of his wife and parents, accepted the price proposed by
petitioner, on the condition that from the purchase price would come the money to be paid to the bank.

Petitioner and respondent Jose Poncio then went to the Republic Savings Bank and secured the consent
of the President thereof for her to pay the arrears on the mortgage and to continue the payment of the
installments as they fall due. The amount in arrears reached a total sum of P247.26. But because
respondent Poncio had previously told her that the money, needed was only P200.00, only the latter
amount was brought by petitioner constraining respondent Jose Poncio to withdraw the sum of P47.00
from his bank deposit with Republic Savings Bank. But the next day, petitioner refunded to Poncio the
sum of P47.00.

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On January 27, 1955, petitioner and respondent Poncio, in the presence of a witness, made and
executed a document in the Batanes dialect, which, translated into English, reads:

CONTRACT FOR ONE HALF LOT WHICH I BOUGHT FROM

JOSE PONCIO

Beginning today January 27, 1955, Jose Poncio can start living on the lot sold by him to me, Rosario
Carbonell, until after one year during which time he will not pa anything. Then if after said one can he
could not find an place where to move his house, he could still continue occupying the site but he should
pay a rent that man, be agreed.

(Sgd) JOSE PONCIO

(Sgd.) ROSARIO CARBONELL
(Sgd) CONSTANCIO MEONADA
Witness

(Pp. 6-7 rec. on appeal).

Thereafter, petitioner asked Atty. Salvador Reyes, also from the Batanes Islands, to prepare the formal
deed of sale, which she brought to respondent Poncio together with the amount of some P400.00, the
balance she still had to pay in addition to her assuming the mortgaged obligation to Republic Savings
Bank.

Upon arriving at respondent Jose Poncio's house, however, the latter told petitioner that he could not
proceed any more with the sale, because he had already given the lot to respondent Emma Infants; and
that he could not withdraw from his deal with respondent Mrs. Infante, even if he were to go to jail.
Petitioner then sought to contact respondent Mrs. Infante but the latter refused to see her.

On February 5, 1955, petitioner saw Emma Infante erecting a all around the lot with a gate.

Petitioner then consulted Atty. Jose Garcia, who advised her to present an adverse claim over the land in
question with the Office of the Register of Deeds of Rizal. Atty. Garcia actually sent a letter of inquiry to
the Register of Deeds and demand letters to private respondents Jose Poncio and Emma Infante.

In his answer to the complaint Poncio admitted "that on January 30, 1955, Mrs. Infante improved her
offer and he agreed to sell the land and its improvements to her for P3,535.00" (pp. 38-40, ROA).

In a private memorandum agreement dated January 31, 1955, respondent Poncio indeed bound himself
to sell to his corespondent Emma Infante, the property for the sum of P2,357.52, with respondent Emma
Infante still assuming the existing mortgage debt in favor of Republic Savings Bank in the amount of
P1,177.48. Emma Infante lives just behind the houses of Poncio and Rosario Carbonell.

On February 2, 1955, respondent Jose Poncio executed the formal deed of sale in favor of respondent
Mrs. Infante in the total sum of P3,554.00 and on the same date, the latter paid Republic Savings Bank
the mortgage indebtedness of P1,500.00. The mortgage on the lot was eventually discharged.

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Informed that the sale in favor of respondent Emma Infante had not yet been registered, Atty. Garcia
prepared an adverse claim for petitioner, who signed and swore to an registered the same on February 8,
1955.

The deed of sale in favor of respondent Mrs. Infante was registered only on February 12, 1955. As a
consequence thereof, a Transfer Certificate of Title was issued to her but with the annotation of the
adverse claim of petitioner Rosario Carbonell.

Respondent Emma Infante took immediate possession of the lot involved, covered the same with 500
cubic meters of garden soil and built therein a wall and gate, spending the sum of P1,500.00. She further
contracted the services of an architect to build a house; but the construction of the same started only in
1959 years after the litigation actually began and during its pendency. Respondent Mrs. Infante spent
for the house the total amount of P11,929.00.

On June 1, 1955, petitioner Rosario Carbonell, thru counsel, filed a second amended complaint against
private respondents, praying that she be declared the lawful owner of the questioned parcel of land;
that the subsequent sale to respondents Ramon R. Infante and Emma L. Infante be declared null and
void, and that respondent Jose Poncio be ordered to execute the corresponding deed of conveyance of
said land in her favor and for damages and attorney's fees (pp. 1-7, rec. on appeal in the C.A.).

Respondents first moved to dismiss the complaint on the ground, among others, that petitioner's claim is
unenforceable under the Statute of Frauds, the alleged sale in her favor not being evidenced by a written
document (pp. 7-13, rec. on appeal in the C.A.); and when said motion was denied without prejudice to
passing on the question raised therein when the case would be tried on the merits (p. 17, ROA in the
C.A.), respondents filed separate answers, reiterating the grounds of their motion to dismiss (pp. 18-23,
ROA in the C.A.).

During the trial, when petitioner started presenting evidence of the sale of the land in question to her by
respondent Poncio, part of which evidence was the agreement written in the Batanes dialect
aforementioned, respondent Infantes objected to the presentation by petitioner of parole evidence to
prove the alleged sale between her and respondent Poncio. In its order of April 26, 1966, the trial court
sustained the objection and dismissed the complaint on the ground that the memorandum presented by
petitioner to prove said sale does not satisfy the requirements of the law (pp. 31-35, ROA in the C.A.).

From the above order of dismissal, petitioner appealed to the Supreme Court (G.R. No. L-11231) which
ruled in a decision dated May 12, 1958, that the Statute of Frauds, being applicable only to executory
contracts, does not apply to the alleged sale between petitioner and respondent Poncio, which
petitioner claimed to have been partially performed, so that petitioner is entitled to establish by parole
evidence "the truth of this allegation, as well as the contract itself." The order appealed from was thus
reversed, and the case remanded to the court a quo for further proceedings (pp. 26-49, ROA in the C.A.).

After trial in the court a quo; a decision was, rendered on December 5, 1962, declaring the second sale
by respondent Jose Poncio to his co-respondents Ramon Infante and Emma Infante of the land in
question null and void and ordering respondent Poncio to execute the proper deed of conveyance of said
land in favor of petitioner after compliance by the latter of her covenants under her agreement with
respondent Poncio (pp. 5056, ROA in the C.A.).

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On January 23, 1963, respondent Infantes, through another counsel, filed a motion for re-trial to adduce
evidence for the proper implementation of the court's decision in case it would be affirmed on appeal
(pp. 56-60, ROA in the C.A.), which motion was opposed by petitioner for being premature (pp. 61-64,
ROA in the C.A.). Before their motion for re-trial could be resolved, respondent Infantes, this time
through their former counsel, filed another motion for new trial, claiming that the decision of the trial
court is contrary to the evidence and the law (pp. 64-78, ROA in the C.A.), which motion was also
opposed by petitioner (pp. 78-89, ROA in the C.A.).

The trial court granted a new trial (pp. 89-90, ROA in the C.A.), at which re-hearing only the respondents
introduced additional evidence consisting principally of the cost of improvements they introduced on the
land in question (p. 9, ROA in the C.A.).

After the re-hearing, the trial court rendered a decision, reversing its decision of December 5, 1962 on
the ground that the claim of the respondents was superior to the claim of petitioner, and dismissing the
complaint (pp. 91-95, ROA in the C.A.), From this decision, petitioner Rosario Carbonell appealed to the
respondent Court of Appeals (p. 96, ROA in the C.A.).

On November 2, 1967, the Court of Appeals (Fifth Division composed of Justices Magno Gatmaitan,
Salvador V. Esguerra and Angle H. Mojica, speaking through Justice Magno Gatmaitan), rendered
judgment reversing the decision of the trial court, declaring petitioner therein, to have a superior right to
the land in question, and condemning the defendant Infantes to reconvey to petitioner after her
reimbursement to them of the sum of P3,000.00 plus legal interest, the land in question and all its
improvements (Appendix "A" of Petition).

Respondent Infantes sought reconsideration of said decision and acting on the motion for
reconsideration, the Appellate Court, three Justices (Villamor, Esguerra and Nolasco) of Special Division
of Five, granted said motion, annulled and set aside its decision of November 2, 1967, and entered
another judgment affirming in toto the decision of the court a quo, with Justices Gatmaitan and
Rodriguez dissenting (Appendix "B" of Petition).

Petitioner Rosario Carbonell moved to reconsider the Resolution of the Special Division of Five, which
motion was denied by Minute Resolution of December 6, 1968 (but with Justices Rodriguez and
Gatmaitan voting for reconsideration) [Appendix "C" of Petition].

Hence, this appeal by certiorari.

Article 1544, New Civil Code, which is decisive of this case, recites:

If the same thing should have been sold to different vendees, the ownership shall be transferred to the
person who may have first taken possession thereof in good faith, if it should movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith
first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in
the possession; and, in the absence thereof, to the person who presents the oldest title, provided there
is good faith (emphasis supplied).

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It is essential that the buyer of realty must act in good faith in registering his deed of sale to merit the
protection of the second paragraph of said Article 1544.

Unlike the first and third paragraphs of said Article 1544, which accord preference to the one who first
takes possession in good faith of personal or real property, the second paragraph directs that ownership
of immovable property should be recognized in favor of one "who in good faith first recorded" his right.
Under the first and third paragraph, good faith must characterize the act of anterior registration (DBP vs.
Mangawang, et al., 11 SCRA 405; Soriano, et al. vs. Magale, et al., 8 SCRA 489).

If there is no inscription, what is decisive is prior possession in good faith. If there is inscription, as in the
case at bar, prior registration in good faith is a pre-condition to superior title.

When Carbonell bought the lot from Poncio on January 27, 1955, she was the only buyer thereof and the
title of Poncio was still in his name solely encumbered by bank mortgage duly annotated thereon.
Carbonell was not aware and she could not have been aware of any sale of Infante as there was no
such sale to Infante then. Hence, Carbonell's prior purchase of the land was made in good faith. Her
good faith subsisted and continued to exist when she recorded her adverse claim four (4) days prior to
the registration of Infantes's deed of sale. Carbonell's good faith did not cease after Poncio told her on
January 31, 1955 of his second sale of the same lot to Infante. Because of that information, Carbonell
wanted an audience with Infante, which desire underscores Carbonell's good faith. With an aristocratic
disdain unworthy of the good breeding of a good Christian and good neighbor, Infante snubbed
Carbonell like a leper and refused to see her. So Carbonell did the next best thing to protect her right
she registered her adversed claim on February 8, 1955. Under the circumstances, this recording of her
adverse claim should be deemed to have been done in good faith and should emphasize Infante's bad
faith when she registered her deed of sale four (4) days later on February 12, 1955.

Bad faith arising from previous knowledge by Infante of the prior sale to Carbonell is shown by the
following facts, the vital significance and evidenciary effect of which the respondent Court of Appeals
either overlooked of failed to appreciate:

(1) Mrs. Infante refused to see Carbonell, who wanted to see Infante after she was informed by
Poncio that he sold the lot to Infante but several days before Infante registered her deed of sale. This
indicates that Infante knew from Poncio and from the bank of the prior sale of the lot by Poncio to
Carbonell. Ordinarily, one will not refuse to see a neighbor. Infante lives just behind the house of
Carbonell. Her refusal to talk to Carbonell could only mean that she did not want to listen to Carbonell's
story that she (Carbonell) had previously bought the lot from Poncio.

(2) Carbonell was already in possession of the mortgage passbook [not Poncio's saving deposit
passbook Exhibit "1" Infantes] and Poncio's copy of the mortgage contract, when Poncio sold the
lot Carbonell who, after paying the arrearages of Poncio, assumed the balance of his mortgaged
indebtedness to the bank, which in the normal course of business must have necessarily informed
Infante about the said assumption by Carbonell of the mortgage indebtedness of Poncio. Before or upon
paying in full the mortgage indebtedness of Poncio to the Bank. Infante naturally must have demanded
from Poncio the delivery to her of his mortgage passbook as well as Poncio's mortgage contract so that
the fact of full payment of his bank mortgage will be entered therein; and Poncio, as well as the bank,

5
must have inevitably informed her that said mortgage passbook could not be given to her because it was
already delivered to Carbonell.

If Poncio was still in possession of the mortgage passbook and his copy of the mortgage contract at the
time he executed a deed of sale in favor of the Infantes and when the Infantes redeemed his mortgage
indebtedness from the bank, Poncio would have surrendered his mortgage passbook and his copy of the
mortgage contract to the Infantes, who could have presented the same as exhibits during the trial, in
much the same way that the Infantes were able to present as evidence Exhibit "1" Infantes, Poncio's
savings deposit passbook, of which Poncio necessarily remained in possession as the said deposit
passbook was never involved in the contract of sale with assumption of mortgage. Said savings deposit
passbook merely proves that Poncio had to withdraw P47.26, which amount was tided to the sum of
P200.00 paid by Carbonell for Poncio's amortization arrearages in favor of the bank on January 27, 1955;
because Carbonell on that day brought with her only P200.00, as Poncio told her that was the amount of
his arrearages to the bank. But the next day Carbonell refunded to Poncio the sum of P47.26.

(3) The fact that Poncio was no longer in possession of his mortgage passbook and that the said
mortgage passbook was already in possession of Carbonell, should have compelled Infante to inquire
from Poncio why he was no longer in possession of the mortgage passbook and from Carbonell why she
was in possession of the same (Paglago, et. al vs. Jara et al 22 SCRA 1247, 1252-1253). The only plausible
and logical reason why Infante did not bother anymore to make such injury , w because in the ordinary
course of business the bank must have told her that Poncio already sold the lot to Carbonell who thereby
assumed the mortgage indebtedness of Poncio and to whom Poncio delivered his mortgage passbook.
Hoping to give a semblance of truth to her pretended good faith, Infante snubbed Carbonell's request to
talk to her about the prior sale to her b Poncio of the lot. As aforestated, this is not the attitude expected
of a good neighbor imbued with Christian charity and good will as well as a clear conscience.

(4) Carbonell registered on February 8, 1955 her adverse claim, which was accordingly annotated on
Poncio's title, four [4] days before Infante registered on February 12, 1955 her deed of sale executed on
February 2, 1955. Here she was again on notice of the prior sale to Carbonell. Such registration of
adverse claim is valid and effective (Jovellanos vs. Dimalanta, L-11736-37, Jan. 30, 1959, 105 Phil. 1250-
51).

(5) In his answer to the complaint filed by Poncio, as defendant in the Court of First Instance, he
alleged that both Mrs. Infante and Mrs. Carbonell offered to buy the lot at P15.00 per square meter,
which offers he rejected as he believed that his lot is worth at least P20.00 per square meter. It is
therefore logical to presume that Infante was told by Poncio and consequently knew of the offer of
Carbonell which fact likewise should have put her on her guard and should have compelled her to
inquire from Poncio whether or not he had already sold the property to Carbonell.

As recounted by Chief Justice Roberto Concepcion, then Associate Justice, in the preceding case of
Rosario Carbonell vs. Jose Poncio, Ramon Infante and Emma Infante (1-11231, May 12, 1958), Poncio
alleged in his answer:

... that he had consistently turned down several offers, made by plaintiff, to buy the land in question, at
P15 a square meter, for he believes that it is worth not less than P20 a square meter; that Mrs. Infante,
likewise, tried to buy the land at P15 a square meter; that, on or about January 27, 1955, Poncio was
advised by plaintiff that should she decide to buy the property at P20 a square meter, she would allow

6
him to remain in the property for one year; that plaintiff then induced Poncio to sign a document, copy
of which if probably the one appended to the second amended complaint; that Poncio signed it 'relying
upon the statement of the plaintiff that the document was a permit for him to remain in the premises in
the event defendant decided to sell the property to the plaintiff at P20.00 a square meter'; that on
January 30, 1955, Mrs. Infante improved her offer and agreed to sell the land and its improvement to her
for P3,535.00; that Poncio has not lost 'his mind,' to sell his property, worth at least P4,000, for the paltry
sum P1,177.48, the amount of his obligation to the Republic Saving s Bank; and that plaintiff's action is
barred by the Statute of Frauds. ... (pp. 38-40, ROA, emphasis supplied).

II

EXISTENCE OF THE PRIOR SALE TO CARBONELL

DULY ESTABLISHED

(1) In his order dated April 26, 1956 dismissing the complaint on the ground that the private
document Exhibit "A" executed by Poncio and Carbonell and witnessed by Constancio Meonada
captioned "Contract for One-half Lot which I Bought from Jose Poncio," was not such a memorandum in
writing within the purview of the Statute of Frauds, the trial judge himself recognized the fact of the
prior sale to Carbonell when he stated that "the memorandum in question merely states that Poncio is
allowed to stay in the property which he had sold to the plaintiff. There is no mention of the
reconsideration, a description of the property and such other essential elements of the contract of sale.
There is nothing in the memorandum which would tend to show even in the slightest manner that it was
intended to be an evidence of contract sale. On the contrary, from the terms of the memorandum, it
tends to show that the sale of the property in favor of the plaintiff is already an accomplished act. By the
very contents of the memorandum itself, it cannot therefore, be considered to be the memorandum
which would show that a sale has been made by Poncio in favor of the plaintiff" (p. 33, ROA, emphasis
supplied). As found by the trial court, to repeat the said memorandum states "that Poncio is allowed to
stay in the property which he had sold to the plaintiff ..., it tends to show that the sale of the property in
favor of the plaintiff is already an accomplished act..."

(2) When the said order was appealed to the Supreme Court by Carbonell in the previous case of
Rosario Carbonell vs. Jose Poncio, Ramon Infante and Emma Infante
(L-11231, supra), Chief Justice Roberto Concepcion, then Associate Justice, speaking for a unanimous
Court, reversed the aforesaid order of the trial court dismissing the complaint, holding that because the
complaint alleges and the plaintiff claims that the contract of sale was partly performed, the same is
removed from the application of the Statute of Frauds and Carbonell should be allowed to establish by
parol evidence the truth of her allegation of partial performance of the contract of sale, and further
stated:

Apart from the foregoing, there are in the case at bar several circumstances indicating that plaintiff's
claim might not be entirely devoid of factual basis. Thus, for instance, Poncio admitted in his answer that
plaintiff had offered several times to purchase his land.

Again, there is Exhibit A, a document signed by the defendant. It is in the Batanes dialect, which,
according to plaintiff's uncontradicted evidence, is the one spoken by Poncio, he being a native of said
region. Exhibit A states that Poncio would stay in the land sold by him to plaintiff for one year, from
January 27, 1955, free of charge, and that, if he cannot find a place where to transfer his house thereon,

7
he may remain upon. Incidentally, the allegation in Poncio's answer to the effect that he signed Exhibit A
under the belief that it "was a permit for him to remain in the premises in the" that "he decided to sell
the property" to the plaintiff at P20 a sq. m." is, on its face, somewhat difficult to believe. Indeed, if he
had not decided as yet to sell the land to plaintiff, who had never increased her offer of P15 a square
meter, there was no reason for Poncio to get said permit from her. Upon the other hand, if plaintiff
intended to mislead Poncio, she would have caused Exhibit A to be drafted, probably, in English , instead
of taking the trouble of seeing to it that it was written precisely in his native dialect, the Batanes.
Moreover, Poncio's signature on Exhibit A suggests that he is neither illiterate nor so ignorant as to sign
document without reading its contents, apart from the fact that Meonada had read Exhibit A to him and
given him a copy thereof, before he signed thereon, according to Meonada's uncontradicted testimony.

Then, also, defendants say in their brief:

The only allegation in plaintiff's complaint that bears any relation to her claim that there has been partial
performance of the supposed contract of sale, is the notation of the sum of P247.26 in the bank book of
defendant Jose Poncio. The noting or jotting down of the sum of P247.26 in the bank book of Jose
Poncio does not prove the fact that the said amount was the purchase price of the property in question.
For all we knew, the sum of P247.26 which plaintiff claims to have paid to the Republic Savings Bank for
the account of the defendant, assuming that the money paid to the Republic Savings Bank came from
the plaintiff, was the result of some usurious loan or accomodation, rather than earnest money or part
payment of the land. Neither is it competent or satisfactory evidence to prove the conveyance of the
land in question the fact that the bank book account of Jose Poncio happens to be in the possession of
the plaintiff. (Defendants-Appellees' brief, pp. 25-26).

How shall We know why Poncio's bank deposit book is in plaintiffs possession, or whether there is any
relation between the P247.26 entry therein and the partial payment of P247.26 allegedly made by
plaintiff to Poncio on account of the price of his land, if we do not allow the plaintiff to explain it on the
witness stand? Without expressing any opinion on the merits of plaintiff's claim, it is clear, therefore,
that she is entitled , legally as well as from the viewpoint of equity, to an opportunity to introduce parol
evidence in support of the allegations of her second amended complaint. (pp. 46-49, ROA, emphasis
supplied).

(3) In his first decision of December 5, 1962 declaring null and void the sale in favor of the Infantes and
ordering Poncio to execute a deed of conveyance in favor of Carbonell, the trial judge found:

... A careful consideration of the contents of Exh. 'A' show to the satisfaction of the court that the sale of
the parcel of land in question by the defendant Poncio in favor of the plaintiff was covered therein and
that the said Exh. "a' was also executed to allow the defendant to continue staying in the premises for
the stated period. It will be noted that Exh. 'A' refers to a lot 'sold by him to me' and having been written
originally in a dialect well understood by the defendant Poncio, he signed the said Exh. 'A' with a full
knowledge and consciousness of the terms and consequences thereof. This therefore, corroborates the
testimony of the plaintiff Carbonell that the sale of the land was made by Poncio. It is further pointed
out that there was a partial performance of the verbal sale executed by Poncio in favor of the plaintiff,
when the latter paid P247.26 to the Republic Savings Bank on account of Poncio's mortgage
indebtedness. Finally, the possession by the plaintiff of the defendant Poncio's passbook of the Republic
Savings Bank also adds credibility to her testimony. The defendant contends on the other hand that the
testimony of the plaintiff, as well as her witnesses, regarding the sale of the land made by Poncio in favor

8
of the plaintiff is inadmissible under the provision of the Statute of Fraud based on the argument that
the note Exh. "A" is not the note or memorandum referred to in the to in the Statute of Fraud. The
defendants argue that Exh. "A" fails to comply with the requirements of the Statute of Fraud to qualify it
as the note or memorandum referred to therein and open the way for the presentation of parole
evidence to prove the fact contained in the note or memorandum. The defendant argues that there is
even no description of the lot referred to in the note, especially when the note refers to only one half
lot. With respect to the latter argument of the Exhibit 'A', the court has arrived at the conclusion that
there is a sufficient description of the lot referred to in Exh. 'A' as none other than the parcel of land
occupied by the defendant Poncio and where he has his improvements erected. The Identity of the
parcel of land involved herein is sufficiently established by the contents of the note Exh. "A". For a while,
this court had that similar impression but after a more and thorough consideration of the context in Exh.
'A' and for the reasons stated above, the Court has arrived at the conclusion stated earlier (pp. 52-54,
ROA, emphasis supplied).

(4) After re-trial on motion of the Infantes, the trial Judge rendered on January 20, 1965 another
decision dismissing the complaint, although he found

1. That on January 27, 1955, the plaintiff purchased from the defendant Poncio a parcel of land
with an area of 195 square meters, more or less, covered by TCT No. 5040 of the Province of Rizal,
located at San Juan del Monte, Rizal, for the price of P6.50 per square meter;

2. That the purchase made by the plaintiff was not reduced to writing except for a short note or
memorandum Exh. A, which also recited that the defendant Poncio would be allowed to continue his
stay in the premises, among other things, ... (pp. 91-92, ROA, emphasis supplied).

From such factual findings, the trial Judge confirms the due execution of Exhibit "A", only that his legal
conclusion is that it is not sufficient to transfer ownership (pp. 93-94, ROA).

(5) In the first decision of November 2, 1967 of the Fifth Division of the Court of Appeals composed
of Justices Esguerra (now Associate Justice of the Supreme Court), Gatmaitan and Mojica, penned by
Justice Gatmaitan, the Court of Appeals found that:

... the testimony of Rosario Carbonell not having at all been attempted to be disproved by defendants,
particularly Jose Poncio, and corroborated as it is by the private document in Batanes dialect, Exhibit A,
the testimony being to the effect that between herself and Jose there had been celebrated a sale of the
property excluding the house for the price of P9.50 per square meter, so much so that on faith of that,
Rosario had advanced the sum of P247.26 and binding herself to pay unto Jose the balance of the
purchase price after deducting the indebtedness to the Bank and since the wording of Exhibit A, the
private document goes so far as to describe their transaction as one of sale, already consummated
between them, note the part tense used in the phrase, "the lot sold by him to me" and going so far even
as to state that from that day onwards, vendor would continue to live therein, for one year, 'during which
time he will not pay anything' this can only mean that between Rosario and Jose, there had been a true
contract of sale, consummated by delivery constitutum possession, Art. 1500, New Civil Code; vendor's
possession having become converted from then on, as a mere tenant of vendee, with the special
privilege of not paying rental for one year, it is true that the sale by Jose Poncio to Rosario Carbonell
corroborated documentarily only by Exhibit A could not have been registered at all, but it was a valid
contract nonetheless, since under our law, a contract sale is consensual, perfected by mere consent,

9
Couto v. Cortes, 8 Phil 459, so much so that under the New Civil Code, while a sale of an immovable is
ordered to be reduced to a public document, Art. 1358, that mandate does not render an oral sale of
realty invalid, but merely incapable of proof, where still executory and action is brought and resisted for
its performance, 1403, par. 2, 3; but where already wholly or partly executed or where even if not yet, it
is evidenced by a memorandum, in any case where evidence to further demonstrate is presented and
admitted as the case was here, then the oral sale becomes perfectly good, and becomes a good cause of
action not only to reduce it to the form of a public document, but even to enforce the contract in its
entirety, Art. 1357; and thus it is that what we now have is a case wherein on the one hand Rosario
Carbonell has proved that she had an anterior sale, celebrated in her favor on 27 January, 1955, Exhibit
A, annotated as an adverse claim on 8 February, 1955, and on other, a sale is due form in favor of Emma
L. Infante on 2 February, 1955, Exhibit 3-Infante, and registered in due form with title unto her issued on
12 February, 1955; the vital question must now come on which of these two sales should prevail; ... (pp.
74-76, rec., emphasis supplied).

(6) In the resolution dated October 30, 1968 penned by then Court of Appeals Justice Esguerra (now
a member of this Court), concurred in by Justices Villamor and Nolasco, constituting the majority of a
Special Division of Five, the Court of Appeals, upon motion of the Infantes, while reversing the decision
of November 2, 1967 and affirming the decision of the trial court of January 20, 1965 dismissing
plaintiff's complaint, admitted the existence and genuineness of Exhibit "A", the private memorandum
dated January 27, 1955, although it did not consider the same as satisfying "the essential elements of a
contract of sale," because it "neither specifically describes the property and its boundaries, nor mention
its certificate of title number, nor states the price certain to be paid, or contrary to the express mandate
of Articles 1458 and 1475 of the Civil Code.

(7) In his dissent concurred in by Justice Rodriguez, Justice Gatmaitan maintains his decision of
November 2, 1967 as well as his findings of facts therein, and reiterated that the private memorandum
Exhibit "A", is a perfected sale, as a sale is consensual and consummated by mere consent, and is binding
on and effective between the parties. This statement of the principle is correct [pp. 89-92, rec.].

III

ADEQUATE CONSIDERATION OR PRICE FOR THE SALE

IN FAVOR OF CARBONELL

It should be emphasized that the mortgage on the lot was about to be foreclosed by the bank for failure
on the part of Poncio to pay the amortizations thereon. To forestall the foreclosure and at the same time
to realize some money from his mortgaged lot, Poncio agreed to sell the same to Carbonell at P9.50 per
square meter, on condition that Carbonell [1] should pay (a) the amount of P400.00 to Poncio and 9b)
the arrears in the amount of P247.26 to the bank; and [2] should assume his mortgage indebtedness.
The bank president agreed to the said sale with assumption of mortgage in favor of Carbonell an
Carbonell accordingly paid the arrears of P247.26. On January 27, 1955, she paid the amount of P200.00
to the bank because that was the amount that Poncio told her as his arrearages and Poncio advanced
the sum of P47.26, which amount was refunded to him by Carbonell the following day. This conveyance
was confirmed that same day, January 27, 1955, by the private document, Exhibit "A", which was
prepared in the Batanes dialect by the witness Constancio Meonada, who is also from Batanes like
Poncio and Carbonell.

10
The sale did not include Poncio's house on the lot. And Poncio was given the right to continue staying on
the land without paying any rental for one year, after which he should pay rent if he could not still find a
place to transfer his house. All these terms are part of the consideration of the sale to Carbonell.

It is evident therefore that there was ample consideration, and not merely the sum of P200.00, for the
sale of Poncio to Carbonell of the lot in question.

But Poncio, induced by the higher price offered to him by Infante, reneged on his commitment to
Carbonell and told Carbonell, who confronted him about it, that he would not withdraw from his deal
with Infante even if he is sent to jail The victim, therefore, "of injustice and outrage is the widow
Carbonell and not the Infantes, who without moral compunction exploited the greed and treacherous
nature of Poncio, who, for love of money and without remorse of conscience, dishonored his own
plighted word to Carbonell, his own cousin.

Inevitably evident therefore from the foregoing discussion, is the bad faith of Emma Infante from the
time she enticed Poncio to dishonor his contract with Carbonell, and instead to sell the lot to her
(Infante) by offering Poncio a much higher price than the price for which he sold the same to Carbonell.
Being guilty of bad faith, both in taking physical possession of the lot and in recording their deed of sale,
the Infantes cannot recover the value of the improvements they introduced in the lot. And after the filing
by Carbonell of the complaint in June, 1955, the Infantes had less justification to erect a building thereon
since their title to said lot is seriously disputed by Carbonell on the basis of a prior sale to her.

With respect to the claim of Poncio that he signed the document Exhibit "A" under the belief that it was
a permit for him to remain in the premises in ease he decides to sell the property to Carbonell at P20.00
per square meter, the observation of the Supreme Court through Mr. Chief Justice Concepcion in G.R.
No. L-11231, supra, bears repeating:

... Incidentally, the allegation in Poncio's answer to the effect that he signed Exhibit A under the belief
that it 'was a permit for him to remain in the premises in the event that 'he decided to sell the property'
to the plaintiff at P20.00 a sq. m is, on its face, somewhat difficult to believe. Indeed, if he had not
decided as yet to sell that land to plaintiff, who had never increased her offer of P15 a square meter,
there as no reason for Poncio to get said permit from her. Upon the they if plaintiff intended to mislead
Poncio, she would have Exhibit A to be drafted, probably, in English, instead of taking the trouble of
seeing to it that it was written precisely in his native dialect, the Batanes. Moreover, Poncio's signature
on Exhibit A suggests that he is neither illiterate nor so ignorant as to sign a document without reading
its contents, apart from the fact that Meonada had read Exhibit A to him-and given him a copy thereof,
before he signed thereon, according to Meonada's uncontradicted testimony. (pp. 46-47, ROA).

As stressed by Justice Gatmaitan in his first decision of November 2, 1965, which he reiterated in his
dissent from the resolution of the majority of the Special Division. of Five on October 30, 1968, Exhibit A,
the private document in the Batanes dialect, is a valid contract of sale between the parties, since sale is a
consensual contract and is perfected by mere consent (Couto vs. Cortes, 8 Phil. 459). Even an oral
contract of realty is all between the parties and accords to the vendee the right to compel the vendor to
execute the proper public document As a matter of fact, Exhibit A, while merely a private document, can
be fully or partially performed, to it from the operation of the statute of frauds. Being a all consensual
contract, Exhibit A effectively transferred the possession of the lot to the vendee Carbonell by
constitutum possessorium (Article 1500, New Civil Code); because thereunder the vendor Poncio

11
continued to retain physical possession of the lot as tenant of the vendee and no longer as knew thereof.
More than just the signing of Exhibit A by Poncio and Carbonell with Constancio Meonada as witness to
fact the contract of sale, the transition was further confirmed when Poncio agreed to the actual payment
by at Carbonell of his mortgage arrearages to the bank on January 27, 1955 and by his consequent
delivery of his own mortgage passbook to Carbonell. If he remained owner and mortgagor, Poncio would
not have surrendered his mortgage passbook to' Carbonell.

IV

IDENTIFICATION AND DESCRIPTION OF THE DISPUTED LOT IN THE MEMORANDUM EXHIBIT "A"

The claim that the memorandum Exhibit "A" does not sufficiently describe the disputed lot as the
subject matter of the sale, was correctly disposed of in the first decision of the trial court of December 5,
1962, thus: "The defendant argues that there is even no description of the lot referred to in the note (or
memorandum), especially when the note refers to only one-half lot. With respect to the latter argument
of the defendant, plaintiff points out that one- half lot was mentioned in Exhibit 'A' because the original
description carried in the title states that it was formerly part of a bigger lot and only segregated later.
The explanation is tenable, in (sic) considering the time value of the contents of Exh. 'A', the court has
arrived at the conclusion that there is sufficient description of the lot referred to in Exh. As none other
than the parcel of lot occupied by the defendant Poncio and where he has his improvements erected.
The Identity of the parcel of land involved herein is sufficiently established by the contents of the note
Exh. 'A'. For a while, this court had that similar impression but after a more and through consideration of
the context in Exh. 'A' and for the reasons stated above, the court has arrived to (sic) the conclusion
stated earlier" (pp. 53-54, ROA).

Moreover, it is not shown that Poncio owns another parcel with the same area, adjacent to the lot of his
cousin Carbonell and likewise mortgaged by him to the Republic Savings Bank. The transaction therefore
between Poncio and Carbonell can only refer and does refer to the lot involved herein. If Poncio had
another lot to remove his house, Exhibit A would not have stipulated to allow him to stay in the sold lot
without paying any rent for one year and thereafter to pay rental in case he cannot find another place to
transfer his house.

While petitioner Carbonell has the superior title to the lot, she must however refund to respondents
Infantes the amount of P1,500.00, which the Infantes paid to the Republic Savings Bank to redeem the
mortgage.

It appearing that the Infantes are possessors in bad faith, their rights to the improvements they
introduced op the disputed lot are governed by Articles 546 and 547 of the New Civil Code. Their
expenses consisting of P1,500.00 for draining the property, filling it with 500 cubic meters of garden soil,
building a wall around it and installing a gate and P11,929.00 for erecting a b ' bungalow thereon, are
useful expenditures, for they add to the value of the property (Aringo vs. Arenas, 14 Phil. 263; Alburo vs.
Villanueva, 7 Phil. 277; Valencia vs. Ayala de Roxas, 13 Phil. 45).

Under the second paragraph of Article 546, the possessor in good faith can retain the useful
improvements unless the person who defeated him in his possession refunds him the amount of such
useful expenses or pay him the increased value the land may have acquired by reason thereof. Under
Article 547, the possessor in good faith has also the right to remove the useful improvements if such

12
removal can be done without damage to the land, unless the person with the superior right elects to pay
for the useful improvements or reimburse the expenses therefor under paragraph 2 of Article 546. These
provisions seem to imply that the possessor in bad faith has neither the right of retention of useful
improvements nor the right to a refund for useful expenses.

But, if the lawful possessor can retain the improvements introduced by the possessor in bad faith for
pure luxury or mere pleasure only by paying the value thereof at the time he enters into possession
(Article 549 NCC), as a matter of equity, the Infantes, although possessors in bad faith, should be allowed
to remove the aforesaid improvements, unless petitioner Carbonell chooses to pay for their value at the
time the Infantes introduced said useful improvements in 1955 and 1959. The Infantes cannot claim
reimbursement for the current value of the said useful improvements; because they have been enjoying
such improvements for about two decades without paying any rent on the land and during which period
herein petitioner Carbonell was deprived of its possession and use.

WHEREFORE, THE DECISION OF THE SPECIAL DIVISION OF FIVE OF THE COURT OF APPEALS OF OCTOBER
30, 1968 IS HEREBY REVERSED; PETITIONER ROSARIO CARBONELL IS HEREBY DECLARED TO HAVE THE
SUPERIOR RIGHT TO THE LAND IN QUESTION AND IS HEREBY DIRECTED TO REIMBURSE TO PRIVATE
RESPONDENTS INFANTES THE SUM OF ONE THOUSAND FIVE HUNDRED PESOS (P1,500.00) WITHIN
THREE (3) MONTHS FROM THE FINALITY OF THIS DECISION; AND THE REGISTER OF DEEDS OF RIZAL IS
HEREBY DIRECTED TO CANCEL TRANSFER CERTIFICATE OF TITLE NO. 37842 ISSUED IN FAVOR OF PRIVATE
RESPONDENTS INFANTES COVERING THE DISPUTED LOT, WHICH CANCELLED TRANSFER CERTIFICATE OF
TITLE NO. 5040 IN THE NAME OF JOSE PONCIO, AND TO ISSUE A NEW TRANSFER CERTIFICATE OF TITLE
IN FAVOR OF PETITIONER ROSARIO CARBONELL UPON PRESENTATION OF PROOF OF PAYMENT BY HER TO
THE INFANTES OF THE AFORESAID AMOUNT OF ONE THOUSAND FIVE HUNDRED PESOS (P1,500.00).

PRIVATE RESPONDENTS INFANTES MAY REMOVE THEIR AFOREMENTIONED USEFUL IMPROVEMENTS

FROM THE LOT WITHIN THREE (3) MONTHS FROM THE FINALITY OF THIS DECISION, UNLESS THE
PETITIONER ROSARIO CARBONELL ELECTS TO ACQUIRE THE SAME AND PAYS THE INFANTES THE
AMOUNT OF THIRTEEN THOUSAND FOUR HUNDRED TWENTY-NINE PESOS (P13,429.00) WITHIN THREE
(3) MONTHS FROM THE FINALITY OF THIS DECISION. SHOULD PETITIONER CARBONELL FAIL TO PAY THE
SAID AMOUNT WITHIN THE AFORESTATED PERIOD OF THREE (3) MONTHS FROM THE FINALITY OF THIS
DECISION, THE PERIOD OF THREE (3) MONTHS WITHIN WHICH THE RESPONDENTS INFANTES MAY
REMOVE THEIR AFOREMENTIONED USEFUL IMPROVEMENTS SHALL COMMENCE FROM THE EXPIRATION
OF THE THREE (3) MONTHS GIVEN PETITIONER CARBONELL TO PAY FOR THE SAID USEFUL
IMPROVEMENTS.

WITH COSTS AGAINST PRIVATE RESPONDENTS.

Castro, C.J, Aquino and Martin, JJ., concur.

Separate Opinions

13
TEEHANKEE, J., concurring:

I concur. My concurrence proceeds from the same premise as the dissenting opinion of Justice Munoz
Palma that both the conflicting buyers of the real property in question, namely, petitioner Rosario
Carbonell as the first buyer may be deemed purchasers in good faith at the respective dates of their
purchase.

The answer to the question of who between the two buyers in good faith should prevail is provided in
the second paragraph of Article 1544 of the Civil Code 1 (formerly Article 1473 of the old Civil Code)
which ordains that "the ownership of the immovable property shall belong to the person acquiring it
who in good faith first recorded it in the Registry of Property."

In the case at bar, the seller executed on January 27, 1955 the private memorandum of sale of the
property in favor of the first buyer Carbonell, However, six days later on February 2, 1955, the seller sold
the property for a second time for an improved price, this time executing a formal registrable deed of
sale in favor of the second buyer Infante.

So it was that when the first buyer Carbonell saw the seller a few days afterwards bringing the formal
deed of sale for the seller's signature and the balance of the agreed cash payment, the seller told her
that he could not proceed anymore with formalizing the first sale because he had already formalized the
second sale in favor of the second buyer Infante.

Since Carbonell (the first buyer) did not have a formal registrable deed of sale, she did the next best
thing to protect her legal rights and registered on February 8, 1955 with the Rizal Register of Deeds her
adverse claim as first buyer entitled to the property. The second buyer Infante registered the deed of
sale in her favor with the Rizal Register of Deeds only on February 12, 1955 (notwithstanding its having
been executed ten days earlier on February 2, 1955), and therefore the transfer certificate of title issued
in her favor carried the duly annotated adverse claim of Carbonell as the first buyer.

Both these registrations were in good faith and hence, as provided by the cited code article, the first
buyer Carbonell as also the first registrant is legally entitled to the property.

The fact that Carbonell registered only an adverse claim as she had no registrable deed of sale is of no
moment. The facts of record amply show that she had a written memorandum of sale, which was
partially executed with the advance payment made by her for the seller's mortgage account with the
bank, and which was perfected and binding in law by their accord on the subject matter and price.
Carbonell could in law enforce in court her rights as first buyer under the memorandum agreement and
compel the seller to execute in her favor a formal registrable deed of sale which would relate back to the
date of the original memorandum agreement.

And under the cited code provision, Carbonell had to duly register such adverse claim as first buyer, as
otherwise the subsequent registration of the second buyer's deed of sale would have obliterated her
legal rights and enable the seller to achieve his fraudulent act of selling the property a second time for a
better price in derogation of her prior right thereto.

14
The fact that the seller refused to execute the formal deed of sale in Carbonell's favor and (as was only to
be expected) informed her that he could not proceed anymore with the sale because he had sold it for a
second time for a better price did not convert her prior registration of her adverse claim into one of bad
faith.

The fraudulent seller's act of informing the first buyer that he has wrongfully sold his property for a
second time cannot work out to his own advantage and to the detriment of the innocent first buyer (by
being considered as an "automatic registration" of the second sale) and defeat the first buyer's right of
priority, in time in right and in registration.

The governing principle here is prius tempore, portior jure 2 (first in time, stronger in right). Knowledge
gained by the first buyer of the second sale cannot defeat the first buyer's rights except only as provided
by the Civil Code and that is where the second buyer first registers in good faith the second sale ahead of
the first. Such knowledge of the first buyer does not bar her from availing of her rights under the law,
among them, to register first her purchase as against the second buyer. But in other so knowledge
gained by the second buyer of the first sale defeats his rights even if he is first to register the second sale,
since such knowledge taints his prior registration with bad faith.

This is the price exacted by Article 1544 of the Civil Code for the second buyer being able to displace the
first buyer: that before the second buyer can obtain priority over the first, he must show that he acted in
good faith throughout (i.e. in ignorance of the first sale and of the first buyer's rights) from the time of
acquisition until the title is transferred to him by registration or failing registration, by delivery of
possession. The second buyer must show continuing good faith and innocence or lack of knowledge of
the first sale until his contract ripens into full ownership through prior registration as provided by law.

The above principles were aptly restated in a 1948 Court of Appeals decision in the case of Gallardo, vs.
Gallardo penned by Justice J.B.L. Reyes, then a member of the appellate court. 3 The facts of that case
and the case at bar are virtually Identical, except that the earlier case was decided under the old Civil
Code (Article 1473 thereof now reproduced as Article 1544 of the present Civil Code), and the ratio
decidendi thereof, mutatis mutandis, is fully applicable, as follows:

Analysis of article 1473 of the Civil Code shows that before a second vendee can obtain priority over the
first, it is indispensable that he should have acted in good faith, (that is to say, in ignorance of the rights
of the first vendee's rights) until the title is transferred to him by actual or constructive delivery of the
thing sold. This is the price exacted by law for his being able to displace the first vendee; and the mere
fact that the second contract of sale was perfected in good faith is not sufficient if, before the title
passes, the second vendee acquires knowledge of the first transaction. That the second buyer innocently
agreed to purchase the land may protect him against responsibility of conspiring with his vendor to
defraud the established rights of the first purchaser; but to defeat the latter's priority in time (based on
the old principle "prius tempore, potior jure," first in time, better in right) the good faith or innocence of
the posterior vendee must needs continue until his contract ripens into ownership by tradition or
recording (Palanca vs. Director of lands, 43 Phil. 141, 154).

That the formal deed of conveyance to Gabino Gallardo was executed after that of Caoagas is of no
moment, the contract of sale being perfected and binding by mere accord on the subject matter and the
price, even if neither is delivered (Article 1450, Civil Code), the deed of conveyance will relate back to the
date of the original agreement. 4

15
Finally, in the present case, the first buyer's registration (February 8, 1955) concededly preceded the
second buyer's registration (February 12, 1955) by four days, and therefore, as provided by the Civil
Code, the first buyer thereby duly preserved her right of priority and is entitled to the property.

MUOZ PALMA, J., dissenting:

Strongly convinced as I am that the decision of the Court of Appeals under review should be affirmed,
this dissenting opinion is being written.

We are here confronted with a double sale made by Jose Poncio of his 195-square meter lot located at V.
Again St., San Juan, Rizal, covered by Transfer Certificate of Title No. 5040, the solution to which is found
in Art. 1544 of the Civil Code, more particularly the second paragraph thereof which provides that
should the thing sold be immovable property, the ownership shall belong to the person acquiring it who
in good with first recorded it in the Registry of property.

1. The two purchasers, namely, petitioner Rosario Carbonell and respondent Emma Infante, are
both purchasers in good faith.

That Rosario Carbonell is a buyer in good faith cannot be disputed for at the time negotiations for the
purchase of the lot were being made between her and the vendor, Jose Poncio, as of January 27, 1955,
there was no indication at all from the latter that another sale was being contemplated.

That Emma Infante is likewise a buyer in good faith is supported by: (a) an express finding of the trial
court in its decision of January 20, 1965, to the effect that when the vendor and purchaser. Infante
consummated the sale on or about January 29, 1955, an examination of the original of T.C.T. 5040 on file
with the Register of Deeds of Rizal as well as the owner's duplicate revealed no annotation of any
encumbrance or lien other than the mortgage in favor of the Republic Savings Bank (p. 92, Record on
Appeal); (b) the findings of fact of the Court of Appeals given in the decision penned by then Justice
Salvador V. Esguerra as well as in the first decision written by Justice Magno Gatmaitan which
subsequently became the basis of the dissenting opinion to the majority, and from which I quote:

2. CONSIDERING: That as basis for discussion of this issue, it must have to be remembered that the
first vendee, Rosario Carbonell, certainly was an innocent purchaser ... but also must it be remembered
that Emma L. Infante, when she bought the property on 2 February, 1955, under Exhibit 3-Infante,
neither had she before then been, preliminary informed of the first sate to Rosario ...; indeed as Emma
has testified on this detail, it is easy to accept her declaration:

Q. When Mr. Jose Poncio offered you this land in question, did he tell you that the land was sold or
otherwise promised to Mrs. Carbonell?

A. Of course not, otherwise will never buy.

(tsn. II:27)

16
in other words, at the respective dates of their purchase, both vendees, Rosario and Emma, were
innocent and had acted in the best of good faith ... (pp. 9-10 of Justice Gatmaitan's decision found on pp.
76-77, rollo; see also p. 7 of his dissenting opinion found on p. 95, rollo).

Departing from a well-entrenched rule set down in a long array of decisions of this Court that factual
findings of the trial court and of the Court -of Appeals are generally binding and conclusive, 1 and that
on appeal by certiorari, questions of fact are not to be determined nor reviewed by Us 2 the Majority
Opinion of my colleagues however undertakes a fact-finding process of its own, and draws the
conclusion that Emma Infante was a buyer in bad faith because, among other things: (a) Emma allegedly
refused to talk to Rosario Carbonell when the latter went to see her about the sale of the lot, which "is
not the attitude expected of a good neighbor imbued with Christian charity and goodwill as well as a
clean conscience" (p. 10, Majority Opinion); (b) "(B)efore or upon paying in full the mortgage
indebtedness of Poncio to the bank. Infante naturally must have demanded from Poncio the delivery to
her of his mortgage passbook as well as Poncio's mortgage contract. . and Poncio as well as the bank,
must have inevitably informed here that said mortgage passbook could not be given to her because it
was already delivered to Carbonell" (p. 9, Ibid); and (c) "... (T)he victim, therefore, 'of injustice and
outrage is the widow Carbonell and not the Infantes, who without moral compunction exploited the
greed and treacherous nature of Poncio, who, for love of money and without remorse of conscience,
dishonored his own plighted word to Carbonell, his own cousin. ... Inevitably evident therefore from the
foregoing discussion, is the bad faith of Emma Infante from the time she enticed Poncio to dishonor his
contract with Carbonell, and instead to sell the lot to her (Infante) by offering Poncio a much higher price
than the price for which he sold the same to Carbonell ..." (p. 20, Majority Opinion; all italicized portions
supplied) all of which are unsupported by the evidence and diametrically contrary to the findings of
the court a quo and the appellate court sustaining the good faith of Emma Infante.

2. Inasmuch as the two purchasers are undoubtedly in good faith, the next question to be resolved
is who of the two first registered her purchase or title in good faith.

In applying Art. 1544 of the Civil Code, it is not enough that the buyer bought the property in good faith,
but that the registration of her title must also be accomplished in good faith. This requirement of good
faith is not only applicable to the second or subsequent purchaser but to the first as well. 3

Construing and applying the second paragraph of Art. 1473 of the Spanish Civil Code which has been
adopted verbatim in Art. 1544 of the Civil Code of the Philippines, this Court in Leung Lee vs. FL Strong
Machinery Co., et al 37 Phil. 644, declared:

It has been suggested that since the provisions of article 1473 of the Civil Code require "good faith," in
express terms, in relation to "possession" and title but contain no express requirement as to 'good faith'
in relation to the "inscription" of the property in the registry, it must he presumed that good faith is not
an essential requisite of registration in order that it may have the effect contemplated in this article. We
cannot agree with this contention. It could not have been the intention of the legislator to base the
preferential right secured under this article of the code upon an inscription of title in bad faith. Such an
interpretation placed upon the language of this section would open wide the door to fraud and
collusion. The public records cannot be converted into instruments of fraud and oppression by one who
secures an inscription therein in bad faith. The force and effect given by law to an inscription in a public
record presupposes the good faith of him who enters such inscription; and rights created by statute,
which are predicated upon an inscription in a public registry, do not and cannot accrue under an

17
inscription "in bad faith," to the benefit of the person who thus makes the inscription. (pp. 648-649,
supra)

Good faith means "freedom from knowledge and circumstances which ought to put a person on
inquiry"; 3* it consists of an honest intention to abstain from taking any conscientious advantage of
another. 4

On this point it is my view that Rosario Carbonell cannot be held to have a title superior to that of Emma
Infante for even if We were to concede that the notation of her adverse claim on February 8, 1955, was
in the nature of registration of title as required in Art. 1544 of the Civil Code, 5 the same was not
accomplished in good faith. This is obvious from occurrences narrated in the Majority Opinion, thus: that
on January 27, 1955, Carbonell and Jose Poncio made and executed the memorandum of sale, Exhibit A;
that thereafter Carbonell asked Atty. Salvador Reyes to prepare the formal deed of sale which she
brought to Poncio together with the amount of some P400.00, the balance she had to pay in addition to
her assuming the mortgage obligation to Republic Savings Bank; that upon arriving at Poncio's house the
latter told Carbonell that he could not proceed anymore with the sale because he had already given the
lot to Emma Infants; that on February 5, 1955, Carbonell saw Emma Infante erecting a wall around the
lot with a gate; that Carbonell consulted Atty. Jose Garcia who advised her to present an adverse claim
with the office of the Register of Deeds, and that being informed that the sale in favor of Emma Infante
had not yet been registered, Atty. Garcia prepared the notice of adverse claim which was signed and
sworn to by Rosario Carbonell and registered on February 8, 1955. (see pp. 34, Decision)

At the time petitioner herein caused the annotation of her adverse claim she was, therefore, cognizant
of facts which impaired her title to the property in question, and taking advantage of the situation that
the second purchaser had not as yet registered her deed of sale, she went ahead of the second buyer
and annotated what was only in the nature of an adverse claim inasmuch as she had no registrable
document of sale at the time. That annotation of Carbonell's adverse claim did not produce any legal
effects as to place her in a preferential situation to that of Infante, the second purchaser, for the simple
reason that a registration made in bad faith is equivalent to no registration at all. It is a settled rule that
the inscription in the registry, to be effective, must be made in good faith. (Pena, supra, p. 164)

3. One last point to be considered is the theory advanced by the dissenting opinion of Justice
Gatmaitan that while Carbonell's registration of her adverse claim may indeed be considered in bad
faith, nonetheless that of Infante was likewise in bad faith because at the time of the registration of the
latter's deed of sale there was already inscribed on the original of the title on file with the Register of
Deeds the adverse claim of Rosario Carbonell.

With due respect to the foregoing conclusion of highly respected Colleague, I hold the view that the act
of the registration of Infante's deed of sale on February 12, 1955, was but a formality in the sense that it
simply formalized what had already been accomplished earlier, that is, the registration of Infantes
purchase as against Carbonell when the latter inquired knowledge of the second sale on or about
January 27, 1955, when she brought the memorandum of sale, Exh. A, to Jose Poncio and was informed
by the latter that he could not go through with the sale because he had already sold it to Emma Infante,
which information was bolstered by the fact that Carbonell saw Infante erecting a wall around the lot on
February 5.

18
We have long accepted the rule that knowledge is equivalent to registration. What would be the purpose
of registration other than to give notice to interested parties and to the whole world of the existence of
rights or liens against the property under question?

What has been clearly and succinctly postulated in T. de Winkleman and Winkleman vs. Veluz 1922, 43
Phil. 604, 609, is applicable to the case before Us, and We quote therefrom:

. . . The purpose of registering an instrument relating to land, annuities, mortgages, liens or any other
class of real rights is to give notice to persons interested of the existence of these various liens against
the property. If the parties interested have actual notice of the existence of such liens then the necessity
for registration does not exist. Neither can one who has actual notice of existing liens acquire any rights
in such property free from such liens by the mere fact that such liens have not been proven recorded.
(citing Obras Pias vs. Devera Ignacio, 17 Phil. 45, 47).

We cannot overlook the fact that while it may be true that the vendor Poncio had signed the
memorandum, Exh. A, from which it may be implied that he sold a lot to Carbonell, there were other
things to be accomplished for purposes of binding third parties, the lot in question being registered land,
such as the execution of a formal deed of sale. Such a document of sale was never signed by Poncio for
according to petitioner Carbonell, when she presented to Poncio the corresponding document together
with the sum of P400.00 which according to her was the balance of the purchase price after she had
assumed the mortgage with the Republic Bank, she was informed by the vendor that the property had
been sold to another. That sale was confirmed when Carbonell saw Infante erecting a wall around the lot
on February 5, 1955. As of that moment when Carbonell had notice or actual knowledge of the second
sale in favor of Emma Infante a valid registration of the latter's deed of sale was constituted as against
Carbonell. Accordingly, Infante has a preferential right to the property, the registration of her sale having
been effected in the foregoing manner, prior to the annotation of Carbonell's adverse claim on February
8, 1955.

The circumstances of the present case are strikingly similar to the hypothetical problem posed in
Commentator Edgardo Paras' Book on the Civil Code of the Philippines and I wholeheartedly concur with
his solution of the problem which is based on law. From him I quote: 6

A sold a parcel of land with a torrens title to B on January 5. A week later, A sold the same land to C.
Neither sale was registered. As soon as B learned of the sale in favor of C, he (B) registered an adverse
claim stating that he was making the claim because the second sale was in fraud of his rights as first
buyer. Later, C registered the deed of sale that had been made in his favor. Who is now the owner B or C?

Ans. C is clearly the owner, although he was the second buyer. This is so, not because of the registration
of the sale itself but because of the AUTOMATIC registration in his favor caused by Bs knowledge of the
first sale (actual knowledge being equivalent to registration). The purpose of registration is to notify. This
notification was done because of Bs knowledge. It is wrong to assert that B was only trying to protect his
right-for there was no more right to be protected. He should have registered the sale BEFORE knowledge
came to him. It is now too late. It is clear from this that with respect to the principle "actual knowledge is
equivalent to registration of the sale about which knowledge has been obtained' the knowledge may
be that-of either the FIRST or the SECOND buyer. (pp. 142-143, Vol. V, 1972 Ed.)

19
Aside from the fact that the sale to Infante was considered registered prior to the registration of
Carbonell's notice of adverse claim, Infante also took immediate physical possession of the property by
erecting a fence with a gate around the lot on February 5, at least tree days prior to Carbonell Is
registration on February 8, 1955.

On top of all these, equity is on the side of Emma Infante. Under the Majority Opinion, Emma Infante
stands to lose the lot she bought in good faith which was fully paid for plus the building she erected
thereon for which she spent the total sun of a little less than P14,000.00, or equivalent to about
P40,000.00 at the time the case was decided by the Appellate Court, considering that Rosario Carbonell
is being given the option either to order the removal of the house or to acquire it at P13,429.00. On this
point I agree with the following statement of Justice Esguerra who penned the decision of the Appellate
Court, thus:

It is indeed inequitable and re revolting to one's sense of justice and fairness that Rosario Carbonell who
paid out of her own money the sum of only P200.00 to the Republic Savings Bank for the account of Jose
Poncio, which was the motivation for the execution of the private instrument, Exhibit A, should have a
superior right to the land involved. The property has been improved at a great expense and a building of
strong materials has been constructed thereon Emma Infants ho spent for her lot and building the total
sum of P13,429.00 made, up of P11,929.00 for cost of land and improvements and the building and
P1,500.00 to discharge the mortgage in favor of the Republic Savings Bank. with the present purchasing
power of the peso this aft i more than 13 years, would be not equivalent to about P40,000.00. Courts
should not lend a hand to the perpetration of such kind of injustice and outrage (see page 88, rollo)

I close paraphrasing the Supreme Court of Oklahoma in Phelps vs. Theime, et al., 217 p. 376; 377, that
"equity is a right wiseneth that considerate all of the particular circumstances of the case and is also
tempered with the sweetness of mercy." (quoting from St. Germain) In this case now before Us there is
no need to invoke mercy, for all that is required is a wise consideration of the particular circumstances
narrated above which warrant a judgment in favor of respondents Infants.

With all the foregoing, I vote for the affirmance of the decision under review.

mG.R. No. L-18497 May 31, 1965

DAGUPAN TRADING COMPANY, petitioner,

vs.
RUSTICO MACAM, respondent.

Angel Sanchez for petitioner.

Manuel L. Fernandez for respondent.

DIZON, J.:

Appeal taken by the Dagupan Trading Company from the decision of the Court of Appeals affirming the
one rendered by the Court of First Instance of Pangasinan in Civil Case No. 13772, dismissing its
complaint.

20
On September 4, 1958, appellant commenced the action mentioned above against appellee Rustico
Macam, praying that it be declared owner of one-eighth portion of the land described in paragraph 2 of
the complaint; that a partition of the whole property be made; that appellee be ordered to pay it the
amount of P500.00 a year as damages from 1958 until said portion is delivered, plus attorney's fees and
costs.

Answering the complaint, appellee alleged, in the main, that Sammy Maron's share in the property
described in the complaint, as well as that of all his co-heirs, had been acquired by purchase by appellee
since June 19 and September 21, 1955, before the issuance of the original certificate of title in their
name; that at the time the levy in execution was made on Sammy Maron's share therein, the latter had
no longer any right or interest in said property; that appellant and its predecessor in interest were
cognizant of the facts already mentioned; that since the sales made in his favor, he had enjoyed
uninterrupted possession of the property and introduced considerable improvements thereon. Appellee
likewise sought to recover damages by way of counterclaim.

After trial upon the issue thus joined, the court rendered judgment dismissing the complaint, which, on
appeal, was affirmed by the Court of Appeals.

The facts of the case are not disputed.

In the year 1955, Sammy Maron and his seven brothers and sisters were pro-indiviso owners of a parcel
of unregistered land located in barrio Parayao, Municipality of Binmaley, Pangasinan. While their
application for registration of said land under Act No. 496 was pending, they executed, on June 19 and
September 21, 1955, two deeds of sale conveying the property to appellee, who thereafter took
possession thereof and proceeded to introduce substantial improvements therein. One month later, that
is, on October 14, 1955, Original Certificate of Title No. 6942 covering the land was issued in the name of
the Maron's, free from all liens and encumbrances.

On August 4, 1956, by virtue of a final judgment rendered in Civil Case No. 42215 of the Municipal Court
of Manila against Sammy Maron in favor of the Manila Trading and Supply Company, levy was made
upon whatever interest he had in the aforementioned property, and thereafter said interest was sold at
public auction to the judgment creditor. The corresponding notice of levy, certificate of sale and the
Sheriff's certificate of final sale in favor of the Manila Trading and Supply Co. because nobody
exercised the right of redemptions were duly registered. On March 1, 1958, the latter sold all its rights
and title to the property to appellant.

The question before Us now is: Who has the better right as between appellant Dagupan Trading
Company, on the one hand, and appellee Rustico Macam, on the other, to the one-eighth share of
Sammy Maron in the property mentioned heretofore?

If the property covered by the conflicting sales were unregistered land, Macam would undoubtedly have
the better right in view of the fact that his claim is based on a prior sale coupled with public, exclusive
and continuous possession thereof as owner. On the other hand, were the land involved in the
conflicting transactions duly registered land, We would be inclined to hold that appellant has the better
right because, as We have consistently held, in case of conveyance of registered real estate, the
registration of the deed of sale is the operative act that gives validity to the transfer. This would be fatal

21
to appellee's claim, the deeds of sale executed in his favor by the Maron's not having been registered,
while the levy in execution and the provisional certificate of sale as well as the final deed of sale in favor
of appellant were registered. Consequently, this registered conveyance must prevail although posterior
to the one executed in favor of appellee, and appellant must be deemed to have acquired such right,
title and interest as appeared on the certificate of title issued in favor of Sammy Maron, subject to no
lien, encumbrance or burden not noted thereon. (Anderson & Co. vs. Garcia, 64 Phil. 506; Reynes, et al.
vs. Barrera, et al., 68 Phil. 656; Banco Nacional, etc. vs. Camus, 70 Phil. 289)

The present case, however, does not fall within either, situation. Here the sale in favor of appellee was
executed before the land subject-matter thereof was registered, while the conflicting sale in favor of
appellant was executed after the same property had been registered. We cannot, therefore, decide the
case in the light of whatever adjudicated cases there are covering the two situations mentioned in the
preceding paragraph. It is our considered view that what should determine the issue are the provisions
of the last paragraph of Section 35, Rule 39 of the Rules of Court, to the effect that upon the execution
and delivery of the final certificate of sale in favor of the purchaser of land sold in an execution sale, such
purchaser "shall be substituted to and acquire all the right, title, interest and claim of the judgment
debtor to the property as of the time of the levy." Now We ask: What was the interest and claim of
Sammy Maron on the one-eighth portion of the property inherited by him and his co-heirs, at the time
of the levy? The answer must necessarily be that he had none, because for a considerable time prior to
the levy, his interest had already been conveyed to appellee, "fully and retrievably as the Court of
Appeals held. Consequently, subsequent levy made on the property for the purpose of satisfying the
judgment rendered against Sammy Maron in favor of the Manila Trading Company was void and of no
effect (Buson vs. Licuaco, 13 Phil. 357-358; Landig vs. U.S. Commercial Company, G.R. No. L-3597, July 31,
1951). Needless to say, the unregistered sale and the consequent conveyance of title and ownership in
favor of appellee could not have been cancelled and rendered of no effect upon the subsequent issuance
of the Torrens title over the entire parcel of land. We cannot, therefore, but agree with the following
statement contained in the appealed decision:

... . Separate and apart from this however, we believe that in the inevitable conflict between a right of
ownership already fixed and established under the Civil Law and/or the Spanish Mortgage Law which
cannot be affected by any subsequent levy or attachment or execution and a new law or system which
would make possible the overthrowing of such ownership on admittedly artificial and technical grounds,
the former must be upheld and applied.1wph1.t

But to the above considerations must be added the important circumstance that, as already stated
before, upon the execution of the deed of sale in his favor by Sammy Maron, appellee took possession of
the land conveyed as owner thereof, and introduced considerable improvements thereon. To deprive
him now of the same by sheer force of technicality would be against both justice and equity.

IN VIEW OF ALL THE FOREGOING, the decision appealed from is affirmed, with costs.

G.R. No. L-48322 April 8, 1987

FELIPE DAVID and ANTONIA G. DAVID, petitioners,

vs.
EULOGIO BANDIN

22
YAP, J.:

These petitions, which were consolidated by resolution of this Court dated February 20, 1980, stemmed
from a complaint filed by the herein respondents with the Court of First Instance of Rizal Branch VII,
Pasay City, on June 14, 1963, for the recovery and partition of property. The complaint was amended
twice to reflect additional pertinent and material facts, such as transfers, partitions, subdivisions and
registration of portions of the properties involved, and to bring in other indispensable parties to the
case.

On April 12, 1975, a decision was rendered by the trial court, in favor of the plaintiffs, declaring,
however, that certain properties could no longer be reconveyed to plaintiffs since they had been
transferred to purchasers who bought them in good faith for value. Not satisfied with the decision, both
plaintiffs and defendants appealed to the Court of Appeals. The plaintiffs' appeal was docketed as CA-
G.R. No. 58647-R, while that of defendants as CA-G.R. No. 60511-R. . Both appeals were consolidated,
and a decision was rendered by the Court of Appeals on May 19, 1978, which modified the decision of
the trial court in that it nullified the transfers made to the defendants who were declared by the trial
court as purchasers in good faith.

From the decision of the Court of Appeals, an appeal was taken by the parties adversely affected thereby
to this Court. Except for petitioners in G.R. No. L-49716 who seek restoration of the status quo ante, all
other petitioners pray that the decision of the trial court be reinstated.

The facts antecedent of this petition, as may be gathered from the decision, are as follows:

During their lifetime, the spouses Juan Ramos, who died on March 5, 1919, and Fortunate Calibo, who
died before 1919, were the owners of two parcels of land situated in Las Pinas, Rizal: 1) A parcel of land
situated in Barrio Talon, with an area of 39,887 square meters, under Tax Declaration No. 9614 (Talon
property for short); and 2) A parcel of land situated in Barrio Laong, with an area of 15,993 square
meters, under Tax Declaration No. 4005, although the actual area when surveyed was 22,285 square
meters (Laong property for short).

Both spouses died intestate, leaving as heirs two legitimate children, Candida and Victorians Ramos, and
grand-daughter, Agapita Ramos, daughter of their deceased sora Anastacio. Upon the death of the said
spouses, their daughter, Candida Ramos, assumed administration of the properties until her death on
February 16, 1955. Victorians Ramos died on December 12,1931.

Both Candida and Victoriana Ramos died intestate. Candida Ramos was survived by the following heirs:
1) Victoria Martin-Omanbac, 2) Antonio Martin, 3) Juanita Martin Vda. de Lucena, 4) Maximina Martin
Vda. de Cosme, 5) Raymundo Martin, 6) Aquilina de la Cruz, and 7) Leonora de la Cruz. Victoriana's heirs
are her children from her two marriages, namely: 1) Eulogio Bandin, 2) Gregorio Bandin, 3) Raymunda
Bandin, 4) Valentin Briones, and 5) Sofio Briones.

The record shows that sometime in 1943, Candida Ramos prevailed upon her niece, Agapita Ramos, and
her nephew, Eulogio Bandin, to sell a portion of the Talon property to the spouses Rufino 0. Miranda and
Natividad Guinto. This portion was divided into three lots: Parcel 1, containing an area of 24,363 square
meters, declared under Tax Declaration No. 2996 (1948). The spouses Rufino Miranda and Natividad
Guinto subsequently sold the said lot to Narciso Velasquez and Albino Miranda. These two later sold the

23
same property to Velasquez Realty Company, Inc., which registered the property and obtained OCT No.
1756 (later cancelled and replaced by TCT No. 165335); Parcel 2, containing an area of 752 square
meters, declared under Tax Declaration No. 3358 (1949); and Parcel 3, containing an area of 516 square
meters under Tax Declaration No. 3359 (1949). Parcels 2 and 3 were subsequently sold by Rufino
Miranda and Natividad Guinto to Jose Ramirez and Sotero Ramirez (survived by Ambrocia Vda. de
Martin), respectively, who registered these properties and obtained OCT Nos. 2027 and 2029 in their
respective names.

The remaining portion of the Talon property was extrajudicially partitioned on September 17, 1955
among the heirs of Candida Ramos, namely: Juanita Martin, Victoria Martin, Maximina M. Vda. de
Cosme, Antonio Martin and Raymundo Martin. In 1959, this property was subdivided (Subdivision Plan
PSU-173299) into seven lots and adjudicated as follows:

1) To the heirs of Raymundo Martin, namely, Juan, Antonio, Rodrigo, Norma, Bernards, Rufina and
Nieves, all surnamed Martin, and Trinidad Bunag Vda. de Martin Lot 1, containing an area of 774
square meters, declared under Tax Declaration No. 5588 (1960). This lot was subsequently sold to
Consolacion de la Cruz who was able to register the property in her name under OCT No. 4731 (later
cancelled and replaced by TCT Nos. 227470 and 227471).

2) To Juanita Martin Lot 2, containing an area of 774 square meters, declared under Tax
Declaration No. 4831, and subsequently titled in her name under OCT No. 10002, issued on December
18, 1973.

3) To Leonora de la Cruz, granddaughter of Candida Ramos by her son Meliton de la Cruz by her
first husband Lot 3, containing an area of 346 square meters, declared under Tax Declaration No. 5526
(1960) and subsequently registered under OCT No. 6102, issued on January 29, 1967.

4) To Antonio Martin Lot 4, containing an area of 774 square meters, declared under Tax
Declaration No. 4833. The property was subsequently sold by the heirs of Antonio Martin to Nemesio
Martin.

5) To Victoria Martin Lot 5, containing an area of 773 square meters, declared under Tax
Declaration No. 5590. This lot was later registered by Victoria, to whom OCT No. 3706 was issued on
August 22, 1963. She subsequently sold a portion of 300 square meters to Magno de la Cruz on
September 25,1963, to whom was issued TCT No. 116450.

6) To Maximina Martin Lot 6, containing an area of 773 square meters, under Tax Declaration
No. 5591 (1960). Maximina was able to register the land and was issued OCT No. 3707 on August 22,
1963. She later sold a portion of 300 square meters to Magno de la Cruz, to whom was issued TCT No.
116450.

7) To Aquiline de la Cruz Lot 7, with an area of 428 square meters, declared under Tax
Declaration No. 5592 (1960). Aquilina is the granddaughter of Candida Ramos by her son Meliton de la
Cruz by her first marriage. Aquilina registered the land in her name in 1967 and was issued OCT No.
6103.

24
The Laong property was sold by Candida Ramos and her children on December 19, 1943 to Hermogenes
Lucena, husband of Juanita Martin, one of the daughters of Candida. On September 23, 1959, Juanita
(then widowed) sold the property to the spouses Gregorio and Mary Venturanza for P43,236.00 of which
P10,000 was paid as down payment, the balance to be paid upon the vendor obtaining Torrens title to
the land. On January 21, 1965, the Venturanzas, in a deed of sale also signed by Juanita Martin,
conveyed a portion of the property with an area of 15,000 square meters to the spouses Felipe and
Antonia David, in liquidation of the latter's investment in the joint real estate venture which they had
entered into with the Venturanzas in April 1959. Juanita Martin Vda. de Lucena was able to register the
property in her name and was issued OCT No. 8916 on July 1, 1971. The portion sold to the spouses
Felipe and Antonia David is presently covered by TCT No. 372092.

From the foregoing facts as established by the evidence, the trial court held that the Talon and Laong
properties formed part of the estate of the spouses Juan Ramos and Fortunate Calibo, which after their
death devolved by right of succession upon their heirs, namely, Candida Ramos, Victorians Ramos and
Agapita Ramos, each of whom was entitled to one-third (1/3) pro-indiviso share of the properties. The
estate of the deceased spouses was never judicially or extra-judicialy settled among their heirs, who,
therefore, remained pro-indiviso co-owners of the said properties, and upon the death of Victorians and
Candida, their respective shares in turn passed to their heirs. Accordingly, the trial court declared the
plaintiffs, Agapita Ramos, and the heirs of Victorians Ramos, entitled to two- thirds (2/3) pro-indiviso
share of the Talon and Laong properties, and ordered the defendants heirs of Candida Ramos to
reconvey to plaintiffs their shares in those properties. However, such reconveyance was no longer
possible with respect to the portions which, in the meantime, had been sold and disposed of to third
parties who were purchasers in good faith and for value.

The following parties were held to be purchasers in good faith. 1) defendants Rufino Miranda, Narciso
Velasquez, Albina Miranda and Velasquez Realty Co., with respect to 24,636 square meters (Parcel 1) of
the Talon property sold by Candida Ramos, Eulogio Bandin and Agapita Ramos in 1943; 2) defendants
Jose Ramirez and Ambrocia Vda. de Ramirez (widow of Sotero Ramirez), with respect to 752 square
meters (Parcel 2) and 516 square meters (Parcel 3), respectively, of the Talon property, 3) defendant
Consolacion de la Cruz, with respect to 774 square meters (Lot 1 of Subdivision Plan PSU-173299); 4)
defendant Nemesio Martin, with respect to 774 square meters (Lot 2 of Subdivision Plan); 5) defendant
Magno de la Cruz, with respect to 300 square meters sold by Victoria Martin and 300 square meters sold
by Maximina Martin (portions of Lots 5 and 6 of Subdivision Plan); 6) defendant spouses Felipe and
Antonia David, with respect to 15,000 square meters of the Laong property. Since the foregoing
properties could not be reconveyed to the plaintiffs, the defendants heirs who sold them were ordered
to pay the plaintiffs two-thirds (2/3) of the present value of such properties.

As stated heretofore, the trial court's decision was upheld by the respondent Court of Appeals, except
with respect to the finding that third parties who bought portions of the properties from the defendants
heirs were purchasers in good faith This finding was reversed by the respondent appellate court. In fine,
the appellate court: a) nullified the sale of the Laong property by Candida Ramos Vda. de Martin and her
children in 1943 in favor of Hermogenes Lucena, the husband of Juanita Martin, one of the daughters of
Candida, as wen as an subsequent sales, transfers and conveyances of said property, insofar as they
affected the two-thirds (2/3) pro-indiviso share of Agapita Ramos and the heirs of Victorians Ramos; b)
nullified the sale of portions of the Talon property by Candida Ramos, Eulogio Bandin and Agapita Ramos
in 1943 in favor of the spouses Rufino Miranda and Natividad Guinto, and all the subsequent transfers of
said properties, insofar as the four-fifteenth (4/15) share of Gregorio Bandin, Raymundo Bandin, Sofio

25
Briones and Valentin Briones were affected; and c) invali dated the deed of extrajudicial partition among
the heirs of Candida Ramos over the remaining portion of the Talon property in 1955 and the subdivision
thereof into individual lots among said heirs, as well as all subsequent transfers and conveyances of
some of said lots, or portions thereof, to third parties, insofar as they affected the two-third (2/3) pro-
indiviso share pertaining to Agapita Ramos and the heirs of Victorians Ramos.

From the above decision of the Court of Appeals, the petitioners have come to us on separate petitions
for review by certiorari.

G.R. No. L-49716.:

The petitioners are the heirs of Candida Ramos, led by Juanita Martin Vda. de Lucena and joined in by
her brothers and sisters who are the children of Candida by her first and second marriages. Primarily,
petitioners alleged that the Court of Appeals erred in not declaring that private respondents' claim if any,
is barred by prescription; and in annulling and ordering the cancellation of Original Certificate of Title No.
8916 issued in the name of Juanita Martin pursuant to a decision by the land registration court, affirmed
by the Court of Appeals in CA G.R. No. 35191-R, which had already become final and executory.

Petitioners claim in their brief, apparently referring to the Laong property only, that Juanita Martin,
widow of Hermogenes Lucena and daughter of Candida Ramos, had been in possession of the property
since 1943 to the exclusion of private respondents. The trial court, however, found that Candida Ramos,
until her death on February 15, 1955, administered the Laong property, and that plaintiffs- appellants
were given their shares of the fruits thereof, though irregular and at times little, depending on the
amount of the harvest. Under Article 494 of the new Civil Code (Article 400 of the old Civil Code),
prescription generally does not run in favor of a co-heir or co-owner as long as, he expressly or impliedly
recognizes the co-ownership. While an implied or constructive trust prescribes in ten years, the rule does
not apply where a fiduciary relation exists and the trustee recognizes the trust. 1

In the case at bar, there is no showing that the rights of the plaintiffs as co-owners were repudiated by
Candida Ramos in her lifetime; in fact, the evidence as found by the trial court show the contrary.

The court a quo did not sustain the defense of laches and prescription put up by the defendants (herein
petitioners) since it was not shown that the plaintiffs were guilty of negligence or slept on their rights.
They sent a letter of demand to the heirs of Candida Ramos on April 23, 1963, and filed their complaint
against them on June 14, 1963, or within a period of approximately eight (8) years from Candida's death.

In sustaining the findings of the trial court, the Court of Appeals did not commit any reversible error.

Petitioners further invoke the doctrine of res judicata in that the decree of registration of the property in
the name of Juanita Martin as owner by the land registration court was affirmed by the Court of Appeals
in its decision dated July 16, 1969 in CA G.R. No. 35191-R, which had already become final and
executory. Both the respondent Court of Appeals and the trial court correctly rejected the petitioners'
contention. There can be no res judicata since private respondents were not parties to the above case.
Neither can it be claimed that the decree of registration vested ownership in Juanita Martin. The
appellate court, citing jurisprudence established by this Court, held that the purpose of the Land
Registration Act is not to create or vest title, but to confirm and register title already vested and existing
in the applicant for a title. 2

26
G.R. No. L-48322.:

The petitioners spouses Felipe David and Antonia G. David purchased portions of the Laong property,
consisting of 15,000 square meters, on February 21, 1965 from the spouses Gregorio and Mary
Venturanza, who, in turn, purchased the property from Juanita Martin Vda. de Lucena, on September 23,
1959. At the time both purchases took place, the property in question was still an unregistered land. The
land was registered in the name of Juanita Martin only on July 1, 1971, to whom was issued OCT No.
8916.

Petitioners contend that the Court of Appellee erred in holding that they are buyers in bad faith, in
ordering the cancellation of OCT No. 8916 and all subsequent transfer certificates of title derived
therefrom, and in ordering petitioners - to reconvey to respondents their two-third (2/3) pro-indiviso
share of the land and to segregate therefrom 10,000 square meters for reconveyance to respondents.

In assailing the decision of the appellate court, petitioners invoke the doctrine of incontrovertibility of
the decree of registration after one year from issuance, and the doctrine of conclusiveness and
indivisibility of titles issued under the Torrens system. Petitioners might have stood on solid ground in
invoking the above doctrines if they had purchased the property from the registered owner after the
issuance of the decree of registration and the corresponding certificate of title in his name. 3

As the record shows, petitioners bought the property when it was still unregistered land. The defense of
having purchased the property in good faith may be availed of only where registered land is involved and
the buyer had relied in good faith on the clear title of the registered owner. One who purchases an
unregistered land does so at his peril His claim of having bought the land in good faith, i.e. without
notice that some other person has a right to, or interest in, the property, would not protect him if it turns
out that the seller does not actually own the property. This is what happened in the case at bar.

G.R.No. L-49867:

In this petition, petitioners Jose Ramirez and the heirs of Ambrocia P. Vda. de Ramirez (widow of Sotero
Ramirez), assail the decision of the respondent Court of Appeals declaring them purchasers in bad faith
and ordering them to reconvey to the plaintiffs Gregorio Bandin, Raymunda Bandin&A Valentin Briones
and Soto Briones, four-fifteenth (4/15) share pro-indiviso of the properties they purchased from the
spouses Rufino Miranda and Natividad Guinto. The land in question, containing an area of 516 square
meters, more or less, was purchased by Jose Ramirez on June 4, 1949. Sotero Ramirez purchased his
land, with an area of 752 square meters on July 9, 1948 and May 10, 1949. These parcels of land
purchased by the Ramirezes were part of the portion of the Talon property bought by the spouses Rufino
and Natividad Miranda from Candida Ramos, Eulogio Bandin and Agapita Ramos in 1943.

The appellate court held that Jose Ramirez and his father Sotero Ramirez were not purchasers in good
faith, not having made diligent investigation of the true ownership of the properties they bought, but
relied merely on the tax declaration shown to them by the seller, Rufino Miranda. We have no reason to
disturb the foregoing findings of the respondent appellate court. Besides, as mentioned earlier, the issue
of good faith or bad faith of the buyer is relevant only where the subject of the sale is registered land
and the purchaser is buying the same from the registered owner, whose title to the land is clean. In such
case, the purchaser who relies on the clean title of the registered owner is protected if he is a purchaser

27
in good faith for value. However, this is not the situation before us in the instant case, What petitioners
bought were unregistered lands.

Petitioners contend that the respondents are barred by estoppel and laches from recovering the
property in question We have already dealt with this issue above. We find the contention without merit.

Petitioners suggest that the portion ordered to be taken from the properties of Jose and Sotero Ramirez
should be taken instead from the shares which pertain to and are held by the heirs of Candida Ramos.
We do not find the suggestion meritorious. The respondents are entitled to their pro- indiviso share of
the property unlawfully sold by Candida Ramos, Agapita Ramos and Eulogio Bandin to the Miranda
spouses from whom the petitioners bought the parcels of land in question. Hence, it would not be
proper for the court to respondents' right to recover their pro-indiviso share of the property only from
the remaining portion still in the possession of the heirs of Candida Ramos.

G.R. No. L-49712:

The case of Magno de la Cruz stands on different footing from the other petitions. The property
purchased by him from Victoria Martin and Maximina Martin were registered lands, covered by Torrens
title. Being a purchaser in good faith for value, Magno de la Cruz is protected by the law. In the absence
of a showing that he had actual notice of the defect in the title of the vendors or that he is a buyer in bad
faith the deed of sale in his favor and the corresponding certificate of title issued in his name can not be
nullified and cancelled. Hence, it was error for the respondent court to invalidate the sale made by
Victoria and Maximina Martin in favor of Magno de la Cruz to the extent that it prejudiced the two-third
(2/3) pro-indiviso share of respondents in the property and to order petitioner to reconvey said share to
respondents. The petition of Magno de la Cruz is meritorious, and the decision appealed from should be
modified accordingly.

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

1. Dismissing the petitions in G.R. Nos. L-48322, L-49716 and L-49687;

2. Granting the petition in G.R. No. L-49712, declaring valid the deeds of sale executed by Victoria
Martin (Exh. 8-Magno de la Cruz) and Maximina Martin (Exh. 4-Magno de la Cruz) in favor of petitioner
Magno de la Cruz, as well as Transfer Certificate of Title No. 116450 issued in the latter's name, ordering
Victoria Martin and Maximina Martin to pay the respondents two-third (2/3) of the present value of the
property sold by them to Magno de la Cruz, and modifying the appealed decision accordingly; and

3. Affirming the appealed decision, except as modified above.

No pronouncement as to costs.

SO ORDERED.

G.R. No. L-28740 February 24, 1981

FERMIN Z. CARAM, JR., petitioner,

28
vs.
CLARO L. LAURETA, respondent.

FERNANDEZ, J.:

This is a petition for certiorari to review the decision of the Court of Appeals promulgated on January 29,
1968 in CA-G. R. NO. 35721-R entitled "Claro L. Laureta, plaintiff-appellee versus Marcos Mata, Codidi
Mata and Fermin Caram, Jr., defendants- appellants; Tampino (Mansaca), et al. Intervenors-appellants,"
affirming the decision of the Court of First Instance of Davao in Civil Case No. 3083. 1

On June 25, 1959, Claro L. Laureta filed in the Court of First Instance of Davao an action for nullity,
recovery of ownership and/or reconveyance with damages and attorney's fees against Marcos Mata,
Codidi Mata, Fermin Z. Caram, Jr. and the Register of Deeds of Davao City. 2

On June 10, 1945, Marcos Mata conveyed a large tract of agricultural land covered by Original Certificate
of Title No. 3019 in favor of Claro Laureta, plaintiff, the respondent herein. The deed of absolute sale in
favor of the plaintiff was not registered because it was not acknowledged before a notary public or any
other authorized officer. At the time the sale was executed, there was no authorized officer before whom
the sale could be acknowledged inasmuch as the civil government in Tagum, Davao was not as yet
organized. However, the defendant Marcos Mata delivered to Laureta the peaceful and lawful possession
of the premises of the land together with the pertinent papers thereof such as the Owner's Duplicate
Original Certificate of Title No. 3019, sketch plan, tax declaration, tax receipts and other papers related
thereto. 3 Since June 10, 1945, the plaintiff Laureta had been and is stin in continuous, adverse and
notorious occupation of said land, without being molested, disturbed or stopped by any of the
defendants or their representatives. In fact, Laureta had been paying realty taxes due thereon and had
introduced improvements worth not less than P20,000.00 at the time of the filing of the complaint. 4

On May 5, 1947, the same land covered by Original Certificate of Title No. 3019 was sold by Marcos Mata
to defendant Fermin Z. Caram, Jr., petitioner herein. The deed of sale in favor of Caram was
acknowledged before Atty. Abelardo Aportadera. On May 22, 1947, Marcos Mata, through Attys.
Abelardo Aportadera and Gumercindo Arcilla, filed with the Court of First Instance of Davao a petition
for the issuance of a new Owner's Duplicate of Original Certificate of Title No. 3019, alleging as ground
therefor the loss of said title in the evacuation place of defendant Marcos Mata in Magugpo, Tagum,
Davao. On June 5, 1947, the Court of First Instance of Davao issued an order directing the Register of
Deeds of Davao to issue a new Owner's Duplicate Certificate of Title No. 3019 in favor of Marcos Mata
and declaring the lost title as null and void. On December 9, 1947, the second sale between Marcos
Mata and Fermin Caram, Jr. was registered with the Register of Deeds. On the same date, Transfer
Certificate of Title No. 140 was issued in favor of Fermin Caram Jr. 5

On August 29, 1959, the defendants Marcos Mata and Codidi Mata filed their answer with counterclaim
admitting the existence of a private absolute deed of sale of his only property in favor of Claro L. Laureta
but alleging that he signed the same as he was subjected to duress, threat and intimidation for the
plaintiff was the commanding officer of the 10th division USFIP operating in the unoccupied areas of
Northern Davao with its headquarters at Project No. 7 (Km. 60, Davao Agusan Highways), in the
Municipality of Tagum, Province of Davao; that Laureta's words and requests were laws; that although
the defendant Mata did not like to sell his property or sign the document without even understanding
the same, he was ordered to accept P650.00 Mindanao Emergency notes; and that due to his fear of

29
harm or danger that will happen to him or to his family, if he refused he had no other alternative but to
sign the document. 6

The defendants Marcos Mata and Codidi Mata also admit the existence of a record in the Registry of
Deeds regarding a document allegedly signed by him in favor of his co-defendant Fermin Caram, Jr. but
denies that he ever signed the document for he knew before hand that he had signed a deed of sale in
favor of the plaintiff and that the plaintiff was in possession of the certificate of title; that if ever his
thumb mark appeared in the document purportedly alienating the property to Fermin Caram, did his
consent was obtained through fraud and misrepresentation for the defendant Mata is illiterate and
ignorant and did not know what he was signing; and that he did not receive a consideration for the said
sale. 7

The defendant Fermin Caram Jr. filed his answer on October 23, 1959 alleging that he has no knowledge
or information about the previous encumbrances, transactions, and alienations in favor of plaintiff until
the filing of the complaints. 8

The trial court rendered a decision dated February 29, 1964, the dispositive portion of which reads: 9

1. Declaring that the deed of sale, Exhibit A, executed by Marcos Mata in favor of Claro L. Laureta
stands and prevails over the deed of sale, Exhibit F, in favor of Fermin Caram, Jr.;

2. Declaring as null and void the deed of sale Exhibit F, in favor of Fermin Caram, Jr.;

3. Directing Marcos Mata to acknowledge the deed of sale, Exhibit A, in favor of Claro L. Laureta;

4. Directing Claro L. Laureta to secure the approval of the Secretary of Agriculture and Natural
Resources on the deed, Exhibit A, after Marcos Mata shall have acknowledged the same before a notary
public;

5. Directing Claro L. Laureta to surrender to the Register of Deeds for the City and Province of
Davao the Owner's Duplicate of Original Certificate of Title No. 3019 and the latter to cancel the same;

6. Ordering the Register of Deeds for the City and Province of Davao to cancel Transfer Certificate
of Title No. T-140 in the name of Fermin Caram, Jr.;

7. Directing the Register of Deeds for the City and Province of Davao to issue a title in favor of Claro
L. Laureta, Filipino, resident of Quezon City, upon presentation of the deed executed by Marcos Mata in
his favor, Exhibit A, duly acknowledged by him and approved by the Secretary of Agriculture and Natural
Resources, and

8. Dismissing the counterclaim and cross claim of Marcos Mata and Codidi Mata, the counterclaim
of Caram, Jr., the answer in intervention, counterclaim and cross-claim of the Mansacas.

The Court makes no pronouncement as to costs.

SO ORDERED.

30
The defendants appealed from the judgment to the Court of Appeals. 10 The appeal was docketed as CA-
G.R. NO. 35721- R.

The Court of Appeals promulgated its decision on January 29, 1968 affirming the judgment of the trial
court.

In his brief, the petitioner assigns the following errors: 11

THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT IRESPE AND APORTADERA WERE
ATTORNEYS-IN-FACT OF PETITIONER CARAM FOR THE PURPOSE OF BUYING THE PROPERTY IN
QUESTION.

II

THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THE EVIDENCE ADDUCED IN THE
TRIAL COURT CONSTITUTE LEGAL EVIDENCE OF FRAUD ON THE PART OF IRESPE AND APORTADERA AT
TRIBUTABLE TO PETITIONER.

III

THE RESPONDENT COURT OF APPEALS COMMITTED GRAVE ERROR OF LAW IN HOLDING THAT
KNOWLEDGE OF IRESPE AND APORTADERA OF A PRIOR UNREGISTERED SALE OF A TITLED PROPERTY
ATTRIBUTABLE TO PETITIONER AND EQUIVALENT IN LAW OF REGISTRATION OF SAID SALE.

IV

THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT AN ACTION FOR RECONVEYANCE
ON THE GROUND OF FRAUD PRESCRIBES WITHIN FOUR (4) YEARS.

The petitioner assails the finding of the trial court that the second sale of the property was made
through his representatives, Pedro Irespe and Atty. Abelardo Aportadera. He argues that Pedro Irespe
was acting merely as a broker or intermediary with the specific task and duty to pay Marcos Mata the
sum of P1,000.00 for the latter's property and to see to it that the requisite deed of sale covering the
purchase was properly executed by Marcos Mata; that the Identity of the property to be bought and the
price of the purchase had already been agreed upon by the parties; and that the other alleged
representative, Atty. Aportadera, merely acted as a notary public in the execution of the deed of sale.

The contention of the petitioner has no merit. The facts of record show that Mata, the vendor, and
Caram, the second vendee had never met. During the trial, Marcos Mata testified that he knows Atty.
Aportadera but did not know Caram. 12 Thus, the sale of the property could have only been through
Caram's representatives, Irespe and Aportadera. The petitioner, in his answer, admitted that Atty.
Aportadera acted as his notary public and attorney-in-fact at the same time in the purchase of the
property. 13

31
The petitioner contends that he cannot be considered to have acted in bad faith because there is no
direct proof showing that Irespe and Aportadera, his alleged agents, had knowledge of the first sale to
Laureta. This contention is also without merit.

The Court of Appeals, in affirming the decision of the trial court, said: 14

The trial court, in holding that appellant Caram. Jr. was not a purchaser in good faith, at the time he
bought the same property from appellant Mata, on May 5, 1947, entirely discredited the testimony of
Aportadera. Thus it stated in its decision:

The testimony of Atty. Aportadera quoted elsewhere in this decision is hollow. There is every reason to
believe that Irespe and he had known of the sale of the property in question to Laureta on the day Mata
and Irespe, accompanied by Leaning Mansaca, went to the office of Atty. Aportadera for the sale of the
same property to Caram, Jr., represented by Irespe as attorney-in-fact. Ining Mansaca was with the two
Irespe and Mata to engage the services 6f Atty. Aportadera in the annulment of the sale of his land
to Laureta. When Leaning Mansaca narrated to Atty. Aportadera the circumstances under which his
property had been sold to Laureta, he must have included in the narration the sale of the land of Mata,
for the two properties had been sold on the same occassion and under the same circumstances. Even as
early as immediately after liberation, Irespe, who was the witness in most of the cases filed by Atty.
Aportadera in his capacity as Provincial Fiscal of Davao against Laureta, must have known of the
purchases of lands made by Laureta when he was regimental commander, one of which was the sale
made by Mata. It was not a mere coincidence that Irespe was made guardian ad litem of Leaning
Mansaca, at the suggestion of Atty. Aportadera and attorney-in-fact of Caram, Jr.

The Court cannot help being convinced that Irespe, attorney-in-fact of Caram, Jr. had knowledge of the
prior existing transaction, Exhibit A, between Mata and Laureta over the land, subject matter of this
litigation, when the deed, Exhibit F, was executed by Mata in favor of Caram, Jr. And this knowledge has
the effect of registration as to Caram, Jr. RA pp. 123-124)

We agree with His Honor's conclusion on this particular point, on two grounds the first, the same
concerns matters affecting the credibility of a witness of which the findings of the trial court command
great weight, and second, the same is borne out by the testimony of Atty. Aportadera himself. (t.s.n., pp.
187-190, 213-215, Restauro).

Even if Irespe and Aportadera did not have actual knowledge of the first sale, still their actions have not
satisfied the requirement of good faith. Bad faith is not based solely on the fact that a vendee had
knowledge of the defect or lack of title of his vendor. In the case of Leung Yee vs. F. L. Strong Machinery
Co. and Williamson, this Court held: 15

One who purchases real estate with knowledge of a defect or lack of title in his vendor can not claim that
he has acquired title thereto in good faith, as against the true owner of the land or of an interest therein,
and the same rule must be applied to one who has knowledge of facts which should have put him upon
such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his
vendor.

In the instant case, Irespe and Aportadera had knowledge of circumstances which ought to have put
them an inquiry. Both of them knew that Mata's certificate of title together with other papers pertaining

32
to the land was taken by soldiers under the command of Col. Claro L. Laureta. 16 Added to this is the fact
that at the time of the second sale Laureta was already in possession of the land. Irespe and Aportadera
should have investigated the nature of Laureta's possession. If they failed to exercise the ordinary care
expected of a buyer of real estate they must suffer the consequences. The rule of caveat emptor requires
the purchaser to be aware of the supposed title of the vendor and one who buys without checking the
vendor's title takes all the risks and losses consequent to such failure. 17

The principle that a person dealing with the owner of the registered land is not bound to go behind the
certificate and inquire into transactions the existence of which is not there intimated 18 should not apply
in this case. It was of common knowledge that at the time the soldiers of Laureta took the documents
from Mata, the civil government of Tagum was not yet established and that there were no officials to
ratify contracts of sale and make them registerable. Obviously, Aportadera and Irespe knew that even if
Mata previously had sold t he Disputed such sale could not have been registered.

There is no doubt then that Irespe and Aportadera, acting as agents of Caram, purchased the property of
Mata in bad faith. Applying the principle of agency, Caram as principal, should also be deemed to have
acted in bad faith.

Article 1544 of the New Civil Code provides that:

Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should be
movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith
first recordered it in the Registry of Property.

Should there be no inscription, the ownership shag pertain to the person who in good faith was first in
the possession; and, in the absence thereof, to the person who presents the oldest title, provided there
is good faith. (1473)

Since Caram was a registrant in bad faith, the situation is as if there was no registration at all. 19

The question to be determined now is, who was first in possession in good faith? A possessor in good
faith is one who is not aware that there exists in his title or mode of acquisition any flaw which
invalidates it. 20 Laureta was first in possession of the property. He is also a possessor in good faith. It is
true that Mata had alleged that the deed of sale in favor of Laureta was procured by force. 21 Such
defect, however, was cured when, after the lapse of four years from the time the intimidation ceased,
Marcos Mata lost both his rights to file an action for annulment or to set up nullity of the contract as a
defense in an action to enforce the same.

Anent the fourth error assigned, the petitioner contends that the second deed of sale, Exhibit "F", is a
voidable contract. Being a voidable contract, the action for annulment of the same on the ground of
fraud must be brought within four (4) years from the discovery of the fraud. In the case at bar, Laureta is
deemed to have discovered that the land in question has been sold to Caram to his prejudice on
December 9, 1947, when the Deed of Sale, Exhibit "F" was recorded and entered in the Original
Certificate of Title by the Register of Deeds and a new Certificate of Title No. 140 was issued in the name

33
of Caram. Therefore, when the present case was filed on June 29, 1959, plaintiff's cause of action had
long prescribed.

The petitioner's conclusion that the second deed of sale, "Exhibit F", is a voidable contract is not correct.
I n order that fraud can be a ground for the annulment of a contract, it must be employed prior to or
simultaneous to the, consent or creation of the contract. The fraud or dolo causante must be that which
determines or is the essential cause of the contract. Dolo causante as a ground for the annulment of
contract is specifically described in Article 1338 of the New Civil Code of the Philippines as "insidious
words or machinations of one of the contracting parties" which induced the other to enter into a
contract, and "without them, he would not have agreed to".

The second deed of sale in favor of Caram is not a voidable contract. No evidence whatsoever was
shown that through insidious words or machinations, the representatives of Caram, Irespe and
Aportadera had induced Mata to enter into the contract.

Since the second deed of sale is not a voidable contract, Article 1391, Civil Code of the Philippines which
provides that the action for annulment shall be brought within four (4) years from the time of the
discovery of fraud does not apply. Moreover, Laureta has been in continuous possession of the land since
he bought it in June 1945.

A more important reason why Laureta's action could not have prescribed is that the second contract of
sale, having been registered in bad faith, is null and void. Article 1410 of the Civil Code of the Philippines
provides that any action or defense for the declaration of the inexistence of a contract does not
prescribe.

In a Memorandum of Authorities 22 submitted to this Court on March 13, 1978, the petitioner insists
that the action of Laureta against Caram has prescribed because the second contract of sale is not void
under Article 1409 23 of the Civil Code of the Philippines which enumerates the kinds of contracts which
are considered void. Moreover, Article 1544 of the New Civil Code of the Philippines does not declare
void a second sale of immovable registered in bad faith.

The fact that the second contract is not considered void under Article 1409 and that Article 1544 does
not declare void a deed of sale registered in bad faith does not mean that said contract is not void.
Article 1544 specifically provides who shall be the owner in case of a double sale of an immovable
property. To give full effect to this provision, the status of the two contracts must be declared valid so
that one vendee may contract must be declared void to cut off all rights which may arise from said
contract. Otherwise, Article 1544 win be meaningless.

The first sale in favor of Laureta prevails over the sale in favor of Caram.

WHEREFORE, the petition is hereby denied and the decision of the Court of Appeals sought to be
reviewed is affirmed, without pronouncement as to costs.

SO ORDERED.

G.R. No. L-34500 March 18, 1988

34
MOISES OLIVARES and JUANITA T. OLIVARES, petitioners-appellants,
vs.
THE HONORABLE CARLOS V. GONZALES as Judge of the Court of First Instance of Iloilo (Branch VI),
respondent and JACINTO TUVILLA, CEFERINO TUVILLA, and JUAN TUMABINI, respondents-appellees.

MELENCIO-HERRERA, J.:

The Disputed Property is a piece of unregistered land located at Tigbauan, Iloilo Identified as Assessor's
Lot No. 343. It was previously owned by respondents-appellees Jacinto Tuvilla and Ceferino Tuvilla (the
Tuvillas, for short) both of Tigbauan, Iloilo.

Sometime in 1955, the Tuvillas executed a "Deed of Sale with Right to Repurchase" in favor of
respondent-appellee Juan Tumabini over the Disputed Property in consideration of the sum of
P1,350.00. The document was duly acknowledged before a Notary Public but was not recorded in the
Registry of Property.

Sometime in 1959, the Tuvillas executed a "Deed of Sale with Pacto de Retro" over the Disputed Property
in favor of petitioners- appellants, Moises Olivares and Juanita T. Olivares (the Olivareses, for short). This
document was acknowledged before a Notary Public and registered with the Registry of Deeds. In 1966,
the Tuvillas also executed in favor of the Olivareses a "Deed of Absolute Sale" covering the Disputed
Property. Petitioners-appellants have been in possession of the Disputed Property since 1959.

On October 11, 1967, respondent-appellee, Juan Tumabini filed Civil Case No. 7410 before Branch I of
the then Court of First Instance of Iloilo against the Tuvillas for the consolidation of ownership over the
Disputed Property by reason of the alleged failure of the Tuvillas to redeem the property from Tumabini
(hereinafter referred to as the Consolidation Case). The Olivareses, however, were not included as
parties to the said case.

During the pre-trial of the Consolidation Case, counsel for the parties agreed to consider the pacto de
retro sale as one of equitable mortgage. Thus, the Trial Court rendered judgment in favor of Tumabini in
the amount of P 1,350.00, pursuant to which, the Court subsequently issued a Writ of Execution on
October 23, 1968.

On November 23, 1968, the Olivareses instituted Civil Case No. 7777 before Branch VI of the former
Court of First Instance of Iloilo, for Quieting of Title, against the Tuvillas, Juan Tumabini the Provincial
Sheriff and Pyramid Surety (hereinafter, the Quieting of Title Case). The said Court issued a Restraining
Order to stop the sale in the Consolidation Case (No. 7410) pending in Branch 1, but the said order was
lifted on February 6, 1969.

Subsequently, the Consolidation Case (No. 7410), the Disputed Property was sold at public auction and a
Writ of Possession was issued in Tumabinis favor. However, the tenant of the Olivareses refused to
surrender possession, prompting a citation for contempt. Action thereon was deferred, however,
pending termination of Civil Case No. 7777.

35
On July 7, 1970, in the Quieting of Title Case (No. 7777), the Trial Court issued an Order dismissing said
case, as follows:

Acting upon the motion for dismissal of this case filed by Atty. Enrique Arguelles, counsel for the
defendants, it appearing that the instant action has been filed since November 23, 1968 and up to this
time plaintiffs failed to exert effort to have the defendants summoned, for failure to prosecute and lack
of interest on the part of the plaintiffs for such unreasonable length of time, as prayed, let this case be
dismissed

No reconsideration was sought nor any appeal taken by the Olivareses.

On July 14, 1971, the same case was refiled, also in Branch VI, docketed as Civil Case No. 8698 (the
Refiled Case) which, however, was dismissed by the Court on September 6, 1971 "it appearing that Civil
Case No. 7777 previously filed and dismissed by the Court embraces the same subject matter and the
same party litigants as the case at bar."

On September 20, 1971, the Court denied the Motion for Reconsideration filed by the Olivareses. Hence,
this appeal by certiorari.

The question posed is whether the dismissal of the Quieting of Title Case (No. 7777) "for failure to
prosecute" barred the institution of a subsequent suit, Civil Case No. 8698, by the same plaintiff against
the same defendants on the same cause of action. Section 3, Rule 17 of the Rules of Court specifically
provides:

Sec. 3. Failure to prosecute. If plaintiff fails to appear at the time of the trial, or to prosecute his
action for an unreasonable length of time, or to comply with these rules or any order of the court, the
action may be dismissed upon motion of the defendant or upon the court's own motion. This dismissal
shall have the effect of an adjudication upon the merits, unless otherwise provided by the court.

Procedurally speaking, therefore, since the dismissal by the Trial Court was unqualified, it had the effect
of an adjudication upon the merits.

However, the equities of the case are with the Olivareses. The first sale with pacto de retro by the
Tuvillas to Tumabini was unregistered; in contrast, the sale in favor of the Olivareses was duly recorded.
The Consolidation Case (Case No. 7410) instituted by Tumabini against the Tuvillas for consolidation of
his ownership did not include the Olivareses as parties defendants even though they were then in
possession of the Disputed Property. Justice and equity demand, therefore, that their side be heard in
the Refiled Case (No. 8698). Then, too, the contempt incident and the matter of the Writ of Possession in
the Consolidation Case (No. 7410) were left unresolved pending the outcome of the Quieting of Title
Case (No. 7777).

In other words, it would be more in keeping with substantial justice if the controversy between the
parties to be resolved on the merits rather than on a procedural technicality in the light of the express
mandate of the Rules that they be "liberally construed in order to promote their object and to assist the
parties in obtaining just, speedy and inexpensive determination of every action and proceeding." The
dismissal of actions is based on sound judicial discretion and such discretion "must be exercised wisely
and prudently never capriciously, with a view to substantial justice." For having failed to meet that

36
standard it will have to be held that respondent Judge acted with grave abuse of discretion (see Tandoc
vs. Tensuan, I, 50835, October 30, 1979, 93 SCRA 880).

WHEREFORE, the questioned Order of dismissal, dated September 6, 1971, in Civil Case No. 8698, is
hereby SET ASIDE and the said case REMANDED for prompt hearing and determination on the merits.
This Decision shag be immediately executory upon promulgation. No costs.

SO ORDERED.

G.R. No. L-56232 June 22, 1984

ABELARDO CRUZ (deceased) substituted by Heirs Consuelo C. Cruz, Claro C. Cruz and Stephen C. Cruz,
per Resolution, petitioners,
vs.
LEODEGARIA CABANA, TEOFILO LEGASPI , ILUMINADA CABANA and THE HONOR- ABLE COURT OF
APPEALS,* respondents.

TEEHANKEE, J.:

The Court affirms the questioned decision of the now defunct Court of Appeals which affirmed that of
the Court of First Instance of Quezon Province, but directs that the seller, respondent Leodegaria Cabana
who sold the property in question twice, first to her co-respondents Teofilo Legaspi and Iluminada
Cabana and later to petitioner Abelardo Cruz (now deceased), should reimburse to petitioner's heirs the
amounts of P2,352.50, which the late petitioner Abelardo Cruz paid to the Philippine National Bank to
discharge the mortgage obligation of said respondent Leodegaria Cabana in favor of said bank, and of
P3,397.50, representing the amount paid by said Abelardo Cruz to her as consideration of the sale with
pacto de retro of the subject property.

This is a simple case of double sale of real property. Respondent appellate court in its decision of August
13, 1980 stated the background facts and resolved the issue in favor of defendants- appellees, first
buyers- respondents herein, and against plaintiff-appellant Abelardo Cruz, petitioner herein (substituted
by his heirs), as follows:

Defendants' evidence shows that on October 21, 1968, defendant Leodegaria Cabana sold the land in
question to defendants-spouses Teofilo Legaspi and Iluminada Cabana (Exh. 1). The said defendants-
spouses attempted to register the deed of sale but said registration was not accomplished because they
could not present the owner's duplicate of title which was at that time in the possession of the PNB as
mortgage.

Likewise, when plaintiff tried to register the deed of sale executed by Leodegaria Cabana on September
3, 1970, said plaintiff was informed that the owner thereof had sold the land to defendants-spouses on
October 21, 1968. Plaintiff was able to register the land in his name on February 9, 1971 (Exh. A). With
the admission of both parties that the land in question was sold to two persons, the main issue to be
resolved in this appeal is as to who of said vendees has a better title to said land.

37
There is no dispute that the land in question was sold with right of repurchase on June 1, 1965 to
defendants- spouses Teofilo Legaspi and Iluminada Cabana (Exh. 1). The said document 'Bilihang Muling
Mabibili' stipulated that the land can be repurchased by the vendor within one year from December 31,
1966 (see par. 5, Exh. 1).lwphl@it Said land was not repurchased and in the meantime, however, said
defendants-spouses took possession of the land.

Upon request of Leodegaria Cabana, the title of the land was lent to her in order to mortgage the
property to the Philippine National Bank. Said title was, forthwith, deposited with the PNB. On October
21, 1968, defendant Leodegaria Cabana sold the land by way of absolute sale to the defendants- spouses
(Exh. 2). However, on November 29, 1968 defendant sold the same property to herein plaintiff and the
latter was able to register it in his name.

The transaction in question is governed by Article 1544 of the Civil Code. True it is that the plaintiff was
able to register the sale in his name but was he in good faith in doing so?

While the title was registered in plaintiff- appellant's name on February 9, 1971 (Exh. A), it appears that
he knew of the sale of the land to defendants-spouses Legaspi as he was informed in the Office of the
Register of Deeds of Quezon. It appears that the defendants-spouses registered their document of sale
on May 13, 1965 under Primary Entry No. 210113 of the Register of Deeds (Exh. 2).

Under the foregoing circumstances, the right of ownership and title to the land must be resolved in favor
of the defendants- spouses Legaspi on three counts. First, the plaintiff-appellant was not in good faith in
registering the title in his name. Consistent is the jurisprudence in this jurisdiction that in order that the
provisions of Article 1544 of the new Civil Code may be invoked, it is necessary that the conveyance must
have been made by a party who has an existing right in the thing and the power to dispose of it (10
Manresa 170, 171). It cannot be set up by a second purchaser who comes into possession of the
property that has already been acquired by the first purchaser in full dominion (Bautista vs. Sison, 39
Phil. 615), this not withstanding that the second purchaser records his title in the public registry, if the
registration be done in bad faith, the philosophy underlying this rule being that the public records cannot
be covered into instruments of fraud and oppression by one who secures an inscription therein in bad
faith (Chupinghong vs. Borreros, 7 CA Rep. 699).

A purchaser who has knowledge of fact which would put him upon inquiry and investigation as to
possible defects of the title of the vendor and fails to make such inquiry and investigation, cannot claim
that he is a purchaser in good faith. Knowledge of a prior transfer of a registered property by a
subsequent purchaser makes him a purchaser in bad faith and his knowledge of such transfer vitiates his
title acquired by virtue of the latter instrument of conveyance which creates no right as against the first
purchaser (Reylago vs. Jarabe, L-20046, March 27, 1968, 22 SCRA 1247).

In the second place, the defendants-spouses registered the deed of absolute sale ahead of plaintiff-
appellant. Said spouses were not only able to obtain the title because at that time, the owner's duplicate
certificate was still with the Philippine National Bank.

In the third place, defendants-spouses have been in possession all along of the land in question. If
immovable property is sold to different vendees, the ownership shall belong to the person acquiring it
who in good faith first recorded it in the registry of property; and should there be no inscription, the
ownership shall pertain to the person who in good faith was first in the possession (Soriano, et al. vs. The

38
Heirs of Domingo Magali et al., L-15133 , July 31, 1963, 8 SCRA 489). Priority of possession stands good
in favor of herein defendants-spouses (Evangelista vs. Abad, [CA] 36 O.G. 2913; Sanchez vs. Ramos, 40
Phil. 614, Quimson vs, Rosete, 87 Phil. 159).

The Court finds that in this case of double sale of real property, respondent appellate court, on the basis
of the undisputed facts, correctly applied the provisions of Article 1544 of the Civil Code that

Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should be
movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith
first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in
the possession; and, in the absence thereof, to the person who presents the oldest title, provided there
is good faith.

There is no question that respondents-spouses Teofilo Legaspi and Iluminada Cabana were the first
buyers, first on June 1, 1965 under a sale with right of repurchase and later on October 21, 1968 under a
deed of absolute sale and that they had taken possession of the land sold to them; that petitioner was
the second buyer under a deed of sale dated November 29, 1968, which to all indications, contrary to
the text, was a sale with right of repurchase for ninety (90) days. 1 There is no question either that
respondents legaspi spouses were the first and the only ones to be in possession of the subject property.

Said respondents spouses were likewise the first to register the sale with right of repurchase in their
favor on May 13, 1965 under Primary Entry No. 210113 of the Register of Deeds. They could not register
the absolute deed of sale in their favor and obtain the corresponding transfer certificate of title because
at that time the seller's duplicate certificate was still with the bank. But there is no question, and the
lower courts so found conclusively as a matter of fact, that when petitioner Cruz succeeded in registering
the later sale in his favor, he knew and he was informed of the prior sale in favor of respondents-
spouses. Respondent appellate court correctly held that such "knowledge of a prior transfer of a
registered property by a subsequent purchaser makes him a purchaser in bad faith and his knowledge of
such transfer vitiates his title acquired by virtue of the latter instrument of conveyance which creates no
right as against the first purchaser."

As the Court held in Carbonell vs. Court of Appeals 2 "it is essential that the buyer of realty must act in
good faith in registering his deed of sale to merit the protection of the second paragraph of [the above
quoted] Article 1544." As the writer stressed in his concurring opinion therein, "(T)he governing principle
here is prius tempore, potior jure (first in time, stronger in right). Knowledge gained by the first buyer of
the second sale cannot defeat the first buyer's rights except only as provided by the Civil Code and that is
where the second buyer first registers in good faith the second sale ahead of the first. Such knowledge of
the first buyer does not bar her from availing of her rights under the law, among them, to register first
her purchase as against the second buyer. But in converso knowledge gained by the second buyer of the
first sale defeats his rights even if he is first to register the second sale, since such knowledge taints his
prior registration with bad faith. This is the price exacted by Article 1544 of the Civil Code for the second
buyer being able to displace the first buyer; that before the second buyer can obtain priority over the

39
first, he must show that he acted in good faith throughout (i.e. in ignorance of the first sale and of the
first buyer's rights) from the time of acquisition until the title is transferred to him by registration or
failing registration, by delivery of possession. The second buyer must show continuing good faith and
innocence or lack of knowledge of the first sale until his contract ripens into full ownership through prior
registration as provided by law."

Petitioner's prayer for alternative relief for reimbursement of the amount of P2,352.50 paid by him to
the bank to discharge the existing mortgage on the property and of the amount of P3,397.50
representing the price of the second sale are well taken insofar as the seller Leodegaria Cabana is
concerned. These amounts have been received by the said seller Leodegaria Cabana on account of a void
second sale and must be duly reimbursed by her to petitioner's heirs, but the Legaspi spouses cannot be
held liable therefor since they had nothing to do with the said second sale nor did they receive any
benefit therefrom. Petitioner's claim for reimbursement of the amount of P102.58 as real estate taxes
paid on the property is not well taken because the respondents Legaspi spouses had been paying the
real estate taxes on the same property since June 1, 1969. 4

ACCORDINGLY, the appealed judgment of respondent appellate court, upholding respondents-spouses

Teofilo Legaspi and Iluminada Cabana as the true and rightful owners of the property in litigation and
ordering the issuance of a new title with the cancellation as null and void of Title No. T- 99140 obtained
by petitioner Abelardo C. Cruz, is hereby affirmed in toto. In accordance with the partial grant of
petitioner's prayer for alternative relief as stated in the preceding paragraph hereof, the Court hereby
orders and sentences respondent Leodegaria Cabana to reimburse and pay to petitioner's heirs the total
sum of P5,750.00.

G..R. No. 132424 May 2, 2006

SPOUSES BONIFACIO R. VALDEZ, JR. and VENIDA M. VALDEZ, Petitioners,

vs.
HON. COURT OF APPEALS, SPOUSES GABRIEL FABELLA and FRANCISCA FABELLA, Respondents.

DECISION

CHICO-NAZARIO, J.:

This petition for review under Rule 45 of the Rules of Court, filed by petitioners spouses Bonifacio R.
Valdez, Jr. and Venida M. Valdez, seeks to nullify and set aside the 22 April 1997 decision1 and 30
January 1998 resolution of the Court of Appeals in CA-G.R. SP No. 43492, which reversed the judgment,
dated 8 January 1997, of the Regional Trial Court of Antipolo, Rizal, Branch 74, in Civil Case No. 3607,
which, in turn, affirmed in toto the decision rendered by the Municipal Trial Court of Antipolo, Rizal,
Branch II, in Civil Case No. 2547.

This case originated from a complaint for unlawful detainer filed by petitioners Bonifacio and Venida
Valdez against private respondents Gabriel and Francisca Fabella before the Municipal Trial Court of
Antipolo, Rizal. The complaint alleges these material facts:

2. That plaintiffs are the registered owner[s] of a piece of residential lot denominated as Lot [N]o. 3 Blk
19 located at Carolina Executive Village, Brgy. Sta. Cruz, Antipolo, Rizal which [they] acquired from

40
Carolina Realty, Inc. Sometime [i]n November 1992 by virtue of Sales Contract, xerox copy of which is
hereto attached marked as Annex "A" and the xerox copy of the Torrens Certificate of Title in her name
marked as Annex "B";

3. That defendants, without any color of title whatsoever occupie[d] the said lot by building their house
in the said lot thereby depriving the herein plaintiffs rightful possession thereof;

4. That for several times, plaintiffs orally asked the herein defendants to peacefully surrender the
premises to them, but the latter stubbornly refused to vacate the lot they unlawfully occupied;

5. That despite plaintiffs referral of the matter to the Barangay, defendants still refused to heed the plea
of the former to surrender the lot peacefully;

6. That because of the unfounded refusal of the herein defendants to settle the case amicably, the
Barangay Captain was forced to issue the necessary Certification to File Action in favor of the herein
plaintiffs in order that the necessary cause of action be taken before the proper court, xerox copy of
which is hereto attached marked as Annex "C";

7. That by reason of the deliberate, malicious and unfounded refusal of the defendants to
vacate/surrender the premises in question, the herein plaintiffs were constrained to engage the
professional services of counsel thus incurring expenses amounting to TEN THOUSAND PESOS
(P10,000.00) representing acceptance fee and additional ONE THOUSAND PESOS (P1,000.00) per
appearance, who on July 12, 1994 sent a formal demand was likewise ignored, (sic) copy of which is
hereto attached as Annex "D";

8. That likewise by virtue of the adamant refusal of the defendants to vacate/surrender the said
premises in question, plaintiff[s] suffered serious anxiety, sleepless nights, mental torture and moral
erosion; x x x2

In their answer, private respondents contended that the complaint failed to state that petitioners had
prior physical possession of the property or that they were the lessors of the former. In the alternative,
private respondents claimed ownership over the land on the ground that they had been in open,
continuous, and adverse possession thereof for more than thirty years, as attested by an ocular
inspection report from the Department of Environment and Natural Resources. They also stressed that
the complaint failed to comply with Supreme Court Circular No. 28-91 regarding affidavits against non-
forum shopping.

The Municipal Trial Court (MTC) rendered a decision in favor of the petitioners, ordering private
respondents to vacate the property and to pay rent for the use and occupation of the same plus
attorneys fees.

Private respondents appealed the MTCs decision to the Regional Trial Court (RTC). The RTC, in a decision
dated 8 January 1997, affirmed in toto the decision of the MTC.

Undeterred, the private respondents filed a petition for review with the Court of Appeals on 10 March
1997 questioning the decision of the RTC.

41
In a decision dated 22 April 1997, the Court of Appeals reversed and set aside the decision of the RTC. It
held that petitioners failed to make a case for unlawful detainer because they failed to show that they
had given the private respondents the right to occupy the premises or that they had tolerated private
respondents possession of the same, which is a requirement in unlawful detainer cases. It added that
the allegations in petitioners complaint lack jurisdictional elements for forcible entry which requires an
allegation of prior material possession. The Court of Appeals ratiocinated thus:

An examination of the complaint reveals that key jurisdictional allegations that will support an action for
ejectment are conspicuously lacking. In particular, an allegation of prior material possession is
mandatory in forcible entry, xxx and the complaint is deficient in this respect. On the other hand, neither
does there appear to be a case of unlawful detainer, since the private respondents failed to show that
they had given the petitioners the right to occupy the premises, which right has now [been]
extinguished.

xxx

In light of the foregoing, the conclusion is inevitable that the Municipal Trial Court before which the
action for ejectment was filed had no jurisdiction over the case. Consequently, the dismissal thereof is in
order.

WHEREFORE, the Petition is hereby GIVEN DUE COURSE, and GRANTED. The decision dated 08 January
1997 rendered by the respondent court is hereby REVERSED and SET ASIDE, and judgment is hereby
rendered DISMISSING the complaint in Civil Case No. 2547 of the Municipal Trial Court of Antipolo, Rizal
for lack of jurisdiction.3

Petitioners filed a motion for reconsideration which was denied in a resolution dated 30 January 1998.4

Hence, the instant petition.

Petitioners submit the following issues for the Courts consideration5:

A. WHETHER OR NOT THE ALLEGATIONS OF THE COMPLAINT CLEARLY MADE OUT A CASE FOR
UNLAWFUL DETAINER.

B. WHETHER OR NOT BASED ON THE ALLEGATION(S) OF THE COMPLAINT, THE MUNICIPAL TRIAL COURT
OF ANTIPOLO, RIZAL, CLEARLY HAS ORIGINAL JURISDICTION OVER THE INSTANT COMPLAINT FILED
BEFORE IT.

Since the two issues are closely intertwined, they shall be discussed together.

In the main, petitioners claim that the averments of their complaint make out a case for unlawful
detainer having alleged that private respondents unlawfully withheld from them the possession of the
property in question, which allegation is sufficient to establish a case for unlawful detainer. They further
contend that the summary action for ejectment is the proper remedy available to the owner if another
occupies the land at the formers tolerance or permission without any contract between the two as the
latter is bound by an implied promise to vacate the land upon demand by the owner.

42
The petition is not meritorious.

Under existing law and jurisprudence, there are three kinds of actions available to recover possession of
real property: (a) accion interdictal; (b) accion publiciana; and (c) accion reivindicatoria.6

Accion interdictal comprises two distinct causes of action, namely, forcible entry (detentacion) and
unlawful detainer (desahuico).7 In forcible entry, one is deprived of physical possession of real property
by means of force, intimidation, strategy, threats, or stealth whereas in unlawful detainer, one illegally
withholds possession after the expiration or termination of his right to hold possession under any
contract, express or implied.8 The two are distinguished from each other in that in forcible entry, the
possession of the defendant is illegal from the beginning, and that the issue is which party has prior de
facto possession while in unlawful detainer, possession of the defendant is originally legal but became
illegal due to the expiration or termination of the right to possess.9

The jurisdiction of these two actions, which are summary in nature, lies in the proper municipal trial
court or metropolitan trial court.10 Both actions must be brought within one year from the date of
actual entry on the land, in case of forcible entry, and from the date of last demand, in case of unlawful
detainer.11 The issue in said cases is the right to physical possession.

Accion publiciana is the plenary action to recover the right of possession which should be brought in the
proper regional trial court when dispossession has lasted for more than one year.12 It is an ordinary civil
proceeding to determine the better right of possession of realty independently of title.13 In other words,
if at the time of the filing of the complaint more than one year had elapsed since defendant had turned
plaintiff out of possession or defendants possession had become illegal, the action will be, not one of
the forcible entry or illegal detainer, but an accion publiciana. On the other hand, accion reivindicatoria is
an action to recover ownership also brought in the proper regional trial court in an ordinary civil
proceeding.14

To justify an action for unlawful detainer, it is essential that the plaintiffs supposed acts of tolerance
must have been present right from the start of the possession which is later sought to be recovered.15
Otherwise, if the possession was unlawful from the start, an action for unlawful detainer would be an
improper remedy.16 As explained in Sarona v. Villegas17:

But even where possession preceding the suit is by tolerance of the owner, still, distinction should be
made.

If right at the incipiency defendants possession was with plaintiffs tolerance, we do not doubt that the
latter may require him to vacate the premises and sue before the inferior court under Section 1 of Rule
70, within one year from the date of the demand to vacate.

xxxx

A close assessment of the law and the concept of the word "tolerance" confirms our view heretofore
expressed that such tolerance must be present right from the start of possession sought to be recovered,
to categorize a cause of action as one of unlawful detainer - not of forcible entry. Indeed, to hold
otherwise would espouse a dangerous doctrine. And for two reasons: First. Forcible entry into the land is
an open challenge to the right of the possessor. Violation of that right authorizes the speedy redress in

43
the inferior court - provided for in the rules. If one year from the forcible entry is allowed to lapse before
suit is filed, then the remedy ceases to be speedy; and the possessor is deemed to have waived his right
to seek relief in the inferior court. Second, if a forcible entry action in the inferior court is allowed after
the lapse of a number of years, then the result may well be that no action of forcible entry can really
prescribe. No matter how long such defendant is in physical possession, plaintiff will merely make a
demand, bring suit in the inferior court upon a plea of tolerance to prevent prescription to set in - and
summarily throw him out of the land. Such a conclusion is unreasonable. Especially if we bear in mind
the postulates that proceedings of forcible entry and unlawful detainer are summary in nature, and that
the one year time-bar to suit is but in pursuance of the summary nature of the action.18 (Underlining
supplied)

It is the nature of defendants entry into the land which determines the cause of action, whether it is
forcible entry or unlawful detainer. If the entry is illegal, then the action which may be filed against the
intruder is forcible entry. If, however, the entry is legal but the possession thereafter becomes illegal, the
case is unlawful detainer.

Indeed, to vest the court jurisdiction to effect the ejectment of an occupant, it is necessary that the
complaint should embody such a statement of facts as brings the party clearly within the class of cases
for which the statutes provide a remedy, as these proceedings are summary in nature.19 The complaint
must show enough on its face the court jurisdiction without resort to parol testimony.20

The jurisdictional facts must appear on the face of the complaint. When the complaint fails to aver facts
constitutive of forcible entry or unlawful detainer, as where it does not state how entry was affected or
how and when dispossession started, the remedy should either be an accion publiciana or an accion
reivindicatoria in the proper regional trial court.21 Thus, in Go, Jr. v. Court of Appeals,22 petitioners filed
an unlawful detainer case against respondent alleging that they were the owners of the parcel of land
through intestate succession which was occupied by respondent by mere tolerance of petitioners as well
as their deceased mother. Resolving the issue on whether or not petitioners case for unlawful detainer
will prosper, the court ruled23:

Petitioners alleged in their complaint that they inherited the property registered under TCT No. C-32110
from their parents; that possession thereof by private respondent was by tolerance of their mother, and
after her death, by their own tolerance; and that they had served written demand on December, 1994,
but that private respondent refused to vacate the property. x x x

It is settled that one whose stay is merely tolerated becomes a deforciant illegally occupying the land the
moment he is required to leave. It is essential in unlawful detainer cases of this kind, that plaintiffs
supposed acts of tolerance must have been present right from the start of the possession which is later
sought to be recovered. This is where petitioners cause of action fails. The appellate court, in full
agreement with the MTC made the conclusion that the alleged tolerance by their mother and after her
death, by them, was unsubstantiated. x x x

The evidence revealed that the possession of defendant was illegal at the inception and not merely
tolerated as alleged in the complaint, considering that defendant started to occupy the subject lot and
then built a house thereon without the permission and consent of petitioners and before them, their
mother. xxx Clearly, defendants entry into the land was effected clandestinely, without the knowledge of
the owners, consequently, it is categorized as possession by stealth which is forcible entry. As explained

44
in Sarona vs. Villegas, cited in Muoz vs. Court of Appeals [224 SCRA 216 (1992)] tolerance must be
present right from the start of possession sought to be recovered, to categorize a cause of action as one
of unlawful detainer not of forcible entry x x x.

And in the case of Ten Forty Realty and Development Corp. v. Cruz,24 petitioners complaint for unlawful
detainer merely contained the bare allegations that (1) respondent immediately occupied the subject
property after its sale to her, an action merely tolerated by petitioner; and (2) her allegedly illegal
occupation of the premises was by mere tolerance. The court, in finding that the alleged tolerance did
not justify the action for unlawful detainer, held:

To justify an action for unlawful detainer, the permission or tolerance must have been present at the
beginning of the possession. x x x

xxxx

In this case, the Complaint and the other pleadings do not recite any averment of fact that would
substantiate the claim of petitioner that it permitted or tolerated the occupation of the property by
Respondent Cruz. The complaint contains only bare allegations that 1) respondent immediately occupied
the subject property after its sale to her, an action merely tolerated by petitioner; and 2) her allegedly
illegal occupation of the premises was by mere tolerance.

These allegations contradict, rather than support, petitioners theory that its cause of action is for
unlawful detainer. First, these arguments advance the view that respondents occupation of the property
was unlawful at its inception. Second, they counter the essential requirement in unlawful detainer cases
that petitioners supposed act of sufferance or tolerance must be present right from the start of a
possession that is later sought to be recovered.25

In the instant case, the allegations in the complaint do not contain any averment of fact that would
substantiate petitioners claim that they permitted or tolerated the occupation of the property by
respondents. The complaint contains only bare allegations that "respondents without any color of title
whatsoever occupies the land in question by building their house in the said land thereby depriving
petitioners the possession thereof." Nothing has been said on how respondents entry was effected or
how and when dispossession started. Admittedly, no express contract existed between the parties. This
failure of petitioners to allege the key jurisdictional facts constitutive of unlawful detainer is fatal.26
Since the complaint did not satisfy the jurisdictional requirement of a valid cause for unlawful detainer,
the municipal trial court had no jurisdiction over the case.27 It is in this light that this Court finds that
the Court of Appeals correctly found that the municipal trial court had no jurisdiction over the
complaint.

WHEREFORE, the petition is DENIED and the judgment of the Court of Appeals dismissing the complaint
in Civil Case No. 2547 of the MTC Antipolo, Rizal for lack of jurisdiction is hereby AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

45
G.R. No. 151815 February 23, 2005

SPOUSES JUAN NUGUID AND ERLINDA T. NUGUID, petitioners,

vs.
HON. COURT OF APPEALS AND PEDRO P. PECSON, respondents.

DECISION

QUISUMBING, J.:

This is a petition for review on certiorari of the Decision1 dated May 21, 2001, of the Court of Appeals in
CA-G.R. CV No. 64295, which modified the Order dated July 31, 1998 of the Regional Trial Court (RTC) of
Quezon City, Branch 101 in Civil Case No. Q-41470. The trial court ordered the defendants, among them
petitioner herein Juan Nuguid, to pay respondent herein Pedro P. Pecson, the sum of P1,344,000 as
reimbursement of unrealized income for the period beginning November 22, 1993 to December 1997.
The appellate court, however, reduced the trial courts award in favor of Pecson from the said
P1,344,000 to P280,000. Equally assailed by the petitioners is the appellate courts Resolution2 dated
January 10, 2002, denying the motion for reconsideration.

It may be recalled that relatedly in our Decision dated May 26, 1995, in G.R. No. 115814, entitled Pecson
v. Court of Appeals, we set aside the decision of the Court of Appeals in CA-G.R. SP No. 32679 and the
Order dated November 15, 1993, of the RTC of Quezon City, Branch 101 and remanded the case to the
trial court for the determination of the current market value of the four-door two-storey apartment
building on the 256-square meter commercial lot.

The antecedent facts in this case are as follows:

Pedro P. Pecson owned a commercial lot located at 27 Kamias Road, Quezon City, on which he built a
four-door two-storey apartment building. For failure to pay realty taxes, the lot was sold at public
auction by the City Treasurer of Quezon City to Mamerto Nepomuceno, who in turn sold it for P103,000
to the spouses Juan and Erlinda Nuguid.

Pecson challenged the validity of the auction sale before the RTC of Quezon City in Civil Case No. Q-
41470. In its Decision,3 dated February 8, 1989, the RTC upheld the spouses title but declared that the
four-door two-storey apartment building was not included in the auction sale.dsavb4 This was affirmed
in toto by the Court of Appeals and thereafter by this Court, in its Decision5 dated May 25, 1993, in G.R.
No. 105360 entitled Pecson v. Court of Appeals.

On June 23, 1993, by virtue of the Entry of Judgment of the aforesaid decision in G.R. No. 105360, the
Nuguids became the uncontested owners of the 256-square meter commercial lot.

As a result, the Nuguid spouses moved for delivery of possession of the lot and the apartment building.

In its Order6 of November 15, 1993, the trial court, relying upon Article 5467 of the Civil Code, ruled that
the Spouses Nuguid were to reimburse Pecson for his construction cost of P53,000, following which, the
spouses Nuguid were entitled to immediate issuance of a writ of possession over the lot and
improvements. In the same order the RTC also directed Pecson to pay the same amount of monthly

46
rentals to the Nuguids as paid by the tenants occupying the apartment units or P21,000 per month from
June 23, 1993, and allowed the offset of the amount of P53,000 due from the Nuguids against the
amount of rents collected by Pecson from June 23, 1993 to September 23, 1993 from the tenants of the
apartment.8

Pecson duly moved for reconsideration, but on November 8, 1993, the RTC issued a Writ of Possession,9
directing the deputy sheriff to put the spouses Nuguid in possession of the subject property with all the
improvements thereon and to eject all the occupants therein.

Aggrieved, Pecson then filed a special civil action for certiorari and prohibition docketed as CA-G.R. SP
No. 32679 with the Court of Appeals.

In its decision of June 7, 1994, the appellate court, relying upon Article 44810 of the Civil Code, affirmed
the order of payment of construction costs but rendered the issue of possession moot on appeal, thus:

WHEREFORE, while it appears that private respondents [spouses Nuguid] have not yet indemnified
petitioner [Pecson] with the cost of the improvements, since Annex I shows that the Deputy //]-0Sheriff
has enforced the Writ of Possession and the premises have been turned over to the possession of private
respondents, the quest of petitioner that he be restored in possession of the premises is rendered moot
and academic, although it is but fair and just that private respondents pay petitioner the construction
cost of P53,000.00; and that petitioner be ordered to account for any and all fruits of the improvements
received by him starting on June 23, 1993, with the amount of P53,000.00 to be offset therefrom.

IT IS SO ORDERED.11 [Underscoring supplied.]

Frustrated by this turn of events, Pecson filed a petition for review docketed as G.R. No. 115814 before
this Court.

On May 26, 1995, the Court handed down the decision in G.R. No 115814, to wit:

WHEREFORE, the decision of the Court of Appeals in CA-G.R. SP No. 32679 and the Order of 15
November 1993 of the Regional Trial Court, Branch 101, Quezon City in Civil Case No. Q-41470 are
hereby SET ASIDE.

The case is hereby remanded to the trial court for it to determine the current market value of the
apartment building on the lot. For this purpose, the parties shall be allowed to adduce evidence on the
current market value of the apartment building. The value so determined shall be forthwith paid by the
private respondents [Spouses Juan and Erlinda Nuguid] to the petitioner [Pedro Pecson] otherwise the
petitioner shall be restored to the possession of the apartment building until payment of the required
indemnity.

No costs.

SO ORDERED.12 [Emphasis supplied.]

In so ruling, this Court pointed out that: (1) Article 448 of the Civil Code is not apposite to the case at bar
where the owner of the land is the builder, sower, or planter who then later lost ownership of the land

47
by sale, but may, however, be applied by analogy; (2) the current market value of the improvements
should be made as the basis of reimbursement; (3) Pecson was entitled to retain ownership of the
building and, necessarily, the income therefrom; (4) the Court of Appeals erred not only in upholding the
trial courts determination of the indemnity, but also in ordering Pecson to account for the rentals of the
apartment building from June 23, 1993 to September 23, 1993.

On the basis of this Courts decision in G.R. No. 115814, Pecson filed a Motion to Restore Possession and
a Motion to Render Accounting, praying respectively for restoration of his possession over the subject
256-square meter commercial lot and for the spouses Nuguid to be directed to render an accounting
under oath, of the income derived from the subject four-door apartment from November 22, 1993 until
possession of the same was restored to him.

In an Order13 dated January 26, 1996, the RTC denied the Motion to Restore Possession to the plaintiff
averring that the current market value of the building should first be determined. Pending the said
determination, the resolution of the Motion for Accounting was likewise held in abeyance.

With the submission of the parties assessment and the reports of the subject realty, and the reports of
the Quezon City Assessor, as well as the members of the duly constituted assessment committee, the
trial court issued the following Order14 dated October 7, 1997, to wit:

On November 21, 1996, the parties manifested that they have arrived at a compromise agreement that
the value of the said improvement/building is P400,000.00 The Court notes that the plaintiff has already
received P300,000.00. However, when defendant was ready to pay the balance of P100,000.00, the
plaintiff now insists that there should be a rental to be paid by defendants. Whether or not this should
be paid by defendants, incident is hereby scheduled for hearing on November 12, 1997 at 8:30 a.m.

Meantime, defendants are directed to pay plaintiff the balance of P100,000.00.

SO ORDERED.15

On December 1997, after paying the said P100,000 balance to Pedro Pecson the spouses Nuguid prayed
for the closure and termination of the case, as well as the cancellation of the notice of lis pendens on the
title of the property on the ground that Pedro Pecsons claim for rentals was devoid of factual and legal
bases.16

After conducting a hearing, the lower court issued an Order dated July 31, 1998, directing the spouses to
pay the sum of P1,344,000 as reimbursement of the unrealized income of Pecson for the period
beginning November 22, 1993 up to December 1997. The sum was based on the computation of
P28,000/month rentals of the four-door apartment, thus:

The Court finds plaintiffs motion valid and meritorious. The decision of the Supreme Court in the
aforesaid case [Pecson vs. Court of Appeals, 244 SCRA 407] which set aside the Order of this Court of
November 15, 1993 has in effect upheld plaintiffs right of possession of the building for as long as he is
not fully paid the value thereof. It follows, as declared by the Supreme Court in said decision that the
plaintiff is entitled to the income derived therefrom, thus

...

48
Records show that the plaintiff was dispossessed of the premises on November 22, 1993 and that he was
fully paid the value of his building in December 1997. Therefore, he is entitled to the income thereof
beginning on November 22, 1993, the time he was dispossessed, up to the time of said full payment, in
December 1997, or a total of 48 months.

The only question left is the determination of income of the four units of apartments per month. But as
correctly pointed out by plaintiff, the defendants have themselves submitted their affidavits attesting
that the income derived from three of the four units of the apartment building is P21,000.00 or
P7,000.00 each per month, or P28,000.00 per month for the whole four units. Hence, at P28,000.00 per
month, multiplied by 48 months, plaintiff is entitled to be paid by defendants the amount of
P1,344,000.00.17

The Nuguid spouses filed a motion for reconsideration but this was denied for lack of merit.18

The Nuguid couple then appealed the trial courts ruling to the Court of Appeals, their action docketed
as CA-G.R. CV No. 64295.

In the Court of Appeals, the order appealed from in CA-G.R. CV No. 64295, was modified. The CA
reduced the rentals from P1,344,000 to P280,000 in favor of the appellee.19 The said amount represents
accrued rentals from the determination of the current market value on January 31, 199720 until its full
payment on December 12, 1997.

Hence, petitioners state the sole assignment of error now before us as follows:

THE COURT OF APPEALS ERRED IN HOLDING PETITIONERS LIABLE TO PAY RENT OVER AND ABOVE THE
CURRENT MARKET VALUE OF THE IMPROVEMENT WHEN SUCH WAS NOT PROVIDED FOR IN THE
DISPOSITIVE PORTION OF THE SUPREME COURTS RULING IN G.R. No. 115814.

Petitioners call our attention to the fact that after reaching an agreed price of P400,000 for the
improvements, they only made a partial payment of P300,000. Thus, they contend that their failure to
pay the full price for the improvements will, at most, entitle respondent to be restored to possession,
but not to collect any rentals. Petitioners insist that this is the proper interpretation of the dispositive
portion of the decision in G.R. No. 115814, which states in part that "[t]he value so determined shall be
forthwith paid by the private respondents [Spouses Juan and Erlinda Nuguid] to the petitioner [Pedro
Pecson] otherwise the petitioner shall be restored to the possession of the apartment building until
payment of the required indemnity."21

Now herein respondent, Pecson, disagrees with herein petitioners contention. He argues that
petitioners are wrong in claiming that inasmuch as his claim for rentals was not determined in the
dispositive portion of the decision in G.R. No. 115814, it could not be the subject of execution. He points
out that in moving for an accounting, all he asked was that the value of the fruits of the property during
the period he was dispossessed be accounted for, since this Court explicitly recognized in G.R. No.
115814, he was entitled to the property. He points out that this Court ruled that "[t]he petitioner
[Pecson] not having been so paid, he was entitled to retain ownership of the building and, necessarily,
the income therefrom."22 In other words, says respondent, accounting was necessary. For accordingly,
he was entitled to rental income from the property. This should be given effect. The Court could have

49
very well specifically included rent (as fruit or income of the property), but could not have done so at the
time the Court pronounced judgment because its value had yet to be determined, according to him.
Additionally, he faults the appellate court for modifying the order of the RTC, thus defeating his right as a
builder in good faith entitled to rental from the period of his dispossession to full payment of the price of
his improvements, which spans from November 22, 1993 to December 1997, or a period of more than
four years.

It is not disputed that the construction of the four-door two-storey apartment, subject of this dispute,
was undertaken at the time when Pecson was still the owner of the lot. When the Nuguids became the
uncontested owner of the lot on June 23, 1993, by virtue of entry of judgment of the Courts decision,
dated May 25, 1993, in G.R. No. 105360, the apartment building was already in existence and occupied
by tenants. In its decision dated May 26, 1995 in G.R. No. 115814, the Court declared the rights and
obligations of the litigants in accordance with Articles 448 and 546 of the Civil Code. These provisions of
the Code are directly applicable to the instant case.

Under Article 448, the landowner is given the option, either to appropriate the improvement as his own
upon payment of the proper amount of indemnity or to sell the land to the possessor in good faith.
Relatedly, Article 546 provides that a builder in good faith is entitled to full reimbursement for all the
necessary and useful expenses incurred; it also gives him right of retention until full reimbursement is
made.

While the law aims to concentrate in one person the ownership of the land and the improvements
thereon in view of the impracticability of creating a state of forced co-ownership,23 it guards against
unjust enrichment insofar as the good-faith builders improvements are concerned. The right of
retention is considered as one of the measures devised by the law for the protection of builders in good
faith. Its object is to guarantee full and prompt reimbursement as it permits the actual possessor to
remain in possession while he has not been reimbursed (by the person who defeated him in the case for
possession of the property) for those necessary expenses and useful improvements made by him on the
thing possessed.24 Accordingly, a builder in good faith cannot be compelled to pay rentals during the
period of retention25 nor be disturbed in his possession by ordering him to vacate. In addition, as in this
case, the owner of the land is prohibited from offsetting or compensating the necessary and useful
expenses with the fruits received by the builder-possessor in good faith. Otherwise, the security
provided by law would be impaired. This is so because the right to the expenses and the right to the
fruits both pertain to the possessor, making compensation juridically impossible; and one cannot be
used to reduce the other.26

As we earlier held, since petitioners opted to appropriate the improvement for themselves as early as
June 1993, when they applied for a writ of execution despite knowledge that the auction sale did not
include the apartment building, they could not benefit from the lots improvement, until they
reimbursed the improver in full, based on the current market value of the property.

Despite the Courts recognition of Pecsons right of ownership over the apartment building, the
petitioners still insisted on dispossessing Pecson by filing for a Writ of Possession to cover both the lot
and the building. Clearly, this resulted in a violation of respondents right of retention. Worse, petitioners
took advantage of the situation to benefit from the highly valued, income-yielding, four-unit apartment
building by collecting rentals thereon, before they paid for the cost of the apartment building. It was only
four years later that they finally paid its full value to the respondent.

50
Petitioners interpretation of our holding in G.R. No. 115814 has neither factual nor legal basis. The
decision of May 26, 1995, should be construed in connection with the legal principles which form the
basis of the decision, guided by the precept that judgments are to have a reasonable intendment to do
justice and avoid wrong.27

The text of the decision in G.R. No. 115814 expressly exempted Pecson from liability to pay rentals, for
we found that the Court of Appeals erred not only in upholding the trial courts determination of the
indemnity, but also in ordering him to account for the rentals of the apartment building from June 23,
1993 to September 23, 1993, the period from entry of judgment until Pecsons dispossession. As pointed
out by Pecson, the dispositive portion of our decision in G.R. No. 115814 need not specifically include
the income derived from the improvement in order to entitle him, as a builder in good faith, to such
income. The right of retention, which entitles the builder in good faith to the possession as well as the
income derived therefrom, is already provided for under Article 546 of the Civil Code.

Given the circumstances of the instant case where the builder in good faith has been clearly denied his
right of retention for almost half a decade, we find that the increased award of rentals by the RTC was
reasonable and equitable. The petitioners had reaped all the benefits from the improvement introduced
by the respondent during said period, without paying any amount to the latter as reimbursement for his
construction costs and expenses. They should account and pay for such benefits.

We need not belabor now the appellate courts recognition of herein respondents entitlement to rentals
from the date of the determination of the current market value until its full payment. Respondent is
clearly entitled to payment by virtue of his right of retention over the said improvement.

WHEREFORE, the instant petition is DENIED for lack of merit. The Decision dated May 21, 2001 of the
Court of Appeals in CA-G.R. CV No. 64295 is SET ASIDE and the Order dated July 31, 1998, of the Regional
Trial Court, Branch 101, Quezon City, in Civil Case No. Q-41470 ordering the herein petitioners, Spouses
Juan and Erlinda Nuguid, to account for the rental income of the four-door two-storey apartment
building from November 1993 until December 1997, in the amount of P1,344,000, computed on the
basis of Twenty-eight Thousand (P28,000.00) pesos monthly, for a period of 48 months, is hereby
REINSTATED. Until fully paid, said amount of rentals should bear the legal rate of interest set at six
percent (6%) per annum computed from the date of RTC judgment. If any portion thereof shall
thereafter remain unpaid, despite notice of finality of this Courts judgment, said remaining unpaid
amount shall bear the rate of interest set at twelve percent (12%) per annum computed from the date of
said notice. Costs against petitioners.

SO ORDERED.

G.R. No. 104482 January 22, 1996

BELINDA TAEDO, for herself and in representation of her brothers and sisters, and TEOFILA CORPUZ
TAEDO, representing her minor daughter VERNA TAEDO, petitioners,
vs.
THE COURT OF APPEALS, SPOUSES RICARDO M. TAEDO AND TERESITA BARERA TAEDO, respondents.

51
DECISION

PANGANIBAN, J.:

Is a sale of future inheritance valid? In multiple sales of the same real property, who has preference in
ownership? What is the probative value of the lower court's finding of good faith in registration of such
sales in the registry of property? These are the main questions raised in this Petition for review on
certiorari under Rule 45 of the Rules of Court to set aside and reverse the Decision1 of the Court of
Appeals2 in CA-G.R. CV NO. 24987 promulgated on September 26, 1991 affirming the decision of the
Regional Trial Court, Branch 63, Third Judicial Region, Tarlac, Tarlac in Civil Case No. 6328, and its
Resolution denying reconsideration thereof, promulgated on May 27, 1992.

By the Court's Resolution on October 25, 1995, this case (along with several others) was transferred from
the First to the Third Division and after due deliberation, the Court assigned it to the undersigned
ponente for the writing of this Decision.

The Facts

On October 20, 1962, Lazardo Taedo executed a notarized deed of absolute sale in favor of his eldest
brother, Ricardo Taedo, and the latter's wife, Teresita Barera, private respondents herein, whereby he
conveyed to the latter in consideration of P1,500.00, "one hectare of whatever share I shall have over Lot
No. 191 of the cadastral survey of Gerona, Province of Tarlac and covered by Title T-13829 of the Register
of Deeds of Tarlac", the said property being his "future inheritance" from his parents (Exh. 1). Upon the
death of his father Matias, Lazaro executed an "Affidavit of Conformity" dated February 28, 1980 (Exh. 3)
to "re-affirm, respect, acknowledge and validate the sale I made in 1962." On January 13, 1981, Lazaro
executed another notarized deed of sale in favor of private respondents covering his "undivided ONE
TWELVE (1/12) of a parcel of land known as Lot 191 . . . " (Exh. 4). He acknowledged therein his receipt of
P10,000.00 as consideration therefor. In February 1981, Ricardo learned that Lazaro sold the same
property to his children, petitioners herein, through a deed of sale dated December 29, 1980 (Exh. E). On
June 7, 1982, private respondents recorded the Deed of Sale (Exh. 4) in their favor in the Registry of
Deeds and the corresponding entry was made in Transfer Certificate of Title No. 166451 (Exh. 5).

Petitioners on July 16, 1982 filed a complaint for rescission (plus damages) of the deeds of sale executed
by Lazaro in favor of private respondents covering the property inherited by Lazaro from his father.

Petitioners claimed that their father, Lazaro, executed an "Absolute Deed of Sale" dated December 29,
1980 (Exit. E). Conveying to his ten children his allotted portion tinder the extrajudicial partition executed
by the heirs of Matias, which deed included the land in litigation (Lot 191).

Petitioners also presented in evidence: (1) a private writing purportedly prepared and signed by Matias
dated December 28, 1978, stating that it was his desire that whatever inheritance Lazaro would receive
from him should be given to his (Lazaro's) children (Exh. A); (2) a typewritten document dated March 10,
1979 signed by Lazaro in the presence of two witnesses, wherein he confirmed that he would voluntarily
abide by the wishes of his father, Matias, to give to his (Lazaro's) children all the property he would
inherit from the latter (Exh. B); and (3) a letter dated January 1, 1980 of Lazaro to his daughter, Carmela,
stating that his share in the extrajudicial settlement of the estate of his father was intended for his
children, petitioners herein (Exh. C).

52
Private respondents, however presented in evidence a "Deed of Revocation of a Deed of Sale" dated
March 12, 1981 (Exh. 6), wherein Lazaro revoked the sale in favor of petitioners for the reason that it was
"simulated or fictitious without any consideration whatsoever".

Shortly after the case a quo was filed, Lazaro executed a sworn statement (Exh. G) which virtually
repudiated the contents of the Deed of Revocation of a Deed of Sale (Exh. 6) and the Deed of Sale (Exh.
4) in favor of private respondents. However, Lazaro testified that he sold the property to Ricardo, and
that it was a lawyer who induced him to execute a deed of sale in favor of his children after giving him
five pesos (P5.00) to buy a "drink" (TSN September 18, 1985, pp. 204-205).

The trial court decided in favor of private respondents, holding that petitioners failed "to adduce a
proponderance of evidence to support (their) claim." On appeal, the Court of Appeals affirmed the
decision of the trial court, ruling that the Deed of Sale dated January 13, 1981 (Exh. 9) was valid and that
its registration in good faith vested title in said respondents.

The Issues

Petitioners raised the following "errors" in the respondent Court, which they also now allege in the
instant Petition:

I. The trial court erred in concluding that the Contract of Sale of October 20, 1962 (Exhibit 7,
Answer) is merely voidable or annulable and not void ab initio pursuant to paragraph 2 of Article 1347 of
the New Civil Code involving as it does a "future inheritance".

II. The trial court erred in holding that defendants-appellees acted in good faith in registering the
deed of sale of January 13, 1981 (Exhibit 9) with the Register of Deeds of Tarlac and therefore ownership
of the land in question passed on to defendants-appellees.

III. The trial court erred in ignoring and failing to consider the testimonial and documentary
evidence of plaintiffs-appellants which clearly established by preponderance of evidence that they are
indeed the legitimate and lawful owners of the property in question.

IV. The decision is contrary to law and the facts of the case and the conclusions drawn from the
established facts are illogical and off-tangent.

From the foregoing, the issues may be restated as follows:

1. Is the sale of a future inheritance valid?

2. Was the subsequent execution on January 13, 1981 (and registration with the Registry of
Property) of a deed of sale covering the same property to the same buyers valid?

3. May this Court review the findings of the respondent Court (a) holding that the buyers acted in
good faith in registering the said subsequent deed of sale and (b) in "failing to consider petitioners'
evidence"? Are the conclusions of the respondent Court "illogical and off-tangent"?

53
The Court's Ruling

At the outset, let it be clear that the "errors" which are reviewable by this Court in this petition for
review on certiorari are only those allegedly committed by the respondent Court of Appeals and not
directly those of the trial court, which is not a party here. The "assignment of errors" in the petition
quoted above are therefore totally misplaced, and for that reason, the petition should be dismissed. But
in order to give the parties substantial justice we have decided to delve into the issues as above re-
stated. The errors attributed by petitioners to the latter (trial) court will be discussed only insofar as they
are relevant to the appellate court's assailed Decision and Resolution.

The sale made in 1962 involving future inheritance is not really at issue here. In context, the assailed
Decision conceded "it may be legally correct that a contract of sale of anticipated future inheritance is
null and void."3

But to remove all doubts, we hereby categorically rule that, pursuant to Article 1347 of the Civil Code,
"(n)o contract may be entered into upon a future inheritance except in cases expressly authorized by
law."

Consequently, said contract made in 1962 is not valid and cannot be the source of any right nor the
creator of any obligation between the parties.

Hence, the "affidavit of conformity" dated February 28, 1980, insofar as it sought to validate or ratify the
1962 sale, is also useless and, in the words of the respondent Court, "suffers from the same infirmity."
Even private respondents in their memorandum4 concede this.

However, the documents that are critical to the resolution of this case are: (a) the deed of sale of January
13, 1981 in favor of private respondents covering Lazaro's undivided inheritance of one-twelfth (1/12)
share in Lot No. 191, which was subsequently registered on June 7, 1982; and (b) the deed of sale dated
December 29, 1980 in favor of petitioners covering the same property. These two documents were
executed after the death of Matias (and his spouse) and after a deed of extra-judicial settlement of his
(Matias') estate was executed, thus vesting in Lazaro actual title over said property. In other words, these
dispositions, though conflicting, were no longer infected with the infirmities of the 1962 sale.

Petitioners contend that what was sold on January 13, 1981 was only one-half hectare out of Lot No.
191, citing as authority the trial court's decision. As earlier pointed out, what is on review in these
proceedings by this Court is the Court of Appeals' decision which correctly identified the subject
matter of the January 13, 1981 sale to be the entire undivided 1/12 share of Lazaro in Lot No. 191 and
which is the same property disposed of on December 29, 1980 in favor of petitioners.

Critical in determining which of these two deeds should be given effect is the registration of the sale in
favor of private respondents with the register of deeds on June 7, 1982.

Article 1544 of the Civil Code governs the preferential rights of vendees in cases of multiple sales, as
follows:

54
Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should be
movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith
first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in
the possession; and, in the absence thereof, to the person who presents the oldest title, provided there
is good faith.

The property in question is land, an immovable, and following the above-quoted law, ownership shall
belong to the buyer who in good faith registers it first in the registry of property. Thus, although the
deed of sale in favor of private respondents was later than the one in favor of petitioners, ownership
would vest in the former because of the undisputed fact of registration. On the other hand, petitioners
have not registered the sale to them at all.

Petitioners contend that they were in possession of the property and that private respondents never
took possession thereof. As between two purchasers, the one who registered the sale in his favor has a
preferred right over the other who has not registered his title, even if the latter is in actual possession of
the immovable property.5

As to third issue, while petitioners conceded the fact of registration, they nevertheless contended that it
was done in bad faith. On this issue, the respondent Court ruled;

Under the second assignment of error, plaintiffs-appellants contend that defendants-appellees acted in
bad faith when they registered the Deed of Sale in their favor as appellee Ricardo already knew of the
execution of the deed of sale in favor of the plaintiffs; appellants cite the testimony of plaintiff Belinda
Taedo to the effect that defendant Ricardo Taedo called her up on January 4 or 5, 1981 to tell her that
he was already the owner of the land in question "but the contract of sale between our father and us
were (sic) already consumated" (pp. 9-10, tsn, January 6, 1984). This testimony is obviously self-serving,
and because it was a telephone conversation, the deed of sale dated December 29, 1980 was not shown;
Belinda merely told her uncle that there was already a document showing that plaintiffs are the owners
(p. 80). Ricardo Taedo controverted this and testified that he learned for the first time of the deed of
sale executed by Lazaro in favor of his children "about a month or sometime in February 1981" (p. 111,
tsn, Nov. 28, 1984). . . .6

The respondent Court, reviewing the trial court's findings, refused to overturn the latter's assessment of
the testimonial evidence, as follows;

We are not prepared to set aside the finding of the lower court upholding Ricardo Taedo's testimony, as
it involves a matter of credibility of witnesses which the trial judge, who presided at the hearing, was in a
better position to resolve. (Court of Appeals' Decision, p. 6.)

In this connection, we note the tenacious allegations made by petitioners, both in their basic petition
and in their memorandum, as follows:

55
1. The respondent Court allegedly ignored the claimed fact that respondent Ricardo "by fraud and
deceit and with foreknowledge" that the property in question had already been sold to petitioners,
made Lazaro execute the deed of January 13, 1981;

2. There is allegedly adequate evidence to show that only 1/2 of the purchase price of P10,000.00
was paid at the time of the execution of the deed of sale, contrary to the written acknowledgment, thus
showing bad faith;

3. There is allegedly sufficient evidence showing that the deed of revocation of the sale in favor of
petitioners "was tainted with fraud or deceit."

4. There is allegedly enough evidence to show that private respondents "took undue advantage
over the weakness and unschooled and pitiful situation of Lazaro Taedo . . ." and that respondent
Ricardo Taedo "exercised moral ascendancy over his younger brother he being the eldest brother and
who reached fourth year college of law and at one time a former Vice-Governor of Tarlac, while his
younger brother only attained first year high school . . . ;

5. The respondent Court erred in not giving credence to petitioners' evidence, especially Lazaro
Taedo's Sinumpaang Salaysay dated July 27, 1982 stating that Ricardo Taedo deceived the former in
executing the deed of sale in favor of private respondents.

To be sure, there are indeed many conflicting documents and testimonies as well as arguments over
their probative value and significance. Suffice it to say, however, that all the above contentions involve
questions of fact, appreciation of evidence and credibility of witnesses, which are not proper in this
review. It is well-settled that the Supreme Court is not a trier of facts. In petitions for review under Rule
45 of the Revised Rules of Court, only questions of law may be raised and passed upon. Absent any
whimsical or capricious exercise of judgment, and unless the lack of any basis for the conclusions made
by the lower courts be amply demonstrated, the Supreme Court will not disturb their findings. At most,
it appears that petitioners have shown that their evidence was not believed by both the trial and the
appellate courts, and that the said courts tended to give more credence to the evidence presented by
private respondents. But this in itself is not a reason for setting aside such findings. We are far from
convinced that both courts gravely abused their respective authorities and judicial prerogatives.

As held in the recent case of Chua Tiong Tay vs. Court of Appeals and Goldrock Construction and
Development Corp.7

The Court has consistently held that the factual findings of the trial court, as well as the Court of
Appeals, are final and conclusive and may not be reviewed on appeal. Among the exceptional
circumstances where a reassessment of facts found by the lower courts is allowed are when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; when the inference
made is manifestly absurd, mistaken or impossible; when there is grave abuse of discretion in the
appreciation of facts; when the judgment is premised on a misapprehension of facts; when the findings
went beyond the issues of the case and the same are contrary to the admissions of both appellant and
appellee. After a careful study of the case at bench, we find none of the above grounds present to justify
the re-evaluation of the findings of fact made by the courts below.

56
In the same vein, the ruling in the recent case of South Sea Surety and Insurance Company, Inc. vs. Hon.
Court of Appeals, et al.8 is equally applicable to the present case:

We see no valid reason to discard the factual conclusions of the appellate court. . . . (I)t is not the
function of this Court to assess and evaluate all over again the evidence, testimonial and documentary,
adduced by the parties, particularly where, such as here, the findings of both the trial court and the
appellate court on the matter coincide. (emphasis supplied)

WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals is AFFIRMED. No
Costs.

SO ORDERED.

G.R. No. 83432 May 20, 1991

RADIOWEALTH FINANCE COMPANY, petitioner,

vs.
MANUELITO S. PALILEO, respondent.

Rolando A. Calang for petitioner.

Sisenando Villaluz, Sr. for respondent.

GANCAYCO, J.:

If the same piece of land was sold to two different purchasers, to whom shall ownership belong? Article
1544 of the Civil Code provides that in case of double sale of an immovable property, ownership shall be
transferred: (1) to the person acquiring it who in good faith first recorded it in the Registry of Property;
(2) in default thereof, to the person who in good faith was first in possession; and (3) in default thereof,
to the person who presents the oldest title, provided there is good faith. There is no ambiguity regarding
the application of the law with respect to lands registered under the Torrens System. Section 51 of
Presidential Decree No. 1529 (amending Section 50 of Act No. 496 clearly provides that the act of
registration is the operative act to convey or affect registered lands insofar as third persons are
concerned. Thus, a person dealing with registered land is not required to go behind the register to
determine the condition of the property. He is only charged with notice of the burdens on the property
which are noted on the face of the register or certificate of title. 1 Following this principle, this Court has
time and again held that a purchaser in good faith of registered land (covered by a Torrens Title) acquires
a good title as against all the transferees thereof whose right is not recorded in the registry of deeds at
the time of the sale. 2

The question that has to be resolved in the instant petition is whether or not the rule provided in Article
1544 of the Civil Code as discussed above, is applicable to a parcel of unregistered land purchased at a
judicial sale. To be more specific, this Court is asked to determine who, as between two buyers of
unregistered land, is the rightful ownerthe first buyer in a prior sale that was unrecorded, or the
second buyer who purchased the land in an execution sale whose transfer was registered in the Register
of Deeds.

57
The facts as found by the Court of Appeals are as follows:

On April 13, 1970, defendant spouses Enrique Castro and Herminia R. Castro sold to plaintiff-appellee
Manuelito Palileo (private respondent herein), a parcel of unregistered coconut land situated in Candiis,
Mansayaw, Mainit, Surigao del Norte. The sale is evidenced by a notarized Deed of Absolute Sale (Exh.
"E"). The deed was not registered in the Registry of Property for unregistered lands in the province of
Surigao del Norte. Since the execution of the deed of sale, appellee Manuelito Palileo who was then
employed at Lianga Surigao del Sur, exercised acts of ownership over the land through his mother
Rafaela Palileo, as administratrix or overseer. Appellee has continuously paid the real estate taxes on said
land from 1971 until the present (Exhs. "C" to "C-7", inclusive).

On November 29, 1976, a judgment was rendered against defendant Enrique T. Castro, in Civil Case No.
0103145 by the then Court of First Instance of Manila, Branch XIX, to pay herein defendant-appellant
Radiowealth Finance Company (petitioner herein), the sum of P22,350.35 with interest thereon at the
rate of 16% per annum from November 2, 1975 until fully paid, and the further sum of P2,235.03 as
attorney's fees, and to pay the costs. Upon the finality of the judgment, a writ of execution was issued.
Pursuant to said writ, defendant provincial Sheriff Marietta E. Eviota, through defendant Deputy
Provincial Sheriff Leopoldo Risma, levied upon and finally sold at public auction the subject land that
defendant Enrique Castro had sold to appellee Manuelito Palileo on April 13,1970. A certificate of sale
was executed by the Provincial Sheriff in favor of defendant- appellant Radiowealth Finance Company,
being the only bidder. After the period of redemption has (sic) expired, a deed of final sale was also
executed by the same Provincial Sheriff. Both the certificate of sale and the deed of final sale were
registered with the Registry of Deeds. 3

Learning of what happened to the land, private respondent Manuelito Palileo filed an action for quieting
of title over the same. After a trial on the merits, the court a quo rendered a decision in his favor. On
appeal, the decision of the trial court was affirmed. Hence, this petition for review on certiorari.

In its petition, Radiowealth Finance Company presents the following errors:

1. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE DEED OF ABSOLUTE SALE (EXHIBIT B)
ALLEGEDLY EXECUTED BY ENRIQUE CASTRO IN FAVOR OF APPELLEE MANUELITO PALILEO, WAS
SIMULATED OR FICTITIOUS.

2. THE COURT OF APPEALS ERRED IN NOT FINDING APPELLEE MANUELITO PALILEO AS

ADMINISTRATOR ONLY OF THE DISPUTED PROPERTY; AND

3. THE COURT OF APPEALS ERRED IN NOT FINDING DEFENDANT-APPELLANT RADIOWEALTH

FINANCE COMPANY OWNER OF THE DISPUTED PROPERTY BY REASON OF THE CERTIFICATE OF SALE AND
THE DEED OF FINAL SALE WHICH WERE ALL REGISTERED IN THE REGISTER OF DEEDS, HENCE, SUPERIOR
TO THAT OF THE DEED OF SALE IN POSSESSION OF MANUELITO PALILEO, FOR BEING NOT REGISTERED. 4

As regards the first and second assigned errors, suffice it to state that findings of fact of the Court of
Appeals are conclusive on this Court and will not be disturbed unless there is grave abuse of discretion.
The finding of the Court of Appeals that the property in question was already sold to private respondent
by its previous owner before the execution sale is evidenced by a deed of sale. Said deed of sale is

58
notarized and is presumed authentic. There is no substantive proof to support petitioner's allegation that
the document is fictitious or simulated. With this in mind, We see no reason to reject the conclusion of
the Court of Appeals that private respondent was not a mere administrator of the property. That he
exercised acts of ownership through his mother also remains undisputed.

Going now to the third assigned error which deals with the main issue presented in the instant petition,
We observe that the Court of Appeals resolved the same in favor of private respondent due to the
following reason; what the Provincial Sheriff levied upon and sold to petitioner is a parcel of land that
does not belong to Enrique Castro, the judgment debtor, hence the execution is contrary to the directive
contained in the writ of execution which commanded that the lands and buildings belonging to Enrique
Castro be sold to satisfy the execution. 5

There is no doubt that had the property in question been a registered land, this case would have been
decided in favor of petitioner since it was petitioner that had its claim first recorded in the Registry of
Deeds. For, as already mentioned earlier, it is the act of registration that operates to convey and affect
registered land. Therefore, a bona fide purchaser of a registered land at an execution sale acquires a
good title as against a prior transferee, if such transfer was unrecorded.

However, it must be stressed that this case deals with a parcel of unregistered land and a different set of
rules applies. We affirm the decision of the Court of Appeals.

Under Act No. 3344, registration of instruments affecting unregistered lands is "without prejudice to a
third party with a better right". The aforequoted phrase has been held by this Court to mean that the
mere registration of a sale in one's favor does not give him any right over the land if the vendor was not
anymore the owner of the land having previously sold the same to somebody else even if the earlier sale
was unrecorded.

The case of Carumba vs. Court of Appeals 6 is a case in point. It was held therein that Article 1544 of the
Civil Code has no application to land not registered under Act No. 496. Like in the case at bar, Carumba
dealt with a double sale of the same unregistered land. The first sale was made by the original owners
and was unrecorded while the second was an execution sale that resulted from a complaint for a sum of
money filed against the said original owners. Applying Section 35, Rule 39 of the Revised Rules of Court,
7 this Court held that Article 1544 of the Civil Code cannot be invoked to benefit the purchaser at the
execution sale though the latter was a buyer in good faith and even if this second sale was registered. It
was explained that this is because the purchaser of unregistered land at a sheriffs execution sale only
steps into the shoes of the judgment debtor, and merely acquires the latter's interest in the property
sold as of the time the property was levied upon.

Applying this principle, the Court of Appeals correctly held that the execution sale of the unregistered
land in favor of petitioner is of no effect because the land no longer belonged to the judgment debtor as
of the time of the said execution sale.

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals in CA-G.R. CV No. 10788 is
hereby AFFIRMED. No costs.

SO ORDERED.

59
G.R. No. 156973 June 4, 2004

SPOUSES TOMAS OCCEA and SILVINA OCCEA, petitioners,

vs.
LYDIA MORALES OBSIANA ESPONILLA, ELSA MORALES OBSIANA SALAZAR and DARFROSA OBSIANA
SALAZAR ESPONILLA, respondents.

DECISION

PUNO, J.:

The case at bar involves a portion of the 1,198-square meter residential lot (lot no. 265) situated in
Sibalom, Antique, originally owned by spouses Nicolas and Irene Tordesillas under OCT No. 1130. The
Tordesillas spouses had three (3) children, namely: Harod, Angela and Rosario, the latter having been
survived by her two (2) children, Arnold and Lilia de la Flor.

After the death of the Tordesillas spouses, the lot was inherited by their children Harod and Angela, and
grandchildren Arnold and Lilia. In 1951, the heirs executed a Deed of Pacto de Retro Sale1 in favor of
Alberta Morales covering the southwestern portion of the lot with an area of 748 square meters.

Three (3) years later, in 1954, Arnold and Lilia executed a Deed of Definite Sale of Shares, Rights,
Interests and Participations2 over the same 748 sq. m. lot in favor of Alberta Morales. The notarized
deed also attested that the lot sold by vendors Arnold and Lilia to Alberta were their share in the estate
of their deceased parents.

Alberta possessed the lot as owner, constructed a house on it and appointed a caretaker to oversee her
property. Thereafter, in July 1956, vendor Arnold de la Flor borrowed the OCT from Alberta covering the
lot. He executed an Affidavit3 acknowledging receipt of the OCT in trust and undertook to return said
title free from changes, modifications or cancellations.

In 1966, Arnold and Angela, nephew and daughter respectively of the Tordesillas spouses, without the
knowledge of Alberta, executed a Deed of Extrajudicial Settlement4 declaring the two of them as the
only co-owners of the undivided 1,198 sq. m. lot no. 265, without acknowledging their previous sale of
748 sq. m. thereof to Alberta. A number of times, thereafter, Alberta and her nieces asked Arnold for the
OCT of the land but Arnold just kept on promising to return it.

In 1983, Arnold executed an Affidavit of Settlement of the Estate5 of Angela who died in 1978 without
issue, declaring himself as the sole heir of Angela and thus consolidating the title of the entire lot in his
name.

In 1985, vendee Alberta Morales died. Her nieces-heirs, Lydia, Elsa and Dafrosa, succeeded in the
ownership of the lot. Months later, as the heirs were about to leave for the United States, they asked
Arnold to deliver to them the title to the land so they can register it in their name. Arnold repeatedly
promised to do so but failed to deliver the title to them.

60
On December 4, 1986, after Albertas heirs left for the States, Arnold used the OCT he borrowed from
the deceased vendee Alberta Morales, subdivided the entire lot no. 265 into three sublots, and
registered them all under his name, viz: lot no. 265-A (with TCT No. 16895), lot no. 265-B (with TCT No.
16896) and lot no. 265-C (with TCT No. 16897). He then paid the real estate taxes on the property.

On August 13, 1990, Arnold sold lot nos. 265-B & C to spouses Tomas and Sylvina Occea, which
included the 748 sq. m. portion previously sold to Alberta Morales. A Deed of Absolute Sale6 over said
lots was executed to the Occea spouses and titles were transferred to their names.

In 1993, after the death of Arnold, the three (3) nieces-heirs of Alberta Morales learned about the
second sale of their lot to the Occea spouses when they were notified by caretaker Abas that they were
being ejected from the land. In 1994, the heirs filed a case7 for annulment of sale and cancellation of
titles, with damages, against the second vendees Occea spouses. In their complaint, they alleged that
the Occeas purchased the land in bad faith as they were aware that the lots sold to them had already
been sold to Alberta Morales in 1954. They averred that before the sale, when Tomas Occea conducted
an ocular inspection of the lots, Morito Abas, the caretaker appointed by Alberta Morales to oversee her
property, warned them not to push through with the sale as the land was no longer owned by vendor
Arnold as the latter had previously sold the lot to Alberta Morales who had a house constructed thereon.

For their part, the Occea spouses claimed that the OCT in the name of the original owners of the lots,
the Tordesillas spouses, was cancelled after it was subdivided between Angela and Arnold in 1969; that
new TCTs had been issued in the latters names; that they were unaware that the subject lots were
already previously sold to Morales as they denied that Tomas had a talk with caretaker Abas on the
matter; that as of December 4, 1987, the TCTs covering the lots were in the name of Arnold and his wife,
without any adverse claim annotated thereon; that vendor Arnold represented to them that the
occupants they saw on the land were squatters and that he merely tolerated their presence; that they
did not personally investigate the alleged squatters on the land and merely relied on the representation
of vendor Arnold; that sometime in 1966-1967, Arnold and his co-heir Angela caused the survey of the
original lot and subdivided it into 3 lots, without opposition from Morales or her heirs. Thus, three (3)
TCTs were issued in 1969 to Arnold and Angela and, two of the lots were then sold to the Occea
spouses, again without objection from Alberta Morales.

The Occea spouses alleged that they were buyers in good faith as the titles to the subject lots were free
from liens or encumbrances when they purchased them. They claimed that in 1989, Arnold offered to
sell the subject lots to them. On August 13, 1990, after they verified with the Antique Registry of Deeds
that Arnolds TCTs were clean and unencumbered, Arnold signed the instrument of sale over the subject
lots in favor of the Occeas for P100,000.00 and new titles were issued in their names.

The Occeas likewise set up the defenses of laches and prescription. They argue that Alberta and
plaintiffs-heirs were barred from prosecuting their action as they failed to assert their right for forty (40)
years. Firstly, they point out that vendor Arnold and Angela subdivided the entire lot in 1966 and
declared themselves as the only co-owners thereof in the deed of extrajudicial settlement. Alberta
Morales failed to oppose the inclusion of her 748 sq. m. lot in the deed. Thus, the title to the entire lot
no. 256 was transferred to the names of Arnold and Angela. Secondly, preparatory to the division of the
lots, vendor Arnold had the land surveyed but Alberta again failed to oppose the same. Finally, Alberta
and her heirs who are claiming adverse rights over the land based on the 1951 Deed of Pacto de Retro
Sale and the 1954 Deed of Definite Sale of Shares failed for 40 years to annotate their adverse claims on

61
the new titles issued to Arnold and Angela, enabling the latter to possess a clean title and transfer them
to the Occea spouses.

After trial, the lower court rendered a decision declaring the Occea spouses as buyers in good faith and
ruled that the action of the heirs was time-barred.

On appeal by Albertas heirs, the Court of Appeals reversed the decision of the trial court. It found that
the Occeas purchased the land in bad faith and that the action filed by Albertas heirs was not barred by
prescription or laches. The dispositive portion reads:

WHEREFORE, the instant appeal is hereby GRANTED. Accordingly, the assailed decision is hereby
REVERSED and SET ASIDE and a new one is rendered declaring the Deed of Absolute Sale dated August
13, 1990 executed between Arnold de la Flor in favor of defendants-appellees null and void and ordering
the cancellation of Transfer Certificate of Title Nos. 16896, 16897, T-18241 and T-18242.

SO ORDERED.8

Hence this appeal where petitioner-spouses Occea raise the following issues:

WHETHER OR NOT A VERBAL INFORMATION COULD BE MADE TO PREVAIL OVER A CLEAN CERTIFICATE
OF TITLE OF A REGISTERED LAND WHICH IS FREE OF ANY LIEN OR ENCUMBRANCE ANNOTATED ON ITS
CERTIFICATE OF TITLE OR ANY ADVERSE CLAIM RECORDED WITH THE REGISTER OF DEEDS.

II

WHETHER OR NOT A BUYER OF A REGISTERED LAND IS OBLIGATED TO MAKE INQUIRIES OF ANY

POSSIBLE DEFECT OR ADVERSE CLAIM AFFECTING ITS OWNERSHIP WHICH DOES NOT APPEAR ON THE
CERTIFICATE OF TITLE.

III

WHETHER OR NOT THE PERIOD OF MORE THAN FORTY (40) YEARS WITHOUT POSITIVE ACTION TAKEN BY
RESPONDENTS, AS WELL AS BY ALBERTA MORALES, TO PROTECT THEIR INTEREST CAN BE CONSIDERED
LACHES AND THUS THEIR PRESENT ACTION HAS PRESCRIBED.

On the first two issues, petitioner-spouses claim that they were purchasers of the land in good faith as
the law does not obligate them to go beyond a clean certificate of title to determine the condition of the
property. They argue that a person dealing with registered land is only charged with notice of the burden
on the property annotated on the title. When there is nothing on the title to indicate any cloud or vice in
the ownership of the property or any encumbrance thereon, the purchaser is not required to explore
further than the title in quest of any hidden defect or inchoate right that may subsequently defeat his
right thereto. They claim they had every right to purchase the land despite the verbal warning made by
caretaker Abas as the information was mere hearsay and cannot prevail over the title of the land which
was free from any encumbrance.

62
Their arguments do not persuade.

The petition at bar presents a case of double sale of an immovable property. Article 1544 of the New
Civil Code provides that in case an immovable property is sold to different vendees, the ownership shall
belong: (1) to the person acquiring it who in good faith first recorded it in the Registry of Property; (2)
should there be no inscription, the ownership shall pertain to the person who in good faith was first in
possession; and, (3) in the absence thereof, to the person who presents the oldest title, provided there is
good faith.

In all cases, good faith is essential. It is the basic premise of the preferential rights granted to the one
claiming ownership over an immovable.9 What is material is whether the second buyer first registers the
second sale in good faith, i.e., without knowledge of any defect in the title of the property sold.10 The
defense of indefeasibility of a Torrens title does not extend to a transferee who takes the certificate of
title in bad faith, with notice of a flaw.11

The governing principle of prius tempore, potior jure (first in time, stronger in right) enunciated under
Art. 1544 has been clarified, thus:

x x x Knowledge by the first buyer of the second sale cannot defeat the first buyers rights except when
the second buyer first registers in good faith the second sale (Olivares vs. Gonzales, 159 SCRA 33).
Conversely, knowledge gained by the second buyer of the first sale defeats his rights even if he is first to
register, since such knowledge taints his registration with bad faith (see also Astorga vs. Court of Appeals,
G.R. No. 58530, 26 December 1984). In Cruz vs. Cabaa (G.R. No. 56232, 22 June 1984, 129 SCRA 656), it
was held that it is essential, to merit the protection of Art. 1544, second paragraph, that the second
realty buyer must act in good faith in registering his deed of sale (citing Carbonell vs. Court of Appeals,
69 SCRA 99 and Crisostomo vs. CA, G.R. No. 95843, 02 September 1992).12

In the case at bar, we find that petitioner-spouses failed to prove good faith in their purchase and
registration of the land. A purchaser in good faith and for value is one who buys property without notice
that some other person has a right to or interest in such property and pays its fair price before he has
notice of the adverse claims and interest of another person in the same property. So it is that the
"honesty of intention" which constitutes good faith implies a freedom from knowledge of circumstances
which ought to put a person on inquiry. At the trial, Tomas Occea admitted that he found houses built
on the land during its ocular inspection prior to his purchase. He relied on the representation of vendor
Arnold that these houses were owned by squatters and that he was merely tolerating their presence on
the land. Tomas should have verified from the occupants of the land the nature and authority of their
possession instead of merely relying on the representation of the vendor that they were squatters,
having seen for himself that the land was occupied by persons other than the vendor who was not in
possession of the land at that time. The settled rule is that a buyer of real property in the possession of
persons other than the seller must be wary and should investigate the rights of those in possession.
Without such inquiry, the buyer can hardly be regarded as a buyer in good faith and cannot have any
right over the property.13 A purchaser cannot simply close his eyes to facts which should put a
reasonable man on his guard and then claim that he acted in good faith under the belief that there was
no defect in the title of his vendor.14 His mere refusal to believe that such defect exists or his willful
closing of his eyes to the possibility of the existence of a defect in his vendors title will not make him an
innocent purchaser for value if it later develops that the title was in fact defective, and it appears that he

63
would have notice of the defect had he acted with that measure of precaution which may reasonably be
required of a prudent man in a similar situation.

Indeed, the general rule is that one who deals with property registered under the Torrens system need
not go beyond the same, but only has to rely on the title. He is charged with notice only of such burdens
and claims as are annotated on the title. However, this principle does not apply when the party has
actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such
inquiry or when the purchaser has knowledge of a defect or the lack of title in his vendor or of sufficient
facts to induce a reasonably prudent man to inquire into the status of the title of the property in
litigation. One who falls within the exception can neither be denominated an innocent purchaser for
value nor a purchaser in good faith.15

The evidence of the private respondents show that when Tomas Occea conducted an ocular inspection
of the land prior to the second sale, Abas, the caretaker of the house which Alberta Morales built on the
land, personally informed Tomas that the lot had been previously sold by the same vendor Arnold to
Alberta Morales. With this information, the Occeas were obliged to look beyond the title of their
vendor and make further inquiries from the occupants of the land as to their authority and right to
possess it. However, despite this information about a prior sale, the Occeas proceeded with the
purchase in haste. They did not inquire from Abas how they could get in touch with the heirs or
representatives of Alberta to verify the ownership of the land. Neither do the records reveal that they
exerted effort to examine the documents pertaining to the first sale. Having discovered that the land
they intended to buy was occupied by a person other than the vendor not in actual possession thereof, it
was incumbent upon the petitioners to verify the extent of the occupants possessory rights.16 The
Occeas did nothing and chose to ignore and disbelieve Abas statement.

On the third issue, we hold that the action to annul title filed by respondents-heirs is not barred by
laches and prescription. Firstly, laches is a creation of equity and its application is controlled by equitable
considerations. Laches cannot be used to defeat justice or perpetuate fraud and injustice. Neither should
its application be used to prevent the rightful owners of a property from recovering what has been
fraudulently registered in the name of another.17 Secondly, prescription does not apply when the person
seeking annulment of title or reconveyance is in possession of the lot because the action partakes of a
suit to quiet title which is imprescriptible.18 In this case, Morales had actual possession of the land when
she had a house built thereon and had appointed a caretaker to oversee her property. Her undisturbed
possession of the land for a period of fifty (50) long years gave her and her heirs a continuing right to
seek the aid of a court of equity to determine the nature of the claim of ownership of petitioner-
spouses.19 As held by this Court in Faja vs. Court of Appeals:20

x x x There is settled jurisprudence that one who is in actual possession of a piece of land claiming to be
owner thereof may wait until his possession is disturbed or his title attacked before taking steps to
vindicate his right, the reason for the rule being, that his undisturbed possession gives him a continuing
right to seek the aid of a court of equity to ascertain and determine the nature of the adverse claim and
its effect on his own title, which right can be claimed only by one who is in possession. x x x The right to
quiet title to the property, seek its reconveyance and annul any certificate of title covering it accrued
only from the time the one in possession was made aware of a claim adverse to his own, and it is only
then that the statutory period of prescription commences to run against such possessor.

64
In the case at bar, Morales caretaker became aware of the second sale to petitioner-spouses only in
1991 when he received from the latter a notice to vacate the land. Respondents-heirs did not sleep on
their rights for in 1994, they filed their action to annul petitioners title over the land. It likewise bears to
stress that when vendor Arnold reacquired title to the subject property by means of fraud and
concealment after he has sold it to Alberta Morales, a constructive trust was created in favor of Morales
and her heirs. As the defrauded parties who were in actual possession of the property, an action of the
respondents-heirs to enforce the trust and recover the property cannot prescribe. They may vindicate
their right over the property regardless of the lapse of time.21 Hence, the rule that registration of the
property has the effect of constructive notice to the whole world cannot be availed of by petitioners and
the defense of prescription cannot be successfully raised against respondents.

In sum, the general rule is that registration under the Torrens system is the operative act which gives
validity to the transfer of title on the land. However, it does not create or vest title especially where a
party has actual knowledge of the claimants actual, open and notorious possession of the property at
the time of his registration.22 A buyer in bad faith has no right over the land. As petitioner-spouses failed
to register the subject land in good faith, ownership of the land pertains to respondent-heirs who first
possessed it in good faith.

IN VIEW WHEREOF, the petition is DISMISSED. No costs.

SO ORDERED.

G.R. No. 73913 January 31, 1989

JERRY T. MOLES, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and MARIANO M. DIOLOSA, respondents.

REGALADO, J.:

This petition for review on certiorari assails the decision of the then Intermediate Appellate Court 1
dismissing the complaint filed by herein petitioner against the herein private respondent in the former
Court of First Instance of Negros Occidental in Civil Case No. 13821 thereof. 2

The factual backdrop of this controversy, as culled from the records, 3 shows that on May 17, 1978,
petitioner Jerry T. Moles commenced a suit against private respondent Mariano M. Diolosa in the
aforesaid trial court, Branch IV in Bacolod City, for rescission of contract with damages. Private
respondent moved to dismiss on the ground of improper venue, invoking therefor Sales Invoice No. 075A
executed between petitioner and private respondent on April 23, 1977 which provides that all judicial
actions arising from this contract shall be instituted in the City of Iloilo. 4 This was opposed by petitioner
who averred that there is no formal document evidencing the sale which is substantially verbal in
character. In an order dated June 23, 1978, the trial court denied the motion to dismiss, holding that the
question of venue could not be resolved at said stage of the case. The subsequent motion for
reconsideration was likewise denied.

65
Consequently, private respondent, invoking the aforesaid venue stipulation, preceeded to this Court on a
petition for prohibition with preliminary injunction in G.R. No. 49078, questioning the validity of the
order denying his aforesaid two motions and seeking to enjoin the trial court from further proceeding
with the case. This petition was dismissed for lack of merit in a resolution of the Court, dated February 7,
1979, and which became final on March 15, 1979. Thereafter, private respondent filed his answer and
proceeded to trial.

The aforecited records establish that sometime in 1977, petitioner needed a linotype printing machine
for his printing business, The LM Press at Bacolod City, and applied for an industrial loan with the
Development Bank of the Philippines. (hereinafter, DBP) for the purchase thereof. An agent of Smith, Bell
and Co. who is a friend of petitioner introduced the latter to private respondent, owner of the Diolosa
Publishing House in Iloilo City, who had two available machines. Thereafter, petitioner went to Iloilo City
to inspect the two machines offered for sale and was informed that the same were secondhand but
functional.

On his second visit to the Diolosa Publishing House, petitioner together with Rogelio Yusay, a letter press
machine operator, decided to buy the linotype machine, Model 14. The transaction was basically verbal
in nature but to facilitate the loan application with the DBP, a pro forma invoice, dated April 23, 1977 and
reflecting the amount of P50,000.00 as the consideration of the sale, was signed by petitioner with an
addendum that payment had not yet been made but that he promised to pay the full amount upon the
release of his loan from the aforementioned bank on or before the end of the month. 5 Although the
agreed selling price was only P40,000.00, the amount on the invoice was increased by P10,000.00, said
increase being intended for the purchase of new matrices for said machine.

Sometime between April and May, 1977, the machine was delivered to petitioner's publishing house at
Tangub, Bacolod City where it was installed by one Crispino Escurido, an employee of respondent
Diolosa. Another employee of the Diolosa Publishing House, Tomas Plondaya, stayed at petitioners
house for almost a month to train the latter's cousin in operating the machine. 6

Under date of August 29, 1977, private respondent issued a certification wherein he warranted that the
machine sold was in A-1 condition, together with other express warranties. 7

Prior to the release of the loan, a representative from the DBP, Bacolod, supposedly inspected the
machine but he merely looked at it to see that it was there . 8 The inspector's recommendation was
favorable and, thereafter, petitioner's loan of P50,000.00 was granted and released. However, before
payment was made to private respondent, petitioner required the former, in a letter dated September
30, 1977, to accomplish the following, with the explanations indicated by him:

1.) Crossed check for P15,407.10 representing.

a) P 10,000.00-Overprice in the machine:

b) P203.00-Freight and handling of the machine;

c) P203.00-Share in the electric repair; and

66
d) P5,000.00- Insurance that Crispin will come back and repair the linotype machine at seller's
account as provided in the contract; after Crispin has put everything in order when he goes home on
Sunday he will return the check of P15,000.00.

2) Official receipt in the amount of P 50,000.00 as full payment of the linotype machine.

These were immediately complied with by private respondent and on the same day, September 30,1977,
he received the DBP check for P50,000.00. 9

It is to be noted that the aforesaid official receipt No. 0451, dated September 30, 1977 and prepared and
signed by private respondent, expressly states that he received from the petitioner the DBP check for
P50,000.00 issued in our favor in full payment of one (1) Unit Model 14 Linotype Machine as per Pro
forma Invoice dated April 23, 1977. 10

On November 29, 1977, petitioner wrote private respondent that the machine was not functioning
properly as it needed a new distributor bar. In the same letter, petitioner unburdened himself of his
grievances and sentiments in this wise.

We bought this machine in good faith because we trusted you very much being our elder brother in
printing and publishing business. We did not hire anybody to look over the machine, much more ask for
a rebate in your price of P40,000.00 and believed what your trusted two men, Tomas and Crispin, said
although they were hiding the real and actual condition of the machine for your business protection.

Until last week, we found out the worst ever to happen to us. We have been cheated because the expert
of the Linotype machine from Manila says, that the most he will buy your machine is at P5,000.00
only. ... 11

Private respondent made no reply to said letter, so petitioner engaged the services of other technicians.
Later, after several telephone calls regarding the defects in the machine, private respondent sent two
technicians to make the necessary repairs but they failed to put the machine in running condition. In
fact, since then petitioner was never able to use the machine. 12

On February 18, 1978, not having received from private respondent the action requested in his
preceding letter as herein before stated, petitioner again wrote private respondent, this time with the
warning that he would be forced to seek legal remedies to protect his interest. 13

Obviously in response to the foregoing letter, private respondent decided to purchase a new distributor
bar and, on March 16, 1978, private respondent delivered this spare part to petitioner through one
Pedro Candido. However, when thereafter petitioner asked private respondent to pay for the price of the
distributor bar, the latter asked petitioner to share the cost with him. Petitioner thus finally decided to
indorse the matter to his lawyer.

An expert witness for the petitioner, one Gil Legaspina, declared that he inspected the linotype machine
involved in this case at the instance of petitioner. In his inspection thereof, he found the following
defects: (1) the vertical automatic stop lever in the casting division was worn out; (2) the justification
lever had a slight breach (balana in the dialect); (3) the distributor bar was worn out; (4) the partition at

67
the entrance channel had a tear; (5) there was no "pie stacker" tube entrance; and (6) the slouch arm
lever in the driving division was worn out.

It turned out that the said linotype machine was the same machine that witness Legaspina had
previously inspected for Sy Brothers, a firm which also wanted to buy a linotype machine for their
printing establishment. Having found defects in said machine, the witness informed Sy Brother about his
findings, hence the purchase was aborted. In his opinion, major repairs were needed to put the machine
back in good running condition. 14

After trial, the court a quo rendered a decision the dispositive portion of which reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, judgment is hereby rendered as follows:

(1) Decreeing the rescission of the contract of sale involving one linotype machine No. 14 between the
defendant as seller and the plaintiff as buyer;

(2) Ordering the plaintiff to return to the defendant at the latter's place of business in Iloilo City the
linotype machine aforementioned together with all accessories that originally were delivered to the
plaintiff;

(3) Ordering the defendant to return to the plaintiff the sum of Forty Thousand Pesos (P40,000.00)
representing the price of the linotype machine, plus interest at the legal rate counted from May 17, 1978
when this action was instituted, until fully paid;

(4) Ordering the defendant to indemnify the plaintiff the sum of Four Thousand Five Hundred Pesos
(P4,500.00) representing unearned income or actual damages;

(5) Ordering the defendant to pay the plaintiff the sum of One Thousand Pesos (Pl,000.00) for attorney's
fees.

Costs against the defendant. 15

From this decision, private respondent appealed to the Intermediate Appellate Court which reversed the
judgment of the lower court and dismissed petitioner's complaint, hence the present petition.

We find merit in petitioner's cause.

On the matter of venue, private respondent relies on the aforementioned Sales Invoice No. 076A which
allegedly requires that the proper venue should be Iloilo City and not Bacolod City. We agree with
petitioner that said document is not the contract evidencing the sale of the linotype machine, it being
merely a preliminary memorandum of a proposal to buy one linotype machine, using for such purpose a
printed form used for printing job orders in private respondent's printing business. As hereinbefore
explained, this issue on venue was brought to Us by private respondent in a special civil action for
prohibition with preliminary injunction in G.R. No. 49078. After considering the allegations contained,
the issues raised and the arguments adduced in said petition, as well as the comments thereto, the
Court dismissed the petition for lack of merit. Respondent court erred in reopening the same issue on
appeal, with a contrary ruling.

68
Furthermore, it was error for the respondent court, after adopting the factual findings of the lower
court, to reverse the latter's holding that the sales invoice is merely a pro forma memorandum. The
records do not show that this finding is grounded entirely on speculation, surmises or conjectures as to
warrant a reversal thereof. 16 In fact, as hereinbefore stated, private respondent expressly admitted in
his official receipt No. 0451, dated September 30, 1977, that the said sales invoice was merely a pro
forma invoice. Consequently, the printed provisions therein, especially since the printed form used was
for purposes of other types of transactions, could not have been intended by the parties to govern their
transaction on the printing machine. It is obvious that a venue stipulation, in order to bind the parties,
must have been intelligently and deliberately intended by them to exclude their case from the
reglementary rules on venue. Yet, even such intended variance may not necessarily be given judicial
approval, as, for instance, where there are no restrictive or qualifying words in the agreement indicating
that venue cannot be laid in any place other than that agreed upon by the parties, 17 and in contracts of
adhesion. 18

Now, when an article is sold as a secondhand item, a question arises as to whether there is an implied
warranty of its quality or fitness. It is generally held that in the sale of a designated and specific article
sold as secondhand, there is no implied warranty as to its quality or fitness for the purpose intended, at
least where it is subject to inspection at the time of the sale. On the other hand, there is also authority
to the effect that in a sale of a secondhand articles there may be, under some circumstances, an implied
warranty of fitness for the ordinary purpose of the article sold or for the particular purpose of the buyer.
19

In a line of decisions rendered by the United States Supreme Court, it had theretofore been held that
there is no implied warranty as to the condition, adaptation, fitness, or suitability for the purpose for
which made, or the quality, of an article sold as and for a secondhand article. 20

Thus, in finding for private respondent, the respondent court cited the ruling in Sison vs. Ago, et al. 21 to
the effect that unless goods are sold as to raise an implied warranty, as a general rule there is no implied
warranty in the sale of secondhand articles. 22

Said general rule, however, is not without exceptions. Article 1562 of our Civil Code, which was taken
from the Uniform Sales Act, provides:

Art. 1562. In a sale of goods, there is an implied warranty or condition as to the quality or fitness of the
goods, as follows:

(1) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for
which the goods are acquired, and it appears that the buyer relies on the seller's skill or judgment
(whether he be the grower or manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose;

xxx

In Drumar Mining Co. vs. Morris Ravine Mining Co., 23 the District Court of Appeals, 3rd District,
California, in applying a similar provision of law, ruled:

69
'There is nothing in the Uniform Sales Act declaring there is no implied warranty in the sale of
secondhand goods. Section 1735 of the Civil Code declares there is no implied warranty or condition as
to the quality or fitness for any particular purpose, of goods supplied under a contract to sell or a sale,
except (this general statement is followed by an enumeration of several exceptions). It would seem that
the legislature intended this section to apply to all sales of goods, whether new or secondhand. In
subdivision 1 of this section, this language is used: where the buyer ... makes known to the seller the
particular purpose for which the goods are required, and it appears that the buyer relies on the seller's
skill or judgment ... there is an implied warranty that the goods shall be reasonably fit for such purpose.'

Furthermore, and of a more determinative role in this case, a perusal of past American decisions 24
likewise reveals a uniform pattern of rulings to the effect that an express warranty can be made by and
also be binding on the seller even in the sale of a secondhand article.

In the aforecited case of Markman vs. Hallbeck, while holding that there was an express warranty in the
sale of a secondhand engine, the court said that it was not error to refuse an instruction that upon the
sale of secondhand goods no warranty was implied, since secondhand goods might be sold under such
circumstances as to raise an implied warranty.

To repeat, in the case before Us, a certification to the effect that the linotype machine bought by
petitioner was in A-1 condition was issued by private respondent in favor of the former. This cannot but
be considered as an express warranty. However, it is private respondent's submission, that the same is
not binding on him, not being a part of the contract of sale between them. This contention is bereft of
substance.

It must be remembered that the certification was a condition sine qua non for the release of petitioner's
loan which was to be used as payment for the purchase price of the machine. Private respondent failed
to refute this material fact. Neither does he explain why he made that express warranty on the condition
of the machine if he had not intended to be bound by it. In fact, the respondent court, in declaring that
petitioner should have availed of the remedy of requiring repairs as provided for in said certification,
thereby considered the same as part and parcel of the verbal contract between the parties.

On the basis of the foregoing circumstances, the inescapable conclusion is that private respondent is
indeed bound by the express warranty he executed in favor of herein petitioner.

We disagree with respondent court that private respondents express warranty as to the A-1 condition of
the machine was merely dealer's talk. Private respondent was not a dealer of printing or linotype
machines to whom could be ascribed the supposed resort to the usual exaggerations of trade in said
items. His certification as to the condition of the machine was not made to induce petitioner to purchase
it but to confirm in writing for purposes of the financing aspect of the transaction his representations
thereon. Ordinarily, what does not appear on the face of the written instrument should be regarded as
dealer's or trader's talk; conversely, what is specifically represented as true in said document, as in the
instant case, cannot be considered as mere dealer's talk.

On the question as to whether the hidden defects in the machine is sufficient to warrant a rescission of
the contract between the parties, we have to consider the rule on redhibitory defects contemplated in
Article 1561 of the Civil Code. A redhibitory defect must be an imperfection or defect of such nature as

70
to engender a certain degree of importance. An imperfection or defect of little consequence does not
come within the category of being redhibitory. 26

As already narrated, an expert witness for the petitioner categorically established that the machine
required major repairs before it could be used. This, plus the fact that petitioner never made appropriate
use of the machine from the time of purchase until an action was filed, attest to the major defects in said
machine, by reason of which the rescission of the contract of sale is sought. The factual finding,
therefore, of the trial court that the machine is not reasonably fit for the particular purpose for which it
was intended must be upheld, there being ample evidence to sustain the same.

At a belated stage of this appeal, private respondent came up for the first time with the contention that
the action for rescission is barred by prescription. While it is true that Article 1571 of the Civil Code
provides for a prescriptive period of six months for a redhibitory action a cursory reading of the ten
preceding articles to which it refers will reveal that said rule may be applied only in case of implied
warranties. The present case involves one with and express warranty. Consequently, the general rule on
rescission of contract, which is four years 27 shall apply. Considering that the original case for rescission
was filed only one year after the delivery of the subject machine, the same is well within the prescriptive
period. This is aside from the doctrinal rule that the defense of prescription is waived and cannot be
considered on appeal if not raised in the trial court, 28 and this case does not have the features for an
exception to said rule.

WHEREFORE, the judgment of dismissal of the respondent court is hereby REVERSED and SET ASIDE, and
the decision of the court a quo is hereby REINSTATED.

SO ORDERED.

G.R. No. 52267 January 24, 1996

ENGINEERING & MACHINERY CORPORATION, petitioner,

vs.
COURT OF APPEALS and PONCIANO L. ALMEDA, respondent.

DECISION

PANGANIBAN, J.:

Is a contract for the fabrication and installation of a central air-conditioning system in a building, one of
"sale" or "for a piece of work"? What is the prescriptive period for filing actions for breach of the terms
of such contract?

These are the legal questions brought before this Court in this Petition for review on certiorari under
Rule 45 of the Rules of Court, to set aside the Decision1 of the Court of Appeals2 in CA-G.R. No. 58276-R
promulgated on November 28, 1978 (affirming in toto the decision3 dated April 15, 1974 of the then
Court of First Instance of Rizal, Branch II4 , in Civil Case No. 14712, which ordered petitioner to pay
private respondent the amount needed to rectify the faults and deficiencies of the air-conditioning
system installed by petitioner in private respondent's building, plus damages, attorney's fees and costs).

71
By a resolution of the First Division of this Court dated November 13, 1995, this case was transferred to
the Third. After deliberating on the various submissions of the parties, including the petition, record on
appeal, private respondent's comment and briefs for the petitioner and the private respondent, the
Court assigned the writing of this Decision to the undersigned, who took his oath as a member of the
Court on October 10, 1995.

The Facts

Pursuant to the contract dated September 10, 1962 between petitioner and private respondent, the
former undertook to fabricate, furnish and install the air-conditioning system in the latter's building
along Buendia Avenue, Makati in consideration of P210,000.00. Petitioner was to furnish the materials,
labor, tools and all services required in order to so fabricate and install said system. The system was
completed in 1963 and accepted by private respondent, who paid in full the contract price.

On September 2, 1965, private respondent sold the building to the National Investment and
Development Corporation (NIDC). The latter took possession of the building but on account of NIDC's
noncompliance with the terms and conditions of the deed of sale, private respondent was able to secure
judicial rescission thereof. The ownership of the building having been decreed back to private
respondent, he re-acquired possession sometime in 1971. It was then that he learned from some NIDC,
employees of the defects of the air-conditioning system of the building.

Acting on this information, private respondent commissioned Engineer David R. Sapico to render a
technical evaluation of the system in relation to the contract with petitioner. In his report, Sapico
enumerated the defects of the system and concluded that it was "not capable of maintaining the desired
room temperature of 76F - 2F (Exhibit C)"5 .

On the basis of this report, private respondent filed on May 8, 1971 an action for damages against
petitioner with the then Court of First Instance of Rizal (Civil Case No. 14712). The complaint alleged that
the air-conditioning system installed by petitioner did not comply with the agreed plans and
specifications. Hence, private respondent prayed for the amount of P210,000.00 representing the
rectification cost, P100,000.00 as damages and P15,000.00 as attorney's fees.

Petitioner moved to dismiss the complaint, alleging that the prescriptive period of six months had set in
pursuant to Articles 1566 and 1567, in relation to Article 1571 of the Civil Code, regarding the
responsibility of a vendor for any hidden faults or defects in the thing sold.

Private respondent countered that the contract dated September 10, 1962 was not a contract for sale
but a contract for a piece of work under Article 1713 of the Civil Code. Thus, in accordance with Article
1144 (1) of the same Code, the complaint was timely brought within the ten-year prescriptive period.

In its reply, petitioner argued that Article 1571 of the Civil Code providing for a six-month prescriptive
period is applicable to a contract for a piece of work by virtue of Article 1714, which provides that such a
contract shall be governed by the pertinent provisions on warranty of title and against hidden defects
and the payment of price in a contract of sale6 .

72
The trial court denied the motion to dismiss. In its answer to the complaint, petitioner reiterated its
claim of prescription as an affirmative defense. It alleged that whatever defects might have been
discovered in the air-conditioning system could have been caused by a variety of factors, including
ordinary wear and tear and lack of proper and regular maintenance. It pointed out that during the one-
year period that private respondent withheld final payment, the system was subjected to "very rigid
inspection and testing and corrections or modifications effected" by petitioner. It interposed a
compulsory counterclaim suggesting that the complaint was filed "to offset the adverse effects" of the
judgment in Civil Case No. 71494, Court of First Instance of Manila, involving the same parties, wherein
private respondent was adjudged to pay petitioner the balance of the unpaid contract price for the air-
conditioning system installed in another building of private respondent, amounting to P138,482.25.

Thereafter, private respondent filed an ex-parte motion for preliminary attachment on the strength of
petitioner's own statement to the effect that it had sold its business and was no longer doing business in
Manila. The trial court granted the motion and, upon private respondent's posting of a bond of
F'50,000.00, ordered the issuance of a writ of attachment.

In due course, the trial court rendered a decision finding that petitioner failed to install certain parts and
accessories called for by the contract, and deviated from the plans of the system, thus reducing its
operational effectiveness to the extent that 35 window-type units had to be installed in the building to
achieve a fairly desirable room temperature. On the question of prescription, the trial court ruled that
the complaint was filed within the ten-year court prescriptive period although the contract was one for a
piece of work, because it involved the "installation of an air-conditioning system which the defendant
itself manufactured, fabricated, designed and installed."

Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. Hence, it
instituted the instant petition.

The Submissions of the Parties

In the instant Petition, petitioner raised three issues. First, it contended that private respondent's
acceptance of the work and his payment of the contract price extinguished any liability with respect to
the defects in the air-conditioning system. Second, it claimed that the Court of Appeals erred when it
held that the defects in the installation were not apparent at the time of delivery and acceptance of the
work considering that private respondent was not an expert who could recognize such defects. Third, it
insisted that, assuming arguendo that there were indeed hidden defects, private respondent's complaint
was barred by prescription under Article 1571 of the Civil Code, which provides for a six-month
prescriptive period.

Private respondent, on the other hand, averred that the issues raised by petitioner, like the question of
whether there was an acceptance of the work by the owner and whether the hidden defects in the
installation could have been discovered by simple inspection, involve questions of fact which have been
passed upon by the appellate court.

The Court's Ruling

The Supreme Court reviews only errors of law in petitions for review on certiorari under Rule 45. It is not
the function of this Court to re-examine the findings of fact of the appellate court unless said findings are

73
not supported by the evidence on record or the judgment is based on a misapprehension of facts7 of
Appeals erred when it held that the defects in the installation were not apparent at the time of delivery
and acceptance of the work considering that private respondent was not an expert who could recognize
such defects. Third. it insisted that, assuming arguendo that there were indeed hidden defects, private
respondent's complaint was barred by prescription under Article 1571 of the Civil Code, which provides
for a six-month prescriptive period.

Private respondent, on the other hand, averred that the issues raised by petitioner, like the question of
whether here was an acceptance of the work by the owner and whether the hidden defects in the
installation could have been discovered by simple inspection, involve questions of fact which have been
passed upon by the appellate court.

The Court has consistently held that the factual findings of the trial court, as well as the Court of
Appeals, are final and conclusive and may not be reviewed on appeal. Among the exceptional
circumstances where a reassessment of facts found by the lower courts is allowed are when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; when the inference
made is manifestly absurd, mistaken or impossible; when there is grave abuse of discretion in the
appreciation of facts; when the judgment is premised on a misapprehension of facts; when the findings
went beyond the issues of the case and the same are contrary to the admissions of both appellant and
appellee. After a careful study of the case at bench, we find none of the above grounds present to justify
the re-evaluation of the findings of fact made by the courts below.8

We see no valid reason to discard the factual conclusions of the appellate court. . . . (I)t is not the
function of this Court to assess and evaluate all over again the evidence, testimonial and documentary,
adduced by the parties, particularly where, such as here, the findings of both the trial court and the
appellate court on the matter coincide.9 (Emphasis supplied)

Hence, the first two issues will not be resolved as they raise questions of fact.

Thus, the only question left to be resolved is that of prescription. In their submissions, the parties argued
lengthily on the nature of the contract entered into by them, viz., whether it was one of sale or for a
piece of work.

Article 1713 of the Civil Code defines a contract for a piece of work thus:

By the contract for a piece of work the contractor binds himself to execute a piece of work for the
employer, in consideration of a certain price or compensation. The contractor may either employ only his
labor or skill, or also furnish the material.

A contract for a piece of work, labor and materials may be distinguished from a contract of sale by the
inquiry as to whether the thing transferred is one not in existence and which would never have existed
but for the order, of the person desiring it10 . In such case, the contract is one for a piece of work, not a
sale. On the other hand, if the thing subject of the contract would have existed and been the subject of a
sale to some other person even if the order had not been given, then the contract is one of sale11 .

Thus, Mr. Justice Vitug12 explains that -

74
A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his
business manufactures or procures for the general market, whether the same is on hand at the time or
not is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his
special order, and not for the general market, it is a contract for a piece of work (Art. 1467, Civil Code).
The mere fact alone that certain articles are made upon previous orders of customers will not argue
against the imposition of the sales tax if such articles are ordinarily manufactured by the taxpayer for
sale to the public (Celestino Co. vs. Collector, 99 Phil. 841).

To Tolentino, the distinction between the two contracts depends on the intention of the parties. Thus, if
the parties intended that at some future date an object has to be delivered, without considering the
work or labor of the party bound to deliver, the contract is one of sale. But if one of the parties accepts
the undertaking on the basis of some plan, taking into account the work he will employ personally or
through another, there is a contract for a piece of work13 .

Clearly, the contract in question is one for a piece of work. It is not petitioner's line of business to
manufacture air-conditioning systems to be sold "off-the-shelf." Its business and particular field of
expertise is the fabrication and installation of such systems as ordered by customers and in accordance
with the particular plans and specifications provided by the customers. Naturally, the price or
compensation for the system manufactured and installed will depend greatly on the particular plans and
specifications agreed upon with the customers.

The obligations of a contractor for a piece of work are set forth in Articles 1714 and 1715 of the Civil
Code, which provide:

Art. 1714. If the contractor agrees to produce the work from material furnished by him, he shall
deliver the thing produced to the employer and transfer dominion over the thing. This contract shall be
governed by the following articles as well as by the pertinent provisions on warranty of title and against
hidden defects and the payment of price in a contract of sale.

Art. 1715. The contractor shall execute the work in such a manner that it has the qualities agreed
upon and has no defects which destroy or lessen its value or fitness for its ordinary or stipulated use.
Should the work be not of such quality, the employer may require that the contractor remove the defect
or execute another work. If the contractor fails or refuses to comply with this obligation, the employer
may have the defect removed or another work executed, at the contractor's cost.

The provisions on warranty against hidden defects, referred to in Art. 1714 above-quoted, are found in
Articles 1561 and 1566, which read as follows:

Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing
sold may have, should they render it unfit for the use for which it is intended, or should they diminish its
fitness for such use to such an extent that, had the vendee been aware thereof, he would not have
acquired it or would have given a lower price for it; but said vendor shall not be answerable for patent
defects or those which may be visible, or for those which are not visible if the vendee is an expert who,
by reason of his trade or profession, should have known them.

xxx xxx xxx

75
Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing
sold, even though he was not aware thereof.

This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the
hidden faults or defects in the thing sold.

The remedy against violations of the warranty against hidden defects is either to withdraw from the
contract (redhibitory action) or to demand a proportionate reduction of the price (accion quanti
manoris), with damages in either case14 .

In Villostas vs. Court of Appeals15 , we held that, "while it is true that Article 1571 of the Civil Code
provides for a prescriptive period of six months for a redhibitory action, a cursory reading of the ten
preceding articles to which it refers will reveal that said rule may be applied only in case of implied
warranties"; and where there is an express warranty in the contract, as in the case at bench, the
prescriptive period is the one specified in the express warranty, and in the absence of such period, "the
general rule on rescission of contract, which is four years (Article 1389, Civil Code) shall apply"16 .

Consistent with the above discussion, it would appear that this suit is barred by prescription because the
complaint was filed more than four years after the execution of the contract and the completion of the
air-conditioning system.

However, a close scrutiny of the complaint filed in the trial court reveals that the original action is not
really for enforcement of the warranties against hidden defects, but one for breach of the contract itself.
It alleged17 that the petitioner, "in the installation of the air conditioning system did not comply with the
specifications provided" in the written agreement between the parties, "and an evaluation of the air-
conditioning system as installed by the defendant showed the following defects and violations of the
specifications of the agreement, to wit:

GROUND FLOOR:

"A. RIGHT WING:

Equipped with Worthington Compressor, Model 2VC4 directly driven by an Hp Elin electric motor 1750
rmp, 3 phase, 60 cycles, 220 volts, complete with starter evaporative condenser, circulating water pump,
air handling unit air ducts.

Defects Noted:

1. Deteriorated evaporative condenser panels, coils are full of scales and heavy corrosion is very
evident.

2. Defective gauges of compressors;

3. No belt guard on motor;

4. Main switch has no cover;

76
5. Desired room temperature not attained;

Aside from the above defects, the following were noted not installed although provided in the
specifications.

1. Face by-pass damper of G.I. sheets No. 16. This damper regulates the flow of cooled air
depending on room condition.

2. No fresh air intake provision were provided which is very necessary for efficient comfort cooling..

3. No motor to regulate the face and by-pass damper.

4. Liquid level indicator for refrigerant not provided.

5. Suitable heat exchanger is not installed. This is an important component to increase refrigeration
efficiency.

6. Modulating thermostat not provided.

7. Water treatment device for evaporative condenser was not provided.

8. Liquid receiver not provided by sight glass.

B. LEFT WING:

Worthington Compressor Model 2VC4 is installed complete with 15 Hp electric motor, 3 phase, 220 volts
60 cycles with starter.

Defects Noted:

Same as right wing. except No. 4, All other defects on right wing are common to the left wing.

SECOND FLOOR: (Common up to EIGHT FLOORS)

Compressors installed are MELCO with 7.5 Hp V-belt driven by 1800 RPM, -220 volts, 60 cycles, 3 phase,
Thrige electric motor with starters.

As stated in the specifications under, Section No. IV, the MELCO compressors do not satisfy the
conditions stated therein due to the following:

1. MELCO Compressors are not provided with automatic capacity unloader.

2. Not provided with oil pressure safety control.

3. Particular compressors do not have provision for renewal sleeves.

77
Out of the total 15 MELCO compressors installed to serve the 2nd floor up to 8th floors, only six (6) units
are in operation and the rest were already replaced. Of the remaining six (6) units, several of them have
been replaced with bigger crankshafts.

NINTH FLOOR:

Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60 cycles, 1750 rpm, Higgs motors with
starters.

Defects Noted are similar to ground floor.

GENERAL REMARKS:

Under Section III, Design conditions of specification for air conditioning work, and taking into account
"A" & "B" same, the present systems are not capable of maintaining the desired temperature of 76 = 2F
(sic).

The present tenant have installed 35 window type air conditioning units distributed among the different
floor levels. Temperature measurements conducted on March 29. 1971, revealed that 78F room (sic) is
only maintained due to the additional window type units.

The trial court, after evaluating the evidence presented, held that, indeed, petitioner failed to install
items and parts required in the contract and substituted some other items which were not in accordance
with the specifications18 , thus:

From all of the foregoing, the Court is persuaded to believe the plaintiff that not only had the defendant
failed to install items and parts provided for in the specifications of the air-conditioning system be
installed, like face and by-pass dampers and modulating thermostat and many others, but also that there
are items, parts and accessories which were used and installed on the air-conditioning system which
were not in full accord with contract specifications. These omissions to install the equipments, parts and
accessories called for in the specifications of the contract, as well as the deviations made in putting into
the air-conditioning system equipments, parts and accessories not in full accord with the contract
specification naturally resulted to adversely affect the operational effectiveness of the air-conditioning
system which necessitated the installation of thirty-five window type of air-conditioning units distributed
among the different floor levels in order to be able to obtain a fairly desirable room temperature for the
tenants and actual occupants of the building. The Court opines and so holds that the failure of the
defendant to follow the contract specifications and said omissions and deviations having resulted in the
operational ineffectiveness of the system installed makes the defendant liable to the plaintiff in the
amount necessary to rectify to put the air conditioning system in its proper operational condition to
make it serve the purpose for which the plaintiff entered into the contract with the defendant.

The respondent Court affirmed the trial court's decision thereby making the latter's findings also its own.

Having concluded that the original complaint is one for damages arising from breach of a written
contract - and not a suit to enforce warranties against hidden defects - we here - with declare that the
governing law is Article 1715 (supra). However, inasmuch as this provision does not contain a specific
prescriptive period, the general law on prescription, which is Article 1144 of the Civil Code, will apply.

78
Said provision states, inter alia, that actions "upon a written contract" prescribe in ten (10) years. Since
the governing contract was executed on September 10, 1962 and the complaint was filed on May 8,
1971, it is clear that the action has not prescribed.

What about petitioner's contention that "acceptance of the work by the employer relieves the
contractor of liability for any defect in the work"? This was answered by respondent Court19 as follows:

As the breach of contract which gave rise to the instant case consisted in appellant's omission to install
the equipments (sic), parts and accessories not in accordance with the plan and specifications provided
for in the contract and the deviations made in putting into the air conditioning system parts and
accessories not in accordance with the contract specifications, it is evident that the defect in the
installation was not apparent at the time of the delivery and acceptance of the work, considering further
that plaintiff is not an expert to recognize the same. From the very nature of things, it is impossible to
determine by the simple inspection of air conditioning system installed in an 8-floor building whether it
has been furnished and installed as per agreed specifications.

Verily, the mere fact that the private respondent accepted the work does not, ipso facto, relieve the
petitioner from liability for deviations from and violations of the written contract, as the law gives him
ten (10) years within which to file an action based on breach thereof.

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. No costs.

SO ORDERED.

G.R. No. 149420 October 8, 2003

SONNY LO, petitioner,

vs.
KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.

DECISION

YNARES-SANTIAGO, J.:

Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of steel
scaffoldings, while petitioner Sonny L. Lo, doing business under the name and style Sans Enterprises, is a
building contractor. On February 22, 1990, petitioner ordered scaffolding equipments from respondent
worth P540,425.80.1 He paid a downpayment in the amount of P150,000.00. The balance was made
payable in ten monthly installments.

Respondent delivered the scaffoldings to petitioner.2 Petitioner was able to pay the first two monthly
installments. His business, however, encountered financial difficulties and he was unable to settle his
obligation to respondent despite oral and written demands made against him.3

On October 11, 1990, petitioner and respondent executed a Deed of Assignment,4 whereby petitioner
assigned to respondent his receivables in the amount of P335,462.14 from Jomero Realty Corporation.
Pertinent portions of the Deed provide:

79
WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house located at
Greenmeadow Avenue, Quezon City owned by Jomero Realty Corporation;

WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR purchased on
account scaffolding equipments from the ASSIGNEE payable to the latter;

WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE for the purchase of the
aforementioned scaffoldings now in the amount of Three Hundred Thirty Five Thousand Four Hundred
Sixty Two and 14/100 Pesos (P335,462.14);

NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five Thousand Four
Hundred Sixty Two and 14/100 Pesos (P335,462.14), Philippine Currency which represents part of the
ASSIGNORs collectible from Jomero Realty Corp., said ASSIGNOR hereby assigns, transfers and sets over
unto the ASSIGNEE all collectibles amounting to the said amount of P335, 462.14;

And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the full power and
authority to demand, collect, receive, compound, compromise and give acquittance for the same or any
part thereof, and in the name and stead of the said ASSIGNOR;

And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its successors and
assigns that said debt is justly owing and due to the ASSIGNOR for Jomero Realty Corporation and that
said ASSIGNOR has not done and will not cause anything to be done to diminish or discharge said debt,
or delay or to prevent the ASSIGNEE, its successors or assigns, from collecting the same;

And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs,
executors, administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE,
its successors or assigns, at his cost and expense, execute and do all such further acts and deeds as shall
be reasonably necessary to effectually enable said ASSIGNEE to recover whatever collectibles said
ASSIGNOR has in accordance with the true intent and meaning of these presents. xxx5 (Italics supplied)

However, when respondent tried to collect the said credit from Jomero Realty Corporation, the latter
refused to honor the Deed of Assignment because it claimed that petitioner was also indebted to it.6 On
November 26, 1990, respondent sent a letter7 to petitioner demanding payment of his obligation, but
petitioner refused to pay claiming that his obligation had been extinguished when they executed the
Deed of Assignment.

Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money against
the petitioner before the Regional Trial Court of Makati, Branch 147, which was docketed as Civil Case
No. 91-074.8

During the trial, petitioner argued that his obligation was extinguished with the execution of the Deed of
Assignment of credit. Respondent, for its part, presented the testimony of its employee, Almeda Baaga,
who testified that Jomero Realty refused to honor the assignment of credit because it claimed that
petitioner had an outstanding indebtedness to it.

80
On August 25, 1994, the trial court rendered a decision9 dismissing the complaint on the ground that the
assignment of credit extinguished the obligation. The decretal portion thereof provides:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the defendant and
against the plaintiff, dismissing the complaint and ordering the plaintiff to pay the defendant attorneys
fees in the amount of P25,000.00.1a\^/phi1.net

Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court
rendered a decision,10 the dispositive portion of which reads:

WHEREFORE, finding merit in this appeal, the court REVERSES the appealed Decision and enters
judgment ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK
SYSTEM PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100
(P335,462.14) with legal interest of 6% per annum from January 10, 1991 (filing of the Complaint) until
fully paid and attorneys fees equivalent to 10% of the amount due and costs of the suit.

SO ORDERED.11

In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to the
respondent, the Court of Appeals held that (1) petitioner failed to comply with his warranty under the
Deed; (2) the object of the Deed did not exist at the time of the transaction, rendering it void pursuant to
Article 1409 of the Civil Code; and (3) petitioner violated the terms of the Deed of Assignment when he
failed to execute and do all acts and deeds as shall be necessary to effectually enable the respondent to
recover the collectibles.12

Petitioner filed a motion for reconsideration of the said decision, which was denied by the Court of
Appeals.13

In this petition for review, petitioner assigns the following errors:

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN DECLARING THE DEED OF
ASSIGNMENT (EXH. "4") AS NULL AND VOID FOR LACK OF OBJECT ON THE BASIS OF A MERE HEARSAY
CLAIM.

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ASSIGNMENT (EXH. "4")
DID NOT EXTINGUISH PETITIONERS OBLIGATION ON THE WRONG NOTION THAT PETITIONER FAILED TO
COMPLY WITH HIS WARRANTY THEREUNDER.

III

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE TRIAL COURT AND IN
ORDERING PAYMENT OF INTERESTS AND ATTORNEYS FEES.14

81
The petition is without merit.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor,
by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of the
debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the
power to enforce it to the same extent as the assignor could enforce it against the debtor.15

Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to
the creditor who accepts it as equivalent of payment of an outstanding debt.16 In order that there be a
valid dation in payment, the following are the requisites: (1) There must be the performance of the
prestation in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a
real right or a credit against the third person; (2) There must be some difference between the prestation
due and that which is given in substitution (aliud pro alio); (3) There must be an agreement between the
creditor and debtor that the obligation is immediately extinguished by reason of the performance of a
prestation different from that due.17 The undertaking really partakes in one sense of the nature of sale,
that is, the creditor is really buying the thing or property of the debtor, payment for which is to be
charged against the debtors debt. As such, the vendor in good faith shall be responsible, for the
existence and legality of the credit at the time of the sale but not for the solvency of the debtor, in
specified circumstances.18

Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal
property,19 produced the effects of a dation in payment which may extinguish the obligation.20
However, as in any other contract of sale, the vendor or assignor is bound by certain warranties. More
specifically, the first paragraph of Article 1628 of the Civil Code provides:

The vendor in good faith shall be responsible for the existence and legality of the credit at the time of
the sale, unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has
been so expressly stipulated or unless the insolvency was prior to the sale and of common knowledge.

From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and
legality of the credit at the time of the sale or assignment. When Jomero claimed that it was no longer
indebted to petitioner since the latter also had an unpaid obligation to it, it essentially meant that its
obligation to petitioner has been extinguished by compensation.21 In other words, respondent alleged
the non-existence of the credit and asserted its claim to petitioners warranty under the assignment.
Therefore, it behooved on petitioner to make good its warranty and paid the obligation.

Furthermore, we find that petitioner breached his obligation under the Deed of Assignment, to wit:

And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs,
executors, administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE,
its successors or assigns, at his cost and expense, execute and do all such further acts and deeds as shall
be reasonably necessary to effectually enable said ASSIGNEE to recover whatever collectibles said
ASSIGNOR has in accordance with the true intent and meaning of these presents.22 (underscoring ours)

Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the
performance thereof in case the same is later found to be inexistent. He should be held liable to pay to
respondent the amount of his indebtedness.

82
Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the sum of
P335,462.14 with legal interest thereon. However, we find that the award by the Court of Appeals of
attorneys fees is without factual basis. No evidence or testimony was presented to substantiate this
claim. Attorneys fees, being in the nature of actual damages, must be duly substantiated by competent
proof.

WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19, 2001 in CA-
G.R. CV No. 47713, ordering petitioner to pay respondent the sum of P335,462.14 with legal interest of
6% per annum from January 10, 1991 until fully paid is AFFIRMED with MODIFICATION. Upon finality of
this Decision, the rate of legal interest shall be 12% per annum, inasmuch as the obligation shall
thereafter become equivalent to a forbearance of credit.23 The award of attorneys fees is DELETED for
lack of evidentiary basis.

SO ORDERED.

G.R. No. 146839 March 23, 2011

ROLANDO T. CATUNGAL, JOSE T. CATUNGAL, JR., CAROLYN T. CATUNGAL and ERLINDA CATUNGAL-
WESSEL, Petitioners,
vs.
ANGEL S. RODRIGUEZ, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

Before the Court is a Petition for Review on Certiorari, assailing the following issuances of the Court of
Appeals in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565: (a) the August 8, 2000
Decision,1 which affirmed the Decision2 dated May 30, 1992 of the Regional Trial Court (RTC), Branch 27
of Lapu-lapu City, Cebu in Civil Case No. 2365-L, and (b) the January 30, 2001 Resolution,3 denying
herein petitioners motion for reconsideration of the August 8, 2000 Decision.

The relevant factual and procedural antecedents of this case are as follows:

This controversy arose from a Complaint for Damages and Injunction with Preliminary
Injunction/Restraining Order4 filed on December 10, 1990 by herein respondent Angel S. Rodriguez
(Rodriguez), with the RTC, Branch 27, Lapu-lapu City, Cebu, docketed as Civil Case No. 2365-L against the
spouses Agapita and Jose Catungal (the spouses Catungal), the parents of petitioners.

In the said Complaint, it was alleged that Agapita T. Catungal (Agapita) owned a parcel of land (Lot
10963) with an area of 65,246 square meters, covered by Original Certificate of Title (OCT) No. 1055 in
her name situated in the Barrio of Talamban, Cebu City. The said property was allegedly the exclusive
paraphernal property of Agapita.

83
On April 23, 1990, Agapita, with the consent of her husband Jose, entered into a Contract to Sell6 with
respondent Rodriguez. Subsequently, the Contract to Sell was purportedly "upgraded" into a Conditional
Deed of Sale7 dated July 26, 1990 between the same parties. Both the Contract to Sell and the
Conditional Deed of Sale were annotated on the title.

The provisions of the Conditional Deed of Sale pertinent to the present dispute are quoted below:

1. The VENDOR for and in consideration of the sum of TWENTY[-]FIVE MILLION PESOS (P25,000,000.00)
payable as follows:

a. FIVE HUNDRED THOUSAND PESOS (P500,000.00) downpayment upon the signing of this agreement,
receipt of which sum is hereby acknowledged in full from the VENDEE.

b. The balance of TWENTY[-]FOUR MILLION FIVE HUNDRED THOUSAND PESOS (P24,500,000.00) shall be
payable in five separate checks, made to the order of JOSE Ch. CATUNGAL, the first check shall be for
FOUR MILLION FIVE HUNDRED THOUSAND PESOS (P4,500,000.00) and the remaining balance to be paid
in four checks in the amounts of FIVE MILLION PESOS (P5,000,000.00) each after the VENDEE have (sic)
successfully negotiated, secured and provided a Road Right of Way consisting of 12 meters in width
cutting across Lot 10884 up to the national road, either by widening the existing Road Right of Way or by
securing a new Road Right of Way of 12 meters in width. If however said Road Right of Way could not be
negotiated, the VENDEE shall give notice to the VENDOR for them to reassess and solve the problem by
taking other options and should the situation ultimately prove futile, he shall take steps to rescind or
cancel the herein Conditional Deed of Sale.

c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the
VENDEE to secure and any or all cost relative to the acquisition thereof shall be borne solely by the
VENDEE. He shall, however, be accorded with enough time necessary for the success of his endeavor,
granting him a free hand in negotiating for the passage.

BY THESE PRESENTS, the VENDOR do hereby agree to sell by way of herein CONDITIONAL DEED OF SALE
to VENDEE, his heirs, successors and assigns, the real property described in the Original Certificate of
Title No. 105 x x x.

xxxx

5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to
rescind the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written
notice relinquishing his rights over the property. The VENDEE shall then be reimbursed by the VENDOR
the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) representing the downpayment, interest
free, payable but contingent upon the event that the VENDOR shall have been able to sell the property
to another party.8

In accordance with the Conditional Deed of Sale, Rodriguez purportedly secured the necessary surveys
and plans and through his efforts, the property was reclassified from agricultural land into residential
land which he claimed substantially increased the propertys value. He likewise alleged that he actively
negotiated for the road right of way as stipulated in the contract.9

84
Rodriguez further claimed that on August 31, 1990 the spouses Catungal requested an advance of
P5,000,000.00 on the purchase price for personal reasons. Rodriquez allegedly refused on the ground
that the amount was substantial and was not due under the terms of their agreement. Shortly after his
refusal to pay the advance, he purportedly learned that the Catungals were offering the property for sale
to third parties.10

Thereafter, Rodriguez received letters dated October 22, 1990,11 October 24, 199012 and October 29,
1990,13 all signed by Jose Catungal who was a lawyer, essentially demanding that the former make up
his mind about buying the land or exercising his "option" to buy because the spouses Catungal allegedly
received other offers and they needed money to pay for personal obligations and for investing in other
properties/business ventures. Should Rodriguez fail to exercise his option to buy the land, the Catungals
warned that they would consider the contract cancelled and that they were free to look for other buyers.

In a letter dated November 4, 1990,14 Rodriguez registered his objections to what he termed the
Catungals unwarranted demands in view of the terms of the Conditional Deed of Sale which allowed
him sufficient time to negotiate a road right of way and granted him, the vendee, the exclusive right to
rescind the contract. Still, on November 15, 1990, Rodriguez purportedly received a letter dated
November 9, 199015 from Atty. Catungal, stating that the contract had been cancelled and terminated.

Contending that the Catungals unilateral rescission of the Conditional Deed of Sale was unjustified,
arbitrary and unwarranted, Rodriquez prayed in his Complaint, that:

1. Upon the filing of this complaint, a restraining order be issued enjoining defendants [the spouses
Catungal], their employees, agents, representatives or other persons acting in their behalf from offering
the property subject of this case for sale to third persons; from entertaining offers or proposals by third
persons to purchase the said property; and, in general, from performing acts in furtherance or
implementation of defendants rescission of their Conditional Deed of Sale with plaintiff [Rodriguez].

2. After hearing, a writ of preliminary injunction be issued upon such reasonable bond as may be fixed by
the court enjoining defendants and other persons acting in their behalf from performing any of the acts
mentioned in the next preceding paragraph.

3. After trial, a Decision be rendered:

a) Making the injunction permanent;

b) Condemning defendants to pay to plaintiff, jointly and solidarily:

Actual damages in the amount of P400,000.00 for their unlawful rescission of the Agreement and their
performance of acts in violation or disregard of the said Agreement;

Moral damages in the amount of P200,000.00;

Exemplary damages in the amount of P200,000.00; Expenses of litigation and attorneys fees in the
amount of P100,000.00; and

Costs of suit.16

85
On December 12, 1990, the trial court issued a temporary restraining order and set the application for a
writ of preliminary injunction for hearing on December 21, 1990 with a directive to the spouses Catungal
to show cause within five days from notice why preliminary injunction should not be granted. The trial
court likewise ordered that summons be served on them.17

Thereafter, the spouses Catungal filed their opposition18 to the issuance of a writ of preliminary
injunction and later filed a motion to dismiss19 on the ground of improper venue. According to the
Catungals, the subject property was located in Cebu City and thus, the complaint should have been filed
in Cebu City, not Lapu-lapu City. Rodriguez opposed the motion to dismiss on the ground that his action
was a personal action as its subject was breach of a contract, the Conditional Deed of Sale, and not title
to, or possession of real property.20

In an Order dated January 17, 1991,21 the trial court denied the motion to dismiss and ruled that the
complaint involved a personal action, being merely for damages with a prayer for injunction.

Subsequently, on January 30, 1991, the trial court ordered the issuance of a writ of preliminary
injunction upon posting by Rodriguez of a bond in the amount of P100,000.00 to answer for damages
that the defendants may sustain by reason of the injunction.

On February 1, 1991, the spouses Catungal filed their Answer with Counterclaim22 alleging that they had
the right to rescind the contract in view of (1) Rodriguezs failure to negotiate the road right of way
despite the lapse of several months since the signing of the contract, and (2) his refusal to pay the
additional amount of P5,000,000.00 asked by the Catungals, which to them indicated his lack of funds to
purchase the property. The Catungals likewise contended that Rodriguez did not have an exclusive right
to rescind the contract and that the contract, being reciprocal, meant both parties had the right to
rescind.23 The spouses Catungal further claimed that it was Rodriguez who was in breach of their
agreement and guilty of bad faith which justified their rescission of the contract.24 By way of
counterclaim, the spouses Catungal prayed for actual and consequential damages in the form of
unearned interests from the balance (of the purchase price in the amount) of P24,500,000.00, moral and
exemplary damages in the amount of P2,000,000.00, attorneys fees in the amount of P200,000.00 and
costs of suits and litigation expenses in the amount of P10,000.00.25 The spouses Catungal prayed for
the dismissal of the complaint and the grant of their counterclaim.

The Catungals amended their Answer twice,26 retaining their basic allegations but amplifying their
charges of contractual breach and bad faith on the part of Rodriguez and adding the argument that in
view of Article 1191 of the Civil Code, the power to rescind reciprocal obligations is granted by the law
itself to both parties and does not need an express stipulation to grant the same to the injured party. In
the Second Amended Answer with Counterclaim, the spouses Catungal added a prayer for the trial court
to order the Register of Deeds to cancel the annotations of the two contracts at the back of their OCT.27

On October 24, 1991, Rodriguez filed an Amended Complaint,28 adding allegations to the effect that the
Catungals were guilty of several misrepresentations which purportedly induced Rodriguez to buy the
property at the price of P25,000,000.00. Among others, it was alleged that the spouses Catungal
misrepresented that their Lot 10963 includes a flat portion of land which later turned out to be a
separate lot (Lot 10986) owned by Teodora Tudtud who sold the same to one Antonio Pablo. The
Catungals also allegedly misrepresented that the road right of way will only traverse two lots owned by

86
Anatolia Tudtud and her daughter Sally who were their relatives and who had already agreed to sell a
portion of the said lots for the road right of way at a price of P550.00 per square meter. However,
because of the Catungals acts of offering the property to other buyers who offered to buy the road lots
for P2,500.00 per square meter, the adjacent lot owners were no longer willing to sell the road lots to
Rodriguez at P550.00 per square meter but were asking for a price of P3,500.00 per square meter. In
other words, instead of assisting Rodriguez in his efforts to negotiate the road right of way, the spouses
Catungal allegedly intentionally and maliciously defeated Rodriguezs negotiations for a road right of way
in order to justify rescission of the said contract and enable them to offer the property to other buyers.

Despite requesting the trial court for an extension of time to file an amended Answer,29 the Catungals
did not file an amended Answer and instead filed an Urgent Motion to Dismiss30 again invoking the
ground of improper venue. In the meantime, for failure to file an amended Answer within the period
allowed, the trial court set the case for pre-trial on December 20, 1991.

During the pre-trial held on December 20, 1991, the trial court denied in open court the Catungals
Urgent Motion to Dismiss for violation of the rules and for being repetitious and having been previously
denied.31 However, Atty. Catungal refused to enter into pre-trial which prompted the trial court to
declare the defendants in default and to set the presentation of the plaintiffs evidence on February 14,
1992.32

On December 23, 1991, the Catungals filed a motion for reconsideration33 of the December 20, 1991
Order denying their Urgent Motion to Dismiss but the trial court denied reconsideration in an Order
dated February 3, 1992.34 Undeterred, the Catungals subsequently filed a Motion to Lift and to Set
Aside Order of Default35 but it was likewise denied for being in violation of the rules and for being not
meritorious.36 On February 28, 1992, the Catungals filed a Petition for Certiorari and Prohibition37 with
the Court of Appeals, questioning the denial of their motion to dismiss and the order of default. This was
docketed as CA-G.R. SP No. 27565.

Meanwhile, Rodriguez proceeded to present his evidence before the trial court.

In a Decision dated May 30, 1992, the trial court ruled in favor of Rodriguez, finding that: (a) under the
contract it was complainant (Rodriguez) that had the option to rescind the sale; (b) Rodriguezs
obligation to pay the balance of the purchase price arises only upon successful negotiation of the road
right of way; (c) he proved his diligent efforts to negotiate the road right of way; (d) the spouses Catungal
were guilty of misrepresentation which defeated Rodriguezs efforts to acquire the road right of way; and
(e) the Catungals rescission of the contract had no basis and was in bad faith. Thus, the trial court made
the injunction permanent, ordered the Catungals to reduce the purchase price by the amount of
acquisition of Lot 10963 which they misrepresented was part of the property sold but was in fact owned
by a third party and ordered them to pay P100,000.00 as damages, P30,000.00 as attorneys fees and
costs.

The Catungals appealed the decision to the Court of Appeals, asserting the commission of the following
errors by the trial court in their appellants brief38 dated February 9, 1994:

87
THE COURT A QUO ERRED IN NOT DISMISSING OF (SIC) THE CASE ON THE GROUNDS OF IMPROPER
VENUE AND LACK OF JURISDICTION.

II

THE COURT A QUO ERRED IN CONSIDERING THE CASE AS A PERSONAL AND NOT A REAL ACTION.

III

GRANTING WITHOUT ADMITTING THAT VENUE WAS PROPERLY LAID AND THE CASE IS A PERSONAL
ACTION, THE COURT A QUO ERRED IN DECLARING THE DEFENDANTS IN DEFAULT DURING THE PRE-TRIAL
WHEN AT THAT TIME THE DEFENDANTS HAD ALREADY FILED THEIR ANSWER TO THE COMPLAINT.

IV

THE COURT A QUO ERRED IN CONSIDERING THE DEFENDANTS AS HAVING LOST THEIR LEGAL STANDING
IN COURT WHEN AT MOST THEY COULD ONLY BE CONSIDERED AS IN DEFAULT AND STILL ENTITLED TO
NOTICES OF ALL FURTHER PROCEEDINGS ESPECIALLY AFTER THEY HAD FILED THE MOTION TO LIFT THE
ORDER OF DEFAULT.

THE COURT A QUO ERRED IN ISSUING THE WRIT [OF] PRELIMINARY INJUNCTION RESTRAINING THE
EXERCISE OF ACTS OF OWNERSHIP AND OTHER RIGHTS OVER REAL PROPERTY OUTSIDE OF THE COURTS
TERRITORIAL JURISDICTION AND INCLUDING PERSONS WHO WERE NOT BROUGHT UNDER ITS
JURISDICTION, THUS THE NULLITY OF THE WRIT.

VI

THE COURT A QUO ERRED IN NOT RESTRAINING ITSELF MOTU PROP[R]IO FROM CONTINUING WITH THE
PROCEEDINGS IN THE CASE AND IN RENDERING DECISION THEREIN IF ONLY FOR REASON OF COURTESY
AND FAIRNESS BEING MANDATED AS DISPENSER OF FAIR AND EQUAL JUSTICE TO ALL AND SUNDRY
WITHOUT FEAR OR FAVOR IT HAVING BEEN SERVED EARLIER WITH A COPY OF THE PETITION FOR
CERTIORARI QUESTIONING ITS VENUE AND JURISDICTION IN CA-G.R. NO. SP 27565 IN FACT NOTICES FOR
THE FILING OF COMMENT THERETO HAD ALREADY BEEN SENT OUT BY THE HONORABLE COURT OF
APPEALS, SECOND DIVISION, AND THE COURT A QUO WAS FURNISHED WITH COPY OF SAID NOTICE.

VII

THE COURT A QUO ERRED IN DECIDING THE CASE IN FAVOR OF THE PLAINTIFF AND AGAINST THE
DEFENDANTS ON THE BASIS OF EVIDENCE WHICH ARE IMAGINARY, FABRICATED, AND DEVOID OF
TRUTH, TO BE STATED IN DETAIL IN THE DISCUSSION OF THIS PARTICULAR ERROR, AND, THEREFORE, THE
DECISION IS REVERSIBLE.39

On August 31, 1995, after being granted several extensions, Rodriguez filed his appellees brief,40
essentially arguing the correctness of the trial courts Decision regarding the foregoing issues raised by
the Catungals. Subsequently, the Catungals filed a Reply Brief41 dated October 16, 1995.

88
From the filing of the appellants brief in 1994 up to the filing of the Reply Brief, the spouses Catungal
were represented by appellant Jose Catungal himself. However, a new counsel for the Catungals, Atty.
Jesus N. Borromeo (Atty. Borromeo), entered his appearance before the Court of Appeals on September
2, 1997.42 On the same date, Atty. Borromeo filed a Motion for Leave of Court to File Citation of
Authorities43 and a Citation of Authorities.44 This would be followed by Atty. Borromeos filing of an
Additional Citation of Authority and Second Additional Citation of Authority both on November 17,
1997.45

During the pendency of the case with the Court of Appeals, Agapita Catungal passed away and thus, her
husband, Jose, filed on February 17, 1999 a motion for Agapitas substitution by her surviving children.46

On August 8, 2000, the Court of Appeals rendered a Decision in the consolidated cases CA-G.R. CV No.
40627 and CA-G.R. SP No. 27565,47 affirming the trial courts Decision.

In a Motion for Reconsideration dated August 21, 2000,48 counsel for the Catungals, Atty. Borromeo,
argued for the first time that paragraphs 1(b) and 549 of the Conditional Deed of Sale, whether taken
separately or jointly, violated the principle of mutuality of contracts under Article 1308 of the Civil Code
and thus, said contract was void ab initio. He adverted to the cases mentioned in his various citations of
authorities to support his argument of nullity of the contract and his position that this issue may be
raised for the first time on appeal.

Meanwhile, a Second Motion for Substitution50 was filed by Atty. Borromeo in view of the death of Jose
Catungal.

In a Resolution dated January 30, 2001, the Court of Appeals allowed the substitution of the deceased
Agapita and Jose Catungal by their surviving heirs and denied the motion for reconsideration for lack of
merit

Hence, the heirs of Agapita and Jose Catungal filed on March 27, 2001 the present petition for review,51
which essentially argued that the Court of Appeals erred in not finding that paragraphs 1(b) and/or 5 of
the Conditional Deed of Sale, violated the principle of mutuality of contracts under Article 1308 of the
Civil Code. Thus, said contract was supposedly void ab initio and the Catungals rescission thereof was
superfluous.

In his Comment,52 Rodriguez highlighted that (a) petitioners were raising new matters that cannot be
passed upon on appeal; (b) the validity of the Conditional Deed of Sale was already admitted and
petitioners cannot be allowed to change theories on appeal; (c) the questioned paragraphs of the
Conditional Deed of Sale were valid; and (d) petitioners were the ones who committed fraud and breach
of contract and were not entitled to relief for not having come to court with clean hands.

The Court gave due course to the Petition53 and the parties filed their respective Memoranda.

The issues to be resolved in the case at bar can be summed into two questions:

I. Are petitioners allowed to raise their theory of nullity of the Conditional Deed of Sale for the first time
on appeal?

89
II. Do paragraphs 1(b) and 5 of the Conditional Deed of Sale violate the principle of mutuality of
contracts under Article 1308 of the Civil Code?

On petitioners change of theory

Petitioners claimed that the Court of Appeals should have reversed the trial courts Decision on the
ground of the alleged nullity of paragraphs 1(b) and 5 of the Conditional Deed of Sale notwithstanding
that the same was not raised as an error in their appellants brief. Citing Catholic Bishop of Balanga v.
Court of Appeals,54 petitioners argued in the Petition that this case falls under the following exceptions:

(3) Matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just
decision and complete resolution of the case or to serve the interest of justice or to avoid dispensing
piecemeal justice;

(4) Matters not specifically assigned as errors on appeal but raised in the trial court and are matters of
record having some bearing on the issue submitted which the parties failed to raise or which the lower
court ignored;

(5) Matters not assigned as errors on appeal but closely related to an error assigned; and

(6) Matters not assigned as errors but upon which the determination of a question properly assigned is
dependent.55

We are not persuaded.

This is not an instance where a party merely failed to assign an issue as an error in the brief nor failed to
argue a material point on appeal that was raised in the trial court and supported by the record. Neither
is this a case where a party raised an error closely related to, nor dependent on the resolution of, an
error properly assigned in his brief. This is a situation where a party completely changes his theory of the
case on appeal and abandons his previous assignment of errors in his brief, which plainly should not be
allowed as anathema to due process.

Petitioners should be reminded that the object of pleadings is to draw the lines of battle between the
litigants and to indicate fairly the nature of the claims or defenses of both parties.56 In Philippine
National Construction Corporation v. Court of Appeals,57 we held that "[w]hen a party adopts a certain
theory in the trial court, he will not be permitted to change his theory on appeal, for to permit him to do
so would not only be unfair to the other party but it would also be offensive to the basic rules of fair
play, justice and due process."58

We have also previously ruled that "courts of justice have no jurisdiction or power to decide a question
not in issue. Thus, a judgment that goes beyond the issues and purports to adjudicate something on
which the court did not hear the parties, is not only irregular but also extrajudicial and invalid. The rule
rests on the fundamental tenets of fair play."59

During the proceedings before the trial court, the spouses Catungal never claimed that the provisions in
the Conditional Deed of Sale, stipulating that the payment of the balance of the purchase price was

90
contingent upon the successful negotiation of a road right of way (paragraph 1[b]) and granting
Rodriguez the option to rescind (paragraph 5), were void for allegedly making the fulfillment of the
contract dependent solely on the will of Rodriguez.

On the contrary, with respect to paragraph 1(b), the Catungals did not aver in the Answer (and its
amended versions) that the payment of the purchase price was subject to the will of Rodriguez but
rather they claimed that paragraph 1(b) in relation to 1(c) only presupposed a reasonable time be given
to Rodriguez to negotiate the road right of way. However, it was petitioners theory that more than
sufficient time had already been given Rodriguez to negotiate the road right of way. Consequently,
Rodriguezs refusal/failure to pay the balance of the purchase price, upon demand, was allegedly
indicative of lack of funds and a breach of the contract on the part of Rodriguez.

Anent paragraph 5 of the Conditional Deed of Sale, regarding Rodriguezs option to rescind, it was
petitioners theory in the court a quo that notwithstanding such provision, they retained the right to
rescind the contract for Rodriguezs breach of the same under Article 1191 of the Civil Code.

Verily, the first time petitioners raised their theory of the nullity of the Conditional Deed of Sale in view
of the questioned provisions was only in their Motion for Reconsideration of the Court of Appeals
Decision, affirming the trial courts judgment. The previous filing of various citations of authorities by
Atty. Borromeo and the Court of Appeals resolutions noting such citations were of no moment. The
citations of authorities merely listed cases and their main rulings without even any mention of their
relevance to the present case or any prayer for the Court of Appeals to consider them.1wphi1 In sum,
the Court of Appeals did not err in disregarding the citations of authorities or in denying petitioners
motion for reconsideration of the assailed August 8, 2000 Decision in view of the proscription against
changing legal theories on appeal.

Ruling on the questioned provisions of the Conditional Deed of Sale

Even assuming for the sake of argument that this Court may overlook the procedural misstep of
petitioners, we still cannot uphold their belatedly proffered arguments.

At the outset, it should be noted that what the parties entered into is a Conditional Deed of Sale,
whereby the spouses Catungal agreed to sell and Rodriguez agreed to buy Lot 10963 conditioned on the
payment of a certain price but the payment of the purchase price was additionally made contingent on
the successful negotiation of a road right of way. It is elementary that "[i]n conditional obligations, the
acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon
the happening of the event which constitutes the condition."60

Petitioners rely on Article 1308 of the Civil Code to support their conclusion regarding the claimed nullity
of the aforementioned provisions. Article 1308 states that "[t]he contract must bind both contracting
parties; its validity or compliance cannot be left to the will of one of them."

Article 1182 of the Civil Code, in turn, provides:

Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the
obligation shall take effect in conformity with the provisions of this Code.

91
In the past, this Court has distinguished between a condition imposed on the perfection of a contract
and a condition imposed merely on the performance of an obligation. While failure to comply with the
first condition results in the failure of a contract, failure to comply with the second merely gives the
other party the option to either refuse to proceed with the sale or to waive the condition .61 This
principle is evident in Article 1545 of the Civil Code on sales, which provides in part:

Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition which is
not performed, such party may refuse to proceed with the contract or he may waive performance of the
condition x x x.

Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay the balance of the
purchase price when he has successfully negotiated and secured a road right of way, is not a condition
on the perfection of the contract nor on the validity of the entire contract or its compliance as
contemplated in Article 1308. It is a condition imposed only on respondents obligation to pay the
remainder of the purchase price. In our view and applying Article 1182, such a condition is not purely
potestative as petitioners contend. It is not dependent on the sole will of the debtor but also on the will
of third persons who own the adjacent land and from whom the road right of way shall be negotiated. In
a manner of speaking, such a condition is likewise dependent on chance as there is no guarantee that
respondent and the third party-landowners would come to an agreement regarding the road right of
way. This type of mixed condition is expressly allowed under Article 1182 of the Civil Code.

Analogous to the present case is Romero v. Court of Appeals,62 wherein the Court interpreted the legal
effect of a condition in a deed of sale that the balance of the purchase price would be paid by the
vendee when the vendor has successfully ejected the informal settlers occupying the property. In
Romero, we found that such a condition did not affect the perfection of the contract but only imposed a
condition on the fulfillment of the obligation to pay the balance of the purchase price, to wit:

From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has
been expressly stipulated but also to all the consequences which, according to their nature, may be in
keeping with good faith, usage and law. Under the agreement, private respondent is obligated to evict
the squatters on the property. The ejectment of the squatters is a condition the operative act of which
sets into motion the period of compliance by petitioner of his own obligation, i.e., to pay the balance of
the purchase price. Private respondent's failure "to remove the squatters from the property" within the
stipulated period gives petitioner the right to either refuse to proceed with the agreement or waive that
condition in consonance with Article 1545 of the Civil Code. This option clearly belongs to petitioner and
not to private respondent.

We share the opinion of the appellate court that the undertaking required of private respondent does
not constitute a "potestative condition dependent solely on his will" that might, otherwise, be void in
accordance with Article 1182 of the Civil Code but a "mixed" condition "dependent not on the will of the
vendor alone but also of third persons like the squatters and government agencies and personnel
concerned." We must hasten to add, however, that where the so-called "potestative condition" is
imposed not on the birth of the obligation but on its fulfillment, only the condition is avoided, leaving
unaffected the obligation itself.63 (Emphases supplied.)

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From the provisions of the Conditional Deed of Sale subject matter of this case, it was the vendee
(Rodriguez) that had the obligation to successfully negotiate and secure the road right of way. However,
in the decision of the trial court, which was affirmed by the Court of Appeals, it was found that
respondent Rodriguez diligently exerted efforts to secure the road right of way but the spouses Catungal,
in bad faith, contributed to the collapse of the negotiations for said road right of way. To quote from the
trial courts decision:

It is therefore apparent that the vendees obligations (sic) to pay the balance of the purchase price arises
only when the road-right-of-way to the property shall have been successfully negotiated, secured and
provided. In other words, the obligation to pay the balance is conditioned upon the acquisition of the
road-right-of-way, in accordance with paragraph 2 of Article 1181 of the New Civil Code. Accordingly, " an
obligation dependent upon a suspensive condition cannot be demanded until after the condition takes
place because it is only after the fulfillment of the condition that the obligation arises." (Javier v[s] CA
183 SCRA) Exhibits H, D, P, R, T, FF and JJ show that plaintiff [Rodriguez] indeed was diligent in his efforts
to negotiate for a road-right-of-way to the property. The written offers, proposals and follow-up of his
proposals show that plaintiff [Rodriguez] went all out in his efforts to immediately acquire an access road
to the property, even going to the extent of offering P3,000.00 per square meter for the road lots (Exh.
Q) from the original P550.00 per sq. meter. This Court also notes that defendant (sic) [the Catungals]
made misrepresentation in the negotiation they have entered into with plaintiff [Rodriguez]. (Exhs. F and
G) The misrepresentation of defendant (sic) [the Catungals] as to the third lot (Lot 10986) to be part and
parcel of the subject property [(]Lot 10963) contributed in defeating the plaintiffs [Rodriguezs] effort in
acquiring the road-right-of-way to the property. Defendants [the Catungals] cannot now invoke the non-
fulfillment of the condition in the contract as a ground for rescission when defendants [the Catungals]
themselves are guilty of preventing the fulfillment of such condition.

From the foregoing, this Court is of the considered view that rescission of the conditional deed of sale by
the defendants is without any legal or factual basis.64 x x x. (Emphases supplied.)

In all, we see no cogent reason to disturb the foregoing factual findings of the trial court.

Furthermore, it is evident from the language of paragraph 1(b) that the condition precedent (for
respondents obligation to pay the balance of the purchase price to arise) in itself partly involves an
obligation to do, i.e., the undertaking of respondent to negotiate and secure a road right of way at his
own expense.65 It does not escape our notice as well, that far from disclaiming paragraph 1(b) as void, it
was the Catungals contention before the trial court that said provision should be read in relation to
paragraph 1(c) which stated:

c. That the access road or Road Right of Way leading to Lot 10963 shall be the responsibility of the
VENDEE to secure and any or all cost relative to the acquisition thereof shall be borne solely by the
VENDEE. He shall, however, be accorded with enough time necessary for the success of his endeavor,
granting him a free hand in negotiating for the passage.66 (Emphasis supplied.)

The Catungals interpretation of the foregoing stipulation was that Rodriguezs obligation to negotiate
and secure a road right of way was one with a period and that period, i.e., "enough time" to negotiate,
had already lapsed by the time they demanded the payment of P5,000,000.00 from respondent. Even
assuming arguendo that the Catungals were correct that the respondents obligation to negotiate a road
right of way was one with an uncertain period, their rescission of the Conditional Deed of Sale would still

93
be unwarranted. Based on their own theory, the Catungals had a remedy under Article 1197 of the Civil
Code, which mandates:

Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be
inferred that a period was intended, the courts may fix the duration thereof.

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

In every case, the courts shall determine such period as may under the circumstances have been
probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.

What the Catungals should have done was to first file an action in court to fix the period within which
Rodriguez should accomplish the successful negotiation of the road right of way pursuant to the above
quoted provision. Thus, the Catungals demand for Rodriguez to make an additional payment of
P5,000,000.00 was premature and Rodriguezs failure to accede to such demand did not justify the
rescission of the contract.

With respect to petitioners argument that paragraph 5 of the Conditional Deed of Sale likewise
rendered the said contract void, we find no merit to this theory. Paragraph 5 provides:

5. That the VENDEE has the option to rescind the sale. In the event the VENDEE exercises his option to
rescind the herein Conditional Deed of Sale, the VENDEE shall notify the VENDOR by way of a written
notice relinquishing his rights over the property. The VENDEE shall then be reimbursed by the VENDOR
the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) representing the downpayment, interest
free, payable but contingent upon the event that the VENDOR shall have been able to sell the property
to another party.67

Petitioners posited that the above stipulation was the "deadliest" provision in the Conditional Deed of
Sale for violating the principle of mutuality of contracts since it purportedly rendered the contract
subject to the will of respondent.

We do not agree.

It is petitioners strategy to insist that the Court examine the first sentence of paragraph 5 alone and
resist a correlation of such sentence with other provisions of the contract. Petitioners view, however,
ignores a basic rule in the interpretation of contracts that the contract should be taken as a whole.

Article 1374 of the Civil Code provides that "[t]he various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all of them taken jointly."
The same Code further sets down the rule that "[i]f some stipulation of any contract should admit of
several meanings, it shall be understood as bearing that import which is most adequate to render it
effectual."68

Similarly, under the Rules of Court it is prescribed that "[i]n the construction of an instrument where
there are several provisions or particulars, such a construction is, if possible, to be adopted as will give
effect to all"69 and "for the proper construction of an instrument, the circumstances under which it was

94
made, including the situation of the subject thereof and of the parties to it, may be shown, so that the
judge may be placed in the position of those whose language he is to interpret."70

Bearing in mind the aforementioned interpretative rules, we find that the first sentence of paragraph 5
must be taken in relation with the rest of paragraph 5 and with the other provisions of the Conditional
Deed of Sale.

Reading paragraph 5 in its entirety will show that Rodriguezs option to rescind the contract is not
absolute as it is subject to the requirement that there should be written notice to the vendor and the
vendor shall only return Rodriguezs downpayment of P500,000.00, without interest, when the vendor
shall have been able to sell the property to another party. That what is stipulated to be returned is only
the downpayment of P500,000.00 in the event that Rodriguez exercises his option to rescind is
significant. To recall, paragraph 1(b) of the contract clearly states that the installments on the balance of
the purchase price shall only be paid upon successful negotiation and procurement of a road right of
way. It is clear from such provision that the existence of a road right of way is a material consideration
for Rodriguez to purchase the property. Thus, prior to him being able to procure the road right of way, by
express stipulation in the contract, he is not bound to make additional payments to the Catungals. It was
further stipulated in paragraph 1(b) that: "[i]f however said road right of way cannot be negotiated, the
VENDEE shall give notice to the VENDOR for them to reassess and solve the problem by taking other
options and should the situation ultimately prove futile, he [Rodriguez] shall take steps to rescind or
[cancel] the herein Conditional Deed of Sale." The intention of the parties for providing subsequently in
paragraph 5 that Rodriguez has the option to rescind the sale is undeniably only limited to the
contingency that Rodriguez shall not be able to secure the road right of way. Indeed, if the parties
intended to give Rodriguez the absolute option to rescind the sale at any time, the contract would have
provided for the return of all payments made by Rodriguez and not only the downpayment. To our mind,
the reason only the downpayment was stipulated to be returned is that the vendees option to rescind
can only be exercised in the event that no road right of way is secured and, thus, the vendee has not
made any additional payments, other than his downpayment.

In sum, Rodriguezs option to rescind the contract is not purely potestative but rather also subject to the
same mixed condition as his obligation to pay the balance of the purchase price i.e., the negotiation of
a road right of way. In the event the condition is fulfilled (or the negotiation is successful), Rodriguez
must pay the balance of the purchase price. In the event the condition is not fulfilled (or the negotiation
fails), Rodriguez has the choice either (a) to not proceed with the sale and demand return of his
downpayment or (b) considering that the condition was imposed for his benefit, to waive the condition
and still pay the purchase price despite the lack of road access. This is the most just interpretation of the
parties contract that gives effect to all its provisions.

In any event, even if we assume for the sake of argument that the grant to Rodriguez of an option to
rescind, in the manner provided for in the contract, is tantamount to a potestative condition, not being a
condition affecting the perfection of the contract, only the said condition would be considered void and
the rest of the contract will remain valid. In Romero, the Court observed that "where the so-called
potestative condition is imposed not on the birth of the obligation but on its fulfillment, only the
condition is avoided, leaving unaffected the obligation itself."71

It cannot be gainsaid that "contracts have the force of law between the contracting parties and should
be complied with in good faith."72 We have also previously ruled that "[b]eing the primary law between

95
the parties, the contract governs the adjudication of their rights and obligations. A court has no
alternative but to enforce the contractual stipulations in the manner they have been agreed upon and
written."73 We find no merit in petitioners contention that their parents were merely "duped" into
accepting the questioned provisions in the Conditional Deed of Sale. We note that although the contract
was between Agapita Catungal and Rodriguez, Jose Catungal nonetheless signed thereon to signify his
marital consent to the same. We concur with the trial courts finding that the spouses Catungals claim of
being misled into signing the contract was contrary to human experience and conventional wisdom since
it was Jose Catungal who was a practicing lawyer while Rodriquez was a non-lawyer.74 It can be
reasonably presumed that Atty. Catungal and his wife reviewed the provisions of the contract,
understood and accepted its provisions before they affixed their signatures thereon.

After thorough review of the records of this case, we have come to the conclusion that petitioners failed
to demonstrate that the Court of Appeals committed any reversible error in deciding the present
controversy. However, having made the observation that it was desirable for the Catungals to file a
separate action to fix the period for respondent Rodriguezs obligation to negotiate a road right of way,
the Court finds it necessary to fix said period in these proceedings. It is but equitable for us to make a
determination of the issue here to obviate further delay and in line with the judicial policy of avoiding
multiplicity of suits.

If still warranted, Rodriguez is given a period of thirty (30) days from the finality of this decision to
negotiate a road right of way. In the event no road right of way is secured by Rodriquez at the end of said
period, the parties shall reassess and discuss other options as stipulated in paragraph 1(b) of the
Conditional Deed of Sale and, for this purpose, they are given a period of thirty (30) days to agree on a
course of action. Should the discussions of the parties prove futile after the said thirty (30)-day period,
immediately upon the expiration of said period for discussion, Rodriguez may (a) exercise his option to
rescind the contract, subject to the return of his downpayment, in accordance with the provisions of
paragraphs 1(b) and 5 of the Conditional Deed of Sale or (b) waive the road right of way and pay the
balance of the deducted purchase price as determined in the RTC Decision dated May 30, 1992.

WHEREFORE, the Decision dated August 8, 2000 and the Resolution dated January 30, 2001 of the Court
of Appeals in CA-G.R. CV No. 40627 consolidated with CA-G.R. SP No. 27565 are AFFIRMED with the
following modification:

If still warranted, respondent Angel S. Rodriguez is given a period of thirty (30) days from the finality of
this Decision to negotiate a road right of way. In the event no road right of way is secured by respondent
at the end of said period, the parties shall reassess and discuss other options as stipulated in paragraph
1(b) of the Conditional Deed of Sale and, for this purpose, they are given a period of thirty (30) days to
agree on a course of action. Should the discussions of the parties prove futile after the said thirty (30)-
day period, immediately upon the expiration of said period for discussion, Rodriguez may (a) exercise his
option to rescind the contract, subject to the return of his downpayment, in accordance with the
provisions of paragraphs 1(b) and 5 of the Conditional Deed of Sale or (b) waive the road right of way
and pay the balance of the deducted purchase price as determined in the RTC Decision dated May 30,
1992.

No pronouncement as to costs.

SO ORDERED.

96
G.R. No. 132196 December 9, 2005

SPOUSES SEGUNDO RAMOS and FELISA VALDEZ, Petitioners,

vs.
HON. COURT OF APPEALS, LEILA VALDEZ-PASCUAL, ARACELI VALDEZ, GLICERIA VALDEZ, JUANA
VALDEZ, SIMEON VALDEZ, CONRADA VALDEZ, SEVERINO VALDEZ, MARIO VALDEZ, ADORACION
VALDEZ, JOSE VALDEZ, DIONISIA VALDEZ, DANILO VALDEZ, SERAPIO VALDEZ, HELEN VALDEZ, PERLA
VALDEZ, and DELIA VALDEZ, Respondents.

DECISION

CHICO-NAZARIO, J.:

This case presents a tangled tale involving the conflicting accounts of petitioners and private
respondents over a piece of land sold by Gregorio Valdez (private respondents father) to petitioners in
1948 and which ostensibly became the subject of a compromise agreement in 1977.

Through the instant Petition for Review on certiorari, spouses Segundo Ramos and Felisa Valdez seek the
reversal of the Decision1 of the Court of Appeals dated 31 July 1997 which reversed the Decision2 of the
Regional Trial Court (RTC), Branch 48, Urdaneta, Pangasinan. The RTC decision dismissed the case filed by
private respondents for Quieting of Title, Ownership, Possession plus Damages with prayer for Writ of
Preliminary Injunction and adjudged petitioners as the lawful owners of a piece of land, with an area of
3,036 square meters, and which forms part of a bigger tract of land covered by Original Certificate of
Title (OCT) No. 48824 of the Registry of Deeds of the Province of Pangasinan in the name of Gregorio
Valdez. Under review as well is the Court of Appeals Resolution3 dated 08 December 1997 denying
petitioners motion for reconsideration.

Private respondents are the children4 of Gregorio Valdez. In 1948, Gregorio Valdez sold the subject land
to petitioners. The absolute deed of sale was subsequently annotated at the back of OCT No. 48824 as
Entry No. 377847. It is the contention of private respondents that as early as 1977, petitioners no longer
owned subject land as they had renounced their rights thereto as evidenced by a compromise
agreement dated 02 June 1977.

Sometime in 1991, Gregorio Valdez died. Private respondents allege that immediately after the death of
their father, petitioners disturbed their possession of subject land by cultivating the same and by
enclosing it with a fence. As petitioners did not heed their demands to vacate, they were constrained to
file a case for Quieting of Title, Ownership, Possession plus Damages with prayer for Writ of Preliminary
Injunction.

Petitioners, in their Answer with Counterclaim, maintain that they remain owners of the subject land as
the compromise agreement being relied upon by private respondents refers to another piece of land.
Thus, they argue that the compromise agreement constitutes a cloud on their title. They prayed, among
other things, for the quieting of their title and that they be adjudged lawful owners of the subject land.

97
The trial court believed petitioners. It sided with petitioners by declaring them owners of the subject
land by virtue of the absolute deed of sale dated 06 January 1948. The dispositive portion of its decision
reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the defendants and against
the plaintiffs and declaring the defendants to be the lawful owners of the land in question.5

The Court of Appeals reversed the trial courts ruling. It held that the land renounced by petitioners was
the subject land and that it was made in favor of Gregorio Valdez, thus:

WHEREFORE, premises considered the decision appealed from is hereby REVERSED and SET ASIDE and
another one entered declaring plaintiffs as owner of the land in question, and ordering defendants-
appellees to vacate the same. With costs against defendants-appellees.

Aggrieved by the aforecited ruling, and their motion for reconsideration having been denied by the Court
of Appeals, petitioners assert before us that

I.

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURTS FINDINGS WHICH TOOK
INTO ACCOUNT THE INTENTIONS OF THE PARTIES IN THE COMPROMISE AGREEMENT IN QUESTION BY
CONSIDERING CIRCUMSTANCES PREVIOUS AND SIMULTANEOUS TO THE EXECUTION OF THE
AGREEMENT.

II.

WHILE THE HONORABLE COURT OF APPEALS CORRECTLY STATED THE UNDERLYING REASONS BEHIND
THE EXECUTION OF THE COMPROMISE AGREEMENT IN QUESTION, IT SERIOUSLY ERRED IN UPHOLDING
THE VALIDITY OF THE COMPROMISE AGREEMENT WITH RESPECT TO A THIRD PERSON WHO WAS A
STRANGER THERETO AND INVOLVING A PARCEL OF LAND WHICH IS FOREIGN TO THE DISPUTE IN THE
LAND REGISTRATION CASE THAT GAVE LIFE TO THE COMPROMISE AGREEMENT.

III.

THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURTS DECISION FINDING NO
LEGAL AND FACTUAL BASES TO UPHOLD THE VALIDITY OF THE ALLEGED RENUNCIATION OF PETITIONERS
RIGHTS OVER THE NORTHERN PORTION OF THE TITLED LAND IN QUESTION INSTEAD OF THE INTENDED
SOUTHERN PORTION OF AN UNTITILED LAND SUBJECT OF THE LRC.6

In order to get to the bottom of this land dispute, the primary and most basic question that has to be
asked is this: Is the absolute deed of sale dated 06 January 1948 between petitioners and private
respondents predecessor-in-interest, Gregorio Valdez, annotated at the back of OCT No. 48824, a cloud
on such title that has to be removed under the grounds stated in the Civil Code?

Articles 476 and 478 of the Civil Code provide:

98
Art. 476. Whenever there is a cloud on title to real property or any interest therein, by reason of any
instrument, record, claim, encumbrance or proceeding which is apparently valid or effective but is in
truth and in fact invalid, ineffective, voidable, or unenforceable, and may be prejudicial to said title, an
action may be brought to remove such cloud or to quiet the title.

An action may also be brought to prevent a cloud from being cast upon title to real property or any
interest therein.

Art. 478. There may also be an action to quiet title or remove a cloud therefrom when the contract,
instrument or other obligation has been extinguished or has terminated, or has been barred by
extinctive prescription.

In herein case, private respondents, as plaintiffs in the case for quieting of title, allege that their fathers
obligation under the deed of absolute sale has been extinguished or has been terminated by virtue of
the compromise agreement dated 02 June 1977 whereby petitioners ostensibly renounced their rights
over the subject property. Petitioners, on the other hand, claim that the same compromise agreement
constitutes a cloud on their title.

The Compromise Agreement7 states:

REPUBLIC OF THE PHILIPPINES

COURT OF FIRST INSTANCE OF PANGASINAN

THIRD JUDICIAL DISTRICT

9th Branch, Urdaneta

SEGUNDO RAMOS, ET AL.,

Applicants. LAND REG. CASE No. U-843

LRC Rec. No. N-48993

vs.
THE DIRECTOR OF LANDS, ET AL.,

Oppositors.

x----------------------------------------x

COMPROMISE AGREEMENT

COME NOW, the parties in the above-entitled case duly assisted by their respective counsels and to this
Honorable Court submit this compromise agreement, to wit:

1. That the oppositor Felipe Cabero hereby withdraw (sic) his opposition in the above-entitled case;

99
2. That the applicants Segundo Ramos and Felisa Valdez hereby also quitclaim and renounce whatever
rights in the document registered under entry No. 377847 annotated at the back of O.C.T. No. 48824 of
Gregorio Valdez;

3. That the parties hereby waive any claim for and against the other.

WHEREFORE, the parties should abide the foregoing compromise agreement and that each of them shall
respect the right of the other.

IN WITNESS WHEREOF, the parties duly assisted by their respective counsels set their hands this 2nd day
of June, 1977, at Urdaneta, Pangasinan.

SEGUNDO RAMOS, FELISA VALDEZ

Applicant Applicant

FELIPE CABERO

Oppositor

ASSISTED BY:

ATTY. ELISEO E. VERSOZA ATTY. NICANOR CALDITO

Counsel for the Applicants Counsel for Oppositor

Soconi, Bugallon, Pang. Pozorrubio, Pang.

To get a proper grip of the controversial compromise agreement, a narration of the circumstances
surrounding its execution is in order.

The compromise agreement was entered into between petitioners and a certain Felipe Cabero in
connection with petitioners application for registration of a piece of untitled land adjacent to the
subject land filed with the Court of First Instance of Pangasinan in LRC Case No. U-843. This untitled land
was purchased by petitioners from a certain Alejandro Alcantara.8 Apparently, Cabero was the actual
occupant of the southern portion of this land, thus, he opposed petitioners application for registration.
Petitioners explained that the southern portion occupied by Cabero was purchased by Cabero from
Gregorio Valdez who sold it by mistake as he (Valdez) thought that the land he was selling was part of his
titled land.

Petitioners version

To save himself from the quagmire he created, Gregorio Valdez entreated upon petitioners to give up the
southern portion of their untitled land in exchange for Caberos withdrawal of his opposition to
petitioners application for registration. Petitioners agreed. Thus, during the pendency of the land
registration proceedings, petitioners and Cabero entered into a compromise agreement. The agreement
was written in English. Its contents were not translated into Ilocano for petitioners but they did not mind

100
as they were represented by their counsel. The signatories to the said agreement were petitioners,
Cabero and their respective counsels. Petitioners, being unlettered, were not aware that the property
they were renouncing under the compromise agreement was the subject property as, definitely, this was
not their intention. Thus, they argued that the compromise agreement contained a false cause and that
they gave their consent thereto by mistake.

Private Respondents version

The compromise agreement categorically states that the property being renounced is the subject
property and that the same is made in favor of private respondents late father, Gregorio Valdez.
Gregorio Valdez was a party to said compromise agreement as his signature is also affixed thereto.

The decision of the trial court

As articulated earlier, the trial court ruled in favor of herein petitioners. It held:

After carefully perusing the records and the evidence adduced, this Court is left to resolve the issues
agreed upon by the parties as indicated in the pre-trial order.

However, before this Court could arrive at a proper solution of the issues, it is imperative to determine
the true intentions of the parties in the controversial compromise agreement (Exh. B) by considering all
the surrounding circumstances previous and simultaneous to the execution of the same.

It is not disputed that the property in question with an area of 3,036 square metes on the northern
portion of a parcel of land was owned by the plaintiffs late father Gregorio Valdez covered by TCT No.
48824 (Exh. A). Sometime in the year 1948, the late Gregorio Valdez sold the said property to defendant-
spouses Segundo Ramos and Felisa Valdez. That sale was annotated at the back of said title as Entry No.
377847 (Exh. A-1).

Defendant Segundo Ramos also bought an untitled land from Alejandro Alcantara in 1945 evidenced by a
deed of absolute sale marked as Exhibit 6. When Segundo Ramos applied for registration of title of the
said land, Felipe Cabero opposed the same. During the pendency of the land registration case, a
compromise agreement (Exh. B) was concluded by the herein defendants as applicants and oppositor
Felipe Cabero.

The Court noted that the portion of land referred to in the said compromise agreement and to have
been renounced allegedly is the northern portion. This is clear in the Entry No. 377847 (Exh. A-1). In
contrast, what has been relinquished and renounced by Segundo Ramos was the southern portion of the
same land being occupied, at that time, by Felipe Cabero. It appears therefore, that there is a different
portion of land that was the real subject of renunciation other than that indicated in the compromise
agreement. Hence, such agreement expresses wrong intentions of the parties. The mistake in the
compromise agreement was recognized and admitted by plaintiff Lilia Valdez when she testified as
rebuttal witness, to wit:

"Q. According to Segundo Ramos there was no consideration whatsoever in favor of your father Gregorio
Valdez that the compromise agreement was executed, what can you say about that?

101
A. That is not true sir.

Q. What is the truth?

A. That is not true sir actually the compromise agreement was made to correct a mistake which was
committed because the deed of sale was executed covering the portion which was titled property when
it should pertain to the untitled property of Gregorio Valdez."

(TSN-Felix, 3-11-92, pp. 8-9)

The renunciation of the southern portion by Segundo Ramos, as he claimed, is inter-related to the
conflict of encroachment of ownership of the land between him and Felipe Cabero. It is unthinkable and
unusual for defendant-spouses to renounce the very portion of land they bought from late Gregorio
Valdez to the latter without any consideration at all.

Morever, a scrutiny of the compromise agreement reveals that the alleged renunciation was not
expressly made in favor of Gregorio Valdez and worst of all, the latter was never a party in the
registration case although his signature was affixed therein (Exh. B-1 and 1-a) without any designation,
nor reference to the land registration case. If ever there was a renunciation, it should be in favor of
Felipe Cabero because he was the oppositor, but he did not anymore pursue his opposition.

In view of the foregoing findings, it could not be said that defendant-spouses did renounce the property
in question which is the northern portion to late Gregorio Valdez from whom they bought it.9

The Ruling of the Court of Appeals

The reversal by the Court of Appeals of the afore-quoted decision was based on the following
ratiocination, to wit:

We agree with appellants contention that the identity of the land subject of the compromise agreement
vis--vis that covered by the Deed of Sale executed between Gregorio Valdez and defendants-appellees
is no longer open to question having been made the subject of pre-trial stipulation (Pre-Trial Order dated
November 19, 1991, supra). Moreover, the evidence presented supports this contention.

As can be seen from the decision dated 19 March 1979 of the Court of First Instance of Pangasinan in
Land Registration Case No. U-843 Record No. N-48998 entitled Segundo Ramos, et al. vs. The Director of
Lands, et al. (Exh. "3", Folder of Exhibits, pp. 15-17) only Felipe Cabero and the Director of Lands
opposed defendants-appellees application for original registration. The subject of this land registration
case was that parcel of land previously owned by Alejandro Alcantara, situated at Barrio Maambal,
Municipality of Pozorrubio, Province of Pangasinan containing an area of 7,073 square meters, more or
less, and more particularly described in Plan Psu-1-002310. As indicated in the aforesaid decision Felipe
Cabero withdrew his opposition. The Decision however does not make any reference to the Compromise
Agreement executed in the same case two (2) years before, on June 2, 1977 marked as Exhibit "B"
(Folder of Exhibits, p. 2).

In the Compromise Agreement (supra), the applicants in the land registration case, Segundo Ramos and
Felisa Valdez had expressed their renunciation of their rights "in the document registered under Entry

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No. 377847 annotated at the back of O.C.T. No. 48824 of Gregorio Valdez". This entry is a Deed of
Absolute Sale (Exhibit "7") executed by Gregorio Valdez married to Maria Soriano in favor of Segundo
Ramos married to Felisa Valdez, the subject of which is a parcel of land consisting of 3,036 square meters
of the northern portion of the land covered by OCT No. 48824 (Exhibit "A").

It is manifest from the foregoing that while the land registration case covered that parcel of land
purchased by appellees from Alejandro Alcantara, which was ultimately decreed in favor of appellees in
the Decision of the LRC marked Exhibit "3"; the Compromise Agreement wherein appellees declared
their renunciation/quitclaim of their rights referred to another parcel of land consisting of 3,036 sq. m.
that was the subject of a Deed of Absolute Sale executed by Gregorio Valdez that was a part of, hence
annotated on OCT No. 48824 registered in Valdez name, which property had been earlier sold to the
Spouses Ramos by Gregorio Valdez. The Spouses Ramos renounced their rights over the latter property
in the Compromise Agreement marked as Exhibit "B"/"1" to effect the withdrawal of the opposition of
Felipe Cabero to their application for registration in the aforesaid LRC No. U-843 (TSN, February 17,
1992, pp. 9-11). Caberos opposition was predicated on his perceived ownership of the southern portion
of the land which was formerly owned by Alejandro Alcantara that was the subject of the land
registration proceedings. This southern portion adjoins another (untitled) property of Gregorio Valdez
(Exhibit "E", Folder of Exhibits p. 13). This had been mistakenly sold by Valdez to Cabero in the belief that
it belonged to him (Valdez). When Valdez recognized his error, and by way of disentangling a conflict that
he had caused, Valdez persuaded Ramos to renounce his rights over the 3,036 sq. m. portion of his titled
property, and at the same time for Cabero to withdraw his opposition to the application by Spouses
Ramos for the registration in their name of the entire lot formerly belonging to Alejandro Alcantara.
Conceivably, Caberos withdrawal of his opposition along with his occupied southern portion of
Alejandro Alcantaras property, was to be exchanged with the 3,036 sq. m. portion renounced by
Spouses Ramos. In his testimony Segundo Ramos spoke of accommodating the entreaties of Gregorio
Valdez whom he called his "father in law" (TSN, February 17, 1992, p. 11).

As a consequence, applicants Spouses Segundo and Felisa Ramos in the LRC case, executed a
Compromise Agreement with Felipe Cabero witnessed by Gregorio Valdez that was meant to renounce
their (Ramos) claim or rights over that portion of the land which they had purchased from Gregorio
Valdez in exchange for the southern portion of the land that was being occupied by Felipe Cabero. To
repeat, Felipe Cabero had occupied the southern portion by virtue of a deed of sale from Gregorio
Valdez but Valdez actually had no right to sell this portion, it being owned by the adjoining owner
Alejandro Alcantara. This is shown by the fact that although the "Absolute Deed of Sale" executed by
Alejandro Alcantara in favor of Spouses Segundo Valdez conveyed only an area of 3,000 sq. m. (Exhibit
"6", Folder of Exhibits, p. 37) the total area applied for and decreed by the Land Registration Court in LRC
No. U-843 in favor of applicant Spouses Segundo Ramos (Exhibit "3", Folder of Exhibits, p. 15) had a total
area of 7,073 sq. m. which fact was admitted by appellee Segundo Ramos on re-cross (TSN, March 11,
1992, p. 3). On this point, Natalia Alcantara dela Cruz, daughter of Alejandro Alcantara testified on
rebuttal.

...

As already stated, the LRC Decision dated 19 March 1979 (Exhibit "3") did not take cognizance of the
Compromise Agreement dated 2 June 1977 although it noted that oppositor Felipe Cabero had
withdrawn his opposition to the application of Spouses Ramos in the LRC case (Exhibits 3-a-1, Folder of
Exhibits, p. 16). The simple explanation is that the Compromise Agreement referred to another parcel of

103
land that was not the subject of the land registration case. In withdrawing his opposition, Felipe Cabero
paved the way for Spouses Segundo Ramos to have the entire property of Alejandro Alcantara registered
in their names, and not just the 3,000 sq. m. that was the subject of the deed of sale signed by Alcantara
in their favor, marked Exhibit "6". Thus, Gregorio Valdez was able to effect the solution to the imbroglio
he had caused by selling to Felipe Cabero land that did not belong to him but to the adjoining owner
Alejandro Alcantara. This is shown by the testimony of Lilia Valdez.

...

On the part of appellees, the loss of the 3,036 sq. m. portion was amply compensated by approximately
4,000 sq. m. of the southern portion that had been occupied by Felipe Cabero but which had been
included in their land registration application. The evidence of the defendants-appellees shows that
"(b)ecause of his mistake, vendor Gregorio Valdez intervened and pleaded to appellees to just relinquish
the area he mistakenly sold to Cabero who in exchange was to withdraw his opposition, hence the
compromise agreement in question was drawn" (TSN, February 17, 1999, p. 11; January 29 1992, pp. 8-
10; Appellees Brief, p. 7). It is to be noted that Gregorio Valdez and Felipe Cabero were closely
associated and even shared the same counsel Atty. Nicanor Caldito who notarized the Deed of Sale
executed by Gregorio Valdez in favor of Segundo Ramos (Exhibits "B"/"1" and "2"; Folder of Exhibits, pp.
2 and 14) and who later appeared as counsel for oppositor Felipe Cabero in the land registration case.
Although the withdrawal of opposition of Felipe Cabero along with his occupation of the southern
portion was successfully effected by the Compromise Agreement, later events showed that Cabero was
eventually removed from the picture of both parcels of land. Evidence shows that Gregorio Valdez
continued to occupy the renounced portion until his death in 1991 (TSN, January 6, 1991, pp. 3-4; Pre-
Trial Order, Record, p. 58). His occupation evidences his continued dominion and exercise of ownership
over the entire land covered by OCT No. 48824.10

To state the obvious, much ado has been made over the compromise agreement. After having reviewed
the records of the case, however, it has become even more obvious that private respondents cannot
assert any rights under said compromise agreement, thus, it cannot be used by them to defeat
petitioners claim over the subject land.

The compromise agreement, like any other contract, takes effect only between the parties, their assigns
and heirs.11 In herein case, the parties to the compromise agreement were petitioners and Felipe
Cabero only as the same was executed by them in connection with LRC Case No. U-843 wherein
petitioners were the applicants and Cabero the oppositor.12 Gregorio Valdez, although he was very
much interested in the compromise agreement as the same would solve the problem he created of
selling to Cabero a piece of land not belonging to him, was not a party thereto. As correctly pointed out
by petitioners, his signature might have appeared in the compromise agreement but it does not appear
in what capacity he was signing. In juxtaposition, the compromise agreement expressly states in what
capacity the other signatories were signing. Thus, typewritten in the agreement are the following
entries:

SEGUNDO RAMOS, FELISA RAMOS

Applicant Applicant

FELIPE CABERO

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Oppositor

ASSISTED BY:

ATTY. ELISEO E. VERSOZA ATTY. NICANOR CALDITO

Counsel for the Applicants Counsel for Oppositor

Soconi, Bugallon, Pang. Pozorrubio, Pang.

The persons whose names were typewritten on the compromise agreement signed above their names.
Gregorio Valdezs name, on the other hand, as well as the role he played in the execution of the
document, was not typewritten on the document. His signature, however, appears on the same line as
the phrase "assisted by" just above the signature of Atty. Caldito. Petitioner Segundo Ramos swears that
he did not see Gregorio Valdez sign the document at the time of the execution of the same.13 Witness
for petitioners, Leonardo Quesora, who was present at the time of the execution of the compromise
agreement, likewise testified that he did not see Gregorio Valdez sign.14 Moreover, none of the private
respondents or their witnesses testified as to having witnessed Gregorio Valdez sign the compromise
agreement.

It is axiomatic that a contract cannot be binding upon and cannot be enforced against one who is not a
party to it, even if he is aware of such contract and has acted with knowledge thereof.15 A person who is
not a party to a compromise agreement cannot be affected by it.16 This is already well-settled. Thus, in
Young v. Court of Appeals17 we stressed:

The main issue in this case is whether or not petitioner can enforce a compromise agreement to which
she was not a party.

This issue has already been squarely settled by this Court in the negative in J.M. Tuason & Co., Inc. v.
Cadampog (7 SCRA 808 [1963]) where it was ruled that appellant is not entitled to enforce a compromise
agreement to which he was not a party and that as to its effect and scope, it has been determined in the
sense that its effectivity if at all, is limited to the parties thereto and those mentioned in the exhibits
(J.M. Tuason & Co., Inc. v. Aguirre, 7 SCRA 112 [1963]). It was reiterated later that a compromise
agreement cannot bind persons who are not parties thereto (Guerrero v. C.A., 29 SCRA 791 [1969]).

Consequently, Gregorio Valdez not being a party to the compromise agreement, his heirs (private
respondents) cannot sue for its performance.

Be that as it may, private respondents additionally harp on the reference to their father made in the
body of the compromise agreement itself which they claim is proof of renunciation of subject land by
petitioners in favor of their father, to wit:

2. That the applicants Segundo Ramos and Felisa Valdez hereby also quitclaim and renounce whatever
rights in the document registered under entry No. 377847 annotated at the back of O.C.T. No. 48824 of
Gregorio Valdez;

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Contrary to the position taken by private respondents, the reference to their father, Gregorio Valdez,
seems to us to be a mere description of the land being renounced. Nothing in the compromise
agreement would suggest that the renunciation of the subject land was to be made in Gregorio Valdezs
favor. Verily, for this Court to interpret the stipulation as conferring some right to a third person (i.e.,
stipulation pour autrui), the following requisites must concur:

1. There must be a stipulation in favor of a third person;

2. The stipulation in favor of a third person should be a part, not the whole, of the contract;

3. The contracting parties must have clearly and deliberately conferred a favor upon a third person, not a
mere incidental benefit or interest;

4. The third person must have communicated his acceptance to the obligor before its revocation; and

5. Neither of the contracting parties bears the legal representation or authorization of the third party.18

To constitute a valid stipulation pour autrie, it must be the purpose and intent of the stipulating parties
to benefit the third person, and it is not sufficient that the third person may be incidentally benefited by
the stipulation.19 In herein case, from the testimony of petitioner Segundo Ramos who is undoubtedly a
party to the compromise agreement, and from the rest of the evidence on hand, any benefit which
accrued to private respondents father was merely incidental.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated 31 July 1997 is REVERSED
and SET ASIDE. The Decision of the Regional Trial Court of Urdaneta, Pangasinan, Branch 48, insofar as it
dismissed the complaint filed by herein private respondents, is hereby AFFIRMED. No costs.

SO ORDERED.

[G.R. No. L-30871. December 28, 1970.]

AURORA P. DE LEON, Petitioner, v. HON. SERAFIN SALVADOR, as Judge of Branch XIV of the Court of
First Instance of Rizal (Caloocan City), and EUSEBIO BERNABE, ALBERTO A. VALINO, Special Deputy
Sheriff of the Office of the Provincial Sheriff, Province of Rizal, and the REGISTER OF DEEDS for
Caloocan City, Respondents.

TEEHANKEE, J.:

Joint decision of two special civil actions which were ordered consolidated since they involve the same
properties and the common issue of conflict of jurisdiction of the two Caloocan City branches of the
Court of First Instance of Rizal.

Case L-30871 arose from the following facts: A judgment for P35,000.00-actual, moral and exemplary
damages obtained by Enrique de Leon against private respondent Eusebio Bernabe in Civil Case No. C-
189 of Branch XII of the Rizal court of first instance, Caloocan City branch presided by Judge Fernando A.

106
Cruz, having become final and executory, a writ of execution was issued by said court. Pursuant thereto,
the city sheriff, on November 8, 1966 levied on execution on two parcels of land of 682.5 square meters
each registered in the names of Bernabe under T.C.T. Nos. 94985 and 94986 of Caloocan City. At the
execution sale held on February 14, 1967, the city sheriff sold the said properties to herein petitioner,
Aurora (sister of the judgment creditor) as the highest bidder for the total sum of P30,194.00, (the
property then being subject to an existing mortgage lien in the amount of P120,000.00). The sheriff
executed the corresponding certificate of sale in her favor, which was duly registered on February 21,
1967 with the Caloocan City register of deeds.

On February 7, 1968, just about two weeks before the expiration of the one-year period to redeem the
properties sold in execution, the judgment debtor Bernabe filed a separate civil action docketed as Civil
Case No. C-1217 against his judgment creditor Enrique de Leon, herein petitioner Aurora P. de Leon as
purchaser and the sheriff as defendants for the setting aside or annulment of the execution sale on
February 14, 1967 "for being anomalous and irregular," and for the ordering of a new auction sale. This
second case, instead of being referred to Judge Cruz presiding over Branch XII which had issued the writ
of execution, was assigned to Branch XIV, the other Caloocan City branch of the Rizal Court of First
Instance presided by Judge Serafin Salvador, who issued on February 19, 1968 a writ of preliminary
injunction enjoining therein defendants, particularly the sheriff to desist "from taking further
proceedings against the properties of the plaintiff [Bernabe] that were sold at public auction on February
14, 1967, and from issuing a sheriffs deed of sale at the expiration of the period of redemption on
February 21, 1968 in favor of defendant Aurora P. de Leon." Aurora moved to dissolve the injunction and
to dismiss this second case on the grounds of laches and lack of jurisdiction of Judge Salvadors court to
interfere with the execution proceedings pending in the first case before Judge Cruz court which is of
equal and co-ordinate jurisdiction, but Judge Salvador denied the same for not being indubitable and
tried the case, notwithstanding Auroras pleas before and after the trial to resolve the issue of his courts
lack of jurisdiction.

Pending his decision, Judge Salvador issued on May 20, 1969 an order granting two ex-parte motions of
Bernabe of May 12, and May 15, 1969 and ordering the sheriff to allow Bernabe to redeem the two
properties sold at public auction more than two years ago on February 14, 1967 under the writ of
execution issued by Judge Cruz court in the first case. On the following day, May 21, 1969, Bernabe
deposited with the sheriff the sum of P33,817.28 as the redemption price (P15,987,00 per lot plus
interests), who issued a certificate of redemption. Bernabe then registered on the following day, May 22,
1969, the sheriffs certificate of redemption with the register of deeds, who in turn cancelled the entry
of the execution sale in favor of Aurora, as well as registered on one of the properties covered by T.C.T.
No. 94986 a deed of first mortgage executed on May 20, 1969 by Bernabe in favor of one Antonio de
Zuzuarregui to secure a loan of P130,000.00. Auroras motion of May 28, 1969 in the second case to set
aside the order and certificate of redemption and registration of mortgage on the ground of lack of
jurisdiction was denied by Judge Salvador, who ruled in his order of June 23, 1969 that "there is no
question that this Court has jurisdiction to hear and determine this case which questions the regularity
and legality of the auction sale of properties held on February 14, 1967, hence the authority granted by
the Court to redeem said properties within the redemption period in order to write finis to the pending
case." 1 Hence, this action for certiorari filed by Aurora impleading the sheriff and the register of deeds
for the annulment and setting aside for lack of jurisdiction of the questioned orders of Judge Salvadors
court as well as of the challenged actuations of the other respondent officials pursuant thereto. As
prayed for, the Court issued a writ of preliminary injunction enjoining said respondents from doing or
taking any other act in connection with the said properties.

107
On May 30, 1969, Aurora also filed in the first case before Judge Cruz court a motion with proper notice
for consolidation of title and for the court to order the sheriff to issue in her favor a final deed of sale
over the subject parcels of land. Judge Cruz order of September 5, 1969, granting Auroras motion over
Bernabes opposition that he had redeemed on May 21, 1969 the said properties by virtue of Judge
Salvadors order of May 20, 1969 in the second case and ordering Bernabe to surrender his owners
duplicates of title for transfer to Aurora, in turn gave rise to Case L-31603 filed by Bernabe. After
Bernabes motion for reconsideration urging Judge Cruz to hold in abeyance Auroras motion for
consolidation of title until this Courts decision in Case L-30871 "which will end once and for all the legal
controversy" over the conflict of jurisdiction between the two courts, was denied by Judge Cruz order of
January 8, 1970, he filed this action for certiorari, impleading the sheriff, for the annulment and
revocation of the questioned orders of Judge Cruz, on the ground of the latters lack of jurisdiction to
issue the same. As prayed for, the Court also issued a writ of preliminary injunction against the
enforcement of Judge Cruz orders, until the conflict between the parties could be finally resolved.

The decisive issue at bar is a simple one of jurisdiction: which court, Branch XII presided by Judge Cruz or
Branch XIV presided by Judge Salvador has exclusive jurisdiction to set aside for alleged irregularities the
execution sale held on February 14, 1967 by virtue of the writ for the execution of the final judgment in
the first case (No. C-189) issued by Judge Cruz court and to order a new auction sale which was the
relief sought by the judgment debtor in the second case (No. C-1217) in Judge Salvadors court?

It is patent that such exclusive jurisdiction was vested in Judge Cruz court. Having acquired jurisdiction
over Case No. C-189 and rendered judgment that had become final and executory, it retained jurisdiction
over its judgment, to the exclusion of all other co-ordinate courts for its execution and all incidents
thereof, and to control, in furtherance of justice, the conduct of its ministerial officers in connection
therewith. 2 Execution of its judgment having been carried out by the sheriff with the levy and sale of
the judgment debtors properties, Eusebio Bernabe as judgment debtor could not in the guise of a new
and separate second action (Case No. 1217) ask another court of coordinate jurisdiction, Judge
Salvadors court, to interfere by injunction with the execution proceedings, to set them aside and to
order the holding of a new execution sale instead of seeking such relief by proper motion and
application from Judge Cruz court which had exclusive jurisdiction over the execution proceedings and
the properties sold at the execution sale.

As early as 1922, in Cabigao v. del Rosario, 3 this Court laid down the doctrine that "no court has power
to interfere by injunction with the judgments or decrees of a court of concurrent or coordinate
jurisdiction having power to grant the relief sought by injunction," pointing out that" (T)he various
branches of the Court of First Instance of Manila are in a sense coordinate courts and to allow them to
interfere with each others judgments or decrees by injunctions would obviously lead to confusion and
might seriously hinder the administration of justice."cralaw virtua1aw library

The Court similarly ruled in Hubahib v. Insular Drug Co., Inc., 4 with reference to Branch II of the Cebu
court of first instance having taken cognizance of an independent action for the annulment of a writ of
execution issued by Branch III of the same court which has rendered the judgment, that "the institution
of said action was not only improper but also absolutely unjustified, on the ground that the appellant
had the remedy of applying to the same Branch III of the lower court, which issued the orders in
question, for reconsideration thereof . . . or of appealing from said orders or from that denying his
motion in case such order has been issued. The various branches of a Court of First Instance of a

108
province or city, having as they have the same or equal authority and exercising as they do concurrent
and coordinate jurisdiction, should not, cannot, and are not permitted to interfere with their respective
cases, much less with their orders or judgments, by means of injunction."cralaw virtua1aw library

In National Power Corporation v. De Veyra, 5 the Court, through former Chief Justice Bengzon, thus
explained that the garnishment or levy of property on execution brings the property into custodia legis
of the court issuing the writ of execution, beyond the interference of all other co-ordinate courts,
thereby avoiding conflicts of power between such courts:" (T)he garnishment of property to satisfy a writ
of execution operates as an attachment and fastens upon the property a lien by which the property is
brought under the jurisdiction of the court issuing the writ." It is brought into custodia legis, under the
sole control of such court. Property is in the custody of the court when it has been seized by an officer
either under a writ of attachment on mesne process or under a writ of execution. A court which has
control of such property, exercises exclusive jurisdiction over the same. No court, except one having a
supervisory control or superior jurisdiction in the premises, has a right to interfere with and change that
possession."cralaw virtua1aw library

The Court in striking down the Baguio courts issuance of a writ of preliminary injunction against the
Baguio City sheriffs garnishment of cash funds of Baguio City deposited in the Baguio branch of the
Philippine National Bank pursuant to a writ of execution issued by the Manila court of first instance for
the satisfaction of a final judgment rendered in favor of the National Power Corporation, and its
assuming cognizance of the separate complaint filed with it, duly indicated the proper procedure in such
cases and the fundamental reason therefor:" (T)he reason advanced by the respondent court of Baguio
City that it should grant relief when there is apparently an illegal service of the writ (the property
garnished being allegedly exempt from execution) may not be upheld, there being a better procedure to
follow, i.e., a resort to the Manila court, wherein the remedy may be obtained, it being the court under
whose authority the illegal levy had been made. Needless to say, an effective ordering of legal
relationships in civil society is possible only when each court is granted exclusive jurisdiction over the
property brought to it." 6

The Court time and again has applied this long established doctrine admonishing court and litigant alike
last year in Luciano v. Provincial Governor 7 that a judge of a branch of a court may not interfere with the
proceedings before a judge of another branch of the same court.

The properties in question were brought into custodia legis of Judge Cruz court and came under its
exclusive jurisdiction when they were levied upon by the sheriff pursuant to the writ for execution of the
judgment rendered by said court. The levy is the essential act by which the judgment debtor s property
is set apart for the satisfaction of the judgment and taken into custody of the law, and from such time
the court issuing the execution acquires exclusive jurisdiction over the property and all subsequent
claims of other parties are subordinated thereto, irrespective of the time when the property is actually
sold. 8 The execution sale having been carried out upon order of Judge Cruz court, any and all questions
concerning the validity and regularity of the sale necessarily had to be addressed to his court which had
exclusive jurisdiction over the properties and were beyond interference by Judge Salvador s court. Justice
Cruz court alone had jurisdiction subject only to the supervisory control or appellate jurisdiction of
superior courts to rule upon the regularity and validity of the sale conducted by its ministerial officers
from the sheriffs office, and his affirmative ruling thereon could not be interfered with by injunction of,
nor sought to be foreclosed by, the challenged orders of Judge Salvadors court.

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Bernabes contention that "he does not attempt to annul or nullify the judgment or order issued by
(Judge Cruz court) . . . If (Judge Salvadors Court) finds the allegations of the complaint to be true, then it
has the jurisdiction to order a new auction sale, which has nothing to do with the judgments or decrees
issued by Judge Cruz court)" 9 is untenable. As above stated, the properties upon being levied on and
sold by virtue of Judge Cruz order of execution were brought into the exclusive custodia legis of Judge
Cruz court This is but in accordance with the established principle that "A case in which an execution
has been issued is regarded as still pending, so that all proceedings on the execution are proceedings in
the suit" 10 and that" (A)n execution is the fruit and end of the suit, and is very aptly called the life of the
law. The suit does not terminate with the judgment; and all proceedings on the execution, are
proceedings in the suit, and which are expressly, by the act of Congress, put under the regulation and
control of the Court of which it issues. It is a power incident to every Court from which process issues,
when delivered to the proper officer, to enforce upon such officer a compliance with his duty." 11 Any
and all questions involving the execution sale concerned the proceedings in Judge Cruz court and had to
be raised and determined in that court, subject to review by the higher courts. They could not be
improperly passed upon by another co-ordinate court behind the back, as it were of Judge Cruz
court.

Judge Salvadors order of May 20, 1969 granting two ex-parte motions of the judgment debtor Bernabe
and directing the sheriff to allow the redemption of the properties notwithstanding that the one-year
redemption period had already lapsed more than one year ago on February 21, 1968 (one year after
registration on May 21, 1967 of the sheriffs sale of May 14, 1967) was equally untenable. It must be
noted that Bernabes action in Judge Salvadors court filed on February 7, 1968 two weeks before the
expiration of the redemption period sought to set aside the execution sale and to have a new auction
sale ordered, on the grounds that the sheriff had allegedly sold the two parcels of land jointly instead of
separately, and that the total sales price of P30,194.00 was shocking to the conscience, alleging that the
two parcels, if sold separately, could easily be sold at P235,000.00 and P150,000.00. Pending decision
and without ruling squarely on his courts lack of jurisdiction over the properties, Judge Salvador
peremptorily issued his redemption order on Bernabes bare manifestation that" (he) has but barely two
days left of the one (1) year period granted by law to redeem" and that" (he) is now ready and willing to
redeem" the properties.

Aside from the basic lack of jurisdiction of Judge Salvadors court to issue the redemption order, the
order per se suffered from other grave flaws. Bernabes motions in effect amounted to an abandonment
of his position on the alleged irregularity of the execution sale, and the logical consequence thereof
which have been the dismissal of his suit. (Thus, soon after Auroras filing of her action for certiorari in
this Court, Bernabe filed his so-called "Urgent Motion to Dismiss" of August 27, 1969 with Judge
Salvadors court praying for the dismissal of the very case filed by him on the ground that having
redeemed the properties, "the case can therefore be considered closed and terminated considering that
defendants [Aurora, Et. Al.] did not interpose any appeal" from the redemption order) But Bernabes
motions were presented on May 12 and May 15, 1969 and it was self-evident from the record that the
one-year period for redemption had long expired more than a year ago on February 21, 1968 as above
stated and that Bernabes allegations that he had two days left of the redemption period was a
gratuitous one. Nothing in the record indicates that Bernabe had ever timely made a valid offer of
redemption so as to safeguard his right thereto prior to his filing his separate action questioning the
validity of the execution sale. It was therefore void and illogical for Judge Salvador to rule, in denying
Auroras motion for reconsideration, that "there is no question that this Court has jurisdiction to hear
and determine this case which questions the regularity and legality of the auction sale of properties held

110
on February 14, 1967, hence the authority granted by the Court to redeem said properties within the
redemption period in order to write finis to the pending case." For Judge Salvador thereby begged the
basic prejudicial questions of his courts lack of jurisdiction and the expiration over a year ago of
Bernabes alleged right of redemption, not to mention that any grant of such right to redeem could not
be decreed in a summary unreasoned order but would have to be adjudged in a formal decision reciting
the facts and the law on which it is based, and which may not be immediately executed, without a
special order therefor. Under Judge Salvadors void orders, all that a judgment debtor whose properties
have been sold at execution sale but who does not have the funds to effect redemption has to do to
unilaterally extend the one-year redemption period would be to file a separate action before another
court of co-ordinate jurisdiction questioning the regularity of the execution sale and upon his getting the
funds, notwithstanding the expiration of the redemption period, get an order of redemption and ask the
court "to write finis to the pending case" which should have been dismissed in the first instance for
lack of jurisdiction.

The doctrine cited that a court or a branch thereof may not interfere with the proceedings before a
judge of another court or branch of the same court since they are all courts of equal and co-ordinate
jurisdiction is an elementary doctrine that has been established with the very system of courts.
Understandable as Bernabes plight and financial predicament may be, still it is incomprehensible why he
should futilely resort, as he did, to filing his separate action with Judge Salvadors court which patently
lacked jurisdiction over the properties sold in execution instead of questioning the regularity of the
execution sale before Judge Cruz court as the court of competent and exclusive jurisdiction, and
properly applying, if he had just grounds, for extension of the redemption period.

As to the alleged gross inadequacy of the price of P30,194.00 paid by Aurora when according to Bernabe
the properties could have been easily sold for a total price of P385,000.00, Bernabe has admitted that
there was an existing mortgage lien on the properties in the amount of P120,000,00 which necessarily
affected their value. This question was not raised at all before Judge Cruz court nor did Judge Salvador
rule thereupon, since he merely issued his void order of redemption. Suffice it to state on the basis of
the record, however, that the failure of Bernabe to timely sell the properties for their fair value through
negotiated sales with third persons either before or after the execution sale in order to be able to
discharge his judgment debt or redeem the properties within the redemption period, or to raise the
necessary amount therefrom to so effect redemption notwithstanding that they have been collecting the
substantial monthly rentals thereof of P2,500.00 monthly even up to now 12 can be attributed only to
his own failings and gross improvidence. They cannot be cited in law or in equity to defeat the lawful
claim of Aurora nor to give validity to the void orders of Judge Salvadors court. The applicable rule on
forced sales where the law gives the owner the right of redemption was thus stated by the Court in
Velasquez v. Coronel: 13 "However, while in ordinary sales for reasons of equity a transaction may be
invalidated on the ground of inadequacy of price, or when such inadequacy shocks ones conscience as
to justify the courts to interfere, such does not follow when the law gives to the owner the right to
redeem, as when a sale is made at public auction, upon the theory that the lesser the price the easier it
is for the owner to effect the redemption. And so it was aptly said: When there is the right to redeem,
inadequacy of price should not be material, because the judgment debtor may reacquire the property or
also sell his right to redeem and thus recover the loss he claims to have suffered by reason of the price
obtained at the auction sale."

Bernabes petition challenging the jurisdiction of Judge Cruz court to issue its orders of September 5,
1969 and January 5, 1970, confirming Auroras acquisition of title to the properties by virtue of the

111
execution sale and ordering Bernabe to transfer possession thereof to her, because of the separate civil
action filed by him in Judge Salvadors court, must necessarily fail since said orders were within the
exclusive competence and jurisdiction of Judge Cruz court.

ACCORDINGLY, in Case L-30871, the writ of certiorari prayed for his granted; respondent Judge Salvadors
court is declared without jurisdiction over Civil Case No. C-1217 other than to dismiss the same and the
writ of preliminary injunction of February 19, 1968 therein issued and the orders of May 20, 1969 and
June 23, 1969 therein issued, as well as respondent sheriffs certificate of redemption issued on May 21,
1969 are set aside and declared null and void; and the writ of preliminary injunction issued by the Court
on September 2, 1969, is made permanent. In Case L-31603, the petition for certiorari is dismissed and
the writ of preliminary injunction issued by this Court on February 11, 1970 is dissolved. No
pronouncement as to costs.

Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando, Barredo, Villamor and Makasiar, JJ., concur.

Concepcion, C.J., concurs in the result.

Castro, J., did not take part.

Flores vs. So
162 SCRA 117
June 1988

FACTS:

On August 2, 1958, plaintiff-appellee Johnson So filed an action for specific performance before the CFI
of Sorsogon, against defendant-appellant Alfonso Flores to effect the redemption of a parcel of coconut
and rice land in Matnog, Sorsogon. It was alleged that one Valentin Gallano sold to Flores the said parcel
of land on February 27, 1950, with right of repurchase within 4 years from the date of the sale, for a
price of P2,550.00. Valentin Gallano sold in an absolute manner the same land to Johnson So on
February 26, 1958 for the price of P5,000.00. On the allegation that the Pacto de Retro Sale did not
embody the real intent and nature of the agreement between the parties, the transaction being a mere
mortgage to secure a loan, Johnson So prayed that the court declare the said Pacto de Retro Sale as a
mere equitable mortgage and order Alfonso Flores to receive the sum of P2,550.00 deposited with the
court and to consider the land in question as redeemed from the latter for all legal purposes.

The lower court ruled that there was a indeed a contract of sale of a parcel of land with the reservation
in favor of Gallano a retro of the right to repurchase it within a period of four (4) years from execution
thereof; that Flores execution of the affidavit of consolidation of ownership on March 6, 1958 and its
subsequent registration in the Office of the Register of Deeds of Sorsogon did not make his ownership
over the subject land absolute for non-compliance with Articles 1606 and 1607 of the New Civil Code;
and that Johnson So has already acquired the right of redemption belonging to Valentin Gallano when he
bought the subject property. Thus, the Court ordered Alfonso Flores to deliver the possession of the land
in question to Johnson So and to execute the necessary deed of resale in favor of the latter and
authorized Flores to withdraw for his own use and benefit the redemption money in the sum of

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P2,550.00. Valentin Gallano was absolved from liability. The Court of Appeals certified the instant case to
the Supreme Court for it involves purely a question of law.

ISSUE:

Who should be the absolute owner of the subject property?

COURT RULING:

The Supreme Court reversed the decision appealed from and declared Alfonso Flores the absolute owner
of the subject property. In a sale with the right of redemption, the ownership over the thing sold is
transferred to the vendee upon execution of the contract, "subject only to the resolutory condition that
the vendor may exercise his right of repurchase within the period agreed upon." Consequently, since the
pacto de retro sale in question, which was executed in February of 1950 before the effectivity of the New
Civil Code in August of 1950, was a contract with a resolutory condition, and the condition was still
pending at the time the new law went into effect, the provisions of the old Civil Code should still apply.

The trial court erred in allowing Johnson So to redeem the subject property. Valentin Gallano was no
longer the owner of the same at the time of sale to Johnson So, thus, no right whatsoever was
transmitted to the latter, except the right to redeem the property. Ownership over the subject property
had long vested upon the defendant-appellant Alfonso Flores.

G.R. No. 72873 May 28, 1987

CARLOS ALONZO and CASIMIRA ALONZO, petitioners,

vs.
INTERMEDIATE APPELLATE COURT and TECLA PADUA, respondents.

CRUZ, J.:

The question is sometimes asked, in serious inquiry or in curious conjecture, whether we are a court of
law or a court of justice. Do we apply the law even if it is unjust or do we administer justice even against
the law? Thus queried, we do not equivocate. The answer is that we do neither because we are a court
both of law and of justice. We apply the law with justice for that is our mission and purpose in the
scheme of our Republic. This case is an illustration.

Five brothers and sisters inherited in equal pro indiviso shares a parcel of land registered in 'the name of
their deceased parents under OCT No. 10977 of the Registry of Deeds of Tarlac. 1

On March 15, 1963, one of them, Celestino Padua, transferred his undivided share of the herein
petitioners for the sum of P550.00 by way of absolute sale. 2 One year later, on April 22, 1964, Eustaquia
Padua, his sister, sold her own share to the same vendees, in an instrument denominated "Con Pacto de
Retro Sale," for the sum of P 440.00. 3

By virtue of such agreements, the petitioners occupied, after the said sales, an area corresponding to
two-fifths of the said lot, representing the portions sold to them. The vendees subsequently enclosed

113
the same with a fence. In 1975, with their consent, their son Eduardo Alonzo and his wife built a semi-
concrete house on a part of the enclosed area. 4

On February 25, 1976, Mariano Padua, one of the five coheirs, sought to redeem the area sold to the
spouses Alonzo, but his complaint was dismissed when it appeared that he was an American citizen . 5
On May 27, 1977, however, Tecla Padua, another co-heir, filed her own complaint invoking the same
right of redemption claimed by her brother. 6

The trial court * also dismiss this complaint, now on the ground that the right had lapsed, not having
been exercised within thirty days from notice of the sales in 1963 and 1964. Although there was no
written notice, it was held that actual knowledge of the sales by the co-heirs satisfied the requirement of
the law. 7

In truth, such actual notice as acquired by the co-heirs cannot be plausibly denied. The other co-heirs,
including Tecla Padua, lived on the same lot, which consisted of only 604 square meters, including the
portions sold to the petitioners . 8 Eustaquia herself, who had sold her portion, was staying in the same
house with her sister Tecla, who later claimed redemption petition. 9 Moreover, the petitioners and the
private respondents were close friends and neighbors whose children went to school together. 10

It is highly improbable that the other co-heirs were unaware of the sales and that they thought, as they
alleged, that the area occupied by the petitioners had merely been mortgaged by Celestino and
Eustaquia. In the circumstances just narrated, it was impossible for Tecla not to know that the area
occupied by the petitioners had been purchased by them from the other. co-heirs. Especially significant
was the erection thereon of the permanent semi-concrete structure by the petitioners' son, which was
done without objection on her part or of any of the other co-heirs.

The only real question in this case, therefore, is the correct interpretation and application of the
pertinent law as invoked, interestingly enough, by both the petitioners and the private respondents. This
is Article 1088 of the Civil Code, providing as follows:

Art. 1088. Should any of the heirs sell his hereditary rights to a stranger before the partition, any or
all of the co-heirs may be subrogated to the rights of the purchaser by reimbursing him for the price of
the sale, provided they do so within the period of one month from the time they were notified in writing
of the sale by the vendor.

In reversing the trial court, the respondent court ** declared that the notice required by the said article
was written notice and that actual notice would not suffice as a substitute. Citing the same case of De
Conejero v. Court of Appeals 11 applied by the trial court, the respondent court held that that decision,
interpreting a like rule in Article 1623, stressed the need for written notice although no particular form
was required.

Thus, according to Justice J.B.L. Reyes, who was the ponente of the Court, furnishing the co-heirs with a
copy of the deed of sale of the property subject to redemption would satisfy the requirement for written
notice. "So long, therefore, as the latter (i.e., the redemptioner) is informed in writing of the sale and the
particulars thereof," he declared, "the thirty days for redemption start running. "

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In the earlier decision of Butte v. UY, 12 " the Court, speaking through the same learned jurist,
emphasized that the written notice should be given by the vendor and not the vendees, conformably to
a similar requirement under Article 1623, reading as follows:

Art. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty
days from the notice in writing by the prospective vendor, or by the vendors, as the case may be. The
deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the
vendor that he has given written notice thereof to all possible redemptioners.

The right of redemption of co-owners excludes that of the adjoining owners.

As "it is thus apparent that the Philippine legislature in Article 1623 deliberately selected a particular
method of giving notice, and that notice must be deemed exclusive," the Court held that notice given by
the vendees and not the vendor would not toll the running of the 30-day period.

The petition before us appears to be an illustration of the Holmes dictum that "hard cases make bad
laws" as the petitioners obviously cannot argue against the fact that there was really no written notice
given by the vendors to their co-heirs. Strictly applied and interpreted, Article 1088 can lead to only one
conclusion, to wit, that in view of such deficiency, the 30 day period for redemption had not begun to
run, much less expired in 1977.

But as has also been aptly observed, we test a law by its results; and likewise, we may add, by its
purposes. It is a cardinal rule that, in seeking the meaning of the law, the first concern of the judge
should be to discover in its provisions the in tent of the lawmaker. Unquestionably, the law should never
be interpreted in such a way as to cause injustice as this is never within the legislative intent. An
indispensable part of that intent, in fact, for we presume the good motives of the legislature, is to render
justice.

Thus, we interpret and apply the law not independently of but in consonance with justice. Law and
justice are inseparable, and we must keep them so. To be sure, there are some laws that, while generally
valid, may seem arbitrary when applied in a particular case because of its peculiar circumstances. In such
a situation, we are not bound, because only of our nature and functions, to apply them just the same, in
slavish obedience to their language. What we do instead is find a balance between the word and the
will, that justice may be done even as the law is obeyed.

As judges, we are not automatons. We do not and must not unfeelingly apply the law as it is worded,
yielding like robots to the literal command without regard to its cause and consequence. "Courts are apt
to err by sticking too closely to the words of a law," so we are warned, by Justice Holmes again, "where
these words import a policy that goes beyond them." 13 While we admittedly may not legislate, we
nevertheless have the power to interpret the law in such a way as to reflect the will of the legislature.
While we may not read into the law a purpose that is not there, we nevertheless have the right to read
out of it the reason for its enactment. In doing so, we defer not to "the letter that killeth" but to "the
spirit that vivifieth," to give effect to the law maker's will.

The spirit, rather than the letter of a statute determines its construction, hence, a statute must be read
according to its spirit or intent. For what is within the spirit is within the letter but although it is not
within the letter thereof, and that which is within the letter but not within the spirit is not within the

115
statute. Stated differently, a thing which is within the intent of the lawmaker is as much within the
statute as if within the letter; and a thing which is within the letter of the statute is not within the statute
unless within the intent of the lawmakers. 14

In requiring written notice, Article 1088 seeks to ensure that the redemptioner is properly notified of the
sale and to indicate the date of such notice as the starting time of the 30-day period of redemption.
Considering the shortness of the period, it is really necessary, as a general rule, to pinpoint the precise
date it is supposed to begin, to obviate any problem of alleged delays, sometimes consisting of only a
day or two.

The instant case presents no such problem because the right of redemption was invoked not days but
years after the sales were made in 1963 and 1964. The complaint was filed by Tecla Padua in 1977,
thirteen years after the first sale and fourteen years after the second sale. The delay invoked by the
petitioners extends to more than a decade, assuming of course that there was a valid notice that tolled
the running of the period of redemption.

Was there a valid notice? Granting that the law requires the notice to be written, would such notice be
necessary in this case? Assuming there was a valid notice although it was not in writing. would there be
any question that the 30-day period for redemption had expired long before the complaint was filed in
1977?

In the face of the established facts, we cannot accept the private respondents' pretense that they were
unaware of the sales made by their brother and sister in 1963 and 1964. By requiring written proof of
such notice, we would be closing our eyes to the obvious truth in favor of their palpably false claim of
ignorance, thus exalting the letter of the law over its purpose. The purpose is clear enough: to make sure
that the redemptioners are duly notified. We are satisfied that in this case the other brothers and sisters
were actually informed, although not in writing, of the sales made in 1963 and 1964, and that such
notice was sufficient.

Now, when did the 30-day period of redemption begin?

While we do not here declare that this period started from the dates of such sales in 1963 and 1964, we
do say that sometime between those years and 1976, when the first complaint for redemption was filed,
the other co-heirs were actually informed of the sale and that thereafter the 30-day period started
running and ultimately expired. This could have happened any time during the interval of thirteen years,
when none of the co-heirs made a move to redeem the properties sold. By 1977, in other words, when
Tecla Padua filed her complaint, the right of redemption had already been extinguished because the
period for its exercise had already expired.

The following doctrine is also worth noting:

While the general rule is, that to charge a party with laches in the assertion of an alleged right it is
essential that he should have knowledge of the facts upon which he bases his claim, yet if the
circumstances were such as should have induced inquiry, and the means of ascertaining the truth were
readily available upon inquiry, but the party neglects to make it, he will be chargeable with laches, the
same as if he had known the facts. 15

116
It was the perfectly natural thing for the co-heirs to wonder why the spouses Alonzo, who were not
among them, should enclose a portion of the inherited lot and build thereon a house of strong materials.
This definitely was not the act of a temporary possessor or a mere mortgagee. This certainly looked like
an act of ownership. Yet, given this unseemly situation, none of the co-heirs saw fit to object or at least
inquire, to ascertain the facts, which were readily available. It took all of thirteen years before one of
them chose to claim the right of redemption, but then it was already too late.

We realize that in arriving at our conclusion today, we are deviating from the strict letter of the law,
which the respondent court understandably applied pursuant to existing jurisprudence. The said court
acted properly as it had no competence to reverse the doctrines laid down by this Court in the above-
cited cases. In fact, and this should be clearly stressed, we ourselves are not abandoning the De Conejero
and Buttle doctrines. What we are doing simply is adopting an exception to the general rule, in view of
the peculiar circumstances of this case.

The co-heirs in this case were undeniably informed of the sales although no notice in writing was given
them. And there is no doubt either that the 30-day period began and ended during the 14 years
between the sales in question and the filing of the complaint for redemption in 1977, without the co-
heirs exercising their right of redemption. These are the justifications for this exception.

More than twenty centuries ago, Justinian defined justice "as the constant and perpetual wish to render
every one his due." 16 That wish continues to motivate this Court when it assesses the facts and the law
in every case brought to it for decision. Justice is always an essential ingredient of its decisions. Thus
when the facts warrants, we interpret the law in a way that will render justice, presuming that it was the
intention of the lawmaker, to begin with, that the law be dispensed with justice. So we have done in this
case.

WHEREFORE, the petition is granted. The decision of the respondent court is REVERSED and that of the
trial court is reinstated, without any pronouncement as to costs. It is so ordered.

G.R. No. 115307 July 8, 1997

MANUEL LAO, petitioner,

vs.
COURT OF APPEALS and BETTER HOMES REALTY & HOUSING CORPORATION, respondents.

PANGANIBAN, J.:

As a general rule, the main issue in an ejectment suit is possession de facto, not possession de jure. In
the event the issue of ownership is raised in the pleadings, such issue shall be taken up only for the
limited purpose of determining who between the contending parties has the better right to possession.
However, where neither of the parties objects to the allegation of the question of ownership which
may be initially improvident or improper in an ejectment suit and, instead, both present evidence
thereon, argue the question in their various submissions and participate in all aspects of the trial without
objecting to the Metropolitan (or Municipal) Trial Court's jurisdiction to decide the question of
ownership, the Regional Trial Court in the exercise of its original jurisdiction as authorized by Section

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11, Rule 40 of the Rules of Court may rule on the issue and the corollary question of whether the
subject deed is one of sale or of equitable mortgage.

These postulates are discussed by the Court as it resolves this petition under Rule 45 seeking a reversal
of the December 21, 1993 Decision 1 and April 28, 1994 Resolution 2 of the Court of Appeals in CA-G.R.
SP No. 92-14293.

The Antecedent Facts

The facts of this case are narrated by Respondent Court of Appeals as follows: 3

On June 24, 1992, (herein Private Respondent Better Homes Realty and Housing Corporation) filed with
the Metropolitan Trial Court of Quezon City, a complaint for unlawful detainer, on the ground that (said
private respondent) is the owner of the premises situated at Unit I, No. 21 N. Domingo Street, Quezon
City, evidenced by Transfer Certificate of Title No. 22184 of the Registry of Deeds of Quezon City; that
(herein Petitioner Manuel Lao) occupied the property without rent, but on (private respondent's) pure
liberality with the understanding that he would vacate the property upon demand, but despite demand
to vacate made by letter received by (herein petitioner) on February 5, 1992, the (herein petitioner)
refused to vacate the premises.

In his answer to the complaint, (herein petitioner) claimed that he is the true owner of the house and lot
located at Unit I, No. 21 N. Domingo Street, Quezon City; that the (herein private respondent) purchased
the same from N. Domingo Realty and Development Corporation but the agreement was actually a loan
secured by mortgage; and that plaintiff's cause of action is for accion publiciana, outside the jurisdiction
of an inferior court.

On October 9, 1992, the Metropolitan Trial Court of Quezon City rendered judgment ordering the
(petitioner) to vacate the premises located at Unit I, No. 21 N. Domingo Street, Quezon City; to pay
(private respondent) the sum of P300.00 a day starting on January 31, 1992, as reasonable rent for the
use and occupation of the premises; to pay plaintiff P5,000.00, as attorney's fees, and costs.

On appeal to the Regional Trial Court of Quezon City, 4 on March 30, 1993, the latter court rendered a
decision reversing that of the Metropolitan Trial Court, and ordering the dismissal of the (private
respondent's) complaint for lack of merit, with costs taxed against (private respondent).

In its decision, the Regional Trial Court held that the subject property was acquired by (private
respondent) from N. Domingo Realty and Development Corporation, by a deed of sale, and (private
respondent) is now the registered owner under Transfer Certificate of Title No. 316634 of the Registry of
Deeds of Quezon City, but in truth the (petitioner) is the beneficial owner of the property because the
real transaction over the subject property was not a sale but a loan secured by a mortgage thereon.

The dispositive portion of the Regional Trial Court's decision is quoted below: 5

WHEREFORE, judgment is hereby rendered reversing the appealed decision and ordering the dismissal of
plaintiffs complaint for lack of merit, with the costs taxed against it.

IT IS SO ORDERED.

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On April 28, 1993, private respondent filed an appeal with the Court of Appeals which reversed the
decision of the Regional Trial Court. The Respondent Court ruled:

The Metropolitan Trial Court has no jurisdiction to resolve the issue of ownership in an action for
unlawful detainer (B.P. 129, Sec. 33 [2]; Cf. Alvir vs. Vera, 130 SCRA 357). The jurisdiction of a court is
determined by the nature of the action alleged in the complaint (Ching vs. Malaya, l53 SCRA 412). In its
complaint in the inferior court, the plaintiff alleged that it is the owner of the premises located at Unit I,
No. 21 N. Domingo Street, Quezon City, and that defendant's occupation is rent free and based on
plaintiffs pure liberality coupled with defendant's undertaking to vacate the premises upon demand, but
despite demands, defendant has refused to vacate. The foregoing allegations suffice to constitute a
cause of action for ejectment (Banco de Oro vs. Court of Appeals, 182 SCRA 464).

The Metropolitan Trial Court is not ousted of jurisdiction simply because the defendant raised the
question ownership (Bolus vs. Court of Appeals, 218 SCRA 798). The inferior court shall resolve the issue
of ownership only to determine who is entitled to the possession of the premises (B.P. 129, Sec. 33[2];
Bolus vs. Court of Appeals, supra).

Here, the Metropolitan Trial Court ruled that as owner, plaintiff (herein private respondent Better Homes
Realty and Housing Corporation) is entitled to the possession of the premises because the defendant's
stay is by mere tolerance of the plaintiff (herein private respondent).

On the other hand, the Regional Trial Court ruled that the subject property is owned by the defendant,
(herein petitioner Manuel Lao) and, consequently, dismissed the complaint for unlawful detainer. Thus,
the Regional Trial Court resolved the issue of ownership, as if the case were originally before it as an
action for recovery of possession, or accion publiciana, within its original jurisdiction. In an appeal from a
decision of the Municipal Trial Court, or Metropolitan Trial Court, in an unlawful detainer case, the
Regional Trial Court is simply to determine whether the inferior court correctly resolved the issue of
possession; it shall not delve into the issue of ownership (Manuel vs. Court of Appeals, 199 SCRA 603).
What the Regional Trial Court did was to rule that the real agreement between the plaintiff and the
previous owner of the property was not a sale, but an equitable mortgage. Defendant was only a
director of the seller corporation, and his claim of ownership could not be true. This question could not
be determined summarily. It was not properly in issue before the inferior court because, as aforesaid,
the only issue was possession de facto (Manlapaz vs. Court of Appeals, 191 SCRA 795), or who has a
better right to physical possession (Dalida vs. Court of Appeals, 117 SCRA 480). Consequently, the
Regional Trial Court erred in reversing the decision of the Metropolitan Trial Court.

WHEREFORE, the Court hereby REVERSES the decision of the Regional Trial Court. In lieu thereof, We
affirm the decision of the Metropolitan Trial Court of Quezon City sentencing the defendant and all
persons claiming right under him to vacate the premises situated at Unit I, No. 21 N. Domingo Street,
Quezon City, and to surrender possession to the plaintiff; to pay plaintiff the sum of P300.00, a day
starting on January 31, 1992, until defendant shall have vacated the premises; to pay plaintiff P5,000.00
as attorneys fees, and costs.

SO ORDERED. 6

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Manuel Lao's motion for reconsideration dated January 24, 1994 was denied by the Court of Appeals in
its Resolution promulgated on April 28, 1994. Hence, this petition for review before this Court. 7

The Issues

Petitioner Manuel Lao raises three issues:

3.1 Whether or not the lower court can decide on the issue of ownership in the present ejectment
case.

3.2 Whether or not private respondent had acquired ownership over the property in question.

3.3 Whether or not petitioner should be ejected from the premises in question 8

The Court's Ruling

The petition for review is meritorious.

First Issue: Jurisdiction to Decide the Issue of Ownership

The Court of Appeals held that as a general rule, the issue in an ejectment suit is possession de facto, not
possession de jure, and that in the event the issue of ownership is raised as a defense, the issue is taken
up for the limited purpose of determining who between the contending parties has the better right to
possession. Beyond this, the MTC acts in excess of its jurisdiction. However, we hold that this is not a
hard and fast rule that can be applied automatically to all unlawful detainer cases.

Section 11, Rule 40 of the Rules of Court provides that "[a] case tried by an inferior court without
jurisdiction over the subject matter shall be dismissed on appeal by the Court of First Instance. But
instead of dismissing the case, the Court of First Instance, in the exercise of its original jurisdiction, may
try the case on the merits if the parties therein file their pleadings and go to the trial without any
objection to such jurisdiction." After a thorough review of the records of this case, the Court finds that
the respondent appellate court failed to apply this Rule and erroneously reversed the RTC Decision.

Respondent Court cites Alvir vs. Vera to support its Decision. On the contrary, we believe such case
buttresses instead the Regional Trial Court's decision. The cited case involves an unlawful detainer suit
where the issue of possession was inseparable from the issue of transfer of ownership, and the latter
was determinable only after an examination of a contract of sale involving the property in question. The
Court ruled that where a "case was tried and heard by the lower court in the exercise of its original
jurisdiction by common assent of the parties by virtue of the issues raised . . . and the proofs presented
by them," any dismissal on the ground of lack of jurisdiction "would only lead to needless delays and
multiplicity of suits." The Court held:

In actions of forcible entry and detainer, the main issue is possession de facto, independently of any
claim of ownership or possession de jure that either party may set forth in his pleading. . . . Defendant's
claim of ownership of the property from which plaintiff seeks to eject him is not sufficient to divest the
inferior court of its jurisdiction over the action of forcible entry and detainer. However, if it appears
during the trial that the principal issue relates to the ownership of the property in dispute and any

120
question of possession which maybe involved necessarily depends upon the result of the inquiry into the
title, previous rulings of this Court are that the jurisdiction of the municipal or city court is lost and the
action should be dismissed.

We have at bar a case where, in effect, the question of physical possession could not properly be
determined without settling that of lawful or de jure possession and of ownership and hence, following
early doctrine, the jurisdiction of the municipal court over the ejectment case was lost and the action
should have been dismissed. As a consequence, respondent court would have no jurisdiction over the
case on appeal and it should have dismissed the case on appeal from the municipal trial court. However,
in line with Section 11, Rule 40 of the Revised Rules of Court, which
reads

Sec. 11. Lack of Jurisdiction. A case tried by an inferior court without jurisdiction over the subject
matter shall be dismissed on appeal by the Court of First Instance. But instead of dismissing the case, the
Court of First Instance in the exercise of its original jurisdiction, may try the case on the merits if the
parties therein file their pleadings and go to trial without objection to such jurisdiction.

this Court held in Saliwan vs. Amores, 51 SCRA 329, 337, that dismissal "on the said ground of lack of
appellate jurisdiction on the part of the lower court flowing from the municipal court's loss of
jurisdiction would lead only to needless delay and multiplicity of suits in the attainment of the same
result and ignores, as above stated, that the case was tried and heard by the lower court in the exercise
of its original jurisdiction by common assent of the parties by virtue of the issues raised by the parties
and the proof presented by them thereon." 9

This pronouncement was reiterated by this Court through Mr. Justice Teodoro R. Padilla in Consignado
vs. Court of Appeals 10 as follows:

As the MTC of Laguna had no jurisdiction over the unlawful detainer case in view of the raised question
of title or ownership over the property in dispute, the RTC of Laguna also had no appellate jurisdiction to
decide the case on the merits. It should have dismissed the appeal. However, it had original jurisdiction
to pass upon the controversy. It is to be noted, in this connection, that in their respective memoranda
filed with the RTC of Laguna, the petitioners and private respondents did not object to the said court
exercising its original jurisdiction pursuant to the aforequoted provisions of Section 11, Rule 40 of the
Rules of Court.

xxx xxx xxx

Petitioners now contend, among others, that the Court of Appeals erred in resolving the question of
ownership as if actual title, not mere possession of subject premises, is involved in the instant case.

The petitioner's contention is untenable. Since the MTC and RTC of Laguna decided the question of
ownership over the property in dispute, on appeal the Court of Appeals had to review and resolve also
the issue of ownership. . . .

It is clear, therefore, that although an action for unlawful detainer "is inadequate for the ventilation of
issues involving title or ownership of controverted real property, [i]t is more in keeping with procedural
due process that where issues of title or ownership are raised in the summary proceedings for unlawful

121
detainer, said proceeding should be dismissed for lack of jurisdiction, unless, in the case of an appeal
from the inferior court to the Court of First Instance, the parties agree to the latter Court hearing the
case in its original jurisdiction in accordance with Section 11, Rule 40 . . ." 11

In the case at bar, a determination of the issue of ownership is indispensable to resolving the rights of
both parties over the property in controversy, and is inseparable from a determination of who between
them has the right to possess the same. Indeed, the very complaint for unlawful detainer filed in the
Metropolitan Trial Court of Quezon City is anchored on the alleged ownership of private respondent over
the subject premises. 12 The parties did not object to the incongruity of a question of ownership being
brought in an ejectment suit. Instead they both submitted evidence on such question, and the
Metropolitan Trial Court decided on the issue. These facts are evident in the Metropolitan Trial Court's
decision:

From the records of the case, the evidence presented and the various arguments advanced by the
parties, the Court finds that the property subject matter of this case is in the name of (herein private
respondent) Better Homes and Realty Housing Corporation; that the Deed of Absolute Sale which was
the basis for the issuance of said TCT No. 22184 is between N. Domingo Realty and Development
Corporation and Better Homes Realty and Housing Corporation which was signed by Artemio S. Lao
representing the seller N. Domingo and Realty Development Corporation; that a Board Resolution of N.
Domingo and Realty and Development Corporation (Exhibit "D" position paper) shows that the Directors
of the Board of the N. Domingo Realty and Development Corporation passed a resolution selling
apartment units I and F located at No. 21 N. Domingo St., Quezon City and designating the (herein
petitioner) with his brother Artemio S. Lao as signatories to the Deed of Sale. The claim therefore of the
(herein petitioner) that he owns the property is not true . . . 13

When the MTC decision was appealed to the Regional Trial Court, not one of the parties questioned the
Metropolitan Trial Court's jurisdiction to decide the issue of ownership. In fact, the records show that
both petitioner and private respondent discussed the issue in their respective pleadings before the
Regional Trial Court. 14 They participated in all aspects of the trial without objection to its jurisdiction to
decide the issue of ownership. Consequently, the Regional Trial Court aptly decided the issue based on
the exercise of its original jurisdiction as authorized by Section 11, Rule 40 of the Rules of Court.

This Court further notes that in both of the contending parties' pleadings filed on appeal before the
Court of Appeals, the issue of ownership was likewise amply discussed. 15 The totality of evidence
presented was sufficient to decide categorically the issue of ownership.

These considerations, taken together with the fact that both the Metropolitan Trial Court and the
Regional Trial Court decided the issue of ownership, justify the review of the lower courts' findings of
fact and decision on the issue of ownership. This we now do, as we dispose of the second issue and
decide the case with finality to spare the parties the time, trouble and expense of undergoing the rigors
of another suit where they will have to present the same evidence all over again and where, in all
probability, the same ultimate issue of ownership will be brought up on appeal.

Second Issue: Absolute Sale or Equitable Mortgage?

Private Respondent Better Homes Realty and Housing Corporation anchored its right in the ejectment
suit on a contract of sale in which petitioner (through their family corporation) transferred the title of

122
the property in question. Petitioner contends, however that their transaction was not an absolute sale,
but an equitable mortgage.

In determining the nature of a contract, the Court looks at the intent of the parties and not at the
nomenclature used to describe it. Pivotal to deciding this issue is the true aim and purpose of the
contracting parties as shown by the terminology used in the covenant, as well as "by their conduct,
words, actions and deeds prior to, during and immediately after executing the agreement." 16 In this
regard, parol evidence becomes admissible to prove the true intent and agreement of the parties which
the Court will enforce even if the title of the property in question has already been registered and a new
transfer certificate of title issued in the name of the transferee. In Macapinlac vs. Gutierrez Repide,
which involved an identical question, the Court succintly stated:

. . . This conclusion is fully supported by the decision in Cuyugan vs. Santos (34 Phil., 100), where this
court held that a conveyance in the form of a contract of sale with pacto de retro will be treated as a
mere mortgage, if really executed as security for a debt, and that this fact can be shown by oral evidence
apart from the instrument of conveyance, a doctrine which has been followed in the later cases of Villa
vs. Santiago (38 Phil., 157), and Cuyugan vs. Santos (39 Phil., 970).

xxx xxx xxx

In the first place, it must be borne in mind that the equitable doctrine which has been so fully stated
above, to the effect that any conveyance intended as security for a debt will be held in effect to be a
mortgage, whether so actually expressed in the instrument or not, operates regardless of the form of the
agreement chosen by the contracting parties as the repository of their will. Equity looks through the
form and considers the substance; and no kind of engagement can be adopted which will enable the
parties to escape from the equitable doctrine to which reference is made. In other words, a conveyance
of land, accompanied by registration in the name of the transferee and the issuance of a new certificate,
is no more secured from the operation of this equitable doctrine than the most informal conveyance
that could be devised. 17

The law enumerates when a contract may be presumed to be an equitable mortgage:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right repurchase another instrument extending the
period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the performance of any other obligation.

xxx xxx xxx 18

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The foregoing presumption applies also to a "contract purporting to be an absolute sale." 19

Applying the preceding principles to the factual milieu of this case, we find the agreement between the
private respondent and N. Domingo Realty & Housing Corporation, as represented by petitioner,
manifestly one of equitable mortgage. First, possession of the property in the controversy remained with
Petitioner Manuel Lao who was the beneficial owner of the property, before, during and after the
alleged sale. 20 It is settled that a "pacto de retro sale should be treated as a mortgage where the
(property) sold never left the possession of the vendors." 21 Second, the option given to Manuel Lao to
purchase the property in controversy had been extended twice 22 through documents executed by Mr.
Tan Bun Uy, President and Chairman of the Board of Better Homes Realty & Housing Corporation. The
wording of the first extension is a refreshing revelation that indeed the parties really intended to be
bound by a loan with mortgage, not by a pacto de retro. It reads, "On June 10, 88, this option is
extended for another sixty days to expired (sic) on Aug. 11, 1988. The purchase price is increased to
P137,000.00. Since Mr. Lao borrow (sic) P20,000.00 from me." 23 These extensions clearly represent the
extension of time to pay the loan given to Manuel Lao upon his failure to pay said loan on its maturity.
Mr. Lao was even granted an additional loan of P20,000.00 as evidenced by the above-quoted
document. Third, unquestionably, Manuel Lao and his brother were in such "dire need of money" that
they mortgaged their townhouse units registered under the name of N. Domingo Realty Corporation, the
family corporation put up by their parents, to Private Respondent Better Homes Realty & Housing
Corporation. In retrospect, it is easy to blame Petitioner Manuel Lao for not demanding a reformation of
the contract to reflect the true intent of the parties. But this seeming inaction is sufficiently explained by
the Lao brothers' desperate need for money, compelling them to sign the document purporting to be a
sale after they were told that the same was just for "formality." 24 In fact, this Court, in various cases
involving the same situation, had occasion to state:

. . . In Jayme, et al. v. Salvador, et al., this Court upheld a judgment of the Court of First Instance of Iloilo
which found the transaction between the parties to be a loan instead of a sale of real property
notwithstanding the terminology used in the document, after taking into account the surrounding
circumstances of the transaction. The Court through Justice Norberto Romualdez stated that while it was
true that plaintiffs were aware of the contents of the contracts, the preponderance of the evidence
showed however that they signed knowing that said contracts did not express their real intention, and if
they did so notwithstanding this, it was due to the urgent necessity of obtaining fund. "Necessitous men
are not, truly speaking, free men; but to answer a present emergency, will submit to any terms that the
crafty may impose upon them." 25

Moreover, since the borrower's urgent need for money places the latter at a disadvantage vis-a-vis the
lender who can thus dictate the terms of their contract, the Court, in case of an ambiguity, deems the
contract to be one which involves the lesser transmission of rights and interest over the property in
controversy. 26

As aptly found and concluded by the regional trial court:

The evidence of record indicates that while as of April 4, 1988 (the date of execution of the Deed of
Absolute Sale whereby the N. Domingo and Realty & Development Corporation purportedly sold the
townhouse and lot subject of this suit to [herein private respondent Better Homes Realty & Housing
Corporation] for P100,000.000) said N. Domingo Realty & Development Corporation (NDRDC, for short)

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was the registered owner of the subject property under Transfer Certificate of Title (TCT) No. 316634 of
the Registry of Deeds for Quezon City, (herein petitioner Manuel Lao) in fact was and has been since
1975 the beneficial owner of the subject property and, thus, the same was assigned to him by the
NDRDC, the family corporation set up by his parents and of which (herein petitioner) and his siblings are
directors. That the parties' real transaction or contract over the subject property was not one of sale but,
rather, one of loan secured, by a mortgage thereon is unavoidably inferrable from the following facts of
record, to (herein petitioner's) possession of the subject property, which started in 1975 yet, continued
and remained even after the alleged sale of April 4, 1988; (herein private respondent) executed an
option to purchase in favor (herein petitioner) as early as April 2, 1988 or two days before (herein private
respondent) supposedly acquired ownership of the property; the said option was renewed several times
and the price was increased with each renewal (thus, the original period for the exercise of the option
was up to June 11, 1988 and the price was P109,000.00; then, on June 10, 1988, the option was
extended for 60 days or until August 11, 1988 and the price was increased to P137,000.00; and then on
August 11, 1988, the option was again extended until November 11,1988 and the price was increased to
P158,840.00); and, the Deed of Absolute Sale of April 4, 1988 was registered and the property
transferred in the name of (private respondent) only on May 10, 1989, per TCT No. 22184 of the Registry
of Deeds for Quezon City (Arts. 1602, nos. 2, 3, & 6, & 1604, Civil Code). Indeed, if it were true, as it
would have the Court believe, that (private respondent) was so appreciative of (petitioner's) alleged
facilitation of the subject property's sale to it, it is quite strange why (private respondent) some two days
before such supposed sale would have been minded and inclined to execute an option to purchase
allowing (petitioner) to acquire the property the very same property it was still hoping to acquire at
the time. Certainly, what is more likely and thus credible is that, if (private respondent) was indeed
thankful that it was able to purchase the property, it would not given (petitioner) any option to purchase
at all . . . 27

Based on the conduct of the petitioner and private respondent and even the terminology of the second
option to purchase, we rule that the intent and agreement between them was undoubtedly one of
equitable mortgage and not of sale.

Third Issue: Should Petitioner Be Ejected?

We answer in the negative. An action for unlawful detainer is grounded on Section 1, Rule 70 of the
Rules of Court which provides that:

. . . a landlord, vendor, vendee, or other person against whom the possession of any land or building is
unlawfully withheld after the expiration or termination of the right to hold possession, by virtue of any
contract, express or implied, or the legal representatives or assigns of any such landlord, vendor, vendee,
or other person, may, at any time within one (1) year after such unlawful deprivation or withholding of
possession, bring an action in the proper inferior court against the person or persons unlawfully
withholding or depriving of possession, or any person or persons claiming under them, for the restitution
of such possession, together with damages and costs . . . .

Based on the previous discussion, there was no sale of the disputed property. Hence, it still belongs to
petitioner's family corporation, N. Domingo Realty & Development Corporation. Private respondent,
being a mere mortgagee, has no right to eject petitioner. Private respondent, as a creditor and
mortgagee, " . . . cannot appropriate the things given by way of pledge
or mortgage, or dispose of them. Any stipulation to the contrary is null and void." 28

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Other Matters

Private respondent in his memorandum also contends that (1) petitioner is not the real party in interest
and (2) the petition should be dismissed for "raising/stating facts not so found by the Court of Appeals."
These deserve scant consideration. Petitioner was impleaded as party defendant in the ejectment suit by
private respondent itself. Thus, private respondent cannot question his standing as a party. As such party,
petitioner should be allowed to raise defenses which negate private respondent's right to the property in
question. The second point is really academic. This ponencia relies on the factual narration of the Court
of Appeals and not on the "facts" supplied by petitioner.

WHEREFORE, the petition is hereby GRANTED. The challenged Decision of the Court of Appeals is
REVERSED and SET ASIDE. The decision of the Regional Trial Court of Quezon City ordering the dismissal
of the complaint for ejectment is REINSTATED and AFFIRMED. No pronouncement as to costs.

SO ORDERED.

G.R. No. L-22331 June 6, 1967

IN RE: PETITION FOR CONSOLIDATION OF TITLE IN THE VENDEES OF A HOUSE AND THE RIGHTS TO A
LOT.
MARIA BAUTISTA VDA. DE REYES, ET AL., vendees-petitioners-appellees.
RODOLFO LANUZA, vendor,
vs.
MARTIN DE LEON, intervenor-appellant.

REGALA, J.:

Rodolfo Lanuza and his wife Belen were the owners of a two-story house built on a lot of the Maria
Guizon Subdivision in Tondo, Manila, which the spouses leased from the Consolidated Asiatic Co. On
January 12, 1961, Lanuza executed a document entitled "Deed of Sale with Right to Repurchase"
whereby he conveyed to Maria Bautista Vda. de Reyes and Aurelia R. Navarro the house, together with
the leasehold rights to the lot, a television set and a refrigerator in consideration of the sum of P3,000 .
The deed reads:

DEED OF SALE WITH RIGHT TO REPURCHASE KNOW ALL MEN BY THESE PRESENTS:

That I, RODOLFO LANUZA, Filipino, of legal age, married to Belen Geronimo, and residing at 783-D
Interior 14 Maria Guizon, Gagalangin, Tondo, Manila, hereby declare that I am the true and absolute
owner of a new two storey house of strong materials, constructed on a rented lot Lot No. 12 of the
Maria Guizon Subdivision, owned by the Consolidated Asiatic Co. as evidenced by the attached
Receipt No. 292, and the plan of the subdivision, owned by said company.

That for and in consideration of the sum of THREE THOUSAND PESOS (P3,000.00) which I have received
this day from Mrs. Maria Bautista Vda. de Reyes, Filipino, of legal age, widow; and Aurelia Reyes, married
to Jose S. Navarro, Filipinos, of legal ages, and residing at 1112 Antipolo St., Tondo, Manila, I hereby SELL,

126
CEDE, TRANSFER, AND CONVEY unto said Maria Bautista Vda. de Reyes, her heirs, succesors,
administrators and assigns said house, including my right to the lot on which it was constructed, and also
my television, and frigidaire "Kelvinator" of nine cubic feet in size, under the following conditions:

I hereby reserve for myself, my heirs, successors, administrators, and assigns the right to repurchase the
above mentioned properties for the same amount of P3,000.00, without interest, within the stipulated
period of three (3) months from the date hereof. If I fail to pay said amount of P3,000.00, within the
stipulated period of three months, my right to repurchase the said properties shall be forfeited and the
ownership thereto shall automatically pass to Mrs. Maria Bautista Vda. de Reyes, her heirs, successors,
administrators, and assigns, without any Court intervention, and they can take possession of the
same.1wph1.t

IN WITNESS WHEREOF, we have signed this contract in the City of Manila, this 12th day of January, 1961.

s/t RODOLFO LANUZA

Vendor s/t MARIA BAUTISTA VDA. DE REYES
Vendee
s/t AURELIA REYES
Vendee WITH MY MARITAL CONSENT:
s/t JOSE S. NAVARRO
When the original period of redemption expired, the parties extended it to July 12, 1961 by an
annotation to this effect on the left margin of the instrument. Lanuza's wife, who did not sign the deed,
this time signed her name below the annotation.

It appears that after the execution of this instrument, Lanuza and his wife mortgaged the same house in
favor of Martin de Leon to secure the payment of P2,720 within one year. This mortgage was executed
on October 4, 1961 and recorded in the Office of the Register of Deeds of Manila on November 8, 1961
under the provisions of Act No. 3344.

As the Lanuzas failed to pay their obligation, De Leon filed in the sheriff's office on October 5, 1962 a
petition for the extra-judicial foreclosure of the mortgage. On the other hand, Reyes and Navarro
followed suit by filing in the Court of First Instance of Manila a petition for the consolidation of
ownership of the house on the ground that the period of redemption expired on July 12, 1961 without
the vendees exercising their right of repurchase. The petition for consolidation of ownership was filed on
October 19. On October 23, the house was sold to De Leon as the only bidder at the sheriffs sale. De
Leon immediately took possession of the house, secured a discharge of the mortgage on the house in
favor of a rural bank by paying P2,000 and, on October 29, intervened in court and asked for the
dismissal of the petition filed by Reyes and Navarro on the ground that the unrecorded pacto de retro
sale could not affect his rights as a third party.

The parties1 thereafter entered into a stipulation of facts on which this opinion is mainly based and
submitted the case for decision. In confirming the ownership of Reyes and Navarro in the house and the
leasehold right to the lot, the court said:

It is true that the original deed of sale with pacto de retro, dated January 12, 1961, was not signed by
Belen Geronimo-Lanuza, wife of the vendor a retro, Rodolfo Lanuza, at the time of its execution. It
appears, however, that on the occasion of the extension of the period for repurchase to July 12, 1961,

127
Belen Geronimo-Lanuza signed giving her approval and conformity. This act, in effect, constitutes
ratification or confirmation of the contract (Annex "A" Stipulation) by Belen Geronimo-Lanuza, which
ratification validated the act of Rodolfo Lanuza from the moment of the execution of the said contract. In
short, such ratification had the effect of purging the contract (Annex "A" Stipulation) of any defect which
it might have had from the moment of its execution. (Article 1396, New Civil Code of the Philippines;
Tang Ah Chan and Kwong Koon vs. Gonzales, 52 Phil. 180)

Again, it is to be noted that while it is true that the original contract of sale with right to repurchase in
favor of the petitioners (Annex "A" Stipulation) was not signed by Belen Geronimo-Lanuza, such failure
to sign, to the mind of the Court, made the contract merely voidable, if at all, and, therefore, susceptible
of ratification. Hence, the subsequent ratification of the said contract by Belen Geronimo-Lanuza
validated the said contract even before the property in question was mortgaged in favor of the
intervenor.

It is also contended by the intervenor that the contract of sale with right to repurchase should be
interpreted as a mere equitable mortgage. Consequently, it is argued that the same cannot form the
basis for a judicial petition for consolidation of title over the property in litigation. This argument is based
on the fact that the vendors a retro continued in possession of the property after the execution of the
deed of sale with pacto de retro. The mere fact, however, that the vendors a retro continued in the
possession of the property in question cannot justify an outright declaration that the sale should be
construed as an equitable mortgage and not a sale with right to repurchase. The terms of the deed of
sale with right to repurchase (Annex "A" Stipulation) relied upon by the petitioners must be considered
as merely an equitable mortgage for the reason that after the expiration of the period of repurchase of
three months from January 12, 1961.

Article 1602 of the New Civil Code provides:

"ART. 1602. The contract shall be presumed to be in equitable mortgage, in any of the following cases;

xxx xxx xxx

"(3) When upon or after the expiration of the right to repurchase another instrument extending the
period of redemption or granting a new period is executed.

xxx xxx xxx

In the present case, it appears, however, that no other instrument was executed between the parties
extending the period of redemption. What was done was simply to annotate on the deed of sale with
right to repurchase (Annex "A" Stipulation) that "the period to repurchase, extended as requested until
July 12, 1961." Needless to say, the purchasers a retro, in the exercise of their freedom to make
contracts, have the power to extend the period of repurchase. Such extension is valid and effective as it
is not contrary to any provision of law. (Umale vs. Fernandez, 28 Phil. 89, 93)

The deed of sale with right to repurchase (Annex "A" Stipulation) is embodied in a public document.
Consequently, the same is sufficient for the purpose of transferring the rights of the vendors a retro over
the property in question in favor of the petitioners. It is to be noted that the deed of sale with right to
repurchase (Annex "A" Stipulation) was executed on January 12, 1961, which was very much ahead in

128
point of time to the execution of the real estate mortgage on October 4, 1961, in favor of intervenor
(Annex "B" Stipulation). It is obvious, therefore, that when the mortgagors, Rodolfo Lanuza and Belen
Geronimo Lanuza, executed the real estate mortgage in favor of the intervenor, they were no longer the
absolute owners of the property since the same had already been sold a retro to the petitioners. The
spouses Lanuza, therefore, could no longer constitute a valid mortgage over the property inasmuch as
they did not have any free disposition of the property mortgaged. (Article 2085, New Civil Code.) For a
valid mortgage to exist, ownership of the property mortgaged is an essential requisite. A mortgage
executed by one who is not the owner of the property mortgaged is without legal existence and the
registration cannot validate. (Philippine National Bank vs. Rocha, 55 Phil. 497).

The intervenor invokes the provisions of article 1544 of the New Civil Code for the reason that while the
real estate mortgage in his favor (Annex "B" Stipulation) has been registered with the Register of Deeds
of Manila under the provisions of Act No. 3344 on November 3, 1961, the deed of sale with right to
repurchase (Annex "A" Stipulation) however, has not been duly registered. Article 1544 of the New Civil
Code, however, refers to the sale of the same property to two or more vendees. This provision of law,
therefore, is not applicable to the present case which does not involve sale of the same property to two
or more vendees. Furthermore, the mere registration of the property mortgaged in favor of the
intervenor under Act No. 3344 does not prejudice the interests of the petitioners who have a better right
over the property in question under the old principle of first in time, better in right. (Gallardo vs.
Gallardo, C.B., 46 O.G. 5568)

De Leon appealed directly to this Court, contending (1) that the sale in question is not only voidable but
void ab initio for having been made by Lanuza without the consent of his wife; (2) that the pacto de retro
sale is in reality an equitable mortgage and therefore can not be the basis of a petition for consolidation
of ownership; and (3) that at any rate the sale, being unrecorded, cannot affect third parties.

We are in accord with the trial court's ruling that a conveyance of real property of the conjugal
partnership made by the husband without the consent of his wife is merely voidable. This is clear from
article 173 of the Civil Code which gives the wife ten years within which to bring an action for
annulment. As such it can be ratified as Lanuza's wife in effect did in this case when she gave her
conformity to the extension of the period of redemption by signing the annotation on the margin of the
deed. We may add that actions for the annulment of voidable contracts can be brought only by those
who are bound under it, either principally or subsidiarily (art. 1397), so that if there was anyone who
could have questioned the sale on this ground it was Lanuza's wife alone.

We also agree with the lower court that between an unrecorded sale of a prior date and a recorded
mortgage of a later date the former is preferred to the latter for the reason that if the original owner had
parted with his ownership of the thing sold then he no longer had the ownership and free disposal of
that thing so as to be able to mortgage it again. Registration of the mortgage under Act No. 3344 would,
in such case, be of no moment since it is understood to be without prejudice to the better right of third
parties.2 Nor would it avail the mortgagee any to assert that he is in actual possession of the property
for the execution of the conveyance in a public instrument earlier was equivalent to the delivery of the
thing sold to the vendee.3

But there is one aspect of this case which leads us to a different conclusion. It is a point which neither
the parties nor the trial court appear to have sufficiently considered. We refer to the nature of the so-
called "Deed of Sale with Right to Repurchase" and the claim that it is in reality an equitable mortgage.

129
While De Leon raised the question below and again in this Court in his second assignment of error, he
has not demonstrated his point; neither has he pursued the logical implication of his argument beyond
stating that a petition for consolidation of ownership is an inappropriate remedy to enforce a mortgage.

De Leon based his claim that the pacto de retro sale is actually an equitable mortgage on the fact that,
first, the supposed vendors (the Lanuzas) remained in possession of the thing sold and, second, when
the three-month period of redemption expired the parties extended it. These are circumstances which
indeed indicate an equitable mortgage.4 But their relevance emerges only when they are seen in the
perspective of other circumstances which indubitably show that what was intended was a mortgage and
not a sale.These circumstances are:

1. The gross inadequacy of the price. In the discussion in the briefs of the parties as well as in the
decision of the trial court, the fact has not been mentioned that for the price of P3,000, the supposed
vendors "sold" not only their house, which they described as new and as being made of strong materials
and which alone had an assessed value of P4,000, but also their leasehold right television set and
refrigerator, "Kelvinator of nine cubic feet in size." indeed, the petition for consolidation of ownership is
limited to the house and the leasehold right, while the stipulation of facts of the parties merely referred
to the object of the sale as "the property in question." The failure to highlight this point, that is, the gross
inadequacy of the price paid, accounts for the error in determining the true agreement of the parties to
the deed.

2. The non-transmission of ownership to the vendees. The Lanuzas, the supposed vendors did not really
transfer their ownership of the properties in question to Reyes and Navarro. What was agreed was that
ownership of the things supposedly sold would vest in the vendees only if the vendors failed to pay
P3,000. In fact the emphasis is on the vendors payment of the amount rather than on the redemption of
the things supposedly sold. Thus, the deed recites that

If I (Lanuza) fail to pay said amount of P3,000.00 within the stipulated period of three months, my right
to repurchase the said properties shall be forfeited and the ownership thereto automatically pass to Mrs.
Maria Bautista Vda. de Reyes . . . without any Court intervention and they can take possession of the
same.

This stipulation is contrary to the nature of a true pacto de retro sale under which a vendee acquires
ownership of the thing sold immediately upon execution of the sale, subject only to the vendor's right of
redemption.5 Indeed, what the parties established by this stipulation is an odious pactum commissorium
which enables the mortgages to acquire ownership of the mortgaged properties without need of
foreclosure proceedings. Needless to say, such a stipulation is a nullity, being contrary to the provisions
of article 2088 of the Civil Code.6 Its insertion in the contract of the parties is an avowal of an intention
to mortgage rather than to sell.7

3. The delay in the filing of the petition for consolidation. Still another point obviously overlooked in the
consideration of this case is the fact that the period of redemption expired on July 12, 1961 and yet this
action was not brought until October 19, 1962 and only after De Leon had asked on October 5, 1962 for
the extra-judicial for closure of his mortgage. All the while, the Lanuzas remained in possession of the
properties they were supposed to have sold and they remained in possession even long after they had
lost their right of redemption.

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Under these circumstances we cannot but conclude that the deed in question is in reality a mortgage.
This conclusion is of far-reaching consequence because it means not only that this action for
consolidation of ownership is improper, as De Leon claims, but, what is more that between the
unrecorded deed of Reyes and Navarro which we hold to be an equitable mortgage, and the registered
mortgage of De Leon, the latter must be preferred. Preference of mortgage credits is determined by the
priority of registration of the mortgages,8 following the maxim "Prior tempore potior jure" (He who is
first in time is preferred in right.)9 Under article 2125 of the Civil Code, the equitable mortgage, while
valid between Reyes and Navarro, on the one hand, and the Lanuzas, on the other, as the immediate
parties thereto, cannot prevail over the registered mortgage of De Leon.

Wherefore, the decision appealed from is reversed, hence, the petition for consolidation is dismissed.
Costs against Reyes and Navarro.

Capulong v CA
GUTIERREZ, JR., J.:p

This is a petition for review of the decision of the respondent Court of Appeals, now Intermediate
Appellate Court, affirming a judgment of the Court of First Instance of Bulacan dismissing the complaint
for annulment of usurious contracts, declaration of the deed of sale as equitable mortgage,
reconveyance, and damages filed by Jovita Ponce Vda. de Capulong and ordering her to pay respondents
the sum of P2,000.00 as attomey's fees and to pay the costs of the suit.

The background facts which led to the filing of this petition are summarized by the respondent Court of
Appeals as follows:

Between November 19, 1964 and May 28, 1965, plaintiff-appellant Jovita Ponce Vda. de Capulong
obtained a series of loans in varied amounts from defendant-appellee Dr. Delfin Tolentino (Exhibits A to
J) the aggregate of which amounted to P16,250.00 (Exh. J) The loans were secured by a continuing
mortgage on plaintiff's 950.3 square meter titled property in barrio Concepcion, municipality of Baliuag,
Bulacan province.

Capulong failed to liquidate the mortgage upon maturity. Dr. Tolentino accepted her proposal to sell to
him the mortgaged property. On February 18, 1967, the notarial document of absolute sale (Exh. K) now
assailed as an equitable mortgage, was executed by Capulong whereby title to the property in question
was transferred to Dr. Tolentino for P21,300.00, which amount was P1,000.00 more than Capulong's
mortgage indebtedness. In another document (Exh. L) Capulong was given an option to purchase the
property on or before November 20, 1967, for the same price of P21,300.00, Capulong failed to exercise
the option in due time. Her efforts to secure an extension of time proved futile. On January 28, 1968, Dr.
Tolentino sold (Exh. O) the land in question to defendants spouses Ricardo G. Tolentino and Pilar de Joya
in whose names it is now titled (Exh. 14).

On February 1, 1968, Jovita Ponce Vda. de Capulong, predecessor-in-interest of the petitioners, filed the
complaint for annulment of usurious contracts, declaration of the deed of sale as an equitable mortgage,
reconveyance, and damages with the Court of First Instance of Bulacan against respondent Delfin G.
Tolentino. The case was docketed as Civil Case No. 3617-M.

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On February 6, 1968, Mrs. Capulong filed an amended complaint alleging inter alia that the subject
property was sold by Delfin Tolentino to the spouses Ricardo G. Tolentino and Pilar de Joya under a
fictitious deed of sale. She also impleaded said spouses as additional defendants.

On September 9, 1968, the private respondents filed their answer alleging inter alia that the transactions
adverted to are not usurious and that the deed of absolute sale between them and Jovita Capulong is a
true and valid sale representing the real intention of the parties.

On March 20, 1975, the trial court dismissed the complaint on the ground that Jovita Capulong was not
able to present concrete evidence to prove her claim of usury and that the testimonies of the defendant
Delfin Tolentino and his witness Fermin Samson were more credible and weighty than those of the
plaintiff and her witness. The dispositive portion of the decision reads:

WHEREFORE, premises considered, the complaint is hereby dismissed for total lack of merit, and the
plaintiff is hereby ordered to pay the defendant the sum of P2,000.00 by way of attorney's fees, and to
pay the cost of this suit.

Jovita Ponce Vda. de Capulong appealed to the then Court of Appeals. On May 9, 1978 while the appeal
was pending, the appellant died, and on motion of her counsel, she was properly substituted by her
children and heirs, the petitioners herein.

On January 27, 1981, the respondent court affirmed in toto the decision of the trial court.

On March 10, 1981, the petitioners filed a motion for reconsideration of said decision but this was
denied in a resolution dated July 16, 1982.

For the grant of this petition, petitioners assign the following errors:

A. THE FORMULA USED BY THE COURT OF APPEALS IN COMPUTING THE 25% INTEREST ON THE
PRINCIPAL OF THE VARIOUS LOANS IN QUESTION IS NOT SUPPORTED BY THE EVIDENCE NOR ADMITTED
BY THE PARTIES.

B. IN GIVING WEIGHT TO THE FINDING OF THE TRIAL COURT ON THE CREDIBILITY OF THE WITNESSES
FOR PRIVATE RESPONDENTS, THE COURT OF APPEALS MISAPPLIED THE RULE ON THE WEIGHT AND
SUFFICIENCY OF EVIDENCE.

C. IN CONCLUDING THAT THE 'OPTION TO REPURCHASE IN THIS CASE IS NOT A SOUND BASIS TO FIND
THE DEED OF SALE IN QUESTION AS AN EQUITABLE MORTGAGE THE COURT OF APPEALS ERRONEOUSLY
APPLIED THE RULING IN THE CASE OF VILLARICA V. COURT OF APPEALS.

The main point for consideration in this petition is whether or not the "Pagbibilihang Tuluyan Ng
Bakuran" should be treated as an equitable mortgage and not the absolute sale it purports to be.

Petitioners submit that the questioned deed of sale is not what it appears to be but that it is an
equitable mortgage because the facts and evidence show it was merely resorted to by the parties in
circumvention of the usury law. Private respondents on the other hand allege that Exhibits 11 and 12 do

132
not embody a sale with repurchase agreement, or "sale con pacto de retro." They state that Exhibit 11 is
a deed of absolute sale while Exhibit 12, in essence, simply grants the appellant an "option to buy."

We find the stand of the private respondents to be without merit, and accordingly reverse the decision
elevated to us for review. Articles 1602 and 1604 of the Civil Code state:

ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following
cases:

(1) Wen the price of a sale with right to repurchase is unusually inadequate;

(2) When the vender remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the
period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the performance of any other obligation

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or
otherwise shall be considered as interest which shall be subject to the usury laws. (Emphasis supplied)

xxx xxx xxx

ART. 1604. The provisions of article 1602 shall also apply to a contract purporting to be an absolute sale.

Where any of the above circumstances defined in Article 1602 is present, a contract of sale with right to
repurchase is presumed to be an equitable mortgage. As stated by the Code Commission which drafted
the new Civil Code, in practically all of the so-called contracts of sale with right of repurchase, the real
intention of the parties is that the pretended purchase price is money loaned and in order to secure the
payment of the loan, a contract purporting to be a sale with pacto de retro is drawn up. (Report of the
Code Commission, p. 63)

The respondent court allowed itself to be misled by our ruling in Villarica v. Court of Appeals, (26 SCRA
189), that:

The right of repurchase is not a right granted the vendor by the vendee in a subsequent instrument, but
is a right reserved by the vendor in the same instrument of sale as one of the stipulations of the
contract. Once the instrument of absolute sale is executed, the vendor can no longer reserve the right to
repurchase, and any right thereafter granted the vendor by the vendee in a separate instrument cannot
be a right of repurchase but some other right like the option to buy in the instant case. ...

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In Villarica, the deed of absolute sale was executed on May 19, 1951. The consideration was P35,000.00.
It was registered on May 25, 1951. On that same day, May 25, 1951, the vendees therein executed
another public instrument where they granted the vendors an option to buy the same property within a
period of one year for the price of P37,750.00. The ruling was based on a particular set of facts.

There is one important factor that differentiates the Villarica case from the instant petition. The
document granting the vendors therein an option to buy back the property was executed six (6) days
after the execution of the deed of sale whereas in the instant case the option to buy was embodied in a
document executed at the same time that the questioned deed of sale was executed. The option to buy
in the Villarica case was interpreted to be only an afterthought. On the other hand, the intent of the
parties to circumvent the provision discouraging pacto de retro is very apparent in the instant case. The
two contracts, the deed of sale and the document embodying the option to repurchase were prepared,
signed, and notarized on the same day. The respondent court should have seen through a transparent
effort to make it appear that the two transactions were not intimately related but distinct and separate
as in the Villarica case. This should have put the court on guard considering the other circumstances of
the case from which no other conclusion could be derived except that the deed of absolute sale and the
document giving the right to repurchase were, in fact, only one transaction of sale pacto de retro which
must be construed as an equitable mortgage. Another factor which the respondent court failed to note is
the sale of the property to the vendee a retro's brother, thus interposing a supposed innocent third party
between the parties to the contract. This second sale was squarely raised in the amended complaint. The
records show that this sale and the issuance of a new Transfer Certificate of Title on the same date as the
sale cannot be deemed to be bona fide.

Looking into the reason for the inclusion of Article 1602 in the New Civil Code, this Court held in Santos
v. Duata (14 SCRA 1041) that:

Article 1602 is a new provision in the Civil Code designed primarily to curtail the evils brought about by
contracts of sale with right of repurchase, such as the circumvention of the usury law and pactum
commission it particularly envisions contracts of sale with right to repurchase where the real intention of
the parties is that the pretended purchase price is money loaned, and in order to secure the payment of
the loan a contract purporting to be a sale with pacto de retro is drawn up. (See report of the Code
Commission, pp. 61-63.)

The records show that over a six-month period, the mother of the petitioners borrowed money on no
less than ten separate occasions from Delfin G. Tolentino. The evidence presented by Mrs. Jovita Ponce
Vda. de Capulong alleges that when her total borrowing. 9 of P13,000.00 were added to what she claims
were usurious interests amounting to P3,250.00, the kited total of P16,250.00 was made to appear at
the P21,300.00 purchase price for the lot when actually no money outside of the ten earlier loan
transactions was exchanged between the parties.

The added fact that Jovita Capulong remained in actual physical possession of the land and enjoyed the
fruits thereof confirms the real intention of the parties to secure the payment of the loans with the land
as security. The records show that the private respondents waited for the period of redemption to expire
before taking possession of the land. Had the petitioners' mother really executed an absolute sale in
favor of respondent Delfin Tolentino, the land which is the object of the transaction should have been
delivered to Tolentino and he would have assumed immediate possession after the execution of the
questioned deed of sale.

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The deed of sale taken together with the companion "right to redeem" contract is only an equitable
mortgage. Therefore, private respondent Delfin G. Tolentino could not validly sell the land to his brother
Ricardo Tolentino and the latter's wife, Pilar de Joya.

Apart from failing to appreciate the fact that the vendee a retro used two separate documents of sale
and option to repurchase to formalize what was basically only one transaction of sale pacto de retro,
thus simulating a Villarica v. Court of Appeals situation, the respondent court also relied too much on the
trial court's failure to find usurious transactions.

The petitioners' mother summarized the loan transactions as follows:

According to Mrs. Capulong, she actually borrowed only P13,000.00 but the contracts evidencing the
transaction make the total appear as P16,250.00. When the last contract, the one now sought to be set
aside, was executed, the loans and interests were allegedly made to appear as a P21,300.00 purchase
price, including a P1,000.00 amount given to her on February 18, 1967, when actually no additional
money was given when the deed of sale was granted.

The respondent court sustained the trial court's conclusions and reasoned out:

There is no merit in this appeal. Appellant's theory, that the purchase of her land in the amount of
P21,300.00 is the sum total of her principal loan allegedly amounting to only P13,000.00 and the
usurious interest thereon at 25% per annum, minus the sum of Pl,500.00 which she paid to Dr. Tolentino
on November 20, 1965, in concept of interest Vide p. 10, appellant's brief), does not find support from a
mathematical computation based on said theory. Thus from November 20, 1964 until February 18, 1967,
when the controverted sale was consummated, a period of 2 years and 3 months, the interest due on
P13,000.00 amounted to P7,412.49. This added to the principal of P13,000.00 would give a result of
P20,412.49. The balance after deducting therefrom the sum of P1,500.00 would be P8,912.49 only, or
P2,387.51 less the sum of P21,300.00.

The petitioners now allege that the Court of Appeals adopted a computation formula in consonance with
the respondents' theory which is not supported by the evidence in the records but which is only a
theory. The petitioners offer their own theory, thus:

Upon the other hand, in adopting the formula now being questioned, the respondent Court of Appeals
disregarded a basic rule followed in the computation of interest charges. It also disregarded what
petitioners offered was a formula of computation used by the parties in accounting for the consideration
of the sale of P21,300.00. In the formula adopted by the respondent Court, the 12% per annum was
computed on the principal loan on a straight basis without taking into account the fact that the said
amount of loan was obtained on different dates.

Anent petitioners' suggested formula which was disregarded by respondent Court of Appeals, the same
consisted in the following: The actual loan received by Jovita Ponce Vda. de Capulong from Delfin
Tolentino of P13,000.00 would command an interest of P6,500.00 computed at the rate of 25% per
annum for 2 years disregarding the 3 months from November 20, 1965 to February 18, 1967. The loan of
P16,250.00 which is the total of the face value of the various loan contracts would command an interest
of P3,250.00 computed at the stipulated rate of 12% per Annum for 2 years and 3 months. The said

135
amounts of interest totalling P9,750.00 added to the actual amount of loan received of P13,000.00 less
the payment of P1,500.00 on November 20, 1965 in the concept of interest, yields a total of P21,250.00
or P50.00 less than the consideration of P21,300.00 stated in the deed of absolute sale. The result using
this formula compared to that in the formula adopted by respondent Court of Appeals suggests that it
was error to have disregarded this formula in favor of the other.

Actually, the determination of whether or not there were usurious transactions in this case depends on
whom to believe the borrowers or the lenders? We see no need to disturb the trial court's findings on
the credibility of the witnesses. Even if no usury was involved, and this is by no means certain or
established to our satisfaction, there is enough evidence in the records to prove that a contract of loan
with mortgage was made to appear in paper as an absolute sale with a companion option to buy.

WHEREFORE, the judgment of the respondent court is hereby REVERSED and SET ASIDE. The deed of
sale executed by Jovita Ponce de Capulong in favor of Dr. Delfin G. Tolentino is declared as an equitable
mortgage. The petitioners are ordered to pay their mortgage indebtedness in the amount of P21,300.00
to the private respondents with legal rate of interest from the time of the expiration of the redemption
period on November 20, 1967 until it is fully paid. The deed of sale executed by Delfin Tolentino in favor
of Ricardo Tolentino and Pilar de Joya, being null and void, is also CANCELLED.

SO ORDERED.

[G.R. No. 117501. July 8, 1997]

SOLID HOMES, INC., petitioner, vs. HON. COURT OF APPEALS, STATE FINANCING CENTER, INC., and
REGISTER OF DEEDS FOR RIZAL, respondents.

DECISION

PANGANIBAN, J.:

Is the failure to annotate the vendor a retros right of repurchase in the certificates of title of the real
estate properties subject of dacion en pago conclusive evidence of the vendee a retros malice and bad
faith, entitling the former to damages? In a sale with pacto de retro, is the repurchase price limited by
Article 1616 of the Civil Code?

These are the basic questions raised in this petition for review on certiorari under Rule 45 of the Rules of
Court assailing the Court of Appeals[1] Decision[2] promulgated on April 25, 1994 and Resolution[3] of
September 26, 1994 in CA-G.R. CV No. 39154, affirming the decision[4] of the Regional Trial Court of
Pasig, Branch 157 in Civil Case No. 51214. The said RTC decision sustained the validity of the subject
dacion en pago agreement and declared the same as a true sale with right of repurchase.

The Facts

The facts of the case as narrated by the trial court and reproduced in the assailed Decision of the Court
of Appeals are undisputed by the parties. These are the relevant portions:

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It appears that on June 4, 1979, Solid Homes executed in favor of State Financing (Center, Inc.) a Real
Estate Mortgage (Exhibit 3) on its properties embraced in Transfer Certificate of Title No. 9633 (Exhibit 9)
and Transfer Certificate of Title No. (492194) -11938 (Exhibit 8) of the Registry of Deeds in Pasig, Metro
Manila, in order to secure the payment of a loan of P10,000,000.00 which the former obtained from the
latter. A year after, Solid Homes applied for and was granted an additional loan of P1,511,270.03 by State
Financing, and to secure its payment, Solid Homes executed the Amendment to Real Estate Mortgage
dated June 4, 1980 (Exhibit 4) whereby the credits secured by the first mortgage on the abovementioned
properties were increased from P10,000,000.00 to P11,511,270.03. Sometime thereafter, Solid Homes
obtained additional credits and financing facilities from State Financing in the sum of P1,499,811,97, and
to secure its payment, Solid Homes executed in favor of State Financing the Amendment to Real Estate
Mortgage dated March 5, 1982 (Exhibit 5) whereby the mortgage executed on its properties on June 4,
1979 was again amended so that the loans or credits secured thereby were further increased from
P11,511,270.03 to P13,011,082.00.

When the loan obligations abovementioned became due and payable, State Financing made repeated
demands upon Solid Homes for the payment thereof, but the latter failed to do so. So, on December 16,
1982, State Financing filed a petition for extrajudicial foreclosure of the mortgages abovementioned with
the Provincial Sheriff of Rizal, who, in pursuance of the petition, issued a Notice of Sheriffs Sale dated
February 4, 1983 (Exhibit 6), whereby the mortgaged properties of Solid Homes and the improvements
existing thereon, including the V.V. Soliven Towers II Building, were set for public auction sale on March
7, 1983 in order to satisfy the full amount of Solid Homes mortgage indebtedness, the interest thereon,
and the fees and expenses incidental to the foreclosure proceedings.

Before the scheduled public auction sale x x x, the mortgagor Solid Homes made representations and
induced State Financing to forego with the foreclosure of the real estate mortgages referred to above. By
reason thereof, State Financing agreed to suspend the foreclosure of the mortgaged properties, subject
to the terms and conditions they agreed upon, and in pursuance of their said agreement, they executed
a document entitled MEMORANDUM OF AGREEMENT/DACION EN PAGO (Memorandum) dated
February 28, 1983 (Exhibits C and 7) x x x. Among the terms and conditions that said parties agreed upon
were x x x:

1. (Solid Homes) acknowledges that it has an outstanding obligation due and payable to (State Financing)
and binds and obligates to pay (State Financing) the totality of its outstanding obligation in the amount
of P14,225,178.40, within one hundred eighty (180) days from date of signing of this instrument.
However, it is understood and agreed that the principal obligation of P14,225,178.40 shall earn interest
at the rate of 14% per annum and penalty of 16% per annum counted from March 01, 1983 until fully
paid.

2. The parties agree that should (Solid Homes) be able to pay (State Financing) an amount equivalent to
sixty per centum (60%) of the principal obligation, or the amount of P8,535,107.04, within the first one
hundred eighty (180) days, (State Financing) shall allow the remaining obligation of (Solid Homes) to be
restructured at a rate of interest to be mutually agreed between the parties.

3. It is hereby understood and agreed that in the event (Solid Homes) fails to comply with the provisions
of the preceding paragraphs, within the said period of one hundred eighty (180) days, this document
shall automatically operate to be an instrument of dacion en pago without the need of executing any
document to such an effect and (Solid Homes) hereby obligates and binds itself to transfer, convey and

137
assign to (State Financing), by way of dacion en pago, its heirs, successors and assigns, and (State
Financing) does hereby accept the conveyance and transfer of the above-described real properties,
including all the improvements thereon, free from all liens and encumbrances, in full payment of the
outstanding indebtedness of (Solid Homes) to (State Financing) x x x.

xxxxxxxxx

6. (State Financing) hereby grants (Solid Homes) the right to repurchase the aforesaid real properties,
including the condominium units and other improvements thereon, within ten (10) months counted
from and after the one hundred eighty (180) days from date of signing hereof at an agreed price of
P14,225,178.40, or as reduced pursuant to par. 5 (d), plus all cost of money equivalent to 30% per
annum, registration fees, real estate and documentary stamp taxes and other incidental expenses
incurred by (State Financing) in the transfer and registration of its ownership via dacion en pago x x x.

xxx xxx xxx

Subsequently, Solid Homes failed to pay State Financing an amount equivalent to 60% (or P8,535,107.04)
of the principal obligation of P14,225,178.40 within 180 days from the signing of the (Memorandum) on
February 28, 1983, as provided under paragraph 2 of the said document. Hence, and in pursuance of
paragraph 3 thereof which provided that this document shall automatically operate to be an instrument
of dacion en pago without the need of executing any document to such an effect x x x(,) State Financing
registered the said (Memorandum) with the Register of Deeds in Pasig, Metro Manila on September 15,
1983. Consequently, the said Register of Deeds cancelled TCT No. 9633 and TCT No. (492194) 11938 in
the name of Solid Homes which were the subject matter of the (Memorandum) abovementioned, and in
lieu thereof, the said office issued Transfer Certificate of Title No. 40533 (Exhibits J and 11) and Transfer
Certificate of Title No. 40534 (Exhibits K and 12) in the name of State Financing. x x x

In a letter dated October 11, 1983 (Exhibit 16), State Financing informed Solid Homes of the transfer in
its name of the titles to all the properties subject matter of the (Memorandum) and demanded among
other things, that Solid Homes turn over to State Financing the possession of the V.V. Soliven Towers II
Building erected on two of the said properties. Solid Homes replied with a letter dated October 14, 1983,
(Exhibit 20) asking for a period of ten (10) days within which to categorize its position on the matter; and
in a subsequent letter dated October 24, 1983, Solid Homes made known to State Financing its position
that the (Memorandum) is null and void because the essence thereof is that State Financing, as
mortgagee creditor, would be able to appropriate unto itself the properties mortgaged by Solid Homes
which is in contravention of Article 2088 of the Civil Code. State Financing then sent to Solid Homes
another letter dated November 3, 1983 (Exhibit 17), whereby it pointed out that Art. 2088 of the Civil
Code is not applicable to the (Memorandum) they have executed, and also reiterated its previous
demand that Solid Homes turn over to it the possession of the V.V. Soliven Towers II Building within five
(5) days, but Solid Homes did not comply with the said demand.

x x x and within that period of repurchase, Solid Homes wrote to State Financing a letter dated April 30,
1984 containing its proposal for repayment schemes under terms and conditions indicated therein for
the repurchase of the properties referred to. In reply to said letter, State Financing sent a letter dated
May 17, 1984 (Exhibit 18) advising Solid Homes that State Financings management was not amenable to
its proposal, and that by way of granting it some concessions, said management made a counter-
proposal requiring Solid Homes to make an initial payment of P10 million until 22 May 1984 and the

138
balance payable within the remaining period to repurchase the properties as provided for under the
(Memorandum) x x x. Thereafter, a number of conferences were held among the corporate officers of
both companies wherein they discussed the payment arrangement of Solid Homes outstanding
obligation, x x x. In a letter dated June 7, 1984 (Exhibit 19), State Financing reiterated the counter-
proposal in its previous letter dated May 17, 1984 to Solid Homes as a way of making good its account,
and at the same time reminded Solid Homes that it has until 27 June 1984 to exercise its right to
repurchase the properties pursuant to the terms and conditions of the (Memorandum), otherwise, it will
have to vacate and turn over the possession of said properties to State Financing. In return, Solid Homes
sent to State Financing a letter dated June 18, 1984 (Exhibits N and 22) containing a copy of the written
offer made by C.L. Alma Jose & Sons, Inc. (Exhibits M and 22-A) to avail of Solid Homes right to
repurchase the V.V. Soliven Towers II pursuant to the terms of the Dacion En Pago. The letter also
contained a request that the repurchase period under said Dacion En Pago which will expire on June 27,
1984 be extended by sixty (60) days to enable Solid Homes to comply with the conditions in the offer of
Alma Jose & Sons, Inc. referred to, and thereafter, to avail of the one year period to pay the balance
based on the verbal commitment of State Financings President. x x x

However, on June 26, 1984, a day before the expiry date of its right to repurchase the properties
involved in the (Memorandum) on June 27, 1984, Solid Homes filed the present action against
defendants State Financing and the Register of Deeds for Metro Manila District II (Pasig), seeking the
annulment of said (Memorandum) and the consequent reinstatement of the mortgages over the same
properties; x x x[5]

As earlier stated, the trial court held that the Memorandum of Agreement/Dacion En Pago executed by
the parties was valid and binding, and that the registration of said instrument in the Register of Deeds
was in accordance with law and the agreement of the parties. It disposed of the case thus:

WHEREFORE, this Court hereby renders judgment, as follows:

1. Declaring that the Memorandum of Agreement/Dacion En Pago entered into by and between plaintiff
Solid Homes and defendant State Financing on February 28, 1983 is a valid and binding document which
does not violate the prohibition against pactum commisorium under Art. 2088 of the Civil Code;

2. Declaring that the said Memorandum of Agreement/Dacion En Pago is a true sale with right of
repurchase, and not an equitable mortgage;

3. Declaring that the registration of the said Memorandum of Agreement/Dacion En Pago with the
defendant Register of Deeds in Pasig, Metro Manila by defendant State Financing on September 15, 1983
is in accordance with law and the agreement of the parties in the said document; but the annotation of
the said document by the said Register of Deeds on the certificates of title over the properties subject of
the Memorandum of Agreement/Dacion En Pago without any mention of the right of repurchase and the
period thereof, is improper, and said Register of Deeds cancellation of the certificates of title in the name
of Solid Homes over the properties referred to and issuance of new titles in lieu thereof in the name of
State Financing - during the period of repurchase and without any judicial order - is in violation of Art.
1607 of the Civil Code, which renders said titles null and void;

4. Ordering the defendant State Financing to surrender to the defendant Register of Deeds in Pasig,
Metro Manila for the cancellation thereof, all the certificates of title issued in its name over the

139
properties subject of the Memorandum of Agreement/Dacion En Pago, including those titles covering
the fully paid condominium units and the substitute collateral submitted in exchange for said
condominium units;

5. Ordering the said defendant Register of Deeds to cancel all the titles in the name of State Financing
referred to and to reinstate the former titles over the same properties in the name of Solid Homes, with
the proper annotation thereon of the Memorandum of Agreement/Dacion En Pago together with the
right of repurchase and the period thereof - as provided in said document - and to return the said
reinstated former titles (owners copies) in the name of Solid Homes to State Financing;

6. Ordering the defendant State Financing to release to plaintiff Solid Homes all the certificates of title
over the fully paid condominium units in the name of Solid Homes, free from all liens and encumbrances
by releasing the mortgage thereon;

7. Granting the plaintiff Solid Homes the opportunity to exercise its right to repurchase the properties
subject of the Memorandum of Agreement/Dacion En Pago within thirty (30) days from the finality of
this Decision, by paying to defendant State Financing the agreed price of P14,225,178.40 plus all cost of
money equivalent to 30% (interest of 14% and penalty of 16% from March 1, 1983) per annum,
registration fees, real estate and documentary stamp taxes and other incidental expenses incurred by
State Financing in the transfer and registration of its ownership via the Dacion En Pago, as provided in
the said document and in pursuance of Articles 1606 and 1616 of the Civil Code; and

8. Ordering the defendant Register of Deeds in Pasig, Metro Manila - should plaintiff Solid Homes fail to
exercise the abovementioned right to repurchase within 30 days from the finality of this judgment - to
record the consolidation of ownership in State Financing over the properties subject of the
Memorandum of Agreement/Dacion En Pago in the Registry of Property, in pursuance of this Order, but
excluding therefrom the fully paid condominium units and their corresponding titles to be released by
State Financing.

For lack of merit, the respective claims of both parties for damages, attorneys fees, expenses of litigation
and costs of suit are hereby denied.[6]

Both parties appealed from the trial courts decision. Solid Homes raised a lone question contesting the
denial of its claim for damages. Such damages allegedly resulted from the bad faith and malice of State
Financing in deliberately failing to annotate Solid Homes right to repurchase the subject properties in the
formers consolidated titles thereto. As a result of the non-annotation, Solid Homes claimed to have been
prevented from generating funds from prospective buyers to enable it to comply with the Agreement
and to redeem the subject properties.

State Financing, on the other hand, assigned three errors against the RTC decision: (1) granting Solid
Homes a period of thirty (30) days from finality of the judgment within which to exercise its right of
repurchase; (2) ordering Solid Homes to pay only 30% per annum as interest and penalty on the principal
obligation, rather than reasonable rental value from the time possession of the properties was illegally
withheld from State Financing; and (3) failing to order the immediate turnover of the possession of the
properties to State Financing as the purchaser a retro from whom no repurchase has been made.

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As to the lone issue raised by Solid Homes, the Court of Appeals agreed with the trial court that the
failure to annotate the right of repurchase of the vendor a retro is not by itself an indication of bad faith
or malice. State Financing was not legally bound to cause its annotation, and Solid Homes could have
taken steps to protect its own interests. The evidence shows that after such registration and transfer of
titles, State Financing willingly negotiated with Solid Homes to enable the latter to exercise its right to
repurchase the subject properties,[7] an act that negates bad faith.

Anent the first error assigned by State Financing, Respondent Court likewise upheld the trial court in
applying Article 1606, paragraph 3[8] of the Civil Code. Solid Homes was not in bad faith in filing the
complaint for the declaration of nullity of the Memorandum of Agreement/Dacion En Pago. There is
statutory basis for petitioners claim that an equitable mortgage existed since it believed that (1) the price
of P14 million was grossly inadequate, considering that the building alone was allegedly built at a cost of
P60 million in 1979 and the lot was valued at P5,000.00 per square meter and (2) it remained in
possession of the subject properties.[9] Furthermore, Article 1607[10] of the Civil Code abolished
automatic consolidation of ownership in the vendee a retro upon expiration of the redemption period by
requiring the vendee to institute an action for consolidation where the vendor a retro may be duly
heard. If the vendee succeeds in proving that the transaction was indeed a pacto de retro, the vendor is
still given a period of thirty days from the finality of the judgment within which to repurchase the
property.[11]

Respondent Court also affirmed the trial courts imposition of the 30% interest per annum on top of the
redemption price in accordance with paragraph 6 of the parties Memorandum of Agreement.[12]

However, Respondent Court of Appeals ruled favorably on State Financings last assigned error by
ordering Solid Homes to deliver possession of the subject properties to the private respondent, citing
jurisprudence that in a sale with pacto de retro, the vendee shall immediately acquire title over and
possession of the real property sold, subject only to the vendors right of redemption.[13] The full text of
the dispositive portion of the assailed Decision is as follows:

WHEREFORE, the judgment appealed from is affirmed with the modification that plaintiff Solid Homes is
further ordered to deliver the possession of the subject property to State Financing.[14]

The two opposing parties filed their respective motions for reconsideration of the assailed Decision. Both
were denied by said Court for lack of merit. Both parties thereafter filed separate petitions for review
before this Court. In a minute Resolution[15] dated December 5, 1994, this Court (Third Division) denied
State Financing Centers petition because of its failure to show that a reversible error was committed by
the appellate court. Its motion for reconsideration of said resolution was likewise denied for lack of
merit. This case disposes only of the petition filed by Solid Homes, Inc.

Issues

In its petition, Solid Homes repeats its arguments before the Court of Appeals. It claims damages
allegedly arising from the non-annotation of its right of repurchase in the consolidated titles issued to
private respondent. Petitioner reiterates its attack against the inclusion of 30% interest per annum as
part of the redemption price. It asserts that Article 1616 of the Civil Code authorizes only the return of
the (1) price of the sale, (2) expenses of the contract and any other legitimate payments by reason of the
sale and (3) necessary and useful expenses made on the thing sold. Considering that the transfer of titles

141
was null and void, it was thus erroneous to charge petitioner the registration fees, documentary stamp
taxes and other incidental expenses incurred by State Financing in the transfer and registration of the
subject properties via the dacion en pago. Lastly, petitioner argues that there is no need for the
immediate turnover of the properties to State Financing since the same was not stipulated under their
Agreement, and the latters rights were amply protected by the issuance of new certificates of title in its
name.

The Courts Ruling

First Issue: Damages

To resolve the issue of damages, an examination of factual circumstances would be necessary, a task that
is clearly beyond this Courts dominion. It is elementary that in petitions for review on certiorari, only
questions of law may be brought by the parties and passed upon by this Court. Findings of fact of lower
courts are deemed conclusive and binding upon the Supreme Court except when the findings are
grounded on speculation, surmises or conjectures; when the inference made is manifestly mistaken,
absurd or impossible; when there is grave abuse of discretion in the appreciation of facts; when the
factual findings of the trial and appellate courts are conflicting; when the Court of Appeals, in making its
findings, has gone beyond the issues of the case and such findings are contrary to the admissions of both
appellant and appellee;[16] when the judgment of the appellate court is premised on a misapprehension
of facts or when it has failed to notice certain relevant facts which, if properly considered, will justify a
different conclusion; when the findings of fact are conclusions without citation of specific evidence upon
which they are based; and when findings of fact of the Court of Appeals are premised on the absence of
evidence but are contradicted by the evidence on record.[17]

The petitioner has not shown any -- and indeed the Court finds none -- of the above-mentioned
exceptions to warrant a departure from the general rule.

In fact, petitioner has not even bothered to support with evidence its claim for actual, moral and
punitive/nominal damages as well as exemplary damages and attorneys fees. It is basic that the claim for
these damages must each be independently identified and justified; such claims cannot be dealt with in
the aggregate, since they are neither kindred or analogous terms nor governed by a coincident set of
rules.[18]

The trial court found, and the Court of Appeals affirmed, that petitioners claim for actual damages was
baseless. Solid Homes utterly failed to prove that respondent corporation had maliciously and in bad
faith caused the non-annotation of petitioners right of repurchase so as to prevent the latter from
exercising such right. On the contrary, it is admitted by both parties that State Financing informed
petitioner of the registration with the Register of Deeds of Pasig of their Memorandum of
Agreement/Dacion en Pago and the issuance of new certificates of title in the name of the respondent
corporation. Petitioner exchanged communications and held conferences with private respondent in
order to draw a mutually acceptable payment arrangement for the formers repurchase of the subject
properties. A written offer from another corporation alleging willingness to avail itself of petitioners right
of repurchase was even attached to one of these communications. Clearly, petitioner was not prejudiced
by the non-annotation of such right in the certificates of titles issued in the name of State Financing.
Besides, as the Court of Appeals noted, it was not the function of respondent corporation to cause said

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annotation. It was equally the responsibility of petitioner to protect its own rights by making sure that its
right of repurchase was indeed annotated in the consolidated titles of private respondent.

The only legal transgression of State Financing was its failure to observe the proper procedure in
effecting the consolidation of the titles in its name. But this does not automatically entitle the petitioner
to damages absent convincing proof of malice and bad faith[19] on the part of private respondent and
actual damages suffered by petitioner as a direct and probable consequence thereof. In fact, the
evidence proffered by petitioner consist of mere conjectures and speculations with no factual moorings.
Furthermore, such transgression was addressed by the lower courts when they nullified the
consolidation of ownership over the subject properties in the name of respondent corporation, because
it had been effected in contravention of the provisions of Article 1607[20] of the Civil Code. Such rulings
are consistent with law and jurisprudence.

Neither can moral damages be awarded to petitioner. Time and again, we have held that a corporation --
being an artificial person which has no feelings, emotions or senses, and which cannot experience
physical suffering or mental anguish -- is not entitled to moral damages.[21]

While the amount of exemplary damages need not be proved, petitioner must show that he is entitled to
moral or actual damages;[22] but the converse obtains in the instant case. Award of attorneys fees is
likewise not warranted when moral and exemplary damages are eliminated and entitlement thereto is
not demonstrated by the claimant.[23]

Lastly, (n)ominal damages are adjudicated in order that a right of the plaintiff, which has been violated or
invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the
plaintiff for any loss suffered by him.[24] As elaborated above and in the decisions of the two lower
courts, no right of petitioner was violated or invaded by respondent corporation.

Second Issue: Redemption Price

Another fundamental principle of procedural law precludes higher courts from entertaining matters
neither alleged in the pleadings nor raised during the proceedings below, but ventilated for the first time
only in a motion for reconsideration or on appeal.[25] On appeal, only errors specifically assigned and
properly argued in the brief will be considered, with the exception of those affecting jurisdiction over the
subject matter as well as plain and clerical errors.[26]

As stated earlier, the single issue raised by petitioner in its appeal of the RTC decision to the Court of
Appeals concerned only the denial of its claim for damages. Petitioner succinctly stated such issue in its
brief as follows:

I. LONE ASSIGNMENT OF ERROR

The trial court erred in that after having found that the registration of the Memorandum of
Agreement/Dacion en Pago on September 15, 1983 [and the consequent cancellation of the titles of
plaintiff-appellant Solid Homes, Inc. and issuance in lieu thereof of titles to defendant-appellant State
Financing Center, Inc. (SFCI)] was null and void because of failure to duly annotate the right to
repurchase granted to plaintiff-appellant Solid Homes, Inc. under par. 6 thereof still then subsisting up to
June 28, 1984 and the failure to comply with the provisions of Art. 1607, Civil Code x x x

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I[t] nonetheless did not rule that such irregular registration unduly deprived plaintiff-appellant Solid
Homes, Inc. of its right of repurchase and that it further erred in not having declared that defendant-
appellant SFCI liable in favor of said plaintiff-appellant for damages.[27]

Petitioner is thus barred from raising a new issue in its appeal before this Court. Nevertheless, in the
interest of substantial justice, we now resolve the additional question posed with respect to the
composition of the redemption price prescribed by the trial court and affirmed by the Court of Appeals,
as follows:

7. Granting the plaintiff Solid Homes the opportunity to exercise its right to repurchase the properties x x
x by paying to defendant State Financing the agreed price of P14,225,178.40 plus all cost of money
equivalent to 30% (interest of 14% and penalty of 16% from March 1, 1983) per annum, registration fees,
real estate and documentary stamp taxes and other incidental expenses incurred by State Financing in
the transfer and registration of its ownership via the Dacion En Pago, as provided in the said document
and in pursuance of Articles 1606 and 1616 of the Civil Code;[28]

Petitioner argues that such total redemption price is in contravention of Art. 1616 of the Civil Code. We
do not, however, find said legal provision to be restrictive or exclusive, barring additional amounts that
the parties may agree upon. Said provision should be construed together with Art. 1601 of the same
Code which provides as follows:

Art. 1601. Conventional redemption shall take place when the vendor reserves the right to repurchase
the thing sold, with the obligation to comply with the provisions of article 1616 and other stipulations
which may have been agreed upon. (emphasis supplied)

It is clear, therefore, that the provisions of Art. 1601 require petitioner to comply with x x x the other
stipulations of the Memorandum of Agreement/Dacion en Pago it freely entered into with private
respondent. The said Memorandums provision on redemption states:

6. The FIRST PARTY (State Financing) hereby grants the SECOND PARTY (Solid Homes) the right to
repurchase the aforesaid real properties, including the condominium units and other improvements
thereon, within ten (10) months counted from and after the one hundred eighty (180) days from date of
signing hereof at an agreed price of P14,225,178.40, or as reduced pursuant to par. 5 (d), plus all cost of
money equivalent to 30% per annum, registration fees, real estate and documentary stamp taxes and
other incidental expenses incurred by the FIRST PARTY (State Financing) in the transfer and registration
of its ownership via dacion en pago x x x[29] (underscoring supplied)

Contracts have the force of law between the contracting parties who may establish such stipulations,
clauses, terms and conditions as they may want, subject only to the limitation that their agreements are
not contrary to law, morals, customs, public policy or public order[30] -- and the above-quoted provision
of the Memorandum does not appear to be so.

Petitioner, however, is right in its observation that the Court of Appeals inclusion of registration fees, real
estate and documentary stamp taxes and other incidental expenses incurred by State Financing in the
transfer and registration of its ownership (of the subject properties) via dacion en pago was vague, if not
erroneous, considering that such transfer and issuance of the new titles were null and void. Thus, the

144
redemption price shall include only those expenses relating to the registration of the dacion en pago, but
not the registration and other expenses incurred in the issuance of new certificates of title in the name
of State Financing.

Possession of the Subject Properties During the Redemption Period

The Court of Appeals Decision modified that of the trial court only insofar as it ordered petitioner to
deliver possession of the subject properties to State Financing, the vendee a retro. We find no legal error
in this holding. In a contract of sale with pacto de retro, the vendee has a right to the immediate
possession of the property sold, unless otherwise agreed upon. It is basic that in a pacto de retro sale,
the title and ownership of the property sold are immediately vested in the vendee a retro, subject only
to the resolutory condition of repurchase by the vendor a retro within the stipulated period.[31]

WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED with the MODIFICATION
that the redemption price shall not include the registration and other expenses incurred by State
Financing Center, Inc. in the issuance of new certificates of title in its name, as this was done without the
proper judicial order required under Article 1607 of the Civil Code.

SO ORDERED.

G.R. No. 150060 August 19, 2003

PRIMARY STRUCTURES CORP. represented herein by its President ENGR. WILLIAM C. LIU, Petitioner,
vs.
SPS. ANTHONY S. VALENCIA and SUSAN T. VALENCIA, Respondents.

DECISION

VITUG, J.:

On appeal is the decision of the Court of Appeals in CA-G.R. CV No. 59960, promulgated on 13 February
2001, which has affirmed in toto the decision of the Regional Trial Court of Cebu City dismissing the
complaint of petitioners for legal redemption over certain rural lots sold to respondents.

Petitioner is a private corporation based in Cebu City and the registered owner of Lot 4523 situated in
Liloan, Cebu, with an area of 22,214 square meters. Adjacent to the lot of petitioner are parcels of land,
identified to be Lot 4527, Lot 4528, and Lot 4529 with a total combined area of 3,751 square meters. The
three lots, aforenumbered, have been sold by Hermogenes Mendoza to respondent spouses sometime
in December 1994. Petitioner learned of the sale of the lots only in January, 1996, when Hermogenes
Mendoza sold to petitioner Lot No. 4820, a parcel also adjacent to Lot 4523 belonging to the latter.
Forthwith, it sent a letter to respondents, on 30 January 1996, signifying its intention to redeem the
three lots. On 30 May 1996, petitioner sent another letter to respondents tendering payment of the
price paid to Mendoza by respondents for the lots. Respondents, in response, informed petitioner that
they had no intention of selling the parcels. Thereupon, invoking the provisions of Articles 1621 and
1623, petitioner filed an action against respondents to compel the latter to allow the legal redemption.
Petitioner claimed that neither Mendoza, the previous owner, nor respondents gave formal or even just
a verbal notice of the sale of the lots as so required by Article 1623 of the Civil Code.

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After trial, the Regional Trial Court of Cebu dismissed petitioners complaint and respondents'
counterclaim; both parties appealed the decision of the trial court to the Court of Appeals. The appellate
court affirmed the assailed decision.

Basically, the issues posed for resolution by the Court in the instant petition focus on the application of
Article 1621 and Article 1623 of the Civil Code, which read:

"ART. 1621. The owners of adjoining lands shall also have the right of redemption when a piece of rural
land, the area of which does not exceed one hectare, is alienated unless the grantee does not own any
rural land.

"This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and
other apparent servitudes for the benefit of other estates.

"If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner
of the adjoining land of smaller area shall be preferred; and should both lands have the same area, the
one who first requested the redemption."

"ART. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty days
from the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of
sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor
that he has given written notice thereof to all possible redemptioners.

"The right of redemption of co-owners excludes that of adjoining owners."

Whenever a piece of rural land not exceeding one hectare is alienated, the law grants to the adjoining
owners a right of redemption except when the grantee or buyer does not own any other rural land.1 In
order that the right may arise, the land sought to be redeemed and the adjacent property belonging to
the person exercising the right of redemption must both be rural lands. If one or both are urban lands,
the right cannot be invoked.2

The trial court found the lots involved to be rural lands. Unlike the case of Fabia vs. Intermediate
Appellate Court3 (which ruled, on the issue of whether a piece of land was rural or not, that the use of
the property for agricultural purpose would be essential in order that the land might be characterized as
rural land for purposes of legal redemption), respondents in the instant case, however, did not dispute
before the Court of Appeals the holding of the trial court that the lots in question are rural lands. In
failing to assail this factual finding on appeal, respondents would be hardput to now belatedly question
such finding and to ask the Court to still entertain that issue.

Article 1621 of the Civil Code expresses that the right of redemption it grants to an adjoining owner of
the property conveyed may be defeated if it can be shown that the buyer or grantee does not own any
other rural land. The appellate court, sustaining the trial court, has said that there has been no evidence
proffered to show that respondents are not themselves owners of rural lands for the exclusionary clause
of the law to apply.

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With respect to the second issue, Article 1623 of the Civil Code provides that the right of legal pre-
emption or redemption shall not be exercised except within thirty days from notice in writing by the
prospective vendor, or by the vendor, as the case may be. In stressing the mandatory character of the
requirement, the law states that the deed of sale shall not be recorded in the Registry of Property unless
the same is accompanied by an affidavit of the vendor that he has given notice thereof to all possible
redemptioners.

The Court of Appeals has equated the statement in the deed of sale to the effect that the vendors have
complied with the provisions of Article 1623 of the Civil Code, as being the written affirmation under
oath, as well as the evidence, that the required written notice to petitioner under Article 1623 has been
met. Respondents, like the appellate court, overlook the fact that petitioner is not a party to the deed of
sale between respondents and Mendoza and has had no hand in the preparation and execution of the
deed of sale.1wphi1 It could not thus be considered a binding equivalent of the obligatory written
notice prescribed by the Code.

In Verdad vs. Court of Appeals4 this court ruled:

"We hold that the right of redemption was timely exercised by private respondents. Concededly, no
written notice of the sale was given by the Burdeos heirs (vendors) to the co-owners required under
Article 1623 of the Civil Code -

"x x x xxx xxx

Hence, the thirty-day period of redemption had yet to commence when private respondent Rosales
sought to exercise the right of redemption on 31 March 1987, a day after she discovered the sale from
the Office of the City Treasurer of Butuan City, or when the case was initiated, on 16 October 1987,
before the trial court.

"The written notice of sale is mandatory. This Court has long established the rule that notwithstanding
actual knowledge of a co-owner, the latter is still entitled to a written notice from the selling co-owner in
order to remove all uncertainties about the sale, its terms and conditions, as well as its efficacy and
status.

"Even in Alonzo vs. Intermediate Appellate Court (150 SCRA 259), relied upon by petitioner in contending
that actual knowledge should be an equivalent to a written notice of sale, the Court made it clear that it
was not reversing the prevailing jurisprudence; said the Court:

"We realize that in arriving at our conclusion today, we are deviating from the strict letter of the law,
which the respondent court understandably applied pursuant to existing jurisprudence. The said court
acted properly as it had no competence to reverse the doctrines laid down by this Court in the above-
cited cases. In fact, and this should be clearly stressed, we ourselves are not abandoning the De Conejero
and Buttle doctrines. What we are doing simply is adopting an exception to the general rule, in view of
the peculiar circumstances of this case.

"In Alonzo, the right of legal redemption was invoked several years, not just days or months, after the
consummation of the contracts of sale. The complaint for legal redemption itself was there filed more
than thirteen years after the sales were concluded."5

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WHEREFORE, the instant petition is GRANTED, and the assailed decision of the Court of Appeals is
reversed and set aside. Petitioner is hereby given a period of thirty days from finality of this decision
within which to exercise its right of legal redemption. No costs.

SO ORDERED.

G.R. No. 86150 March 2, 1992

GUZMAN, BOCALING & CO., petitioner,

vs.
RAOUL S. V. BONNEVIE, respondent.

CRUZ, J.:

The subject of the controversy is a parcel of land measuring six hundred (600) square meters, more or
less, with two buildings constructed thereon, belonging to the Intestate Estate of Jose L. Reynoso.

This property was leased to Raoul S. Bonnevie and Christopher Bonnevie by the administratrix, Africa
Valdez de Reynoso, for a period of one year beginning August 8, 1976, at a monthly rental of P4,000.00.

The Contract of lease contained the following stipulation:

20. In case the LESSOR desire or decides to sell the lease property, the LESSEES shall be given a
first priority to purchase the same, all things and considerations being equal.

On November 3, 1976 according to Reynoso, she notified the private respondents by registered mail that
she was selling the leased premises for P600.000.00 less a mortgage loan of P100,000.00, and was giving
them 30 days from receipt of the letter within which to exercise their right of first priority to purchase
the subject property. She said that in the event that they did not exercise the said right, she would
expect them to vacate the property not later then March, 1977.

On January 20, 1977, Reynoso sent another letter to private respondents advising them that in view of
their failure to exercise their right of first priority, she had already sold the property.

Upon receipt of this letter, the private respondents wrote Reynoso informing her that neither of them
had received her letter dated November 3, 1976; that they had advised her agent to inform them
officially should she decide to sell the property so negotiations could be initiated; and that they were
"constrained to refuse (her) request for the termination of the lease.

On March 7, 1977, the leased premises were formally sold to petitioner Guzman, Bocaling & Co. The
Contract of Sale provided for immediate payment of P137,500.00 on the purchase price, the balance of
P262,500.00 to be paid only when the premises were vacated.

On April 12, 1977, Reynoso wrote a letter to the private respondents demanding that they vacate the
premises within 15 days for their failure to pay the rentals for four months. When they refuse, Reynoso

148
filed a complaint for ejectment against them which was docketed as Civil Case No. 043851-CV in the then
City Court of Manila.

On September 25, 1979, the parties submitted a Compromise Agreement, which provided inter alia that
"the defendant Raoul S.V. Bonnevie shall vacate the premises subject of the Lease Contract, Voluntarily
and Peacefully not later than October 31, 1979."

This agreement was approved by the City Court and became the basis of its decision. However, as the
private respondents failed to comply with the above-qouted stipulation, Reynoso filed a motion for
execution of the judgment by compromise, which was granted on November 8, 1979.

On November 12, 1979, private respondent Raoul S. Bonnevie filed a motion to set aside the decision of
the City Court as well as the Compromise Agreement on the sole ground that Reynoso had not delivered
to him the "records of payments and receipts of all rentals by or for the account of defendant ..." The
motion was denied and the case was elevated to the then Court of First Instance. That Court remanded
the case to the City Court of Manila for trial on the merits after both parties had agreed to set aside the
Compromise Agreement.

On April 29, 1980, while the ejectment case was pending in the City Court, the private respondents filed
an action for annulment of the sale between Reynoso and herein petitioner Guzman, Bocaling & Co. and
cancellation of the transfer certificate of title in the name of the latter. They also asked that Reynoso be
required to sell the property to them under the same terms ands conditions agreed upon in the Contract
of Sale in favor of the petitioner This complaint was docketed as Civil Case No. 131461 in the then Court
of First Instance of Manila.

On May 5, 1980, the City Court decided the ejectment case, disposing as follows:

WHEREFORE, judgment is hereby rendered ordering defendants and all persons holding under them to
vacate the premises at No. 658 Gen. Malvar Street, Malate, Manila, subject of this action, and deliver
possession thereof to the plaintiff, and to pay to the latter; (1) The sum of P4,000.00 a month from April
1, 1977 to August 8, 1977; (2) The sum of P7,000.00 a month, as reasonable compensation for the
continued unlawful use and occupation of said premises, from August 9, 1977 and every month
thereafter until defendants actually vacate and deliver possession thereof to the plaintiff; (3) The sum of
P1,000.00 as and for attorney's fees; and (4) The costs of suit.

The decision was appealed to the then Court of First Instance of Manila, docketed as Civil Case No.
132634 and consolidated with Civil Case No. 131461. In due time, Judge Tomas P. Maddela, Jr., decided
the two cases as follows:

WHEREFORE, premises considered, this Court in Civil Case No. 132634 hereby modifies the decision of
the lower court as follows:

1 Ordering defendants Raoul S.V. Bonnevie and Christopher Bonnevie and all persons holding
under them to vacate the premises at No. 658 Gen. Malvar St., Malate, Manila subject of this action and
deliver possessions thereof to the plaintiff; and

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2 To pay the latter the sum of P4,000.00 a month from April 1, 1977 up to September 21, 1980
(when possession of the premises was turned over to the Sheriff) after deducting whatever payments
were made and accepted by Mrs. Africa Valdez Vda. de Reynoso during said period, without
pronouncement as to costs.

As to Civil Case No. 131461, the Court hereby renders judgment in favor of the plaintiff Raoul Bonnevie
as against the defendants Africa Valdez Vda. de Reynoso and Guzman and Bocaling & Co. declaring the
deed of sale with mortgage executed by defendant Africa Valdez Vda. de Reynoso in favor of defendant
Guzman and Bocaling null and void; cancelling the Certificate of Title No. 125914 issued by the Register
of Deeds of Manila in the name of Guzman and Bocaling & Co.,; the name of Guzman and Bocaling &
Co.,; ordering the defendant Africa Valdez Vda. de Reynoso to execute favor of the plaintiff Raoul
Bonnevie a deed of sale with mortgage over the property leased by him in the amount of P400,000.00
under the same terms and conditions should there be any other occupants or tenants in the premises;
ordering the defendants jointly and severally to pay the plaintiff Raoul Bonnevie the amount of
P50,000.00 as temperate damages; to pay the plaintiff jointly and severally the of P2,000.00 per month
from the time the property was sold to defendant Guzman and Bocaling by defendant Africa Valdez Vda
de Reynoso on March 7, 1977, up to the execution of a deed of sale of the property by defendant Africa
Valdez Vda. de Reynoso in favor of plaintiff Bonnevie; to pay jointly and severally the plaintiff Bonnevie
the amount of P20,000.00 as exemplary damages, for attorney's fees in the amount of P10,000.00, and
to pay the cost of suit.

Both Reynoso and the petitioner company filed with the Court of Appeals a petition for review of this
decision. The appeal was eventually resolved against them in a decision promulgated on March 16, 1988,
where the respondent court substantially affirmed the conclusions of the lower court but reduced the
award of damages. 1

Its motion for reconsideration having been denied on December 14, 1986, the petitioner has come to
this Court asserting inter alia that the respondent court erred in ruling that the grant of first priority to
purchase the subject properties by the judicial administratrix needed no authority from the probate
court; holding that the Contract of Sale was not voidable but rescissible; considering the petitioner as a
buyer in bad faith ordering Reynoso to execute the deed of sale in favor of the Bonnevie; and not passing
upon the counterclaim. Reynoso has not appealed.

The Court has examined the petitioner's contentions and finds them to be untenable.

Reynoso claimed to have sent the November 3, 1976 letter by registered mail, but the registry return
card was not offered in evidence. What she presented instead was a copy of the said letter with a
photocopy of only the face of a registry return card claimed to refer to the said letter. A copy of the other
side of the card showing the signature of the person who received the letter and the data of the receipt
was not submitted. There is thus no satisfactory proof that the letter was received by the Bonnevies.

Even if the letter had indeed been sent to and received by the private respondent and they did not
exercise their right of first priority, Reynoso would still be guilty of violating Paragraph 20 of the Contract
of Lease which specifically stated that the private respondents could exercise the right of first priority,
"all things and conditions being equal." The Court reads this mean that there should be identity of the
terms and conditions to be offered to the Bonnevies and all other prospective buyers, with the
Bonnevies to enjoy the right of first priority.

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The selling price qouted to the Bonnevies was P600,000.00, to be fully paid in cash less only the
mortgage lien of P100,000.00. 2 On the other hand, the selling price offered to and accepted by the
petitioner was only P400,000.00 and only P137,500.00 was paid in cash while the balance of
P272,500.00 was to be paid "when the property (was) cleared of tenants or occupants. 3

The fact that the Bonnevies had financial problems at that time was no justification for denying them the
first option to buy the subject property. Even if the Bonnevies could not buy it at the price qouted,
Reynoso could not sell it to another for a lower price and under more favorable terms and conditions.
Only if the Bonnevies failed to exercise their right of first priority could Reynoso lawfully sell the subject
property to others, and at that only under the same terms and conditions offered to the Bonnevies.

The Court agrees with the respondent court that it was not necessary to secure the approval by the
probate court of the Contract of Lease because it did not involve an alienation of real property of the
estate nor did the term of the lease exceed one year so as top make it fall under Article 1878(8) of the
Civil Code. Only if Paragraph 20 of the Contract of Lease was activated and the said property was
intended to be sold would it be required of the administratrix to secure the approval of the probate
court pursuant to Rule 89 of the Rules of Court.

As a strict legal proposition, no judgment of the probate court was reviewed and eventually annuled
collaterally by the respondent court as contended by the petitioner. The order authorizing the sale in its
favor was duly issued by the probate court, which thereafter approved the Contract of Sale resulting in
the eventual issuance if title in favor of the petitioner. That order was valid insofar as it recognized the
existence of all the essential elements of a valid contract of sale, but without regard to the special
provision in the Contract of Lease giving another party the right of first priority.

Even if the order of the probate court was valid, the private respondents still had a right to rescind the
Contract of Sale because of the failure of Reynoso to comply with her duty to give them the first
opportunity to purchase the subject property.

The petitioner argues that assuming the Contract of Sale to be voidable, only the parties thereto could
bring an action to annul it pursuant to Article 1397 of the Civil Code. It is stressed that private
respondents are strangers to the agreement and therefore have no personality to seek its annulment.

The respondent court correctly held that the Contract of Sale was not voidable rescissible. Under Article
1380 to 1381 (3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. The status of creditors could be validly
accorded the Bonnevies for they had substantial interests that were prejudiced by the sale of the subject
property to the petitioner without recognizing their right of first priority under the Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third
persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by
means of the restoration of things to their condition at the moment prior to the celebration of said
contract. 4 It is a relief allowed for the protection of one of the contracting parties and even third
persons from all injury and damage the contract may cause, or to protect some incompatible and
preferent right created by the contract. 5 Recission implies a contract which, even if initially valid,
produces a lesion or pecuniary damage to someone that justifies its invalidation for reasons of equity. 6

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It is true that the acquisition by a third person of the property subject of the contract is an obstacle to
the action for its rescission where it is shown that such third person is in lawful possession of the subject
of the contract and that he did not act in bad faith. 7 However, this rule is not applicable in the case
before us because the petitioner is not considered a third party in relation to the Contract of Sale nor
may its possession of the subject property be regarded as acquired lawfully and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the petitioner
cannot be deemed a purchaser in good faith for the record shows that its categorically admitted it was
aware of the lease in favor of the Bonnevies, who were actually occupying the subject property at the
time it was sold to it. Although the Contract of Lease was not annotated on the transfer certificate of title
in the name of the late Jose Reynoso and Africa Reynoso, the petitioner cannot deny actual knowledge
of such lease which was equivalent to and indeed more binding than presumed notice by registration.

A purchaser in good faith and for value is one who buys the property of another without notice that
some other person has a right to or interest in such property and pays a full and fair price for the same at
the time of such purchase or before he has notice of the claim or interest of some other person in the
property. 8 Good faith connotes an honest intention to abstain from taking unconscientious advantage of
another. 9 Tested by these principles, the petitioner cannot tenably claim to be a buyer in good faith as it
had notice of the lease of the property by the Bonnevies and such knowledge should have cautioned it
to look deeper into the agreement to determine if it involved stipulations that would prejudice its own
interests.

The petitioner insists that it was not aware of the right of first priority granted by the Contract of Lease,
Assuming this to be true, we nevertherless agree with the observation of the respondent court that:

If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes Par. 20 on
priority right given to the Bonnevies, it had only itself to blame. Having known that the property it was
buying was under lease, it behooved it as a prudent person to have required Reynoso or the broker to
show to it the Contract of Lease in which Par. 20 is contained.

Finally, the petitioner also cannot invoke the Compromise Agreement which it says canceled the right of
first priority granted to the Bonnevies by the Contract of Lease. This agreement was set side by the
parties thereto, resulting in the restoration of the original rights of the private respondents under the
Contract of Lease. The Joint Motion to Remand filed by Reynoso and the private respondents clearly
declared inter alia:

That without going into the merits of instant petition, the parties have agreed to SET ASIDE the
compromise agreement, dated September 24, 1979 and remand Civil Case No. 043851 of the City Court
of Manila to Branch IX thereof for trial on the merits. 10

We find, in sum, that the respondent court did not commit the errors imputed to it by the petitioner. On
the contrary, its decision is conformable to the established facts and the applicable law and
jurisprudence and so must be sustained.

WHEREFORE, the petition in DENIED, with costs against the petitioner. The challeged decision is
AFFIRMED in toto. It is so ordered.

152
G.R. No. 87415 January 23, 1992

YEK SENG CO., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, DEWEY VELOSO YAP and DAVID T. VELOSO YAP, respondents.

CRUZ, J. :p

The simple question raised in the case at bar could have been definitely resolved on the lowest level of
the judiciary and did not have to reach the highest tribunal. If we have given the petition due course, it
was only for the purpose of settling it once and for all and avoiding future needless impositions on the
time of this Court.

The subject of the petition is a verbal contract of lease over a portion of a building belonging to the
private respondents and occupied by the petitioner as lessee. It is situated on Ylaya Street in Manila. The
leased premises have been used by the petitioner for its general merchandise business for more than
twenty years. The agreed monthly rental was P3,000.00.

On December 12, 1985, the lessors notified the petitioner that they were terminating the lease as they
intended to renovate the building and thereafter use it themselves. The petitioner refused to vacate. The
private respondents then filed a complaint for ejectment against the petitioner in the Municipal Trial
Court of Manila on January 22, 1986. For its part, the petitioner filed a petition for consignation of the
monthly rentals which it claimed had been refused by the lessors.

In his decision dated July 2, 1987, 1 Judge Tirso C. Briones disposed thus:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant, ordering
the latter and all persons claiming rights under it, to vacate the premises specifically described in the
amended complaint; to pay plaintiffs the sum of P3,000.00 as rental for the reasonable use and
occupancy of the premises commencing January, 1986 and monthly thereafter, until the same shall have
been finally surrendered to the plaintiffs, less whatever payments that may have been made during the
pendency of the case; the sum of P10,000.00 as and for attorney's fees plus costs of suit.

The petition for consignation is hereby denied for lack of merit.

This decision was affirmed by the Regional Trial Court of Manila, 2 which was in turn sustained by the
Court of Appeals. 3 In this petition for review on certiorari, the principal submission is that the courts
below erred in not giving the petitioner an extension of its lease in accordance with Article 1687 of the
Civil Code.

This article provides as follows:

Art. 1687. If the period for the lease has not been fixed, it is understood to be from year to year, if
the rent agreed upon is annual; from month to month, if it is monthly; from week to week, if the rent is
weekly; and from day to day, if the rent is to be paid daily. However, even though a monthly rent is paid,

153
and no period the lease has been set, the courts may fix a longer term for the lessee after the lessee has
occupied the premises for over one year. If the rent is weekly, the courts may likewise determine a
longer period after the lessee has been in possession for over six months. In case of daily rent, the courts
may also fix a longer period after the lessee has stayed in the place for over one month.

In support of its position, the petitioner cites the cases of Araneta v. De Mesa, 35 SCRA 137, and Divino v.
Marcos, 4 SCRA 186.

The Court can only wonder why the petitioner has invoked the first case at all as it is clearly inapplicable.
A little study would have readily revealed this. The appeal was dismissed in that case simply because the
question raised had already become moot and academic; no ruling was made on the merits.

In the second case, the Court upheld the extension of the lease because of the peculiar circumstances
involved, as related thus by the trial court:

When the plaintiff's petition was called for hearing, the parties agreed that judgment be rendered on the
pleadings in connection with such petition. According to the pleadings, there is no controversy that
plaintiff has been occupying the lot in question since May 7, 1936, when he purchased from one Antonio
Castro the house constructed thereon. It also appears that plaintiff was assured by the defendants that
the house bought would remain thereon as long as plaintiff continues paying his rents. It further appears
that on March 19, 1947, plaintiff constructed an addition to the house with the knowledge and consent
of the defendants. Said addition cost the plaintiff the amount of P20,000 00.

There is no written agreement as to the duration of the lease between plaintiff and defendants. The fact
remains that plaintiff entered the premises with the knowledge and consent of the defendants and with
the assurance of the latter that the plaintiff could remain occupying the lot as long as he pays the
corresponding rents.

Sustaining this finding, this Court made the following additional observations:

The lot in question has been rented to the petitioner for about 20 years and his predecessor in interest
for more. Even though rentals had been paid monthly, still no period for the duration of the lease had
been set. The lease had been consistently and tacitly renewed ("tacita reconduccion") until the
ejectment case was filed (Co Tiam v. Diaz, 75 Phil. 672; Villanueva v. Canlas, 77 Phil. 381; Art. 1670,
N.C.C.; Art. 1566, Old Civil Code). Having made substantial or additional improvements on the lot, and
considering the difficulty of looking for another place to which petitioner could transfer such
improvements, and the length of his occupancy of the lot (since 1936), and the impression acquired by
him that he could stay on the premises, as long as he could pay the rentals, it would seem that there
exists just grounds for granting the extension of lease and that the extension of two years granted by the
trial court, is both fair and equitable.

It was considered important in that case that: 1) the plaintiff had been occupying the leased premises for
more than twenty years; 2) he was assured by the defendants that he could remain in the house as long
as he continued paying the rentals; and 3) he made improvements on the house costing P20,000,00 with
the consent of the defendants. The petitioner in the case at bar has not pointed to similar circumstances
other than the claim that it has been occupying the subject premises for more than twenty years. On this
point, Judge Roberto M. Lagman of the Regional Trial Court correctly held:

154
On the second issue, the Court noted that the parties did not submit any evidence on the basis of the
stipulation of the facts earlier narrated. Thus, there is nothing in the record which would show any fact
or circumstance which justifies the extension of the lease. The mere occupancy of the premises for a
number of years, by itself, is not sufficient.

The circumstance that the petitioner has paid its rentals religiously during the past twenty years is also
not sufficient to justify the extension it demands. Neither are the substantial improvements it allegedly
made on the leased premises nor the difficulty of finding another place of business, on which it has not
submitted any evidence at all. The Court makes the wry observation that the petitioner has only itself to
blame if, being engaged in business, it did not take the necessary precautions against its possible and
even abrupt displacement because of the termination of the month-to-month lease. As for the argument
that the private respondents had not yet secured a building permit for the alleged intended renovation,
it is obviously no argument at all and deserves no further comment.

In the view of the Court, the applicable case is Cruz v. Intermediate Appellate Court, 4 where it was held:

Ricardo Cruz further maintains that the lease contract with Roman Legarda So is one with an indefinite
period, no specific term having been agreed upon by the parties, hence the court can legally fix a longer
term. He invokes the second sentence of Article 1687 of the Civil Code which states that even though a
monthly rental is paid, and no period for the lease has been set, the courts may fix a longer term for the
lease after the lessee has occupied the premises for over one year.

We reject such proposition.

As earlier stated, the contract of Ricardo Cruz, being on a month-to-month basis, is a lease with a
definite period. Since the contract of lease is for a definite term, the lessee cannot avail of the benefits
under Article 1687 which applies only if there is no definite term. And even assuming arguendo that
Article 1687 applies, Ricardo Cruz would still not be entitled to have the term fixed for a longer period
since his action was filed only after the contract had expired.x

As held in Vda. de Prieto vs. Santos, et al. (98 Phil. 509 [1956] ):

Under this provision, if the period of a lease contract has not been specified by the parties therein, it is
understood to be from month to month, if the rent agreed upon is monthly, as in the cases at bar.
Consequently, the contract expires at the end of such month, unless, prior thereto, the extension of said
term has been sought by appropriate action and judgment is eventually rendered therein granting said
relief.

Defendants hereto maintain that the lease contracts did not, and could not, come to an end until after
the court has fixed its lifetime and the term thus fixed has expired. This view is, to our mind, untenable.
To begin with, defendants assume that their contracts are without term, prior to the judicial action
authorized in said Article 1687, whereas the same provides that the duration of lease contracts shall be
yearly, monthly, weekly or daily depending upon whether the rental agreed upon is annual, monthly,
weekly, or daily. In other words, said contracts have a term fixed by law, and are not indefinite in
duration, before said judicial intervention. Secondly, said Article 1687 merely gives the court discretion

155
to extend the period of the lease. The court is not bound to extend said term. It may legally refuse to do
so, if the circumstances surrounding the case warrants such action. . . . (Emphasis reproduced)

Conformably, we hold that as the rental in the case at bar was paid monthly and the term had not been
expressly agreed upon, the lease was understood under Article 1687 to be terminable from month to
month. At the time the petitioner was asked to vacate the leased premises, the lease contract had
already expired and therefore, following the above-quoted decisions, could no longer be extended. In
fact, even if such contract had not yet expired, its extension would still be subject to the sound discretion
of the court and was by no means obligatory upon it as a merely ministerial duty.

To quote again from the decision of the Regional Trial Court:

As correctly cited by the plaintiffs, "The power of the Courts to fix a longer term for lease is protestative
or discretionary, "may" is the word to be exercised or not in accordance with the particular
circumstances of the case; a longer term to be granted where equities come into play demanding
extension, to be denied where none appears, always with due deference to the parties' freedom to
contract." (Divino v. Marcos, January 31, 1962, 5 SCRA 186.) Moreover, the lease had already expired
when the extension was sought. In the case of Prieto v. Santos, 98 Phil. 509 cited in Alegre v. Laperal, 22
SCRA 934, it was held that "an extension of the lease may be sought by the tenant before, not after the
termination of the lease." At any rate, whatever extension the defendant may be entitled to has already
been dissipated by the length of time 2 years that this case has been pending.

The petitioner also contends that it was denied its day in court when judgment was rendered against it
without the benefit of a trial on the merits. This posture is likewise unacceptable. Contrary to its
submission, the case was not decided by Summary Procedure but in accordance with Rule 20, Section 3,
and Rule 30, Section 2, of the Rules of Court. There was no trial on the merits because, as the record will
show, the petitioner's counsel agreed to submit the case for decision on the basis of the stipulations of
the parties at the pre-trial conference. Judgment was rendered on that basis.

It must be added that even if there was indeed no trial before the Municipal Trial Court, the petitioner
was heard nonetheless when it appealed to the Regional Trial Court; when it filed its motion for
reconsideration of the decision; and when it appealed to the respondent court. The petitioner cannot
pretend that it was unable to fully argue its case before that court, for the fact is that it did so, not only
in its brief but also when it filed a motion for reconsideration of its decision and also a motion for a
hearing on that motion.

The respondent court did not err in sustaining the award of attorney's fees in the sum of P10,000.00,
taking into account the fact that the petitioner unreasonably resisted the private respondent's demand
to vacate the property following the termination of their lease contract. The petitioner's intransigence
made it necessary for the latter to litigate for the enforcement of their just and valid claim and thus incur
the expenses that must now be justly charged to it.

Judge Lagman acutely observed that the petitioner had already enjoyed a de facto extension of two
years during the period the ejectment case was pending, first before the Municipal Trial Court and then
before his court. We note with disapproval that by appealing to the Court of Appeals and later to this
Court, the petitioner gained another extension of more than three years, for a total of almost six years
from the time the amended complaint was filed on June 17, 1986.

156
It is an economic fact that construction costs rose considerably during that period, thus increasing the
expenses of the renovation intended by the private respondents. Such increase could have been also
awarded against the petitioner as part of the actual damages of the private respondents except that no
evidence of this has been presented.

Many lessees are able to defer their deserved ejectment through the simple expedient of appealing their
lost cause all the way up to even this Court. This transparent gambit is all-too-familiar. The delay entailed
in deciding these appeals is usually unavoidable because the courts of justice are saddled by a heavy
load of cases and cannot dispose of them as fast as might be desired. It is common knowledge of this
difficulty that has encouraged the filing of groundless appeals by "clever" lawyers who know from the
start that they are doomed to fail.

Counsel are admonished against abusing the judicial process by lodging appeals intended merely to
unduly prolong a case and so "buy time" for their clients. In the future, this Court will take a sterner view
of such tactics and impose severe sanctions upon lawyers who, for money or malice, would cynically
frustrate the ends of the law and the speedy administration of justice by deliberately delaying the final
disposition of their hopeless cases. Atty. Ismael M. Estella, the petitioner's counsel, is particularly
enjoined to take serious heed of this warning.

WHEREFORE, the petition is DENIED and the appealed decision AFFIRMED in toto, with triple costs
against the petitioner.

SO ORDERED.

G.R. No. 76656 December 11, 1992

SPOUSES EUTIQUIANO CLUTARIO and ARACELI CLUTARIO, petitioners,

vs.
HON. COURT OF APPEALS, HON. GEORGE C. MACLI-ING, RTC Judge of Quezon City, Branch C (100), and
SPOUSES MELQUIADES GANDIA and MARIA V. GANDIA, respondents.

ROMERO, J.:

Private respondents, the Spouses Melquiades Gandia and Maria V. Gandia, are the owners of a two-
storey residential apartment located at No. 56 Liberty St., Murphy, Cubao, Quezon City. Since 1961, while
private respondents have been occupying the upper storey of the house, petitioners have been staying
on the ground floor by virtue of a verbal lease agreement for a monthly rental of P150.00.

On May 9, 1980, private respondents, through their counsel, wrote a letter to the petitioners giving them
ninety (90) days to vacate the premises. According to them, due to their advanced age and failing health,
they have decided to occupy the entire apartment, including the ground floor leased to petitioners.
Because petitioners did not heed the demand letter, private respondents brought the matter to the
Katarungan Pambarangay for settlement, but this did not meet with success. Another demand letter was
sent by private respondents to petitioners on January 20, 1981.

157
In the meantime, it appears that from August 1980, petitioners were in arrears in the payment of their
rentals. On March 4, 1981, private respondents filed a complaint for ejectment against petitioner Araceli
Clutario 1 before the Metropolitan Trial Court (MTC) of Quezon City citing the following two grounds: (1)
their need for the premises; and (2) non-payment of rentals by petitioners from August 1980. Pending
the proceedings before the MTC, petitioners paid the back rentals from August 1980 until May 1981.

After trial, the MTC rendered judgment 2 on January 16, 1984 dismissing the complaint on the ground
that private respondents "failed to support their causes of action with substantial evidence." 3

Private respondents then filed an appeal with the Regional Trial

Court (RTC) of Quezon City. On March 29, 1985, respondent Judge George C. Macli-ing rendered a well-
written decision reversing the MTC judgment. Respondent Judge ruled that petitioners' non-payment of
rentals for more than three months and private respondents' genuine need for the leased premises are
sufficient causes for petitioners' ejectment. The dispositive portion of the RTC decision reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE, and
in lieu thereof, another one is rendered and entered in favor of the appellants and against the appellees:

1. Ordering the defendants-appellees and all persons claiming rights under them to vacate the
premises, identified as the Ground Floor of No. 56 Liberty Avenue, Murphy, Cubao, Quezon City, and
restore possession thereof to plaintiffs-appellants.

2. Ordering defendants-appellees to pay rental arrearages from June, 1981, at the rate of P150.00
per month, until such arrearages shall have been fully paid and the premises vacated and possession
thereof restored to plaintiffs-appellants.

3. Ordering defendants-appellees to pay P2,000.00 as and for attorney's fees; and to pay the costs.

SO ORDERED. 4

It was then petitioners' turn to impugn this judgment by filing a petition for review before the Court of
Appeals. In a decision dated September 18, 1986, 5 the respondent Court of Appeals affirmed the RTC
judgment but deleted the award of attorney's fees to private respondents. Petitioners elevated the case
before this Court, on a petition for review under Rule 45 of the Rules of Court, seeking the reversal of the
Court of Appeals' decision affirming the RTC ruling that they can be ejected by their lessors, the private
respondents.

The petition is without merit.

B.P. Blg. 25 (1979), which was the governing law at the time of the filing of the complaint and which the
parties had to rely on, provides, in section 5, six (6) grounds for ejectment. 6 In seeking to oust
petitioners from the leased premises, private respondents invoke two of those six grounds, namely: (1)
arrears in payment of rent for three (3) months at any one time; 7 and (2) need of the lessors to
repossess their property for their own use or for the use of any immediate member of their family as
residential unit. 8 Petitioners contend that private respondents cannot avail of either ground.

158
No longer disputed is the rule that non-payment of rentals is a sufficient ground for ejectment. 9 Under
sec. 5 (b) of B.P. Blg. 25 (1979), the arrears in rent payment must be for at least three (3) months.
Petitioners started defaulting on their payments in August 1980. On May 15, 1981, they paid P1,500.00
for their rents for the period August 1980 to May 15 1981 at the rate of P150.00 per month. By then,
they had been in arrears for nine (9) months. However, petitioners contend that private respondents, by
accepting the payment of the back rentals, waived their non-payment of rentals for more than three (3)
months as a ground for ejectment.

The contention is without merit.

Case law is to the effect that the acceptance by the lessor of the payment by the lessee of the rentals in
arrears does not constitute a waiver of the default in the payment of rentals as a valid cause of action for
ejectment. 10 The Court notes that when petitioners paid the back rentals on May 15, 1981, private
respondents had already filed the complaint for ejectment earlier, to be specific, on March 4, 1981. The
conduct of private respondents subsequent to their acceptance of the back rentals belies any intention
to waive their right to eject petitioners as a result of the latter's failure to pay the rent for more than
three (3) months. They did not enter into an amicable settlement with petitioners. Neither did they
notify the trial court of their intention to have the complaint dismissed. Instead, they participated
actively in the proceedings before the MTC during all the time that the case dragged on for almost three
years. 11 When the MTC decided adversely against them, private respondents appealed the judgment to
the RTC. Not only have they participated earnestly in all subsequent proceedings even after they
obtained favorable judgments from the RTC and the Court of Appeals, but they have likewise been
consistent in their position that petitioners should be ejected, not only because they need the leased
premises, but also because of petitioners' default in the payment of rentals for more than three (3)
months.

In light of the surrounding circumstances of the case, as well as the prevailing jurisprudence, the Court
rules that the acceptance by private respondents of the petitioners-lessees' back rentals did not
constitute a waiver or abandonment of their cause of action for ejectment against the latter.

Proof of any one of the factors enumerated in section 5 of B.P. Blg. 25 (1979) is sufficient cause for
judicial ejectment of a lessee. Having proved one of such grounds, i.e., arrears in payment of rent for
three (3) months at any one time, private respondents may legally eject petitioners without having to
prove the other grounds for ejectment. Nevertheless, to bolster their action for ejectment, private
respondents invoked in their complaint a second ground for ejectment, namely, their need for the leased
premises. 12

Petitioners are bound by the established jurisprudence that under B.P. Blg. 25 (1979), the need by the
lessor of the leased premises for his own use or that of his immediate family is a valid ground for
ejectment. 13 They, however, submit that this ground for ejectment is not available to private
respondents who own, apart from the disputed premises, three other apartment units located at Nos.
56-A, 56-B and 56-C Liberty St., Murphy, Cubao, Quezon City, at least one of which is allegedly available
for occupancy by private respondents.

Indeed, for the lessor to be able to validly eject the lessee on the ground of need for the leased property,
it must be shown that there is no other available residential unit to satisfy that need. 14 The non-
availability must exist at the time of the demand by the lessor on the lessee to vacate the property. 15 In

159
the instant case, petitioners allege that the other apartment units of private respondents are vacant and
available to the latter for occupancy. 16 Private respondents deny this allegation, claiming that the other
units were occupied when they gave notice to the petitioners to vacate the disputed premises, and
remain so occupied until now. 17 None of the three courts which have already adjudicated on the
controversy gave credence to petitioners' allegation. The MTC which decided in petitioners' favor did not
make a finding that the other apartment units of private respondents were available for occupancy by
the latter. On the contrary, the respondent Court of Appeals ruled that "the other apartments of private
respondents were tenanted." 18 The Court finds no cogent reason to disturb this finding.

The MTC, in deciding in favor of petitioners, ruled that private respondents did not need the disputed
premises which is the ground floor of the apartment unit leased to petitioners, because they were
already occupying the upper floor of the unit. The relevant portion of the MTC decision reads:

On this score, the evidence is clear that the plaintiffs, though owners of the residential house identified
as No. 56 Liberty Avenue, Murphy, Quezon City, occupying the upper floor thereof, are the only persons
living on this upper floor of the house. The only reason advanced by them for needing to repossess the
ground floor or lower part of the house occupied by the defendant, is because the plaintiffs are aging
and sickly, as according to the plaintiffs' letter (Exh. "B") to the defendant, plaintiffs "personally need that
lower portion of the house for personal use and occupancy since they are getting older and aggravated
by their poor health, they get easily tired in going up and downstairs." Obviously, plaintiffs' need of the
lower portion of the house is for convenience. It is the view of this Court that when the framers of Batas
Pambansa Blg. 25 included "need of the premises" as a ground for judicial eviction, personal
convenience is not intended, because the law states clearly that the repossession of the property for the
use of the owner/lessor (or immediate member) must concur with the other requisites, one of which is
that the owner / lessor does not own any other residential unit.

Plaintiffs' position therefore, on this ground, is not only weak but more so not in accord with the spirit,
intent and letter of Batas Pambansa Blg. 25. It may be true that plaintiffs are sickly and aging but their
physical condition is not a legal argument to effect eviction of the-defendant. 19

The need for the leased premises by the lessor as a valid ground for ejectment has already been given a
liberal interpretation in Caudal v. Court of Appeals, 20 where it was held that the conversion of the
leased property into a servants' quarters was a legitimate need within the purview of sec. 5 (c) of B.P.
Blg. 25 (1979). The Court, speaking through then Chief Justice Marcelo B. Fernan, made the following
statements:

Observe that the law does not strictly confine the meaning of the word "residence" mainly for habitation
purposes as restrictedly interpreted by petitioner. In a way, the definition admits a measure of liberality,
albeit limited, since a residence may also be the site of a home industry, or a retail store or be used for
business purposes so long as it is principally used for dwelling purposes. The law in giving greater
importance to the abode being used principally for dwelling purposes, has set the limitation on the
maximum amount of capitalization to P5,000.00, which is small by present standards.

Thus, if an abode can be used for limited business purposes, we see no reason why it cannot be used as
an abode for persons rendering services usually necessary or desirable for the maintenance and
enjoyment of a home and who personally minister to the personal comfort and convenience of the
members of the houses. 21

160
In the case at bar, it appears that the decision of private respondents to occupy both the lower and
upper portions of the property sprang not only from mere convenience, but from necessity as well, due
to their advanced age and the poor health of respondent Melquiades Gandia. While the upper portion of
the premises may have been sufficient to satisfy private respondents' residential needs in 1961 when
they leased the lower portion to petitioners, it no longer sufficed in 1980 or nineteen (19) years later,
when they served the notice to vacate, their personal circumstances having drastically changed.

WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals AFFIRMED.

SO ORDERED.

G.R. No. 89307 May 8, 1992

DR. MA. WENDELYN V. YAP, EVELIA H. BADIAGAN, TERESITA A. BALADAD and FLORENCIA C. DE VERA,
petitioners,
vs.
DR. VERGEL G. CRUZ, THE HON. MARCELO R. OBIEN, as Presiding Judge of the Regional Trial Court of
Manila, Br. 44, and THE HON. COURT OF APPEALS, respondents.

MEDIALDEA, J.:

This petition seeks the reversal of the decision of respondent Court of Appeals in CA-G.R. Sp. No. 15790
dismissing the petition for review and affirming the decision of the Regional Trial Court of Manila, Branch
44 in Civil Case No. 86-38296 which in turn affirmed the decision of the Metropolitan Trial Court of
Manila, Branch 27 in Civil Case No. 113298.

The facts of the case are as follows:

Dr. Vergel G. Cruz, the private respondent in this case was the bonafide tenant of Amado Q. Bugayon, Jr.
for almost five years in the premises in question just before this controversy started. He religiously paid
the monthly rentals of P1,400.00, introduced several improvements and operated a veterinary clinic
known as Malate Veterinary Clinic. Sometime in the latter part of July, 1985, he offered for sale the
goodwill of the veterinary clinic and some of its equipment to Dr. Wendelyn V. Yap, Evelia H. Badiagan,
Teresita A. Baladad and Florencia C. de Vera, the petitioners herein. During the period of negotiations,
private respondent Cruz introduced to the landlord Dr. Wendelyn V. Yap at the person interested in
taking over the clinic. However, the negotiations did not materialize but the petitioners managed to
enter into a contract of lease for the said premises at a monthly rental of P1,800.00 with the landlord. As
a result, private respondent Cruz brought an action for "Forcible Entry with Damages" with the
Metropolitan Trial Court of Manila, Branch 27 against petitioners herein and the landlord.

On June 26, 1986, the Metropolitan Trial Court of Manila, Branch 27, rendered its decision in favor of
private respondent Cruz, the dispositive portion of which states:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and all the defendants are ordered to
vacate the premises in question and surrender peaceful possession of the premises to plaintiff;

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defendants Amado Bugayon, Jr. and Dr. Wendelyn Yap only are ordered to pay jointly and severally the
plaintiff the amount of P3,000.00 as moral damages; the amount of P2,000.00 as exemplary damages
and the sum of P2,000.00 as attorney's fees. (Rollo, p. 22-A)

On May 11, 1988, the Regional Trial Court of Manila, Branch 44 affirmed the aforesaid decision of the
Metropolitan Trial Court and on April 21, 1989, the Court of Appeals dismissed the petition for review of
petitioners and affirmed the decision of the Regional Trial Court, Branch 44. Hence, this petition was filed
raising the following assignment of errors:

2.1. The Hon. Court of Appeals erred in ruling that the lower courts were correct in their decision
that the petitioners must vacate the premises and turn over the possession thereof to the private
respondent despite the fact that the private respondent had already failed and refused to pay for the
rentals thereof, thus, did not have any right thereto, and the petitioners had a valid lease agreement
thereof with the owner of the premises;

2.2. The Hon. Court of Appeals erred in ruling that the owner of the premises must be forced to
release the premises to the private respondent even if there is already a valid and existing contract with
the petitioners and the refusal of the owner to lease the same to the private respondent due to the
latter's failure to pay the rentals therefor;

2.3. The Hon. Court of Appeals erred in ruling that the possession by the petitioners of the premises
located at 1118 Pres. Quirino Avenue was dependent upon the sale of the goodwill of the Malate
Veterinary Clinic by the private respondent to the petitioners. (pp. 74-75, Rollo)

There is no dispute that the petitioners gained access to the leased premises in question by virtue of the
offer of the private respondent to sell the goodwill over his veterinary clinic to them. By one reason or
another, i.e., the alleged increase in the asking price for the goodwill from P12,000.00 to P15,000.00 and
the alleged failure of private respondent to secure the necessary permits and licenses from the
government authorities, the negotiations bagged down. What then happens to the leasehold rights of
private respondent over the premises in question which he had already transferred to petitioners?
Private respondent claims that in view of the failure of negotiations, the petitioners should have
returned the leased premises to him but instead of so doing, they entered into a lease contract with the
landlord thereby ousting him therefrom through strategy or stealth.

On the other hand, the bone of contention of petitioners is that the lease between private respondent
and the landlord was automatically terminated because while the negotiations for the sale of the
goodwill was still on-going, the private respondent stopped paying the rentals for the leased premises
which was already on a month-to-month basis as the formal lease had long expired. They claim that they
were informed of the same and given the option by the landlord to either vacate the premises or enter
into a new lease agreement with him and to pay an increased rental of P1,800.00 for the premises
beginning the month of August, 1985. As such, their possession of the premises has absolutely nothing
to do with the proposed sale of the goodwill by private respondent. Thus, they claim that the decision of
the lower courts is contrary to law inasmuch as it had equated the sale of the goodwill with the
possession of the premises occupied by the petitioners.

Correctly, the petitioners claim a right to the premises in question apart from the proposed sale of the
goodwill. Precisely, private respondent's action for forcible entry and damages recognizes such fact

162
because he predicates his cause of action on the deprivation of his possession by virtue of the new lease
contract executed by the petitioners with the landlord. Whether this contract is valid is the question to
be resolved here.

We rule in favor of private respondent. When the petitioners and the landlord executed a new contract
of lease, the lease of private respondent was still valid and subsisting. There is no question that private
respondent has not effectively relinquished his leasehold rights over the premises in question in view of
the failure of negotiations for the sale of the goodwill. Clearly, the transfer of the leasehold rights is
conditional in nature and has no force and effect if the condition is not complied with.

True, the lease of private respondent is on a month-to-month basis and may be terminated at the end of
any month after proper notice or demand to vacate has been given (Rivera v. Florendo, G.R. No. 60066,
July 31, 1986, 143 SCRA 278; Zablan v. CA, G.R. No. 57844, September 30, 1987, 154 SCRA 487; Uy Hoo
and Sons Realty Development Corp. v. CA, G.R. No. 83263, June 14, 1989, 174 SCRA 100; Palanca v. IAC,
G.R. No. 71566, December 15, 1989, 180 SCRA 119). In the case at bar, however, the lack of proper
notice or demand to vacate upon the private respondent is clearly evident. In the absence of such
notice, the lease of private respondent continues to be in force and can not be deemed to have expired
as of the end of the month automatically. Neither can the non-payment of the rent for the month of
August, 1985 be a ground for termination of the lease without a demand to pay and to vacate. The
instant case can easily be differentiated from the case of Vda. de Kraut v. Lontok, G.R. No. L-18374,
February 27, 1963, 7 SCRA 281, which was cited by petitioners in support of their contention that a lease
on a month-to-month basis may be terminated at the end of any month and shall be deemed terminated
upon the lessee's refusal to pay the increased rental because here there was neither demand on the part
of the landlord to pay the rental nor refusal on the part of the private respondent to pay the same as in
fact he made a tender of his rental payment in the latter part of August, 1985. Thus, when the landlord
and the petitioners entered into a new contract of lease effectively depriving the private respondent of
his lease, they were clearly guilty of forcible entry in view of the subsisting lease of private respondent.

ACCORDINGLY, the petition is hereby DENIED and the questioned decision of the Court of Appeals is
AFFIRMED.

SO ORDERED.

G.R. No. L-62603 March 27, 1990

UNITED REALTY CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS and REVEREND FATHER JOSE TORRALBA SY, respondents.

GANCAYCO, J.:

Whether the contract of lease is for a definite or indefinite period of time and the applicability of the
provisions of Presidential Decree No. 20 and Batas Pambansa Bilang 25 are the issues in this case.

The facts are undisputed.

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In March 1964 and December 1964 petitioner and private respondent Rev. Father Jose Torralba Sy,
entered into separate contracts of lease over two apartments located at 913-E and 193-F Josefina Street,
Sampaloc, Manila, with the common provision covering its duration as follows:

To hold the same for one month from the (15th day of March, 1964 for Apt. No. 913-E and lst day of
January, 1964 for Apt. No. 913- F) and so on from month to month at a rent of TWO HUNDRED PESOS
(P200.00), Philippine Currency, per month, payable in advance on the first TEN (10) days of each calendar
month, until the lease shall terminate, which termination shall be determined by either party giving FIVE
(5) days notice in writing. 1

It was further stipulated in the two contracts that "in case the lessee shall continuously withhold
possession of the apartments after he or she has been properly notified of the termination of his or her
right to occupy the same, the lessor shall be entitled to collect P400.00 every month or fraction thereof,
as reasonable compensation for the use of the place and as damages."

Private respondent removed the portion separating the two apartments and converted the same
principally for use as a Buddhist chapel.

On August 1, 1970, petitioner leased to private respondent the apartment at 937-E Josefina Street,
Sampaloc, Manila, effective August 1, 1970 for the monthly rental of P300.00, 2 payable in advance
within the first ten (10) days of the month for his use as residence only. It was also stipulated in said
contract that "in case the lessee shall continuously withhold possession of the apartments after he/she
has been notified of the termination of his/her right to occupy the same, the lessor shall be entitled to
collect P500.00 every month or fraction thereof, as reasonable compensation for the use of the place
and as damages.

On September 24, 1975, petitioner sent a letter to private respondent that effective November 1, 1975
the new rental for the two apartments will be P500.00 per door or P1,000.00 for the two doors, likewise
payable in advance within the first ten (10) days of the calendar month, with the request that petitioner
be informed of private respondent's decision as to the new rate not later than October 25, 1976 so that
it may be guided accordingly. 3 Instead private respondent complained to the Department of Public
Information, Malacanang, Manila. In the confrontation between the parties, the Presidential Complaint
and Action Committee found that there was no violation of P.D. No. 20 as the subject premises are being
principally as a Buddhist Temple and therefore are not covered. Private respondent then sent a letter-
complaint thru counsel dated November 13, 1975 to them Asst. Executive Secretary Ronaldo E. Zamora
who in response issued Opinion No. 480, Series of 1975 dated November 20, 1975 signed by Deputy
Executive Secretary Roberto V. Reyes. 4 Therein it was held that the increase in rental demanded was in
violation of P.D. No. 20 and that as 1/4 of the two-door apartments is being used likewise as a chapel
incidental to the calling of the private respondent as a monk it cannot be called as a commercial or
public establishment or as a place for the exercise of one's profession because the same is not for profit.

However, on November 16, 1976, in response to the letter of petitioner, Secretary Ronaldo E. Zamora, as
Presidential Assistant for Legal Affairs, issued Opinion No. 629, Series of 1976, as follows:

While it may be conceded arguendo that for being used as a place for worship, the premises may not
necessarily be considered as commercial for purposes of ruling out the applicability of Presidential
Decree No. 20 dated October 12, 1972, which freezes rates of rentals of dwelling unit at their present

164
levels when the same do not exceed P300.00 per month, it is equally true that the same will, as it does,
not fall within the protective mantle of the decree.

It is to be noted that the decreed prohibition against rental increase applies only to dwelling units or lots
used for residential purposes, the monthly rent of which does not exceed P300.00. On this point
Republic Act No. 6359 defines 'dwelling unit as follows:

"A dwelling unit refers to a house and lot used for residential purposes and shall include not only
buildings, dwelling places, except motels, hotels, or hotel rooms; but also those used for home industries
or retail store if the owner thereof and his family actually live therein and use it principally for residential
purpose; Provided, That in case of a retail store the capital thereof does not exceed five thousand
pesos." (Emphasis supplied.)

Thus if the leased apartment units are used principally for purposes of religious worship, the incidental
fact that Father Sy and/or his family live therein will not include them in that class of tenants favored by
the emergency law on housing (Morales vs. Zamora, 31 Phil. 204). In such case, the matter of regulating
the monthly rentals become conventional between him and the URC. This should not be understood to
mean, however, that the latter is free to demand an arbitrary amount. Equity and justice require that
both parties observe reasonable terms and conditions in bringing about a mutual covenant.

Under the circumstances, therefore, this Office, on equitable considerations and for reasons of public
policy, believes that rental increases should be raised to reasonable levels only. 5

On January 3, 1977, petitioner through counsel furnished private respondent through counsel a xerox
copy of said Opinion No. 629, Series of 1976 and demanded that the private respondent vacate and
surrender the two premises within five (5) days from receipt of the same and to pay his rental
indebtedness minus the deposit made. Nevertheless, private respondent failed to vacate the premises.

Hence, petitioner filed a complaint for unlawful detainer in the City Court of Manila on March 7, 1977.
After the issues were joined and the trial on the merits, a decision was rendered on February 16, 1981
dismissing the complaint and counter-claim without pronouncement as to costs. Both parties asked for a
reconsideration of the decision but the same was denied. Hence, both parties appealed to the Court of
First Instance of Manila, wherein in due course a decision was rendered on December 28, 1981 affirming
the judgment of the City Court with the modification finding private respondent entitled to moral
damages in the amount of P4,000.00, exemplary damage ages in the amount of P2,000.00 and attorney's
fees of P2,000.00 and the costs of the suit. A motion for reconsideration filed by petitioner was denied
by the trial court in an order of February 25, 1982.

Hence, a petition for review was filed by petitioner with the Court of Appeals, wherein after the issues
were joined, a decision was rendered on October 7, 1982 dismissing the petition with costs against
petitioner. 6 A motion for reconsideration filed by petitioner of the decision was denied in a resolution of
November 17, 1982.

Thus, this petition.

165
A reading of the two contracts of lease entered into between petitioner and private respondent
hereinabove reproduced show that its period is from month to month and that the lease may be
terminated when either party gives a 5 days notice in writing.

No doubt such a stipulation between the parties demonstrates that the agreement of lease is for a
definite period and not for an indefinite period as held by the appellate court.

In Rantael vs. CA, 7 involving a similar contract of lease between the parties this Court found that a lease
on a month to month basis expires after the last day of the 30th day period repeating the same cycle of
the 30-day period until either party express their prerogative under their agreement to terminate the
same.

The only difference between Rantael and the present case is that in the former the parties may
terminate the agreement upon 30 days notice while in this case, the agreement is that the termination
by either party may be upon 5 days notice. Such difference is of no moment. And such agreement is
binding and is the law between the parties.

Since the lease agreement in question is for a definite period it follows that petitioner has a right to
judicially eject private respondent from the premises as an exception to the general rule provided for in
Section 4 of P.D. No. 20 which provides as follows:

Except when the lease is for a definite period, the provisions of paragraph (1) of Article 1673 of the Civil
Code of the Philippines insofar as they refer to dwelling unit or land on which another's dwelling is
located shall be suspended until otherwise provided; but other provisions of the Civil Code and the Rules
of Court of the Philippines on lease contracts insofar as they are not in conflict with the provisions of this
Act, shall apply. (Emphasis supplied.)

Moreover, under Section of 5(f) of B.P. Blg. 25 one of the grounds for ejectment is the expiration of the
period of a written lease contract. In this case, because of the failure of the private respondent to pay
the increased rental demanded by petitioner, petitioner elected to terminate the contract and asked the
private respondent to vacate the premises. A lease contract may be terminated at the end of any month,
which shall be deemed terminated upon the refusal to pay the increased monthly rental demanded by
the petitioner, provided the same is not exhorbitant. 8

Further, there is no question in this case that the two apartments subject of litigation if not a greater
portion thereof is not used by private respondent as his residence but for a Buddhist Temple. Thus, it is
with more reason that this lease agreement does not fall within the protective mantle of the provision of
P.D. No. 20 and B.P. No. 25 which covers only dwelling units.

Lastly, considering that during the pendency of this appeal, the private respondent died on August 23,
1987, thus the said lease agreements were effectively terminated by the death of private respondent
who is the lessee of the premises in question.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 7, 1982 and
its Resolution dated November 17, 1982 are hereby reversed and set aside and another judgment is
hereby rendered ordering private respondent and/or his heirs or successors-in-interest to immediately

166
vacate the premises of the property in question and to pay the unpaid rentals thereof of P1,000.00 a
month for the two apartments until they vacate the premises, with costs against private respondent.

SO ORDERED.

G.R. No. 117423 January 24, 1996

LEGAR MANAGEMENT & REALTY CORPORATION, petitioner,

vs.
COURT OF APPEALS, HON. JUAN O. ENRIQUEZ, JR., FELIPE PASCUAL, and DIONISIO ANCHETA,
respondents.

DECISION

PUNO, J.:

This is an appeal from the Decision, dated July 6, 1994, of the Court of Appeals, 1 affirming the reversal
by the Regional Trial Court of Quezon City, Branch 92, of the Decision 2 of the Metropolitan Trial Court of
Quezon City, Branch 31, the dispositive portion of which reads, as follows:

In view of the foregoing, this Court finds the plaintiff's (herein petitioner's) claim to have been duly
established against defendants (herein private respondents) Felipe Pascual and Dionisio Ancheta, and
therefore renders judgment against (them), ordering said defendants (private respondents), as follows:

1. Ordering the defendants (private respondents) and all persons claiming rights under them to
vacate the premises at No. 318-T E. Rodriguez, St. Blvd., Quezon City and surrender possession thereof
to plaintiff (petitioner);

2. Ordering the defendants (private respondents) to pay the sum of TWO THOUSAND PESOS
(P2,000.00) as and for, attorney's fees; and

3. ordering the defendants (private respondents) to pay the costs of suit.

SO ORDERED.3

The facts are undisputed.

Spouses Augusto and Celia Legasto owned an apartment building located along E. Rodriguez, Sr.
Boulevard in Quezon City. They entered into a written contract of lease with no definite period with
private respondents Pascual and Ancheta, covering unit 318-T of the building. Sometime in 1987, the
Legasto spouses and their children organized petitioner Legar Management & Realty Corporation, and
transferred and assigned thereto all their rights, interests, and privileges over certain properties,
including the subject apartment building.

Thereafter, petitioner allowed private respondents to continue occupying their apartment unit by virtue
of a verbal contract of lease which was renewable on a month-to-month basis. Pursuant to their verbal

167
lease agreement, private respondents were to pay petitioner a monthly rental of One Thousand Five
Hundred Forty-Five Pesos (P1,545.00).

On April 21, 1992, petitioner wrote private respondent Pascual a formal notice of termination,
requesting him to vacate unit 318-T by the end of May, 1992. A similar formal notice was sent to private
respondent Ancheta on June 4, 1992, demanding vacation of the same unit by the end of June, 1992.
Both refused to heed petitioner's demand and did not vacate the subject premises.

Petitioner instituted an ejectment case against private respondents with the Metropolitan Trial Court of
Quezon City. The case was docketed as Civil Case No. 6011, and raffled to Branch 31 of the court.4

At the end of trial, the MTC found for petitioner and held that the verbal lease contract between the
parties, being on a month-to-month basis, is for a definite period, and may be terminated at the end of
any month. On appeal, the Regional Trial Court of Quezon City, Branch 92,5 reversed the MTC Decision,
holding that "the mere expiration of the month-to-month lease period in accordance with Article 1687 of
the New Civil Code does not automatically give rise to an ejectment in cases governed by the Rent
Control Law, in view of Section 6 of Batas Pambansa Blg. 877, as amended. There is need for existence of
other grounds enumerated under Section 5 of B.P. Blg. 877, as amended, in order to eject a lessee."

The RTC Decision was upheld by the Court of Appeals which ruled, inter alia, that:

As held in Rivera vs. Florendo . . . , reiterated in Miranda vs. Ortiz . . . , independently of the grounds for
ejectment enumerated in Batas Pambansa Blg. 25 (now Batas Pambansa Blg. 877, extended by Republic
Act Nos. 6643 and 6828), the owner/lessor cannot eject the tenant by reason of the expiration of the
period of lease as fixed or determined under Article 1687 of the Civil Code. Even if in the instant case the
month-to-month period is deemed to have expired at the end of the month after notice of demand to
vacate . . . , (private) respondents' eviction cannot be allowed without regard to the grounds for
ejectment enumerated in Section 5 of Batas Pambansa Blg. 877.6 (Citation omitted.)

Petitioner now impugns the Decision of the Court of Appeals as against existing law and jurisprudence.

The petition is meritorious.

The issue is whether the lessee of a residential property covered by the Rent Control Law can be ejected
on the basis alone of the expiration of the verbal lease contract under which rentals are paid monthly.
We resolved this issue in the affirmative in the case of Acab vs. Court of Appeals, G.R. No. 112285,
February 21, 1995, 241 SCRA 546.

We held:

"Section 6 of Batas Pambansa Blg. 877, which is exactly the same as Section 6 of Batas Pambansa Blg. 25,
provides that:

'Sec. 6: Application of the Civil Code and Rules of Court of the Philippines. - Except when the lease is for
a definite period, the provisions of paragraph (1) of Article 1673 of the Civil Code of the Philippines,
insofar as they refer to residential units covered by this Act, shall be suspended during the effectivity of
this Act, but other provisions of the Civil Code and the Rules of Court on lease contracts, insofar as they

168
are not in conflict with the provisions of the Act shall apply. In a long line of cases, xxx beginning with
Rivera v. Florendo, 143 SCRA 278 (1986), this Court has held that said provision does not suspend the
effects of Article 1687 of the New Civil Code which provides as follows:

'Art. 1687. If the period for the lease has not been fixed, it is understood to be from year to year, if
the rent agreed upon is annual; from month to month, if it is monthly; from week to week, if it is weekly;
and from day to day, if the rent is to be paid daily. However, even though a monthly rent is paid, and no
period for the lease has been set, the courts may fix a longer term for the lease after the lessee has
occupied the premises for over one year. If the rent is weekly, the courts may likewise determine a
longer period after the lessee has been in possession for over six months. In case of daily rent, the courts
may fix a longer period after the lessee has stayed in the place for over one month.'

Thus, we have held that lease agreements with no specified period, but in which rentals are paid
monthly, are considered to be on a month-to-month basis. . . . They are for a definite period and expire
after the last day of any given thirty-day period, upon proper demand and notice by the lessor to
vacate. . . .

In the case at bench, it was found by all three lower courts that the lease over the subject property was
on a month-to-month basis, and that there was proper notice of non-renewal of contract and demand
for vacation of premises made by petitioners on private respondent. Unquestionably, therefore, the
verbal lease agreement entered into by private respondent and petitioners' father and predecessor-in-
interest has been validly terminated, in which case there is sufficient cause for ejectment under Section
5(f) of Batas Pambansa Blg. 877 which reads:

Sec. 5: Grounds for Judicial Ejectment. - Ejectment shall be allowed on the following grounds:

xxx xxx xxx

(f) Expiration of the period of the lease contract.

This is in line with Our holding in the case of Palanca v. Intermediate Appellate Court, 180 SCRA 119
(1989), that:

In the recently decided case of Uy Hoo and Sons Realty Development Corporation v. Court of Appeals
and Thomas Kuan,7 . . . this Court ruled that a month to month lease under Article 1687 is a lease with a
definite period, the expiration of which upon previous demand by the lessor to vacate, can justify
ejectment.

The Court noted that notwithstanding the fact that the Miranda8case and the Rivera9 case quoted
therein involved a need for the lessor to re-possess the leased premises for his own use, (which fact is
not present in this case), the Court applied the ruling therein on the ground that:

. . . the thrust of the decision in said cases appears to be that "the determination of the period of a lease
agreement can still be made in accordance with said Article 1687, and that in a month to month lease
situation, when petitioners (lessor) gave private respondent (lessee) notice to vacate the premises in
question, the contract of lease is deemed to have expired as of the end of the month."

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IN VIEW WHEREOF, the petition is GRANTED. The Decisions of the Court of Appeals in CA-G.R. SP No.
32152, dated July 6, 1994, and of the Regional Trial Court of Quezon City, Branch 92 in Civil Case No. Q-
9315330, dated August 26, 1993, are REVERSED AND SET ASIDE. The Decision, dated February 2, 1993,
of the Metropolitan Trial Court of Quezon City, Branch 31, is REINSTATED. No costs.

SO ORDERED.

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