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594 SUPREME COURT REPORTS ANNOTATED

Crisologo-Jose vs. Court of Appeals

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G.R. No. 80599.September 15, 1989.

ERNESTINA CRISOLOGO-JOSE, petitioner, vs. COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as Vice-President for Sales of Mover Enterprises, Inc., respondents.

Negotiable Instruments Law; Corporations; Rule that an accommodation party liable on the instrument to a holder for value does not apply to corporations which are accommodation parties; Reasons.—The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to corporations which are accommodation parties. This is because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires. Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee with knowledge that the issue or indorsement of the instrument by the corporation is for the accommodation of another, he cannot recover against the corporation thereon.

Same; Same; Same; Same; Exception; An officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for accommodation only if specifically authorized to do so; Personal liability of signatories in the instrument.—By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so. Corollarily, corporate officers, such as the president and vice-president, have no power to execute for mere

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* SECOND DIVISION.

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accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith.

Same; Same; Same; Same; Consignation; Payment; Remedy of consignation, proper; Case at bar; Effects of consignation.—We interpose the caveat,however, that by holding that the remedy of consignation is proper under the given circumstances, we do not thereby rule that all the operative facts for consignation which would produce the effect of payment are present in this case. Those are factual issues that are not clear in the records before us and which are for the Regional Trial Court of Quezon City to ascertain in Civil Case No. Q-33160, for which reason it has advisedly been directed by respondent court to give due course to the complaint for consignation, and which would be subject to such issues or claims as may be raised by defendant and the counterclaim filed therein which is hereby ordered similarly revived.

Checks; B.P. 22; Presumptive rule to determine whether or not there was insufficiency of funds in or credit with the drawee bank. —These are aside the considerations that the disputed period involved in the criminal case is only a presumptive rule, juris tantum at that, to determine whether or not there was knowledge of insufficiency of funds in or credit with the drawee bank; that payment of civil liability is not a mode for extinguishment of criminal liability; and that the requisite quantum of evidence in the two types of cases are not the same.

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PETITION to review the decision of the Court of Appeals. Torres, Jr., J.

The facts are stated in the opinion of the Court. Melquiades P. de Leon for petitioner. Rogelio A. Ajes for private respondent.

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Crisologo-Jose vs. Court of Appeals

REGALADO, J.:

Petitioner seeks the annulment of the decision 1 of respondent Court of Appeals, promulgated on September 8, 1987, which reversed the decision of the trial court dismissing the complaint for consignation filed by therein plaintiff Ricardo S. Santos, Jr. The parties are substantially agreed on the following facts as found by both lower courts:

2

“In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover Enterprises, Inc. incharge of marketing and sales; and the president of the said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty. Benares, in accommodation of his clients, the spouses Jaime and Clarita Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated June 14, 1980, in the amount of P45,000.00 (Exh. ‘1’) payable to defendant Ernestina Crisologo- Jose. Since the check was under the account of Mover Enterprises, Inc., the same was to be signed by its president, Atty. Oscar Z. Benares, and the treasurer of the said corporation. However, since at that time, the treasurer of Mover Enterprises was not available, Atty. Benares prevailed upon the plaintiff, Ricardo S. Santos, Jr., to sign the aforesaid check as an alternate signatory. Plaintiff Ricardo S. Santos, Jr. did sign the check. It appears that the check (Exh. ‘1’) was issued to defendant Ernestina Crisologo-Jose in consideration of the waiver or quitclaim by said defendant over a certain property which the Government Service Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar Benares, the spouses Jaime and Clarita Ong, with the understanding that upon approval by the GSIS of the compromise agreement with the spouses Ong, the check will be encashed accordingly. However, since the compromise agreement was not approved within the expected period of time, the aforesaid check for P45,000.00 (Exh. ‘1’) was replaced by Atty. Benares with another Traders Royal Bank check bearing No. 379299 dated August 10, 1980, in the same amount of P45,000.00

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(Exhs. ‘A’ and ‘2’), also payable to the defendant Jose. This replacement check was also signed by Atty. Oscar Z. Benares and

1 Penned by Justice Justo P. Torres, Jr. and concurred in by Associate Justices Leonor Ines Luciano and Oscar M. Herrera; Rollo, 18.

2 Civil Case No. Q-33160, Regional Trial Court of Quezon City, Branch XCVI.

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by the plaintiff Ricardo S. Santos, Jr. When defendant deposited this replacement check (Exhs. ‘A’ and ‘2’) with her account at Family Savings Bank, Mayon Branch, it was dishonored for insufficiency of funds. A subsequent redepositing of the said check was likewise dishonored by the bank for the same reason. Hence, defendant through counsel was constrained to file a criminal complaint for violation of Batas Pambansa Blg. 22 with the Quezon City Fiscal’s Office against Atty. Oscar Z. Benares and plaintiff Ricardo S. Santos, Jr. The investigating Assistant City Fiscal, Alfonso Llamas, accordingly filed an amended information with the court charging both Oscar Benares and Ricardo S. Santos, Jr., for violation of Batas Pambansa Blg. 22 docketed as Criminal Case No. Q-14867 of then Court of First Instance of Rizal, Quezon City. “Meanwhile, during the preliminary investigation of the criminal charge against Benares and the plaintiff herein, before Assistant City Fiscal Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier’s check No. CC 160152 for P45,000.00 dated April 10, 1981 to the defendant Ernestina Crisologo-Jose, the complainant in that criminal case. The defendant refused to receive the cashier’s check in payment of the dishonored check in the amount of P45,000.00. Hence, plaintiff encashed the aforesaid cashier’s check and subsequently deposited said amount of P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs. ‘D’ and ‘E’). Incidentally, the cashier’s check adverted to above was purchased by Atty. Oscar Z. Benares and given to the plaintiff herein to be applied in payment of the dishonored check.”

3

After trial, the court a quo, holding that it was “not persuaded to believe that consignation referred to in Article 1256 of the Civil Code is applicable to this case,” rendered judgment dismissing plaintiff’s complaint and defendant’s counterclaim. As earlier stated, respondent court reversed and set aside said judgment of dismissal and revived the complaint

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for consignation, directing the trial court to give due course thereto. Hence, the instant petition, the assignment of errors wherein are prefatorily stated and discussed seriatim. 1. Petitioner contends that respondent Court of Appeals erred in holding that private respondent, one of the signatories of the check issued under the account of Mover Enterprises, Inc., is an accommodation party under the Negotiable Instru-

3 Rollo, 19-20.

4 Rollo, 18.

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amount of said check. Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and not private respondent who merely signed the check in question in a representative capacity, that is, as vice-president of said corporation, hence he is not liable thereon under the Negotiable Instruments Law. The pertinent provision of said law referred to provides:

Sec. 29. Liability of accommodation party.—An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party.

Consequently, to be considered an accommodation party, a person must (1) be a party to the instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value therefor, and (3) sign for the purpose of lending his name for the credit of some other person. Based on the foregoing requisites, it is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. From the standpoint of contract law, he differs from the ordinary concept of a debtor therein in the sense that he has not received any valuable consideration for the

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instrument he signs. Nevertheless, he is liable to a holder for value as if the contract was not for accommodation, 5 in whatever capacity such accommodation party signed the instrument, whether primarily or secondarily. Thus, it has been held that in lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. 6 Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this case, as petitioner suggests, the inevitable question is whether or not it may be held liable on

5 Ang Tiong vs. Ting, et al., 22 SCRA 713 (1968). 6 Philipine Bank of Commerce vs. Aruego, 102 SCRA 530 (1981).

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the accommodation instrument, that is, the check issued in favor of herein petitioner. We hold in the negative. The aforequoted provision of the Negotiable Instruments Law which holds an accommodation party liable on the instrument to a holder for value, although such holder at the time of taking the instrument knew him to be only an accommodation party, does not include nor apply to

corporations which are accommodation parties. 7

because the issue or indorsement of negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires. 8 Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. If the form of the instrument, or the nature of the transaction, is such as to charge the indorsee with knowledge that the issue or indorsement of the instrument by the corporation is for the accommodation of another, he cannot recover against the corporation thereon. By way of exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the corporation for the accommodation of a third person only if specifically authorized to do so. 10 Corollarily, corporate officers, such as the president and vice-president, have no power to execute

This is

9

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for mere accommodation a negotiable instrument of the corporation for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern. Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect of the corporate business or operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be personally liable therefor, as well as the consequences arising from their acts in connection therewith.

7 11 C.J.S. 309.

8 14A C.J. 732.

9 Oppenheim vs. Simon Reigel Cigar Co., 90 N.Y.S. 355, cited in 11 C.J.S. 309. 10 In re Wrentham Mfg. Co., 2 Low. 119; Hall vs. Auburn Turnp. Co., 27 Cal. 255, cited in 14A C.J. 461.

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The instant case falls squarely within the purview of the aforesaid decisional rules. If we indulge petitioner in her aforesaid postulation, then she is effectively barred from recovering from Mover Enterprises, Inc. the value of the check. Be that as it may, petitioner is not without recourse. The fact that for lack of capacity the corporation is not bound by an accommodation paper does not thereby absolve, but should render personally liable, the signatories of said instrument where the facts show that the accommodation involved was for their personal account, undertaking or purpose and the creditor was aware thereof. Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the check was issued at the instance and for the personal account of Atty. Benares who merely prevailed upon respondent Santos to act as co- signatory in accordance with the arrangement of the corporation with its depository bank. That it was a personal undertaking of said corporate officers was apparent to petitioner by reason of her personal involvement in the financial arrangement and the fact that, while it was the corporation’s check which was issued

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to her for the amount involved, she actually had no transaction directly with said corporation. There should be no legal obstacle, therefore, to petitioner’s claims being directed personally against Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr., president and vice-president, respectively, of Mover Enterprises, Inc.

2. On her second assignment of error, petitioner argues that the Court of Appeals erred in holding that the consignation of the sum of P45,000.00, made by private respondent after his tender of payment was refused by petitioner, was proper under Article 1256 of the Civil Code.

Petitioner’s submission is that no creditor-debtor relationship exists between the parties, hence consignation is not proper. Concomitantly, this argument was premised on the assumption that private respondent Santos is not an accommodation party. As previously discussed, however, respondent Santos is an accommodation party and is, therefore, liable for the value of the check. The fact that he was only a co-signatory does not detract from his personal liability. A co-maker or co-drawer under the circumstances in this case is as much an accommoda-

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tion party as the other co-signatory or, for that matter, as a lone signatory in an accommodation instrument. Under the doctrine in Philippine Bank of Commerce vs. Aruego, supra, he is in effect a co-surety for the accommodated party with whom he and his co-signatory, as the other co-surety, assume solidary liabilityex lege for the debt involved. With the dishonor of the check, there was created a debtor- creditor relationship, as between Atty. Benares and respondent Santos, on the one hand, and petitioner, on the other. This circumstance enables respondent Santos to resort to an action of consignation where his tender of payment had been refused by petitioner. We interpose the caveat,however, that by holding that the remedy of consignation is proper under the given circumstances, we do not thereby rule that all the operative facts for consignation which would produce the effect of

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payment are present in this case. Those are factual issues that are not clear in the records before us and which are for the Regional Trial Court of Quezon City to ascertain in Civil Case No. Q-33160, for which reason it has advisedly been directed by respondent court to give due course to the complaint for consignation, and which would be subject to such issues or claims as may be raised by defendant and the counterclaim filed therein which is hereby ordered similarly revived. 3. That respondent court virtually prejudged Criminal Case No. Q-14687 of the Regional Trial Court of Quezon City filed against private respondent for violation of Batas Pambansa Blg. 22, by holding that no criminal liability had yet attached to private respondent when he deposited with the court the amount of P45,000.00 is the final plaint of petitioner. We sustain petitioner on this score. Indeed, respondent court went beyond the ratiocination called for in the appeal to it in CA-G.R. CV. No. 05464. In its own decision therein, it declared that “(t)he lone issue dwells in the question of whether an accommodation party can validly consign the amount of the debt due with the court after his tender of payment was refused by the creditor.” Yet, from the commercial and civil law aspects determinative of said issue, it digressed into the merits of the aforesaid Criminal Case No. Q-14867, thus:

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Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of such insufficiency of funds or credit. Thus, the making, drawing and issuance of a check, payment of which is refused by the drawee because of insufficient funds in or credit with such bank is prima facie evidence of knowledge of insufficiency of funds or credit, when the check is presented within 90 days from the date of the check. “It will be noted that the last part of Section 2 of B.P. 22 provides that the element of knowledge of insufficiency of funds or credit is not present and, therefore, the crime does not exist, when the drawer pays the holder the amount due or makes arrangements for payment in full by the drawee of such check within five (5) banking days after receiving notice that such check has not been paid by the drawee. “Based on the foregoing consideration, this Court finds that the plaintiff-appellant acted within his legal rights when he

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consigned the amount of P45,000.00 on August 14, 1981, between August 7, 1981, the date when plaintiff-appellant receive (sic) the notice of non-payment, and August 14, 1981, the date when the debt due was deposited with the Clerk of Court (a Saturday and a Sunday which are not banking days) intervened. The fifth banking day fell on August 14, 1981. Hence, no criminal liability has yet attached to plaintiff-appellant when he deposited the amount of P45,000.00 with the Court a quo on August 14, 1981.”

11

That said observations made in the civil case at bar and the intrusion into the merits of the criminal case pending in another court are improper do not have to be belabored. In the latter case, the criminal trial court has to grapple with such factual issues as, for instance, whether or not the period of five banking days had expired, in the process determining whether notice of dishonor should be reckoned from any prior notice if any has been given or from receipt by private respondents of the subpoena therein with supporting affidavits, if any, or from the first day of actual preliminary investigation; and whether there was a justification for not making the requisite arrangements for payment in full of such check by the drawee bank within the said period. These are matters alien to the present controversy on tender and consignation of payment, where no such period and its legal effects are involved. These are aside from the considerations that the disputed

11 Rollo, 21-22.

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period involved in the criminal case is only a presumptive rule, juris tantum at that, to determine whether or not there was knowledge of insufficiency of funds in or credit with the drawee bank; that payment of civil liability is not a mode for extinguishment of criminal liability; and that the requisite quantum of evidence in the two types of cases are not the same. To repeat, the foregoing matters are properly addressed to the trial court in Criminal Case No. Q-14867, the resolution of which should not be interfered with by respondent Court of Appeals at the present posture of said

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case, much less preempted by the inappropriate and unnecessary holdings in the aforequoted portion of the decision of said respondent court. Consequently, we modify the decision of respondent court in CA-G.R. CV No. 05464 by setting aside and declaring without force and effect its pronouncements and findings insofar as the merits of Criminal Case No. Q-14867 and the liability of the accused therein are concerned. WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court of Appeals is AFFIRMED. SO ORDERED.

Paras, Padilla and Sarmiento, JJ., concur. Melencio-Herrera J., No part. Did not participate in deliberations.

Judgment affirmed with modifications.

Notes.—In order that consignation may be effective, the debtor must first comply with certain requirements prescribed by law. (Soco vs. Militante, 123 SCRA 160.) Without prior notice, consignation is void as payment. (Soco vs. Militante, 123 SCRA 160.)

——o0o——

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Guzman vs. Court of Appeals

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G.R. No. 81949.September 15, 1989.

SPOUSES EMETERIO and LOLITA GUZMAN, petitioners, vs. HONORABLE COURT OF APPEALS and SPOUSES GUILLERMO and GERARDA EVANGELISTA, respondents.

Agrarian Reform; Urban Land Reform Law; Right of First Refusal; Only legitimate tenants who have resided for ten years or more on specific parcels of land in declared urban land reform zones or urban zones, and who have built their houses thereon, have the right of first refusal.—It is clear from the language of the law that only legitimate tenants who have resided for ten years or more on specific parcels of land situated in declared Urban Land Reform Zones or Urban Zones, and who have built their homes thereon, have the right not to be dispossessed therefrom and the

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“right of first refusal” to purchase the property under reasonable terms and conditions to be determined by the appropriate government agency. At the time of the sale of the subject property to petitioners, Proclamation No. 1967 [Amending Proclamation No. 1893 by specifying 244 sites in Metropolitan Manila as Areas for Priority Development (APDs) and Urban Land Reform Zones], promulgated on May 14, 1980, was the prevailing law enumerating the parcels of land affected by Pres. Dec. Nos. 1517, 1640 and 1642, and LOI No. 935. A simple reading of the list of 244 sites described in the annex to Proclamation No. 1967 reveals that the subject property was not among the APDs or Urban Land Reform Zones in Navotas. Thus, when the subject property was sold to petitioners, it was neither covered by, nor subject, to the conditions set forth in, the Urban Land Reform Law.

Same; Same; Tenants, Defined; Tenants, as defined in Pres. Decree No. 1517 does not include those whose possession of the property is under litigation.—Secondly, private respondents are not even “tenants” within the purview of Pres. Dec. No. 1517. Section 3 (f) of this decree, which defines the term “tenant,” provides: Tenant refers to the rightful occupant of land and its structures, but does not include those whose presence on the land is merely tolerated and without the benefit of contract, those who enter the land by force or deceit, or those whose possession is under litigation [italics supplied.] It cannot be denied that at the time the subject property was declared an APD in December 1987, the right of private respondents to occupy and possess the subject property was then an issue under litigation in the action

* THIRD DIVISION.

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for ejectment filed against them by petitioners.

Civil Law; Contracts; Lease; Suspension of Rental Payments; Private respondent’s belief that the subject property should have been sold to them, does not justify the unilateral withholding of rental payments due the new owner.—Upon the purchase of the

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leased property and proper notice by the vendee to the lessee, the latter must pay the agreed monthly rentals to the new owner since, by virtue of the sale, the vendee steps into the shoes of the original lessor to whom the lessee bound himself to pay [Mirasol v. Magsuci, G.R. No. L-17125, November 28, 1966, 18 SCRA 801]. In the instant case, despite their receipt of the demand letter dated March 21, 1986 informing them of the change of property ownership, private respondents unjustifiably failed to pay the monthly rentals which accrued for the account of the new owner. Their belief that the subject property should have been sold to them does not justify the unilateral withholding of rental payments due to Lolita Guzman as new owner of the property. Private respondents must be reminded that Article 1658 of the New Civil Code provides only two instances wherein the lessee may suspend payment of rent, namely, in case the lessor fails to make the necessary repairs or to maintain the lessee in peaceful and adequate enjoyment of the property leased [See Reyes v. Arca, G.R. No. L-21447, November 29, 1965, 15 SCRA 442].

Same; Same; Same; Ejectment; Private respondents’ continued stay in the property without having paid a single monthly rental is a sufficient cause for ejectment.—Private respondents should have at the very least replied to Lolita Guzman’s letter and tendered payment of the monthly rentals which accrued in her favor beginning March 1986, and if such were to be refused by her, then private respondents should have made a consignation thereof or deposited the rentals due pending the resolution of their alleged claim against the administratrix of the estate of the late Mercedes Policarpio [SeeIpapo v. IAC, G.R. No. 72740, January 27, 1987, 147 SCRA 342]. Instead, they opted to take a hard-line stance in refusing to acknowledge Lolita Guzman as owner and lessor, and, in so doing, gave cause to be declared in default in their obligation to pay rentals due her. [SeeLandicho v. Tensuan, G.R. No. 51216, June 30, 1987, 151 SCRA 410]. Thus, when petitioners filed their action for ejectment, the rentals (which were payable in advance within the first five days of each month) corresponding to the months of March, April and May, 1986 had not been paid. And the glaring situation to date is that private respondents continue to occupy the subject property without having paid a single monthly rental which accrued pending litigation. Under these circumstances,

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the Court finds that sufficient cause for their ejectment under Section 5 (b) of Batas Pambansa Blg. 877 has been established. [SeeRoxas v. IAC, G.R. Nos. 74279 and 74801-03, January 20, 1988, 157 SCRA 166].

Civil Procedure; Prejudicial Question; Ejectment; Possession; Mere allegation of ownership by the defendant in an ejectment case or the pendency of an action for reconveyance does not divest the inferior court of jurisdiction over the ejectment suit; Exceptions.— Finally, the Court is not unaware of Civil Case No. 957-MN pending in the Regional Trial Court of Malabon. This action was instituted by private respondents on July 1, 1987 against petitioners and administratrix Rufina Samaniego for the annulment of the sale and the reconveyance of the subject property in favor of private respondents. As correctly held by respondent appellate court, Civil Case No. 957-MN poses no prejudicial question to the resolution of the instant petition. Well settled is the rule that the mere allegation of ownership of the property in dispute by the defendant in an ejectment suit or the pendency of an action for reconveyance of title over the same property does not divest the inferior court of its jurisdiction over the ejectment suit [Alilaya v. Espanola, G.R. No. L-36208, September 18, 1981, 107 SCRA 564; De la Cruz v. Court of Appeals, G.R. No. 57454, November 29, 1984, 133 SCRA 520; Drilon v. Gaurana, G.R. No. L-35482, April 30, 1987, 149 SCRA 342]. The only exception to this rule is where the question of de facto possession cannot be determined properly without settling that of de jure possession and ownership because the latter is inseparably linked with the former [Andres v. Soriano, 101 Phil. 848 (1957); Castro v. de los Reyes, 109 Phil. 64 (1960); Alvir v. Vera, G.R. No. L-39338, July 16, 1984, 130 SCRA 357; De la Santa v. Court of Appeals, G.R. Nos. L-30560 and L-31078, November 18, 1985, 140 SCRA 44].

Contracts; Lease; Right of Removal; Useful Improvements; Private respondents have the right to remove their house and other useful improvements should petitioner refuse to reimburse the amount thereof; ornamental objects may be removed if no damage shall be caused to the principal and that the owner of the principal do not choose to retain them by paying their value.—Moreover, since private respondents had built in good faith their house on the leased subject property, it is appropriate to mention that Article 1678 of the New Civil Code governs the parties’ rights thereto. As the new lessors, petitioners have the option to appropriate the house and other useful improvements made by private respondents by paying one-half of their value. But private respondents do not have the right to compel petitioners to

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appropriate the improvements and make reimbursement, nor to retain possession

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of the subject property until such reimbursement. Their right under the law is the removal of the house and other useful improvements in the event that petitioners refuse to reimburse the above amount [Lapena v. Morfe, 101 Phil. 997 (1957); Balucanag v. Francisco, G.R. No. L-33422, May 30, 1983, 122 SCRA 498]. Incidentally, as regards ornamental objects, private respondents may remove the same provided that no damage is caused to the principal thing and petitioners do not choose to retain them by paying their value at the time the lease is extinguished.

PETITION for certiorari to review the decision of the Court of Appeals.

The facts are stated in the opinion of the Court. Eleazar S. Calasan for petitioners. Bienvenido J. Medel for private respondents.

CORTÉS, J.:

This is a petition for review on certiorari which seeks the reversal of the decision of the Court of Appeals rendered in CA-G.R. SP No. 13475 setting aside the decisions of the Regional Trial Court and Metropolitan Trial Court, and dismissing the complaint for ejectment filed by petitioners against private respondents. The facts of the case are as follows:

Since 1937, private respondents have been in possession of a 184 sq. m. parcel of land situated at M. Policarpio Street, Bagong Barrio, Navotas, Metro Manila by virtue of an oral lease agreement with the late Mercedes Policarpio whereby the former agreed to pay a monthly rental of thirty eight pesos (P38.00), payable in advance within the first five (5) days of each month. Petitioner Lolita Guzman, on the other hand, is presently the registered owner of the same property, having acquired the same from the Estate of the late Mercedes Policarpio by virtue of a Deed of Absolute Sale dated March 3, 1986 executed in her favor by the

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administratrix Rufina Samaniego. This sale was judicially approved by the probate court in Special Proceedings No. 2640 entitled “Testate Estate of Mercedes Policarpio.” Lolita Guzman’s ownership is evidenced by TCT No. T- 134078 issued by the Register of Deeds of Caloocan City on March 17, 1986. Soon after the sale, Lolita Guzman, through her counsel, sent

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private respondents a letter dated March 21, 1986 informing them that she is the new owner of the subject property and demanding that they vacate it in view of their failure to pay the monthly rentals since October 1983 despite previous demands by the former owner and pay the rentals in arrears. Due to the failure of private respondents to reply to, or comply with, the above demand, peitioner spouses brought their complaint before the Barangay Chairman, but no amicable settlement was reached. Petitioners then filed on May 7, 1986 a complaint for ejectment against private respondents in the Metropolitan Trial Court, invoking Section 5(b) of Batas Pambansa Blg. 877. The case was docketed as Civil Case No. 2839. Private respondents, in their verified answer, alleged that they had been religiously paying their monthly rentals for the subject property upon which they constructed their home until the middle part of 1984 when they were advised by the administratrix Rufina Samaniego to cease making payments because the estate was then being partitioned and the subdivided units were to be offered for sale to the respective occupants at twentyfive thousand pesos (P25,000.00). They had offered to pay the amount in cash on the condition that a clear title would be given, but were informed that it would be sometime before titles could be issued for the individual units. But in violation of their “right of first refusal” under Pres. Dec. No. 1517 [otherwise known as the Urban Land Reform Law], the administratrix executed an absolute deed of sale over the property in favor of petitioner Lolita Guzman. They finally concluded that petitioners had no cause of action against them in view of the nullity of this deed of sale. On May 5, 1987, the court rendered judgment against private respondents ordering them to vacate the subject property and to pay the sum of one thousand one hundred

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seventy-eight pesos (P1,178.00) representing unpaid rentals from October 1983 until April 1986 and the sum of thirty-eight pesos (P38.00) for every month thereafter until they have completely surrendered possession of the property to the petitioners. The court held that:

x x x The defendant admitted in his answer (par. 3) that he received

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the letter of demand dated March 17, 1986 (sic) sent by the plaintiffs’ counsel, but there is (sic) no reply or answer was made by the defendant to the aforesaid letter of demand, to explain why he should not pay the rentals claimed by the plaintiffs. Thus, the plaintiffs were constrained to file the present action under Section 5 (b) of BP 877. The plaintiffs being the registered owner of the property in question, as evidence (sic) by TCT No. T-134078, they have the better right of possession as adverse to the defendant. Moreover, the defendant cannot be considered as a legitimate tenant as contemplated by the Urban Land Reform Act, he having failed to comply religiously with his obligation to pay the agreed rentals on time, he became a possessor in bad faith and his ejectment from the premises is allowed by BP 877 and therefore not entitled to the protection of P.D. No. 1517 as amended and its implemented (sic) proclamations of the Rental Control Law. x x x

[MTC Decision, p. 3; Rollo, p. 52.]

On Appeal, this decision was affirmed in toto by the Regional Trial Court on October 16, 1987 in Appealed Civil Case No. 262-MN. Private respondents then filed on December 11, 1987 a petition for review with the Court of Appeals. In a decision promulgated on January 28, 1988, the Court of Appeals 1 set aside the decisions of the lower courts and dismissed for lack of merit petitioners complaint for ejectment. The Court of Appeals held that the ejectment of private respondents from the subject property on the ground of non-payment of rentals was baseless and improper, finding that:

x x x

[private respondents] have been leasing and actually occupying subject lot since 1937 at a meager rental of P38.00 a

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month, and did even offer to pay cash of P25,000.00 therefor, it is simply unbelievable that they defaulted or failed to pay the measly rental of P38.00 a month as [petitioners] would like the court to understand. [Private respondents’] theory that they were told to stop paying their rents sometime in October 1984 is more in accord with reason and human experience. If they were really told by the administratrix of the estate

1 Penned by Fidel P. Purisima with Segundino G. Chua and Nicolas P. Lapena, Jr. concurring.

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Guzman vs. Court of Appeals

of the deceased owner-lessor to hold or defer their rental payments, it stands to reason that [they] never defaulted in the payment of their rental for the lot in question. Indeed, if they were not advised to pay their rents, why should [they] falter in their rental payments when they have their house thereon, are actually residing therein and have the financial capacity to buy the lot in dispute on spot cash basis? If they stopped paying the monthly rental therefor since October 1984, it was not due to inability or refusal on their part to pay; but was upon the advice of the administratrix of the estate of the late owner-lessor Mercedes Policarpio. The latter unequivocably [sic] told [private respondents] not to pay their rents anymore because the area would be subdivided and sold to the actual occupants, including the [private respondents] with respect to the lot in question which they have been renting and occupying for around fifty (50) years already. With the foregoing explanation of [private respondents] for their failure to pay their rental starting October 1984, an assertion inducing faith and reliance and which has not been effectively controverted, [their] ejectment on the ground of non-payment of rental is improper and cannot be sanctioned. x x x

[CA Decision, pp. 5-6; Rollo, pp. 18-19.]

Moreover, the Court of Appeals upheld private respondents’ contention that they have the “right of first refusal” to purchase the property pursuant to Section 6 of Pres. Dec. No. 1517. Hence, petitioners filed the instant petition, assigning the following as errors: