G.R. No.
109355 October 29, 1999 excess of jurisdiction; and (4) whether or not only three-fourths of subject lots should be returned to the
SERAFIN MODINA, petitioner,
vs.
COURT OF APPEALS AND ERNESTO HONTARCIEGO, PAUL FIGUEROA, TEODORO HIPALLA AND
RAMON CHIANG, MERLINDA CHIANG, respondents.
The parcels of land in question are those under the name of Ramon Chiang (hereinafter referred to as
CHIANG) covered by TCT Nos. T-86912, T-86913, and T-86914. He theorized that subject properties
were sold to him by his wife, Merlinda Plana Chiang (hereinafter referred to as MERLINDA), as evidenced
by a Deed of Absolute Sale dated December 17, 1975, 1 and were subsequently sold by CHIANG to the
petitioner Serafin Modina (MODINA), as shown by the Deeds of Sale, dated August 3, 1979 and August
24, 1979, respectively.
MODINA brought a Complaint for Recovery of Possession with Damages against the private respondents,
Ernesto Hontarciego, Paul Figueroa and Teodoro Hipalla, docketed as Civil Case No. 13935 before the
Regional Trial Court of Iloilo City.
Upon learning the institution of the said case, MERLINDA presented a Complaint-in-intervention, seeking
the declaration of nullity of the Deed of Sale between her husband and MODINA on the ground that the
titles of the parcels of land in dispute were never legally transferred to her husband. Fraudulent acts were
allegedly employed by him to obtain a Torrens Title in his favor. However, she confirmed the validity of
the lease contracts with the other private respondents.
MERLINDA also admitted that the said parcels of land were those ordered sold by Branch 2 of the then
Court of First Instance of Iloilo in Special Proceeding No. 2469 in "Intestate Estate of Nelson Plana" where
she was appointed as the administratix, being the widow of the deceased, her first husband. An Authority
to Sell was issued by the said Probate Court for the sale of the same properties. 2
After due hearing, the Trial Court decided in favor of MERLINDA, disposing thus:
WHEREFORE, judgment is hereby rendered (1) declaring as void and inexistent the sale of Lots 10063, 10088, 10085
and 10089 of the Cadastral Survey of Sta. Barbara by Merlinda Plana in favor of Ramon Chiang as evidenced by the
deed of definite sale dated December 17, 1975 (Exhibits "H"; "3"-Chiang; "9" Intervenor) as well as the Certificates of
Title Nos. T-86912, T-86913, T-86914 and T-86915 in the name of Ramon Chiang; (2) declaring as void and inexistent
the sale of the same properties by Ramon Chiang in favor of Serafin Modina as evidenced by the deeds of sale (Exhibits
"A", "B", "6" — Chiang and "7" — Chiang) dated August 3, and 24, 1979, as well as Certificates of Title Nos. T-102631,
102630, 102632 and 102890 in the name of Serafin Modina; (3) ordering the Register of Deeds of Iloilo to cancel said
certificates of title in the names of Ramon Chiang and Serafin Modina and to reinstate the Certificates of Title Nos. T-
57960, T-57962, T-57963 and T-57864 in the name of Nelson Plana; (4) ordering Serafin Modina to vacate and restore
possession of the lots in question to Merlinda Plana Chiang; (5) ordering Ramon Chiang to restitute and pay to Serafin
Modina the sum of P145,800.00 and; (6) ordering Serafin Modina to pay Ernesto Hontarciego the sum of P44,500.00 as
actual and compensatory damages plus the sum of P5,000.00, for and as attorney's fees, with costs in favor of said
defendants against the plaintiff.
On appeal; the Court of Appeals affirmed the aforesaid decision in toto.
Dissatisfied therewith, petitioner found his way to this Court via the present Petition for Review under the
Rule 45 seeking to set aside the assailed decision of the Court of Appeals.
Raised for resolution here are: (1) whether the sale of subject lots should be nullified, (2) whether
petitioner was not a purchaser in good faith, (3) whether the decision of the trial court was tainted with
private respondent.
Anent the first issue, petitioner theorizes that the sale in question is null and void for being violative of
Article 1490 3 of the New Civil Code prohibiting sales between spouses. Consequently, what is applicable
is Article 1412 4 supra on the principle of in pari delicto, which leaves both guilty parties where they are,
and keeps undisturbed the rights of third persons to whom the lots involved were sold; petitioner
stressed.1âwphi1.nêt
Petitioner anchors his submission on the following statements of the Trial Court which the Court of Appeals
upheld, to wit:
Furthermore, under Art. 1490, husband and wife are prohibited to sell properties to each other. And
where, as in this case, the sale is inexistent for lack of consideration, the principle of in pari delicto non
oritur actio does not apply. (Vasquez vs. Porta, 98 Phil 490), (Emphasis ours) Thus, Art. 1490 provides:
Art. 1490. The husband and the wife cannot sell property to each other, except:
(1) when a separation of propety was agreed upon in the marriage settlements; or
(2) when there has been a judicial separation of property under Art. 191.
The exception to the rule laid down in Art. 1490 of the New Civil Code not having existed with respect
to the property relations of Ramon Chiang and Merlinda Plana Chiang, the sale by the latter in favor of
the former of the properties in question is invalid for being prohibited by law. Not being the owner of
subject properties, Ramon Chiang could not have validly sold the same to plaintiff Serafin Modina. The
sale by Ramon Chiang in favor of Serafin Modina is, likewise, void and inexistent.
The Court of Appeals, on the other hand, adopted the following findings a quo: that there is no sufficient
evidence establishing fault on the part of MERLINDA, and therefore, the principle of in pari delicto is
inapplicable and the sale was void for want of consideration. In effect, MERLINDA can recover the lots
sold by her husband to petitioner MODINA. However, the Court of Appeals ruled that the sale was void
for violating Article 1490 of the Civil Code, which prohibits sales between spouses.
The principle of in pari delicto non oritur actio 6 denies all recovery to the guilty parties inter se. It applies
to cases where the nullity arises from the illegality of the consideration or the purpose of the
contract. 7 When two persons are equally at fault, the law does not relieve them. The exception to this
general rule is when the principle is invoked with respect to inexistent contracts. 8
In the petition under consideration, the Trial Court found that subject Deed of Sale was a nullity for lack
of any consideration. 9 This finding duly supported by evidence was affirmed by the Court of Appeals.
Well-settled is the rule that this Court will not disturb such finding absent any evidence to the contrary. 10
Under Article 1409 11 of the New Civil Code, enumerating void contracts, a contract without consideration
is one such void contract. One of the characteristics of a void or inexistent contract is that it produces no
effect. So also, inexistent contracts can be invoked by any person whenever juridical effects founded
thereon are asserted against him. A transferor can recover the object of such contract by accion
reivindicatoria and any possessor may refuse to deliver it to the transferee, who cannot enforce the
transfer. 12
Thus, petitioner's insistence that MERLINDA cannot attack subject contract of sale as she was a guilty
party thereto is equally unavailing.
But the pivot of inquiry here is whether MERLINDA is barred by the principle of in pari delicto from
questioning subject Deed of Sale.
It bears emphasizing that as the contracts under controversy are inexistent contracts within legal
contemplation. Articles 1411 and 1412 of the New Civil Code are inapplicable. In pari delicto doctrine
applies only to contracts with illegal consideration or subject matter, whether the attendant facts
constitute an offense or misdemeanor or whether the consideration involved is merely rendered illegal. 13
The statement below that it is likewise null and void for being violative of Article 1490 should just be
treated as a surplusage or an obiter dictum on the part of the Trial Court as the issue of whether the
parcels of land in dispute are conjugal in nature or they fall under the exceptions provided for by law,
was neither raised nor litigated upon before the lower Court. Whether the said lots were ganancial
properties was never brought to the fore by the parties and it is too late to do so now.
Furthermore, if this line of argument be followed, the Trial Court could not have declared subject contract
as null and void because only the heirs and the creditors can question its nullity and not the spouses
themselves who executed the contract with full knowledge of the prohibition. 14
Records show that in the complaint-in-intervention of MERLINDA, she did not aver the same as a ground
to nullify subject Deed of Sale. In fact, she denied the existence of the Deed of Sale in favor of her
husband. In the said Complaint, her allegations referred to the want of consideration of such Deed of
Sale. She did not put up the defense under Article 1490, to nullify her sale to her husband CHIANG
because such a defense would be inconsistent with her claim that the same sale was
inexistent.1âwphi1.nêt
The Trial Court debunked petitioner's theory that MERLINDA intentionally gave away the bulk of her and
her late husband's estate to defendant CHIANG as his exclusive property, for want of evidentiary anchor.
They insist on the Deed of Sale wherein MERLINIDA made the misrepresentation that she was a widow
and CHIANG was single, when at the time of execution thereof, they were in fact already married.
Petitioner insists that this document conclusively established bad faith on the part of MERLINDA and
therefore, the principle of in pari delicto should have been applied.
These issues are factual in nature and it is not for this Court to appreciate and evaluate the pieces of
evidence introduced below. An appellate court defers to the factual findings of the Trial Court, unless
petitioner can show a glaring mistake in the appreciation of relevant evidence.
Since one of the characteristics of a void or inexistent contract is that it does not produce any effect,
MERLINDA can recover the property from petitioner who never acquired title thereover.
As to the second issue, petitioner stresses that his title should have been respected since he is a purchaser
in good faith and for value. The Court of Appeals, however, opined that he (petitioner) is not a purchaser
in good faith. It found that there were circumstances known to MODINA which rendered their transaction
fraudulent under the attendant circumstances.
As a general rule, in a sale under the Torrens system, a void title cannot give rise to a valid title. The
exception is when the sale of a person with a void title is to a third person who purchased it for value and
in good faith.
A purchaser in good faith 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 at the time of the purchase or
before he has notice of the claim or interest of some other person in the property.
In the case under scrutiny, petitioner cannot claim that he was a purchaser in good faith. There are
circumstances which are indicia of bad faith on his part, to wit: (1) He asked his nephew, Placido Matta,
to investigate the origin of the property and the latter learned that the same formed part of the properties
of MERLINDA's first husband; (2) that the said sale was between the spouses; (3) that when the property
was inspected, MODINA met all the lessees who informed that subject lands belong to MERLINDA and
they had no knowledge that the same lots were sold to the husband.
It is a well-settled rule that a purchaser cannot close his eyes to facts which would put a reasonable man
upon his guard to make the necessary inquiries, and then claim that he acted in good faith. His mere
refusal to believe that such defect exists, or his wilful closing of his eyes to the possibility of the existence
of a defect in his vendor's title, will not make him an innocent purchaser for value, if it afterwards develops
that the title was in fact defective, and it appears that he had such notice of the defect as would have led
to its discovery had he acted with that measure of precaution which may reasonably be required of a
prudent man in a like situation. 15
Thus, petitioner cannot claim that the sale between him and MODINA falls under the exception provided
for by law.
With regard to the third issue posed by petitioner — whether the Trial Court's decision allowing recovery
on the part of Merlinda Chiang of subject properties was void — petitioner's contention is untennable. It
is theorized that as the sale by MERLINDA was by virtue of an Order to Sell issued in the Intestate Estate
Proceedings of her late husband, Nelson Plana — to allow recovery will defeat the said order of the Probate
Court. Petitioner equated the aforesaid Order to Sell as a judgment, which another court in a regular
proceeding has no jurisdiction to reverse.
Petitioner is under the mistaken impression that as the Order to Sell had become a judgment in itself as
to the validity of the sale of the properties involved, any question as to its nullity should have been
brought before the Court of Appeals on appeal when the said Order was issued.
It is a well-settled rule that a Court of First Instance (now Regional Trial Court) has jurisdiction over a
case brought to rescind a sale made upon prior authority of a Probate Court. This does not constitute an
interference or review of the order of a co-equal Court since the Probate Court has no jurisdiction over
the question of title to subject properties. Consequently, a separate action may be brought to determine
the question of ownership. 16
Lastly, on the issue of whether only three-fourths of the property in question should have been returned
to MERLINDA, petitioner's stance is equally unsustainable. It is a settled doctrine that an issue which was
neither averred in the Complaint nor raised during the trial before the lower court cannot be raised for
the first time on appeal, as such a recourse would be offensive to the basic rules of fair play, justice, and
due process. 17
The issue of whether only three-fourths of subject property will be returned was never an issue before the lower court and
therefore, the petitioner cannot do it now. A final word. In a Petition for Review, only questions of law may be raised. It is
perceived by the Court that what petitioner is trying to, albeit subtly, is for the Court to examine the probative value or
evidentiary weight of the evidence presented below 18. The Court cannot do that unless the appreciation of the pieces of
evidence on hand is glaringly erroneous. But this is where petitioner utterly failed.1âwphi1.nêt
WHEREFORE, the Petition is DENIED and the decision of the Court of Appeals, dated September 30, 1992, in CA-G.R. CV
No. 26051 AFFIRMED. No pronouncement as to costs.
[G.R. No. L-1411. September 29, 1953.] the effect of the law governing rescission of contracts? Our answer must of necessity be in the negative
following the doctrine laid down in the case of Trinidad Gonzaga de Cabauatan, et al. vs. Uy Hoo, et al.,
DIONISIO RELLOSA, Petitioner, vs. GAW CHEE HUN, Respondent. 88 Phil. 103, wherein we made the following pronouncement: "We can, therefore, say that even if the
plaintiffs can still invoke the Constitution, or the doctrine in the Krivenko Case, to set aside the sale in
On February 2, 1944, Dionisio Rellosa sold to Gaw Chee Hun a parcel of land, together with the house
question, they are now prevented from doing so if their purpose is to recover the lands that they have
erected thereon, situated in the City of Manila, Philippines, for the sum of P25,000. The vendor remained voluntarily parted with, because of their guilty knowledge that what they were doing was in violation of
in possession of the property under a contract of lease entered into on the same date between the same
the Constitution. They cannot escape this conclusion because they are presumed to know the law. As this
parties. Alleging that the sale was executed subject to the condition that the vendee, being a Chinese
court well said: 'A party to an illegal contract cannot come into a court of law and ask to have his illegal
citizen, would obtain the approval of the Japanese Military Administration in accordance with (seirei) No.
objects carried out. The law will not aid either party to an illegal agreement; it leaves the parties where
6 issued on April 2, 1943, by the Japanese authorities, and said approval has not been obtained, and
it finds them.' The rule is expressed in the maxims: 'Ex dolo malo non oritur actio,' and 'In pari delicto
that, even if said requirement were met, the sale would at all events be void under article XIII, section
potior est conditio defendentis.' (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 210, 216.)"
5, of our Constitution, the vendor instituted the present action in the Court of First Instance of Manila
seeking the annulment of the sale as well as the lease covering the land and the house above mentioned, The doctrine above adverted to is the one known as In Pari Delicto. This is well known not only in this
and praying that, once the sale and the lease are declared null and void, the vendee be ordered to return jurisdiction but also in the United States where common law prevails. In the latter jurisdiction, the
to vendor the duplicate of the title covering the property, and be restrained from in any way dispossessing doctrine is stated thus: "The proposition is universal that no action arises, in equity or at law, from an
the latter of said property. illegal contract; no suit can be maintained for its specific performance, or to recover the property agreed
to be sold or delivered, or the money agreed to be paid, or damages for its violation. The rule has
Defendant answered the complaint setting up as special defense that the sale referred to in the complaint
sometimes been laid down as though it were equally universal, that where the parties are in pari delicto,
was absolute and unconditional and was in every respect valid and binding between the parties, it being
no affirmative relief of any kind will be given to one against the other." (Pomeroy's Equity Jurisprudence,
not contrary to law, morals and public order, and that plaintiff is guilty of estoppel in that, by having
Vol. 3, 5th ed., p. 728.)
executed a deed of lease over the property, he thereby recognized the title of defendant to that property.
It is true that this doctrine is subject to one important limitation, namely, "whenever public policy is
Issues having been joined, and the requisite evidence presented by both parties, the court declared both
considered as advanced by allowing either party to sue for relief against the transaction" (idem, p. 733).
the sale and the lease valid and binding and dismissed the complaint. The court likewise ordered plaintiff
But not all contracts which are illegal because opposed to public policy come under this limitation. The
to turn over the property to defendant and to pay a rental of P50 a month from August 1, 1945 until the
cases in which this limitation may apply only "include the class of contracts which are intrinsically contrary
property has been actually delivered. As this decision was affirmed in toto by the Court of Appeals, plaintiff
to public policy, contracts in which the illegality itself consists in their opposition to public policy, and any
sued out the present petition for review.
other species of illegal contracts in which, from their particular circumstances, incidental and collateral
motives of public policy require relief." Examples of this class of contracts are usurious contracts,
One of the issues raised by petitioner refers to the validity of Seirei No. 6 issued on April 2, 1943 by the
marriage-brokerage contracts and gambling contracts. (Idem. pp. 735-737.)
Japanese authorities which prohibits an alien from acquiring any private land not agricultural in nature
during the occupation unless the necessary approval is obtained from the Director General of the Japanese
In our opinion, the contract in question does not come under this exception because it is not intrinsically
Military Administration. Petitioner contends that the sale in question cannot have any validity under the
contrary to public policy, nor one where the illegality itself consists in its opposition to public policy. It is
above military directive in view of the failure of respondent to obtain the requisite approval and it was
illegal not because it is against public policy but because it is against the Constitution. Nor may it be
error for the Court of Appeals to declare said directive without any binding effect because the occupation
contended that to apply the doctrine of pari delicto would be tantamount to contravening the fundamental
government could not have issued it under article 43 of the Hague Regulations which command that laws
policy embodied in the constitutional prohibition in that it would allow an alien to remain in the illegal
that are municipal in character of an occupied territory should be respected and cannot be ignored unless
possession of the land, because in this case the remedy is lodged elsewhere. To adopt the contrary view
prevented by military necessity.
would be merely to benefit petitioner and not to enhance public interest.

We do not believe it necessary to consider now the question relative to the validity of Seirei No. 6 of the
The danger foreseen by counsel in the application of the doctrine above adverted to is more apparent
Japanese Military Administration for the simple reason that in our opinion the law that should govern the
than real. If we go deeper in the analysis of our situation we would not fail to see that the best policy
particular transaction is not the above directive but the Constitution adopted by the then Republic of the
would be for Congress to approve a law laying down the policy and the procedure to be followed in
Philippines on September 4, 1943, it appearing that the aforesaid transaction was executed on February
connection with transactions affected by our doctrine in the Krivenko case. We hope that this should be
2, 1944. Said Constitution, in its article VIII, section 5, provides that "no private agricultural land shall done without much delay. And even if this legislation be not forthcoming in the near future, we do not
be transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold
believe that public interest would suffer thereby if only our executive department would follow a more
lands of the public domain in the Philippines", which provisions are similar to those contained in our
militant policy in the conservation of our natural resources as or dained by our Constitution. And we say
present Constitution. As to whether the phrase "private agricultural land" employed in said Constitution
so because there are at present two ways by which this situation may be remedied, to wit, (1) action for
includes residential lands, as the one involved herein, there can be no doubt because said phrase has
reversion, and (2) escheat to the state. An action for reversion is slightly different from escheat
already been interpreted in the affirmative sense by this court in the recent case of Krivenko vs. Register
proceeding, but in its effects they are the same. They only differ in procedure. Escheat proceedings may
of Deeds, 79 Phil. 461, wherein this court held that "under the Constitution aliens may not acquire private
be instituted as a consequence of a violation of article XIII, section 5 of our Constitution, which prohibits
or public agricultural lands, including residential lands." This matter has been once more submitted to
transfers of private agricultural lands to aliens, whereas an action for reversion is expressly authorized
the court for deliberation, but the ruling was reaffirmed. This ruling fully disposes of the question touching
by the Public Land Act (sections 122, 123, and 124 of Commonwealth Act No. 141).
on the validity of the sale of the property herein involved.
In the United States, as almost everywhere else, the doctrine which imputes to the sovereign or to the
The sale in question having been entered into in violation of the Constitution, the next question to be
government the ownership of all lands and makes such sovereign or government the original source of
determined is, can petitioner have the sale declared null and void and recover the property considering
private titles, is well recognized (42 Am. Jur., 785). This doctrine, which was expressly affirmed in original grant or title, and this is so for in the event of such annulment or cancellation no one else could
Lawrence vs. Garduo, G. R. No. 16542, and which underlies all titles in the Philippines, (See Ventura, legitimately claim the property except its original owner or grantor the state.
Land Registration and Mortgages, 2nd ed., pp. 2-3) has been enshrined in our Constitution (article XIII).
The doctrine regarding the course of all titles being the same here as in the United States, it would seem We repeat. There are two ways now open to our government whereby it could implement the doctrine of
that if escheat lies against aliens holding lands in those states of the Union where common law prevails this Court in the Krivenko case thereby putting in force and carrying to its logical conclusion the mandate
or where similar constitutional or statutory prohibitions exist, no cogent reason is perceived why similar of our Constitution. By following either of these remedies, or by approving an implementary law as above
proceedings may not be instituted in this jurisdiction. suggested, we can enforce the fundamental policy of our Constitution regarding our natural resources
without doing violence to the principle of pari delicto. With these remedies open to us, we see no justifiable
"Escheat is an incident or attribute of sovereignty, and rests on the principle of the ultimate ownership reason for pursuing the extreme unusual remedy now vehemently urged by the amici curiae.
by the state of all property within its jurisdiction.' (30 C.J.S., 1164.)
". . . America escheats belong universally to the state or some corporation thereof as the ultimate In view of the foregoing, we hold that the sale in question is null and void, but plaintiff is barred from
proprietor of land within its Jurisdiction." (19 Am. Jur., 382.) taking the present action under the principle of pari delicto.
"An escheat is nothing more or less than the reversion of property to the state, which takes place when
The decision appealed from is hereby affirmed without pronouncement as to costs.
the title fails." (Delany vs. State, 42 N. D., 630, 174 N.W., 290, quoted in footnote 6, 19 Am. Jur.,
381.)
"As applied to the right of the state to lands purchased by an alien, it would more properly be termed
a 'forfeiture' at common law." (19 Am. Jur., 381.)
"In modern law escheat denotes a falling of the estate into the general property of the state because
the tenant is an alien or because he has died intestate without lawful heirs to take his estate by
succession, or because of some other disability to take or hold property imposed by law." (19 Am. Jur.,

With regard to an action for reversion, the following sections of Commonwealth Act No. 141 are pertinent:

"SEC. 122. No land originally acquired in any manner under the provisions of this Act, nor any
permanent improvement on such land, shall be encumbered, alienated, or transferred, except to
persons, corporations, associations, or partnerships who may acquire lands of the public domain under
this Act or to corporations organized in the Philippines authorized therefor by their charters."

"SEC. 123. No land originally acquired in any manner under the provisions of any previous Act,
ordinance, royal decree, royal order, or any other provision of law formerly in force in the Philippines
with regard to public lands, terrenos baldios y realenqos, or lands of any other denomination that were
actually or presumptively of the public domain or by royal grant or in any other form, nor any permanent
improvement on such land, shall be encumbered, alienated, or conveyed, except to persons,
corporations or associations who may acquire land of the public domain under this Act or to corporate
bodies organized in the Philippines whose charters authorize them to do so: Provided, however, That
this prohibition shall not be applicable to the conveyance or acquisition by reason of hereditary
succession duly acknowledged and legalized by competent courts; Provided, further, That in the event
of the ownership of the lands and improvements mentioned in this section and in the last preceding
section being transferred by judicial decree to persons, corporations or associations not legally
capacitated to acquire the same under the provisions of this Act, such persons, corporation, or
associations shall be obliged to alienate said lands or improvements to others so capacitated within the
precise period of five years; otherwise, such property shall revert to the Government."

"SEC. 124. Any acquisition, conveyance, alienation, transfer, or other contract made or executed in
violation of any of the provisions of sections one hundred and eighteen, one hundred and twenty, one
hundred and twenty-one, one hundred and twenty-two, and one hundred and twenty-three of this Act
shall be unlawful and null and void from its execution and shall produce the effect of annulling and
cancelling the grant, title, patent, or permit originally issued, recognized or confirmed, actually or
presumptively, and cause the reversion of the property and its improvements to the State."

Note that the last quoted provision declared any prohibited conveyance not only unlawful but null and
void ab initio. More important yet, it expressly provides that such conveyances will produce "the effect of
annulling and cancelling the grant, title, patent, or permit, originally issued, recognized of confirmed,
actually or presumptively", and of causing "the reversion of the property and its improvements to the
State." The reversion would seem to be but a consequence of the annulment and cancellation of the
G.R. No. 215014
REBECCA FULLIDO, Petitioner,
vs.
GINO GRILLI, Respondent.
Sometime in 1994, Grilli, an Italian national, met Fullido in Bohol and courted her. In 1995, Grilli decided
to build a residential house where he and Fullido would to stay whenever he would be vacationing in the
country. Grilli financially assisted Fullido in procuring a lot located in Biking I, Dauis, Bohol, from her
parents which was registered in her name under Transfer Certificate of Title (TCT) No. 30626.5 On the
said property, they constructed a house, which was funded by Grilli. Upon completion, they maintained
a common-law relationship and lived there whenever Grilli was on vacation in the Philippines twice a year.
In 1998, Grilli and Fullido executed a contract of lease, 6 a memorandum of agreement7 (MOA) and a
special power of attorney8 (SPA), to define their respective rights over the house and lot.
The lease contract stipulated, among others, that Grilli as the lessee, would rent the lot, registered in the
name of Fullido, for a period of fifty (50) years, to be automatically renewed for another fifty (50) years
upon its expiration in the amount of P10,000.00 for the whole term of the lease contract; and that Fullido
as the lessor, was prohibited from selling, donating, or encumbering the said lot without the written
consent of Grilli. The pertinent provisions of the lease contract over the house and lot are as follows:
That for and in consideration of the total amount of rental in the amount of TEN THOUSAND (P10,000.00)
PESOS, Philippine Currency, paid by the LESSEE to the LESSOR, receipt of which is hereby acknowledged,
the latter hereby leases to the LESSEE a house and lot, and all the furnishings found therein, land situated
at Biking I, Dauis, Bohol, Philippines, absolutely owned and belonging to the LESSOR and particularly
described as follows, to wit:
That the LESSOR and the LESSEE hereby agree as they have agreed to be bound by the following terms
and conditions, to wit:
1. That the term of the lease shall be FIFTY (50) YEARS from August 16, 1998 to August 15, 2048,
automatically renewed for the same term upon the expiration thereof;
7. That the LESSOR is strictly prohibited to sell, donate, encumber, or in any manner convey the
property subject of this lease to any third person, without the written consent of the LESSEE. 9
The said lease contract was duly registered in the Register of Deeds of Bohol.
The MOA, on the other hand, stated, among others, that Grilli paid for the purchase price of the house
and lot; that ownership of the house and lot was to reside with him; and that should the common-law
relationship be terminated, Fullido could only sell the house and lot to whomever Grilli so desired.
Specifically, the pertinent terms of the MOA read:
NOW WHEREFORE, FOR AND IN CONSIDERATION of the foregoing premises, the parties hereto agree
as they hereby covenant to agree that the FIRST PARTY (Grilli) shall permanently reside on the property
as above-mentioned, subject to the following terms and conditions:
1. That ownership over the above-mentioned properties shall reside absolutely with herein FIRST
PARTY, and the SECOND PARTY (Fullido) hereby acknowledges the same;
2. That the SECOND PARTY is expressly prohibited to sell the above-stated property, except if said
sale is with the conformity of the FIRST PARTY;
3. That the SECOND PARTY hereby grants the FIRST PARTY, the absolute and irrevocable right, to
reside in the residential building so constructed during his lifetime, or any time said FIRST PARTY
may so desire;
4. That in the event the common-law relationship terminates, or when the SECOND PARTY marries
another, or enters into another common-law relationship with another, said SECOND PARTY shall be
obliged to execute a DEED OF ABSOLUTE SALE over the above-stated parcel of land and residential
building, in favor of whomsoever the FIRST PARTY may so desire, and be further obliged to turn over
the entire consideration of the said sale to the FIRST PARTY , or if the law shall allow, the FIRST
PARTY shall retain ownership of the said land, as provided for in paragraph 7 below;
7. That if the cases referred to in paragraph 4 shall occur and in the event that a future law shall be
passed allowing foreigners to own real properties in the Philippines, the ownership of the above-
described real properties shall pertain to the FIRST PARTY, and the herein undersigned SECOND
PARTY undertakes to execute all the necessary deeds, documents, and contracts to effect the transfer
of title in favor of the FIRST PARTY;
Lastly, the SPA allowed Grilli to administer, manage, and transfer the house and lot on behalf of Fullido.
Initially, their relationship was harmonious, but it turned sour after 16 years of living together. Both
charged each other with infidelity. They could not agree who should leave the common property, and
Grilli sent formal letters to Fullido demanding that she vacate the property, but these were unheeded. On
September 8, 2010, Grilli filed a complaint for unlawful detainer with prayer for issuance of preliminary
injunction against Fullido before the MCTC, docketed as Civil Case No. 244.
Grilli’s Position
The complaint stated that the common-law relationship between Grilli and Fullido began smoothly, until
Grilli discovered that Fullido was pregnant when he arrived in the Philippines in 2002. At first, she told
him that the child she was carrying was his. After the delivery of the child, however, it became apparent
that the child was not his because of the discrepancy between the child’s date of birth and his physical
presence in the Philippines and the difference between the baby’s physical features and those of Grilli.
Later on, she admitted that the child was indeed sired by another man.
Grilli further claimed that he was so devastated that he decided to end their common-law relationship.
Nevertheless, he allowed Fullido to live in his house out of liberality and generosity, but this time, using
another room. He did not demand any rent from Fullido over the use of his property.
After a year, Fullido became more hostile and difficult to handle. Grilli had to make repairs with his house
every time he arrived in the Philippines because she was not maintaining it in good condition. Fullido also
let her two children, siblings and parents stay in his house, which caused damage to the property. He
even lost his personal belongings inside his house on several occasions. Grilli verbally asked Fullido to
move out of his house because they were not getting along anymore, but she refused. He could no longer
tolerate the hostile attitude shown to him by Fullido and her family, thus, he filed the instant complaint.
Fullido’s Position
Fullido countered that she met Grilli sometime in 1993 when she was still 17 years old working as a
cashier in Alturas Supermarket. Grilli was then a tourist in Bohol who persistently courted her.
At first, Fullido was hesitant to the advances of Grilli because she could not yet enter into a valid marriage.
When he assured her and her parents that they would eventually be married in three years, she eventually
agreed to have a relationship with him and to live as common-law spouses. Sometime in 1995, Grilli
offered to build a house for her on a parcel of land she exclusively owned which would become their
conjugal abode. Fullido claimed that their relationship as common-law spouses lasted for more than 18
years until she discovered that Grilli had found a new and younger woman in his life. Grilli began to
threaten and physically hurt her by knocking her head and choking her.
When Fullido refused to leave their house even after the unlawful detainer case was filed, Grilli again
harassed, intimidated and threatened to hurt her and her children. Thus, she filed a petition for Temporary
Protection Order (TPO) and Permanent Protection Order (PPO) against Grilli under Republic Act (R.A.) No.
9262 before the Regional Trial Court, Branch 3, Bohol (RTC-Branch 3). In an Order,11 dated February 23,
2011, the RTC-Branch 3 granted the TPO in favor of Fullido and directed that Grilli must be excluded from
their home.
Fullido finally asserted that, although it was Grilli who funded the construction of the house, she
exclusively owned the lot and she contributed to the value of the house by supervising its construction
and maintaining their household.
The MCTC Ruling
In its decision, dated March 31, 2011, the MCTC dismissed the case after finding that Fullido could not
be ejected from their house and lot. The MCTC opined that she was a co-owner of the house as she
contributed to it by supervising its construction. Moreover, the MCTC respected the TPO issued by RTC-
Branch 3 which directed that Grilli be removed from Fullido’s residence. The dispositive portion of the
MCTC decision reads:
WHEREFORE, judgment is hereby rendered:
1. Dismissing the instant case;
2. Ordering the Plaintiff to pay to Defendant the amount of Fifty Thousand Pesos (P50,000.00) as moral
damages, and Twenty Thousand Pesos (P20,000.00) as exemplary damages, and Twenty Thousand
Pesos (P20,000.00) as Attorney’s Fees; and
3. Denying the prayer for the issuance of Preliminary Mandatory Injunction.
Not in conformity, Grilli elevated the matter before the RTC.
The RTC Ruling
In its decision, dated April 26, 2012, the RTC reversed and set aside the MCTC decision. The RTC was of
the view that Grilli had the exclusive right to use and possess the house and lot by virtue of the contract
of lease executed by the parties. Since the period of lease had not yet expired, Fullido, as lessor, had the
obligation to respect the peaceful and adequate enjoyment of the leased premises by Grilli as lessee. The
RTC opined that absent a judicial declaration of nullity of the contract of lease, its terms and conditions
were valid and binding. As to the TPO, the RTC held that the same had no bearing in the present case
which merely involved the possession of the leased property.
Aggrieved, Fullido instituted an appeal before the CA alleging that her land was unlawfully transferred by
Grilli to a certain Jacqueline Guibone (Guibone), his new girlfriend, by virtue of the SPA earlier executed
by Fullido.
The CA Ruling
In its assailed decision, dated May 31, 2013, the CA upheld the decision of the RTC emphasizing that in
an ejectment case, the only issue to be resolved would be the physical possession of the property. The
CA was also of the view that as Fullido executed both the MOA and the contract of lease, which gave Grilli
the possession and use of the house and lot, the same constituted as a judicial admission that it was Grilli
who had the better right of physical possession. The CA stressed that, if Fullido would insist that the said
documents were voidable as her consent was vitiated, then she must institute a separate action for
annulment of contracts. Lastly, the CA stated that the TPO issued by the RTC-Branch 3 under Section 21
of R.A. No. 9262 was without prejudice to any other action that might be filed by the parties.
Fullido filed a motion for reconsideration,13 but she failed to attach the proofs of service of her motion.
For said reason, it was denied by the CA in its assailed resolution, dated September 24, 2014.
Hence, this present petition raising the following:
ISSUES
I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND DEPARTED FROM ESTABLISHED LAW
AND JURISPRUDENCE IN DENYING THE PETITION FOR REVIEW AND IN AFFIRMING THE DECISION OF
RTC BOHOL BRANCH 47 EJECTING PETITIONER FROM THE SUBJECT PROPERTIES, WHICH EJECTMENT
ORDER IS ANCHORED ON PATENTLY NULL AND VOID CONTRACTS.
II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED AND DEPARTED FROM ESTABLISHED LAW
IN AFFIRMING THE DECISION OF THE RTC BOHOL BRANCH 47 EJECTING PETITIONER FROM THEIR
CONJUGAL ABODE WHERE RESPONDENT HAS BEEN EARLIER ORDERED TO VACATE BY VIRTUE OF A
PERMANENT PROTECTION ORDER THUS EFFECTIVELY SETTING ASIDE, NEGATING AND/OR VIOLATING
AN ORDER ISSUED BY A COURT OF CO-EQUAL JURISDICTION.
III. THE HONORABLE COURT OF APPEALS LIKEWISE ERRED AND DEPARTED FROM ESTABLISHED LAW
AND JURISPRUDENCE IN DENYING THE PETITIONER’S MOTION FOR RECONSIDERATION, AMONG
OTHERS, FOR NONCOMPLIANCE WITH SECTION 1 RULE 52 VIS-À-VIS SECTION 13, RULE 13 OF THE
1997 RULES OF CIVIL PROCEDURE.14
Fullido argues that she could not be ejected from her own lot based on the contract of lease and the MOA
because those documents were null and void for being contrary to the Constitution, the law, public policy,
morals and customs; that the MOA prevented her from disposing or selling her own land, while the
contract of lease favoring Grilli, a foreigner, was contrary to the Constitution as it was a for a period of
fifty (50) years, and, upon termination, was automatically renewable for another fifty (50) years; that
the TPO, which became a PPO by virtue of the July 5, 2011 Decision 15 of RTC-Branch 3, should not be
defeated by the ejectment suit; and that the CA should have liberally applied its procedural rules and
allowed her motion for reconsideration.
In his Comment,16 Grilli countered that he was the rightful owner of the house because a foreigner was
not prohibited from owning residential buildings; that the lot was no longer registered in the name of
Fullido as it was transferred to Guibone, covered by TCT No. 101-2011000335; that if Fullido wanted to
assail the lease contract, she should have first filed a separate action for annulment of the said contract,
which she did in Civil Case No. 8094, pending before the Regional Trial Court of Bohol; and that by signing
the contracts, Fullido fully agreed with their terms and must abide by the same.
In her Reply,17 Fullido insisted that the contract of lease and the MOA were null and void, thus, these
could not be the source of Grilli’s de facto possession.
The Court’s Ruling
The Court finds the petition meritorious.
Unlawful detainer is an action to recover possession of real property from one who unlawfully withholds
possession thereof after the expiration or termination of his right to hold possession under any contract,
express or implied. The possession of the defendant in unlawful detainer is originally legal but became
illegal due to the expiration or termination of the right to possess. The only issue to be resolved in an
unlawful detainer case is the physical or material possession of the property involved, independent of any
claim of ownership by any of the parties.18
In this case, Fullido chiefly asserts that Grilli had no right to institute the action for unlawful detainer
because the lease contract and the MOA, which allegedly gave him the right of possession over the lot,
were null and void for violating the Constitution. Contrary to the findings of the CA, Fullido was not
only asserting that the said contracts were merely voidable, but she was consistently invoking
that the same were completely void.19 Grilli, on the other hand, contends that Fullido could not
question the validity of the said contracts in the present ejectment suit unless she instituted a separate
action for annulment of contracts. Thus, the Court is confronted with the issue of whether a contract
could be declared void in a summary action of unlawful detainer.
Under the circumstances of the case, the Court answers in the affirmative.
A void contract cannot be the source of any right; it cannot be utilized in an ejectment suit
A void or inexistent contract may be defined as one which lacks, absolutely either in fact or in law, one
or some of the elements which are essential for its validity.20 It is one which has no force and effect from
the very beginning, as if it had never been entered into; it produces no effect whatsoever either against
or in favor of anyone.21 Quod nullum est nullum producit effectum. Article 1409 of the New Civil Code
explicitly states that void contracts also cannot be ratified; neither can the right to set up the defense of
illegality be waived.22 Accordingly, there is no need for an action to set aside a void or inexistent
contract.23
A review of the relevant jurisprudence reveals that the Court did not hesitate to set aside a void contract
even in an action for unlawful detainer. In Spouses Alcantara v. Nido,24 which involves an action for
unlawful detainer, the petitioners therein raised a defense that the subject land was already sold to them
by the agent of the owner. The Court rejected their defense and held that the contract of sale was void
because the agent did not have the written authority of the owner to sell the subject land.
Similarly, in Roberts v. Papio,25 a case of unlawful detainer, the Court declared that the defense of
ownership by the respondent therein was untenable. The contract of sale invoked by the latter was void
because the agent did not have the written authority of the owner. A void contract produces no effect
either against or in favor of anyone.
In Ballesteros v. Abion,26 which also involves an action for unlawful detainer, the Court disallowed the
defense of ownership of the respondent therein because the seller in their contract of sale was not the
owner of the subject property. For lacking an object, the said contract of sale was void ab initio.
Clearly, contracts may be declared void even in a summary action for unlawful detainer because,
precisely, void contracts do not produce legal effect and cannot be the source of any rights. To emphasize,
void contracts may not be invoked as a valid action or defense in any court proceeding, including an
ejectment suit. The next issue that must be resolved by the Court is whether the assailed lease contract
and MOA are null and void.
<>The lease contract and the MOA circumvent the constitutional restraint against foreign ownership of
lands.
Under Section 1 of Article XIII of the 1935 Constitution, natural resources shall not be alienated, except
with respect to public agricultural lands and in such cases, the alienation is limited to Filipino citizens.
Concomitantly, Section 5 thereof states that, save in cases of hereditary succession, no private
agricultural land shall be transferred or assigned except to individuals, corporations, or associations
qualified to acquire or hold lands of the public domain in the Philippines. The prohibition on the transfer
of lands to aliens was adopted in the present 1987 Constitution, under Sections 2, 3 and 7 of Article XII
thereof. Agricultural lands, whether public or private, include residential, commercial and industrial lands.
The purpose of prohibiting the transfer of lands to foreigners is to uphold the conservation of our national
patrimony and ensure that agricultural resources remain in the hands of Filipino citizens.27
The prohibition, however, is not limited to the sale of lands to foreigners. It also covers leases of lands
amounting to the transfer of all or substantially all the rights of dominion. In the landmark case
of Philippine Banking Corporation v. Lui She,28 the Court struck down a lease contract of a parcel of land
in favor of a foreigner for a period of ninety-nine (99) years with an option to buy the land for fifty (50)
years. Where a scheme to circumvent the Constitutional prohibition against the transfer of lands to aliens
is readily revealed as the purpose for the contracts, then the illicit purpose becomes the illegal cause
rendering the contracts void. Thus, if an alien is given not only a lease of, but also an option to
buy, a piece of land by virtue of which the Filipino owner cannot sell or otherwise dispose of
his property, this to last for 50 years, then it becomes clear that the arrangement is a virtual
transfer of ownership whereby the owner divests himself in stages not only of the right to enjoy the
land but also of the right to dispose of it — rights which constitute ownership. If this can be done, then
the Constitutional ban against alien landholding in the Philippines, is indeed in grave peril. 29
In Llantino v. Co Liong Chong,30 however, the Court clarified that a lease contract in favor of aliens for a
reasonable period was valid as long as it did not have any scheme to circumvent the constitutional
prohibition, such as depriving the lessors of their right to dispose of the land. The Court explained that
"[a]liens are not completely excluded by the Constitution from use of lands for residential purposes. Since
their residence in the Philippines is temporary, they may be granted temporary rights such as a lease
contract which is not forbidden by the Constitution. Should they desire to remain here forever and share
our fortune and misfortune, Filipino citizenship is not impossible to acquire." 31 The lessee-foreigner
therein eventually acquired Filipino citizenship.
Consequently, Presidential Decree (P.D.) No. 471 was enacted to regulate the lease of lands to
aliens.1avvphi1 It provides that the maximum period allowable for the duration of leases of private lands
to aliens or alien-owned corporations, associations, or entities not qualified to acquire private lands in the
Philippines shall be twenty-five (25) years, renewable for another period of twenty-five (25) years upon
mutual agreement of both lessor and lessee.32 It also provides that any contract or agreement made
or executed in violation thereof shall be null and void ab initio.33
Based on the above-cited constitutional, legal and jurisprudential limitations, the Court finds that the
lease contract and the MOA in the present case are null and void for virtually transferring the reigns of
the land to a foreigner.
As can be gleaned from the contract, the lease in favor of Grilli was for a period of fifty (50) years,
automatically extended for another fifty (50) years upon the expiration of the original period. Moreover,
it strictly prohibited Fullido from selling, donating, or encumbering her land to anyone without the written
consent of Grilli. For a measly consideration of P10,000.00, Grilli would be able to absolutely occupy the
land of Fullido for 100 years, and she is powerless to dispose the same. The terms of lease practically
deprived Fullido of her property rights and effectively transferred the same to Grilli.
Worse, the dominion of Grilli over the land had been firmly cemented by the terms of the MOA as it
reinforced Grilli’s property rights over the land because, first, it brazenly dictated that ownership of the
land and the residential building resided with him. Second, Fullido was expressly prohibited from
transferring the same without Grilli’s conformity. Third, Grilli would permanently reside in the residential
building. Fourth, Grilli may capriciously dispose Fullido’s property once their common-law relationship is
terminated. This right was recently exercised when the land was transferred to Guibone. Lastly, Fullido
shall be compelled to transfer the land to Grilli if a law would be passed allowing foreigners to own real
properties in the Philippines.
Evidently, the lease contract and the MOA operated hand-in-hand to strip Fullido of any dignified right
over her own property. The term of lease for 100 years was obviously in excess of the allowable periods
under P.D. No. 471. Even Grilli admitted that "this is a case of an otherwise valid contract of lease that
went beyond the period of what is legally permissible."34 Grilli had been empowered to deprive Fullido
of her land’s possession, control, disposition and even its ownership. The jus possidendi, jus utendi, jus
fruendi, jus abutendi and, more importantly, the jus disponendi – the sum of rights which composes
ownership – of the property were effectively transferred to Grilli who would safely enjoy the same for
over a century. The title of Fullido over the land became an empty and useless vessel, visible only in
paper, and was only meant as a dummy to fulfill a foreigner’s desire to own land within our soils. It is
disturbing how these documents were methodically formulated to circumvent the constitutional In the present case, both Grilli and Fullido were undoubtedly parties to a void contract. Fullido, however,
prohibition against land ownership by foreigners. The said contracts attempted to guise themselves as a was not barred from filing the present petition before the Court because the matters at hand involved an
lease, but a closer scrutiny of the same revealed that they were intended to transfer the dominion of a issue of public policy, specifically the Constitutional prohibition against land ownership by aliens. As
land to a foreigner in violation of Section 7, Article XII of the 1987 Constitution. Even if Fullido voluntary pronounced in Philippine Banking Corporation v. Lui She, the said constitutional provision would be
executed the same, no amount of consent from the parties could legalize an unconstitutional agreement. defeated and its continued violation sanctioned if the lands continue to remain in the hands of a
The lease contract and the MOA do not deserve an iota of validity and must be rightfully struck down as foreigner.40 Thus, the doctrine of in pari delicto shall not be applicable in this case.
null and void for being repugnant to the fundamental law. These void documents cannot be the source of
rights and must be treated as mere scraps of paper. WHEREFORE, the petition is GRANTED. The May 31, 2013 Decision of the Court of Appeals and its
September 24, 2014 Resolution in CA-G.R. CEB-SP No. 06946 are hereby REVERSED and SET
Grilli does not have a cause of action for unlawful detainer ASIDE. The complaint filed by Gino Grilli before the Municipal Circuit Trial Court, Dauis-Panglao, Dauis,
Bohol, docketed as Civil Case No. 244, is DISMISSED for lack of cause of action.
Ultimately, the complaint filed by Grilli was an action for unlawful detainer. Section 1 of Rule 70 of the
Rules of Court lays down the requirements for filing a complaint for unlawful detainer, to wit:
Who may institute proceedings, and when. – Subject to the provision of the next succeeding section, a
person deprived of the possession of any land or building by force, intimidation, threat, strategy, or
stealth, or a lessor, 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 lessor,
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 Municipal Trial 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.

A complaint sufficiently alleges a cause of action for unlawful detainer if it recites the following: (1)
initially, possession of property by the defendant was by contract with or by tolerance of the plaintiff; (2)
eventually, such possession became illegal upon notice by plaintiff to defendant of the termination of the
latter’s right of possession; (3) thereafter, the defendant remained in possession of the property and
deprived the plaintiff of the enjoyment thereof; and (4) within one year from the last demand on
defendant to vacate the property, the plaintiff instituted the complaint for ejectment. 35

The Court rules that Grilli has no cause of action for unlawful detainer against Fullido. As can be gleaned
from the discussion above, the complainant must either be a lessor, vendor, vendee, or other person
against whom the possession of any land or building is unlawfully withheld. In other words, the
complainant in an unlawful detainer case must have some right of possession over the property.

In the case at bench, the lease contract and the MOA, from which Grilli purportedly drew his right of
possession, were found to be null and void for being unconstitutional. A contract that violates the
Constitution and the law is null and void ab initio and vests no rights and creates no obligations. It
produces no legal effect at all.36 Hence, as void contracts could not be the source of rights, Grilli had no
possessory right over the subject land. A person who does not have any right over a property from the
beginning cannot eject another person possessing the same. Consequently, Grilli’s complaint for unlawful
detainer must be dismissed for failure to prove his cause of action.

In Pari Delicto Doctrine is not applicable

On a final note, the Court deems it proper to discuss the doctrine of in pari delicto. Latin for "in equal
fault," in pari delicto connotes that two or more people are at fault or are guilty of a crime. Neither courts
of law nor equity will interpose to grant relief to the parties, when an illegal agreement has been made,
and both parties stand in pari delicto.37

The application of the doctrine of in pari delicto is not always rigid. An accepted exception arises when
its application contravenes well-established public policy. In this jurisdiction, public policy has been
defined as that principle of the law which holds that no subject or citizen can lawfully do that which has
a tendency to be injurious to the public or against the public good. 38 Thus, whenever public policy is
advanced by either party, they may be allowed to sue for relief against the transaction. 39
G.R. No. 182252, August 03, 2016
JOSE NORBERTO ANG, Petitioner, v. THE ESTATE OF SY SO, Respondent.
Sometime in the late 1930s, respondent Sy So, a Chinese citizen, was married to a certain Jose Ang.4
Sy So maintained a sari-sari store, while her husband maintained a foundry shop. Testimonial evidence
showed that, by virtue of her business, she was financially well-off on her own.5chanrobleslaw
The couple was childless. In 1941, when a woman approached respondent Sy So and offered a seven- or
eight-month-old infant for adoption, respondent immediately accepted the offer.6 No formal adoption
papers were processed, but the child was christened as Jose Norberto Ang (Jose Norberto), the present
petitioner.7 Respondent subsequently "adopted" three other wards: Mary Ang, Tony Ang, and Teresita
Tan.8chanrobleslaw
Jose Ang died in 1943 during the Pacific War.9 After his death, respondent Sy So maintained her store
and engaged in cigarette trading.10chanrobleslaw
Later, respondent Sy So acquired a property described as a 682.5 square meter lot located at 10th
Avenue, Grace Park, Caloocan City. She registered it under TCT No. 73396 (the 10th Avenue lot) in the
name of petitioner Jose Norberto, who was then three years old, in keeping with the Chinese tradition of
registering properties in the name of the eldest male son or ward. Respondent Sy So subsequently
acquired the other subject property with an area of 1,977 square meters, located at 11th Avenue, Grace
Park, Caloocan City and registered under TCT No. 10425 (the 11th Avenue lot) on 24 July 1944, likewise
under Jose Norberto's name.11chanrobleslaw
Between 1940 and 1950, a six-door apartment building on the 10th Avenue lot was constructed at
respondent Sy So's expense.12 Later on, two more apartment doors were built on the property, bringing
the total to eight apartment doors. For over 30 years, respondent Sy So, along with petitioner and her
other wards, lived there.13chanrobleslaw
Respondent Sy So alleged that she kept the titles to the two properties under lock and key and never
showed them to anyone.14 However, she gave Jose Norberto a photocopy of TCT No. 10425, so that he
could show it to prospective tenants.15chanrobleslaw
Unbeknownst to respondent Sy So, Jose Norberto filed Petitions for the Issuance of Second Owner's
Duplicate Certificate of Title for TCT Nos. 73396 and 10425.16 In 1971, he sold the 11th Avenue lot,
which was covered by TCT No. 10425.17chanrobleslaw
On 5 April 1974, Jose Norberto's counsel wrote respondent Sy So, demanding a monthly payment of P500
as her contribution for real estate taxes on the 10lh Avenue lot.18chanrobleslaw
On 14 March 1989, said counsel wrote another letter to respondent Sy So, formally demanding that she
vacate the 10th Avenue lot within a period of three months, and informing her that she would be charged
¥5,000 as monthly rent.19chanrobleslaw
On 25 July 1989, Jose Norberto filed an ejectment suit against respondent Sy So on the ground of
nonpayment of rentals on the 10th Avenue lot.20 The ejectment case was dismissed on 30 October 1989
by the Metropolitan Trial Court.21chanrobleslaw
On 14 November 1996, Jose Norberto filed a second ejectment?case against respondent Sy So, but the
case was dismissed by the MTC on 30 October 1997. The dismissal was affirmed by this Court on 4 June
2001,22chanrobleslaw
Meanwhile, on 9 June 1993, respondent Sy So filed with the RTC a case for "Transfer of Trusteeship from
the Defendant Jose Norberto Ang to the New Trustee, Tony Ang, with Damages.23 Citing Jose Norberto's
gross ingratitude, disrespectfulness, dishonesty and breach of trust, respondent Sy So argued that she
had bought the two parcels of land and constructed the apartment doors thereon at her own expense.
Thus, she alleged that there was an implied trust over the properties in question.24 She thereafter prayed
for the following reliefs:
[Orders be] issued to the Register of Deeds of Caloocan City, ordering the removal or cancellation of
the name of Jose Norberto Ang as owner in TCT No. 73396 in the value of P375,000.00 more or less
which includes improvements, and placing, instead, the name of Tony Ang as the owner and trustee;
To declare null and void the fraudulent sale made to Benjamin Lee as per Annex "C" of the complaint;
Ordering the defendant to pay moral damages in the amount of at least P50,000.00;
Plaintiff prays for such other relief or reliefs as may be just, proper and equitable under the premises.
In his Answer, Jose Norberto countered that respondent Sy So was a plain housewife; that the two subject
parcels of land were acquired through the money given to him by his foster father, Jose Ang; and that
the apartments were built using funds derived from the sale of the latter's other properties. Jose Norberto
further alleged that when he came of age, he took possession of the properties and allowed respondent
Sy So to stay thereon without paying rent. However, he shouldered the real estate taxes on the
land.26chanrobleslaw
After trial, the RTC rendered a Decision on 23 May 2005 dismissing respondent Sy So's Complaint. The
dispositive portion reads:
WHEREFORE, above premises considered, this Court hereby deems it proper to dismiss Plaintiffs
Complaint, as well as Defendant's counterclaim, as the same are hereby DISMISSED for failure of the
parties to prove their respective claims by preponderance of evidence.
Likewise, the titles under the name of the Defendants are hereby confirmed and affirmed with all the
attributes of ownership.
In so ruling, the trial court found that there was no implied trust because, under Art. 1448 of the New
Civil Code, "[tjhere is an implied trust when property is sold, and the legal estate is granted to one party
but the price is paid by another for the purpose of having the beneficial interest of the property." In this
case, the trial court reasoned that respondent Sy So did not intend to have the beneficial interest of the
properties, but to make her wards the beneficiaries thereof.28chanrobleslaw
Moreover, the RTC cited Article 1448 of the New Civil Code which states: "[i]f the person to whom the
title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is
implied by law, it being disputably presumed that there is a gift in favor of the child." Applying this
provision to the present case, the trial court ruled that when Sy So gave the subject properties to Jose
Norberto - who was her child, though not legally adopted - no implied trust was created pursuant to law.
Finally, the RTC ruled that the action was a collateral attack on Jose Norberto's Torrens title; and that, in
any event, respondent Sy So's cause of action was barred by laches, having been instituted 49 years
after the titles had been issued in petitioner's name.30chanrobleslaw
Aggrieved by the trial court's Decision, respondent Sy So appealed to the CA.
In her Plaintiff-Appellant's Brief, Sy So argued that Jose Norberto could not be considered as her child in
the absence of any formal adoption proceedings.31 This being so, under Article 1448 of the New Civil
Code, there could be no disputable presumption that the properties had been given to him as gifts.32
She also argued that laches had not set in, because there is no prescriptive period for an action to compel
a trustee to convey the property registered in the latter's name for the benefit of the cestui que trust.33
Furthermore, she alleged that the trust was repudiated on 25 July 1989 when the first ejectment suit was
filed by petitioner, and that when the present case was instituted against him, only three years, 10
months and 14 days had elapsed.34chanrobleslaw
For his part, petitioner argued in his Appellee's Brief that Sy So had acknowledged that Jose Norberto
was one of her wards or adopted children; hence, Sy So could no longer claim that he was not her child.35
He further argued that the instant case should have been dismissed outright because respondent, being
a Chinese citizen, could not own real property in the Philippines under the 1987 Constitution which
prohibits aliens from owning private lands save in cases of hereditary succession.36 He alleged that the
present case involved a prohibited collateral attack against his title and claimed that, as the Complaint
was filed almost 50 years after the issuance of the title in his name, the action was already barred by
laches.
The appellate court partially granted respondent Sy So's appeal in a Decision dated 25 July 2007, the
decretal portion of which reads:
WHEREFORE, premises considered, the Appeal is PARTIALLY GRANTED in the sense that Appellant's
claim for reimbursement of the purchase price over the lot covered by TCT No. 10425 is DENIED on
the ground of prescription whereas with respect to Appellant's action re the subject property covered
by TCT No. 73396, the Appellant is declared as the true, absolute and lawful owner of the property
under TCT No. 73396 and ordering the Appellee to RECONVEY said property to the Appellant within ten
(10) days from notice and to pay the costs of the suit.
The CA upheld the applicability of Article 144839 of the New Civil Code and the existence of an implied
trust.40 Moreover, it found that petitioner had not been legally adopted by respondent41 and thus, there
being no legal relationship between the parties, the disputable presumption under Article 1448 did not
arise.42chanrobleslaw
As to the issue of whether there was a collateral attack on Jose Norberto's title, the CA ruled that the
legal doctrine of indefeasibility of a Torrens title was inapplicable. It explained that respondent did not
question the validity of petitioner's title, but merely prayed for the transfer thereof, as the instant action
was actually one of reconveyance.
Finally, the CA found that laches had set in as regards the 11th Avenue lot covered by TCT No. 10425,
but not with respect to the 10th Avenue lot covered by TCT No. 73396. Since respondent Sy So was in
possession of the 10th Avenue lot, the CA reasoned that the action for reconveyance was imprescriptible.
However, the CA did not pass upon petitioner's contention that under the Constitution, respondent Sy So
was disqualified from owning private lands in the Philippines.
After unsuccessfully praying for a reconsideration of the CA Decision,45 Jose Norberto filed the instant
Rule 45 petition for review before this Court.
On 9 October 2008, We received notice of the death of Sy So pending the resolution of the instant case.46
Counsel for respondent likewise notified this Court that Tony Ang, one of the foster sons and allegedly
the trustee-designate of the deceased, should substitute in her stead.47chanrobleslaw
In a Reply dated 17 December 2008, petitioner Jose Norberto vehemently opposed the substitution. He
argued that the original action for transfer of trusteeship was an action in personam; thus, it was
extinguished by the death of respondent.48 Moreover, he contended that Tony Ang had no legal
personality to represent Sy So as her alleged trustee, because there was as yet no final judgment
validating the change of trusteeship between the parties.49chanrobleslaw
We grant the Petition.
Respondent Sy So would have this Court declare that she is the true owner of the real properties in
question and that as owner, she has the right to have the land titles transferred from the name of Jose
Norberto to that of Tony Ang, Sy So's trustee-designate. On the other hand, petitioner Jose Norberto
counters that reconveyance does not lie, because respondent Sy So is a Chinese citizen.
Sy So's Chinese citizenship is undisputedly shown by the records, and even supported by documentary
evidence presented by the representative of respondent Sy So herself.
The purchase of the subject parcels of land was made sometime in 1944,50 during the effectivity of the
1935 Constitution. The relevant sections of Article XIII thereof provide:ChanRoblesVirtualawlibrary
SECTION 1. All agricultural timber, and mineral lands of the public domain, waters, minerals, coal,
petroleum, and other mineral oils, all forces of potential energy and other natural resources of the
Philippines belong to the State, and their disposition, exploitation, development, or utilization shall be
limited to citizens of the Philippines or to corporations or associations at least sixty per centum of the
capital of which is owned by such citizens, subject to any existing right, grant, lease, or concession at the
time of the inauguration of the Government established under this Constitution. Natural resources, with
the exception of public agricultural land, shall not be alienated, and no license, concession, or lease for
the exploitation, development, or utilization of any of the natural resources shall be granted for a period
exceeding twenty-five years, renewable for another twenty-five years, except as to water rights for
irrigation, water supply, fisheries, or industrial uses other than the development of water power, in which
cases beneficial use may be the measure and limit of the grant.
SECTION 5. Save in cases of hereditary succession, no private agricultural land shall be transferred or
assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public
domain in the Philippines.
As early as Krivenko v. Register of Deeds,51 We have interpreted the foregoing to mean that, under the
Constitution then in force, aliens may not acquire residential lands: "One of the fundamental principles
underlying the provision of Article XIII of the Constitution x x x is 'that lands, minerals, forests, and other
natural resources constitute the exclusive heritage of the Filipino nation. They should, therefore, be
preserved for those under the sovereign authority of that nation and for their posterity.'"
These provisions have been substantially carried over to the present Constitution, and jurisprudence
confirms that aliens are disqualified from acquiring lands of the public domain. In Ting Ho v. Teng Gui,52
Muller v. Muller53Frenzel v. Catito,54 and Cheesman v. Intermediate Appellate Court,55 all cited in
Matthews v. Sps. Taylor56 We upheld the constitutional prohibition on aliens acquiring land in the
Philippines. We have consistently ruled thus in line with constitutional intent to preserve and conserve
the national patrimony. Our Constitution clearly reserves for Filipino citizens or corporations at least sixty
percent of the capital of which is owned by Filipinos the right to acquire lands of the public domain.57
The prohibition against aliens owning lands in the Philippines is subject only to limited constitutional
exceptions, and not even an implied trust can be permitted on equity considerations.58chanrobleslaw
Much as We sympathize with the plight of a mother who adopted an infant son, only to have her ungrateful
ward eject her from her property during her twilight years, We cannot grant her prayer. Applying the
above rules to the present case, We find that she acquired the subject parcels of land in violation of the
constitutional prohibition against aliens owning real property in the Philippines. Axiomatically, the
properties in question cannot *be legally reconveyed to one who had no right to own them in the first
place. This being the case, We no longer find it necessary to pass upon the question of respondent Sy
So's substitution in these proceedings.
The Solicitor General, however, may initiate an action for reversion or escheat of the land to the State.59
In sales of real estate to aliens incapable of holding title thereto by virtue of the provisions of the
Constitution, both the vendor and the vendee are deemed to have committed the constitutional violation.
Being in pari delicto the courts will not afford protection to either party. The proper party who could assail
the sale is the Solicitor General.60chanrobleslaw
WHEREFORE, the instant petition for review is GRANTED. The assailed Decision and Resolution of the
Court of Appeals in CA-G.R. CV No. 85444 dated 25 July 2007 and 27 March 2008, respectively, insofar
as petitioner was ordered to reconvey the property covered by TCT No. 73396 to respondent and to pay
the costs of suit, are hereby REVERSED.
G.R. No. L-17587 September 12, 1967 In two wills executed on August 24 and 29, 1959 (Def Exhs. 285 & 279), she bade her legatees to respect
the contracts she had entered into with Wong, but in a codicil (Plff Exh. 17) of a later date (November 4,
1959) she appears to have a change of heart. Claiming that the various contracts were made by her
PHILIPPINE BANKING CORPORATION, representing the estate of JUSTINA SANTOS Y CANON
because of machinations and inducements practiced by him, she now directed her executor to secure the
FAUSTINO, deceased, plaintiff-appellant,
annulment of the contracts.
vs.
LUI SHE in her own behalf and as administratrix of the intestate estate of Wong Heng,
deceased, defendant-appellant. On November 18 the present action was filed in the Court of First Instance of Manila. The complaint
alleged that the contracts were obtained by Wong "through fraud, misrepresentation, inequitable conduct,
undue influence and abuse of confidence and trust of and (by) taking advantage of the helplessness of
Justina Santos y Canon Faustino and her sister Lorenzo were the owners in common of a piece of land in
the plaintiff and were made to circumvent the constitutional provision prohibiting aliens from acquiring
Manila. This parcel, with an area of 2,582.30 square meters, is located on Rizal Avenue and opens into
lands in the Philippines and also of the Philippine Naturalization Laws." The court was asked to direct the
Florentino Torres street at the back and Katubusan street on one side. In it are two residential houses
Register of Deeds of Manila to cancel the registration of the contracts and to order Wong to pay Justina
with entrance on Florentino Torres street and the Hen Wah Restaurant with entrance on Rizal Avenue.
Santos the additional rent of P3,120 a month from November 15, 1957 on the allegation that the
The sisters lived in one of the houses, while Wong Heng, a Chinese, lived with his family in the restaurant.
reasonable rental of the leased premises was P6,240 a month.
Wong had been a long-time lessee of a portion of the property, paying a monthly rental of P2,620.

In his answer, Wong admitted that he enjoyed her trust and confidence as proof of which he volunteered
On September 22, 1957 Justina Santos became the owner of the entire property as her sister died with
the information that, in addition to the sum of P3,000 which he said she had delivered to him for
no other heir. Then already well advanced in years, being at the time 90 years old, blind, crippled and an
safekeeping, another sum of P22,000 had been deposited in a joint account which he had with one of her
invalid, she was left with no other relative to live with. Her only companions in the house were her 17
maids. But he denied having taken advantage of her trust in order to secure the execution of the contracts
dogs and 8 maids. Her otherwise dreary existence was brightened now and then by the visits of Wong's
in question. As counterclaim he sought the recovery of P9,210.49 which he said she owed him for
four children who had become the joy of her life. Wong himself was the trusted man to whom she
advances.
delivered various amounts for safekeeping, including rentals from her property at the corner of Ongpin
and Salazar streets and the rentals which Wong himself paid as lessee of a part of the Rizal Avenue
property. Wong also took care of the payment; in her behalf, of taxes, lawyers' fees, funeral expenses, Wong's admission of the receipt of P22,000 and P3,000 was the cue for the filing of an amended
masses, salaries of maids and security guard, and her household expenses. complaint. Thus on June 9, 1960, aside from the nullity of the contracts, the collection of various amounts
allegedly delivered on different occasions was sought. These amounts and the dates of their delivery are
P33,724.27 (Nov. 4, 1957); P7,344.42 (Dec. 1, 1957); P10,000 (Dec. 6, 1957); P22,000 and P3,000 (as
"In grateful acknowledgment of the personal services of the lessee to her," Justina Santos executed on
admitted in his answer). An accounting of the rentals from the Ongpin and Rizal Avenue properties was
November 15, 1957 a contract of lease (Plff Exh. 3) in favor of Wong, covering the portion then already
also demanded.
leased to him and another portion fronting Florentino Torres street. The lease was for 50 years, although
the lessee was given the right to withdraw at any time from the agreement; the monthly rental was
P3,120. The contract covered an area of 1,124 square meters. Ten days later (November 25), the contract In the meantime as a result of a petition for guardianship filed in the Juvenile and Domestic Relations
was amended (Plff Exh. 4) so as to make it cover the entire property, including the portion on which the Court, the Security Bank & Trust Co. was appointed guardian of the properties of Justina Santos, while
house of Justina Santos stood, at an additional monthly rental of P360. For his part Wong undertook to Ephraim G. Gochangco was appointed guardian of her person.
pay, out of the rental due from him, an amount not exceeding P1,000 a month for the food of her dogs
and the salaries of her maids.
In his answer, Wong insisted that the various contracts were freely and voluntarily entered into by the
parties. He likewise disclaimed knowledge of the sum of P33,724.27, admitted receipt of P7,344.42 and
On December 21 she executed another contract (Plff Exh. 7) giving Wong the option to buy the leased P10,000, but contended that these amounts had been spent in accordance with the instructions of Justina
premises for P120,000, payable within ten years at a monthly installment of P1,000. The option, written Santos; he expressed readiness to comply with any order that the court might make with respect to the
in Tagalog, imposed on him the obligation to pay for the food of the dogs and the salaries of the maids sums of P22,000 in the bank and P3,000 in his possession.
in her household, the charge not to exceed P1,800 a month. The option was conditioned on his obtaining
Philippine citizenship, a petition for which was then pending in the Court of First Instance of Rizal. It
The case was heard, after which the lower court rendered judgment as follows:
appears, however, that this application for naturalization was withdrawn when it was discovered that he
[A]ll the documents mentioned in the first cause of action, with the exception of the first which is the
was not a resident of Rizal. On October 28, 1958 she filed a petition to adopt him and his children on the
lease contract of 15 November 1957, are declared null and void; Wong Heng is condemned to pay unto
erroneous belief that adoption would confer on them Philippine citizenship. The error was discovered and
plaintiff thru guardian of her property the sum of P55,554.25 with legal interest from the date of the
the proceedings were abandoned.
filing of the amended complaint; he is also ordered to pay the sum of P3,120.00 for every month of his
occupation as lessee under the document of lease herein sustained, from 15 November 1959, and the
On November 18, 1958 she executed two other contracts, one (Plff Exh. 5) extending the term of the moneys he has consigned since then shall be imputed to that; costs against Wong Heng.
lease to 99 years, and another (Plff Exh. 6) fixing the term of the option of 50 years. Both contracts are
written in Tagalog.
From this judgment both parties appealed directly to this Court. After the case was submitted for decision,
both parties died, Wong Heng on October 21, 1962 and Justina Santos on December 28, 1964. Wong
was substituted by his wife, Lui She, the other defendant in this case, while Justina Santos was substituted
by the Philippine Banking Corporation.
Justina Santos maintained — now reiterated by the Philippine Banking Corporation — that the lease
contract (Plff Exh. 3) should have been annulled along with the four other contracts (Plff Exhs. 4-7)
because it lacks mutuality; because it included a portion which, at the time, was in custodia legis; because
the contract was obtained in violation of the fiduciary relations of the parties; because her consent was
obtained through undue influence, fraud and misrepresentation; and because the lease contract, like the
rest of the contracts, is absolutely simulated.
Paragraph 5 of the lease contract states that "The lessee may at any time withdraw from this agreement."
It is claimed that this stipulation offends article 1308 of the Civil Code which provides that "the contract
must bind both contracting parties; its validity or compliance cannot be left to the will of one of them."
We have had occasion to delineate the scope and application of article 1308 in the early case of Taylor v.
Uy Tieng Piao.1 We said in that case:
Article 1256 [now art. 1308] of the Civil Code in our opinion creates no impediment to the insertion in
a contract for personal service of a resolutory condition permitting the cancellation of the contract by
one of the parties. Such a stipulation, as can be readily seen, does not make either the validity or the
fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege of
cancellation; for where the contracting parties have agreed that such option shall exist, the exercise of
the option is as much in the fulfillment of the contract as any other act which may have been the subject
of agreement. Indeed, the cancellation of a contract in accordance with conditions agreed upon
beforehand is fulfillment.2
And so it was held in Melencio v. Dy Tiao Lay 3 that a "provision in a lease contract that the lessee, at
any time before he erected any building on the land, might rescind the lease, can hardly be regarded as
a violation of article 1256 [now art. 1308] of the Civil Code."
The case of Singson Encarnacion v. Baldomar 4 cannot be cited in support of the claim of want of
mutuality, because of a difference in factual setting. In that case, the lessees argued that they could
occupy the premises as long as they paid the rent. This is of course untenable, for as this Court said, "If
this defense were to be allowed, so long as defendants elected to continue the lease by continuing the
payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner
should desire the lease to continue the lessees could effectively thwart his purpose if they should prefer
to terminate the contract by the simple expedient of stopping payment of the rentals." Here, in contrast,
the right of the lessee to continue the lease or to terminate it is so circumscribed by the term of the
contract that it cannot be said that the continuance of the lease depends upon his will. At any rate, even
if no term had been fixed in the agreement, this case would at most justify the fixing of a period 5 but not
the annulment of the contract.
Nor is there merit in the claim that as the portion of the property formerly owned by the sister of Justina
Santos was still in the process of settlement in the probate court at the time it was leased, the lease is
invalid as to such portion. Justina Santos became the owner of the entire property upon the death of her
sister Lorenzo on September 22, 1957 by force of article 777 of the Civil Code. Hence, when she leased
the property on November 15, she did so already as owner thereof. As this Court explained in upholding
the sale made by an heir of a property under judicial administration:
That the land could not ordinarily be levied upon while in custodia legis does not mean that one of the
heirs may not sell the right, interest or participation which he has or might have in the lands under
administration. The ordinary execution of property in custodia legis is prohibited in order to avoid
interference with the possession by the court. But the sale made by an heir of his share in an
inheritance, subject to the result of the pending administration, in no wise stands in the way of such
administration.6
It is next contended that the lease contract was obtained by Wong in violation of his fiduciary relationship
with Justina Santos, contrary to article 1646, in relation to article 1941 of the Civil Code, which disqualifies
"agents (from leasing) the property whose administration or sale may have been entrusted to them." But
Wong was never an agent of Justina Santos. The relationship of the parties, although admittedly close
and confidential, did not amount to an agency so as to bring the case within the prohibition of the law.
Just the same, it is argued that Wong so completely dominated her life and affairs that the contracts
express not her will but only his. Counsel for Justina Santos cites the testimony of Atty. Tomas S. Yumol
who said that he prepared the lease contract on the basis of data given to him by Wong and that she told
him that "whatever Mr. Wong wants must be followed." 7
The testimony of Atty. Yumol cannot be read out of context in order to warrant a finding that Wong
practically dictated the terms of the contract. What this witness said was:
Q Did you explain carefully to your client, Doña Justina, the contents of this document before she signed it?
A I explained to her each and every one of these conditions and I also told her these conditions were quite onerous for her, I don't really know
if I have expressed my opinion, but I told her that we would rather not execute any contract anymore, but to hold it as it was before, on a verbal
month to month contract of lease.
Q But, she did not follow your advice, and she went with the contract just the same?
A She agreed first . . .
Q Agreed what?
A Agreed with my objectives that it is really onerous and that I was really right, but after that, I was called again by her and she told me to
follow the wishes of Mr. Wong Heng.
Q So, as far as consent is concerned, you were satisfied that this document was perfectly proper?
A Your Honor, if I have to express my personal opinion, I would say she is not, because, as I said before, she told me — "Whatever Mr. Wong
wants must be followed."8
Wong might indeed have supplied the data which Atty. Yumol embodied in the lease contract, but to say
this is not to detract from the binding force of the contract. For the contract was fully explained to Justina
Santos by her own lawyer. One incident, related by the same witness, makes clear that she voluntarily
consented to the lease contract. This witness said that the original term fixed for the lease was 99 years
but that as he doubted the validity of a lease to an alien for that length of time, he tried to persuade her
to enter instead into a lease on a month-to-month basis. She was, however, firm and unyielding. Instead
of heeding the advice of the lawyer, she ordered him, "Just follow Mr. Wong Heng." 9 Recounting the
incident, Atty. Yumol declared on cross examination:
Considering her age, ninety (90) years old at the time and her condition, she is a wealthy woman, it is
just natural when she said "This is what I want and this will be done." In particular reference to this
contract of lease, when I said "This is not proper," she said — "You just go ahead, you prepare that, I
am the owner, and if there is any illegality, I am the only one that can question the illegality."10
Atty. Yumol further testified that she signed the lease contract in the presence of her close friend,
Hermenegilda Lao, and her maid, Natividad Luna, who was constantly by her side.11 Any of them could
have testified on the undue influence that Wong supposedly wielded over Justina Santos, but neither of
them was presented as a witness. The truth is that even after giving his client time to think the matter
over, the lawyer could not make her change her mind. This persuaded the lower court to uphold the
validity of the lease contract against the claim that it was procured through undue influence.
Indeed, the charge of undue influence in this case rests on a mere inference 12 drawn from the fact that
Justina Santos could not read (as she was blind) and did not understand the English language in which
the contract is written, but that inference has been overcome by her own evidence.
Nor is there merit in the claim that her consent to the lease contract, as well as to the rest of the contracts
in question, was given out of a mistaken sense of gratitude to Wong who, she was made to believe, had
saved her and her sister from a fire that destroyed their house during the liberation of Manila. For while
a witness claimed that the sisters were saved by other persons (the brothers Edilberto and Mariano Sta.
Ana)13 it was Justina Santos herself who, according to her own witness, Benjamin C. Alonzo, said "very
emphatically" that she and her sister would have perished in the fire had it not been for Wong. 14 Hence
the recital in the deed of conditional option (Plff Exh. 7) that "[I]tong si Wong Heng ang siyang nagligtas
sa aming dalawang magkapatid sa halos ay tiyak na kamatayan", and the equally emphatic avowal of
gratitude in the lease contract (Plff Exh. 3).
As it was with the lease contract (Plff Exh. 3), so it was with the rest of the contracts (Plff Exhs. 4-7) —
the consent of Justina Santos was given freely and voluntarily. As Atty. Alonzo, testifying for her, said:
[I]n nearly all documents, it was either Mr. Wong Heng or Judge Torres and/or both. When we had
conferences, they used to tell me what the documents should contain. But, as I said, I would always
ask the old woman about them and invariably the old woman used to tell me: "That's okay. It's all
right."15
But the lower court set aside all the contracts, with the exception of the lease contract of November 15,
1957, on the ground that they are contrary to the expressed wish of Justina Santos and that their
considerations are fictitious. Wong stated in his deposition that he did not pay P360 a month for the
additional premises leased to him, because she did not want him to, but the trial court did not believe
him. Neither did it believe his statement that he paid P1,000 as consideration for each of the contracts
(namely, the option to buy the leased premises, the extension of the lease to 99 years, and the fixing of
the term of the option at 50 years), but that the amount was returned to him by her for safekeeping.
Instead, the court relied on the testimony of Atty. Alonzo in reaching the conclusion that the contracts
are void for want of consideration.
Atty. Alonzo declared that he saw no money paid at the time of the execution of the documents, but his
negative testimony does not rule out the possibility that the considerations were paid at some other time
as the contracts in fact recite. What is more, the consideration need not pass from one party to the other
at the time a contract is executed because the promise of one is the consideration for the other. 16
With respect to the lower court's finding that in all probability Justina Santos could not have intended to
part with her property while she was alive nor even to lease it in its entirety as her house was built on it,
suffice it to quote the testimony of her own witness and lawyer who prepared the contracts (Plff Exhs. 4-
7) in question, Atty. Alonzo:
The ambition of the old woman, before her death, according to her revelation to me, was to see to it
that these properties be enjoyed, even to own them, by Wong Heng because Doña Justina told me that
she did not have any relatives, near or far, and she considered Wong Heng as a son and his children
her grandchildren; especially her consolation in life was when she would hear the children reciting
prayers in Tagalog.17
She was very emphatic in the care of the seventeen (17) dogs and of the maids who helped her much,
and she told me to see to it that no one could disturb Wong Heng from those properties. That is why
we thought of the ninety-nine (99) years lease; we thought of adoption, believing that thru adoption
Wong Heng might acquire Filipino citizenship; being the adopted child of a Filipino citizen. 18
This is not to say, however, that the contracts (Plff Exhs. 3-7) are valid. For the testimony just quoted,
while dispelling doubt as to the intention of Justina Santos, at the same time gives the clue to what we
view as a scheme to circumvent the Constitutional prohibition against the transfer of lands to aliens. "The
illicit purpose then becomes the illegal causa"19 rendering the contracts void.
Taken singly, the contracts show nothing that is necessarily illegal, but considered collectively, they reveal
an insidious pattern to subvert by indirection what the Constitution directly prohibits. To be sure, a lease
to an alien for a reasonable period is valid. So is an option giving an alien the right to buy real property
on condition that he is granted Philippine citizenship. As this Court said in Krivenko v. Register of Deeds:20
[A]liens are not completely excluded by the Constitution from the use of lands for residential purposes.
Since their residence in the Philippines is temporary, they may be granted temporary rights such as a
lease contract which is not forbidden by the Constitution. Should they desire to remain here forever
and share our fortunes and misfortunes, Filipino citizenship is not impossible to acquire.
But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which
the Filipino owner cannot sell or otherwise dispose of his property, 21 this to last for 50 years, then it
becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests himself
in stages not only of the right to enjoy the land ( jus possidendi, jus utendi, jus fruendi and jus abutendi)
but also of the right to dispose of it ( jus disponendi) — rights the sum total of which make up ownership.
It is just as if today the possession is transferred, tomorrow, the use, the next day, the disposition, and
so on, until ultimately all the rights of which ownership is made up are consolidated in an alien. And yet
this is just exactly what the parties in this case did within the space of one year, with the result that
Justina Santos' ownership of her property was reduced to a hollow concept. If this can be done, then the
Constitutional ban against alien landholding in the Philippines, as announced in Krivenko v. Register of
Deeds,22 is indeed in grave peril.
It does not follow from what has been said, however, that because the parties are in pari delicto they will
be left where they are, without relief. For one thing, the original parties who were guilty of a violation of
the fundamental charter have died and have since been substituted by their administrators to whom it
would be unjust to impute their guilt.23 For another thing, and this is not only cogent but also important,
article 1416 of the Civil Code provides, as an exception to the rule on pari delicto, that "When the
agreement is not illegal per se but is merely prohibited, and the prohibition by law is designed for the
protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or
delivered." The Constitutional provision that "Save in cases of hereditary succession, no private
agricultural land shall be transferred or assigned except to individuals, corporations, or associations
qualified to acquire or hold lands of the public domain in the Philippines"24 is an expression of public policy
to conserve lands for the Filipinos. As this Court said in Krivenko:
It is well to note at this juncture that in the present case we have no choice. We are construing the
Constitution as it is and not as we may desire it to be. Perhaps the effect of our construction is to
preclude aliens admitted freely into the Philippines from owning sites where they may build their homes.
But if this is the solemn mandate of the Constitution, we will not attempt to compromise it even in the
name of amity or equity . . . .
For all the foregoing, we hold that under the Constitution aliens may not acquire private or public
agricultural lands, including residential lands, and, accordingly, judgment is affirmed, without costs.25
That policy would be defeated and its continued violation sanctioned if, instead of setting the contracts
aside and ordering the restoration of the land to the estate of the deceased Justina Santos, this Court
should apply the general rule of pari delicto. To the extent that our ruling in this case conflicts with that
laid down in Rellosa v. Gaw Chee Hun 26 and subsequent similar cases, the latter must be considered
as pro tanto qualified.
The claim for increased rentals and attorney's fees, made in behalf of Justina Santos, must be denied for
lack of merit.
And what of the various amounts which Wong received in trust from her? It appears that he kept two
classes of accounts, one pertaining to amount which she entrusted to him from time to time, and another
pertaining to rentals from the Ongpin property and from the Rizal Avenue property, which he himself was
leasing.
With respect to the first account, the evidence shows that he received P33,724.27 on November 8, 1957
(Plff Exh. 16); P7,354.42 on December 1, 1957 (Plff Exh. 13); P10,000 on December 6, 1957 (Plff Exh.
14) ; and P18,928.50 on August 26, 1959 (Def. Exh. 246), or a total of P70,007.19. He claims, however,
that he settled his accounts and that the last amount of P18,928.50 was in fact payment to him of what
in the liquidation was found to be due to him.
He made disbursements from this account to discharge Justina Santos' obligations for taxes, attorneys'
fees, funeral services and security guard services, but the checks (Def Exhs. 247-278) drawn by him for
this purpose amount to only P38,442.84.27 Besides, if he had really settled his accounts with her on
August 26, 1959, we cannot understand why he still had P22,000 in the bank and P3,000 in his
possession, or a total of P25,000. In his answer, he offered to pay this amount if the court so directed
him. On these two grounds, therefore, his claim of liquidation and settlement of accounts must be
rejected.
After subtracting P38,442.84 (expenditures) from P70,007.19 (receipts), there is a difference of P31,564
which, added to the amount of P25,000, leaves a balance of P56,564.35 28 in favor of Justina Santos.
As to the second account, the evidence shows that the monthly income from the Ongpin property until its sale in Rizal
Avenue July, 1959 was P1,000, and that from the Rizal Avenue property, of which Wong was the lessee, was P3,120.
Against this account the household expenses and disbursements for the care of the 17 dogs and the salaries of the 8 maids
of Justina Santos were charged. This account is contained in a notebook (Def. Exh. 6) which shows a balance of P9,210.49
in favor of Wong. But it is claimed that the rental from both the Ongpin and Rizal Avenue properties was more than enough
to pay for her monthly expenses and that, as a matter of fact, there should be a balance in her favor. The lower court did
not allow either party to recover against the other. Said the court:
[T]he documents bear the earmarks of genuineness; the trouble is that they were made only by Francisco Wong and
Antonia Matias, nick-named Toning, — which was the way she signed the loose sheets, and there is no clear proof that
Doña Justina had authorized these two to act for her in such liquidation; on the contrary if the result of that was a deficit
as alleged and sought to be there shown, of P9,210.49, that was not what Doña Justina apparently understood for as
the Court understands her statement to the Honorable Judge of the Juvenile Court . . . the reason why she preferred to
stay in her home was because there she did not incur in any debts . . . this being the case, . . . the Court will not
adjudicate in favor of Wong Heng on his counterclaim; on the other hand, while it is claimed that the expenses were
much less than the rentals and there in fact should be a superavit, . . . this Court must concede that daily expenses are
not easy to compute, for this reason, the Court faced with the choice of the two alternatives will choose the middle
course which after all is permitted by the rules of proof, Sec. 69, Rule 123 for in the ordinary course of things, a person
will live within his income so that the conclusion of the Court will be that there is neither deficit nor superavit and will
let the matter rest here.
Both parties on appeal reiterate their respective claims but we agree with the lower court that both claims should be
denied. Aside from the reasons given by the court, we think that the claim of Justina Santos totalling P37,235, as rentals
due to her after deducting various expenses, should be rejected as the evidence is none too clear about the amounts spent
by Wong for food29 masses30 and salaries of her maids.31 His claim for P9,210.49 must likewise be rejected as his averment
of liquidation is belied by his own admission that even as late as 1960 he still had P22,000 in the bank and P3,000 in his
possession.
ACCORDINGLY, the contracts in question (Plff Exhs. 3-7) are annulled and set aside; the land subject-matter of the
contracts is ordered returned to the estate of Justina Santos as represented by the Philippine Banking Corporation; Wong
Heng (as substituted by the defendant-appellant Lui She) is ordered to pay the Philippine Banking Corporation the sum of
P56,564.35, with legal interest from the date of the filing of the amended complaint; and the amounts consigned in court
by Wong Heng shall be applied to the payment of rental from November 15, 1959 until the premises shall have been
vacated by his heirs. Costs against the defendant-appellant.
G.R. No. 143958 July 11, 2003
ALFRED FRITZ FRENZEL, petitioner,
vs.
EDERLINA P. CATITO, respondent.
Petitioner Alfred Fritz Frenzel is an Australian citizen of German descent. He is an electrical engineer by
profession, but worked as a pilot with the New Guinea Airlines. He arrived in the Philippines in 1974,
started engaging in business in the country two years thereafter, and married Teresita Santos, a Filipino
citizen. In 1981, Alfred and Teresita separated from bed and board without obtaining a divorce.
Sometime in February 1983, Alfred arrived in Sydney, Australia for a vacation. He went to King's Cross,
a night spot in Sydney, for a massage where he met Ederlina Catito, a Filipina and a native of Bajada,
Davao City. Unknown to Alfred, she resided for a time in Germany and was married to Klaus Muller, a
German national. She left Germany and tried her luck in Sydney, Australia, where she found employment
as a masseuse in the King's Cross nightclub. She was fluent in German, and Alfred enjoyed talking with
her. The two saw each other again; this time Ederlina ended up staying in Alfred's hotel for three days.
Alfred gave Ederlina sums of money for her services. 4
Alfred was so enamored with Ederlina that he persuaded her to stop working at King's Cross, return to
the Philippines, and engage in a wholesome business of her own. He also proposed that they meet in
Manila, to which she assented. Alfred gave her money for her plane fare to the Philippines. Within two
weeks of Ederlina's arrival in Manila, Alfred joined her. Alfred reiterated his proposal for Ederlina to stay
in the Philippines and engage in business, even offering to finance her business venture. Ederlina was
delighted at the idea and proposed to put up a beauty parlor. Alfred happily agreed.
Alfred told Ederlina that he was married but that he was eager to divorce his wife in Australia. Alfred
proposed marriage to Ederlina, but she replied that they should wait a little bit longer.
Ederlina found a building at No. 444 M.H. del Pilar corner Arquiza Street, Ermita, Manila, owned by one
Atty. Jose Hidalgo who offered to convey his rights over the property for P18,000.00. Alfred and Ederlina
accepted the offer. Ederlina put up a beauty parlor on the property under the business name Edorial
Beauty Salon, and had it registered with the Department of Trade and Industry under her name. Alfred
paid Atty. Hidalgo P20,000.00 for his right over the property and gave P300,000.00 to Ederlina for the
purchase of equipment and furniture for the parlor. As Ederlina was going to Germany, she executed a
special power of attorney on December 13, 19835 appointing her brother, Aser Catito, as her attorney-
in-fact in managing the beauty parlor business. She stated in the said deed that she was married to Klaus
Muller. Alfred went back to Papua New Guinea to resume his work as a pilot.
When Alfred returned to the Philippines, he visited Ederlina in her Manila residence and found it unsuitable
for her. He decided to purchase a house and lot owned by Victoria Binuya Steckel in San Francisco del
Monte, Quezon City, covered by Transfer Certificate of Title No. 218429 for US$20,000.00. Since Alfred
knew that as an alien he was disqualified from owning lands in the Philippines, he agreed that only
Ederlina's name would appear in the deed of sale as the buyer of the property, as well as in the title
covering the same. After all, he was planning to marry Ederlina and he believed that after their marriage,
the two of them would jointly own the property. On January 23, 1984, a Contract to Sell was entered into
between Victoria Binuya Steckel as the vendor and Ederlina as the sole vendee. Alfred signed therein as
a witness.6 Victoria received from Alfred, for and in behalf of Ederlina, the amount of US$10,000.00 as
partial payment, for which Victoria issued a receipt. 7 When Victoria executed the deed of absolute sale
over the property on March 6, 1984,8 she received from Alfred, for and in behalf of Ederlina, the amount
of US$10,000.00 as final and full payment. Victoria likewise issued a receipt for the said amount. 9 After
Victoria had vacated the property, Ederlina moved into her new house. When she left for Germany to visit
Klaus, she had her father Narciso Catito and her two sisters occupy the property.
Alfred decided to stay in the Philippines for good and live with Ederlina. He returned to Australia and sold
his fiber glass pleasure boat to John Reid for $7,500.00 on May 4, 1984. 10 He also sold his television and
video business in Papua New Guinea for K135,000.00 to Tekeraoi Pty. Ltd. 11 He had his personal
properties shipped to the Philippines and stored at No. 14 Fernandez Street, San Francisco del Monte,
Quezon City. The proceeds of the sale were deposited in Alfred's account with the Hong Kong Shanghai
Banking Corporation (HSBC), Kowloon Branch under Bank Account No. 018-2-807016.12 When Alfred was
in Papua New Guinea selling his other properties, the bank sent telegraphic letters updating him of his
account.13 Several checks were credited to his HSBC bank account from Papua New Guinea Banking
Corporation, Westpac Bank of Australia and New Zealand Banking Group Limited and Westpac Bank-PNG-
Limited. Alfred also had a peso savings account with HSBC, Manila, under Savings Account No. 01-725-
183-01.14
Once, when Alfred and Ederlina were in Hong Kong, they opened another account with HSBC, Kowloon,
this time in the name of Ederlina, under Savings Account No. 018-0-807950.15 Alfred transferred his
deposits in Savings Account No. 018-2-807016 with the said bank to this new account. Ederlina also
opened a savings account with the Bank of America Kowloon Main Office under Account No. 30069016. 16
On July 28, 1984, while Alfred was in Papua New Guinea, he received a Letter dated December 7, 1983
from Klaus Muller who was then residing in Berlin, Germany. Klaus informed Alfred that he and Ederlina
had been married on October 16, 1978 and had a blissful married life until Alfred intruded therein. Klaus
stated that he knew of Alfred and Ederlina's amorous relationship, and discovered the same sometime in
November 1983 when he arrived in Manila. He also begged Alfred to leave Ederlina alone and to return
her to him, saying that Alfred could not possibly build his future on his (Klaus') misfortune. 17
Alfred had occasion to talk to Sally MacCarron, a close friend of Ederlina. He inquired if there was any
truth to Klaus' statements and Sally confirmed that Klaus was married to Ederlina. When Alfred confronted
Ederlina, she admitted that she and Klaus were, indeed, married. But she assured Alfred that she would
divorce Klaus. Alfred was appeased. He agreed to continue the amorous relationship and wait for the
outcome of Ederlina's petition for divorce. After all, he intended to marry her. He retained the services of
Rechtsanwaltin Banzhaf with offices in Berlin, as her counsel who informed her of the progress of the
proceedings.18 Alfred paid for the services of the lawyer.
In the meantime, Alfred decided to purchase another house and lot, owned by Rodolfo Morelos covered
by TCT No. 92456 located in Peña Street, Bajada, Davao City. 19 Alfred again agreed to have the deed of
sale made out in the name of Ederlina. On September 7, 1984, Rodolfo Morelos executed a deed of
absolute sale over the said property in favor of Ederlina as the sole vendee for the amount of
P80,000.00.20 Alfred paid US$12,500.00 for the property.
Alfred purchased another parcel of land from one Atty. Mardoecheo Camporedondo, located in Moncado,
Babak, Davao, covered by TCT No. 35251. Alfred once more agreed for the name of Ederlina to appear
as the sole vendee in the deed of sale. On December 31, 1984, Atty. Camporedondo executed a deed of
sale over the property for P65,000.00 in favor of Ederlina as the sole vendee. 21 Alfred, through Ederlina,
paid the lot at the cost of P33,682.00 and US$7,000.00, respectively, for which the vendor signed
receipts.22 On August 14, 1985, TCT No. 47246 was issued to Ederlina as the sole owner of the said
property.23
Meanwhile, Ederlina deposited on December 27, 1985, the total amount of US$250,000 with the HSBC
Kowloon under Joint Deposit Account No. 018-462341-145.24
The couple decided to put up a beach resort on a four-hectare land in Camudmud, Babak, Davao, owned
by spouses Enrique and Rosela Serrano. Alfred purchased the property from the spouses for P90,000.00,
and the latter issued a receipt therefor.25 A draftsman commissioned by the couple submitted a sketch of
the beach resort.26 Beach houses were forthwith constructed on a portion of the property and were
eventually rented out by Ederlina's father, Narciso Catito. The rentals were collected by Narciso, while
Ederlina kept the proceeds of the sale of copra from the coconut trees in the property. By this time, Alfred
had already spent P200,000.00 for the purchase, construction and upkeep of the property.
Ederlina often wrote letters to her family informing them of her life with Alfred. In a Letter dated January
21, 1985, she wrote about how Alfred had financed the purchases of some real properties, the
establishment of her beauty parlor business, and her petition to divorce Klaus. 27
Because Ederlina was preoccupied with her business in Manila, she executed on July 8, 1985, two special
powers of attorney28 appointing Alfred as attorney-in-fact to receive in her behalf the title and the deed
of sale over the property sold by the spouses Enrique Serrano.
In the meantime, Ederlina's petition for divorce was denied because Klaus opposed the same. A second
petition filed by her met the same fate. Klaus wanted half of all the properties owned by Ederlina in the
Philippines before he would agree to a divorce. Worse, Klaus threatened to file a bigamy case against
Ederlina.29
Alfred proposed the creation of a partnership to Ederlina, or as an alternative, the establishment of a
corporation, with Ederlina owning 30% of the equity thereof. She initially agreed to put up a corporation
and contacted Atty. Armando Dominguez to prepare the necessary documents. Ederlina changed her
mind at the last minute when she was advised to insist on claiming ownership over the properties acquired
by them during their coverture.
Alfred and Ederlina's relationship started deteriorating. Ederlina had not been able to secure a divorce
from Klaus. The latter could charge her for bigamy and could even involve Alfred, who himself was still
married. To avoid complications, Alfred decided to live separately from Ederlina and cut off all contacts
with her. In one of her letters to Alfred, Ederlina complained that he had ruined her life. She admitted
that the money used for the purchase of the properties in Davao were his. She offered to convey t he
properties deeded to her by Atty. Mardoecheo Camporedondo and Rodolfo Morelos, asking Alfred to
prepare her affidavit for the said purpose and send it to her for her signature. 30 The last straw for Alfred
came on September 2, 1985, when someone smashed the front and rear windshields of Alfred's car and
damaged the windows. Alfred thereafter executed an affidavit-complaint charging Ederlina and Sally
MacCarron with malicious mischief.31
On October 15, 1985, Alfred wrote to Ederlina's father, complaining that Ederlina had taken all his life
savings and because of this, he was virtually penniless. He further accused the Catito family of acquiring
for themselves the properties he had purchased with his own money. He demanded the return of all the
amounts that Ederlina and her family had "stolen" and turn over all the properties acquired by him and
Ederlina during their coverture.32
Shortly thereafter, Alfred filed a Complaint33 dated October 28, 1985, against Ederlina, with the Regional
Trial Court of Quezon City, for recovery of real and personal properties located in Quezon City and Manila.
In his complaint, Alfred alleged, inter alia, that Ederlina, without his knowledge and consent, managed
to transfer funds from their joint account in HSBC Hong Kong, to her own account with the same bank.
Using the said funds, Ederlina was able to purchase the properties subject of the complaints. He also
alleged that the beauty parlor in Ermita was established with his own funds, and that the Quezon City
property was likewise acquired by him with his personal funds.34
Ederlina failed to file her answer and was declared in default. Alfred adduced his evidence ex parte.
In the meantime, on November 7, 1985, Alfred also filed a complaint 35 against Ederlina with the Regional
Trial Court, Davao City, for specific performance, declaration of ownership of real and personal properties,
sum of money, and damages. He alleged, inter alia, in his complaint:
4. That during the period of their common-law relationship, plaintiff solely through his own efforts and
resources acquired in the Philippines real and personal properties valued more or less at P724,000.00;
The defendant's common-law wife or live-in partner did not contribute anything financially to the
acquisition of the said real and personal properties. These properties are as follows:
I. Real Properties
a. TCT No. T-92456 located at Bajada, Davao City, consisting of 286 square meters, (with residential
house) registered in the name of the original title owner Rodolfo M. Morelos but already fully paid by
plaintiff. Valued at P342,000.00;
b. TCT No. T-47246 (with residential house) located at Babak, Samal, Davao, consisting of 600 square
meters, registered in the name of Ederlina Catito, with the Register of Deeds of Tagum, Davao del
Norte valued at P144,000.00;
c. A parcel of agricultural land located at Camudmud, Babak, Samal, Davao del Norte, consisting of
4.2936 hectares purchased from Enrique Serrano and Rosela B. Serrano. Already paid in full by
plaintiff. Valued at P228,608.32;
II. Personal Properties:
a. Furniture valued at P10,000.00.
5. That defendant made no contribution at all to the acquisition, of the above-mentioned properties as
all the monies (sic) used in acquiring said properties belonged solely to plaintiff;36
Alfred prayed that after hearing, judgment be rendered in his favor:
WHEREFORE, in view of the foregoing premises, it is respectfully prayed that judgment be rendered in
favor of plaintiff and against defendant:
a) Ordering the defendant to execute the corresponding deeds of transfer and/or conveyances in favor
of plaintiff over those real and personal properties enumerated in Paragraph 4 of this complaint;
b) Ordering the defendant to deliver to the plaintiff all the above real and personal properties or their
money value, which are in defendant's name and custody because these were acquired solely with
plaintiffs money and resources during the duration of the common-law relationship between plaintiff
and defendant, the description of which are as follows:
(1) TCT No. T-92456 (with residential house) located at Bajada, Davao City, consisting of 286 square
meters, registered in the name of the original title owner Rodolfo Morelos but already fully paid by
plaintiff. Valued at P342,000.00;
(2) TCT No. T-47246 (with residential house) located at Babak, Samal, Davao, consisting of 600
square meters, registered in the name of Ederlina Catito, with the Register of Deeds of Tagum, Davao
del Norte, valued at P144,000.00;
(3) A parcel of agricultural land located at Camudmud, Babak, Samal, Davao del Norte, consisting of
4.2936 hectares purchased from Enrique Serrano and Rosela B. Serrano. Already fully paid by
plaintiff. Valued at P228,608.32;
c) Declaring the plaintiff to be the sole and absolute owner of the above-mentioned real and personal
properties;
d) Awarding moral damages to plaintiff in an amount deemed reasonable by the trial court;
e) To reimburse plaintiff the sum of P12,000.00 as attorney's fees for having compelled the plaintiff to
litigate;
f) To reimburse plaintiff the sum of P5,000.00 incurred as litigation expenses also for having compelled
the plaintiff to litigate; and
g) To pay the costs of this suit;
Plaintiff prays other reliefs just and equitable in the premises. 37
In her answer, Ederlina denied all the material allegations in the complaint, insisting that she acquired
the said properties with her personal funds, and as such, Alfred had no right to the same. She alleged
that the deeds of sale, the receipts, and certificates of titles of the subject properties were all made out
in her name.38 By way of special and affirmative defense, she alleged that Alfred had no cause of action
against her. She interposed counterclaims against the petitioner. 39
In the meantime, the petitioner filed a Complaint dated August 25, 1987, against the HSBC in the Regional
Trial Court of Davao City40 for recovery of bank deposits and damages.41 He prayed that after due
proceedings, judgment be rendered in his favor, thus:
WHEREFORE, plaintiff respectfully prays that the Honorable Court adjudge defendant bank, upon
hearing the evidence that the parties might present, to pay plaintiff:
1. ONE HUNDRED TWENTY SIX THOUSAND TWO HUNDRED AND THIRTY U.S. DOLLARS AND NINETY
EIGHT CENTS (US$126,230.98) plus legal interests, either of Hong Kong or of the Philippines, from
20 December 1984 up to the date of execution or satisfaction of judgment, as actual damages or in
restoration of plaintiffs lost dollar savings;
2. The same amount in (1) above as moral damages;
3. Attorney's fees in the amount equivalent to TWENTY FIVE PER CENT (25%) of (1) and (2) above;
4. Litigation expenses in the amount equivalent to TEN PER CENT (10%) of the amount in (1) above;
and
5. For such other reliefs as are just and equitable under the circumstances.42
On April 28, 1986, the RTC of Quezon City rendered its decision in Civil Case No. Q-46350, in favor of Alfred, the decretal
portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered ordering the defendant to perform the following:
(1) To execute a document waiving her claim to the house and lot in No. 14 Fernandez St., San Francisco Del Monte,
Quezon City in favor of plaintiff or to return to the plaintiff the acquisition cost of the same in the amount of
$20,000.00, or to sell the said property and turn over the proceeds thereof to the plaintiff;
(2) To deliver to the plaintiff the rights of ownership and management of the beauty parlor located at 444 Arquiza St.,
Ermita, Manila, including the equipment and fixtures therein;
(3) To account for the earnings of rental of the house and lot in No. 14 Fernandez St., San Francisco Del Monte,
Quezon City, as well as the earnings in the beauty parlor at 444 Arquiza St., Ermita, Manila and turn over one-half of
the net earnings of both properties to the plaintiff;
(4) To surrender or return to the plaintiff the personal properties of the latter left in the house at San Francisco Del
Monte, to wit:
"(1) Mamya automatic camera
(1) 12 inch "Sonny" T.V. set, colored with remote control.
(1) Micro oven
(1) Electric fan (tall, adjustable stand)
(1) Office safe with (2) drawers and safe
(1) Electric Washing Machine
(1) Office desk and chair
(1) Double bed suits
(1) Mirror/dresser
(1) Heavy duty voice/working mechanic
(1) "Sony" Beta-Movie camera
(1) Suitcase with personal belongings
(1) Cardboard box with belongings
(1) Guitar Amplifier
(1) Hanger with men's suit (white)."
To return to the plaintiff, (1) Hi-Fi Stereo equipment left at 444 Arquiza Street, Ermita, Manila, as well as the Fronte
Suzuki car.
(4) To account for the monies (sic) deposited with the joint account of the plaintiff and defendant (Account No. 018-
0-807950); and to restore to the plaintiff all the monies (sic) spent by the defendant without proper authority;
(5) To pay the amount of P5,000.00 by way of attorney's fees, and the costs of suit.
However, after due proceedings in the RTC of Davao City, in Civil Case No. 17,817, the trial court rendered
judgment on September 28, 1995 in favor of Ederlina, the dispositive portion of which reads:
WHEREFORE, the Court cannot give due course to the complaint and hereby orders its dismissal. The
counterclaims of the defendant are likewise dismissed.
The trial court ruled that based on documentary evidence, the purchaser of the three parcels of land
subject of the complaint was Ederlina. The court further stated that even if Alfred was the buyer of the
properties; he had no cause of action against Ederlina for the recovery of the same because as an alien,
he was disqualified from acquiring and owning lands in the Philippines. The sale of the three parcels of
land to the petitioner was null and void ab initio. Applying the pari delicto doctrine, the petitioner was
precluded from recovering the properties from the respondent.
Alfred appealed the decision to the Court of Appeals 45 in which the petitioner posited the view that
although he prayed in his complaint in the court a quo that he be declared the owner of the three parcels
of land, he had no intention of owning the same permanently. His principal intention therein was to be
declared the transient owner for the purpose of selling the properties at public auction, ultimately enabling
him to recover the money he had spent for the purchase thereof.
On March 8, 2000, the CA rendered a decision affirming in toto the decision of the RTC. The appellate
court ruled that the petitioner knowingly violated the Constitution; hence, was barred from recovering
the money used in the purchase of the three parcels of land. It held that to allow the petitioner to recover
the money used for the purchase of the properties would embolden aliens to violate the Constitution, and
defeat, rather than enhance, the public policy. 46
Hence, the petition at bar.
The petitioner assails the decision of the court contending that:
THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE RULE OF IN PARI DELICTO IN THE
INSTANT CASE BECAUSE BY THE FACTS AS NARRATED IN THE DECISION IT IS APPARENT THAT THE
PARTIES ARE NOT EQUALLY GUILTY BUT RATHER IT WAS THE RESPONDENT WHO EMPLOYED FRAUD
AS WHEN SHE DID NOT INFORM PETITIONER THAT SHE WAS ALREADY MARRIED TO ANOTHER
GERMAN NATIONAL AND WITHOUT SUCH FRAUDULENT DESIGN PETITIONER COULD NOT HAVE
PARTED WITH HIS MONEY FOR THE PURCHASE OF THE PROPERTIES. 47
and
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE INTENTION OF THE
PETITIONER IS NOT TO OWN REAL PROPERTIES IN THE PHILIPPINES BUT TO SELL THEM AT PUBLIC
AUCTION TO BE ABLE TO RECOVER HIS MONEY USED IN PURCHASING THEM. 48
Since the assignment of errors are intertwined with each other, the Court shall resolve the same
simultaneously.
The petitioner contends that he purchased the three parcels of land subject of his complaint because of
his desire to marry the respondent, and not to violate the Philippine Constitution. He was, however,
deceived by the respondent when the latter failed to disclose her previous marriage to Klaus Muller. It
cannot, thus, be said that he and the respondent are "equally guilty;" as such, the pari delicto doctrine
is not applicable to him. He acted in good faith, on the advice of the respondent's uncle, Atty. Mardoecheo
Camporedondo. There is no evidence on record that he was aware of the constitutional prohibition against
aliens acquiring real property in the Philippines when he purchased the real properties subject of his
complaint with his own funds. The transactions were not illegal per se but merely prohibited, and under
Article 1416 of the New Civil Code, he is entitled to recover the money used for the purchase of the
properties. At any rate, the petitioner avers, he filed his complaint in the court a quo merely for the
purpose of having him declared as the owner of the properties, to enable him to sell the same at public
auction. Applying by analogy Republic Act No. 133 49 as amended by Rep. Act No. 4381 and Rep. Act No.
4882, the proceeds of the sale would be remitted to him, by way of refund for the money he used to
purchase the said properties. To bar the petitioner from recovering the subject properties, or at the very
least, the money used for the purchase thereof, is to allow the respondent to enrich herself at the expense
of the petitioner in violation of Article 22 of the New Civil Code.
The petition is bereft of merit.
Section 14, Article XIV of the 1973 Constitution provides, as follows:
Save in cases of hereditary succession, no private land shall be transferred or conveyed except to
individuals, corporations, or associations qualified to acquire or hold lands in the public domain. 50
Lands of the public domain, which include private lands, may be transferred or conveyed only to
individuals or entities qualified to acquire or hold private lands or lands of the public domain. Aliens,
whether individuals or corporations, have been disqualified from acquiring lands of the public domain.
Hence, they have also been disqualified from acquiring private lands. 51
Even if, as claimed by the petitioner, the sales in question were entered into by him as the real vendee,
the said transactions are in violation of the Constitution; hence, are null and void ab initio.52 A contract
that violates the Constitution and the law, is null and void and vests no rights and creates no obligations.
It produces no legal effect at all.53 The petitioner, being a party to an illegal contract, cannot come into
a court of law and ask to have his illegal objective carried out. One who loses his money or property by
knowingly engaging in a contract or transaction which involves his own moral turpitude may not maintain
an action for his losses. To him who moves in deliberation and premeditation, the law is unyielding. 54 The
law will not aid either party to an illegal contract or agreement; it leaves the parties where it finds
them.55 Under Article 1412 of the New Civil Code, the petitioner cannot have the subject properties
deeded to him or allow him to recover the money he had spent for the purchase thereof. 56 Equity as a
rule will follow the law and will not permit that to be done indirectly which, because of public policy,
cannot be done directly.57 Where the wrong of one party equals that of the other, the defendant is in the
stronger position . . . it signifies that in such a situation, neither a court of equity nor a court of law will
administer a remedy.58 The rule is expressed. in the maxims: EX DOLO ORITUR ACTIO and IN PARI
DELICTO POTIOR EST CONDITIO DEFENDENTIS.59
The petitioner cannot feign ignorance of the constitutional proscription, nor claim that he acted in good
faith, let alone assert that he is less guilty than the respondent. The petitioner is charged with knowledge
of the constitutional prohibition.60 As can be gleaned from the decision of the trial court, the petitioner
was fully aware that he was disqualified from acquiring and owning lands under Philippine law even before
he purchased the properties in question; and, to skirt the constitutional prohibition, the petitioner had
the deed of sale placed under the respondent's name as the sole vendee thereof:
Such being the case, the plaintiff is subject to the constitutional restrictions governing the acquisition
of real properties in the Philippines by aliens.
From the plaintiff's complaint before the Regional Trial Court, National Capital Judicial Region, Branch
84, Quezon City in Civil Case No. Q-46350 he alleged:
x x x "That on account that foreigners are not allowed by the Philippine laws to acquire real properties
in their name as in the case of my vendor Miss Victoria Vinuya (sic) although married to a foreigner,
we agreed and I consented in having the title to subject property placed in defendant's name alone
although I paid for the whole price out of my own exclusive funds." (paragraph IV, Exhibit "W.")
and his testimony before this Court which is hereby quoted:
ATTY. ABARQUEZ:
Q. In whose name the said house and lot placed, by the way, where is his house and lot located?
A. In 14 Fernandez St., San Francisco, del Monte, Manila.
 Q. In whose name was the house placed? mortgaged property except after default and for the sole purpose of foreclosure, receivership,
A. Ederlina Catito because I was informed being not a Filipino, I cannot own the property. (tsn, p. 11, August 27, 1986).
COURT: enforcement or other proceedings and in no case for a period of more than five years from actual
Q. So you understand that you are a foreigner that you cannot buy land in the Philippines? possession and shall not bid or take part in any sale of such real property in case of
A. That is correct but as she would eventually be my wife that would be owned by us later on. (tsn, p. 5, September 3, 1986)
foreclosure: Provided, That said mortgagee or successor-in-interest may take possession of said
Q. What happened after that?
A. She said you foreigner you are using Filipinos to buy property. property after default in accordance with the prescribed judicial procedures for foreclosure and
Q. And what did you answer? receivership and in no case exceeding five years from actual possession. 65
A: I said thank you very much for the property I bought because I gave you a lot of money (tsn., p. 14, ibid).

From the evidence on record, the three parcels of land subject of the complaint were not mortgaged to
It is evident that the plaintiff was fully aware that as a non-citizen of the Philippines, he was disqualified
the petitioner by the owners thereof but were sold to the respondent as the vendee, albeit with the use
from validly purchasing any land within the country.61
of the petitioner's personal funds.

The petitioner's claim that he acquired the subject properties because of his desire to marry the
Futile, too, is petitioner's reliance on Article 22 of the New Civil Code which reads:
respondent, believing that both of them would thereafter jointly own the said properties, is belied by his
Art. 22. Every person who through an act of performance by another, or any other means, acquires or
own evidence. It is merely an afterthought to salvage a lost cause. The petitioner admitted on cross-
comes into possession of something at the expense of the latter without just or legal ground, shall
examination that he was all along legally married to Teresita Santos Frenzel, while he was having an
return the same to him.66
amorous relationship with the respondent:
ATTY. YAP:
Q When you were asked to identify yourself on direct examination you claimed before this Honorable Court that your status is that of being
The provision is expressed in the maxim: "MEMO CUM ALTERIUS DETER DETREMENTO PROTEST" (No
married, do you confirm that?
A Yes, sir. person should unjustly enrich himself at the expense of another). An action for recovery of what has been
Q To whom are you married? paid without just cause has been designated as an accion in rem verso.67 This provision does not apply
A To a Filipina, since 1976.
Q Would you tell us who is that particular person you are married since 1976?
if, as in this case, the action is proscribed by the Constitution or by the application of the pari
A Teresita Santos Frenzel. delicto doctrine. 68 It may be unfair and unjust to bar the petitioner from filing an accion in rem
Q Where is she now?
verso over the subject properties, or from recovering the money he paid for the said properties, but, as
A In Australia.
Q Is this not the person of Teresita Frenzel who became an Australian citizen? Lord Mansfield stated in the early case of Holman vs. Johnson:69 "The objection that a contract is immoral
A I am not sure, since 1981 we were separated. or illegal as between the plaintiff and the defendant, sounds at all times very ill in the mouth of the
Q You were only separated, in fact, but not legally separated?
A Thru my counsel in Australia I filed a separation case.
defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general
Q As of the present you are not legally divorce[d]? principles of policy, which the defendant has the advantage of, contrary to the real justice, as between
A I am still legally married.62
him and the plaintiff."

The respondent was herself married to Klaus Muller, a German citizen. Thus, the petitioner and the
IN LIGHT OF ALL THE FOREGOING, the petition is DISMISSED. The decision of the Court of Appeals is
respondent could not lawfully join in wedlock. The evidence on record shows that the petitioner in fact
AFFIRMED in toto.
knew of the respondent's marriage to another man, but nonetheless purchased the subject properties
under the name of the respondent and paid the purchase prices therefor. Even if it is assumed gratia
Costs against the petitioner.
arguendi that the respondent and the petitioner were capacitated to marry, the petitioner is still
disqualified to own the properties in tandem with the respondent. 63

The petitioner cannot find solace in Article 1416 of the New Civil Code which reads:
Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the
law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover
what he has paid or delivered.64

The provision applies only to those contracts which are merely prohibited, in order to benefit private
interests. It does not apply to contracts void ab initio. The sales of three parcels of land in favor of the
petitioner who is a foreigner is illegal per se. The transactions are void ab initio because they were entered
into in violation of the Constitution. Thus, to allow the petitioner to recover the properties or the money
used in the purchase of the parcels of land would be subversive of public policy.

Neither may the petitioner find solace in Rep. Act No. 133, as amended by Rep. Act No. 4882, which
reads:
SEC. 1. Any provision of law to the contrary notwithstanding, private real property may be mortgaged
in favor of any individual, corporation, or association, but the mortgagee or his successor-in-interest,
if disqualified to acquire or hold lands of the public domain in the Philippines, shall not take possession
of the mortgaged property during the existence of the mortgage and shall not take possession of
G.R. No. L-35702 May 29, 1973 31, 1934, whereby he was issued a plan Psu-99791 (Exhibit "B"). (The land claimed contained an
area of 171:3561 hectares.)
DOMINGO D. RUBIAS, plaintiff-appellant,
vs. 2. Before the war with Japan, Francisco Militante filed with the Court of First Instance of Iloilo an
ISAIAS BATILLER, defendant-appellee. application for the registration of the title of the land technically described in psu-99791 (Exh.
"B") opposed by the Director of Lands, the Director of Forestry and other oppositors. However,
In this appeal certified by the Court of Appeals to this Court as involving purely legal questions, we affirm during the war with Japan, the record of the case was lost before it was heard, so after the war
the dismissal order rendered by the Iloilo court of first instance after pre-trial and submittal of the Francisco Militante petitioned this court to reconstitute the record of the case. The record was
pertinent documentary exhibits. reconstituted on the Court of the First Instance of Iloilo and docketed as Land Case No. R-695,
GLRO Rec. No. 54852. The Court of First Instance heard the land registration case on November
Such dismissal was proper, plaintiff having no cause of action, since it was duly established in the record
14, 1952, and after the trial this court dismissed the application for registration. The appellant,
that the application for registration of the land in question filed by Francisco Militante, plaintiff's vendor
Francisco Militante, appealed from the decision of this Court to the Court of Appeals where the case
and predecessor interest, had been dismissed by decision of 1952 of the land registration court as
was docketed as CA-GR No. 13497-R..
affirmed by final judgment in 1958 of the Court of Appeals and hence, there was no title or right to the
land that could be transmitted by the purported sale to plaintiff. 3. Pending the disposal of the appeal in CA-GR No. 13497-R and more particularly on June 18,
1956, Francisco Militante sold to the plaintiff, Domingo Rubias the land technically described in psu-
As late as 1964, the Iloilo court of first instance had in another case of ejectment likewise upheld by final
99791 (Exh. "A"). The sale was duly recorded in the Office of the Register of Deeds for the province
judgment defendant's "better right to possess the land in question . having been in the actual possession
of Iloilo as Entry No. 13609 on July 11, 1960 (Exh. "A-1").
thereof under a claim of title many years before Francisco Militante sold the land to the plaintiff."
(NOTE: As per deed of sale, Exh. A, what Militante purportedly sold to plaintiff-appellant, his son-
Furthermore, even assuming that Militante had anything to sell, the deed of sale executed in 1956 by
in-law, for the sum of P2,000.00 was "a parcel of untitled land having an area Of 144.9072 hectares
him in favor of plaintiff at a time when plaintiff was concededly his counsel of record in the land
... surveyed under Psu 99791 ... (and) subject to the exclusions made by me, under (case) CA-
registration case involving the very land in dispute (ultimately decided adversely against Militante by the
i3497, Land Registration Case No. R-695, G.L.R.O. No. 54852, Court of First Instance of the
Court of Appeals' 1958 judgment affirming the lower court's dismissal of Militante's application for province of Iloilo. These exclusions referred to portions of the original area of over 171 hectares
registration) was properly declared inexistent and void by the lower court, as decreed by Article 1409 in
originally claimed by Militante as applicant, but which he expressly recognized during the trial to
relation to Article 1491 of the Civil Code.
pertain to some oppositors, such as the Bureau of Public Works and Bureau of Forestry and several
other individual occupants and accordingly withdrew his application over the same. This is expressly
The appellate court, in its resolution of certification of 25 July 1972, gave the following backgrounder of
made of record in Exh. A, which is the Court of Appeals' decision of 22 September 1958
the appeal at bar:
confirming the land registration court's dismissal of Militante's application for registration.)
On August 31, 1964, plaintiff Domingo D. Rubias, a lawyer, filed a suit to recover the ownership and
4. On September 22,1958 the Court of appeals in CA-G.R. No. 13497-R promulgated its judgment
possession of certain portions of lot under Psu-99791 located in Barrio General Luna, Barotac Viejo,
confirming the decision of this Court in Land Case No. R-695, GLRO Rec. No. 54852 which dismissed
Iloilo which he bought from his father-in-law, Francisco Militante in 1956 against its present occupant
the application for Registration filed by Francisco Militante (Exh. "I").
defendant, Isaias Batiller, who illegally entered said portions of the lot on two occasions — in 1945 and
in 1959. Plaintiff prayed also for damages and attorneys fees. (pp. 1-7, Record on Appeal). In his
5. Domingo Rubias declared the land described in Exh. 'B' for taxation purposes under Tax Dec.
answer with counter-claim defendant claims the complaint of the plaintiff does not state a cause of
No. 8585 (Exh. "C") for 1957; Tax Dec. Nos. 9533 (Exh. "C-1") and 10019 (Exh. "C-3")for the year
action, the truth of the matter being that he and his predecessors-in-interest have always been in 1961; Tax Dec. No. 9868 (Exh. "C-2") for the year 1964, paying the land taxes under Tax Dec. No.
actual, open and continuous possession since time immemorial under claim of ownership of the portions
8585 and 9533 (Exh. "D", "D-1", "G-6").
of the lot in question and for the alleged malicious institution of the complaint he claims he has suffered
moral damages in the amount of P 2,000.00, as well as the sum of P500.00 for attorney's fees. ... 6. Francisco Militante immediate predecessor-in-interest of the plaintiff, has also declared the land
for taxation purposes under Tax Dec. No. 5172 in 1940 (Exh. "E") for 1945; under Tax Dec. No. T-
On December 9, 1964, the trial court issued a pre-trial order, after a pre-trial conference between the
86 (Exh. "E-1") for 1948; under Tax Dec. No. 7122 (Exh. "2"), and paid the land taxes for 1940
parties and their counsel which order reads as follows..
(Exhs. "G" and "G-7"), for 1945 46 (Exh. "G-1") for 1947 (Exh. "G-2"), for 1947 & 1948 (Exh. "G-
3"), for 1948 (Exh. "G-4"), and for 1948 and 1949 (Exh. "G-5").
'When this case was called for a pre-trial conference today, the plaintiff appeared assisted by himself
and Atty. Gregorio M. Rubias. The defendant also appeared, assisted by his counsel Atty. Vicente R. 7. Tax Declaration No. 2434 in the name of Liberato Demontaño for the land described therein
Acsay.
(Exh. "F") was cancelled by Tax. Dec. No. 5172 of Francisco Militante (Exh. "E"). Liberato
Demontaño paid the land tax under Tax Dec. No. 2434 on Dec. 20, 1939 for the years 1938 (50%)
A. During the pre-trial conference, the parties have agreed that the following facts are attendant in
and 1959 (Exh. "H").
this case and that they will no longer introduced any evidence, testimonial or documentary to prove
them:
8. The defendant had declared for taxation purposes Lot No. 2 of the Psu-155241 under Tax Dec.
Not. 8583 for 1957 and a portion of Lot No. 2, Psu-155241, for 1945 under Tax Dec. No. 8584
1. That Francisco Militante claimed ownership of a parcel of land located in the Barrio of General
(Exh. "2-A" Tax No. 8583 (Exh. "2") was revised by Tax Dec. No. 9498 in the name of the defendant
Luna, municipality of Barotac Viejo province of Iloilo, which he caused to be surveyed on July 18-
(Exh. "2-B") and Tax Dec. No. 8584 (Exh. "2-A") was cancelled by Tax Dec. No. 9584 also in the
name of the defendant (Exh. "2-C"). The defendant paid the land taxes for Lot 2, Psu-155241, on
 Nov. 9, 1960 for the years 1945 and 1946, for the year 1950, and for the year 1960 as shown by
the certificate of the treasurer (Exh. "3"). The defendant may present to the Court other land taxes
receipts for the payment of taxes for this lot.
9. The land claimed by the defendant as his own was surveyed on June 6 and 7,1956, and a
plan approved by Director of Land on November 15, 1956 was issued, identified as Psu 155241
(Exh. "5").
10. On April 22, 1960, the plaintiff filed forcible Entry and Detainer case against Isaias Batiller in
the Justice of the Peace Court of Barotac Viejo Province of Iloilo (Exh. "4") to which the defendant
Isaias Batiller riled his answer on August 29, 1960 (Exh. "4-A"). The Municipal Court of Barotac
Viejo after trial, decided the case on May 10, 1961 in favor of the defendant and against the
plaintiff (Exh. "4-B"). The plaintiff appealed from the decision of the Municipal Court of Barotac
Viejo which was docketed in this Court as Civil Case No. 5750 on June 3, 1961, to which the
defendant, Isaias Batiller, on June 13, 1961 filed his answer (Exh. "4-C"). And this Court after the
trial. decided the case on November 26, 1964, in favor of the defendant, Isaias Batiller and against
the plaintiff (Exh. "4-D").
(NOTE: As per Exh. 4-B, which is the Iloilo court of first instance decision of 26 November
1964 dismissing plaintiff's therein complaint for ejectment against defendant, the iloilo court
expressly found "that plaintiff's complaint is unjustified, intended to harass the defendant" and
"that the defendant, Isaias Batiller, has a better right to possess the land in question described in
Psu 155241 (Exh. "3"), Isaias Batiller having been in the actual physical possession thereof under
a claim of title many years before Francisco Militante sold the land to the plaintiff-hereby dismissing
plaintiff's complaint and ordering the plaintiff to pay the defendant attorney's fees ....")
B. During the trial of this case on the merit, the plaintiff will prove by competent evidence the following:
1. That the land he purchased from Francisco Militante under Exh. "A" was formerly owned and
possessed by Liberato Demontaño but that on September 6, 1919 the land was sold at public auction
by virtue of a judgment in a Civil Case entitled "Edw J. Pflieder plaintiff vs. Liberato Demontaño
Francisco Balladeros and Gregorio Yulo, defendants", of which Yap Pongco was the purchaser (Exh. "1-
3"). The sale was registered in the Office of the Register of Deeds of Iloilo on August 4, 1920, under
Primary Entry No. 69 (Exh. "1"), and a definite Deed of Sale was executed by Constantino A. Canto,
provincial Sheriff of Iloilo, on Jan. 19, 1934 in favor of Yap Pongco (Exh. "I"), the sale having been
registered in the Office of the Register of Deeds of Iloilo on February 10, 1934 (Exh. "1-1").
2. On September 22, 1934, Yap Pongco sold this land to Francisco Militante as evidenced by a notarial
deed (Exh. "J") which was registered in the Registry of Deeds on May 13, 1940 (Exh. "J-1").
3. That plaintiff suffered damages alleged in his complaint.
C. Defendants, on the other hand will prove by competent evidence during the trial of this case the
following facts:
1. That lot No. 2 of the Psu-1552 it (Exh. '5') was originally owned and possessed by Felipe Batiller,
grandfather of the defendant Basilio Batiller, on the death of the former in 1920, as his sole heir. Isaias
Batiller succeeded his father , Basilio Batiller, in the ownership and possession of the land in the year
1930, and since then up to the present, the land remains in the possession of the defendant, his
possession being actual, open, public, peaceful and continuous in the concept of an owner, exclusive of
any other rights and adverse to all other claimants.
2. That the alleged predecessors in interest of the plaintiff have never been in the actual possession of
the land and that they never had any title thereto.
3. That Lot No. 2, Psu 155241, the subject of Free Patent application of the defendant has
been approved.
4. The damages suffered by the defendant, as alleged in his counterclaim."'1
The appellate court further related the developments of the case, as follows:
On August 17, 1965, defendant's counsel manifested in open court that before any trial on the merit of
the case could proceed he would file a motion to dismiss plaintiff's complaint which he did, alleging
that plaintiff does not have cause of action against him because the property in dispute which he
(plaintiff) allegedly bought from his father-in-law, Francisco Militante was the subject matter of LRC
No. 695 filed in the CFI of Iloilo, which case was brought on appeal to this Court and docketed as CA-
G.R. No. 13497-R in which aforesaid case plaintiff was the counsel on record of his father-in-law,
Francisco Militante. Invoking Arts. 1409 and 1491 of the Civil Code which reads:
'Art. 1409. The following contracts are inexistent and void from the beginning:
(7) Those expressly prohibited by law.
'ART. 1491. The following persons cannot acquire any purchase, even at a public auction, either in
person of through the mediation of another: .
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and
employees connected with the administration of justice, the property and rights of in litigation or levied
upon an execution before the court within whose jurisdiction or territory they exercise their respective
functions; this prohibition includes the act of acquiring an assignment and shall apply to lawyers, with
respect to the property and rights which may be the object of any litigation in which they may take
part by virtue of their profession.'
defendant claims that plaintiff could not have acquired any interest in the property in dispute as the
contract he (plaintiff) had with Francisco Militante was inexistent and void. (See pp. 22-31, Record on
Appeal). Plaintiff strongly opposed defendant's motion to dismiss claiming that defendant can not invoke
Articles 1409 and 1491 of the Civil Code as Article 1422 of the same Code provides that 'The defense
of illegality of contracts is not available to third persons whose interests are not directly affected' (See
pp. 32-35 Record on Appeal).
On October 18, 1965, the lower court issued an order disclaiming plaintiffs complaint (pp. 42-49,
Record on Appeal.) In the aforesaid order of dismissal the lower court practically agreed with
defendant's contention that the contract (Exh. A) between plaintiff and Francism Militante was null and
void. In due season plaintiff filed a motion for reconsideration (pp. 50-56 Record on Appeal) which was
denied by the lower court on January 14, 1966 (p. 57, Record on Appeal).
Hence, this appeal by plaintiff from the orders of October 18, 1965 and January 14, 1966.
Plaintiff-appellant imputes to the lower court the following errors:
'1. The lower court erred in holding that the contract of sale between the plaintiff-appellant and his
father-in-law, Francisco Militante, Sr., now deceased, of the property covered by Plan Psu-99791, (Exh.
"A") was void, not voidable because it was made when plaintiff-appellant was the counsel of the latter
in the Land Registration case.
'2. The lower court erred in holding that the defendant-appellee is an interested person to question the
validity of the contract of sale between plaintiff-appellant and the deceased, Francisco Militante, Sr.
'3. The lower court erred in entertaining the motion to dismiss of the defendant-appellee after he had
already filed his answer, and after the termination of the pre-trial, when the said motion to dismiss
raised a collateral question.
'4. The lower court erred in dismissing the complaint of the plaintiff-appellant.'
The appellate court concluded that plaintiffs "assignment of errors gives rise to two (2) legal posers —
(1) whether or not the contract of sale between appellant and his father-in-law, the late Francisco
Militante over the property subject of Plan Psu-99791 was void because it was made when plaintiff was
counsel of his father-in-law in a land registration case involving the property in dispute; and (2) whether
or not the lower court was correct in entertaining defendant-appellee's motion to dismiss after the latter
had already filed his answer and after he (defendant) and plaintiff-appellant had agreed on some matters
in a pre-trial conference. Hence, its elevation of the appeal to this Court as involving pure questions of
law.
It is at once evident from the foregoing narration that the pre-trial conference held by the trial court at
which the parties with their counsel agreed and stipulated on the material and relevant facts and
submitted their respective documentary exhibits as referred to in the pre-trial order, supra,2 practically
amounted to a fulldress trial which placed on record all the facts and exhibits necessary for adjudication
of the case.
The three points on which plaintiff reserved the presentation of evidence at the-trial dealing with the
source of the alleged right and title of Francisco Militante's predecessors, supra,3 actually are already
made of record in the stipulated facts and admitted exhibits. The chain of Militante's alleged title and
right to the land as supposedly traced back to Liberato Demontaño was actually asserted by Militante
(and his vendee, lawyer and son-in-law, herein plaintiff) in the land registration case and rejected by the
Iloilo land registration court which dismissed Militante's application for registration of the land. Such
dismissal, as already stated, was affirmed by the final judgment in 1958 of the Court of Appeals.4
The four points on which defendant on his part reserved the presentation of evidence at the trial dealing
with his and his ancestors' continuous, open, public and peaceful possession in the concept of owner of
the land and the Director of Lands' approval of his survey plan thereof, supra,5 are likewise already duly
established facts of record, in the land registration case as well as in the ejectment case wherein the
Iloilo court of first instance recognized the superiority of defendant's right to the land as against plaintiff.
No error was therefore committed by the lower court in dismissing plaintiff's complaint upon defendant's
motion after the pre-trial.
1. The stipulated facts and exhibits of record indisputably established plaintiff's lack of cause of action
and justified the outright dismissal of the complaint. Plaintiff's claim of ownership to the land in question
was predicated on the sale thereof for P2,000.00 made in 1956 by his father-in- law, Francisco Militante,
in his favor, at a time when Militante's application for registration thereof had already been dismissed by
the Iloilo land registration court and was pending appeal in the Court of Appeals.
With the Court of Appeals' 1958 final judgment affirming the dismissal of Militante's application for
registration, the lack of any rightful claim or title of Militante to the land was conclusively and decisively
judicially determined. Hence, there was no right or title to the land that could be transferred or sold by
Militante's purported sale in 1956 in favor of plaintiff.
Manifestly, then plaintiff's complaint against defendant, to be declared absolute owner of the land and to
be restored to possession thereof with damages was bereft of any factual or legal basis.
2. No error could be attributed either to the lower court's holding that the purchase by a lawyer of the
property in litigation from his client is categorically prohibited by Article 1491, paragraph (5) of the
Philippine Civil Code, reproduced supra;6 and that consequently, plaintiff's purchase of the property in
litigation from his client (assuming that his client could sell the same since as already shown above, his
client's claim to the property was defeated and rejected) was void and could produce no legal effect, by
virtue of Article 1409, paragraph (7) of our Civil Code which provides that contracts "expressly prohibited
or declared void by law' are "inexistent and that "(T)hese contracts cannot be ratified. Neither can the
right to set up the defense of illegality be waived."
The 1911 case of Wolfson vs. Estate of Martinez7 relied upon by plaintiff as holding that a sale of property
in litigation to the party litigant's lawyer "is not void but voidable at the election of the vendor" was
correctly held by the lower court to have been superseded by the later 1929 case of Director of Lands vs.
Abagat.8 In this later case of Abagat, the Court expressly cited two antecedent cases involving the same
transaction of purchase of property in litigation by the lawyer which was expressly declared invalid under
Article 1459 of the Civil Code of Spain (of which Article 1491 of our Civil Code of the Philippines is the
counterpart) upon challenge thereof not by the vendor-client but by the adverse parties against whom
the lawyer was to enforce his rights as vendee thus acquired.
These two antecedent cases thus cited in Abagat clearly superseded (without so expressly stating the previous ruling
in Wolfson:
The spouses, Juan Soriano and Vicente Macaraeg, were the owners of twelve parcels of land. Vicenta Macaraeg died in
November, 1909, leaving a large number of collateral heirs but no descendants. Litigation between the surviving
husband, Juan Soriano, and the heirs of Vicenta immediately arose, and the herein appellant Sisenando Palarca acted
as Soriano's lawyer. On May 2, 1918, Soriano executed a deed for the aforesaid twelve parcels of land in favor of
Sisenando Palarca and on the following day, May 3, 1918, Palarca filed an application for the registration of the land in
the deed. After hearing, the Court of First Instance declared that the deed was invalid by virtue of the provisions of
article 1459 of the Civil Code, which prohibits lawyers and solicitors from purchasing property rights involved in any
litigation in which they take part by virtue of their profession. The application for registration was consequently denied,
and upon appeal by Palarca to the Supreme Court, the judgement of the lower court was affirmed by a decision
promulgated November 16,1925. (G.R. No. 24329, Palarca vs. Director of Lands, not reported.)
In the meantime cadastral case No. 30 of the Province of Tarlac was instituted, and on August 21, 1923, Eleuteria
Macaraeg, as administratrix of the estate of Vicente Macaraeg, filed claims for the parcels in question. Buenaventura
Lavitoria administrator of the estate of Juan Soriano, did likewise and so did Sisenando Palarca. In a decision dated June
21, 1927, the Court of First Instance, Judge Carballo presiding, rendered judgment in favor of Palarea and ordered the
registration of the land in his name. Upon appeal to this court by the administration of the estates of Juan Soriano and
Vicente Macaraeg, the judgment of the court below was reversed and the land adjudicated to the two estates as conjugal
property of the deceased spouses. (G.R. No. 28226, Director of Lands vs. Abagat, promulgated May 21, 1928, not
reported.)9
In the very case of Abagat itself, the Court, again affirming the invalidity and nullity of the lawyer's
purchase of the land in litigation from his client, ordered the issuance of a writ of possession for the return
of the land by the lawyer to the adverse parties without reimbursement of the price paid by him and
other expenses, and ruled that "the appellant Palarca is a lawyer and is presumed to know the law. He
must, therefore, from the beginning, have been well aware of the defect in his title and is, consequently,
a possessor in bad faith."
As already stated, Wolfson and Abagat were decided with relation to Article 1459 of the Civil Code of
Spain then adopted here, until it was superseded on August 30, 1950 by the Civil Code of the Philippines
whose counterpart provision is Article 1491.
Article 1491 of our Civil Code (like Article 1459 of the Spanish Civil Code) prohibits in its six paragraphs
certain persons, by reason of the relation of trust or their peculiar control over the property, from
acquiring such property in their trust or control either directly or indirectly and "even at a public or judicial
auction," as follows: (1) guardians; (2) agents; (3) administrators; (4) public officers and employees;
judicial officers and employees, prosecuting attorneys, and lawyers; and (6) others especially disqualified
by law.
In Wolfson which involved the sale and assignment of a money judgment by the client to the lawyer,
Wolfson, whose right to so purchase the judgment was being challenged by the judgment debtor, the
Court, through Justice Moreland, then expressly reserved decision on "whether or not the judgment in
question actually falls within the prohibition of the article" and held only that the sale's "voidability can
not be asserted by one not a party to the transaction or his representative," citing from Manresa 10 that
"(C)onsidering the question from the point of view of the civil law, the view taken by the code, we must
limit ourselves to classifying as void all acts done contrary to the express prohibition of the statute. Now
then: As the code does not recognize such nullity by the mere operation of law, the nullity of the acts
hereinbefore referred to must be asserted by the person having the necessary legal capacity to do so and
decreed by a competent court." 11
The reason thus given by Manresa in considering such prohibited acquisitions under Article 1459 of the
Spanish Civil Code as merely voidable at the instance and option of the vendor and not void — "that the
Code does not recognize such nullity de pleno derecho" — is no longer true and applicable to our own
Philippine Civil Code which does recognize the absolute nullity of contracts "whose cause, object, or
purpose is contrary to law, morals, good customs, public order or public policy" or which are "expressly
prohibited or declared void by law" and declares such contracts "inexistent and void from the
beginning." 12
The Supreme Court of Spain and modern authors have likewise veered from Manresa's view of the Spanish
codal provision itself. In its sentencia of 11 June 1966, the Supreme Court of Spain ruled that the
prohibition of Article 1459 of the Spanish Civil Code is based on public policy, that violation of the
prohibition contract cannot be validated by confirmation or ratification, holding that:
The criterion of nullity of such prohibited contracts under Article 1459 of the Spanish Civil Code (Article
1491 of our Civil Code) as a matter of public order and policy as applied by the Supreme Court of Spain
to administrators and agents in its above cited decision should certainly apply with greater reason to
judges, judicial officers, fiscals and lawyers under paragraph 5 of the codal article.
It is noteworthy that Caltan's rationale for his conclusion that fundamental consideration of public policy
render void and inexistent such expressly prohibited purchase (e.g. by public officers and employees of
government property intrusted to them and by justices, judges, fiscals and lawyers of property and rights
in litigation and submitted to or handled by them, under Article 1491, paragraphs (4) and (5) of our Civil
Code) has been adopted in a new article of our Civil Code, viz, Article 1409 declaring such prohibited
contracts as "inexistent and void from the beginning." 18
Indeed, the nullity of such prohibited contracts is definite and permanent and cannot be cured by
ratification. The public interest and public policy remain paramount and do not permit of compromise or
ratification. In his aspect, the permanent disqualification of public and judicial officers and lawyers
grounded on public policy differs from the first three cases of guardians, agents and administrators
(Article 1491, Civil Code), as to whose transactions it had been opined that they may be "ratified" by
means of and in "the form of a new contact, in which cases its validity shall be determined only by the
circumstances at the time the execution of such new contract. The causes of nullity which have ceased
to exist cannot impair the validity of the new contract. Thus, the object which was illegal at the time of
the first contract, may have already become lawful at the time of the ratification or second contract; or
the service which was impossible may have become possible; or the intention which could not be
ascertained may have been clarified by the parties. The ratification or second contract would then be valid
from its execution; however, it does not retroact to the date of the first contract." 19
As applied to the case at bar, the lower court therefore properly acted upon defendant-appellant's motion
to dismiss on the ground of nullity of plaintiff's alleged purchase of the land, since its juridical effects and
plaintiff's alleged cause of action founded thereon were being asserted against defendant-appellant. The
principles governing the nullity of such prohibited contracts and judicial declaration of their nullity have
been well restated by Tolentino in his treatise on our Civil Code, as follows:
Parties Affected. — Any person may invoke the in existence of the contract whenever juridical effects
founded thereon are asserted against him. Thus, if there has been a void transfer of property, the
transferor can recover it by the accion reinvindicatoria; and any prossessor may refuse to deliver it to
the transferee, who cannot enforce the contract. Creditors may attach property of the debtor which has
been alienated by the latter under a void contract; a mortgagee can allege the inexistence of a prior
encumbrance; a debtor can assert the nullity of an assignment of credit as a defense to an action by
the assignee.
Action On Contract. — Even when the contract is void or inexistent, an action is necessary to declare
its inexistence, when it has already been fulfilled. Nobody can take the law into his own hands; hence,
the intervention of the competent court is necessary to declare the absolute nullity of the contract and
to decree the restitution of what has been given under it. The judgment, however, will retroact to the
very day when the contract was entered into.
If the void contract is still fully executory, no party need bring an action to declare its nullity; but if any
party should bring an action to enforce it, the other party can simply set up the nullity as a defense. 20
ACCORDINGLY, the order of dismissal appealed from is hereby affirmed, with costs in all instances against
plaintiff-appellant. So ordered.
G.R. No. L-25891 November 29, 1977
BENEDICTO M. JAVIER, as administrator of the Estate of Eusebio Cruz, petitioner,
vs.
DOMINGA VDA. DE CRUZ, and LEONILA, ROMAN, ELISEO, LIBERATA, and MELECIO, all
surnamed CRUZ, respondents.
This is an appeal by the plaintiff from the decision of the Court of First Instance of Rizal in Civil Case No. 5996
entitled "Benedicto M. Javier, etc. vs. Dominga Vda. de Cruz, et al." the dispositive part of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered one in favor of the defendants and against the plaintiff
dismissing the two above-entitled cases, dissolving the writ of preliminary injunction, ordering the plaintiff to pay
attorney's fees in the sum of One Thousand Pesos (P1,000.00) and condemning the said plaintiff to pay the costs of suit.
IT IS ORDERED. Pasig, Rizal, August 29, 1962. (Sgd.) Andres Reyes
( /t/ ) ANDRES REYES Judge 1
The Court of Appeals, in a resolution promulgated on March 19, 1966 certified to the Supreme Court the case because "the
value of the property in question is more than half a million pesos ..." hence "is beyond the jurisdiction of this Court." 2
On February 1, 1960 Benedicto M. Javier, as administrator of the Estate of Eusebio Cruz, instituted against
Dominga Vda. de Cruz and her children Civil Case No. 5996 to declare null and void a deed of sale of a
part of a parcel of land located in Barrio San Isidro, Taytay, Rizal containing an area of 182,959 square
meters and assessed at P4,310.00 under Tax No. 9136 under Tax No. 9136 in the name of Estate of E.
Cruz.
The amended complaint stated that Eusebio Cruz, who died on February 2, 1941 at the age of 100 years
without leaving any will nor compulsory heirs, was the absolute and exclusive owner of a parcel of
mountainous and unimproved land situated in sitio Matogalo, Taytay, Rizal which he inherited from his
forebears, described therein; that during his lifetime, Eusebio Cruz had been living with one Teodora
Santos 'without the sanction of marriage"; that Teodora Santos had with her as distant relatives and
protegees the brothers Gregorio Cruz and Justo Cruz; that Gregorio Cruz was the father of Delfin Cruz,
deceased husband of defendant Dominga Vda. de Cruz and father of defendants Leonila, Roman, Eliseo,
Leberata and Melecio, all surnamed Cruz; that on January 16, 1941 Delfin Cruz, by means of deceit and
in collusion with persons among them his father Gregorio Cruz made Eusebio Cruz, who could read and
write, stamp his thumbmark on a deed of sale of a portion of the land described in the complaint consisting
of 26,577 square meters for the sum of P700.00 in favor of said Delfin Cruz; that at that time Delfin Cruz
did not have theithin thirty days from submittal of the case for decision, but the validity of the law cannot
be seriously challenged." 14
Petitioner fiscal, as already stated, filed the informations in the ten cases with the Circuit Criminal Court
rather than with the respondent judge's court to mitigate the latter court's caseload in accordance with
the purpose of the Circuit Criminal Court law or at the request of the offended parties and complainants.
Since the filing of the information or complaint "supplies -the occasion for the exercise of jurisdiction
vested by law in a particular court" 15 and the law confers concurrent jurisdiction in the Circuit Criminal
Court, the said court properly assumed jurisdiction over the said cases and there is no lawful basis for
respondent judge's prayer that said cases be returned to his court "for the lawful actions which are needed
on them" and to set at naught the judgments of conviction already rendered by the Circuit Criminal Court
in some of the cases and the other proceedings therein.
For administrative and record purposes, however, petitioner fiscal should have promptly and in due course advised the
clerk of respondent judge's court that the informations had been filed with the Circuit Criminal Court. Petitioner fiscal
recognized this oversight and duly "apologized humbly" to respondent judge and pleaded an "acute lack of personnel in
his office" in extenuation. Under the circumstances and considering that petitioner was only discharging his duty according
to his best lights, and could not be said to have in any way acted arbitrarily or in bad faith in filing the informations with
the Circuit Criminal Court, his apology could have been graciously accepted by respondent judge with an admonition to
exercise greater care in the future, in lieu of the unwarranted imposition of punitive fines in the total sum of P 1,000.00.
ACCORDINGLY, the questioned contempt orders and fines imposed therein are annulled and set aside. Without costs.
G.R. No. L-43668-69 July 31, 1978
POTENCIANO MENIL and wife CRISPINA NAYVE, petitioners,
vs.
COURT OF APPEALS, AGUEDA GARAN, FRANCISCO CALANIAS, MIGUEL NAYVE, JR., and
DEVELOPMENT BANK OF THE PHILIPPINES, respondents.
On November 3, 1955, Agueda Garan obtained a homestead patent over the land in question.
On February 4, 1956, Original Certificate of Title No. 220 was issued by the Register of Deeds of Surigao
in her name pursuant to the homestead patent.
On May 7, 1960, within the prohibitive 5-year period, Agueda Garan sold the land to movant Patenciano
Manil for P415.00, as evidenced by a deed of sale bearing the same date. But, for reasons not revealed
in the records, the contracting parties did not registered the deed of sale in the Registry of Deeds in
Surigao. Original Certificate of Title No. 220 was not cancelled and the land remained registered in the
name of Agueda Garan.
On August 30, 1964, Agueda Garan executed another deeds of sale over the same parcel of land in favor
of the same vendee, Potenciano Menil, and for the same price P415.00.
On August 30, 1965, the contracting parties registered the second deed of sale in the Registry of Deeds
in Surigao. Original Certificate of Title No. 220 was cancelled, and Transfer Certificate of Title No. T-60,
in lieu thereof, was issued in the name of Potenciano Menil.
On February 28, 1966, Potenciano Menil mortgaged the land to the Development Bank of the Philippines
to secure an agricultural loan which the former obtained fromthe latter.
... in the 1st Indorsement, dated May 26, 1965, of the Acting Chief, land Management Division of the
Bureau of Lands to the Secretary of Agriculture and Natural Resources, (that) the former recommended
to the latter the approval of the sale dated March 3, 1964; and the Officer-in-Charge, for and in the
absence of the Undersecretary for Natural Resources, in his 2nd Indorsement, dated June 23, 1965,
approved the same. Movant Potenciano Menil was notified on July 12, 1965 of the approval of the sale to
Mm of the tract of land covered by OCT No. 220.
Petitioners were in possession of the land in question until sometime in 1967 when private respondents
Agueda Garan, Francisco Calanias, Miguel Nayve, Jr., Rufo Nayve, and Lucio Calanias forcibly took
possession of the said land, and filed against petitioners Civil Case No. 1692 for "Quieting of Title" before
Branch 11 of the Court of First Instance of Surigao del Norte. The said court dismissed the complaint,
awarded damages to the petitioners, and granted the writ of execution prayed for by the latter.
However, upon the claim that the above decision was silent on the issue of who are entitled to the
possession of the land under litigation, the private respondents refused to vacate the land, thus, forcing
petitioners to file on July 8, 1968 Civil Case No. 1810 for "Recovery of Possession" of the said land before
Branch 1 of the same Court of First Instance of Surigao del Norte. On the other hand, during the pendency
of Civil Case No. 1810, private respondents filed against the petitioners Civil Case No. 1816 for the
reconveyance of the land litigated in Civil Case No. 1692 and Civil Case No. 1810 before the same court.
By agreement of the parties, Civil Case No. 1810 and Civil Case No. 1816 were jointly heard by the Court
of First Instance of Surigao del Norte, Branch I. A joint judgment dated June 13. 1970 was rendered
declaring that the decision in Civil Case No. 1692 clearly stated that the spouses Menil were legally
entitled to the possession of the land, ordering private respondents to restore possession of the land in
litigation to petitioners, and dismissing Civil Case No. 1816 for insufficiency of evidence. On a motion for
reconsideration filed by the private respondents, the lower court ordered the reopening of the two cases,
after the rehearing of which the said court affirmed the joint judgment dated June 13, 1970, but dismissed
Civil Case No. 1816 insofar as the Development Bank of the Philippines was concerned.
Private respondents appealed to the Court of Appeals. The appellate court in its Decision dated April 18,
1975 dismissed the appeal and affirmed the decision of the lower court, with a declaration that the
decision in Civil Case No. 1692 was res judicata to Civil Case No. 1810 and Civil Case No. 1816. On a
motion for reconsideration filed by private respondents, the appellate court set aside its Decision and
rendered the Resolution dated September 3, 1975 which declared the sale of the homestead in question
to petitioners as nun and void, ordered the cancellation of Transfer Certificate of Title No. T-60 and the
mortgage in favor of the Development Bank of the Philippines, the re-issuance of Original Certificate of
Title No. 220 in favor of homesteader Agueda Garan, and ordered Garan to reimburse Menil the sum of
P415.00, the price of the sale, the interest thereon being declared compensated by the fruits Menil
received from their possession of the properties. Petitioners and the Development Bank of the Philippines
respectively moved to reconsider the said Resolution. Acting to said Motion for Reconsideration, the
appellate court in its Resolution dated January 16, 1976 affirmed the Resolution dated September 3,
1975, denied petitioners' motion for reconsideration, but granted that of the Development Bank of the
Philippines by declaring the mortgage executed by petitioners over the land in favor of said bank as valid.
Petitioners now filed this appeal by way of certiorari seeking that the Resolutions of the Court of Appeals
dated September 3, 1975 and January 16, 1976 be set aside and that the Decision of the same court
dated April 18, 1975 be revived.
In the Resolution of September 3, 1975 which petitioners seek to set aside, the Court of Appeals said:
In Our above-said decision. We expressed the view that the decision in Civil Case No. 1692 was on the
merits because it was rendered after trial on the merits and therefore res judicata to the subsequent
herein cases. After a thorough reading and review of the said decision in Civil Case No. 1692, however,
We have voted to revise that view. The discussion in the latter decision is replete with unequivocal (sic)
and contradictory opinions that it is quite difficult to comprehend what the trial judge's conclusion is.
The main part of the dispositive portion, however, provides:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of the defendant,
Potenciano Menil, and against the herein plaintiffs dismissing the latter's complaint.
To paraphrase, what was dismissed in said judgment was plaintiffs' complaint, not the action itself, as
according to the discussion the action was not the proper one availed of. From this, it may be inferred
that the intention of said trial judge was just to dismiss the complaint without prejudice to the filing of
the proper action.
We agree with the appellate court that the decision rendered in Civil Case No. 1692 was not res judicata to
the subsequent cases, Civil Case No. 1810 and Civil Case No. 1816. The issue of the validity of the sale
of the homestead land within the 5 year prohibitory period under Section 118 of the Public Land Act was
not squarely raised and decided in said Civil Case No. 1692 which was brought only for "Quieting of Title."
The more fundamental issue presented for Our resolution is: Who are entitled to the land under litigation?
It is not disputed by the parties that the contract of sale executed on May 7, 1960, having been executed
less than 5 years from May 7, 1960, the date the homestead patent was awarded to private respondent
Agueda Garan, is null and void for being violative of Section 118 of C.A. 141 [Public Land Act] which
provides:
Sec. 118. Except in favor of the government or any of its branches, units, or institutions, lands acquired
under free patent or homestead provisions shall not be subject to encumbrance or alienation from the
date of the approval of the application and for a term of five years from and after the date of issuance
of the patent or grant, nor shall they become liable to the satisfaction of any debt contracted prior to
the expiration of said period, but the improvements or crops on the land may be mortgaged or pledged
to qualified persons, associations, or corporations.
Petitioners contend, however, that the subsequent approval thereof by the Secretary of Agriculture and
Natural Resources, and the execution of the confirmatory deed of sale on August 10, 1965, cured any
defect that the first sale may have suffered.
In finding such contention without merit, the appellate court in its Resolution dated September 3, 1975,
which was substantially affirmed by its Resolution dated January 16, 1975, declared:
This case is almost Identical with Manzano vs. Ocampo (I SCRA 69 1) where it was held;
We therefore, hold that the sale in question is illegal and void for having been made within five years
from the date of Manzano's patent, in violation of Section 118 of the Public Land Law, Being void from
its inception, the approval thereof by the undersecretary of Agriculture and Natural Resources after the
lapse of five years from Manzano's patent did not legalize the sale. (Santander v. Villanueva, G.R. No.
L-6184, Feb. 28, 1958; Cadiz v. Nicolas, G.R. No. L-9198, Feb. 13, 1958). The result is that the
homestead in question must be returned to Manzano's heirs, petitioners herein, who are, in turn, bound
to restore to appellee Ocampo the sum of P3,000.00 received by Manzano as the price thereof. (Medel
v. Eliazo, G.R. No. L-12617, Aug. 27, 1959, Santander vs. Villanueva, supra; Feb. 28, 1958). The fruits
of the land should equitable compensate the interest on the price.
As to the execution of the confirmatory deed of sale, by proper analogy, the Supreme Court in the said
case said:
The law prohibiting any transfer or alienation of homestead land within five years from the issuance of
the patent does not distinguish between executory and consummated sales; and it would hardly be in
keeping with the primordial aim of this prohibition to preserve and keep in the family of the
homesteader the piece of land that the state had gratuitously given to them, to hold valid a homestead
sale actually perfected during the period of prohibition but with the execution of the formal deed of
conveyance and the the delivery of possession of the land sold to the buyer deferred until after the
expiration of the prohibitory period, purposely to circumvent the very law that prohibits and declares
invalid such transaction to protect the homesteader and his family. To hold valid such arrangements
would be to throw the door wide open to an possible fraudulent subterfuges and schemes that persons
interested in land given to homesteaders may devise to circumvent and defeat the legal provision
prohibiting their alienation within five years from the issuance of the homestead's patent.
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.
Further, noteworthy is the fact that the second contract of sale over the said homestead in favor of the
same vendee, petitioner Potenciano Menil, is for the same price of P415.00. Clearly, the unvarying term
of the said contract is ample manifestation that the same is simulated and that no object or consideration
passed between the parties to the contract. It is evident from the whole record of the case that the
homestead had long been in the possession of the vendees upon the execution of the first contract of
sale on May 7, 1960; likewise, the amount of P415.00 had long been paid to Agueda Garan on that same
occasion. We find no evidence to the contrary.
With respect to the Resolution of January 16, 1976 of the respondent appellate court, likewise assailed
by petitioners, which granted the motion for reconsideration of the Development Bank of the Philippines
and declared the mortgage executed by Potenciano Menil over the land in favor of said Bank to be valid,
We hold that petitioners are liable for the payment of the agricultural loan obtained by them from the
Bank for which the land was mortgaged by them as security.
IN VIEW OF THE FOREGOING, the Resolution of September 3, 1975 as modified by the Resolution of
January 16, 1976 is affirmed. Judgment is hereby rendered:
(1) Declaring null and void the sale of the homestead under litigation to petitioners Potenciano Menil
and wife, Crispina Nayve;
(2) Ordering the Register of Deeds of Surigao del Norte to cancel Transfer Certificate of Title No. T-60,
and to re-issue Original Certificate of Title No. 220 in the name of private respondent Agueda Garan,
subject to the mortgage executed by petitioner Potenciano Menil in favor of private respondent
Development Bank of the Philippines which is hereby declared valid, and ordered to be annotated on
said Original Certificate of Title by the said Register of Deeds;
(3) Ordering petitioners Potenciano Menil and wife, Crispina Nayve, to reimburse respondent Agueda
Garan the sum of P415.00, the price of the sale, the interest thereon being compensated by the fruits
petitioners Potenciano Menil and wife, Crispina Nayve, received from their possession of the homestead;
(4) Ordering petitioners to pay the agricultural loan obtained by them from the Development Bank of
the Philippines for which the land had been mortgaged as collateral. This judgment is without prejudice
to any appropriate action the Government may take against private respondent Agueda Garan pursuant
to Section 124 of C. A. 141. No pronouncement as to costs.

We are fully in accord with the conclusion of the appellate court that the issue presented in the case at
bar is squarely resolved by the doctrine enunciated in the aforecited case of Manzano v.
Ocampo, supra. Indeed, We cannot discern in the case at bar any new element or matter which may
possibly bar the application of the ruling in Manzano v. Ocampo as contended by the petitioners.

It cannot be claimed that there are two contracts: one which is undisputably null and void, and another,
having been executed after the lapse of the 5-year prohibitory period, which is valid. The second contract
of sale executed on March 3, 1964 is admittedly a confirmatory deed of sale. Even the petitioners concede
this point. 3 Inasmuch as the contract of sale executed on May 7, 1960 is void for it is expressly prohibited
or declared void by law [CA- 141, Section 118], it therefore cannot be confirmed nor ratified. Article 1409
of the New Civil Code states:
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object, or purpose is contrary to law, morals, good customs, public order or
public policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained;
(7) Those expressly prohibited or declared void by law.
G.R. No. L-26096 February 27, 1979
THE DIRECTOR OF LANDS, petitioner,
vs.
SILVERETRA ABABA, ET AL., claimants, JUAN LARRAZABAL, MARTA C. DE LARRAZABAL,
MAXIMO ABAROQUEZ and ANASTACIA CABIGAS, petitioners-appellants, ALBERTO
FERNANDEZ, adverse claimant-appellee.
The adverse claimant, Atty. Alberto B. Fernandez was retained as counsel by petitioner, Maximo
Abarquez, in Civil Case No. R-6573 of the Court of First Instance of Cebu, entitled "Maximo Abarquez vs.
Agripina Abarquez", for the annulment of a contract of sale with right of repurchase and for the recovery
of the land which was the subject matter thereof. The Court of First Instance of Cebu rendered a decision
on May 29, 1961 adverse to the petitioner and so he appealed to the Court of Appeals.
Litigating as a pauper in the lower court and engaging the services of his lawyer on a contingent basis,
petitioner, liable to compensate his lawyer whom he also retained for his appeal executed a document on
June 10, 1961 in the Cebuano-Visayan dialect whereby he obliged himself to give to his lawyer one-half
(1/2) of whatever he might recover from Lots 5600 and 5602 should the appeal prosper. The contents of
the document as translated are as follows:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
That I, MAXIMO ABARQUEZ, Plaintiff in Case No. R-6573 of the Court of First Instance of Cebu, make
known through this agreement that for the services rendered by Atty. Alberto B. Fernandez who is my
lawyer in this case, if the appeal is won up to the Supreme Court, I Promise and will guarantee that I
win give to said lawyer one-half (1/2) of what I may recover from the estate of my father in Lots No.
5600 and 5602 which are located at Bulacao Pardo, City of Cebu. That with respect to any money which
may be adjudged to me from Agripina Abarquez, except 'Attorney's Fees', the same shall pertain to me
and not to said lawyer.
IN WITNESS WHEREOF, I have caused my right thumb. mark to be affixed hereto this 10th of June,
1961, at the City of Cebu.
The real Property sought to be recovered in Civil Case No. R6573 was actually the share of the petitioner
in Lots 5600 and 5602, which were part of the estate of his deceased parents and which were partitioned
the heirs which included petitioner Maximo Abarquez and his elder sister Agripina Abarquez, the
defendant in said civil case.
This partition was made pursuant to a project of partition approved by the Court which provided am other
that Lots Nos. 5600 and 5602 were to be divided into three equal Parts, one third of which shall be given
to Maximo Abarquez. However, Agripina Abarquez the share of her brother stating that the latter executed
an instrument of pacto de retro prior to the partition conveying to her any or all rights in the estate of
their parents. Petitioner discovered later that the claim of his sister over his share was based on an
instrument he was believe all along to be a mere acknowledgment of the receipt of P700.00 which his
sister gave to him as a consideration for g care of their father during the latter's illness and never an
instrument of pacto de retro. Hence, he instituted an action to annul the alleged instrument of pacto de
retro.
The Court of Appeals in a decision promulgated on August 27, 1963 reversed the decision of the lower
court and annulled the dead of pacto de retro. Appellee Agripina Abarquez filed a motion for
reconsideration but the same was denied in a resolution dated January 7, 1964 (p. 66, Record on Appeal;
p. 13, Rec.) and the judgment became final and executory on January 22,1964.
Subsequently, Transfer Certificate of Title No. 31841 was issued on May 19,1965 in the name of Maximo
Abarquez, married to Anastacia Cabigas, over his adjudged share in Lots Nos. 5600 and 5602 containing
an area of 4,085 square meters (p. 110, ROA; p. 13, rec.). These parcels of land later by the subject
matter of the adverse claim filed by the claimant.
The case having been resolved and title having been issued to petitioner, adverse claimant waited for
petitioner to comply with ha obligation under the document executed by him on June 10, 1961 by
delivering the one-half (½) portion of the said parcels of land.
Petitioner refused to comply with his obligation and instead offered to sell the whole parcels of land
covered by TCT No. 31841 to petitioner-spouses Juan Larrazabal and Marta C. de Larrazabal. Upon being
informed of the intention of the petitioner, adverse t claimant immediately took stops to protect his
interest by filing with the trial court a motion to annotate Ins attorney's lien on TCT No. 31841 on June
10, 1965 and by notifying the prospective buyers of his claim over the one-half portion of the parcels of
land.
Realizing later that the motion to annotate attorney's lien was a wrong remedy, as it was not within the
purview of Section 37, rule 138 of the Revised Rule of Court, but before the same was by the trial court,
adverse t by an affidavit of adverse claim on July 19, 1965 with the Register of Deeds of Cebu (p. 14,
ROA; p. 13, rec.). By virtue of the petition of mid affidavit the adverse claim for one-half (½) of the lots
covered by the June 10, 1961 document was annotated on TCT No. 31841.
Notwithstanding the annotation of the adverse claim, petitioner-spouse Maximo Abarquez and Anastacia
Cabigas conveyed by deed of absolute sale on July 29, 1965 two-thirds (2/3) of the lands covered by TCT
No. 31841 to petitioner-spouses Juan Larrazabal and Marta C. de Larrazabal. When the new transfer
certificate of title No. 32996 was issued, the annotation of adverse claim on TCT No. 31841 necessarily
had to appear on the new transfer certificate of title. This adverse claim on TCT No. 32996 became the
subject of cancellation proceedings filed by herein petitioner-spouses on March 7, 1966 with the Court of
First Instance of Cebu (p. 2 ROA; p. 13, rec.). The adverse claimant, Atty. Alberto B. Fernandez, filed his
opposition to the petition for cancellation on March 18, 1966 (p. 20, ROA; p. 13 rec.). The trial court
resolved the issue on March 19, 1966, when it declared that:
...the petition to cancel the adverse claim should be denied. The admission by the petitioners that the
lawyers (Attys. Fernandez and Batiguin) are entitled to only one-third of the lot described in Transfer
Certificate of Title No. 32966 is the best proof of the authority to maintain said adverse claim
Petitioner-spouses decided to appeal the order of dismissal to this Court and correspondingly filed the
notice of appeal on April 1, 1966 with the trial court. On April 2, 1966, petitioner-spouses filed the appeal
bond and subsequently filed the record on appeal on April 6, 1966. The records of the case were forwarded
to this Court through the Land Registration Commission of Manila and were received by this Court on May
5, 1966.
Counsel for the petitioner-spouses filed the printed record on appeal on July 12, 1966. Required to file
the appellants' brief, counsel filed one on August 29, 1966 while that of the appellee was filed on October
1, 1966 after having been granted an extension to file his brief.
The case was submitted for decision on December 1, 1966. Counsel for the petitioners filed a motion to
expunge appellees' brief on December 8, 1966 for having been filed beyond the reglementary period, but
the same was denied by this Court in a resolution dated February 13, 1967.
The pivotal issue to be resolved in the instant case is the validity or nullity of the registration of the
adverse claim of Atty. Fernandez, resolution of which in turn hinges on the question of whether or not
the contract for a contingent fee, basis of the interest of Atty. Fernandez, is prohibited by the Article 1491
of the New Civil Code and Canon 13 of the Canons of Professional Ethics.
Petitioners contend that a contract for a contingent fee violates Article 1491 because it involves an
assignment of a property subject of litigation. That article provides:
Article 1491. The following persons cannot acquire by purchase even at a public or judicial auction,
either in person or through the petition of another.
(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior and other o and employees
connected with the administration of justice, the property and rights in litigation or levied upon an
execution before the court within whose jurisdiction or territory they exercise their respective
functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with
respect to the property and rights which may be the object of any litigation in which they may take
part by virtue of their profession (Emphasis supplied).
This contention is without merit. Article 1491 prohibits only the sale or assignment between the lawyer
and his client, of property which is the subject of litigation. As WE have already stated. "The prohibition
in said article a only to applies stated: " The prohibition in said article applies only to a sale or assignment
to the lawyer by his client of the property which is the subject of litigation. In other words, for the
prohibition to operate, the sale or t of the property must take place during the pendency of the litigation
involving the property" (Rosario Vda. de Laig vs. Court of Appeals, et al., L-26882, November 21, 1978).
Likewise, under American Law, the prohibition does not apply to "cases where after completion of
litigation the lawyer accepts on account of his fee, an interest the assets realized by the litigation" "There
is a clear distraction between such cases and one in which the lawyer speculates on the outcome of the
matter in which he is employed"
A contract for a contingent fee is not covered by Article 1491 because the tranfer or assignment of the
property in litigation takes effect only after the finality of a favorable judgment. In the instant case, the
attorney's fees of Atty. Fernandez, consisting of one-half (1/2) of whatever Maximo Abarquez might
recover from his share in the lots in question, is contingent upon the success of the appeal. Hence, the
payment of the attorney's fees, that is, the transfer or assignment of one-half (1/2) of the property in
litigation will take place only if the appeal prospers. Therefore, the tranfer actually takes effect after the
finality of a favorable judgment rendered on appeal and not during the pendency of the litigation involving
the property in question. Consequently, the contract for a contingent fee is not covered by Article 1491.
While Spanish civilists differ in their views on the above issue — whether or not a contingent fee contract
(quota litis agreement) is covered by Article 1491 — with Manresa advancing that it is covered, thus:
The Supreme Court of Spain, in its sentencia of 12 November 1917, has ruled that Article 1459 of the
Spanish Civil Code (Article 1491 of our Civil Code) does not apply to a contract for a contingent fee
because it is not contrary to morals or to law, holding that:
In the Philippines, among the Filipino commentators, only Justice Capistrano ventured to state his view
on the said issue, thus:
The incapacity to purchase or acquire by assignment, which the law also extends to lawyers with t to
the property and rights which may be the object of any litigation in which they may take part by virtue
of their profession, also covers contracts for professional services quota litis. Such contracts, however,
have been declared valid by the Supreme Court"
Dr. Tolentino merely restated the views of Castan and Manresa as well as the state of jurisprudence in
Spain, as follows:
Attorneys-at-law—Some writers, like Goyena, Manresa and Valverde believe that this article covers
quota litis agreements, under which a lawyer is to be given an aliquot part of the property or amount
in litigation if he should win the case for his client. Scaevola and Castan, however, believe that such a
contract does not involve a sale or assignment of right but it may be void under other articles of the
Code, such as those referring to illicit cause- On the other hand the Spanish Supreme Court has held
that this article is not applicable to a contract which limits the fees of a lawyer to a certain percentage
of what may be recovered in litigation, as this is not contrary to moral or to law. (Tolentino, Civil Code
of the Philippines, p. 35, Vol. V [1959]; Castan, supra, Emphasis supplied).
Petitioners her contend that a contract for a contingent fee violates the Canons of Professional Ethics.
this is likewise without merit This posture of petitioners overlooked Canon 13 of the Canons which
expressly contingent fees by way of exception to Canon 10 upon which petitioners relied. For while Canon
10 prohibits a lawyer from purchasing ...any interest in the subject matter of the litigation which he is
conducting", Canon 13, on the other hand, allowed a reasonable contingent fee contract, thus: "A contract
for a con. tangent fee where sanctioned by law, should be reasonable under all the circumstances of the
ca including the risk and uncertainty of the compensation, but should always be subject to the supervision
of a court, as to its reasonableness." As pointed out by an authority on Legal Ethics:
Every lawyer is intensely interested in the successful outcome of his case, not only as affecting his
reputation, but also his compensation. Canon 13 specifically permits the lawyer to contract for a con
tangent fee which of itself, negatives the thought that the Canons preclude the lawyer's having a stake
in his litigation. As pointed out by Professor Cheatham on page 170 n. of his Case Book, there is an
inescapable conflict of interest between lawyer and client in the matter of fees. Nor despite some
statements to the con in Committee opinions, is it believed that, particularly in view of Canon 13, Canon
10 precludes in every case an arrangement to make the lawyer's fee payable only out of the results of
the litigation. The distinction is between buying an interest in the litigation as a speculation which Canon
10 condemns and agreeing, in a case which the lawyer undertakes primarily in his professional capacity,
to accept his compensation contingent on the outcome
These Canons of Professional Ethics have already received "judicial recognition by being cited and applied
by the Supreme Court of the Philippines in its opinion" Malcolm, Legal and Judicial Ethics, p. 9 [1949]).
And they have likewise been considered sources of Legal Ethics. More importantly, the American Bar
Association, through Chairman Howe of the Ethics Committee, opined that "The Canons of Professional
Ethics are legislative expressions of professional opinion ABA Op. 37 [1912])" [See footnote 25, Drinker,
Legal Ethics, p. 27]. Therefore, the Canons have some binding effect
Likewise, it must be noted that this Court has already recognized this type of a contract as early as the
case of Ulanday vs. Manila Railroad Co. (45 PhiL 540 [1923]), where WE held that "contingent fees are
not prohibited in the Philippines, and since impliedly sanctioned by law 'Should be under the supervision
of the court in order that clients may be protected from unjust charges' (Canons of Profession 1 Ethics)".
In the 1967 case of Albano vs. Ramos (20 SCRA 171 [19671), the attorney was allowed to recover in a
separate action her attomey's fee of one-third (1/3) of the lands and damages recovered as stipulated in
the contingent fee contract. And this Court in the recent case of Rosario Vda de Laig vs. Court of Appeals,
et al. (supra), which involved a contingent fee of one-half (½) of the property in question, held than
,contingent fees are recognized in this i jurisdiction (Canon 13 of the Canons of Professional Ethics
adopted by the Philippine Bar association in 1917 [Appendix B, Revised Rules of Court)), which contingent
fees may be a portion of the property in litigation."
Contracts of this nature are permitted because they redound to the benefit of the poor client and the In resolving now the issue of the validity or nullity for the registration of the adverse claim, Section 110
lawyer "especially in cases where the client has meritorious cause of action, but no means with which to of the Land Registration Act (Act 496) should be considered. Under d section, an adverse claim may be
pay for legal services unless he can, with the sanction of law, make a contract for a contingent fee to be registered only by..
paid out of the proceeds of the litigation" (Francisco, Legal Ethics, p. 294 [1949], citing Lipscomb vs. Whoever claims any part or interest in registered land adverse to the registered owner, arising
Adams 91 S.W. 1046, 1048 [1949]). Oftentimes, contingent fees are the only means by which the poor subsequent to the date of the o registration ... if no other provision is made in this Act for registering
and helpless can redress for injuries sustained and have their rights vindicated. Thus: the same ...
The reason for allowing compensation for professional services based on contingent fees is that if a
person could not secure counsel by a promise of large fees in case of success, to be derived from the
The contract for a contingent fee, being valid, vested in Atty Fernandez an interest or right over the lots
subject matter of the suit, it would often place the poor in such a condition as to amount to a practical
in question to the extent of one-half thereof. Said interest became vested in Atty. Fernandez after the
denial of justice. It not infrequently happens that person are injured through the negligence or willful
case was won on appeal because only then did the assignment of the one-half (½) portion of the lots in
misconduct of others, but by reason of poverty are unable to employ counsel to assert their rights. In
question became effective and binding. So that when he filed his affidavit of adverse claim his interest
such event their only means of redress lies in gratuitous service, which is rarely given, or in their ability
was already an existing one. There was therefore a valid interest in the lots to be registered in favor of
to find some one who will conduct the case for a contingent fee. That relations of this king are often
Atty. Fernandez adverse to Mo Abarquez.
abused by speculative attorneys or that suits of this character are turned into a sort of commercial
traffic by the lawyer, does not destroy the beneficial result to one who is so poor to employ counsel (id,
at p. 293, citing Warvelle, Legal Ethics, p. 92, Emphasis supplied). Moreover, the interest or claim of Atty. Fernandez in the lots in question arose long after the original
petition which took place many years ago. And, there is no other provision of the Land Registration Act
under which the interest or claim may be registered except as an adverse claim under Section 110 thereof.
Justice George Malcolm, writing on contingent fees, also stated that:
The interest or claim cannot be registered as an attorney's charging lien. The lower court was correct in
... the system of contingent compensation has the merit of affording to certain classes of persons the
denying the motion to annotate the attomey's lien. A charging lien under Section 37, Rule 138 of the
opportunity to procure the prosecution of their claims which otherwise would be beyond their means. In
Revised Rules of Court is limited only to money judgments and not to judgments for the annulment of a
many cases in the United States and the Philippines, the contingent fee is socially necessary (Malcolm,
contract or for delivery of real property as in the instant case. Said Section provides that:
Legal and Judicial Ethics, p. 55 [1949], emphasis supplied).
Section 37. An attorney shall have a lien upon the funds, documents and papers of his client which
have lawfully come into his oppossession and may retain the same until his lawful fees and
Stressing further the importance of contingent fees, Professor Max Radin of the University of California, disbursements have been paid, and may apply such funds to the satisfaction thereof. He shall also have
said that: a lien to the same extent upon all judgments, for the payment of money, and executions issued in
The contingent fee certainly increases the possibility that vexatious and unfounded suits will be brought. pursuance of such judgments, which he has secured in a litigation of his client ... (emphasis supplied).
On the other hand, it makes possible the enforcement of legitimate claims which otherwise would be
abandoned because of the poverty of the claimants. Of these two possibilities, the social advantage
Therefore, as an interest in registered land, the only adequate remedy open to Atty. Fernandez is to
seems clearly on the side of the contingent fee. It may in fact be added by way of reply to the first
register such interest as an adverse claim. Consequently, there being a substantial compliance with
objection that vexations and unfounded suits have been brought by men who could and did pay
Section 110 of Act 496, the registration of the adverse claim is held to be valid. Being valid, its registration
substantial attorney's fees for that purpose.
should not be cancelled because as WE have already stated, "it is only when such claim is found
unmeritorious that the registration thereof may be cancelled" (Paz Ty Sin Tei vs. Jose Lee Dy Piao 103
Finally, a contingent fee contract is always subject to the supervision of the courts with respect to the Phil. 867 [1958]).
stipulated amount and may be reduced or nullified. So that in the event that there is any undue influence
or fraud in the execution of the contract or that the fee is excessive, the client is not without remedy
The one-half (½) interest of Atty. Fernandez in the lots in question should therefore be respected. Indeed,
because the court will amply protect him. As held in the case of Grey vs. Insular Lumber Co., supra, citing
he has a better right than petitioner-spouses, Juan Larrazabal and Marta C. de Larrazabal. They purchased
the case of Ulanday vs. Manila Railroad Co., supra:
their two-thirds (2/3) interest in the lots in question with the knowledge of the adverse claim of Atty.
Where it is shown that the contract for a contingent fee was obtained by any undue influence of the
Fernandez. The adverse claim was annotated on the old transfer certificate of title and was later annotated
attorney over the client, or by any fraud or imposition, or that the compensation is so clearly excessive
on the new transfer certificate of title issued to them. As held by this Court:
as to amount to extortion, the court win in a proper case protect the aggrieved party.
The annotation of an adverse claim is a measure designed to protect the interest of a person over a
piece of real property where the registration of such interest or right is not otherwise provided for by
In the present case, there is no iota of proof to show that Atty. Fernandez had exerted any undue influence the Land Registration Act, and serves as a notice and warning to third parties dealing with said property
or had Perpetrated fraud on, or had in any manner taken advantage of his client, Maximo Abarquez. And, that someone is claiming an interest on the same or a better right than the registered owner thereof .
the compensation of one-half of the lots in question is not excessive nor unconscionable considering the
contingent nature of the attorney's fees. Having purchased the property with the knowledge of the adverse claim, they are therefore in bad faith. Consequently,
they are estopped from questioning the validity of the adverse claim. WHEREFORE, THE DECISION OF THE LOWER COURT
DENYING THE PETITION FOR THE CANCELLATION OF THE ADVERSE CLAIM SHOULD BE, AS IT IS HEREBY AFFIRMED,
With these considerations, WE find that the contract for a contingent fee in question is not violative of
WITH COSTS AGAINST PETITIONER-APPELLANTS JUAN LARRAZABAL AND MARTA C. DE LARRAZABAL.
the Canons of Professional Ethics. Consequently, both under the provisions of Article 1491 and Canons
10 and 13 of the Canons of Profession Ethics, a contract for a contingent fee is valid
G.R. No. L-45645 June 28, 1983
FRANCISCO A. TONGOY, for himself and as Judicial Administrator of the Estate of the Late Luis
D. Tongoy and Ma. Rosario Araneta Vda. de Tongoy, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, MERCEDES T. SONORA, JUAN T. SONORA, JESUS T.
SONORA, TRINIDAD T. SONORA, RICARDO P. TONGOY, CRESENCIANO P. TONGOY, AMADO P.
TONGOY, and NORBERTO P. TONGOY, respondents.
The case is basically an action for reconveyance respecting two (2) parcels of land in Bacolod City. The
first is Lot No. 1397 of the Cadastral Survey of Bacolod, otherwise known as Hacienda Pulo, containing
an area of 727,650 square meters and originally registered under Original Certificate of Title No. 2947 in
the names of Francisco Tongoy, Jose Tongoy, Ana Tongoy, Teresa Tongoy and Jovita Tongoy in pro-
indiviso equal shares. Said co-owners were all children of the late Juan Aniceto Tongoy. The second is Lot
No. 1395 of the Cadastral Survey of Bacolod, briefly referred to as Cuaycong property, containing an area
of 163,754 square meters, and formerly covered by Original Certificate of Title No. 2674 in the name of
Basilisa Cuaycong.
Of the original registered co-owners of Hacienda Pulo, three died without issue, namely: Jose Tongoy,
who died a widower on March 11, 1961; Ama Tongoy, who also died single on February 6, 1957, and
Teresa Tongoy who also died single on November 3, 1949. The other two registered co-owners, namely,
Francisco Tongoy and Jovita Tongoy, were survived by children. Francisco Tongoy, who died on
September 15, 1926, had six children; Patricio D. Tongoy and Luis D. Tongoy by the first marriage;
Amado P. Tongoy, Ricardo P. Tongoy; Cresenciano P. Tongoy and Norberto P. Tongoy by his second wife
Antonina Pabello whom he subsequently married sometime after the birth of their children. For her part,
Jovita Tongoy (Jovita Tongoy de Sonora), who died on May 14, 1915, had four children: Mercedes T.
Sonora, Juan T. Sonora, Jesus T. Sonora and Trinidad T. Sonora.
By the time this case was commenced, the late Francisco Tongoy's aforesaid two children by his first
marriage, Patricio D. Tongoy and Luis D. Tongoy, have themselves died. It is claimed that Patricio D.
Tongoy left three acknowledged natural children named Fernando, Estrella and Salvacion, all surnamed
Tongoy. On the other hand, there is no question that Luis D. Tongoy left behind a son, Francisco A.
Tongoy, and a surviving spouse, Ma. Rosario Araneta Vda. de Tongoy.
The following antecedents are also undisputed, though by no means equally submitted as the complete
facts, nor seen in Identical lights: On April 17, 1918, Hacienda Pulo was mortgaged by its registered co-
owners to the Philippine National Bank (PNB), Bacolod Branch, as security for a loan of P11,000.00
payable in ten (10) years at 8% interest per annum. The mortgagors however were unable to keep up
with the yearly amortizations, as a result of which the PNB instituted judicial foreclosure proceedings over
Hacienda Pulo on June 18, 1931. To avoid foreclosure, one of the co-owners and mortgagors, Jose
Tongoy, proposed to the PNB an amortization plan that would enable them to liquidate their account. But,
on December 23, 1932, the PNB Branch Manager in Bacolod advised Jose Tongoy by letter that the latter's
proposal was rejected and that the foreclosure suit had to continue. As a matter of fact, the suit was
pursued to finality up to the Supreme Court which affirmed on July 31, 1935 the decision of the CFI giving
the PNB the right to foreclose the mortgage on Hacienda Pulo. In the meantime, Patricio D. Tongoy and
Luis Tongoy executed on April 29, 1933 a Declaration of Inheritance wherein they declared themselves
as the only heirs of the late Francisco Tongoy and thereby entitled to the latter's share in Hacienda Pulo.
On March 13, 1934, Ana Tongoy, Teresa Tongoy, Mercedes Sonora, Trinidad Sonora, Juan Sonora and
Patricio Tongoy executed an "Escritura de Venta" (Exh. 2 or Exh. W), which by its terms transferred for
consideration their rights and interests over Hacienda Pulo in favor of Luis D. Tongoy. Thereafter, on
October 23, 1935 and November 5, 1935, respectively, Jesus Sonora and Jose Tongoy followed suit by
each executing a similar "Escritura de Venta" (Exhs. 3 or DD and 5 or AA) pertaining to their corresponding
rights and interests over Hacienda Pulo in favor also of Luis D. Tongoy. In the case of Jose Tongoy, the
execution of the "Escritura de Venta" (Exh. 5 or AA) was preceded by the execution on October 14, 1935
of an Assignment of Rights (Exh. 4 or Z) in favor of Luis D. Tongoy by the Pacific Commercial Company
as judgment lien-holder (subordinate to the PNB mortgage) of Jose Tongoy's share in Hacienda Pulo. On
the basis of the foregoing documents, Hacienda Pulo was placed on November 8, 1935 in the name of
Luis D. Tongoy, married to Maria Rosario Araneta, under Transfer Certificate of "Title No. 20154 (Exh.
20). In the following year, the title of the adjacent Cuaycong property also came under the name of Luis
D. Tongoy, married to Maria Rosario Araneta, per Transfer Certificate of Title No. 21522, by virtue of an
"Escritura de Venta" (Exh. 6) executed in his favor by the owner Basilisa Cuaycong on June 22, 1936
purportedly for P4,000.00. On June 26, 1936, Luis D. Tongoy executed a real estate mortgage over the
Cuaycong property in favor of the PNB, Bacolod Branch, as security for loan of P4,500.00. Three days
thereafter, on June 29, 1936, he also executed a real estate mortgage over Hacienda Pulo in favor of the
same bank to secure an indebtedness of P21,000.00, payable for a period of fifteen (15) years at 8% per
annum. After two decades, on April 17, 1956, Luis D. Tongoy paid off all his obligations with the PNB,
amounting to a balance of P34,410.00, including the mortgage obligations on the Cuaycong property and
Hacienda Pulo. However, it was only on April 22, 1958 that a release of real estate mortgage was executed
by the bank in favor of Luis D. Tongoy. On February 5, 1966, Luis D. Tongoy died at the Lourdes Hospital
in Manila, leaving as heirs his wife Maria Rosario Araneta and his son Francisco A. Tongoy. Just before
his death, however, Luis D. Tongoy received a letter from Jesus T. Sonora, dated January 26, 1966,
demanding the return of the shares in the properties to the co-owners.
Not long after the death of Luis D. Tongoy, the case now before Us was instituted in the court below on
complaint filed on June 2, 1966 by Mercedes T. Sonora, Juan T. Sonora ** , Jesus T. Sonora, Trinidad T.
Sonora, Ricardo P. Tongoy and Cresenciano P. Tongoy. Named principally as defendants were Francisco
A. Tongoy, for himself and as judicial administrator of the estate of the late Luis D. Tongoy, and Maria
Rosario Araneta Vda. de Tongoy. Also impleaded as defendants, because of their unwillingness to join as
plaintiffs were Amado P. Tongoy, Norberto P. Tongoy ** and Fernando P. Tongoy. Alleging in sum that
plaintiffs and/or their predecessors transferred their interests on the two lots in question to Luis D. Tongoy
by means of simulated sales, pursuant to a trust arrangement whereby the latter would return such
interests after the mortgage obligations thereon had been settled, the complaint prayed that 'judgment
be rendered in favor of the plaintiffs and against the defendants-
(a) Declaring that the HACIENDA PULO, Lot 1397-B-3 now covered by T.C.T. No. 29152, Bacolod
City, and the former Cuaycong property, Lot 1395 now covered by T.C.T. No. T-824 (RT-4049)
(21522), Bacolod City, as trust estate belonging to the plaintiffs and the defendants in the proportion
set forth in Par. 26 of this complaint;
(b) Ordering the Register of Deeds of Bacolod City to cancel T.C.T. No. 29152 and T.C.T. No. T-824
(RT-4049) (21522), Bacolod City, and to issue new ones in the names of the plaintiffs and defendants
in the proportions set forth in Par. 26 thereof, based on the original area of HACIENDA PULO;
(c) Ordering the defendants Francisco A. Tongoy and Ma. Rosario Araneta Vda. de Tongoy to render
an accounting to the plaintiffs of the income of the above two properties from the year 1958 to the
present and to deliver to each plaintiff his corresponding share with legal interest thereon from 1958
and until the same shall have been fully paid;
(d) Ordering the defendants Francisco Tongoy and Ma. Rosario Araneta Vda. de Tongoy to pay to the
plaintiffs as and for attorney's fees an amount equivalent to twenty-four per cent (24%) of the rightful
shares of the plaintiffs over the original HACIENDA PULO and the Cuaycong property, including the
income thereof from 1958 to the present; and
(e) Ordering the defendants Francisco A. Tongoy and Ma. Rosario Vda. de Tongoy to pay the costs of
this suit.
Plaintiffs also pray for such other and further remedies just and equitable in the premises.
Defendants Francisco A. Tongoy and Ma. Rosario Vda. de Tongoy filed separate answers, denying in effect
plaintiffs' causes of action, and maintaining, among others, that the sale to Luis D. Tongoy of the two lots
in question was genuine and for a valuable consideration, and that no trust agreement of whatever nature
existed between him and the plaintiffs. As affirmative defenses, defendants also raised laches,
prescription, estoppel, and the statute of frauds against plaintiffs. Answering defendants counter claimed 2) To reconvey to Ricardo P. Tongoy, Cresenciano P. Tongoy, Amado P. Tongoy and Norberto P.
for damages against plaintiffs for allegedly bringing an unfounded and malicious complaint. Tongoy as substituted and represented by his heirs each a 14/135th portion of both Hacienda Pulo
and the Cuaycong property, also based on their original shares; provided that the 12 hectares already
For their part, defendants Norberto Tongoy and Amado Tongoy filed an answer under oath, admitting reconveyed to them by virtue of the Order for execution pending appeal of the judgment shall be
every allegation of the complaint. On the other hand, defendant Fernando Tongoy originally joined duly deducted;
Francisco A. Tongoy in the latter's answer, but after the case was submitted and was pending decision, 3) To render an accounting to the parties named in pars. 1 and 2 above with respect to the income
the former filed a verified answer also admitting every allegation of the complaint. of Hacienda Pulo and the Cuaycong property from May 5, 1958 up to the time the reconveyances as
herein directed are made; and to deliver or pay to each of said parties their proportionate shares of
Meanwhile, before the case went to trial, a motion to intervene as defendants was filed by and was
the income, if any, with legal interest thereon from the date of filing of the complaint in this case,
granted to Salvacion Tongoy and Estrella Tongoy, alleging they were sisters of the full blood of Fernando
January 26, 1966, until the same is paid;
Tongoy. Said intervenors filed an answer similarly admitting every allegation of the complaint.
4) To pay unto the parties mentioned in par. 1 above attorney's fees in the sum of P 20,000.00; and
5) To pay the costs.
After trial on the merits, the lower court rendered its decision on October 15, 1968 finding the existence
of an implied trust in favor of plaintiffs, but at the same time holding their action for reconveyance barred
Petitioners Francisco A. Tongoy and Ma. Rosario Araneta Vda. de Tongoy (defendants-appellants) have
by prescription, except in the case of Amado P. Tongoy, Ricardo P. Tongoy, Cresenciano P. Tongoy, and
come before Us on petition for review on certiorari with the following assignments of errors (pp. 23-24,
Norberto P. Tongoy, who were adjudged entitled to reconveyance of their corresponding shares in the
Brief for Petitioners):
property left by their father Francisco Tongoy having been excluded therefrom in the partition had during
I. The Court of Appeals erred in finding that there was a trust constituted on Hacienda Pulo.
their minority, and not having otherwise signed any deed of transfer over such shares. The dispositive
II. The Court of Appeals erred in finding that the purchase price for the Cuaycong property was paid by
portion of the decision reads:
Jose Tongoy and that said property was also covered by a trust in favor of respondents.
IN VIEW OF ALL THE FOREGOING considerations, judgment is hereby rendered dismissing the
III. Conceding, for the sake of argument, that respondents have adequately proven an implied trust in
complaint, with respect to Mercedes, Juan, Jesus and Trinidad, all surnamed Sonora. The defendants their favor, the Court of Appeals erred in not finding that the rights of respondents have prescribed, or
Francisco Tongoy and Rosario Araneta Vda. de Tongoy are hereby ordered to reconvey the
are barred by laches.
proportionate shares of Ricardo P., Cresenciano P., Amado P., and Norberto P., all surnamed Tongoy in
IV. The Court of Appeals erred in finding that the respondents Tongoy are the legitimated children of
Hda. Pulo and the Cuaycong property. Without damages and costs.
Francisco Tongoy.
V. Granting arguendo that respondents Tongoy are the legitimated children of Francisco Tongoy, the
Upon motion of plaintiffs, the foregoing dispositive portion of the decision was subsequently clarified by
Court of Appeals erred in not finding that their action against petitioners has prescribed.
the trial court through its order of January 9, 1969 in the following tenor:
VI. The Court of Appeals erred in ordering petitioners to pay attorney's fees of P 20,000.00.
Considering the motion for clarification of decision dated November 7, 1968 and the opposition thereto,
VII. The Court of Appeals erred in declaring that execution pending appeal in favor of respondents
and with the view to avoid further controversy with respect to the share of each heir, the dispositive
Tongoys was justified.
portion of the decision is hereby clarified in the sense that, the proportionate legal share of Amado P.
Tongoy, Ricardo P. Tongoy, Cresenciano P. Tongoy and the heirs of Norberto P. Tongoy, in Hda. Pulo
I. It appears to US that the first and second errors assigned by petitioners are questions of fact which
and Cuaycong property consist of 4/5 of the whole trust estate, leaving 1/5 of the same to the heirs of
are beyond OUR power to review.
Luis D. Tongoy.
Thus, as found by the respondent Court of Appeals:
Both parties appealed the decision of the lower court to respondent appellate court. Plaintiffs-appellants
We shall consider first the appeal interposed by plaintiffs-appellants. The basic issues underlying the
Mercedes T. Sonora, Jesus T. Sonora, Trinidad T. Sonora and the heirs of Juan T. Sonora questioned the
disputed errors raised suggest themselves as follows: 1) whether or not the conveyance respecting the
lower court's decision dismissing their complaint on ground of prescription, and assailed it insofar as it
questioned lots made in favor of Luis D. Tongoy in 1934 and 1935 were conceived pursuant to a trust
held that the agreement created among the Tongoy-Sonora family in 1931 was an implied, and not an
agreement among the parties; 2) if so, whether the trust created was an express or implied trust; and
express, trust; that their action had prescribed; that the defendants-appellants were not ordered to
3) if the trust was not an express trust, whether the action to enforce it has prescribed.
render an accounting of the fruits and income of the properties in trust; and that defendants were not
ordered to pay the attorney's fees of plaintiffs- appellants. For their part, defendants-appellants Francisco The first two issues indicated above will be considered together as a matter of logical necessity, being so
A. Tongoy and Ma. Rosario Araneta Vda. de Tongoy not only refuted the errors assigned by plaintiffs- closely interlocked. To begin with, the trial court found and ruled that the transfers made in favor of Luis
appellants, but also assailed the findings that there was preponderance of evidence in support of the D. Tongoy were clothed with an implied trust, arriving at this conclusion as follows:
existence of an implied trust; that Ricardo P. Tongoy, Amado P. Tongoy and Norberto P. Tongoy are the The Court finds that there is preponderance of evidence in support of the existence of constructive,
legitimate half-brothers of the late Luis D. Tongoy; that their shares in Hacienda Pulo and Cuaycong implied or tacit trust. The hacienda could have been leased to third persons and the rentals would have
property should be reconveyed to them by defendants-appellants; and that an execution was ordered been sufficient to liquidate the outstanding obligation in favor of the Philippine National Bank. But the
pending appeal. co-owners agreed to give the administration of the property to Atty. Luis D. Tongoy, so that the latter
can continue giving support to the Tongoy-Sonora family and at the same time, pay the amortization
On December 3, 1975, respondent court rendered the questioned decision, the dispositive portion of
in favor of the Philippine National Bank, in the same manner that Jose Tongoy did. And of course, if the
which is as follows:
administration is successful, Luis D. Tongoy would benefit with the profits of the hacienda. Simulated
WHEREFORE, judgment is hereby rendered modifying the judgment and Orders appealed from by
deeds of conveyance in favor of Luis D. Tongoy were executed to facilitate and expedite the transaction
ordering Maria Rosario Araneta Vda. de Tongoy and Francisco A. Tongoy. —
with the Philippine National Bank. Luis D. Tongoy supported the Tongoy-Sonora family, defrayed the
1) To reconvey to Mercedes T. Sonora, Juan T. Sonora (as substituted and represented by his heirs),
expenses of Dr. Jesus Sonora and Atty. Ricardo P. Tongoy, in their studies. Luis Tongoy even gave
Jesus T. Sonora and Trinidad T. Sonora each a 7/60th portion of both Hacienda Pulo and the Cuaycong
Sonoras their shares in the "beneficacion" although the "beneficacion" were included in the deeds of
property, based on their original shares;
sale. The amount of consideration of the one-fifth (15) share of Jose Tongoy is one hundred (P 100,00)
pesos only. Likewise the consideration of the sale of the interests of the Pacific Commercial Company
is only P100.00 despite the fact that Jose Tongoy paid in full his indebtedness in favor of said company.
The letter of Luis D. Tongoy dated November 5, 1935 (Exhibit 'BB-1') is very significant, the tenor of
which is quoted hereunder:
Dear Brother Jose:
Herewith is the deed which the bank sent for us to sign. The bank made me pay the Pacific the sum
of P100.00 so as not to sell anymore the land in public auction. This deed is for the purpose of
dispensing with the transfer of title to the land in the name of the bank, this way we will avoid many
expenses.
Yours,
Luis D. Tongoy
Jose Tongoy signed the deed because he incurred the obligation with the Pacific and paid it. In releasing
the second mortgage, Luis Tongoy paid only P100.00 and the deed was in favor of Luis Tongoy. This
was done in order "to avoid many expenses " of both Jose and Luis as obviously referred to in the word
"WE".
Those two transactions with nominal considerations are irrefutable and palpable evidence of the
existence of constructive or implied trust.
Another significant factor in support of the existence of constructive trust is the fact that in 1933-34,
when proposals for amicable settlement with the Philippine National Bank were being formulated and
considered, Luis D. Tongoy was yet a neophite (sic) in the practice of law, and he was still a bachelor.
It was proven that it was Jose Tongoy, the administrator of Hda. Pulo, who provided for his expenses
when he studied law, when he married Maria Araneta, the latter's property were leased and the rentals
were not sufficient to cover all the considerations stated in the deeds of sale executed by the co-owners
of Hda. Pulo, no matter how inadequate were the amounts so stated. These circumstances fortified the
assertion of Judge Arboleda that Luis D. Tongoy at that time was in no condition to pay the purchase
price of the property sold,
But the Court considers the evidence of execution of express trust agreement insufficient. Express trust
agreement was never mentioned in the plaintiffs' pleadings nor its existence asserted during the pre-
trial hearings. It was only during the trial on the merits when Atty. Eduardo P. Arboleda went on to
testify that he prepared the deed of trust agreement.
Indeed the most formidable weapon the plaintiff could have used in destroying the "impregnable walls
of the defense castle consisting of public documents" is testimony of Atty. Eduardo P. Arboleda. He is
most qualified and in a knowable position to testify as to the truth of the existence of the trust
agreement, because he was not only the partner of the late Luis D. Tongoy in their practice of law
especially during the time he prepared and/or notarized the deeds of sale but he was also his colleague
in the City Council. But however forceful would be the impact of his testimony, it did not go beyond the
establishment of constructive or implied trust agreement. In the first place, if it is true that written
trust agreement was prepared by him and signed by Luis D. Tongoy for the security of the vendor, why
is it that only two copies of the agreement were prepared, one copy furnished Jose Tongoy and the
other kept by Luis Tongoy, instead of making five copies and furnished copy to each co-owner, or at
least one copy would have been kept by him? Why is it that when Atty. Arboleda invited Mrs. Maria
Rosario Araneta Vda. de Tongoy and her son to see him in his house, Atty. Arboleda did not reveal or
mention the fact of the existence of a written trust agreement signed by the late Luis D. Tongoy? The
revelation of the existence of a written trust agreement would have been a vital and controlling factor
in the amicable settlement of the case, which Atty. Arboleda would have played an effective role as an
unbiased mediator. Why did not Atty. Arboleda state the precise context of the written agreement; its
form and the language it was written, knowing as he should, the rigid requirements of proving the
contents of a lost document. It is strange that when Mrs. Maria Rosario Araneta Vda. de Tongoy and
her son were in the house of Atty. Arboleda, in compliance with his invitation for the supposed friendly
settlement of the case, Atty. Arboleda did not even submit proposals for equitable arbitration of the
case. On the other hand, according to Mrs. Tongoy, Mrs. Arboleda intimated her desire to have Atty.
Arboleda be taken in. The Court refuses to believe that Judge Arboleda was aware of the alleged
intimations of Mrs. Arboleda, otherwise he would not have tolerated or permitted her to indulge in such
an embarrassing and uncalled for intrusion. The plaintiffs evidently took such ungainly insinuations with
levity so much so that they did not think it necessary to bring Mrs. Arboleda to Court to refute this fact.
The parties, on either side of this appeal take issue with the conclusion that there was an implied trust,
one side maintaining that no trust existed at all, the other that the trust was an express trust.
To begin with, We do not think the trial court erred in its ultimate conclusion that the transfers of the
two lots in question made in favor of the late Luis D. Tongoy by his co-owners in 1933 and 1934 created
an implied trust in favor of the latter. While, on one hand, the evidence presented by plaintiffs-
appellants to prove an express trust agreement accompanying the aforesaid transfers of the lots are
incompetent, if not inadequate, the record bears sufficiently clear and convincing evidence that the
transfers were only simulated to enable Luis D. Tongoy to save Hacienda Pulo from foreclosure for the
benefit of the co-owners, including himself. Referring in more detail to the evidence on the supposed
express trust, it is true that plaintiffs- appellants Jesus T. Sonora, Ricardo P. Tongoy, Mercedes T.
Sonora and Trinidad T. Sonora have testified with some vividness on the holding of a family conference
in December 1931 among the co-owners of Hacienda Pulo to decide on steps to be taken vis-a-vis the
impending foreclosure of the hacienda by the PNB upon the unpaid mortgage obligation thereon.
Accordingly, the co-owners had agreed to entrust the administration and management of Hacienda Pulo
to Luis D. Tongoy who had newly emerged as the lawyer in the family. Thereafter, on the representation
of Luis D. Tongoy that the bank wanted to deal with only one person it being inconvenient at time to
transact with many persons, specially when some had to be out of town the co-owners agreed to make
simulated transfers of their participation in Hacienda Pulo to him. As the evidence stands, even if the
same were competent, it does not appear that there was an express agreement among the co-owners
for Luis D. Tongoy to hold Hacienda Pulo in trust, although from all the circumstances just indicated
such a trust may be implied under the law (Art. 1453, Civil Code; also see Cuaycong vs. Cuaycong, L-
21616, December 11, 1967, 21 SCRA 1192, 1197-1198). But, whatever may be the nature of the trust
suggested in the testimonies adverted to, the same are incompetent as proof thereof anent the timely
objections of defendants-appellees to the introduction of such testimonial evidence on the basis of the
survivorship rule. The witnesses being themselves parties to the instant case, suing the representatives
of the deceased Luis D. Tongoy upon a demand against the latter's estate, said witnesses are barred
by the objections of defendants-appellees from testifying on matters of fact occurring before the death
of the deceased (Sec. 20[a], Rule 130), more particularly where such occurrences consist of verbal
agreements or statements made by or in the presence of the deceased.
Neither has the existence of the alleged contra-documento-- by which Luis D. Tongoy supposedly
acknowledged the transfers to be simulated and bound himself to return the shares of his co-owners
after the mortgage on the Hacienda had been discharged-been satisfactorily established to merit
consideration as proof of the supposed express trust. We can hardly add to the sound observations of
the trial court in rejecting the evidence to the effect as insufficient, except to note further that at least
plaintiffs-appellants Mercedes T. Sonora and Trinidad T. Sonora have testified having been apprised of
the document and its contents when Luis D. Tongoy supposedly delivered one copy to Jose Tongoy.
And yet as the trial court noted, no express trust agreement was ever mentioned in plaintiffs-appellants'
pleadings or at the pre-trial.
Nevertheless, there is on record enough convincing evidence not barred by the survivorship rule, that
the transfers made by the co-owners in favor of Luis D. Tongoy were simulated and that an implied or
resulting trust thereby came into existence, binding the latter to make reconveyance of the co-owners'
shares after the mortgage indebtedness on Hacienda Pulo has been discharged. Thus it appears beyond
doubt that Hacienda Pulo has been the source of livelihood to the co-owners and their dependents,
when the subject transfers were made. It is most unlikely that all of the several other co-owners should
have come at the same time to one mind about disposing of their participation in the hacienda, when
the same counted so much in their subsistence and self-esteem. Only extreme necessity would have
forced the co-owners to act in unison towards earnestly parting with their shares, taking into account
the meager considerations mentioned in the deeds of transfer which at their most generous gave to
each co-owner only P2,000.00 for a 1/5 part of the hacienda. As it appears to Us, the impending
foreclosure on the mortgage for P11,000.00 could not have created such necessity. Independent of
testimony to the effect, it is not hard to surmise that the hacienda could have been leased to others on
terms that would have satisfied the mortgage obligation. Moreover, as it turned out, the PNB was
amenable, and did actually accede, to a restructuring of the mortgage loan in favor of Luis D. Tongoy,
thereby saving the hacienda from foreclosure. As a matter of fact, the co-owners must have been
posted on the attitude of the bank regarding the overdue mortgage loan, and its willingness to renew
or restructure the same upon certain conditions. Under such circumstances, it is more reasonable to
conclude that there was no compelling reason for the other co-owners to sell out their birthrights to
Luis D. Tongoy, and that the purported transfers were, as claimed by them in reality simulated pursuant
to the suggestion that the bank wanted to deal with only one person. In fact, as recited in the Escritura
de Venta (Exh. AA) executed between Luis. D. Tongoy and Jose Tongoy, it appears that the series of
transfers made in favor of the former by the co-owners of Hacienda Pulo followed and was made
pursuant to a prior arrangement made with the PNB by Luis D. Tongoy to redeem the shares or
participation of his co-owners. That this was readily assented to in the anxiety to save and preserve
Hacienda Pulo for all its co-owners appears very likely anent undisputed evidence that the said co-
owners had been used to entrusting the management thereof to one among them, dating back to the
time of Francisco Tongoy who once acted as administrator, followed by Jose Tongoy, before Luis D.
Tongoy himself took over the hacienda.
Strongly supported the theory that the transfers were only simulated to enable Luis D. Tongoy (to)
have effective control and management of the hacienda for the benefit of all the co-owners is
preponderant evidence to the effect that he was in no financial condition at the time to purchase the
hacienda. Witness Eduardo Arboleda who was a law partner of Luis D. Tongoy when the transfers were
made, and who is not a party in this case, emphatically testified that Luis D. Tongoy could not have
produced the money required for the purchase from his law practice then. On the other hand, the
suggestion that his wife Ma. Rosario Araneta had enough income from her landed properties to
sufficiently augment Luis D. Tongoy's income from his practice is belied by evidence that such properties
were leased, and the rentals collected in advance, for eleven (11) crop years beginning 1931 (Exh.
EEE), when they were not yet married.
The financial incapacity of Luis D. Tongoy intertwines, and together gains strength, with proof that the
co-owners as transferors in the several deeds of sale did not receive the considerations stated therein.
In addition to the testimony of the notary public, Eduardo P. Arboleda, that no consideration as recited
in the deeds of transfer were ever paid in his presence, all the transferors who testified including Jesus
T. Sonora, Mercedes T. Sonora and Trinidad T. Sonora-all denied having received the respective
considerations allegedly given them. While said transferors are parties in this case, it has been held
that the survivorship rule has no application where the testimony offered is to the effect that a thing
did not occur (Natz vs. Agbulos, CA-G.R. No. 4098-R, January 13, 1951; Mendoza v. C. Vda. de Goitia,
54 Phil. 557, cited by Mora, Comments on the Rules of Court, 1970 ed., Vol. 5, p. 174).
Also of some significance is the fact that the deeds of transfer executed by Ana Tongoy, Teresa Tongoy,
Mercedes Sonora, Trinidad Sonora, Juan Sonora, and Patricio Tongoy (Exh. W) as well as that by Jesus
Sonora (Exh. DD) did not even bother to clarify whether Luis D. Tongoy as transferee of his co-owners'
share was assuming the indebtedness owing to the PNB upon the mortgage on Hacienda Pulo. In an
honest-to-goodness sale, it would have been most unlikely that the transferors would have paid no
attention to this detail, least of all where, as in this case, the transfers were apparently prompted by
the inability of the co-owners to discharge the mortgage obligation and were being pressed for payment.
Furthermore, the tenor of the letter from Luis D. Tongoy to Jose Tongoy, dated November 5, 1935
(Exhibit Bb-1), as heretofore quoted with portions of the decision on appeal, is very revealing of the
fact that the steps taken to place Hacienda Pulo in the name of Luis D. Tongoy were made for the
benefit not only of himself but for the other co-owners as well. Thus, the letter ends with the clause-
"this way we will avoid many expenses.
Finally, it is not without significance that the co-owners and their dependents continued to survive
apparently from the sustenance from Hacienda Pulo for a long time following the alleged transfers in
favor of Luis D. Tongoy. In fact, it does not appear possible that Jesus T. Sonora and Ricardo P. Tongoy
could have finished medicine and law, respectively, without support from Luis D. Tongoy as
administrator of the common property.
All the foregoing, considered together, constitute clear and convincing evidence that the transfers made
in favor of Luis D. Tongoy by his co- owners were only simulated, under circumstances giving rise to
an implied or resulting trust whereby Luis D. Tongoy is bound to hold title in trust for the benefit of his
co-owners.
The Court of Appeals found enough convincing evidence not barred by the aforecited survivorship rule to
the effect that the transfers made by the co- owners in favor of Luis D. Tongoy were simulated.
All these findings of fact, as a general rule, are conclusive upon US and beyond OUR power to review. It
has been well-settled that the jurisdiction of the Supreme Court in cases brought to IT from the Court of
Appeals is limited to reviewing and revising errors of law imputed to it, its findings of fact being conclusive
as a matter of general principle (Chan vs. C.A., 33 SCRA 737, 744; Alquiza vs. Alquiza, 22 SCRA 494,
497).
The proofs submitted by petitioners do not place the factual findings of the Court of Appeals under any
of the recognized exceptions to the aforesaid general rule.
I
The initial crucial issue therefore is-whether or not the rights of herein respondents over subject
properties, which were the subjects of simulated or fictitious transactions, have already prescribed.
The negative answer to the aforesaid query is found in Articles 1409 and 1410 of the New Civil Code.
Said provisions state thus:
Art. 1409. The following contracts are inexistent and void from the beginning:
2) Those which are absolutely simulated or fictitious;
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.
Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.
The characteristic of simulation is the fact that the apparent contract is not really desired nor intended to
produce legal effects nor in any way alter the juridical situation of the parties. Thus, where a person, in
order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he
does not really intend to divest himself of his title and control of the property; hence, the deed of transfer
is but a sham. This characteristic of simulation was defined by this Court in the case of Rodriguez vs.
Rodriguez, No. L-23002, July 31, 1967, 20 SCRA 908.
A void or inexistent contract is one which has no force and effect from the very beginning, as if it had
never been entered into, and which cannot be validated either by time or by ratification (p. 592, Civil
Code of the Philippines, Vol. IV, Tolentino, 1973 Ed.).
Avoid contract produces no effect whatsoever either against or in favor of anyone; hence, it does not
create, modify or extinguish the juridical relation to which it refers (p. 594, Tolentino, supra).
The following are the most fundamental characteristics of void or inexistent contracts:
 1) As a general rule, they produce no legal effects whatsoever in accordance with the principle "quod
nullum est nullum producit effectum."
2) They are not susceptible of ratification.
3) The right to set up the defense of inexistence or absolute nullity cannot be waived or renounced.
4) The action or defense for the declaration of their inexistence or absolute nullity is imprescriptible.
5) The inexistence or absolute nullity of a contract cannot be invoked by a person whose interests are
not directly affected (p. 444, Comments and Jurisprudence on Obligations and Contracts, Jurado, 1969
Ed.; emphasis supplied).
The nullity of these contracts is definite and cannot be cured by ratification. The nullity is permanent,
even if the cause thereof has ceased to exist, or even when the parties have complied with the contract
spontaneously (p. 595, Tolentino, supra).
In Eugenio vs. Perdido, et al., No. L-7083, May 19, 1955, 97 Phil. 41, this Court thus reiterated:
Under the existing classification, such contract would be "inexisting" and the "action or defense for
declaration' of such inexistence "does not prescribe' (Art. 14 10 New Civil Code). While it is true that
this is a new provision of the New Civil Code, it is nevertheless a principle recognized since Tipton vs.
Velasco, 6 Phil. 67 that "mere lapse of time cannot give efficacy to contracts that are null and void.
Consistently, this Court held that 11 where the sale of a homestead is nun and void, the action to recover
the same does not prescribe because mere lapse of time cannot give efficacy to the contracts that are
null and void and inexistent" (Angeles, et al. vs. Court of Appeals, et al., No. L-11024, January 31, 1958,
102 Phil. 1006).
In the much later case of Guiang vs. Kintanar (Nos. L-49634-36, July 25, 1981, 106 SCRA 49), this Court
enunciated thus:
It is of no consequence, pursuant to the same article, that petitioners, the Guiang spouses, executed
on August 21, 1975, apparently in ratification of the impugned agreement, the deeds of sale covering
the two lots already referred to and that petitioners actually received in part or in whole the money
consideration stipulated therein, for according to the same Article 1409, contracts contemplated
therein, as the one We are dealing with, "cannot be ratified nor the defense of its illegality be waived."
Neither it it material, much less decisive, that petitioners had not earlier judicially moved to have the
same annulled or set aside. Under Article 1410 of the Civil Code, (t)he action or defense for declaration
of the inexistence of a contract does not prescribe.
Evidently, therefore, the deeds of transfer executed in favor of Luis Tongoy were from the very beginning
absolutely simulated or fictitious, since the same were made merely for the purpose of restructuring the
mortgage over the subject properties and thus preventing the foreclosure by the PNB.
Considering the law and jurisprudence on simulated or fictitious contracts as aforestated, the within action
for reconveyance instituted by herein respondents which is anchored on the said simulated deeds of
transfer cannot and should not be barred by prescription. No amount of time could accord validity or
efficacy to such fictitious transactions, the defect of which is permanent.
There is no implied trust that was generated by the simulated transfers; because being fictitious or
simulated, the transfers were null and void ab initio-from the very beginning and thus vested no rights
whatsoever in favor of Luis Tongoy or his heirs. That which is inexistent cannot give life to anything at
all.
II.
But even assuming arguendo that such an implied trust exists between Luis Tongoy as trustee and the
private respondents as cestui que trust, still the rights of private respondents to claim reconveyance is
not barred by prescription or laches.
Petitioners maintain that, even conceding that respondents have adequately proven an implied trust in
their favor, their rights have already prescribed, since actions to enforce an implied trust created under
the old Civil Code prescribes in ten years.
Under Act No. 190, whose statute of limitation would apply if there were an implied trust as in this
case, the longest period of extinctive prescription was only ten years (Salao vs. Salao, 70 SCRA 84;
Diaz vs. Gorricho and Aguado, 103 Phil. 261, 226).
On the other hand, private respondents contend that prescription cannot operate against the cestui
que trust in favor of the trustee, and that actions against a trustee to recover trust property held by him
are imprescriptible (Manalang vs. Canlas, 50 OG 1980). They also cite other pre-war cases to bolster this
contention, among which are: Camacho vs. Municipality of Baliwag, 28 Phil. 46; Uy vs. Cho Jan Ling, 19
Phil. 202 [pls. see pp. 258-259, Brief for Respondents, p. 398, rec.]. They further allege that possession
of a trustee is, in law, possession of the cestui que trust and, therefore, it cannot be a good ground for
title by prescription (Laguna vs. Levantino, 71 Phil. 566; Cortez vs. Oliva, 33 Phil. 480, cited on p. 261,
Brief for Respondents, supra).
The rule now obtaining in this jurisdiction is aptly discussed in the case of Bueno vs. Reyes (27 SCRA
1179, 1183), where the Court through then Mr. Justice Makalintal, held:
While there are some decisions which hold that an action upon a trust is imprescriptible, without
distinguishing between express and implied trusts, the better rule, as laid down by this Court in other
decisions, is that prescription does supervene where the trust is merely an implied one. The reason has
been expressed by Mr. Justice J.B.L. Reyes in J.M. Tuazon and Co., Inc. vs. Magdangal, 4 SCRA 84, 88,
as follows:
Under Section 40 of the Old Code of Civil Procedure, all actions for recovery of real property prescribe
in ten years, excepting only actions based on continuing or subsisting trusts that were considered by
section 38 as imprescriptible. As held in the case of Diaz vs. Gorricho, L-11229, March 29, 1958,
however, the continuing or subsisting trusts contemplated in Sec. 38 of the Code of Civil Procedure
referred only to express unrepudiated trusts, and did not include constructive trusts (that are imposed
by law) where no fiduciary relation exists and the trustee does not recognize the trust at all.
This doctrine has been reiterated in the latter case of Escay vs. C.A. (61 SCRA 370, 387), where WE held
that implied or constructive trusts prescribe in ten years. "The prescriptibility of an action for
reconveyance based on implied or constructive trust, is now a settled question in this jurisdiction. It
prescribes in ten years" (Boñaga vs. Soler, et al., 2 SCRA 755; J.M. Tuazon and Co., Inc. vs. Magdangal,
4 SCRA 88, special attention to footnotes).
Following such proposition that an action for reconveyance such as the instant case is subject to
prescription in ten years, both the trial court and respondent appellate court are correct in applying the
ten-year prescriptive period.
The question, however, is, from what time should such period be counted?
The facts of the case at bar reveal that the title to Hacienda Pulo was registered in the name of Luis D.
Tongoy with the issuance of TCT No. 20154 on November 8, 1935; that the title to the adjacent Cuaycong
property was transferred to Luis D. Tongoy with the issuance of TCT No. 21522 on June 22, 1936. The
properties were mortgaged in the year 1936 by said Luis D. Tongoy for P4,500.00 and P 21,000.00,
respectively, for a period of fifteen years; that the mortgage obligations to the PNB were fully paid on
April 17, 1956; that the release of mortgage was recorded in the Registry of Deeds on May 5, 1958; and
that the case for reconveyance was filed in the trial court on June 2, 1966.
Considering that the implied trust resulted from the simulated sales which were made for the purpose of
enabling the transferee, Luis D. Tongoy, to save the properties from foreclosure for the benefit of the co-
owners, it would not do to apply the theory of constructive notice resulting from the registration in the
trustee's name. Hence, the ten-year prescriptive period should not be counted from the date of
registration in the name of the trustee, as contemplated in the earlier case of Juan vs. Zuñiga (4 SCRA
1221). Rather, it should be counted from the date of recording of the release of mortgage in the Registry
of Deeds, on which date May 5, 1958 — the cestui que trust were charged with the knowledge of the
settlement of the mortgage obligation, the attainment of the purpose for which the trust was constituted.
Indeed, as respondent Court of Appeals had correctly held:
... as already indicated, the ten-year prescriptive period for bringing the action to enforce the trust or
for reconveyance of plaintiffs-appellants" shares should be toned from the registration of the release of
the mortgage obligation, since only by that time could plaintiffs-appellants be charged with constructive
knowledge of the liquidation of the mortgage obligations, when it became incumbent upon them to
expect and demand the return of their shares, there being no proof that plaintiffs-appellants otherwise
learned of the payment of the obligation earlier. More precisely then the prescriptive period should be
reckoned from May 5, 1958 when the release of the mortgage was recorded in the Registry of Deeds,
which is to say that the present complaint was still filed within the period on June 4, 1966.
Consequently, petitioner Francisco A. Tongoy as successor-in-interest and/or administrator of the estate
of the late Luis D. Tongoy, is under obligation to return the shares of his co-heirs and co-owners in the
subject properties and, until it is done, to render an accounting of the fruits thereof from the time that
the obligation to make a return arose, which in this case should be May 5, 1958, the date of registration
of the document of release of mortgage.
Hence, WE find no evidence of abuse of discretion on the part of respondent Court of Appeals when it
ordered such accounting from May 5, 1958, as well as the imposition of legal interest on the fruits and
income corresponding to the shares that should have been returned to the private respondents, from the
date of actual demand which has been determined to have been made on January 26, 1966 by the
demand letter (Exh. TT) of respondent Jesus T. Sonora to deceased Luis D. Tongoy.
III
With respect to the award of attorney's fees in the sum of P20,000.00, the same appears to have been
properly made, considering that private respondents were unnecessarily compelled to litigate (Flordelis
vs. Mar, 114 SCRA 41; Sarsosa Vda. de Barsobin vs. Cuenco, 113 SCRA 547; Phil. Air Lines vs. C.A., 106
SCRA 393). As pointed out in the questioned decision of the Court of Appeals:
As for the claim for attorney's fees, the same appears to be well taken in the light of the findings WE
have made considering that prevailing plaintiffs- appellants were forced to litigate to enforce their rights,
and that equity under all the circumstances so dictate, said plaintiffs-appellants should recover attorney's
fees in a reasonable amount. We deem P20,000.00 adequate for the purpose.
IV
The remaining assignement of error dwells on the question of whether or not respondents Amado,
Ricardo, Cresenciano and Norberto, all surnamed Tongoy, may be considered legitimated by virtue of the
marriage of their parents, Francisco Tongoy and Antonina Pabello, subsequent to their births and shortly
before Francisco died on September 15, 1926. Petitioners maintain that since the said respondents were
never acknowledged by their father, they could not have been legitimated by the subsequent marriage
of their parents, much less could they inherit from the estate of their father, the predecessor-in-interest
of Luis D. Tongoy, who is admittedly the half brother of the said respondents.
Both the trial court and the respondent appellate court have found overwhelming evidence to sustain the
following conclusions: that Amado P. Tongoy, Ricardo P. Tongoy, Cresenciano P. Tongoy and Norberto P.
Tongoy were born illegitimate to Antonina Pabello on August 19, 1910 (Exh. A), August 12,1914 (Exh.
B), December 1, 1915 (Exhs. C and C- 1) and August 4, 1922 (Exh. D), respectively; that Francisco
Tongoy was their father; that said Francisco Tongoy had before them two legitimate children by his first
wife, namely, Luis D. Tongoy and Patricio D. Tongoy; that Francisco Tongoy and Antonina Pabello were
married sometime before his death on September 15, 1926 (Exh. H); that shortly thereafter, Luis D.
Tongoy and Patricio D. Tongoy executed an Extra-Judicial Declaration of Heirs, leaving out their half-
brothers Amado, Ricardo, Cresenciano, and Norberto, who were then still minors; that respondents
Amado, Ricardo, Cresenciano and Norberto were known and accepted by the whole clan as children of
Francisco; that they had lived in Hacienda Pulo with their parents, but when they went to school, they
stayed in the old family home at Washington Street, Bacolod, together with their grandmother, Agatona
Tongoy, as well as with the Sonoras and with Luis and Patricio Tongoy; that everybody in Bacolod knew
them to be part of the Tongoy-Sonora clan; and that Luis D. Tongoy as administrator of Hacienda Pulo,
also spent for the education of Ricardo Tongoy until he became a lawyer; and that even petitioners admit
the fact that they were half-brothers of the late Luis D. Tongoy.
The bone of contention, however, hinges on the absence of an acknowledgment through any of the modes
recognized by the Old Civil Code (please see Articles 131 and 135 of the Old Civil Code), such that
legitimation could not have taken place in view of the provisions of Art. 121 of the same Code which
states that "children shall be considered legitimated by a subsequent marriage only when they have been
acknowledged by the parents before or after the celebration thereof."
Of course, the overwhelming evidence found by respondent Court of Appeals conclusively shows that
respondents Amado, Ricardo, Cresenciano and Norberto have been in continuous possession of the status
of natural, or even legitimated, children. Still, it recognizes the fact that such continuous possession of
status is not, per se, a sufficient acknowledgment but only a ground to compel recognition (Alabat vs.
Alabat, 21 SCRA 1479; Pua vs. Chan, 21 SCRA 753; Larena vs. Rubio, 43 Phil. 1017).
Be that as it may, WE cannot but agree with the liberal view taken by respondent Court of Appeals when
it said:
... It does seem equally manifest, however, that defendants-appellants stand on a purely technical
point in the light of the overwhelming evidence that appellees were natural children of Francisco Tongoy
and Antonina Pabello, and were treated as legitimate children not only by their parents but also by the
entire clan. Indeed, it does not make much sense that appellees should be deprived of their hereditary
rights as undoubted natural children of their father, when the only plausible reason that the latter could
have had in mind when he married his second wife Antonina Pabello just over a month before his death
was to give legitimate status to their children. It is not in keeping with the more liberal attitude taken
by the New Civil Code towards illegitimate children and the more compassionate trend of the New
Society to insist on a very literal application of the law in requiring the formalities of compulsory
acknowledgment, when the only result is to unjustly deprive children who are otherwise entitled to
hereditary rights. From the very nature of things, it is hardly to be expected of appellees, having been
reared as legitimate children by their parents and treated as such by everybody, to bring an action to
compel their parents to acknowledge them. In the hitherto cited case of Ramos vs. Ramos, supra, the
Supreme Court showed the way out of patent injustice and inequity that might result in some cases
simply because of the implacable insistence on the technical amenities for acknowledgment. Thus, it
held —
Unacknowledged natural children have no rights whatsoever (Buenaventura vs. Urbano, 5 Phil. 1;
Siguiong vs. Siguiong, 8 Phil. 5, 11; Infante vs. Figueras, 4 Phil. 738; Crisolo vs. Macadaeg, 94 Phil.
862). The fact that the plaintiffs, as natural children of Martin Ramos, received shares in his estate
implied that they were acknowledged. Obviously, defendants Agustin Ramos and Granada Ramos and
the late Jose Ramos and members of his family had treated them as his children. Presumably, that fact
was well-known in the community. Under the circumstances, Agustin Ramos and Granada Ramos and
the heirs of Jose Ramos, are estopped from attacking plaintiffs' status as acknowledged natural children
(See Arts. 283 [4] and 2666 [3], New Civil Code). [Ramos vs. Ramos, supra].
With the same logic, estoppel should also operate in this case in favor of appellees, considering, as
already explained in detail, that they have always been treated as acknowledged and legitimated
children of the second marriage of Francisco Tongoy, not only by their presumed parents who raised
them as their children, but also by the entire Tongoy-Sonora clan, including Luis D. Tongoy himself who
 had furnished sustenance to the clan in his capacity as administrator of Hacienda Pulo and had in fact
supported the law studies of appellee Ricardo P. Tongoy in Manila, the same way he did with Jesus T.
Sonora in his medical studies. As already pointed out, even defendants-appellants have not questioned
the fact that appellees are half-brothers of Luis D. Tongoy. As a matter of fact, that are really children
of Francisco Tongoy and Antonina Pabello, and only the technicality that their acknowledgment as
natural children has not been formalized in any of the modes prescribed by law appears to stand in the
way of granting them their hereditary rights. But estoppel, as already indicated, precludes defendants-
appellants from attacking appellees' status as acknowledged natural or legitimated children of Francisco
Tongoy. In addition to estoppel, this is decidedly one instance when technicality should give way to
conscience, equity and justice.
It is time that WE, too, take a liberal view in favor of natural children who, because they enjoy the
blessings and privileges of an acknowledged natural child and even of a legitimated child, found it rather
awkward, if not unnecessary, to institute an action for recognition against their natural parents, who,
without their asking, have been showering them with the same love, care and material support as are
accorded to legitimate children. The right to participate in their father's inheritance should necessarily
follow.
The contention that the rights of the said respondents — Tongoys have prescribed, is without merit. The
death of Francisco Tongoy having occurred on September 15, 1926, the provisions of the Spanish Civil
Code is applicable to this case, following the doctrine laid down in Villaluz vs. Neme (7 SCRA 27) where
this Court, through Mr. Justice Paredes, held:
Considering that Maria Rocabo died (on February 17, 1937) during the regime of the Spanish Civil Code,
the distribution of her properties should be governed by said Code, wherein it is provided that between
co-heirs, the act to demand the partition of the inheritance does not prescribe (Art. 1965 [Old Civil
Code]; Baysa, et al. vs. Baysa, 53 Off. Gaz. 7272). Verily, the 3 living sisters were possessing the
property as administratices of the other co-heirs, plaintiffs-appellants herein, who have the right to
vindicate their inheritance regardless of the lapse of time (Sevilla vs. De los Angeles, L- 7745, 51 Off.
Gaz. 5590, and cases cited therein).
1935 of an Assignment of Rights [4 or Z) in favor of Luis D. Tongoy by the Pacific Commercial Company
as judgment lien-holder [subordinate of the PNB mortgage] of Jose Tongoy on Hacienda Pulo
November 5, 1935 — Hacienda Pulo was placed in the name of Luis D. Tongoy married to Ma. Rosario
Araneta with the issuance of TCT 20154 (Exh. 20);
June 22, 1936 — An Escritura de Venta was executed by Basilisa Cuaycong over the Cuaycong property
in favor of Luis D. Tongoy, thereby resulting in the issuance of TCT No. 21522 in the name of Luis D.
Tongoy married to Ma. Rosario Araneta;
June 26, 1936 — Luis D. Tongoy executed a real estate mortgage over the Cuaycong property in favor
of the PNB to secure a loan of P4,500.00; and
June 29, 1936 — Luis D. Tongoy executed a real estate mortgage over Hacienda Pulo to secure a loan
of P21,000.00 payable for fifteen years.
When the mortgages were constituted, respondents Cresenciano Tongoy and Norberto Tongoy were still
minors, while respondent Amado Tongoy became of age on August 19, 1931, and Ricardo Tongoy attained
majority age on August 12, 1935. Still, considering that such transfer of the properties in the name of
Luis D. Tongoy was made in pursuance of the master plan to save them from foreclosure, the said
respondents were precluded from doing anything to assert their rights. It was only upon failure of the
herein petitioner, as administrator and/or successor-in-interest of Luis D. Tongoy, to return the properties
that the prescriptive period should begin to run.
As above demonstrated, the prescriptive period is ten year-from the date of recording on May 5, 1958 of
the release of mortgage in the Registry of Deeds.
WHEREFORE, THE JUDGMENT APPEALED FROM IS HEREBY AFFIRMED IN TOTO.

Even following the more recent doctrine enunciated in Gerona vs. de Guzman (11 SCRA 153) that "an
action for reconveyance of real property based upon a constructive or implied trust, resulting from fraud,
may be barred by the statute of limitations" (Candelaria vs. Romero, L-12149, Sept. 30, 1960; Alzona
vs. Capunita, L-10220, Feb. 28, 1962)", and that "the action therefor may be filed within four years from
the discovery of the fraud x x x", said period may not be applied to this case in view of its peculiar
circumstances. The registration of the properties in the name of Luis D. Tongoy on November 8, 1935
cannot be considered as constructive notice to the whole world of the fraud.

It will be noted that the foreclosure on the original mortgage over Hacienda Pulo was instituted by PNB
as early as June 18, 1931, from which time the members of the Tongoy-Sonora clan had been in constant
conference to save the property. At that time all the respondents-Tongoys were still minors (except
Amado, who was already 23 years old then), so that there could be truth to the allegation that their
exclusion in the Declaration of Inheritance executed by Patricio and Luis Tongoy on April 29, 1933 was
made to facilitate matters-as part of the general plan arrived at after the family conferences to transfer
the administration of the property to the latter. The events that followed were obviously in pursuance of
such plan, thus:

March 13, 1934 — An Escritura de Venta (Exh. 2 or W) was executed in favor of Luis D. Tongoy by Ana
Tongoy, Teresa Tongoy, Mercedes Sonora, Trinidad Sonora, Juan Sonora and Patricio Tongoy,
transferring their rights and interests over Hacienda Pulo to the former.
October 23, 1935 — An Escritura de Venta (Exh. 3 or DD) was executed by Jesus Sonora, likewise
transferring his rights and interests over Hacienda Pulo to Luis D. Tongoy;
November 5, 1935 — An Escritura de Venta (Exh. 5 or AA) was also executed by Jose Tongoy in favor
of Luis D. Tongoy for the same purpose; (Note: This was preceded by the execution on October 14,
G.R. No. L-64693 April 27, 1984 In the event the condition of the three Toyota rears will no longer serve the purpose of the deed of
conveyance because of their deterioration, or because they are no longer serviceable, or because they
LITA ENTERPRISES, INC., petitioner, are no longer available, then Lita Enterprises, Inc. is ordered to pay the plaintiffs their fair market value
vs. as of July 22, 1975. (Annex "D", p. 167, Rollo.)
SECOND CIVIL CASES DIVISION, INTERMEDIATE APPELLATE COURT, NICASIO M. OCAMPO and
FRANCISCA P. GARCIA, respondents. Its first and second motions for reconsideration having been denied, petitioner came to Us, praying
that: têñ.£îhqwâ£
"Ex pacto illicito non oritur actio" [No action arises out of an illicit bargain] is the tune-honored maxim 2. ... after legal proceedings, decision be rendered or resolution be issued, reversing, annulling or
that must be applied to the parties in the case at bar. Having entered into an illegal contract, neither can amending the decision of public respondent so that:
seek relief from the courts, and each must bear the consequences of his acts. (a) the additional paragraph added by the public respondent to the DECISION of the lower court (CFI)
be deleted;
The factual background of this case is undisputed.
(b) that private respondents be declared liable to petitioner for whatever amount the latter has paid
or was declared liable (in Civil Case No. 72067) of the Court of First Instance of Manila to Rosita
Sometime in 1966, the spouses Nicasio M. Ocampo and Francisca Garcia, herein private respondents,
Sebastian Vda. de Galvez, as heir of the victim Florante Galvez, who died as a result ot the gross
purchased in installment from the Delta Motor Sales Corporation five (5) Toyota Corona Standard cars to
negligence of private respondents' driver while driving one private respondents' taxicabs.
be used as taxicabs. Since they had no franchise to operate taxicabs, they contracted with petitioner Lita
Enterprises, Inc., through its representative, Manuel Concordia, for the use of the latter's certificate of
Unquestionably, the parties herein operated under an arrangement, comonly known as the "kabit
public convenience in consideration of an initial payment of P1,000.00 and a monthly rental of P200.00
system", whereby a person who has been granted a certificate of convenience allows another person who
per taxicab unit. To effectuate Id agreement, the aforesaid cars were registered in the name of petitioner
owns motors vehicles to operate under such franchise for a fee. A certificate of public convenience is a
Lita Enterprises, Inc, Possession, however, remained with tile spouses Ocampo who operated and
special privilege conferred by the government . Abuse of this privilege by the grantees thereof cannot be
maintained the same under the name Acme Taxi, petitioner's trade name.
countenanced. The "kabit system" has been Identified as one of the root causes of the prevalence of graft
and corruption in the government transportation offices. In the words of Chief Justice Makalintal, 1 "this
About a year later, on March 18, 1967, one of said taxicabs driven by their employee, Emeterio Martin,
is a pernicious system that cannot be too severely condemned. It constitutes an imposition upon the goo
collided with a motorcycle whose driver, one Florante Galvez, died from the head injuries sustained
faith of the government.
therefrom. A criminal case was eventually filed against the driver Emeterio Martin, while a civil case for
damages was instituted by Rosita Sebastian Vda. de Galvez, heir of the victim, against Lita Enterprises,
Although not outrightly penalized as a criminal offense, the "kabit system" is invariably recognized as
Inc., as registered owner of the taxicab in the latter case, Civil Case No. 72067 of the Court of First
being contrary to public policy and, therefore, void and inexistent under Article 1409 of the Civil Code, It
Instance of Manila, petitioner Lita Enterprises, Inc. was adjudged liable for damages in the amount of
is a fundamental principle that the court will not aid either party to enforce an illegal contract, but will
P25,000.00 and P7,000.00 for attorney's fees.
leave them both where it finds them. Upon this premise, it was flagrant error on the part of both the trial
and appellate courts to have accorded the parties relief from their predicament. Article 1412 of the Civil
This decision having become final, a writ of execution was issued. One of the vehicles of respondent
Code denies them such aid. It provides:têñ.£îhqwâ£
spouses with Engine No. 2R-914472 was levied upon and sold at public auction for 12,150.00 to one
ART. 1412. if the act in which the unlawful or forbidden cause consists does not constitute a criminal
Sonnie Cortez, the highest bidder. Another car with Engine No. 2R-915036 was likewise levied upon and
offense, the following rules shall be observed;
sold at public auction for P8,000.00 to a certain Mr. Lopez.
(1) when the fault, is on the part of both contracting parties, neither may recover what he has given
Thereafter, in March 1973, respondent Nicasio Ocampo decided to register his taxicabs in his name. He by virtue of the contract, or demand the performance of the other's undertaking.
requested the manager of petitioner Lita Enterprises, Inc. to turn over the registration papers to him, but
The defect of inexistence of a contract is permanent and incurable, and cannot be cured by ratification or
the latter allegedly refused. Hence, he and his wife filed a complaint against Lita Enterprises, Inc., Rosita
by prescription. As this Court said in Eugenio v. Perdido, 2 "the mere lapse of time cannot give efficacy
Sebastian Vda. de Galvez, Visayan Surety & Insurance Co. and the Sheriff of Manila for reconveyance of
to contracts that are null void."
motor vehicles with damages, docketed as Civil Case No. 90988 of the Court of First Instance of Manila.
Trial on the merits ensued and on July 22, 1975, the said court rendered a decision, the dispositive portion
The principle of in pari delicto is well known not only in this jurisdiction but also in the United States
of which reads: têñ.£îhqwâ£
where common law prevails. Under American jurisdiction, the doctrine is stated thus: "The proposition is
WHEREFORE, the complaint is hereby dismissed as far as defendants Rosita Sebastian Vda. de Galvez,
universal that no action arises, in equity or at law, from an illegal contract; no suit can be maintained for
Visayan Surety & Insurance Company and the Sheriff of Manila are concerned.
its specific performance, or to recover the property agreed to be sold or delivered, or damages for its
Defendant Lita Enterprises, Inc., is ordered to transfer the registration certificate of the three Toyota
property agreed to be sold or delivered, or damages for its violation. The rule has sometimes been laid
cars not levied upon with Engine Nos. 2R-230026, 2R-688740 and 2R-585884 [Exhs. A, B, C and D]
down as though it was equally universal, that where the parties are in pari delicto, no affirmative relief
by executing a deed of conveyance in favor of the plaintiff.
of any kind will be given to one against the other." 3 Although certain exceptions to the rule are provided
Plaintiff is, however, ordered to pay Lita Enterprises, Inc., the rentals in arrears for the certificate of
by law, We see no cogent reason why the full force of the rule should not be applied in the instant case.
convenience from March 1973 up to May 1973 at the rate of P200 a month per unit for the three cars.
WHEREFORE, all proceedings had in Civil Case No. 90988 entitled "Nicasio Ocampo and Francisca P.
Petitioner Lita Enterprises, Inc. moved for reconsideration of the decision, but the same was denied by
Garcia, Plaintiffs, versus Lita Enterprises, Inc., et al., Defendants" of the Court of First Instance of Manila
the court a quo on October 27, 1975. (p. 121, Ibid.)
and CA-G.R. No. 59157-R entitled "Nicasio Ocampo and Francisca P. Garica, Plaintiffs-Appellees, versus
Lita Enterprises, Inc., Defendant-Appellant," of the Intermediate Appellate Court, as well as the decisions
On appeal by petitioner, docketed as CA-G.R. No. 59157-R, the Intermediate Appellate Court modified
rendered therein are hereby annuleled and set aside. No costs.
the decision by including as part of its dispositive portion another paragraph, to wit: têñ.£îhqwâ£
G.R. No. L-45038 April 30, 1987
MANOTOK REALTY, INC., petitioner,
vs.
THE HON. COURT OF APPEALS and FELIPE MADLANGAWA, respondents.
The private respondent Felipe Madlangawa claims that he has been occupying a parcel of land in the Clara
de Tambunting de Legarda Subdivision since 1949 upon permission being obtained from Andres Ladores,
then an overseer of the subdivision, with the understanding that the respondent would eventually buy
the lot.
On April 2, 1950, the owner of the lot, Clara Tambunting, died and her entire estate, including her
paraphernal properties which covered the lot occupied by the private respondent were placed
under custodia legis.
On April 22, 1950, the private respondent made a deposit for the said lot in the sum of P1,500.00 which
was received by Vicente Legarda, husband of the late owner. As evidenced by the receipt issued by
Vicente Legarda, the lot consisted of an area of 240 square meters and was sold at P30.00 per square
meter. There, thus, remained an unpaid balance of P5,700.00 but the private respondent did not pay or
was unable to pay this balance because after the death of the testatrix, Clara Tambunting de Legarda,
her heirs could not settle their differences. Apart from the initial deposit, no further payments were made
from 1950.
On April 28, 1950, Don Vicente Legarda was appointed as a special administrator of the estate. Meanwhile
the private respondent remained in possession of the lot in question.
Subsequently, the petitioner became the successful bidder and vendee of the Tambunting de Legarda
Subdivision consisting of 44 parcels of land spread out in the districts of Tondo and Sta. Cruz, Manila,
pursuant to the deeds of sale executed in its favor by the Philippine Trust Company on March 13 and 20,
1959, as administrator of the Testate Estate of Clara Tambunting de Legarda, in Special Proceeding No.
10809 of the Manila probate court. The lot in dispute was one of those covered by the sale. The Deed of
Sale, among others, provided for the following terms and conditions:
1. — The VENDEE assumes the risk and expenses of ejecting the tenants or squatters on the said
parcels of land if it decides to eject them. Any rentals or damages that may be due or collectible from
the said tenants or squatters for the period subsequent to the date of this deed of sale shall belong to
the VENDEE but rentals due from the said tenants or squatters prior to the execution of this deed of
sale shall belong to the VENDOR.
3. — The VENDEE renounces the right to warranty in case of eviction with the knowledge of the risks
of eviction and assumes its consequences with respect not only to the lots subject-of the above
mentioned cases and claims but also with respect to any other lots subject of contracts of sale or
promises to sell that may have been executed by the deceased, Clara Tambunting de Legarda and/or
Vicente L. Legarda, and it hereby relieves the estate of Clara Tambunting de Legarda and the Philippine
Trust Company, in its capacity as Administrator thereof, of any and all liability with respect thereto in
case of eviction. All sums of money that have been paid to the deceased Clara Tambunting de Legarda
and/or Vicente L. Legarda and/or the administrator of Clara Tambunting de Legarda on account of the
purchase price of said lots shall belong to the estate, but any sums of money that are or may be due
as the balance of the purchase price of said lots shall belong to the VENDEE. (pp. 27-28, Rollo).
In its effort to clear the Tambunting Subdivision of its squatters and occupants, the petitioner caused the
publication of several notices in the Manila Times issues of January 1, 1966 and the Taliba issues of
January 2, and March 16, 1966, advising the occupants to vacate their respective premises, otherwise,
court action with damages would follow. In addition to these notices by publication, the petitioner sent
circulars to the occupants to vacate.
The private respondent was one of the many occupants who refused to vacate the lots they were
occupying, so that on April 26, 1968, the petitioner filed the action below to recover the said lot.
The trial court dismissed the petitioner's action after finding that the Identity of the parcel of land
described in the complaint had not been sufficiently established as the very same piece of land in the
material and physical possession of the private respondent.
On appeal, the respondent Court of Appeals found the Identity of the lot sought to be recovered by the
petitioner to be the same as that in the physical possession of the private respondent and ruled that the
only right remaining to the petitioner is to enforce the collection of the balance because accordingly, it
stepped into the shoes of its predecessor; and that since the area now in possession of the petitioner
which is that involved in the present case is only 115 square meters, the balance after deducting the
deposit of P1,500.00 is P2,551.85, and as per order of the Court of First Instance of Manila, the said
balance should be paid in 18 equal monthly installments.
In this petition, the petitioner maintains that the Court of Appeals committed a reversible error in holding
that the sale by Don Vicente Legarda in favor of the private respondent is valid, binding, and enforceable
against the petitioner.
The petitioner contends that since there is no dispute that the property in question was the paraphernal
property of Clara Tambunting, who died on April 2, 1950, Vicente Legarda had no authority whatsoever
to sell the said property to the private respondent on May 12, 1950 since the former was appointed as
administrator of the estate of Clara Tambunting only on August 28, 1950. Therefore, the questioned sale
could not have bound Clara Tambunting's estate because the vendor Vicente Legarda neither acted as
the owner nor the administrator of the subject property when the alleged sale took place. As regards the
provision in the deed of sale which it executed with the Philippine Trust Company wherein it bound itself
to respect the contracts of sale or promises to sell that may have been executed by Vicente Legarda and
renounced the right to warranty in case of eviction, the petitioner argues that this re-required respect
only for those valid sales executed by the deceased Clara Tambunting and by persons vested with
authority to act on behalf of the estate.
On the other hand, the private respondent contends that the aforequoted provisions of the deed of sale
are a declaration or admission against the interest of the petitioner, and shows that the acts of Vicente
Legarda had been ratified by the Philippine Trust Company and approved by the probate court. The
petitioner, therefore, is allegedly estopped from questioning the authority of Vicente Legarda in selling
the property in dispute.
It is an undisputed fact that the lot in dispute is the paraphernal property of Dona Clara Tambunting and
that at the time of the sale thereof, the owner was already dead. Thus, the only question to be resolved
in this petition is: in what capacity did the husband of the deceased, Don Vicente Legarda, dispose of the
lot?
Articles 136 and 137 of the Civil Code of the Philippines provide:
Art. 136. The wife retains the ownership of the paraphernal property.
Art. 137. The wife shall have the administration of the paraphernal property, unless she delivers the
same to the husband by means of a public instrument empowering him to administer it.
In this case, the public instrument shall be recorded in the Registry of Property. As for the movables,
the husband shall give adequate security.
There is nothing in the records that wig show that Don Vicente Legarda was the administrator of the
paraphernal properties of Dona Clara Tambunting during the lifetime of the latter. Thus, it cannot be said
that the sale which was entered into by the private respondent and Don Vicente Legarda had its inception
before the death of Dona Clara Tambunting and was entered into by the former for and on behalf of the
latter, but was only consummated after her death. Don Vicente Legarda, therefore, could not have validly
disposed of the lot in dispute as a continuing administrator of the paraphernal properties of Dona Clara
Tambunting.
It is also undisputed that the probate court appointed Don Vicente Legarda as administrator of the estate
only on August 28, 1950, more than three months after the questioned sale had taken place.
We are, therefore, led to the inevitable conclusion that the sale between Don Vicente Legarda and the
private respondent is void ab initio, the former being neither an owner nor administrator of the subject
property. Such being the case, the sale cannot be the subject of the ratification by the Philippine Trust
Company or the probate court. As was held in the case of Arsenal v. Intermediate Appellate Court (143
SCRA 40, 49):
Under the provisions of the Civil Code, a void contract is inexistent from the beginning. It cannot be
ratified neither can the right to set up the defense of its illegality be waived. (Art. 1409, Civil Code .
To further distinguish this contract from the other kinds of contract, a commentator has stated that.
The right to set up the nullity of a void or non-existent contract is not limited to the parties as in the
case of annuable or voidable contracts, it is extended to third persons who are directly affected by
the contract. (Tolentino, Civil Code of the Philippines, Vol. IV, p. 604, [1973]).
Any person may invoke the inexistence of the contract whenever juridical affects founded thereon
are asserted against him. (Id. P. 595).
Section 1, Rule 89 of the Revised Rules of Court provides for the procedure on how a property in custodia
legis can be disposed of by sale:
Order of sale of personalty. — Upon the application of the executor or administrator, and on written
notice to the heirs and other persons interested, the court may order the whole or a part of the personal
estate to be sold, if it appears necessary for the purpose of paying debts, expenses of administration,
or legacies, or for the preservation of the property.
After the appointment of Don Vicente Legarda as administrator of the estate of Dona Clara Tambunting,
he should have applied before the probate court for authority to sell the disputed property in favor of the
private respondent. If the probate court approved the request, then Don Vicente Legarda would have
been able to execute a valid deed of sale in favor of the respondent. Unfortunately, there was no effort
on the part of the administrator to comply with the above-quoted rule of procedure nor on that of the
respondent to protect his interests or to pay the balance of the installments to the court appointed
administrator.
As was held in Kline v. Shoup (226 Pacific Reporter 729, 731), which we find applicable in the case at
bar:
There are, however, certain steps to be taken in the administration of an estate which the law deems
of sufficient importance to have placed without the power of the probate court to effect under the
jurisdiction acquired over the general subject matter by law and over the estate and those interested
therein, by the filing and due service of the petition for the appointment of an administrator and the
order of appointment and issuance of letters, and at least one of such steps is the sale of the real
property of an estate for the payment of the debts of the deceased. C.S. 7603, provides that —
No sale of any property of an estate of a decedent is valid unless made under order of the probate
court. ...
From the foregoing, it cannot be denied that the law recognizes the issuance of an order of sale as an
indispensable requisite in effecting a valid sale of the property of a decedent's estate. ...
Considering the location of the disputed lot, we find a monthly rental of Twenty Centavos (P0.20) per
square meter to be more than fair to the private respondent for his use of the premises. The petitioner,
however, should return the P 1,500.00 received by Mr. Legarda, with legal interest, to the respondent.
WHEREFORE, IN VIEW OF THE FOREGOING, the decision appealed from is hereby REVERSED and SET ASIDE. The private respondent is ordered
to SURRENDER the material and physical possession of Lot No. 277, Block I to the petitioner and to pay the latter the rentals as stated above from
May, 1950 until he surrenders the said lot. The petitioner shall reimburse the private respondent the amount of P1,500.00 with legal interest from
May, 1950 or offset said amount from the rentals due to it. Costs against the private respondent.
G.R. No. 73564 March 25, 1988
CORNELIA CLANOR VDA. DE PORTUGAL, FRANCISCO C. PORTUGAL, PETRONA C. PORTUGAL,
CLARITA PORTUGAL, LETICIA PORTUGAL, and BENEDICTO PORTUGAL, JR., petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HUGO C. PORTUGAL, respondents.
Petitioner Cornelia Clanor and her late husband Pascual Portugal, during the lifetime of the latter, were
able to accumulate several parcels of real property. Among these were a parcel of residential land situated
in Poblacion, Gen. Trias, Cavite, designated as Lot No. 3201, consisting of 2,069 square meters, more or
less, and covered by T.C.T. No. RT-9355, in their names, and an agricultural land located at Pasong
Kawayan, Gen. Trias, Cavite, with an area of 43,587 square meters, more or less, known as Lot No. 2337,
and also registered in their names under T.C.T. No. RT-9356 of the Registry of Deeds for the Province of
Cavite.
Sometime in January, 1967, the private respondent Hugo Portugal, a son of the spouses, borrowed from
his mother, Cornelia, the certificates of title to the above-mentioned parcels of land on the pretext that
he had to use them in securing a loan that he was negotiating. Cornelia, the loving and helpful mother
that she was, assented and delivered the titles to her son. The matter was never again brought up until
after Pascual Portugal died on November 17, 1974. (Cornelia herself died on November 12, 1987.) When
the other heirs of the deceased Pascual Portugal, the petitioners herein, for the purposes of executing an
extra-judicial partition of Pascual's estate, wished to have all the properties of the spouses collated,
Cornelia asked the private respondent for the return of the two titles she previously loaned, Hugo
manifested that the said titles no longer exist. When further questioned, Hugo showed the petitioners
Transfer Certificate of Title T.C.T. No. 23539 registered in his and his brother Emiliano Portugal's names,
and which new T.C.T. cancelled the two previous ones. This falsification was triggered by a deed of sale
by which the spouses Pascual Portugal and Cornelia Clanor purportedly sold for P8,000.00 the two parcels
of land adverted to earlier to their two sons, Hugo and Emiliano. Confronted by his mother of this fraud,
Emiliano denied any participation. And to show his good faith, Emiliano caused the reconveyance of Lot
No. 2337 previously covered by TCT No. RT-9356 and which was conveyed to him in the void deed of
sale. Hugo, on the other hand, refused to make the necessary restitution thus compelling the petitioners,
his mother and his other brothers and sisters, to institute an action for the annulment of the controversial
deed of sale and the reconveyance of the title over Lot No. 3201 (the residential land). After hearing, the
trial court rendered its decision, the dispositive portion of which reads:
WHEREFORE, under our present perspectives, judgment is hereby rendered; and the Court hereby
declares inoperative the Deed of Sale (Exhibit A and Exhibit 1) and all its appertaining and subsequent
documents corresponding with Transfer Certificate of Title No. T-23539 of the Register of Deeds for the
Province of Cavite, as well as all subsequent Transfer Certificates of Title which may have been produced
corresponding to the parcels of land, subject matter hereof.
The issues raised by the petitioners are:
1. Whether or not the present action has prescribed;
2. Whether or not the respondent court was justified in disturbing the trial court's findings on the credibility of the
witnesses presented during the trial; and
3. Whether or not the appellate court could entertain the defense of prescription which was not raised by the private
respondents in their answer to the complaint nor in a motion to dismiss.
There is really nothing novel in this case as an the issues raised had been, on several occasions, ruled
upon by the Court. Apropos the first issue, which is the timeliness of the action, the trial court correctly
ruled that the action instituted by the petitioners has not yet prescribed. Be that as it may, the conclusion
was reached through an erroneous rationalization, i.e., the case is purely for reconveyance based on an
implied or constructive trust. Obviously, the trial court failed to consider the lack of consideration or cause
in the purported deed of sale by which the residential lot was allegedly transferred to the private
respondent by his parents. On the other hand, the respondent Intermediate Appellate Court held that
since the action for reconveyance was fathered by a fraudulent deed of sale, Article 1391 of the Civil
Code which lays down the rule that an action to annul a contract based on fraud prescribes in four years,
applies. Hence, according to the respondent court, as more than four years had elapsed from January
23, 1967 when the assailed deed was registered and the petitioners' cause of action supposedly accrued,
the suit has already become stale when it was commenced on October 26, 1976, in the Court of First
Instance of Cavite. For reasons shortly to be shown, we can not give our imprimatur to either view.
The case at bar is not purely an action for reconveyance based on an implied or constructive trust. Neither
is it one for the annullment of a fraudulent contract. A closer scrutiny of the records of the case readily
supports a finding that fraud and mistake are not the only vices present in the assailed contract of sale
as held by the trial court. More than these, the alleged contract of sale is vitiated by the total absence of
a valid cause or consideration. The petitioners in their complaint, assert that they, particularly Cornelia,
never knew of the existence of the questioned deed of sale. They claim that they came to know of the
supposed sale only after the private respondent, upon their repeated entreaties to produce and return
the owner's duplicate copy of the transfer certificate of title covering the two parcels of land, showed to
them the controversial deed. And their claim was immeasurably bolstered when the private respondent's
co-defendant below, his brother Emiliano Portugal, who was allegedly his co-vendee in the transaction,
disclaimed any knowledge or participation therein. If this is so, and this is not contradicted by the
decisions of the courts below, the inevitable implication of the allegations is that contrary to the recitals
found in the assailed deed, no consideration was ever paid at all by the private respondent. Applying the
provisions of Articles 1350, 1352, and 1409 of the new Civil Code in relation to the indispensable requisite
of a valid cause or consideration in any contract, and what constitutes a void or inexistent contract, we
rule that the disputed deed of sale is void ab initio or inexistent, not merely voidable. And it is provided
in Article 1410 of the Civil Code, that '(T)he action or defense for the declaration of the inexistence of a
contract does not prescribe.
But even if the action of the petitioners is for reconveyance of the parcel of land based on an implied or
constructive trust, still it has been seasonably filed. For as heretofore stated, it is now settled that actions
of this nature prescribe in ten years, the point of reference being the date of registration of the deed or
the date of the issuance of the certificate of titIe over the property. 4 In this case, the petitioner
commenced the instant action for reconveyance in the trial court on October 26, 1976, or less than ten
years from January 23, 1967 when the deed of sale was registered with the Register of Deeds. 5 Clearly,
even on this basis alone, the present action has not yet prescribed.
On the credibility of witnesses presented in court, there is no doubt that the trial court's findings on this
score deserves full respect and we do not have any reason to disturb it here now. 6 After all, the trial
court judge is in a better position to make that appreciation for having heard personally the witnesses
and observed their deportment and manner of testifying during the trial. 7 The exceptions to this time
honored policy are: when the trial court plainly overlooked certain facts of substantial import and value
which if only correctly considered by the court might change the outcome of the case; 8 and, if the judge
who rendered the decision was not the one who heard the evidence. 9 Neither of these exceptions is
present here. Therefore, the respondent appellate court's ruling questioning the credibility of petitioner
Cornelia Clanor Vda. de Portugal must be reversed.
Anent the last issue raised by the petitioner, we have already ruled that the defense of prescription
although not raised by the defendant may nevertheless be passed upon by the court when its presence
is plainly apparent on the face of the complaint itself. 10 At any rate, in view of our earlier finding that the
deed of sale in controversy is not simply fraudulent but void ab initio or inexistent our ruling on this third
issue would not have any material bearing on the overall outcome of this petition. The petitioner's action
remains to be seasonably instituted.
WHEREFORE, the petition is hereby GRANTED; the Decision dated October 21, 1985 and the Resolution dated January 24,
1986 of the Intermediate Appellate Court are hereby REVERSED and SET ASIDE; the deed of sale dated January 23, 1967
evidencing the sale of Lot No. 3201 to private respondent Hugo Portugal is declared VOID AB INITIO; and the private
respondent is ORDERED to reconvey to petitioners the title over the said Lot No. 3201 which is now under TCT No. T-
23539. Costs against the private respondent.
G.R. No. 110053 October 16, 1995
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS, CELEBRADA MANGUBAT and ABNER MANGUBAT, respondents.
On July 20, 1981, herein petitioner Development Bank of the Philippines (DBP) executed a "Deed of
Absolute Sale" in favor of respondent spouses Celebrada and Abner Mangubat over a parcel of
unregistered land identified as Lot 1, PSU-142380, situated in the Barrio of Toytoy, Municipality of
Garchitorena, Province of Camarines Sur, containing an area of 55.5057 hectares, more or less.
The land, covered only by a tax declaration, is known to have been originally owned by one Presentacion
Cordovez, who, on February 4, 1937, donated it to Luciano Sarmiento. On June 8, 1964, Luciano
Sarmiento sold the land to Pacifico Chica.
On April 27, 1965, Pacifico Chica mortgaged the land to DBP to secure a loan of P6,000.00. However, he
defaulted in the payment of the loan, hence DBP caused the extrajudicial foreclosure of the mortgage. In
the auction sale held on September 9, 1970, DBP acquired the property as the highest bidder and was
issued a certificate of sale on September 17, 1970 by the sheriff. The certificate of sale was entered in
the Book of Unregistered Property on September 23, 1970. Pacifico Chica failed to redeem the property,
and DBP consolidated its ownership over the same.
On October 14, 1980, respondent spouses offered to buy the property for P18,599.99. DBP made a
counter-offer of P25,500.00 which was accepted by respondent spouses. The parties further agreed that
payment was to be made within six months thereafter for it to be considered as cash payment. On July
20, 1981, the deed of absolute sale, which is now being assailed herein, was executed by DBP in favor of
respondent spouses. Said document contained a waiver of the seller's warranty against eviction. 2
Thereafter, respondent spouses applied for an industrial tree planting loan with DBP. The latter required
the former to submit a certification from the Bureau of Forest Development that the land is alienable and
disposable. However, on October 29, 1981, said office issued a certificate attesting to the fact that the
said property was classified as timberland, hence not subject to disposition. 3
The loan application of respondent spouses was nevertheless eventually approved by DBP in the sum of
P140,000.00, despite the aforesaid certification of the bureau, on the understanding of the parties that
DBP would work for the release of the land by the former Ministry of Natural Resources. To secure
payment of the loan, respondent spouses executed a real estate mortgage over the land on March 17,
1982, which document was registered in the Registry of Deeds pursuant to Act No. 3344.
The loan was then released to respondent spouses on a staggered basis. After a substantial sum of
P118,540.00 had been received by private respondents, they asked for the release of the remaining
amount of the loan. It does not appear that their request was acted upon by DBP, ostensibly because the
release of the land from the then Ministry of Natural Resources had not been obtained.
On July 7, 1983, respondent spouses, as plaintiffs, filed a complaint against DBP in the trial court 4 seeking
the annulment of the subject deed of absolute sale on the ground that the object thereof was verified to
be timberland and, therefore, is in law an inalienable part of the public domain. They also alleged that
petitioner, as defendant therein, acted fraudulently and in bad faith by misrepresenting itself as the
absolute owner of the land and in incorporating the waiver of warranty against eviction in the deed of
sale.5
In its answer, DBP contended that it was actually the absolute owner of the land, having purchased it for
value at an auction sale pursuant to an extrajudicial foreclosure of mortgage; that there was neither
malice nor fraud in the sale of the land under the terms mutually agreed upon by the parties; that
assuming arguendo that there was a flaw in its title, DBP can not be held liable for anything inasmuch as
respondent spouses had full knowledge of the extent and nature of DBP's rights, title and interest over
the land.
It further averred that the annulment of the sale and the return of the purchase price to respondent
spouses would redound to their benefit but would result in petitioner's prejudice, since it had already
released P118,540.00 to the former while it would be left without any security for the P140,000.00 loan;
and that in the remote possibility that the land is reverted to the public domain, respondent spouses
should be made to immediately pay, jointly and severally, the total amount of P118,540.00 with interest
at 15% per annum, plus charges and other expenses.6
On May 25, 1990, the trial court rendered judgment annulling the subject deed of absolute sale and
ordering DBP to return the P25,500.00 purchase price, plus interest; to reimburse to respondent spouses
the taxes paid by them, the cost of the relocation survey, incidental expenses and other damages in the
amount of P50,000.00; and to further pay them attorney's fees and litigation expenses in the amount of
P10,000.00, and the costs of suit.7
In its recourse to the Court of Appeals, DBP raised the following assignment of errors:
1. The trial court erred in declaring the deed of absolute sale executed between the parties canceled and annulled on
the ground that therein defendant-appellant had no title over the property subject of the sale.
2. The trial court erred in finding that defendant-appellant DBP acted fraudulently and in bad faith or that it had
misrepresented facts since it had prior knowledge that subject property was part of the public domain at the time of sale
to therein plaintiffs-appellees.
3. The trial court erred in finding said plaintiffs-appellees' waiver of warranty against eviction void.
4. The trial court erred awarding to therein plaintiffs-appellees damages arising from an alleged breach of contract.
5. The trial court erred in not ordering said plaintiffs-appellees to pay their loan obligation to defendant-appellant DBP
in the amount of P118,540. 8
As substantially stated at the outset, respondent Court of Appeals rendered judgment modifying the
disposition of the court below by deleting the award for damages, attorney's fees, litigation expenses and
the costs, but affirming the same in all its other aspects.9 On April 7, 1993, said appellate court also
denied petitioner's motion for reconsideration. 10
Not satisfied therewith, DBP interposed the instant petition for review on certiorari, raising the following
issues:
1. Whether or not private respondent spouses Celebrada and Abner Mangubat should be ordered to
pay petitioner DBP their loan obligation due under the mortgage contract executed between them and
DBP; and
2. Whether or not petitioner should reimburse respondent spouses the purchase price of the property
and the amount of P11,980.00 for taxes and expenses for the relocation Survey. 11
Considering that neither party questioned the legality and correctness of the judgment of the court a quo,
as affirmed by respondent court, ordering the annulment of the deed of absolute sale, such decreed
nullification of the document has already achieved finality. We only need
The Court of Appeals, after an extensive discussion, found that there had been no bad faith on the part
of either party, and this r, therefore, to dwell on the effects of that declaration of nullity.emains
uncontroverted as a fact in the case at bar. Correspondingly, respondent court correctly applied the rule
that if both parties have no fault or are not guilty, the restoration of what was given by each of them to
the other is consequently in order. 12 This is because the declaration of nullity of a contract which is
void ab initio operates to restore things to the state and condition in which they were found before the
execution thereof. 13
We also find ample support for said propositions in American jurisprudence. The effect of an application
of the aforequoted rule with respect to the right of a party to recover the amount given as consideration
has been passed upon in the case of Leather Manufacturers National Bank vs. Merchants National
Bank 14 where it was held that: "Whenever money is paid upon the representation of the receiver that he
has either a certain title in property transferred in consideration of the payment or a certain authority to
receive the money paid, when in fact he has no such title or authority, then, although there be no fraud
or intentional misrepresentation on his part, yet there is no consideration for the payment, the money
remains, in equity and good conscience, the property of the payer and may be recovered back by him."
Therefore, the purchaser is entitled to recover the money paid by him where the contract is set aside by
reason of the mutual material mistake of the parties as to the identity or quantity of the land sold. 15 And
where a purchaser recovers the purchase money from a vendor who fails or refuses to deliver the title,
he is entitled as a general rule to interest on the money paid from the time of payment. 16
A contract which the law denounces as void is necessarily no contract whatever, and the acts of the
parties in an effort to create one can in no wise bring about a change of their legal status. The parties
and the subject matter of the contract remain in all particulars just as they did before any act was
performed in relation thereto. 17
An action for money had and received lies to recover back money paid on a contract, the consideration
of which has failed. 18 As a general rule, if one buys the land of another, to which the latter is supposed
to have a good title, and, in consequence of facts unknown alike to both parties, he has no title at all,
equity will cancel the transaction and cause the purchase money to be restored to the buyer, putting both
parties in status quo. 19
Thus, on both local and foreign legal principles, the return by DBP to respondent spouses of the purchase
price, plus corresponding interest thereon, is ineluctably called for.
Petitioner likewise contends that the trial court and respondent Court of Appeals erred in ordering the
reimbursement of taxes and the cost of the relocation survey, there being no factual or legal basis
therefor. It argues that private respondents merely submitted a "list of damages" allegedly incurred by
them, and not official receipts of expenses for taxes and said survey. Furthermore, the same list has
allegedly not been identified or even presented at any stage of the proceedings, since it was vigorously
objected to by DBP.
Contrary to the claim of petitioner, the list of damages was presented in the trial court and was
correspondingly marked as "Exhibit P." 20 The said exhibit was, thereafter, admitted by the trial court but
only as part of the testimonial evidence for private respondents, as stated in its Order dated August 16,
1988.21
However, despite that admission of the said list of damages as evidence, we agree with petitioner that
the same cannot constitute sufficient legal basis for an award of P4,000.00 and P7,980.00 as
reimbursement for land taxes and expenses for the relocation survey, respectively. The list of damages
was prepared extrajudicially by respondent spouses by themselves without any supporting receipts as
bases thereof or to substantiate the same. That list, per se, is necessarily self-serving and, on that
account, should have been declared inadmissible in evidence as the factum probans.
In order that damages may be recovered, the best evidence obtainable by the injured party must be
presented. Actual or compensatory damages cannot be presumed, but must be duly proved, and so
proved with a reasonable degree of certainty. A court cannot rely on speculation, conjecture or guesswork
as to the fact and amount of damages, but must depend upon competent proof that they have been
suffered and on evidence of the actual amount thereof. If the proof is flimsy and unsubstantial, no
damages will be awarded. 22
Turning now to the issue of whether or not private respondents should be made to pay petitioner their
loan obligation amounting to P118,540.00, we answer in the affirmative.
In its legal context, the contract of loan executed between the parties is entirely different and discrete
from the deed of sale they entered into. The annulment of the sale will not have an effect on the existence
and demandability of the loan. One who has received money as a loan is bound to pay to the creditor an G.R. No. L-33048 April 16, 1982
equal amount of the same kind and quality. 23
EPIFANIA SARSOSA VDA. DE BARSOBIA and PACITA W. VALLAR, petitioners,
The fact that the annulment of the sale will also result in the invalidity of the mortgage does not have an vs.
effect on the validity and efficacy of the principal obligation, for even an obligation that is unsupported VICTORIANO T. CUENCO, respondent.
by any security of the debtor may also be enforced by means of an ordinary action. Where a mortgage
is not valid, as where it is executed by one who is not the owner of the property, or the consideration of The lot in controversy is a one-half portion (on the northern side) of two adjoining parcels of coconut land
the contract is simulated 25 or false, 26 the principal obligation which it guarantees is not thereby rendered located at Barrio Mancapagao, Sagay, Camiguin, Misamis Oriental (now Camiguin province), with an area
null and void. That obligation matures and becomes demandable in accordance with the stipulations of 29,150 square meters, more or less. 2
pertaining to it.
The entire land was owned previously by a certain Leocadia Balisado, who had sold it to the spouses
Under the foregoing circumstances, what is lost is only the right to foreclose the mortgage as a special Patricio Barsobia (now deceased) and Epifania Sarsosa, one of the petitioners herein. They are Filipino
remedy for satisfying or settling the indebtedness which is the principal obligation. In case of nullity, the citizens.
mortgage deed remains as evidence or proof of a personal obligation of the debtor, and the amount due
On September 5, 1936, Epifania Sarsosa then a widow, sold the land in controversy to a Chinese, Ong
to the creditor may be enforced in an ordinary personal action. 27
King Po, for the sum of P1,050.00 (Exhibit "B"). Ong King Po took actual possession and enjoyed the
It was likewise incorrect for the Court of Appeals to deny the claim of petitioner for payment of the loan fruits thereof.
on the ground that it failed to present the promissory note therefor. While respondent court also made
On August 5, 1961, Ong King Po sold the litigated property to Victoriano T. Cuenco (respondent herein),
the concession that its judgment was accordingly without prejudice to the filing by petitioner of a separate
a naturalized Filipino, for the sum of P5,000.00 (Exhibit "A"). Respondent immediately took actual
action for the collection of that amount, this does not detract from the adverse effects of that erroneous
possession and harvested the fruits therefrom.
ruling on the proper course of action in this case.

On March 6, 1962, Epifania "usurped" the controverted property, and on July 26, 1962, Epifania (through
The fact is that a reading of the mortgage contract 28 executed by respondent spouses in favor of
petitioner, dated March 17, 1982, will readily show that it embodies not only the mortgage but the her only daughter and child, Emeteria Barsobia), sold a one-half (1/2) portion of the land in question to
Pacita W. Vallar, the other petitioner herein (Exhibit "2"). Epifania claimed that it was not her intention
complete terms and conditions of the loan agreement as well. The provisions of said contract, specifically
to sell the land to Ong King Po and that she signed the document of sale merely to evidence her
paragraphs 16 and 28 thereof, are so precise and clear as to thereby render unnecessary the introduction
indebtedness to the latter in the amount of P1,050.00. Epifania has been in possession ever since except
of the promissory note which would merely serve the same purpose.
for the portion sold to the other petitioner Pacita.
Furthermore, respondent Celebrada Mangubat expressly acknowledged in her testimony that she and her
On September 19, 1962, respondent filed a Forcible Entry case against Epifania before the Municipal
husband are indebted to petitioner in the amount of P118,000.00, more or less. 29 Admissions made by
Court of Sagay, Camiguin. The case was dismissed for lack of jurisdiction since, as the laws then stood,
the parties in the pleadings or in the course of the trial or other proceedings do not require proof and can
the question of possession could not be properly determined without first settling that of ownership.
not be contradicted unless previously shown to have been made through palpable mistake. 30

On December 27, 1966, respondent instituted before the Court of First Instance of Misamis Oriental a
Thus, the mortgage contract which embodies the terms and conditions of the loan obligation of
Complaint for recovery of possession and ownership of the litigated land, against Epifania and Pacita
respondent spouses, as well as respondent Celebrada Mangubat's admission in open court, are more than
Vallar (hereinafter referred to simply as petitioners).
adequate evidence to sustain petitioner's claim for payment of private respondents' aforestated
indebtedness and for the adjudication of DBP's claim therefor in the very same action now before us.
In their Answer below, petitioners insisted that they were the owners and possessors of the litigated land;
that its sale to Ong King Po, a Chinese, was inexistent and/or void ab initio; and that the deed of sale
It is also worth noting that the adjustment and allowance of petitioner's demand by counterclaim or set-
between them was only an evidence of Epifania's indebtedness to Ong King Po.
off in the present action, rather than by another independent action, is favored or encouraged by law.
Such a practice serves to avoid circuitry of action, multiplicity of suits, inconvenience, expense, and
The trial Court rendered judgment:
unwarranted consumption of the time of the court. The trend of judicial decisions is toward a liberal
1. Dismissing the complaint with costs against plaintiff (respondent herein).
extension of the right to avail of counterclaims or set-offs. 31
2. Declaring the two Deeds of Sale, Exhibits A and B, respectively, inexistent and void from the
beginning; and
The rules on counterclaim are designed to achieve the disposition of a whole controversy of the conflicting
3. Declaring defendant Pacita W. Vallar as the lawful owner and possessor of the portion of land she
claims of interested parties at one time and in one action, provided all parties can be brought before the
bought from Emeteria Barsobia (pp. 57, 67, Record.) 3
court and the matter decided without prejudicing the rights of any party. 32

On appeal, the Court of Appeals reversed the aforementioned Decision and decreed instead that
WHEREFORE, the judgment appealed from is hereby MODIFIED, by deleting the award of P11,980.00 as
respondent was the owner of the litigated property, thus:
reimbursement for taxes and expenses for the relocation survey, and ordering respondent spouses
In view of all the foregoing considerations, the judgment appealed from is hereby reversed. In lieu
Celebrada and Abner Mangubat to pay petitioner Development Bank of the Philippines the amount of
thereof, we render judgment:
P118,540.00, representing the total amount of the loan released to them, with interest of 15% per
(a) Declaring the plaintiff-appellant Victoriano T. Cuenco the absolute owner of the land in question,
annum plus charges and other expenses in accordance with their mortgage contract. In all other respects,
with the right of possession thereof;
the said judgment of respondent Court of Appeals is AFFIRMED.
(b) Ordering the defendants-appellees to restore the possession of said land to the plaintiff;
 (c) Dismissing the defendants' counterclaim; While, strictly speaking, Ong King Po, private respondent's vendor, had no rights of ownership to transmit,
(d) Condemning the defendants to pay to the plaintiff the sum of it is likewise inescapable that petitioner Epifania had slept on her rights for 26 years from 1936 to 1962.
P10,000.00 representing the latter's share from the sale of copra which he failed to receive since By her long inaction or inexcusable neglect, she should be held barred from asserting her claim to the
March, 1962 when he was deprived of his possession over the land, and which defendants illegally litigated property (Sotto vs. Teves, 86 SCRA 157 [1978]).
appropriated it to their own use and benefit, plus legal interest from the filing of the complaint until Laches has been defined as the failure or neglect, for an unreasonable and unexplained length of time,
fully paid; plus P2,000.00 representing expenses and attorney's fees; to do that which by exercising due diligence could or should have been done earlier; it is negligence or
(e) Sentencing the defendants to pay the costs. omission to assert a right within a reasonable time, warranting a presumption that the party entitled
to assert it either has abandoned it or declined to assert it. (Tijam, et al. vs. Sibonghanoy, et al., No.
Following the denial of their Motion for Reconsideration, petitioners filed the instant Petition for Review L-21450, April 15, 1968, 23 SCRA 29, 35). (cited in Sotto vs. Teves, 86 SCRA 154 [1978]).
on certiorari with this Court on January 21, 1971. Petitioners claim that the Court of Appeals erred:
I. ... when it reversed the judgment of the trial court declaring petitioner Pacita W. Vallar as the lawful Respondent, therefore, must be declared to be the rightful owner of the property.
possessor and owner of the portion of land she purchased from Emeteria Barsobia, not a party to this
case, there being no evidence against her. The award of actual damages in respondent's favor of P10,000.00, as well as of attorney's fees and
II ... when it included petitioner Pacita W. Vallar to pay P10,000.00, with legal interest from the filing expenses of litigation of P2,000.00, is justified. Respondent was deprived of the possession of his land
of the complaint, representing respondent's share in the harvest and to pay the costs, there being no and the enjoyment of its fruits from March, 1962. The Court of Appeals fixed respondent's share of the
evidence against her. sale of copra at P10,000.00 for eight years at four (4) harvests a year. The accuracy of this finding has
III. ... when it condemned petitioners to pay P2,000.00 representing expenses and attorney's fees, not been disputed.
there being no factual, legal and equitable justification.
However, we find merit in the assigned error that petitioner, Pacita Vallar, should not be held also liable
IV. ... in not applying the rule on pari delicto to the facts of the case or the doctrine enunciated ... in
for actual damages to respondent. In the absence of contrary proof, she, too, must be considered as a
the case of Philippine Banking Corporation vs. Lui She, L-17587, September 12, 1967, to ... Petitioner
Epifania Sarsosa Vda. de Barsobia. vendee in good faith of petitioner Epifania.
V. ... in denying, for lack of sufficient merits, petitioners' motion for rehearing or reconsideration of its
The award of attorney's fees and litigation expenses in the sum of P2,000.00 in respondent's favor is in
decision. 5
order considering that both petitioners compelled respondent to litigate for the protection of his interests.
Moreover, the amount is reasonable. 10
As the facts stand, a parcel of coconut land was sold by its Filipino owner, petitioner Epifania, to a Chinese,
Ong King Po, and by the latter to a naturalized Filipino, respondent herein. In the meantime, the Filipino
WHEREFORE, except for that portion holding petitioner, Pacita W. Vallar, also liable for damages of
owner had unilaterally repudiated the sale she had made to the Chinese and had resold the property to
P10,000.00, the appealed judgment is hereby affirmed.
another Filipino. The basic issue is: Who is the rightful owner of the property?
Costs against petitioners.
There should be no question that the sale of the land in question in 1936 by Epifania to Ong King Po was
inexistent and void from the beginning (Art. 1409 [7], Civil Code) 6 because it was a contract executed
against the mandatory provision of the 1935 Constitution, which is an expression of public policy to
conserve lands for the Filipinos. Said provision reads:
Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned
except to individuals, corporations, or associations, qualified to acquire or hold lands of the public
domain. 7

Had this been a suit between Epifania and Ong King Po, she could have been declared entitled to the
litigated land on the basis, as claimed, of the ruling in Philippine Banking Corporation vs. Lui
She, 8 reading:
... For another thing, and this is not only cogent but also important. Article 1416 of the Civil Code
provides as an exception to the rule on pari delicto that when the agreement is not illegal per se but is
merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may,
if public policy is thereby enhanced, recover what he has sold or delivered. ...

But the factual set-up has changed. The litigated property is now in the hands of a naturalized Filipino. It
is no longer owned by a disqualified vendee. Respondent, as a naturalized citizen, was constitutionally
qualified to own the subject property. There would be no more public policy to be served in allowing
petitioner Epifania to recover the land as it is already in the hands of a qualified person. Applying by
analogy the ruling of this Court in Vasquez vs. Giap and Li Seng Giap & Sons: 9
... if the ban on aliens from acquiring not only agricultural but also urban lands, as construed by this
Court in the Krivenko case, is to preserve the nation's lands for future generations of Filipinos, that aim
or purpose would not be thwarted but achieved by making lawful the acquisition of real estate by aliens
who became Filipino citizens by naturalization.
G.R. No. L-36731 January 27, 1983
VICENTE GODINEZ, ET AL., plaintiffs-appellants,
vs.
FONG PAK LUEN ET AL., defendants, TRINIDAD S. NAVATA, defendant-appellee.
The plaintiffs filed this case to recover a parcel of land sold by their father, now deceased, to Fong Pak
Luen, an alien, on the ground that the sale was null and void ab initio since it violates applicable provisions
of the Constitution and the Civil Code.
The order of the Court of First Instance of Sulu dismissing the complaint was appealed to the Court of
Appeals but the latter court certified the appeal to us since only pure questions of law were raised by the
appellants.
The facts of the case were summarized by the Court of Appeals as follows:
On September 30, 1966, the plaintiffs filed a complaint in the Court of First Instance of Sulu alleging
among others that they are the heirs of Jose Godinez who was married to Martina Alvarez Godinez
sometime in 1910; that during the marriage of their parents the said parents acquired a parcel of land
lot No. 94 of Jolo townsite with an area of 3,665 square meters as evidenced by Original Certificate of
Title No. 179 (D -155) in the name of Jose Godinez; that their mother died sometime in 1938 leaving the
plaintiffs as their sole surviving heirs; that on November 27, 1941, without the knowledge of the plaintiffs,
the said Jose Godinez, for valuable consideration, sold the aforesaid parcel of land to the defendant Fong
Pak Luen, a Chinese citizen, which transaction is contrary to law and in violation of the Civil Code because
the latter being an alien who is inhibited by law to purchase real property; that Transfer Certificate Title
No. 884 was then issued by the Register of Deeds to the said defendant, which is null and void ab
initio since the transaction constituted a non-existent contract; that on January 11, 1963, said defendant
Fong Pak Luen executed a power of attorney in favor of his co-defendant Kwan Pun Ming, also an alien,
who conveyed and sold the above described parcel of land to co-defendant Trinidad S. Navata, who is
aware of and with full knowledge that Fong Pak Luen is a Chinese citizen as well as Kwan Pun Ming, who
under the law are prohibited and disqualified to acquire real property in this jurisdiction; that defendant
Fong Pak Luen has not acquired any title or interest in said parcel of land as the purported contract of
sale executed by Jose Godinez alone was contrary to law and considered non- existent, so much so that
the alleged attorney-in-fact, defendant Kwan Pun Ming had not conveyed any title or interest over said
property and defendant Navata had not acquired anything from said grantor and as a consequence
Transfer Certificate of Title No. 1322, which was issued by the Register of Deeds in favor of the latter is
null and void ab initio,- that since one-half of the said property is conjugal property inherited by the
plaintiffs from their mother, Jose Godinez could -not have legally conveyed the entire property; that
notwithstanding repeated demands on said defendant to surrender to plaintiffs the said property she
refused and still refuses to do so to the great damage and prejudice of the plaintiffs; and that they were
constrained to engage the services of counsel in the sum of P2,000.00.1äwphï1.ñët The plaintiffs thus
pray that they be adjudged as the owners of the parcel of land in question and that Transfer Certificate
of Title RT-90 (T-884) issued in the name of defendant Fong Pak Luen be declared null and void ab initio;
and that the power of attorney issued in the name of Kwan Pun Ming, as well as Transfer Certificate of
Title No. 'L322 issued in the name of defendant Navata be likewise declared null and void, with costs
against defendants.
On August 18, 1966, the defendant Register of Deeds filed an answer claiming that he was not yet the
register of deeds then; that it was only the ministerial duty of his office to issue the title in favor of the
defendant Navata once he was determined the registerability of the documents presented to his office.
On October 20, 1966, the defendant Navata filed her answer with the affirmative defenses and
counterclaim alleging among others that the complaint does not state a cause of action since it appears
from the allegation that the property is registered in the name of Jose Godinez so that as his sole property
he may dispose of the same; that the cause of action has been barred by the statute of limitations as the
alleged document of sale executed by Jose Godinez on November 27, 1941, conveyed the property to
defendant Fong Pak Luen as a result of which a title was issued to said defendant; that under Article 1144
(1) of the Civil Code, an action based upon a written contract must be brought within 10 years from the
time the right of action accrues; that the right of action accrued on November 27, 1941 but the complaint
was filed only on September 30, 1966, beyond the 10 year period provided for by law; that the torrens
title in the name of defendant Navata is indefeasible who acquired the property from defendant Fong Pak
Luen who had been in possession of the property since 1941 and thereafter defendant Navata had
possessed the same for the last 25 years including the possession of Fong Pak Luen; that the complaint
is intended to harass the defendant as a civic leader and respectable member of the community as a
result of which she suffered moral damages of P100,000.00, P2,500.00 for attorney's fees and P500.00
expenses of litigation, hence, said defendant prays that the complaint be dismissed and that her
counterclaim be granted, with costs against the plaintiffs. On November 24, 1967, the plaintiffs filed an
answer to the affirmative defenses and counter-claim. As the defendants Fong Pak Luen and Kwan Pun
Ming are residing outside the Philippines, the trial court upon motion issued an order of April 17, 1967,
for the service of summons on said defendants by publication. No answer has been filed by said
defendants.
On December 2, 196 7, the court issued an order as follows:
Both parties having agreed to the suggestion of the Court that they submit their supplemental pleadings
to support both motion and opposition and after submittal of the same the said motion to dismiss which
is an affirmative defense alleged in the complaint is deemed submitted. Failure of both parties or either
party to submit their supplemental pleadings on or about December 9, the Court will resolve the case.
On November 29, 1968, the trial court issued an order missing the complaint without pronouncement as
to costs. (Record on Appeal, pp. 31- 37). A motion for reconsideration of this order was filed by the
plaintiffs on December 12, 196F, which was denied by the trial court in an order of July 11, 1969, (Rec.
on Appeal, pp. 38, 43, 45, 47). The plaintiffs now interpose this appeal with the following assignments of
errors:
I. The trial court erred in dismissing plaintiffs-appellants' complaint on the ground of prescription of
action, applying Art. 1144 (1) New Civil Code on the basis of defendant Trinidad S. Navata's affirmative
defense of prescription in her answer treated as a motion to dismiss.
II. The trial court erred in denying plaintiffs-appellants' motion for reconsideration of the order of
dismissal.
III. The trial court erred in not ordering this case to be tried on the merits."
The appellants contend that the lower court erred in dismissing the complaint on the ground that their
cause of action has prescribed. While the issue raised appears to be only the applicability of the law
governing prescription, the real question before us is whether or not the heirs of a person who sold a
parcel of land to an alien in violation of a constitutional prohibition may recover the property if it had, in
the meantime, been conveyed to a Filipino citizen qualified to own and possess it.
The question is not a novel one. Judicial precedents indicate fairly clearly how the question should be
resolved.
There can be no dispute that the sale in 1941 by Jose Godinez of his residential lot acquired from the
Bureau of Lands as part of the Jolo townsite to Fong Pak Luen, a Chinese citizen residing in Hongkong,
was violative of Section 5, Article XIII of the 1935 Constitution which provided:
Sec. 5. Save in cases of hereditary succession, no private agricultural land will be transferred or
assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the
public domain in the Philippines.
The meaning of the above provision was fully discussed in Krivenko v. Register of Deeds of Manila (79
Phil. 461) which also detailed the evolution of the provision in the public land laws, Act No. 2874 and
Commonwealth Act No. 141. The Krivenko ruling that "under the Constitution aliens may not acquire
private or agricultural lands, including residential lands" is a declaration of an imperative constitutional
policy. Consequently, prescription may never be invoked to defend that which the Constitution prohibits.
However, we see no necessity from the facts of this case to pass upon the nature of the contract of sale
executed by Jose Godinez and Fong Pak Luen whether void ab initio, illegal per se or merely pro-
exhibited.** It is enough to stress that insofar as the vendee is concerned, prescription is unavailing.
But neither can the vendor or his heirs rely on an argument based on imprescriptibility because the land
sold in 1941 is now in the hands of a Filipino citizen against whom the constitutional prescription was
never intended to apply. The lower court erred in treating the case as one involving simply the application
of the statute of limitations.
From the fact that prescription may not be used to defend a contract which the Constitution prohibits, it
does not necessarily follow that the appellants may be allowed to recover the property sold to an alien.
As earlier mentioned, Fong Pak Luen, the disqualified alien vendee later sold the same property to Trinidad
S. Navata, a Filipino citizen qualified to acquire real property.
. . . (I)f the ban on aliens from acquiring not only agricultural but, also urban lands, as construed by
this Court in the Krivenko case, is to preserve the nation's land for future generations of Filipinos, that
aim or purpose would not be thwarted but achieved by making lawful the acquisition of real estate by
aliens who became Filipino citizens by naturalization. The title to the parcel of land of the vendee, a
naturalized Filipino citizen, being valid that of the domestic corporation to which the parcel of land has
been transferred, must also be valid, 96.67 per cent of its capital stock being owned by Filipinos.
Herrera v. Luy Kim Guan (SCRA 406) reiterated the above ruling by declaring that where land is sold to
a Chinese citizen, who later sold it to a Filipino, the sale to the latter cannot be impugned.
The appellants cannot find solace from Philippine Banking Corporation v. Lui She (21 SCRA 52) which
relaxed the pari delicto doctrine to allow the heirs or successors-in-interest, in appropriate cases, to
recover that which their predecessors sold to aliens.

In Vasquez v. Li Seng Giap and Li Seng Giap & Sons (96 Phil. 447), where the alien vendee later sold the Only recently, in Sarsosa vda. de Barsobia v. Cuenco (113 SCRA 547) we had occasion to pass upon a
property to a Filipino corporation, this Court, in affirming a judgment dismissing the complaint to rescind factual situation substantially similar to the one in the instant case. We ruled:
the sale of real property to the defendant Li Seng Giap on January 22, 1940, on the ground that the
But the factual set-up has changed. The litigated property is now in the hands of a naturalized Filipino.
vendee was an alien and under the Constitution incapable to own and hold title to lands, held:
It is no longer owned by a disqualified vendee. Respondent, as a naturalized citizen, was constitutionally
In Caoile vs. Yu Chiao 49 Qff Gaz., 4321; Talento vs. Makiki 49 Off. Gaz., 4331; Bautista vs. Uy 49 Off. qualified to own the subject property. There would be no more public policy to be served in allowing
Gaz., 4336; Rellosa vs. Gaw Chee 49 Off. Gaz., 4345 and Mercado vs. Go Bio, 49 Off. Gaz., 5360, the petitioner Epifania to recover the land as it is already in the hands of a qualified person. Applying by
majority of this Court has ruled that in sales of real estate to aliens incapable of holding title thereto analogy the ruling of this Court in Vasquez vs. Giap & Sons: (.96 Phil. 447 [1955])
by virtue of the provisions of the Constitution (Section 5, Article XIII Krivenko vs. Register of Deeds, 44
Off. Gaz., 471) both the vendor and the vendee are deemed to have committed the constitutional ... if the ban on aliens from acquiring not only agricultural but also urban lands, as construed by this
Court in the Krivenko case, is to preserve the nation's lands for future generations of Filipinos, that aim
violation and being thus in pari delicto the courts will not afford protection to either party. (Article 1305,
or purpose would not be thwarted but achieved by making lawful the acquisition of real estate by aliens
old Civil Code; Article 1411, new Civil Code) From this ruling three Justices dissented. (Mr. Justice
who became Filipino citizens by naturalization.
Pablo, Mr. Justice Alex. Reyes and the writer. See Caoile vs. Yu Chiao Talento vs. Makiki Bautista us.
Uy, Rellosa vs. Gaw Chee and Mercado vs. Go Bio). supra.
While, strictly speaking, Ong King Po, private respondent's vendor, had no rights of ownership to
transmit, it is likewise in escapable that petitioner Epifania had slept on her rights for 26 years from
The action is not of rescission because it is not postulated upon any of the grounds provided for in
1936 to 1962. By her long inaction or inexcusable neglect, she should be held barred from asserting
Article 1291 of the old Civil Code and because the action of rescission involves lesion or damage and
her claim to the litigated property (Sotto vs. Teves, 86 SCRA 157 [1978])
seeks to repair it. It is an action for annulment under Chapter VI, Title II, Book 11, on nullity of
contracts, based on a defect in the contract which invalidates it independently of such lesion or
Laches has been defined as the failure or neglect, for an unreasonable and unexplained length of time,
damages. (Manresa, Commentarios al Codigo Civil Espanol Vol. VIII, p. 698, 4th ed.) It is very likely
to do that which by exercising due diligence could or should have been done earlier; it is negligence or
that the majority of this Court proceeded upon that theory when it applied the in pari delicto rule
ommission to assert a right within a reasonable time, warranting a presumption that the party entitled
referred to above.
to assert it either has abandoned it or declined to assert it. (Tijam, et al. vs. Sibonghanoy, et al., No.
L-21450, April 15, 1968, 23 SCRA 29, 35).' (Cited in Sotto vs. Teves, 86 SCRA 154 [1978]).
In the United States the rule is that in a sale of real estate to an alien disqualified to hold title thereto
the vendor divests himself of the title to such real estate and has no recourse against the vendee
Respondent, therefore, must be declared to be the rightful owner of the property.
despite the latter's disability on account of alienage to hold title to such real estate and the vendee may
hold it against the whole world except as against the State. It is only the State that is entitled by In the light of the above considerations, we find the second and third assignments of errors without merit.
proceedings in the nature of office found to have a forfeiture or escheat declared against the vendee Respondent Navata, the titled owner of the property is declared the rightful owner.
who is incapable of holding title to the real estate sold and conveyed to him. Abrams vs. State, 88 Pac.
327; Craig vs. Leslie et al., 4 Law, Ed. 460; 3 Wheat, 563, 589590; Cross vs. Del Valle, 1 Wall, [U.S.] WHEREFORE, the instant appeal is hereby denied. The orders dismissing the complaint and denying the
513; 17 Law. Ed., 515; Governeur vs. Robertson, 11 Wheat, 332, 6 Law. Ed., 488.) motion for reconsideration are affirmed.

However, if the State does not commence such proceedings and in the meantime the alien becomes
naturalized citizen, the State is deemed to have waived its right to escheat the real property and the
title of the alien thereto becomes lawful and valid as of the date of its conveyance or transfer to him.
(Osterman vs. Baldwin, 6 Wall, 116, 18 Law. ed. 730; Manuel vs. Wulff, 152 U.S. 505, 38 Law. ed.
532; Pembroke vs. Houston, 79, SW 470; Fioerella vs. Jones, 259 SW 782. The rule in the United States
that in a sale of real estate to an alien disqualified to hold title thereto, the vendor divests himself of
the title to such real estate and is not permitted to sue for the annulment Of his Contract, is also the
rule under the Civil Code. ... Article 1302 of the old Civil Code provides: ... Persons sui juris cannot,
however, avail themselves of the incapacity of those with whom they contracted; ...
G.R. No. L-11240 December 18, 1957
CONCHITA LIGUEZ, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, MARIA NGO VDA. DE LOPEZ, ET AL., respondents.
The case began upon complaint filed by petitioner-appellant against the widow and heirs of the late
Salvador P. Lopez to recover a parcel of 51.84 hectares of land, situated in barrio Bogac-Linot, of the
municipality of Mati, Province of Davao. Plaintiff averred to be its legal owner, pursuant to a deed of
donation of said land, executed in her favor by the late owner, Salvador P. Lopez, on 18 May 1943. The
defense interposed was that the donation was null and void for having an illicit causa or consideration,
which was the plaintiff's entering into marital relations with Salvador P. Lopez, a married man; and that
the property had been adjudicated to the appellees as heirs of Lopez by the court of First Instance, since
1949.
The Court of Appeals found that the deed of donation was prepared by the Justice of the Peace of Mati,
Davao, before whom it was signed and ratified on the date aforesaid. At the time, the appellant Liguez
was a minor, only 16 years of age. While the deed recites—
That the DONOR, Salvador P. Lopez, for and in the consideration of his love and affection for the said
DONEE, Conchita Liguez, and also for the good and valuable services rendered to the DONOR by the
DONEE, does by these presents, voluntarily give grant and donate to the said donee, etc.
the Court of Appeals found that when the donation was made, Lopez had been living with the parents of
appellant for barely a month; that the donation was made in view of the desire of Salvador P. Lopez, a
man of mature years, to have sexual relations with appellant Conchita Liguez; that Lopez had confessed
to his love for appellant to the instrumental witnesses, with the remark that her parents would not allow
Lopez to live with her unless he first donated the land in question; that after the donation, Conchita
Liguez and Salvador P. Lopez lived together in the house that was built upon the latter's orders, until
Lopez was killed on July 1st, 1943, by some guerrillas who believed him to be pro-Japanese.
It was also ascertained by the Court of Appeals that the donated land originally belonged to the conjugal
partnership of Salvador P. Lopez and his wife, Maria Ngo; that the latter had met and berated Conchita
for living maritally with her husband, sometime during June of 1943; that the widow and children of Lopez
were in possession of the land and made improvements thereon; that the land was assessed in the tax
rolls first in the name of Lopez and later in that of his widow.; and that the deed of donation was never
recorded.
Upon these facts, the Court of Appeals held that the deed of donation was inoperative, and null and void (1) because the
husband, Lopez, had no right to donate conjugal property to the plaintiff appellant; and (2) because the donation was
tainted with illegal cause or consideration, of which donor and donee were participants.
Appellant vigorously contends that the Court of First Instance as well as the Court of Appeals erred in
holding the donation void for having an illicit cause or consideration. It is argued that under Article 1274
of the Civil Code of 1889 (which was the governing law in 1948, when the donation was executed), "in
contracts of pure beneficence the consideration is the liberality of the donor", and that liberality per se
can never be illegal, since it is neither against law or morals or public policy.
The flaw in this argument lies in ignoring that under Article 1274, liberality of the do or is deemed causa in
those contracts that are of "pure" beneficence; that is to say, contracts designed solely and exclusively
to procure the welfare of the beneficiary, without any intent of producing any satisfaction for the donor;
contracts, in other words, in which the idea of self-interest is totally absent on the part of the transferor.
For this very reason, the same Article 1274 provides that in remuneratory contracts, the consideration is
the service or benefit for which the remuneration is given; causa is not liberality in these cases because
the contract or conveyance is not made out of pure beneficence, but "solvendi animo." In consonance
with this view, this Supreme Court in Philippine Long Distance Co. vs. Jeturian * G.R. L-7756, July 30,
1955, like the Supreme Court of Spain in its decision of 16 Feb. 1899, has ruled that bonuses granted to
employees to excite their zeal and efficiency, with consequent benefit for the employer, do not constitute
donation having liberality for a consideration.
Here the facts as found by the Court of Appeals (and which we can not vary) demonstrate that in making
the donation in question, the late Salvador P. Lopez was not moved exclusively by the desire to benefit
appellant Conchita Liguez, but also to secure her cohabiting with him, so that he could gratify his sexual
impulses. This is clear from the confession of Lopez to the witnesses Rodriguez and Ragay, that he was
in love with appellant, but her parents would not agree unless he donated the land in question to her.
Actually, therefore, the donation was but one part of an onerous transaction (at least with appellant's
parents) that must be viewed in its totality. Thus considered, the conveyance was clearly predicated upon
an illicit causa.
Appellant seeks to differentiate between the alleged liberality of Lopez, as causa for the donation in her
favor, and his desire for cohabiting with appellant, as motives that impelled him to make the donation,
and quotes from Manresa and the jurisprudence of this Court on the distinction that must be maintained
between causa and motives (De Jesus vs. Urrutia and Co., 33 Phil. 171). It is well to note, however that
Manresa himself (Vol. 8, pp. 641-642), while maintaining the distinction and upholding the
inoperativeness of the motives of the parties to determine the validity of the contract, expressly excepts
from the rule those contracts that are conditioned upon the attainment of the motives of either party.
The same view is held by the Supreme Court of Spain, in its decisions of February 4, 1941, and December
4, 1946, holding that the motive may be regarded as causa when it predetermines the purpose of the
contract.
In the present case, it is scarcely disputable that Lopez would not have conveyed the property in question
had he known that appellant would refuse to cohabit with him; so that the cohabitation was an implied
condition to the donation, and being unlawful, necessarily tainted the donation itself.
The Court of Appeals rejected the appellant's claim on the basis of the well- known rule "in pari delicto non oritur actio" as
embodied in Article 1306 of 1889 (reproduced in Article 1412 of the new Civil Code):
ART. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the
following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the
contract, or demand the performance of the other's undertaking;
(2) When only one of the contracting parties is at fault, he cannot recover, what he has given by reason of the contract,
or ask for fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what
he has given without any obligation to comply with his promise.
In our opinion, the Court of Appeals erred in applying to the present case the pari delicto rule. First,
because it can not be said that both parties here had equal guilt when we consider that as against the
deceased Salvador P. Lopez, who was a man advanced in years and mature experience, the appellant
was a mere minor, 16 years of age, when the donation was made; that there is no finding made by the
Court of Appeals that she was fully aware of the terms of the bargain entered into by and Lopez and her
parents; that, her acceptance in the deed of donation (which was authorized by Article 626 of the Old
Civil Code) did not necessarily imply knowledge of conditions and terms not set forth therein; and that
the substance of the testimony of the instrumental witnesses is that it was the appellant's parents who
insisted on the donation before allowing her to live with Lopez. These facts are more suggestive of
seduction than of immoral bargaining on the part of appellant. It must not be forgotten that illegality is
not presumed, but must be duly and adequately proved.
In the second place, the rule that parties to an illegal contract, if equally guilty, will not be aided by the
law but will both be left where it finds them, has been interpreted by this Court as barring the party from
pleading the illegality of the bargain either as a cause of action or as a defense. Memo auditor propriam
turpitudinem allegans. Said this Court in Perez vs. Herranz, 7 Phil. 695-696:
 It is unnecessary to determine whether a vessel for which a certificate and license have been
fraudulently obtained incurs forfeiture under these or any other provisions of this act. It is enough for
this case that the statute prohibits such an arrangement as that between the plaintiff and defendant so
as to render illegal both the arrangement itself and all contracts between the parties growing out of it.
It does not, however, follow that the plaintiff can succeed in this action. There are two answers to his
claim as urged in his brief. It is a familiar principle that the courts will not aid either party to enforce
an illegal contract, but will leave them both where it finds them; but where the plaintiff can establish a
cause of action without exposing its illegality, the vice does not affect his right to recover. The American
authorities cited by the plaintiff fully sustain this doctrine. The principle applies equally to a defense.
The law in those islands applicable to the case is found in article 1305 of the Civil Code, shutting out
from relief either of the two guilty parties to an illegal or vicious contract.
In the case at bar the plaintiff could establish prima facie his sole ownership by the bill of sale from
Smith, Bell and Co. and the official registration. The defendant, on his part, might overthrow this title
by proof through a certain subsequent agreement between him and the plaintiff, dated March 16, 1902,
that they had become owners in common of the vessel, 'the agreement not disclosing the illegal motive
for placing the formal title in the plaintiff. Such an ownership is not in itself prohibited, for the United
States courts recognize the equitable ownership of a vessel as against the holder of a legal title, where
the arrangement is not one in fraud of the law. (Weston vs. Penniman, Federal Case 17455; Scudder
vs. Calais Steamboat Company, Federal Case 12566.).
On this proof, the defendant being a part owner of the vessel, would have defeated the action for its
exclusive possession by the plaintiff. The burden would then be cast upon the plaintiff to show the
illegality of the arrangement, which the cases cited he would not be allowed to do.
The situation confronting us is exactly analogous. The appellant seeks recovery of the disputed land on
the strength of a donation regular on its face. To defeat its effect, the appellees must plead and prove
that the same is illegal. But such plea on the part of the Lopez heirs is not receivable, since Lopez, himself,
if living, would be barred from setting up that plea; and his heirs, as his privies and successors in interest,
can have no better rights than Lopez himself.
Appellees, as successors of the late donor, being thus precluded from pleading the defense of immorality
or illegal causa of the donation, the total or partial ineffectiveness of the same must be decided by
different legal principles. In this regard, the Court of Appeals correctly held that Lopez could not donate
the entirety of the property in litigation, to the prejudice of his wife Maria Ngo, because said property
was conjugal in character and the right of the husband to donate community property is strictly limited
by law.
ART. 1409. The conjugal partnership shall also be chargeable with anything which may have been given or promised by
the husband alone to the children born of the marriage in order to obtain employment for them or give then, a profession
or by both spouses by common consent, should they not have stipulated that such expenditures should be borne in
whole or in part by the separate property of one of them.".
ART. 1415. The husband may dispose of the property of the conjugal partnership for the purposes mentioned in Article
1409.)
ART. 1413. In addition to his powers as manager the husband may for a valuable consideration alienate and encumber
the property of the conjugal partnership without the consent of the wife.
The text of the articles makes it plain that the donation made by the husband in contravention of law is
not void in its entirety, but only in so far as it prejudices the interest of the wife. In this regard, as
Manresa points out (Commentaries, 5th Ed., pp. 650-651, 652-653), the law asks no distinction between
gratuitous transfers and conveyances for a consideration.
To determine the prejudice to the widow, it must be shown that the value of her share in the property
donated can not be paid out of the husband's share of the community profits. The requisite data, however,
are not available to us and necessitate a remand of the records to the court of origin that settled the
estate of the late Salvador P. Lopez.
The situation of the children and forced heirs of Lopez approximates that of the widow. As privies of their
parent, they are barred from invoking the illegality of the donation. But their right to a legitime out of his
estate is not thereby affected, since the legitime is granted them by the law itself, over and above the
wishes of the deceased. Hence, the forced heirs are entitled to have the donation set aside in so far as in
officious: i.e., in excess of the portion of free disposal (Civil Code of 1889, Articles 636, 654) computed
as provided in Articles 818 and 819, and bearing in mind that "collationable gifts" under Article 818 should
include gifts made not only in favor of the forced heirs, but even those made in favor of strangers, as
decided by the Supreme Court of Spain in its decisions of 4 May 1899 and 16 June 1902. So that in
computing the legitimes, the value of the property to herein appellant, Conchita Liguez, should be
considered part of the donor's estate. Once again, only the court of origin has the requisite date to
determine whether the donation is inofficious or not.
With regard to the improvements in the land in question, the same should be governed by the rules of
accession and possession in good faith, it being undisputed that the widow and heirs of Lopez were
unaware of the donation in favor of the appellant when the improvements were made.
The appellees, relying on Galion vs. Garayes, 53 Phil. 43, contend that by her failure to appear at the
liquidation proceedings of the estate of Salvador P. Lopez in July 1943, the appellant has forfeited her
right to uphold the donation if the prejudice to the widow Maria Ngo resulting from the donation could be
made good out of the husband's share in the conjugal profits. It is also argued that appellant was guilty
of laches in failing to enforce her rights as donee until 1951. This line of argument overlooks the capital
fact that in 1943, appellant was still a minor of sixteen; and she did not reach the age of majority until
1948. Hence, her action in 1951 was only delayed three years. Nor could she be properly expected to
intervene in the settlement of the estate of Lopez: first, because she was a minor during the great part
of the proceedings; second, because she was not given notice thereof ; and third, because the donation
did not make her a creditor of the estate. As we have ruled in Lopez vs. Olbes, 15 Phil. 547-548:
The prima facie donation inter vivos and its acceptance by the donees having been proved by means
of a public instrument, and the donor having been duly notified of said acceptance, the contract is
perfect and obligatory and it is perfectly in order to demand its fulfillment, unless an exception is proved
which is based on some legal reason opportunely alleged by the donor or her heirs.
So long as the donation in question has not been judicially proved and declared to be null, inefficacious,
or irregular, the land donated is of the absolute ownership of the donees and consequently, does not
form a part of the property of the estate of the deceased Martina Lopez; wherefore the action instituted
demanding compliance with the contract, the delivery by the deforciant of the land donated, or that it
be, prohibited to disturb the right of the donees, should not be considered as incidental to the probate
proceedings aforementioned.
The case of Galion vs. Gayares, supra, is not in point. First, because that case involved a stimulated
transfer that case have no effect, while a donation with illegal causa may produce effects under certain
circumstances where the parties are not of equal guilt; and again, because the transferee in the Galion
case took the property subject to lis pendens notice, that in this case does not exist.
In view of the foregoing, the decisions appealed from are reversed and set aside, and the appellant
Conchita Liguez declared entitled to so much of the donated property as may be found, upon proper
liquidation, not to prejudice the share of the widow Maria Ngo in the conjugal partnership with Salvador
P. Lopez or the legitimes of the forced heirs of the latter. The records are ordered remanded to the court
of origin for further proceedings in accordance with this opinion. Costs against appellees. So ordered.
G.R. No. L-65510 March 9, 1987
TEJA MARKETING AND/OR ANGEL JAUCIAN, petitioner,
vs.
HONORABLE INTERMEDIATE APPELLATE COURT * AND PEDRO N. NALE, respondents.
"'Ex pacto illicito' non oritur actio" (No action arises out of illicit bargain) is the time-honored maxim that
must be applied to the parties in the case at bar. Having entered into an illegal contract, neither can seek
relief from the courts, and each must bear the consequences of his acts." (Lita Enterprises vs. IAC, 129
SCRA 81.)
The factual background of this case is undisputed. The same is narrated by the respondent court in its
now assailed decision, as follows:
On May 9, 1975, the defendant bought from the plaintiff a motorcycle with complete accessories and a
sidecar in the total consideration of P8,000.00 as shown by Invoice No. 144 (Exh. "A"). Out of the total
purchase price the defendant gave a downpayment of P1,700.00 with a promise that he would pay plaintiff
the balance within sixty days. The defendant, however, failed to comply with his promise and so upon his
own request, the period of paying the balance was extended to one year in monthly installments until
January 1976 when he stopped paying anymore. The plaintiff made demands but just the same the
defendant failed to comply with the same thus forcing the plaintiff to consult a lawyer and file this action
for his damage in the amount of P546.21 for attorney's fees and P100.00 for expenses of litigation. The
plaintiff also claims that as of February 20, 1978, the total account of the defendant was already
P2,731.06 as shown in a statement of account (Exhibit. "B"). This amount includes not only the balance
of P1,700.00 but an additional 12% interest per annum on the said balance from January 26, 1976 to
February 27, 1978; a 2% service charge; and P 546.21 representing attorney's fees.
In this particular transaction a chattel mortgage (Exhibit 1) was constituted as a security for the payment
of the balance of the purchase price. It has been the practice of financing firms that whenever there is a
balance of the purchase price the registration papers of the motor vehicle subject of the sale are not
given to the buyer. The records of the LTC show that the motorcycle sold to the defendant was first
mortgaged to the Teja Marketing by Angel Jaucian though the Teja Marketing and Angel Jaucian are one
and the same, because it was made to appear that way only as the defendant had no franchise of his
own and he attached the unit to the plaintiff's MCH Line. The agreement also of the parties here was for
the plaintiff to undertake the yearly registration of the motorcycle with the Land Transportation
Commission. Pursuant to this agreement the defendant on February 22, 1976 gave the plaintiff P90.00,
the P8.00 would be for the mortgage fee and the P82.00 for the registration fee of the motorcycle. The
plaintiff, however failed to register the motorcycle on that year on the ground that the defendant failed
to comply with some requirements such as the payment of the insurance premiums and the bringing of
the motorcycle to the LTC for stenciling, the plaintiff saying that the defendant was hiding the motorcycle
from him. Lastly, the plaintiff explained also that though the ownership of the motorcycle was already
transferred to the defendant the vehicle was still mortgaged with the consent of the defendant to the
Rural Bank of Camaligan for the reason that all motorcycle purchased from the plaintiff on credit was
rediscounted with the bank.
On his part the defendant did not dispute the sale and the outstanding balance of P1,700. 00 still payable
to the plaintiff. The defendant was persuaded to buy from the plaintiff the motorcycle with the side car
because of the condition that the plaintiff would be the one to register every year the motorcycle with
the Land Transportation Commission. In 1976, however, the plaintfff failed to register both the chattel
mortgage and the motorcycle with the LTC notwithstanding the fact that the defendant gave him P90.00
for mortgage fee and registration fee and had the motorcycle insured with La Perla Compana de Seguros
(Exhibit "6") as shown also by the Certificate of cover (Exhibit "3"). Because of this failure of the plaintiff
to comply with his obligation to register the motorcycle the defendant suffered damages when he failed
to claim any insurance indemnity which would amount to no less than P15,000.00 for the more than two
times that the motorcycle figured in accidents aside from the loss of the daily income of P15.00 as
boundary fee beginning October 1976 when the motorcycle was impounded by the LTC for not being
registered.
The defendant disputed the claim of the plaintiff that he was hiding from the plaintiff the motorcycle
resulting in its not being registered. The truth being that the motorcycle was being used for transporting
passengers and it kept on travelling from one place to another. The motor vehicle sold to him was
mortgaged by the plaintiff with the Rural Bank of Camaligan without his consent and knowledge and the
defendant was not even given a copy of the mortgage deed. The defendant claims that it is not true that
the motorcycle was mortgaged because of re-discounting for rediscounting is only true with Rural Banks
and the Central Bank. The defendant puts the blame on the plaintiff for not registering the motorcycle
with the LTC and for not giving him the registration papers inspite of demands made. Finally, the evidence
of the defendant shows that because of the filing of this case he was forced to retain the services of a
lawyer for a fee on not less than P1,000.00.
... it also appears and the Court so finds that defendant purchased the motorcycle in question, particularly
for the purpose of engaging and using the same in the transportation business and for this purpose said
trimobile unit was attached to the plaintiffs transportation line who had the franchise, so much so that in
the registration certificate, the plaintiff appears to be the owner of the unit. Furthermore, it appears to
have been agreed, further between the plaintiff and the defendant, that plaintiff would undertake the
yearly registration of the unit in question with the LTC. Thus, for the registration of the unit for the year
1976, per agreement, the defendant gave to the plaintiff the amount of P82.00 for its registration, as
well as the insurance coverage of the unit.
Eventually, petitioner Teja Marketing and/or Angel Jaucian filed an action for "Sum of Money with
Damages" against private respondent Pedro N. Nale in the City Court of Naga City. The City Court
rendered judgment in favor of petitioner, the dispositive portion of which reads:
WHEREFORE, decision is hereby rendered dismissing the counterclaim and ordering the defendant to
pay plaintiff the sum of P1,700.00 representing the unpaid balance of the purchase price with legal rate
of interest from the date of the filing of the complaint until the same is fully paid; to pay plaintiff the
sum of P546.21 as attorney's fees; to pay plaintiff the sum of P200.00 as expenses of litigation; and to
pay the costs.
On appeal to the Court of First Instance of Camarines Sur, the decision was affirmed in toto. Private
respondent filed a petition for review with the Intermediate Appellate Court and on July 18, 1983 the said
Court promulgated its decision, the pertinent portion of which reads —
However, as the purchase of the motorcycle for operation as a trimobile under the franchise of the
private respondent Jaucian, pursuant to what is commonly known as the "kabit system", without the
prior approval of the Board of Transportation (formerly the Public Service Commission) was an illegal
transaction involving the fictitious registration of the motor vehicle in the name of the private
respondent so that he may traffic with the privileges of his franchise, or certificate of public
convenience, to operate a tricycle service, the parties being in pari delicto, neither of them may bring
an action against the other to enforce their illegal contract [Art. 1412 (a), Civil Code].
WHEREFORE, the decision under review is hereby set aside. The complaint of respondent Teja Marketing
and/or Angel Jaucian, as well as the counterclaim of petitioner Pedro Nale in Civil Case No. 1153 of the
Court of First Instance of Camarines Sur (formerly Civil Case No. 5856 of the City Court of Naga City)
are dismissed. No pronouncement as to costs.
The decision is now before Us on a petition for review, petitioner Teja Marketing and/or Angel Jaucian
presenting a lone assignment of error — whether or not respondent court erred in applying the doctrine
of "pari delicto."
We find the petition devoid of merit.
Unquestionably, the parties herein operated under an arrangement, commonly known as the "kabit
system" whereby a person who has been granted a certificate of public convenience allows another person
who owns motor vehicles to operate under such franchise for a fee. A certificate of public convenience is
a special privilege conferred by the government. Abuse of this privilege by the grantees thereof cannot
be countenanced. The "kabit system" has been Identified as one of the root causes of the prevalence of
graft and corruption in the government transportation offices.
Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized as being
contrary to public policy and, therefore, void and in existent under Article 1409 of the Civil Code. It is a
fundamental principle that the court will not aid either party to enforce an illegal contract, but will leave
both where it finds then. Upon this premise it would be error to accord the parties relief from their
predicament. Article 1412 of the Civil Code denies them such aid. It provides:
Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal
offense, the following rules shall be observed:
1. When the fault is on the part of both contracting parties, neither may recover that he has given
by virtue of the contract, or demand, the performance of the other's undertaking.
The defect of in existence of a contract is permanent and cannot be cured by ratification or by prescription.
The mere lapse of time cannot give efficacy to contracts that are null and void.
WHEREFORE, the petition is hereby dismissed for lack of merit. The assailed decision of the Intermediate
Appellate Court (now the Court of Appeals) is AFFIRMED. No costs.
G.R. No. L-23559 October 4, 1971
AURELIO G. BRIONES, plaintiff-appellee,
vs.
PRIMITIVO P. CAMMAYO, ET AL., defendants-appellants.
On February 22, 1962, Aurelio G. Briones filed an action in the Municipal Court of Manila against Primitivo,
Nicasio, Pedro, Hilario and Artemio, all surnamed Cammayo, to recover from them, jointly and severally,
the amount of P1,500.00, plus damages, attorney's fees and costs of suit. The defendants answered the
complaint with specific denials and the following special defenses and compulsory counterclaim:
By way of — SPECIAL DEFENSES
Defendants allege:
4. Defendants executed the real estate mortgage, Annex "A" of the complaint, as security for the loan of
P1,200.00 given to defendant Primitivo P. Cammayo upon the usurious agreement that defendant pays
to the plaintiff and that the plaintiff reserve and secure, as in fact plaintiff reserved and secured himself,
out of the alleged loan of P1,500.00 as interest the sum of P300.00 for one year;
5. That although the mortgage contract, Annex "A" was executed for securing the payment of P1,500.00
for a period of one year, without interest, the truth and the real fact is that plaintiff delivered to the
defendant Primitivo P. Cammayo only the sum of P1,200.00 and withheld the sum of P300.00 which was
intended as advance interest for one year;
6. That on account of said loan of P1,200.00, defendant Primitivo P. Cammayo paid to the plaintiff during
the period from October 1955 to July 1956 the total sum of P330.00 which plaintiff, illegally and unlawfully
refuse to acknowledge as part payment of the account but as in interest of the said loan for an extension
of another term of one year;
7. That said contract of loan entered into between plaintiff and defendant Primitivo P. Cammayo is a
usurious contract and is contrary to law, morals, good customs, public order or public policy and is,
therefore, in existent and void from the beginning (Art. 1407 Civil Code);
And as — COMPULSORY COUNTERCLAIM
Defendants replead all their allegations in the preceding paragraphs;
8. That plaintiff, by taking and receiving interest in excess of that allowed by law, with full intention to
violate the law, at the expense of the defendants, committed a flagrant violation of Act 2655, otherwise
known as the Usury Law, causing the defendants damages and attorney's fees, the amount of which will
be proven at the trial;
9. That this is the second time this same case is filed before this court, the first having been previously
filed and docketed in this court as Civil Case No. 75845 (Branch VII) and the same was dismissed by the
Court of First Instance of Manila on July 13, 1961 in Civil Case No. 43121 (Branch XVII) and for repeatedly
bringing this case to the court, harassing and persecuting defendants in that manner, defendants have
suffered mental anguish and anxiety for which they should be compensated for moral damages.
On September 7, 1962, Briones filed an unverified reply in which he merely denied the allegations of the
counterclaim. Thereupon the defendants moved for the rendition of a summary judgment on the ground
that, upon the record, there was no genuine issue of fact between the parties. The Municipal Court granted
the motion and rendered judgment sentencing the defendants to pay the plaintiff the sum of P1,500.00,
with interests thereon at the legal rate from February 22, 1962, plus the sum of P150.00 as attorney's
fees. From this judgment, the defendants appealed to the Court of First Instance of Manila where,
according to the appealed decision, "defendant has asked for summary judgment and plaintiff has agreed
to the same." (Record on Appeal p. 21). Having found the motion for summary judgment to be in order,
the court then, proceeded to render judgment as follows:
Judgment is, therefore, rendered, ordering Defendant to pay plaintiff the sum of P1,180.00 with interest
thereon at the legal rate from October 16, 1962 until fully paid. This judgment represents Defendant's
debt of P1,500.00 less usurious interest of P120.00 and the additional sum of P200.00 as attorney's
fees or a total deduction of P320.00. Plaintiff shall pay the costs.
In the present appeal defendants claim that the trial court erred in sentencing them to pay the principal
of the loan notwithstanding its finding that the same was tainted with usury, and erred likewise in not
dismissing the case.
It is not now disputed that the contract of loan in question was tainted with usury. The only questions to
be resolved, therefore, are firstly, whether the creditor is entitled to collect from the debtor the amount
representing the principal obligation; secondly, in the affirmative, if he is entitled to collect interests
thereon, and if so, at what rate.
The Usury Law penalizes any person or corporation who, for any loan or renewal thereof or forbearance,
shall collect or receive a higher rate or greater sum or value than is allowed by law, and provides further
that, in such case, the debtor may recover the whole interest, commissions, premiums, penalties and
surcharges paid or delivered, with costs and attorney's fees, in an appropriate action against his creditor,
within two (2) years after such payment or delivery
Construing the above provision, We held in Go Chioco vs. Martinez, 45 Phil. 256 that even if the contract
of loan is declared usurious the creditor is entitled to collect the money actually loaned and the legal
interest due thereon.
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the
debtor in a usurious contract of loan should pay the creditor the amount which he justly owes him citing
in support of this ruling its previous decisions in Go Chioco Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570,
and Delgado vs. Duque Valgona, 44 Phil. 739.
In all the above cited cases it was recognized and held that under Act 2655 a usurious contract is void;
that the creditor had no right of action to recover the interest in excess of the lawful rate; but that this
did not mean that the debtor may keep the principal received by him as loan — thus unjustly enriching
himself to the damage of the creditor.
Then in Lopez and Javelona vs. El Hogar Filipino, 47 249, We also held that the standing jurisprudence
of this Court on the question under consideration was clearly to the effect that the Usury Law, by its letter
and spirit, did not deprive the lender of his right to recover from the borrower the money actually loaned
to and enjoyed by the latter. This Court went further to say that the Usury Law did not provide for the
forfeiture of the capital in favor of the debtor in usurious contracts, and that while the forfeiture might
appear to be convenient as a drastic measure to eradicate the evil of usury, the legal question involved
should not be resolved on the basis of convenience.
Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-
19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held that when a contract
is found to be tainted with usury "the only right of the respondent (creditor) ... was merely to collect the
amount of the loan, plus interest due thereon."
The view has been expressed, however, that the ruling thus consistently adhered to should now be
abandoned because Article 1957 of the new Civil Code — a subsequent law — provides that contracts and
stipulations, under any cloak or device whatever, intended to circumvent the laws against usury, shall be
void, and that in such cases "the power may recover in accordance with the laws on usury." From this
the conclusion is drawn that the whole contract is void and that, therefore, the creditor has no right to
recover — not even his capital.
The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated, and the view
referred to in the preceding paragraph is adequately answered, in Angel Jose, etc. vs. Chelda Enterprises,
et al. (L-25704, April 24, 1968). On the question of whether a creditor in a usurious contract may or may
not recover the principal of the loan, and, in the affirmative, whether or not he may also recover interest
thereon at the legal rate, We said the following:
The court found that there remained due from defendants an unpaid principal amount of P20,287.50;
that plaintiff charged usurious interests, of which P1,048.15 had actually been deducted in advance by
plaintiff from the loan; that said amount of P1,048.15 should therefore be deducted from the unpaid
principal of P20,287.50, leaving a balance of P19,247.35 still payable to the plaintiff. Said court held
that notwithstanding the usurious interests charged, plaintiff is not barred from collecting the principal
of the loan or its balance of P19,247.35. Accordingly, it stated in the dispositive portion of the decision,
thus:
WHEREFORE, judgment is hereby rendered, ordering the defendant partnership to pay to the plaintiff
the amount of P19,247.35, with legal interest thereon from May 29, 1964 until paid, plus an additional
sum of P2,000.00 as damages for attorney's fee; and, in case the assets of defendant partnership be
insufficient to satisfy this judgment in full, ordering the defendant David Syjueco to pay to the plaintiff
one-half (½) of the unsatisfied portion of this judgment.
With costs against the defendants.
Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest,
may the creditor recover the principal of the loan? (2) Should attorney's fees be awarded in plaintiff's
favor?
Great reliance is made by appellants on Art. 1411 of the New Civil Code which states:
ART. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the
act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against
each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the
disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.
This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what
he has given, and shall not be bound to comply with his promise.
Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule
of pari delicto expressed in Article 1411, supra, applies, so that neither party can bring action against
each other. Said rule, however, appellants add, is modified as to the borrower, by express provision of
the law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the
interest allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot
recover on the contract. So — they continue — the New Civil Code provisions must be upheld as against
the Usury Law, under which a loan with usurious interest is not totally void, because of Article 1961 of
the New Civil Code, that: "Usurious contracts shall be governed by the Usury Law and other special
laws, so far as they are not inconsistent with this Code. (Emphasis ours.) .
We do not agree with such reasoning, Article 1411 of the New Civil Code is not new; it is the same as
Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous
interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with usurious
interest is not totally void only as to the interest.
True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a contract's
nullity proceeds from illegality of the cause or object of said contract.
 However, appellants fail to consider that a contract of loan with usurious interest consists of principal
and accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay
interest thereon.
And said two stipulations are divisible in the sense that the former can still stand without the latter.
Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the
accessory obligations; but the waiver of the latter shall leave the former in force."
The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders
a nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides
in this regard: "In case of a divisible contract, if the illegal terms can be separated from the legal ones,
the latter may be enforced."
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only
as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be
deemed void, since it is the only one that is illegal.
Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6,
any person who for a loan shall have paid a higher rate or greater sum or value than is allowed in said
law, may recover the whole interest paid. The New Civil Code, in Article 1413 states: "Interest paid in
excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon
from the date of payment." Article 1413, in speaking of "interest paid in excess of the interest allowed
by the usury laws" means the whole usurious interest; that is, in a loan of P1,000, with interest of 20%
per annum or P200 for one year, if the borrower pays said P200, the whole P200 is the usurious interest,
not just that part thereof in excess of the interest allowed by law. It is in this case that the law does
not allow division. The whole stipulation as to interest is void, since payment of said interest is illegal.
The only change effected, therefore, by Article 1413, New Civil Code, is not to provide for the recovery
of the interest paid in excess of that allowed by law, which the Usury Law already provided for, but to
add that the same can be recovered "with interest thereon from the date of payment."
The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage
stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes
one without stipulation as to payment of interest. It should not, however, be interpreted to mean
forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender.
Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury.
The principal debt remaining without stipulation for payment of interest can thus be recovered by
judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest from
the date of the demand (in this case from the filing of the complaint). Such interest is not due to
stipulation, for there was none, the same being void. Rather, it is due to the general provision of law
that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of
damages (Art. 2209, Civil Code). The court a quo therefore, did not err in ordering defendants to pay
the principal debt with interest thereon at the legal rate, from the date of filing of the complaint.
In answer to the contention that the forfeiture of the principal of the usurious loan is necessary to punish
the usurer, We say this: Under the Usury Law there is already provision for adequate punishment for the
usurer namely, criminal prosecution where, if convicted, he may be sentence to pay a fine of not less
than P50 nor more than P500, or imprisonment of not less than 30 days nor more than one year, or both,
in the discretion of the court. He may further be sentenced to return the entire sum received as interest,
with subsidiary imprisonment in case of non-payment thereof. lt is, of course, to be assumed that this
last penalty may be imposed only if the return of the entire sum received as interest had not yet been
the subject of judgment in a civil action involving the usurious contract of load.
In arriving at the above conclusion We also considered our decision in Mulet vs. The People of the
Philippines (73 Phil. p. 60), but found that the same does not apply to the present case. The facts therein
involved were as follows:
On July 25, 1929, Alejandra Rubillos and Espectacion Rubillos secured from petitioner Miguel Mulet a
loan of P550, payable within 5 years at 30 per cent interest per annum. In the deed of mortgage
executed by the Rubillos as a security; the sum of P1,375 was made to appear as the capital of the
loan. This amount obviously represented the actual loan of P550 and the total interest of P825 computed
at 30 per cent per annum for 5 years. Within four years of following the execution of the mortgage, the
debtors made partial payments aggregating P278.27, on account of interest. Thereafter, the debtors
paid the whole capital of P550, due to petitioner's promise to condone the unpaid interest upon payment
of such capital. But to their surprise, petitioner informed them that they were still indebted in the sum
of P546.73 which represented the balance of the usurious interest. And in consideration of this amount,
petitioner pressed upon the debtors to execute in October, 1933, in his favor, a deed of sale with pacto
de retro of a parcel of land, in substitution of the original mortgage which was cancelled. From the date
of the execution of the new deed up to 1936, petitioner received, as his share of the products of the
land, the total sum of P480. Prosecuted on November 18, 1936, for the violation of the Usury Law,
petitioner was convicted by the trial court, and on appeal, the judgment was affirmed by the Court of
Appeals. The instant petition for certiorari is directed at that portion of the decision of the appellate
court ordering petitioner to return to the offended parties the sum of P373.27, representing interests
received by him in excess of that allowed by law.
It was Mulet's claim that, as the amount of P373.27 had been paid more than two years prior to the filing
of the complaint for usury against him, its return could no longer be ordered in accordance with the
prescriptive period provided therefor in Section 6 of the Usury Law. Said amount was made up of the
usurious interest amounting to P278.27 paid to Mulet, in cash, and the sum of P480.00 paid to him in
kind, from the total of which two amounts 14% interest allowed by law — amounting to P385.85 — was
deducted. Our decision was that Mulet should return the amount of P480.00 which represented the value
of the produce of the land sold to him under pacto de retro which, with the unpaid balance of the usurious
interest, was the consideration of the transaction — meaning the pacto de retro sale. This Court then
said:
... . This last amount is not usurious interest on the capital of the loan but the value of the produce of
the land sold to petitioner under pacto de retro with the unpaid balance of the usurious interest
(P546.73) as the consideration of the transaction. This consideration, because contrary to law, is illicit,
and the contract which results therefrom, null and void. (Art. 1275, Civil Code). And, under the
provisions of article 1305, in connection with article 1303, of the Civil Code, when the nullity of a
contract arises from the illegality of the consideration which in itself constitutes a felony, the guilty
party shall be subject to criminal proceeding while the innocent party may recover whatever he has
given, including the fruits thereof. (emphasis supplied).
It is clear, therefore, that in the Mulet case, the principal of the obligation had been fully paid by the
debtor to the creditor; that the latter was not sentenced to pay it back to the former, and that what this
Court declared recoverable by the debtor were only the usurious interest paid as well as the fruits of the
property sold under pacto de retro.
IN VIEW OF THE FOREGOING, the decision, appealed from is modified in the sense that appellee may
recover from appellant the principal of the loan (P1,180.00) only, with interest thereon at the legal rate
of 6% per annum from the date of the filing of the complaint. With costs.
G.R. No. 226213, September 27, 2017
G. HOLDINGS, INC., Petitioner, v. CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC.
(CEPALCO) AND FERROCHROME PHILIPPINES, INC., Respondents.
From March 1990, Cagayan Electric Power and Light Company, Inc. (CEPALCO), which operates a light
and power distribution system in Cagayan de Oro City, supplied power to the ferro-alloy smelting plant
of Ferrochrome Philippines, Inc. 6 (FPI) at the PfflVIDEC Industrial Estate in Tagoloan, Misamis
Oriental.7 When FPI defaulted in the payment of its electric power bills amounting to P16,301,588.06 as
of March 1996, CEPALCO demanded payment thereof. 8 FPI paid CEPALCO on three separate dates the
total amount of P13,161,916.44, leaving a balance of P2,899,859.15. 9 FPI failed again to pay its
subsequent electricity bills, thereby increasing its unpaid electric bills to P29,509,240.89 as of May
1996.10 For failure to pay FPI's outstanding bills, CEPALCO disconnected the electric power supply to FPI
in May 1996.11 After sending a statement of account with P30,147,835.65 unpaid bills plus 2% monthly
surcharge, CEPALCO filed a collection suit (Civil Case No. 65789) against FPI in July 1996 before the
Regional Trial Court of Pasig City, Branch 264 (RTC-Pasig).12
RTC-Pasig rendered a Decision (Partial Summary Judgment) dated April 22, 1999 in favor of CEPALCO,
ordering FPI to pay CEPALCO P25,608,579.98.13 On January 19, 2004, RTC-Pasig rendered its
Decision14 in favor of CEPALCO, affirming the P25,608,579.98 award for basic cost of energy consumed
(given in the Partial Summary Judgment), and ordering the payment of P2,364,703.80 for contracted
energy or energy differential and surcharges, PHIVIDEC royalty and franchise tax. 15
On February 27, 2004, FPI appealed the Decision of the RTC-Pasig to the CA (CA G.R. CV No. 86228
[CEPALCO collection case]).16
17
CEPALCO moved for execution pending appeal, which was granted by RTC-Pasig. The writ of execution
was issued on March 30, 2004.18 FPI filed before the CA a certiorari petition with prayer for temporary
restraining order (TRO) and preliminary injunction (CA G.R. SP No. 83224 [CEPALCO execution case]).19
In the meantime, Sheriff Renato B. Baron (Baron) of RTC-Pasig issued notices of levy upon personal and
real properties dated April 1 and 2, 2004 and notices of sale on execution of personal and real properties
dated April 1, 2004.20
In CA G.R. SP No. 83224 (CEPALCO execution case), the CA issued an initial TRO in its Resolution dated
April 6, 2004 and then a writ of preliminary injunction in its Resolution dated June 11, 2004, enjoining
the implementation of the Order granting execution pending appeal. 21
On April 5, 2004, GHI filed a case (Civil Case No. 2004-111) against Sheriff Baron, CEPALCO and FPI for
Nullification of Sheriffs Levy on Execution and Auction Sale, Recovery of Possession of Properties and
Damages before the RTC-CDO.22 GHI claimed that the levied ferro-alloy smelting facility, properties and
equipment are owned by it as evidenced by a Deed of Assignment 23 dated March 11, 2003 (the Deed of
Assignment) executed by FPI in consideration of P50,366,926.71. 24
In the unilateral Deed of Assignment, FPI, as the assignor, through its stockholders and Board of
Directors' duly authorized representative and Acting President, Juanito E. Figueroa, in consideration of
obligations amounting to P50,366,926.71 as of December 31, 2002, inclusive of the interest charges,
assigned, transferred, ceded and conveyed absolutely in favor of GHI, as the assignee, "all of the
[assignor's! properties, equipment and facilities, located in Phividec Industrial Estate,
Tagoloan, Misamis Oriental and more particularly described in the attached schedules as Annexes
'I', 'II', 'III', 'IV['] and 'V'."25
Prior to the Deed of Assignment, FPI sent to GFII a letter 26 dated February 28, 2003 wherein the manner
by which the obligation of FPI amounting to P50,366,926.71 (as of December 31, 2002) would be
addressed per their earlier discussions was confirmed, to wit:
1. The obligation of FPI to G. Holdings amounting to P50,366,926.71 (as of December 31,
2002) shall be covered by assignment of certain FPI assets sufficient to cover the obligations
even at today's depressed metal prices.
2. The right to the work process owned by FPI shall be made available to G. Holdings under the
following options[:]
Option A
As soon as metal prices and major costs justify, FPI shall at its capital and expense operate the
plant including the assets transferred to G. Holdings. Revenue shall be shared with G.
Holdings at the rate of 20% of EBITDA (Earnings Before Interest[,] Taxes,
Depreciation and Amortization.)
A minimum of P10.0 million annually shall be shared by G. Holdings. The [c]ost of
maintenance and upkeep of assets shall be covered by FPI.
Option B
[G.] Holdings shall be the entity to operate the plant and business with its capital and
expense.
As owner of the rights to the work process, FPI shall be entitled to a share of 10% in
the EBITDA with a minimum of P7.5 million per year.
This arrangement shall be for a minimum of 8 years after which G. Holdings can acquire the
rights for an amount equal to P36.0 M.
All financial requirements shall be shouldered by G. Holdings x x x.
3. The option shall be decided by G. Holdings within a three[-]year period beyond which the
choice shall be made by FPI within a 3[-] year period. The cycle will be repeated if the plant
has not operated for six years from assignment.27
The letter bears the conformity of GHI.28
CEPALCO filed its answer with compulsory counterclaim and cross-claim.29 In its counterclaim, CEPALCO
assailed the validity of the Deed of Assignment executed by FPI in favor of GHI in payment of alleged
advances from GHI (sister company of FPI) from 1998 to 2002 amounting to £50,366,926.71, inclusive
of interest, as of December 2002. CEPALCO contended that the Deed of Assignment was null and void for
being absolutely simulated and, as a dacion en pago, it did not bear the conformity of the creditor. GHI
and FPI have substantially the same directors. The Deed of Assignment was in fraud of FPFs creditors as
it was made after the RTC-Pasig had already rendered a partial judgment in favor of CEPALCO and was,
therefore, rescissible.30
In the meantime, the CA rendered its Decision dated August 14, 2008 in CA G.R. CV No. 86228 (CEPALCO
collection case) granting FPFs appeal in part and the RTC-Pasig Decision was affirmed but modified by
deleting the award of the PHIVIDEC royalty of 1%. 31 FPI elevated the CA Decision to the Court and was
docketed as G.R. No. 185892.32 In April 2010, the Court denied FPI's petition in its Resolution dated April
21, 2010 for failure of FPI to sufficiently show that the CA committed any reversible error in the challenged
decision and resolution to warrant the Court's discretionary appellate jurisdiction. 33
In CA G.R. SP No. 83224 (CEPALCO execution case), the CA dismissed FPI's petition for lack of merit and
affirmed the assailed orders of the RTC-Pasig, and FPI's motion for reconsideration was likewise denied. 34
The RTC-CDO Ruling
Going back to the RTC-CDO case (Civil Case No. 2004-111), the origin of the present case, a
Decision35 dated July 22, 2013 was rendered in favor of CEPALCO and against GHI: (1) rescinding the
Deed of Assignment; (2) ordering GHI to pay CEPALCO actual and exemplary damages as well as
attorney's fees; and (3) lifting the writ of preliminary injunction.36
The rescission of the Deed of Assignment by the RTC-CDO was anchored on the presence of several
badges of fraud, to wit: (a) the consideration of the assignment was P50 million while the value of the
assets of FPI amounted to P280 million; (b) the existence of the "Outokumpo" work process of smelting
(which was allegedly more valuable than the smelting facility subject of the assignment and without which
the smelting facility could not be operated), as well as its value, were not sufficiently established; (c) the
assignment of all or substantially all of FPI's assets was made when FPI was suffering financially and after
the rendition of the partial judgment in favor of CEPALCO; and (d) GHI did not take exclusive possession
of the assets assigned to it.37
The dispositive portion of the RTC-CDO Decision states:
WHEREFORE, judgment is hereby rendered in favor of defendant CEPALCO against G Holdings Inc. as
follows:
1. Rescinding the Deed of Assignment dated March 11, 2003 between G Holdings Inc. in favor of
Ferrochrome Philippines Inc.;
2. Ordering G [HJoldings Inc. to pay defendant CEPALCO the following:
2.a Actual damages in the amount of Php256,587.48;
2.b Exemplary damages in the amount of Php1,000,000.00; and
2.c Attorney's Fees in the amount of Php500,000.00
3. Lifting the Writ of Preliminary Injunction and finding G. [H]oldings Inc. and Oriental Assurance
Corporation liable on the Phpl Million Preliminary Injunction Bond to partially satisfy the
foregoing sums.
4. Costs against G Holdings, Inc.
GHI appealed the RTC-CDO Decision to the CA.39 The appeal was docketed as CA-G.R. CV No. 03366-
MIN.40
The CA Ruling
In its Decision41 dated April 14, 2016, the CA denied the appeal and affirmed the RTC-CDO Decision. The
CA ruled that the RTC-CDO correctly found the existence of fraud or deliberate intent on the part of FPI
and GHI to defraud CEPALCO. The agreement between GHI and FPI where GHI was given the option to
operate the smelting facility using the alleged "Outokumpo" work process which FPI retained, subject to
payment of an agreed amount to FPI as owner of the rights of the work process, was designed to keep
the smelting facility intact and insulated against execution in satisfaction of CEPALCO's judgment credit.
The CA also ruled that the Deed of Assignment was absolutely simulated and having been executed after
the Partial Summary Judgment rendered by the RTC-Pasig, it was done in anticipation of the adverse final
outcome of the RTC-Pasig case. Regarding GHI's contention that CEPALCO failed to pay the filing fees,
the CA noted that CEPALCO filed its Answer with Compulsory Counterclaim and Cross-claim on April 26,
2004. At that time, the CA reasoned that CEPALCO was not yet liable to pay filing fees. Under Rule 141,
Section 7, as amended by A.M. No. 04-2-04-SC, docket fees were required to be paid for compulsory
counterclaims and cross-claims effective only on August 16, 2004.42
The dispositive portion of the CA Decision states:
WHEREFORE, the instant appeal is DENIED. The Decision dated 22 July 2013 of the Regional Trial
Court, 10th Judicial Region, Branch 38, Cagayan de Oro City, in Civil Case No. 2004-111 is
hereby AFFIRMED.
GHI filed a motion for reconsideration, which was denied in a Resolution 44 dated July 25, 2016.
Hence, this Petition. CEPALCO filed its Comment45 dated May 12, 2017.
Issues
Whether the CA erred in not dismissing CEPALCO's permissive counterclaim for non-payment of docket
fees.
Whether the CA erred in holding that the Deed of Assignment was absolutely simulated.
Whether the CA erred in rescinding the Deed of Assignment absent an independent action for rescission.
Whether the CA erred in holding that the Deed of Assignment was done in fraud of creditors and badges
of fraud accompanied its execution.
Whether GHI is entitled to its claims for damages.46
The Court's Ruling
Filing Fees of CEPALCO's Counterclaim
In justifying the non-payment of filing fees on the counterclaim of CEPALCO, the CA ruled:
As for the absence of filing fees, it is noteworthy that CEPALCO filed its Answer with Compulsory
Counterclaim and Cross-Claim on 26 April 2004. At that time, CEPALCO was not yet liable to pay filing
fees. The Supreme Court stressed, however, that effective 16 August 2004 under Rule 141, Section 7,
as amended by A.M. No. 04-2-04-SC, docket fees are required to be paid for compulsory counterclaims
and cross-claims.47
As to the cause of action of GHI in its Complaint in Civil Case No. 2004-111 (RTC-CDO case), the caption
states that it is for: "FOR INJUNCTION AND NULLIFICATION OF SHERIFF'S LEVY ON EXECUTION AND
AUCTION SALE; RECOVERY OF POSSESSION OF PROPERTIES; AND DAMAGES, WITH PRAYER FOR
ISSUANCE OF TEMPORARY RESTRAINING ORDER AND WRIT OF PRELIMINARY INJUNCTION."48 In its
second cause of action, GHI alleges that it is "entitled to the immediate return and restitution of said
[transportation and] mobile equipment." 49 In the Complaint's prayer, GHI seeks the return of the
possession of such properties to GHI, "the rightful owner thereof."50 As basis of its claim of ownership,
GHI alleges in the Complaint that:
x x x The smelter facility/properties subject of sheriffs Notice of Levy Upon Personal Property and Notice
of Levy Upon Real Property are owned by GHI, having acquired the same through a Deed of Assignment
of March 11, 2003 executed by FPI in favor of GHI, in consideration of x x x [P]50,366,926.71 x x x
paid by GHI. x x x51
In light of the foregoing, CEPALCO's counterclaim and prayer for rescission of the Deed of Assignment
can only be viewed, as it is indeed, a compulsory counterclaim because it "arises out of or is connected
with the transaction or occurrence constituting the subject matter of the opposing party's claim and does
not require for its adjudication the presence of third parties of whom the court cannot acquire
jurisdiction."52 Being a compulsory counterclaim, the CA was correct when it ruled that as of the filing of
CEPALCO's Answer with Compulsory Counterclaim and Cross-Claim on April 26, 2004, it was not liable to
pay filing fees on its compulsory counterclaim. Thus, on the first issue, the CA committed no reversible
error when it did not order the dismissal of CEPALCO's counterclaim, which is compulsory, for non-
payment of docket fees.
Efficacy of the Deed of Assignment
Since the second, third and fourth issues concern the legal effect or efficacy, if any, of the Deed of
Assignment between GHI and FPI, they will be discussed together. It is noted, however, that the legality
or efficacy of the Deed of Assignment is attacked in the second issue as being absolutely simulated, while,
in the third and fourth issues, it is claimed to be rescissible for having been undertaken in fraud of
creditors, given the presence of badges of fraud in its execution.
Under the Civil Code, there are four defective contracts, namely: (1) rescissible contracts; (2) voidable
contracts; (3) unenforceable contracts; and (4) void or inexistent contracts. However, it has been opined
that, strictly speaking, only the voidable and unenforceable contracts are defective contracts and are the
only ones susceptible of ratification unlike the rescissible ones which suffer from no defect and the void
or inexistent contracts which do not exist and are absolute nullity. 53 Thus, the four may be more
appropriately categorized as species or forms of the inefficacy of contracts.54
Since the Deed of Assignment is being questioned for being both rescissible and, at the same time, an
absolute simulation, it may be apropos to compare rescissible contracts with void or inexistent contracts.
Rescission has been defined as a remedy to make ineffective a contract validly entered into and which is
obligatory under normal conditions by reason of external causes resulting in a pecuniary prejudice to one
of the contracting parties or their creditors. 55 Rescission, which is a specie or form of the inefficacy of
contracts and operates by law and not through the will of the parties, requires the following: (1) a contract
initially valid and (2) a lesion or pecuniary prejudice to someone. 56
Under Article 1381 of the Civil Code, the following contracts are rescissible: (1) those which are entered
into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the
value of the things which are the object thereof; (2) those agreed upon in representation of absentees,
if the latter suffer the lesion stated in the preceding number; (3) those undertaken in fraud of creditors
when the latter cannot in any manner collect the claims due them; (4) those which refer to things under
litigation if they have been entered into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority; and (5) all other contracts specially declared by law to be
subject to rescission.
It is further provided under Article 1383 that the action for rescission is a subsidiary one, and cannot thus
be instituted except when the party suffering damage has no other legal means to obtain reparation for
the same.
On the other hand, void or inexistent contracts are those which are ipso jure prevented from producing
their effects and are considered as inexistent from the very beginning because of certain imperfections. 57
Under Article 1409 of the Civil Code, the following contracts are inexistent and void from the beginning:
(1) those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy; (2) those which are absolutely simulated or fictitious; (3) those whose cause or object did not
exist at the time of the transaction; (4) those whose object is outside the commerce of men; (5) those
which contemplate an impossible service; (6) those where the intention of the parties relative to the
principal object of the contract cannot be ascertained; and (7) those expressly prohibited or declared void
by law.
These contracts cannot be ratified and the right to set up the defense of illegality cannot be
waived.58 Further, the action or defense for the declaration of the inexistence of a contract does not
prescribe.
Rescission and nullity can be distinguished in the following manner: (a) by reason of the basis — rescission
is based on prejudice, while nullity is based on a vice or defect of one of the essential elements of a
contract; (2) by reason of purpose — rescission is a reparation of damages, while nullity is a sanction;
(3) by reason of effects — rescission affects private interest while nullity affects public interest; (4) by
reason of nature of action — rescission is subsidiary while nullity is a principal action; (5) by reason of
the party who can bring action — rescission can be brought by a third person while nullity can only be
brought by a party; and (6) by reason of susceptibility to ratification — rescissible contracts need not be
ratified while void contracts cannot be ratified.59
They can likewise be distinguished as follows: (1) as to defect: In rescissible contracts, there is damage
or injury either to one of the contracting parties or to third persons; while in void or inexistent contracts,
one or some of the essential requisites of a valid contract are lacking in fact or in law; (2) As to effect:
The first are considered valid and enforceable until they are rescinded by a competent court; while the
latter do not, as a general rule, produce any legal effect; (3) As to prescriptibility of action or defense:
In the first, the action for rescission may prescribe; while in the latter, the action for declaration of nullity
or inexistence or the defense of nullity or inexistence does not prescribe; (4) As to susceptibility of
ratification: The first are not susceptible of ratification, but are susceptible of convalidation; while the
latter are not susceptible of ratification; (5) As to who may assail contracts: The first may be assailed not
only by a contracting party but even by a third person who is prejudiced or damaged by the contract;
while the latter may be assailed not only by a contracting party but even by a third party whose interest
is directly affected; (6) As to how contracts may be assailed: the first may be assailed directly, and not
collaterally; while the latter may be assailed directly or collaterally. 60
The enumerations and distinctions above indicate that rescissible contracts and void or inexistent
contracts belong to two mutually exclusive groups. A void or inexistent contract cannot at the same time
be a rescissible contract, and vice versa. The latter, being valid and until rescinded, is efficacious while
the former is invalid. There is, however, a distinction between inexistent contracts and void ones as to
their effects. Inexistent contracts produce no legal effect whatsoever in accordance with the principle
"quod nullum est nullum producit effectum"61 In case of void contracts where the nullity proceeds from
the illegality of the cause of object, when executed (and not merely executory) they have the effect of
barring any action by the guilty to recover what he has already given under the contract. 62
The RTC-CDO ruled the Deed of Assignment as a rescissible contract and ordered its rescission. However,
the CA, while affirming the RTC-CDO Decision, stated that it "agree[d] with the RTC[-CDO] that the Deed
of Assignment was absolutely simulated"63 and, at the same time, noted that "the RTC-CDO correctly
found the existence of fraud or deliberate intent on the part of FPI and GHI to defraud
CEPALCO."64 Unfortunately, however, and contrary to what the CA declared, nowhere is it ruled in the
RTC-CDO Decision that the Deed of Assignment was absolutely simulated.
Given a seemingly conflicting finding or ruling by the RTC-CDO and the CA as to the classification of the
Deed of Assignment — whether rescissible or inexistent, it behooves the Court to resolve the conflict.
Under Article 1345 of the Civil Code, simulation of a contract may be absolute, when the parties do not
intend to be bound at all, or relative, when the parties conceal their true agreement. The former is known
as contracto simulado while the latter is known as contracto disimulado.65 An absolutely simulated or
fictitious contract is void while a relatively simulated contract when it does not prejudice a third person
and is not intended for any purpose contrary to law, morals, good customs, public order or public policy
binds the parties to their real agreement.66
In Vda. de Rodriguez v. Rodriguez,67 the Court, speaking through the renowned civilist, Justice J.B.L.
Reyes, stated that:
x x x the characteristic of simulation is the fact that the apparent contract is not really desired or
intended to produce legal effects or in any way alter the juridical situation of the parties. Thus, where
a person, in order to place his property beyond the reach of his creditors, simulates a transfer of it to
another, he does not really intend to divest himself of his title and control of the property; hence, the
deed of transfer is but a sham. x x x68
The Court, in Heirs of Spouses Intac v. CA,69 reiterated that:
In absolute simulation, there is a colorable contract but it has no substance as the parties have no
intention to be bound by it. "The main characteristic of an absolute simulation is that the apparent
contract is not really desired or intended to produce legal effect or in any way alter the juridical situation
of the parties." "As a result, an absolutely simulated or fictitious contract is void, and the parties may
recover from each other what they may have given under the contract." 70
In the Deed of Assignment, did FPI intend to divest itself of its title and control of the properties assigned
therein?
The lack of intention on the part of FPI to divest its ownership and control of "all of [its] properties,
equipment and facilities, located in Phividec Industrial Estate, Tagoloan, Misamis Oriental" 71 — in spite of
the wordings in the Deed of Assignment that FPI "assigned, transferred, ceded and conveyed [them] x x WHEREFORE, the Petition is hereby DENIED for lack of merit. The Court of Appeals' Decision dated
x absolutely in favor of [GHI]"72 — is evident from the letter dated February 28, 2003 which April 14, 2016 and Resolution dated July 25, 2016 in CA-G.R. CV No. 03366-MIN as well as the Decision
reveals the true intention of FPI and GHI. dated July 22, 2013 of the Regional Trial Court of Cagayan de Oro City, Branch 38 in Civil Case No. 2004-
111 are hereby AFFIRMED with MODIFICATIONS. The Deed of Assignment dated March 11, 2003
In the letter dated February 28, 2003, it is there provided that the right to the work process, otherwise executed by respondent Ferrochrome Philippines, Inc. in favor of petitioner G. Holdings, Inc. is declared
known as "Outokumpo," was to be retained by FPI and would only be made available to GHI under two inexistent for being absolutely simulated; the complaint of petitioner G. Holdings, Inc. is dismissed for
options. One option even gave FPI the option to operate the assigned assets with the obligation to pay lack of cause of action; and pursuant to Nacar v. Gallery Frames,79 the total amount awarded in the RTC-
GHI a guaranteed revenue. While GHI was given the first crack to choose which of the two options to CDO Decision shall earn 6% interest per year from the date of finality of this Decision until fully paid.
take, such chosen option would only last for three years, and subsequently, FPI would make the choice
and the option chosen by FPI would last for the next three years. The cycle would then be repeated if the
ferro-alloy plant would not be operated for six years from assignment. 73 What is evident, therefore, in
the delineation of the different options available to FPI and GHI in the settlement of FPI's obligations to
the latter is that FPI did not intend to really assign its assets "absolutely" to GHI. Stated differently, this
letter belies the wordings of the Deed of Assignment that, it should be emphasized, was executed a mere
11 days after the letter, that is, on March 11, 2003.

That there was no intention to absolutely assign to GHI all of FPI's assets was confirmed by the finding
of the RTC-CDO that, according to FPI's Acting President, Juanito E. Figueroa, "GHI cannot operate the
[equipment, machinery and smelting facilities] without the patented 'Outokumpo' process and GHI has
not been operating the same."74 Moreover, the equipment and machinery remain physically in the plant
premises, slowly depreciating with the passage of time, and, worse, there also appears to be no effective
delivery as the premises on which these are located remain under the control of FPI which continues to
employ the security and skeletal personnel in the plant premises. 75

Thus, in executing the Deed of Assignment, FPI's intention was not to transfer absolutely the assigned
assets (admittedly valued at about P280 Million 76) to GHI in payment of FPI's obligations to GHI
amounting to P50,366,926.71.77 FPI, as shown above, did not really intend to divest itself of its title and
control of the assigned properties. FPI's real intention was, borrowing the words of Justice J.B.L Reyes
in Rodriguez, to place them beyond the reach of its creditor CEPALCO. This was astutely observed by the
CA Decision, viz.:
x x x The Deed of Assignment was executed while Civil Case No. 65789 was already pending with the
RTC-Pasig and after the Partial Summary Judgment was rendered on 22 April 1999. In anticipation of
the adverse final outcome of Civil Case No. 65789 as promulgated in the 19 January 2004 Decision of
the RTC-Pasig, GHI and FPI executed the Deed of Assignment. Hence, the presumption of fraud set in
by operation of the law against the sister companies, FPI, then already the judgment debtor, and GHI.78

As to the presence of badges of fraud, which the RTC-CDO found to have existed and affirmed by the CA,
they do, in fact, confirm the intention of FPI to defraud CEPALCO. But these findings do not thereby
render as rescissible the Deed of Assignment under Article 1381(3). Rather, they fortify the finding that
the Deed of Assignment was "not really desired or intended to produce legal effects or in any way alter
the juridical situation of the parties" or, put differently, that the Deed of Assignment was a sham, or
a contracto simulado.

Thus, given the foregoing, the Deed of Assignment is declared inexistent for being absolutely simulated
or fictitious. Accordingly, the CA correctly ruled that the Deed of Assignment was absolutely simulated,
although it was in error in affirming the rescission ordered by the RTC-CDO because, as explained above,
rescissible contracts and void or inexistent contracts belong to two mutually exclusive groups. This error,
however, does not justify the granting of the Petition.

Entitlement to Damages

The Court's declaration of the inexistence of the Deed of Assignment renders the resolution of the fifth
issue — on GHI's entitlement to damages — superfluous. Instead, the dismissal of its complaint for lack
of cause of action is warranted.