G.R. No. L-35702 May 29, 1973

DOMINGO D. RUBIAS, plaintiff-appellant, vs.ISAIAS BATILLER, defendant-appellee.

Gregorio M. Rubias for plaintiff-appellant.

Vicente R. Acsay for defendant-appellee.

TEEHANKEE, J.:

In this appeal certified by the Court of Appeals to this Court as involving purely legal questions, we affirm the dismissal order rendered by the Iloilo court of first instance after pre-trial and submittal of the pertinent documentary exhibits.

Such dismissal was proper, plaintiff having no cause of action, since it was duly established in the record that the application for registration of the land in question filed by Francisco Militante, plaintiff's vendor and predecessor interest, had been dismissed by decision of 1952 of the land registration court as 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.

As late as 1964, the Iloilo court of first instance had in another case of ejectment likewise upheld by final judgment defendant's "better right to possess the land in question . having been in the actual possession thereof under a claim of title many years before Francisco Militante sold the land to the plaintiff."

Furthermore, even assuming that Militante had anything to sell, the deed of sale executed in 1956 by him in favor of plaintiff at a time when plaintiff was concededly his counsel of record in the land registration case involving the very land in dispute (ultimately decided adversely against Militante by the Court of Appeals' 1958 judgment affirming the lower court's dismissal of Militante's application for registration) was properly declared inexistent and void by the lower court, as decreed by Article 1409 in relation to Article 1491 of the Civil Code.

The appellate court, in its resolution of certification of 25 July 1972, gave the following backgrounder of the appeal at bar:

On August 31, 1964, plaintiff Domingo D. Rubias, a lawyer, filed a suit to recover the ownership and possession of certain portions of lot under Psu-99791 located in Barrio General Luna, Barotac Viejo, Iloilo which he bought from his father-in-law, Francisco Militante in 1956 against its present occupant 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 answer with counter-claim defendant claims the complaint of the plaintiff does not state a cause of action, the truth of the matter being that he and his predecessors-in-interest have always been in actual, open and continuous possession since time immemorial under claim of ownership of the portions 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. ...

On December 9, 1964, the trial court issued a pre-trial order, after a pre-trial conference between the parties and their counsel which order reads as follows..

'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. Acsay.

A. During the pre-trial conference, the parties have agreed that the following facts are attendant in this case and that they will no longer introduced any evidence, testimonial or documentary to prove them:

1. That Francisco Militante claimed ownership of a parcel of land located in the Barrio of General Luna, municipality of Barotac Viejo province of Iloilo, which he caused to be surveyed on July 18-31, 1934, whereby he was issued a plan Psu-99791 (Exhibit "B"). (The land claimed contained an area of 171:3561 hectares.)

2. Before the war with Japan, Francisco Militante filed with the Court of First Instance of Iloilo an 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, during the war with Japan, the record of the case was lost before it was heard, so after the war Francisco Militante petitioned this court to reconstitute the record of the case. The record was 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 14, 1952, and after the trial this court dismissed the application for registration. The appellant, Francisco Militante, appealed from the decision of this Court to the Court of Appeals where the case was docketed as CA-GR No. 13497-R..

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-99791 (Exh. "A"). The sale was duly recorded in the Office of the Register of Deeds for the province of Iloilo as Entry No. 13609 on July 11, 1960 (Exh. "A-1").

(NOTE: As per deed of sale, Exh. A, what Militante purportedly sold to plaintiff-appellant, his son-in-law, for the sum of P2,000.00 was "a parcel of untitled land having an area Of 144.9072 hectares ... surveyed under Psu 99791 ... (and) subject to the exclusions made by me, under (case) CA-i3497, Land Registration Case No. R-695, G.L.R.O. No. 54852, Court of First Instance of the province of Iloilo. These exclusions referred to portions of the original area of over 171 hectares originally claimed by Militante as applicant, but which he expressly recognized during the trial to 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 made of record in Exh. A, which is the Court of Appeals' decision of 22 September 1958 confirming the land registration court's dismissal of Militante's application for registration.)

4. On September 22,1958 the Court of appeals in CA-G.R. No. 13497-R promulgated its judgment confirming the decision of this Court in Land Case No. R-695, GLRO Rec. No. 54852 which dismissed the application for Registration filed by Francisco Militante (Exh. "I").

5. Domingo Rubias declared the land described in Exh. 'B' for taxation purposes under Tax Dec. No. 8585 (Exh. "C") for 1957; Tax Dec. Nos. 9533 (Exh. "C-1") and 10019 (Exh. "C-3")for the year 1961; Tax Dec. No. 9868 (Exh. "C-2") for the year 1964, paying the land taxes under Tax Dec. No. 8585 and 9533 (Exh. "D", "D-1", "G-6").

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-86 (Exh. "E-1") for 1948; under Tax Dec. No. 7122 (Exh. "2"), and paid the land taxes for 1940 (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").

7. Tax Declaration No. 2434 in the name of Liberato Demontaño for the land described therein (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%) and 1959 (Exh. "H").

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 (Exh. "2-A" Tax No. 8583 (Exh. "2") was revised by Tax Dec. No. 9498 in the name of the defendant (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:

xxx xxx xxx

(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: .

xxx xxx xxx

(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 Martinez 7 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:

... la prohibicion que el articulo 1459 del C.C. establece respecto a los administradores y apoderados, la cual tiene conforme a la doctrina de esta Sala, contendia entre otras, en S. de 27-5-1959, un fundamento de orden moral lugar la violacion de esta a la nulidad de pleno derecho del acto o negocio celebrado, ... y prohibicion legal, afectante orden publico, no cabe con efecto alguno la aludida retification ... 13

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.

Citing the same decisions of the Supreme Court of Spain, Gullon Ballesteros, his "Curso de Derecho Civil, (Contratos Especiales)" (Madrid, 1968) p. 18, affirms that, with respect to Article 1459, Spanish Civil Code:.

Que caracter tendra la compra que se realice por estas personas? Porsupuesto no cabe duda de que el caso (art.) 1459, 40 y 50, la nulidad esabsoluta porque el motivo de la prohibicion es de orden publico. 14

Perez Gonzales in such view, stating that "Dado el caracter prohibitivo delprecepto, la consequencia de la infraccion es la nulidad radical y ex lege." 15

Castan, quoting Manresa's own observation that.

"El fundamento do esta prohibicion es clarisimo. No sa trata con este precepto tan solo de guitar la ocasion al fraude; persiguese, ademasel proposito de rodear a las personas que intervienen en la administrcionde justicia de todos los retigios que necesitan pora ejercer su ministerio librandolos de toda suspecha, que aunque fuere in fundada, redundura endescredito de la institucion." 16 arrives at the contrary and now accepted view that "Puede considerace en nuestro derecho inexistente 'o radicalmente nulo el contrato en los siguentes cases: a) ...; b) cuando el contrato se ha celebrado en violacion de una prescripcion 'o prohibicion legal, fundada sobre motivos de orden publico (hipotesis del art. 4 del codigo) ..." 17

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.

Makalintal, Zaldivar, Castro,. Fernando, Barredo, Makasiar, Antonio and Esguerra, JJ., concur.

DIGEST:

Facts: Francisco Militante claimed ownership of a parcel of land located in the Barrio General Luna, Barotac Viejo, Iloilo, which he caused to be surveyed on 18-31 July 1934, whereby he was issued a plan Psu-99791 (containing an area of 171.3561 hectares.) Before the war with Japan, Militante filed with the CFI Iloilo an application for the registration of title of the land technically described in Psu-99791 opposed by the Director of Lands, the Director of Forestry and other oppositors. However, during the war with Japan, the record of the case was lost before it was heard, so after the war Militante petitioned the Court to reconstitute the record of the case. The record was reconstituted in the CFI Iloilo (Land Case R-695, GLRO Rec. 54852). The CFI heard the land registration case on 11 November 1952, and after trial the Court dismissed the application for registration. Militante appealed to the Court of Appeals (CA-GR 13497-R). Pending the disposal of the appeal or on 18 June 1956, Militante sold to Domingo Rubias, his son-in-law and a lawyer by profession, the land technically described in Psu-99791. The sale was duly recorded in the Office of the Register of Deeds for the Province of Iloilo (Entry 13609) on 14 July 1960. On 22 September 1958, the CA promulgated its judgment confirming the decision of the trial court dismissing the Application for Registration filed by Militante.

Domingo Rubias declared the land for taxation purposes under Tax Declaration (TD) 8585 for 1957; TD 9533 and TD 10019 for 1961; TD 9868 for 1964, paying the land taxes under TD 8585 and TD 9533. Militante has also declared the land for taxation purposes under TD 5172 in 1940, under TD T-86 for 1945, under TD 7122 for 1948, and paid the land taxes for 1940, for 1945-46, for 1947, for 1947 & 1948, for 1948, and for 1948 and 1949. TD 2434 in the name of Liberato Demontaño for the land described therein was cancelled by TD 5172 of Militante. Demontaño paid the land tax under TD 2434 on 20 December 1939 for the years 1938 and 1959. Isaias Batiller had declared for taxation purposes Lot 2 of Psu-144241 under TD 8583 for 1957 and a portion of Lot 2 under TD 8584 for 1945. TD 8483 was revised by TD 9498 while TD 9584 was cancelled by TD 9584 both in the name of Batiller. Batiller paid the land taxes for Lot 2 on 9 November 1960 for the year 1945 and 1946, 1950 and 1960 as shown by the certificate of the treasurer.The land claimed by Batiller as his own was surveyed on 6-7 June 1956, and a plan approved by Director of Lands on 15 November 1956 was issued, identified as Psu 155241.

On 22 April 1960, Rubias filed a forcible Entry and Detainer case against Batiller in the Justice of the Peace Court of Barotac Viejo, Iloilo. On May 1961 and after trial, the Municipal Court of Barotac Viejo decided the case in favor of the Batiller. Rubias appealed from the decision of the Municipal Court of Barotac Viejo to the CFI Iloilo. On 26 November 1964 and after the trial, the CFI decided the case likewise in favor of Batiller, holding that he has “better right to possess the land in question having been in the actual possession thereof under a claim of title many years before Militante sold the land to Rubias.

On 31 August 1964, Rubias filed a suit to recover the ownership and possession of certain portions of lot under Psu-99791, bought from his father-in-law, Francisco Militante in 1956, against its present occupant Batiller, who allegedly entered said portions of the lot in 1945 and in 1959. Rubias prayed also for damages and attorney’s fees. On 17 August 1965, the CFI dismissed the case, the court therein practically agreeing that the contract between Rubias and Militante was null and void. Rubias filed a motion for reconsideration, which was likewise denied by the lower court on 14 January 1966. Thereafter, Rubias filed an appeal before the Court of Appeals, which certified said appeal to the Supreme as involving purely legal questions.

The Supreme Court affirmed the order of dismissal appealed, with costs against Rubias.

1. Pre-trial practically amounted to a full dress trial when parties agreed and stipulated on facts and submitted their respective documentary exhibitsThe 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, practically amounted to a full dress trial which placed on record all the facts and exhibits necessary for adjudication of the case. Rubias’ evidence dealing with the source of the alleged right and title of Militante’s predecessors are already made of record. The chain of Militante’s alleged title and right to the land allegedly tracing back to Demontano in the land registration case and was rejected by the Iloilo land registration court, the decision of which was affirmed by final judgment by the Court of Appeals. Batiller’s evidence 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, are likewise already duly established facts of record, in the land registration case as well as in the ejectment case wherein the Iloilo CFI recognized the superiority of Batiller’s right to the land as against Rubias. Therefore, the lower court did not err in dismissing Rubias’ complaint upon Batiller’s motion after the pre-trial.

2. Rubias had no cause of actionRubias complaint, 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. The CA’s final judgment affirming the dismissal of Militante’s application of registration made it conclusive that Militante lack rightful claim or title to the land. There was no right or title to the land that could be transferred or sold by Militante’s purported sale in favor of Rubias in 1956.

3. Purchase of a lawyer of a property in litigation prohibited; Contract void and cannot be ratifiedThe 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 (“The following persons cannot acquire any purchase, even at a public or judicial auction, either in person or through the mediation of another xxx [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 in litigation or levied upon an execution before the court within whose jurisdiction or territory their 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.”) and that consequently, Rubias’ purchase of the property in litigation from his client(and father-in-law) 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 void from the beginning” and that “(T)hese contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.”

4. Wolfson v. Estate of Martinez superceded by case of Director of Lands v. AbagatThe 1911 case of Wolfson v. Estate of Martinez which held that a sale of property in litigation to the party litigant’s lawyer “its not void but voidable at the election of the vendor” has been superseded by the 1929 case of Director of Lands vs. Abagat. 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 seeking to enforce his rights as vendee thus acquired. Thus, the Court in Abagat affirmed 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 purchaser-lawyer 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.

5. Prohibitions under Article 1491 NCC (Article 1459 Spanish Civil Code)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.

6. Wolfson case decided in line with Manresa’s viewIn Wolfson, the Court 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 property to the transaction or his representative,” citing from Manresa that “(C)onsidering the question from the point of view of the civil law, the view taken by the code, the Court 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.”

7. Manresa’s view not applicable under the NCC; Spanish Supreme Court and modern authors have veered away from Manresa on this pointThe reason 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 is “that the Code does not recognize such nullity de pleno derecho.” This is no longer true and applicable to the 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.”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. 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 should certainly apply with greater reason to judges, judicial officers, fiscals and lawyers under paragraph 5 of the codal article. [also see viewpoints of Gullon Ballesteros in Curso de Derecho Civil (Contratos Especiales 1968), of Perez Gonzales, and of Castan]

8. Nullity of prohibited contracts definite and permanent and cannot be cured by ratification; If object has subsequently become legal, such may be subject to second contractThe nullity of 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 this 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 has been opined that they may be “ratified” by means of and in “the form of a new contract, in which case its validity shall be determined only by the circumstances at the time of 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.

9. Who may invoke the inexistence of contract; Proper action to be filedTolentino, in his treaties on the Civil Code, stated that (as to persons affected) “any person may invoke the inexistence 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 reivindicatoria; and any possessor 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.”He further stated that (as to 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.”

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.

Jose F. Aguirre for petitioner.

Pedro A. Manzanares for respondents.

FERNANDEZ, J.:

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.

Makasiar, Muñoz Palma, Martin, Fernandez and Guerrero JJ., concur.

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.

Bernardo O. Almeda for petitioners.

Ismael Sanchez and Raul O. del Castillo for respondents.

GUERRERO, J:

Appeal by certiorari from the Resolution of the Court of Appeals 1 dated September 3, 1975 and from the Resolution of the same Court 2 dated January 16, 1976, resolving petitioner's motion for reconsideration of its Joint Decision, dated April 18, 1975, in CA-G.R. No. 51242-R entitled "Potenciano Menil and Wife Crispina Nayve, Plaintiffs-Appellees, versus Francisco Calanias, et al., Defendant-Appellants" and CA-G.R. No. 51243-R entitled "Agueda Garan, Plaintiff-Appellant, versus Potenciano Menil et al., Defendants-Appellees," and which this Court had resolved to treat as a special civil action per Resolution dated May 14, 1976.

The Resolution of January 16, 1976 sufficiently states the antecedents facts of the cases.

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.

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.

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.

SO ORDERED.

Teehankee (Chairman), Makasiar, Muñoz Palma and Fernandez, JJ., concur.

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.

Juanito Ll. Abao for petitioners-appellants.

Alberto R Fernandez in his own behalf.

MAKASIAR, J.:

This is an appeal from the order of the Court of First Instance of Cebu dated March 19, 1966 denying the petition for the cancellation of an adverse claim registered by the adverse claimant on the transfer certificate of title of the petitioners.

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.

THUMBMARKMAXIMO ABARQUEZ

(p. 5, Petitioner-Appellant's Brief, p. 26, rec.)

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 (p. 57, ROA; p. 13, rec.).

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.

xxx xxx xxx

(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" (Drinker, Henry S., Legal Ethics, p. 100 [1953], citing App. A, 280; N.Y. Ciu 714). "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" (Drinker, supra, p. 100 citing A.B.A. Op. 279).

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:

Se ha discutido si en la incapacidad de Ion Procumdam y Abogados asta o el pecto de quota litis. Consiste este, como es sabido, en la estipulacion de que el Abogado o el Procurador ban de hacer suyos una parte alicuota de In cona que se li m la son es favorable. Con es te concepto a la vista, es para nosortros que el articulo que comentamos no menciona ese pacto; pero como la incapacidad de los Abogados y Procuradores se extinede al acto de adquirir por cesion; y la efectividad del pacto de quota litis implica necesariamente una cesion, estimamos que con solo el num. 5 del articulo 1459 podria con exito la nulidad de ese pacto tradicionalmente considerado como ilicito.

xxx xxx xxx

Debe tenerse tambien en cuenta, respecto del ultimo parrafo del articulo 1459, la sentencia del Tribunal Supreme de 25 Enero de 1902, que delcara que si bien el procurador no puede adquirir para si los bienes, en cuanto a los cuales tiene incapacidad, puede adquirirlos para otra persona en quien no concurra incapacidad alguna (Manresa, Comentarios al Codigo Civil Español, Tomo X, p. 110 [4a ed., 1931] emphasis supplied).

Castan, maintaining that it is not covered, opines thus;

C. Prohibiciones impuestas a las personas encargadas, mas o menos directamente, de la administracion de justicia.—El mismo art. 1,459 del Codigo civil prohibe a los Magistrados, Jueces, individuos del Minesterio fiscal, Secretarios de Tribunales y Juzgados y Oficiales de Justicia adquirir por compra (aunque sea en subasta publica o judicial, por si ni por persona alguna intermedia). 'Los bienes y derechos que estuviesen en litigio ante el Tribunal en cuya jurisdicion on teritorio ejercieran sus respectivas funciones, extendiendo se esta prohibicion al acto de adquirir por cesion', y siendo tambien extensiva ' Alos Abogados y Procuradores respecto a los bienes y derecho que fueran objeto del un litigio en que intervengan pos su profession y oficio.'

El fundamento de esta prohibicion es clarismo. No solo se trata—dice Manresa—de quitar la ocasion al fraude; persiguese, ademas, el proposito de rodear a las personas que intervienen en la administracion de justicia de todos los

prestigios que necesitan para ejercer su ministerio, librando los de toda sospecha, que, aunque fuere infundada, redundaria en descredito de la institucion.

Por no dor lugar a recelos de ninguna clase, admite el Codigo (en el apartado penutimo del art. 1.459) algunos casos en que, por excepcion, no se aplica el pricipio prohibitivo de que venimos hablando. Tales son los de que se trate de acciones hereditarias entre coheredero, de cesion en pago de creditos, o de garantia de los bienes que posean los funcionarios de justicia.

Algunos autores (Goyena, Manresa, Valverde) creen que en la prohibicion del art. 1.459 esta comprendido el pacto de quota litis (o sea el convenio por el cual se concede al Abogado o Procurador, para el caso de obtener sentencia favorable una parte alicuota de la cosa o cantidad que se litiga), porque dicho pacto supone la venta o cesion de una parte de la cosa o drecho que es objecto del litigio. Pero Mucius Scaevola oberva, conrazon, que en el repetido pacto no hay propiamente caso de compraventa ni de cesion de derechos, y bastan para estimario nulo otros preceptos del Codigo como los relativos a la ilicitud de la causa (Castan, Derecho Civil Espñol, Tomo 4, pp. 68-69, [9a ed., 1956], emphasis supplied).

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:

... que no es susceptible de aplicarse el precepto contenido en el num. 5 del art. 1.459 a un contrato en el que se restrigen los honorarios de un Abogado a un tanto por ciento de lo que se obtuviera en el litigio, cosa no repudiada por la moral ni por la ley (Tolentino, Civil Code of the Philippines, p. 35, Vol. V [1959]; Castan, supra; Manresa, supra).

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" (Capistrano, Civil Code of the Philippines, p. 44, Vol. IV [1951]).

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 (Drinker, Henry S Legal Ethics, p. 99, [1953], Emphasis supplied).

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)". The same doctrine was subsequently reiterated in Grey vs. Insular Lumber Co. (97 PhiL 833 [1955]) and Recto vs. Harden (100 PhiL 427 [1956]).

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 lawyer "especially in cases where the client has meritorious cause of action, but no means with which to pay for legal services unless he can, with the sanction of law, make a contract for a contingent fee to be paid out of the proceeds of the litigation" (Francisco, Legal Ethics, p. 294 [1949], citing Lipscomb vs. Adams 91 S.W. 1046, 1048 [1949]). Oftentimes, contingent fees are the only means by which the poor and helpless can redress for injuries sustained and have their rights vindicated. Thus:

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 subject matter of the suit, it would often place the poor in such a condition as to amount to a practical denial of justice. It not infrequently happens that person are injured through the negligence or willful misconduct of others, but by reason of poverty are unable to employ counsel to assert their rights. In such event their only means of redress lies in gratuitous service, which is rarely given, or in their ability to find some one who will conduct the case for a contingent fee. That relations of this king are often 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).

Justice George Malcolm, writing on contingent fees, also stated that:

... the system of contingent compensation has the merit of affording to certain classes of persons the opportunity to procure the prosecution of their claims which otherwise would be beyond their means. In many cases in the United States and the Philippines, the contingent fee is socially necessary (Malcolm, Legal and Judicial Ethics, p. 55 [1949], emphasis supplied).

Stressing further the importance of contingent fees, Professor Max Radin of the University of California, said that:

The contingent fee certainly increases the possibility that vexatious and unfounded suits will be brought. 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 seems clearly on the side of the contingent fee. It may in fact be added by way of reply to the first objection that vexations and unfounded suits have been brought by men who could and did pay substantial attorney's fees for that purpose (Radin, Contingent Fees in California, 28 Cal. L. Rev. 587, 589 [1940], emphasis supplied).

Finally, a contingent fee contract is always subject to the supervision of the courts with respect to the 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 because the court will amply protect him. As held in the case of Grey vs. Insular Lumber Co., supra, citing the case of Ulanday vs. Manila Railroad Co., supra:

Where it is shown that the contract for a contingent fee was obtained by any undue influence of the attorney over the client, or by any fraud or imposition, or that the compensation is so clearly excessive as to amount to extortion, the court win in a proper case protect the aggrieved party.

In the present case, there is no iota of proof to show that Atty. Fernandez had exerted any undue influence or had Perpetrated fraud on, or had in any manner taken advantage of his client, Maximo Abarquez. And, the compensation of one-half of the lots in question is not excessive nor unconscionable considering the contingent nature of the attorney's fees.

With these considerations, WE find that the contract for a contingent fee in question is not violative of 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

In resolving now the issue of the validity or nullity for the registration of the adverse claim, Section 110 of the Land Registration Act (Act 496) should be considered. Under d section, an adverse claim may be registered only by..

Whoever claims any part or interest in registered land adverse to the registered owner, arising subsequent to the date of the o registration ... if no other provision is made in this Act for registering the same ...

The contract for a contingent fee, being valid, vested in Atty Fernandez an interest or right over the lots in question to the extent of one-half thereof. Said interest became vested in Atty. Fernandez after the case was won on appeal because only then did the assignment of the one-half (½) portion of the lots in question became effective and binding. So that when he filed his affidavit of adverse claim his interest was already an existing one. There was therefore a valid interest in the lots to be registered in favor of Atty. Fernandez adverse to Mo Abarquez.

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. The interest or claim cannot be registered as an attorney's charging lien. The lower court was correct in denying the motion to annotate the attomey's lien. A charging lien under Section 37, Rule 138 of the Revised Rules of Court is limited only to money judgments and not to judgments for the annulment of a contract or for delivery of real property as in the instant case. Said Section provides that:

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 disbursements have been paid, and may apply such funds to the satisfaction thereof. He shall also have a lien to the same extent upon all judgments, for the payment of money, and executions issued in pursuance of such judgments, which he has secured in a litigation of his client ... (emphasis supplied).

Therefore, as an interest in registered land, the only adequate remedy open to Atty. Fernandez is to register such interest as an adverse claim. Consequently, there being a substantial compliance with Section 110 of Act 496, the registration of the adverse claim is held to be valid. Being valid, its registration 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 Phil. 867 [1958]).

The one-half (½) interest of Atty. Fernandez in the lots in question should therefore be respected. Indeed, he has a better right than petitioner-spouses, Juan Larrazabal and Marta C. de Larrazabal. They purchased their two-thirds (2/3) interest in the lots in question with the knowledge of the adverse claim of Atty. Fernandez. The adverse claim was annotated on the old transfer certificate of title and was later annotated on the new transfer certificate of title issued to them. As held by this Court:

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 the Land Registration Act, and serves as a notice and warning to third parties dealing with said property that someone is claiming an interest on the same or a better right than the registered owner thereof (Sanchez, Jr. vs. Court of Appeals, 69 SCRA 332 [1976]; Paz Ty Sin Tei vs. Jose Le Dy Piao supra).

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 COSTS AGAINST PETITIONER-APPELLANTS JUAN LARRAZABAL AND MARTA C. DE LARRAZABAL.

SO ORDERED.

Teehankee (Chairman), Fernandez, Guerrero, De Castro and Melencio-Herrera, JJ., concur.

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.

Tañada, Sanchez, Tanada & Tanada Law Office for petitioners.

Reyes & Pablo Law Office for respondents.

MAKASIAR, J.:

This is a petition for certiorari, to review the decision of respondent Court of Appeals in CA-G.R. No. 45336-R, entitled "Mercedes T. Sonora, et al. versus Francisco A. Tongoy, et al.", promulgated on December 3, 1975.

The antecedent facts which are not controverted are quoted in the questioned decision, as follows:

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 for damages against plaintiffs for allegedly bringing an unfounded and malicious complaint.

For their part, defendants Norberto Tongoy and Amado Tongoy filed an answer under oath, admitting every allegation of the complaint. On the other hand, defendant Fernando Tongoy originally joined Francisco A. Tongoy in the latter's answer, but after the case was submitted and was pending decision, the former filed a verified answer also admitting every allegation of the complaint.

Meanwhile, before the case went to trial, a motion to intervene as defendants was filed by and was granted to Salvacion Tongoy and Estrella Tongoy, alleging they were sisters of the full blood of Fernando Tongoy. Said intervenors filed an answer similarly admitting every allegation of the complaint.

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 by prescription, except in the case of Amado P. Tongoy, Ricardo P. Tongoy, Cresenciano P. Tongoy, and Norberto P. Tongoy, who were adjudged entitled to reconveyance of their corresponding shares in the property left by their father Francisco Tongoy having been excluded therefrom in the partition had during their minority, and not having otherwise signed any deed of transfer over such shares. The dispositive portion of the decision reads:

IN VIEW OF ALL THE FOREGOING considerations, judgment is hereby rendered dismissing the complaint, with respect to Mercedes, Juan, Jesus and Trinidad, all surnamed Sonora. The defendants Francisco Tongoy and Rosario Araneta Vda. de Tongoy are hereby ordered to reconvey the proportionate shares of Ricardo P., Cresenciano P., Amado P., and Norberto P., all surnamed Tongoy in Hda. Pulo and the Cuaycong property. Without damages and costs.

SO ORDERED.

Upon motion of plaintiffs, the foregoing dispositive portion of the decision was subsequently clarified by the trial court through its order of January 9, 1969 in the following tenor:

Considering the motion for clarification of decision dated November 7, 1968 and the opposition thereto, and with the view to avoid further controversy with respect to the share of each heir, the dispositive 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 and Cuaycong property consist of 4/5 of the whole trust estate, leaving 1/5 of the same to the heirs of Luis D. Tongoy.

SO ORDERED. (pp. 157-166, Vol. I, rec.).

Both parties appealed the decision of the lower court to respondent appellate court. Plaintiffs-appellants Mercedes T. Sonora, Jesus T. Sonora, Trinidad T. Sonora and the heirs of Juan T. Sonora questioned the lower court's decision dismissing their complaint on ground of prescription, and assailed it insofar as it held that the agreement created among the Tongoy-Sonora family in 1931 was an implied, and not an express, trust; that their action had prescribed; that the defendants-appellants were not ordered to 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 A. Tongoy and Ma. Rosario Araneta Vda. de Tongoy not only refuted the errors assigned by plaintiffs-appellants, but also assailed the findings that there was preponderance of evidence in support of the existence of an implied trust; that Ricardo P. Tongoy, Amado P. Tongoy and Norberto P. Tongoy are the legitimate half-brothers of the late Luis D. Tongoy; that their shares in Hacienda Pulo and Cuaycong property should be reconveyed to them by defendants-appellants; and that an execution was ordered pending appeal.

On December 3, 1975, respondent court rendered the questioned decision, the dispositive portion of which is as follows:

WHEREFORE, judgment is hereby rendered modifying the judgment and Orders appealed from by ordering Maria Rosario Araneta Vda. de Tongoy and Francisco A. Tongoy. —

1) To reconvey to Mercedes T. Sonora, Juan T. Sonora (as substituted and represented by his heirs), Jesus T. Sonora and Trinidad T. Sonora each a 7/60th portion of both Hacienda Pulo and the Cuaycong property, based on their original shares;

2) To reconvey to Ricardo P. Tongoy, Cresenciano P. Tongoy, Amado P. Tongoy and Norberto P. 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 reconveyed to them by virtue of the Order for execution pending appeal of the judgment shall be duly deducted;

3) To render an accounting to the parties named in pars. 1 and 2 above with respect to the income 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 the income, if any, with legal interest thereon from the date of filing of the complaint in this case, January 26, 1966, until the same is paid;

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.

SO ORDERED (pp. 207-208, Vol. 1, rec.).

Petitioners Francisco A. Tongoy and Ma. Rosario Araneta Vda. de Tongoy (defendants-appellants) have come before Us on petition for review on certiorari with the following assignments of errors (pp. 23-24, Brief for Petitioners):

I. The Court of Appeals erred in finding that there was a trust constituted on Hacienda Pulo.

II. The Court of Appeals erred in finding that the purchase price for the Cuaycong property was paid by Jose Tongoy and that said property was also covered by a trust in favor of respondents.

III. Conceding, for the sake of argument, that respondents have adequately proven an implied trust in their favor, the Court of Appeals erred in not finding that the rights of respondents have prescribed, or are barred by laches.

IV. The Court of Appeals erred in finding that the respondents Tongoy are the legitimated children of Francisco Tongoy.

V. Granting arguendo that respondents Tongoy are the legitimated children of Francisco Tongoy, the Court of Appeals erred in not finding that their action against petitioners has prescribed.

VI. The Court of Appeals erred in ordering petitioners to pay attorney's fees of P 20,000.00.

VII. The Court of Appeals erred in declaring that execution pending appeal in favor of respondents Tongoys was justified.

I

It appears to US that the first and second errors assigned by petitioners are questions of fact which are beyond OUR power to review.

Thus, as found by the respondent Court of Appeals:

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We shall consider first the appeal interposed by plaintiffs-appellants. The basic issues underlying the disputed errors raised suggest themselves as follows: 1) whether or not the conveyance respecting the questioned lots made in favor of Luis D. Tongoy in 1934 and 1935 were conceived pursuant to a trust agreement among the parties; 2) if so, whether the trust created was an express or implied trust; and 3) if the trust was not an express trust, whether the action to enforce it has prescribed.

The first two issues indicated above will be considered together as a matter of logical necessity, being so closely interlocked. To begin with, the trial court found and ruled that the transfers made in favor of Luis D. Tongoy were clothed with an implied trust, arriving at this conclusion as follows:

The Court finds that there is preponderance of evidence in support of the existence of constructive, implied or tacit trust. The hacienda could have been leased to third persons and the rentals would have been sufficient to liquidate the outstanding obligation in favor of the Philippine National Bank. But the 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 in favor of the Philippine National Bank, in the same manner that Jose Tongoy did. And of course, if the administration is successful, Luis D. Tongoy would benefit with the profits of the hacienda. Simulated deeds of conveyance in favor of Luis D. Tongoy were executed to facilitate and expedite the transaction with the Philippine National Bank. Luis D. Tongoy supported the Tongoy-Sonora family, defrayed the expenses of Dr. Jesus Sonora and Atty. Ricardo P. Tongoy, in their studies. Luis Tongoy even gave Sonoras their shares in the "beneficacion" although the "beneficacion" were included in the deeds of 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 (cf. de Buencamino, et al. vs. De Matias, et al., L-19397, April 30, 1966, 16 SCRA 849)" [pp. 170-181, Vol. I, rec.].

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:

xxx xxx xxx

2) Those which are absolutely simulated or fictitious;

xxx xxx xxx

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived (emphasis supplied).

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 (p. 35 of questioned Decision, on p. 191, rec.).

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 (p. 36 of Decision, p. 151, rec.).

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 (cf. Vda. de Sta. Ana vs. Rivera, L-22070, October 29, 1966,18 SCRA 588) [pp. 196-198, Vol. 1, rec.].

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).

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, 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.

SO ORDERED.

Guerrero and Escolin, JJ., concur.

Aquino and Abad Santos, JJ., concurs in the result.

Concepcion, Jr., and De Castro, JJ., took no part.

G.R. No. L-64693 April 27, 1984

LITA ENTERPRISES, INC., petitioner, vs.SECOND CIVIL CASES DIVISION, INTERMEDIATE APPELLATE COURT, NICASIO M. OCAMPO and FRANCISCA P. GARCIA, respondents.

Manuel A. Concordia for petitioner.

Nicasio Ocampo for himself and on behalf of his correspondents.

ESCOLIN, J.:ñé+.£ªwph!1

"Ex pacto illicito non oritur actio" [No action arises out of an illicit bargain] is the tune-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.

The factual background of this case is undisputed.

Sometime in 1966, the spouses Nicasio M. Ocampo and Francisca Garcia, herein private respondents, purchased in installment from the Delta Motor Sales Corporation five (5) Toyota Corona Standard cars to 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 public convenience in consideration of an initial payment of P1,000.00 and a monthly rental of P200.00 per taxicab unit. To effectuate Id agreement, the aforesaid cars were registered in the name of petitioner Lita Enterprises, Inc, Possession, however, remained with tile spouses Ocampo who operated and maintained the same under the name Acme Taxi, petitioner's trade name.

About a year later, on March 18, 1967, one of said taxicabs driven by their employee, Emeterio Martin, collided with a motorcycle whose driver, one Florante Galvez, died from the head injuries sustained 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, Inc., as registered owner of the taxicab in the latter case, Civil Case No. 72067 of the Court of First Instance of Manila, petitioner Lita Enterprises, Inc. was adjudged liable for damages in the amount of P25,000.00 and P7,000.00 for attorney's fees.

This decision having become final, a writ of execution was issued. One of the vehicles of respondent spouses with Engine No. 2R-914472 was levied upon and sold at public auction for 12,150.00 to one Sonnie Cortez, the highest bidder. Another car with Engine No. 2R-915036 was likewise levied upon and sold at public auction for P8,000.00 to a certain Mr. Lopez.

Thereafter, in March 1973, respondent Nicasio Ocampo decided to register his taxicabs in his name. He requested the manager of petitioner Lita Enterprises, Inc. to turn over the registration papers to him, but the latter allegedly refused. Hence, he and his wife filed a complaint against Lita Enterprises, Inc., Rosita Sebastian Vda. de Galvez, Visayan Surety & Insurance Co. and the Sheriff of Manila for reconveyance of 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 of which reads: têñ.£îhqwâ£

WHEREFORE, the complaint is hereby dismissed as far as defendants Rosita Sebastian Vda. de Galvez, Visayan Surety & Insurance Company and the Sheriff of Manila are concerned.

Defendant Lita Enterprises, Inc., is ordered to transfer the registration certificate of the three Toyota cars not levied upon with Engine Nos. 2R-230026, 2R-688740 and 2R-585884 [Exhs. A, B, C and D] by executing a deed of conveyance in favor of the plaintiff.

Plaintiff is, however, ordered to pay Lita Enterprises, Inc., the rentals in arrears for the certificate of convenience from March 1973 up to May 1973 at the rate of P200 a month per unit for the three cars. (Annex A, Record on Appeal, p. 102-103, Rollo)

Petitioner Lita Enterprises, Inc. moved for reconsideration of the decision, but the same was denied by the court a quo on October 27, 1975. (p. 121, Ibid.)

On appeal by petitioner, docketed as CA-G.R. No. 59157-R, the Intermediate Appellate Court modified the decision by including as part of its dispositive portion another paragraph, to wit: têñ.£îhqwâ£

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 are no longer available, then Lita Enterprises, Inc. is ordered to pay the plaintiffs their fair market value as of July 22, 1975. (Annex "D", p. 167, Rollo.)

Its first and second motions for reconsideration having been denied, petitioner came to Us, praying that: têñ.£îhqwâ£

1. ...

2. ... after legal proceedings, decision be rendered or resolution be issued, reversing, annulling or amending the decision of public respondent so that:

(a) the additional paragraph added by the public respondent to the DECISION of the lower court (CFI) be deleted;

(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 Sebastian Vda. de Galvez, as heir of the victim Florante Galvez, who died as a result ot the gross negligence of private respondents' driver while driving one private respondents' taxicabs. (p. 39, Rollo.)

Unquestionably, the parties herein operated under an arrangement, comonly known as the "kabit system", whereby a person who has been granted a certificate of convenience allows another person who owns motors 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. In the words of Chief Justice Makalintal, 1 "this is a pernicious system that cannot be too severely condemned. It constitutes an imposition upon the goo faith of the government.

Although not outrightly penalized as a criminal offense, the "kabit system" is invariably recognized as being contrary to public policy and, therefore, void and inexistent 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 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 Code denies them such aid. It provides:têñ.£îhqwâ£

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.

The defect of inexistence of a contract is permanent and incurable, and cannot be cured by ratification or by prescription. As this Court said in Eugenio v. Perdido, 2 "the mere lapse of time cannot give efficacy to contracts that are null void."

The principle of in pari delicto is well known not only in this jurisdiction but also in the United States where common law prevails. Under American jurisdiction, the doctrine is stated thus: "The proposition is universal that no action arises, in equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or to recover the property agreed to be sold or delivered, or damages for its property agreed to be sold or delivered, or damages for its violation. The rule has sometimes been laid down as though it was equally universal, that where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other." 3 Although certain exceptions to the rule are provided by law, We see no cogent reason why the full force of the rule should not be applied in the instant case.

WHEREFORE, all proceedings had in Civil Case No. 90988 entitled "Nicasio Ocampo and Francisca P. Garcia, Plaintiffs, versus Lita Enterprises, Inc., et al., Defendants" of the Court of First Instance of Manila 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 rendered therein are hereby annuleled and set aside. No costs.

SO ORDERED.1äwphï1.ñët

Feranando, C.J., Teehankee, Makasiar, Concepcion, Jr., Guerrero, Abad Santos, De Castro, Melencio-Herrera, Plana, Relova, Gutierrez, Jr. and De la Fuente, JJ., concur.

Aquino, J., took no part.

G.R. No. L-66696 July 14, 1986

FRANCISCA ARSENAL and REMEDIO ARSENAL, petitioners, vs.THE INTERMEDIATE APPELLATE COURT, HEIRS OF TORCUATO SURALTA, and SPOUSES FILOMENO PALAOS and MAHINA LAGWAS, respondents.

Ruben Gamolo for respondent Filomeno Palaos.

GUTIERREZ, JR., J.:

The question to be resolved in this case is who among the two alleged purchasers of a four-hectare portion of land granted in homestead has acquired a valid title thereto.

The facts as stated by the trial court are:

On January 7, 1954, the defendant Filomeno Palaos secured OCT No. P-290 (Exh. A) from the Register of Deeds of Bukidnon for Lot 81, Pls-112, consisting of 87,829 sq. m. more or less, situated at former barrio of Kitaotao now a municipality of Bukidnon, by virtue of Homestead Patent No. V-23602 granted to him.

On September 10, 1957, said Filomeno Palaos and his wife Mahina Lagwas executed in favor of the plaintiff, Torcuato Suralta, sold four (4) hectares of the land embraced in his Torrens Certificate for the sum of P 890.00, Philippine Currency, by means of a deed of acknowledged before a Notary (Exh. C). Plaintiff Suralta immediately took possession

of the four-hectare portion of Lot 81 above-mentioned cultivated and worked the same openly, continuously and peacefully up to the present time in concept of owner thereof. He built a house and introduced permanent improvements thereon now valued at no less than P20,000.00.

Sometime in 1964, the defendant-spouses Francisca Arsenal and Remedio Arsenal became tenants of an adjoining land owned by Eusebio Pabualan that is separated from the land in question only by a public road. They also came to know the plaintiff as their neighbor who became their compadre later, and saw him very often working and cultivating the land in question. In the course of their relationship the plaintiff came to know of their intention to buy the remaining land of Filomeno Palaos (t.s.n., pp. 13-14, 45-47).

On March 14, 1967, said Filomeno Palaos and his wife executed a notarial Deed of Sale (Exh. 1 for the defendant) in consideration of the amount of P800.00, Philippine Currency, supposedly for the remaining three (3) hectares of their land without knowing that the document covered the entirety of Lot 81 including the four-hectare portion previously deeded by them to the plaintiff. The deed of sale was presented to the Office of the Commission on National Integration at Malaybalay for approval because Palaos and his wife belong to the cultural minorities and unlettered. The field representative and inspector of that office subsequently approved the same (Exh. K and Exh. 2) without inspecting the land to determine the actual occupants thereon.

The defendants Arsenal took possession of the three-hectare portion of Lot 81 after their purchase and have cultivated the same up to the present time but they never disturbed the plaintiff's possession over the four-hectare portion that he had purchased in 1957. On March 28, 1967, Francisca Arsenal caused the tax declaration of the entire lot to be transferred in her name (Exh. 6). The plaintiff learned of the transfer of the tax declaration to Francisca Arsenal and because of their good relations at the time, he agreed with Arsenal to contribute in the payment of the land taxes and paid yearly from 1968 to 1973 the amount of P10.00 corresponding to his four-hectare portion to Francisca Arsenal (Exhs. F, F-1, G, G-1, H, and H-1).

On July 11, 1973, the plaintiff presented his Sales Contract in the Office of the Register of Deeds but it was refused registration for having been executed within the prohibitive period of five years from the issuance of the patent. In order to cure the defect, he caused Filomeno Palaos to sign a new Sales Contract (Exh. D) in his favor before Deputy Clerk of Court Florentina Villanueva covering the same four-hectare portion of Lot 81. In August 1973, the plaintiff caused the segregation of his portion from the rest of the land by Geodetic Engineer Benito P. Balbuena, who conducted the subdivision survey without protest from Francisca Arsenal who was notified thereof. The subdivision plan (Exh. E) was approved by the Commissioner of Land Registration on April 18, 1974.

In December 1973, however, the plaintiff saw for the first time the Deed of Sale embracing the whole Lot 81 signed by Filomeno Palaos in favor of Francisca Arsenal. Immediately he asked Palaos for explanation but the latter told him that he sold only three hectares to Arsenal. Plaintiff approached Francisca Arsenal for a satisfactory arrangement but she insisted on abiding by her contract. Because of their disagreement, Francisca Arsenal registered her Deed of Sale on December 6, 1973 and obtained Transfer Certificate of Title No. T-7879 (Exh. E) for the entire Lot 81 without the knowledge of the plaintiff.

On January 7, 1974, the plaintiff sent a telegram (Exh. 1) to the Secretary of Agriculture and Natural Resources requesting suspensions of the approval of the sale executed by Filomeno Palaos in favor of Francisca Arsenal, not knowing that the latter had already secured a transfer certificate of title from the Register of Deeds.

In the middle part of said month of January 1974, plaintiff however learned of the cancellation of the original certificate of title of Palaos and the issuance of the Transfer Certificate to Arsenal so he sought the help of the municipal authorities of Kitaotao to reach an amicable settlement with Francisca Arsenal who, on the other hand, refused to entertain all overture to that effect. ... .

On March 6, 1974, Torcuato Suralta filed a case against Filomeno Palaos, Mahina Lagwas, Francisca Arsenal, Remedio Arsenal and the Register of Deeds of Bukidnon for the annulment of Transfer Certificate of Title No. T-7879 issued to the Arsenals insofar as it covers the four-hectare portion previously sold to him.

In answer to the complaint, the Arsenals denied previous knowledge of the sale to Suralta of the land in question. As a special defense, they assailed the validity of the purchase by Suralta in 1957, pointing to the prohibition contained in the Public Land Law against its disposal within the period of five years from the issuance of the homestead patent. They also questioned the legality of the sale made to Suralta in 1957 by Filomeno Palaos and Mahina Lagwas for not having been approved by the Commission on National Integration despite the fact that Palaos and his wife belong to the cultural minorities, are illiterates, and do not understand the English language in which the deed of sale in favor of Suralta was written.

In their answer, the spouses Filomeno Palaos and Mahina Lagwas sustained the sale made by them to Suralta. They alleged that they verbally sold one hectare to one Tiburcio Tadena and sold the remaining 3.7829 hectares to the Arsenals. They stated that they informed the Arsenals about the previous sale of four hectares to Suralta. They also claimed that the Arsenals took undue advantage of their ignorance and illiteracy and caused them to sign the document of sale so as to include the entire 87,829 sq. m.covered by their original title.

On May 4, 1976, the trial court rendered judgment in favor of Suralta. It imputed bad faith to the Arsenals and declared them disqualified to avail of the protection afforded by the provisions of the Civil Code to innocent purchasers although they registered their purchase ahead of Suralta.

The court held that:

xxx xxx xxx

The defendants Arsenal could not also avail of the prohibition in the Public Land Act against the disposal of any land granted to a citizen under that law because the benefit of said prohibition does not inure to any third party. Only the government could have filed the adequate proceedings for confiscation of the land for violation of the condition of the grant by Palaos. Moreover, a verbal sale of land is valid and effective as between the parties to the agreement and Filomeno Palaos had reaffirmed the sale he made in favor of the plaintiff in 1957 by executing another instrument in 1973 to cure whatever defects which may have affected their formal contract.

Likewise, Francisca Arsenal cannot take advantage of the lack of approval by the Commission on National Integration of the sale made by Filomeno Palaos in favor of plaintiff Torcuato Suralta. Only the latter, in whose favor the protection is afforded, could contest the document on the ground, as Francisca Arsenal was not a party to said contract and even if she is also a member of the cultural minority for being only half a native of Bukidnon because she and her husband who is from Cebu are both literates.

On appeal to the Intermediate Appellate Court, the aforestated decision was affirmed in toto on October 24, 1983. The Court maintained that:

The disquisition of the lower court having been made mainly upon assessment of the facts as borne by the testimonies of witnesses presented as resolved in a long line of decisions, this Court is loath to overturn findings of facts of the court a quo, which is more in a position to determine their truth or falsity, having heard the witnesses testify ... .

On March 20, 1984, the spouses Arsenal went to this Court in a petition for review on certiorari assigning the following alleged errors of the court below:

I

THE INTERMEDIATE APPELLATE COURT ERRED IN NOT DISMISSING THE APPEALED CASE FOR LACK OF CAUSE OF ACTION.

II

THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE TRIAL COURT'S ARGUMENT TO THE EFFECT THAT THE BENEFIT OF THE PROHIBITION IN THE PUBLIC LAND LAW AGAINST THE DISPOSAL OF ANY LAND GRANTED TO A CITIZEN UNDER THAT LAW DOES NOT INSURE TO ANY THIRD PARTY, HENCE, PETITIONERS COULD NOT AVAIL OF THE SAID PROHIBITION.

III

THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE TRIAL COURT'S ARGUMENT THAT THE PETITIONERS COULD NOT TAKE ADVANTAGE OF THE LACK OF APPROVAL BY THE COMMISSION ON NATIONAL INTEGRATION OF THE SALE MADE BY RESPONDENT TORCUATO SURALTA.

IV

THE INTERMEDIATE APPELLATE COURT ERRED IN GIVING TOO MUCH WEIGHT TO THE ALLEGED BAD FAITH OF PETITIONERS.

V

THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE TRIAL COURT DECLARING RESPONDENT TORCUATO SURALTA TO BE THE LEGITIMATE OWNER OF THE DISPUTED LAND AND IN ORDERING THE REGISTER OF DEEDS OF BUKIDNON TO CANCEL TCT NO. T-7879 AND ORDERING THE ISSUANCE OF ANOTHER TITLE FOR THE PORTION DESIGNATED AS LOT 8l-A OF THE SUBDIVISION PLAN LRC-PLD-198451.

VI

THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE AWARD OF MORAL DAMAGES AND ATTORNEY's FEES TO PRIVATE RESPONDENTS.

In resisting respondent Suralta's claim, the petitioners rely heavily on the nullity of the contract of sale executed in 1957 between the respondents Palaos and Suralta. They allege that because the previous sale was void from the beginning, it cannot be ratified and "No amount of bad faith on the part of the petitioners could make it valid and enforceable in the courts of law."

These arguments are impressed with merit.

The law on the matter which is the Public Land Act (Commonwealth Act No. 141, as amended) 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.

No alienation, transfer, or conveyance of any homestead after five years and before twenty-five years after issuance of title shall be valid without the approval of the Secretary of Agriculture and Natural Resources, which approval shall not be denied except on constitutional and legal ground (As amended by Com. Act No. 456, approved June 8, 1939).

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Sec. 120. Conveyance and encumbrance made by persons belonging to the so-called 'non-Christian Filipinos' or national cultural minorities, when proper, shall be valid if the person making the conveyance or encumbrance is able to read and can understand the language in which the instrument or conveyance or encumbrance is written. Conveyances and encumbrances made by illiterate non-Christians or literate non-Christians where the instrument of conveyance is in a language not understood by the said literate non-Christian shall not be valid unless duly approved by the Chairman of the Commission on National Integration. (As amended by Rep. Act No. 3872, approved June 18, 1964).

xxx xxx xxx

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 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.

The above provisions of law are clear and explicit. A contract which purports of alienate, transfer, convey or encumber any homestead within the prohibitory period of five years from the date of the issuance of the patent is void from its execution. In a number of cases, this Court has held that such provision is mandatory (De los Santos v. Roman Catholic Church of Midsayap, 94 Phil. 405).

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 annullable 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 effects founded thereon are asserted against him. (Id. p. 595).

Concededly, the contract of sale executed between the respondents Palaos and Suralta in 1957 is void. It was entered into three (3) years and eight (8) months after the grant of the homestead patent to the respondent Palaos in 1954.

Being void, the foregoing principles and rulings are applicable. Thus, it was erroneous for the trial court to declare that the benefit of the prohibition in the Public Land Act "does not inure to any third party." Such a sweeping declaration does not find support in the law or in precedents. A third person who is directly affected by a void contract may set up its nullity. In this case, it is precisely the petitioners' interest in the disputed land which is in question.

As to whether or not the execution by the respondents Palaos and Suralta of another instrument in 1973 cured the defects in their previous contract, we reiterate the rule that an alienation or sale of a homestead executed within the five-year prohibitory period is void and cannot be confirmed or ratified. This Court has on several occasions ruled on the nature of a confirmatory sale and the public policy which proscribes it. In the case of Menil v. Court of Appeals (84 SCRA 413), we stated that:

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. (Record on Appeal, pp. 55-56). 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. ... .

xxx xxx xxx

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. ...

In another case, Manzano v. Ocampo (1 SCRA 691, 697), where the sale was perfected during the prohibitory period but the formal deed of conveyance was executed after such period, this Court ruled that:

xxx xxx xxx

... This execution of the formal deed after the expiration of the prohibitory period did not and could not legalize a contract that was void from its inception. Nor was this formal deed of sale 'a totally distinct transaction from the promissory note and the deed of mortgage', as found by the Court of Appeals, for it was executed only in compliance and fulfillment of the vendor's previous promise, under the perfected sale of January 4, 1938, to execute in favor of his vendee the formal act of conveyance after the lapse of the period of inhibition of five years from the date of the homestead patent. What is more, the execution of the formal deed of conveyance was postponed by the parties precisely to circumvent the legal prohibition of their sale.

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, (Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v. Roman Catholic Church of .Midsayap, G.R. No. L-6088, Feb. 25, 1954.) 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 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 all 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.

The respondents Palaos and Suralta admitted that they executed the subsequent contract of sole in 1973 in order to cure the defects of their previous contract. The terms of the second contract corroborate this fact as it can easily be seen from its terms that no new consideration passed between them. The second contract of sale being merely confirmatory, it produces no effect and can not be binding.

Notwithstanding the above circumstances of the case, however, we still think that the petitioners' claim to the land must fail.

The petitioner's view that the court erred in giving too much weight to their alleged bad faith has no merit. The issue of bad faith constitutes the fundamental barrier to their claim of ownership.

The finding of bad faith by the lower court is binding on us since it is not the function of this Court to analyze and review evidence on this point all over again (Sweet Lines, Inc. v. Court of Appeals, 121 SCRA 769) but only to determine its substantiality (Dela Concepcion v. Mindanao Portland Cement Corporation, 127 SCRA 647).

In this case, there is substantial evidence to sustain the verdict of bad faith. We find several significant findings of facts made by the courts below, which were not disputed by the petitioners, crucial to its affirmance.

First of all, we agree with the lower court that it is unusual for the petitioners, who have, been occupying the disputed land for four years with respondent Suralta to believe, without first verifying the fact, that the latter was a mere mortgagee of the portion of the land he occupies.

Second, it is unlikely that the entire 8.7879 hectares of land was sold to them for only P800,00 in 1967 considering that in 1957, a four-hectare portion of the same was sold to the respondent Suralta for P819.00. The increased value of real properties through the years and the disparity of the land area show a price for the land too inadequate for a sale allegedly done in good faith and for value.

Third, contrary to the usual conduct of good faith purchasers for value, the petitioners actively encouraged the respondent Suralta to believe that they were co-owners of the land. There was no dispute that the petitioners, without informing the respondent Suralta of their title to the land, kept the latter in peaceful possession of the land he occupies and received annual real estate tax contributions from him. It was only in 1973 when the respondent Suralta discovered the petitioners' title to the land and insisted on a settlement of the adverse claim that the petitioners registered their deed of sale and secured a transfer certificate of title in their favor.

Clearly, the petitioners were in bad faith in including the entire area of the land in their deed of sale. They cannot be entitled to the four-hectare portion of the land for lack of consideration. To uphold their claim of ownership over that portion of land would be contrary to the well-entrenched principle against unjust enrichment consecrated in our Civil Code to the end that in cases not foreseen by the lawmaker, no one may unjustly benefit himself to the prejudice of another (Report of the Code Commission, p. 41).

Who then is entitled to the portion of the land which is under litigation?

The peculiar circumstances of the case seem to make a categorical pronouncement on the case difficult.

At first blush, the equities of the case seem to lean in favor of the respondent Suralta who, since 1957, has been in possession of the land which was almost acquired in an underhanded manner by the petitioners. We cannot, however, gloss over the fact that the respondent Suralta was himself guilty of transgressing the law by entering, in 1957, into a transaction clearly prohibited by law. It is a long standing principle that equity follows the law. Courts exercising equity jurisdiction are bound by rules of law and have no arbitrary discretion to disregard them. Equitable reasons will not control against any well-settled rule of law or public policy (McCurdy v. County of Shiawassee, 118 N.W. 625). Thus, equity cannot give validity to a void contract. If, on the basis of equity, we uphold the respondent Suralta's claim over the land which is anchored on the contracts previously executed we would in effect be giving life to a void contract.

There is another observation worthy of consideration. This Court has ruled in a number of cases that the reversion of a public land grant to the government is effected only at the instance of the Government itself (Gacayan v. Leano, 121 SCRA 260; Gonzalo Puyat & Sons, Inc. v. De las Ama and Aliño, 74 Phil. 3). The reversion contemplated in the Public Land Act is not automatic. The Government has to take action to cancel the patent and the certificate of title in order that the land involved may be reverted to it (Villacorta v. Ulanday, 73 Phil. 655). Considering that this is an ordinary civil action in which the Government has not been included as a party and in view of the settled jurisprudence, we rule against the automatic reversion of the land in question to the State.

Lastly, in cases where the homestead has been the subject of void conveyances, the law still regards the original owner as the rightful owner subject to escheat proceedings by the State. In the Menil and Monzano cases earlier cited, this Court awarded the land back to the original owner notwithstanding the fact that he was equally guilty with the vendee in circumventing the law. This is so because this Court has consistently held that "the pari delicto doctrine may not be invoked in a case of this kind since it would run counter to an avowed fundamental policy of the State, that the forfeiture of a homestead is a matter between the State and the grantee or his heirs, and that until the State had taken steps to annul the grant and asserts title to the homestead the purchaser is, as against the vendor or his heirs, no more entitled to keep the land than any intruder." (Acierto et al. v. De los Santos, et al. 95 Phil. 887; de los Santos v. Roman Catholic Church of Midsayap, et al., supra) We should stress that the vendors of the homestead are unlettered members of a tribe belonging to the cultural minorities.

We see, however, a distinguishing factor in this case that sets it apart from the above cases. The original owners in this case, the respondent Palaos and his wife, have never disaffirmed the contracts executed between them and the respondent Suralta. More than that, they expressly sustained the title of the latter in court and failed to show any interest in recovering the land. Nonetheless, we apply our earlier rulings because we believe that as in pari delicto may not be invoked to defeat the policy of the State neither may the doctrine of estoppel give a validating effect to a void contract. Indeed, it is generally considered that as between parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or is against public policy (19 Am. Jur. 802). It is not within the competence of any citizen to barter away what public policy by law seeks to preserve (Gonzalo Puyat & Sons, Inc. v. De los Amas and Aliño, supra). Of course, this pronouncement covers only the previous transactions between the respondents. We cannot pass upon any new contract, between the same parties involving the same land if this is their clear intention. Any new transaction, however, would be subject to whatever steps the Government may take for the reversion of the property to it.

With the resolution of the principal issues and in view of our own conclusions of facts and law, we hold untenable the lower court's award of moral damages, attorney's fees and litigation expenses.

WHEREFORE, the decision of the Intermediate Appellate Court is REVERSED and SET ASIDE. Judgment is hereby rendered:

(a) Declaring null and void the sale of the four-hectare portion of the homestead to respondent Torcuato Suralta and his heirs;

(b) Declaring null and void the sale of the same portion of land to the petitioners Francisca Arsenal and Remedio Arsenal:

(c) Ordering the Register of Deeds of Bukidnon to cancel Transfer Certificate of Title No. T-7879 as to the disputed four-hectare portion and to reissue an Original Certificate of Title for the portion designated as Lot 81-A of the Subdivision Plan LRC-PLD-198451 prepared by Geodetic Engineer Benito P. Balbuena and approved by the Commission on Land Registration, in favor of the respondents Filomeno Palaos and Mahina Lagwas;

(d) Ordering the respondents Filomeno Palaos and Mahina Lagwas to reimburse the heirs of the respondent Torcuato Suralta the sum of EIGHT HUNDRED NINETY PESOS (P890.00), the price of the sale. The value of any improvements made on the land and the interests on the purchase price are compensated by the fruits the respondent Suralta and his heirs received from their long possession of the homestead.

This judgment is without prejudice to any appropriate action the Government may take against the respondents Filomeno Palaos and Mahina Lagwas pursuant to Section 124 of Commonwealth Act No. 141, as amended.

SO ORDERED.

Feria (Chairman), Fernan, Alampay and Paras, JJ., concur.

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.

SARMIENTO, J.:

Seeking the reversal of the decision 1 dated October 21, 1985 of the former Intermediate Appellate Court in CA-G.R. CV No. 70247, entitled "Cornelia Clanor Vda. de Portugal, et al. vs. Hugo Portugal, and the reinstatement of the decision 2 in their favor, dated June 30, 1980, of the Court of First Instance of Cavite in Civil Case No. NC-699 entitled "Cornelia Vda. de Portugal, et al. vs. Hugo Portugal," the petitioners now come to us by way of this petition for review by certiorari.

The factual background that gave rise to the present controversy is summarized as follows:

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:

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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.

SO ORDERED. 3

From this decision, Hugo Portugal, the private respondent herein and the defendant in the trial court, appealed to the respondent appellate court which reversed, hence the present petition.

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.

We find the petition meritorious.

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.

SO ORDERED.

G.R. No. L-18805 August 14, 1967

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs.HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO GARCIA,3 and LEONOR MOLL, defendants-appellees.

Simeon M. Gopengco and Solicitor General for plaintiff-appellant.L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion Reyna, Montecillo and Belo for defendants-appellees.

SANCHEZ, J.:

The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for the protection, preservation and development of the coconut industry in the Philippines. On August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that corporation the express power "to buy, sell, barter, export, and in any other manner deal in, coconut, copra, and dessicated coconut, as well as their by-products, and to act as agent, broker or commission merchant of the producers, dealers or merchants" thereof. The charter amendment was enacted to stabilize copra prices, to serve coconut producers by securing advantageous prices for them, to cut down to a minimum, if not altogether eliminate, the margin of middlemen, mostly aliens.4

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and Casimiro Garcia were members of the Board; defendant Leonor Moll became director only on December 22, 1947.

NACOCO, after the passage of Republic Act 5, embarked on copra trading activities. Amongst the scores of contracts executed by general manager Kalaw are the disputed contracts, for the delivery of copra, viz:

(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o. b., delivery: August and September, 1947. This contract was later assigned to Louis Dreyfus & Co. (Overseas) Ltd.

(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long ton, f.o.b., Philippine ports, to be shipped: September-October, 1947. This contract was also assigned to Louis Dreyfus & Co. (Overseas) Ltd.

(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery: September, 1947.

(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton, c.i.f., Los Angeles, California, delivery: November, 1947.

(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for 1,500 long tons, $164,00 per ton, c.i.f., New York, to be shipped in November, 1947.

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons, $154.00 per ton, f.o.b., 3 Philippine ports, delivery: November, 1947.

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery: November and December, 1947. This contract was assigned to Pacific Vegetable Co.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery: December, 1947 and January, 1948. This contract was assigned to Pacific Vegetable Co.

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f., Pacific ports, delivery: January, 1948. This contract was assigned to Pacific Vegetable Co.

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts. Nature supervened. Four devastating typhoons visited the Philippines: the first in October, the second and third in November, and the fourth in December, 1947. Coconut trees throughout the country suffered extensive damage. Copra production decreased. Prices spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export facilities increased the time necessary to accumulate shiploads of copra. Quick turnovers became impossible, financing a problem.

When it became clear that the contracts would be unprofitable, Kalaw submitted them to the board for approval. It was not until December 22, 1947 when the membership was completed. Defendant Moll took her oath on that date. A meeting was then held. Kalaw made a full disclosure of the situation, apprised the board of the impending heavy losses. No action was taken on the contracts. Neither did the board vote thereon at the meeting of January 7, 1948 following. Then, on January 11, 1948, President Roxas made a statement that the NACOCO head did his best to avert the losses, emphasized that government concerns faced the same risks that confronted private companies, that NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long thereafter, that is, on January 30, 1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved the contracts hereinbefore enumerated.

As was to be expected, NACOCO but partially performed the contracts, as follows:

Buyers Tons Delivered UndeliveredPacific Vegetable Oil 2,386.45 4,613.55Spencer Kellog None 1,000Franklin Baker 1,000 500Louis Dreyfus 800 2,200Louis Dreyfus (Adamson contract of July 30, 1947) 1,150 850Louis Dreyfus (Adamson Contract of August 14, 1947) 1,755 245T O T A L S7,091.459,408.55The buyers threatened damage suits. Some of the claims were settled, viz: Pacific Vegetable Oil Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation, P78,210.00; Spencer Kellog & Sons, P159,040.00.

But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of First Instance of Manila, upon claims as follows: For the undelivered copra under the July 30 contract (Civil Case 4459); P287,028.00; for the balance on the August 14 contract (Civil Case 4398), P75,098.63; for that per the September 12 contract reduced to judgment (Civil Case 4322, appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-of-court amicable settlement when the Kalaw management was already out. The corporation thereunder paid Dreyfus P567,024.52 representing 70% of the total claims. With particular reference to the Dreyfus claims, NACOCO put up the defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do business here; and (2) failure to deliver was due to force majeure, the typhoons. To project the utter unreasonableness of this compromise, we reproduce in haec verba this finding below:

x x x However, in similar cases brought by the same claimant [Louis Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also involving a claim of P345,654.68 wherein defendant set up same defenses as above, plaintiff accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the same proportion, the claim of Dreyfus against NACOCO should have been compromised for only P10,000.00, if at all. Now, why should defendants be held liable for the large sum paid as compromise by the Board of Liquidators? This is just a sample to show how unjust it would be to hold defendants liable for the readiness with which the Board of Liquidators disposed of the NACOCO funds, although there was much possibility of successfully resisting the claims, or at least settlement for nominal sums like what happened in the Syjuco case.5

All the settlements sum up to P1,343,274.52.

In this suit started in February, 1949, NACOCO seeks to recover the above sum of P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil Code); and defendant board members, including Kalaw, with bad faith and/or breach of trust for having approved the contracts. The fifth amended complaint, on which this case was tried, was filed on July 2, 1959. Defendants resisted the action upon defenses hereinafter in this opinion to be discussed.

The lower court came out with a judgment dismissing the complaint without costs as well as defendants' counterclaims, except that plaintiff was ordered to pay the heirs of Maximo Kalaw the sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw from NACOCO.

Plaintiff appealed direct to this Court.

Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of P2,601.94.

Right at the outset, two preliminary questions raised before, but adversely decided by, the court below, arrest our attention. On appeal, defendants renew their bid. And this, upon established jurisprudence that an appellate court may base its decision of affirmance of the judgment below on a point or points ignored by the trial court or in which said court was in error.6

1. First of the threshold questions is that advanced by defendants that plaintiff Board of Liquidators has lost its legal personality to continue with this suit.

Accepted in this jurisdiction are three methods by which a corporation may wind up its affairs: (1) under Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of the Corporation Law]7 whereby, upon voluntary dissolution of a corporation, the court may direct "such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation;" (2) under Section 77 of the Corporation Law, whereby a corporation whose corporate existence is terminated, "shall nevertheless be continued as a body corporate for three years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the purpose of continuing the business for which it was established;" and (3) under Section 78 of the Corporation Law, by virtue of which the corporation, within the three year period just mentioned, "is authorized and empowered to convey all of its property to trustees for the benefit of members, stockholders, creditors, and others interested."8

It is defendants' pose that their case comes within the coverage of the second method. They reason out that suit was commenced in February, 1949; that by Executive Order 372, dated November 24, 1950, NACOCO, together with other government-owned corporations, was abolished, and the Board of Liquidators was entrusted with the function of settling and closing its affairs; and that, since the three year period has elapsed, the Board of Liquidators may not now continue with, and prosecute, the present case to its conclusion, because Executive Order 372 provides in Section 1 thereof that —

Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut Corporation, the National Tobacco Corporation, the National Food Producer Corporation and the former enemy-owned or controlled corporations or associations, . . . are hereby abolished. The said corporations shall be liquidated in accordance with law, the provisions of this Order, and/or in such manner as the President of the Philippines may direct; Provided, however, That each of the said corporations shall nevertheless be continued as a body corporate for a period of three (3) years from the effective date of this Executive Order for the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of and, convey its property in the manner hereinafter provided.

Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found impossible within the 3 year period to reduce disputed claims to judgment, nonetheless, "suits by or against a corporation abate when it ceases to be an entity capable of suing or being sued" (Fisher, The Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris Secundum likewise is authority for the statement that "[t]he dissolution of a corporation ends its existence so that there must be statutory authority for prolongation of its life even for purposes of pending litigation"9 and that suit "cannot be continued or revived; nor can a valid judgment be rendered therein, and a judgment, if rendered, is not only erroneous, but void and subject to collateral attack." 10 So it is, that abatement of pending actions follows as a matter of course upon the expiration of the legal period for liquidation, 11 unless the statute merely requires a commencement of suit within the added time. 12 For, the court cannot extend the time alloted by statute. 13

We, however, express the view that the executive order abolishing NACOCO and creating the Board of Liquidators should be examined in context. The proviso in Section 1 of Executive Order 372, whereby the corporate existence of NACOCO was continued for a period of three years from the effectivity of the order for "the purpose of prosecuting and defending suits by or against it and of enabling the Board of Liquidators gradually to settle and close its affairs, to dispose of and convey its property in the manner hereinafter provided", is to be read not as an isolated provision but in conjunction with the whole. So reading, it will be readily observed that no time limit has been tacked to the existence of the Board of Liquidators and its function of closing the affairs of the various government owned corporations, including NACOCO.

By Section 2 of the executive order, while the boards of directors of the various corporations were abolished, their powers and functions and duties under existing laws were to be assumed and exercised by the Board of Liquidators. The President thought it best to do away with the boards of directors of the defunct corporations; at the same time, however, the President had chosen to see to it that the Board of Liquidators step into the vacuum. And nowhere in the

executive order was there any mention of the lifespan of the Board of Liquidators. A glance at the other provisions of the executive order buttresses our conclusion. Thus, liquidation by the Board of Liquidators may, under section 1, proceed in accordance with law, the provisions of the executive order, "and/or in such manner as the President of the Philippines may direct." By Section 4, when any property, fund, or project is transferred to any governmental instrumentality "for administration or continuance of any project," the necessary funds therefor shall be taken from the corresponding special fund created in Section 5. Section 5, in turn, talks of special funds established from the "net proceeds of the liquidation" of the various corporations abolished. And by Section, 7, fifty per centum of the fees collected from the copra standardization and inspection service shall accrue "to the special fund created in section 5 hereof for the rehabilitation and development of the coconut industry." Implicit in all these, is that the term of life of the Board of Liquidators is without time limit. Contemporary history gives us the fact that the Board of Liquidators still exists as an office with officials and numerous employees continuing the job of liquidation and prosecution of several court actions.

Not that our views on the power of the Board of Liquidators to proceed to the final determination of the present case is without jurisprudential support. The first judicial test before this Court is National Abaca and Other Fibers Corporation vs. Pore, L-16779, August 16, 1961. In that case, the corporation, already dissolved, commenced suit within the three-year extended period for liquidation. That suit was for recovery of money advanced to defendant for the purchase of hemp in behalf of the corporation. She failed to account for that money. Defendant moved to dismiss, questioned the corporation's capacity to sue. The lower court ordered plaintiff to include as co-party plaintiff, The Board of Liquidators, to which the corporation's liquidation was entrusted by Executive Order 372. Plaintiff failed to effect inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider. Ground: excusable negligence, in that its counsel prepared the amended complaint, as directed, and instructed the board's incoming and outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the court and a copy of the same to defendant's counsel. She mailed the copy to the latter but failed to send the original to the court. This motion was rejected below. Plaintiff came to this Court on appeal. We there said that "the rule appears to be well settled that, in the absence of statutory provision to the contrary, pending actions by or against a corporation are abated upon expiration of the period allowed by law for the liquidation of its affairs." We there said that "[o]ur Corporation Law contains no provision authorizing a corporation, after three (3) years from the expiration of its lifetime, to continue in its corporate name actions instituted by it within said period of three (3) years." 14 However, these precepts notwithstanding, we, in effect, held in that case that the Board of Liquidators escapes from the operation thereof for the reason that "[o]bviously, the complete loss of plaintiff's corporate existence after the expiration of the period of three (3) years for the settlement of its affairs is what impelled the President to create a Board of Liquidators, to continue the management of such matters as may then be pending." 15 We accordingly directed the record of said case to be returned to the lower court, with instructions to admit plaintiff's amended complaint to include, as party plaintiff, the Board of Liquidators.

Defendants' position is vulnerable to attack from another direction.

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and placed its assets in the hands of the Board of Liquidators. The Board of Liquidators thus became the trustee on behalf of the government. It was an express trust. The legal interest became vested in the trustee — the Board of Liquidators. The beneficial interest remained with the sole stockholder — the government. At no time had the government withdrawn the property, or the authority to continue the present suit, from the Board of Liquidators. If for this reason alone, we cannot stay the hand of the Board of Liquidators from prosecuting this case to its final conclusion. 16 The provisions of Section 78 of the Corporation Law — the third method of winding up corporate affairs — find application.

We, accordingly, rule that the Board of Liquidators has personality to proceed as: party-plaintiff in this case.

2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.

Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in their nineteenth special defense, that plaintiff's action is personal to the deceased Maximo M. Kalaw, and may not be deemed to have survived after his death.18 They say that the controlling statute is Section 5, Rule 87, of the 1940 Rules of Court.19 which provides that "[a]ll claims for money against the decedent, arising from contract, express or implied", must be filed in the estate proceedings of the deceased. We disagree.

The suit here revolves around the alleged negligent acts of Kalaw for having entered into the questioned contracts without prior approval of the board of directors, to the damage and prejudice of plaintiff; and is against Kalaw and the other directors for having subsequently approved the said contracts in bad faith and/or breach of trust." Clearly then, the present case is not a mere action for the recovery of money nor a claim for money arising from contract. The suit involves alleged tortious acts. And the action is embraced in suits filed "to recover damages for an injury to person or property, real or personal", which survive. 20

The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30, 1962. There, plaintiffs sought to recover damages from defendant Llemos. The complaint averred that Llemos had served plaintiff by registered mail with a copy of a petition for a writ of possession in Civil Case 4824 of the Court of First Instance at Catbalogan, Samar, with notice that the same would be submitted to the Samar court on February 23, 1960 at 8:00 a.m.; that in view of the copy and notice served, plaintiffs proceeded to the said court of Samar from their residence in Manila accompanied

by their lawyers, only to discover that no such petition had been filed; and that defendant Llemos maliciously failed to appear in court, so that plaintiffs' expenditure and trouble turned out to be in vain, causing them mental anguish and undue embarrassment. Defendant died before he could answer the complaint. Upon leave of court, plaintiffs amended their complaint to include the heirs of the deceased. The heirs moved to dismiss. The court dismissed the complaint on the ground that the legal representative, and not the heirs, should have been made the party defendant; and that, anyway, the action being for recovery of money, testate or intestate proceedings should be initiated and the claim filed therein. This Court, thru Mr. Justice Jose B. L. Reyes, there declared:

Plaintiffs argue with considerable cogency that contrasting the correlated provisions of the Rules of Court, those concerning claims that are barred if not filed in the estate settlement proceedings (Rule 87, sec. 5) and those defining actions that survive and may be prosecuted against the executor or administrator (Rule 88, sec. 1), it is apparent that actions for damages caused by tortious conduct of a defendant (as in the case at bar) survive the death of the latter. Under Rule 87, section 5, the actions that are abated by death are: (1) claims for funeral expenses and those for the last sickness of the decedent; (2) judgments for money; and (3) "all claims for money against the decedent, arising from contract express or implied." None of these includes that of the plaintiffs-appellants; for it is not enough that the claim against the deceased party be for money, but it must arise from "contract express or implied", and these words (also used by the Rules in connection with attachments and derived from the common law) were construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194,

"to include all purely personal obligations other than those which have their source in delict or tort."

Upon the other hand, Rule 88, section 1, enumerates actions that survive against a decedent's executors or administrators, and they are: (1) actions to recover real and personal property from the estate; (2) actions to enforce a lien thereon; and (3) actions to recover damages for an injury to person or property. The present suit is one for damages under the last class, it having been held that "injury to property" is not limited to injuries to specific property, but extends to other wrongs by which personal estate is injured or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously cause a party to incur unnecessary expenses, as charged in this case, is certainly injury to that party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).

The ruling in the preceding case was hammered out of facts comparable to those of the present. No cogent reason exists why we should break away from the views just expressed. And, the conclusion remains: Action against the Kalaw heirs and, for the matter, against the Estate of Casimiro Garcia survives.

The preliminaries out of the way, we now go to the core of the controversy.

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly entered into the controverted contracts without the prior approval of the corporation's directorate. Plaintiff leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites, as amongst the duties of the general manager, the obligation: "(b) To perform or execute on behalf of the Corporation upon prior approval of the Board, all contracts necessary and essential to the proper accomplishment for which the Corporation was organized."

Not of de minimis importance in a proper approach to the problem at hand, is the nature of a general manager's position in the corporate structure. A rule that has gained acceptance through the years is that a corporate officer "intrusted with the general management and control of its business, has implied authority to make any contract or do any other act which is necessary or appropriate to the conduct of the ordinary business of the corporation. 21 As such officer, "he may, without any special authority from the Board of Directors perform all acts of an ordinary nature, which by usage or necessity are incident to his office, and may bind the corporation by contracts in matters arising in the usual course of business. 22

The problem, therefore, is whether the case at bar is to be taken out of the general concept of the powers of a general manager, given the cited provision of the NACOCO by-laws requiring prior directorate approval of NACOCO contracts.

The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary in this enterprise are copra sales for future delivery. The movement of the market requires that sales agreements be entered into, even though the goods are not yet in the hands of the seller. Known in business parlance as forward sales, it is concededly the practice of the trade. A certain amount of speculation is inherent in the undertaking. NACOCO was much more conservative than the exporters with big capital. This short-selling was inevitable at the time in the light of other factors such as availability of vessels, the quantity required before being accepted for loading, the labor needed to prepare and sack the copra for market. To NACOCO, forward sales were a necessity. Copra could not stay long in its hands; it would lose weight, its value decrease. Above all, NACOCO's limited funds necessitated a quick turnover. Copra contracts then had to be executed on short notice — at times within twenty-four hours. To be appreciated then is the difficulty of calling a formal meeting of the board.

Such were the environmental circumstances when Kalaw went into copra trading.

Long before the disputed contracts came into being, Kalaw contracted — by himself alone as general manager — for forward sales of copra. For the fiscal year ending June 30, 1947, Kalaw signed some 60 such contracts for the sale of copra to divers parties. During that period, from those copra sales, NACOCO reaped a gross profit of P3,631,181.48. So

pleased was NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it voted to grant him a special bonus "in recognition of the signal achievement rendered by him in putting the Corporation's business on a self-sufficient basis within a few months after assuming office, despite numerous handicaps and difficulties."

These previous contract it should be stressed, were signed by Kalaw without prior authority from the board. Said contracts were known all along to the board members. Nothing was said by them. The aforesaid contracts stand to prove one thing: Obviously, NACOCO board met the difficulties attendant to forward sales by leaving the adoption of means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.

Liberally spread on the record are instances of contracts executed by NACOCO's general manager and submitted to the board after their consummation, not before. These agreements were not Kalaw's alone. One at least was executed by a predecessor way back in 1940, soon after NACOCO was chartered. It was a contract of lease executed on November 16, 1940 by the then general manager and board chairman, Maximo Rodriguez, and A. Soriano y Cia., for the lease of a space in Soriano Building On November 14, 1946, NACOCO, thru its general manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca. On December 22, 1947, when the controversy over the present contract cropped up, the board voted to approve a lease contract previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. On the same date, the board gave its nod to a contract for renewal of the services of Dr. Manuel L. Roxas. In fact, also on that date, the board requested Kalaw to report for action all copra contracts signed by him "at the meeting immediately following the signing of the contracts." This practice was observed in a later instance when, on January 7, 1948, the board approved two previous contracts for the sale of 1,000 tons of copra each to a certain "SCAP" and a certain "GNAPO".

And more. On December 19, 1946, the board resolved to ratify the brokerage commission of 2% of Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French Government. Such ratification was necessary because, as stated by Kalaw in that same meeting, "under an existing resolution he is authorized to give a brokerage fee of only 1% on sales of copra made through brokers." On January 15, 1947, the brokerage fee agreements of 1-1/2% on three export contracts, and 2% on three others, for the sale of copra were approved by the board with a proviso authorizing the general manager to pay a commission up to the amount of 1-1/2% "without further action by the Board." On February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was favorably acted upon by the board. On March 19, 1947, a 2% brokerage commission was similarly approved by the board for Pacific Trading Corporation on the sale of 2,000 tons of copra.

It is to be noted in the foregoing cases that only the brokerage fee agreements were passed upon by the board, not the sales contracts themselves. And even those fee agreements were submitted only when the commission exceeded the ceiling fixed by the board.

Knowledge by the board is also discernible from other recorded instances.1äwphï1.ñët

When the board met on May 10, 1947, the directors discussed the copra situation: There was a slow downward trend but belief was entertained that the nadir might have already been reached and an improvement in prices was expected. In view thereof, Kalaw informed the board that "he intends to wait until he has signed contracts to sell before starting to buy copra."23

In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then current: The copra market appeared to have become fairly steady; it was not expected that copra prices would again rise very high as in the unprecedented boom during January-April, 1947; the prices seemed to oscillate between $140 to $150 per ton; a radical rise or decrease was not indicated by the trends. Kalaw continued to say that "the Corporation has been closing contracts for the sale of copra generally with a margin of P5.00 to P7.00 per hundred kilos." 24

We now lift the following excerpts from the minutes of that same board meeting of July 29, 1947:

521. In connection with the buying and selling of copra the Board inquired whether it is the practice of the management to close contracts of sale first before buying. The General Manager replied that this practice is generally followed but that it is not always possible to do so for two reasons:

(1) The role of the Nacoco to stabilize the prices of copra requires that it should not cease buying even when it does not have actual contracts of sale since the suspension of buying by the Nacoco will result in middlemen taking advantage of the temporary inactivity of the Corporation to lower the prices to the detriment of the producers.

(2) The movement of the market is such that it may not be practical always to wait for the consummation of contracts of sale before beginning to buy copra.

The General Manager explained that in this connection a certain amount of speculation is unavoidable. However, he said that the Nacoco is much more conservative than the other big exporters in this respect.25

Settled jurisprudence has it that where similar acts have been approved by the directors as a matter of general practice, custom, and policy, the general manager may bind the company without formal authorization of the board of directors. 26 In varying language, existence of such authority is established, by proof of the course of business, the

usage and practices of the company and by the knowledge which the board of directors has, or must be presumed to have, of acts and doings of its subordinates in and about the affairs of the corporation. 27 So also,

x x x authority to act for and bind a corporation may be presumed from acts of recognition in other instances where the power was in fact exercised. 28

x x x Thus, when, in the usual course of business of a corporation, an officer has been allowed in his official capacity to manage its affairs, his authority to represent the corporation may be implied from the manner in which he has been permitted by the directors to manage its business.29

In the case at bar, the practice of the corporation has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and in NACOCO's behalf without prior board approval. If the by-laws were to be literally followed, the board should give its stamp of prior approval on all corporate contracts. But that board itself, by its acts and through acquiescence, practically laid aside the by-law requirement of prior approval.

Under the given circumstances, the Kalaw contracts are valid corporate acts.

4. But if more were required, we need but turn to the board's ratification of the contracts in dispute on January 30, 1948, though it is our (and the lower court's) belief that ratification here is nothing more than a mere formality.

Authorities, great in number, are one in the idea that "ratification by a corporation of an unauthorized act or contract by its officers or others relates back to the time of the act or contract ratified, and is equivalent to original authority;" and that " [t]he corporation and the other party to the transaction are in precisely the same position as if the act or contract had been authorized at the time." 30 The language of one case is expressive: "The adoption or ratification of a contract by a corporation is nothing more or less than the making of an original contract. The theory of corporate ratification is predicated on the right of a corporation to contract, and any ratification or adoption is equivalent to a grant of prior authority." 31

Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects from the moment it was constituted." 32 By corporate confirmation, the contracts executed by Kalaw are thus purged of whatever vice or defect they may have. 33

In sum, a case is here presented whereunder, even in the face of an express by-law requirement of prior approval, the law on corporations is not to be held so rigid and inflexible as to fail to recognize equitable considerations. And, the conclusion inevitably is that the embattled contracts remain valid.

5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or breach of trust" in the board's ratification of the contracts without prior approval of the board. For, in reality, all that we have on the government's side of the scale is that the board knew that the contracts so confirmed would cause heavy losses.

As we have earlier expressed, Kalaw had authority to execute the contracts without need of prior approval. Everybody, including Kalaw himself, thought so, and for a long time. Doubts were first thrown on the way only when the contracts turned out to be unprofitable for NACOCO.

Rightfully had it been said that bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of the nature of fraud.34 Applying this precept to the given facts herein, we find that there was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or "breach of a known duty," or "Some motive or interest or ill will" that "partakes of the nature of fraud."

Nor was it even intimated here that the NACOCO directors acted for personal reasons, or to serve their own private interests, or to pocket money at the expense of the corporation. 35 We have had occasion to affirm that bad faith contemplates a "state of mind affirmatively operating with furtive design or with some motive of self-interest or ill will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close examination of all the reported cases, although there are many dicta not easily reconcilable, yet I have found no judgment or decree which has held directors to account, except when they have themselves been personally guilty of some fraud on the corporation, or have known and connived at some fraud in others, or where such fraud might have been prevented had they given ordinary attention to their duties. . . ." Plaintiff did not even dare charge its defendant-directors with any of these malevolent acts.

Obviously, the board thought that to jettison Kalaw's contracts would contravene basic dictates of fairness. They did not think of raising their voice in protest against past contracts which brought in enormous profits to the corporation. By the same token, fair dealing disagrees with the idea that similar contracts, when unprofitable, should not merit the same treatment. Profit or loss resulting from business ventures is no justification for turning one's back on contracts entered into. The truth, then, of the matter is that — in the words of the trial court — the ratification of the contracts was "an act of simple justice and fairness to the general manager and the best interest of the corporation whose

prestige would have been seriously impaired by a rejection by the board of those contracts which proved disadvantageous." 37

The directors are not liable." 38

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing regions. Result: Copra production was impaired, prices spiralled, warehouses destroyed. Quick turnovers could not be expected. NACOCO was not alone in this misfortune. The record discloses that private traders, old, experienced, with bigger facilities, were not spared; also suffered tremendous losses. Roughly estimated, eleven principal trading concerns did run losses to about P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra marketing department of NACOCO, observed that from late 1947 to early 1948 "there were many who lost money in the trade." 39 NACOCO was not immune from such usual business risk.

The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis Dreyfus & Co. by pleading in its answers force majeure as an affirmative defense and there vehemently asserted that "as a result of the said typhoons, extensive damage was caused to the coconut trees in the copra producing regions of the Philippines and according to estimates of competent authorities, it will take about one year until the coconut producing regions will be able to produce their normal coconut yield and it will take some time until the price of copra will reach normal levels;" and that "it had never been the intention of the contracting parties in entering into the contract in question that, in the event of a sharp rise in the price of copra in the Philippine market produce by force majeure or by caused beyond defendant's control, the defendant should buy the copra contracted for at exorbitant prices far beyond the buying price of the plaintiff under the contract." 40

A high regard for formal judicial admissions made in court pleadings would suffice to deter us from permitting plaintiff to stray away therefrom, to charge now that the damage suffered was because of Kalaw's negligence, or for that matter, by reason of the board's ratification of the contracts. 41

Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies spread throughout the islands. It could purchase 2,000 tons of copra a day. The various contracts involved delivery of but 16,500 tons over a five-month period. Despite the typhoons, NACOCO was still able to deliver a little short of 50% of the tonnage required under the contracts.

As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction of damage and wrong is here absent. There cannot be an actionable wrong if either one or the other is wanting. 43

7. On top of all these, is that no assertion is made and no proof is presented which would link Kalaw's acts — ratified by the board — to a matrix for defraudation of the government. Kalaw is clear of the stigma of bad faith. Plaintiff's corporate counsel 44 concedes that Kalaw all along thought that he had authority to enter into the contracts, that he did so in the best interests of the corporation; that he entered into the contracts in pursuance of an overall policy to stabilize prices, to free the producers from the clutches of the middlemen. The prices for which NACOCO contracted in the disputed agreements, were at a level calculated to produce profits and higher than those prevailing in the local market. Plaintiff's witness, Barretto, categorically stated that "it would be foolish to think that one would sign (a) contract when you are going to lose money" and that no contract was executed "at a price unsafe for the Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO envisioned a profit of around P752,440.00. 46

Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted with NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The dailies and quotations from abroad were guideposts to him.

Of course, Kalaw could not have been an insurer of profits. He could not be expected to predict the coming of unpredictable typhoons. And even as typhoons supervened Kalaw was not remissed in his duty. He exerted efforts to stave off losses. He asked the Philippine National Bank to implement its commitment to extend a P400,000.00 loan. The bank did not release the loan, not even the sum of P200,000.00, which, in October, 1947, was approved by the bank's board of directors. In frustration, on December 12, 1947, Kalaw turned to the President, complained about the bank's short-sighted policy. In the end, nothing came out of the negotiations with the bank. NACOCO eventually faltered in its contractual obligations.

That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence, would seem to be supported by the fact that even as the contracts were being questioned in Congress and in the NACOCO board itself, President Roxas defended the actuations of Kalaw. On December 27, 1947, President Roxas expressed his desire "that the Board of Directors should reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been openly disputed, the board, at its regular meeting, appointed Maximo M. Kalaw as acting general manager of the corporation.

Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia Milling Co., Inc., L-15092, May 18, 1962:

"They (the directors) hold such office charged with the duty to act for the corporation according to their best judgment, and in so doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of a corporation should be operated at a loss during a business depression, or closed down at a smaller loss, is a purely business and economic problem to be determined by the directors of the corporation, and not by the court. It is a well known rule of law that questions of policy of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its judgment for the judgment of the board of directors; the board is the business manager of the corporation, and so long as it acts in good faith its orders are not reviewable by the courts." (Fletcher on Corporations, Vol. 2, p. 390.) 48

Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49

Viewed in the light of the entire record, the judgment under review must be, as it is hereby, affirmed.

Without costs. So ordered.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and Angeles, JJ., concur.Fernando, J., took no part.Concepcion, C.J. and Dizon, J., are on leave.

G.R. No. 81552 May 28, 1990

DIONISIO FIESTAN and JUANITA ARCONADO, petitioners vs.COURT OF APPEALS; DEVELOPMENT BANK OF THE PHILIPPINES, LAOAG CITY BRANCH; PHILIPPINE NATIONAL BANK, VIGAN BRANCH, ILOCOS SUR, FRANCISCO PERIA and REGISTER OF DEEDS OF ILOCOS SUR, respondents.

Pedro Singson Reyes for petitioners.

The Chief Legal Counsel for PNB.

Public Assistance Office for Francisco Peria.

Ruben O. Fruto, Bonifacio M. Abad and David C. Frez for DBP Laoag Branch.

FERNAN, C.J.:

In this petition for review on certiorari, petitioners spouses Dionisio Fiestan and Juanita Arconada owners of a parcel of land (Lot No. 2B) situated in Ilocos Sur covered by TCT T-13218 which they mortgaged to the Development Bank of the Philippines (DBP) as security for their P22,400.00 loan, seek the reversal of the decision of the Court of Appeals 1 dated June 5, 1987 affirming the dismissal of their complaint filed against the Development Bank of the Philippines, Laoag City Branch, Philippine National Bank, Vigan Branch, Ilocos Sur, Francisco Peria and the Register of Deeds of Ilocos Sur, for annulment of sale, mortgage, and cancellation of transfer certificates of title.

Records show that Lot No. 2-B was acquired by the DBP as the highest bidder at a public auction sale on August 6, 1979 after it was extrajudicially foreclosed by the DBP in accordance with Act No. 3135, as amended by Act No. 4118, for failure of petitioners to pay their mortgage indebtedness. A certificate of sale was subsequently issued by the Provincial Sheriff of Ilocos Sur on the same day and the same was registered on September 28, 1979 in the Office of the Register of Deeds of Ilocos Sur. Earlier, or on September 26, 1979, petitioners executed a Deed of Sale in favor of DBP which was likewise registered on September 28, 1979.

Upon failure of petitioners to redeem the property within the one (1) year period which expired on September 28, 1980, petitioners' TCT T-13218 over Lot No. 2-B was cancelled by the Register of Deeds and in lieu thereof TCT T-19077 was issued to the DBP upon presentation of a duly executed affidavit of consolidation of ownership.

On April 13,1982, the DBP sold the lot to Francisco Peria in a Deed of Absolute Sale and the same was registered on April 15, 1982 in the Office of the Register of Deeds of Ilocos Sur. Subsequently, the DBP's title over the lot was cancelled and in lieu thereof TCT T-19229 was issued to Francisco Peria.

After title over said lot was issued in his name, Francisco Peria secured a tax declaration for said lot and accordingly paid the taxes due thereon. He thereafter mortgaged said lot to the PNB Vigan Branch as security for his loan of P115,000.00 as required by the bank to increase his original loan from P49,000.00 to P66,000.00 until it finally reached the approved amount of P115,000.00. Since petitioners were still in possession of Lot No. 2-B, the Provincial Sheriff ordered them to vacate the premises.

On the other hand, petitioners filed on August 23, 1982 a complaint for annulment of sale, mortgage and cancellation of transfer certificates of title against the DBP-Laoag City, PNB Vigan Branch, Ilocos Sur, Francisco Peria and the Register of Deeds of Ilocos Sur, docketed as Civil Case No. 3447-V before the Regional Trial Court of Vigan, Ilocos Sur.

After trial, the RTC of Vigan, Ilocos Sur, Branch 20, rendered its decision 2 on November 14, 1983 dismissing the complaint, declaring therein, as valid the extrajudicial foreclosure sale of the mortgaged property in favor of the DBP as highest bidder in the public auction sale held on August 6, 1979, and its subsequent sale by DBP to Francisco Peria as well as the real estate mortgage constituted thereon in favor of PNB Vigan as security for the P115,000.00 loan of Francisco Peria.

The Court of Appeals affirmed the decision of the RTC of Vigan, Ilocos Sur on June 20, 1987.

The motion for reconsideration having been denied 3 on January 19, 1988, petitioners filed the instant petition for review on certiorari with this Court. Petitioners seek to annul the extrajudicial foreclosure sale of the mortgaged property on August 6, 1979 in favor of the Development Bank of the Philippines (DBP) on the ground that it was conducted by the Provincial Sheriff of Ilocos Sur without first effecting a levy on said property before selling the same at the public auction sale. Petitioners thus maintained that the extrajudicial foreclosure sale being null and void by virtue of lack of a valid levy, the certificate of sale issued by the Provincial Sheriff cannot transfer ownership over the lot in question to the DBP and consequently the deed of sale executed by the DBP in favor of Francisco Peria and the real estate mortgage constituted thereon by the latter in favor of PNB Vigan Branch are likewise null and void.

The Court finds these contentions untenable.

The formalities of a levy, as an essential requisite of a valid execution sale under Section 15 of Rule 39 and a valid attachment lien under Rule 57 of the Rules of Court, are not basic requirements before an extrajudicially foreclosed property can be sold at public auction. At the outset, distinction should be made of the three different kinds of sales under the law, namely: an ordinary execution sale, a judicial foreclosure sale, and an extrajudicial foreclosure sale, because a different set of law applies to each class of sale mentioned. An ordinary execution sale is governed by the pertinent provisions of Rule 39 of the Rules of Court. Rule 68 of the Rules of Court applies in cases of judicial

foreclosure sale. On the other hand, Act No. 3135, as amended by Act No. 4118 otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages" applies in cases of extrajudicial foreclosure sale.

The case at bar, as the facts disclose, involves an extrajudicial foreclosure sale. The public auction sale conducted on August 6, 1979 by the Provincial Sheriff of Ilocos Sur refers to the "sale" mentioned in Section 1 of Act No. 3135, as amended, which was made pursuant to a special power inserted in or attached to a real estate mortgage made as security for the payment of money or the fulfillment of any other obligation. It must be noted that in the mortgage contract, petitioners, as mortgagor, had appointed private respondent DBP, for the purpose of extrajudicial foreclosure, "as his attorney-in-fact to sell the property mortgaged under Act No. 3135, as amended, to sign all documents and perform any act requisite and necessary to accomplish said purpose .... In case of foreclosure, the Mortgagor hereby consents to the appointment of the mortgagee or any of its employees as receiver, without any bond, to take charge of the mortgaged property at once, and to hold possession of the same ... 4

There is no justifiable basis, therefore, to apply by analogy the provisions of Rule 39 of the Rules of Court on ordinary execution sale, particularly Section 15 thereof as well as the jurisprudence under said provision, to an extrajudicial foreclosure sale conducted under the provisions of Act No. 3135, as amended. Act No. 3135, as amended, being a special law governing extrajudicial foreclosure proceedings, the same must govern as against the provisions on ordinary execution sale under Rule 39 of the Rules of Court.

In that sense, the case of Aparri vs. Court Of Appeals, 13 SCRA 611 (1965), cited by petitioners, must be distinguished from the instant case. On the question of what should be done in the event the highest bid made for the property at the extrajudicial foreclosure sale is in excess of the mortgage debt, this Court applied the rule and practice in a judicial foreclosure sale to an extrajudicial foreclosure sale in a similar case considering that the governing provisions of law as mandated by Section 6 of Act No. 3135, as amended, specifically Sections 29, 30 and 34 of Rule 39 of the Rules of Court (previously Sections 464, 465 and 466 of the Code of Civil Procedure) are silent on the matter. The said ruling cannot, however, be construed as the legal basis for applying the requirement of a levy under Section 15 of Rule 39 of the Rules of Court before an extrajudicially foreclosed property can be sold at public auction when none is expressly required under Act No. 3135, as amended.

Levy, as understood under Section 15, Rule 39 of the Rules of Court in relation to execution of money judgments, has been defined by this Court as the act whereby a sheriff sets apart or appropriates for the purpose of satisfying the command of the writ, a part or the whole of the judgment-debtor's property. 5

In extrajudicial foreclosure of mortgage, the property sought to be foreclosed need not be identified or set apart by the sheriff from the whole mass of property of the mortgagor for the purpose of satisfying the mortgage indebtedness. For, the essence of a contract of mortgage indebtedness is that a property has been identified or set apart from the mass of the property of the debtor-mortgagor as security for the payment of money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of payment. By virtue of the special power inserted or attached to the mortgage contract, the mortgagor has authorized the mortgagee-creditor or any other person authorized to act for him to sell said property in accordance with the formalities required under Act No. 3135, as amended.

The Court finds that the formalities prescribed under Sections 2, 3 and 4 of Act No. 3135, as amended, were substantially complied with in the instant case. Records show that the notices of sale were posted by the Provincial Sheriff of Ilocos Sur and the same were published in Ilocos Times, a newspaper of general circulation in the province of Ilocos Sur, setting the date of the auction sale on August 6, 1979 at 10:00 a.m. in the Office of the Sheriff, Vigan, Ilocos Sur. 6

The nullity of the extrajudicial foreclosure sale in the instant case is further sought by petitioners on the ground that the DBP cannot acquire by purchase the mortgaged property at the public auction sale by virtue of par. (2) of Article 1491 and par. (7) of Article 1409 of the Civil Code which prohibits agents from acquiring by purchase, even at a public or judicial auction either in person or through the mediation of another, the property whose administration or sale may have been entrusted to them unless the consent of the principal has been given.

The contention is erroneous.

The prohibition mandated by par. (2) of Article 1491 in relation to Article 1409 of the Civil Code does not apply in the instant case where the sale of the property in dispute was made under a special power inserted in or attached to the real estate mortgage pursuant to Act No. 3135, as amended. It is a familiar rule of statutory construction that, as between a specific statute and general statute, the former must prevail since it evinces the legislative intent more clearly than a general statute does. 7 The Civil Code (R.A. 386) is of general character while Act No. 3135, as amended, is a special enactment and therefore the latter must prevail. 8

Under Act No. 3135, as amended, a mortgagee-creditor is allowed to participate in the bidding and purchase under the same conditions as any other bidder, as in the case at bar, thus:

Section 5. At any sale, the creditor, trustee, or other person authorized to act for the creditor, may participate in the bidding and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made.

In other words, Section 5 of Act No. 3135, as amended, creates and is designed to create an exception to the general rule that a mortgagee or trustee in a mortgage or deed of trust which contains a power of sale on default may not become the purchaser, either directly or through the agency of a third person, at a sale which he himself makes under the power. Under such an exception, the title of the mortgagee-creditor over the property cannot be impeached or defeated on the ground that the mortgagee cannot be a purchaser at his own sale.

Needless to state, the power to foreclose is not an ordinary agency that contemplates exclusively the representation of the principal by the agent but is primarily an authority conferred upon the mortgagee for the latter's own protection. It is an ancillary stipulation supported by the same cause or consideration for the mortgage and forms an essential and inseparable part of that bilateral agreement. 9 Even in the absence of statutory provision, there is authority to hold that a mortgagee may purchase at a sale under his mortgage to protect his own interest or to avoid a loss to himself by a sale to a third person at a price below the mortgage debt. 10 The express mandate of Section 5 of Act No. 3135, as amended, amply protects the interest of the mortgagee in this jurisdiction.

WHEREFORE, in view of the foregoing, the petition is DENIED for lack of merit and the decision of the Court of Appeals dated June 20, 1987 is hereby AFFIRMED. No cost.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortes JJ., concur.

G.R. No. 95900 July 23, 1992

JULIUS C. OUANO, petitioner, vs.COURT OF APPEALS, MARKET DEVELOPERS, INC., JULIAN O. CHUA, SUPREME MERCHANT CONSTRUCTION SUPPLY, INC., JOHNNY ANG, alias Chua Pek Giok, and FLORENTINO RAFOLS, JR., respondent.

REGALADO, J.:

This petition for review on certiorari assails the decision of the Court of Appeals in CA-G.R. CV No. 12693, promulgated on August 30, 1990, reversing the decision of the Regional Trial Court of Cebu, Branch XI, in Civil Case No. R-20037 wherein judgment had been rendered for petitioner, as well as the resolution of said respondent court, dated October 15, 1990, denying petitioner's motion for reconsideration. 1

As found by respondent court, petitioner is the registered owner and operator of the motor vessel known as M/V Don Julio Ouano. On October 8, 1980, petitioner leased the said vessel to respondent Rafols under a charter party. The consideration for the letting and hiring of said vessel was P60,000.00 a month, with P30,000.00 as down payment and the balance of P30,000.00 to be paid within twenty (20) days after actual departure of the vessel from the port of call. It was also expressly stipulated that the charterer should operate the vessel for his own benefit and should not sublet or sub-charter to the same without the knowledge and written consent of the owner.

On October 11, 1980, Rafols contracted with respondent Market Developers, Inc. (hereafter, MADE) through its group manager, respondent Julian O. Chua, under an agreement denominated as a "Fixture Note" to transport 13,000 bags of cement from Iligan City to General Santos City, consigned to respondent Supreme Merchant Construction Supply, Inc. (SMCSI, for brevity) for a freightage of P46,150.00. Said amount was agreed to be payable to Rafols by MADE in two installments, that is, P23,075.00 upon loading of the cement at Iligan City and the balance of P23,075.00 upon completion of loading and receipt of the cement cargo by the consignee. The fixture note did not have the written consent of petitioner.

Rafols had on board the M/V Don Julio Ouano his sobre cargo (jefe de viaje) when it departed from Iligan City until the cargo of cement was unloaded in General Santos City, the port of destination.

On October 13, 1980, petitioner wrote a letter to MADE through its aforesaid manager, Chua, "to strongly request, if not demand to hold momentarily any payment or partial payment whatsoever due M/V Don Julio Ouano until Mr. Florentino Rafols makes goods his commitment" to petitioner.

On October 20, 1980, MADE, as shipper, paid Rafols the amount of P23,075.00 corresponding to the last installment of the freightage for the aforestated cargo of cement.

The entire cargo was thereafter unloaded at General Santos City Port and delivered to the consignee, herein respondent SMCSI, without any attempt on the part of either the captain of M/V Don Julio Ouano or the said sobre cargo of Rafols, or even of petitioner himself who was then in General Santos City Port, to hold and keep in deposit either the whole or part of the cement cargo to answer for freightage. Neither was there any demand made on any of the respondents for a bond to secure payment of the freightage, nor to assert in any manner the maritime lien for unpaid freight over the cargo by giving notice thereof to the consignee SMCI. The cement was sold in due course of trade by SMCI to its customers in October and November, 1980.

On January 6, 1981, petitioner filed a complaint in the Regional Trial Court of Cebu against MADE, as shipper; SMC, as consignee; and Rafols, as charterer, seeking payment of P23,000.00 representing the freight charges for the cement cargo, aside from moral and exemplary damages in the sum of P150,000.00, attorney's fees and expenses of litigation.

On March 10, 1981, MADE filed its answer, while Ang and Chua filed theirs on February 10 and May 31, 1982, respectively. Rafols was declared in default for failure to file his answer despite due service of summons.

On account of the subsequent dropping and impleading of parties defendant, the complaint underwent several amendments until the case was eventually tried on the third amended complaint, which alleged three causes of action against the aforenamed respondents as answering defendants therein.

On May 25, 1985, the trial court rendered a decision in favor of petitioner, with the following disposition:

WHEREFORE, premises considered, this Court render(s) judgment 1) under plaintiff's first cause of action, ordering defendant MADE (Market Developers, Inc.), Julian O. Chua, Supreme Merchant Construction Supply, Inc., Johnny Ang otherwise known as Chua Pek Giok and defaulted defendant Florentino Rafols, Jr., jointly and severally, to pay to plaintiff Julius C. Ouano the sum of P23,075.00 corresponding to the first 50% freight installment on plaintiff's vessel "M/V Don Julio Ouano" included as part of the purchase price paid by defendant SMCSI to defendant MADE, plus legal interest from January 6, 1981 date of filing of the original complaint; 2) under the second cause of action, sentencing MADE (Market Developers), Julian O. Chua and Florentino Rafols, Jr., jointly and solidarily, to pay plaintiff P50,000.00 in concept of moral and exemplary damages, and P5,000.00 attorney's fees; and 3) under the third cause of action, sentencing defendant Supreme Merchant Construction Supply, Inc. and Johnny Ang alias Chua Pek Giok, jointly and severally, to pay plaintiff P200,000.00 attorney's fees and expenses of litigation, P4,000.00, including P1,000.00 incurred by plaintiff for travel to General Santos City to coordinate with the plaintiff (sic) in serving an alias summons per sheriff's return of service (Exhibit 'S'), with costs against all the defendants. 2

On appeal, respondent Court of Appeals reversed the aforesaid decision, holding as follows:

In the light of the foregoing, appellee Ouano has no cause of action against appellants MADE and SMCSI, but only against defendant Rafols. Their principals not being liable to appellee for the payment of the freightage in question, the agents, appellants Julian O. Chua and Johnny Ang alias Chua Pek Giok who had acted within the scope of their authority, would accordingly not be liable to appellee.

For the same reason that the defendants-appellants are not liable to pay the appellee the freightage in question, the award of moral and exemplary damages, attorney 's fees and expenses of litigation in favor of appellee has no factual and legal basis.

WHEREFORE, premises considered, the decision appealed from is reversed and set aside with respect to the defendants-appellants who are hereby absolved from the complaint. The decision is affirmed with respect to defendant Florentino Rafols. 3

Petitioner filed a motion for reconsideration which, as already stated, was denied by the Court of Appeals, 4 hence the present petition with the following assignment of errors:

1. The Honorable Court of Appeals erred in not holding respondents MADE and Chua liable for damages to petitioner for quasi-delict under Art. 2176, New Civil Code, let alone for inducement to violate contract under Art. 1314 thereof.

2. The Court of Appeals erred in not holding respondents MADE and Chua liable for all damages which are the natural and probable consequences of their act or omission, the term "all damages" being broad enough to embrace the P150,000.00 moral and exemplary damages claimed by petitioner, as well as P10,000.00 attorney's fees likewise claimed by him (Art. 2202, N.C.C.).

3. The Court of Appeals erred in not holding respondents MADE and Chua liable jointly and solidarily (Art. 2194, N.C.C.) for the foregoing damages and attorney's fee, as well as actual damages of P23,075.00 representing unpaid freight on petitioner's vessel.

4. The Court of Appeals erred in not holding that in contracts and quasi-delicts the defendants shall be liable for all damages which are the natural and probable consequences of the act or omission complained of, more so if attended with fraud, bad faith, malice or wanton attitude (Arts. 2201 and 2202, N.C.C.).

5. The Court of Appeals erred in not holding, in accord with the settled doctrine in Overseas Factors, Inc. vs. South Sea Shipping, 4 SCRA 401, that where freight is included in the purchase price, the carrier's lien exists if freight was not paid, hence, the continued liability of respondents MADE and Chua and respondents Supreme Merchant Construction Supply, Inc. and Chua Pek Giok. 5

We find no merit in this petition.

Preliminarily, the thesis of petitioner that the aforestated fixture note executed by Rafols and MADE was in derogation of the prohibition against the subletting or sub-chartering of the vessel has been duly confuted by respondent court. It pointed out that Rafols did not, by entering into said contract of transportation of the cement cargo, thereby sublease the vessel. The possession, operation, and management of the vessel was not transferred to MADE but remained with Rafols as the lessee or charterer. Rafols, as such lessee, was the one who bound himself to transport, as he did transport, the cargo of cement for a fixed price. 6 On the other hand, even indulging petitioner in his argument that there was a sublease or sub-charter by reason of that one particular cargo of MADE, still no right of recovery exists in his favor against any of the private respondents, except respondent Rafols, as we shall hereunder demonstrate.

It is a basic principle in civil law that, with certain exceptions not obtaining in this case, a contract can only bind the parties who had entered into it or their successors who assumed their personalities or their juridical positions, and that, as a consequence, such contract can neither favor nor prejudice a third person. 7 It is undisputed that the charter contract was entered into only by and between petitioner and respondent Rafols, and the other private respondents were neither parties thereto nor were they aware of the provisions thereof. The aforesaid allegations of petitioner that Rafols violated the prohibition in the contract against the sublease or sub-charter of the vessel without his knowledge and written consent, even if true, does not give rise to a cause of action against the supposed sublease or sub-charterer. The act of the charterer in sub-chartering the vessel, in spite of a categorical prohibition may be a violation of the contract, but the owner's right of recourse is against the original charterer, either for rescission or fulfillment, with the payment of damages in either case. 8

The obligation of contracts is limited to the parties making them and, ordinarily, only those who are parties to contracts are liable for their breach. Parties to a contract cannot thereby impose any liability on one who, under its terms, is a stranger to the contract, and, in any event, in order to bind a third person contractually, an expression of assent by such person is necessary. 9

We likewise reject the contention of petitioner that MADE and Chua should be held liable for damages for a quasi-delict under Article 2176 of the Civil Code for having failed to obtain his consent before entering into an agreement with Rafols, and under Article 1314 of the same Code for inducing Rafols to violate the charter party.

The obligation to obtain the written consent of petitioner before subleasing or sub-chartering the vessel was on Rafols and not on MADE, hence the latter cannot be held liable for the supposed non-compliance therewith.

Moreover, we cannot conceive of how MADE and Chua could be guilty of inducing Rafols to violate the original charter party. Firstly, there is no evidence on record to show that said respondents had knowledge of the prohibition imposed in the original charter party to sublease or sub-charter the vessel. Secondly, at the time the fixture note was entered into between Rafols and MADE, a written authorization signed by the wife of petitioner in his behalf, authorizing Rafols to execute contracts, negotiate for cargoes and receive freight payments, 10 was shown by the former to the latter. Although the said authorization may have been made by the wife, the same, however, can evidently be proof of good faith on the part of MADE and Chua who merely relied thereon. Thirdly, as stated in the fixture note, the agreement between Rafols and MADE was for the former to transport the cement of the latter using either the "M/V Don Julio Ouano or substitute vessel at his discretion." 11 Hence, the decision to use the M/V Don Julio Ouano in transporting the cargo of MADE was solely that of Rafols.

Also, herein petitioner is deemed to have ratified the supposed sub-charter contract entered into by MADE and Rafols when he demanded the payment of the second freight installment as provided in the agreement and, later, received the same by virtue of the decision of the Court of First Instance of Cebu in Civil Case No. R-19845, an interpleader case filed by MADE. 12

Contrary to petitioner's contestation, the act of MADE in paying the first freight installment to Rafols is not an indication of bad faith or malice. Article 1240 of the Civil Code provides that "(p)ayment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it." Consequently, MADE, under the fixture note, was under obligation to pay the freight to Rafols.

Now, even on petitioner's theory that there was a sublease, it must be stressed that in a sublease arrangement, the basic principles of which are applicable in the present case, there are two distinct leases involved, that is, the principal lease and the sublease. There are two juridical relationships which co-exist and are intimately related to each other, but which are nonetheless distinct one from the other. In such arrangement, the personality of the lessee qua lessee does not disappear; his rights and obligations vis-a-vis the lessor are not passed on to nor acquired by the sublessee. The lessor is, in the main and except only in the instances specified in the Civil Code, a stranger to the relationship between the lessee-sublessor and the sublessee. The lessee-sublessor is not an agent of the lessor nor is the lessor an agent of the lessee-sublessor. The sublessee has no right or authority to pay the sublease rentals to the lessor, said rentals being due and payable to the lessee-sublessor. 13 MADE was, therefore, under no obligation to pay petitioner since the freightage was payable to Rafols.

Although it is provided in Article 1652 of the Civil Code that the sublessee is subsidiarily liable to the lessor for any rent due from the lessee, the sublessee shall not be responsible beyond the amount of rent due from him, in accordance with the terms of the sublease, at the time of the extrajudicial demand by the lessor. However, in the case at bar, petitioner made no demand for payment from MADE. His letter dated October 13, 1980 was only a request to hold momentarily any payment due for the use of M/V Don Julio Ouano until respondent Rafols had made good his obligations to him.

In the absence of any positive action on the part of petitioner, MADE could not withhold the payment of the freight to Rafols. As stated in the fixture note, the first freight installment was due and payable upon arrival of the assigned vessel at the port of loading. The goods were loaded in the vessel on or before October 9, 1980, 14 hence on that date the first freight installment was already due and demandable. To further withhold the payment of said installment would constitute a breach of MADE's obligation under the foregoing contract.

In addition, it is also worth noting that, as alleged in paragraph 6 of petitioner's basic complaint filed in the court below, payments were actually made after October 13, 1980 by Rafols to petitioner, to wit: (a) two checks in the total amount of P30,000.00 dated October 13 and 21, 1980, respectively; and (b) a third postdated check for P32,000.00 issued on November 9, 1980. 15 The fact that the said checks bounced for insufficient funds cannot in any way be ascribable to MADE nor can it create or affect any liability which petitioner seeks to impute to respondents MADE, SMCSI and their agents.

Anent the issue on maritime lien on the cargo, it is the theory of petitioner that the first freight installment having remained unpaid to him as owner of M/V Don Julio Ouano, the maritime lien on the cargo subsists. The said contention is specious and untenable.

Herein petitioner, as owner of the vessel, has no lien on the cargo. A charter party may, among other classifications, be of two kinds: One is where the owner agrees to carry a cargo which the charterer agrees to provide, and the second is where there is an entire surrender by the owner of the vessel to the charterer, who hires the vessel as one hires a house, takes her empty, and provides the officers and provisions, and, in short, the entire outfit. In such a contract, the charterer is substituted in place of the owner and becomes the owner for the voyage. 16 This second type is also known as a bareboat charter or otherwise referred to as a demise of the vessel. 17

In a charter party of the second kind, not only the entire capacity of the ship is let but the ship itself, and the possession is passed to the charterer. The entire control and management of it is given up to him. The general owner loses his lien for freight, but the lien itself is not destroyed; the charterer is substituted in his place, in whose favor the lien continues to exist when goods are taken on freight. The general owner, however, has no remedy for the charter of

his vessel but his personal action on the covenants of the charter party. It is a contract in which he trusts in the personal credit of the charterer. 18

Therefore, where the charter constitutes a demise of the ship and the charterer is the owner for the voyage, and that is the kind of charter party involved in the instant case, the general owner has no lien on the cargo for the hire of the vessel, in the absence of an express provision therefor 19 as in the case at bar.

Moreover, even on the assumption that petitioner had a lien on the cargo for unpaid freight, the same was deemed waived when the goods were unconditionally released to the consignee at the port of destination. A carrier has such a lien only while it retains possession of the goods, so that delivery of the goods to the consignee or a third person terminates, or constitutes a waiver of, the lien. 20 The lien of a carrier for the payment of freight charges is nothing more than the right to withhold the goods, and is inseparably associated with its possession and dependent upon it. 21

The shipowner's lien for freight is not in the nature of a hypothecation which will remain a charge upon the goods after he has parted with possession, but is simply the right to retain them until the freight is paid, and is therefore lost by an unconditional delivery of the goods to the consignee. 22

Furthermore, under Article 667 of the Code of Commerce, the period during which the lien shall subsist is twenty (20) days. Parenthetically, this has been modified by the Civil Code, Article 2241 whereof provides that credits for transportation of the goods carried, for the price of the contract and incidental expenses shall constitute a preferred claim or lien on the goods carried until their delivery and for thirty (30) days thereafter. During this period, the sale of the goods may be requested, even though there are other creditors and even if the shipper or consignee is insolvent. But, this right may not be made use of where the goods have been delivered and were turned over to a third person without malice on the part of the third person and for a valuable consideration. In the present case, the cargo of cement was unloaded from the vessel and delivered to the consignee on October 23, 1980, without any oral or written notice or demand having been made on SMCSI for unpaid freight on the cargo. Consequently, after the lapse of thirty (30) days from the date of delivery, the cargo of cement had been released from any maritime lien for unpaid freight.

Petitioner's invocation of Overseas Factors, Inc., et al. v. South Sea Shipping Co., et al., 23 therefore, is ineffectual and unavailing. In said case, the cargo was still in the possession of the carrier whose officers and crew refused to unload the same unless the balance of the freight was paid. In this case before us, the cargo had already been unconditionally delivered to the consignee SMCI without protest.

WHEREFORE, the petition is DENIED and the assailed judgment of respondent Court of Appeals is hereby AFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla and Nocon, JJ., concur.

DIGEST:

Facts: Julius C. Ouano is the registered owner and operator of the motor vessel known as M/V Don Julio Ouano. On 8 October 1980, Ouano leased the said vessel to Florentino Rafols Jr. under a charter party. The consideration for the letting and hiring of said vessel was P60,000.00 a month, with P30,000.00 as down payment and the balance of P30,000.00 to be paid within 20 days after actual departure of the vessel from the port of call. It was also expressly stipulated that the charterer should operate the vessel for his own benefit and should not sublet or sub-charter the same without the knowledge and written consent of the owner. On 11 October 1980, Rafols contracted with Market Developers, Inc. (MADE) through its group manager, Julian O. Chua, under an agreement denominated as a “Fixture Note” to transport 13,000 bags of cement from Iligan City to General Santos City, consigned to Supreme Merchant Construction Supply, Inc. (SMCSI) for a freightage of P46,150.00. Said amount was agreed to be payable to Rafols by MADE in two installments, that is, P23,075.00 upon loading of the cement at Iligan City and the balance of P23,075.00 upon completion of loading and receipt of the cement cargo by the consignee. The fixture note did not have the written consent of Ouano. Rafols had on board the M/V Don Julio Ouano his sobre cargo (jefe de viaje) when it departed from Iligan City until the cargo of cement was unloaded in General Santos City, the port of destination. On 13 October 1980, Ouano wrote a letter to MADE through its manager, Chua, “to strongly request, if not demand to hold momentarily any payment or partial payment whatsoever due M/V Don Julio Ouano until Mr. Florentino Rafols makes good his commitment” to petitioner. On 20 October 1980, MADE, as shipper, paid Rafols the amount of P23,075.00 corresponding to the first installment of the freightage for the aforestated cargo of cement. The entire cargo was thereafter unloaded at General Santos City Port and delivered to the consignee, SMCSI, without any attempt on the part of either the captain of M/V Don Julio Ouano or the said sobre cargo of Rafols, or even of Ouano himself who was

then in General Santos City Port, to hold and keep in deposit either the whole or part of the cement cargo to answer for freightage. Neither was there any demand made on Rafols, et. al. for a bond to secure payment of the freightage, nor to assert in any manner the maritime lien for unpaid freight over the cargo by giving notice thereof to the consignee SMCI. The cement was sold in due course of trade by SMCSI to its customers in October and November 1980.

On 6 January 1981, Ouano filed a complaint in the RTC of Cebu against MADE, as shipper; SMCSI, as consignee; and Rafols, as charterer, seeking payment of P23,000.00 representing the freight charges for the cement cargo, aside from moral and exemplary damages in the sum of P150,000.00, attorney’s fees and expenses of litigation. On 10 March 1981, MADE filed its answer, while Ang and Chua filed theirs on 10 February 1982 and 31 May 1982, respectively. Rafols was declared in default for failure to file his answer despite due service of summons. On 25 May 1985, the trial court rendered a decision in favor of Ouano, (1) ordering MADE, Chua, SMCSI, Ang (Chua Pek Giok) and Rafols, jointly and severally, to pay to Ouano the sum of P23,075.00 corresponding to the first 50% freight installment on the latter’s vessel `M/V Don Julio Ouano’ included as part of the purchase price paid by SMCSI to MADE, plus legal interest from 6 January 1981 date of filing of the original complaint; (2) sentencing MADE, Chua and Rafols, jointly and solidarily, to pay Ouano P50,000.00 in concept, of moral and exemplary damages, and P5,000.00 attorney’s fees; and (3) sentencing SMCSI and Ang, jointly and severally, to pay Ouano P200,000.00 attorney’s fees and expenses of litigation, P4,000.00, including P1,000.00 incurred by Ouano for travel to General Santos City to coordinate in serving an alias summons per sheriff’s return of service, with costs against Rafols, et.al.

On appeal, and on 30 August 1990, the Court of Appeals reversed the decision, and absolved MADE, et. al. from the complaint; but affirmed the decision with respect to Rafols. Ouano filed a motion for reconsideration which was denied by the Court of Appeals on 15 October 1990. Hence, the petition for review on certiorari.

The Supreme Court denied the petition and affirmed the assailed judgment of the Court of Appeals.

1. Contract binding upon contracting parties; Contract neither favor nor prejudice third personIt is a basic principle in civil law that, with certain exceptions not obtaining in the present case, a contract can only bind the parties who had entered into it or their successors who assumed their personalities or their juridical positions, and that, as a consequence, such contract can neither favor nor prejudice a third person. Herein, the charter contract was entered into only by and between Ouano and Rafols, and MADE and SMCSI were neither parties thereto nor were they aware of the provisions thereof.

2. Violation of charter party does not give rise to cause of action against sublessee or sub-charterer; Owner’s recourseThe violation of the prohibition in the contract against the sublease or sub-charter of the vessel without the vessel owner’s knowledge and written consent does not give rise to a cause of action against the supposed sublessee or sub-charterer. The act of the charterer in sub-chartering the vessel, in spite of a categorical prohibition may be a violation of the contract, but the owner’s right of recourse is against the original charterer, either for rescission or fulfillment, with the payment of damages in either case.

3. Obligations of contracts limited to parties making themThe obligation of contracts is limited to the parties making them and, ordinarily, only those who are parties to contracts are liable for their breach. Parties to a contract cannot thereby impose any liability on one who, under its terms, is a stranger to the contract, and, in any event, in order to bind a third person contractually, an expression of agent by such person is necessary.

4. MADE and Chua not liable for damages for quasi-delict under Article 176 NCCMADE and Chua are not to be held liable for damages for a quasi-delict under Article 176 of the Civil Code for having failed to obtain his consent before entering into an agreement with Rafols. The obligation to obtain the written consent of Ouano before subleasing or sub-chartering the vessel was on Rafols and not on MADE, hence the latter cannot be held liable for the supposed non-compliance therewith.

5. MADE and Chua not liable for damages for quasi-delict under Artice 1314 for inducing Rafols to violate charter partyMADE and Chua could not be held guilty of inducing Rafols to violate the original charter party. (1) There is no evidence on record to show that MADE and Chua had knowledge of the prohibition imposed in the original charter party to sublease or sub-charter the vessel. (2) At the time the fixture note was entered into between Rafols and MADE, a written authorization signed by the wife of Ouano in his behalf, authorizing Rafols to execute contracts, negotiate for cargoes and receive freight payments, was shown by the former to the latter. Although the said authorization may have been made by the wife, the same, however, can evidently be proof of good faith on the part of MADE and Chua who merely relied thereon. (3) As stated in the fixture note, the agreement between Rafols and MADE was for the former to transport the cement of the latter using either the “M/V Don Julio Ouano or substitute vessel at his discretion.” Hence, the decision to use the M/V Don Julio Ouano in transporting the cargo of MADE was solely that of Rafols.

6. Demand of second freight installment a ratification of the sub-charter contract

Herein, Ouano is deemed to have ratified the supposed sub-charter contract entered into by MADE and Rafols when he demanded the payment of the second freight installment as provided in the agreement and, later, received the same by virtue of the decision of the CFI of Cebu in Civil Case R-19845, an interpleader case filed by MADE.

7. Payment not indication of bad faith or malice; Article 1240 NCCThe act of MADE in paying the first freight installment to Rafols is not an indication of bad faith or malice. Article 1240 of the Civil Code provides that “(p)ayment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it.” Consequently, MADE, under the fixture note, was under obligation to pay the freight to Rafols.

8. Leases involved in a sublease agreement; Rights and obligations of partiesIn a sublease arrangement, there are two distinct leases involved, that is, the principal lease and the sublease. There are two juridical relationships which co-exist and are intimately related to each other, but which are nonetheless distinct one from the other. In such arrangement, the personality of the lessee qua lessee does not disappear; his rights and obligations vis-a-vis the lessor are not passed on to nor acquired by the sublessee. The lessor is in the main and except only in the instances specified in the Civil Code, a stranger to the relationship between the lessee-sublessor and the sublessee. The lessee-sublessor is not an agent of the lessor nor is the lessor an agent of the lessee-sublessor. The sublessee has no right or authority to pay the sublease rentals to the lessor, said rentals being due and parable to the lessee-sublessor. Herein, MADE was under no obligation to pay Ouano since the freightage was payable to Rafols.

9. Article 1652 NCC, Sublessee subsidiary liable to lessor; No demand however was made against sublesseeAlthough it is provided in Article 1652 of the Civil Code that the sublessee is subsidiarily liable to the lessor for any rent due from the lessee, the sublessee shall not be responsible beyond the amount of rent due from him, in accordance with the terms of the sublease, at the time of the extrajudicial demand by the lessor. Herein, Ouano made no demand for payment from MADE. His letter dated 13 October 1980 was only a request to hold momentarily any payment due for the use of M/V Don Julio Ouano until Rafols had made good his obligations to him.

10. MADE could not withhold payment of freightIn the absence of any positive action on the part of Ouano, MADE could not withhold the payment of the freight to Rafols. As stated in the fixture note, the first freight installment was due and payable upon arrival of the assigned vessel at the port of loading. The goods were loaded in the vessel on or before 9 October 1980, hence on that date the first freight installment was already due and demandable. To further withhold the payment of said installment would constitute a breach of MADE’s obligation under the foregoing contract.

11. Rafols’ bouncing checks cannot be ascribable to MADEHerein, payments were actually made after 13 October 1980 by Rafols to Ouano, to wit: (a) two checks in the total amount of P30,000.00 dated October 13 and 21, 1980, respectively; and (b) a third postdated check for P32,000.00 issued on 9 November 1980. The fact that the said checks bounced for insufficient funds cannot in any way be ascribable to MADE nor can it create or affect any liability which Ouano seeks to impute to MADE, SMCSI and their agents.

12. Kinds of charter partyA charter party may, among other classifications, be of two kinds: One is where the owner agrees to carry a cargo which the charterer agrees to provide, and the second is where there is an entire surrender by the owner of the vessel to the charterer, who hires the vessel as one hires a house, takes her empty, and provides the officers and provisions, and, in short, the entire outfit. In such a contract, the charterer is substituted in place of the owner and becomes the owner for the voyage. This second type is also known as a bareboat charter or otherwise referred to as a demise of the vessel. In a charter party of the second kind, not only the entire capacity of the ship is let but the ship itself, and the possession is passed to the charterer. The entire control and management of it is given up to him. The general owner loses his lien for freight, but the lien itself is not destroyed, the charterer is substituted in his place, in whose favor the lien continues to exist when goods are taken on freight. The general owner, however, has no remedy for the charter of his vessel but his personal action on the covenants of the charter party. It is a contract in which he trusts in the personal credit of the charterer. Therefore, where the charter constitutes a demise of the ship and the charterer is the owner for the voyage, and that is the kind of charter party involved in the present case, the general owner has no lien on the cargo for the hire of the vessel, in the absence of an express provision therefor.

13. Lien on unpaid freight available when owner retains possession of goodsEven on the assumption that Ouano had a lien on the cargo for unpaid freight, the same was deemed waived when the goods were unconditionally released to the consignee at the port of destination. A carrier has such a lien only while it retains possession of the goods, so that delivery of the goods to the consignee or a third person terminates, or constitutes a waiver of, the lien. The lien of a carrier for the payment of freight charges is nothing more than the right to withhold the goods, and is inseparably associated with its possession and dependent upon it.

14. Shipowner’s lien on freight not in the nature of hypothecationThe shipowner’s lien for freight is not in the nature of a hypothecation which will remain a charge upon the goods after he has parted with possession, but is simply the right to retain them until the freight is paid, and is therefore lost by an unconditional delivery of the goods to the consignee.

15. Article 667 of Code of Commerce as modified by Article 2241 NCC; Period where lien subsistsUnder Article 667 of the Code of Commerce, the period during which the lien shall subsist is 20 days. Parenthetically, this has been modified by the Civil Code, Article 2241 whereof provides that credits for transportation of the goods carried, for the price of the contract and incidental expenses shall constitute a preferred claim or lien on the goods carried until their delivery and for 30 days thereafter. During this period, the sale of the goods may be requested, even though there and other creditors and even if the shipper or consignee is insolvent. But, this right may not be made use of where the goods have been delivered and were turned over to a third person without malice on the part of the third person and for a valuable consideration.

16. Overseas Factors vs. South Sea Shipping inapplicableThe case of Overseas Factors, Inc., et al. vs. South Sea Shipping Co., et al. is ineffectual and unavailing. In said case, the cargo was still in the possession of the carrier whose officers and crew refused to unload the same unless the balance of the freight was paid. Herein, the cargo had already been unconditionally delivered to the consignee SMCI without protest.

G.R. No. 138703 June 30, 2006

DEVELOPMENT BANK OF THE PHILIPPINES1 and PRIVATIZATION AND MANAGEMENT OFFICE (formerly ASSET PRIVATIZATION TRUST), Petitioners, vs.HON. COURT OF APPEALS, PHILIPPINE UNITED FOUNDRY AND MACHINERY CORP. and PHILIPPINE IRON MANUFACTURING CO., INC., Respondents.

D E C I S I O N

AZCUNA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court of the decision of the Court of Appeals (CA) dated May 7, 1999 in CA-G.R. CV No. 49239 entitled "Philippine United Foundry and Machinery Corp. and Philippine Iron Manufacturing Co., Inc. v. Development Bank of the Philippines and Asset Privatization Trust" which upheld the decision of the Regional Trial Court (RTC), Branch 98 of Quezon City in Civil Case No. Q-49650.

Sometime in March 1968, the Development Bank of the Philippines (DBP) granted to respondents Philippine United Foundry and Machineries Corporation and Philippine Iron Manufacturing Company, Inc. an industrial loan in the amount of P2,500,000 consisting of P500,000 in cash and P2,000,000 in DBP Progress Bonds. The loan was evidenced by a promissory note2 dated June 26, 1968 and secured by a mortgage3 executed by respondents over their present and future properties such as buildings, permanent improvements, various machineries and equipment for manufacture.

Subsequently, DBP granted to respondents another loan in the form of a five-year revolving guarantee amounting to P1,700,000 which was reflected in the amended mortgage contract4 dated November 20, 1968. According to

respondents, the loan guarantee was extended to them when they encountered difficulty in negotiating the DBP Progress Bonds. Respondents were only able to sell the bonds in 1972 or about five years from its issuance for an amount that was 25% less than its face value.5

On September 10, 1975, the outstanding accounts of respondents with DBP were restructured in view of their failure to pay. Thus, the outstanding principal balance of the loans and advances amounting to P4,655,992.35 were consolidated into a single account. The restructured loan was evidenced by a new promissory note6 dated November 12, 1975 payable within seven years, with partial payments on the principal to be made beginning on the third year plus a 12% interest per annum payable every month. The following paragraph appears at the bottom portion of the note:

This promissory note represents the consolidation into one account of the outstanding principal balance of PHILIMCO and PHUMACO’s account, and is prepared pursuant to Res. No. 228, dated September 10, 1975, approved by the Executive Committee pursuant to Bd. Res. No. 3577, s. of 1975. This note is secured by mortgages on the existing assets of the firms.7

On the other hand, all accrued interest and charges due amounting to P3,074,672.21 were denominated as "Notes Taken for Interests" and evidenced by a separate promissory note8 dated November 12, 1975. The following annotation appears at the bottom portion of the note:

This promissory note represents all accrued interests and charges which are taken up as "NOTES TAKEN FOR INTEREST" due on the accounts of PHILIMCO and PHUMACO approved under Bd. Res. No. 3577, s. of 1975. This note is secured by (a) mortgage on the existing assets of the firm.9

Both notes provided for the following additional charges and penalties:

(1) 12% interest per annum on unpaid amortizations10 ;

(2) 10% penalty charge per annum on the total amortizations past due effective 30 days from the date respondents failed to comply with any of the terms stipulated in the notes11 ; and,

(3) Bank advances for insurance premiums, taxes, rentals, litigation and acquired assets expenses, collection and other out-of-pocket expenses not covered by inspection and processing fees subject to the following charges12 :

(a) One time service charge of ½% on the amount advanced to be included in the receivable account;

(b) Penalty charge of 8% per annum on past due advances; and

(c) Interest at 12% per annum.

Notwithstanding the restructuring, respondents were still unable to comply with the terms and conditions of the new promissory notes. As a result, respondents requested DBP to refinance the matured obligation. The request was granted by DBP, pursuant to which three foreign currency denominated loans sourced from DBP’s own foreign borrowings were extended to respondents on various dates between 1980 and 1981.13 These loans were secured by mortgages14 on the properties of respondents and were evidenced by the following promissory notes:

Face Value Maturity Date Interest Rate Per Annum(1) Promissory Note15 dated December 11, 1980 $661,330 December 15, 1990 3% over DBP’s borrowing rate16(2) Promissory Note17 dated June 5, 1981 $666,666 June 23, 1991 3% over DBP’s borrowing rate18(3) Promissory Note19 dated December 16, 1981 $486,472.37 December 31, 1982 4% over DBP’s borrowing costApart from the interest, the promissory notes imposed additional charges and penalties if respondents defaulted on their payments. The notes dated December 11, 1980 and June 5, 1981 specifically provided for a 2% annual service fee computed on the outstanding principal balance of the loans as well as the following additional interest and penalty charges on the loan amortizations or portions in arrears:

(a) If in arrears for thirty (30) days or less:

i. Additional interest at the basic loan interest rate per annum computed on total amortizations past due, irrespective of age.

ii. No penalty charge

(b) If in arrears for more than thirty (30) days:

i. Additional interest at the basic loan interest rate per annum computed on total amortizations past due, irrespective of age, plus,

ii. Penalty charge of 16% per annum computed on amortizations or portions thereof in arrears for more than thirty (30) days counted from the date the amount in arrears becomes liable to this charge.20

Under these two notes, respondents also bound themselves to pay bank advances for insurance premiums, taxes, litigation and acquired assets expenses and other out-of-pocket expenses not covered by inspection and processing fees as follows:

(a) One-time service charge of 2% of the amount advanced, same to be included in the receivable account.

(b) Interest at 16% per annum.

(c) Penalty charge from date of advance at 16% per annum.

The note dated December 16, 1981, on the other hand, provided for the interest and penalty charges on loan amortizations or portions of it in arrears as follows:

(a) Additional interest at the basic loan interest per annum computed on total amortizations past due irrespective of age; plus

(b) Penalty charges of 8% per annum computed on total amortizations in arrears, irrespective of age.21

Respondents were likewise bound to pay bank advances for insurance premiums, taxes, litigation and acquired assets expenses and other out-of-pocket expenses not covered by inspection and processing fees as follows:

(a) One-time service charge of 2% of (the) amount advanced, same to be included and debited to the advances account;

(b) Interest at the basic loan interest rate; and

(c) Penalty charge from date of advance at 8% per annum.22

Sometime in October 1985, DBP initiated foreclosure proceedings upon its computation that respondents’ loans were in arrears by P62,954,473.68.23 According to DBP, this figure already took into account the intermittent payments made by respondents between 1968 and 1981 in the aggregate amount of P5,150,827.71.24

However, the foreclosure proceedings were suspended on twelve separate occasions from October 1985 to December 1986 upon the representations of respondents that a financial rehabilitation fund arising from a contract with the military was forthcoming. On December 23, 1986, before DBP could proceed with the foreclosure proceedings, respondents instituted the present suit for injunction.

On January 6, 1987, the complaint was amended to include the annulment of mortgage. On December 15, 1987, the complaint was amended a second time to implead the Asset Privatization Trust (APT) (now the Privatization and Management Office [PMO])25 as a party defendant.

Respondents’ cause of action arose from their claim that DBP was collecting from them an unconscionable if not unlawful or usurious obligation of P62,954,473.68 as of September 30, 1985, out of a mere P6,200,000 loan. Primarily, respondents contended that the amount claimed by DBP is erroneous since they have remitted to DBP approximately P5,300,000 to repay their original debt. Additionally, respondents assert that since the loans were procured for the Self-Reliant Defense Posture Program of the Armed Forces of the Philippines (AFP), the latter’s breach of its commitment to purchase military armaments and equipment from respondents amounts to a failure of consideration that would justify the annulment of the mortgage on respondents’ properties.26

On December 24, 1986, the RTC issued a temporary restraining order. A Writ of Preliminary Injunction was subsequently issued on May 4, 1987. After trial on the merits, the court rendered a decision in favor of respondents,27 the dispositive portion of which reads:

WHEREFORE, in view of the foregoing consideration, judgment is hereby rendered in favor of the [respondents] and against the defendants [DBP and APT], ordering that:

(1) The Writ of Preliminary Injunction already issued be made permanent;

(2) The [respondents] be made to pay the original loans in the aggregate amount of Six Million Two Hundred Thousand (P6,200,000) Pesos;

(3) The [respondents’] payment in the amount of Five Million Three Hundred Thirty-Five Thousand, Eight Hundred Twenty-seven Pesos and Seventy-one Centavos (P5,335,827.71) be applied to payment for interest and penalties; and

(4) No further interest and/or penalties on the aforementioned principal obligation of P6.2 million shall be imposed/charged upon the [respondents] for failure of the military establishment to honor their commitment to a valid and consummated contract with the former. Costs against the defendants.

SO ORDERED.

Both DBP and PMO appealed the decision to the CA. The CA, however, affirmed the decision of the RTC. Aggrieved, DBP filed with the CA a motion for a reconsideration28 dated May 26, 1999, which motion has not been resolved by the CA to date. PMO, on the other hand, sought relief directly with the Court by filing this present petition upon the following grounds:

I. THE CA DISREGARDED THE BINDING AND OBLIGATORY FORCE OF CONTRACTS WHICH IS THE LAW BETWEEN THE PARTIES.

x x x

II. THE CA VIOLATED THE PRINCIPLE OF LAW THAT CONTRACTS TAKE EFFECT ONLY BETWEEN THE PARTIES AS IT LINKED RESPONDENTS’ CONTRACTS WITH THE AFP WITH RESPONDENTS’ LOANS WITH DBP.

x x x

III. THE CA ERRED IN PERMANENTLY ENJOINING THE DBP AND APT FROM FORECLOSING THE MORTGAGES ON RESPONDENTS’ PROPERTIES THEREBY VIOLATING THE PROVISIONS OF P[RESIDENTIAL] D[ECREE NO.] 385 AND PROCLAMATION NO. 50.29

On the first issue, PMO asserts that the CA erred in declaring that the interest rate on the loans had been unilaterally increased by DBP despite the evidence on record (consisting of promissory notes and testimonies of witnesses for DBP) showing otherwise. PMO also claims that the CA failed to take into account the effect of the restructuring and refinancing of the loans granted by DBP upon the request of respondents.

Anent the second issue, PMO argues that the failure of the AFP to honor its commitment to respondents should have had no bearing on respondents’ loan obligations to DBP as DBP was not a party to their contract. Hence, PMO contends that the CA ran afoul of the principle of relativity of contracts when it ruled that no further interest could be imposed on the loans.

Finally, PMO claims that DBP, being a government financial institution, could not be enjoined by any restraining order or injunction, whether permanent or temporary, from proceeding with the foreclosure proceedings mandated under Section 1 of Presidential Decree No. 385.

For their part, respondents moved for the denial of the petition in their comment dated October 27, 1999,30 stating that (1) the petition merely raises questions of fact and not of law; (2) PMO is engaged in forum shopping considering that the motion for reconsideration filed by its co-defendant, DBP, against the CA decision was still pending before the appellate court; and, (3) the petition is fatally defective because the attached certification against non-forum shopping does not conform to the requirements set by law. After PMO filed its reply denying the foregoing allegations, the parties submitted their respective memoranda.

The petition is partly meritorious.

Prefatorily, it bears stressing that only questions of law may be raised in a petition for review on certiorari under Rule 45 of the Rules of Court. This Court is not a trier of facts, its jurisdiction in such a proceeding being limited to reviewing only errors of law that may have been committed by the lower courts. Consequently, findings of fact of the trial court and the CA are final and conclusive, and cannot be reviewed on appeal.31 It is not the function of the Court to reexamine or reevaluate evidence, whether testimonial or documentary, adduced by the parties in the proceedings below.32 Nevertheless, the rule admits of certain exceptions and has, in the past, been relaxed when the lower courts’ findings were not supported by the evidence on record or were based on a misapprehension of facts,33 or when certain relevant and undisputed facts were manifestly overlooked that, if properly considered, would justify a different conclusion.34

The resolution of the present controversy turns on the issue regarding the precise amount of respondents’ principal obligation under the series of mortgages which DBP, as mortgagee-creditor, attempted to foreclose. In this case, the total amount of respondents’ indebtedness is not simply a question of fact but is a question of law, one requiring the application of legal principles for the computation of the amount owed, and is thus a matter that can be properly brought up for the Court’s determination.35

PMO claims that the total outstanding obligation of respondents reached P62.9 Million on September 30, 1985. This amount was purportedly the peso equivalent of the foreign-currency denominated loans granted to respondents to refinance the original loans they procured, and is inclusive of interest, penalties and other surcharges incurred from that date as a result of respondents’ past defaults. Respondents contend, on the other hand, that DBP grossly

misstated the extent of their obligation, and insist that they should be made liable only for the amount of P6.2 Million which they actually received from DBP.

As mentioned, the RTC ultimately sustained respondents and made permanent the writ of preliminary injunction it issued to enjoin the foreclosure proceedings. Respondents were directed to pay only the amount of the original loans, that is, P6.2 Million, with the P5.3 Million which they previously paid to be applied as interest and penalties. The RTC did not find respondents culpable for defaulting on their loan obligations and passed the blame to the AFP for not fulfilling its contractual obligations to respondents.

The CA affirmed the RTC decision and agreed that DBP cannot be allowed to foreclose on the mortgage securing respondents’ loan. The CA surmised that since DBP failed to adequately explain how it arrived at P62.9 Million, the original loan amount of P6.2 Million could only have been "blatantly enlarged or erroneously computed" by DBP through the imposition of an "unconscionable rate of interest and charges." The CA also agreed with the trial court that there was no consideration for the mortgage contracts executed by respondents considering the proceeds from the alleged foreign currency loans were never actually received by the latter. This view is untenable and lacks foundation.

As correctly pointed out by PMO, the original loans alluded to by respondents had been refinanced and restructured in order to extend their maturity dates. Refinancing is an exchange of an old debt for a new debt, as by negotiating a different interest rate or term or by repaying the existing loan with money acquired from a new loan.36 On the other hand, restructuring, as applied to a debt, implies not only a postponement of the maturity37 but also a modification of the essential terms of the debt (e.g., conversion of debt into bonds or into equity,38 or a change in or amendment of collateral security) in order to make the account of the debtor current.39

In this instance, it is important to note that DBP accommodated respondents’ request to restructure and refinance their account twice in view of the financial difficulties the latter were experiencing. The first restructuring/refinancing was granted in 1975 while the second one was undertaken sometime in the early 1980s. Pursuant to the restructuring schemes, respondents executed promissory notes and mortgage contracts in favor of DBP,40 the second restructuring being evidenced by three promissory notes dated December 11, 1980, June 5, 1981 and December 16, 1981 in the total amount of $1.8 Million. The reason respondents seek to be excused from fulfilling their obligation under the second batch of promissory notes is that first, they allegedly had "no choice" but to sign the documents in order to have the loan restructured41 and thus avert the foreclosure of their properties, and second, they never received any proceeds from the same. This reasoning cannot be sustained.

Respondents’ allegation that they had no "choice" but to sign is tantamount to saying that DBP exerted undue influence upon them. The Court is mindful that the law grants an aggrieved party the right to obtain the annulment of a contract on account of factors such as mistake, violence, intimidation, undue influence and fraud which vitiate consent.42 However, the fact that the representatives were "forced" to sign the promissory notes and mortgage contracts in order to have respondents’ original loans restructured and to prevent the foreclosure of their properties does not amount to vitiated consent.

The financial condition of respondents may have motivated them to contract with DBP, but undue influence cannot be attributed to DBP simply because the latter had lent money. The concept of undue influence is defined as follows:

There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress.43

While respondents were purportedly financially distressed, there is no clear showing that those acting on their behalf had been deprived of their free agency when they executed the promissory notes representing respondents’ refinanced obligations to DBP. For undue influence to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting party as to destroy the latter’s free agency, making such party express the will of another rather than its own. The alleged lingering financial woes of a debtor per se cannot be equated with the presence of undue influence.44

Corollarily, the threat to foreclose the mortgage would not in itself vitiate consent as it is a threat to enforce a just or legal claim through competent authority.45 It bears emphasis that the foreclosure of mortgaged properties in case of default in payment of a debtor is a legal remedy given by law to a creditor.46 In the event of default by the mortgage debtor in the performance of the principal obligation, the mortgagee undeniably has the right to cause the sale at public auction of the mortgaged property for payment of the proceeds to the mortgagee.47

It is likewise of no moment that respondents never physically received the proceeds of the foreign currency loans. When the loan was refinanced and restructured, the proceeds were understandably not actually given by DBP to respondents since the transaction was but a renewal of the first or original loan and the supposed proceeds were applied as payment for the latter.

It also bears emphasis that the second set of promissory notes executed by respondents must govern the contractual relation of the parties for they unequivocally express the terms and conditions of the parties’ loan agreement, which

are binding and conclusive between them. Parties are free to enter into stipulations, clauses, terms and conditions they may deem convenient; that is, as long as these are not contrary to law, morals, good customs, public order or public policy.48 With the signatures of their duly authorized representatives on the subject notes and mortgage contracts, the genuineness and due execution of which having been admitted,49 respondents in effect freely and voluntarily affirmed all the concurrent rights and obligations flowing therefrom. Accordingly, respondents are barred from claiming the contrary without transgressing the principle of estoppel and mutuality of contracts. Contracts must bind both contracting parties; their validity or compliance cannot be left to the will of one of them.50

The significance of the promissory notes should not have been overlooked by the trial court and the CA. By completely disregarding the promissory notes, the lower courts unilaterally modified the contractual obligations of respondents after the latter already benefited from the extension of the maturity date on their original loans, to the damage and prejudice of PMO which steps into the shoes of DBP as mortgagee-creditor.

At this juncture, it must be emphasized that a party to a contract cannot deny its validity after enjoying its benefits without outrage to one’s sense of justice and fairness. Where parties have entered into a well-defined contractual relationship, it is imperative that they should honor and adhere to their rights and obligations as stated in their contracts because obligations arising from it have the force of law between the contracting parties and should be complied with in good faith.51

As a rule, a court in such a case has no alternative but to enforce the contractual stipulations in the manner they have been agreed upon and written. Courts, whether trial or appellate, generally have no power to relieve parties from obligations voluntarily assumed simply because their contract turned out to be disastrous or unwise investments.52

Thus, respondents cannot be absolved from their loan obligations on the basis of the failure of the AFP to fulfill its commitment under the manufacturing agreement53 entered by them allegedly upon the prompting of certain AFP and DBP officials. While it is true that the DBP representatives appear to have been aware that the proceeds from the sale to the AFP were supposed to be applied to the loan, the records are bereft of any proof that would show that DBP was a party to the contract itself or that DBP would condone respondents’ credit if the contract did not materialize. Even assuming that the AFP defaulted in its obligations under the manufacturing agreement, respondents’ cause of action lies with the AFP, and not with DBP or PMO. The loan contract of respondents is separate and distinct from their manufacturing agreement with the AFP.

Incidentally, the CA sustained the validity of a loan obligation but annulled the mortgage securing it on the ground of failure of consideration. This is erroneous. A mortgage is a mere accessory contract and its validity would depend on the validity of the loan secured by it.54 Hence, the consideration of the mortgage contract is the same as that of the principal contract from which it receives life, and without which it cannot exist as an independent contract. 55 The debtor cannot escape the consequences of the mortgage contract once the validity of the loan is upheld.

Again, as a rule, courts cannot intervene to save parties from disadvantageous provisions of their contracts if they consented to the same freely and voluntarily.56 Thus, respondents cannot now protest against the fact that the loans were denominated in foreign currency and were to be paid in its peso equivalent after they had already given their consent to such terms.57 There is no legal impediment to having obligations or transactions paid in a foreign currency as long as the parties agree to such an arrangement. In fact, obligations in foreign currency may be discharged in Philippine currency based on the prevailing rate at the time of payment.58 For this reason, it was improper for the CA to reject outright DBP’s claim that the conversion of the remaining balance of the foreign currency loans into peso accounted for the considerable differential in the total indebtedness of respondents mainly because the exchange rates at the time of demand had been volatile and led to the depreciation of the peso.59

PMO also denies that a unilateral increase in the interest rates on the loans caused the substantial increase in the indebtedness of respondents and points out that the promissory notes themselves specifically provided for the rates of interest as well as penalty and other charges which were merely applied on respondents’ outstanding obligations. It should be noted, however, that at the time of the transaction, Act No. 2655, as amended by Presidential Decree No. 116 (Usury Law), was still in full force and effect. Basic is the rule that the laws in force at the time the contract is made governs the effectivity of its provisions.60 Section 2 of the Usury Law specifically provides as follows:

Sec. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or a greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered, or by any document conveying such real estate or interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, that the rate of interest under this section or the maximum rate of interest that may be prescribed by the monetary board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board.

A perusal of the promissory notes reveals that the interest charged upon the notes is dependent upon the borrowing cost of DBP which, however, would be pegged at a fixed rate assuming certain factors. The notes dated December 11, 1980 and June 5, 1981, for example, had a per annum interest rate of 3% over DBP’s borrowing rate that will become

1 ½% per annum in the event the loan is drawn under the Central Bank’s Jumbo Loan. These were further subject to the condition that should the loan from where they were drawn be fully repaid, the interest to be charged on respondents’ remaining dollar obligation would be pegged at 16% per annum.61 The promissory note dated December 16, 1981, on the other hand, had a per annum interest rate of 4% over DBP’s borrowing rate. This rate would also become 1 ½% per annum in the event the loan is drawn under the Central Bank’s Jumbo Loan. However, should the loan from where respondents’ foreign currency loan was drawn be fully repaid, the interest to be charged on their remaining dollar obligation would be pegged at 18% per annum.62

Due to the variable factors mentioned above, it cannot be determined whether DBP did in fact apply an interest rate higher than what is prescribed under the law. It appears on the records, however, that DBP attempted to explain how it arrived at the amount stated in the Statement of Account63 it submitted in support of its claim but was not allowed by the trial court to do so citing the rule that the best evidence of the same is the document itself. 64 DBP should have been given the opportunity to explain its entries in the Statement of Account in order to place the figures that were cited in the proper context. Assuming the interest applied to the principal obligation did, in fact, exceed 12%, in addition to the other penalties stipulated in the note, this should be stricken out for being usurious.

In usurious loans, the entire obligation does not become void because of an agreement for usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to the interest is void. The debt is then considered to be without stipulation as to the interest. In the absence of an express stipulation as to the rate of interest, the legal rate of 12% per annum shall be imposed.65

As to the issue raised by PMO that the injunction issued by the lower courts violated Presidential Decree No. 385, the Court agrees with the ruling of the CA. Presidential Decree No. 385 was issued primarily to see to it that government financial institutions are not denied substantial cash inflows which are necessary to finance development projects all over the country, by large borrowers who, when they become delinquent, resort to court actions in order to prevent or delay the government’s collection of their debts and loans.66

The government, however, is bound by basic principles of fairness and decency under the due process clause of the Bill of Rights. Presidential Decree No. 385 does not provide the government blanket authority to unqualifiedly impose the mandatory provisions of the decree without due regard to the constitutional rights of the borrowers. In fact, it is required that a hearing first be conducted to determine whether or not 20% of the outstanding arrearages has been paid, as a prerequisite for the issuance of a temporary restraining order or a writ of preliminary injunction. Hence, the trial court can, on the basis of the evidence then in its possession, make a provisional determination on the matter of the actual existence of the arrearages and the amount on which the 20% requirement is to be computed. Consequently, Presidential Decree No. 385 cannot be invoked where the extent of the loan actually received by the borrower is still to be determined.67

Finally, respondents’ allegation that PMO is engaged in forum shopping is untenable. Forum shopping is the act of a party, against whom an adverse judgment has been rendered in one forum, of seeking another and possibly favorable opinion in another forum by appeal or a special civil action of certiorari.68 As correctly pointed out by PMO, the present petition is merely an appeal from the adverse decision rendered in the same action where it was impleaded as co-defendant with DBP. That DBP opted to file a motion for reconsideration with the CA rather than a direct appeal to this Court does not bar PMO from seeking relief from the judgment by taking the latter course of action.

It must be remembered that PMO was impleaded as party defendant through the amended complaint69 dated November 25, 1987. Persons made parties-defendants via a supplemental complaint possess locus standi or legal personality to seek a review by the Court of the decision by the CA which they assail even if their co-defendants did not appeal the said ruling of the appellate court.70 Even assuming that separate actions have been filed by two different parties involving essentially the same subject matter, no forum shopping is committed where the parties did not resort to multiple judicial remedies. 71

In any event, the Court deems it fit to put an end to this controversy and to finally adjudicate the rights and obligations of the parties in the interest of a speedy dispensation of justice, taking into account the length of time this action has been pending with the courts as well as in light of the fact that PMO is the real party-in-interest in this case, being the successor-in-interest of DBP.

WHEREFORE, the petition is PARTLY GRANTED and the assailed Decision dated May 7, 1999 rendered by the Court of Appeals in CA-G.R. CV No. 49239 is REVERSED AND SET ASIDE. The case is hereby remanded to the trial court for determination of the total amount of the respondents’ obligation based on the promissory notes dated December 11, 1980, June 5, 1981 and December 16, 1981 according to the interest rate agreed upon by the parties or the interest rate of 12% per annum, whichever is lower.

No costs.

SO ORDERED.

ADOLFO S. AZCUNAAssociate Justice

G.R. No. L-54538 April 25, 1985

HEIRS OF SPOUSES LUIS YANAS and MARIA AGLIMOT, represented by Abraham Yanas, petitioners, vs.HEIRS OF SPOUSES ANTONIO ACAYLAR and GELACIA ACAYLAR, namely, Antonio, Jr., Cecilia, Godofredo, Pacita, Corazon and Loreta, all surnamed Acaylar, and COURT OF APPEALS, respondents.

Litigating & Lingating Law Office for petitioners.

Edgar Baguio for private respondents.

AQUINO, Jr., J.:

This case is about the validity of the sale of land executed by Luis Yanas, an illiterate Subano. Yanas, also known as Sulung Subano, had occupied, even before 1926, Lot No. 5408 with an area of 13 hectares located at Sitio Dionom (Lower Gumay), Barrio Sianib, Pinan (Dipolog), Zamboanga del Norte (Exh. L). Through lawyer Leoncio S. Hamoy, Yanas claimed the lot in the cadastral proceeding.

It is adjacent to the Dionom Creek and is about two kilometers from the national highway. He planted the land to rice, corn, coconuts and fruit trees. He built houses thereon. He declared it for tax purposes in his name. Judge Manalac on September 30, 1941 issued Decree No. N-11330 adjudicating Lot No. 5408 to Yanas "married to Maria Aglimot" (Exh. C).

Lawyer Valeriano S. Concha, Sr., an adjoining owner of Yanas since 1946, who became clerk of court, testified that Yanas had always occupied the lot since 1946 up to his death in 1962 (103 tsn June 4, 1970). His son filed an adverse claim for Yanas.

On August 7,1950 Yanas thumbmarked in Dapitan a deed of sale and conveyance wherein he purportedly sold to Antonio L. Acaylar of Dapitan for P200 his 13-hectare land. The sale was notarized on the following day, August 8. An instrumental witness was lawyer Hamoy. The sale was approved by Governor Felipe B. Azcuna on May 15, 1953 or 33 months after the sale.

It is the theory of the heirs of Yanas that that deed of sale is fictitious and fraudulent because what Yanas thumbmarked on August 7, 1950 was supposed to be a receipt attesting that he owed Hamoy P 200 for his legal services. Hamoy allegedly taking advantage of his illiteracy, made Yanas affix his thumbmark to a deed of sale in English (Exh. 2).

The decree issued by Judge Manalac in 1941 was registered only on June 5, 1954. On that day, OCT No. 64 was issued to Yanas. On December 21, 1954 Acaylar registered the 1950 deed of sale. He obtained TCT No. T-3338 (Exh. 5). How Acaylar came to have possession of the owner's duplicate of OCT No. 64 and why it was not delivered to Yanas are not shown in the record.

When Yanas discovered that his title was cancelled, he caused on August 28, 1958 an adverse claim to be annotated on Acaylar's title. He stated in his adverse claim that he never sold his land and that the price of P200 was grossly inadequate because the land was worth not less than P6,000 (Exh. D).

Yanas died in 1962. His widow, Maria Aglimot, also a Subano, and his children filed in 1963 an action to declare void Acaylar's title. A notice of lis pendens was annotated on that title. Aglimot died in 1965. The trial court found the sale to be valid and binding. The Appellate Court affirmed the trial court's decision. The heirs of Yanas appealed to this Court.

They contend that the Appellate Court erred in not holding that the deed of sale was fabricated and simulated and, therefore, void ab initio and that Maria Aglimot as surviving spouse could recover the lot.

The heirs of Acaylar, through counsel who did not take part in the trial, maintain that the sale was "true and faithful" and that the widow had no right to recover one-half of the lot.

We hold that the sale was fictitious and fraudulent. Among the badges of fraud and fictitiousness taken collectively are the following: (1) the fact that the sale is in English, the alleged vendor being illiterate; (2) the fact that his wife did not join in the sale and that her name is indicated in the deed as "Maria S. Yanas" when the truth is that her correct name is Maria Aglimot Yanas; (3) the obvious inadequacy of P200 as price for a 13-hectare land (P15.40 a hectare); (4) the notarization of the sale on the day following the alleged thumbmarking of the document; (5) the failure to state the boundaries of the lot sold; (6) the fact that the governor approved it more than two years after the alleged sale; (7) its registration more than three years later, and (8) the fact that the Acaylars were able to occupy only four hectares out of the 13 hectares and were eventually forcibly ousted therefrom by the children and agents of the vendor. It was not a fair and regular transaction done in the ordinary course of business.

The grave flaws in the evidence for defendants Acaylar are the patent contradictions in the testimonies of Antonio L. Acaylar and lawyer Hamoy, their principal witnesses on the validity of the sale. Acaylar testified that he signed the deed of sale and that one Tupas was an instrumental witness (12-13 tsn May 4, 1970). The truth is that Acaylar never signed the deed and Tupas was not a witness. The instrumental witnesses were Hamoy and Paulino Empeynado.

Hamoy at first testified on November 20, 1968 that on August 7, 1950 he was a witness in the deed of sale (Exh. 2 and 6) executed by Yanas who had requested him to look for a buyer of his lot (122-124 tsn). That means that Hamoy met Yanas in August 1950.

More than a year later, or on June 22, 1970, Hamoy, testifying as a rebuttal witness for Acaylar, declared on direct and cross-examination that he last saw Yanas in 1946 (103-106). He absurdly stated that his name appears as an instrumental witness in the deed of sale but he testified: "That is my name but I did not sign that" (107).

The deed of sale (Exh. 2 and 6) appears as Document No. 113, page 57, Book 3, series of 1950 of Jose G. Empeynado's notarial register. Teofisto Realiza, the clerk in charge of the court archives, testified on November 10, 1966 that Document No. 113 is an affidavit of Lorenzo Bajamunde, not a deed of sale signed by Yanas (4-5 tsn).

However, five days later, or on November 15, 1966, he issued a certified copy of the deed of sale, Exhibit 2, to Acaylar's lawyer. Presumably, the deed of sale was a part of the notarial report of Empeynado but he did not enter the sale in his notarial book.

The fact that the alleged sale took place in 1950 and the action to have it declared void or inexistent was filed in 1963 is immaterial. The action or defense for the declaration of the inexistence of a contract does not prescribe (Art. 1410, Civil Code).

WHEREFORE, the decisions of the trial court and the Court of Appeals are reversed and set aside. The heirs of Luis Yanas are declared the owners of Lot No. 5408 of the Dipolog cadastre entitled to the possession thereof.

SO ORDERED.

Makasiar (Chairman), Abad Santos, Escolin and Cuevas, JJ., concur.

Justice Concepcion is on leave.

G.R. No. L-33048 April 16, 1982

EPIFANIA SARSOSA VDA. DE BARSOBIA and PACITA W. VALLAR, petitioners, vs.VICTORIANO T. CUENCO, respondent.

MELENCIO-HERRERA, J.:

Sought to be reviewed herein is the judgment dated August 18, 1970, of the Court of Appeals, 1 rendered in CA-G.R. No. 41318-R, entitled "Victoriano T. Cuenco, Plaintiff-appellant, vs. Epifania Sarsosa Vda. de Barsobia and Pacita W. Vallar, Defendants- appellees, " declaring Victoriano T. Cuenco (now the respondent) as the absolute owner of the coconut land in question.

The lot in controversy is a one-half portion (on the northern side) of two adjoining parcels of coconut land located at Barrio Mancapagao, Sagay, Camiguin, Misamis Oriental (now Camiguin province), with an area of 29,150 square meters, more or less. 2

The entire land was owned previously by a certain Leocadia Balisado, who had sold it to the spouses Patricio Barsobia (now deceased) and Epifania Sarsosa, one of the petitioners herein. They are Filipino citizens.

On September 5, 1936, Epifania Sarsosa then a widow, sold the land in controversy to a Chinese, Ong King Po, for the sum of P1,050.00 (Exhibit "B"). Ong King Po took actual possession and enjoyed the fruits thereof.

On August 5, 1961, Ong King Po sold the litigated property to Victoriano T. Cuenco (respondent herein), a naturalized Filipino, for the sum of P5,000.00 (Exhibit "A"). Respondent immediately took actual possession and harvested the fruits therefrom.

On March 6, 1962, Epifania "usurped" the controverted property, and on July 26, 1962, Epifania (through 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 to sell the land to Ong King Po and that she signed the document of sale merely to evidence her indebtedness to the latter in the amount of P1,050.00. Epifania has been in possession ever since except for the portion sold to the other petitioner Pacita.

On September 19, 1962, respondent filed a Forcible Entry case against Epifania before the Municipal Court of Sagay, Camiguin. The case was dismissed for lack of jurisdiction since, as the laws then stood, the question of possession could not be properly determined without first settling that of ownership.

On December 27, 1966, respondent instituted before the Court of First Instance of Misamis Oriental a Complaint for recovery of possession and ownership of the litigated land, against Epifania and Pacita Vallar (hereinafter referred to simply as petitioners).

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 between them was only an evidence of Epifania's indebtedness to Ong King Po.

The trial Court rendered judgment:

1. Dismissing the complaint with costs against plaintiff (respondent herein).

2. Declaring the two Deeds of Sale, Exhibits A and B, respectively, inexistent and void from the beginning; and

3. Declaring defendant Pacita W. Vallar as the lawful owner and possessor of the portion of land she bought from Emeteria Barsobia (pp. 57, 67, Record.) 3

On appeal, the Court of Appeals reversed the aforementioned Decision and decreed instead that respondent was the owner of the litigated property, thus:

xxx xxx xxx

In view of all the foregoing considerations, the judgment appealed from is hereby reversed. In lieu thereof, we render judgment:

(a) Declaring the plaintiff-appellant Victoriano T. Cuenco the absolute owner of the land in question, with the right of possession thereof;

(b) Ordering the defendants-appellees to restore the possession of said land to the plaintiff;

(c) Dismissing the defendants' counterclaim;

(d) Condemning the defendants to pay to the plaintiff the sum of P10,000.00 representing the latter's share from the sale of copra which he failed to receive since March, 1962 when he was deprived of his possession over the land, and which defendants illegally appropriated it to their own use and benefit, plus legal interest from the filing of the complaint until fully paid; plus P2,000.00 representing expenses and attorney's fees;

(e) Sentencing the defendants to pay the costs.

SO ORDERED. 4

Following the denial of their Motion for Reconsideration, petitioners filed the instant Petition for Review 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 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.

II ... when it included petitioner Pacita W. Vallar to pay P10,000.00, with legal interest from the filing of the complaint, representing respondent's share in the harvest and to pay the costs, there being no evidence against her.

III. ... when it condemned petitioners to pay P2,000.00 representing expenses and attorney's fees, there being no factual, legal and equitable justification.

IV. ... in not applying the rule on pari delicto to the facts of the case or the doctrine enunciated ... in the case of Philippine Banking Corporation vs. Lui She, L-17587, September 12, 1967, to ... Petitioner Epifania Sarsosa Vda. de Barsobia.

V. ... in denying, for lack of sufficient merits, petitioners' motion for rehearing or reconsideration of its decision. 5

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 owner had unilaterally repudiated the sale she had made to the Chinese and had resold the property to another Filipino. The basic issue is: Who is the rightful owner of the property?

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.

While, strictly speaking, Ong King Po, private respondent's vendor, had no rights of ownership to transmit, it is likewise inescapable that petitioner Epifania had slept on her rights for 26 years from 1936 to 1962. By her long inaction or inexcusable neglect, she should be held barred from asserting her claim to the litigated property (Sotto vs. Teves, 86 SCRA 157 [1978]).

Laches has been defined as the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or 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. L-21450, April 15, 1968, 23 SCRA 29, 35). (cited in Sotto vs. Teves, 86 SCRA 154 [1978]).

Respondent, therefore, must be declared to be the rightful owner of the property.

The award of actual damages in respondent's favor of P10,000.00, as well as of attorney's fees and expenses of litigation of P2,000.00, is justified. Respondent was deprived of the possession of his land and the enjoyment of its fruits from March, 1962. The Court of Appeals fixed respondent's share of the sale of copra at P10,000.00 for eight years at four (4) harvests a year. The accuracy of this finding has not been disputed.

However, we find merit in the assigned error that petitioner, Pacita Vallar, should not be held also liable for actual damages to respondent. In the absence of contrary proof, she, too, must be considered as a vendee in good faith of petitioner Epifania.

The award of attorney's fees and litigation expenses in the sum of P2,000.00 in respondent's favor is in order considering that both petitioners compelled respondent to litigate for the protection of his interests. Moreover, the amount is reasonable. 10

WHEREFORE, except for that portion holding petitioner, Pacita W. Vallar, also liable for damages of P10,000.00, the appealed judgment is hereby affirmed.

Costs against petitioners.

SO ORDERED.

Teehankee (Chairman), Makasiar, Fernandez, Guerrero and Plana, JJ., concur.

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.

Dominador Sobrevinas for plaintiffs-appellants.

Muss S. Inquerto for defendant-appellee

GUTIERREZ, JR., J.:

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.

In Vasquez v. Li Seng Giap and Li Seng Giap & Sons (96 Phil. 447), where the alien vendee later sold the property to a Filipino corporation, this Court, in affirming a judgment dismissing the complaint to rescind the sale of real property to the defendant Li Seng Giap on January 22, 1940, on the ground that the vendee was an alien and under the Constitution incapable to own and hold title to lands, held:

In Caoile vs. Yu Chiao 49 Qff Gaz., 4321; Talento vs. Makiki 49 Off. Gaz., 4331; Bautista vs. Uy 49 Off. Gaz., 4336; Rellosa vs. Gaw Chee 49 Off. Gaz., 4345 and Mercado vs. Go Bio, 49 Off. Gaz., 5360, the majority of this Court has ruled that in sales of real estate to aliens incapable of holding title thereto 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 violation and being thus in pari delicto the courts will not afford protection to either party. (Article 1305, old Civil Code; Article 1411, new Civil Code) From this ruling three Justices dissented. (Mr. Justice 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.

The action is not of rescission because it is not postulated upon any of the grounds provided for in Article 1291 of the old Civil Code and because the action of rescission involves lesion or damage and 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 damages. (Manresa, Commentarios al Codigo Civil Espanol Vol. VIII, p. 698, 4th ed.) It is very likely that the majority of this Court proceeded upon that theory when it applied the in pari delicto rule referred to above.

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 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 proceedings in the nature of office found to have a forfeiture or escheat declared against the vendee 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.] 513; 17 Law. Ed., 515; Governeur vs. Robertson, 11 Wheat, 332, 6 Law. Ed., 488.)

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; ...

xxx xxx xxx

. . . (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.

Only recently, in Sarsosa vda. de Barsobia v. Cuenco (113 SCRA 547) we had occasion to pass upon a factual situation substantially similar to the one in the instant case. We ruled:

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 & Sons: (.96 Phil. 447 [1955])

... 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.

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 1936 to 1962. By her long inaction or inexcusable neglect, she should be held barred from asserting her claim to the litigated property (Sotto vs. Teves, 86 SCRA 157 [1978])

Laches has been defined as the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or ommission 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. L-21450, April 15, 1968, 23 SCRA 29, 35).' (Cited in Sotto vs. Teves, 86 SCRA 154 [1978]).

Respondent, therefore, must be declared to be the rightful owner of the property.

In the light of the above considerations, we find the second and third assignments of errors without merit. Respondent Navata, the titled owner of the property is declared the rightful owner.

WHEREFORE, the instant appeal is hereby denied. The orders dismissing the complaint and denying the motion for reconsideration are affirmed.

SO ORDERED.

Teehankee (Chairman), Melencio-Herrera, Plana, Vasquez and Relova, JJ., concur.

G.R. No. L-31606 March 28, 1983

DONATO REYES YAP and MELITONA MARAVILLAS, petitioners, vs.HON. EZEKIEL S. GRAGEDA, as Judge of the Court of First Instance of Albay and JOSE A. RICO, respondents.

Jose P. Oira for petitioners.

Rodolfo A. Madrid for respondents.

GUTIERREZ, JR., J.:

We are asked in this petition to review the amended decision of the respondent court which declared as absolutely null and void the sale of a residential lot in Guinobatan, Albay to a Chinese national and ordered its reconveyance to the vendors thirty years after the sale inspite of the fact that the vendee had been a naturalized Filipino citizen for fifteen years at the time.

We grant the petition. The questioned decision and the order amending it are reversed and set aside.

The facts are not disputed.

On April 12, 1939, Maximino Rico, for and in his own behalf and that of the minors Maria Rico, Filomeno Rico, Prisco Rico, and Lourdes' Rico, executed a Deed of Absolute Sale (Annex 'A' to the complaint) over Lot 339 and a portion of Lot 327 in favor of the petitioner Donato Reyes Yap who was then a Chinese national. Respondent Jose A. Rico is the eldest son of Maximino Rico, one of the vendors in Annex 'A'.

Subsequently, the petitioner as vendee caused the registration of the instrument of sale and the cancellation of Original Certificates of Title Nos. 29332 and 29410 and the consequent issuance in his favor of Transfer Certificate of Title No. T-2433 covering the two lots subject matter of the Contract of Sale.

After the lapse of nearly fifteen years from and after the execution of the deed of absolute sale, Donato Reyes Yap was admitted as a Filipino citizen and allowed to take his oath of allegiance to the Republic of the Philippines. He was, thereafter, issued Certificate of Naturalization No. 7, File No. 19 of the Court of First Instance of Albay.

On December 1, 1967, the petitioner ceded the major portion of Lot No. 327 consisting of 1,078 square meters which he acquired by purchase under the deed of sale in favor of his engineer son, Felix Yap, who was also a Filipino citizen because of the Filipino citizenship of his mother and the naturalization of his father Donato Reyes Yap.

Subsequently, Lourdes Rico, aunt and co-heir of respondent Jose A. Rico. sold the remaining portion of Lot 327 to the petitioner who had his rights thereon duly registered under Act 496. Petitioner, Donato Reyes Yap, has been in possession of the lots in question since 1939, openly, publicly, continuously, and adversely in the concept of owner until the present time. The petitioner has one surviving son by his first marriage to a Filipino wife. He has five children by his second marriage also to a Filipina and has a total of 23 grandchildren all of whom are Filipino citizens.

The respondent court considered Section 5, Article XIII of the 1935 Constitution that "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" to be an absolute and unqualified prohibition and, therefore, ruled that a conveyance contrary to it would not be validated nor its void nature altered by the subsequent naturalization of the vendee.

The dispositive portion of the amended decision reads:

WHEREFORE, in view of all the foregoing, the Contract of Sale embodied in the 'Escritura de Compra Venta' which is attached to the Complaint as Annex 'A', is hereby declared null and void ab initio and without any legal force and effect.

The action to recover Lot 339 of the Cadastral Survey of Guinobatan, Albay, covered by Transfer Certificate of Title No. T2433. and Lot 327 covered by the same Transfer Certificate of Title, is hereby granted to plaintiff, upon payment of the consideration price of P150.00 and declaring plaintiff as the lawful owner and entitled to the possession thereof.

Defendant Donato Reyes Yap is hereby ordered to produce his Transfer Certificate of Title No. T-2433 to the Register of Deeds of Albay, so as to enable said office to make the due and proper annotations on said title as well as in the original of the declaration of nullity as herein adjudged. Let Transfer Certificate of Title issued to plaintiff, concerning said Lots 339 and 327 of the Cadastral Survey of Guinobatan, Albay.

COSTS AGAINST DEFENDANTS.

The rulings in Vasquez v.Leng Seng Giap et al. (96 Phil. 447) and Sarosa Vda. de Bersabia v. Cuenco (113 SCRA 547) sustain the petitioner's contentions. We stated in Sarosa Vda de Bersabia:

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) 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 in. individuals, corporations, or associations, qualified to acquire or hold lands of the public domain.

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, 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 Leng Seng Giap & Sons:

... 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.

Only recently, we had occasion to reiterate the above rulings in Vicente Godines v. Fong Pak Luen, et al. (G.R. No. L-36731, January 27, 1983).

WHEREFORE, the amended judgment of the respondent court is hereby REVERSED and SET ASIDE. The complaint is DISMISSED.

SO ORDERED.

Teehankee (Chairman), Melencio-Herrera, Plana, Vasquez and Relova, JJ., concur.

G.R. No. L-31831 April 28, 1983

JESUS PINEDA, petitioner, vs.JOSE V. DELA RAMA and COURT OF APPEALS, respondents.

Rosauro Alvarez for petitioner.

Arturo Zialcita for respondents.

GUTIERREZ, JR., J.:

This is a petition to review on certiorari a decision of the Court of Appeals which declared petitioner Jesus Pineda liable on his promissory note for P9,300.00 and directed him to pay attorney's fees of P400.00 to private respondent, Jose V. dela Rama.

Dela Rama is a practising lawyer whose services were retained by Pineda for the purpose of making representations with the chairman and general manager of the National Rice and Corn Administration (NARIC) to stop or delay the institution of criminal charges against Pineda who allegedly misappropriated 11,000 cavans of palay deposited at his ricemill in Concepcion, Tarlac. The NARIC general manager was allegedly an intimate friend of Dela Rama.

According to Dela Rama, petitioner Pineda has used up all his funds to buy a big hacienda in Mindoro and, therefore, borrowed the P9,300.00 subject of his complaint for collection. In addition to filling the suit to collect the loan evidenced by the matured promissory note, Dela Rama also sued to collect P5,000.00 attorney's fees for legal services rendered as Pineda's counsel in the case being investigated by NARIC.

The Court of First Instance of Manila decided Civil Case No. 45762 in favor of petitioner Pineda. The court believed the evidence of Pineda that he signed the promissory note for P9,300.00 only because Dela Rama had told him that this amount had already been advanced to grease the palms of the 'Chairman and General Manager of NARIC in order to save Pineda from criminal prosecution.

The court stated:

xxx xxx xxx

... The Court, after hearing the testimonies of the witness and examining the exhibits in question, finds that Exhibit A proves that the defendant himself did not receive the amount stated therein, because according to said exhibit that amount was advanced by the plaintiff in connection with the defendant's case, entirely contradicting the testimony of the plaintiff himself, who stated in open Court that he gave the amount in cash in two installments to the defendant. The Court is more inclined to believe the contents of Exhibit A, than the testimony of the plaintiff. On this particular matter, the defendant has established that the plaintiff made him believe that he was giving money to the authorities of the NARIC to grease their palms to suspend the prosecution of the defendant, but the defendant, upon inquiry, found out that none of the authorities has received that amount, and there was no case that was ever contemplated to be filed against him. It clearly follows, therefore, that the amount involved in this Exhibit A was imaginary. It was given to the defendant, not to somebody else. The purpose for which the amount was intended was illegal.

However, the Court believes that plaintiff was able to get from the defendant the amount of P3,000.00 on October 7, as shown by the check issued by the defendant, Exhibit 2, and the letter, Exhibit 7, was antedated October 6, as per plaintiff's wishes to show that defendant was indebted for P3,000.00 when, as a matter of fact, such amount was produced in order to grease the palms of the NARIC officials for withholding an imaginary criminal case. Such amount was never given to such officials nor was there any contemplated case against the defendant. The purpose for which such amount was intended was indeed illegal.

The trial court rendered judgment as follows:

WHEREFORE, the Court finds by a preponderance of evidence that the amount of P9,300.00 evidenced by Exhibit A was not received by the defendant, nor given to any party for the defendant's benefit.Consequently, the plaintiff has no right to recover said amount. The amount of P3,000.00 was given by the defendant to grease the palms of the NARIC officials. The purpose was illegal, null and void. Besides, it was not given at all, nor was it true that there was a contemplated case against the defendant. Such amount should be returned to the defendant. The services rendered by the plaintiff to the defendant is worth only P400.00, taking into consideration that the plaintiff received an air-conditioner and six sacks of rice. The court orders that the plaintiff should return to the defendant the amount of P3,000.00, minus P400.00 plus costs.

The Court of Appeals reversed the decision of the trial court on a finding that Pineda, being a person of more than average intelligence, astute in business, and wise in the ways of men would not "sign any document or paper with his name unless he was fully aware of the contents and important thereof, knowing as he must have known that the language and practices of business and of trade and commerce call to account every careless or thoughtless word or deed."

The appellate court stated:

No rule is more fundamental and by men of honor and goodwill more dearly cherished, than that which declares that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Corollary to and in furtherance of this principle, Section 24 of the Negotiable instruments Law (Act No.

2031) explicitly provides that every negotiable instrument is deemed prima facie to have been issued for a valuable consideration, and every person whose signature appears thereon to have become a party thereto for value.

We find this petition meritorious.

The Court of Appeals relied on the efficacy of the promissory note for its decision, citing Section 24 of the Negotiable Instruments Law which reads:

SECTION 24. Presumption of consideration.—Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.

The Court of Appeals' reliance on the above provision is misplaced. The presumption that a negotiable instrument is issued for a valuable consideration is only puma facie. It can be rebutted by proof to the contrary. (Bank of the Philippine Islands v. Laguna Coconut Oil Co. et al., 48 Phil. 5).

According to Dela Rama, he loaned the P9,300.00 to Pineda in two installments on two occasions five days apart - first loan for P5,000.00 and second loan for P4,300.00, both given in cash. He also alleged that previously he loaned P3,000.00 but Pineda paid this other loan two days afterward.

These allegations of Dela Rama are belied by the promissory note itself. The second sentence of the note reads - "This represents the cash advances made by him in connection with my case for which he is my attorney-in- law."

The terms of the note sustain the version of Pineda that he signed the P9,300.00 promissory note because he believed Dela Rama's story that these amounts had already been advanced by Dela Rama and given as gifts for NARIC officials.

Dela Rama himself admits that Pineda engaged his services to delay by one month the filing of the NARIC case against Pineda while the latter was trying to work out an amicable settlement. There is no question that Dela Rama was indeed a close friend of then NARIC Administrator Jose Rodriquez having worked with him in the Philippine consulate at Hongkong and that Dela Rama made what he calls "proper representations" with Rodriguez and with other NARIC officials in connection with the investigation of the criminal charges against Pineda.

We agree with the trial court which believed Pineda. It is indeed unusual for a lawyer to lend money to his client whom he had known for only three months, with no security for the loan and on interest. Dela Rama testified that he did not even know what Pineda was going to do with the money he borrowed from him. The petitioner had just purchased a hacienda in Mindoro for P210,000.00, owned sugar and rice lands in Tarlac of around 800 hectares, and had P60,000.00 deposits in three banks when he executed the note. It is more logical to believe that Pineda would not borrow P5,000.00 and P4,300.00 five days apart from a man whom he calls a "fixer" and whom he had known for only three months.

There is no dispute that an air-conditioning unit valued at P1,250.00 was purchased by Pineda's son and given to Dela Rama although the latter claims he paid P1,250.00 for the unit when he received it. Pineda, however, alleged that he gave the air-conditioning unit because Dela Rama told him that Dr. Rodriguez was asking for one air-conditioning machine of 1.5 horsepower for the latter's NARIC office. Pineda further testified that six cavans of first class rice also intended for the NARIC Chairman and General Manager, together with the airconditioning unit, never reached Dr. Rodriguez but were kept by the lawyer.

Considering the foregoing, we agree with the trial court that the promissory note was executed for an illegal consideration. Articles 1409 and 1412 of the Civil Code in part, provide:

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 and public policy;

xxx xxx xxx

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.

xxx xxx xxx

Whether or not the supposed cash advances reached their destination is of no moment. The consideration for the promissory note - to influence public officers in the performance of their duties - is contrary to law and public policy. The promissory note is void ab initio and no cause of action for the collection cases can arise from it.

WHEREFORE, the decision of the Court of Appeals is SET ASIDE. The complaint and the counterclaim in Civil Case No. 45762 are both DISMISSED.

SO ORDERED.

Teehankee (Chairman), Melencio-Herrera, Plana, Vasquez and Relova, JJ., concur.

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.

Ruiz, Ruiz and Ruiz for appellant.Laurel Law Offices for appellees.

REYES, J.B.L., J.:

From a decision of the Court of Appeals, affirming that of the Court of First Instance of Davao dismissing her complaint for recovery of land, Conchita Liguez has resorted to this Court, praying that the aforesaid decision be reversed on points of law. We granted certiorari on October 9, 1956.

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. (Paragraph 2, Exhibit "A")

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.

. . . distincion importantisima, que impide anular el contrato por la sola influencia de los motivos a no ser que se hubiera subordinando al cumplimiento de estos como condiciones la eficacia de aquel.

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 rule was reaffirmed in Lima vs. Lini Chu Kao, 51 Phil. 477.

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 (Civil Code of 1889, Arts. 1409, 1415, 1413; Baello vs. Villanueva, 54 Phil. 213).

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.

Puede la mujer como proprietaria hacer anular las donaciones aun durante el matrimonio? Esta es, en suma, la cuestion, reducida a determinar si la distinta naturaleza entre los actos a titulo oneroso y los actos a titulo lucrativo, y sus especiales y diversas circunstancias, pueden motivar una solucion diferente en cuanto a la epoca en que la mujer he de reclamar y obtener la nulidad del acto; cuestion que no deja de ser interesantisima.lawphi1.net

El Codigo, a pesar de la variacion que ha introducido en el proyecto de 1851, poniendo como segundo parrafo del articulo 1.413, o como limitacion de las enajenaciones u obligaciones a titulo oneroso, lo que era una limitacion general de todos los actos del marido, muestra, sin embargo, que no ha variado de criterio y que para el las donaciones deben en todo equipararse a cualquier otro acto ilegal o frraudulento de caracter oneroso, al decir en el art. 1.419: "Tambien se traera a colacion en el inventario de la sociedad— el importe de las donaciones y enajenaciones que deban considerarse ilegales o fraudulentas, con sujecion al art. 1.413.' (Debio tambien citarse el articulo 1.415, que es el que habla de donaciones.)lawphi1.net

"En resumen: el marido solo puede donar los bienes gananciales dentro de los limites marcados en el art. 1.415. Sin embargo, solo la mujer o sus herederos pueden reclamar contra la valides de la donacion, pues solo en su interes establece la prohibicion. La mujer o sus herederos, para poder dejar sin efecto el acto, han de sufrir verdadero perjuicio, entendiendose que no le hay hasta, tanto que, terminada por cualquier causa la sociedad de gananciales, y hecha su liquidacion, no pueda imputarse lo donado al haber por cualquier concepto del marido, ni obtener en su consecuencia la mujer la dibida indemnizacion. La donacioni reviste por tanto legalmente, una eficacia condicional, y en armonia con este caracter, deben fijarse los efectos de la misma con relacion a los adquirentes y a los terceros poseedores, teniendo, en su caso, en cuenta lo dispuesto en la ley Hipotecaria. Para prevenir todo perjuicio, puede la mujer, durante el matrimonio inmediatamente al acto, hacer constar ante los Tribunales su existencia y solicitor medidas de precaucion, como ya se ha dicho. Para evitarlo en lo sucesivo, y cuando las circunstancias lo requieran, puede instar la declaracion de prodigalidad.

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.

Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, and Endencia, JJ., concur.

G.R. No. L-17587 December 18, 1967

PHILIPPINE BANKING CORPORATION, representing the estate of JUSTINIA SANTOS Y CANON FAUSTINO, deceased, plaintiff-appellant, vs.LUI SHE, in her own behalf and as administratrix of the intestate estate of Wong Heng, deceased, defendant-appellant.

Nicanor S. Sison for plaintiff-appellant.Ozaeta, Gibbs and Ozaeta for defendant-appellant.

R E S O L U T I O N

CASTRO, J.:

This is the second motion that the defendant-appellant has filed relative to this Court's decision of September 12, 1967. The first was a motion for reconsideration. Accepting the nullity of the other contracts (Plff Exhs. 4-7), the defendant-appellant nevertheless contended that the lease contract (Plff Exh. 3) is so separable from the rest of the contracts that it should be saved from invalidation.lawphil

In denying the motion, we pointed to the circumstances —

that on November 15, 1957, the parties entered into the lease contract for 50 years: that ten days after, that is on November 25, they amended the contract so as to make it cover the entire property of Justina Santos; that on December 21, less than a month after, they entered into another contract giving Wong Heng the option to buy the leased premises should his pending petition for naturalization be granted; that on November 18, 1958, after failing to secure naturalization and after finding that adoption does not confer the citizenship of the adopting parent on the adopted, the parties entered into two other contracts extending the lease to 99 years and fixing the period of the option to buy at 50 years.

which indubitably demonstrate that each of the contracts in question was designed to carry out Justina Santos' expressed wish to give the land to Wong and thereby in effect place its ownership in alien hands,1 about which we shall have something more to say toward the end of this resolution. We concluded that "as the lease contract was part of a scheme to violate the Constitution it suffers from the same infirmity that renders the other contracts void and can no more be saved from illegality than the rest of the contracts."

The present motion is for a new trial and is based on three documents executed by Justina Santos which, so it is claimed, constitute newly-discovered material evidence. These documents are a codicil dated November 11, 1957 and two wills executed on August 24 and August 29, 1959. In the codicil Justina Santos not only named Tita Yaptinchay LaO the administratrix of her estate with the right to buy the properties of the estate, but also provided that if the said LaO was legally disqualified from buying (as she really was under article 1491 (3) of the Civil Code), she was to be her sole heir. In either case, the codicil imposed on the administratrix the obligation to have masses said for the soul of the testatrix and those of the latter's sister and parent. On the other hand, in both her 1959 wills Justina Santos enjoined her heirs to respect the lease contract made, and the conditional option given, in favor of Wong.

These documents form part of the records of civil case 59470 of the Court of First Instance of Manila in which the settlement of the estate of Justina Santos is pending, and so it is now claimed that they could not have been produced at the trial of this case which was concluded on August 6, 1960 because they were presented in the probate court only after the death of Justina Santos on December 28, 1964.itc-alf

This is a misrepresentation of the grossest sort. The documents were known to the defendant-appellant and her counsel even before the death of Justina Santos. As a matter of fact, the wills executed on August 24 and August 29, 1959 were presented in this case as Exhibits 285 and 279, respectively, for the defendant-appellant, and were considered and expressly referred to in the decision of the lower court and in our decision.itc-alf As for the codicil of November 11, 1957, the defendant-appellant can hardly feign ignorance of its essence even when this case was being tried in the lower court considering that its provisions were substantially adverted to in the testimony of one of her witnesses2 and were in fact recited in the decision a own a quo.3 By no means can the documents in question be considered newly-discovered evidence so as to warrant a reopening of this case.4

Nor is there anything in the documents that is likely to alter the result we have already reached in this case. With respect to the 1957 codicil, it is claimed that Justina Santos could not have intended by the 99-year lease to give Wong the ownership of the land considering that she had earlier (the codicil was made on November 11, 1957 while the lease contract was executed on November 15, 1957) devised the property to Tita Yaptinchay LaO.

Without passing on the validity of her testamentary disposition since the issue is one pending before the probate court, it suffices to state here that even granting that Justina Santos had devised the land in dispute to LaO, Justina Santos was not thereby barred or precluded from subsequently giving the land to Wong. The execution of the lease contract which, together with the other contracts, amount to a transfer of ownership to Wong, constitutes an implied revocation of her codicil, at least insofar as the disposition of the land is concerned.5

As for the 1959 wills, it is said that they manifest a desire to abide by the law, as is evident from the statement therein that Wong's right to buy the land be allowed "anytime he or his children should be entitled to buy lands in the Philippines (i.e., upon becoming Filipino citizens)".lawphil it seems obvious, however, that this is nothing but a reiteration of the substance of the lease contract and conditional option to buy which in compensation, as our decision demonstrates, amount to a conveyance, the protestation of compliance with the law notwithstanding. In cases like the one at bar, motives are seldom avowed and avowals are not always candid. The problem is not, however, insuperable, especially as in this case the very witnesses for the defendant-appellant testified that —

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 illegality, I am the only one that can question the illegality.'"6

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.7

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 adoption, believing that thru adoption Wong Heng might acquired Filipino citizenship, being the adopted child of a Filipino citizen.lawphil8

The other points raised in the motion for new trial either have already been disposed of in our decision or are so insubstantial to merit any attention.

ACCORDINGLY, the motion for new trial is denied.

Concepcion, C.J., Reyes J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur.

G.R. No. L-45255 November 14, 1986

HEIRS OF MARCIANA G. AVILA, petitioners, vs.HON. COURT OF APPEALS, and ALADINO CH. BACARRISAS, respondents.

Ruben M. Orteza for petitioner.

Abeto D. Salcedo for private respondent.

PARAS, J.:

This is a petition for review on certiorari of the October 6, 1976 Decision of the Court of Appeals in CA-G.R. No. SP-05598 (Aladino Ch. Bacarrisas vs. Hon. Benjamin K. Gorospe, et al), granting certiorari and setting aside the Order of respondent Judge dated May 24, 1976.

In 1939, the Court of First Instance of Misamis Oriental, as a cadastral court, adjudicated Lots 594 and 828 of the Cadastral Survey of Cagayan to Paz Chavez. But because Paz Chavez failed to pay the property taxes of Lot 594, the government offered the same for sale at a public auction. Marciana G. Avila, a teacher, wife of Leonardo Avila and the mother of the herein petitioners, participated in and won the bidding. Despite the provision of Section 579 of the Revised Administrative Code prohibiting public school teachers from buying delinquent properties, nobody, not even the government questioned her participation in said auction sale. In fact on February 20, 1940, after the expiration of the redemption period, the Provincial Treasurer executed in her favor the final bill of sale. (Rollo, pp. 10-11).

Sometime in 1947, OCT Nos. 100 and 101, covering said Lots 594 and 828, were issued in favor of Paz Chavez. In opposition thereto, private respondents filed a petition for review of the decrees on August 25, 1947 at the Court of First Instance of Misamis Oriental, Branch II, in Cadastral Case No. 17, Lot No. 594 entitled "The Director of Lands, Applicant v. Atanacia Abalde, et al., Claimants in Re: Petition for Review of Decree, Marciana G. Avila, Petitioner vs. Paz Chavez, Respondents." After hearing on the merits, the Cadastral Court promulgated a Decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered SETTING ASIDE the decision of this Court of December 13, 1940, which adjudicated the lots in question in favor of respondent Paz Chavez, and declaring NULL and VOID Decrees Nos. 433 and 434 issued by the Chief of Land Registration Office on June 19, 1947 as well as the certification of title covering Lots Nos. 594 and 828 of the Cadastral Survey of Cagayan issued by the Register of Deeds. Judgment is also hereby rendered adjudicating said Lot No. 594 to the heirs of the late Marciana G. Avila, namely: ..., all residents of

Malaybalay, Bukidnon, and Lot 828 of the same cadastre to Leonardo Avila, Sr., also of Malaybalay, subject to whatever RIGHTS OF WAY or EASEMENTS which the government of the Philippines or any of its instrumentalities may have acquire over said Lots.

The Clerk of Court is hereby directed to send copies of this decision to the Chief of the Land Registration Commission, the Provincial Fiscal the Provincial Treasurer, and the Director of Lands. Once this decision has become final, the Chief of Land Registration Commission shall issue the corresponding decrees and certificate of title in favor of the above-mentioned heirs of Marciana G. Avila and in favor of Leonardo Avila, Sr.

Paz Chavez appealed the said decision with the Court of Appeals, docketed therein as CA-G.R. No. 38129-R. The Court of Appeals rendered a Decision on March 20, 1974, the pertinent portion of which, reads:

The legal prohibition cited, therefore, would taint the title of Marciana G. Avila over Lot 594, with a flaw sufficient to make said title not proper for registration, specially as against the government, who has not (sic) impleaded in the proceedings, on the petition for review of the decree, to be heard as to whether it would resist the registration of said lot in favor of Marciana G. Avila.

In view of the foregoing, judgment is hereby rendered modifying the decision appealed from by disallowing the registration of Lot No. 594 in the name of Marciana G. Avila, but affirming said decision in all other respects, with costs against appellant. Let a copy of this decision be furnished the Solicitor General and the Provincial Fiscal of Misamis Oriental for their information and guidance. (Rollo, pp. 11-12).

Upon remand of the records to the Court below, Avila moved for execution, and a writ of possession which was opposed by Paz Chavez, who was succeeded by the herein private respondent Aladino Ch. Bacarrisas on the alleged ground that he has the actual and physical possession of Lot 594 where his residential house has stood since 1946.

Private respondent's Urgent Motion for Correction of Writ of Execution having been denied, a certiorari and mandamus with preliminary injunction suit was filed with the Court of Appeals, which was docketed therein as CA-SP-05598, alleging, among other things, that inasmuch as the Court of Appeals in CA-G.R. No. 38129-R modified the trial court's decision by disallowing the registration of Lot 594 in favor of the Avilas, the latter have no interest, right, claims, title or participation in Lot No. 594 to which they could claim possession. (Petitioner's Brief, Rollo, pp. 61-63). On said petition, the Court of Appeals, in a Decision dated October 6, 1976, declared:

CONSIDERING: That decision of cadastral court adjudicating Lot 594 was "disallowed" by this Court of Appeals, the fact that said decision had also annulled the decree and title of Chavez to the same in the petition for review, in the mind of tills Court, did not produce the effect of adjudicating, in categorical terms, the possession of Lot 594 in favor of Avila, there is nothing in the dispositive part nor even in the body of the decision of this CA-G.R. No. 38129-R that says that, and since the question here presented is whether or not cadastral court should place Avila in possession thru a writ of execution, and since the writ of execution is nothing more, nothing less, than a writ of possession, and since that writ is given only to the party in the land registration or cadastral case in whose favor decree had been issued, Manlapas v. Liorente, 48 Phil. 298, or if not a decree, at least, a judgment of confirmation of title, Director of Lands v. CFI of Tarlac, 51 Phil. 806,-this must mean that when respondent Court herein issued the writ of execution as to Lot 594, there really was no legal basis for the same; for Avila had not secured a decree, nor a judgment of confirmation of title over said Lot 594, since from the fact that this Court of Appeals had affirmed the decision of cadastral court annulling Chavez (Bacarrisas) to Lot 594, it would not follow that this Court of Appeals had decreed, or in the least, adjudged, that it was Avila who was the owner entitled to its possession, the conclusion can not follow from the premise; therefore the writ of execution as to Lot 594 has to be ruled to have been improvidently issued, and there being no other adequate relief available unto Bacarrisas, the remedy of certiorari by him chosen was correct.

IN VIEW WHEREOF, this Court is constrained to grant as it now grants certiorari, order sought to be annulled is set aside, with costs against respondent Avila. (Rollo, pp. 27-28).

Petitioners filed a motion for reconsideration but the same was denied by the Court of Appeals in a Resolution dated November 29, 1976.

Hence, this petition (Rollo, pp. 9-22).

Respondent filed his Comment on February 28, 1977 (Ibid, pp. 34-37) in compliance with the resolution of the First Division of this Court dated January 31, 1977 (Ibid., p. 33).

In a Resolution dated March 7, 1977, the First Division of this Court resolved to give due course to the petition (Ibid., p. 43).

On March 20, 1977, petitioners filed their Brief (Ibid., pp. 58-72) while respondent filed his Brief on July 6, 1977 (Ibid., pp. 83-92) and petitioners their Reply Brief on August 17, 1977 (Ibid., pp. 100-107).

In a Resolution dated August 29, 1977, the First Division of this Court resolved to declare this case submitted for decision (Ibid., p. 110.)

The petitioners assigned the following alleged errors of the Court of Appeals-

1. THE HON. COURT OF APPEALS IN CA-G.R. SP-05598, OCTOBER 6, 1976, THE QUESTIONED DECISION, ERRED BECAUSE, WHEREAS SAID COURT PREVIOUSLY IN CA-G.R. No. L-38129-R, MARCH, 1974, MODIFIED THE DECISION OF THE COURT OF FIRST INSTANCE OF MISAMIS ORIENTAL BY DISALLOWING ONLY THE REGISTRATION OF LOT 594 BUT AFFIRMED THE ADJUDICATION THEREOF TO THE PETITIONERS, IN THE PRESENT QUESTIONED DECISION SAID COURT VIRTUALLY MODIFIED FURTHER THE PREVIOUS DECISION WHICH HAD LONG BECOME FINAL BY DISALLOWING BOTH THE REGISTRATION AND ADJUDICATION OF LOT 594;

2. THE HON. COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONERS ARE NOT ENTITLED TO POSSESSION OF LOT 594 BECAUSE, SINCE PETITIONERS' TITLE WAS RECOGNIZED BY SAID COURT PREVIOUSLY IN CA-G.R. NO. L-38129-R, MARCH, 1974, IT FOLLOWS THAT THEY ARE ENTITLED TO POSSESS LOT 594;

3. THE HON. COURT OF APPEALS ERRED IN THAT TO DENY POSSESSION OF LOT 594 TO THE PETITIONERS WHO WON IN CADASTRAL CASE NO. 17 OF THE COURT OF FIRST INSTANCE OF MISAMIS ORIENTAL, IS TO MAKE THE LOSERS IN SAID CASE-THE PREDECESSOR-IN-INTEREST OF PRIVATE RESPONDENT WHOSE DECREES NOS. 433 and 434 COVERING LOTS 594 AND 828 WERE ORDERED CANCELLED FOR BEING NULL AND VOID, AS THE WINNER, A SITUATION MOST UNJUST AND UNFAIR; AND

4. THE HON COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT CORRECTLY CHOSE THE REMEDY OF certiorari FOR THE REASON THAT THERE IS NOTHING AT ALL IN THE RECORDS TO SHOW AN EXERCISE OF GRAVE ABUSE OF DISCRETION OR WHIMSICAL AND ARBITRARY EXERCISE THEREOF.

The pivotal issue in this case is who has the right of possession of the land in question.

Petitioners seek to distinguish between registration and adjudication of land under the Torrens System, claiming that in the March 20, 1974 Decision of the Court of Appeals in CA-G.R. No. 38129-R, registration of Lot No. 594 in favor of the late Marciana G. Avila was disallowed, but the adjudication thereof in her favor, was affirmed. In effect, it is their view that ownership and possession are separated in aforesaid decision, so that they assert that they are entitled to the possession of Lot 594, although they are not entitled to its registration in their names.

Such contention is without merit.

While it is true that Marciana Avila, their mother and predecessor-in-interest, purchased the questioned property at a public auction conducted by the government; paid the purchase price; and was issued a final bill of sale after the expiration of the redemption period, it is however undisputed that such purchase was prohibited under Section 579 of the Revised Administrative Code, as amended, which provides:

Section 579. Inhibition against purchase of property at tax sale.-Official and employees of the Government of the Republic of the Philippines are prohibited from purchasing, directly or indirectly, from the Government, any property sold by the Government for the non-payment of any public tax. Any such purchase by a public official or employee shall be void.

Thus, the sale to her of Lot 594 is void.

On the other hand, under Article 1409 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. (Arsenal, et al. vs, The Intermediate Appellate Court. et al., G.R. No. 66696, July 14, 1986). Moreover, Marciana Avila was a party to an illegal transaction, and therefore, under Art. 1412 of the Civil Code, she cannot recover what she has given by reason of the contract or ask for the fulfillment of what has been promised her.

Furthermore, in a registration case, the judgment confirming the title of the applicant and ordering its registration in his name necessarily carries with it the delivery of possession which is an inherent element of the right of ownership. (Abulocion et al. v. CFI of Iloilo, et al., 100 Phil. 553 [1956]). Hence, a writ of possession may be issued not only against the person who has been defeated in a registration case but also against anyone unlawfully and adversely occupying the land or any portion thereof during the land registration proceedings up to the issuance of the final decree. It is the duty of the registration court to issue said writ when asked for by the successful claimant. (Demorar v. Ibañez, etc., et al., 97 Phil. 72 [1955]; Abulocion et al v. CFI of Iloilo, et al., supra).

Under the circumstances, possession cannot be claimed by petitioners, because their predecessor-in-interest besides being at fault is not the successful claimant in the registration proceedings and hence not entitled to a writ of possession. As correctly stated by the Court of Appeals when respondent Court issued the writ of execution as to Lot 594, there really was no legal basis for the same, for Avila had not secured a decree, nor a judgment of confirmation of title over said lot.

Much less can possession be claimed by private respondents as it is undisputed that the land in question has been the subject of a tax sale of delinquent property with a final bill of sale.

Neither did the government file any claim for possession; nor appear to be impleaded in any of the actions or petitions before the Courts, Its only interest in the land in question appears to be in the collection of taxes.

Consequently, the situation is evidently one of failure of ownership because of the violation of Section 579 of the Administrative Code. Otherwise stated, the property apparently has no owner.

Under the principle that the State is the ultimate proprietor of land within its jurisdiction, subject land may be escheated in favor of the government upon filing of appropriate actions for reversion or escheat under Section 5, Rule 91 of the Rules of Court relative to properties alienated in violation of any statute.

As to the last issue, it has already been ruled that certiorari is proper where the trial court has already issued a writ of execution of the questioned judgment, the issuance being a question of law. (Vda. de Sayman vs. Court of Appeals, 121 SCRA 650).

PREMISES CONSIDERED, the October 6,1976 Decision of the Court of Appeals is hereby AFFIRMED.

SO ORDERED.

Feria (Chairman), Fernan, Alampay, and Gutierrez, Jr., JJ., concur.

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.

Cirilo A. Diaz, Jr. for petitioner.

Henry V. Briguera for private respondent.

PARAS, J.:

"'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.

xxx xxx xxx

... 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.

SO ORDERED.

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].

xxx xxx xxx

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.

SO ORDERED.

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.

SO ORDERED.

Fernan (Chairman), Gutierrez, Jr., Padilla, Bidin and Cortez, JJ., concur.

Alampay, J., took no part.