1

G.R. No. L-2659 October 12, 1950

In the matter of the testate estate of Emil Maurice Bachrach, deceased. MARY McDONALD BACHRACH, petitioner-appellee, vs.SOPHIE SEIFERT and ELISA ELIANOFF, oppositors-appellants.

Ross, Selph, Carrascoso and Janda for appellants.Delgado and Flores for appellee.

OZAETA, J.:

Is a stock dividend fruit or income, which belongs to the usufructuary, or is it capital or part of the corpus of the estate, which pertains to the remainderman? That is the question raised in the appeal.

The deceased E. M. Bachrach, who left no forced heir except his widow Mary McDonald Bachrach, in his last will and testament made various legacies in cash and willed the remainder of his estate as follows:

Sixth: It is my will and do herewith bequeath and devise to my beloved wife Mary McDonald Bachrach for life all the fruits and usufruct of the remainder of all my estate after payment of the legacies, bequests, and gifts provided for above; and she may enjoy said usufruct and use or spend such fruits as she may in any manner wish.

The will further provided that upon the death of Mary McDonald Bachrach, one-half of the all his estate "shall be divided share and share alike by and between my legal heirs, to the exclusion of my brothers."

The estate of E. M. Bachrach, as owner of 108,000 shares of stock of the Atok-Big Wedge Mining Co., Inc., received from the latter 54,000 shares representing 50 per cent stock dividend on the said 108,000 shares. On June 10, 1948, Mary McDonald Bachrach, as usufructuary or life tenant of the estate, petitioned the lower court to authorize the Peoples Bank and Trust Company as administrator of the estate of E. M. Bachrach, to her the said 54,000 share of stock

dividend by endorsing and delivering to her the corresponding certificate of stock, claiming that said dividend, although paid out in the form of stock, is fruit or income and therefore belonged to her as usufructuary or life tenant. Sophie Siefert and Elisa Elianoff, legal heirs of the deceased, opposed said petition on the ground that the stock dividend in question was not income but formed part of the capital and therefore belonged not to the usufructuary but to the remainderman. And they have appealed from the order granting the petition and overruling their objection.

While appellants admits that a cash dividend is an income, they contend that a stock dividend is not, but merely represents an addition to the invested capital. The so-called Massachusetts rule, which prevails in certain jurisdictions in the United States, supports appellants' contention . It regards cash dividends, however large, as income, and stock dividends, however made, as capital. (Minot vs. Paine, 99 Mass., 101; 96 Am. Dec., 705.) It holds that a stock dividend is not in any true sense any true sense any dividend at all since it involves no division or severance from the corporate assets of the dividend; that it does not distribute property but simply dilutes the shares as they existed before; and that it takes nothing from the property of the corporation, and nothing to the interests of the shareholders.

On the other hand, so called Pennsylvania rule, which prevails in various other jurisdictions in the United States, supports appellee's contention. This rule declares that all earnings of the corporation made prior to the death of the testator stockholder belong to the corpus of the estate, and that all earnings, when declared as dividends in whatever form, made during the lifetime of the usufructuary or life tenant. (Earp's Appeal, 28 Pa., 368.)

. . . It is clear that testator intent the remaindermen should have only the corpus of the estate he left in trust, and that all dividends should go the life tenants. It is true that profits realized are not dividends until declared by the proper officials of the corporation, but distribution of profits, however made, in dividends, and the form of the distribution is immaterial. (In re Thompson's Estate, 262 Pa., 278; 105 Atl. 273, 274.)

In Hite vs. Hite (93 Ky., 257; 20 S. W., 778, 780), the Court of Appeals of Kentucky, speaking thru its Chief Justice, said:

. . . Where a dividend, although declared in stock, is based upon the earnings of the company, it is in reality, whether called by one name or another, the income of the capital invested in it. It is but a mode of distributing the profit. If it be not income, what is it? If it is, then it is rightfully and equitably the property of the life tenant. If it be really profit, then he should have it, whether paid in stock or money. A stock dividend proper is the issue of new shares paid for by the transfer of a sum equal to their par value from the profits and loss account to that representing capital stock; and really a corporation has no right to a dividend, either in cash or stock, except from its earnings; and a singular state of case — it seems to us, an unreasonable one — is presented if the company, although it rests with it whether it will declare a dividend, can bind the courts as to the proper ownership of it, and by the mode of payment substitute its will for that of that of the testator, and favor the life tenants or the remainder-men, as it may desire. It cannot, in reason, be considered that the testator contemplated such a result. The law regards substance, and not form, and such a rule might result not only in a violation of the testator's intention, but it would give the power to the corporation to beggar the life tenants, who, in this case, are the wife and children of the testator, for the benefit of the remainder-men, who may perhaps be unknown to the testator, being unborn when the will was executed. We are unwilling to adopt a rule which to us seems so arbitrary, and devoid of reason and justice. If the dividend be in fact a profit, although declared in stock, it should be held to be income. It has been so held in Pennsylvania and many other states, and we think it the correct rule. Earp's Appeal, 28 Pa. St. 368; Cook, Stocks & S. sec. 554. . . .

We think the Pennsylvania rule is more in accord with our statutory laws than the Massachusetts rule. Under section 16 of our Corporation Law, no corporation may make or declare any dividend except from the surplus profits arising from its business. Any dividend, therefore, whether cash or stock, represents surplus profits. Article 471 of the Civil Code provides that the usufructuary shall be entitled to receive all the natural, industrial, and civil fruits of the property in usufruct. And articles 474 and 475 provide as follows:

ART. 474. Civil fruits are deemed to accrue day by day, and belong to the usufructuary in proportion to the time the usufruct may last.

ART. 475. When a usufruct is created on the right to receive an income or periodical revenue, either in money or fruits, or the interest on bonds or securities payable to bearer, each matured payment shall be considered as the proceeds or fruits such right.

When it consists of the enjoyment of the benefits arising from an interest in an industrial or commercial enterprise, the profits of which are not distributed at fixed periods, such profits shall have the same consideration.lawphil.net

In either case they shall be distributed as civil fruits, and shall be applied in accordance with the rules prescribed by the next preceding article.

The 108,000 shares of stock are part of the property in usufruct. The 54,000 shares of stock dividend are civil fruits of the original investment. They represent profits, and the delivery of the certificate of stock covering said dividend is equivalent to the payment of said profits. Said shares may be sold independently of the original shares, just as the offspring of a domestic animal may be sold independently of its mother.

The order appealed from, being in accordance with the above-quoted provisions of the Civil Code, his hereby affirmed, with costs against the appellants.

DIGEST

Facts:

The deceased E. M. Bachrach, who left no forced heir except his widow Mary McDonald Bachrach, in his last will and testament made various legacies in cash and willed the remainder of his estate. The estate of E. M. Bachrach, as owner of 108,000 shares of stock of the Atok-Big Wedge Mining Co., Inc., received from the latter 54,000 shares representing 50 per cent stock dividend on the said 108,000 shares. On June 10, 1948, Mary McDonald

Bachrach, as usufructuary or life tenant of the estate, petitioned the lower court to authorize the Peoples Bank and Trust Company, as administrator of the estate of E. M. Bachrach, to transfer to her the said 54,000 shares of stock dividend by indorsing and delivering to her the corresponding certificate of stock, claiming that said dividend, although paid out in the form of stock, is fruit or income and therefore belonged to her as usufructuary or life tenant. Sophie Siefert and Elisa Elianoff, legal heirs of the deceased, opposed said petition on the ground that the stock dividend in question was not income but formed part of the capital and therefore belonged not to the usufructuary but to the remainderman. While appellants admit that a cash dividend is an income, they contend that a stock dividend is not, but merely represents an addition to the invested capital.

Issue:

Whether or not a dividend is an income and whether it should go to the usufructuary.

Held:

The usufructuary shall be entitled to receive all the natural, industrial, and civil fruits of the property in usufruct. The 108,000 shares of stock are part of the property in usufruct. The 54,000 shares of stock dividend are civil fruits of the original investment. They represent profits, and the delivery of the certificate of stock covering said dividend is equivalent to the payment of said profits. Said shares may be sold independently of the original shares, just as the offspring of a domestic animal may be sold independently of its mother. If the dividend be in fact a profit, although declared in stock, it should be held to be income. A dividend, whether in the form of cash or stock, is income and, consequently, should go to the usufructuary, taking into consideration that a stock dividend as well as a cash dividend can be declared only out of profits of the corporation, for if it were declared out of the capital it would be a serious violation of the law.

Under the Massachusetts rule, a stock dividend is considered part of the capital and belongs to the remainderman; while under the Pennsylvania rule, all earnings of a corporation, when declared as

dividends in whatever form, made during the lifetime of the usufructuary, belong to the latter. The Pennsylvania rule is more in accord with our statutory laws than the Massachusetts rule.

G.R. No. 35223 September 17, 1931

THE BACHRACH MOTOR CO., INC., plaintiff-appellee, vs.TALISAY-SILAY MILLING CO., ET AL., defendants-appellees. THE PHILIPPINE NATIONAL BANK, intervenor-appellant.

Roman J. Lacson for intervenor-appellant.Mariano Ezpeleta for plaintiff-appellee.Nolan and Hernaez for defendants-appellees Talisay-Silay Milling Co. and Cesar Ledesma.

ROMUALDEZ, J.:

This proceeding originated in a complaint filed by the Bachrach Motor Co., Inc., against the Talisay-Silay Milling Co., Inc., for the delivery of the amount P13,850 or promissory notes or other instruments or credit for that sum payable on June 30, 1930, as bonus in favor of Mariano Lacson Ledesma; the complaint further prays that the sugar central be ordered to render an accounting of the amounts it owes Mariano Lacson Ledesma by way of bonus, dividends, or otherwise, and to pay the plaintiff a sum sufficient to satisfy the judgment mentioned in the complaint, and that the sale made by said Mariano Lacson Ledesma be declared null and void.

The Philippine National Bank filed a third party claim alleging a

preferential right to receive any amount which Mariano Lacson Ledesma might be entitled to from the Talisay-Silay Milling Co. as bonus, because that would be civil fruits of the land mortgaged to said bank by said debtor for the benefit of the central referred to, and by virtue of a deed of assignment, and praying that said central be ordered to delivered directly to the intervening bank said sum on account of the latter's credit against the aforesaid Mariano Lacson Ledesma.

The corporation Talisay-Silay Milling Co., Inc., answered the complaint stating that of Mariano Lacson Ledesma's credit, P7,500 belonged to Cesar Ledesma because he had purchased it, and praying that it be absolved from the complaint and that the proper party be named so that the remainder might be delivered.

Cesar Ledesma, in turn, claiming to be the owner by purchase in good faith an for a reconsideration of the P7,500 which is a part of the credit referred to above, answered praying that he be absolved from the complaint.

The plaintiff Bachrach Motor Co., Inc., answered the third party claim alleging that its credit against Mariano Lacson Ledesma was prior and preferential to that of the intervening bank, and praying that the latter's complaint be dismissed.

At the trial all the parties agreed to recognize and respect the sale made in favor of Cesar Ledesma of the P7,500 part of the credit in question, for which reason the trial court dismissed the complaint and cross-complaint against Cesar Ledesma authorizing the defendant central to deliver to him the aforementioned sum of P7,500. And upon conclusion of the hearing, the court held that the Bachrach Motor Co., Inc., had a preferred right to receive the amount of P11,076.02 which was Mariano Lacson Ledesma's bonus, and it ordered the defendant central to deliver said sum to the plaintiff.

The Philippine National Bank appeals, assigning the following alleged errors as committed by the trial court:

1. In holding that the bonus which the Talisay-Silay Milling Co., Inc., bound itself to pay the planters who had mortgaged their land to the Philippine National Bank to secure the payment of the debt of said

central to said bank is not civil fruits of said land.

2. In not holding that said bonus became subject to the mortgage executed by the defendant Mariano Lacson Ledesma to the Philippine National Bank to secure the payment of his personal debt to said bank when it fell due.

3. In holding that the assignment (Exhibit 9, P.N.B.) of said bonus made on March 7, 1930, by Mariano Lacson Ledesma to the Philippine National Bank to be applied to the payment of his debt to said Philippine National Bank is fraudulent.

4. In holding that the Bachrach Motor Co. Inc., in civil case No. 31597 of the Court of First Instance of Manila levied a valid attachment upon the bonus in question.

5. In admitting and considering the supplementary complaint filed by the Bachrach Motor Co., Inc., alleging as a cause of action the attachment of the bonus in question which said Bachrach Motor Co., Inc., in civil case No. 31821 of the Court of First Instance of Manila levied after the filing of the original complaint in this case, and after Mariano Lacson Ledesma in this case had been declared in default.

6. In holding that the Bachrach Motor Co., Inc., has a preferential right to receive from the Talisay-Silay Milling Co., Inc., the amount of P11,076.02 which is in the possession of said corporation as the bonus to be paid to Mariano Lacson Ledesma, and in ordering the Talisay-Silay Milling Co., Inc., to deliver said amount to the Bachrach Motor Co., Inc.

7. In not holding that the Philippine National Bank has a preferential right to receive from the Talisay-Silay Milling Co., Inc., the amount of P11,076.02 held by said corporation as Mariano Lacson Ledesma's bonus, and in not ordering said Talisay-Silay Milling Co., Inc., to deliver said amount to the Philippine National Bank.

8. In not holding that the amended complaint and the supplementary complaint of the Bachrach Motor Co., Inc., do not state facts sufficient to constitute a cause of action in favor of the Bachrach Motor Co., Inc., and against the Talisay-Silay Milling Co., Inc., or against the Philippine National Bank.

The appellant bank bases its preferential right upon the contention that the bonus in question is civil fruits of the lands which the owners had mortgaged for the benefit of the central giving the bonus, and that, as civil fruits of said land, said bonus was assigned by Mariano Lacson Ledesma on March 7, 1930, by virtue of the document Exhibit 9 of said intervening institution, which admitted in its brief that "if the bonus in question is not civil fruits or rent which became subject to the mortgage in favor of the Philippine National Bank when Mariano Lacson Ledesma's personal obligation fell due, the assignment of March 7, 1930 (Exhibit 9, P.N.B.), is null and void, not because it is fraudulent, for there was no intent of fraud in executing the deed, but that the cause or consideration of the assignment was erroneous, for it was based upon the proposition that the bonus was civil fruits of the land mortgaged to the Philippine National Bank." (P. 31.)

The fundamental question, then, submitted to our consideration is whether or not the bonus in question is civil fruits.

This is how the bonus came to be granted: On December 22, 1923, the Talisay-Silay Milling Co., Inc., was indebted to the Philippine National Bank. To secure the payment of its debt, it succeeded in inducing its planters, among whom was Mariano Lacson Ledesma, to mortgage their land to the creditor bank. And in order to compensate those planters for the risk they were running with their property under the mortgage, the aforesaid central, by a resolution passed on that same date, i.e., December 22, 1923, undertook to credit the owners of the plantation thus mortgaged every year with a sum equal to two per centum of the debt secured according to yearly balance, the payment of the bonus being made at once, or in part from time to time, as soon as the central became free of its obligations to the aforesaid bank, and of those contracted by virtue of the contract of supervision, and had funds which might be so used, or as soon as it obtained from said bank authority to make such payment. (Exhibits 5, 6; P.N.B.)

Article 355 of the Civil Code considers three things as civil fruits: First, the rents of buildings; second, the proceeds from leases of lands; and, third, the income from perpetual or life annuities, or other similar sources of revenue. It may be noted that according to the context of the law, the phrase "u otras analogas" refers only to rent or

income, for the adjectives "otras" and "analogas" agree with the noun "rentas," as do also the other adjectives "perpetuas" and "vitalicias." That is why we say that by "civil fruits" the Civil Code understands one of three and only three things, to wit: the rent of a building, the rent of land, and certain kinds of income.

As the bonus in question is not rent of a building or of land, the only meaning of "civil fruits" left to be examined is that of "income."

Assuming that in broad juridical sense of the word "income" it might be said that the bonus in question is "income" under article 355 of the Civil Code, it is obvious to inquire whether it is derived from the land mortgaged by Mariano Lacson Ledesma to the appellant bank for the benefit of the central; for it is not obtained from that land but from something else, it is not civil fruits of that land, and the bank's contention is untenable.

It is to be noted that the said bonus bears no immediate, but only a remote accidental relation to the land mentioned, having been granted as compensation for the risk of having subjected one's land to a lien in favor of the bank, for the benefit of the entity granting said bonus. If this bonus be income or civil fruits of anything, it is income arising from said risk, or, if one chooses, from Mariano Lacson Ledesma's generosity in facing the danger for the protection of the central, but certainly it is not civil fruits or income from the mortgaged property, which, as far as this case is concerned, has nothing to do with it. Hence, the amount of the bonus, according to the resolution of the central granting it, is not based upon the value, importance or any other circumstance of the mortgaged property, but upon the total value of the debt thereby secured, according to the annual balance, which is something quite distinct from and independent of the property referred to.

Finding no merit in this appeal, the judgment appealed from is affirmed, without express finding as to costs. So ordered.

DIGESTFacts: On 22 December 1923, the Talisay-Silay Milling Co., Inc., was indebted to the PNB. To secure the payment of its debt, it

succeeded in inducing its planters, among whom was Mariano Lacson Ledesma, to mortgage their land to the bank. And in order to compensate those planters for the risk they were running with their property under that mortgage, the aforesaid central, by a resolution passed on the same date, and amended on 23 March 1928, undertook to credit the owners of the plantation thus mortgaged every year with a sum equal to 2% of the debt secured according to the yearly balance, the payment of the bonus being made at once, or in part from time to time, as soon as the central became free of its obligations to the bank, and of those contracted by virtue of the contract of supervision, and had funds which might be so used, or as soon as it obtained from said bank authority to make such payment.

<It seems Mariano Lacson Ledesma is indebted from Bachrach Motor; the circumstance of which is not found in the case facts.>

Bachrach Motor Co., Inc. filed a complaint against the Talisay-Silay Milling Co., Inc., for the delivery of the amount of P13,850 or promissory notes or other instruments of credit for that sum payable on 30 June 1930, as bonus in favor of Mariano Lacson Ledesma. The complaint further prays that the sugar central be ordered to render an accounting of the amounts it owes Mariano Lacson Ledesma by way of bonus, dividends, or otherwise, and to pay Bachrach Motors a sum sufficient to satisfy the judgment mentioned in the complaint, and that the sale made by said Mariano Lacson Ledesma be declared null and void. The PNB filed a third

party claim alleging a preferential right to receive any amount which Mariano Lacson Ledesma might be entitled from Talisay-Silay Milling as bonus. Talisay-Silay answered the complaint that Mariano Lacson Ledesma’s credit (P7,500) belonged to Cesar Ledesma because he had purchase it. Cesar Ledesma claimed to be an owner by purchase in good faith. At the trial all the parties agreed to recognize and respect the sale made in favor of Cesar Ledesma of the P7,500 part of the credit in question, for which reason the trial court dismissed the complaint and cross-complaint against Cesar Ledesma authorizing the central to deliver to him the sum of P7,500. And upon conclusion of the hearing, the court held that the Bachrach Motor Co., Inc., had a preferred right to receive the amount of P11,076.02 which was

Mariano Lacson Ledesma’s bonus, and it ordered the central to deliver said sum to Bachrach Motors. PNB appealed.

The Supreme Court affirmed the judgment appealed from, as it found no merit in the appeal;, without express finding as to costs.

1. Civil Fruits under Article 355 of the Civil Code

Article 355 of the Civil Code considers three things as civil fruits: First, the rents of buildings;

second, the proceeds from leases of lands; and, third, the income from perpetual or life annuities, or other similar sources of revenue. According to the context of the law, the phrase “u otras analogas” refers only to rents or income, for the adjectives “otras” and “analogas” agree with the noun “rentas,” as do also the other adjectives “perpetuas” and “vitalicias.” The “civil fruits” the Civil Code understands one of three and only three things, to wit: the rent of a building, the rent of land, and certain kinds of income.

2. Bonus not a civil fruit; not an income of the land

The amount of the bonus, according to the resolution of the central granting it, is not based upon the value, importance or any other circumstance of the mortgaged property, but upon the total value of the debt thereby secured, according to the annual balance, which is something quite distinct from and independent of the property referred to. As the bonus is not obtained from the land, it is not civil fruits of that land. It is neither rent of buildings, proceeds from lease of lands, or income under Article 355 of the Civil Code.

G.R. No. 133879 November 21, 2001

EQUATORIAL REALTY DEVELOPMENT, INC., petitioner, vs.MAYFAIR THEATER, INC., respondent.

PANGANIBAN, J.:

General propositions do not decide specific cases. Rather, laws are interpreted in the context of the peculiar factual situation of each proceeding. Each case has its own flesh and blood and cannot be ruled upon on the basis of isolated clinical classroom principles.

While we agree with the general proposition that a contract of sale is valid until rescinded, it is equally true that ownership of the thing sold is not acquired by mere agreement, but by tradition or delivery. The peculiar facts of the present controversy as found by this Court in an earlier relevant Decision show that delivery was not actually effected; in fact, it was prevented by a legally effective impediment. Not having been the owner, petitioner cannot be entitled to the civil fruits of ownership like rentals of the thing sold. Furthermore, petitioner's bad faith, as again demonstrated by the specific factual milieu of said Decision, bars the grant of such benefits. Otherwise, bad faith would be rewarded instead of punished.

The Case

Filed before this Court is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the March 11, 1998 Order2 of the Regional Trial Court of Manila (RTC), Branch 8, in Civil Case No. 97-85141. The dispositive portion of the assailed Order reads as follows:

"WHEREFORE, the motion to dismiss filed by defendant Mayfair is hereby GRANTED, and the complaint filed by plaintiff Equatorial is hereby DISMISSED."3

Also questioned is the May 29, 1998 RTC Order4 denying petitioner's Motion for Reconsideration.

The Facts

The main factual antecedents of the present Petition are matters of

record, because it arose out of an earlier case decided by this Court on November 21, 1996, entitled Equatorial Realty Development, Inc. v. Mayfair Theater, Inc.5 (henceforth referred to as the "mother case"), docketed as G.R No. 106063.

Carmelo & Bauermann, Inc. ("Camelo" ) used to own a parcel of land, together with two 2-storey buildings constructed thereon, located at Claro M. Recto Avenue, Manila, and covered by TCT No. 18529 issued in its name by the Register of Deeds of Manila.

On June 1, 1967, Carmelo entered into a Contract of Lease with Mayfair Theater Inc. ("Mayfair") for a period of 20 years. The lease covered a portion of the second floor and mezzanine of a two-storey building with about 1,610 square meters of floor area, which respondent used as a movie house known as Maxim Theater.

Two years later, on March 31, 1969, Mayfair entered into a second Contract of Lease with Carmelo for the lease of another portion of the latter's property — namely, a part of the second floor of the two-storey building, with a floor area of about 1,064 square meters; and two store spaces on the ground floor and the mezzanine, with a combined floor area of about 300 square meters. In that space, Mayfair put up another movie house known as Miramar Theater. The Contract of Lease was likewise for a period of 20 years.

Both leases contained a provision granting Mayfair a right of first refusal to purchase the subject properties. However, on July 30, 1978 — within the 20-year-lease term — the subject properties were sold by Carmelo to Equatorial Realty Development, Inc. ("Equatorial") for the total sum of P11,300,000, without their first being offered to Mayfair.

As a result of the sale of the subject properties to Equatorial, Mayfair filed a Complaint before the Regional Trial Court of Manila (Branch 7) for (a) the annulment of the Deed of Absolute Sale between Carmelo and Equatorial, (b) specific performance, and (c) damages. After trial on the merits, the lower court rendered a Decision in favor of Carmelo and Equatorial. This case, entitled "Mayfair" Theater, Inc. v. Carmelo and Bauermann, Inc., et al.," was docketed as Civil Case No. 118019.

On appeal (docketed as CA-GR CV No. 32918), the Court of Appeals (CA) completely reversed and set aside the judgment of the lower court.

The controversy reached this Court via G.R No. 106063. In this mother case, it denied the Petition for Review in this wise:

"WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty Development, Inc. and Carmelo & Bauermann, Inc. is hereby deemed rescinded; Carmelo & Bauermann is ordered to return to petitioner Equatorial Realty Development the purchase price. The latter is directed to execute the deeds and documents necessary to return ownership to Carmelo & Bauermann of the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots for P11,300,000.00."6

The foregoing Decision of this Court became final and executory on March 17, 1997. On April 25, 1997, Mayfair filed a Motion for Execution, which the trial court granted.

However, Carmelo could no longer be located. Thus, following the order of execution of the trial court, Mayfair deposited with the clerk of court a quo its payment to Carmelo in the sum of P11,300,000 less; P847,000 as withholding tax. The lower court issued a Deed of Reconveyance in favor of Carmelo and a Deed of Sale in favor of Mayfair. On the basis of these documents, the Registry of Deeds of Manila canceled Equatorial's titles and issued new Certificates of Title7 in the name of Mayfair.

Ruling on Equatorial's Petition for Certiorari and Petition contesting the foregoing manner of execution, the CA in its Resolution of November 20, 1998, explained that Mayfair had no right to deduct the P847,000 as withholding tax. Since Carmelo could no longer be located, the appellate court ordered Mayfair to deposit the said sum with the Office of the Clerk of Court, Manila, to complete the full amount of P11,300,000 to be turned over to Equatorial.

Equatorial questioned the legality of the above CA ruling before this Court in G.R No. 136221 entitled "Equatorial Realty Development,

Inc. v. Mayfair Theater, Inc." In a Decision promulgated on May 12, 2000,8 this Court directed the trial court to follow strictly the Decision in GR. No. 106063, the mother case. It explained its ruling in these words:

"We agree that Carmelo and Bauermann is obliged to return the entire amount of eleven million three hundred thousand pesos (P11,300,000.00) to Equatorial. On the other hand, Mayfair may not deduct from the purchase price the amount of eight hundred forty-seven thousand pesos (P847,000.00) as withholding tax. The duty to withhold taxes due, if any, is imposed on the seller Carmelo and Bauermann, Inc."9

Meanwhile, on September 18, 1997 — barely five months after Mayfair had submitted its Motion for Execution before the RTC of Manila, Branch 7 — Equatorial filed with the Regional Trial Court of Manila, Branch 8, an action for the collection of a sum of money against Mayfair, claiming payment of rentals or reasonable compensation for the defendant's use of the subject premises after its lease contracts had expired. This action was the progenitor of the present case.

In its Complaint, Equatorial alleged among other things that the Lease Contract covering the premises occupied by Maxim Theater expired on May 31, 1987, while the Lease Contract covering the premises occupied by Miramar Theater lapsed on March 31, 1989.10

Representing itself as the owner of the subject premises by reason of the Contract of Sale on July 30, 1978, it claimed rentals arising from Mayfair's occupation thereof.

Ruling of the RTC Manila, Branch 8

As earlier stated, the trial court dismissed the Complaint via the herein assailed Order and denied the Motion for Reconsideration filed by Equatorial.11

The lower court debunked the claim of petitioner for unpaid back rentals, holding that the rescission of the Deed of Absolute Sale in the mother case did not confer on Equatorial any vested or residual proprietary rights, even in expectancy.

In granting the Motion to Dismiss, the court a quo held that the critical issue was whether Equatorial was the owner of the subject property and could thus enjoy the fruits or rentals therefrom. It declared the rescinded Deed of Absolute Sale as avoid at its inception as though it did not happen."

The trial court ratiocinated as follows:

"The meaning of rescind in the aforequoted decision is to set aside. In the case of Ocampo v. Court of Appeals, G.R. No. 97442, June 30, 1994, the Supreme Court held that, 'to rescind is to declare a contract void in its inception and to put an end as though it never were. It is not merely to terminate it and release parties from further obligations to each other but to abrogate it from the beginning and restore parties to relative positions which they would have occupied had no contract ever been made.'

"Relative to the foregoing definition, the Deed of Absolute Sale between Equatorial and Carmelo dated July 31, 1978 is void at its inception as though it did not happen.

"The argument of Equatorial that this complaint for back rentals as 'reasonable compensation for use of the subject property after expiration of the lease contracts presumes that the Deed of Absolute Sale dated July 30, 1978 from whence the fountain of Equatorial's all rights flows is still valid and existing.

xxx xxx xxx

"The subject Deed of Absolute Sale having been rescinded by the Supreme Court, Equatorial is not the owner and does not have any right to demand backrentals from the subject property. . .12

The trial court added: "The Supreme Court in the Equatorial case, G.R No. 106063, has categorically stated that the Deed of Absolute Sale dated July 31, 1978 has been rescinded subjecting the present complaint to res judicata."13

Hence, the present recourse.14

Issues

Petitioner submits, for the consideration of this Court, the following issues:15

"A

The basis of the dismissal of the Complaint by the Regional Trial Court not only disregards basic concepts and principles in the law on contracts and in civil law, especially those on rescission and its corresponding legal effects, but also ignores the dispositive portion of the Decision of the Supreme Court in G.R. No. 106063 entitled 'Equatorial Realty Development, Inc. & Carmelo & Bauermann, Inc. vs. Mayfair Theater, Inc.'

"B.

The Regional Trial Court erred in holding that the Deed of Absolute Sale in favor of petitioner by Carmelo & Bauermann, Inc., dated July 31, 1978, over the premises used and occupied by respondent, having been 'deemed rescinded' by the Supreme Court in G.R. No. 106063, is 'void at its inception as though it did not happen.'

"C.

The Regional Trial Court likewise erred in holding that the aforesaid Deed of Absolute Sale, dated July 31, 1978, having been 'deemed rescinded' by the Supreme Court in G.R. No. 106063, petitioner 'is not the owner and does not have any right to demand backrentals from the subject property,' and that the rescission of the Deed of Absolute Sale by the Supreme Court does not confer to petitioner 'any vested right nor any residual proprietary rights even in expectancy.'

"D.

The issue upon which the Regional Trial Court dismissed the civil case, as stated in its Order of March 11, 1998, was not raised by respondent in its Motion to Dismiss.

"E.

The sole ground upon which the Regional Trial Court dismissed Civil

Case No. 97-85141 is not one of the grounds of a Motion to Dismiss under Sec. 1 of Rule 16 of the 1997 Rules of Civil Procedure."

Basically, the issues can be summarized into two: (1) the substantive issue of whether Equatorial is entitled to back rentals; and (2) the procedural issue of whether the court a quo's dismissal of Civil Case No. 97-85141 was based on one of the grounds raised by respondent in its Motion to Dismiss and covered by Rule 16 of the Rules of Court.

This Court's Ruling

The Petition is not meritorious.

First Issue:Ownership of Subject Properties

We hold that under the peculiar facts and circumstances of the case at bar, as found by this Court en banc in its Decision promulgated in 1996 in the mother case, no right of ownership was transferred from Carmelo to Equatorial in view of a patent failure to deliver the property to the buyer.

Rental — a CivilFruit of Ownership

To better understand the peculiarity of the instant case, let us begin with some basic parameters. Rent is a civil fruit16 that belongs to the owner of the property producing it17 by right of accession.18

Consequently and ordinarily, the rentals that fell due from the time of the perfection of the sale to petitioner until its rescission by final judgment should belong to the owner of the property during that period.

By a contract of sale, "one of the contracting parties obligates himself to transfer ownership of and to deliver a determinate thing and the other to pay therefor a price certain in money or its equivalent."19

Ownership of the thing sold is a real right,20 which the buyer acquires only upon delivery of the thing to him "in any of the ways specified in articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee."21

This right is transferred, not merely by contract, but also by tradition or delivery.22 Non nudis pactis sed traditione dominia rerum

transferantur. And there is said to be delivery if and when the thing sold "is placed in the control and possession of the vendee."23 Thus, it has been held that while the execution of a public instrument of sale is recognized by law as equivalent to the delivery of the thing sold,24

such constructive or symbolic delivery, being merely presumptive, is deemed negated by the failure of the vendee to take actual possession of the land sold.25

Delivery has been described as a composite act, a thing in which both parties must join and the minds of both parties concur. It is an act by which one party parts with the title to and the possession of the property, and the other acquires the right to and the possession of the same. In its natural sense, delivery means something in addition to the delivery of property or title; it means transfer of possession.26 In the Law on Sales, delivery may be either actual or constructive, but both forms of delivery contemplate "the absolute giving up of the control and custody of the property on the part of the vendor, and the assumption of the same by the vendee."27

Possession NeverAcquired by Petitioner

Let us now apply the foregoing discussion to the present issue. From the peculiar facts of this case, it is clear that petitioner never took actual control and possession of the property sold, in view of respondent's timely objection to the sale and the continued actual possession of the property. The objection took the form of a court action impugning the sale which, as we know, was rescinded by a judgment rendered by this Court in the mother case. It has been held that the execution of a contract of sale as a form of constructive delivery is a legal fiction. It holds true only when there is no impediment that may prevent the passing of the property from the hands of the vendor into those of the vendee.28 When there is such impediment, "fiction yields to reality — the delivery has not been effected."29

Hence, respondent's opposition to the transfer of the property by way of sale to Equatorial was a legally sufficient impediment that effectively prevented the passing of the property into the latter's hands.

This was the same impediment contemplated in Vda. de Sarmiento v. Lesaca,30 in which the Court held as follows:

"The question that now arises is: Is there any stipulation in the sale in question from which we can infer that the vendor did not intend to deliver outright the possession of the lands to the vendee? We find none. On the contrary, it can be clearly seen therein that the vendor intended to place the vendee in actual possession of the lands immediately as can be inferred from the stipulation that the vendee 'takes actual possession thereof . . . with full rights to dispose, enjoy and make use thereof in such manner and form as would be most advantageous to herself.' The possession referred to in the contract evidently refers to actual possession and not merely symbolical inferable from the mere execution of the document.

"Has the vendor complied with this express commitment? she did not. As provided in Article 1462, the thing sold shall be deemed delivered when the vendee is placed in the control and possession thereof, which situation does not here obtain because from the execution of the sale up to the present the vendee was never able to take possession of the lands due to the insistent refusal of Martin Deloso to surrender them claiming ownership thereof. And although it is postulated in the same article that the execution of a public document is equivalent to delivery, this legal fiction only holds true when there is no impediment that may prevent the passing of the property from the hands of the vendor into those of the vendee. x x x."31

The execution of a public instrument gives rise, therefore, only to a prima facie presumption of delivery. Such presumption is destroyed when the instrument itself expresses or implies that delivery was not intended; or when by other means it is shown that such delivery was not effected, because a third person was actually in possession of the thing. In the latter case, the sale cannot be considered consummated.

However, the point may be raised that under Article 1164 of the Civil Code, Equatorial as buyer acquired a right to the fruits of the thing sold from the time the obligation to deliver the property to petitioner arose.32 That time arose upon the perfection of the Contract of Sale on July 30, 1978, from which moment the laws provide that the parties to a sale may reciprocally demand performance.33 Does this

mean that despite the judgment rescinding the sale, the right to the fruits34 belonged to, and remained enforceable by, Equatorial?

Article 1385 of the Civil Code answers this question in the negative, because "[r]escission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; x x x" Not only the land and building sold, but also the rental payments paid, if any, had to be returned by the buyer.

Another point. The Decision in the mother case stated that "Equatorial x x x has received rents" from Mayfair "during all the years that this controversy has been litigated." The Separate Opinion of Justice Teodoro Padilla in the mother case also said that Equatorial was "deriving rental income" from the disputed property. Even herein ponente's Separate Concurring Opinion in the mother case recognized these rentals. The question now is: Do all these statements concede actual delivery?

The answer is "No." The fact that Mayfair paid rentals to Equatorial during the litigation should not be interpreted to mean either actual delivery or ipso facto recognition of Equatorial's title.

The CA Records of the mother case 35 show that Equatorial — as alleged buyer of the disputed properties and as alleged successor-in-interest of Carmelo's rights as lessor — submitted two ejectment suits against Mayfair. Filed in the Metropolitan Trial Court of Manila, the first was docketed as Civil Case No. 121570 on July 9, 1987; and the second, as Civil Case No. 131944 on May 28, 1990. Mayfair eventually won them both. However, to be able to maintain physical possession of the premises while awaiting the outcome of the mother case, it had no choice but to pay the rentals.

The rental payments made by Mayfair should not be construed as a recognition of Equatorial as the new owner. They were made merely to avoid imminent eviction. It is in this context that one should understand the aforequoted factual statements in the ponencia in the mother case, as well as the Separate Opinion of Mr. Justice Padilla and the Separate Concurring Opinion of the herein ponente.

At bottom, it may be conceded that, theoretically, a rescissible contract is valid until rescinded. However, this general principle is not

decisive to the issue of whether Equatorial ever acquired the right to collect rentals. What is decisive is the civil law rule that ownership is acquired, not by mere agreement, but by tradition or delivery. Under the factual environment of this controversy as found by this Court in the mother case, Equatorial was never put in actual and effective control or possession of the property because of Mayfair's timely objection.

As pointed out by Justice Holmes, general propositions do not decide specific cases. Rather, "laws are interpreted in the context of the peculiar factual situation of each case. Each case has its own flesh and blood and cannot be decided on the basis of isolated clinical classroom principles."36

In short, the sale to Equatorial may have been valid from inception, but it was judicially rescinded before it could be consummated. Petitioner never acquired ownership, not because the sale was void, as erroneously claimed by the trial court, but because the sale was not consummated by a legally effective delivery of the property sold.

Benefits Precluded byPetitioner's Bad Faith

Furthermore, assuming for the sake of argument that there was valid delivery, petitioner is not entitled to any benefits from the "rescinded" Deed of Absolute Sale because of its bad faith. This being the law of the mother case decided in 1996, it may no longer be changed because it has long become final and executory. Petitioner's bad faith is set forth in the following pertinent portions of the mother case:

"First and foremost is that the petitioners acted in bad faith to render Paragraph 8 'inutile.'

xxx xxx xxx

"Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible. We agree with respondent Appellate Court that the records bear out the fact that Equatorial was aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot tenably claim to be a purchaser in good faith, and, therefore, rescission lies.

xxx xxx xxx

"As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad faith, since it was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact, as correctly observed by the Court of Appeals, Equatorial admitted that its lawyers had studied the contract of lease prior to the sale. Equatorial's knowledge of the stipulations therein should have cautioned it to look further into the agreement to determine if it involved stipulations that would prejudice its own interests.

xxx xxx xxx

"On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial took unconscientious advantage of Mayfair."37 (Italics supplied)

Thus, petitioner was and still is entitled solely to he return of the purchase price it paid to Carmelo; no more, no less. This Court has firmly ruled in the mother case that neither of them is entitled to any consideration of equity, as both "took unconscientious advantage of Mayfair."38

In the mother case, this Court categorically denied the payment of interest, a fruit of ownership. By the same token, rentals, another fruit of ownership, cannot be granted without mocking this Court's en banc Decision, which has long become final.

Petitioner's claim of reasonable compensation for respondent's use and occupation of the subject property from the time the lease expired cannot be countenanced. If it suffered any loss, petitioner must bear it in silence, since it had wrought that loss upon itself. Otherwise, bad faith would be rewarded instead of [email protected]

We uphold the trial court's disposition, not for the reason it gave, but for (a) the patent failure to deliver the property and (b) petitioner's bad faith, as above discussed.

Second Issue:itc-alfGround in Motion to Dismiss

Procedurally, petitioner claims that the trial court deviated from the accepted and usual course of judicial proceedings when it dismissed Civil Case No. 97-85141 on a ground not raised in respondent's Motion to Dismiss. Worse, it allegedly based its dismissal on a ground not provided for in a motion to dismiss as enunciated in the Rules of [email protected]

We are not convinced A review of respondent's Motion to Dismiss Civil Case No. 97-85141 shows that there were two grounds invoked, as follows:

"(A)

Plaintiff is guilty of forum-shopping. itc-alf

"(B)

Plaintiff's cause of action, if any, is barred by prior judgment."39

The court a quo ruled, inter alia, that the cause of action of petitioner plaintiff in the case below) had been barred by a prior judgment of this Court in G.R No. 106063, the mother case.

Although it erred in its interpretation of the said Decision when it argued that the rescinded Deed of Absolute Sale was avoid," we hold, nonetheless, that petitioner's cause of action is indeed barred by a prior judgment of this Court. As already discussed, our Decision in G.R No. 106063 shows that petitioner is not entitled to back rentals, because it never became the owner of the disputed properties due to a failure of delivery. And even assuming arguendo that there was a valid delivery, petitioner's bad faith negates its entitlement to the civil fruits of ownership, like interest and rentals.

Under the doctrine of res judicata or bar by prior judgment, a matter that has been adjudicated by a court of competent jurisdiction must be deemed to have been finally and conclusively settled if it arises in any subsequent litigation between the same parties and for the same cause.40 Thus, "[a] final judgment on the merits rendered by a court of competent jurisdiction is conclusive as to the rights of the parties and

their privies and constitutes an absolute bar to subsequent actions involving the same claim, demand, or cause of action."41 Res judicata is based on the ground that the "party to be affected, or some other with whom he is in privity, has litigated the same matter in a former action in a court of competent jurisdiction, and should not be permitted to litigate it again.42

It frees the parties from undergoing all over again the rigors of unnecessary suits and repetitive trials. At the same time, it prevents the clogging of court dockets. Equally important, it stabilizes rights and promotes the rule of [email protected]

We find no need to repeat the foregoing disquisitions on the first issue to show satisfaction of the elements of res judicata. Suffice it to say that, clearly, our ruling in the mother case bars petitioner from claiming back rentals from respondent. Although the court a quo erred when it declared "void from inception" the Deed of Absolute Sale between Carmelo and petitioner, our foregoing discussion supports the grant of the Motion to Dismiss on the ground that our prior judgment in G.R No. 106063 has already resolved the issue of back rentals.

On the basis of the evidence presented during the hearing of Mayfair's Motion to Dismiss, the trial court found that the issue of ownership of the subject property has been decided by this Court in favor of Mayfair. We quote the RTC:

"The Supreme Court in the Equatorial case, G.R. No. 106063 has categorically stated that the Deed of Absolute Sale dated July 31, 1978 has been rescinded subjecting the present complaint to res judicata."43 (Emphasis in the original)

Hence, the trial court decided the Motion to Dismiss on the basis of res judicata, even if it erred in interpreting the meaning of "rescinded" as equivalent to "void" In short, it ruled on the ground raised; namely, bar by prior judgment. By granting the Motion, it disposed correctly, even if its legal reason for nullifying the sale was wrong. The correct reasons are given in this Decision.

WHEREFORE, the Petition is hereby DENIED. Costs against petitioner.itc-alf

SO ORDERED.

Davide Jr., C.J., Quisumbing, Pardo, Buena, Ynares-Santiago and Carpio, JJ., concur.Bellosillo, J., I join the dissent of J. Gutierrez.Melo, J., concurring opinion.Puno, J., concur and also join the concurring opinion of J. Melo. Vitug, J., see dissenting opinion.Kapunan, J., join the dissenting opinions of Justices Vitug and Sandoval-Gutierrez.Mendoza, J., concur in this and Melo, J.'s concurring opinion.De Leon, Jr., J., join the dissenting opinion of Justice J.C. Vitug.

Concurring Opinion

MELO, J., concurring:

While I express my conformity to the ponencia of our distinguished colleague, Mr. Justice Artemio V. Panganiban, I would just like to make the following observations:

1. The issue in this case was squarely resolved in our 1996 En Banc decision in the main case. What petitioner is asking us to do now is to reverse or modify a judgment which is accurate in every respect, conformable to law and jurisprudence, and faithful to principles of fairness and justice.

2. Petitioner's submissions are deceiving. It is trying to collect unjustified and unbelievably increased rentals by provoking a purely academic discussion, as far as respondent is concerned, of a non-applicable provision of the Civil Code on contracts.

3. To grant the petition is to reward bad faith, for petitioner has deprived respondent of the latter's property rights for twenty-three (23) years and has forced it to defend its interests in case after case during that lengthy period. Petitioner now tries to inflict further injury in the fantastic and groundless amount of P115,947,867.00. To remand this case to the lower court in order to determine the back rentals allegedly due to petitioner Equatorial Realty Development Corporation, Inc. is to encourage continuation of crafty tactics and to allow the further dissipation of scarce judicial time and resources.

The instant petition arose from a complaint for back rentals, increased rentals and interests filed by petitioner Equatorial Realty Development, Inc. (Equatorial) against respondent Mayfair Theater, Inc. (Mayfair). It has to be adjudicated in the context of three earlier petitions decided by this Court.

A dispute between the two parties over the ownership of a commercial lot and building along Claro M. Recto Avenue in Manila has led to 23 years of protracted litigation, including the filing of 4 petitions with the Court, namely, G.R. No. L-106063, decided on November 21, 1996 (264 SCRA 483); G.R. No. 103311 decided on March 4, 1992; G.R. No. 136221, decided on May 12, 2000; and the present petition, G.R. No. 133879.

The case at bar is a classic illustration of how a dubious interpretation of the dispositive portion of the 1996 decision for petitioner could lead to 5 more years of bitter litigation after the initial 18 years of legal proceedings over the first case.

Lease contracts over the subject property were executed on June 1, 1967 and March 31, 1969 by original owner Carmelo and Bauermann, Inc. (Carmelo) in favor of herein respondent Mayfair. The leases expired on May 31, 1987 and March 31, 1989, respectively. The lease contracts embodied provisions giving Mayfair a right-of-first-refusal should Carmelo sell the property.

In an act characterized as bad faith by this Court, the property, in violation of the right of first refusal, was sold by Carmelo to herein petitioner Equatorial, on July 31, 1978 for P11,300,000.00. On September 13, 1978, Mayfair filed the first case for annulment of the contract of sale, specific performance of the right-of-first-refusal provision, and damages. The Regional Trial Court (RTC) of Manila decided the case in favor of Equatorial on February 7, 1991. Counterclaims for compensation arising from the use of the premises were awarded to Equatorial by the 1991 RTC decision.

On June 23, 1992, the Court of Appeals reversed the RTC decision, thus leading to the first petition, G.R. No. 106063, filed against Mayfair by both Equatorial and Carmelo.

On November 21, 1996, this Court En Banc rendered its decision

(264 SCRA 483 [1996]), disposing:

WHEREFORE, the petition for review of the decision of the Court of Appeals dated June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty Development, Inc. and Carmelo & Bauermann, Inc. is hereby rescinded; petitioner Carmelo & Bauermann is ordered to return to petitioner Equatorial Realty Development the purchase price. The latter is directed to execute the deeds and documents necessary to return ownership to Carmelo & Bauermann of the disputed lots. Carmelo and Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots for P11,300,000.00.

In the Court of Appeals decision (CA-G.R. CV No. 32918, June 23, 1992) in the main case, raised to this Court, Mayfair was ordered to directly pay P11,300,000.00 to Equatorial whereupon Equatorial would execute the deeds and documents necessary for the transfer of ownership to Mayfair and the registration of the property in its name. The execution of documents and the transfer of the property were directly between Equatorial and Mayfair. Our decision in 1996 (G.R. No. 106063) affirmed the appellate decision. However, while the 1978 deed of sale questioned by Mayfair was rescinded, we ordered Carmelo to first return to Equatorial the purchase price of the property, whereupon Equatorial would return ownership to Carmelo, after which Mayfair would buy the lot for P11,300,000.00 from Carmelo.

When the case was remanded to the RTC for execution of the decision, it was ascertained that Carmelo and Bauermann, Inc. was no longer in existence. The Sheriff could not enforce the portions of the judgment calling for acts to be performed by Carmelo. Mayfair, therefore, deposited the amount of P11,300,000.00 with the RTC for payment to Equatorial, hoping that the latter would faithfully comply with this Court's decision. In this regard, it may be mentioned that buyer Mayfair also paid P847,000.00 in taxes which the vendors should have paid. The RTC ordered the execution of deeds of transfer, the cancellation of Equatorial's titles to the property, and the issuance of new titles in favor of Mayfair. Accordingly, the property was registered in the name of Mayfair and titles issued in its favor.

Equatorial, however, saw an opening for further litigation. It questioned the method employed by the RTC to execute the Court's judgment, arguing that the directives involving Carmelo's participation were ignored by the trial court. The litigation over the alleged incorrectness of the execution eventually led to the second petition earlier mentioned — G.R. No. 136221.

It may be mentioned at this point that on July 9, 1987, while the right-of-first-refusal and cancellation case was pending, Equatorial filed an action for ejectment against Mayfair. Because the issue of ownership was still pending in the case for rescission of deed of sale including the enforcement of the right-of-first-refusal provision, the ejectment case was dismissed. Appeals to the RTC and the Court of Appeals were denied.

On March 26, 1990, still another ejectment case was filed by Equatorial. In decisions which reached all the way to this Court in G.R. No. 103311, the cases for ejectment did not prosper. Mayfair won the cases on March 4, 1992.

The three cases decided by the Court in these litigations between Equatorial and Mayfair, all of them in favor of Mayfair, are antecedents of the present and fourth petition. Equatorial has been adjudged as having unlawfully and in bad faith acquired property that should have belonged to Mayfair since 1978. Ownership and title have been unquestionably transferred to Mayfair.

Seemingly, Equatorial now seeks to profit from its bad faith. While the case involving the allegedly incorrect execution of the 1996 decision on cancellation of the deed of sale in G.R. No. 106063 was being litigated, Equatorial filed on September 18, 1997 with the RTC of Manila two complaints for payment of back and increased rentals arising from the use by Mayfair of the lot, building, and other fixed improvements. From the time the property was sold by Carmelo to Equatorial, lessee Mayfair had been paying to Equatorial the rentals fixed in the 1967 and 1969 lease contracts with the original owner. This was during the pendency of the complaint for annulment of the contract of sale, specific performance of the right-of-first-refusal provision, and damages.

As found in our 1998 decision in G.R. No. 106063, the disputed property should have actually belonged to Mayfair at the time. However, to avoid the ejectment cases, which Equatorial nonetheless later filed, Mayfair was forced to pay rentals to Equatorial. It paid the rentals based on the rates fixed by Carmelo in the lease contracts.

Equatorial, claiming the 1967 and 1969 rentals to be inadequate, claimed increased amounts as reasonable compensation. Because the amounts fixed by the lease contract with Carmelo but paid to Equatorial were only at the rate of P17,966.21 monthly while Equatorial wanted P210,000.00 every month plus legal interests, the suit was for the payment of P115,947,867.68 as of June 19, 1997.

Citing the 1996 decision in G.R. No. 106063, Mayfair contended that it owned the property under the decision. It stated that the sale by Carmelo to Equatorial had been cancelled, and, as owner, Mayfair owed no increased rentals to Equatorial based on said decision.

The present case on back rentals could not be conclusively decided because the execution and finality of the issue of ownership were being contested for 5 years in the petition on the proper execution filed in G.R. No. 136221. This petition had to wait for the resolution of G.R. No. 136221.

In its decision dated May 12, 2000, in G.R. No. 136221 (First Division, per Mr. Justice Pardo; Davide, Jr., C.J., Kapunan, and Ynares-Santiago, JJ., concurring), this Court reiterated the judgment in G.R. No. 106063. It emphasized that the 1996 decision awarding the property to Mayfair was clear. It stated that the decision having attained finality, there was nothing left for the parties to do but to adhere to the mandates of the decision.

In the dispositive portion, however, the Court ordered the trial court "to carry out the execution following strictly the terms" of the 1996 decision. However, as earlier stated, this could not be done because Carmelo had ceased to exist. There was no longer any Carmelo which could return the P11,300,000.00 consideration of the 1978 sale to Equatorial as ordered in the dispositive portion of the 1996 decision. Equatorial could not and would not also execute the deeds returning the property to Carmelo, as directed in the decision. Neither

could the defunct Carmelo sell the property to Mayfair at the sale price in 1978 when the right of first refusal was violated.

Mayfair had to file a motion for partial reconsideration, emphasizing that it was impossible for a corporation which has gone out of existence to obey the specific orders of this Court. A resolution was, therefore, rendered on June 25, 2001 putting an end to the controversy over the proper implementation of the 1996 judgment.

This June 25, 2001 Resolution in G.R. No. 136221 validated the issuance of new titles in the name of the adjudicated owner, Mayfair. The Court ordered the direct release to Equatorial of the P11,300,000.00 deposited in court for the account of the defunct Carmelo.

In the follow-up Resolution of the First Division in G.R. No. 136221 dated June 25, 2001, the Court, after describing the case as a Promethean one involving the execution of a decision which has been long final, and after calling the efforts to stave off execution as a travesty of justice, instructed the trial court:

1. To execute the Court's Decision strictly in accordance with the ruling in G.R. No. 106063 by validating the acts of the sheriff of Manila and the titles in the name of Mayfair Theater, Inc. issued by the Register of Deeds of Manila consistent therewith;

2. In case of failure of Carmelo and Bauermann to accept the amount of P11,300,000.00 deposited by Mayfair Theater, Inc. with the Clerk of Court, Regional Trial Court, Manila, to authorize the Clerk of Court to RELEASE the amount of P11,300,000.00 deposited with the court for the account of Carmelo and Bauermann, Inc. to petitioner;

3. To devolve upon the trial court the determination of other issues that may remain unresolved among the parties, relating to the execution of this Court's final decision in G.R. No. 106063.

In light of the Court's judgments in G.R. No. 106063 and G.R. No. 136221, the present petition in G.R. No. 133879 for back rentals should now be finally resolved, applying the rulings in those earlier decisions.

Indubitably, the 1978 deed of sale executed by Carmelo in favor of Equatorial over the disputed property has been set aside by this Court. Equatorial was declared a buyer in bad faith. The contract was characterized as a fraudulent sale and the entirety of the indivisible property sold to Equatorial was the property we ordered to be conveyed to Mayfair for the same price paid by Equatorial to Carmelo.

It is also beyond question that the method of execution of the 1996 decision by the RTC, the direct payment by Mayfair to Equatorial, bypassing and detouring the defunct Carmelo corporation, has been validated by this Court. There are no longer any procedural obstacles to the full implementation of the decision.

And finally, the property sold to Equatorial in violation of Mayfair's right of first refusal is now indisputably possessed by, and owned and titled in the name of, respondent Mayfair.

Parenthetically, the issue on the payment of back and increased rentals, plus interests, was actually settled in the 1996 decision in G.R. No. 106063. It could not be enforced at the time only because of the controversy unfortunately raised by Equatorial over the proper execution of the 1996 decision.

It is now time to reiterate the 1996 decision on interests and settle the dispute between Mayfair and Equatorial once and for all.

Thus, we reiterate that:

On the question of interest payments on the principal amount of P11,300.000.00, it must be borne in mind that both Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a contract entered into with Mayfair. It sold the property to Equatorial with purpose and intent to withhold any notice or knowledge of the sale coming to the attention of Mayfair. All the circumstances point to a calculated and contrived plan of non-compliance with the agreement of first refusal.

On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full knowledge the Mayfair had a right to or interest in the property superior to its own. Carmelo and

Equatorial took unconscientious advantage of Mayfair.

Neither may Carmelo and Equatorial avail of consideration based on equity which might warrant the grant of interests. The vendor received as payment from the vendee what, at the time, was a full and fair price for the property. It has used the P11,300,000.00 all these years earning income or interest from the amount. Equatorial, on the other hand, has received rents and otherwise profited from the use of the property turned over to it by Carmelo. In fact, during all the years that this controversy was being litigated. Mayfair paid rentals regularly to the buyer who had an inferior right to purchase the property. Mayfair is under no obligation to pay any interests arising from this judgment to either Carmelo or Equatorial (264 SCRA 483, pp. 511-512).

Worthy quoting too is the concurring opinion in our 1996 decision of Mr. Justice Teodoro R. Padilla as follows:

The equities of the case support the foregoing legal disposition. During the intervening years between 1 August 1978 and this date, Equatorial (after acquiring the C.M. Recto property for the price of P11,300,000.00) had been leasing the property and deriving rental income therefrom. In fact, one of the lessees in the property was Mayfair. Carmelo had, in turn, been using the proceeds of the sale, investment-wise and/or operation wise in its own business.

It may appear, at first blush, that Mayfair is unduly favored by the solution submitted by this opinion, because the price of P11,300,000.00 which it has to pay Carmelo in the exercise of its right of first refusal, has been subjected to the inroads of inflation so that its purchasing power today is less than when the same amount was paid by Equatorial to Carmelo. But then it cannot be overlooked that it was Carmelo's breach of Mayfair's right of first refusal that prevented Mayfair from paying the price of P11,300,000.00 to Carmelo at about the same time the amount was paid by Equatorial to Carmelo. Moreover, it cannot be ignored that Mayfair had also incurred consequential or "opportunity" losses by reason of its failure to acquire and use the property under its right of first refusal. In fine, any loss in purchasing power of the price of P11,300,000.00 is for Carmelo to incur or absorb on account of its bad faith in breaching

Mayfair's contractual right of first refusal to the subject property. (ibid., pp. 511-512).

It can be seen from the above ruling that the issue of rentals and interests was fully discussed and passed upon in 1996. Equatorial profited from the use of the building for all the years when it had no right or, as stated in our decision, had an inferior right over the property. Mayfair, which had the superior right, continued to pay rent but it was the rate fixed in the lease contract with Carmelo. We see no reason for us to now deviate from the reasoning given in our main decision. The decision has been final and executory for five (5) years and petitioner has failed to present any valid and reasonable ground to reconsider, modify or reverse it. Let that which has been fairly adjudicated remain final.

My second observation relates to the clever but, to my mind, deceptive argument foisted by Equatorial on the Court.

Equatorial relies on the Civil Code provision on rescissible contracts to bolster its claim. Its argument is that a rescissible contract remains valid and binding upon the parties thereto until the same is rescinded in an appropriate judicial proceeding.

Equatorial conveniently fails to state that the July 31, 1978 Deed of Absolute Sale was between Equatorial and Carmelo only. Respondent Mayfair was not a party to the contract. The deed of sale was surreptitiously entered into between Carmelo and Equatorial behind the back and in violation of the rights of Mayfair. Why should the innocent and wronged party now be made to bear the consequences of an unlawful contract to which it was not privy? Insofar as Equatorial and Carmelo are concerned, their 1978 contract may have validly transferred ownership from one to the other. But not as far as Mayfair is concerned.

Mayfair starts its arguments with a discussion of Article 1381 of the Civil Code that contracts entered into in fraud of creditors are rescissible. There is merit in Mayfair's contention that the legal effects are not restricted to the contracting parties only. On the contrary, the rescission is for the benefit of a third party, a stranger to the contract. Mayfair correctly states that as far as the injured third party is

concerned, the fraudulent contract, once rescinded, is non-existent or void from its inception. Hence, from Mayfair's standpoint, the deed of absolute sale which should not have been executed in the first place by reason of Mayfair's superior right to purchase the property and which deed was cancelled for that reason by this Court, is legally non-existent. There must be a restoration of things to the condition prior to the celebration of the contract (Respondent relies on Almeda vs. J. M. & Company, 43072-R, December 16, 1975, as cited in the Philippine Law Dictionary; IV Arturo M. Tolentino, Civil Code of the Philippines, 570, 1990 Ed., citing Manresa; IV Edgardo L. Paras, Civil Code of the Philippines, 717-718, 1994 Ed.).

It is hard not to agree with the explanations of Mayfair, to wit:

4.22. As a consequence of the rescission of the Deed of Absolute Sale, it was as if Equatorial never bought and became the lessor of the subject properties. Thus, the court a quo did not err in ruling that Equatorial is not the owner and does not have any right to demand back rentals from [the] subject property.

4.23. Tolentino, supra, at 577-578 further explains that the effects of rescission in an accion pauliana retroact to the date when the credit or right being enforced was acquired.

"While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the credit was constituted . . ." (emphasis supplied)

4.24. The clear rationale behind this is to prevent conniving parties, such as Equatorial and Carmelo, from benefiting in any manner from their unlawful act of entering into a contract in fraud of innocent parties with superior rights like Mayfair. Thus, to allow Equatorial to further collect rentals from Mayfair is to allow the former to profit from its own act of bad faith. Ex dolo malo non oritur actio. (Respondent's Comment, pp. 338-339, Rollo).

This brings me to my third and final observation in this case. This Court emphasized in the main case that the contract of sale between

Equatorial and Carmelo was characterized by bad faith. The Court described the sale as "fraudulent" in its 1996 decision. It stated that the damages which Mayfair suffered are in terms of actual injury and lost opportunities, emphasizing that Mayfair should not be given an empty or vacuous victory. Moreover, altogether too many suits have been filed in this case. Four separate petitions have come before us, necessitating full length decisions in at least 3 of them. The 1996 decision stressed that the Court has always been against multiplicity of suits.

There was bad faith from the execution of the deed of sale because Equatorial and Carmelo affirmatively operated with furtive design or with some motive of self-interest or ill-will or for ulterior purposes (Air France vs. Carrascoso, 18 SCRA 166 [1966]). There was breach of a known duty by the two parties to the unlawful contract arising from motives of interests or ill-will calculated to cause damage to another (Lopez vs. Pan American World Airways, 123 Phil. 264 [1966]).

The presence of bad faith is clear from the records. Our resolution of this issue in 1996 (G.R. 106063) is res judicata.

We stated:

First and foremost is that the petitioners (referring to Equatorial and Carmelo) acted in bad faith to render Paragraph 8 "inutile".

xxx xxx xxx

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible. We agree with respondent Appellate Court that the records bear out the fact that Equatorial was aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts. As such Equatorial cannot tenably claim to be a purchaser in good faith and, therefore, rescission lies.

xxx xxx xxx

As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad faith, since it was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact, as correctly observed by the Court of Appeals,

Equatorial admitted that its lawyers had studied the contract of lease prior to the sale. Equatorial's knowledge of the stipulations therein should have cautioned it to look further into the agreement to determine if it involved stipulations that would prejudice its own interests.

xxx xxx xxx

On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial took unconscientious advantage of Mayfair (264 SCRA 506, 507-511).

We ruled that because of bad faith, neither may Carmelo and Equatorial avail themselves of considerations based on equity which might warrant the grant of interests and, in this case, unconscionably increased rentals.

Verily, if Mayfair were a natural person it could very well have asked for moral damages instead of facing a lengthy and expensive suit to pay rentals many times higher than those stipulated in the contract of lease. Under the Civil Code, Mayfair is the victim in a breach of contract where Carmelo and Equatorial acted fraudulently and in bad faith.

Considering the judgments in our 3 earlier decisions, Mayfair is under no obligation to pay any interests, whether based on law or equity, to Carmelo or Equatorial. Mayfair is the wronged entity, the one which has suffered injury since 1978 or for the 23 years it was deprived of the property.

Equatorial has received rentals and other benefits from the use of the property during these 23 years, rents and benefits which would have accrued to Mayfair if its rights had not been violated.

There is no obligation on the part of respondent Mayfair to pay any increased, additional, back or future rentals or interests of any kind to petitioner Equatorial under the circumstances of this case.

I, therefore, concur with the majority opinion in denying due course

and dismissing the petition.

Puno and Mendoza, JJ., concur.

DIGEST

FACTS:Petitioner Carmelo and Bauermann Inc. leased its parcel of land with 2-storey building to respondent Mayfair Theater Inc.They entered a contract which provides that if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive option to purchase the same.

Carmelo informed Mayfair that it will sell the property to Equatorial. Mayfair made known its interest to buy the property but only to the extent of the leased premises.Notwithstanding Mayfair’s intention, Carmelo sold the property to Equatorial.

ISSUE:WON the sale of the property to Equatorial is valid.

HELD:The sale of the property should be rescinded because Mayfair has the right of first refusal. Both Equatorial and Carmelo are in bad faith because they knew of the stipulation in the contract regarding the right of first refusal.

The stipulation is a not an option contract but a right of first refusal and as such the requirement of a separate consideration for the option, has no applicability in the instant case. The consideration is built in the reciprocal obligation of the parties.

In reciprocal contract, the obligation or promise of each party is the consideration for that of the other. (Promise to lease in return of the right to first refusal)

With regard to the impossibility of performance, only Carmelo can be blamed for not including the entire property in the right of first refusal. Court held that Mayfair may not have the option to buy the property. Not only the leased area but the entire property.

G.R. No. L-44606 November 28, 1938

VICENTE STO. DOMINGO BERNARDO, plaintiff-appellant, vs.CATALINO BATACLAN, defendant-appellant. TORIBIO TEODORO, purchaser-appellee.

Pedro de Leon for plaintiff-appellant. Angel H. Mojica and Francisco Lavides for defendant appellant. Jose Y. Garde for appellee.

LAUREL, J.:

This is an appeal taken by both the plaintiff and the defendant from the order of September 26, 1935, hereinabove referred to, of the Court of First Instance of Cavite in Civil Case No. 2428.

There is no controversy as to the facts. By a contract of sale executed from Pastor Samonte and others ownership of a parcel of land of about 90 hectares situated in sitio Balayunan, Silang, Cavite. To secure possession of the land from the vendors the said plaintiff, on July 20, 1929, instituted Civil Case No. 1935 in the Court of First Instance of Cavite. The trial court found for the plaintiff in a decision which was affirmed by this Supreme Court on appeal (G.R. No. 33017). 1 When plaintiff entered upon the premises, however, he found the defendant herein, Catalino Bataclan, who appears to have been authorized by former owners, as far back as 1922, to clear the land and make improvements thereon. As Bataclan was not a party in Case No. 1935, plaintiff, on June 11, 1931, instituted against him, in the Court of First Instance of Cavite, Civil Case No. 2428. In this

case, plaintiff was declared owner but the defendant was held to be a possessor in good faith, entitled to reimbursement in the total sum of P1,642, for work done and improvements made. The dispositive part of the decision reads:

Por las consideraciones expuestas, se declara al demandante Vicente Santo Domingo Bernardo dueño con derecho a la posesion del terreno que se describe en la demanda, y al demandado Catalino Bataclan con derecho a que del demandante le pague la suma de P1,642 por gastos utiles hechos de buena fe en el terreno, y por el cerco y ponos de coco y abaca existentes en el mismo, y con derecho, ademas a retener la posesion del terreno hasta que se le pague dicha cantidad. Al demandante puede optar, en el plazo de treinta dias, a partir de la fecha en que fuere notificado de la presente, por pagar esa suma al demandado, haciendo asi suyos el cerco y todas las plantaciones existentes en el terreno, u obligar al demandado a pagarle el precio terreno, a razon de trescientos pesos la hectarea. En el caso de que el demandante optara por que el demandado le pagara el precio del terreno, el demandado efectuara el pago en el plazo convenientes por las partes o que sera fijado por el Juzgado. Sin costas.

Both parties appealed to this court (G. R. No. 37319). 2 The decision appealed from was modified by allowing the defendant to recover compensation amounting to P2,212 and by reducing the price at which the plaintiff could require the defendant to purchase the land in question from P300 to P200 per hectare. Plaintiff was given by this court 30 days from the date when the decision became final within which to exercise his option, either to sell the land to the defendant or to buy the improvements from him. On January 9, 1934, the plaintiff manifested to the lower court his desire "to require the defendant to pay him the value of the land at the rate of P200 per hectare or a total price of P18,000 for the whole tract of land." The defendant informed the lower court that he was unable to pay the land and, on January 24, 1934, an order was issued giving the plaintiff 30 days within which to pay the defendant the sum of P2,212 stating that, in the event of failure to make such payment, the land would be ordered sold at public auction "Para hacer pago al demandante de la suma de P2,212 y el remanente despues de deducidos los gastos legales de la venta en publica subasta sera entregado al demandante." On

February 21, 1934, plaintiff moved to reconsider the foregoing order so that he would have preference over the defendant in the order of payment. The motion was denied on March 1, 1934 but on March 16 following the court below, motu proprio modified its order of January 24, "en el sentido de que el demandante tiene derecho preferente al importe del terreno no se vendiere en publica subasta, a razon de P200 por hectares y el remanente, si acaso lo hubiere se entregara al demandado en pago de la cantidad de P2,212 por la limpieza del terreno y las mejoras introducidas en el mismo por el citado demandado." On April 24, 1934, the court below, at the instance of the plaintiff and without objection on the part of the defendant, ordered the sale of the land in question at public auction. The land was sold on April 5, 1935 to Toribio Teodoro, the highest bidder, for P8,000. In the certificate of sale issued to said purchaser on the very day of sale, it was stated that the period of redemption of the land sold was to expire on April 5, 1936. Upon petition of Toribio Teodoro the court below ordered the provincial sheriff to issue another certificate not qualified by any equity of redemption. This was complied with by the sheriff on July 30, 1935. On September 18, 1935, Teodoro moved that he be placed in possession of the land purchased by him. The motion was granted by order of September 26, 1935, the dispositive part of which is as follows:

Por tanto, se ordena al Sheriff Provincial de Cavite ponga a Toribio Teodoro en posesion del terreno comprado por el en subasta publica y por el cual se le expidio certificado de venta definitiva, reservando al demandado su derecho de ejercitar una accion ordinaria para reclamar del demandante la cantidad de P2,212 a que tiene derecho por la limpieza y mejoras del terreno y cuya suma, en justicia y equidad, debe ser descontada y deducida de la suma de P8,000 que ya ha recibido el demandante.

The Civil Code confirms certain time-honored principles of the law of property. One of these is the principle of accession whereby the owner of property acquires not only that which it produces but that which is united to it either naturally or artificially. (Art. 353.) Whatever is built, planted or sown on the land of another, and the improvements or repairs made thereon, belong to the owner of the land (art. 358). Where, however, the planter, builder, or sower has acted in good faith, a conflict of rights arises between the owners and

it becomes necessary to protect the owner of the improvements without causing injustice to the owner of the land. In view of the impracticability of creating what Manresa calls a state of "forced coownership" (vol. 3, 4th ed., p. 213), the law has provided a just and equitable solution by giving the owner of the land the option to acquire the improvements after payment of the proper indemnity or to oblige the builder or planter to pay for the land and the sower to pay the proper rent (art. 361). It is the owner of the land who is allowed to exercise the option because his right is older and because, by the principle of accession, he is entitled to the ownership of the accessory thing (3 Manresa, 4th ed., p. 213). In the case before us, the plaintiff, as owner of the land, chose to require the defendant, as owner of the improvements, to pay for the land.

The defendant states that he is a possessor in good faith and that the amount of P2,212 to which he is entitled has not yet been paid to him. Therefore, he says, he has a right to retain the land in accordance with the provisions of article 453 of the Civil Code. We do not doubt the validity of the premises stated. "Considera la ley tan saarada y legitima la deuda, que, hasta que sea pagada, no consiente que la cosa se restituya all vencedor." (4 Manresa, 4th ed, p., 304.) We find, however, that the defendant has lost his right of retention. In obedience to the decision of this court in G.R. No. 37319, the plaintiff expressed his desire to require the defendant to pay for the value of the land. The said defendant could have become owner of both land and improvements and continued in possession thereof. But he said he could not pay and the land was sold at public auction to Toribio Teodoro. The law, as we have already said, requires no more than that the owner of the land should choose between indemnifying the owner of the improvements or requiring the latter to pay for the land. When he failed to pay for the land, the defendant herein lost his right of retention.

The sale at public auction having been asked by the plaintiff himself (p. 22, bill of exceptions) and the purchase price of P8,000 received by him from Toribio Teodoro, we find no reason to justify a rapture of the situation thus created between them, the defendant-appellant not being entitled, after all, to recover from the plaintiff the sum of P2,212. lawphi1.net

The judgment of the lower court is accordingly modified by eliminating

therefrom the reservation made in favor of the defendant-appellant to recover from the plaintiff the sum of P2,212. In all the respects, the same is affirmed, without pronouncement regarding costs. So ordered.

Avanceña, C.J., Villa-Real, Imperial and Diaz, JJ., concur.

DIGEST

Facts:

By a contract of sale executed from Pastor Samonte and others ownership of a parcel of land of about 90 hectares. To secure possession of the land from the vendors the said plaintiff, on July 20, 1929, instituted a civil case. The trial court found for the plaintiff in a decision which was affirmed by this Supreme Court on appeal (G.R. No. 33017). When plaintiff entered upon the premises, however, he found the defendant herein, Catalino Bataclan, who appears to have been authorized by former owners, as far back as 1922, to clear the land and make improvements thereon. As Bataclan was not a party in the civil case, plaintiff, on June 11, 1931, instituted against him a civil case. In this case, plaintiff was declared owner but the defendant was held to be a possessor in good faith, entitled for reimbursement in the total sum of P1,642, for work done and improvements made.

The defendant states that he is a possessor in good faith and that the amount of P2,212 to which he is entitled has not yet been paid to him. Therefore, he says, he has a right to retain the land in accordance with the provisions of article 453 of the Civil Code. In obedience to the decision of this court in G.R. No. 37319, the plaintiff expressed his desire to require the defendant to pay for the value of the land. The said defendant could have become owner of both land and improvements and continued in possession thereof. But he said he could not pay and the land was sold at public auction to Toribio Teodoro. When he failed to pay for the land, the defendant herein lost his right of retention.

Issue:

Whether or not there is good faith.

Held:

The judgment of the lower court is accordingly modified by eliminating therefrom the reservation made in favor of the defendant-appellant to recover from the plaintiff the sum of P2,212. In all the respects, the same is affirmed, without pronouncement regarding costs. So ordered

The sale at public auction having been asked by the plaintiff himself (p. 22, bill of exceptions) and the purchase price of P8,000 received by him from Toribio Teodoro, we find no reason to justify a rapture of the situation thus created between them, the defendant-appellant not being entitled, after all, to recover from the plaintiff the sum of P2,212.

G.R. No. L-175 April 30, 1946

DAMIAN IGNACIO, FRANCISCO IGNACIO and LUIS IGNACIO, petitioners, vs.ELIAS HILARIO and his wife DIONISIA DRES, and FELIPE NATIVIDAD, Judge of First Instance of Pangasinan, respondents.

Leoncio R. Esliza for petitioners.Mauricio M. Monta for respondents.

MORAN, C.J.:

This is a petition for certiorari arising from a case in the Court of First Instance of Pangasinan between the herein respondents Elias Hilario and his wife Dionisia Dres as plaintiffs, and the herein petitioners

Damian, Francisco and Luis, surnamed Ignacio, as defendants, concerning the ownership of a parcel of land, partly rice-land and partly residential. After the trial of the case, the lower court, presided over by Hon. Alfonso Felix, rendered judgment holding plaintiffs as the legal owners of the whole property but conceding to defendants the ownership of the houses and granaries built by them on the residential portion with the rights of a possessor in good faith, in accordance with article 361 of the Civil Code. The dispositive part of the decision, hub of this controversy, follows:

Wherefore, judgment is hereby rendered declaring:

(1) That the plaintiffs are the owners of the whole property described in transfer certificate of title No. 12872 (Exhibit A) issued in their name, and entitled to the possession of the same;

(2) That the defendants are entitled to hold the position of the residential lot until after they are paid the actual market value of their houses and granaries erected thereon, unless the plaintiffs prefer to sell them said residential lot, in which case defendants shall pay the plaintiffs the proportionate value of said residential lot taking as a basis the price paid for the whole land according to Exhibit B; and

(3) That upon defendant's failure to purchase the residential lot in question, said defendants shall remove their houses and granaries after this decision becomes final and within the period of sixty (60) days from the date that the court is informed in writing of the attitude of the parties in this respect.

No pronouncement is made as to damages and costs.

Once this decision becomes final, the plaintiffs and defendants may appear again before this court for the purpose of determining their respective rights under article 361 of the Civil Code, if they cannot come to an extra-judicial settlement with regard to said rights.

Subsequently, in a motion filed in the same Court of First Instance but now presided over by the herein respondent Judge Hon. Felipe Natividad, the plaintiffs prayed for an order of execution alleging that since they chose neither to pay defendants for the buildings nor to sell to them the residential lot, said defendants should be ordered to

remove the structure at their own expense and to restore plaintiffs in the possession of said lot. Defendants objected to this motion which, after hearing, was granted by Judge Natividad. Hence, this petition by defendants praying for (a) a restraint and annulment of the order of execution issued by Judge Natividad; (b) an order to compel plaintiffs to pay them the sum of P2,000 for the buildings, or sell to them the residential lot for P45; or (c), a rehearing of the case for a determination of the rights of the parties upon failure of extra-judicial settlement.

The judgment rendered by Judge Felix is founded on articles 361 and 453 of the Civil Code which are as follows:

ART. 361. The owner of land on which anything has been built, sown or planted in good faith, shall have the right to appropriate as his own the work, sowing or planting, after the payment of the indemnity stated in articles 453 and 454, or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent.

ART. 453. Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until such expenses are made good to him.

Useful expenses shall be refunded to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or paying the increase in value which the thing may have acquired in consequence thereof.

The owner of the building erected in good faith on a land owned by another, is entitled to retain the possession of the land until he is paid the value of his building, under article 453. The owner of the land, upon the other hand, has the option, under article 361, either to pay for the building or to sell his land to the owner of the building. But he cannot, as respondents here did, refuse both to pay for the building and to sell the land and compel the owner of the building to remove it from the land where it is erected. He is entitled to such remotion only when, after having chosen to sell his land, the other party fails to pay for the same. But this is not the case before us.

We hold, therefore, that the order of Judge Natividad compelling defendants-petitioners to remove their buildings from the land belonging to plaintiffs-respondents only because the latter chose neither to pay for such buildings not to sell the land, is null and void, for it amends substantially the judgment sought to be executed and is, furthermore, offensive to articles 361 and 453 of the Civil Code.

There is, however, in the decision of Judge Felix a question of procedure which calls for the clarification, to avoid uncertainty and delay in the disposition of cases. In that decision, the rights of both parties are well defined under articles 361 and 453 of the Civil Code, but it fails to determine the value of the buildings and of the lot where they are erected as well as the periods of time within which the option may be exercised and payment should be made, these particulars having been left for determination apparently after the judgment has become final. This procedure is erroneous, for after the judgment has become final, no additions can be made thereto and nothing can be done therewith except its execution. And execution cannot be had, the sheriff being ignorant as to how, for how much, and within what time may the option be exercised, and certainly no authority is vested in him to settle these matters which involve exercise of judicial discretion. Thus the judgment rendered by Judge Felix has never become final, it having left matters to be settled for its completion in a subsequent proceeding, matters which remained unsettled up to the time the petition is filed in the instant case.

For all the foregoing, the writ of execution issued by Judge Natividad is hereby set aside and the lower court ordered to hold a hearing in the principal case wherein it must determine the prices of the buildings and of the residential lot where they are erected, as well as the period of time within which the plaintiffs-respondents may exercise their option either to pay for the buildings or to sell their land, and, in the last instance, the period of time within which the defendants-petitioners may pay for the land, all these periods to be counted from the date the judgment becomes executory or unappealable. After such hearing, the court shall render a final judgment according to the evidence presented by the parties.

The costs shall be paid by plaintiffs-respondents.

G.R. No. L-57288 April 30, 1984

LEONILA SARMINETO, petitioner, vs.HON. ENRIQUE A. AGANA, District Judge, Court of First Instance of Rizal, Seventh Judicial District, Branch XXVIII, Pasay City, and SPOUSES ERNESTO VALENTINO and REBECCA LORENZO-VALENTINO, respondents.

Mercedes M. Respicio for petitioner.

Romulo R. Bobadilla for private respondents.

MELENCIO-HERRERA, J.:ñé+.£ªwph!1

This Petition for certiorari questions a March 29, 1979 Decision rendered by the then Court of First Instance of Pasay City. The Decision was one made on memoranda, pursuant to the provisions of RA 6031, and it modified, on October 17, 1977, a judgment of the then Municipal Court of Paranaque, Rizal, in an Ejectment suit instituted by herein petitioner Leonila SARMIENTO against private respondents, the spouses ERNESTO Valentino and Rebecca Lorenzo. For the facts, therefore, we have to look to the evidence presented by the parties at the original level.

It appears that while ERNESTO was still courting his wife, the latter's mother had told him the couple could build a RESIDENTIAL HOUSE on a lot of 145 sq. ms., being Lot D of a subdivision in Paranaque

(the LAND, for short). In 1967, ERNESTO did construct a RESIDENTIAL HOUSE on the LAND at a cost of P8,000.00 to P10,000.00. It was probably assumed that the wife's mother was the owner of the LAND and that, eventually, it would somehow be transferred to the spouses.

It subsequently turned out that the LAND had been titled in the name of Mr. & Mrs. Jose C. Santo, Jr. who, on September 7 , 1974, sold the same to petitioner SARMIENTO. The following January 6, 1975, SARMIENTO asked ERNESTO and wife to vacate and, on April 21, 1975, filed an Ejectment suit against them. In the evidentiary hearings before the Municipal Court, SARMIENTO submitted the deed of sale of the LAND in her favor, which showed the price to be P15,000.00. On the other hand, ERNESTO testified that the then cost of the RESIDENTIAL HOUSE would be from P30,000.00 to P40,000.00. The figures were not questioned by SARMIENTO.

The Municipal Court found that private respondents had built the RESIDENTIAL HOUSE in good faith, and, disregarding the testimony of ERNESTO, that it had a value of P20,000.00. It then ordered ERNESTO and wife to vacate the LAND after SARMIENTO has paid them the mentioned sum of P20,000.00.

The Ejectment suit was elevated to the Court of First Instance of Pasay where, after the submission of memoranda, said Court rendered a modifying Decision under Article 448 of the Civil Code. SARMIENTO was required, within 60 days, to exercise the option to reimburse ERNESTO and wife the sum of 40,000.00 as the value of the RESIDENTIAL HOUSE, or the option to allow them to purchase the LAND for P25,000.00. SARMIENTO did not exercise any of the two options within the indicated period, and ERNESTO was then allowed to deposit the sum of P25,000.00 with the Court as the purchase price for the LAND. This is the hub of the controversy. SARMIENTO then instituted the instant certiorari proceedings.

We agree that ERNESTO and wife were builders in good faith in view of the peculiar circumstances under which they had constructed the RESIDENTIAL HOUSE. As far as they knew, the LAND was owned by ERNESTO's mother-in-law who, having stated they could build on the property, could reasonably be expected to later on give them the

LAND.

In regards to builders in good faith, Article 448 of the Code provides: têñ.£îhqwâ£

ART. 448. The owner of the land on which anything has been built, sown or planted in good faith,

shall have the right

to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in articles 546 and 548, or

to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent.

However, the builder or planter cannot be obliged to buy the land if its value is considerably more than that of the building or trees. In such case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the building or trees after proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof. (Paragraphing supplied)

The value of the LAND, purchased for P15,000.00 on September 7, 1974, could not have been very much more than that amount during the following January when ERNESTO and wife were asked to vacate. However, ERNESTO and wife have not questioned the P25,000.00 valuation determined by the Court of First Instance.

In regards to the valuation of the RESIDENTIAL HOUSE, the only evidence presented was the testimony of ERNESTO that its worth at the time of the trial should be from P30,000.00 to P40,000.00. The Municipal Court chose to assess its value at P20,000.00, or below the minimum testified by ERNESTO, while the Court of First Instance chose the maximum of P40,000.00. In the latter case, it cannot be said that the Court of First Instance had abused its discretion.

The challenged decision of respondent Court, based on valuations of P25,000.00 for the LAND and P40,000.00 for the RESIDENTIAL HOUSE, cannot be viewed as not supported by the evidence. The provision for the exercise by petitioner SARMIENTO of either the

option to indemnify private respondents in the amount of P40,000.00, or the option to allow private respondents to purchase the LAND at P25,000.00, in our opinion, was a correct decision. têñ.£îhqwâ£

The owner of the building erected in good faith on a land owned by another, is entitled to retain the possession of the land until he is paid the value of his building, under article 453 (now Article 546). The owner, of the land. upon, the other hand, has the option, under article 361 (now Article 448), either to pay for the building or to sell his land to the owner of the building. But he cannot, as respondents here did, refuse both to pay for the building and to sell the land and compel the owner of the building to remove it from the land where it is erected. He is entitled to such remotion only when, after having chosen to sell his land, the other party fails to pay for the same. (Emphasis ours)

We hold, therefore, that the order of Judge Natividad compelling defendants-petitioners to remove their buildings from the land belonging to plaintiffs-respondents only because the latter chose neither to pay for such buildings nor to sell the land, is null and void, for it amends substantially the judgment sought to be executed and is, furthermore, offensive to articles 361 (now Article 448) and 453 (now Article 546) of the Civil Code. (Ignacio vs. Hilario, 76 Phil. 605, 608 [1946]).

WHEREFORE, the Petition for Certiorari is hereby ordered dismissed, without pronouncement as to costs.

SO ORDERED.1äwphï1.ñët

DIGEST

FACTS:Before Ernesto Valentino and Rebecca Lorenzo wed, Rebecca’s mother offered a lot in Paranaque that they could build their house on. In 1967, they finally built their home which cost about PhP8,000-10,000, thinking that someday, the lot would be transferred to them in their name. It turns out, though, that the lot was owned by the Spouses Santos who , in turn, sold the same to Leonila Sarmiento in 1974. A

year later, Sarmiento ordered the Valentinos to vacate their lot, then eventually filed and Ejection Suit against them.

The lower court ruled in Sarmiento’s favor and ordered her to pay 20,000 as the value of the house. But the case was then elevated to the CFI of Pasay (w/ Agana as Judge), and pursuant to Art.448 of the CC (March 1979), the Court ordered Sarmiento to exercise the option in 60 days to pay Ernesto 40,000 as the value of the house or to let them purchase the land for 25,000. Sarmiento was not able to exercise this option, and the CFI allowed Ernesto to deposit the 25,000 purchase price with the Court.

ISSUE:Whether or not the land owner is compelled to exercise either option: to buy the building or to sell the land?

HELD:Ernesto and his wife (BPS) were clearly in good faith as they believed that Rebecca’s mother has the capacity to eventually transfer the title of the land to them. In line with this, Sarmiento (LO) was required to exercise only 2 options: To purchase the house or to sell the land to them, in this case, based on the value decided by the courts. Since Sarmiento failed to exercise the option within the allotted period, and based on Art. 448, the LO is compelled by law to exercise either option. Not choosing either is a violation of the law.

G.R. No. L-57348 May 16, 1985

FRANCISCO DEPRA, plaintiff-appellee, vs.AGUSTIN DUMLAO, defendant-appellant.

Roberto D. Dineros for plaintiff-appellee.

Veil D. Hechanova for defendant-appellant.

MELENCIO-HERRERA, J.:

This is an appeal from the Order of the former Court of First Instance of Iloilo to the then Court of Appeals, which the latter certified to this instance as involving pure questions of law

Plaintiff-appellee, Francisco Depra, is the owner of a parcel of land registered under Transfer Certificate of Title No. T3087, known as Lot No. 685, situated in the municipality of Dumangas, Iloilo, with an area of approximately 8,870 square meters. Agustin Dumlao, defendant-appellant, owns an adjoining lot, designated as Lot No. 683, with an approximate area of 231 sq. ms.

Sometime in 1972, when DUMLAO constructed his house on his lot, the kitchen thereof had encroached on an area of thirty four (34) square meters of DEPRA's property, After the encroachment was discovered in a relocation survey of DEPRA's lot made on November 2,1972, his mother, Beatriz Depra after writing a demand letter asking DUMLAO to move back from his encroachment, filed an action for Unlawful Detainer on February 6,1973 against DUMLAO in the Municipal Court of of Dumangas, docketed as Civil Case No 1, Said complaint was later amended to include DEPRA as a party plain. plaintiff.

After trial, the Municipal Court found that DUMLAO was a builder in good faith, and applying Article 448 of the Civil Code, rendered

judgment on September 29, 1973, the dispositive portion of which reads:

Ordering that a forced lease is created between the parties with the plaintiffs, as lessors, and the defendants as lessees, over the disputed portion with an area of thirty four (34) square meters, the rent to be paid is five (P5.00) pesos a month, payable by the lessee to the lessors within the first five (5) days of the month the rent is due; and the lease shall commence on the day that this decision shall have become final.

From the foregoing judgment, neither party appeal so that, ff it were a valid judgment, it would have ordinarily lapsed into finality, but even then, DEPRA did not accept payment of rentals so that DUMLAO deposited such rentals with the Municipal Court.

On July 15,1974, DEPRA filed a Complaint for Quieting of Title against DUMLAO before the then Court of First Instance of Iloilo, Branch IV (Trial Court), involving the very same 34 square meters, which was the bone of contention in the Municipal Court. DUMLAO, in his Answer, admitted the encroachment but alleged, in the main, that the present suit is barred by res judicata by virtue of the Decision of the Municipal Court, which had become final and executory.

After the case had been set for pre-trial, the parties submitted a Joint Motion for Judgment based on the Stipulation of Facts attached thereto. Premised thereon, the Trial Court on October 31, 1974, issued the assailed Order, decreeing:

WHEREFORE, the Court finds and so holds that the thirty four (34) square meters subject of this litigation is part and parcel of Lot 685 of the Cadastral Survey of Dumangas of which the plaintiff is owner as evidenced by Transfer Certificate of Title No. 3087 and such plaintiff is entitled to possess the same.

Without pronouncement as to costs.

SO ORDERED.

Rebutting the argument of res judicata relied upon by DUMLAO, DEPRA claims that the Decision of the Municipal Court was null and

void ab initio because its jurisdiction is limited to the sole issue of possession, whereas decisions affecting lease, which is an encumbrance on real property, may only be rendered by Courts of First Instance.

Addressing out selves to the issue of validity of the Decision of the Municipal Court, we hold the same to be null and void. The judgment in a detainer case is effective in respect of possession only (Sec. 7, Rule 70, Rules of Court). 1 The Municipal Court over-stepped its bounds when it imposed upon the parties a situation of "forced lease", which like "forced co-ownership" is not favored in law. Furthermore, a lease is an interest in real property, jurisdiction over which belongs to Courts of First Instance (now Regional Trial Courts) (Sec. 44(b), Judiciary Act of 1948; 2

Sec. 19 (2) Batas Pambansa Blg. 129). 3 Since the Municipal Court, acted without jurisdiction, its Decision was null and void and cannot operate as res judicata to the subject complaint for Queting of Title. Besides, even if the Decision were valid, the rule on res judicata would not apply due to difference in cause of action. In the Municipal Court, the cause of action was the deprivation of possession, while in the action to quiet title, the cause of action was based on ownership. Furthermore, Sec. 7, Rule 70 of the Rules of Court explicitly provides that judgment in a detainer case "shall not bar an action between the same parties respecting title to the land. " 4

Conceded in the Stipulation of Facts between the parties is that DUMLAO was a builder in good faith. Thus,

8. That the subject matter in the unlawful detainer case, Civil Case No. 1, before the Municipal Court of Dumangas, Iloilo involves the same subject matter in the present case, the Thirty-four (34) square meters portion of land and built thereon in good faith is a portion of defendant's kitchen and has been in the possession of the defendant since 1952 continuously up to the present; ... (Emphasis ours)

Consistent with the principle that our Court system, like any other, must be a dispute resolving mechanism, we accord legal effect to the agreement of the parties, within the context of their mutual concession and stipulation. They have, thereby, chosen a legal formula to resolve their dispute to appeal ply to DUMLAO the rights of a "builder in good faith" and to DEPRA those of a "landowner in good faith" as prescribed in Article 448. Hence, we shall refrain from further

examining whether the factual situations of DUMLAO and DEPRA conform to the juridical positions respectively defined by law, for a "builder in good faith" under Article 448, a "possessor in good faith" under Article 526 and a "landowner in good faith' under Article 448.

In regards to builders in good faith, Article 448 of the Civil Code provides:

ART. 448. The owner of the land on which anything has been built sown or planted in good faith,

shall have the right

to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in articles 546 and 548, or

to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent.

However, the builder or planter cannot be obliged to buy the land if its value is considerably more than that of the building or trees. In such case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the building or trees after proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof (Paragraphing supplied)

Pursuant to the foregoing provision, DEPRA has the option either to pay for the encroaching part of DUMLAO's kitchen, or to sell the encroached 34 square meters of his lot to DUMLAO. He cannot refuse to pay for the encroaching part of the building, and to sell the encroached part of his land, 5 as he had manifested before the Municipal Court. But that manifestation is not binding because it was made in a void proceeding.

However, the good faith of DUMLAO is part of the Stipulation of Facts in the Court of First Instance. It was thus error for the Trial Court to have ruled that DEPRA is "entitled to possession," without more, of the disputed portion implying thereby that he is entitled to have the kitchen removed. He is entitled to such removal only when, after having chosen to sell his encroached land, DUMLAO fails to pay for

the same. 6 In this case, DUMLAO had expressed his willingness to pay for the land, but DEPRA refused to sell.

The owner of the building erected in good faith on a land owned by another, is entitled to retain the possession of the land until he is paid the value of his building, under article 453 (now Article 546). The owner of the land, upon the other hand, has the option, under article 361 (now Article 448), either to pay for the building or to sell his land to the owner of the building. But he cannot as respondents here did refuse both to pay for the building and to sell the land and compel the owner of the building to remove it from the land where it erected. He is entitled to such remotion only when, after having chosen to sell his land. the other party fails to pay for the same (italics ours).

We hold, therefore, that the order of Judge Natividad compelling defendants-petitioners to remove their buildings from the land belonging to plaintiffs-respondents only because the latter chose neither to pay for such buildings nor to sell the land, is null and void, for it amends substantially the judgment sought to be executed and is. furthermore, offensive to articles 361 (now Article 448) and 453 (now Article 546) of the Civil Code. (Ignacio vs. Hilario, 76 Phil. 605, 608[1946]).

A word anent the philosophy behind Article 448 of the Civil rode.

The original provision was found in Article 361 of the Spanish Civil Code; which provided:

ART. 361. The owner of land on which anything has been built, sown or planted in good faith, shall have the right to appropriate as his own the work, sowing or planting, after the payment of the indemnity stated in Articles 453 and 454, or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent.

As will be seen, the Article favors the owner of the land, by giving him one of the two options mentioned in the Article. Some commentators have questioned the preference in favor of the owner of the land, but Manresa's opinion is that the Article is just and fair.

. . . es justa la facultad que el codigo da al dueno del suelo en el

articulo 361, en el caso de edificacion o plantacion? Algunos comentaristas la conceptuan injusta, y como un extraordinario privilegio en favor de la propiedad territorial. Entienden que impone el Codigo una pena al poseedor de buena fe y como advierte uno de los comentaristas aludidos 'no se ve claro el por que de tal pena . . . al obligar al que obro de buena fe a quedarse con el edificio o plantacion, previo el pago del terreno que ocupa, porque si bien es verdad que cuando edifico o planto demostro con este hecho, que queria para si el edificio o plantio tambien lo es que el que edifico o planto de buena fe lo hizo en la erronea inteligencia de creerse dueno del terreno Posible es que, de saber lo contrario, y de tener noticia de que habia que comprar y pagar el terreno, no se hubiera decidido a plantar ni a edificar. La ley obligandole a hacerlo fuerza su voluntad, y la fuerza por un hecho inocente de que no debe ser responsable'. Asi podra suceder pero la realidad es que con ese hecho voluntario, aunque sea inocente, se ha enriquecido torticeramente con perjuicio de otro a quien es justo indemnizarle,

En nuestra opinion, el Codigo ha resuelto el conflicto de la manera mas justa y equitativa y respetando en lo possible el principio que para la accesion se establece en el art. 358. 7

Our own Code Commission must have taken account of the objections to Article 361 of the Spanish Civil Code. Hence, the Commission provided a modification thereof, and Article 448 of our Code has been made to provide:

ART. 448. The owner of the land on which anything has been built, sown or planted in good faith, shall have the right to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in articles 546 and 548, or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent. However, the builder or planter cannot be obliged to buy the land if its value is considerably more than that of the building or trees. In such case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the building or trees after proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof.

Additional benefits were extended to the builder but the landowner

retained his options.

The fairness of the rules in Article 448 has also been explained as follows:

Where the builder, planter or sower has acted in good faith, a conflict of rights arises between the owners, and it becomes necessary to protect the owner of the improvements without causing injustice to the owner of the land. In view of the impracticability of creating a state of forced co-ownership, the law has provided a just solution by giving the owner of the land the option to acquire the improvements after payment of the proper indemnity, or to oblige the builder or planter to pay for the land and the sower to pay for the proper rent. It is the owner of the land who is authorized to exercise the option, because his right is older, and because, by the principle of accession, he is entitled to the ownership of the accessory thing. (3 Manresa 213; Bernardo vs. Bataclan, 37 Off. Gaz. 1382; Co Tao vs. Chan Chico, G.R. No. 49167, April 30, 1949; Article applied: see Cabral, et al vs. Ibanez [S.C.] 52 Off. Gaz. 217; Marfori vs. Velasco, [C.A.] 52 Off. Gaz. 2050). 8

WHEREFORE, the judgment of the trial Court is hereby set aside, and this case is hereby ordered remanded to the Regional Trial Court of Iloilo for further proceedings consistent with Articles 448 and 546 of the Civil Code, as follows:

1. The trial Court shall determine

a) the present fair price of DEPRA's 34 square meter area of land;

b) the amount of the expenses spent by DUMLAO for the building of the kitchen;

c) the increase in value ("plus value") which the said area of 34 square meters may have acquired by reason thereof, and

d) whether the value of said area of land is considerably more than that of the kitchen built thereon.

2. After said amounts shall have been determined by competent evidence, the Regional, Trial Court shall render judgment, as follows:

a) The trial Court shall grant DEPRA a period of fifteen (15) days within which to exercise his option under the law (Article 448, Civil Code), whether to appropriate the kitchen as his own by paying to DUMLAO either the amount of tile expenses spent by DUMLAO f or the building of the kitchen, or the increase in value ("plus value") which the said area of 34 square meters may have acquired by reason thereof, or to oblige DUMLAO to pay the price of said area. The amounts to be respectively paid by DUMLAO and DEPRA, in accordance with the option thus exercised by written notice of the other party and to the Court, shall be paid by the obligor within fifteen (15) days from such notice of the option by tendering the amount to the Court in favor of the party entitled to receive it;

b) The trial Court shall further order that if DEPRA exercises the option to oblige DUMLAO to pay the price of the land but the latter rejects such purchase because, as found by the trial Court, the value of the land is considerably more than that of the kitchen, DUMLAO shall give written notice of such rejection to DEPRA and to the Court within fifteen (15) days from notice of DEPRA's option to sell the land. In that event, the parties shall be given a period of fifteen (15) days from such notice of rejection within which to agree upon the terms of the lease, and give the Court formal written notice of such agreement and its provisos. If no agreement is reached by the parties, the trial Court, within fifteen (15) days from and after the termination of the said period fixed for negotiation, shall then fix the terms of the lease, provided that the monthly rental to be fixed by the Court shall not be less than Ten Pesos (P10.00) per month, payable within the first five (5) days of each calendar month. The period for the forced lease shall not be more than two (2) years, counted from the finality of the judgment, considering the long period of time since 1952 that DUMLAO has occupied the subject area. The rental thus fixed shall be increased by ten percent (10%) for the second year of the forced lease. DUMLAO shall not make any further constructions or improvements on the kitchen. Upon expiration of the two-year period, or upon default by DUMLAO in the payment of rentals for two (2) consecutive months, DEPRA shall be entitled to terminate the forced lease, to recover his land, and to have the kitchen removed by DUMLAO or at the latter's expense. The rentals herein provided shall be tendered by DUMLAO to the Court for payment to DEPRA, and such tender shall constitute evidence of whether or not compliance

was made within the period fixed by the Court.

c) In any event, DUMLAO shall pay DEPRA an amount computed at Ten Pesos (P10.00) per month as reasonable compensation for the occupancy of DEPRA's land for the period counted from 1952, the year DUMLAO occupied the subject area, up to the commencement date of the forced lease referred to in the preceding paragraph;

d) The periods to be fixed by the trial Court in its Precision shall be inextendible, and upon failure of the party obliged to tender to the trial Court the amount due to the obligee, the party entitled to such payment shall be entitled to an order of execution for the enforcement of payment of the amount due and for compliance with such other acts as may be required by the prestation due the obligee.

No costs,

SO ORDERED.

DIGEST

The properties of Francisco Depra and Agustin Dumlao were adjoining each other. In 1972, Dumlao built his house however, he unwittingly built the kitchen portion of his house on Depra’s land. Depra then sued Dumlao for unlawful detainer. During pre-trial, the parties agreed that Dumlao was a builder in good faith.

Eventually, the trial court ruled that both parties were in good faith but then a forced lease was ordered whereby Dumlao retains the kitchen but he shall pay a rental to Depra at P5.00 per month. But Depra refused to receive the rental payments from Dumlao, instead, Depra filed an action for quieting of title against Dumlao. In his defense, Dumlao raised the defense of res judicata considering that the nature and purpose of the initial unlawful detainer case and that of the subsequent quieting of title case is ejectment.

ISSUES:

1. Whether or not the order of forced lease decreed in the unlawful detainer case is valid.

2. Whether or not the subsequent case of res judicata is barred by prescription due to the prior case of unlawful detainer.

HELD:

1. No. The judgment of forced lease is improper. A forced lease, just like co-ownership is not favored. It should be considered that the parties themselves stipulated that Dumlao, the builder, was in good faith and it was later found that Depra, the owner, was also in good faith. Hence, what applies is the provisions of Article 448 of the Civil Code, which provides in sum that:

a. Builder in good faith – entitled to retain the possession of the land on which he built in good faith until he is paid the value of the building he built in good faith;

b. Owner in good faith – has the option to either (i) pay for the building OR (ii) sell his land to the builder in good faith but builder cannot be forced to buy said land if the same is considerably more than the value of the building.

Forced rent only comes in if the owner exercises his right to sell the land but the builder rejects it by reason of the price thereof being considerably more than the value of the building – in such case, the parties shall agree to the terms of the lease, if they can’t agree then they may bring the issue to court.

2. No. The action for quieting of title is not barred by reason of res judicata. The cause of action in the unlawful detainer case involves possession while the cause of action in the quieting of title case involves ownership. Furthermore, the Rules of Court explicitly

provides that judgment in a detainer case shall not bar an action between the same parties respecting title to the land.

[G.R. No. 108894. February 10, 1997]

TECNOGAS PHILIPPINES MANUFACTURING CORPORATION, petitioner, vs. COURT OF APPEALS (FORMER SPECIAL SEVENTEENTH DIVISION) and EDUARDO UY, respondents.

D E C I S I O NPANGANIBAN, J.:

The parties in this case are owners of adjoining lots in Paraaque, Metro Manila. It was discovered in a survey that a portion of a building of petitioner, which was presumably constructed by its predecessor-in-interest, encroached on a portion of the lot owned by private respondent. What are the rights and obligations of the parties? Is petitioner considered a builder in bad faith because, as held by respondent Court,

he is presumed to know the metes and bounds of his property as described in his certificate of title? Does petitioner succeed into the good faith or bad faith of his predecessor-in-interest which presumably constructed the building?

These are the questions raised in the petition for review of the Decision[1] dated August 28, 1992, in CA-G.R. CV No. 28293 of respondent Court[2] where the disposition reads:[3]

WHEREFORE, premises considered, the Decision of the Regional Trial Court is hereby reversed and set aside and another one entered -

1. Dismissing the complaint for lack of cause of action;

2. Ordering Tecnogas to pay the sum of P2,000.00 per month as reasonable rental from October 4, 1979 until appellee vacates the land;

3. To remove the structures and surrounding walls on the encroached area;

4. Ordering appellee to pay the value of the land occupied by the two-storey building;

5. Ordering appellee to pay the sum of P20,000.00 for and as attorneys fees;

6. Costs against appellee.

Acting on the motions for reconsideration of both petitioner and private respondent, respondent Court ordered the deletion of paragraph 4 of the dispositive portion in an Amended Decision dated February 9, 1993, as follows:[4]

WHEREFORE, premises considered, our decision of August 28,

1992 is hereby modified deleting paragraph 4 of the dispositive portion of our decision which reads:

4. Ordering appellee to pay the value of the land occupied by the two-storey building.

The motion for reconsideration of appellee is hereby DENIED for lack of merit.

The foregoing Amended Decision is also challenged in the instant petition.

The Facts

The facts are not disputed. Respondent Court merely reproduced the factual findings of the trial court, as follows:[5]

That plaintiff (herein petitioner) which is a corporation duly organized and existing under and by virtue of Philippine laws is the registered owner of a parcel of land situated in Barrio San Dionisio, Paraaque, Metro Manila known as Lot 4331-A (should be 4531-A) of Lot 4531 of the Cadastral Survey of Paraaque, Metro Manila, covered by Transfer Certificate of Title No. 409316 of the Registry of Deeds of the Province of Rizal; that said land was purchased by plaintiff from Pariz Industries, Inc. in 1970, together with all the buildings and improvements including the wall existing thereon; that the defendant (herein private respondent) is the registered owner of a parcel of land known as Lot No. 4531-B of Lot 4531 of the Cadastral Survey of Paraaque, LRC (GLRO) Rec. No. 19645 covered by Transfer Certificate of Title No. 279838, of the Registry of Deeds for the Province of Rizal; that said land which adjoins plaintiffs land was purchased by defendant from a certain Enrile Antonio also in 1970; that in 1971, defendant purchased another lot also adjoining plaintiffs land from a certain Miguel Rodriguez and the same was registered in

defendants name under Transfer Certificate of Title No. 31390, of the Registry of Deeds for the Province of Rizal; that portions of the buildings and wall bought by plaintiff together with the land from Pariz Industries are occupying a portion of defendants adjoining land; that upon learning of the encroachment or occupation by its buildings and wall of a portion of defendants land, plaintiff offered to buy from defendant that particular portion of defendants land occupied by portions of its buildings and wall with an area of 770 square meters, more or less, but defendant, however, refused the offer. In 1973, the parties entered into a private agreement before a certain Col. Rosales in Malacaang, wherein plaintiff agreed to demolish the wall at the back portion of its land thus giving to defendant possession of a portion of his land previously enclosed by plaintiffs wall; that defendant later filed a complaint before the office of Municipal Engineer of Paraaque, Metro Manila as well as before the Office of the Provincial Fiscal of Rizal against plaintiff in connection with the encroachment or occupation by plaintiffs buildings and walls of a portion of its land but said complaint did not prosper; that defendant dug or caused to be dug a canal along plaintiffs wall, a portion of which collapsed in June, 1980, and led to the filing by plaintiff of the supplemental complaint in the above-entitled case and a separate criminal complaint for malicious mischief against defendant and his wife which ultimately resulted into the conviction in court of defendants wife for the crime of malicious mischief; that while trial of the case was in progress, plaintiff filed in Court a formal proposal for settlement of the case but said proposal, however, was ignored by defendant.

After trial on the merits, the Regional Trial Court[6] of Pasay City, Branch 117, in Civil Case No. PQ-7631-P, rendered a decision dated December 4, 1989 in favor of petitioner who was the plaintiff therein. The dispositive portion reads:[7]

WHEREFORE, judgment is hereby rendered in favor of plaintiff

and against defendant and ordering the latter to sell to plaintiff that portion of land owned by him and occupied by portions of plaintiffs buildings and wall at the price of P2,000.00 per square meter and to pay the former:

1. The sum of P44,000.00 to compensate for the losses in materials and properties incurred by plaintiff through thievery as a result of the destruction of its wall;

2. The sum of P7,500.00 as and by way of attorneys fees; and

3. The costs of this suit.

Appeal was duly interposed with respondent Court, which as previously stated, reversed and set aside the decision of the Regional Trial Court and rendered the assailed Decision and Amended Decision. Hence, this recourse under Rule 45 of the Rules of Court.

The Issues

The petition raises the following issues:[8]

(A)

Whether or not the respondent Court of Appeals erred in holding the petitioner a builder in bad faith because it is presumed to know the metes and bounds of his property.

(B)

Whether or not the respondent Court of Appeals erred when it used the amicable settlement between the petitioner and the private respondent, where both parties agreed to the demolition of the rear portion of the fence, as estoppel amounting to recognition by petitioner of respondents right over his property including the portions of the land where the

other structures and the building stand, which were not included in the settlement.

(C)

Whether or not the respondent Court of Appeals erred in ordering the removal of the structures and surrounding walls on the encroached area and in withdrawing its earlier ruling in its August 28, 1992 decision for the petitioner to pay for the value of the land occupied by the building, only because the private respondent has manifested its choice to demolish it despite the absence of compulsory sale where the builder fails to pay for the land, and which choice private respondent deliberately deleted from its September 1, 1980 answer to the supple-mental complaint in the Regional Trial Court.

In its Memorandum, petitioner poses the following issues:

A

The time when to determine the good faith of the builder under Article 448 of the New Civil Code, is reckoned during the period when it was actually being built; and in a case where no evidence was presented nor introduced as to the good faith or bad faith of the builder at that time, as in this case, he must be presumed to be a builder in good faith, since bad faith cannot be presumed.[9]

B.

In a specific boundary overlap situation which involves a builder in good faith, as in this case, it is now well settled that the lot owner, who builds on the adjacent lot is not charged with constructive notice of the technical metes and bounds contained in their torrens titles to determine the exact and precise extent of his boundary perimeter.[10]

C.

The respondent courts citation of the twin cases of Tuason & Co. v. Lumanlan and Tuason & Co. v. Macalindong is not the judicial authority for a boundary dispute situation between adjacent torrens titled lot owners, as the facts of the present case do not fall within nor square with the involved principle of a dissimilar case.[11]

D.

Quite contrary to respondent Uys reasoning, petitioner Tecnogas continues to be a builder in good faith, even if it subsequently built/repaired the walls/other permanent structures thereon while the case a quo was pending and even while respondent sent the petitioner many letters/filed cases thereon.[12]

D. (E.)

The amicable settlement between the parties should be interpreted as a contract and enforced only in accordance with its explicit terms, and not over and beyond that agreed upon; because the courts do not have the power to create a contract nor expand its scope.[13]

E. (F.)

As a general rule, although the landowner has the option to choose between: (1) buying the building built in good faith, or (2) selling the portion of his land on which stands the building under Article 448 of the Civil Code; the first option is not absolute, because an exception thereto, once it would be impractical for the landowner to choose to exercise the first alternative, i.e. buy that portion of the house standing on his land, for the whole building might be rendered useless. The workable solution is for him to select the second alternative, namely, to sell to the builder that part of his land on which was constructed a portion of the house.[14]

Private respondent, on the other hand, argues that the petition is suffering from the following flaws:[15]

1. It did not give the exact citations of cases decided by the Honorable Supreme Court that allegedly contradicts the ruling of the Hon. Court of Appeals based on the doctrine laid down in Tuason vs. Lumanlan case citing also Tuason vs. Macalindong case (Supra).

2. Assuming that the doctrine in the alleged Co Tao vs. Chico case is contradictory to the doctrine in Tuason vs. Lumanlan and Tuason vs. Macalindong, the two cases being more current, the same should prevail.

Further, private respondent contends that the following unmistakably point to the bad faith of petitioner: (1) private respondents purchase of the two lots, was ahead of the purchase by petitioner of the building and lot from Pariz Industries; (2) the declaration of the General Manager of Tecnogas that the sale between petitioner and Pariz Industries was not registered because of some problems with China Banking Corporation; and (3) the Deed of Sale in favor of petitioner was registered in its name only in the month of May 1973.[16]

The Courts Ruling

The petition should be granted.

Good Faith or Bad Faith

Respondent Court, citing the cases of J. M. Tuason & Co., Inc. vs. Vda. de Lumanlan[17] and J. M. Tuason & Co., Inc. vs. Macalindong,[18] ruled that petitioner cannot be considered in good faith because as a land owner, it is presumed to know the metes and bounds of his own

property, specially if the same are reflected in a properly issued certificate of title. One who erroneously builds on the adjoining lot should be considered a builder in (b)ad (f)aith, there being presumptive knowledge of the Torrens title, the area, and the extent of the boundaries.[19]

We disagree with respondent Court. The two cases it relied upon do not support its main pronouncement that a registered owner of land has presumptive knowledge of the metes and bounds of its own land, and is therefore in bad faith if he mistakenly builds on an adjoining land. Aside from the fact that those cases had factual moorings radically different from those obtaining here, there is nothing in those cases which would suggest, however remotely, that bad faith is imputable to a registered owner of land when a part of his building encroaches upon a neighbors land, simply because he is supposedly presumed to know the boundaries of his land as described in his certificate of title. No such doctrinal statement could have been made in those cases because such issue was not before the Supreme Court. Quite the contrary, we have rejected such a theory in Co Tao vs. Chico,[20] where we held that unless one is versed in the science of surveying, no one can determine the precise extent or location of his property by merely examining his paper title.

There is no question that when petitioner purchased the land from Pariz Industries, the buildings and other structures were already in existence. The record is not clear as to who actually built those structures, but it may well be assumed that petitioners predecessor-in-interest, Pariz Industries, did so. Article 527 of the Civil Code presumes good faith, and since no proof exists to show that the encroachment over a narrow, needle-shaped portion of private respondents land was done in bad faith by the builder of the encroaching structures, the latter should be presumed to have built them

in good faith.[21] It is presumed that possession continues to be enjoyed in the same character in which it was acquired, until the contrary is proved.[22] Good faith consists in the belief of the builder that the land he is building on is his, and his ignorance of any defect or flaw in his title.[23] Hence, such good faith, by law, passed on to Parizs successor, petitioner in this case. Further, (w)here one derives title to property from another, the act, declaration, or omission of the latter, while holding the title, in relation to the property, is evidence against the former.[24] And possession acquired in good faith does not lose this character except in case and from the moment facts exist which show that the possessor is not unaware that he possesses the thing improperly or wrongfully.[25] The good faith ceases from the moment defects in the title are made known to the possessor, by extraneous evidence or by suit for recovery of the property by the true owner.[26]

Recall that the encroachment in the present case was caused by a very slight deviation of the erected wall (as fence) which was supposed to run in a straight line from point 9 to point 1 of petitioners lot. It was an error which, in the context of the attendant facts, was consistent with good faith. Consequently, the builder, if sued by the aggrieved landowner for recovery of possession, could have invoked the provisions of Art. 448 of the Civil Code, which reads:

The owner of the land on which anything has been built, sown or planted in good faith, shall have the right to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in articles 546 and 548, or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent. However, the builder or planter cannot be obliged to buy the land if its value is considerably more than that of the building or trees. In such case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the building or

trees after proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof.

The obvious benefit to the builder under this article is that, instead of being outrightly ejected from the land, he can compel the landowner to make a choice between the two options: (1) to appropriate the building by paying the indemnity required by law, or (2) sell the land to the builder. The landowner cannot refuse to exercise either option and compel instead the owner of the building to remove it from the land.[27]

The question, however, is whether the same benefit can be invoked by petitioner who, as earlier stated, is not the builder of the offending structures but possesses them as buyer.

We answer such question in the affirmative.

In the first place, there is no sufficient showing that petitioner was aware of the encroachment at the time it acquired the property from Pariz Industries. We agree with the trial court that various factors in evidence adequately show petitioners lack of awareness thereof. In any case, contrary proof has not overthrown the presumption of good faith under Article 527 of the Civil Code, as already stated, taken together with the disputable presumptions of the law on evidence. These presumptions state, under Section 3 (a) of Rule 131 of the Rules of Court, that the person is innocent of a crime or wrong; and under Section 3 (ff) of Rule 131, that the law has been obeyed. In fact, private respondent Eduardo Uy himself was unaware of such intrusion into his property until after 1971 when he hired a surveyor, following his purchase of another adjoining lot, to survey all his newly acquired lots. Upon being apprised of the encroachment,

petitioner immediately offered to buy the area occupied by its building -- a species of conduct consistent with good faith.

In the second place, upon delivery of the property by Pariz Industries, as seller, to the petitioner, as buyer, the latter acquired ownership of the property. Consequently and as earlier discussed, petitioner is deemed to have stepped into the shoes of the seller in regard to all rights of ownership over the immovable sold, including the right to compel the private respondent to exercise either of the two options provided under Article 448 of the Civil Code.

Estoppel

Respondent Court ruled that the amicable settlement entered into between petitioner and private respondent estops the former from questioning the private respondents right over the disputed property. It held that by undertaking to demolish the fence under said settlement, petitioner recognized private respondents right over the property, and cannot later on compel private respondent to sell to it the land since private respondent is under no obligation to sell.[28]

We do not agree. Petitioner cannot be held in estoppel for entering into the amicable settlement, the pertinent portions of which read:[29]

That the parties hereto have agreed that the rear portion of the fence that separates the property of the complainant and respondent shall be demolished up to the back of the building housing the machineries which demolision (sic) shall be undertaken by the complainant at anytime.

That the fence which serve(s) as a wall housing the electroplating machineries shall not be demolished in the mean time which

portion shall be subject to negotiation by herein parties.

From the foregoing, it is clear that petitioner agreed only to the demolition of a portion of the wall separating the adjoining properties of the parties -- i.e. up to the back of the building housing the machineries. But that portion of the fence which served as the wall housing the electroplating machineries was not to be demolished. Rather, it was to be subject to negotiation by herein parties. The settlement may have recognized the ownership of private respondent but such admission cannot be equated with bad faith. Petitioner was only trying to avoid a litigation, one reason for entering into an amicable settlement.

As was ruled in Osmea vs. Commission on Audit,[30]

A compromise is a bilateral act or transaction that is expressly acknowledged as a juridical agreement by the Civil Code and is therein dealt with in some detail. `A compromise, declares Article 2208 of said Code, `is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced.

xxx xxx xxx

The Civil Code not only defines and authorizes compromises, it in fact encourages them in civil actions. Art. 2029 states that `The Court shall endeavor to persuade the litigants in a civil case to agree upon some fair compromise. x x x.

In the context of the established facts, we hold that petitioner did not lose its rights under Article 448 of the Civil Code on the basis merely of the fact that some years after acquiring the property in good faith, it learned about -- and aptly recognized -- the right of private respondent to a portion of the land occupied by its building. The supervening

awareness of the encroachment by petitioner does not militate against its right to claim the status of a builder in good faith. In fact, a judicious reading of said Article 448 will readily show that the landowners exercise of his option can only take place after the builder shall have come to know of the intrusion -- in short, when both parties shall have become aware of it. Only then will the occasion for exercising the option arise, for it is only then that both parties will have been aware that a problem exists in regard to their property rights.

Options of Private Respondent

What then is the applicable provision in this case which private respondent may invoke as his remedy: Article 448 or Article 450[31] of the Civil Code?

In view of the good faith of both petitioner and private respondent, their rights and obligations are to be governed by Art. 448. The essential fairness of this codal provision has been pointed out by Mme. Justice Ameurfina Melencio-Herrera, citing Manresa and applicable precedents, in the case of Depra vs. Dumlao,[32] to wit:

Where the builder, planter or sower has acted in good faith, a conflict of rights arises between the owners, and it becomes necessary to protect the owner of the improvements without causing injustice to the owner of the land. In view of the impracticality of creating a state of forced co-ownership, the law has provided a just solution by giving the owner of the land the option to acquire the improvements after payment of the proper indemnity, or to oblige the builder or planter to pay for the land and the sower to pay the proper rent. It is the owner of the land who is authorized to exercise the option, because his right is older, and because, by the principle of accession, he is entitled to the ownership of the accessory thing. (3 Manresa 213; Bernardo vs.

Bataclan, 37 Off. Gaz. 1382; Co Tao vs. Chan Chico, G. R. No. 49167, April 30, 1949; Article applied; see Cabral, et al. vs. Ibanez [S.C.] 52 Off. Gaz. 217; Marfori vs. Velasco, [C.A.] 52 Off. Gaz. 2050).

The private respondents insistence on the removal of the encroaching structures as the proper remedy, which respondent Court sustained in its assailed Decisions, is thus legally flawed. This is not one of the remedies bestowed upon him by law. It would be available only if and when he chooses to compel the petitioner to buy the land at a reasonable price but the latter fails to pay such price.[33] This has not taken place. Hence, his options are limited to: (1) appropriating the encroaching portion of petitioners building after payment of proper indemnity, or (2) obliging the latter to buy the lot occupied by the structure. He cannot exercise a remedy of his own liking.

Neither is petitioners prayer that private respondent be ordered to sell the land[34] the proper remedy. While that was dubbed as the more workable solution in Grana and Torralba vs. The Court of Appeals, et al.,[35] it was not the relief granted in that case as the landowners were directed to exercise within 30 days from this decision their option to either buy the portion of the petitioners house on their land or sell to said petitioners the portion of their land on which it stands.[36] Moreover, in Grana and Torralba, the area involved was only 87 square meters while this case involves 520 square meters[37]. In line with the case of Depra vs. Dumlao,[38] this case will have to be remanded to the trial court for further proceedings to fully implement the mandate of Art. 448. It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of future litigation.[39]

Petitioner, however, must also pay the rent for the property occupied by its building as prescribed by respondent Court from October 4, 1979, but only up to the date private respondent serves notice of its option upon petitioner and the trial court; that is, if such option is for private respondent to appropriate the encroaching structure. In such event, petitioner would have a right of retention which negates the obligation to pay rent.[40] The rent should however continue if the option chosen is compulsory sale, but only up to the actual transfer of ownership.

The award of attorneys fees by respondent Court against petitioner is unwarranted since the action appears to have been filed in good faith. Besides, there should be no penalty on the right to litigate.[41]

WHEREFORE, premises considered, the petition is hereby GRANTED and the assailed Decision and the Amended Decision are REVERSED and SET ASIDE. In accordance with the case of Depra vs. Dumlao,[42] this case is REMANDED to the Regional Trial Court of Pasay City, Branch 117, for further proceedings consistent with Articles 448 and 546 [43] of the Civil Code, as follows:

The trial court shall determine:

a) the present fair price of private respondents 520 square-meter area of land;

b) the increase in value (plus value) which the said area of 520 square meters may have acquired by reason of the existence of the portion of the building on the area;

c) the fair market value of the encroaching portion of the building; and

d) whether the value of said area of land is considerably more than the fair market value of the portion of the building thereon.

2. After said amounts shall have been determined by competent evidence, the regional trial court shall render judgment as follows:

a) The private respondent shall be granted a period of fifteen (15) days within which to exercise his option under the law (Article 448, Civil Code), whether to appropriate the portion of the building as his own by paying to petitioner its fair market value, or to oblige petitioner to pay the price of said area. The amounts to be respectively paid by petitioner and private respondent, in accordance with the option thus exercised by written notice of the other party and to the court, shall be paid by the obligor within fifteen (15) days from such notice of the option by tendering the amount to the trial court in favor of the party entitled to receive it;

b) If private respondent exercises the option to oblige petitioner to pay the price of the land but the latter rejects such purchase because, as found by the trial court, the value of the land is considerably more than that of the portion of the building, petitioner shall give written notice of such rejection to private respondent and to the trial court within fifteen (15) days from notice of private respondents option to sell the land. In that event, the parties shall be given a period of fifteen (15) days from such notice of rejection within which to agree upon the terms of the lease, and give the trial court formal written notice of the agreement and its provisos. If no agreement is reached by the parties, the trial court, within fifteen (15) days from and after the termination of the said period fixed for negotiation, shall then fix the terms of the lease

provided that the monthly rental to be fixed by the Court shall not be less than two thousand pesos (P2,000.00) per month, payable within the first five (5) days of each calendar month. The period for the forced lease shall not be more than two (2) years, counted from the finality of the judgment, considering the long period of time since 1970 that petitioner has occupied the subject area. The rental thus fixed shall be increased by ten percent (10%) for the second year of the forced lease. Petitioner shall not make any further constructions or improvements on the building. Upon expiration of the two-year period, or upon default by petitioner in the payment of rentals for two (2) consecutive months, private respondent shall be entitled to terminate the forced lease, to recover his land, and to have the portion of the building removed by petitioner or at latters expense. The rentals herein provided shall be tendered by petitioner to the trial court for payment to private respondent, and such tender shall constitute evidence of whether or not compliance was made within the period fixed by the said court.

c) In any event, petitioner shall pay private respondent an amount computed at two thousand pesos (P2,000.00) per month as reasonable compensation for the occupancy of private respondents land for the period counted from October 4, 1979, up to the date private respondent serves notice of its option to appropriate the encroaching structures, otherwise up to the actual transfer of ownership to petitioner or, in case a forced lease has to be imposed, up to the commencement date of the forced lease referred to in the preceding paragraph;

d) The periods to be fixed by the trial court in its decision shall be non-extendible, and upon failure of the party obliged to tender to the trial court the

amount due to the obligee, the party entitled to such payment shall be entitled to an order of execution for the enforcement of payment of the amount due and for compliance with such other acts as may be required by the prestation due the obligee.

No costs.

SO ORDERED.

DIGEST

FACTSPetitioner bought a lot together with the building and improvements including the wall which encroached that of the defendant. Upon learning of such encroachment, petitioner offered to buy the land but defendant refused.

After 2 years, through an agreement, petitioner agreed to demolish the wall (but the case did not state what happened to this agreement, my assumption is that it did not happen due to conflicts that arose after)

Defendant dug a canal along the wall which caused a portion of it to collapse. Petitioner filed a supplemental complaint re the action and a separate criminal action of malicious mischief (which the wife was convicted of)

RTC decided for the petitioners and the CA reversed. Note that respondent wants to have the wall demolished.

ISSUES:A. Whether or not petitioner is a builder in bad faith because it is 'presumed to know the metes and bounds of his property.'B. Whether or not amicable settlement was a proper remedyC. Whether or not respondent can opt to demolish the structure without exercising the option to sell the land to the petitioner and the latter cannot do buy the same

RULING: Petition was granted.Good faith or Bad Faith – No such doctrinal statement that supports that the knowledge of metes and bounds of a land due to the Torrens system would amount to bad faith if there was encroachment on the land of another.

A. When the petitioner purchased the lot, the wall was already built. Even the respondent did not knew about the encroachment until he has hired a surveyor.

B. Where one derives title to the property from another, the act, declaration, or omission of the latter, while holding the title, in relation to the property, is evidence against the former. And possession in good faith does not lose this character except when the possessor is aware of this impropriety.

C. The encroachment was very narrow which can be considered as a mere error. Remedy – the petitioner, despite being a purchaser of the original builder, can compel the landowner to either buy the property or sell the piece of land because:

1. He was really unaware of the encroachment basing on the fact presented by both sides.

2. When the petitioner bought the land, he has stepped into the rights of the original owner (hence, the right to compel the LO to buy or sell is also transferred)

Estoppel – Petitioner is not considered in estoppel only because it has previously agreed to demolish a part of the wall. Rather, it was to be negotiated by the parties concern. In the meantime, petitioner has to pay the rent for the property occupied by its building only up to the date when respondent serves notice of their option. Case remanded back to the trial court for determination of the value of the land and the number of days to allot for the respondent to choose an option.

G.R. No. L-32974 July 30, 1979

BARTOLOME ORTIZ, petitioner, vs.HON. UNION C. KAYANAN, in his capacity as Judge of the Court of First Instance of Quezon, Branch IV; ELEUTERIO ZAMORA, QUIRINO COMINTAN, VICENTE FERRO, AND GREGORIO PAMISARAN, respondents.

Salonga, Ordoñ;ez, Yap, Sicat & Associates and Salvador, Ulgado & Carbon for petitioner.

Jose A. Cusi for private respondents.

ANTONIO, J.:1äwphï1.ñët

Petition for certiorari and Prohibition with Preliminary Injunction to nullify the Order of respondent Judge directing the execution of the final judgment in Civil Case No. C-90, entitled "Bartolome Ortiz vs. Secretary of Agriculture and Natural Resources, et al.," and the Writ of Execution issued to implement said Order, allegedly for being inconsistent with the judgment sought to be enforced.

Civil Case No. C-90 was filed by Bartolome Ortiz who sought the review and/or annulment of the decision of the Secretary of Agriculture and Natural Resources, giving preference to the sales applications of private respondents Quirino Comintan and Eleuterio Zamora over Lot No. 5785, PLS-45, located at Barrio Cabuluan, Calauag, Quezon.

I

The factual background of the case, as found by respondent Court, is

as follows:têñ.£îhqwâ£

... The lot in controversy was formerly the subject of Homestead Application No. 122417 of Martin Dolorico II, plaintiff's ward who died on August 20, 1931; that since then it was plaintiff who continued the cultivation and possession of the property, without however filing any application to acquire title thereon; that in the Homestead Application No. 122417, Martin Dolorico II named his uncle, Martin Dolorico I as his heir and successor in interest, so that in 1951 Martin Dolorico I executed an affidavit relinquishing his rights over the property in favor of defendants Quirino Comintan and Eleuterio Zamora, his grandson and son-in-law, respectively, and requested the Director of Lands to cancel the homestead application; that on the strength of the affidavit, Homestead Application No. 122417 was cancelled and thereafter, defendants Comintan and Zamora filed their respective sales applications Nos. 8433 and 9258; that plaintiff filed his protest on November 26, 1951 alleging that he should be given preference to purchase the lot inasmuch as he is the actual occupant and has been in continuous possession of the same since 1931; and inspite of plaintiff's opposition, "Portion A" of the property was sold at public auction wherein defendant Comintan was the only bidder; that on June 8, 1957, investigation was conducted on plaintiff's protest by Assistant Public Lands Inspector Serapion Bauzon who submitted his report to the Regional Land Officer, and who in turn rendered a decision on April 9, 1958, dismissing plaintiff's claim and giving due course to defendants' sales applications on the ground that the relinquishment of the homestead rights of Martin Dolorico I in favor of Comintan and Zamora is proper, the former having been designated as successor in interest of the original homestead applicant and that because plaintiff failed to participate in the public auction, he is forever barred to claim the property; that plaintiff filed a motion for reconsideration of this decision which was denied by the Director of Lands in his order dated June 10, 1959; that, finally, on appeal to the Secretary of Agriculture and Natural Resources, the decision rendered by the Regional Land Officer was affirmed in toto. 1

On March 22, 1966, respondent Court rendered judgment in the afore-mentioned civil case, the dispositive portion of which reads as follows:têñ.£îhqwâ£

IN VIEW OF THE FOREGOING CONSIDERATIONS, judgment is hereby rendered awarding Lot No. 5785-A of PLS-45, (Calauag Public Land Subdivision) one-half portion of the property in litigation located at Bo. Cabuluan, Calauag, Quezon, in favor of defendant QUIRINO COMINTAN, being the successful bidder in the public auction conducted by the bureau of Lands on April 18, 1955, and hereby giving due course to the Sales Application No. 9258 of defendant Eleuterio Zamora over the other half, Lot No. 5785-B of PLS-45, Calauag, without prejudice to the right of plaintiff BARTOLOME ORTIZ to participate in the public bidding of the same to be announced by the Bureau of Lands, Manila. However, should plaintiff Bartolome Ortiz be not declared the successful bidder thereof, defendants Quirino Comintan and Eleuterio Zamora are ordered to reimburse jointly said plaintiff the improvements he has introduced on the whole property in the amount of THIRTEEN THOUSAND SIX HUNDRED THIRTY-TWO (P13,632.00) PESOS, the latter having the right to retain the property until after he has been fully paid therefor, without interest since he enjoys the fruits of the property in question, with prejudice and with costs again the plaintiff. 2

Plaintiff appealed the decision to the Court of Appeals.

Two (2) years after the rendition of the judgment by the court a quo, while the case was pending appeal and upon petition of private respondents Quirino Comintan and Eleuterio Zamora, respondent Court appointed respondent Vicente Ferro, Clerk of Court, as Receiver to collect tolls on a portion of the property used as a diversion road. On August 19, 1969, the Court of Appeals issued a Resolution annulling the Order appointing the Receiver. Subsequently, on February 19, 1970, the Appellate Court affirmed the decision of the trial court. A petition for review on certiorari of the decision of the Court of Appeals was denied by this Court on April 6, 1970. At this point, private respondents filed a petition for appointment of a new receiver with the court a quo. This petition was granted and the receiver was reappointed. Petitioner sought the annulment of this Order with the Court of Appeals, but said Court ruled that its decision had already become final and that the records of the case were to be remanded to the trial court.

Not satisfied with such denial, petitioner filed a petitioner for certiorari,

prohibition and mandamus with preliminary injunction before this Court, 3 praying for the annulment of the Order reappointing the Receiver. On July 13, 1970, the petition was dismissed by this Court on the ground of insufficient showing of grave abuse of discretion.

II

The judgment having become final and executory private respondents filed a motion for the execution of the same, praying as follows:têñ.£îhqwâ£

WHEREFORE, it is respectfully prayed of this Honorable Court to order the issuance of a writ of execution in accordance with the judgment of this Honorable Court, confirmed by the Court of Appeals and the Supreme Court, commanding any lawful officer to deliver to defendants Comintan and Zamora the land subject of the decision in this case but allowing defendants to file a bond in such amount as this Honorable Court may fix, in lieu of the P13,632.00 required to be paid to plaintiff, conditioned that after the accounting of the tools collected by plaintiff, there is still an amount due and payable to said plaintiff, then if such amount is not paid on demand, including the legal interests, said bond shall be held answerable.

Ordering further the plaintiff to render an accounting of the tolls he collected from March of 1967 to December 31, 1968 and from September 1969 to March 31, 1970, and deliver said tolls collected to the receiver and if judgment is already executed, then to Quirino Comintan and Eleuterio Zamora; and,

Finally, to condemn plaintiff to pay moral damages for withholding the tools which belong to your movant in an amount this Court may deem just in the premises. 4

Acting upon the foregoing motion, respondent Judge issued an Order, dated September 23, 1970, stating, among others, the following: têñ.£îhqwâ£

The records further disclosed that from March 1967 to December 31, 1968, piaintiff Bartolome Ortiz collected tolls on a portion of the propertv in question wherein he has not introduced anv improvement particularlv on Lot No. 5785-A; PLS-45 awarded to defendant Quirino

Comintan, thru which vehicular traffic was detoured or diverted, and again from September 1969 to March 31, 1970, the plaintiff resumed the collection of tools on the same portion without rendering any accounting on said tolls to the Receiver, who, was reappointed after submitting the required bond and specifically authorized only to collect tolls leaving the harvesting of the improvements to the plaintiff.

xxx xxx xxx

ln virtue of he findings of this Court as contained in the dispositive portion of its decision, the defendants are jointly obligated to pay the plaintiff in the amount of P13,632.00 as reasonable value of the improvements he introduced on the whole property in question, and that he has the right of retention until fully paid. It can be gleaned from the motion of the defendants that if plaintiff submits an accounting of the tolls he collected during the periods above alluded to, their damages of about P25,000.00 can more than offset their obligation of P13,362.00 in favor of the plaintiff, thereafter the possession of the land be delivered to the defendants since the decision of the Supreme Court has already become final and executory, but in the interregnum pending such accounting and recovery by the Receiver of the tolls collected by the plaintiff, the defendants pray that they allowed to put up a bond in lieu of the said P13,632.00 to answer for damages of the former, if any.

On the other hand, plaintiff contends in his opposition, admitting that the decision of the Supreme Court has become final and executory; (1) the offer of a bond in lieu of payment of P13,632.00 does not, and cannot, satisfy the condition imposed in the decision of this Court which was affirmed in toto; (2) the public sale of Portion "B" of the land has still to take place as ordained before the decision could be executed; and, (3) that whatever sums plaintiff may derive from the property cannot be set off against what is due him for the improvements he made, for which he has to be reimbursed as ordered.

xxx xxx xxx

Let it be known that plaintiff does not dispute his having collected tolls during the periods from March 1967 to December 31, 1968 and from

September 1969 to March 31, 1970. The Supreme Court affirmed the decision of this Court its findings that said tolls belong to the defendant, considering that the same were collected on a portion of the land question where the plaintiff did not introduce any improvement. The reimbursement to the plaintiff pertains only to the value of the improvements, like coconut trees and other plants which he introduced on the whole property. The tolls collected by the plaintiff on an unimproved portion naturally belong to the defendants, following the doctrine on accretion. Further, the reappointment of a Receiver by this Court was upheld by the Supreme Court when it denied the petition for certiorari filed by the plaintiff, bolstering the legal claim of defendants over said tolls. Thus, the decision of the Supreme Court rendered the decision of this Court retroactive from March 22, 1966 although pending accounting of the tolls collected by the plaintiff is justified and will not prejudice anybody, but certainly would substantially satisfy the conditions imposed in the decision. However, insofar as the one-half portion "B" of the property, the decision may be executed only after public sale by the Bureau of Lands shall be accomplished.

WHEREFORE, finding the Motion for Execution filed by the defendants to be meritorious, the same is granted; provided, however, that they put up a bond equal the adjudicated amount of P13,632.00 accruing in favor of the plaintiff, from a reputable or recognized bonding or surety company, conditioned that after an accounting of the tolls collected by the plaintiff should there be found out any balance due and payable to him after reckoning said obligation of P13,632.00 the bond shall be held answerable therefor. 5

Accordingly, a Writ of Execution was issued after private respondent Quirino Comintan had filed the required bond. The writ directed the Sheriff to enforce the decision of the Court, and stated, part in, the following:têñ.£îhqwâ£

But should there be found any amount collectible after accounting and deducting the amount of P3,632.00, you are hereby ordered that of the goods and chattels of Bartolome Ortiz of Bo. Kabuluan, Calauag, Quezon, be caused to be made any excess in the above-metioned amount together with your lawful fees and that you render same to defendant Quirino Comintan. If sufficient personal property

cannot be found thereof to satisfy this execution and lawful fees thereon, then you are commanded that of the lands and buildings of the said BARTOLOME ORTIZ you make the said excess amount in the manner required by the Rules of Court, and make return of your proceedings within this Court within sixty (60) days from date of service.

You are also ordered to cause Bartolome Ortiz to vacate the property within fifteen (15) days after service thereof the defendant Quirino Comintan having filed the required bond in the amount of THIRTEEN THOUSAND SIX HUNDRED THIRTY-TWO (P13,632.00) PESOS. 6

On October 12, 1970, petitioner filed a Motion for Reconsideration of the aforesaid Order and Writ of Execution, alleging: têñ.£îhqwâ£

(a) That the respondent judge has no authority to place respondents in possession of the property;

(b) That the Supreme Court has never affirmed any decision of the trial court that tolls collected from the diversionary road on the property, which is public land, belong to said respondents;

(c) That to assess petitioner a P25,000.00 liability for damages is purely punitive imposition without factual or legal justification.

The foregoing Motion for Reconsideration was denied by respondent Judge per Order dated November 18, 1970. Saod Order states, in part:têñ.£îhqwâ£

It goes without saying that defendant Comintan is entitled to be placed in possession of lot No. 5785-A of PLS-45 (Calauag Public Land Subdivision) and enjoyment of the tolls from March, 1967 to March, 1968 and from September, 1969 to March 31, l970 which were received by plaintiff Bartolome Ortiz, collected from the property by reason of the diversion road where vehicular traffic was detoured. To defendant Comintan belongs the tolls thus collected from a portion of the land awarded to him used as a diversionary road by the doctrine of accretion and his right over the same is ipso jure, there being no need of any action to possess said addition. It is so because as consistently maintained by the Supreme Court, an applicant who has complied with all the terms and conditions which entitle him to a

patent for a particular tract of publlic land, acquires a vested right therein and is to be regarded as equitable owner thereof so that even without a patent, a perfected homestead or sales application is a property right in the fullest sense, unaffectcd by the fact that the paramount title is still in the Government and no subsequent law can deprive him of that vested right The question of the actual damages suffered by defendant Comintan by reason of the unaccounted tolls received by plaintiff had already been fully discussed in the order of September 23, 1970 and the Court is honestly convinced and believes it to be proper and regular under the circumstances.

Incidentally, the Court stands to correct itself when in the same order, it directed the execution of he decision with respect to the one-half portion "B" of the property only after the public sale by the Bureau of Lands, the same being an oversight, it appearing that the Sales Application of defendant Eleuterio Zamora had already been recognized and full confirmed by the Supreme Court.

In view thereof, finding the motion filed by plaintiff to be without merit, the Court hereby denies the same and the order of September 23, 1970 shall remain in full force subject to the amendment that the execution of the decision with respect to the one-half portion "B" shall not be conditioned to the public sale by the Bureau of Lands.

SO ORDERED. 7

III

Petitioner thus filed the instant petition, contending that in having issued the Order and Writ of Execution, respondent Court "acted without or in excess of jurisdiction, and/or with grave abuse of discretion, because the said order and writ in effect vary the terms of the judgment they purportedly seek to enforce." He argued that since said judgment declared the petitioner a possessor in good faith, he is entitled to the payment of the value of the improvements introduced by him on the whole property, with right to retain the land until he has been fully paid such value. He likewise averred that no payment for improvements has been made and, instead, a bond therefor had been filed by defendants (private respondents), which, according to petitioner, is not the payment envisaged in the decision which would

entitle private respondents to the possession of the property. Furthermore, with respect to portion "B", petitioner alleges that, under the decision, he has the right to retain the same until after he has participated and lost in the public bidding of the land to be conducted by the Bureau of Lands. It is claimed that it is only in the event that he loses in the bidding that he can be legally dispossessed thereof.

It is the position of petitioner that all the fruits of the property, including the tolls collected by him from the passing vehicles, which according to the trial court amounts to P25,000.00, belongs to petitioner and not to defendant/private respondent Quirino Comintan, in accordance with the decision itself, which decreed that the fruits of the property shall be in lieu of interest on the amount to be paid to petitioner as reimbursement for improvements. Any contrary opinion, in his view, would be tantamount to an amendment of a decision which has long become final and executory and, therefore, cannot be lawfully done.

Petitioner, therefore, prayed that: (1) a Writ of Preliminary Injunction be issued enjoining the enforcement of the Orders of September 23, 1970 and November 18, 1970, and the Writ of Execution issued thereto, or restoring to petitioner the possession of the property if the private respondents had been placed in possession thereof; (2) annulling said Orders as well as the Writ of Execution, dissolving the receivership established over the property; and (3) ordering private respondents to account to petitioner all the fruits they may have gathered or collected from the property in question from the time of petitioiier's illegal dispossession thereof.

On January 29, 1971, this Court issued the Writ of Preliminary Injunction. On January 30, 1971, private respondents filed a Motion for Reconsideration and/or Modification of the Order dated January 29, 1971. This was followed by a Supplemental Motion for Reconsideration and Manifestation on February 3, 1971. In the latter motion, private respondents manifested that the amount of P14,040.96, representing the amount decreed in the judgment as reimbursement to petitioner for the improvements, plus interest for six months, has already been deposited by them in court, "with the understanding that said amount shall be turned over to the plaintiff after the court a quo shall have determined the improvement on Lot

5785-A, and subsequently the remaining balance of the deposit shall be delivered to the petitioner (plaintiff therein) in the event he loses the bid for Lot 5785-B in favor of private respondent Eleuterio Zamora." 8 The deposit is evidenced by a certification made by the Clerk of the Court a quo. 9 Contending that said deposit was a faithful compliance with the judgment of the trial court, private respondent Quirino Comintan prayed for the dissolution of the Writ of Injunction.

It appears that as a consequence of the deposit made by private respondents, the Deputy, Sheriff of Calauag, Quezon ousted petitioner's representative from the land in question and put private respondents in possession thereof. 10

On March 10, 1971, petitioner filed a "Comment on Respondents' 'Motion for Reconsideration' dated January 29, 1971' and 'Supplemental Motion for Reconsideration and Manifestation,'" contending that the tender of deposit mentioned in the Suplemental Motion was not really and officially made, "inasmuch as the same is not supported by any official receipt from the lower court, or from its clerk or cashier, as required by law;" that said deposit does not constitute sufficient compliance with the judgment sought to be enforced, neither was it legally and validly made because the requisites for consignation had not been complied with; that the tender of legal interest for six months cannot substitute petitioner's enjoyment of the fruits of the property as long as the judgment in Civil Case No. C-90 has not been implemented in the manner decreed therein; that contrary to the allegations of private respondents, the value of the improvements on the whole property had been determined by the lower court, and the segregation of the improvements for each lot should have been raised by them at the opportune moment by asking for the modification of the decision before it became final and executory; and that the tolls on the property constituted "civil fruits" to which the petitioner is entitled under the terms of the decision.

IV

The issue decisive of the controvery is—after the rendition by the trial court of its judgment in Civil Case No. C-90 on March 22, 1966 confirming the award of one-half of the property to Quirino Comintan

—whether or not petitioner is still entitled to retain for his own exclusive benefit all the fruits of the property, such as the tolls collected by him from March 1967 to December 1968, and September 1969 to March 31, 1970, amounting to about P25,000.00. In other words, petitioner contends that so long as the aforesaid amount of P13,632,00 decreed in the judgment representing the expenses for clearing the land and the value of the coconuts and fruit trees planted by him remains unpaid, he can appropriate for his exclusive benefit all the fruits which he may derive from the property, without any obligation to apply any portion thereof to the payment of the interest and the principal of the debt.

We find this contention untenable.

There is no question that a possessor in good faith is entitled to the fruits received before the possession is legally interrupted. 11

Possession in good faith ceases or is legally interrupted from the moment defects in the title are made known to the possessor, by extraneous evidence or by the filing of an action in court by the true owner for the recovery of the property. 12 Hence, all the fruits that the possessor may receive from the time he is summoned in court, or when he answers the complaint, must be delivered and paid by him to the owner or lawful possessor. 13

However, even after his good faith ceases, the possessor in fact can still retain the property, pursuant to Article 546 of the New Civil Code, until he has been fully reimbursed for all the necessary and useful expenses made by him on the property. This right of retention has been considered as one of the conglomerate of measures devised by the law for the protection of the possessor in good faith. Its object is to guarantee the reimbursement of the expenses, such as those for the preservation of the property, 14 or for the enhancement of its utility or productivity. 15 It permits the actual possessor to remain in possession while he has not been reimbursed by the person who defeated him in the possession for those necessary expenses and useful improvements made by him on the thing possessed. The principal characteristic of the right of retention is its accessory character. It is accessory to a principal obligation. Considering that the right of the possessor to receive the fruits terminates when his good faith ceases, it is necessary, in order that this right to retain may be useful, to concede to the creditor the right to secure reimbursement from the fruits of the property by utilizing its proceeds for

the payment of the interest as well as the principal of the debt while he remains in possession. This right of retention of the property by the creditor, according to Scaevola, in the light of the provisions of Article 502 of the Spanish Civil Code, 16 is considered not a coercive measure to oblige the debtor to pay, depriving him temporarily of the enjoyment of the fruits of his property, but as a means of obtainitig compensation for the debt. The right of retention in this case is analogous to a contract of antichresis and it cati be considered as a means of extinguishing the obligation, inasmuch as the right to retain the thing lasts only for the period necessary to enable the creditor to be reimbursed from the fruits for the necessary and useful expenses. 17

According to Manresa, the right of retention is, therefore, analogous to that of a pledge, if the property retained is a movable, and to that of antichresis, if the property held is immovable. 18 This construction appears to be in harmony with similar provisions of the civil law which employs the right of retention as a means or device by which a creditor is able to obtain the payment of a debt. Thus, under Article 1731 of the New Civil Code, any person who has performed work upon a movable has a right to retain it by way of pledge until he is paid. Similarly, under Article 1914 of the same Code, the agent may retain in pledge the things which are the object of the agency until the principal effects reimbursement of the funds advanced by the former for the execution of the agency, or he is indemnified for all damages which he may have suffered as a consequence of the execution of the agency, provided he is free from fault. To the same effect, the depositary, under Article 1994 of the same Code, may retain the thing in pledge until the full payment of what may be due him by reason of the deposit. The usufructuary, pursuant to Article 612 of the same Code, may retain the property until he is reimbursed for the amount paid for taxes levied on the capital (Article 597) and tor extraordinary repairs (Article 594).

In all of these cases, the right of retention is used as a means of extinguishing the obligation. As amply observed by Manresa: "El derecho de retencion, lo hemos dicho, es el derecho de prenda o el de anticresis constituido por la ley con independencia de las partes." 19 In a pledge, if the thing pledged earns or produces fruits, income, dividends or interests, the creditor shall compensate what he receives with those which are owing him. 20 In the same manner, in a contract of antichresis, the creditor acquires the right to receive the fruits of an immovable of his debtor with the obligation to apply them to payment of the interest, if owing, and thereafter to the principal of his credit. 21 The debtor

can not reacquire enjoyment of the immovable until he has actually paid what he owes the creditor. 22

Applying the afore-cited principles to the case at bar, petitioner cannot appropriate for his own exclusive benefit the tolls which he collected from the property retained by him. It was his duty under the law, after deducting the necessary expenses for his administration, to apply such amount collected to the payment of the interest, and the balance to the payment of the obligation.

We hold, therefore, that the disputed tolls, after deducting petitioner's expenses for administration, belong to Quirino Comintan, owner of the land through which the toll road passed, further considering that the same was on portions of the property on which petitioner had not introduced any improvement. The trial court itself clarified this matter when it placed the toll road under receivership. The omission of any mention of the tolls in the decision itself may be attributed to the fact that the tolls appear to have been collected after the rendition of the judgment of the trial court.

The records further reveal that earnest efforts have been made by private respondents to have the judgment executed in the most practicable manner. They deposited in court the amount of the judgment in the sum of P13,632.00 in cash, subject only to the accounting of the tolls collected by the petitioner so that whatever is due from him may be set off with the amount of reimbursement. This is just and proper under the circumstances and, under the law, compensation or set off may take place, either totally or partially. Considering that petitioner is the creditor with respect to the judgment obligation and the debtor with respect to the tolls collected, Comintan being the owner thereof, the trial court's order for an accounting and compensation is in accord with law. 23

With respect to the amount of reimbursement to be paid by Comintan, it appears that the dispositive portion of the decision was lacking in specificity, as it merely provided that Comintan and Zamora are jointly liable therefor. When two persons are liable under a contract or under a judgment, and no words appear in the contract or judgment to make each liable for the entire obligation, the presumption is that their obligation is joint or mancomunada, and each debtor is liable only for

a proportionate part of the obligation. 24 The judgment debt of P13,632.00 should, therefore, be pro-rated in equal shares to Comintan and Zamora.

Regarding Lot 5785-B, it appears that no public sale has yet been conducted by the Bureau of Lands and, therefore, petitioner is entitled to remain in possession thereof. This is not disputed by respondent Eleuterio Zamora. 25 After public sale is had and in the event that Ortiz is not declared the successful bidder, then he should be reimbursed by respondent Zamora in the corresponding amount for the improvements on Lot 5785-B.

WHEREFORE, in view hereof, the Order of respondent Court of November 18, 1970 is hereby modified to conform to the foregoing judgment. The Writ of Preliminary Injunction, dated January 29, 1971, is hereby dissolved. Without special pronouncement as to costs.

Barredo (Chairman), Concepcion, Jr. and Guerrero, JJ., concur. 1äwphï1.ñët

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