G.R. No. 93687 - Co vs. Court of Appeals

In 1965, petitioner Marcelita Co entered into a contract to buy two parcels of land owned by Andres Gabriel at Malabon, Rizal on an installment basis, with the entire purchase price eventually paid.
Upon completion of payments in 1966, Andres Gabriel proposed that the titles be transferred to a person without registered real property in order to facilitate registration; as a result, the final deeds of sale were executed in the name of Marcelita’s brother, Ruperto Padonan, to act merely as trustee.
One of the lots was later sold to Hipolito Tamayo, while the other lot was titled in Ruperto Padonan’s name; a house was constructed on the property that remained under the trust agreement.

On January 28, 1973, in furtherance of the trust arrangement, Ruperto Padonan executed a deed of absolute sale in favor of petitioner Marcelita Co and also executed a special power of attorney authorizing petitioner Romeo Co to alienate and encumber the properties. Notably, the deed of sale in favor of Marcelita Co was never registered.
On September 10, 1974, Ruperto Padonan executed another deed of absolute sale covering the lot (with the house) in his name in favor of private respondent Eduardo Memije; the Registry of Deeds subsequently issued Transfer Certificate of Title No. 457594 in the name of the respondents.

Petitioners continued in possession of the property despite the issuance of title in favor of the respondents.
On March 5, 1975, private respondents filed a suit for recovery of possession and quieting of title. That case was dismissed when it was apparently not prosecuted.
In 1976, respondents filed for a writ of possession in original land registration proceedings, which was initially granted by the lower court but later set aside by this Court in 1983 (G.R. No. L-46239).
Petitioners then filed a separate Civil Case for annulment of the deed of sale and title involving the disputed lot and house; however, this case was dismissed on the ground of improper venue.

On November 14, 1983, respondents instituted Civil Case No. 370-MN in the RTC of Malabon seeking recovery of possession of the property registered in their names.
Petitioners asserted affirmative defenses of fraud and ownership, interposing these as a compulsory counterclaim rather than pursuing them in an independent annulment case.
The trial court ruled in favor of private respondents on May 18, 1987, ordering petitioners to vacate the property, pay monthly compensation, attorney’s fees, and costs; petitioners’ counterclaims were dismissed.
The Court of Appeals later affirmed, with modifications, the judgment of the trial court, noting that attacking the validity of a Torrens title via affirmative defenses in an action for recovery of possession amounts to a collateral attack and that petitioners should have pursued a separate action for annulment.

Petitioners alleged that the trial and appellate courts acted without jurisdiction or with grave abuse of discretion in dismissing their compulsory counterclaims on fraud and ownership.
They contended that the court’s dismissal:

Totals disregarded counterclaims, thereby limiting the relief available in a recovery action.
Treated the simultaneous raising of fraud and ownership as a collateral attack on the indefeasibility of the Torrens title.
Summarily dismissed their counterclaims without stating adequate legal grounds.
Ignored evidence suggesting bad faith in the registration of the property.
Erroneously held that there was a double sale contrary to the evidence.

Whether the counterclaim attacking the deed of sale and challenged on the ground of fraud, raised as an affirmative defense in a recovery of possession case, is properly characterized as a compulsory counterclaim or constitutes an impermissible collateral attack on the indefeasibility of the Torrens title.
Whether petitioners should have pursued a separate action expressly for the annulment of the deed of sale and title instead of interposing the counterclaims in the recovery case.

Whether the existence of two separate transactions – the unregistered sale in favor of petitioner Marcelita Co and the registered sale in favor of respondents – precludes the mixing of issues in one single proceeding via counterclaims.
How the doctrine of a compulsory counterclaim applies when the counterclaim arises from a transaction distinct from that upon which the opposing party's claim is based.

Whether the matter of the double sale, given that the final deed of sale was executed twice, affects the registered title and the subsequent recovery of possession in favor of the respondents.
Whether the alleged bad faith in the registration process of the subject property should render the respondents’ title susceptible to collateral attack.