G.R. No. L-18452 - Cosio vs. Palileo

This case is an action to recover possession of a house following a prior ruling in *Palileo vs. Cosio*, where the transaction involving the house was declared not a sale but a loan secured by an equitable mortgage (pacto de retro sale).
The contested property is a two-story house located at 25 Antipolo Street, Pasay City, on a lot owned by Hospicio de San Juan de Dios. The house was formerly owned by Felicisima Vda. de Barza.

On October 4, 1950, respondent Cherie Palileo bought the house and leasehold rights but only partially paid the purchase price, mortgaging the house for the balance.
Due to default by Palileo, the mortgage was foreclosed and the house was to be sold at auction; however, Palileo raised funds on December 18, 1951, receiving P12,000 from petitioner Beatriz Cosio de Rama under a "Conditional Sale of Residential Building" document which was in truth a loan secured by the house as collateral with a right to repurchase within one year.
Palileo continued to occupy the house as tenant, paying monthly rent of P250 to Cosio de Rama.

Petitioner Cosio de Rama insured the house against fire. On October 25, 1952, fire partially destroyed the house. The insurance company paid P13,107 as indemnity.
Petitioner Augusto Cosio, at the behest of his sister, entered the premises and started necessary repairs, completed in 1953 at a P12,000 cost.
Respondent Palileo filed a reformation suit aiming to declare the deed as a loan with equitable mortgage (filed December 4, 1952) and separately filed an ejectment suit against Augusto Cosio for unlawful occupancy (filed December 11, 1952).

The ejectment suit was dismissed by the Municipal Court and again by the Court of First Instance of Pasig for failure of Palileo to prosecute; dismissal was expressly made "without prejudice."
Both the lower court and the Supreme Court (in *Palileo vs. Cosio*) declared the transaction a loan with an equitable mortgage; accordingly, Cosio de Rama was to return excess interest collected, but could retain insurance proceeds that assigned the loan rights to the insurer.

Petitioner Cosio moved to dismiss the current possession action based on the previous dismissal of the ejectment suit; the motion was denied.
Lower court ruled Cosio de Rama a possessor in good faith entitled to retain possession until reimbursed for repairs, ordering Palileo to pay P12,000 plus interest as reimbursement.
Court of Appeals modified the ruling, declaring Cosio de Rama temporary owner by virtue of the pacto de retro sale and entitled to possession, but held possession ceased to be in good faith once Palileo filed ejectment and reformation suits in December 1952. The appellate court ruled Cosio and Cosio de Rama were possessors in bad faith, ordered them to pay monthly rent of P300, and denied reimbursement for repair expenses.

Petitioners argued they were possessors in good faith throughout, contending the Court did not invalidate but reformed the contract, and that the dismissed ejectment suit could not serve as notice of defect.
They relied on Article 526 of the Civil Code codifying good and bad faith possession.

Whether petitioners (Cosio and Cosio de Rama) were possessors in good faith or bad faith following the declaration that the transaction was a loan with equitable mortgage, not a sale with right of repurchase.
Whether petitioners are entitled to reimbursement of expenses for repairing the house, despite being possessors in bad faith.
Whether the prior dismissal of the ejectment suit bars the present possession action.