Case Summary (G.R. No. L-18452)
Applicable Law
The case was decided in 1965; thus, the 1935 Philippine Constitution applies. Relevant legal provisions cited include Articles 526, 546, 549, and 449 of the Civil Code.
Background of the Dispute
Respondent Cherie Palileo purchased the house and leasehold right but mortgaged it to secure the balance of the purchase price. Upon default, the mortgage was foreclosed but Palileo was able to raise funds to execute a "conditional sale" of the house to petitioner Beatriz Cosio de Rama with a right to repurchase within a year. Palileo remained as a tenant paying monthly rent under this agreement. Petitioner Cosio de Rama insured the house, which was partially destroyed by fire in 1952. Petitioner Augusto Cosio entered the premises at Beatriz’s instigation to commence repairs costing P12,000.
Origin of Litigation
Respondent Palileo filed an action for reformation of the deed of pacto de retro sale into a loan with an equitable mortgage, effectively challenging the conditional sale’s authenticity. She also filed an ejectment suit against Augusto Cosio, which was dismissed with no prejudice after an appeal. This reformation case was successful in the Court of First Instance and affirmed by this Court, which held that the transaction was a loan secured by an equitable mortgage, not a sale with a right of repurchase.
Issue of Possession and its Effects
The present action seeks possession of the house following the declaration that the "sale" was actually a mortgage. Petitioners argued they were possessors in good faith and entitled to retain possession, including claim for reimbursement for repair expenses. The trial court ruled petitioners were possessors in good faith and granted possession to Palileo conditioned on reimbursing Cosio de Rama’s expenses.
Court of Appeals Decision
The Court of Appeals modified this decision, declaring that by virtue of the pacto de retro sale, petitioner Cosio de Rama became the temporary owner and possessor but became a possessor in bad faith upon Palileo’s filing of ejectment and reformation suits in December 1952. Consequently, petitioners were ordered to pay monthly rental during their occupancy and denied reimbursement of repair expenses.
Petitioners' Arguments on Appeal
They invoked Article 526 of the Civil Code, contending they remained in good faith because the Court’s reformation did not invalidate but only corrected the instrument to reflect real intentions. They argued the dismissed ejectment case did not put them on notice of title defect to convert their possession to bad faith.
Supreme Court Analysis on Possession Character
The Court held that petitioners never had a legal right of possession under the conditional sale since it was only a security mortgage. Upon reformation, they knew their status as mortgagees, negating good faith possession. Mistake concerning the contract’s nature was not tenable as the Court's reformation made clear the parties’ true agreement from the beginning. Consequently, petitioners were possessors in bad faith from the outset of occupying the property post-conditional sale.
Liability for Rent and Reimbursement for Repairs
As possessors in bad faith, petitioners are jointly liable to pay reasonable rent at P300 per month as affirmed by the appellate court (Civil Code, Article 549). However, the Supreme Court distinguished that petitioners were not "builders in bad faith" but merely made necessary repairs after fire damage. Under Article 546, necessary expenses must be reimbursed to possessors regardless of good or bad faith. Application of Article 449 (which denies indemnity for bad faith builders) was deemed inapplicable because the repairs restored the existing structure rather than new construction or accession on another’s land. Petitioners were thus ent
...continue readingCase Syllabus (G.R. No. L-18452)
Factual Background and Procedural History
- The litigation concerns the possession of a two-story house located at 25 (formerly No. 6) Antipolo Street, Pasay City, which was originally owned by Felicisima Vda. de Barza and situated on land owned by Hospicio de San Juan de Dios.
- On October 4, 1950, respondent Cherie Palileo acquired the house and the leasehold right to the lot by paying part of the purchase price and mortgaging the house to secure the balance.
- Palileo defaulted on the mortgage, prompting foreclosure proceedings and advertisement of the house for sale. Before auction, Palileo raised funds on December 18, 1951, receiving P12,000 from petitioner Beatriz Cosio de Rama in return for executing a document styled as a "Conditional Sale of Residential Building."
- The document purported to convey ownership to petitioner Cosio de Rama but reserved the right of repurchase to respondent Palileo within one year; Palileo remained in possession as a tenant paying P250 monthly rent.
- Petitioner Cosio de Rama insured the house against fire, and after fire damage on October 25, 1952, collected P13,107 from the insurer.
- Petitioner Augusto Cosio, acting at the behest of his sister Beatriz, entered the property to effect repairs costing P12,000, despite a pending ejectment case initiated by respondent Palileo in December 1952, which sought to recognize the transaction as a loan with equitable mortgage rather than a conditional sale.
- The ejectment suit was dismissed twice: first by the Municipal Court of Pasay City and later on appeal due to failure to prosecute but expressly without prejudice.
- The previous decision in Palileo vs. Cosio held the parties' agreement was a loan secured by an equitable mortgage, not a sale, reforming the document accordingly and directing partial refund of excess interest collected.
- This subsequent case concerns the right to possession in light of the prior ruling and the effects of possession thereafter.
Legal Issues Presented
- Whether petitioners were possessors in good or bad faith following the Court's prior decision reclassifying the transaction as a mortgage loan.
- The legal consequences of possession under a pacto de retro sale transformed by judicial reformation into a mortgage instrument.
- Whether petitioner Cosio de Rama is entitled to reimbursement of expenses incurred in repairing the house after fire damage.
- If the dismissal of the prior ejectment proceedings bars the current action for recovery of possession.
- The effect of continued repair and occupation by petitioners after the flaw in their title was made known.
- The appropriate measure of damages or compensation due to respondent Palileo for unlawful possession.
Court's Findings and Analysis on Possession and Title
- The Court reaffirmed that the document titled "Conditional Sale" was in substance a mo