G.R. No. L-54526 - Metropolitan Waterworks and Sewerage System vs. Court of Appeals

Case Summary (G.R. No. L-54526)

Petitioner

Petitioner MWSS (formerly NAWASA) defended its possession by invoking R.A. No. 1383 (which it asserted vested ownership, possession, and control of waterworks systems in NAWASA) and filed a counterclaim seeking reimbursement for necessary and useful improvements amounting to P255,000.00.

Respondent

The City of Dagupan sued for recovery of ownership and possession of the Dagupan Waterworks System and opposed any claim by NAWASA/MWSS to indemnity or the right to remove improvements, asserting that NAWASA was a possessor in bad faith.

Key Dates and Procedural Milestones

Trial court judgment in favor of the City of Dagupan, based on a stipulation of facts, holding NAWASA a possessor in bad faith and denying reimbursement for useful improvements.
Affirmation by the Court of Appeals.
Supreme Court decision rendered August 25, 1986 (appeal by certiorari under Rule 45 of the Rules of Court).

Applicable Law and Rules Referenced

Civil Code provisions: Article 449; Articles 546, 547, and 549 (governing builders/possessors in good or bad faith, reimbursement for useful expenses, right of retention, and removal of improvements).
Rules of Court: Rule 45 (petition for review on certiorari), Rule 65 (special civil action of certiorari), and Rule 10, Section 5 (amendment to conform to or authorize presentation of evidence).
Precedents cited in the proceedings: Santos v. Mojica; Mindanao Academy, Inc. v. Yap; Carbonell v. Court of Appeals; and procedural authorities on joinder of the court as a party in certiorari proceedings (e.g., Elks Club v. Rovira; Sacay v. Sandiganbayan).
Applicable constitution: the constitution in force at the time of decision (pre-1987 constitutional framework).

Procedural History and Preliminary Observations

The City filed suit to recover ownership and possession. NAWASA pleaded R.A. No. 1383 and counterclaimed for reimbursement of useful expenses. The trial court decided the case on a stipulation of facts, found NAWASA a possessor in bad faith, and denied indemnity. NAWASA appealed to the Court of Appeals, which affirmed. MWSS then sought review before the Supreme Court via Rule 45. The Supreme Court also addressed procedural errors frequently committed in Rule 45 petitions, notably the improper joinder of the court which rendered the questioned judgment as a respondent, and clarified when such joinder is necessary (i.e., when Rule 65 certiorari grounds are also asserted).

Issue Presented

The sole legal issue presented to the Supreme Court was whether a possessor in bad faith has the right to remove useful improvements introduced by that possessor, notwithstanding the finding of bad faith (and, relatedly, whether reimbursement for such useful expenses is permissible).

Procedural Objection to the Issue’s Presentation

The City objected that the question of removal of useful improvements was not pleaded at trial nor assigned as error before the Court of Appeals, and thus it was improperly raised for the first time before the Supreme Court. The City further argued that, even if the issue were considered, the improvements were not identified in a manner permitting separation without substantial injury.

Court’s Treatment of the Procedural Objection

The Supreme Court acknowledged the technical correctness of the City’s procedural objection: NAWASA should have pleaded an alternative counterclaim for removal of improvements rather than seeking only reimbursement. The Court rejected petitioner’s reliance on Rule 10, Section 5 (amendment to conform to the evidence) because that provision presupposes that evidence on the unpleaded issue was in fact admitted without objection, whereas here no evidence on removability had been introduced and the case was decided on stipulated facts. Despite the procedural defect, the Court exercised its discretion to decide the substantive question presented.

Substantive Legal Analysis and Holding

The Supreme Court held decisively that a possessor in bad faith has no right to remove useful improvements and is not entitled to indemnity for such improvements. The Court’s analysis invoked and applied the Civil Code provisions as follows:

Article 449: A builder who builds in bad faith on another’s land loses what is built and has no right to indemnity.
Article 546: Only a possessor in good faith is entitled to reimbursement for useful expenses and may exercise a right of retention until reimbursed.
Article 547: A possessor in good faith may remove useful improvements provided removal can be effected without damage to the principal thing and if the lawful possessor does not instead choose to reimburse.
Article 549: A possessor in bad faith has a limited right to remove only improvements of pure luxury or mere pleasure, and only if removal does not injure the thing and the lawful possessor does not elect to retain them by payment of their value.

Applying these provisions, the Court concluded that NAWASA, as a possessor in bad faith, lost any right to reimbursement or removal of useful improvements. The Court characterized NAWASA as a “builder in bad faith” who, under Article 449 and the pertinent articles on possessory rights, could not recover the value of useful expenses nor remove such improvements.

Discussion and Treatment of Precedent

The Court considered authorities cited by petitioner and explained why they did not alter the statutory result:

Mindanao Academy, Inc. v. Yap: The Court noted that this case did not support petitioner’s position; construction performed after the filing of an annulment action rendered the builder a possessor in bad faith, precluding recovery. The Court emphasized that items allowed to be removed in that case (equipment, furniture, books) were outside the scope of the judgment and th

Case Syllabus (G.R. No. L-54526)

Procedural History

Petition for review on certiorari filed by petitioner Metropolitan Waterworks and Sewerage System (MWSS), successor-in-interest of the National Waterworks and Sewerage Authority (NAWASA), from a decision of the Court of Appeals affirming the judgment of the Court of First Instance of Pangasinan.
Trial court declared respondent City of Dagupan (CITY) the lawful owner of the Dagupan Waterworks System and held NAWASA to be a possessor in bad faith, denying indemnity for useful improvements.
NAWASA appealed to the Court of Appeals; the Court of Appeals affirmed the trial court.
MWSS sought review before the Supreme Court raising a single issue regarding the right to remove useful improvements introduced by NAWASA.
The Supreme Court proceeded to rule on the merits despite noting procedural defects and other procedural observations.

Parties

Petitioner: Metropolitan Waterworks and Sewerage System (MWSS), successor-in-interest of the National Waterworks and Sewerage Authority (NAWASA).
Respondents: The Court of Appeals (joined as respondent in the petition) and the City of Dagupan (CITY).
Note on joinder: The decision opens with an admonition about the common error of joining the court as a party respondent in a Rule 45 appeal, clarifying when such joinder is proper.

Facts (as stipulated)

The City of Dagupan filed a complaint against NAWASA for recovery of ownership and possession of the Dagupan Waterworks System.
NAWASA invoked R.A. 1383 as a special defense, asserting it vested ownership, possession and control of all waterworks systems throughout the Philippines.
NAWASA counterclaimed for reimbursement of expenses for necessary and useful improvements in the amount of P255,000.00.
Judgment in the trial court was rendered in favor of the City based on a stipulation of facts; NAWASA was found to be a possessor in bad faith and not entitled to reimbursement.
The improvements asserted by NAWASA were made after the complaint was filed and after Supreme Court decisions declared unconstitutional the taking by NAWASA of patrimonial waterworks systems without just compensation (as noted by the Court of Appeals).

Pleadings and Claims

CITY: Complaint for recovery of ownership and possession of Dagupan Waterworks System.
NAWASA/MWSS:
- Special defense: R.A. 1383 vesting NAWASA with ownership/possession/control of waterworks.
- Counterclaim: Reimbursement for necessary and useful improvements (P255,000.00).
- Later argued on appeal (and in Supreme Court) entitlement to remove useful improvements (though this was not pleaded as an alternative counterclaim at trial).

Issue Presented to the Supreme Court

Whether a possessor in bad faith (NAWASA/MWSS) has the right to remove useful improvements introduced to the Dagupan Waterworks System.

Procedural and Joinder Observations by the Court

The Court criticized the common error of joining the court which rendered the appealed judgment as a party respondent in a Rule 45 appeal, explaining:
- In an appeal by certiorari under Rule 45, the only parties are the appellant (petitioner) and the appellee (respondent); the court that rendered the judgment is not a party.
- Joinder of the Intermediate Appellate Court or Sandiganbayan as party respondent is only necessary when the petitioner-appellant claims the court acted without or in excess of jurisdiction or with grave abuse of discretion (i.e., when the petition for review on certiorari is at the same time a petition for certiorari under Rule 65).
- Examples and authorities cited: Elks Club vs. Rovira, Sacay vs. Sandiganbayan, Lianga Lumber Company vs. Lianga Timber Co., Inc.
The Court recognized the CITY’s procedural objection that MWSS raised the removability issue for the first time in the Supreme Court and that NAWASA should have pleaded an alternative counterclaim for removal.
MWSS argued implied consent under Sec. 5, Rule 10 of the Rules of Court, citing the provision allowing issues tried by express or implied consent to be treated as if raised in the pleadings. The Court rejected this argument because no evidence had been introduced on removability and the case was decided on a stipulation of facts; hence pleadings could not be deemed amended to conform to evidence.

Trial Court Ruling

The Court of First Instance of Pangasinan declared the City of Dagupan the lawful owner of the Dagupan Waterworks System.
The trial court found NAWASA to be a possessor in bad faith and denied its claim for reimbursement of useful improvements.
Judgment was rendered on the basis of stipulated facts.

Court of Appeals Ruling (Affirmance)

The Court of Appeals affirmed the trial court, specifically reasoning:
- Useful expenses were made "in utter bad faith" because they were instituted after the complaint and after Supreme Court decisions declared NAWASA’s takings unconstitutional.
- Cited Article 546 of the New Civil Code: a builder or possessor in bad faith is not entitled to indemnity for useful improvements (citing Santos vs. Mojica, L-25450, Jan. 31, 1969).
- Reiterated the doctrine that an owner is