G.R. No. 117501 - Solid Homes, Inc. vs. Court of Appeals

Case Summary (G.R. No. 117501)

Key Dates

Relevant transactional and procedural dates in the record: mortgage executed June 4, 1979 (and amended 1980, 1982); Notice of Sheriff’s Sale issued February 4, 1983; Memorandum of Agreement/Dacion en Pago executed February 28, 1983; petition registered with Register of Deeds September 15, 1983 (new TCTs issued in SFCI’s name); correspondences and repurchase negotiations 1983–1984; repurchase period expired June 27, 1984; complaint filed June 26, 1984; Court of Appeals decision April 25, 1994; Supreme Court decision July 8, 1997.

Applicable Law

Primary substantive provisions invoked and applied: Articles 1601, 1606, 1607 and 1616 of the Civil Code concerning sale with right of repurchase (pacto de retro), Article 2088 (on pactum commissorium) as pleaded by petitioner, and relevant procedural rules (Rule 45 petition for certiorari, and limits on issues on appeal under Rule 51). By reason of the decision date (1997), the 1987 Philippine Constitution is the constitutional backdrop for judicial review.

Facts — Transactional Background

Solid Homes borrowed from SFCI and secured loans by real estate mortgages covering properties (including V.V. Soliven Towers II). When obligations matured, SFCI filed for extrajudicial foreclosure and scheduled a sheriff’s sale. The parties executed a Memorandum of Agreement dated February 28, 1983 to forestall foreclosure. That instrument stipulated, among other things, that if Solid Homes failed to meet certain payment thresholds within 180 days the document would operate as a dacion en pago (transfer to SFCI in full satisfaction), and it granted Solid Homes a ten-month repurchase period (counted after the 180 days) at an agreed price with an added “cost of money” of 30% per annum plus registration fees, taxes and incidental expenses.

Facts — Registration, Communications and Litigation

Solid Homes did not meet the 60% payment requirement and SFCI registered the Memorandum with the Register of Deeds on September 15, 1983, leading to cancellation of Solid Homes’ TCTs and issuance of new titles in SFCI’s name. Solid Homes disputed the instrument’s validity invoking Article 2088, exchanged letters and engaged in negotiations for possible repurchase arrangements, but did not effect redemption. On June 26, 1984 Solid Homes filed suit seeking annulment of the Memorandum and reinstatement of mortgages.

RTC Ruling

The trial court declared the Memorandum valid and binding and characterized it as a true sale with a right of repurchase (pacto de retro), not merely an equitable mortgage. The RTC held the registration of the Memorandum was in accordance with law and the parties’ agreement but found the Register of Deeds’ cancellation of the original titles and issuance of new titles in SFCI’s name during the repurchase period improper and in violation of Article 1607; those titles were declared null and void. The RTC ordered reinstatement of Solid Homes’ former titles with proper annotation of the Memorandum and repurchase period, allowed Solid Homes a 30-day period to repurchase following finality of judgment by paying the agreed price plus cost of money and expenses, and denied all claims for damages.

Court of Appeals Ruling

The Court of Appeals affirmed the RTC on major points: it held the failure to annotate the right of repurchase on SFCI’s consolidated titles was not by itself conclusive proof of malice or bad faith entitling Solid Homes to damages; it applied Article 1606 (allowing the vendor a thirty-day repurchase after final judgment where the vendor is not in bad faith); it sustained the contractual imposition of 30% per annum “cost of money” as part of the agreed redemption price; and it modified the RTC decision by ordering Solid Homes to deliver possession of the subject properties to SFCI, reasoning that under a pacto de retro the vendee a retro immediately acquires title and possession, subject only to the vendor’s redemption right.

Issues Presented to the Supreme Court

Solid Homes’ petition to the Supreme Court renewed three principal contentions: (1) entitlement to damages because SFCI allegedly acted in bad faith by not causing annotation of the vendor’s repurchase right on the consolidated titles, thereby preventing Solid Homes from raising funds to redeem; (2) the inclusion of a 30% per annum cost of money and certain registration and issuance expenses in the redemption price violates Article 1616 (which lists the items the vendor must return to the vendee on repurchase); and (3) the trial and appellate courts erred in ordering immediate turnover of possession to SFCI when the parties allegedly did not agree on such turnover.

Standard of Review and Scope of Review

The Supreme Court reiterated that a Rule 45 petition is confined to questions of law; findings of fact below are binding unless the narrow exceptions (e.g., findings based on conjecture, palpable mistake, grave abuse of discretion, or contradictory findings) are shown. The Court found none of those exceptions present and noted Solid Homes failed to prove entitlement to damages with specific evidence. The Court also observed the general appellate limitation that issues not raised in the lower courts or in the appellant’s brief are ordinarily barred.

Supreme Court on Damages

The Court held that the mere failure by SFCI to annotate the right of repurchase on consolidated titles does not automatically establish malice or bad faith. The record showed SFCI informed Solid Homes of registration and the issuance of new titles, and both parties negotiated payment arrangements and discussed repurchase prospects — conduct inconsistent with malice. The Court emphasized Solid Homes had the means and responsibility to protect its own interests (including ensuring annotation) and that the only legal transgression found was procedural (failure to comply with Article 1607’s required judicial order for consolidation), which the lower courts remedied. Because Solid Homes failed to prove actual, moral or exemplary damages, and because a corporation cannot claim moral damages, the Court denied damages, attorney’s fees and nominal relief predicated on a rights-violation theory.

Supreme Court on Redemption Price

Although the specific composition of the redemption price was not raised properly in the appeal, the Court addressed the contention in the interest of justice. It interpreted Article 1601 together with Article 1616: Article 1601

Case Syllabus (G.R. No. 117501)

Procedural Posture

Petition for review on certiorari under Rule 45 assailing the Court of Appeals Decision promulgated April 25, 1994 and Resolution of September 26, 1994 in CA-G.R. CV No. 39154, which affirmed the Regional Trial Court of Pasig, Branch 157 Decision in Civil Case No. 51214.
The RTC decision sustained the validity of the Memorandum of Agreement/Dacion en Pago and declared it a true sale with right of repurchase (pacto de retro).
Both parties appealed the RTC decision to the Court of Appeals; both parties thereafter filed motions for reconsideration of the CA Decision which were denied.
Separate petitions for review were filed to the Supreme Court by both parties; the Supreme Court (Third Division) in a minute Resolution dated December 5, 1994 denied State Financing Center's petition for failure to show reversible error. This opinion disposes of the petition filed by Solid Homes, Inc.

Central Questions Presented

Whether the failure to annotate the vendor a retro's (Solid Homes) right of repurchase in the certificates of title of the properties subject of the dacion en pago is conclusive evidence of the vendee a retro's (State Financing) malice and bad faith, thus entitling the vendor to damages.
In a sale with pacto de retro, whether the repurchase (redemption) price is limited by Article 1616 of the Civil Code, or whether additional stipulations agreed by the parties may be included.
Whether possession of the subject properties should be delivered to the vendee a retro during the redemption period.

Undisputed Facts

Solid Homes executed a Real Estate Mortgage in favor of State Financing on June 4, 1979 to secure a P10,000,000 loan, evidenced by Exhibit a3a and TCT No. 9633 and (492194)-11938 (Exhibits a9a, a8a).
Amendments increasing the secured credits to P11,511,270.03 (June 4, 1980, Exhibit a4a) and P13,011,082.00 (March 5, 1982, Exhibit a5a) were later executed to secure additional financing.
When the obligations matured and Solid Homes defaulted, State Financing filed for extrajudicial foreclosure; a Notice of Sheriff's Sale dated February 4, 1983 set public auction on March 7, 1983 (Exhibit a6a).
Prior to the auction, Solid Homes induced State Financing to suspend foreclosure, culminating in the execution of a MEMORANDUM OF AGREEMENT/DACION EN PAGO dated February 28, 1983 (Exhibits aCa and a7a).
The Memorandum contained express terms including acknowledgement of indebtedness, a conditional allowance for restructuring upon payment of 60% of principal within 180 days, automatic operation as dacion en pago upon failure to pay 60% within 180 days, and a grant to Solid Homes of the right to repurchase within a specified period at an agreed price plus specified costs (see key paragraphs reproduced below).

Key Terms of the Memorandum of Agreement / Dacion en Pago (as recited)

Paragraph 1: Solid Homes acknowledges an outstanding obligation of P14,225,178.40, to be paid within 180 days; principal to earn interest at 14% p.a. and penalty of 16% p.a. from March 1, 1983 until fully paid.
Paragraph 2: If Solid Homes pays 60% (P8,535,107.04) within 180 days, State Financing will allow restructuring of the remaining obligation at mutually agreed interest.
Paragraph 3: If Solid Homes fails to comply within 180 days, the instrument will automatically operate as dacion en pago without need of another document and Solid Homes obligates itself to transfer the described properties to State Financing in full payment of indebtedness; State Financing accepts the conveyance free from liens and encumbrances.
Paragraph 6: State Financing grants Solid Homes the right to repurchase the properties within ten (10) months counted from and after the 180 days from the date of signing at an agreed price of P14,225,178.40 (or reduced pursuant to par. 5(d)), plus all cost of money equivalent to 30% per annum, registration fees, real estate and documentary stamp taxes and other incidental expenses incurred by State Financing in the transfer and registration of its ownership via dacion en pago.

Registration and Subsequent Correspondence and Conduct

Solid Homes failed to pay the 60% within 180 days; pursuant to paragraph 3 the Memorandum "automatically" operated as dacion en pago.
State Financing registered the Memorandum with the Register of Deeds in Pasig on September 15, 1983; the Register cancelled TCT No. 9633 and TCT No. (492194) 11938 in Solid Homes' name and issued Transfer Certificate of Title No. 40533 and No. 40534 in State Financing's name (Exhibits aJa, a11a, aKa, a12a).
State Financing, by letter dated October 11, 1983 (Exhibit a16a), informed Solid Homes of the transfer and demanded turnover of possession of the V.V. Soliven Towers II Building; Solid Homes responded on October 14, 1983 seeking time to categorize its position and on October 24, 1983 asserted nullity of the Memorandum alleging contravention of Article 2088 (automatic appropriation by mortgagee).
State Financing replied November 3, 1983 (Exhibit a17a) disputing applicability of Art. 2088 and reiterated demand for possession; Solid Homes did not comply.
Solid Homes wrote April 30, 1984 proposing repayment schemes; State Financing countered May 17, 1984 (Exhibit a18a) requiring initial P10 million by May 22, 1984 and balance within the repurchase period.
Further conferences ensued; State Financing reiterated June 7, 1984 (Exhibit a19a) the counter-proposal and reminded Solid Homes it had until June 27, 1984 to exercise repurchase rights.
Solid Homes on June 18, 1984 transmitted a written offer from C.L. Alma Jose & Sons, Inc. to avail of Solid Homes' repurchase right and requested a 60-day extension of the repurchase period; Solid Homes filed suit June 26, 1984, seeking annulment of the Memorandum and reinstatement of mortgages, one day before the June 27, 1984 repurchase expiry.

Trial Court Findings and Decree (RTC, Branch 157)

The trial court declared:
- The Memorandum of Agreement/Dacion en Pago of February 28, 1983 is valid and binding and does not violate the prohibition against pactum commissorium under Art. 2088.
- The Memorandum is a true sale with right of repurchase (pacto de retro), not an equitable mortgage.
- Registration of the Memorandum with the Register of Deeds on September 15, 1983 was in accordance with law and the parties' agreement, but the Register of Deeds' annotation on the certificates of title without any mention of the right of repurchase and period thereof was improper; cancellation and issuance of new titles in State Financing's name during the period of repurchase without judicial order violated Art. 1607 rendering those titles null and void.
The RTC ordered, among other things, that:
- State Financing surrender certificates of title issued in its name for cancellation.
- The Register of Deeds cancel the titles in State Financing's name and reinstate former titles in Solid Homes' name with proper annotation of the Memorandum and repurchase right/period.
- State Financing release to Solid Homes the titles over fully paid condominium units free of liens and encumbrances.
- Solid Homes be given 30 days from finality of judgment to exercise repurchase by paying P14,225,178.40 plus cost of money equivalent to 30% p.a. (interest of 14% and penalty 16% from March 1, 1983), registration fees, real estate and documentary stamp taxes and other incidental expenses incurred by State Financing (pursuant to Articles 1606 and 1616 Civil Code).
- If Solid Homes fails to repurchase within 30 days, the Register of Deeds shall record consolidation of ownership in State Financing, excluding fully paid condominium units.
The RTC denied claims for damages, attorney's fees, litigation expenses and costs for lack of merit.

Court of Appeals Ruling (assailed Decision)

The Court of Appeals affirmed the RTC decision with the modification that Solid Homes was ordered to deliver possession of the subject property to State Financing.
On Solid Homes' claim for damages based o