G.R. No. 237934 - State Investment Trust, Inc. vs. Carlos Baculo

Case Summary (G.R. No. 237934)

Factual Background

On March 25, 1997, SITI entered into two Contracts to Sell with Spouses Baculo for the purchase of the subject properties. For the property under TCT No. RT-49377 (367961), the purchase price was PHP 2,789,500.00 with a downpayment of PHP 697,375.00, and the balance of PHP 2,092,125.00 was payable over three years in thirty-six (36) equal monthly amortizations, starting June 25, 1997, at an interest rate of nineteen percent (19%) per annum. For the property under TCT No. RT-49378 (367962), the purchase price was PHP 2,754,500.00 with a downpayment of PHP 688,625.00, and the balance of PHP 2,065,875.00 was similarly payable in thirty-six (36) equal monthly amortizations starting June 25, 1997, with the same interest rate of nineteen percent (19%) per annum. Based on the contracts, Spouses Baculo occupied the properties.

In November 1997, the estate of the late Martha Hernandez filed a complaint for reconveyance and declaration of nullity of the TCTs covering the subject properties against SITI and Spouses Baculo before Branch 217, RTC Quezon City (Civil Case No. Q-97-32866). Lis pendens notices were annotated on both TCTs.

Spouses Baculo paid only the downpayments and eight monthly amortizations for each contract. Due to business difficulties, they requested that payment be limited to interest until their business improved. SITI granted the request and restructured the payment schedule, extending amortizations until June 25, 2003. After paying three monthly amortizations under the restructure, Spouses Baculo defaulted again. SITI sent demand letters to require compliance with the restructured schedule.

By a letter dated January 30, 1999, Spouses Baculo asked to suspend payments until the reconveyance case was settled. SITI acceded and suspended amortizations from October 1998 until the reconveyance case was finally resolved, on the condition of automatic lifting of the suspension and immediate resumption if SITI prevailed. The reconveyance case reached the Court of Appeals, where it was dismissed for failure of the estate to file its brief, and the dismissal became final on December 12, 2004. SITI notified Spouses Baculo by letter dated February 2, 2005 and demanded resumption of payment of the outstanding balances, and later demanded settlement through a letter dated July 13, 2005.

Instead of paying, Spouses Baculo sought further suspension, this time due to the annotations of lis pendens. After SITI denied the request and informed the spouses that the annotations had been cancelled, Spouses Baculo continued to defer payment, claiming that the titles’ cloud was not yet removed and that dismissal was merely technical. In response, SITI sent a letter dated September 26, 2005 stating that the annotations were cancelled and that payment should proceed, but Spouses Baculo again requested deferment pending full removal of the cloud.

Finally, on November 16, 2005, SITI sent a letter cancelling all concessions and demanding full payment within five days, warning that the Contracts to Sell would be deemed rescinded/cancelled due to violations and that the letter would be considered notice of rescission/cancellation with further demand that Spouses Baculo vacate and surrender possession. Spouses Baculo threatened filing civil and criminal cases if SITI insisted on paying the balance. SITI reiterated its position in a letter dated January 4, 2006, demanding vacation within fifteen days. As Spouses Baculo did not vacate, SITI filed an ejectment case.

MeTC Proceedings

SITI instituted an ejectment complaint before Branch 34, Metropolitan Trial Court of Quezon City (MeTC). Spouses Baculo, in their Answer, claimed they had not violated the contracts because they could not be compelled to resume amortizations while the titles remained clouded. They also raised a jurisdictional objection, asserting that the issue involved rescission and that rescission had not been made through a notarial act, hence was not binding. They thus argued that their possession could not be deemed illegal.

In its Decision dated November 20, 2007, the MeTC ruled for SITI. It ordered Spouses Baculo to vacate and surrender possession, to pay PHP 5,000.00 per month as rental from January 2006 until they vacated, to pay PHP 20,000.00 as attorney’s fees, and to pay costs. While the MeTC recognized that rescission was invalid for lack of compliance with the notarial or judicial demand requirement under Article 1592 of the Civil Code, it held that ejectment could still lie because, in a Contract to Sell, the seller retains ownership until full payment. Since Spouses Baculo failed to pay, ownership remained with SITI, and SITI could demand eviction based on its proprietary right.

The MeTC also held that Republic Act No. 6552 did not apply because Spouses Baculo had paid only eight installments per contract, which was contrary to the law’s threshold for particular protections under Section 3(b) of the Act.

RTC Appellate Proceedings

Spouses Baculo appealed to Branch 221, Regional Trial Court of Quezon City (RTC Branch 221). In its Decision dated October 30, 2009, RTC Branch 221 reversed the MeTC Decision on jurisdictional grounds, holding that the MeTC should have dismissed for lack of jurisdiction because the complaint effectively hinged on rescission. Nevertheless, RTC Branch 221 took cognizance of the case in the interest of justice, since it had original jurisdiction and without prejudice to the admission of amended pleadings and additional evidence.

After proceedings, RTC Branch 96 promulgated its Decision dated October 17, 2014. It declared both Contracts to Sell rescinded and ordered the amounts paid to SITI to be forfeited as stipulated. It further ordered Spouses Baculo to vacate and surrender possession to SITI. RTC Branch 96 found that SITI had clear grounds to rescind because Spouses Baculo failed to comply with their commitment to resume payments according to the restructured schedule, and because SITI’s demands established rescission under the law.

Court of Appeals Ruling

Spouses Baculo and the heirs then appealed to the Court of Appeals. In its Decision dated March 24, 2017, the CA reversed RTC Branch 96 and dismissed SITI’s complaint. The CA held that respondents were not barred from questioning jurisdiction because, even if they did not timely question the RTC Branch 221’s assumption of jurisdiction, they actively participated through trial and only challenged jurisdiction when the decision became adverse to them.

More decisively, the CA found that Section 4, not Section 3, of Republic Act No. 6552 governed because the vendees paid only eight monthly installments per contract, which meant they paid less than two years of installments. Under Section 4, the seller must give a sixty-day grace period from the date the installment became due. If the buyer fails after the grace period, the seller may cancel only after thirty days from receipt by the buyer of the notice of cancellation or demand for rescission by a notarial act.

The CA concluded that SITI’s demand letter dated November 16, 2005 did not satisfy the notarial act requirement. It therefore ruled that the contracts were not validly rescinded. The CA further reasoned that contractual stipulations cannot override statutory requirements. Invoking Section 7 of Republic Act No. 6552, it ruled that any provision contrary to Sections 3, 4, 5, and 6 is null and void. Thus, the unilateral rescission/cancellation scheme in the contracts could not prevail over Section 4.

SITI’s partial motion for reconsideration was denied on March 5, 2018, prompting the petition before the Supreme Court.

Issues Presented

The Court addressed whether the CA erred in holding that the Contracts to Sell were not validly cancelled or rescinded. SITI argued that Spouses Baculo acted in bad faith by repeatedly imposing additional conditions that prolonged payment suspension beyond what the seller agreed to, and that SITI substantially complied with rescission requirements through its letter dated January 4, 2006. SITI also claimed that the MeTC Decision, which ordered Spouses Baculo to vacate, effectively operated as the notice of cancellation under Republic Act No. 6552.

Spouses Baculo maintained that SITI’s unilateral rescission was void for lack of compliance with Republic Act No. 6552. They also justified suspension of amortizations due to the reconveyance case that allegedly put SITI’s ownership into question.

Legal Basis and Reasoning

The Court began by reiterating the purpose of Republic Act No. 6552 to protect buyers from onerous and oppressive stipulations and to define rights and remedies of installment buyers and sellers, including the seller’s right to cancel in conditional sales upon buyer’s nonpayment. The Court treated the factual premise as undisputed: Spouses Baculo had paid only eight monthly amortizations per contract, translating to less than two years of installments. Hence, Section 4 applied.

The Court reproduced Section 4 and set out the requisites that must be met before actual cancellation: the seller must first give a grace period of at least sixty days from the date the installment became due; second, the seller must serve notice of cancellation or demand for rescission by notarial act if the buyer fails to pay after the grace period; and third, the seller may cancel only after thirty days from the buyer’s receipt of the notarial notice.

The Court then analyzed the contracts. Paragraph 5 of the Contracts to Sell provided that SITI had the right to unilaterally rescind/cancel without judicial declaration upon failure to pay installments with interest or upon violation of contract terms, and that all sums paid would be forfeited, with forfeited amounts and improvements becoming rentals if the buyer was already in possession. The clause also expressly stated that it was without prejudice to the Maceda Law whenever applicable. The Court therefore held that Paragraph 5 did not dispen

Case Syllabus (G.R. No. 237934)

The case involved a Petition for Review on Certiorari assailing rulings of the Court of Appeals (CA) that reversed the Regional Trial Court (RTC) and dismissed SITI’s complaint to enforce rescission/cancellation of two Contracts to Sell.
The controversy focused on whether SITI validly cancelled or rescinded the contracts under Republic Act No. 6552 (Realty Installment Buyer Protection Act, the Maceda Law).
The Supreme Court affirmed the CA’s dismissal of the complaint but modified the outcome by ordering payment of the outstanding purchase price within a fixed period and by providing consequences in case of default.

Parties and Procedural Posture

Petitioner State Investment Trust, Inc. (SITI) owned the subject properties and initiated the case as the seller-creditor under two Contracts to Sell.
Respondents were Carlos Baculo and the heirs of his deceased spouse Victoria Baculo, namely Ronaldo Baculo, Roniel Baculo, Rozziel Baculo-Quitoriano, and Richard Baculo.
SITI sued for eviction/ejectment before the Metropolitan Trial Court of Quezon City (MeTC), Branch 34, after it demanded rescission/cancellation and demanded that respondents vacate.
The MeTC ruled in SITI’s favor, ordering immediate vacation and surrender, payment of rentals as computed, attorney’s fees, and costs.
On appeal, the RTC Branch 221 reversed on jurisdictional grounds but took cognizance of the case in the interest of justice, allowing further proceedings.
The RTC Branch 96 later held that the two Contracts to Sell were rescinded and that SITI had the right to possess the properties.
On further appeal, the CA reversed the RTC and dismissed SITI’s complaint, holding that SITI failed to comply with Section 4 of Republic Act No. 6552.
SITI moved for reconsideration in the CA, which the CA denied, prompting the petition before the Supreme Court.

Key Factual Allegations

SITI was the registered owner of two parcels of land in Batasan Hills, Quezon City, with respective areas of 797 sqm and 787 sqm, covered by TCT No. RT-49377 (367961) and TCT No. RT-49378 (367962).
On March 25, 1997, SITI executed two Contracts to Sell with Spouses Baculo for the sale of the subject properties.
For the property under TCT No. RT-49377 (367961), the purchase price was PHP 2,789,500.00 with a downpayment of PHP 697,375.00, and the balance was PHP 2,092,125.00 payable in three years through 36 equal monthly amortizations starting June 25, 1997, with interest at nineteen percent (19%) per annum.
For the property under TCT No. RT-49378 (367962), the purchase price was PHP 2,754,500.00 with a downpayment of PHP 688,625.00, and the balance was PHP 2,065,875.00 payable under the same amortization structure and interest rate.
Spouses Baculo occupied the properties based on the contracts.
In November 1997, the estate of the late Martha Hernandez filed a reconveyance action (Civil Case No. Q-97-32866) against SITI and Spouses Baculo before the RTC Branch 217, and lis pendens notices were annotated on the titles.
Spouses Baculo paid only the downpayments and eight monthly amortizations for each property before seeking leniency due to business difficulties.
SITI granted a restructured arrangement to allow payment of only interest initially and extended amortization deadlines until June 25, 2003.
Spouses Baculo again defaulted, which led SITI to demand compliance with the restructured schedule.
Spouses Baculo requested suspension of payments pending the outcome of the reconveyance case, and SITI agreed, conditioned on automatic lifting of the suspension and immediate resumption if SITI prevailed.
The reconveyance case eventually reached the CA and was dismissed for failure to file a brief, and the dismissal became final on December 12, 2004.
After finality, SITI demanded resumption of payments through letters in February 2005 and July 2005, but Spouses Baculo sought further suspension tied to the cancellation of the lis pendens annotations and later argued the reconveyance dismissal was merely technical.
SITI informed respondents that the annotations were already cancelled, and still respondents delayed payments, reiterating that clouds on title prevented compliance.
SITI then sent a letter dated November 16, 2005 cancelling concessions and demanding full payment within five days, threatening that failure would result in rescission/cancellation and that the letter would be considered notice of cancellation and demand to vacate and surrender.
Respondents threatened cases if SITI insisted on payment due to alleged defects in title, and SITI reiterated its position in a letter dated January 4, 2006 demanding vacating within 15 days.
Spouses Baculo refused to vacate, leading SITI to file an ejectment complaint before the MeTC.

Contractual Provisions Invoked

Paragraph 5 of the two Contracts to Sell granted SITI the right to unilaterally rescind and/or cancel upon failure to pay any installment with interest or upon violation of contract terms, without necessity of judicial declaration.
Paragraph 5 also stipulated that sums paid would be forfeited as liquidated damages, and if the vendee was already in possession, forfeited amounts and improvements would become rentals without reimbursement and with ejectability as an intruder or unlawful detainer.
The contracts expressly stated that this unilateral rescission/cancellation right was without prejudice to the provisions of the Maceda Law (Republic Act No. 6552) whenever applicable.
The contracts provided an interest rate of 19% per annum and a penalty interest of 3% per month for failure to pay installment payments.

Issues Presented

The central issue was whether the CA erred in holding that the Contracts to Sell were not validly cancelled or rescinded.
The matter hinged on compliance with the statutory requisites under Section 4 of Republic Act No. 6552, especially the requirement of a notarial act notice of cancellation/demand for rescission after a 60-day grace period.
A related issue arose on whether SITI’s invoked defenses and exceptions to coverage under the Maceda Law could be raised for the first time on appeal.

Contentions of the Parties

SITI argued that respondents acted in bad faith by repeatedly requesting conditions to prolong payment suspension that respondents allegedly never agreed to in the manner claimed.
SITI maintained that it substantially complied with statutory notice requirements by serving a letter dated January 4, 2006.
SITI argued that the MeTC Decision ordering respondents to vacate effectively operated as the notice under Republic Act No. 6552.
SITI asserted that once rescission was valid, all payments should be forfeited in its favor.
SITI alternatively urged that even if no valid rescission existed, the CA should have ordered respondents to pay within 60 days the outstanding balance plus interests and to vacate without need of demand, with payments treated as rentals.
Respondents countered that SITI’s unilateral cancellation was void for not following Republic Act No. 6552, particularly the notarial requirement under Section 4.
Respondents also justified stopping amortization payments due to the reconveyance case that challenged SITI’s ownership.
SITI further claimed in reply that it was not covered by Republic Act No. 6552 because it was merely an investment house, not an investment developer, and because the properties all