The bad faith of one cancels the bad faith of the other

The story began when Linda and her husband, Pedro, borrowed from Tess. As security for the loan, Linda and Pedro mortgaged their property in favor of Tess. The mortgage deed was then duly annotated on the title of the property.

When Pedro died, Linda found herself unable to pay the loan. This was the beginning of the end of the sisters’ closeness.

Tess claimed that Linda then agreed to sell the subject land to her. The sisters then executed a Deed of Sale and a Release of Mortgage. According to Tess, the consideration of the sale was the loan and an additional P50,000, which Tess paid. Eventually, a new title was issued in the name of Tess, married to Al.  Thereafter, Tess and Al constructed a three-storey building on the subject land.

But Tess’ version is a tall tale according to Linda. Linda and her children refused to acknowledge the sale, pointing out that since Pedro died in 1989, his signature in the Deed of Sale executed in 1992 was definitely forged.

Tess and Al then filed a Complaint for Cancellation of Title with collection of sum of money against Linda and her children before the Regional Trial Court. The spouses demanded the return of the purchase price and and the cost of the construction of the three-storey building, but to no avail.

During the pretrial conference, the parties admitted and/or stipulated on the following facts: (a) the subject land was previously covered by a TCT in the name of Erlinda and Pedro, but such title was cancelled and replaced by a TCT in the name of Teresita; (b) the Deed of Sale and Release of Mortgage executed  were forged, and thus, should be cancelled; (c) in view of said cancellations, the new TCT should likewise be cancelled and its predecessor TCT should be reinstated; (d) from the time when the spurious Deed of Sale was executed until the present, Tess and Al have been the actual occupants of the subject land as well as all improvements therein, including the three-storey building constructed by respondents; and (e) the loan Linda and Pedro obtained still subsists and that Tess and Al paid for the improvements being currently occupied by Linda and her children, that is, the three-storey building.

Q: What is pretrial?

A: Pretrial is a procedural device intended to clarify and limit the basic issues raised by the parties and to take the trial of cases out of the realm of surprise and maneuvering.

More significantly, a pretrial has been institutionalized as the answer to the clarion call for speedy disposition of cases. It is, thus, mandatory for the trial court to conduct pretrial in civil cases in order to realize the paramount objective of simplifying, abbreviating and expediting trial.

Q: What is the significance of the admissions and/or stipulations entered into by the party litigants during the pretrial conference?

A: Parties are bound to honor the admissions and/or stipulations they made during pretrial.

Q: Do Tess and Al have the right to collect from Linda and her children the loan Linda and Pedro borrowed from them?

A: While Linda and her children with Pedro admitted the existence of the loan obligation as well as Tess and Al’s right to collect on the same, it does not necessarily follow that Tess and Al should collect the loan amount from Linda and her children.

It must be pointed out that such loan was contracted by Linda, who is only one out of the four defendants sued, and her deceased husband, Pedro, during the latter’s lifetime and while their marriage was still subsisting. As they were married before the effectivity of the Family Code of the Philippines and absent any showing of any prenuptial agreement between Linda and Pedro, their property relations were governed by the system of conjugal partnership of gains.

Hence, pursuant to Article 121 of the Family Code, the loan obligation, including interest if any, is chargeable to Linda and Pedro’s conjugal partnership as it was a debt contracted by both of them during their marriage; and should the conjugal partnership be insufficient to cover the same, then Linda and Pedro (more particularly, his estate as he is already deceased) shall be solidarily liable for unpaid balance with their separate properties.

While the portion attributable to Pedro was not considered extinguished by his death, it is merely passed on to his estate; and thus, his heirs, i.e., their children, could not be held directly answerable for the same.

Q: What could be an alternative remedy available to Tess and Al to enable them to collect the loan?

A: They may also choose to foreclose the mortgage on the subject land as the same was duly constituted to secure the loan obligation. In other words, they have the option to either file a personal action for collection of sum of money or institute a real action to foreclose on the mortgage security. The aforesaid remedies are alternative, meaning the choice of one will operate to preclude the other.

Q: What is the effect of the parties having stipulated that the Deed of Sale and Release of Mortgage were forged?

A: The Deed of Sale stands to be nullified in view of the parties’ stipulation to this effect. Thus, it is incumbent upon the parties to return what they have received from said sale.

Accordingly, Linda and her children are entitled to the return of the subject land as stipulated during the pretrial. To effect the same, the Register of Deeds should cancel the new TCT, and thereafter, reinstate the predecessor TCT in the name of Pedro and Linda and, restore the same to its previous state before its cancellation, i.e., with the mortgage executed by the parties annotated thereon.

On the other hand, Tess is entitled to the refund of the additional consideration she paid for such sale.

Q: Are Tess and Al entitled to be reimbursed for the construction of the three-storey building on the land?

A: It depends.

The terms builder, planter or sower in good faith as used in reference to Article 448 of the Civil Code, refers to one who, not being the owner of the land, builds, plants or sows on that land believing himself to be its owner and unaware of the defect in his title or mode of acquisition. The essence of good faith lies in an honest belief in the validity of one’s right, ignorance of a superior claim and absence of intention to overreach another.

On the other hand, bad faith may only be attributed to a landowner when the act of building, planting or sowing was done with his knowledge and without opposition on his part.

Tess was apprised of Pedro’s death in 1990. As such, she knew all along that the aforesaid 1992 Deed of Sale—which contained a signature purportedly belonging to Pedro, who died in 1989, or three years prior to its execution—was void and would not have operated to transfer any rights over the subject land to her name. Despite such awareness of the defect in their title to the subject land, Al and Tess still proceeded in constructing a three-storey building thereon.

Indubitably, they should be deemed as builders in bad faith.

Linda and her children, on the other hand, knew of the defect in the execution of the Deed of Sale from the start, but nonetheless, still acquiesced to the construction of the three-storey building thereon. Hence, they should likewise be considered as landowners in bad faith.

In this relation, Article 453 of the Civil Code provides that where both the landowner and the builder, planter or sower acted in bad faith, they shall be treated as if both of them were in good faith.

The law also provides that whenever both the landowner and the builder/planter/sower are in good faith (or in bad faith, pursuant to the aforecited provision), the landowner is given two options under Article 448 of the Civil Code, namely: (a) he may appropriate the improvements for himself after reimbursing the buyer (the builder in good faith) the necessary and useful expenses under Articles 546 and 548 of the Civil Code; or (b) he may sell the land to the buyer, unless its value is considerably more than that of the improvements, in which case, the buyer shall pay reasonable rent.

Applying the aforesaid rule in this case, under the first option, Linda and her children may appropriate for themselves the three-storey building on subject land after payment of indemnity as provided by law.

Under this option, Tess and Al would have a right of retention over the three-storey building as well as the subject land until Linda and her children complete the reimbursement. Under the second option, Linda and her children may sell the subject land to Tess and Al at a price equivalent to the current market value thereof.

However, if the value of the subject land is considerably more than the value of the three-storey building, Tess and Al cannot be compelled to purchase the subject land. Rather, they can only be obliged to pay petitioners reasonable rent.

Source: Delos Santos vs. Abejon, G.R. No. 215820, March 20, 2017

Ma. Soledad Deriquito-Mawis is Dean, College of Law at the Lyceum of the Philippines University; Chairperson, Philippine Association of Law Schools; and founder of Mawis Law Office