VILLA SI VS. GARCIA G.R. No.

190106 January 15, 2014

Facts: Villasi engaged the services of respondent Fil-Garcia Construction, Inc. (FGCI) to
construct a seven-storey condominium building located Cubao, Quezon City. For failure of
Villasi to fully pay the contract price despite several demands, FGCI initiated a suit for
collection of sum of money. Villasi filed an answer specifically denying the material
allegations of the complaint. Contending that FGCI has no cause of action against her, Villasi
averred that she delivered the total amount of P7,490,325.10 to FGCI but the latter
accomplished only 28% of the project. To enforce her right as prevailing party, Villasi filed
a Motion for Execution. To satisfy the judgment, the sheriff levied on a building located
Kalayaan Avenue, Quezon City. While the building was declared for taxation purposes in the
name of FGCI, the lots in which it was erected were registered in the names of the Spouses
Garcia. The Spouses Garcia argued that the building covered by the levy was mistakenly
assessed by the City Assessor in the name of FGCI and that it could not be levied upon not
being owned by the judgment debtor.
Issue: Whether the general rule on accession can be applied in the case at bar
(accessory follows the principal)
Ruling: While it is a horn-book doctrine that the accessory follows the principal, that is, the
ownership of the property gives the right by accession to everything which is produced
thereby, or which is incorporated or attached thereto, either naturally or artificially, such rule
is not without exception. In cases where there is a clear and convincing evidence to prove that
the principal and the accessory are not owned by one and the same person or entity, the
presumption shall not be applied and the actual ownership shall be upheld.
When there are factual and evidentiary evidence to prove that the building and the lot on
which it stands are owned by different persons, they shall be treated separately. As such, the
building or the lot, as the case may be, can be made liable to answer for the obligation of
its respective owner.
CCI VS NANOL (GR NO. 176791 NOVEMBER 14, 2012)
Communities Cagayan Inc. vs Spouses Nanol, GR No. 176791 November 14, 2012
Facts: Sometime in 1994, respondent-spouses Arsenio and Angeles Nanol entered into
contract to Sell with petitioner Communities Cagayan, Inc., whereby the former  agreed to
sell to respondent-spouses a house and Lots 17 and 19″ locate Block 16,  Camella  Homes 
Subdivision,  Cagayan de  Oro City,  for the  price  of P 368,000.00.  Respondent-spouses, 
however,  did not  avail  of petitioner’s  inhouse  financing  due  to  its high  interest  rates. 
Instead,  they obtained  a loan from Capitol  Development  Bank,  a  sister  company of
petitioner,  using  the  property  as collateral.  To  facilitate the loan,  a simulated  sale over 
the property  was  executed by petitioner in favor of respondent-spouses. Accordingly,  titles 
were transferred  in the  names  of respondent-spouses  under Transfer Certificates  of Title
(TCT)  Nos.  105202  and 105203,  and  submitted  to  Capitol  Development  Bank for loan
processing.   Unfortunately,  the  bank collapsed  and closed  before it  could release  the 
loan.  Thus,  on  November  30,  1997,  respondent-spouses  entered into  another Contract
to  Sell with  petitioner  over the  same property for the  same price  of P 368,000.00.   This 
time,  respondent-spouses  availed of  petitioner’s  in-house financing  thus,  undertaking  to 
pay the  loan  over  four years,  from  1997 to 2001.  Sometime in 2000,  respondent  Arsenio
demolished  the  original  house  and constructed  a three-story  house  allegedly valued at  P
3.5  million,  more  or  less. In July  2001,  respondent  Arsenio  died,  leaving his  wife, 
herein respondent Angeles,  to  pay for  the  monthly  amortizations.
 petitioner sent respondent-spouses a Notice of Delinquency and Cancellation of
Contract to Sell – dismissed by lower court

Elevated to RTC - Complaint for Cancellation of Title, Recovery of Possession,

Reconveyance and Damages -  Deed of Absolute Sale VOID, Transfer Certificates
of Title are ordered CANCELLED

Petitioner questioned the order to reimburse the cost of the new house because
respondent-spouses were in bad faith when they renovated and improved the
house

Issue: Whether or not respondents are considered builders in good faith entitled to

indemnification for necessary and useful expenses and/or to buy the land under the provisions
of the New Civil Code.
Held: Yes. Respondent-spouses are entitled to reimbursement of the
improvements made on the property. As  a  general  rule,  Article  448  on builders 
in good faith does  not  apply where  there  is  a  contractual  relation  between  the  parties, 
such  as  in  the  instant case.   We  went  over the  records  of this  case and we  note  that 
the  parties  failed to attach  a copy of the  Contract  to Sell.   As  such,  we  are  constrained 
to  apply Article 448  of the Civil  Code,  which  provides  viz:  
ART.  448. The  owner  of  the  land  on  which anything has  been  built, sown or  planted
in good  faith, shall  have  the  right  to appropriate  as  his  own the works, sowing or 
planting, after  payment  of  the  indemnity  provided  for  in Articles  546  and 548, or  to
oblige  the  one  who built  or  planted to pay the  price  of the  land, and  the  one  who
sowed, the  proper  rent. However, the  builder  or  planter cannot  be  obliged to buy the 
land if  its  value  is  considerably  more  than that  of  the building or  trees. In such  case,
he  shall  pay reasonable  rent, if  the  owner  of  the land does  not  choose  to
appropriate  the  building or  trees  after  proper  indemnity. The  parties shall  agree 
upon  the terms  of  the lease  and  in  case of  disagreement, the court  shall  fix  the terms 
thereof.
Article 448  of the  Civil  Code  applies  when  the builder believes  that  he is the owner  of
the  land  or that  by  some  title  he  has  the  right  to build  thereon, or that,  at least,  he 
has  a  claim  of  title  thereto.  Concededly,  this  is  not  present  in the instant  case.   The 
subject  property is  covered by  a  Contract  to  Sell  hence ownership  still remains with 
petitioner  being  the  seller.   Nevertheless,  there were already instances  where  this  Court 
applied  Article  448  even if the  builders  do  not have  a  claim  of  title over  the property.   
Thus: 
This  Court  has  ruled  that  this  provision  covers  only  cases  in  which the builders, 
sowers or  planters believe themselves  to  be  owners  of  the  land  or,  at least,  to  have a
claim  of  title thereto.   It  does not  apply  when  the interest  is merely that  of  a  holder,
such as  a  mere  tenant, agent  or  usufructuary.  From  these pronouncements, good  faith is 
identified by the  belief  that  the  land is  owned;  or that  –  by  some  title  –  one  has  the 
right  to  build,  plant,  or  sow  thereon. 
However,  in  some  special  cases,  this  Court  has used  Article 448  by recognizing  good 
faith  beyond this  limited definition.  Thus, in  Del  Campo  v. Abesia, this  provision was 
applied to one  whose  house  –  despite  having been built at the  time  he  was  still co-
owner  –  overlapped with  the  land of  another.   This article  was also  applied  to  cases
wherein  a builder  had  constructed improvements  with the  consent  of  the  owner.  The 
Court  ruled that  the  law deemed the  builder  to be  in good  faith.   In  Sarmiento  v.
Agana,  the  builders  were found to  be  in good  faith  despite  their  reliance  on the 
consent  of  another,  whom they had  mistakenly  believed to  be  the  owner  of  the  land.

In fine,  the Court  applied  Article  448 by construing  good faith beyond its
limited definition.   We find no reason not  to  apply the  Court’s  ruling in  Spouses
Macasaet  v.  Spouses  Macasaet  in  this case.   We  thus  hold  that  Article  448  is also
applicable  to the  instant  case.   First,  good faith  is  presumed  on the  part  of the
respondent-spouses.   Second,  petitioner  failed to rebut  this presumption.   Third, no
evidence  was  presented  to  show  that  petitioner  opposed  or  objected  to  the
improvements introduced by the  respondent-spouses.   Consequently,  we  can validly
presume  that  petitioner  consented  to  the  improvements  being  constructed.   This
presumption  is  bolstered  by  the  fact  that  as  the  subdivision developer, petitioner  must 
have given  the respondent-spouses  permits to  commence  and undertake  the 
construction.    Under  Article  453  of  the  Civil  Code,  “it  is understood  that  there  is  bad
faith  on the  part  of the  landowner whenever the  act was  done  with  his  knowledge  and
without  opposition on his  part.” 
LUCIANO BRIONES and NELLY BRIONES, Petitioners, vs. JOSE MACABAGDAL, FE
D. MACABAGDAL and VERGON REALTY INVESTMENTS CORPORATION,
Respondents. (G.R. No. 150666, August 3, 2010).
FACTS:
Spouses Macabagdal purchased from Vergon a lot located in Vergonville Subdivision.
Sometime in 1984, spouses Briones, after obtaining the necessary building permit from
Vergon, started constructing on the same parcel of land (they thought was theirs due to mix-
up by Vergon’s manager). After learning of such, spouses Macabagdal demanded spouses
Briones to demolish the house and vacate the property. Spouses Briones refused.
Spouses Macabagdal thus filed a case for recovery of ownership and possession of said
parcel of land. The RTC and CA ruled in favor of spouses Macabagdal, and ordered
spouses Briones to either vacate the property or to pay spouses Macabagdal the prevailing
price of the land.
ISSUE:
Are spouses Briones builders in good faith, thus, must not bear the damage alone?
HELD: 
Yes. Since there was NO EVIDENCE to show that spouses Briones were builders in bad
faith, they must be considered builders in good faith. Thus, the landowner is given the option
to appropriate the building by paying compensation or to oblige the builder to pay the
price of the land. Moreover, the builder in good faith is entitled to be reimbursed the
necessary and useful expenses they made of the subject land.
Thus, spouses Macabagdal cannot demand the removal of the building UNLESS he first
exercises the option of appropriating such after payment to spouses Briones of the proper
compensation.
Heirs of Joaquin Limense vs Rita Vda. De Ramos
Facts:
Lozada was the registered owner of a land in Manila, he subdivided his property into five
and gave the divided lots to his daughters through a deed of donation on March 9, 1932.
In 1981, Joaquin Limense wanted to build a hollow block fence on his property but could not
because a substantial portion of the respondent's building encroached upon portion of
Limense property.
Limense demanded the removal of the encroached area, respondent ignored both oral and
written demands.
In the RTC, the respondents averred that they are daughters of the Lozada. After subdividing
the said lot, Dalmacio Lozada donated Lot No. 12-C in favor of his daughters Catalina,
married to Sotero Natividad; Isabel, married to Isaac Limense; and Salud, married to
Francisco Ramos. Being the surviving heirs of Francisco Ramos, respondents later became
co-owners of Lot No. 12-C. Lot No. 12-C has served as right of way or common alley of all
the heirs of Dalmacio Lozada since 1932 up to the present. As a common alley, it could not
be closed or fenced by Joaquin Limense without causing damage and prejudice to
respondents.
RTC: dismissed the complaint of Limense ruling that an apparent easement of right of way
existed in favor of respondents. The Court also finds that when plaintiff acquired the lot (12-
C) which forms the alley, he knew that said lot could serve no other purpose than as an alley.
Joaquin filed a notice of appeal but during the pendency of the appeal with the CA, Joaquin
died. His heirs then elevated the case to the SC via petition for review on certiorari.
Issue: Whether CA committed a grave abuse amounting to lack of jurisdiction in
holding that respondents has an easement of right of way.
However, although the owner of the property has the right to enclose or fence his
property, he must respect servitudes constituted thereon. The question now is
whether respondents are entitled to an easement of right of way.

The existence of the easement of right of way was therefore known to

petitioners who must respect the same, in spite of the fact that their
transfer certificates of title do not mention any burden or easement. It is an
established principle that actual notice or knowledge is as binding as
registration.

Held: In the case at bar, the action filed before the RTC against respondents was an action for
removal of obstruction and damages.  Respondents raised the defense that Joaquin Limense's
title could have been obtained through fraud and misrepresentation in the trial proceedings
before the RTC. Such defense is in the nature of a collateral attack, which is not allowed by
law.
As with the present case, the CA's observation that TCT No. 96886 is of dubious origin, as
TCT No. 40043 does not appear to have been disposed of by Catalina, Isabel and Salud
Lozada, is improper and constitutes an indirect attack on TCT No. 96886.  As we see it, TCT
No. 96886, at present, is the best proof of Joaquin Limense’s ownership over Lot No. 12-
C.  Thus, the CA erred in ruling that respondents and petitioners co-owned Lot No. 12-C, as
said lot is now registered exclusively in the name of Joaquin Limense.
Due to the foregoing, Joaquin Limense, as the registered owner of Lot 12-C, and his
successors-in-interest, may enclose or fence his land or tenements by means of walls, ditches,
live or dead hedges, or by any other means without detriment to servitudes constituted
thereon.
Joaquin Limense and his successors-in-interests are fully aware that Lot No. 12-C has been
continuously used and utilized as an alley by respondents and residents in the area for a long
period of time.
The portions of Lot No. 12-D, particularly the overhang, covering 1 meter in width and 17
meters in length; the stairs; and the concrete structures are all within the 1/3 share allotted to
them by their donor Dalmacio Lozada and, hence, there was absence of a showing that
respondents acted in bad faith when they built portions of their house on Lot No. 12-C.
WHEREFORE, the petition is DENIED, the Decision of the Court of Appeals dated
December 20, 2001 in CA-G.R. CV No. 33589 is AFFIRMED with the following
MODIFICATIONS:
1. No co-ownership exists over Lot No. 12-C, covered by TCT No. 96886, between
petitioners and respondents. 
2. The case is REMANDED to the Regional Trial Court, Branch 15, Manila, for further
proceedings without further delay to determine the facts essential to the proper application of
Articles 448 and 546 of the Civil Code.
Elvira Arangote vs. Spouses Martin and Lourdes Maglunob and Romeo Salido;FACTS:

Elvira Arangote acquired the subject parcel of land from Esperanza Maglunob,who is grand

aunt of respondents Martin Maglunob and Romeo Salido. In June 1986, Esperenza executed
an affidavit in which she renounced her rights, share and participation in the land in favor of
Elvira and her husband. It appears that the lot was not
exclusive property of Esperanza but also of the other heirs of Martin whom sherepresented in 
the partition agreement. Elvira and her husband, Ray constructed a house on the land in
1989 and in 1993, OCT was issued in her name bythe DAR. However, respondents with the
help of hired persons entered the property
and built a wall behind and in front of Elvira’s house. Elvira and Ray suedrespondents for
quieting of title and declaration of ownership. Respondents averred that they
were co-owners of the land with Esperanza who allegedly inherited the land from Martin 1
together with Tomas and Inocencia (Martin 2’s and Romeo’s predecessor in interest). They
argued that Esperanza could not have validly waived her rights in favor of Elvira and
Ray. MCTC ruled for Elvira. RTCreversed MCTC and declared respondent’s lawful owners 
of the land together withthe other heirs of Martin I. Elvira went to the CA but the CA
affirmed the RTC decision. Before SC, Elvira argued that both RTC and CA erred in
declaring the affidavit of Esperanza void because it is a valid and binding proof of transfer of
ownership of the subject property as it was coupled with actual delivery.

ISSUE: Whether or not the donation to Elvira and her husband is valid.

HELD: Supreme Court affirmed the decision of CA. SC ruled that the affidavit executed by

Esperanza wherein she renounced, relinquished and waived all her rights, share, interest and
participation in the subject property in favor of Elvira and Ray is in fact a donation. Thus, it
should have complied with the requirements of Article 749 of the Civil Code.
A simple donation of real property to be valid
:1) Must be made in a public instrument;2) It must be accepted, which must be in the same
deed of donation or in a separate
publicinstrument;3) If the acceptance is made in a separate instrument, the donor must be noti
fied inauthentic form and the same must be noted in both instruments. The affidavit executed
by Esperanza relinquishing her rights, share and participation over the property in favor of
Elvira suffered from legal infirmities. In Sumipat vs.Banga, the Court ruled that title
to immovable does not pass from the donor to the done by virtue of a Deed of Donation until
and unless it has been accepted in a public instrument and the donor duly notified thereof. In
this case, the acceptance of the donation was not made by Elvira either in the same affidavit
or in a separate public instrument. Neither was there notice of acceptance given to the donor,
therefore the donation is void.
PHILIPPINE NATIONAL BANK, petitioner, vs. GENEROSO DE JESUS
FACTS:Respondent filed a complaint against petitioner before the Regional Trial Court of
Occidental Mindoro for recovery of ownership and possession, with damages, over the
questioned property. On 26 March 1993, he had caused a verification survey of the property
and discovered that the northern portion of the lot was being encroached upon by a building
of petitioner to the extent of 124 square meters.
Despite two letters of demand sent by respondent, petitioner failed and refused to vacate the
area.Petitioner asserted that when it acquired the lot and the building sometime in 1981 from
then Mayor Bienvenido Ignacio, the encroachment already was in existence and to remedy
the situation, MayorIgnacio offered to sell the area in question (which then also belonged to
Ignacio) to petitioner at P100.00 per square meter which offer the latter claimed to have
accepted. The sale, however, did not materialize when, without the knowledge and consent of
petitioner, Mayor Ignacio later mortgaged the lot to the Development Bank of the
Philippines.The trial court decided the case in favor of respondent declaring him to be the
rightful owner.The Court of Appeals sustained the trial court.
Issue: w/n petitioner can validly invoke art 48 for being a builder in good faith
HELD:In reference to Article 448, et seq., of the Civil Code, a builder in good faith is one
who, not being the owner of the land, builds on that land believing himself to be its owner
and unaware of any defect in his title or mode of acquisition. The essence of good faith lies in
an honest belief in the validity of ones right, ignorance of a superior claim, and absence of
intention to overreach another. Applied to possession, one is considered in good faith if he is
not aware that there exists in his title or mode of acquisition any flaw which invalidates it.
Evidently, petitioner was quite aware, and indeed advised, prior to its acquisition of the land
and building from Ignacio that a part of the building sold to it stood on the land not covered
by the land conveyed to it. Equally significant is the fact that the building, constructed on the
land by Ignacio, has in actuality been part of the property transferred to petitioner. Article
448, of the Civil Code refers to a piece of land whose ownership is claimed by two or more
parties, one of whom has built some works (or sown or planted something) and not to a case
where the owner of the land is the builder, sower, or planter who then later loses ownership
of the land by sale or otherwise for, elsewise stated, where the true owner himself is the
builder of works on his own land, the issue of good faith or bad faith is entirely irrelevant. In
fine, petitioner is not in a valid position to invoke the provisions of Article 448 of the Civil
Code.
Case Digest: Heirs of Victorino Sarili v. Pedro Lagrosa G.R. No. 193517 January 15,
2014

Facts:
Respondent Pedro Lagrosa is the owner of a parcel of land situated in Caloocan City. He
resided in California, USA and during a vacation in the Philippines found that a new
certificate of title was issued by the RD in the name of Victorino Sarili by virtue of an alleged
falsified document by Sps. Sarili and the RD. Sps. Sarili maintained that they are innocent
buyers for value having purchased the property from Ramon B. Rodriguez who possessed
and presented a Special Power of Attorney to sell/dispose the property.

Issue:
Whether or not there was a valid conveyance of the subject property to Sps. Sarili.

Ruling:
Since the notarization of the Special Power of Attorney was defective, the sale between
Victorino and Ramon is void. Accordingly, the land title in the name of Victorino married to
Isabel should be annulled and the name of respondent be reinstated. As to the house built by
Sps. Sarili on the land, since he was aware of the palpable irregularity in the Special Power of
Attorney and that the person he was dealing with was possibly not authorized, he is
considered a builder in bad faith.
G.R. No. L-54526 August 25, 1986
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner,
vs.
THE COURT OF APPEALS and THE CITY OF DAGUPAN, respondents.
Miguel T. Caguioa, Ireneo B. Orlino and Manuel D. Victorio for respondent City of
Dagupan.

FERIA, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals which
affirmed the decision of the then Court of First Instance of Pangasinan. The lower court had
declared respondent City of Dagupan the lawful owner of the Dagupan Waterworks System
and held that the National Waterworks and Sewerage Authority, now petitioner Metropolitan
Waterworks and Sewerage System, was a possessor in bad faith and hence not entitled to
indemnity for the useful improvements it had introduced.
Before proceeding further, it may be necessary to invite attention to the common error of
joining the court (be it a Regional Trial Court, the Intermediate Appellate Court, or the
Sandiganbayan) as a party respondent in an appeal by certiorari to this Court under Rule 45
of the Rules of Court. The only parties in an appeal by certiorari are the appellant as
petitioner and the appellee as respondent. (Cf. Elks Club vs. Rovira, 80 Phil. 272) The court
which rendered the judgment appealed from is not a party in said appeal. It is in the special
civil action of certiorari under Section 5 of Rule 65 of the Rules of Court where the court or
judge is required to be joined as party defendant or respondent. The joinder of the
Intermediate Appellate Court or the Sandiganbayan as party respondent in an appeal by
certiorari is necessary in cases where the petitioner-appellant claims that said court acted
without or in excess of its jurisdiction or with grave abuse of discretion. An example of this is
a case where the petitioner-appellant claims that the Intermediate Appellate Court or the
Sandiganbayan acted with grave abuse of discretion in making its findings of fact, thus
justifying the review by this court of said findings of fact. (See the exceptions to the rule of
conclusiveness of the findings of fact of the Intermediate Appellate Court or the
Sandiganbayan in the case of Sacay vs. Sandiganbayan, G.R. Nos. 66497-98, July 10, 1986.)
In such a case, the petition for review on certiorari under Rule 45 of the Rules of Court is at
the same time a petition for certiorari under Rule 65, and the joinder of the Intermediate
Appellate Court or the Sandiganbayan becomes necessary. (Cf. Lianga Lumber Company vs.
Lianga Timber Co., Inc., March 31, 1977, 76 SCRA 197).
The City of Dagupan (hereinafter referred to as the CITY) filed a complaint against the
former National Waterworks and Sewerage Authority (hereinafter referred to as the
NAWASA), now the Metropolitan Waterworks and Sewerage System (hereinafter referred to
as MWSS), for recovery of the ownership and possession of the Dagupan Waterworks
System. NAWASA interposed as one of its special defenses R.A. 1383 which vested upon it
the ownership, possession and control of all waterworks systems throughout the Philippines
and as one of its counterclaims the reimbursement of the expenses it had incurred for
necessary and useful improvements amounting to P255,000.00. Judgment was rendered by
the trial court in favor of the CITY on the basis of a stipulation of facts. The trial court found
NAWASA to be a possessor in bad faith and hence not entitled to the reimbursement claimed
by it. NAWASA appealed to the then Court of Appeals and argued in its lone assignment of
error that the CITY should have been held liable for the amortization of the balance of the
loan secured by NAWASA for the improvement of the Dagupan Waterworks System. The
appellate court affirmed the judgment of the trial court and ruled as follows:
However, as already found above, these useful expenses were made in utter bad faith for they
were instituted after the complaint was filed and after numerous Supreme Court decisions
were promulgated declaring unconstitutional the taking by NAWASA of the patrimonial
waterworks systems of cities, municipalities and provinces without just compensation.
Under Article 546 of the New Civil Code cited by the appellant, it is clear that a builder or a
possessor in bad faith is not entitled to indemnity for any useful improvement on the
premises. (Santos vs. Mojica, L-25450, Jan. 31, 1969). In fact, he is not entitled to any right
regarding the useful expenses (II Paras (1971) 387). He shall not have any right whatsoever.
Consequently, the owner shall be entitled to all of the useful improvements without any
obligation on his part (Jurado, Civil Law Reviewer (1974) 223).
Petitioner-Appellant MWSS, successor-in-interest of the NAWASA, appealed to this Court
raising the sole issue of whether or not it has the right to remove all the useful improvements
introduced by NAWASA to the Dagupan Waterworks System, notwithstanding the fact that
NAWASA was found to be a possessor in bad faith. In support of its claim for removal of
said useful improvements, MWSS argues that the pertinent laws on the subject, particularly
Articles 546, 547 and 549 of the Civil Code of the Philippines, do not definitely settle the
question of whether a possessor in bad faith has the right to remove useful improvements. To
bolster its claim MWSS further cites the decisions in the cases of Mindanao Academy, Inc.
vs. Yap (13 SCRA 190) and Carbonell vs. Court of Appeals (69 SCRA 99).
The CITY in its brief questions the raising of the issue of the removal of useful improvements
for the first time in this Court, inasmuch as it was not raised in the trial court, much less
assigned as an error before the then Court of Appeals. The CITY further argues that
petitioner, as a possessor in bad faith, has absolutely no right to the useful improvements; that
the rulings in the cases cited by petitioner are not applicable to the case at bar; that even
assuming that petitioner has the right to remove the useful improvements, such improvements
were not actually identified, and hence a rehearing would be required which is improper at
this stage of the proceedings; and finally, that such improvements, even if they could be
identified, could not be separated without causing substantial injury or damage to the
Dagupan Waterworks System.
The procedural objection of the CITY is technically correct. NAWASA should have alleged
its additional counterclaim in the alternative-for the reimbursement of the expenses it had
incurred for necessary and useful improvements or for the removal of all the useful
improvements it had introduced.
Petitioner, however, argues that although such issue of removal was never pleaded as a
counterclaim nevertheless it was joined with the implied consent of the CITY, because the
latter never filed a counter-manifestation or objection to petitioner's manifestation wherein it
stated that the improvements were separable from the system, and quotes the first part of Sec.
5 of Rule 10 of the Rules of Court to support its contention. Said provision reads as follows:
SEC. 5. Amendment to conform to or authorize presentation of evidence.-When issues not
raised by the pleadings are tried by express or implied consent of the parties, they shall be
treated in all respects, as if they had been raised in the pleadings. Such amendment of the
pleadings as may be necessary to cause them to conform to the evidence and to raise these
issues may be made upon motion of any party at any time, even after judgment; but failure so
to amend does not affect the result of the trial of these issues. ...
This argument is untenable because the above-quoted provision is premised on the fact that
evidence had been introduced on an issue not raised by the pleadings without any objection
thereto being raised by the adverse party. In the case at bar, no evidence whatsoever had been
introduced by petitioner on the issue of removability of the improvements and the case was
decided on a stipulation of facts. Consequently, the pleadings could not be deemed amended
to conform to the evidence.
However, We shall overlook this procedural defect and rule on the main issue raised in this
appeal, to wit: Does a possessor in bad faith have the right to remove useful improvements?
The answer is clearly in the negative. Recognized authorities on the subject are agreed on this
point. *
Article 449 of the Civil Code of the Philippines provides that "he who builds, plants or sows
in bad faith on the land of another, loses what is built, planted or sown without right to
indemnity." As a builder in bad faith, NAWASA lost whatever useful improvements it had
made without right to indemnity (Santos vs. Mojica, Jan. 31, 1969, 26 SCRA 703).
Moreover, under Article 546 of said code, only a possessor in good faith shall be refunded for
useful expenses with the right of retention until reimbursed; and under Article 547 thereof,
only a possessor in good faith may remove useful improvements if this can be done without
damage to the principal thing and if the person who recovers the possession does not exercise
the option of reimbursing the useful expenses. The right given a possessor in bad faith is to
remove improvements applies only to improvements for pure luxury or mere pleasure,
provided the thing suffers no injury thereby and the lawful possessor does not prefer to retain
them by paying the value they have at the time he enters into possession (Article 549, Id.).
The decision in the case of Mindanao Academy, Inc. vs. Yap (13 SCRA 190) cited by
petitioner does not support its stand. On the contrary, this Court ruled in said case that "if the
defendant constructed a new building, as he alleges, he cannot recover its value because the
construction was done after the filing of the action for annulment, thus rendering him a
builder in bad faith who is denied by law any right of reimbursement." What this Court
allowed appellant Yap to remove were the equipment, books, furniture and fixtures brought
in by him, because they were outside of the scope of the judgment and may be retained by
him.
Neither may the decision in the case of Carbonell vs. Court of Appeals (69 SCRA 99), also
cited by petitioner, be invoked to modify the clear provisions of the Civil Code of the
Philippines that a possessor in bad faith is not entitled to reimbursement of useful expenses or
to removal of useful improvements.
In said case, both the trial court and the Court of Appeals found that respondents Infantes
were possessors in good faith. On appeal, the First Division of this Court reversed the
decision of the Court of Appeals and declared petitioner Carbonell to have the superior right
to the land in question. On the question of whether or not respondents Infantes were
possessors in good faith four Members ruled that they were not, but as a matter of equity
allowed them to remove the useful improvements they had introduced on the land. Justice
Teehankee (now Chief Justice) concurred on the same premise as the dissenting opinion of
Justice Munoz Palma that both the conflicting buyers of the real property in question, namely
petitioner Carbonell as the first buyer and respondents Infantes as the second buyer, may be
deemed purchasers in good faith at the respective dates of their purchase. Justice Munoz
Palma dissented on the ground that since both purchasers were undoubtedly in good faith,
respondents Infantes' prior registration of the sale in good faith entitled them to the ownership
of the land. Inasmuch as only four Members concurred in ruling that respondents Infantes
were possessors in bad faith and two Members ruled that they were possessors in good faith
said decision does not establish a precedent. Moreover, the equitable consideration present in
said case are not present in the case at bar.
WHEREFORE, the decision of the appellate court is affirmed with costs against petitioner.
SO ORDERED.
[ GR No. L-18452, May 31, 1965 ]
AUGUSTO COSIO v. CHERIE PALILEO

REGALA, J.:
This is an action to recover the possession of a house. It was filed following our decision
in Palileo vs. Cosio, 97 Phil., 919; 51 Off. Gaz., 6181, in which We ruled that the house in
question had not been sold but had merely been given as security for a debt the pacto de retro
sale between the parties being in reality a loan with an equitable mortgage. In a sense,
therefore, this case is a sequel to Palileo vs. Cosio. The parties are here this time to litigate on
the issue of possession and its effects.
The house in this case, a two-story building, was formerly owned
by Felicisima Vda. de Barza. It is located at 25 (formerly 6) Antipolo Street, Pasay City, on a
lot belonging to the Hospicio de San Juan de Dios. On October 4, 1950, this house and the
leasehold right to the lot were bought by respondent Cherie Palileo who paid part of the
purchase price and mortgaged the house to secure the payment of the balance.
It appears that respondent Palileo defaulted in her obligation, because of which the mortgage
was foreclosed and the house was advertised for sale. Fortunately for her, however,
respondent Palileo was able to raise money on December 18, 1951 before the house could be
sold at public auction. On this date, respondent Palileo received from petitioner
Beatriz Cosio de Rama the sum of P12,000 in consideration of which she signed a document
entitled "Conditional Sale of Residential Building," purporting to convey to
petitioner Cosio de Rama the, house in question. Under this document, the right to repurchase
the house within one year was reserved to respondent Palileo the same day, the parties
entered into an agreement by respondent Palileo remained in possession of the house as
tenant, paying petitioner Cosio de Rama a monthly rental of P250.
Petitioner Cosio de Rama subsequently insured the house against fire with the Associated
Insurance & Surety Co., Inc. On October 25, 1952, fire broke out in the house and partly
destroyed the same. For the loss, petitioner Cosio de Rama was paid P13,107 by the
insurance company.
At the instance of his sister, petitioner Cosio de Rama, the other
petitioner Augusto Cosio entered the premises and began the repair of the house. Soon after
an action was filed by respondent Palileo against Cosio de Rama for the reformation of the
deed of pacto de retro sale into a loan with an equitable mortgage. This case was filed in. the
Court of First Instance of Rizal on December 4, 1952. One week after (December 11),
respondent Palileo filed another action in the Municipal Court of Pasay City, this time
seeking the ejectment of petitioner Cosio who, it was alleged, had entered and occupied the
house without the knowledge and consent of respondent Palileo. Just the same, however,
repair work went on and although at times interrupted it was finally completed in 1953 at a
cost of P12,000.
Meanwhile the ejectment suit was dismissed by the Municipal Court.
Respondent Palileo appealed to the Court of First Instance of Pasig, but the case was again
dismissed, this time for failure of respondent Palileo to prosecute. The dismissal of the case
was subsequently made "without Prejudice."
In the other case, respondent Palileo was successful. Both the lower court and this Court
declared the transaction of the parties to be a loan with an equitable mortgage and not a
conditional sale. It was found that the amount of P12,000, which purported to be the price,
was in fact a loan; that the amount of P250 paid every month as rent w in reality interest; and
that the house allegedly sold was intended to be a security for the loan. Accordingly, this
Court directed petitioner Cosio de Rama to return to respondent Palileo the sum of P810
which she had collected as interest in excess of that allowed by law. This Court likewise
ruled that petitioner Cosio de Rama could keep the proceeds of the fire insurance but that her
claim against respondent Palileo under the loan was to be deemed assigned to the insurance
company.
As earlier stated, this suit was instituted to recover the possession of the house as a
consequence of our decision that it had not really been sold but had merely been given as
security for a loan. It was originally brought against petitioner Cosio who asked that the
action be dismissed on the ground that it was barred by the judgment of the Municipal Court
which dismissed the ejectment case against him. The court denied the motion to dismiss. And
so petitioner Cosio filed his answer. He was later joined by petitioner Cosio de Rama who
was allowed to intervene in the action.
Thereafter the lower court rendered judgment finding petitioner Cosio de Rama to be a
possessor in good faith with a right to retain possession until reimbursed for her expenses in
repairing the house. The dispositive portion of its decision reads:
"In view of the foregoing, the Court hereby renders judgment declaring plaintiff Palileo as the
lawful owner of the house No. 25 Antipolo Street, Pasay City and entitled to the possession
thereof" upon her paying to intervenor defendant Beatriz Cosio de Rama the sum of
TWELVE THOUSAND (P12.000.00) PESOS with interest at the legal rate from December
22, 1946 which is the date of the filing of intervenor-defendant's counterclaim until paid.
There's no judgment for costs."
Not satisfied, respondent Palileo appealed to the Com of Appeals and succeeded in having
the lower court's decision modified. The appellate court ruled that
"by virtue of the pacto de retro sale intervenor-appellee (Beatriz , Cosio de Rama) became the
temporary owner of the house as such she was entitled to the possession thereof from the date
of such conditional sale although appellant (Cherie Palileo) was its actual occupant
as intervenor-appellee's tenant. * * * However, when appellant instituted the ejectment ease
against appellee (Augusto Cosio) and intervenor-appellee (Cosio do Rama) as early as
December 1952, when the latter had just started to reconstruct the house, and she likewise
commenced the action against intervenor-appellee in the same month of December, 1952, to
have the deed of pacto de retro sale declared as one of loan with equitable mortgage,
said appellee and intervenor-apnellee's title to the house suffered from a flaw. From that time
both appellee and intervenor-appellee ceased to be considered possessors in good faith. (Art.
528, new Civil Code; Tacas vs. Tobon, 53 Phil. 356; Lopez. Inc. vs. Phil. Eastern Trading
Co., Inc., 52 Off. Gaz. 1452). And if they chose to continue reconstructing the house even
after they were apprised of a flaw on their title they did so as builders in bad faith."
Accordingly, it rendered judgment as follows:
"Wherefore, with the modification that appellant (Cherie Palileo is hereby declared the lawful
owner of the house known as No. 25 Antipolo Street, Pasay City, and entitled to the
possession thereof, without reimbursing intervenor-appellee (Beatriz Cosio de Rama) the sum
of P12,000 allegedly spent for the reconstruction of the same, and appellee (Augusto Cosio)
and intervenor-appellee (Cosio de llama are hereby ordered to pay appellant a monthly rental
of P300 during the time they actually occupied the house just mentioned as possessors in bad
faith, the decision appealed from is hereby affirmed in all other respects. Without any
pronouncement as to costs."
Petitioners Cosio and Cosio de Rama have appealed to Court by certiorari, citing Article 526
of the Civil Code which states as follows:
"He is deemed a possessor in good faith who is not aware that there exists in his title or mode
of acquisition any flaw which invalidates it,
"He is deemed a possessor in bad faith who possesses in any case contrary to the foregoing.
Mistake upon a doubtful or difficult question of law may be the basis of good faith."
They contend that they were not only possessors in good faith from the beginning but that
they continue to be such even after this Court's declaration that their transaction was a loan
with a mortgage and not a sale with a right of repurchase, because, as a matter of fact, this
Court did not invalidate, but merely reformed, the supposed deed of sale. Petitioners likewise
aver that neither can the ejectment suit be considered to be notice of any defect or flaw in
their mode of acquisition because that case was after all dismissed.
We believe that both the petitioners and the Court of Appeals are in error in saying that the
former had a right to the possession of the house under the deed of pacto de retro sale.
Petitioners did not have such a right at any time and they knew this.
In reforming instruments, courts do not make another contract for the parties (See Civil Code
arts. 1359-1369 and the Report of the Code Commission 56). They merely inquire into the
intention of the parties and, having found it, reform the written instrument (not the contract)
in order that it may express the real intention of the parties (See Id., arts. 1365 and 1602).
This is what was done in the earlier case between the parties. In holding that the document
entitled "Conditional Sale of Residential Building" was in fact a mortgage, this Court said:
"This document did not express the true intention of the parties which was merely to place
said property (the house) as security for the payment of the loan." (Palileo vs. Cosio 97 Phil.,
919; 51 Off. Gaz. 6181 at 6184).
If that was the intention of the parties (to conform to which their written instrument was
reformed) then petitioner Cosio de Rama knew from the beginning that was a mere
mortgagee. For the same reason, she could not have been mistaken as to the true nature of
their agreement. Hence, in bidding her brother, petitioner Cosio enter the premises and make
repairs and in later occupying the house herself, petitioner Cosio de Rama with this
knowledge.
As possessors in bad faith, petitioners are jointly liable for the payment of rental, the
reasonable value of was found by the appellate court is P300 a month. (Art. 549.
See Lerma vs. de la Cruz, 7 Phil. 581). This finding is supported by the evidence and we find
no reason to disturb it.
But even as we hold petitioner Cosio de Rama to be a possessor in bad faith we nevertheless
believe that she is entitled to be reimbursed for her expenses in restoring the house to its
original condition after it had been partly damaged by fire, because such expenses are
necessary (Angeles vs. Lozada, 54 Phil. 184) and, under Article 546, are to be refunded even
to possessors in bad faith. As already stated, petitioner Cosio de Rama spent P12,000 for the
repair work.
The error of the appellate court lies in its failure to appreciate the distinction that while
petitioner Cosio de Rama is a possessor in bad faith, she is not a builder |n bad faith. Thus in
describing petitioners as "builders in bad faith" and, consequently, in holding that they have
no right to be reimbursed, the court obviously applied Article 449 which states that "he who
builds, plants or sows in bad faith on the land of another loses what is built, planted or
sown without right to indemnity." But article 449 is a rule of accession and we are not here
concerned with accession. There is here no reason for the application of the
principle accesio cedit principali, such as is contemplated in cases of accession continua of
which article 449 is a rule. For what petitioners did in this case was not to build a new house
on the land of another. Rather, what they did was merely to make repairs on a house that had
been partly destroyed by fire and we are asked whether they have a right to be refunded for
what they spent in repairs. The land on which the house is built is not even owned by
respondent Palileo, that land being the property of the Hospicio de San Juan de Dios. This
case comes under article 546 which, as we have already indicated, provides for the refund of
necessary expenses "to every possessor."
And now we come to the last point in petitioners' assignment of errors. It is contended that
the present action is barred by the judgment of the Municipal Court which dismissed
the ejectment case filed by respondent Palileo against petitioner Cosio. It is said that although
that judgment was vacated when it was appealed to the Court of First Instance, the
subsequent dismissal of the case was equivalent to the withdrawal of the appeal and therefore
to a revival of the judgment of the Municipal Court. That judgment, to repeat, dismissed
the ejectment case against petitioner Cosio.
We note that this point, though raised in the Court of First Instance, was not properly
assigned as error in the Court of Appeals. It was there taken up only in the "preliminary
remarks" in the brief. Although petitioners were appellees in the Court of Appeals, they
should have assigned this alleged error if only to maintain the decision of the lower court.
Apart from this consideration, we believe that this action is not barred by the prior judgment
in the ejectment case. The pertinent provisions of the Rules of Court state:
"Effect of appeals. A perfected appeal shall operate to vacate the judgment of the justice of
the peace or the municipal court and the action when duly docketed in the Court of First
Instance, shall stand for trial de novo upon its merits in accordance with the regular procedure
in that court, as though the same had never been tried before and had been originally there
commenced. the appeal is withdrawn, or dismissed for failure to prosecute, the judgment
shall be deemed revived and shall forthwith remanded to the justice of the peace or municipal
court for executive." (Rule 40, sec. 9, Rules of Court.)
The following comment answers squarely petitioners' arguments:
"The case shall stand in the Court of First Instance as though the same 'had been originally
there commenced.' Thus, if action is filed in an inferior court, and the plaintiff fails to appear
and the case is dismissed, may the plaintiff file another complaint for the same cause? The
Supreme Court hold that, since the appeal had the effect of vacating the judgment of the
inferior court and, therefore, the case, when dismissed, wan in the Court of First Instance as if
the same 'had been originally there commenced' and since dismissals on the ground
aforementioned, of cases coming within the original jurisdiction of the Court of First
Instance, are without prejudice, the conclusion is that the plaintiff may file a new complaint
for the same cause. (Marco vs. Hashim, 40 Phil. 592) This ruling however, is affected to a
certain extent by Rule 17, section 3, which provides that the dismissal of a case on the ground
of plaintiff's failure to appear at the trial, is a final adjudication upon the merits, unless the
court otherwise provides." (2 Moran, Comments' on the Rules of Court, 344-345 1963).
Here the dismissal of the ejectment case for failure of respondent Palileo to prosecute was
expressly made to be without prejudice. That judgment, therefore, cannot be a bar to the
filing of another action like the present.
Wherefore, with the modification that petitioner Cosio de Rama should be reimbursed her
necessary expenses »ft the amount of P12,000 by respondent Palileo, the judgment of the
Court of Appeals is affirmed in all other respects, without any pronouncement as to costs.