LA EXISTENCIA DE FACTORES QUE INDUCEN AL INCUMPLIMIEN 'ID

First Division, Davide Jr (J): 3 concur, 1 on leave

Facts: Pedro P. Pecson was the owner of a commercial lot located in Kamias Street, Quezon City, on which

he built a 4-door 2-storey apartment building. For his failure to pay realty taxes amounting to P12,000.00, the lot was sold at public auction by the City Treasurer of Quezon City to Mamerto Nepomuceno who in turn sold it on 12 October 1983 to the spouses Juan Nuguid and Erlinda Tan-Nuguid, for P103,000.00. Pecson challenged the validity of the auction sale in Civil Case Q-41470 before the RTC Quezon City. In its decision of 8 February 1989, the RTC dismissed the complaint, but as to the Nuguid’s claim that the sale included the apartment building, it held that the issue concerning it was “not a subject of the litigation.” In resolving Nuguid’s motion to reconsider this issue, the trial court held that there was no legal basis for the contention that the apartment building was included in the sale.Both parties then appealed the decision to the Court of Appeals (CA-GR CV 293)1. In its decision of 30 April 1992, the Court of Appeals affirmed in toto the assailed decision. It also agreed with the trial court that the apartment building was not included in the auction sale of the commercial lot. The petition to review the said decision was subsequently denied by the Supreme Court. Entry of judgment was made on 23 June 1993.

On November 1993, Nuguid filed with the trial court a motion for delivery of possession of the lot and the apartment building, citing Article 546 of the Civil Code. Acting thereon, the trial court issued on 15 November 1993 the challenged order, ordering Nuguid to reimburse Pecson the construction cost of P53,000 and upon such payment, Nuguid is entitled to immediate issuance of a writ of possession over the lot and improvements thereon. The Court also held that as Nuguid has been declared the uncontested owner of the lot in question as per Entry of Judgment of the Supreme Court dated 23 June 1993, Pecson should pay to Nuguid rent of no less than P21,000.00 per month from said date (as this is the very same amount paid monthly by the tenants occupying the lot), such rent being offset against the amount pertaining to the construction cost. Pecson moved for the reconsideration of the order but it was not acted upon by the trial court. Instead, on 18 November 1993, the trial court issued a writ of possession directing the deputy sheriff “to place Juan Nuguid in possession of subject property located at 79 Kamias Road, Quezon City, with all the improvements thereon and to eject therefrom all occupants therein, their agents, assignees, heirs and representatives.”

Pecson then filed with the Court of Appeals a special civil action for certiorari and prohibition assailing the order of 15 November 1993 (CA-GR SP 32679). In its decision of 7 June 1994, the Court of Appeals affirmed in part the order of the trial court citing Articles 448 of the Civil Code. The Court of Appeals ruled that Pecson’s quest to be restored in possession of the premises is rendered moot and academic as the deputy sheriff has enforced the writ of possession and the premises had been turned over to Nuguid’s possession; and ordered Pecson to account for any and all fruits of the improvements received by him starting 23 June 1993 with the amount of P53,000 to be offset therefrom. Aggrieved by the Court of Appeals’ decision, Pecson filed the petition for review on certiorari.

The Supreme Court set aside the decision of the Court of Appeals in CA-GR SP 32679 and the Order of 15 November 1993 of the RTC, Branch 101, Quezon City in Civil Case Q-41470. The Court remanded the case to the trial court for it to determine the current market value of the apartment building on the lot. For this purpose, the parties shall be allowed to adduce evidence on the current market value of the apartment building. The value so determined shall be forthwith paid by Nuguid to Pecson, otherwise Pecson shall be

restored to the possession of the apartment building until payment of the required indemnity.

1. Pertinent provisions: Article 448 and Article 546 of the Civil Code

Article 448 provides that “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. (361a)” while Article 546 provides that “Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor. Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof. (453a)”

2. Applicability of Articles 448 and 526

Article 448 refers to a land whose ownership is claimed by two or more parties, one of whom has built some works, or sown or planted something. The building, sowing or planting may have been made in good faith or in bad faith. The rule on good faith laid down in Article 526 of the Civil Code shall be applied in determining whether a builder, sower or planter had acted in good faith.

3. Strict application of Article 448: does not apply to owner who subsequently loses ownership of land by sale or donation; Coleongco v. Regalado

Article 448 does not apply 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 donation. As held in Coleongco vs. Regalado, Article 361 of the old Civil Code is not applicable in the case, for Regalado constructed the house on his own land before he sold said land to Coleongco. Article 361 applies only in cases where a person constructs a building on the land of another in good or in bad faith, as the case may be. It does not apply to a case where a person constructs a building on his own land, for then there can be no questions as to good or bad faith on the part of the builder. 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.

4. Application of Article 448 by analogy in preventing a state of forced co-ownership

The provision on indemnity in Article 448 may be applied by analogy considering that the primary intent of Article 448 is to avoid a state of forced co-ownership and that the parties, including the two courts below, agree that Articles 448 and 546 of the Civil Code are applicable and indemnity for the improvements may be paid although they differ as to the basis of the indemnity.

5. Article 546 does not state the manner to determine value of useful improvements; Value to be based on market or present value, not the cost during time of construction

Article 546 does not specifically state how the value of the useful improvements should be determined. In

Javier vs. Concepcion, Jr., the Court pegged the value of the useful improvements consisting of various

fruits, bamboos, a house and camarin made of strong material based on the market value of the said improvements. In Sarmiento vs. Agana, despite the finding that the useful improvement, a residential house, was built in 1967 at a cost of between P8,000.00 to P10,000.00, the landowner was ordered to reimburse the builder in the amount of P40,000.00, the value of the house at the time of the trial. In De Guzman vs. De la

Fuente, the landowner was required to pay the “present value” of the house, a useful improvement. In the

present case, the lower court erred in holding the cost of construction of the apartment building in 1965, and not its current market value, is sufficient reimbursement for necessary and useful improvements made by Pecson.

6. Objective of Article 546 is to administer justice between parties involved; Current value of the property, to prevent unjust enrichment to one of the parties; Parties’ right to adduce evidence on present market value of improvement

The objective of Article 546 of the Civil Code is to administer justice between the parties involved. In this regard, as stated in Rivera vs. Roman Catholic Archbishop of Manila, the said provision was formulated in trying to adjust the rights of the owner and possessor in good faith of a piece of land, to administer complete justice to both of them is such a way as neither one nor the other may enrich himself of that which does not belong to him. Guided by this precept, it is therefore the current market value of the improvements which should be made the basis of reimbursement. A contrary ruling would unjustly enrich the private respondents who would otherwise be allowed to acquire a highly valued income-yielding 4-unit apartment building for a measly amount. Consequently, the parties should therefore be allowed to adduce evidence on the present market value of the apartment building upon which the trial court should base its finding as to the amount of reimbursement to be paid by the landowner.

7. Builder in good faith’s right of retention until indemnification for improvements; no rents due

The trial court erred in ordering Pecson to pay monthly rentals equal to the aggregate rentals paid by the lessees of the apartment building. Since Nuguid has opted to appropriate the apartment building, Pecson is thus entitled to the possession and enjoyment of the apartment building, until he is paid the proper indemnity, as well as of the portion of the lot where the building has been constructed. This is so because the right to retain the improvements while the corresponding indemnity is not paid implies the tenancy or possession in fact of the land in which it is built, planted or sown. As Pescon has not been paid, he was entitled to retain ownership of the building and, necessarily, the income therefrom.

[77]

People’s Bank v. Dahican Lumber [G.R. No. L-17500. May 16, 1967.]

En Banc, Dizon (J): 8 concur.

Facts: On 8 September 1948, Atlantic Gulf & Pacific Company of Manila (ATLANTIC) sold and assigned all

its right in the Dahican lumber concession to Dahican Lumber Company (DALCO) for P500,000.00 of which only the amount of $50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained various loans from the People’s Bank (P200,000.00, as of 13 July 1950). DALCO also obtained, through the Bank, a loan of $250,000.00 from the Export-Import Bank of Washington D.C. (through 5 promissory notes of $50,000.00 each, maturing on different dates), executed by both DALCO and the Dahican American Lumber Corporation (DAMCO), a foreign corporation and a stockholder of DALCO, all payable to the BANK. As security, DALCO executed on 13 July 1950 a deed of mortgage covering live parcels of land situated in the province of Camarines Norte, together with all the buildings and other improvements existing thereon and all the personal properties of the mortgagor located in its place of business in the municipalities of Mambulao and Capalonga, Camarines Norte in favor of the BANK. On the same date, DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00. Both deeds contained a provision extending the mortgage lien to properties to be subsequently acquired by the mortgagor. Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and 9,286 shares of DAMCO to secure the same obligations. Upon DALCO’s and DAMCO’s failure to pay the fifth promissory note upon its maturity, the BANK paid the same to the Export-Import Bank of Washington D.C. and the latter assigned to the former its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to 1 April 1953 to pay the overdue promissory note.

to, or in replacement of some of those already owned and used by it. Pursuant to the provision of the mortgage deeds quoted heretofore regarding “after acquired properties”, the BANK requested DALCO to submit complete lists of said properties but the latter failed to do so. In connection with these purchases, there appeared in the books of DALCO the sum of P452,860.55 as due to Connell Bros. Company (CONNEL) and the sum of P2,151,678.34 to DAMCO. On 16 December 1952, the Board of Directors of DALCO passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of sale were executed.

On 23 January 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that the agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on 12 February 1953, ATLANTIC and the BANK, commenced foreclosure proceedings in the CFI Camarines Norte against DALCO and DAMCO. Upon motion of the parties, the Court, on 30 September 1953, issued an order transferring the venue of the action to the CFI Manila (Civil Case 20987). On 30 August 1958, upon motion of all the parties, the Court ordered the sale of all the machineries, equipment and supplies of DALCO, and the same were subsequently sold for a total consideration of P175,000.00 which was deposited in court pending final determination of the action. By a similar agreement one half (P87,500.00) of this amount was considered as representing the proceeds obtained from the sale of the “undebated properties” (those not claimed by DAMCO and CONNELL), and the other half as representing those obtained from the sale of the “after acquired properties”. After due trial, the Court, on 15 July 1960, rendered Judgment against Dahican Lumber Co, ordering it to pay the bank, ATLANTIC, CONNEL and DAMCO; and adjudicating the half of the sum realized from sale of the properties unto the plaintiffs; and the other half to both the plaintiffs and defendant DAMCO and CONNELL. The Court further ordered that the cost of the receivership shall be borne by the Bank, Atlantic, Connell and DAMCO. On the following day, the Court issued a supplementary decision ordering the sale at public auction of lands object to the mortgages if DALCO fails to pay the bank and Atlantic. Therafter, all the parties appealed.

The Supreme Court modified the appealed judgment and affirmed in all other respects. With costs.

1. On “after acquired properties,” stipulation is clear and valid

The stipulation in the Deed of Mortgage states that all property of every nature, buildings, machinery, etc. taken in exchange or replacement by the mortgagor “shall immediately be and become subject to the lien of this mortgage in the same manner and to the same extent as if now included therein”. No clearer language could have been chosen. Further, such stipulation is common is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the properties given as security. It is only logical in all cases where the properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used (thus subject to wear and tear); they shall be replaced with others to be thereafter acquired by the mortgagor, such understanding either express or implied. If such properties were of the nature already referred to, it would be poor judgment on the part of the creditor who does not see to it that a similar provision is included in the contract.

2. Registry of chattel mortgage as to affect third party does not apply to the case

Though it is the law in this jurisdiction that, to affect third persons, a chattel mortgage must be registered and must describe the mortgaged chattels or personal properties sufficiently to enable the parties and any other person to identify them, such law does not apply to the present case (?reason).

3. Whether old or new civil code to be used as guide irrelevant in this case

The mortgages in question were executed on 13 July 1950 with the old Civil Code still in force. There can be no doubt that the provisions of said code must govern their interpretation and the question of their validity. It happens, however, that Articles 334 and 1877 of the old Civil Code are substantially reproduced in Article 415 and 2127, respectively, of the new Civil Code. It is, therefore, immaterial in this case whether we take the

former or the latter as guide in deciding the point under consideration.

4. Civil code does not define real property but enumerates them

Article 415 does not define real property but enumerates what are considered as such, among them being machinery, receptacles, instruments or replacements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said industry or works.

5. Chattels place in real properties mortgaged within the operation of Art 415 (5), and 2127 of the New Civil Code; Illustrative cases: Berkenkotter v. Cu Unjieng and Cu Unjieng Hijos v. Mabalacat Sugar

The chattels, placed in the real properties mortgaged to plaintiffs, came within the operation of Art. 415, paragraph 5 and Art. 2127 of the new Civil Code. This is consistent with previous rulings of the court. (1) In Berkenkotter vs. Cu Unjieng (61 Phil. 663), Article 334 [5] of the old Civil Code gives the character of real property to machinery, liquid containers, instruments or replacements intended by the owner of any building or land for use in connection with any industry or trade being carried on therein and which are expressly adapted to meet the requirements of such trade or industry; and (2) In Cu Unjieng Hijos vs. Mabalacat Sugar Co. (58 Phil. 439), a mortgage constituted on a sugar central includes not only the land on which it is built but also the buildings, machinery and accessories installed at the time the mortgage was constituted as well as the