When a motion to dismiss (or an affirmative defense treated as such) is based on the ground that the complaint states no cause of action, the court must determine the sufficiency of the cause of action based solely on the allegations in the complaint, hypothetically admitting their truth, and cannot consider external facts or evidence presented during a preliminary hearing, except in very limited circumstances not present in this case.

The dispute arose from conflicting claims of ownership over a 557-square meter parcel of land in Magalang, Pampanga. Petitioners, heirs of Epifanio Makam and Severina Bautista, claimed acquisition through a Deed of Sale dated April 20, 1894, and continuous possession. Respondents, heirs of Fausta Baluyut, claimed ownership based on Transfer Certificate of Title (TCT) No. 213777-R, derived from an Original Certificate of Title (OCT) issued pursuant to a Land Registration Decree in 1919. The conflict escalated when respondents sent demand letters to petitioners to vacate the property in June 2005, leading petitioners to file a complaint for Annulment and Quieting of Title.

• Petitioners alleged they are heirs of Epifanio Makam and Severina Bautista, who acquired a 557-sqm property in Magalang, Pampanga, via a Deed of Sale dated April 20, 1894.
• Petitioners claimed continuous, open, adverse, and notorious possession for over a hundred years, including constructing houses and paying real estate taxes.
• In June 2005, petitioners received demand letters from respondents (heirs of Fausta Baluyut) claiming ownership and demanding they vacate the property.
• Upon inquiry, petitioners found the property was titled in respondents' names under TCT No. 213777-R.
• Petitioners filed a complaint for Annulment and Quieting of Title, asserting their 1894 deed and possession, and alleging respondents' TCT was invalid and a cloud on their title.
• Respondents, in their Answer, claimed absolute ownership under TCT No. 213777-R, inherited from Fausta Baluyut, whose title originated from OCT No. RO-1138 (11376) issued pursuant to Land Registration Decree No. 122511 on June 28, 1919.
• Respondents raised affirmative defenses: petitioners had no cause of action (deed was spurious), prescription and laches (over 80 years since decree), and res judicata (prior dismissed case, Civil Case No. 5487).
• The RTC conducted a preliminary hearing on the affirmative defenses, where respondents presented documentary evidence including the 1919 Land Registration Case decision, OCT, and TCT. Petitioners opted not to present evidence, arguing only the complaint's allegations should be considered.
• The RTC dismissed the complaint, finding petitioners' 1894 deed invalid against the 1919 decision and subsequent Torrens title, and that petitioners lacked legal or equitable title. The CA affirmed this decision.

• The trial court and CA erred in considering external factors and evidence beyond the allegations in the complaint to determine the sufficiency of the cause of action.
• The determination of whether a complaint states a cause of action must be based solely on the facts alleged in the complaint, hypothetically admitting them as true.
• Their complaint sufficiently stated a cause of action for quieting of title, alleging their interest in the property and the invalidity of respondents' title.
• An action to quiet title filed by a plaintiff in possession of the property is imprescriptible.
• Respondents are guilty of laches for attempting to enforce their supposed rights only after more than 80 years.
• The 1894 deed of sale should be considered hypothetically admitted for purposes of determining if the complaint sufficiently states a cause of action.

• Petitioners have no valid, legal, and sufficient cause of action because their alleged 1894 deed of sale is spurious and cannot prevail over the Land Registration Decree No. 122511 issued in 1919 in favor of their predecessor-in-interest.
• The action is barred by prescription and laches, as petitioners asserted their interest over 80 years after the issuance of the land registration decree and OCT.
• A title registered under the Torrens system cannot be defeated by adverse, open, and notorious possession, or by prescription.
• The action is barred by res judicata and violates the prohibition against forum shopping due to a previously dismissed similar case (Civil Case No. 5487).
• The trial court has discretion under Section 6, Rule 16 of the Rules of Court to conduct a preliminary hearing on affirmative defenses and consider evidence presented therein.
• Petitioners are estopped from arguing that only allegations in the complaint should be considered, as they were given the opportunity to present evidence during the preliminary hearing.

• Whether the Court of Appeals erred in affirming the dismissal of petitioners' complaint on the ground of lack of cause of action or failure to state a cause of action by considering evidence presented during a preliminary hearing on affirmative defenses.

• Yes, the Court of Appeals erred. The petition was GRANTED, and the case was REMANDED to the RTC for trial on the merits.
• The Court clarified the distinction between "failure to state a cause of action" (insufficiency of allegations in the pleading) and "lack of cause of action" (insufficiency of factual basis for the action). "Failure to state a cause of action" is a ground for a motion to dismiss under Rule 16, while "lack of cause of action" is resolved after trial.
• The RTC and CA incorrectly treated respondents' affirmative defense of "lack of cause of action" as "failure to state a cause of action" and erroneously applied Section 6, Rule 16 to hold a preliminary hearing and receive evidence for it.
• For "failure to state a cause of action," the test is whether, hypothetically admitting the truth of the allegations in the complaint, a judge may validly grant the relief demanded. Inquiry is confined to the complaint, and external facts are generally not considered.
• Petitioners' complaint sufficiently alleged a cause of action for quieting of title: (1) their interest in the property via a 1894 Deed of Sale and long possession, and (2) respondents' TCT being invalid and a cloud on their title.
• Section 6, Rule 16, allowing a preliminary hearing on affirmative defenses, does not apply when the ground is "failure to state a cause of action" because this ground must be determined solely from the complaint's allegations.
• The exceptions to the rule of confining inquiry to the complaint (e.g., judicial notice, legally impossible allegations, facts unfounded by record in pleadings, evidence from annexes or stipulations, or evidence from other hearings) were not applicable here. The case of Tan v. Director of Forestry was distinguished and found not controlling.
• Petitioners consistently argued that only the complaint's allegations should be considered and were not estopped.
• The trial court erred in receiving evidence during the preliminary hearing to determine if the complaint failed to state a cause of action. Such evidence should be presented during a trial on the merits.

• Failure to State a Cause of Action — Refers to the insufficiency of allegations in the pleading to establish a right to relief. It is determined by examining only the allegations in the complaint, hypothetically admitting them as true. The Court ruled that the RTC and CA erred in going beyond the complaint's allegations to dismiss the case on this ground (though often mislabeled as "lack of cause of action" by the lower courts).
• Lack of Cause of Action — Refers to the insufficiency of factual basis for the action, which is determined after the parties have presented their evidence during trial. The Court clarified that this was the actual nature of the respondents' defense, which should not have been resolved in a preliminary hearing as if it were a "failure to state a cause of action."
• Hypothetical Admission Rule — In determining whether a complaint states a cause of action, the facts alleged in the complaint are hypothetically admitted as true. The Court emphasized that the lower courts violated this rule by inquiring into the truth of petitioners' allegations and the authenticity of their documents during the preliminary hearing.
• Action to Quiet Title (Article 476, Civil Code) — An action brought to remove or prevent a cloud on title to real property or any interest therein, by reason of any instrument, record, claim, encumbrance, or proceeding which is apparently valid or effective but is in truth and in fact invalid, ineffective, voidable, or unenforceable. The Court found that petitioners' complaint sufficiently alleged the elements for this action.
• Requisites for Quieting of Title — (1) The plaintiff or complainant has a legal or equitable title to or interest in the real property subject of the action; and (2) the deed, claim, encumbrance, or proceeding claimed to be casting cloud on his title must be shown to be in fact invalid or inoperative despite its prima facie appearance of validity or legal efficacy. The Court noted petitioners alleged these requisites.
• Imprescriptibility of Action to Quiet Title by Plaintiff in Possession — An action to quiet title is imprescriptible if the plaintiff is in possession of the property. The Court mentioned this in passing, suggesting that if petitioners were indeed in possession as alleged, their action might not be barred by prescription.
• Section 6, Rule 16 of the Rules of Court (Pleading grounds as affirmative defenses) — Allows a court, in its discretion, to conduct a preliminary hearing on affirmative defenses that are grounds for a motion to dismiss. The Court ruled that this section is not applicable when the affirmative defense raised is "failure to state a cause of action" because this must be determined solely from the complaint's allegations.

• "As a preliminary matter, we wish to stress the distinction between the two grounds for dismissal of an action: failure to state a cause of action, on the one hand, and lack of cause of action, on the other hand. The former refers to the insufficiency of allegation in the pleading, the latter to the insufficiency of factual basis for the action."
• "The familiar test for determining whether a complaint did or did not state a cause of action against the defendants is whether or not, admitting hypothetically the truth of the allegations of fact made in the complaint, a judge may validly grant the relief demanded in the complaint."
• "In determining the existence of a cause of action, only the statements in the complaint may properly be considered. It is error for the court to take cognizance of external facts or hold preliminary hearings to determine their existence."
• "An affirmative defense, raising the ground that there is no cause of action as against the defendants poses a question of fact that should be resolved after the conduct of the trial on the merits."
• "Thus, in a preliminary hearing on a motion to dismiss or on the affirmative defenses raised in an answer, the parties are allowed to present evidence except when the motion is based on the ground of insufficiency of the statement of the cause of action which must be determined on the basis only of the facts alleged in the complaint and no other."

• Dabuco vs. Court of Appeals — Cited to emphasize the distinction between "failure to state a cause of action" and "lack of cause of action."
• Insular Investment and Trust Corporation v. Capital One Equities Corporation (citing Perpetual Savings Bank v. Fajardo and Rava Development Corporation v. Court of Appeals) — Cited for the familiar test in determining whether a complaint states a cause of action, which involves hypothetically admitting the truth of the allegations in the complaint.
• Evangelista v. Santiago (citing Garcon v. Redemptorist Fathers) — Cited to elucidate that an affirmative defense of "no cause of action" requires hypothetical admission of facts alleged in the complaint and that inquiry into the truth of allegations or consideration of external facts is improper at this stage.
• Tan v. Director of Forestry — Cited as a case presenting an exception to the general rule of confining inquiry to the complaint, but distinguished from the present case on several grounds (hearing was for preliminary injunction, plaintiff availed of opportunity to present evidence, evidence admitted by stipulation/annexed, overriding public interest).
• San Lorenzo Village Association v. CA — Cited to support the point that "lack or absence of cause of action" is not a ground for dismissal under Rule 16; rather, the ground is that "the complaint states no cause of action."
• Far East Bank v. Court of Appeals — Cited for the principle that in determining the sufficiency of allegations, there is a hypothetical admission of facts alleged in the complaint.
• Heirs of Paez v. Torres — Cited to support that an affirmative defense raising no cause of action (interpreted as lack of cause of action) poses a question of fact for trial.
• Municipality of Binan v. Court of Appeals; Misamis Occidental II Cooperative, Inc. v. David — Cited for the rule that a preliminary hearing is not necessary when the affirmative defense is failure to state a cause of action.
• D.C. Crystal, Inc. v. Laya; Del Bros Hotel Corporation v. Court of Appeals; Rava Development Corporation v. Court of Appeals — Cited to show it is error for the court to hold a preliminary hearing to determine external facts when the ground is failure to state a cause of action.
• Merrill Lynch Futures, Inc. v. Court of Appeals — Cited for the impropriety of receiving and considering evidence on the ground that the complaint fails to state a cause of action.
• Almarza v. Arguelles — Cited for the principle that an action to quiet title is imprescriptible if the plaintiffs are in possession of the property.

• Rules of Court, Rule 16, Section 1(g) — Provides "That the pleading asserting the claim states no cause of action" as a ground for a motion to dismiss. This was central to the discussion on how this ground should be assessed.
• Rules of Court, Rule 16, Section 6 — Pertains to pleading grounds for dismissal as affirmative defenses and allows the court, in its discretion, to conduct a preliminary hearing thereon. The Supreme Court ruled this section does not apply when the ground is "failure to state a cause of action," as the RTC and CA incorrectly applied it.
• Civil Code, Article 476 — Defines an action to quiet title. The Court assessed whether petitioners' complaint alleged the requisites under this article.