BPI vs. Sanchez

A party to a contract to sell may validly rescind the agreement upon dishonor of payment checks, and the subsequent transfer to third persons who acted in bad faith does not bar rescission under Article 1385 of the Civil Code; banks, as mortgagees, are held to a higher standard of diligence and cannot claim good faith when they fail to scrutinize obvious anomalies in the title and loan transaction.

Vicente Victor C. Sanchez, Kenneth Nereo Sanchez, and Imelda C. Vda. de Sanchez co-owned a 900-square-meter parcel of land at No. 10 Panay Avenue, Quezon City, registered under TCT 156254. Kenneth and Imelda had died, with Felisa Yap (Kenneth's widow) and Vicente acting for the respective heirs. Jesus V. Garcia, doing business as TransAmerican Sales and Exposition, Inc. (TSEI), sought to purchase the property for townhouse development. The dispute arose from Garcia's failure to fully pay the purchase price, his unauthorized construction of townhouses on the property, and his fraudulent procurement of a new title (TCT 383697) in TSEI's name, which he used to sell townhouse units to several buyers and to secure a loan from Far East Bank and Trust Company (FEBTC), which later merged with Bank of the Philippine Islands (BPI).

Vicente Victor C. Sanchez (Vicente), Kenneth Nereo Sanchez, and Imelda C. Vda. de Sanchez co-owned a 900-square-meter parcel of land at No. 10 Panay Avenue, Quezon City, registered under TCT 156254. Kenneth and Imelda had died; Felisa Yap, Kenneth's widow, and Vicente acted for the respective heirs. On October 10, 1988, Jesus V. Garcia (Garcia), doing business as TransAmerican Sales and Exposition, Inc. (TSEI), wrote to Vicente offering to buy the property for ₱1,800,000, with ₱50,000 as earnest money and the balance payable upon execution of the deed of absolute sale. The offer was good for only seven days, and the period elapsed without an agreement.

Sometime in the third week of October 1988, Yap and Garcia met at the Quezon City Sports Club and agreed on the sale of the property for ₱1,850,000, payable in cash after the occupants vacated. Garcia was to pay ₱50,000 immediately as earnest money, handle all documentation including reconstitution of the original title and extrajudicial settlement of the estate, cause demolition of the old house, and turn over the demolition proceeds to the Sanchezes. Pursuant to this oral agreement, Yap turned over to Garcia the original owner's copy of TCT 156254, the copy of the filed Application for Restitution of Title, and copies of real estate tax receipts, while Garcia paid ₱50,000 as earnest money. Yap then required the occupants to vacate the property. Immediately after it was vacated, Garcia, without Yap's knowledge or consent, took possession of the lot, installed his own caretaker with instructions not to allow anyone to enter, demolished the old house, and advertised the construction and sale of "Trans American Townhouse V" thereon. Despite numerous demands, Garcia failed to pay the balance of the purchase price.

On December 5, 1988, Yap was informed that the checks for the purchase price were ready, and on December 8, 1988, Vicente came to Garcia's office to collect them. Of the six checks presented, four were post-dated. To document the check payments, the parties executed an Agreement dated December 8, 1988, providing that the total consideration of ₱1,850,000 was payable through six RBC checks—two dated December 8, two dated December 14, and two dated December 22, 1988—in amounts ranging from ₱250,000 to ₱400,000. The Agreement stipulated that once all checks were honored and encashed, Yap and Vicente would execute an Extrajudicial Settlement of Estate with Sale conveying the property to Garcia, who would then reconstitute the burned title and effect transfer of registration at his own expense. Proviso No. 6 provided that if any check was dishonored, Yap and Vicente could opt to rescind the contract, forfeit the ₱50,000 earnest money, and retain the value of damages effected by the demolition, not to exceed ₱290,000.

The first four checks were deposited without issue, but the last two checks, each amounting to ₱400,000, were dishonored for "DAIF" or drawn against insufficient funds. Yap wrote Garcia on December 26, 1988, informing him of the dishonor and demanding replacement within five days, but the request went unheeded. On January 10, 1989, Yap informed Garcia that she and Vicente were rescinding the Agreement and demanded the return of the original owner's copy of TCT 156254. Garcia offered two manager's checks totaling ₱300,000, which Yap refused, reiterating the rescission and demanding return of all documents. Garcia's counsel, Atty. Francisco Beato, Jr., responded on January 27, 1989, claiming that the ₱800,000 balance was due only upon Yap and Vicente's payment of realty, inheritance, and capital gains taxes, and effectively refused to return the documents or vacate the property. Yap's counsel refuted this claim on February 16, 1989, and reiterated the rescission.

Meanwhile, on February 19, 1989, Yap and Vicente discovered that Garcia had posted an advertisement in the Manila Bulletin offering to sell units at Trans American Townhouse V on the subject property. On February 27, 1989, their counsel wrote the Housing and Land Use Regulatory Board (HLURB) informing it of the illegal advertisement and urging cancellation or denial of any permit. The HLURB issued a Cease and Desist Order (CDO) on March 17, 1989, certifying that Garcia and TSEI had not been issued any permit for the townhouse project and directing them to stop development and selling. The CDO and warnings to possible buyers were published in the Philippine Daily Inquirer on April 16, 1989, and in the Manila Bulletin on April 19, 1989. Despite the CDO, TSEI continued construction and selling activities, prompting the HLURB to fine TSEI ₱10,000 on June 1, 1989. The City Building Official of Quezon City also confirmed in a letter dated March 14, 1989, that the construction was illegal and at its 5% initial stage. Yap additionally wrote the Register of Deeds on April 3, 1989, informing it that TCT 156254 was no longer in their possession and requesting that the office clear any transaction with them first.

Garcia managed to cause the cancellation of TCT 156254 and its replacement with TCT 383697 in the name of TSEI. Notably, TCT 383697 bore an issuance date of June 9, 1988—before the parties' agreement in October 1988. Garcia used TCT 383697 to sell townhouse units to several buyers. On January 31, 1989, TSEI sold to Generoso Tulagan a 52-square-meter portion for ₱800,000 under a Conditional Deed of Sale, and later another unit for ₱600,000 under a Contract to Sell dated February 21, 1989. Reynaldo Maniwang bought a unit for ₱700,000 through an Absolute Deed of Sale dated February 22, 1989. Arturo Marquez purchased a unit for ₱800,000 under a Contract to Sell dated March 13, 1989. The spouses Jose and Visitacion Caminas bought a unit for ₱650,000 through an Absolute Deed of Sale dated March 21, 1989. Varied Traders Concept, Inc. (VTCI) bought three townhouses for ₱700,000 each under three Absolute Deeds of Sale all dated October 30, 1989. Except for VTCI's deeds, all other contracts identified the purchased lots as covered by TCT 156254 (the Sanchezes' title), even though the buyers were shown TCT 383697 in TSEI's name. The buyers verified the photocopy of TCT 383697 with the Registry of Deeds, which confirmed the title was clean. TSEI left the townhouse units unfinished, forcing the buyers to complete construction themselves.

On May 22, 1989, FEBTC entered into a loan agreement with TSEI secured by a real estate mortgage over the property. Garcia initially gave FEBTC TCT 156254, then submitted a copy of TCT 383697 in TSEI's name, purportedly explaining that the parties were still in the process of transferring title. Upon default, FEBTC foreclosed and had the Foreclosure Certificate of Sale annotated on TCT 383697. FEBTC later merged with BPI, with BPI as the surviving bank. On February 15, 1990, Yap and Vicente filed before the RTC of Quezon City, Branch 89, a complaint for rescission of contract, restitution, and damages against TSEI and Garcia, docketed as Civil Case No. Q-90-4690. The RTC found that the Sanchezes had the right to rescind the Agreement under Proviso No. 6, that the Agreement was in the nature of a contract to sell with ownership remaining with the Sanchezes because the suspensive condition—honored checks—was not met, and that TSEI and Garcia were builders in bad faith. The RTC also found the intervenors to have acted in bad faith. The CA affirmed with modification, ordering cancellation of TCT 383697 and reinstatement of TCT 156254, but found the Sanchezes equally in bad faith for failing to file an action for injunction against the construction, applying Article 448 of the Civil Code.

• Validity of Rescission (BPI): BPI argued that the Sanchezes had no intention of rescinding the Agreement, that rescission could not take place because the property had already been acquired by a third person who acted in good faith, and that the Sanchezes should bear all losses arising from their own negligence.
• Collateral Attack on Title (BPI): BPI contended that the CA erred in ordering the annulment of TCT 383697 in a collateral action, and that the CA had no jurisdiction to do so since such relief was never prayed for in the complaint.
• Unjust Enrichment (BPI): BPI maintained that decreeing rescission would result in the unjust enrichment of the Sanchezes at BPI's expense.
• Rights Under Article 448 (BPI): Assuming Article 448 applied, BPI argued that it had already acquired the rights of the defendants under the said article.
• Entitlement to Article 448 Benefits (Tulagan, Marquez heirs, VTCI): Petitioners argued that as buyers and possessors of townhouse units constructed by Garcia on the subject property, they were entitled to the same benefits granted to Garcia under Article 448 of the Civil Code, Garcia having been declared by the CA as a builder in good faith of the improvements.
• Perfected Contract of Sale (Maniwang): Maniwang argued that the CA failed to apply pertinent provisions of law and prevailing jurisprudence when it disregarded the perfected contract of sale under the nomenclature "Contract to Sell" entered into by the Sanchezes and defendants prior to the December 8 Agreement.
• Innocent Purchaser in Good Faith (Maniwang): Maniwang contended that he was an innocent purchaser in good faith and that the CA erred in applying Article 448 to his case, resulting in the total disregard of his rights over the subject property.
• Negligence of the Sanchezes (All Petitioners): Petitioners argued that the Sanchezes were negligent in turning over the owner's original duplicate copy of TCT 156254 despite receiving only ₱50,000 earnest money, in surrendering possession of the property to Garcia and TSEI, and in failing to stop the construction of the townhouses.

• Negligence of the Sanchezes: Whether the Sanchezes were negligent in turning over the owner's copy of TCT 156254, in surrendering possession of the property, and in failing to stop construction of the townhouses.
• Bad Faith of the Sanchezes: Whether the Sanchezes acted in bad faith for failing to file an action for injunction against the construction of the townhouses on their property, such that Article 453 of the Civil Code should apply.
• Bad Faith of Garcia and TSEI: Whether Garcia and TSEI were builders in bad faith.
• Bad Faith of Intervenor-Purchasers: Whether the intervenor-purchasers (Caminas, Maniwang, Tulagan, Marquez, and VTCI) were purchasers in good faith or in bad faith.
• Good Faith of BPI as Mortgagee: Whether BPI (as successor to FEBTC) was a mortgagee in good faith.
• Validity of Rescission: Whether the extrajudicial rescission of the Agreement by the Sanchezes was valid and whether it was barred by the subsequent transfer of the property to third persons.
• Applicable Provision for Improvements: Whether Articles 449-450 of the Civil Code (bad faith builder) or Article 448 (good faith builder) applies to the improvements constructed on the subject property.
• Cancellation of TCT 383697: Whether TCT 383697 in the name of TSEI may be cancelled, and whether the suit constituted a collateral attack on said title.

• Negligence of the Sanchezes: No. The Sanchezes were not negligent in surrendering the owner's copy of TCT 156254, as this was done in pursuance of their agreement with Garcia, who had committed to handle documentation and reconstitution. Possession was not voluntarily surrendered but taken by Garcia without their consent.
• Bad Faith of the Sanchezes: No. The Sanchezes did not act in bad faith under Article 453, as they opposed the construction by writing the HLURB and the City Building Official, resulting in cease and desist orders, rather than passively allowing the construction to continue.
• Bad Faith of Garcia and TSEI: Yes. Garcia and TSEI knew the property belonged to the Sanchezes, had not fully paid the purchase price, and proceeded to build townhouses without the landowners' consent and against their will.
• Bad Faith of Intervenor-Purchasers: Yes. All intervenors acted in bad faith by executing contracts identifying TCT 156254 (the Sanchezes' title) as covering the property sold, yet failing to verify with the Register of Deeds whether that title had been cancelled, failing to inquire with the HLURB about permits, and ignoring published cease and desist orders.
• Good Faith of BPI as Mortgagee: No. BPI (as successor to FEBTC) was not a mortgagee in good faith, having failed to require a Special Power of Attorney from the Sanchezes, to verify HLURB approval for the mortgage under PD 957, to scrutinize the anomalous TCT 383697 (which predated the Agreement), and to exercise the heightened diligence required of banks.
• Validity of Rescission: Yes. The rescission was valid under Article 1191, and was not barred by Article 1385 because the third-party transferees (intervenors) acted in bad faith.
• Applicable Provision for Improvements: Articles 449-450 apply. Because Garcia, TSEI, and the intervenors acted in bad faith, the Sanchezes were given three options: appropriate the improvements without indemnity, demand demolition at the builders' expense, or compel payment of the land's price.
• Cancellation of TCT 383697: Yes. TCT 383697 was properly cancelled, as the suit—though originally an action for rescission—became a direct attack on TCT 383697 when the Sanchezes expressly alleged in their answers to the interventions that the title was fake and void.

• Negligence of the Sanchezes: The CA had already ruled that the issue of the Sanchezes' negligence was never raised at pre-trial and could no longer be raised on appeal. Even if passed upon, the Sanchezes could not be considered negligent. The surrender of the owner's duplicate copy of TCT 156254 was made in pursuance of their agreement, under which Garcia had committed to personally undertake the preparation and execution of the Extrajudicial Settlement with Sale and the reconstitution of the original title. The Sanchezes had insufficient knowledge in the legalities of real estate transactions, as evidenced by their reliance on an oral agreement. Possession was not voluntarily surrendered; Garcia took it without their knowledge, posted a caretaker, and demolished the old house. Negligence, defined as the omission of that diligence required by the nature of the obligation and corresponding to the circumstances of the persons, time, and place, was not established.

• Bad Faith of the Sanchezes: The CA erred in finding the Sanchezes in bad faith under Article 453 for failing to file an action for injunction. Article 453's second paragraph states that a landowner is in bad faith if he does not oppose unauthorized construction despite knowledge, but does not prescribe the form such opposition must take. The Sanchezes did take action: they wrote the HLURB and the City Building Official, resulting in two CDOs and several directives against Garcia/TSEI. The Sanchezes could not be faulted for not enjoining the sales to the intervenors, as those transactions occurred during the same period the Sanchezes were demanding full payment and exercising their right of extrajudicial rescission. The pre-selling commenced almost immediately after the agreement and continued when the two postdated checks bounced. As to the FEBTC and VTCI transactions, the Sanchezes were not aware of those dealings despite the actions they undertook.

• Bad Faith of Garcia and TSEI: Both the RTC and CA correctly found Garcia and TSEI to be builders in bad faith. They knew the property still belonged to the Sanchezes, had not fully paid the purchase price, and no contract of sale had been executed in their favor. They took possession without the landowners' consent, demolished the old house, constructed 20-unit townhouses, and advertised the units for sale—all against the Sanchezes' will.

• Bad Faith of Intervenor-Purchasers: The general rule that persons dealing with property covered by a Torrens title need not go beyond what appears on its face admits an exception where the purchaser has knowledge of a defect or lack of title in the vendor, or is aware of sufficient facts to induce a reasonably prudent person to inquire. The intervenors executed contracts identifying TCT 156254 (the Sanchezes' title) as covering the property, yet the title did not pertain to their vendor (Garcia/TSEI). This should have driven them to investigate the true status of the property by verifying with the Register of Deeds whether TCT 156254 had been cancelled, asking for the deed of absolute sale, and checking the primary entry book. They should have insisted on talking to the Sanchezes before executing the conveyances. They should have been suspicious of Garcia's explanation about reconstitution and verified with the court where the reconstitution case was pending. They should have verified with the HLURB whether the project was registered and licensed, which would have revealed the CDO. VTCI, whose deeds cited TCT 383697, likewise failed to verify the title's authenticity; the title's issuance date of June 9, 1988 predated the December 8, 1988 Agreement, showing it was spurious. VTCI also fully paid for unfinished townhouses after the CDO was issued and after public warnings were published in major newspapers—transactions not in accord with normal business practice.

• Good Faith of BPI as Mortgagee: The general rule that a mortgagee need not look beyond the title does not apply to banks and financial institutions, which are required to exercise greater care and due diligence. FEBTC failed to require a Special Power of Attorney from the Sanchezes authorizing the mortgage of TCT 156254, failed to require HLURB written approval for the mortgage as mandated by Section 18 of PD 957, failed to ascertain whether full payment had been made under Proviso No. 6 of the Agreement, failed to scrutinize TCT 383697 (whose June 9, 1988 issuance date predated the December 1988 Agreement and the May 1989 loan negotiation), released loan portions in April before loan approval on May 22, 1989, and verified TCT 383697 only after loan approval, with the Register of Deeds certification issued on June 13, 1989 upon Garcia's request. These anomalies demonstrated FEBTC's negligence and precluded a finding of good faith.

• Validity of Rescission: Article 1191 of the Civil Code provides that the power to rescind is implied in reciprocal obligations where one obligor fails to comply. The last paragraph states that rescission is "without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law." Article 1385 provides that rescission shall not take place when the things are legally in the possession of third persons who did not act in bad faith. Because all intervenors were found to have acted in bad faith, the subsequent transfers in their favor did not and could not bar rescission. The Agreement was in the nature of a contract to sell, where ownership remained with the Sanchezes because the suspensive condition—honored checks—was not fulfilled. The dishonor of the last two checks for DAIF entitled the Sanchezes to rescind under Proviso No. 6.

• Applicable Provision for Improvements: Because Garcia, TSEI, and the intervenors acted in bad faith, Articles 449-450 of the Civil Code apply, not Article 448. Article 449 provides that one who builds in bad faith on the land of another loses what is built without right to indemnity. Article 450 gives the landowner the option to demand demolition at the builder's expense or compel the builder to pay the price of the land. The Sanchezes were thus given three options: (1) appropriate the townhouses and improvements without indemnifying TSEI or the intervenors; (2) demand demolition at the expense of TSEI or the intervenors; or (3) ask the intervenors to pay the price of the land. The Sanchezes must choose within thirty days from finality. If they choose the third option, the case is remanded to the RTC to determine the fair market value of the land as of 1988.

• Cancellation of TCT 383697: BPI argued that under Section 48 of PD 1529, a Torrens certificate cannot be cancelled except in a direct attack. The Court distinguished direct from collateral attack, citing Sarmiento vs. Court of Appeals: an attack is direct when the object of the action is to annul the title, and collateral when the attack is made as an incident in an action seeking different relief. Although the case was originally an action for rescission, it became a direct attack on TCT 383697 when the Sanchezes, confronted with the title through the intervenors' answers, expressly alleged in their own answers to the interventions that the title was fake, forged, and absolutely void. The CA correctly ordered the cancellation of TCT 383697.

• Contract to Sell vs. Contract of Sale — In a contract to sell, ownership is retained by the seller until full payment of the purchase price; the full payment is the suspensive condition, and non-payment does not automatically rescind the contract but merely prevents the obligation to convey title from arising. The Court applied this doctrine to hold that because the last two checks were dishonored, the suspensive condition was not fulfilled, ownership remained with the Sanchezes, and rescission was proper under Proviso No. 6 of the Agreement.

• Innocent Purchaser for Value in Good Faith — The general rule is that persons dealing with property covered by a Torrens certificate of title are not required to go beyond what appears on its face. The exception is where the purchaser has knowledge of a defect or lack of title in the vendor, or is aware of sufficient facts to induce a reasonably prudent person to inquire into the status of the property. To prove good faith, the following conditions must all be present: (a) the seller is the registered owner; (b) the owner is in possession; and (c) at the time of sale, the buyer was not aware of any claim or interest of another person in the property, or of any defect in the seller's title or capacity to convey. The Court found all intervenors failed to satisfy these conditions because their contracts identified TCT 156254 in the Sanchezes' name, yet they did not verify with the Register of Deeds, the HLURB, or the Sanchezes themselves.

• Heightened Diligence for Banks as Mortgagees — The general rule that a mortgagee need not look beyond the title does not apply to banks and other financial institutions, which are required to exercise greater care and due diligence. The Court applied this doctrine to hold FEBTC (now BPI) negligent for failing to require a Special Power of Attorney, HLURB approval under PD 957, verification of full payment, and scrutiny of the anomalous TCT 383697.

• Bad Faith Builder (Articles 449-450, Civil Code) — One who builds, plants, or sows in bad faith on the land of another loses what is built without right to indemnity. The landowner may demand demolition at the builder's expense or compel the builder to pay the price of the land. The Court applied this doctrine to give the Sanchezes three options regarding the townhouses built in bad faith by Garcia, TSEI, and the intervenors.

• Direct vs. Collateral Attack on Torrens Title — A certificate of title cannot be subject to collateral attack under Section 48 of PD 1529. An attack is direct when the object of the action is to annul the title; it is collateral when the attack is an incident in an action seeking different relief. The Court held that the rescission action became a direct attack on TCT 383697 when the Sanchezes expressly alleged in their answers to the interventions that the title was fake and void.

• Rescission and Third-Party Rights (Article 1385, Civil Code) — Rescission shall not take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. The Court held that because all intervenors acted in bad faith, the subsequent transfers did not bar rescission.

• "The general rule that a mortgagee need not look beyond the title does not apply to banks and other financial institutions as greater care and due diligence are required of them, and FEBTC should have exercised the appropriate due diligence review and made the requisite inquiries about the subject property which was offered to secure the loan applied for by Garcia/TSEI under a real estate mortgage." — This passage articulates the heightened diligence standard for banks as mortgagees, the controlling rationale for denying BPI good-faith status.

• "From the foregoing, the fact that all the intervenors turned a blind eye to the flaws and defects in the ownership of TSEI over the property and miserably failed to undertake measures required of a reasonably prudent man to investigate the title of the pseudo owner and the legality of the townhouse project constitutes bad faith for which there is no available relief under the law." — This passage summarizes the ratio decidendi for finding all intervenor-purchasers in bad faith, denying them relief under the Torrens system.

• "Although the case was originally an action for rescission, it became a direct attack on TCT 383697. To be sure, there is no indication that when the Sanchezes filed their complaint with the RTC they already knew of the existence of TCT 383697. However, when they were confronted with the title through the filing of the various Answers of the intervenors, the Sanchezes directly stated that the title was a fake." — This passage defines the doctrinal basis for treating the rescission action as a direct attack on TCT 383697, overcoming the collateral-attack prohibition under Section 48 of PD 1529.

• "In the extant case, the failure of TSEI to pay the consideration for the sale of the subject property entitled the Sanchezes to rescind the Agreement. And in view of the finding that the intervenors acted in bad faith in purchasing the property, the subsequent transfer in their favor did not and cannot bar rescission." — This passage states the interplay between Article 1191 (right to rescind) and Article 1385 (exception for bad-faith third parties), the core ratio on the validity of rescission.

• Cang vs. Cullen, G.R. No. 163078, November 25, 2009 — Cited for the definition of negligence as the omission of that diligence required by the nature of the obligation and corresponding to the circumstances of the persons, time, and place. Applied to determine whether the Sanchezes were negligent in turning over the title and possession.

• Centeno vs. Court of Appeals, No. L-40105, November 11, 1985 — Cited for the rule that persons dealing with property covered by a Torrens certificate of title are not required to go beyond what appears on its face. The Court noted the exception applied because the intervenors knew the title did not pertain to their vendor.

• Home Bankers Savings and Trust Co. vs. Court of Appeals, G.R. No. 128354, April 26, 2005 — Cited for the exception to the Torrens rule: where the purchaser has knowledge of a defect or lack of title in the vendor, or is aware of sufficient facts to induce a reasonably prudent person to inquire.

• Toledo-Banaga vs. CA, G.R. No. 127941, January 28, 1999 — Cited for the rule that one who buys property with full knowledge of flaws and defects in the title of the vendor is in bad faith and estopped from claiming good-faith acquisition.

• Bautista vs. Jalandoni, G.R. No. 171464, November 27, 2013 — Cited for the three conditions necessary to prove good faith in purchasing property: (a) the seller is the registered owner; (b) the owner is in possession; and (c) the buyer was not aware of any claim or defect. All conditions must be present.

• Alano vs. Planters' Development Bank, G.R. No. 171628, June 13, 2011 — Cited for the doctrine that banks and financial institutions are held to a higher standard of care and due diligence than ordinary mortgagees, and the general rule that a mortgagee need not look beyond the title does not apply to them.

• Sarmiento vs. Court of Appeals, G.R. No. 152267, September 16, 2005 — Cited for the distinction between a direct and collateral attack on a Torrens title. Applied to hold that the rescission action became a direct attack on TCT 383697 when the Sanchezes expressly alleged the title was fake in their answers to the interventions.

• Metropolitan Waterworks and Sewerage System vs. Court of Appeals, No. L-54526, August 25, 1986 — Cited in support of the Sanchezes' option to appropriate improvements built in bad faith without indemnity under Article 449 of the Civil Code.

• Article 1191, Civil Code of the Philippines — Provides the power to rescind in reciprocal obligations where one party fails to comply, with payment of damages. Applied to uphold the Sanchezes' right to rescind the Agreement upon TSEI's failure to pay the purchase price.

• Article 1385, Civil Code of the Philippines — Provides that rescission shall not take place when the things object of the contract are legally in the possession of third persons who did not act in bad faith. Applied to hold that because the intervenors acted in bad faith, the subsequent transfers did not bar rescission.

• Articles 449-450, Civil Code of the Philippines — Govern the rights of a landowner against a bad-faith builder: the builder loses what is built without indemnity, and the landowner may demand demolition at the builder's expense or compel payment of the land's price. Applied to give the Sanchezes three options regarding the townhouses.

• Article 453, Civil Code of the Philippines — Provides that if there is bad faith on the part of both the builder and the landowner, the rights of both shall be the same as though both acted in good faith; bad faith on the landowner's part is understood when the act was done with his knowledge and without opposition. The Court held this provision inapplicable because the Sanchezes did oppose the construction through administrative remedies.

• Article 448, Civil Code of the Philippines — Governs the rights of parties when a builder acts in good faith. The CA applied this provision, but the Supreme Court held it inapplicable because all builders and purchasers acted in bad faith, making Articles 449-450 the proper provisions.

• Section 48, Presidential Decree No. 1529 (Property Registration Decree) — Provides that a certificate of title shall not be subject to collateral attack and cannot be altered, modified, or cancelled except in a direct proceeding. BPI invoked this provision, but the Court held the action had become a direct attack on TCT 383697.

• Section 18, Presidential Decree No. 957 (Subdivision and Condominium Buyers' Protective Decree) — Requires prior written approval of the HLURB for any mortgage of a subdivision lot or unit. Applied to show FEBTC's negligence in failing to require HLURB approval for the mortgage of the subject property.

Associate Justices Diosdado M. Peralta, Mariano S. Villarama, Jr., Bienvenido L. Reyes, and Francis H. Jardeleza concurred.