Canlas vs. Court of Appeals

A lawyer who acquires his client's property by exploiting the client's financial distress and moral ascendancy, and who alters the conveyance document without the client's knowledge, is liable for damages; the transfer is voidable for undue influence under Articles 1330 and 1390 of the Civil Code, even though it is not prohibited under Article 1491 because it was executed after the subject litigation attained finality.

Paterno R. Canlas, an attorney, represented Francisco Herrera in an injunction suit (Civil Case No. 30679) against L & R Corporation to prevent consolidation of title over Herrera's foreclosed properties. The parties to that suit eventually entered a compromise agreement, approved by the court on November 19, 1982, granting Herrera an additional year to redeem the properties for P600,000 with one per cent monthly interest, and stipulating P100,000 in attorney's fees for Canlas. Herrera remained in dire financial straits and could not meet either obligation, setting the stage for the dispute between lawyer and client over the disposition of the properties and the payment of fees.

Francisco Herrera was the registered owner of eight (or six, according to the petitioner) parcels of land in Quezon City. Between 1977 and 1978, he obtained various loans from L & R Corporation, a financing institution, totalling P420,000, secured by deeds of mortgage over those parcels. On August 28, 1979, upon maturity of the loans and following Herrera's failure to pay, L & R Corporation caused an extrajudicial foreclosure, and the properties were sold at public auction with the corporation as highest bidder.

Pending redemption, Herrera filed a complaint for injunction against L & R Corporation to enjoin consolidation of title, and obtained preliminary injunctive relief. He was represented by Atty. Paterno R. Canlas. Two years later, with no imminent end to the litigation in sight, the parties entered into a compromise agreement: L & R Corporation accorded Herrera another year to redeem the foreclosed properties upon payment of P600,000 with interest at one per cent per month, and stipulated that Canlas would be entitled to attorney's fees of P100,000. On November 19, 1982, the court approved the compromise.

Herrera, however, remained in dire financial straits — a fact Canlas himself conceded — and could not raise the funds to repay the loans, let alone the P100,000 in attorney's fees. Canlas moved for execution of his fees, and the court granted execution, though it does not appear that the sum was actually collected. Sometime thereafter, the two met to discuss relief for Herrera with respect to both his liability to L & R Corporation and his obligation to Canlas. Canlas contended that Herrera "earnestly implored" him to redeem the properties; Herrera maintained that it was Canlas who offered to advance the money, provided Herrera executed a "transfer of mortgage" over the properties in his favor. The Court found Herrera's version more credible, given Canlas's moral ascendancy over his client and Herrera's increasing desperation.

Pursuant to their agreement, the parties executed a "Deed of Sale and Transfer of Rights of Redemption and/or to Redeem," enabling Canlas to redeem the parcels and register them in his name. Herrera subsequently filed loan applications with Family Savings Bank to finance a wet market project on the premises, only to discover that the properties had already been registered in Canlas's name. He further discovered that the deed on file with the Register of Deeds had been altered: the original phrase conveying "any and all my rights of equity of redemption and/or to redeem" had been changed to "any and all my rights of the real properties and/or to redeem." Canlas admitted making the intercalations, claiming they were necessary to facilitate registration and did not change the meaning of the document.

Herrera caused the annotation of an adverse claim on the certificates of title. Canlas moved for cancellation of the adverse claim and for a writ of possession; the court granted both. Herrera countered with motions for a temporary restraining order and to recall the writ of possession, which were denied. He also commenced disbarment proceedings against Canlas before the Supreme Court and filed criminal complaints for estafa, falsification, and "betrayal of trust" with the Department of Justice. On December 1, 1983, Herrera instituted an action for reconveyance and reformation of document, praying that the titles issued in Canlas's name be cancelled and that the deed be reformed to reflect the true agreement — a mortgage, not a sale. The trial court dismissed the complaint, holding that the alteration did not change the contract's meaning, that Canlas had acquired an interest as a judgment creditor under Section 29(b) of Rule 39, that Herrera had lost all rights by failing to redeem within the extended period, and that the ban on sales of property in custodia legis to lawyers did not apply since the sale took place after judgment had attained finality. The dismissal became final.

Undaunted, Herrera filed a petition for "Annulment of Judgment" in the Court of Appeals on December 6, 1985, seeking to set aside Judge Castro's orders granting execution of attorney's fees, denying his prayer for a restraining order, and denying the motion to recall the writ of possession. Canlas filed a comment followed by a motion to dismiss. The Court of Appeals denied the motion to dismiss on December 8, 1986, and denied reconsideration on March 3, 1987. Canlas then filed the instant petition with the Supreme Court.

• Improper Remedy and Prematurity: Petitioner argued that the petition before the Court of Appeals was in reality a petition for certiorari disguised as one for annulment of judgment, and thus faced legal impediments: it was filed out of time, allegedly two years from the issuance of the assailed orders, and was not preceded by a motion for reconsideration.
• No Judgment to Annul: Petitioner contended that assuming annulment of judgment were proper, no judgment exists for annulment, the assailed orders being interlocutory in nature rather than final judgments.
• Res Judicata: Petitioner maintained that the Court of Appeals should have dismissed the petition on the ground of res judicata, the dismissal of the reconveyance case having attained finality.
• Moot and Academic: Petitioner argued that the case had become moot and academic because he had disposed of the subject properties long before the filing of the suit before the Court of Appeals.
• Rehash of Arguments: Petitioner asserted that the Court of Appeals erred in denying his motion to dismiss solely on the ground that the arguments raised therein were but a rehash of those in his comment to the petition.

• True Nature of Agreement: Respondent maintained that the agreement with Canlas was that the latter would lend the money for a year, so that Herrera would have time to look for a loan for the wet market project he intended to put up on the property, and that the deed should be reformed to reflect this understanding as a mortgage rather than a sale.
• Falsification of the Deed: Respondent alleged that the "Deed of Sale and Transfer of Rights of Equity of Redemption and/or to Redeem" on file with the Register of Deeds had been falsified, the phrase "rights of equity of redemption" having been altered to "rights of the real properties."
• Collusion and Undue Influence: Respondent alleged collusion between Canlas and the presiding judge to expedite collection of fees, and maintained that Canlas had exploited his moral ascendancy and Herrera's financial desperation to force the conveyance of the properties.

• Propriety of Annulment of Judgment: Whether the Court of Appeals gravely abused its discretion in not dismissing the petition below, given that it was in reality a petition for certiorari filed out of time and not preceded by a motion for reconsideration.
• Res Judicata: Whether the Court of Appeals erred in not dismissing the petition on the ground of res judicata, the dismissal of the reconveyance case having become final.
• Mootness: Whether the Court of Appeals erred in not dismissing the petition as moot and academic, the petitioner having disposed of the subject properties before the filing of the suit.
• Rehash of Arguments: Whether the Court of Appeals erred in denying the motion to dismiss on the ground that the arguments were a rehash.
• Prohibition Under Article 1491: Whether the conveyance of the redemption rights to the petitioner-lawyer is subject to the statutory ban on acquisition by attorneys of property in litigation.
• Reasonableness of Attorney's Fees: Whether the stipulated attorney's fees of P100,000 were reasonable and enforceable.

• Propriety of Annulment of Judgment: Sustained, on technical grounds. The petition below did not state a cause of action for annulment of judgment, the assailed orders being interlocutory rather than a judgment, and no extrinsic fraud as defined in Macabingkil was shown to have vitiated the proceedings.
• Res Judicata: Sustained on technical grounds. The dismissal of the reconveyance case had attained finality, and the matters raised in the annulment petition were not proper subjects for annulment of judgment.
• Mootness: Sustained on technical grounds. The petitioner had disposed of the subject properties before the filing of the annulment suit.
• Rehash of Arguments: Sustained on technical grounds. The Court of Appeals erred in denying the motion to dismiss solely because the arguments were a rehash.
• Prohibition Under Article 1491: No. The transfer was not subject to the prohibition because the deed was executed following the finality of the decision approving the compromise agreement, at which point the lands had ceased to be property "the object of any litigation" within the meaning of Article 1491(5).
• Reasonableness of Attorney's Fees: No. The P100,000 claim was unreasonable under the standards of Section 24, Rule 138 and Article 2208 of the Civil Code, and was reduced to P20,000 on a quantum meruit basis.

• Propriety of Annulment of Judgment: Annulment of judgment rests on a single ground: extrinsic fraud. As defined in Macabingkil vs. People's Homesite and Housing Corporation, extrinsic fraud refers to any fraudulent act of the prevailing party committed outside the trial, whereby the defeated party is prevented from exhibiting fully his side of the case. Herrera's petition before the Court of Appeals assailed not the judgment itself but the orders implementing it. Moreover, Herrera was privy to the incidents he complained of and had entered timely oppositions and motions. His allegation of collusion between Canlas and the judge was plain speculation and did not amount to extrinsic fraud. Neither was certiorari proper, as it presupposes the absence of an appeal, and while there is no appeal from execution of judgment, appeal lies in case of irregular implementation of the writ. The orders impugned were conformable to the letter of the judgment approving the compromise agreement, and no irregular execution was shown.
• Res Judicata: The dismissal of the reconveyance case (Civil Case No. 40066) had attained finality. The matters Herrera sought to relitigate through annulment of judgment were the same subjects already passed upon and finally resolved by the trial court.
• Mootness: Canlas admitted that titles to the properties had been issued to new owners long before the filing of the annulment petition. The properties had been conveyed to third persons, rendering the controversy over their possession and ownership moot in the narrow procedural sense.
• Rehash of Arguments: The arguments raised in the motion to dismiss before the Court of Appeals were the same as those in Canlas's comment to the petition, and the appellate court erred in denying the motion solely on that ground.
• Prohibition Under Article 1491: Article 1491(5) prohibits lawyers from acquiring by purchase "the property and rights which may be the object of any litigation in which they may take part by virtue of their profession." In Rubias vs. Batiller, such contracts were declared void under Article 1409(7) of the Civil Code. However, in Director of Lands vs. Ababa, the Court held that the prohibition does not apply to contingent contracts in which the conveyance takes place after judgment, so that the property can no longer be said to be "subject of litigation." In this case, the deed was executed following the finality of the decision approving the compromise agreement. It was a new contract, not one in pursuance of the compromise, in which Canlas purportedly assumed redemption rights. By virtue of this subsequent agreement, the lands had ceased to be property "the object of any litigation." The transfer was therefore not prohibited under Article 1491, but as a voidable contract it was open to annulment on the ground of undue influence under Articles 1330 and 1390 of the Civil Code.
• Reasonableness of Attorney's Fees: The extent of services Canlas rendered in Civil Case No. 30679 was not impressive enough to justify P100,000. The case did not involve complex questions of fact or law requiring substantial research or legwork. The market value of the properties was not a proper measure of the importance of the case. Canlas's professional stature did not warrant the sum claimed. Under Section 24, Rule 138, a written contract for services controls the amount to be paid unless found by the court to be unconscionable or unreasonable. The fees were reduced to P20,000 on a quantum meruit basis. Furthermore, Canlas's claim to an attorney's lien upon the properties under Section 29(b) of Rule 39 was rejected, as that rule refers to realty sold as a result of execution in satisfaction of judgment, whereas redemption here was decreed by compromise agreement between mortgagor and mortgagee, which did not make Canlas a redemptioner.

• Practice of Law as a Profession, Not a Business — Law advocacy is not capital that yields profits; the returns it produces are simple rewards for a job done or service rendered. The practice of law is impressed with public interest and is subject to State regulation. A lawyer who exploits his mastery of procedural law to score a "technical knockout" over his own client violates his oath to conduct himself with all good fidelity to his clients and to "delay no man for money." The Court applied this principle to condemn Canlas's conduct in leveraging his moral ascendancy over his financially distressed client to acquire the client's properties.
• Extrinsic Fraud as Ground for Annulment of Judgment — Extrinsic or collateral fraud refers to any fraudulent act of the prevailing party committed outside the trial of the case, whereby the defeated party is prevented from exhibiting fully his side of the case by fraud or deception practiced on him by his opponent. Only extrinsic fraud — not intrinsic fraud — can serve as a basis for annulment of judgment. The Court found that Herrera's allegations of collusion between Canlas and the judge did not constitute extrinsic fraud, as Herrera was privy to the incidents and had entered timely oppositions.
• Prohibition on Lawyers Acquiring Property in Litigation (Article 1491) — Article 1491(5) prohibits lawyers from acquiring by purchase property and rights which may be the object of any litigation in which they take part by virtue of their profession. Contracts violating this prohibition are void under Article 1409(7). However, the prohibition does not apply to contingent contracts executed after judgment has become final, at which point the property is no longer "the object of any litigation." The Court held the transfer was not prohibited because the deed was executed after the compromise judgment attained finality.
• Voidable Contracts for Undue Influence — Under Articles 1330 and 1390 of the Civil Code, a contract where consent is given through undue influence is voidable. A contract of adhesion must be read against the party who prepared it. The Court invalidated the transfer for undue influence, finding that Herrera, by reason of bankruptcy, had become an easy quarry to his counsel's moral influence and ascendancy, and that the ceding of redemption rights was intended merely to forestall total loss of the parcels, subject to redemption under easier terms.
• Quantum Meruit for Attorney's Fees — Under Section 24, Rule 138 of the Rules of Court and Article 2208 of the Civil Code, attorney's fees must be reasonable. A written contract for services controls the amount unless found unconscionable or unreasonable. Courts may reduce fees on a quantum meruit basis, considering the importance of the subject matter, the extent of services rendered, and the professional standing of the attorney. The Court reduced the P100,000 fee to P20,000, finding the services rendered did not warrant the original amount.
• Litigation Is Not a Game of Technicalities — Procedural rules have for their object the assistance of parties in obtaining just, speedy, and inexpensive determination of every action and proceeding. When procedure becomes an impediment to that objective, it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy. The Court invoked this doctrine to justify resolving the case on its merits despite sustaining the petitioner's procedural objections.

• "Law advocacy, we reiterate, is not capital that yields profits. The returns it births are simple rewards for a job done or service rendered. It is a calling that, unlike mercantile pursuits which enjoy a greater deal of freedom from government interference, is impressed with a public interest, for which it is subject to State regulation." — This passage articulates the Court's fundamental view of the legal profession as a public calling rather than a commercial enterprise, and serves as the ethical foundation for condemning the petitioner's conduct.
• "A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of movement and position, entraps and destroys the other. It is, rather, a contest in which each contending party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the merits." — Quoted from Alonso vs. Villamor (1910), this passage defines the Court's rationale for looking past procedural barriers to resolve the controversy on its merits, particularly where ethical violations by a lawyer against his own client are involved.
• "It is only extrinsic or collateral fraud, as distinguished from intrinsic fraud, however, that can serve as the basis for the annulment of judgment." — This formulation, drawn from Macabingkil vs. People's Homesite and Housing Corporation, defines the controlling standard for annulment of judgment and explains why the private respondent's petition did not state a proper cause of action for that remedy.
• "The Court finds the occasion fit to stress that lawyering is not a moneymaking venture and lawyers are not merchants, a fundamental standard that has, as a matter of judicial notice, eluded not a few law advocates." — This passage states the ethical principle underlying the Court's condemnation of the petitioner's exploitation of his client, and is frequently cited in subsequent legal ethics jurisprudence.

• Macabingkil vs. People's Homesite and Housing Corporation, No. L-29080, August 17, 1976, 72 SCRA 326 — Followed. Provides the canonical definition of extrinsic fraud as the sole ground for annulment of judgment. The Court applied this definition to conclude that Herrera's allegations of collusion did not constitute extrinsic fraud.
• Rubias vs. Batiller, No. L-35702, May 29, 1973 — Followed. Held that contracts prohibited under Article 1491 are void by force of Article 1409(7) of the Civil Code. The Court noted this principle but distinguished the case because the transfer here occurred after the litigation became final.
• Director of Lands vs. Ababa, No. L-26096, February 27, 1979, 88 SCRA 513 — Followed. Held that the prohibition in Article 1491 does not apply to contingent contracts in which conveyance takes place after judgment, so that the property can no longer be said to be "subject of litigation." The Court relied on this ruling to hold that Canlas's acquisition was not prohibited under Article 1491.
• Alonso vs. Villamor, 16 Phil. 315 (1910) — Followed. Enunciated the principle that litigation is not a game of technicalities. The Court invoked this doctrine to justify resolving the case on its merits despite sustaining the petitioner's procedural objections.
• De Guzman vs. Court of Appeals, No. L-52733, July 23, 1985, 137 SCRA 730 — Cited for the proposition that while there is no appeal from execution of judgment, appeal lies in case of irregular implementation of the writ. The Court found no irregular execution in this case.

• Article 1491(5), Civil Code — Prohibits lawyers from acquiring by purchase, even at public or judicial auction, the property and rights which may be the object of any litigation in which they take part by virtue of their profession. The Court held this prohibition inapplicable because the conveyance occurred after the subject litigation had attained finality.
• Article 1409(7), Civil Code — Declares contracts prohibited by law to be inexistent and void from the beginning. Cited in connection with Rubias vs. Batiller regarding contracts violating Article 1491.
• Article 2038, Civil Code — Provides that a compromise in which there is mistake, fraud, violence, intimidation, undue influence, or falsity of documents is subject to the provisions on voidable contracts. The Court noted this provision as applicable to the compromise agreement at issue.
• Article 1330, Civil Code — Provides that a contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. Applied to invalidate the transfer of redemption rights for undue influence.
• Article 2208, Civil Code — Requires that attorney's fees and expenses of litigation must be reasonable. The Court invoked this provision in reducing the stipulated fees.
• Section 24, Rule 138, Rules of Court — Provides that an attorney is entitled to no more than reasonable compensation, considering the importance of the subject matter, the extent of services rendered, and the professional standing of the attorney; a written contract for services controls the amount unless found unconscionable or unreasonable. The Court applied this provision to reduce the P100,000 fee to P20,000.
• Section 29(b), Rule 39, Rules of Court — Governs the right of a creditor having a lien by attachment, judgment, or mortgage on property sold to redeem the same. The Court held this provision inapplicable, as redemption was decreed by compromise agreement and did not make Canlas a redemptioner.
• Rule 1, Section 2, Rules of Court — States that procedural rules have for their object the assistance of parties in obtaining just, speedy, and inexpensive determination of every action and proceeding. Cited to justify the Court's decision to look past procedural technicalities and resolve the case on its merits.

Melencio-Herrera (Chairperson) and Medialdea, JJ., concurred.