Cristobal vs. Gomez

A partnership agreement created to redeem a brother's property from a prior sale with pacto de retro, stipulating that the property would be returned to the original owner or his legitimate children once the capital advanced was fully paid, constitutes an express trust binding on the parties and their successors, and the trustee cannot retain the property after the trust purpose has been accomplished.

Epifanio Gomez, the deceased husband of plaintiff Paulina Cristobal and father of the four Gomez children who joined as co-plaintiffs, originally owned three parcels of land in Bacoor, Cavite, including salt beds. On December 13, 1891, he sold the property under a contract of sale with pacto de retro to Luis R. Yangco, redeemable in five years for ₱2,500, but the redemption period lapsed without repurchase, consolidating title in Yangco. Years later, Yangco informally allowed Epifanio the privilege of repurchasing, but Epifanio lacked the means. He sought assistance from his kinsman Bibiano Bañas, who agreed to advance the funds only if Epifanio's brother Marcelino Gomez (the defendant) and sister Telesfora Gomez would assume personal responsibility for the loan. The defendant is the brother of Epifanio Gomez; the plaintiffs are Epifanio's widow and children.

Epifanio Gomez owned three parcels of land in Bacoor, Cavite, including salt beds. On December 13, 1891, he sold the property under a contract of sale with pacto de retro to Luis R. Yangco, redeemable in five years for ₱2,500, remaining in possession as lessee. The redemption period lapsed without repurchase, consolidating title in Yangco, who nevertheless later conceded to Epifanio the privilege of repurchasing. Epifanio lacked the means to repurchase and applied to his kinsman Bibiano Bañas for assistance. Bañas agreed to advance ₱7,000 upon the personal credit of Epifanio's brother Marcelino Gomez and sister Telesfora Gomez. In late July 1907, the four parties — Bañas, Epifanio, Marcelino, and Telesfora — met at Telesfora's home in Manila and reached an agreement: Bañas would advance ₱7,000 on the personal credit of Marcelino and Telesfora, the money would be used to repurchase the property in the names of Marcelino and Telesfora, who would hold and administer the property until the capital was paid off, after which the property would be returned to Epifanio Gomez.

This agreement was carried into effect through two documents. By Exhibit D, executed on July 10, 1907, Yangco conveyed the three parcels to Marcelino and Telesfora for a recited consideration of ₱5,000, though the actual amount paid was ₱6,700 — comprising ₱5,000 for the redemption, ₱1,500 to pay a separate loan Epifanio had obtained from Gregoria Yangco, and ₱200 as a gift to Yangco's manager. By Exhibit A, executed on August 12, 1907, Marcelino and Telesfora created a "private partnership in participation" to redeem the property, with capital of ₱7,000 (₱1,500 from Marcelino and ₱5,550 from Telesfora), stipulating that all income from the property would be applied to amortization of the capital, that the property would be placed in their names with Marcelino as manager, and that once the capital was fully covered, the property would be returned to Epifanio Gomez or his legitimate children. A further condition in paragraph (j) required Epifanio to manifest good behavior in the opinion of Marcelino and Telesfora before the property could be returned.

A little more than a year later, Epifanio Gomez died, leaving his widow Paulina Cristobal and four children. Marcelino entered into possession of the property and maintained it for approximately twenty years, during which he improved the salt beds by converting them from Filipino to Chinese style, and the property quintupled in value to approximately ₱50,000. On September 10, 1909, Telesfora, desiring to free herself from responsibility to Bañas, conveyed her interest in the three parcels to Marcelino by Exhibit E, the recited consideration of ₱6,096 representing the estimated amount of the Bañas obligation, though no money actually passed. On the same day, the parties declared the partnership dissolved (Exhibit 13), and Bañas required Marcelino to execute a sale with pacto de retro of the property to Bañas for ₱8,500 (Exhibit 14) as security for the indebtedness, with Bañas simultaneously leasing the property back to Marcelino at a semiannual rental of ₱510. The redemption period passed without repurchase, but on June 26, 1915, Bañas extended the right to repurchase indefinitely. On April 1, 1918, Marcelino paid Bañas ₱7,575.92 in full satisfaction and received a reconveyance, closing the documentary chain. Marcelino admitted at trial that he had obtained enough income from the property to reimburse him for all outlays, including the Bañas loan.

The trial court found that the property belonged to the plaintiffs as co-owners and ordered Marcelino to surrender the property, execute a deed of transfer, and pay costs. Marcelino appealed, maintaining that he owned the property in his own right.

N/A — The decision does not recount specific legal arguments of the plaintiffs-appellees beyond their claim to ownership as co-owners and heirs of Epifanio Gomez.

• Ownership in Own Right: Defendant-appellant claimed to be owner in his own right of all the property subject of the action, asserting that the funds used to redeem the property from Bañas in 1918 were his own money obtained from the sale of a lithographic plant.
• Donation Theory: Appellant argued that any right Epifanio might have had under Exhibit A could only derive from the aspect of the agreement as a donation, and since the donation was never accepted by Epifanio in a public document, his interest was unenforceable.
• Good Behavior Condition: Appellant contended that paragraph (j) of the partnership agreement made good behavior a condition precedent to the return of the property, and that Epifanio violated this condition by selling salt lots to various persons and attending cockfights distasteful to his siblings.
• Consolidation of Title: Appellant argued that since the property consolidated in Bañas in 1915 under the pacto de retro sale, the subsequent repurchase by Marcelino in 1918 vested indefeasible title in him free from the original trust.
• Prescription: Appellant urged that prescription favored him, having been in possession for more than ten years under the deed by which he acquired sole right from his sister in 1909.
• Estoppel on Parcel C: Appellant relied on a notarial document dated December 31, 1904, in which Epifanio Gomez, acting as notary public, certified that Marcelino Gomez was the true owner of certain properties including parcel C, contending that Epifanio and his successors were estopped from claiming the lot.

• Nature of the Agreement: Whether the partnership agreement (Exhibit A) constituted an express trust binding on the parties and their successors, or merely an unaccepted donation.
• Good Behavior Condition: Whether Epifanio Gomez's alleged misbehavior constituted a valid ground for forfeiture of the right to recover the property, particularly as against his legitimate children.
• Effect of Consolidation in Bañas: Whether the consolidation of title in Bañas in 1915 and the subsequent repurchase by Marcelino in 1918 extinguished the trust and vested indefeasible title in Marcelino.
• Prescription: Whether prescription favored the defendant given his possession of the property.
• Estoppel on Parcel C: Whether the 1904 notarial document executed by Epifanio Gomez estopped the plaintiffs from claiming parcel C.

• Nature of the Agreement: Yes. The partnership agreement (Exhibit A) constituted an express trust, not a donation, and was fully binding on both contracting parties and their successors under article 1257 of the Civil Code.
• Good Behavior Condition: No. Epifanio's alleged misbehavior during the year or more he lived after the trust agreement could not be attributed as a ground of forfeiture to his legitimate children ten years later, especially as no step had ever been taken during Epifanio's lifetime to defeat his rights on account of misbehavior.
• Effect of Consolidation in Bañas: No. The 1918 purchase was really a repurchase consequent upon Bañas's extension of the redemption period, and Marcelino must be considered to hold in the same right as before — subject to the trust in favor of Epifanio Gomez.
• Prescription: No. Prescription does not run in favor of a trustee in possession under a continuing and subsisting trust; and even assuming the prescriptive period began in 1918, ten years had not elapsed when the action was instituted.
• Estoppel on Parcel C: No. No estoppel could be invoked because Marcelino was not misled by the false statement in the 1904 document, which was merely part of a scheme between Epifanio and Marcelino to defeat Yangco's rights or other creditors.

• Nature of the Agreement: The partnership agreement (Exhibit A) between Marcelino and Telesfora Gomez created a trust for the express purpose of rescuing the property of Epifanio Gomez. The agreement expressly stipulated that once the capital employed, with interest and incidental expenses, was fully covered, the property would be returned to Epifanio or his legitimate children. This was not a donation requiring acceptance in a public document, but an express trust. Epifanio was present when the arrangement was discussed and assented to it, as testified by Bañas; and even if he never saw Exhibit A itself, he understood the nature of the arrangement and his assent constituted sufficient acceptance. Under the second paragraph of article 1257 of the Civil Code, the successors of Epifanio Gomez were entitled to demand fulfillment of the trust. The dissolution of the partnership through Exhibits E and 13 merely eliminated Telesfora from responsibility and clothed Marcelino alone with the obligations created by Exhibit A; it did not destroy the beneficial right of Epifanio.

• Good Behavior Condition: The trust agreement contemplated return of the property when the debt was fully liquidated, which did not occur until 1918, while Epifanio died in 1908. Misbehavior by Epifanio during the year or more he lived after the trust agreement could not be attributed as a ground of forfeiture to his legitimate children ten years later. No step had ever been taken during Epifanio's lifetime to defeat his rights under the trust on account of alleged misbehavior.

• Effect of Consolidation in Bañas: Bañas held the property under the pacto de retro sale (Exhibit 14) as mere security for his loan, as evidenced by his acceptance of partial payments on the capital and his voluntary indefinite extension of the redemption period after nominal consolidation. The purchase effected by Marcelino in 1918 was really a repurchase consequent upon that extension, and he must be considered to hold in the same right as before — subject to the trust in favor of Epifanio Gomez.

• Prescription: Prescription is not effective in favor of a trustee in possession under a continuing and subsisting trust (Code of Civil Procedure, sec. 38). The defendant was merely a trustee, not a holder adverse to all other claimants. Even assuming the statute of limitations began to run in 1918 when Marcelino recovered the property from Bañas, the ten-year period had not been completed when the action was instituted, and the minority of one or more plaintiffs during that period could be disregarded.

• Estoppel on Parcel C: The 1904 notarial document in which Epifanio certified that Marcelino was the true owner of certain properties was part of a scheme between the brothers to defeat Yangco's rights or other creditors — a plot they never carried into effect. No estoppel could be invoked by Marcelino or his successors because he was not misled by the false statement contained therein.

• Express Trust Created by Partnership Agreement — A partnership agreement stipulating that property redeemed from a prior sale will be held and administered by the partners until the capital advanced is fully paid, after which it shall be returned to the original owner or his legitimate children, creates an express trust. The trustee is bound to administer the property in that character and must reconvey once the trust purpose is accomplished. The successors of the beneficiary are entitled to demand fulfillment under article 1257 of the Civil Code. Applied here: Marcelino and Telesfora's partnership agreement (Exhibit A) was held to be an express trust binding on Marcelino and his successors, requiring reconveyance to Epifanio's heirs after the loan was fully liquidated.

• Prescription Does Not Run Against a Continuing Trust — A trustee in possession under a continuing and subsisting trust cannot invoke prescription, as possession in that capacity is not adverse to the beneficiary. Under section 38 of the Code of Civil Procedure, prescription is not effective in favor of such a holder. Applied here: Marcelino's possession for over twenty years did not ripen into ownership by prescription because he held as trustee, not adversely.

• Pacto de Retro Sale as Mere Security — When a sale with pacto de retro is in reality intended as security for a loan, as evidenced by the lender's acceptance of partial payments and voluntary extension of the redemption period after nominal consolidation, the property is held as mere security and not as absolute title. Applied here: Bañas's pacto de retro purchase from Marcelino was treated as security for the ₱7,000 loan, and the 1918 reconveyance was a repurchase, not a new acquisition free of the trust.

• "The so-called partnership agreement (Exhibit A) between Marcelino Gomez and his sister created a trust for the express purpose of rescuing the property of Epifanio Gomez; and now that the purpose has been accomplished, the property should be returned to his legitimate children, as provided in paragraph (i) of the agreement." — This passage states the ratio decidendi: the partnership agreement constituted an express trust whose purpose having been accomplished, reconveyance to the beneficiary's heirs was required.

• "Prescription is not effective in favor of such a holder (Code of Civil Procedure, sec. 38)." — This establishes the rule that prescription does not run in favor of a trustee in possession under a continuing trust, a doctrine frequently cited in subsequent trust jurisprudence.

• "The partnership agreement should not be viewed in the light of an intended donation, but as an express trust." — This distinguishes an express trust from a donation, rejecting the defendant's argument that the agreement required acceptance in a public document to be enforceable.

• Martinez vs. Graño, 42 Phil. 35 — Followed. The Court held that a person who agrees with vendors to buy property and administer it until all debts are paid, after which the property shall be turned back to the original owner, is bound by such agreement and becomes in effect a trustee upon buying in the property. The same rule was applied to Marcelino Gomez's partnership agreement.

• Article 1257, Civil Code (second paragraph) — Provides that contracts are binding not only as to what is expressly stipulated but also as to all consequences which, by their nature, equity, or law, are deemed included therein. Applied to hold that the successors of Epifanio Gomez were entitled to demand fulfillment of the trust created by Exhibit A.
• Section 38, Code of Civil Procedure — Provides that prescription is not effective in favor of a trustee in possession under a continuing and subsisting trust. Applied to reject the defendant's defense of prescription.

Avanceña, C.J., Johnson, Malcolm, Villamor, Ostrand, and Romualdez, JJ., concurred.

• Johns, J. (with whom Villa-Real, J., concurred) — Dissented on the ground that there was no evidence that the defendant acted as trustee or ever recognized a trust, and that during the entire twenty-year period he never rendered any accounting nor was ever requested to do so. The dissent characterized the majority ruling as penalizing the defendant for his thrift and prudent business methods, taking the property without compensation for twenty years of faithful service. It emphasized that the defendant spent his own time and money improving the property, paid a portion of the purchase price from his own funds, and at all times treated the property as his own. The dissent argued that the very fact that no one demanded an accounting during twenty years was conclusive evidence that the defendant never held title in trust, and that the case would never have appeared in court but for the increase in property value. The judgment of the lower court should have been reversed.