De Guzman vs. Court of Appeals

In a true pacto de retro sale, title and ownership of the property sold are immediately vested in the vendee a retro, subject to the resolutory condition of repurchase by the vendor a retro within the stipulated period; failure of the vendor a retro to repurchase vests absolute title and ownership in the vendee a retro by operation of law, and the vendor's subsequent conveyance of the same property to a third party is void for lack of title to convey.

Deogracias Queriza was the original owner of a 745-square-meter parcel of unregistered residential land situated in San Fabian, Pangasinan. On July 20, 1957, he executed a Deed of Pacto de Retro Sale over the land in favor of his niece, private respondent Raymunda Ringor Quirimit, for ₱500.00, with the express stipulation that the vendor a retro could repurchase within five years and that upon failure to do so the contract would become an absolute, irrevocable, and consummated sale. Private respondent did not register the deed but took possession of the land by building her house on a portion thereof. At the time of the sale, the land had an assessed value of ₱380.00.

Deogracias Queriza was the original owner of a parcel of unregistered residential land containing approximately 745 square meters, situated in San Fabian, Pangasinan. On July 20, 1957, he executed a Deed of Pacto de Retro Sale over the land in favor of his niece, private respondent Raymunda Ringor Quirimit, for ₱500.00, with the express stipulation that the vendor a retro could exercise the right of repurchase within five years from execution and that upon failure to do so the contract would acquire the character of an absolute, irrevocable, and consummated sale. Private respondent did not register the deed but took possession of the land by building her house on a portion thereof.

Subsequently, Deogracias Queriza mortgaged the same parcel of land to the Manaoag Rural Bank. The land was allegedly redeemed on his behalf by his nephew, Miguel Queriza, on November 4, 1963. Without having exercised his right to repurchase under the pacto de retro sale, Deogracias Queriza executed a Deed of "Rimunitary [sic] Inter-vivos Donation" on April 26, 1967, covering the disputed land and two others, in favor of Miguel Queriza. Miguel Queriza thereafter declared the land in his name for taxation purposes and registered the Deed of Donation on August 8, 1967 in the Register of Deeds of Pangasinan.

On December 8, 1970, Miguel Queriza sold the land to petitioners, spouses Gregorio de Guzman, Jr. and Corazon Quinto. The Deed of Sale was registered on December 9, 1970, and the tax declaration was placed under their names. Petitioners lived not far from the property, and private respondent was actually residing in a house standing on the land at the time of the sale. Private respondent had confronted petitioners and informed them that the land had already been sold to her before they purchased it from Miguel Queriza. Petitioner Gregorio de Guzman testified that he noticed a house on the property but found nobody there on a single visit, and that he relied on the advice of a Notary Public that the title was clean.

In January 1971, petitioners sent private respondent written notice to vacate the land. Upon her refusal, they instituted Civil Case No. D-2662 for Quieting of Title and Recovery of Possession before the then Court of First Instance of Pangasinan, Fourth Branch. After trial, the court rendered judgment on January 19, 1973, declaring petitioners owners of the land and ordering private respondent to vacate, ruling that the pacto de retro sale was only a mortgage and that the Deed of Donation in favor of Miguel Queriza was valid. On appeal, the Court of Appeals reversed, finding the transaction to be a true pacto de retro sale and declaring private respondent the owner, applying Article 1544 of the New Civil Code on double sales.

• Improper Application of Article 1544: Petitioners contended that the appellate court erred in resolving the case under Article 1544 of the New Civil Code, relating to double sales, when such provision was never cited nor invoked by private respondent in the court a quo.
• Equitable Mortgage: Petitioners argued that the appellate court erred in not holding that the pacto de retro sale was an equitable mortgage in accordance with Article 1602 of the Civil Code.
• Negligence Rule: Petitioners maintained that the appellate court erred in not applying the rule that as between two innocent parties, the one who was negligent should bear the loss.
• Denial of Reconsideration: Petitioners argued that the appellate court erred in denying their motion for reconsideration.
• Change of Theory on Appeal: Petitioners theorized that since the trial court did not cite Article 1544, the appellate court was precluded from applying it, as doing so would entertain an issue not raised in the lower court and allow private respondent to change her theory on appeal.

• Applicability of Article 1544: Whether the Court of Appeals erred in applying Article 1544 of the New Civil Code on double sales to a case involving an earlier pacto de retro sale of unregistered land and a subsequent donation by the vendor a retro.
• Nature of the Transaction: Whether the pacto de retro sale between Deogracias Queriza and private respondent was a true pacto de retro sale or an equitable mortgage under Article 1602 of the Civil Code.
• Good Faith of Petitioners: Whether petitioners were purchasers in good faith, such that the rule on negligence as between two innocent parties should apply.
• Propriety of Appellate Court's Ruling: Whether the appellate court entertained an issue not raised in the lower court or allowed private respondent to change her theory on appeal.

• Applicability of Article 1544: No. The appellate court misapplied Article 1544, as the case did not involve a double sale under that provision but rather a pacto de retro sale followed by a donation of property the vendor a retro no longer owned.
• Nature of the Transaction: The pacto de retro sale was a true sale, not an equitable mortgage. The consideration of ₱500.00 was not unusually inadequate given the land's assessed value of ₱380.00, and the evidence showed that private respondent, not the vendor a retro, enjoyed the fruits of the land.
• Good Faith of Petitioners: No. Petitioners were purchasers in bad faith because they failed to inquire into the rights of the actual, visible, and public possessor of the land, despite living nearby and having been forewarned by private respondent that the land had already been sold to her.
• Propriety of Appellate Court's Ruling: No error in entertaining the issue or allowing a change of theory. The issue of who had a better right to the property was the very issue in an action for quieting of title, and private respondent's answer in the trial court had already raised the defense of petitioners' knowledge of her prior sale.

• Applicability of Article 1544: The appellate court erred in applying Article 1544, which governs double sales, because the case involved a pacto de retro sale of unregistered land and a subsequent donation by the vendor a retro — not two successive sales of the same property. However, the appellate court's ultimate conclusion that private respondent should be declared owner was nonetheless correct, as the case could be resolved on the proper legal basis even though the wrong provision was cited. The issue of who between the parties had a better right to the property was precisely the issue in an action for quieting of title and recovery of possession, and thus was properly before the appellate court.

• Nature of the Transaction: After a thorough review of the records, the Court found the transaction between Deogracias Queriza and private respondent to be a true pacto de retro sale. The consideration of ₱500.00 paid in 1957 was not unusually inadequate, considering the land had an assessed value of only ₱380.00 at the time of Miguel Queriza's sale to petitioners in 1971. The trial court's finding that the vendor a retro appropriated the fruits of the land was contrary to the evidence, as private respondent testified that she herself enjoyed the products of the land. Private respondent's failure to consolidate her ownership was satisfactorily explained by the close blood relationship with Deogracias Queriza and the trust reposed in his assurances that he had no heirs to challenge her, he being a Notary Public whose words she had reason to rely upon.

• Good Faith of Petitioners: The rule that as between two innocent parties the negligent one should bear the loss could not apply because petitioners were not innocent purchasers. The appellate court found that private respondent was actually residing in a house on the land when petitioners bought it, that petitioners lived nearby, and that private respondent had already confronted and informed them of her prior sale before their purchase. Petitioners failed to make the ordinary inquiries a prudent person would have made when buying land in the actual, visible, and public possession of someone other than the vendor. The Notary Public's assurance of a clean title could not be relied upon because the land was unregistered and there was no certificate of title to speak of. Such failure constituted gross negligence amounting to bad faith. Where land sold is in the possession of a person other than the vendor, the purchaser is required to go beyond the certificate of title and make inquiries concerning the rights of the actual possessor; failure to do so makes the purchaser a buyer in bad faith.

• Propriety of Appellate Court's Ruling: The appellate court did not entertain an issue not raised in the lower court nor allow private respondent to change her theory on appeal. The very issue in an action for quieting of title and recovery of possession is who between the parties has a better right to the property, which was the issue resolved. An examination of private respondent's answer in the trial court revealed she had interposed two defenses: the invalidity of the Deed of Donation by reason of fraud, undue influence, or mental incapacity of the donor, and the petitioners' knowledge of her prior pacto de retro sale. Thus, it was inaccurate to say she shifted her theory from the donor's senility to the vendees' bad faith to avail of Article 1544.

• Pacto de Retro Sale — Nature and Effect — The essence of a pacto de retro sale is that title and ownership of the property sold are immediately vested in the vendee a retro, subject to the resolutory condition of repurchase by the vendor a retro within the stipulated period. Failure of the vendor a retro to perform the resolutory condition vests upon the vendee a retro, by operation of law, absolute title and ownership over the property sold. The Court applied this doctrine to hold that absolute ownership vested in private respondent in 1962 upon Deogracias Queriza's failure to repurchase within five years.

• Non-Requirement of Consolidation under Article 1607 — Failure of the vendee a retro to consolidate title under Article 1607 of the Civil Code does not impair title or ownership already vested by operation of law, because the method prescribed therein is merely for the purpose of registering the consolidated title. The Court relied on this to sustain private respondent's ownership despite her non-registration.

• Nemo dat quod non habet (Donor Cannot Convey What Is Not His) — A donor cannot lawfully convey what is not his property. Since Deogracias Queriza was no longer owner of the land in 1967 when he donated it to Miguel Queriza, the donation conveyed no title, and consequently Miguel Queriza could convey no title to petitioners.

• Registration Does Not Vest Title — Registration does not vest title; it is not a mode of acquiring ownership but is merely evidence of such title over a particular property. It does not give the holder any better title than what he actually has. Where registration is made in bad faith, it is as if no registration was made at all insofar as the party with a superior right is concerned. Conversely, actual knowledge of a prior sale amounts to registration thereof. The Court applied this to nullify the effect of petitioners' registration of their deed of sale.

• Duty to Inquire When Land Is in Possession of Another — Where the land sold is in the possession of a person other than the vendor, the purchaser is required to go beyond the certificate of title and make inquiries concerning the rights of the actual possessor. Failure to do so makes the purchaser a buyer in bad faith. The Court applied this to find petitioners were purchasers in bad faith because they failed to inquire into the rights of private respondent, who was in actual, visible, and public possession of the land.

• "The essence of a pacto de retro sale is that title and ownership of the property sold are immediately vested in the vendee a retro, subject to the resolutory condition of repurchase by the vendor a retro within the stipulated period. Failure thus of the vendor a retro to perform said resolutory condition vests upon the vendee by operation of law absolute title and ownership over the property sold" — This passage states the ratio decidendi on the nature and effect of a pacto de retro sale, defining the doctrinal rule that ownership vests in the vendee a retro by operation of law upon the vendor's failure to repurchase.

• "Registration does not vest title. It is not a mode of acquiring ownership but is merely evidence of such title over a particular property. It does not give the holder any better title than what he actually has." — This passage articulates the canonical formulation of the principle that registration is merely evidentiary and not constitutive of title, a principle frequently cited in subsequent jurisprudence on land registration disputes.

• "The failure of appellees to take the ordinary precautions which a prudent man would have taken under the circumstances, specially in buying a piece of land in the actual visible and public possession of another person, other than the vendor, constitutes gross negligence amounting to bad faith." — This passage, quoted by the Court from the Court of Appeals' decision, defines the standard for determining bad faith in purchasers of land in the actual possession of another, establishing that failure to inquire is gross negligence equivalent to bad faith.

• Oviedo vs. Garcia, 40 SCRA 17 — Cited as authority for the proposition that failure of the vendor a retro to repurchase vests absolute title and ownership in the vendee a retro by operation of law.
• Rosario vs. Rosario, 110 Phil. 394 — Cited alongside Oviedo vs. Garcia for the same proposition regarding vesting of ownership in pacto de retro sales.
• Tan Queto vs. Candongo, 106 SCRA 197 — Cited as further authority on the effect of the vendor a retro's failure to repurchase.
• Defensor vs. Blanco, 11 SCRA 1 — Cited for the rule that failure of the vendee a retro to consolidate title under Article 1607 does not impair title or ownership, the method being merely for registration purposes.
• Esquejo vs. Fortaleza, 13 SCRA 187 — Cited for the principle that a donor cannot lawfully convey what is not his property.
• Cruz vs. Cabana, 129 SCRA 656 — Cited for the principle that registration does not vest title and that actual knowledge of a prior sale amounts to registration thereof.
• Conspecto vs. Fruto, 31 Phil. 144 — Cited for the rule that one who purchases real property in the actual possession of another should at least make inquiry concerning the rights of those in possession, and that absent such inquiry the purchaser cannot be regarded as bona fide.

• Article 1544, Civil Code of the Philippines — Governs double sales of the same property. The appellate court applied this provision, but the Supreme Court held it was misapplied because the case involved a pacto de retro sale and a subsequent donation, not two successive sales.
• Article 1602, Civil Code of the Philippines — Enumerates the circumstances under which a contract purporting to be an absolute sale is presumed to be an equitable mortgage. Petitioners invoked this provision, but the Court found the transaction was a true pacto de retro sale and not an equitable mortgage.
• Article 1607, Civil Code of the Philippines — Prescribes the procedure for consolidation of ownership by the vendee a retro. The Court held that failure to comply with this article does not impair title or ownership already vested by operation of law, as the method is merely for registering the consolidated title.

Gutierrez, Jr., Feliciano, Bidin, and Cortes, JJ., concurred.