Development Bank of the Philippines vs. Court of Appeals and Spouses Timoteo and Selfida S. Piñeda

A mortgagee-buyer who consolidates title and takes possession of foreclosed property after the expiration of the one-year redemption period under Act No. 3135 is a possessor in good faith and is entitled to keep the fruits of the property, notwithstanding the homesteader's separate right to repurchase under Section 119 of Commonwealth Act No. 141, unless the mortgagee was aware of a flaw invalidating its title.

The respondent spouses Piñeda were registered owners of a parcel of homestead land in Dumarao, Capiz, covered by Homestead Patent No. 0844 and Original Certificate of Title No. P-1930. On March 7, 1972, they mortgaged the property to DBP to secure an agricultural loan of P20,000.00. The property was tenanted land covered by P.D. No. 27, which declared tenant-farmers as owners of the land they tilled. The Ministry of Justice later issued Opinion No. 92, Series of 1978, declaring that lands covered by P.D. No. 27 could not be the object of foreclosure proceedings after the decree's promulgation on October 21, 1972.

The respondent spouses Timoteo and Selfida Piñeda were the registered owners of a parcel of land in barangay Astorga, Dumarao, Capiz, containing 238,406 square meters, covered by Homestead Patent No. 0844 and Original Certificate of Title No. P-1930. On March 7, 1972, they mortgaged the property to the Development Bank of the Philippines to secure an agricultural loan of P20,000.00. When the Piñedas failed to comply with the terms of the mortgage, DBP extrajudicially foreclosed the property on February 2, 1977. DBP was the highest bidder at the foreclosure sale, and a Sheriff's Certificate of Sale was executed in its favor, indicating that the property was "sold subject to the redemption within five (5) years from the date of registration of this instrument and in the manner provided for by law applicable to this case." The certificate of sale was registered on April 25, 1977.

On March 10, 1978, after the expiration of the one-year redemption period under Section 6 of Act No. 3135, DBP consolidated its title by executing an Affidavit of Consolidation of Ownership. A Final Deed of Sale was executed in DBP's favor and registered together with the Affidavit of Consolidation on May 30, 1978. Original Certificate of Title No. P-1930 was cancelled and TCT No. T-15559 was issued in DBP's name. DBP thereafter took possession of the property and appropriated its produce.

On July 5, 1978, the Ministry of Justice issued Opinion No. 92, Series of 1978, declaring that lands covered by P.D. No. 27, like the subject property, could not be the object of foreclosure proceedings after the decree's promulgation on October 21, 1972. On August 24, 1981, the Piñedas offered to redeem the property by offering P10,000.00 as partial redemption payment, which DBP accepted and conditionally approved as a down payment. However, on November 11, 1981, DBP informed the Piñedas that their offer to redeem could not be favorably considered because the property was tenanted under P.D. No. 27.

On November 16, 1981, DBP requested the Acting Register of Deeds of Capiz to cancel TCT No. T-15559 and restore OCT No. P-1930 in the Piñedas' name. The Register of Deeds suggested that DBP file a petition in court pursuant to Section 108 of Presidential Decree No. 1529. DBP filed such petition with the Court of First Instance of Capiz, Branch II, docketed as Special Case No. 2653, which was favorably acted upon on February 22, 1982. The foreclosure proceeding was declared null and void, and the Register of Deeds was ordered to cancel TCT No. 15559 and revive OCT No. 1930.

Meanwhile, on December 21, 1981, the Piñedas filed the instant complaint against DBP, averring that DBP, in evident bad faith, caused the consolidation of its title despite the five-year redemption period stated in the Sheriff's Certificate of Sale and that their offer to redeem was made well within that period. The RTC ruled in favor of the Piñedas, and the Court of Appeals affirmed, awarding P216,000.00 as the value of the property's produce for three years, P10,000.00 in attorney's fees, and litigation costs. The Court of Appeals stated that DBP was in evident bad faith when it unlawfully took possession of the property and defied what was written on the Sheriff's Certificate of Sale.

• Lack of Evidence for Actual Damages: DBP maintained that the valuation of the income derived from the property allegedly amounting to P216,000.00 was not proven by the Piñedas, who had the burden of proving actual damages. DBP argued that the property did not produce income amounting to P72,000.00 per annum, and Selfida Piñeda herself admitted this fact.

• Absence of Bad Faith: DBP alleged that the mere fact that it took possession and administration of the property does not warrant a finding of bad faith. DBP argued that (a) the Piñedas consented to and approved the takeover, (b) Section 7 of Act No. 3135 allows the mortgagee-buyer to take possession even during the redemption period, and (c) there is no law prohibiting the purchaser at public auction from consolidating title after the one-year redemption period.

• Statutory Lien Attaches by Operation of Law: DBP argued that even if the five-year redemption period was not indicated in the TCT, Sections 44 and 46 of P.D. No. 1529 attach such lien by operation of law, and Section 119 of C.A. No. 141 makes the right of redemption a statutory lien that subsists despite absence of registration.

• Reliance on Ministry of Justice Opinion: DBP could not have been in bad faith when it denied the Piñedas' offer to redeem because the denial was premised on Opinion No. 92 of the Minister of Justice, and DBP immediately filed a petition to nullify the foreclosure proceedings, which was against its own interests.

• Contractual Right to Possession: DBP asserted that the Piñedas appointed DBP as their attorney-in-fact or agent in case of foreclosure under Section 4 of the mortgage contract, which allowed DBP to take possession of the property and hold the rents and profits derived therefrom.

• Entitlement to Fruits: DBP argued that as the lawful possessor after consolidating its title, it was entitled to the fruits and income of the property pursuant to Section 34, Rule 39 of the Rules of Court.

• Bad Faith Through Premature Consolidation: The Piñedas argued that DBP's bad faith stemmed from the fact that DBP consolidated title over the disputed property despite the statement in the Sheriff's Certificate of Sale that the land was subject to a five-year redemption period.

• Right to Repurchase Under Section 119: The Piñedas were of the belief that Section 119 of C.A. No. 141 prohibits a purchaser of homestead land in a foreclosure sale from consolidating title over the property after the one-year period to redeem has expired.

• Bad Faith of DBP: Whether DBP was in bad faith when it took possession of the disputed lot after consolidating its title.
• Award of Actual Damages: Whether the Court of Appeals erred in awarding actual damages of P216,000.00 in favor of the Piñedas notwithstanding the absence of evidence substantiating said award.
• Award of Attorney's Fees and Litigation Costs: Whether the Court of Appeals erred in affirming the award of attorney's fees and litigation costs in favor of the Piñedas.

• Bad Faith of DBP: No. DBP was a possessor in good faith, not being aware of any flaw in its title or mode of acquisition that invalidated it. The burden was on the Piñedas to prove DBP's bad faith, which they failed to do.

• Award of Actual Damages: No. The award of P216,000.00 as the value of the annual produce was deleted because DBP, as a possessor in good faith, was entitled to keep the fruits of the property during its possession.

• Award of Attorney's Fees and Litigation Costs: No. The awards for attorney's fees and litigation expenses were deleted because DBP's acts were clearly not unjustified, and the Piñedas were not compelled to litigate by reason of any unjustified act or omission of DBP.

• Bad Faith of DBP: The Court defined a possessor in good faith as one who is not aware that there exists in his title or mode of acquisition any flaw which invalidates it, citing Article 526 of the Civil Code. Good faith is always presumed, and upon him who alleges bad faith rests the burden of proof, citing Article 527. The Piñedas failed to prove that DBP was aware of the flaw in its title, i.e., the nullity of the foreclosure. DBP's act of consolidating its title and taking possession after the expiration of the one-year redemption period was in accordance with Section 6 of Act No. 3135 and in consonance with Section 4 of the mortgage contract. The Ministry of Justice Opinion No. 92 was issued on July 5, 1978, almost two months after DBP consolidated its title on March 10, 1978. By law and jurisprudence, a mistake upon a doubtful or difficult question of law may properly be the basis of good faith. Citing Maneclang vs. Baun, the Court held that good faith of the possessor ceases when an action to recover possession is filed against him and he is served summons. DBP was served summons on June 30, 1982, but by that time it was no longer in possession of the property, as possession was given back to the Piñedas after the foreclosure was declared null and void on February 22, 1982. Therefore, any income collected by DBP from May 30, 1978 up to February 22, 1982 belongs to DBP as a possessor in good faith.

• Award of Actual Damages: The Court held that the right of DBP to consolidate its title and take possession of the subject property is not affected by the Piñedas' right to repurchase within five years under Section 119 of C.A. No. 141. Section 119 does not contain any prohibition to convey homestead land but grants the homesteader, his widow or legal heirs a right to repurchase within five years in the event that he conveys the land. The right to repurchase is based on the assumption that the person under obligation to reconvey the property has the full title to the property because it was voluntarily conveyed to him or that he consolidated his title thereto by reason of a redemptioner's failure to exercise his right of redemption. The five-year period of redemption fixed in Section 119 of the Public Land Law for homestead sold at extrajudicial foreclosure begins to run from the day after the expiration of the one-year period of repurchase allowed in an extrajudicial foreclosure. Thus, DBP's consolidation of title did not derogate from or impair the right of the Piñedas to redeem under C.A. No. 141.

• Award of Attorney's Fees and Litigation Costs: Although attorney's fees may be awarded if the claimant is compelled to litigate with third persons or to incur expenses to protect his interest by reason of an unjustified act or omission of the party from whom it is sought, the Court held that DBP's acts were clearly not unjustified. The award of attorney's fees was therefore deleted.

• Good Faith Possession — A possessor in good faith is one who is not aware that there exists in his title or mode of acquisition any flaw which invalidates it (Article 526, Civil Code). Good faith is always presumed, and upon him who alleges bad faith on the part of a possessor rests the burden of proof (Article 527, Civil Code). The Court applied this doctrine to hold that DBP was a possessor in good faith because the Ministry of Justice opinion declaring the foreclosure void was issued after DBP had already consolidated its title, and a mistake upon a doubtful or difficult question of law may properly be the basis of good faith.

• Cessation of Good Faith — Good faith of the possessor ceases when an action to recover possession of the property is filed against him and he is served summons therefor (Maneclang vs. Baun). In this case, DBP was served summons on June 30, 1982, but by that time it was no longer in possession of the disputed land, as possession had been returned to the Piñedas after the foreclosure was declared null and void on February 22, 1982. Therefore, DBP's possession was never legally interrupted, and it was entitled to keep the fruits collected during its possession.

• Right of Repurchase Under Section 119 of C.A. No. 141 — Section 119 does not prohibit the conveyance of homestead land but grants the homesteader, his widow or legal heirs a right to repurchase the land within five years in the event that he conveys it. The right to repurchase is based on the assumption that the person under obligation to reconvey the property has the full title to the property because it was voluntarily conveyed to him or that he consolidated his title thereto by reason of a redemptioner's failure to exercise his right of redemption. The five-year period of redemption begins to run from the day after the expiration of the one-year period of repurchase allowed in an extrajudicial foreclosure.

• "A possessor in good faith is one who is not aware that there exists in his title or mode of acquisition any flaw, which invalidates it. Good faith is always presumed, and upon him who alleges bad faith on the part of a possessor rests the burden of proof." — This passage defines the controlling doctrine of good faith possession and allocates the burden of proof, which was the basis for absolving DBP from liability.

• "The Opinion of the Ministry of Justice was issued on July 5, 1978 or almost two months after DBP consolidated its title to the property on March 10, 1978. By law and jurisprudence, a mistake upon a doubtful or difficult question of law may properly be the basis of good faith." — This passage explains why DBP's reliance on the validity of its consolidation was in good faith, as the legal flaw was only declared after DBP had already acted.

• "Section 119 does not contain any prohibition to convey homestead land but grants the homesteader, his widow or legal heirs a right to repurchase said land within a period of five years in the event that he conveys said land." — This passage clarifies the proper interpretation of Section 119 of C.A. No. 141, distinguishing the right to repurchase from a prohibition on conveyance.

• Maneclang vs. Baun, 208 SCRA 179 [1992] — Cited as controlling authority for the rule that when a contract of sale is void, the possessor is entitled to keep the fruits during the period for which it held the property in good faith, and that good faith ceases when an action to recover possession is filed and summons is served.

• Tarnate vs. Court of Appeals, 241 SCRA 254 [1995] — Cited to support the rule that if no redemption is made within one year, the purchaser is entitled as a matter of right to consolidate title to the property.

• Javelosa vs. Court of Appeals, 265 SCRA 493 [1997] — Cited to support the rule that the purchaser is entitled as a matter of right to possess the property after the redemption period expires.

• Pascua vs. Talens, 80 Phil. 792 [1948] — Cited to explain the policy of homestead laws to distribute disposable agricultural lands of the State to land-destitute citizens for their home and cultivation, and that the right to repurchase under Section 119 aims to preserve and keep in the family of the homesteader that portion of public land which the State had gratuitously given him.

• Rural Bank of Davao City vs. Court of Appeals, 217 SCRA 554 [1993] — Cited to support the proposition that the right to repurchase under Section 119 is based on the assumption that the person under obligation to reconvey the property has the full title to the property.

• Belisario vs. Intermediate Appellate Court, 165 SCRA 101 [1988] — Cited for the settled rule that the five-year period of redemption fixed in Section 119 of the Public Land Law for homestead sold at extrajudicial foreclosure begins to run from the day after the expiration of the one-year period of repurchase allowed in an extrajudicial foreclosure.

• Philippine National Bank vs. Court of Appeals, 256 SCRA 44 [1996] — Cited to support the rule that attorney's fees may be awarded if the claimant is compelled to litigate with third persons or to incur expenses to protect his interest by reason of an unjustified act or omission of the party from whom it is sought.

• Section 6, Act No. 3135 — Provides that in extrajudicial foreclosure sales, the debtor may redeem the property within one year from the date of sale. The Court applied this provision to hold that DBP's consolidation of title after the one-year period was in accordance with law.

• Section 7, Act No. 3135 — Allows the purchaser at a foreclosure sale to petition the court for possession during the redemption period, furnishing a bond. Cited by DBP to support its right to take possession of the property.

• Section 119, Commonwealth Act No. 141 (Public Land Act) — Provides that every conveyance of land acquired under the free patent or homestead provisions shall be subject to repurchase by the applicant, his widow, or legal heirs within five years from the date of conveyance. The Court interpreted this provision as granting a right to repurchase, not a prohibition on conveyance, and held that DBP's consolidation of title did not impair this right.

• Sections 44 and 46, Presidential Decree No. 1529 — Provide that registered land shall be subject to statutory liens and incidents arising by operation of law. Cited by DBP to argue that the right of redemption attaches by operation of law even without annotation in the title.

• Section 108, Presidential Decree No. 1529 — Provides for the amendment and alteration of certificates of title by order of the proper court. This was the basis for DBP's petition to cancel TCT No. T-15559 and revive OCT No. P-1930.

• Articles 526 and 527, Civil Code — Define a possessor in good faith and provide that good faith is always presumed, with the burden of proving bad faith on the party alleging it. These provisions were the foundation of the Court's ruling that DBP was a possessor in good faith.

• Section 34, Rule 39, Rules of Court — Provides that the purchaser at a foreclosure sale is entitled to receive the rents of the property sold or the value of the use or occupation thereof pending redemption. Cited by DBP to support its entitlement to the fruits of the property.

• P.D. No. 27 — Decreeing the emancipation of tenants from the bondage of the soil, transferring to them the ownership of the land they till. The Ministry of Justice Opinion No. 92 declared that lands covered by this decree could not be the object of foreclosure proceedings after its promulgation.

Melo, Vitug, Panganiban, and Purisima, JJ., concurred.