Escay vs. Court of Appeals

The original and supplementary contracts transferring the properties of the estate of Emilio Escay to Jose Escay, Sr. in consideration of his assumption of the estate's mortgage indebtedness to the Philippine National Bank, subject to the heirs' right of repurchase within five years from full payment, were valid deeds of sale with assumption of obligation, and the failure of the heirs to exercise the right of repurchase within the stipulated period extinguished any claim to the properties, while the action for reconveyance based on implied or express trust had prescribed.

Emilio and Jose Escay, Sr. were brothers. Emilio had mortgaged his properties to the Philippine National Bank (PNB) during his lifetime but died in 1924 before satisfying the obligation. The estate of Emilio Escay was under probate administration, with Atty. Eduardo Arboleda serving as judicial administrator. PNB filed a foreclosure suit against the estate in 1930. The transactions at issue were governed by the Code of Civil Procedure, which regulated the authority of probate courts to approve sales of estate properties and prescribed notice requirements to heirs.

Emilio and Jose Escay, Sr. were brothers. During his lifetime, Emilio mortgaged his properties to the Philippine National Bank. He died in 1924 before he could pay his obligation, which had mounted. In 1930, the bank filed a foreclosure suit against the estate of Emilio, then represented by its administrator, Atty. Eduardo Arboleda. Pending the foreclosure suit, on April 28, 1933, an original contract was entered into among PNB, Jose Escay, Sr., and the administrator, under which Jose assumed the mortgage indebtedness of his deceased brother Emilio. This arrangement was agreed to by Magdalena Vda. de Escay, widow of Emilio, in her own behalf and as guardian ad litem of their children. On May 13, 1933, Magdalena executed a written conformity (Exhibit "G") to the original contract, expressly consenting to the transfer of the estate's rights over the mortgaged lots to Jose Escay, Sr., in consideration of his assumption of the estate's entire obligation to PNB.

When it was discovered that the original contract failed to state the transfer of ownership of the properties to Jose Escay, Sr. — an omission attributed to Atty. Recto of PNB, who had drafted the deed with only the bank's interests in mind — a supplementary contract was executed among PNB, the administrator Atty. Arboleda, and Jose Escay, Sr. This supplementary contract expressly ceded and transferred all rights over the mortgaged properties to Jose Escay, Sr. in consideration of his assumption of the estate's obligation to PNB, subject to the right of the heirs of Emilio to repurchase the properties within five years after Jose Escay, Sr. had fully paid the estate's obligation to PNB, Bacolod Branch. The probate court approved the supplementary contract in its order of February 24, 1934. A copy of the order was sent by registered mail to Magdalena Vda. de Escay, who took no action to set it aside.

In 1936, Roberto Escay, the eldest son of Emilio, executed a contract of lease (Exhibit 8) in which he acknowledged Jose Escay, Sr. to be the owner of the properties in question; Magdalena signed as witness thereto. By 1939, titles over the properties had been transferred to Jose Escay, Sr.'s name. Jose Escay, Sr. paid the estate's obligation to PNB in full — making outright payments of more than ₱4,000 for arrearages, delivering 750 piculs of sugar to the bank at ₱6.30 per picul, making subsequent yearly payments of 450 piculs beginning crop year 1933–34 until the obligation was fully liquidated, and paying more than ₱1,128.00 to discharge the estate's obligation to the Pacific Commercial Company. After fully paying PNB, Jose Escay, Sr. mortgaged the same properties to the Compañia General de Tabacos.

In 1941, Magdalena Vda. de Escay, Roberto, and the other children filed a complaint against Jose Escay, Sr. and Atty. Arboleda for recovery of ownership and possession of the properties. In that complaint, the petitioners themselves alleged as fact that Jose Escay, Sr. had paid in full the mortgage indebtedness with PNB and was holding the properties under adverse and exclusive possession for his exclusive benefit. The case was provisionally dismissed on July 24, 1944 upon motion of the parties. In 1959, the heirs filed the present action for reconveyance. The Court of Appeals upheld the validity of the contracts as deeds of sale with assumption of obligation, found that the right of repurchase had expired, and held that the action had prescribed.

• Nature of the Contracts: Petitioners contended that the original and supplementary contracts were not deeds of sale but merely transferred possession, administration, and supervision of the properties to Jose Escay, Sr.; it was never the intention of the heirs to transfer ownership.
• Lack of Consideration and Simulation: Petitioners argued that the contracts were fictitious and simulated for lack of consideration, and that an action to annul a non-existent contract does not prescribe.
• Invalidity of Supplementary Contract for Lack of Notice: Petitioners maintained that the supplementary contract was null and void because it was approved by the probate court without their knowledge and consent, there being no written notice to the heirs as required by Section 714 of the Code of Civil Procedure.
• Lack of Probate Court Authority: Petitioners argued that the probate court had no power under Section 718 of the Code of Civil Procedure to authorize the sale of estate properties to satisfy a mortgage lien, which would in effect constitute a foreclosure not within the probate court's power.
• Antichresis Theory: Petitioners contended that the contracts were antichretic in nature, and therefore no ownership could have been transferred to Jose Escay, Sr.; he merely became a creditor of the estate entitled to appropriate the fruits of the properties to satisfy his credit.
• Adverse Possession of Registered Land: Petitioners argued that since the properties were registered under the Torrens system, acquisitive prescription under Section 41, Act 190 could not apply.
• Implied Trust: Petitioners contended that since the titles were transferred to Jose Escay, Sr. by fraudulent means, an implied trust was created by operation of law, making him a trustee for the heirs of Emilio Escay, whose right to recover does not prescribe.
• Express Trust: Petitioners raised for the first time in their reply to respondents' comment on the motion for reconsideration that the contracts created an express trust, and that an action based on express trust does not prescribe.
• Non-Payment of Obligation: Petitioners pointed out that the annotation of the encumbrance relating to the estate's obligation to PNB still appeared on the titles, suggesting the obligation had not been fully paid.

• Valid Sale with Right of Repurchase: Respondents maintained that the original and supplementary contracts were valid deeds of sale with assumption of obligation, transferring ownership to Jose Escay, Sr. subject to the heirs' right of repurchase within five years from full payment of the estate's obligation to PNB.
• Valuable Consideration: Respondents argued that the assumption of the mortgage indebtedness constituted valuable consideration, supported by Jose Escay, Sr.'s actual payments to PNB and the Pacific Commercial Company.
• Heirs' Consent: Respondents contended that the heirs had consented to the transfer through their mother and guardian ad litem, Magdalena Vda. de Escay, whose written conformity (Exhibit "G") and subsequent silence upon receipt of the probate court's order approving the supplementary contract demonstrated knowledge and approval.
• Expiration of Repurchase Period: Respondents maintained that the five-year repurchase period had long expired, as full payment was made before 1941, and the heirs never made any offer to repurchase.
• Prescription: Respondents argued that the action for reconveyance had prescribed, whether based on implied trust (ten years from discovery of fraud in 1941) or express trust (ten years from repudiation in 1941).

• Validity of Contracts: Whether the original contract, the supplementary contract, and the probate court order approving the latter are valid.
• Adverse Possession: Whether the respondents acquired the properties by adverse possession or acquisitive prescription.
• Implied Trust: Whether Jose Escay, Sr. held the properties in implied trust for the heirs of Emilio Escay.
• Express Trust: Whether the contracts created an express trust in favor of the petitioners.
• Full Payment: Whether Jose Escay, Sr. fully paid the obligation of the estate of Emilio Escay to PNB.
• Prescription: Whether the petitioners' action for reconveyance had prescribed.

• Validity of Contracts: Yes. The original and supplementary contracts were valid deeds of sale with assumption of obligation, transferring ownership to Jose Escay, Sr. subject to the heirs' right of repurchase, with the heirs' consent having been given through their guardian ad litem.
• Adverse Possession: Yes. Jose Escay, Sr. became the registered owner in 1939 and possessed the properties in the concept of owner continuously, publicly, openly, and adversely for more than 25 years, acknowledged by the petitioners themselves.
• Implied Trust: No. No fraud was proved in the execution of the contracts, which resulted from bona fide negotiations among the estate administrator, PNB, the heirs' guardian ad litem, and Jose Escay, Sr.; without fraud, no trust relation arose.
• Express Trust: No. A party may not change its theory on appeal; the express trust theory was raised for the first time in the reply to the comment on the motion for reconsideration, and in any event, an express trust concerning immovable property cannot be proved by parol evidence and prescribes ten years from repudiation.
• Full Payment: Yes. The Court of Appeals made a binding finding of fact that Jose Escay, Sr. paid in full the estate's obligation to PNB, corroborated by the petitioners' own allegations in their 1941 complaint.
• Prescription: Yes. The action for reconveyance had prescribed, whether based on implied trust (ten years from discovery of fraud in 1941) or express trust (ten years from repudiation in 1941), and the five-year repurchase period had long expired.

• Validity of Contracts: The intention to transfer ownership was evident from the written conformity of Magdalena Vda. de Escay (Exhibit "G"), executed on May 13, 1933, in which she consented to the transfer of the estate's rights over the mortgaged properties to Jose Escay, Sr. in consideration of his assumption of the estate's obligation to PNB. The supplementary contract merely reduced to writing what had already been agreed upon at the execution of the original contract. The contracts were supported by valuable consideration — Jose Escay, Sr.'s assumption and actual payment of the estate's mortgage indebtedness, including outright cash payments, delivery of sugar piculs, and discharge of obligations to the Pacific Commercial Company. The contracts were not antichretic because Jose Escay, Sr. did not become a creditor of the estate entitled to appropriate the fruits; he became a debtor of PNB and owner of the properties subject only to the right of repurchase. The supplementary contract did not contravene Section 718 of the Code of Civil Procedure because a rule of procedure cannot impair the substantive right of the owners to dispose of their properties, and the sale was made with the prior notice, consent, conformity, and approval of the heirs through their guardian ad litem. The lack of strict compliance with the written notice requirement was cured by Magdalena's prior conformity and her silence upon receipt of the probate court's order, which strongly supported the inference that she had consented.

• Adverse Possession: Titles over the properties were transferred to Jose Escay, Sr. in 1939, making him the registered owner. The Court of Appeals found that Jose Escay, Sr. alone possessed and enjoyed the fruits of the properties, introduced permanent improvements consisting of roads and fruit trees, and that this possession was continuous, uninterrupted, public, open, and adverse, recognized particularly by Roberto Escay and Magdalena Vda. de Escay. The petitioners themselves admitted this adverse and exclusive possession in both their 1941 and 1959 complaints. As Jose Escay, Sr. was the registered owner since 1939, the matter of acquisitive prescription was an alternative defense that need not have been discussed but was nonetheless supported by the record.

• Implied Trust: No fraud was proved. The contracts resulted from a series of bona fide negotiations among the estate's judicial administrator, PNB (represented by Atty. Recto), the heirs through their guardian ad litem, and Jose Escay, Sr. There was no evidence that Atty. Recto or PNB contrived or confederated with the administrator or the heirs. PNB had no interest in fraudulently divesting the estate of its ownership. The omission in the original contract of the transfer provision was attributed to Atty. Recto's focus on protecting the bank's interests, not to fraud. Without fraud, no implied or constructive trust arose.

• Express Trust: A party may not change its theory on appeal. Petitioners originally relied on implied trust in the lower court, did not discuss it in their Court of Appeals brief, revived it in their motion for reconsideration before the Court of Appeals, maintained it in their petition for review before the Supreme Court, and only raised express trust for the first time in their reply to respondents' comment on the motion for reconsideration. In any event, an express trust concerning an immovable cannot be proved by parol evidence, and actions based on express trust prescribe ten years from repudiation of the trust. The Court of Appeals found that the trust, assuming one existed, had been repudiated by Jose Escay, Sr. in 1941 when he refused to transfer the property and the heirs filed Civil Case No. 8829.

• Full Payment: The Court of Appeals made a binding finding of fact that full payment of the estate's obligation to PNB had been made by Jose Escay, Sr., and that he subsequently mortgaged the properties to the Compañia General de Tabacos. This finding was corroborated by the petitioners' own 1941 complaint, which expressly alleged that Jose Escay, Sr. "paid in full the mortgage indebtedness with the Philippine National Bank." The continued annotation of the encumbrance on the titles was explained by standard banking practice, whereby annotations of extinguished mortgages are not cancelled to save on registration expenses, and the fact that the obligation had been fully paid was the reason Jose Escay, Sr. was able to use the same properties as collateral for a subsequent loan.

• Prescription: On the first point, assuming the five-year repurchase period commenced only in 1941, it had long since expired, extinguishing any repurchase right. On the second point, Jose Escay, Sr.'s open, public, adverse, and continuous possession for more than 25 years from the execution and approval of the supplementary contract to the filing of the complaint had extinguished any right to seek reconveyance, as an action for reconveyance prescribes in ten years under Section 40 of the Code of Civil Procedure. On the third point, assuming fraud in the transfer, the lapse of time since the alleged discovery in 1941 had extinguished any right to seek reconveyance. An implied trust prescribes in ten years from discovery of the fraud; an express trust prescribes ten years from repudiation. Both periods had run.

• Sale with Assumption of Obligation vs. Antichresis — A contract whereby a party assumes the mortgage indebtedness of another in consideration of the transfer of ownership of the mortgaged properties to him, subject to a right of repurchase, is a deed of sale with assumption of obligation, not an antichretic contract. In antichresis, the creditor appropriates the fruits of the property to satisfy his credit; in a sale with assumption of obligation, the buyer becomes a debtor of the bank and owner of the properties, not a creditor of the estate.

• Procedural Rules Cannot Impair Substantive Rights of Property Owners — A rule of procedure, such as Section 718 of the Code of Civil Procedure governing the probate court's authority to authorize sales of estate properties, cannot prevail over the will of the owners to dispose of their properties. Where the heirs consented to the sale through their guardian ad litem, their substantive right to dispose of their properties could not be curtailed by the procedural law.

• Party May Not Change Theory on Appeal — A party is bound by the theory it adopts in the lower court and may not change its theory on appeal. Petitioners who originally relied on implied trust could not subsequently raise express trust for the first time in a reply to a comment on a motion for reconsideration.

• Prescription of Actions Based on Trust — An action for reconveyance based on implied or constructive trust prescribes in ten years from discovery of the fraud. An action based on express trust prescribes ten years from repudiation of the trust by the trustee. The prescriptibility of an action for reconveyance based on implied or constructive trust is settled in this jurisdiction.

• Binding Effect of Court of Appeals' Findings of Fact — Findings of fact by the Court of Appeals are conclusive upon the Supreme Court and binding on it, absent grave abuse of discretion. The Supreme Court will not disturb such findings where they are supported by the evidence.

• "A rule of procedure cannot prevail over the will of the owner insofar as the dispositions of his properties are concerned." — This passage, quoted from the Court of Appeals, articulates the principle that procedural requirements governing probate court sales cannot override the substantive right of property owners to dispose of their properties when they have consented to the disposition.

• "It is high time these transgressions of the law were stopped." — This passage from the Code Commission report, quoted in Justice Barredo's dissent, reflects the legislative disfavor toward ventas con pacto de retro that informed Articles 1602 and 1603 of the New Civil Code, which the dissent argued should have been applied to construe the transaction as an equitable mortgage.

• "And assuming an express trust, the trust had been repudiated by Jose Escay, Sr. when in 1941 he refused to transfer the property to the appellants, and appellants filed Civil Case No. 8829 in 1941 for the recovery of the properties." — This passage from the Court of Appeals, adopted by the majority, establishes the point of repudiation from which the prescriptive period for an express trust action begins to run.

• Boñaga vs. Soler, G.R. No. L-15717, June 30, 1961 — Cited for the settled rule that an action for reconveyance based on implied or constructive trust prescribes in ten years. Followed.
• J.M. Tuason & Co., Inc. vs. Magdangal, G.R. No. L-15539, January 30, 1962 — Cited for the same proposition on prescription of actions based on implied trust. Followed.
• Alzona vs. Capunitan, G.R. No. L-10228, February 28, 1963 — Cited for the prescriptibility of actions for reconveyance based on implied trust. Followed.
• Bueno vs. Reyes, L-22587, April 28, 1969, 27 SCRA 1179 — Cited for the same proposition on prescription. Followed.
• Manuel Diaz vs. Carmen Gorricho, 54 O.G. p. 8429 — Cited for the rule that express trusts prescribe ten years from repudiation of the trust, pursuant to Section 40 of the Code of Civil Procedure. Followed.
• Dalandan vs. Julio, 10 SCRA 400 — Cited in the dissent for the proposition that payment of land taxes by the vendee but chargeable to the account of the heirs indicates an equitable mortgage under Article 1602 of the Civil Code. Relied upon by the dissent.
• Basco vs. Puzon, 69 Phil. 706 — Cited in the dissent for the rule that where the redemption price is to be fixed after an accounting by the buyer a retro, failure to render such accounting excuses the seller a retro from effecting repurchase within the stipulated time. Relied upon by the dissent.
• Morales vs. Ventanilla, 84 Phil. 459 and Calaguas vs. Lim, 83 Phil. 796 — Cited in the dissent as decisions on the intent of contracts of sale with right of repurchase that "no longer hold" in light of the New Civil Code's provisions. Distinguished/overruled by the dissent.

• Section 714, Code of Civil Procedure — Required written notice to heirs for the validity of a probate court's approval of a sale of estate properties. The Court held that the heirs' consent through their guardian ad litem, coupled with the registered mailing of the order to the widow and her silence, satisfied the substantive requirement notwithstanding procedural deficiencies.
• Section 718, Code of Civil Procedure — Governed the probate court's authority to authorize sales of estate properties. The Court held that this procedural provision could not impair the substantive right of the heirs, who had consented to the sale, to dispose of their properties.
• Section 40, Code of Civil Procedure — Provided that an action for reconveyance prescribes in ten years. Applied to bar the petitioners' action, whether based on implied trust (ten years from discovery of fraud in 1941) or express trust (ten years from repudiation in 1941).
• Section 41, Act 190 — Governed acquisitive prescription. The Court noted that since Jose Escay, Sr. became the registered owner in 1939, acquisitive prescription was an alternative defense, but his open, public, adverse, and continuous possession for more than 25 years satisfied its requisites.
• Article 1602, Civil Code — Enumerated circumstances indicating an equitable mortgage, including the vendee's payment of land taxes chargeable to the vendor. Cited in the dissent to argue the transaction was an equitable mortgage.
• Article 1603, Civil Code — Provided that in case of doubt, a contract purporting to be a sale with right of repurchase shall be construed as an equitable mortgage. Cited in the dissent, with retroactive application to transactions entered into before the effectivity of the New Civil Code.
• Article 1606, Civil Code — Limited the repurchase period to a maximum of ten years. Cited in the dissent's footnote regarding the motion's reference to an indefinite repurchase period.
• Article 1607, Civil Code — Required a judicial order, issued only after due hearing, before the Register of Deeds could record a consolidation of the vendee a retro's title. Cited in the dissent to argue that consolidation was premature absent proper accounting.

Justices Fernando, Antonio, and Aquino concurred in the Resolution.

• Justice Barredo — Justice Barredo dissented, arguing that the Court of Appeals' decision was "fatally deficient in factual and legal basis." He contended that the original contract of April 28, 1933 contained nothing suggesting any transfer of ownership, and that the conformity of Magdalena Vda. de Escay, dated May 13, 1933, was silent on any right of repurchase and was executed before the supplementary contract. He found the factual conclusions of the Court of Appeals self-contradictory, particularly its admission that written notice to the heirs might not have been sufficient while simultaneously inferring consent from the widow's silence. On the legal question, Justice Barredo held that the transaction was an equitable mortgage rather than a venta con pacto de retro, relying on Article 1602 (payment of land taxes chargeable to the heirs) and Article 1603 (doubt construed as equitable mortgage) of the Civil Code, with retroactive effect. He further argued that Magdalena's capacity as guardian ad litem was doubtful, that no proper accounting was rendered by Jose Escay, Sr. to enable the heirs to repurchase (citing Basco vs. Puzon), that the consolidation of title was premature, and that prescription could not run because the right to repurchase had not yet begun. He voted to grant the motion for reconsideration, give due course to the petition, reverse the Court of Appeals, and allow the petitioners either to repurchase the haciendas or to require respondents to foreclose the equitable mortgage.