Fornilda vs. Branch 164, RTC

A lawyer is prohibited from acquiring, whether by purchase, mortgage, or assignment, property and rights that are the object of litigation in which the lawyer has taken part by virtue of the profession, and any such transaction is void ab initio under Article 1491(5) in relation to Article 1409 of the Civil Code — the nullity is imprescriptible, cannot be waived, and extends to whatever results directly from the illegal source.

Julio M. Catolos died leaving six parcels of land in Tanay, Rizal. His estate became the subject of intestate proceedings before the then Court of First Instance of Rizal, Pasig (Special Proceedings No. 3103). Atty. Sergio I. Amonoy appeared as counsel for several legal heirs, including Alfonso I. Fornilda and Asuncion M. Pasamba. A project of partition adjudicated the six parcels to those two heirs, and the court approved it on 12 January 1965. Only eight days thereafter, on 20 January 1965, the adjudicatees executed a mortgage over the same parcels in favor of Atty. Amonoy to secure payment of his attorney’s fees of ₱27,600.00 for services in the intestate proceeding. The estate was formally closed and terminated only on 6 August 1969. Both Alfonso I. Fornilda and Asuncion M. Pasamba died in 1969; petitioners are among the heirs of Alfonso I. Fornilda.

• Nature: Petition for certiorari with preliminary injunction to set aside the Writ of Possession dated 25 July 1985 and demolition orders dated 25 April and 16 May 1986 issued in the foreclosure case by respondent RTC Branch 164. Petitioners also sought disciplinary action against respondent Atty. Sergio I. Amonoy.

• The Intestate Estate: Six parcels of land in Tanay, Rizal, were part of the estate of the late Julio M. Catolos. In Special Proceedings No. 3103 before the then Court of First Instance of Rizal, Pasig, respondent Atty. Amonoy acted as counsel for some of the legal heirs, including Alfonso I. Fornilda and Asuncion M. Pasamba. The court approved a Project of Partition on 12 January 1965, adjudicating the six parcels to Alfonso I. Fornilda and Asuncion M. Pasamba.

• The Mortgage: Only eight days after the approval of the Project of Partition, or on 20 January 1965, Alfonso I. Fornilda and Asuncion M. Pasamba executed a Contract of Mortgage over the six parcels in favor of Atty. Amonoy. The mortgage secured the payment of his attorney’s fees in the amount of ₱27,600.00 for services rendered in the intestate proceedings. The estate was not yet closed — it was declared closed and terminated only on 6 August 1969.

• Foreclosure Proceedings: The mortgage debt remained unpaid. On 21 January 1970, Atty. Amonoy instituted judicial foreclosure (Civil Case No. 12726) against the heirs. In their answer, petitioners contested the reasonableness of the attorney’s fees. The trial court rendered judgment on 28 September 1972 ordering the heirs to pay ₱27,600.00 as principal, ₱11,880.00 as harvest value from two parcels, and 25% of the total as additional attorney’s fees, with the properties to be sold at public auction upon default.

• Auction and Transfer: The properties were sold at public auction on 23 March 1973, with Atty. Amonoy as the sole bidder for ₱23,760.00. The sale was judicially confirmed on 2 May 1973. A deficiency execution sale followed, again with Atty. Amonoy as sole bidder. On the basis of an Affidavit of Consolidation of Ownership, tax declarations were consolidated in Amonoy’s name.

• Annulment Case: On 19 December 1973, an action for annulment of the foreclosure judgment (Civil Case No. 18731) was filed by, among others, petitioners. The complaint squarely raised the invalidity of the mortgage and the foreclosure acquisition under Article 1491(5) of the Civil Code, which prohibits attorneys from purchasing property and rights in litigation. The trial court dismissed the complaint on 7 November 1977, holding that the disqualification under Article 1491 was not absolute and that a judgment creditor may bid at a sheriff’s sale. The Court of Appeals affirmed on 22 July 1981 on grounds of (1) no legal impediment to an heir encumbering his share after partition approval, (2) res judicata, and (3) absence of extrinsic fraud.

• Writ of Possession and Demolition: Upon remand of the foreclosure case, respondent RTC Branch 164 issued a Writ of Possession on 25 July 1985. Deputy Sheriff notified petitioners to vacate. Later, on motion of Atty. Amonoy, the court issued orders on 25 April and 16 May 1986 authorizing the demolition of petitioners’ houses. On 1 June 1986, the house of petitioner Angela Fornilda was demolished. The Supreme Court issued a Temporary Restraining Order on 2 June 1986 to prevent further demolition.

• Prohibition under Article 1491(5): Petitioners maintained that the mortgage and the subsequent sheriff’s sales were null and void because they contravened the positive statutory injunction in Article 1491(5) of the Civil Code, which prohibits lawyers from acquiring, even at a public or judicial auction, property and rights that are the object of litigation in which they participate by virtue of their profession.

• Lack of Jurisdiction: Petitioners argued that because the mortgage was void, the trial court in the foreclosure case never acquired jurisdiction over the subject matter, and the judgment rendered therein could not be a bar by res judicata to the later action for annulment.

• Charge of Malpractice: Petitioners further charged respondent Amonoy with malpractice and prayed for his disbarment, alleging that he had acquired the properties through immoral and illegal means.

• Judicial Adjudication: Respondent Amonoy countered that the questions of attorney’s fees, the mortgage, the foreclosure sale, its judicial confirmation, and his ultimate ownership and possession had all been judicially adjudicated with finality.

• Validity of Acquisition: Respondent argued that the mortgage was a valid encumbrance after partition approval and that his acquisition at the auction sale was lawful. The trial court in the annulment case and the Court of Appeals had already ruled that Article 1491(5) did not bar a judgment creditor from bidding at a sheriff’s sale.

• Coverage of Article 1491(5): Whether the mortgage executed by the heirs in favor of their lawyer over properties that were the subject of the intestate proceedings falls within the prohibition under Article 1491(5) of the Civil Code.

• Validity of Mortgage and Foreclosure: Whether the nullity of the mortgage vitiates the subsequent foreclosure judgment, auction sale, and transfer of ownership.

• Res Judicata and Prescription: Whether the prior final judgment in the foreclosure case or the annulment suit precludes the challenge to the mortgage, and whether the action for nullity is barred by prescription.

• Coverage of Article 1491(5): The mortgage fell squarely within the prohibition. Article 1491(5) forbids lawyers from acquiring property or rights that are the object of litigation in which they take part by virtue of their profession. The prohibition extends not only to direct purchases but also to acquisitions through mortgage and subsequent foreclosure. At the time the mortgage was executed on 20 January 1965, the Project of Partition had been approved only eight days earlier, and the intestate estate remained pending — it was closed only on 6 August 1969. The lawyer-client relationship still existed, and the properties were still “in litigation.” The mortgage thus asserted an adverse title while the fiduciary relation of trust and confidence persisted, evincing an intent to ride roughshod over client interests. The subsequent auction acquisition after termination of the proceedings did not remove the transaction from the prohibition; allowing otherwise would permit indirectly what cannot be done directly.

• Validity of Mortgage and Foreclosure: The mortgage contract, being expressly prohibited by law, is inexistent and void ab initio under Article 1409(1) and (7) of the Civil Code. Consequently, the six parcels could not have been the valid object of any mortgage in favor of Atty. Amonoy, nor of a subsequent foreclosure sale. The illegality extends to whatever results directly from the illegal source, pursuant to Article 1422. Because the mortgage was void, the trial court in the foreclosure case never acquired jurisdiction over the subject matter, and the judgment rendered therein could not attain finality or constitute res judicata.

• Res Judicata and Prescription: The defense of illegality of a void or inexistent contract is imprescriptible under Article 1410; neither may the right to set up such defense be waived (Article 1409). The absence of a valid final judgment and the lack of jurisdiction over the subject matter in the foreclosure case meant that two essential requisites of res judicata were missing. Hence, neither the foreclosure judgment nor the dismissal of the annulment complaint barred the present challenge. Since the nullity of the mortgage proceeds from the illegality of the cause or object and does not constitute a criminal offense, the rule under Article 1412(2) applies: the party not at fault (petitioners) may demand the return of what has been given, without obligation to comply with the promise. The properties were ordered returned to petitioners.

• Prohibition on lawyers acquiring property in litigation (Article 1491[5]) — A lawyer is absolutely prohibited from acquiring, by purchase or assignment, or through the medium of a mortgage and subsequent foreclosure sale, the property and rights that are the object of litigation in which the lawyer has intervened by virtue of the profession. The prohibition is rooted in public policy and the fiduciary character of the attorney-client relationship. It covers not only sales to private individuals but also public or judicial sales. The prohibition is all-embracing and applies whenever the attorney-client relationship subsists with respect to the property in suit.

• Doctrine of void ab initio contracts (Articles 1409, 1410, 1422, Civil Code) — Contracts whose cause, object, or purpose is contrary to law, or those expressly prohibited or declared void by law, are inexistent and void from the beginning. They cannot be ratified, and the defense of illegality cannot be waived. The action or defense for the declaration of their inexistence is imprescriptible. The illegality extends to whatever results directly from the illegal source. Where only one party is at fault and the act does not constitute a criminal offense, the innocent party may demand the return of what has been given without any obligation to comply with his promise.

• Jurisdiction and res judicata where void contract is involved — A void contract cannot confer jurisdiction over the subject matter upon the court in which it is sued upon; a judgment based on a void contract is a nullity and can be attacked at any time. Two requisites of res judicata — a final judgment and a judgment rendered by a court having jurisdiction over the subject matter — are conspicuously absent when the underlying contract is void.

• “Telling, therefore, is the fact that the transaction involved falls squarely within the prohibition against any acquisition by a lawyer of properties belonging to parties they represent which are still in suit.”

• “The fact that the properties were first mortgaged and only subsequently acquired in an auction sale long after the termination of the intestate proceedings will not remove it from the scope of the prohibition. To rule otherwise would be to countenance indirectly what cannot be done directly.”

• “Being a void contract, the action or defense for the declaration of its inesistence is imprescriptible. The defect of a void or inexistence contract is permanent. Mere lapse of time cannot give it efficacy.”

• “By analogy, the illegality must be held to extend to whatsover results directly from the illegal source.”

• Hernandez vs. Villanueva, 40 Phil. 773 — Cited to support the breadth of the prohibition under Article 1491(5): a lawyer is prohibited from acquiring property or rights involved in litigation in which the lawyer intervenes by virtue of the profession.

• Rubias vs. Batiller, 51 SCRA 130 — Invoked for the same proposition that the prohibition covers acquisitions by lawyers of property in litigation.

• Director of Lands vs. Abagat, 53 Phil. 147 — Relied on for the rule that contracts entered into in contravention of a statutory prohibition are inexistent and void ab initio.

• Municipality of Antipolo vs. Zapanta, No. L-65334, December 26, 1984, 133 SCRA 820 — Cited for the principle that a void judgment cannot operate as res judicata, as two requisites — a final judgment and jurisdiction over the subject matter — are absent.

• Article 1491(5), Civil Code — Prohibits lawyers from acquiring, by purchase or assignment, property and rights that are the object of litigation in which they take part by virtue of their profession. The Court applied this provision to void the mortgage taken by Atty. Amonoy over the properties of his clients during the pendency of the estate proceedings.

• Article 1409(1) and (7), Civil Code — Declares inexistent and void from the beginning contracts whose cause, object, or purpose is contrary to law, as well as those expressly prohibited or declared void by law. The mortgage fell under both grounds.

• Article 1410, Civil Code — The action or defense for the declaration of the inexistence of a void contract is imprescriptible. Applied to hold that the nullity of the mortgage could be raised at any time.

• Article 1422, Civil Code — The illegality of the cause or object extends to whatever results directly from it. The Court applied this principle to strike down the foreclosure sale and all subsequent transfers flowing from the void mortgage.

• Article 1412(2), Civil Code — When only one party is at fault and the act does not constitute a criminal offense, the innocent party may demand return of what has been given without any obligation to comply with his promise. Applied to order the return of the properties to petitioners.

Justices Paras, Sarmiento, and Regalado concurred. Justice Padilla took no part.