Goldenrod, Inc. vs. Court of Appeals

In the absence of a clear and express stipulation authorizing forfeiture, earnest money given in a contract of sale is considered part of the purchase price and must be returned to the buyer upon extrajudicial rescission, particularly when the seller does not oppose the rescission and alienates the subject property to another.

Pio Barreto and Sons, Inc. (Barreto & Sons) owned forty-three parcels of registered land in Quiapo, Manila, mortgaged to United Coconut Planters Bank (UCPB). By 1988 the loan was unpaid and foreclosure loomed. Goldenrod, Inc. offered to purchase the property. Its president, Sonya G. Mathay, wrote Anthony Que, president of Barreto & Sons, on 25 May 1988, accepting the seller’s amendments to the offer and enclosing P1 million as earnest money that “shall form part of the purchase price.” When Barreto & Sons’ corporate term expired, its assets and liabilities, including the Quiapo land, were transferred to Pio Barreto Realty Development, Inc. (Barreto Realty). The parties agreed on a total consideration structured as: (a) P24.5 million to satisfy Barreto Realty’s outstanding loan with UCPB by the bank’s 30 June 1988 deadline, and (b) P20 million as balance, payable in installments over three years at 18% interest per annum.

Goldenrod did not pay UCPB on 30 June 1988. It secured a one-month extension until 31 July 1988 but failed again. Its request for an additional sixty days was denied by the bank. Meanwhile, at Goldenrod’s earlier request, Barreto Realty reconsolidated the forty-three titles into two lots, incurring about P250,000 in expenses; the new titles issued on 4 August 1988. Goldenrod’s bid for a shorter extension was also refused. On 30 August 1988, Goldenrod’s agent, Logarta Realty and Development Corporation, informed Anthony Que that Goldenrod could not proceed with the purchase due to the bank’s denial and demanded return of the P1 million earnest money. One day later, on 31 August 1988, Barreto Realty sold Lot 2 to Asiaworld Trade Center Phils., Inc. for P23 million. On 13 October 1988, Lot 1 was transferred to UCPB by dation, then sold by the bank to Asiaworld for P24 million. Despite repeated demands, Barreto Realty refused to refund the earnest money, eventually prompting Goldenrod to sue.

• The Offer and Earnest Money: Pio Barreto and Sons, Inc. (Barreto & Sons) owned forty-three parcels of registered land in Quiapo, Manila, mortgaged to UCPB. Goldenrod, Inc. offered to buy the property. On 25 May 1988, Goldenrod’s president Sonya Mathay wrote Anthony Que, president of Barreto & Sons, confirming acceptance of the seller’s amendments and enclosing P1 million as earnest money, explicitly stating it “shall form part of the purchase price.” The letter also requested reconsolidation of the lots into their mother titles.

• Transfer and Terms of Purchase: When Barreto & Sons’ corporate term expired, all assets, including the Quiapo property, were transferred to respondent Pio Barreto Realty Development, Inc. (Barreto Realty). The parties agreed that Goldenrod would pay: (a) P24.5 million representing Barreto Realty’s outstanding loan with UCPB, due on 30 June 1988, the bank’s deadline; and (b) P20 million as the balance of the purchase price, payable in installments over three years at 18% annual interest.

• Failure to Pay and Reconsolidation: Goldenrod did not pay UCPB on 30 June 1988. It secured a one-month extension until 31 July 1988 but failed to pay. A further request for sixty days was denied by the bank. Meanwhile, in compliance with Goldenrod’s request, Barreto Realty reconsolidated the forty-three titles into two lots, incurring approximately P250,000 in expenses; the new titles issued on 4 August 1988. Goldenrod’s subsequent plea for a thirty-day extension was also rejected.

• Extrajudicial Rescission and Demand for Refund: On 30 August 1988, Alicia P. Logarta of Logarta Realty and Development Corporation, acting as Goldenrod’s agent and broker, wrote Anthony Que stating that Goldenrod could not push through with the purchase due to circumstances beyond its control—specifically, UCPB’s denial of the extension—and demanded the return of the P1 million earnest money. Goldenrod’s lawyer reiterated the demand on 7 February 1989, but private respondents did not comply.

• Subsequent Sale of the Property: On 31 August 1988, one day after receiving notice of rescission, Barreto Realty sold Lot 2 to Asiaworld Trade Center Phils., Inc. for P23 million. On 13 October 1988, Lot 1 was transferred to UCPB by dation, and UCPB later sold it to Asiaworld for P24 million.

• Defense of Private Respondents: In their answer to the complaint, private respondents alleged that the parties had agreed the earnest money would be forfeited to cover losses and damages should Goldenrod fail to comply with the purchase terms.

• Trial Court Findings: The Regional Trial Court found no written agreement on forfeiture of the earnest money and determined that the P1 million was intended to form part of the purchase price. It ruled that retaining the money after the sale failed constituted unjust enrichment under Articles 22 and 23 of the Civil Code.

• No Stipulation for Forfeiture: Petitioner argued that absent an express written stipulation authorizing forfeiture, the earnest money, which was intended to form part of the purchase price, must be returned once the sale was not consummated.

• Unjust Enrichment: Petitioner maintained that allowing private respondents to retain the P1 million while also selling the property to a third party would result in unjust enrichment at its expense.

• Implied Agreement to Forfeit as Damages: Private respondents contended that the parties had agreed that the earnest money of P1 million would be forfeited to answer for losses and damages they might suffer in the event petitioner failed to comply with the terms of the purchase agreement.

• Forfeiture of Earnest Money: In the absence of an express stipulation, whether the seller may retain the earnest money as damages when the sale fails due to the fault of the buyer.

• Forfeiture of Earnest Money: Earnest money could not be retained. Applying Article 1482 of the Civil Code, the P1 million was part of the purchase price and served as proof of the perfection of the contract, an advance payment to be deducted from the total price. No clear and express agreement permitted forfeiture upon the buyer’s failure to pay the balance. Petitioner’s notice that it would no longer proceed with the sale constituted extrajudicial rescission, which private respondents did not oppose. Their silence amounted to an admission of the veracity and validity of the rescinding party’s claim under the doctrine of Adelfa Properties, Inc. v. Court of Appeals. Furthermore, private respondents’ act of selling Lot 2 to Asiaworld just one day after receiving the rescission notice, and later conveying Lot 1 to UCPB for ultimate transfer to Asiaworld, effectively acquiesced in the rescission. Pursuant to Article 1385 of the Civil Code, rescission obliges the return of the things received under the contract together with fruits and interest. Having rescinded and resold the property, Barreto Realty was bound to return the earnest money with legal interest from the date of notice of rescission. Allowing the seller to keep both the P1 million and the proceeds of the second sale would be inequitable.

• Earnest Money under Article 1482, Civil Code — Earnest money given in a contract of sale shall be considered part of the purchase price and proof of the perfection of the contract. It is an advance payment to be deducted from the total price. In the absence of a clear and express stipulation to the contrary, it cannot be forfeited as damages when the buyer fails to pay the balance of the price.

• Extrajudicial Rescission of Reciprocal Contracts — Reciprocal contracts may be rescinded extrajudicially without prior court approval. If the other party does not oppose the declaration of rescission, specifying grounds for objection, and fails to reply or protest, silence operates as an admission of the validity of the rescinding party’s claim (Adelfa Properties, Inc. v. Court of Appeals, G.R. No. 111238, 25 January 1995, 240 SCRA 565). The right to rescind is nonetheless subject to scrutiny and review by the proper court (University of the Philippines v. de los Angeles, No. L-28602, 29 September 1970, 35 SCRA 102).

• Obligation to Restitute upon Rescission under Article 1385, Civil Code — Rescission creates the obligation to return the things which were the object of the contract together with their fruits and interest. The vendor is obliged to return the purchase price received where the buyer rescinds the sale or where the transaction is called off and the property is sold to a third person.

• “In the absence of a specific stipulation, may the seller of real estate keep the earnest money to answer for damages in the event the sale fails due to the fault of the prospective buyer?” — The opening sentence frames the central legal question the decision was promulgated to settle.

• “Hence, the parties could not have intended that the earnest money or advance payment would be forfeited when the buyer should fail to pay the balance of the price, especially in the absence of a clear and express agreement thereon.” — This passage encapsulates the ratio that a forfeiture of earnest money cannot be presumed and must be based on an unequivocal stipulation.

• “It would be most inequitable if respondent BARRETTO REALTY would be allowed to retain petitioner's payment of P1,000,000.00 and at the same time appropriate the proceeds of the second sale made to another.” — The Court’s pointed rejection of double recovery grounds the restitutionary logic of the ruling.

• University of the Philippines v. de los Angeles, No. L-28602, 29 September 1970, 35 SCRA 102 — Cited for the principle that the right to rescind contracts is not absolute and is subject to court scrutiny; used to lay the foundation for the validity of extrajudicial rescission subject to judicial review.

• Adelfa Properties, Inc. v. Court of Appeals, G.R. No. 111238, 25 January 1995, 240 SCRA 565 — Followed as controlling authority on the effects of extrajudicial rescission of reciprocal contracts; applied to treat private respondents’ silence as acquiescence to the rescission.

• Halili v. Doret, 95 Phil. 78 (1954) — Cited to support the obligation of the vendor to return the purchase price if the buyer rescinds the sale.

• Palay, Inc. v. Clave, G.R. No. 56076, 21 September 1983, 124 SCRA 638 — Cited as precedent for the proposition that a seller who resells the property to a third person after the transaction is called off must return the earnest money; also supplied the inequity language against double recovery.

• Article 1482, Civil Code — Provides that earnest money given in a contract of sale is considered part of the purchase price and proof of the perfection of the contract. Applied to characterize Goldenrod’s P1 million as an advance payment that could not be forfeited without a clear contrary agreement.

• Article 1385, Civil Code — Mandates that rescission creates the obligation to return the things received under the contract together with fruits and interest. Applied to oblige Barreto Realty to return the earnest money with legal interest from the date of notice of extrajudicial rescission.

• Articles 22 and 23, Civil Code — Provisions on unjust enrichment, invoked by the trial court but not by the Supreme Court as the basis for its ruling, which rested instead on the law on sales and rescission.

Davide, Jr., Vitug, Panganiban, and Quisumbing, JJ., concurred.