Gotesco Properties, Inc. vs. Spouses Fajardo

In a contract to sell, the developer's unjustified failure to deliver title and possession after the buyer's full payment constitutes a substantial breach warranting rescission under Article 1191 of the Civil Code, and upon rescission, the buyer is entitled to recover the prevailing market value of the property — not merely the purchase price — to prevent unjust enrichment. Corporate officers, however, cannot be held personally or solidarily liable for the corporation's obligations absent a showing of malice or bad faith.

Respondent-spouses Eugenio and Angelina Fajardo entered into a contract to sell with petitioner Gotesco Properties, Inc. (GPI), a subdivision developer, for the purchase of a 100-square meter lot in Evergreen Executive Village, a subdivision project in Caloocan City. The lot formed part of a larger property covered by TCT No. 244220 (the mother title), which GPI acquired in 1992 but which bore no technical description. The transaction is governed by Presidential Decree No. 957 (PD 957), the Subdivision and Condominium Buyers' Protective Decree, which imposes on subdivision owners and developers the obligation to deliver title to the buyer upon full payment of the purchase price.

On January 24, 1995, respondent-spouses Eugenio and Angelina Fajardo entered into a Contract to Sell with petitioner-corporation Gotesco Properties, Inc. (GPI) for the purchase of a 100-square meter lot identified as Lot No. 13, Block No. 6, Phase No. IV of Evergreen Executive Village, a subdivision project owned and developed by GPI located at Deparo Road, Novaliches, Caloocan City. The subject lot is a portion of a bigger lot covered by Transfer Certificate of Title (TCT) No. 244220, referred to as the mother title. Under the contract, the spouses undertook to pay the purchase price of P126,000.00 within a 10-year period, including interest at the rate of nine percent (9%) per annum. GPI, for its part, agreed to execute a final deed of sale in favor of the spouses upon full payment of the stipulated consideration.

GPI had acquired the subject property on March 10, 1992 through a Deed of Partition and Exchange executed between it and Andres Pacheco, the former registered owner. TCT No. 244220 was issued to GPI on March 16, 1992, but the title did not bear any technical description. This omission would later prove consequential, as it prevented the subdivision of the mother title into individual lots with separate certificates of title. Despite the spouses' full payment of the purchase price on January 17, 2000 and subsequent demands, GPI failed to execute the deed of sale and to deliver the title and physical possession of the subject lot.

Petitioners maintained that the failure to deliver title was beyond GPI's control. They explained that GPI had filed a petition for inscription of technical description (LRC Case No. 4211) before the Regional Trial Court of Caloocan City, Branch 131, which was initially granted but later reversed by the Court of Appeals on July 15, 2003 due to technical defects — namely, GPI's failure to implead the adverse claimant, to notify adjoining owners, and to sufficiently establish the ownership of its predecessor-in-interest. Petitioners argued that this reversal caused the delay in subdividing the property. They also pointed out that an adverse claim and levy by the Bangko Sentral ng Pilipinas (BSP), annotated on the title long after the execution of the contract, had already been settled.

The record, however, revealed significant gaps in GPI's diligence. No plausible explanation was offered as to why the petition for inscription, dated January 6, 2000, was filed only after almost eight years from GPI's acquisition of the property in 1992. Neither did petitioners explain why GPI took no positive action to file a new petition for inscription within a reasonable time after the CA's July 15, 2003 dismissal. GPI filed a new petition before the RTC-Caloocan, Branch 122 (LRC Case No. C-5026) only on November 23, 2006 — after receiving the spouses' letter dated February 10, 2006 and after the filing of the complaint on May 3, 2006. While the trial court decided the latter petition in GPI's favor, there was no showing that the decision had attained finality, that the approved technical description had been annotated on TCT No. 244220, or that the subdivision plan had been approved. Moreover, despite petitioners' allegation that the BSP claim had been settled, there appeared to be no cancellation of the annotations on GPI's title.

On May 3, 2006, the spouses filed before the Housing and Land Use Regulatory Board-Expanded National Capital Region Field Office (HLURB-ENCRFO) a complaint for specific performance or rescission of contract with damages against GPI and the members of its Board of Directors — Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go, and Vicente Go. The spouses alleged that GPI violated Section 20 of PD 957 by failing to construct and provide water facilities, improvements, and other development for the subdivision project, and that GPI failed to provide boundary marks for each lot. They further alleged that the mother title, including the subject lot, had no technical description and had been levied upon by the BSP without their knowledge. The HLURB-ENCRFO ruled in favor of the spouses on February 9, 2007, finding that GPI's obligation to execute the deed and deliver title arose upon full payment and that GPI's failure constituted substantial breach warranting rescission. This ruling was successively affirmed by the HLURB Board of Commissioners, the Office of the President, and the Court of Appeals, with the CA modifying the refund to reflect the prevailing market value of the property pursuant to Solid Homes vs. Tan.

• No Right to Rescind: Petitioners insisted that the spouses had no right to rescind the contract because GPI's inability to comply was due to reasons beyond its control — specifically, the legal proceedings concerning the subdivision of the property into individual lots — and therefore GPI should not be held liable to refund the payments received.
• No Liability of Individual Petitioners: Petitioners argued that the individual petitioners — the members of GPI's Board of Directors — never participated in the acts complained of nor were found to have acted in bad faith, and thus should not be held liable to pay damages and attorney's fees.

• Right to Rescind: Whether respondent-spouses Fajardo had the right to rescind the contract to sell given GPI's failure to deliver title and possession after full payment.
• Measure of Recovery Upon Rescission: Whether the refund due to the spouses upon rescission should be pegged at the prevailing market value of the property rather than merely the purchase price paid.
• Damages: Whether the award of moral and exemplary damages, attorney's fees, and costs of suit was proper.
• Liability of Corporate Officers: Whether the individual petitioners — GPI's board members — could be held solidarily liable with GPI for the payment of damages.

• Right to Rescind: Yes. GPI's unjustified and unreasonable delay in delivering title and possession after full payment constituted a substantial breach of the contract to sell, entitling the spouses to rescission under Article 1191 of the Civil Code and Section 25 of PD 957.
• Measure of Recovery Upon Rescission: Yes. The refund was properly pegged at the prevailing market value of the property, consistent with Solid Homes vs. Tan, to prevent unjust enrichment of the developer.
• Damages: Yes. The awards of moral and exemplary damages, attorney's fees, and costs of suit were sustained, GPI's unjustified failure having caused the spouses serious anxiety, mental anguish, and sleepless nights.
• Liability of Corporate Officers: No. The individual petitioners were absolved from solidary liability, there being no showing that they acted maliciously or in bad faith toward the spouses.

• Right to Rescind: In a contract to sell, the seller's obligation to deliver the corresponding certificates of title is simultaneous and reciprocal to the buyer's full payment of the purchase price. Section 25 of PD 957 imposes upon the subdivision owner or developer the mandatory obligation to deliver the title of the lot to the buyer upon full payment. The records showed that GPI acquired the subject property in 1992 but its title bore no technical description. No plausible explanation was offered for the nearly eight-year delay in filing the petition for inscription (January 6, 2000), nor for GPI's failure to take positive action to file a new petition within a reasonable time after the CA dismissed the first petition on July 15, 2003. GPI filed a new petition only on November 23, 2006 — after the spouses' demand and the filing of the complaint. Even then, there was no showing that the decision had attained finality or that the technical description had been annotated on the title. The BSP annotations likewise remained uncanceled. The long delay from the date of demand on September 16, 2002 was unreasonable and unjustified, constituting substantial breach and accorded the spouses the right to rescind under Article 1191 of the Civil Code.

• Measure of Recovery Upon Rescission: Rescission does not merely terminate the contract; it abrogates the contract from its inception and restores the parties to their original positions, requiring mutual restitution. Article 1385 of the Civil Code, which creates the obligation to return the things which were the object of the contract together with their fruits and the price with its interest, applies equally to rescission under Article 1191. Only GPI benefited from the contract, having received full payment plus interest as early as January 17, 2000, while the spouses remained prejudiced by the non-delivery of the lot. To refund only the purchase price would result in unjust enrichment, as the value of the property had escalated after almost a decade. Consistent with Solid Homes vs. Tan, equity and justice dictate that the injured party recover the prevailing market value of the undelivered lot, consistent with the protective intent of PD 957.

• Damages: GPI's unjustified failure to comply with its obligations caused the spouses serious anxiety, mental anguish, and sleepless nights, justifying the award of moral damages. Exemplary damages were proper to deter similarly minded subdivision developers from committing the same transgression. The award of attorney's fees was sustained because the spouses were constrained to engage counsel to file suit.

• Liability of Corporate Officers: It was not shown that the individual petitioners acted maliciously or dealt with the spouses in bad faith. Under settled doctrine, in the absence of malice and bad faith, officers of a corporation cannot be made personally liable for the liabilities of the corporation, which has a personality separate and distinct from its officers, stockholders, and members. Accordingly, the individual petitioners were absolved from solidary liability.

• Rescission under Article 1191 and Mutual Restitution — Rescission of reciprocal obligations under Article 1191 abrogates the contract from its inception and requires mutual restitution, restoring the parties to their original positions. Article 1385 of the Civil Code, which obliges the party demanding rescission to return the things received, applies equally to rescission under Article 1191. In this case, the Court applied the doctrine to hold that upon rescission of the contract to sell, the developer must return not merely the purchase price but the prevailing market value of the property, since the developer had benefited from full payment while the buyer received nothing.

• Unjust Enrichment in Subdivision Sales — Where a subdivision developer fails to deliver title and possession after the buyer's full payment, refunding only the purchase price would constitute unjust enrichment, as the property's value would have appreciated over time. Equity and justice require that the injured buyer be paid the market value of the lot. The Court relied on Solid Homes vs. Tan to peg the refund at prevailing market value, consistent with PD 957's intent to protect buyers against unscrupulous developers.

• Corporate Officer Liability — Corporate officers cannot be held personally or solidarily liable for the corporation's obligations absent a showing of malice or bad faith. The corporation possesses a personality separate and distinct from its officers, stockholders, and members. The Court applied this doctrine to absolve GPI's board members from solidary liability, no malice or bad faith having been established.

• "Indeed, there would be unjust enrichment if respondents Solid Homes, Inc. & Purita Soliven are made to pay only the purchase price plus interest. It is definite that the value of the subject property already escalated after almost two decades from the time the petitioner paid for it. Equity and justice dictate that the injured party should be paid the market value of the lot, otherwise, respondents Solid Homes, Inc. & Purita Soliven would enrich themselves at the expense of herein lot owners when they sell the same lot at the present market value." — This passage, quoted from Solid Homes vs. Tan, articulates the rationale for awarding market value rather than purchase price upon rescission, and is the controlling formulation applied to subdivision sale rescission cases.

• "Rescission does not merely terminate the contract and release the parties from further obligations to each other, but abrogates the contract from its inception and restores the parties to their original positions as if no contract has been made." — This defines the nature and effects of rescission under Article 1191, establishing the doctrinal basis for mutual restitution.

• "Settled is the rule that in the absence of malice and bad faith, as in this case, officers of the corporation cannot be made personally liable for liabilities of the corporation which, by legal fiction, has a personality separate and distinct from its officers, stockholders, and members." — This states the controlling rule on corporate officer liability, applied to absolve the individual petitioners.

• Solid Homes vs. Tan, G.R. Nos. 145156-57, July 29, 2005 — Controlling precedent on the measure of recovery upon rescission of a subdivision sale contract; held that the buyer is entitled to the prevailing market value of the property, not merely the purchase price, to prevent unjust enrichment of the developer.
• Cantemprate vs. CRS Realty Development Corporation, G.R. No. 171399, May 8, 2009 — Cited for the proposition that in a contract to sell, the seller's obligation to deliver title is simultaneous and reciprocal to the buyer's full payment.
• Unlad Resources Development Corporation vs. Dragon, G.R. No. 149338, July 28, 2008 — Cited for the doctrine that rescission abrogates the contract from its inception and restores the parties to their original positions, and that Article 1385 applies to rescission under Article 1191.
• Laperal vs. Solid Homes, Inc., G.R. No. 130913, June 21, 2005 — Cited through Unlad for the principle that Article 1385's mutual restitution requirements apply to rescission under Article 1191.
• Goldloop Properties Inc. vs. Government Service Insurance System, G.R. No. 171076, August 1, 2012 — Cited for the requirement of mutual restitution in rescission cases.
• Alert Security and Investigation Agency, Inc. vs. Pasawilan, G.R. No. 182397, September 14, 2011 — Cited for the doctrine that corporate officers cannot be held personally liable for corporate obligations absent malice or bad faith.

• Section 25, Presidential Decree No. 957 (The Subdivision and Condominium Buyers' Protective Decree) — Requires the owner or developer to deliver the title of the lot or unit to the buyer upon full payment. Applied as the statutory basis for GPI's obligation to deliver title to the spouses, the breach of which warranted rescission.
• Section 20, Presidential Decree No. 957 — Requires every owner or developer to construct and provide facilities, improvements, infrastructures, and other development within one year from issuance of the license. The spouses alleged violation of this provision, though the Court's ruling centered on Section 25.
• Article 1191, Civil Code — Provides the power to rescind obligations in reciprocal ones in case one of the obligors should not comply with what is incumbent upon him. Applied as the legal basis for the spouses' right to rescind the contract to sell.
• Article 1385, Civil Code — Provides that rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest. Applied to require mutual restitution upon rescission under Article 1191.

Justices Carpio (Chairperson), Del Castillo, Perez, and Mendoza concurred. No separate concurring opinions were noted.