Hi-Lon Manufacturing, Inc. vs. Commission on Audit

A road right-of-way (RROW) devoted to public use constitutes property of public dominion outside the commerce of man that cannot be validly transferred to private persons, and a claimant who acquired title to land through a deed expressly excluding such RROW cannot claim just compensation therefor despite the erroneous inclusion of the RROW in subsequent Torrens certificates of title.

In 1978, the government converted a 29,690-square-meter portion of an 89,070-square-meter parcel of land in Calamba, Laguna, into a road right-of-way (RROW) for the Manila South Expressway Extension Project. The subject property had been registered successively under Commercial and Industrial Real Estate Corporation (CIREC), Philippine Polymide Industrial Corporation (PPIC), and subsequently the Development Bank of the Philippines (DBP) following foreclosure. The government neither initiated expropriation proceedings nor paid just compensation to the registered owners, nor did it annotate its claim on the titles. In 1987, pursuant to Proclamation No. 50 and Administrative Order No. 14, DBP transferred its acquired assets to the Asset Privatization Trust (APT) for disposal. APT conducted a public bidding on June 30, 1987, where Fibertex Corporation emerged as the highest bidder for the assets formerly belonging to PPIC. Subsequently, APT executed a Deed of Absolute Sale dated October 29, 1987, with TG Property, Inc. (TGPI)—parent company of Hi-Lon Manufacturing, Inc.—conveying only the "total useable area of 59,380 square meters," expressly excluding the 29,690-square-meter RROW. TGPI registered the property and obtained Transfer Certificate of Title No. T-158786 covering the entire 89,070 square meters, including the RROW. In 1995, TGPI sold the entire parcel to Hi-Lon, which registered the property under Transfer Certificate of Title No. T-383819.

• The Government Taking: In 1978, the Ministry of Public Works and Highways (now DPWH) converted 29,690 square meters of the 89,070-square-meter property into a road right-of-way for the Manila South Expressway Extension Project without expropriation proceedings or payment of just compensation. The property was then registered under CIREC (TCT No. T-40999), subsequently transferred to PPIC (TCT No. T-120988), and later foreclosed by DBP (TCT No. T-151837). No annotation of the government's claim was made on any of these titles.
• The APT Sale: Pursuant to Proclamation No. 50 and Administrative Order No. 14, DBP transferred the property to the Asset Privatization Trust (APT). In a public bidding on June 30, 1987, Fibertex Corporation (not TGPI) participated as bidder for the PPIC assets. APT subsequently executed a Deed of Absolute Sale dated October 29, 1987, with TGPI, specifying that the subject was the "total useable area of 59,380 sq. m.," expressly excluding the 29,690 sq. m. used as RROW. The Deed referenced Tax Declaration No. 9114 indicating the RROW exclusion.
• Transfer to Hi-Lon: On December 9, 1987, the Register of Deeds cancelled DBP's title and issued TCT No. T-158786 in TGPI's name covering the entire 89,070 sq. m., including the RROW. From 1987 to 1996, TGPI paid real property taxes for the entire area. On April 16, 1995, TGPI executed a Deed of Absolute Sale in favor of Hi-Lon for the entire 89,070 sq. m. for ₱44,535,000.00, resulting in the issuance of TCT No. 383819 in Hi-Lon's name.
• The Claim for Just Compensation: In 1998, Hi-Lon, through Attorney-in-Fact Rupert P. Quijano, requested payment for the RROW from the DPWH. An Ad Hoc Committee valued the property at ₱2,500/sq. m. based on 1999 BIR zonal valuation. On December 21, 2001, a Deed of Sale was executed between Hi-Lon and the Republic (through DPWH) for ₱67,492,500.00. On January 23, 2002, DPWH made a partial payment of ₱10,461,338.00 to Hi-Lon.
• Audit Findings: Post-audit examination revealed that TGPI did not participate in the public bidding; only Fibertex, TNC Philippines, Inc., and P. Lim Investment, Inc. participated. The Abstract of Bids showed the land was offered for its "useable portion of 5.9 hectares only." The COA found that the Deed of Sale between APT and Fibertex (for improvements) disclosed the exclusion of the RROW, corroborating that the 29,690 sq. m. was never part of the sale to TGPI.

• Entitlement to Just Compensation: Hi-Lon maintained that it acquired the entire 89,070 sq. m. property from TGPI, which in turn acquired it from APT pursuant to the October 29, 1987 Deed of Sale. Petitioner argued that the Whereas Clauses in the Deed referred to the entire property, and that APT expressly warranted the property was free from liens and encumbrances, negating any need to investigate further.
• Good Faith Acquisition: Hi-Lon asserted that the lack of annotation on the titles of CIREC, PPIC, DBP, and TGPI regarding the RROW, combined with the express warranty in the Deed of Sale, established its status as an innocent purchaser for value of the entire property.
• Lack of Government Ownership: Hi-Lon argued that the government acquired title to the RROW only in 2001 when the Deed of Sale was executed between Hi-Lon and DPWH, and that the government's use of the property since 1978 without expropriation proceedings did not vest ownership.
• Estoppel by Laches: Hi-Lon posited that the government's failure to register its claim on the titles from 1978 to 1987 (nine years) and its execution of the 2001 Deed of Sale estopped it from denying Hi-Lon's ownership.
• Collateral Attack on Title: Hi-Lon contended that the COA committed grave abuse of discretion by collaterally attacking its Torrens title (TCT No. T-383819) and that of TGPI, arguing that COA lacked jurisdiction to determine questions of ownership and entitlement to just compensation.
• Proclamation No. 50: Hi-Lon cited Bagatsing v. Committee on Privatization to argue that Proclamation No. 50 does not prohibit APT from selling performing assets, and that regardless of classification, the RROW could not be excluded if the entire property was sold.

• Nature of the Asset: The Office of the Solicitor General (OSG) countered that the RROW, being used for public highway purposes since 1978, was a performing asset that APT had no authority to sell under Proclamation No. 50, which targeted non-performing assets.
• Exclusion from Sale: The OSG argued that the Deed of Sale dated October 29, 1987, clearly excluded the 29,690 sq. m. RROW, limiting the conveyance to 59,380 sq. m. of useable area. The OSG emphasized that TGPI was not a bidder in the public auction, and that the Abstract of Bids showed only Fibertex, TNC Philippines, and P. Lim Investment participated.
• Property of Public Dominion: The OSG maintained that RROW is property of public dominion under Article 420 of the New Civil Code, outside the commerce of man, and cannot be registered in private names or sold.
• Statutory Liens: The OSG argued that public highways constitute statutory liens under Section 39 of Act No. 496 and Section 44 of Presidential Decree No. 1529, binding subsequent purchasers regardless of registration, and that the physical presence of the highway provided actual notice to Hi-Lon.
• COA Jurisdiction: The OSG asserted that COA acted within its constitutional authority to disallow irregular, unnecessary, or excessive expenditures of government funds, and that determining ownership was necessary to fulfill this mandate.
• Non-Estoppel: The OSG contended that the State is not estopped by the mistakes or errors of its officials, especially in sovereign acts, and that the 2001 Deed of Sale was a unilateral mistake that cannot vest title.

• Entitlement to Just Compensation: Whether Hi-Lon is entitled to just compensation for the 29,690 sq. m. road right-of-way.
• Ownership of the RROW: Whether the 29,690 sq. m. portion used as RROW was validly transferred to Hi-Lon's predecessor-in-interest or remained government property.
• COA Jurisdiction and Grave Abuse of Discretion: Whether the COA committed grave abuse of discretion in disallowing the payment and determining ownership, and whether it had jurisdiction to inquire into questions of title.
• Collateral Attack on Title: Whether the COA's determination that Hi-Lon did not own the RROW constituted an impermissible collateral attack on Hi-Lon's certificate of title.
• Estoppel: Whether the government is estopped from claiming ownership of the RROW by its failure to annotate its claim on prior titles or by executing the 2001 Deed of Sale.

• Entitlement to Just Compensation: Hi-Lon is not entitled to just compensation. The Deed of Sale dated October 29, 1987, between APT and TGPI unambiguously limited the subject of the sale to the "total useable area of 59,380 sq. m.," expressly excluding the 29,690 sq. m. RROW. Because Hi-Lon's predecessor-in-interest acquired only 59,380 sq. m., Hi-Lon acquired no rights over the RROW and cannot claim compensation for property it does not own.
• Nature of RROW as Property of Public Dominion: The RROW, devoted to public use as a highway since 1978, constitutes property of public dominion under Article 420 of the New Civil Code. As such, it is outside the commerce of man and cannot be the subject of sale, donation, or lease. Even if erroneously included in a Torrens title, land devoted to public use remains government property.
• Statutory Liens and Actual Notice: Public highways established by law constitute statutory liens under Section 39 of Act No. 496 and Section 44 of P.D. No. 1529, binding subsequent purchasers regardless of registration. The physical presence of the Manila South Expressway on the property provided Hi-Lon with actual notice of the government's claim, negating any claim of good faith.
• COA Jurisdiction and Absence of Grave Abuse: The COA did not commit grave abuse of discretion. Under Section 2(2), Article IX-D of the 1987 Constitution, COA has the authority to disallow irregular, unnecessary, or excessive expenditures and is not limited to the grounds cited by the auditor. Determining ownership was necessary to prevent the irregular disbursement of public funds to a claimant with no valid title.
• No Collateral Attack: The COA did not collaterally attack Hi-Lon's certificate of title. It questioned Hi-Lon's claim of ownership over the RROW based on the clear terms of the 1987 Deed of Sale, not the validity of the certificate itself. Registration does not vest title if the property was never validly transferred; the Torrens system cannot be used to perpetrate fraud against the true owner.
• Non-Estoppel of the State: The State is not estopped by the mistakes of its officials or agents in the performance of sovereign acts. The failure to annotate the RROW on prior titles does not bar the government from asserting ownership over property of public dominion. The 2001 Deed of Sale was a unilateral mistake that cannot transfer title to property the government never owned or validly disposed of to Hi-Lon's predecessor.

• Property of Public Dominion: Properties intended for public use, such as road right-of-ways (RROW), are properties of public dominion under Article 420 of the New Civil Code. They are outside the commerce of man and cannot be leased, donated, sold, or be the object of a contract, except for repairs or incidental improvements. Even if erroneously included in a Torrens certificate, such properties remain government property.
• Statutory Liens on Registered Land: Section 39 of Act No. 496 (Land Registration Act) and Section 44 of P.D. No. 1529 (Property Registration Decree) provide that public highways or ways established by law constitute statutory liens that bind the whole world and affect registered land even without annotation on the certificate of title.
• Actual Notice Equivalent to Registration: Actual notice of an encumbrance or claim is equivalent to registration because to hold otherwise would be to tolerate fraud. Purchasers with actual notice of circumstances that should put a reasonable person on guard cannot claim to be innocent purchasers for value.
• Certificate of Title vs. Ownership: A certificate of title is merely evidence of ownership; it does not create or vest title. Registration is not a mode of acquiring ownership. The Torrens system cannot be used to shield fraud or to divest the lawful owner of title for transfer to another who has not acquired it by any mode recognized by law.
• Collateral Attack: An attack on a title is direct when the object is to annul or set aside the judgment pursuant to which the title was decreed; it is collateral when, in an action for different relief, an attack on the judgment is made as an incident thereof. Questioning ownership based on the terms of a prior deed of sale does not constitute a collateral attack on the certificate of title.
• Scope of COA Audit Power: The Commission on Audit is not limited to reviewing only the grounds relied upon by the auditor of a government agency. It is duty-bound to make its own assessment of the merits of disallowed disbursements to prevent irregular, unnecessary, excessive, extravagant, or unconscionable expenditures of government funds.
• Non-Estoppel of the State: The State, as represented by the government, is not estopped by the mistakes or errors of its officials or agents, especially when the government's actions are sovereign in nature.

• "The subject of this Deed of Absolute Sale, therefore, as fully disclosed in the APT Asset Specific Catalogue, is the total useable area of 59,380 sq. m." — The Court cited this contractual provision to establish that the 29,690 sq. m. RROW was expressly excluded from the sale to TGPI.
• "Being of similar character as roads for public use, a RROW can be considered as a property of public dominion, which is outside the commerce of man, and cannot be leased, donated, sold, or be the object of a contract." — The Court classified RROW as property of public dominion under Article 420 of the New Civil Code.
• "Section 39 of Act No. 496 and Section 44 of P.D. No. 1529 provide for statutory liens which subsist and bind the whole world, even without the benefit of registration under the Torrens System." — The Court emphasized that public highways need not be annotated to affect subsequent purchasers.
• "Actual notice is equivalent to registration, because to hold otherwise would be to tolerate fraud and the Torrens System cannot be used to shield fraud." — The Court equated actual knowledge of the highway with constructive notice.
• "The Torrens system cannot be used to divest the lawful owner of his title for the purpose of transferring it to another who has not acquired it by any of the modes allowed or recognized by law." — The Court affirmed that registration does not cure defects in the transfer of property of public dominion.
• "COA is not required to limit its review only to the grounds relied upon by a government agency's auditor with respect to disallowing certain disbursements of public funds. In consonance with its general audit power, respondent COA is not merely legally permitted, but is also duty-bound to make its own assessment of the merits of the disallowed disbursement." — The Court affirmed the broad audit powers of the COA under the Constitution.

• Bagatsing v. Committee on Privatization, G.R. No. 112399, July 14, 1995 — Distinguished; held that Proclamation No. 50 does not prohibit APT from selling performing assets, but the Court noted that RROW is property of public dominion that cannot be sold regardless of classification.
• Manila International Airport Authority v. Court of Appeals, 528 Phil. 181 (2006) — Cited for the principle that properties of public dominion are not subject to levy, encumbrance, or disposition through public or private sale.
• Heirs of Clemente Ermac v. Heirs of Vicente Ermac, G.R. No. 115402, July 15, 1998 — Cited for the distinction between a certificate of title (evidence of ownership) and title itself (ownership), and that the Torrens system cannot be used to perpetuate fraud.
• Mallilin, Jr. v. Castillo, 661 Phil. 307 (2011) — Cited for the definition of direct versus collateral attack on titles.
• Balangcad v. Court of Appeals, 283 Phil. 59 (1992) — Cited for the principle that the Torrens system merely confirms ownership and does not create it, and cannot be used to divest the lawful owner.
• Ledesma v. Municipality of Iloilo, 49 Phil. 769 (1926) — Cited for the rule that inclusion of public highways in a certificate of title by mistake does not vest ownership in the certificate holder.
• Yap v. Commission on Audit, 633 Phil. 174 (2010) — Cited for the principle that COA is not limited to the grounds cited by the auditor and must make its own assessment of disallowed disbursements.
• Heirs of Reyes v. Republic, 529 Phil. 510 (2006) — Cited for the rule that the State is not estopped by the mistakes or errors of its officials or agents.

• Article 420, New Civil Code — Defines property of public dominion as those intended for public use, such as roads, canals, ports, and bridges, which are outside the commerce of man.
• Section 2, Article IX-D, 1987 Constitution — Grants COA the power to examine, audit, and settle all accounts pertaining to government funds and properties, and to disallow irregular, unnecessary, excessive, extravagant, or unconscionable expenditures.
• Section 39, Act No. 496 (Land Registration Act) — Provides that public highways established by law constitute statutory liens affecting registered land even if not annotated on the certificate.
• Section 44, P.D. No. 1529 (Property Registration Decree) — Reiterates that public highways or ways established or recognized by law are statutory liens not required to be registered to be valid against subsequent purchasers.
• Article 1370, New Civil Code — Provides that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.
• Section 48, P.D. No. 1529 — Bars collateral attacks on certificates of title; the Court clarified that this refers to the certificate as evidence of ownership, not the underlying title itself.

Maria Lourdes P.A. Sereno (Chief Justice), Antonio T. Carpio, Presbitero J. Velasco, Jr., Teresita J. Leonardo-de Castro, Lucas P. Bersamin, Mariano C. Del Castillo, Jose Catral Mendoza, Estela M. Perlas-Bernabe, Marvic M.V.F. Leonen, Francis H. Jardeleza, Alfredo Benjamin S. Caguioa (took no part due to prior OSG action), Samuel R. Martires, Noel Gimenez Tijam, and Andres B. Reyes, Jr.