Larrazabal vs. Fernandez

A contract for a contingent fee is valid and not prohibited by Article 1491 of the Civil Code or the Canons of Professional Ethics, because the transfer or assignment of the property in litigation takes effect only after the finality of a favorable judgment, not during the pendency of the litigation. The interest vested in the lawyer by such a contract may be registered as an adverse claim under Section 110 of the Land Registration Act, and purchasers who acquire the property with knowledge of the adverse claim are in bad faith and estopped from questioning its validity.

The adverse claimant, Atty. Alberto B. Fernandez, was retained as counsel by petitioner Maximo Abarquez in Civil Case No. R-6573 of the Court of First Instance of Cebu, an action for the annulment of a contract of sale with right of repurchase and for the recovery of land. Abarquez litigated as a pauper and engaged his lawyer on a contingent basis. The property in dispute consisted of Lots 5600 and 5602, which were part of the estate of Abarquez's deceased parents and had been partitioned among the heirs, with one-third going to Abarquez. His sister Agripina claimed his share based on an alleged instrument of pacto de retro, which Abarquez believed to be merely an acknowledgment of receipt of ₱700.00.

Maximo Abarquez, litigating as a pauper, retained Atty. Alberto B. Fernandez as counsel in Civil Case No. R-6573 for the annulment of a contract of sale with right of repurchase and recovery of land. The Court of First Instance of Cebu rendered a decision adverse to Abarquez on May 29, 1961, and he appealed to the Court of Appeals. On June 10, 1961, Abarquez executed a document in the Cebuano-Visayan dialect obliging himself to give his lawyer one-half of whatever he might recover from Lots 5600 and 5602 should the appeal prosper. The property sought to be recovered was Abarquez's share in the lots, which were part of his deceased parents' estate and had been partitioned among the heirs, with one-third given to Abarquez. His sister Agripina had claimed his share based on an instrument of pacto de retro that Abarquez believed to be a mere acknowledgment of receipt of ₱700.00.

The Court of Appeals reversed the lower court's decision on August 27, 1963, annulling the deed of pacto de retro. The judgment became final and executory on January 22, 1964. Subsequently, Transfer Certificate of Title No. 31841 was issued on May 19, 1965, in the name of Maximo Abarquez, married to Anastacia Cabigas, over his adjudged share in the lots containing an area of 4,085 square meters. The adverse claimant waited for Abarquez to comply with his obligation under the June 10, 1961 document by delivering the one-half portion of the parcels of land. Abarquez refused and instead offered to sell the whole parcels to petitioner-spouses Juan Larrazabal and Marta C. de Larrazabal.

Upon being informed of Abarquez's intention, Fernandez filed a motion to annotate his attorney's lien on TCT No. 31841 on June 10, 1965, and notified the prospective buyers of his claim. Realizing that the motion to annotate attorney's lien was a wrong remedy, Fernandez filed an affidavit of adverse claim on July 19, 1965, with the Register of Deeds of Cebu, which was annotated on TCT No. 31841. Notwithstanding the annotation, Abarquez and Cabigas conveyed by deed of absolute sale on July 29, 1965, two-thirds of the lands to the Larrazabal spouses. When the new TCT No. 32996 was issued, the annotation of adverse claim necessarily appeared on it. The Larrazabal spouses filed a petition for cancellation of the adverse claim on March 7, 1966, with the Court of First Instance of Cebu. Fernandez filed his opposition on March 18, 1966. The trial court denied the petition on March 19, 1966, declaring that the admission by the petitioners that the lawyers were entitled to only one-third of the lot was the best proof of the authority to maintain the adverse claim.

• Violation of Article 1491: Petitioners contended that a contract for a contingent fee violates Article 1491 of the New Civil Code because it involves an assignment of a property subject of litigation, which is prohibited by paragraph (5) thereof.
• Violation of Canons of Professional Ethics: Petitioners contended that a contract for a contingent fee violates the Canons of Professional Ethics, specifically relying on Canon 10 which prohibits a lawyer from purchasing any interest in the subject matter of the litigation he is conducting.

• Validity of the Contingent Fee Contract: Respondent argued that the contract for a contingent fee is valid and not covered by Article 1491 because the transfer or assignment of the property in litigation takes effect only after the finality of a favorable judgment, not during the pendency of the litigation.
• Propriety of the Adverse Claim: Respondent maintained that his interest in the lots, having arisen after the case was won on appeal, was an existing interest that could only be registered as an adverse claim under Section 110 of the Land Registration Act, since a charging lien under Section 37, Rule 138 of the Revised Rules of Court is limited to money judgments.

• Validity of Contingent Fee Contract: Whether a contract for a contingent fee is prohibited by Article 1491 of the New Civil Code and Canon 13 of the Canons of Professional Ethics.
• Validity of Adverse Claim Registration: Whether the registration of the adverse claim of Atty. Fernandez under Section 110 of the Land Registration Act is valid and should not be cancelled.

• Validity of Contingent Fee Contract: No. A contract for a contingent fee is not covered by Article 1491 because the transfer or assignment of the property in litigation takes effect only after the finality of a favorable judgment, and it is expressly allowed by Canon 13 of the Canons of Professional Ethics.
• Validity of Adverse Claim Registration: Yes. The registration of the adverse claim is valid, as the contingent fee contract vested in Atty. Fernandez an existing interest in the lots after the case was won on appeal, and there being no other provision of the Land Registration Act under which such interest could be registered, Section 110 thereof applies.

• Validity of Contingent Fee Contract: Article 1491 prohibits only the sale or assignment between the lawyer and his client of property which is the subject of litigation, and for the prohibition to operate, the sale or transfer of the property must take place during the pendency of the litigation involving the property. In the instant case, the attorney's fees of Atty. Fernandez, consisting of one-half of whatever Maximo Abarquez might recover from his share in the lots, was contingent upon the success of the appeal. Hence, the payment of the attorney's fees, that is, the transfer or assignment of one-half of the property in litigation, would take place only if the appeal prospered, and the transfer actually takes effect after the finality of a favorable judgment rendered on appeal, not during the pendency of the litigation. The Court cited the Spanish Supreme Court's ruling that Article 1459 of the Spanish Civil Code does not apply to a contract for a contingent fee because it is not contrary to morals or to law. The Court also noted that Canon 13 of the Canons of Professional Ethics expressly allows a reasonable contingent fee contract, notwithstanding Canon 10's prohibition on purchasing an interest in the subject matter of litigation. The distinction is between buying an interest in the litigation as a speculation, which Canon 10 condemns, and agreeing, in a case which the lawyer undertakes primarily in his professional capacity, to accept his compensation contingent on the outcome. The Court further held that contingent fees are recognized in this jurisdiction, citing Ulanday vs. Manila Railroad Co., Grey vs. Insular Lumber Co., Recto vs. Harden, Albano vs. Ramos, and Rosario Vda. de Laig vs. Court of Appeals. Such contracts redound to the benefit of the poor client, and in the present case, there was no proof of undue influence or fraud, and the compensation of one-half of the lots was not excessive nor unconscionable considering the contingent nature of the attorney's fees.

• Validity of Adverse Claim Registration: Under Section 110 of the Land Registration Act, an adverse claim may be registered by whoever claims any part or interest in registered land adverse to the registered owner, arising subsequent to the date of the original registration, if no other provision is made in the Act for registering the same. The contract for a contingent fee, being valid, vested in Atty. Fernandez an interest or right over the lots to the extent of one-half thereof. Said interest became vested after the case was won on appeal because only then did the assignment of the one-half portion of the lots become effective and binding. When he filed his affidavit of adverse claim, his interest was already an existing one. The interest or claim of Atty. Fernandez arose long after the original registration, and there is no other provision of the Land Registration Act under which the interest or claim may be registered except as an adverse claim under Section 110. The interest cannot be registered as an attorney's charging lien, as a charging lien under Section 37, Rule 138 of the Revised Rules of Court is limited only to money judgments and not to judgments for the annulment of a contract or for delivery of real property. The annotation of an adverse claim is a measure designed to protect the interest of a person over a piece of real property where the registration of such interest or right is not otherwise provided for by the Land Registration Act, and serves as a notice and warning to third parties dealing with said property. The Larrazabal spouses purchased their two-thirds interest with knowledge of the adverse claim, as it was annotated on the old transfer certificate of title and later on the new one issued to them. Having purchased the property with knowledge of the adverse claim, they are in bad faith and consequently estopped from questioning the validity of the adverse claim.

• Contingent fee contracts and Article 1491 — Article 1491(5) of the Civil Code prohibits lawyers from acquiring by purchase or assignment the property and rights which may be the object of any litigation in which they take part by virtue of their profession. The prohibition applies only to a sale or assignment to the lawyer by his client of the property which is the subject of litigation, and for the prohibition to operate, the sale or transfer of the property must take place during the pendency of the litigation involving the property. A contract for a contingent fee is not covered by Article 1491 because the transfer or assignment of the property in litigation takes effect only after the finality of a favorable judgment, not during the pendency of the litigation.

• Contingent fees under the Canons of Professional Ethics — While Canon 10 prohibits a lawyer from purchasing any interest in the subject matter of the litigation he is conducting, Canon 13 expressly allows a reasonable contingent fee contract, which should be reasonable under all the circumstances of the case, including the risk and uncertainty of the compensation, and should always be subject to the supervision of a court as to its reasonableness. The distinction is between buying an interest in the litigation as a speculation, which Canon 10 condemns, and agreeing, in a case which the lawyer undertakes primarily in his professional capacity, to accept his compensation contingent on the outcome.

• Adverse claims under Section 110 of the Land Registration Act — An adverse claim may be registered by whoever claims any part or interest in registered land adverse to the registered owner, arising subsequent to the date of the original registration, if no other provision is made in the Act for registering the same. The annotation of an adverse claim is a measure designed to protect the interest of a person over a piece of real property where the registration of such interest or right is not otherwise provided for by the Land Registration Act, and serves as a notice and warning to third parties dealing with said property that someone is claiming an interest on the same or a better right than the registered owner thereof. It is only when such claim is found unmeritorious that the registration thereof may be cancelled.

• Attorney's charging lien — A charging lien under Section 37, Rule 138 of the Revised Rules of Court is limited only to money judgments and not to judgments for the annulment of a contract or for delivery of real property. An attorney shall have a lien upon the funds, documents and papers of his client which have lawfully come into his possession and may retain the same until his lawful fees and disbursements have been paid, and may apply such funds to the satisfaction thereof. He shall also have a lien to the same extent upon all judgments for the payment of money, and executions issued in pursuance of such judgments, which he has secured in a litigation of his client.

• "The prohibition in said article applies only to a sale or assignment to the lawyer by his client of the property which is the subject of litigation. In other words, for the prohibition to operate, the sale or transfer of the property must take place during the pendency of the litigation involving the property." — This passage defines the scope of Article 1491(5) and establishes the temporal requirement for the prohibition to apply, forming the basis for holding that contingent fee contracts are not covered.

• "A contract for a contingent fee is not covered by Article 1491 because the transfer or assignment of the property in litigation takes effect only after the finality of a favorable judgment." — This is the ratio decidendi on the validity of contingent fee contracts, distinguishing them from prohibited acquisitions during the pendency of litigation.

• "The distinction is between buying an interest in the litigation as a speculation which Canon 10 condemns and agreeing, in a case which the lawyer undertakes primarily in his professional capacity, to accept his compensation contingent on the outcome." — This passage reconciles Canon 10 and Canon 13 of the Canons of Professional Ethics, clarifying that contingent fee arrangements are permissible when the lawyer acts in his professional capacity rather than as a speculator.

• "The annotation of an adverse claim is a measure designed to protect the interest of a person over a piece of real property where the registration of such interest or right is not otherwise provided for by the Land Registration Act, and serves as a notice and warning to third parties dealing with said property that someone is claiming an interest on the same or a better right than the registered owner thereof." — This passage articulates the purpose and function of adverse claim annotations under Section 110 of the Land Registration Act, supporting the validity of the registration in this case.

• Rosario Vda. de Laig vs. Court of Appeals, L-26882, November 21, 1978 — Cited as controlling precedent for the proposition that Article 1491 prohibits only a sale or assignment to the lawyer by his client of the property which is the subject of litigation, and that the transfer must take place during the pendency of the litigation. The case involved a contingent fee of one-half of the property in question and held that contingent fees are recognized in this jurisdiction.

• Ulanday vs. Manila Railroad Co., 45 Phil. 540 (1923) — Cited as the earliest Philippine case recognizing that contingent fees are not prohibited in the Philippines and are impliedly sanctioned by law, subject to the supervision of the court to protect clients from unjust charges.

• Grey vs. Insular Lumber Co., 97 Phil. 833 (1955) — Followed, reiterating the doctrine that contingent fees are permitted, and holding that where a contract for a contingent fee was obtained by undue influence, fraud, or imposition, or where the compensation is so clearly excessive as to amount to extortion, the court will protect the aggrieved party.

• Recto vs. Harden, 100 Phil. 427 (1956) — Cited as reiterating the doctrine that contingent fees are recognized in the Philippines.

• Albano vs. Ramos, 20 SCRA 171 (1967) — Cited as a case where the attorney was allowed to recover in a separate action her attorney's fee of one-third of the lands and damages recovered as stipulated in the contingent fee contract.

• Paz Ty Sin Tei vs. Jose Lee Dy Piao, 103 Phil. 867 (1958) — Cited for the proposition that it is only when an adverse claim is found unmeritorious that the registration thereof may be cancelled.

• Sanchez, Jr. vs. Court of Appeals, 69 SCRA 332 (1976) — Cited for the definition of the annotation of an adverse claim as a measure designed to protect the interest of a person over a piece of real property and as a notice and warning to third parties dealing with said property.

• Article 1491(5), New Civil Code — Prohibits justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice from acquiring by purchase or assignment the property and rights in litigation before the court within whose jurisdiction or territory they exercise their respective functions. The prohibition extends to lawyers with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession. The Court held that this provision applies only to transfers during the pendency of litigation and does not cover contingent fee contracts where the transfer takes effect after finality of a favorable judgment.

• Canon 10, Canons of Professional Ethics — Prohibits a lawyer from purchasing any interest in the subject matter of the litigation he is conducting. The Court distinguished this from contingent fee contracts, holding that the prohibition applies to buying an interest in litigation as a speculation, not to agreeing to accept compensation contingent on the outcome in a case undertaken primarily in a professional capacity.

• Canon 13, Canons of Professional Ethics — Expressly allows a reasonable contingent fee contract, which should be reasonable under all the circumstances of the case, including the risk and uncertainty of the compensation, and should always be subject to the supervision of a court as to its reasonableness. The Court held that this canon expressly sanctions contingent fees by way of exception to Canon 10.

• Section 110, Land Registration Act (Act 496) — Provides that an adverse claim may be registered by whoever claims any part or interest in registered land adverse to the registered owner, arising subsequent to the date of the original registration, if no other provision is made in the Act for registering the same. The Court held that the lawyer's interest under the contingent fee contract, having arisen after the case was won on appeal, was properly registered as an adverse claim under this provision.

• Section 37, Rule 138, Revised Rules of Court — Provides that an attorney shall have a lien upon the funds, documents and papers of his client which have lawfully come into his possession and may retain the same until his lawful fees and disbursements have been paid, and shall also have a lien to the same extent upon all judgments for the payment of money and executions issued in pursuance of such judgments. The Court held that this charging lien is limited only to money judgments and not to judgments for the annulment of a contract or for delivery of real property, making the adverse claim the only adequate remedy.

Teehankee (Chairman), Fernandez, Guerrero, De Castro, and Melencio-Herrera, JJ., concurred.