Nakpil vs. Intermediate Appellate Court

Where a person purchases property in his own name with funds advanced for another, a constructive trust arises under Art. 1450 of the Civil Code, and any arrangement by which the purchaser automatically acquires the property upon the beneficiary's failure to reimburse the advances is a void pactum commissorium under Art. 2088.

Jose "Pinggoy" Nakpil and Carlos "Charlie" Valdes were best friends from their high school days at La Salle and later at the Philippine Law School, a closeness that led Valdes to serve as Nakpil's confidant, lawyer, accountant, auditor, and on some occasions business and financial consultant. Their families were equally close: Pinggoy became godfather of Charlie's second son, and Charlie became godfather of Pinggoy's youngest. The dispute concerns Pulong Maulap, a summer residence in Baguio City along Moran Street, which the Nakpils occupied and over which the two families would later litigate ownership.

Sometime in 1965, the Valdeses purchased Pulong Maulap, a summer residence in Baguio City along Moran Street, for P150,000.00. Carlos J. Valdes gave a downpayment of P50,000.00 and assumed the vendors' mortgage obligation of P100,000.00 with the Philippine National Bank (PNB), which he reduced to P75,000.00 by paying P25,000.00. On 12 July 1965, a deed of sale was executed and Transfer Certificate of Title No. 10247 was issued in Valdes' name. Even before the deed of sale was executed, in the early part of May 1965, the Nakpils moved in and stayed at Pulong Maulap, remaining there even after Pinggoy's death. According to petitioner, her husband Jose "Pinggoy" Nakpil had, prior to his death, requested Valdes to purchase Pulong Maulap and thereafter register the sale and hold the title thereto in trust for him, which Valdes did. Valdes, for his part, denied the existence of any trust agreement, averring that he bought the summer residence for himself with his own funds and without any participation of the late Nakpil; that he only informed Pinggoy of the acquisition, and Pinggoy merely showed interest in buying the property if he could have the money; and that, considering their avowed friendship, he offered the usufruct of the property to the Nakpils, who in turn agreed to shoulder its maintenance expenses, real estate taxes, fire insurance premiums, and servicing of interest on the mortgage obligation.

In order to facilitate the servicing of the mortgage obligation over Pulong Maulap, the loan was transferred to the First United Bank (FUB), where Pinggoy Nakpil was then a vice-president. Valdes borrowed P75,000.00 from FUB with which he paid PNB, and at the same time constituted in favor of FUB a mortgage over Pulong Maulap. He also borrowed P65,000.00 from FUB to finance the repair and renovation of Pulong Maulap.

Petitioner anchored her claim of her late husband's ownership on several documents. Exhibit "H" is a letter dated 28 March 1969 sent by Carlos J. Valdes & Co., an accounting firm owned by respondent Valdes, to the City Treasurer of Baguio, remitting "[o]n behalf of (our) their clients, Mr. Jose Nakpil . . . the following FUB checks for the payment of their 1969 real estate taxes" on Pulong Maulap. Exhibit "J" is a letter of Valdes to petitioner dated 24 August 1973, bearing the latter's handwritten conforme, date, and signature, in which Valdes stated that at the First United Bank there were two loans in his name — PN # ERB-893/73 for P65,000.00 and PN # 644/72 for P75,000.00 — and that "[b]oth of these loans, while in my name, were obtained by Pinggoy for his person"; that he would take over the total loan of P140,000.00 and pay all the interests due on the notes; and that petitioner would continue occupying the premises at Moran St., free of any encumbrance or payment, for five years starting 1 August 1973, with real property taxes to be paid by Valdes and maintenance expenses shouldered by petitioner. Exhibit "L" is another letter of Valdes to petitioner dated 17 September 1974, stating that "[o]ur records show that the P75,000.00 initially advanced for the Moran property still remains unpaid," and computing the total at P375,056.64.

On 13 February 1978, Valdes assigned Pulong Maulap to Caval Realty Corporation, for which Transfer Certificate of Title No. T-28484 was issued on 23 March 1978; Caval was 99.7% owned by Valdes, and the transfer was made in exchange for 1,500 shares of stock. Later, after petitioner allegedly received a P2,000,000.00 offer for Pulong Maulap from Pasay City Mayor Pablo Cuneta, she wrote Valdes demanding a reconveyance to enable her to effect the sale and reimburse him from the proceeds. On 30 December 1978, Valdes allegedly told petitioner that he could not execute the deed of conveyance because Pulong Maulap was his and he had no intention of selling it. Petitioner also sent Valdes and his wife a letter dated 31 July 1978, asking whether, if she could raise the amount necessary to pay back his advances for Pulong Maulap, he would be willing to reconvey the property to them as soon as she reimbursed his advances. On 21 March 1979, petitioner instituted an action for reconveyance with damages for breach of trust before the RTC of Baguio City against Valdes and Caval Realty Corporation.

The RTC found that while the downpayment of P50,000.00 and the further sum of P25,000.00 paid to PNB came from Valdes' personal funds, he considered them as a loan to Nakpil; and that while the remaining P75,000.00 representing the balance of the mortgage indebtedness was liquidated with the proceeds of an FUB loan in Valdes' name, that loan was actually Nakpil's. The RTC also construed petitioner's 31 July 1978 letter as "more an expression of her (petitioner's) resignation to her having lost the property than a demand for reconveyance." The IAC, on the other hand, found that there was no trust at all.

• Trust Relationship: Petitioner argued that the IAC erred in holding that the documents she presented (Exhibits "H," "J," and "L") were insufficient to prove the existence of a trust relationship.
• Pactum Commissorium: Petitioner argued that the IAC failed to rule that the trial court's interpretation of petitioner's conformity to Exh. "J" as a waiver was, in essence, a pactum commissorium, and therefore null and void.

• No Direct Proof of Trust: Respondent Valdes maintained that no direct proof was presented to sustain that he was merely instructed by petitioner's late husband to purchase the disputed property and thereafter register and hold title thereto in trust for the latter.
• Art. 1450 Inapplicable: Respondent argued that no implied trust could arise under Art. 1450 since the provision refers only to instances where the purchase price of the property sold is paid by the lender for the benefit of the borrower or buyer of the property; here, Valdes bought the property using his own funds, and the late Nakpil came into the picture only after the sale to Valdes was consummated, and only as an offeror to buy the property from Valdes.
• No Pactum Commissorium: Respondent contended that Exhibits "J" and "L" cannot amount to pactum commissorium since its elements — the existence of a creditor-debtor relationship; the obligation is secured by pledge or mortgage of certain properties over which the debtor has title; and ownership of the property passes to the creditor by mere default of debtor — are not present.

• Applicability of Art. 1450: Whether Art. 1450 of the Civil Code applies, giving rise to a constructive trust between Valdes and the late Nakpil over Pulong Maulap.
• Reconveyance: Whether, if Art. 1450 applies, petitioner can still compel reconveyance of Pulong Maulap from respondent Valdes.

• Applicability of Art. 1450: Yes. A constructive trust under Art. 1450 of the Civil Code existed, Valdes having purchased Pulong Maulap with funds he himself treated as advances to the late Nakpil. His own letters expressly recognized the trust, and he was estopped from claiming he bought the property for himself.
• Reconveyance: Yes, but only upon reimbursement. Petitioner may redeem and compel conveyance of Pulong Maulap after reimbursing Valdes P375,056.64 with legal interest from 31 July 1978. The action, filed in 1979, was well within the ten-year prescriptive period, which began to run only upon Valdes' repudiation of the trust in 1973.

• Applicability of Art. 1450: The SC began with the definition of implied trusts, which may either be resulting or constructive, as those which, without being express, are deducible from the nature of the transaction as matters of intent, or which are superinduced on the transaction by operation of law as matter of equity, independently of the particular intention of the parties. Art. 1450 is an illustration of an implied trust which is constructive. It presupposes a situation where a person, using his own funds, purchases a certain piece of land in behalf of another who, in the meantime, may not have sufficient funds to purchase the land; the property is then transferred in the name of the trustee, the person who paid for the land, until he is reimbursed by the beneficiary, and it is only after the beneficiary reimburses the trustee of the purchase price that the former can compel conveyance of the purchased property. From the evidence, the SC concluded that Valdes, using his own funds, purchased Pulong Maulap in behalf of the late Nakpil. This was based on Valdes' letters to petitioner, where he categorically admitted that "[b]oth of these loans, while in my (respondent Valdes) name, were obtained by Pinggoy (the late Nakpil) for his person," and that the "P75,000.00 initially advanced for the Moran property still remains unpaid." It was evident from these letters that while the balance of P75,000.00 on the mortgage of the vendors with PNB was liquidated from the proceeds of a loan Valdes obtained from FUB, such loan was actually secured by the late Nakpil by merely using Valdes' name; the same was true of the P65,000.00 FUB loan used to finance the repair and renovation of Pulong Maulap. And while the downpayment of P50,000.00 and the partial payment of P25,000.00 to PNB came from the personal funds of Valdes, he considered them as advances to the late Nakpil — otherwise, Valdes would never have deemed the amount as "unpaid" in his letter to petitioner of 17 September 1974. The letter of Valdes to the City Treasurer of Baguio, remitting payment of real estate taxes "[o]n behalf" of the Nakpils, was an express recognition of the implied trust. Consequently, Valdes was estopped from claiming that he bought Pulong Maulap for himself, and not merely in trust for the late Nakpil, as this contention was belied by the facts. The SC thus ruled that a constructive trust under Art. 1450 of the New Civil Code existed between the parties.
• Reconveyance: The SC held that petitioner could not as yet redeem and compel conveyance of the property, because Valdes must still be reimbursed for the advances he made on the disputed property, such reimbursement being a conditio sine qua non for compelling conveyance under Art. 1450. On prescription, the SC ruled that the period within which to compel conveyance of Pulong Maulap is not imprescriptible; an action for reconveyance based on an implied or constructive trust prescribes in ten years. But in this case, petitioner could still compel conveyance provided she reimburses Valdes for all his expenses, because Valdes never repudiated the constructive trust during the lifetime of the late Jose Nakpil; on the contrary, he expressly recognized it. The prescriptive period therefore did not begin to run until after he repudiated the trust, and such repudiation came when Valdes excluded Pulong Maulap from the list of properties of the late Jose Nakpil submitted to the intestate court in 1973. Even then, the present action for conveyance was filed in 1979, or well within the ten-year period. On the claim of dacion en pago, the SC held that a careful examination of Exh. "J" did not show that petitioner, as administratrix of the estate of the late Jose Nakpil, released or surrendered the latter's interest over Pulong Maulap to respondent; there could be no dacion en pago to speak of since ownership of the thing delivered was never transferred to the creditor, and the trust relations between the parties were therefore never extinguished. Besides, petitioner could not have waived the interest of her children with the late Jose M. Nakpil, who are her co-heirs to the Nakpil estate. The SC also found that Exh. "I-2," an annex to the claim filed against the estate proceedings of the late Jose Nakpil by his brother Angel Nakpil, prepared by Carlos J. Valdes & Co., which is a list of the application of the proceeds of various FUB loans contracted as of 31 December 1973 by the late Jose Nakpil, whether in his name or that of others, contained the two loans contracted in the name of respondent; if ownership of Pulong Maulap was already transferred or ceded to Valdes, these loans should not have been included in the list. The SC further held that what the parties merely agreed to under the arrangement outlined in Exh. "J" was that Valdes would undertake to "take over the total loan of P140,000.00 and pay all of the interests due on the notes" while the heirs of the late Jose Nakpil would continue to live in the disputed property for five years without any remuneration save for regular maintenance expenses. This did not mean, however, that if at the end of the five-year period petitioner failed to reimburse Valdes for his advances, which respondent computed to be P375,056.64 as of 31 July 1978 per his letter to petitioner of 17 September 1974, Valdes could already automatically assume ownership of Pulong Maulap; instead, the remedy of respondents Carlos J. Valdes and Caval Realty Corporation was to proceed against the estate of the late Jose M. Nakpil and/or the property itself. The arrangement entered into between the parties, whereby Pulong Maulap was to be "considered sold to him (respondent)" in case petitioner fails to reimburse Valdes, must then be construed as tantamount to a pactum commissorium which is expressly prohibited by Art. 2088 of the Civil Code, for there was to be automatic appropriation of the property by Valdes in the event of failure of petitioner to pay the value of the advances. Contrary to respondent's manifestations, all the elements of a pactum commissorium were present: there was a creditor-debtor relationship between the parties; the property was used as security for the loan; and there was automatic appropriation by respondent of Pulong Maulap in case of default of petitioner. In fine, the SC concluded that there was a constructive trust between the parties under Art. 1450 of the New Civil Code, and consequently, petitioner may redeem and compel conveyance of the disputed property but only after reimbursing respondent the sum of P375,056.64, with legal interest from 31 July 1978, the amount advanced by Valdes for the purchase of Pulong Maulap.

• Constructive trust under Art. 1450 — When the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom it is paid. The beneficiary may redeem the property and compel a conveyance thereof to him, but only after reimbursing the trustee for the advances made. In this case, Valdes purchased Pulong Maulap with funds he himself treated as advances to the late Nakpil, giving rise to a constructive trust; reconveyance was ordered upon reimbursement of P375,056.64 with legal interest from 31 July 1978.
• Pactum commissorium — An additional provision in a pledge, mortgage, antichresis, or any similar contract wherein the creditor can automatically appropriate the thing given as security if the debt is not paid within the stipulated period; expressly prohibited by Art. 2088 of the Civil Code. The elements are: (1) a creditor-debtor relationship between the parties; (2) the property is used as security for the loan; and (3) automatic appropriation by the creditor of the property in case of default. The SC found all three present in the arrangement allowing Valdes to automatically acquire Pulong Maulap upon petitioner's failure to reimburse his advances.
• Prescription of action for reconveyance based on constructive trust — An action for reconveyance based on an implied or constructive trust prescribes in ten years, but the prescriptive period does not begin to run until the trustee repudiates the trust. Valdes never repudiated the trust during the lifetime of the late Nakpil and expressly recognized it; repudiation came only in 1973 when he excluded Pulong Maulap from the list of Nakpil's properties submitted to the intestate court, and the action filed in 1979 was well within the ten-year period.
• Dacion en pago — The alienation of property to the creditor in satisfaction of a debt in money; it requires the transfer of ownership of the thing delivered to the creditor. Absent such transfer, there is no dacion en pago and the trust relationship is not extinguished. The SC held that Exh. "J" did not show any release or surrender of Nakpil's interest, and petitioner could not have waived the interest of her children, who are co-heirs to the Nakpil estate.

• "Implied trusts, which may either be resulting or constructive, are those which, without being express, are deducible from the nature of the transaction as matters of intent, or which are superinduced on the transaction by operation of law as matter of equity, independently of the particular intention of the parties." — The SC's canonical definition of implied trusts, laying the groundwork for its application of Art. 1450.
• "Article 1450 presupposes a situation where a person, using his own funds, purchases a certain piece of land in behalf of another who, in the meantime, may not have sufficient funds to purchase the land." — The SC's formulation of the factual situation that triggers the constructive trust under Art. 1450.
• "the remedy of respondents Carlos J. Valdes and Caval Realty Corporation was to proceed against the estate of the late Jose M. Nakpil and/or the property itself." — The SC's holding that petitioner's failure to reimburse did not entitle Valdes to automatic ownership; the proper remedy was a claim against the estate or the property.
• "The arrangement entered into between the parties, whereby Pulong Maulap was to be 'considered sold to him (respondent) . . .' in case petitioner fails to reimburse Valdes, must then be construed as tantamount to a pactum commissorium which is expressly prohibited by Art. 2088 of the Civil Code." — The SC's holding that the automatic-appropriation arrangement was a void pactum commissorium.

• O'Laco vs. Co Cho Chit, G.R. No. 58010, 30 March 1993 — Cited for the definition of implied trusts.
• Salao vs. Salao, G.R. No. L-26699, 16 March 1976, 70 SCRA 65 — Cited for the definition of implied trusts.
• Tale vs. Court of Appeals, G.R. No. 101028, 23 April 1992, 208 SCRA 266 — Cited for the rule that an action for reconveyance based on an implied or constructive trust prescribes in ten years.
• Segura vs. Segura, G.R. No. L-29320, 19 September 1988, 165 SCRA 369 — Cited for the rule that the prescriptive period does not begin to run until the trustee repudiates the trust.
• Philippine National Bank vs. Pineda, G.R. No. L-46658, 13 May 1991, 197 SCRA 1 — Cited in connection with the discussion on waiver and the rights of co-heirs.
• Mahoney vs. Tuason, 39 Phil. 952 — Cited for the doctrine on pactum commissorium.
• Puig vs. Sellner, 45 Phil. 286 — Cited for the doctrine on pactum commissorium.
• Northern Motors vs. Herrera, 49 SCRA 392 — Cited for the doctrine on pactum commissorium.

• Art. 1450, New Civil Code — If the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom it is paid; the latter may redeem the property and compel a conveyance thereof to him. Applied: Valdes purchased Pulong Maulap with funds he treated as advances to Nakpil, giving rise to a constructive trust, but reconveyance was conditioned on reimbursement of P375,056.64 with legal interest from 31 July 1978.
• Art. 2088, New Civil Code — The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them; any stipulation to the contrary is null and void. Applied: the arrangement allowing Valdes to automatically acquire Pulong Maulap upon petitioner's failure to reimburse was a void pactum commissorium.
• Art. 1245, New Civil Code — Dacion en pago; the alienation of property to the creditor in satisfaction of a debt in money. Applied: no dacion en pago occurred because ownership of Pulong Maulap was never transferred to Valdes, and the trust relationship was never extinguished.