Orduña vs. Fuentebella

An oral contract for the sale of real property that has been partially executed through partial payments and transfer of possession is removed from the Statute of Frauds and is enforceable; an action for reconveyance based on fraud is imprescriptible where the plaintiff is in possession of the property; and a buyer of registered land who fails to inquire into the rights of a person other than the vendor who is in actual possession is not an innocent purchaser for value and cannot claim protection under the Torrens system or the double-sale rules of Article 1544 of the Civil Code.

Sometime in 1996, Armando Gabriel Sr. verbally sold a 74-square-meter residential lot in Baguio City to petitioner Antonita Orduña, with the price payable in installments. Antonita and her sons had occupied the lot since 1979 and built a house on it. After Gabriel Sr.’s death, his son Armando Gabriel Jr. inherited the property, continued accepting installment payments from the Orduñas, and authorized them to fence the lot. Gabriel Jr. later, without the Orduñas’ knowledge, sold the lot to respondent Bernard Banta, who sold it to respondents Marcos and Benjamin Cid, who in turn sold it to respondent Eduardo Fuentebella. Each buyer obtained a new certificate of title. When Fuentebella demanded that the occupants vacate, the Orduñas sued to annul the title and recover the property.

• The Oral Sale and Possession: Sometime in 1996, Armando Gabriel Sr. sold the subject lot to petitioner Antonita Orduña under a verbal agreement, with the price payable in installments. No formal deed was executed. Antonita and her sons, Dennis and Anthony, had been occupying the lot since 1979 and had constructed a house on it. They declared the house for tax purposes under Tax Declaration No. 96-04012-111087 and paid real property taxes.
• Partial Payments and Acknowledgment: After Gabriel Sr.’s death, his son Armando Gabriel Jr. secured TCT No. T-71499 over the lot and continued accepting payments. On December 12, 1996, Gabriel Jr. authorized Antonita to fence the lot. He acknowledged receipt of PhP 40,000 on December 13, 1996. In a letter dated May 1, 1997, he confirmed aggregate payments of PhP 65,000 and an outstanding balance of PhP 60,000. A further PhP 10,000 payment was receipted on November 24, 1997.
• Subsequent Sales Without Possessors’ Knowledge: Badly in need of money, Gabriel Jr. borrowed PhP 50,000 from respondent Bernard Banta, with the lot as security; upon default, a Deed of Sale dated June 30, 1999 was executed and TCT No. T-72782 issued in Banta’s name. Banta then sold the lot to respondents Marcos and Benjamin Cid for PhP 80,000 via a Deed of Absolute Sale dated January 19, 2000, yielding TCT No. T-72783. The Cids sold the lot to respondent Eduardo Fuentebella for an undisclosed amount through a Deed of Absolute Sale dated May 11, 2000; TCT No. T-3276 was issued in Fuentebella’s name on May 16, 2000. All respondents claimed to have checked the title and found it clean; Fuentebella alleged he inspected the property and found it unoccupied.
• Demand and Discovery: In May 2000, Fuentebella sent a demand letter for all occupants to vacate. Petitioners then learned from Gabriel Jr.’s estranged wife, Teresita, that she had filed a complaint for falsification against her husband and the Cids, alleging her signature on the Gabriel Jr.-Banta deed was forged. Teresita expressed willingness to honor the original sale to petitioners.
• Filing of the Complaint: On July 3, 2001, petitioners, joined by Teresita, filed the complaint for Annulment of Title, Reconveyance with Damages against respondents, praying for cancellation of Fuentebella’s title, reinstatement of Gabriel Jr.’s title, and recognition of their right to acquire ownership upon payment of the remaining balance.

• Statute of Frauds and Partial Execution: Petitioners argued that the oral sale was partially executed through partial payments and transfer of possession, thus removing it from the Statute of Frauds and rendering it enforceable.
• Nullity of Subsequent Sales: Petitioners maintained that the conveyance from Gabriel Jr. to Banta and the succeeding transfers were void because Gabriel Jr. was bound by the prior sale and the purchasers acted in bad faith.
• Respondents Not Buyers in Good Faith: Petitioners contended that the respondents were not innocent purchasers for value because they failed to investigate the rights of the Orduñas, who were in actual possession, and that their registration of title was tainted with bad faith.
• Adequacy of Consideration: Petitioners asserted that the agreed price of PhP 125,000 was adequate and that incomplete payment is distinct from inadequacy of consideration.
• Prescription: Petitioners argued that their action for reconveyance was imprescriptible because they were in possession of the property, and the suit was in the nature of an action to quiet title.
• Damages: Petitioners claimed the award of moral and exemplary damages and attorney’s fees was baseless, as the suit was brought in good faith.

• Statute of Frauds: Respondents claimed the verbal sale was unenforceable under Article 1403(2)(e) of the Civil Code, as it was not reduced to writing.
• Innocent Purchaser for Value: Respondents insisted that each successive buyer relied on the clean Torrens title and had no obligation to look beyond it; Fuentebella further alleged that he inspected the property and found it unoccupied.
• Prescription: Respondents argued that the action for annulment of title was filed more than one year after the issuance of Fuentebella’s certificate of title on May 16, 2000, thus time-barred.
• Inadequacy of Consideration: Respondents echoed the trial court’s view that petitioners had not fully paid the purchase price for more than a decade, rendering the transaction without adequate consideration.

• Statute of Frauds and Partial Execution: Whether the oral sale is unenforceable under the Statute of Frauds, or whether partial execution removes it from the Statute’s coverage.
• Adequacy of Consideration: Whether the sale lacked adequate consideration due to incomplete payment of the purchase price.
• Prescription: Whether the action for annulment of title and reconveyance had prescribed.
• Good Faith of Purchasers: Whether respondents are innocent purchasers for value entitled to the protection of the Torrens system and the rule on double sales under Article 1544 of the Civil Code.

• Statute of Frauds and Partial Execution: The oral sale was enforceable. The Statute of Frauds under Article 1403(2) applies only to executory contracts — those where no performance has yet been made. Here, the contract was partially executed: petitioners made partial payments accepted by both Gabriel Sr. and Gabriel Jr., and possession of the lot was transferred to them. Partial execution takes the contract out of the Statute. Additionally, a contract infringing the Statute is ratified by the acceptance of benefits under Article 1405; Gabriel Jr. accepted the partial payments and thus could not invoke the Statute to bar enforcement.
• Adequacy of Consideration: The sale had adequate consideration. Incomplete payment is not equivalent to inadequacy of price; the parties agreed to a PhP 125,000 purchase price, which was higher than the PhP 50,000 Gabriel Jr. later received from Banta and the PhP 80,000 Banta received from the Cids. Inadequacy of price is not a ground to set aside a sale unless it is shocking to the conscience, which was not the case.
• Prescription: The action was not time-barred. An action for reconveyance based on fraud is imprescriptible if the plaintiff is in possession of the property, as the suit partakes of an action to quiet title, which does not prescribe. Petitioners were in actual possession as owners, having purchased the lot and built their home. The one-year prescriptive period under Section 32 of P.D. No. 1529 did not apply because respondents were not innocent purchasers for value.
• Good Faith of Purchasers: None of the respondent-purchasers were buyers in good faith. A buyer of land in the actual possession of a person other than the seller is duty-bound to investigate the rights of that possessor; failure to do so constitutes bad faith. Gabriel Jr. was not in possession when he sold to Banta; Banta was not in possession when he sold to the Cids; and the Cids were not in possession when they sold to Fuentebella. Each successive buyer knew or should have known of the petitioners’ possession and was obliged to inquire. Because their registration was not coupled with good faith, they cannot invoke the protection of the Torrens system or the priority rule under Article 1544. Even if one of them registered first, knowledge of the prior sale and possession defeats any claim of priority.

• Partial Execution and the Statute of Frauds — The Statute of Frauds applies only to executory contracts. A verbal contract for the sale of real property that has been partially executed — by partial payments accepted by the vendor and by transfer of possession to the buyer — is removed from the Statute’s coverage and is enforceable. Acceptance of benefits under the contract further ratifies it under Article 1405 of the Civil Code.
• Imprescriptibility of Reconveyance by a Possessor — An action for annulment of title or reconveyance based on fraud is imprescriptible if the plaintiff is in possession of the subject property. The prescriptive period of ten years from issuance of the certificate of title applies only when the plaintiff is not in possession. A possessor claiming ownership may wait until possession is disturbed before vindicating his right; the action is in the nature of a suit for quieting of title, which does not prescribe.
• Duty of a Buyer to Investigate an Adverse Possessor — A purchaser of registered land who is aware, or should be aware, that a person other than the vendor is in actual possession must go beyond the certificate of title and investigate the possessor’s rights. Failure to do so constitutes bad faith, and the purchaser cannot be considered an innocent purchaser for value entitled to protection under the Torrens system or Article 1544 of the Civil Code.
• Good Faith Requirement in Double Sales (Article 1544) — Under Article 1544 of the Civil Code, knowledge by the second buyer of the first sale defeats his rights even if he is first to register, because such knowledge taints the registration with bad faith. Registration must be coupled with good faith to confer priority over an earlier unregistered sale.

• "The Statute of Frauds … applies only to executory contracts, i.e., those where no performance has yet been made. … the legal consequence of non-compliance with the Statute does not come into play where the contract in question is completed, executed, or partially consummated."
• "The purpose of the Statute is to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses … The form required under the Statute is for convenience or evidentiary purposes only."
• "An action for annulment of title or reconveyance based on fraud is imprescriptible where the suitor is in possession of the property subject of the acts, the action partaking as it does of a suit for quieting of title which is imprescriptible."
• "Basic is the rule that a buyer of a piece of land which is in the actual possession of persons other than the seller must be wary and should investigate the rights of those in possession. Otherwise, without such inquiry, the buyer can hardly be regarded as a buyer in good faith."
• "Where the land sold is in the possession of a person other than the vendor, the purchaser must go beyond the certificates of title and make inquiries concerning the rights of the actual possessor."

• Arrogante v. Deliarte, G.R. No. 152132, July 24, 2007 — Followed for the rule that the Statute of Frauds applies only to executory contracts, not to those partially consummated.
• Occeña v. Esponilla, G.R. No. 156973, June 4, 2004 — Applied for the doctrines that an action for reconveyance by a possessor is imprescriptible and that knowledge by the second buyer of the first sale defeats his rights even if he registers first.
• Heirs of Salvador Hermosilla v. Remoquillo, G.R. No. 167320, January 30, 2007 — Cited on the prescriptive period for reconveyance: ten years if out of possession, imprescriptible if in possession.
• Embrado v. Court of Appeals, G.R. No. 51457, June 27, 1994 — Relied upon for the principle that a buyer who fails to investigate the rights of an adverse possessor is in bad faith.
• Heirs of Trinidad De Leon Vda. de Roxas v. Court of Appeals, G.R. No. 138660, February 5, 2004 — Cited for the purchaser’s duty to look beyond the certificate of title when the land is in another’s possession.

• Article 1403(2)(e), Civil Code — Statute of Frauds; requires contracts for the sale of real property to be in writing. Held inapplicable because the contract was partially executed.
• Article 1405, Civil Code — Ratification of contracts infringing the Statute of Frauds by acceptance of benefits. Applied to Gabriel Jr.’s acceptance of partial payments.
• Article 1356, Civil Code — Contracts are generally obligatory regardless of form, provided essential requisites are present. Cited to underscore that form is for validity or enforceability only when the law requires.
• Article 1544, Civil Code — Rules on double sale of immovable property; ownership belongs to the first registrant in good faith. Interpreted to require good faith in registration; knowledge of prior sale defeats the second buyer’s right despite prior registration.
• Section 32, Presidential Decree No. 1529 — Innocent purchaser for value protection; after one year, the decree of registration becomes incontrovertible, but an innocent purchaser for value is protected. The provision did not bar the action because respondents were not innocent purchasers.

Corona, C.J. (Chairperson), Leonardo-De Castro, Del Castillo, and Perez, JJ.