Philippine Economic Zone Authority vs. Fernandez

An action for reconveyance of land prescribes four years from discovery of fraud, deemed to occur upon issuance of the certificate of title, or ten years from the alleged fraudulent registration when based on implied or constructive trust, and cannot be maintained once the property has passed to an innocent purchaser for value. The imprescriptibility of an action for reconveyance based on implied or constructive trust applies only when the plaintiff is in possession of the property.

The subject property is Lot No. 4673 of the Opon Cadastre in Lapu-Lapu City, covered by Original Certificate of Title No. RO-2537, registered in the names of sixteen individuals including Florentina Rapaya. The lot was among the objects of expropriation proceedings docketed as Civil Case No. 510-L before Branch XVI of the Regional Trial Court of Lapu-Lapu City, for the establishment of an export processing zone. The Export Processing Zone Authority (EPZA), petitioner's predecessor, was the expropriating agency, and the expropriation was resolved through a Compromise Agreement approved by the trial court.

The subject of the controversy is Lot No. 4673 of the Opon Cadastre in Lapu-Lapu City, covered by Original Certificate of Title (OCT) No. RO-2537 dated May 19, 1982, registered in the names of Florentina Rapaya, Victorino Cuizon, Isidro Cuizon, Ursula Cuizon, Benito Lozano, Isabel Lozano, Pelagia Lozano, Augusto Lozano, Valeriano Ybañez, Jesus Ybañez, Numeriano Ybañez, Martino Ybañez, Eutiquio Patalinghug, Celedonio Patalinghug, Santiago Patalinghug, and Silvino Patalinghug. The lot has an area of 11,345 square meters, more or less.

On May 15, 1982, Jorgea Igot-Soroño, Frisca Booc, and Felix Cuizon executed an Extrajudicial Partition, declaring themselves the only surviving heirs of the registered owners. Consequently, they were issued TCT No. 12467 on July 8, 1982. Because the lot was among the objects of expropriation proceedings docketed as Civil Case No. 510-L pending before Branch XVI of the RTC of Lapu-Lapu City, that court rendered a partial Decision on August 11, 1982, approving a Compromise Agreement between the Export Processing Zone Authority (EPZA) and the new registered owners. Under the agreement, EPZA would pay P68,070 as just compensation for the expropriation of the property for an export processing zone. As a consequence, petitioner acquired title over the lot, and TCT No. 12788 was issued by the Register of Deeds of Lapu-Lapu City on October 13, 1982.

On July 29, 1996, private respondents filed with the RTC of Lapu-Lapu City a Complaint for Nullity of Documents, Redemption and Damages against petitioner and Jorgea Igot-Soroño et al., docketed as Civil Case No. 4534-L. The Complaint alleged that private respondents had been excluded from the extrajudicial settlement of the estate and sought the nullification of several documents, including TCT No. 12788 issued in the name of petitioner. On February 17, 1997, petitioner filed a Motion to Dismiss on the ground of prescription, which was denied by the respondent judge on January 12, 1998; the Motion for Reconsideration was likewise denied on March 31, 1998.

The Court of Appeals, in denying petitioner's subsequent Petition for Certiorari, reasoned that the complaint was in effect an action for reconveyance, that the defrauding co-heirs held the property in constructive trust for the excluded heirs, and that the action was imprescriptible. The CA relied on the principle that an action to compel a trustee to convey property registered in his name for the benefit of the cestui que trust cannot be met with the defense of prescription.

• Prescription: Petitioner argued that private respondents' claim against the subject property had already prescribed, because the two-year period within which an unduly excluded heir may seek a new settlement of the estate had lapsed by the time private respondents filed their action with the trial court.
• Constructive Notice: Petitioner argued that private respondents received constructive notice of the extrajudicial partition by reason of its registration with the Registry of Deeds, and that the two-year period commenced from July 8, 1982, the date of inscription of the extrajudicial settlement on OCT No. 2537.
• Reconveyance Not Available: Petitioner argued that reconveyance does not lie against expropriated property, since the property had already been conveyed to the government in appropriate expropriation proceedings.

• Constructive Trust: Private respondents argued that the defrauding co-heirs committed a breach of trust by falsely representing themselves as the only heirs, creating a constructive trust in favor of the defrauded parties, and that the excluded heir's action is imprescriptible.
• Void Contract: Private respondents argued that the action involves the declaration of nullity of a void or inexistent contract which became the basis for the fraudulent registration, and that under Article 1410 of the Civil Code, the action for declaration of inexistence of a void contract does not prescribe.
• Inapplicability of Constructive Notice: Private respondents argued, citing Juan vs. Zuñiga and Sevilla vs. Angeles, that the defense of prescription cannot be set up in an action whose purpose is to recover property held by a person for the benefit of another, notwithstanding the constructive notice rule.

• Prescription: Whether the appellate court erred in not holding that private respondents' claim against the expropriated property had prescribed.
• Reconveyance: Whether the appellate court erred in not holding that reconveyance does not lie against the expropriated property.

• Prescription: Yes. Private respondents' action for reconveyance based on fraud had prescribed, having been instituted on July 29, 1996, more than four years from the issuance of title on August 11, 1982; even if based on implied or constructive trust, the action prescribed ten years from the alleged fraudulent registration.
• Reconveyance: Yes. Reconveyance cannot be availed of once the property has passed to an innocent purchaser for value; the government, having acquired title through a judicially approved Compromise Agreement in expropriation proceedings, is presumed to have acted in good faith.

• Prescription: Under Section 4, Rule 74 of the Rules of Court, persons unduly deprived of their lawful participation in a settlement may assert their claim only within two years after the settlement and distribution of the estate. This period does not apply to those who had no part in or had no notice of the settlement, since an extrajudicial partition is an ex parte proceeding. However, by its registration in the manner provided by law, a transaction may be known actually or constructively. Private respondents were deemed constructively notified of the extrajudicial settlement by reason of its registration and annotation in the certificate of title, and had two years, or until July 8, 1984, within which to file their objections. The only exception to the prescription period is when the title remains in the hands of the heirs who fraudulently caused the partition or in those of their transferees who cannot be considered innocent purchasers for value. Here, title was no longer in the name of the allegedly fraudulent heirs but already in that of an innocent purchaser for value — the government, which is presumed to have acted in good faith in acquiring the lot through a Compromise Agreement judicially approved in proper expropriation proceedings. Even assuming fraud on the part of the other heirs, private respondents may proceed only against the defrauding heirs, not against petitioner which had no participation in or knowledge of the alleged fraud. The remedy of an owner prejudiced by fraud where property was subsequently sold to an innocent purchaser for value is an action for damages against the perpetrators of the fraud.

• Reconveyance: An action for reconveyance resulting from fraud prescribes four years from the discovery of the fraud, and such discovery is deemed to have taken place upon the issuance of the certificate of title over the property, since registration is constructive notice to all persons. Private respondents' action had clearly prescribed, as title was issued on August 11, 1982, while the suit was instituted only on July 29, 1996. Even an action based on implied or constructive trust would have prescribed, because such action prescribes ten years from the alleged fraudulent registration or date of issuance of the certificate of title. The imprescriptibility of an action for reconveyance based on implied or constructive trust applies only when the plaintiff is in possession of the property, making the action one to quiet title. Private respondents are not in possession of the disputed property and do not even claim to be. The CA's reliance on Juan vs. Zuñiga was misplaced, as the principle therein has no application where the supposed trustee has effectively repudiated the trust by conveying the property to the government through expropriation. Finally, reconveyance cannot be availed of once the property has passed to an innocent purchaser for value. The property was conveyed to the government in appropriate expropriation proceedings, the regularity or validity of which has not been questioned, and petitioner should enjoy the security afforded to innocent third persons under the registration laws. Private respondents may, however, sue their co-heirs for damages for the alleged fraud.

• Prescription of Action for Reconveyance Based on Fraud — An action for reconveyance resulting from fraud prescribes four years from the discovery of the fraud, and such discovery is deemed to have taken place upon the issuance of the certificate of title over the property, because registration of real property is constructive notice to all persons. Applied here, the action filed in 1996 was time-barred, title having been issued in 1982.

• Prescription of Action for Reconveyance Based on Implied or Constructive Trust — An action for reconveyance based on an implied or constructive trust prescribes ten years from the alleged fraudulent registration or date of issuance of the certificate of title over the property. The imprescriptibility of such action applies only when the plaintiff or the person enforcing the trust is in possession of the property, in which case the action is one to quiet title and does not prescribe.

• Innocent Purchaser for Value — Reconveyance cannot be availed of once the property has passed to an innocent purchaser for value. The government is presumed to have acted in good faith in the acquisition of the lot, considering that title thereto was obtained through a Compromise Agreement judicially approved in proper expropriation proceedings. The remedy of an owner fraudulently deprived of property subsequently sold to an innocent purchaser for value is an action for damages against the persons who perpetrated the fraud.

• Repudiation of Constructive Trust — An action to compel, for the benefit of the cestui que trust, the conveyance of property registered in the trustee's name does not prescribe unless the trustee repudiates the trust. In this case, the supposed trustee repudiated the trust by directly performing an act of ownership — conveying the property to the government through expropriation.

• "An action for reconveyance of land, an equitable remedy recognized under our land registration laws, is subject to the applicable rules on prescription. Moreover, the right to pursue such reivindicatory action may be defeated when the property sought to be recovered has been conveyed to an innocent purchaser for value." — This opening statement articulates the two controlling principles of the decision: prescription applies to reconveyance actions, and innocent purchasers for value are protected.

• "The only exception to the above-mentioned prescription is when the title remains in the hands of the heirs who have fraudulently caused the partition of the subject property or in those of their transferees who cannot be considered innocent purchasers for value." — This defines the narrow exception to the two-year prescription period under Section 4, Rule 74, which did not apply because title had passed to the government.

• "An action for reconveyance resulting from fraud prescribes four years from the discovery of the fraud; such discovery is deemed to have taken place upon the issuance of the certificate of title over the property. Registration of real property is considered a constructive notice to all persons and, thus, the four-year period shall be counted therefrom." — This states the canonical rule on prescription of reconveyance actions based on fraud, frequently cited in subsequent jurisprudence.

• "The imprescriptibility of an action for reconveyance based on implied or constructive trust applies only when the plaintiff or the person enforcing the trust is in possession of the property. In effect, the action for reconveyance is an action to quiet the property title, which does not prescribe." — This qualifies the imprescriptibility doctrine, limiting it to possessors of the property, and was the basis for rejecting private respondents' claim of imprescriptibility.

• Juan vs. Zuñiga, 4 SCRA 1221, April 28, 1962 — Distinguished and held to be misplaced; the principle therein that the defense of prescription cannot be set up in an action to recover property held by a person for the benefit of another has no application where the trustee has repudiated the trust by conveying the property to the government through expropriation.
• Eduarte vs. CA, 253 SCRA 391, February 9, 1996 — Followed; cited for the proposition that the fact that co-heirs' title was fraudulently secured cannot prejudice the rights of a purchaser in good faith and for value, and that the remedy of the defrauded owner is an action for damages against the perpetrators of the fraud.
• Serna vs. CA, 308 SCRA 527, June 18, 1999 — Followed; cited for the rule that the law recognizes the right of a person deprived of an estate by actual fraud to seek reconveyance, and for the four-year prescription period for reconveyance based on fraud.
• Salvatierra vs. CA, 261 SCRA 45, August 26, 1996; Olviga vs. CA, 227 SCRA 330, October 21, 1993; Sta. Ana Jr. vs. CA, 281 SCRA 624, November 13, 1997 — Followed; cited for the ten-year prescription period for actions for reconveyance based on implied or constructive trust.
• Vda. de Cabrera vs. CA, 267 SCRA 339, February 3, 1997 — Followed; cited for the rule that imprescriptibility of an action for reconveyance based on implied or constructive trust applies only when the plaintiff is in possession of the property.
• Viloria vs. CA, 309 SCRA 529, June 30, 1999 — Followed; cited for the rule that an action to compel conveyance of property registered in the trustee's name does not prescribe unless the trustee repudiates the trust.
• Lucena vs. CA, 313 SCRA 47, August 25, 1999 — Followed; cited for the rule that reconveyance cannot be availed of once the property has passed to an innocent purchaser for value.
• Sampilo & Salacup vs. CA, 103 Phil 70, February 28, 1958; Villaluz vs. Neme, 7 SCRA 27, January 31, 1963 — Followed; cited for the proposition that Section 4, Rule 74 is not meant to be a statute of limitations and that an extrajudicial partition, being an ex parte proceeding, would not affect third persons who had no knowledge thereof.

• Section 4, Rule 74, Rules of Court — Provides that persons unduly deprived of their lawful participation in an estate may compel settlement within two years after the settlement and distribution of the estate. The Court applied this provision to determine that private respondents' claim had prescribed, as they were deemed constructively notified by the registration of the extrajudicial settlement and failed to act within the two-year period.
• Article 1410, Civil Code — Declares that the action or defense for the declaration of the inexistence of a void contract does not prescribe. The Court implicitly rejected private respondents' reliance on this provision, holding that the action was in effect one for reconveyance subject to prescription, not an imprescriptible action to declare a void contract.

• Justice Melo (Chairman)
• Justice Vitug
• Justice Gonzaga-Reyes
• Justice Sandoval-Gutierrez