Princess Rachel Development Corporation vs. Hill View Marketing Corporation

A builder acts in bad faith when, despite actual knowledge of encroachment on another's property, it proceeds with construction using the wrong boundary line to take advantage of the adjoining landowner's absence; such builder forfeits the right to indemnity under Article 449 of the Civil Code, while the landowner retains the option to appropriate the improvements without payment, demand removal at the builder's expense, or compel the builder to purchase the land.

Princess Rachel Development Corporation (PRDC) owned two parcels of land in Kalibo, Aklan covered by Transfer Certificates of Title Nos. T-24348 and T-24349. Hillview Marketing Corporation (Hillview) owned the adjoining property. In 2004, Hillview commenced construction of a condominium project known as Alargo Residences. In August 2007, PRDC conducted a relocation survey in contemplation of selling the properties to Boracay Enclave Corporation, which revealed that Hillview had encroached on approximately 2,783 square meters of PRDC's land. The encroachment was substantial and visible, comprising developed land with three concrete houses and a swimming pool.

• Nature of Action: PRDC instituted an accion publiciana suit against Hillview Marketing Corporation and its stockholders Stefanie and Robert Dornau to recover possession of encroached portions of land located in Kalibo, Aklan, consisting of 383 square meters in Lot 1-B-7-B-1 and 2,400 square meters in Lot 1-B-7-A-1, totaling 2,783 square meters.
• The Encroachment: In August 2007, Engineer Lester Madlangbayan conducted a relocation survey of PRDC's properties and discovered that Hillview, which owned the adjoining Lot 1-B-7-A-2, had encroached approximately 2,614 square meters; a subsequent survey by the court-appointed Commissioner confirmed encroachment of 2,783 square meters on which Hillview had constructed three concrete houses and a swimming pool as part of its Alargo Residences project.
• Knowledge of Encroachment: Engineer Reynaldo Lopez, hired by Hillview to survey its property, testified that he discovered the concrete monuments on Hillview's boundary were erroneous and encroached upon PRDC's land; he informed Martin Dornau (Stefanie's husband and Hillview owner) of the encroachment, but Martin instructed him to proceed with the survey anyway since the adjoining lot was vacant, and the subdivision plans were prepared using the wrong boundary line.
• Respondents' Defense: Hillview claimed it bought the land from the Tirols free from liens and encumbrances, diligently examined titles and boundaries, and relied on the subdivision and survey plans prepared by Engr. Lopez which were approved by the Department of Environment and Natural Resources (DENR) and showed no encroachment; it argued that any error was due to Engr. Lopez's professional negligence.
• Procedural Posture: The RTC directed submission of relocation surveys; respondents failed to submit their own relocation survey, offering only a consolidated sketch plan prepared without actual ground survey, and sought postponement of the court-appointed Commissioner's survey, later impugning the Commissioner's report as clandestinely conducted.

• Actual Knowledge of Encroachment: Petitioners argued that Hillview was actually informed by its own surveyor, Engr. Lopez, of the encroachment on PRDC's properties, and Martin Dornau's instruction to proceed despite such knowledge established bad faith; respondents never refuted these allegations or presented testimonial evidence to prove Martin never relayed the information.
• Invalidity of Good Faith Defense: Petitioners maintained that the validity of subdivision plans approved by the DENR does not determine whether respondents knowingly constructed on another's property; the plans' validity was irrelevant given respondents' actual knowledge of the encroachment prior to and during construction.
• Inapplicability of Good Faith Provisions: Petitioners contended that Articles 448, 546, and 548 of the Civil Code, applied by the CA, were inapplicable because Hillview was a builder in bad faith, not good faith.
• Solidary Liability of Individual Respondents: Petitioners urged the Court to pierce the veil of corporate fiction, arguing that Stefanie and Robert Dornau, as stockholders and corporate officers, personally benefited from the construction and should be held solidarily liable with Hillview.

• Reliance on Survey Plans: Respondents countered that they had the right to rely on the subdivision and survey plans prepared by Engr. Lopez, a licensed geodetic engineer, which were approved by the DENR-LMS and carried the presumption of regularity as public documents; they acted in good faith by relying on the professional execution of the survey.
• Absence of Bad Faith: Respondents argued that there was no sufficient proof that Martin's alleged knowledge of encroachment was relayed to Hillview, and that the subdivision plans remained valid and subsisting; they claimed to have bought the land and constructed improvements within the technical boundaries stated in their titles.
• Inaction of Petitioners: Respondents contended that PRDC's delay in filing the complaint from 2004 (when construction began) to 2008 indicated inaction and laches, supporting the presumption of good faith under Article 527 of the Civil Code.
• Professional Liability of Surveyor: Respondents argued that if any encroachment existed, it was due to Engr. Lopez's professional misconduct, for which he should be held liable, not Hillview.

• Builder's Faith: Whether Hillview Marketing Corporation was a builder in good faith or bad faith.
• Landowner's Faith: Whether PRDC was a landowner in good faith.
• Applicable Legal Provisions: Whether Articles 449, 450, and 451 (bad faith provisions) or Articles 448, 546, and 548 (good faith provisions) of the Civil Code apply to determine the rights and obligations of the parties.
• Award of Damages: Whether petitioners are entitled to actual, temperate, or nominal damages.
• Piercing the Corporate Veil: Whether individual respondents Stefanie and Robert Dornau should be held solidarily liable with Hillview Marketing Corporation.

• Builder's Faith: Hillview was a builder in bad faith because it proceeded with construction despite actual knowledge of the substantial encroachment; Engr. Lopez informed Martin Dornau of the encroachment and the use of the wrong boundary line, yet Hillview maintained such use to take advantage of PRDC's vacant adjoining property, demonstrating a state of mind operating with furtive design and self-interest.
• Landowner's Faith: PRDC was a landowner in good faith because it discovered the encroachment only in 2007 and immediately sent demand letters to vacate and filed the complaint, thereby acting within a reasonable time to protect its rights; the registered owner of land is not required to maintain constant vigilance over property to avoid losing it.
• Applicable Legal Provisions: Articles 449, 450, and 451 of the Civil Code apply, not Articles 448, 546, and 548; under Article 449, a builder in bad faith loses what is built without right to indemnity, while under Articles 450 and 451, the landowner may demand demolition at the builder's expense, compel the builder to pay the price of the land, or appropriate the improvements without indemnity, and is entitled to damages.
• Award of Damages: Actual damages were properly deleted as PRDC expunged its claim for reasonable rentals and failed to prove pecuniary loss; temperate damages were unwarranted for lack of basis to conclude pecuniary loss existed; nominal damages of P100,000 were awarded under Articles 2221 and 2222 because Hillview violated PRDC's property rights.
• Piercing the Corporate Veil: Individual respondents Stefanie and Robert Dornau cannot be held solidarily liable because petitioners failed to prove by clear and convincing evidence that they assented to unlawful acts or were guilty of gross negligence or bad faith; bare allegations are insufficient to pierce the corporate veil.

• Builder in Bad Faith — Bad faith contemplates a state of mind affirmatively operating with furtive design or some motive of self-interest or ill will for ulterior purposes. To be deemed a builder in good faith, it is essential that a person asserts title to the land and is unaware of any flaw in title or mode of acquisition. Actual knowledge of encroachment, combined with continued construction despite such knowledge and taking advantage of the adjoining owner's absence, constitutes bad faith.
• Landowner in Good Faith — A registered owner enjoys the indefeasibility of title and may rest secure without necessity of waiting in the "mirador de su casa" (watchtower of his house) to avoid losing land. A landowner is deemed in bad faith only when the encroachment was done with his knowledge and without opposition on his part; mere delay in discovering encroachment does not constitute bad faith if the owner acts promptly upon discovery.
• Piercing the Corporate Veil — To hold a corporate officer personally liable for corporate obligations, two requisites must concur: (a) allegation that the officer assented to patently unlawful acts, or was guilty of gross negligence or bad faith; and (b) clear and convincing proof of such unlawful acts, negligence, or bad faith. Bare allegations unsubstantiated by evidence are not equivalent to proof.

• "Bad faith contemplates a state of mind affirmatively operating with furtive design or some motive of self-interest or ill will for ulterior purposes."
• "To be deemed a builder in good faith, it is essential that a person asserts title to the land on which he builds, i.e., that he be a possessor in the concept of owner, and that he be unaware that there exists in his title or mode of acquisition any flaw which invalidates it."
• "As a registered owner, PRDC enjoys the indefeasibility of its titles and, thus, 'may rest secure without necessity of waiting in the portals of the court sitting in the 'mirador de su casa' to avoid the possibility of losing his land.'"
• "Hillview is not an ordinary landowner, but a property developer... As a large property developer, Hillview ought to have, and which it could have easily dispensed, verified the definite boundaries of the property it sought to improve."

• Villanueva v. Sandiganbayan, 295 Phil. 615 (1993) — Cited for the definition of bad faith as a state of mind affirmatively operating with furtive design or ill will.
• Spouses Espinoza v. Spouses Mayandoc, 812 Phil. 95 (2017) — Cited for the requisites of good faith in building: assertion of title and unawareness of flaws.
• Salao v. Salao, 162 Phil. 89 (1976) — Cited for the principle that registered owners need not maintain constant vigilance over property.
• Zaragoza v. Tan, 847 Phil. 437 (2017) — Cited for the requisites to pierce the veil of corporate fiction and hold officers personally liable.

• Article 449, Civil Code — Provides that a builder in bad faith loses what is built, planted, or sown without right of indemnity.
• Article 450, Civil Code — Grants the landowner the option to demand demolition at the builder's expense or compel the builder to pay the price of the land.
• Article 451, Civil Code — Entitles the landowner to damages from a builder in bad faith.
• Article 453, Civil Code — Deems there is bad faith on the part of the landowner whenever the act was done with his knowledge and without opposition on his part.
• Articles 2221 and 2222, Civil Code — Provide for the award of nominal damages to vindicate a violated right or invaded property right.

Leonen, J.; Caguioa, J.; Lazaro-Javier, J.; Zalameda, J. (all filed separate concurring opinions).