Spouses Pudadera vs. Magallanes

A buyer of registered land who has actual knowledge of facts—such as visible prior possession, a fence, and structures erected by another—that would impel a reasonably cautious person to inquire into the seller’s title is not an innocent purchaser for value, and his subsequent registration will not prevail over the right of a first buyer in good faith who was first in possession under Article 1544 of the Civil Code.

Belen Consing Lazaro owned Lot 11-E, a 5,333 sq. m. parcel in Arevalo, Iloilo City, covered by TCT No. T-51250. In 1979, she sold a 400 sq. m. portion to Daisy Teresa Cortel Magallanes under a contract to sell, executing a Deed of Definite Sale in 1980 upon full payment. Magallanes took possession, fenced the lot with barbed wire, and built a nipa hut. Lazaro also sold other portions of Lot 11-E to various buyers and executed a Partition Agreement in 1980 assigning Magallanes and Mario Gonzales a combined 800 sq. m. lot denominated Lot 11-E-8. When Lazaro refused to surrender the mother title to enable subdivision, Magallanes and the other buyers filed an adverse claim and a notice of lis pendens. In 1981, Lazaro sold the entire Lot 11-E-8 to her niece Lyn Lazaro and the latter’s husband, the Spouses Natividad, who obtained TCT No. T-58606. Magallanes sued the Natividads, causing a new lis pendens annotation on that title. The case was dismissed for lack of jurisdiction in 1985; the order of dismissal became final. On July 3, 1986, the Spouses Natividad sold a 400 sq. m. portion (Lot 11-E-8-A) to petitioner Ramy Pudadera, who obtained TCT No. T-72734. The dismissal order was inscribed on the title four days later, on July 7, 1986. Magallanes subsequently built two houses of strong materials on the lot. Petitioners failed to recover possession in a forcible entry case and commenced the present action for recovery of ownership and quieting of title.

• Nature of the Action: Petitioners, spouses Ramy and Zenaida Pudadera, filed an action for recovery of ownership, quieting of title, and damages against respondents Ireneo Magallanes and the heirs of Daisy Teresa Cortel Magallanes. Petitioners claimed absolute ownership of Lot 11-E-8-A by virtue of TCT No. T-72734, alleging that respondents had constructed houses on the lot without their consent.

• The First Sale and Possession: Belen Consing Lazaro, the original owner of Lot 11-E, sold a 400 sq. m. portion to Daisy Teresa Cortel Magallanes through a Contract to Sell dated March 13, 1979, and executed a Deed of Definite Sale on July 21, 1980 after full payment. Magallanes immediately took possession, fenced the lot with barbed wire, filled it with soil, and built a nipa hut. A Partition Agreement dated July 14, 1980 assigned Magallanes and Mario Gonzales to Lot 11-E-8 (800 sq. m., with each owning 400 sq. m.).

• The Second Sale and Subdivision: Lazaro refused to surrender the mother title, prompting Magallanes and other buyers to annotate an adverse claim (1981) and a notice of lis pendens. On November 23, 1981, Lazaro sold Lot 11-E-8 to her niece and nephew-in-law, the Spouses Natividad, who obtained TCT No. T-58606. Magallanes filed a civil case against the Natividads for specific performance, causing another lis pendens annotation on TCT No. T-58606 on September 2, 1983. The Natividads later subdivided Lot 11-E-8 into Lot 11-E-8-A and Lot 11-E-8-B, each 400 sq. m.

• Dismissal of the Case Against Spouses Natividad and Sale to Petitioners: The civil case filed by Magallanes against the Natividads was dismissed for lack of jurisdiction in an Order dated September 16, 1985. The order became final and executory. On July 3, 1986, the Spouses Natividad sold Lot 11-E-8-A to petitioner Ramy Pudadera for ₱25,000.00. A new title, TCT No. T-72734, was issued in his name. The order dismissing the case against the Natividads was inscribed on TCT No. T-58606 only on July 7, 1986.

• Visible Possession and the Forcible Entry Case: Magallanes later built two houses of strong materials on the lot. Petitioners filed a forcible entry case, which was dismissed by the Municipal Trial Court on July 17, 1991, on the ground that Magallanes was first in possession and that petitioner Ramy Pudadera had notice of her possession when he bought the lot. A relocation survey commissioned in that case confirmed that the lot occupied by Magallanes was the very lot claimed by petitioners.

• Identity of the Lot: Petitioners argued that Magallanes was claiming Lot 11-E-8-B, not Lot 11-E-8-A, as evidenced by her zoning application and tax declarations; thus, there was no conflict of claims over the lot titled in petitioners’ name.

• Double Sale and Good Faith: Petitioners maintained that any double sale occurred between Lazaro and the Spouses Natividad, not involving them. They contended that the appellate court erred in finding the Spouses Natividad in bad faith merely because Lyn Natividad was Lazaro’s niece, without impleading the Natividads and giving them their day in court. Consequently, petitioners argued that they derived good faith from their predecessors and that respondents failed to overcome the presumption of good faith.

• Notice of Lis Pendens: Petitioners argued that the notice of lis pendens was already effectively cancelled at the time of their purchase because the dismissal order had become final and executory; the inscription of cancellation was a mere formality. Citing Spouses Po Lam v. Court of Appeals, they contended that the existing court order for cancellation made them buyers in good faith.

• Attorney’s Fees and Damages: Petitioners questioned the award of attorney’s fees for lack of basis and claimed they should instead be awarded damages because respondents unlawfully prevented them from taking possession.

• Ownership of the Same Lot: Respondents countered that they were in possession of and claiming ownership over Lot 11-E-8-A, not Lot 11-E-8-B; petitioners’ contention was misleading. Magallanes had alleged in her Answer that she was the absolute lawful owner of Lot 11-E-8-A.

• Prior Ownership and Possession: Respondents asserted that Magallanes acquired the lot through a valid sale in 1979–1980, immediately took possession, erected a barbed-wire fence, filled the lot with soil, built a nipa hut, and stayed there until her death, taking steps to protect her rights by recording adverse claims and filing suit.

• Buyer in Bad Faith: Respondents argued that petitioners could not be buyers in good faith because at the time of the sale on July 3, 1986, the notice of lis pendens was still annotated on the title, the cancellation having been inscribed only on July 7, 1986. The visible possession and improvements on the property further put petitioners on notice of Magallanes’ claim.

• Identity of the Subject Lot: Whether the parties were claiming different lots, such that no conflict of interest existed over Lot 11-E-8-A.

• Good Faith of Petitioners as Second Buyers: Whether the Court of Appeals erred in applying the principle of innocent purchasers for value and in finding that petitioners were not buyers in good faith.

• Propriety of Attorney’s Fees: Whether the award of attorney’s fees in favor of respondents was proper.

• Identity of the Subject Lot: The argument that respondents were claiming a different lot was specious. Magallanes alleged in her Answer that she was the absolute lawful owner of Lot 11-E-8-A. Her acts of fencing the lot and constructing houses thereon evinced her claim of ownership. In the forcible entry case, a court-commissioned relocation survey confirmed that the entire lot occupied by Magallanes was the very same Lot 11-E-8-A claimed by petitioners. Both parties plainly asserted ownership over the same lot, notwithstanding errors in Magallanes’ zoning application and tax declarations.

• Good Faith of Petitioners as Second Buyers: The notice of lis pendens could not serve as a basis for finding bad faith because the dismissal order was final and executory before the sale to petitioners, even if the annotation of cancellation was inscribed only four days later. Pursuant to Spouses Po Lam v. Court of Appeals, an existing court order for cancellation of lis pendens prevents reliance on that notice to establish bad faith. Nonetheless, petitioners were not buyers in good faith because they had actual knowledge of other circumstances that should have prompted inquiry. Magallanes had been in visible, actual physical possession since 1979—she fenced the property, constructed a nipa hut, and later two houses of strong materials. Petitioners visited the lot several times before purchasing; the trial court found that petitioner Ramy Pudadera saw the existing fence and should have inquired about who was in possession. A buyer who has knowledge of facts that would impel a reasonably cautious man to investigate a possible defect in the seller’s title acts in bad faith if he proceeds without inquiry. The burden of proving good faith lies on the buyer asserting it and cannot be discharged by mere invocation of the presumption of good faith. The presence or absence of good faith on the part of the Spouses Natividad was irrelevant because petitioners’ own bad faith, independently established by their failure to investigate visible possession, was sufficient to defeat their claim. Under Article 1544, Magallanes, as the first buyer in good faith who was first in possession, possessed a better right than petitioners, who registered without good faith. The cancellation of petitioners’ title and the issuance of a new one in respondents’ names was thus proper.

• Propriety of Attorney’s Fees: The award of attorney’s fees was deleted for lack of basis. Attorney’s fees are the exception rather than the rule and cannot be granted merely because the prevailing party succeeded in the litigation. There was insufficient evidence that petitioners instituted the action with deliberate intent to cause prejudice. Hence, the award was removed.

• Buyer in Good Faith — Duty to Inquire — A buyer of registered land may rely on the certificate of title, but this rule does not apply when the buyer has actual knowledge of facts and circumstances that would impel a reasonably cautious man to inquire further. Visible possession by another, such as a fence and structures, constitutes notice of a possible adverse claim. Willful closing of eyes to the possibility of a defect in the vendor’s title will not make the buyer an innocent purchaser for value.

• Requisites for Second Buyer to Prevail Under Article 1544 — For a second buyer to displace a first buyer in a double sale of immovable property, it must be shown that: (1) the second buyer acted in good faith from the time of acquisition until title is transferred by registration or delivery of possession, and (2) the second buyer maintained continuing good faith and lack of knowledge of the first sale until his contract ripened into full ownership through prior registration.

• Burden of Proof on Good Faith — The burden to establish the status of a purchaser and registrant in good faith lies upon the one who asserts it. This onus probandi cannot be discharged by mere invocation of the legal presumption of good faith.

• Effect of Canceled Lis Pendens — A notice of lis pendens that has been ordered cancelled by a final court order does not serve as a basis for a finding of bad faith if the cancellation was final at the time of the sale, even if the annotation of cancellation had not yet been physically inscribed on the title.

• Award of Attorney’s Fees — Exception — Attorney’s fees are not awarded simply because the defendant prevails and the action is declared unfounded; there must be a showing of deliberate intent to cause prejudice, and the right to litigate should not be penalized in the absence of such bad faith.

• “One is considered a buyer in bad faith not only when he purchases real estate with knowledge of a defect or lack of title in his seller but also when he has knowledge of facts which should have alerted him to conduct further inquiry or investigation.”

• “His mere refusal to believe that such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in his vendor’s title, will not make him an innocent purchaser for value if it later develops that the title was in fact defective, and it appears that he had such notice of the defect had he acted with that measure of precaution which may reasonably be required of a prudent man in a like situation.”

• “The burden of proof to establish the status of a purchaser and registrant in good faith lies upon the one who asserts it. This onus probandi cannot be discharged by mere invocation of the legal presumption of good faith.”

• Spouses Po Lam v. Court of Appeals, 400 Phil. 858 (2000) — Applied for the proposition that an order of cancellation of a notice of lis pendens, though not yet annotated, prevents the notice from being used to infer bad faith. Distinguished on the facts because petitioners’ bad faith was independently shown by visible possession.

• Cheng v. Genato, 360 Phil. 891 (1998) — Cited for the twin requisites under Article 1544: the second buyer must show good faith from acquisition until registration and continuing good faith until his contract ripens into full ownership through prior registration.

• Hemedes v. Court of Appeals, 374 Phil. 692 (1999) — Cited for the definition of a purchaser in good faith as one who buys without notice of another’s interest and pays a fair price before learning of adverse claims.

• Sigaya v. Mayuga, 504 Phil. 600 (2005) — Applied for the rule that reliance on a certificate of title is not absolute when the buyer has actual knowledge of circumstances that should prompt inquiry, and that the burden of proving good faith lies on the party asserting it.

• Article 1544, Civil Code — Applied. In double sale of immovables, ownership belongs to the first registrant in good faith, then the first possessor in good faith, then the buyer with the oldest title in good faith. Petitioners, as second registrants, failed to prove good faith because of visible prior possession by the first buyer; therefore, the first buyer in good faith who first took possession (Magallanes) held superior right.

Chief Justice Renato C. Corona (Chairperson), Associate Justice Presbitero J. Velasco, Jr., Associate Justice Teresita J. Leonardo-De Castro, Associate Justice Jose Portugal Perez.