Sumaoang vs. Judge, RTC, Branch XXXI, Guimba, Nueva Ecija

An attorney who, through a trial court's mistaken conversion of his one-half contingent fee into a peso judgment, acquires the entire litigated property at public auction holds one-half of that property under an implied trust in favor of his former clients and must reconvey it, together with one-half of the net profits derived therefrom. The finality of the judgment and the trial court's unassailed jurisdiction do not preclude this equitable relief.

Andres Sumaoang and his brothers Vitaliano and Pedro retained Atty. Jorge A. Pascua to pursue their claim over a homestead originally applied for by their predecessor, Sebastian Sumaoang. Their engagement was governed by a written contingent fee agreement and by the fiduciary and supervisory rules applicable to lawyers under the Code of Professional Responsibility. The Civil Code provisions on implied and constructive trusts, particularly Articles 1442 and 1456, supply the equitable framework for resolving property acquired by a lawyer through an execution sale.

On 15 July 1933, Sebastian Sumaoang filed with the Bureau of Lands a homestead application over Lot No. 3098 of the Cadastral Survey of Santiago, Isabela, covering 21.3445 hectares, and took possession of and cultivated the lot. Because of illness and the dangerous conditions in Santiago, Isabela immediately after the Second World War, he transferred his residence to Sta. Ignacia, Tarlac, where he died on 22 August 1952. During his absence, Florencio and Regino Domingo applied for a homestead patent over Lot No. 3098. On 11 May 1950, Florencio Domingo was granted Homestead Patent No. V-5218, and on its strength the Register of Deeds of Isabela issued Original Certificate of Title No. T-1202 to him.

To protect their interests over the homestead, Andres Sumaoang and his brothers Vitaliano and Pedro engaged the services of Atty. Jorge A. Pascua. In a letter dated 17 December 1964, they promised him a contingent fee of "not less than one-half (1/2)" of the entire homestead if it was recovered. As counsel, Atty. Pascua filed a formal protest with the Bureau of Lands contesting the legality of the issuance of Homestead Patent No. V-5218 to Florencio Domingo. On 7 February 1962, the Bureau of Lands rendered a decision declaring Homestead Patent No. V-5218 inoperative and ordering that steps be taken toward filing a reversion case to cancel the patent and its corresponding certificate of title and to dispose of the land to petitioner and his brothers as heirs of Sebastian Sumaoang should the facts warrant.

Pursuant to that decision, the Solicitor General filed, on behalf of the Republic, a reversion case against Florencio and Regino Domingo for cancellation of Homestead Patent No. V-5218 and Original Certificate of Title No. T-1201 before the CFI of Isabela. Atty. Pascua filed, on behalf of petitioner and his brothers, a complaint-in-intervention claiming preferential rights to the land. After trial, the CFI of Isabela rendered a decision dated 17 February 1971 declaring the homestead patent and certificate of title null and void and ordering reversion of the land to the State subject to the rights of petitioner and his brothers. The dispositive portion also ordered Florencio Domingo to surrender his owner's duplicate title for cancellation, directed the Register of Deeds to cancel the patent and title, and ordered Florencio Domingo to pay the intervenors 160 2/3 cavanes of palay or its value of P1,928.00, computed at P12.00 per cavan, per agricultural year since 1953 until the judgment became final. The decision was affirmed by both the Court of Appeals and the Supreme Court and became final and executory on 11 February 1973. In 1977, petitioner and his brothers took possession of Lot No. 3098 and subdivided it among themselves.

Not having received compensation for his professional services, Atty. Pascua filed sometime in 1979 a complaint for collection of attorney's fees against his former clients before the CFI of Guimba, Nueva Ecija. In its judgment dated 31 August 1982, the trial court stated that Atty. Pascua was entitled only to "the equivalent of one-half of the property — in its peso valuation" and ordered petitioner and his brothers to pay P110,000.00 as attorney's fees, P1,500.00 as attorney's fees in the prosecution of the instant case, and the costs of suit. The decision became final and executory. On motion of Atty. Pascua, the trial court on 22 April 1983 ordered the issuance of a writ of execution, and the corresponding writ was issued by the Branch Clerk of Court on 25 January 1985. The Deputy Provincial Sheriff then levied upon and sold at public auction the entire 21.3445-hectare lot to Atty. Pascua as the sole and hence highest bidder, for P110,000.00 as partial payment of the judgment obligation.

Petitioner brought the present Petition asking for nullification of the 31 August 1982 decision, the writ of execution, the notice of levy and auction sale, and the certificate of sale issued in favor of Atty. Pascua. Petitioner contended that the award of P110,000.00 was unconscionable; that the Solicitor General, not Atty. Pascua, had actively handled the reversion case; that Atty. Pascua's participation was limited to filing the complaint-in-intervention; and that the contract for legal services provided only for P5,000.00 in attorney's fees, as Atty. Pascua allegedly admitted in the complaint-in-intervention. Atty. Pascua maintained that the award was not unconscionable and that the decision had already become final and executory. The trial court had fixed the P110,000.00 amount without requiring or obtaining any third-party appraisal of the actual or fair market value of the 21.3445 hectares, although it noted that the land commanded a high price per hectare because the NIA had constructed an irrigation canal nearby, enabling two harvests a year, and that the land commanded a minimum of P10,000.00 per hectare.

• Unconscionable Attorney's Fees: Petitioner argued that the award of P110,000.00 as attorney's fees was unconscionable.
• Limited Participation of Counsel: Petitioner maintained that the Solicitor General, and not Atty. Pascua, had actively handled the reversion case, and that Atty. Pascua's participation was limited to filing a complaint-in-intervention on behalf of his clients, asking for the same relief as the Solicitor General plus the additional prayer that his clients be accorded preferential rights over the land.
• Contract for Legal Services: Petitioner contended that the contract for legal services between petitioner and his brothers, on the one hand, and Atty. Pascua, on the other, provided only for attorney's fees of P5,000.00, as Atty. Pascua himself allegedly admitted in the complaint-in-intervention filed in the reversion case.
• Improper Venue: Petitioner alleged improper venue as a ground for nullifying the decision already rendered and final.
• Nullification of Decision and Execution: Petitioner sought the nullification of the 31 August 1982 decision of the Guimba CFI, as well as the writ of execution, the notice of levy and auction sale, and the certificate of sale issued in favor of Atty. Pascua.

• Reasonableness of Attorney's Fees: Atty. Pascua contended that the award of attorney's fees by the Guimba CFI in its 31 August 1982 decision was not unconscionable.
• Finality of Judgment: Atty. Pascua maintained that the 31 August 1982 decision had already become final and executory.

• Annulment and Finality: Whether the final and executory decision of the Guimba CFI, the writ of execution, levy, auction sale, and certificate of sale may be annulled or set aside on the grounds alleged.
• Reasonableness of Attorney's Fees: Whether the P110,000.00 award of attorney's fees, which enabled Atty. Pascua to acquire the entire 21.3445-hectare property, was reasonable or unconscionable.
• Implied Trust and Reconveyance: Whether Atty. Pascua holds the property acquired at public auction under an implied or constructive trust in favor of petitioner and his brothers to the extent of one-half, requiring reconveyance and accounting for net profits.

• Annulment and Finality: No, not on the grounds alleged. The judgment was not annulled for lack of jurisdiction, fraud, or illegality, and improper venue did not suffice; nevertheless, finality and jurisdiction were not decisive, and the Court granted equitable relief by treating the petition as one for reconveyance.
• Reasonableness of Attorney's Fees: Yes. The fees became unreasonable and unconscionable. Although the contingent fee contract was lawful, the trial court's conversion of the one-half share into P110,000.00 and the execution sale allowed Atty. Pascua to acquire the entire property, leaving his clients still owing P1,500.00.
• Implied Trust and Reconveyance: Yes. Under Article 1456 of the Civil Code, Atty. Pascua holds the property acquired at public sale under an implied trust in favor of petitioner and his brothers to the extent of one-half. The operative mistake was the trial judge's, and Atty. Pascua took advantage of it; he must reconvey one-half of the land and one-half of the net profits.

• Annulment and Finality: The ordinary rule is that a judgment may be annulled only on defined grounds, such as lack of jurisdiction, fraud, or illegality. Petitioner did not adduce any jurisdictional defect vitiating the judgment, nor did he show that the judgment violated a particular statute; the allegation of improper venue would not suffice to nullify a decision already rendered and final. Nevertheless, the Court considered that the finality of the 31 August 1982 decision and the trial court's unassailed jurisdiction were not decisive. The attorney-client relationship is fiduciary. Canon 17 of the Code of Professional Responsibility requires a lawyer to owe fidelity to his client's cause and to be mindful of the trust and confidence reposed in him, while Canon 16 requires a lawyer to hold in trust all monies and properties of his client that may come into his possession. A lawyer is also an officer of the court, and his compensation for professional services is subject to the supervision of the court to ensure that the fees he charges and receives remain reasonable and commensurate with the services rendered and to maintain the dignity and integrity of the legal profession. Upon taking his attorney's oath, a lawyer submits himself to the authority of the courts to regulate his right to charge professional fees. The Court thus proceeded on equitable grounds rather than merely enforcing the final judgment.
• Reasonableness of Attorney's Fees: The original contingent fee agreement between Atty. Pascua and his clients was not itself unreasonable or unconscionable. The fees became unreasonable and unconscionable as a result of the subsequent dispositions of the trial court. The trial court upheld the contingent fee contract but, instead of awarding Atty. Pascua a one-half portion of the property, unilaterally and officiously converted the form or medium of compensation into a peso amount representing the value of that one-half portion. It fixed P110,000.00 as the "equivalent of 1/2 of the property — in its peso valuation" without requiring or obtaining any third-party appraisal of the actual or fair market value of the 21.3445 hectares. The trial court was grossly uninformed about property valuations, especially the valuation of property sold at public sale in Guimba, Nueva Ecija. The judgment allowed Atty. Pascua to acquire the entire parcel of land, even though the trial court had intended to award him only one-half of its value. Under Licudan vs. Court of Appeals, there should never be an instance where a lawyer gets as attorney's fees the entire property involved in the litigation, and it is unconscionable for the victor in litigation to lose everything he won to the fees of his own lawyer. Atty. Pascua purchased the entire land at public auction for P110,000.00, leaving his clients still owing him P1,500.00. The amount and character of his attorney's fees thus became unreasonable and unconscionable and constituted unjust enrichment at the expense of his clients.
• Implied Trust and Reconveyance: Atty. Pascua must be regarded as holding the title of the property acquired by him at public sale under an implied trust in favor of petitioner and his brothers to the extent of one-half of that property. Article 1456 of the Civil Code provides that if property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. The mistake or fraud that results in an implied trust may be the mistake or fraud of a third person and need not be committed directly by the trustee. Here, an implied trust was established upon the land acquired by Atty. Pascua even though the operative mistake was a mistake of the trial judge. The judge intended to convey only one-half of the land as attorney's fees to Atty. Pascua, but Atty. Pascua took advantage of the judge's mistake to acquire all 21.3445 hectares for himself. He knew that under his contract with his clients he was entitled to ask only for one-half of the land. The conclusion also rests on the principles of the general law of trusts, which through Article 1442 of the Civil Code have been adopted or incorporated into Philippine civil law to the extent they are not inconsistent with the Civil Code, other statutes, and the Rules of Court. Roa, Jr. vs. Court of Appeals recognized that a constructive trust arises contrary to intention and in invitum against one who, by fraud, actual or constructive, duress or abuse of confidence, commission of wrong, or any form of unconscionable conduct, artifice, concealment, or questionable means, or in any way against equity and good conscience, has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy. A constructive trust is substantially an appropriate remedy against unjust enrichment; it is raised by equity in respect of property acquired by fraud, or where, although acquired originally without fraud, it is against equity that it should be retained by the person holding it. A constructive trust is not based on an expressed intent that it shall exist, or even on an implied or presumed intent; it is created by a court of equity as a means of affording relief. Fraud on the part of the person holding or detaining the property is not essential. As stated in Beatty vs. Guggenheim Exploration Co., when property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee. The consequences of an implied trust are principally that the implied trustee shall deliver possession and reconvey title to the property to the beneficiary, pay the latter the fruits and other net profit received from the property during the period of wrongful or unconscionable holding, and otherwise adjust the equities between the trustee holding the legal title and the beneficiaries. Applying Article 1456 and these principles, the Court treated the Petition for Annulment as a Petition for Reconveyance and required Atty. Pascua to reconvey one-half of the 21.3445 hectares, plus one-half of all profits net of expenses and taxes which he may have derived from or in respect of the land during the time he held it, to petitioner and his brothers.

• Fiduciary relationship between lawyer and client; court supervision of attorney's fees — The attorney-client relationship is fiduciary. Canon 17 of the Code of Professional Responsibility requires a lawyer to owe fidelity to his client's cause and to be mindful of the trust and confidence reposed in him; Canon 16 requires a lawyer to hold in trust all monies and properties of his client that may come into his possession. A lawyer is also an officer of the court, and his compensation is subject to court supervision to ensure reasonableness and to maintain the dignity and integrity of the legal profession. Applied: Atty. Pascua's acquisition of the entire property as fees was unconscionable and unjust enrichment.
• Unconscionable attorney's fees — A lawyer should never get the entire property involved in litigation as attorney's fees; it is unconscionable for the victor in litigation to lose everything he won to the fees of his own lawyer. Applied: Atty. Pascua acquired all 21.3445 hectares although entitled only to one-half.
• Implied trust under Article 1456 — If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. The mistake or fraud may be of a third person and need not be committed directly by the trustee. Applied: the trial judge's mistake allowed Atty. Pascua to acquire the entire land; he holds one-half in trust for his former clients.
• Constructive trust as an equitable remedy against unjust enrichment — A constructive trust arises by operation of law contrary to intention and in invitum against one who, by fraud, actual or constructive, duress, abuse of confidence, unconscionable conduct, or questionable means, obtains or holds a legal right to property he ought not, in equity and good conscience, hold. It is not based on expressed or implied intent; it is created by a court of equity, and fraud is not essential. Applied: equity converted Atty. Pascua into a trustee, requiring reconveyance and accounting.
• General law of trusts incorporated through Article 1442 — General principles of trusts are adopted or incorporated into Philippine civil law to the extent they are not inconsistent with the Civil Code, other statutes, and the Rules of Court. Applied: the Court drew on general trust principles, including American jurisprudence, to define and apply constructive trust.
• Finality of judgment and equitable relief — The fact that the challenged judgment had become final and executory, and that the trial court's jurisdiction was not successfully assailed, was not decisive where the attorney-client relationship was fiduciary and the execution of the judgment produced an unconscionable result. The Court therefore treated the Petition for Annulment as a Petition for Reconveyance and granted equitable relief.

• "There should never be an instance where a lawyer gets as attorney's fees the entire property involved in the litigation. It is unconscionable for the victor in litigation to lose everything he won to the fees of his own lawyer." — This passage, quoted from Licudan vs. Court of Appeals, states the ratio for treating the attorney's acquisition of the entire property as unconscionable.
• "If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes." — This is Article 1456 of the Civil Code, the statutory basis for the implied trust imposed on Atty. Pascua.
• "We believe and so hold that respondent Atty. Pascua, under the circumstances of this case, must be regarded as holding the title of the property acquired by him at public sale under an implied trust in favor of petitioner and his brothers, to the extent of one-half (1/2) of that property." — This is the Court's core holding on the implied trust and the extent of Atty. Pascua's beneficial ownership.
• "When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee." — Quoted from Beatty vs. Guggenheim Exploration Co., this is the canonical formulation of constructive trust as an equitable remedy against unjust enrichment.

• Licudan vs. Court of Appeals, 193 SCRA 293 (1991) — Quoted for the rule that a lawyer should never get the entire property as attorney's fees and that it is unconscionable for the victor to lose everything to his own lawyer; the Court relied on it to characterize the fees as unconscionable.
• Roa, Jr. vs. Court of Appeals, 123 SCRA 3 (1983) — Source of constructive trust principles; the Court relied on the general law of trusts and unjust enrichment in imposing an implied trust.
• Beatty vs. Guggenheim Exploration Co., 122 N.E. 378 (1919) — Cited for the formulation that equity converts the holder of legal title into a trustee when he cannot in good conscience retain the beneficial interest.
• Montinola vs. Gonzales, 178 SCRA 677 (1989) — Cited for the ordinary rule that a judgment may be annulled only on defined grounds: lack of jurisdiction, fraud, or illegality.
• Laureano vs. Stevenson, 45 Phil. 252 (1923) and Diaz vs. Gorricho and Aguado, 103 Phil. 261 (1958) — Cited for the rule that the mistake or fraud resulting in an implied trust may be that of a third person and need not be committed by the trustee.
• Ramos vs. Bidin, 161 SCRA 561 (1988) and Gorospe and Sebastian vs. Gochangco, 106 Phil. 425 (1959) — Cited for the principle that a lawyer's compensation is subject to the supervision of the courts.
• Miguel vs. Court of Appeals, 29 SCRA 760 (1969) — Cited for drawing on American trust precedents because trust law has been more frequently applied in England and the United States than in Spain.

• Article 1456, Civil Code — If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. Applied: Atty. Pascua acquired the entire land because of the trial judge's mistake; he holds one-half in trust for the Sumaoangs.
• Article 1442, Civil Code — General principles of the law of trusts are adopted or incorporated into Philippine civil law to the extent they are not inconsistent with the Civil Code, other statutes, and the Rules of Court. Applied: the Court used general constructive trust principles to resolve the case.
• Canon 17, Code of Professional Responsibility — A lawyer owes fidelity to the cause of his client and shall be mindful of the trust and confidence reposed in him. Applied: the attorney-client relationship is fiduciary, and Atty. Pascua's acquisition violated that trust.
• Canon 16, Code of Professional Responsibility — A lawyer shall hold in trust all monies and properties of his client that may come into his possession. Applied: the property acquired at execution sale was subject to a trust for the clients.

• Justice Regalado: Concurred. He agreed with the ponencia's use of equitable trust principles and its emphasis on the ethical norms for lawyers and the judiciary's continuing supervisory powers over their conduct. He added the caveat that equity should not supplant applicable law. He observed that the trial judge committed a grievous error in disregarding the written contingent fee agreement, and that although the judgment became final and executory so that res judicata set in under the conventional procedural path, res judicata may be set aside in favor of substantial justice under the peculiar circumstances. He noted that annulment of judgment is not provided for in the procedural rules and that no prejudice would result because the adjudication was strictly in accordance with the parties' agreement that private respondent receive one-half of the property as contingent fee.
• Justices Nocon and Campos, Jr.: Concurred.
• Chief Justice Narvasa: On leave.