RICHARD JUAN, PETITIONER, VS. GABRIEL YAP, SR.

, RESPONDENT
CARPIO, J.:
The Case
This resolves the petition for review1 of the ruling2 of the Court of Appeals finding
petitioner Richard Juan as trustee of an implied trust over a mortgage contract in favor of
respondent Gabriel Yap, Sr.
The Facts
On 31 July 1995, the spouses Maximo and Dulcisima Caeda (Caeda spouses) mortgaged
to petitioner Richard Juan (petitioner), employee and nephew of respondent Gabriel Yap,
Sr. (respondent), two parcels of land in Talisay, Cebu to secure a loan of P1.68 million,
payable within one year. The Contract was prepared and notarized by Atty. Antonio Solon
(Solon).
On 30 June 1998, petitioner, represented by Solon, sought the extrajudicial foreclosure of
the mortgage. Although petitioner and respondent participated in the auction sale, the
properties were sold to petitioner for tendering the highest bid of P2.2 million.3 No
certificate of sale was issued to petitioner, however, for his failure to pay the sales
commission.4
On 15 February 1999, respondent and the Caeda spouses executed a memorandum of
agreement (MOA) where (1) the Caeda spouses acknowledged respondent as their real
mortgagee-creditor x x x while Richard Juan [petitioner] is merely a trustee5 of
respondent; (2) respondent agreed to allow the Caeda spouses to redeem the foreclosed
properties for P1.2 million; and (3) the Caeda spouses and respondent agreed to initiate
judicial action either to annul or reform the [Contract] or to compel Richard Juan to
reconvey the mortgagees rights6 to respondent as trustor. Three days later, the Caeda
spouses and respondent sued petitioner in the Regional Trial Court of Cebu City (trial
court) to declare respondent as trustee of petitioner vis a vis the Contract, annul
petitioners bid for the foreclosed properties, declare the Contract superseded or
novated by the MOA, and require petitioner to pay damages, attorneys fees and the
costs. The Caeda spouses consigned with the trial court the amount of P1.68 million as
redemption payment.

pay moral damages and attorneys fees, and requiring respondent to deliver the titles in
question to petitioner.7 The trial court, however, granted the Caeda spouses prayer to
redeem the property and accordingly ordered the release of the redemption payment to
petitioner. In arriving at its ruling, the trial court gave primacy to the terms of the
Contract, rejecting respondents theory in light of his failure to assert beneficial interest
over the mortgaged properties for nearly four years.
Respondent appealed to the Court of Appeals (CA), imputing error in the trial courts
refusal to recognize a resulting trust between him and petitioner and in granting
monetary reliefs to petitioner.
Ruling of the Court of Appeals
The CA granted the petition, set aside the trial courts ruling, declared respondent the
Contracts mortgagee, directed the trial court to release the redemption payment to
respondent, and ordered petitioner to pay damages and attorneys fees.8 The CA found
the following circumstances crucial in its concurrence with respondents theory,
notwithstanding the terms of the Contract: (1) Solon testified that he drew up the
Contract naming petitioner as mortgagee upon instructions of respondent; (2) Dulcisima
Caeda acknowledged respondent as the creditor from whom she and her husband
obtained the loan the Contract secured; and (3) respondent shouldered the payment of
the foreclosure expenses.9 Instead, however, of annulling the Contract, the CA held that
reformation was the proper remedy, with the MOA serv[ing] as the correction done by
the parties to reveal their true intent.10
In this petition, petitioner prays for the reversal of the CAs ruling. Petitioner relies on the
terms of the Contract, and argues that respondents proof of a resulting trust created in
his favor is weak. Petitioner also assails the award of damages to respondent for lack of
basis.
On the other hand, respondent questions the propriety of this petition for raising only
factual questions, incompatible with the office of a petition for review on certiorari.
Alternatively, respondent argues that the pieces of parol evidence the CA used to anchor
its ruling are more than sufficient to prove the existence of an implied trust between him
and petitioner.
The Issues

In his Answer, petitioner insisted on his rights over the mortgaged properties. Petitioner
also counterclaimed for damages and attorneys fees and the turn-over of the owners
copy of the titles for the mortgaged properties.
The Ruling of the Trial Court
The trial court ruled against respondent and his co-plaintiffs and granted reliefs to
petitioner by declaring petitioner the true and real mortgagee, ordering respondent to

The petition raises the following questions:

1. Whether an implied trust arose between petitioner and respondent, binding petitioner
to hold the beneficial title over the mortgaged properties in trust for respondent; and
2. Whether respondent is entitled to collect damages.
The Ruling of the Court

We hold in the affirmative on both questions, and thus affirm the CA.
Conflicting
Rule 45 Review

Rulings

Below

Justify

The question of the existence of an implied trust is factual,11 hence, ordinarily outside
the purview of a Rule 45 review of purely legal questions.12 Nevertheless, our review is
justified by the need to make a definitive finding on this factual issue in light of the
conflicting rulings rendered by the courts below.13
Implied Trust in Mortgage Contracts
An implied trust arising from mortgage contracts is not among the trust relationships the
Civil Code enumerates.14 The Code itself provides, however, that such listing does not
exclude others established by the general law on trust x x x.15 Under the general
principles on trust, equity converts the holder of property right as trustee for the benefit
of another if the circumstances of its acquisition makes the holder ineligible in x x x good
conscience [to] hold and enjoy [it].16 As implied trusts are remedies against unjust
enrichment, the only problem of great importance in the field of constructive trusts is
whether in the numerous and varying factual situations presented x x x there is a
wrongful holding of property and hence, a threatened unjust enrichment of the
defendant.17
Applying these principles, this Court recognized unconventional implied trusts in
contracts involving the purchase of housing units by officers of tenants associations in
breach of their obligations,18 the partitioning of realty contrary to the terms of a
compromise agreement,19 and the execution of a sales contract indicating a buyer
distinct from the provider of the purchase money.20 In all these cases, the formal holders
of title were deemed trustees obliged to transfer title to the beneficiaries in whose favor
the trusts were deemed created. We see no reason to bar the recognition of the same
obligation in a mortgage contract meeting the standards for the creation of an implied
trust.
Parol Evidence Favor Respondent
The resolution of this appeal hinges on the appreciation of two conflicting sets of proofs
petitioners (based on the mortgage contract) or respondents (based on parol evidence
varying the terms of the mortgage contract, allowed under the Civil Code21). After a
review of the records, we find no reason to reverse the ruling of the CA finding
respondents case convincing.

directed their request not to petitioner but to respondent who granted the extension.24
Petitioner, therefore, was a stranger to the loan agreement, the principal obligation the
Contract merely secured.
Secondly, Solon, the notary public who drew up and notarized the Contract, testified that
he placed petitioners name in the Contract as the mortgagor upon the instruction of
respondent.25 Respondent himself explained that he found this arrangement convenient
because at the time of the Contracts execution, he was mostly abroad and could not
personally attend to his businesses in the country.26 Respondent disclosed that while
away, he trusted petitioner, his nephew by affinity and paid employee, to take care of
everything.27 This arrangement mirrors that in Tigno v. Court of Appeals28 where the
notary public who drew up a sales contract testified that he placed the name of another
person in the deed of sale as the vendee upon instructions of the actual buyer, the source
of the purchase money, who had to go abroad to attend to pressing concerns. In settling
the competing claims between the nominal buyer and the financier in Tigno, we gave
credence to the parol evidence of the latter and found the former liable to hold the
purchased property in trust of the actual buyer under an implied trust. No reason has
been proffered why we should arrive at a different conclusion here.
Lastly, it was respondent, not petitioner, who shouldered the payment of the foreclosure
expenses.29 Petitioners failure to explain this oddity, coupled with the fact that no
certificate of sale was issued to him (despite tendering the highest bid) for his nonpayment of the commission, undercuts his posturing as the real mortgagor.
Clearly then, petitioner holds title over the mortgaged properties only because
respondent allowed him to do so. The demands of equity and justice mandate the
creation of an implied trust between the two, barring petitioner from asserting
proprietary claims antagonistic to his duties to hold the mortgaged properties in trust for
respondent. To arrive at a contrary ruling is to tolerate unjust enrichment, the very evil
the fiction of implied trust was devised to remedy.
Award of Damages Proper
Nor do we find reversible error in the CAs award of moral and exemplary damages to
respondent. Respondent substantiated his claim for the former30 and the interest of
deterring breaches of trusts justifies the latter.
WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 23 November 2007
and Resolution dated 6 March 2008 of the Court of Appeals.
Torbela vs. Spouses Rosario GR 140528 Dec. 07, 2011

In the first place, the Caeda spouses acknowledged respondent as the lender from whom
they borrowed the funds secured by the Contract. They did so in the MOA22 and
Dulcisima Caeda reiterated the concession on the stand.23 True enough, when the
Caeda spouses sought an extension of time within which to settle their loan, they

FACTS: The issue is over a parcel of land inherited by the Torbela siblings from their parents.
They executed a deed of absolute quitclaim over the property in favor of Dr. Rosario. Four days after, a
TCT was issued in Dr. Rosarios name covering the property.

Another deed of absolute quitclaim was subsequently executed twelve days after by Dr. Rosario
acknowledging that he only borrowed the lot from the Torbela siblings and was already returning the
same. This deed was notarized but not immediately annotated.
Dr. Rosario used the land as mortgage for a loan he obtain through DBP for P70,000.00. He used the
proceeds of the loan to build a 4 storey building which was initially used as a hospital but later converted
into a commercial space. Part was leased to PT&T and the rest to Rosario s sister who operated the
Rose Inn Hotel and Restaurant.
Dr. Rosario fully paid the loan from DBP and the mortgage was cancelled and ratified by a notary public.
However, Dr. Rosario took another loan from PNB. He later acquired a third loan from Banco Filipino and
bought out the loan from PNB cancelling the mortgage with PNB. Rosario failed to pay their loan in
Banco Filipino and the property was extrajudicially foreclosed.
Meanwhile, back in 1965, the Torbela siblings sought to register their ownership over the lot and to
perfect their title but couldnt because the title was still with DBP. They showed as proof the deed of
absolute quitclaim presented executed by Rosario himself. In 1986, they filed a civil case for recovery of
ownership and possession and damages. They tried to redeem the lot from Banco Filipino but failed. TCT
was issued to Banco FIilipino.
The Torbelas claim they have right over the rents of the building through accession because they are the
land owners.
ISSUE: Who has right over the improvements made on the lot and the rents thereof.
RULING: According to Art. 440, the accessory follows the principal. Ownership of property gives the right
by accession to everything which is produced thereby, or which is incorporated or attached thereto, either
naturally or artificially.
However, in the case at bar, both Torbela siblings and Rosario are deemed in bad faith. The Torbelas
knew Rosario built on the land and even allowed him to use the land to obtain a loan from DBP. Rosario
on the other hand consciously built on land he knew was not his. They both had knowledge and did not
oppose.
Art. 453 states that when both parties are in bad faith, the case shall be treated as though both were in
good faith thus the application of Art. 448.
448 allows the Land Owner 2 options in the case at bar. Either indemnify Rosario and appropriate the lot
to himself or ask Rosario to buy the lot or the rent rate. This case was remanded to the RTC for the
Torbelas to make such decision.
Still following the rules of accession, civil fruits such as rent belong to the owner of the building. Rosario
has rights over the rent and improvements and shall continue until the Torbela siblings have chosen an
option from 448.
ON EXPRESS TRUST
"x x x.

There was an express trust between the Torbela siblings and Dr. Rosario.
There is no dispute that the Torbela sibling inherited the title to Lot No. 356-A from their
parents, the Torbela spouses, who, in turn, acquired the same from the first registered
owner of Lot No. 356-A, Valeriano.
Indeed, the Torbela siblings executed a Deed of Absolute Quitclaim on December 12,
1964 in which they transferred and conveyed Lot No. 356-A to Dr. Rosario for the
consideration of P9.00. However, the Torbela siblings explained that they only executed
the Deed as an accommodation so that Dr. Rosario could have Lot No. 356-A registered in
his name and use said property to secure a loan from DBP, the proceeds of which would
be used for building a hospital on Lot No. 356-A a claim supported by testimonial and
documentary evidence, and borne out by the sequence of events immediately following
the execution by the Torbela siblings of said Deed. On December 16, 1964, TCT No.
52751, covering Lot No. 356-A, was already issued in Dr. Rosarios name. On December
28, 1964, Dr. Rosario executed his own Deed of Absolute Quitclaim, in which he expressly
acknowledged that he only borrowed Lot No. 356-A and was transferring and
conveying the same back to the Torbela siblings for the consideration of P1.00. On
February 21, 1965, Dr. Rosarios loan in the amount of P70,200.00, secured by a mortgage
on Lot No. 356-A, was approved by DBP. Soon thereafter, construction of a hospital
building started on Lot No. 356-A.
Among the notable evidence presented by the Torbela siblings is the testimony of Atty.
Lorenza Alcantara (Atty. Alcantara), who had no apparent personal interest in the
present case. Atty. Alcantara, when she was still a boarder at the house of Eufrosina
Torbela Rosario (Dr. Rosarios mother), was consulted by the Torbela siblings as regards
the extrajudicial partition of Lot No. 356-A. She also witnessed the execution of the two
Deeds of Absolute Quitclaim by the Torbela siblings and Dr. Rosario.
In contrast, Dr. Rosario presented TCT No. 52751, issued in his name, to prove his
purported title to Lot No. 356-A. In Lee Tek Sheng v. Court of Appeals,[53] the Court made
a clear distinction between title and the certificate of title:
The certificate referred to is that document issued by the Register of Deeds known as the
Transfer Certificate of Title (TCT). By title, the law refers to ownership which is
represented by that document. Petitioner apparently confuses certificate with title.
Placing a parcel of land under the mantle of the Torrens system does not mean that
ownership thereof can no longer be disputed. Ownership is different from a certificate of
title. The TCT is only the best proof of ownership of a piece of land. Besides, the certificate
cannot always be considered as conclusive evidence of ownership. Mere issuance of the
certificate of title in the name of any person does not foreclose the possibility that the real
property may be under co-ownership with persons not named in the certificate or that
the registrant may only be a trustee or that other parties may have acquired interest
subsequent to the issuance of the certificate of title. To repeat, registration is not the
equivalent of title, but is only the best evidence thereof. Title as a concept of ownership
should not be confused with the certificate of title as evidence of such ownership
although both are interchangeably used. x x x.[54] (Emphases supplied.)

Registration does not vest title; it is merely the evidence of such title. Land registration
laws do not give the holder any better title than what he actually has.[55] Consequently,
Dr. Rosario must still prove herein his acquisition of title to Lot No. 356-A, apart from his
submission of TCT No. 52751 in his name.
Dr. Rosario testified that he obtained Lot No. 356-A after paying the Torbela siblings
P25,000.00, pursuant to a verbal agreement with the latter. The Court though observes
that Dr. Rosarios testimony on the execution and existence of the verbal agreement with
the Torbela siblings lacks significant details (such as the names of the parties present,
dates, places, etc.) and is not corroborated by independent evidence.
In addition, Dr. Rosario acknowledged the execution of the two Deeds of Absolute
Quitclaim datedDecember 12, 1964 and December 28, 1964, even affirming his own
signature on the latter Deed. The Parol Evidence Rule provides that when the terms of the
agreement have been reduced into writing, it is considered as containing all the terms
agreed upon and there can be, between the parties and their successors in interest, no
evidence of such terms other than the contents of the written agreement.[56] Dr. Rosario
may not modify, explain, or add to the terms in the two written Deeds of Absolute
Quitclaim since he did not put in issue in his pleadings (1) an intrinsic ambiguity, mistake,
or imperfection in the Deeds; (2) failure of the Deeds to express the true intent and the
agreement of the parties thereto; (3) the validity of the Deeds; or (4) the existence of
other terms agreed to by the Torbela siblings and Dr. Rosario after the execution of the
Deeds.[57]
Even if the Court considers Dr. Rosarios testimony on his alleged verbal agreement with
the Torbela siblings, the Court finds the same unsatisfactory. Dr. Rosario averred that the
two Deeds were executed only because he was planning to secure loan from the
Development Bank of the Philippines and Philippine National Bank and the bank needed
absolute quitclaim[.][58] While Dr. Rosarios explanation makes sense for the first Deed
of Absolute Quitclaim dated December 12, 1964 executed by the Torbela siblings (which
transferred Lot No. 356-A to Dr. Rosario for P9.00.00), the same could not be said for the
second Deed of Absolute Quitclaim dated December 28, 1964 executed by Dr. Rosario. In
fact, Dr. Rosarios Deed of Absolute Quitclaim (in which he admitted that he only
borrowed Lot No. 356-A and was transferring the same to the Torbela siblings for
P1.00.00) would actually work against the approval of Dr. Rosarios loan by the banks.
Since Dr. Rosarios Deed of Absolute Quitclaim dated December 28, 1964 is a declaration
against his self-interest, it must be taken as favoring the truthfulness of the contents of
said Deed.[59]
It can also be said that Dr. Rosario is estopped from claiming or asserting ownership over
Lot No. 356-A based on his Deed of Absolute Quitclaim dated December 28, 1964. Dr.
Rosario's admission in the said Deed that he merely borrowed Lot No. 356-A is deemed
conclusive upon him. Under Article 1431 of the Civil Code, [t]hrough estoppel an
admission or representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying thereon.[60] That admission
cannot now be denied by Dr. Rosario as against the Torbela siblings, the latter having
relied upon his representation.

Considering the foregoing, the Court agrees with the RTC and the Court of Appeals that
Dr. Rosario only holds Lot No. 356-A in trust for the Torbela siblings.
Trust is the right to the beneficial enjoyment of property, the legal title to which is vested
in another. It is a fiduciary relationship that obliges the trustee to deal with the property
for the benefit of the beneficiary. Trust relations between parties may either be express
or implied. An express trust is created by the intention of the trustor or of the parties,
while an implied trust comes into being by operation of law.[61]
Express trusts are created by direct and positive acts of the parties, by some writing or
deed, or will, or by words either expressly or impliedly evincing an intention to create a
trust. Under Article 1444 of the Civil Code, [n]o particular words are required for the
creation of an express trust, it being sufficient that a trust is clearly intended.[62] It is
possible to create a trust without using the word trust or trustee. Conversely, the
mere fact that these words are used does not necessarily indicate an intention to create a
trust. The question in each case is whether the trustor manifested an intention to create
the kind of relationship which to lawyers is known as trust. It is immaterial whether or
not he knows that the relationship which he intends to create is called a trust, and
whether or not he knows the precise characteristics of the relationship which is called a
trust.[63]
In Tamayo v. Callejo,[64] the Court recognized that a trust may have a constructive or
implied nature in the beginning, but the registered owners subsequent express
acknowledgement in a public document of a previous sale of the property to another
party, had the effect of imparting to the aforementioned trust the nature of an express
trust. The same situation exists in this case. When Dr. Rosario was able to register Lot No.
356-A in his name under TCT No. 52751 on December 16, 1964, an implied trust was
initially established between him and the Torbela siblings under Article 1451 of the Civil
Code, which provides:
ART. 1451. When land passes by succession to any person and he causes the legal title to
be put in the name of another, a trust is established by implication of law for the benefit
of the true owner.
Dr. Rosarios execution of the Deed of Absolute Quitclaim on December 28, 1964,
containing his express admission that he only borrowed Lot No. 356-A from the Torbela
siblings, eventually transformed the nature of the trust to an express one. The express
trust continued despite Dr. Rosario stating in his Deed of Absolute Quitclaim that he was
already returning Lot No. 356-A to the Torbela siblings as Lot No. 356-A remained
registered in Dr. Rosarios name under TCT No. 52751 and Dr. Rosario kept possession of
said property, together with the improvements thereon.
x x x."
Alejandro Ty vs. Sylvia Ty

553 SCRA 306

Pasio vs. Monterroyo

Facts: Alexander Ty, son of Alejandro Ty and husband of Sylvia Ty, dies of cancer at the
age of 34. Sylvia files petition for the settlement of Alexanders intestate estate. She also
asks court to sell or mortgage properties in order to pay the estate tax amounting to
P4,714,560.02 assessed by the BIR. The properties include a parcel of land in EDSA
Greenhills, a residential land in Wack Wack, and the Meridien condo unit in Annapolis,
Greenhills.

G.R. No. 159494

Alejandro Ty opposed the move and filed for recovery of the property with prayer for
preliminary injunction and/or temporary restraining order. Plaintiff Alejandro claims
that he owns the EDSA, Wack Wack and Meridien condo unit because he paid for them.
The property was supposedly registered in trust for Alexanders brothers and sisters in
case plaintiff dies. Plaintiff also claimed that Alex had no financial capacity to purchase
the disputed property, as the latter was only dependent on the former.
Sylvia countered that Alexander had purchased the property with his money. Alexander
was financially capable of purchasing it because he had been managing the family
corporations since he was 18 years old and was also engage in other profitable
businesses.
The RTC granted the application for preliminary injunction and decides in favor of
plaintiff regarding the recovery of the property. CA reversed the RTC stating that the
implication created by law under Art. 1448 does not apply if the property was in the
name of the purchasers child. They agreed that plaintiff partly paid for the EDSA
property. Plaintiff appealed.
Issue: whether there was an implied trust under Art. 1448 of the Civil Code?
Held: No, there was no implied trust created in relation to the EDSA property. If the
person to whom the title is conveyed is the child of the one paying the price of the sale, no
trust is implied by law under Art. 1448, the so-called purchase money resulting trust. The
said article provides an exception: if the person to whom the title is conveyed is a child,
legitimate or illegitimate, of the one paying the price of the sale, NO TRUST is IMPLIED by
LAW, it being disputable presumed that there is a gift in favor of the child. The Court also
noted that plaintiff failed to prove that he did not intend a donation.
Regarding the Meridien Condo and Wack Wack property, the court said that plaintiff
failed to prove that purchase money came from him. They also said that Alexander was
capable of purchasing the property as he had been working for nine years, had a car care
business, and was actively engaged in the business dealings of several family
corporations from which he received emoluments and other benefits. Hence, no implied
trust created because there was no proof that plaintiff had paid for said properties.

July 31, 2008

FACTS:
patent.

The Director of Land granted Laureano Pasinos application for homestead

The said land was divided by a creek, hence, two portionsLot A and Lot B.

OCTs were issued by LMB covering the lands, respectively.

Here comes the respondent alleging exclusive and notorious possession of Lot
B. He contended that the OCT issued in favor of petitioners over the subject lot was null
and void.
ISSUE:
1.

Who is the rightful owner of the subject land?

2.
What is the effect if the homestead patent granted in accordance with law (not
so in this case) is registered? LTD proper.
HELD:
1. Monterroyo.
First, LMB has no jurisdiction to issue free patent titles.
Secondly, the subject land has been converted into private land thru operation of the law
by virtue of prescription, thus In Director of Lands v. IAC, the Court ruled:
Alienable public land held by a possessor, continuously or through his predecessors-ininterest, openly, continuously and exclusively for the prescribed statutory period (30
years under The Public Land Act, as amended) is converted to private property by the
mere lapse or completion of the period, ipso jure.
The respondent to that effect has presented proof.
2.

Once a homestead patent granted in accordance with law is registered, the certificate of
title issued by virtue of the patent has the force and effect of a Torrens title issued under
the land registration law. In this case, the issuance of a homestead patent in 1952 in favor
of Laureano was not registered. Section 103 of Presidential Decree No. 1529 mandates
the registration of patents, and registration is the operative act to convey the land to the
patentee, thus: Sec. 103. x x x x. The deed, grant, patent or instrument of conveyance from
the Government to the grantee shall not take effect as a conveyance or bind the land but
shall operate only as a contract between the Government and the grantee and as evidence
of authority to the Register of Deeds to make registration. It is the act of registration that
shall be the operative act to affect and convey the land, and in all cases under this Decree,
registration shall be made in the office of the Register of Deeds of the province or city
where the land lies. The fees for registration shall be paid by the grantee. After due
registration and issuance of the certificate of title, such land shall be deemed to be
registered land to all intents and purposes under this Decree.
ON TRUST
Under the principle of constructive trust, registration of property by one person in his
name, whether by mistake or fraud, the real owner being another person, impresses upon
the title so acquired the character of a constructive trust for the real owner, which would
justify an action for reconveyance.29 In the action for reconveyance, the decree of
registration is respected as incontrovertible but what is sought instead is the transfer of
the property wrongfully or erroneously registered in anothers name to its rightful owner
or to one with a better right.30 If the registration of the land is fraudulent, the person in
whose name the land is registered holds it as a mere trustee, and the real owner is
entitled to file an action for reconveyance of the property.

Carolina Hernandez-Nievera, et. al. v. Wilfredo Hernandez, et.al.

G.R. No. 171165, 14 February 2011, SECOND DIVISION, (Peralta,J.)
The test of incompatibility is whether the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible, and the latter
obligation novates the first.
Project Movers Realty & Development Corporation (PMRDC), one of the respondents,
entered into different agreements with the other respondents Home Insurance &
Guaranty Corporation (HIGC) and Land Bank of the Philippines through its president
Mario Villamor in reference to construction projects contemplated to be executed in
Batangas and Caloocan City. PMRDC then entered into a Memorandum of Agreement
(MOA) with petitioners Carolina Hernandez-Nievera, Margarita H. Malvar and Demetrio

P. Hernandez wherein PMRDC was given the option to buy pieces of land owned by the
former within 12 months from the date of the instrument along with the payment of
option money. It was further stated that in case there is failure to avail within the
stipulated option period of 12 months, the option money shall be forfeited in favor of the
vendor and the vendee shall return all the Transfer Certificates of Title (TCT) of the
covered parcels of land to the former.
When PMRDC decided to convey more properties to its Asset Pool, it entered a Deed of
Assignment and Conveyance with LBP and Demetrio, who acted through the same special
power of attorney used in the MOA. The DAC sought to transfer and assign some lands in
Area II to the asset pool in exchange for a number of shares of stock which had been
issued in favor and in the name of Demetrio.
PMRDC admits that they did not avail the express stipulation of 12-month option period
in the MOA. Hernandez-Nievera, et. al. demands that the TCTs be returned to them but
PMRDC refused contending that the properties were already transferred and assigned to
the Asset Pool pursuant to the DAC. Hernandez-Nievera, et. al. filed an action to rescind
the MOA and to declare the DAC a nullity. The trial court ruled in favor of HernandezNievera. Aggrieved, the other party appealed to the Court of Appeals which reversed and
set aside the ruling of the trial court. Hence, this petition.
ISSUE: Whether or not the Memorandum of Agreement was novated by the Deed of
Assignment and Conveyance
HELD:
Petition DENIED.
Hernandez-Nievera, et. al.s cause stems from the failure of PMRDC to restore to them the
possession of the TCTs of the lands within Area II upon its failure to exercise the option to
purchase within the 12-month period stipulated in the MOA. Hernandez, et. al. maintain,
however, that said obligation, dependent as it is on the exercise of the option to purchase,
has altogether been expressly obliterated by the terms of the DAC whereby HernandezNievera, et. al., through Demetrio as attorney-in-fact, have agreed to novate the terms of
the MOA by extinguishing the core obligations of PMRDC on the payment of option
money. This seems to suggest that with the execution of the DAC, PMRDC has already
entered into the exercise of its option except that its obligation to deliver the option
money has, by subsequent agreement embodied in the DAC, been substituted instead by
the obligation to issue participation certificates in Demetrios name but which, likewise,
has not yet been performed by PMRDC. But Hernandez-Nievera, et. al.s stand against the
validity of the DAC on the ground that the signature of Demetrio therein was spurious.
On this score, this Court quotes with approval the decision of the Court of Appeals, aptly
citing the case of California Bus Lines, Inc. v. State Investment House, Inc. thus
There are two ways which could indicate, in fine, the presence of novation and thereby
produce the effect of extinguishing an obligation by another which substitutes the same.
The first is when novation has been explicitly stated and declared in unequivocal terms.
The second is when the old and the new obligations are incompatible on every point. The

test of incompatibility is whether the two obligations can stand together, each one having
its independent existence. If they cannot, they are incompatible, and the latter obligation
novates the first. Corollarily, changes that breed incompatibility must be essential in
nature and not merely accidental. The incompatibility must take place in any of the
essential elements of the obligation such as its object, cause or principal conditions
thereof; otherwise, the change would be merely modificatory in nature and insufficient to
extinguish the original obligation.