EN BANC

G.R. No. L-23386 December 12, 1925

MERCEDES GUSTILO, ET AL., plaintiffs.

MERCEDES GUSTILO and her husband LEOPOLDO JEREZA, appellants,
vs.
HERMINIO MARAVILLA, defendant-appellant.

Enrique C. Locsin for plaintiffs-appellants.

Feria and La O for defendant-appellant.

OSTRAND, J.:

It appears from the record that one Antonia Gustilo was originally the owner of
the Malago or Mercedes plantation in the municipality of Sarabia, Occidental Negros,
under Torrens transfer certificates of title Nos. 719 and 720. These certificates bear
a memorandum of a mortgage executed on April 30, 1918, in favor of the Philippine
National Bank for the sum of P8,000, with interest at 8 per cent per annum, and for
the term of ten years. On August 3, 1918, Antonia Gustilo leased the property for
the term of seven years to the plaintiff Vicente Ardosa at an annual rent of P1,000.
The lease is evidenced by a notarial document Exhibit G, and it is recited therein that
Ardosa paid the rent in advance for the whole term of the lease, or a total sum of
P7,000. By Notarial document Exhibit D, executed on the 10th of the same month,
Ardosa subleased the plantation to the plaintiff Felix Montinola Celis for three
agricultural years, or until June 30, 1921. The term of the sublease was
subsequently, on August 15, 1921, by a private document or "receipt" extended so
as to embrace the full term of the original lease.

On August 8, 1920, Antonia Gustilo executed a deed of sale for the property in favor
of the plaintiff Mercedes Gustilo, the consideration named in the deed being
P30,000, the purchaser assuming the mortgage debt to the Philippine National Bank

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(Exhibit 1). As Antonia's certificates appear to have been issued in favor of
Mercedes.

On November 24, 1920, Antonia and Mercedes Gustilo executed a second mortgage
on the same property in favor of the defendant Herminio Maravilla for the sum of
P25,000, and for the term of one year from the date of the document. Upon the
expiration of the term, the debt secured by the mortgage was paid with money
alleged to have been furnished by Jose Maravilla, a cousin of the defendant, and
another mortgage was on January 4, 1922, executed in Jose's favor for P28,000,
representing the original debt of P25,000 with interest.

When the debt secured by the last mortgage fell due, Herminio Maravilla, in the
name of Jose Maravilla, demanded payment which Mercedes Gustilo was unable to
make and it was finally agreed between the parties that the title to the plantation
was to be transferred to the defendant in full satisfaction of the debt, the defendant
assuming the debt to the National Bank. A deed to that effect was thereupon
executed by Mercedes Gustilo and her husband, the plaintiff Leopoldo Jereza, in
favor of the defendant on August 9, 1922 (Exhibit A).

In the meantime Felix Montinola remained in possession of the plantation by virtue

of his sublease and in a letter dated September 21, 1922, the defendant notified him
that he would be required to pay 12 per cent of the total sugar production of the
plantation as rent. Relying on the lease from Antonia Gustilo to Ardosa and his own
sublease from the latter, Montinola refused to pay rent to the defendant, and in
December, 1922, jointly with Mercedes Gustilo and Vicente Ardosa, brought the
present action.

In the complaint the plaintiffs is substance allege the facts hereinbefore set forth
and, in addition thereto, aver that though in the deed from Mercedes Gustilo and
Leopoldo Jereza to the defendant no mention was made of the lease to Ardosa and
Montinola, the defendant by false statements led Mercedes Gustilo to believe that he
would nevertheless respect the lease, and that in this belief she and her husband
executed the deed. Upon the facts so stated, the plaintiffs pray that judgment be
rendered declaring that the defendant has no right to the crop growing on the

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hacienda and to collect rents during the duration of the term of the lease to Ardosa;
that it be further declared that said lease is an incumbrance upon the property which
the defendant has bound himself to respect, and that it be ordered that said lease
be noted on the transfer certificate of title issued in favor of the defendant.

The defendant in his answer denied the allegations of the complaint and, by way of
cross-complaint and counterclaim, alleges that at the time of his purchase of the
plantation, he had no knowledge of the existence of a lease on the property; that if
he had such knowledge, he would not have made the purchase; that the plaintiffs
fraudulently concealed from him the existence of the lease; that subsequently to the
purchase he has paid to the Philippine National Bank the sum of P1,253.19 on the
mortgage assumed by him through his purchase of the land; and that he has paid
the sum of P573.74 in back taxes on the land which should have been paid by the
vendors. He therefore asks that the contract of sale of the plantation to him be
declare rescinded and that judgment be rendered against the plaintiffs for the sum
of P1,253.19 for payments made to the Philippine National Bank, and for the further
sum of P573.74 for back taxes paid.

In answer to the defendants cross-complaint and counterclaim, the plaintiffs allege

that at the time of his purchase, the defendant was fully informed of all
incumbrances on the Mercedes plantation, and that he assumed the payment and
fulfillment of said incumbrances and obligations; that he has not complied with the
terms and conditions under which the sale of the property to him was made; and
that through his failure to comply with such terms and conditions, the plaintiffs have
suffered damages in the sum of P20,000. They therefore ask that the sale be
declared rescinded through the fault of the defendant and that judgment be
rendered against the defendant and in favor of the plaintiffs for the sum of P20,000
and for the costs.

Upon trial, the court below found that when the defendant purchased the property
in question from the plaintiff Mercedes Gustilo, he had full knowledge of the fact that
the property had been leased to Vicente Ardosa, as well as of the terms of said
lease, and held that it therefore become a part of the contract of sale. The court also
declared that the lease, being for a terms of more than six years, was registerable

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and ordered that it be entered upon the certificates of title and upon the records of
the register of deeds. The court further found that the defendant had failed to fulfill
his obligations under the contract of sale and declared said contract rescinded,
holding that inasmuch as the rescission was due to his fault, the defendant had
failed to fulfill his obligations under the contract of sale and declared said contract
rescinded, holding inasmuch as the rescission was due to his fault, the defendant
was not entitled to recover any sum which he might have expended in consideration
of the sale. It also held that under the exceptions established in article 1571 of the
Civil Code, the defendant had no right to terminate the lease in question and was
not entitled to receive any sum for the occupation of the land by the lessee. The
plaintiffs' claim for damages was disallowed. The plaintiffs' Mercedes Gustilo and
Leopoldo Jereza appeal and so does the defendant.

The appeal of Mercedes Gustilo and Leopoldo Jereza relates to their claim for
damages and is so entirely without merit as to require no discussion. It may be
noted that the defendant has never had possession of the property and has received
no benefit therefrom.

The defendants presents the following assignments of error:

1. The trial court erred in holding that the defendant and appellant had notice at the
time of making the purchase that the land was leased for seven years to Vicente
Ardosa and sublet by the latter to the plaintiff Felix Montinola Celis, and that the
defendant having made the purchase with knowledge of said lease, the same in
effect became a part of the contract of sale to him of the plantation.

2. The trial court erred in holding that the defendant has no right to terminate the
lease in question, and therefore is not entitled to receive any amount whatsoever in
consideration of said lease, the latter coming within the two exceptions or provisos
of article 1571 of the Civil Code.

3. The trial court erred in holding that the contract of lease at bar is registerable,
and in ordering its registration in the register of property and its notation on the
proper transfer certificate of title as an incumbrance upon the land.

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4. The trial court erred in holding that by reason of the defendant's failure to
perform the obligations contracted by him in the contract of sale in question, said
contract was rescinded as prayed for by the defendant, but without any right on the
part of the latter to be repaid for any such amount as he may have spent or paid by
reason of said contract.

5. The trial court erred in ordering that the amount of the price of the sale of 12 per
cent of the crop placed by order of the court in possession of Felix Montinola as
depositary be delivered to the latter.lawphi1.net

The first, second and fifth assignments of error have reference principally to
questions of fact upon which the findings of the court below are fully sustained by
the evidence. That the defendant at the time of purchasing the plantation had full
knowledge of the fact that it had been leased to Vicente Ardosa, is shown not only
by the testimony of Mercedes Gustilo and Leopoldo Jereza but is also corroborated
by the notary before whom the deed was acknowledged. This testimony, in
connection with the circumstances surrounding the case, leaves no doubt whatever
upon that point. Neither have we any doubt that the defendant was informed as the
terms of the lease and of the fact that the rent had been paid in advance. This being
established, the defendant was bound to respect the lease and the court below did
not err in holding that said lease in effect became a part of the contract of sale.

This conclusion is in harmony with our decision in the case of T. de Winkleman and
Winkleman vs. Veluz (43 Phil., 604). The fact that the land in question in this case is
registered land while the land in the Winkleman case was unregistered, does not
affect the legal principles involved. The Land Registration Act only protects the
holder in good faith, and cannot be used as a shield for frauds. Strong and
convincing evidence is, of course, required to establish the existence of
encumbrances not appearing on the certificate of title, but such evidence is not
lacking in the present case.lawphi1.net

The defendant's failure to respect the Ardosa lease is in itself a sufficient breach of
the terms of the contract of sale to justify its rescission, but in addition thereto it is
also to be observed that while the present action was pending in the Court of First

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Instance, one Aquiles M. Sajo, a near relative of the defendant, brought an action
against Mercedes and Antonia Gustilo and Leopoldo Jereza upon a promissory note
for P28,000 executed in favor of Jose Maravilla, and secured by the mortgage of
January 4, 1922, the plaintiff alleging that the note and the corresponding mortgage
had been assigned to him by Jose Maravilla on August 16, 1922, one week after the
sale of the plantation to the defendant. In view of the fact that it clearly appears
that sale was made with the understanding and for the purpose of canceling the
debt evidenced by the note and mortgage upon which Sajo's action was brought,
the plaintiffs are also for this reason clearly entitled to a rescission.

Under the third assignment of error, the defendant-appellant argues that the
assignment of the lease by Ardosa to Montinola did not appear in a notarial
instrument and that therefore the trial court erred in ordering that the lease be
entered upon the certificate of title. There is not much force in this argument; if the
court had jurisdiction, the judgment itself would be sufficient warrant for the entry of
the corresponding memorandum, but inasmuch as the term of the lease has already
expired, the entry in question is unnecessary and the judgment must be modified
accordingly. In this connection it may be well to call attention to the fact that under
the last paragraph of section 112 of the Land Registration Act, petition for
amendments or alterations of certificates of title — which includes the entry of a
memorandum — must be "filed and entitled in the original case in which the degree
of registration was entered," and upon that ground it may have been error to order
such an entry in the present proceedings.

The defendant's fourth assignment of error is well taken. The trial court may
possibly have been misled by paragraph 2 of article 1306 of the Civil Code, but the
paragraph applies only to cases where "the nullity arises from illegality of the
consideration or the purpose of the contract" (Civil Code, art. 1305). The provision
applicable to the present case is found in article 1303 which read as follows:

When an obligation has been adjudged void, the contracting parties shall restore to
each other the things which have been the subject-matter of the contract, together
with their fruits, and the price paid therefore, together with interest, without
prejudice to the provisions of the following articles.

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The court below therefore erred in holding that the defendant was not entitled to
reimbursement for his payment to the National Bank and for taxes.

For the reasons stated, the judgment appealed from is affirmed in so far as it holds
that the defendant was bound to respect the lease from Antonia Gustilo to Vicente
Ardosa and the sublease to Felix Montinola, declares the sale of the plantation by
the plaintiffs Mercedes Gustilo and Leopoldo Jereza to the defendant rescinded, and
awards to Felix Montinola the sugar produced on the plantation during his
receivership or the money received from the sale of such sugar. In all other
respects, the judgment is reversed.

It is hereby ordered that the defendant have and recover judgment against the
plaintiffs Mercedes Gustilo and Leopoldo Jereza, jointly and severally, for the sum of
P1,253.19 for payments made on their behalf to the National Bank and for the
further sum of P573.74 for taxes paid, all with interest at the rate of 6 per cent per
annum from February 23, 1923, the date of the filing of the defendant's cross-
complaint and counterclaim. The defendant-appellant shall pay the costs of both
instances. So ordered.

Avanceña, C.J., Johnson, Street, Malcolm, Johns, Romualdez, and Villa-Real, JJ.,
concur.

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