**Facts:**
The case revolves around a property dispute that originated from the sale of a lot and a house in Bacolod, Negros Occidental, Philippines. Pedro F. Regalado owned lot No. 1205-A, and within this lot was lot No. 157, which had a house occupied by the Japanese Army during World War II. In September 1944, Regalado sold lot No. 157 to Vicente M. Coleongco, who then became the registered owner.
Coleongco contended that the sale included the house, and upon the liberation of Bacolod by the American forces, which briefly occupied the house, he received rental payments. However, Regalado moved into the house after the Americans vacated it. Coleongco initiated Civil Case No. 185 in 1947 to assert ownership of the house but was unsuccessful. His appeal to the Court of Appeals was declared abandoned.
In July 1947, Coleongco initiated another action (docket No. 718) to eject Regalado from the property. Regalado sold the house to Leonor Montilla before the resolution of this case. Montilla was made aware of the pending action and assumed any obligations arising from it, freeing Regalado from outcomes related to the case.
The Court of First Instance of Negros Occidental ruled in favor of Coleongco, ordering Regalado and Montilla to vacate the house and compensate Coleongco for occupation of the lot since September 1945. Both Regalado and Montilla appealed the decision.
**Issues:**
1. Whether Leonor Montilla was erroneously declared in default.
2. Whether the defendants were liable to pay monthly rentals to Coleongco for the occupation of the property.
3. Whether the defendants should be ordered to remove their house from Coleongco’s lot.
4. Whether the rights of the defendants under Article 361 of the old Civil Code, which deals with the rights of landowners and builders in good faith, were properly considered.
**Court’s Decision:**
1. The Supreme Court found that despite the procedural issues leading to Montilla’s default declaration, the interests and defenses of both defendants were adequately represented, making the lower court’s error inconsequential.
2. The Court recognized Coleongco’s right to eject the defendants from his property but clarified that this right was subject to the obligations and rights of Regalado and Montilla as builders in good faith, per Article 361 of the old Civil Code.
3. The Court corrected the Court of Appeals and the lower court by establishing that Article 361 was not applicable in this situation since Regalado built the house on his own land before selling the lot to Coleongco.
**Doctrine:**
The Supreme Court reiterated the doctrine that Article 361 of the old Civil Code applies only when improvements are made by a builder in good faith on the land of another. It does not apply to cases where the builder of the improvements was also the original owner of the land, as in this case.
**Class Notes:**
1. Definition of Good Faith in Property Law: Good faith refers to the honest intention to abstain from taking any unconscientious advantage of another, even through technicalities of law, together with an absence of all information or belief of facts that would render the transaction unconscientious.
2. Article 361 of the Old Civil Code: “The owner of land on which anything has been built, sown, or planted in good faith, shall have the right: to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in Articles 453 and 456; or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent.”
3. Ejectment and Rights of Builders in Good Faith: The right of a landowner to eject a builder from his property is contingent upon the options provided under Article 361, which are either appropriate the improvements after compensation or compel the builder to purchase the land.
**Historical Background:**
The context of this case underscores the complexities of property rights and transactions post-World War II in the Philippines, a time marked by recovery and reconstruction efforts. Issues surrounding land and property ownership were prevalent due to the disruptions caused by the war, including occupation by foreign forces and the ensuing changes in the control of properties. This case illustrates the legal challenges in determining ownership and rights over properties and improvements made thereon during such turbulent periods.
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