BLISS DEVELOPMENT CORP./HOME GUARANTY CORPORATION, PETITIONER, VS. MONTANO DIAZ, DOMINGO TAPAY, AND EDGAR H. ARREZA, RESPONDENTS.

Bliss Development Corporation versus Diaz

The Case

This is a petition for review on certiorari brought by Bliss Development Corporation, later reorganized as the Home Guaranty Corporation, against Montano Diaz, Domingo Tapay, and Edgar Arreza. Diaz sued for a sum of money after he lost the lot he thought he had bought, and the case asks who must bear the loss when a chain of assignments of the right to purchase a registered lot collapses. It matters because the Court separates two questions that are easily blurred: whether a buyer is in good faith, and whether the seller or landowner is liable despite the buyer's own failure of diligence. The answer turns on unjust enrichment and on the builder in bad faith whose landowner is equally in bad faith.

Procedural History

Diaz filed his complaint for a sum of money before the Regional Trial Court of Makati City, Branch 59, and later amended it to include Arreza and Tapay as defendants. Arreza moved to dismiss on the ground of res judicata, and when the matter reached the Supreme Court, the Court held that Diaz's claim against Arreza was a compulsory counterclaim barred by res judicata, so the case against Arreza was dismissed. After trial, the Regional Trial Court dismissed the complaint for lack of merit, finding that Diaz failed to prove he was an assignee in good faith. Diaz appealed to the Court of Appeals, which reversed and set aside the trial court's decision, declaring Diaz both a buyer and a builder in good faith and ordering Bliss and Tapay to pay him. Bliss and Tapay moved for reconsideration, and the Court of Appeals denied both motions. Bliss then filed the present petition for review on certiorari before the Supreme Court. Tapay did not elevate the ruling against him.

Facts

Bliss Development Corporation owned a registered lot in New Capitol Estates I, Quezon City, covered by a transfer certificate of title in its own name. In October 1984 it executed a deed of sale over the property in favor of the spouses Emiliano and Leonila Melgazo, but title remained in Bliss's name. In 1991 a certain Rodolfo Nacua wrote to Bliss claiming that the spouses had transferred their rights to him, and he offered to pay their outstanding obligations. Before the property was fully paid, Nacua sold his rights to Olivia Garcia, who transferred them to Elizabeth Reyes, who transferred them to Domingo Tapay, who then sold his rights to Montano Diaz for 600,000 pesos.

Diaz paid Bliss amortizations amounting to 406,915 pesos and 15 centavos, and Bliss issued him a permit to occupy the property. Diaz then introduced improvements worth 700,000 pesos. In April 1992 Bliss executed a contract to sell in favor of Diaz. In April 1994, however, Bliss informed Diaz that Edgar Arreza was claiming that the heirs of the Melgazo spouses had sold him the rights over the property, and Bliss placed Diaz's account in inactive status.

Bliss filed an interpleader case against Diaz and Arreza before the Regional Trial Court of Makati City, Branch 146. That court ruled in March 1996 that the signatures of the Melgazo spouses transferring their rights to Nacua were forgeries, and held that Arreza had the better right. The decision became final and executory. Diaz then filed the present complaint, and the trial court dismissed it, finding he had not shown himself to be an assignee in good faith. The Court of Appeals reversed, and the case reached the Supreme Court on Bliss's petition.

Issues

• Whether or not the claim is barred by the doctrine of immutability of judgment in view of the earlier ruling that Diaz's claim against Arreza was barred by res judicata.
• Whether or not Bliss acted in bad faith in dealing with Diaz.
• Whether or not Diaz is a purchaser for value and in good faith.
• Whether or not Bliss is liable to return the amortizations paid by Diaz under the doctrine of unjust enrichment.
• Whether or not Bliss is liable to Diaz for the value of the improvements he introduced on the property.

Applicable Provisions

Article 22 of the Civil Code provides:

Every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.

This is the basis for ordering Bliss to return the amortizations it received from Diaz.

Article 448 of the Civil Code provides:

The owner of the 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 546 and 548, or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent. However, the builder or planter cannot be obliged to buy the land if its value is considerably more than that of the building or trees. In such case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the building or trees after proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof.

This governs the landowner's options over improvements built on the land.

Article 453 of the Civil Code provides:

If there was bad faith, not only on the part of the person who built, planted or sowed on the land of another, but also on the part of the owner of such land, the rights of one and the other shall be the same as though both had acted in good faith. It is understood that there is bad faith on the part of the landowner whenever the act was done with his knowledge and without opposition on his part.

This is the provision that equalizes the rights of Diaz and Bliss, both having acted in bad faith.

Article 546 of the Civil Code provides:

Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor. Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof.

This measures the reimbursement owed for the improvements.

Article 548 of the Civil Code provides:

Expenses for pure luxury or mere pleasure shall not be refunded to the possessor in good faith; but he may remove the ornaments with which he has embellished the principal thing if it suffers no injury thereby, and if his successor in the possession does not prefer to refund the amount expended.

This completes the scheme of indemnity for builders.

Ruling

On the first issue, the Court held that the claim is not barred. The interpleader case was between Arreza and Diaz, and it resolved their conflicting claims, not any claim either might have against Bliss. There is therefore neither identity of parties nor identity of subject matter, and the elements of res judicata are absent.

On the second issue, the Court held that Bliss acted in bad faith. As early as 1991 it knew of Arreza's claim and even received amortizations from him, yet it acknowledged the transfer to Diaz, accepted his amortizations, and issued him a permit to occupy, informing him of the conflict only in 1994. This was evident bad faith.

On the third issue, the Court held that Diaz was not a purchaser for value and in good faith. The doctrine of not going beyond the face of the title did not apply, because what was sold was not the lot itself but the personal right to purchase it from Bliss. Diaz failed to trace the source of Tapay's right, and had he done so he would have discovered that Nacua's right rested on a forged deed.

On the fourth issue, the Court held that Bliss must return the amortizations under unjust enrichment. The buyer-seller relationship between Diaz and Bliss was rendered null and void by the final ruling that Arreza was the rightful buyer, leaving no valid consideration for the payments.

On the fifth issue, the Court held that Bliss must indemnify Diaz for the improvements. Because both parties acted in bad faith, Article 453 treats their rights as though both had acted in good faith, and since selling the land to Diaz was no longer viable, indemnity was the only remedy. For the same reason, the awards of moral damages, exemplary damages, and attorney's fees were deleted.

Doctrine

A purchaser in good faith and for value buys property of another without notice of another's right or interest and pays a full and fair price before such notice. The mirror doctrine does not apply where what is transferred is not the registered land but a mere personal right to purchase it, so the buyer must trace the source of that right.

Under Article 22 of the Civil Code, no one may retain a benefit at another's expense without just or legal ground. Where the sale is voided, the amortizations paid must be returned.

Under Article 453 of the Civil Code, where both the builder and the landowner acted in bad faith, their rights are the same as though both had acted in good faith, so the builder is entitled to indemnity for improvements under Articles 448 and 546, but not to moral or exemplary damages.

Disposition

The petition was partially granted: the Court of Appeals decision was modified, ordering Bliss to pay Diaz 1,106,915 pesos and 58 centavos for amortizations and improvements, and Tapay to pay Diaz 600,000 pesos, while deleting the awards of moral damages, exemplary damages, and attorney's fees.

Remember This

Memorize this line: when both the builder and the landowner are in bad faith, Article 453 treats them as if both were in good faith, so the builder gets indemnity but no damages. Examiners use this case to test the mirror doctrine's limits on assigned rights to purchase, unjust enrichment, and the Article 448 to 548 rules on builders in bad faith.