SPOUSES MARIANO CASTILLO AND PILAR CASTILLO IN THEIR OWN BEHALF AND IN REPRESENTATION OF HEIRS OF EDUARDO CASTILLO, PETITIONERS, VS. HEIRS OF VICENTE MADRIGAL AND/OR SUSANA REAL…

Castillo versus Madrigal

The Case

This is a petition for review on certiorari brought by spouses Mariano Castillo and Pilar Castillo, in their own behalf and in representation of the heirs of Eduardo Castillo, against the heirs of Vicente Madrigal and Susana Realty, Incorporated. The petitioners sued to annul a deed of sale and the transfer certificates of title issued in favor of Vicente Madrigal and later of Susana Realty, and in the alternative to compel reconveyance of a parcel of land in Ermita, Manila, with damages. The case matters because it draws a sharp line between two kinds of attack on a registered title: an action to declare a contract inexistent, which never prescribes, and an action for damages, which does; and it reminds us that reconveyance will not lie once the land has passed to an innocent purchaser for value.

Procedural History

The petitioners filed a verified complaint before the Court of First Instance of Manila, now the Regional Trial Court, for annulment of contract and transfer certificate of title and, in the alternative, reconveyance with damages. The private respondents moved to dismiss on two grounds: that the complaint states no cause of action, and that the cause of action is barred by the statute of limitations. The trial court granted the motion and dismissed the complaint. On appeal, the Court of Appeals affirmed the dismissal in its entirety, holding that even granting fraud in the registration, the remedy of reconveyance had to be brought within ten years from the registration of the property in the name of Vicente Madrigal, and that the complaint was filed far too late. The petitioners then came to the Supreme Court by petition for review on certiorari.

Facts

The petitioners and their brother Eduardo Castillo were registered co-owners of a parcel of land in Ermita, Manila, covered by a transfer certificate of title issued in their names and in that of Eduardo on August 11, 1941. They had inherited the land from their mother, Petronila Vda. de Castillo. After the property was mortgaged in favor of the Agricultural and Industrial Bank, and because of the war conditions then prevailing, the petitioners entrusted the possession, management and supervision of the land to Eduardo, reposing full trust and confidence in him. Beginning in 1941 and for many years thereafter, the petitioners left Manila for business ventures in the provinces, staying for long periods in Cagayan Valley, while Eduardo managed the property and collected the rentals on the understanding that the accumulated amounts would be used to redeem the mortgage, which he did.

The petitioners never gave Eduardo authority to sell their undivided shares, and they never entered into any transaction with any person conveying the property. When they returned from abroad in 1977 and asked Eduardo for their share, he was already sickly and could not explain; his wife, Paula Castillo, told them that she and Eduardo did not know the mysterious transactions by which the property had been transferred and registered in the name of Vicente Madrigal. Upon verification, the petitioners found that an alleged deed of sale purportedly executed by them and Eduardo appeared on the back of the title, although they had never signed any document in favor of Vicente Madrigal. The property was later transferred by Vicente Madrigal to Susana Realty, Incorporated.

The petitioners exerted peaceful efforts to recover the property, but Susana Realty refused to heed their inquiries. On December 17, 1979, they filed their complaint, alleging that the transfer to Vicente Madrigal was done through fraud, simulation, illegality and serious irregularity equivalent to nullity and inexistence of contract, and that the transfer certificate of title in the name of Susana Realty was therefore null and void. The trial court dismissed the complaint, and the Court of Appeals affirmed.

Issues

• Whether or not the petitioners' action for annulment of contract and transfer certificate of title and, in the alternative, reconveyance with damages is subject to prescription.
• Whether or not the complaint states a cause of action against the private respondents.

Applicable Provisions

Article 1318 of the Civil Code provides:

Article 1318. There is no contract unless the following requisites concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established.

The petitioners invoke this article to show that without their consent there was no contract at all.

Article 1409 of the Civil Code provides:

Article 1409. The following contracts are inexistent and void from the beginning: (3) Those whose cause or object did not exist at the time of the transaction.

This is the provision that classifies the alleged deed of sale as inexistent and void from the beginning.

Article 1410 of the Civil Code provides:

Article 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.

This is the decisive provision on the first issue, because it removes the action from the operation of any period of limitation.

Article 1144 of the Civil Code provides:

Article 1144. The following actions must be brought within ten years from the time the right of action accrues: (1) Upon a written contract; (2) Upon an obligation created by law; (3) Upon a judgment.

This governs the claim for damages, which the Court held had already prescribed.

Ruling

On the first issue, the Court ruled that both the trial court and the Court of Appeals erred. The complaint plainly alleged that the petitioners never gave their consent to any sale and never signed any document in favor of Vicente Madrigal. What they sought was therefore the declaration of the inexistence of the deed of sale because of the absence of consent, and under Article 1410 that kind of action is imprescriptible. The action for reconveyance is likewise imprescriptible, because its basis is the alleged void contract of sale. The Court relied on its earlier ruling in Baranda versus Baranda, which distinguished a voidable contract tainted with fraud, mistake, undue influence, violence or intimidation from a contract that is null and void from the beginning, and held that lack of consent makes the deed void altogether and subject to attack at any time. The Court added that where there is a showing of illegality, the property registered is deemed to be simply held in trust for the real owner by the person in whose name it is registered, and the former then has the right to sue for reconveyance, an action that is also imprescriptible.

Nevertheless, the Court held that the action for damages against the private respondents had already prescribed under Article 1144. It should have been brought within ten years from the sale to Vicente Madrigal and the issuance of the transfer certificate of title in his name on July 12, 1943, if against his heirs, or within ten years from the issuance of the transfer certificate of title in the name of Susana Realty on May 12, 1954, if against the firm.

On the second issue, the Court held that the dismissal on the ground of failure to state a cause of action was correct. The rule is that an action to compel reconveyance will lie only as long as the property is still in the name of the person who caused the wrongful registration and has not passed to an innocent third person for value. Here the property had already been conveyed to Susana Realty, an innocent party for value. The petitioners' claim that Susana Realty was not an innocent purchaser for value was not borne out by the allegations of the complaint. Where a complaint for recovery of ownership and possession alleges that some defendants bought the land from co-defendants who had a defective title, but does not allege that the purchasers were in bad faith or had notice of the defect in their vendors' title, there is a failure to state a cause of action. By reason of this failure, Susana Realty is presumed to be an innocent purchaser for value and in good faith, entitled to protection under the law.

Doctrine

First, an action for the declaration of the inexistence of a contract does not prescribe, because Article 1410 says so in terms. Where the complaint alleges that the plaintiffs never gave their consent and never signed the deed, the contract is not merely voidable but inexistent and void from the beginning under Article 1409, and it may be attacked at any time.

Second, the action for reconveyance based on a void contract of sale is likewise imprescriptible, because the registered owner who caused the wrongful registration is deemed to hold the property in trust for the real owner.

Third, the imprescriptibility of the action does not save a complaint that fails to state a cause of action. Reconveyance lies only while the property remains in the hands of the person who caused the wrongful registration; once it has passed to an innocent purchaser for value, the remedy is lost.

Fourth, a complaint that does not allege bad faith or notice on the part of the purchaser fails to state a cause of action, and the purchaser is presumed to be an innocent purchaser for value and in good faith.

Fifth, the action for damages is distinct from the action to annul or reconvey, and it prescribes under Article 1144 within ten years from the accrual of the right of action.

Disposition

The petition was denied, and the decision of the Court of Appeals was affirmed, subject only to the modification that the action for annulment and reconveyance is imprescriptible, although the action for damages had prescribed and the complaint failed to state a cause of action against Susana Realty.

Remember This

Memorize the line that an action to declare the inexistence of a void contract does not prescribe under Article 1410, but reconveyance will not lie against an innocent purchaser for value. Examiners use this case to test the distinction between void and voidable contracts, the imprescriptibility of the action for nullity, and the failure to state a cause of action when bad faith is not alleged against the purchaser.