VICENTE I. SANTOS, PETITIONER, VS. INTERMEDIATE APPELLATE COURT, MARIA REYES, EUGENIO CRUZ, LUCERIA REYES, EDUARDO MEDINA AND MAXIMINO DE LEON, RESPONDENTS.

This is a petition for review on certiorari of the April
3, 1986 decision* of the
then Intermediate Appellate Court in AC-G.R. CV No. 03516 reversing the
appealed decision of the Court of First Instance of Cavite,
and the July 15, 1986 resolution of the same court denying the motion for
reconsideration.

The controversy in this case involves a residential lot situated
in Digman, Bacoor, Cavite, and a house constructed thereon. 
Herein petitioner Vicente I. Santos and private respondents Maximino de Leon and Valentina
Barron all died during the pendency of the case and
were all duly substituted.

As found by the trial court,
the undisputed facts of this case are as follows:

The late spouses Antonia San Jose and Valentina
Barron, who were childless, took custody of the late Maximino
de Leon, who was then a baby, without formalities of legal or judicial
adoption.  Together, they lived in a
conjugal house on the land, now in question, in Digman,
Bacoor, Cavite,
even after Maximino de Leon had gotten married and
raised a family.  (Rollo,
pp. 203­-204).

On February 27, 1955,
Antonio San Jose died, leaving a last will and testament, which was duly
probated by the Court of First Instance of Cavite in
a decision rendered on April 20, 1955
in Special Proceedings No. 5668.  Among
the properties bequeathed by the deceased in his will to Maximino de Leon was a piece of
residential lot with a house erected thereon described as “isang loobang tirahan
sa baybay dagat sa Digman
at kasama ang bahay (materiales mistos) na nakatirik
doon” (Rollo, p. 8).

In March, 1955, Valentina Barron, the
widow, at her own expense, caused the demolition of the said conjugal house and
replaced it with a new one (now in question) on the same spot.  Maximino de Leon
consented to and even helped in said construction, and thereafter, lived
therein with his family.  Later, Maximino de Leon and his family moved and settled
elsewhere.

In a Project of Partition dated December 15, 1955 (Exhibit
“E”) duly executed by Maximino de Leon and Valentina Barron, Item “H”, consisting of one (1)
residential lot at Poblacion Bacoor,
Cavite, covered by Tax Declaration No. 6108 and
assessed at P740.00, was assigned and adjudicated in favor of Maximino de Leon. 
Said project of partition was duly approved by the probate court in an
Order dated July 12, 1956.  Upon motion of the administrator of the
estate, the court a quo issued an
Order on March 29, 1957
(Exhibit “G”) ordering the distribution of the estate of the deceased
Antonio San Jose among his heirs in accordance with the aforesaid project of
partition (Rollo, p. 9).

When de Leon returned in 1959, he found private respondents
spouses Eugenio Cruz and Maria Reyes occupying the
house together with Valentina Barron.  When said occupants refused to vacate the premises,
Maximino de Leon, on July 16, 1959, filed an ejectment
case, Civil Case No. 113, with the Municipal Court of Bacoor,
Cavite,
claiming ownership of the house in question.

In the answer, it was alleged that Valentina
Barron is the true and legitimate owner of the house.  She built it at her own expense after the
death of her husband and prior to the preparation and approval of the Project
of Partition.  The house is now covered
by Tax Declaration No. 7101 in the name of Valentina
Barron as lawful owner thereof. 
Respondents pointed out that only the residential lot, without any
house, has been adjudicated to Maximino de Leon in
the Project of Partition dated December
15, 1955 and approved by the Court of First Instance of Cavite in its order dated July 12, 1956, with the express approval of Maximino de Leon.  As
such, he is in estoppel to impugn the validity and
legality of the adjudication to him of the lot only, without the house.

In the alternative, they raised the defense that Valentina Barron is a builder in good faith since that
improvement was constructed at a time when said controverted
lot was still part of the conjugal property of Valentina
Barron and the deceased Antonio San Jose, and that under Article 448 of the
Civil Code, Maximino de Leon has the option to pay
the value of the improvement which is greater than the lot.

On November 7, 1957,
the Justice of the Peace Court of Bacoor, finding
that the case involved conflicting claims on the ownership of the house subject
of litigation, dismissed the same for lack of jurisdiction.  The dismissal was appealed to the Court of
First Instance of Cavite, and the same was docketed
therein as Civil Case No. 143 (Rollo, p. 205).

Subsequently, on January
2, 1962, while the said Civil Case No. 143 was pending, Maximino de Leon filed Civil Case No. 411 against the same
defendants in Civil Case No. 143, for recovery of possession of the lot and
house.  In both cases, defendants,
particularly Valentina Barron, claimed, among other
defenses, the right of a builder in good faith under Article 448 of the Civil
Code.

While these cases were pending, Valentina
Barron died on March 27, 1963
and was substituted by respondents spouses Eugenio
Cruz and Maria Reyes on November 6,
1964.  Meanwhile, on April 2, 1964, respondent Maximino de Leon, for the sum of P15,700.00, sold the
questioned lot (more or less 930 square meters) and the house (Record, pp.
84-85) to Vicente Santos, petitioner herein, without notice to the trial court
nor to private respondents.  The sale was
duly registered with the Registry of Deeds for the Province
of Cavite
on April 6, 1964 (Exhibit
“A-1-A”).

On April 25, 1964, petitioner wrote a letter (Exhibit
“H”) to respondent Maria Reyes, advising her that he had acquired
title over the parcel of land, the house and the “camalig”
being occupied by them and that he now needs the property in the pursuit of his
business, for which reason, he demanded that they vacate the premises and
surrender the same to him within ten (10) days from receipt thereof, including
the payment of P500.00 monthly rental from April 2, 1964 for the use of the
property.  This letter was received by
the addressee through mail as evidenced by the Registry Return Card presented
as Exhibit “H-1” (Rollo, p. 27).

On April 30, 1965,
petitioner filed a Complaint in Intervention in Civil Case No. 411 claiming
that he bought the litigated land with an area of 930 square meters from Maximino de Leon.

On May 6, 1965,
petitioner sent another letter to respondent Maria Reyes (Exhibit
“I”) reiterating his demand to vacate the premises and the payment of
P500.00 monthly rentals from April 2,
1964 within five (5) days from receipt.

In her reply of May 16, 1965 (Exhibit “J”), respondent
Maria Reyes stated that petitioner has no right to collect the rental demanded
considering that the property acquired is still under litigation, to which,
petitioner, in his letter of May 20,
1965 (Exhibit “K”), made the rejoinder that it is only the house
which is the subject of litigation and that the lot is never involved in the
suit between respondent and respondent Maximino de
Leon.

In the answer to the complaint-in-intervention, the spouses Maria
Reyes and Eugenio Cruz claimed that Maximino de Leon had
no right to sell the land because of the pendency of
a case wherein Maximino sought the annulment of the
Project of Partition involving the land where the house is constructed.  As counterclaim, respondents invoked the
rights of pre-emption appertaining to a builder in good faith.

In the meantime, petitioner had a parcel of land he bought from Maximino de Leon, surveyed. 
On February 2, 1967,
the Director of Lands approved the survey plan over the land, designated as
Psu-216172 (Exhibit “B”) showing a total area of 1,937 square meters.

On August 29, 1969,
the trial court dismissed said Civil Case No. 411 without prejudice.

Aforesaid Civil Cases Nos. 143 and N-411 were revived by the
petitioner, filing with the trial court on April 7, 1972, Civil Case No. N-1762 (later known as Civil
Case No. B-16), against herein private respondents together with Maximino de Leon for recovery of the subject land, now
claimed to be 1,937 square meters.

In their Answer with Counterclaim and a Cross-Claim (Records, pp.
26-34), private respondents aver that the area of the subject land is only 930
square meters, more or less, and that petitioner is estopped
from claiming that its area is 1,937 square meters; that the land area in
excess of 930 square meters, and north of subject land, is a public land
covered by Miscellaneous Sales (III-I) Application No. 633 of respondent
Medina, filed with the Bureau of Lands, who actually occupied said public land,
introducing improvements thereon; that the court has no jurisdiction over said
public land, jurisdiction being with the Bureau of Lands; that as builder in good faith, they are entitled to retention
of subject land, without obligation to pay rental until Maximino
de Leon shall have exercised the option; that they have preferential rights to
buy the subject land; and that the sale of subject land by Maximino
de Leon to Vicente Santos is rescissible or annulable.  In their
cross-claim against their co-respondent Maximino de
Leon, they asserted ownership of the house in question, sought enforcement of
their rights as builders in good faith, and prayed for a rescission of the sale
of subject land for being in fraud of private respondents.

After a protracted trial, the question of ownership of said house
was settled, when on October 18, 1973, respondent Maximino
de Leon (as cross-defendant) and respondents spouses Maria Reyes and Eugenio S. Cruz (as cross-claimants) filed a Motion to
Approve Compromise Agreement (Ibid., pp. 44, 46), wherein Maximino de Leon admitted that:  (1) the house in question was constructed by Valentina Barron Reyes, at her own expense, on the portion
of the land pertaining to the conjugal partnership property of the spouses
Antonio San Jose and Valentina Barron Reyes, prior to
his acquisition of the said lot; (2) he was prevailed upon by petitioner, who
was aware of the pendency of Civil Cases Nos. 143 and
N-411 and was even his financier in the said cases, to sell the land in
question to him (petitioner); (3) he
did not offer to buy the house from respondents spouses nor from their
predecessor-in-interest Valentina Barron Reyes, nor
did he offer to sell the questioned land to them; (4) he did not notify them of
his intention to sell the land in question; (5) that he decided to sell the
land to petitioner; (6) that he sold to petitioner the parcel of land in
question with an area of 930 square meters only, and the excess portion is a
public land which is actually occupied by respondents spouses Edwardo Medina and Luceria Reyes;
(7) that he recognizes the right of private respondents to purchase the land on
which the house in question is erected; and (8) that he recognizes their right
to a rescission of the contract of sale of subject lot between him and
petitioner.  Said Compromise Agreement
was signed by private respondents Maria Reyes and Eugenio
S. Cruz on the one hand and by Maximino de Leon on
the other, assisted by their respective counsel.  This Compromise Agreement was approved by the
trial court in an order dated October
22, 1973 as its judgment (Ibid.,
pp. 69-70).

In a decision dated July
30, 1982 (Ibid., pp.
91-110), the trial court ruled in favor of petitioner.  The decretal
portion of the said decision reads:

“WHEREFORE, by preponderance of evidence, judgment is hereby
rendered for the plaintiff and against
the defendants as follows:

“a)   Declaring plaintiff
and his successors-in-interest to be the lawful owners of the parcel of land
described in the complaint and on the survey plan Psu-216172, including all the
improvements now existing thereon;

“b)   Ordering
defendants to immediately vacate and surrender to plaintiff possession of the
aforesaid land and all the improvements found thereon;

“c)   Sentencing
defendants Maria Reyes and Eugenio Cruz to jointly
and severally pay rental to plaintiff for their use and occupation of the premises
under litigation at the rate of P500.00 a month from April, 1964 until the
plaintiff is fully restored in possession of the same, with interest at the
legal rate from the filing of this case;

“d)   Requiring the
defendants to jointly and severally pay plaintif
attorney’s fees in the sum of P10,000.00;

“e)   Dismissing
defendants’ counterclaim and for the latter to pay the costs.

On appeal, public respondent, then
Intermediate Appellate Court, in its decision of April 3, 1986 (Rollo, pp.
23-32), reversed
the appealed decision –

“WHEREFORE, the decision a quo is
hereby REVERSED or SET ASIDE and another one is rendered rescinding or
declaring as null and void the deed of sale (Exh. A
or 23) and ordering Maximino de Leon, his heirs,
successors or assigns, to execute a deed of sale conveying the land in question
in favor of the defendants-appellants for the sum of ELEVEN THOUSAND SEVEN
HUNDRED PESOS (P11,700.00), Philippine Currency, representing the price of the land after deducting the sum of
P4,000.00, the price of the house, from the purchase price of both house and
lot in the total sum of P15,700.00 as stated in Exh.
A or 23, within 30 days from receipt of the order of execution to be issued in
this case.  No costs.”

Petitioner filed a Motion for Reconsideration (Ibid., pp.
34-39), but the same was denied in a resolution dated July 15, 1986 (Ibid., p. 33).  Hence, the instant petition.

The Second Division of this Court, after the required pleadings
were filed, (Ibid., p. 147) gave due course to the petition in the
resolution of January 9, 1989
and required the parties to submit simultaneously their respective
memoranda.  In compliance therewith,
petitioner filed his memorandum on May
29, 1989 (Ibid., pp. 180-192), while private respondents
filed their memorandum on July 8, 1989
(Ibid., pp. 203-225).

There is no dispute as to the ownership of the lot bequeathed by
the late Antonio San Jose to Maximino de Leon but
only as to the ownership of the house built thereon by the surviving spouse Valentina Barron immediately after the death of her husband
San Jose.

The question at issue is whether or not Valentina
Barron was a builder in good faith and as
such, is entitled to the rights of pre-emption prescribed under Article
448 of the Civil Code.

At the outset, it must be stated that pursuant to Article 527 of
the Civil Code, which reads:

“Art. 527.  Good faith
is always presumed, and upon him who alleges bad faith on the part of a
possessor rests the burden of proof.”

The late Valentina
Barron, predecessor-in-interest of private respondents, except Maximino de Leon, has in her favor the presumption that she
constructed the house in question in good faith.  As aptly argued by private respondents, there
is no allegation in the complaint that even remotely suggests that the late Valentina Barron was a builder in bad faith; that there is
not even a scintilla of proof, attempting to show that she was in bad faith;
and that in such situation, presumption of good faith remains (Sideco v. Pascua, 13 Phil.
342).  The reason for the presumption of
innocence is given because every person should be presumed honest until the
contrary is proved (U.S.
v. Rapinan, 1 Phil.
294).  Moreover, on equitable grounds,
she was entitled to the
property.

It will be recalled that Valentina Barron
constructed the house on the lot in question
sometime in March, 1955, less than a month after her husband died on
February 27, 1955 and before the
approval of a project of partition submitted on or about February 21, 1956 in Sp. Proc. No. 5668, made for the
purpose of segregating the house from the land. 
It is of record that when Barron gave her conformity to the project of
partition what was included in the estate of her husband and allotted to Maximino de Leon as one of his shares in the inheritance,
is the lot only, now covered by Tax Declaration No. 6108 (Rollo,
p. 29).

It, therefore, stands to reason that when Valentina
Barron constructed the house she thought that said land was still her conjugal
property unknowing that it was the same land bequeathed by her husband to Maximino de Leon, the ownership and possession of which, by
the latter, retroacted as of February 27, 1955, the death of the testator
(Article 777, Civil Code; Rollo, p. 73).  In fact, the error in the identification of
the land, if any, is attributable not only to Valentina
Barron alone but also to Maximino de Leon who as
earlier stated, not only consented but also helped in the construction of the
house in litigation.  Thus, under similar
circumstances, this Court ruled:

“The proof clearly shows that the defendant went into
possession of the land in question and erected her house thereon by and with
the permission of the plaintiff, and therefor in good
faith.  The improvement thus made by the defendant, can not become the
property of the plaintiff except upon paying a due consideration to the
defendant.” (Aringo v. Arena, 14 Phil.
263, 268 [1909]).

In the final analysis, it is more reasonable to believe that bad
faith lies in the actuations of Maximino de Leon as
shown by his admissions in a compromise agreement that knowing the rights of Valentina Barron over the property he sold the parcel of
land to petitioner without notice.

Neither can de Leon claim that as there is no dispute as to the ownership of the land, the same is not
in litigation.  Precisely, respondents’
claim of pre-emption and right of retention placed the same under litigation
and subject to disposition by the trial court. 
Having opted to sell the land, de Leon is bound under the law to sell the same to Barron and not to
petitioner.  Hence, the sale of the land
to petitioner is rescissible under Article 1381,
Civil Code, paragraph 4.

It is likewise established that petitioner is a buyer in bad
faith, on the unrebutted testimony of Eugenio Cruz, that he told the petitioner at the wake of
Barron that the cases against subject property are still pending and that the
same involved both house and land (Rollo, p. 217).

Ultimately, respondent court did not err in declaring the sale of
subject land invalid for being in fraud of creditors and rescinded, under
Article 1381 of the Civil Code, paragraph 4. 
More accurately, the sale was rescissible
because the property was then under litigation.

PREMISES CONSIDERED, the instant petition is hereby DENIED and the assailed decision of the
Intermediate Appellate Court, now Court of Appeals, is hereby AFFIRMED.

SO ORDERED.

Padilla, Sarmiento, and Regalado, JJ., concur.

Melencio-Herrera, J., (Chairman), concur on grounds of
equity.

* First Civil Cases Division;
penned by Associate Justice Leonor Ines Luciano, and
concurred in by Presiding Justice Ramon G. Gaviola,
Jr. and Associate Justice Ma. Rosario Quetulio-Losa.