Republic of the Philippines


G.R. No. L-18452             May 20, 1966

CHERIE PALILEO, respondent.

Recto Law Offices for petitioners.
Bengzon, Villegas and Zarraga for respondent.


Petitioners have filed a motion for reconsideration of the decision in this case in so far as it declares petitioner Cosio de Rama to be a possessor in bad faith of a house, with obligation to pay rental for its use.

Petitioners contend, first of all, that Cosio de Rama could not have known that she was not entitled to the possession of the house before the decision in Palileo v. Cosio, 97 Phil. 919 (1955), because even Palileo herself referred to Cosio de Rama as the owner of the house. For instance, the following portion of a letter, written by Palileo to Sor Consuelo of the Hospicio de San Jose, dated February 17, 1952, is cited.

I am in receipt of your letter today and wish to explain the situation about the lot and house.

x x x Everyone who sees my house falls in love with it and so instead of my offer to mortgage the house, the other party wanted a conditional sale for one (1) year. This means that Miss Cosio is the temporary owner of my house until December 31, 1952 or until I can pay her back P12,000 before that date.

Another letter is cited in which the Hospicio de San Jose made the statement that Palileo had "sold the house to Miss B. Cosio" and it is said that Palileo's failure to deny this statement was in effect an admission of the truth of that statement. Finally, it is contended that when the house was burning, respondent Palileo called Cosio de Rama and told her: "Betty, your house is burning!" All this is shown to prove that before their transaction was declared to be an equitable mortgage, Cosio de Rama had a right to the possession of the house.

Palileo may indeed have called the transaction a "sale" and referred to Cosio de Rama as "owner" of the house, but that is no reason for inferring that the parties understood their contract to be one of sale. For that matter, they entitled their contract "Conditional Sale of Residential Building" and it was doubtless in the context of that contract that Palileo referred to Cosio de Rama as the "temporary owner of my house until December 31, 1952 or until I can pay her back P12,000 before that time." Because the parties referred to their contract as a "conditional sale," should we then have held that Cosio de Rama was the "temporary owner" with a right to the possession of the house?

A transaction is determined by the nature thereof. The nature of the agreement being inherent in the agreement itself, exists from the very moment the transaction was entered into. Thus: "Except as to bona fide city purchasers without notice and those standing in similar relations, on the reformation of an instrument the general rule is that it relates back to and takes effect from the time of its original execution, especially as between the parties themselves ... (76 C.J.S. par. 93, citing cases therein).

The fact is that in Palileo v. Cosio, supra, this Court found Cosio de Rama to be a mere mortgagee of the house and that decision is now final. It was merely to pursue the logical implication of that decision that we ruled in this case that if the parties' true agreement was to make the house a security for a loan, then Cosio de Rama, as mortgagee must have known that she was not at all entitled to the possession of the house. This, because the function of reformation is not to make a new contract for the parties but only to make the instrument speak their genuine intention.

Changing their position, petitioners now maintain that Cosio de Rama was given possession of the house and the proposition is now advanced that a mortgagee may be given possession of the property mortgaged "without thereby altering the nature of the contract," petitioners citing Legaspi v. Celestial, 66 Phil. 372 (1938) for authority. A complete statement of the rule laid down in Legaspi reads:

In a contract of mortgage, the mortgagor, as a general rule, retains the possession of the property mortgaged as security for the payment of the sum borrowed from the mortgagee, and pays the latter a certain per cent thereof as interest on his principal by way of compensation for his sacrifice in depriving himself of the use of said money and the enjoyment of its fruits, in order to give them to the mortgagor. Inasmuch as it is not an essential requisite of the contract of mortgage that the property mortgaged remain in the possession of the mortgagor (Article 1857 of the Civil Code) the latter may deliver said property to the mortgagee, without thereby altering the nature of the contract. It not being an essential requisite of said contract of mortgage that the principal of the mortgage credit bear interest, or that the interest, as compensation for the use of the principal and enjoyment of its fruits, be in the form of a certain per cent thereof, such interest may be in the form of fruits of the mortgaged property, without the contract's losing thereby its character of a mortgage contract. (At 377-378)

We may mention, at this point, that this ruling was made in answer to the contention of the appellant in that case that the contract was an antichresis and not a mortgage. Of course in other cases the rule has been laid down that where by agreement the mortgaged property is delivered to the mortgagee, such mortgagee in possession is subject to the obligation of an antichretic creditor to apply the fruits to the payment, first, of the interest and, later, of the principal. (Diego vs. Fernando, G.R. No. L-15128, August 25, 1960; Macapinlac v. Gutierrez Repide, 43 Phil. 770 [1922].) Thus it was held in Macapinlac v. Gutierrez Repide, supra, at 786-87:

The respective rights and obligations of the parties to a contract of antichresis, under the Civil Code, appear to be similar and in many respects identical with those recognized in the equity jurisprudence of England and America as incident to the position of a mortgagee in possession in reference to which the following propositions may be taken to be established, namely, that if the mortgagee acquires possession in any lawful manner, he is entitled to retain such possession until the indebtedness is satisfied and the property redeemed; that the nonpayment of the debt within the term agreed does not vest the ownership of the property in the creditor; that the general duty of the mortgagee in possession towards the premises is that of the ordinary prudent owner; that the mortgagee must account for the rents and profits of the land, or its value for purposes of use and occupation, any amount thus realized going towards the discharge of the mortgage debt; that if the mortgagee remains in possession after the mortgage debt has been satisfied, he becomes a trustee for the mortgagor as to the excess of the rents and profits over such debt; and, lastly, that the mortgagor can only enforce his rights to the land by an equitable action for an account and to redeem. (3 Pomeroy Equity Jurisprudence, secs. 1215-1218)

Now, was there an agreement in this case to permit Cosio de Rama to have possession of the house in lieu of the payment of interest? Quite the contrary, the parties stipulated that interest (in the form of rent) was to be paid at the rate of P250 a month, an amount which we found to be excessive. For petitioners, therefore, to espouse the theory of a mortgagee in possession would be for them to admit unwittingly that doubly excessive interest was collected for a loan of P12,000 which Cosio de Rama had extended to Palileo.

Nor would it improve petitioners' position to argue that since Palileo remained in possession of the house as lessee, her possession was that of Cosio de Rama on the principle that a lessee's possession is the lessor's possession. Precisely, we held in the earlier case of Palileo v. Cosio, supra, that there was no lease contract between the parties, because the so-called rents were in reality interests. Indeed, Article 1602 of the Civil Code states that "The contract shall be presumed to be an equitable mortgage ... (2) When the vendor remains in possession as lessee or otherwise.

Furthermore, it is error to say that the possession of the premises of the house was delivered to the petitioner for the period of the consideration of the transaction because the transaction having been found to be an equitable mortgage the respondent, as mortgagor, retained possession of the premises, under the general principle of law as elsewhere stated, and therefore there was actually no legal possession that was transferred from the mortgagor (respondent) to the mortgagee (petitioner) by virtue of the aforesaid transaction.

Still, it is insisted that when petitioners entered the premises, they acted well within their right.

For this purpose, petitioners submit three propositions:

(1) their right as mortgagee to take possession of the house; (2) their right as mortgagee to take possession of the house because it was abandoned; (3) their right as mortgagee, who may, "if [they] can make a peaceable entry upon the mortgaged premises after condition [is] broken, x x x maintain such possession against the mortgagor," petitioners citing Cook v. Cooper, 18 Or. 142, 22 P. 945 (1889) for the last proposition.

The first proposition is contrary to settled law, according to which a simple mortgage does not give the mortgagee the right to the possession of the mortgaged property unless the contract contains some special provision (Alvano v. Batoon, 25 Phil. 178) [1913]); the second proposition is contrary to the facts as found by both the trial and the appellate courts to the effect that, at the time of the fire, the house was being rented by Mary Icard as tenant of Palileo. If at the time petitioners entered the premises no one was in actual possession of the house, it was because of the fire that destroyed part of it. This fact did not certainly give petitioners a right to enter the premises. The third proposition is non-sequitur for at the time petitioners took possession of the house, no condition of the loan had been broken. At any rate, after claiming the right to possession as incident of ownership, petitioners should not claim the right of possession as mortgagee. A mortgagee in possession is one "who has lawfully acquired actual or constructive possession of the premises mortgaged to him, standing upon his rights as mortgagee and not claiming under another title, for the purpose of enforcing his security upon such property or making its income help to pay his debt." (Diaz v. de Mendezona, 48 Phil. 666, 669 [1926]).1wph1.t

In Palileo v. Cosio, supra, we upheld Cosio de Ramas right to the proceeds of the fire insurance even as we held that her claim against Palileo on the loan of P12,000 was to be deemed assigned to the insurer, the Associated Insurance & Surety Company. It is now contended that, with the decision in this case, the right of Cosio de Rama as adjudged in the earlier case would be lost. More specifically, it is claimed that under the decision in this case, Palileo would "not only find herself in effect absolved from paying her mortgage indebtedness but she gets, in addition, at absolutely no expense to her, a completed house plus several thousand pesos in the form of rentals for the house which fire destroyed and which she did not rebuild."

This is a gross misrepresentation. Nowhere in the decision in this case do we "in effect" absolve Palileo from her indebtedness on the loan. If the point which petitioners wish to make is that after offsetting Palileo's obligation on the loan with the amount of rentals due her (which according to petitioners now total P46,800) there would still be left a balance in her favor, then the situation is one that cannot be questioned. A possessor in bad faith is liable for rent during all the time he deprived the owner of the use of the property. (Lerma v. De la Cruz, 7 Phil. 580 [1907].)

Independently of the foregoing, it is logical to presume that for about the same period that she has been deprived of the use of the property the respondent may have suffered damages by way of the rentals she may have paid for the premises she has occupied to settle herself in the meantime. On that basis, whatever amount the respondent will therefore receive from the petitioner as rentals for the property in question would but be a reimbursement of what she had paid as rentals for another place.

Parenthetically, and on the point that Palileo would in effect be "absolved" from paying the loan, we note that the petitioner had already collected the insurance proceeds from the Associated Insurance & Surety Company which should be deemed in payment of the loan. Aside therefrom, the petitioner may again collect the amount of P12,297.00 with legal interest thereon, this time from the respondent by virtue of the assignment of the credit (originally P13,107.00 but reduced by P8,100.00 paid thereon) which was assigned to the petitioner by the Associated Insurance & Surety Company for P1.00 (Exh. "T") which assignment we have upheld by affirming the decision of the Court of Appeals on the matter.

In the letter Exhibit "L", the "Associated Insurance & Surety Company considers the payment made of the insurance policy as insurance risk and therefore its policy precludes it from recovering what has been paid on account of the risk attaching to an insurance policy." It would therefore appear that the petitioner would be collecting the mortgage indebtedness twice since it is apparent from the letter Exhibit "L", pertinent portion of which is quoted above, and from the deed of assignment Exhibit "T" that the only consideration for the assigned credit is P1.00.

Nor is it fair to say that the decision in this case would hand over to Palileo a "completed house" at absolutely "no expense to her" considering that the decision orders Palileo to reimburse Cosio de Rama the expenses incurred by the latter in repairing the house.

It is finally contended that at any rate rents should run up to June 1958 only when Cosio de Rama died, because bad faith is personal and intransmissible (Civil Code, Art. 534). The short answer to this would be that, under the Code, it is presumed that possession continues to be enjoyed in the same character in which it was acquired, until the contrary is proved (Art. 529). We have already shown that petitioners' possession has been in bad faith and we have not been shown the contrary.

Moreover, the finding on the liability for the payment of rental is applicable not only to the deceased Cosio de Rama but also to the petitioner Augusto Cosio during all the time that the respondent has been deprived of the possession of the premises in question.

In any case, and in so far as petitioner Beatriz Cosio de Rama is concerned, since the latter's estate should be deemed in possession of the premises and is enjoying the benefit of such possession, it (the estate) should be held liable for the rental of the house. Whether part of the rentals accrued during the lifetime of the petitioner Cosio de Rama and the other part, to her estate, would be of no serious consequence since the ultimate result will practically be the same, namely, the total amount of the rentals should now be paid by Beatriz Cosio de Rama's estate. It would be an empty formality to require the respondent Palileo to file a separate claim for the rentals that accrued after the death of petitioner Beatriz Cosio de Rama against the latter's estate instead of joining said rentals as all due under the instant case since it will be the same estate that will pay for it.

The motion for reconsideration is denied.

Bengzon, C.J., Bautista Angelo and Zaldivar, JJ., concur.
J.P. Bengzon and Sanchez, JJ., took no part.

Separate Opinions

MAKALINTAL, J., dissenting:

I am for reconsidering the decision by eliminating therefrom the adjudication of rents in favor of respondent Cherie Palileo at the rate of P300.00. To date the aggregate amount of such rents is over P46,000.00 and it seems to me that to award it to her is in effect to put a premium on her own default, for if she had paid her indebtedness on time (within one year from December 18, 1951) she would not have had such rents at all.

The main ground upon which petitioner Beatriz Cosio de Rama's liability is based is that she was a possessor of the house in bad faith, and this finding in turn is based on the decision of this Court in the first case between the parties (Palileo vs. Cosio, 97 Phil. 919) that their contract executed on December 18, 1951, while denominated a sale with the right of repurchase, was in reality an equitable mortgage. That case was for reformation of instrument, filed sometime towards the end of 1952. I do not believe, in view of the circumstances, that just because the transaction was held to be an equitable mortgage petitioner Cosio de Rama necessarily had no right to the possession of the house and was aware of it from the very moment the instrument was executed. The obvious, and to my mind the only, effect of that decision is that non-payment of the obligation within the period stipulated one year from December 18, 1951 did not preclude redemption of the property ostensibly sold nor result in the consolidation of the ownership thereof in the vendee. The agreement concerning possession of the house explicit in the contract and implicit in the contemporaneous acts of the parties was in no wise affected by our decision.

The deed of sale itself, of course, presupposed delivery of the house to the vendee. Such delivery was confirmed simultaneously by the lease of the house to the vendor, pursuant to which the latter remained in occupancy as tenant for five (5) months, leaving the place in May, 1952. The day after the sale, that is, on December 19, 1951 petitioner Cosio de Rama insured the house for her own account and paid the corresponding premium on the policy. She likewise secured a new contract of lease with the Hospicio de San Jose, owner of the lot on which the house was situated, and paid the rents therefor in the sum of P135.00 a quarter. On February 17, 1952 respondent wrote a letter to Sor Consuelo of the Hospicio de San Jose, stating that under her contract with petitioner, "Miss Cosio is the temporary owner of my house until December 31, 1952 or until I can pay her back P12,000.00 before that time."

After the house was partially burned on October 25, 1952, it was petitioner who reconstructed it. Nobody was then in occupancy. It was entirely proper that petitioner should take charge to protect her interest. If she knew or thought then that she had no right to be in possession, as the decision under consideration says, there would be no point in reconstructing the house at all: she had collected the insurance proceeds and the loan she had extended to respondent was still outstanding and therefore supposed to be collectible, even if the property set up as guaranty had been damaged. Indeed, respondent herself considered it the duty of petitioner to rebuild the house as shown by a pleading she filed in the first case, wherein she complained that "... defendant (Cosio de Rama) did not rebuild said building notwithstanding that she had received the aforesaid sum of P13,107.00 from the insurance company," and alleged that she was willing to pay her indebtedness of P12,000.00 "provided the defendant first rebuild the building in question to its original condition before its destruction by fire."

The inference as to possession that might be derived from the judicial construction of the sale as an equitable mortgage cannot, in my opinion, overthrow the clear agreement of the parties, implemented by their conduct, that such possession should be in the vendee (equitable mortgage); and to make her pay rents would be rewarding ,the defaulting debtor unjustly, since it was precisely her default which assured her of such rents month after month for many years without having to comply with the obligations of a lessor with respect to the maintainance of the house in good condition, and to the payment of taxes, of premiums on the insurance and of the rents of the lot on which the said house is situated.

Concepcion, J.B.L. Reyes and Dizon, concur.


November 28, 1966


Petitioners have filed a second motion for reconsideration based on substantially the same grounds advanced by them in their first motion for reconsideration, grounds which were already considered in both the resolution of May 20, 1966 and in the dissenting opinion of Mr. Justice Makalintal. Thus, the following circumstances are cited as basis for petitioners' claim of good faith in taking possession of the house.

1. The agreement of the parties whereby respondent Palileo was allowed to remain in possession of the house, ostensibly as lessee, after it was allegedly sold to petitioner Cosio de Rama.

2. The alleged impression of the parties that their transaction was one of conditional sale, by virtue of which petitioner Cosio de Rama became the "temporary owner" of the house, evident in the act of petitioner Cosio de Rama of insuring the house against fire, renewing the lease of the land on which it was built and repairing the house when it was partly destroyed by fire.

But, as already stated in the prior case of Palileo v. Cosio, 97 Phil. 919 (1955), as well as in the main decision in this case, the agreement to permit respondent Palileo to remain in possession of the house as lessee thereof was merely a device to enable the collection of excessive interests in the guise of monthly rentals. It is precisely schemes such as these which the law presumes to be equitable mortgages (Civil Code, Art. 1606 [2]) and it was on this score that this Court declared the parties' contract to be a mortgage.

The second has already been answered also in the resolution of May 20, 1966. Consistently with the design to conceal the true nature of their agreement which they styled a "Conditional Sale of a Residential House," it was not unlikely for the parties to act the way parties to a real sale might act. This probably explains why petitioner Cosio de Rama renewed the lease on the land when it expired, although, with respect to the insurance which she took, it might be said that even a mere mortgagee has an insurable interest in the thing mortgaged. This is the ruling in the first case of Palileo vs. Cosio, supra, and it was on the basis of this ruling that petitioner Cosio de Rama's right to the proceeds of the fire insurance was upheld.

However, realizing that the issues in this case are such that even members of the Court are divided and considering that mistake upon difficult questions of law may be the basis of good faith (Civil Code, Art. 526), we have decided to give petitioners the benefit of the doubt. For this reason, petitioners must now be deemed to have taken possession of the house in good faith, in the honest belief that they were entitled to do so, and that it was only after the decision in Palileo vs. Cosio, supra, became final on December 15, 1955 that petitioners' bad faith started, because it was from that date only that they became aware of the flaw in their title (Art. 528). Petitioners' liability for rent must accordingly be deemed to begin from December 15, 1955 only but their right to reimbursement for necessary expenses as declared in our original decisions in this case, is reaffirmed. Such reimbursement, in the amount of P12,000 may be deducted from the rents due the respondent.

Wherefore, the dispositive portion of the original decision is hereby modified to read as follows:

WHEREFORE, with the modification that petitioner Cosio de Rama should be reimbursed her necessary expenses in the amount of P12,000 by respondent Palileo, and that petitioners, for their possession of the house, are ordered to pay respondent Palileo a monthly rental of P300 starting from the time the decision in Palileo v. Cosio, 96 Phil. 919 [1955] became final on December 15, 1955 the judgment of the Court of Appeals is affirmed in all other respects, without any pronouncement as to costs.

Reyes, J.B.L., Dizon and Zaldivar, JJ., concur.
Bengzon, J.P., Sanchez and Castro, JJ., took no part.

MAKALINTAL, J., dissenting:

I have set forth, in my dissent from this Court's resolution denying petitioners' first motion for reconsideration, the reasons why they should not be held liable for rents on the house in question, which under the decision would not aggregate approximately P50,000.00, at P300.00 a month since December 1952. The resolution on petitioners' second motion for reconsideration now modifies the judgment in the sense that their liability for such rents should start only from December 15, 1955, when our decision in the present case of Palileo vs. Cosio, 97 Phil. 919, became final. The modification is based on the proposition that "petitioners must be deemed to have taken possession of the house in good faith, in the honest belief that they were entitled to do so,1 and that it was only after the decision in Palileo vs. Cosio, supra, became final on December 15, 1955 that petitioners' bad faith started, because it was from that date only that they became aware of the flaw in their title (Art. 528).

I am still unable to accept this new development. If petitioners' original possession of the house was in good faith and I am convinced it was and has since continued to be so even the alleged change in the character of that possession by virtue of the 1955 decision would not render them liable for rents thereafter. As possessors in good faith they incurred necessary expenses on the house when they reconstructed it after the fire in 1952, spending the amount of P12,000.00 for that purpose. And under Article 546 of the Civil Code a possessor in good faith has the right of retention until such necessary expenses have been refunded. I believe, under the facts and circumstances of this case, that to grant respondent Palileo's claim for rents without her having made reimbursement not to say without having paid her original indebtedness, which has been assigned back to the petitioners by the insurance company would be to allow said respondent to enrich herself unjustly at petitioners' expense. For petitioners could very well have put the P12,000.00 to some other lucrative use than the reconstruction of the mortgaged house and received, by way of income, the equivalent of the rental value thereof. As it is, however, under the present resolution of this Court respondent would in effect receive the income from capital which she has not invested; and petitioners in turn would be virtually penalized for having spent their money in reconstructing the house, because if they had not done so the house would hardly command any rental value, having been almost totally destroyed. I do not think the whole setup is equitable and just.

Concepcion, J., concurs.


Makalintal, J., dissenting:

1That was in 1952, under the contract of "conditional sale" between the parties.

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