EN BANC

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

AUGUSTO COSIO and BEATRIZ DE

RAMA, petitioners, vs. CHERIE PALILEO, respondent.

Recto Law Offices for petitioners.

Bengzon, Villegas & Zarraga for respondent.

DECISION

REGALA, J : p

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 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 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.
". . . 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 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 [1992].) 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 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 non-payment 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 petitioner's 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, . . . maintain such
possession against the mortgagor," petitioners citing Cook v. Cooper, 18
Or. 142, 22 P. 945 (1989) 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 own 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])

In Palileo v. Cosio, supra we upheld Cosio de Rama's 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 petitioner's 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 "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 months after month for many years without having to comply
with the obligations of a lessor with respect to the maintenance 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, JJ., concur.

RESOLUTION ON SECOND MOTION FOR RECONSIDERATION

November 28, 1966.
REGALA, J : p

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 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 doe 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."
J.B.L. Reyes, Dizon and Zaldivar, JJ., concur.
J.P. Bengzon, Sanchez and Castro did not take part.

Separate Opinions
MAKALINTAL, J., dissenting:

I have set forth, in my dissent from this Court's resolution denying

petitioner's 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 petitioner's 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 petitioner's 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 petitioner's 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.
||| (Cosio v. Palileo, G.R. No. L-18452, [May 20, 1966])