G.R. No. L-18452; May 31, 1965
AUGUSTO COSIO and BEATRIZ COSIO DE RAMA, petitioners, vs. CHERIE PALILEO, respondent.

FACTS

Respondent Cherie Palileo purchased a house on a leased lot. On December 18, 1951, she received P12,000 from petitioner Beatriz Cosio de Rama and executed a document titled “Conditional Sale of Residential Building” (a pacto de retro sale), with a right to repurchase within one year. Simultaneously, Palileo remained in possession as a tenant, paying a monthly rental of P250. The house was later partly destroyed by fire on October 25, 1952. Cosio de Rama, who had insured the house, collected P13,107 from the insurance company. At Cosio de Rama’s instance, petitioner Augusto Cosio entered the premises and began repairs, completed in 1953 at a cost of P12,000.
On December 4, 1952, Palileo filed an action against Cosio de Rama in the Court of First Instance of Rizal to reform the pacto de retro sale into a loan with an equitable mortgage. On December 11, 1952, she filed an ejectment suit against Augusto Cosio in the Municipal Court of Pasay City, which was dismissed and later appealed to the Court of First Instance, where it was dismissed without prejudice for failure to prosecute.
In the reformation case, both the lower court and the Supreme Court (in Palileo v. Cosio) declared the transaction a loan with an equitable mortgage, not a sale. The Court found the P12,000 was a loan, the P250 monthly payment was interest, and the house was security. Cosio de Rama was ordered to return excess interest and could keep the insurance proceeds, with her claim against Palileo deemed assigned to the insurance company.
Subsequently, Palileo filed this action to recover possession of the house. The lower court declared Palileo the lawful owner but required her to reimburse Cosio de Rama P12,000 for repairs before obtaining possession. The Court of Appeals modified this, declaring Palileo the owner entitled to possession without reimbursement, and ordered petitioners to pay monthly rental of P300 as possessors in bad faith, holding they became such when Palileo filed the ejectment and reformation actions in December 1952.

ISSUE

1. Whether petitioners were possessors in good faith entitled to reimbursement for repair expenses.
2. Whether the prior dismissal of the ejectment case bars the present action.

RULING

1. Petitioners were possessors in bad faith. The Supreme Court held that petitioners never had a right to possession under the pacto de retro sale. The earlier reformation case established that the true intention of the parties was merely to secure a loan with the house as a mortgage. As a mere mortgagee, Cosio de Rama knew from the beginning she was not entitled to possession. Therefore, in entering the premises and making repairs, petitioners acted with knowledge of the flaw in their title, making them possessors in bad faith under Article 526 of the Civil Code. They are jointly liable for rental, fixed at P300 monthly.
However, Cosio de Rama is entitled to reimbursement for necessary expenses. The Court distinguished between a possessor in bad faith and a builder in bad faith. Article 449 (on accession) does not apply, as petitioners did not build a new house but repaired an existing one partly destroyed by fire. Under Article 546, necessary expenses are refundable even to a possessor in bad faith. The P12,000 spent for repairs were necessary to restore the house after the fire and must be reimbursed by Palileo.
2. The present action is not barred by res judicata. The prior ejectment case was dismissed without prejudice for failure to prosecute. Under Rule 40, Section 9 of the Rules of Court, a perfected appeal vacates the inferior court’s judgment, and the case stands for trial de novo in the Court of First Instance as if originally commenced there. Since the dismissal was expressly without prejudice, it does not constitute a final adjudication on the merits and does not bar the filing of this subsequent action.
DISPOSITIVE:
The judgment of the Court of Appeals is AFFIRMED with the modification that respondent Cherie Palileo must reimburse petitioner Beatriz Cosio de Rama the sum of P12,000 for necessary repair expenses. Petitioners are ordered to pay Palileo a monthly rental of P300 for the time they occupied the house as possessors in bad faith. No pronouncement as to costs.