G.R. No. 142310 ; September 20, 2004
ARRA REALTY CORPORATION and SPOUSES CARLOS ARGUELLES and REMEDIOS DELA RAMA ARGUELLES, petitioners, vs. GUARANTEE DEVELOPMENT CORPORATION AND INSURANCE AGENCY and ENGR. ERLINDA PEÑALOZA, respondents.

FACTS

Arra Realty Corporation (ARC), through its president Carlos Arguelles, agreed to sell a portion of the second floor of its building to its project engineer, Erlinda Peñaloza, in 1982. Payments were to be credited to her stock subscription. Peñaloza took possession, paid over ₱1.1 million, and operated a school there. Unknown to her, ARC mortgaged the entire property to China Banking Corporation in May 1983. Upon discovering the mortgage in July 1984, Peñaloza stopped payments, proposed to assume the proportionate loan, and filed an adverse claim on the title in November 1984. ARC defaulted on its loan, leading to foreclosure and a public auction sale to the bank in 1986.
In 1987, ARC entered a Deed of Conditional Sale with Guarantee Development Corporation and Insurance Agency (GDCIA) to redeem and then sell the property. GDCIA redeemed it, and a Deed of Absolute Sale was executed, with GDCIA retaining ₱1 million of the purchase price to cover potential claims from occupants like Peñaloza. TCT was issued to GDCIA free of liens. Peñaloza sued ARC, GDCIA, and the Arguelles spouses for specific performance or damages. The trial court ruled for Peñaloza against ARC and the spouses, ordering them to pay damages, but dismissed the case against GDCIA, declaring it a buyer in good faith. The Court of Appeals affirmed.

ISSUE

Whether the Court of Appeals erred in affirming the trial court’s decision which: (1) held petitioners liable to Peñaloza; (2) declared GDCIA a purchaser in good faith; and (3) refused to declare the deeds between ARC and GDCIA rescinded.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals. On the first issue, petitioners’ liability to Peñaloza was established. ARC, through Carlos Arguelles, entered into a contract of sale with Peñaloza but subsequently mortgaged the property without her knowledge, constituting a breach of contract. Her action for specific performance converted to one for damages due to the foreclosure and subsequent sale to a third party. The Court found no merit in petitioners’ claim that the contract was merely a stock subscription agreement; the clear terms indicated a sale of a specific portion of the building.
On the second issue, GDCIA was correctly declared a purchaser in good faith. GDCIA relied on the clean title presented by ARC after the redemption from foreclosure. The adverse claim filed by Peñaloza had already been cancelled prior to the sale to GDCIA. Furthermore, GDCIA exercised due diligence by retaining part of the purchase price to answer for any claims from occupants, which negates any finding of bad faith or conspiracy with ARC.
On the third issue, the Court found no basis to rescind the deeds between ARC and GDCIA. The Deed of Conditional Sale obligated ARC to deliver the property free of occupants, and the subsequent Deed of Absolute Sale contained similar warranties. GDCIA’s act of retaining ₱1 million was a prudent measure directly responsive to ARC’s breach of its warranty, not a ground for rescission by the petitioners who were the breaching parties. The petitioners failed to fulfill their contractual obligations to GDCIA.