G.R. No. 176425 . January 25, 2012.
HEIRS OF MANUEL UY EK LIONG, represented by BELEN LIM VDA. DE UY, Petitioners, vs. MAURICIA MEER CASTILLO, HEIRS OF BUENAFLOR C. UMALI, represented by NANCY UMALI, VICTORIA H. CASTILLO, BERTILLA C. RADA, MARIETTA C. CAVANEZ, LEOVINA C. JALBUENA and PHILIP M. CASTILLO, Respondents.

FACTS

Respondents, heirs of Felipe Castillo, owned four parcels of land. The properties were sold at public auction to Insurance Corporation of the Philippines (ICP), which later sold them to Philippine Machinery Parts Manufacturing Co., Inc. (PMPMCI). On September 29, 1976, respondents (and Buenaflor Umali) filed Civil Case No. 8085 to annul these transactions and the titles issued to PMPMCI. Due to financial difficulties in prosecuting the case, respondents entered into an Agreement dated September 20, 1978 with Atty. Edmundo Zepeda (for legal services) and Manuel Uy Ek Liong (as financier for litigation expenses). The Agreement stipulated that in the event of a favorable decision, Atty. Zepeda and Manuel would be entitled to 40% of all realties and/or monetary benefits awarded to respondents. On the same date, respondents also executed a Kasunduan (agreement) to sell their remaining 60% share in the properties to Manuel for ₱180,000.00, with a ₱1,000.00 downpayment, and respondents retaining a 1,750-square meter portion. The Kasunduan included a penalty clause of ₱50,000.00 for violation.
Manuel Uy Ek Liong died on August 19, 1989, survived by petitioners. Civil Case No. 8085 culminated in a Supreme Court Decision dated September 13, 1990 ( G.R. No. 89561 ) in favor of respondents. After the decision became final, the properties were subdivided: 60% (31,983 sq m) registered in the names of respondents, and 40% (21,324 sq m) registered in the names of petitioners and Atty. Zepeda.
In 1993, respondents offered to sell their 60% share to petitioners for ₱500.00 per square meter. Petitioners insisted on the price in the Kasunduan (₱180,000.00 for the 60% share) and demanded execution of a deed of sale. Respondents refused. Petitioners filed a complaint for specific performance and damages. Respondents contended that both the Agreement and the Kasunduan were illegal, unconscionable, and contrary to public policy. The Regional Trial Court (RTC) ruled in favor of petitioners, upholding the Kasunduan as valid and binding. The Court of Appeals reversed the RTC, declaring both the Agreement and the Kasunduan void ab initio for being contrary to law and public policy. Petitioners elevated the case to the Supreme Court via a Petition for Review on Certiorari.

ISSUE

Whether the Agreement and the Kasunduan are valid and enforceable contracts.

RULING

The Supreme Court DENIED the petition and AFFIRMED the Court of Appeals Decision.
1. The Agreement is Void. The Agreement constituted a champertous contract, which is prohibited. A champertous contract is one where a lawyer agrees to carry on a suit in exchange for a share of the proceeds. The Agreement provided that Atty. Zepeda and Manuel Uy Ek Liong would receive 40% of the properties or monetary benefits recovered in the litigation. This arrangement is against public policy because it encourages speculation in lawsuits, promotes unnecessary litigation, and compromises the lawyer’s duty to act with competence and diligence for the client’s best interest, free from personal financial stake in the outcome. The Court cited Rule 138, Section 19 of the Rules of Court and Canon 10, Rule 10.01 of the Code of Professional Responsibility, which prohibit lawyers from acquiring an interest in the subject matter of litigation. The Agreement was therefore void ab initio.
2. The Kasunduan is Inextricably Linked to the Void Agreement and is Also Void. The Kasunduan was executed on the same date as the Agreement and was part of a single scheme or package. The consideration for the sale under the Kasunduan (₱180,000.00 for the 60% share) was grossly inadequate, amounting to only about ₱5.63 per square meter, while the contemporaneous market value was much higher. This gross inadequacy of price indicated that the Kasunduan was not a true sale but a means to effectuate the illegal sharing arrangement under the void Agreement. The Kasunduan’s validity was dependent on the success of the litigation financed under the void Agreement. Consequently, the Kasunduan, being ancillary to the illegal Agreement, shared its illegality and was also void.
3. No Rights Can Be Derived from a Void Contract. Since both contracts were void from the beginning, they produced no legal effect. Petitioners could not demand specific performance based on the void Kasunduan. The registration of the 40% share under TCT No. T-72026 in the names of petitioners and Atty. Zepeda, being a direct result of the void Agreement, conferred no valid title.
4. Disposition. The Supreme Court affirmed the Court of Appeals’ ruling declaring the Agreement and the Kasunduan void ab initio. The Court noted that this decision was without prejudice to Atty. Zepeda filing a proper action for the collection of reasonable attorney’s fees based on quantum meruit for services actually rendered. It was also without prejudice to the filing of administrative charges against Atty. Zepeda for violating the Canons of Professional Responsibility.