G.R. No. 201070, August 1, 2016
LUZ S. NICOLAS, Petitioner vs. LEONORA C. MARIANO, Respondent

FACTS

The subject of the controversy is a one-half portion of a parcel of land in Caloocan City, part of an NHA Bagong Barrio Project grant to respondent Leonora C. Mariano. The grant was subject to a mortgage and a proviso prohibiting its transfer or encumbrance within five years from the release of the mortgage without NHA’s prior written consent. Mariano obtained a loan from petitioner Luz S. Nicolas secured by a mortgage over the subject property. After defaulting, Mariano executed a second mortgage deed (“Sanglaan ng Lupa at Bahay”) for an increased amount, which contained a stipulation that if the debt was not paid, the property would be considered sold to Nicolas. Subsequently, upon another default, Mariano executed a Deed of Absolute Sale over the property to Nicolas. From June 1999 to June 2004, Nicolas collected rentals from Mariano’s apartment units on the property, amounting to ₱600,000. Mariano filed a complaint seeking release from the mortgage agreements, alleging full payment of her debt through the collected rentals, and prayed for damages. The Regional Trial Court ruled in favor of Mariano, declaring the deed of sale invalid due to lack of consideration and consent, and ordered the cancellation of the mortgages, the return of excess rental collections, and the payment of damages. The Court of Appeals reversed the RTC decision, applying the principle of “in pari delicto.” The CA found that both parties were at fault: Mariano for mortgaging and selling property she did not yet fully own (as the NHA mortgage was unpaid and the prohibition period was not lifted) and Nicolas for knowingly entering into such agreements. The CA left the parties as they were at the time of filing and deleted the award of damages.

ISSUE

Whether the Court of Appeals correctly applied the principle of “in pari delicto,” thereby denying both parties’ claims for affirmative relief and leaving them as they were at the time the case was filed.

RULING

Yes. The Supreme Court affirmed the decision of the Court of Appeals. The principle of “in pari delicto” applies when both parties are equally at fault or in equal fault. In such a case, neither party can obtain positive relief from the courts, and they shall be left in the situation they were at the time the case was filed. The Court found that both parties were not in good faith. Mariano mortgaged and sold property that was still subject to an unpaid NHA mortgage and a contractual prohibition against transfer without consent. Nicolas, on the other hand, knowingly entered into mortgage and sale agreements over such encumbered property. Therefore, both parties were in pari delicto. Consequently, the Court denied the petition and affirmed the CA’s ruling, which set aside the RTC’s orders for cancellation of mortgages, reimbursement, and payment of damages, leaving the parties as they were.