G.R. No. L-47544. January 28, 1980.
PEPITO VELASCO, AMABLE LUMANLAN, RAMON GALANG, FELIPE LUMBANG and APOLONIO DE LOS SANTOS, petitioners, vs. COURT OF APPEALS and GOVERNMENT SERVICE INSURANCE SYSTEM, respondents.

FACTS

The petitioners, led by Amable Lumanlan, were contractors who constructed houses on a property originally owned by Alta Farms, which was mortgaged to the GSIS. After Alta Farms defaulted, it sold the property to Asian Engineering Corporation, which then engaged Laigo Realty Corporation to develop it into a subdivision. Laigo contracted with petitioner Lumanlan to build houses. The GSIS, as mortgagee, did not approve these transactions. When the GSIS eventually foreclosed on the property, the petitioners filed an action in the Court of First Instance of Pampanga to recover the value of their improvements. The trial court ruled in favor of the petitioners. The GSIS filed a motion for new trial, which the trial court denied as pro-forma, subsequently declaring its judgment final and executory.
The Court of Appeals reversed the trial court, holding the GSIS’s motion for new trial was not pro-forma and thus suspended the period to appeal, making the decision still appealable. The petitioners then elevated the case to the Supreme Court via certiorari, challenging this procedural ruling. However, the Supreme Court, noting the comprehensive pleadings and to serve substantial justice, decided to treat the petition as an appeal on the merits under Republic Act 5440, bypassing the purely procedural issue to resolve the underlying controversy.

ISSUE

The core issue is whether the petitioners-contractors have a valid claim against the GSIS for the value of the improvements they built on the mortgaged property.

RULING

The Supreme Court ruled against the petitioners, affirming the substantive position of the GSIS. The legal logic is anchored on property law principles governing mortgages and the rights of builders in good faith. A mortgage directly subjects the property to the lien for the security of the creditor. The petitioners’ claim arises from contracts with Laigo Realty, which was not the owner but a mere developer acting without the consent of the mortgagee-GSIS. The GSIS’s mortgage lien attached to the property and all its accessions and improvements. Since the petitioners built the houses with knowledge of the GSIS’s existing mortgage and without its authorization, they cannot be considered builders in good faith. Consequently, they have no right of retention or reimbursement against the mortgagee-GSIS, which acquired the property through foreclosure. Their recourse lies solely against their immediate contractors, Laigo Realty and Asian Engineering, with whom they privity of contract exists. The Court held that allowing such claims against the GSIS would unjustly enrich the petitioners at the expense of the mortgagee’s superior lien and would undermine the security function of a mortgage. Thus, the decision of the Court of Appeals was sustained, albeit on substantive rather than procedural grounds.