G.R. No. L-18452 May 20, 1966
AUGUSTO COSIO and BEATRIZ DE RAMA, petitioners, vs. CHERIE PALILEO, respondent.

FACTS

Petitioners Augusto Cosio and Beatriz de Rama (Cosio de Rama) filed a motion for reconsideration of a decision declaring Cosio de Rama a possessor in bad faith of a house, with an obligation to pay rental for its use. The dispute originated from a transaction between Cosio de Rama and respondent Cherie Palileo, which was previously adjudged by the Court in Palileo v. Cosio (97 Phil. 919 [1955]) to be an equitable mortgage, not a conditional sale. Petitioners contended that Cosio de Rama could not have known she was not entitled to possession before that 1955 decision, citing letters where Palileo referred to the transaction as a sale and to Cosio de Rama as the “temporary owner.” They also argued that Cosio de Rama, as mortgagee, could be given possession of the mortgaged property without altering the contract’s nature, citing Legaspi v. Celestial. The Court found that the parties’ true agreement was a mortgage, and as such, Cosio de Rama, as mortgagee, knew she was not entitled to possession. The Court rejected the claim of a mortgagee in possession, noting the parties stipulated for monthly interest (disguised as rent), and emphasized that a simple mortgage does not confer possession rights unless specially provided. Petitioners also argued they had rights to possession due to abandonment or after condition broken, but the Court found these contrary to facts and law. The Court modified its decision, ruling that bad faith and liability for rents started only from December 15, 1955, when the Palileo v. Cosio decision became final.

ISSUE

Whether petitioner Beatriz de Rama (Cosio de Rama) is a possessor in bad faith of the house and thus liable to pay rental for its use.

RULING

Yes, but modified. The Court denied the motion for reconsideration but modified its decision regarding the start of liability. Cosio de Rama is a possessor in bad faith, but her bad faith commenced only on December 15, 1955, the date the decision in Palileo v. Cosio became final. Prior to that, she was a possessor in good faith, acting under the honest belief she was entitled to possession under the “conditional sale” contract. The Court held that the nature of the transaction as an equitable mortgage existed from its inception, and as a mortgagee, Cosio de Rama was not entitled to possession unless specially agreed. The Court rejected arguments that she was a mortgagee in possession, as the parties stipulated for interest payments, and no agreement allowed possession in lieu of interest. The Court also found no right to possession based on abandonment or broken condition, as the facts did not support these. Consequently, Cosio de Rama is liable for rents from December 15, 1955, onwards, as a possessor in bad faith.