Tongoy vs. Court of Appeals

Absolutely simulated or fictitious contracts are void and inexistent from the beginning; the action or defense for declaration of their inexistence does not prescribe. No implied trust can arise from a void simulated transfer. Where a resulting trust was created to save property from foreclosure, the ten‑year prescriptive period for reconveyance based on an implied trust runs from the time the cestui que trust acquires constructive notice that the purpose of the trust has been accomplished — in this case, the recording of the release of mortgage. Natural children who continuously possess the status of legitimated children and are treated as such by the family may be recognized as legitimate heirs by estoppel, despite the absence of formal acknowledgment under the old Civil Code.

Hacienda Pulo, a 727,650‑square‑meter property in Bacolod City, was originally registered in the names of the five Tongoy siblings — Francisco, Jose, Ana, Teresa, and Jovita — in equal pro‑indiviso shares. Jovita married into the Sonora family; Francisco had children by two marriages, including Luis D. Tongoy, a lawyer. In 1918 the co‑owners mortgaged the hacienda to the Philippine National Bank (PNB) for P11,000. When they defaulted, the PNB commenced judicial foreclosure in 1931. To avert the loss of the family’s primary source of livelihood, the co‑owners agreed to a plan whereby the property would be placed under the administration and name of Luis D. Tongoy, who would negotiate with the bank. The other co‑owners executed simulated deeds of transfer in 1934‑1935, enabling Luis to obtain a restructured loan and new certificates of title in his name. A neighboring parcel, the Cuaycong property, was later acquired and similarly titled in Luis’s name. After the mortgage was fully paid in 1956 and the release recorded in 1958, the co‑owners and their heirs demanded reconveyance, which Luis’s estate refused.

• Co‑ownership of Hacienda Pulo: Lot No. 1397 (Hacienda Pulo), containing 727,650 sq m, was originally registered under Original Certificate of Title No. 2947 in the names of Francisco, Jose, Ana, Teresa, and Jovita Tongoy, all children of Juan Aniceto Tongoy, in equal pro‑indiviso shares. Jose, Ana, and Teresa died without issue. Francisco Tongoy left six children — Patricio and Luis by a first marriage, and Amado, Ricardo, Cresenciano, and Norberto by a second union with Antonina Pabello. Jovita Tongoy de Sonora left four children: Mercedes, Juan, Jesus, and Trinidad.

• The Mortgage and Foreclosure Threat: On April 17, 1918, the co‑owners mortgaged Hacienda Pulo to the PNB for P11,000, payable in ten years at 8% interest. Default occurred, and on June 18, 1931, the PNB instituted judicial foreclosure. The case reached the Supreme Court, which affirmed the right to foreclose on July 31, 1935.

• The Simulated Transfers to Luis D. Tongoy: To save the property, the co‑owners agreed to place administration in the hands of Luis D. Tongoy, a newly licensed lawyer. Purportedly because the bank preferred to deal with a single person, the co‑owners executed notarized “Escritura de Venta” deeds transferring their shares to Luis in 1934‑1935. The consideration was nominal (e.g., P100 for Jose Tongoy’s share). Luis D. Tongoy obtained a restructured loan of P21,000 secured by a mortgage over the hacienda and had Transfer Certificate of Title No. 20154 issued in his name on November 8, 1935. The adjacent Cuaycong property (Lot No. 1395, 163,754 sq m) was also acquired and titled in his name under TCT No. 21522 on June 22, 1936, through a deed from Basilisa Cuaycong for P4,000; it was likewise mortgaged to the PNB.

• Payment of Mortgage and Demand: The PNB mortgage obligations were fully paid on April 17, 1956, but the release of mortgage was not recorded until May 5, 1958. Luis D. Tongoy died on February 5, 1966, shortly after receiving a demand letter from Jesus T. Sonora dated January 26, 1966, for the return of the co‑owners’ shares. His estate, represented by his son Francisco A. Tongoy and widow Ma. Rosario Araneta, refused to reconvey.

• Status of the Respondents‑Tongoy: Amado, Ricardo, Cresenciano, and Norberto were born to Antonina Pabello before her marriage to Francisco Tongoy; the parents married sometime before Francisco’s death on September 15, 1926. The children were raised in the family home, supported by the clan, and treated as legitimate. Luis D. Tongoy and Patricio D. Tongoy executed an extrajudicial declaration of heirship in 1933 omitting these half‑brothers, who were then minors.

• No Trust Constituted on Hacienda Pulo: Petitioners maintained that the deeds of transfer were genuine sales for valuable consideration and that no trust — express or implied — existed between the co‑owners and Luis D. Tongoy.

• No Trust Over Cuaycong Property: Petitioners argued that the Cuaycong property was bought by Luis D. Tongoy with his own funds, not by Jose Tongoy, and therefore was not impressed with any trust.

• Prescription and Laches: Even assuming an implied trust, petitioners contended that the action for reconveyance had prescribed, as the ten‑year prescriptive period under Act No. 190 should be counted from the registration of the titles in 1935 and 1936, or that the claim was barred by laches.

• Respondents‑Tongoy Not Legitimated: Petitioners asserted that Amado, Ricardo, Cresenciano, and Norberto were never acknowledged by Francisco Tongoy in any mode recognized by the Spanish Civil Code; thus, the subsequent marriage of their parents did not produce legitimation, and they had no right to inherit.

• Prescription of Respondents‑Tongoy’s Action: Granting they were legitimated, petitioners argued their action had nonetheless prescribed.

• Attorney’s Fees Improper: Petitioners claimed the award of P20,000.00 attorney’s fees was unjustified.

• Execution Pending Appeal Unjustified: Petitioners assigned as error the appellate court’s declaration that execution pending appeal in favor of the respondents‑Tongoy was proper.

• Simulated Transfers and Trust: Respondents countered that the transfers were absolutely simulated, executed solely to restructure the mortgage and prevent foreclosure. They argued that an express trust agreement existed (a contra‑documento) or, in the alternative, that the circumstances created an implied trust.

• Imprescriptibility of Action: Respondents maintained that an action to recover trust property held by a trustee is imprescriptible; the trustee’s possession is that of the cestui que trust and cannot ripen into title by prescription. They also invoked Article 1410 of the Civil Code, arguing that the action to declare the inexistence of simulated contracts does not prescribe.

• Liberal Interpretation of Legitimation: Respondents relied on their continuous possession of the status of natural children and the fact that they were treated as legitimate by the entire Tongoy‑Sonora clan, including Luis D. Tongoy. They invoked estoppel and the liberal policy of the New Civil Code to support their right to inherit.

• Attorney’s Fees: Respondents asserted that they were compelled to litigate to enforce their rights, justifying the award.

• Validity of Transfers: Whether the conveyances to Luis D. Tongoy were absolutely simulated and void, rendering the action for reconveyance imprescriptible under Article 1410 of the Civil Code.

• Prescription under Implied Trust: Assuming an implied trust existed, whether the action for reconveyance was barred by the ten‑year prescriptive period or by laches.

• Commencement of Prescriptive Period: From what point should the prescriptive period be counted — from the registration of titles in the name of Luis D. Tongoy in 1935/1936, or from the recording of the release of mortgage on May 5, 1958.

• Status of Respondents‑Tongoy: Whether respondents Amado, Ricardo, Cresenciano, and Norberto Tongoy, born out of wedlock, were legitimated by the subsequent marriage of their parents and entitled to inherit despite the absence of formal acknowledgment; and whether their action had prescribed.

• Attorney’s Fees: Whether the award of P20,000.00 as attorney’s fees was proper.

• Validity of Transfers: The deeds of transfer were absolutely simulated because the parties did not intend to transfer ownership but merely to clothe Luis D. Tongoy with the appearance of sole ownership to facilitate restructuring of the mortgage. Under Article 1409(2) of the Civil Code, absolutely simulated contracts are void and inexistent from the beginning. Consequently, the action or defense for declaration of their inexistence does not prescribe, pursuant to Article 1410. Being void ab initio, the simulated transfers could not give rise to any implied trust.

• Prescription under Implied Trust: Even if the simulated transfers were treated as giving rise to an implied or resulting trust, the action for reconveyance based on such a trust prescribes in ten years under Act No. 190, the statute of limitations applicable to the pre‑Civil Code trust. The complaint, however, was filed within that period.

• Commencement of Prescriptive Period: The ten‑year prescriptive period was correctly reckoned from May 5, 1958 — the date the release of mortgage was recorded in the Registry of Deeds. Only from that moment could the cestui que trust be charged with constructive knowledge that the mortgage obligations had been discharged and that the purpose for which the trust was constituted had been achieved. Counting from the registration of titles in the trustee’s name in 1935/1936 would frustrate the very object of the arrangement. The complaint filed on June 2, 1966 fell comfortably within the ten‑year window.

• Status of Respondents‑Tongoy: The respondents‑Tongoy were entitled to inherit as legitimated children. The evidence overwhelmingly demonstrated that they had continuously possessed the status of acknowledged natural children — they were raised within the family, supported by Luis D. Tongoy, and treated as legitimate by the entire Tongoy‑Sonora clan. Under these circumstances, the heirs of Luis D. Tongoy were estopped from attacking their status on the technical ground that formal acknowledgment was lacking. The Court adopted a liberal view consistent with equity and the more compassionate trend of the New Civil Code, holding that the right to participate in their father’s inheritance should be recognized. Moreover, an action for partition among co‑heirs does not prescribe under Article 1965 of the Spanish Civil Code, and the prescriptive period for any fraud‑based claim could not have begun until the mortgage was released and reconveyance refused.

• Attorney’s Fees: The award of P20,000.00 attorney’s fees was proper because the respondents were compelled to litigate to protect their rights, and equity warranted the recovery.

• Absolute simulation and imprescriptibility — A contract is absolutely simulated when the parties do not intend to be bound by it and merely create a fictitious appearance. Such a contract is void and inexistent from the beginning under Article 1409(2), Civil Code. It cannot be ratified, nor can the defense of nullity be waived. Under Article 1410, the action or defense for declaration of its inexistence does not prescribe. Void simulated transfers produce no legal effect and cannot generate an implied trust.

• Prescription of action based on implied trust — Under the Code of Civil Procedure (Act No. 190), an action for reconveyance based on an implied or constructive trust prescribes in ten years. The prescriptive period does not run from registration in the trustee’s name where the trust was constituted for a specific purpose (e.g., to restructure a mortgage and save the property from foreclosure); it commences only when the cestui que trust acquires constructive notice that the purpose has been fulfilled — here, upon the recording of the release of mortgage.

• Estoppel and legitimation by continuous possession of status — When children have been in continuous possession of the status of natural or legitimated children, are treated as such by the entire family including the decedent’s other heirs, and the parents subsequently marry, the heirs are estopped from challenging their legitimation on purely technical grounds of absent formal acknowledgment. A liberal construction of legitimation laws is warranted to prevent patent injustice.

• Imprescriptibility of action for partition among co‑heirs — Under Article 1965 of the Spanish Civil Code, an action to demand partition of inheritance among co‑heirs does not prescribe. Co‑heirs who remain in possession are deemed administrators for the benefit of the other co‑heirs.

• “Under Article 1410 of the Civil Code, ‘the action or defense for declaration of the inexistence of a contract does not prescribe.’” — This crystallizes the rule that simulated deeds, being void from the beginning, can be attacked at any time.

• “There is no implied trust that was generated by the simulated transfers; because being fictitious or simulated, the transfers were null and void ab initio — from the very beginning and thus vested no rights whatsoever in favor of Luis Tongoy or his heirs. That which is inexistent cannot give life to anything at all.”

• “Thus, the ten-year prescriptive period should not be counted from the date of registration in the name of the trustee … Rather, it should be counted from the date of recording of the release of mortgage in the Registry of Deeds, on which date May 5, 1958 — the cestui que trust were charged with the knowledge of the settlement of the mortgage obligation, the attainment of the purpose for which the trust was constituted.”

• “It is time that We, too, take a liberal view in favor of natural children who, because they enjoy the blessings and privileges of an acknowledged natural child and even of a legitimated child, found it rather awkward, if not unnecessary, to institute an action for recognition against their natural parents … The right to participate in their father’s inheritance should necessarily follow.”

• Eugenio vs. Perdido, 97 Phil. 41 — Followed; an action for declaration of inexistence of a void contract does not prescribe, a principle recognized since Tipton vs. Velasco.

• Guiang vs. Kintanar, 106 SCRA 49 — Followed; reiterated that contracts under Art. 1409 cannot be ratified and the action for declaration of inexistence does not prescribe.

• Bueno vs. Reyes, 27 SCRA 1179 — Followed; the prescriptive period for enforcement of an implied trust is ten years under the old Code of Civil Procedure, because only express continuing and subsisting trusts are imprescriptible.

• J.M. Tuazon & Co., Inc. vs. Magdangal, 4 SCRA 84 — Followed; distinguished between express unrepudiated trusts (imprescriptible) and implied or constructive trusts (prescriptible in ten years).

• Ramos vs. Ramos — Followed; applied estoppel to prevent heirs from attacking the status of acknowledged natural children who had been continuously treated as such.

• Villaluz vs. Neme, 7 SCRA 27 — Followed; under the Spanish Civil Code, the action to demand partition among co‑heirs does not prescribe.

• Articles 1409(2) and 1410, New Civil Code — Absolutely simulated or fictitious contracts are void and inexistent from the beginning. The action or defense for declaration of their inexistence does not prescribe. Applied to declare the simulated deeds of transfer void ab initio and to hold that the action for reconveyance was not barred by time.

• Article 1453, New Civil Code — Defines when an implied trust arises. Although the transfers were void simulations, the Court alternatively assumed an implied trust for the sake of argument and applied prescription rules.

• Article 121, Spanish Civil Code — Required acknowledgment of natural children before or after marriage for legitimation. The Court relaxed its formal application on grounds of estoppel and equity.

• Article 1965, Spanish Civil Code — Action for partition of inheritance among co‑heirs does not prescribe. Applied to the respondents‑Tongoy’s claim to their father’s share.

• Act No. 190 (Code of Civil Procedure), Sections 38 and 40 — Section 38 exempted continuing or subsisting express trusts from prescription; Section 40 provided a ten‑year prescriptive period for actions to recover real property. Used to determine the prescriptive period for an implied trust, had one existed.

• Section 20(a), Rule 130, Rules of Court — Survivorship disqualification rule. Barred testimony of interested parties regarding statements or agreements with the deceased Luis D. Tongoy, but did not bar testimony that no consideration was paid.

Guerrero and Escolin, JJ., concurred. Aquino and Abad Santos, JJ., concurred in the result. Concepcion, Jr., and De Castro, JJ., took no part.

N/A — There were no dissenting opinions.