G.R. No.

138971 June 6, 2001

PHILIPPINE ECONOMIC ZONE AUTHORITY (PEZA), petitioner,

PANGANIBAN, J.:

An action for reconveyance of land, an equitable remedy recognized under our land registration laws, is
subject to the applicable rules on prescription. Moreover, the right to pursue such reivindicatory action
may be defeated when the property sought to be recovered has been conveyed to an innocent purchaser
for value.

The Case

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking to set
aside the June 8, 1999 Decision1 of the Court of Appeals (CA) in CA-GR SP No. 47575. In the said Decision,
the CA sustained the January 12, 19982 and the March 31, 19983 Orders of the Regional Trial Court of
Lapu-Lapu City (Branch 54) in Civil Case No. 4534-L, which denied petitioner’s Motion to Dismiss and
Motion for Reconsideration, respectively. The dispositive portion of the CA Decision reads as follows:

"WHEREFORE, [there being] no abuse of discretion committed by respondent court, the instant petition
is hereby DISMISSED."

The Facts

The subject of the present controversy is Lot No. 4673 of the Opon Cadastre situated in Lapu-Lapu City,
covered by Original Certificate of Title (OCT) No. RO-2537 (May 19, 1982) and registered in the names of
Florentina Rapaya, Victorino Cuizon, Isidro Cuizon, Ursula Cuizon, Benito Lozano, Isabel Lozano, Pelagia
Lozano, Augusto Lozano, Valeriano Ybañez, Jesus Ybañez, Numeriano Ybañez, Martino Ybañez, Eutiquio
Patalinghug, Celedonio Patalinghug, Santiago Patalinghug and Silvino Patalinghug. The lot has an area of
11,345 square meters, more or less.

On May 15, 1982, Jorgea Igot-Soroño, Frisca Booc and Felix Cuizon executed an Extrajudicial Partition, in
which they declared themselves as the only surviving heirs of the registered owners of the aforesaid lot.
Consequently, they were issued TCT No. 12467 on July 8, 1982.

Considering that the said lot was among the objects of expropriation proceedings docketed as Civil Case
No 510-L and pending before it, Branch XVI of the Regional Trial Court (RTC) of Lapu-Lapu City rendered a
partial Decision on August 11, 1982. In that Decision, the RTC approved the Compromise Agreement
entered into between the Export Processing Zone Authority (EPZA) and the new registered owners of Lot
No. 4673; namely, Jorgea Igot-Soroño, Frisca Booc and Felix Cuizon. In accordance with the approved
Compromise Agreement, EPZA would pay P68,070 as just compensation for the expropriation of the
subject property, which was to be used for an export processing zone to be established in Lapu-Lapu City.

As a consequence of the RTC Decision, petitioner acquired title over Lot No. 4673 and the corresponding
Transfer Certificate of Title (TCT) No. 12788 issued by the Register of Deeds of Lapu-Lapu City on October
13, 1982.
On July 29, 1996, private respondents filed with the RTC of Lapu-Lapu City a Complaint for Nullity of
Documents, Redemption and Damages against petitioner and Jorgea-Igot Soroño et al. Docketed as Civil
Case No. 4534-L, the Complaint alleged that herein private respondents had been excluded from the
extrajudicial settlement of the estate. It likewise sought the nullification of several documents, including
TCT No. 12788 dated October 13, 1992, issued in the name of herein petitioner.

On February 17, 1997, petitioner filed a Motion to Dismiss the Complaint on the ground of prescription.
This Motion was denied by respondent judge in the Order dated January 12, 1998. A Motion for
Reconsideration thereof was likewise denied in the Order dated March 31, 1998.

On April 30, 1998, petitioner elevated the matter to the Court of Appeals through a Petition for Certiorari.
As earlier noted, the CA dismissed the Petition.

Hence, this recourse.4

The CA Ruling

In denying the Petition, the CA ratiocinated as follows:

"Civil Case No. 4534-L although instituted in the guise of a complaint for Nullity of Documents,
Redemption and Damages is in effect an action for reconveyance of the property to plaintiffs of a portion
which rightfully belong to them. It would be against good reason and conscience not to hold that
defendants, Francisca ‘Frisca’ Booc, heirs of deceased Jorg[e]a Igot-Soronio and heirs of Felix Cuizon
committed a breach of trust which enabled them to execute a Deed of Extrajudicial Partition[,] Special
Power of Attorney and Deed of Absolute Sale in favor of EPZA to the prejudice of the plaintiffs as their co-
heirs. Therefore, in an action like this case, the private respondents may be ordered to make reconveyance
of the property to the person rightfully entitled to it.

"It is undeniable that defendants defrauded plaintiffs by falsely representing that they were the only heirs
of deceased Juan Cuizon and Florentina Rapaya, succeeded in having the original title cancelled and
enabling them to appropriate the land in favor of EPZA and a new one issued in the name of the latter
(EPZA). This way of acquiring title create[s] what is called ‘constructive trust’ in favor of the defrauded
party and grants the latter the right to vindicate [itself] x x x regardless of the lapse of time. Thus, it has
been held that if a person obtain(s) a legal title to the property by fraud or concealment, courts of equity
will impress upon the title a so called ‘trust’ in favor of the defrauded party. In fact, it has long been held
that a co-heir who through fraud, succeeds in obtaining a certificate of title in his name to the prejudice
of his co-heirs, is deemed to hold the land in trust for the latter. The excluded heir’s action is
imprescriptible.

"And if the action involve(s) the declaration of the nullity or inexistence of a void or inexistent contract
which became the basis for the fraudulent registration of the subject property, then the action is
imprescriptible. This finds codal support in Article 1410 of the Civil Code, which declares that the action
or defense for the declaration of the inexistence of a void contract does not prescribe.

"As to the constructive notice rule alleged by the petitioner, (the) Supreme Court in the case of Juan vs.
Zuniga, citing Sevilla vs. Angeles, has this to say:

'While this ruling is correct as applied to ordinary actions by recovery of real property which is covered by
a torrens title upon the theory that its registration under our registration system has the effect of
constructive notice to the whole world, the same cannot be applied x x x when the purpose of the action
is to compel a trustee to convey the property registered in his name for the benefit of the cestui que trust.
In other words, the defense of prescription cannot be set up in an action whose purpose is to recover
property held by a person for the benefit of another.’

The Issues

Petitioner interposes the following issues for the consideration of this Court:

"I

Whether or not the appellate court erred in not holding that private respondents’ claim against
expropriated property had prescribed.

"II

Whether or not the appellate court erred in not holding that reconveyance does not lie against the
expropriated property."5

The Court’s Ruling

The Petition is meritorious.

First Issue:
Prescription

Petitioner avers that private respondents’ claim against the subject property has already prescribed,
because the two-year period within which an unduly excluded heir may seek a new settlement of the
estate had already lapsed by the time private respondents filed their action with the trial court. Petitioner
further argues that private respondents received constructive notice in view of the registration of the
extrajudicial partition with the Registry of Deeds. According to petitioner, the two-year period
commenced from July 8, 1982, the date of inscription of the extrajudicial settlement on OCT No. 2537.

The pertinent provisions of Section 4, Rule 74 of the Rules of Court, are reproduced for easy reference, as
follows:

"Section 4. Liability of distributees and estate. - If it shall appear at any time within two (2) years after the
settlement and distribution of an estate in accordance with the provisions of either of the first two sections
of this rule, that an heir or other person has been unduly deprived of his lawful participation in the estate,
such heir or such other person may compel the settlement of the estate in the courts in the manner
hereinafter provided for the purpose of satisfying such lawful participation. And if within the same time of
two (2) years, it shall appear that there are debts outstanding against the estate which have not been
paid, or that an heir or other person has been unduly deprived of his lawful participation payable in
money, the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle the
amount of such debts or lawful participation and order how much and in what manner each distributee
shall contribute in the payment thereof, and may issue execution, if circumstances require, against the
bond provided in the preceding section or against the real estate belonging to the deceased, or both. Such
bond and such real estate shall remain charged with a liability to creditors, heirs, or other persons for the
full period of two (2) years after such distribution, notwithstanding any transfers of real estate that may
have been made." (Emphasis supplied)
A perusal of the foregoing provision will show that persons unduly deprived of their lawful participation
in a settlement may assert their claim only within the two-year period after the settlement and
distribution of the estate. This prescription period does not apply, however, to those who had no part in
or had no notice of the settlement. Section 4, Rule 74 of the Rules of Court, is not meant to be a statute of
limitations. Moreover, by no reason or logic can one contend that an extrajudicial partition, being merely
an ex parte proceeding, would affect third persons who had no knowledge thereof.6 Be that as it may, it
cannot be denied, either, that by its registration in the manner provided by law, a transaction may be
known actually or constructively.

In the present case, private respondents are deemed to have been constructively notified of the
extrajudicial settlement by reason of its registration and annotation in the certificate of title over the
subject lot. From the time of registration, private respondents had two (2) years or until July 8, 1984,
within which to file their objections or to demand the appropriate settlement of the estate.

On the matter of constructive notice vis-à-vis prescription of an action to contest an extrajudicial partition,
a leading authority on land registration elucidates as follows:

"While it may be true that an extrajudicial partition is an ex parte proceeding, yet after its registration
under the Torrens system and the annotation on the new certificate of title of the contingent liability of
the estate for a period of two years as prescribed in Rule 74, Section 4, of the Rules of Court, by operation
of law a constructive notice is deemed made to all the world, so that upon the expiration of said period all
third persons should be barred [from going] after the particular property, except where title thereto still
remains in the names of the alleged heirs who executed the partition tainted with fraud, or their
transferees who may not qualify as ‘innocent purchasers for value’. If the liability of the registered
property should extend indefinitely beyond that period, then such constructive notice which binds the
whole world by virtue of registration would be meaningless and illusory. x x x."7 (Emphasis supplied)

The only exception to the above-mentioned prescription is when the title remains in the hands of the
heirs who have fraudulently caused the partition of the subject property or in those of their transferees
who cannot be considered innocent purchasers for value.

In this regard, title to the property in the present case was no longer in the name of the allegedly
fraudulent heirs, but already in that of an innocent purchaser for value – the government. Moreover, the
government is presumed to have acted in good faith in the acquisition of the lot, considering that title
thereto was obtained through a Compromise Agreement judicially approved in proper expropriation
proceedings.

Even assuming that there was in fact fraud on the part of the other heirs, private respondents may
proceed only against the defrauding heirs, not against petitioner which had no participation in or
knowledge of the alleged fraud. The fact that the co-heirs’ title to the property was fraudulently secured
cannot prejudice the rights of petitioner which, absent any showing that it had knowledge or participation
in the irregularity, is considered a purchaser in good faith and for value.8

The remedy of an owner alleged to have been prejudiced or fraudulently deprived of property that was
subsequently sold to an innocent purchaser for value is an action for damages against the person or
persons who perpetrated the fraud.9
Second Issue:
Limitations on Reconveyance

The law recognizes the right of a person, who, by adjudication or confirmation of title obtained by actual
fraud, is deprived of an estate or an interest therein.10 Although a review of the decree of registration is
no longer possible after the one-year period from its entry expires, still available is an equitable remedy
to compel the reconveyance of property to those who may have been wrongfully deprived of it. 11 This
equitable remedy afforded by law is not without limitations, however.

An action for reconveyance resulting from fraud prescribes four years from the discovery of the fraud;
such discovery is deemed to have taken place upon the issuance of the certificate of title over the
property. Registration of real property is considered a constructive notice to all persons and, thus, the four-
year period shall be counted therefrom.12 Clearly then, private respondents’ action for reconveyance
based on fraud has already prescribed, considering that title to said property had been issued way back
on August 11, 1982, while the reivindicatory suit was instituted only on July 29, 1996.

Even an action for reconveyance based on an implied or a constructive trust would have already
prescribed just the same, because such action prescribes ten (10) years from the alleged fraudulent
registration or date of issuance of the certificate of title over the property.13 The imprescriptibility of an
action for reconveyance based on implied or constructive trust applies only when the plaintiff or the
person enforcing the trust is in possession of the property. In effect, the action for reconveyance is an
action to quiet the property title, which does not prescribe.14 Undisputedly, private respondents are not
in possession of the disputed property. In fact, they do not even claim to be in possession of it, even if to
do so would enable them to justify the imprecriptibility of their action.

Accordingly, the CA Decision’s reliance on Juan v. Zuñiga,15 as regards the imprescriptibility of an action
for reconveyance based on implied or constructive trust, is utterly misplaced in the light of the foregoing
rulings of the Court declaring a ten-year period of prescription for such action. Moreover, the principle
enunciated therein has no application to the instant case, considering that the supposed "trustee" herein
has effectively repudiated the so-called "trust" by directly performing an act of ownership; that is, by
conveying the property to the government through expropriation. An action to compel, for the benefit of
the cestui que trust, the conveyance of property registered in the trustee’s name does not prescribe unless
the trustee repudiates the trust.16 Thus, private respondents cannot invoke the imprescriptibility of their
action for reconveyance, irrespective of their basis for it.

Finally, it must be remembered that reconveyance is a remedy of those whose property has been
wrongfully or erroneously registered in the name of another. Such recourse, however, cannot be availed
of once the property has passed to an innocent purchaser for value. For an action for reconveyance to
prosper, the property should not have passed into the hands of an innocent purchaser for value.17

Indubitably, we find that the property has already been conveyed to the government in appropriate
expropriation proceedings, the regularity or validity of which has not been questioned. Petitioner should,
therefore, enjoy the security afforded to innocent third persons under our registration laws. Equally
important, its title to the property must be rightfully preserved.

Hence, private respondents’ action to recover the subject property from the government cannot be
maintained, not only because of the prescription of the action, but on account of the protection given to
innocent purchasers for value granted under our land registration laws. Indeed, the inevitable
consequences of the Torrens system of land registration must be upheld in order to give stability to it and
provide finality to land disputes.

This ruling notwithstanding, private respondents are not without recourse. They may sue for damages
their co-heirs who have allegedly perpetrated fraud in Civil Case No. 4534-L pending before the RTC. The
right and the extent of damages to be awarded to private respondents shall be determined by the trial
court, subject to the evidence duly established during the proceedings.

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision of the Court of Appeals REVERSED.
The Orders of the Regional Trial Court of Lapu-Lapu City (Branch 54) in Civil Case No. 4534-L, dated January
12, 1998 and March 31, 1998, are SET ASIDE and the said Civil Case, as against petitioner, is DISMISSED.
No costs.

SO ORDERED.