G.R. No. 47206, September 27, 1989, 178 SCRA 1


Santiago de Erquiaga was the owner of 100% or 3,100 paid-up shares of stock of the Erquiaga Development Corporation (EDC) which owns the Hacienda San Jose in Irosin, Sorsogon.

On November 4, 1968, he entered into an Agreement with Jose L. Reynoso to sell to the latter his 3,100 shares (or 100%) of EDC for P900,000, payable in installments on definite dates fixed in the contract but not later than November 30, 1968.

Reynoso failed to pay the second and third installments on time. Thus, the total price of the sale was increased to P971,371.70 payable on or before December 17, 1969. The increase represented brokers’ commission and interest.

As of December 17, 1968, Reynoso was able to pay P410,000 to Erquiaga who thereupon transferred all his shares to Reynoso, as well as the possession of the Hacienda San Jose, EDC’s only asset. However, as provided in paragraph 3, subparagraph (c) of the contract to sell, Reynoso pledged 1,500 shares in favor of Erquiaga as security for the balance of his obligation.

Reynoso failed to pay the balance of P561,321.70 on or before December 17, 1969, as provided in the promissory notes he delivered to Erquiaga. So, on March 2, 1970, Erquiaga, through counsel, formally informed Reynoso that he was rescinding the sale of his shares in EDC.

Erquiaga filed a complaint for rescission with preliminary injunction against Reynoso and EDC, in CFI Sorsogon, Branch I. The CFI ruled in favor of Erquiaga, rescinded the sale, and ordered Reynoso to: (a) return and reconvey to Erquiaga the 3,100 paid up shares of stock of the EDC; (b) render a full accounting of the fruits he received by virtue of said shares, and to return said fruits received by him to Erquiaga; (c) and pay Erquiaga P12,000 as actual damages, P50,000 as attorney’s fees, the costs of this suit and expenses of litigation (P62,000). Erquiaga was ordered to return to Reynoso P100,000 plus legal interest from November 4, 1968, and P310,000 plus legal interest from December 17, 1968, until paid (P410,000 total).

The CFI decision became final and executory. However, it issued another order holding in abeyance Erquiaga’s payment of P410,000 plus interest, pending Reynoso’s accounting of the fruits he received on account of the shares. In the same order, the CFI appointed a receiver since (a) the accounting of the fruits received by Reynoso would take time; and (b) Erquiaga has shown sufficient and justifiable ground for the appointment of a receiver ‘in order to preserve the Hacienda which has obviously been mismanaged by Reynoso (arrears in DBP loan amounting to P503,510.70 and danger of foreclosure to Erquiaga’s damage).

On April 26, 1973, Jose L. Reynoso died and he was substituted by his surviving spouse Africa Valdez Vda. de Reynoso and children, as defendants. The Reynoso heirs (Reynosos) filed a petition for certiorari in the CA against the CFI order. The CA dismissed the petition. The SC affirmed. Upon Erquiaga’s motion, the CFI issued an order on February 12, 1975: (a) dissolving the receivership and ordering the delivery of the possession of the Hacienda San Jose to Erquiaga, (b) ordering Erquiaga to file a P410,000 bond conditioned to the payment of whatever may be due to the Reynoso heirs after the approval of Reynoso’s accounting report; and (c) allowing Erquiaga’s counsel to inspect, copy and photograph certain documents related to the accounting report.

The CFI approved Erquiaga’s submitted bond and turned over the possession, management and control of the hacienda to him. Upon Erquiaga’s Omnibus Motion, opposed by Reynosos, the CFI ordered the latter to deliver to Erquiaga within 5 days from receipt of the order the 1,600 shares which are in their possession. The CFI also denied the prayer to (a) strike out all expenses allegedly incurred by Reynosos in the production of the fruits of Hacienda San Jose; (b) declare Erquiaga’s obligation to pay Reynosos P410,000 with interest as fully compensated by the fruits earned by Reynosos from the property; and (c) issue a writ of execution against Reynosos to pay Erquiaga P62,000.

Reynosos filed a petition for certiorari against the last order. The CA ruled in their favor, holding that the CFI acted with GADALEJ in refusing to order the reimbursement of the P410,000 purchase price plus interests awarded in the final decision and the setoff therewith of P62,000 as damages and attorney’s fees in Erquiaga’s favor. Thus, the CA directed Erquiaga to return P410,000 (or net P348,000 after deducting P62,000 due from Reynoso) as the price paid by Reynoso for the shares of stock, with legal rate of interest, and the return by Reynoso of Erquiaga’s 3,100 shares with the fruits.

At the time of the CA decision:
o Hacienda San Jose was returned to Erquiaga;
o Reynoso has returned to Erquiaga only the pledged 1,500 shares of stock;
o Reynoso has not complied with (b) and (c) of the decision;
o Erquiaga has not returned P410k required by the decision.

Erquiaga alleged that the CA decision of requiring him to pay Reynosos P410,000 plus interest, without first awaiting Reynoso’s accounting of the fruits of the Hacienda San Jose, violates the law of the case and Art. 1385, CC, alters the final order dated February 12, 1975 of the trial court, and is inequitous.


WON Erquiaga’s allegation has merit


NO. The CA order is in full accord with Art. 1385, CC:

“ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

“Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.

“In this case, indemnity for damages may be demanded from the person causing the loss.”

The Hacienda San Jose and 1,500 shares of stock have already been returned to Erquiaga. Therefore, upon the return to him of the remaining 1,600 shares, Erquiaga should return to Reynoso P410,000 which the latter paid for those shares. Pursuant to the rescission decreed in the final judgment, there should be simultaneous mutual restitution of the principal object of the contract to sell (3,100 shares) and of the consideration paid (P410,000). This should not await the mutual restitution of the fruits, namely: the legal interest earned by Reynoso’s P410,000 while in the possession of Erquiaga, and its counterpart: the fruits of Hacienda San Jose which Reynoso received from the time the hacienda was delivered to him on November 4, 1968 until it was placed under receivership by the court on March 3, 1975.

However, since Reynoso has not yet given an accounting of those fruits, it is only fair that Erquiaga’s obligation to deliver to Reynoso the legal interest earned by his money, should await the rendition and approval of his accounting. To this extent, the decision of the Court of Appeals should be modified. For it would be inequitable and oppressive to require Erquiaga to pay the legal interest earned by Reynoso’s P410,000 since 1968 or for the past 20 years (amounting to over P400,000 by this time) without first requiring Reynoso to account for the fruits of Erquiaga’s hacienda which he allegedly squandered while it was in his possession from November 1968 up to March 3, 1975.

 * Case digest by Kristine Camille Gahuman, LLB-1, Andres Bonifacio Law School, SY 2017-2018