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CIVIL CODE OF THE PHILIPPINESTITLE V. — TRUSTSChapter 1GENERAL PROVISIONSINTRODUCTORY COMMENT:(1) ‘Trust’ Defi ned(a) It is the right to the benefi cial enjoyment of property, the legal title to which is vested in another. (65 C. 212).(b) It is a fi duciary relationship concerning property which obl...

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TITLE V. — TRUSTS Chapter 1 GENERAL PROVISIONS INTRODUCTORY COMMENT: (1) ‘Trust’ Defined (a)

It is the right to the beneficial enjoyment of property, the legal title to which is vested in another. (65 C.J. 212).

(b)

It is a fiduciary relationship concerning property which obliges the person holding it to deal with the property for the benefit of another. (Pacheco v. Arro, 85 Phil. 505). The person holding, in view of his equitable title, is allowed to exercise certain powers belonging to the owner of the legal title. (54 Am. Jur. 21). Gelano v. Court of Appeals L-39050, Feb. 24, 1981

The word “trustee” as used in the corporation statute must be understood in the general concept, and may include the attorney prosecuting the case filed by the Corporation. (2) Characteristics of a ‘Trust’ (a)

It is a fiduciary relationship. (Pacheco v. Arro, 85 Phil. 505).

(b)

Created by law or by agreement. (Art. 1441, Civil Code).

(c)

Where the legal title is held by one, and the equitable title or beneficial title is held by another. (65 C.J. 212). 888

Art. 1440

CIVIL CODE OF THE PHILIPPINES

(3) ‘Trust’ Distinguished from ‘Guardianship’ or ‘Executorship’ In a trust, the trustee or holder has LEGAL TITLE to the property; a guardian, administrator, or executor does not have. (4) ‘Trust’ Distinguished from a ‘Stipulation Pour Autrui’ (a)

A trust may exist because of a legal provision or because of an agreement; a stipulation pour autrui can arise only in the case of contracts.

(b)

A trust refers to specific property; a stipulation pour autrui refers to specific property or to other things.

(5) Co-Ownership as a ‘Trust’ Sotto v. Teves L-38010, Oct. 31, 1978 A co-ownership is a form of trust, with each co-owner being a trustee for each of the others. Art. 1440. A person who establishes a trust is called the trustor; one in whom confidence is reposed as regards property for the benefit of another person is known as the trustee; and the person for whose benefit the trust has been created is referred to as the beneficiary. COMMENT: (1) Parties to a ‘Trust’ (a)

trustor or settler — he establishes the trust

(b)

trustee — holds the property in trust for the benefit of another

(c)

beneficiary or cestui que trust — the person for whose benefit the trust has been created (NOTE: The trustor may at the same time be also the beneficiary.) 889

Arts. 1441-1442

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(2) Elements of a ‘Trust’ (a)

Parties to the trust

(b)

The trust property or the trust estate or the subject matter of the trust

Art. 1441. Trusts are either express or implied. Express trusts are created by the intention of the trustor or of the parties. Implied trusts come into being by operation of law. COMMENT: Classification of Trusts (a)

Express trust — created by the parties, or by the intention of the trustor. (Art. 1441).

(b)

Implied trust — created by operation of law (“trust by operation of law”). [NOTE: There are two kinds of implied trusts: 1)

Resulting trust — (also called bare or passive trust) — Here, there is an intent to create a trust but it is not effective as an express trust. [Example: Art. 1451, where a person who inherits property registers the same in another’s name, whom he does not intend to have any beneficial interest therein for he wants this for himself. (See Severino v. Severino, 44 Phil. 343; See 65 C.J. 363).]

2)

Constructive trust — Here, no intention to create a trust is present, but a trust is nevertheless created by law to prevent unjust enrichment or oppression. [Example: If a person acquires property by mistake, he is considered by the law as a trustee while he holds the same. (Art. 1456, Civil Code). (See Ocampo v. Zaporteza, 53 Phil. 442).]

Art. 1442. The principles of the general law of trusts, insofar as they are not in conflict with this Code, the Code of Commerce, the Rules of Court and special laws are hereby adopted. 890

Art. 1442

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COMMENT: (1) Suppletory Effect of the General Law of Trusts The principles of the general law of trusts are merely suppletory. (Art. 1442). (2) Comment of the Code Commission This Article incorporates a large part of the American law on trusts, and thereby the Philippine legal system will be amplified and will be rendered more suited to a just and equitable solution of many questions. (Report of the Code Com., p. 60). (3) Anglo-American Precedents As the law of trust has been much more frequently applied in the U.S. and in England than it has in Spain, such may be drawn freely upon Anglo-American precedents. This is particularly so, because Anglo-American trusts are derived from Roman and Civil Law nations. (Gov’t. v. Abadilla, 46 Phil. 642). (4) Cases Gelano v. Court of Appeals L-39050, Feb. 24, 1981 A lawyer who has been defending the interest of a corporation may, in the case of a litigation in court still pending after the expiration of the three-year period after dissolution, still continue as TRUSTEE of the corporation at least with respect to the matter in litigation. This would be in substantial compliance with the Corporation Code which allows the conveyance of the properties of a corporation to a trustee to enable it to prosecute and defend suits by or against the corporation beyond the threeyear period. Rizal Surety & Insurance Co. v. CA 73 SCAD 606 (1996) The so-called adversary positions of the parties had no effect on the trust as it never changed the position of the parties in relation to each other and to the dollar proceeds. 891

Art. 1442

CIVIL CODE OF THE PHILIPPINES

The Loss and Subrogation Receipt did not exculpate petitioner from its liability for the accrued interest as this obligation arose in connection with its role as trustee. The signing of said receipt was a valid pre-condition before petitioner could be compelled to turn over the whole amount of the insurance to the two insured. It is grossly unfair for anyone to earn income on the money of another and still refuse to share any part of that income with the latter.

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Chapter 2 EXPRESS TRUSTS Art. 1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence. COMMENT: (1) Formalities Re Express Trusts The law says that “no express trusts concerning an immovable or any interest therein may be proved by parol (oral) evidence.” Therefore: (a)

the requirement that the express trust be written is only for enforceability, not for validity between the parties. Hence, this Article may by analogy be included under the Statute of Frauds. (See Gamboa v. Gamboa, 52 Phil. 503).

(b)

By implication, for a trust over personal property an oral agreement is valid and enforceable between the parties.

(c)

Regarding third persons, the trust must be: in a public instrument and REGISTERED in the Registry of Property, if it concerns REAL PROPERTY.

(2) Distinguished from the Formalities of an Implied Trust An implied trust (whether real or personal property is involved) may be proved by oral evidence. (Art. 1457, Civil Code). Art. 1444. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended. 893

Art. 1444

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COMMENT: (1) How an Express Trust Is Created (a)

By conveyance to the trustee by an act inter vivos or mortis causa (as in a will).

(b)

By admission of the trustee that he holds the property, only as trustee. [In the case of Geronimo & Isidro v. Nava & Aquino, L-12111, Jan. 31, 1959, the Supreme Court held that where, pursuant to a court decision, the plaintiff not only allowed but even directed the tenant to pay the rentals to the defendants, and permitted the latter to occupy and take possession of the property when the tenant disoccupied it, such acts should be construed as a recognition of the fact that the property, though still in the former’s name, was to be held in trust for the defendant, to be conveyed to him on payment of the purchase price, and such trust is an EXPRESS one.] Julio v. Dalandan L-19012, Oct. 20, 1967 FACTS: The deceased father of the defendants executed on Sept. 8, 1950 an affidavit attesting to the following facts:

(a)

that he owed someone a sum of money;

(b)

that as security thereof, he gave a parcel of land to the creditor;

(c)

that in view of his failure to pay the debt, the mortgage was foreclosed;

(d)

that he felt bound by such foreclosure;

(e)

that he therefore promises to replace said land by another lot or farm of approximately the same area on the condition that his children should not be forced to give the harvest, and on the further condition that substitution should not be required immediately. This promise was accepted by the creditor. 894

Art. 1444

CIVIL CODE OF THE PHILIPPINES

The present case was instituted by the creditor to declare him owner of the land, and to fix the period for the delivery of the land to him. A motion to dismiss was filed on the ground of prescription, more than 10 years having elapsed. ISSUE: Has the action by the creditor prescribed? HELD: No, the action has not prescribed. (a)

In the first place, the case involves an express trust. Under Art. 1444 of the Civil Code, no particular words are needed for the creation of an express trust. In this case the naked ownership of the land passed to the creditor, while the usufruct remained with the children of the deceased affiant for an undetermined period of time. The children are deemed to have held the land as trustees of the creditor. In view of the creation of the express trust, it is clear that no period of prescription is involved, the recovery being imprescriptible.

(b)

In the second place, assuming that there is no trust involved in this case, the period of prescription is, under the facts, a term of 30 years. Observations on the Julio v. Dalandan case:

(a)

It is doubtful whether a trust was intended in this case. While it is true that no particular words are needed for the creation of an express trust, still there must be an INTENT to create a fiduciary relationship with respect to the property. No such relationship was contemplated in this case.

(b)

Indeed, if it is true that the naked ownership was immediately transferred to the creditor, and the children were the usufructuaries, it is the creditor who would be the trustee and the children would be the usufructuary — beneficiaries or the cestui que trust — not the other way around.

(c)

It is impossible to regard the creditor as the naked owner, for the affidavit (which was conformed to by the creditor) clearly stipulated that the substitution (of the land for the debt) would not be required immediately.

(d)

The alleged “substitution” was really in the form of a dation in payment or assignment to take place in the future. 895

Art. 1444

CIVIL CODE OF THE PHILIPPINES

Therefore, to determine whether the creditor’s right had already prescribed, what the court should have done was to first fix a period for the transfer of the property. Later, the court could determine if more than 10 years (not 30 years) had elapsed from the date the transfer should have been done. (See Art. 1144 of the Civil Code). (2) Clear Intent There must be a CLEAR INTENTION to create a trust. (Thus, no particular or technical words are required.) (Lorenzo v. Posadas, 64 Phil. 353). (3) Capacity (a)

The trustor must be capacitated to convey property. [Hence, it has been held that a minor cannot create an express or conventional trust of any kind. (Gayondato v. Treasurer, 49 Phil. 244). However, a joint owner of a thing may be a trustor and the other a trustee of one’s share. (Lavadi v. De Mendoza, 72 Phil. 186).]

(b)

The trustee must be capacitated to hold property and to enter into contracts.

(c)

The beneficiary must be capacitated to receive gratuitously from the trustor. (Therefore, if he is incapacitated to be the trustor’s donee, heir or legatee, or devisee, he cannot become a beneficiary of a gratuitous trust.)

(4) Administration of the Trust (a)

The trustee must file a bond. (Sec. 5, Rule 98, Rules of Court).

(b)

The trustee must make an inventory of the real and personal property in trust. (Sec. 6[a], Rule 98, Rules of Court).

(c)

The trustee must manage and dispose of the estate and faithfully discharge his trust in relation thereto, according to law or according to the terms of the trust instrument as long as they are legal and possible. (Sec. 6[b], Rules 98, Rules of Court). 896

Art. 1445

CIVIL CODE OF THE PHILIPPINES

(d)

The trustee must render a true and clear account. (Sec. 6[c], Rule 98, Rules of Court).

(e)

The trustee cannot acquire the property held in trust by prescription as long as the trust is admitted. (If he repudiates, and this is made known to the party involved, prescription is permitted). (See Bancairen v. Diones, 98 Phil. 122). [NOTE: In Escobar v. Locsin, 74 Phil. 86, the Court had occasion to rule that a trust is sacred and inviolable, and the courts should therefore shield fiduciary relations against every manner of chicanery.] QUERY: May a trustee of a trust estate be personally liable? HELD: In the absence of an express stipulation in a contract entered into by a trustee for a corporation that the trust estate and not the trustee should be liable on the contract, the trustee is liable in its individual capacity. (Tan Senguan & Co. v. Phil. Trust Co., 58 Phil. 700). QUERY: When may a trustee sue as such? HELD: Before a trustee may sue or be sued alone as such, it is essential that his trust be EXPRESS, that is, a trust created by the direct and positive acts of the parties, by some writing, deed, or will or by proceedings in court. (Philippine Air Lines, Inc. v. Heald Lumber Co., L-11479, Aug. 1957).

Art. 1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust. COMMENT: Effect if Trustee Declines The trust ordinarily continues even if the trustee declines. Reason — the court will appoint a new trustee, unless otherwise provided for in the trust instrument. (Sec. 3, Rule 98, Rules of Court). A new trustee has to be appointed, otherwise the trust will not exist. (65 C.J. 233). [NOTE: As between the mother and the uncle of a minor, the former ought to be preferred as trustee of the proceeds of an 897

Art. 1446

CIVIL CODE OF THE PHILIPPINES

insurance policy of the deceased father in the absence of evidence that would reveal the incompetence of the mother. (Cabanas v. Pilapil, L-25843, July 25, 1974).] Art. 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary. COMMENT: (1) Necessity of Acceptance by the Beneficiary For the trust to be effective, the beneficiary must accept: (a)

expressly,

(b)

or impliedly,

(c)

or presumably.

(2) When Acceptance Is Presumed If the granting of benefit is PURELY GRATUITOUS (no onerous condition), the acceptance by the beneficiary is presumed. Exception: If there is proof that he really did NOT accept. [NOTE: Acceptance by the beneficiary of a gratuitous trust is NOT subject to the rules for the formalities of donations. Therefore, even if real property is involved, acceptance by the beneficiary need not be in a public instrument. (Cristobal v. Gomez, 50 Phil. 810). Here, the court held that mere acquiescence in the formation of the trust, and acceptance under the second paragraph of Art. 1311 (regarding a stipulation pour autrui) are sufficient.] (3) How Express Trusts Are ENDED (a)

Mutual agreement by all the parties

(b)

Expiration of the term 898

Art. 1446

CIVIL CODE OF THE PHILIPPINES

(c)

Fulfillment of the resolutory condition

(d)

Rescission or annulment (as in other contracts)

(e)

Loss of subject matter of the trust (physical loss or legal impossibility)

(f)

Order of the court (as when the purpose of the trust is being frustrated)

(g)

Merger

(h)

Accomplishment of the purpose of the trust [NOTE: A testamentary trust for the administration and eventual sale of certain properties of the testator ends not at the time the trustee’s petition for the sale of the property is approved by the court, but at the time said sale is actually made and the proceeds thereof distributed to the proper recipients. (Trusteeship of Estate of Benigno Diaz, L-1011, Aug. 31, 1960).]

899

Chapter 3 IMPLIED TRUSTS INTRODUCTORY COMMENT: Comment of the Code Commission The doctrine of implied trust is founded on equity. The principle is applied in the American legal system to numerous cases where an injustice would result if the legal estate or title were to prevail over the equitable right of the beneficiary. (Com. Report, p. 60). Even though there has been no fraud or immorality involved, still there is a mutual antagonism between the trustee and the beneficiary. (65 C.J. 222). Fair dealing demands the establishment of the relation. (Dixon v. Dixon, 124 A. 198). Art. 1447. The enumeration of the following cases of implied trust does not exclude others established by the general law of trust, but the limitation laid down in article 1442 shall be applicable. COMMENT: Enumeration of Instances of Implied Trust The enumeration is not exclusive. But trusts are recognized only if not in conflict with: (a)

the Civil Code,

(b)

the Code of Commerce,

(c)

the Rules of Court,

(d)

Special Laws. 900

Art. 1447

CIVIL CODE OF THE PHILIPPINES

Rabuco v. Hon. Antonio Villegas L-24661, Feb. 28, 1974 The City of Manila only holds in trust, for the National Government, lands reserved for communal or community property. Therefore, if the national government decides to sell the parcels of land to their occupants, it cannot be said that the City of Manila is being deprived of property without due process of law. Victorias v. Leuenberger and CA GR 31189, Mar. 31, 1989 FACTS: In 1934, SG, the administratrix of the property left by her husband and of the conjugal partnership property, sold Lot A and Lot B, a 4-hectare portion of Lot 140, to the Municipality of Victorias. Said municipality used this lot as cemetery. Unfortunately, Victorias failed to register the deed of sale. When SG died in 1942, NL, the granddaughter claimed to have inherited the land from the former. In 1963, she had the property relocated and registered in her name. But the municipality prevented her from cultivating a portion of the lot, Lots A and B, because the same had been sold to the municipality. So, NL sued the municipality to recover the portion occupied by the latter. HELD: As registered owner, NL is entitled to the protection afforded to a holder of a Torrens Title. Under the Torrens system, every person receiving a certificate of title in pursuance o...