G.R. No. 115307 July 8, 1997
MANUEL LAO, petitioner, vs. COURT OF APPEALS and BETTER HOMES REALTY & HOUSING CORPORATION, respondents.

FACTS

Private respondent Better Homes Realty and Housing Corporation filed a complaint for unlawful detainer against petitioner Manuel Lao with the Metropolitan Trial Court (MTC) of Quezon City. Better Homes alleged it was the owner of the premises, evidenced by Transfer Certificate of Title No. 22184, and that Lao occupied the property without rent, purely on its liberality, with an understanding to vacate upon demand, which he refused to do despite a demand letter. In his answer, Lao claimed he was the true owner of the house and lot, and that the transaction between Better Homes and N. Domingo Realty and Development Corporation, from which Better Homes purchased the property, was actually a loan secured by a mortgage, not a sale. He also contended the cause of action was for accion publiciana, outside the MTC’s jurisdiction. The MTC ruled in favor of Better Homes, ordering Lao to vacate and pay reasonable rent and attorney’s fees. Lao appealed to the Regional Trial Court (RTC). The RTC reversed the MTC, dismissing the complaint. It held that while Better Homes was the registered owner, the real transaction was not a sale but a loan secured by an equitable mortgage, making Lao the beneficial owner. Better Homes appealed to the Court of Appeals. The Court of Appeals reversed the RTC and reinstated the MTC decision, ruling that the MTC had no jurisdiction to resolve the issue of ownership beyond determining who had a better right to possession for the purpose of the ejectment suit, and that the RTC, on appeal, erred in delving into the ownership issue and ruling on the nature of the deed.

ISSUE

Whether the Regional Trial Court, on appeal from an ejectment case, could rule on the issue of ownership and determine if the subject deed was one of sale or equitable mortgage.

RULING

Yes. The Supreme Court granted the petition, reversed the Court of Appeals, and reinstated the RTC decision dismissing the complaint. The Court held that while the general rule is that the main issue in an ejectment suit is possession de facto and any issue of ownership is taken up only to determine who has the better right to possession, this is not an absolute rule. Under Section 11, Rule 40 of the Rules of Court, if a case is tried by an inferior court without jurisdiction over the subject matter, the RTC on appeal may dismiss it. However, instead of dismissing, the RTC may try the case on the merits if the parties filed their pleadings and went to trial without objecting to such jurisdiction. In this case, neither party objected to the allegation of the question of ownership in the ejectment suit. Both presented evidence on ownership, argued the question in their submissions, and participated in all aspects of the trial without objecting to the MTC’s jurisdiction to decide the question of ownership. Consequently, the RTC, in the exercise of its original jurisdiction as authorized by Section 11, Rule 40, was correct in ruling on the issue of ownership and the corollary question of whether the deed was one of sale or equitable mortgage. The Court found that the RTC correctly determined the transaction was an equitable mortgage, not a sale, and thus properly dismissed the ejectment complaint.