The Supreme Court, in Tolentino v. Court of Appeals, affirmed that a deed of absolute sale can be declared an equitable mortgage if the real intention of the parties was to secure a loan, protecting borrowers from unfair foreclosure. This ruling ensures that individuals are not unjustly deprived of their property due to deceptive sales agreements masking loan arrangements. It underscores the judiciary’s commitment to upholding fairness and equity in contractual relations, especially where a disparity in bargaining power exists.

Deceptive Deeds: When a Sale Is Actually a Loan in Disguise

Spouses Pedro and Josefina de Guzman, facing financial difficulties, initially mortgaged their land to the Rehabilitation Finance Corporation (RFC). After foreclosure, they sought assistance from Raymundo Tolentino and Lorenza Roño to redeem their property. Tolentino and Roño provided a loan of P18,000, with an agreement for repayment over ten years. Ostensibly to secure the loan, the De Guzmans were asked to sign a Deed of Promise to Sell and later, a Deed of Absolute Sale, with the assurance that these documents were merely security measures. However, Tolentino and Roño used the Deed of Absolute Sale to transfer the title to their names, leading the De Guzmans to file a complaint for the declaration of sale as an equitable mortgage and reconveyance of the property.

The Regional Trial Court ruled in favor of the De Guzmans, declaring the transaction an equitable mortgage. The Court of Appeals affirmed this decision, prompting Tolentino and Roño to elevate the case to the Supreme Court. The petitioners argued that Article 1602 of the Civil Code, which presumes certain sales to be equitable mortgages, should not apply because the parties had express agreements regarding possession and tax payments. They also contended that the De Guzmans pursued the wrong legal remedy.

The Supreme Court, however, found no merit in the petitioners’ arguments. The Court clarified that Article 1602 applies even when express agreements exist, focusing instead on the true intent of the parties. Article 1602 of the Civil Code specifies instances when a contract, regardless of its form, is presumed to be an equitable mortgage:

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

The Court emphasized that the presence of any of the conditions outlined in Article 1602 raises the presumption of an equitable mortgage, protecting vulnerable parties from potentially exploitative agreements. The Court also stated:

Art. 1604. The provisions of article 1602 shall also apply to a contract purporting to be an absolute sale.

The Supreme Court highlighted that the trial court correctly identified several badges of equitable mortgage in this case. The Deed of Promise to Sell, the Deed of Absolute Sale, and the Contract to Sell were related transactions, indicating that the petitioners intended to hold the property as security for the loan, not as owners. The consideration matched the loan amount, further suggesting that the petitioners did not intend to profit from the transactions beyond repayment of the debt. Crucially, the De Guzmans remained in possession of the property and continued paying real estate taxes, reinforcing the conclusion that the sale was merely a security arrangement.

The Court addressed the petitioner’s claim that the respondents pursued the wrong legal remedy by stating that it was raised for the first time on appeal. The Court cited a wealth of jurisprudence to the effect that issues not raised during trial cannot be raised for the first time on appeal. Litigants must present all arguments and defenses during the initial proceedings to ensure fairness and prevent surprises. The Supreme Court noted that Article 1605 of the Civil Code, which suggests an action for reformation of instruments, does not mandate it. The use of “may” in legal provisions typically indicates discretion, not obligation, allowing parties to pursue other appropriate remedies. The Supreme Court ultimately denied the petition and affirmed the Court of Appeals’ decision.

FAQs

What is an equitable mortgage?	An equitable mortgage is a transaction that, despite appearing as a sale, is intended to secure the payment of a debt. It is recognized to protect borrowers from unfair practices.
What factors indicate an equitable mortgage?	Key indicators include the seller remaining in possession, the seller paying taxes, an inadequate purchase price, and related transactions suggesting a security arrangement. These factors demonstrate the parties’ true intent.
Does Article 1602 of the Civil Code apply if there is a written agreement?	Yes, Article 1602 applies even with written agreements. The court will look beyond the document’s form to determine the parties’ real intention.
What is the significance of continued possession by the seller?	Continued possession by the seller after a supposed sale is a strong indicator that the transaction was intended as a security arrangement, not an actual transfer of ownership.
Can a party raise a new issue on appeal?	Generally, no. Issues must be raised during the trial court proceedings to be considered on appeal, ensuring fairness and preventing surprises.
Is an action for reformation of instruments the only remedy in equitable mortgage cases?	No, Article 1605 of the Civil Code provides for reformation but does not preclude other appropriate actions, such as a declaration of nullity or reconveyance, depending on the specific circumstances.
What does the word “may” signify in a legal provision?	The word “may” typically indicates that the provision is discretionary, not mandatory, allowing parties flexibility in choosing their course of action.
Why did the Supreme Court rule in favor of the De Guzmans?	The Court found sufficient evidence that the Deed of Absolute Sale was intended as security for a loan, not a genuine sale, based on the circumstances and actions of the parties.

The Tolentino v. Court of Appeals case reaffirms the judiciary’s role in protecting individuals from inequitable agreements by carefully examining the true intentions behind contracts. This decision serves as a reminder that substance prevails over form, and that courts will intervene to ensure fairness and prevent unjust enrichment.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Tolentino v. Court of Appeals, G.R. No. 128759, August 01, 2002