This Supreme Court decision clarifies how to execute judgments involving equitable mortgages, emphasizing that reconveyance of property must occur before ordering payment of its fair market value. The Court held that lower courts erred in prioritizing the payment of fair market value over the original agreement for reconveyance, especially when the property could still be returned. This ruling ensures that the true intent of an equitable mortgage—securing a debt—is upheld and that property rights are properly restored once the debt is settled, preventing unjust enrichment.

Mortgage or Sale? Unraveling Obligations in Real Property Disputes

The case of David A. Raymundo v. Galen Realty and Mining Corporation arose from a dispute over a house and lot in Makati City. Galen Realty and Mining Corporation (Galen) originally owned the property, covered by Transfer Certificate of Title (TCT) No. S-105-651. In 1987, Galen executed a Deed of Sale in favor of David A. Raymundo, who subsequently sold the property to Tensorex Corporation, resulting in TCT No. 149755 being issued in Tensorex’s name. Galen then filed a case for Reconveyance with Damages, arguing that the initial transaction with Raymundo was not an outright sale but an equitable mortgage intended to secure a debt. The central legal question was whether the courts correctly ordered the execution of the judgment, which involved reconveyance or, if infeasible, payment of the property’s fair market value.

The Regional Trial Court (RTC) initially ruled that the transaction was indeed an equitable mortgage, a decision upheld by the Court of Appeals (CA) with a modification reducing Galen’s loan obligation to P3,865,000.00. The CA’s decision, which became final and executory, stipulated that Raymundo should reconvey the property to Galen upon payment of the debt plus legal interest, or if reconveyance was no longer feasible, Raymundo and Tensorex should solidarily pay Galen the fair market value of the property. Following the final judgment, Galen moved for execution, seeking the fair market value of the property less the mortgage debt, along with damages and costs. Raymundo opposed this, arguing that the CA decision provided two distinct alternatives: reconveyance upon payment or, if impossible, payment of fair market value.

The RTC granted Galen’s motion, ordering the issuance of a writ of execution based on an appraisal valuing the property at P49,470,000.00. A special sheriff issued notices demanding payment and levied on Tensorex’s rights and interests in the property. Raymundo objected to the impending auction sale, expressing his readiness to reconvey the property once Galen fulfilled its financial obligations. Galen countered that reconveyance was no longer viable due to encumbrances on the property and the operational dissolution of Tensorex. The RTC initially suspended the auction, requiring Raymundo to prove the feasibility of reconveyance by presenting a title registered in his name, but later lifted the suspension, leading to the property’s sale at public auction with Galen as the highest bidder.

Raymundo elevated the matter to the CA via a special civil action for certiorari, which was dismissed. The CA upheld the RTC’s writ of execution, prompting Raymundo to seek recourse with the Supreme Court, arguing that the writ altered the final CA decision by prioritizing payment of fair market value over reconveyance. The Supreme Court emphasized that a writ of execution must strictly adhere to the judgment’s essential terms and cannot deviate from them. According to the Court, the principal obligation under the CA decision was for Raymundo to reconvey the property upon Galen’s payment of its mortgage obligation.

The Supreme Court cited well-established principles regarding equitable mortgages. The agreement was for security and not a transfer of ownership, Galen retained ownership, and Raymundo’s duty to reconvey was contingent upon Galen fulfilling its financial obligations. The Court underscored that the essence of an equitable mortgage is to secure a debt, not to transfer ownership of the property to the mortgagee.

“the circumstance that the original transaction was subsequently declared to be an equitable mortgage must mean that the title to the subject land which had been transferred to private respondents actually remained or is transferred back to [the] petitioners herein as owners-mortgagors, conformably to the well-established doctrine that the mortgagee does not become the owner of the mortgaged property because the ownership remains with the mortgagor.” (Montevirgen, et al. v. CA, et al., 198 Phil. 338 (1982))

The Court noted that the RTC erred in demanding proof of Raymundo’s willingness to reconvey, as his obligation was secondary to Galen’s payment. Should Raymundo refuse to reconvey, the Court clarified that the Rules of Court provide mechanisms for the court to appoint another person to perform the act at Raymundo’s expense. Moreover, Galen’s obligation to pay was not contingent on Raymundo’s prior reconveyance; if Galen failed to pay, the remedy was foreclosure, not an immediate demand for the property’s fair market value.

Sec. 10. Execution of judgments for specific act. (a) conveyance, delivery of deeds, or other specific acts; vesting title.—If a judgment directs a party to execute a conveyance of land or personal property, or to deliver deeds or other documents, or to perform any other specific act in connection therewith, and the party fails to comply within the time specified, the court may direct the act to be done at the cost of the disobedient party by some other person appointed by the court and the act when so done shall have like effect as if done by the party.

The Court emphasized that the obligation to pay the property’s fair market value arises only when reconveyance is no longer feasible, such as when the property has been transferred to an innocent purchaser or has been dissipated. In this case, the RTC improperly accommodated Galen’s preference for payment of the fair market value, treating it as the primary obligation, even though reconveyance remained a viable option. The Court noted that any transactions Tensorex entered into were subject to the notice of lis pendens, which served as constructive notice to subsequent parties. Allowing Raymundo and Tensorex to retain the property while ordering payment of its fair market value would effectively transform the equitable mortgage into a sale, violating public policy against pactum commissorium, which prohibits creditors from appropriating or disposing of mortgaged properties.

In addressing the issue of interest, the Court applied established guidelines for determining the applicable rates. The Court directed the RTC to implement the CA decision in accordance with its ruling, particularly concerning the proper application of interest rates. The Supreme Court clarified that Galen’s mortgage indebtedness would accrue interest at 12% per annum from the complaint’s filing until June 30, 2013, and thereafter at 6% per annum until fully paid. Conversely, damages, attorney’s fees, and costs payable by Raymundo would accrue interest at 6% per annum from the date the CA decision became final until fully paid.

FAQs

What is an equitable mortgage?	An equitable mortgage is a transaction that appears to be a sale but is actually intended to secure a debt. The real property serves as collateral for the loan, and the borrower retains ownership.
What does it mean to reconvey a property?	To reconvey a property means to transfer the title back to the original owner. In the context of an equitable mortgage, it involves returning ownership to the mortgagor once the debt is settled.
What is a writ of execution?	A writ of execution is a court order directing law enforcement to enforce a judgment. It typically involves seizing assets to satisfy a debt or compelling a party to perform a specific action.
What is lis pendens?	Lis pendens is a notice filed in public records to warn potential buyers or lenders that the property is subject to a pending lawsuit. It serves as constructive notice that the property’s title is in dispute.
What is pactum commissorium?	Pactum commissorium is an agreement that allows a creditor to automatically appropriate the pledged or mortgaged property if the debtor defaults. Such agreements are generally prohibited under Philippine law as against public policy.
When can a court order payment of the fair market value instead of reconveyance?	A court can order payment of the fair market value only when reconveyance is no longer feasible. This typically occurs when the property has been sold to an innocent third party or is otherwise impossible to recover.
What interest rates apply in equitable mortgage cases?	Interest rates depend on the period and type of obligation. Generally, loans and forbearance of money follow the rate set by the Bangko Sentral ng Pilipinas, while damages follow the legal interest rate outlined in the Civil Code.
What is the significance of the finality of a court decision?	Once a court decision becomes final and executory, it is binding on the parties and cannot be altered, except in specific circumstances. This principle ensures stability and predictability in legal outcomes.

In summary, the Supreme Court’s decision in Raymundo v. Galen Realty reinforces the principle that judgments must be executed in accordance with their original terms, prioritizing reconveyance in equitable mortgage cases unless it is genuinely infeasible. This ruling safeguards the rights of mortgagors and prevents the unjust enrichment of mortgagees by strictly adhering to the true intent of an equitable mortgage—securing a debt rather than transferring ownership.

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: David A. Raymundo vs. Galen Realty and Mining Corporation, G.R. No. 191594, October 16, 2013