The Supreme Court clarified the distinction between an equitable mortgage and an absolute sale in property transactions. The Court ruled that a deed of sale can be considered an equitable mortgage if the true intention of the parties was to secure a debt, protecting vulnerable borrowers from potentially unfair property transfers. This decision highlights the judiciary’s role in ensuring that contractual agreements reflect the genuine intent of the parties involved, especially when there is a power imbalance.

From Cattle to Collateral: When a Sale is Really a Loan in Disguise

Spouses Carlos and Eulalia Raymundo and Spouses Angelito and Jocelyn Buenaobra sought to reverse the Court of Appeals’ decision, which had favored Spouses Dominador and Rosalia Bandong. The appellate court reclassified a Deed of Absolute Sale as an equitable mortgage, giving the Bandongs a year to repay their P70,000 debt to the Raymundos. The Raymundos had argued the original deed was a valid sale, and that the subsequent sale to the Buenaobras should be upheld. The Supreme Court ultimately sided with the Bandongs, solidifying protections against the exploitation of debtors through the misuse of sale contracts.

The case originated from Dominador Bandong’s employment as a “biyahero” for Eulalia Raymundo, who was in the business of buying and selling cattle. Dominador incurred a shortage of P70,000, leading to the execution of a Deed of Sale for a parcel of land owned by the Bandongs in favor of Eulalia. This property was later sold to the Buenaobra spouses. The Bandongs then filed a case to annul the sale, arguing it was intended as an equitable mortgage to secure Dominador’s debt, not an actual transfer of ownership. The Raymundos, on the other hand, contended that the sale was voluntary and valid, and that the Buenaobras were innocent purchasers for value.

At the heart of the matter was the true intention of the parties when they entered into the Deed of Sale. The Civil Code provides specific instances when a contract, even if it appears to be an absolute sale, can be presumed to be an equitable mortgage. Article 1602 of the Civil Code states:

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.

To determine the true nature of the agreement, the Supreme Court relied on the principle established in Reyes v. Court of Appeals, which emphasizes examining the intention of the parties and the circumstances surrounding the contract’s execution. The Court stated:

In determining whether a deed absolute in form is a mortgage, the court is not limited to the written memorials of the transaction. The decisive factor in evaluating such agreement is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all the surrounding circumstances, such as the relative situation of the parties at that time, the attitude acts, conduct, declarations of the parties, the negotiations between them leading to the deed, and generally, all pertinent facts having a tendency to fix and determine the real nature of their design and understanding.

The Supreme Court found that the Deed of Sale was indeed intended as security for Dominador’s debt, not as a genuine transfer of ownership. This conclusion was supported by Eulalia’s admission that she typically required her “biyaheros” to surrender property titles and execute deeds of sale as security for their financial obligations. Furthermore, the fact that the Bandongs remained in possession of the property after the supposed sale reinforced the interpretation of the contract as an equitable mortgage.

Building on this principle, the Court emphasized that the existence of even one condition outlined in Article 1602 is sufficient to presume an equitable mortgage, aligning with the legal inclination to favor the least transmission of property rights. In Aguirre v. Court of Appeals, the Court highlighted:

The explicit provision of Article 1602 that any of those circumstances would suffice to construe a contract of sale to be one of equitable mortgage is in consonance with the rule that the law favors the least transmission of property rights. To stress, the existence of any one of the conditions under Article 1602, not a concurrence, or an overwhelming number of such circumstances, suffices to give rise to the presumption that the contract is an equitable mortgage.

Given the finding that the transaction was an equitable mortgage, Eulalia did not have the right to transfer ownership of the property to the Buenaobras. The Court then addressed the issue of whether the Buenaobras were innocent purchasers for value. An innocent purchaser for value is someone who buys property without notice of any other person’s right or interest in the property and pays a fair price. The Court found that Jocelyn Buenaobra, Eulalia’s grandniece, could not claim this status.

The burden of proving good faith rests on the one asserting it, and it is not enough to rely on the presumption of good faith. The Court cited Arrofo v. Quiño, elucidating the principle that while a person dealing with registered land is generally not required to inquire beyond the Torrens title, this rule is not absolute. A purchaser cannot close their eyes to facts that should put a reasonable person on guard. The Court in Arrofo v. Quiño stated:

Thus, while it is true x x x that a person dealing with registered lands need not go beyond the certificate of title, it is likewise a well-settled rule that a purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man on his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. His mere refusal to face up to the fact that such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in the vendor’s or mortgagor’s title, will not make him an innocent purchaser for value, if it afterwards develops that the title was in fact defective, and it appears that he had such notice of the defect as would have led to its discovery had he acted with the measure of precaution which may be required of a prudent man in a like situation.

The Court noted that Jocelyn’s relationship with Eulalia and her awareness of Dominador’s possession of the property should have prompted her to investigate further. This failure to investigate negated her claim of being an innocent purchaser for value. The court’s decision underscores the importance of due diligence when purchasing property, especially when there are indications that the seller’s title may be questionable or that other parties have a claim to the property.

Finally, the Court addressed the argument that the Bandongs’ action for annulment of sale was filed belatedly. The Court reiterated the principle that a person in actual possession of land, claiming ownership, may await to vindicate their right. Their undisturbed possession grants them a continuing right to seek judicial aid to determine the nature of adverse claims on their title. The Court also clarified that the prior ejectment case, which had been decided in favor of the Buenaobras, did not alter the conclusion in this case. Ejectment cases focus solely on physical possession, and any determination of ownership is not final or conclusive.

FAQs

What was the central issue in this case?	The main issue was whether the Deed of Sale between the Bandongs and Raymundos was a valid sale or an equitable mortgage. The court examined the intent of the parties to determine the true nature of the transaction.
What is an equitable mortgage?	An equitable mortgage is a transaction that, despite lacking the formal requirements of a mortgage, reveals the intention of the parties to charge real property as security for a debt. It protects borrowers from unfair property transfers.
Under what circumstances can a sale be considered an equitable mortgage?	According to Article 1602 of the Civil Code, a sale can be considered an equitable mortgage if the price is unusually inadequate, the seller remains in possession of the property, or if other circumstances suggest the intention was to secure a debt.
What does it mean to be an ‘innocent purchaser for value’?	An innocent purchaser for value is someone who buys property without notice that another person has a right or interest in it and pays a fair price. They are generally protected from prior claims on the property.
Why were the Buenaobras not considered innocent purchasers in this case?	The Buenaobras were not considered innocent purchasers because Jocelyn was related to Eulalia and knew of her business practices, and they were aware that the Bandongs were in possession of the property. This knowledge should have prompted them to investigate further.
What is the significance of remaining in possession of the property after a sale?	Remaining in possession of the property after a sale is a key indicator that the transaction may be an equitable mortgage rather than an absolute sale. It suggests that the seller did not intend to transfer ownership.
How does this ruling protect borrowers?	This ruling protects borrowers by ensuring that their true intentions are considered when entering into property transactions. It prevents lenders from exploiting borrowers by disguising loans as sales.
Does a prior ejectment case affect a claim of ownership?	No, an ejectment case only determines physical possession of the property and does not conclusively resolve issues of ownership. A separate action is needed to determine ownership rights.

The Supreme Court’s decision in this case serves as a reminder of the importance of protecting vulnerable parties in property transactions. By carefully examining the intent behind contracts and considering the surrounding circumstances, the courts can prevent the misuse of legal forms to exploit borrowers. This ruling provides a safeguard against unfair practices and reinforces the principle that substance should prevail over form in contractual agreements.

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: SPS. CARLOS AND EULALIA RAYMUNDO AND SPS. ANGELITO AND JOCELYN BUENAOBRA VS. SPS. DOMINADOR AND ROSALIA BANDONG, G.R. NO. 171250, July 04, 2007