In the case of Spouses John T. Sy and Leny N. Sy, and Valentino T. Sy vs. Ma. Lourdes De Vera-Navarro and Benjaemy Ho Tan Landholdings, Inc., the Supreme Court ruled that a Deed of Absolute Sale was, in fact, an equitable mortgage, thereby protecting the rights of the original landowners. The Court emphasized that even if a document appears to be an absolute sale, it can be proven to be a loan with a mortgage based on the parties’ true intentions and certain circumstances. This decision safeguards property owners from losing their land due to loan agreements disguised as sales and highlights the importance of good faith in real estate transactions.

From Loan to Loss? Unmasking an Equitable Mortgage in Zamboanga City

This case revolves around a property dispute in Zamboanga City. Spouses John and Leny Sy, along with Valentino Sy, sought to nullify a Deed of Absolute Sale involving their property, claiming it was merely an equitable mortgage securing a loan from Ma. Lourdes De Vera-Navarro. The property was later sold to Benjaemy Ho Tan Landholdings, Inc. (BHTLI). The central legal question is whether the deed was genuinely a sale or a disguised mortgage, and whether BHTLI was a buyer in good faith.

The Regional Trial Court (RTC) initially sided with the Sys, declaring the deed an equitable mortgage. However, the Court of Appeals (CA) reversed this decision, leading to the Supreme Court review. The Supreme Court, in its analysis, highlighted the critical distinction between a legitimate sale and an equitable mortgage, emphasizing the importance of intent and circumstances surrounding the transaction. The Court explained that an **equitable mortgage** arises when a contract, though lacking the typical formalities of a mortgage, clearly demonstrates the intention to secure a debt with real property.

Article 1602 of the Civil Code outlines specific instances when a contract, regardless of its denomination, is presumed to be an equitable mortgage. These include situations where the price is unusually inadequate, the seller remains in possession of the property, or any circumstance indicating the real intention was to secure a debt.

“Article 1602 of the Civil Code states that a 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.

”

Building on this principle, the Supreme Court underscored that the presence of even one of these circumstances is sufficient to classify a sale as an equitable mortgage. The Court noted that trial courts have the crucial role of evaluating witness testimonies and evidence to ascertain the true intent behind a transaction.

In this case, the Supreme Court identified several indicators that the purported sale was actually an equitable mortgage: The Sys remained in possession of the property, the purchase price was inadequate, De Vera-Navarro retained the supposed purchase price, and the intention was for the deed to secure the debt. The Court found it “uncanny” that De Vera-Navarro did not take possession of the property after the alleged sale. This situation aligns with the second circumstance outlined in Article 1602, where the vendor remains in possession.

Furthermore, the inadequacy of the purchase price was a significant factor. The RTC took judicial notice that similar establishments in Zamboanga City were worth significantly more than the P5,000,000 indicated in the Deed of Absolute Sale. The fact that De Vera-Navarro mortgaged the property for P13,000,000 and sold it to BHTLI for the same amount further confirmed this inadequacy. These elements highlight that the real intent was to create security for a debt.

The Court also addressed the admissibility of parol evidence, clarifying that it is indeed permissible to prove that a seemingly absolute sale was, in reality, a loan with a mortgage. This principle is vital in protecting vulnerable parties from unfair agreements. The Supreme Court further stressed that courts are inclined to construe transactions as equitable mortgages when doubts arise, favoring the lesser transmission of rights.

“x x x a document which appears on its face to be a sale-absolute x x x may be proven by the vendor x x x to be one of a loan with mortgage. In this case, parol evidence becomes competent and admissible to prove that the instrument was in truth and in fact given merely as a security for the payment of a loan. And upon proof of the truth of such allegations, the court will enforce the agreement or understanding in consonance with the true intent of the parties at the time of the execution of the contract. Sales with a right to repurchase are not favored.”

A critical aspect of the case involved the documentary evidence presented by De Vera-Navarro. Because her Formal Offer of Evidence was expunged by the RTC, the CA erred in considering these documents. The Supreme Court reiterated that evidence not formally offered has no probative value and must be excluded.

Turning to BHTLI’s claim as a buyer in good faith, the Supreme Court found this argument unconvincing. The Court emphasized that the burden of proving good faith lies with the party claiming it, and BHTLI failed to discharge this burden. The continued possession of the property by the Sys should have alerted BHTLI to investigate further. Moreover, the annotation of an adverse claim on the title before BHTLI finalized the purchase should have put them on notice of a potential issue.

The Supreme Court held that BHTLI could not claim ignorance of any infirmity, considering the prior annotation of the adverse claim. The Court concluded that BHTLI was not a buyer in good faith and, therefore, the sale to them was null and void.

FAQs

What was the key issue in this case?	The key issue was whether a Deed of Absolute Sale was genuinely a sale or an equitable mortgage, and whether the subsequent buyer, BHTLI, was a buyer in good faith.
What is an equitable mortgage?	An equitable mortgage is a transaction that, despite appearing as a sale, is intended to secure a debt. Article 1602 of the Civil Code lists several circumstances that indicate an equitable mortgage.
What are the ‘badges’ of an equitable mortgage?	The “badges” are circumstances listed in Article 1602 of the Civil Code that suggest a sale is actually an equitable mortgage, such as inadequate price or the seller remaining in possession.
What does it mean to be a buyer in good faith?	A buyer in good faith is someone who purchases property without knowledge of any defects or claims against the seller’s title. They must have acted honestly and diligently in the transaction.
Why was the Deed of Absolute Sale considered an equitable mortgage?	The Deed was deemed an equitable mortgage because the price was inadequate, the Sys remained in possession, De Vera-Navarro retained the purchase price, and the intent was to secure a debt.
Why was BHTLI not considered a buyer in good faith?	BHTLI was not a buyer in good faith because the Sys remained in possession, and an adverse claim was annotated on the title before BHTLI finalized the purchase.
Can parol evidence be used to prove a sale is actually a mortgage?	Yes, parol evidence is admissible to prove that a seemingly absolute sale was actually intended as a loan with a mortgage, allowing the court to ascertain the true agreement.
What is the significance of Article 1602 of the Civil Code in this case?	Article 1602 lists circumstances indicating an equitable mortgage. The presence of even one circumstance can convert a purported sale into an equitable mortgage.

The Supreme Court’s decision reinforces the protection afforded to property owners in loan agreements. It serves as a reminder that courts will look beyond the surface of a contract to determine the true intent of the parties. The ruling underscores the importance of conducting thorough due diligence in real estate transactions and highlights that continued possession and prior notice of claims are critical factors in determining good faith.

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: Spouses John T. Sy and Leny N. Sy, and Valentino T. Sy, PETITIONERS, VS. Ma. Lourdes De Vera-Navarro and Benjaemy Ho Tan Landholdings, Inc., G.R. No. 239088, April 03, 2019