G.R. No. 143388, 6 October 2003


Petitioners Rolando and Rosita Cruz, spouses, were the owners and operators of a dry goods stall in Divisoria. They contracted a series of loans in varied amounts from private respondents, spouses Miguel and Cecilia Capistrano, who were in the business of lending money on a “five-six” basis. Respondent Cecilia Capistrano was then operating her lending business on a portion of petitioners’ stall. The Capistranos and the Cruzes were close friends.

On 31 May 1985 petitioners obtained the first of these loans in the total amount of P135,000.00 evidenced by two (2) separate receipts. As conditions for the loan, private respondents required petitioner Rosita Cruz to open a checking account with PhilBanking, Las Piñas Extension Office, and thereafter asked her to sign a blank check with the promise that the check would only be for safekeeping and would not be deposited with the bank. To secure the loan, private respondents obliged petitioners to surrender their Transfer Certificate of Title No. S-98034 covering a 240-square meter lot together with the house standing thereon located in San Antonio Valley XVII, Las Piñas, Metro Manila. Petitioner Rosita Cruz promptly complied with all the conditions imposed by private respondents. Subsequently, petitioners secured three (3) more loans from the Capistranos on various dates in the amounts of P40,000.00, P15,000.00 and P5,000.00.

Sometime in 1988, after all the sidewalk stalls in Divisoria were demolished, respondent Capistranos were no longer able to collect from the vendors who owed them. Petitioners later discovered that private respondents had mortgaged their property in Las Piñas, Metro Manila, to San Miguel Corporation (SMC) to secure payment of a credit line. Verification from the Office of the Register of Deeds of Las Piñas showed that petitioners’ TCT No. S-98034 was already cancelled and TCT No. (98729) T-2156-A was issued in the name of private respondents Miguel and Cecilia Capistrano by using a Deed of Absolute Sale purportedly executed in their favor by petitioners.

The parties’ respective versions as to how the disputed Deed of Absolute Sale came about differed radically. Petitioners denied executing the Deed of Absolute Sale, tenaciously asserting that at the time they were negotiating with private respondents concerning the loans, the latter required them to sign on several blank sheets of paper with the understanding that private respondents would superimpose a mortgage deed thereon, but it turned out that private respondents, instead of a deed of mortgage, typed on those blank papers the deed of sale in question.


Whether the deed of absolute sale is, in reality, one of equitable mortgage?


It was one of equitable mortgage. Vendors covered by Art. 1602 usually find themselves in an unequal position when bargaining with the vendees, and will readily sign onerous contracts to get the money they need. Necessitous men are not really free men in the sense that to answer a pressing emergency they will submit to any terms that the crafty may impose on them. This is precisely the evil that Art. 1602 seeks to guard against. The evident intent of the provision is to give the supposed vendor maximum safeguards for the protection of his legal rights under the true agreement of the parties.

Article 1602, par. (1), accords significance to the gross inadequacy of the price of a purported sale to such an extent as to create the presumption that the transaction is an equitable mortgage.

In the instant case, petitioners acquired the 240-square meter house and lot subject of the deed of sale for P78,000.00 in 1975. The house was remodeled and converted into a two-storey residence in 1982 at the cost of P280,000.00. From these figures, petitioners spent a total of P358,000.00 in acquiring the property and introducing improvements thereon. Yet, the property was purportedly sold to private respondents in 1985 for a measly P66,000.00, or barely 19% of its total acquisition and improvement cost three (3) years before, in 1982. Certainly, no seller in his right senses would agree to part with his valuable property for such an unusually inadequate consideration.

We take judicial notice of the fact that the value of real properties does not remain stagnant, but is on a constant upswing. Given the incessant currency devaluation and spiraling costs of commodities, it would certainly be unrealistic that the market value of petitioners’ property in 1985 would depreciate greatly three (3) years later. The rule is well-settled that a contract appearing on its face to be a definite sale, like the contract in question, may be interpreted as an equitable mortgage if any of the circumstances in Art. 1602 of the New Civil Code, such as the gross inadequacy of the price, is present.

The other factor to consider is the continuous and unmolested physical possession of the contested property by petitioners for almost three (3) years, from the time of the alleged sale of the property in 1985 to the filing by petitioners of the case for annulment of the deed of sale in 1988. Although symbolically, the Deed of Absolute Sale transferred possession of the property to respondent Capistranos, it was petitioners, the supposed vendors, who remained in physical possession of the property. In fact, it does not even appear from the records that the Capistranos ever declared the property in their names for taxation purposes or paid taxes thereon since the execution of the document. Neither is there any showing that private respondents or any person acting in their behalf ever demanded of petitioners to vacate the premises after the “execution” of the “deed of sale” in their favor.

Verily, had the intention of the parties been a contract of sale and not merely a contract of mortgage, private respondents could have asserted their right to possess the property, and would not have allowed petitioners to freely stay thereon for such a long period of almost three (3) years. Private respondents’ decision to eject petitioners from the property came only after the institution of this case by petitioners; obviously an afterthought, and designed merely to harass petitioners.

In determining the nature of a contract, the Court looks at the intent of the parties and not at the nomenclature used to describe it. Pivotal to deciding this issue is the true aim and purpose of the contracting parties as shown by the terminology used in the covenant, as well as “by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement.” In this regard, parole evidence becomes admissible to prove the true intent and agreement of the parties which the Court will enforce even if the title to the property in question has already been registered and a new transfer certificate of title issued in the name of the transferee.

Indeed, all these circumstances, taken together, are familiar badges of an equitable mortgage. Private respondents could not in a pactum commissorium fashion appropriate the disputed property for themselves as they appeared to have done; otherwise, their act will not be countenanced by this Court being contrary to good morals and public policy hence void. If they wish to secure a perfect title over the mortgaged property, they should do so in accordance with law, i.e., by foreclosing the mortgage and buying the property in the auction sale.

Moreover, we have ruled that in case of doubt in the circumstances surrounding the execution of a contract, as in this case, the least transmission of rights and interests shall prevail if the contract is gratuitous and, if onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.

*Case digest by Mary Tweetie Antonette G. Semprun, JD – IV, Andres Bonifacio College, SY 2019 – 2020