Lustan v. Court of Appeals
REITERATIONFacts
The Antecedents: Petitioner Adoracion Lustan owned a parcel of land which she leased to Nicolas Parangan. During the lease, Parangan extended loans to Lustan and, using Special Powers of Attorney, secured agricultural loans from the Philippine National Bank (PNB) with Lustan's land as collateral. Lustan later signed a Deed of Pacto de Retro Sale and a Deed of Definite Sale, which Parangan represented as mere evidence of her indebtedness. Parangan asserted ownership based on the Deed of Definite Sale, leading to Lustan filing a case to cancel liens, quiet title, and recover possession. Procedural History: The Regional Trial Court (RTC) of Iloilo City ruled in favor of Lustan, declaring the Deed of Sale an equitable mortgage, ordering the cancellation of unauthorized loans, and directing Parangan to pay the loans secured from PNB and return possession of the land upon Lustan's payment of P75,000.00. Upon appeal, the Court of Appeals (CA) reversed the RTC's decision. This led to the present petition before the Supreme Court. The Petition: The petitioner, Adoracion Lustan, seeks review of the CA's decision, arguing that the CA erred in finding that the conditions for an equitable mortgage under Article 1602 of the Civil Code were not proven, that she signed the Deed of Sale with knowledge of its contents, and in giving full faith and credit to the testimony of a witness whose account contradicted other evidence. The petition contends that the Deed of Definite Sale was intended as security for a debt, not an absolute sale, and questions the validity of loans secured by Parangan using her property as collateral without her full knowledge.
Issue(s)
Whether the Deed of Definite Sale is an equitable mortgage. Whether petitioner's property is liable to PNB for the loans contracted by Parangan by virtue of the Special Power of Attorney.
Ruling
The Supreme Court reinstated the judgment of the lower court with modifications, declaring the Deed of Definite Sale as an equitable mortgage, ordering the return of possession of the subject land to the petitioner upon payment of P75,000.00 within ninety (90) days, declaring the mortgages in favor of PNB as valid and subsisting, and ordering private respondent Parangan to pay petitioner attorney's fees and costs.
Ratio Decidendi
On the issue of whether the Deed of Definite Sale is an equitable mortgage: The Court held that the Deed of Definite Sale is an equitable mortgage. It emphasized that if the words of a contract appear contrary to the evident intention of the parties, the latter shall prevail. The evidence showed that the parties intended to consolidate Lustan's indebtedness to Parangan in a single instrument and secure it with the property. The Court invoked Article 1602(6) in relation to Article 1604 of the Civil Code, which presumes a contract of sale to be an equitable mortgage when it can be fairly inferred that the real intention is to secure the payment of a debt. The Court found that Lustan, being illiterate, signed the deed without full understanding of its contents, relying on Parangan's assurance that it merely evidenced her indebtedness. The burden to prove full explanation of the terms to an illiterate party rests on the party enforcing the contract, a burden not discharged by Parangan. The Court also found contradictions in the testimonies of Parangan's witnesses, casting doubt on their credibility, and gave more weight to the testimony of Lustan's witness who stated the contract was not read or explained and was understood to consolidate debts. On the issue of whether petitioner's property is liable to PNB for the loans contracted by Parangan: The Court ruled in the affirmative, holding that third persons may secure loans by pledging or mortgaging their own property, and valid consent makes the mortgage binding even if the loans were solely for the benefit of the borrower. The Court found that the Special Powers of Attorney executed by Lustan in favor of Parangan were continuing in nature. Absent a valid revocation furnished to the mortgagee (PNB), the SPAs continued to have force and effect as against third persons who had no knowledge of any lack of authority. Article 1921 of the Civil Code protects third parties when an agency is revoked without their notice. The Court further noted that even if the agent exceeded his authority, the principal is solidarily liable if the principal allowed the agent to act as though he had full powers, as per Article 1911 of the Civil Code. The property mortgaged is directly and immediately subjected to the mortgage and is liable for the fulfillment of the obligation, subject to execution and sale. However, the petitioner has the right to demand indemnification from Parangan for any amount paid from the proceeds of her property to satisfy the unpaid debts.
Main Doctrine
A contract purporting to be an absolute sale may be presumed to be an equitable mortgage if it can 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, especially when one party is illiterate and the terms of the contract were not fully explained.