Cruz v. Court of Appeals
REITERATIONFacts
The Antecedents: Petitioners Rolando and Rosita Cruz, owners of a dry goods stall, obtained several loans from private respondents, spouses Miguel and Cecilia Capistrano, who were in the money lending business on a "five-six" basis. As security for the loans, petitioners surrendered their Transfer Certificate of Title (TCT) No. S-98034 and signed a blank check. Petitioners later discovered that their TCT was cancelled and a new one was issued in the name of the Capistranos based on a Deed of Absolute Sale, which petitioners claimed was falsified by typing a deed of sale on blank papers they had signed with the understanding it would be a mortgage deed. Private respondents claimed the deed of sale was voluntarily executed by petitioners to offset their indebtedness. Procedural History: Petitioners filed a complaint for annulment of the Deed of Absolute Sale, the TCT issued to the Capistranos, and subsequent mortgage deeds. They also filed a criminal complaint for Estafa Through Falsification of Public Documents. The criminal complaint was dismissed for lack of merit. The Capistranos filed counter-complaints for Violation of CA No. 142, BP 22, and Estafa, and an ejectment case. Petitioners were exonerated in the criminal cases. The RTC ruled in favor of petitioners, declaring the Deed of Absolute Sale null and void and ordering the cancellation of the TCT. The Court of Appeals reversed the RTC, finding no sufficient evidence of fraud and upholding the validity of the Deed of Absolute Sale. Petitioners' motion for reconsideration was denied. The Petition: Petitioners assailed the Court of Appeals' decision, arguing that the appellate court erred in upholding the validity of the Deed of Absolute Sale and failing to recognize the transaction as loans. They contended that the practice in "five-six" lending, the awkward signatures on the deed, the gross inadequacy of the price (₱66,000.00 for a property worth significantly more), and the fact that they retained possession of the property all indicated an equitable mortgage, not a sale. They also argued that it was inconceivable to trade their property valued at ₱750,000.00 for a ₱195,000.00 debt.
Issue(s)
Whether the Deed of Absolute Sale is an equitable mortgage. Whether petitioners' loans to private respondents have been fully paid.
Ruling
The Supreme Court modified the decision of the Court of Appeals. It ruled that the Deed of Absolute Sale was an equitable mortgage, not a sale. The Registrar of Deeds of Las Piñas was directed to cancel TCT No. (98729) T-2156-A and issue a new title in the name of petitioners, subject to the equitable mortgage rights of the private respondents. Petitioners were ordered to pay the unpaid balance of ₱66,000.00 with legal interest within ten (10) months from the finality of the decision, otherwise the property would be sold at public auction.
Ratio Decidendi
On the issue of whether the Deed of Absolute Sale is an equitable mortgage: The Court held that beneath the veneer of an absolute deed of sale was a concealed mortgage. Several circumstances pointed to this conclusion: (1) the gross inadequacy of the price (₱66,000.00 for a property acquired and improved at a cost of ₱358,000.00), which is a strong badge of equitable mortgage under Article 1602(1) of the Civil Code. The Court noted that no seller in their right senses would part with valuable property for such an unusually inadequate consideration, especially considering the constant upswing in real property values. (2) The continuous and unmolested physical possession of the property by the petitioners for almost three years after the alleged sale, which is another indicator of an equitable mortgage under Article 1602(2). Had it been a sale, the buyers would have asserted their right to possess the property. (3) Respondent Cecilia Capistrano's admission during trial that the title was delivered to them as security for the payment of the loans, directly supporting the existence of a mortgage under Article 1602(6), which covers cases where the real intention is to secure the payment of a debt. The Court emphasized that in determining the nature of a contract, the intent of the parties prevails over the nomenclature used, and parole evidence is admissible to prove this true intent. The Court also cited Article 1604 of the Civil Code, stating that Article 1602 applies to contracts purporting to be absolute sales. The Court reiterated the principle that a creditor cannot appropriate mortgaged property through a pactum commissorium, as such stipulation is void. The ownership of the mortgaged property remains with the mortgagor. On the issue of whether petitioners' loans to private respondents have been fully paid: The Court was not inclined to completely sustain petitioners' claim of full payment due to the absence of adequate evidence. While acknowledging petitioners' efforts to settle their indebtedness, the Court found that they had not fully paid the subject loans. The Court noted the private respondents' insistence that no payment had been made, yet curiously, there was no record of any demand for payment from the Capistranos despite the maturity of the loans. The Court surmised that the truth lay somewhere in the middle: petitioners made partial payments but did not fully settle the debt, and private respondents had a valid credit, but not for the entire original loan amount. The Court concluded that the purchase price of ₱66,000.00 stated in the deed of sale likely represented the unpaid balance of the loans, for which the property was appropriated in full satisfaction thereof. Therefore, the Court ordered petitioners to pay this balance with legal interest.
Main Doctrine
A contract appearing on its face to be a definite sale may be interpreted as an equitable mortgage if circumstances such as gross inadequacy of price, continued possession by the vendor, or the vendor's admission that the title was given as security, are present, indicating the parties' true intention was to secure a debt, not to transfer ownership.