Arrofo v. Quiño
REITERATIONFacts
1. The Antecedents: Pedro Quiño owned a parcel of land in Basak, Mandaue City. On April 11, 1990, Quiño executed a Deed of Absolute Sale of the land to Renato Mencias, explicitly excluding the house on the property. A second Deed of Absolute Sale, without this exclusion, was executed on March 11, 1991. Subsequently, the property was transferred to Renato's name and then sold to Lourdes S. Arrofo on March 30, 1993. 2. Procedural History: Quiño filed an action for Reconveyance of Property with Annulment of Deeds of Sale and Damages against Renato, his wife Myrna, and Arrofo. Quiño contended that the transaction was a mortgage, not a sale, intended to secure a ₱15,000 loan. The Regional Trial Court ruled in favor of the defendants, upholding the validity of the deeds of sale. Upon appeal, the Court of Appeals reversed the trial court's decision, annulling the deeds of sale and ordering the reinstatement of Quiño's title, finding the transaction to be an equitable mortgage and Arrofo not a buyer in good faith. 3. The Petition: Lourdes S. Arrofo filed a petition for review with the Supreme Court, assailing the Court of Appeals' decision. The petition raises two main issues: whether the Court of Appeals erred in ruling that the Deed of Sale between Quiño and Renato was void as an equitable mortgage, and whether Arrofo was not a buyer in good faith. Arrofo argues that the consideration paid was adequate and that she acted in good faith as a purchaser of registered land.
Issue(s)
Whether the Court of Appeals correctly ruled that the Deed of Sale dated April 11, 1990, executed by Quiño in favor of Renato is void as the true agreement of the parties is one of equitable mortgage. Whether the Court of Appeals correctly ruled that Arrofo is not a buyer in good faith, and thus the Deed of Sale executed by Renato in her favor is void.
Ruling
The petition is denied. The Decision of the Court of Appeals is affirmed with modification regarding the interest rate. Pedro Quiño shall pay 18% interest per annum on his ₱15,000 loan from Renato Mencias. The assailed Decision is affirmed in all other aspects.
Ratio Decidendi
On the issue of whether the transaction is an equitable mortgage: The Court affirmed the appellate court's ruling that the contract between Quiño and Renato is an equitable mortgage, not an absolute sale. The Court reiterated that the decisive factor is the intention of the parties, which can be inferred from surrounding circumstances, not just the contract's terminology. Several circumstances supported this conclusion: (1) Renato and Myrna did not take possession of the property, as evidenced by the continued payment of rentals by the lessee, Flaviano Moralde, Jr., to Quiño; (2) neither the first nor the second Deed of Absolute Sale reflected the parties' true intention, as indicated by the testimony of Fiscal Bienvenido Mabanto, Jr., a witness to the first deed, who stated that the deed was not to be notarized until Quiño's redemption period expired, and Quiño, being illiterate, signed under duress of circumstances; and (3) the consideration paid was unusually inadequate, considering the property's value and the subsequent sale price between Renato and Arrofo. These circumstances fall under paragraphs one, two, and six of Article 1602 of the Civil Code, establishing the transaction as a loan secured by a mortgage. On the issue of whether Arrofo is a buyer in good faith: The Court upheld the appellate court's finding that Arrofo is not a buyer in good faith. While a buyer of registered land is generally not required to look beyond the title, this protection is not absolute. Arrofo, despite conducting an ocular inspection and knowing the property was within her neighborhood, failed to act as a prudent buyer. She observed the house on the property but did not inquire about its occupants or who received the rentals. Crucially, she admitted that Myrna was her lessee in another room of Arrofo's house. The fact that Myrna, who was renting from Arrofo, was selling a property with a house on it should have alerted Arrofo. Arrofo should have inquired about the occupant of the house and the recipient of the rentals, which would have revealed that the lessee was paying Quiño, not Renato and Myrna. This failure to exercise due diligence negates her claim of being an innocent purchaser for value.
Main Doctrine
A contract purporting to be an absolute sale is deemed an equitable mortgage if any of the circumstances enumerated under Article 1602 of the Civil Code are present, indicating the parties' real intention to secure a debt. A buyer of registered land cannot close their eyes to facts that should put a reasonable person on guard, and failure to inquire despite suspicious circumstances negates good faith.