Dala v. Auticio
REITERATIONFacts
The Antecedents: Respondent Editha A. Auticio filed a petition to consolidate ownership over a 1,378 square meter parcel of land, alleging that she purchased it from petitioner Froilan Dala on June 4, 2001, for P32,000.00, through a Deed of Sale Under Pacto de Retro. She claimed the six-month redemption period expired without petitioner repurchasing the property. Respondent further alleged that petitioner surreptitiously encumbered the land and offered it for sale, delaying the consolidation of ownership. Petitioner countered that the true agreement was a loan of P20,000.00 with 10% monthly interest for six months, with the land serving as security. He claimed respondent compelled him to sign the Deed of Sale Under Pacto de Retro, which did not reflect their actual agreement, and that the price was disproportionate to the land's market value. Petitioner continued to possess the land, pay taxes, and offered to repay the loan plus interest, which respondent refused. Procedural History: The respondent's petition was filed with the Regional Trial Court (RTC), Branch 1, Borongan, Eastern Samar. The RTC, in its Decision dated July 21, 2008, declared the contract a true sale with right to repurchase but, citing Article 1606 of the Civil Code, allowed petitioner to repurchase the property within 30 days from finality of judgment for P32,000.00 plus P182,000.00 in interest. On appeal, the Court of Appeals, in its Decision dated August 29, 2012, affirmed the RTC's finding of a pacto de retro sale but modified the dispositive portion by deleting the provision allowing repurchase and declaring respondent the absolute owner. Petitioner's motion for reconsideration was denied by Resolution dated December 19, 2012. The Petition: Petitioner Froilan Dala assails the Court of Appeals' dispositions through a petition for review on certiorari under Rule 45 of the Rules of Court. He reiterates his argument that the contract was an equitable mortgage, not a pacto de retro sale, emphasizing his continued possession of the property and the exorbitant interest rate. He contends that the Court of Appeals erred in not holding that the ten percent (10%) monthly interest was unconscionable and in failing to recognize the transaction as an equitable mortgage, despite the circumstances indicating it was intended to secure a debt. He seeks to have the contract declared an equitable mortgage and to be allowed to redeem the property.
Issue(s)
Whether the contract executed by the parties is a sale with pacto de retro or an equitable mortgage. Whether the stipulation for automatic appropriation of the property upon failure to repurchase constitutes pactum commissorium and is void.
Ruling
The Supreme Court reversed the Court of Appeals, ruling that the purported contract of sale with pacto de retro is an equitable mortgage. The Court found that the parties' real intention was to secure a loan with the land as collateral. The stipulation for automatic appropriation of the property upon failure to repurchase was declared void as pactum commissorium. The Municipal Assessor of Borongan, Eastern Samar was directed to cancel the tax declaration in respondent's name, and petitioner was granted the right to redeem the property upon full payment of the mortgage obligation with legal interest.
Ratio Decidendi
On whether the contract is a sale with pacto de retro or an equitable mortgage: The Court held that the contract, though denominated as a Deed of Sale Under Pacto de Retro, was in reality an equitable mortgage. The policy of the law is to discourage pacto de retro sales and to protect vulnerable parties from being taken advantage of by creditors, thus, in case of doubt, such contracts are construed as equitable mortgages. The Court found that the parties' intention was not to sell the land but to use it as security for petitioner's loan. This was supported by several circumstances: (1) the petitioner remained in possession of the land even after the execution of the contract and continued to pay realty taxes thereon; (2) the petitioner's testimony and his sister's corroboration indicated that the land was intended merely as collateral for a loan from respondent, who was a known money lender; and (3) the price of ₱32,000.00 for a 1,378 square meter parcel of coconut land was considered potentially inadequate, especially given petitioner's financial distress at the time. The Court emphasized that the presence of any circumstance under Article 1602 of the Civil Code is sufficient to presume an equitable mortgage. On whether the stipulation for automatic appropriation constitutes pactum commissorium and is void: The Court declared the stipulation in the Deed of Sale that "if the VENDOR shall fail to exercise his right to repurchase as herein granted within the period stipulated, then this conveyance shall become absolute and irrevocable, without the necessity of drawing up a new deed of absolute sale, subject to the requirement of the law regarding consolidation of ownership" as void for being a pactum commissorium. The Court cited Article 2088 of the Civil Code, which prohibits creditors from appropriating mortgaged property upon default. The Court explained that pactum commissorium requires a stipulation for automatic appropriation by the creditor of the mortgaged property in case of non-payment. Such an arrangement is contrary to morals and public policy. The Court noted that this stipulation contradicts the nature of a true pacto de retro sale, where ownership is immediately vested in the vendee subject to the vendor's right of redemption, and not automatically transferred upon default without foreclosure proceedings. The Court reiterated that this type of stipulation is void and unenforceable.
Main Doctrine
A contract denominated as a sale with right to repurchase (pacto de retro) will be presumed to be an equitable mortgage if any of the circumstances enumerated in Article 1602 of the Civil Code are present, particularly when the parties' real intention is that the transaction shall secure the payment of a debt. The presence of pactum commissorium also renders the stipulation void.