Fernandez v. Del Rosario
REITERATIONFacts
The Antecedents: Paz V. del Rosario executed an instrument (Exhibit 6) on May 21, 1928, selling a parcel of land with an unfinished building to Engracio de Asis y Parafina for P7,000. On the same day, she leased the property back from De Asis for P70 monthly for two years (Exhibit 4). Subsequently, she executed instruments (Exhibits 5 and 3) acknowledging receipt of additional sums of P3,000 and P2,000 from De Asis, increasing the sale price to P12,000, in consideration of further improvements. On June 29, 1928, a new lease agreement (Exhibit A) was executed, revoking the previous one, with a monthly rental of P120 for two years. This new lease stipulated that the tenant (Del Rosario) would assume expenses for improvements, taxes, and mortgage payments to Alfredo Chicote, and that the landlord (De Asis) would sell the property to the tenant for P12,000 plus advances if all conditions were met. Failure to comply would terminate the lease and option to purchase. Del Rosario defaulted on several conditions, including rent, insurance premiums, land tax, and mortgage payments. On December 6, 1929, De Asis sold the property to Rafael Fernandez for P13,000 (Exhibit D), delivering all prior deeds and the lease contract. Fernandez registered the sale and obtained Transfer Certificate of Title No. 34475 (Exhibit B). Procedural History: Rafael Fernandez filed a complaint against Paz V. del Rosario for ejectment, seeking to recover possession of the property, payment of rent, and damages. The defendant denied the allegations and asserted that the transaction was a loan secured by a mortgage in the form of a sale with a lease attached, reserving the right to redeem. The Court of First Instance of Manila dismissed the ejectment case, declared Certificate of Title No. 34475 null and void, ordered Fernandez to execute a deed of conveyance in favor of Del Rosario, and ordered Del Rosario to reimburse Fernandez for the loan amount and advances. Fernandez appealed. The Petition: The plaintiff-appellant, Rafael Fernandez, assigned several errors to the trial court's decision, primarily arguing that the contracts were absolute sales, not loans secured by mortgage, that the defendant was estopped from claiming otherwise, and that he was a purchaser in good faith.
Issue(s)
Whether parol evidence is admissible to show that contracts, appearing as absolute sales, were intended as a loan secured by mortgage. Whether the contracts between Paz V. del Rosario and Engracio de Asis y Parafina were absolute sales or a loan secured by mortgage. Whether Rafael Fernandez was a purchaser in good faith. Whether the trial court erred in ordering the cancellation of Transfer Certificate of Title No. 34475 and refusing to give it full force and effect.
Ruling
The Supreme Court affirmed the dismissal of the ejectment case and the order absolving the defendant from the complaint. It reversed the other aspects of the judgment, specifically the order for Fernandez to execute a deed of conveyance and for Del Rosario to reimburse him, as the case was primarily an ejectment proceeding based on breach of lease, and the court lacked jurisdiction to make other rulings beyond dismissal. The Court held that the transaction was a loan secured by a mortgage, and Fernandez, having knowledge of the true nature of the transaction, acquired no more rights than a mortgagee.
Ratio Decidendi
On the admissibility of parol evidence: The Court reiterated its consistent holding that when the issue is whether a written transaction is an absolute sale or a loan secured by a mortgage, and the answer under oath alleges that the real intention was the latter, parol evidence may be admitted to prove it. This is in line with established jurisprudence that allows extrinsic evidence to show the true nature of a contract when its form belies its substance. The Court cited previous cases such as Cuyugan vs. Santos and Ignacio vs. Chua Hong to support this principle. The defendant's denial of the lessor's title, in this context, does not bar her from proving that the contract of lease, arising from a sale with right to repurchase, was in reality a mortgage contract. On the nature of the contracts: The Court found that the contracts between Paz V. del Rosario and Engracio de Asis y Parafina were intended as a loan secured by a mortgage, not an absolute sale. The Court reasoned that the execution of subsequent instruments increasing the sale price and the lease rental, coupled with the defendant's assumption of significant expenses and mortgage payments, indicated a loan arrangement. The fact that the P7,000 stated in Exhibit 6 was increased with money provided by the defendant herself for improvements, and that the lease was altered to reflect these changes, strongly suggested that the initial P7,000 was not a true sale price but a loan amount. The increase in sale price and rent was merely a mechanism to secure the loan and its interest. On the good faith of Rafael Fernandez: The Court ruled that Rafael Fernandez was not a purchaser in good faith. It reasoned that Fernandez received all the deeds of sale and the lease contract executed by Del Rosario in favor of De Asis. With these documents in his possession, Fernandez could not have failed to discover that the real transaction was a loan secured by a mortgage under the guise of a sale with lease. Therefore, when he purchased the rights of De Asis, he knew that he was acquiring only the rights of a mortgagee, not those of a bona fide vendee. His registration and acquisition of a transfer certificate of title did not protect him because he lacked good faith. On the cancellation of the title and the plaintiff's rights: The Court affirmed the trial court's decision to declare Certificate of Title No. 34475 null and void. Since the Court found that the transaction was a mortgage and that Fernandez was not a purchaser in good faith, he acquired no more rights than the mortgagee had. Consequently, he did not acquire the rights of a vendee, and the mortgagor (Del Rosario) remained the owner of the property, entitled to remain in possession. The Court's ruling in Sevilla and De Leon vs. Tolentino was applied, stating that a lessee can prove that a contract of sale with right to repurchase, from which the lease arose, was actually a mortgage, thus negating the lessor's right to possession.
Main Doctrine
A vendee of property with a Torrens transfer certificate of title who knows from the documents delivered to him by the vendor that the latter's title is fictitious, and that his only right is that of a mortgagee, does not act in good faith and acquires no more right than the vendor had.