Sps. Onofre v. Vda.

De Leon
G.R. No. 197503, Oct 9, 2019
First Division
Topic: Equitable Mortgage

Facts: The late Juan de Leon (Juan) was the owner of a parcel of land consisting of nineteen (19)
hectares located in Barangay Sula, San Jose, Tarlac. Before his death, he obtained a loan from
Rural Bank of Zaragoza (the bank) which was secured by a Real Estate Mortgage over the subject
property. Juan was unable to pay his loan obligation with the bank. Consequently, on Dec 18,
1984, Juan and his wife, respondent Natividad P. Vda. de Leon (Natividad) entered a Deed of Sale
with Assumption of Mortgage with petitioners Onofre G. Basa (Onofre) and Rosa de Leon (Spouses
Basa). 
The parties, however, have different interpretations of the instrument. Sps. Basa insisted that the
subject property was validly transferred and conveyed in their favor while respondents claimed
that the true intention of the parties in executing the said instrument was for Spouses Basa to pay
the loan obligation of Juan with the bank and take possession of the subject property as the new
mortgagee thereof.  Apparently, another Deed of Sale, dated Jan 14, 1973, was previously
executed, transferring a 5-hectare portion of the subject property to Sps. Basa. 
Respondents filed a complaint seeking to nullify the Deed of Sale and the Deed of Absolute Sale
with Assumption of Mortgage and to declare the latter deed as a mortgage and not a Deed of
Sale. 
Respondents claimed that they inherited the subject property when Juan died on Jan 22, 1997.
They alleged that the subject property was mortgaged by Juan in favor of the bank to secure a loan
in the amount of P28,339.50. Juan was unable to pay his loan, so he pleaded with Sps. Basa to
assume the obligation. Allegedly, under their agreement, Sps. Basa would take possession of the
subject property until Juan would be able to repay them. Respondents insisted that the true intent
and agreement of the parties was for Spouses Basa to pay Juan's loan obligation with the bank.
Spouses Basa even assured them that they would not take advantage of the provisions of the
simulated Deed of Sale. 
For their part, Sps. Basa claimed that Juan convinced them to purchase the subject property to
prevent it from being foreclosed by the bank. Juan executed the Deed of Absolute Sale to transfer
the subject property to Spouses Basa without qualification and/or right of redemption.
Consequently, Spouses Basa paid the entire amount of the loan with the bank and was issued a
Cancellation and Discharge of Mortgage. However, Juan did not transfer the title of the subject
property in their names; thus, they decided to process the transfer on their own.

Issue: Whether the transaction entered by the parties was an equitable mortgage.

Ruling: The Deed of Absolute Sale with Assumption of Mortgage between the parties is an equitable
mortgage and not a contract of sale.
An equitable mortgage is defined as one which although lacking in some formality, or form or
words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties
to charge real property as security for a debt and contains nothing impossible or contrary to
law.  Its essential requisites are: (1) that the parties entered a contract denominated as a contract
of sale; and (2) that their intention was to secure an existing debt by way of a mortgage. 
Article 1602 of the Civil Code states that a contract shall be presumed to be an equitable
mortgage, in any of the following cases: (1) When the price of a sale with a right of repurchase is
unusually inadequate; (2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument extending the
period of redemption or granting a new period is executed; (4) When the purchases retains for
himself a part of the purchase price; (5) When the vendor binds himself to pay the taxes on the
thing sold; (6) In any other case where it may 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.
Based on the records of the case, this Court finds that there is no reason to depart from the
conclusion of the RTC and the CA that the Deed of Absolute Sale with Assumption of Mortgage
entered by the parties is, in fact, an equitable mortgage.
Jurisprudence consistently shows that the presence of even one of the circumstances enumerated
in Article 1602 is sufficient to convert a purported contract of sale into an equitable mortgage. In
the instant case, the presence of at least two badges of an equitable mortgage creates a strong
presumption that the real transaction between the parties was an equitable mortgage.
1.  The price of the sale is grossly inadequate.
There is no provision in said deeds stating that the petitioners sold their property in partial
payment of their outstanding account to the respondents (P3,198,886.47), and partly for an
additional P2,078,000.00. If it is true, as claimed by the respondents, that the petitioners sold
the seven parcels of land to them not only for P2,078,000.00 as appearing in said deeds, but also
for the outstanding account of P3,198,886.47, the same should have been specifically and
positively stated in the said deeds.
Also, this Court agrees with the RTC that even if the purchase price is P115,854.27, as petitioners
insist, the amount is still grossly inadequate as consideration for the 19 hectares tract of land. As
the RTC declared:
Moreover, the purchase price in the amount of P6,000.00 mentioned in the questioned deed is
unusually inadequate for the 19 hectares tract of land. Even if this Court will take into
consideration the total amount of payments made by the defendants with the mortgagee Bank
which is no less than P109,854.27 [outstanding balance of the late Juan [d]e Leon as of September
26, 1989 per letter of the authorized deputy of the mortgagee bank and attached to the records of
this case], still, it is unusually inadequate for the said huge tract of land. x x x 
2.  The real intention of the parties may be inferred from the circumstances surrounding the
purported sale.
In Spouses Reyes v. CA, this Court ruled that utmost consideration must be given to the intention
of the parties considering the relative situation of each and the circumstances surrounding the
execution of the contract, thus:
In determining whether a deed absolute in form is a mortgage, the court is not limited to
the written memorials of the transaction. The decisive factor in evaluating such agreement is the
intention of the parties, as shown not necessarily by the terminology used in the contract but by
all the surrounding circumstances, such as the relative situation of the parties at that time, the
attitude acts, conduct, declarations of the parties, the negotiations between them leading to the
deed, and generally, all pertinent facts tending to fix and determine the real nature of their design
and understanding.
In the instant case, it is undisputed that Juan and Natividad were exhausting all means to save the
subject property from being foreclosed by the bank. At first, they asked help from Natividad's
elder brother. After he refused, they convinced Spouses Basa to assume their obligation. As
agreed, upon, Spouses Basa would take possession of the subject property until Juan is able to
repay them.  Thus, they executed the Deed of Sale with Assumption of Mortgage. Their true
intention, however, was for Spouses Basa to be the new mortgagees of the subject property upon
cancellation and discharge of the mortgage by the bank.
There is no doubt that the real transaction between the parties is an equitable mortgage and not a
sale. Indeed, it is contrary to human experience that a person would easily part with his property
after incurring a debt. Rather, he would first look for means to settle his obligation and the selling
of his property would be his last resort.  Significantly, the Court has previously ruled that when in
doubt, courts are generally inclined to construe a transaction purporting to be a sale as an
equitable mortgage, which involves a lesser transmission of rights and interests over the property
in controversy.