G.R. No. 10265 - Cuyugan vs. Santos

The plaintiff, Eutiquiano Cuyugan, as the sole heir of his mother, Guillerma Cuyugan y Canda, alleged that his mother, in 1895, borrowed P3,500 from the defendant, Isidoro Santos.
To secure the loan, she executed a written instrument (Exhibit C) which on its face was a deed of sale of a parcel of land, incorporating a reserved right for the vendor to repurchase for P3,500.

Though the document appeared as a sale, the parties intended it merely to evidence a loan and serve as a security for the repayment of the loan amount.
The deed allowed the plaintiff’s mother to remain in possession of the land as a nominal tenant of the defendant, agreeing to an annual rent of P420 – an amount equal to the agreed 12% annual interest rate on the loan.

In 1897, the plaintiff’s mother paid P1,000 towards the loan, following which the nominal rent was reduced from P420 to P300 per annum. This adjustment corresponded to the interest on the reduced principal balance.
The reduced annual rent, reflecting the diminished debt, implied a continuing relationship governed by the loan’s terms rather than a conventional sale.

Shortly before the institution of the present action, the defendant served notice demanding a reversion to the original annual payment of P420.
Upon the plaintiff’s refusal to comply with the renewed demand, the defendant set up a claim of full ownership and threatened to eject the plaintiff from the land.
The plaintiff tendered an offer to pay the full remaining debt along with one year’s unpaid interest, but the defendant rejected the offer and refused to cancel or reconvey the deed.

At the trial level, a demurrer to the complaint was sustained on the ground that the pleading, supported by the deed, did not constitute a cause of action, given its appearance as a sale with a reserved right of repurchase.
The lower court noted that the deed stated a sale, the repurchase price had not been paid in full, and the allowed repurchase period had expired.
The case was subsequently brought on appeal challenging the ruling on the demurrer.

The demurrer admitted the material facts of the complaint, which, if proven, indicated that the document was intended as a security for a loan (i.e. a mortgage) rather than an absolute conveyance.
The acceptance by the defendant of partial payment and the subsequent reduction in rent are strong indicators that the true nature of the transaction was a secured loan and not a bona fide sale.

Whether the instrument, although in the form of a deed of sale with a reserved right of repurchase, truly evidenced a loan secured by the land rather than an absolute sale.
Whether extrinsic (parol) evidence is admissible to show that the parties’ real intention was to create a security arrangement (a mortgage) rather than effect a sale.
Whether the acceptance of partial repayment (P1,000) and the adjustment in the annual rent reflect an underlying agreement that was inconsistent with an irrevocable sale.
Whether the trial court erred in sustaining the demurrer by relying solely on the face of the deed and excluding evidence that could reveal the true contractual intent.