G.R. No. 119794 - Tuazon vs. Court of Appeals

On July 15, 1987, spouses Tomas S. Tuazon and Natividad S. Tuazon executed an Absolute Deed of Sale selling a 650-square-meter conjugal lot (along with a two-storey building with Apartment Units Nos. 161 and 163) to John Siy Lim.
The property, originally covered by Transfer Certificate Title (TCT) No. 860, was cancelled and replaced by TCT No. 152621 issued in Lim’s name following the duly registered deed.
The deed was drafted by Atty. Crisostomo, counsel for the Tuazons.

Prior to the sale, on December 18, 1970, Tomas See Tuazon (then serving as President and General Manager of Universal Rubber Products, Inc.), together with co-mortgagors, mortgaged the subject lot to the Philippine Bank of Commerce (PBCom) to secure a loan amounting to P4,830,265.90.
When the mortgagors defaulted, PBCom foreclosed and sold the property at public auction, with PBCom emerging as the highest bidder.
Amid PBCom’s auction and redemptive negotiations, complex arrangements evolved involving Tuazon, Lim, and Bernice (the daughter of the Tuazons) concerning a loan accommodation meant to aid in redeeming the property.

Petitioner contended that even before the 1-year redemption period (expiring July 28, 1987), discussions occurred whereby Bernice informed her parents that Lim was willing to assist with a P1 Million redemption.
Negotiations ensued wherein the arrangement proposed a split: 60% (P600,000) as a URPI loan secured by chattel mortgage of machinery and 40% as Lim’s personal loan.
An adjustment of P20,000 was made to account for advance rent on rented office space, reducing Lim’s personal loan to P380,000.
Lim eventually redeemed the property from PBCom for P1,000,000, subject to his surrendering stock certificates in a dacion en pago arrangement.

To protect creditors and prevent levies from suppliers and laborers of Universal Rubber Products, Inc., the title was transferred to Lim through a transaction priced at P380,000.
Despite the issuance of the new title in Lim’s favor, the original title and associated documents were delivered to the petitioner.
Petitioner continued residing on the property even after delivery of the title.
Tensions later surfaced between Bernice and Lim, and after a period during which Lim began asserting control—paying real estate taxes and leasing out part of the property—petitioner brought a Complaint for Reformation of Contract, Quieting of Title with Damages.
Petitioner argued that the true intention was to effect a loan accommodation (thus constituting an equitable mortgage) rather than an absolute sale.

The Branch 131 Regional Trial Court initially rendered a decision on December 2, 1991, in favor of Lim, declaring the deed an absolute and unconditional sale.
Subsequent motions for reconsideration led, on November 16, 1992, to a modified ruling that reformed the deed as an equitable mortgage, directed petitioner to pay the accommodation, and reinstated the original title.
Lim elevated the case to the Court of Appeals on July 28, 1993, contesting the application of the doctrine of pari delicto and the characterization of the transaction.
In its decision dated March 31, 1995, the Court of Appeals reversed the reconsidered order and reinstated the original trial court decision that upheld the absolute sale, while also addressing issues concerning unpaid rentals.

On June 2, 1995, petitioner subsequently filed a Petition for Review on Certiorari before the Supreme Court.
Petitioner charged that:

The Court of Appeals erred in characterizing the transaction as an absolute sale rather than an equitable mortgage.
The lower court erred in holding petitioner liable for unpaid rentals.

Petitioner further asserted that the purchase price was inadequate and contended that his continued possession implied ownership rights.

Evidence pertaining to the fair market value includes claims of potential buyers and a valuation by a bank agent, none of which were substantiated by the records.
Payment of transfer taxes and capital gains tax (with a capital gains tax receipt reflecting 5% of the fair market value used as tax base) supported the validity of the sale price.
The subsequent actions of both parties—Lim’s payment of real estate taxes and the leasing arrangements—reinforced the practical effect and legal recognition of the sale as absolute.

Whether the Absolute Deed of Sale executed on July 15, 1987, was a bona fide absolute sale or a simulated transaction concealing an equitable mortgage intended to secure a debt.

Whether the alleged inadequacy of the purchase price and the petitioner’s retention of possession substantiate the application of Article 1602 (and by extension Article 1604) regarding equitable mortgage.

Whether there was sufficient evidence—such as a meeting of minds, fraud, or inequitable conduct—to justify the reformation of the written instrument to reflect a true mortgage agreement.

Whether the petitioner should be held liable for unpaid rentals during the period when the property was occupied, in light of the subsequent leasing arrangements executed by Lim.