Title
Buce vs. Court of Appeals
Case
G.R. No. 75575
Decision Date
Jan 25, 1988
Plaintiffs sold properties to defendants to repurchase foreclosed land, alleging fraud. Court ruled it was a mortgage, not a sale, due to inadequate price, tax payments, and possession.
reformation of instrument
sale
mortgage
A

Case Summary (G.R. No. 75575)

Factual Background

The plaintiffs in the RTC were described as the registered owners of three parcels of land covered by TCT No. 495974 located at Cainta, Taytay, Rizal, and TCT Nos. 128979 and 128980 located at Pandacan, Manila. These properties were mortgaged with Monte de Piedad & Savings Bank to secure a loan of P178,953.37. When the loan matured and remained unpaid by the plaintiffs, the mortgage was foreclosed by the bank.

In July 1979, the plaintiffs purportedly sold the three properties, together with all improvements, to the defendants-spouses for a consideration of P179,000.00. The transaction was embodied in a Deed of Sale, marked as Exhibit A for the plaintiffs and as Exhibit 4 for the defendants. The consideration of P179,000.00 was then used by the plaintiffs to repurchase the foreclosed properties from the bank, as shown by Exhibits 1 and 1-A. After the repurchase, the properties were simultaneously sold and delivered to the defendants-spouses under the same Deed of Sale, Exhibit A.

The plaintiffs later filed an action for reformation of the deed of sale, plus damages. They alleged that, although Exhibit A was denominated as an absolute deed of sale, it did not reflect the parties’ true intention due to alleged fraud and/or inequitable conduct, and they invoked Article 1369 of the Civil Code. They contended that the stated consideration of P179,000.00 was in truth a loan extended by the defendants to the plaintiffs, with the properties mortgaged as security. They further claimed that there was a verbal understanding for a monthly interest of P4,000.00 and that the defendants actually paid interest amounts evidenced by Exhibit B-1, Exhibit B-2, and related computations under Exhibits C, C-1, C-2, and C-3. Plaintiffs also presented evidence intended to show their capacity and the character of the improvements, including pictures (Exhibit D) of a constructed house and tax receipts (Exhibits E, E-1, and E-2) showing payment of real property taxes.

Trial Court Proceedings

After receiving and weighing the evidence, the RTC dismissed the complaint, with costs against the plaintiffs. The RTC’s ruling effectively upheld the character of Exhibit A as a deed of sale rather than an instrument of mortgage security.

Intermediate Appellate Court Proceedings

On appeal to the then Intermediate Appellate Court (now the Court of Appeals), the appellate court reversed the RTC decision. It declared that the document denominated as Deed of Sale (Exhibit A) was in legal effect a real estate mortgage. It ordered the defendants-spouses to execute a formal Deed of Real Estate Mortgage covering the properties in reformation of the document dated September 30, 1979. It also provided for execution of the deed by the court clerk if the defendants failed to comply within thirty (30) days from notice. Further, it directed the Register of Deeds for Manila to cancel and revoke the titles issued in the names of the defendants-spouses and to reinstate the earlier titles of the plaintiffs.

The Parties’ Positions on Review

When the case reached the Supreme Court, petitioners challenged the appellate court’s determination that the transaction was an equitable mortgage. They did not assail the appellate court’s conclusion that the private respondent had been paying interest on the P179,000.00. However, they took exception to the appellate court’s finding that the private respondent remained in possession of the properties. Petitioners argued that such occupancy of the house along Narciso Street, Pandacan was allegedly attributable to a prior verbal accommodation with respondents’ mother, allowing occupancy for two years, after which the private respondent allegedly refused to vacate despite the expiration of the grace period. Petitioners asserted that the respondents’ mother was not presented as a witness to conceal the alleged verbal agreement.

In their overall position, petitioners maintained that the transaction should be treated as a sale, and they attempted to show that any indicia pointing toward mortgage security could be explained by the claimed occupancy arrangement.

Issues

The Supreme Court framed the controversy as a single, controlling issue: whether the written contract entered into between the parties was truly a sale or a real estate mortgage, notwithstanding its denomination as an absolute deed of sale.

Legal Basis and Reasoning

The Supreme Court sustained the appellate court’s finding that the consideration was unusually inadequate and that other surrounding circumstances showed that the parties’ real intention was to secure the repayment of a debt.

First, the Court pointed to evidence on market value. The private respondent testified that the property along Narciso Street in Pandacan, consisting of a house and lot, had a market value of P450,000, another house and lot in Talundon, Pandacan was valued at P50,000, and a vacant residential lot in Brookside Subdivision, Cainta, Rizal was worth P100,000. The Court noted that, even if the private respondent was not an expert, petitioners themselves had stated in their tax declarations that the two Pandacan properties had an aggregate market value of P236,220.00. Adding the third property’s value made the inadequacy of the stated purchase price of P179,000.00 even more apparent. The Court stressed that one Pandacan property had an expensive residential house, a factor that would ordinarily command a “hefty sum” beyond the stated consideration.

Second, the Court found the closeness between the stated sale consideration and the bank indebtedness particularly telling. The petitioners argued that P179,000.00 was the consideration for a sale. Yet the evidence showed that the private respondent’s indebtedness to the bank at the relevant time was P178,953.37, leaving only a difference of P46.63. The Court considered it highly significant that the stated “price” nearly matched the loan to be settled with the bank, supporting the inference that the supposed sale consideration was actually the amount advanced as a loan to enable redemption or repurchase after foreclosure.

Third, the Court relied on payment and possession indicia consistent with a mortgage arrangement. It affirmed that the private respondent continued paying realty taxes for the years 1980 and 1981, even though the subject properties had been covered by the alleged sale. It further addressed petitioners’ attempt to treat subsequent tax payments as inconsistent with mortgage security. The appellate court had already characterized the later tax payments in 1982 as “belated,” occurring only after the complaint was filed on September 9, 1981 and after plaintiffs had already paid taxes for the two years immediately preceding. The Supreme Court treated this as strengthening, rather than weakening, the mortgage inference.

Fourth, on the interest payments, the Supreme Court noted that the appellate court’s conclusion that the private respondent paid interest on the P179,000.00 was not assailed by petitioners.

Fifth, the Court evaluated petitioners’ objection regarding possession. Petitioners contended that the private respondent’s occupancy resulted from a verbal arrangement allowing occupancy for two years, yet the petitioners also admitted that the private respondent’s mother was not presented as witness. The Court held that petitioners could have asked the trial court to subpoena the mother if they were genuinely determined to disclose the alleged verbal agreement, but they did not. Thus, the Court treated petitioners’ explanation as insufficient to overcome the appellate court’s factual conclusions.

The Court also addressed the doctrinal point that, ordinarily, mere disproportion between price and land value might not be sufficient on its own. It explained that prior cases cited by the private respondent had merely stated that disproportion alone, absent other incompatible circumstances, could not justify concluding the transaction was a loan. In the present case, however, the Court held that additional circumstances existed and,

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