G.R. No. 111924 - Lustan vs. Court of Appeals

Case Summary (G.R. No. 111924)

Procedural History

Petitioner filed an action in the Regional Trial Court (RTC), Iloilo City, for cancellation of liens, quieting of title, recovery of possession and damages, asserting that documents executed in favor of respondent Parangan were in substance equitable mortgages and that certain mortgages annotated on TCT No. T-561 were unauthorized. The RTC rendered judgment in favor of petitioner, ordering cancellation of unauthorized liens, declaring the pacto de retro and deed of definite sale null and void (treating them as equitable mortgages), directing Parangan to pay loans to PNB and return the title, and conditioning petitioner’s recovery of possession on payment of P75,000.00 to Parangan. The Court of Appeals reversed the RTC. Petitioner sought review before the Supreme Court.

Facts

Petitioner owned Lot 8069 (10.0057 hectares), TCT No. T-561. On February 25, 1969 she leased it to Parangan for ten years at P1,000.00 annual rent.
During the lease Parangan extended small loans to petitioner. To secure an agricultural loan from PNB, petitioner executed a Special Power of Attorney (SPA) in favor of Parangan on July 29, 1970. A second SPA dated February 18, 1972 enabled Parangan to secure four additional loans (P24,000; P38,000; P38,600; P25,000) on various dates, with the last three claimed to be without petitioner’s knowledge and for Parangan’s benefit. These encumbrances were annotated on the certificate of title.
Petitioner signed a Deed of Pacto de Retro Sale on April 16, 1973; this was later superseded by a Deed of Definite Sale dated May 4, 1979, by which petitioner purportedly conveyed the property to Parangan for P75,000. Parangan represented that the document merely evidenced petitioner’s indebtedness to him.
Upon petitioner’s demand for return of the title, Parangan asserted ownership under the Definite Sale, prompting the RTC action.

Issues Presented

Whether the Deed of Definite Sale is in reality an equitable mortgage (i.e., whether the sale was a guise to secure a loan).
Whether the mortgages annotated in favor of PNB, obtained by Parangan under the Special Powers of Attorney, are enforceable against petitioner (i.e., whether petitioner’s property is liable for those loans).

Legal Standards and Governing Provisions

A contract is perfected by consent (Art. 1315); a contract of sale is perfected when minds meet on the thing and the price (Art. 1475); interpretation favors the parties’ real intent over the literal words of the instrument (Art. 1370, second paragraph).
Articles 1602 and 1604: a contract purporting to be a sale may be presumed an equitable mortgage when certain circumstances exist (e.g., inadequate price, vendor remains in possession, vendor binds self to pay taxes, purchaser retains part of price, or “any other case” showing the transaction is intended to secure a debt). Only one of the enumerated circumstances suffices to raise the presumption. Art. 1604 extends these rules to absolute sales.
When a contracting party is illiterate or cannot understand the language, the party seeking to enforce the contract must prove that its terms were fully explained to that person (Art. 1332; cited jurisprudence).
Agency principles: an SPA that is continuing remains effective as to third persons until revoked by public instrument and notice furnished to the other contracting party (Art. 1921). Acts within the written terms of the SPA bind the principal as against third persons who lack knowledge of any revocation or restriction; the principal may be solidarily liable with the agent if the principal allowed the agent to act as though possessing full powers (Art. 1911 and cited jurisprudence). Mortgaged property of third persons is directly and jointly liable for the obligation guaranteed (Arts. 2085, 2126 and cited authorities).

Supreme Court’s Findings on Nature of the Transaction

The Supreme Court agreed with the RTC that the Deed of Definite Sale was, in substance, an equitable mortgage. The Court found that the parties’ true intent was to consolidate petitioner’s indebtedness to Parangan and to secure the indebtedness with the land. Thus, notwithstanding that the instrument was denominated a sale, parol evidence was admissible to show the true intent, and that intent controlled over the document’s labels. The Court applied Arts. 1602 and 1604 and concluded that the circumstances established warranted the presumption of equitable mortgage, specifically under the catch-all provision (Art. 1602(6)) where it may be fairly inferred the transaction was intended as security for debt.

Admissibility of Parol Evidence and Witness Credibility

The Court considered petitioner’s illiteracy and the lack of evidence that the deed’s contents were read and explained to her. When a party is illiterate, the burden is on the party enforcing the contract to show that it was fully explained in a language understood. The Court found that this burden was not satisfied. The CA’s reliance on the testimony of witness Delia Cabial was rejected because of material contradictions between Cabial’s testimony and that of the notary (Judge Lebaquin), undermining her credibility. The testimony of petitioner’s witness Celso Pamplona, who stated the document was not read or explained and that he understood the document to be evidencing petitioner’s indebtedness, was credited. On credibility and record review, the Supreme Court concluded the deed did not reflect the real intention of the parties and was therefore an equitable mortgage.

Agency, Special Power of Attorney, and Liability of the Property to PNB Loans

The Court ruled that the mortgages in favor of PNB were valid and subsisting. The SPA granted by petitioner to Parangan authorized him to obtain the indicated loans, and the SPA was continuing in nature; absent revocation by public instrument and notice to PNB, the bank had no notice of any limitation or revocation. An act within the written terms of the SPA is binding on the principal as to third persons. Even if Parangan exceeded authority in obtaining some loans for his own benefit, petitioner’s property, which was expressly mortgaged, nonetheless became directly liable for the loans. The principal may seek indemnification or reimbursement from the agent (Parangan) for amounts paid to the bank or otherwise discharged due to the mortgages; the Court recognized petitioner’s right to demand proportional indemnification from Parangan should the property be sold to satisfy unpaid debts.

Errors by the Court of Appeals and Standard of Review

The Supreme Court found reversible errors in the Court of Appeals’ factual assessment, especially its acceptance of Cabial’s testimony and rejection of the RTC’s credibility determinations and factual

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Case Syllabus (G.R. No. 111924)

Facts of the Case

Petitioner Adoracion Lustan is the registered owner of Lot 8069 of the Cadastral Survey of Calinog, Iloilo, containing an area of 10.0057 hectares, covered by Transfer Certificate of Title No. T-561.
On February 25, 1969, petitioner leased the property to private respondent Nicolas Parangan for ten (10) years at an annual rent of P1,000.00.
During the lease period, Parangan regularly extended small loans to petitioner to defray daily expenses and finance her daughter's education.
On July 29, 1970, petitioner executed a Special Power of Attorney (SPA) in favor of Parangan to secure an agricultural loan from Philippine National Bank (PNB) with the lot as collateral.
On February 18, 1972, petitioner executed a second SPA, by virtue of which Parangan secured four additional loans in the amounts of P24,000.00; P38,000.00; P38,600.00; and P25,000.00 on December 15, 1975; September 6, 1976; July 2, 1979; and June 2, 1980, respectively.
The last three loans were obtained without petitioner’s knowledge and their proceeds were used by Parangan for his own benefit.
The encumbrances from these loans were duly annotated on the certificate of title.
On April 16, 1973, petitioner signed a Deed of Pacto de Retro Sale in favor of Parangan (as stated in the source). That instrument was later superseded by a Deed of Definite Sale dated May 4, 1979, which petitioner signed after Parangan represented that the document merely evidenced the loans he had extended to her.
For fear of further encumbrances, petitioner demanded return of her certificate of title; Parangan refused and asserted ownership by virtue of the Deed of Definite Sale under which petitioner purportedly conveyed the property for P75,000.00.

Procedural History

Petitioner filed an action in the Regional Trial Court (RTC) of Iloilo City for cancellation of liens, quieting of title, recovery of possession and damages against Parangan and PNB.
The RTC rendered judgment ordering, among other things: cancellation of unauthorized loans and encumbrances on TCT No. T-561 (entries nos. 286231; 338638; and 352794); declaring the Deed of Pacto de Retro Sale and the Deed of Definite Sale null and void and to be deeds of equitable mortgage; ordering Parangan to pay all loans he secured from PNB and PNB to return TCT No. T-561 to petitioner; ordering Parangan to return possession upon petitioner’s payment of P75,000.00 within 90 days (otherwise sale ordered to satisfy payment); and ordering Parangan to pay petitioner attorney’s fees of P15,000.00 and costs.
On appeal, the Court of Appeals reversed the RTC.
Petitioner elevated the case to the Supreme Court by petition, alleging errors by the CA including its conclusion that Art. 1602 conditions were not proven, that petitioner signed the deed with knowledge of its contents, that the testimony of Delia Cabial deserved full credit, and that the SPA authorizing “unlimited” loans was relevant.

Issues Presented

Whether the Deed of Definite Sale is in reality an equitable mortgage.
Whether petitioner’s property is liable to PNB for the loans contracted by Parangan by virtue of the Special Power(s) of Attorney.

Trial Court Findings (as recited in the record)

The RTC found that certain loans were unauthorized and ordered cancellation of attendant encumbrances on the TCT (entries nos. 286231; 338638; and 352794).
The RTC declared the Deed of Pacto de Retro Sale (dated in its decision as April 25, 1978) and the Deed of Definite Sale (dated in its decision as May 6, 1979) executed by petitioner in favor of Parangan as null and void and characterized them as deeds of equitable mortgage.
The RTC ordered Parangan to pay all loans he secured from PNB that used TCT No. T-561 as security and ordered PNB to return the TCT to petitioner.
The RTC ordered return of possession of Lot 8069 to petitioner upon payment of P75,000.00 within 90 days; otherwise a sale was to be ordered to satisfy payment.
The RTC ordered Parangan to pay petitioner attorney’s fees of P15,000.00 and costs of suit.

Court of Appeals Ruling (summary of respondent court’s position)

The Court of Appeals reversed the RTC, concluding that none of the conditions in Article 1602 of the New Civil Code had been proven by preponderance of evidence.
The CA concluded that petitioner signed the Deed of Sale with knowledge of its contents.
The CA credited the testimony of witness Delia Cabial and relied on that testimony in upholding the validity of the Deed of Definite Sale.
The CA treated the Special Power(s) of Attorney as relevant and binding for the loans secured.

Supreme Court Holding (disposition)

The Supreme Court found errors in the Court of Appeals’ factual and legal findings and reinstated the judgment of the lower court with modifications.
The Deed of Definite Sale was declared to be an equitable mortgage.
Private respondent Nicolas Parangan was ordered to return possession of the subject land to petitioner upon the latter’s payment of P75,000.00 within ninety (90) days from receipt of the decision.
The mortgages in favor of PNB were declared valid and subsisting and may be subjected to execution sale.
Private respondent Parangan was ordered to pay petitioner P15,000.00 by way of attorney’s fees and to pay the costs of the suit.
The decision was rendered by Justice Francisco; Narvasa, C.J. (Chairman), Davide, Jr., Melo, and Panganiban, JJ., concurred.

Legal Principles and Authorities Applied

A contract is perfected by mere consent (Art. 1315, Civil Code).
A contract of sale is perfected when