Title
Tolentino vs. Court of Appeals
Case
G.R. No. 128759
Decision Date
Aug 1, 2002
Spouses de Guzman mortgaged property, redeemed it with a loan from petitioners, who secured a deed of absolute sale under false pretenses. Courts ruled the transaction as an equitable mortgage, ordering reconveyance and repayment of the loan balance.
equitable mortgage
reconveyance
property

Case Summary (G.R. No. 127694)

Factual Background

Spouses Pedro and Josefina de Guzman were the registered owners of the subject land under TCT No. 20248 T-105. They obtained a loan from the Rehabilitation Finance Corporation (RFC), now the Development Bank of the Philippines (DBP), and executed a mortgage on the property as security. Upon their failure to pay, the mortgage was foreclosed.

Before the redemption period expired, the de Guzman spouses obtained a subsequent loan for P18,000 from petitioners Tolentino and Rono, purportedly to redeem the property. The parties agreed that repayment would extend over ten years at P150 a month, commencing on February 1963. On December 14, 1962, the loan with RFC was paid and the mortgage was cancelled.

Tolentino and Rono then asked the de Guzman spouses to execute a Deed of Promise to Sell on the representation that they needed security for the new loan. Subsequently, on February 1, 1963 (as stated in the appellate narrative), they again requested execution of a Deed of Absolute Sale, explaining that they wanted the de Guzman children to be made responsible in the event of the parents’ untimely death. Using the Deed of Absolute Sale, petitioners obtained cancellation of TCT No. 20248 T-105, resulting in issuance of TCT No. 69164 in their names.

Pedro de Guzman died on June 9, 1971. Josefina and their children attempted to settle the remaining loan balance. Petitioners, claiming they could no longer recall the actual arrangements, agreed to reconvey the property only on condition that respondents pay the market value prevailing in 1971. Upon verification with the Registry of Deeds of Quezon City, respondents learned that title had already been transferred to petitioners. The de Guzman spouses then filed suit seeking a judicial declaration that the transaction was an equitable mortgage and seeking reconveyance, damages, and appropriate relief.

Trial Court Proceedings

On March 21, 1988, the Regional Trial Court of Pasig City, Branch 162, ruled for the plaintiffs (de Guzman heirs) and held that the transaction between the spouses de Guzman and the defendants was a mere equitable mortgage, with the corresponding instruments treated as deeds of mortgage securing the P18,000 loan. The court also ordered plaintiffs to pay the unpaid balance of the loan in the amount of P3,750, plus legal interest until full payment. It further ordered defendants to reconvey the property and required defendants to pay P3,000 as attorneys’ fees.

In reaching this conclusion, the trial court emphasized the parties’ real intent. It treated the Deed of Promise to Sell, the Deed of Absolute Sale, and a Contract to Sell as related transactions that, according to the trial court, showed petitioners did not intend to hold the property as owners. Instead, the court found that petitioners were using the documents as security for the loan extended to respondents. It also considered the consideration involved—P18,000, the amount of the loan—which indicated that petitioners did not profit from the transactions.

The trial court further found that the de Guzman spouses remained in possession of the property and continued to pay real estate taxes even after the execution of the Deed of Absolute Sale. It treated these circumstances as badges of equitable mortgage. Invoking Articles 1602 and 1604 of the Civil Code, the trial court ruled that the presence of the cited elements sufficiently raised the presumption that the transaction was an equitable mortgage.

Appellate Court Ruling

Petitioners appealed to the Court of Appeals. The appellate court affirmed in toto the trial court’s decision. Petitioners’ motion for reconsideration was subsequently denied.

The Parties’ Contentions

In the Supreme Court, petitioners assigned two errors.

First, petitioners argued that Article 1602 of the Civil Code applies only when there is no express agreement or stipulation between the parties. They relied on the language that the contract “shall be presumed” and contended that the trial court and Court of Appeals improperly used the presumption despite alleged express stipulations. Petitioners claimed that the parties expressly agreed that respondents would remain in possession and would pay real estate taxes, and thus, in petitioners’ view, Article 1602 should have been considered inapplicable.

Second, petitioners contended that respondents adopted an improper remedy. They insisted that respondents should have sought reformation of instrument under Article 1605, rather than filing an action for declaration of nullity of the deed of sale coupled with specific performance.

Respondents countered that the issue on the propriety of the remedy had not been raised earlier, and thus could not be introduced for the first time on appeal. They also asserted that petitioners’ active participation in the proceedings in the trial court should bar them from questioning respondents’ choice of action. On the merits, respondents maintained that Article 1605 did not preclude the aggrieved party from resorting to another action that would more effectively protect the party’s interest and recover the property.

Issues Raised for Review

The Supreme Court had to determine, first, whether the trial court and Court of Appeals erred in applying Article 1602 to characterize the transaction as an equitable mortgage notwithstanding the alleged presence of express stipulations. It also had to resolve whether respondents’ choice of action—distinct from reformation under Article 1605—was barred or improper.

Legal Basis and Reasoning

On petitioners’ first assignment of error, the Court held that petitioners’ reading of Article 1602 was untenable. The Court observed that nothing in Article 1602 indicated that it applied only in the absence of an express agreement. The Court also cited that Article 1602 had been applied in multiple cases even when the parties had an express or written contract.

In this regard, the Court relied on its earlier rulings in Lapat vs. Rosario and Misena vs. Rongavilla. In Lapat vs. Rosario, the Court addressed a situation where the petitioner sought consolidation of ownership based on alleged failure to repurchase under deeds labeled as deeds of sale with right to repurchase. The Court found that the deeds, despite their form, functioned as an equitable mortgage because the real intention was to secure payment of a debt, applying paragraph 6 of Article 1602, which covers cases where it may be fairly inferred that the real intention of the parties was to secure payment of a debt or performance of an obligation.

Similarly, in Misena vs. Rongavilla, the Court held that a transaction presented as an absolute sale, secured by a misrepresentation intended to foreclose the mortgage and constrain the redemption period, was in reality an equitable mortgage. The Court reasoned that the real intention in signing the document was to provide security for the loan, not to transfer ownership. The Court treated these precedents as reaffirming that form does not control when the circumstances show that the document secures a debt.

Applying those principles, the Court concluded that the trial court’s reliance on Article 1602, as affirmed by the Court of Appeals, was proper. The Court did not disturb the factual findings below that the related instruments, the identity of the consideration as the loan amount, and the continued possession and tax payments by respondents constituted badges of an equitable mortgage. Those circumstances supported the presumption under Article 1602, and the same provisions applied to a contract purporting to be an absolute sale through Article 1604.

On the second assignment of error,

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