Bautista vs. Unangst

A deed of sale with right of repurchase is presumed to be an equitable mortgage when the vendor was in urgent need of money at the time of execution, remained in possession of the property, and the purchase price corresponded to the amount of an existing debt, pursuant to Article 1602, paragraphs 2 and 6, of the Civil Code; the existence of a single circumstance suffices to raise the presumption, and in case of doubt the contract shall be construed as an equitable mortgage under Article 1603.

Petitioner Benjamin Bautista owned GAB Rent-A-Car, a car rental shop. Respondent Shirley G. Unangst was the common-law wife of Hamilton Salak, who rented a vehicle from petitioner and failed to return it within the lease period. The dispute centered on a deed of sale with right of repurchase over respondent's residential property in Olongapo City, executed to settle car rental arrears and to discharge respondent's mortgage obligation to a certain Jojo Lee, whose loan was then in default and scheduled for public auction.

On November 15, 1996, Hamilton Salak rented a car from GAB Rent-A-Car, a car rental shop owned by petitioner Benjamin Bautista, at ₱1,000.00 per day for three consecutive days. Salak failed to return the car after the lease period, prompting petitioner to file charges for estafa, violation of Batas Pambansa Blg. 22, and carnapping. On February 2, 1997, Salak and his common-law wife, respondent Shirley G. Unangst, were arrested while riding the rented car along Quezon City by officers of the Criminal Investigation Service Group of the Philippine National Police. The following day, petitioner demanded from Salak at the CISG Office the sum of ₱232,372.00 as payment for car rental fees, fees incurred in locating the car, attorney's fees, capital gains tax, transfer tax, and other incidental expenses.

Salak and respondent expressed willingness to pay but lacked cash, leading Salak to propose selling respondent's house and lot to petitioner. Petitioner agreed after consulting his wife, Cynthia, who also agreed to pay respondent's mortgage loan to a certain Jojo Lee in the amount of ₱295,000.00, as the property was set for public auction on February 17, 1997. To formalize their amicable settlement, Cynthia, Salak, and respondent executed a written agreement stipulating that respondent would sell, subject to repurchase, her residential property to Cynthia for ₱527,372.00 — comprising ₱295,000.00 paid to Lee to release the mortgage and ₱232,372.00 due to GAB Rent-A-Car. Cynthia also agreed to desist from pursuing the complaint against Salak and respondent. Petitioner and respondent likewise executed a separate deed of sale with right to repurchase, specifying that respondent would pay capital gains tax, current real estate taxes, and utility bills; that failure to repurchase within 30 days from the date of the deed would require respondent and her assigns to immediately vacate and deliver possession to petitioner without need of a judicial order; and that respondent's refusal would entitle petitioner to take immediate possession.

Respondent failed to repurchase the property within the stipulated period. Petitioner registered the deed with the Register of Deeds, transferred the tax declarations to his name, and paid capital gains taxes of ₱71,129.05 and real estate taxes of ₱11,993.72. Respondent refused to vacate despite repeated demands. On June 5, 1998, petitioner filed a complaint for specific performance, recovery of possession, sum of money, consolidation of ownership, and damages before the RTC of Olongapo City, later amended on June 16, 1998 to include a prayer for consolidation of ownership under Article 1607 of the Civil Code. Respondent countered that she signed the deed under duress and intimidation, that the sale was simulated since she never received the stipulated consideration, and that the transaction was an equitable mortgage under Articles 1602 and 1604 of the Civil Code due to its onerous conditions and shockingly low consideration. The RTC rendered judgment on July 29, 2004 in favor of petitioner, declaring the deed a valid sale, ordering respondent to vacate, consolidating ownership in petitioner's name, and awarding ₱10,000.00 monthly compensation, tax reimbursements, and ₱70,000.00 in attorney's fees.

Respondents failed to interpose a timely appeal. On September 10, 2004, respondent filed a petition for relief under Section 38 of the 1997 Rules of Civil Procedure, asserting she learned of the RTC decision only on September 6, 2004 upon receiving a copy of petitioner's motion for execution. Petitioner moved to dismiss, arguing that respondent paid only ₱200.00 as docket fees — insufficient, as the correct amount was ₱1,715.00. The deficiency arose from the Clerk of Court's erroneous assessment; the correct amount was subsequently paid on February 22, 2005. The RTC granted the petition for relief and directed respondents to file a notice of appeal, which they did on February 23, 2005. The CA reversed the RTC on April 7, 2006, declaring the deed an equitable mortgage and finding that the trial court properly applied the rules liberally in giving due course to the petition for relief.

• Docket Fees and Jurisdiction: Petitioner contended that although respondent's petition for relief was filed within the reglementary period, the proper docket fees of ₱1,715.00 were paid beyond the 60-day period prescribed under Section 3 of Rule 38. He posited that jurisdiction over the petition was acquired only upon full payment of the prescribed docket fees, and since payment was belated, the RTC could not have allowed respondents to appeal.
• Nature of the Contract: Petitioner argued that the deed of sale with right to repurchase did not fall under any instance enumerated in Article 1602 of the Civil Code warranting construal as an equitable mortgage. He maintained that the language and terms of the deed were clear and unequivocal and should be construed in their literal sense.

• Justifiable Reason for Deficient Payment: Respondent countered that the belated payment of the correct docket fees was not due to their fault but to the Clerk of Court's erroneous assessment, and that the court may extend the time for payment of docket fees where there is a justifiable reason for the failure to pay the correct amount within the prescribed period, such as mistake or excusable negligence.
• Equitable Mortgage: Respondent argued that her consent to the deed was procured under duress and that even assuming consent was freely given, the contract partook of an equitable mortgage under Articles 1602 and 1604 of the Civil Code because of its onerous conditions and shockingly low consideration.
• Uncontested RTC Order: Respondent asserted that petitioner failed to contest the RTC order allowing payment of supplementary docket fees, having filed neither a motion for reconsideration nor a petition for certiorari to question said order.

• Docket Fees: Whether the RTC acquired jurisdiction over respondent's petition for relief despite the belated payment of the correct docket fees, caused by the Clerk of Court's erroneous assessment.
• Nature of the Contract: Whether the deed of sale with right of repurchase executed by the parties should be construed as an equitable mortgage under Article 1602 of the Civil Code.

• Docket Fees: Yes. The RTC properly gave due course to the petition for relief, the belated payment of the correct docket fees having been due to a justifiable reason — the Clerk of Court's erroneous assessment — and not a dilatory tactic. Strict application of the jurisdictional rule on docket fees may be mitigated under exceptional circumstances to serve the interest of justice.
• Nature of the Contract: Yes. The deed of sale with right of repurchase is an equitable mortgage under Article 1602, paragraphs 2 and 6, of the Civil Code, the surrounding circumstances showing that the real intention of the parties was to secure the payment of debts rather than to effect a true sale.

• Docket Fees: While payment of the full amount of appellate docket and other lawful fees within the reglementary period is mandatory and jurisdictional, the strict application of this rule may be mitigated under exceptional circumstances to better serve the interest of justice. Respondent initially paid ₱200.00 because that was the amount assessed by the Clerk of Court of the RTC of Olongapo City; the correct amount of ₱1,715.00 was paid upon discovery of the deficiency. Citing Segovia vs. Barrios (1946), the Court held that every citizen has the right to assume and trust that a public officer charged by law with certain duties knows and performs them in accordance with law; to penalize a citizen for relying in good faith on such officer is repugnant to justice. The failure to pay the correct amount was not a dilatory tactic nor an attempt to circumvent the Rules of Court, as respondent demonstrated willingness to pay by promptly settling the correct amount upon assessment. The emerging trend in the Court's rulings is to afford every party-litigant the amplest opportunity for proper and just determination of their cause, free from the constraints of technicalities, for it is far better to dispose of a case on the merits than on a technicality that may result in injustice.

• Nature of the Contract: Three circumstances independently established the transaction as an equitable mortgage. First, before executing the deed, respondent and Salak were under police custody and sorely pressed for money, as they would not be released unless they paid petitioner. Respondent was in no position to bargain with their creditor. The principle applies that necessitous men are not, truly speaking, free men, but to answer a present emergency will submit to any terms that the crafty may impose upon them. When the vendor is in urgent need of money at execution, the alleged sale with pacto de retro will be construed as an equitable mortgage. Second, petitioner allowed respondent and Salak to retain possession of the property despite execution of the deed; retention by the vendor of possession is inconsistent with the vendee's acquisition of ownership under a true sale and discloses in the alleged vendee a lack of interest in the property that belies the truthfulness of a sale a retro. Third, the purchase price stated in the deed corresponded exactly to the amount of the indebtedness of both respondent and Salak to petitioner — the car rental payments and the reimbursement of what petitioner paid to the mortgagee Jojo Lee. Since the deed was executed in consideration of these loans and indebtedness, it is indubitably an equitable mortgage. Under Article 1602, the existence of one circumstance suffices to create the presumption; concurrence of multiple circumstances is not required. Article 1603 further provides that in case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. The Court found no doubt that the transaction was a loan secured by the property by way of mortgage. Article 1602 is designed primarily to curtail the evils brought about by contracts of sale with right of repurchase, such as the circumvention of the laws against usury and pactum commissorium.

• Presumption of Equitable Mortgage (Article 1602, Civil Code) — A contract of sale with right of repurchase is presumed to be an equitable mortgage when any of the following circumstances exist: (1) the price of a sale with right of repurchase is unusually inadequate; (2) the vendor remains in possession as lessee or otherwise; (3) upon or after the expiration of the right to repurchase, another instrument extending the period of redemption or granting a new period is executed; (4) the purchaser retains for himself a part of the purchase price; (5) the vendor binds himself to pay taxes on the thing sold; or (6) in any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. Two requisites must concur: (a) the parties entered into a contract denominated as a contract of sale, and (b) their intention was to secure an existing debt by way of a mortgage. Only one circumstance under Article 1602 need be shown; the concurrence or overwhelming number of circumstances is not required. In this case, paragraphs 2 (vendor remained in possession) and 6 (real intention to secure payment of debts) were satisfied.

• Equitable Mortgage in Case of Doubt (Article 1603, Civil Code) — In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. The Court found no doubt that the transaction was a loan secured by the property by way of mortgage.

• Determination of the True Nature of a Contract — The decisive factor in evaluating an agreement is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all the surrounding circumstances: the relative situations of the parties at the time, their attitude, acts, conduct, and declarations, the negotiations leading to the deed, and generally all pertinent facts tending to fix and determine the real nature of their design and understanding. Documentary and parol evidence may be submitted and admitted to prove intention. The nomenclature used by the contracting parties does not determine the nature of the contract.

• Relaxation of Procedural Rules for the Interest of Justice — While payment of full docket fees within the reglementary period is mandatory and jurisdictional, strict application may be mitigated under exceptional circumstances. Where a party in good faith pays less than the correct amount because that was the assessment made by the Clerk of Court, and promptly pays the balance upon discovery, dismissal is unwarranted. Failure to pay docket fees within the reglementary period allows only discretionary, not automatic, dismissal, and such power should be exercised with sound discretion in accordance with justice and fair play.

• "Necessitous men are not, truly speaking, free men; but to answer a present emergency, will submit to any terms that the crafty may impose upon them." — This passage articulates the rationale for construing sales executed under financial distress as equitable mortgages, capturing the principle that consent obtained under urgent necessity is not truly free and that contracts so obtained should not be enforced as onerous sales.

• "The decisive factor in evaluating such agreement is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all the surrounding circumstances, such as the relative situation of the parties at that time, the attitude, acts, conduct, declarations of the parties, the negotiations between them leading to the deed, and generally, all pertinent facts having a tendency to fix and determine the real nature of their design and understanding." — This defines the controlling test for determining the true nature of a contract, emphasizing surrounding circumstances over nomenclature and establishing that parol evidence is admissible to prove intention.

• "Every citizen has the right to assume and trust that a public officer charged by law with certain duties knows his duties and performs them in accordance with law. To penalize such citizen for relying upon said officer in all good faith is repugnant to justice." — This passage establishes the principle that good-faith reliance on a Clerk of Court's assessment of docket fees justifies relaxation of the mandatory payment rule, forming the ratio decidendi for the procedural issue.

• Segovia vs. Barrios, 75 Phil. 764 (1946) — Controlling precedent for the proposition that an appellant who in good faith pays less than the correct docket fee because of the Clerk of Court's assessment, and promptly pays the balance, should not have their appeal dismissed. The Court relied on this as the foundational authority for relaxing the docket fee rule.
• Lorbes vs. Court of Appeals, 351 SCRA 716 (2001) — Followed for the rule that only one circumstance under Article 1602 suffices to create the presumption of equitable mortgage, and for the test of determining party intention from surrounding circumstances rather than contract nomenclature.
• Legaspi vs. Ong, 459 SCRA 122 (2005) — Followed for the principle that the nomenclature used by the contracting parties does not determine the nature of a contract, and that when in doubt, courts are inclined to construe a transaction purporting to be a sale as an equitable mortgage.
• Ramos vs. Court of Appeals, 180 SCRA 635 (1989) — Followed for the rule that whenever a deed of sale with pacto de retro, regular on its face, is given as security for a loan, it must be regarded as an equitable mortgage, and that sales with right of repurchase are not favored.
• Aranas vs. Endona, 117 SCRA 753 (1982) — Followed for the principle that the strict application of the jurisdictional nature of the rule on payment of appellate docket fees may be mitigated under exceptional circumstances to better serve the interest of justice.
• Meatmasters International Corporation vs. Lelis Integrated Development Corporation, 452 SCRA 626 (2005) — Cited by the CA for the rule that failure to pay docket fees within the reglementary period allows only discretionary, not automatic, dismissal, and that such power should be exercised with sound discretion.

• Article 1602, Civil Code — Enumerates the circumstances where a contract of sale with right of repurchase is presumed to be an equitable mortgage. Applied through paragraph 2 (vendor remains in possession as lessee or otherwise) and paragraph 6 (in any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation). The Court held that only one circumstance need be shown.
• Article 1603, Civil Code — Provides that in case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. The Court found no doubt that the transaction was a loan secured by the property.
• Article 1604, Civil Code — Made applicable to sales with right of repurchase under Article 1602; cited by respondent in her Answer as basis for construing the contract as an equitable mortgage.
• Article 1607, Civil Code — Cited in petitioner's amended complaint as basis for the prayer for consolidation of ownership.
• Section 38, 1997 Rules of Civil Procedure — Governed respondent's petition for relief from the RTC judgment, enabling her to appeal after the reglementary period lapsed.

Ynares-Santiago, Chairperson; Austria-Martinez; Chico-Nazario; Nachura, JJ., concurred.