Ching Sen Ben vs. Court of Appeals

A contract denominated as a sale with right to repurchase is presumed to be an equitable mortgage when the purchase price is unusually inadequate and the vendor remains in possession, and the mortgagee must seek judicial foreclosure under Rule 68 rather than consolidation of title under Rule 64 to enforce the mortgage and obtain title to the mortgaged property.

Ching Sen Ben was engaged in the business of constructing houses on lots he owned and selling them to buyers who financed the purchase through housing loans from institutions such as the Social Security System (SSS). David Vicente was one such buyer who agreed to purchase a house and lot in Bayan-bayanan, Marikina, Metro Manila, from Ching Sen Ben, intending to pay the P150,000 purchase price through an SSS housing loan. The SSS approved only P119,400 of the loan, leaving a balance that the parties sought to secure through a subsequent deed of sale with assumption of mortgage and right to repurchase, giving rise to the dispute over the true nature of that instrument.

Ching Sen Ben was engaged in the business of constructing houses on lots he owned and selling them to buyers who paid with the proceeds of housing loans from financing institutions such as the SSS. He agreed with David Vicente to construct a house on his 90-square-meter lot in Bayan-bayanan, Marikina, Metro Manila, covered by TCT No. 128394, and to transfer the same to Vicente at a total price of P150,000, payable from the proceeds of an SSS housing loan. Vicente's loan application was approved by the SSS but only for P119,400. Nevertheless, on March 24, 1988, Ching Sen Ben executed a Deed of Absolute Sale over the property in favor of Vicente, on the basis of which TCT No. 146078 was issued in Vicente's name. Ching Sen Ben informed Vicente that the balance of his account was P43,000.

Vicente executed a Promissory Note in favor of the SSS and, to secure the loan, a Deed of Real Estate Mortgage over the lot and improvements, including the house to be constructed. One essential condition of the mortgage was that Vicente could not sell or dispose of the property without the SSS's prior consent, on pain of foreclosure. The loan proceeds were remitted by Vicente to Ching Sen Ben in partial payment, and Ching Sen Ben constructed the house as agreed. On April 4, 1988, Ching Sen Ben sent Vicente a statement showing a balance of P43,000 still due. Vicente failed to pay this balance.

On September 21, 1988, the parties executed a Deed of Sale With Assumption of Mortgage and With Right to Repurchase, wherein Vicente, as vendor, sold and conveyed the property to Ching Sen Ben, as vendee, for P60,242.86. Ching Sen Ben assumed all of Vicente's obligations under the SSS mortgage. Vicente agreed to pay monthly interest of P800 commencing October 30, 1988, and reserved the right to redeem the property within one year for P69,842; if he failed to redeem within that period, the conveyance would be deemed an absolute and irrevocable sale. Vicente, however, remained in possession of the property.

On January 13, 1990, Ching Sen Ben demanded payment of Vicente's account, but Vicente again failed to pay. On February 5, 1990, Ching Sen Ben paid the SSS in full the amount of P144,917.06 on Vicente's account, for which he received a Real Estate Loan Payment Return. The SSS executed a Release of Real Estate Mortgage on February 28, 1990, annotated on TCT No. 146078. On March 10, 1990, Ching Sen Ben, through counsel, demanded that Vicente execute a Deed of Absolute Sale over the property, but Vicente refused. On May 16, 1990, Ching Sen Ben executed an Affidavit of Consolidation of Ownership, and on July 10, 1990, he filed a petition for consolidation of title in LRC Case No. R-4309 before the RTC of Pasig City. The trial court found that the real intention of the parties was to secure the payment of the balance of the purchase price and transfer fees totaling P43,000, and that Vicente had remained in possession of the property after the execution of the deed.

• Nature of the Relationship: Petitioner maintained that the relationship between the parties was that of owner-builder-seller and buyer, not creditor and debtor, and that there was no loan or debt to be secured by a mortgage.
• Assumption of Mortgage: Petitioner argued that if the intention was to secure a debt, there would have been no reason for him to assume Vicente's mortgage obligations to the SSS, and that he did so with good motives, "sticking his neck out" for Vicente's benefit.
• Entitlement to Foreclosure: Petitioner contended that since the deed of sale was an equitable mortgage, he was entitled as a matter of right to the foreclosure thereof, and that the CA's refusal to order foreclosure resulted in unjust enrichment.
• Error of the CA on the Nature of the Transaction: Petitioner argued that the CA erred in holding that the transaction was an equitable mortgage, contending it was decided in a way not in accord with law or applicable decisions of the Supreme Court.

• Nature of the Transaction: Whether the deed of sale with assumption of mortgage and right to repurchase is an equitable mortgage.
• Proper Remedy: Whether petitioner, as mortgagee of an equitable mortgage, may enforce it through a petition for consolidation of title under Rule 64, or whether judicial foreclosure under Rule 68 is the proper remedy.

• Nature of the Transaction: Yes. The deed of sale with assumption of mortgage and right to repurchase is an equitable mortgage, the consideration of P60,242.86 being unusually inadequate compared to the original purchase price of P150,000 and the vendor having remained in possession of the property.
• Proper Remedy: No. A petition for consolidation of title under Rule 64 is not the appropriate remedy to enforce a transaction declared to be a mortgage; the mortgagee must file a petition for judicial foreclosure under Rule 68.

• Nature of the Transaction: In determining a contract's real nature, courts are not bound by the parties' denomination of the instrument; the decisive factor is the intention of the parties as shown by their contemporaneous and subsequent acts. Article 1602 of the Civil Code enumerates instances where a contract is presumed to be an equitable mortgage, including when the price of a sale with right to repurchase is unusually inadequate and when the vendor remains in possession. Article 1603 provides that in case of doubt, a contract purporting to be a sale with right to repurchase should be considered an equitable mortgage, the policy being to discourage pacto de retro sales and prevent circumvention of the usury laws and the prohibition against pactum commissorium. In this case, the purported consideration of P60,242.86 was unusually inadequate compared to the P150,000 purchase price when Vicente bought the property only six months earlier. Vicente, the supposed vendor, remained in possession and retained ownership, which was why petitioner had to bring an action for consolidation of title. In a mortgage, the mortgagor merely subjects the property to a lien but retains ownership and possession. The real intention was to secure the payment of the balance of the purchase price and transfer fees totaling P43,000, as evidenced by Vicente's obligation to pay P800 monthly interest — an obligation that implies the existence of a debt. The stipulation automatically vesting absolute title in the vendee upon failure to redeem is void as pactum commissorium. Petitioner's assumption of Vicente's SSS mortgage does not detract from the mortgage nature of the agreement; it was done primarily for petitioner's own benefit, as it assured him of either payment of the debt or recovery of the property, which he could then resell at a higher price.
• Proper Remedy: Petitioner did not pray for judicial foreclosure in his petition before the trial court. A petition for consolidation of title under Rule 64, although a special civil action, should be filed in the land registration case, whereas a petition for judicial foreclosure of real estate mortgage under Rule 68 is a special civil action independent of the land registration case. Following Montevirgen vs. Court of Appeals, an action for consolidation of ownership is not the appropriate remedy to enforce a transaction declared to be a mortgage; the mortgagee should foreclose the mortgage if he wishes to secure title to the mortgaged property. The award of P5,000 in attorney's fees was proper, as Vicente was compelled to litigate to protect his interest against petitioner's unlawful designs.

• Equitable Mortgage (Articles 1602 and 1603, Civil Code) — A contract denominated as a sale with right to repurchase is presumed to be an equitable mortgage when any of the circumstances enumerated in Article 1602 are present, including: (1) the price is unusually inadequate; (2) the vendor remains in possession as lessee or otherwise; (3) upon or after expiration of the right to repurchase, another instrument extending the redemption period is executed; (4) the purchaser retains 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 is to secure the payment of a debt or the performance of an obligation. In case of doubt, a pacto de retro sale should be considered an equitable mortgage. The policy is to discourage pacto de retro sales and prevent circumvention of the usury laws and the prohibition against pactum commissorium. In this case, the presumption arose because the consideration of P60,242.86 was unusually inadequate compared to the P150,000 original purchase price, and the vendor remained in possession.

• Pactum Commissorium — A stipulation in a mortgage or equitable mortgage that automatically vests ownership of the mortgaged property in the mortgagee upon the mortgagor's failure to pay or redeem is void as pactum commissorium. The stipulation in the deed that absolute title shall vest in the vendee upon the vendor's failure to redeem within the stipulated period was struck down on this ground.

• Determination of the Real Nature of a Contract — Courts are not bound by the parties' denomination of a contract; the decisive factor is the intention of the parties as shown by their contemporaneous acts at the time of execution and their subsequent acts. Parol evidence may be admitted to prove the true intent of the parties even where the contract is denominated a pacto de retro sale.

• "In the determination of a contract's real nature, courts are not bound by the parties' denomination of the same. The decisive factor is the intention of the parties, as shown by the parties' contemporaneous acts at the time of the execution of the said contract and their acts subsequent thereto." — This passage states the controlling principle for construing the true nature of a contract regardless of its denomination, the ratio decidendi for recharacterizing the deed as an equitable mortgage.

• "The policy of the law is to discourage pacto de retro sales and thereby prevent the circumvention of the prohibition against usury and pactum commissorium." — This articulates the legislative policy underlying Articles 1602 and 1603, explaining why the presumption in favor of equitable mortgage exists.

• "Petitioner cannot invoke the stipulation in the deed of sale with right to repurchase that absolute title shall be vested in the vendee in case the vendor failed to redeem the property on the specified date. Such stipulation is void for being a pactum commissorium." — This defines the legal defect in the automatic-vesting clause and explains why petitioner could not rely on it to consolidate title.

• "An action for consolidation of ownership of a parcel of land is not the appropriate remedy to enforce a transaction declared to be a mortgage because the mortgagee should foreclose the mortgage if he wishes to secure a title to the mortgaged property." — This passage, quoting Montevirgen vs. Court of Appeals, establishes the proper procedural remedy for a mortgagee seeking title to mortgaged property.

• Orence vs. Court of Appeals, G.R. No. 125766, October 19, 1998 — Cited for the principle that courts are not bound by the parties' denomination of a contract in determining its real nature.
• Olea vs. Court of Appeals, 247 SCRA 274 (1995) — Cited for the rule that the owner of the property may prove by parol evidence that a contract denominated a pacto de retro sale is in fact something else, by showing the true intent of the parties.
• Matanguihan vs. Court of Appeals, 275 SCRA 380 (1997) — Cited for the policy that the equitable mortgage provisions are intended to protect the unlettered and penurious against their creditors.
• Adlawan vs. Torres, 233 SCRA 645 (1994) — Cited for the principle that in a contract of mortgage, the mortgagor merely subjects the property to a lien but retains ownership and possession.
• Montevirgen vs. Court of Appeals, 112 SCRA 641 (1982) — Cited as controlling authority that an action for consolidation of ownership is not the appropriate remedy to enforce a transaction declared to be a mortgage; the mortgagee must foreclose.
• Singson vs. Court of Appeals, 282 SCRA 149 (1997) — Cited for the rule on award of attorney's fees when a party is compelled to litigate to protect his interest by reason of an unjustified act of the other party.
• Brahm Industries, Inc. vs. NLRC, 280 SCRA 828 (1997) — Cited alongside Singson for the same rule on attorney's fees.

• Article 1602, Civil Code — Enumerates the instances when a contract shall be presumed to be an equitable mortgage, including unusually inadequate price and the vendor remaining in possession. Applied to hold that the deed of sale with assumption of mortgage and right to repurchase was an equitable mortgage.
• Article 1603, Civil Code — Provides that in case of doubt, a contract purporting to be a sale with right to repurchase should be considered an equitable mortgage. Relied upon to articulate the policy discouraging pacto de retro sales.
• Rule 64, Revised Rules of Court — Governs petitions for consolidation of title in land registration cases. Held to be an improper remedy for enforcing a mortgage.
• Rule 68, Revised Rules of Court — Governs judicial foreclosure of real estate mortgage as a special civil action independent of the land registration case. Identified as the proper remedy available to petitioner.

Bellosillo, Quisumbing, and Buena, JJ., concurred.