Cuyugan vs. Santos

Parol evidence is admissible to prove that a deed, absolute on its face or in the form of a sale with right of repurchase, was in fact executed merely as security for a loan, and upon such proof the transaction will be treated and enforced as an equitable mortgage, provided the evidence is clear, convincing, and satisfactory and the rights of innocent third parties have not intervened.

The plaintiff, Eutiquiano Cuyugan, is the sole heir of his mother, Guillerma Cuyugan y Candia, who in 1895 borrowed P3,500 from the defendant, Isidoro Santos. The transaction was documented as a deed of sale of land with a reserved right to repurchase, but the complaint alleged it was intended merely to evidence the loan and serve as security for its repayment. The case was litigated under the new Code of Civil Procedure (Act No. 190), enacted under American sovereignty and modeled on American procedural rules, alongside the Spanish Civil Code provisions on contracts then in force in the Philippines.

In 1895, Guillerma Cuyugan y Candia borrowed P3,500 from Isidoro Santos and executed a document (Exhibit C) that purported on its face to be a deed of sale of her land, with a reservation in favor of the vendor of the right to repurchase for the sum of P3,500. According to the complaint, the instrument was intended by the parties merely to evidence the loan and to serve as security for its repayment. Under the terms of the arrangement, Guillerma remained in possession of the land as a nominal tenant of Santos, paying annual rent of P420 — an amount exactly equal to 12% annual interest on the P3,500 loan.

Two years later, in 1897, Guillerma paid P1,000 on the loan, whereupon the nominal rent was reduced from P420 to P300 per annum, corresponding to 12% interest on the unpaid balance of P2,500. Guillerma and her son, Eutiquiano Cuyugan, continued in peaceable possession of the land until the year prior to the institution of the action, when Santos served notice on Eutiquiano that an annual payment of P420 would again be required — reverting to the original amount before the P1,000 partial payment. Upon Eutiquiano's refusal to meet this demand, Santos asserted ownership and threatened ejectment.

Eutiquiano thereupon offered to pay, and stood ready to pay, the balance due on the original indebtedness plus unpaid interest for one year, but Santos declined to accept the tender and refused to cancel the formal deed of sale. The complaint prayed that Santos be required to accept the amount tendered and cancel the deed of conveyance. The trial court sustained a demurrer to the complaint, finding no cause of action stated because the deed on its face was a sale with right of repurchase, the repurchase price had not been fully paid, and the repurchase period had long since expired.

• True Nature of the Transaction: Petitioner maintained that the deed of sale with right of repurchase was intended by the parties merely to evidence a loan and serve as security for its repayment, and that he was entitled to tender the balance due and compel cancellation of the deed.
• Admissibility of Parol Evidence: Petitioner argued that parol evidence should be admitted to establish the true nature of the transaction, notwithstanding the deed's apparent terms.

• Parol Evidence Rule: Respondent contended that even if the allegations in the complaint were true, the demurrer should be sustained because any evidence tending to alter, vary, or defeat the terms of the written deed of conveyance attached to the complaint would be inadmissible at trial.
• Prior Jurisprudence: Respondent relied on prior decisions of the Court holding that the intent of parties executing instruments purporting to evidence sales with right of repurchase was sufficiently disclosed by the terms of the instruments themselves, and that such intent should be given full force and effect despite contentions that the original transactions were loans secured by land.

• Admissibility of Parol Evidence: Whether parol evidence is admissible to prove that a deed purporting on its face to be a sale with right of repurchase was in fact executed merely as security for a loan.
• Sufficiency of the Complaint: Whether the complaint states a cause of action sufficient to survive a demurrer, given the allegations that the transaction was a loan and that partial payments were accepted by the defendant.

• Admissibility of Parol Evidence: Yes. Parol evidence is admissible to show that a deed absolute in form or a sale with right of repurchase was in fact given as security for a loan, and upon such proof the transaction may be enforced as an equitable mortgage, provided the evidence is clear, convincing, and satisfactory.
• Sufficiency of the Complaint: Yes. The demurrer admits all material facts well pleaded, including that the true nature of the transaction was a loan secured by the deed and that the defendant accepted a P1,000 partial payment with a corresponding reduction in "rent" — facts that entitle the plaintiff to relief on either of two hypotheses.

• Admissibility of Parol Evidence: The Court examined whether the new Code of Civil Procedure (Act No. 190), modeled on American procedural rules, barred the admission of parol evidence to establish the true nature of a transaction. It concluded that neither the Statute of Frauds nor the parol evidence rule prohibits such inquiry. The parol evidence rule excludes evidence to contradict the language of a written instrument but does not forbid inquiry into the object of the parties in executing and receiving it. Citing U.S. Supreme Court authority (Russell vs. Southard, Brick vs. Brick, Monagas vs. Albertucci), the Court held that where it is alleged and proved that a loan on security was really intended, both fraud and vice in the consideration are sufficiently averred to require a court of equity to treat the transaction as a mortgage. The Court further found that the Spanish Civil Code's principles — that contracts are perfected by mere consent (Art. 1258), that parties may establish any clauses not contrary to law, morals, or public order (Art. 1255), that the validity and fulfillment of contracts cannot be left to the will of one party (Art. 1256), and that contracts are binding whatever their form provided essential conditions exist (Art. 1278) — support the same conclusion. The prohibition against unjust enrichment (Regla 17, Title 34, Siete Partida) reinforces the lender's obligation to honor the agreement. However, the presumption is that the instrument is what it purports to be, and the burden rests on the party seeking to prove otherwise to overcome that presumption by clear, convincing, and satisfactory evidence. The Court noted that the real difficulty confronting borrowers has not been the failure of the law to recognize their rights but the inherent difficulty of proving the existence of such an oral contract, a difficulty heightened under the Spanish Code by the disqualification of interested parties from testifying (Art. 1247), though mitigated under the new rules of evidence.

• Sufficiency of the Complaint: On demurrer, all material facts well pleaded are admitted. The defendant therefore admitted that the true nature of the transaction was a loan secured by a formal conveyance, and that the plaintiff's successor had tendered the full amount of the indebtedness with interest. Additionally, the complaint alleged that in 1897, two years after the deed's execution, the defendant accepted P1,000 from the vendor and reduced the annual "rent" from P420 to P300 — a reduction corresponding to 12% interest on the reduced balance. This acceptance is wholly inconsistent with a claim of absolute ownership. Either the original transaction was a loan secured by the deed, or, if it was a genuine sale with right of repurchase, the defendant's acceptance of partial repayment constituted a waiver of his right to refuse resale after the original repurchase period expired. Upon either hypothesis, the plaintiff is entitled to relief. Citing Lichauco vs. Berenguer, the Court held that a vendee who has been reimbursed for part of the repurchase price is bound to fulfill the obligation to sell back, and the irrevocability of ownership is incompatible with the acceptance of such partial payments.

• Equitable Mortgage Doctrine — A deed absolute on its face, or a sale with right of repurchase, may be proved by parol evidence to be in fact an equitable mortgage given as security for a loan. The true intention of the parties at the time the instrument was executed must govern. The correct test, where it can be applied, is the continued existence of a debt or liability between the parties. Circumstances throwing light on the real intent include: (a) the existence of a collateral agreement for payment of money to the grantee, (b) the grantor's liability to pay interest, (c) inadequacy of price, (d) the grantor remaining in possession of the land conveyed, and (e) any negotiation or application for a loan preceding or during the transaction. The presumption is that the instrument is what it purports to be, and the burden rests on the moving party to overcome that presumption by testimony that is clear, convincing, and satisfactory beyond reasonable controversy.

• Parol Evidence Rule — Exception for Equitable Mortgage — The parol evidence rule excludes evidence to contradict or vary the language of a written instrument but does not forbid inquiry into the object or purpose of the parties in executing and receiving it. Evidence tending to show that no transfer of title was contemplated does not fall within the prohibition against oral evidence varying the terms of a written instrument. The Statute of Frauds does not stand in the way of treating an absolute deed as a mortgage when such was the intention of the parties, even if the agreement for redemption or defeasance rests wholly in parol.

• Unjust Enrichment — The principle that no man may wrongfully enrich himself at the expense of another (Regla 17, Title 34, Siete Partida) imposes an imperative obligation on a lender who has taken land as security to carry out the agreement, and secures the borrower's right to have it enforced by the courts, provided the rights of innocent third parties have not intervened.

• "To insist on what was really a mortgage, as a sale, is in equity a fraud, which cannot be successfully practiced, under the shelter of any written papers, however precise and complete they may appear to be." — Quoted from Russell vs. Southard, this passage articulates the equitable rationale for admitting parol evidence to prove that a deed absolute in form was intended as a mortgage.

• "The fact that the real transaction between the parties was a borrowing and lending, will, whenever, or however it may appear, show that a deed absolute on its face was intended as a security for money; and whenever it can be ascertained to be a security for money, it is only a mortgage, however artfully it may be disguised." — Quoted from Edrington vs. Harper, this formulation is frequently cited as the canonical statement of the equitable mortgage doctrine.

• "The American doctrine on this subject does not differ materially from the principles set forth in our Civil Code." — Quoted from Monagas vs. Albertucci, this passage bridges the American equitable doctrine and the Spanish Civil Code provisions applicable in the Philippines, establishing that both systems reach substantially identical results.

• "Defendant can not eat his cake and have it too." — The Court's characteristically direct rejection of the defendant's attempt to retain both the partial payment and claim absolute ownership, illustrating the second ground for reversal.

• Russell vs. Southard, 53 U.S. 139 — U.S. Supreme Court authority cited as controlling on the admissibility of parol evidence to prove that a deed absolute in form was intended as a mortgage. The Court adopted its reasoning extensively, including the principle that the parol evidence rule does not forbid inquiry into the object of the parties in executing the instrument.
• Monagas vs. Albertucci, 235 U.S. 81 — U.S. Supreme Court case affirming the Supreme Court of Porto Rico's ruling that parol evidence is admissible to determine whether an instrument is a mortgage or conditional sale. Cited as persuasive authority given the similarity between the Porto Rican and Philippine Civil Codes, and for the test of the continued existence of a debt or liability.
• Lichauco vs. Berenguer, 20 Phil. Rep. 12 — Philippine precedent holding that partial payments accepted by a vendee from a vendor for repurchase are incompatible with the irrevocability of the purchaser's title, binding the vendee to fulfill the obligation to resell. Applied as direct authority for the second ground of reversal.
• Brick vs. Brick, 98 U.S. 514 — U.S. Supreme Court authority cited for the proposition that parol evidence is admissible in equity to show that an instrument apparently transferring title was delivered as security for a loan, and that a court of equity will look beyond the terms of an instrument to the real transaction.

• Article 1255, Spanish Civil Code — Provides that contracting parties may make any agreement and establish any clauses and conditions they deem advisable, provided not contrary to law, morals, or public order. Applied to support the validity of an oral agreement that a deed would be held as security.
• Article 1256, Spanish Civil Code — Provides that the validity and fulfillment of contracts cannot be left to the will of one of the contracting parties. Applied to prevent the lender from unilaterally treating the deed as absolute.
• Article 1258, Spanish Civil Code — Provides that contracts are perfected by mere consent. Applied to establish that the oral agreement was valid from the moment of consent.
• Article 1278, Spanish Civil Code — Provides that contracts are binding whatever their form, provided the essential conditions for validity exist. Applied to support enforcement of the oral agreement despite lack of formalities.
• Article 1279, Spanish Civil Code — Provides that either party may compel the other to comply with formalities prescribed for contracts. Applied to the borrower's right to compel execution of proper formalities once a valid personal obligation exists.
• Article 1248, Spanish Civil Code — Provides that the probative force of witness testimony shall be valued by courts, taking care that affairs usually documented in public deeds are not decided by mere coincidence of testimony. Applied to maintain the standard that proof must be clear, convincing, and satisfactory.
• Regla 17, Title 34, Siete Partida — The equitable principle that no man may wrongfully enrich himself at the expense of another. Applied as a foundational principle compelling the lender to honor the agreement and securing the borrower's right to enforcement.

Arellano, C.J., Torres, Trent, and Araullo, JJ., concurred. Johnson and Moreland, JJ., took no part.