Dela Cruz vs. Dumasig

A sale of land acquired under Presidential Decree No. 27 to an heir of the landowner is void unless made by hereditary succession; the prohibition is not satisfied by a voluntary sale inter vivos, and a simulated sale — where the parties never intended to be bound — produces no legal effect whatsoever.

Petitioners and respondent Rosalinda D. Epe are siblings — all children of Spouses Eniego P. Dela Cruz and Silvestra Dela Cruz (Sps. Dela Cruz), who died on July 31, 2009 and October 30, 2007, respectively. During their lifetime, Sps. Dela Cruz owned 35,153 square meters of agricultural land in Lala, Lanao del Norte, covered by an emancipation patent issued under Presidential Decree No. 27 and registered under Transfer Certificate of Title No. EP-250. Presidential Decree No. 27 restricts the transfer of lands acquired pursuant to that decree, permitting alienation only by hereditary succession or to the government, and — as later clarified in jurisprudence — to the actual tenant-tiller of the land.

Spouses Eniego P. Dela Cruz and Silvestra Dela Cruz owned 35,153 square meters of agricultural land in Sitio Cogon, Barangay Lala Proper, Lala, Lanao del Norte, evidenced by an emancipation patent under Transfer Certificate of Title No. EP-250. Sometime in 1987, Sps. Dela Cruz obtained a loan from Cooperative Rural Bank (CRB) in Tubod, Lanao del Norte, and mortgaged two of their lots, including the subject property. The loan was never paid, and the bank foreclosed the real estate mortgage.

Fearing the loss of their properties, Sps. Dela Cruz approached their daughter Rosalinda at her home in Iligan City and asked for help to pay the loan and redeem the foreclosed properties. In exchange, they promised that the subject property would be her share in the inheritance. Rosalinda agreed and paid the loan, though the receipt issued by CRB indicated Silvestra Dela Cruz as the payor. After payment, CRB returned the original copies of the TCTs to Sps. Dela Cruz, who in turn gave them to Rosalinda.

On December 27, 2003, Sps. Dela Cruz and Rosalinda went to Atty. Gregorio Pizarro, who drafted a Deed of Sale with Assumption of Mortgage involving the subject property. The deed was signed by all parties and duly notarized. In 2004, however, Sps. Dela Cruz remortgaged the same property to a certain Erlito Llanes for PHP 350,000.00. Rosalinda, for her part, possessed the subject property for only one cropping season in 2003 and then returned it to her parents, who continued to possess, cultivate, and enjoy the land until their respective deaths in 2007 and 2009. While still alive, Sps. Dela Cruz also executed an Amended Waiver of Rights and Interest dated July 13, 2005 over the subject property in favor of their son Diego, to form part of his share in the inheritance.

On August 22, 2011, after the deaths of both parents, Rosalinda mortgaged the subject property to respondent Alejandro Dumasig for PHP 700,000.00. They executed an Agreement of Loan with Real Estate Mortgage, with Rosalinda as borrower-mortgagor and Dumasig as lender-mortgagee, witnessed by their respective children and duly notarized. Of the PHP 700,000.00, PHP 100,000.00 was used to pay a loan to Paulino Saladaga and PHP 500,000.00 was paid to Llanes. Petitioners, the other children of Sps. Dela Cruz, claimed that they had tilled and cultivated the land during their parents' lifetime and had only entrusted its management to Rosalinda. Sometime in 2011, they discovered that Dumasig had begun occupying and cultivating the land without their knowledge or consent. Dumasig told them Rosalinda had mortgaged a 30,000-square meter portion to him, but he failed to produce a copy of the Deed of Real Estate Mortgage or any Deed of Absolute Sale.

In December 2016, petitioners demanded that Dumasig return possession of the subject property, asserting it was inherited from their parents, but he refused. The dispute was brought before the barangay, but no settlement was reached. Petitioners then filed a complaint for accion reivindicatoria with damages before the Regional Trial Court of Lanao del Norte, Branch 21. The trial court found the sale void, declaring the sale fictitious because Sps. Dela Cruz continued to possess and cultivate the land after the execution of the Deed of Sale until their deaths, and because the sale violated Presidential Decree No. 27. The Court of Appeals reversed, holding the notarized Deed of Sale valid and ruling that the transfer to Rosalinda fell within the exception to PD 27 because she was an heir.

• Lack of Consideration: Petitioners argued that the sale between Sps. Dela Cruz and Rosalinda was void for lack of consideration, since the purchase price came from loan proceeds obtained by Sps. Dela Cruz and not from Rosalinda's own funds.
• No Intent to Sell: Petitioners maintained that Sps. Dela Cruz never truly intended to sell the land, as evidenced by their continued cultivation of the property after the purported sale and their remortgaging of the same to Llanes in 2004, as well as their execution of an Amended Waiver of Rights and Interest in favor of Diego in 2005.
• Violation of Presidential Decree No. 27: Petitioners contended that the sale was void for violating PD 27, which prohibits transfers of covered lands except by hereditary succession or to the government. Although Rosalinda is an heir, the transfer was by sale, not by hereditary succession, and therefore fell outside the exception.
• Deprivation of Legtimes: Petitioners asserted that the sale to Rosalinda deprived them of their legitimes, since the subject property was the only remaining property of Sps. Dela Cruz at the time of their death.
• Void Mortgage to Dumasig: Petitioners argued that since the sale to Rosalinda was void, Dumasig's possession and ownership derived from the subsequent mortgage were likewise void.

• Validity of the Sale (Simulation): Whether the Deed of Sale with Assumption of Mortgage between Sps. Dela Cruz and Rosalinda was void for being an absolutely simulated contract.
• Validity of the Sale (PD 27 Prohibition): Whether the sale of the subject property — land acquired under Presidential Decree No. 27 — to Rosalinda, an heir of the landowners, was void for violating the decree's prohibition on transfers.
• Validity of the Mortgage to Dumasig: Whether the Agreement of Loan with Real Estate Mortgage between Rosalinda and Dumasig was valid given the void sale.

• Validity of the Sale (Simulation): Yes, the sale was void. The totality of the parties' prior, contemporaneous, and subsequent acts demonstrated that Sps. Dela Cruz never intended to transfer ownership, and Rosalinda exercised no acts of dominion over the property until after her parents' deaths.
• Validity of the Sale (PD 27 Prohibition): Yes, the sale was void. Presidential Decree No. 27 permits transfer of covered lands only by hereditary succession, to the government, or to the actual tenant-tiller — a sale inter vivos to an heir does not qualify under any exception.
• Validity of the Mortgage to Dumasig: No, the mortgage was void. Rosalinda was not the absolute owner of the property she mortgaged, failing a requisite under Article 2085 of the Civil Code.

• Validity of the Sale (Simulation): In absolute simulation, a colorable contract exists but has no substance because the parties have no intent to be bound by it. The apparent contract is not really desired to produce legal effects or alter the juridical situation of the parties, rendering it void. In determining whether a contract is absolutely simulated, the totality of the parties' prior, contemporaneous, and subsequent acts must be considered. Here, six circumstances established the absence of intent to sell: (1) the money Rosalinda used to pay the CRB loan came from a loan she obtained from Saladaga using the subject property as collateral, not her own funds; (2) Sps. Dela Cruz continued to possess and exercise rights of ownership over the property after the 2003 sale until their deaths; (3) they remortgaged the property to Llanes for PHP 350,000.00 in 2004; (4) Rosalinda possessed the land for only one cropping season and immediately returned it to her parents; (5) Sps. Dela Cruz executed an Amended Waiver of Rights and Interest in favor of Diego while still alive; and (6) only after Sps. Dela Cruz's death did Rosalinda take over and mortgage the property to Dumasig. Rosalinda's failure to exercise any act of dominion after the sale belied any intention to be bound by the Deed of Sale.

• Validity of the Sale (PD 27 Prohibition): Presidential Decree No. 27 provides that title to land acquired pursuant to the decree shall not be transferable except by hereditary succession or to the government. Jurisprudence clarifies that there are only three exceptions to the prohibition: transfer to the government, transfer to the heirs of the landowner via hereditary succession, and transfer to the actual tenant-tiller of the land. The Court of Appeals erred in upholding the sale on the rationale that Rosalinda was an heir; the transfer to an heir must be via hereditary succession, not via sale. Neither of the other two exceptions applied, as it was undisputed that at the time of the sale, Rosalinda was not the actual tenant-tiller — Sps. Dela Cruz were. The sale was therefore void.

• Validity of the Mortgage to Dumasig: Under Article 2085 of the Civil Code, an essential requisite of a valid mortgage is that the mortgagor be the absolute owner of the thing mortgaged. Since the sale to Rosalinda was void, she never acquired ownership of the subject property and could not validly mortgage it to Dumasig. The Agreement of Loan with Real Estate Mortgage was accordingly void. The petitioners and Rosalinda, as the children and compulsory heirs of Sps. Dela Cruz, became co-owners of the subject property under Article 1078 of the Civil Code, which provides that where there are two or more heirs, the whole estate is owned in common by such heirs before partition.

• Absolute Simulation of Contract — In absolute simulation, there is a colorable contract but it has no substance, as the parties have no intent to be bound by it. The main characteristic is that the apparent contract is not really desired or intended to produce legal effects or alter the juridical situation of the parties. An absolutely simulated or fictitious contract is void. To determine whether a contract is absolutely simulated, the totality of the parties' prior, contemporaneous, and subsequent acts must be considered. In this case, the continued possession and cultivation by Sps. Dela Cruz, their remortgaging of the property, Rosalinda's brief possession and immediate return of the land, and the execution of a waiver in favor of another heir collectively established that the Deed of Sale was simulated.

• Prohibition on Transfer of Lands Under Presidential Decree No. 27 — Title to land acquired pursuant to PD 27 shall not be transferable except by hereditary succession or to the government. Jurisprudence has recognized three exceptions to the prohibition: (1) transfer to the government; (2) transfer to the heirs of the landowner via hereditary succession; and (3) transfer to the actual tenant-tiller of the land. A sale inter vivos to an heir does not fall within the exception of hereditary succession. Sales or transfers made in violation of PD 27 and Executive Order No. 228 in favor of persons other than the government or the farmer's successor by hereditary succession are null and void.

• Requisites of a Valid Mortgage (Article 2085, Civil Code) — The essential requisites of a contract of pledge or mortgage include: (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; and (3) that the persons constituting the pledge or mortgage have free disposal of their property. Because Rosalinda was not the absolute owner of the subject property — the sale to her being void — the mortgage she executed in favor of Dumasig was likewise void.

• "In absolute simulation, there is a colorable contract but it has no substance as the parties have no intent to be bound by it. The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effects or in any way alter the juridical situation of the parties." — This passage defines the doctrine of absolute simulation and serves as the ratio decidendi for the Court's nullification of the Deed of Sale.

• "The law is clear. There are thus only three exceptions to the prohibition against transfer of ownership over lands covered by Presidential Decree No. 27, viz.: first, to the Government; second, to the heirs of the landowners via hereditary succession; and third, to the actual tenant-tiller of the same." — This passage articulates the canonical enumeration of exceptions to the PD 27 transfer prohibition, a formulation frequently relied upon in agrarian law jurisprudence.

• "To be valid, the transfer to the landowner's heirs must be via hereditary succession, not via sale, as in this case." — This sentence crystallizes the distinction between hereditary succession and sale inter vivos in the context of PD 27, directly refuting the Court of Appeals' reasoning.

• Heirs of Spouses Intac vs. Court of Appeals, 697 Phil. 373 (2012) — Cited for the doctrine on absolute simulation of contracts, explaining that a colorable contract lacking the parties' intent to be bound is void.
• Abella vs. Heirs of Francisca C. San Juan, 781 Phil. 533 (2016) — Cited for the rule that sales or transfers of lands in violation of PD 27 and EO 228 in favor of persons other than the government or the farmer's successor by hereditary succession are null and void.
• Estate of the Late Encarnacion Vda. De Panililio vs. Dizon, 562 Phil. 518 (2007) — Cited within Abella for the same proposition regarding the nullity of transfers violating PD 27.
• Digan vs. Malines, 822 Phil. 220 (2017) — Cited for the clarification that the general prohibition on transfer of tenanted rice and corn lands applies except when the conveyance is made in favor of the actual tenant-tiller.
• Clemente vs. Court of Appeals, 771 Phil. 113 (2015) — Cited for the principle that the totality of the parties' prior, contemporaneous, and subsequent acts must be considered in determining whether a contract is absolutely simulated.

• Presidential Decree No. 27 — Prohibits the transfer of title to land acquired pursuant to the decree except by hereditary succession or to the government. Applied to nullify the sale of the subject emancipation-patent land to Rosalinda, as the transfer was by sale inter vivos, not by hereditary succession, and Rosalinda was not the actual tenant-tiller.
• Executive Order No. 228 — Declaring full land ownership to qualified farmer beneficiaries covered by PD 27. Cited alongside PD 27 in Abella for the rule that transfers in violation of these laws are null and void.
• Civil Code, Article 2085 — Enumerates the essential requisites of a valid contract of pledge or mortgage, including that the mortgagor be the absolute owner of the thing mortgaged. Applied to invalidate the mortgage between Rosalinda and Dumasig, since Rosalinda was not the absolute owner.
• Civil Code, Article 1078 — Provides that where there are two or more heirs, the whole estate of the decedent is, before partition, owned in common by such heirs. Applied to declare petitioners and Rosalinda as co-owners of the subject property upon the death of Sps. Dela Cruz.

Leonen, SAJ. (Chairperson), M. Lopez, J. Lopez, and Kho, Jr., JJ., concurred.