Heirs of Aniolina H. Sebua vs. Bravante

A contract purporting to be an absolute sale is presumed to be an equitable mortgage when 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 presence of even one of the circumstances enumerated in Article 1602 of the Civil Code suffices to declare a contract as an equitable mortgage, and the mortgagee's consolidation of ownership due to the mortgagor's default constitutes pactum commissorium, which is void.

Petitioners are the heirs of Aniolina Vda. de Sebua and her husband Exequeil Sebua, who owned Cadastral Lot No. 1525-E, a 16,000-square-meter parcel of land in Barangay Malaya, Banga, South Cotabato. Respondent Feliciana Bravante and her husband Julian Bravante were the alleged mortgagees or purchasers of the property. The dispute centered on whether the parties' transaction was an equitable mortgage or an absolute sale, a determination that would decide who had the right to possess and own the subject property. The case involved the application of Articles 1602 and 1604 of the Civil Code, which establish the presumption of equitable mortgage in certain circumstances.

Petitioners, heirs of Aniolina Vda. de Sebua and her husband Exequeil Sebua, owned Cadastral Lot No. 1525-E, a parcel of land with an area of approximately 16,000 square meters located in Barangay Malaya, Banga, South Cotabato. Exequeil cultivated the land for years despite residing in Crossing Tupi, South Cotabato.

Sometime in 1985, according to petitioners, Exequeil mortgaged the subject land to respondent's husband Julian Bravante for a loan of P30,000.00 granted without interest. The parties agreed that Julian was to cultivate the land and keep the income arising therefrom until Exequeil was able to redeem the land. In 1995, Exequeil visited Julian to pay the loan and redeem the land, but Julian requested to continue cultivating it, which Exequeil granted as a friend. In 2003, Exequeil again attempted to redeem the land but learned that Julian had died a year earlier. Exequeil himself died on 29 November 2003. After his death, petitioners' children signified their intention to redeem the land, but respondent was already claiming ownership. Conciliation before the Barangay Captain failed.

Respondent, in her Answer with Compulsory Counterclaim, denied petitioners' ownership and alleged a different version of events. She claimed that sometime in 1980, petitioners and Exequeil mortgaged the land to a certain Recto Debuque. In 1982, Recto demanded payment of the P5,000.00 loan. Since they could not pay, petitioners and Exequeil approached respondent and her husband to borrow P7,000.00 secured by the subject lot, with P5,000.00 given to Recto as redemption price and P2,000.00 to petitioners. Additional loans followed: P3,000.00 on 08 February 1983; P1,350.00 on 16 October 1983; P3,550.00 on 06 November 1983; P1,000.00 on 21 April 1984; P500.00 on 13 September 1984; P3,000.00 on 04 March 1985; and P600.00 on 17 March 1985. On 23 March 1985, the loan reached P22,202.00, and since the amount exceeded the consideration of the mortgage contract, petitioners and Exequeil allegedly agreed to waive their rights to the land in favor of respondent and her husband for a total consideration of P30,000.00. Respondent and her husband made additional payments of P500.00 on 09 June 1985, P298.00 on 16 June 1985, P2,000.00 on 18 June 1985, and P3,500.00 on 16 September 1985. Finally, on 03 October 1985, respondent and her husband paid P1,500.00 as the final installment, making them the lawful owners of the land.

The RTC found that the parties initially entered into an oral loan of money, with the subject property offered as guaranty, and that the produce from the land was applied as payment for interest. The RTC characterized the transaction as an equitable mortgage under Article 1602(6) of the Civil Code. The CA, however, found that petitioners' sole witness, their son Joseph H. Sebua, gave hearsay testimony, and that respondent also failed to clearly establish that petitioners waived their rights over the property. The CA thus dismissed the complaint for lack of cause of action and left things as they were.

• Probative Value of Testimony: Petitioners argued that the CA committed a reversible error in not giving any probative value to the testimony of Joseph H. Sebua, their sole witness.
• Presumption of Equitable Mortgage: Petitioners argued that the CA committed a reversible error in not finding that various circumstances in the case gave rise to the presumption that the transaction was one of equitable mortgage.
• Failure to Rebut Presumption: Petitioners argued that the CA committed a reversible error in not holding that respondent failed to adduce evidence to rebut the legal presumption that the subject transaction was an equitable mortgage.

• Waiver of Rights: Respondent argued that petitioners and Exequeil agreed to waive their rights to the subject land in favor of respondent and her husband for a total consideration of P30,000.00, making them the lawful owners of the land.
• Adequacy of Price: Respondent presented a 1982 Deed of Sale of an adjacent lot to show that the sale price was not grossly inadequate.
• Hearsay Evidence: Respondent argued that petitioners failed to prove their claim because the testimony of their sole witness was based on hearsay.

• Equitable Mortgage: Whether the transaction between the parties constituted an equitable mortgage under Article 1602(6) of the Civil Code.
• Pactum Commissorium: Whether respondent's consolidation of ownership over the subject property due to petitioners' failure to pay the obligation constituted pactum commissorium, which is void.
• Interest Rates: What interest rates should apply to petitioners' obligation.

• Equitable Mortgage: Yes. The transaction was an equitable mortgage under Article 1602(6) of the Civil Code, as it may be fairly inferred that the real intention of the parties was that the transaction shall secure the payment of a debt. The presence of even one of the circumstances in Article 1602 suffices to declare a contract as an equitable mortgage.
• Pactum Commissorium: Yes. Respondent's consolidation of ownership over the subject property due to petitioners' failure to pay the obligation constituted pactum commissorium, which is void for being contrary to morals and public policy. The mortgagee's proper remedy is to cause the foreclosure of the mortgage and buy the property at a foreclosure sale.
• Interest Rates: The rate of 12% per annum applies from the filing of the complaint on 06 August 2009 until 30 June 2013, and the legal rate of 6% per annum applies from 01 July 2013 until finality of the Decision.

• Equitable Mortgage: The Court defined an equitable mortgage as one which, although lacking in some formality, form, words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt. The essential requisites are: (1) the parties enter into what appears to be a contract of sale; but (2) their intention is to secure an existing debt by way of mortgage. Article 1602, in relation to Article 1604 of the Civil Code, enumerates instances when a contract is presumed to be an equitable mortgage, including when the price of a sale with right to repurchase is unusually inadequate, when the vendor remains in possession as lessee or otherwise, when another instrument extending the period of redemption is extended, when the purchaser retains a part of the purchase price, when the vendor binds himself to pay the taxes, and 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. The presence of even one of these circumstances is sufficient to declare a contract as an equitable mortgage, in consonance with the rule that the law favors the least transmission of property rights. In determining the nature of a contract, courts are not bound by the title or name given by the parties; the decisive factor is the intention of the parties as shown by their conduct, words, actions, and deeds prior to, during, and immediately after executing the agreement. The Court noted that petitioners and her husband were in dire need of money and repeatedly took out loans. Respondent's own evidence showed that in 1983, the recording stated "to acknowledge receipt of P7,000 x x x which is to be returned upon demand," and by 1984, respondent started writing "[r]eceived x x x as partial payment for the land." However, respondent's evidence did not specifically mention the subject property, and she admitted the self-serving nature of the memoranda. In light of Exequeil's repeated attempts to pay off the loan and regain possession, respondent's claim of ownership failed.
• Pactum Commissorium: The Court held that as a mortgagee, respondent's consolidation of ownership over the subject property due to petitioners' failure to pay the obligation constituted pactum commissorium. The mortgagee's default does not operate to automatically vest ownership of the encumbered property on the mortgagee. Such arrangements are contrary to morals and public policy and thus void. If a mortgagee in equity desires to obtain title to a mortgaged property, the proper remedy is to cause the foreclosure of the mortgage in equity and buy it at a foreclosure sale, which respondent did not do.
• Interest Rates: The Court applied the rate of 12% per annum from the date of the filing of the complaint on 06 August 2009 until 30 June 2013, and the legal rate of 6% per annum from 01 July 2013 until finality of the Decision, following the ruling in Nacar vs. Gallery Frames. The Court deleted the award of attorney's fees as the parties were impelled by an honest belief that their respective actions were justified.

• Equitable Mortgage — An equitable mortgage is one which, although lacking in some formality, form, words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. The essential requisites are: (1) the parties enter into what appears to be a contract of sale; but (2) their intention is to secure an existing debt by way of mortgage. The Court applied this doctrine to find that the parties' transaction, despite appearing as an absolute sale, was actually an equitable mortgage given the circumstances.
• Presumption of Equitable Mortgage (Article 1602) — The contract shall be presumed to be an equitable mortgage in any of the following cases: (1) when the price of a sale with right to repurchase is unusually inadequate; (2) when the vendor remains in possession as lessee or otherwise; (3) when upon or after the expiration of the right to repurchase, another instrument extending the period of redemption or granting a new period is extended; (4) when the purchaser retains for himself a part of the purchase price; (5) when the vendor binds himself to pay the 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. The presence of even one of these circumstances suffices to declare a contract as an equitable mortgage, not a concurrence or an overwhelming number of such circumstances.
• Pactum Commissorium — The mortgagee's default does not operate to automatically vest on the mortgagee the ownership of the encumbered property. Such arrangements are contrary to morals and public policy and thus void. If a mortgagee in equity desires to obtain title to a mortgaged property, the mortgagee's proper remedy is to cause the foreclosure of the mortgage in equity and buy it at a foreclosure sale.

• "An equitable mortgage is one which, although lacking in some formality, form, words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. The essential requisites of an equitable mortgage are: (1) the parties enter into what appears to be a contract of sale; but (2) their intention is to secure an existing debt by way of mortgage." — This passage defines the doctrine of equitable mortgage and its essential requisites, serving as the foundational rule applied in this case.
• "The presence of even one of the circumstances in Article 1602 is sufficient to declare a contract as an equitable mortgage. The explicit provision of Article 1602 that any of those enumerated circumstances would suffice to construe a contract of sale to be one of equitable mortgage is in consonance with the rule that the law favors the least transmission of property rights." — This passage establishes the rule that a single circumstance under Article 1602 suffices to create the presumption of equitable mortgage, which is a key principle in the Court's reasoning.
• "As a mortgagee, respondent's consolidation of ownership over the subject property due to petitioner and her husband's failure to pay the obligation is considered as pactum commissorium. The mortgagee's default does not operate to automatically vest on the mortgagee the ownership of the encumbered property. This Court has repeatedly declared such arrangements as contrary to morals and public policy and thus, void." — This passage articulates the doctrine of pactum commissorium and its invalidity, which was central to the Court's rejection of respondent's claim of ownership.

• Cuyugan vs. Santos, 34 Phil. 100 (1916) — Cited for the principle that necessitous individuals are not truly free persons, reaffirming protection to debtors.
• Vda. de Delfin vs. Dellota, 566 Phil. 389 (2008) — Cited as authority for the definition and essential requisites of an equitable mortgage.
• Spouses Reyes vs. Court of Appeals, 393 Phil. 479 (2000) — Cited for the rule that Article 1602 applies even to a contract purporting to be an absolute sale if the real intention of the parties is to secure the payment of a debt.
• Repuela vs. Estate of Spouses Larawan, 802 Phil. 821 (2016) — Cited for the proposition that Article 1602, in relation to Article 1604, enumerates instances when a contract is presumed to be an equitable mortgage.
• Aguirre vs. Court of Appeals, 380 Phil. 736 (2000) — Cited for the rule that the presence of even one of the circumstances in Article 1602 suffices to declare a contract as an equitable mortgage.
• Zamora vs. Court of Appeals, 328 Phil. 1106 (1996) — Cited for the principle that courts are not bound by the title or name given by the parties in determining the nature of a contract, and that the decisive factor is the intention of the parties.
• Dacquel vs. Spouses Sotelo, G.R. No. 203946, 04 August 2021 — Cited for the doctrine of pactum commissorium and the rule that the mortgagee's default does not automatically vest ownership of the encumbered property on the mortgagee.
• Muñoz vs. Ramirez, 643 Phil. 267 (2010) — Cited for the rule that respondent should return the subject property to petitioner upon payment of the loan within ninety (90) days from finality of the Decision.
• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Cited for the applicable interest rates: 12% per annum from the filing of the complaint until 30 June 2013, and 6% per annum from 01 July 2013 until finality of the Decision.

• Article 1602(6), Civil Code — Provides that a contract shall be presumed to be an equitable mortgage 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 applied this provision to find that the parties' transaction was an equitable mortgage.
• Article 1604, Civil Code — Provides that the provisions of Article 1502 shall also apply to a contract purporting to be an absolute sale. The Court applied this provision in relation to Article 1602 to determine the nature of the transaction.
• Rule 45, Rules of Court — The procedural basis for the Petition for Review filed by petitioners before the Supreme Court.

Gesmundo, C.J. (Chairperson), Hernando, Rosario, and Marquez, JJ., concurred in the decision.