Heirs of Balite vs. Lim

A deed of sale stating a false consideration is valid as a relatively simulated contract if the parties intended to be bound and the true consideration is lawful; the contract will be enforced according to the real agreement. Further, a co-owner may validly sell her undivided ideal share in co-owned property even if the deed purports to transfer a determinate portion, but the sale is effective only as to that aliquot share and does not bind the other co-owners beyond the portion that may be allotted upon partition.

Spouses Aurelio and Esperanza Balite owned a 17,551-square-meter parcel of land in Northern Samar under OCT No. 10824. Upon Aurelio’s intestate death, Esperanza and their eight children became co-owners; Esperanza’s undivided share was 9,751 square meters. Esperanza later fell ill and needed funds for hospitalization. Through her daughter Cristeta, she offered to sell her undivided share to Rodrigo Lim for P1,000,000. To reduce capital gains tax, the parties agreed to execute a deed of absolute sale reflecting only P150,000 as the price, while a contemporaneous Joint Affidavit declared the true consideration and an installment payment schedule. Several children learned of the sale and objected. Esperanza died during the transaction, and litigation ensued over the validity of the sale and the property’s ownership.

• Nature of the Property and Co-ownership: Spouses Aurelio and Esperanza Balite owned a 17,551-square-meter parcel of land in Catarman, Northern Samar, covered by OCT No. 10824. Aurelio died intestate in 1985, survived by Esperanza and their eight children. Esperanza inherited an undivided share of 9,751 square meters; the children succeeded to the remainder, becoming co-owners of the whole.

• The Sale and Joint Affidavit: Desperately ill and in need of hospital funds, Esperanza, through her daughter Cristeta, offered to sell her undivided share to Rodrigo Lim for P1,000,000. The parties agreed to execute a Deed of Absolute Sale reflecting a price of only P150,000 to minimize capital gains tax. On April 16, 1996, Esperanza signed the deed covering a 10,000-square-meter portion of the property. Contemporaneously, the parties executed a Joint Affidavit declaring the true consideration of P1,000,000 and an installment payment schedule.

• Partial Payments and Possession: Lim took possession, introduced improvements, and made partial payments totaling P320,000 (as admitted by petitioners) or more. Several receipts were signed by Esperanza, Cristeta, and Antonio Balite. The August 24, 1996 Receipt signed by Antonio acknowledged that as of that date, the remaining balance was P350,000.

• Opposition by Other Heirs: Upon learning of the sale, several children wrote to the Register of Deeds on August 21, 1996, opposing registration on the ground of lack of consent and absence of partition. Esperanza herself later wrote Lim on October 23, 1996, withdrawing her commitments due to her children’s objections.

• Esperanza’s Death and Subsequent Events: Esperanza died intestate on October 31, 1996. Lim caused the publication of the Deed of Absolute Sale in a newspaper and paid the capital gains tax based on the P150,000 stated price. The Register of Deeds initially refused to issue a new title for lack of the owner’s duplicate; Lim filed a petition for mandamus.

• Registration and Title Issuance: The trial court granted mandamus, directing cancellation of OCT No. 10824 and issuance of a certificate of title in Lim’s name over Lot 243. TCT No. 6683 was issued to Lim on July 10, 1997, carrying over a notice of lis pendens that had been annotated at the instance of the heirs. Lim subsequently mortgaged the property to Rizal Commercial Banking Corporation for a P2,000,000 loan.

• Litigation and Procedural Moves: The heirs filed Civil Case No. 920 for annulment of sale, quieting of title, injunction, and damages. They sought to amend the complaint to implead the bank; the trial court rejected the amended complaint, ruling it constituted a collateral attack on the Torrens title and was improper under Rule 63. The trial court ultimately dismissed the complaint, holding the sale valid under Article 493 and that the excess area came from the shares of consenting children.

• Nullity of the Deed of Absolute Sale: Petitioners argued that the deed was falsified and void because the stated consideration of P150,000 was intended to evade capital gains taxes, rendering the cause unlawful and the contract contrary to law and public policy. The Joint Affidavit was not a valid substitute for a true and lawful cause but part of a scheme to defraud the government.

• Equitable Mortgage: Even if the sale were valid, the inadequate and unconscionably low consideration shown on the deed should convert the transaction into an equitable mortgage under Article 1602 of the Civil Code, requiring only one of the enumerated circumstances to apply. The fact that Lim secured a P2,000,000 loan on the same property supported the allegation of gross inadequacy.

• Rights of Heirs upon Esperanza’s Death: By the time the deed was registered on May 30, 1997, Esperanza had already died; the property had passed to her heirs, rendering the registration functus officio and the document incapable of binding the land.

• Propriety of Amended Complaint: The trial court erred in rejecting the amended complaint impleading the bank; the amendment was proper and should have been deemed admitted to conform to evidence.

• Nullity of TCT No. 6683: Due to the annotated notice of lis pendens, the certificate of title in Lim’s name and all subsequent dealings—including the mortgage—were void or subject to the litigation’s outcome.

• Damages and Attorney’s Fees: The Court of Appeals should have awarded damages and attorney’s fees in petitioners’ favor.

• Respondent’s Outstanding Liability: The appellate court misapprehended the evidence; receipts showed only P320,000 in payments, not the amount that would leave a P120,000 balance. The August 24, 1996 Receipt was unreliable.

• Validity of the Sale: Respondent maintained that the Deed of Absolute Sale was valid and binding, as the parties genuinely intended a sale. The presence of a false price did not void the contract because the true consideration of P1,000,000 was lawful and evidenced by the Joint Affidavit.

• Co-owner’s Right to Dispose: Under Article 493 of the Civil Code, Esperanza had the absolute right to alienate her undivided pro indiviso share; lack of consent from other co-owners did not nullify the sale.

• No Equitable Mortgage: The transaction was a true sale, not a loan secured by mortgage, and the requisites under Article 1602 were not established. The price was not grossly inadequate, and the P2,000,000 loan did not prove otherwise.

• Computation of Balance: Respondent submitted evidence of payments, including the Receipt dated August 24, 1996 signed by Antonio Balite, which stated a remaining balance of P350,000. After deducting subsequent payments of P30,000 and P200,000, the outstanding amount was correctly determined by the Court of Appeals to be P120,000.

• Validity of the Deed of Absolute Sale: Whether the Deed of Absolute Sale was void because the stated consideration was falsified and intended to evade taxes, thus having an unlawful cause.

• Equitable Mortgage: Whether the sale should be deemed an equitable mortgage under Articles 1602 and 1604 of the Civil Code due to the alleged gross inadequacy of the purchase price.

• Co-Ownership and Transfer of Property: Whether the sale of a specific 10,000-square-meter portion by a co-owner was valid, and whether the property reverted to the heirs upon Esperanza’s death before registration of the sale.

• Respondent’s Remaining Liability: Whether the Court of Appeals correctly determined that respondent’s outstanding liability on the purchase price was P120,000.

• Validity of the Deed of Absolute Sale: The contract was a relatively simulated one under Article 1345 of the Civil Code. The parties intended to be bound; all essential requisites of a binding contract were present—consent, object, and cause. The false price merely concealed the true consideration of P1,000,000, which was lawful. Under Article 1353, a false cause renders a contract void only if no true and lawful cause exists. The parties are bound by their real agreement as stated in the Joint Affidavit. The motives of the contracting parties—to reduce capital gains tax—do not take the place of consideration or invalidate the contract, though the government retains the right to collect the proper tax on the true purchase price.

• Equitable Mortgage: The presumption under Article 1602 did not apply because the contract was not merely purporting to be a sale but was genuinely one. Two requisites must concur for Articles 1602 and 1604 to operate: (1) the contract is denominated as a sale, and (2) the parties’ true intention was to secure an existing debt by mortgage. No clear and convincing evidence of a debtor-creditor relationship existed; the documentary evidence, particularly the Joint Affidavit, confirmed the absolute sale. The voluntary, unconditional acceptance of contractual obligations, along with clear and readily understandable terms, foreclosed any interpretation that the transaction was an equitable mortgage. The alleged gross inadequacy of price was not substantiated, as no evidence of market values was presented; the P2,000,000 loan was merely a security and did not by itself prove inadequacy.

• Co-Ownership and Transfer of Property: Under Article 493 of the Civil Code, a co-owner has full ownership of her ideal share and may alienate it without the consent of other co-owners. Although the deed purported to sell a determinate 10,000-square-meter portion, the sale was valid only to the extent of Esperanza’s pro indiviso share of 9,751 square meters, as consistently held in jurisprudence. The buyer became a co-owner of the entire property to that extent, subject to the results of partition. Ownership transferred upon the perfection of the sale on April 16, 1996, not upon registration in 1997. Consequently, the alienated share no longer formed part of Esperanza’s estate at her death and could not be inherited by her heirs.

• Respondent’s Remaining Liability: The Court of Appeals’ finding that respondent’s balance amounted to P120,000 was affirmed. Factual findings of the Court of Appeals are binding on the Supreme Court under a Rule 45 petition, absent any recognized exceptional circumstances. The August 24, 1996 Receipt—admitted by the trial court without rebuttal from signatory Antonio Balite—established an outstanding balance of P350,000. Deducting subsequent payments of P30,000 and P200,000, the unpaid sum was correctly computed.

• Relative Simulation (Articles 1345, 1353, Civil Code) — A contract is relatively simulated when the parties state a false cause to conceal their true agreement. Unlike absolute simulation, which is void due to the absence of any intent to be bound, relative simulation produces a valid and enforceable contract if all essential requisites exist and the true cause is lawful. The false cause does not void the contract; the parties are bound by their real agreement. The doctrine was applied here to uphold the sale at the true price of P1,000,000, despite the false P150,000 figure intended to evade taxes.

• Binding Force of Contracts (Article 1370, Civil Code) — When the terms of a contract are clear and unambiguous, they must be interpreted according to their literal meaning; no room for construction exists, and the contract is the law between the parties. Applied to reject the argument that the Deed of Absolute Sale should be reinterpreted as an equitable mortgage.

• Equitable Mortgage (Articles 1602, 1604, Civil Code) — Before a contract of sale can be presumed an equitable mortgage, two requisites must concur: (1) the contract is denominated as a sale, and (2) the parties’ true intention was to secure an existing debt by way of mortgage. The presence of any single circumstance in Article 1602 raises a presumption, but that presumption does not arise where the evidence clearly establishes the transaction as a genuine sale. Mere inadequacy of price, without proof of a debtor-creditor relationship, is insufficient.

• Co-ownership and Alienation of Undivided Shares (Article 493, Civil Code) — Each co-owner has full ownership of his ideal share and may validly alienate, assign, or mortgage it without the consent of the other co-owners. A deed that purports to sell a specific, determinate portion of common property is not per se void; it is given effect only with respect to the seller’s pro indiviso share, and the buyer becomes a co-owner subject to the outcome of partition.

• Transfer of Ownership upon Perfection — In a contract of sale, ownership passes to the buyer upon delivery of the thing sold, which occurs upon execution of the deed when the vendor intends to transfer title. Registration is not the operative act that transfers ownership. Hence, a perfected sale removes the property from the seller’s estate, and her heirs cannot claim it upon her death.

• Factual Findings of the Court of Appeals — Factual findings of the Court of Appeals are generally binding and conclusive on the Supreme Court in petitions for review on certiorari under Rule 45. Exceptions exist only in limited instances, such as manifestly mistaken inference, misapprehension of facts, conflicting findings, or overlooked relevant undisputed facts.

• "A deed of sale that allegedly states a price lower than the true consideration is nonetheless binding between the parties and their successors in interest." — Opening paragraph summarizing the core holding on simulation and enforceability.

• "If the parties state a false cause in the contract to conceal their real agreement, such a contract is relatively simulated. Here, the parties’ real agreement binds them." — Articulation of relative simulation doctrine and its effect.

• "The binding force of a contract must be recognized as far as it is legally possible to do so." — Principle from Lopez v. Vda. De Cuaycong invoked to reject petitioners’ attempt to undo the contract.

• "The motives of the contracting parties for lowering the price of the sale — in the present case, the reduction of capital gains tax liability — should not be confused with the consideration. Although illegal, the motives neither determine nor take the place of the consideration." — Distinction between unlawful motive and lawful consideration.

• "For Articles 1602 and 1604 to apply, two requisites must concur: one, the parties entered into a contract denominated as a contract of sale; and, two, their intention was to secure an existing debt by way of mortgage." — Clarified requisites for equitable mortgage.

• "The mere fact that the deed purports to transfer a concrete portion does not per se render the sale void. The sale is valid, but only with respect to the aliquot share of the selling co-owner." — Rule on alienation of co-owned property.

• Velasquez et al. v. Court of Appeals et al., 345 SCRA 468 (2000) — Adopted definition of relative simulation; where parties state a false cause to conceal their real agreement, the real agreement binds them.

• Robleza v. Court of Appeals, 174 SCRA 354 (1989) — Affirmed that when essential requisites are present and simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable.

• San Pedro v. Lee et al., G.R. No. 156522, May 28, 2004 — Enumerated the two concurring requisites before Articles 1602 and 1604 on equitable mortgage may apply.

• Del Campo v. Court of Appeals, 351 SCRA 1 (2001) — Applied the rule that a co-owner’s sale of a specific portion of unpartitioned property is valid only as to her aliquot share.

• Philippine Airlines, Inc. v. Court of Appeals, 275 SCRA 621 (1997) — Restated the principle that factual findings of the Court of Appeals are binding on the Supreme Court in Rule 45 petitions.

• Article 1345, Civil Code — Distinguishes between absolute simulation (void) and relative simulation (valid and binding to the real agreement). Applied to classify the deed as relatively simulated.

• Article 1353, Civil Code — Provides that a statement of a false cause renders a contract void only if it is not proved that the contract was founded upon another cause which is true and lawful. Applied to sustain the validity of the sale based on the true P1,000,000 consideration.

• Article 1602, Civil Code — Enumerates circumstances under which a contract of sale is presumed to be an equitable mortgage. Found inapplicable because the contract was a genuine sale, not a security arrangement.

• Article 1604, Civil Code — Stipulates that the presence of any of the circumstances in Article 1602 suffices to trigger the equitable mortgage presumption. Did not apply due to failure to satisfy the dual requisites.

• Article 493, Civil Code — Grants each co-owner full ownership of his part and the right to alienate, assign, or mortgage it. Provided the legal basis for upholding the sale of Esperanza’s pro indiviso share.

• Article 1370, Civil Code — Directs that contracts clear and unambiguous in their terms be interpreted according to their literal meaning. Invoked to reject equitable mortgage recharacterization.

Justices Sandoval-Gutierrez, Carpio-Morales, and Garcia concurred. Justice Corona was on leave.

N/A (no dissenting opinions were recorded).