Heirs of Policronio Ureta, Sr. vs. Heirs of Liberato Ureta

A deed of sale is void for being absolutely simulated when the parties did not intend to be bound by it and no consideration was paid, even if executed to reduce inheritance taxes. Furthermore, an extrajudicial partition signed by one heir without a special power of attorney from co-heirs is unenforceable under Article 1403(1) of the Civil Code, not voidable under Article 1390, but becomes valid and binding upon implied ratification by the co-heirs through acts of ownership over the partitioned property.

Alfonso Ureta, a property owner with 14 children, sought to reduce inheritance taxes upon the suggestion of his son, a municipal judge. In October 1969, Alfonso executed four deeds of absolute sale covering several parcels of land in favor of three of his children—Policronio, Liberato, Prudencia—and his common-law wife, Valeriana. No monetary consideration was actually paid for any of the sales. Alfonso retained possession of the properties and enjoyed their produce until his death in 1972. Policronio, the grantee in one of the deeds involving six parcels of land, never took possession of the properties, demanded the produce, or paid real estate taxes on them during his lifetime. After the deaths of both Alfonso and Policronio, Alfonso's remaining heirs executed a deed of extrajudicial partition in 1989, which included the properties previously covered by the simulated sales. Conrado, Policronio's eldest son, signed the partition document on behalf of his co-heirs without a written special power of attorney.

• The Simulated Sales: In October 1969, Alfonso Ureta executed four deeds of absolute sale over his properties in favor of his children Policronio, Liberato, Prudencia, and his common-law wife Valeriana. The execution was suggested by Francisco, a municipal judge son, to reduce inheritance taxes. No money was involved in any of the transactions.
• Continued Ownership by Alfonso: Despite the execution of the deeds, Alfonso continued to possess the lands and enjoy their produce. The tenants of the properties covered by Policronio's deed never turned over the produce to Policronio but only to Alfonso and, later, to the administrators of Alfonso's estate.
• Policronio's Inaction: Policronio never took possession of the subject lands, demanded delivery of the produce, or paid real estate taxes thereon during his lifetime. He also never informed his children about the existence of the deed of sale. He died in 1974, two years after Alfonso.
• The Extrajudicial Partition: On April 19, 1989, Alfonso's heirs executed a Deed of Extrajudicial Partition, which included the properties covered by the four simulated deeds. The document expressly recognized that the prior transfers were merely for tax purposes and therefore null and void from the beginning. Conrado, Policronio's eldest son, signed the partition on behalf of his co-heirs without a written special power of attorney.
• Subsequent Acts of Heirs of Policronio: Conrado retained possession of one of the parcels adjudicated to him and his siblings. In 1994, several of Policronio's other heirs executed a special power of attorney authorizing their sister to mortgage another parcel of land adjudicated to them under the partition to secure a bank loan.
• The Dispute: In 1995, the Heirs of Policronio discovered the deed of sale and the extrajudicial partition. Claiming ownership based on the deed of sale and alleging that Conrado lacked authority to sign the partition, they demanded the exclusion of the six parcels from Alfonso's estate. Amicable settlement failed, prompting the filing of the complaint.

• Validity of the Deed of Sale (Heirs of Policronio): Petitioners argued that the deed of sale was valid, being a duly notarized public instrument containing all essential elements of a contract, and that the parol evidence rule barred the introduction of evidence aliunde to contradict its terms. They maintained that the failure to take possession was consistent with Filipino family practice, and inadequacy of price does not render a contract void.
• Prescription and Estoppel (Heirs of Policronio): Petitioners contended that the action to question the deed of sale had prescribed under Article 1144, given that 21 years had elapsed. They further argued that Article 1412 of the Civil Code barred the Heirs of Alfonso from recovering the properties because both parties were at fault in the unlawful cause of tax evasion.
• Invalidity of the Extrajudicial Partition (Heirs of Policronio): Petitioners insisted that the partition was voidable due to Conrado's lack of authority and vitiated consent, and that ratification could not validate the inclusion of properties that did not belong to the estate.
• Nature of the Partition (Heirs of Alfonso): Petitioners argued that the CA erred in classifying the partition as voidable under Article 1390; it should be deemed unenforceable under Article 1403(1). They contended that a special power of attorney was unnecessary because partition is not an act of strict dominion or conveyance, and that the partition was ratified when the Heirs of Policronio took possession and mortgaged the property.
• Preterition and Remand (Heirs of Alfonso): Petitioners argued that if the Heirs of Policronio were excluded, it constituted preterition, which does not nullify the partition but obligates the other heirs to pay the omitted share. They asserted that remand was unnecessary.

• Simulation and Nullity of the Sale (Heirs of Alfonso): Respondents countered that the deed of sale was absolutely simulated and void for lack of consideration, emphasizing that parol evidence was admissible because the validity and true intent of the contract were put in issue.
• Authority to Sign the Partition (Heirs of Policronio): Respondents argued that Conrado lacked the legal capacity and written authority to bind his co-heirs to the extrajudicial partition, rendering the contract voidable under Article 1390(1) of the Civil Code.
• Imprescriptibility of Void Contracts (Heirs of Alfonso): Respondents maintained that the action to declare the inexistence of a void contract is imprescriptible under Article 1410, and that Article 1412 on illegal contracts is inapplicable to simulated contracts which lack any cause.

• Validity of the Deed of Sale: Whether the 1969 Deed of Sale is void for being absolutely simulated and lacking consideration, and whether parol evidence is admissible to prove simulation.
• Prescription and Estoppel: Whether the action to question the validity of the simulated deed of sale is barred by prescription or by the principle of in pari delicto under Article 1412.
• Validity of the Extrajudicial Partition: Whether the Deed of Extrajudicial Partition is voidable for lack of authority under Article 1390, or unenforceable under Article 1403(1), and whether it was ratified by the co-heirs.

• Validity of the Deed of Sale: The deed of sale was declared void for being absolutely simulated and for lack of consideration. The parties did not intend to be bound by the contract, and no purchase price was ever paid despite the stipulation in the document. The true intention of the parties, which prevails over the literal meaning of the contract, was proven by the contemporaneous and subsequent acts of the parties, particularly Alfonso's continued possession and enjoyment of the produce, and Policronio's complete failure to assert rights of ownership. Parol evidence was admissible under Rule 130, Section 9(b) and (c) because the failure of the written agreement to express the true intent of the parties and the validity of the agreement were put in issue. The objection to the admissibility of such evidence was likewise deemed waived for failure to object during trial.
• Prescription and Estoppel: The action to question the validity of the deed of sale is imprescriptible under Article 1410 of the Civil Code, as void contracts produce no legal effects and can be attacked at any time. Article 1412 is inapplicable because it presupposes a contract with an illegal cause or subject matter, whereas a simulated contract is non-existent and lacks any cause. Furthermore, any supposed tax evasion was mooted by the inclusion of the properties in the estate partition, making them subject to estate and inheritance taxes.
• Validity of the Extrajudicial Partition: The extrajudicial partition was held to be unenforceable under Articles 1403(1) and 1317, not voidable under Article 1390(1). The issue pertained to Conrado's lack of authority to represent his co-heirs, not his incapacity to give consent. A special power of attorney was not required because partition among heirs is not a conveyance of property or an act of strict dominion, but merely a confirmation of title. However, the partition was validated by the implied ratification of the co-heirs, evidenced by their execution of a special power of attorney to mortgage the partitioned property, Conrado's retention of possession of another parcel, and their failure to timely object. The defense of preterition was rejected because it applies only to testamentary succession, not to intestate extrajudicial partitions.

• Absolute Simulation of Contracts — An absolutely simulated contract is void because the parties do not intend to be bound by it, lacking the essential element of consent. The main characteristic is that the apparent contract is not intended to produce legal effect or alter the juridical situation of the parties. The true intention of the parties, determined from their contemporaneous and subsequent acts, prevails over the literal terms of the contract.
• Imprescriptibility of Actions to Declare Inexistence of Void Contracts — The action for the declaration of the inexistence of a contract does not prescribe. The right to set up the defense of absolute nullity cannot be waived or renounced.
• Unauthorized Contracts — Contracts entered into in the name of another by one without authority or legal representation are unenforceable unless ratified by the person on whose behalf it was executed. This is distinct from voidable contracts where a party is incapable of giving consent.
• Nature of Partition — Partition among heirs is not a conveyance of real property or an act of strict dominion resulting in a change of ownership. It is merely a designation and segregation of the part belonging to each heir, confirming or ratifying pre-existing title. Thus, a special power of attorney under Article 1878 is not required, and even oral partitions are valid between the parties when no creditors are affected.
• Implied Ratification — An unauthorized contract may be ratified expressly or impliedly by the person on whose behalf it was executed. Implied ratification is demonstrated by acts of ownership over the partitioned property, such as using it as loan collateral, and by the failure to timely object to the unauthorized act.

• "The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is void, and the parties may recover from each other what they may have given under the contract."
• "The most protuberant index of simulation of contract is the complete absence of an attempt in any manner on the part of the ostensible buyer to assert rights of ownership over the subject properties."
• "The operation of the parol evidence rule requires the existence of a valid written agreement. It is, thus, not applicable in a proceeding where the validity of such agreement is the fact in dispute, such as when a contract may be void for lack of consideration."
• "Article 1412 is not applicable to fictitious or simulated contracts, because they refer to contracts with an illegal cause or subject-matter. This article presupposes the existence of a cause, it cannot refer to fictitious or simulated contracts which are in reality non-existent."
• "It has been held in several cases that partition among heirs is not legally deemed a conveyance of real property resulting in change of ownership. It is not a transfer of property from one to the other, but rather, it is a confirmation or ratification of title or right of property that an heir is renouncing in favor of another heir who accepts and receives the inheritance."

• Valerio v. Refresca, G.R. No. 163687, March 28, 2006 — Followed. Cited for the doctrine that absolute simulation occurs when parties do not intend to be bound, rendering the contract void, whereas relative simulation binds the parties to their real agreement.
• Badillo v. Ferrer, 236 Phil. 438 (1987) — Followed. Cited for the rule that a deed of extrajudicial partition signed without authority is unenforceable under Articles 1403(1) and 1317, not voidable under Article 1390.
• Barcelona v. Barcelona, 100 Phil 251 (1956) — Followed. Cited for the principle that partition among heirs is not a conveyance of property but a confirmation of title, thus not requiring a special power of attorney.
• Tongoy v. Court of Appeals, 208 Phil. 95 (1983) — Followed. Cited for the fundamental characteristics of void or inexistent contracts, including their imprescriptibility and the principle that they produce no legal effects.
• Manila Banking Corporation v. Silverio, 504 Phil. 17 (2005) — Followed. Cited for the proposition that the complete absence of an attempt by the ostensible buyer to assert ownership is a clear badge of simulation.

• Article 1345, Civil Code — Defines absolute simulation (parties do not intend to be bound) and relative simulation (parties conceal true agreement). Applied to classify the deed of sale as absolutely simulated.
• Article 1346, Civil Code — Declares absolutely simulated contracts void. Applied to nullify the deed of sale.
• Article 1409(2), Civil Code — Lists absolutely simulated or fictitious contracts as inexistent and void from the beginning. Applied as the legal basis for the nullity of the deed of sale.
• Article 1410, Civil Code — Provides that the action for the declaration of the inexistence of a contract does not prescribe. Applied to reject the defense of prescription.
• Article 1412, Civil Code — Governs contracts with an unlawful cause where no criminal offense is committed. Held inapplicable because the provision presupposes an illegal cause, whereas a simulated contract is non-existent and lacks any cause.
• Rule 130, Section 9(b) and (c), Rules of Court — Exceptions to the parol evidence rule, allowing evidence aliunde when the written agreement fails to express the true intent of the parties or when the validity of the agreement is put in issue. Applied to admit evidence proving the simulation of the deed of sale.
• Article 1403(1), Civil Code — Classifies contracts entered into without authority as unenforceable. Applied to classify the extrajudicial partition signed by Conrado without a special power of attorney.
• Article 1317, Civil Code — Requires authority to contract in the name of another; provides that unauthorized contracts are unenforceable unless ratified. Applied to determine the nature of the extrajudicial partition and the effect of subsequent ratification.
• Article 1390(1), Civil Code — Renders contracts voidable when a party is incapable of giving consent. Held inapplicable because the issue was lack of authority, not incapacity to consent.
• Article 1878(5) and (15), Civil Code — Requires a special power of attorney to enter into contracts transmitting ownership of immovables or for acts of strict dominion. Held inapplicable because partition is not a conveyance or an act of strict dominion.
• Article 854, Civil Code — Governs preterition in testamentary succession. Held inapplicable because preterition requires a will, and the case involved intestate succession.

Velasco, Jr., Peralta, Abad, Sereno