Integrated Credit and Corporate Services vs. Cabreza

A contract denominated as a "Memorandum of Agreement" that allows a former owner to reacquire a foreclosed property by installment payments is a contract of sale of real property on installments governed by the Maceda Law (R.A. 6552), and rescission thereof requires strict compliance with the notarial act requirement under Section 4 of the law; however, where the property has already been sold to a third party without valid rescission, equity permits upholding the subsequent sale and ordering the seller to refund the payments made by the defaulting buyer.

ICCS is a partnership duly organized under the laws of the Republic of the Philippines, while Citibank, N.A. is a domestic banking corporation. Cabreza was the registered owner of a house and lot covered by TCT No. 149759/T-752 (the subject property). In 1990, Cabreza opened a credit line with Citibank secured by a real estate mortgage over the subject property. After he defaulted, Citibank instituted foreclosure proceedings, and ICCS emerged as the highest bidder at the public auction. The dispute centers on the nature and validity of a subsequent agreement between ICCS and Cabreza allowing the latter to reacquire the property by installment payments, and the consequences of ICCS's sale of the same property to the spouses Gan while that agreement remained in force.

Cabreza was the registered owner of a house and lot covered by TCT No. 149759/T-752. In 1990, he applied for a credit line with Citibank, secured by a real estate mortgage over the subject property. After he defaulted, Citibank initiated foreclosure proceedings. The public auction was initially deferred when the parties agreed to restructure Cabreza's liability, but Cabreza again defaulted under the restructured loan. The public auction was finally conducted, and ICCS emerged as the highest bidder.

Cabreza's sister, Rosalinda, negotiated with ICCS for the repurchase of the subject property. On June 9, 1994, or two days prior to the expiration of the redemption period, Cabreza sent ICCS a letter offering to redeem the property at a price of P10 million to be paid in installments. The parties subsequently entered into a Memorandum of Agreement (MOA), under which ICCS agreed to postpone consolidation of title and allowed Cabreza, with the spouses Aguilar as guarantors, to redeem the property at an agreed price of P10,345,914.75 payable in installments on specified dates. The MOA admitted in evidence was not dated. It stated that the redemption period had already expired without a valid redemption, that ICCS was already entitled to consolidation of title, and that the MOA would be deemed automatically terminated and canceled upon default or non-compliance by Cabreza or the spouses Aguilar.

Pursuant to the MOA, Rosalinda issued several checks: P1,800,000.00 on July 21, 1994; P100,000.00 on July 29, 1994; P100,000.00 on August 5, 1994; P1,845,914.75 on September 30, 1994; and P179,522.93 on October 30, 1994, representing the first monthly amortization. She likewise issued postdated checks for the subsequent monthly amortizations. The first three checks were deposited, cleared, and credited to ICCS's account. The fourth check, however, was dishonored for insufficient funds. On October 6, 1994, ICCS sent Cabreza and the spouses Aguilar a letter demanding payment of the amount of the fourth check, warning that failure to pay would constrain ICCS to consolidate title. Despite the non-payment, Rosalinda still issued the fifth check, which was cleared and credited to ICCS's account. The succeeding checks for subsequent monthly amortizations were no longer encashed by ICCS.

On December 23, 1994, ICCS informed Cabreza and the spouses Aguilar that it had already consolidated its title to the subject property and required them to vacate. ICCS then sold the property to the spouses Gan by a Deed of Sale dated February 1, 1995, for which the latter were issued TCT No. 199445. According to Cabreza and the spouses Aguilar, Rosalinda offered to pay in cash the amount of the dishonored fourth check, but ICCS demanded payment of the entire balance. Rosalinda then offered to fully pay the whole balance, but ICCS refused to receive it. ICCS countered that the fifth check was deposited by mere inadvertence, as its check custodian was not informed of the cancellation of the MOA. The spouses Gan contended they were purchasers in good faith, having verified with the Register of Deeds that the title was clean and unencumbered. Rosalinda testified that prior to the sale, she called Estela Gan to inform her of their claim over the property, which Estela denied.

• Nature of the MOA: ICCS argued that the MOA was a voluntary agreement extending the redemption period, not a contract of sale, constituting a conversion of legal redemption to conventional redemption; as such, the Maceda Law does not apply.
• Automatic termination clause: ICCS maintained that the MOA expressly provided for automatic cancellation upon breach, and that the Court has upheld the validity of contractual stipulations providing for automatic rescission upon non-payment, with no evidence that the termination was attended by bad faith.
• No waiver of right to rescind: ICCS argued that it did not waive its right to rescind when it inadvertently deposited the fifth check after the default on the fourth check, as there was no valid abandonment of a right—the depositing was done through inadvertence and mistake.
• Inability to comply: ICCS posited that even assuming it waived its right to rescind, Cabreza and the spouses Aguilar would not have been able to comply with the MOA because they maintained insufficient funds and subsequently closed the deposit account.
• Valid sale to spouses Gan: ICCS claimed that after termination of the MOA, it consolidated title and became the absolute owner, so there was no legal impediment to sell the property to the spouses Gan, and consequently no basis to reimburse the payments made by the spouses Gan.

• Implied warranty and ICCS bad faith (Spouses Gan): The spouses Gan contended that in a contract of sale there is an implied warranty that the seller is the owner and the thing sold is free from encumbrances; ICCS warranted valid title, and the registered title bore no adverse claim or annotation. They ascribed bad faith to ICCS and prayed for nullification of the Deed of Sale and return of the purchase price and other fees, plus interest.
• MOA as contract of sale (Cabreza and spouses Aguilar): Cabreza and the spouses Aguilar contended that the MOA is a contract of sale but merely an extension of the redemption period, and that ICCS had no right to unilaterally rescind the MOA and sell the subject property to the spouses Gan.
• Insufficiency of dishonor as basis for rescission (Cabreza and spouses Aguilar): They argued that the dishonor of the fourth check was not sufficient basis for ICCS to unilaterally and unjustly rescind the MOA, and prayed for dismissal of the petition.

• Nature of the MOA: Whether the MOA between ICCS and Cabreza, with the spouses Aguilar as guarantors, is a contract of sale.
• Validity of rescission: Whether ICCS validly rescinded the MOA.

• Nature of the MOA: Yes. The MOA is a contract of sale of real property on installments, containing all essential elements—consent, object, and price certain—and is thus governed by the Maceda Law (R.A. 6552).
• Validity of rescission: No. The MOA was not validly rescinded because ICCS failed to comply with the requirement under Section 4 of the Maceda Law that the notice or demand for rescission be made by a notarial act; the December 23, 1994 letter was a simple, unnotarized letter.

• Nature of the MOA: The Court found no reason to disturb the lower courts' finding that the MOA is a contract of sale. While Cabreza sent a letter on June 9, 1994 offering to redeem the property by installment payments, the MOA constituted ICCS's acceptance. The MOA admitted in evidence was not dated, making it doubtful when a voluntary agreement for extension of the redemption period was reached. Citing GE Money Bank, Inc. vs. Spouses Dizon, the Court noted that a valid extension of the redemption period requires (a) voluntary agreement of the parties to extend before expiration of the redemption period, and (b) the debtor's commitment to pay the redemption price on a fixed date. The first requisite was not met because the MOA itself stated that the redemption period had already expired and that ICCS was entitled to consolidation of title. ICCS thus became the absolute owner upon expiration of the redemption period. Nevertheless, the MOA remained a valid agreement in the form of a contract of sale of real property in installments. The Court applied the principle that a contract is what the law defines it to be, not what the parties call it. Under Article 1458 of the Civil Code, the essential elements of a contract of sale are consent, object, and price certain in money or its equivalent—all of which were present in the MOA. The subject property owned by ICCS was the object, and the P10,345,914.75 payable in installments constituted the price. The Maceda Law therefore applies.

• Validity of rescission: The Court agreed with the CA that the MOA was not validly rescinded, but on a different ground. The Court found no valid rescission because the requirements of Section 4 of the Maceda Law were not complied with. Section 4 provides that where less than two years of installments have been paid, the seller must give the buyer a grace period of not less than sixty days from the date the installment became due; if the buyer fails to pay after the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of a notice of cancellation or demand for rescission by a notarial act. Citing Pryce Properties Corp. vs. Nolasco, Jr., the Court enumerated four conditions: (1) the buyer has paid less than two years of installments; (2) the seller gives a sixty-day grace period; (3) the seller gives notice of cancellation or demand for rescission by notarial act; and (4) the seller may actually cancel only after thirty days from the buyer's receipt of the notarial notice. The December 23, 1994 letter informing Cabreza and the spouses Aguilar that ICCS was consolidating title should have effectively canceled the MOA, but it was not notarized—it was not accompanied by an acknowledgment or even a jurat, and was merely a simple letter signed by ICCS's managing partner. The notarial rescission contemplated by law is a unilateral cancellation acknowledged before a notary public and accompanied by competent evidence of identity. Furthermore, there was no showing that the thirty-day waiting period after receipt was observed. The MOA therefore remained valid and subsisting. The Court found it unnecessary to discuss the issue of waiver by depositing the fifth check, as the invalid rescission was dispositive. Because the MOA was still subsisting when ICCS sold the property to the spouses Gan, ICCS could not transmit ownership it did not validly have. However, on equitable grounds and drawing support from Orbe vs. Filinvest Land, Inc., the Court upheld the validity of the Deed of Sale to the spouses Gan, who had themselves prayed for nullification of the Deed of Sale and return of the purchase price. Since the property was no longer available, ICCS was ordered to refund the amounts actually paid by Cabreza and the spouses Aguilar under the MOA—P2,179,522.93—with legal interest at 12% per annum from filing of the Complaint on February 9, 1995 until June 30, 2013, and 6% per annum from July 1, 2013 until full payment.

• Maceda Law (R.A. 6552), Section 4 — Notarial Rescission Requirement — Where the buyer has paid less than two years of installments, the seller may not immediately cancel the contract. Four conditions must be met: (1) the defaulting buyer has paid less than two years of installments; (2) the seller must give a sixty-day grace period reckoned from the date the installment became due; (3) if the buyer fails to pay after the grace period, the seller must give notice of cancellation or demand for rescission by notarial act; and (4) the seller may actually cancel only after thirty days from the buyer's receipt of the notarial notice. The notarial rescission contemplated is a unilateral cancellation acknowledged before a notary public and accompanied by competent evidence of identity. A simple, unnotarized letter does not satisfy this requirement. The Court applied this doctrine to hold that ICCS's December 23, 1994 letter did not validly rescind the MOA.

• Contract is What the Law Defines, Not What the Parties Call It — The nature of a contract is determined by its essential elements and the intention of the parties as manifested by their stipulations, not by the title or designation given by the parties. The Court applied this principle to hold that the MOA, though not denominated a "Deed of Sale," was a contract of sale because it contained all essential elements under Article 1458 of the Civil Code: consent, object, and price certain.

• Extension of Redemption Period — Requisites — For a valid extension of the statutory redemption period in extrajudicial foreclosure, two requisites must be established: (a) voluntary agreement of the parties to extend the redemption period, and (b) the debtor's commitment to pay the redemption price on a fixed date. The agreement must be made before the expiration of the redemption period. The Court found the first requisite unmet because the undated MOA itself stated the redemption period had already expired.

• Equitable Relief Where Property Sold to Third Party Without Valid Rescission — Where a seller has sold property to a third party while the original contract of sale on installments remains subsisting due to invalid rescission, equity permits upholding the subsequent sale and ordering the seller to refund the payments made by the defaulting buyer, rather than annulling the subsequent sale and reconveying the property. The Court drew this from Orbe vs. Filinvest Land, Inc.

• "A contract is what the law defines it to be, and not what the contracting parties call it." — This passage articulates the controlling principle for determining the nature of a contract, which the Court applied to classify the MOA as a contract of sale despite its title.

• "The notarial rescission contemplated in the law 'is a unilateral cancellation by a seller of a perfected contract thereunder acknowledged by a notary public and accompanied by competent evidence of identity.'" — This defines the canonical formulation of notarial rescission under Section 4 of the Maceda Law, which ICCS's simple letter failed to satisfy.

• "In fine, the MOA is still valid and subsisting when ICCS sold the subject property to the spouses Gan." — This states the ratio decidendi connecting the invalid rescission to the consequence that ICCS could not validly transmit ownership, leading to the equitable resolution of the dispute.

• "the Court resolves to dispose this aspect of the case in an equitable manner, thereby upholding the validity of the Deed of Sale to the spouses Gan." — This passage marks the Court's equitable departure from the lower courts' rulings, choosing to uphold the subsequent sale rather than order reconveyance, in order to resolve a dispute that had been ongoing for almost 25 years.

• GE Money Bank, Inc. vs. Spouses Dizon, 756 Phil. 502 (2015) — Cited for the two requisites of a valid extension of the redemption period: voluntary agreement before expiration and commitment to pay on a fixed date. The Court found the first requisite unmet due to the undated MOA and its own recital that the redemption period had lapsed.

• Pryce Properties Corp. vs. Nolasco, Jr., G.R. No. 203990, August 24, 2020 — Cited for the four conditions under Section 4 of the Maceda Law that must be met before a seller may cancel a contract. The Court applied these conditions to determine that ICCS's rescission was invalid for lack of a notarial act.

• Orbe vs. Filinvest Land, Inc., 817 Phil. 934 (2017) — Cited as controlling support for the equitable remedy of refunding payments to the defaulting buyer where the property has already been sold to a third party without valid rescission. The Court applied this to uphold the Deed of Sale to the spouses Gan and order ICCS to refund Cabreza and the spouses Aguilar.

• Bank of the Philippine Islands vs. Spouses Co, 772 Phil. 291 (2015) — Cited for the principle that the purchaser of a foreclosed property at public auction becomes the absolute owner upon expiration of the redemption period without valid redemption.

• Tolentino vs. Philippine Postal Savings Bank, Inc., G.R. No. 241329, November 13, 2019 — Cited for the principle that a contract is what the law defines it to be, not what the parties call it.

• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Cited for the applicable legal interest rates: 12% per annum from filing of the Complaint until June 30, 2013, and 6% per annum from July 1, 2013 until full payment.

• Article 1458, Civil Code (Republic Act No. 386) — Defines a contract of sale as one where a party obligates himself to transfer ownership and deliver a determinate thing, and the other to pay a price certain in money or its equivalent. The Court applied this to classify the MOA as a contract of sale, finding all essential elements—consent, object, and price—present.

• Section 4, Republic Act No. 6552 (Maceda Law) — Governs cancellation of contracts for sale of real property on installments where the buyer has paid less than two years. Requires a sixty-day grace period, a notice or demand for rescission by notarial act, and a thirty-day waiting period after receipt before actual cancellation. The Court held ICCS's rescission invalid for failure to comply with the notarial act requirement.

• Act No. 3135 — Regulates the sale of property under special powers inserted in or annexed to real estate mortgages, including the one-year redemption period. ICCS invoked it to argue that the redemption period may be extended by agreement, but the Court found no valid extension had occurred before expiration.

Leonen (Chairperson), Inting, Delos Santos, and J. Lopez, JJ., concurred.