JMA House Inc. vs. Sta. Monica Industrial and Development Corporation

A contract denominated as a deed of absolute sale with a separate option to buy is not an equitable mortgage absent clear and convincing proof of a debtor-creditor relationship between the parties; the presumptions under Article 1602 of the Civil Code require that the parties entered into a contract denominated as a sale and that their intention was to secure an existing debt by way of mortgage. An option to buy must be supported by a consideration distinct from the purchase price, and the optionee must exercise the option within the stipulated period by tendering payment; a mere notice of intention to accept without payment or tender does not constitute valid compliance.

JMA House Incorporated was a family corporation that owned a 1,611.6-square-meter lot with a three-storey commercial and residential building in Quezon City. The property had been extrajudicially foreclosed by Pioneer Savings and Loan Association, Inc. after JMA defaulted on a ₱1,500,000.00 loan, and Pioneer acquired the property at public auction for ₱2,000,000.00. JMA sought to redeem the property before the expiration of the one-year redemption period and entered into negotiations with Sta. Monica Industrial and Development Corporation, whose president was Eugenio Trinidad, to obtain funds for the redemption. AGCOR was another family corporation whose president, Dr. Albert Guerrero, later purchased the property from Sta. Monica.

JMA House Incorporated, a family corporation, owned a parcel of land identified as Lot No. 4, Block No. 13, Subdivision Plan No. Psd-35337 covered by TCT No. 268126, located in Quezon City across Gate 1 of Maryknoll College, with an area of 1,611.6 square meters and a three-storey commercial and residential building occupied by tenants. JMA had obtained a ₱1,500,000.00 loan from Pioneer Savings and Loan Association, Inc., secured by a real estate mortgage over the property. Upon JMA's default, the mortgage was extrajudicially foreclosed, and Pioneer was the winning bidder at ₱2,000,000.00 during the public auction on August 26, 1985. The Certificate of Sale was annotated on TCT No. 268126 on October 11, 1985, giving JMA one year, or until October 11, 1986, to redeem the property.

Sometime in June 1986, JMA decided to redeem the property from Pioneer earlier than the one-year deadline and needed ₱2,300,000.00 for the purpose. Rosita Alberto, JMA's General Manager, negotiated with Sta. Monica's president, Eugenio Trinidad, for a loan. During the negotiations, the parties agreed that Sta. Monica would purchase the property for ₱3,021,000.00. Trinidad insisted that JMA execute a deed of absolute sale rather than a real estate mortgage. Alberto suggested a real estate mortgage instead, given the property's higher value, but Trinidad refused. By way of compromise, Alberto proposed that a supplemental deed giving JMA the option to repurchase the property within two years be executed, to which Trinidad agreed. The respective lawyers of JMA and Sta. Monica prepared two deeds.

On June 23, 1986, Pioneer and JMA executed a Deed of Legal Redemption and Absolute Sale, whereby Pioneer transferred all rights over the property to JMA for ₱2,300,000.00, with the parties declaring that JMA's loan was fully paid and extinguished. On June 30, 1986, JMA executed a Deed of Absolute Sale over the lot and buildings in favor of Sta. Monica, acknowledging receipt of ₱4,100,000.00 as purchase price. On the same day, the parties executed a contract denominated as Option to Buy, granting JMA the option to buy back the property for ₱4,100,000.00 within one year from the execution of the Deed of Absolute Sale, or on or before July 1, 1987, with a grace period of one year immediately upon expiration thereof, until July 1, 1988. If JMA availed of the extension, it would pay an additional 3.5% per month as liquidated damages until the full amount was paid or the option exercised. From the ₱3,021,000.00 received from Sta. Monica, JMA remitted ₱2,300,000.00 to Pioneer. Alberto turned over the owner's duplicate of TCT No. 268126 to Trinidad, and the Register of Deeds issued TCT No. 347638 in the name of Sta. Monica; however, the Option to Buy was not annotated on the title. Sta. Monica thenceforth paid the realty taxes, while JMA continued collecting rentals from the tenants with Sta. Monica's knowledge and conformity. On November 17, 1986, Sta. Monica mortgaged the property to PCI Capital Corporation as security for a ₱3,600,000.00 loan.

On January 26, 1988, Sta. Monica, through Trinidad, informed Alberto and the tenants that due to JMA's failure to repurchase the property, it had been sold to AGCOR effective February 1, 1988, and that AGCOR would collect the rentals. Alberto protested, insisting the repurchase period had not yet elapsed. Nevertheless, on February 2, 1988, Sta. Monica and AGCOR executed a Deed of Absolute Sale over the property for ₱5,700,000.00. Part of the amount was used by Sta. Monica to redeem the property from PCI Capital Corporation, which executed a Release of Real Estate Mortgage on February 16, 1988. On February 17, 1988, the Register of Deeds issued TCT No. 376746 in the name of AGCOR, which paid realty taxes starting 1988. On October 30, 1989, AGCOR mortgaged the property to Planter's Development Bank as security for a ₱7,000,000.00 loan.

On June 30, 1988, Trinidad received from Alberto five checks drawn against JMA's account totaling ₱3,000,000.00 and ₱57,000.00 in cash from Atty. Rosalie Alberto as partial payment for the property. The checks were dishonored by the drawee bank, and Trinidad failed to return the cash amount. On November 11, 1991, JMA filed a complaint against Sta. Monica and AGCOR for specific performance, reconveyance, and damages, alleging that the transaction was an equitable mortgage and that it had a right to repurchase under the Option to Buy. The RTC dismissed the complaint, finding the transaction to be a sale with option to buy, not an equitable mortgage, and declaring AGCOR a purchaser in good faith. The CA affirmed, holding that the contracts were what they purported to be, that JMA was barred by laches, and that the notarized deeds carried a presumption of regularity.

• Equitable Mortgage: Petitioner maintained that the transaction between it and Sta. Monica was in reality an equitable mortgage, not a deed of sale with option to buy, citing Article 1602 of the Civil Code. It argued that the trial and appellate courts ignored evidence showing: (1) petitioner was in dire need of money when it executed the deeds; (2) it continued to possess the property and collect rentals from tenants after execution of the deeds; and (3) the purchase price of ₱4,100,000.00 was grossly inadequate compared to the property's appraised market value of ₱11,080,000.00.
• Laches: Petitioner contended that the CA erred in holding it guilty of laches, asserting that its right to enforce its claim over the property had not been barred by unreasonable delay.
• AGCOR's Good Faith: Petitioner argued that the CA erred in upholding the finding that AGCOR had no knowledge of the Option to Buy, implying that AGCOR was not a purchaser in good faith.

• Factual Issues Beyond Review: Respondents averred that the issues raised by petitioner were factual in nature and thus proscribed from review by the Supreme Court under Rule 45, and that the factual findings of the trial court as affirmed by the CA were conclusive.
• Not an Equitable Mortgage: Respondents insisted that Article 1602 did not apply because petitioner failed to exercise its option and pay the agreed repurchase price, and that the CA decision was in accord with law and evidence.
• Laches: Respondents argued that petitioner was barred by laches when it filed its complaint only on November 11, 1991, well after the option period had expired.
• AGCOR's Good Faith: AGCOR claimed it was a purchaser in good faith, having examined the title and found no annotation of the Option to Buy, and that it had no knowledge of the option until September 30, 1988. It further asserted that the option was not registered with the Register of Deeds, that JMA was estopped from claiming a sale with right to repurchase, and that JMA was guilty of laches.

• Review of Factual Issues: Whether the Court is proscribed from reviewing the factual issues raised by petitioner.
• Equitable Mortgage: Whether the transaction between JMA and Sta. Monica is an equitable mortgage under Article 1602 of the Civil Code.
• Laches: Whether petitioner is barred by laches from filing the action against the respondents.
• Purchaser in Good Faith: Whether respondent AGCOR was in good faith when it purchased the property from Sta. Monica for ₱5,700,000.00.

• Review of Factual Issues: No, as a general rule, but the Court may look into factual issues in exceptional cases where the lower court's findings are contrary to the evidence or tainted with grave abuse of discretion. The Court proceeded to address the merits.
• Equitable Mortgage: No. The transaction was a deed of absolute sale with a valid option to buy, not an equitable mortgage, because petitioner failed to prove by clear and convincing evidence that a debtor-creditor relationship existed between the parties, which is a requisite for the application of Article 1602.
• Laches: Yes. Petitioner failed to exercise its option within the stipulated period and filed its complaint only on November 11, 1991, well after the option period had lapsed.
• Purchaser in Good Faith: Yes. AGCOR examined the title and found no annotation of the Option to Buy, and there was no evidence that AGCOR had knowledge of the option at the time of purchase.

• Review of Factual Issues: Section 1, Rule 45 of the Rules of Court provides that only questions of law may be raised before the Supreme Court, as the Court is not a trier of facts. The trial court's findings, as affirmed by the CA, are conclusive unless there is preponderant evidence that the lower court ignored, misconstrued, or misinterpreted cogent and substantial facts. The Court may resolve factual issues in exceptional cases where the lower court's findings are contrary to the evidence or tainted with grave abuse of discretion amounting to excess of jurisdiction. The Court found occasion to address the merits despite the general proscription.

• Equitable Mortgage: Under Article 1602 of the Civil Code, a contract shall be presumed to be an equitable mortgage in enumerated cases, but two requisites must concur: (1) the parties entered into a contract denominated as a sale; and (2) their intention was to secure an existing debt by way of mortgage. A debtor-creditor relationship must exist; where there is no debt, there can be no mortgage, for if there is nothing to secure, there can be no security. Petitioner alleged it borrowed ₱3,021,000.00 from Sta. Monica, but no testimonial or documentary evidence was adduced to prove the existence of such a loan. The only evidence of money received was the Deed of Absolute Sale acknowledging receipt of ₱4,100,000.00. The "Redemption Receipt" signed by Trinidad on June 30, 1988 for ₱3,057,000.00 did not prove a loan was secured in 1986; it was part of the repurchase price under the Option to Buy. Petitioner expected Sta. Monica to execute a deed of sale back to it, not a release of mortgage, which was inconsistent with an equitable mortgage. The parties, both assisted by counsel, had compromised on executing a deed of absolute sale with an option to buy rather than a real estate mortgage. The inadequacy of the purchase price did not negate the sale because under the Option to Buy, petitioner was obliged to pay only ₱4,100,000.00 to repurchase. The option was supported by a consideration distinct from the purchase price—the compromise itself, whereby petitioner would not have agreed to sell unless given the option to repurchase. Petitioner, however, failed to exercise the option within the stipulated period, did not pay the liquidated damages required during the grace period, and the partial payment made on June 30, 1988 consisted of dishonored checks and was made after the property had already been sold to AGCOR.

• Laches: The Option to Buy gave petitioner one year from June 30, 1986, or until June 30, 1987, to exercise the option, with a one-year grace period until June 30, 1988, subject to payment of 3.5% monthly liquidated damages. Petitioner failed to exercise the option by June 30, 1987, and neither did it pay the liquidated damages from July 1, 1987 to June 1988. Sta. Monica sold the property to AGCOR on February 2, 1988, before the grace period expired, but petitioner did not file its complaint until November 11, 1991. The acceptance of ₱3,057,000.00 in dishonored checks and cash on June 30, 1988 did not resuscitate the lost right, particularly since the property had already been sold and titled to AGCOR. A mere notice of intention to accept, or acceptance without payment or tender, does not constitute valid compliance with the option.

• Purchaser in Good Faith: AGCOR's president examined the title at the Register of Deeds and discovered the property was mortgaged to PCI Capital Corporation but found no annotation of the Option to Buy. The Option to Buy was not registered or annotated on the dorsal portion of TCT No. 347638. AGCOR purchased the property for value and had TCT No. 376746 issued in its name. There was no evidence that AGCOR had knowledge of the Option to Buy at the time of purchase. The unregistered option could not bind a third party purchaser in good faith.

• Equitable Mortgage under Article 1602 — A contract shall be presumed to be an equitable mortgage in the cases enumerated under Article 1602 of the Civil Code, including when the price is unusually inadequate, when the vendor remains in possession, or when it may be fairly inferred that the real intention is to secure payment of a debt. However, two requisites must concur: (1) the parties entered into a contract denominated as a sale; and (2) their intention was to secure an existing debt by way of mortgage. A debtor-creditor relationship must exist; without a debt, there can be no mortgage. The burden is on the party alleging equitable mortgage to prove it by clear and convincing evidence, and the presumption is that the contract is what it purports to be. In this case, the Court found no evidence of a loan or debtor-creditor relationship between JMA and Sta. Monica, and petitioner expected a deed of sale back rather than a release of mortgage, which was inconsistent with an equitable mortgage.

• Option to Buy — Requisites and Exercise — An option is a continuing offer by which an owner gives another the right to buy property at a fixed price within a certain time. It is governed by the second paragraph of Article 1479 of the Civil Code. An option must be supported by a consideration distinct and separate from the purchase price; without such consideration, it is unenforceable. The consideration need not be monetary but may consist of any benefit to the promisee or detriment to the promisor. The optionee must exercise the option within the stipulated period by tendering payment; a mere notice of intention to accept, or acceptance without payment or tender, does not constitute valid compliance. In this case, the compromise to execute the deed of absolute sale on condition that an option to buy be granted constituted sufficient consideration for the option. However, petitioner failed to exercise the option within the stipulated period.

• Purchaser in Good Faith — A purchaser in good faith is one who buys property without knowledge of any defect or encumbrance on the title and pays fair value. An unregistered option to buy not annotated on the title cannot bind a third-party purchaser. In this case, AGCOR examined the title, found no annotation of the Option to Buy, and purchased the property for value, making it a purchaser in good faith.

• "the intention must be established, not by simple declarations of the parties, but by proof of facts and circumstances, inconsistent with the rule of absolute purchase, otherwise, the solemnity of deeds would always be exposed to the slippery memory of witnesses." — This passage, quoting the North Carolina Supreme Court in O'briant vs. Lee, articulates the evidentiary standard for proving that a deed of absolute sale is actually an equitable mortgage: clear, unequivocal, and convincing evidence of facts inconsistent with absolute purchase.

• "For the presumptions under the article to apply, two requisites must concur: (1) that the parties entered into a contract denominated as a sale; and (2) that their intention was to secure an existing debt by way of mortgage." — This states the controlling two-requisite test for the application of Article 1602 presumptions, which the Court applied to find that no equitable mortgage existed because no debtor-creditor relationship was proven.

• "If there is no relation of debtor-creditor, but by the terms of the contract one is merely given an option to buy real property for a fixed amount and for a fixed price, there is no equitable mortgage; the optionee is not bound to buy and to pay for said real property." — This passage distinguishes an equitable mortgage from an option to buy based on the presence or absence of a debtor-creditor relationship, which was the decisive factor in ruling against petitioner.

• "A mere notice of an intention to accept, or of an acceptance without such payment or tender, does not constitute a valid compliance." — This states the rule that exercise of an option requires actual payment or tender, not merely notice of intention, which was fatal to petitioner's claim since its checks were dishonored and the partial payment was made after the property had already been sold to AGCOR.

• San Pedro vs. Lee, G.R. No. 156522, May 28, 2004 — Cited for the two-requisite test for the application of Article 1602 presumptions: that the parties entered into a contract denominated as a sale and that their intention was to secure an existing debt by way of mortgage. The Court applied this test to find that no equitable mortgage existed.
• Villamor vs. Court of Appeals, G.R. No. 97332, October 10, 1991 — Cited for the definition of consideration as "the why of the contract, the essential reason which moves the contracting parties to enter into the contract," in support of the ruling that the option was supported by consideration distinct from the purchase price.
• Lao vs. Court of Appeals, G.R. No. 115307, July 8, 1997 — Cited for the proposition that the Court will enforce the true agreement of the parties even if the property has already been registered and a new TCT issued in the name of the transferee, in the context of ascertaining the parties' true intention.
• Aquino vs. Court of Appeals, 380 Phil. 736 (2000) — Cited for the rule that he who alleges that a contract does not reflect the true intention of the parties may prove the same by documentary or parol evidence, establishing the evidentiary burden on petitioner.

• Article 1602, Civil Code — Enumerates the cases where a contract shall be presumed to be an equitable mortgage. The Court applied this provision but found that the two requisite conditions—existence of a contract denominated as a sale and intention to secure an existing debt—were not satisfied because no debtor-creditor relationship was proven.
• Article 1370, Civil Code — Provides that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. Applied to hold that the clear terms of the notarized Deed of Absolute Sale and Option to Buy should govern.
• Article 1479, Civil Code (second paragraph) — Provides that a promise to buy and sell a determinate thing for a price certain is reciprocally demandable. Applied in characterizing the option to buy as a continuing offer governed by this provision.
• Section 1, Rule 45, Rules of Court — Provides that only questions of law may be raised in the Supreme Court. Applied to frame the general proscription against factual review, while recognizing exceptions for grave abuse of discretion or findings contrary to evidence.
• Section 1, Rule 131, Revised Rules of Evidence — Cited for the burden of proof on petitioner to prove its claim that it borrowed ₱3,021,000.00 from Sta. Monica, failing which its claim would be defeated.

Chief Justice Artemio V. Panganiban (Chairperson), Associate Justice Consuelo Ynares-Santiago, Associate Justice Ma. Alicia Austria-Martinez, and Associate Justice Minita V. Chico-Nazario concurred.