Labasan vs. Lacuesta

A contract purporting to be a sale with right to repurchase is construed as an equitable mortgage when the price is unusually inadequate, the vendor remains in possession, and the vendee fails to declare the property for taxation or consolidate ownership.

Spouses Clemente and Hermenigilda Lacuesta owned an unregistered, irrigated riceland in Badoc, Ilocos Norte, declared for taxation under Hermenigilda's name. In 1927, they needed money and entered into a transaction with spouses Gelacio and Marcela Labasan involving this riceland. The document executed was in the Ilocano dialect and contained conflicting terms suggesting both a sale with right to repurchase and a loan with security. The Lacuestas sought to recover the property decades later, leading to the present litigation.

In 1927, spouses Clemente and Hermenigilda Lacuesta owned an unregistered, irrigated riceland in Badoc, Ilocos Norte. Facing an urgent necessity for money, they executed a document in the Ilocano dialect on April 20, 1927, in favor of spouses Gelacio and Marcela Labasan. The document stated that the Lacuestas were selling the riceland to the Labasans for P225.00, which they had already received. It included a stipulation that the land could be reconveyed if ten years had not elapsed and the same amount of money was returned. The document also contained clauses referring to the "urgent necessity for money," the Lacuestas' responsibility for all tenancy matters during the Labasans' "ownership," and the receipt being made as "security."

On April 23, 1948, the Lacuestas filed a complaint against the Labasans in the Court of First Instance of Ilocos Norte, seeking reconveyance. They alleged that the P225.00 was a loan secured by the riceland, and that they had tendered payment in 1943 and again after the liberation, but the Labasans refused, claiming ownership. The Labasans countered that the transaction was a sale with a right to repurchase, which the Lacuestas failed to exercise within ten years, making the Labasans absolute owners; Gelacio Labasan had subsequently donated the property to his son, Roberto.

The trial court ruled in 1959 that the document was a pacto de retro sale and that the right to redeem was lost. The Court of Appeals, however, reversed this in 1966, finding the contract to be an equitable mortgage. The appellate court noted that the purchase price of P225.00 was grossly inadequate for a property valued at over P1,000.00, that the Lacuestas remained in physical possession and handled cultivation, and that the Labasans never declared the property for taxation or consolidated their ownership. The Supreme Court affirmed the appellate court's factual findings and legal conclusion.

• Nature of the Contract: Petitioners argued that the Lacuestas conveyed the land via a pacto de retro sale with a right to repurchase within ten years, and because the Lacuestas failed to exercise this right within the stipulated period, the vendees a retro became absolute owners.

• Nature of the Contract: Respondents countered that the P225.00 was a loan secured by the riceland, and that their attempts to repay the loan and recover the land were refused by the petitioners.

• Nature of the Contract: Whether the document executed between the spouses Lacuesta and spouses Labasan constitutes a pacto de retro sale or an equitable mortgage.

• Nature of the Contract: Yes, the contract is an equitable mortgage. The Court affirmed the appellate court's ruling that the transaction was a loan secured by an equitable mortgage, not a sale with right to repurchase.

• Nature of the Contract: The terms of the document (Exhibit "1-A") were ambiguous, containing conflicting terminologies such as "urgent necessity for money," "selling the land," and "receipt is made as security." Under Article 1371 of the Civil Code, the contemporaneous and subsequent acts of the parties must be considered to determine their true intent. Several circumstances established that the transaction was an equitable mortgage: First, the Lacuestas executed the document due to urgent financial necessity, indicating a loan rather than a sale. Second, the amount of P225.00 was grossly inadequate as a purchase price for an irrigated riceland valued at over P1,000.00, a circumstance expressly recognized by Article 1602(1) of the New Civil Code. Third, the Lacuestas remained in physical possession of the property and handled cultivation and tenancy matters, which Article 1602(2) treats as an indicator of an equitable mortgage. Fourth, the Labasans never declared the property for taxation in their name nor paid taxes on it until 1944, and they failed to consolidate their ownership as required under the Old Civil Code. Finally, applying the rule of construction that doubts in onerous contracts are settled in favor of the greatest reciprocity of interest, a loan involves a smaller transmission of rights than an absolute sale.

• Equitable Mortgage vs. Pacto de Retro Sale — When a contract purporting to be a sale with right to repurchase contains ambiguities, courts look beyond the document's wording to the parties' intent, as evidenced by contemporaneous and subsequent acts. Under Article 1602 of the Civil Code, a contract is presumed to be an equitable mortgage if the price is unusually inadequate, the vendor remains in possession, or the vendee fails to pay taxes. In this case, the gross inadequacy of the price, the vendor's continued possession, and the vendee's failure to consolidate ownership or pay taxes all pointed to an equitable mortgage.
• Interpretation of Contracts — If the terms of a contract are clear, the literal meaning controls; but if the words appear contrary to the evident intention of the parties, the latter prevails. When terms are ambiguous, the reason behind the transaction and surrounding circumstances are examined to ascertain true intent. In case of doubt concerning surrounding circumstances, the least transmission of rights and interests prevails if gratuitous, and if onerous, the doubt is settled in favor of the greatest reciprocity of interest.

• "Necessitous men are not, truly speaking, free men; but to answer a present emergency, will submit to any terms that the crafty may impose upon them." — This quotation, cited from Villa vs. Santiago, underscores the Court's reasoning that the Lacuestas' urgent need for money vitiated their true intent to sell, supporting the conclusion that the transaction was a loan.
• "such a contract involves a smaller transmission of rights and interests, and the debtor does not surrender all rights to his property but simply confers upon the creditor the right to collect what is owing from the value of the thing given as security, there existing between the parties a greater reciprocity of rights and obligations." — This passage from Olino vs. Medina articulates the principle of resolving doubts in onerous contracts in favor of the greatest reciprocity of interest, justifying the preference for a mortgage over a sale.

• Jayme vs. Salvador — Cited to support the proposition that a transaction is deemed a loan rather than a sale when the parties signed a contract knowing it did not express their real intention due to the urgent necessity of obtaining funds.
• Quinga vs. Court of Appeals — Followed to show that gross inadequacy of price and the vendor's continued possession justify construing a purported sale as an equitable mortgage.
• Santos vs. Duata — Applied to demonstrate that the vendor's continued possession and payment of taxes, combined with the vendee's failure to consolidate, are significant circumstances indicating an equitable mortgage, and that Article 1602 of the New Civil Code may be applied retroactively.
• Olino vs. Medina — Relied upon for the rule that when there is doubt concerning the surrounding circumstances in the execution of a contract, the doubt is settled in favor of the greatest reciprocity of interest, favoring a loan/mortgage over a sale.

• Article 1371, Civil Code — Provides that to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. Applied to examine the parties' acts to resolve the ambiguity in the document.
• Article 1602, Civil Code — Enumerates circumstances under which a contract purporting to be a sale with right to repurchase is construed as an equitable mortgage, including unusually inadequate price and the vendor remaining in possession. Applied to determine the true nature of the transaction.
• Article 1378, Civil Code — States that in case of doubt, the least transmission of rights prevails in gratuitous contracts, and in onerous contracts, the doubt is settled in favor of the greatest reciprocity of interest. Applied to favor the interpretation of the contract as a loan/mortgage.

Teehankee (Chairman), Makasiar, Fernandez, and Guerrero, JJ., concurred.