Lao vs. Court of Appeals

A Regional Trial Court, on appeal from an inferior court’s ejectment judgment where the question of possession is inseparable from ownership and both parties voluntarily submit evidence and argument on ownership without objecting to the inferior court’s lack of jurisdiction, may assume original jurisdiction under Section 11, Rule 40 of the Rules of Court and decide the issue of ownership; and a contract that is in form an absolute sale will be treated as an equitable mortgage when the parties’ true intent is shown by circumstances such as the vendor’s continued possession, repeated extensions of a repurchase option, and the vendor’s urgent need for money.

Better Homes Realty & Housing Corporation, holding Transfer Certificate of Title No. 22184 over a townhouse unit at Unit I, No. 21 N. Domingo Street, Quezon City, demanded that Manuel Lao vacate the property he had been occupying by sheer tolerance. Lao refused, asserting that the title resulted from a transaction that was a loan secured by an equitable mortgage, not a genuine sale. Better Homes filed a complaint for unlawful detainer in the Metropolitan Trial Court of Quezon City, anchoring its right to possession on its registered ownership.

• Nature: Better Homes Realty & Housing Corporation filed an action for unlawful detainer against Manuel Lao over a townhouse unit at Unit I, No. 21 N. Domingo Street, Quezon City. It claimed ownership under TCT No. 22184, alleged that Lao occupied the premises by tolerance without rent under an understanding that he would vacate upon demand, and stated that despite a demand letter received on February 5, 1992, Lao refused to leave.
• Defense: Lao answered that he was the true beneficial owner; Better Homes’ title was acquired from N. Domingo Realty & Development Corporation — the family corporation that originally owned the property — through a transaction that was in reality a loan secured by an equitable mortgage, not a sale. He contended the action was really for recovery of possession (accion publiciana) outside the MTC’s jurisdiction.
• The Alleged Sale: The property was originally registered in the name of N. Domingo Realty & Development Corporation under TCT No. 316634. On April 4, 1988, a Deed of Absolute Sale was executed between that corporation, represented by Artemio S. Lao and Manuel Lao as authorized signatories, and Better Homes for a price of P100,000.00. Two days earlier (April 2, 1988), Better Homes had executed an Option to Purchase in favor of Manuel Lao, granting him the right to buy the property for P109,000.00 until June 11, 1988.
• Extensions and Loan Language: The option was extended on June 10, 1988, for another sixty days (until August 11, 1988) with the price increased to P137,000.00; the document stated: “Since Mr. Lao borrow P20,000.00 from me.” On August 11, 1988, the option was again extended until November 11, 1988, with the price increased to P158,840.00. The Deed of Absolute Sale was registered and TCT No. 22184 issued in Better Homes’ name only on May 10, 1989, more than a year after the purported sale. Throughout this period, Lao remained in possession of the property, having lived there since 1975.
• MTC Judgment: The Metropolitan Trial Court ruled that Better Homes was the registered owner, that the Deed of Absolute Sale was valid, and that Lao’s claim of ownership was untrue. It ordered Lao to vacate and pay rent, attorney’s fees, and costs.
• RTC Judgment: On appeal, the Regional Trial Court reversed. It found that while Better Homes held the registered title, the real agreement was a loan secured by mortgage, as evidenced by Lao’s continued possession, the pre-existing option to purchase and repeated extensions, the increase in price with each extension, the lending language in the extension document, and the Lao brothers’ dire financial need. The RTC dismissed the complaint.
• CA Ruling: The Court of Appeals reversed, holding that in an appeal from an MTC ejectment decision, the RTC should only determine who has the better right to physical possession and may not decide ownership. The CA concluded the MTC had correctly resolved the ejectment action based on Better Homes’ ownership.

• Assumption of Original Jurisdiction: Petitioner argued that the RTC properly decided the issue of ownership because both parties litigated it without objection, bringing the case within Section 11, Rule 40 of the Rules of Court — the RTC was authorized to try the case on the merits in the exercise of its original jurisdiction, and dismissal for lack of jurisdiction would result in needless multiplicity of suits.
• Equitable Mortgage: Petitioner maintained that the Deed of Absolute Sale was in truth an equitable mortgage, pointing to his continued possession, the option to purchase granted before the sale, its repeated extensions with escalating price, the loan language in the extension document, and his urgent need for money that compelled him to sign the sale as a mere formality. He invoked the Civil Code presumptions and the principle that equity disregards the form in favor of the substance of the transaction.

• Improper Assumption of Ownership Issue: Respondent contended that the MTC had jurisdiction over the unlawful detainer suit based on the allegations of ownership and tolerance, and that the RTC on appeal had no authority to decide ownership — its role was confined to reviewing the correctness of the MTC’s determination of physical possession.
• Absolute Sale: Respondent insisted the transaction was a genuine sale, established by the Deed of Absolute Sale, the corporate board resolution authorizing it, and the subsequent transfer of title.
• Real Party in Interest: Respondent argued that petitioner was not the real party in interest to assert ownership because the property belonged to the family corporation, a claim given scant consideration since petitioner was the defendant impleaded by respondent itself.
• Impermissible Factual Allegations: Respondent asserted the petition raised facts not found by the Court of Appeals and sought dismissal on that ground, which the Court treated as academic because it relied on the CA’s own factual recitation.

• Jurisdiction Over Issue of Ownership in Ejectment: Whether the Regional Trial Court, in an appeal from an unlawful detainer case, may decide ownership when the parties voluntarily submitted evidence and argued the matter without objecting to the inferior court’s lack of jurisdiction.
• Nature of the Transaction: Whether the agreement between Better Homes and N. Domingo Realty & Development Corporation was an absolute sale or an equitable mortgage.
• Right to Eject: Whether petitioner Manuel Lao should be ejected from the premises.

• Jurisdiction Over Issue of Ownership in Ejectment: The RTC validly assumed original jurisdiction under Section 11, Rule 40 of the Rules of Court and properly decided the issue of ownership. While the general rule confines ejectment proceedings to possession de facto, when the question of possession is inseparable from ownership and the parties litigate the latter without objection, the inferior court loses jurisdiction, but the RTC may exercise its original jurisdiction if the parties filed pleadings and proceeded to trial without raising jurisdictional objections. Both parties in this case submitted evidence on ownership before the MTC without objection, the MTC ruled on it, and on appeal both extensively discussed ownership in their pleadings before the RTC. Applying Alvir v. Vera and Consignado v. Court of Appeals, the RTC’s decision on ownership averted needless multiplicity of suits and was procedurally proper.
• Nature of the Transaction: The agreement was an equitable mortgage, not an absolute sale. The Court applied the presumptions under Articles 1602 and 1604 of the Civil Code, examining the parties’ intent through their contemporaneous and subsequent conduct. Lao remained in possession before, during, and after the alleged sale. Better Homes granted Lao an option to repurchase just two days before the sale and extended it twice, increasing the price each time; the first extension document referred explicitly to a loan. The Lao brothers were in desperate need of funds, placing them at a disadvantage and reinforcing the inference that the contract was intended as security for a debt. Equity disregards the form of the instrument and enforces the actual agreement of the parties; parol evidence is admissible for this purpose even after registration of title.
• Right to Eject: Ejectment was not warranted. Since the transaction was an equitable mortgage, Better Homes was a mere mortgagee-creditor. Article 2088 of the Civil Code prohibits a mortgagee from appropriating or disposing of the mortgaged property. Private respondent had no right to eject petitioner because the title it relied upon did not reflect a genuine sale and petitioner’s possession was lawful.

• Separability of Possession and Ownership in Ejectment — The primary issue in an ejectment suit is possession de facto; ownership may be inquired into only to determine who has the better right to possession. When the question of possession cannot be resolved without ruling on ownership, the inferior court loses jurisdiction and the case must be dismissed, unless the parties voluntarily litigate the ownership issue and the Regional Trial Court properly assumes original jurisdiction on appeal under Section 11, Rule 40. (Alvir v. Vera, Consignado v. Court of Appeals)
• Assumption of Original Jurisdiction on Appeal — Section 11, Rule 40 — A case tried by an inferior court without jurisdiction over the subject matter shall be dismissed on appeal; however, the Regional Trial Court, in the exercise of its original jurisdiction, may try the case on the merits if the parties file their pleadings and go to trial without any objection to such jurisdiction. This rule prevents needless delay, multiplicity of suits, and unjust technical dismissal when the parties have fully presented their respective cases.
• Presumptions of Equitable Mortgage (Articles 1602 and 1604, Civil Code) — A contract, regardless of its form as an absolute sale or sale with pacto de retro, is presumed an equitable mortgage when: (1) the price is unusually inadequate; (2) the vendor remains in possession; (3) after expiration of the right to repurchase, another instrument extends the period; (4) the purchaser retains part of the purchase price; (5) the vendor binds himself to pay the taxes; or (6) in any other case where it may fairly be inferred that the real intention is to secure payment of a debt. A court must examine the parties’ intent through their conduct, words, and actions before, during, and after execution; parol evidence is admissible to prove the true nature of the agreement, even if title has been transferred and a new certificate issued.
• Prohibition Against Pactum Commissorium (Article 2088, Civil Code) — A creditor-mortgagee cannot appropriate or dispose of the thing given as security; any stipulation to the contrary is void. A mortgagee therefore lacks standing to eject the mortgagor from possession based solely on a registered title founded on a contract determined to be an equitable mortgage.

• “As a general rule, the main issue in an ejectment suit is possession de facto, not possession de jure. In the event the issue of ownership is raised in the pleadings, such issue shall be taken up only for the limited purpose of determining who between the contending parties has the better right to possession. However, where neither of the parties objects to the allegation of the question of ownership — which may be initially improvident or improper — in an ejectment suit and, instead, both present evidence thereon, argue the question in their various submissions and participate in all aspects of the trial without objecting to the Metropolitan (or Municipal) Trial Court’s jurisdiction to decide the question of ownership, the Regional Trial Court — in the exercise of its original jurisdiction as authorized by Section 11, Rule 40 of the Rules of Court — may rule on the issue and the corollary question of whether the subject deed is one of sale or of equitable mortgage.” — The controlling rule distilled from precedents.
• “Equity looks through the form and considers the substance; and no kind of engagement can be adopted which will enable the parties to escape from the equitable doctrine to which reference is made.” — Applied in disregarding the absolute sale form.
• “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.” — Justifying the court’s solicitude for the borrower in an inequitable transaction.
• “In determining the nature of a contract, the Court looks at the intent of the parties and not at the nomenclature used to describe it. Pivotal to deciding this issue is the true aim and purpose of the contracting parties as shown by the terminology used in the covenant, as well as ‘by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement.’” — The controlling standard for distinguishing equitable mortgage from sale.

• Alvir vs. Vera, 130 SCRA 357 (1984) — Applied; established that when possession cannot be determined without settling ownership, the inferior court loses jurisdiction, but the RTC may assume original jurisdiction under Section 11, Rule 40 if the parties litigate without objection to avoid dismissal and multiplicity of suits.
• Consignado vs. Court of Appeals, 207 SCRA 297 (1992) — Applied; reiterated that the RTC has no appellate jurisdiction but may exercise original jurisdiction, and the Court of Appeals on further appeal must review the ownership issue.
• De la Santa vs. Court of Appeals, 140 SCRA 44 (1985) — Cited for the principle that it is more consistent with procedural due process to dismiss an ejectment suit when ownership is genuinely raised, unless the parties agree to the RTC’s exercise of original jurisdiction.
• Zamora vs. Court of Appeals, G.R. No. 102557, July 30, 1996 — Relied upon for the standards of intent and the adage about necessitous men, as well as the admissibility of parol evidence to prove equitable mortgage.
• Macapinlac vs. Gutierrez Repide, 43 Phil. 770 (1922) — Doctrine that a conveyance intended as security is a mortgage regardless of form, and parol evidence is admissible to show the true nature even against a registered title.
• Saliwan vs. Amores, 51 SCRA 329 (1973) — Referred to as the source of the rule that dismissal for lack of jurisdiction would cause needless delay when the case was already heard on the merits in the RTC’s original jurisdiction by common assent.

• Section 11, Rule 40, Rules of Court — Provides that a case tried by an inferior court without jurisdiction over the subject matter shall be dismissed on appeal, but the RTC may try it on the merits in its original jurisdiction if the parties file pleadings and go to trial without objection. Applied as the procedural anchor for the RTC’s valid exercise of original jurisdiction.
• Article 1602, Civil Code — Enumerates the circumstances giving rise to a presumption of equitable mortgage. The Court relied on the vendor’s continued possession (No. 2), the extensions of the repurchase period (No. 3), and the general inference that the transaction secured a debt (No. 6).
• Article 1604, Civil Code — Extends the presumptions in Article 1602 to a contract purporting to be an absolute sale. Applied to the Deed of Absolute Sale so that the same presumptions could be invoked.
• Article 2088, Civil Code — Prohibits the creditor from appropriating or disposing of the thing pledged or mortgaged; renders any stipulation to the contrary void. Operated to deny the mortgagee’s claim of right to eject the mortgagor.
• Section 1, Rule 70, Rules of Court — Defines the cause of action for unlawful detainer as founded on the unlawful withholding of possession after the expiration or termination of a right to hold; cited to show that Better Homes, lacking a valid sale, had no terminated right that could support ejectment.
• Section 33(2), Batas Pambansa Blg. 129 — Delineates the MTC’s exclusive original jurisdiction over ejectment cases; cited by the CA but deemed inapplicable because jurisdiction was lost when the ownership issue became inseparable from possession.

Narvasa, C.J., Davide, Jr. and Francisco, JJ., concur. (Melo, J., on leave.)