Lustan vs. Court of Appeals

A contract of absolute sale is presumed to be an equitable mortgage where it can be fairly inferred that the real intention of the parties is to secure the payment of a debt; the illiteracy of one party shifts the burden to the party enforcing the contract to prove that its terms were fully explained. Moreover, a principal is bound by the acts of an agent under a continuing special power of attorney even if the agent exceeds internal limits of authority, where no revocation has been communicated to the third-party mortgagee.

Adoracion Lustan owned a 10.0057-hectare parcel of land in Calinog, Iloilo, covered by TCT No. T-561. She leased the property to Nicolas Parangan in 1969. During the lease, Parangan regularly extended small loans to Lustan for her daily expenses and her daughter’s education. To secure an agricultural loan, Lustan executed a Special Power of Attorney in favor of Parangan authorizing him to mortgage the property to the Philippine National Bank. A second Special Power of Attorney followed in 1972, enabling Parangan to obtain additional loans. Some of these later loans were contracted without Lustan’s knowledge, and Parangan used the proceeds for his own benefit. Lustan subsequently signed instruments that Parangan later presented as a deed of pacto de retro sale and, ultimately, a deed of definite sale. She insisted he had assured her the documents merely evidenced her indebtedness.

• Ownership and Lease: Petitioner Adoracion Lustan was the registered owner of Lot 8069 of the Cadastral Survey of Calinog, Iloilo, containing 10.0057 hectares and covered by TCT No. T-561. In 1969, she leased the property to private respondent Nicolas Parangan for a term of ten years at an annual rent of P1,000.
• Loans and Special Powers of Attorney: During the lease, Parangan regularly extended small loans to Lustan to defray daily expenses and finance her daughter’s education. On July 29, 1970, Lustan executed a Special Power of Attorney in favor of Parangan to secure an agricultural loan from respondent Philippine National Bank (PNB) using the lot as collateral. A second Special Power of Attorney was executed on February 18, 1972, authorizing Parangan to obtain further loans. By virtue of this second SPA, Parangan secured four loans in the amounts of P24,000, P38,000, P38,600, and P25,000 on various dates from 1975 to 1980. The last three loans were contracted without Lustan’s knowledge, and Parangan used the proceeds for his own benefit. The encumbrances were annotated on the title.
• Execution of the Deeds: On April 16, 1973, Lustan signed a Deed of Pacto de Retro Sale in favor of Parangan. That document was later superseded by a Deed of Definite Sale dated May 4, 1979, which Lustan signed upon Parangan’s representation that it merely evidenced the loans he had extended to her. The deed stated that Lustan conveyed the property and all improvements absolutely to Parangan for P75,000.
• Demand and Dispute: Concerned that continued borrowing might prejudice her property, Lustan demanded the return of her certificate of title. Parangan refused and asserted ownership under the Deed of Definite Sale.
• Trial Court Findings: The RTC found that Lustan was illiterate and that the Deed of Definite Sale was not read or explained to her. The trial court gave greater weight to the testimony of Lustan’s witness, Celso Pamplona, who stated that the document was not read or explained and that he was told it merely consolidated her debts. The court also noted contradictions between Parangan’s witness, Delia Cabial, and the notarizing judge, who denied that any receipts were presented or accounting made.

• Equitable Mortgage: Petitioner argued that the Deed of Definite Sale was intended merely to secure her existing indebtedness to Parangan, thereby raising the presumption of an equitable mortgage under Article 1602 of the Civil Code, particularly under the sixth circumstance (real intention to secure a debt).
• Invalid Consent: Petitioner maintained that, as an illiterate person, the contents of the deed were neither read nor explained to her; consequently, she could not have given valid consent to an absolute sale.
• Credibility of Witnesses: Petitioner contended that the Court of Appeals erred in giving full credit to the testimony of Delia Cabial, which was materially contradicted by Judge Lebaquin, the notarizing officer.

• Validity of Sale: Private respondents Parangan asserted that the Deed of Definite Sale was a valid, absolute conveyance executed voluntarily and with knowledge of its contents, as purportedly established by the testimony of the instrumental witness and the notarization.
• Continuing Authority: Respondent PNB maintained that the Special Powers of Attorney were continuing in nature and authorized all loans obtained, and that the bank had no notice of any limitation on Parangan’s authority, rendering the mortgages valid and binding on the property.

• Equitable Mortgage: Whether the Deed of Definite Sale executed by petitioner in favor of private respondent Parangan should be treated as an equitable mortgage rather than an absolute sale.
• Enforceability of Mortgages: Whether the mortgages constituted on the property in favor of PNB by virtue of the special powers of attorney are valid and enforceable against petitioner.

• Equitable Mortgage: The Deed of Definite Sale was declared an equitable mortgage. The evidence sufficiently established that the true intention of the parties was to consolidate petitioner’s existing debts and secure them with the property, not to effect a genuine sale. Under Articles 1602(6) and 1604 of the Civil Code, a contract of absolute sale is presumed to be an equitable mortgage in any case where it may be fairly inferred that the real intention of the parties is to secure the payment of a debt. The presumption was triggered by the circumstances that petitioner was illiterate, the deed was not read or explained to her, and she was induced to sign under the misrepresentation that the instrument merely evidenced her indebtedness. The burden of proving that the terms had been fully explained rested on the party enforcing the contract — a burden that was not discharged, particularly in light of the trial court’s credibility assessments, which are entitled to great respect.
• Enforceability of Mortgages: The mortgages in favor of PNB were declared valid and subsisting. Article 2085 of the Civil Code allows third persons to mortgage their own property to secure an obligation. The Special Powers of Attorney executed by petitioner in favor of Parangan were continuing; under Article 1921, revocation of an agency does not prejudice third persons who were not given notice. No revocation was communicated to PNB, and the bank was entitled to rely on the apparent authority conferred by the written powers. Even if Parangan exceeded the limits of his authority vis-à-vis petitioner, Article 1911 makes the principal solidarily liable where the principal allowed the agent to act as though he had full powers. Accordingly, the property could be subjected to execution sale, without prejudice to petitioner’s right to demand proportional indemnification from Parangan for any amount paid from the proceeds of such sale.

• Equitable Mortgage Presumptions under Articles 1602 and 1604, Civil Code — A contract of absolute sale is presumed to be an equitable mortgage if any of the circumstances enumerated in Article 1602 is present. Two requisites must be satisfied for the presumption to arise: (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. The existence of any one of the circumstances, not a concurrence or an overwhelming number, suffices to give rise to the presumption. Here, the sixth circumstance applied — the real intention of the parties was to secure a debt — because the illiterate petitioner signed documents under a misrepresentation that they merely evidenced her indebtedness.
• Burden of Proof Where a Party Is Illiterate — Where a party is unable to read or cannot understand the language of the contract and alleges mistake or fraud, the burden shifts to the party enforcing the contract to prove that its terms were fully explained to the former in a language understood by him.
• Continuing Special Power of Attorney and Third-Party Rights — An agent’s authority under a continuing special power of attorney remains effective as to third persons who have no notice of revocation. Under Article 1921, revocation not communicated to a specified third person does not prejudice that person. A principal is bound by the acts of an agent that fall within the terms of the written power of attorney, even if the agent exceeds limits according to internal instructions not known to the third party.
• Mortgage of Third-Party Property — Pursuant to Article 2085, third persons may secure an obligation by mortgaging their own property. The property so mortgaged is directly and jointly liable for the fulfillment of the obligation, and may be subjected to execution sale, with the third-party mortgagor entitled to indemnity from the debtor.

• “If the words of the contract appear to be contrary to the evident intention of the parties, the latter shall prevail over the former.” — This passage, applying Article 1370, underscores the primacy of the parties’ true intent over the literal terms of the instrument in determining the nature of the contract.
• “Settled is the rule that where a party to a contract is illiterate or cannot read or cannot understand the language in which the contract is written, the burden is on the party interested in enforcing the contract to prove that the terms thereof are fully explained to the former in a language understood by him.”
• “The existence of any of the circumstances therein, not a concurrence nor an overwhelming number of such circumstances, suffices to give rise to the presumption that the contract is an equitable mortgage.”
• “Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers.”

• Gaw vs. IAC, 220 SCRA 405 — Cited for the rule that when the Court of Appeals and the trial court reach conflicting factual findings, the Supreme Court may review the evidence.
• Olea vs. CA, 247 SCRA 274 — Cited for the admissibility of parol evidence to prove that a document ostensibly a sale was in truth a mortgage.
• Uy vs. CA, 230 SCRA 664 — Relied upon for the doctrine that any single circumstance under Article 1602 suffices to raise the presumption of equitable mortgage.
• Cayabyab vs. IAC, G.R. No. 75120, April 28, 1994 — Applied for the burden of proof when a contracting party is illiterate.
• Eugenio vs. CA, 239 SCRA 207 — Used to support the rule that a third person may rely on the terms of a written power of attorney as defining the scope of the agent’s authority.
• Cuison vs. CA, 227 SCRA 391 — Cited for the principle that the principal is solidarily liable when the agent is allowed to act with apparent full powers.

• Article 1370, Civil Code — The intention of the parties prevails over the literal words of a contract when they are contrary to the evident intent.
• Articles 1602 and 1604, Civil Code — Enumeration of circumstances that give rise to the presumption that a contract of sale is an equitable mortgage; applied to declare the Deed of Definite Sale an equitable mortgage.
• Article 1332, Civil Code — When a party is unable to read or the contract is in a language not understood, the enforcing party must prove that the terms were fully explained; placed the burden on Parangan, which he failed to discharge.
• Article 1921, Civil Code — Revocation of an agency does not prejudice third persons who were not given notice; used to hold the mortgages valid as against petitioner.
• Article 1911, Civil Code — The principal is solidarily liable with the agent where the principal allows the agent to act as though he had full powers; reinforced PNB’s right to enforce the mortgage.
• Article 2085, Civil Code — Third persons may secure an obligation by mortgaging their own property; basis for the validity of the mortgages on petitioner’s land even if the loans were for Parangan’s benefit.
• Article 2126, Civil Code — The mortgage directly and immediately subjects the property upon which it is imposed; supported execution sale of the mortgaged property.

Narvasa, C.J., Davide, Jr., Melo, and Panganiban, JJ., concurred.