Macapinlac vs. Gutierrez Repide, et al.

A conveyance in the form of an absolute sale with pacto de retro, executed merely as security for a debt, is treated in equity as a mortgage; registration under the Torrens system does not defeat that equitable character as against a transferee who takes with notice, and relief from fraud in a subsequent transfer is governed by the ordinary period for fraud, not the one-year period for an original decree of registration. An order sustaining a demurrer and simultaneously dismissing the complaint is final and appealable, and dismissal without opportunity to amend is reversible error.

Hacienda Dolores, located in Porac, Pampanga, was registered under Act No. 496 in the name of Jose C. Macapinlac. Macapinlac had executed a conveyance in favor of E. M. Bachrach, whose rights later passed to Francisco Gutierrez Repide; J. F. Boomer claimed a prior contractual right hostile to both. The dispute implicated the Torrens system’s effect on equitable rights and the Code of Civil Procedure rules on demurrers, amendment, and appeal.

On and prior to August 22, 1916, Jose C. Macapinlac owned Hacienda Dolores in Porac, Pampanga, assessed at P288,000 and registered under Act No. 496; Torrens certificate No. 427 had been issued to him on May 13, 1916. Macapinlac was indebted to the Bachrach Garage & Taxicab Company for the price of an automobile and accessories. On August 22, 1916, he executed fourteen promissory notes payable to the Bachrach Garage & Taxicab Company, amounting in all to P12,960, falling due monthly from September 2, 1916 to October 2, 1917, each for P1,000 except the last two which together amounted to P960. On September 1, 1916, eleven of the notes were discounted at the Philippine National Bank; the other three, amounting to P2,277.70, remained with the payee corporation and were later paid in full by Macapinlac.

Contemporaneously with the delivery of the notes, and as security for their payment, Macapinlac executed what on its face purported to be a deed of sale with privilege of repurchase, to be exercised on or before October 2, 1917. The conveyance covered all the property in Torrens certificate No. 427, subject to the encumbrances noted thereon, and was annotated on the back of the certificate. E. M. Bachrach was named as transferee instead of the alleged real creditor, the Bachrach Garage & Taxicab Company. The complaint alleged that the deed of sale was void for lack of consideration as between Macapinlac and E. M. Bachrach, the nominal beneficiary, but the decision attached little importance to that nonconformity.

On November 8, 1917, Francisco Gutierrez Repide acquired for P5,000 all the rights of E. M. Bachrach in the property. The complaint alleged that Repide was then well aware that the transfer to Bachrach had been made to secure a debt owing to the Bachrach Company, that part of the debt had been paid, and that the balance really due was less than one-half of the P12,960 expressed in the notes. Repide then sought to have the certificate of title transferred to his own name. The question was referred to the judge of the Court of First Instance of Pampanga, who was of the opinion that the conveyance to Bachrach was a straight contract of sale with pacto de retro and, since ownership had consolidated in the purchaser, directed the register of deeds to register the property in Repide’s name and issue a new certificate. That order was entered in case No. 104, the same land registration proceedings in which title had been registered in Macapinlac’s name.

It was inferred that the registration in Repide’s name was accomplished with Macapinlac’s external approval and by means of his assistance or collusion, including an affidavit by Macapinlac submitted in support of Repide’s contention. Macapinlac alleged that his apparent acquiescence in the transfer was due to fraudulent practices and undue influence exerted by Repide. The complaint contained a full narrative of facts which, if true, would justify relief from fraudulent practices, duress, or undue influence. At the time of the filing of the complaint, Repide was in actual possession of the property and had in effect been enjoying possession since August 24, 1917, allegedly prejudicing Macapinlac by no less than P200,000 per annum. It also appeared that Repide had taken over from the Archbishop of Manila a mortgage on the property, paying P35,000, and may have discharged other liens.

J. F. Boomer filed a cross-complaint asserting a right to Hacienda Dolores hostile to both Macapinlac and Repide, based on a contract, Exhibit 1, between Macapinlac and Boomer dated anterior to the contract of sale with pacto de retro of August 22, 1916. If the allegations of the cross-complaint were true, they showed a cause of action proper to be ventilated in the suit.

• Right to Amend: Jose C. Macapinlac assigned as error the trial court’s dismissal of the complaint immediately upon sustaining the demurrer, without allowing him an opportunity to amend.
• Sufficiency of the Complaint: Macapinlac insisted upon the sufficiency of his complaint in point of law, thereby requiring the Supreme Court to review the order sustaining the demurrer and not merely the denial of leave to amend.
• Boomer’s Cross-Complaint: J. F. Boomer asserted by cross-complaint a right to Hacienda Dolores hostile to both Macapinlac and Repide, based on a contract between Macapinlac and Boomer dated anterior to the August 22, 1916 conveyance; the allegations, if true, stated a cause of action proper to be ventilated in the suit.

• Prematurity of Appeal: The appellee suggested that the appeal was premature because an order merely sustaining a demurrer is not forthwith appealable.
• Indefeasibility of Torrens Title: The Repide estate insisted that Repide’s title had become indefeasible because the land had been conveyed to him, a transfer certificate had been issued in his name, and the original certificate had been cancelled more than one year before the action was begun.
• Prescription: The defense rested on the ground that the Torrens certificate was unimpeachable in Repide’s hands and that the plaintiff’s remedy for fraud had prescribed.

• Prematurity of Appeal: Whether an appeal from an order sustaining a demurrer and simultaneously dismissing the complaint is premature.
• Right to Amend: Whether the trial court erred in dismissing the complaint upon sustaining the demurrer without giving the plaintiff an opportunity to amend.
• Equitable Mortgage: Whether a conveyance in the form of a sale with pacto de retro, executed as security for a debt, must be treated in equity as a mortgage.
• Transferee with Notice: Whether a transferee who acquires the grantee’s interest with notice of the security nature of the conveyance takes subject to the debtor’s equitable rights.
• Torrens Registration and Prescription: Whether registration of the property in the transferee’s name under the Torrens system makes the title indefeasible and bars relief after one year.
• Tender and Redemption: Whether the debtor must make a valid tender before seeking redemption and an accounting.
• Boomer’s Cross-Complaint: Whether the trial court erred in sustaining the demurrer to Boomer’s cross-complaint.

• Prematurity of Appeal: No. An order sustaining a demurrer and at the same time actually dismissing the complaint is definitive and final, hence appealable; an order merely sustaining a demurrer is not.
• Right to Amend: Yes. Section 101 of the Code of Civil Procedure gives the plaintiff the election to amend after a demurrer is sustained; dismissal without that opportunity is reversible error.
• Equitable Mortgage: Yes. A conveyance absolute on its face or with pacto de retro, if executed as security for a debt, is treated in equity as a mortgage, regardless of the form chosen by the parties.
• Transferee with Notice: Yes. A party acquiring an interest with notice of an existing equity takes subject to that equity; Repide, aware of the security nature of the transaction, stands in Bachrach’s position.
• Torrens Registration and Prescription: No. Registration under the Torrens system does not change civil rights except as expressly provided; fraud in a subsequent transfer allows legal and equitable remedies within the ordinary period for fraud, or four years under the Code of Civil Procedure, not one year.
• Tender and Redemption: No. Tender is not necessary where the amount due cannot be known until an accounting is had; after accounting, the court may decree redemption.
• Boomer’s Cross-Complaint: Yes. The demurrer to Boomer’s cross-complaint was improperly sustained; the Torrens transfer was not an insuperable obstacle, and the same errors applied.

• Prematurity of Appeal: The order appealed from did not merely sustain a demurrer; it also dismissed the complaint. While an order merely sustaining a demurrer is not forthwith appealable and an appeal in such case is premature under Serrano vs. Serrano, an order sustaining a demurrer and at the same time actually dismissing the complaint is definitive and final. Had no appeal been prosecuted, the plaintiff would have been completely and forever out of court. The appeal was therefore properly taken.

• Right to Amend: The trial court committed manifest error when it dismissed the complaint at the same time that it sustained the demurrer, without allowing the plaintiff an opportunity to amend if he had elected to do so. Section 101 of the Code of Civil Procedure expressly provides that the plaintiff shall have this election, and it has been repeatedly held reversible error to dismiss a cause immediately upon sustaining a demurrer without giving the plaintiff an opportunity to amend, as in Molina vs. La Electricista and Ibañez de Aldecoa vs. Fortis. Because Macapinlac also insisted upon the sufficiency of his complaint in point of law, and because section 143 of the Code of Civil Procedure entitles a party appealing by bill of exceptions to a review of all rulings, orders, and judgments duly excepted to, the Supreme Court also reviewed the order sustaining the demurrer.

• Equitable Mortgage: The complaint alleged that the conveyance to Bachrach was executed as security for a debt owing by Macapinlac to the Bachrach Company. Under Cuyugan vs. Santos, followed in Villa vs. Santiago and the later Cuyugan vs. Santos, a conveyance in the form of a contract of sale with pacto de retro will be treated as a mortgage if really executed as security for a debt, and this fact may be shown by oral evidence apart from the instrument. The test is the continued existence of a debt or liability between the parties, so that the conveyance is in reality intended as security for the debt or indemnity against the liability; if the debt is still subsisting and the payment stipulated for reconveyance is in reality the payment of that existing debt, the transaction amounts to a mortgage whatever language the parties used. Equity looks through the form and considers the substance. The nonconformity of the promissory notes and the deed of sale as regards creditor and beneficiary was of little importance.

• Transferee with Notice: Repide acquired Bachrach’s interest for a valuable consideration, but the complaint alleged that he was fully aware of the nature of the transaction between Bachrach and Macapinlac and knew that part of the secured debt had been paid. The cardinal rule is that a party who acquires any interest in property with notice of an existing equity takes subject to that equity; the purchaser with notice is liable in equity to the same extent and in the same manner as the person from whom he purchased. Having acquired Bachrach’s interest with knowledge that the contract of August 22, 1916, had been executed as security for a debt, Repide, or his estate, must be understood to stand toward Macapinlac in exactly the same position that Bachrach would have occupied had the transfer to Repide never been effected.

• Torrens Registration and Prescription: Repide’s contention that his title had become indefeasible because a transfer certificate was issued in his name and the original certificate cancelled more than one year before the action was unsound. The equitable doctrine that any conveyance intended as security for a debt will be held in effect to be a mortgage operates regardless of the form of the agreement, and a conveyance accompanied by registration in the transferee’s name and the issuance of a new certificate is no more secured from that doctrine than an informal conveyance. Under section 70 of the Land Registration Act, the circumstance that land has been judicially registered under the Torrens system does not change or affect civil rights and liabilities except as expressly provided; as between the immediate parties to a contract affecting such lands, their rights are generally determined by the same rules applicable to unregistered land. An original decree of registration under section 38 is different from a subsequent transfer under sections 50 to 55. Under section 38, a person deprived of land by a decree of registration procured by fraud is limited to one year after entry of the decree to file a petition for review, and even that remedy is unavailable if an innocent purchaser for value has acquired the property. Under section 55, if a subsequent transfer is infected with fraud or the title is procured by fraudulent means to be registered in the transferee’s name, the injured party may pursue all legal and equitable remedies against the parties to the fraud, saving the rights of any innocent holder for value. This means the defrauded person may bring an appropriate action within the ordinary period of limitation applicable to fraud, or within the four-year period prescribed in subsection 4 of section 43 of the Code of Civil Procedure. The plaintiff’s cause of action to annul the registration in Repide’s name did not prescribe at one year, and it had not been barred when the action was begun.

• Tender and Redemption: The complaint alleged that Macapinlac had made a written offer to Repide to pay all debts and charges held by Repide against the property, which Repide refused. That allegation was not sufficient to comply with section 347 of the Code of Civil Procedure, which declares that a written offer to pay a particular sum of money is, if rejected, equivalent to actual tender, because the written offer did not mention a particular sum as the amount to be paid. There was therefore no valid tender. However, the case was not one where tender was necessary, because the amount actually due could not be known until an accounting was had and the extent of the plaintiff’s indebtedness reduced to certainty. Once that was accomplished, it would become the duty of the court, upon such amendment of the complaint as might appear desirable, to make the proper decree allowing the plaintiff to redeem and requiring the executrix of Repide to surrender the property. The estate of Repide occupied substantially the position of a mortgagee in possession. Under the doctrine of Barretto vs. Barretto, and by reference to the Civil Code provisions on antichresis, non-payment of the debt does not vest ownership in the creditor, but the debtor cannot recover enjoyment of the property without first paying in full what he owes; the creditor must apply the fruits to interest and then to principal and must account to the debtor. The mortgagee in possession may retain possession until the indebtedness is satisfied and the property redeemed, must account for rents and profits, and if he remains in possession after the debt is satisfied, he becomes a trustee for the mortgagor as to the excess. The mortgagor can enforce his rights by an equitable action for an account and to redeem. Repide’s estate was entitled to charge Macapinlac for amounts paid to free the property from liens, including the P35,000 paid to take over the Archbishop of Manila’s mortgage, and to retain possession until all valid claims were satisfied, in obedience to the maxim that he who seeks equity must do equity. The complaint’s assumption that fraud would entitle Macapinlac to immediate restoration was mistaken; the fraud related only to the registration of title in Repide’s name, and even without that act the Repide estate would merely be in the position occupied by Repide after acquiring Bachrach’s interest, without prejudice to rights acquired by that purchase. Macapinlac would be entitled to have the certificate cancelled and another issued to show the correct state of facts.

• Boomer’s Cross-Complaint: Boomer’s cross-complaint asserted a right to Hacienda Dolores hostile to both Macapinlac and Repide, based on a contract, Exhibit 1, between Macapinlac and Boomer dated anterior to the August 22, 1916 conveyance. If the allegations were true, as must be assumed upon demurrer, the cross-complaint showed a cause of action proper to be ventilated in the suit. The trial judge sustained the demurrer apparently because the transfer of the certificate of title to Repide was considered an insuperable obstacle, but that point had already been fully discussed in connection with the controversy between the principal litigants. The action of the trial judge in sustaining the demurrer to Boomer’s cross-complaint involved the same errors committed in the other branch of the case.

• Equitable Mortgage (Absolute Conveyance as Security) — A conveyance of land absolute on its face, including a contract of sale with pacto de retro, executed merely as security for a debt, is treated in equity as a mortgage. The essential requisite is the continued existence of a debt or liability between the parties; if the debt is not discharged by the conveyance and the payment stipulated for reconveyance is in reality the payment of that existing debt, the transaction amounts to a mortgage whatever language the parties used. Equity looks through the form and considers the substance, and parol evidence is admissible to show the true character of the transaction. The Court applied this doctrine to the deed executed by Macapinlac in favor of Bachrach, holding that it must be treated as security for the debt to the Bachrach Company.

• Purchaser with Notice Takes Subject to Existing Equity — A party who acquires any interest in property, legal or equitable, even for a valuable consideration, with notice of an existing equitable estate, interest, claim, or right in the same subject matter held by a third person, is liable in equity to the same extent and in the same manner as the person from whom he purchased; he acquires only what his vendor can honestly transfer. The Court applied this rule to Repide, who acquired Bachrach’s interest with knowledge that the conveyance had been executed as security for a debt and that part of the debt had been paid. Repide therefore stood in Bachrach’s position.

• Torrens Registration Does Not Alter Civil Rights Except as Provided — The circumstance that land has been judicially registered under the Torrens system does not change or affect civil rights and liabilities with respect thereto except as expressly provided in the Land Registration Act. As between the immediate parties to a contract affecting registered land, their rights are generally determined by the same rules of law applicable to unregistered land. The Court applied this to hold that registration of the property in Repide’s name did not defeat the equitable mortgage character of the transaction.

• Fraud in Subsequent Transfer vs. Original Registration — Under section 38 of the Land Registration Act, a person deprived of land by an original decree of registration procured by fraud is limited to one year after entry of the decree to file a petition for review, and that remedy is unavailable if an innocent purchaser for value has acquired the property. Under section 55, if a subsequent transfer is infected with fraud or the title is procured by fraudulent means to be registered in the transferee’s name, the injured party may pursue all legal and equitable remedies against the parties to the fraud, saving the rights of any innocent holder for value. The defrauded person may bring an appropriate action within the ordinary period of limitation applicable to fraud, or within the four-year period prescribed in subsection 4 of section 43 of the Code of Civil Procedure. The Court applied this to hold that Macapinlac’s action to annul the registration in Repide’s name had not prescribed at one year.

• Mortgagee in Possession and Antichresis Accounting — Non-payment of the debt does not vest ownership of the property in the creditor, but the debtor cannot recover enjoyment of the property without first paying in full what he owes. The creditor is obliged to apply the fruits derived from the estate first to interest, if any, and then to the principal, and must account to the debtor for those fruits. A mortgagee in possession may retain possession until the indebtedness is satisfied and the property redeemed; he must account for rents and profits, and if he remains in possession after the debt is satisfied, he becomes a trustee for the mortgagor as to the excess. The mortgagor can enforce his rights by an equitable action for an account and to redeem. The Court applied this doctrine by treating the Repide estate as a mortgagee in possession and requiring an accounting before redemption.

• Tender Not Required Where Amount Is Unliquidated — Under section 347 of the Code of Civil Procedure, a written offer to pay a particular sum of money is, if rejected, equivalent to actual tender, but the offer must mention a particular sum. However, tender is not necessary where the amount actually due cannot be known until an accounting is had and the indebtedness reduced to certainty. The Court applied this to hold that Macapinlac’s written offer was not a valid tender, but that no tender was required before an accounting.

• Dismissal After Demurrer Without Leave to Amend — Under section 101 of the Code of Civil Procedure, the plaintiff has the election to amend after a demurrer is sustained. It is reversible error for a Court of First Instance to dismiss a cause immediately upon sustaining a demurrer without giving the plaintiff an opportunity to amend if he so desires. The Court applied this to reverse the trial court’s dismissal of Macapinlac’s complaint.

• Finality and Appealability of Order Dismissing Upon Demurrer — An order merely sustaining a demurrer is not forthwith appealable, and an appeal in such case is premature. However, an order sustaining a demurrer and at the same time actually dismissing the complaint is definitive and final in the sense necessary to justify an appeal. The Court applied this to hold that Macapinlac’s appeal was not premature.

• "While it is of course undeniable that an order merely sustaining a demurrer is not forthwith appealable, and an appeal in such case is premature (Serrano vs. Serrano, 9 Phil., 142), the same cannot be said of an order sustaining a demurrer and at the same time actually dismissing the complaint." — This passage establishes the procedural ruling that an order dismissing the complaint upon demurrer is final and appealable, distinguishing it from an order merely sustaining a demurrer.

• "Any conveyance of land absolute on its face, without anything in its terms to indicate that it is otherwise than an absolute conveyance, and without any accompanying written defeasance, contract of repurchase, or other agreement, may, in equity, by means of extrinsic and parol evidence, be shown to be in a reality a mortgage as between the original parties, and as against all those deriving title from or under the grantee, who are not bona fide purchasers for value and without notice." — This is the Court’s canonical statement of the equitable mortgage doctrine, quoted from Pomeroy, and it supplies the ratio for treating the deed with pacto de retro as security.

• "In the second place, the circumstance that the land has been judicially registered under the Torrens system does not change or affect civil rights and liabilities with respect thereto except as expressly provided in the Land Registration Act (see sec. 70); and as between the immediate parties to any contract affecting such lands their rights will generally be determined by the same rules of law that are applicable to unregistered land." — This passage defines the limited effect of Torrens registration on civil rights and supports the holding that registration did not defeat the equitable mortgage.

• "But the case is not one where a tender is necessary, because the amount actually due cannot be known until an accounting is had and the extent of the plaintiff's indebtedness reduced to certainty." — This passage states the rule that tender is excused where the debt is unliquidated and an accounting is required before redemption.

• Cuyugan vs. Santos, 34 Phil., 100 — Controlling precedent holding that a conveyance in the form of a contract of sale with pacto de retro will be treated as a mortgage if really executed as security for a debt, and that this fact can be shown by oral evidence apart from the instrument.
• Villa vs. Santiago, 38 Phil., 157 — Followed the doctrine in Cuyugan vs. Santos on the equitable mortgage character of a conveyance executed as security.
• Cuyugan vs. Santos, 39 Phil., 970 — Later case following the same equitable mortgage doctrine.
• Barretto vs. Barretto, 37 Phil., 234 — Applied by the Court to hold that the rights of the parties were essentially the same as under antichresis, requiring the creditor in possession to account for fruits and the debtor to pay the debt before recovering enjoyment.
• Serrano vs. Serrano, 9 Phil., 142 — Cited for the rule that an order merely sustaining a demurrer is not forthwith appealable and an appeal in such case is premature; distinguished because the order in this case also dismissed the complaint.
• Molina vs. La Electricista, 6 Phil., 519 — Cited for the rule that it is reversible error to dismiss a cause immediately upon sustaining a demurrer without giving the plaintiff an opportunity to amend.
• Ibañez de Aldecoa vs. Fortis, 17 Phil., 82 — Cited together with Molina vs. La Electricista for the same rule on the plaintiff’s right to amend after a demurrer is sustained.
• Cancino vs. Valdez, 3 Phil., 429 — Cited for the rule that a party appealing by bill of exceptions is entitled to a review of all rulings, orders, and judgments made in the action to which he duly excepted.
• Balderrama vs. Compañia General de Tabacos, 13 Phil., 609 — Cited with Cancino vs. Valdez on the extent of review on appeal by bill of exceptions.

• Section 101, Code of Civil Procedure — Provides that the plaintiff shall have the election to amend after a demurrer is sustained; the trial court violated this provision by dismissing the complaint immediately without allowing amendment.
• Section 143, Code of Civil Procedure — Provides that a party appealing by bill of exceptions is entitled to a review of all rulings, orders, and judgments made in the action to which he duly excepted; applied to allow review of the order sustaining the demurrer.
• Section 347, Code of Civil Procedure — Declares that a written offer to pay a particular sum of money is, if rejected, equivalent to actual tender; Macapinlac’s written offer did not mention a particular sum and was therefore not a valid tender.
• Subsection 4, Section 43, Code of Civil Procedure — Prescribes the four-year period for actions based on fraud; applied to hold that Macapinlac’s action to annul the registration procured by fraud had not prescribed.
• Sections 50 to 55, Land Registration Act (Act No. 496) — Govern subsequent registration by transfer of a certificate of title; section 55 allows the injured party to pursue all legal and equitable remedies against parties to a fraudulent subsequent transfer, saving the rights of an innocent holder for value.
• Section 38, Land Registration Act (Act No. 496) — Limits a person deprived of land by an original decree of registration procured by fraud to one year after entry of the decree to file a petition for review, unavailable against an innocent purchaser for value; distinguished from the subsequent transfer in this case.
• Section 70, Land Registration Act (Act No. 496) — Provides that registration under the Torrens system does not change or affect civil rights and liabilities except as expressly provided; applied to preserve the equitable mortgage despite registration in Repide’s name.
• Articles 1881-1884, Civil Code — Govern antichresis; cited by analogy to hold that non-payment does not vest ownership in the creditor, that the debtor cannot recover enjoyment without paying the debt, and that the creditor must apply fruits to interest and principal and account to the debtor.

Araullo, C.J.; Malcolm; Avanceña; Villamor; Ostrand; Johns; and Romualdez, JJ., concur.

• Johnson, J. — Dissented; the provided text does not state the grounds for the dissent.