Mariano vs. Court of Appeals

Parol evidence is admissible to prove that a notarized deed of sale is a sham transaction where the validity of the agreement is put in issue by the pleadings; notarization does not place the instrument beyond scrutiny for fraud. A contract may also be annulled where the consent of one party was procured by fraud.

Private respondents Juanito and Teresita Faustino owned an inherited agricultural parcel of 2,035 square meters in Deparo, Caloocan City, covered by TCT No. 129613, which they wanted to develop into a subdivision. Petitioner Julia Ang Eng Mariano was a businesswoman of repute whom they approached for financing. The dispute concerns the legal effect of a notarized Deed of Sale dated September 29, 1987 over that property, and the interaction of the parol evidence rule with Article 1330 of the New Civil Code on annulment for fraud.

Private respondents Juanito and Teresita Faustino owned an inherited agricultural parcel of 2,035 square meters in Deparo, Caloocan City, covered by TCT No. 129613 in their names. They wanted to transform it into a subdivision and spent P6,000.00 for a subdivision survey. A person approached them and told them that a certain Julia Ang could help in the development. After Juanito was introduced to Julia Ang Eng Mariano, she promised him a loan of P250,000.00 to start the development.

On October 28, 1986, the Faustinos mortgaged the land to petitioner for P250,000.00, with the condition that they construct a house on the lot so they could secure another P250,000.00 using the house and lot as security. They received only P150,000.00 from the first mortgage, petitioner saying the balance covered interest and other expenses. After the house was constructed, they signed another mortgage document on January 15, 1987 for P250,000.00, but again received only P150,000.00. Both mortgage deeds provided that if the mortgagor failed to pay the principal within one year, the mortgage would be foreclosed and the property sold in accordance with law; if the mortgagor paid the obligation with interest, the mortgage would become null and void.

Petitioner claimed that the Faustinos approached her on October 28, 1986 for a P250,000.00 loan secured by a mortgage on the land; that on January 15, 1987 they secured another P250,000.00 on the same security; and that, foreseeing inability to pay when the loans became due, they sold the same parcel to her for an additional P320,550.00 on September 29, 1987. A deed of sale was drawn up on that date, and TCT No. 156493 was issued in petitioner’s name. The Faustinos refused to turn over possession and instead sued for annulment of the deed of sale and damages.

According to the Faustinos, they were unschooled farmers who relied completely on their trust and confidence in petitioner. They signed prepared mortgage forms she told them to sign. After the two mortgages, petitioner told them she could easily secure a P1,000,000.00 bank loan for their project, but the bank required that the property be in her name for the loan to be processed. Trusting her, they signed on September 29, 1987 a prepared deed of sale she handed to them. The deed recited consideration of P325,550.00, receipt of which was acknowledged. When they discovered that there was no loan and that they were being asked to vacate their land, they took petitioner to court.

On cross-examination, petitioner testified that the real intention of the parties in executing the deed of sale was to secure a P1,000,000.00 loan on the property in her name, that whatever the Faustinos owed her would be deducted from the loan proceeds, and that the Faustinos would assume payment of the loan. The P1,000,000.00 mortgage loan never materialized. Although petitioner ostensibly acquired full ownership on September 29, 1987, she took no step to obtain possession even though the Faustinos remained on the premises, and her answer dated November 22, 1988 did not interpose any counterclaim on possession. The trial court dismissed the complaint, relying on the validity of the deed of sale as the best evidence of the transaction, but the Court of Appeals found the deed a sham transaction, not representing the true intent of the parties and with no consideration passed or received.

• Standard of Proof for Public Documents: Petitioner argued that the Court of Appeals erred in annulling the questioned deed because a duly executed and attested public document requires more convincing proof, greater than preponderance of evidence, to annul and set aside its efficacy.
• Notarization and Solemnities: Petitioner maintained that the Deed of Sale truly represented the contract between the parties, was drawn up with all the solemnities prescribed by law, and was properly notarized; she relied on the notarial certification of Notary Public Alfonso B. Capacillo dated September 24, 1987 that the document was executed by the parties in the presence of witnesses Juanito Chan and Gaspar Dandan.
• Factual Findings on Appeal: Petitioner argued that the Court of Appeals arrived at factual conclusions based on fallacious premises not borne by the records, and that the trial court’s findings of fact carry more weight on appeal than those of the public respondent.
• Nature of Transaction: Petitioner claimed the private respondents approached her for loans secured by mortgages and later sold the land to her for an additional P320,550.00 because they foresaw inability to pay the loans when they became due.

• Fraud and Trickery: Private respondents claimed they were tricked by petitioner into signing over their property to her.
• Sham Transaction and No Consideration: They argued that the deed of sale was a sham transaction, not representing the true intent of the parties, and that no consideration passed or was received.
• Purpose of Transfer: They maintained that they signed the deed only because petitioner told them the bank required the property to be in her name so she could secure a P1,000,000.00 loan for their subdivision project, and that they trusted her completely as unschooled farmers.
• Admissibility of Parol Evidence: They contended that the circumstances before and after the deed showed the true transaction, which put the validity of the agreement in issue and allowed extrinsic evidence.

• Parol Evidence: Whether parol evidence is admissible to show that the notarized Deed of Sale dated September 29, 1987 was a sham transaction where the validity of the agreement is put in issue by the pleadings.
• Validity of the Deed of Sale: Whether the Deed of Sale is null and void for fraud and lack of consideration.
• Standard of Proof for Public Documents: Whether the Court of Appeals erred in annulling the duly executed and notarized Deed of Sale without proof greater than preponderance of evidence.
• Factual Findings on Appeal: Whether the Court of Appeals erred in arriving at factual conclusions based on premises not borne by the records and contrary to the trial court’s findings.

• Parol Evidence: Yes. Under Section 7, Rule 130, the parol evidence rule does not apply when the validity of the agreement is put in issue; extrinsic evidence is admissible to establish fraud or that the writing failed to express the true intent of the parties.
• Validity of the Deed of Sale: The deed is null and void. It was a sham transaction, not representing the true intent of the parties, and no consideration passed or was received; consent was procured by fraud.
• Standard of Proof for Public Documents: No. Notarization does not make the instrument immune from scrutiny; extrinsic evidence may overcome the presumption of regularity when fraud is shown, and the Court of Appeals correctly annulled the deed.
• Factual Findings on Appeal: No. The Court of Appeals’ factual conclusions were supported by the record, including petitioner’s own cross-examination and the circumstances before and after the deed.

• Parol Evidence: The parol evidence rule recognizes exceptions: where a mistake or imperfection of the writing, or its failure to express the true intent and agreement of the parties, or the validity of the agreement is put in issue by the pleadings (Sec. 7, Rule 130). The rule making a writing the exclusive evidence of the agreement is not applicable when the validity of such agreement is the fact in dispute. A contract may be annulled where consent of one contracting party was procured by mistake, fraud, intimidation, violence, or undue influence (Art. 1330, New Civil Code). Bough vs. Cantiveros held that where the validity of the agreement is the issue, parol evidence may be introduced to establish illegality or fraud. Although the writing may have been accompanied by the most solemn formalities, no instrument is so sacred when tainted with fraud as to place it beyond the scrutiny of extrinsic evidence; such evidence overcomes the presumption fraus est odiosa et non praesumenda. Here, private respondents alleged that the deed was a sham and that they were tricked into signing it, thereby putting its validity in issue. Their evidence showed they wanted a financier for their subdivision; petitioner promised loans; they received only P150,000.00 for each P250,000.00 mortgage; petitioner told them the bank required the property in her name to secure a P1,000,000.00 loan; they signed the deed in reliance on that representation; and the loan never materialized. Petitioner’s own cross-examination corroborated that the real intention was to secure a P1,000,000.00 loan on the property in her name, with whatever the Faustinos owed her deducted from the proceeds and the Faustinos assuming payment. Parol evidence was therefore admissible.
• Validity of the Deed of Sale: The deed of sale recited an absolute sale for P325,550.00, but the circumstances before and after showed it was a sham. The first mortgage was executed on October 28, 1986 and the second on January 15, 1987; both had one-year terms. The deed of sale was executed on September 29, 1987, before both mortgage accounts were due. Petitioner’s stated motivation for the sale—that the Faustinos foresaw inability to pay when the loans became due—was therefore not true. Petitioner also inconsistently claimed that the P320,550.00 consideration was in addition to the previous P500,000.00 loans, but testified that the only consideration for the deed was P320,550.00 because the P500,000.00 was considered a mortgage. Petitioner herself revealed the true nature of the deed on cross-examination: the intention was merely to secure a P1,000,000.00 loan on the property based on her credit as a businesswoman, with the Faustinos’ debt deducted from the proceeds and the Faustinos assuming the P1,000,000.00 mortgage. The P1,000,000.00 loan never materialized. After ostensibly acquiring full ownership on September 29, 1987, petitioner took no step to obtain possession although the Faustinos stayed on the premises, and her answer dated November 22, 1988 did not interpose any counterclaim on possession. These circumstances led to the conclusion that the deed was a sham transaction, not representing the true intent of the parties, and that no consideration passed or was received. The Court of Appeals’ reasoning was more in accord with business common sense and ordinary experience.
• Standard of Proof for Public Documents: Petitioner relied heavily on the notarial certification of the Deed of Absolute Sale by Notary Public Alfonso B. Capacillo on September 24, 1987, stating that the document was executed by the parties in the presence of witnesses Juanito Chan and Gaspar Dandan. But the notarization did not place the deed beyond scrutiny. The rule that a notarized document has evidentiary weight does not preclude annulment where fraud is established by clear and convincing evidence. The Court noted that petitioner could have easily rebutted private respondents’ negative averment by presenting the notary public and the two witnesses to the deed; their testimony that the Faustinos signed the deed in their presence and received the consideration of P320,550.00 would have defeated the complaint. No such testimony was given. Petitioner’s own corroborating testimony showed why: there was no such loan, and the deed of sale was a scheme to get the property from private respondents. Thus, the Court of Appeals did not err in annulling the deed despite its notarization.
• Factual Findings on Appeal: Although trial court findings of fact generally carry weight on appeal, they may be reversed when the record shows a different conclusion. The Court found the Court of Appeals’ ratiocination—on why the deed of sale was in reality a sham transaction—more in accord with business common sense and ordinary experience. The record supported the appellate court’s factual conclusions: the mortgages were not yet due when the deed was executed; petitioner gave inconsistent accounts of the consideration; petitioner’s cross-examination revealed the true intention to secure a P1,000,000.00 loan; the loan never materialized; and petitioner took no step to obtain possession. The Court therefore found no reversible error in the appellate court’s factual conclusions.

• Parol Evidence Rule – Exception Where Validity Is in Issue — Under Section 7, Rule 130, when the terms of an agreement are reduced to writing, prior or contemporaneous oral agreements are generally inadmissible to contradict the writing. An exception exists where a mistake or imperfection of the writing, or its failure to express the true intent and agreement of the parties, or the validity of the agreement is put in issue by the pleadings. In this case, because private respondents alleged that the deed of sale was a sham and procured by fraud, its validity was in issue, and parol evidence was admissible to establish fraud.
• Annulment of Contract for Fraud — Article 1330 of the New Civil Code allows annulment of a contract where the consent of one of the contracting parties was procured by mistake, fraud, intimidation, violence, or undue influence. The Court applied this provision because petitioner induced the Faustinos to sign the deed by representing that the transfer was necessary to secure a P1,000,000.00 bank loan, which never materialized.
• Notarized Documents Are Not Immune from Attack for Fraud — A notarized public document is presumed regular, but no instrument is so sacred when tainted with fraud as to place it beyond the scrutiny of extrinsic evidence. The presumption fraus est odiosa et non praesumenda is overcome by evidence of fraud. The Court held that the notarial certification did not prevent annulment of the deed.
• Sham Transaction — A deed of sale that does not represent the true intent of the parties and under which no consideration passed or was received is a sham transaction and is void. The Court affirmed the finding that the Deed of Sale dated September 29, 1987 was a sham intended only to secure a promised loan.
• Negative Averment and Burden of Proof — When a negative is averred and the means of proving the fact are equally within the control of each party, the burden is on the party averring the negative; but when the opposite party must, from the nature of the case, be in possession of full and plenary proof to disprove the negative, that party should adduce the proof, and failure to do so presumes it does not exist. The Court noted that petitioner could have presented the notary public and witnesses to rebut the claim that the deed was a sham, but did not.

• "The rule on parol evidence recognizes the following exceptions: (a) where a mistake or imperfection of the writing, or its failure to express the true intent and agreement of the parties, or the validity of the agreement is put in issue by the pleadings; (b) xxxx xxx (Sec. 7, Rule 130)." — This passage states the exception to the parol evidence rule that the Court applied, allowing extrinsic evidence because the validity of the deed was in issue.
• "While the writing itself may have been accompanied by the most solemn formalities, no instrument is so sacred when tainted with fraud as to place it beyond the scrutiny of extrinsic evidence. This evidence overcomes the known presumption fraus est odiosa et non praesumenda (Yturralde v. Vagilidad, 28 SCRA 393 [1969])." — This is the Court’s canonical formulation that notarization and solemnities do not shield a fraudulent instrument from extrinsic evidence.
• "These circumstances taken together lead to the conclusion espoused by the appellants, that the deed of sale is a sham transaction, not representing the true intent of the parties and that no consideration passed or was received." — This passage, quoted with approval from the Court of Appeals, states the factual and legal conclusion that the deed was void as a sham.
• "Her own words make out a case of fraud which she practised upon the private respondents." — This passage relies on petitioner’s own cross-examination testimony to establish that the deed was procured by fraud.

• Pagsuyuin vs. Intermediate Appellate Court, 193 SCRA 547 — Cited for the exceptions to the parol evidence rule, particularly that parol evidence is admissible where the validity of the agreement is put in issue by the pleadings.
• Bough vs. Cantiveros, 40 Phil. 209 — Cited as early authority holding that where the validity of the agreement is the issue, parol evidence may be introduced to establish illegality or fraud.
• Yturralde vs. Vagilidad, 28 SCRA 393 [1969] — Cited for the principle that fraud is not presumed and that extrinsic evidence may overcome the presumption of regularity of a solemnly executed writing.
• Almendra vs. IAC, 204 SCRA 142 — Cited by petitioner; the Court noted its teaching that the testimony of the notarizing lawyer deserves credence and is conclusive as to the truthfulness of the deed’s contents absent clear and convincing evidence to the contrary, but petitioner failed to present the notary public and witnesses.
• United States vs. Denver & Rio Grande Railroad Company, 191 U.S. 84; 48 L. Ed 106 — Cited for the rule on negative averments and burden of proof: where the opposing party has full proof to disprove the negative, that party must adduce it, and failure to do so presumes the negative is established.

• Section 7, Rule 130, Rules of Court — The parol evidence rule; the Court applied its exception where the validity of the agreement is put in issue by the pleadings, allowing extrinsic evidence to show fraud and that the deed did not express the true intent of the parties.
• Article 1330, New Civil Code — Provides that a contract may be annulled where the consent of one of the contracting parties was procured by mistake, fraud, intimidation, violence, or undue influence. The Court applied this article to annul the Deed of Sale because petitioner procured the Faustinos’ consent through fraud.

Narvasa, C.J. (Chairman), Padilla, Regalado, and Campos, Jr., JJ.