Ramos vs. Sarao

A contract denominated as a pacto de retro sale is presumed to be an equitable mortgage when the vendor remains in possession of the property sold, and the nomenclature used by the parties does not control; the decisive factor is the parties' intention as shown by their contemporaneous and subsequent acts.

Spouses Jonas Ramos and Myrna Ramos owned a conjugal house and lot in Makati City covered by TCT No. 151784. The property was subject to a mortgage held by a commercial bank, which was on the verge of foreclosure. Susana S. Sarao was a person approached by the Ramos spouses — together with the Tolentino spouses — for a transaction involving the property. The Ramos spouses were estranged from each other during the relevant period, with Myrna eventually filing suit alone, impleading Jonas as co-defendant due to his unwillingness to sue as co-plaintiff.

On February 21, 1991, Spouses Jonas and Myrna Ramos executed a contract over their conjugal house and lot in favor of Susana S. Sarao for ₱1,310,430. The contract was entitled "Deed of Sale Under Pacto de Retro" and granted the Ramos spouses the option to repurchase the property within six months from February 21, 1991, for the same amount plus interest of 4.5 percent per month. It was further stipulated that failure to pay the monthly interest or to exercise the right to repurchase within the stipulated period would render the conveyance an absolute sale. According to Myrna, the actual loan amount was ₱1,234,000; the deed showed ₱1,310,430 because ₱20,000 in attorney's fees was added and the total was multiplied by the 4.5 percent interest rate to prepay compounded interest. The property's market value at the time was approximately ₱10 million.

The transaction was entered into on the same day the property was to be foreclosed by a commercial bank, indicating the spouses' dire need for funds. After executing the deed, the Ramos spouses — specifically Myrna and her children — continued to reside in the property, even after Jonas had abandoned them. The property likewise remained Myrna's address for service of court orders and pleadings throughout the proceedings.

In May 1991, Myrna wrote to Sarao's lawyer, Atty. Mario Aguinaldo, requesting a computation of the loan obligation and expressing her intention to redeem the property. She received no reply. Through her husband, she later obtained a handwritten computation from Sarao totaling ₱1,562,712.14. On July 23, 1991, Atty. Aguinaldo sent Myrna a letter with a computation under the heading "House and Lot Loan," totaling ₱2,911,579.22. Myrna considered this amount exorbitant, as it included items not covered by the agreement such as gasoline, miscellaneous expenses, taxes, attorney's fees, and other alleged loans. On June 14, 1991, Jonas wrote to Sarao's lawyer admitting that he no longer had the financial capacity to repurchase the property — a letter Sarao later relied upon. However, prior to that letter, on May 17, 1991, Myrna had already sent a letter to Sarao's lawyer referring to the transaction as a mortgage.

On July 30, 1991, Myrna tendered to Sarao two manager's checks totaling ₱1,633,034.20, based on Sarao's own computation of the loan obligation. Sarao refused to accept the checks, claiming they were insufficient. On August 1, 1991, Myrna wrote to Sarao stating that if payment was not accepted, she would consign the amount. On August 8, 1991, she filed a complaint for redemption of the property and damages, docketed as Civil Case No. 91-2188 before Branch 145 of the Makati RTC. On August 13, 1991, she deposited the two checks with the RTC by way of consignation, pursuant to a court order authorizing the clerk of court to receive the amount. On December 21, 1991, Sarao filed a separate petition for consolidation of ownership, docketed as Civil Case No. 91-3434 before Branch 61 of the Makati RTC. The two cases were consolidated and jointly tried before Branch 145.

After trial, the RTC dismissed Myrna's complaint and granted Sarao's prayer for consolidation of title. The RTC found the contract to be a bona fide pacto de retro sale and held that the consignation was invalid for failure to tender the correct amount and to comply with notice requirements. The CA affirmed this ruling in toto on August 31, 2001. Both courts overlooked the undisputed fact that the Ramos spouses had remained in possession of the property throughout.

• Nature of the Contract: Petitioner argued that the disputed deed of sale under pacto de retro was in reality an equitable mortgage, the parties' intention being merely to secure a loan, not to transfer ownership of the property.
• Validity of Tender and Consignation: Petitioner maintained that she had validly tendered payment of the redemption price in the correct amount of ₱1,633,034.20, based on Sarao's own computation, and that the consignation was properly effected with the required notice to Sarao.
• Damages and Attorney's Fees: Petitioner sought moral damages of ₱500,000 for sleepless nights and anxiety over potential homelessness, as well as attorney's fees.

• Procedural Defect: Respondent Sarao argued that the petition should be dismissed outright because petitioner failed to serve a copy of the petition on the Court of Appeals.
• Questions of Fact Improper Under Rule 45: Respondent contended that the petition raised questions of fact, which are not proper in a Rule 45 petition.
• Bona Fide Pacto de Retro: Respondent maintained that the contract was a genuine pacto de retro sale, citing Jonas Ramos's June 14, 1991 letter admitting inability to repurchase the property.
• Invalid Consignation: Respondent argued that the consignation was invalid because petitioner failed to deposit the correct repurchase price and failed to comply with the required notice of consignation.
• Claim to Jonas Ramos's Share: In a belated manifestation, Sarao declared herself owner of Jonas Ramos's one-half share of the conjugal property due to his alleged failure to file a timely appeal with the CA.

• Nature of the Contract: Whether the disputed Deed of Sale Under Pacto de Retro was in reality an equitable mortgage.
• Validity of Consignation: Whether there was a valid tender of payment of the redemption price and a valid consignation in this case.
• Damages and Attorney's Fees: Whether petitioner was entitled to moral damages and attorney's fees.

• Nature of the Contract: Yes. The contract was an equitable mortgage, the vendors having remained in possession of the property, which triggers the presumption under Article 1602(2) of the Civil Code.
• Validity of Consignation: Yes. The tender of payment and consignation were valid, the amount consigned being correct based on Sarao's own computation and the notice requirement having been satisfied by petitioner's August 1, 1991 letter.
• Damages and Attorney's Fees: No. Petitioner's bare assertions were insufficient to prove the legal basis for moral damages, and no contractual or statutory basis for attorney's fees was established.

• Nature of the Contract: The nomenclature used by the contracting parties does not determine the nature of the contract; the decisive factor is their intention as shown by their conduct, words, actions, and deeds prior to, during, and after executing the agreement, pursuant to Article 1371 of the Civil Code. Article 1602 enumerates circumstances that give rise to a presumption of equitable mortgage, and the presence of even one suffices. In this case, paragraph (2) of Article 1602 was squarely applicable: the vendor remained in possession of the property. Petitioner and her children continued to reside in the house even after Jonas had abandoned them, and the property remained her address for service of court orders and pleadings. This presumption imposed on Sarao the burden to present clear and convincing evidence to rebut it, which she failed to discharge. Additional circumstances reinforced the conclusion: the property's market value was approximately ₱10 million but was "sold" for only ₱1,310,430; the transaction was entered into on the very day the property was to be foreclosed by a commercial bank, showing the spouses' dire need for funds; and Sarao's own lawyer's July 23, 1991 letter computed the obligation under the heading "House and Lot Loan," indicating the property served as security for a loan. Jonas Ramos's June 14, 1991 letter admitting inability to repurchase could not override this finding, as Myrna had already referred to the transaction as a mortgage in her May 17, 1991 letter, and the spouses were already estranged at the time. The law disfavors pacto de retro sales because they are frequently used to circumvent the prohibition on pactum commissorium and to conceal loans secured by mortgage, consistent with the doctrine that the law favors the least transmission of rights.

• Validity of Consignation: The principal loan was ₱1,310,430 plus 4.5 percent monthly interest compounded for six months. Petitioner expressed her desire to pay in the fifth month, and the total amount due was ₱1,633,034.19, based on the computation of Sarao herself. The amount of ₱2,911,579.22 that Sarao demanded was plainly exorbitant, as it included items not covered by the agreement — gasoline, miscellaneous expenses, taxes, attorney's fees, and other alleged loans. Since the property was used solely as security for the ₱1,310,430 loan, it was improper to include those extraneous charges. When Sarao unjustly refused the tender of payment, petitioner correctly filed suit and consigned the amount. Regarding the notice requirement under Article 1257 of the Civil Code, petitioner's August 1, 1991 letter to Sarao — stating that should Sarao fail to accept payment, she would consign the amount — constituted an unequivocal announcement of consignation. A tender of payment and notice of consignation may be done in the same act, which is precisely what petitioner did. The consignation thus produced the effect of payment, with retroactive effect to the time of deposit.

• Damages and Attorney's Fees: Petitioner's bare assertions of sleepless nights and anxiety over being homeless were insufficient to prove the legal basis for moral damages under Article 2219 of the Civil Code. An award of moral damages was uncalled for, considering it was Sarao's accommodation that settled the spouses' earlier obligation with the commercial bank and allowed them to retain ownership of the property. Attorney's fees were likewise not proper, as no contractual or statutory liability therefor was shown. Sound public policy frowns on penalizing the right to litigate, especially where — as here — the dispute concerned the very characterization of the contract.

• Equitable Mortgage Presumption (Article 1602, Civil Code) — A contract shall be presumed to be an equitable mortgage in any of the enumerated cases, including when the vendor remains in possession as lessee or otherwise, when the price is unusually inadequate, or in any case where it may be fairly inferred that the real intention is to secure the payment of a debt. The presence of even one circumstance suffices to convert a contract into an equitable mortgage. The presumption imposes a burden on the party challenging it to present substantial and credible evidence to rebut it; the favored party need not introduce proof to establish the presumption. In this case, the vendor's continued possession of the property triggered the presumption under paragraph (2), which Sarao failed to overcome.

• Nomenclature Does Not Determine Nature of Contract — The designation or title given by the parties to a contract does not control its legal nature. The decisive factor is the parties' intention as shown by their contemporaneous and subsequent acts, pursuant to Article 1371 of the Civil Code. Even a contract denominated as a pacto de retro may be disproven as such by parol evidence, provided the nature of the agreement is placed in issue by the pleadings.

• Consignation Requirements — Consignation requires: (1) a valid tender of payment; (2) deposit of the proper amount with the judicial authority; and (3) notice to all interested parties. A tender of payment and notice of consignation may be done in the same act. When the creditor refuses tender of payment without just cause, the debtor is discharged from the obligation by consignation, which produces the effect of payment with retroactive effect to the time of deposit.

• Law Favors Least Transmission of Rights — The construction of a pacto de retro as an equitable mortgage is consistent with the doctrine that the law favors the least transmission of rights, as pacto de retro schemes are frequently used to circumvent the prohibition on pactum commissorium and to conceal loans secured by mortgage.

• "This Court has consistently decreed that the nomenclature used by the contracting parties to describe a contract does not determine its nature. The decisive factor is their intention — as shown by their conduct, words, actions and deeds — prior to, during, and after executing the agreement." — This passage articulates the controlling principle for distinguishing a pacto de retro sale from an equitable mortgage, anchoring the analysis in the parties' intention rather than the contract's label.

• "Jurisprudence has consistently declared that the presence of even just one of the circumstances set forth in the forgoing Civil Code provision suffices to convert a contract to an equitable mortgage." — This formulation establishes the evidentiary standard for applying the Article 1602 presumption, a principle frequently cited in subsequent equitable mortgage cases.

• "The presumption of equitable mortgage imposes a burden on Sarao to present clear evidence to rebut it. Corollary to this principle, the favored party need not introduce proof to establish such presumption; the party challenging it must overthrow it, lest it persist." — This defines the burden-shifting framework under the Article 1602 presumption, placing the evidentiary burden squarely on the party contesting the equitable mortgage characterization.

• "Because petitioners' consignation of the amount of ₱1,633,034.20 was valid, it produced the effect of payment." — This statement links the validity of consignation to its legal effect of payment, a key conclusion resolving the second issue.

• Ching Sen Ben vs. Court of Appeals, 373 Phil. 544 (1999) — Cited for the principle that the nomenclature used by the parties does not determine the nature of the contract and that the law discourages pacto de retro as a vehicle to circumvent pactum commissorium.
• San Pedro vs. Lee, GR No. 156522 (2004) — Cited for the essential requisites of an equitable mortgage: (1) the parties enter into what appears to be a contract of sale, but (2) their intention is to secure an existing debt by way of a mortgage.
• Lorbes vs. Court of Appeals, 351 SCRA 716 (2001) — Cited for the principle that there is no single conclusive test to determine whether a deed absolute on its face is really a loan secured by a mortgage, and that the law favors the least transmission of rights.
• Tison vs. Court of Appeals, 342 Phil. 550 (1997) — Cited for the rule that the presumption of equitable mortgage imposes a burden on the challenging party to rebut it, while the favored party need not introduce proof.
• Eternal Gardens Memorial Park Corp. vs. Court of Appeals, 282 SCRA 553 (1997) — Cited for the principle that valid consignation produces the effect of payment.

• Article 1602, Civil Code — Enumerates the circumstances under which a contract is presumed to be an equitable mortgage, including when the vendor remains in possession (paragraph 2) and when the price is unusually inadequate (paragraph 1). Applied to find the presumption triggered by the vendors' continued possession of the property.
• 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 determine that the parties' conduct — continued possession, loan characterization by Sarao's own lawyer — revealed an intention to secure a loan.
• Article 1607, Civil Code — Provides that consolidation of ownership in the vendee by virtue of the vendor's failure to repurchase shall not be recorded in the Registry of Property without a judicial order. Cited to explain that a judicial order is required merely for recording, not for vesting title in a pacto de retro.
• Article 1256, Civil Code — Defines consignation as the proper remedy when the creditor refuses to receive payment. Applied to justify petitioner's consignation after Sarao's unjust refusal.
• Article 1257, Civil Code — Provides that the obligor may be released by consignation provided it is first announced to the parties interested in the fulfillment of the obligation. Applied to find that petitioner's August 1, 1991 letter satisfied the notice requirement.
• Article 1258, Civil Code — Sets forth the requisites of consignation, including deposit of the proper amount with the judicial authority and notification of interested parties. Applied to validate the consignation.
• Article 2175, Civil Code — Provides that any person constrained to pay the taxes of another shall be entitled to reimbursement from the latter. Applied to order petitioner to reimburse Sarao ₱67,567.10 for real property taxes paid to halt an auction sale.
• Article 2219, Civil Code — Enumerates the cases in which moral damages may be recovered. Applied to deny the claim, petitioner's bare assertions being insufficient to fall within any enumerated category.
• Article 2208, Civil Code — Enumerates the exceptions under which attorney's fees may be recovered in the absence of stipulation. Applied to deny the claim, no applicable ground having been established.

Justices Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia concurred in the decision.