Richard Juan vs. Gabriel Yap, Sr.

An implied trust may arise over a mortgage contract, notwithstanding the written terms naming another as mortgagee, where the circumstances show that the nominal mortgagee holds the mortgagee's rights only for the benefit of the actual lender; such trust may be proved by parol evidence and is enforced to prevent unjust enrichment.

Petitioner Richard Juan was an employee and nephew by affinity of respondent Gabriel Yap, Sr. The dispute concerns a real estate mortgage over two parcels of land in Talisay, Cebu, in which Juan was named mortgagee but Yap claimed to be the actual lender. The Civil Code recognizes implied trusts, provides that its enumeration of implied trusts is not exclusive, and allows an implied trust to be proved by oral evidence.

On 31 July 1995, the spouses Maximo and Dulcisima Cañeda mortgaged to petitioner Richard Juan, an employee and nephew of respondent Gabriel Yap, Sr., two parcels of land in Talisay, Cebu to secure a loan of ₱1.68 million payable within one year. The contract was prepared and notarized by Atty. Antonio Solon.

On 30 June 1998, petitioner, represented by Solon, sought the extrajudicial foreclosure of the mortgage. Although petitioner and respondent participated in the auction sale, the properties were sold to petitioner for tendering the highest bid of ₱2.2 million. No certificate of sale was issued to petitioner, however, for his failure to pay the sale's commission.

On 15 February 1999, respondent and the Cañeda spouses executed a memorandum of agreement (MOA) where (1) the Cañeda spouses acknowledged respondent as their "real mortgagee-creditor x x x while Richard Juan [petitioner] is merely a trustee" of respondent; (2) respondent agreed to allow the Cañeda spouses to redeem the foreclosed properties for ₱1.2 million; and (3) the Cañeda spouses and respondent agreed to initiate judicial action "either to annul or reform the [Contract] or to compel Richard Juan to reconvey the mortgagee’s rights" to respondent as trustor. Three days later, the Cañeda spouses and respondent sued petitioner in the Regional Trial Court of Cebu City to declare respondent as trustee of petitioner vis a vis the Contract, annul petitioner's bid for the foreclosed properties, declare the Contract "superseded or novated" by the MOA, and require petitioner to pay damages, attorney's fees, and costs. The Cañeda spouses consigned with the trial court the amount of ₱1.68 million as redemption payment.

In his Answer, petitioner insisted on his rights over the mortgaged properties. Petitioner also counterclaimed for damages and attorney's fees and the turn-over of the owner's copy of the titles for the mortgaged properties.

The trial court ruled against respondent and his co-plaintiffs and granted reliefs to petitioner by declaring petitioner the "true and real" mortgagee, ordering respondent to pay moral damages and attorney's fees, and requiring respondent to deliver the titles in question to petitioner. The trial court, however, granted the Cañeda spouses' prayer to redeem the property and accordingly ordered the release of the redemption payment to petitioner. In arriving at its ruling, the trial court gave primacy to the terms of the Contract, rejecting respondent's theory in light of his failure to assert beneficial interest over the mortgaged properties for nearly four years.

On appeal, the Court of Appeals found the following circumstances crucial in its concurrence with respondent's theory, notwithstanding the terms of the Contract: (1) Solon testified that he drew up the Contract naming petitioner as mortgagee upon instructions of respondent; (2) Dulcisima Cañeda acknowledged respondent as the creditor from whom she and her husband obtained the loan the Contract secured; and (3) respondent shouldered the payment of the foreclosure expenses. The trial court, for its part, had given primacy to the terms of the Contract and found that respondent failed to assert beneficial interest over the mortgaged properties for nearly four years.

• Written Contract Prevails: Petitioner relied on the terms of the Contract and argued that respondent's proof of a resulting trust created in his favor was weak.
• Damages Lack Basis: Petitioner assailed the award of damages to respondent for lack of basis.

• Propriety of Rule 45 Petition: Respondent questioned the propriety of the petition for raising only factual questions, incompatible with the office of a petition for review on certiorari.
• Sufficiency of Parol Evidence: Respondent argued alternatively that the parol evidence the Court of Appeals used to anchor its ruling was more than sufficient to prove the existence of an implied trust between him and petitioner.

• Implied Trust: Whether an implied trust arose between petitioner and respondent, binding petitioner to hold the beneficial title over the mortgaged properties in trust for respondent.
• Damages: Whether respondent is entitled to collect damages.

• Implied Trust: Yes. An implied trust may arise over a mortgage contract where equity and justice require it to prevent unjust enrichment, and parol evidence is admissible to prove it under the Civil Code.
• Damages: Yes. The award of moral and exemplary damages was proper because respondent substantiated his claim for moral damages and the interest of deterring breaches of trusts justified exemplary damages.

• Implied Trust: The existence of an implied trust is a factual question ordinarily outside a Rule 45 review of purely legal questions. Review was nevertheless justified by the need to make a definitive finding on the factual issue in light of the conflicting rulings below. An implied trust arising from mortgage contracts is not among the trust relationships enumerated in the Civil Code, but Article 1447 provides that the enumeration does not exclude others established by the general law on trust. Under general principles, equity converts the holder of a property right into a trustee for another's benefit if the circumstances of acquisition make the holder ineligible in good conscience to hold and enjoy it. Implied trusts are remedies against unjust enrichment; the key question is whether there is a wrongful holding of property and threatened unjust enrichment. The Court had recognized unconventional implied trusts in contracts involving the purchase of housing units by officers of tenants' associations in breach of their obligations, the partitioning of realty contrary to a compromise agreement, and the execution of a sales contract indicating a buyer distinct from the provider of the purchase money. In those cases, the formal holders of title were deemed trustees obliged to transfer title to the beneficiaries. No reason exists to bar recognition of the same obligation in a mortgage contract meeting the standards for an implied trust. On the facts, respondent's parol evidence was convincing: the Cañeda spouses acknowledged respondent as lender in the MOA and Dulcisima Cañeda reiterated this on the stand; when they sought an extension, they directed the request to respondent, who granted it, showing petitioner was a stranger to the loan agreement the Contract merely secured. Solon testified he placed petitioner's name in the Contract as mortgagor upon respondent's instruction. Respondent explained the arrangement was convenient because he was mostly abroad and could not personally attend to his businesses; he trusted petitioner, his nephew by affinity and paid employee, to take care of everything. This mirrored Tigno vs. Court of Appeals, where the notary public testified he placed another person's name as vendee upon instructions of the actual buyer, the source of the purchase money, who had to go abroad; the Court gave credence to the financier's parol evidence and found the nominal buyer liable to hold the property in trust under an implied trust. Finally, respondent, not petitioner, shouldered the foreclosure expenses; petitioner's failure to explain this oddity, coupled with no certificate of sale being issued to him despite his highest bid because he did not pay the commission, undercut his claim as real mortgagor. Thus petitioner held title only because respondent allowed him to do so; equity and justice mandated an implied trust, barring petitioner from asserting proprietary claims antagonistic to his duties, and a contrary ruling would tolerate unjust enrichment.
• Damages: The Court of Appeals' award of moral and exemplary damages to respondent was not reversible error. Respondent substantiated his claim for moral damages, and the interest of deterring breaches of trusts justified exemplary damages.

• Implied Trust in Mortgage Contracts — An implied trust may arise over a mortgage contract even though such trust is not among the Civil Code's enumerated implied trusts, because Article 1447 does not exclude others established by the general law on trust. Equity converts a holder of a property right into a trustee for another's benefit when the circumstances of acquisition make the holder ineligible in good conscience to hold and enjoy the property. The Court applied this to a mortgage contract where the nominal mortgagee held the mortgagee's rights only for the actual lender, to prevent unjust enrichment.
• Parol Evidence to Prove Implied Trust — Under Article 1457 of the Civil Code, an implied trust may be proved by oral evidence. The Court relied on parol evidence—the Cañeda spouses' acknowledgment of respondent as lender, Solon's testimony that he named petitioner as mortgagee upon respondent's instructions, and respondent's payment of foreclosure expenses—to vary the written mortgage contract and establish the implied trust.
• Unjust Enrichment as Basis of Implied Trust — Implied trusts are remedies against unjust enrichment; the central question is whether there is a wrongful holding of property and threatened unjust enrichment. The Court found that allowing petitioner to assert proprietary claims would tolerate the very evil implied trust was devised to remedy.
• Rule 45 Review of Factual Issues — Although the existence of an implied trust is a factual question ordinarily outside a Rule 45 review of purely legal questions, review is justified when there are conflicting rulings below and a definitive factual finding is needed. The Court applied this exception.
• Damages for Breach of Trust — Moral damages may be awarded when substantiated, and exemplary damages are justified by the interest of deterring breaches of trusts. The Court affirmed the award of moral and exemplary damages.

• "An implied trust arising from mortgage contracts is not among the trust relationships the Civil Code enumerates. The Code itself provides, however, that such listing "does not exclude others established by the general law on trust x x x."" — This passage states the ratio for recognizing an implied trust in a mortgage contract not enumerated by the Civil Code, anchoring the ruling on Article 1447.
• "Under the general principles on trust, equity converts the holder of property right as trustee for the benefit of another if the circumstances of its acquisition makes the holder ineligible "in x x x good conscience [to] hold and enjoy [it]."" — This defines the equitable basis for treating a nominal holder as a trustee, which the Court applied to petitioner as the named mortgagee.
• "As implied trusts are remedies against unjust enrichment, the "only problem of great importance in the field of constructive trusts is whether in the numerous and varying factual situations presented x x x there is a wrongful holding of property and hence, a threatened unjust enrichment of the defendant."" — This articulates the unjust-enrichment rationale that the Court used to justify the implied trust.
• "Clearly then, petitioner holds title over the mortgaged properties only because respondent allowed him to do so. The demands of equity and justice mandate the creation of an implied trust between the two, barring petitioner from asserting proprietary claims antagonistic to his duties to hold the mortgaged properties in trust for respondent. To arrive at a contrary ruling is to tolerate unjust enrichment, the very evil the fiction of implied trust was devised to remedy." — This is the Court's core conclusion applying the implied trust doctrine to the facts and explaining the consequence of a contrary ruling.

• Tigno vs. Court of Appeals, 345 Phil. 486 (1997) — The Court relied on this as analogous controlling precedent: a notary public testified he placed another person's name as vendee upon the instructions of the actual buyer, the source of the purchase money, who had to go abroad; the Court credited the financier's parol evidence and held the nominal buyer liable to hold the property in trust under an implied trust. The Court found the present arrangement mirrored Tigno.
• Spouses Rosario vs. Court of Appeals, 369 Phil. 729 (1999) — Cited for the procedure of reviewing a factual issue under Rule 45 when there are conflicting rulings below; the Court observed the same procedure in Spouses Rosario and Tigno.
• Roa, Jr. vs. Court of Appeals, 208 Phil. 2, 14 (1983) — Cited for the general principles on trust: equity converts the holder of a property right into a trustee for another's benefit if the circumstances of acquisition make the holder ineligible in good conscience to hold and enjoy the property. Also cited for recognizing an implied trust in partitioning realty contrary to a compromise agreement.
• Heirs of Moreno vs. Mactan-Cebu International Airport Authority, 459 Phil. 948, 966 (2003) — Cited for the principle that implied trusts are remedies against unjust enrichment and that the key question is whether there is a wrongful holding of property and threatened unjust enrichment.
• Policarpio vs. Court of Appeals, 336 Phil. 329 (1997) and Arlegui vs. Court of Appeals, 428 Phil. 381 (2002) — Cited as cases where the Court recognized unconventional implied trusts in contracts involving the purchase of housing units by officers of tenants' associations in breach of their obligations.

• Article 1447, Civil Code — Provides that the enumeration of implied trusts does not exclude others established by the general law on trust, subject to Article 1442. The Court used this to recognize an implied trust in a mortgage contract not among the enumerated cases.
• Articles 1448–1454, Civil Code — The enumerated implied trusts; the Court noted that an implied trust arising from mortgage contracts is not among them.
• Article 1457, Civil Code — An implied trust may be proved by oral evidence. The Court relied on parol evidence to establish the implied trust.
• Section 1, Rule 45, 1997 Rules of Civil Procedure — A petition for review on certiorari ordinarily covers only questions of law; the Court nevertheless reviewed the factual issue of implied trust because of conflicting rulings below.

Antonio Eduardo B. Nachura, Diosdado M. Peralta, Roberto A. Abad, and Jose C. Mendoza.