Spouses Lorbes vs. Court of Appeals

A deed absolute on its face is construed as an equitable mortgage when any of the circumstances enumerated in Article 1602 of the Civil Code is present, the law favoring the least transmission of property rights. The presence of even one such circumstance suffices, and the decisive factor is the intention of the parties as shown by all surrounding circumstances, not the terminology of the contract.

Petitioners Spouses Octavio and Epifania Lorbes were the registered owners of a 225-square meter parcel of land in Antipolo, Rizal, covered by Transfer Certificate of Title No. 165009. They mortgaged the property to Florencio and Nestor Carlos for P150,000.00, an obligation that later increased to P500,000.00. Private respondent Ricardo delos Reyes was their son-in-law, while private respondent Josefina Cruz was a family friend of the delos Reyeses and an employee of the Land Bank of the Philippines. Because the mortgage obligation was nearing maturity and the property faced foreclosure, petitioners sought the assistance of delos Reyes, who in turn requested Cruz to take out a housing loan with Land Bank, collateral being a standard requirement of banks.

Petitioners Spouses Octavio and Epifania Lorbes were the registered owners of a 225-square meter parcel of land located in Antipolo, Rizal, covered by Transfer Certificate of Title No. 165009. Sometime in August 1991, they mortgaged the property to Florencio and Nestor Carlos in the amount of P150,000.00. About a year later, the mortgage obligation had increased to P500,000.00, and fearing foreclosure of their only conjugal property, petitioners asked their son-in-law, private respondent Ricardo delos Reyes, for help in redeeming it. Delos Reyes agreed to help but, having no money at the time, solicited the assistance of private respondent Josefina Cruz, a family friend of the delos Reyeses and an employee of the Land Bank of the Philippines.

It was agreed that petitioners would sign a deed of sale conveying the mortgaged property in favor of Cruz, who would thereafter apply for a housing loan with Land Bank using the subject property as collateral. Out of the proceeds of the loan, P500,000.00 would be paid to the Carloses as mortgagees, and any balance would be applied by petitioners for capital gains tax, expenses for the cancellation of the mortgage to the Carloses, transfer of title to Cruz, and registration of a mortgage in favor of Land Bank. The monthly amortization on the housing loan, which was supposed to be deducted from Cruz's salary, would be reimbursed by delos Reyes.

On September 29, 1992, the Land Bank issued a letter of guarantee in favor of the Carloses, informing them that Cruz's loan had been approved. On October 22, 1992, Transfer Certificate of Title No. 165009 was cancelled and Transfer Certificate of Title No. 229891 in the name of Josefina Cruz was issued in lieu thereof. On November 25, 1992, the mortgage was discharged.

Sometime in 1993, petitioners notified delos Reyes that they were ready to redeem the property, but the offer was refused. According to petitioners, they saw no reason why private respondents would renege on their original agreement other than the fact that petitioners and the members of their family had resigned en masse from the Mahal Namin Organization, of which delos Reyes was president and chairman of the board of directors and Cruz was treasurer. Petitioners claimed that the deed was merely a formality to meet the bank's requirements for the housing loan, that the real intention of the parties was to apply the loan proceeds to the payment of the mortgage obligation, and that the transaction was not an absolute sale but an equitable mortgage, considering that the price was inadequate relative to the property's market value and that they continued paying the real estate taxes thereon even after the execution of the deed. They demanded moral damages, exemplary damages, and attorney's fees.

Aggrieved, petitioners filed on July 22, 1994 a complaint for reformation of instrument and damages with the RTC of Antipolo, Rizal. Summons and a copy of the complaint were served upon private respondents on August 1, 1994, but private respondents filed their answer only on September 1, 1994, beyond the reglementary period. On September 5, 1994, petitioners moved to declare private respondents in default, which the trial court granted on September 16, 1994. On September 30, 1994, petitioners presented their evidence ex parte, principally through the testimony of petitioner Octavio Lorbes, corroborated by his son, Atty. Salvador Lorbes. Private respondents' motion to lift the order of default and to strike out the evidence presented ex parte was denied on October 26, 1994. On June 20, 1995, the trial court rendered judgment in favor of petitioners, finding that the Deed of Absolute Sale did not reflect the true intention of the parties and that the transaction was an equitable mortgage, since the price stated was insufficient compared to the property's value, petitioners remained in possession, and they continued to pay the real estate taxes after the execution of the deed.

The Court of Appeals reversed, finding that private respondents had been denied due process by the trial court's refusal to lift the default order, that the transaction was one of absolute sale rather than equitable mortgage, and that the RTC decision was constitutionally infirm for failing to clearly and distinctly state the facts and the law on which it was based. On the equitable mortgage issue, the appellate court held that inadequacy of price was material only in a sale with right to repurchase, that petitioners' estimate of the property's market value came only from the bare testimony of Octavio Lorbes, that petitioners' remaining in possession resulted only from their refusal to vacate despite lawful demands, and that there was no documentary evidence that they continued paying taxes after the sale. The trial court, for its part, had found that the prevailing market value of the lot alone in 1992 was P400,000.00 per square meter, such that the lot alone, excluding the house and improvements, would already cost more than a million pesos, rendering the P600,000.00 consideration in the deed considerably insufficient.

• Equitable Mortgage: Petitioners maintained that the Court of Appeals erred in ruling that the Deed of Absolute Sale dated October 21, 1992 was not an equitable mortgage, insisting that the deed was merely a formality to meet the bank's collateral requirements and that the true intention of the parties was to secure the housing loan whose proceeds would pay off their mortgage obligation to the Carloses.
• Due Process and Default: Petitioners argued that the Court of Appeals erred in ruling that by declaring private respondents in default, the latter were denied due process of law.
• Constitutional Requirement in Decisions: Petitioners contended that the Court of Appeals erred in ruling that the trial court's decision violated the constitutional requirement that it clearly and distinctly state the facts and the law on which it is based.

• Equitable Mortgage: Whether the Court of Appeals erred in ruling on the nature of the Deed of Absolute Sale dated October 21, 1992, specifically whether the transaction between petitioners and private respondent Cruz was a bona fide and absolute conveyance or merely an equitable mortgage.
• Due Process and Default: Whether the Court of Appeals erred in ruling that by declaring private respondents in default, they were denied due process of law.
• Constitutional Requirement in Decisions: Whether the Court of Appeals erred in ruling that the trial court's decision violated the constitutional requirement that it should clearly and distinctly state the facts and the law on which it is based.

• Due Process and Default: No. The Court of Appeals did not err in holding that the default order was immoderate and violated private respondents' due process rights, courts being required to be liberal in setting aside orders of default; however, no remand was warranted because such relief was not prayed for and private respondents' defenses were fully ventilated before the appellate court.
• Constitutional Requirement in Decisions: Yes. The Court of Appeals erred, since the RTC decision clearly complied with the constitutional requirement to state clearly and distinctly the facts and the law on which it was based.
• Equitable Mortgage: Yes. The Court of Appeals erred; the true intention of the parties was not to convey ownership but merely to secure the housing loan of Cruz, and the transaction was an equitable mortgage under Article 1602 of the Civil Code.

• Due Process and Default: The rule is well-settled that courts should be liberal in setting aside orders of default, judgments of default being frowned upon unless it clearly appears that reopening the case is intended for delay. Orders of default should be the exception rather than the rule, allowed only in clear cases of obstinate refusal by the defendant to comply with the trial court's orders. Under the factual milieu, the RTC was remiss in denying private respondents' motion to lift the order of default and to strike out the evidence presented ex parte, especially considering that an answer had been filed, albeit out of time. The default order was thus immoderate and violative of due process. Nevertheless, the violation was not of a degree sufficient to justify remand, first, because such relief was not prayed for by private respondents, and second, because the affirmative defenses and evidence they would have presented before the RTC were capably ventilated before the Court of Appeals and were taken into account by the latter in reviewing the correctness of the RTC's evaluation of petitioners' evidence and ultimately in reversing the RTC decision. This was evident from the appellate court's citation with approval of a number of private respondents' arguments and evidence, including the documents annexed to their opposition to the issuance of a writ of preliminary injunction. The reversal by the appellate court was not simply on due process grounds but on the merits, going into the issue of whether the transaction was one of equitable mortgage or of sale; the Court could therefore properly take cognizance of the substantive issue while bearing in mind the inordinate manner by which the RTC issued its default order.

• Constitutional Requirement in Decisions: The holding of the Court of Appeals was reversed for being unfounded, since the RTC decision, parts of which were reproduced in the Court's discussion, clearly complied with the constitutional requirement to state clearly and distinctly the facts and the law on which it was based.

• Equitable Mortgage: There is no conclusive test to determine whether a deed absolute on its face is really a simple loan accommodation secured by a mortgage. The decisive factor is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all the surrounding circumstances, such as the relative situation of the parties at the time, their attitude, acts, conduct, and declarations, the negotiations between them leading to the deed, and generally all pertinent facts having a tendency to fix and determine the real nature of their design and understanding; documentary and parol evidence may be submitted and admitted to prove such intention. The conditions giving rise to a presumption of equitable mortgage under Article 1602 of the Civil Code apply with equal force to a contract purporting to be one of absolute sale, and the presence of even one of the enumerated circumstances, not a concurrence of them, suffices to construe a contract of sale as one of equitable mortgage, in consonance with the rule that the law favors the least transmission of property rights. Under Article 1602, a contract is presumed to be an equitable mortgage when (a) the price of a sale with right to repurchase is unusually inadequate; (b) the vendor remains in possession as lessee or otherwise; (c) upon or after the expiration of the right of repurchase another instrument extending the period of redemption or granting a new period is executed; (d) the purchaser retains for himself a part of the purchase price; (e) the vendor binds himself to pay the taxes on the thing sold; and (f) in any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. Applying these considerations, the true intention of the parties in executing the Deed of Absolute Sale was not to convey ownership of the property but merely to secure the housing loan of Cruz, in which petitioners had a direct interest since the proceeds were to be immediately applied to their outstanding mortgage obligation to the Carloses. Before the execution of the deed, petitioners' mortgage obligation was nearing maturity and they were in dire need of money to meet it; hence, they asked the help of delos Reyes, who in turn requested Cruz to take out a housing loan with Land Bank. Since collateral is a standard requirement of banks, it was made to appear that the property was sold to Cruz so she could declare it as collateral, in line with the basic requirement that the mortgagor be the absolute owner of the property sought to be mortgaged. Consistent with their agreement, as soon as the housing loan was approved, the full amount of the proceeds was immediately turned over to petitioners, who promptly paid P500,000.00 to the Carloses in full satisfaction of their mortgage obligation, with the balance spent on transferring title to Cruz and registering the new mortgage with Land Bank. The Deed of Absolute Sale and its supporting documents did not reflect the true arrangement as to how the loan proceeds were to be actually applied because it was not the intention of the parties for these documents to do so; the sole purpose for preparing them was to satisfy Land Bank that the collateral requirement relative to Cruz's housing loan application was met. Were the loan indeed a housing loan, it would be curious that Cruz kept none of the proceeds but allowed the bulk thereof to be immediately applied to petitioners' outstanding mortgage obligation; it also strains credulity that petitioners, who were exhausting all means to save their sole conjugal real property from foreclosure, would concurrently part with the same in favor of Cruz. Such urgent prospect of foreclosure explained why petitioners would subscribe to an agreement that on its face represented their unconditional relinquishment of ownership; the Court has declared that while it was true that plaintiffs were aware of the contents of the contracts, the preponderance of the evidence showed that they signed knowing that the contracts did not express their real intention, and if they did so notwithstanding, it was due to the urgent necessity of obtaining funds, for "necessitous men are not, truly speaking, free men; but to answer a present emergency, will submit to any terms that the crafty may impose upon them." The facts further bore out that petitioners remained in possession of the disputed property after the execution of the deed and the transfer of registered title to Cruz in October 1992; Cruz made no demand on petitioners to vacate until March 19, 1994, which was two days after petitioners signified their intention to redeem the property by paying the full amount of P600,000.00. The finding of the appellate court that petitioners remained in possession only because they refused to vacate on Cruz's demand was therefore not accurate, since the records reflected that no such demand was made until more than a year after the purported sale. Copies of realty tax receipts attached to the record also showed that petitioners continued paying taxes on the property for the period 1992 to 1994, or after the property was supposed to have been sold to Cruz. Enough of the circumstances set out in Article 1602 were thus attendant to show that the true arrangement between petitioners and private respondent Cruz was an equitable mortgage. That a transfer certificate of title was issued in favor of Cruz did not import conclusive evidence of ownership or that the agreement was one of sale, since the equitable doctrine that any conveyance intended as security for a debt will be held to be a mortgage, whether so actually expressed in the instrument or not, operates regardless of the form of the agreement chosen by the contracting parties as the repository of their will; equity looks through the form and considers the substance, and a conveyance of land accompanied by registration in the name of the transferee and the issuance of a new certificate is no more secured from the operation of the equitable doctrine than the most informal conveyance that could be devised. On the propriety of reformation, the Court of Appeals found petitioners' action for reformation unmeritorious because there was no showing that the failure of the deed of sale to express the parties' true intention was due to mistake, fraud, inequitable conduct, or accident; indeed, under the facts, reformation may not be proper for failure to fully meet the requisites of Article 1359 of the Civil Code, and because the evidence eventually bore out that the contested Deed of Absolute Sale was not intended to reflect the true agreement between the parties but was merely to comply with the collateral requirements of Land Bank. However, the fact that the complaint was categorized as one for reformation of instrument should not preclude the Court from passing upon the issue of whether the transaction was in fact an equitable mortgage, as the same had been squarely raised in the complaint and had been the subject of arguments and evidence of the parties; it is not the caption of the pleading but the allegations therein that determine the nature of the action, and the Court shall grant the relief warranted by the allegations and the proof even if no such relief is prayed for. Finally, on the award of damages, considering the due process flaws that attended the default judgment of the RTC, and applying the rule that in instances where no actual damages are adjudicated the awards for moral and exemplary damages may be reduced, the award for moral damages was reduced from P50,000.00 to P30,000.00, while the award of attorney's fees in the amount of P50,000.00 was sustained, it being clear that petitioners were compelled to incur expenses and undergo the rigors of litigation to recover their property.

• Equitable Mortgage under Article 1602 — A contract purporting to be an absolute sale is presumed to be an equitable mortgage when any of the following circumstances is present: (a) the price of a sale with right to repurchase is unusually inadequate; (b) the vendor remains in possession as lessee or otherwise; (c) upon or after the expiration of the right of repurchase another instrument extending the period of redemption or granting a new period is executed; (d) the purchaser retains for himself a part of the purchase price; (e) the vendor binds himself to pay the taxes on the thing sold; and (f) in any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. The presence of even one circumstance, not a concurrence, suffices. In this case, the Court found that enough of these circumstances attended the transaction — petitioners remained in possession, continued paying realty taxes, and the real intention was to secure the housing loan — warranting its construction as an equitable mortgage.

• Intention of the Parties as the Decisive Factor — There is no conclusive test to determine whether a deed absolute on its face is really a loan accommodation secured by a mortgage. The decisive factor is the intention of the parties, as shown not necessarily by the terminology of the contract but by all surrounding circumstances, including the relative situation of the parties, their attitude, acts, conduct, and declarations, the negotiations leading to the deed, and generally all pertinent facts tending to fix the real nature of their design and understanding. Documentary and parol evidence may be admitted to prove such intention.

• Least Transmission of Property Rights — The law favors the least transmission of property rights, which is why the presence of even a single Article 1602 circumstance suffices to construe a contract of sale as an equitable mortgage.

• Equity Looks Through Form — Any conveyance intended as security for a debt will be held in effect to be a mortgage, whether so actually expressed in the instrument or not, and operates regardless of the form of the agreement chosen by the contracting parties. Registration of the land in the transferee's name and the issuance of a new certificate do not remove the conveyance from the operation of this equitable doctrine.

• Liberal Setting Aside of Default Orders — Courts should be liberal in setting aside orders of default, judgments of default being frowned upon unless it clearly appears that reopening the case is intended for delay. Orders of default should be the exception rather than the rule, allowed only in clear cases of obstinate refusal by the defendant to comply with the trial court's orders.

• Nature of Action Determined by Allegations, Not Caption — It is not the caption of the pleading but the allegations therein that determine the nature of the action, and the court shall grant the relief warranted by the allegations and the proof even if no such relief is prayed for. Thus, although the complaint was captioned as one for reformation, the Court could pass upon the issue of equitable mortgage squarely raised in the allegations.

• Necessitous Men — While parties may be aware of the contents of contracts they sign, the preponderance of evidence may show that they signed knowing the contracts did not express their real intention, and if they did so notwithstanding, it was due to the urgent necessity of obtaining funds; "necessitous men are not, truly speaking, free men; but to answer a present emergency, will submit to any terms that the crafty may impose upon them."

• "The decisive factor in evaluating such agreement is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all the surrounding circumstances, such as the relative situation of the parties at that time, the attitude, acts, conduct, declarations of the parties, the negotiations between them leading to the deed, and generally, all pertinent facts having a tendency to fix and determine the real nature of their design and understanding. As such, documentary and parol evidence may be submitted and admitted to prove the intention of the parties." — This passage states the controlling standard for determining whether a deed absolute is in truth an equitable mortgage, and is the ratio decidendi for the Court's resolution of the substantive issue.

• "Moreover, the presence of even one of the circumstances laid out in Article 1602, and not a concurrence of the circumstances therein enumerated, suffices to construe a contract of sale to be one of equitable mortgage." — This defines the operative threshold for the Article 1602 presumption, a formulation frequently cited in subsequent jurisprudence on equitable mortgages.

• "xxx it must be borne in mind that the equitable doctrine xxx to the effect that any conveyance intended as security for a debt will be held in effect to be a mortgage, whether so actually expressed in the instrument or not, operates regardless of the form of the agreement chosen by the contracting parties as the repository of their will. Equity looks through the form and considers the substance; and no kind of engagement can be adopted which will enable the parties to escape from the equitable doctrine to which reference is made. In other words, a conveyance of land, accompanied by registration in the name of the transferee and the issuance of a new certificate, is no more secured from the operation of the equitable doctrine than the most informal conveyance that could be devised." — Quoted from Oronce vs. Court of Appeals (citing Macapinlac vs. Gutierrez Repide), this passage establishes that registration in the transferee's name does not defeat the equitable mortgage doctrine.

• "Well-settled is the rule that courts should be liberal in setting aside orders of default for judgments of default are frowned upon, unless in cases where it clearly appears that the reopening of the case is intended for delay." — This states the governing standard for the due process issue, which the Court applied in sustaining the appellate court's finding that the RTC's default order was immoderate.

• Oronce vs. Court of Appeals, 298 SCRA 133 — Cited as authority for the equitable doctrine that any conveyance intended as security for a debt is held in effect to be a mortgage regardless of the form chosen by the parties, and that registration of the land in the transferee's name does not remove the conveyance from the operation of that doctrine.
• Macapinlac vs. Gutierrez Repide, 43 Phil. 770 — Cited (through Oronce) as the source of the equitable doctrine that equity looks through the form and considers the substance, and that a conveyance of land accompanied by registration in the transferee's name is no more secured from the operation of the equitable doctrine than the most informal conveyance.
• Aguirre vs. Court of Appeals, G.R. No. 131520, January 28, 2000 — Cited for the rules that the Article 1602 conditions apply with equal force to a contract purporting to be one of absolute sale, that the presence of even one circumstance suffices, and that the law favors the least transmission of property rights.
• Spouses Reyes vs. Court of Appeals, G.R. No. 134166, August 25, 2000 — Cited for the rule that there is no conclusive test to determine whether a deed absolute on its face is really a loan accommodation secured by a mortgage, and that the decisive factor is the intention of the parties.
• Lao vs. Court of Appeals, 275 SCRA 237 — Cited for the principle that parties who signed contracts knowing they did not express their real intention did so due to the urgent necessity of obtaining funds, and that "necessitous men are not, truly speaking, free men."
• Tanchan vs. Court of Appeals, 305 SCRA 491 — Cited for the rule that courts should be liberal in setting aside orders of default.
• Gerales vs. Court of Appeals, 218 SCRA 638 — Cited, together with Tanchan, for the liberal treatment of orders of default.
• Leyte vs. Cusi, 152 SCRA 496 — Cited for the rule that the issuance of orders of default should be the exception rather than the rule, allowed only in clear cases of obstinate refusal by the defendant to comply with the trial court's orders.
• Solid Homes, Inc. vs. Court of Appeals, 271 SCRA 157 — Cited for the rule that it is not the caption of the pleading but the allegations therein that determine the nature of the action, and that the court shall grant the relief warranted by the allegations and the proof even if no such relief is prayed for.
• Tiongco vs. Deguma, 317 SCRA 527 — Cited (citing Del Rosario vs. Court of Appeals, 267 SCRA 158) for the rule that where no actual damages are adjudicated, awards for moral and exemplary damages may be reduced.
• NIA vs. Gamit, 215 SCRA 436 — Cited by the Court of Appeals for the requisites of reformation of instruments under Article 1359 of the Civil Code.
• Misena vs. Rongavilla, 303 SCRA 749 — Cited for the rule that the Article 1602 conditions apply with equal force to a contract purporting to be one of absolute sale.

• Article 1602, Civil Code — Enumerates the circumstances giving rise to a presumption of equitable mortgage. The Court applied it to hold that the Deed of Absolute Sale was in truth an equitable mortgage, since several of the enumerated circumstances attended the transaction, and the presence of even one suffices.
• Article 1604, Civil Code — Provides that the provisions on equitable mortgage apply to a contract purporting to be one of absolute sale. Cited to establish that the Article 1602 presumption extends to deeds absolute on their face.
• Article 1359, Civil Code — Governs the requisites of reformation of instruments. Cited in the discussion of why reformation was technically improper, the deed not having been intended to reflect the true agreement of the parties.
• Article 2085, Civil Code — Requires, among the essential requisites of a mortgage, that the mortgagor be the absolute owner of the property mortgaged. Cited to explain why the parties made it appear that the property was sold to Cruz, so that she could declare it as collateral for the Land Bank housing loan.
• Constitutional requirement that decisions state the facts and the law — The Court held that the RTC decision complied with the constitutional requirement to state clearly and distinctly the facts and the law on which it was based, reversing the appellate court's contrary finding.

Melo (Chairman), Vitug, Panganiban, and Sandoval-Gutierrez, JJ., concur.