Spouses Rosario vs. Alvar

A final judgment bars, under res judicata by conclusiveness of judgment, the re-litigation of facts and issues actually and directly resolved in the prior case even if the later action has a different cause of action; and a prior final adjudication that deeds of absolute sale were intended as equitable mortgages is itself sufficient reformation of the instrument, so a separate reformation action is not required before judicial foreclosure.

Agnes Annabelle Dean-Rosario and respondent Priscilla P. Alvar were debtor and creditor, their relationship originating from loans secured by real estate mortgages over two parcels covered by Transfer Certificates of Title Nos. 167438 and 167439. The dispute later centered on deeds of absolute sale over the same lots executed in favor of Priscilla’s daughter, Evangeline Arceo, and later transferred to Priscilla, which were claimed to be equitable mortgages rather than true sales. The statutory backdrop includes Article 1602 of the Civil Code, which presumes a contract to be an equitable mortgage in enumerated cases, and Article 1365, which permits reformation when the instrument states an absolute sale but the parties actually agreed on a mortgage.

Petitioner Agnes Annabelle Dean-Rosario, joined by her husband Firmo S. Rosario, obtained loans from respondent Priscilla P. Alvar on separate dates in 1989 totaling ₱600,000. The loans were secured by real estate mortgages over two parcels of land covered by Transfer Certificates of Title Nos. 167438, the spouses’ residence, and 167439, a five-door rental apartment. In December 1990, the mortgages were discharged.

On March 16, 1992 and July 17, 1992, Agnes executed two Deeds of Absolute Sale over the two lots in favor of Priscilla’s daughter, Evangeline Arceo, for ₱900,000 each. Evangeline later sold the lots to Priscilla, also for ₱900,000 each. According to the spouses, Priscilla deceived Agnes into signing the deeds in favor of Evangeline because Agnes merely intended to renew the mortgages over the two lots. Priscilla, for her part, claimed that she was the absolute owner of the lots and that Agnes sold them because she was in dire need of money.

On April 27, 1994, Priscilla sent a demand letter to the spouses asking them to vacate Lot 1. This prompted the spouses to file before the Regional Trial Court of Makati City a Complaint for Declaration of Nullity of Contract of Sale and Mortgage, Cancellation of Transfer Certificates of Title and Issuance of New TCTs with Damages, docketed as Civil Case No. 94-1797, against Priscilla. Priscilla, in turn, filed with the RTC a Complaint for Recovery of Possession, docketed as Civil Case No. 96-135. The cases were consolidated.

The consolidated cases proceeded to the RTC and then to the Court of Appeals. In its November 15, 2006 Decision, the Court of Appeals found that Priscilla was the one who paid the purchase price of the two lots at the time of their supposed sale to Evangeline and characterized the transfers as equitable mortgages. That Decision became final and executory after the parties failed to file a motion for reconsideration or an appeal.

On October 17, 2007, Priscilla sent a letter to Agnes demanding payment of the outstanding obligation amounting to ₱1.8 million. Because the spouses failed or refused to pay, Priscilla filed before the RTC of Makati, Branch 148, a Complaint for Judicial Foreclosure of Real Estate Mortgage, docketed as Civil Case No. 07-997. The spouses moved to dismiss, but the RTC denied the motion. Priscilla later moved to declare the defendants in default for failure to file an answer within the reglementary period, and the RTC granted the motion.

• Legal Personality to Foreclose: Petitioners contended that Priscilla had no legal personality to institute the judicial foreclosure proceedings because the Deeds of Absolute Sale, which were deemed equitable mortgages, were executed by them in favor of Evangeline, not Priscilla; they invoked Borromeo vs. Court of Appeals, 550 SCRA 269, and Article 1311 of the New Civil Code.
• No Legal or Factual Basis for ₱1.8 Million: Petitioners claimed that the obligation of ₱1.8 million had no legal and factual bases because the only loan they obtained was ₱600,000.
• Reformation Before Foreclosure: Petitioners insisted that before the subject lots could be judicially foreclosed, a reformation of the fake and simulated Deeds of Absolute Sale must first be done to enable them to present documentary and parol evidence.
• Contrary to Gov. Bacaron: Petitioners raised that the Court of Appeals’ ruling was contrary to Gov. Bacaron, 472 SCRA 339.

• Legal Personality: Priscilla maintained that she had legal personality to institute the foreclosure proceedings pursuant to the November 15, 2006 Decision.
• Finality of Indebtedness: The indebtedness of petitioners was established in the said Decision, which had long attained finality.
• Unpaid Loan and Basis of Foreclosure: She asserted that the loan had not been paid and that the judicial foreclosure was not based on the old mortgages that had been discharged, but on the Deeds of Absolute Sale, which were considered as equitable mortgages in the November 15, 2006 Decision.
• No Need for Reformation: Priscilla asserted that there was no need for reformation as the declaration in the November 15, 2006 Decision was sufficient.

• Conclusiveness of Judgment — Existence of Loan and Legal Personality: Whether the Court of Appeals erred in dismissing the appeal and in holding that reformation was no longer necessary, specifically whether Priscilla had legal personality to file the judicial foreclosure and whether the ₱1.8 million obligation had legal and factual basis.
• Reformation Before Foreclosure: Whether reformation of the instruments must be made prior to foreclosure proceedings after the contracts were treated as equitable mortgages.
• Gov. Bacaron: Whether the Court of Appeals’ ruling was contrary to Gov. Bacaron, 472 SCRA 339.

• Conclusiveness of Judgment — Existence of Loan and Legal Personality: No. The November 15, 2006 CA Decision became final and executory; under res judicata by conclusiveness of judgment, petitioners are barred from re-litigating the existence of the ₱1.8 million loan and Priscilla’s legal personality to foreclose.
• Reformation Before Foreclosure: No. The prior CA declaration that the parties intended an equitable mortgage was itself sufficient reformation; a separate reformation action is unnecessary and would be redundant.
• Gov. Bacaron: Not separately resolved. The Court decided the petition on conclusiveness of judgment and the sufficiency of the prior CA declaration as reformation, without a separate discussion of Gov. Bacaron.

• Conclusiveness of Judgment — Existence of Loan and Legal Personality: The November 15, 2006 Decision of the CA in CA-G.R. CV No. 81350 had attained finality because the parties did not file a motion for reconsideration or an appeal. Under res judicata by conclusiveness of judgment, facts and issues actually and directly resolved in a former suit cannot again be raised in any future case between the same parties, even if the latter suit involves a different claim or cause of action. Unlike res judicata by prior judgment, only identity of parties and subject matter is required. The elements are: (1) the judgment sought to bar the new action must be final; (2) the decision must have been rendered by a court having jurisdiction over the subject matter and the parties; (3) the disposition must be a judgment on the merits; and (4) there must be identity of parties, but not identity of causes of action. All elements were present. The prior Decision established the existence of the ₱1.8 million loan and recognized Priscilla’s legal personality to foreclose because she was the one who loaned the spouses ₱1.8 million. Petitioners were therefore estopped from raising those issues again.
• Reformation Before Foreclosure: Reformation of an instrument is a remedy in equity where a written instrument already executed is allowed by law to be reformed or construed to express or conform to the real intention of the parties. Its rationale is that it would be unjust and inequitable to enforce a written instrument that does not express or reflect the real intention of the parties. In the November 15, 2006 Decision, the CA denied the spouses’ complaint for declaration of nullity on the ground that what was required was reformation under Article 1365 of the Civil Code. In ruling that the Deeds of Absolute Sale were actually mortgages, the CA in effect reformed the instruments based on the true intention of the parties. A separate complaint for reformation was therefore no longer necessary because it would only be redundant and a waste of time. The CA had also declared that absent proof that the spouses had fully paid their obligation, Priscilla could seek foreclosure of the subject lots.
• Gov. Bacaron: The text does not supply a separate rationale for this issue; the Court resolved the petition on the grounds set out above.

• Res judicata by conclusiveness of judgment — A final judgment bars the re-litigation of facts and issues actually and directly resolved in a former suit between the same parties, even if the later suit involves a different claim or cause of action. Unlike res judicata by prior judgment, it requires only identity of parties and subject matter, not identity of causes of action. The elements are: (1) the judgment sought to bar the new action must be final; (2) the decision must have been rendered by a court having jurisdiction over the subject matter and the parties; (3) the disposition must be a judgment on the merits; and (4) there must be identity of parties, but not identity of causes of action. The Court applied this doctrine because the November 15, 2006 CA Decision was final, rendered on the merits by a court with jurisdiction, and involved the same parties; it therefore barred petitioners from re-litigating the existence of the ₱1.8 million loan and Priscilla’s legal personality to foreclose.
• Reformation of instruments — A remedy in equity where a written instrument already executed is allowed by law to be reformed or construed to express or conform to the real intention of the parties. The rationale is that it would be unjust and inequitable to enforce an instrument that does not reflect the parties’ true intention. The Court held that the CA’s prior ruling that the Deeds of Absolute Sale were actually equitable mortgages already amounted to reformation, making a separate reformation action unnecessary before foreclosure.
• Equitable mortgage under Article 1602 — Under Article 1602 of the Civil Code, a contract is presumed to be an equitable mortgage in enumerated cases. The prior CA Decision applied this provision to characterize the deeds of absolute sale as equitable mortgages; because that Decision became final, the Supreme Court treated the characterization as conclusive and sufficient for foreclosure purposes.

• "Under the doctrine of conclusiveness of judgment, facts and issues actually and directly resolved in a former suit cannot again be raised in any future case between the same parties, even if the latter suit may involve a different claim or cause of action." — This states the core doctrine applied by the Court to bar re-litigation of the loan and Priscilla’s legal personality.
• "Consequently, there is no need for Us to delve into the issues raised by petitioner spouses Rosario pertaining to the existence of the loan and the legal personality of Priscilla to file a case for judicial foreclosure as the November 15, 2006 Decision already established the existence of the loan in the amount of ₱1.8 million and recognized the legal personality of Priscilla to foreclose the subject property, as she was the one who loaned spouses Rosario the amount of ₱1.8 million." — This explains the effect of conclusiveness of judgment on the disputed issues.
• "The pronouncement in the November 15, 2006 Decision that the parties' intention was to execute an equitable mortgage is sufficient reformation of such instrument." — This is the Court’s ratio on why a separate reformation action is unnecessary.
• "In ruling that the Deeds of Absolute Sale were actually mortgages, the CA, in effect, had reformed the instruments based on the true intention of the parties. Thus, the filing of a separate complaint for reformation of instrument is no longer necessary because it would only be redundant and a waste of time." — This elaborates the reformation holding and its practical basis.

• Heirs of Tomas Dolleton vs. Fil-Estate Management, Inc., 602 Phil. 781, 803 (2009) — Cited for the doctrine of conclusiveness of judgment and the distinction between res judicata by prior judgment and res judicata by conclusiveness of judgment.
• Navarette vs. Manila International Freight Forwarders, Inc., G.R. No. 200580, February 11, 2015, 750 SCRA 414, 425-426 — Cited for the elements of res judicata by conclusiveness of judgment.
• Degayo vs. Magbanua-Dinglasan, G.R. No. 173148, April 6, 2015, 755 SCRA I, 12 — Cited for the rule that the binding effect and enforceability of an earlier final judgment’s dictum cannot be re-litigated in a later case.
• Rosello-Bentir vs. Hon. Leanda, 386 Phil. 802, 811 (2000) — Cited for the definition and rationale of reformation of instruments.
• Borromeo vs. Court of Appeals, 550 SCRA 269 — Invoked by petitioners to argue that Priscilla had no legal personality to foreclose; the Court did not adopt this argument, resolving the issue through conclusiveness of judgment.

• Article 1602, Civil Code — Provides that a contract shall be presumed an equitable mortgage in enumerated cases. The prior CA Decision applied this provision to treat the Deeds of Absolute Sale as equitable mortgages, and the Supreme Court treated that final characterization as conclusive.
• Article 1365, Civil Code — Provides that if two parties agree upon a mortgage or pledge of real or personal property but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper. The CA cited this provision in the prior case; the Supreme Court held that the CA’s declaration of an equitable mortgage already served as the required reformation.

Mariano C. Del Castillo (ponente), Teresita J. Leonardo-De Castro, Estela M. Perlas-Bernabe, and Francis H. Jardeleza. Maria Lourdes P.A. Sereno was on official leave.