Tan vs. Valdehueza

A contract purporting to be a sale with right to repurchase (pacto de retro) is presumed to be an equitable mortgage where the vendor remains in possession of the land and pays the realty taxes thereon, and no third party is involved; such presumption applies whether the instrument is registered or not, since under article 2125 of the new Civil Code an unrecorded mortgage is nonetheless binding between the parties. Corollarily, the dismissal of a prior action for failure to prosecute, although it operates as an adjudication on the merits under Section 3 of Rule 17, does not bar a subsequent action where the causes of action are not identical and the judgments are not inconsistent.

Lucia Tan was the plaintiff-appellee, and the Valdehueza siblings — Arador, Rediculo, Pacita, Concepcion, and Rosario — were the defendants-appellants, the answer filed by Arador and Rediculo standing also as the answer of their sisters. The dispute turned on two distinct sets of transactions: Tan's acquisition of one parcel at an execution sale, and two deeds of pacto de retro executed by Arador and Rediculo over portions of a second, unregistered parcel. The governing statutory backdrop shifted with the effectivity of the new Civil Code on August 30, 1950: under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of a mortgage even as between the parties, whereas article 2125 of the new Civil Code made an unrecorded mortgage nonetheless binding between them.

On May 6, 1955, at a public auction sale held at the Capitol Building in Oroquieta, Misamis Occidental, Lucia Tan emerged as the highest bidder for a parcel of land, and Vicente D. Roa, then Ex-Officio Provincial Sheriff, executed a Certificate of Sale in her favor. When Arador Valdehueza failed to redeem the land within the one-year period provided by law, the sheriff executed an Absolute Deed of Sale in Tan's favor. The Notice of Sheriff's Sale, the Certificate of Sale, and the Absolute Deed of Sale were marked as Annexes A, B, and C, respectively, and were made integral parts of the parties' stipulation of facts.

Separately, Arador and Rediculo Valdehueza executed two deeds of pacto de retro in Tan's favor over two portions of another parcel of unregistered land, for a total consideration of P1,500. The deed marked Annex E, dated March 15, 1955, covered the amount of P1,200 and was registered with the Registry of Deeds; the deed marked Annex D, dated August 5, 1955, covered the amount of P300 and was not registered. From the execution of these deeds, Arador and Rediculo remained in possession of the land, and the land taxes on it were paid by them.

On July 24, 1957, Tan filed Civil Case No. 2002 against the Valdehuezas, a complaint for injunction to restrain them from entering the parcel of land and gathering the nuts therein. That complaint and the counterclaim were subsequently dismissed by order dated May 22, 1963, for the failure of the parties to seek the immediate trial thereof, thus evincing a lack of interest on their part to proceed with the case.

Tan thereafter instituted Civil Case No. 2574 before the Court of First Instance of Misamis Occidental (Branch I) against Arador and Rediculo Valdehueza, seeking (a) a declaration of ownership and recovery of possession of the parcel described in the first cause of action, and (b) consolidation of ownership of the two portions of the unregistered parcel described in the second cause of action, purportedly sold to her under the two deeds of pacto de retro. The parties admitted the legal capacity of the plaintiff to sue, the identity of the land in the first cause of action, and that the answer filed by Arador and Rediculo stood as the answer of Pacita, Concepcion, and Rosario Valdehueza. They also stipulated that Tan was the same plaintiff, and Arador, Rediculo, and Pacita the same defendants, in Civil Case No. 2002. After the issues were joined, the parties submitted a stipulation of facts, praying for its approval and that it be made the basis of the decision, and the case was decided on that stipulation and its annexes.

The facts material to the Supreme Court's analysis were that the Valdehuezas remained in possession of the land covered by the two deeds of pacto de retro and paid the realty taxes thereon, that no third party was involved in either transaction, and that neither the original nor the amended complaint in Civil Case No. 2574 alleged any delivery to Tan of the harvest from the land involved in the second cause of action.

• Res Judicata: The Valdehuezas maintained that the dismissal of Civil Case No. 2002 for failure to prosecute operated, under Section 3 of Rule 17 of the Rules of Court, as an adjudication upon the merits, and therefore barred the first cause of action in Civil Case No. 2574.
• Equitable Mortgage: The Valdehuezas argued that the transactions between the parties on the second cause of action should be declared equitable mortgages rather than simple loans.
• Double Prejudice and Harvest Proceeds: The Valdehuezas claimed that their answer affirmed that they remained in possession of the land and gave the proceeds of the harvest to the plaintiff, so that an order to pay legal interest on the amounts stated in the deeds of pacto de retro would subject them to double prejudice; the trial court should therefore have ordered evidence to be adduced on the harvest.

• Res Judicata: Whether the dismissal of Civil Case No. 2002 for failure to prosecute barred, under the principle of res judicata, the first cause of action in Civil Case No. 2574.
• Equitable Mortgage: Whether the transactions evidenced by the two deeds of pacto de retro, one registered and one unregistered, should be treated as equitable mortgages rather than as a simple loan secured by the property.
• Harvest Proceeds and Double Prejudice: Whether the Valdehuezas would suffer double prejudice from being ordered to pay legal interest on the amounts stated in the deeds of pacto de retro without evidence on who profited from the harvest.
• Legal Interest: Whether legal interest at six percent per annum could be imposed on the amounts of P1,200 and P300 subject of the equitable mortgages.

• Res Judicata: No. The causes of action in Civil Case No. 2002, which concerned only possession and the fruits of the land, and in Civil Case No. 2574, which concerns ownership with possession as a mere attribute, are not identical, and the prior judgment is not inconsistent with the latter.
• Equitable Mortgage: Yes. Both deeds, whether registered or not, are presumed equitable mortgages under article 1602 of the Civil Code, the vendors having remained in possession and paid the realty taxes with no third party involved; under article 2125 an unrecorded mortgage is nonetheless binding between the parties.
• Harvest Proceeds and Double Prejudice: No. The record does not support the claim, since neither the original nor the amended complaint alleged delivery of the harvest to Tan, leaving nothing in the answer to affirm, and the case was submitted on a stipulation of facts.
• Legal Interest: No. Article 1956 of the new Civil Code provides that no interest is due unless expressly stipulated in writing, and Tan did not pray for interest, her thesis having been a consolidation of ownership.

• Res Judicata: The Valdehuezas invoked Section 3 of Rule 17 of the Rules of Court, which provides that a dismissal for failure to prosecute "shall have the effect of an adjudication upon the merits." That contention was rejected because the causes of action in the two cases are not identical. Civil Case No. 2002 was for injunction against entry into the land and the gathering of nuts from it, whereas Civil Case No. 2574 sought to remove any doubt or cloud upon Tan's ownership, with a prayer for declaration of ownership and recovery of possession. Applying the test of absence of inconsistency between prior and subsequent judgments, the failure of Tan in Case No. 2002 to secure an injunction against the Valdehuezas was held not inconsistent with her being adjudged in Case No. 2574 as owner of the land with the right to recover possession thereof. Case No. 2002 involved only the possession of the land and the fruits thereof, while Case No. 2574 involves ownership of the land, with possession as a mere attribute of ownership. The judgment in the first case could not and did not encompass the judgment in the second, although the second judgment would encompass the first. It was further noted that suitors in actions to quiet title need not be in possession of the property.

• Equitable Mortgage: The trial court treated the registered deed of pacto de retro as an equitable mortgage but considered the unregistered deed as a mere case of simple loan secured by the property sold under pacto de retro, on the ground that no suit lies to foreclose an unregistered mortgage. That ruling rested on article 1875 of the old Civil Code and on decisions of the Court circa 1910 and 1912. Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of a mortgage even as between the parties, but under article 2125 of the new Civil Code, in effect since August 30, 1950, this is no longer so; if the instrument is not recorded, the mortgage is nonetheless binding between the parties. Because the Valdehuezas remained in possession of the land and paid the realty taxes, the contracts which purported to be pacto de retro transactions are presumed to be equitable mortgages, whether registered or not, there being no third parties involved.

• Harvest Proceeds and Double Prejudice: The claim that the Valdehuezas would suffer double prejudice if made to pay legal interest on the amounts stated in the pacto de retro contracts, because their answer allegedly affirmed that they remained in possession and gave the proceeds of the harvest to Tan, was not supported by the record. Nowhere in the original and the amended complaints is there an allegation of delivery to Tan of the harvest from the land involved in the second cause of action; hence the defendants' answer had none to affirm. In submitting their stipulation of facts, the parties prayed for its approval and that it be made the basis of the decision, which the court did. The trial court therefore could not be faulted for not receiving evidence on who profited from the harvest.

• Legal Interest: The imposition of legal interest on the amounts subject of the equitable mortgages, P1,200 and P300 respectively, is without legal basis, because no interest shall be due unless it has been expressly stipulated in writing under article 1956 of the new Civil Code. Furthermore, Tan did not pray for such interest; her thesis was a consolidation of ownership, which was properly rejected, the contracts being equitable mortgages. With the definitive resolution of the rights of the parties, the Court found it needless to pass upon Tan's petition for receivership, leaving her free to address the petition to the court a quo should circumstances warrant.

• Res judicata — identity of causes of action — A prior judgment operates as a bar only where the causes of action are identical, and one test of identity is whether the judgment sought will be inconsistent with the prior judgment; if no inconsistency is shown, the prior judgment is not a bar. The Court applied this test in holding that a dismissed injunction suit concerning possession and the fruits of the land did not bar a subsequent action for declaration of ownership and recovery of possession, since the second judgment would encompass the first but not vice versa.
• Equitable mortgage presumption under pacto de retro — Under article 1602 of the Civil Code, a contract purporting to be a sale with right to repurchase is presumed to be an equitable mortgage where the vendor remains in possession of the land and pays the realty taxes thereon. The Court applied the presumption to both deeds executed by the Valdehuezas, they having remained in possession and paid the land taxes, with no third parties involved.
• Non-registration of a mortgage — Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of a mortgage even as between the parties; under article 2125 of the new Civil Code, effective August 30, 1950, this is no longer so, and if the instrument is not recorded the mortgage is nonetheless binding between the parties. The Court thus rejected the trial court's treatment of the unregistered deed of pacto de retro as a mere simple loan.
• No interest without written stipulation — Under article 1956 of the new Civil Code, no interest shall be due unless it has been expressly stipulated in writing. The Court struck down the award of legal interest on the P1,200 and P300 because no written stipulation of interest existed and the plaintiff had not prayed for it.
• Action to quiet title; possession not required — Suitors in actions to quiet title need not be in possession of the property. The Court invoked this rule in rejecting the res judicata defense, noting that Case No. 2002 involved only possession and fruits while Case No. 2574 involved ownership.

• "Applying the test of absence of inconsistency between prior and subsequent judgments, we hold that the failure of Tan, in case 2002, to secure an injunction against the Valdehuezas to prevent them from entering the land and gathering nuts is not inconsistent with her being adjudged, in case 2574, as owner of the land with right to recover possession thereof." — This passage states the ratio decidendi on the res judicata issue, supplying the controlling test for identity of causes of action where a prior action was dismissed for failure to prosecute.
• "The Valdehuezas having remained in possession of the land and the realty taxes having been paid by them, the contracts which purported to be pacto de retro transactions are presumed to be equitable mortgages, whether registered or not, there being no third parties involved." — This is the canonical formulation of the equitable mortgage presumption as applied to both the registered and unregistered deeds, and is the most frequently cited holding of the case.
• "Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of a mortgage even as between the parties, but under article 2125 of the new Civil Code (in effect since August 30,1950), this is no longer so." — This passage marks the doctrinal shift in the registration requirement for mortgages and explains why the trial court's reliance on superseded law was erroneous.
• "The imposition of legal interest on the amounts subject of the equitable mortgages, P1,200 and P300, respectively, is without legal basis, for, 'No interest shall be due unless it has been expressly stipulated in writing.' (Article 1956, new Civil Code)" — This passage applies article 1956 to strike the award of legal interest, illustrating that interest cannot be imposed absent a written stipulation even in an equitable mortgage setting.

• Balbecino vs. Ortega, L-14231, April 28, 1962, 4 SCRA 1178 — Cited in support of the rule under article 477 of the Civil Code that suitors in actions to quiet title need not be in possession of the property, a point the Court used in rejecting the res judicata defense.
• Santos vs. Duata, L-20901, August 31, 1965, 14 SCRA 1041 — Cited as authority for the article 1602 presumption that a contract purporting to be a pacto de retro transaction is an equitable mortgage, the principal basis for the Court's ruling on the second cause of action.
• Samanilla vs. Cajucom et al., 107 Phil. 432 — Cited in the footnote supporting the rule that under article 2125 of the new Civil Code an unrecorded mortgage remains binding between the parties, the ground for reversing the trial court's treatment of the unregistered deed as a simple loan.

• Article 1602, Civil Code — Provides that a contract purporting to be a sale with right to repurchase is presumed to be an equitable mortgage where the vendor remains in possession and pays the realty taxes. Applied to both deeds of pacto de retro because the Valdehuezas remained in possession and paid the land taxes, with no third parties involved.
• Article 2125, new Civil Code — Provides that a mortgage is binding between the parties even if the instrument is not recorded. Applied to hold that the unregistered deed of pacto de retro (Annex D) was as valid an equitable mortgage between the parties as the registered one (Annex E).
• Article 1875, Civil Code of 1889 — Formerly required registration for the validity of a mortgage even as between the parties. Cited to show that the trial court's ruling rested on superseded law, the new Civil Code having removed the requirement.
• Article 1956, new Civil Code — Provides that no interest shall be due unless expressly stipulated in writing. Applied to strike the award of legal interest on the P1,200 and P300, no written stipulation of interest having been shown and no prayer for interest having been made.
• Article 477, new Civil Code — Provides that suitors in actions to quiet title need not be in possession of the property. Invoked in rejecting the res judicata defense, since Case No. 2574 concerned ownership rather than mere possession.
• Section 3, Rule 17, Rules of Court — Provides that a dismissal for failure to prosecute shall have the effect of an adjudication upon the merits. Invoked by the Valdehuezas but held inapplicable because the causes of action in the two cases were not identical.

Makalintal, C.J., Makasiar, Esguerra, and Muñoz Palma, JJ., concurred. Teehankee, J., was on leave. Martin, J., took no part.