Villarica vs. Court of Appeals

The Court held that a contract of absolute sale will not be presumed an equitable mortgage under Article 1602 of the Civil Code when the consideration is adequate, full payment is expressly acknowledged, and subsequent instruments grant an option to buy rather than reserving a right of repurchase in the original contract. The presumption of equitable mortgage is rebutted by clear evidence demonstrating the parties’ intent to effect an absolute transfer of ownership.

In May 1951, spouses Angel and Nieves Villarica executed a deed of absolute sale conveying a 1,174-square-meter lot in Davao City to spouses Gaudencio Consunji and Juliana Monteverde for P35,000. The vendors had acquired the property less than a year earlier for P20,000, financing the purchase partially through a loan and a mortgage to the Philippine Alien Property Custodian. On the date the sale was acknowledged, the vendees executed a separate public instrument granting the vendors a one-year option to repurchase the property for P37,750. The vendees registered the deed of sale, secured a new transfer certificate of title, and subsequently sold the lot to Jovito S. Francisco in February 1953. Francisco registered the subsequent sale and obtained a new title in his name.

• On May 19, 1951, the spouses Villarica executed a deed of absolute sale (Exhibit B) conveying a 1,174-square-meter lot in Davao City to the spouses Consunji for P35,000. The instrument was drafted and notarized by the Villaricas’ appointed agent, Juan B. Espolong.
• On the same day the sale was acknowledged, the Consunjis executed a separate public instrument (Exhibit D) granting the Villaricas a one-year option to repurchase the property for P37,750.
• The Consunjis registered the deed of sale in July 1951, resulting in the cancellation of the Villaricas’ title and the issuance of a new title in their names.
• In February 1953, the Consunjis sold the property to Jovito S. Francisco for P47,000 via a public instrument that was duly registered, transferring title to Francisco.
• The Villaricas initiated an action for reformation, alleging that Exhibit B was intended as security for a usurious loan of P28,000 rather than an absolute sale. They claimed the price was inadequate, they remained in possession, the repurchase period was extended, and they paid property taxes.
• The Consunjis maintained that the deed reflected the parties’ true intent and interposed a counterclaim for unpaid loans evidenced by promissory notes. Francisco asserted his status as a purchaser in good faith.
• The trial court initially found an equitable mortgage, but the appellate court reversed, concluding that the sale was absolute, the price was fair, and the vendors had acknowledged full receipt of the P35,000 consideration.

• Petitioners maintained that the deed of absolute sale should be presumed an equitable mortgage under Articles 1602 to 1604 of the Civil Code.
• Petitioners argued that the P35,000 sale price was grossly inadequate compared to the property’s alleged market value.
• Petitioners contended that their continued collection of rentals and payment of taxes indicated retained possession and economic burden consistent with a security transaction.
• Petitioners asserted that the subsequent extension of the one-year repurchase period by one month satisfied the statutory condition under Article 1602(3) for presuming an equitable mortgage.

• Respondents Consunji and Monteverde countered that the deed of absolute sale expressed the genuine intention of the parties and that petitioners had fully acknowledged receipt of the P35,000 purchase price.
• Respondents argued that the subsequent instrument (Exhibit D) created a mere option to buy, not a statutory right of repurchase, and therefore could not convert the absolute sale into a pacto de retro or equitable mortgage.
• Respondents maintained that petitioners’ temporary collection of rents was a concession for relocation expenses, not proof of retained possession, and that tax payments covered only pre-sale arrears which vendors were contractually obligated to settle.
• Respondent Francisco relied on his registered title and good faith purchase to oppose any reformation that would impair his ownership.

• Procedural Issues:
  • Whether the Supreme Court may review the Court of Appeals’ factual determinations regarding the true nature of the contract and the outstanding loan amounts.
• Substantive Issues:
  • Whether the deed of absolute sale should be presumed an equitable mortgage under Articles 1602 to 1604 of the Civil Code based on alleged inadequacy of price, retained possession, extension of repurchase period, and payment of taxes.

• Procedural:
  • The Court declined to disturb the appellate court’s factual determinations, holding that findings regarding the amounts due from the petitioners to the respondents, as evidenced by promissory notes and partial payments, are factual in nature and binding on the Supreme Court.
• Substantive:
  • The Court ruled that the deed of absolute sale was not an equitable mortgage, as petitioners failed to establish any of the statutory badges of equity. The P35,000 price was not inadequate, given that petitioners had purchased the lot for P20,000 only a year prior and realized a substantial profit. Petitioners did not remain in possession as lessees; their temporary collection of rents was a limited accommodation, after which the vendees collected rentals directly. The subsequent option to buy was legally distinct from a reserved right of repurchase under Article 1601, meaning its extension did not trigger Article 1602(3). Furthermore, petitioners’ tax payments covered only back taxes, which vendors are obligated to clear prior to transferring unencumbered title. The petitioners’ written acknowledgment of full payment of the purchase price conclusively rebutted any presumption of a loan transaction.

• Presumption of Equitable Mortgage (Articles 1602–1604, Civil Code) — The law presumes a contract to be an equitable mortgage when specific circumstances, such as gross inadequacy of price or vendor retention of possession, are present. The Court applied this doctrine by systematically examining each alleged circumstance and finding them absent or legally insufficient, thereby upholding the contract as an absolute sale.
• Distinction Between Option to Buy and Right of Repurchase (Article 1601, Civil Code) — A conventional redemption (pacto de retro) requires the vendor to reserve the right to repurchase within the same instrument of sale. A subsequent grant of an option to buy by the vendee is a separate right and does not satisfy the statutory criteria for equitable mortgage. The Court relied on this distinction to reject petitioners’ argument that the extended option period triggered Article 1602(3).

• "The right of repurchase is not a right granted the vendor by the vendee in a subsequent instrument, but is a right reserved by the vendor in the same instrument of sale as one of the stipulations of the contract. Once the instrument of absolute sale is executed, the vendor can no longer reserve the right to repurchase, and any right thereafter granted the vendor by the vendee in a separate instrument cannot be a right of repurchase but some other right like the option to buy in the instant case." — The Court emphasized this principle to clarify that a post-sale option does not transform an absolute sale into a pacto de retro or equitable mortgage, thereby foreclosing the application of Article 1602(3).

• Article 1601, New Civil Code — Defines conventional redemption as a right reserved by the vendor in the contract of sale. The Court cited this provision to distinguish a reserved right of repurchase from a subsequently granted option to buy.
• Article 1602, New Civil Code — Enumerates circumstances that give rise to the presumption of an equitable mortgage. The Court applied this article to analyze petitioners’ claims regarding price, possession, extension of period, and tax payments.
• Article 1603, New Civil Code — Provides that the presumption of equitable mortgage applies notwithstanding the contract’s designation as a sale. The Court referenced it in evaluating whether the parties’ true intent was security rather than transfer.
• Article 1604, New Civil Code — Extends the presumption of equitable mortgage to contracts purporting to be sales with right to repurchase. The Court considered it alongside Article 1602 to assess petitioners’ reformation claim.
• Article 2208, New Civil Code — Enumerates instances where attorney’s fees may be recovered. The Court referenced this provision to justify the removal of the P2,350 attorney’s fees awarded to Francisco, finding the case did not fall within the statutory exceptions.