Bovine woes
Eulie was engaged in the business of buying and selling large cattle. She employed “biyaheros” who were tasked to buy large cattle with the financial capital provided by Eulie and delivering the procured cattle to her for further disposal.
To secure the financial capital she advanced for the biyaheros, Eulie required them to surrender the titles of their properties and execute corresponding Deeds of Sale in her favor.
Domeng is one of Eulie’s biyaheros. Unlike the other biyaheros, Eulie did not require Domeng to post any security in the performance of his duties.
Much to her dismay, however, Eulalia found that Domeng incurred shortage in his cattle procurement operation.
Domeng and his wife then executed a Deed of Sale in favor of Eulie covering a parcel of land. On the strength of the aforesaid deed, the subject property was registered in the names of Eulie and her husband. Eulie and her husband thereafter sold the property to Joy and Angel, Eulie’s grandniece and grand nephew-in-law, respectively.
After the TCT of the subject property was transferred to their names, Joy and Angel then filed an action for the ejectment against Domeng and his wife. Joy and Angel had won.
Meanwhile, to assert their right to the subject property, Domeng and his wife instituted an action for annulment of sale before the Regional Trial Court against Eulie and Joy. Domeng and his wife alleged that there was no sale intended but only equitable mortgage for the purpose of securing the shortage incurred by Dominador while employed as biyahero by Eulalia.
Eulie countered that Domeng received from her a significant sum of money, either as cash advances or as personal loan. When he could no longer pay his obligations, Domeng and his wife sold the property to them. Eulie even harped on the fact that Domeng even personally appeared before the notary public and manifested that the deed was their own voluntary act and deed.
For her part, Joy maintained that she was a buyer in good faith and for value for she personally inquired from the Register of Deeds of the presence of any liens and encumbrances on the TCT of the subject property and found that the same was completely free therefrom.
While she admitted that she had previous notice that Domeng were in possession of the subject property, Joy claimed that the said possessors acknowledged her ownership thereof and even asked for time to vacate. In the end though, they refused to leave the premises.
Q: What is an equitable mortgage?
A: An equitable mortgage is one that—although lacking in some formality, forms and words, or other requisites demanded by a statute—nevertheless reveals the intention of the parties to charge a real property as security for a debt and contains nothing impossible or contrary to law.
Q: When will the law presume a contract to be an equitable mortgage?
A: The instances when a contract—regardless of its nomenclature—may be presumed to be an equitable mortgage are enumerated in the Civil Code as follows:
Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the cases: when the price of a sale with right to repurchase is unusually inadequate; when vendor remains in possession as lessee or otherwise; when upon or after expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; when the purchaser retains for himself a part of the purchase price; and when vendor binds himself to pay taxes on the thing sold.
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.
Q: When will a contract purporting to be an absolute sale be deemed as equitable mortgage?
A: For Articles 1602 and 1604 to apply, two requisites must concur: one, the parties entered into a contract denominated as a contract of sale; and two, their intention was to secure existing debt by way of equitable mortgage.
In determining whether a deed absolute in form is a mortgage, the court is not limited to the written memorials of the transaction. 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.
Q: Is the deed of sale of Domeng and Eulie a deed of absolute sale or an equitable mortgage?
A: It is an equitable mortgage. The deed was never intended the transfer of ownership of the subject property but to burden the same with an encumbrance to secure the indebtedness incurred by Domeng on the occasion of his employment with Eulie.
By Eulie’s own admission, it was her customary business practice to require her biyaheros to deliver to her the titles to their real properties and to execute in her favor the corresponding deeds of sale over the said properties as security for the money she provided for their cattle procurement task.
Since Domeng worked for Eulie’s business for years, he was allowed to advance the money without any security. Significantly, it was only after he incurred a shortage that the sale contract was executed.
The explicit provision of Article 1602 that any of those circumstances would suffice to construe a contract of sale to be one of equitable mortgage is in consonance with the rule that the law favors the least transmission of property rights.
The existence of any one of the conditions under Article 1602, not a concurrence, or an overwhelming number of such circumstances, suffices to give rise to the presumption that the contract is an equitable mortgage.
Q: What then is the effect if a deed of sale is deemed an equitable mortgage?
A: The agreement between Domeng and Eulie was not avoided in its entirety so as to prevent it from producing any legal effect at all. Instead, since the said transaction is an equitable mortgage, it consequentially, altered the relationship of the parties from seller and buyer, to mortgagor and mortgagee, while the subject property is not transferred but subjected to a lien in favor of the latter.
Q: What is effect of the subsequent sale of the property by Eulie and her husband to Joy and her husband?
A: Having threshed the issue that there was no sale in favor of Eulie but an equitable mortgage, it follows that Eulie has no right to subsequently transfer ownership of the subject property, in consonance with the principle that nobody can dispose of what he does not have.
Q: Is Joy an innocent purchaser for value that would protect her against Domeng’s claim? Can she not rely on indefeasibility of a Torrens title?
A: While it is true that a person dealing with registered lands need not go beyond the certificate of title, it is likewise a well-settled rule that a purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man on his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor.
His mere refusal to face up to the fact that such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in the vendor’s or mortgagor’s title, will not make him an innocent purchaser for value, if it afterwards develops that the title was in fact defective, and it appears that he had such notice of the defect as would have led to its discovery had he acted with the measure of precaution which may be required of a prudent man in a like situation.
Joy is not an innocent purchaser for value. To begin with, she is a grandniece of Eulalia and resides in the same locality where the latter lives and conducts her principal business.
It is therefore impossible for her not to acquire knowledge of her grand aunt’s business practice of requiring her biyaheros to surrender the titles to their properties and to sign the corresponding deeds of sale over said properties in her favor, as security. This alone should have put Joy on guard for any possible abuses that Eulie may commit with the titles and the deeds of sale in her possession.
The glaring lack of good faith of Joy is more apparent in her own admission that she was aware that Doming was in possession of the subject property.
A buyer of real property that is in the possession of a person other than the seller must be wary. A buyer who does not investigate the rights of the one in possession can hardly be regarded as a buyer in good faith.
Q: What is the effect of the judgment in the ejectment case on the case that Domeng filed against Eulie and her niece?
A: None. In ejectment cases, all the court may do is resolve who is entitled to its possession although in doing so, it may make a determination of who is the owner of the property to resolve the issue of possession.
But such determination of ownership is not clothed with finality. Neither will it affect ownership of the property or constitute a binding and conclusive adjudication on the merits with respect to the issue of ownership. (Source: Sps. Raymundo vs. Sps. Bandong, G.R. No. 171250, July 4, 2007)
Ma. Soledad Deriquito-Mawis is Dean, College of Law, Lyceum of the Philippines University; Chairperson of Philippine Association of Law Schools; and founder of Mawis Law Office
