Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 155716               October 2, 2009

ROCKVILLE EXCEL INTERNATIONAL EXIM CORPORATION, Petitioner,

vs.
SPOUSES OLIGARIO CULLA and BERNARDITA MIRANDA, Respondents.

DECISION

BRION, J.:

Whether a Deed of Absolute Sale is really an absolute sale of real property or an equitable
mortgage is the main issue now before us. Petitioner Rockville Excel International Exim
Corporation (Rockville) prays in this petition1 that we reverse the October 9, 2002 decision2 of
the Court of Appeals (CA) in CA G.R. SP No. 66070, denying its appeal and affirming the
decision of the Regional Trial Court (RTC), Batangas City, Branch 2 in Civil Case No. 4789,
which dismissed their complaint for specific performance against the respondents Spouses
Oligario (Oligario) and Bernardita Culla.

BACKGROUND FACTS

The spouses Oligario and Bernardita (Sps. Culla) are the registered owners of a parcel of land
covered by Transfer Certificate of Title (TCT) No. 5416. They mortgaged this property to PS
Bank to secure a loan of P1,400,000.00.

Sometime in 1993, the Office of the Clerk of Court and the Ex-Officio Sheriff issued a Sheriff’s
Notice of Sale for the extrajudicial foreclosure of the property. To prevent the foreclosure,
Oligario approached Rockville – represented by its president and chairman, Diana Young – for
financial assistance. Rockville accommodated Oligario’s request and extended him a loan of
P1,400,000.00. This amount was increased by P600,000.00 for the cash advances Oligario
requested, for a total loan amount of P2,000,000.00.

According to Rockville, when Oligario failed to pay the P2,000,000.00 loan after repeated
demands and promises to pay, the Sps. Culla agreed to pay their indebtedness by selling to
Rockville another property the spouses owned in Brgy. Calicanto, Batangas City (property). The
property has an area of approximately 7,074 square meters and is covered by TCT No. T-19538.
Since a survey of the surrounding properties revealed that the property is worth more than the
Sps. Culla’s P2,000,000.00 loan, the parties agreed to fix the purchase price at P3,500,000.00.

As narrated by Rockville, it accepted the offer for a dacion en pago; on June 25, 1994, Rockville
and Oligario executed a Deed of Absolute Sale over the property. While the property was a
conjugal property of the Sps. Culla, only Oligario signed the Deed of Absolute Sale. Rockville
asserted that, by agreement with the Sps. Culla, Rockville would pay the additional
P1,500,000.00 after Bernardita affixes her signature to the Deed of Absolute Sale.

Rockville claimed that it had always been ready and willing to comply with its obligation to
deliver the P1,500,000.00. In fact, Rockville initially deposited this whole amount with May
Bank of Malaysia, with notice to Oligario, which amount was subsequently transferred to
Rockville’s law firm. However, when Bernardita continued to refuse to sign the Deed of
Absolute Sale, Rockville caused the annotation of an adverse claim on TCT No. T-19538 in
order to protect its interest in the property. Furthermore, Rockville tried to transfer the title of the
property in its name but the Registry of Deeds refused to carry out the transfer, given the absence
of Bernardita’s signature in the Deed of Absolute Sale.

On February 4, 1997, Rockville filed a complaint for Specific Performance and Damages before
the Regional Trial Court (RTC) of Batangas City, Branch 2 against the Sps. Culla, praying that
the lower court order Bernardita to sign the Deed of Absolute Sale or, in the alternative, to
authorize the sale even without Bernardita’s signature.

In their Answer, the Sps. Culla alleged that the purported Deed of Absolute Sale failed to reflect
their true intentions, as the deed was meant only to guarantee the debt to Diana Young, not to
Rockville. Contrary to Rockville’s contention, the agreement was that the P1,500,000.00 had to
be paid before Bernardita would sign the Deed of Absolute Sale. When neither Rockville nor
Diana Young paid the P1,500,000.00, the Sps. Culla volunteered to repay the P2,000,000.00 and
opted to rescind the sale.

On October 26, 1999, the RTC decided the case in the respondents’ favor,3 dismissing
Rockville’s complaint after finding that the transaction between the parties was in reality an
equitable mortgage, not an absolute sale. The dispositive portion of the RTC decision states:

WHEREFORE, in view of all the foregoing, the complaint filed by the plaintiff, Rockville Excel
International Exim Corporation against defendants Oligario Culla and Bernardita Miranda is
hereby DISMISSED. The Absolute Deed of Sale executed between the said plaintiff and
defendants on June 25, 1994 is hereby declared as an equitable mortgage and, defendants are
hereby entitled to redeem the mortgaged property upon full payment of their mortgaged debt to
the plaintiff in the total amount of two million pesos (P2,000,000.00) with legal rate of interest
from June 25, 1994, the time the loan matured, until it is fully satisfied. With costs against the
plaintiff.

SO ORDERED.

THE CA DECISION

Rockville appealed to the CA. In the assailed October 9, 2002 decision, the CA concluded that
the purported contract of sale between Rockville and the Sps. Culla was in reality an equitable
mortgage based on the following factual circumstances: (a) the glaring inadequacy in the
consideration for the sale and the actual market value of the property; (b) the fact that the Sps.
Culla remained in possession of the property even after the execution of the Deed of Absolute
Sale; (c) the fact that Rockville never paid the Sps. Culla the agreed P1,500,000.00 balance in the
purchase price; and (d) Rockville’s continuous grant of extensions to the Sps. Culla to pay their
loan despite the execution of the deed of sale.

THE PETITION

The present petition – filed after the CA denied Rockville’s motion for reconsideration – asks us
to resolve whether the parties’ agreement is an absolute sale or an equitable mortgage of real
property.

Rockville submits that the CA erred in finding that the contract of sale with the Sps. Culla was
an equitable mortgage, insisting that the transaction was a dacion en pago. Rockville points out
that the Sps. Culla themselves admitted that they agreed to sell the property as payment for the
P2,000,000.00 loan and for the additional payment of P1,500,000.00 Rockville was to pay.
Rockville further argues that even without Bernardita’s signature on the Deed of Absolute Sale,
the document is still binding as Oligario represented the spouses in the transaction. Since
Bernardita benefited from the transaction, with the P1,400,000.00 of the purchase price having
been used to redeem the mortgaged conjugal property, Rockville posits that Bernardita impliedly
and effectively ratified the sale.
The Sps. Culla, on the other hand, maintain the contrary view and insist that the RTC and the CA
were correct in holding that the sale was in fact an equitable mortgage.

THE COURT’S RULING

We find the petitioner’s arguments to be legally flawed, and therefore deny the petition for lack
of merit.

No dacion en pago

Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of an existing obligation. It is a special
mode of payment where the debtor offers another thing to the creditor who accepts it as
equivalent to the payment of an outstanding debt.4 For dacion en pago to exist, the following
elements must concur: (a) existence of a money obligation; (b) the alienation to the creditor of a
property by the debtor with the consent of the former; and (c) satisfaction of the money
obligation of the debtor.5

Rockville mainly contends that the Sps. Culla sold their property to pay their due and
demandable P2,000,000.00 debt; the transaction is therefore a dacion en pago. It also repeatedly
emphasized that Bernardita admitted in her testimony that she would have signed the Deed of
Absolute Sale if Rockville had paid the P1,500,000.00.

Rockville’s arguments would have been telling and convincing were it not for the undisputed
fact that even after the execution of the Deed of Absolute Sale, Rockville still granted Oligario
time to repay his P2,000,000.00 indebtedness. In fact, as Diana Young admitted in her testimony,
Rockville gave Oligario the chance to pay off the loan on the same day that the deed was
executed. As Diana Young stated:

Q. Why, he was asking for the extension of P2 million pesos that he barrowed (sic) from
you to be paid by him?

A. He asked me for the extension of time to pay.

Q. After the execution of the deed of sale (Exhibit "C")?

A. On the very day. Yes, after the lapse of the six (6) months to pay back the property.

Q. So what appears was a document of sale Exhibit "C" was executed signed by the
defendant, Oligario Culla, signed by you and then notarized by a Notary Public.

A. Yes, sir.

Q. On same occasion he asked from you that he be given an extension of six (6) months
within which to pay the loan of P2 million pesos?

A. Yes, sir.6

If the parties had truly intended a dacion en pago transaction to extinguish the Sps. Culla’s
P2,000,000.00 loan and Oligario had sold the property in payment for this debt, it made no sense
for him to continue to ask for extensions of the time to pay the loan. More importantly, Rockville
would not have granted the requested extensions to Oligario if payment through a dacion en pago
had taken place. That Rockville granted the extensions simply belied its contention that they had
intended a dacion en pago.

On several occasions, we have decreed that in determining the nature of a contract, courts are not
bound by the title or name given by the parties. The decisive factor in evaluating an agreement is
the intention of the parties, as shown, not necessarily by the terminology used in the contract but,
by their conduct, words, actions and deeds prior to, during and immediately after executing the
agreement.7 Thus, to ascertain the intention of the parties, their contemporaneous and subsequent
acts should be considered. Once the intention of the parties is duly ascertained, that intent is
deemed as integral to the contract as its originally expressed unequivocal terms.8

Thus, we agree with the factual findings of the RTC and the CA that no agreement of sale was
perfected between Rockville and the Sps. Culla. On the contrary, what they denominated as a
Deed of Absolute Sale was in fact an equitable mortgage.

Definition of equitable mortgage

An equitable mortgage has been defined "as one which although lacking in some formality, or
form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the
parties to charge real property as security for a debt, there being no impossibility nor anything
contrary to law in this intent."9

A contract of sale is presumed to be an equitable mortgage when any of the following

circumstances, enumerated in Article 1602 of the Civil Code, is present:

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following
cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) 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.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as
rent or otherwise shall be considered as interest which shall be subject to the usury laws.
[Emphasis supplied.]

The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale.10

For the presumption of an equitable mortgage to arise under Article 1602, two (2) requisites must
concur: (a) that the parties entered into a contract denominated as a contract of sale; and, (b) that
their intention was to secure an existing debt by way of a mortgage. Any of the circumstances
laid out in Article 1602, not the concurrence nor an overwhelming number of the enumerated
circumstances, is sufficient to support the conclusion that a contract of sale is in fact an equitable
mortgage.11 In several cases, we have not hesitated to declare a purported contract of sale to be
an equitable mortgage based solely on one of the enumerated circumstances under Article
1602.12 This approach follows the rule that when doubt exists on the nature of the parties’
transaction, the law favors the least transmission of property rights.13

Indicators of equitable mortgage

In the present case, three attendant circumstances indicate that the purported sale was in fact an
equitable mortgage. First, the Sps. Culla retained possession of the property. Second, Rockville
kept a part of the purchase price. Third, as previously discussed, Rockville continued to give the
Sps. Culla extensions on the period to repay their loan even after the parties allegedly agreed to a
dacion en pago. These circumstances, coupled with the clear and unequivocal testimonies of
Oligario and Bernardita that the purpose of the Deed of Absolute Sale was merely to guarantee
their loan, clearly reveal the parties’ true intention to execute an equitable mortgage and not a
contract of sale.

That a contract where the vendor remains in physical possession of the land, as lessee or
otherwise, is an equitable mortgage is well-settled.14 The reason for this rule lies in the legal
reality that in a contract of sale, the legal title to the property is immediately transferred to the
vendee; retention by the vendor of the possession of the property is inconsistent with the
vendee’s acquisition of ownership under a true sale.15 It discloses, in the alleged vendee, a lack of
interest in the property that belies the truthfulness of the sale.16

According to Rockville, it took possession of the property, albeit constructively and not through
actual occupation. Rockville contends, too, that its possession of the title to the property and its
subsequent attempt to register the property in its name are clear indicators of its intent to enforce
the contract of sale.

We cannot agree with these positions. In the first place, the Sps. Culla retained actual possession
of the property and this was never disputed. Rockville itself admits this in its petition, but claims
in justification that since the property is contiguous to the site of the Sps. Culla’s family home, it
would have been impossible for Rockville to obtain actual possession of the property. Regardless
of where the property is located, however, if the transaction had really been a sale as Rockville
claimed, it should have asserted its rights for the immediate delivery and possession of the lot
instead of allowing the Sps. Culla to freely stay in the premises. Its failure to do so suggests that
Rockville did not truly intend to enforce the contract of sale.

Moreover, we observe that while Rockville did take steps to register the property in its name, it
did so more than two years after the Deed of Absolute Sale was executed, and only after
Oligario’s continued failure to pay the P2,000,000.00 loan.

In addition, Rockville admitted that it never paid the P1,500,000.00 balance to the Sps. Culla. As
found by the RTC, while Rockville claims that it deposited this amount with May Bank of
Malaysia and notified Oligario of the deposit, no evidence was presented to support this claim.
Besides, even if this contention had been true, the deposit in a foreign bank was neither a valid
tender of payment nor an effective consignation.1avvphi1

Lastly, the numerous extensions granted by Rockville to Oligario to pay his debt after the
execution of the Deed of Sale convince us that the parties never intended to enter into a contract
of sale; instead, the intent was merely to secure the payment of Oligario’s loan.

All told, we see no reason to depart from the findings and conclusions of both the trial court and
the Court of Appeals.

WHEREFORE, premises considered, we DENY the petition for lack of merit; the assailed
Decision dated October 9, 2002 in CA G.R. SP No. 66070 is thus AFFIRMED. Costs against the
petitioner.

SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:
 CONCHITA CARPIO-MORALES
Associate Justice
Acting Chairperson

CONSUELO YNARES-SANTIAGO MARIANO C. DEL CASTILLO

Associate Justice Associate Justice

ROBERTO A. ABAD
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.

CONCHITA CARPIO-MORALES
Associate Justice
Acting Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Acting Division Chairperson’s
Attestation, it is hereby certified that the conclusions in the above Decision were reached in
consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice