PABLO IRAO, JR., PETITIONER-APPELLEE, VS. THE HEIRS OF EUSEBIO MORTEL, REPRESENTED BY WENINA MORTEL VILLANUEVA GANORAN, RESPONDENTS-APPELLANTS.

Irao versus Heirs of Eusebio Mortel

The Case

This is the case of Irao versus the Heirs of Eusebio Mortel. Pablo Irao, Junior, the buyer in a deed of sale with right to repurchase, asked the court to consolidate ownership in his name after the sellers failed to repurchase within the agreed period. The heirs of Eusebio Mortel, represented by Wenina Mortel Villanueva Ganoran, resisted, insisting that the document, whatever its title, was really an equitable mortgage securing a loan. The case matters because it shows how the Court looks past the label the parties give a contract and asks one question: did they really intend a sale, or did they intend security for a debt? It is a staple of the law on equitable mortgage under Article 1602 of the Civil Code.

Procedural History

Pablo Irao, Junior filed a petition for consolidation of ownership before the Regional Trial Court, Branch 82, in Odiongan, Romblon. After pre-trial and trial on the merits, the trial court ruled in his favor, holding that none of the circumstances in Article 1602 of the Civil Code described the case, and it consolidated ownership of the lot in his name. The heirs appealed. The appeal was brought to the Supreme Court, which resolved it by reversing the trial court.

Facts

The subject is a residential lot of 198 square meters in Barangay Ligaya, Odiongan, Romblon, covered by a tax declaration in the name of the Heirs of Eusebio Mortel. In March 2005, Wenina Ganoran, accompanied by her aunt, approached Pablo Irao, Junior, for money. She needed it to redeem the lot from a Mr. Caesar Fiel, who had earlier filed his own petition for consolidation of ownership over the same property. She sought 400,000 pesos, payable in three years.

Irao told her, in the local language, that if she could give him papers to guarantee the borrowing, that is when he would give the money. Following that instruction, she had documents prepared: a Deed of Sale with Right of Repurchase, a special power of attorney, and a tax declaration. She then received a loan computation from Unlad Savings for a principal of 400,000 pesos over three years at 18 percent interest per year, with total interest of 116,574.89 pesos, which added to the principal gave 516,574.89 pesos. That figure became the price stated in the deed. She received the principal less an additional interest of 2,500 pesos a month, and later, when payments were not made, she was asked to sign a promissory note for 60,000 pesos, termed rentals.

Using the borrowed money, the heirs settled their debt with Mr. Fiel. When the right to repurchase expired in March 2008 without repurchase, Irao filed the petition for consolidation of ownership. At trial, it appeared that Irao never inspected the lot, either before or after the sale, and that he was not looking to buy property when Ganoran approached him.

Issues

• Whether or not the trial court erred in granting the petition for consolidation of ownership.
• Whether or not the deed of sale with right to repurchase is actually an equitable mortgage.

Applicable Provisions

Article 1602 of the Civil Code provides:

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 law.

This provision supplies the presumption that decides the case: the presence of any one circumstance makes the contract an equitable mortgage, regardless of how the parties named it.

Ruling

On the first issue, the Court held that the trial court erred in granting consolidation. On the second issue, it held that the deed was indeed an equitable mortgage. The Court stressed that Article 1602 uses the words "in any of the following cases," so the existence of any one circumstance suffices. Here, the sixth paragraph applies: the real intention of the parties was that the transaction secure the payment of a debt. The Court relied on Irao's own testimony that Ganoran came to him for money to redeem the property from Mr. Fiel. It noted the Unlad Savings loan computation, which became the basis of the amount released, and the fact that Irao never inspected the lot and was not interested in buying property.

The Court also quoted its earlier ruling in Tolentino versus the Court of Appeals, which held that nothing in Article 1602 indicates it applies only in the absence of an express agreement, and that the provision has been applied despite written contracts. Because the contract was an equitable mortgage, the heirs remain the lawful owners and are entitled to possession.

Doctrine

First, a contract is judged by its real intention, not by its title. No matter how the parties designate it, if any circumstance in Article 1602 is present, it is presumed to be an equitable mortgage. Second, the presence of any one circumstance is enough, because the provision speaks of "any of the following cases." Third, the sixth paragraph is the catch-all: where it may be fairly inferred that the real intention is to secure a debt, the contract is an equitable mortgage. Fourth, Article 1602 was designed to curtail the evils of sales with right of repurchase, such as circumvention of the usury law and pactum commissorium, the automatic forfeiture of the property to the creditor. A Bar answer should state the presumption, identify the circumstance present, and tie it to the parties' real intent.

Disposition

The appeal was granted. The trial court's decision was reversed and set aside, the deed of sale with right to repurchase was declared an equitable mortgage, and the petition for consolidation of title was denied.

Remember This

Memorize this line: the presence of any single circumstance in Article 1602 makes the contract an equitable mortgage, whatever the parties call it. Examiners use this case to test whether you can look past the title of a deed and apply the sixth paragraph's catch-all to protect a debtor's property.