ALEXANDER T. CASTRO, PLAINTIFF-APPELLANT, VS. LUIS ESCUTIN, ADMINISTRATOR IN SPECIAL PROCEEDING NO. V-2033, DEFENDANT-APPELLEE.

This is an appeal from the decision of the Court of First
Instance, Branch I, of Capiz in Civil Case No. V-2681, for reco­very of property, consisting of 30 parcels of land
and of unpaid rentals for their cultivation.

Plaintiff-appellant Alexander Castro is the adopted son of the
late Father Eduardo N. Castro, parish priest of Tanjay,
Negros Oriental. 
Defendant-appellee Luis Escutin
is one of the heirs, and the administrator of the testate estate, of the late Nicanor Escutin, who died in
1955.  Upon Nicanor’s death, Special Proceedings No. V-2033 over
his testate estate was filed in the Court of First Instance, Branch II.  In the special proceedings, defendant-appellee Luis Escutin, in his
capacity as Administrator, returned an inventory; plaintiff-appellant Alexander
Castro filed a motion to exclude the subject 30 parcels of land from this
inventory on the ground that they are his properties.  Before this motion could be resolved in
Branch II, the complaint in this case was filed in Branch I.  Accordingly, the presiding judge in Branch II
entered an order in Special Proceedings No. V-2033, holding
in abeyance his reso­lution of the motion, pending final determination of the civil action in Branch I.  The decision rendered on 7 July 1966 by the court a quo dismissed
the complaint, with costs against the plaintiff.  Hence, this appeal.

The Supreme Court took cognizance of the appeal because the value
of the property involved is in excess of TWO HUNDRED THOUSAND PESOS (P200, 000.
00), Phi­lippine currency.  Plaintiff-appellant
Alexander T. Castro executed a subscribed verification stating that in his complaint, he claims ownership of the 30 parcels of land which
his predecessor-in-interest, the late Father Castro, allegedly purchased
in the sum of SIXTY NINE THOUSAND THREE HUNDRED PESOS (P69, 300. 00).  He further stated that the 30 lots contain a
total area of 141 hectares more or less, most of which are ricelands
very near the poblacion of Dao, Capiz, and the rest of which are lands in the poblacion itself. 
He also stated that at the rate of P1,400.00
per hectare, the ricelands near the poblacion of Dao are worth at least P182, 000.
00.  This amount, added to the amount
representing the value of the lands in the poblacion,
total TWO HUNDRED FOUR THOUSAND PESOS (P204, 000. 00), an aggregate value which
he considers to be conservative.  (Record on Appeal, pp. 127-130).

It appears that the late Nicanor Escutin was a sugar planter who owned Hacienda Escutin in Lacaron, Dao, Capiz.  For financing, he turned to the Asturias
Sugar Central Inc. at Dumalag, Capiz,
which extended him a running account. 
Unfor­tunately, financial reverses visited the hacienda, provoking from Asturias
a threat to foreclose the pending mortgage (See Exhibit 2).  This was no idle threat, for Asturias
had previously foreclosed the mortgages on the haciendas of two other
millers.  If the threat was carried out,
foreclosure would mean losing not only the hacienda, but also the other Escutin properties by means of a deficiency judgment.  Nicanor decided to
seek the advice of a close family friend and lawyer, Gervasio
Diaz.  He recommended that they should
simulate an encumbrance on Nicanor’s properties not
directly involved with Asturias,
to stave off attachment or execution for the satisfaction of a possible
deficiency judgment.

In this simulated encumbrance, the role of creditor was played by
Father Eduardo N. Castro, Nicanor’s close boyhood
friend and schoolmate.  Father Castro was
godfather to Nicanor’s eldest son, the defendant-appellee.  Father Castro
also solem­nized the second marriage of Nicanor.  He stayed with Nicanor
when he was assigned as parish priest of Dao.

Gervasio prepared a deed of mortgage on
Nicanor’s 30 parcels of land in favor of Father
Castro.  This contract, styled “Escritura de Prestamo con Hipoteca,” (Exhibit A) appears to have been executed
on 5 June 1932 in Ayuquitan (now Amlan) Negros Oriental, “for the consideration of a loan of
P63,000.00, with interest at 10% per annum,” to
be paid on or before 30 December 1944.  The contract was accompanied by a
counter-receipt (contra recibo) by the mortgagee, acknowledging
payment of the redemption price stipulated in the contract of mortgage (See
Exhibit 13).  After the mortgage contract
and counter-receipt were signed, Father Castro sent the mortgage contract to
Notary Public Pedro Bandoquillo for acknowledgment.

Nicanor’s financial problems did not
lighten; in fact they deteriorated, and Asturias
required him to sign a promissory note. 
At this occasion, the threat of foreclosure was reiterated, and this
prompted Nicanor to seek further legal advice from Gervacio.  To fortify
Nicanor’s position, Gervacio
drafted a deed of sale, styled “Escritura de Venta Definitiva” (Exhibit
B).  It appears to have been executed on
27 July 1933 at Tanjay, Negros
Oriental, and stipulated that Nicanor sold, conveyed,
and trans­ferred all the parcels of land described in Exhibit A in favor of
Father Castro for the sum of P63,000.00 plus
P6,300.00, representing the unpaid interest of 10% per annum, as stipulated in
the aforementioned Exhibit A, or at the total price of P69,300.00.  The deed of sale had a built-in agreement of
lease in favor of Nicanor at P1,000.00
yearly for all of the same pro­perties described in Exhibit A.  Nicanor and Father
Castro signed the deed of sale with the built-in lease agreement, and the
corres­ponding counter-receipt.

Defendant-appellee introduced evidence
to show that despite the deed of sale, Nicanor
continued to possess and enjoy, and exercise acts of ownership over, all the
properties.  After Nicanor’s
death, these properties were partitioned and distributed to his heirs who, at
the time this civil action was filed in 1963, had been individually in
possession of their respective shares since 1956 (Exhibits 8, 8-A, 8-B and 8-C).  Defendant-appellee’s
evidence also shows that the properties remained registered in Nicanor’s name.  The
tax declarations were in his name; he paid the taxes in his own capacity, and not as agent for another.  After his death, his children paid the taxes.  Neither Nicanor nor
his surviving heirs ever paid the interest stipulated in the contract of
mortgage, nor the yearly rental stipulated in the deed of sale.

At the pre-trial conference, the parties admitted the genuineness
and due execution, both of the contract of mortgage,
and of the deed of definite sale with the built-in lease contract.  Therefore, the only issue left was whether
the two contracts, which are onerous in character, were executed for
consideration and therefore valid, as claimed by plaintiff-appellant; or were
simulated and therefore void, as claimed by defendant-appellee.  This remains the issue on appeal.

To resolve the issue, we start with the legal presumption that
there was a sufficient consideration for a written contract.  (Rules of Court, Rule 131,
Section 5, paragraph r).  At the
outset, then, the regular presumption weighs the case in favor of
plaintiff-appellant, and imposes the burden of proof on the defendant-appellee, since the burden of proof lies on the party who
would be defeated if no evidence were given on either side.  (Rules of Court, Rule 131, Section 1).  However, granting that even private
transactions are to be presumed fair and regular, the presumption is only prima facie, and must yield to evidence.  (Genato
v. de Lorenzo, L-24983, 20 May 1968; 23 SCRA 618.)

The cumulative effect of the evidence presented by the defendant-appellee is to identify certain badges of fraud that attach
themselves to both contracts under consideration.  Neither Nicanor nor
his successors-in-interest ever paid interest or rentals, pursuant to the
provisions of the two instruments.  Their
possession of all the lands was peaceful, adverse, and continuous, and they
exclusively enjoyed its fruits.  The
certificate of title covering the lands remained in Nicanor’s
name, and it was he who declared them for taxation purposes and paid the taxes,
a duty assumed by his heirs after his death.

More startling to the dispassionate mind is the incongruence
between the income supposed to be earned by the
property under the deed of mortgage on the one hand, and the income supposed to
be earned under the deed of sale on the other hand.  Under the deed of mortgage, Father Castro
apparently was to earn P6,300.00 yearly, representing
the interest at 10% per annum on the principal loan.  But under the deed of sale, Father Castro
apparently was to earn only P1,000.00 yearly,
represent­ing the payment for the lease. 
It thus appears that when Father Castro extended a loan secured by the
mortgage, he stood to earn more by way of interest payments, than when he
bought the land outright and then leased it out.  Such an obvious discrepancy would not escape
the notice of a reasonable man, and can only be explained as a grave symptom of
simulation.  Moreover, the late Father
Castro took no step whatsoever to assume ownership over the land, such as
demanding payment for interest or rentals. 
This failure to take exclusive possession of the property allegedly sold
to him is a clear badge of fraud [See Oria vs.
McMicking, 21 Phil. 243 (1912)].

The plaintiff-appellant implicitly admits as much, for in the
lower court, he argued that this case should be subsumed under the principle of
In pari delicto non oritur action (Record on Appeal, page
121).  However, to the general rule that
when two persons are equally at fault, the law will not relieve them, the
Supreme Court has laid down an exception, by deciding that the rule does not
apply to an inexistent contract [Gonzales vs. Trinidad, 67 Phil. 682 (1939)].  Moreover, the intent to defraud, which was
the animus of the two simulated contracts, was never effectuated.  For the finances of the
Hacienda Escutin subse­quently took a turn for the
better, and Asturias abandoned the threat to foreclose the mortgage on the hacienda.

Another token of fraud is the relationship between Nicanor and Father Castro, the ostensible
mortgagee-vendee.  It has been observed
that fraud is generally accompanied by a secret trust, and that, as in this
case, the ostensible debtor selects a person in whom he can repose trust and
confidence.  [See Ford v. Chelf, 112 Vd. 98, 102, 70 S.E.
500, cited in Garcia et al. v. Bituin, etc. et al.,
CA-G.R. No. 12297-R, 55 O.G.
1785 (1958)].  Nicanor
and Father Castro were bosom friends with a long history of trust and
intimacy.  The element of trust is
further accentuated by the execution between them, in addition to the two
instruments in question, of two secret documents known as the counter-receipt (contra
recibo).

Thus, in their totality, defendant-appellee’s
proof is sufficiently weighty to overthrow the legal presumption of suffi­cient
consideration.  Badges of fraud, when
clear and unmistakable, will serve to destroy the camouflage of validity.  Indeed, we find overwhelming proof that the
instruments in question were without consideration and fraudulent, executed
merely to lend color of authenticity to what was calculated as Nicanor’s would-be status of insolvency.  Since both the mortgage and the sale were
fictitious and simulated, they were void ab initio [New Civil Code, Art. 1409.  See Mapalo
v. Mapalo, L-21489 & L-21628, 19 May 1966; 17 SCRA
114; Vda. de Rodriguez v.
Rodriguez, L-23002, 31 July 1967;
20 SCRA 908). 
In the con­templation of law, it is as if they never were, with the
result that the lands covered by the instruments remain under the ownership of
the alleged mortgagor-vendor, Nicanor Escutin, and his successors-in-interest.

WHEREFORE, the judgment of dismissal is hereby
affirmed.  Without
costs.

SO ORDERED.

Antonio, (Acting Chairman), Aquino, Santos,
and De Castro*, JJ., concur.

Barredo and
Concepcion, Jr., JJ., on leave.

* Justice Pacifico
de Castro has been designated to sit with the Second Division.