IN RE: PETITION FOR CONSOLIDATION OF TITLE IN THE VENDEES OF A HOUSE AND THE RIGHTS TO A LOT.  MARIA BAUTISTA VDA. DE REYES, ET AL., VENDEES-PETITIONERS-APPELLEES, RODOLFO LANUZ…

Reyes versus Lanuza

The Case

This is a petition for the consolidation of ownership of a house and leasehold rights over a lot, filed by the vendees in a deed of sale with right to repurchase, Maria Bautista Vda. de Reyes and Aurelia Reyes Navarro, against the vendors Rodolfo Lanuza and his wife Belen, with Martin de Leon intervening as mortgagee. The case matters because the Supreme Court, speaking through Justice Regala, looked past the label the parties gave their contract and held that a deed of sale with right to repurchase may in truth be an equitable mortgage, with consequences that reach the rights of third persons who registered their own security later.

Procedural History

Reyes and Navarro filed the petition for consolidation of ownership in the Court of First Instance of Manila. De Leon, the mortgagee, intervened and moved to dismiss on the ground that the unrecorded sale with right to repurchase could not affect his rights as a third party. The parties submitted a stipulation of facts, and the trial court ruled in favor of Reyes and Navarro, confirming their ownership of the house and the leasehold right. De Leon appealed directly to the Supreme Court, assigning three errors: that the sale was void from the beginning for lack of the wife's consent, that the deed was really an equitable mortgage and could not support a petition for consolidation, and that the unrecorded sale could not affect third parties.

Facts

Rodolfo Lanuza and his wife Belen owned a two-story house of strong materials built on a lot in the Maria Guizon Subdivision in Tondo, Manila, which they leased from the Consolidated Asiatic Company. On January 12, 1961, Rodolfo executed a document entitled Deed of Sale with Right to Repurchase, conveying to Maria Bautista Vda. de Reyes and Aurelia Reyes Navarro the house, together with the leasehold rights to the lot, a television set, and a refrigerator, for 3,000 pesos. The deed reserved to the vendor the right to repurchase the same properties for the same amount, without interest, within three months, and provided that if he failed to pay, his right to repurchase would be forfeited and ownership would automatically pass to the vendees without court intervention. Belen did not sign the deed at its execution.

When the original period expired, the parties extended it to July 12, 1961 by an annotation on the left margin of the instrument, and this time Belen signed her name below the annotation. Meanwhile, on October 4, 1961, the Lanuzas mortgaged the same house to Martin de Leon to secure 2,720 pesos, and the mortgage was recorded in the Office of the Register of Deeds of Manila on November 8, 1961 under Act Number 3344.

When the Lanuzas failed to pay, De Leon filed a petition for extra-judicial foreclosure on October 5, 1962. Reyes and Navarro then filed their petition for consolidation of ownership on October 19, 1962, on the ground that the period of redemption had expired on July 12, 1961 without repurchase. On October 23, 1962, the house was sold to De Leon as the only bidder at the sheriff's sale, and he immediately took possession and intervened in the case. Throughout, the Lanuzas remained in possession of the properties they were supposed to have sold.

Issues

• Whether or not a conveyance of conjugal real property made by the husband without the consent of his wife is void from the beginning or merely voidable and susceptible of ratification.
• Whether or not the deed of sale with right to repurchase is in reality an equitable mortgage and therefore cannot be the basis of a petition for consolidation of ownership.
• Whether or not the unrecorded deed of the vendees may prevail over the later registered mortgage of De Leon.

Applicable Provisions

Article 1602 of the Civil Code provides:

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

This presumption, read with the other circumstances of the case, is what led the Court to recharacterize the deed as a mortgage.

Article 2088 of the Civil Code provides:

Article 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

The automatic-transfer clause in the deed is the odious pactum commissorium that this article forbids, and its presence betrayed an intention to mortgage rather than to sell.

Article 2125 of the Civil Code provides:

Article 2125. The mortgagee may demand the registration of the mortgage, and the registrar shall record it in the registry of deeds. The mortgage, once registered, shall be preferred over any other mortgage or encumbrance subsequently recorded.

This is the provision that gave De Leon's registered mortgage priority over the earlier but unrecorded equitable mortgage of Reyes and Navarro.

Ruling

On the first issue, the Court agreed with the trial court that a conveyance of conjugal real property made by the husband without the consent of his wife is merely voidable, since the wife is given ten years within which to bring an action for annulment. As such it can be ratified, and Belen ratified it when she gave her conformity to the extension of the period of redemption by signing the annotation. The Court added that actions for the annulment of voidable contracts can be brought only by those bound under them, so that if anyone could have questioned the sale on this ground, it was the wife alone.

On the second issue, the Court parted from the trial court. It held that the deed was in reality an equitable mortgage, pointing to the gross inadequacy of the price, since for 3,000 pesos the vendors parted with a new house of strong materials alone assessed at 4,000 pesos, plus the leasehold right, the television set, and the refrigerator. It noted the non-transmission of ownership, because the deed made ownership vest in the vendees only upon the vendors' failure to pay, which is contrary to a true sale with right to repurchase where the vendee acquires ownership immediately subject only to redemption. The Court quoted the deed:

If I fail to pay said amount of 3,000 pesos within the stipulated period of three months, my right to repurchase the said properties shall be forfeited and the ownership thereto automatically pass to Mrs. Maria Bautista Vda. de Reyes x x x without any Court intervention and they can take possession of the same.

This, the Court said, is an odious pactum commissorium, a nullity under Article 2088, and its insertion is an avowal of an intention to mortgage rather than to sell. The Court also noted the delay in filing the petition for consolidation, brought only after De Leon had sought foreclosure, while the Lanuzas remained in possession.

On the third issue, the Court held that between the unrecorded deed of Reyes and Navarro, now held to be an equitable mortgage, and the registered mortgage of De Leon, the latter must be preferred. Preference of mortgage credits is determined by priority of registration, following the maxim prior tempore potior jure, he who is first in time is preferred in right. Under Article 2125, the equitable mortgage, while valid between the immediate parties, cannot prevail over the registered mortgage of De Leon.

Doctrine

A conveyance of conjugal real property by the husband without the wife's consent is voidable, not void, and may be ratified by her; only the wife may bring the action for annulment. A contract styled as a sale with right to repurchase is construed according to its true nature, and where the price is grossly inadequate, ownership does not pass to the vendee until the vendor fails to pay, and the deed carries a pactum commissorium, the contract is an equitable mortgage under Article 1602. As between an unrecorded equitable mortgage and a later registered mortgage, the registered mortgage is preferred under Article 2125, following the maxim prior tempore potior jure.

Disposition

The Supreme Court reversed the decision appealed from and dismissed the petition for consolidation of ownership, with costs against Reyes and Navarro.

Remember This

The single line to memorize is that the true nature of a contract is determined by its substance, not its label, and a pactum commissorium reveals a mortgage disguised as a sale. Examiners use this case to test the presumptions of equitable mortgage under Article 1602 and the priority of a registered mortgage over an earlier unrecorded one.