BERNICE LEGASPI, PETITIONER, VS. SPOUSES RITA AND FRANCISCO ONG, RESPONDENTS.

Legaspi versus Ong

The Case

This is a petition for review on certiorari brought by Bernice Legaspi against the spouses Rita and Francisco Ong. Legaspi asks the Supreme Court to annul the decision of the Court of Appeals which had reversed the trial court and declared that the deed of sale with right to repurchase she signed with the Ong spouses was in truth an equitable mortgage. The case matters because it is the Court's cleanest statement that the label parties give their contract does not control its nature, and that the presence of even one badge under Article 1602 of the Civil Code suffices to convert an apparent pacto de retro sale into a mere security for a loan.

Procedural History

In October 1990, Legaspi filed a petition for consolidation of ownership before the Regional Trial Court of Manila, Branch 39, praying that the title in the name of the Permanent Savings and Loan Bank be cancelled and a new one issued in her name. The Ong spouses answered, alleging that the deed was actually an equitable mortgage with a stipulation amounting to pactum commissorium, and set up a compulsory counterclaim. On July 6, 1993, the trial court ruled for Legaspi, ordering consolidation of title in her name and awarding attorney's fees, while dismissing the counterclaim. The spouses' motion for reconsideration was denied.

Meanwhile, Legaspi had also filed an unlawful detainer case before the Metropolitan Trial Court of Manila, Branch 19, which decided against the spouses in September 1993, ordering them to vacate and to pay monthly compensation, attorney's fees, and costs. Possession was delivered to Legaspi's father by the sheriff in October 1993, and the spouses' appeal to the Regional Trial Court was later dismissed as moot and academic.

The Ong spouses appealed the consolidation case to the Court of Appeals. The appellate court allowed execution pending appeal, and the Register of Deeds cancelled the bank's title and issued a new one in Legaspi's name. On July 30, 1998, the Court of Appeals reversed the trial court, declared the transaction an equitable mortgage, dismissed Legaspi's complaint, and ordered the spouses to redeem the property while ordering Legaspi to pay monthly rent, attorney's fees, and costs. Legaspi's motion for reconsideration was denied in January 2000, so she came to the Supreme Court by petition for review on certiorari.

Facts

The Ong spouses owned a parcel of land with a two-storey house on Matienza Street, San Miguel, Manila. They mortgaged it to the Permanent Savings and Loan Bank to secure a loan. When they failed to pay, the bank foreclosed and bought the property at public auction. The spouses did not redeem within the redemption period, so title was consolidated in the bank's name in November 1988, although the spouses continued to occupy the premises.

When the bank was ordered liquidated by the Monetary Board, its assets had to be disposed of, and the spouses, as original owners, were given first priority to buy back the property for 2,655,000 pesos on or before June 13, 1989. Having no money, they approached Stephen Hong, the father of Bernice Legaspi and a friend of Francisco Ong, for help. The parties reduced their agreement to a Deed of Sale with Right to Repurchase, drafted by Legaspi's counsel and signed on June 13, 1989. Under its terms, Legaspi would pay the bank 2,655,000 pesos for and in behalf of the vendors, who would have four months, extendible by one month upon request, to repurchase, without interest; if they failed to repurchase, interest at four percent per month would be charged from execution of the document; and should they fail to comply with the terms, the property would become that of the vendee.

On that same last day to redeem, Legaspi paid the bank with her own check, and a deed of absolute sale was executed between the bank's liquidator and the spouses as original owners. Legaspi received the documents days later. She then wrote the spouses reminding them that the four-month period would expire on October 12, 1989. She later extended the period to November 28, 1989 upon their request, and even in April 1990 demanded payment within five days. The spouses never redeemed. Legaspi filed the consolidation case, and the spouses countered that the deed was really an equitable mortgage with a pactum commissorium clause.

Issues

• Whether or not a deed denominated as a sale with right to repurchase may be construed as an equitable mortgage despite its nomenclature.
• Whether or not the circumstances of this transaction bring it within the presumptions of Article 1602 of the Civil Code.
• Whether or not the fact that title had been consolidated in the bank's name, and that Legaspi paid the bank directly, prevents a finding of equitable mortgage.

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: (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.

This is the provision the Court applies, and the presence of any single circumstance listed is enough to raise the presumption.

Article 1603 of the Civil Code provides:

Article 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.

This supplies the rule of preference: doubt is resolved in favor of the lesser transmission of rights that an equitable mortgage entails.

Ruling

On the first issue, the Court held that the nomenclature parties use does not determine a contract's nature. What controls is the intent of the parties, shown not necessarily by the terminology of the contract but by all the surrounding circumstances: their relative situations at the time, their attitudes, acts, conduct, and declarations, the negotiations leading to the deed, and generally all pertinent facts that fix the real nature of their design. Even a deed styled as a pacto de retro may be disproved by parol evidence where the nature of the agreement is placed in issue by the pleadings. When in doubt, courts construe a purported sale as an equitable mortgage.

On the second issue, the Court agreed with the Court of Appeals that four badges were present: the vendors remained in possession after the execution of the contract; the price of 2,655,000 pesos was grossly inadequate against a property said to command 16 million pesos; the original redemption period was extended more than once; and the deed stipulated interest. The Court stressed that the presence of even one circumstance under Article 1602 suffices. It recalled the Code Commission's observation that in practically all so-called sales with right of repurchase, the real intention is that the pretended purchase price is money loaned, secured by a deed drawn up as a pacto de retro sale.

On the third issue, the Court rejected Legaspi's argument that Article 1602 could not apply because title had already been consolidated in the bank and she had paid the bank directly, so that no debt existed between the parties. The Court was not persuaded. Although title had been consolidated in the bank as early as 1988, the property was bought back by the spouses as original owners, and it was their transaction with Legaspi that the Court examined for its true character.

Doctrine

A contract is judged by its substance, not its title. The name the parties give it does not determine its nature; the intent of the parties, drawn from all the surrounding circumstances, does. Under Article 1602 of the Civil Code, a contract purporting to be a sale with right to repurchase is presumed to be an equitable mortgage when any one of the enumerated badges is present, among them inadequate price, the vendor's continued possession, an extension of the redemption period, and a stipulation for interest. Under Article 1603, doubt is resolved in favor of equitable mortgage, because it involves a lesser transmission of rights over the property. A party may show the true character of the deed by parol evidence, provided the nature of the agreement is placed in issue by the pleadings.

Disposition

The Supreme Court denied Legaspi's petition and affirmed the Court of Appeals, holding the transaction an equitable mortgage and sustaining the order for the spouses to redeem and for Legaspi to account for rents, attorney's fees, and costs.

Remember This

Memorize this line: the presence of even one circumstance under Article 1602 is sufficient basis to declare a sale with right to repurchase an equitable mortgage. Examiners use this case to test the badges of equitable mortgage, the rule that nomenclature does not control, and the preference for the lesser transmission of rights under Article 1603.