OSCAR D. RAMOS AND LUZ AGUDO, PETITIONERS, VS. HON. COURT OF APPEALS, ADELAIDA RAMOS AND LAZARO E. MENESES, RESPONDENTS.

The instant petition for review on certiorari impugns the
decision of the Court of Appeals dated October 7, 1975,^[1]
which affirmed in toto the decision of
the Court of First Instance of Tarlac in Civil Case
No. 4168, entitled “Adelaida Ramos, et al. vs.
Oscar D. Ramos, et al.,” holding that the contracts between the parties
are not ventas con pacto
de retro but are equitable mortgages.

Sometime in January, 1959, private respondent Adelaida
Ramos borrowed from her brother, petitioner Oscar D. Ramos, the amounts of
P5,000.00 and P9,000.00 in connection with her business transaction with one Flor Ramiro, Fred Naboa and Atty.
Ruperto Sarandi involving
the recovery of a parcel of land in Tenejeros, Malabon.  The said
amount was used to finance the trip to Hawaii of Ramiro, Naboa
and Atty. Sarandi. 
As security for said loan, private respondent Adelaida
Ramos executed in favor of petitioners two (2) deeds of conditional sale dated
May 27, 1959 and August 30, 1959, of her rights, shares, interests and
participation respectively over Lot No. 4033 covered by Original Certificate of
Title No. 5125 registered in the name of their parents, Valente
Ramos and Margarita Denoga, now deceased,^[2]
and Lot No. 4221 covered by Transfer Certificate of Title No. 10788 then
registered in the names of Socorro Ramos, Josefina Ramos and Adelaida Ramos,^[3]
said properties being of the Cadastral Survey of Paniqui,
Tarlac.

Upon the failure of said private respondent as vendor a retro
to exercise her right of repurchase within the redemption period, aforenamed petitioner filed a petition for consolidation
and approval of the conditional sale of Lot No. 4033 in Special Proceedings No.
5174, entitled “Intestate Estate of the late Margarita Denoga,”^[4]
and a petition for approval of the pacto de
retro sale of Lot No. 4221 in the former Court of First Instance of Tarlac acting as a cadastral court.^[5]
On January 22, 1960, the
said probate court issued an order with the following disposition:

“WHEREFORE, the deed of CONDITIONAL SALE executed on May 27,
1959, by Adelaida Ramos in favor of spouses Oscar D.
Ramos and Luz Agudo, conveying to the latter by way
of pacto de retro sale whatever rights and interests
the former may have in Lot No. 4033 of the Cadastral Survey of Paniqui, which deed of conditional sale is known as
Document No. 14, Page 26, Book VI, Series of 1959, of the notarial
register of Notary Public Jose P. Sibal, is hereby
approved.”^[6]

The cadastral Court also issued a similar order dated April 18, 1960, the dispositive portion of which reads:

“WHEREFORE, by way of granting the petition, the Court orders
the consolidation of ownership and dominion in petitioners?spouses Oscar
D. Ramos and Luz Agudo over the rights, shares and
interests of Adelaida Ramos in Lot No. 4221 of the
Cadastral Survey of Paniqui, Tarlac,
which the latter sold to the former under a pacto de
retro sale executed in a public instrument known as Document No. 22, Page 28,
Book No. VI, Series of 1959, of the Notarial Registry
of Notary Public Jose P. Sibal but which she failed
to repurchase within the period specified in said document.”^[7]

Private respondents had been and remained in possession of these
properties until sometime in 1964 when petitioners took possession thereof.

On February 28, 1968,
private respondents filed Civil Case No. 4168 with the then Court of First
Instance of Tarlac for declaration of nullity of
orders, reformation of instrument, recovery of possession with preliminary
injunction and damages.  The complaint
therein alleged that the deeds of conditional sale, dated May 27, 1959 and August 30, 1959, are mere mortgages and were vitiated by
misrepresentation, fraud and undue influence and that the orders dated January 22, 1960 and April 18, 1960, respectively issued
by the probate and cadastral courts, were null and void for lack of
jurisdiction.  Petitioners, in their
answer to the complaint, specifically deny the allegations of fraud and
misrepresentation and interposed as defense the fact that the questioned
conditional sales of May 27, 1959 and August 30, 1959 were voluntarily executed
by private respondent Adelaida Ramos and truly
expressed the intention of the parties; that the action, if any, has long
prescribed; that the questioned orders of January 22, 1960 and April 18, 1960,
approving the consolidation of ownership of the lands in question in favor of petitioners
were within the jurisdiction of the lower court, in its capacity as a probate
court insofar as Lot No. 4033 is concerned, and acting as a cadastral court
with respect to Lot No. 4221; and that said lands subject of the conditional
sales were in custodia legis
in connection with the settlement of the properties of the late Margarita Denoga, the predecessor in interest of both petitioners and
private respondents.

On January 7, 1970, the court below issued a pre-trial order to
the effect that petitioners admit the genuineness and due execution of the
promissory notes marked as Exhibits “F” and “F-1” and that
the principal triable issue is whether or not the
documents purporting to be deeds of conditional sale, marked as Exhibits
“B,” “B-1” and “G” were in fact intended to be
equitable mortgages.^[8]
In its order dated February 17, 1971,
the trial court also declared: 
“Both parties agreed and manifested in open court the principal
obligation in the transaction reflected in Exhibits ‘B’, and ‘B-1’ and ‘G’ is
one of loan.  The parties differ,
however, on the nature of the security described therein.”^[9]

On May 17, 1971,
the court a quo rendered a decision the decretal
part of which reads:

“WHEREFORE, judgment is hereby rendered:

1) Denying defendants’ motion to dismiss of February 23, 1970;

2) Declaring Exhibits ‘B’, ‘B-1’ and ‘G’ as loan transaction
secured by real estate mortgages;

3) Annulling and setting aside Exhibits ‘D’, ‘D-1′, ‘I’, ‘I-1′ and
‘I-2’;

4) Ordering
plaintiffs, jointly and severally to pay (within ninety [90] days from receipt
of a copy of this judgment) defendants the sum of P5,000.00 specified in
Exhibit ‘B’, with interest thereon at the legal rate from November 28, 1959
until full payment together with the sum of P9,308.00 specified in Exhibit ‘G’
with interest thereon at the legal rate from December 1, 1959 until full
payment, and in default of such payment, let the properties mortgaged under
Exhibits ‘B’, ‘B-1′ and ‘G’ be sold to realize the mortgage debt and costs; and

5) Dismissing defendants’ counter-claim.

With costs against defendants.”^[10]

On June 14, 1971,
petitioners appealed said decision to the Court of Appeals which, on October 7, 1975, affirmed in all
respects the judgment of the trial court. 
Petitioners’ motion for reconsideration of said decision was denied on November 27, 1975.^[11]

On January 8, 1976,
petitioners filed the petition at bar anchored on the following assignment of
errors:

“1.  The Hon. Court of
Appeals erred in not applying the correct provisions of law interpreting the
conditional sales dated May 27, 1959 and August 30, 1959, Exhibits ‘B’ and ‘G’,
as equitable mortgages.

“2.  That as a consequence of
its ruling that the conditional sales, Exhibits ‘B’ and ‘G’, are equitable
mortgages, the Hon. Court of Appeals erred in ordering the reformation of the
same.

“3.  The Honorable Court of
Appeals erred in holding that the order dated January 22, 1960, Exhibit C or 2,
and the order dated April 18, 1960, Exhibit H or 6, issued by the probate court
in Sp. Proc. No. 5174 and by the cadastral court in G.L.R.O. Rec. No. 395,
respectively, are null and void for lack of jurisdiction.

“4.  The Hon. Court of
Appeals erred in not applying the applicable provisions of law on the
prescription of action and in not dismissing the complaint filed in the lower
court.^[12]

We find the petition devoid of merit.

Article 1602 of the Civil Code provides:

“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.”

The Court of Appeals, in holding that the two (2) deeds
purporting to be pacto de retro
sale contracts are equitable mortgages, relied on the following factual
findings of the trial court, to wit:

“Several undisputed circumstances persuade this Court (that)
the questioned deeds should be construed as equitable mortgages as contemplated
in Article 1602 of the Civil Code, namely: 
(1) plaintiff vendor remained in possession until 1964 of the properties
she allegedly sold in 1959 to defendants; (2) the sums representing the alleged
purchase price were actually advanced to plaintiff by way of loans, as
expressly admitted by the parties at the hearing of February 17, 1971,
reflected in an Order of the same date; and (3) the properties allegedly
purchased by defendant Oscar Ramos and his wife have never been declared for
taxation purposes in their names. 
Exhibits K, K-1, L and L-1.”^[13]

Even if we indulge the petitioners in their contention that they
are justified in not taking possession of the lots considering that what were
allegedly sold to them were only the rights, shares, interests and
participation of private respondent Adelaida Ramos in
the said lots which were under administration,^[14]
however, such fact will not justify a reversal of the conclusion reached by
respondent court that the purported deeds of sale con pacto de retro are equitable
mortgages.  Such a conclusion is
buttressed by the other circumstances catalogued by respondent court especially
the undisputed fact that the two deeds were executed by reason of the loan
extended by petitioner Oscar Ramos to private respondent Adelaida
Ramos and that the purchase price stated therein was the amount of the loan
itself.

The above-stated circumstances are more than sufficient to show
that the true intention of the parties is that the transaction shall secure the
payment of said debt and, therefore, shall be presumed to be an equitable
mortgage under Paragraph 6 of Article 1602 hereinbefore quoted.  Settled is the rule that to create the presumption
enunciated by Article 1602, the existence of one circumstance is enough.^[15]
The said article expressly provides therefor “in
any of the following cases,” hence the existence of any of the
circumstances enumerated therein, not a concurrence nor an overwhelming number
of such circumstances, suffices to give rise to the presumption that the
contract with the right of repurchase is an equitable mortgage.  As aptly stated by the Court of Appeals:

“Thus, it may be fairly inferred that the real intention of
the parties is that the transactions in question were entered into to secure
the payment of the loan and not to sell the property (Article 1602, Civil
Code).  Under Article 1603, of the Civil
Code it is provided that:  ‘In case of
doubt, a contract purporting to be a sale with right to repurchase shall be
construed as an equitable mortgage’.  In
this case, we have no doubt that the transaction between the parties is that of
a loan secured by said properties by way of mortgage.  Hence, we find that Exhibits B and G do not
reflect the true and real intention of the parties and should accordingly be
reformed and construed as equitable mortgages.”^[16]

Equally puerile is the other contention of petitioners that
respondent court erred in not applying the exclusionary parol
evidence rule in ascertaining the true intendment of the contracting
parties.  The present case falls squarely
under one of the exceptions to said rule as provided in then Section 7 of Rule
130, thus:

x        x          x

(a) Where a mistake or imperfection of the writing or its failure
to express the true intent and agreement of the parties, or the validity of the
agreement is put in issue by the pleadings;”^[17]

x        x          x

Moreover, it is a well entrenched principle in the interpretation
of contracts that if the terms thereof are clear and leave no doubt as to the
intention of the contracting parties the literal meaning of the stipulation
shall control but when the words appear to be contrary to the evident intention
of the parties, the latter shall prevail over the former.^[18]

The admission of parol testimony to
prove that a deed, absolute in form, was in fact given and accepted as a
mortgage does not violate the rule against the admission of oral evidence to
vary or contradict the terms of a written instrument.^[19]
Sales with a right to repurchase, as defined by the Civil Code, are not
favored.  We will not construe
instruments to be sales with a right to repurchase, with the stringent and
onerous effects which follow, unless the terms of the document and the
surrounding circumstances require it. 
Whenever, under the terms of the writing, any other construction can
fairly and reasonably be made, such construction will be adopted and the
contract will be construed as a mere loan unless the court can see that, if
enforced according to its terms, it is not an unconscionable one.^[20]

On the faces thereof, the contracts purport to be sales with pacto de retro; however, since the
same were actually executed in consideration of the aforesaid loans said
contracts are indubitably equitable mortgages. 
The rule is firmly settled that whenever it is clearly shown that a deed
of sale with pacto de retro,
regular on its face, is given as security for a loan, it must be regarded as an
equitable mortgage.^[21]

With respect to the orders dated January 22, 1960 and April 18,
1960, issued by the court below acting as a probate court and cadastral court,
respectively, the same could not preclude the institution of the case now under
review.

A reading of the order of the probate court will show that it is
merely an approval of the deed of conditional sale dated May 27, 1959 executed by petitioner Adelaida Ramos in favor of petitioners.  There is nothing in said order providing for
the consolidation of ownership over the lots allegedly sold to petitioners nor
was the issue of the validity of said contract discussed or resolved
therein.  “To give approval”
means in its essential and most obvious meaning, to confirm, ratify, sanction
or consent to some act or thing done by another.^[22]
The approval of the probate court of the conditional sale is not a conclusive
determination of the intrinsic or extrinsic validity of the contract but a mere
recognition of the right of private respondent Adelaida
Ramos as an heir, to dispose of her rights and interests over her inheritance
even before partition.^[23]
As held in Duran, et al., vs. Duran,^[24]
the approval by the settlement court of the assignment pendente
lite, made by one heir in favor of the other
during the course of the settlement proceedings, is not deemed final until the
estate is closed and said order can still be vacated, hence the assigning heir
remains an interested person in the proceeding even after said approval.

Moreover, the probate jurisdiction of the former court of first instance
or the present regional trial court relates only to matters having to do with
the settlement of the estate and probate of wills of deceased persons, and the
appointment and removal of administrators, executors, guardians and trustees.  Subject to settled exceptions not present in
this case, the law does not extend the jurisdiction of a probate court to the
determination of questions of ownership that arise during the proceeding.  The parties concerned may choose to bring a
separate action as a matter of convenience in the preparation or presentation
of evidence.^[25]
Obviously, the approval by the probate court of the conditional sale was
without prejudice to the filing of the proper action for consolidation of
ownership and/or reformation of instrument in the proper court within the
statutory period of prescription.

The same jurisdictional flaw obtains in the order of
consolidation issued by the cadastral court. 
The court of first instance or the regional trial court, acting as a
cadastral court, acts with limited competence. 
It has no jurisdiction to take cognizance of an action for consolidation
of ownership, much less to issue an order to that effect; such action must have
been filed in the former court of first instance, now in the regional trial court,
in the exercise of its general jurisdiction. 
That remedy, and the procedure therefor, is
now governed by Rule 64 of the Rules of Court as a special civil action
cognizable by the regional trial court in the exercise of original general
jurisdiction.

Antecedent thereto, Article 1607 of the Civil Code provided for
consolidation as follows:

“In case of real property, the consolidation of ownership in
the vendee by virtue of the failure of the vendor to comply with the provisions
of article 1616 shall not be recorded in the Registry of Property without a
judicial order, after the vendor has been duly heard.”

Hence in Crisologo,
et al. vs. Centeno,
et al.,^[26]
we ruled that said Article 1607 contemplates a contentious proceeding wherein
the vendor a retro must be named respondent in the caption and
title of the petition for consolidation of ownership and duly summoned and
heard.  An order granting the vendee’s
petition for consolidation of ownership, without the vendor a retro
being named as respondent, summoned and heard, is a patent nullity for want of
jurisdiction of the court over the person of the latter.

The questioned order of consolidation issued by the cadastral
court, being void for lack of jurisdiction, is in contemplation of law
non-existent and may be wholly disregarded. 
Such judgment may be assailed any time, either directly or collaterally,
by means of a separate action or by resisting such judgment in any action or
proceeding whenever it is invoked.^[27]
It is not necessary to take any step to vacate or avoid a void judgment; it may
simply be ignored.^[28]

On the issue of prescription, in addition to what has been said,
the present case, having been filed on February
28, 1960, approximately seven (7) years from the execution of the
questioned deeds, was seasonably instituted. 
The prescriptive period for actions based upon a written contract and
for reformation is ten (10) years under Article 1144 of the Civil Code.  Such right to reformation is expressly
recognized in Article 1365 of the same code.^[29]

Article 1602 of the Civil Code is designed primarily to curtail
the evils brought about by contracts of sale with right of repurchase, such as
the circumvention of the laws against usury and pactum
commissorium.^[30]
In the present case before us, to rule otherwise would contravene the
legislative intent to accord the vendor a retro maximum
safeguards for the protection of his legal rights under the true agreement of
the parties.  The judicial experience in
cases of this nature and the rationale for the remedial legislation are worth
reiterating, considering that such nefarious practices still persist:

“It must be admitted that there are some cases where the
parties really intend a sale with right to repurchase.  Although such cases are rare, still the
freedom of contract must be maintained and respected.  Therefore, the contract under consideration
is preserved, but with adequate safeguards and restrictions.

“One of the gravest problems that must be solved is that
raised by the contract of sale with right of repurchase or pacto
de retro.  The evils
arising from this contract have festered like a sore on the body politic.  x x x

x        x          x

“It is a matter of common knowledge that in practically all of
the so-called contracts of sale with right of repurchase, the real intention of
the parties is that the pretended purchase-price is money loaned, and in order
to secure the payment of the loan a contract purporting to be a sale with pacto de retro is drawn up.  It is thus that the provisions contained in
articles 1859 and 1858 of the present Civil Code which respectively prohibit
the creditor from appropriating the things given in pledge or mortgage and
ordering that said things be sold or alienated when the principal obligation
becomes due, are circumvented.

“Furthermore, it is well-known that the practice in these
so-called contracts of sale with pacto de
retro is to draw up another contract purporting to be a lease of the
property to the supposed vendor, who pays in money or in crops a so-called
rent.  It is, however, no secret to
anyone that this simulated rent is in truth and in fact interest on the money
loaned.  In many instances, the interest
is usurious.  Thus, the usury law is also
circumvented.

“It is high time these transgressions of the law were
stopped.  It is believed by the
Commission that the plan submitted for the solution of the problem will meet
with the approval of an enlightened public opinion, and in general, of everyone
moved by a sense of justice.

“During the deliberations of the Commission the question arose
as to whether the contract of purchase with pacto
de retro should be abolished and forbidden.  On first impression, this should be done, but
there is every reason to fear that in such a case the usurious money-lenders
would demand of the borrowers that, although the real agreement is one of loan
secured with a mortgage, the instrument to be signed should purport to be an
absolute sale of the property involved. 
Should this happen, the problem would become aggravated.  Moreover, it must be admitted that there are
some cases where the parties really intend a sale with right to
repurchase.  Although such cases are
rare, still the freedom of contract must be maintained and respected.  Therefore, the contract under consideration
is preserved in the Project of Civil Code, but with adequate safeguards and
restrictions.”^[31]

WHEREFORE, the instant petition is hereby DENIED and the
assailed decision of the Court of Appeals is hereby AFFIRMED.

SO ORDERED.

Melencio-Herrera, (Chairman), Paras, Padilla, and Sarmiento, JJ., concur.

^[1]
CA-G.R. No. 49345-R.  Penned by Justice
Emilio A. Gancayco and concurred in by Associate
Justices Ricardo C. Puno and B.S. de la Fuente, Rollo, 28-37.

^[2]
Folder of Exhibits, 1-6.

^[3] Ibid.,
11-13, 15.

^[4] Ibid.,
7-8.

^[5] Ibid.,
16-17.

^[6] Rollo, 7-8.

^[7] Ibid.,
8.

^[8] Rollo, 25; Record on Appeal, 64-67.

^[9] Ibid.,
id., 132.

^[10]
Folder of Original Record on Appeal, 103-104.

^[11] Rollo, 48.

^[12] Ibid.,
105; Brief for Petitioners, 8-9.

^[13] Rollo, 32-33.

^[14]
A co-owner has the right to freely sell and dispose of his undivided interest
but no right to sell a divided, definite part of the real estate owned in
common.  The transferee does not acquire
any specific portion of the whole until partition.  (Lopez vs. Ilustre,
5 Phil. 567 [1906]; Ramos Silos, et al. vs. Ramos, et al., 97 Phil. 263
[1955]).

^[15] Santos
vs. Duata, et al., 14 SCRA 1041 (1965); Capulong, et al. vs. Court of Appeals, et al., 130
SCRA 245 (1984).

^[16] Rollo, 33-34.

^[17]
Formerly, Sec. 22, Rule 123, 1940 Rules of Court; now reproduced in Sec. 9,
Rule 130, 1989 Revised Rules on Evidence.

^[18]
Art. 1370, Civil Code; Labasan, et al. vs. Lacuesta, et al., 86 SCRA 16 (1978); Balatero
vs. Intermediate Appellate Court, et al., 154 SCRA 530 (1987).

^[19]
Ignacio vs. Chua Hong, et al., 52 Phil. 940 (1929); Aguinaldo
vs. Esteban, et al., 135 SCRA 645 (1985); Serrano vs. Court of
Appeals, et al., 139 SCRA 179 (1985).

^[20]
Padilla vs. Linsangan, 19 Phil. 65 (1911); Aquino vs. Deala, 63 Phil.
582 (1936).

^[21]
Ignacio vs. Chua Hong, supra; Capulong
vs. Court of Appeals, et al., ante.

^[22]
State vs. Rhein, 127 N.W., 1079, 1081; 149 Iowa,
76; 3A Words and Phrases, Permanent Edition, 500.

^[23]
Arts. 493 and 1088, Civil Code; Jakosalem vs. Rafols, et al., 73 Phil. 628; De Borja,
et al. vs. Vda. de Borja,
46 SCRA 755 (1972); Go Ong vs. Court of
Appeals, 154 SCRA 271 (1987).

^[24]
20 SCRA 279 (1967).

^[25] Vda. de Mañalac vs. Ocampo, et al., 73 Phil. 661 (1942).

^[26]
26 SCRA 48 (1948).

^[27] Banco Español-Filipino vs.
Palanca, 37 Phil. 921 (1918); Gomez vs. Concepcion, etc., et al., 47 Phil.
717 (1925); Ang Lam vs. Rosillosa,
et al., 86 Phil. 447 (1950).

^[28]
49 C.J.S. 879-880.

^[29] Conde, et al. vs. Cuenca, et al, 99 Phil. 1056
(1956); Seno vs. Mangubat, 156 SCRA 113
(1987).

^[30] Balatero vs. Intermediate Appellate Court, et al., ante.

^[31]
Report of the Code Commission, 61-64.