AURORA P. CAPULONG, BENJAMIN P. CAPULONG, CESAR P. CAPULONG, DOLORES P. CAPULONG, ESTER P. CAPULONG, FERNANDO P. CAPULONG, FELICITAS P. CAPULONG, IRMA P. CAPULONG, JAIME P. CAPU…

This is a petition for review of the decision of the respondent Court of
Appeals, now Intermediate Appellate Court, affirming a judgment of the
Court of First Instance of Bulacan dismissing the complaint for
annulment of usurious contracts, declaration of the deed of sale as
equitable mortgage, reconveyance, and damages filed by Jovita Ponce Vda.
de Capulong and ordering her to pay respondents the sum of P2,000.00 as
attorney’s fees and to pay the costs of the suit.

The background facts which led to the filing of this petition are summarized by the respondent Court of Appeals as follows:

“Between November 19, 1964 and May 28, 1965, plaintiff-appellant
Jovita Ponce Vda. de Capulong obtained a series of loans in varied
amounts from defendant-appellee Dr. Delfin Tolentino (Exhibits A to J),
the aggregate of which amounted to P16,250.00 (Exh. J). The loans were
secured by a con­tinuing mortgage on plaintiff’s 950.3 square meter
titled property in barrio Concepcion, municipality of Baliuag, Bulacan
province.

“Capulong failed to liquidate the mortgage upon maturity. Dr.
Tolentino accepted her proposal to sell to him the mortgaged property.
On February 18, 1967, the notarial document of absolute sale (Exh. K)
now assailed as an equitable mortgage, was executed by Capulong whereby
title to the property in question was transferred to Dr. Tolentino for
P21,300.00, which amount was P1,000.00 more than Capulong’s mortgage
indebtedness. In another document (Exh. L) Capulong was given an option
to purchase the property on or before November 20, 1967, for the same
price of P21,300.00, Capulong failed to exercise the option in due time.
Her efforts to secure an extension of time proved futile. On January
28, 1968, Dr. Tolentino sold (Exh. O) the land in question to defendants
spouses Ricardo G. Tolentino and Pilar de Joya in whose names it is now
titled (Exh. 14).”

On February 1, 1968, Jovita Ponce Vda. de Capulong,
predecessor-in-interest of the petitioners, filed the complaint for
annulment of usurious contracts, declara­tion of the deed of sale as an
equitable mortgage, reconveyance, and damages with the Court of First
Instance of Bulacan against respondent Delfin G. Tolentino. The case was
docketed as Civil Case No. 3617-M.

On February 6, 1968, Mrs. Capulong filed an amended complaint alleging
inter alia that the subject property was sold by Delfin Tolentino to the
spouses Ricardo G. Tolentino and Pilar de Joya under a fictitious deed
of sale. She also impleaded said spouses as additional defendants.

On September 9, 1968, the private respondents filed their answer
alleging inter alia that the transactions adverted to are not usurious
and that the deed of absolute sale between them and Jovita Capulong is a
true and valid sale representing the real intention of the parties.

On March 20, 1975, the trial court dismissed the complaint on the ground
that Jovita Capulong was not able to present concrete evidence to prove
her claim of usury and that the testimonies of the defendant Delfin
Tolentino and his witness Fermin Samson were more credible and weighty
than those of the plaintiff and her witness. The dispositive portion of
the decision reads:

“WHEREFORE, premises considered, the complaint is hereby dismissed
for total lack of merit, and the plaintiff is hereby ordered to pay the
defendant the sum of P2,000.00 by way of attorney’s fees, and to pay
the cost of this suit.”

Jovita Ponce Vda. de Capulong appealed to the then Court of Appeals. On
May 9, 1978 while the appeal was pending, the appellant died, and on
motion of her counsel, she was properly substituted by her children and
heirs, the petitioners herein.

On January 27, 1981, the respondent court affirmed in toto the decision of the trial court.

On March 10, 1981, the petitioners filed a motion for reconsideration of
said decision but this was denied in a resolution dated July 16, 1982.

For the grant of this petition, petitioners assign the following errors:

A. THE FORMULA USED BY THE COURT OF APPEALS IN COMPUTING THE 25%
INTEREST ON THE PRINCIPAL OF THE VARIOUS LOANS IN QUESTION IS NOT
SUPPORTED BY THE EVIDENCE NOR ADMITTED BY THE PARTIES.

B. IN GIVING WEIGHT TO THE FINDING OF THE TRIAL COURT ON THE
CREDIBILITY OF THE WITNESSES FOR PRIVATE RESPONDENTS, THE COURT OF
APPEALS MISAPPLIED THE RULE ON THE WEIGHT AND SUFFICIENCY OF EVIDENCE.

C. IN CONCLUDING THAT THE ‘OPTION TO REPURCHASE’ IN THIS CASE IS NOT
A SOUND BASIS TO FIND THE DEED OF SALE IN QUESTION AS AN EQUITABLE
MORTGAGE, THE COURT OF APPEALS ERRONEOUSLY APPLIED THE RULING IN THE
CASE OF VILLARICA V. COURT OF APPEALS.

The main point for consideration in this petition is whether or not the
“Pagbibilihang Tuluyan Ng Bakuran” should be treated as an equitable
mortgage and not the absolute sale it purports to be.

Petitioners submit that the questioned deed of sale is not what it
appears to be but that it is an equitable mortgage because the facts and
evidence show it was merely resorted to by the parties in
circumven­tion of the usury law. Private respondents on the other hand
allege that Exhibits 11 and 12 do not embody a sale with repurchase
agreement, or “sale con pacto de retro.” They state that
Exhibit 11 is a deed of absolute sale while Exhibit 12, in essence,
simply grants the appel­lant an “option to buy.”

We find the stand of the private respondents to be without merit, and
accordingly reverse the decision elevated to us for review. Articles
1602 and 1604 of the Civil Code state:

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 laws. (Italics supplied)

xxx                xxx                   xxx

ART. 1604. The provisions of article 1602 shall also apply to a contract purporting to be an absolute sale.

Where any of the above circumstances defined in Article 1602 is present,
a contract of sale with right to repurchase is presumed to be an
equitable mortgage. As stated by the Code Commission which drafted the
new Civil Code, 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. (Report of the Code Commission, p. 63)

The respondent court allowed itself to be misled by our ruling in Villarica v. Court of Appeals, (26 SCRA 189), that:

“The right of repurchase is not a right granted the vendor by the
vendee in a subsequent instrument, but is a right reserved by the vendor
in the same instrument of sale as one of the stipulations of the
contract. Once the instrument of absolute sale is executed, the vendor
can no longer reserve the right to repurchase, and any right thereafter
granted the vendor by the vendee in a separate instrument cannot be a
right of repurchase but some other right like the option to buy in the
instant case. x x x”

In Villarica, the deed of absolute sale was executed on May 19,
1951. The consideration was P35,000.00. It was registered on May 25,
1951. On that same day, May 25, 1951, the vendees therein executed
another public instrument where they granted the vendors an option to
buy the same property within a period of one year for the price of
P37,750.00. The ruling was based on a particular set of facts.

There is one important factor that differentiates the Villarica
case from the instant petition. The document granting the vendors
therein an option to buy back the property was executed six (6) days
after the execution of the deed of sale whereas in the instant case the
option to buy was embodied in a document executed at the same time that
the questioned deed of sale was executed. The option to buy in the Villarica
case was interpreted to be only an afterthought. On the other hand, the
intent of the parties to circumvent the provision discouraging pacto de retro
sales is very apparent in the instant case. The two contracts, the deed
of sale and the document embodying the option to repurchase were
prepared, signed, and notarized on the same day. The respondent court
should have seen through a transparent effort to make it appear that the
two transactions were not intimately related but distinct and separate
as in the Villarica case. This should have put the court on
guard considering the other circumstances of the case from which no
other conclusion could be derived except that the deed of absolute sale
and the document giving the right to repurchase were, in fact, only one
trans­action of sale pacto de retro which must be construed as
an equitable mortgage. Another factor which the respondent court failed
to note is the sale of the property to the vendee a retro’s brother,
thus interposing a supposed innocent third party between the parties to
the contract. This second sale was squarely raised in the amended
complaint. The records show that this sale and the issuance of a new
Transfer Certificate of Title on the same date as the sale cannot be
deemed to be bona fide.

Looking into the reason for the inclusion of Article 1602 in the New Civil Code, this Court held in Santos v. Duata (14 SCRA 1041) that:

“Article 1602 is a new provision in the Civil Code designed
primarily to curtail the evils brought about by contracts of sale with
right of repurchase, such as the circumvention of the usury law and pactum commissorium.
It particularly envisions contracts of sale with right to repurchase
where 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. (See report of the Code Commission, pp. 61-63.)

The records show that over a six-month period, the mother of the
petitioners borrowed money on no less than ten separate occasions from
Delfin G. Tolentino. The evidence presented by Mrs. Jovita Ponce Vda. de
Capulong alleges that when her total borrowings of P13,000.00 were
added to what she claims were usurious interests amount­ing to
P3,250.00, the kited total of P16,250.00 was made to appear as the
P21,300.00 purchase price for the lot when actually no money outside of
the ten earlier loan transactions was exchanged between the parties.

The added fact that Jovita Capulong remained in actual physical
possession of the land and enjoyed the fruits thereof confirms the real
intention of the parties to secure the payment of the loans with the
land as security. The records show that the private respondents waited
for the period of redemption to expire before taking possession of the
land. Had the petitioners’ mother really executed an absolute sale in
favor of respondent Delfin Tolentino, the land which is the object of
the transaction should have been delivered to Tolentino and he would
have assumed immediate possession after the execution of the questioned
deed of sale.

The deed of sale taken together with the companion “right to redeem”
contract is only an equitable mortgage. Therefore, private respondent
Delfin G. Tolentino could not validly sell the land to his brother
Ricardo Tolentino and the latter’s wife, Pilar de Joya.

Apart from failing to appreciate the fact that the vendee a retro used
two separate documents of sale and option to repurchase to formalize
what was basically only one transaction of sale pacto de retro, thus simulating a Villarica v. Court of Appeals situation, the respondent court also relied too much on the trial court’s failure to find usurious transactions.

The petitioners’ mother summarized the loan transactions as follows:

Date Obtained	Actual Loan	25% Interest	Amounts per Documents
Nov. 20, 1964	P5,000.00	P1,250.00	P6,250.00
(Exh. “A”)
Dec. 5, 1964	600.00	150.00	750.00
(Exh. “B”)
Dec. 21, 1964	1,000.00	250.00	1,250.00
(Exh. “C”)
Jan. 6, 1965	1,500.00	375.00	1,875.00
(Exh. “D”)
Jan. 19, 1965	1,500.00	375.00	1,875.00
(Exh. “E”)
Feb. 18, 1965	1,000.00	250.00	1,250.00
(Exh. “F”)
April 17, 1965	600.00	150.00	750.00
(Exh. “G”)
April 19, 1965	800.00	200.00	1,000.00
(Exh. “H”)
May 21, 1965	500.00	125.00	625.00
(Exh. “I”)
May 28, 1965	500.00	125.00	625.00
(Exh. “J”)
Total:	P13,000.00	P3,250.00	P16,250.00

According to Mrs. Capulong, she actually borrowed only P13,000.00 but
the contracts evidencing the transaction make the total appear as
P16,250.00. When the last contract, the one now sought to be set aside,
was executed, the loans and interests were allegedly made to appear as a
P21,300.00 purchase price, including a P1,000.00 amount given to her on
February 18, 1967, when actually no additional money was given when the
deed of sale was granted.

The respondent court sustained the trial court’s conclusions and reasoned out:

“There is no merit in this appeal. Appellant’s theory, that the
purchase of her land in the amount of P21,300.00 is the sum total of her
principal loan allegedly amounting to only P13,000.00 and the usurious
interest thereon at 25% per annum, minus the sum of P1,500.00 which she
paid to Dr. Tolentino on November 20, 1965, in concept of interest (Vide
p. 10, appellant’s brief), does not find support from a mathematical
computation based on said theory. Thus from November 20, 1964 until
February 18, 1967, when the controverted sale was consummated, a period
of 2 years and 3 months, the interest due on P13,000.00 amounted to
P7,412.49. This added to the principal of P13,000.00 would give a result
of P20,412.49. The balance after deducting therefrom the sum of
P1,500.00 would be P18,912.49 only, or P2,387.51 less the sum of
P21,300.00.”

The petitioners now allege that the Court of Appeals adopted a
computation formula in consonance with the respondents’ theory which is
not supported by the evidence in the records but which is only a theory.
The petitioners offer their own theory, thus:

“Upon the other hand, in adopting the formula now being
questioned, the respondent Court of Appeals disregarded a basic rule
followed in the computation of interest charges. It also disregarded
what petitioners offered was a formula of computation used by the
parties in accounting for the considera­tion of the sale of P21,300.00.
In the formula adopted by the respondent Court, the 12% per annum was
computed on the principal loan on a straight basis without taking into
account the fact that the said amount of loan was obtained on different
dates.

“Anent petitioners’ suggested formula which was disregarded by
respondent Court of Appeals, the same consisted in the following: The
actual loan received by Jovita Ponce Vda. de Capulong from Delfin
Tolentino of P13,000.00 would command an interest of P6,500.00 computed
at the rate of 25% per annum for 2 years disre­garding the 3 months from
November 20, 1965 to February 18, 1967. The loan of P16,250.00 which is
the total of the face value of the various loan contracts would command
an interest of P3,250.00 computed at the stipulated rate of 12% per
annum for 2 years and 3 months. The said amounts of interest totalling
P9,750.00 added to the actual amount of loan received of P13,000.00 less
the payment of P1,500.00 on November 20, 1965 in the concept of
interest, yields a total of P21,250.00 or P50.00 less than the
consideration of P21,300.00 stated in the deed of absolute sale. The
result using this formula compared to that in the formula adopted by
respondent Court of Appeals suggests that it was error to have
disregarded this formula in favor of the other.”

Actually, the determination of whether or not there were usurious
transactions in this case depends on whom to believe – the borrowers or
the lenders? We see no need to disturb the trial court’s findings on the
credi­bility of the witnesses. Even if no usury was involved, and this
is by no means certain or established to our satisfaction, there is
enough evidence in the records to prove that a contract of loan with
mortgage was made to appear in paper as an absolute sale with a
companion option to buy.

WHEREFORE, the judgment of the respondent court is hereby REVERSED and
SET ASIDE. The deed of sale executed by Jovita Ponce de Capulong in
favor of Dr. Delfin G. Tolentino is declared as an equitable mortgage.
The petitioners are ordered to pay their mortgage indebtedness in the
amount of P21,300.00 to the private respondents with legal rate of
interest from the time of the expiration of the redemption period on
November 20, 1967 until it is fully paid. The deed of sale executed by
Delfin Tolentino in favor of Ricardo Tolentino and Pilar de Joya, being
null and void, is also CANCELLED.
SO ORDERED.

Teehankee, (Chairman), Plana, Relova, and De La Fuente, JJ., concur.

Melencio-Herrera, J., on official leave.