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…

Capulong versus Tolentino

The Case

This is the story of a widow, Jovita Ponce Vda. de Capulong, who borrowed money again and again from Dr. Delfin Tolentino, and who later found her land dressed up in paper as an absolute sale. She sued to annul the usurious contracts, to have the deed of sale declared an equitable mortgage, to recover the property, and to claim damages. The case matters because it is the Supreme Court's clearest lesson on Articles 1602 and 1604 of the Civil Code: when the real intention of the parties is to secure a debt, the Court will look past the label the parties gave their contract and treat it as an equitable mortgage.

Procedural History

Jovita Capulong filed her complaint with the Court of First Instance of Bulacan, and later amended it to implead the spouses Ricardo Tolentino and Pilar de Joya, to whom the land had been sold. The trial court dismissed the complaint for lack of merit, found no concrete evidence of usury, preferred the testimony of Dr. Tolentino and his witness, and ordered the plaintiff to pay 2,000 pesos in attorney's fees plus costs. She appealed to the Court of Appeals. While the appeal was pending, she died, and her children, the petitioners here, were substituted in her place. The Court of Appeals affirmed the trial court in full. A motion for reconsideration was denied. The petitioners then came to the Supreme Court on a petition for review.

Facts

Between November 1964 and May 1965, Jovita Capulong obtained a series of loans from Dr. Delfin Tolentino, on no less than ten separate occasions, secured by a continuing mortgage on her 950 square meter titled lot in Baliuag, Bulacan. According to her evidence, she actually received 13,000 pesos, but the contracts made the total appear as 16,250 pesos because of interests of 3,250 pesos. She failed to pay upon maturity.

Dr. Tolentino accepted her proposal to sell him the mortgaged property. On February 18, 1967, a notarial deed of absolute sale was executed, transferring the land to him for 21,300 pesos, which was 1,000 pesos more than her mortgage indebtedness. On the very same day, in a separate document, she was given an option to buy the property back on or before November 20, 1967, for the same price of 21,300 pesos. She failed to exercise the option, and her pleas for an extension proved futile.

On January 28, 1968, Dr. Tolentino sold the land to his brother Ricardo Tolentino and the latter's wife, Pilar de Joya, in whose names it was titled. Throughout all of this, Jovita Capulong remained in actual physical possession of the land and enjoyed its fruits; the buyers waited for the redemption period to expire before taking possession.

Issues

• Whether or not the deed of absolute sale, taken together with the companion document granting the option to repurchase, should be treated as an equitable mortgage rather than the absolute sale it purports to be.
• Whether or not the sale by Delfin Tolentino to his brother Ricardo Tolentino and the latter's wife is valid.

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 that supplies the presumption, and the Court finds several of its circumstances present here.

Article 1604 of the Civil Code provides:

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

This is the bridge that lets the Court apply the presumption to a deed that calls itself an absolute sale.

Ruling

On the first issue, the Court ruled for the petitioners and reversed. The private respondents argued that the first document was an absolute sale and the second merely an option to buy, relying on the Villarica ruling that a right of repurchase must be reserved in the same instrument of sale. The Court distinguished Villarica: there, the option document was executed six days after the deed of sale and was an afterthought; here, the deed of sale and the document embodying the option to repurchase were prepared, signed, and notarized on the same day. The Court saw a transparent effort to make one transaction appear as two, and held that the two documents were in fact one transaction of sale with pacto de retro, which must be construed as an equitable mortgage.

The Court also relied on the circumstances of Article 1602. Jovita Capulong remained in actual physical possession of the land and enjoyed its fruits, which confirms that the real intention was to secure the loans with the land. The Court noted that the buyers waited for the redemption period to expire before taking possession, whereas a true absolute sale would have meant immediate delivery. The Court added that even if no usury was involved, and this was by no means certain, there was enough evidence that a contract of loan with mortgage was made to appear in paper as an absolute sale with a companion option to buy.

On the second issue, the Court held that because the deed of sale was only an equitable mortgage, Delfin Tolentino could not validly sell the land to his brother and the brother's wife. The sale to them was void, and the Court noted that interposing a supposed innocent third party between the parties to the contract could not be deemed bona fide.

Doctrine

First, under Article 1602, when any of the enumerated circumstances is present, a contract of sale with right to repurchase is presumed to be an equitable mortgage. Second, under Article 1604, that presumption applies with equal force to a contract purporting to be an absolute sale. Third, the true test is the real intention of the parties: where the pretended purchase price is in truth money loaned, and the sale is drawn up only to secure its payment, the contract is an equitable mortgage. Fourth, the presence of the vendor in possession, enjoying the fruits, is a strong badge of a mortgage rather than a sale. Fifth, a deed of sale and a companion option to repurchase executed on the same day are one transaction, not two, and the Villarica ruling does not apply where the option is not a mere afterthought.

Disposition

The Court reversed and set aside the judgment of the Court of Appeals, declared the deed of sale an equitable mortgage, ordered the petitioners to pay their mortgage indebtedness of 21,300 pesos with legal interest from the expiration of the redemption period until fully paid, and cancelled the void sale to Ricardo Tolentino and Pilar de Joya.

Remember This

Memorize this line: a deed of absolute sale and a same-day option to repurchase are one transaction of sale with pacto de retro, and where the vendor stays in possession, that transaction is an equitable mortgage under Articles 1602 and 1604. Examiners use this case to test the badges of equitable mortgage and to distinguish it from the Villarica ruling on options granted in a separate, later instrument.