The Supreme Court, in this case, clarified the distinction between a valid sale and an equitable mortgage disguised as a sale. The Court ruled that a deed of absolute sale will be upheld as a true sale unless proven otherwise. This means the party claiming that a sale was, in fact, a loan secured by a mortgage, carries a heavy burden to present clear and convincing evidence to that effect. Such evidence must demonstrate that the parties intended the property to serve as collateral for a debt, not to transfer ownership outright.

Unmasking the Intent: Was it a Sale or a Loan in Disguise?

In 1991, Romualdo and Emerlinda Anselmo allegedly sold their land and garments factory to Spouses William and Rosemarie Hernandez for P2,500,000. After the sale was registered, the Anselmos refused to vacate the property, leading the Hernandezes to file a suit for specific performance. The Anselmos claimed the sale was a mere loan agreement secured by an equitable mortgage, designed to circumvent laws against pactum commissorium (where the creditor automatically owns the collateral upon the debtor’s failure to pay). The trial court upheld the sale, a decision affirmed by the Court of Appeals, prompting the Anselmos to appeal to the Supreme Court.

The Supreme Court emphasized the principle of contractual autonomy, which states that a contract is the law between the parties, and its validity should be upheld unless there is a clear showing of defects such as fraud, mistake, or undue influence. In this case, the Anselmos argued that the Deed of Absolute Sale was not a true reflection of their agreement with the Hernandezes, and was in fact an equitable mortgage securing a loan.

Building on this principle, the Court reiterated that for a contract to be deemed an equitable mortgage, the following conditions must be met:

• The parties entered into what appears to be a contract of sale.
• Their intention was to secure an existing debt by way of mortgage.

The burden of proof lies with the party asserting that the contract was an equitable mortgage. The Anselmos attempted to demonstrate that the circumstances surrounding the sale indicated their intent to treat the property as collateral, not to transfer ownership. They highlighted the prior loan transactions with Boston Equity Resources, Inc., where William Hernandez served as president, and argued that the sale was a mere continuation of their debt arrangement. The Court, however, found that while the circumstances raised questions, the Anselmos failed to provide sufficient evidence to overcome the presumption that the Deed of Absolute Sale reflected the parties’ true intent.

Moreover, the Supreme Court pointed out that the Anselmos did not specifically seek the annulment or reformation of the Deed of Absolute Sale in their pleadings. Their defense was limited to arguing that the sale was void for lack of consideration, a claim the lower courts found unsubstantiated. This procedural lapse further weakened their case.

In their “Answer with Compulsory Counterclaim,” the defendants patently failed to allege and pray for the annulment of the said Deed of Absolute Sale as a counterclaim, but limited their allegations and prayer to actual, moral and exemplary damages.

The Court acknowledged discrepancies in the financial details of the transaction, such as the difference between the stated consideration in the deed and the actual amount received by the Anselmos. However, it deemed these discrepancies insufficient to invalidate the sale, especially given the Anselmos’ admission that they received a substantial portion of the agreed-upon consideration. This decision underscores the importance of clear and consistent evidence when challenging the validity of a written contract. Litigants must present compelling proof that the parties intended something other than what is explicitly stated in the agreement.

Finally, with respect to the award of damages by the lower courts, the Supreme Court held that moral damages, exemplary damages, attorney’s fees and litigation costs were not warranted in this case as the respondent failed to sufficiently show a legal basis for such claims.

FAQs

What was the key issue in this case?	The key issue was whether the Deed of Absolute Sale between the Anselmos and Hernandezes was a true sale or an equitable mortgage. The Anselmos claimed the sale was merely a loan agreement with the property serving as collateral.
What is an equitable mortgage?	An equitable mortgage exists when a contract appears to be a sale, but the true intention of the parties is to secure an existing debt with the property. The debtor retains ownership but pledges the property as security.
Who has the burden of proving that a sale is an equitable mortgage?	The party claiming that a sale is an equitable mortgage bears the burden of proving this claim. They must present clear and convincing evidence to demonstrate the true intent of the parties.
What evidence did the Anselmos present to support their claim?	The Anselmos presented loan documents from Boston Equity Resources, Inc. and argued that the sale was a continuation of their debt arrangement with William Hernandez, the company president. They highlighted financial discrepancies.
Why did the Supreme Court rule against the Anselmos?	The Supreme Court ruled against the Anselmos because they failed to present sufficient evidence to overcome the presumption that the Deed of Absolute Sale reflected the parties’ true intent. Their pleadings did not properly seek annulment of the sale.
What is pactum commissorium?	Pactum commissorium is an agreement where the creditor automatically acquires ownership of the collateral upon the debtor’s failure to pay. It is prohibited under Philippine law.
What is the significance of this case?	This case clarifies the standard of proof required to challenge the validity of a written contract of sale and reinforces the principle of contractual autonomy. The case sets a high bar for proving that a sale was intended as an equitable mortgage.
Were damages awarded in this case?	The Supreme Court reversed the award of moral damages, exemplary damages, attorney’s fees, and litigation costs. The respondent failed to present a solid legal basis for those claims.

This case serves as a reminder of the importance of carefully documenting all aspects of a transaction and seeking legal advice when entering into significant contracts. The principle that a contract is the law between the parties holds significant weight in Philippine jurisprudence, emphasizing the need for clear and unequivocal evidence to challenge the terms of a written agreement.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Romualdo Anselmo vs. Spouses William Hernandez, G.R. No. 154339, October 15, 2007