In Spouses Cesar R. Romulo and Nenita S. Romulo v. Spouses Moises P. Layug, Jr., and Felisarin Layug, the Supreme Court ruled that a Deed of Absolute Sale was actually an equitable mortgage. The court prioritized the true intention of the parties over the document’s form. This means even if a document looks like a sale, it can be treated as a loan secured by property. This protects borrowers from unfair lenders.

Deed of Sale or Hidden Loan? Unraveling an Equitable Mortgage

The case revolves around a property dispute between the Romulo spouses and the Layug spouses. The Romulos initially obtained loans from the Layugs, which they struggled to repay. To supposedly settle the debt, a Deed of Absolute Sale was executed, transferring the Romulos’ property to the Layugs. However, the Romulos claimed they were misled into signing the deed and that it was only meant as security for their loan, not an actual sale.

The Regional Trial Court (RTC) sided with the Romulos, declaring the Deed of Absolute Sale an equitable mortgage. The Court of Appeals (CA) reversed this decision, stating the Romulos failed to prove fraud in obtaining their signatures. The Supreme Court, however, reversed the CA decision, reinforcing the RTC’s original ruling.

The Supreme Court emphasized that the form of a contract does not always reflect the true intent of the parties. The Court considered the actions and conduct of the parties before, during, and after the execution of the agreement. Several factors indicated the true intent was to secure a debt rather than to transfer ownership through sale. One significant factor was that the Romulos remained in possession of the property even after the supposed sale.

Furthermore, the Layugs continued to extend loans to the Romulos even after the execution of the Deed of Absolute Sale. This suggested that the initial debt had not been extinguished by the transfer of property, leading to a belief that the Layugs aimed to formalize security on the property due to doubts on whether the Romulos could fully repay their loan. It was at this moment that the Romulos were in a difficult situation to bargain. “Necessitous men are not, truly speaking, free men; but to answer a present emergency will submit to any terms that the crafty may impose upon them.”

The Civil Code addresses these scenarios in Articles 1602 and 1604. These articles state that a contract, even if it appears to be an absolute sale, is presumed to be an equitable mortgage under certain conditions. These conditions serve as red flags, indicating that the true agreement might be a secured loan rather than an actual transfer of property.

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 vendor binds himself to pay the taxes on the thing sold;

5) When the purchaser retains for himself a part of the purchase price;

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. (Emphasis supplied.)

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

For the presumption of an equitable mortgage to arise, two main conditions must exist. The first is that the parties entered into a contract that is a sale, and the second is that their true intention was to secure an existing debt. Proof of even one of these conditions is enough to presume that the contract is an equitable mortgage, meaning an overwhelming number of conditions do not need to be satisfied.

The Supreme Court ultimately favored the Romulos. The court recognized the economic imbalance and vulnerability of the Romulos when the agreement was made. As such, the original ruling was reinstated with a modification reducing the amount of moral and exemplary damages.

FAQs

What was the key issue in this case?	The central issue was whether the Deed of Absolute Sale between the Romulos and the Layugs was genuinely a sale or an equitable mortgage intended to secure a loan.
What is an equitable mortgage?	An equitable mortgage is a transaction that looks like a sale but is actually intended to secure the payment of a debt. The law presumes certain conditions exist to protect borrowers.
What factors did the Supreme Court consider?	The court considered factors like the Romulos’ continued possession of the property, the Layugs’ continued lending, and the inadequacy of the stated purchase price. These all pointed to the true agreement.
How does this case protect borrowers?	The ruling protects borrowers by recognizing that the true intent of parties should prevail over the written form of a contract. It gives borrowers recourse when agreements are disguised.
What is the significance of Article 1602 of the Civil Code?	Article 1602 lists conditions under which a contract of sale is presumed to be an equitable mortgage. Any condition raises the presumption.
Why were the moral and exemplary damages reduced?	The court found that the Romulos were not completely without fault, as they exhibited contributory negligence by signing blank documents, which mitigated the damages.
What was the effect of the Layugs continuing to lend money to the Romulos?	The Supreme Court explained that respondents continuing to lend money to petitioners did not make sense if the intention of the parties was really to extinguish petitioners’ outstanding obligation.
How did the previous ejectment case affect the Supreme Court’s decision?	In the ejectment case both lower courts stated that the petitioners signing the blank document would only serve as guaranty for the payment of their obligation to the respondents.

This case illustrates the importance of looking beyond the written form of a contract to uncover the parties’ true intentions, especially when dealing with secured transactions. The Supreme Court’s decision reinforces the protection afforded to borrowers and ensures fairness in property dealings.

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: Spouses Cesar R. Romulo and Nenita S. Romulo, Petitioners, vs. Spouses Moises P. Layug, Jr., and Felisarin Layug, Respondents., G.R. NO. 151217, September 08, 2006