In Cruz v. Capistrano, the Supreme Court ruled that a contract purporting to be an absolute sale was actually an equitable mortgage due to the inadequate price and the vendor’s continued possession of the property. This decision underscores the judiciary’s commitment to protecting vulnerable borrowers from predatory lending practices, particularly in “five-six” arrangements. It emphasizes that courts will look beyond the literal terms of a contract to ascertain the true intent of the parties, especially where there are indications of unfair advantage or oppression. The ruling ensures that borrowers retain their property rights and are not unjustly deprived of their assets through manipulative transactions.

House or Loan? When Friendship and ‘Five-Six’ Lending Blur the Lines

The case arose from a series of loans between the Cruz spouses, who operated a dry goods stall, and the Capistrano spouses, who were in the “five-six” lending business. The Cruzes obtained loans totaling P135,000, secured by their Transfer Certificate of Title (TCT) for a property in Las Piñas. Eventually, the Capistranos presented a Deed of Absolute Sale, transferring the property title to their names, which the Cruzes contested, claiming it was meant as a mortgage. The core legal question was whether the Deed of Absolute Sale truly reflected a sale or an equitable mortgage to secure the loans. This involved scrutinizing the parties’ intent and the circumstances surrounding the transaction.

The heart of the legal analysis centered on Article 1602 of the New Civil Code, which provides indicators for determining when a contract should be presumed an equitable mortgage. Specifically, the Court highlighted two key indicators present in this case. One was the unusually inadequate price, and the other, the fact that the vendor remained in possession of the property. According to Article 1602 of the New Civil Code:

Art. 1602. The contract shall be presumed to be an equitable mortgage in any of the following cases:

(1) When the price of the sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(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.

The Cruzes initially acquired the property for P78,000 and invested P280,000 in renovations, totaling P358,000. The supposed sale price of P66,000, which was stipulated in the Deed, represented barely 19% of the total investment, which the Court deemed as an indicator of the inadequacy of price. Additionally, despite the purported sale, the Cruzes remained in continuous and undisturbed possession of the property for nearly three years, further pointing to an equitable mortgage.

The Court also gave weight to Cecilia Capistrano’s admission that the TCT was delivered as security for the loans, thus confirming the true intent behind the transaction. The Court cited Lao v. Court of Appeals, emphasizing that:

x x x x In determining the nature of a contract, the Court looks at the intent of the parties and not at the nomenclature used to describe it. Pivotal to deciding this issue is the true aim and purpose of the contracting parties as shown by the terminology used in the covenant, as well as “by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement.”

Furthermore, the Court recognized the inherent vulnerability of borrowers in “five-six” lending arrangements, highlighting that individuals in dire financial straits may agree to onerous terms. It would be extremely unfair to enforce provisions of a deed of sale, the true nature of which was an equitable mortgage. Ultimately, the Supreme Court modified the Court of Appeals’ decision. The Registrar of Deeds was directed to cancel the title issued under the Capistranos’ name and reissue it under the Cruzes’ name, subject to the Capistranos’ rights as equitable mortgagees. The Cruzes were ordered to pay the remaining balance of P66,000 with legal interest, failing which the property would be sold at public auction. This balanced outcome aimed to protect both parties’ rights: the Cruzes’ property rights and the Capistranos’ right to recover the remaining debt.

FAQs

What was the key issue in this case?	The central issue was whether the Deed of Absolute Sale between the Cruz and Capistrano spouses was genuinely a sale or an equitable mortgage securing their loans.
What is an equitable mortgage?	An equitable mortgage is a transaction that appears to be a sale but is intended to secure a debt, where the real intention is to encumber property as collateral.
What factors did the Court consider in determining the contract’s true nature?	The Court considered the inadequate price of the property in relation to its actual value, the vendors’ continuous possession of the property, and the admission of the vendee that the property title was given as security for a loan.
How does Article 1602 of the Civil Code apply in this case?	Article 1602 lists circumstances where a contract shall be presumed an equitable mortgage, including inadequate price and the vendor remaining in possession, both present in this case.
What is the significance of the vendors remaining in possession of the property?	The vendors remaining in possession implies that the transaction was not a true sale since buyers typically take immediate possession of property they purchased.
What did the Supreme Court ultimately decide?	The Supreme Court ruled that the contract was an equitable mortgage, ordered the title to be transferred back to the Cruz spouses, and required them to pay the Capistrano spouses the remaining balance of the loan with legal interest.
What is a “five-six” lending arrangement?	“Five-six” lending is an informal lending scheme with high interest rates, often targeting small business owners with urgent financial needs and where receipts for payment may not be issued.
What is the implication of the court’s ruling for lenders in similar cases?	Lenders may only recover the actual debt amount, not retain ownership of property used as security without proper foreclosure proceedings, and they must ensure fair dealing and transparency in their transactions.

In conclusion, Cruz v. Capistrano exemplifies the Philippine Supreme Court’s commitment to protecting vulnerable borrowers from unfair lending practices. The Court will delve into the true nature of contracts, even when disguised as absolute sales, to prevent unjust enrichment and uphold equity. It highlights the importance of transparency and fairness in lending, ensuring that the borrowers’ rights are protected.

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: Cruz v. Capistrano, G.R. No. 143388, October 6, 2003