Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 42108 December 29, 1989

OSCAR D. RAMOS and LUZ AGUDO, petitioners,

vs.
HON. COURT OF APPEALS, ADELAIDA RAMOS and LAZARO E. MENESES, respodents.

Godofredo V. Magbiray for petitioners.

Joselito Lim for private respondents.

REGALADO, J.:

The instant petition for review on certiorari impugns the decision of the Court of Appeals dated
October 7, 1975,   which affirmed in toto the decision of the Court of First Instance of Tarlac in Civil
1

Case No. 4168, entitled "Adelaida Ramos, et al. vs. Oscar D. Ramos, et al.," holding that the
contracts between the parties are not ventas con pacto de retro but are equitable mortgages.

Sometime in January 1959, private respondent Adelaida Ramos borrowed from her brother,
petitioner Oscar D. Ramos, the amounts of P 5,000.00 and P 9,000.00 in connection with her
business transaction with one Flor Ramiro, Fred Naboa and Atty. Ruperto Sarandi involving the
recovery of a parcel of land in Tenejeros, Malabon. The said amount was used to finance the trip to
Hawaii of Ramiro, Naboa and Atty. Sarandi. As security for said loan, private respondent Adelaida
Ramos executed in favor of petitioners two (2) deeds of conditional sale dated May 27, 1959 and
August 30, 1959, of her rights, shares, interests and participation respectively over Lot No. 4033
covered by Original Certificate of Title No. 5125 registered in the name of their parents, Valente
Ramos and Margarita Denoga, now deceased;   and Lot No. 4221 covered by Transfer Certificate of
2

Title No. 10788 then registered in the names of Socorro Ramos, Josefina Ramos and Adelaida
Ramos,   said properties being of the Cadastral Survey of Paniqui, Tarlac.
3

Upon the failure of said private respondent as vendor a retro to exercise her right of repurchase
within the redemption period, aforenamed petitioner filed a petition for consolidation and approval of
the conditional sale of Lot No. 4033 in Special Proceedings No. 5174, entitled "Intestate Estate of
the late Margarita Denoga,"   and a petition for approval of the pacto de retro sale of Lot No. 4221 in
4

the former Court of First Instance of Tarlac acting as a cadastral court.   On January 22, 1960, the
5

said probate court issued an order with the following disposition:

WHEREFORE, the deed of CONDITIONAL SALE executed on May 27, 1959, by

Adelaida Ramos in favor of spouses Oscar D. Ramos and Luz Agudo, conveying to
the latter by way of pacto de retro sale whatever rights and interests the former may
have in Lot No. 4033 of the Cadastral Survey of Paniqui, which deed of conditional
sale is known as Document No. 14, Page 26, Book VI, Series of 1959, of the notarial
register of Notary Public Jose P. Sibal, is hereby approved.  6
The cadastral Court also issued a similar order dated April 18, 1960, the dispositive portion of which
reads:

WHEREFORE, by way of granting the petition, the Court orders the consolidation of
ownership and dominion in petitioners-spouses Oscar D. Ramos and Luz Agudo
over the rights, shares and interests of Adelaida Ramos in Lot No. 4221 of the
Cadastral Survey of Paniqui, Tarlac, which the latter sold to the former under a pacto
de retro sale executed in a public instrument known as Document No. 22, Page 28,
Book No. VI. Series of 1959, of the Notarial Registry of Notary Public Jose P. Sibal
but which she failed to repurchase within the period specified in said Document.  7

Private respondents had been and remained in possession of these properties until sometime in
1964 when petitioner took possession thereof.

On February 28, 1968, private respondent filed Civil Case No. 4168 with the then Court of First
Instance of Tarlac for declaration of nullity of orders, reformation of instrument, recovery of
possession with preliminary injunction and damages. The complaint therein alleged that the deeds of
conditional sale, dated May 27, 1959 and August 30, 1959, are mere mortgages and were vitiated by
misrepresentation, fraud and undue influence and that the orders dated January 22, 1960 and April
18, 1960, respectively issued by the probate and cadastral courts, were null and void for lack of
jurisdiction. Petitioners, in their answer to the complaint, specifically deny the allegations of fraud
and misrepresentation and interposed as defense the fact that the questioned conditional sales of
May 27, 1959 and August 30, 1959 were voluntarily executed by private respondent Adelaida
Ramos and truly expressed the intention of the parties; that the action, if any, has long prescribed;
that the questioned orders of January 22, 1960 and April 18, 1960, approving the consolidation of
ownership of the lands in question in favor of petitioner were within the jurisdiction of the lower court,
in its capacity as a probate court insofar as Lot No. 4033 is concerned, and acting as a cadastral
court with respect to Lot No. 4221; and that said lands subject of the conditional sales were in
custodia legis in connection with the settlement of the properties of the late Margarita Denoga, the
predecessor in interest of both petitioners and private respondents.

On January 7, 1970, the court below issued a pre-trial order to the effect that petitioners admit the
genuineness and due execution of the promissory notes marked as Exhibits "F" and "F-1 " and that
the principal triable issue is whether or not the documents purporting to be deeds of conditional sale,
marked as Exhibits "B", "B-1" and "G" were in fact intended to be equitable mortgages.   In its order
8

dated February 17, 1971, the trial court also declared: "Both parties agreed and manifested in open
court the principal obligation in the transaction reflected in Exhibits 'B' and 'B-l' and 'G' is one of loan.
The parties differ, however, on the nature of the security described therein.  9

On May 17, 1971, the court a quo rendered a decision the decretal part of which reads:

WHEREFORE, judgment is hereby rendered:

1) Denying defendants' motion to dismiss of February 23, 1970;

2) Declaring Exhibits 'B', 'B-I' and 'G' as loan transaction secured by

real estate mortgages;

3) Annulling and setting aside Exhibits 'D', 'D-l', 'I', 'I-l' and 'I-2';
 4) Ordering plaintiffs, jointly and severally to pay (within ninety [90]
days from receipt of a copy of this judgment) defendants the sum of P
5,000.00 specified in Exhibit 'B', with interest thereon at the legal rate
from November 28, 1959 until full payment together with the sum of P
9,308.00 specified in Exhibit 'G' with interest thereon at the legal rate
from December 1, 1959 until full payment, and in default of such
payment, let the properties mortgaged under Exhibits 'B', 'B-1' and 'G'
be sold to realize the mortgage debt and costs; and

5) Dismissing defendants' counter-claim.

With costs against defendants.  10

On June 14, 1971, petitioners appealed said decision to the Court of Appeals which, on October 7,
1975; affirmed in all respects the judgment of the trial court. Petitioners' motion for reconsideration of
said decision was denied on November 27, 1975.  11

On January 8, 1976, petitioners filed the petition at bar anchored on the following assignments of
errors:

1. The Hon. Court of Appeals erred in not applying the correct

provisions of law interpreting the conditional sales dated May 27,
1959 and August 30, 1959, Exhibits 'B' and 'G' as equitable
mortgages.

2. That as a consequence of its ruling that the conditional sales,

Exhibits 'B' and 'G', are equitable mortgages, the Hon. Court of
Appeals erred in ordering the reformation of the same.

3. The Honorable Court of Appeals erred in holding that the order

dated January 22, 1960, Exhibit C or 2, and the order dated April 18,
1960, Exhibit H or 6, issued by the probate court in Sp. Proc. No.
5174 and by the cadastral court in G.L.R.O. Rec. No. 395,
respectively, are null and void for lack of jurisdiction.

4. The Hon. Court of Appeals erred in not applying the applicable

provisions of law on the prescription of action and in not dismissing
the complaint filed in the lower court. 12

We find the petition devoid of merit.

Article 1602 of the Civil Code provides:

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.

The Court of Appeals, in holding that the two (2) deeds purporting to be pacto de retro sale contracts
are equitable mortgages, relied on the following factual findings of the trial court, to wit:

Several undisputed circumstances persuade this Court (that) the questioned deeds
should be construed as equitable mortgages as contemplated in Article 1602 of the
Civil Code, namely: (1) plaintiff vendor remained in possession until 1964 of the
properties she allegedly sold in 1959 to defendants; (2) the sums representing the
alleged purchase price were actually advanced to plaintiff by way of loans, as
expressly admitted by the parties at the hearing of February 17, 1971, reflected in an
Order of the same date: and (3) the properties allegedly purchased by defendant
Oscar Ramos and his wife have never been declared for taxation purposes in their
names. Exhibits K, K-1, L and L-1.  13

Even if we indulge the petitioners in their contention that they are justified in not taking possession of
the lots considering that what were allegedly sold to them were only the rights, shares, interests and
participation of private respondent Adelaida Ramos in the said lots which were under
administration,   however, such fact will not justify a reversal of the conclusion reached by
14

respondent court that the purported deeds of sale con pacto de retro are equitable mortgages. Such
a conclusion is buttressed by the other circumstances catalogued by respondent court especially the
undisputed fact that the two deeds were executed by reason of the loan extended by petitioner
Oscar Ramos to private respondent Adelaida Ramos and that the purchase price stated therein was
the amount of the loan itself.

The above-stated circumstances are more than sufficient to show that the true intention of the
parties is that the transaction shall secure the payment of said debt and, therefore, shall be
presumed to be an equitable mortgage under Paragraph 6 of Article 1602 hereinbefore quoted.
Settled is the rule that to create the presumption enunciated by Article 1602, the existence of one
circumstance is enough.  The said article expressly provides therefor "in any of the following cases,"
15

hence the existence of any of the circumstances enumerated therein, not a concurrence nor an
overwhelming number of such circumstances, suffices to give rise to the presumption that the
contract with the right of repurchase is an equitable mortgage. As aptly stated by the Court of
Appeals:

Thus, it may be fairly inferred that the real intention of the parties is that the
transactions in question were entered into to secure the payment of the loan and not
 to sell the property (Article 1602, Civil Code). Under Article 1603 of the Civil Code it
is provided that 'in case of doubt, a contract purporting to be a sale with right to
repurchase shall be construed as an equitable mortgage' in this case, we have no
doubt that the transaction between the parties is that of a loan secured by said
properties by way of mortgage. Hence, we find that Exhibits B and G do not reflect
the true and real intention of the parties and should accordingly be reformed and
construed as equitable mortgages.  16

Equally puerile is the other contention of petitioners that respondent court erred in not applying the
exclusionary parol evidence rule in ascertaining the true intendment of the contracting parties. The
present case falls squarely under one of the exceptions to said rule as provided in then Section 7 of
Rule 130, thus:

xxx xxx xxx

(a) Where a mistake or imperfection of the writing or its failure to

express the true intent and agreement of the parties, or the validity of
the agreement is put in issue by the pleadings; 17

xxx xxx xxx

Moreover, it is a well-entrenched principle in the interpretation of contracts that if the terms thereof
are clear and leave no doubt as to the intention of the contracting parties the literal meaning of the
stipulation shall control but when the words appear to be contrary to the evident intention of the
parties, the latter shall prevail over the former. 18

The admission of parol testimony to prove that a deed, absolute in form, was in fact given and
accepted as a mortgage does not violate the rule against the admission of oral evidence to vary or
contradict the terms of a written instrument.  Sales with a right to repurchase, as defined by the Civil
19

Code, are not favored. We will not construe instruments to be sales with a right to repurchase, with
the stringent and onerous effects which follow, unless the terms of the document and the
surrounding circumstances require it. Whenever, under the terms of the writing, any other
construction can fairly and reasonably be made, such construction will be adopted and the contract
will be construed as a mere loan unless the court can see that, if enforced according to its terms, it is
not an unconscionable one.  20

On the faces thereof, the contracts purport to be sales with pacto de retro; however, since the same
were actually executed in consideration of the aforesaid loans said contracts are indubitably
equitable mortgages. The rule is firmly settled that whenever it is clearly shown that a deed of sale
with pacto de retro, regular on its face, is given as security for a loan, it must be regarded as an
equitable mortgage.  21

With respect to the orders dated January 22, 1960 and April 18, 1960, issued by the Court below
acting as a probate court and cadastral court, respectively, the same could not preclude the
institution of the case now under review.

A reading of the order of the probate court will show that it is merely an approval of the deed of
conditional sale dated May 27, 1959 executed by petitioner Adelaida Ramos in favor of petitioners.
There is nothing in said order providing for the consolidation of ownership over the lots allegedly sold
to petitioners nor was the issue of the validity of said contract discussed or resolved therein. "To give
approval" means in its essential and most obvious meaning, to confirm, ratify, sanction or consent to
some act or thing done by another.   The approval of the probate court of the conditional sale is not
22
a conclusive determination of the intrinsic or extrinsic validity of the contract but a mere recognition
of the right of private respondent Adelaida Ramos as an heir, to dispose of her rights and interests
over her inheritance even before partition.   As held in Duran, et al., vs. Duran   the approval by the
23 24

settlement court of the assignment pendente lite, made by one heir in favor of the other during the
course of the settlement proceedings, is not deemed final until the estate is closed and said order
can still be vacated, hence the assigning heir remains an interested person in the proceeding even
after said approval.

Moreover, the probate jurisdiction of the former court of first instance or the present regional trial
court relates only to matters having to do with the settlement of the estate and probate of wills of
deceased persons, and the appointment and removal of administrators, executors, guardians and
trustees. Subject to settled exceptions not present in this case, the law does not extend the
jurisdiction of a probate court to the determination of questions of ownership that arise during the
proceeding. The parties concerned may choose to bring a separate action as a matter of
convenience in the preparation or presentation of evidence.   Obviously, the approval by the probate
25

court of the conditional sale was without prejudice to the filing of the proper action for consolidation
of ownership and/or reformation of instrument in the proper court within the statutory period of
prescription.

The same jurisdictional flaw obtains in the order of consolidation issued by the cadastral court. The
court of first instance or the regional trial court, acting as cadastral court, acts with limited
competence. It has no jurisdiction to take cognizance of an action for consolidation of ownership,
much less to issue an order to that effect, such action must have been filed in the former court of first
instance, now in the regional trial court, in the exercise of its general jurisdiction. That remedy, and
the procedure therefor, is now governed by Rule 64 of the Rules of Court as a special civil action
cognizable by the regional trial court in the exercise of original general jurisdiction.

Antecedent thereto, Article 1607 of the Civil Code provided for consolidation as follows:

In case of real property, the consolidation of ownership in the vendee by virtue of the
failure of the vendor to comply with the provisions of article 1616 shall not be
recorded in the Registry of Property without a judicial order, after the vendor has
been duly heard.

Hence in Crisologo, et al. vs. Centeno, et al.,   we ruled that said Article 1607 contemplates a
26

contentious proceeding wherein the vendor a retro must be named respondent in the caption and
title of the petition for consolidation of ownership and duly summoned and heard. An order granting
the vendee's petition for consolidation of ownership, without the vendor a retro being named as
respondent, summoned and heard, is a patent nullity for want of jurisdiction of the court over the
person of the latter.

The questioned order of consolidation issued by the cadastral court, being void for lack of
jurisdiction, is in contemplation of law non-existent and may be wholly disregarded. Such judgment
may be assailed any time, either directly or collaterally, by means of a separate action or by resisting
such judgment in any action or proceeding whenever it is invoked.   It is not necessary to take any
27

step to vacate or avoid a void judgment; it may simply be ignored.  28

On the issue of prescription, in addition to what has been said, the present case, having been filed
on February 28, 1960, approximately seven (7) years from the execution of the questioned deeds,
was seasonably instituted. The prescriptive period for actions based upon a written contract and for
reformation is ten (10) years under Article 1144 of the Civil Code. Such right to reformation is
expressly recognized in Article 1365 of the same code.  29
Article 1602 of the Civil Code is designed primarily to curtail the evils brought about by contracts of
sale with right of repurchase, such as the circumvention of the laws against usury and pactum
commissorium.  In the present case before us, to rule otherwise would contravene the legislative
30

intent to accord the vendor a retro maximum safeguards for the protection of his legal rights under
the true agreement of the parties. The judicial experience in cases of this nature and the rationale for
the remedial legislation are worth reiterating, considering that such nefarious practices still persist:

It must be admitted that there are some cases where the parties really intend a sale
with right to repurchase. Although such cases are rare, still the freedom of contract
must be maintained and respected. Therefore, the contract under consideration is
preserved, but with adequate safeguards and restrictions.

One of the gravest problems that must be solved is that raised by the contract of sale
with right of repurchase or pacto de retro. The evils arising from this contract have
festered like a sore on the body politic. ...

xxx xxx xxx

It is a matter of common knowledge that 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. It is thus that the
provisions contained in articles 1859 and 1858 of the present Civil Code which
respectively prohibit the creditor from appropriating the things given in pledge or
mortgage and ordering that said things be sold or alienated when the principal
obligation becomes due, are circumvented.

Furthermore, it is well-known that the practice in these so-called contracts of sale

with pacto de retro is to draw up another contract purporting to be a lease of the
property to the supposed vendor, who pays in money or in crops a so-called rent. It
is, however, no secret to anyone that this simulated rent is in truth and in fact interest
on the money loaned. In many instances, the interest is usurious. Thus, the usury
law is also circumvented.

It is high time these transgressions of the law were stopped. It is believed by the
Commission that the plan submitted for the solution of the problem will meet with the
approval of an enlightened public opinion, and in general, of everyone moved by a
sense of justice.

During the deliberations of the Commission the question arose as to whether the
contract of purchase with pacto de retro should be abolished and forbidden. On first
impression, this should be done, but there is every reason to fear that in such a case
the usurious money-lenders would demand of the borrowers that, although the real
agreement is one of loan secured with a mortgage, the instrument to be signed
should purport to be an absolute sale of the property involved. Should this happen,
the problem would become aggravated. Moreover, it must be admitted that there are
some cases where the parties really intend a sale with right to repurchase. Although
such cases are rare, still the freedom of contract must be maintained and respected.
Therefore, the contract under consideration is preserved in the Project of Civil Code,
but with adequate safeguards and restrictions.  31
WHEREFORE, the instant petition is hereby DENIED and the assailed decision of the Court of
Appeals is hereby AFFIRMED.

SO ORDERED.

Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.

Footnotes

1 CA-G.R. No. 49354-R. Penned by Justice Emilio A. Gancayco and concurred in by

Associate Justices Ricardo C. Puno and B.S. de la Fuente. Rollo, 28-37.

2 Folder of Exhibits, 1-6.

3 Ibid., 11-13, 15.

4 Ibid., 7-8.

5 Ibid., 16-17.

6 Rollo, 7-8.

7 Ibid., 8.

8 Rollo, 25; Record on Appeal, 64-67.

9 Ibid., Id., 132.

10 Folder of original Record on Appeal, 103-104.

11 Rollo, 48.

12 Ibid., 105: Brief for Petitioners, 8-9.

13 Rollo, 32-33.

14 A co-owner has the right to freely sell and dispose of his undivided interest but no
right to sell a divided, definite part of the real estate owned in common. The
transferee does not acquire any specific portion of the whole until partition. (Lopez
vs. Ilustre, 5 Phil. 567 [1906]; Ramos Silos, et al. vs. Ramos. et al., 97 Phil. 263
[1955]).

15 Santos vs. Duata, et al., 14 SCRA 1041 (1965); Capulong, et al. vs. Court of
Appeals, et al., 130 SCRA 245 (1984).

16 Rollo, 33-34.
17 Formerly, Sec. 22, Rule 123, 1940 Rules of Court; now reproduced in Sec. 9,
Rule 130, 1989 Revised Rules on Evidence.

18 Art. 1370, Civil Code; Labasan, et al. vs. Lacuesta. et al., 86 SCRA 16 (1978);
Balatero vs. Intermediate Appellate Court, et al., 154 SCRA 530 (1987).

19 Ignacio vs. Chua Hong, et al., 52 Phil. 940 (1929); Aguinaldo vs. Esteban, et al.,
135 SCRA 645 (1985); Serrano vs. Court of Appeals, et al., 139 SCRA 179 (1985).

20 Padilla vs. Linsangan, 19 Phil. 65 (1911); Aquino vs. Deala 63 Phil .582 (1936).

21 Ignacio vs. Chua Hong, supra; Capulong vs. Court of Appeals. et al., ante.

22 State vs. Rhein; 127 N.E., 1079,1081; 149 Iowa, 76; 3A Words and Phrases,
Permanent Edition, 500.

23 Arts. 493 and 1088, Civil Code, Jakosalem vs. Rafols, et al., 73 Phil. 628; De
Borja, et al. vs. Vda. de Borja, 46 SCRA 755 (1972); Go On vs. Court of Appeals,
154 SCRA 271 (1987).

24 20 SCRA 279 (1967).

25 Vda. de Manalac vs. Ocampo, et al., 73 Phil. 661 (1942).

26 26 SCRA 48 (1948).

27 Banco Espanol-Filipino vs. Palanca, 37 Phil. 921 (1918); Gomez vs. Concepcion,
etc., et al., 47 Phil. 717 (1925); Ang Lam vs. Rosillosa et. al., 86 Phil. 447 (1950).

28 49 C.J.S. 879-880.

29 Conde, et al. vs. Cuenca, et al, 99 Phil. 1056 (1956); Seno vs. Mangubat, 156
SCRA 113 (1987).

30 Balatero vs. Intermediate Appellate Court, et al., ante.

31 Report of the Code Commission, 61-64.