TITLE: Dala v.

Auticio

GR NO. 205672

DATE: June 22, 2022

SUBJECT MATTER: Equitable Mortgage, Pacto de retro sale

DOCTRINES: 1. In a sale with right to repurchase (pacto de retro), the title and
ownership of the property sold are immediately vested in the
vendee, subject to the vendor's exercise of his or her right of
redemption within the stipulated period. In fine, the failure of
the vendor a retro to repurchase the property vests upon the
vendee a retro, by operation of law, absolute title and
ownership over the property sold.
2. An equitable mortgage masquerading as a sale with pacto de
retro is a contract which, though lacking the formality, form, or
words, or other requisites demanded by the statute, reveals
the intention of the parties to burden a piece or pieces of real
property only to secure the payment of a debt.
3. A contract denominated as a pacto de retro sale should be
construed as a mortgage when its terms are ambiguous or the
circumstances surrounding its execution or its performance are
incompatible or inconsistent with a sale. And even though a
contract is denominated a pacto de retro sale, the owner of the
property may prove that it is otherwise by showing, through
parol evidence, the real intent of the parties.
4. In a sale with right to repurchase, title and ownership of the
property sold are immediately vested in the vendee subject to
the vendor's right to repurchase within the stipulated period.
Where the vendor, however, remains in physical possession of
the land, for no explicable reason, this fact is an indicium of an
equitable mortgage.
5. In pactum commissorium, the ownership of the security will
pass to the creditor by the mere default in payment of the loan
by the debtor. The Court has invariably declared that this kind
of arrangement is void for being contrary to morals and public
policy.

FACTS: This case involves a dispute over the nature of a contract between the
parties. The respondent sought to consolidate ownership of a parcel of
land under a deed of sale with pacto de retro, while the petitioner
claimed that the contract was actually an equitable mortgage. The trial
court ruled in favor of the respondent, but the Court of Appeals
modified the decision, declaring the respondent as the absolute owner
of the property.

ISSUE/S: 1. Whether or not the provision on pactum commissorium

negates the alleged sale of the property as it is deemed null
 and void?
2. Whether or not an equitable mortgage masquerading as a sale
with the right to repurchase is a valid pacto de retro sale?
3. Whether or not the Civil Code of the Philippines provides that
in case of doubt and conflicting claims, a contract purporting to
be a pacto de retro sales shall be construed as an equitable
mortgage?

RULING: 1.
In pactum commissorium, the ownership of the security will pass to
the creditor by the mere default in payment of the loan by the debtor.
In the long line of cases, the Supreme Court has invariably declared
that this kind of arrangement is void for being contrary to morals and
public policy.

Article 2088 of the Civil Code provides that the creditor cannot
appropriate the things given by way of pledge or mortgage or dispose
of them. Any stipulation to the contrary is null and void.

Hence, pactum commissorium requires the following elements:

(1) There should be a property mortgaged by way of security for the
payment of the principal obligation; and
(2) There should be a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.

In this case, when the vendor and vendee stipulated in their deed that
"if the vendor shall fail to exercise his right to repurchase as herein
granted within the period stipulated, then this conveyance shall
become absolute and irrevocable, without the necessity of drawing up
a new deed of absolute sale, subject to the requirement of the law
regarding consolidation of ownership, they evidently entered into a
pactum commissorium arrangement that enables the mortgagee to
acquire ownership of the mortgaged property without the need of
foreclosure proceedings.

The Supreme Court ruled that this stipulation violates Article 2088 of
the Civil Code; hence, it is void. It contradicts the nature of a true
pacto de retro sale, under which a vendee acquires ownership of the
thing sold immediately upon execution of the sale, subject only to the
vendor's right of redemption.

2.
The Supreme Court ruled that in the pacto de retro sale, the title and
ownership of the property sold are immediately vested in the vendee,
subject to the vendor's exercise of his or her right of redemption within
the stipulated period; however, it noted that an equitable mortgage
masquerading as a sale with the right to repurchase is a contract that,
though lacking the formality, form, or words, or other requisites
demanded by the statute, reveals the intention of the parties to burden
a piece or pieces of real property only to secure the payment of a
debt. It has two (2) requisites:
(1) The parties enter into what appears to be a contract of sale, but
(2) Their intention is to secure an existing debt by way of a mortgage.

In this instance, when there is a doubt, a contract purporting to be a

sale with the right to repurchase should be considered an equitable
mortgage.

Here, though the vendor and the vendee memorialized their

transaction as a Deed of Sale Under Pacto De Retro, their intent was
not to sell the land with the right of repurchase but simply to set it up
as security for the vendor's debt of P32,000.00. As directed by the
verbal phrase "shall be presumed," the Court is required by Article
1602 of the Civil Code to presume conclusively a contract to be an
equitable mortgage and not a pacto de retro sale.

This is because the law discourages pacto de retro sales, which would
usually lead to an unlawful pactum commissorium. This court has
taken judicial notice of the fact that pacto de retro sales have been
frequently used to conceal contracts of loans secured by a mortgage.

3.
The Civil Code of the Philippines states that in case of doubt and
conflicting claims, a contract purporting to be a sale with the right to
repurchase shall be construed as an equitable mortgage. The policy of
the law is to discourage pacto de retro sales and thereby prevent the
circumvention of the prohibition against usury and pactum
commissorium. It stated Article 1602 of the Civil Code, which provides
that the contract shall be presumed to be an equitable mortgage in
any of the following cases:

(1) When the price of a sale with the 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;
and
(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 presence of any of these circumstances is enough for the

presumption to arise. No concurrence or an overwhelming number is
necessary. The law's intention is to protect those who are vulnerable
due to circumstances such as poverty, penury, and lack of education
from being taken advantage of by creditors. Their vulnerabilities
invariably find themselves in no position whatsoever to bargain fairly
with their lenders