G.R. No.

L-47120 October 15, 1990

SPOUSES LORETO CLARAVALL and VICTORIA CLARAVALL petitioners,

vs.
THE HONORABLE COURT OF APPEALS and SPOUSES FRANCISCO RAMIREZ and
CAROLINA RAMIREZ, respondents.

Sps Claravall obtained loans from the DBP in the amount of P52,000.00 for the construction of a
commercial building on the property situated in Ilagan Isabela and executed a mortgage in favor of
the latter. Sps Claravall failed to pay the amortization thus threatened to foreclose by the DBP.
However, the Sps was able to pay the DBP by executing a deed of sale with a 5 year option to
repurchase the same to certain Juan Ang-ngan.

Claravall exercised the said right to repurchase the property from Ang-angan by obtaining a loan
from Sps Ramirez in the amount of P75,000.00. A deed of sale was executed over the same
property by the Claravalls in favor of Ramirez with an option of repurchase within a period of 2 years.
However, after 2 years Sps failes to redeem the subject property and because of this they brought a
suit against the Sps Ramirez to compel them to sell the property.

Pending trial of the case, a complaint in intervention was filed by one Domingo G. Herman alleging
that he is a brother of plaintiff Victoria Claravall and owner of ½ of the entire property as his
inheritance from their deceased parents and that plaintiff Victoria Claravall obtained a certificate of
title by means of fraud. He prays that the contract between plaintiffs and defendants be declared null
and void with respect to his ½ legitimate share of the property in question.

Trial Court Ruling

Ruled in favor of private respondents (Sps Ramirez).

CA Ruling

Affirmed in toto trial court ruling. Motion of Reconsideration was then filed finding it meritorious, CA
remand the records to the lower court. Aggrieved by the said resolution, hence thus petition.

Issue: WON the Deed of Absolute Sale and Option to Repurchase executed by the parties must be
treated as an equitable mortgage and not the absolute sale it purports to be.

SC Ruling.

Yes, the sale executed by parties is a equitable mortgage.

Articles 1602 and 1604 of the Civil Code state:

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 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 case, any money, fruits, or other
benefit to be received by the vendees as rent or otherwise shall be considered as
interest which shall be subject to the usury laws.

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

Under Article 1604 a contract purporting to be an absolute sale shall be presumed to be an equitable
mortgage, should any of the conditions in Article 1602 be present. Otherwise stated, the presence of
only one circumstance defined in Article 1602 is sufficient for a contract of sale with right to
repurchase to be presumed an equitable mortgage.

First. the record shows that the petitioners were holding on to their property despite financial
difficulties to the extent that they had to incur bigger and bigger loans in order to be able to pay the
usurious interest involved. In this regard, this Court has already laid down the rule that a pacto de
retro sale may be deemed an equitable mortgage when executed due to urgent necessity for money
of the apparent vendor.

Secondly, is the inadequacy of the consideration for the supposed sale considering that the property
involved is a parcel of land with a 3 storey commercial building.

A third circumstance is the fact that on the date of expiration of the period to repurchase the
property, private respondents, specifically Carolina Ramirez instead of accepting the repurchase
price of the property on the pretext that she would not want to transact business with petitioners in
the absence of her husband, executed a note extending the period of redemption It is well-settled
that extension of the period of redemption is indicative of equitable mortgage (

From the foregoing transactions, it is evident that petitioners and private respondents entered into a
contract of equitable mortgage and not a deed of absolute sale as the latter insisted.

Still further, this Court ruled that even if no usury was involved, a contract of loan with mortgage
made to appear in paper as an absolute sale with a companion option to buy, is null and void.

WHEREFORE, the decision of respondent Court promulgated on April 22, 1976 and its resolution of
June 22, 1977 are hereby Reversed and Set Aside. The deed of absolute sale between the parties
with the option to repurchase is declared as an equitable mortgage and, petitioners are declared
entitled to redeem the mortgaged property which shall be effected upon payment of their mortgage
debt to private respondents in the total amount of P85,000.00 with legal rate of interest from the time
the loan matured until it is fully paid.