CRUZ VS.

BANCOM FINANCE CORPORATION

G.R. No. 147788 March 19, 2002

Facts:

Norma Sulit was introduced by Candelaria Sanchez to Edilberto and Simplicio Cruz and
offered to purchase the parcel of land owned by the Cruz brothers. The asking-price for the land
was P700, 000, but Sulit had only P25,000 which Edilberto accepted as earnest money with the
agreement that title would pass to Sulit on the payment of the balance. Sulit failed to pay the
balance. Capitalizing on the close relationship of Sanchez with the brothers, Sulit succeeded in
having the brothers execute a document of sale in favor of Sanchez who would then obtain a
bank loan in her name using the said land as collateral. On the same day, Sanchez executed
another Deed of Absolute Sale in favor of Sulit. Sulit assumed all the obligations of Sanchez to
the original owners of the land in a Special Agreement. Unknown to the brothers, Sulit managed
to obtain a loan from Bancom secured by a mortgage over the land. Because Sulit failed to pay
the purchase price stipulated in the Special Agreement, the brothers filed a complaint for
reconveyance. Sulit also defaulted in her payment to the Bank and her mortgage was foreclosed.
At the auction sale, Bancom was declared the highest bidder.

Issue:
Whether or not the Deeds of Sale were valid and binding.

Held:
Simulation takes place when the parties do not really want the contract they have
executed to produce the legal effects expressed by its wordings. Art. 1345 states that simulation
of a contract may be absolute or relative. The former takes place when the parties conceal their
true agreement while Art. 1346 states that an absolutely simulated contract is void. A relative
stimulation, when it does not prejudice a third person and is not intended for any purpose
contrary to law, morals, good customs, public order or pubic policy binds the parties to their
agreement. The Deeds of Sale were executed merely to facilitate the use of the property as
collateral to secure a loan from a bank. Although the Deed of Sale between the brothers and
Sanchez stipulated a consideration, there was actually no exchange of money. Moreover, the
failure of Sulit to take possession of the property sold to her was a clear badge of simulation that
rendered the whole transaction void and without force and effect.