SALES Case Digests

for FINALS
2016-2017

EH 405
9/22/2016
Principle: Requirement of previous examination of buyer

Fule vs CA

Facts:
Fule, the petitioner, is an expert banker and jewelry businessman, who works for Prudential Bank.. Fr. Jacobe had a
Tanay property, which he mortgaged it to Prudential Bank. The mortgage was then foreclosed in favor of the bank,
and later acquired by Fule.

Fule met Dr. Cruz, and noticed the emerald-cut diamond earrings that the latter was wearing. He offered to buy it
for Php100k, but was turned down. Fule was insistent as he offered to but it multiple times. He then offered to
barter the Tanay property, which allegedly is valued at Php400k with the earrings. Dr. Cruz accepted. The parties
then engaged the services of Atty. Belarmino to have the property transferred, although the period of redemption
has not yet prescribed. The property was then successfully delivered to Dr. Cruz with issue of redemption was
resolved.

Dr. Cruz delivered to Fule, through his agent, Dichoso, the earrings. Dr. Cruz tendered the earrings, and asked if
they were okay. Fule nodded, and accepted the earrings. Sometime later, Fule complained that the earrings were
fake. He hired different testers to prove the counterfeit. The testers said that it was. Fule then wanted to annul the
sale due to fraud. He took matters to the court, but neither the RTC nor the CA ruled in his favor.

Issue:
1. WON there was valid delivery on the part of the buyer.
2. WON there was fraud.
3. WON the sale can be annulled.

Ruling:
1. YES. The fact that Fule accepted it there was delivery. He was given the ample time to look into the
jewelry, and tested whether it was genuine or not. He only complained days after the delivery was made. The
stages of a contract are preparation, perfection and consummation. All these were present. Moreover, there was
meeting of the minds. The contract was then perfected and consummated by the time the documents were
completed, and the earrings were accepted. Therefore, there was delivery.
2. NO. There is fraud when, through the insidious words or machinations of one of the contracting parties,
the other is induced to enter into a contract which, without them, he would not have agreed to. There was none.
The fact that Fule was given the ample time, but failed to test the earrings, does not constitute fraud. As an expert
jeweler and banker, he possesses the skills to examine the jewelry. It was only after a long period of time, wherein
he alleged the counterfeit. Furthermore, the fact that Dr. Cruz did not want to sell her earrings, in the first place,
did not constitute insidious words or machinations. If there was such, it was on the part of Fule. As a businessman,
why would he sell a property worth Php400k for a jewelry worth Php100k? Moreover, he may want to rescind the
sale to keep the genuine jewelry, “return” the fake one, and have the property. We may not know. Therefore, there
was no fraud.
3. NO. Fule alleged that the contract was voidable. The grounds for a voidable contract are those where one
of the parties is incapable of giving consent to a contract; and those where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud. It was proven in the first issue that there was no fraud in the first
place. In the absence of such grounds, the contract cannot be annulled.
Principle: Effect of acceptance of buyer (Exception); Action for the price of personal property: Grounds

PERCIVAL DE GUZMAN vs. TRIANGLE ACE CORP.

[G.R. No. 149153.September 12, 2001]

FACTS:
The case stems from a purchase made by petitioner from respondent upon which the former failed to pay a
quantity of the total price for the steel bars allegedly bought. When asked to pay for the price, the petitioner
countered stating that his total liability should be reduced due to the fact that the steel bars delivered by
respondent measured only 8 mm. X 20 ft. instead of 9 mm. X 20 ft. as agreed upon by them. This prompted the
respondent to file the present suit.

The trial court gave judgment for respondent. CA affirmed such decision stating that petitioner had waived his
right to claim damages for the alleged deliveries of undersized steel bars as he failed to give notice of such fact to
respondent within six months from the date of the delivery of the steel bars.

Petitioner contends that he has ten years within which to notify the seller of the breach of warranty.He argues that
since the orders for steel bars were covered by invoices issued by respondent, Art. 1144 (1), which pertains to the
ten-year prescriptive period for filing of actions based upon a written contract, is applicable.Petitioner adds that
since he filed his counterclaim on April 28, 1999, or within ten years from the deliveries of the steel bars in 1987 and
1988, he should be deemed to have timely notified respondent of the breach of warranty.

ISSUE: Does the buyer have any liability to pay the original unpaid price notwithstanding the breach of warranty?

RULING:
Yes. Art 1586 provides that the seller shall not be liable if after the acceptance of the goods the buyer fails to give
notice to the seller of the breach in any warranty within a reasonable time after the buyer knows, or ought to know
of such breach. The Court of Appeals correctly ruled that the "reasonable time" provided in Art. 1571, which
involves the period for the filing of actions for breach of implied warranty.

It is important to take note that the buyer must notify the seller of the breach of warranty at any time before the
latter has filed the suit for the collection of the unpaid price since the purpose of the rule requiring notice is to
prevent the buyer from interposing belated claims for damages as an offset to a suit begun by the seller for the
purchase price.

It can’t be denied that in this case, petitioner failed to make any notification to the seller within a reasonable time.
The argument that the case was filed within the 10-year period is likewise unavailing. Further, if the ownership of
the goods has passed to the buyer and he wrongfully refuses to pay for such, the seller may maintain an action for
the price of the goods.

A buyer is deemed to have accepted the goods when he does an act inconsistent with the ownership of the seller,
or when, after the lapse of a reasonable time, he retains the goods without intimating to the seller that he has
rejected them (Civil Code, Art. 1585).In the case at bar, there is no dispute that the steel bars purchased by
petitioner were received by him.

It is also not disputed that petitioner made partial payments for the goods and that some of the steel bars were in
fact used by him to manufacture reinforced concrete pipes although they were allegedly rejected on the ground
that the steel bars were undersized.The retention and use of the steel bars by petitioner clearly show that he
accepted the goods and for this reason he should pay of the price of the same.
Principle: Suspension of payment for refusal to issue title

Arra Realty Corp. vs. Guarantee Dev't Corp. - 2004

Facts:

Arra Realty Corporation was the owner of a parcel of land, located in Alvarado Street, Legaspi Village, Makati
City. Through its president, Architect Carlos D. Arguelles, the ARC decided to construct a five-story building on its
property and engaged the services of Engineer Erlinda Peñaloza as project and structural engineer. Peñaloza and
the ARC, agreed that Peñaloza would share the purchase price of one floor of the building for the price of
P3,105,838 Sometime in May 1983, Peñaloza took possession of the one-half portion of the second floor where she
put up her office and a school. Unknown to her, ARC had executed a real estate mortgage over the lot and the
entire building in favor of the China Banking Corporation. Peñaloza was able to pay P1,175,124.59 for the portion
of the second floor of the building she had purchased from the ARC. Then she learned that the property had been
mortgaged to the China Banking Corporation sometime. When the ARC failed to pay its loan to China Banking
Corporation, the subject property was foreclosed extrajudicially, and, thereafter, sold at public auction to China
Banking Corporation. Peñaloza filed a complaint for "specific performance or damages" with a prayer for a writ of
preliminary injunction against the petitioners.

Issue:

whether or not there has been a perfected contract of sale

whether or not there the suspension of payment is valid

Held:

1. Yes.

The petitioner ARC, as vendor, and respondent Peñaloza, as vendee, entered into a contract of sale over a
portion of the second floor of the building yet to be constructed for a price payable in installments. As soon as the
second floor was constructed within five (5) months, respondent Peñaloza would take possession of the property,
and title thereto would be transferred to her name. The parties had agreed on the three elements of subject matter,
price, and terms of payment. Hence, the contract of sale was perfected, it being consensual in nature, perfected by
mere consent, which, in turn, was manifested the moment there was a meeting of the minds as to the offer and the
acceptance thereof. The perfection of the sale is not negated by the fact that the property subject of the sale was not
yet in existence. This is so because the ownership by the seller of the thing sold at the time of the perfection of the
contract of sale is not an element of its perfection. A perfected contract of sale cannot be challenged on the ground
of nonownership on the part of the seller at the time of its perfection. What the law requires is that the seller has the
right to transfer ownership at the time the thing is delivered. Perfection per se does not transfer ownership which
occurs upon the actual or constructive delivery of the thing sold. Peñaloza took possession of a portion of the
second floor of the building the moment she put up her office and operated the school.

Art. 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or
constructive delivery thereof.

Admittedly, respondent Peñaloza failed to pay the downpayment on time. But then, the petitioner ARC
accepted, without any objections, the delayed payments of the respondent; hence, as provided in Article 1235 of the
New Civil Code, the obligation of the respondent is deemed complied with.
2. Yes.

Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or

objection, the obligation is deemed fully complied with

• The respondent cannot be blamed for suspending further remittances of payment to the petitioner ARC
because when she pushed for the issuance of her title to the property after taking possession thereof, the ARC
failed to comply. She was aghast when she discovered that in July 1984, even before she took possession of the
property, the petitioner ARC had already mortgaged the lot and the building to the China Banking Corporation;
when she offered to pay the balance of the purchase price of the property to enable her to secure her title thereon,
the petitioner ARC ignored her offer.

Under Article 1590 of the New Civil Code, a vendee may suspend the payment of the price of the property sold:

• Art. 1590. Should the vendee be disturbed in the possession or ownership of the thing acquired, or should
he have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may
suspend the payment of the price until the vendor has caused the disturbance or danger to cease, unless the latter
gives security for the return of the price in a proper case, or it has been stipulated that, notwithstanding any such
contingency, the vendee shall be bound to make the payment. A mere act of trespass shall not authorize the
suspension of the payment of the price.

• Respondent Peñaloza was impelled to cause the annotation of an adverse claim at the dorsal portion of
TCT No. 112269.
Principle: Rate of interest payable as indemnity for delay in performance of obligation

Crismina Garments V. CA
G.R. No. 128721 March 9, 1999

FACTS:

February 1979 - April 1979: Crismina Garments, Inc. contracted the services of D'Wilmar Garments, for the sewing
of 20,762 pieces of assorted girls denims for P76,410

At first, the Crismina was told that the sewing of some of the pants were defective so it offered to take them back
but then she was told it was good already and asked her to return for her check.

Crismina failed to pay and told her that 6,164 pairs were defective and asked for actual damages of P49,925.51

RTC: favored D'Wilmar P76,140 at 12% per annum, P5,000 attorney's fees and cost of suit

CA: affirmed but delete the attorney's fees

ISSUE: W/N they should impose 12% interest for an obligation which is not a loan in the absence of stipulation

HELD:

NO. Appealed Decision is MODIFIED. The rate of interest shall be 6%/annum, computed from the time of
the filing of the Complaint in the trial court until the finality of the judgment. If the adjudged principal and the
interest (or any part thereof) remain unpaid thereafter, the interest rate shall be 12% per annum computed from the
time the judgment becomes final and executory until it is fully satisfied.

Article 1589 on the Civil Code

[t]he vendee [herein petitioner] shall owe interest for the period between the delivery of the thing and the
payment of the price . . . should he be in default from the time of judicial or extrajudicial demand for the
payment of the price.

Article 2209 of the Civil Code

If the obligation consists in the payment of money and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence
of stipulation, the legal interest, which is 6%/annum

Usury Law

rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of express contract as to such rate of interest, shall be twelve per cent (12%) per annum award of interest in
the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof

When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been stipulated in writing interest due shall itself earn
legal interest from the time it is judicially demanded

In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code

When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty

where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the judgment of the
court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained).

The actual base for the computation of legal interest shall, in any case, be . . . the amount finally adjudged.

When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to forbearance of credit

amount due in this case arose from a contract for a piece of work, not from a loan or forbearance of money, the
legal interest of six percent (6%) per annum should be applied.

Furthermore, since the amount of the demand could be established with certainty when the Complaint was filed,
the six percent (6%) interest should be computed from the filing of the said Complaint.

But after the judgment becomes final and exuecutory until the obligation is satisfied, the interest should be
reckoned at twelve percent (%12) per year
Principle: Rate of interest payable as indemnity for delay in performance of obligation

NACAR V GALLERY FRAMES, INC

GR 189871 August 13, 2013

FACTS:

Dario Nacar filed a labor case against Gallery Frames and its owner Felipe Bordey, Jr. Nacar alleged that he was
dismissed without cause by Gallery Frames on January 24, 1997. On October 15, 1998, the Labor Arbiter (LA) found
Gallery Frames guilty of illegal dismissal hence the Arbiter awarded Nacar P158,919.92 in damages consisting of
backwages and separation pay.

Gallery Frames appealed all the way to the Supreme Court (SC). The Supreme Court affirmed the decision of the
Labor Arbiter and the decision became final on May 27, 2002.

After the finality of the SC decision, Nacar filed a motion before the LA for recomputation as he alleged that his
backwages should be computed from the time of his illegal dismissal (January 24, 1997) until the finality of the SC
decision (May 27, 2002) with interest. The LA denied the motion as he ruled that the reckoning point of the
computation should only be from the time Nacar was illegally dismissed (January 24, 1997) until the decision of the
LA (October 15, 1998). The LA reasoned that the said date should be the reckoning point because Nacar did not
appeal hence as to him, that decision became final and executory.

ISSUE: Whether or not the Labor Arbiter is correct.

HELD: No. There are two parts of a decision when it comes to illegal dismissal cases (referring to cases where the
dismissed employee wins, or loses but wins on appeal). The first part is the ruling that the employee was illegally
dismissed. This is immediately final even if the employer appeals – but will be reversed if employer wins on
appeal.

The second part is the ruling on the award of backwages and/or separation pay. For backwages, it will be
computed from the date of illegal dismissal until the date of the decision of the Labor Arbiter. But if the employer
appeals, then the end date shall be extended until the day when the appellate court’s decision shall become final.
Hence, as a consequence, the liability of the employer, if he loses on appeal, will increase – this is just but a risk that
the employer cannot avoid when it continued to seek recourses against the Labor Arbiter’s decision. This is also in
accordance with Article 279 of the Labor Code.

Anent the issue of award of interest in the form of actual or compensatory damages, the Supreme Court ruled that
the old case of Eastern Shipping Lines vs CA is already modified by the promulgation of the Bangko Sentral ng
Pilipinas Monetary Board Resolution No. 796 (promulgated July 1, 2013) which lowered the legal rate of interest
from 12% to 6%. Specifically, the rules on interest are now as follows:

1. Monetary Obligations ex. Loans:

a. If stipulated in writing:
a.1. shall run from date of judicial demand (filing of the case)
a.2. rate of interest shall be that amount stipulated

b. If not stipulated in writing

b.1. shall run from date of default (either failure to pay upon extra-judicial demand or upon
judicial demand whichever is appropriate and subject to the provisions of Article 1169 of the Civil
Code)
b.2. rate of interest shall be 6% per annum

2. Non-Monetary Obligations (such as the case at bar)

a. If already liquidated, rate of interest shall be 6% per annum, demandable from date of judicial or extra-
judicial demand (Art. 1169, Civil Code)
 b. If unliquidated, no interest
Except: When later on established with certainty. Interest shall still be 6% per annum demandable
from the date of judgment because such on such date, it is already deemed that the amount of
damages is already ascertained.

3. Compounded Interest
This is applicable to both monetary and non-monetary obligations. The 6% per annum computed against
award of damages (interest) granted by the court. To be computed from the date when the court’s decision
becomes final and executory until the award is fully satisfied by the losing party.

4. The 6% per annum rate of legal interest shall be applied prospectively:

Final and executory judgments awarding damages prior to July 1, 2013 shall apply the 12% rate;
Final and executory judgments awarding damages on or after July 1, 2013 shall apply the 12% rate for
unpaid obligations until June 30, 2013; unpaid obligations with respect to said judgments on or after July 1,
2013 shall still incur the 6% rate.
Principle: Transcaction presumed to be equitable mortgage: Contracts with Right to Repurchase

CABALLERO et al. vs. ONG TIAO BOK

SECOND DIVISION

Facts:

The subject property are two parcels of land located in Calatrava, Negros Occidental owned by Spouses
Caballero. The lots (Lot Nos. 3 and 1451), with a total area of 110,010 square meters, were covered by
Transfer Certificate of Title Nos. 24402 and 24403, respectively.

On March 17, 1972, Sergio Caballero, with the marital consent of his wife, Elisea Hechanova, sold the
two lots to herein respondent Ong Tiao Bok for P60,000.00 under a contract denominated as "Deed of
Sale with Right to Repurchase."

The contract provided:

• A purchase price of P60,000.00;

• P23,000.00 should be paid to the Philippine National Bank;

• P30,000.00 to a certain Rogelio Cruz;

• the remaining amount of P7,000.00 should be paid to Caballero;

• that the vendor may repurchase the property within a period of five years from the date of the
execution of the contract with a grace period of three years from the expiration of the original period of
five years; and

• that an area of 400 square meters in Lot No. 3, a beach resort with coconut and nipa palm trees,
would be reserved for the exclusive use of the vendor until the expiration of the period of redemption,
although it appears that respondent took possession of the lots. The deed of sale was duly registered.

On January 29, 1996, after Sergio Caballero and Elisea Hechanova had died and 16 years after the
expiration of the stipulated period of redemption, petitioners filed an action in the Regional Trial Court,
Branch 58, San Carlos City, Negros Occidental, for the cancellation of the annotations of the sale on the
titles to the lots.

Petitioner’s contention:

They contended that the contract between their predecessor-in-interest and respondent was in fact a
contract of equitable mortgage and, since the ten (10) year prescriptive period for the foreclosure of the
mortgage had lapsed, the annotation on the titles to the lots constituted a cloud thereon which should be
removed.

Trial Court’s ruling:

The trial court dismissed petitioners' complaint on the ground that the Contract in question is a valid
contract of sale with right of repurchase, and not an equitable mortgage, and that in any case laches has
set in to bar petitioners' action.
For this reason, it ordered the Registrar of Deeds of Negros Occidental to cancel TCT Nos. 24402 and
24403 and to issue a new one in the name of respondent since, with the vendor's failure to redeem the
properties, title thereto became consolidated in favor of respondent.

CA’s ruling:

On appeal to the Court of Appeals, the ruling was affirmed. Petitioners' motion for reconsideration was
also denied. Hence this petition.

Issue:

• Whether or not the contract entered into between the parties is that of a sale or a mortgage?

• Whether or not the purchase price was inadequate?

• Whether or not the stipulation allowing the Caballeros exclusive use of a portion of the sold
properties is a valid ground for the petitioner to remain in possession of the said property?

• Whether or not petitioners are barred by laches?

Ruling:

1. The contract entered into by the parties is one of a contract of sale. In order to determine whether
a contract is one of sale or mortgage, the intention of the parties must be ascertained.

In this case, as expressly stipulated in the said contract, that:

"for and in consideration of the sum of P60,000.00, which the Party of the Second Part [respondent] shall
pay the Party of the First Part [Caballero], the latter hereby sells, cedes, and conveys unto the Party of
the Second Part all his rights, interest and participation in the abovementioned lots" and that "after the
expiration of five (5) years from the signing of th[e] contract the Party of the First Part has the right to
repurchase the two lots for the same consideration as stated in the Deed of Sale with pacto de [r]etro and
that the said Party of the First Part shall have a grace period of three (3) years from the expiration of the
five years."

These stipulations clearly express the intention of the parties to enter into a contract of sale with a right
of repurchase. Their contract needs no interpretation and should be enforced as written.

2. The price was adequate. As expressly stipulated under Art. 1602(1) of the Civil Code:

“A contract shall be presumed to be an equitable mortgage when the price of a sale with right to
repurchase is unusually inadequate. The inadequacy of the price paid must be so gross and
unconscionable that the mind revolts at it and is such as a reasonable man would neither directly nor
indirectly be likely to consent to.

In the case at bar, while the purchase price of the land was P60,000.00 when its assessed value is
P65,610.00, the difference cannot be considered unconscionable and revolting. The Caballeros likewise
utilized a large part of the purchase price in order to settle their obligation to their creditors (PNB and
Cruz). This obviously was a major factor in their decision to sell the properties at a price slightly lower
than its assessed value.

The petitioners claim that "it is public knowledge that that assessed value of properties is far below their
fair market value ... thus a selling price equal or a little below that of the assessed value . . . is certainly
and definitely inadequate” is likewise untenable. In the absence, of any evidence on the actual extent of
the inadequacy of the price proving the same to be grossly inadequate, such allegation cannot be given
much weight. Indeed, the vendor in cases of pacto de retro sale usually fixes a price less than the real
value to make it easier for him to return the price received not to mention that in cases of sale with right
of repurchase, the price obtained is ordinarily less than that paid in cases of absolute sale.

3. There is also no merit in petitioners' contention that by virtue of the stipulation allowing the
Caballeros exclusive use of a portion of the sold properties, they have remained in possession thereof
and that, as provided in Art. 1602(2) of the Civil Code, this is an indication that the contract is one of
equitable mortgage.

As found by the Trial Court, the Caballeros did not really remain in possession of the lots and that it was
respondent who has been in possession thereof since the execution of the contract in question. Moreover,
the reservation of the portion of the area in question hardly amounts to the possession contemplated by
law. Considering the nature of the property reserved (beach resort) and the area it covers (400 square
meters) in relation to the size of the entire property (more than 11 hectares), it is evident that the
arrangement was more a form of accommodation to the former lot owners than a recognition of their
right to remain on the land.

The applied purpose appears to be merely to give them access to the beach resort. Indeed, the contract
provided that upon the expiration of the period of redemption, the Caballeros would no longer be
allowed access to any part of the purchased property.

4. Petitioners are also barred by laches from claiming any rights under the contract. They brought
this action more than 23 years after the execution of the contract, during which period respondent was in
possession of the land. Petitioners have slept on their claimed right.

For the foregoing reasons, the Court RESOLVED to deny the petition for lack of showing that the Court
of Appeals committed a reversible error.
Principle: Transcaction presumed to be equitable mortgage; Contracts with Right to Repurchase

MYRNA RAMOS VS. SUSANA S. SARAO AND JONAS RAMOS

G.R. NO. 149756, February 11, 2005

FACTS:

On February 21, 1991, Spouses Jonas Ramos and Myrna Ramos executed a contract over their conjugal
house and lot under the Registry of Deeds of Makati in favor of Susana S. Sarao for and in consideration
of P1,310,430. The contract entitled “DEED OF SALE UNDER PACTO DE RETRO,” granted the Ramos
spouses the option to repurchase the property within six months from February 21, 1991, for P1,310,430
plus an interest of 4.5 percent a month. The contract was subsequently executed after the spouses Ramos
loaned the amount of P1,234,000.00 from Sarao. The amount to be paid exceeded the loan obligation as it
included the P20,000 attorney’s fees, multiplied the 4.5% interest rate.

Myrna Ramos claimed that the market value of the property was calculated to be more or less P10
million, but was offered only for 1,310,430.00 for the reason that the subject property is to be redeemed.

The parties agreed that Sarao will keep the Torrens the title until the lapse of the six month period, in
which case Myrna Ramos will redeem the subject property and the Torrens title covering it. It was
further agreed that should the spouses fail to pay the monthly interest or to exercise the right to
repurchase within the stipulated period, the conveyance would be deemed an absolute sale.

On July 30, 1991, Myrna Ramos tendered to Sarao the amount of P1,633,034.20 in the form of two
manager’s checks, which the latter refused to accept for being insufficient to pay the loan obligation.
Myrna came to court to consign the checks, and proceeded to the Register of Deeds to cause the
annotation of lis pendens.

Myrna filed a complaint for the redemption of the property and moral damages plus attorney’s fees.
Sarao filed for a consolidation of ownership in pacto de retro sale.

RTC and CA ruled in favor of Sarao and granted the prayer to consolidate the title of the property in her
favor.

ISSUE:

Whether or not the subject Deed of Sale under Pacto de Retro was, and is in reality and under the law an
equitable mortgage.

HELD:

The pivotal issue in the instant case is whether the parties intended the contract to be a bona fide pacto
de retro sale or an equitable mortgage.

In a pacto de retro, ownership of the property sold is immediately transferred to the vendee a retro,
subject only to the repurchase by the vendor a retro within the stipulated period. The vendor a retro’s
failure to exercise the right of repurchase within the agreed time vests upon the vendee a retro, by
operation of law, absolute title to the property. Such title is not impaired even if the vendee a retro fails
to consolidate title under Article 1607 of the Civil Code.
On the other hand, an equitable mortgage is a contract that --although lacking the formality, the form or
words, or other requisites demanded by a statute -- nevertheless reveals the intention of the parties to
burden a piece or pieces of real property as security for a debt. The essential requisites of such a contract
are as follows: (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. The nonpayment of the debt when due gives the
mortgagee the right to foreclose the mortgage, sell the property, and apply the proceeds of the sale to the
satisfaction of the loan obligation.

There is no single conclusive test to determine whether a deed absolute on its face is really a simple loan
accommodation secured by a mortgage. However, the law enumerates several instances that show when
a contract is presumed to be an equitable mortgage, as follows:

Article 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 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.

Jurisprudence has consistently declared that the presence of even just one of the circumstances set forth
in the forgoing Civil Code provision suffices to convert a contract to an equitable mortgage. Article 1602
specifically states that the equitable presumption applies to any of the cases therein enumerated.

The petitioner and her children retained possession of the property allegedly sold. They continued to use
it as their residences. In fact, it remained as Myrna’s address for the service of court orders and copies of
Respondent Sarao’s pleadings. Clearly, the spouses entered into the alleged pacto de retro sale to secure
a loan obligation, and not to transfer ownership of the property.

Equitable mortgage is presumed to be favored by law. The law discourages the use of a pacto de rectro
because this scheme is frequently used to circumvent a contract, pactum commisorium. The court noted
that a pacto de rectro is used to conceal a contract of loan secured by a mortgage.

The presumption imposes a burden on Sarao to rebut it. Ramos, the favored party need not introduce
proof to establish the presumption; the party challenging it must adduce substantial and credible
evidence to prove it. Sarao, in this case miserably failed to discharge the evidentiary burden.

In as much as the contract between parties was an equitable mortgage, Respondent Sarao’s remedy was
to recover the loan amount from petitioner by fining an action for the amount due or by foreclosing the
property.

SC declared the disputed contract as an equitable mortgage.

Principle: Transaction presumed to be Equitable Mortgage: contracts with right to repurchase

Dino vs. Jardines

Facts:

Diño (petitioner) filed a Petition for Consolidation of Ownership with the RTC. She alleged that:
Jardines (respondent) executed in her favor a Deed of Sale with Pacto de Retro over a parcel of land with
improvements covered by a Tax Declaration, the consideration for which amounted to P165,000.00; it
was stipulated in the deed that the period for redemption would expire in six months; such period
expired but neither respondent nor any of her legal representatives were able to redeem or repurchase
the subject property; as a consequence, absolute ownership over the property has been consolidated in
favor of petitioner.

Respondent countered that the Deed of Sale with Pacto de Retro did not embody the real intention of the
parties; the transaction actually entered into by the parties was one of simple loan and the Deed of Sale
with Pacto de Retro was executed just as a security for the loan; the amount borrowed by respondent
was only P50,000.00 with monthly interest of 9% to be paid within a period of six months; it was never
the intention of respondent to sell her property to petitioner; the value of respondent’s residential house
alone is over a million pesos and if the value of the lot is added, it would be around 1.5 million; it is
unthinkable that respondent would sell her property worth one and a half million pesos for only
P165,000.00. Petitioner insisted on appropriating the property of respondent which she put up as
collateral for the loan; respondent has been the one paying for the realty taxes on the subject property.

Issue: WON it is a pacto de retro sale.

Ruling:

The fact that respondent has remained in actual physical possession of the property in question, and that
respondent has been the one paying the real property taxes on the subject property was established by
the admission made by petitioner during the pre-trial conference and embodied in the Pre-Trial Order.
The finding that the purchase price in the amount of P165,000.00 earns monthly interest was based on
petitioner’s own testimony and admission that the amount of P165,000.00, if not paid, shall bear an
interest of 10% per month.

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.
The presence of even one of the above-mentioned circumstances is sufficient basis to declare a contract
of sale with right to repurchase as one of equitable mortgage. 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.

In the instant case, the presence of the circumstances provided for under paragraphs (2) and (5) of
Article 1602, and the fact that petitioner herself demands payment of interests on the purported
purchase price of the subject property, clearly show that the intention of the parties was merely for the
property to stand as security for a loan. The transaction between herein parties was then correctly
construed by the CA as an equitable mortgage.
CONTRACTS OF ABSOLUTE

Principle: Effect when transaction is deemed an equitable mortgage: Reformation of instrument

BENNY GO, petitioner, vs. ELIODORO BACARON, respondent.

[G.R. No. 159048. October 11, 2005.]

FACTS:

As evidenced by the Transfer of Rights dated October 1, 1993, Eliodoro Bacaron conveyed a 15.3955-hectare parcel of land
located in Langub, Talomo, Davao City, in favor of Benny Go for P20,000.00.

About a year thereafter, Bacaron, seeking to recover his property, went to Go to pay his alleged P20,000.00 'loan' but the
latter refused to receive the same and to return his property saying that the transaction between the two of them was a sale and
not a mortgage as claimed by Bacaron. This prompted Bacaron to file a Complaint for Reformation of Instrument with Damages
and prayer for issuance of a writ of preliminary injunction with the RTC of Davao City against Go.

In Bacaron’s Complaint:

In mid-1993, he suffered business reversals which prompted him to borrow P20,000 from Go. The latter required him
first to execute a document purporting to be a “Transfer of Rights” but was told that it was only for formality as Bacaron
could still recover the unregistered land the moment he pays the loan. Although the document did not express the true
intention of the parties which is equitable mortgage, he still signed the same as he was in a very tight financial situation
and he was assured by Go that he can still redeem said property.

To support his claim that it was an equitable mortgage only, he stressed the fact that P20,000 is grossly inadequate as
a selling price for a 15-hectare land considering that the market value at that time amounts to P100,000 per hectare. More
so, he remained in possession of the property despite said transaction.

In Go’s Answer:
He denies that the transaction was only an equitable mortgage but an actual transfer of right- sale. That when
Bacaron suffered business reverses, his accounts with the petitioner remained unpaid, as evidenced by postdated checks,
cash vouchers and promissory notes. His total indebtedness was P985, 423.70, exclusive of interest.

In order to avoid filing a case against Bacaron, the latter offered to pay his indebtedness through dacion en page,
giving the land in question as full payment thereof. Although it is true that it is very unreasonable for him to agree to
accept said land in exchange for over a million of indebtedness, he was only forced to do so as Bacaron told him that if he
would not accept the offer, other creditors would grab said land.

ISSUES (per syllabus):

1. WON the agreement between the parties was a contract of Absolute Sale
2. What is the effect when the transaction is deemed an Equitable mortgage

RULING:

1. No. It was an Equitable Mortgage.

Equitable mortgage has been defined "as one which although lacking in some formality, or form or words, or other requisites
demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and
contains nothing impossible or contrary to law.”

The instances in which a contract of sale is presumed to be an equitable mortgage are enumerated in Article 1602 of the Civil
Code as follows:
"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 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."

Furthermore, Article 1604 of the Civil Code provides that "[t]he provisions of Article 1602 shall also apply to a contract
purporting to be an absolute sale.

Inadequate Consideration
The parties' respective arguments show that the sum of P20,000, by itself, is inadequate to justify the purported absolute
Transfer of Rights. Petitioner's claim that there was a dacion en pago is not reflected on the instrument executed by the parties.
That claim, however, confirms the inadequacy of the P20,000 paid in consideration of the Transfer of Rights; hence, the Contract
does not reflect the true intention of the parties. As to what their true intention was — whether dacion en pago or equitable
mortgage — will have to be determined by some other means.|||

Possession
Possession is the holding of a thing or the enjoyment of a right, whether by material occupation or by the fact that the right —
or, as in this case, the property — is subjected to the will of the claimant.|
In the present case, the witnesses of respondent swore that they had seen him gather fruits and coconuts on the property. Based
on the cited case, the witnesses' testimonies sufficiently establish that even after the execution of the assailed Contract,
respondent has remained in possession of the property. The testimonies proffered by petitioner's witnesses merely indicated
that they were tenants of the property. Assuming that the witnesses of petitioner were indeed credible, their testimonies were
insufficient to establish that he enjoyed possession over the property.

Payment of Realty Tax

Respondent counters with the CA's findings that it was he who paid realty taxes on the property. The appellate court concluded
that he had paid taxes for the years 1995, 1996 and 1997 within each of those years; hence, before the filing of the present
controversy. In contrast, petitioner paid only the remaining taxes due on October 17, 1997, or after the case had been instituted.
That the parties intended to enter into an equitable mortgage is bolstered by respondent's continued payment of the real
property taxes subsequent to the alleged sale. Payment of those taxes is a usual burden attached to ownership. Coupled with
continuous possession of the property, it constitutes evidence of great weight that a person under whose name the realty taxes
were declared has a valid and rightful claim over the land.

Real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other
obligation
That the parties intended to enter into an equitable mortgage is also shown by the fact that the "seller" was driven to obtain the
loan at a time when he was in urgent need of money; and that he signed the Deed of Sale, despite knowing that it did not
express the real intention of the parties. 33 In the present proceedings, the collapse of his business prompted respondent to
obtain the loan. 34 Petitioner himself admitted that at the time they entered into the alleged absolute sale, respondent had
suffered from serious business reversals.

2. Reformation of Instrument to reflect the true intention of the parties

It is the intention of the parties that determines whether a contract is one of sale or of mortgage.

In the present case, one of the parties to the contract raises as an issue the fact that their true intention or agreement is not
reflected in the instrument. Under this circumstance, parol evidence becomes admissible and competent evidence to prove the
true nature of the instrument. Hence, unavailing is the assertion of petitioner that the interpretation of the terms of the Contract
is unnecessary, and that the parties clearly agreed to execute an absolute deed of sale. His assertion does not hold, especially in
the light of the provisions of Article 1604 of the Civil Code, under which even contracts purporting to be absolute sales are
subject to the provisions of Article 1602.

Moreover, under Article 1605 of the New Civil Code, the supposed vendor may ask for the reformation of the instrument,
should the case be among those mentioned in Articles 1602 and 1604. Because respondent has more than sufficiently established
that the assailed Contract is in fact an equitable mortgage rather than an absolute sale, he is allowed to avail himself of the
remedy of reformation of contracts.

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution AFFIRMED.
Principle: Transactions Presumed to be Equitable Mortgages

SPOUSES CESAR R. ROMULO and NENITA S. ROMULO, petitioners, vs.

SPOUSES MOISES P. LAYUG, JR., and FELISARIN LAYUG, respondents.

FACTS:
Petitioners Spouses Cesar and Nenita Romulo filed a verified Complaint for Cancellation of Title,
Annulment of Deed of Absolute Sale and Contract of Lease with Damages against respondents Spouses
Moises and Felisarin Layug.

Petitioners averred in their complaint that they obtained from respondents a loan and to secure
the payment, the respondents allegedly duped petitioners into signing a Contract of Lease and a Deed of
Absolute Sale covering petitioners' house and lot. The Deed of Absolute Sale purportedly facilitated the
cancellation of petitioners' title on the house and lot and the issuance of a new TCT in the name of
respondents. Thus, petitioners prayed for the nullification of the Deed of Absolute Sale, the contract of
lease and the new issued TCT.

Respondents denied petitioners' allegations and vouched for the validity of the Deed of Absolute
Sale, particularly as having been voluntarily executed by the parties for the purpose of extinguishing
petitioners' indebtedness to respondents.

Prior to the filing of this civil case, respondent Moises Layug, Jr. ("Moises") filed another civil
case for an action for ejectment against petitioners to compel the latter to vacate the house and lot
allegedly sold by petitioners to Moises and subsequently rented out by him to petitioners. Moises
alleged that petitioners violated the terms of the Contract of Lease when the latter failed to pay any
rental or exercise their option to repurchase the house and lot and refused to vacate the property despite
demand. The MeTC, RTC, CA and SC dismissed and denied Moises’ complaint.

The RTC rendered judgment on the first civil case in favour of petitioners Spouses Romulo.

The Court of Appeals reversed and set aside the RTC Decision, mainly on the ground that
petitioners failed to present sufficient evidence to prove their allegation that their signatures to the Deed
of Absolute Sale were obtained fraudulently.

The RTC and the Court of Appeals differ in opinion. The trial court based its declaration that an
equitable mortgage was intended by the parties on the finding that petitioners remained in possession of
the house and lot even after the property was supposedly sold to respondents. The Court of Appeals
disagreed and declared that an absolute sale was contemplated by the parties based on the express
stipulations in the Deed of Absolute Sale and on the acts of ownership by respondents subsequent to its
execution.

ISSUE: Whether or not the transaction between the parties constitutes an equitable mortgage.

RULING:
The SC held that respondents' continuing to lend money to petitioners does not make sense if the
intention of the parties was really to extinguish petitioners' outstanding obligation. The logical and
inevitable conclusion is that respondents deemed it wise to formalize a security instrument on
petitioners' house and lot by executing the Deed of Absolute Sale after realizing that petitioners could no
longer fully satisfy their obligation to respondents. The circumstances surrounding the execution of the
Deed of Absolute Sale, particularly the fact that respondents continued to extend some loans to
petitioners after its execution, precludes the Court from declaring that the parties intended the transfer
of the property from one to the other by way of sale.

For the presumption of equitable mortgage to arise, two requisites must be satisfied, namely: that
the parties entered into a contract denominated as a contract of sale and that their intention was to
secure an existing debt by way of mortgage. Under Article 1604 of the Civil Code, 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. To stress, the existence of any one of the conditions under Article 1602, not a
concurrence, or an overwhelming number of such circumstances, suffices to give rise to the presumption
that the contract is an equitable mortgage. It must be emphasized too, however, that there is no
conclusive test to determine whether a deed absolute on its face is really a simple loan accommodation
secured by a mortgage. In fact, it is often a question difficult to resolve and is frequently made to depend
on the surrounding circumstances of each case. When in doubt, courts are generally inclined to construe
a transaction purporting to be a sale as an equitable mortgage, which involves a lesser transmission of
rights and interests over the property in controversy.

In the case at bar, petitioners remained in possession of the house and lot even after the execution
of the Deed of Absolute Sale. Moreover, they remained in possession of the property for more than the
reasonable time that would suggest that petitioners were mere lessees thereof. For one, it took
respondents more than five years from the time of the execution of the Deed of Absolute Sale and the
Contract of Lease to file the action for ejectment. Within this period, petitioners neither paid any rental
nor exercised the option to buy purportedly the leased property from respondents. Incidentally, in the
decisions of the MeTC and the RTC in the separate action for ejectment, both lower courts observed that
when petitioners were made to sign a blank document, which turned out to be a Contract of Lease of
their house and lot, they were of the belief that the blank document would serve only as guaranty for the
payment of their obligation to respondents.

The claim that petitioners' possession of the house and lot was by sheer tolerance of respondents
is specious. Respondents could not explain why they allowed petitioners more than five years to look for
another place to transfer. These circumstances only support the conclusion that the parties never really
intended to transfer title to the property. Under paragraph 2 of Article 1602, where the purported vendor
remains in possession of the property subject of the sale and it can be inferred that the true intention of
the parties was to secure an existing debt, the transaction shall be deemed an equitable mortgage.

Under paragraph 1 of Article 1602, where the purchase price is inadequate, a contract of sale is
also presumed to be an equitable mortgage. Based on respondents' evidence, petitioners' property was
valued at P700, 000.00 but the assailed Deed of Absolute Sale stated a consideration of only P200, 000.00.
Contrary to the appellate court's declaration that the inadequacy of the purchase price is not sufficient to
set aside the sale, the Court finds the same as clearly indicative of the parties' intention to make the
property only a collateral security of petitioners' debt. The Court is not convinced that petitioners would
allow the sale of their residential property for even less than half of its market value.

WHEREFORE, the petition is GRANTED.

Principle: Contract of Absolute Sale; Effect when the transaction is deemed an equitable mortgage:
Reformation of instrument

BACUNGAN v. CA
G.R. No. 170282 (December 18, 2008) SECOND DIVISION, Tinga, J.

FACTS:

Respondents Napoleon and Victoria Velo instituted an action for reconveyance with damages against petitioners
Alexander and Jean Jimeno Bacungan before RTC. Respondents alleged that they were the registered owners of 18
parcels of land situated in Rosales, Pangasinan and embraced in different Transfer Certificate of Title (TCT).

Respondents claimed that sometime in February of 1993, they had experienced business reversals and financial
difficulties and had sought assistance from petitioners in securing a loan. Petitioners allegedly proposed that they
would obtain the loan provided that respondents secure the transfer of the titles to petitioners that would be used
as security for the loan. Respondents agreed. However, respondents claimed that after petitioners had obtained the
new titles, they never applied for a loan with the bank but had secretly negotiated for the sale of the properties to
third parties.

In their answer, petitioners asserted that respondents offered to sell to them 23 parcels of land, 18 of which were
used as collateral for the loan respondents had obtained from Traders Royal Bank. Petitioners claimed to have
bought 22 parcels of land and executed the corresponding deeds of sale on 26 February 1993 and 10 March 1993.
They also allegedly paid in full respondents’ obligation with said bank but only 18 certificates of title released by
the bank were delivered to petitioners. Petitioners further maintained that they returned one of the deeds of sale to
respondents and considered the sale as cancelled. Petitioners averred that the amounts they paid to respondents
were more than enough as consideration of the 23 contracts.

The RTC rendered a decision on 20 April 1999, dismissing the complaint for lack of merit. Respondents elevated
the matter to the CA arguing that the contracts between respondents and petitioners were simulated. On 21 March
2005, the CA rendered the assailed decision, reversing the RTC’s judgment.

ISSUE: Whether or not the deeds of absolute sale embody the agreements of the parties.

HELD:

The Court finds that the deeds of absolute sale do not embody the real intention of the parties. The records reveal
that respondents executed several real estate mortgages over the properties to secure the payment of the total
amount of P350,000.00. Respondents defaulted on the payments, prompting the bank to foreclose the properties.
However, as illustrated in the testimony of respondent Victoria Velo, respondents and petitioners devised a plan in
which they agreed that in exchange for the apparent transfer of ownership of the parcels of land to petitioners, the
latter would provide for the funds for the redemption of the properties from the bank in addition to the loan that
petitioners would obtain from the bank. Thus, respondents were able to redeem the properties for the amount of
P369,000.00 that was advanced by way of mortgage to them by petitioners.

Thereafter, respondents executed several deeds of sale purporting to transfer the 18 parcels of lands. The parties
further agreed that upon the transfer of the properties in the name of petitioners, the latter would obtain another
loan from the bank using the properties as collateral. Petitioners were supposed to remit the loan proceeds to
respondents after deducting the amount of P369,000.00 and, thereafter, allow respondents to buy back the
properties. However, because petitioners had failed to secure a loan from the bank after the transfer of the titles in
their names, respondents instituted the present action to nullify the deeds of sale on the ground that the sale was
simulated.
This kind of arrangement, where the ownership of the land is supposedly transferred to the buyer who provides
for the funds to redeem the property from the bank but nonetheless allows the seller to later on buy back the
properties, is in the nature of an equitable mortgage governed by Articles 1602 and 1604 of the Civil Code.

In the instant case, three telling circumstances indicating that an equitable mortgage exists are present.
First, as established by the CA, the price of each of the properties was grossly inadequate. Second, petitioners
retained part of the “purchase price” when they failed to turn over to the respondents the loan that they were
supposed to secure from the bank. Third, petitioners insisted that part of the consideration of the sale consisted of
amounts previously borrowed by respondents from them, indicating that petitioners were using the properties as
“security” for the payment of respondents’ other loans from them.

The CA concluded that the sale was simulated because of the gross inadequacy of the prices and the failure
by respondents to receive the purchase price. Gross inadequacy of price by itself will not result in a void contract.
That respondents did not receive the purchase price is not entirely correct. As discussed, the consideration for the
transaction was to secure the payment of respondents’ loan to petitioners.

Also, the CA’s conclusion that petitioner Alexander Bacungan admitted that the sale was simulated is not
supported by the records of the case. Petitioners merely admitted that previous to the execution of the deeds of
sale, respondents had borrowed other sums of money from them.

All told, while the deeds of sale do not reflect the true intention of the parties, their real agreement must
nonetheless be recognized and enforced. This being the case, the proper remedy availed was to institute an action
for the reformation of the deeds of sale in order to reflect the true intention of the parties. However, instead of
dismissing the complaint altogether, the just and expeditious manner is to settle once and for all the rights and
obligations of the parties under the equitable mortgage.

ADJUDICATION: The petition for review on certiorari is PARTLY GRANTED.

Principle: No right of repurchase after alleged equitable mortgage was declared pacto de retro

ABILLA vs GOBONSENG
[G.R. NO. 146651 | JANUARY 17, 2002]

FACTS:

Petitioner spouses instituted against respondents an action for specific performance, recovery of sum of money and
damages, docketed as Civil Case No. 8148 of the Regional Trial Court of Dumaguete City, Branch XLII, seeking the
reimbursement of the expenses they incurred in connection with the preparation and registration of two public
instruments, namely a “Deed of Sale” and an “Option to Buy.”

In their answer, respondents raised the defense that the transaction covered by the “Deed of Sale” and “Option to
Buy” which appears to be a Deed of Sale with Right of Repurchase, was in truth, in fact, in law, and in legal
construction, a mortgage.

ISSUE:

May the vendors in a sale judicially declared as a pacto de retro exercise the right of repurchase under Article 1606,
third paragraph, of the Civil Code, after they have taken the position that the same was an equitable mortgage?

RTC:
On October 29, 1990, the trial court ruled in favor of petitioners and declared that the transaction between the
parties was not an equitable mortgage. Citing Villarica vs Court of Appeals, it ratiocinated that neither was the said
transaction embodied in the “Deed of Sale” and “Option to Buy” a pacto de retro sale, but a sale giving
respondents until August 31, 1983 within which to buy back the seventeen lots subject of the controversy.

CA:
On the appeal filed by the respondents the CA decided as:
On appeal by respondents, the Court of Appeals ruled that the transaction between the parties was a pacto de retro
sale, and not an equitable mortgage. The decretal portion thereof states:
WHEREFORE, the decision appealed from is MODIFIED by deleting the award of attorney’s fees. In other respects
the decision of the lower court is AFFIRMED. Costs against defendant-appellants.
Motion for reconsideration was denied.

On January 14, 2001, Branch 41 of the Regional Trial Court of Dumaguete City, to which the case was reraffled, set
aside the November 10, 1999 order and granted respondents’ motion to repurchase.
Hence, the instant recourse.

RULING:

At the outset, it must be stressed that it has been respondents’ consistent claim that the transaction subject hereof
was an equitable mortgage and not a pacto de retro sale or a sale with option to buy.

Even after the Court of Appeals declared the transaction to be a pacto de retro sale, respondents maintained their
view that the transaction was an equitable mortgage. Seeing the chance to turn the decision in their favor, however,
respondents abandoned their theory that the transaction was an equitable mortgage and adopted the finding of the
Court of Appeals that it was in fact a pacto de retro sale.

Respondents now insist that they are entitled to exercise the right to repurchase pursuant to the third paragraph of
Article 1606 of the Civil Code, which reads:

However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was
rendered in a civil action on the basis that the contract was a true sale with right to repurchase.
The question now is, can respondents avail of the aforecited provision? Following the theory of the respondents
which was sustained by the trial court, the scenario would be that although respondents failed in their effort to
prove that the contract was an equitable mortgage, they could nonetheless still repurchase the property within 30
days from the finality of the judgment declaring the contract to be truly a pacto de retro sale. However, under the
undisputed facts of the case at bar, this cannot be allowed.

In the parallel case of Vda. de Macoy v. Court of Appeals, the petitioners therein raised the defense that the
contract was not a sale with right to repurchase but an equitable mortgage. They further argued as an alternative
defense that even assuming the transaction to be a pacto de retro sale, they can nevertheless repurchase the
property by virtue of Article 1606, third paragraph of the Civil Code. It was held that the said provision was
inapplicable.

In the case at bar, both the trial court and the Court of Appeals were of the view that the subject transaction was
truly a pacto de retro sale; and that none of the circumstances under Article 1602 of the Civil Code exists to warrant
a conclusion that the transaction subject of the “Deed of Sale” and “Option to Buy” was an equitable mortgage.

The Court of Appeals correctly noted that if respondents really believed that the transaction was indeed an
equitable mortgage, as a sign of good faith, they should have, at the very least, consigned with the trial court the
amount of P896,000.00, representing their alleged loan, on or before the expiration of the right to repurchase on
August 21, 1983.

Clearly, therefore, the declaration of the transaction as a pacto de retro sale will not, under the circumstances,
entitle respondents to the right of repurchase set forth under the third paragraph of Article 1606 of the Civil Code.

SC DECISION:

WHEREFORE, in view of all the foregoing, the instant petition is GRANTED and the January 14, 2001 Order of the
Regional Trial Court of Dumaguete City, Branch 41, in Civil Case No. 8148, is REVERSED and SET ASIDE.
Principle: Legal Redemption, Requisites Thereof; Written Notice Of Sale By Vendee Or
Co-Owner-Vendor not required to a co owner with actual notice

SENEN B. AGUILAR, petitioner, vs. VIRGILIO B. AGUILAR and ANGEL B. AGUILAR, respondents.

FACTS:

The brothers Senen and Virgilio purchased a house and lot for the benefit of their father, Maximiano
Aguilar (now deceased). They executed a written agreement stipulating that their shares in the house and lot
would be equal; and that Senen would live with their father on condition that he would pay the Social Security
System (SSS) the remaining loan obligation of the former owners. When their father died, Virgilio then demanded
that Senen vacate the house and that the property be sold, the proceeds to be divided between them. Senen refused
to comply with Virgilio's demand.

Virgilio filed a complaint with the RTC for specific performance. Virgilio prayed that Senen be compelled
to sell the property so that the proceeds could be divided between them. Senen was declared as in default by the
trial court and Virgilio was allowed to present his evidence ex parte.

The trial court rendered its Decision, declaring the brothers co-owners of the house and lot and are entitled
to equal shares; and ordering that the property be sold, the proceeds to be divided equally between them. The trial
court also ordered Senen to vacate the property and to pay Virgilio rentals with interests corresponding to the
period from January 1975 until he leaves the premises.

The Court of Appeals reversed the trial court's Decision.

Virgilio then filed with this Court a petition for review on certiorari and the SC rendered its Decision to
reinstate the RTC’s decision and that respondent Senen B. Aguilar is ordered to vacate the premises in question
within ninety (90) days from receipt of this decision, and to pay petitioner Virgilio B. Aguilar, a monthly rental of
P1, 200.00 with interest at the legal rate from the time he received the decision of the trial court directing him to
vacate until he effectively leaves the premises.

After 7 years, Senen filed with the RTC an action for legal redemption against Virgilio and another brother,
Angel. In his complaint, Senen alleged that while he knows that Virgilio sold his 1/2 share of the property to Angel
he (Senen) was not furnished any written notice of the sale. Consequently, as a co-owner, he has the right to
redeem the property.

Meanwhile, pursuant to the SC’s decision on the first case, the property was sold at public auction to
Alejandro C. Sangalang, intervenor-respondent herein. Virgilio then received his share of the proceeds as well as
the rental payments due from Senen. The trial court dismissed the civil case on the ground of laches, holding that
Senen incurred a delay of seven (7) years before asserting his right to redeem the property in question.

On appeal, the Court of Appeals affirmed the assailed Order of the trial court. Hence, the instant petition
for review on certiorari.

ISSUE:

Whether or not the Court of Appeals erred in holding that Senen's complaint for legal redemption is barred
by laches.

Whether or not written a notice of sale by the vendor to his co-owner who has an actual knowledge of the
sale is indispensible to exercise their legal redemption.
RULING:

1. No, CA is correct. As discussed, laches is the failure or neglect, for an unreasonable and unexplained
length of time, to do that which could or should have been done earlier through the exercise of due diligence. In
this case, petitioner has actual knowledge of the sale of Virgilio's share to Angel in 1989. As provided by Article
1623, he has thirty days from such actual knowledge within which to exercise his right to redeem the property.
Inexplicably, petitioner did not take any action. He waited for seven (7) years before filing his complaint.
Definitely, such an unexplained delay is tantamount to laches. To be sure, to uphold his right would unduly cause
injury to respondent-intervenor, a purchaser in good faith and for value.

2. SC ruled in this case that a co-owner with actual notice of the sale is not entitled to a written notice for such
would be superfluous. From Articles 1620 and 1623 of the Civil Code, the following are the requisites for the
exercise of legal redemption: (1) There must be a co-ownership; (2) one of the co-owners sold his right to a stranger;
(3) the sale was made before the partition of the co-owned property; (4) the right of redemption must be exercised
by one or more co-owners within a period of thirty days to be counted from the time that he or they were notified
in writing by the vendee or by the co-owner vendor; and (5) the vendee must be reimbursed for the price of the
sale. In this case, the sale took place in January 1989. Petitioner admits that he has actual knowledge of the sale.
However, he only asserted his right to redeem the property in March 1995 by filing the instant complaint. Both the
trial court and the Appellate Court ruled that this was seven (7) years late.

In addition, SC said that by the time Senen filed the civil case for legal redemption, his right was no longer
available to him. We have held that after a property has been subdivided and distributed among the co-owners, the
community has terminated and there is no reason to sustain any right of pre-emption or redemption.

Therefore, the petition is DENIED.

Principle: Requisites of Redemption

Avila v. Barabat
G.R No. 141993, March 17, 2006
Facts:

The subject of this controversy is a portion of a 433-square meter parcel of land located in Poblacion, Toledo City,
Cebu. The entire property is registered in the name of Anunciacion Bahenavda. de Nemeño. Upon her death,
ownership of the lot was transferred by operation of law to her five children, petitioners Narcisa Avila, Natividad
Macapaz, Francisca Adlawan, Leon Nemeño and Jose Bahena.

In 1964, respondent Benjamin Barabat leased a portion of the house owned by Avila. Avila subsequently relocated
to Cagayan de Oro City. She came back to Toledo City in July 1979 to sell her house and share in the lot to her
siblings but no one showed interest in it. She then offered it to respondents who agreed to buy it. Respondents
stopped paying rentals to Avila and took possession of the property as owners. They also assumed the payment of
realty taxes on it.

Sometime in early 1982, respondents were confronted by petitioner Januario Adlawan who informed them that
they had until March 1982 only to stay in Avila’s place because he was buying the property. Respondents replied
that the property had already been sold to them by Avila. They showed Adlawan the July 17, 1979 document
executed by Avila.

Avila denied having offered to sell her property to respondents. She claimed that respondents gave her an P8,000
loan conditioned on her signing a document constituting her house and share in lot no. 348 as security for its
payment.

Issue:

Whether or not the sale was an equitable mortgage

Whether or not the co-owners have the right to redemption

Ruling:

Issue 1

No, it was an absolute sale.

Petitioners claim that the appellate court erred in ruling that the transaction between respondents and Avila was
an absolute sale, not an equitable mortgage. They assert that the facts of the case fell within the ambit of Article
1602 in relation to Article 1604 of the Civil Code on equitable mortgage because they religiously paid the realty tax
on the property and there was gross inadequacy of consideration.

For Articles 1602 and 1604 to apply, two requisites must concur: (1) the parties entered into a contract denominated
as a contract of sale and (2) their intention was to secure an existing debt by way of mortgage. Here, both the trial
and appellate courts found that Exhibit "A" evidenced a contract of sale. They also agreed that the circumstances of
the case show that Avila intended her agreement with respondents to be a sale. Both courts were unanimous in
finding that the subsequent acts of Avila revealed her intention to absolutely convey the disputed property. It was
only after the perfection of the contract, when her siblings began protesting the sale, that she wanted to change the
agreement.

Issue 2

No, the petitioners have no right of redemption.

Art. 1620. A co-owner of a thing may exercise the right of redemption in case the shares of all the other co-owners
or any of them, are sold to a third person. If the price of the alienation is grossly excessive, the redemptioner shall
pay only a reasonable one.
Should two or more co-owners desire to exercise the right of redemption, they may only do so in proportion to the
share they may respectively have in the thing owned in common. Petitioners’ right to redeem would have existed
only had there been co-ownership among petitioners-siblings. But there was none. For this right to be exercised, co-
ownership must exist at the time the conveyance is made by a co-owner and the redemption is demanded by the
other co-owner or co-owner(s). However, by their own admission, petitioners were no longer co-owners when the
property was sold to respondents in 1979. The co-ownership had already been extinguished by partition.

Here, the particular portions pertaining to petitioners had been ascertained and they in fact already took
possession of their respective parts. The following statement of petitioners in their amended answer as one of their
special and affirmative defenses was revealing:

F-8. That all defendants [i.e., petitioners] in this case who are co-owners of lot 348 have their own respective
buildings constructed on the said lot in which case it can be safely assumed that that their respective shares in the
lot have been physically segregated although there is no formal partition of the land among themselves.

Being an express judicial admission, it was conclusive on petitioners unless it was made through palpable mistake
or that no such admission was in fact made.

The purpose of partition is to separate, divide and assign a thing held in common among those to whom it belongs.
By their own admission, petitioners already segregated and took possession of their respective shares in the lot.
Their respective shares were therefore physically determined, clearly identifiable and no longer ideal. Thus, the co-
ownership had been legally dissolved. With that, petitioners’ right to redeem any part of the property from any of
their former co-owners was already extinguished. As legal redemption is intended to minimize co-ownership, once
a property is subdivided and distributed among the co-owners, the community ceases to exist and there is no more
reason to sustain any right of legal redemption.
Principle: Effects of redemption by co-owner of a deceased co-owner’s share;
When to exercise redemption: Notice

NELSON CABALES and RITO CABALES vs. COURT OF APPEALS,

JESUSFELIANO and ANUNCIANO FELIANO
G.R. No. 162421, August 31, 2007

FACTS:

Sometime in 1964, Rurfino Cabales died leaving behind a parcel of land inSouthern Leyte to his wife, Saturnina
and six children, namely, Bonifacio, Francisco,Alberto, Albino, Lenora, and Rito. On 1971, the brothers and co-
owners Bonifacio,Alberto and Albino sold the property to Dr. Corrompido with a right to repurchasewithin eight
(8) years. On 1972, prior to the redemption of the property, Albertodied leaving behind his wife and son, Nelson,
herein petitioner.

Sometime later and within the redemption period, the said brothers and their mother, in lieu of Alberto, tendered
their payment to Dr. Corrompido. Subsequently,Saturnina, and her four children, Bonifacio, Albino, Francisco and
Leonora sold the said land to Spouses Feliano. It was provided in the deed of sale that the shares of Nelson and
Rito, being minor at the time of the sale, will be held in trust by the vendee and will paid upon them reaching the
age of 21.In 1986, Rito received the sum of 1,143 pesos from the Spouses Felianorepresenting his share from the
proceeds of the sale of the property.

It was only in1988, that Nelson learned of the sale from his uncle, Rito. He signified his intention to redeem the
property in 1993 but it was only in 1995 that he filed a complaint for redemption against the Spouses Feliano. The
respondent Spouses averred that the petitioners are estopped from denying the sale since: (1) Rito already received
his share; and (2) Nelson, failed to tender the total amount of the redemption price.

The Regional Trial Court ruled in favour of Spouses Feliano on the ground that Nelson was no longer entitled to
the property since, his right was subrogated bySaturnina upon the death of his father, Alberto. It also alleged that
Rito had no more right to redeem since Saturnina, being his legal guardian at the time of the sale was properly
vested with the right to alienate the same.

The Court of Appeals modified the decision of the trial court stating that the sale made by Saturnina in behalf of
Rito and Nelson were unenforceable.

ISSUE:

Whether or not the sale made by a legal guardian (Saturnina) in behalf of the minors were binding upon them.

HELD:

With regard to the share of Rito, the contract of sale was valid. UnderSection 1, Rule 96 “A guardian shall have the
care and custody of the person of hisward, and the management of his estate, or the management of the estate only.
x xx” Indeed, the legal guardian only has the plenary power of administration of theminor’s property. It does not
include the power of alienation which needs judicialauthority. Thus, when Saturnina, as legal guardian of
petitioner Rito, sold the latter’s pro indiviso share in subject land, she did not have the legal authority to doso.
Accordingly, the contract as to the share of Rito was unenforceable. However,when he received the proceeds of the
sale, he effectively ratified it. This act of ratification rendered the sale valid and binding as to him.With respect to
petitioner Nelson, the contract of sale was void. He was a minor at the time of the sale. Saturnina or any and all the
other co-owners were no this legal guardians; rather it was his mother who if duly authorized by the courts,could
validly sell his share in the property. Consequently, petitioner Nelson retained ownership over their undivided
share in the said property. However, Nelson can no longer redeem the property since the thirty day redemption
period has expired and thus he remains as co-owner of the property with the Spouses Feliano.
Principle: Redemption by excluded co-heir

Galvez v. Court of Appeals

G.R. No. 157954, March 24, 2006

FACTS:

Timotea Galvez died intestate in Apri. 1965 leaving behind her children Ulpiano and Pax Galvez as heirs. Ulpiano
died in July 1959, thereby, predeceased Timotea and was suruvived by his son, Porfino. Timotea left a 4,304.5 sq.
m. land in Pagdaranan, San Fernando, La Union covered by a tax declaration. In May 1970, Paz executed an
affidavit of adjudication stating that she is the true and lawful owner of the property. In June 2002, Paz, without the
knowledge and consent of Porfino, sold the property to Carlos Tam for P10,000 who had it titled and sold the same
to Tycoon Properties, Inc. Porfino filed an action for legal redemption and damages.

ISSUES:

1. Has Porfino’s cause of action prescribed?

2. Did Paz make a repudiation of the co-ownership?

HELD:

No. (1) Under Art. 494 of the Civil Code, prescription shall not run in faovr or co-owners or co-heirs as long as he
expressly or impliedly recognizes the co-ownership. For title to prescribe in favor of a co-owner, there must be a
clear showing that he has repudiated the claims of the other co-owners and the latter has been categorically
advised of the exclusive claim he is making to the property in question. The rule requires a clear repudiation of the
co-ownership duly communicated to the other co-owners. It is only when such unequivocal notice has been given
that the period of prescription will begin to run against the other co-owners and ultimately divest them of their
own title if they do not seasonably defend it. To sustain a plea of prescription, it must always clearly appear that
one who was originally a joint owner has repudiated the claims of his co-owners, and that his co-owners were
apprised or should have been apprised of his claim of adverse and exclusive ownership before the alleged
prescriptive period began to run.

(2) Possession of a co-owner is like that of a trustee and shall not be regarded as adverse to the other co-owner but
in fact beneficial to all of them. The execution of the affidavit of self-adjudication does not constitute such
sufficient act of repudiation as to effectively exclude Porfino from the property. Thus, Porfino is entitled to redeem
the whole propertty and to damages.

In this case, we find that Paz Galvez effected no clear and evident repudiation of the co-ownership. The execution
of the affidavit of self-adjudication does not constitute such sufficient act of repudiation as contemplated under the
law as to effectively exclude Porfirio Galvez from the property. This Court has repeatedly expressed its
disapproval over the obvious bad faith of a co-heir feigning sole ownership of the property to the exclusion of the
other heirs essentially stating that one who acts in bad faith should not be permitted to profit from it to the
detriment of others. In the cases of Adille[33] and Pangan[34] where, as in this case, a co-heir was excluded from
his legal share by the other co-heir who represented himself as the only heir, this Court held that the act of
exclusion does not constitute repudiation.
Principle: Redemption in rural lands

FABIA v IAC
GR No. 66101, Nov. 21, 1984
FACTS:

The lot in question is originally owned by Hugo Mararac. Hugo Mararac sold the land to Leonardo Mararac and
Monica Resuello on March 27, 1971. At that time, the lot now owned by petitioners was owned by respondents
Angel Mararac and Juanito Mararac.

Leonardo Mararac and Monica Resuello sold to the Sps. Fabia the land in question on February 25, 1975. At that
time, the lot on the eastern side of the land in question was owned by Angel Mararac and his brother, Juanito
Mararac.

During both sales and the period in between, there was no offer of legal redemption. The land in question in
relation to the respondents is not separated by ravine, by brook, trail, road or other servitude for the bene¬fit of
others. The land in question is fenced and was fenced even before the first sale in March 27, 1971. The Fabias own
rural lands other than the land in question.

Now, respondent Angel Mararac filed a case against Fabia to exercise their right of legal redemption under NCC
1621,

Art. 1621. The owners of adjoining lands shall also have the right of redemption when a piece of rural land, the
area of which does not exceed one hectare, is alienated, unless the grantee does not own any rural land. This right
is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other apparent
servitudes for the benefit of other estates.

If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the
adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first
requested the redemption.

TC: in favor of Fabia

• No preponderance of evidence to support the claim for legal redemption since there is no evidence that the
land is rural.

• The complaint is a redemption of rural land but describes the land as “residential land.”

• The fact that the lot is enclosed with a bamboo fence and has 9 fruit bearing coconut trees, 45 coconut trees
not yet bearing fruit, about 120 banana plants, two bamboo clumps, on its northern part a fish well newly
constructed and on its eastern side hollow blocks and sand and gravel do not militate against its being residential
for the ordinary Philippine residence is traditionally profuse with trees and plants for home sufficiency, esthetic
appreciation and ecological balance.

• NCC 1621 is only applicable to rural lands, thus it cannot apply

• NCC 1622 (for urban lands) cannot apply since the complaint does not allege that the land is so small and
so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, and
having been bought merely for speculative purposes

IAC: reversed the decision of the TC

• Determining point is location of the property. It is in a barrio. If it is in the city or town resembling a city,
meaning the "poblacion", it is urban property. If it is situated in the sitios, barrios or barangays, other than a city or
town resembling a city, it is rural land, or one located in the countryside.

Petitioners’ contention: the land is primarily used for residential purposes and the complaint describes the land
itself as “residential.” They rely upon the judicial admissions in the complaint which bind the Mararacs.
Respondents’ contention: the land was utilized by Fabia exclusively for agricultural purposes from the time it was
purchased up to the time of the ocular inspection. The land is located in a barrio which is an agricultural district.
They argued that the complaint does not bind them since the description therein was just copied from the deed of
sale between Fabia and the original owner.

ISSUE: Whether or not the land in question can be considered as rural land for purposes of legal redemption?

RULING:

No, the land in question is not rural land hence cannot be subject to legal redemption.

In view of this legislative objective, the "use" of property for agricultural purpose is essential in order that
the same be characterized as rural land for purposes of legal redemption under Article 1621 of the Civil Code. The
small parcel of land one hectare or less in area, must be dedicated to agriculture before the owners of adjoining
lands may claim a right of redemption under Article 1621 of the Civil Code.

Thus, rural lands are distinguished from urban tenements: (2) By its purpose or being for agricultural, fishing or
timber exploitation, and not for dwelling, industry or commerce.

The respondents have failed to satisfy the above criterion. The land in question cannot be legally classified as rural
land since it is principally used for residential rather than agricultural purposes.

A further requisite laid down by the law to enable legal redemption of adjoining lands is that both the land
of the one exercising the right and the adjacent property sought to be redeemed should be rural or destined for
agricultural exploitation. If either, is urban or both are urban, there is no right of redemption. Again, the intention
of the law in providing for this right of redemption must be home in mind. If the land adjacent to that which is
sought to be redeemed is not agricultural, then the redemption is in vain, it does not answer the purpose behind
the law. So that, if one of the tenements is urban, the right of legal redemption allowed under this article cannot be
invoked.

Undeniably, the land adjoining that which is sought to be redeemed is a piece of residential land on which the
respondents live based from the stipulation of facts of the parties.

Again, this is deemed an admission by the respondents of the residential character of their own land thus
disqualifying them from rightfully redeeming the property in question.

Petition is granted.
Principle: Redemption in rural lands

Primary Structures Corp. vs. Sps. Valencia

G.R. No. 150060, August 19, 2003

Facts:

Petitioner is the registered owner of Lot 4523. Adjacent thereto are parcels of land identified as Lots no. 4527, 4528
and 4529, which were sold by owner Mendoza to respondent spouses in December 1994.

When petitioner learned of the sale in January 1996, it signified its intention to redeem the lots, invoking the right
afforded under Articles 1621 and 1623 of the Civil Code. Respondent spouses, however, refused to sell.

Reference:

ART. 1621.

The owners of adjoining lands shall also have the right of redemption when a piece of rural land, the area of which
does not exceed one hectare, is alienated unless the grantee does not own any rural land.

This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other
apparent servitudes for the benefit of other estates.

If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the
adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first
requested the redemption.

ART. 1623.

The right of legal pre-emption or redemption shall not be

exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the
case may be. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit
of the vendor that he has given written notice thereof to all possible redemptioners.

The right of redemption of co-owners excludes that of adjoining owners.

Issue:

Whether or not the petitioner can legally redeem the properties

Ruling:

Yes. The Court upheld the right of petitioner and gave it 30 days from finality of the Court's decision to exercise its
right of legal redemption.

The trial court found the adjacent lots involved to be rural lands.

There was no evidence to show that respondents are not themselves owners of rural lands for the exclusionary
clause under Art. 1621 of the Civil Code to apply.

As to the requirement that the right of redemption shall not be exercised except within 30 days from notice in
writing by the prospective vendor, the Court ruled that there was no sufficient evidence for the compliance of the
obligatory written notice prescribed by the New Civil Code.
Principle: Procedure in Redemption; When to exercise the redemption

Verdad v. CA
Facts:
The petitioner, Zosima Verdad, is the purchaser of a 248-square meter residential lot on Marcos M. Calo
St., Butuan City. Private respondent, Socorro Cordero Vda. de Rosales, seeks to exercise a right of legal
redemption over the subject property and traces her title to the late Macaria Atega, her mother-in-law, who
died intestate on 08 March 1956.
During her lifetime, Macaria contracted two marriages: the first with Angel Burdeos and the second,
following the latter’s death, with Canuto Rosales. At the time of her own death, Macaria was survived by her
son Ramon A. Burdeos and her grandchild (by her daughter Felicidad A. Burdeos) Estela Lozada of the first
marriage and her children of the second marriage, namely, David Rosales, Justo Rosales, Romulo Rosales,
and Aurora Rosales.
Socorro Rosales is the widow of David Rosales who himself, sometime after Macarias death, died
intestate without an issue.
In an instrument, dated 14 June 1982, the heirs of Ramon Burdeos, namely, his widow Manuela Legaspi
Burdeos and children Felicidad and Ramon, Jr., sold to petitioner Zosima Verdad (their interest on) the
disputed lot supposedly for the price of P55,460.00. In a duly notarized deed of sale, dated 14 November 1982,
it would appear, however, that the lot was sold for only P23,000.00. Petitioner explained that the second deed
was intended merely to save on the tax on capital gains.
Socorro discovered the sale on 30 March 1987 while she was at the City Treasurers Office. On 31 March
1987, she sought the intervention of the Lupong Tagapayapa of Barangay 9, Princess Urduja, for the
redemption of the property. She tendered the sum of P23,000.00 to Zosima. The latter refused to accept the
amount for being much less than the lots current value of P80,000.00. No settlement having been reached
before the Lupong Tagapayapa, private respondents, on 16 October 1987, initiated against petitioner an action
for Legal Redemption with Preliminary Injunction before the Regional Trial Court of Butuan City.
The trial court handed down its decision holding, in fine, that private respondent’s right to redeem the
property had already lapsed.
An appeal to the Court of Appeals was interposed by private respondents. The appellate court, in its
decision of 22 April 1993, reversed the decision.

Issue:
Whether or not the right of redemption was timely exercised by private respondents

Held:
We hold that the right of redemption was timely exercised by private respondents. Concededly, no
written notice of the sale was given by the Burdeos heirs (vendors) to the co-owners required under Article
1623 of the Civil Code
ART. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty
days from the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of
sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that
he has given written notice thereof to all possible redemptioners.
Hence, the thirty-day period of redemption had yet to commence when private respondent Rosales sought to
exercise the right of redemption on 31 March 1987, a day after she discovered the sale from the Office of the
City Treasurer of Butuan City, or when the case was initiated, on 16 October 1987, before the trial court.
 The written notice of sale is mandatory. This Court has long established the rule that notwithstanding
actual knowledge of a co-owner, the latter is still entitled to a written notice from the selling co-owner in
order to remove all uncertainties about the sale, its terms and conditions, as well as its efficacy and status
Even in Alonzo vs. Intermediate Appellate Court, relied upon by petitioner in contending that actual
knowledge should be an equivalent to a written notice of sale, the Court made it clear that it was not
reversing the prevailing jurisprudence; said the Court:
In Alonzo, the right of legal redemption was invoked several years, notjust days or months, after the
consummation of the contracts of sale. The complaint for legal redemption itself was there filed more than
thirteen years after the sales were concluded.
Relative to the question posed by petitioner on private respondents tender of payment, it is enough
that we quote, with approval, the appellate court; viz:
In contrast, records clearly show that an amount was offered, as required in Sempio vs. Del Rosario,
44 Phil. 1 and Daza vs. Tomacruz, 58 Phil. 414, by the redemptioner-appellant during the barangay
conciliation proceedings (Answer, par. 8) but was flatly rejected by the appellee, not on the ground that it was
not the purchase price (though it appeared on the face of the deed of sale, Exh. J-1), nor that it was offered as
partial payment thereof, but rather that it was unconscionable based upon its present value. (Answer, par. 8)
Principle: When to exercise redemption: Notice

Francisco vs Boiser
GR 137677

Facts:

Petitioner Adalia B. Francisco and three of her sisters were co-owners of four parcels of registered lands on which
the Ten Commandments Building at 689 Rizal Avenue Extension, Caloocan City, was erected. On August 6, 1979,
they sold 1/5 of their undivided share in the subject parcels of land to their mother, Adela Blas, for P10,000.00. On
August 8, 1986, without the knowledge of the other co-owners, Adela Blas sold her 1/5 share for P10,000.00 to
respondent Zenaida Boiser who is another sister of petitioner. On August 5, 1992, petitioner received summons,
with a copy of the complaint in Civil Case No. 15510 filed by respondent demanding her share in the rentals being
collected by petitioner from the tenants of the building. Petitioner then informed respondent that she was
exercising her right of redemption as a co-owner of the subject property. On August 12, 1992, she deposited the
amount of P10,000.00 as redemption price. On September 14, 1995, petitioner instituted a civil case alleging that the
30 day period for redemption under Art. 1623 of the Civil Code had not begun to run against her since the vendor,
Adela Blas, never informed her and the other owners about the sale to respondent. She learned about the sale only
on August 5, 1992, after she received the summons in Civil Case No. 15510, together with the complaint.
Respondent, on the other hand, contended that petitioner knew about the sale as early as May 30, 1992, when she
wrote petitioner a letter informing the latter about the sale, with a demand that the rentals corresponding to her 1/5
share be remitted to her. Said letter was sent with a copy of the Deed of Sale between respondent and Adela Blas.

RTC dismissed petitioner

CA affirmed RTC.

Issue:

Whether or not the letter of May 30, 1992 sent by respondent to petitioner notifying her of the sale on August 8,
1986 of Adela Blas' 1/5 share of the property to respondent, containing a copy of the deed evidencing such sale, can
be considered sufficient as compliance with the notice requirement of Art. 1623 for the purpose of legal
redemption.

Held:

No, Art. 1623 of the Civil Code is clear in requiring that the written notification should come from the vendor or
prospective vendor, not from any other person. In the case at bar, the written notice came from the buyer or vendee
and not from the vendor of the property subject of legal redemption. The Court also ruled that the receipt by
petitioner of summons in Civil Case No. 15510 on August 5, 1992 amounted to actual knowledge of the sale from
which the 30-day period of redemption commenced to run. Petitioner then had until September 4, 1992 within
which to exercise her right of legal redemption, but in August 12, 1992 she deposited the P10,000.00 redemption
price. As petitioner's exercise of said right was timely, the same should be given effect.
Principle: When to exercise redemption: Notice

Vda. De Ape v. CA & Lumayno

G.R. No. 133638. April 15, 2005
Legal Principle: Art. 1623; when to exercise the redemption; written notice should come from the vendor or
prospective vendor, not from any other person; petitioner could no longer invoke her right to redeem from private
respondent for the exercise of this right presupposes the existence of a co-ownership at the time the conveyance is
made by a co-owner and when it is demanded by the other co-owner or co-owners.

FACTS:

Cleopas Ape was the registered owner of a parcel of land of the Escalante Cadastre of Negros Occidental and
covered by an OCT. Upon Cleopas Ape’s death sometime in 1950, the property passed on to his wife, Maria
Ondoy, and their 11 children, namely: Fortunato, Cornelio, Bernalda, Bienvenido, Encarnacion, Loreta, Lourdes,
Felicidad, Adela, Dominador, and Angelina, all surnamed Ape.

In 1973, Private respondent Generosa Cawit de Lumayno, joined by her husband, Braulio, instituted a case for
Specific Performance of a Deed of Sale with Damages against petitioner Fortunato and his wife Perpetua before the
then CFI of Negros Occidental. They alleged that they previously entered into a lease agreement with the
petitioner. But, in 1971, Fortunato went to her store at the time when their lease contract was about to expire. He
allegedly demanded the rental payment for his land but as she was no longer interested in renewing their lease
agreement, they agreed instead to enter into a contract of sale which Fortunato acceded to provided private
respondent bought his portion of subject lot for P5,000. The agreement was contained in a receipt prepared by
private respondents son-in-law, Andres Flores, at her request. She alleged that Flores read the document to
Fortunato and asked the latter whether he had any objection thereto. Fortunato then went on to affix his signature
on the receipt.

The private respondent and her husband further alleged that they had purchased from Fortunatos co-owners, as
evidenced by various written instruments, their respective portions of subject Lot. By virtue of these sales, they
insisted that Fortunato was no longer a co-owner thus, his right of redemption no longer existed.

Fortunato and petitioner, on the other hand, argued that what they have entered into was a contract of lease which
commenced in 1960 and was supposed to last until 1965 with an option for another five (5) years. They denied that
Fortunato sold his share to the respondent and that his signature appearing on the purported receipt was forged.
That, in 1971, she and her husband went to private respondents house to collect past rentals for their land then
leased by the former, however, they managed to collect only thirty pesos, that private respondent made the
petitioner’s husband sign a receipt acknowledging the receipt of said amount of money and that the contents of
said receipt were never explained to them. She also stated in her testimony that her husband was an illiterate and
only learned how to write his name in order to be employed in a sugar central.

As for private respondents purchase of the shares owned by Fortunatos co-owners, petitioner argued that neither
she nor her husband received any notice regarding those sales transactions. Petitioners invoke their right of legal
redemption under Article 1623 of the New Civil Code in view of the alleged sale of the undivided portions of the
lot in question by their co-heirs and co-owners as claimed by the plaintiffs in their complaint.

The trial court dismissed both the complaint and the counterclaim. The CA reversed in favor of the respondent’s
claim but affirmed the trial court’s ruling that Fortunatos receipt of the Second Owners Duplicate of OCT,
containing the adverse claim of private respondent and her husband, constituted a sufficient compliance with the
written notice requirement of Article 1623 of the Civil Code and the period of redemption under this provision had
long lapsed.

Hence, this petition. Petitioner claimed that the CA erred in ruling that she could no longer redeem the portion of
subject Lot already acquired by private respondent for no written notice of said sales was furnished them.
According to her, the CA unduly expanded the scope of the law by equating Fortunatos receipt of Second Owners
Duplicate of OCT with the written notice requirement of Article 1623.
On the other hand, private respondent argued that the annotation on the second owners certificate over subject lot
constituted constructive notice to the whole world of private respondents claim over the majority of said parcel of
land. Relying on our decision in the case of Cabrera v. Villanueva, private respondent insisted that when Fortunato
received a copy of the second owners certificate, he became fully aware of the contracts of sale entered into
between his co-owners on one hand and private respondent and her deceased husband on the other.

ISSUES:

(1) Whether Fortunato was furnished with a written notice of sale of the shares of his co-owners as required by
Article 1623 of the Civil Code?

(2) Whether the receipt signed by Fortunato proves the existence of a contract of sale between him and private
respondent?

RULING: The petition is partly meritorious.

(1) No. Article 1623 of the Civil Code provides:

The right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in

writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not be recorded in

the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof

to all possible redemptioners.

Art. 1623 of the Civil Code is clear in requiring that the written notification should come from the vendor or

prospective vendor, not from any other person. In this case, the records are bereft of any indication that Fortunato

was given any written notice of prospective or consummated sale of the portions of subject Lot by the vendors or

would-be vendors. The thirty (30)-day redemption period under the law, therefore, has not commenced to run.

Despite this, however, the petitioner could NO longer invoke her right to redeem from private respondent for the

exercise of this right presupposes the existence of a co-ownership at the time the conveyance is made by a co-

owner and when it is demanded by the other co-owner or co-owners.

The regime of co-ownership exists when ownership of an undivided thing or right belongs to different persons. By

the nature of a co-ownership, a co-owner cannot point to specific portion of the property owned in common as his

own because his share therein remains intangible. As legal redemption is intended to minimize co-ownership, once

the property is subdivided and distributed among the co-owners, the community ceases to exist and there is no

more reason to sustain any right of legal redemption. In this case, records reveal that although subject lot has not

yet been formally subdivided, still, the particular portions belonging to the heirs of Cleopas Ape had already been

ascertained and they in fact took possession of their respective parts.

Hence, the petitioner is no longer entitled to the right of redemption under Article 1632 of the Civil Code as the Lot

had long been partitioned among its co-owners.

(2) No. In this jurisdiction, the general rule is that he who alleges fraud or mistake in a transaction must

substantiate his allegation as the presumption is that a person takes ordinary care for his concerns and that private

dealings have been entered into fairly and regularly. The exception to this rule is provided for under Article 1332 of

the Civil Code which provides that [w]hen one of the parties is unable to read, or if the contract is in a language not

understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms

thereof have been fully explained to the former.

In this case, as private respondent is the one seeking to enforce the claimed contract of sale, she bears the burden of

proving that the terms of the agreement were fully explained to Fortunato Ape who was an illiterate. This she

failed to do. While she claimed in her testimony that the contents of the receipt were made clear to Fortunato, such

allegation was debunked by Andres Flores himself when the latter took the witness stand. The receipt was in

English and he Flores was aware that Fortunato does not know how to read and write English.

Hence, SC annuls the contract of sale between Fortunato and private respondent on the ground of vitiated consent.
Principle: Period of redemption in auction sale of homestead to satisfy money judgment

Tupas v Damasco
G.R. No. L-34654
Facts:

A parcel was acquired by spouses Benjamin Tupas and Leonor Baldonado (now plaintiffs-appellees) under the

homestead provisions of the Public Land Act. Homestead Patent No. V-240 was issued to the said spouses and on

July 8, 1952, Original Certificate of Title No. V-1042 of the Office of the Register of Deeds of Cotabato was issued in

their names.

Deed of Sale for P3,000.00 was executed on May 1, 1957 by plaintiffs-appellees in favor of Juanita Bulaong and on

the basis thereof, Transfer Certificate of Title No. T-5281 was issued in Juanita Bulaong's name on December 16,

1957. Since 1951 to the present, Juanita Bulaong and her father, defendant-appellant Eusebio Bulaong, have been

actually occupying the said parcel and later caused the construction of a residential building thereon valued at

P35,000.00, more or less.

Benjamin Tupas had obtained a special crop loan from the Philippine National Bank. For failure to pay the said

loan, the Philippine National Bank instituted a civil case for "Sum of Money" before against Benjamin Tupas and a

writ of preliminary attachment was issued in the said case. The Provincial Sheriff executed in favor of the

Philippine National Bank a certificate of sale dated April 6, 1959 specifying therein that the one-year period of

redemption shall expire on April 4, 1960. The certificate of sale was registered in the Office of the Register of Deeds

of Cotabato on August 26, 1959.

On April 4, 1959, pursuant to a writ of execution issued by the Court of First Instance of Cotabato in said Civil Case

No. 770, (PNB vs. Tupas, et al) the Provincial Sheriff of Cotabato sold the land in question at public auction to the

Philippine National Bank for P6,400.00 being the sole bidder.

On June 10, 1965, spouses Benjamin Tupas and Leonor Baldonado, filed against spouses Daniel Damasco and

Juanita Bulaong Damasco, Zacarias Antonio as Register of Deeds of Cotabato and the Philippine National Bank, an

action for the "Repurchase of Land Under Section 119 of Commonwealth Act 141" which was docketed as Civil

Case No. 597 now subject of the present appeal.

Issue:

Whether or not the Spouses can repurchase the land

Ruling:

Section 119 of the Public Land Law (Commonwealth Act 141, as amended) provides — têñ.£îhqwâ£

Every conveyance of land acquired under the free patent or homestead provisions, when proper, shall be subject to

repurchase by the applicant, his widow or legal heirs, within a period of five years from the date of the

conveyance. (Italics supplied.)

It is not disputed that the land subject matter of this case was acquired by appellees, spouses Benjamin Tupas and

Leonor Baldonado, under the homestead provisions of the Public Land Law and the patent was issued to the said

appellees on March 8, 1951. On April 4, 1959 the homestead was sold by the sheriff in an execution sale to satisfy

the judgment in favor of the Philippine National Bank in Civil Case No. 770 and in which execution sale the

Philippine National Bank was the highest bidder. The certificate of sale in favor of the Philippine National Bank

was executed on April 6, 1959 specifying therein that the one-year period of redemption shall expire on April 4,

1960. The said certificate of sale was registered in the Office of the Register of Deeds of Cotabato on August 26,

1959. The instant complaint for repurchase was filed on June 10, 1965.

Appellees could only exercise the right to repurchase his former homestead within five years from April 4, 1959,

the date of the execution sale or up to April 4, 1964. Since this action to repurchase was filed on June 10, 1965, the

same was filed out of time. At any rate, even if we have to compute the five-year period from the expiration of the

right to redeem granted to a judgment debtor, still this case was filed beyond five years, because the one-year

period of redemption in this case expired on April 4, 1960, and the five-year period from April 4, 1960 is April 4,

1965.
Principle: Period of redemption in auction sale of homestread

Belisario vs. Intermediate Appellate Court

No. L-73503. August 30,1988

Facts:

The subject matter of this case is a piece of land originally covered by Original Certificate of Title, pursuant to

Homestead Patent No. 45183 issued in the names of Rufino Belisario and Felipa Lauga located in Valencia,

Bukidnon. On August 3, 1948, upon the death of Rufino Belisario, the ownership of the land was extra-judicially

settled among his children (petitioners herein), namely: Benjamin, Pacita, Victoria Silverio, Francisco, Anatolia

Felipe and Teresita, all surnamed Belisario and his widow, Felipa Lauga and in whose names Transfer Certificate

of Tittle No. T-124 was issued. Sometime in 1950, on the strength of a special power of attorney executed by some

of the petitioners in favor of petitioner, Benjamin Belisario, said land was mortgaged to the Philippine National

Bank (PNB) to secure a promissory note in the sum of P1, 200.

Petitioners-mortgagors defaulted in the payment of the loan. Consequently, the mortgage was extra-judicially

foreclosed and on January 31, 1963 the land was sold at public auction for P3, 134.76 with respondent PNB as the

highest bidder. On April 21, 1971, petitioners wrote to respondent PNB making known their "desire to redeem

and/or repurchase the said property for and in the same price as the auction sale, P3,134.76," and enclosed therein a

postal money order in the amount of P630.00 as partial payment, with the balance to be paid in twelve equal

monthly installments. At the time petitioners offered to redeem the subject property, the Sheriff's Certificate of Sale

covering the sale at public auction to the respondent PNB was not yet registered. Having been apprised of the non-

registration, the respondent PNB caused the registration of the Sheriff's Certificate of Sale with the Register of

Deeds of Bukidnon and a Transfer Certificate of Title was later issued in the name of respondentbank.

On August 24, 1971, respondent PNB sent a reply letter to petitioners, refusing the tender of P630.00 as partial

payment of the total obligations of P7, 041.41 due from petitioners (which included the amount of P2, 027.02

allegedly paid by respondent Vicente Cabrera to respondent PNB) and stating further that under existing

regulations of the bank, payment by way of redemption must be paid in full and not by installments.

On February 8, 1973, respondent PNB sold the land in question to respondent Cabrera for P5,000 and the

corresponding TCT was issued in his name. Respondent Cabrera filed an action for Recovery of Possession and

Damages against herein petitioners, together with their tenants, who were actual possessors of the land, with the

Court of First Instance (now Regional Trial Court) of

Bukidnon. In turn, petitioners filed on January 9, 1975, an action for Repurchase of Homestead

against the respondents PNB and Cabrera with the Court of First Instance of Bukidnon. After pre-trial but before

trial on the merits, respondent Cabrera filed a Motion to Dismiss the petitioners' action for Repurchase of

Homestead. The trial court granted the Motion to Dismiss.

After their motion for reconsideration and/or new trial was denied by the trial court, petitioners appealed to the

Intermediate Appellate Court. Respondent appellate court affirmed the lower court's decision in toto. Hence, this

instant petition.

Issue:

Can the petitioners validly exercise their right to repurchase the subject property under the Public Land Act?

Held:

The subject piece of land was sold at public auction to respondent PNB on January 31, 1963. However, the Sheriff's

Certificate of Sale was registered only on July 22, 1971. The redemption period, for purposes of determining the

time when a formal Deed of Sale may be executed or issued and the ownership of the registered land consolidated

in the purchaser at an extrajudicial foreclosure sale under Act 3135, should be reckoned from the date of the

registration of the Certificate of Sale in the Office of the Register of Deeds concerned and not from the date of

public auction (PNB vs. CA et al., G.R. L-30831 and L-31176, Nov. 21, 1979, 94 SCRA 357, 371). In this case, under

Act 3135, petitioners may redeem the property until July 22, 1972. In addition, Section 119 of Commonwealth Act

141 provides that every conveyance of land acquired under the free patent or homestead patent provisions of the

Public Land Act, when proper, shall be subject to repurchase by the applicant, his widow or legal heirs, within the

period of five years from the date of conveyance. The five-year period of redemption fixed in Section 119 of the

Public Land Law of homestead sold at extrajudicial foreclosure begins to run from the day after the expiration of

the one-year period of repurchase allowed in an extrajudicial foreclosure. Hence, petitioners still had five (5) years

from July 22, 1972 (the expiration of the redemption period under Act 3135) within which to exercise their right to

repurchase under the Public Land Act.

Principle: Assignment of credit; Effect of valid assignment

EDGAR LEDONIO, - versus- CAPITOL DEVELOPMENT CORPORATION

G.R. No. 149040. July 4, 2007

FACTS:

Respondent alleged that petitioner obtained from a Ms. Patrocinio S. Picache two loans, with the aggregate

principal amount of P60,000.00, and covered by promissory notes duly signed by petitioner.

On 1 April 1989, Ms. Picache executed an Assignment of Credit in favor of respondent, which was signed by two

witnesses and duly acknowledged by Ms. Picache before a Notary Public.

Since petitioner did not pay any of the loans covered by the promissory notes when they became due, respondent

sent petitioner several demand letters. Petitioner still failed and refused to settle his indebtedness, thus, prompting

respondent to file the Complaint with the RTC.

In his Answer filed with the RTC, petitioner sought the dismissal of the Complaint averring that respondent had

no cause of action against him. He denied obtaining any loan from Ms. Picache and questioned the genuineness

and due execution of the promissory notes, for they were the result of intimidation and fraud; hence, void.

The RTC rendered a Decision ruling in favor of respondent. The RTC sustained the validity and enforceability of

the Assignment of Credit executed by Ms. Picache in favor of respondent, even in the absence of petitioners

consent to the said assignment

Petitioner filed an appeal with the Court of Appeals which affirmed the latter Decision.

Petitioners main argument is that the Court of Appeals erred when it ruled that there was an assignment of credit

and that there was no novation/subrogation in the case at bar. Petitioner asserts the position that consent of the

debtor to the assignment of credit is a basic/essential element in order for the assignee to have a cause of action

against the debtor. Without the debtors consent, the recourse of the assignee in case of non-payment of the

assigned credit, is to recover from the assignor. Petitioner further argues that even if there was indeed an

assignment of credit, as alleged by the respondent, then there had been a novation of the original loan contracts

when the respondent was subrogated in the rights of Ms. Picache, the original creditor. In support of said

argument, petitioner invokes the following provisions of the Civil Code

ART. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is

not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that

it may take effect.

ART. 1301. Conventional subrogation of a third person requires the consent of the original parties and the third

person.
According to petitioner, the assignment of credit constitutes conventional subrogation which requires the consent

of the original parties to the loan contract, namely, Ms. Picache (the creditor) and petitioner (the debtor); and the

third person, the respondent (the assignee). Since petitioner never gave his consent to the assignment of credit,

then the subrogation of respondent in the rights of Ms. Picache as creditor by virtue of said assignment is without

force and effect.

ISSUE:

1. W/O the document signed by Ms. Picache and Respondent is an Assignment of Credit or a Conventional

Subrogation?

2. W/O consent of respondent is needed for the validity of an Assignment of Credit or a Subrogation?

3. W/O notice to respondent is needed for the validity of the Assignment of Credit?

RULING:

ISSUE#1: Assignment or Subrogation; and

ISSUE#2: Consent

The Court declares that the transaction between Ms. Picache and respondent was an assignment of credit, not

conventional subrogation, and does not require petitioners consent as debtor for its validity and enforceability.

An assignment of credit has been defined as an agreement by virtue of which the owner of a credit (known as the

assignor), by a legal cause - such as sale, dation in payment or exchange or donation - and without need of the

debtor's consent, transfers that credit and its accessory rights to another (known as the assignee), who acquires the

power to enforce it, to the same extent as the assignor could have enforced it against the debtor.

On the other hand, subrogation, by definition, is the transfer of all the rights of the creditor to a third person, who

substitutes him in all his rights. It may either be legal or conventional. Legal subrogation is that which takes place

without agreement but by operation of law because of certain acts. Conventional subrogation is that which takes

place by agreement of parties.

Although it may be said that the effect of the assignment of credit is to subrogate the assignee in the rights of the

original creditor, this Court still cannot definitively rule that assignment of credit and conventional subrogation are

one and the same.

A noted authority on civil law provided a discourse on the difference between these two transactions, to wit
Under our Code, however, conventional subrogation is not identical to assignment of credit. In the former, the

debtors consent is necessary; in the latter, it is not required. Subrogation extinguishes an obligation and gives rise

to a new one; assignment refers to the same right which passes from one person to another. The nullity of an old

obligation may be cured by subrogation, such that the new obligation will be perfectly valid; but the nullity of an

obligation is not remedied by the assignment of the creditors right to another.

In an assignment of credit, the consent of the debtor is not necessary in order that the assignment may fully

produce the legal effects. What the law requires in an assignment of credit is not the consent of the debtor, but

merely notice to him as the assignment takes effect only from the time he has knowledge thereof. A creditor may,

therefore, validly assign his credit and its accessories without the debtors consent. On the other hand, conventional

subrogation requires an agreement among the parties concerned the original creditor, the debtor, and the new

creditor. It is a new contractual relation based on the mutual agreement among all the necessary parties.

Article 1300 of the Civil Code provides that conventional subrogation must be clearly established in order that it

may take effect. Since it is petitioner who claims that there is conventional subrogation in this case, the burden of

proof rests upon him to establish the same by a preponderance of evidence.

In this case, the Assignment of Credit executed by Ms. Picache in favor of respondent, was a simple deed of

assignment. There is nothing in the said Assignment of Credit which imparts to this Court, whether literally or

deductively, that a conventional subrogation was intended by the parties thereto. The terms of the Assignment of

Credit only convey the straightforward intention of Ms. Picache to sell, assign, transfer, and convey to respondent

the debt due her from petitioner, as evidenced by the two promissory notes of the latter. By virtue of the same

document, Ms. Picache gave respondent full power to sue for, collect and discharge, or sell and assign the very

same debt. The Assignment of Credit was signed solely by Ms. Picache, witnessed by two other persons. No

reference was made to securing the conforme of petitioner to the transaction, nor any space provided for his

signature on the said document.

The duty to pay does not depend on the consent of the debtor; otherwise, all creditors would be prevented from

assigning their credits because of the possibility of the debtors' refusal to give consent. Certainly, an assignment of

credit and its accessory rights does not at all obliterate the obligation of the debtor to pay, but merely puts the

assignee in the place of the assignor.

ISSUE #3: Proper Notice

It bears to emphasize that even if the consent of petitioner as debtor is unnecessary for the validity and

enforceability of the assignment of credit, nonetheless, the petitioner must have knowledge, acquired either by

formal notice or some other means, of the assignment so that he may pay the debt to the proper party, which shall

now be the assignee.

Manresa, in commenting upon the provisions of article 1626 of the Civil Code mentions the necessity for the notice

to the debtor in order that the assignment may fully produce its legal effects. It refers to a notice and not to a

petition for the consent which is not necessary. Lack of notice however will not imply that the assignment will not

exist legally. Its effects will only be limited to the parties thereto; at least, they will not reach the debtor.

The contract (Assignment) does not lose its efficacy with respect to the parties who made it; but article 1626

determines specifically one of the consequences arising from the failure to give notice, the debtor shall be released

from the obligation. So that if the creditor assigned his credit, acting in bad faith and taking advantage of the fact

that the debtor does not know anything about the assignment because the latter has not been notified, and collects

its amount, the debtor shall be free from the obligation, inasmuch as it has been legally extinguished by a payment

which fully redounds to his benefit. The assignee can take advantage of all civil and criminal actions against the

assignor, but he can ask nothing from the debtor, because the latter did not know of the assignment, nor was he

bound to know it; the assignor should blame himself for his failure to have the notice made.

Hence, there not having been any notice to the debtor, the existence of his knowledge of the assignment should be

proved by him who is interested therein; and the debtor is not bound to prove his ignorance.

In a more recent case, Aquintey v. Spouses Tibong, this Court stated: The law does not require any formal notice to

bind the debtor to the assignee, all that the law requires is knowledge of the assignment. Even if the debtor had not

been notified, but came to know of the assignment by whatever means, the debtor is bound by it.

In this case, Petitioner does not deny having knowledge of the assignment of credit by Ms. Picache to the

respondent. When petitioners loans became overdue, it was respondent and its counsel who sent several demand

letters to him. It can be reasonably presumed that petitioner received said letters for they were sent by registered

mail, and the return cards were signed by petitioner’s agent. Petitioner expressly acknowledged receipt of

respondents demand letter to which he replied with another letter. It further appears that petitioner had never

questioned why it was respondent seeking payment of the loans and not the original creditor, Ms. Picache. All

these circumstances tend to establish that respondent already knew of the assignment of credit made by Ms.

Picache in favor of respondent and explains his acceptance of all the demands for payment of the loans made upon

him by the respondent.

Finally, assuming arguendo that this Court considers petitioner a third person to the Assignment of Credit the fact

that the said document was duly notarized makes it legally enforceable even as to him as respondent is presumed

to have received constructive notice of such in accordance with Article 1625 of the Civil Code.
Principle: Assignment of credit; Effect of valid assignment

SERVICEWIDE SPECIALISTS, INC. v. COURT OF APPEALS

GR No. 116363, December 10, 1999

FACTS:

Sometime in 1975, respondent spouses Atty. Jesus and Elizabeth Ponce bought on installment a Holden Torana
vehicle from C. R. Tecson Enterprises. They executed a promissory note and a chattel mortgage on the vehicle
dated December 24, 1975 in favor of the C. R. Tecson Enterprises to secure payment of the note. The mortgage was
registered both in the Registry of Deeds and the Land Transportation Office.

On the same date, C.R. Tecson Enterprises, in turn, executed a deed of assignment of said promissory note and
chattel mortgage in favor of Filinvest Credit Corporation with the conformity of the Sps. Ponce. The latter were
aware of the endorsement of the note and the mortgage to Filinvest as they in fact availed of its financing services
to pay for the car.

In 1976, Sps. Ponce transferred and delivered the vehicle to Conrado R. Tecson by way of sale with assumption of
mortgage.Subsequently, in 1978, Filinvest assigned all its rights and interest over the same promissory note and
chattel mortgage to petitioner Servicewide Specialists Inc. without notice to Sps. Ponce.

Due to the failure of the Sps. Ponce to pay the installments under the promissory note from October 1977 to March
1978, and despite demands to pay the same or to return the vehicle, Servicewide Specialists Inc. was constrained to
file before the Regional Trial Court of Manila on May 22, 1978 a complaint for replevin with damages against them,
docketed as Civil Case No. 115567.

In their answer, Sps. Ponce denied any liability claiming they had already returned the car to Conrado Tecson
pursuant to the Deed of Sale with Assumption of Mortgage. Thus, they filed a third party complaint against
Conrado Tecson praying that in case they are adjudged liable to petitioner, Conrado Tecson should reimburse
them.

RTC: Favored Servicewide and Ordered Sps. Ponce to pay Servicewide with right to reimbursement from Tecson

CA: Reversed the RTC.

ISSUE:

1. Whether or not the assignment of a credit requires notice to the debtor in order to bind him.

RULING:

1. ONLY NOTICE IS REQUIRED TO BIND THE DEBTOR.

PRINCIPLE: Only notice to the debtor of the assignment of credit is required. His consent is not required. In
contrast, consent of the creditor-mortgagee to the alienation of the mortgaged property is necessary in order to
bind said creditor. Article 1626 of the Civil Code which provides that the debtor who, before having knowledge of
the assignment, pays his creditor shall be released from the obligation is applicable only where the debtor pays the
creditor prior to acquiring knowledge of the latter’s assignment of his credit. It does not apply, nor is it relevant, to
cases of non-payment after the debtor came to know of the assignment of credit. Since the assignee of the credit
steps into the shoes of the creditor-mortgagee to whom the chattel was mortgaged, it follows that the assignees
consent is necessary in order to bind him of the alienation of the mortgaged thing by the debtor-mortgagor. This is
tantamount to a novation.

As the new assignee, Servicewide’s consent is necessary before the Sps. Ponce’s alienation of the vehicle can be
considered as binding against third persons. Servicewide is considered a third person with respect to the sale with
mortgage between Sps. Ponce and third party defendant Conrado Tecson. In this case, however, since the
alienation by the Sps. Ponce of the vehicle occurred prior to the assignment of credit to Servicewide, it follows that
the former were not bound to obtain the consent of the latter as it was not yet an assignee of the credit at the time
of the alienation of the mortgaged vehicle.
PRINCIPLE: The sale with assumption of mortgage made by Sps. Ponce is tantamount to a substitution of debtors.
In such case, mere notice to the creditor is not enough, his consent is always necessary as provided in Article 1293
of the Civil Code. Without such consent by the creditor, the alienation made by Sps. Ponce is not binding on the
former. On the other hand, Articles 1625,1626 and 1627 of the Civil Code on assignment of credits do not require
the debtors consent for the validity thereof and so as to render him liable to the assignee. The law speaks not of
consent but of notice to the debtor, the purpose of which is to inform the latter that from the date of assignment he
should make payment to the assignee and not to the original creditor. Notice is thus for the protection of the
assignee because before said date, payment to the original creditor is valid.

When Tecson Enterprises assigned the promissory note and the chattel mortgage to Filinvest, it was made with
respondent spouses tacit approval. When Filinvest in turn, as assignee, assigned it further to Servicewide, the latter
should have notified the Sps. Ponce of the assignment in order to bind them. This, they failed to do. The testimony
of petitioners witness that notice of assignment was sent to respondent spouses was stricken off the record. The
consent to the assignment given by Sps. Ponce to Filinvest cannot be construed as the spouses knowledge of the
assignment to Servicewide precisely because at the time of the assignment to the latter, the spouses had earlier sold
the vehicle to another. However, Having subsequently stepped into the shoes of Filinvest, Servicewide acquired
the same rights as the former had against respondent spouses. Therefore, for failure of respondent spouses to
obtain the consent of Filinvest thereto, the sale of the vehicle to Conrado R. Tecson was not binding on the former.
When the credit was assigned by Filinvest to petitioner, respondent spouses stood on record as the debtor-
mortgagor.

FALLO:

WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE. The decision of the
Regional Trial Court is AFFIRMED and REINSTATED. Respondents Jesus Ponce and Elizabeth Ponce
are ORDERED to pay petitioner, jointly and severally, the following sums:
a) P26,633,09, plus interest at 14% per annum from April 26, 1978 until fully paid;
b) 25% of the above sum in item (a) as liquidated damages;
c) P5,000.00 as attorneys fees; and
d) costs of suit.
In connection with the Third Party Complaint of the respondents, the third party defendant Conrado Tecson is
hereby ordered to reimburse respondents Ponce for all the sums the latter would pay to petitioner, and attorneys
fees of P3,000.00.
Principle: Effect of valid assignment

SONNY LO vs KJS ECO-FORMWORK SYSTEM PHIL, INC.

Facts:

Lo, doing business under the name San’s Enterprises, ordered scaffolding equipments from KJS worth P540,425.80.

Lo paid a downpayment of P150,000 and the balance was to be paid in 10 monthly installments.

KJS delivered the scaffoldings to Lo, who paid the first two installments. However, his business encountered

financial difficulties and he was unable to settle his obligation despite oral and written demands.

Lo and KJS executed a Deed of Assignment, whereby Lo assigned to KJS his receivables in the amount of

P335,462.14 from Jomero Realty Corporation. The agreement also stipulated: “The ASSIGNOR further agrees and

stipulates as aforesaid that the said ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at

times hereafter, at the request of said ASSIGNEE, its successors or assigns, at his cost and expense, execute and do

all such further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover

whatever collectibles said ASSIGNOR has in accordance with the true intent and meaning of these presents.”

When KJS tried to collect the said credit from Jomero, it refused to honor the Deed of Assignment because it

claimed that Lo was also indebted to it. KJS sent a letter to Lo demanding payment but he refused claiming that his

obligation had been extinguished when they executed the Deed of Assignment.

KJS filed an action for recovery of a sum of money against Lo with the RTC, which dismissed the complaint on the

ground that the assignment of credit extinguished the obligation. However, the CA held that the Deed of

Assignment did not extinguish the obligation of Lo.

Issue: W/N the Deed of Assignment extinguished Lo’s obligation.

Held:

NO, he failed to comply with his warranty. In dacion en pago as a special mode of payment, the debtor offers

another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking

really partakes in one sense of the nature of sale – the creditor is really buying the thing or property of the debtor,

payment for which is to be charged against the debtor’s debt.

The assignment of credit, which is in the nature of a sale of personal property, produced the effects of a dation in

payment, which may extinguish the obligation. However, as in any other contract of sale, the vendor or assignor is

bound by certain warranties. Paragraph 1 of Article 1628 of the Civil Code provides: The vendor in good faith shall

be responsible for the existence and legality of the credit at the time of the sale, unless it should have been sold as
doubtful; but not for the solvency of the debtor, unless it has been so expressly stipulated or unless the insolvency

was prior to the sale and of common knowledge.

Lo, as assignor, is bound to warrant the existence and legality of the credit at the time of the sale or assignment.

When Jomero claimed that it was no longer indebted to Lo since the latter also had an unpaid obligation to it, it

essentially meant that its obligation to Lo has been extinguished by compensation. As a result, KJS alleged the non-

existence of the credit and asserted its claim to Lo’s warranty under the assignment. Lo was therefore required to

make good its warranty and pay the obligation.

Furthermore, Lo breached his obligation under the Deed of Assignment as he did not “execute and do all such

further acts and deeds as shall be reasonably necessary to effectually enable said ASSIGNEE to recover whatever

collectibles said ASSIGNOR has in accordance with the true intent and meaning of these presents.” By warranting

the existence of the credit, Lo should have ensured its performance in case it is found to be inexistent. He should be

held liable to pay to KJS the amount of his indebtedness

Judgment Affirmed.