Sale vs Equitable Mortgage: When a Deed of Sale Is Considered a Loan

In the Philippines, disputes often arise when a property owner signs a deed of absolute sale but later claims the transaction was actually a loan secured by the property. The Supreme Court, in Anselmo v. Spouses Hernandez (G.R. No. 154339, October 15, 2007), clarified the rules on when a deed of sale may be recharacterized as an equitable mortgage—and when courts will uphold the sale as genuine.

The Facts of the Case

Romualdo Anselmo and his wife, along with co-owners, owned a 712-square meter lot in Quezon City where they lived and operated a garments factory. On April 24, 1991, they executed a deed of absolute sale over the property in favor of Spouses William and Rosemarie Hernandez for P2,500,000. The sale was registered, and a new title was issued in the buyers' names.

The sellers, however, refused to vacate the property. They claimed the deed of sale was fraudulent and that the real transaction was a loan of P2,500,000 from William Hernandez, with the property serving as collateral. They alleged they received only P300,000 in cash and that Hernandez, who was president of Boston Equity Resources, Inc., used the company to lend money to unsuspecting borrowers.

The buyers filed a complaint for specific performance and damages to obtain possession. The Regional Trial Court ruled in favor of the buyers, and the Court of Appeals affirmed. The sellers appealed to the Supreme Court.

The Issue

The central question was whether the parties truly entered into a contract of sale or whether the deed of sale should be treated as an equitable mortgage securing a loan.

The Ruling

The Supreme Court upheld the validity of the sale. The Court noted that it is not a trier of facts and that the findings of the trial court and the Court of Appeals, when they agree, are given great weight.

The evidence showed that the sellers obtained a loan from Boston Equity, not from the buyers directly. The Court pointed to several key facts: the sellers signed a promissory note for P2,500,000 with Boston Equity; they received P2,250,000 through a loan voucher; they wrote letters requesting extension of payment to Boston Equity; and the buyers' president, William Hernandez, was also president of Boston Equity.

The Court found no reason to overturn the lower courts' findings. The sellers failed to prove that the deed of sale was simulated or that it should be treated as an equitable mortgage. They also failed to file a proper counterclaim for annulment of the deed.

However, the Court deleted the awards of moral damages, exemplary damages, and attorney's fees because the buyers failed to prove the factual basis for these claims.

When a Deed of Sale May Be Treated as an Equitable Mortgage

Under Article 1602 of the Civil Code, a contract is presumed to be an equitable mortgage in certain circumstances, such as when the price of the sale is unusually inadequate, when the vendor remains in possession, or when there is an agreement to repurchase. The party claiming that a deed of sale is actually a mortgage bears the burden of proving this with clear and convincing evidence.

In this case, the sellers failed to present sufficient evidence. Their claim that the deed was a "ruse" to circumvent the prohibition against pactum commissorium (a stipulation that the lender automatically owns the property upon default) was not supported by the records.

Practical Takeaways

• A deed of absolute sale is presumed to be a genuine sale. The party claiming it is actually a loan or mortgage must prove this with substantial evidence.
• Courts look at the totality of circumstances, including who received the money, the presence of promissory notes, and whether the parties acted consistently with a sale or a loan.
• Simply claiming that a sale was intended as security is not enough; documentary evidence and credible testimony are essential.
• If a party believes a deed does not reflect the true agreement, they should file a proper action for reformation or annulment, not just raise it as a defense.
• Awards for moral damages, exemplary damages, and attorney's fees require clear factual and legal basis; courts will delete them if unsupported.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.