Equitable Mortgage

An equitable mortgage is one that - although lacking in some formality, forms and words, or other requisites demanded by a statute - nevertheless reveals the intention of the parties to charge a real property as security for a debt and contains nothing impossible or contrary to law. Here's an actual case :

Spouses Raymundo et. al. vs. Spouses Bandong (G.R. No. 171250, July 4, 2007) - Digest

Facts : Eulalia Raymundo (Eulalia) was engaged in the business of buying and selling large cattle for which she employed “biyaheros” whose task involved the procuring of large cattle with the financial capital provided by petitioner and delivering the procured cattle to her for further disposal.

In order to secure the financial capital she advanced for the “biyaheros,” Eulalia required them to surrender the Transfer Certificates of Title (TCT) of their properties and to execute the corresponding Deeds of Sale in her favor.

Dominador Bandong (Domeng), who had been working for petitioner three decades, was not required by Eulalia to post any security in the performance of his work. However, she discovered that Domeng incurred shortage in his cattle procurement operation in the amount of P70,000.00. Domeng and his wife Rosalia then executed a deed of sale in favor of Eulalia a registered parcel of land. On the strength of the aforesaid deed, the subject property was registered in the names of Eulalia and her husband Carlos.

The subject property was thereafter sold by Spouses Raymundo to their grandniece Jocelyn Buenaobra. After the TCT of the subject property was transferred to the name of Jocelyn and husband Angelito, they instituted an action for ejectment against the Spouses Bandong before the MeTC. The lower court ruled in favor of the Spouses Buenaobra which, on appeal, was affirmed in toto by the RTC and subsequently, by the Court of Appeals

To assert their right to the subject property, the Spouses Bandong instituted an action for annulment of sale before the RTC against Eulalia and Jocelyn alleging that there was no sale intended but only equitable mortgage for the purpose of securing the shortage incurred by Domeng in the amount of P70,000 while employed as “biyahero” by Eulalia.

The RTC rendered a decision in favor of Eulalia and Jocelyn by declaring that the deed of sale valid and, consequently, the subsequent sale between Eulalia and Jocelyn was also lawful. On appeal, the CA reversed the RTC Decision and found that the transaction entered into by Domeng and Eulalia was not one of sale but an equitable mortgage. The Court of Appeals denied the Motion for Reconsideration filed by Spouses Raymundo and Buenaobra. Hence, this petition.

Issue : 1) Whether the deed of sale between Domeng and Eulalia is a contract of sale or an equitable mortgage.

Ruling : An equitable mortgage is one that - although lacking in some formality, forms and words, or other requisites demanded by a statute - nevertheless reveals the intention of the parties to charge a real property as security for a debt and contains nothing impossible or contrary to law. The instances when a contract - regardless of its nomenclature - may be presumed to be an equitable mortgage are enumerated under Art. 1602 of the New Civil Code.

In executing the said deed of sale, Domeng and Eulalia never intended the transfer of ownership of the subject property but to burden the same with an encumbrance to secure the indebtedness incurred by Domeng on the occasion of his employment with Eulalia. The agreement between Dominador and Eulalia was not avoided in its entirety so as to prevent it from producing any legal effect at all.

Instead, the said transaction is an equitable mortgage, thereby merely altering the relationship of the parties from seller and buyer, to mortgagor and mortgagee, while the subject property is not transferred but subjected to a lien in favor of the latter.

To reiterate, the existence of any one of the conditions under Article 1602 of the New Civil Code, not a concurrence, or an overwhelming number of such circumstances, suffices to give rise to the presumption that the contract is an equitable mortgage.