G.R. No. L-43082

June 18, 1937


FACTS: Thomas Hanley died, leaving a will and a considerable amount of real and personal properties. Proceedings for the probate of his will and the settlement and distribution of his estate were begun in the CFI of Zamboanga. The will was admitted to probate.

The CFI considered it proper for the best interests of the estate to appoint a trustee to administer the real properties which, under the will, were to pass to nephew Matthew ten years after the two executors named in the will was appointed trustee. Moore acted as trustee until he resigned and the plaintiff Lorenzo herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue (Posadas) assessed against the estate an inheritance tax, together with the penalties for deliquency in payment. Lorenzo paid said amount under protest, notifying Posadas at the same time that unless the amount was promptly refunded suit would be brought for its recovery. Posadas overruled Lorenzo’s protest and refused to refund the said amount. Plaintiff went to court. The CFI dismissed Lorenzo’s complaint and Posadas’ counterclaim. Both parties appealed to this court.



(e) Has there been delinquency in the payment of the inheritance tax?


HELD: The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances


The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the decedent’s property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery to the cestui que trust, the beneficiary in this case, within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code. This contention is well taken and is sustained. A trustee is but an instrument or agent for the cestui que trust


The appointment of Moore as trustee was made by the trial court in conformity with the wishes of the testator as expressed in his will. It is true that the word “trust” is not mentioned or used in the will but the intention to create one is clear. No particular or technical words are required to create a testamentary trust. The words “trust” and “trustee”, though apt for the purpose, are not necessary. In fact, the use of these two words is not conclusive on the question that a trust is created. ” To constitute a valid testamentary trust there must be a concurrence of three circumstances:


(1) Sufficient words to raise a trust;

(2) a definite subject;

(3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect so providing.”


There is no doubt that the testator intended to create a trust. He ordered in his will that certain of his properties be kept together undisposed during a fixed period, for a stated purpose. The probate court certainly exercised sound judgment in appointmening a trustee to carry into effect the provisions of the will


As the existence of the trust was already proven, it results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and, therefore, liable for the payment of interest and surcharge provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. On that date trust estate vested in him. The interest due should be computed from that date.

NOTES: Other issues:


(a) When does the inheritance tax accrue and when must it be satisfied?

The accrual of the inheritance tax is distinct from the obligation to pay the same.

Acording to article 657 of the Civil Code, “the rights to the succession of a person are transmitted from the moment of his death.” “In other words”, said Arellano, C. J., “. . . the heirs succeed immediately to all of the property of the deceased ancestor. The property belongs to the heirs at the moment of the death of the ancestor as completely as if the ancestor had executed and delivered to them a deed for the same before his death.”

Whatever may be the time when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the decedent’s death. The time when the heirs legally succeed to the inheritance may differ from the time when the heirs actually receive such inheritance. ” Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The two sections follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. — The following shall not be taxed:

(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor. xx

SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:

(a) In the second and third cases of the next preceding section, before entrance into possession of the property.

(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary or intestate proceedings shall be instituted prior to the expiration of said period, the payment shall be made by the executor or administrator before delivering to each beneficiary his share.

The instant case does[not] fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been paid before the delivery of the properties in question to Moore as trustee.

(b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the testator’s death, or on its value ten years later?


If death is the generating source from which the power of the estate to impose inheritance taxes takes its being and if, upon the death of the decedent, succession takes place and the right of the estate to tax vests instantly, the tax should be measured by the value of the estate as it stood at the time of the decedent’s death, regardless of any subsequent contingency value of any subsequent increase or decrease in value


(c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees?


A trustee, no doubt, is entitled to receive a fair compensation for his services. But from this it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute in the Philippines which requires trustees’ commissions to be deducted in determining the net value of the estate subject to inheritance tax


(d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive effect?


A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect, . . . .” Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such effect can be given the statute by this court.



CUISON vs. CA and Valiant

G.R. No. 88539

October 26, 1993


FACTS: Kue Cuison is a sole proprietorship engaged in the purchase and sale of newsprint, bond paper and scrap.

Valiant Investment Associates delivered various kinds of paper products to a certain Tan. The deliveries were made by Valiant pursuant to orders allegedly placed by Tiac who was then employed in the Binondo office of petitioner. Upon delivery, Tan paid for the merchandise by issuing several checks payable to cash at the specific request of Tiac. In turn, Tiac issued nine (9) postdated checks to Valiant as payment for the paper products. Unfortunately, sad checks were later dishonored by the drawee bank.

Thereafter, Valiant made several demands upon petitioner to pay for the merchandise in question, claiming that Tiac was duly authorized by petitioner as the manager of his Binondo office, to enter into the questioned transactions with Valiant and Tan. Petitioner denied any involvement in the transaction entered into by Tiac and refused to pay Valiant.

Left with no recourse, private respondent filed an action against petitioner for the collection of sum of money representing the price of the merchandise. After due hearing, the trial court dismissed the complaint against petitioner for lack of merit. On appeal, however, the decision of the trial court was modified, but was in effect reversed by the CA. CA ordered petitioner to pay Valiant with the sum plus interest, AF and costs.

ISSUE: WON Tiac possessed the required authority from petitioner sufficient to hold the latter liable for the disputed transaction






As to the merits of the case, it is a well-established rule that one who clothes another with apparent authority as his agent and holds him out to the public as such cannot be permitted to deny the authority of such person to act as his agent, to the prejudice of innocent third parties dealing with such person in good faith and in the honest belief that he is what he appears to be

It matters not whether the representations are intentional or merely negligent so long as innocent, third persons relied upon such representations in good faith and for value. Article 1911 of the Civil Code provides:

“Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers.”

The above-quoted article is new. It is intended to protect the rights of innocent persons. In such a situation, both the principal and the agent may be considered as joint tortfeasors whose liability is joint and solidary.

It is evident from the records that by his own acts and admission, petitioner held out Tiac to the public as the manager of his store in Binondo. More particularly, petitioner explicitly introduced to Villanueva, Valiant’s manager, as his (petitioner’s) branch manager as testified to by Villanueva. Secondly, Tan, who has been doing business with petitioner for quite a while, also testified that she knew Tiac to be the manager of the Binondo branch. Even petitioner admitted his close relationship with Tiu Huy Tiac when he said that they are “like brothers” There was thus no reason for anybody especially those transacting business with petitioner to even doubt the authority of Tiac as his manager in the Binondo branch.


Tiac, therefore, by petitioner’s own representations and manifestations, became an agent of petitioner by estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon (Article 1431, Civil Code of the Philippines). A party cannot be allowed to go back on his own acts and representations to the prejudice of the other party who, in good faith, relied upon them. Taken in this light,. petitioner is liable for the transaction entered into by Tiac on his behalf. Thus, even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to fact as though he had full powers (Article 1911 Civil Code), as in the case at bar.

Finally, although it may appear that Tiac defrauded his principal (petitioner) in not turning over the proceeds of the transaction to the latter, such fact cannot in any way relieve nor exonerate petitioner of his liability to private respondent. For it is an equitable maxim that as between two innocent parties, the one who made it possible for the wrong to be done should be the one to bear the resulting loss


NARIC vs. CA et al

G.R. No. L-32320

July 16, 1979

FACTS: The National Rice and Corn Corporation (Naric) had on stock 8000 metric tons of corn which it could not dispose of due to its poor quality. Naric called for bids for the purchase of the corn and rice. But precisely because of the poor quality of the corn, a direct purchase of said corn even with the privilege of importing commodities did not attract good offers. Davao Merchandising Corporation  (Damerco) came in with its offer to act as agent in the exportation of the corn, with the agent answering for the price thereof and shouldering all expenses incidental thereto, provided it can import commodities, paying the NARIC therefor from the price it offered for the corn. Damerco was to open a domestic letter of credit, which shall be available to the NARIC drawing therefrom through sight draft without recourse. The availability of said letter or letters of credit to the NARIC was dependent upon the issuance of the export permit. The payment therefor depended on the importation of the collateral goods, that is after its arrival.

The first half of the collateral goods were successfully imported. Due to the inferior quality of the corn, it had to be replaced with more acceptable stock. This caused such delay that the letters of credit expired without the NARIC being able to draw the full amount therefrom. Checks and PN were issued by DAMERCO for the purpose of securing the unpaid part of the price of the corn and as guaranty that DAMERCO will purchase the corresponding collateral goods.

But because of the change of administration in the government, barter transactions were suspended. Hence, DAMERCO was not able to import the remaining collateral goods.

NARIC instituted in the CFI of Manila against DAMERCO and Fieldmen’s Insurance Co. Inc. an action for recovery of a sum of money representing the balance of the value of corn and rice exported by DAMERCO.

The trial court rendered in favor of NARIC ordering DAMERCO and Fieldmen’s Insurance Co. Inc., to pay, jointly and severally. CA reversed the trial court’s decision and rendered a new judgement dismissing the complaint as premature and for lack of cause of action. Hence this petition for certiorari.


ISSUE: Whether DAMERCO only acted as an agent of NARIC or is a buyer


HELD: the petition for review is denied and the resolution of the CA appealed from is hereby affirmed



Clearly from the contract between NARIC and DAMERCO: bids were previously called for by the NARIC for  the purchase of corn and rice to be exported as well as of the imported commodities that will be brought in, but said biddings did not succeed in attracting good offers. Subsequently, Damerco made an offer. Now, to be sure, the contract designates the Naric as the seller and the Damerco as the buyer. These designations, however, are merely nominal, since the contract thereafter sets forth the role of the “buyer” (Damerco)’ “as agent of the seller” in exporting the quantity and kind of corn and rice as well as in importing the collateral goods thru barter and “to pay the aforementioned collateral goods.”

The contract between the NARIC and the DAMERCO is bilateral and gives rise to a reciprocal obligation. The said contract consists of two parts: (1) the exportation by the DAMERCO as agent for the NARIC of the rice and corn; and (2) the importation of collateral goods by barter on a back to back letter of credit or no-dollar remittance basis. It is evident that the DAMERCO would not have entered into the agreement were it not for the stipulation as to the importation of the collateral goods which it could purchase.

It appears that we were also misled to believe that the Damerco was buying the corn. A closer look at the pertinent provisions of the contract, however, reveals that the price as stated in the contract was given tentatively for the purpose of fixing the price in barter. It should likewise be stressed that the aforesaid exportation and importation was on a “no-dollar remittance basis”. In other words, the agent, herein defendant Damerco, was not to be paid by its foreign buyer in dollars but in commodities. Damerco could not get paid unless the commodities were imported, and Damerco was not exporting and importing on its own but as agent of the plaintiff, because it is the latter alone which could export and import on barter basis according to its charter. Thus, unless Damerco was made an agent of the plaintiff, the former could not export the corn and rice nor import at the same time the collateral goods. This was precisely the intention of the parties.

He is not to be considered a buyer, who should be liable for the sum sought by NARIC because the contract itself clearly provides the Damerco was to export the rice and corn, AND TO BUY THE collateral goods. There is nothing in the contract providing unconditionally that Damerco was buying the rice and corn. To be more specific, if the agreement was just a sale of corn to Damerco, the contract need not specify that Damerco was to buy the collateral goods.



G.R. No. 144214

July 14, 2003

FACTS:  Villareal, C. Jose and J. Jose formed a partnership for the operation of a restaurant and catering business under the name “Aquarius Food House and Catering Services, each contributing 250K. Ramirez was later added, contributing 250K as well. After some time, one of them (J. Jose) withdrew from the partnership; his capital contribution was refunded to him in cash by agreement of the partners.

Without prior knowledge of respondents, petitioners closed down the restaurant, allegedly because of increased rental. On March 1, 1987, The respondent spouses wrote petitioners, saying that they were no longer interested in continuing their partnership or in reopening the restaurant, and that they were accepting the latter’s offer to return their capital contribution. The repeated oral and written requests were, however, left unheeded


Before the RTC, respondents subsequently filed a Complaintfor the collection of a sum of money from petitioners. the RTC ruled in favor of the respondents, ordering petitioners to pay damages and AF and costs.


The CA sustained the lower court’s decision, and made a computation on the petitioners’ liability to respondents:


Capital, at dissolution:                        **P1,000,000.00

Less: liability to creditors                                 240,658.00

Amount to be distributed to partners               759,342.00

Over: Number of partners                                              3

Each partner’s share at dissolution                 253,114.00


** which is erroneous, as this is the capital at the BEGINNING of the partnership


Hence this petition.


ISSUE:  WON the CA computation was erroneous

HELD: We hold that respondents have no right to demand from petitioners the return of their equity share.


Generally, in the pursuit of a partnership business, its capital is either increased by profits earned or decreased by losses sustained. It does not remain static and unaffected by the changing fortunes of the business. In the computation of the amount to be refunded to respondents, The CA did not consider:

1. The omission of any provision for the depreciationof the furniture and the equipment.

2. The amortization of the goodwill is not reflected

3. The capitalization amount paid by the partnership to J. Jose when he withdrew from the partnership.

Because of the above-mentioned transactions, the partnership capital was actually reduced.

But the disposition is without prejudice to proper proceedings for the accounting, the liquidation and the distribution of the remaining partnership assets, if any



G.R. No. 413

February 2, 1903

FACTS: Fernandez alleges that in January, 1900, he entered into a verbal agreement with Dela Rosa to form a partnership for the purchase of cascoes and the carrying on of the business of letting the same for hire in Manila, and  Dela Rosa is to buy the cascoes and each partner to furnish for that purpose such amount of money as he could, the profits to be divided proportionately; Fernandez furnished Dela Rosa sums to purchase and repair cascoes, the latter taking the titles in his own name; that in April the parties undertook to draw up articles of partnership for the purpose of embodying the same in an authentic document, but that the defendant having proposed a draft of such articles which differed materially from the terms of the earlier verbal agreement, and being unwillingly to include the 2nd casco in the partnership, they were unable to come to any understanding and no written agreement was executed; that the defendant having in the meantime had the control and management of the two cascoes, the plaintiff made a demand for an accounting upon him, which the defendant refused to render, denying the existence of the partnership altogether.

Dela Rosa admits that the project of forming a partnership in the casco business in which he was already engaged to some extent individually was discussed between himself and the plaintiff in January, 1900, but he denies that any agreement was ever consummated. He denies that the plaintiff furnished any money in January, 1900, for the purchase of the first casco, or for repairs on the same, but claims that he borrowed 300 pesos on his individual account in January from the bakery firm, consisting of the plaintiff, Marcos Angulo, and Antonio Angulo. The 825 pesos, which he admits he received from the Fernandez  March 5, he claims was for the purchase of the first casco, which he alleged was bought March 12, and he alleges that he never received anything from the defendant toward the purchase of the 2nd casco. He claims to have paid, exclusive of repairs, 1,200 pesos for the first casco and 2,000 pesos for the second one.


(1) Did a partnership exist between the parties?

(2) If such partnership existed, was it terminated as a result of the act of the defendant in receiving back the 1,125 pesos?


(1) “Partnership is a contract by which two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.” (Civil Code, art. 1665.)

The essential points upon which the minds of the parties must meet in a contract of partnership are, therefore, (1) mutual contribution to a common stock, and (2) a joint interest in the profits. If the contract contains these two elements the partnership relation results, and the law itself fixes the incidents of this relation if the parties fail to do so. (Civil Code, secs. 1689, 1695.)

We have found as a fact that money was furnished by the plaintiff and received by the defendant with the understanding that it was to be used for the purchase of the cascoes in question. This establishes the first element of the contract, namely, mutual contribution to a common stock. The second element, namely, the intention to share profits, appears to be an unavoidable deduction from the fact of the purchase of the cascoes in common, in the absence of any other explanation of the object of the parties in making the purchase in that form, and, it may be added, in view of the admitted fact that prior to the purchase of the first casco the formation of a partnership had been a subject of negotiation between them.

It is thus apparent that a complete and perfect contract of partnership was entered into by the parties. This contract, it is true, might have been subject to a suspensive condition, postponing its operation until an agreement was reached as to the respective participation of the partners in the profits, the character of the partnership as collective or en comandita, and other details, but although it is asserted by counsel for the defendant that such was the case, there is little or nothing in the record to support this claim, and that fact that the defendant did actually go on and purchase the boat, as it would seem, before any attempt had been made to formulate partnership articles, strongly discountenances the theory.

The execution of a written agreement was not necessary in order to give efficacy to the verbal contract of partnership as a civil contract, the contributions of the partners not having been in the form of immovables or rights in immovables. (Civil Code, art. 1667.) The special provision cited, requiring the execution of a public writing in the single case mentioned and dispensing with all formal requirements in other cases, renders inapplicable to this species of contract the general provisions of article 1280 of the Civil Code.

2) The remaining question is as to the legal effect of the acceptance by the plaintiff of the money returned to him by the defendant after the definitive failure of the attempt to agree upon partnership articles. The amount returned fell short, in our view of the facts, of that which the plaintiff had contributed to the capital of the partnership, since it did not include the sum which he had furnished for the repairs of casco No. 1515. Moreover, it is quite possible, as claimed by the plaintiff, that a profit may have been realized from the business during the period in which the defendant have been administering it prior to the return of the money, and if so he still retained that sum in his hands. For these reasons the acceptance of the money by the plaintiff did not have the effect of terminating the legal existence of the partnership by converting it into a societas leonina, as claimed by counsel for the defendant.

The result is that we hold and declare that a partnership was formed between the parties in January, 1900, the existence of which the defendant is bound to recognize; that cascoes No. 1515 and 2089 constitute partnership property, and that the plaintiff is entitled to an accounting of the defendant’s administration of such property, and of the profits derived therefrom. This declaration does not involve an adjudication as to any disputed items of the partnership account.



G.R. L-11229

March 29, 1958

FACTS:  2 lots originally belonged to the conjugal partnership of Francisco Diaz and Maria Sevilla, the OCTs under their name. Francisco died and was  survived by wife and 3 children.

Appellee Gorricho filed an action against Maria in the CFI of Manila, and a writ of attachment was issued upon the shares of Maria in said lots. Thereafter, said parcels were sold at public auction and purchased by Gorricho. Maria failed to redeem within one year, whereupon the acting provincial sheriff executed a final deed of sale in favor of Gorricho. In said final deed, however, the sheriff conveyed to Gorricbo the whole of the 2 parcels instead of only the half-interest of Maria therein. Pursuant to said deed, Gorricho obtained a TCT in her name and has been possessing said land is as owner ever since.

Then,  Maria died. Her 3 children filed the action in CFI of Nueva Ecija against Gorricho and her husband Aguado to compel them to execute in their favor a deed of reconveyance over an undivided one-half interest over the lots in question (the share therein of their deceased father illegally conveyed by the provincial sheriff to Gorricho), which defendants were allegedly holding in trust for them. Defendants answered denying the allegations of the complaint and alleging, as a special defense, that plaintiffs’ action has long prescribed.

After trial, the court below rendered judgment, holding that while a constructive trust in plaintiffs’ favor arose when defendant Gorricho took advantage of the error of the provincial sheriff in conveying to her the whole of the parcels in question and obtained title in herself, the action of plaintiffs was, however, barred by laches and prescription. From this judgment, plaintiffs appealed.

The principal contention of appellants is that their father’s half of the disputed property was acquired by Gorricho through an error of the provincial sheriff; that having been acquired through error, it was subject to an implied trust, as provided by Article 1456 of the new Civil Code; and therefore, since the trust is continuing and subsisting, the appellants may compel reconveyance of the property despite the lapse of time, specially, because prescription does not run against titles registered under Act 496

ISSUE:  WON laches constitutes a bar to actions to enforce a constructive trust

HELD:   The judgment appealed from is affirmed


Article 1456 of the new Civil Code, while not retroactive in character, merely expresses a rule already recognized by our courts prior to the Code’s promulgation. Appellants are, however, in error in believing that like express trusts, such constructive trusts may not be barred by lapse of time. The American law on trusts has always maintained a distinction between express trusts created by intention of the parties, and the implied or constructive trusts that are exclusively created by law, the latter not being trusts in their technical sense.

The express trusts disable the trustee from acquiring for his own benefit the property committed to his management or custody, at least while he does not openly repudiate the trust, and makes such repudiation known to the beneficiary or cestui que trust. For this reason, the old Code of Civil Procedure declared that the rules on adverse possession do not apply to “continuing and subsisting” (i.e., unrepudiated) trusts.

In constructive trusts, as pointed out by the court below, the rule is that laches constitutes a bar to actions to enforce the trust, and repudiation is not required, unless there is concealment of the facts giving rise to the trust

The reason for the difference in treatment is obvious. In express trusts, the delay of the beneficiary is directly attributable to the trustee who undertakes to hold the property for the former, or who linked to the beneficiary by confidential or fiduciary relations. The trustee’s possession is, therefore, not adverse to the beneficiary, until and unless the latter is made aware that the trust has been repudiated. But in constructive trusts (that are imposed by law), there is neither promise nor fiduciary relation; the so-called trustee does not recognize any trust and has no intent to hold for the beneficiary; therefore, the latter is not justified in delaying action to recover his property. It is his fault if he delays; hence, he may be estopped by his own laches.

Of course the equitable doctrine of estoppel by laches requires that the one invoking it must show, not only the unjustified inaction, but that some unfair injury would result to him unless the action is held barred. This requirement the appellees have not met, and they are thereby bereft of the protection of this rule.

We are of the opinion that the judgment of dismissal should be upheld, because the appellants’ cause of action to attack the sheriff’s deed and cancel the TCTs  issued to the appellees accrued from the year of issuance and recording, 1937, and appellants have, allowed fifteen (15) years to elapse before taking remedial action, notwithstanding the appellees’ public assertion of title during this entire period, to extinguish appellant’s action. Under the old Code of Civil Procedure, in force at the time, the longest period extinctive prescription was only ten years.

Raymundo vs. Bandong

Spouses Raymundo and Spouses Buenaobra vs. Spouses Bandong

G. R. 171250

July 4, 2007

FACTS: Eulalia Raymundo was engaged in the business of buying and selling large cattle from different provinces within the Philippines.  For this purpose, she employed “biyaheros” whose primary task involved the procuring of large cattle with the financial capital provided by Eulalia 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 TCTs of their properties and to execute the corresponding Deeds of Sale in her favor.

Dominador Bandong had been working for Eulalia as one of her biyaheros. Sometime, Eulalia found that Dominador incurred some shortage in his cattle procurement operation. Because of such,  Dominador and his wife Rosalia then executed a Deed of Sale in favor of Eulalia, covering a parcel of land, located at Caloocan City and registered under their names.  On the strength of the aforesaid deed, the subject property was registered in the names of Eulalia and her husband. The subject property was thereafter sold by the Spouses Raymundo to Eulalia’s grandniece and herein co-petitioner, Jocelyn Buenaobra (Jocelyn).  Thus, the subject property came to be registered in the name of Jocelyn and her husband.

After the TCT of the subject property was transferred to their names, the Spouses Buenaobra instituted before the MeTC an action for ejectment against the Spouses Bandong.  The MeTC ruled in favor of the Spouses Buenaobra which, on appeal, was affirmed in toto by the RTC and subsequently, by the CA.  Finally, when the case was raised on appeal before us, we issued a Resolution finding that no substantial arguments were raised therein to warrant the reversal of the appealed decision.

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 Dominador.

For her part, Jocelyn maintained that she was a buyer in good faith and for value for she personally inquired from the RD of the presence of any liens and encumbrances on the TCT of the subject property and found that the same was completely free therefrom.

The RTC rendered a Decision in favor of Eulalia and Jocelyn by declaring that the Deed of Sale between Dominador and Eulalia was valid and binding and, consequently, the subsequent sale between Eulalia and Jocelyn was also lawful absent any showing that Jocelyn was a buyer in bad faith.

On appeal the CA reversed the RTC Decision and found that the transaction entered into by Dominador and Eulalia was not one of sale but an equitable mortgage considering that the purchase price was grossly inadequate and the Spouses Bandong remained as possessors of the subject property after Eulalia’s alleged purchase thereof.  The appellate court likewise charged Jocelyn with knowledge that the Spouses Raymundo were not the absolute owners of the subject property negating the presumption that she was an innocent purchaser for value.

The CA found the MR filed by petitioners unmeritorious and denied the same, hence, this instant Petition for Review on Certiorari.









1. NO; 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 in 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;


(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.


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


For Articles 1602 and 1604 to apply, two requisites must concur: one, the parties entered into a contract denominated as a contract of sale; and two, their intention was to secure an existing debt by way of an equitable mortgage.

In determining whether a deed absolute in form is a mortgage, the court is not limited to the written memorials of the transaction.  The decisive factor in evaluating such agreement is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all the surrounding circumstances, such as the relative situation of the parties at that time xx

By applying the aforestated principle to the case at bar, we are constrained to rule that in executing the said Deed of Sale, Dominador 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 Dominador on the occasion of his employment with Eulalia.


The explicit provision of Article 1602 that any of those circumstances would suffice to construe a contract of sale to be one of equitable mortgage is in consonance with the rule that the law favors the least transmission of property rights.

2. NO; Having threshed the issue that there was no sale in favor of Eulalia but an equitable mortgage leads us to an inevitable conclusion that she has no right to subsequently transfer ownership of the subject property, in consonance with the principle that nobody can dispose of what he does not have.   One of the exceptions to this rule, however, can be found in Article 1506 of the Civil Code, wherein the seller has voidable title to a property but his title has not yet been nullified at the time of the sale, and the subsequent buyer of the property was in good faith.

In the present case, we are not convinced by the petitioners’ incessant assertion that Jocelyn is an innocent purchaser for value.  To begin with, she is a grandniece of Eulalia and resides in the same locality where the latter lives and conducts her principal business.  It is therefore impossible for her not to acquire knowledge of her grand aunt’s business practice of requiring her biyaheros to  surrender the titles to their properties and to sign the corresponding deeds of sale over said properties in her favor, as security.  And the glaring lack of good faith of Jocelyn is more apparent in her own admission that she was aware that Dominador and a certain Lourdes were in possession of the subject property.  A buyer of real property that is in the possession of a person other than the seller must be wary.  A buyer who does not investigate the rights of the one in possession can hardly be regarded as a buyer in good faith