G.R. No. L-60578 February 23, 1988
PATERNO D. ESCUDERO AND ARACELI D. ESCUDERO, petitioners, vs. JUDGE CEFERINO E. DULAY, Court of First Instance of Cebu (Branch XVI), COURT OF APPEALS, RUDY AMISTAD AND PACITA AMISTAD, respondents.

FACTS

Petitioners, the Escudero spouses, executed a “Deed of Absolute Sale under Pacto de Retro” over their conjugal property in favor of respondents, the Amistad spouses, for P42,350.00, with a three-month redemption period. The period expired without redemption. Respondents filed a petition for consolidation of title. In her verified Answer, petitioner Araceli Escudero asserted the transaction was not a true sale but an equitable mortgage securing a loan of P35,000.00 with interest, citing gross inadequacy of price and her continued possession of the property as indicia.
Subsequently, upon advice of counsel, petitioners deposited the redemption price with the trial court. During pre-trial, their counsel moved for judgment on the pleadings, explicitly abandoning the equitable mortgage defense. He argued that even assuming the transaction was a pacto de retro sale, petitioners retained the right to repurchase within thirty days after final judgment under Article 1606 of the Civil Code. The trial court granted the motion and ordered title consolidated in favor of respondents. The Court of Appeals affirmed.

ISSUE

Whether the trial court and the Court of Appeals erred in rendering judgment based solely on the pleadings and the counsel’s abandonment of a defense, thereby precluding a determination on the true nature of the contract as an equitable mortgage.

RULING

Yes. The Supreme Court granted the petition and reversed the lower courts’ decisions. The legal logic centers on the principle that a client is not bound by the admissions or mistakes of counsel when such actions result in the deprivation of property or due process. While petitioners’ counsel formally abandoned the equitable mortgage defense during pre-trial, this procedural maneuver could not override the substantive rights of the clients, especially when the defense was properly pleaded under oath in the Answer. The sworn allegation that the contract was an equitable mortgage, supported by evidence like a note from the parties’ agent, presented a genuine factual issue requiring a full trial on the merits. The Court emphasized that the right to litigate a bona fide claim affecting property rights cannot be forfeited by the mere tactical error or oversight of counsel. Furthermore, applying the doctrine from Lianga Bay Logging Co., Inc. vs. Court of Appeals, the Supreme Court resolved the case on its merits to prevent prolonged litigation, as the records were sufficient for a final determination. It found the circumstances indicative of an equitable mortgage, thus entitling petitioners to redeem the property. The consignation of the redemption price was deemed valid, and respondents were ordered to reconvey the title.