G.R. No. 133491 October 13, 1999
ALEXANDER G. ASUNCION, petitioner, vs. EDUARDO B. EVANGELISTA and COURT OF APPEALS, respondents.

FACTS

Private respondent Eduardo B. Evangelista operated a piggery under the trade name Embassy Farms. In 1981, he and others organized Embassy Farms, Inc., with private respondent holding 90% of the shares and serving as president. The piggery facility was located on his landholdings in Bulacan. To provide working capital, private respondent obtained several personal loans secured by real estate mortgages on his properties. He defaulted on these loans, and by June 1984, his aggregate debt, including interest and charges, ballooned to almost P6,000,000.00. On August 2, 1984, petitioner Alexander G. Asuncion and private respondent executed a Memorandum of Agreement. Under this agreement, private respondent would cede, transfer, and convey to petitioner all his enumerated parcels of real property with improvements and all his shares of stock in Embassy Farms, Inc., amounting to 90% of its paid-in equity. In consideration, petitioner agreed to: (1) pay private respondent P1,000,000.00 upon signing and a further P500,000.00 within 90 days; (2) make available specified amounts for operating expenses; (3) assume all of private respondent’s stated loan obligations with the creditor institutions; and (4) make initial payments to restructure some loans. Private respondent warranted free and marketable titles to the shares and effective control of the corporation. Petitioner later filed a complaint for specific performance and damages against private respondent.

ISSUE

The core issue is the validity and enforceability of the Memorandum of Agreement, specifically whether it is a contract of sale or an equitable mortgage, and whether there was a breach of warranty by private respondent justifying rescission and damages.

RULING

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals. The Court held that the Memorandum of Agreement was not a contract of sale but an equitable mortgage. The agreement was essentially a security arrangement for the loans petitioner assumed on behalf of private respondent. The transfer of properties and shares was intended to secure the payment of the assumed debts, not to convey ownership absolutely. The Court found that private respondent breached his warranty of effective control over the corporation, as he could not transfer shares held of record by third parties. This breach constituted a failure of consideration. Consequently, the Court of Appeals correctly ordered the rescission of the agreement. The award of damages in the amount of P32,644,420.55 to private respondent was upheld, representing the value of the properties and shares petitioner had taken control of, minus the amounts petitioner had paid. The Supreme Court emphasized that the rescission was due to private respondent’s breach of warranty, not due to lesion or inadequacy of price.