G.R. No. 142944 . April 15, 2005
EDENBERT MADRIGAL AND VIRGILIO MALLARI, Petitioners, vs. THE COURT OF APPEALS AND JOSE MALLARI, Respondents.

FACTS

Private respondent Jose Mallari and his wife owned a 340-square meter lot with a two-storey house in Olongapo City. Needing funds for his wife’s travel, Jose considered a bank mortgage. His son, petitioner Virgilio Mallari, dissuaded him, proposing instead an assignment of a portion of the property. Virgilio assured his father that the family could remain in possession, that Jose could redeem the property anytime, and that Virgilio would not dispose of it without consent. Relying on these assurances, Jose and his wife executed a “Deed of Absolute Sale” on October 22, 1987, purportedly selling the property to Virgilio for a grossly inadequate price of ₱50,000. The deed inaccurately described the property as a one-storey house on a 135-square meter lot.
Subsequently, without Jose’s knowledge, Virgilio sold the same property to petitioner Edenbert Madrigal, a longtime neighbor, for the same amount on June 25, 1988. Jose only discovered this second sale when Madrigal demanded that he vacate the premises. Jose then filed a complaint for annulment, redemption, and damages against Virgilio and Madrigal before the Regional Trial Court.

ISSUE

The core issues were: (1) whether the “Deed of Absolute Sale” between Jose and Virgilio was truly a sale or an equitable mortgage; (2) whether Edenbert Madrigal was a buyer in good faith; and (3) whether the awards of moral and exemplary damages and attorney’s fees to Jose were proper.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals. The Court upheld the concurrent findings of the lower courts that the transaction between Jose and Virgilio was an equitable mortgage, not an absolute sale. The legal logic rested on the presence of indicia under Article 1602 of the Civil Code, particularly the gross inadequacy of the price (₱50,000 for a property commanding a much higher value) and the fact that the vendors remained in possession of the property. Virgilio’s assurances of redemption and continued possession further confirmed the loan security nature of the transaction.
Consequently, Virgilio had no valid title to convey to Madrigal. The Court also affirmed that Madrigal was not a buyer in good faith. As a longtime neighbor, he was aware of the property’s true ownership and condition. The gross undervaluation and the patent discrepancy in the property’s description between the deed and its actual state should have prompted a prudent buyer to investigate, which Madrigal failed to do. The awards of damages and attorney’s fees were sustained as Virgilio’s fraudulent machinations and Madrigal’s lack of good faith justified them. The Court found no reason to deviate from the factual conclusions of the lower courts.