G.R. No. 161407; June 5, 2009
JOAQUIN VILLEGAS and EMMA M. VILLEGAS, Petitioners, vs. RURAL BANK OF TANJAY, INC., Respondent.

FACTS

Petitioners obtained an agricultural loan from respondent bank, secured by a mortgage on their residential property. Upon their default, the mortgage was extrajudicially foreclosed, and the bank purchased the property at the auction. After petitioners failed to redeem the property within the statutory period, the parties entered into a “Promise to Sell” agreement. Under this contract, the bank promised to resell the property to petitioners for a fixed price, payable in installments over five years, with a substantial down payment. The agreement contained a stipulation that a delay in any yearly installment for ninety days would render the sale null and void, with payments refundable less interest and liquidated damages.
Petitioners paid the down payment but subsequently defaulted on the first yearly installment. Consequently, the bank consolidated its ownership over the property, and a new title was issued in its name. Petitioners then filed an action seeking, among other remedies, the declaration of nullity of the original loan and mortgage contracts and the recovery of possession of the property. They argued the contracts were void for being simulated agricultural loans intended to circumvent the lending limits of the Rural Banks Act (R.A. No. 720), as the loan was secured by a residential property and not used for sugar cane farming.

ISSUE

Whether petitioners are entitled to recover possession of the foreclosed property and to have the original loan and mortgage contracts declared null and void.

RULING

No. The Supreme Court denied the petition and affirmed the modified decision of the Court of Appeals. The legal logic is anchored on the principle of estoppel and the pari delicto doctrine. Petitioners actively participated in securing the loan by making it appear to be an agricultural crop loan to avail of the bank’s financing. Having benefited from the loan proceeds, they are estopped from impugning the validity of the contracts they themselves procured through misrepresentation. The Court emphasized that parties to a contract cannot seek its nullity after enjoying its benefits, especially when their own acts contributed to its alleged illegality.
Furthermore, the Court applied the pari delicto rule under Article 1412 of the Civil Code. Since both parties were in equal fault (in delicto) for entering into a contract with an unlawful purpose—circumventing banking laws—the law will leave them where they are. Neither can seek relief from the courts; the petitioner, who is not innocent, cannot recover what he has given by reason of the contract. The subsequent “Promise to Sell” was a separate, valid contract entered into after the foreclosure and consolidation of title, which petitioners breached. Their failure to comply with its terms precludes any right to recover the property. Their remedy was limited to the reimbursement of their down payment, which the Court of Appeals had already correctly ordered.