G.R. No. 203946 , August 04, 2021
ARTURO A. DACQUEL, PETITIONER, VS. SPOUSES ERNESTO SOTELO AND FLORA DACQUEL-SOTELO, REPRESENTED BY THEIR ATTORNEY-IN-FACT, IMELDA SOTELO, RESPONDENTS.

FACTS

The case involves a parcel of land in Malabon City. In 1994, respondents-spouses Ernesto and Flora Sotelo (the Sotelos) borrowed P140,000.00 from petitioner Arturo Dacquel (Flora’s brother) to fund the construction of a 7-door apartment on the land. The Sotelos claimed the loan was payable in double the amount (P280,000.00) from the rental income of four apartment units, with the land ceded as security. Consequently, on September 1, 1994, the parties executed a Deed of Sale for a consideration of P140,000.00, leading to the cancellation of the Sotelos’ title (TCT No. 738) and the issuance of a new one (TCT No. M-10649) in Dacquel’s name. The Sotelos alleged that after Dacquel collected the full P280,000.00 by March 2000, he refused to return the land. They filed a complaint for annulment of title and reconveyance, asserting the Deed of Sale was an equitable mortgage and that Dacquel held the title only as security. They presented evidence of their continued possession, including building permits, utility billings, and lease contracts in Ernesto’s name, and claimed the property’s 1994 market value was P1,750,000.00. Dacquel countered that the Sotelos’ total debt was P1,000,000.00, recorded in a diary, and they offered to sell the land to him. He claimed the Deed of Sale reflected the true sale for P1,000,000.00, but only P140,000.00 was indicated to reduce taxes. The Regional Trial Court (RTC) dismissed the Sotelos’ complaint, upholding the validity of the sale. The Court of Appeals (CA) reversed the RTC, declaring the Deed of Sale an equitable mortgage based on badges of fraud—gross inadequacy of price and the Sotelos’ continued possession—and ordered Dacquel to reconvey the property and pay attorney’s fees.

ISSUE

The main issue is whether the September 1, 1994 Deed of Sale is a true contract of sale or an equitable mortgage.

RULING

The Supreme Court affirmed the CA’s ruling that the transaction was an equitable mortgage, not a sale, but deleted the award of attorney’s fees. The Court applied Articles 1602 and 1604 of the Civil Code, which presume a transaction is an equitable mortgage under certain circumstances. Two conclusive badges of fraud were present: (1) Gross inadequacy of the price—the undisputed market value of the 350-square meter property in 1994 was P1,750,000.00 (P5,000.00 per square meter), while the Deed of Sale stated only P140,000.00. Dacquel failed to substantiate his claim of a P1,000,000.00 debt or that the sale was a dacion en pago for that amount, as the Deed did not reflect this. (2) Continued possession by the vendors—the Sotelos remained in actual possession, evidenced by their supervision of the apartment construction, execution of lease contracts, and collection of rentals from three units, with Dacquel failing to prove he authorized them to act on his behalf. The Court held that the issuance of a title in Dacquel’s name did not vest ownership, as he remained a mere mortgagee. However, the award of attorney’s fees was deleted because there was no sufficient showing of bad faith on Dacquel’s part; both parties were impelled by an honest belief in the righteousness of their causes, stemming from undocumented transactions.