G.R. No. 32471, December 29, 1930
SEVERINO JAYME and LEONARDA RAMOS, plaintiffs-appellees, vs. JUAN D. SALVADOR, ET AL., defendants-appellants.

FACTS

Plaintiffs Severino Jayme and Leonarda Ramos owed a debt secured by a mortgage on their property, the Supang estate. To pay this debt, they obtained a loan of P18,000 from defendant Juan D. Salvador through a series of simulated transactions. These included: (1) a simulated sale of the Supang estate to the defendants for P26,000 (Exhibit D); (2) a simulated purchase by the plaintiffs of another lot (Lot 69-C) from the defendants for P8,000 (Exhibit E); (3) a simulated lease of the Supang estate back to the plaintiffs with an annual rental of P3,120, which actually represented 12% interest on the purported P26,000 sale price (Exhibit F); and (4) an option for the plaintiffs to repurchase the estate (Exhibit G). The P8,000 check for Lot 69-C was immediately endorsed back to the defendants, while the P18,000 check was used by the plaintiffs to pay their original debt. Subsequently, the defendants, using the transfer certificate of title now in their name, mortgaged the Supang estate to the Philippine National Bank (PNB) for P20,000. When the plaintiffs later secured funds to repay the loan, the defendants refused, leading to this suit to annul the simulated contracts and recover the property.

ISSUE

1. Whether the simulated contracts (Exhibits D, E, F, and G) are null and void.
2. Whether the mortgage constituted by the defendants in favor of PNB over the Supang estate is valid.
3. What are the respective liabilities of the parties arising from the annulment of the contracts and the mortgage?

RULING

1. The simulated contracts are null and void. The court found that the deeds of sale, lease, and option were mere simulations intended to disguise a loan secured by the property. The true agreement was a loan of P18,000 at 12% interest, not a sale. Therefore, Exhibits D, E, F, and G are declared void for being contrary to the real intention of the parties and for constituting a pactum commissorium (forbidden agreement of automatic forfeiture upon non-payment).

2. The mortgage in favor of PNB is valid as to the bank, but the underlying sale to the defendants is void. PNB is an innocent mortgagee for value, relying in good faith on the transfer certificate of title issued in the defendants’ name. The mortgage itself (Exhibit 24) remains enforceable, but the obligation is ultimately the responsibility of the true debtors. Since the plaintiffs, by their participation in the simulated sale, enabled the defendants to obtain the title and mortgage the property, they are liable to PNB for the loan amount received (P18,000) plus interest, up to the P20,000 mortgage debt.

3. The parties’ liabilities are adjusted as follows:
– The simulated contracts are annulled.
– The titles are ordered reconstituted: Lot 69-C is returned to the defendants, and the Supang estate is returned to the plaintiffs.
– A mortgage in favor of PNB for P20,000 is noted on the new title of the Supang estate, with the plaintiffs as the true mortgagors.
– The plaintiffs must pay PNB the amount they received (P18,000 plus P2,160 interest), which shall be applied to the P20,000 mortgage debt.
– The defendants must reimburse the plaintiffs for any additional interest the plaintiffs pay to PNB beyond the P2,160, offset by a smaller sum the plaintiffs owe the defendants.
– The plaintiffs’ debt to the defendants is fixed at P18,000 plus one year’s interest of P2,160.

The appealed judgment was modified accordingly.