G.R. No. 55336 May 4, 1989
BENJAMIN VALLANGCA, RODOLFO VALLANGCA and ALFREDO VALLANGCA, petitioners, vs. HON. COURT OF APPEALS and NAZARIO RABANES, respondents.

FACTS

The dispute involves over eleven hectares of agricultural land in Buguey, Cagayan, originally registered in the name of the Heirs of Esteban Billena and later under TCT No. 1005 in the names of Maximiniana Crisostomo and Ana Billena. Upon the death of her husband in 1944, Ana Billena, illiterate and needing funds for burial expenses, allegedly mortgaged the land to her cousin, Nazario Rabanes, for P800 in Japanese war notes. In 1946, Rabanes presented a document which he represented as a mortgage contract for Billena to sign. Billena later discovered the document was a deed of absolute sale. She and her son tendered repayment to Rabanes, but he refused, claiming the land could no longer be redeemed. The petitioners, Billena’s sons, remained in possession. Rabanes first filed an injunction suit in 1971, which was dismissed. He then filed a complaint for recovery of possession in 1972.

ISSUE

The primary issue is whether the dismissal of the first injunction case constitutes res judicata, barring the subsequent recovery of possession suit. The core substantive issue is the true nature of the 1946 transaction—whether it was an equitable mortgage or an absolute sale—and its legal consequences regarding ownership and possession.

RULING

The Supreme Court reversed the Court of Appeals. On the procedural issue, res judicata did not apply. The dismissal of the first injunction case was without prejudice, as it was dismissed upon Rabanes’s own motion, and the court did not adjudicate the merits of ownership or possession. The second action was therefore not barred. On the substantive merits, the Court ruled the transaction was an equitable mortgage, not a sale. The consideration of P800 was grossly inadequate for a sale of over eleven hectares. More critically, the land was a homestead patent, making it subject to the legal restrictions under Commonwealth Act No. 141. The law prohibits its alienation or encumbrance within five years from the grant of the patent, except to the government. Any conveyance within this period is considered an equitable mortgage. The original title was issued in 1936, and the disputed transaction occurred in 1946, well within the prohibited period. Therefore, the 1946 deed, even if phrased as a sale, operated only as an equitable mortgage. Consequently, Ana Billena’s tender of repayment in 1946 was a valid exercise of the right to redeem. The petitioners, as her heirs, retain the right to redeem the property by returning the P800 loan amount with interest.