G.R. No. L-10265; March 3, 1916
EUTIQUIANO CUYUGAN, plaintiff-appellant, vs. ISIDORO SANTOS, defendant-appellee.

FACTS:
The plaintiff, Eutiquiano Cuyugan, as the sole heir of his deceased mother Guillerma Cuyugan, filed a complaint against Isidoro Santos. He alleged that in 1895, his mother borrowed P3,500 from the defendant and executed a document (Exhibit C) which, while appearing on its face to be a deed of sale of land with a right to repurchase for the same amount, was in fact intended merely as security for the loan. Under this arrangement, his mother remained in possession as a nominal tenant, paying an annual “rent” of P420, which corresponded to 12% annual interest on the loan. In 1897, a partial payment of P1,000 was made on the loan, after which the annual payment was reduced to P300, reflecting the interest on the reduced principal. The plaintiff and his mother continued in possession until the defendant, years later, demanded a return to the original P420 annual payment and threatened ejectment, claiming absolute ownership. The plaintiff tendered payment of the outstanding balance and one year’s interest, but the defendant refused to accept it and cancel the deed. The trial court sustained the defendant’s demurrer to the complaint, ruling that the attached deed was a pacto de retro sale and that the right to repurchase had expired, thus the complaint stated no cause of action. The plaintiff appealed.

ISSUE:
1. Whether a demurrer should be sustained against a complaint that alleges, contrary to the terms of a written deed of sale with pacto de retro, that the true intention of the parties was to create a loan secured by the property (an equitable mortgage).

RULING:
The Supreme Court REVERSED the order of the trial court and held that the demurrer should have been overruled on two independent grounds.

1. On the Admissibility of Parol Evidence to Prove an Equitable Mortgage: The Court ruled that parol evidence is admissible to show that a document purporting to be an absolute sale or a sale with a right to repurchase was in fact intended to secure a loan. While such evidence must be clear, convincing, and satisfactory to overcome the presumption that a written instrument expresses the true agreement, a demurrer admits the truth of the well-pleaded allegations in the complaint. Since the complaint alleged that the deed was merely a security for a loan, the demurrer admitted this fact for the purpose of the pleading challenge. Therefore, the plaintiff was entitled to an opportunity to present evidence at trial to prove these allegations.

2. On the Legal Effect of the Partial Payment and Adjusted “Rent”: The Court held that the defendant’s acceptance of the P1,000 payment and his act of reducing the subsequent annual payments were facts wholly inconsistent with a claim of absolute ownership under an expired pacto de retro sale. This conduct could only be explained under one of two theories: (a) it confirmed that the original transaction was indeed a loan, with the payments being applied to the principal and interest; or (b) if the original deed was a true sale, the defendant, by accepting the payment, waived his right to treat the ownership as irrevocable and entered into a new agreement obliging him to resell the property upon payment of the balance. Under either theory, the plaintiff stated a valid cause of action for the cancellation of the deed upon payment of the balance due.

The case was remanded to the trial court for further proceedings. No costs were awarded.