G.R. No. L-12045; March 22, 1918
CLARA RODRIGUEZ, JULIANA ASBAN, and DEMETRIO MIARNADA, plaintiffs-appellees, vs. CATALINO PAMINTUAN and MANUELA DE JESUS, defendants-appellants.

FACTS:
On March 21, 1903, Manuela de Jesus executed a power of attorney in favor of her husband, Catalino Pamintuan, authorizing him to borrow money and secure it by a mortgage on her properties. On June 1, 1903, Pamintuan executed a notarized instrument in favor of Pedro Rodriguez (predecessor-in-interest of the plaintiffs) which, on its face, was a deed of sale of the lands for P5,000 with a right to repurchase within ten years and an obligation to deliver 120 pilones of sugar annually as rental. The plaintiffs initially filed an action for recovery of possession and unpaid rentals. The defendants contended that the instrument was intended merely as security for a loan. The plaintiffs later amended their complaint, aligning with the defendants’ contention, and prayed for payment of the loan with interest, treating it as a debt secured by a mortgage.

The trial court found that the power of attorney and the instrument were duly executed, the P5,000 was received, and only P300 had been paid. However, the trial court rendered judgment in favor of the plaintiffs for recovery of possession of the land and payment of 1,440 pilones of sugar (less the P300 equivalent), treating the contract as a true sale with pacto de retro.

ISSUE:
Whether the instrument, purporting to be a deed of sale with a right to repurchase, should be given effect as an equitable mortgage intended merely to secure a loan.

RULING:
Yes. The Supreme Court reversed the trial court’s decision. It held that the power of attorney only authorized Pamintuan to mortgage the property, not to sell it. There was no evidence that Manuela de Jesus authorized or ratified a sale. However, based on the evidence and the parties’ subsequent conduct (including the plaintiffs’ amended complaint), the true intention of the parties was to secure a loan of P5,000, not to effect an absolute sale. The instrument, though unrecorded and thus not a legal mortgage, constituted an equitable mortgage or a loan secured by the property.

Applying the doctrine from Cuyugan vs. Santos, the Court ruled that such an agreement is valid and enforceable between the parties according to their true intent, so long as the rights of innocent third parties are not prejudiced. The lender may be compelled to treat the transaction as a mortgage. Consequently, the plaintiffs are entitled to a money judgment for the loan amount with interest, and to have the property sold to satisfy the debt, but not to recover possession as absolute owners.

The Court modified the judgment, ordering the defendants to pay the plaintiffs P5,000 with interest at P720 per annum from June 1, 1903, less the P300 already paid, and for the sale of the property to satisfy the judgment.