G.R. No. L-2263; May 30, 1951
PAZ Y. OCAMPO, JOSEFA Y. OCAMPO, ISIDRO Y. OCAMPO, GIL Y. OCAMPO, MAURO Y. OCAMPO, and VICENTE Y. OCAMPO, plaintiffs-appellees, vs. CONRADO POTENCIANO, VICTOR POTENCIANO and LOURDES POTENCIANO, defendants. VICTOR POTENCIANO and LOURDES POTENCIANO, defendants-appellants.

FACTS

On February 3, 1930, Edilberto Ocampo, married to Paz Yatco, executed a deed purporting to be a sale with pacto de retro for P2,500 of a town lot with a house to Conrado Potenciano and his wife Rufina Reyes. On the same day, Ocampo signed a lease contract for the property at an annual rental of P300, equivalent to 12% of the purchase price. The property, located in Biñan, Laguna, was conjugal property of the Ocampo spouses. The redemption period was extended several times, with the last extension expiring on February 3, 1938. After the period lapsed, Potenciano consolidated title on January 24, 1939, and a new certificate was issued in his and his wife’s name. Rufina Reyes and Edilberto Ocampo subsequently died. On February 28, 1939, Conrado Potenciano gave Paz Yatco an option to repurchase the property for P2,500 within five years, with an annual rental of P300. On or about February 7, 1944, Paz Yatco tendered P4,000 to Potenciano, which was rejected. She then deposited the money in court and filed an action to compel acceptance and reinstate title. Potenciano’s children, Victor and Lourdes, intervened, claiming the option was void as to their deceased mother’s share, which they inherited, and that they were exercising a co-owner’s right of redemption over their father’s share. The Court of First Instance ruled in favor of the Ocampo heirs. The Court of Appeals found the original pacto de retro sale was in reality an equitable mortgage with 12% interest, held the option and lease contracts valid and binding, and ruled that appellants were not co-owners and had no right of legal redemption. It further held Paz Yatco validly exercised her option and the consignation of P4,000 in Japanese military notes was lawful.

ISSUE

The primary issue is whether the original transaction was a true pacto de retro sale or an equitable mortgage, and the legal effects of that characterization on the subsequent option agreement, the consolidation of title, and the claims of the Potenciano children.

RULING

The Supreme Court modified the judgment of the Court of Appeals. It affirmed the finding that the pacto de retro sale (Exhibit A) was in reality a loan with security or an equitable mortgage, with the simulated rental covering the 12% interest. Consequently, the consolidation of title by Potenciano was null and void. The Court disagreed with the Court of Appeals’ holding that the option agreement novated the mortgage contract, ruling that Potenciano had no authority to enter into such an agreement alone after his wife’s death, as the conjugal partnership must be liquidated in the testate or intestate proceedings of the deceased spouse under Act No. 3176 (now Section 2, Rule 75, Rules of Court). The Court found the option agreement was likely merely an extension of time for payment of the mortgage debt. Therefore, at the time of Paz Yatco’s tender and consignation, the equitable mortgage was still in effect. The tender and consignation, made in legal currency, were valid and had the effect of discharging the obligation. Since ownership never validly passed to the Potenciano spouses, their children acquired no ownership rights through inheritance or legal redemption. The Supreme Court declared the obligation evidenced by Exhibit A discharged and ordered the Register of Deeds to cancel the transfer certificate of title issued to Potenciano and issue a new one in favor of the heirs of Edilberto Ocampo and Paz Yatco.