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Supreme Court weighs in again for the underdog

(Article published in the Nov 23,2005 issue of Manila Standard Today)

         In an era of credit-driven lifestyles, maintaining one’s reputation of being a “good credit” is just as crucial to an estate planner as having substantial assets.   Thus, when strong winds of adversity buffet the economy, whether man-made like the Asian financial crisis of 1987 or acts of nature like the recent “Katrina”, borrowers are forced adopt various ways in order to cope, or even just, for many, to survive. 

 For some of the rich and/or powerful, the attractive action is often to simply pass on the problem to their lenders.  Afraid of having neither the sheriff nor the hungry wolf at their doors, they prefer to  leave it to their creditors, mostly banks, to “restructure” the debts they do not pay.  For many of the poor and/or powerless, no action is a viable option.  After all, hunger is a daily visitor and the sheriff is a hardly credible threat since his cost is more often bigger than their unpaid debt. 

 But for those in-between, constituting the over-whelming majority that make up the critical mass that, ironically, keep the credit economy humming in good times, maintaining “good credit” in bad times mean making painful sacrifices, at times, even having to put at risk the roofs over their heads and the wells from which they draw financial sustenance. 

 The case of Spouses Natalio and Felicidad Salonga v. Spouses Manuel and Nenita Concepcion and Florencia Realty Corporation, G.R. No. 151333, September 20, 2005 like last week’s summary of the Bank of the Philippine Islands tax victory, is good news to the underdog.  It illustrates the plight of these in-betweens and tells of how the Supreme Court and the law came to their rescue. Like an O. Henry story, it has a twist: equity triumphed, appropriately, in this case on “equitable mortgage”.


   The 16 July 1990 earthquake, which many of us recall collapsed a school building in Nueva Ecija and brought down the Hyatt Terraces Hotel in Baguio City, made the business fortunes of the Salongas slide from the upper to the lower side of the wheel. Eventually, they defaulted on their bank loans.   Their loans were covered by real estate mortgages on prime parcels of land and so one by one the creditor banks foreclosed or threatened to foreclose.

 The first to foreclose, on 4 September 1991, was the Rural Bank of Malasiqui.  It was followed by Development Bank of the Philippines on 21 November 1991.  The Associated  Bank filed for extra-judicial foreclosure on 01 October 1992.  What remained, after the flurry of public auctions, was the spouses Salonga’s loan with the Philippine National Bank which was secured by their home and the lot on which it was built. 

Judging from the facts of the case, the spouses Salonga were, by this time, “taong nagigipit” or persons in dire need.  As the Pilipino proverb continues, they “sa patalim man ay kakapit” or, would hang on for dear life even to the blade of a knife.

 The “knife” was financial assistance from the spouses Concepcion, who were in the business of lending money.  The spouses Concepcion paid Php 500,000 to  PNB which thus executed a Release of Real Estate Mortgage and gave the title to the Concepcions.  They also remitted a total of Php 596,000 to Associated Bank which similarly gave the release papers to the Concepcions.  And for the payment of the Salonga’s around Php 2 million outstanding, DBP likewise released the papers to the Concepcions. The “blade,” however, consisted in a 3% interest per month and, additionally, 5% commission if the properties mortgaged were sold to third parties.

 When, after several months, the Salongas were not able to repay the amounts paid to their creditors by the Concepcions nor sell the properties released from the mortgages to the creditor banks, the blade cut deeper.  The Salongas were asked, and they apparently agreed, to execute deeds of absolute sale over their properties in favor of the Concepcions and Florencia Realty Corporation. 

 The wheel of fortune did not stop turning, however, lady luck started smiling. In 1994 their daughter of the Salongas returned from abroad.  Like a true Filipina daughter, she learned of what her parents were constrained to do and wanted her parents to redeem title to their home, at least. But she and her parents were told by the Concepcions that titles had already been transferred to them.  However, the Concepcions gave a price at which they would be willing sell back.  There was no agreement.  Hence, the case in court.

 The issue before the courts was simply whether the Salongas had parted with their property in payment of their debt (and therefore, the Concepcions were under no obligation to sell back to the Salongas at a price they did not like) or had simply offered their properties as security for their debt (in which case the Salongas could force the Concepcions to return the titles upon full payment of their obligation).  The Supreme Court held it was the latter.

 In contractual disputes, where the parties are not in agreement as to what they agreed upon, courts resolve the controversy by determing the “intent” of the parties.  The name given to the document is not conclusive as to the nature and effect of parties’ contract.  Not even the notarization of the document gives it binding effect.  What is determinative is “the intention of parties as shown by the surrounding circumstances, such as the relative situation of the parties at that time, the attitude, acts, conduct, and declaration of the parties before, during and after the execution of the deed, and generally all pertinent facts having a tendency to determine the real nature of their design and understanding.”

 The Supreme Court observed that the Salongas, who were not able to repay the Concepcions, were faced with eviction for their residence unless they executed deeds of absolute sale.  Furthermore, the consideration in the deeds had an uncanny correspondence to the indebtedness of the Salongas paid for by the Concepcions but was grossly disproportionate to the market value.  Moreover, the Concepcions agreed not to register the deeds of sale provided the Salongas paid the interest of 3% a month.  And the Salongas remained in possession of their house without paying any rental. 

 The Supreme Court, applying Article 1602 of the New Civil Code (the code is called “new” even if it has been effective since 1950!) ruled that instead of being true conveyances of ownership, the so-called “absolute deeds of sale” were merely “equitable mortgages”.   In other words, the “intent” of the Salongas and the Concepcions, as manifested by the facts proven in court, showed that the Salongas did not intend, and the Concepcions did not expect, an actual transfer ownership but simply a method to secure repayment of the moneys lent by the Concepcions. 

 The contracts were thus “equitable mortgages” because while in law the form purported that the agreements were of sale; in equity, the substance was shown to merely the creation of a security for debt.  In our jurisdiction where our courts are both courts of law and courts of equity, judges must interpret an agreement according to the real intent of the parties as evidenced therein and, if not contrary to some positive rule or law or public policy, will give it effect, even though it does not meet the technical and formal requirements of the law. 

 We fault our judiciary so often; but Salonga v. Concepcion assures us all is not lost.