THIRD DIVISION

[G.R. No. 156125. August 25, 2010.]

FRANCISCO MUÑOZ, JR., petitioner, vs. ERLINDA RAMIREZ

and ELISEO CARLOS, respondents.

DECISION

BRION, J :
p

We resolve the present petition for review on certiorari 1 filed by

petitioner Francisco Muñoz, Jr. (petitioner) to challenge the decision 2 and the
resolution 3 of the Court of Appeals (CA) in CA-G.R. CV No. 57126. 4 The CA
decision set aside the decision 5 of the Regional Trial Court (RTC), Branch
166, Pasig City, in Civil Case No. 63665. The CA resolution denied the
petitioner's subsequent motion for reconsideration.
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly
summarized below.
Subject of the present case is a seventy-seven (77)-square meter
residential house and lot located at 170 A. Bonifacio Street, Mandaluyong
City (subject property), covered by Transfer Certificate of Title (TCT) No.
7650 of the Registry of Deeds of Mandaluyong City in the name of the
petitioner. 6
The residential lot in the subject property was previously covered by
TCT No. 1427, in the name of Erlinda Ramirez, married to Eliseo Carlos
(respondents). 7
On April 6, 1989, Eliseo, a Bureau of Internal Revenue employee,
mortgaged TCT No. 1427, with Erlinda's consent, to the Government Service
Insurance System (GSIS) to secure a P136,500.00 housing loan, payable
within twenty (20) years, through monthly salary deductions of P1,687.66. 8
The respondents then constructed a thirty-six (36)-square meter, two-story
residential house on the lot.
On July 14, 1993, the title to the subject property was transferred to
the petitioner by virtue of a Deed of Absolute Sale, dated April 30, 1992,
executed by Erlinda, for herself and as attorney-in-fact of Eliseo, for a stated
consideration of P602,000.00. 9 HCITAS

On September 24, 1993, the respondents filed a complaint with the

RTC for the nullification of the deed of absolute sale, claiming that there was
no sale but only a mortgage transaction, and the documents transferring the
title to the petitioner's name were falsified.
The respondents alleged that in April 1992, the petitioner granted
them a P600,000.00 loan, to be secured by a first mortgage on TCT No.
1427; the petitioner gave Erlinda a P200,000.00 10 advance to cancel the
GSIS mortgage, and made her sign a document purporting to be the
mortgage contract; the petitioner promised to give the P402,000.00 balance
when Erlinda surrenders TCT No. 1427 with the GSIS mortgage cancelled,
and submits an affidavit signed by Eliseo stating that he waives all his rights
to the subject property; with the P200,000.00 advance, Erlinda paid GSIS
P176,445.27 11 to cancel the GSIS mortgage on TCT No. 1427; 12 in May
1992, Erlinda surrendered to the petitioner the clean TCT No. 1427, but
returned Eliseo's affidavit, unsigned; since Eliseo's affidavit was unsigned,
the petitioner refused to give the P402,000.00 balance and to cancel the
mortgage, and demanded that Erlinda return the P200,000.00 advance;
since Erlinda could not return the P200,000.00 advance because it had been
used to pay the GSIS loan, the petitioner kept the title; and in 1993, they
discovered that TCT No. 7650 had been issued in the petitioner's name,
cancelling TCT No. 1427 in their name.
The petitioner countered that there was a valid contract of sale. He
alleged that the respondents sold the subject property to him after he
refused their offer to mortgage the subject property because they lacked
paying capacity and were unwilling to pay the incidental charges; the sale
was with the implied promise to repurchase within one year, 13 during which
period (from May 1, 1992 to April 30, 1993), the respondents would lease the
subject property for a monthly rental of P500.00; 14 when the respondents
failed to repurchase the subject property within the one-year period despite
notice, he caused the transfer of title in his name on July 14, 1993; 15 when
the respondents failed to pay the monthly rentals despite demand, he filed
an ejectment case 16 against them with the Metropolitan Trial Court (MeTC),
Branch 60, Mandaluyong City, on September 8, 1993, or sixteen days before
the filing of the RTC case for annulment of the deed of absolute sale.
During the pendency of the RTC case, or on March 29, 1995, the MeTC
decided the ejectment case. It ordered Erlinda and her family to vacate the
subject property, to surrender its possession to the petitioner, and to pay the
overdue rentals. 17
In the RTC, the respondents presented the results of the scientific
examination 18 conducted by the National Bureau of Investigation of Eliseo's
purported signatures in the Special Power of Attorney 19 dated April 29, 1992
and the Affidavit of waiver of rights dated April 29, 1992, 20 showing that
they were forgeries.
The petitioner, on the other hand, introduced evidence on the
paraphernal nature of the subject property since it was registered in
Erlinda's name; the residential lot was part of a large parcel of land owned
by Pedro Ramirez and Fructuosa Urcla, Erlinda's parents; it was the subject
of Civil Case No. 50141, a complaint for annulment of sale, before the RTC,
Branch 158, Pasig City, filed by the surviving heirs of Pedro against another
heir, Amado Ramirez, Erlinda's brother; and, as a result of a compromise
agreement, Amado agreed to transfer to the other compulsory heirs of
Pedro, including Erlinda, their rightful shares of the land. 21
 THE RTC RULING
In a Decision dated January 23, 1997, the RTC dismissed the complaint.
It found that the subject property was Erlinda's exclusive paraphernal
property that was inherited from her father. It also upheld the sale to the
petitioner, even without Eliseo's consent as the deed of absolute sale bore
the genuine signatures of Erlinda and the petitioner as vendor and vendee,
respectively. It concluded that the NBI finding that Eliseo's signatures in the
special power of attorney and in the affidavit were forgeries was immaterial
because Eliseo's consent to the sale was not necessary. 22 AHCTEa

The respondents elevated the case to the CA via an ordinary appeal

under Rule 41 of the Revised Rules of Court.
THE CA RULING
The CA decided the appeal on June 25, 2002. Applying the second
paragraph of Article 158 23 of the Civil Code and Calimlim-Canullas v. Hon.
Fortun, 24 the CA held that the subject property, originally Erlinda's exclusive
paraphernal property, became conjugal property when it was used as
collateral for a housing loan that was paid through conjugal funds — Eliseo's
monthly salary deductions; the subject property, therefore, cannot be validly
sold or mortgaged without. Eliseo's consent, pursuant to Article 124 25 of the
Family Code. Thus, the CA declared void the deed of absolute sale, and set
aside the RTC decision.
When the CA denied 26 the subsequent motion for reconsideration, 27
the petitioner filed the present petition for review on certiorari under Rule 45
of the Revised Rules of Court.
THE PETITION
The petitioner argues that the CA misapplied the second paragraph of
Article 158 of the Civil Code and Calimlim-Canullas 28 because the
respondents admitted in the complaint that it was the petitioner who gave
the money used to cancel the GSIS mortgage on TCT No. 1427; Article 120 29
of the Family Code is the applicable rule, and since the value of the house is
less than the value of the lot, then Erlinda retained ownership of the subject
property. He also argues that the contract between the parties was a sale,
not a mortgage, because (a) Erlinda did not deny her signature in the
document; 30 (b) Erlinda agreed to sign a contract of lease over the subject
property; 31 and, (c) Erlinda executed a letter, dated April 30, 1992,
confirming the conversion of the loan application to a deed of sale. 32
THE CASE FOR THE RESPONDENTS
The respondents submit that it is unnecessary to compare the
respective values of the house and of the lot to determine ownership of the
subject property; it was acquired during their marriage and, therefore,
considered conjugal property. They also submit that the transaction between
the parties was not a sale, but an equitable mortgage because (a) they
remained in possession of the subject property even after the execution of
the deed of absolute sale, (b) they paid the 1993 real property taxes due on
the subject property, and (c) they received P200,000.00 only of the total
stated price of P602,000.00. ACTIHa

THE ISSUE
The issues in the present case boil down to (1) whether the subject
property is paraphernal or conjugal; and, (2) whether the contract between
the parties was a sale or an equitable mortgage.
OUR RULING
We deny the present Petition but for reasons other than those
advanced by the CA.
This Court is not a trier of facts. However, if the inference, drawn by
the CA, from the facts is manifestly mistaken, as in the present case, we can
review the evidence to allow us to arrive at the correct factual conclusions
based on the record. 33
First Issue:
Paraphernal or Conjugal?
As a general rule, all property acquired during the marriage, whether
the acquisition appears to have been made, contracted or registered in the
name of one or both spouses, is presumed to be conjugal unless the contrary
is proved. 34
In the present case, clear evidence that Erlinda inherited the
residential lot from her father has sufficiently rebutted this presumption of
conjugal ownership. 35 Pursuant to Articles 92 36 and 109 37 of the Family
Code, properties acquired by gratuitous title by either spouse, during the
marriage, shall be excluded from the community property and be the
exclusive property of each spouse. 38 The residential lot, therefore, is
Erlinda's exclusive paraphernal property.
The CA, however, held that the residential lot became conjugal when
the house was built thereon through conjugal funds, applying the second
paragraph of Article 158 of the Civil Code and Calimlim-Canullas. 39 Under
the second paragraph of Article 158 of the Civil Code, a land that originally
belonged to one spouse becomes conjugal upon the construction of
improvements thereon at the expense of the partnership. We applied this
provision in Calimlim-Canullas, 40 where we held that when the conjugal
house is constructed on land belonging exclusively to the husband, the land
ipso facto becomes conjugal, but the husband is entitled to reimbursement
of the value of the land at the liquidation of the conjugal partnership.
The CA misapplied Article 158 of the
Civil Code and Calimlim-Canullas
We cannot subscribe to the CA's misplaced reliance on Article 158 of
the Civil Code and Calimlim-Canullas. ISTCHE

As the respondents were married during the effectivity of the Civil

Code, its provisions on conjugal partnership of gains (Articles 142 to 189)
should have governed their property relations. However, with the enactment
of the Family Code on August 3, 1989, the Civil Code provisions on conjugal
partnership of gains, including Article 158, have been superseded by those
found in the Family Code (Articles 105 to 133). Article 105 of the Family
Code states:

xxx xxx xxx

The provisions of this Chapter [on the Conjugal

Partnership of Gains] shall also apply to conjugal partnerships
of gains already established between spouses before the
effectivity of this Code, without prejudice to vested rights already
acquired in accordance with the Civil Code or other laws, as provided
in Article 256.

Thus, in determining the nature of the subject property, we refer to the

provisions of the Family Code, and not the Civil Code, except with respect to
rights then already vested.
Article 120 of the Family Code, which supersedes Article 158 of the
Civil Code, provides the solution in determining the ownership of the
improvements that are made on the separate property of the spouses, at the
expense of the partnership or through the acts or efforts of either or both
spouses. Under this provision, when the cost of the improvement and any
resulting increase in value are more than the value of the property at the
time of the improvement, the entire property of one of the spouses shall
belong to the conjugal partnership, subject to reimbursement of the value of
the property of the owner-spouse at the time of the improvement; otherwise,
said property shall be retained in ownership by the owner-spouse, likewise
subject to reimbursement of the cost of the improvement. 41
In the present case, we find that Eliseo paid a portion only of the GSIS
loan through monthly salary deductions. From April 6, 1989 42 to April 30,
1992, 43 Eliseo paid about P60,755.76, 44 not the entire amount of the GSIS
housing loan plus interest, since the petitioner advanced the P176,445.27 45
paid by Erlinda to cancel the mortgage in 1992. Considering the P136,500.00
amount of the GSIS housing loan, it is fairly reasonable to assume that the
value of the residential lot is considerably more than the P60,755.76 amount
paid by Eliseo through monthly salary deductions.
Thus, the subject property remained the exclusive paraphernal
property of Erlinda at the time she contracted with the petitioner; the written
consent of Eliseo to the transaction was not necessary. The NBI finding that
Eliseo's signatures in the special power of attorney and affidavit were
forgeries was immaterial.
Nonetheless, the RTC and the CA apparently failed to consider the real
nature of the contract between the parties.
Second Issue:
Sale or Equitable Mortgage?
Jurisprudence has defined an equitable mortgage "as one which
although lacking in some formality, or form or words, or other requisites
demanded by a statute, nevertheless reveals the intention of the parties to
charge real property as security for a debt, there being no impossibility nor
anything contrary to law in this intent." 46
cISDHE

Article 1602 of the Civil Code enumerates the instances when a

contract, regardless of its nomenclature, may be presumed to be an
equitable mortgage: (a) when the price of a sale with right to repurchase is
unusually inadequate; (b) when the vendor remains in possession as
lessee or otherwise; (c) when upon or after the expiration of the right to
repurchase another instrument extending the period of redemption or
granting a new period is executed; (d) when the purchaser retains for
himself a part of the purchase price; (e) when the vendor binds
himself to pay the taxes on the thing sold; and, (f) in any other case
where it may be fairly inferred that the real intention of the parties
is that the transaction shall secure the payment of a debt or the
performance of any other obligation. These instances apply to a
contract purporting to be an absolute sale. 47
For the presumption of an equitable mortgage to arise under Article
1602 of the Civil Code, two (2) requisites must concur: (a) that the parties
entered into a contract denominated as a contract of sale; and, (b) that their
intention was to secure an existing debt by way of a mortgage. Any of the
circumstances laid out in Article 1602 of the Civil Code, not the concurrence
nor an overwhelming number of the enumerated circumstances, is sufficient
to support the conclusion that a contract of sale is in fact an equitable
mortgage. 48 CHEDAc

Contract is an equitable mortgage

In the present case, there are four (4) telling circumstances pointing to
the existence of an equitable mortgage.
First, the respondents remained in possession as lessees of the subject
property; the parties, in fact, executed a one-year contract of lease, effective
May 1, 1992 to April 30, 1993. 49
Second, the petitioner retained part of the "purchase price," the
petitioner gave a P200,000.00 advance to settle the GSIS housing loan, but
refused to give the P402,000.00 balance when Erlinda failed to submit
Eliseo's signed affidavit of waiver of rights.
Third, respondents paid the real property taxes on July 8, 1993, despite
the alleged sale on April 30, 1992; 50 payment of real property taxes is a
usual burden attaching to ownership and when, as here, such payment is
coupled with continuous possession of the property, it constitutes evidence
of great weight that the person under whose name the realty taxes were
declared has a valid and rightful claim over the land. 51
Fourth, Erlinda secured the payment of the principal debt owed to the
petitioner with the subject property. The records show that the petitioner, in
fact, sent Erlinda a Statement of Account showing that as of February 20,
1993, she owed P384,660.00, and the daily interest, starting February 21,
1993, was P641.10. 52 Thus, the parties clearly intended an equitable
mortgage and not a contract of sale.
 That the petitioner advanced the sum of P200,000.00 to Erlinda is
undisputed. This advance, in fact, prompted the latter to transfer the subject
property to the petitioner. Thus, before the respondents can recover the
subject property, they must first return the amount of P200,000.00 to the
petitioner, plus legal interest of 12% per annum, computed from April 30,
1992.
We cannot sustain the ballooned obligation of P384,660.00, claimed in
the Statement of Account sent by the petitioner, 53 sans any evidence of how
this amount was arrived at. Additionally, a daily interest of P641.10 or
P19,233.00 per month for a P200,000.00 loan is patently unconscionable.
While parties are free to stipulate on the interest to be imposed on monetary
obligations, we can step in to temper the interest rates if they are
unconscionable. 54
In Lustan v. CA, 55 where we established the reciprocal obligations of
the parties under an equitable mortgage, we ordered the reconveyance of
the property to the rightful owner therein upon the payment of the loan
within ninety (90) days from the finality of the decision. 56
WHEREFORE, in light of all the foregoing, we hereby D E N Y the
present petition. The assailed decision and resolution of the Court of Appeals
in CA-G.R. CV No. 57126 are AFFIRMED with the following
MODIFICATIONS: AECcTS

1. The Deed of Absolute Sale dated April 30, 1992 is hereby

declared an equitable mortgage; and
2. The petitioner is obligated to RECONVEY to the respondents the
property covered by Transfer Certificate of Title No. 7650 of the Register of
Deeds of Mandaluyong City, UPON THE PAYMENT OF P200,000.00, with 12%
legal interest from April 30, 1992, by respondents within NINETY DAYS FROM
THE FINALITY OF THIS DECISION.
Costs against the petitioner.
SO ORDERED.
Carpio Morales, Bersamin, Villarama, Jr. and Sereno, JJ., concur.

Footnotes

1.Filed under Rule 45 of the Revised Rules of Court; rollo, pp. 11-16.

2.Dated June 25, 2002, penned by Associate Justice Juan Q. Enriquez, Jr., with the
concurrence of Associate Justices Eugenio S. Labitoria and Mariano C. del
Castillo (now a member of this Court); id. at 21-28.

3.Dated November 13, 2002; id. at 31.

4.Entitled "Erlinda Ramirez and Eliseo Carlos v. Francisco E. Muñoz, Jr."

5.Dated January 23, 1997; Original Records, pp. 296-299.

6.Id. at 71-72.

7.Id. at 68-69.

8.Folder of Plaintiffs' Formal Offer of Additional Evidence, pp. 6-8.

9.Original Records, pp. 76-77.

10.TSN dated September 19, 1994, Testimony of Erlinda Ramirez, p. 4.

11.Id. at 80-81.

12.Memorandum of Encumbrances of TCT No. 1427; id. at 69.

13.TSN dated July 14, 1995, Testimony of Francisco Muñoz, Sr., pp. 7-8.

14.Original Records, p. 152.

15.Id. at 71-72.

16.Civil Case No. 14271, entitled Francisco Muñoz, Jr., rep. by his attorney-in-fact,
Francisco Muñoz v. Sps. Eliseo & Erlinda Ramirez; id. at 153-155.

17.Id. at 156-162.

18.Folder of Plaintiffs' Formal Offer of Additional Evidence.

19.Original Records, p. 70.

20.Id. at 74.

21.Id. at 163-169 and 170-172.

22.Supra note 5.

23.Art. 158. . . .

Buildings constructed, at the expense of the partnership, during the marriage

on land belonging to one of the spouses, also pertain to the partnership, but
the value of the land shall be reimbursed to the spouse who owns the same.

24.214 Phil. 593 (1984).

25.Art. 124. The administration and enjoyment of the conjugal partnership shall
belong to both spouses jointly. In case of disagreement, the husband's
decision shall prevail, subject to recourse to the court by the wife for proper
remedy, which must be availed of within five years from the date of the
contract implementing such decision.

In the event that one spouse is incapacitated or otherwise unable to

participate in the administration of the conjugal properties, the other spouse
may assume sole powers of administration. These powers do not include
disposition or encumbrance without authority of the court or the
written consent of the other spouse. In the absence of such
authority or consent, the disposition or encumbrance shall be void.
However, the transaction shall be construed as a continuing offer on the part
of the consenting spouse and the third person, and may be perfected as a
 binding contract upon the acceptance by the other spouse or authorization
by the court before the offer is withdrawn by either or both offerors.

26.Resolution of November 13, 2002; supra note 3.

27.Rollo , pp. 131-136.

28.Supra note 24.

29.Art. 120. The ownership of improvements, whether for utility or adornment,

made on the separate property of the spouses at the expense of the
partnership or through the acts or efforts of either or both spouses shall
pertain to the conjugal partnership, or to the original owner-spouse, subject
to the following rules:

When the cost of the improvement made by the conjugal partnership

and any resulting increase in value are more than the value of the
property at the time of the improvement, the entire property of one
of the spouses shall belong to the conjugal partnership, subject to
reimbursement of the value of the property of the owner-spouse at
the time of the improvement; otherwise, said property shall be
retained in ownership by the owner-spouse, likewise subject to
reimbursement of the cost of the improvement.

In either case, the ownership of the entire property shall be vested upon the
reimbursement, which shall be made at the time of the liquidation of the
conjugal partnership.

30.TSN dated September 19, 1994, Testimony of Erlinda Ramirez, p. 14.

31.Original Records, p. 152.

32.Id. at 151.

33.Hi-Cement Corporation v. Insular Bank of Asia and America, G.R. Nos. 132403 &
132419, September 28, 2007, 534 SCRA 269; Heirs of Flores Restar v. Heirs
of Dolores R. Cichon , G.R. No. 161720, November 22, 2005, 475 SCRA 731,
739; Casol v. Purefoods Corporation , G.R. No. 166550, September 22, 2005,
470 SCRA 585, 589.

34.FAMILY CODE, Art. 116.

35.Supra note 21.

36.Art. 92. The following shall be excluded from the community property:

(1) Property acquired during the marriage by gratuitous title by either

spouse[.]

37.Art. 109. The following shall be the exclusive property of each spouse:

xxx xxx xxx

(2) That which each acquires during the marriage by gratuitous title[.]

38.Previously Articles 148 and 201 of the Civil Code.

39.Supra note 24.

40.Ibid.

41.Ferrer v. Ferrer, G.R. No. 166496, November 29, 2006, 508 SCRA 570, 581.

42.Date GSIS granted the loan; supra note 8.

43.Date Erlinda settled the loan; supra note 11.

44.P1,687.66 x 36 months' salary deductions (May 1989 to April 1992) =

P60,755.76.

45.Supra note 11.

46.Rockville Excel International Exim Corporation v. Culla , G.R. No. 155716,

October 2, 2009, 602 SCRA 128, 136.

47.CIVIL CODE, Article 1604.

48.Bacungan v. Court of Appeals , G.R. No. 170282, December 18, 2008, 574 SCRA
642, 648-649; Sps. Salonga v. Sps. Concepcion , 507 Phil. 287, 303 (2005);
Sps. Reyes v. Court of Appeals, 393 Phil. 479, 490 (2000).

49.Supra note 14.

50.Original Records, p. 174.

51.Lumayag v. Heirs of Jacinto Nemeño , G.R. No. 162112, July 3, 2007, 526 SCRA
315, 327-328; Go v. Bacaron , G.R. No. 159048, October 11, 2005, 472 SCRA
339, 352.

52.Original Records, p. 82.

53.Ibid.

54.Toring v. Ganzon-Olan, G.R. No. 168782, October 10, 2008, 568 SCRA 376, 383.

55.334 Phil. 609 (1997).

56.Id. at 620. See also Bacungan v. Court of Appeals, supra note 47, at 650.