Abilla vs. Gobonseng

The right of repurchase under Article 1606, third paragraph of the Civil Code—allowing repurchase within thirty days from the finality of a judgment declaring a contract to be a true sale with right to repurchase—is available only to vendors who honestly and sincerely believed in good faith that the transaction was an equitable mortgage, and not to those who knew it was a true pacto de retro sale but claimed otherwise merely to avoid their contractual obligations or escape the consequences of an expired redemption period.

The case involves a dispute over seventeen lots located in Daro and Bantayan, Dumaguete City, covered by Transfer Certificate of Title Nos. 14321-14337. The parties executed a "Deed of Sale" and an "Option to Buy" which the respondents (original vendors) claimed was actually an equitable mortgage to secure a loan obligation, while the petitioners (vendees) insisted it was either a sale with option to buy or a pacto de retro sale. The controversy centered on whether the vendors could still repurchase the properties after the judicial declaration that the transaction was a true pacto de retro sale, despite their previous insistence that it was merely an equitable mortgage.

• Petitioner spouses Ronaldo P. Abilla and Geralda A. Dizon instituted an action for specific performance, recovery of sum of money and damages against respondent spouses Carlos Ang Gobonseng, Jr. and Theresita Mimie Ong before the RTC of Dumaguete City, Branch 42, docketed as Civil Case No. 8148.
• The action sought reimbursement of expenses incurred in connection with the preparation and registration of two public instruments: a "Deed of Sale" and an "Option to Buy" covering seventeen lots located in Daro and Bantayan, Dumaguete City, covered by Transfer Certificate of Title Nos. 14321-14337.
• In their answer, respondents raised the defense that the transaction was in truth an equitable mortgage, not a pacto de retro sale or a sale with option to buy.
• The RTC ruled in favor of petitioners on October 29, 1990, declaring the transaction was not an equitable mortgage but a sale giving respondents until August 31, 1983 to buy back the properties.
• On appeal, the Court of Appeals modified the decision, declaring the transaction was a pacto de retro sale, not an equitable mortgage, and deleted the award of attorney's fees.
• Respondents' petition for review with the Supreme Court (G.R. No. 131358) was dismissed for being filed out of time, and the motion for reconsideration was denied with finality on June 17, 1998.
• Respondents filed a second motion for reconsideration claiming entitlement to repurchase under Article 1606, third paragraph of the Civil Code, which was denied; the denial became final on February 8, 1999.
• On February 23, 1999, respondents filed an urgent motion to repurchase with tender of payment before the RTC, which was initially denied on November 10, 1999 by Judge Ibarra B. Jaculbe, Jr., who subsequently inhibited himself.
• On January 14, 2001, Branch 41 of the RTC (to which the case was reraffled) set aside the November 10, 1999 order and granted respondents' motion to repurchase.

• Petitioners argued that respondents cannot avail of the right of repurchase under Article 1606, third paragraph because they consistently maintained that the transaction was an equitable mortgage, not a pacto de retro sale.
• They contended that the third paragraph of Article 1606 applies only to vendors who honestly believed in good faith that the transaction was a mortgage, which was not the case here.
• They asserted that allowing respondents to repurchase would effectively resuscitate an expired right of repurchase and alter the contract's stipulation regarding the definite period for repurchase, which had already expired in 1983.
• They argued that respondents only invoked the third paragraph of Article 1606 after their theory of equitable mortgage failed, demonstrating lack of good faith and constituting an attempt to set at naught the pacto de retro sale.

• Respondents initially claimed that the transaction was an equitable mortgage, not a pacto de retro sale, as a defense against the petitioners' action for specific performance.
• After the Court of Appeals declared the transaction to be a pacto de retro sale, respondents abandoned their equitable mortgage theory and insisted they were entitled to exercise the right to repurchase pursuant to the third paragraph of Article 1606 of the Civil Code.
• They argued that since the transaction was judicially declared to be a true sale with right to repurchase, they should be allowed to repurchase within thirty days from the time final judgment was rendered as provided in Article 1606.

• Procedural Issues: N/A
• Substantive Issues: Whether respondents, who consistently claimed that the transaction was an equitable mortgage, may exercise the right of repurchase under Article 1606, third paragraph of the Civil Code after the courts declared the transaction to be a true pacto de retro sale.

• Procedural: N/A
• Substantive: The Supreme Court held that respondents cannot exercise the right of repurchase under Article 1606, third paragraph. The Court ruled that the application of this provision is predicated upon the bona fides of the vendor a retro; it must appear that there was an honest and sincere belief, founded on facts attendant upon the execution of the sale, that the agreement was in reality a mortgage. In this case, respondents consistently claimed the transaction was an equitable mortgage only to avoid the consequences of the pacto de retro sale. When their equitable mortgage theory failed, they shifted their position to claim the benefit of Article 1606. The Court found that there were no circumstances generating honest doubt as to the parties' intention, and the transaction was clearly a sale with pacto de retro. Allowing respondents to repurchase would resuscitate an expired right and alter the contract's stipulation on the definite period for repurchase, effectively rewarding bad faith and fraud. The petition was granted and the January 14, 2001 RTC Order was reversed and set aside.

• Good Faith Requirement in Article 1606 — The third paragraph of Article 1606 applies only to vendors a retro who honestly and sincerely believed in good faith that the transaction was an equitable mortgage. The provision is inapplicable when the vendor knew the agreement was truly a sale with pacto de retro but claimed otherwise merely to avoid contractual obligations or escape the consequences of an expired redemption period.
• Resuscitation of Expired Rights — A vendor cannot be allowed to use Article 1606 to resurrect an expired right of repurchase or set at naught a pacto de retro by simply instituting an action to reform the contract into an equitable mortgage, knowing it to be in truth a sale with pacto de retro.

• "The application of the third paragraph of Article 1606 is predicated upon the bona fides of the vendor a retro. It must appear that there was a belief on his part, founded on facts attendant upon the execution of the sale with pacto de retro, honestly and sincerely entertained, that the agreement was in reality a mortgage, one not intended to affect the title to the property ostensibly sold, but merely to give it as security for a loan or other obligation."
• "If the rule were otherwise, it would be within the power of every vendor a retro to set at naught a pacto de retro, or resurrect an expired right of repurchase, by simply instituting an action to reform the contract — known to him to be in truth a sale with pacto de retro — into an equitable mortgage."
• "The rule would thus be made a tool to spawn, protect and even reward fraud and bad faith, a situation surely never contemplated or intended by the law."

• Vda. de Macoy v. Court of Appeals — Cited as the parallel case where the Court held that Article 1606, third paragraph is inapplicable when there is no honest doubt as to the parties' intention that the transaction was clearly a sale with pacto de retro.
• Adorable v. Inacala — Cited to support the ruling that when proofs establish there could be no honest doubt as to the parties' intention that the transaction was clearly a sale with pacto de retro, the vendor a retro is not entitled to the benefit of the third paragraph of Article 1606.
• Villarica v. Court of Appeals — Cited by the trial court in its decision as basis for ruling that the transaction was not a pacto de retro sale but a sale with option to buy.
• Felicen, Sr. v. Orias — Cited in Vda. de Macoy v. Court of Appeals regarding the interpretation of Article 1606.

• Article 1606, third paragraph, Civil Code — Provides that the vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase. The Court interpreted this provision to require good faith belief that the transaction was an equitable mortgage.
• Article 1602, Civil Code — Enumerates the circumstances that indicate a contract is an equitable mortgage. The Court noted that none of these circumstances existed in the present case to warrant a conclusion that the transaction was an equitable mortgage.