Dizon vs. Gaborro

A transaction labeled as an absolute sale but where the vendor retains the right to repurchase the property, the transferee assumes the mortgage debts as consideration, and the transferee takes possession and enjoys the fruits of the property, constitutes an innominate contract under Article 1307 of the New Civil Code partaking of the nature of antichresis rather than an absolute sale, and is subject to reformation to reflect the true intention of the parties that the vendor may recover the property upon reimbursement of the principal debt assumed.

The case arises from a financial arrangement between a landowner in default of mortgage obligations and a third party willing to assume such obligations to prevent the land from remaining idle. After the Development Bank of the Philippines foreclosed on the mortgaged properties, the owner (Dizon) entered into agreements with Gaborro whereby the latter would assume the mortgage debts in exchange for possession and enjoyment of the lands, with the understanding that the owner could eventually recover the properties. The dispute centers on whether this arrangement created an absolute sale with a repurchase option or a security transaction akin to antichresis where the creditor-possessor applies the fruits to the debt.

• Petitioner Jose P. Dizon was the registered owner of three parcels of land in Mabalacat, Pampanga with an aggregate area of 130.58 hectares, covered by Transfer Certificate of Title No. 15679.
• The properties were subject to a first mortgage in favor of the Development Bank of the Philippines (DBP) to secure a loan of P38,000.00, and a second mortgage in favor of the Philippine National Bank (PNB) to secure a debt of P93,831.91.
• After Dizon defaulted, DBP foreclosed the mortgage extrajudicially on May 26, 1959 under Act No. 3135, and the properties were sold to DBP for P31,459.21.
• On October 6, 1959, Dizon and Alfredo G. Gaborro executed two instruments: (1) a "Deed of Sale with Assumption of Mortgage" purportedly selling the lands for P131,831.91 (the aggregate of the two mortgage debts), and (2) an "Option to Purchase Real Estate" giving Dizon the right to repurchase the properties from January 1965 to December 31, 1970 upon payment of the same amount plus 8% interest.
• No actual cash consideration was paid by Gaborro to Dizon; the "purchase price" consisted solely of Gaborro's assumption of Dizon's mortgage obligations to DBP and PNB.
• On January 7, 1960, Dizon executed an "Assignment of Right of Redemption and Assumption of Obligation" in favor of Gaborro, assigning his right to redeem the foreclosed properties from DBP.
• Gaborro took possession of the lands on October 6, 1959, introduced improvements, cultivated the lands (raising sugarcane and other crops), appropriated the produce to himself, and paid the land taxes.
• Gaborro made payments to both DBP and PNB on account of the assumed mortgage debts.
• On July 5, 1961, Dizon offered to reimburse Gaborro for amounts paid to the banks but without tendering cash, and demanded accounting of income, claiming the transaction was one of antichresis.
• Gaborro refused, leading Dizon to file the complaint for reformation of instruments, accounting, and reconveyance.

• The "Deed of Sale with Assumption of Mortgage" and "Option to Purchase Real Estate" did not express the true intention of the parties and should be reformed as they constitute an equitable mortgage or conveyance by way of security, not an absolute sale.
• Dizon remained the lawful owner of the lands as the foreclosure sale merely transferred the right of redemption, not full ownership, during the redemption period.
• The presence of the repurchase option (Option to Purchase) is conclusive evidence that the transaction is an equitable mortgage rather than an absolute sale.
• The "Assignment of Right of Redemption" was merely a reiteration of the terms of the deed of sale and did not convert the transaction into an absolute sale.
• As mortgagee-in-possession (or party holding the property as security), Gaborro and his estate should account for all fruits and income derived from the lands from October 6, 1959, or alternatively pay rentals for the occupation thereof.
• Gaborro's estate should be ordered to reconvey the lands to Dizon upon payment of the balance due after deducting the value of the produce or fruits.

• The "Deed of Sale with Assumption of Mortgage" expressed the true agreement of the parties "fully, truthfully and religiously" as an absolute sale.
• The "Option to Purchase Real Estate" did not express the true intention of the parties and was executed merely to protect Dizon's reputation among his townmates, and in any event, the action was premature.
• The "Assignment of Right of Redemption and Assumption of Obligation" conclusively established that Gaborro purchased the lands and acquired the right of redemption from Dizon, making the transaction an absolute sale.
• The consideration for the assignment consisted of 300 cavans of palay delivered by Mrs. Gaborro to Dizon.
• Dizon was no longer the owner of the lands at the time of the transaction because DBP had already acquired them at the extrajudicial foreclosure sale on May 26, 1959, and Dizon only retained a mere right to redeem under Act 3135.

• Procedural Issues: Whether the action for reformation was premature; Whether the Court of Appeals erred in modifying the trial court's decision regarding the period for exercise of the right to reimburse.
• Substantive Issues: Whether the instruments "Deed of Sale with Assumption of Mortgage" and "Option to Purchase Real Estate" constitute an absolute sale or merely an equitable mortgage or conveyance by way of security; Whether the transaction partakes of the nature of antichresis; Whether Gaborro or his estate should account for the fruits and income derived from the lands; Whether Dizon is entitled to reconveyance of the properties.

• Procedural: The Court dismissed the procedural objections regarding prematurity, noting that while the trial court found the action premature, the Court of Appeals' modification establishing a one-year period for Dizon to exercise his right to reimburse/reacquire the properties from the date the judgment becomes final provided a fair and reasonable resolution. The Court approved this procedural framework as just and equitable.
• Substantive: The Supreme Court affirmed the Court of Appeals' decision with further modifications, holding that:
• The transaction was not an absolute sale because (1) there was no actual money consideration paid (the P131,831.91 was not actually received by Dizon), and (2) Dizon had already lost full ownership rights due to the foreclosure sale, retaining only the right of redemption which he could transfer but which did not constitute full title.
• The transaction constitutes an innominate contract under Article 1307 of the New Civil Code, partaking of the nature of antichresis, whereby Gaborro assumed Dizon's debts in exchange for possession and enjoyment of the lands until reimbursement.
• The instruments must be reformed to reflect the true intention of the parties under Articles 1359 and 1361 of the New Civil Code.
• Dizon is entitled to reconveyance of the properties within one year from finality of the judgment by reimbursing Gaborro's estate for amounts actually paid on account of the principal only (P131,831.91 maximum) of the loans with DBP and PNB, exclusive of interests and land taxes, based on certified statements from the banks.
• Any outstanding balance on the original principal loans assumed by Gaborro shall be deducted from the reconveyance price to enable Dizon to pay the banks directly.
• Dizon is not entitled to an accounting of the fruits, harvests, and income received by Gaborro, as these are offset against the interest and land taxes paid by Gaborro which Dizon is likewise not obligated to reimburse.

• Antichresis — A contract whereby the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. In this case, the Court characterized the transaction as an innominate contract partaking of the nature of antichresis because Gaborro took possession of the lands, enjoyed the fruits, and applied them toward the satisfaction of Dizon's mortgage obligations, with the understanding that Dizon could recover the properties upon reimbursement of the principal amounts.
• Reformation of Instruments — When there is a meeting of the minds between the parties to a contract but their true intention is not expressed in the instrument purporting to embody the agreement, the instrument may be reformed to express the true intention. The Court applied Articles 1359 and 1361 of the New Civil Code to reform the "Deed of Sale" and "Option to Purchase" to reflect the true antichretic nature of the transaction.
• Equitable Mortgage vs. Absolute Sale — The presence of a right to repurchase, lack of actual consideration, and retention of possession by the vendor are indicators that a transaction is a mortgage rather than a sale. The Court held that where the consideration is merely the assumption of debt and the vendor retains the right to recover the property upon reimbursement, the transaction is a security arrangement, not an absolute sale.
• Right of Redemption under Act 3135 — After an extrajudicial foreclosure sale, the debtor retains the right to redeem the property within one year from the date of sale, and during this period, the debtor remains entitled to possession and the fruits of the property. The Court held that Dizon could only transfer his limited right of redemption to Gaborro, not full ownership, because the foreclosure sale had already divested him of full ownership rights.

• "In view of all these considerations, the law and Jurisprudence, and the facts established. We find that the agreement between petitioner Dizon and respondent Gaborro is one of those innominate contracts under Art. 1307 of the New Civil Code whereby petitioner and respondent agreed 'to give and to do' certain rights and obligations respecting the lands and the mortgage debts of petitioner which would be acceptable to the bank, but partaking of the nature of the antichresis insofar as the principal parties, petitioner Dizon and respondent Gaborro, are concerned."
• "Mistake is a ground for the reformation of an instrument which there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, and one of the parties may ask for such reformation to the end that such true intention may be expressed."
• "On the issue of the accounting of the fruits, harvests and other income received from the three parcels of land... We hold that in fairness and equity and in the interests of justice that since We have ruled out the obligation of petitioner Dizon to reimburse respondent Gaborro of any interests and land taxes that have accrued or been paid by the latter on the loans of Dizon with DBP and PNB, petitioner Dizon in turn is not entitled to an accounting of the fruits, harvests and other income received by respondent Gaborro from the lands, for certainly, petitioner cannot have both benefits and the two may be said to offset each other."

• Riosa v. Verzosa, 26 Phil. 86 — Cited for the principle that the judgment debtor remains in possession of foreclosed property during the redemption period and is entitled to the fruits, with the purchaser not entitled to possession.
• Velasco v. Rosenberg's Inc., 32 Phil. 72 — Cited in support of the rule regarding possession and fruits during the redemption period.
• Pabico v. Pauco, 43 Phil. 572 — Cited regarding the rights of the judgment debtor in possession during redemption.
• Power v. PNB, 54 Phil. 54 — Cited for the principle that the debtor retains possession and right to fruits during the redemption period.
• Gorospe v. Gochangco, L-12735, Oct. 30, 1959 — Cited regarding possession rights during redemption period.
• Magno v. Viola and Sotto, 61 Phil. 80 — Cited for the principle that the right to redeem land sold under execution is a property right that may be sold or transferred voluntarily by its owner.
• Gonzales v. Calimbas, 51 Phil. 355 — Cited regarding the rights of the judgment debtor in possession during the redemption period.

• Article 1307, New Civil Code — Defines innominate contracts as those which are not specifically named or regulated by the Code but are governed by the stipulations of the parties, by the general principles of contracts, and by the rules governing the most analogous nominate contracts. The Court applied this to characterize the agreement as an innominate contract partaking of antichresis.
• Articles 1359 and 1361, New Civil Code — Provide for reformation of instruments when there is a meeting of the minds but the true intention is not expressed in the instrument due to mistake. The Court applied these provisions to reform the deeds to reflect the true antichretic nature of the transaction.
• Section 6, Act No. 3135 (as amended by Act 4118) — Governs the right of redemption after extrajudicial foreclosure, providing that the debtor may redeem within one year from the date of sale. The Court cited this to establish that Dizon retained only the right of redemption, not full ownership, after the foreclosure sale.
• Rule 39, Section 33, Revised Rules of Court — Provides that the judgment debtor remains in possession of the property during the redemption period. The Court cited this to support the finding that Dizon could only transfer limited rights to Gaborro.