Dizon vs. Gaborro

A deed of sale over foreclosed property executed by the mortgagor during the redemption period is not an absolute sale but a transfer of the right of redemption, and the true intention of the parties governs the reformation of the instrument.

Petitioner Dizon owned three parcels of land in Pampanga, mortgaged to DBP (first mortgage) and PNB (second mortgage). After he defaulted, DBP extrajudicially foreclosed the mortgage and purchased the properties at auction on May 26, 1959. Dizon retained his right of redemption under Act No. 3135.

• Original Filing: Court of First Instance (CFI) of Pampanga, Branch II, Civil Case No. 2184
• Lower Court Decision: March 14, 1970 — The CFI reformed the documents to reflect that Gaborro would assume and pay Dizon's debts in exchange for possession and enjoyment of the lands until Dizon fully reimbursed him. However, the CFI held that Dizon's action was premature because it was filed before the redemption/option period expired.
• Appeal: CA-G.R. No. 46975-R — The CA affirmed the CFI decision but modified it by granting Dizon the right to refund Gaborro the sum of P131,831.91 plus 8% interest within one year from finality of judgment, failing which Dizon would lose his right over the lands forever.
• SC Action: Petition for Review on Certiorari assailing the CA decision.

• The Mortgages and Foreclosure: Dizon owned 130.58 hectares covered by TCT No. 15679, mortgaged to DBP (P38,000) and PNB (P93,831.91). Upon default, DBP foreclosed and bought the property at auction on May 26, 1959. A sheriff's certificate of sale was issued.
• The Two Contracts: On October 6, 1959, Dizon and Gaborro executed two simultaneous documents:
  • Deed of Sale with Assumption of Mortgage: Stated Dizon sold the land to Gaborro for P131,831.91 (the exact sum of the two bank loans), which Gaborro "acknowledged" receiving, though no money actually changed hands. Gaborro assumed the mortgage debts.
  • Option to Purchase Real Estate: Gaborro granted Dizon the option to repurchase the properties from January 1965 to December 1970 for P131,831.91 plus 8% interest per annum. It allowed partial payments but required full payment to change possession/ownership.
  • The Assignment of Right of Redemption: On January 7, 1960, Dizon executed an "Assignment of Right of Redemption and Assumption of Obligation" in favor of Gaborro, transferring his right to redeem the properties from DBP and relinquishing all rights to the properties.
  • Subsequent Transactions: Gaborro wrote DBP asking to assume the mortgage and pay in 10 years. DBP approved but required a 20% down payment. On July 11, 1960, DBP and Gaborro executed a conditional sale. Gaborro took possession, cultivated the land, raised sugarcane, paid land taxes, and appropriated all produce without giving Dizon any share.
  • The Demand and Lawsuit: On July 5, 1961, Dizon demanded an accounting of the produce and offered to reimburse Gaborro (without tendering cash), claiming the transaction was antichresis. Gaborro refused. Dizon sued for reformation, arguing the documents constituted an equitable mortgage.

• The "Deed of Sale with Assumption of Mortgage" and "Option to Purchase Real Estate" constitute a single transaction that is an equitable mortgage or conveyance by way of security, not an absolute sale.
• There was no actual consideration for the sale, as the P131,831.91 was never paid by Gaborro but merely represented Dizon's assumed debts.
• The "Assignment of Right of Redemption" is a mere reiteration of the deed of sale, not a separate purchase of the property.
• As a mortgagee in possession, Gaborro is obligated to render an accounting of the fruits and income of the land or pay rentals, and must reconvey the land upon payment of the balance due after deducting the net value of the produce.

• The "Deed of Sale with Assumption of Mortgage" expresses the true agreement of the parties.
• The "Option to Purchase Real Estate" does not reflect the true intention; it was executed merely to protect Dizon's reputation among his townmates.
• The "Assignment of Right of Redemption" proves Gaborro purchased the lands independently, with the consideration being 300 cavans of palay delivered by Gaborro's wife.
• DBP argued that Dizon was no longer the owner of the land after the foreclosure sale, possessing only a right of redemption.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the "Deed of Sale with Assumption of Mortgage" and "Option to Purchase Real Estate" constitute an absolute sale or an equitable mortgage/transfer of the right of redemption.
  • Whether the estate of Gaborro is obligated to render an accounting of the fruits and income of the properties.

• Procedural: N/A
• Substantive:
  • The documents do not constitute an absolute sale but a transfer of the right of redemption. After the foreclosure sale, Dizon no longer possessed full ownership rights to transfer; he only retained the right of redemption and the right to possess the property during the redemption period. The "Deed of Sale" could not be an unconditional sale because (1) no money was actually paid as consideration, and (2) Dizon no longer had full title to convey. The "Option to Purchase" merely granted Dizon the right to recover the properties by reimbursing Gaborro. Because of mutual mistake in executing documents that did not reflect the true intention of the parties (that Gaborro would pay the debts in exchange for possession until Dizon reimbursed him), reformation under Articles 1359 and 1361 of the Civil Code was proper.
  • Gaborro is not obligated to render an accounting of the fruits. In equity, since Dizon is not required to reimburse Gaborro for the interest on the loans or the land taxes paid by Gaborro, Dizon is correspondingly not entitled to the fruits, harvests, and income received by Gaborro. The two benefits offset each other.

• Transfer of Right of Redemption — A judgment debtor or mortgagor whose property has been sold at a foreclosure sale can transfer their right of redemption. The purchaser at a foreclosure sale only has an inchoate right subject to defeat by redemption. A deed of sale executed by the mortgagor during the redemption period is not a sale of full ownership, but a transfer of the right of redemption.
• Reformation of Instruments due to Mutual Mistake — Under Articles 1359 and 1361 of the Civil Code, when a mutual mistake of the parties causes an instrument to fail to disclose their real agreement (e.g., executing an absolute sale over foreclosed property when the true intent was merely to transfer the right of redemption and assume debts), the instrument may be reformed to express the true intention.
• Offset of Fruits against Interest and Taxes in Equitable Mortgage/Redemption — Where a possessor pays the principal debts, interest, and taxes on a property, and the owner is allowed to redeem by reimbursing only the principal, the owner is not entitled to an accounting of the fruits. The interest/taxes paid by the possessor and the fruits retained by the possessor offset each other in the interest of fairness.

• Act No. 3135, Section 6 (as amended by Act 4118) — Governs extrajudicial foreclosure sales, granting the debtor a one-year right of redemption. Applied to establish that Dizon's rights after the foreclosure sale were limited to redemption and possession, not full ownership.
• Article 1359, Civil Code — Provides that reformation of an instrument is proper when, due to mistake, the true intention of the parties is not expressed. Applied to reform the "Deed of Sale" and "Option to Purchase."
• Article 1361, Civil Code — Allows reformation of an instrument when there is a mutual mistake of the parties causing the failure of the instrument to disclose their real agreement. Applied to justify reformation.