Lacorte vs. Court of Appeals

A person who is not a party to a contract may maintain an action for its annulment or reformation if he stands to be prejudiced by its enforcement; where a deed of reconveyance was intended for all heirs under a prior equitable mortgage/promise to buy and sell but was executed in favor of only one heir and spouse, the proper relief is reformation to include the omitted heirs as parties, subject to their pro rata contribution.

Petitioners and private respondent Peregrino Lacorte are siblings and heirs of Maria Inocencio Lacorte, the original owner of a 14,556-square-meter parcel of land in Sta. Cruz, Lezo, Aklan. The property had been foreclosed by the Rural Bank of Malinao, Aklan, Inc., which later sold it to respondent Jose Icaca. The Civil Code provisions on equitable mortgage, annulment of contracts, and reformation of instruments provide the legal backdrop against which the heirs’ claims to the property are assessed.

Petitioners Simon, Rosario, Severino, Jerosalina, and Cirila, together with private respondent Peregrino Lacorte, are heirs of Maria Inocencio Lacorte, the original owner of a 14,556-square-meter parcel of land in Sta. Cruz, Lezo, Aklan. The property was foreclosed by the Rural Bank of Malinao, Aklan, Inc., which, after consolidating its ownership, sold the same to respondent Jose Icaca.

On October 17, 1983, Icaca and Simon Lacorte, acting for himself and in behalf of the heirs of Maria Lacorte, executed an Agreement authorizing Icaca to purchase the property from the bank, provided that the heirs were given the right to repurchase it for P33,090.00 within one year from that date. The one-year redemption period was extended to March 1987 by another Agreement dated October 16, 1984. Both agreements were signed by Simon for himself and in representation of the heirs. On November 4, 1984, Peregrino’s wife, Adela, paid Icaca P26,000.00 as deposit for the repurchase.

Without the knowledge and consent of petitioners, and before the expiration of the grace period, Peregrino and Adela purchased the land in their names through a Deed of Reconveyance executed by Icaca dated February 3, 1987. This prompted petitioners to file an action on December 9, 1988 for annulment of the contract, alleging evident bad faith and violation of the prior agreements, resulting in prejudice to their property rights.

In their Answer, Peregrino and Adela denied any agreement to sell the property collectively to the heirs and argued that because the bank legally sold the land to Icaca, Icaca’s sale to them was valid. Jose Icaca filed a separate Answer alleging that while he sold the property to the spouses, he did so in the honest belief and understanding that they bought it for the common good of all pursuant to his agreement with the spouses and the plaintiffs; that the spouses assured him they were buying not for themselves alone but for the benefit of the plaintiffs; that had he known otherwise he would not have sold the property to them; and that he had no objection to the rescission and/or annulment of the Deed of Reconveyance because his intention was to reconvey the property to the plaintiffs and his co-defendants.

At trial, the evidence showed that Maria Lacorte and two of her children, petitioners Rosario and Jerosalina, remained in possession of the property despite the Agreement, as admitted by Adela Lacorte. The second Agreement dated October 16, 1984 extended the period to March 1987 and referred to P12,090.00 as “their recent mortgage debt.” Adela Lacorte testified that she informed petitioners about the P26,000.00 she had paid to Icaca because she wanted them to help raise the balance; that she was accompanied by petitioner Rosario Lacorte when she met Icaca to negotiate the repurchase; and that she got mad and decided to go alone because petitioners had no money to add to the P26,000.00. Simon Lacorte testified that petitioners negotiated with the bank for a reduction of the redemption price from P45,000.00 to P21,000.00, then consulted Icaca, to whom the land had also been mortgaged for P12,500.00, about paying the redemption price; that his brothers and sisters agreed to the arrangements except respondent Peregrino, who said it was up to them. Jose Icaca testified that only Simon approached him; that he did not intend to sell the property to Peregrino and Adela but sold it because he pitied them and because of his agreement with Simon; that he understood he was selling to the brothers and sisters; that Adela told him she would tell them they had acquired the property; and that he thought the document was for the brothers and sisters. Adela Lacorte prepared the Deed of Reconveyance.

The trial court found that the agreements marked as Exhibits B and C constituted a promise to buy and sell; that respondent spouses acted in bad faith in purchasing the land solely in their favor; that the Deed of Reconveyance was executed within the period granted for the heirs to collectively repurchase; and that Adela Lacorte had asked petitioners to look for the P7,090.00 balance as part of the purchase price. It concluded that petitioners had a cause of action under the promise to buy and sell, reciprocally demandable under Article 1479 of the Civil Code.

• Cause of Action for Annulment/Rescission: Petitioners maintained that they were entitled to bring an action for annulment and/or rescission of the Deed of Reconveyance despite not being parties thereto, because their rights were prejudiced.
• Bad Faith and Violation of Prior Agreements: Petitioners alleged that the Deed of Reconveyance was entered into in evident bad faith and in violation of the previous agreements between the parties, resulting in prejudice to their property rights.
• Nature of the Agreements: Petitioners’ claim to the property was based on the agreements with Icaca, which they relied upon as giving them the right to repurchase the land.

• Validity of Sale and No Collective Agreement: Respondents Peregrino and Adela denied that there was an agreement to sell the property collectively to the heirs of Maria Lacorte, and argued that since the bank legally sold the land to Icaca, Icaca’s sale to them was valid.
• Exclusive Ownership and Lack of Knowledge: Respondent spouses insisted they were the exclusive owners because they paid for the property, that it was never intended that they buy it for and in behalf of the other heirs, and that they had no knowledge of and participation in the October 17, 1983 Agreement.
• Icaca’s Position: Respondent Jose Icaca alleged that he sold the property to the spouses in the honest belief and understanding that they bought it for the common good of all pursuant to his agreement with them and the plaintiffs, and that he had no objection to rescission and/or annulment because his intention was to reconvey the property to the plaintiffs and his co-defendants.

• Nature of the Agreements: Whether the Agreement dated October 17, 1983 and the Agreement dated October 16, 1984 entered into by Jose Icaca and Simon Lacorte, in behalf of the heirs of Maria Lacorte, constituted an equitable mortgage or a promise to buy and sell giving all the heirs the right to repurchase the property.
• Cause of Action for Annulment/Rescission: Whether petitioners, who were not parties to the Deed of Reconveyance executed by Jose Icaca in favor of spouses Peregrino and Adela Lacorte, were entitled to bring an action for annulment and/or rescission of that deed.
• Reformation of the Deed: Whether petitioners were entitled to reformation of the Deed of Reconveyance to include them as additional parties.

• Nature of the Agreements: Yes. The agreements constituted an equitable mortgage/promise to buy and sell; the heirs retained possession and an extension of the redemption period was executed, bringing the case within the presumption of an equitable mortgage under Article 1602 of the Civil Code.
• Cause of Action for Annulment/Rescission: Yes. Although petitioners were not parties to the Deed of Reconveyance, they could sue for annulment because they stood to be prejudiced by its enforcement, falling within the exception to Article 1397 of the Civil Code.
• Reformation of the Deed: Yes. Reformation was proper to reflect the true intention of the parties by including petitioners as additional parties, there having been a meeting of the minds on the object and consideration; petitioners must contribute pro rata to the payments and expenses.

• Nature of the Agreements: Article 1602 presumes an equitable mortgage when the vendor remains in possession as lessee or otherwise, or 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. Petitioners’ mother and two children remained in possession despite the Agreement, as admitted by Adela Lacorte. The second Agreement extended the redemption period to March 1987. The Agreement itself referred to P12,090.00 as “their recent mortgage debt,” indicating an earlier mortgage by Maria Lacorte in favor of Icaca. The Deed of Reconveyance executed by Icaca presupposed a prior agreement to reconvey; such agreements may be in the nature of a sale with a right of repurchase or an equitable mortgage. Simon Lacorte executed the Agreement for and in behalf of all the heirs, so any payment by one or some heirs logically inures to the benefit of all. Respondent spouses’ denial of knowledge was not credible: the initial P26,000.00 was paid on November 4, 1984, immediately after the extension Agreement; the P7,090.00 balance was paid in February 1987 when the Deed of Reconveyance was executed, within the extended period; no separate agreement between the spouses and Icaca existed; it was improbable that Icaca would accept the balance after a long period without stipulation; Adela claimed she informed petitioners about the P26,000.00 because she wanted help raising the balance; Adela admitted that her mother-in-law and two petitioners remained in possession; Adela knew petitioners were interested and was accompanied by petitioner Rosario in negotiations; Simon negotiated the bank’s reduction of the redemption price from P45,000.00 to P21,000.00 and consulted Icaca, who had a P12,500.00 mortgage; the spouses were initially uninterested and cooperated only after the reduction. Icaca testified that he intended to sell to the whole family, that only Simon approached him, that Adela told him she would tell the others they had acquired the property, and that he thought the document was for the brothers and sisters. Adela prepared the Deed of Reconveyance, so any ambiguity was resolved against her. The intention of the parties was to reconvey the land to all the heirs of Maria Lacorte; Adela’s payment inured to the benefit of all; petitioners were prejudiced because they should have been included as parties.
• Cause of Action for Annulment/Rescission: Article 1397 provides the general rule that an action for annulment of contract may be instituted only by those who are principally or subsidiarily obliged thereby. The exception allows one who is not principally or subsidiarily bound to ask for annulment if his rights are prejudiced by one of the contracting parties. Petitioners were not parties to the Deed of Reconveyance, but they were intended beneficiaries under the prior agreements and stood to be prejudiced by the enforcement of a deed executed solely in favor of Adela Lacorte. There was no doubt that petitioners were entitled to bring an action to annul the contract because they stood to be prejudiced by its enforcement. Article 1359 provides that when there has been a meeting of the minds but the true intention is not expressed in the instrument by reason of mistake, fraud, inequitable conduct, or accident, one of the parties may ask for reformation; if such mistake, fraud, inequitable conduct, or accident prevented a meeting of the minds, the proper remedy is annulment. Here, there was a meeting of the minds on the object and consideration, but Adela fraudulently excluded petitioners’ names from the Deed of Reconveyance.
• Reformation of the Deed: Petitioners should have been made parties to the Deed of Reconveyance. From the start of the negotiations with the bank and later with Jose Icaca, petitioners actively participated; they remained in possession of the land, gathered fruits therefrom, and never relinquished their rights. Adela Lacorte recognized their right when she sought their help in raising money to pay for the land. Jose Icaca was deluded by Adela’s misrepresentation that she was acting for and in behalf of all the heirs of Maria Lacorte. Since petitioners should in truth and in fact be parties to the Deed of Reconveyance, they are entitled to reformation of the contract to reflect the true intention of the parties. Jose Icaca, the real injured party because of the fraud committed on him, acquiesced to the cancellation of the contract. There was nothing to prevent reformation, as had in effect been granted by the trial court as an additional or alternative relief. What is necessary is only a reformation of the Deed of Reconveyance by reflecting therein the names of petitioners as additional parties, since there has been a meeting of the minds on the object and the consideration. Petitioners need merely contribute pro rata to the payments and expenses as may have been made or shall thereafter be involved in implementing the relief, the details of which shall be determined by the trial court.

• Equitable Mortgage under Article 1602 — A contract is presumed to be an equitable mortgage when the vendor remains in possession as lessee or otherwise, or 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. The Court applied this presumption because the heirs remained in possession and a second Agreement extended the redemption period to March 1987; the reference to “their recent mortgage debt” further indicated an earlier mortgage.
• Contract of Reconveyance — A contract of reconveyance presupposes the existence of a prior agreement wherein a party to whom property was conveyed undertakes to reconvey the same to the other party under certain terms and conditions. Such agreements may be in the nature of a contract of sale with a right of repurchase or an equitable mortgage. The Deed of Reconveyance executed by Icaca supported the finding that the Agreement of October 17, 1983 was an equitable mortgage.
• Exception to Article 1397 on Annulment by a Non-Party — The general rule under Article 1397 is that an action for annulment of contract may be instituted only by those who are principally or subsidiarily obliged thereby. The exception allows one who is not principally or subsidiarily bound to ask for annulment if his rights are prejudiced by one of the contracting parties. Petitioners, though not parties to the Deed of Reconveyance, were intended beneficiaries under the prior agreements and stood to be prejudiced by its enforcement.
• Reformation of Instrument under Article 1359 — When there has been a meeting of the minds of the parties but their true intention is not expressed in the instrument by reason of mistake, fraud, inequitable conduct, or accident, one of the parties may ask for reformation. If such mistake, fraud, inequitable conduct, or accident prevented a meeting of the minds, the proper remedy is annulment. The Court found a meeting of the minds on the object and consideration, but Adela fraudulently excluded petitioners’ names, so reformation was proper.
• Intention of Contracting Parties under Article 1371 — In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. The Court relied on the timing of payments, continued possession, negotiations, and Icaca’s testimony to conclude that the parties intended the land to be reconveyed to all the heirs.
• Payment by One Heir Inures to All — Where one heir executes an agreement for and in behalf of all the heirs, any payment made by one or some of the heirs logically and definitely inures to the benefit of all the heirs. Adela Lacorte’s payment was therefore deemed to inure to the benefit of all the heirs of Maria Lacorte.
• Ambiguity in a Contract Prepared by a Party — Any ambiguity in the Deed of Reconveyance, which was prepared by Adela Lacorte, must be resolved against her and in favor of Jose Icaca, who merely signed it.

• “A contract is presumed to be an equitable mortgage when the vendor remains in possession as lessee or otherwise, or 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.” — This states the Article 1602 rule applied by the Court to characterize the agreements between Icaca and Simon Lacorte as an equitable mortgage.
• “A contract of reconveyance, therefore, presupposes the existence of a prior agreement wherein a party to whom property was conveyed undertakes to reconvey the same to the other party under certain terms and conditions.” — This defines the nature of a contract of reconveyance and supports the conclusion that the Deed of Reconveyance was but a consequence of the prior right to repurchase.
• “There is no doubt that petitioners are entitled to bring an action to annul the contract because they stand to be prejudiced by the enforcement of the Deed of Reconveyance.” — This is the ratio on the exception to Article 1397, allowing a non-party to sue for annulment when prejudiced.
• “We accordingly declare that what is necessary is only a reformation of the Deed of Reconveyance by reflecting therein the names of herein petitioners as additional parties thereto, since there has been a meeting of the minds on the object and the consideration.” — This states the final relief granted: reformation rather than outright rescission, with petitioners contributing pro rata.

• Article 1602, Civil Code — Provides the presumption of an equitable mortgage when the vendor remains in possession as lessee or otherwise, or 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. Applied to characterize the agreements between Icaca and Simon Lacorte as an equitable mortgage.
• Article 1397, Civil Code — Provides the general rule that an action for annulment of contract may be instituted only by those who are principally or subsidiarily obliged thereby, with the exception that one not bound may ask for annulment if his rights are prejudiced by one of the contracting parties. Applied to allow petitioners to sue despite not being parties to the Deed of Reconveyance.
• Article 1359, Civil Code — Provides that when there has been a meeting of the minds but the true intention is not expressed in the instrument by reason of mistake, fraud, inequitable conduct, or accident, one of the parties may ask for reformation; if such mistake, fraud, inequitable conduct, or accident prevented a meeting of the minds, the proper remedy is annulment. Applied to justify reformation of the Deed of Reconveyance.
• Article 1362, Civil Code — Provides that if one party was mistaken and the other acted fraudulently or inequitably to disclose their real agreement, the instrument may be reformed. Cited in the decision’s footnotes in support of reformation.
• Article 1371, Civil Code — Provides that in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. Applied to infer the intention to reconvey the land to all the heirs.
• Article 1479, Civil Code — Cited by the trial court in concluding that petitioners had a cause of action by reason of the promise to buy and sell executed between the Lacortes and Icaca, which is reciprocally demandable.

Justices Melo, Puno, Mendoza, and Martinez concurred.