Multi-Ventures Capital and Management Corporation vs. Stalwart Management Services Corporation, et al.

A party seeking reformation under Article 1359 of the Civil Code must overcome the presumption that the instrument sets out the true agreement and must prove that the instrument fails to express the parties' true intention by reason of mistake, fraud, inequitable conduct, or accident; expediency and convenience are not grounds for reformation.

Multi-Ventures Capital and Management Corporation and Stalwart Management Services Corporation were corporations that, according to respondent, were both engaged in dealing and trading government securities. Their dispute concerned a January 11, 1991 transaction involving Land Bank bonds originally valued at ₱11,557,972.60, documented in a Confirmation of Agreement. Article 1359 of the Civil Code authorizes reformation of an instrument when, there having been a meeting of the minds, the parties' true intention is not expressed in the instrument by reason of mistake, fraud, inequitable conduct, or accident.

Multi-Ventures Capital and Management Corporation and Stalwart Management Services Corporation were corporations that, according to respondent, were both engaged in dealing and trading government securities. On January 11, 1991, the parties entered into a transaction involving various Land Bank bonds originally valued at ₱11,557,972.60, at a discounted price, as shown in a Confirmation of Agreement. The parties also executed a letter dated January 11, 1991, in which Stalwart offered to purchase the Land Bank bonds from Multi-Ventures on January 10, 1992 for the total amount of ₱11,557,972.60.

On July 10, 1991, Multi-Ventures filed a Complaint for Reformation of Instrument with application for attachment against Stalwart and its officers before the RTC of Makati, Branch 134. Multi-Ventures alleged that on January 11, 1991, Stalwart obtained from it a loan of ₱9,000,000.00, with interest; that for purposes of expediency, the transaction was denominated as a sale whereby Multi-Ventures bought the Land Bank bonds from Stalwart at a discounted price; and that the bonds served as partial collateral for the payment of the loan. Multi-Ventures further alleged that Stalwart and some of its officers planned to defraud their creditors by absconding and disposing of its properties, constraining Multi-Ventures to seek reformation so that the ostensible sale of the bonds would be expressed as a loan agreement.

Stalwart and its co-defendants answered, denying the allegations. They claimed that both Multi-Ventures and Stalwart were engaged in dealing and trading government securities; that the January 11, 1991 transaction was really a purchase of Land Bank bonds; and that there was no mistake, fraud, inequitable conduct, or accident in the preparation of the true agreement such that reformation was called for.

The record showed that the Confirmation of Agreement (Exhibit "1") and the offer to purchase by defendants (Exhibit "B") were executed simultaneously and delivered to Multi-Ventures. Multi-Ventures relied principally on the buy-back letter to argue that the transaction was a loan, insisting that the amount borrowed was ₱9,000,000.00 with interest, or a total of ₱11,557,972.60, payable within one year. According to Multi-Ventures, the buy-back letter proved a loan because Stalwart would buy back the bonds in the same amount payable under the alleged loan agreement. The evidence also showed that almost immediately after taking possession of the bonds, Multi-Ventures, through its Vice-President and incorporator Natividad Aureola, endorsed and transferred the bonds to AFP Mutual Benefits Association, Inc., as collateral for an investment made by the latter. Exhibits "8" to "9" showed that the bonds were delivered to Multi-Ventures pursuant to the Contract of Sale. Multi-Ventures admitted that the parties agreed to execute a purchase and sale agreement "for purposes of expediency and convenience."

The RTC found the transaction to be a loan and ordered reformation, while the Court of Appeals found it to be a sale. In so ruling, the Court of Appeals found no direct or substantial proof that the bonds would have demanded a lower actual price when sold, and it characterized Multi-Ventures' endorsement and transfer of the bonds to AFP Mutual Benefits Association, Inc. as an act of ownership. The Court of Appeals also found that the simultaneous execution and delivery of the Confirmation of Agreement and the offer to purchase were not inconsistent with a sale, and that more concrete and convincing evidence was needed to hold that the agreement was a loan.

• Nature of the Transaction: Petitioner argued that the true and intended transaction between Multi-Ventures and Stalwart was a loan, not a sale of Land Bank bonds.
• Buy-Back Letter: Petitioner maintained that the January 11, 1991 letter, in which Stalwart offered to purchase the Land Bank bonds on January 10, 1992 for ₱11,557,972.60, proved that the transaction was a loan because the buy-back amount equaled the alleged loan of ₱9,000,000.00 plus interest.
• Reformation: Petitioner argued that the Court of Appeals erred in not ordering reformation of the instrument, which ostensibly appeared as a purchase and sale with the right to repurchase the Land Bank bonds, so as to reflect the true agreement of a ₱9,000,000.00 loan payable within one year, with ₱11,537,972.60 inclusive of interest.
• Misappreciation of Facts: Petitioner contended that the Court of Appeals, due to misappreciation of facts and evidence, erred in reversing the RTC and in not declaring that the intended and true transaction was a loan.

• Nature of the Transaction: Respondent countered that the January 11, 1991 transaction was really a purchase of Land Bank bonds, not a loan.
• Absence of Grounds for Reformation: Respondent argued that there was no mistake, fraud, inequitable conduct, or accident in the preparation of the true agreement such that reformation was proper.
• Business Context: Respondent claimed that both petitioner and respondent were companies engaged in dealing and trading government securities.

• Nature of the Contract: Whether the contract entered into by Multi-Ventures Capital and Management Corporation and Stalwart Management Services Corporation is one of loan or sale.

• Nature of the Contract: No. The transaction was one of sale, not loan. The Confirmation of Agreement accurately expressed the parties' true intention, and petitioner failed to prove mistake, fraud, inequitable conduct, or accident to justify reformation under Article 1359.

• Nature of the Contract: The Court sustained the Court of Appeals' ruling that the transaction was a sale. Although Rule 45 ordinarily limits review to questions of law, the divergent findings of the RTC and the Court of Appeals constrained the Court to review the evidence. Reformation under Article 1359 requires (1) a meeting of the minds, (2) an instrument that does not express the true intention of the parties, and (3) a failure due to mistake, fraud, inequitable conduct, or accident. There was no question that the parties met minds; the dispute was whether the instrument expressed their true intention and, if not, whether any of the statutory causes attended its execution. The onus probandi lay on petitioner, and the instrument was presumed to set out the true agreement and to have been executed for valuable consideration. Petitioner failed to overturn that presumption. Its principal reliance on the January 11, 1991 buy-back letter did not prove a loan; the letter instead supported a sale because, if the bonds were merely collateral, there would have been no need for Stalwart to buy them back, and ownership had transferred to petitioner on January 11, 1991. The Court of Appeals' findings further showed no direct or substantial proof that the bonds would have demanded a lower actual price when sold, and poor business decisions are not adequate grounds to nullify a contract entered into in the course of business operations. The simultaneous execution and delivery of the Confirmation of Agreement and the offer to purchase were not inconsistent with a sale, and more concrete and convincing evidence was required to establish a loan. More significantly, petitioner endorsed and transferred the bonds to AFP Mutual Benefits Association, Inc., as collateral for an investment; this was an act of ownership, not the act of one holding property merely as security for a loan. Petitioner offered no plausible explanation for that transfer. Finally, petitioner failed to show mistake, fraud, inequitable conduct, or accident; it admitted that the parties executed the purchase and sale agreement for expediency and convenience, which are not grounds for reformation. Absent such proof, the Confirmation of Agreement remained the best evidence of the parties' real intent. The sale was accurately expressed, and petitioner had no cause of action for reformation.

• Reformation of Instruments under Article 1359 — Reformation is a remedy in equity whereby a written instrument is made or construed so as to express or conform to the real intention of the parties where some error or mistake has been committed. It does not create a new contract but establishes and perpetuates the real contract between the parties. The requisites are: (1) a meeting of the minds of the parties; (2) the instrument does not express the true intention of the parties; and (3) the failure of the instrument to express the true intention is due to mistake, fraud, inequitable conduct, or accident. In this case, there was a meeting of the minds, but petitioner failed to prove that the instrument did not express the true intention and that any statutory cause attended its execution.
• Presumption of Validity and Burden of Proof in Reformation — An instrument is presumed to set out the true agreement of the parties and to have been executed for valuable consideration. The onus probandi is upon the party who insists that the contract should be reformed. Petitioner failed to overturn the presumption and failed to discharge its burden.
• Subsequent and Contemporaneous Acts as Evidence of Intent — While intention involves a state of mind that may be difficult to decipher, the subsequent and contemporaneous acts of the parties, as well as evidentiary facts proved and admitted, may reflect their intention. The Court used the buy-back letter and petitioner's subsequent endorsement and transfer of the bonds to AFP Mutual Benefits Association, Inc. as evidence that the transaction was a sale.
• Acts of Ownership — An endorsement and transfer of property as collateral for an investment is an act of ownership that can only be made by one who owns the property, not by one who holds it merely as security for a loan. Petitioner's transfer of the bonds to AFP Mutual Benefits Association, Inc. fortified the finding that the transaction was a sale.
• Poor Business Decisions — Poor business decisions are not adequate grounds to nullify the effects of a contract entered into in the course of business operations. The alleged improbability that petitioner would purchase the bonds for ₱9,000,000.00 when they could have been sold for 6.5 million pesos did not invalidate the sale.
• Expediency and Convenience — Expediency and convenience are not grounds for the reformation of an instrument. Petitioner's admission that the parties executed a purchase and sale agreement for expediency and convenience did not justify reformation.

• "The sole issue in this case is whether the contract entered into by Multi-Ventures Capital and Management Corporation (petitioner) and Stalwart Management Services Corporation (respondent) is one of loan or sale." — Frames the sole issue resolved by the Court.
• "In order that an action for reformation of instrument may prosper, the following requisites must concur: (1) there must have been a meeting of the minds of the parties to the contract; (2) the instrument does not express the true intention of the parties; and (3) the failure of the instrument to express the true intention of the parties is due to mistake, fraud, inequitable conduct or accident." — States the requisites for reformation under Article 1359.
• "Expediency and convenience, however, are not grounds for the reformation of an instrument." — States the controlling rule rejecting petitioner's explanation for the sale form.
• "The transaction of sale entered into by the parties on January 11, 1991 is accurately expressed in the Confirmation of Agreement. Petitioner, therefore, has no cause of action for its reformation." — States the ratio decidendi and final conclusion.

• Microsoft Corporation vs. Maxicorp, Inc., G.R. No. 140946, September 13, 2004, 438 SCRA 224, 232. — Cited for the rule that the Court is not a trier of facts and that only questions of law may be raised under Rule 45, as well as for the exception where the RTC and the Court of Appeals have divergent findings.
• Quiros vs. Arjona, G.R. No. 158901, March 9, 2004, 425 SCRA 57, 65. — Cited for the definition of reformation as a remedy in equity by which a written instrument is made or construed to express the real intention of the parties.
• The National Irrigation Administration vs. Gamit, G.R. No. 85869, November 6, 1992, 215 SCRA 436, 451. — Cited for the requisites that must concur for an action for reformation of an instrument to prosper.
• Sarming vs. Dy, 432 Phil. 685, 699 (2002). — Cited for the principle that subsequent and contemporaneous acts of the parties, as well as evidentiary facts proved and admitted, may reflect their intention.
• Huibonhua vs. Court of Appeals, 378 Phil. 386, 407 (1999). — Cited for the rule that the onus probandi is upon the party who insists that the contract should be reformed.
• BA Finance Corporation vs. Intermediate Appellate Court, G.R. No. 76497, January 20, 1993, 217 SCRA 261, 277. — Cited for the presumption that an instrument sets out the true agreement of the parties and that it was executed for valuable consideration.

• 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, a party may ask for reformation. The Court applied this provision and found petitioner failed to prove the requisites.
• Rule 45, Rules of Court — Limits review to questions of law and ordinarily bars the Court from acting as a trier of facts. The Court applied the exception because the RTC and the Court of Appeals had divergent findings on the nature of the transaction.
• Section 4, Rule 45, Rules of Court — Cited in the footnote for the deletion of the Court of Appeals from the title of the case as an impleaded respondent.

Consuelo Ynares-Santiago (Chairperson), Minita V. Chico-Nazario, and Antonio Eduardo B. Nachura concurred.