FIRST DIVISION

G.R. No. 146651 January 17, 2002

RONALDO P. ABILLA and GERALDA A. DIZON, petitioners,

vs.
CARLOS ANG GOBONSENG, JR. and THERESITA MIMIE ONG, respondents.

YNARES-SANTIAGO, J.:

May the vendors in a sale judicially declared as a pacto de retro exercise the right of repurchase
under Article 1606, third paragraph, of the Civil Code, after they have taken the position that the
same was an equitable mortgage?

This is the legal question raised in this petition for review assailing the January 14, 2001 Order1
of the Regional Trial Court of Dumaguete City, Branch 41, in Civil Case No. 8148, which
granted herein respondent spouses the right to repurchase the seventeen lots2 subject of the pacto
de retro sale within thirty (30) days from the finality of the order.

The undisputed facts are as follows:

Petitioner spouses instituted against respondents an action for specific performance, recovery of
sum of money and damages, docketed as Civil Case No. 8148 of the Regional Trial Court of
Dumaguete City, Branch XLII, seeking the reimbursement of the expenses they incurred in
connection with the preparation and registration of two public instruments, namely a "Deed of
Sale"3 and an "Option to Buy."4 In their answer, respondents raised the defense that the
transaction covered by the "Deed of Sale" and "Option to Buy," which appears to be a Deed of
Sale with Right of Repurchase, was in truth, in fact, in law, and in legal construction, a
mortgage.5

On October 29, 1990, the trial court ruled in favor of petitioners and declared that the transaction
between the parties was not an equitable mortgage. Citing Villarica v. Court of Appeals,6 it
ratiocinated that neither was the said transaction embodied in the "Deed of Sale" and "Option to
Buy" a pacto de retro sale, but a sale giving respondents until August 31, 1983 within which to
buy back the seventeen lots subject of the controversy. The dispositive portion thereof reads:

IN THE LIGHT OF THE FOREGOING, it is the considered opinion of this Court that
plaintiffs have proven by preponderance of evidence their case and judgment is therefore
rendered in their favor as follows:

1. Ordering defendants to pay plaintiffs the sum of P171,483.40 representing the

total expenses incurred by plaintiffs in the preparation and registration of the
Deed of Sale, amount paid to the Bank of Asia and America (IBAA) and capital
gains tax with legal rate of interest from the time the same was incurred by
plaintiffs up to the time payment is made by defendants; P10,000.00 as attorneys
 fees; P15,000.00 moral damages; P10,000.00 expenses of litigation and to pay
cost.

2. The Philippine National Bank, Dumaguete City Branch is directed to release in

favor of plaintiffs, the spouses Ronaldo P. Abilla and Gerald A. Dizon all the
money deposited with the said bank, representing the rentals of a residential house
erected inside in one of the lots in question;

3. For insufficiency of evidence, defendants counterclaim is ordered dismissed.

SO ORDERED.7

On appeal by respondents, the Court of Appeals ruled that the transaction between the parties
was a pacto de retro sale, and not an equitable mortgage.8 The decretal portion thereof states:

WHEREFORE, the decision appealed from is MODIFIED by deleting the award of

attorneys fees. In other respects the decision of the lower court is AFFIRMED. Costs
against defendant-appellants.

SO ORDERED.9

On November 10, 1997, the Court of Appeals denied the motion for reconsideration of the
foregoing decision.

Respondents filed a petition for review with this Court which was docketed as G.R. No. 131358;
however, the same was dismissed on February 11, 1998, for having been filed out of time.10 The
motion for reconsideration thereof was denied with finality on June 17, 1998.11

Undaunted, respondents filed a second motion for reconsideration, claiming that since the
transaction subject of the controversy was declared a pacto de retro sale by the Court of Appeals,
they can therefore repurchase the property pursuant to the third paragraph of Article 1606 of the
Civil Code. The issue of the applicability of Article 1606 of the Civil Code was raised by the
respondents only in their motion for clarification with the Court of Appeals, and not before the
trial court and on appeal to the Court of Appeals. Thus, respondents second motion for
reconsideration was denied.12 The denial became final and executory on February 8, 1999.13

On February 23, 1999, respondents filed with the trial court in Civil Case No. 8148 an urgent
motion to repurchase the lots in question with tender of payment. The motion was, however,
denied on November 10, 199914 by Judge Ibarra B. Jaculbe, Jr., who subsequently inhibited
himself from the case.

On January 14, 2001, Branch 41 of the Regional Trial Court of Dumaguete City, to which the
case was reraffled, set aside the November 10, 1999 order and granted respondents motion to
repurchase.

Hence, the instant recourse.

At the outset, it must be stressed that it has been respondents consistent claim that the
transaction subject hereof was an equitable mortgage and not a pacto de retro sale or a sale with
option to buy. Even after the Court of Appeals declared the transaction to be a pacto de retro
sale, respondents maintained their view that the transaction was an equitable mortgage. Seeing
the chance to turn the decision in their favor, however, respondents abandoned their theory that
the transaction was an equitable mortgage and adopted the finding of the Court of Appeals that it
was in fact a pacto de retro sale. Respondents now insist that they are entitled to exercise the
right to repurchase pursuant to the third paragraph of Article 1606 of the Civil Code, which
reads:

However, 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 question now is, can respondents avail of the aforecited provision? Following the theory of
the respondents which was sustained by the trial court, the scenario would be that although
respondents failed in their effort to prove that the contract was an equitable mortgage, they could
nonetheless still repurchase the property within 30 days from the finality of the judgment
declaring the contract to be truly a pacto de retro sale. However, under the undisputed facts of
the case at bar, this cannot be allowed.

In the parallel case of Vda. de Macoy v. Court of Appeals,15 the petitioners therein raised the
defense that the contract was not a sale with right to repurchase but an equitable mortgage. They
further argued as an alternative defense that even assuming the transaction to be a pacto de retro
sale, they can nevertheless repurchase the property by virtue of Article 1606, third paragraph of
the Civil Code. It was held that the said provision was inapplicable, thus:

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. In that event, if the matter of the real nature of the contract is submitted for
judicial resolution, the application of the rule is meet and proper; that the vendor a retro
be allowed to repurchase the property sold within 30 days from rendition of final
judgment declaring the contract to be a true sale with right to repurchase. Conversely, if it
should appear that the parties agreement was really one of sale transferring ownership
to the vendee, but accompanied by a reservation to the vendor of the right to repurchase
the property and there are no circumstances that may reasonably be accepted as
generating some honest doubt as to the parties' intention, the proviso is inapplicable. The
reason is quite obvious. 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. As postulated by the
petitioner, "to allow herein private respondents to repurchase the property by applying
said paragraph x x x to the case at bar despite the fact that the stipulated redemption
 period had already long expired when they instituted the present action, would in effect
alter or modify the stipulation in the contract as to the definite and specific limitation of
the period for repurchase (2 years from date of sale or only until June 25, 1958) thereby
not simply increasing but in reality resuscitating the expired right to repurchase x x x and
likewise the already terminated and extinguished obligation to resell by herein
petitioner." 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.

This Court has already had occasion to rule on the proper interpretation of the provision
in question. In Adorable v. Inacala, where the proofs established that there could be no
honest doubt as to the parties intention, that the transaction was clearly and definitely a
sale with pacto de retro, the Court adjudged the vendor a retro not to be entitled to the
benefit of the third paragraph of Article 1606.16

In the case at bar, both the trial court and the Court of Appeals were of the view that the subject
transaction was truly a pacto de retro sale; and that none of the circumstances under Article 1602
of the Civil Code exists to warrant a conclusion that the transaction subject of the "Deed of Sale"
and "Option to Buy" was an equitable mortgage. The Court of Appeals correctly noted that if
respondents really believed that the transaction was indeed an equitable mortgage, as a sign of
good faith, they should have, at the very least, consigned with the trial court the amount of
P896,000.00, representing their alleged loan, on or before the expiration of the right to
repurchase on August 21, 1983.

Clearly, therefore, the declaration of the transaction as a pacto de retro sale will not, under the
circumstances, entitle respondents to the right of repurchase set forth under the third paragraph
of Article 1606 of the Civil Code.

WHEREFORE, in view of all the foregoing, the instant petition is GRANTED and the January
14, 2001 Order of the Regional Trial Court of Dumaguete City, Branch 41, in Civil Case No.
8148, is REVERSED and SET ASIDE.

SO ORDERED.