FIRST DIVISION

[G.R. No. 146651. January 17, 2002.]

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

ANG GOBONSENG, JR. and TERESITA MIMIE ONG , respondents.

Romero Arreza & Magtanong Law Office for petitioners.

Rotelio U. Lumjod for private respondents.
SYNOPSIS
Petitioners sued respondents for speci c performance, recovery of sum of
money and damages claiming that they incurred expenses in the preparation of the
deed of sale and an option to buy. Respondents consistently alleged that the
transaction was an equitable mortgage and not a pacto de retro sale or a sale with
option to buy. They maintained this stance even when the case reached the Court of
Appeals. Both the trial and appellate courts rendered judgment adverse to
respondents. However, after the nality of the decision of the appellate court,
respondents abandoned their theory and insisted that they are now entitled to exercise
the right of repurchase pursuant to Article 1606 of the Civil Code. EcHIDT

In the parallel case of Vda. de Macoy v. Court of Appeals it was held that the
application of the third paragraph of Article 1606 of the Civil Code is predicated upon
the bona des of the vendor a retro and that it must appear that there was a belief on
his part that the agreement was in reality a mortgage. With the ndings of the courts
that the transaction was a pacto de retro sale, the losing parties cannot now be allowed
to change their theory and consequently exercise the right of repurchase.

SYLLABUS

REMEDIAL LAW; ACTIONS; PARTIES; NOT ALLOWED TO CHANGE THEIR THEORY AFTER
RENDITION OF ADVERSE DECISION WHICH ATTAINED FINALITY. — 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. The Court held that the petitioners therein raised the defense that the
contract was not a sale with right to repurchase but an equitable mortgage. 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. . . . 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
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 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. 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.

DECISION

YNARES-SANTIAGO , J : p

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
Order 1 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 lots 2
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

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 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
attorney's 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
attorney's 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,
respondent's 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, 1999 14 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.
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 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 . . . 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)
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 thereby not simply increasing but in reality resuscitating the expired right to
repurchase . . . 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. 1 6

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.
Davide, Jr., C.J., Puno, Kapunan and Pardo, JJ., concur.
Footnotes

1. Issued by Judge Araceli S. Alafriz (Annex "A", Rollo, p. 28).

2. Covered by Transfer Certificate of Title Nos. 14321-14337 and located in Daro and
Bantayan, Dumaguete City (See Annex "D", Rollo, p. 133).
3. Annex "E", Rollo, p. 136.
4. Annex "D", Rollo, p. 133.

5. Annex "C", Rollo, p. 129.

6. 26 SCRA 189 (1968).

7. Penned by Judge Jesus L. Tabilon (Annex "B", Rollo, pp. 45-46).

8. Second Division, composed of Associate Justices Vicente V. Mendoza (chairman and
ponente), Jesus M. Elbinias (member), and Lourdes K. Tayao-Jaguros (member).
9. Annex "C", Rollo, p. 60 (Dated December 15, 1993).
10. Annex "E", Rollo, p. 63.

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 11. Annex "F", Rollo, p. 64.

12. Annex "G", Rollo, p. 68.

13. Annex "H", Rollo, p. 70.
14. See Annex "I", Rollo, p. 72.

15. 206 SCRA 244 (1992).

16. Ibid., citing Felicen, Sr. v. Orias, 156 SCRA 586 (1987).

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