G.R. No. L-33182 December 18, 1987
PEDRO A. FELICEN SR., substituted by his widow, BEATRIZ LANUEVO and his children, vs. SEVERINO ORIAS, MILAGROS ORIAS DE LIM, and the COURT OF APPEALS

FACTS

The spouses Severino Orias and Milagros O. Lim sold a parcel of land to Pedro A. Felicen, Sr. through a “Deed of Sale With Right to Repurchase.” The deed expressly reserved to the vendors the right to redeem the property within two years. This stipulated period expired without the vendors making any offer to repurchase. Approximately eight years after the expiration of the redemption period, the vendors filed a suit to compel the vendee to resell and reconvey the property to them. They claimed the contract was actually an equitable mortgage, not a true sale with a right to repurchase.
Both the Trial Court and the Court of Appeals found that the contract was unequivocally a pacto de retro sale, not a loan or mortgage. The courts noted the contract’s plain terms and the absence of any indicia of a disguised mortgage under Article 1602 of the Civil Code. The vendors’ claim that they had attempted to repurchase within the period was also found unproven. Despite these findings, the lower courts applied the third paragraph of Article 1606, granting the vendors a new 30-day period to repurchase from the finality of the judgment declaring the contract a true sale.

ISSUE

Whether the vendors a retro are entitled to the benefit of the 30-day repurchase period under the third paragraph of Article 1606 of the Civil Code, despite the clear nature of the contract as a sale with pacto de retro and the long expiration of the stipulated redemption period.

RULING

No. The Supreme Court reversed the decisions of the lower courts. The application of Article 1606’s third paragraph is predicated on the good faith of the vendor a retro. It requires an honest belief, founded on attendant facts, that the agreement was truly a mortgage, not a sale. The provision is meant to protect a vendor who, under a bona fide misconception about the contract’s nature, seeks judicial reformation. Here, the evidence conclusively established the contract as a clear and distinct pacto de retro sale with no provisions suggesting a loan or circumstances generating honest doubt. To apply the rule in this case, where the action was filed eight years after the redemption period lapsed and based on an unsubstantiated claim, would allow the vendor to resurrect an expired right through a baseless action. This would make the rule a tool for fraud and bad faith, which the law never intended. Following the precedent in Adorable v. Inacala, the Court declared the vendors’ right to repurchase expired and ownership vested absolutely in the vendee.