RAQUEL ADORABLE, ET AL., PETITIONERS, VS. IRINEA INACALA, ET AL., RESPONDENTS.

Adorable versus Inacala

The Case

This is an appeal by the petitioners, the Adorables, against the respondents led by Irenea Inacala, over a parcel of land in Cabanatuan, Nueva Ecija. The action turns on the character and effect of a deed of sale executed in 1941, which the Court of Appeals treated as a sale with a right of repurchase, a pacto de retro sale, and allowed the seller to redeem. The case matters because it draws a sharp line between the third paragraph of Article 1606 of the Civil Code, which protects a seller who never truly agreed to a sale with repurchase, and the ordinary case where the right to repurchase was expressly stipulated and simply allowed to lapse.

Procedural History

The dispute reached the Supreme Court on appeal from the decision of the Court of Appeals. The Court of Appeals held that the deed of sale between Irenea Inacala and Arcadio Mendoza should be given the effect of a mere pacto de retro sale, and that under the third paragraph of Article 1606 of the Civil Code, Inacala should be permitted to exercise the right of repurchase. The petitioners, the Adorables, appealed that decision to the Supreme Court, assigning as error the application of the third paragraph of Article 1606 of the new Civil Code.

Facts

Irenea Inacala was the registered owner of a parcel of land in barrio Valdefuente, Cabanatuan, Nueva Ecija. On July 1, 1941, through the intervention of Claro Pacis, she executed a deed of sale covering a fifteen-hectare lot in favor of Arcadio Mendoza for 420 pesos. On the same occasion, Mendoza executed a private instrument granting Inacala the option to repurchase the lot for the same consideration within one year from the date of the sale.

Mendoza afterwards sold the property to the spouses Eugenio and Margarita Ramos, to whom a transfer certificate of title was issued. The petitioners, all surnamed Adorable, in turn bought the land from the Ramos spouses, and a transfer certificate of title was issued in their name. Since the first sale in 1941, Inacala, who had not redeemed the land from Mendoza, never relinquished possession of it.

It was only in 1951, during the opening of the Pampanga River Irrigation Project, when the petitioners attempted to take physical possession through one Geronimo Fajardo, who leased the land from them, that the petitioners were apprised for the first time of Inacala's claim over the lot.

Issues

• Whether or not the transaction between Irenea Inacala and Arcadio Mendoza is a pacto de retro sale.
• Whether or not the Court of Appeals erred in applying the third paragraph of Article 1606 of the new Civil Code to permit Inacala to repurchase.
• Whether or not the petitioners were purchasers in good faith.

Applicable Provisions

The third paragraph of Article 1606 of the Civil Code provides:

In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.

This is the provision the Court of Appeals applied to allow redemption, and which the Supreme Court held inapplicable because the sale here was expressly with a right to repurchase.

Article 1509 of the old Civil Code, in force at the time of the transaction, provides:

The vendor may exercise the right of repurchase within the period expressly stipulated in the contract, and in the absence of such stipulation, within four years from the date of the contract.

This is the provision the Court applied to hold that, the one-year period having expired without redemption, ownership was irrevocably acquired by the original purchaser.

Ruling

On the first issue, the Court held that there can be no question about the correctness of the conclusion of the Court of Appeals that the transaction is a pacto de retro sale. The private instrument granting Inacala the option to repurchase was conclusive on the point.

On the second issue, the Court ruled that the Court of Appeals erred in applying the third paragraph of Article 1606 of the new Civil Code. That provision, the Court explained, refers to cases involving a transaction where one of the parties contests or denies that the true agreement is one of sale with right of repurchase. Here, the sale was expressly with a right to repurchase by virtue of the instrument granting Inacala the right to redeem within one year. As this stipulated period expired without her having redeemed the land, the original purchaser, Arcadio Mendoza, had irrevocably acquired ownership over the property in accordance with Article 1509 of the old Civil Code, which was in force at the time of the transaction.

On the third issue, the Court found it unnecessary to discuss the petitioners' contention that the Court of Appeals erred in holding that they were not purchasers in good faith, because the resolution of the second issue already disposed of the case.

Doctrine

The third paragraph of Article 1606 of the Civil Code applies only where one of the parties contests or denies that the true agreement is one of sale with a right of repurchase. Where the right to repurchase is expressly stipulated, the contract is a true pacto de retro sale, and the seller who fails to redeem within the stipulated period loses the right, the buyer having irrevocably acquired ownership under Article 1509 of the old Civil Code. A pacto de retro sale is a sale with a right of repurchase, and the express stipulation of that right removes the case from the doubt that the equitable mortgage rule is meant to resolve.

Disposition

The decision appealed from was reversed, and the petitioners were declared owners of the land in controversy, without pronouncement as to costs.

Remember This

The single line to memorize: the third paragraph of Article 1606 applies only where the true agreement as a sale with repurchase is contested or denied, not where the right to repurchase was expressly stipulated and simply allowed to lapse. Examiners use this case to test the distinction between a genuine pacto de retro sale and the equitable mortgage rule, and the effect of the expiration of the stipulated redemption period.