A. Francisco Realty and Development Corporation vs. Court of Appeals

Stipulations in a promissory note providing for the automatic transfer of ownership of mortgaged property to the creditor upon the debtor's failure to pay interest constitute a pactum commissorium, which is void under Article 2088 of the Civil Code. The prohibition applies regardless of whether the stipulation appears in the mortgage deed itself or in a separate document such as a promissory note, as the substance of the arrangement, not its form, determines its validity.

Petitioner A. Francisco Realty and Development Corporation is a domestic corporation engaged in real estate development. Private respondents are the spouses Romulo S.A. Javillonar and Erlinda P. Javillonar, who owned real property covered by TCT No. 58748 located at No. 56 Dragonfly Street, Valle Verde VI, Pasig, Metro Manila. The parties entered into a loan transaction wherein petitioner granted respondents a P7.5 Million loan, secured by a real estate mortgage over the subject property, with an interest rate of 4% per month. The transaction was structured through multiple documents, including a promissory note, a deed of mortgage, and an undated deed of sale in favor of the mortgagee.

Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private respondents, the spouses Romulo and Erlinda Javillonar. In consideration of the loan, respondents executed: (a) a promissory note dated November 27, 1991, stating an interest charge of 4% per month for six months; (b) a deed of mortgage over realty covered by TCT No. 58748, together with the improvements thereon; and (c) an undated deed of sale of the mortgaged property in favor of the mortgagee. The interest on the loan was to be paid in four installments: half of the total amount agreed upon (P900,000.00) to be paid in advance through a deduction from the loan proceeds, with the balance to be paid monthly by checks post-dated March 27, April 27, and May 27, 1992. The promissory note expressly provided that upon failure of the mortgagor to pay the interest without prior arrangement with the mortgagee, full possession of the property would be transferred and the deed of sale would be registered. For this purpose, the owner's duplicate of TCT No. 58748 was delivered to petitioner.

Petitioner claimed that private respondents failed to pay the interest, and as a consequence, it registered the sale of the land in its favor on February 21, 1992. As a result, TCT No. 58748 was cancelled and TCT No. PT-85569 was issued in the name of petitioner. Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on March 13, 1992, for which they signed a promissory note providing that if the additional note and/or the original P7.5 Million note remained unpaid and/or unsettled, without any need for prior demand or notification, respondents promised to vacate voluntarily and allow petitioner to appropriate and occupy the real property.

Petitioner demanded possession of the mortgaged realty and payment of 4% monthly interest from May 1992, plus surcharges. When respondent spouses refused to vacate, petitioner filed an action for possession before the Regional Trial Court in Pasig City. In their answer, respondents admitted liability on the loan but alleged that it was not their intent to sell the realty, as the undated deed of sale was executed merely as additional security for the payment of their loan. They further claimed that they were not notified of the registration of the sale and that there was no interest then unpaid, as they had been paying interest even subsequent to the registration of the sale. As an alternative defense, respondents contended that the complaint was actually for ejectment and, therefore, the Regional Trial Court had no jurisdiction. As counterclaim, respondents sought the cancellation of TCT No. PT-85569 and the issuance of a new title evidencing their ownership of the property.

• Jurisdiction of the Trial Court: Petitioner argued that the Court of Appeals erred in ruling that the Regional Trial Court had no jurisdiction over the complaint, as the allegations in the complaint raised issues involving more than a simple claim for immediate possession, including the validity of the transfer of ownership, the alleged new liability for P400,000.00 a month from the time of demand to vacate, and the continuing liability under both loans to pay interest and surcharges.

• Pactum Commissorium: Petitioner contended that Article 2088 of the Civil Code envisions a provision in the deed of mortgage itself providing for the automatic conveyance of the mortgaged property in case of failure of the debtor to pay the loan. Petitioner argued that the proscribed stipulation should be found in the mortgage deed itself, and since the subject deed of mortgage did not contain such a provision, Article 2088 could not apply.

• Jurisdiction: Respondents contended that the complaint was actually for ejectment and, therefore, the Regional Trial Court had no jurisdiction to try the case, as unlawful detainer cases are exclusively cognizable by municipal trial courts.

• Nature of the Transaction: Respondents alleged that it was not their intent to sell the realty, as the undated deed of sale was executed merely as additional security for the payment of their loan. They claimed they were not notified of the registration of the sale and that there was no interest then unpaid, as they had been paying interest even subsequent to the registration of the sale.

• Counterclaim: As counterclaim, respondents sought the cancellation of TCT No. PT-85569 as secured by petitioner and the issuance of a new title evidencing their ownership of the property.

• Jurisdiction of the Regional Trial Court: Whether the Court of Appeals erred in ruling that the Regional Trial Court had no jurisdiction over the complaint filed by petitioner.

• Pactum Commissorium: Whether the Court of Appeals erred in ruling that the contractual documents subject of the instant case are constitutive of pactum commissorium as defined under Article 2088 of the Civil Code of the Philippines.

• Jurisdiction of the Regional Trial Court: No. The Court of Appeals erred in ruling that the Regional Trial Court had no jurisdiction. The complaint raised issues beyond mere possession de facto, including the validity of the transfer of ownership, alleged new liability for monthly rentals, and continuing liability under both loans, which converted the case into one incapable of pecuniary estimation and thus within the jurisdiction of the Regional Trial Court.

• Pactum Commissorium: Yes. The Court of Appeals correctly ruled that the stipulations in the promissory notes constituted a pactum commissorium. The stipulations providing that upon failure of respondent spouses to pay interest, ownership of the property would be automatically transferred to petitioner and the deed of sale would be registered, embodied the two elements of pactum commissorium: (1) a pledge or mortgage wherein property is given as security, and (2) a stipulation for automatic appropriation by the creditor in the event of non-payment.

• Jurisdiction of the Regional Trial Court: The Court distinguished unlawful detainer from accion publiciana and accion reivindicatoria. Unlawful detainer is limited to the question of possession de facto and is brought before the inferior court to recover physical possession only, where dispossession has lasted for not more than one year. The allegations in both the original and amended complaints clearly raised issues involving more than the question of possession: (a) the validity of the transfer of ownership to petitioner; (b) the alleged new liability of private respondents for P400,000.00 a month from the time petitioner made its demand to vacate; and (c) the alleged continuing liability of private respondents under both loans to pay interest and surcharges. Citing De Rivera vs. Halili, the Court noted that when litigants raise issues regarding their respective rights under various contractual documents, the case is converted from a mere detainer suit to one "incapable of pecuniary estimation" and thus beyond the authority of inferior courts. The Court also held that the compulsory counterclaim filed by respondent spouses challenging petitioner's title was not merely a collateral attack, as a counterclaim stands on the same footing and is tested by the same rules as an independent action.

• Pactum Commissorium: The Court rejected petitioner's contention that the proscribed stipulation must be found in the mortgage deed itself, stating that to sustain such theory would allow a subversion of the prohibition in Article 2088. Citing Nakpil vs. Intermediate Appellate Court, the Court noted that even where no deed of mortgage was expressly executed, an agreement whereby property held in trust was ceded to the trustee upon failure of the beneficiary to pay his debt was void for being a pactum commissorium. The Court also cited Reyes vs. Sierra, which categorically ruled that a mortgagee's mere act of registering the mortgaged property in his own name upon the mortgagor's failure to redeem the property amounted to the exercise of the privilege of a mortgagee in a pactum commissorium. Applying Uy Tong vs. Court of Appeals, the Court found that the stipulations in the promissory notes embodied the two elements of pactum commissorium: (1) there was a pledge or mortgage wherein a property was pledged or mortgaged by way of security for the payment of the principal obligation; and (2) there was a stipulation for automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period. The subject transaction being void, the registration of the deed of sale by virtue of which petitioner obtained TCT No. PT-85569 was also declared void.

• Pactum Commissorium — Under Article 2088 of the Civil Code, the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them, and any stipulation to the contrary is null and void. The two elements of pactum commissorium are: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period. The prohibition applies regardless of whether the stipulation appears in the mortgage deed itself or in a separate document such as a promissory note, as the substance of the arrangement, not its form, determines its validity.

• Accion Interdictal vs. Accion Publiciana vs. Accion Reivindicatoria — These are the three kinds of actions to judicially recover possession of real property. Accion interdictal (forcible entry and unlawful detainer) is limited to the question of possession de facto and is brought before the inferior court to recover physical possession only, where dispossession has lasted for not more than one year. Accion publiciana is the plenary action to recover the right of possession. Accion reivindicatoria is the action to recover ownership, which includes recovery of possession. When a complaint raises issues beyond mere possession, such as the validity of the transfer of ownership and continuing liability under contractual arrangements, the case is converted into one "incapable of pecuniary estimation" and falls within the jurisdiction of the Regional Trial Court.

• Counterclaim as an Independent Action — A counterclaim is considered a complaint, only this time the original defendant becomes the plaintiff. It stands on the same footing and is to be tested by the same rules as if it were an independent action. Hence, the same rules on jurisdiction in an independent action apply to a counterclaim.

• "The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void." — This is the canonical formulation of Article 2088 of the Civil Code, which prohibits pactum commissorium stipulations and serves as the basis for declaring the subject transaction void.

• "The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period." — This passage from Uy Tong vs. Court of Appeals, as adopted by the Court, defines the two elements of pactum commissorium and is the controlling test applied to the facts of the case.

• "The act of applicant in registering the property in his own name upon mortgagor's failure to redeem the property would to a pactum commissorium which is against good morals and public policy." — This passage from Reyes vs. Sierra establishes that a mortgagee's act of registering mortgaged property in his own name upon the mortgagor's failure to redeem constitutes a pactum commissorium, which is against good morals and public policy.

• Nakpil vs. Intermediate Appellate Court, 225 SCRA 456 (1993) — Controlling precedent holding that an agreement whereby property held in trust was ceded to the trustee upon failure of the beneficiary to pay his debt was void for being a pactum commissorium, even where no deed of mortgage was expressly executed.

• Reyes vs. Sierra, 93 SCRA 472 (1979) — Followed, holding that a mortgagee's mere act of registering the mortgaged property in his own name upon the mortgagor's failure to redeem the property amounted to the exercise of the privilege of a mortgagee in a pactum commissorium.

• Uy Tong vs. Court of Appeals, 161 SCRA 383 (1988) — Followed, providing the two elements of pactum commissorium: (1) a pledge or mortgage wherein property is given as security, and (2) a stipulation for automatic appropriation by the creditor in the event of non-payment.

• De Rivera vs. Halili, 9 SCRA 59 (1963) — Followed, holding that when litigants raise issues regarding their respective rights under various contractual documents, the case is converted from a mere detainer suit to one "incapable of pecuniary estimation" and beyond the authority of inferior courts.

• De Leon vs. Court of Appeals, 245 SCRA 166 (1995) — Cited for the distinction between unlawful detainer, accion publiciana, and accion reivindicatoria.

• Olca vs. Court of Appeals, 247 SCRA 274 (1995) — Followed, holding that stipulations in pacto de retro sales providing for automatic vesting of title to the vendee upon failure to redeem are void for being a pactum commissorium.

• Article 2088, Civil Code of the Philippines — Provides that the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them, and any stipulation to the contrary is null and void. This provision was applied to declare void the stipulations in the promissory notes providing for automatic transfer of ownership to petitioner upon respondents' failure to pay interest.

• Section 33, B.P. Blg. 129 — Vests municipal trial courts with exclusive original jurisdiction over forcible entry and unlawful detainer cases. The Court distinguished the present case from those falling under this provision, holding that the complaint raised issues beyond mere possession.

• Rule 70, Rules of Court — Defines the action for unlawful detainer as withholding possession by a person from another for not more than one year after the expiration or termination of the supposed right to hold possession by virtue of a contract. The Court applied this definition to distinguish unlawful detainer from accion publiciana.

Justices Melo, Puno, and Martinez concurred with the decision of Justice Mendoza.