Bustamante vs. Rosel

A stipulation in a loan contract granting the creditor the option to purchase the mortgaged property at a pre-set price upon the debtor's default constitutes pactum commissorium, which is void under Article 2088 of the Civil Code, even if disguised as a conditional sale or option to buy, because it effectively allows automatic appropriation of the security by the creditor.

The case arose from a loan transaction executed on March 8, 1987, wherein petitioner Natalia Bustamante and her husband borrowed P100,000.00 from respondent Norma Rosel, offering a 70-square meter portion of their land along Congressional Avenue, Quezon City as collateral. The loan agreement contained a provision stating that if the borrowers failed to pay, the lender had the option to buy the collateral for P200,000.00. When the loan matured, the borrower tendered payment but the creditor refused to accept it, insisting instead on enforcing the option to purchase the collateral.

• On March 8, 1987, petitioner Natalia Bustamante and her late husband Ismael C. Bustamante entered into a loan agreement with respondent Norma Rosel for P100,000.00 with interest at 18% per annum for a period of two years.
• As security for the loan, the borrowers mortgaged a 70-square meter portion of their land covered by TCT No. 80667 located along Congressional Avenue, Quezon City, inclusive of an apartment standing thereon.
• The loan agreement contained a stipulation that in the event the borrowers fail to pay the loan, the lender has the option to buy or purchase the collateral for a total consideration of P200,000.00, inclusive of the borrowed amount and interest.
• When the loan matured on March 1, 1989, respondents proposed to buy the collateral at the pre-set price of P200,000.00, but petitioner refused and instead requested an extension of time to pay, offering to sell another residential lot located at Road 20, Project 8, Quezon City as substitute payment.
• Respondents refused to extend the payment and rejected the substitute lot, insisting that petitioner sign a prepared deed of absolute sale of the collateral.
• On March 1, 1989, petitioner tendered payment of the loan to respondents, which the latter refused to accept, demanding instead the execution of the deed of sale.
• On February 28, 1990, respondents filed a complaint for specific performance with consignation against petitioner and her spouse with the Regional Trial Court, Quezon City, Branch 84 (Civil Case No. Q-90-4813).
• On March 5, 1990, petitioner filed a petition for consignation and deposited the amount of P153,000.00 with the City Treasurer of Quezon City on August 10, 1990.
• Respondents also consigned the amount of P47,500.00 with the trial court, representing the balance of the P200,000.00 purchase price after deducting the principal loan of P100,000.00 and accrued interest of P52,500.00.

• The stipulation in the loan agreement allowing respondents to purchase the collateral upon default constitutes pactum commissorium, which is expressly prohibited by Article 2088 of the Civil Code and is therefore null and void.
• The real intention of the parties was to put up the collateral as a guarantee similar to an equitable mortgage under Article 1602 of the Civil Code, not as an absolute sale or option to purchase.
• Petitioner did not fail to pay the loan; she tendered payment on the maturity date but respondents refused to accept it, instead insisting on acquiring the collateral.
• The consideration of P200,000.00 for the 70-square meter property situated at Congressional Avenue, Quezon City is grossly inadequate and would result in unjust enrichment for respondents.

• The agreement between the parties was not a sale with right of repurchase but a loan with interest at 18% per annum, and if petitioner fails to pay, the respondent was given the right to purchase the property for P200,000.00.
• Contracts have the force of law between the contracting parties and must be complied with in good faith pursuant to Article 1159 of the Civil Code.
• The stipulation is not contrary to law, morals, good customs, public order, or public policy under Article 1306 of the Civil Code.
• Petitioner failed to pay the loan at maturity, triggering the option to buy provision.

• Procedural Issues: Whether the Supreme Court should grant the motion for reconsideration and set aside its previous resolution denying the petition for review on certiorari.
• Substantive Issues:
  • Whether petitioner failed to pay the loan at its maturity date.
  • Whether the stipulation in the loan contract allowing the creditor to purchase the collateral upon default is valid and enforceable, or whether it constitutes void pactum commissorium.

• Procedural: The Supreme Court granted the motion for reconsideration, set aside its Resolution dated February 9, 1998, reversed the Decision of the Court of Appeals in CA-G.R. CV No. 40193, and dismissed the complaint filed by respondents in Civil Case No. Q-90-4813.
• Substantive:
  • The Court ruled that petitioner did not fail to pay the loan as she tendered payment on the maturity date which respondents refused to accept, instead insisting on the execution of a deed of sale over the collateral.
  • The stipulation allowing the creditor to purchase the mortgaged property upon the debtor's default constitutes pactum commissorium under Article 2088 of the Civil Code, which is null and void. The arrangement effectively allowed automatic appropriation of the security by the creditor in case of non-payment, disguised as an option to buy.
  • The sale of the collateral was an obligation with a suspensive condition that never arose because petitioner was willing and able to pay the loan. The condition (failure to pay) did not occur, thus respondents had no right to demand fulfillment of the obligation to sell.

• Pactum Commissorium — A stipulation in a contract of pledge or mortgage whereby the creditor automatically appropriates the thing mortgaged or pledged in case of non-payment of the principal obligation. The elements are: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. The Court applied this doctrine to invalidate the loan provision allowing respondents to purchase the collateral upon petitioner's default, noting that the arrangement was tantamount to automatic appropriation disguised as an option to buy.
• Freedom of Contract Limitation — While parties are free to establish stipulations, clauses, terms and conditions as they deem convenient under Article 1306 of the Civil Code, such freedom is limited by the requirement that stipulations must not be contrary to law, morals, good customs, public order, or public policy. The Court applied this to strike down the contractual provision violating Article 2088.

• "All persons in need of money are liable to enter into contractual relationships whatever the condition if only to alleviate their financial burden albeit temporarily. Hence, courts are duty bound to exercise caution in the interpretation and resolution of contracts lest the lenders devour the borrowers like vultures do with their prey."
• "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." (Article 2088, Civil Code)
• "The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy." (Article 1306, Civil Code)

• Nakpil vs. Intermediate Appellate Court (225 SCRA 456) — Cited as controlling precedent for the definition and elements of pactum commissorium; the Court quoted its ruling that an arrangement for automatic appropriation of property by the creditor in case of failure to pay constitutes pactum commissorium which is prohibited by Article 2088 of the Civil Code.
• Development Bank of the Philippines vs. Court of Appeals (284 SCRA 14) — Cited for the authoritative definition of the elements of pactum commissorium.
• Syjuco v. Court of Appeals (172 SCRA 111) — Initially cited in the Court's denied resolution for the principle that the contract is the law between the parties and must be complied with in good faith.
• Phil. American General Insurance v. Mutuc (61 SCRA 22) — Cited in the initial resolution for the binding nature of contracts between parties.
• Herrera v. Petrophil Corporation (146 SCRA 360) — Cited in the initial resolution regarding the obligatory force of contracts.
• Uy Tong vs. Court of Appeals (161 SCRA 383) — Cited in DBP case regarding the elements of pactum commissorium.

• Article 2088, Civil Code — Provides that the creditor cannot appropriate things given by way of pledge or mortgage, or dispose of them, and declares any stipulation to the contrary null and void; served as the primary basis for ruling that the option to buy clause constitutes void pactum commissorium.
• Article 1306, Civil Code — Provides that contracting parties may establish stipulations provided they are not contrary to law, morals, good customs, public order, or public policy; cited to emphasize that freedom of contract is limited by statutory prohibitions against pactum commissorium.
• Article 1181, Civil Code — Provides that in conditional obligations, the acquisition of rights depends upon the happening of the event which constitutes the condition; applied to characterize the sale of collateral as an obligation with a suspensive condition that did not arise because petitioner tendered payment.
• Article 1159, Civil Code — States that contracts have the force of law between the contracting parties; cited by respondents and distinguished by the Court as subject to the limitation in Article 1306.
• Article 1602, Civil Code — Cited by petitioner in her motion for reconsideration regarding the concept of equitable mortgage as the supposed real intention of the parties.
• Rule 45, 1964 Revised Rules of Court — Procedural basis for the petition for review on certiorari filed with the Supreme Court.