Ong vs. Roban Lending Corporation

A contract is void for being pactum commissorium when the mortgagee automatically acquires ownership of the mortgaged property upon the debtor's failure to pay the obligation within the stipulated period, without any foreclosure proceedings or redemption. The elements of pactum commissorium 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.

Petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban Lending Corporation totaling ₱4,000,000.00, secured by a real estate mortgage over their parcels of land in Binauganan, Tarlac City covered by TCT No. 297840. The loans were governed by promissory notes providing for 3.5% monthly interest rates, 5% penalty per month on the total amount due, and 25% attorney's fees, plus additional charges denominated as "EVAT/AR." The parties subsequently executed an Amendment to Amended Real Estate Mortgage consolidating their loans, followed by a Dacion in Payment Agreement and a Memorandum of Agreement on the same date.

Petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban Lending Corporation on different dates from July 14, 1999 to March 20, 2000, in the total amount of ₱4,000,000.00. These loans were secured by a real estate mortgage on petitioners' parcels of land located in Binauganan, Tarlac City, covered by TCT No. 297840. The promissory notes governing the loans provided for 3.5% monthly interest rates, 5% penalty per month on the total amount due and demandable, and a further sum of 25% attorney's fees thereon, with respondent additionally exacting sums denominated as "EVAT/AR."

On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real Estate Mortgage consolidating their loans inclusive of charges thereon, which totaled ₱5,916,117.50. On the same date, the parties executed a Dacion in Payment Agreement wherein petitioners assigned the properties covered by TCT No. 297840 to respondent in settlement of their total obligation, and a Memorandum of Agreement providing that the parties agreed to consolidate and restructure all aforementioned loans, which had been all past due and delinquent since April 19, 2000, with petitioners signing another promissory note in the amount of ₱5,916,117.50, with a promise to pay in full within one year from the date of consolidation and restructuring, otherwise petitioners agreed to have their Dacion in Payment agreement enforced.

In April 2002, petitioners filed a Complaint before the RTC of Tarlac City for declaration of mortgage contract as abandoned, annulment of deeds, illegal exaction, unjust enrichment, accounting, and damages, alleging that the Memorandum of Agreement and the Dacion in Payment executed are void for being pactum commissorium. Petitioners alleged that they had previously made payments on their loan accounts, but because of the illegal exactions thereon, the total balance appeared not to have moved at all, hence, accounting was in order. Respondent maintained the legality of its transactions, arguing that the Dacion in Payment Agreement is lawful and valid as recognized under Article 1245 of the Civil Code as a special form of payment, and that the accumulated interest and other charges computed for more than two years would stand reasonable and valid.

After pre-trial, the initial hearing of the case was reset several times due to, among other things, the parties' efforts to settle the case amicably. During the scheduled initial hearing of May 7, 2003, the RTC reset the case to June 18, 2003, with plaintiff's counsel manifesting that he would submit the case for summary judgment if he could not present his witness. The June 18, 2003 setting was eventually rescheduled to February 11, 2004, at which the RTC directed the counsels to be ready with their memoranda together with all exhibits or evidence needed to support their respective positions, which should be the basis for the judgment on the pleadings if the parties fail to settle the case in the next scheduled setting. At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel of respondent filed a memorandum.

• Procedural Due Process: Petitioners faulted the Court of Appeals for failing and refusing to apply procedural requisites which would warrant the setting aside of the summary judgment in violation of their right to due process.
• Disputed Facts: Petitioners argued that the Court of Appeals failed to consider that trial in the case is necessary because the facts are very much in dispute.
• Pactum Commissorium: Petitioners maintained that the Memorandum of Agreement and the Dacion en Pago Agreement were designed to circumvent the law against pactum commissorium.
• Contrary to Law and Public Policy: Petitioners argued that the Memorandum of Agreement and the Dacion en Pago are null and void for being contrary to law and public policy.
• Unconscionable Charges: Petitioners decried the additional charges of 3.5% monthly interest, 5% monthly penalty, 25% attorney's fees, and "EVAT/AR" exactions as illegal, iniquitous, unconscionable, and revolting to the conscience as they hardly allow any borrower any chance of survival in case of default.

• Novation: Respondent maintained that if the voluntary execution of the Memorandum of Agreement and Dacion in Payment Agreement novated the Real Estate Mortgage, then the allegation of pactum commissorium has no more legal leg to stand on.
• Validity of Dacion en Pago: Respondent argued that the Dacion in Payment Agreement is lawful and valid as it is recognized under Article 1245 of the Civil Code as a special form of payment whereby the debtor alienates property to the creditor in satisfaction of a monetary obligation.
• Reasonableness of Charges: Respondent argued that the accumulated interest and other charges computed for more than two years would stand reasonable and valid, taking into consideration that the principal loan is ₱4,000,000, and if it indeed became beyond the petitioners' capacity to pay, then the fault is attributed to them and not the respondent.
• Reliance on Precedent: Respondent cited Solid Homes, Inc. vs. Court of Appeals, where the Court upheld a Memorandum of Agreement/Dacion en Pago.

• Pactum Commissorium: Whether the Memorandum of Agreement and Dacion in Payment executed by the parties constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code.
• Dacion en Pago: Whether the Dacion in Payment Agreement is a valid dacion en pago that extinguished petitioners' obligation to respondent.
• Unconscionable Interest Rates: Whether the monthly interest rate of 3.5%, the monthly penalty fee of 5%, and the attorney's fees of 25% stipulated in the loan contracts are unconscionable and should be reduced.
• Propriety of Summary Judgment: Whether the trial court and the Court of Appeals erred in rendering summary judgment when there were genuine issues of material fact, particularly on the issue of petitioners' prayer for accounting.

• Pactum Commissorium: Yes. The Memorandum of Agreement and Dacion in Payment constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code, because they contain no provisions for foreclosure proceedings nor redemption, and respondent automatically acquires ownership of the properties upon petitioners' failure to pay their debt within the stipulated period.
• Dacion en Pago: No. The Dacion in Payment did not extinguish petitioners' obligation to respondent; on the contrary, under the Memorandum of Agreement executed on the same day, petitioners had to execute a promissory note for ₱5,916,117.50 which they were to pay within one year, showing that the alienation of the properties was by way of security, not by way of satisfying the debt.
• Unconscionable Interest Rates: Yes. The monthly interest rate of 3.5% (42% per annum) is unconscionable and reduced to 12% per annum; the monthly penalty fee of 5% (60% per annum) is unconscionable and reduced to 12% per annum of the amount due, computed from the time of demand; and the attorney's fees of 25% of the principal, interests, and penalty fees are unconscionable and reduced to 25% of the principal amount only.
• Propriety of Summary Judgment: No. A summary judgment is permitted only if there is no genuine issue as to any material fact and a moving party is entitled to a judgment as a matter of law; petitioners' prayer for accounting requires the presentation of evidence on the issue of partial payment, which respondent denied, thus presenting a genuine issue.

• Pactum Commissorium: The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings, 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. In this case, the Memorandum of Agreement and the Dacion in Payment contain no provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent the right to enforce the Dacion in Payment transferring to it ownership of the properties covered by TCT No. 297840. Respondent, in effect, automatically acquires ownership of the properties upon petitioners' failure to pay their debt within the stipulated period. That the questioned contracts were freely and voluntarily executed by petitioners and respondent is of no moment, pactum commissorium being void for being prohibited by law.
• Dacion en Pago: In a true dacion en pago, the assignment of the property extinguishes the monetary debt. In this case, the alienation of the properties was by way of security, and not by way of satisfying the debt. The Dacion in Payment did not extinguish petitioners' obligation to respondent. On the contrary, under the Memorandum of Agreement executed on the same day as the Dacion in Payment, petitioners had to execute a promissory note for ₱5,916,117.50 which they were to pay within one year. The case of Solid Homes, Inc. vs. Court of Appeals cited by respondent did not involve the issue of pactum commissorium.
• Unconscionable Interest Rates: Courts may reduce interest rates, penalty charges, and attorney's fees if they are iniquitous or unconscionable, pursuant to Articles 1229 and 2227 of the Civil Code. The monthly interest rate of 3.5%, or 42% per annum, is unconscionable and reduced to 12% per annum. The penalty fee at the monthly rate of 5% (60% per annum) of the total amount due and demandable, with interest not paid when due added to and becoming part of the principal and likewise bearing interest at the same rate, compounded monthly, is unconscionable and reduced to a yearly rate of 12% of the amount due, to be computed from the time of demand. The attorney's fees of 25% of the principal, interests and interests thereon, and the penalty fees are unconscionable, and reduced to 25% of the principal amount only.
• Propriety of Summary Judgment: A summary judgment is permitted only if there is no genuine issue as to any material fact and a moving party is entitled to a judgment as a matter of law. A summary judgment is proper if, while the pleadings on their face appear to raise issues, the affidavits, depositions, and admissions presented by the moving party show that such issues are not genuine. A genuine issue, as opposed to a fictitious or contrived one, is an issue of fact that requires the presentation of evidence. Petitioners' prayer for accounting requires the presentation of evidence on the issue of partial payment, which respondent denied. Neither is a judgment on the pleadings proper, since a judgment on the pleadings may be rendered only when an answer fails to tender an issue or otherwise admits the material allegations of the adverse party's pleadings. Respondent's Answer with Counterclaim disputed petitioners' claims that the Memorandum of Agreement and Dation in Payment are illegal, that the extra charges on the loans are unconscionable, and petitioners' allegation of bad faith.

• Pactum Commissorium — A stipulation in a contract of pledge or mortgage whereby the creditor automatically appropriates the thing pledged or mortgaged in case of non-payment of the principal obligation within the stipulated period is void. 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 in finding that the Memorandum of Agreement and Dacion in Payment, which contained no provisions for foreclosure proceedings nor redemption and allowed respondent to automatically acquire ownership of the properties upon petitioners' failure to pay within one year, constituted pactum commissorium.
• Dacion en Pago Distinguished from Pactum Commissorium — In a true dacion en pago, the assignment of the property extinguishes the monetary debt. Where the alienation of the properties is by way of security and not by way of satisfying the debt, the transaction constitutes pactum commissorium rather than dacion en pago. The Court applied this distinction in finding that the Dacion in Payment did not extinguish petitioners' obligation because they had to execute a promissory note for the same amount payable within one year.
• Reduction of Unconscionable Interest Rates — Courts may reduce interest rates, penalty charges, and attorney's fees if they are iniquitous or unconscionable, pursuant to Articles 1229 and 2227 of the Civil Code. The Court applied this doctrine in reducing the 3.5% monthly interest (42% per annum) to 12% per annum, the 5% monthly penalty (60% per annum) to 12% per annum computed from time of demand, and the attorney's fees to 25% of the principal amount only.
• Summary Judgment — A summary judgment is permitted only if there is no genuine issue as to any material fact and a moving party is entitled to a judgment as a matter of law. A genuine issue, as opposed to a fictitious or contrived one, is an issue of fact that requires the presentation of evidence. The Court applied this doctrine in finding that the trial court and Court of Appeals erred in rendering summary judgment because petitioners' prayer for accounting required presentation of evidence on the disputed issue of partial payment.
• Judgment on the Pleadings — A judgment on the pleadings may be rendered only when an answer fails to tender an issue or otherwise admits the material allegations of the adverse party's pleadings. The Court applied this doctrine in finding that judgment on the pleadings was not proper because respondent's Answer with Counterclaim disputed petitioners' claims regarding the illegality of the agreements, the unconscionability of the charges, and the allegation of bad faith.

• "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 text of Article 2088 of the Civil Code, which the Court applied as the controlling provision prohibiting pactum commissorium and rendering the Memorandum of Agreement and Dacion in Payment null and void.
• "In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent the right to enforce the Dacion in Payment transferring to it ownership of the properties covered by TCT No. 297840. Respondent, in effect, automatically acquires ownership of the properties upon petitioners' failure to pay their debt within the stipulated period." — This passage articulates the Court's application of the elements of pactum commissorium to the facts of the case, forming the core of the ratio decidendi.
• "In a true dacion en pago, the assignment of the property extinguishes the monetary debt. In the case at bar, the alienation of the properties was by way of security, and not by way of satisfying the debt." — This passage distinguishes dacion en pago from pactum commissorium, establishing that the Dacion in Payment did not extinguish petitioners' obligation because they had to execute a promissory note for the same amount payable within one year.
• "A summary judgment is permitted only if there is no genuine issue as to any material fact and a moving party is entitled to a judgment as a matter of law. A summary judgment is proper if, while the pleadings on their face appear to raise issues, the affidavits, depositions, and admissions presented by the moving party show that such issues are not genuine. A genuine issue, as opposed to a fictitious or contrived one, is an issue of fact that requires the presentation of evidence." — This passage states the standard for summary judgment under Rule 35 of the Rules of Court and explains why the trial court and Court of Appeals erred in rendering summary judgment given the genuine issue of partial payment raised by petitioners' prayer for accounting.

• Lumayag vs. Heirs of Jacinto Nemeño, G.R. No. 162112, July 3, 2007, 526 SCRA 315 — Cited for the definition of pactum commissorium as enabling the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings.
• Development Bank of the Philippines vs. Court of Appeals, 348 Phil. 15 (1998) — Cited as controlling precedent for the elements of pactum commissorium and for the distinction between dacion en pago and pactum commissorium, particularly that in a true dacion en pago the assignment of property extinguishes the monetary debt.
• Solid Homes, Inc. vs. Court of Appeals, 341 Phil. 261 (1997) — Distinguished by the Court; respondent cited this case where the Court upheld a Memorandum of Agreement/Dacion en Pago, but the Court noted that the case did not involve the issue of pactum commissorium.
• United Coconut Planters Bank vs. Beluso, G.R. No. 159912, August 17, 2007, 530 SCRA 567 — Cited for the principle that courts may reduce interest rates and penalty charges if they are iniquitous or unconscionable, and for the reduction of penalty fees to 12% per annum computed from time of demand.
• Poltan vs. BPI Family Savings Bank, Inc., G.R. No. 164307, March 5, 2007, 517 SCRA 430 — Cited for the principle that courts may reduce unconscionable interest rates and for the reduction of the monthly interest rate to 12% per annum.
• Radiowealth Finance Co., Inc. vs. International Corporate Bank, G.R. Nos. 77042-43, February 28, 1990, 182 SCRA 862 — Cited for the principle that courts may reduce interest rates, penalty charges, and attorney's fees if they are iniquitous or unconscionable.
• Titan Construction Corporation vs. Uni-Field Enterprises, Inc., G.R. No. 153874, March 1, 2007, 517 SCRA 180 — Cited for the reduction of attorney's fees to 25% of the principal amount only.
• Pineda vs. Heirs of Eliseo Guevarra, G.R. No. 143188, February 14, 2007, 515 SCRA 627 — Cited for the rule under Rule 35, Section 3 of the Rules of Court that a summary judgment is permitted only if there is no genuine issue as to any material fact and a moving party is entitled to a judgment as a matter of law.
• Marcelo vs. Sandiganbayan, G.R. No. 156605, August 28, 2007, 531 SCRA 385 — Cited for the definition of a genuine issue as opposed to a fictitious or contrived one, being an issue of fact that requires the presentation of evidence.

• Article 2088, Civil Code — 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. The Court applied this provision in declaring the Memorandum of Agreement and Dacion in Payment null and void for being pactum commissorium.
• Article 1245, Civil Code — Recognizes dacion en pago as a special form of payment whereby the debtor alienates property to the creditor in satisfaction of a monetary obligation. The Court applied this provision in distinguishing a true dacion en pago, where the assignment of property extinguishes the debt, from the transaction in this case where the alienation was by way of security.
• Article 1229, Civil Code — Empowers courts to equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor, or when the penalty is iniquitous or unconscionable. The Court applied this provision in reducing the unconscionable penalty fees.
• Article 2227, Civil Code — Provides that liquidated damages, whether intended as penalty or not, shall be equitably reduced if they are iniquitous or unconscionable. The Court applied this provision in reducing the unconscionable interest rates and attorney's fees.
• Articles 1409, Civil Code — Provides that contracts whose object is contrary to law are void and inexistent from the beginning. The Court cited this provision in holding that the fact that the questioned contracts were freely and voluntarily executed is of no moment, pactum commissorium being void for being prohibited by law.
• Rule 35, Section 3, Rules of Court — Provides that a summary judgment is permitted only if there is no genuine issue as to any material fact and a moving party is entitled to a judgment as a matter of law. The Court applied this rule in finding that the trial court and Court of Appeals erred in rendering summary judgment.
• Rule 34, Section 1, Rules of Court — Provides that a judgment on the pleadings may be rendered only when an answer fails to tender an issue or otherwise admits the material allegations of the adverse party's pleadings. The Court applied this rule in finding that judgment on the pleadings was not proper because respondent's Answer disputed petitioners' claims.

• Associate Justice Leonardo A. Quisumbing
• Associate Justice Dante O. Tinga
• Associate Justice Presbitero J. Velasco, Jr.
• Associate Justice Arturo D. Brion (inhibited; replaced by additional member per Raffle dated July 2, 2008 pursuant to Administrative Circular No. 84-2007)