Ruby Shelter Builders and Realty Development Corporation vs. Tan

A mutual agreement where a debtor voluntarily sells mortgaged property to the creditor to extinguish a debt constitutes a valid dacion en pago and is not a prohibited pactum commissorium, provided there is no stipulation for automatic appropriation of the property by the creditor upon the debtor's default.

Ruby Shelter Builders and Realty Development Corporation (Ruby Shelter) had an outstanding loan obligation to Romeo Y. Tan and Roberto L. Obiedo (Tan and Obiedo), secured by a real estate mortgage over five parcels of land. As of March 2005, the debt amounted to PHP 95,700,620.00. To secure an extension and condonation of interests, the parties entered into a Memorandum of Agreement (MOA).

• Filed in the Regional Trial Court (RTC) of Naga City, Branch 22 (Civil Case No. 2006-0030).
• RTC Decision (Jan. 30, 2013): Dismissed Ruby Shelter's complaint for annulment, upheld the validity of the MOA and Deeds of Sale, and ordered Tan and Obiedo to pay PHP 5,000,000.00 to Ruby Shelter.
• RTC Order (Apr. 25, 2013): Modified the decision, deleting the order for PHP 5,000,000.00 payment and instead ordering Ruby Shelter and its president to pay PHP 10,000,000.00 in liquidated damages.
• CA Decision (Oct. 20, 2014): Initially reversed the RTC, declaring the MOA partially void for pactum commissorium and annulling the Deeds of Sale.
• CA Amended Decision (Feb. 18, 2015): Reversed its earlier decision and affirmed the RTC's ruling in toto.
• SC (Aug. 5, 2024): Denied the petition and affirmed the CA Amended Decision with modification on the interest rate for liquidated damages.

• Ruby Shelter owed Tan and Obiedo PHP 95,700,620.00, secured by a real estate mortgage over five lots.
• On March 17, 2005, they executed a MOA. Key terms:
  • Tan and Obiedo condoned interests/penalties from Oct. 1, 2004 to Dec. 31, 2005 (PHP 74,678,647.00).
  • Ruby Shelter was given until Dec. 31, 2005, to pay the remaining obligation.
  • Upon execution, Ruby Shelter would execute Deeds of Absolute Sale (dated Jan. 2, 2006) over the properties "by way of dacion en pago."
  • If Ruby Shelter paid by Dec. 31, 2005, the corresponding deed would be nullified.
  • If Ruby Shelter failed to pay, Tan and Obiedo could have the deeds notarized and titles transferred.
  • Ruby Shelter agreed to pay PHP 10,000,000.00 in liquidated damages if it contested the transaction.
  • Ruby Shelter executed the Deeds of Absolute Sale.
  • Ruby Shelter failed to pay by Dec. 31, 2005, and later contested the interest computations.
  • Tan and Obiedo had the deeds notarized on Jan. 3, 2006.
  • Ruby Shelter filed a complaint to annul the deeds, arguing they were void pactum commissorium.

• The MOA did not novate the original loan but only modified the terms of payment.
• The arrangement constitutes pactum commissorium because it allows the creditor to automatically acquire ownership of the mortgaged property without foreclosure.
• The condoned interests are included in the stated principal obligation; thus, no separate liability exists.
• The liquidated damages of PHP 10,000,000.00 are unconscionable and violate its right to access the courts.

• The petition raises factual issues improper for a Rule 45 review.
• The parties validly novated the mortgage into a dacion en pago, extinguishing the debt.
• Ruby Shelter, through its board resolution, voluntarily offered the properties as payment.
• Ruby Shelter is estopped from questioning the sale after benefiting from the condonation of interests.
• The liquidated damages are valid and stipulated in the MOA.

• Procedural Issues: Whether the petition improperly raises questions of fact.
• Substantive Issues:
  1. Whether the CA erred in ruling that the parties novated the real estate mortgage and entered into a dacion en pago.
  2. Whether the MOA is void for being a pactum commissorium.

• Procedural: The SC agreed that the petition primarily raised factual issues (e.g., intent of the parties, existence of pactum commissorium), which are generally not reviewable under Rule 45. However, it proceeded to resolve the substantive issues.
• Substantive:
  1. On Novation and Dacion en Pago: The SC ruled that the parties validly novated the original loan obligation. The MOA created a modificatory novation regarding the condonation of interests and extension of time, and an extinctive novation via dacion en pago in case of non-payment. The execution of the Deeds of Absolute Sale, with the purchase price being the outstanding debt, constituted a valid dacion en pago that extinguished the obligation. The period granted was for the modified obligation, not the original loan, distinguishing it from cases like Spouses Ong and Rockville.
  2. On Pactum Commissorium: The SC held the MOA was not void for pactum commissorium. The two elements of pactum commissorium are: (a) a property mortgaged as security, and (b) a stipulation for automatic appropriation by the creditor upon default. Here, the transfer of ownership was not automatic; it required the execution of a separate Deed of Absolute Sale, which the parties treated as a sale. The prohibition targets automatic appropriation, not a mutually agreed sale to extinguish a debt. Ruby Shelter voluntarily offered the properties, and there was no evidence of overreaching.

• Novation — The SC reiterated the four requisites: (1) a previous valid obligation; (2) agreement of all parties to a new contract; (3) extinguishment of the old contract; and (4) validity of the new one. It distinguished between extinctive (total) and modificatory (partial) novation.
• Dacion en Pago — Defined as a special mode of payment where the debtor delivers a thing to the creditor as an accepted equivalent of performance. Its requisites are: (1) performance of a prestation in lieu of payment (animo solvendi); (2) difference between the prestation due and that given (aliud pro alio); and (3) agreement that the obligation is extinguished. It is governed by the law on sales.
• Pactum Commissorium — Prohibited under Article 2088 of the Civil Code. Its elements are: (1) a property mortgaged or pledged as security; and (2) a stipulation for automatic appropriation by the creditor upon the debtor's default. The SC emphasized that a mutual agreement to sell the property to the creditor to satisfy the debt is not pactum commissorium.

• "Not all instances of alienation of mortgaged property by the debtor in favor of the creditor in the event of failure to timely pay the obligation will be declared void for being pactum commissorium. The prohibition does not extend to a mutual agreement between the debtor and the creditor that the property subject of the mortgage is sold to the latter to extinguish the obligation."
• "The evil that is sought to be avoided in a pactum commissorium is not the alienation of the mortgaged properties to the creditor upon default of the debtor per se. Pactum commissorium is a stipulation for automatic vesting of title over the security in the creditor in case of the debtor's default."
• "When the parties entered into a separate Deed of Absolute Sale, it proves that there was no automatic transfer of ownership, and therefore, no pactum commissorium."

• Spouses Ong v. Roban Lending Corporation — Distinguished. In that case, the Dation in Payment Agreement was triggered automatically upon default, making it a void pactum commissorium. Here, the sale was a pre-agreed extinguishment mechanism, not an automatic appropriation.
• Rockville Excel International Exim Corporation v. Spouses Culla — Distinguished. In that case, the grant of an extension to pay negated the claim of dacion en pago, indicating an equitable mortgage. Here, the extension was for the modified obligation under the MOA, consistent with a sale.
• Tan Chun Tic v. West Coast Life Insurance Co. — Followed. The SC cited this case to illustrate the distinction between a void assignment allowing the creditor to appropriate the property and a valid agreement where the debtor sells the property to the creditor to satisfy the debt.
• Filinvest Credit Corporation v. Philippine Acetylene, Co., Inc. — Cited to explain the modern concept of dacion en pago as an objective novation where the debt is treated as the purchase price.

• Civil Code, Art. 1231 — Enumerates modes of extinguishing obligations, including novation and payment.
• Civil Code, Art. 1245 — Provides that dation in payment is governed by the law on sales.
• Civil Code, Art. 1291 — Provides that obligations may be modified by changing their object or principal conditions (basis for modificatory novation).
• Civil Code, Art. 1374 — Stipulates that the various clauses of a contract must be interpreted together.
• Civil Code, Art. 2088 — Prohibits the creditor from appropriating the things given by way of pledge or mortgage (source of pactum commissorium prohibition).
• Civil Code, Art. 2226 — Defines liquidated damages.
• Civil Code, Art. 2227 — Empowers courts to reduce iniquitous or unconscionable liquidated damages.

• N/A (The decision was unanimous with concurrence from Hernando, Zalameda, Rosario, and Marquez, JJ.)