Ruby Shelter Builders and Realty Development Corporation vs. Tan

The SC held that the MOA constituted a valid novation of the original loan agreement, extinguishing the obligation through a dacion en pago (dation in payment). The prohibition against pactum commissorium does not extend to a mutual agreement where the debtor sells the mortgaged property to the creditor to satisfy the debt.

Ruby Shelter Builders obtained a substantial loan from Romeo Y. Tan and Roberto L. Obiedo, secured by a real estate mortgage over five parcels of land. As of March 2005, the outstanding debt was PHP 95,700,620.00. To secure an extension for repayment and a condonation of accrued interests and penalties, the parties executed a MOA on March 17, 2005.

• Filed in the Regional Trial Court (RTC) of Naga City as a complaint for annulment of deed of sale.
• The RTC dismissed the complaint, upholding the validity of the MOA and deeds of sale, and ordered Ruby Shelter to pay liquidated damages.
• Ruby Shelter appealed to the Court of Appeals (CA).
• The CA initially reversed the RTC, declaring the MOA partially void and annulling the deeds of sale. Upon respondents' motion for reconsideration, the CA reversed itself in an Amended Decision and affirmed the RTC.
• Ruby Shelter elevated the case to the Supreme Court via a Petition for Review on Certiorari under Rule 45.

• Ruby Shelter (petitioner) owed Tan and Obiedo (respondents) PHP 95,700,620.00, secured by a real estate mortgage over five lots.
• To get an extension of time to pay and a condonation of interests/penalties, Ruby Shelter offered to execute Deeds of Absolute Sale over the mortgaged properties.
• The parties executed a MOA stipulating: (1) condonation of interests/penalties; (2) Ruby Shelter had until Dec. 31, 2005, to pay; (3) Ruby Shelter would execute Deeds of Absolute Sale dated Jan. 2, 2006, "by way of dacion en pago"; (4) if Ruby Shelter paid by Dec. 31, 2005, the deeds would be nullified; (5) if Ruby Shelter failed to pay, respondents could have the deeds notarized and registered to transfer title.
• Ruby Shelter executed the Deeds of Absolute Sale.
• Ruby Shelter failed to pay by the deadline and later challenged the notarization of the deeds.
• Ruby Shelter filed a complaint to annul the deeds, arguing they were void for being pactum commissorium.

• The MOA did not novate the original loan; it only modified the terms of payment.
• The arrangement enabled the creditor to acquire ownership of the mortgaged property without foreclosure, which is the essence of a prohibited pactum commissorium.
• The condoned interests were already included in the total obligation amount.
• The liquidated damages of PHP 10,000,000.00 were unconscionable and violated its right to access the courts.

• The petition should be dismissed for raising factual issues (interpretation of the MOA).
• The CA correctly found the parties agreed to a dacion en pago, not a pactum commissorium.
• Ruby Shelter voluntarily offered the properties as payment, as shown by its Board Resolution.
• Ruby Shelter is estopped from assailing the sale since the obligation was extinguished.
• The liquidated damages are valid under the Civil Code.

• Procedural Issues: Whether the petition improperly raises questions of fact, which are not reviewable in a Rule 45 petition.
• Substantive Issues:
  1. Whether the CA erred in ruling that the parties novated the real estate mortgage and entered into a valid dacion en pago.
  2. Whether the MOA and Deeds of Sale are void for being a pactum commissorium.

• Procedural: The SC noted that the determination of pactum commissorium is a factual issue, as it requires examining contractual stipulations and intent. While the petition largely raised factual matters, the SC proceeded to resolve the substantive issues for finality.
• Substantive:
  1. On Novation and Dacion en Pago: The SC ruled the MOA novated the original loan agreement. The parties' intent, as gleaned from the MOA and a prior Board Resolution of Ruby Shelter, was to extinguish the obligation through a dacion en pago—a special mode of payment where the properties were sold to the creditor. The elements of a valid dacion en pago were present: delivery of the properties animo solvendi, a prestation different from that due (land instead of money), and agreement that the delivery would extinguish the obligation.
  2. On Pactum Commissorium: The SC held the MOA was not void for being 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 was conditioned on the execution of a separate Deeds of Absolute Sale, which Ruby Shelter itself voluntarily offered and executed. The prohibition targets automatic vesting of title, not a mutual agreement to sell the property to satisfy the debt.

• Novation — The extinguishment of an obligation by creating a new one that replaces it. The SC found an extinctive novation because the MOA created a new mode of extinguishing the obligation (dacion en pago) that was incompatible with the original mortgage arrangement.
• Dacion en Pago — 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) a prestation different from that due (aliud pro alio); and (3) agreement that the delivery extinguishes the obligation. The SC applied this, treating the sale of the properties as extinguishing the debt.
• Pactum Commissorium — A prohibited stipulation where the creditor automatically appropriates the thing given as security upon the debtor's default, without need of foreclosure. Its elements are: (1) a property mortgaged/pledged as security; (2) a stipulation for automatic appropriation upon default. The SC distinguished this from a mutual agreement to sell the property to settle the debt.

• "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."
• "Pactum commissorium condemns the situation where upon failure to pay or to redeem the mortgage, the land automatically passes to the mortgagee."
• "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."

• Spouses Ong v. Roban Lending Corporation — Distinguished. In that case, the Dation in Payment Agreement provided for automatic transfer of ownership and was void as pactum commissorium. Here, the transfer was not automatic but required the execution of a separate deed.
• Rockville Excel International Exim Corporation v. Spouses Culla — Distinguished. In that case, the extension to pay negated a dacion en pago, indicating an equitable mortgage. Here, the extension was for the modified obligation under the MOA, not the original loan, and the deeds were not mere security.
• Tan Chun Tic v. West Coast Life Insurance Co. — Followed. This case distinguished between an assignment allowing the mortgagee to dispose of property (void) and an agreement where the debtor sells the property to the creditor to satisfy the debt (valid). The SC applied this distinction.

• Civil Code, Art. 1231 — Lists 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. 2088 — Prohibits the creditor from appropriating the things given by way of pledge or mortgage (source of pactum commissorium prohibition).
• Civil Code, Art. 1226 & 2226 — Cited regarding the validity of liquidated damages.