Spouses Pen vs. Spouses Julian

A deed of sale executed simultaneously with a real estate mortgage, where the deed is left blank as to consideration and date to be filled upon the debtor's default, constitutes a prohibited pactum commissorium under Article 2088 of the Civil Code, rendering the sale void and inexistent. Monetary interest cannot be imposed unless expressly stipulated in writing pursuant to Article 1956 of the Civil Code, but compensatory interest may be imposed as damages for delay at the prevailing legal rate.

The respondents, Spouses Santos and Linda Julian, obtained several loans from petitioner Adelaida Pen, secured by a real estate mortgage over their property covered by TCT No. 327733. The loans were evidenced by promissory notes charging interest at 6% per month, with the initial interests deducted from the loan proceeds. The parties' transaction involved both a real estate mortgage and an alleged deed of sale over the same property, the true nature of which became the central dispute in the case.

On April 9, 1986, the respondents obtained a P60,000.00 loan from petitioner Adelaida Pen, followed by additional loans of P50,000.00 on May 23, 1986 and P10,000.00 on May 27, 1986. The initial interests were deducted from each loan, and two promissory notes were executed charging interest at 6% per month. As security, the respondents executed a Real Estate Mortgage over their property covered by TCT No. 327733 on May 23, 1986, and the owner's duplicate of the title was delivered to the petitioners.

According to the petitioners' version, when the loans became due and demandable, the respondents failed to pay despite several demands. Petitioner Adelaida decided to institute foreclosure proceedings but was prevailed upon by respondent Linda not to foreclose, who instead offered the mortgaged property as payment in kind. After an ocular inspection, the parties agreed to value the property at P70,000.00. On October 22, 1986, respondent Linda executed a two-page Deed of Sale. Petitioner Adelaida then paid the capital gains tax and real property tax, and title was transferred to the petitioners through TCT No. 364880 issued on July 17, 1987. A reconstituted title was issued on July 9, 1994 after the Quezon City Register of Deeds was burned.

The petitioners alleged that in July 1989, respondent Linda offered to repurchase the property at P436,115.00 payable in cash on July 31, 1989, but failed to do so. Similar offers were made in February 1990 and June 28, 1990, with respondent Linda offering P100,000.00 as a sign of good faith. The offer was rejected, but the amount was later deducted from the respondents' indebtedness, leaving an unpaid balance of P319,065.00 as of October 15, 1997.

The respondents, on the other hand, averred that at the time the mortgage was executed, they were required by petitioner Adelaida to sign a one-page document purportedly an "Absolute Deed of Sale" that was undated, unfilled, and unnotarized, containing no consideration. They alleged total payments of P115,400.00, with their last payment of P100,000.00 on June 28, 1990. In December 1992, respondent Linda offered to pay P150,000.00, but petitioner Adelaida refused and demanded P250,000.00. Upon verification with the Registry of Deeds, the respondents discovered that the title had already been registered in petitioner Adelaida's name under TCT No. 364880, with the transfer entered on July 17, 1987. They also discovered a notarized two-page Deed of Sale indicating a consideration of P70,000.00, made to appear as executed on October 22, 1986, notarized by Atty. Cesar Ching. The respondents filed an Affidavit of Adverse Claim in January 1993 and formally demanded reconveyance on August 12, 1994, but the petitioners refused, prompting the filing of the complaint on September 8, 1994.

The RTC found that the respondents had not agreed on the consideration for the sale at the time they signed the deed of sale, rendering the sale void for lack of an essential requisite. The CA, however, pronounced the deed of sale void as a pactum commissorium, finding that the deed was executed simultaneously with the real estate mortgage, was blank as to consideration and date, and that the details would be filled upon the respondents' default.

• Validity of the Deed of Sale: Petitioners argued that their transaction with the respondents was a valid dacion en pago, highlighting that it was respondent Linda who had offered to sell her property upon her default, and that the parties agreed the deed of sale would not yet contain the date and consideration because they had still to agree on the price.
• Monetary Interest: Petitioners contended that the CA erred in ruling that no monetary interest was due for respondent Linda's use of petitioner Adelaida's money, given the loans extended and the interest rates agreed upon.

• Fraudulent Transfer: Respondents alleged that petitioner Adelaida, through obvious bad faith, maliciously typed, unilaterally filled up, and caused to be notarized the Deed of Sale earlier signed by respondent Julian, using this spurious deed of sale as the vehicle for her fraudulent transfer of the property to herself.
• Lack of Consideration: Respondents maintained that the deed of sale was undated, unfilled, and unnotarized, and did not contain any consideration at the time they signed it, thus lacking an essential requisite of a valid contract.

• Validity of the Deed of Sale: Whether the Court of Appeals erred in ruling against the validity of the deed of sale as a pactum commissorium.
• Monetary Interest: Whether the Court of Appeals erred in ruling that no monetary interest was due for respondent Linda's use of petitioner Adelaida's money.

• Validity of the Deed of Sale: No. The deed of sale was properly declared void as a pactum commissorium under Article 2088 of the Civil Code, which prohibits the creditor from appropriating the things given by way of pledge or mortgage. All elements of pactum commissorium were present: there was a mortgage wherein property was mortgaged as security, and there was a stipulation for automatic appropriation by the creditor upon non-payment, implied from the signing of the blank deed of sale simultaneously with the mortgage.
• Monetary Interest: No. Monetary interest cannot be imposed absent an express written stipulation pursuant to Article 1956 of the Civil Code. However, compensatory interest at the legal rate was properly imposed as damages for delay, with the rate modified to 6% per annum from July 1, 2013 pursuant to Nacar vs. Gallery Frames.

• Validity of the Deed of Sale: The Court explained that Article 2088 of the Civil Code prohibits the creditor from appropriating the things given by way of pledge or mortgage, or from disposing of them, and any stipulation to the contrary is null and void. The elements for pactum commissorium to exist are: (a) that there should be a pledge or mortgage wherein property is pledged or mortgaged by way of security for the payment of the principal obligation; and (b) 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 first element was present as the property was mortgaged as security. As to the second, the authorization for Adelaida to appropriate the property upon Linda's default was implied from Linda's having signed the blank deed of sale simultaneously with her signing of the real estate mortgage. The haste with which the transfer was made upon default, and the eventual transfer in a manner not in the form of a valid dacion en pago, confirmed the nature of the transaction as a pactum commissorium. The Court also rejected the petitioners' theory of dacion en pago, noting that for a valid dacion en pago, the alienation of the property must fully extinguish the debt, yet the respondents' debt subsisted despite the transfer. The Court further noted that the absence of the consideration from Linda's copy of the deed of sale was credible proof of the lack of an essential requisite for the sale, as the meeting of the minds of the parties did not transpire. Even assuming Linda's leaving the consideration blank implied authority to fill it in upon default, the conclusion that the deed was a pactum commissorium still holds.
• Monetary Interest: The Court distinguished between monetary interest, which is the compensation fixed by the parties for the use or forbearance of money, and compensatory interest, which may be imposed by law or by the courts as penalty or indemnity for damages. Pursuant to Article 1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated in writing. Two requirements must be present for monetary interest to be imposed: (a) that there has been an express stipulation for the payment of interest; and (b) that the agreement for the payment of interest has been reduced in writing. Considering that the promissory notes contained no stipulation on the payment of monetary interest, monetary interest cannot be validly imposed. The CA properly imposed compensatory interest to offset the delay in the respondents' performance of their obligation. However, the rate was modified: from the time of demand on October 13, 1994 until June 30, 2013, the legal rate was 12% per annum conformably with Eastern Shipping Lines; and from July 1, 2013 until full payment, the legal interest is 6% per annum following Nacar vs. Gallery Frames, which recognized Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796 dated May 16, 2013 lowering the legal rate of interest.

• Pactum Commissorium — Under Article 2088 of the Civil Code, the creditor is prohibited from appropriating the things given by way of pledge or mortgage, or from disposing of them; any stipulation to the contrary is null and void. The elements are: (a) that there should be a pledge or mortgage wherein property is pledged or mortgaged by way of security for the payment of the principal obligation; and (b) 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. In this case, the signing of a blank deed of sale simultaneously with the real estate mortgage, with the details to be filled upon default, constituted an implied stipulation for automatic appropriation, rendering the sale void.
• Dacion en Pago — Dacion en pago is in the nature of a sale because property is alienated in favor of the creditor in satisfaction of a debt in money. For a valid dacion en pago to transpire, the following elements must be established: (a) the existence of a money obligation; (b) the alienation to the creditor of a property by the debtor with the consent of the former; and (c) the satisfaction of the money obligation of the debtor. The alienation of the property must fully extinguish the debt. In this case, the respondents' debt subsisted despite the transfer, negating a valid dacion en pago.
• Monetary Interest vs. Compensatory Interest — Monetary interest is the compensation fixed by the parties for the use or forbearance of money, while compensatory interest may be imposed by law or by the courts as penalty or indemnity for damages. Pursuant to Article 1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated in writing. Two requirements must be present for monetary interest to be imposed: (a) that there has been an express stipulation for the payment of interest; and (b) that the agreement for the payment of interest has been reduced in writing. Compensatory interest may be imposed as damages for delay in the performance of an obligation.

• "Article 2088 of the Civil Code prohibits the creditor from appropriating the things given by way of pledge or mortgage, or from disposing of them; any stipulation to the contrary is null and void." — This passage states the controlling statutory prohibition against pactum commissorium, forming the basis for declaring the deed of sale void.
• "The elements for pactum commissorium to exist are as follows, to wit: (a) that there should be a pledge or mortgage wherein property is pledged or mortgaged by way of security for the payment of the principal obligation; and (b) 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 provides the canonical two-element test for pactum commissorium, which the Court applied to the facts of the case.
• "Pursuant to Article 1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated in writing. In order for monetary interest to be imposed, therefore, two requirements must be present, specifically: (a) that there has been an express stipulation for the payment of interest; and (b) that the agreement for the payment of interest has been reduced in writing." — This passage articulates the requirements for imposing monetary interest, which the Court applied to delete the monetary interest imposed by the lower courts.

• A. Francisco Realty and Development Corp. vs. Court of Appeals, G.R. No. 125055, October 30, 1998, 298 SCRA 349 — Cited as the source of the elements of pactum commissorium, which the Court applied to the facts of the case.
• Moreno, Jr. vs. Private Management Office, G.R. No. 159373, November 16, 2006, 507 SCRA 63 — Cited for the discussion on the perfection of contracts, requiring that the minds of the parties meet at every point, with nothing left open for further arrangement.
• Dao Heng Bank, Inc. (now Banco de Oro Universal Bank) vs. Laigo, G.R. No. 173856, November 20, 2008, 571 SCRA 434 — Cited for the definition of dacion en pago as a sale where property is alienated in favor of the creditor in satisfaction of a debt in money.
• Rockville Excel International Exim Corporation vs. Culla, G.R. No. 155716, October 2, 2009, 602 SCRA 128 — Cited for the elements of a valid dacion en pago, which the Court applied to reject the petitioners' theory.
• Siga-an vs. Villanueva, G.R. No. 173227, January 20, 2009, 576 SCRA 696 — Cited for the distinction between monetary interest and compensatory interest, and the requirements for imposing monetary interest.
• Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78 — Cited as the basis for the 12% per annum legal rate of interest imposed from the time of demand until June 30, 2013.
• Nacar vs. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439 — Cited as the basis for the 6% per annum legal rate of interest from July 1, 2013, recognizing Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796.
• Bernales vs. Heirs of Julian Sambaan, G.R. No. 163271, January 15, 2010, 610 SCRA 90 — Cited for the principle that factual findings of the CA should be respected and accorded great weight, and even finality when supported by substantial evidence on record.
• Castillo vs. Court of Appeals, G.R. No. 106472, August 7, 1996, 260 SCRA 374 — Cited for the principle that the Court should not disturb the CA's conclusions in the absence of a clear showing of abuse, arbitrariness, or capriciousness.
• Starbright Sales Enterprises, Inc. vs. Philippine Realty Corporation, G.R. No. 177936, January 18, 2012, 663 SCRA 326 — Cited for the rule that in a sale, the contract is perfected at the moment when the seller obligates herself to deliver and to transfer ownership of a thing or right to the buyer for a price certain.

• Article 2088, Civil Code — Prohibits the creditor from appropriating the things given by way of pledge or mortgage, or from disposing of them; any stipulation to the contrary is null and void. Applied to declare the deed of sale void as a pactum commissorium.
• Article 1318, Civil Code — Provides the requisites for any contract to be valid: (a) the consent of the contracting parties; (b) the object; and (c) the consideration. Applied to find that the absence of consideration in the deed of sale indicated lack of an essential requisite.
• Article 1305, Civil Code — Defines a contract as a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. Cited in relation to the perfection of contracts.
• Article 1956, Civil Code — Provides that no interest shall be due unless it has been expressly stipulated in writing. Applied to delete the monetary interest imposed by the lower courts, as the promissory notes contained no stipulation on the payment of monetary interest.

• Chief Justice Maria Lourdes P.A. Sereno
• Associate Justice Teresita J. Leonardo-de Castro
• Associate Justice Jose Portugal Perez
• Associate Justice Estela M. Perlas-Bernabe