G.R. No. L-8720 - Reyes vs. Nebrija

Plaintiffs sought to compel the defendants to execute a deed of conveyance of a parcel of land pursuant to the stipulated agreement.
Plaintiffs additionally claimed damages in the amount of P5,000.

The cause of action was based on a mortgage agreement that provided for a future conveyance of the land.
Specific Covenant:

The mortgage stated, “That the conditions of this mortgage are that if I Eduvigis Hernandez or any heirs cannot redeem this mortgage in the same amount plus twelve (12%) per cent per annum interest, this [amount] shall be considered as full payment of this parcel of land without further action in Court, within two (2) years from that date of the contract.”
Interpretation of the covenant meant that upon failure to redeem within the agreed period, the land would automatically and without judicial process pass to the mortgagee.

They argued that the agreement was null and void.
The amounts claimed by the plaintiffs were alleged to represent usurious interests.
Counterclaim: Defendants sought damages of P5,000 and demanded that the plaintiffs return the palay and any amounts unduly paid as partial payment of the principal obligation.

Plaintiffs traversed the special defenses and counterclaim set up by the defendants.

On December 1, 1954, both parties, through counsel, submitted a stipulation of facts.
They agreed to submit their pleadings and respective exhibits as evidence.
The court rendered judgment on the pleadings based on this stipulation.

The decision held that the agreement on which the plaintiffs based their rights was null and void.
Reason: The covenant constituted a pactum commissorium, as it automatically transferred title to the mortgagee upon the mortgagor’s failure to redeem.
Legal Basis:

The covenant contravened Articles 1859 and 1884 of the old Civil Code.
Previous jurisprudence, notably Tan Chun Tic vs. West Coast Life Insurance Co. and Locsin, had similarly condemned such stipulations.

The case was dismissed with costs against the plaintiffs.
Plaintiffs were advised that their claim could only be pursued as ordinary mortgage creditors under section 7, Rule 87 of the Rules of Court.

Plaintiffs attempted to differentiate the present case from other cases with similar issues.
They maintained that in previous cases the mortgagee was granted authority to take over the property and dispose of it, which they argued did not occur in the present agreement.
The court rejected this distinction, noting that the covenant clearly stipulated an automatic transfer “without further action in Court,” characterizing it as a pactum commissorium.

Whether the clause providing that failure to redeem the mortgage within the stipulated period automatically constitutes full payment (i.e., a transfer of ownership) constitutes a pactum commissorium.
Whether this clause is void as contrary to law, morals, and public policy.

Whether the case cited, such as Tan Chun Tic vs. West Coast Life Insurance Co. and Locsin, properly controls the present case.
Whether the arguments put forward to differentiate the case from those decisions have any merit.

The issue of whether the usurious interest claim raised by the defendants, and their counterclaim for damages, could override or validate the covenant in question.