G.R. No. 148163 - Banco Filipino Savings and Mortgage Bank vs. Ybanez

On June 4, 1979, Solid Homes executed in favor of State Financing Center, Inc. a Real Estate Mortgage to secure a loan of P10,000,000.00 on properties covered by TCT No. 9633 and TCT No. (492194)-11938.
A year later, an additional loan of P1,511,270.03 was obtained, prompting the execution of an Amendment to the original mortgage dated June 4, 1980, thereby increasing the secured loan to P11,511,270.03.
Further financing obtained in the sum of P1,499,811.97 led Solid Homes to execute another Amendment on March 5, 1982, raising the total secured obligation to P13,011,082.00.

Upon Solid Homes’ failure to settle its accrued obligations, State Financing initiated extrajudicial foreclosure by filing a petition on December 16, 1982, which led to the issuance of a Notice of Sheriff’s Sale (February 4, 1983) setting an auction date.
Before the public auction, Solid Homes induced State Financing to suspend the foreclosure process, resulting in the execution of a Memorandum of Agreement/Dacion en Pago on February 28, 1983.
Key terms of the Memorandum included:

Acknowledgment of the outstanding obligation amounting to P14,225,178.40, subject to a 14% interest and a 16% penalty per annum commencing March 1, 1983, due within 180 days.
A stipulation that if Solid Homes could pay 60% (P8,535,107.04) of the principal within the 180-day period, then the remaining debt could be restructured.
Conversely, if the stipulated payment was not met, the Memorandum would automatically operate as a dacion en pago, transferring the properties to State Financing, with the additional provision allowing Solid Homes a right to repurchase the properties within ten months after the 180-day period at an agreed price plus additional cost-of-money and registration and other incidental expenses.

Solid Homes’ failure to pay the mandated 60% of the obligation resulted in the automatic conversion of the Memorandum into an instrument of dacion en pago.
State Financing registered the Memorandum with the Register of Deeds in Pasig on September 15, 1983.
The Register of Deeds subsequently cancelled the original titles (TCT No. 9633 and TCT No. (492194)-11938) and issued new Transfer Certificates of Title in the name of State Financing, albeit without annotating the repurchase right and its period.

Following the title transfer, State Financing informed Solid Homes by letter (October 11, 1983) of the change of ownership and demanded the turnover of possession of the V.V. Soliven Towers II Building.
Solid Homes, contesting the validity of the dacion en pago and the effect of the registration, responded in subsequent communications (October 14 and October 24, 1983) asserting that the arrangement violated Article 2088 of the Civil Code.
Further negotiations occurred, including an attempt by Solid Homes (April 30, 1984) to propose new repayment schemes and a subsequent counter-proposal by State Financing (May 17, 1984), culminating in reiterated positions and additional demands (June 7, 1984) regarding the exercise of the repurchase right.

The Regional Trial Court (RTC) ruled that the Memorandum of Agreement/Dacion en Pago was valid, characterizing it as a true sale with a right of repurchase rather than an equitable mortgage.
The RTC ordered remedial measures including:

Cancellation of the improperly annotated titles in Solid Homes’ name and reissuance with the correct annotation of the repurchase right.
Granting Solid Homes a thirty-day period from finality to exercise the repurchase right by paying the agreed price plus cost-of-money at 30% per annum (reflecting the interest and penalty stipulated) and appropriate registration and incidental fees.
Imposition of the turnover of the properties’ possession to State Financing if Solid Homes did not exercise its repurchase right.

Appeals were filed by both parties with Solid Homes challenging the exclusion of damages and certain computations of the redemption price, and State Financing contesting the immediate turnover order.

The Court of Appeals largely affirmed the RTC’s ruling, with modifications regarding the expenses included in the redemption price.
Solid Homes’ claim for damages based on the alleged bad faith in failing to annotate its repurchase right was rejected, as evidence showed that State Financing had engaged in further negotiations which negated any presumption of malice.
State Financing’s contention regarding the immediate turnover and the computation of interest was partly upheld, with the caveat that certain registration expenses (pertaining to the issuance of new titles) be excluded from the redemption price.

Whether the failure to annotate the vendor’s (Solid Homes’) right to repurchase on the titles constitutes retroactive evidence of malice or bad faith that would entitle Solid Homes to damages.
Whether the agreed redemption price—which includes the sale price of P14,225,178.40 plus a cost-of-money computed at 30% per annum along with additional fees and taxes—contravenes Article 1616 of the Civil Code.
Whether the registration process (cancellation of Solid Homes’ titles and issuance of new ones in the name of State Financing) complied with the legal requirements, particularly with respect to proper annotation and the resulting effects under Article 1607 of the Civil Code.
Whether the immediate turnover of possession of the properties to State Financing, as ordered by the lower courts, was proper and consistent with the principles applicable to a sale with pacto de retro.