G.R. No. 160408 - Spouses Pen vs. Spouses Julian

On April 9, 1986, Santos and Linda Julian obtained a ₱60,000 loan from Adelaida Pen; on May 23 and May 27, 1986, they received additional loans of ₱50,000 and ₱10,000 respectively, evidenced by two promissory notes bearing 6% monthly interest and with initial interests deducted upfront (₱3,600; ₱2,400; ₱600).
As security, the Julians executed a real estate mortgage over TCT No. 327733 on May 23, 1986, and delivered the owner’s duplicate to the Pens.

Upon default, instead of foreclosing, the Pens and Linda Julian agreed on an in-kind settlement: an ocular inspection valued the property at ₱70,000; on October 22, 1986, a two-page Deed of Sale (initially blank as to date and consideration) was signed by Linda Julian; the Pens paid capital gains and real property taxes; TCT No. 364880 was issued July 17, 1987, and reconstituted as RT-45272 on July 9, 1994 following a registry fire.
The Julians offered to repurchase the property in July 1989, February 1990, and June 28, 1990, agreeing on ₱436,115 with a ₱100,000 deposit applied to the loan balance; as of October 15, 1997, their unpaid obligation totaled ₱319,065.

The Julians claim they were coerced into signing an undated, unfilled “Absolute Deed of Sale” concurrently with the mortgage; they paid a total of ₱115,400 (last ₱100,000 on June 28, 1990); subsequent offers to pay in December 1992 were rebuffed; they discovered the title transfer in early 1993, filed an Affidavit of Adverse Claim, and demanded reconveyance on August 12, 1994.
On September 8, 1994, they sued for cancellation of sale and title, recovery of possession, and damages; the RTC (Aug. 30, 1999) declared the October 22, 1986 Deed of Sale void for lack of consideration, canceled TCT RT-45272, ordered reconveyance, and required the Julians to pay ₱319,065 plus legal interest, without prejudice to the Pens’ right to foreclose.

The Court of Appeals affirmed with modification: voided the sale, canceled TCT RT-45272, ordered reconveyance, and directed the Julians to pay the unpaid balance of ₱43,492.15 (as of June 28, 1990) with 12% per annum compensatory interest from that date until full payment, preserving the Pens’ foreclosure right.
It held the sale void as a prohibited pactum commissorium (deed executed with the mortgage and blanks to be filled upon default) and ruled that monetary interest could not be imposed absent a written stipulation in the promissory notes.

Whether the Court of Appeals erred in declaring the October 22, 1986 Deed of Sale void.
Whether the Court of Appeals erred in ruling that no monetary interest was due and instead imposing compensatory interest.