Title
A. Francisco Realty and Development Corp. vs. Court of Appeals
Case
G.R. No. 125055
Decision Date
Oct 30, 1998
Petitioner registered property sale after respondents defaulted on loan interest, but SC voided transfer as pactum commissorium, affirming RTC jurisdiction over ownership claims.
unlawful detainer
possessory action
accion publiciana
A

Case Summary (G.R. No. 111858)

The Loans and the Security Arrangements

Petitioner granted respondents a loan of P7.5 Million. In consideration thereof, respondents executed a promissory note dated November 27, 1991 providing for interest at four percent (4%) per month for six months, and a deed of mortgage over realty covered by TCT No. 58748, together with its improvements. Respondents also executed an undated deed of sale of the mortgaged property in favor of petitioner. Under the payment scheme, interest was payable in installments, with half of the agreed total interest amount (P900,000.00) payable in advance through a deduction from the loan proceeds, and the balance payable monthly by means of post-dated checks dated March 27, April 27, and May 27, 1992. The promissory note contained an express clause that upon failure of the mortgagor to pay interest without prior arrangement with the mortgagee, “full possession of the property will be transferred and the deed of sale will be registered.” To enable registration, respondents delivered the duplicate owner’s copy of TCT No. 58748 to petitioner.

Petitioner alleged that respondents failed to pay interest as agreed, and petitioner therefore registered the deed of sale on February 21, 1992. As a result, TCT No. 58748 was cancelled and TCT No. PT-85569 was issued in petitioner’s name.

Subsequently, respondents obtained an additional loan of P2.5 Million from petitioner on March 13, 1992, for which they executed another promissory note stating payment due on April 27, 1992, with interest at four percent (4%) a month until fully paid. That second promissory note also contained a stipulation that if the note and/or the earlier P7.5 Million promissory note remained unpaid and/or unsettled, petitioner could demand that respondents vacate voluntarily and allow petitioner to appropriate and occupy the real property located at 56 Dragonfly, Valle Verde VI, Pasig, Metro Manila for exclusive use.

Petitioner’s Demand and the Filing of the Possession Action

After registering the deed of sale in its favor, petitioner demanded possession of the mortgaged realty and payment of four percent (4%) monthly interest from May 1992, plus surcharges. When respondents refused to vacate, petitioner filed an action for possession before the Regional Trial Court of Pasig City.

Respondents’ Answer and Counterclaim

In their answer, respondents admitted liability on the loan but denied that the execution of the undated deed of sale was intended to be a transfer of ownership upon default. They asserted that the deed of sale was executed merely as an additional security for the loan. They further claimed that they were not notified of the registration of the sale and contended that interest had in fact been paid even after registration.

As an alternative defense, respondents argued that petitioner’s pleading was actually a complaint for ejectment, specifically unlawful detainer, and that the trial court therefore lacked jurisdiction because such actions were exclusively cognizable by the Metropolitan or Municipal Trial Courts. In their counterclaim, respondents sought the cancellation of TCT No. PT-85569 held by petitioner and the issuance of a new title evidencing their ownership of the property.

Proceedings in the Trial Court

On December 19, 1992, the Regional Trial Court rendered judgment declaring petitioner’s ownership over the property under TCT No. 85569. The trial court ordered respondents to cease and desist from further acts of dispossession or from withholding possession from petitioner. The trial court denied petitioner’s claim for damages, including attorneys’ fees, for lack of competent proof. The trial court’s disposition therefore treated petitioner’s claimed ownership and right to possession as valid consequences of the transaction and registration.

Appellate Review: Jurisdiction and the Nature of the Stipulations

Respondents appealed to the Court of Appeals. The Court of Appeals reversed the trial court in toto and dismissed the complaint. It held first that the Regional Trial Court had no jurisdiction because the action was in essence for unlawful detainer, which fell within the exclusive jurisdiction of municipal trial courts. It reasoned that the case fit within the framework of Rule 70 of the Rules of Court on unlawful detainer, which covers withholding of possession by a person who is entitled to possession after the expiration or termination of the right to possess by virtue of a contract, express or implied.

Second, the Court of Appeals ruled that even assuming jurisdiction, petitioner’s action could not succeed because the deed of sale relied upon was void as a pactum commissorium prohibited by Article 2088 of the Civil Code. It affirmed that the contractual arrangements operated as an automatic conveyance of the property to the creditor upon default, without foreclosure.

Petitioner moved for reconsideration, but the Court of Appeals denied the motion on May 7, 1996. Petitioner then elevated the case by petition for review on certiorari, placing in issue the trial court’s jurisdiction and the validity of the stipulations.

Issue One: Whether the Regional Trial Court Lacked Jurisdiction

On the jurisdictional question, the Court held that the Court of Appeals erred in characterizing the complaint as a simple unlawful detainer case. The Court explained that the essential distinction in ejectment actions turns on the nature of the question presented. Unlawful detainer is limited to the question of possession de facto. It is a summary process intended to protect actual possession or the right to possession and is not designed to determine title. The Court emphasized that inferior courts may resolve ownership questions raised by a defendant only to the extent necessary to decide possession, and such resolution is not conclusive.

The Court then examined petitioner’s allegations in both the original and amended complaints. It found that petitioner raised matters beyond possession, including the validity of the transfer of ownership to petitioner and the contractual consequences of respondents’ alleged defaults, including (a) respondents’ alleged continuing liability for interest and surcharges and (b) a further claimed obligation involving P400,000.00 a month from the time of demand to vacate as monthly rental, tied to respondents’ failure to pay such amounts. The Court underscored that petitioner’s own pleading expressly alleged that the mortgage was to be converted into a deed of absolute sale by executing the deed of sale upon failure to pay interest, that the deed and title duplicate were delivered for that purpose, and that after registration petitioner demanded surrender of possession.

The Court also addressed the effect of respondents’ counterclaim. It ruled that the counterclaim challenging title was not merely a collateral attack. It reiterated that a counterclaim is deemed a complaint, meaning that jurisdiction rules applicable to independent actions apply to it as well. Accordingly, the Court concluded that the case was not a matter that could be confined to a purely summary determination of possession de facto. Because the issues necessarily required adjudication of the parties’ contractual rights affecting ownership, liability, and the validity of the instruments, the trial court had jurisdiction over the controversy as framed.

Issue Two: Whether the Stipulations Constituted Pactum Commissorium

On the merits, the Court affirmed the appellate court’s conclusion that the stipulations were void as pactum commissorium under Article 2088.

The Court explained the governing principle. Article 2088 prohibits the creditor from appropriating the things given by way of pledge or mortgage, or disposing of them, by any stipulation to the contrary being null and void. The Court clarified the petitioner’s theory and rejected it. Petitioner maintained that Article 2088 applies only where the mortgage deed itself contains the prohibited automatic conveyance clause. The Court held that accepting petitioner’s theory would subvert the prohibition in Article 2088. It reasoned that pactum commissorium may exist notwithstanding how parties attempt to distribute the stipulations among instruments, if the transaction as embodied effectively provides for automatic appropriation upon default.

To demonstrate the sufficiency of the elements, the Court relied on prior rulings holding that agreements resulting in automatic appropriation upon default are void under Article 2088. It cited the Court’s discussion in Nakpil v. Intermediate Appellate Court, where even absent an express deed of mortgage, the arrangement was construed as tantamount to pactum commissorium because it carried the elements of a creditor-debtor relationship, use of property as security, and automatic appropriation upon default. It further referenced the Court’s consistent stance that where a contract purports to be a sale with the onerous

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