Title
Ruby Shelter Builders and Realty Development Corporation vs. Romeo Y. Tan, Roberto L. Obiedo and Atty. Tomas A. Reyes
Case
G.R. No. 217368
Decision Date
Aug 5, 2024
Ruby Shelter Builders contested the validity of deeds of absolute sale executed as dacion en pago for its obligation. The Supreme Court upheld the CA's ruling, affirming the novation of mortgage and dismissal of the annulment complaint.
mortgage
real estate
dacion en pago

Case Summary (G.R. No. 217368)

Factual Background

Ruby Shelter obtained a loan secured by real estate mortgages over five parcels of land bearing TCT Nos. 29918, 38374, 38376, 39225 and 39232 in Concepcion Pequena, Naga City. As of March 2005, the outstanding obligation totalled PHP 95,700,620.00. To obtain an extension, the parties executed a Memorandum of Agreement (MOA) dated March 17, 2005. The MOA recited a condonation of interest, penalties and surcharges totaling PHP 74,678,647.00 for October 1, 2004 to December 31, 2005. It provided that Ruby Shelter would execute Deeds of Absolute Sale, uniformly dated January 2, 2006, over the mortgaged properties by way of dacion en pago and set out schedules for redemption by lot. The MOA contained a redemption clause, a provision allowing the notarization and registration of the deeds in case of nonpayment, a clause imposing liquidated damages of not less than PHP 10,000,000.00 if Ruby Shelter contested the transactions, and an alternative provision under which a payment of PHP 5,000,000.00 would constitute full payment.

Transaction and Immediate Events

Pursuant to the MOA, Ruby Shelter executed separate Deeds of Absolute Sale dated January 3, 2006 in favor of Tan and Obiedo. On December 27, 2005, Ruby Shelter, through Sia, informed Tan and Obiedo of its intention to redeem the properties and requested discussions regarding the computation of interest, penalties and surcharges. The parties met several times but failed to agree on the final computation. Ruby Shelter alleged that Tan and Obiedo caused premature notarization of the deeds on January 3, 2006, and that the notarization falsely represented Sia’s presence or ratification. Tan and Obiedo and Atty. Reyes deny fraud and assert lawful execution and notarization.

Trial Court Proceedings

Ruby Shelter sued to annul the Deeds of Absolute Sale, asserting that they constituted an unlawful pactum commissorium. The RTC, in a Decision dated January 30, 2013, dismissed the complaint. The RTC held that the MOA effected an objective novation by means of dacion en pago and that the deeds constituted valid payment, extinguishing the mortgage obligation. The RTC initially ordered payment of PHP 5,000,000.00 pursuant to paragraph 8 of the MOA but, by Order dated April 25, 2013, modified its decision. The April 25 order affirmed the legality and validity of the MOA and the five Deeds of Absolute Sale, dismissed the complaint and claims for damages, and ordered Ruby Shelter and Ruben Sia to pay PHP 10,000,000.00 as liquidated damages, inclusive of costs and attorney’s fees.

Court of Appeals Proceedings

On appeal the Court of Appeals first rendered a Decision on October 20, 2014 that partially granted Ruby Shelter’s appeal. The CA declared the MOA partially void insofar as it effected automatic appropriation of the properties, annulled the five Deeds of Absolute Sale, and held Ruby Shelter liable for the principal obligation of PHP 95,700,620.00 plus PHP 74,678,647.00 as condoned interest and penalties, fixed interest rates, imposed liquidated damages of PHP 10,000,000.00 and joint liability of Sia, and directed foreclosure if the judgment was not paid within ninety days. Upon motions for reconsideration, the CA promulgated an Amended Decision dated February 18, 2015. The Amended Decision granted defendants’ motion for reconsideration, reversed the October 20, 2014 decision, and affirmed in toto the RTC Decision and April 25, 2013 Order.

Issues Presented

The parties framed the controversy principally as two issues: (a) whether the MOA and the attendant deeds novated the existing real estate mortgage by way of dacion en pago, thereby extinguishing Ruby Shelter’s obligation; and (b) whether the MOA or deeds are void for being a pactum commissorium because they purportedly permitted automatic appropriation of mortgaged property by the creditor upon default.

Parties’ Contentions

Ruby Shelter contends that the MOA merely modified the terms of payment and did not novate the original obligation; that the transaction amounted to a prohibited pactum commissorium enabling the creditor to acquire ownership without foreclosure; that condoned interest was already included in the principal; that respondents’ possession of the properties negated accrual of legal interest; and that the liquidated damages clause is unconscionable and impairs access to court. Tan and Obiedo argue that the petition largely raises factual questions and should be dismissed under Rule 45; that the MOA effected an extinctive novation by dacion en pago; that acts of the parties demonstrate acceptance of the properties as full payment; that Ruby Shelter is estopped from assailing the sale; that the MOA treats principal and condoned interest as separate sums; and that the PHP 10,000,000.00 liquidated damages clause is valid under Articles 1226 and 2226 of the Civil Code.

Scope of Review and Preliminary Ruling

The Court reiterated that review under Rule 45 is confined to questions of law and that findings of fact by the courts below are generally conclusive. The Court listed established exceptional grounds permitting review of factual findings but found none sufficient to displace the factual findings of the courts a quo. Because Ruby Shelter’s main arguments rested on factual matters concerning contractual intent, the Court observed that de novo factual reexamination was inappropriate. Nevertheless, the Court addressed the substantive legal questions to bring finality to the controversy.

Novation and Dacion en Pago — Legal Principles

The Court surveyed the law on novation under Article 1231 of the Civil Code and its classifications: extinctive (total) and modificatory (partial). The Court explained that extinctive novation requires express intention to extinguish the old obligation and create a new one, while modificatory novation alters terms without destroying the principal obligation. The Court reviewed the law on dacion en pago under Article 1245, which treats dacion en pago as a special mode of payment governed by the law on sales and which, by agreement and consent, effects extinguishment of the obligation to the extent agreed.

Application of Novation and Dacion en Pago to the MOA

The Court analyzed the MOA as comprising three operative agreements: (1) condonation of interest, penalties and surcharges for a specified period; (2) a period until December 31, 2005 to pay the modified obligation, in whole or by lot; and (3) the sale of the mortgaged properties to the creditors upon failure to pay. The Court held that the first option produced a modificatory novation since it merely altered the terms of the existing debt. The second option, however, contemplated the creditor’s acceptance of the properties as equivalent to payment. The Court concluded that when Ruby Shelter executed the Deeds of Absolute Sale and the parties manifested consent that such deeds would be effective upon failure to satisfy the modified obligation, the transaction constituted a valid dacion en pago and an objective or extinctive novation as to the lots so sold. The Court found that the sale was perfected because consent, a definite object and price equivalent to the debt were present. The Court relied on the MOA as a whole, the contemporaneous Board Resolution authorizing Sia to negotiate and offer dacion en pago, and the parties’ conduct in giving effect to the MOA.

Distinction from Precedent and Rebuttal of Ruby Shelter’s Reliance

The Court considered Ruby Shelter’s reliance on Spouses Ong v. Roban Lending Corporation and Rockville Excel International Exim Corporation v. Spouses Culla, which had found purported dation arrangements to be equitable mortgages or void for pactum commissorium where extensions negated intent to effect sale. The Court distinguished those cases. It held that the extension in the present MOA pertained to the modified obligation and did not negate an intention to treat the deeds as payment if default occurred. The Court emphasized contract construction rules, including Article 1374, and concluded that the MOA must be read in its entirety to give effect to all stipulations.

Pactum Commissorium — Legal Principles

The Court reviewed the doctrine of pactum commissorium and Article 2088 of the Civil Code, which prohibits the creditor from appropriating or disposing of pledged or mortgaged things and voids stipulations to the contrary. The Court reiterated that pactum commissorium targets automatic appropriation of mortgaged property without foreclosure and protects mortgagors from coercive forfeiture. The Court surveyed leading jurisprudence distinguishing illegal automatic appropriation from valid transactions in which the mortgagor validly conveys ownership to the creditor by separate sale or by mutual agreement of dacion en pago.

Application to the Present Case — No Pactum Commissorium

The Court concluded that the MOA and deeds did not constitute pactum commissorium. The Court explained that pactum commissorium applies where a mortgagee is empowered to appropriate the security upon default without further formalities. By contrast, a mutual agreement whereby the debtor sells the mortgaged property to the creditor as payment falls within the permissible scope of Article 1245. Here, the parties executed Deeds of Absolute Sale; Ruby Shelter volunt

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