Case Summary (G.R. No. 172592)
Key Dates
Loans: July 14, 1999 to March 20, 2000.
Amendment / Dacion / MOA executed: February 12, 2001.
Complaint filed: April 2002.
Trial court decision (RTC Branch 64, Tarlac City): April 21, 2004.
Court of Appeals decision: November 30, 2005.
Applicable Law
Primary constitutional basis: 1987 Philippine Constitution (applicable because the decision postdates 1990).
Relevant statutory and doctrinal authorities cited: Civil Code Articles 1245 (dacion en pago), 1409 and 2088 (prohibition of pactum commissorium), Articles 1229 and 2227 (on interest, penalties and unconscionability), Rules of Court (Rule 35 §3 on summary judgment; Rule 34 §1 on judgment on the pleadings), and controlling jurisprudence cited in the record (including Development Bank of the Philippines v. Court of Appeals, Solid Homes, Inc. v. Court of Appeals, United Coconut Planters Bank v. Beluso, Poltan v. BPI Family Savings Bank, Inc., Radiowealth Finance Co., Inc. v. International Corporate Bank, Titan Construction Corporation v. Uni-Field Enterprises, Inc., and Lumayag v. Heirs of Jacinto Nemeño).
Procedural History
Petitioners sued in the Regional Trial Court for declaration that the real estate mortgage and its amendments were abandoned and void, that the MOA and the Dacion in Payment were void as pactum commissorium, and for accounting and damages, alleging unconscionable and illegal interest, penalties, attorney’s fees and other charges. The RTC rendered what it described as judgment on the pleadings but effectively entered summary judgment dismissing the complaint. The Court of Appeals affirmed, treating the error in nomenclature as immaterial. Petitioners sought review by this Court.
Issues Presented
(1) Whether the Memorandum of Agreement and the Dacion in Payment constitute pactum commissorium and are therefore void;
(2) Whether the Dacion in Payment was a valid dacion en pago (a true payment) or merely a security device;
(3) Whether the contractual interest, penalty and attorney’s fees provisions are unconscionable and subject to judicial reduction; and
(4) Whether summary disposition was proper given the factual disputes (notably the petitioners’ claim of partial payments and resulting entitlement to an accounting).
Elements and Legal Standard on Pactum Commissorium
Article 2088 of the Civil Code forbids a stipulation allowing the creditor to appropriate the thing given as pledge or mortgage; such pactum commissorium is void. The elements of pactum commissorium are (1) property mortgaged as security for a principal obligation, and (2) a stipulation that the creditor will automatically appropriate the mortgaged property upon nonpayment without foreclosure or redemption procedures. Pactum commissorium cannot be validated simply by voluntary execution if it contravenes the law.
Application to the MOA and Dacion in Payment — Pactum Commissorium Found
The MOA and the Dacion in Payment, read together, permitted respondent to acquire ownership of the mortgaged properties automatically upon petitioners’ failure to pay within the one-year period provided by the MOA; neither instrument provided for foreclosure proceedings nor redemption. The Dacion did not operate as a true payment extinguishing the obligation because the MOA required petitioners to execute a promissory note for P5,916,117.50 payable within one year. Thus the assignment of the properties functioned as security coupled with an automatic appropriation clause — the very characteristics of pactum commissorium condemned by Article 2088. The Court distinguished prior authorities (e.g., Solid Homes) where the issue of pactum commissorium was not present.
Dacion en Pago vs. Security by Alienation
Under Article 1245, a true dacion en pago is an agreement by which the debtor transfers property to the creditor in payment of an obligation, thereby extinguishing the debt. Here, the parties’ contemporaneous MOA expressly preserved a monetary obligation (new promissory note) rather than extinguishing it. Consequently, the so-called Dacion in Payment was a device to secure payment with an automatic appropriation contingency, not a bona fide dacion en pago.
Unconscionable Interest, Penalties and Attorney’s Fees — Judicial Reduction
The Court found the contractual finance charges unconscionable under applicable Civil Code provisions and controlling jurisprudence and reduced them as follows: (a) the contractual monthly interest of 3.5% (42% per annum) was reduced to 12% per annum; (b) the contractual monthly penalty of 5% (60% per annum), assessed on the total amount due and demandable and compounded monthly, was reduced to a yearly rate of 12% of the amount due, to be computed from time of demand; and (c) attorney’s fees stipulated at 25% of the principal, interest and penalties were reduced to 25% of the principal amount
...continue readingCase Syllabus (G.R. No. 172592)
Title, Citation, and Court
- Reported as 579 Phil. 769; Second Division; G.R. No. 172592; Decision dated July 09, 2008.
- Decision authored by Justice Carpio Morales; concurring justices: Quisumbing (Chairperson), Tinga, Velasco, Jr., and Brion.
- Parties: Spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong as petitioners; Roban Lending Corporation as respondent.
Factual Background — Loan Transactions and Security
- From July 14, 1999 to March 20, 2000, petitioners obtained several loans from respondent aggregating P4,000,000.00.
- The loans were secured by a real estate mortgage on petitioners' parcels of land in Binauganan, Tarlac City, covered by Transfer Certificate of Title No. 297840.
- On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real Estate Mortgage consolidating loans and charges, totaling P5,916,117.50.
- On the same date, the parties executed a Dacion in Payment Agreement wherein petitioners assigned the properties covered by TCT No. 297840 to respondent in settlement of their total obligation (as recited in the document).
- Also on February 12, 2001, the parties executed a Memorandum of Agreement (MOA) which:
- Stated that the parties agreed to consolidate and restructure past-due and delinquent loans, totaling P5,916,117.50.
- Stated that petitioners (the “SECOND PARTY”) would sign another promissory note for P5,916,117.50 and promised to pay in full within one year from consolidation and restructuring.
- Stipulated that if petitioners failed to pay within the year, the Dacion in Payment executed the same day would be enforced (language indicating enforcement of the Dacion if the promissory note was not paid).
Plaintiffs’ Complaint: Causes of Action and Allegations
- Petitioners filed a Complaint in April 2002 (Civil Case No. 9322, RTC, Tarlac City) seeking:
- Declaration that the real estate mortgage contract and its amendments were abandoned, annulling deeds.
- Declaration that the Memorandum of Agreement and Dacion in Payment were void for being pactum commissorium.
- Declaration that interests, penalties, EVAT/AR charges, and attorney’s fees assessed and loaded into plaintiffs’ loan accounts were unjust, iniquitous, unconscionable, illegal and thus to be stricken out.
- An accounting of plaintiffs’ loan accounts to determine the true balances against legal charges only.
- Damages and other equitable reliefs (including moral damages not less than P100,000; exemplary damages P50,000; attorney’s fees P50,000 plus P1,000 appearance fee per hearing; and costs of suit).
- Petitioners alleged:
- The original promissory notes carried 3.5% monthly interest (42% per annum), 5% monthly penalty on the total amount due and demandable, and 25% attorney’s fees thereon.
- Respondent also exacted sums denominated “EVAT/AR.”
- The additional charges were “illegal, iniquitous, unconscionable, and revolting to the conscience,” allegedly making survival on default unlikely.
- They had previously made payments, but because of alleged illegal exactions the total balance seemed not to move, hence a need for accounting.
Respondent’s Answer and Counterclaim: Position and Defenses
- Respondent maintained the legality of its transactions and argued:
- If the MOA and Dacion in Payment novated the Real Estate Mortgage, the pactum commissorium allegation would have no legal basis.
- The Dacion in Payment is lawful and valid and recognized under Article 1245 of the Civil Code as a special form of payment whereby a debtor alienates property to a creditor in satisfaction of a monetary obligation.
- The accumulated interest and other charges computed for more than two years were reasonable and valid in view of the principal loan of P4,000,000; if plaintiffs could not pay, the fault was attributed to them.
- Respondent disputed petitioners’ claims of illegality of agreements, unconscionability of extra charges, and allegations of bad faith.
Pre-Trial and Trial Court Proceedings — Scheduling and Procedural Orders
- After pre-trial, the initial hearing, originally set December 11, 2002, was reset several times as parties pursued settlement efforts.
- On May 7, 2003, the RTC issued an order resetting the initial hearing to June 18, 2003 because plaintiff Wilfredo Ong was absent attending to a sick relative; plaintiff’s counsel indicated intention to seek summary judgment if the witness could not be presented.
- The June 18, 2003 setting was eventually rescheduled to February 11, 2004; counsel agreed to reset to April 14, 2004, with directions to be ready with memoranda and exhibits to support positions “which should be the basis for the judgment on the pleadings if the parties fail to settle.”
- At the April 14, 2004 hearing, both counsels appeared but only respondent’s counsel filed a memorandum.
Trial Court Decision (RTC Branch 64, April 21, 2004)
- The RTC, “finding on the basis of the pleadings that there was no pactum commissorium,” dismissed the complaint.
- The RTC’s decision was described in the record as rendering judgment on the pleadings though it was characterized by the Court of Appeals as a summary judgment.
Court of Appeals Ruling (Decision of November 30, 2005)
- The Court of Appeals noted the RTC’s usage of the term “judgment on the pleadings” but clarified that what the RTC actually rendered was a summary judgment.
- The CA explained the distinction: a judgment on the pleadings is proper only when an answer fails to tender an issue or admits the material allegations; summary judgment is proper