Ong v. Roban Lending Corporation
REITERATIONFacts
The Antecedents: Petitioners-spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong obtained several loans from respondent Roban Lending Corporation totaling ₱4,000,000.00, secured by a real estate mortgage. On February 12, 2001, they executed an Amendment to Amended Real Estate Mortgage consolidating their loans, including charges, to ₱5,916,117.50. On the same date, they executed a Dacion in Payment Agreement assigning the mortgaged properties to respondent in settlement of their obligation, and a Memorandum of Agreement (MOA) stipulating that failure to pay the consolidated debt within one year would result in the enforcement of the Dacion in Payment. The loans had uniform promissory notes with 3.5% monthly interest, 5% monthly penalty, and 25% attorney's fees, plus other exactions denominated as "EVAT/AR." Procedural History: Petitioners filed a complaint before the RTC of Tarlac City, seeking the declaration of the mortgage contract as abandoned, annulment of deeds, illegal exaction, unjust enrichment, accounting, and damages, alleging that the MOA and Dacion in Payment Agreement constituted pactum commissorium. Respondent maintained the legality of the transactions, arguing that the MOA and Dacion in Payment novated the mortgage and that dacion en pago is a lawful special form of payment. After several postponements, the RTC, finding no pactum commissorium based on the pleadings, dismissed the complaint via summary judgment. The Court of Appeals affirmed the RTC's decision, considering the trial court's error in nomenclature as mere semantics. Petitioners' motion for reconsideration was denied. The Petition: Petitioners filed a Petition for Review on Certiorari, faulting the Court of Appeals for failing to apply procedural requisites for summary judgment, not considering that trial was necessary due to disputed facts, failing to hold that the MOA and Dacion in Payment circumvented the law against pactum commissorium, and failing to declare the said agreements void for being contrary to law and public policy.
Issue(s)
Whether the Memorandum of Agreement and Dacion in Payment Agreement constitute pactum commissorium. Whether the interest rates, penalty fees, and attorney's fees are unconscionable and illegal. Whether a summary judgment or judgment on the pleadings was proper.
Ruling
The Supreme Court reversed and set aside the Court of Appeals decision. It declared the Memorandum of Agreement and the Dacion in Payment Agreement null and void for being pactum commissorium. The Court modified the loan terms by reducing the monthly interest rate to 12% per annum, the monthly penalty fee to 12% per annum of the amount due from the time of demand, and the attorney's fees to 25% of the principal amount only. The case was remanded to the court of origin for the purpose of receiving evidence on petitioners' prayer for accounting.
Ratio Decidendi
On whether the Memorandum of Agreement and Dacion in Payment Agreement constitute pactum commissorium: The Court held that both agreements constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code. The elements of pactum commissorium are (1) a property mortgaged by way of security, and (2) a stipulation for automatic appropriation by the creditor of the mortgaged property upon non-payment. In this case, the MOA and Dacion in Payment lacked provisions for foreclosure or redemption, and the failure of petitioners to pay within the one-year period gave respondent the right to automatically acquire ownership of the properties. The Court distinguished this from a true dacion en pago, where the assignment of property extinguishes the monetary debt; here, the alienation was by way of security, and the obligation was not extinguished, as evidenced by the execution of a new promissory note. The voluntary execution of the contracts does not validate pactum commissorium, as it is void for being prohibited by law. On whether the interest rates, penalty fees, and attorney's fees are unconscionable and illegal: The Court found the monthly interest rate of 3.5% (42% per annum) and the monthly penalty fee of 5% (60% per annum) to be unconscionable. Applying existing jurisprudence, the Court reduced the monthly interest rate to 12% per annum. The penalty fee was also reduced to a yearly rate of 12% of the amount due, to be computed from the time of demand. The attorney's fees of 25% of the principal, interests, and penalty fees were deemed unconscionable and reduced to 25% of the principal amount only. The Court noted that courts may reduce such charges if they are iniquitous or unconscionable. On whether a summary judgment or judgment on the pleadings was proper: The Court ruled that neither a summary judgment nor a judgment on the pleadings was proper. A summary judgment is permitted only if there is no genuine issue as to any material fact, which was not the case here, as petitioners' prayer for accounting required the presentation of evidence on partial payments. A judgment on the pleadings is proper only when the answer fails to tender an issue or admits the material allegations of the adverse party's pleadings. In this case, respondent's Answer disputed the claims of pactum commissorium, illegality of charges, and bad faith, thus tendering issues of fact that required trial. The trial court and the Court of Appeals erred in holding that a summary judgment was proper.
Main Doctrine
A stipulation in a mortgage contract that allows the creditor to automatically appropriate the mortgaged property upon the debtor's default, without foreclosure proceedings, constitutes pactum commissorium, which is null and void under Article 2088 of the Civil Code. Furthermore, interest rates and penalty fees that are iniquitous or unconscionable may be reduced by the courts.