Pen v. Julian
REITERATIONFacts
1. The Antecedents: The respondents, Spouses Santos and Linda Julian, obtained several loans from petitioner Adelaida Pen, totaling P120,000.00, with a stipulated monthly interest of 6%. As security for these loans, the respondents executed a Real Estate Mortgage over their property. The petitioners allege that the respondents failed to pay the loans when due, and instead of foreclosing, Adelaida Pen accepted the mortgaged property in payment in kind, valued at P70,000.00, through a Deed of Sale executed on October 22, 1986. Subsequently, the property was transferred to the petitioners' names. The respondents, however, claim they were made to sign a blank, undated, and unnotarized Absolute Deed of Sale at the time of the mortgage, and that their total payments amounted to P115,400.00. They discovered the property had been transferred to Adelaida Pen's name in July 1987 and filed an adverse claim in January 1993. 2. Procedural History: The respondents filed a civil complaint on September 8, 1994, seeking the cancellation of the sale and title, recovery of possession, and damages, alleging the Deed of Sale was unilaterally filled up and notarized in bad faith by Adelaida Pen. The Regional Trial Court (RTC), Branch 77, Quezon City, ruled in favor of the respondents, declaring the Deed of Sale void due to lack of essential requisites (consideration) and finding the action imprescriptible. The RTC ordered the reconveyance of the property and payment of the outstanding balance by the respondents. The petitioners appealed this decision. The Court of Appeals (CA), in its decision promulgated on October 20, 2003, affirmed the RTC's declaration that the Deed of Sale was void, but on different grounds: it was a prohibited pactum commissorium because the deed was executed simultaneously with the mortgage and was blank as to consideration and date, to be filled upon default. The CA also modified the monetary award, deleting monetary interest due to lack of written stipulation and imposing compensatory interest. 3. The Petition: The petitioners, Spouses Roberto and Adelaida Pen, seek reversal of the CA's decision through a petition for review on certiorari. They raise two main issues: (1) whether the CA erred in ruling against the validity of the deed of sale, and (2) whether the CA erred in ruling that no monetary interest was due for the respondents' use of the money. The petitioners argue that the transaction was a valid dacion en pago. The Supreme Court, while acknowledging that factual issues are generally not reviewed, found merit in addressing the legal questions. The Court affirmed the CA's conclusion that the deed of sale was void, adopting the CA's reasoning that the transaction constituted pactum commissorium. The Court also agreed with the CA that monetary interest was not due due to the absence of a written stipulation, but modified the imposition of compensatory interest to reflect prevailing jurisprudence on legal interest rates.
Issue(s)
Whether the Court of Appeals erred in ruling against the validity of the deed of sale, specifically whether the transaction constituted a prohibited pactum commissorium or a valid dacion en pago. Whether the Court of Appeals erred in ruling that no monetary interest was due for the use of money, and the propriety of imposing compensatory interest.
Ruling
The Supreme Court affirmed the Court of Appeals' decision declaring the Deed of Sale void, but modified the award of interest. The Court held that the transaction constituted a prohibited pactum commissorium. The outstanding obligation shall earn legal interest of 12% per annum from October 13, 1994, until June 30, 2013, and 6% per annum from July 1, 2013, until full payment.
Ratio Decidendi
On the validity of the deed of sale: The Court affirmed the CA's ruling that the deed of sale was void, adopting the CA's justification that the transaction constituted a prohibited pactum commissorium. Article 2088 of the Civil Code explicitly prohibits a creditor from appropriating pledged or mortgaged property. The elements of pactum commissorium are: (a) a pledge or mortgage securing an obligation, and (b) a stipulation for automatic appropriation by the creditor upon default. Both elements were present, as the property was mortgaged, and the simultaneous execution of a blank deed of sale implied an agreement for automatic appropriation upon default. The CA's finding that the deed of sale was executed simultaneously with the mortgage, with its completion conditioned on non-payment, was a factual determination that the Court would not disturb absent arbitrariness. Furthermore, the transaction could not be considered a valid dacion en pago because the debt was not extinguished by the transfer of the property, as required for such a mode of payment. The absence of a certain consideration in the deed of sale, as evidenced by the respondents' copy, indicated a lack of meeting of the minds on an essential element of a contract of sale, thus preventing its perfection. On the issue of monetary interest: The Court affirmed the CA's deletion of monetary interest. Article 1956 of the Civil Code requires an express written stipulation for the payment of interest. Since the promissory notes did not contain any such stipulation, monetary interest could not be validly imposed. The Court reiterated that interest as compensation for the use of money (monetary interest) requires a written agreement, while interest as damages for delay (compensatory interest) may be imposed by law or courts. The CA correctly imposed compensatory interest to address the respondents' delay in fulfilling their obligation.
Main Doctrine
A deed of sale executed simultaneously with a real estate mortgage, with the consideration left blank and to be filled upon default, constitutes a prohibited pactum commissorium, rendering the sale void. Monetary interest cannot be imposed without express written stipulation, but compensatory interest may be awarded as damages for delay.