Case Digest: Spouses Pen v Spouses Julian, GR No. 160408, January 11, 2016

Commercial Law | Pactum Commissorium

Facts: 

• Sps. Santos and Linda Julian (Appellees) obtain several loans from Appellant Adelaida Pen. 
1. April 9, 1986 = P60,000 loan
2. May 23, 1986 = P50,000 loan
3. May 27, 1986 = P10,000 loan 
• The initial interests were deducted: 
1. P3,600 from P60,000 loan; 
2. P2,400 from P50,000 loan; 
3. P600 from P10,000 loan.
• Two promissory notes were executed to evidence the loans: 
• Dated April 9, 1986 (due June 15, 1986) for P60,000; 
• Dated May 22, 1986 (due July 22, 1986) for P50,000.
• Both loans were charged interest at 6% per month. 
• On May 23, 1986, the appellees executed a Real Estate Mortgage over their property registered under the name of appellee Santos Julian, Jr.

Sps. Pen (Appellant Ver)

• Appellant claims that appellees failed to pay when the loans became due and demandable despite demand.
• Adelaida decided to institute foreclosure proceedings.
• She claimed that Linda persuade her not to foreclose the property because of the cost of litigation and embarrassment of the proceedings.
• Instead, appellee Linda offered their mortgaged property as payment in kind valued at P70,000.00. 
• On Oct 22, 1986, appellee executed a Deed of Sale.
• Pen paid the capital gains tax and the required real property tax. 
• On July 17, 1987, title to the property was transferred to the appellants.
• On July 1989, appellants allege that Linda offered to repurchase the property to which they agreed at the repurchase price of P436,115.00 payable in cash on July 31, 1989. 
• The appellees failed to repurchase on the agreed date. 
• On February 1990, appellees again offered to repurchase the property for the same amount, but they still failed to repurchase. 
• On June 28, 1990, another offer was made to repurchase the property for the same amount. 
• Linda offered to pay P100,000.00 in cash as sign of good faith. 
• The offer was rejected by appellant Adelaida. 
• Adelaida held the money only for safekeeping upon the pleading of Linda. 
• Upon agreement, the P100,000.00 was deducted from the balance of the appellees' indebtedness.
• As of October 15, 1997, their unpaid balance amounted to P319,065.00. 

Sps. Julian (Appellee Ver)

• Appellees claim that at the time the mortgage was executed, they were required by Adelaida to sign a document purportedly an "Absolute Deed of Salem."
• It did not contain any consideration, and was "undated, unfilled and unnotarized". 
• They allege that their total payments amounted to P115,400.00, their last payment was on June 28, 1990 in the amount of P100,000.00.
• In December 1992, Linda Julian offered to pay Adelaida the amount of P150,000.00. 
•  Adelaida refused to accept the offer and demanded that she be paid the amount of P250,000.00. 
• Unable to meet the demand, Linda desisted from the offer.
• Linda requested that she be shown the land title conveyed but Adelaida refused. 
• Upon verification with the Registry of Deeds of Quezon City, Linda was informed that the title to the mortgaged property had already been registered in the name of appellee Adelaida on July 17, 1987
• On January 1993, appellee filed an Affidavit of Adverse Claim. 
• Appellees discovered Declarations of Real Property and a Deed of Sale notarized by Atty. Cesar Ching.
• The Deed of Sale dated October 22, 1986 indicates P70,000 consideration.
• On September 8, 1994, appellees filed a suit for the Cancellation of Sale, Cancellation of Title issued to the appellants; Recovery of Possession; Damages with Prayer for Preliminary Injunction. 
• The complaint alleged that Adelaida, through obvious bad faith, maliciously typed, unilaterally filled up, and caused to be notarized the Deed of Sale earlier signed by appellee Julian, and used this spurious deed of sale as the vehicle for her fraudulent transfer unto herself the parcel of land.

• RTC: Ruled in favor of the Sps. Julian.
• Declared the Deed of Sale void and ordered reconveyance of property.
• CA: Affirmed the RTC but modified interest rate to 12% per annum from June 28, 1990, on unpaid balance of P43,492.15.
• Pronounced the deed of sale as void but not because of the supposed lack of consideration as the RTC had indicated, but because of the deed of sale having been executed at the same time as the real estate mortgage, which rendered the sale as a prohibited pactum commissorium in light of the fact that the deed of sale was blank as to the consideration and the date, which details would be filled out upon the default by the respondents.

Issues: 

• Whether the CA erred in ruling against the validity of the deed of sale. NO
• Whether the CA erred in ruling that no monetary interest was due for Linda's use of Adelaida's money. NO

Held:

The appeal is partly meritorious.

That the petitioners are raising factual issues about the true nature of their transaction with the respondent is already of itself, sufficient reason to forthwith deny due course to the petition for review on certiorari. They cannot ignore that any appeal to the Court is limited to questions of law because the Court is not a trier of facts. As such, the factual findings of the CA should be respected and accorded great weight, and even finality when supported by the substantial evidence on record.  Moreover, in view of the unanimity between the RTC and the CA on the deed of sale being void, varying only in their justifications, the Court affirms the CA, and adopts its conclusions on the invalidity of the deed of sale.

Nonetheless, We will take the occasion to explain why we concur with the CA's justification in discrediting the deed of sale between the parties as pactum commissorium.

Article 2088 of the Civil Code prohibits the creditor from appropriating the things given by way of pledge or mortgage, or from disposing of them; any stipulation to the contrary is null and void.

 The elements for pactum commissorium to exist are as follows, to wit: 

1. that there should be a pledge or mortgage wherein property is pledged or mortgaged by way of security for the payment of the principal obligation; and
2. that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period.

The first element was present considering that the property of the respondents was mortgaged by Linda in favor of Adelaida as security for the former's indebtedness. 

As to the second, the authorization for Adelaida to appropriate the property subject of the mortgage upon Linda's default was implied from Linda's having signed the blank deed of sale simultaneously with her signing of the real estate mortgage.

The haste with which the transfer of property was made upon the default by Linda on her obligation, and the eventual transfer of the property in a manner not in the form of a valid dacion en pago ultimately confirmed the nature of the transaction as a pactum commissorium.

It is notable that in reaching its conclusion that Linda's deed of sale had been executed simultaneously with the real estate mortgage, the CA first compared the unfilled deed of sale presented by Linda with the notarized deed of sale adduced by Adelaida. The CA justly deduced that the completion and execution of the deed of sale had been conditioned on the non-payment of the debt by Linda, and reasonably pronounced that such circumstances rendered the transaction pactum commissorium. The Court should not disturb or undo the CA's conclusion in the absence of the clear showing of abuse, arbitrariness or capriciousness on the part of the CA.

The petitioners have theorized that their transaction with the respondents was a valid dacion en pago by highlighting that it was Linda who had offered to sell her property upon her default. Their theory cannot stand scrutiny. 

Dacion en pago is in the nature of a sale because property is alienated in favor of the creditor in satisfaction of a debt in money.

For a valid dacion en pago to transpire, however, the attendance of the following elements must be established, namely: 

1. the existence of a money obligation;
2. the alienation to the creditor of a property by the debtor with the consent of the former; and
3. the satisfaction of the money obligation of the debtor.

To have a valid dacion en pago, therefore, the alienation of the property must fully extinguish the debt. Yet, the debt of the respondents subsisted despite the transfer of the property in favor of Adelaida.

The petitioners insist that the parties agreed that the deed of sale would not yet contain the date and the consideration because they had still to agree on the price. Their insistence is not supported by the established circumstances. It appears that two days after the loan fell due on October 15, 1986, Linda offered to sell the mortgaged property; hence, the parties made the ocular inspection of the premises on October 18, 1986. By that time, Adelaida had already become aware that the appraiser had valued the property at P70,000.00. If that was so, there was no plausible reason for still leaving the consideration on the deed of sale blank if the deed was drafted by Adelaida on October 20, 1986, especially considering that they could have conveniently communicated with each other in the meanwhile on this significant aspect of their transaction. It was also improbable for Adelaida to still hand the unfilled deed of sale to Linda as her copy if, after all, the deed of sale would be eventually notarized on October 22, 1986.

According to Article 1318 of the Civil Code, the requisites for any contract to be valid are, namely:

1. the consent of the contracting parties; 
2. the object; and
3. the consideration. 

There is a perfection of a contract when there is a meeting of the minds of the parties on each of these requisites. The following passage has fittingly discussed the process of perfection in Moreno, Jr. v. Private Management Office: 

To reach that moment of perfection, the parties must agree on the same thing in the same sense, so that their minds meet as to all the terms. They must have a distinct intention common to both and without doubt or difference; until all understand alike, there can be no assent, and therefore no contract. The minds of parties must meet at every point; nothing can be left open for further arrangement. So long as there is any uncertainty or indefiniteness, or future negotiations or considerations to be had between the parties, there is not a completed contract, and in fact, there is no contract at all. 

In a sale, the contract is perfected at the moment when the seller obligates herself to deliver and to transfer ownership of a thing or right to the buyer for a price certain, as to which the latter agrees. The absence of the consideration from Linda's copy of the deed of sale was credible proof of the lack of an essential requisite for the sale. In other words, the meeting of the minds of the parties so vital in the perfection of the contract of sale did not transpire. And, even assuming that Linda's leaving the consideration blank implied the authority of Adelaida to fill in that essential detail in the deed of sale upon Linda's default on the loan, the conclusion of the CA that the deed of sale was a pactum commisorium still holds, for, as earlier mentioned, all the elements of pactum commisorium were present.

Anent interest, the CA deleted the imposition of monetary interest but decreed compensatory interest of 12% per annum.

Interest that is the compensation fixed by the parties for the use or forbearance of money is referred to as monetary interest. On the other hand, interest that may be imposed by law or by the courts as penalty or indemnity for damages is called compensatory interest. In other words, the right to recover interest arises only either by virtue of a contract or as damages for delay or failure to pay the principal loan on which the interest is demanded. 

The CA correctly deleted the monetary interest from the judgment. Pursuant to Article 1956 of the Civil Code, no interest shall be due unless it has been expressly stipulated in writing. In order for monetary interest to be imposed, therefore, two requirements must be present, specifically:

1. that there has been an express stipulation for the payment of interest; and
2. that the agreement for the payment of interest has been reduced in writing.

Considering that the promissory notes contained no stipulation on the payment of monetary interest, monetary interest cannot be validly imposed.

The CA properly imposed compensatory interest to offset the delay in the respondents' performance of their obligation. Nonetheless, the imposition of the legal rate of interest should be modified to conform to the prevailing jurisprudence. The rate of 12% per annum imposed by the CA was the rate set in accordance with Eastern Shipping Lines, Inc., v. Court of Appeals.

In the meanwhile, Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796 dated May 16, 2013, amending Section 2 of Circular No. 905, Series of 1982, and Circular No. 799, Series of 2013, has lowered to 6% per annum the legal rate of interest for a loan or forbearance of money, goods or credit starting July 1, 2013. This revision is expressly recognized in Nacar v. Gallery Frames. It should be noted, however, that imposition of the legal rate of interest at 6% per annum is prospective in application.

Accordingly, the legal rate of interest on the outstanding obligation of P43,492.15 as of June 28, 1990, as the CA found, should be as follows:

1. from the time of demand on October 13, 1994 until June 30, 2013, the legal rate of interest was 12% per annum conformably with Eastern Shipping Lines; and
2. following Nacar, from July 1, 2013 until full payment, the legal interest is 6% per annum.

WHEREFORE, the Court AFFIRMS the decision promulgated on October 20, 2003 subject to the MODIFICATION that the amount of P43,492.15 due from the respondents shall earn legal interest of 12% per annum reckoned from October 13, 1994 until June 30, 2013, and 6% per annum from July 1, 2013 until full payment.

Without pronouncement on costs of suit.