G.R. No.

150197 July 28, 2005

PRUDENTIAL BANK, Petitioner,

vs.
DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.

DECISION

Tinga, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner
Prudential Bank seeks the reversal of the Decision1 of the Court of Appeals dated 27 September
2001 in CA-G.R. CV No. 59543 affirming the Decision of the Regional Trial Court (RTC) of Pasig
City, Branch 160, in favor of respondents.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of
land in San Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the
Register of Deeds of Rizal. On 10 July 1975, they executed a deed of real estate mortgage in favor
of petitioner Prudential Bank to secure the payment of a loan worth P250,000.00.2 This mortgage
was annotated at the back of TCT No. 438157. On 4 August 1975, respondents executed the
corresponding promissory note, PN BD#75/C-252, covering the said loan, which provides that the
loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2% service charge, and
that the note is secured by a real estate mortgage as aforementioned.3 Significantly, the real estate
mortgage contained the following clause:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained
from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective
of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00)
Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether
direct or indirect, principal or secondary as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the
Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on
the back of this document, and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .4

On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345

for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a "hold-out"
on the mortgagor’s foreign currency savings account with the bank under Account No. 129, and that
the mortgagor’s passbook is to be surrendered to the bank until the amount secured by the "hold-
out" is settled.5

On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the
husband and wife were President and Chairman of the Board and Vice President,6 respectively, PN
BD#76/C-430 covering P545,000.000. As provided in the note, the loan is secured by "Clean-Phase
out TOD CA 3923," which means that the temporary overdraft incurred by Donalco Trading, Inc. with
petitioner is to be converted into an ordinary loan in compliance with a Central Bank circular directing
the discontinuance of overdrafts.7
On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a
straight loan of P545,000.00, the proceeds of which shall be used to liquidate the outstanding loan
of P545,000.00 TOD. The letter likewise mentioned that the securities for the loan were the deed of
assignment on two promissory notes executed by Bancom Realty Corporation with Deed of
Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and
transportation equipment.8

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of

G.B. Alviar Realty and Development, Inc. and for the release of the real estate mortgage for
the P450,000.00 loan covering the two (2) lots located at Vam Buren and Madison Streets, North
Greenhills, San Juan, Metro Manila. The payment was acknowledged by petitioner who accordingly
released the mortgage over the two properties.9

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the
property covered by TCT No. 438157. Per petitioner’s computation, respondents had the total
obligation of P1,608,256.68, covering the three (3) promissory notes, to wit: PN BD#75/C-252
for P250,000.00, PN BD#76/C-345 for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus
assessed past due interests and penalty charges. The public auction sale of the mortgaged property
was set on 15 January 1980.10

Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary
injunction with the RTC of Pasig,11 claiming that they have paid their principal loan secured by the
mortgaged property, and thus the mortgage should not be foreclosed. For its part, petitioner averred
that the payment of P2,000,000.00 made on 6 March 1979 was not a payment made by
respondents, but by G.B. Alviar Realty and Development Inc., which has a separate loan with the
bank secured by a separate mortgage.12

On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with
the extra-judicial foreclosure.13 Respondents sought reconsideration of the decision.14 On 24 August
1994, the trial court issued an Order setting aside its earlier decision and awarded attorney’s fees to
respondents.15 It found that only the P250,000.00 loan is secured by the mortgage on the land
covered by TCT No. 438157. On the other hand, the P382,680.83 loan is secured by the foreign
currency deposit account of Don A. Alviar, while the P545,000.00 obligation was an unsecured loan,
being a mere conversion of the temporary overdraft of Donalco Trading, Inc. in compliance with a
Central Bank circular. According to the trial court, the "blanket mortgage clause" relied upon by
petitioner applies only to future loans obtained by the mortgagors, and not by parties other than the
said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers
thereof.

On appeal to the Court of Appeals, petitioner made the following assignment of errors:

I. The trial court erred in holding that the real estate mortgage covers only the promissory note
BD#75/C-252 for the sum of P250,000.00.

II. The trial court erred in holding that the promissory note BD#76/C-345 for P2,640,000.00
(P382,680.83 outstanding principal balance) is not covered by the real estate mortgage by
expressed agreement.

III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is not covered
by the real estate mortgage.

IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.
V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees attorney’s
fees for P20,000.00.16

The Court of Appeals affirmed the Order of the trial court but deleted the award of attorney’s fees.17 It
ruled that while a continuing loan or credit accommodation based on only one security or mortgage
is a common practice in financial and commercial institutions, such agreement must be clear and
unequivocal. In the instant case, the parties executed different promissory notes agreeing to a
particular security for each loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale
of the property for the three loans is improper.18

The Court of Appeals, however, found that respondents have not yet paid the P250,000.00 covered
by PN BD#75/C-252 since the payment of P2,000,000.00 adverted to by respondents was issued for
the obligations of G.B. Alviar Realty and Development, Inc.19

Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the Court
of Appeals as grounds herein.

Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause" in the real estate
mortgage expressly covers not only the P250,000.00 under PN BD#75/C-252, but also the two other
promissory notes included in the application for extrajudicial foreclosure of real estate
mortgage.20 Thus, it claims that it acted within the terms of the mortgage contract when it filed its
petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies on the cases of Lim
Julian v. Lutero,21 Tad-Y v. Philippine National Bank,22 Quimson v. Philippine National Bank,23 C & C
Commercial v. Philippine National Bank,24 Mojica v. Court of Appeals,25 and China Banking
Corporation v. Court of Appeals,26 all of which upheld the validity of mortgage contracts securing
future advancements.

Anent the Court of Appeals’ conclusion that the parties did not intend to include PN BD#76/C-345 in
the real estate mortgage because the same was specifically secured by a foreign currency deposit
account, petitioner states that there is no law or rule which prohibits an obligation from being
covered by more than one security.27Besides, respondents even continued to withdraw from the
same foreign currency account even while the promissory note was still outstanding, strengthening
the belief that it was the real estate mortgage that principally secured all of respondents’ promissory
notes.28 As for PN BD#76/C-345, which the Court of Appeals found to be exclusively secured by the
Clean-Phase out TOD 3923, petitioner posits that such security is not exclusive, as the "dragnet
clause" of the real estate mortgage covers all the obligations of the respondents.29

Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of
stating that the promissory notes were executed by them not in their personal capacity but as
corporate officers. It claims that PN BD#76/C-430 was in fact for home construction and personal
consumption of respondents. Thus, it states that there is a need to pierce the veil of corporate
fiction.30

Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge
and understanding of the "dragnet clause," being highly educated individuals, seasoned
businesspersons, and political personalities.31 There was no oppressive use of superior bargaining
power in the execution of the promissory notes and the real estate mortgage.32

For their part, respondents claim that the "dragnet clause" cannot be applied to the subsequent
loans extended to Don Alviar and Donalco Trading, Inc. since these loans are covered by separate
promissory notes that expressly provide for a different form of security.33 They reiterate the holding of
the trial court that the "blanket mortgage clause" would apply only to loans obtained jointly by
respondents, and not to loans obtained by other parties.34Respondents also place a premium on the
finding of the lower courts that the real estate mortgage clause is a contract of adhesion and must be
strictly construed against petitioner bank.35

The instant case thus poses the following issues pertaining to: (i) the validity of the "blanket
mortgage clause" or the "dragnet clause"; (ii) the coverage of the "blanket mortgage clause"; and
consequently, (iii) the propriety of seeking foreclosure of the mortgaged property for the non-
payment of the three loans.

At this point, it is important to note that one of the loans sought to be included in the "blanket
mortgage clause" was obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C-430
was executed by respondents on behalf of Donalco Trading, Inc. and not in their personal capacity.
Petitioner asks the Court to pierce the veil of corporate fiction and hold respondents liable even for
obligations they incurred for the corporation. The mortgage contract states that the mortgage covers
"as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including
interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect,
principal or secondary." Well-settled is the rule that a corporation has a personality separate and
distinct from that of its officers and stockholders. Officers of a corporation are not personally liable
for their acts as such officers unless it is shown that they have exceeded their authority.36 However,
the legal fiction that a corporation has a personality separate and distinct from stockholders and
members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues.37 PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the
respondents, is not within the contemplation of the "blanket mortgage clause." Moreover, petitioner is
unable to show that respondents are hiding behind the corporate structure to evade payment of their
obligations. Save for the notation in the promissory note that the loan was for house construction
and personal consumption, there is no proof showing that the loan was indeed for respondents’
personal consumption. Besides, petitioner agreed to the terms of the promissory note. If
respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of
long standing that it is, should have insisted that the note be made in the name of respondents
themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity
and not as officers of the corporation.

Now on the main issues.

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one
which is specifically phrased to subsume all debts of past or future origins. Such clauses are
"carefully scrutinized and strictly construed."38 Mortgages of this character enable the parties to
provide continuous dealings, the nature or extent of which may not be known or anticipated at the
time, and they avoid the expense and inconvenience of executing a new security on each new
transaction.39 A "dragnet clause" operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to execute additional security documents,
thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et
cetera.40 Indeed, it has been settled in a long line of decisions that mortgages given to secure future
advancements are valid and legal contracts,41 and the amounts named as consideration in said
contracts do not limit the amount for which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and other indebtedness can be gathered.42

The "blanket mortgage clause" in the instant case states:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained
from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective
of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00)
Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor
and/or DEBTOR, including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books
and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage
unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . .
.43 (Emphasis supplied.)

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real
estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit
facilities and advancements that may be obtained by the respondents. The terms of the above
provision being clear and unambiguous, there is neither need nor excuse to construe it otherwise.

The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket mortgage
clauses," are of a different factual milieu from the instant case. There, the subsequent loans were
not covered by any security other than that for the mortgage deeds which uniformly contained the
"dragnet clause."

In the case at bar, the subsequent loans obtained by respondents were secured by other securities,
thus: PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency
savings account, while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was
secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of assignment on two
promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U.
Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. The
matter of PN BD#76/C-430 has already been discussed. Thus, the critical issue is whether the
"blanket mortgage" clause applies even to subsequent advancements for which other securities
were intended, or particularly, to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One school
advocates that a "dragnet clause" so worded as to be broad enough to cover all other debts in
addition to the one specifically secured will be construed to cover a different debt, although such
other debt is secured by another mortgage.44The contrary thinking maintains that a mortgage with
such a clause will not secure a note that expresses on its face that it is otherwise secured as to its
entirety, at least to anything other than a deficiency after exhausting the security specified
therein,45 such deficiency being an indebtedness within the meaning of the mortgage, in the absence
of a special contract excluding it from the arrangement.46

The latter school represents the better position. The parties having conformed to the "blanket
mortgage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an
implied understanding that subsequent loans need not be secured by other securities, as the
subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the first
security is a corollary component of the "dragnet clause." But of course, there is no prohibition, as in
the mortgage contract in issue, against contractually requiring other securities for the subsequent
loans. Thus, when the mortgagor takes another loan for which another security was given it could
not be inferred that such loan was made in reliance solely on the original security with the "dragnet
clause," but rather, on the new security given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court in the cited case made an
inquiry whether the second loan was made in reliance on the original security containing a "dragnet
clause." Accordingly, finding a different security was taken for the second loan no intent that the
parties relied on the security of the first loan could be inferred, so it was held. The rationale involved,
the court said, was that the "dragnet clause" in the first security instrument constituted a continuing
offer by the borrower to secure further loans under the security of the first security instrument, and
that when the lender accepted a different security he did not accept the offer.47

In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to
the bank to provide the security of the mortgage for advances of and when they were made. Thus, it
was concluded that the "offer" was not accepted by the bank when a subsequent advance was
made because (1) the second note was secured by a chattel mortgage on certain vehicles, and the
clause therein stated that the note was secured by such chattel mortgage; (2) there was no
reference in the second note or chattel mortgage indicating a connection between the real estate
mortgage and the advance; (3) the mortgagor signed the real estate mortgage by her name alone,
whereas the second note and chattel mortgage were signed by the mortgagor doing business under
an assumed name; and (4) there was no allegation by the bank, and apparently no proof, that it
relied on the security of the real estate mortgage in making the advance.48

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a
contrary intention, a mortgage containing a "dragnet clause" will not be extended to cover future
advances unless the document evidencing the subsequent advance refers to the mortgage as
providing security therefor.49

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property
because of non-payment of all the three promissory notes. While the existence and validity of the
"dragnet clause" cannot be denied, there is a need to respect the existence of the other security
given for PN BD#76/C-345. The foreclosure of the mortgaged property should only be for
the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security
for the second promissory note. As held in one case, where deeds absolute in form were executed
to secure any and all kinds of indebtedness that might subsequently become due, a balance due on
a note, after exhausting the special security given for the payment of such note, was in the absence
of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the
giving of the special security.50 This is recognition that while the "dragnet clause" subsists, the
security specifically executed for subsequent loans must first be exhausted before the mortgaged
property can be resorted to.

One other crucial point. The mortgage contract, as well as the promissory notes subject of this case,
is a contract of adhesion, to which respondents’ only participation was the affixing of their signatures
or "adhesion" thereto.51 A contract of adhesion is one in which a party imposes a ready-made form of
contract which the other party may accept or reject, but which the latter cannot modify.52

The real estate mortgage in issue appears in a standard form, drafted and prepared solely by
petitioner, and which, according to jurisprudence must be strictly construed against the party
responsible for its preparation.53 If the parties intended that the "blanket mortgage clause" shall cover
subsequent advancement secured by separate securities, then the same should have been
indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum,
that is, construed against the party who caused the ambiguity which could have avoided it by the
exercise of a little more care.54 To be more emphatic, any ambiguity in a contract whose terms are
susceptible of different interpretations must be read against the party who drafted it,55 which is the
petitioner in this case.
Even the promissory notes in issue were made on standard forms prepared by petitioner, and as
such are likewise contracts of adhesion. Being of such nature, the same should be interpreted
strictly against petitioner and with even more reason since having been accomplished by
respondents in the presence of petitioner’s personnel and approved by its manager, they could not
have been unaware of the import and extent of such contracts.

Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that
respondents have not yet paid the P250,000.00, and gave no credence to their claim that they paid
the said amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property could still
be properly subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as
mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been
exhausted, subject of course to defenses which are available to respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No.
59543 is AFFIRMED.

Costs against petitioner.

SO ORDERED.

G.R. No. 125055 October 30, 1998

A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P.
JAVILLONAR, respondents.

MENDOZA, J.:

This is a petition for review on certiorari of the decision rendered on February 29, 1996 by the Court
of Appeals 1reversing, in toto, the decision of the Regional Trial Court of Pasig City in Civil Case No.
62290, as well as the appellate court's resolution of May 7, 1996 denying reconsideration.

Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private
respondents, the spouses Romulo and Erlinda Javillonar, in consideration of which the latter
executed the following documents: (a) a promissory note, dated November 27, 1991, stating an
interest charge of 4% per month for six months; (b) a deed of mortgage over realty covered by TCT
No. 58748, together with the improvements thereon; and (c) an undated deed of sale of the
mortgaged property in favor of the mortgagee, petitioner A. Francisco Realty. 2

The interest on the said loan was to be paid in four installments: half of the total amount agreed
upon (P900,000.00) to be paid in advance through a deduction from the proceeds of the loan, while
the balance to be paid monthly by means of checks post-dated March 27, April 27, and May 27,
1992. The promissory note expressly provided that upon "failure of the MORTGAGOR (private
respondents) to pay the interest without prior arrangement with the MORTGAGEE (petitioner), full
possession of the property will be transferred and the deed of sale will be registered. 3 For this
purpose, the owner's duplicate of TCT No. 58748 was delivered to petitioner A. Francisco Realty.
Petitioner claims that private respondents failed to pay the interest and, as a consequence, it
registered the sale of the land in its favor on February 21, 1992. As a result, TCT No. 58748 was
cancelled and in lieu thereof TCT No. PT-85569 was issued in the name of petitioner A. Francisco
Realty. 4

Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on
March 13, 1992 for which they signed a promissory note which reads:

PROMISSORY NOTE

For value received I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT

CORPORATION, the additional sum of Two Million Five Hundred Thousand Pesos
(P2,500,000.00) on or before April 27, 1992, with interest at the rate of four percent
(4%) a month until fully paid and if after the said date this note and/or the other
promissory note of P7.5 Million remains unpaid and/or unsettled, without any need
for prior demand or notification, I promise to vacate voluntarily and willfully and/or
allow A.FRANCISCO REALTY AND DEVELOPMENT CORPORATION to
appropriate and occupy for their exclusive use the real property located at 56
Dragonfly, Valle Verde VI, Pasig, Metro Manila. 5

Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly interest
from May 1992, plus surcharges. As respondent spouses refused to vacate, petitioner filed the
present action for possession before the Regional Trial Court in Pasig City. 6

In their answer, respondents admitted liability on the loan but alleged that it was not their intent to
sell the realty as the undated deed of sale was executed by them merely as an additional security for
the payment of their loan. Furthermore, they claimed that they were not notified of the registration of
the sale in favor of petitioner A. Francisco Realty and that there was no interest then unpaid as they
had in fact been paying interest even subsequent to the registration of the sale. As an alternative
defense, respondents contended that the complaint was actually for ejectment and, therefore, the
Regional Trial Court had no jurisdiction to try the case. As counterclaim, respondents sought the
cancellation of TCT No. PT-85569 as secured by petitioner and the issuance of a new title
evidencing their ownership of the property. 7

On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of
which reads as follows:

WHEREFORE, prescinding from the foregoing considerations, judgment is hereby

rendered declaring as legal and valid, the right of ownership of A. Francisco Realty
Find Development Corporation, over the property subject of this case and now
registered in its name as owner thereof, under TCT No. 85569 of the Register of
Deeds of Rizal, situated at No. 56 Dragonfly Street, Valle Verde VI, Pasig, Metro
Manila.

Consequently, defendants are hereby ordered to cease and desist from further
committing acts of dispossession or from withholding possession from plaintiff of the
said property as herein described and specified.

Claim for damages in all its forms, however, including attorney's fees, are hereby
denied, no competent proofs having been adduced on record, in support thereof. 8
Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial court
and dismissed the complaint against them. The appellate court ruled that the Regional Trial Court
had no jurisdiction over the case because it was actually an action for unlawful detainer which is
exclusively cognizable by municipal trial courts. Furthermore, it ruled that, even presuming
jurisdiction of the trial court, the deed of sale was void for being in fact a pactum commissorium
which is prohibited by Art. 2088 of the Civil Code.

Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied the
motion in its resolution, dated May 7, 1996. Hence, this petition for review on certiorari raising the
following issues:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE

REGIONAL TRIAL COURT HAD NO JURISDICTION OVER THE COMPLAINT
FILED BY THE PETITIONER.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE

CONTRACTUAL DOCUMENTS SUBJECT OF THE INSTANT CASE ARE
CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED UNDER ARTICLE
2088 OF THE CIVIL CODE OF THE PHILIPPINES.

On the first issue, the appellate court stated:

Ostensibly, the cause of action in the complaint indicates a case for unlawful
detainer, as contra-distinguished from accion publiciana. As contemplated by Rule
70 of the Rules of Court, an action for unlawful detainer which falls under the
exclusive jurisdiction of the Metropolitan or Municipal Trial Courts, is defined as
withholding from by a person from another for not more than one year, the
possession of the land or building to which the latter is entitled after the expiration or
termination of the supposed rights to hold possession by virtue of a contract, express
or implied. (Tenorio vs. Gamboa, 81 Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). If no
action is initiated for forcible entry or unlawful detainer within the expiration of the 1
year period, the case may still be filed under the plenary action to recover
possession by accion publiciana before the Court of First Instance (now the Regional
Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain language, the case at bar
is a legitimate ejectment case filed within the 1 year period from the jurisdictional
demand to vacate. Thus, the Regional Trial Court has no jurisdiction over the case.
Accordingly, under Section 33 of B.P. Blg. 129 Municipal Trial Courts are vested with
the exclusive original jurisdiction over forcible entry and unlawful detainer case. (Sen
Po Ek Marketing Corp. vs. CA, 212 SCRA 154 [1990]) 9

We think the appellate court is in error. What really distinguishes an action for unlawful detainer from
a possessory action (accion publiciana) and from a reivindicatory action (accion reivindicatoria) is
that the first is limited to the question of possession de facto.

An unlawful detainer suit (accion interdictal) together with forcible entry are the two
forms of an ejectment suit that may be filed to recover possession of real property.
Aside from the summary action of ejectment, accion publiciana or the plenary action
to recover the right of possession and accion reivindicatoria or the action to recover
ownership which includes recovery of possession, make up the three kinds of actions
to judicially recover possession.
 Illegal detainer consists in withholding by a person from another of the possession of
a land or building to which the latter is entitled after the expiration or termination of
the former's right to hold possession by virtue of a contract, express or implied. An
ejectment suit is brought before the proper inferior court to recover physical
possession only or possession de facto and not possession de jure, where
dispossession has lasted for not more than one year. Forcible entry and unlawful
detainer are quieting processes and the one-year time bar to the suit is in pursuance
of the summary nature of the action. The use of summary procedure in ejectment
cases is intended to provide an expeditious means of protecting actual possession or
right to possession of the property. They are not processes to determine the actual
title to an estate. If at all, inferior courts are empowered to rule on the question of
ownership raised by the defendant in such suits, only to resolve the issue of
possession. Its determination on the ownership issue is, however, not conclusive. 10

The allegations in both the original and the amended complaints of petitioner before the trial court
clearly raise issues involving more than the question of possession, to wit: (a) the validity of the
Transfer of ownership to petitioner; (b) the alleged new liability of private respondents for
P400,000.00 a month from the time petitioner made its demand on them to vacate; and (c) the
alleged continuing liability of private respondents under both loans to pay interest and surcharges on
such. As petitioner A. Francisco Realty alleged in its amended complaint:

5. To secure the payment of the sum of 7.5 Million together with the monthly interest,
the defendant spouses agreed to execute a Deed of Mortgage over the property with
the express condition that if and when they fail to pay monthly interest or any
infringement thereof they agreed to convert the mortgage into a Deed of Absolute
Sale in favor of the plaintiff by executing Deed of Sale thereto, copy of which is
hereto attached and incorporated herein as Annex "A";

6. That in order to authorize the Register of Deeds into registering the Absolute Sale
and transfer to the plaintiff, defendant delivered unto the plaintiff the said Deed of
Sale together with the original owner's copy of Transfer Certificate of Title No. 58748
of the Registry of Rizal, copy of which is hereto attached and made an integral part
herein as Annex "B";

7. That defendant spouses later secured from the plaintiff an additional loan of P2.5
Million with the same condition as aforementioned with 4% monthly interest;

8. That defendants spouses failed to pay the stipulated monthly interest and as per
agreement of the parties, plaintiff recorded and registered the Absolute Deed of Sale
in its favor on and was issued Transfer Certificate of Title No. PT-85569, copy of
which is hereto attached and incorporated herein as Annex "C";

9. That upon registration and transfer of the Transfer Certificate of Title in the name
of the plaintiff, copy of which is hereto attached and incorporated herein as Annex
"C", plaintiff demanded the surrender of the possession of the above-described
parcel of land together with the improvements thereon, but defendants failed and
refused to surrender the same to the plaintiff without justifiable reasons thereto;
Neither did the defendants pay the interest of 4% a month from May, 1992 plus
surcharges up to the present;

10. That it was the understanding of the parties that if and when the defendants shall
fail to pay the interest due and that the Deed of Sale be registered in favor of plaintiff,
 the defendants shall pay a monthly rental of P400,000.00 a month until they vacate
the premises, and that if they still fail to pay as they are still failing to pay the amount
of P400,000.00 a month as rentals and/or interest, the plaintiff shall take physical
possession of the said property; 11

It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues which
involved more than a simple claim for the immediate possession of the subject property. Such issues
range across the full scope of rights of the respective parties under their contractual arrangements.
As held in an analogous case:

The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of
Hagonoy, Bulacan extended far beyond the issues generally involved in unlawful
detainer suits. The litigants therein did not raise merely the question of who among
them was entitled to the possession of the fishpond of Federico Suntay. For all
judicial purposes, they likewise prayed of the court to rule on their respective rights
under the various contractual documents — their respective deeds of lease, the deed
of assignment and the promissory note — upon which they predicate their claims to
the possession of the said fishpond. In other words, they gave the court no
alternative but to rule on the validity or nullity of the above documents. Clearly, the
case was converted into the determination of the nature of the proceedings from a
mere detainer suit to one that is "incapable of pecuniary estimation" and thus beyond
the legitimate authority of the Justice of the Peace Court to rule on. 12

Nor can it be said that the compulsory counterclaim filed by respondent spouses challenging the title
of petitioner A. Francisco Realty was merely a collateral attack which would bar a ruling here on the
validity of the said title.

A counterclaim is considered a complaint, only this time, it is the original defendant

who becomes the plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It stands on the
same footing and is to be tested by the same rules as if it were an independent
action. Hence, the same rules on jurisdiction in an independent action apply to a
counterclaim (Vivar v. Vivar, 8 SCRA 847 (1963); Calo v. Ajar International, Inc. v. 22
SCRA 996 (1968); Javier v. Intermediate Appellate Court, 171 SCRA 605 (1989);
Quiason, Philippine Courts and Their Jurisdictions, 1993 ed., p. 203). 13

On the second issue, the Court of Appeals held that, even "on the assumption that the trial court has
jurisdiction over the instant case," petitioner's action could not succeed because the deed of sale on
which it was based was void, being in the nature of a pactum commissorium prohibited by Art. 2088
of the Civil Code which provides:

Art. 2088. The creditor cannot appropriate the things given by way to pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.

With respect to this question, the ruling of the appellate court should be affirmed. Petitioner denies,
however, that the promissory notes contain a pactum commissorium. It contends that —

What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision
in the deed of mortgage providing for the automatic conveyance of the mortgaged
property in case of the failure of the debtor to pay the loan (Tan v. West Coast Life
Assurance Co., 54 Phil. 361). A pactum commissorium is a forfeiture clause in a
deed of mortgage (Hechanova v. Adil, 144 SCRA 450; Montevergen v. Court of
Appeals, 112 SCRA 641; Report of the Code Commission, 156).
 Thus, before Article 2088 can find application herein, the subject deed of mortgage
must be scrutinized to determine if it contains such a provision giving the creditor the
right "to appropriate the things given by way of mortgage without following the
procedure prescribed by law for the foreclosure of the mortgage" (Ranjo v. Salmon,
15 Phil. 436). IN SHORT, THE PROSCRIBED STIPULATION SHOULD BE FOUND
IN THE MORTGAGE DEED ITSELF. 14

The contention is patently without merit. To sustain the theory of petitioner would be to allow a
subversion of the prohibition in Art. 2088.

In Nakpil v. Intermediate Appellate Court, 15 which involved the violation of a constructive trust, no deed
of mortgage was expressly executed between the parties in that case: Nevertheless, this Court ruled that
an agreement whereby property held in trust was ceded to the trustee upon failure of the beneficiary to
pay his debt to the former as secured by the said property was void for being a pactum commissorium.
Itwas there held:

The arrangement entered into between the parties, whereby Pulong Maulap was to
be "considered sold to him (respondent) . . ." in case petitioner fails to reimburse
Valdes, must then be construed as tantamount to a pactum commissorium which is
expressly prohibited by Art. 2088 of the Civil Code. For, there was to be automatic
appropriation of the property by Valdez in the event of failure of petitioner to pay the
value of the advances. Thus, contrary to respondent's manifestations, all the
elements of a pactum commissorium were present: there was a creditor-debtor
relationship between the parties; the property was used as security for the loan; and,
there was automatic appropriation by respondent of Pulong Maulap in case of default
of petitioner. 16

Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to
be pacto de retro sales but found actually to be equitable mortgages.

It has been consistently held that the presence of even one of the circumstances
enumerated in Art. 1602 of the New Civil Code is sufficient to declare a contract of
sale with right to repurchase an equitable mortgage. This is so because pacto de
retro sales with the stringent and onerous effects that accompany them are not
favored. In case of doubt, a contract purporting to be a sale with the right to
repurchase shall be construed as an equitable mortgage.

Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing
that complete and absolute title shall be vested on the vendee should the vendors fail
to redeem the property on the specified date. Such stipulation that the ownership of
the property would automatically pass to the vendee in case no redemption was
effected within the stipulated period is void for being a pactum commissorium which
enables the mortgagee to acquire ownership of the mortgaged property without need
of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage
rather that to sell the property. 17

Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgagee's mere act of registering the
mortgaged property in his own name upon the mortgagor's failure to redeem the property amounted to
the exercise of the privilege of a mortgagee in a pactum commissorium.

Obviously, from the nature of the transaction, applicant's a predecessor-in-interest is

a mere mortgagee, and ownership of the thing mortgaged is retained by Basilia
 Beltran, the mortgagor. The mortgagee, however, may recover the loan, although the
mortgage document evidencing the loan was nonregistrable being a purely private
instrument. Failure of mortgagor to redeem the property does not automatically vest
ownership of the property to the mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This violates the provision of Article
2088 of the New Civil Code, which reads:

The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose by them. Any stipulation to the contrary is null and void.

The act of applicant in registering the property in his own name upon mortgagor's
failure to redeem the property would to a pactum commissorium which is against
good morals and public policy. 19

Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of
respondent spouses to pay interest, ownership of the property would be automatically transferred to
petitioner A. Francisco Realty and the deed of sale in its favor would be registered, are in substance
a pactum commissorium. They embody the two elements of pactum commissorium as laid down in
Uy Tong v. Court of Appeals, 20 to wit:

The prohibition on pactum commissorium stipulations is provided for by Article 2088

of the Civil Code:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgagee, or dispose of the same. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to
exist: (1) that there should be a pledge or mortgage wherein a 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. 21

The subject transaction being void, the registration of the deed of sale, by virtue of which petitioner
A. Francisco Realty was able to obtain TCT No. PT-85569 covering the subject lot, must also be
declared void, as prayed for by respondents in their counterclaim.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed

petitioner's complaint against respondent spouses on the ground that the stipulations in the
promissory notes are void for being a pactum commissorium, but REVERSED insofar as it ruled that
the trial court had no jurisdiction over this case. The Register of Deeds of Pasig City is hereby
ORDERED to CANCEL TCT No. PT-85569 issued to petitioner and ISSUE a new one in the name
of respondent spouses.

SO ORDERED.