4. Development Bank of the Philippines vs.

Court of Appeals and Lydia Cuba

284 SCRA 14

Facts:
Lydia Cuba is a grantee of a fishpond lease agreement from the Government. She
later obtained a loan from DBP in the amounts of P109,000.00, P109,000.00, and P98,
700.00 under the terms stated in the three promissory notes. As a security for the said
loan Cuba executed a two Deed of Assignment of her Leasehold Rights. She then failed
to pay her loan when it became due in accordance with the terms of the promissory notes.
DBP in turn appropriated the leasehold rights of Cuba over the fishpond, without
foreclosure proceedings, whether judicial or extrajudicial. After appropriating the said
leasehold rights DBP executed a Deed of Conditional Sale of the Leasehold Rights in
favor of respondent Cuba over the same fishpond, to which Cuba agreed. Respondent
Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale, however
she was able enter with DBP a temporary arrangement with DBP for the Deferment
Notarial Rescission of Deed of Conditional Sale. However, a Notice of Rescission through
Notarial Act was sent the DBP to Cuba, then it took possession of the fishpond in
question. After it took possession of the said fishpond, DBP disposed the property in favor
of Agripina Caperal through a deed of conditional sale. Then a new fishpond lease
agreement was awarded by the Government to Caperal.

Lydia Cuba filed an action with the Regional Trial Court for the declaration of nullity
of DBP’s appropriation of her leaseholds over the subject fishpond, for the annulment of
the Deed of Conditional Sale executed in her favor by DBP, the annulment of DBP’s sale
of the fishpond to Caperal, and the restoration of her rights over the said fishpond and for
damages. The RTC ruled in favor of Cuba, declaring that DBP’s taking possession and
ownership of the subject property without foreclosure was violative of Art. 2088 of the Civil
Code, and that condition No. 12 of the Assignment of the Leasehold Rights was void for
being a clear case of pactum commissorium.

Both Cuba and DBP elevated the case to the CA, with Cuba seeking an increase
in the amount of damages, while DBP questioned the findings of fact and law of the RTC.
The CA reversed the ruling of the RTC with regards to the validity of the acts of DBP.

Issue:
Whether or not the two Deed of Assignment executed by Cuba in favor of DBP
would operate as a mortgage or some other contract.

Held:
YES. Lydia executed the 2 Deeds of Assignment as a security for the loans that
she obtained from DBP, according the case of People’s Bank and Trust Co. vs. Odom an
assignment to guaranty an obligation is in effect a mortgage. And it was also indicated in
the provisions of the promissory note executed by Cuba, that her assigned leasehold
rights were referred to as mortgaged properties and the instrument itself a mortgage
contract.
5. Natalia P. Bustamante vs. Spouses Rodito F. Rosel and Norma A. Rosel
319 SCRA 413

Facts:
Norma Rosel entered into a loan agreement with petitioner Natalia Bustamante
wherein the latter borrowed P100,000.00 payable in 2 years. To guarantee payment, the
spouses put as collateral 70 square meters of their lot inclusive of the apartment therein.
In the event of borrower’s default, contract states the lender has the option to buy or
purchase the collateral for P200,000.00. The loan was about to mature on March 1, 1989,
the Rosels proposed to buy the said portion at the pre-set price. Petitioners, however,
refused and requested for extension of time to pay the loan. On the due date, petitioners
tendered payment of the loan to respondents which the latter refused to accept. On March
4, 1990, respondents sent a demand letter asking petitioner to sell the collateral pursuant
to the option to buy embodied in the loan agreement. Prior to that, they filed with the RTC
an action for specific performance in February.

Issue:
Whether or not the stipulation in the loan contract was valid and enforceable.

Held:
NO. The elements of pactum commissorium are as follows: (1) there should be a
property mortgaged by way of security for the payment of the principal obligation, and (2)
there should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated period.
In this case, the intent to appropriate the property given as collateral in favor of the creditor
appears to be evident, for the debtor is obliged to dispose of the collateral at the pre-
agreed consideration amounting to practically the same amount as the loan. In effect, the
creditor acquires the collateral in the event of nonpayment of the loan. This is within the
concept of pactum commissorium. Such stipulation is void.
6. Spouses Wilfredo N.Ong and Edna Sheila Pagiuo-Ong vs. Roban Lending
Corporation
557 SCRA 516

Facts:
On various dates, Spouses Ong obtained several loans from respondent Roban
Lending Corporation in the total amount of P4,000,000.00. These loans were secured by
real estate mortgage on Spouses Ong‘s parcel of lands. Later Spouses Ong and Roban
executed several agreements – an amendment to the amended Real Estate Mortgage
which consolidated their loans amounting to P5, 916,117.50; dacion in payment wherein
spouses Ong assigned their mortgaged properties to Roban to settle their total obligation
and Memorandum of Agreement (MOA) in which the dacion in payment agreement will
be automatically enforced in case spouses Ong fail to pay within one year from the
execution of the agreement. Spouses Ong filed a complaint before Regional Trial Court
of Tarlac City to declare the mortgage contract, dacion in payment agreement, and MOA
void. Spouses Ong allege that the dacion in payment agreement is pactum
commissorium, and therefore void. In its Answer with counterclaim, Roban alleged that
the dacion in payment agreement is valid because it is a special form of payment
recognized under Article 1245 of the Civil Code. RTC ruled in favor of Roban, finding that
there was no pactum commissorium. The Court of Appeals upheld the RTC decision.

Issue:
Whether or not the dacion in payment agreement entered into by Spouses Ong
and Roban constitutes pactum commissorium.

Held:
YES. The Court finds that the Memorandum of Agreement and Dacion in Payment
constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code
which provides that the creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void

The elements of pactum commissorium, which enables the mortgagee to acquire

ownership of the mortgaged property without the need of any foreclosure proceedings,
are: (1) there should be a property mortgaged by way of security for the payment of the
principal obligation, and (2) there should be a stipulation for automatic appropriation by
the creditor of the thing mortgaged in case of non-payment of the principal obligation
within the stipulated period.

Here, Memorandum of Agreement and the Dacion in Payment contain no

provisions for foreclosure proceedings nor redemption. Under the Memorandum of
Agreement, the failure by the petitioners to pay their debt within the one-year period gives
respondent the right to enforce the Dacion in Payment transferring to it ownership of the
properties covered by TCT No. 297840. Respondent, in effect, automatically acquires
ownership of the properties upon Spouses Ong’s failure to pay their debt within the
stipulated period. In a true dacion en pago, the assignment of the property extinguishes
the monetary debt. The alienation of the properties was by way of security, and not by
way of satisfying the debt. The Dacion in Payment did not extinguish Spouses Ong’s
obligation to Roban. On the contrary, under the Memorandum of Agreement executed on
the same day as the Dacion in Payment, petitioners had to execute a promissory note for
P5, 916, 117.50 which they were to pay within one year.
7. Spouses Bonifacio and Faustina Paray, and Vidal Espeleta vs. Dra. Abdulia C.
Rodriguez, Miguela R. Jariol assisted by her husband Antolin Jariol, Sr., Leonora
Nolasco assisted by her husband Feliciano Nolasco, Dolores Soberano assisted
by her husband Jose Soberano, Jr., Julia R. Generoso, Teresita R. Natividad and
Genoveva R. Soronio assisted by her husband Alfonso Soronio
479 SCRA 571

Facts:
Respondents were the owners of shares of stock in Quirino-Leonor-Rodriguez
Realty Inc. In 1979 to 1980, respondents secured by way of pledge of some of their shares
of stock to petitioners Bonifacio and Faustina Paray the payment of certain loan
obligations. When the Parays attempted to foreclose the pledges on account of
respondents’ failure to pay their loans, respondents filed complaints with RTC of Cebu
City. The actions sought the declaration of nullity of the pledge agreements, among
others. However the RTC dismissed the complaint and gave due course to the foreclosure
and sale at public auction of the various pledges. This decision attained finality after it
was affirmed by the Court of Appeals and the Supreme Court.

Respondents then received Notices of Sale which indicated that the pledged
shares were to be sold at public auction. However, before the scheduled date of auction,
all of respondents caused the consignation with the RTC Clerk of Court of various
amounts. It was claimed that respondents had attempted to tender payments to the
Parays, but had been rejected. Notwithstanding the consignations, the public auction took
place as scheduled, with petitioner Vidal Espeleta successfully bidding for all of the
pledged shares. None of respondents participated or appeared at the auction.

Respondents instead filed a complaint with the RTC seeking the declaration of
nullity of the concluded public auction. Respondents argued that their tender of payment
and subsequent consignations served to extinguish their loan obligations and discharged
the pledge contracts. Petitioners countered that the auction sale was conducted pursuant
to a final and executory judgment and that the tender of payment and consignations were
made long after their obligations had fallen due. They pointed out that the amounts
consigned could not extinguish the principal loan obligations of respondents since they
were not sufficient to cover the interests due on the debt. They likewise argued that the
essential procedural requisites for the auction sale had been satisfied.

Issue:
Whether or not the consignations made by respondents prior to the auction sale
are sufficient to extinguish the loan obligations and the subject pledged contracts.

Held:
NO. There is no doubt that if the principal obligation is satisfied, the pledges should
be terminated as well. Article 2098 of the Civil Code provides that the right of the creditor
to retain possession of the pledged item exists only until the debt is paid. Article 2105 of
the Civil Code further clarifies that the debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid the debt and its interest. At
the same time, the right of the pledgee to foreclose the pledge is also established under
the Civil Code. When the credit has not been satisfied in due time, the creditor may
proceed with the sale by public auction under the procedure provided under Article 2112
of the Code.

In order that the consignation could have the effect of extinguishing the pledge
contracts, such amounts should cover not just the principal loans, but also the monthly
interests thereon.

In the case at bar, while the amounts consigned by respondents could answer for
their respective principal loan obligations, they were not sufficient to cover the interests
due on these loans, which were pegged at the rate of 5% per month or 60% per annum.