G.R. No. 160408 January 11, 2016
SPOUSES ROBERTO and ADELAIDA PEN, Petitioners, vs. SPOUSES SANTOS and LINDA JULIAN, Respondents.

FACTS

On April 9, 1986, respondents obtained a P60,000.00 loan from petitioner Adelaida Pen, followed by loans of P50,000.00 and P10,000.00 on May 23 and 27, 1986, respectively. Interests were deducted in advance. Two promissory notes were executed, and as security, respondents executed a Real Estate Mortgage over their property (TCT No. 327733) on May 23, 1986, delivering the owner’s duplicate title to petitioners. Petitioners allege that upon respondents’ default, respondent Linda Julian offered the mortgaged property as payment in kind to avoid foreclosure. The parties agreed to value the property at P70,000.00, and on October 22, 1986, a Deed of Sale was executed. Petitioners paid the corresponding taxes, and title was transferred to them (TCT No. 364880). Petitioners further allege that respondents later offered to repurchase the property but failed to do so, and a P100,000.00 payment was applied to their indebtedness. Respondents aver that at the time the mortgage was executed, they were made to sign a one-page document purportedly an “Absolute Deed of Sale” that was undated, unfilled as to consideration, and unnotarized. They claimed total payments of P115,400.00. In December 1992, upon discovering the title was already in petitioners’ name, respondents filed an adverse claim and later a suit for Cancellation of Sale, Cancellation of Title, Recovery of Possession, and Damages.

ISSUE

1. Whether the Court of Appeals erred in ruling against the validity of the Deed of Sale.
2. Whether the Court of Appeals erred in ruling that no monetary interest was due for the respondent’s use of the petitioner’s money.

RULING

The Supreme Court affirmed the CA decision with modification regarding the interest rate. The appeal was partly meritorious.
1. The Court affirmed the CA’s finding that the Deed of Sale dated October 22, 1986, was void. It concurred with the CA’s justification that the deed constituted a prohibited pactum commissorium under Article 2088 of the Civil Code. The elements were present: a) the property was mortgaged as security for the loan, and b) there was a stipulation for automatic appropriation by the creditor (petitioner) upon the debtor’s (respondent) non-payment. The deed of sale, signed in blank as to consideration and date at the time of the mortgage, was to be filled out upon default, effectively allowing the creditor to appropriate the mortgaged property without foreclosure, which is void.
2. On the issue of interest, the Court modified the CA’s ruling. The CA correctly found that the promissory notes contained no stipulation for the payment of monetary interest; thus, no interest for the use of money could be imposed. However, compensatory interest by way of damages for the delay in payment was warranted. The CA computed the respondents’ unpaid balance as P43,492.15 as of June 28, 1990, subject to legal interest. The Supreme Court applied the legal interest rates as follows: 12% per annum from the time of judicial demand (October 13, 1994) until June 30, 2013, and 6% per annum from July 1, 2013, until full payment, following the adjustments established in Nacar v. Gallery Frames.
DISPOSITIVE:
The Court AFFIRMED the CA decision subject to the MODIFICATION that the amount of P43,492.15 due from the respondents 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.