G.R. No. 172592; July 9, 2008
SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG, Petitioners, vs. ROBAN LENDING CORPORATION, Respondent.

FACTS

Petitioners obtained loans totaling ₱4,000,000.00 from respondent, secured by a real estate mortgage. After the loans became delinquent, the parties executed three documents on February 12, 2001: an Amendment to the mortgage consolidating the total obligation at ₱5,916,117.50; a Dacion in Payment Agreement assigning the mortgaged properties to the respondent in settlement of the debt; and a Memorandum of Agreement (MOA). The MOA stipulated that petitioners signed a new promissory note for the consolidated amount and promised to pay in full within one year, failing which the Dacion in Payment Agreement would be enforced.
Petitioners filed a complaint before the RTC seeking annulment of the agreements. They alleged the MOA and Dacion pact constituted a pactum commissorium, prohibited under Article 2088 of the Civil Code. They further contended that the stipulated interest, penalties, and additional charges were illegal, iniquitous, and unconscionable. The RTC, after several postponements and based on the pleadings and a memorandum filed only by the respondent, dismissed the complaint. The Court of Appeals affirmed the dismissal, prompting the petitioners’ appeal to the Supreme Court.

ISSUE

The primary issue is whether the agreements constitute a pactum commissorium. A secondary issue is the propriety of the trial court’s procedure in rendering judgment.

RULING

The Supreme Court granted the petition, reversed the lower courts’ decisions, and remanded the case for further proceedings. The legal logic is twofold. First, the MOA and Dacion pact, read together, effectively created a pactum commissorium. A pactum commissorium is a stipulation authorizing the creditor to appropriate the mortgaged property upon the debtor’s default, which is void for being contrary to law and public policy. Here, the MOA made the enforcement of the Dacion automatic upon the petitioners’ failure to pay the new promissory note within one year. This automatic appropriation upon default is the essence of the prohibited pact. The Court clarified that a true dacion en pago is a distinct, voluntary mode of extinguishing an obligation, not a conditional, automatic consequence of a separate promise to pay.
Second, the trial court erred in rendering a summary judgment. Summary judgment is only proper when, based on the pleadings and supporting documents, there is no genuine issue as to any material fact. The petitioners’ complaint raised substantial factual issues regarding the validity of the stipulated charges and the true nature of the agreements. These issues required a full trial for the presentation of evidence. The Court also found the petitioners’ claim of unconscionable interest and penalties to be a triable issue of fact meriting judicial review. Consequently, the case was remanded to the RTC for a full trial on the merits.