GR 174240; (March, 2013) (Digest)
G.R. No. 174240 ; March 20, 2013
SPOUSES LEHNER and LUDY MARTIRES, Petitioners, vs. MENELIA CHUA, Respondent.
FACTS
Respondent Menelia Chua, co-owner of twenty-four memorial lots, obtained a loan of ₱150,000.00 from petitioner spouses Lehner and Ludy Martires on December 18, 1995. The loan was secured by a real estate mortgage over the property. The contract stipulated an 8% monthly interest and an additional 10% monthly interest in case of default. Respondent failed to fully settle her obligation. Subsequently, without any foreclosure proceedings, ownership of the memorial lots was transferred to the petitioners through a Deed of Transfer executed on July 3, 1996.
Respondent filed a complaint seeking the annulment of the mortgage contract, alleging the interest rates were unconscionable. She later amended her complaint to include the annulment of the Deed of Transfer and an accompanying Affidavit of Warranty, claiming she discovered they were forged. The Regional Trial Court (RTC) dismissed her complaint and awarded damages to the petitioners. The Court of Appeals (CA) initially affirmed the RTC with modifications but, upon respondent’s motion for reconsideration, reversed itself in an Amended Decision.
ISSUE
The core issue is whether the Deed of Transfer, which conveyed ownership of the mortgaged property to the petitioners without foreclosure, is valid.
RULING
The Supreme Court DENIED the petition and AFFIRMED the CA’s Amended Decision. The Deed of Transfer was declared void ab initio. The legal logic is anchored on the nature and purpose of a real estate mortgage under Article 2085 of the Civil Code. A mortgage is merely an accessory contract securing the principal obligation of a loan; it is not a conveyance of ownership. The creditor’s right is limited to foreclosing the mortgage upon the debtor’s default, selling the property at public auction, and applying the proceeds to the debt. Any stipulation allowing the automatic transfer of ownership to the mortgagee upon default—a pactum commissorium—is expressly prohibited by law for being oppressive. The execution of the Deed of Transfer, absent foreclosure, constituted precisely this illegal pact. Consequently, the transfer was invalid. The Court upheld the CA’s order to cancel the registration in the petitioners’ name and revert ownership to respondent, subject to her obligation to pay the valid loan. The legal interest on the loan was reduced to 12% per annum, as the stipulated 8% monthly interest was deemed excessive. The proper remedy for the petitioners to satisfy the debt is the foreclosure of the mortgage in accordance with law.