G.R. No. 101083 , July 30, 1993
METROPOLITAN BANK AND TRUST COMPANY, Petitioner, vs. HON. COURT OF APPEALS AND FORTUNATA M. VDA. DE ALONZO, Respondents.

FACTS

Fortunata M. Vda. de Alonzo (respondent) was the registered owner of a parcel of land. She obtained a loan from Metropolitan Bank and Trust Company (petitioner) and, as security, executed a Real Estate Mortgage over the property. The mortgage contract contained a “Special Power to Sell” clause, authorizing the mortgagee bank to extrajudicially foreclose the mortgage and sell the property at public auction in case of default. Upon Alonzo’s alleged default, the bank extrajudicially foreclosed the mortgage and purchased the property as the highest bidder at the public auction. The bank then filed an ex-parte petition for the issuance of a writ of possession with the Regional Trial Court (RTC), which was granted. Alonzo opposed the writ’s implementation, arguing that the “Special Power to Sell” clause in the mortgage contract was a pactum commissorium, which is expressly prohibited under Article 2088 of the Civil Code, and thus the foreclosure and sale were void.

ISSUE

Whether the “Special Power to Sell” clause in the real estate mortgage contract, authorizing the mortgagee to extrajudicially foreclose and sell the property at public auction upon the mortgagor’s default, constitutes a pactum commissorium and is therefore void.

RULING

NO. The “Special Power to Sell” clause is not a pactum commissorium and is valid. The Supreme Court affirmed the validity of the foreclosure and sale.
A pactum commissorium is a stipulation which automatically vests in the mortgagee the ownership of the mortgaged property upon the mortgagor’s default, without the need of any foreclosure proceeding or judicial action. It is void for being contrary to the principle of equity and the nature of a mortgage as a mere security for a debt. In this case, the clause in question did not provide for automatic appropriation. Instead, it expressly authorized the mortgagee to extrajudicially foreclose the mortgage in accordance with Act No. 3135 , as amended. The bank complied with the statutory procedure for extrajudicial foreclosure, including posting of notices and a public auction. The clause was merely a contractual implementation of the mortgagor’s agreement to the remedy of extrajudicial foreclosure as allowed by law. It did not shortcut the legal process but rather invoked it. Therefore, the stipulation was a valid special power to sell pursuant to a foreclosure, not a prohibited pactum commissorium. The petition was granted, and the writ of possession in favor of the bank was upheld.