G.R. No. 101083
METROPOLITAN BANK AND TRUST COMPANY, petitioner, vs. HON. COURT OF APPEALS AND SPOUSES FORTUNATO and VIRGINIA VILLONCO, respondents.

July 30, 1993

FACTS

Spouses Fortunato and Virginia Villonco obtained a loan from Metropolitan Bank and Trust Company (Metrobank) secured by a real estate mortgage over their property. The mortgage contract contained an “automatic increase” clause stating that the mortgage also secured “any and all other indebtedness of every kind already incurred or which may hereafter be incurred” by the mortgagors to the mortgagee. When the Villoncos defaulted on the principal loan, Metrobank extrajudicially foreclosed the mortgage. The Villoncos filed an action for annulment of the foreclosure sale, arguing that the “automatic increase” clause was a *pactum commissorium* and therefore void under Article 2088 of the Civil Code, as it would allow the bank to appropriate the property for obligations other than the one for which the mortgage was originally constituted.

ISSUE

Whether the “automatic increase” or “dragnet” clause in the real estate mortgage contract is a *pactum commissorium* and therefore null and void.

RULING

NO. The Supreme Court upheld the validity of the “dragnet” clause. The clause is not a *pactum commissorium*. A *pactum commissorium* is a stipulation which authorizes the creditor to appropriate the thing mortgaged in the event of non-payment, and is prohibited because it allows the creditor to gain ownership of the property without a foreclosure sale, to the prejudice of the debtor. The clause in question does not allow such appropriation; it merely expands the scope of the security to cover other past and future debts. The foreclosure was conducted through a public sale, not through automatic appropriation by the bank. The Court ruled that dragnet clauses are valid and common in banking practice to secure fluctuating credit accommodations, provided the future debts are of the same kind as the primary obligation and are not unrelated. The foreclosure was for the debt secured by the mortgage, which included obligations covered by the dragnet clause. The petition was granted, and the Court of Appeals’ decision annulling the foreclosure sale was reversed.