BY GEROME DALIPE IV
ILOILO City – The Supreme Court (SC) has reaffirmed the principle that lenders cannot automatically acquire ownership of collateral properties upon default.
However, borrowers remain free to voluntarily transfer ownership through valid agreements.
In a decision penned by Chief Justice Alexander G. Gesmundo, the SC’s First Division upheld the transfer of properties owned by Ruby Shelter Builders and Realty Development Corporation (Ruby Shelter) to its creditors, Romeo Y. Tan and Roberto L. Obiedo.
The Court ruled that the transfer was based on a valid Memorandum of Agreement (MOA) and did not violate the prohibition against pactum commissorium under Article 2088 of the Civil Code.
Pactum commissorium refers to an agreement where a debtor agrees to forfeit property automatically to a creditor upon default, which the Civil Code prohibits to prevent unfair practices.
The SC decision clarified that while lenders cannot seize the collateral property by default, they can acquire it if the borrower agrees to a voluntary transfer under lawful terms.
Case background
Ruby Shelter borrowed P95 million from Tan and Obiedo, using several properties as collateral.
To give Shelter more time to repay, the parties signed an MOA stipulating that in case of non-payment, Tan and Obiedo could register deeds of absolute sale to transfer ownership of the properties to themselves.
Tan and Obiedo would pay Shelter P5 million for the properties. Shelter executed deeds of absolute sale for the collateral properties.
However, when settlement negotiations failed, Tan and Obiedo notarized the deeds, prompting Shelter to file a case in the Regional Trial Court (RTC). Shelter argued that the deeds constituted a pactum commissorium and were invalid.
Lower court rulings
The RTC dismissed Shelter’s complaint, holding that the MOA was commissorium because Shelter voluntarily agreed to the sale.
The Court of Appeals (CA) initially ruled in favor of Shelter but later reversed its decision, upholding the RTC’s ruling.
The SC upheld the validity of the MOA and the subsequent transfer of ownership to Tan and Obiedo.
Under the Civil Code, a pactum commissorium occurs when (1) a property is used as collateral, and (2) the loan agreement includes a provision for automatic transfer of ownership upon default.
It is prohibited to protect borrowers from disproportionate loss of property. Hence, the transfer of ownership was not automatic.
Instead, Shelter voluntarily entered into the MOA, agreeing to sell the properties as repayment for the loan.
Borrowers may freely sell collateral properties to creditors as repayment, provided the sale is consensual and separate from the loan agreement.
Ownership of collateral can only be transferred through foreclosure and public auction to ensure fairness.
The SC affirmed that the MOA was a valid and voluntary agreement, distinguishing it from pactum commissorium, which remains prohibited under Philippine law./PN
