DBP vs CA

FACTS :

Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines under the terms
stated in the Promissory Notes. As security for said loans, Cuba executed 2 deeds of assignment of
her leasehold rights over the subject fishpond. Plaintff failed to pay her loan.

Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP appropriated the
Leasehold Rights of plaintiff Lydia Cuba over the fishpond. DBP executed a Deed of conditional sale
of the leasehold rights in favor of the Cuba. Letter to repurchase was sent by Cuba to DBP, which
the latter accepted.

After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new Fishpond
Lease Agreement was issued by the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba
only, excluding her husband;

Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale. Then,
entered with the DBP a temporary arrangement whereby in consideration for the deferment of the
Notarial Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba promised to make certain
payments as stated in temporary Arrangement. Defendant DBP thereafter sent a Notice of
Rescission thru Notarial Act which was received by plaintiff Lydia Cuba. After the Notice of
Rescission, defendant DBP took possession of the Leasehold Rights of the fishpond.

DBP took possession of the Leasehold Rights over the fishpond in question, DBP advertised in the
SUNDAY PUNCH the public bidding 1984, to dispose of the property;Thereafter executed a Deed of
Conditional Sale in favor of defendant Agripina Caperal.Thereafter, defendant Caperal was awarded
Fishpond Lease Agreement by the Ministry of Agriculture and Food.

Trial Court resolved the issue in favor of CUBA by declaring that DBP's taking possession and
ownership of the property without foreclosure was plainly violative of Article 2088 of the Civil Code
which provides as follows:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.

The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for being
a clear case of pactum commissorium expressly prohibited and declared null and void by Article
2088 of the Civil Code.

CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The former
sought an increase in the amount of damages, while the latter questioned the findings of fact and
law of the lower court.

The CA reversed the decision of the trial court declaring that the act of DBP in appropriating Cuba's
leasehold rights and interest under Fishpond Lease Agreement was valid, also with regard the deeds
of assignment executed by Cuba in favor of DBP; the deed of conditional sale between CUBA and
DBP; and the deed of conditional sale between DBP and Caperal, the Fishpond Lease Agreement in
favor of Caperal, and the assignment of leasehold rights executed by Caperal in favor of DBP.

ISSUE : WON the deed of assignment was a pactum commissorium contrary to Article 2088 of the
Civil Code.

HELD :

We do not, however, buy CUBA's argument that condition no. 12 of the deed of assignment
constituted pactum commissorium. Said condition reads:

12. That effective upon the breach of any condition of this assignment, the Assignor
hereby appoints the Assignee his Attorney-in-fact with full power and authority to take
actual possession of the property above-described, together with all improvements
thereon, subject to the approval of the Secretary of Agriculture and Natural
Resources, to lease the same or any portion thereof and collect rentals, to make
repairs or improvements thereon and pay the same, to sell or otherwise dispose of
whatever rights the Assignor has or might have over said property and/or its
improvements and perform any other act which the Assignee may deem convenient
to protect its interest. All expenses advanced by the Assignee in connection with
purpose above indicated which shall bear the same rate of interest aforementioned
are also guaranteed by this Assignment. Any amount received from rents,
administration, sale or disposal of said property may be supplied by the Assignee to
the payment of repairs, improvements, taxes, assessments and other incidental
expenses and obligations and the balance, if any, to the payment of interest and then
on the capital of the indebtedness secured hereby. If after disposal or sale of said
property and upon application of total amounts received there shall remain a
deficiency, said Assignor hereby binds himself to pay the same to the Assignee upon
demand, together with all interest thereon until fully paid. The power herein granted
shall not be revoked as long as the Assignor is indebted to the Assignee and all acts
that may be executed by the Assignee by virtue of said power are hereby ratified.

The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by
way of security for the payment of the principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period. 11

Condition no. 12 did not provide that the ownership over the leasehold rights would automatically
pass to DBP upon CUBA's failure to pay the loan on time. It merely provided for the appointment of
DBP as attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said
real rights, in case of default by CUBA, and to apply the proceeds to the payment of the loan. This
provision is a standard condition in mortgage contracts and is in conformity with Article 2087 of the
Civil Code, which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged
property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As
admitted by it during the pre-trial, it had "[w]ithout foreclosure proceedings, whether judicial or
extrajudicial, . . . appropriated the [l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in
question." Its contention that it limited itself to mere administration by posting caretakers is further
belied by the deed of conditional sale it executed in favor of CUBA.

DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of
appropriating the leasehold rights. As stated earlier, condition no. 12 did not provide that CUBA's
default would operate to vest in DBP ownership of the said rights. Besides, an assignment to
guarantee an obligation, as in the present case, is virtually a mortgage and not an
absolute conveyance of title which confers ownership on the assignee.

At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of Article 2088 of the
Civil Code, which forbids a credit or from appropriating, or disposing of, the thing given as security
for the payment of a debt.

The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop
her from questioning DBP's act of appropriation. Estoppel is unavailing in this case. As held by this
Court in some cases, estoppel cannot give validity to an act that is prohibited by law or against public
policy. Hence, the appropriation of the leasehold rights, being contrary to Article 2088 of the Civil
Code and to public policy, cannot be deemed validated by estoppel.

BUSTAMANTE vs. ROSEL

FACTS : Norma Rosel entered into a loan agreement with petitioner Natalia Bustamante and her
late husband Ismael C. Bustamante for the sum of P 100,000 and putting as collateral portion of his
parcel of land and in the event that she failed to pay, the lender has the option to buy or purchase
the collateral.

When the loan was about to mature, respondents proposed to buy the said collateral guarantee.
Petitioner, however, refused to sell and requested for extension of time to pay the loan and offered to
sell to respondents another residential lot located at Road 20, Project 8, Quezon City, with the
principal loan plus interest to be used as down payment. Respondents refused to extend the
payment of the loan and to accept the lot in Road 20 as it was occupied by squatters and petitioner
and her husband were not the owners thereof but were mere land developers entitled to subdivision
shares or commission if and when they developed at least one half of the subdivision area.

Hence, petitioner tendered payment of the loan to respondents which the latter refused to accept,
insisting on petitioner's signing a prepared deed of absolute sale of the collateral.

Respondents filed with the RTC a complaint for specific performance with consignation against
petitioner and her spouse. Respondents sent a demand letter asking petitioner to sell the collateral
pursuant to the option to buy embodied in the loan agreement.

On the other hand, petitioner filed in the RTC a petition for consignation, and deposited the amount
of P153,000.00 with the City Treasurer.
When petitioner refused to sell the collateral and barangay conciliation failed, respondents
consigned the amount of P47,500.00 with the trial court.

Trial court rendered a decision denying the plaintiff's prayer for the defendants' execution of the
Deed of Sale to Convey the collateral in plaintiffs' favor and ordering the defendant to pay the loan
with interest thereon.

Respondents appealed from the decision to the Court of Appeals. The Court of Appeals rendered
decision reversing the ruling of the RTC. Hence, this petition.

ISSUE : WON the stipulation in the loan contract was valid and enforceable.

HELD :

We note the eagerness of respondents to acquire the property given as collateral to guarantee the
loan. The sale of the collateral is an obligation with a suspensive condition. It is dependent upon the
happening of an event, without which the obligation to sell does not arise. Since the event did not
occur, respondents do not have the right to demand fulfillment of petitioner's obligation, especially
where the same would not only be disadvantageous to petitioner but would also unjustly enrich
respondents considering the inadequate consideration (P200,000.00) for a 70 square meter property
situated at Congressional Avenue, Quezon City.

Respondents argue that contracts have the force of law between the contracting parties and must be
complied with in good faith. 21 There are, however, certain exceptions to the rule, specifically Article
1306 of the Civil Code, which provides:

Art. 1306. The contracting parties may establish such stipulations, clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.

A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the
property given as security for the loan. This is embraced in the concept of pactum commissorium,
which is proscribed by law. 22

The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by
way of security for the payment of the principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period. 23

In Nakpil vs. Intermediate Appellate Court, 24 we said:

The arrangement entered into between the parties, whereby Pulong Maulap was to
be "considered sold to him (respondent) . . . in case petitioner fails to reimburse
Valdes, must then be construed as tantamount to pactum commissorium which is
expressly prohibited by Art. 2088 of the Civil Code. For, there was to be automatic
appropriation of the property by Valdes in the event of failure of petitioner to pay the
 value of the advances. Thus, contrary to respondent's manifestation, all the elements
of apactum commissorium were present: there was a creditor-debtor relationship
between the parties; the property was used as security for the loan; and there was
automatic appropriation by respondent ofPulong Maulap in case of default of
petitioner.

A significant task in contract interpretation is the ascertainment of the intention of the parties and
looking into the words used by the parties to project that intention. In this case, the intent to
appropriate the property given as collateral in favor of the creditor appears to be evident, for the
debtor is obliged to dispose of the collateral at the pre-agreed consideration amounting to practically
the same amount as the loan. In effect, the creditor acquires the collateral in the event of non
payment of the loan. This is within the concept of pactum commissorium. Such stipulation is void.

All persons in need of money are liable to enter into contractual relationships whatever the condition
if only to alleviate their financial burden albeit temporarily. Hence, courts are duty bound to exercise
caution in the interpretation and resolution of contracts lest the lenders devour the borrowers like
vultures do with their prey.