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G.R. No. 30882 – 54 Phil. 361 – Civil Law – Credit Transactions – Pactum Commissorium – Mortgage
On September 15, 1925, Go Chulian executed a mortgage in favor of Genoveva De Jayme over 2 parcels of land. The mortgage had a clause which allowed De Jayme to appropriate the lands to herself in case Chulian is unable to pay by March 20, 1926, thereby transferring ownership to her in that event. On September 16, 1925, West Coast Life Insurance Co. sued Chulian for the recovery of a sum of money. The 2 parcels of land owned by Chulian were attached on September 21, 1925.
On March 20, 1926, when the mortgage matured without Chulian’s payment to De Jayme, the latter assigned her right to Tan Chun Tic. Tan Chun Tic succeeded in having the titles to the parcels of land transferred to his name. He then petitioned for the lifting of the attachment on the parcels of land. West Coast Life opposed the said petition as West Coast Life claimed that the mortgage between Chulian and De Jayme was a pactum commissorium.
ISSUE: Whether or not the mortgage between Chulian and De Jayme was a pactum commissorium thus void per provision of law.
HELD: Yes. The mortgage is pactum commissorium as per the [old] civil code:
ART. 1859. The creditor may not appropriate to himself the things given in pledge or mortgage, or dispose of them.
The pactum commissorium, that is, the additional stipulation to a contract of loan, whereby the thing pledged shall become the property of the creditor in the event of the non-payment of the debt within the term fixed, is void.
The creditor has no right to appropriate the chattels and effects pledged, or to make payment to himself and by himself of his credit with the value thereof, for he is only allowed to collect the debt out of the proceeds of the sale of the effects and chattels pledged.
On the other hand, the court impressed that what can be allowed is a stipulation of a promise to sell the mortgaged property to the creditor in case of nonpayment, but not the outright appropriation for such constitutes pactum commissorium which is disallowed by law.