Published 17 June 2019, The Daily Tribune

They say that the only person who sticks closer to you than a friend is a creditor. Aside from incessant reminders for payment, creditors have become clever in obtaining security and payment from debtors. But such methods must yield to the requirements of the law, as will be illustrated in these  scenarios.

Suppose that a debtor, in obtaining a loan, executed a Real Estate Mortgage over property registered under his name. As is the common practice, he also delivered the owner’s duplicate of the Transfer Certificate of Title of the property to the creditor for safekeeping and as additional  layer of security in relation to the mortgage constituted between them.

The creditor also creatively asked the debtor to sign an “Absolute Deed of Sale” with details in blank supposedly as another layer of security. The debtor subsequently defaulted, causing the creditor to cause the transfer of the property’s title under his name on the basis of the documents in his possession.

What is the debtor’s remedy?

Article 2088 of the Civil Code prohibits the creditor from appropriating the things given by way of pledge or mortgage, or from disposing of them; any stipulation to the contrary is null and void.  Arrangements in violation of these are called “pactum commissorium,” which exists when there is a pledge or mortgage wherein property is encumbered by way of security for the payment of the principal obligation; and there is a stipulation for an automatic appropriation by the creditor of the thing in the event of nonpayment of the principal obligation.

The first element is present, considering that the property of the debtor was mortgaged in favor of the creditor to secure the former’s indebtedness. As to the second, the authorization for the creditor to appropriate the property subject of the mortgage upon the debtor’s default can be implied from the creditor’s signing of a blank deed of sale simultaneously with her signing of the real estate mortgage. The transfer of property that was made upon default by the debtor makes it in the nature of a pactum commissorium, hence, null and void.

In such instance, the debtor must file and annotate an Affidavit of Adverse Claim on the new TCT issued in the name of the creditor. He must also formally demand the reconveyance of the title and the property to him. If the creditor refuses, the debtor may file a civil complaint for reconveyance of property and cancellation of the TCT issued in the name of the creditor.

In another situation, suppose there is a loan transaction between a debtor and a creditor whereby the debtor put up as security the mortgage of his property. Eventually, the debtor entered into a Deed of Absolute Sale with the creditor, but the debt continued to subsist and the debtor remained in possession of the property.

In such case, the debtor can assert that the transaction is not really one of sale, but of equitable mortgage. Article 1604 of the Civil Code enumerates several instances when a contract, purporting to be, and in fact styled as, an absolute sale, is presumed to be an equitable mortgage, thus:

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

As evident from Article 1602 itself, the presence of any of the circumstances suffices for a contract to be deemed an equitable mortgage. In such instance, the debtor may file a Complaint for reformation of the instrument in order to reflect the real intention and agreement of the parties, and to similarly pray for the reconveyance of the property and cancellation of any new TCT issued on the basis of the instrument between the parties.

Honesty in all dealings is the best way to avoid headaches and problems. Therefore, I hope that the foregoing examples may aid you, my dear readers, to act justly and in good faith when involved in similar transactions

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