The Supreme Court ruled in favor of Cuba. The court held that the assignment was intended as security, not an absolute sale. Therefore, DBP’s act of taking the property without foreclosure was illegal. The court ordered DBP to pay damages to Cuba for the "moral shock and social humiliation" caused by her unlawful ejectment. Other References for "118342"
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The dispute centered on whether a creditor could automatically take ownership of a property used as collateral without a formal foreclosure proceeding. The Supreme Court ruled in favor of Cuba
Lydia Cuba, a fishpond leaseholder, obtained loans from the Development Bank of the Philippines (DBP) . As security, she executed an "Assignment of Leasehold Rights." When she defaulted on her payments, DBP unilaterally appropriated her leasehold rights without a public auction or judicial foreclosure, then sold them to a third party. The court ordered DBP to pay damages to
Decided on January 5, 1998, this case is a staple in Philippine property and credit law, specifically regarding the prohibition of pactum commissorium .
The Supreme Court had to determine if the "Assignment of Leasehold Rights" was a legal transfer of ownership or merely a mortgage. If it were a mortgage, DBP's automatic takeover would constitute pactum commissorium —an agreement allowing a creditor to automatically own the collateral upon the debtor's default, which is strictly prohibited under Article 2088 of the Civil Code of the Philippines.