Fallen short of established expectations

Barbie is the registered owner of a parcel of land. In 1997, Barbie obtained a P300,000 loan from Kasangga Cooperative. She mortgaged her lot to Kasangga Cooperative to guarantee payment of the loan. Kasangga Cooperative, in turn, used the land title as collateral under its Loan Account No. 97-CC-013 with Banco de Lupa.

In 1998, Barbie decided to sell the lot to pay her loan. She instructed her son-in-law, Domeng, to look for a buyer. Domeng referred his friend,Manny. Manny agreed to buy the lot for P900,000. He was able to convince Barbie to state in the deed of absolute sale that the purchase stated purchase price is at P300,000 to reduce the taxes. Barbie obliged.

Manny did not, however, turn-over the agreed purchase price to Domeng when the latter delivered the duly accomplished deed of absolute sale.

Instead, Manny promised that the he would pay the amount upon his return from the United States. A promise that forever remained one.

Meanwhile, unknown to Barbie, Manny paid her loan with Kasangga Cooperative. Consequently, Kasangga Cooperative was able to pay its loan with Banco de Lupa.

Manny then applied for a loan of P1 million with Banco de Lupa using Barbie’s property. Banco de Lupa demanded that as a condition for the approval of the loan, the title of the collateral should first be transferred to Manny. And so he did.

Manny and Banco de Lupa executed a Credit Line Agreement and a Real Estate Mortgage over the property. On the same day, Banco released the proceeds of the loan to Manny.

Subsequently, however, Manny failed to pay the loan with the bank. As one would expect, Banco de Lupa filed an Application for Extra-judicial Foreclosure of Real Estate Mortgage stating that Manny’s total indebtedness amounted to more than a million.

When Barbie found out what happened to her property, she immediately filed a Complaint for Nullification of the Deed of Absolute Sale, Reconveyance of Title and Damages with Prayer for Temporary Restraining Order and/or Issuance of Writ of Preliminary Injunction. Named defendants were Manny, Banco de Lupa, , the Register of Deeds of Occidental Mindoro and the Acting Clerk of Court.

Q: Is the deed of absolute executed by and between Barbie and Manny a valid and binding contract?

A: No. It is a well-entrenched rule that a forged or fraudulent deed is a nullity and conveys no title. Moreover, where the deed of sale states that the purchase price has been paid but in fact has never been paid, the deed of sale is void ab initio for lack of consideration.

Q: What then is the effect of the void Deed of Absolute sale on the transfer certificate title that Manny was able to obtain in his favor?

A: Since the Deed of Absolute between Manny and Barbie is void, the corresponding transfer certificate title that was issued to Manny is likewise void. In Yu Bun Guan v. Ong, the Supreme Court ruled that there was no legal basis for the issuance of the certificate of title and the CA correctly cancelled the same when the deed of absolute sale was completely simulated, void and without effect.

In Ereña v. Querrer-Kauffman, the Supreme Court held that when the instrument presented for registration is forged, even if accompanied by the owner’s duplicate certificate of title, the registered owner does not thereby lose his title, and neither does the mortgagee acquire any right or title to the property. In such a case, the mortgagee under the forged instrument is not a mortgagee protected by law.

The above is without prejudice, however, to the right of Manny to recover from Barbie what he paid to Kasangga Cooperative for the account of Barbie, otherwise there will be unjust enrichment by Barbie.

Q: Is Land Bank a mortgagee in good faith?

A: No, it is not a mortgagee in good faith.

There is indeed a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy.

This is the doctrine of “the mortgagee in good faith” based on the rule that buyers or mortgagees dealing with property covered by a Torrens Certificate of Title are not required to go beyond what appears on the face of the title. However, it has been consistently held that this rule does not apply to banks, which are required to observe a higher standard of diligence.

A bank whose business is impressed with public interest is expected to exercise more care and prudence in its dealings than a private individual, even in cases involving registered lands. A bank cannot assume that, simply because the title offered as security is on its face free of any encumbrances or lien, it is relieved of the responsibility of taking further steps to verify the title and inspect the properties to be mortgaged.

The following shows that Banco de Lupa is not a mortgagee in good faith: (a) that Land Bank processed Manny’s loan application upon his presentation of the title, which was still under the name of Barbie; and (b) The bank even ignored the fact that the cooperative previously used Barbie’s title as collateral in its loan account with it.

In Bank of Commerce v. San Pablo, Jr., the Supreme Court held that when “the person applying for the loan is other than the registered owner of the real property being mortgaged, [such fact] should have already raised a red flag and which should have induced the Bank x x x to make inquiries into and confirm x x x [the] authority to mortgage x x x.

A person who deliberately ignores a significant fact that could create suspicion in an otherwise reasonable person is not an innocent purchaser for value.”

The fact that the bank did not investigate and inspect the property to ascertain its actual occupants militate against the bank. The Court took judicial notice of the standard practice of banks, before approving a loan, to send representatives to the premises of the land offered as collateral to investigate its real owners.

Q: What is good faith?

A: Good faith, or the lack of it, is a question of intention. In ascertaining intention, courts are necessarily controlled by the evidence as to the conduct and outward acts by which alone the inward motive may, with safety, be determined.

(Source: Land Bank of the Philippines vs. Poblete, G.R. No. 196577, February 25, 2013)

Ma. Soledad Deriquito-Mawis is Dean at the Lyceum of the Philippines University; Chairperson of the Philippine Association of Law Schools; and founder of Mawis Law Office