Guia is the registered owner of a parcel of agricultural land as evidenced by an Original Certificate of Title (OCT).
She sold the south portion of her land with an approximate area of 1,350 sqm to her friends, spouses Pete and Carrie.
Pete and Carrie immediately took actual possession of the land despite the fact that the Deed of Sale has not been registered with the Register of Deeds nor annotated on Guia’s Original Certificate Title. The couple started planting sugarcane on their land, and in due time, enjoyed the fruits of the labor.
Meanwhile, after the execution of the unregistered Deed of Absolute Sale, Guia ordered her son, Ed, to subdivide the land into three lots and to apply for the issuance of separate titles therefor, to wit: Lot 3-A, Lot 3-B, and Lot 3-C. Guia likewise instructed Ed to deliver the Transfer Certificate of Title (TCT) corresponding to Lot 3-C to Pete and Carrie.
Ed succeeded in canceling the original certificate title and in subdividing the lot.
The TCT corresponding to Lot 3-C was issued with Guia still as the registered owner of the land. Yet, Ed deliberately did not deliver the TCT for Lot 3-C to Pete and Carrie.
Meanwhile, the Lord called Guia to be by His side.
Unknown to Pete and Carrie, Ed applied for a loan with ABC Rural Bank and offered to secure the loan with a Deed of Real Estate Mortgage over Lot 3-C. The Bank thereafter conducted its usual credit investigation.
The Bank’s Report of Inspection and Credit Investigation stated, among others, that the land to be used as collateral was inspected and that lot is planted with sugarcane with annual yield crops in the amount of P15,000.
The Bank thereafter approved Ed’s loan application. The loan and Real Estate Mortgage were made pursuant to the Special Power of Attorney purportedly executed by Guia, the registered owner of Lot 3-C, in favor of the mortgagor, Ed.
Moreover, the Real Estate Mortgage and Special Power of Attorney were duly annotated in the memorandum of encumbrances of the transfer certificate title covering Lot 3-C.
Seven years after the unregistered sale between Guia and spouses Pete and Carrie, the couple, much to their horror, discovered from the Register of Deeds the following facts: (1) the subdivision of Guia’s lot into Lots 3-A, 3-B, and 3-C; (2) the issuance of separate TCTs for each lot; and (3) the annotation of the Real Estate Mortgage and Special Power of Attorney over Lot 3-C which is the lot they bought from Guia.
Immediately, Pete and Carrie registered their adverse claim based on the unregistered sale over Lot 3-C. The spouses insisted that they have a better right over the parcel of land than the bank. On the other hand, the Bank claims that it is a mortgagee in good faith, and thus has better right than the spouses.
Q: What is the doctrine of mortgagee in good faith?
A: The doctrine of mortgagee in good faith refers to 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.
The doctrine of “mortgagee in good faith” is based on the rule that all persons dealing with the property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title.
The public interest in upholding the indefeasibility of a certificate of title, as evidence of lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certificate of title.
Q: What is the degree of prudence required of a mortgagee when he does not deal directly with the registered owner of the real property?
A: In cases where the mortgagee does not directly deal with the registered owner of real property, the law requires that a higher degree of prudence be exercised by the mortgagee.
While one who buys from the registered owner does not need to look behind the certificate of title, one who buys from one who is not the registered owner is expected to examine not only the certificate of title but all factual circumstances necessary for one to determine if there are any flaws in the title of the transferor, or in the capacity to transfer the land.
Thus, where the mortgagor is not the registered owner of the property but is merely an attorney-in-fact of the same, it is incumbent upon the mortgagee to exercise greater care and a higher degree of prudence in dealing with such mortgagor.
Q: What is the degree of diligence required when the mortgagee is a banking institution?
A: Unlike private individuals, it is expected to exercise greater care and prudence in its dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations.
The bank cannot rely merely on the certificate of title offered by the mortgagor in ascertaining the status of mortgaged properties. Since its business is impressed with public interest, the mortgagee-bank is duty-bound to be more cautious even in dealing with registered lands. Indeed, the rule that person dealing with registered lands can rely solely on the certificate of title does not apply to banks. Thus, before approving a loan application, it is a standard operating practice for these institutions to conduct an ocular inspection of the property offered for mortgage and to verify the genuineness of the title to determine the real owners thereof. The apparent purpose of an ocular inspection is to protect the “true owner” of the property as well as innocent third parties with a right, interest or claim thereon from a usurper who may have acquired a fraudulent certificate of title thereto.
Q: Why is the degree of diligence required of bank higher than an ordinary person?
A: The required degree of diligence is higher because the banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence.
Q: In this case, did ABC Rural Bank exercise the required degree of diligence, prudence, and care in approving the loan application of Ed?
A: No, it did not. The Bank should have diligently conducted an investigation of the land offered as collateral. While it is true that the Bank inspected the land, it turned a blind eye to the finding of its credit investigator that the lot is planted with sugarcane with annual yield crops in the amount of P15,000.
The above fact should have immediately prompted the Bank to conduct further inquiries, especially since Ed was not the registered owner of the land being mortgaged. He merely derived the authority to mortgage the lot from the Special Power of Attorney allegedly executed by Guia. Hence, it was incumbent upon the Bank to be more cautious in dealing with Ed and inquire further regarding the identity and possible adverse claim of those in actual possession of the property.
Q: Is ABC Rural Bank then a mortgagee in good faith?
A: In view of the above, when the Bank acted with haste in granting the mortgage loan and did not ascertain the ownership of the land being mortgaged, as well as the authority of the supposed agent executing the mortgage, it cannot be considered an innocent mortgagee. Consequently, the Bank is not entitled to protection under the law. The unregistered sale in favor of the spouses Pete and Carrie must prevail over the mortgage lien of ABC Rural Bank.
(Source: Arguelles vs. Malarayat Rural Bank, Inc., G.R. No. 200468, March 19, 2014)
Ma. Soledad Deriquito-Mawis Dean, College of Law, Lyceum of the Philippine University Chairperson, Philippine Association of Law Schools Mawis Law Office