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PROPERTY RULES

Institutional apostasy

Lorenz is the son of the now deceased Jovi, who was the owner of a parcel of lot. He decided to reclaim his mother’s right over a parcel of land. Believing in his cause, Lorenz filed a complaint for reconveyance of land and cancellation of its transfer certificate title against spouses Neo and Nen, Ed, and the Bank.

In his complaint, Lorenz claimed that: (a) Nen falsified a Deed of Sale and caused the transfer of title of the lot in her and her brother Ed’s names; (b) spouses Santo and Ed mortgaged the lot to the Bank as security for their loan; (c) he was dispossessed of the lot when the Bank foreclosed the property upon Nen and Ed’s failure to pay their loan; (d) titles of the lot and another foreclosed land were consolidated in one TCT, under the name of the Bank; and that (e) Nen was already found criminally guilty of falsifying the said deed by another court.

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In their answer, the spouses Santo admitted having mortgaged the lot to the Bank. They also admitted that the property was foreclosed because they failed to pay their loan.

Moreover, they confirmed that Nenita was convicted in the falsification case filed by Musni. By way of defense, however, the spouses Santo alleged that they, together with Ed, ran a lending business. As security for a loan, Lorenz and his wife executed a Deed of Sale over the lot in favor of spouses Santo. The title of the lot was then transferred to Nen and Ed, mortgaged to the Bank, and was foreclosed later.

The Bank, on the other hand, asserted that it is a mortgagee in good faith and an innocent purchaser for value. It claimed that the transfer of the title in its name was because of a decision rendered by the Department of Agrarian Reform Adjudication Board. It countered that its transaction with the spouses Santo and Ed was legitimate, and that it verified the authenticity of the title with the Register of Deeds. Further, the bank loan was secured by another lot owned by the Spouses Santo, and not solely by the lot being claimed by Musni.

The Bank prayed that it be paid the value of the property and expenses it incurred, should the trial court order the reconveyance of the property to Lorenz.

Q: What is the doctrine of mortgagee in good faith?

A: The doctrine of “mortgagee in good faith” is based on the rule that all persons dealing with property covered by a Torrens Certificate of Title are not required to go beyond what appears on the face of the title. This is in deference to 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.

Q: What is the standard of care and due diligence required of a bank in order to be deemed a mortgagee in good faith?

A: In the case of banks and other financial institutions, greater care and due diligence are required since they are imbued with public interest, failing which renders the mortgagees in bad faith.

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 owner(s) thereof.

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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.

Banks are expected to be more cautious than ordinary individuals in dealing with lands, even registered ones, since the business of banks is imbued with public interest. It is of judicial notice that the standard practice for banks before approving a loan is to send a staff to the property offered as collateral and verify the genuineness of the title to determine the real owner or owners.

Q: Is the Bank in this case a mortgagee in good faith?

A: No, it is not. It was established that the Bank’s account officer failed to establish that the bank’s standard operating procedure in accepting the property as security, including having investigators visit the subject property and appraise its value were followed.

Q: What is a purchaser in good faith?

A: A purchaser in good faith is one who buys property without notice that some other person has a right to or interest in such property and pays its fair price before he has notice of the adverse claims and interest of another person in the same property.

Q: Is the Bank a purchaser in good faith?

A:  The Bank is not an innocent purchaser for value. With all its resources, it could have ascertained how Nen acquired the land mortgaged to it and later foreclosed by it. The fact the property was foreclosed after the criminal case was instituted should have warned it. The Bank shall be responsible for its and its employer shortcomings

The rule on “innocent purchasers or [mortgagees] for value” is applied more strictly when the purchaser or the mortgagee is a bank.

Banks are expected to exercise higher degree of diligence in their dealings, including those involving lands. Banks may not rely simply on the face of the certificate of title.

(Source: Land Bank of the Philippines vs. Musni, et al., G.R. No. 206343, February 22, 2017)

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

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