Canlas vs. Court of Appeals

A mortgage constituted by impostors is void, and a bank that fails to exercise the higher degree of diligence required of banking institutions in verifying the identity of mortgagors cannot claim the protective mantle of the land registration law; under the doctrine of last clear chance, the bank must bear the loss.

Osmundo S. Canlas and Angelina Canlas were the registered owners of two parcels of land in San Dionisio (BF Homes), Parañaque, Metro Manila, each with a semi-concrete residential house and covered by separate transfer certificates of title. Osmundo and Vicente Mañosca entered a business venture and a sale arrangement involving the same parcels, under which Osmundo executed a special power of attorney in Mañosca's favor and delivered the owner's copies of the titles. Asian Savings Bank is a banking institution whose business is affected with public interest and which is required to observe a degree of diligence higher than that of a good father of a family. The Civil Code provisions on diligence and mortgages, particularly Articles 1173 and 2085, supply the statutory backdrop for the dispute.

Osmundo S. Canlas and Angelina Canlas, husband and wife, owned two parcels of land in San Dionisio (BF Homes), Parañaque, Metro Manila, each with a semi-concrete residential house, covered by Transfer Certificate of Title No. 54366 in Osmundo's name and Transfer Certificate of Title No. S-78498 in Angelina's name. In August 1982, Osmundo and Vicente Mañosca decided to venture into business and raise the capital needed for it. Osmundo executed a Special Power of Attorney authorizing Mañosca to mortgage the two parcels. Osmundo later agreed to sell the parcels to Mañosca for P850,000, of which P500,000 was payable within one week and the P350,000 balance would serve as Osmundo's investment in the business. Osmundo delivered the transfer certificates of title to Mañosca. Mañosca issued two postdated checks in favor of Osmundo for P40,000 and P460,000, but the check covering the larger amount was not sufficiently funded.

On September 3, 1982, Mañosca mortgaged the same parcels for P100,000 to a certain Attorney Manuel Magno, using impostors who misrepresented themselves as the Canlas spouses. On September 29, 1982, Mañosca obtained a P500,000 loan from Asian Savings Bank (ASB), using the same parcels as security, again with the same impostors introducing themselves as Osmundo and Angelina Canlas. When the loan was not paid, ASB extrajudicially foreclosed the mortgage.

On January 15, 1983, Osmundo wrote ASB that the mortgage over the two parcels had been executed without the Canlas spouses' authority and requested that steps be taken to annul or revoke it. On January 18, 1983, Osmundo also wrote the Office of Sheriff Maximo O. Contreras asking that the auction sale scheduled for February 3, 1983 be cancelled or held in abeyance. Sheriff Contreras and ASB refused to heed Osmundo's position and proceeded with the scheduled auction sale.

On February 3, 1983, the Canlas spouses instituted the present case for annulment of the deed of real estate mortgage with a prayer for a writ of preliminary injunction. On May 23, 1983, the trial court issued an Order restraining the sheriff from issuing the corresponding Certificate of Sheriff's Sale. Vicente Mañosca was declared in default for failure to file his answer despite several motions for extension.

The trial court found that the mortgage had been executed by impostors and annulled it. On appeal, the Court of Appeals found that Osmundo had been introduced by Mañosca as "Leonardo Rey" during a luncheon meeting at the Metropolitan Club attended by bank officers; that Osmundo did not correct the introduction; that he accompanied Mañosca when documents for the loan were submitted and when a P200,000 manager's check was released; and that he received that check. The Court of Appeals concluded from these circumstances that Osmundo had actively participated in the loan application.

• Validity of Mortgage: Petitioner argued that the Court of Appeals erred in holding that the mortgage of the properties subject of the case was valid.
• Negligence and Estoppel: Petitioner maintained that the Court of Appeals erred in holding that petitioners are not entitled to relief because they were negligent and therefore must bear the loss.
• Bank's Due Diligence: Petitioner argued that the Court of Appeals erred in holding that ASB exercised due diligence in granting the loan application.
• Bad Faith in Foreclosure: Petitioner contended that the Court of Appeals erred in holding that ASB did not act with bad faith in proceeding with the foreclosure sale.
• Moral Damages: Petitioner argued that the Court of Appeals erred in awarding ASB moral damages.

• Validity of Mortgage: Whether the real estate mortgage over the Canlas spouses' properties in favor of ASB is valid.
• Negligence and Estoppel: Whether the Canlas spouses are barred from relief because they were negligent and must bear the loss.
• Bank's Due Diligence: Whether ASB exercised the degree of diligence required of banks in granting Mañosca's loan and accepting the mortgage.
• Bad Faith in Foreclosure: Whether ASB acted in bad faith in proceeding with the foreclosure sale.
• Moral Damages: Whether ASB is entitled to moral damages.
• Attorney's Fees: Whether the Canlas spouses are entitled to attorney's fees.

• Validity of Mortgage: No. The mortgage is void because it was executed by impostors, not by the absolute owners; a mortgage constituted by an impostor is void under Article 2085 of the Civil Code.
• Negligence and Estoppel: No. The Canlas spouses are not estopped; the Court of Appeals' finding of participation had no sustainable basis, and the P200,000 check was payment for the land sold to Mañosca.
• Bank's Due Diligence: No. ASB failed to exercise the higher diligence required of banks; it relied only on residence certificates and signatures matching a prior mortgage, without identification cards or additional proof of identity.
• Bad Faith in Foreclosure: The foreclosure sale cannot stand. It was conducted under a void mortgage and despite the Canlas spouses' notice; the bank must bear the loss under the doctrine of last clear chance, although the Court did not rest on an express finding of bad faith.
• Moral Damages: No. The Court of Appeals erred in awarding ASB moral damages; the bank was negligent and must bear the loss, and the RTC decision reinstated by the Court did not award ASB moral damages.
• Attorney's Fees: No. The Court stated that Osmundo Canlas was negligent, making petitioners undeserving of attorney's fees; the dispositive nevertheless reinstated the RTC decision in full.

• Validity of Mortgage: The Court applied Article 2085 of the Civil Code, which provides that a contract of mortgage must be constituted only by the absolute owner of the property mortgaged. A mortgage constituted by an impostor is void. The records established that the deed of real estate mortgage was entered into and signed by impostors who misrepresented themselves as Osmundo and Angelina Canlas. The Special Power of Attorney executed by Osmundo in favor of Mañosca did not authorize the mortgage because the mortgage was not executed by Mañosca under the Special Power of Attorney but by impostors. The mortgage was therefore a complete nullity, and the public auction sale conducted under it was illegal and without binding effect.
• Negligence and Estoppel: The Court of Appeals concluded that Osmundo Canlas was a party to the fraudulent scheme of Mañosca and was estopped from impugning the validity of the deed of mortgage. The Supreme Court found that the findings of the Court of Appeals were barren of any sustainable basis. The execution of the deeds of mortgage was made possible not by the Special Power of Attorney but through the use of impostors who misrepresented themselves as the Canlas spouses. Osmundo was introduced as "Leonardo Rey" by Mañosca only on the occasion of the luncheon meeting at the Metropolitan Club. His failure to rectify the misrepresentation could not be taken as a fraudulent act; he did not want to embarrass Mañosca and waited for the end of the meeting to correct him. During the luncheon meeting, they did not talk about the security or collateral for the loan, as corroborated by Josefina Rojo, the account officer of ASB. Osmundo accompanied Mañosca because he wanted to make sure that Mañosca would pay the balance of the purchase price of the lots out of the proceeds of the loan. He did not know that the collateral used by Mañosca were the Canlas spouses' properties; Mañosca showed him several certificates of title of lots which, according to Mañosca, were the collaterals. The receipt by Osmundo of the P200,000 check from ASB did not estop him from assailing the validity of the mortgage because the amount was in payment of the parcels of land he sold to Mañosca. However, Osmundo Canlas was undoubtedly negligent in entrusting the titles to Mañosca, which negligence made the petitioners undeserving of an award of attorney's fees.
• Bank's Due Diligence: Under Article 1173 of the Civil Code, if the law or contract does not state the diligence to be observed in the performance of an obligation, that which is expected of a good father of a family is required. The degree of diligence required of banks is more than that of a good father of a family because the business of a bank is affected with public interest, holding in trust the money of depositors, which the bank should guard against loss due to negligence or bad faith. The protective mantle of the land registration law is accorded only to purchasers or mortgagees for value and in good faith. In this case, ASB did not observe the requisite diligence in ascertaining or verifying the real identity of the couple who introduced themselves as the spouses Osmundo Canlas and Angelina Canlas. Not even a single identification card was exhibited by the impostors. The bank acted on their representations simply on the basis of residence certificates bearing signatures which tended to match the signatures affixed on a previous deed of mortgage to Atty. Magno covering the same parcels of land. The previous deed of mortgage did not bear the tax account number of the spouses, as well as the Community Tax Certificate of Angelina Canlas. Despite this, the bank did not require the impostors to submit additional proof of their true identity. Felizardo Mangubat, Assistant Vice President of ASB, testified that the bank accepted the signatures on the basis of the prior notarized mortgage and residence certificates. These efforts fell short of the responsibility of the bank to observe more than the diligence of a good father of a family.
• Bad Faith in Foreclosure: The bank and the sheriff proceeded with the auction sale scheduled on February 3, 1983 despite Osmundo Canlas' January 15, 1983 letter to ASB and January 18, 1983 letter to the sheriff informing them that the mortgage was without the Canlas spouses' authority and requesting that the auction sale be cancelled or held in abeyance. Because the mortgage was void, the foreclosure and auction sale had no valid foundation. The Court held that for not observing the degree of diligence required of banking institutions, ASB had to bear the loss sued upon. The Court's ratio rested on ASB's negligence and the doctrine of last clear chance rather than on an express finding of bad faith; the RTC decision declaring the auction sale illegal and without binding effect was reinstated.
• Moral Damages: The Court of Appeals awarded ASB P50,000 as moral and exemplary damages and P15,000 as attorney's fees. The Supreme Court set aside the Court of Appeals decision and reinstated the RTC decision. Since ASB failed to exercise the required diligence and must bear the loss, it is not entitled to moral damages. The RTC decision did not award ASB moral damages.
• Attorney's Fees: The RTC awarded P20,000 as attorney's fees to the Canlas spouses. The Court stated that under the attendant facts and circumstances, Osmundo Canlas was undoubtedly negligent, which negligence made the petitioners undeserving of an award of attorney's fees. The dispositive portion nonetheless reinstated the RTC decision in full.

• Degree of diligence required of banks — Banks must exercise a degree of diligence higher than that of a good father of a family because banking is affected with public interest and banks hold depositors' money in trust. They must exercise necessary care and prudence even when dealing with registered or titled property. The protective mantle of the land registration law is accorded only to purchasers or mortgagees for value and in good faith. In this case, ASB failed to verify the identity of the impostors, relying only on residence certificates and signatures matching a prior mortgage, without identification cards or additional proof. It therefore could not claim the protection of the land registration law and had to bear the loss.
• Doctrine of last clear chance — Where both parties are negligent but the negligent act of one is appreciably later in point of time than that of the other, or where it is impossible to determine whose fault or negligence caused the incident, the one who had the last clear opportunity to avoid the impending harm but failed to do so is chargeable with the consequences. Assuming Osmundo Canlas was negligent in entrusting the titles to Mañosca, ASB had the last clear chance to prevent the fraud by faithfully complying with the requirements for ascertaining the identity of persons transacting with it. The bank must therefore suffer the resulting loss.
• Mortgage by impostor is void — A contract of mortgage must be constituted only by the absolute owner of the property mortgaged. A mortgage constituted by an impostor is void. Because the deed of real estate mortgage was entered into and signed by impostors who misrepresented themselves as the Canlas spouses, the mortgage was a complete nullity, and the foreclosure and auction sale based on it were illegal and without binding effect.
• No estoppel from failure to correct misrepresentation — The Court rejected the Court of Appeals' conclusion that Osmundo Canlas was estopped by having been introduced as "Leonardo Rey" and failing to correct the misrepresentation. His silence at the luncheon meeting was not fraudulent; he did not want to embarrass Mañosca and waited until the meeting ended. The meeting did not discuss the loan's collateral, and his receipt of the P200,000 check was payment for the land he had sold to Mañosca. He was unaware that Mañosca used the Canlas spouses' parcels as security.

• "The degree of diligence required of banks is more than that of a good father of a family; in keeping with their responsibility to exercise the necessary care and prudence in dealing even on a registered or titled property. The business of a bank is affected with public interest, holding in trust the money of the depositors, which bank deposits the bank should guard against loss due to negligence or bad faith, by reason of which the bank would be denied the protective mantle of the land registration law, accorded only to purchasers or mortgagees for value and in good faith." — This passage states the Court's ratio on the higher diligence required of banks and explains why ASB could not invoke the protection accorded to good-faith mortgagees.
• "Under the doctrine of last clear chance, which is applicable here, the respondent bank must suffer the resulting loss. In essence, the doctrine of last clear chance is to the effect that where both parties are negligent but the negligent act of one is appreciably later in point of time than that of the other, or where it is impossible to determine whose fault or negligence brought about the occurrence of the incident, the one who had the last clear opportunity to avoid the impending harm but failed to do so, is chargeable with the consequences arising therefrom." — This passage defines the doctrine of last clear chance and applies it to place the loss on ASB despite any antecedent negligence of Osmundo Canlas.
• "Settled is the rule that a contract of mortgage must be constituted only by the absolute owner on the property mortgaged; a mortgage, constituted by an impostor is void." — This passage states the controlling rule on the validity of mortgages and supplies the basis for annulling the mortgage in this case.
• "Considering that it was established indubitably that the contract of mortgage sued upon was entered into and signed by impostors who misrepresented themselves as the spouses Osmundo Canlas and Angelina Canlas, the Court is of the ineluctible conclusion and finding that subject contract of mortgage is a complete nullity." — This passage is the Court's concluding finding that the mortgage was void and is commonly cited for the effect of a mortgage executed by impostors.

• Philippine Bank of Commerce vs. Court of Appeals, 269 SCRA 695 — Cited for the rule that the degree of diligence required of banks is more than that of a good father of a family, and for the doctrine of last clear chance.
• Rural Bank of Sariaya, Inc. vs. Yacon, 175 SCRA 62 — Cited for the principle that a bank's business is affected with public interest and that the protective mantle of the land registration law is accorded only to purchasers or mortgagees for value and in good faith.
• Parqui vs. PNB, 96 Phil. 157 [1954] — Cited for the rule that a mortgage constituted by an impostor is void.
• Picart vs. Smith, 37 Phil. 809 — Cited in the discussion of the doctrine of last clear chance.

• Article 1173, Civil Code — Provides that fault or negligence of the obligor consists in the omission of the diligence required by the nature of the obligation and corresponding to the circumstances of persons, time, and place; if the law or contract does not state the diligence to be observed, that expected of a good father of a family is required. The Court applied this provision but held that banks must observe more than good father diligence, so ASB's reliance on residence certificates and signatures without further verification fell short.
• Article 2085, Civil Code — Requires that a contract of mortgage be constituted only by the absolute owner of the property mortgaged. The Court applied this provision to hold that the mortgage executed by impostors who misrepresented themselves as the Canlas spouses was void.
• Rule 45, Rules of Court — The petition was filed as a Petition for Review on Certiorari under Rule 45. The Court granted it and set aside the Court of Appeals decision.

Melo, Vitug and Gonzaga-Reyes, JJ., concur. Panganiban, J., in the result.