De la Cruz vs. Fabie

An innocent purchaser for value who acquires registered land from a person whose certificate of title was procured through a forged deed obtains a valid and indefeasible title under the Torrens system, and the original owner who was negligent in safeguarding her certificate of title cannot recover the land from such innocent purchaser.

Gregoria Hernandez was the registered owner of a parcel of land in Binondo, Manila, covered by certificate of title No. 121 under the Torrens system (Act No. 496). Vedasto Velazquez served as her attorney-in-fact and resided with her, holding all muniments of title to her property. After Hernandez's death, Marcos de la Cruz became the administrator of her estate. The Torrens system's assurance fund, administered by the Insular Treasurer, was designed to indemnify registered owners wrongfully deprived of their land through fraudulent registration, but only where the owner was without negligence. A prior action (case No. 5858) against the assurance fund had already been dismissed on demurrer and affirmed by the Supreme Court on the ground of Hernandez's negligence.

Gregoria Hernandez was the registered owner of a parcel of land situated at No. 364 Calle Magdalena in the district of Binondo, Manila, covered by certificate of title No. 121 issued by the register of deeds on January 11, 1904. Vedasto Velazquez was her attorney-in-fact and, in that capacity, held all documents and muniments of title relating to the land, including the owner's duplicate certificate. Velazquez lived in the same house as Hernandez, who was sixty years old, had no husband or children, and depended on the rental income from the land for her support.

A few days after the registration of the land in Hernandez's name, Velazquez abused the confidence reposed in him by forging a notarial instrument purporting to show that Hernandez had sold the land to him for P8,000. He presented this forged deed (Exhibit A) and Hernandez's certificate of title No. 121 to the register of deeds, who cancelled Hernandez's title and issued certificate of title No. 43 in Velazquez's name on January 18, 1904. On November 7, 1904, Velazquez sold the land to Ramon Fabie for P5,000 under a pacto de retro, with a stipulated repurchase period of one year, extendable for another year by mutual agreement. Fabie registered the deed (Exhibit C) on the same date, and a memorandum of the sale was entered on the back of Velazquez's certificate of title No. 43. The repurchase period expired on November 7, 1905, without Velazquez exercising his right, and the sale thereupon became absolute and final by operation of the covenant itself.

The fraud was discovered sometime between November 7, 1904, and November 7, 1905. Hernandez, according to testimony adduced by the plaintiff's own witnesses, had as early as 1904 demanded that Velazquez return her documents, and Velazquez had responded that he would deliver, "if not the money, the document" — suggesting some arrangement between them regarding the land. Hernandez did not commence judicial proceedings until September 26, 1906, when she filed a complaint against Velazquez in the CFI of Manila to annul the fraudulent deed. A notice of lis pendens was not served on the register of deeds until May 8, 1907 — more than two and a half years after the sale to Fabie had become irrevocable. On May 31, 1907, Velazquez executed a deed of final and absolute sale (Exhibit D) in favor of Fabie, who presented it to the register of deeds and was issued certificate of title No. 766. On December 31, 1907, the CFI rendered judgment annulling the forged deed (Exhibit A), though Hernandez never notified the register of deeds of the loss or theft of her certificate No. 121, as required by section 55 of Act No. 496, nor did she register the judgment of annulment as required by section 81.

After Hernandez's death, her administrator, Marcos de la Cruz, first sued the Insular Treasurer for indemnity from the assurance fund (case No. 5858), but the complaint was dismissed on demurrer and the dismissal was affirmed by the Supreme Court on September 23, 1911, principally on the ground of Hernandez's negligence. On October 31, 1911, de la Cruz filed a new complaint against Fabie and the register of deeds, praying for cancellation of the registrations and certificates, restoration of the land, and damages. By stipulation of the parties in the second proceedings, it was admitted that the deed from Hernandez to Velazquez was fraudulent, null, and void, and that Ramon Fabie was an innocent holder of a certificate of title for value. The trial court, presided over by Judge Charles S. Lobingier, granted all the demands, ordering cancellation of documents A, C, and D and certificates Nos. 43 and 766, and adjudicating possession of the land to the plaintiff.

• Validity of Fabie's Title: Petitioner maintained that Fabie's title was perfect and vested on November 7, 1904, when he purchased the land under pacto de retro and immediately registered the sale, the certificate of title bearing no encumbrance at that time, pursuant to sections 50 and 55 of Act No. 496.
• Effect of Pacto de Retro: Petitioner argued that the validity of a contract of purchase and sale is not affected by the addition of a pacto de retro, since ownership of the thing sold is thereby transferred to the vendee, who is substituted for the vendor, as decided in Guillermo vs. Matienzo, 8 Phil. Rep. 368.
• Irrelevance of Lis Pendens: Petitioner contended that the notice of lis pendens registered on May 8, 1907, could not affect Fabie's rights, which were acquired on November 7, 1904, and had become irrevocable and absolute on November 7, 1905 — two and a half years before the lis pendens was filed.
• Supererogatory Nature of Exhibit D: Petitioner asserted that the deed of final sale (Exhibit D) was unnecessary and supererogatory, since the pacto de retro (Exhibit C) had already become an absolute sale by operation of its own terms on November 7, 1905, and that even if Exhibit D were declared null and void, the land would still belong to Fabie by virtue of Exhibit C.

• Validity of Exhibit D: Whether the deed of final sale (Exhibit D) executed by Velazquez in favor of Fabie should be annulled and cancelled.
• Cancellation of Registrations: Whether the registrations of documents A, C, and D and certificates Nos. 43 and 766 should be cancelled.
• Innocent Purchaser for Value: Whether Fabie, as an innocent purchaser for value who bought from a registered owner whose title was procured through a forged deed, acquired a valid and indefeasible title under the Torrens system.
• Owner's Negligence: Whether Hernandez's negligence in safeguarding her certificate of title and in delaying judicial action precluded recovery, whether against the assurance fund or against Fabie.
• Effect of Lis Pendens: Whether the notice of lis pendens registered on May 8, 1907, could affect Fabie's rights acquired in November 1904.

• Validity of Exhibit D: No. The deed of final sale (Exhibit D) is supererogatory and merely corroborative, since the pacto de retro (Exhibit C) had already become an absolute sale on November 7, 1905, by force of its own terms, making Exhibit D unnecessary to vest title in Fabie.
• Cancellation of Registrations: No. Registrations C and D are perfectly legal, and registration A, though fraudulently obtained, remains in full force and effect under section 38 of Act No. 496 because there is an innocent purchaser for value, in whose favor the decree of registration fraudulently obtained shall not be opened.
• Innocent Purchaser for Value: Yes. Fabie, having been stipulated as an innocent holder of a certificate of title for value, is the absolute owner of the land under section 55 of Act No. 496, and the action for recovery of possession cannot prosper against him.
• Owner's Negligence: Yes. Hernandez's negligence — in surrendering her certificate of title to Velazquez, in failing to notify the register of deeds of its loss, in failing to take timely judicial action for over two years despite knowledge of the fraud, and in failing to register the judgment annulling the forged deed — precluded recovery from the assurance fund under section 101 of Act No. 496 and supported the dismissal of the action against Fabie.
• Effect of Lis Pendens: No. A notice of lis pendens registered on May 8, 1907, cannot affect a sale consummated on November 7, 1904, which had become irrevocable and absolute on November 7, 1905.

• Validity of Exhibit D: The Court found that the pacto de retro (Exhibit C) contained a clause providing that if the vendor did not repurchase the property within one year, the conditional sale would convert into an absolute and unrestricted one. The repurchase period expired on November 7, 1905, without Velazquez exercising his right. By operation of the covenant itself, the sale became final and absolute on that date. The subsequent deed of final sale (Exhibit D), executed on May 31, 1907, was therefore supererogatory — it conferred no additional right and served merely as a confirmation of what was already implied by the registration formalities. Even if Exhibit D were declared null and void, the land would still belong to Fabie because Exhibit C, a perfect title of ownership in accordance with law, remained in force. The Court relied on Guillermo vs. Matienzo, 8 Phil. Rep. 368, for the principle that a pacto de retro does not affect the ownership of the thing sold more than to either reconvey it to the vendor or consolidate it in the purchaser once the condition has been fulfilled or extinguished.

• Cancellation of Registrations: The Court held that cancelling registrations C and D was improper because they were perfectly legal instruments executed by the then-registered owner, Velazquez, in favor of Fabie. As for registration A — the fraudulent registration procured by Velazquez's forged deed — the Court applied section 38 of Act No. 496, which provides that in case there is an innocent purchaser for value, the decree of registration fraudulently obtained shall not be opened but shall remain in full force and effect forever, subject only to the right of appeal. Because Fabie was an innocent purchaser for value who found no objection to registration A and whose certificate No. 43 was issued upon it, that registration could not be cancelled to his prejudice. The Court further noted that cancelling registration A would not revive Hernandez's original registration, since the original inscription had disappeared the moment it was substituted by the registration of Exhibit A, which remained unchallenged in the registry. Hernandez had never petitioned for the cancellation of registration A or for the reentry of her original registration — petitions she had not made even in the present complaint filed seven years after the events.

• Innocent Purchaser for Value: The Court applied the second proviso of section 55 of Act No. 496, which states that after the transcription of the decree of registration on the original application, any subsequent registration procured by the presentation of a forged duplicate certificate or forged deed shall be null and void, but with the qualification that "in all cases of registration procured by fraud the owner may pursue all his legal and equitable remedies against the parties to such fraud, without prejudice to the rights of any innocent holder for value of a certificate of title." By stipulation of the parties in the present proceedings, it was admitted that Fabie was an innocent holder of a certificate of title for value. Consequently, under section 55, he was the absolute owner of the land, and the action for recovery of possession could not prosper. The Court emphasized that the registry showed Velazquez as the owner, which enabled Fabie to deal with him; Fabie's title was perfect under sections 50 and 55 of Act No. 496, and his ownership originated from the consummation of the contract and the delivery of the thing purchased.

• Owner's Negligence: The Court found that Hernandez was negligent on multiple grounds. First, she had surrendered her certificate of title and all muniments of title to Velazquez, her attorney-in-fact, who lived in the same house. The Court distinguished abuse of confidence from robbery: while robbery is an unforeseen and fortuitous event for which no negligence can be charged, abuse of confidence "is not a fortuitous event, unforeseen and unavoidable; rather should it be foreseen and avoided." Second, Hernandez knew of the fraud as early as 1904 — she demanded the return of her documents and Velazquez spoke of delivering "if not the money, the document" — yet she allowed two years to pass before commencing judicial proceedings in September 1906. Third, she failed to notify the register of deeds of the loss or theft of her certificate No. 121 as required by section 55 of Act No. 496. Fourth, she failed to register the judgment annulling the forged deed as required by section 81. The Court cited section 101 of Act No. 496, which allows recovery from the assurance fund only by a person who is "without negligence" wrongfully deprived of land, and found that Hernandez had not met this condition. The Court quoted from James Edward Hoff's "Australian Torrens System" that "no damages are recoverable from the 'assurance fund' if the loss has been caused or contributed to by the owner's negligence."

• Effect of Lis Pendens: The Court held that the notice of lis pendens, registered on May 8, 1907, could not affect Fabie's rights, which had been acquired on November 7, 1904 — two and a half years earlier — and had become irrevocable and absolute on November 7, 1905. The plaintiff himself had argued in his brief in the prior case that all questions relative to the lis pendens should be eliminated, and the Court adopted this reasoning. The lis pendens was filed long after Fabie's title had already vested and become indefeasible.

• Innocent Purchaser for Value Under the Torrens System — A person who purchases registered land for value and in good faith from a registered owner whose title was procured through a forged instrument acquires a valid and indefeasible title, notwithstanding the fraud or forgery committed by the prior registered owner. Under section 55 of Act No. 496, while a registration procured by a forged deed is null and void as between the owner and the forger, the rights of an innocent holder for value of a certificate of title are expressly preserved. The forged registration may serve as the root of a good title in favor of a bona fide transferee for value. The Court applied this doctrine by holding that Fabie, stipulated as an innocent holder for value, was the absolute owner and could not be deprived of the land.

• Negligence as a Bar to Recovery from the Assurance Fund — Under section 101 of Act No. 496, only a person who is "without negligence" wrongfully deprived of registered land by the registration of another person may recover from the assurance fund. The owner's negligence in safeguarding the certificate of title, in failing to notify the register of deeds of its loss, or in delaying judicial action bars recovery. The Court applied this doctrine by finding that Hernandez's surrender of her certificate to Velazquez, her knowledge of the fraud as early as 1904 without taking action until September 1906, and her failure to comply with statutory notification requirements constituted negligence precluding indemnity.

• Abuse of Confidence Distinguished from Robbery — Abuse of confidence by an agent or attorney-in-fact is not a fortuitous event; it is a willful and deliberate act that should be foreseen and avoided by the principal. Unlike robbery, which is unforeseen and unavoidable, abuse of confidence implies negligence on the part of the person wronged, as where an owner leaves a checkbook in the possession of another and the latter draws against the bank. The Court used this distinction to establish that Hernandez's loss was attributable to her own negligence rather than to an unforeseeable criminal act.

• Pacto de Retro as Transfer of Ownership — A sale with pacto de retro transfers ownership to the vendee, who is substituted for the vendor, subject only to the right of repurchase. When the repurchase period expires without exercise, the sale becomes absolute and final by operation of the covenant itself, without need of any further instrument. The Court applied this doctrine in holding that Exhibit D was supererogatory because Exhibit C had already vested absolute title in Fabie on November 7, 1905.

• "abuse of confidence is not a fortuitous event, unforeseen and unavoidable; rather should it be foreseen and avoided; it is a willful and deliberate act on the part of the person who commits the abuse, perhaps because of the indolence and negligence of the person wronged" — This passage articulates the Court's distinction between robbery and abuse of confidence, establishing that an owner who entrusts documents of title to an agent bears responsibility for the foreseeable consequences, and that such negligence bars recovery from the assurance fund.

• "in all cases of registration procured by fraud the owner may pursue all his legal and equitable remedies against the parties to such fraud, without prejudice to the rights of any innocent holder for value of a certificate of title." — This is the proviso of section 55 of Act No. 496 upon which the majority relied to hold that Fabie's title as an innocent purchaser for value was superior to Hernandez's claim, notwithstanding the forged deed through which Velazquez obtained his registration.

• "it has only been shown, by virtue of a stipulation of facts, that Ramon Fabie is an innocent holder of a certificate of title for value; consequently, in conformity with the oft-cited section 55 of Act No. 496, he is the absolute owner of the land mentioned in the complaint, and the action for recovery of possession, improperly brought against him, can in no wise prosper." — This is the Court's concluding statement on the innocent purchaser issue, directly applying section 55 to the stipulated facts and disposing of the action for recovery of possession.

• Guillermo vs. Matienzo, 8 Phil. Rep. 368 — Cited by the plaintiff himself and adopted by the Court for the principle that a pacto de retro does not affect the ownership of the thing sold more than to either reconvey it to the vendor or consolidate it in the purchaser once the condition has been fulfilled or extinguished. The Court relied on this as settled doctrine supporting Fabie's absolute ownership.

• Merchant vs. Lafuente, 5 Phil. Rep. 638 — Cited in connection with the application of the Mortgage Law of Cuba and the Philippines, specifically Article 34, which provides that instruments executed by a person who appears in the registry as having a right to execute them shall not be invalidated by third persons after they have been recorded, even if the right of the person executing them is later annulled by virtue of a prior deed not recorded. The Court used this to support the proposition that Fabie's registration, appearing on the face of the registry as valid, could not be invalidated by Hernandez's unregistered prior claim.

• Hernandez vs. Velazquez (case No. 5858) — The prior proceedings between the same parties, in which the Supreme Court affirmed the dismissal of the action against the assurance fund on the ground of Hernandez's negligence. The Court treated the legal points decided in that case as binding, even though it was resolved on demurrer, and used the negligence finding as a foundation for the present ruling.

• Section 50, Act No. 496 (Land Registration Act) — Provides that the act of registration shall be the operative act to convey and affect registered land, and that no deed purporting to convey registered land shall operate as a conveyance except through registration. The Court cited this provision to establish that Fabie's title was perfect upon registration of his deed of sale.

• Section 55, Act No. 496 — Provides that the production of the owner's duplicate certificate is conclusive authority to the register of deeds to enter a new certificate, binding upon the registered owner in favor of every purchaser for value and in good faith. Its second proviso declares that any subsequent registration procured by a forged duplicate certificate or forged deed shall be null and void, but with the saving clause that the owner may pursue remedies against the parties to the fraud "without prejudice to the rights of any innocent holder for value of a certificate of title." The Court relied on this proviso to hold Fabie's title valid and indefeasible. The same section also requires the owner to notify the register of deeds of the loss or theft of the owner's duplicate certificate, which Hernandez failed to do.

• Section 38, Act No. 496 — Provides that in case there is an innocent purchaser for value, the decree of registration fraudulently obtained shall not be opened but shall remain in full force and effect forever. The Court applied this to uphold the validity of registration A (the forged deed) insofar as it served as the basis for Fabie's innocent purchase.

• Section 79, Act No. 496 — Governs the filing of notices of lis pendens. The Court noted that Hernandez failed to file the lis pendens immediately upon filing her suit in September 1906, instead waiting until May 1907.

• Section 81, Act No. 496 — Requires the registration of judgments affecting registered land. The Court found that Hernandez failed to register the December 31, 1907 judgment annulling the forged deed, which would have allowed the register to enter a memorandum of annulment on Velazquez's certificate of title No. 43.

• Section 101, Act No. 496 — Provides that any person who is "without negligence" wrongfully deprived of registered land by the registration of another person may bring an action against the Insular Treasurer for indemnity from the assurance fund. The Court applied this provision to deny recovery because Hernandez's negligence was established.

• Article 34, Mortgage Law of Cuba and the Philippines — Provides that instruments executed by a person who, according to the registry, has a right to execute them shall not be invalidated by third persons after they have been recorded, even if the right of the person executing them is later annulled by virtue of a prior deed not recorded. The Court applied this to support the validity of Fabie's purchase from Velazquez, who appeared in the registry as the owner.

• Johnson, J. — Concurred in the result.
• Torres, J. — Concurred in the decision, but expressed the view that certified copies of the forged deed and related documents should be forwarded to the Attorney-General so that appropriate criminal action might be taken against Velazquez.
• Carson, J. — Concurred, expressing satisfaction that the second proviso of section 55 of Act No. 496, construed in light of the general purpose of the statute, means that a registration procured by forgery, while null and void as between the parties, may nevertheless be the root of a good title in favor of a bona fide purchaser for value who claims through the person whose registration was void. He acknowledged constitutional objections to this construction but declined to hold the proviso unconstitutional until the Supreme Court of the United States should rule to the contrary, citing Niblack's Analysis of the Torrens System and provisions from California, Massachusetts, and Hawaii statutes.

• Moreland, J. — Dissented, arguing that the second proviso of section 55 of Act No. 496 — declaring that any subsequent registration procured by a forged duplicate certificate or forged deed "shall be null and void" — is so clear and comprehensive that it leaves no room for doubt: the rights of an innocent purchaser for value must yield to the superior rights of an owner whose property was taken by forgery. He contended that the proviso was specifically enacted to limit the privileges granted to innocent purchasers for value in the enacting clause, and that it refers not to the forger (who is not a purchaser at all) but to the innocent purchaser whose rights are being restrained. Moreland rejected the distinction between a "registration" and a "title founded on a registration," arguing that under section 50 of Act No. 496, registration is the title itself — the sole determinant of ownership under the Torrens system — and that if the registration is null and void, no title is created or transferred. He further argued that the defenses of negligence, laches, and estoppel were never raised by the parties or considered by the trial court, and that the sole question presented was whether a bona fide purchaser from a registered holder who obtained title through a forged instrument deprives the original owner of the property. Moreland contended that any system which renders the ownership of real estate less secure than that of personal property is "inherently wrong," and that the proviso, far from emasculating the Torrens system, protects the innocent owner — who is entitled to first consideration — from the irretrievable loss of land through forgery.