Development Bank of the Philippines vs. Court of Appeals

Registration under the Torrens system does not create or vest ownership of land erroneously included in the certificate; ownership already acquired by 30 years of public, peaceful, uninterrupted and adverse possession in the concept of owner prevails, and the erroneously titled portion must be segregated and reconveyed to the true owner.

Development Bank of the Philippines is a banking institution extending loans secured by mortgages over registered lands, held to a higher standard of diligence because its business is impressed with public interest. Carlos Cajes was a long-time occupant-claimant of 19.4 hectares in San Miguel, Bohol, relying on successive tax declarations and actual cultivation. Jose Alvarez and later the spouses Gaudencio and Rosario Beduya were the registered owners of a much larger parcel covered by OCT No. 546 and TCT No. 10101 that overlapped Cajes' occupancy. Act No. 496, the Land Registration Act, supplies the governing framework on indefeasibility of decrees, exceptions to conclusiveness, and reconveyance for fraud or error.

Ulpiano Mumar owned 19.4 hectares in San Miguel, Bohol since 1917, evidenced by Tax Declaration No. 3840. In 1950 Mumar sold the land to Carlos Cajes, who was issued Tax Declaration No. R-1475 that same year, later superseded by Tax Declaration Nos. R-799 in 1961 and D-2247 in 1974. Cajes occupied and cultivated the land, planting cassava and camote in certain portions, a possession corroborated by witness Eleuterio Cambangay who knew of the 1950 transfer.

In 1969, unknown to Cajes, Jose Alvarez succeeded in registering a parcel of 1,512,468.00 square meters in his name, for which OCT No. 546 was issued on June 16, 1969. The registered parcel included the 19.4 hectares occupied by Cajes, although Alvarez never occupied nor introduced improvements thereon. In 1972 Alvarez sold the registered land to the spouses Gaudencio and Rosario Beduya, to whom TCT No. 10101 was issued. That same year the Beduyas obtained a P526,000.00 loan from petitioner Development Bank of the Philippines and mortgaged the land covered by TCT No. 10101 as security. In 1978 SAAD Investment Corp. and SAAD Agro-Industries, Inc., represented by Gaudencio Beduya, together with the spouses Beduya personally, executed another mortgage over the land in favor of petitioner to secure P1,430,000.00.

Thereafter the Beduyas failed to pay, the mortgage was foreclosed, and at the January 31, 1985 foreclosure sale petitioner was the highest bidder. Upon failure to redeem, petitioner consolidated ownership. Meanwhile, in 1978 Cajes had also applied for a loan from petitioner, offering his 19.4-hectare property under Tax Declaration No. D-2247 as security. Petitioner's representative Patton R. Olano inspected and appraised the land and the loan was approved and released, but petitioner later discovered the mortgaged land was included in TCT No. 10101, cancelled the loan, and demanded immediate payment. Cajes paid, for which a Cancellation of Mortgage dated March 18, 1981 was issued releasing the property. Sometime in April 1986, more than a year after the foreclosure sale, a re-appraisal of TCT No. 10101 revealed Cajes occupying a portion; informed that petitioner had become owner and asked to vacate, he refused.

Petitioner then filed a complaint for recovery of possession with damages, while Cajes counterclaimed ownership and damages. The trial court factually found the decree of registration binding and declared petitioner owner, whereas the Court of Appeals factually found continuous actual possession by Cajes since 1950 tacked to Mumar's possession since 1917, absence of possession by Alvarez or the Beduyas, and petitioner's knowledge through Beduya and its own 1979 inspection that Cajes occupied the disputed portion.

• Decree of Registration and Benin: Petitioner argued that under Sections 38 and 46 of Act 496 and Benin vs. Tuason, 57 SCRA 531, predecessor Jose Alvarez became owner by virtue of the decree of registration, and that Cajes' possession for more than 30 years cannot overcome it because prescriptive title completed before registration was cut off and extinguished, while prescription begun or completed after registration cannot operate against the registered owner.
• Innocent Mortgagee and Purchaser for Value: Petitioner maintained that it was an innocent mortgagee for value of the land when the Beduyas mortgaged TCT No. 10101 in 1972 and 1978, and an innocent purchaser when it bought the same at the 1985 public auction sale, such that reconveyance cannot prosper against it.
• Estoppel: Petitioner argued that approval of Cajes' 1978 loan and execution of a mortgage over the 19.4 hectares did not estop it from questioning his title, accusing Cajes of misrepresentations that led it to believe in his valid ownership.

• Effect of Registration vs. Acquisitive Prescription: Whether the decree of registration in favor of Jose Alvarez and successors vested ownership of the 19.4 hectares despite Cajes' prior long possession, or whether ownership by acquisitive prescription prevailed and required reconveyance.
• Prescription of Reconveyance and Collateral Attack: Whether the action for reconveyance based on implied or constructive trust had prescribed after more than 10 years from registration, and whether validity of TCT No. 10101 could be ruled upon in a recovery-of-possession case with counterclaim.
• Innocent Mortgagee/Purchaser for Value: Whether petitioner was an innocent mortgagee for value and innocent purchaser at the foreclosure sale whose rights bar reconveyance.
• Estoppel and Misrepresentation: Whether petitioner was estopped from denying Cajes' title by approving his loan and mortgaging the same land, or whether Cajes misrepresented his ownership.

• Effect of Registration vs. Acquisitive Prescription: No. Registration did not vest ownership of the erroneously included 19.4 hectares; Cajes' ownership by more than 30 years' adverse possession tacked to his predecessor prevailed and reconveyance was proper.
• Prescription of Reconveyance and Collateral Attack: No. The reconveyance claim did not prescribe because Cajes remained in actual possession, and validity of TCT No. 10101 could be decided because the counterclaim constituted a direct attack.
• Innocent Mortgagee/Purchaser for Value: No. Petitioner was neither an innocent mortgagee in 1972 nor an innocent purchaser in 1985, having failed to exercise bank-level diligence and having actual awareness of Cajes' possession and claim.
• Estoppel and Misrepresentation: No estoppel against petitioner was found, and no misrepresentation by Cajes was found; the estoppel issue did not affect ownership, which remained with Cajes.

• Effect of Registration vs. Acquisitive Prescription: Benin vs. Tuason was distinguished because it involved vast subdivided tracts bought by innocent purchasers, prior Tuason tax declarations and a 1914 title repeatedly upheld, plus prescription and laches after 41 years — not merely a decree. Section 39 of Act 496 on cutting off rights by registration applies to liens or encumbrances and unannotated easements, not to ownership itself. Registration was never a mode of acquiring ownership; it only confirms title already created and vested, protects only holders in good faith, and does not permit enrichment by error or inclusion of land never possessed. Applied here, Cajes' actual, open, peaceful and continuous possession since 1950, tacked to Mumar's since 1917, with Tax Declarations R-1475, R-799 and D-2247 as strong indicia of ownership in the concept of owner, ripened into ownership by extraordinary prescription requiring 30 years without just title or good faith before the 1969 registration. Neither Alvarez nor the Beduyas ever possessed or exercised ownership, despite Beduya's knowledge of Cajes' occupancy, so inclusion in OCT No. 546 and TCT No. 10101 was erroneous and subject to reconveyance in equity without necessarily cancelling the Torrens title.
• Prescription of Reconveyance and Collateral Attack: Generally reconveyance based on implied or constructive trust prescribes in 10 years from decree or certificate issuance, but the rule applies only when the claimant is not in possession. One in actual possession as owner may wait until possession is disturbed or title attacked, retaining a continuing right to seek equity to determine the adverse claim. As sole occupant, Cajes could still seek reconveyance despite lapse of more than 10 years. Although indefeasibility cannot be collaterally attacked and the original complaint was for recovery of possession, the counterclaim claiming ownership and damages stands as an independent complaint and direct attack, permitting determination of TCT No. 10101's validity to avoid circuitous cancellation proceedings.
• Innocent Mortgagee/Purchaser for Value: Under Section 38, a certificate is conclusive and a buyer need not look behind it, but reconveyance lies unless the property passed to an innocent purchaser for value, a condition sine qua non, with the same protection extended to innocent mortgagees who may rely on the face of the title absent anything exciting suspicion. Banks, however, must exercise more care than private individuals, including ocular inspection and inquiry into real owners. Here no investigation preceded the 1972 Beduya mortgage; Olano admitted first knowing the property only in 1979 when checking overlap with Cajes' mortgage. Moreover, before the 1985 purchase petitioner already knew from Beduya that Cajes occupied part of TCT No. 10101 and had itself investigated in 1979 and taken Cajes' tax-declared land as collateral in 1978. Deliberately ignoring facts putting a reasonable man on guard, and buying land in the visible possession of one other than the vendor without inquiry, constitutes gross negligence amounting to bad faith.
• Estoppel and Misrepresentation: Cajes made no misrepresentation because he was in fact the real owner, supporting his 1978 mortgage with tax declarations and a Clerk of Court certification that no civil, land registration or cadastral case affected Tax Declaration No. D-2247, believed in good faith. Estoppel in pais requires acts, representations, admissions or culpable silence inducing rightful reliance resulting in prejudice if denial were allowed. Upon learning of overlap petitioner immediately demanded full payment and cancelled the mortgage, with nothing showing implied acquiescence to Cajes' title, so no estoppel barred questioning title. The outcome was nevertheless controlled by ownership and bad-faith findings, requiring segregation and reconveyance of the 19.4 hectares to Cajes.

• Registration merely confirms title; it does not create or vest ownership — Registration under the Torrens system brings titles under a comprehensive system for indefeasibility and security but does not create title nor vest one; it confirms title already created and vested. Applied to hold that OCT No. 546 and TCT No. 10101 did not make Alvarez or the Beduyas owners of the 19.4 hectares they never possessed, and that error including another's land must be corrected by reconveyance.
• Acquisitive prescription as mode of acquiring ownership of immovables — Ordinary prescription requires public, peaceful, uninterrupted adverse possession in the concept of owner for 10 years in good faith with just title; extraordinary prescription requires 30 years without just title or good faith. Applied to hold Cajes, in possession since 1950 tacked to Mumar since 1917, had acquired ownership before the 1969 registration.
• Tax declarations coupled with actual possession as indicia of ownership — While not conclusive, tax declarations and realty tax payments evidence possession in the concept of owner and a bona fide claim, since no one pays taxes on property not in actual or constructive possession. Applied to bolster Cajes' claim through Tax Declaration Nos. R-1475, R-799 and D-2247 together with cultivation.
• Reconveyance based on implied/constructive trust; non-prescription when claimant in possession — Such action generally prescribes in 10 years from registration, but does not prescribe when the claimant remains in actual possession, the action in effect seeking to quiet title and enforceable whenever possession is disturbed or title attacked. Applied to allow Cajes' claim despite more than 10 years since 1969.
• Counterclaim as direct attack on title — A counterclaim is considered a complaint by the original defendant and tested as an independent action, permitting adjudication of certificate validity even where the original suit was only for possession. Applied to treat Cajes' counterclaim as a direct attack on TCT No. 10101 rather than a prohibited collateral attack.
• Innocent purchaser/mortgagee for value and bank diligence — A subsequent purchaser or mortgagee relying on a clean certificate without anything exciting suspicion is protected, but one who closes his eyes to facts putting a reasonable man on guard, especially a bank that must inspect collateral and inquire into possessors' rights, is in bad faith. Applied to deny petitioner protection because it failed to investigate in 1972 and bought in 1985 with knowledge of Cajes' occupancy and claim, as in Rural Bank of Sariaya, Inc. vs. Yacon and Cavite Development Bank vs. Lim.
• Estoppel in pais — Arises when one by acts, representations, admissions, or culpable silence induces another to rightfully rely to his prejudice. Applied to find no estoppel where petitioner promptly cancelled Cajes' loan upon discovering overlap and never acquiesced to his title.

• "It does not create a title nor vest one. It simply confirms a title already created and already vested, rendering it forever indefeasible. . ." — States the purpose of land registration from City of Manila vs. Lack, relied upon to reject the claim that the 1969 decree alone made Alvarez owner.
• "If a person obtains a title under the Torrens system, which includes by mistake or oversight land which can no longer be registered under the system, he does not, by virtue of the said certificate alone, become the owner of the lands illegally included." — Articulates the rule denying ownership by erroneous inclusion, applied to Alvarez, the Beduyas and petitioner.
• "[A]n action for reconveyance of a parcel of land based on implied or constructive trust prescribes in ten years, the point of reference being the date of registration of the deed or the date of the issuance of the certificate of title over the property, but this rule applies only when the plaintiff or the person enforcing the trust is not in possession of the property, since if a person claiming to be the owner thereof is in actual possession of the property, as the defendants are in the instant case, the right to seek reconveyance, which in effect seeks to quiet title to the property, does not prescribe." — States the prescription exception that preserved Cajes' reconveyance claim as actual possessor.
• "One who purchases real property which is in the actual possession of another should, at least, make some inquiry concerning the right of those in possession. The actual possession by other than the vendor should, at least put the purchaser upon inquiry." — States the inquiry duty defeating petitioner's claim to be an innocent purchaser for value.

• Benin vs. Tuason, 57 SCRA 531 (1974) — Distinguished; although cited for cutting off prescriptive title by registration, its result rested on valid Tuason title, innocent purchasers, and laches/prescription, unlike erroneous inclusion without possession here.
• City of Manila vs. Lack, 19 Phil. 324 (1911) — Followed for the purpose of registration as merely confirming vested title, not creating it.
• Angeles vs. Samia, 66 Phil. 444 (1938) — Followed; erroneous registration in favor of non-possessors to the prejudice of the actual occupant must be corrected and does not vest better title than lawfully owned.
• Reyes vs. Court of Appeals, G.R. No. 127608, Sept. 30, 1999 — Followed as latest application that securing title does not operate to vest ownership.
• Vda. De Cabrera vs. Court of Appeals, 335 SCRA 19 (1997); Heirs of Jose Olviga vs. Court of Appeals, 227 SCRA 330 (1993) — Followed for non-prescription of reconveyance/quieting-title actions by one in actual possession.
• Rural Bank of Sariaya, Inc. vs. Yacon, 175 SCRA 62 (1989); Cavite Development Bank vs. Lim, G.R. No. 13169, Feb. 1, 2000 — Applied on innocent mortgagee protection and heightened diligence required of banks before accepting registered-land collateral.
• Lucena vs. Court of Appeals, G.R. No. L-77468, Aug. 25, 1999; Santiago vs. Court of Appeals, 247 SCRA 336 (1995) — Applied that a purchaser cannot ignore suspicious facts and must inquire into rights of actual possessors other than the vendor.

• Sec. 39, Act No. 496 (Land Registration Act) — Provides every registered owner and subsequent good-faith purchaser holds free of all encumbrances except those noted and specified subsisting ones; construed as cutting off liens/encumbrances and unregistered easements upon registration of the servient estate, not ownership acquired by prescription.
• Sec. 38, Act No. 496 — Provides decrees of registration bind the land and quiet title, conclusive against all, becoming incontrovertible after one year absent innocent purchaser for value; applied to allow reconveyance for land deprived by registration while protecting only innocent purchasers/mortgagees, which petitioner was not.
• Sec. 112, Act No. 496, in relation to Sec. 11, Cadastral Act — Permits cancellation or correction of certificates erroneously including more land than lawfully owned; invoked through Angeles doctrine to correct inclusion of Cajes' 19.4 hectares.
• Art. 2085, Civil Code — Requires absolute ownership by the mortgagor for a valid mortgage, but subsequent nullity of mortgagor's title does not nullify an innocent mortgagee's lien; held inapplicable to save petitioner because it was not in good faith.

Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.