Erasusta, Jr. vs. Court of Appeals

A banking institution that accepts a real estate mortgage without first conducting an on-the-spot investigation of the mortgaged premises, notwithstanding the presence of structures in the actual, visible, and public possession of persons other than the mortgagor, is guilty of gross negligence amounting to bad faith and cannot be considered a mortgagee in good faith entitled to the protection of the Torrens system.

The Prieto Estate in Sampaloc, Manila was subdivided into separate lots and sold to tenants on installment basis, among them Lucena De Los Reyes, who purchased two lots under separate contracts of sale on installment. Neither contract carried a technical description of the lots, which were identified only by the street addresses of the existing structures on them. Pacific Banking Corporation is a banking institution engaged in extending loans secured by real estate mortgages, and the Amorins are the family of Fortunato A. Amorin, to whom De Los Reyes transferred her rights over one of the lots. The controversy is governed by the Torrens system and by Section 48 of Presidential Decree No. 1529, which bars collateral attack on certificates of title.

The Prieto Estate in Sampaloc, Manila was subdivided into separate lots and sold to tenants on installment basis, and Lucena De Los Reyes was among the tenant-purchasers. Under a Contract of Sale on Installment dated September 30, 1959, she purchased Lot 19-C; under a similar contract dated December 13, 1960, she purchased Lot 19-A. Neither contract contained a technical description of the lots, which were identified instead by the addresses of the existing structures on them — the house on Lot 19-C bearing the address 933 Maria Luisa Street and the house on Lot 19-A bearing the address 925 Maria Luisa Street.

On January 30, 1968, De Los Reyes transferred her rights over Lot 19-C to Fortunato A. Amorin, the late husband of respondent Amparo J. Amorin. The following day, January 31, 1968, Prieto, the subdivision owner, executed a deed of sale in favor of Fortunato, and Transfer Certificate of Title No. 91454/T-732 was issued in his name. The Amorins took possession of the house at 933 Maria Luisa Street and erected their residential house thereon. After Fortunato's death, Amparo and their children executed an Extrajudicial Partition, and on January 20, 1969, TCT No. 95422 was issued in their names.

Sometime in September 1973, a representative of respondent Pacific Banking Corporation went to the Amorins' house at 933 Maria Luisa Street and informed them that their property had been mortgaged to and foreclosed by the Bank. In 1974, the Bank sent a formal demand for the Amorins to vacate the premises, insisting that they were occupying Lot 19-A and that the Bank had become its owner.

The Bank's claim traced back to a fraud committed by Benjamin Valenzuela, to whom De Los Reyes had entrusted the documents evidencing her rights over Lot 19-A, Lot 11, and Lot 34-D on his representation that he would assist her in transferring the titles to her three children. Valenzuela instead fraudulently transferred the rights over the lots to himself. Prieto, unaware of the fraud and of the forged instrument, executed a deed of sale over the properties in favor of Valenzuela, who then secured transfer certificates of title in his own name — TCT No. 73596 over Lot 34-D, TCT No. 73955 over Lot 19-A, and TCT No. 74018 over Lot 11. Valenzuela thereafter mortgaged the properties to the Bank. Upon discovering the fraud, De Los Reyes filed two criminal complaints for estafa thru falsification of public documents against Valenzuela, docketed as Criminal Cases Nos. 15922 and 15923 before the Court of First Instance of Manila, Branches IV and VII, in both of which he was convicted. On July 31, 1970, the Bank foreclosed on Valenzuela's real estate mortgages; Lot 11, Lot 19-A, and Lot 34-D were sold at public auction to the Bank as the highest bidder, and the Bank eventually consolidated its ownership and was issued new transfer certificates of title — TCT No. 105544 for Lot 19-A, TCT No. 105545 for Lot 34-D, and TCT No. 105546 for Lot 11.

Amparo Amorin confronted De Los Reyes about the Bank's eviction notices, but the latter maintained that the Bank was simply mistaken, since it was Lot 19-A, and not Lot 19-C, that had been foreclosed. Dissatisfied with the explanation, Amparo checked the records of the subdivision owner and of the Land Registration Commission, which confirmed a mix-up in the designation of the two lots: Lot 19-C was in fact the lot located at 925 Maria Luisa Street, while Lot 19-A was the lot located at 933 Maria Luisa Street. Amparo then demanded that De Los Reyes and her tenants surrender and vacate 925 Maria Luisa Street, which was actually Lot 19-C, but De Los Reyes refused, insisting that the lot occupied by the Amorins at 933 Maria Luisa Street was Lot 19-C. In May 1974, the Bank reiterated its formal demand for the Amorins to surrender and vacate Lot 19-A at 933 Maria Luisa Street within thirty days from receipt of the letter. The Amorins had earlier filed ejectment suits against De Los Reyes and her tenants at 925 Maria Luisa Street, docketed as Civil Case Nos. 91794 and 91795 before the CFI of Manila, Branch XXII, but the complaints were dismissed in a decision dated February 28, 1974.

Compelled to act, the Amorins filed an action for Recovery of Ownership with Damages against De Los Reyes, her tenants Eladia R. Buhay, the spouses Jose and Asuncion Mendoza, and Alfredo Ramos, and the Bank. In the same proceedings, De Los Reyes filed a cross-claim against the Bank and a motion for a third-party complaint against Prieto. In the two criminal cases against Valenzuela, the trial courts found that Valenzuela never took possession of the premises, never paid taxes thereon, and never exercised any act indicative of ownership other than mortgaging the lots successively, while De Los Reyes remained in continuous possession of the subject lots through her tenants and continued to pay the real estate taxes therefor.

• Innocent Purchaser for Value: Petitioners contended that the Court of Appeals committed reversible error when it declared respondent Bank an innocent purchaser for value entitled to the protection of the law with a better right over Lot 19-A, located at 933 Maria Luisa Street, than petitioners and the Amorins.
• Failure to Cancel TCT No. 105544: On appeal, De Los Reyes lamented the trial court's failure to order the cancellation of respondent Bank's TCT No. 105544 over Lot 19-A in its August 9, 1996 Order, despite the fact that such cancellation had been contained in the trial court's January 23, 1986 Decision.

• Indispensable Party: Respondent Bank argued that the trial court erred in ordering the cancellation of its TCT Nos. 105545 (Lot 34-D) and 105546 (Lot 11) despite the fact that the forger Valenzuela, the previous registered owner from whom it acquired the properties, was not impleaded as an indispensable party in the case.
• Collateral Attack on Titles: Respondent Bank argued that the trial court erred in allowing De Los Reyes to collaterally attack the validity of the said transfer certificates of title in the suit filed by the Amorins, notwithstanding that the properties covered by those titles were not involved in the complaint, invoking the rule that a certificate of title cannot be altered, modified, or cancelled except in a direct proceeding in accordance with law.

• Good Faith of the Mortgagee Bank: Whether the Court of Appeals erred in declaring respondent Bank an innocent purchaser for value entitled to the protection of the law with a better right over Lot 19-A, located at 933 Maria Luisa Street, than petitioners and the Amorins.
• Collateral Attack on Certificates of Title: Whether respondent Bank's transfer certificates of title may be collaterally attacked and cancelled in the action for recovery of ownership, or whether Section 48 of P.D. 1529 bars such attack.
• Indispensable Party: Whether Benjamin Valenzuela, the forger from whom respondent Bank acquired the mortgaged properties, is an indispensable party without whom no valid judgment can be rendered.

• Good Faith of the Mortgagee Bank: No. The Bank is a mortgagee in bad faith, having accepted the mortgaged lots without any on-the-spot investigation of the premises despite the presence of occupants other than the mortgagor, so that it cannot claim the protection accorded to an innocent mortgagee for value.
• Collateral Attack on Certificates of Title: The titles may be cancelled. What cannot be collaterally attacked is the certificate of title and not the title itself, and in any event the Bank failed to raise this defense in the trial court, rendering it waived.
• Indispensable Party: No. The forgeries committed by Valenzuela had been established beyond reasonable doubt in criminal judgments that had become final, so there was no need to implead him for a final determination of the action.

• Good Faith of the Mortgagee Bank: The rule that every person dealing with registered land may safely rely on the correctness of the certificate of title and is charged with notice only of such burdens and claims as are annotated thereon, so that where nothing on the face of the title indicates a cloud or vice in ownership the purchaser need not explore further, supplied the premise on which the Court of Appeals rested. That premise presupposes a purchaser or mortgagee in good faith, and the resolution of the case turned on that question. While a forged or fraudulent document may become the root of a valid title, that doctrine holds only where the property has already been transferred from the name of the owner to that of the forger; here, the fraudulent registration of the property in Valenzuela's name through a forged deed of sale did not vest title in him, because a certificate is not conclusive evidence of title and registration does not vest title but is merely evidence of it. A certificate of title merely confirms or records title already existing and vested; it cannot be used to protect a usurper from the true owner, to shield the commission of fraud, or to permit one to enrich himself at the expense of others, and the Torrens system has never been recognized as a mode of acquiring ownership. It is a matter of judicial notice that a banking institution, before approving a loan, sends its representative to the premises of the land offered as collateral and investigates who the true owners and possessors are. Here, the Bank made no investigation at all: no officer or employee inspected the premises before the mortgages were executed, and its employee Jesus Ortega was a close friend of Valenzuela. Neither the mortgagor nor the seller was in possession of the lands mortgaged or sold, a circumstance that should have aroused the Bank's suspicion and obliged it, as an institution in the business of extending loans secured by real estate mortgage and thus familiar with the rules on land registration, to exercise more care and prudence than private individuals and to conduct a more exhaustive investigation of the history of the mortgagor's title. Its acceptance of the mortgage notwithstanding the existence of structures on the property in the actual, visible, and public possession of a person other than the mortgagor constituted gross negligence amounting to bad faith. The findings in the two criminal cases confirmed that Valenzuela never took possession of the premises, never paid taxes, and never exercised any act indicative of ownership other than mortgaging the lots, while De Los Reyes remained in continuous possession through her tenants and continued to pay the real estate taxes. The Bank was therefore not a mortgagee in good faith, and the Court of Appeals' contrary conclusion could not stand.
• Collateral Attack on Certificates of Title: Section 48 of P.D. 1529 provides that a certificate of title shall not be subject to collateral attack and cannot be altered, modified, or cancelled except in a direct proceeding in accordance with law. What cannot be collaterally attacked, however, is the certificate of title and not the title itself; the certificate is the document issued by the Register of Deeds known as the Transfer Certificate of Title, while the title referred to by law is the ownership represented by that document, and placing a parcel of land under the mantle of the Torrens system does not mean that ownership thereof can no longer be disputed. Ownership is different from a certificate of title. Moreover, the Bank did not raise the issue of non-collateral attack on its titles as a defense in the trial court, and under Section 1, Rule 9 of the 1997 Rules of Civil Procedure, a defense not raised in the pleadings is deemed waived and cannot be raised for the first time on appeal.
• Indispensable Party: An indispensable party is one without whom there can be no final determination of the action. The Bank contended that Valenzuela, the forger from whom it acquired the properties, was such a party. The forgeries and falsifications of the deeds of assignment covering Lots 19-A, 34-D, and 11 had been established beyond reasonable doubt. In Criminal Case No. 15922, the lower court in its decision dated November 28, 1975 declared the Deed of Assignment of Rights over Lots 19-A and 34-D purportedly executed by De Los Reyes in favor of Valenzuela to be forged, and the Court of Appeals affirmed Valenzuela's conviction in CA-G.R. No. 19147-CR with modification only as to the penalty imposed. In Criminal Case No. 15923, the trial court's decision of September 6, 1977 convicting Valenzuela was not appealed, Valenzuela having withdrawn his appeal, and thus became final and executory. Because the forgeries had been proven beyond reasonable doubt, there was no need to implead Valenzuela. The decisions in both criminal cases, including the decision of the Court of Appeals in CA-G.R. No. 19147-CR, were presented in evidence; the trial court took cognizance of them and rendered judgment on January 23, 1986, later modified by the Order dated August 9, 1996, thereby making a final determination of the action.

• Torrens Registration Does Not Vest Title — A certificate of title is not conclusive evidence of title; registration does not vest title but is merely evidence of title over a particular property. Certificates of title merely confirm or record title already existing and vested, and cannot be used to protect a usurper from the true owner, to shield the commission of fraud, or to permit one to enrich himself at the expense of others. The Torrens system has never been recognized as a mode of acquiring ownership. In this case, the fraudulent registration of the lots in Valenzuela's name through a forged deed of sale did not vest title in him, so the titles he obtained and later mortgaged to the Bank could not prevail over the prior and subsisting rights of De Los Reyes.
• Forged Instrument as Root of a Valid Title — Exception — While a forged or fraudulent document may become the root of a valid title, this is true only where the property has already been transferred from the name of the owner to that of the forger. The doctrine serves to emphasize that a person who deals with registered property in good faith will acquire good title from a forger and be absolutely protected by a Torrens title. Because the lots here had not been validly transferred from De Los Reyes to Valenzuela, the exception did not apply, and the Bank's protection depended entirely on whether it was a purchaser or mortgagee in good faith.
• Mortgagee in Good Faith — Heightened Diligence of Banks — A banking institution, before approving a loan, is expected to send its representative to the premises of the land offered as collateral and to investigate who the true owners and possessors are. Being in the business of extending loans secured by real estate mortgage, a bank is familiar with the rules on land registration and is expected to exercise more care and prudence than private individuals in dealing with registered lands. Given the suspicion-provoking presence of occupants other than the owner on the land to be mortgaged, the bank is bound to conduct a more exhaustive investigation of the history of the mortgagor's title. Acceptance of the mortgage notwithstanding the existence of structures in the actual, visible, and public possession of a person other than the mortgagor constitutes gross negligence amounting to bad faith. A buyer who fails to investigate or inquire concerning the rights of those in actual possession of the property being mortgaged or sold can hardly be regarded as a buyer in good faith.
• Non-Collateral Attack on Certificates of Title — Under Section 48 of P.D. 1529, a certificate of title shall not be subject to collateral attack and cannot be altered, modified, or cancelled except in a direct proceeding in accordance with law. What cannot be collaterally attacked is the certificate of title and not the title itself; the certificate is the document issued by the Register of Deeds, while the title referred to by law is the ownership represented by that document. Placing a parcel of land under the mantle of the Torrens system does not mean that ownership thereof can no longer be disputed, because ownership is different from a certificate of title.
• Waiver of Defenses Not Raised in the Pleadings — Under Section 1, Rule 9 of the 1997 Rules of Civil Procedure, defenses not raised in the pleadings are deemed waived. The Bank's non-collateral attack defense, not having been raised in the trial court, could not be raised for the first time on appeal.
• Indispensable Party — An indispensable party is one without whom there can be no final determination of the action. Where the forgeries and falsifications relied upon have already been established beyond reasonable doubt in criminal cases whose judgments have become final and executory, and those judgments were presented in evidence in the civil case, the forger need not be impleaded for the trial court to make a final determination of the action.

• "It is a matter of judicial notice that a banking institution, before approving a loan, sends its representative to the premises of the land offered as collateral and investigates who are the true owners and possessors thereof." — This passage establishes the standard of diligence against which the Bank's conduct was measured, and it supplies the factual predicate for the finding that the Bank made no investigation whatsoever before accepting the mortgages.
• "That respondent Bank accepted in mortgage the property in question notwithstanding the existence of structures on the property and which were in actual, visible and public possession of a person other than the mortgagor, constitutes gross negligence amounting to bad faith." — This is the ratio decidendi on the central issue: the Bank's failure to investigate the premises, coupled with the visible possession of non-mortgagors, negated good faith and disqualified it from the protection accorded to innocent mortgagees for value.
• "What cannot be collaterally attacked is the certificate of title and not the title. The certificate referred to is that document issued by the Register of Deeds known as the Transfer Certificate of Title (TCT). By title, the law refers the ownership which is represented by that document." — This passage states the canonical distinction between the certificate of title and the title itself, which is the doctrinal basis for allowing the cancellation of the Bank's certificates notwithstanding Section 48 of P.D. 1529.
• "The Torrens system has never been recognized as a mode of acquiring ownership." — This formulation anchors the Court's holding that Valenzuela's fraudulent registration did not vest ownership in him and that the Bank could not rely on the mere face of the certificates to defeat the prior rights of the true owners.

• Gatioan vs. Gaffud, No. L-21953, March 28, 1969, 27 SCRA 706 — Cited as the source of the rule, treated as a matter of judicial notice, that before a bank grants a loan on the security of land it first undertakes a careful examination of the applicant's title as well as a physical and on-the-spot investigation of the land itself; the Court used it to hold that the Bank's failure to do so rendered it a mortgagee in bad faith.
• Republic vs. De Guzman, G.R. No. 105630, 326 SCRA 267 (2000) — Cited for the rule that a buyer who fails to investigate or inquire concerning the rights of those in actual possession of the property being mortgaged or sold can hardly be regarded as a buyer in good faith.
• Cruz vs. Bancom Finance Corporation, G.R. No. 147788, 379 SCRA 490 (2002) — Cited as a closely analogous case holding that a mortgagee-bank, unlike private individuals, is expected to exercise greater care and prudence in its dealings involving registered lands, and that ascertainment of the status or condition of the property offered as security must be a standard and indispensable part of its operations.
• Lee Tek Sheng vs. Court of Appeals, 292 SCRA 544 (1998) — Cited for the distinction between the certificate of title and the title itself, and for the proposition that placing land under the Torrens system does not preclude dispute over ownership.
• State Investment House, Inc. vs. Court of Appeals, 324 Phil. 642 (1996) — Cited for the general rule that a person dealing with registered land may rely on the correctness of the certificate of title and is charged with notice only of annotated burdens and claims.
• Mathay vs. Court of Appeals, 356 Phil. 869 (1998) — Cited for the rule that a certificate is not conclusive evidence of title.
• Vda. de Cabrera vs. Court of Appeals, 335 Phil. 19 (1997) — Cited for the rule that registration does not vest title but is merely evidence of title over a particular property.
• Esquivias vs. Court of Appeals, 339 Phil. 184 (1997) — Cited for the rule that certificates of title cannot be used to protect a usurper, to shield the commission of fraud, or to permit enrichment at the expense of others.
• Heirs of Teodoro dela Cruz vs. Court of Appeals, 358 Phil. 652 (1998) — Cited for the proposition that the Torrens system has never been recognized as a mode of acquiring ownership.
• Fule vs. Legare, 117 Phil. 367 (1963) — Cited for the doctrine that a forged or fraudulent document may become the root of a valid title, subject to the qualification that the property must already have been transferred from the owner to the forger.
• Sacay vs. Sandiganbayan, 226 Phil. 496 (1986) — Cited for the rule that the Supreme Court must inquire into questions of fact where the courts below have conflicting findings, which justified review of the Court of Appeals' reversal of the trial court's factual conclusion on the Bank's good faith.
• Keng Hua Paper Products Co. Inc. vs. Court of Appeals, G.R. No. 116863, 286 SCRA 257 (1998) — Cited in connection with Section 1, Rule 9 of the 1997 Rules of Civil Procedure, for the rule that a defense not raised in the trial court cannot be raised for the first time on appeal.
• Consolidated Rural Bank (Cagayan Valley), Inc. vs. Court of Appeals, G.R. No. 132161, 448 SCRA 347 (2005) — Cited in support of the conclusion that the Bank, for merely relying on the certificates of title and failing to ascertain the status of the mortgaged properties as is standard in its operations, is a mortgagee in bad faith.

• Section 48, Presidential Decree No. 1529 (Property Registration Decree) — Provides that a certificate of title shall not be subject to collateral attack and cannot be altered, modified, or cancelled except in a direct proceeding in accordance with law. The Court construed the provision as protecting the certificate of title and not the title itself, so that the Bank's certificates, though registered, could be cancelled where they traced back to a forger's fraudulent registration; the Court likewise held that the Bank waived the defense by failing to raise it in the trial court.
• Section 1, Rule 9, 1997 Rules of Civil Procedure — Provides that defenses not raised in the pleadings are deemed waived. The Court applied it to bar the Bank from raising the non-collateral attack defense for the first time on appeal, since it had not pleaded that defense in the trial court.

Puno (Chairperson), Sandoval-Gutierrez, Corona, and Azcuna, JJ., concurred.