Far East Bank & Trust Co. vs. Marquez

A mortgage on a subdivision lot or condominium unit executed by a property developer without prior written HLURB approval is void under Section 18 of PD 957, and the encumbrance of an entire parcel of land does not exempt the subdivided portions from this prohibition. A mortgagee who has knowledge of facts sufficient to induce a reasonably prudent person to inquire into the status of the property cannot claim good faith.

Respondent Arturo L. Marquez entered into a Contract to Sell with Transamerican Sales and Exposition (TSE), through its owner/general manager Engr. Jesus Garcia, for a 52.5-square-meter lot with a three-storey townhouse unit in Diliman, Quezon City. The lot formed part of a larger property covered by TCT No. 156254. Presidential Decree No. 957, entitled "Regulating the Sale of Subdivision Lots and Condominiums, Providing Penalties for Violations Thereof," governs the relationship between subdivision developers and lot buyers, including the regulation of mortgages constituted by developers over subdivision lots.

On March 13, 1989, respondent Arturo Marquez entered into a Contract to Sell with Transamerican Sales and Exposition (TSE), through its owner/general manager Engr. Jesus Garcia, involving a 52.5-square-meter lot in Diliman, Quezon City with a three-storey townhouse unit denominated as Unit No. 10, for a total consideration of ₱800,000. The lot formed part of a property covered by TCT No. 156254 (later TCT No. 383697). On May 22, 1989, TSE obtained a loan of ₱7,650,000 from petitioner Far East Bank & Trust Co. (FEBTC) and mortgaged the entire property covered by TCT No. 156254. The mortgage contract's "Whereas" clause stated that the loan was to partially finance the construction of a 20-unit townhouse project.

TSE failed to pay its loan obligation, prompting FEBTC to extrajudicially foreclose the real estate mortgage. FEBTC became the highest bidder at ₱15.7 million in the auction sale conducted for the purpose. Meanwhile, respondent had already paid a total of ₱600,000 when he stopped payment upon noticing that construction of his townhouse unit had slackened. He later discovered that the slowdown was due to the foreclosure.

On January 29, 1991, respondent instituted a case with the HLURB's Office of Appeals, Adjudication and Legal Affairs (OAALA), docketed as HLRB Case No. REM-012991-4712, to compel TSE to complete construction of the townhouse, to prevent enforceability of the extrajudicial foreclosure, and to have the mortgage between TSE and FEBTC declared invalid for violation of Section 18 of PD 957. The OAALA ruled in respondent's favor on November 11, 1991, declaring the mortgage unenforceable against respondent, ordering FEBTC to accept amortization payments and deliver title to Unit No. 10 upon full payment, and ordering the Register of Deeds to cancel the mortgage and certificate of sale annotations on TCT No. 156254. FEBTC's appeals to the HLURB Board of Commissioners and the Office of the President were both denied, the former affirming the OAALA decision in toto on July 18, 1994, and the latter likewise affirming. FEBTC then elevated the case to the Court of Appeals, which denied the petition on April 27, 2001, finding that FEBTC knew a subdivision was forthcoming and should have required submission of the requisite government approvals rather than relying on TSE's representations. The CA additionally noted that the Certification against forum shopping attached to the petition had not been made under oath.

• Applicability of Section 18, PD 957: Petitioner contended that Section 18 of PD 957 did not apply because the land mortgaged was one whole, unsubdivided parcel, not a "subdivision lot," and that prior written NHA/HLURB approval was not required for constituting a mortgage on the property.
• Directory Nature of Section 18: Petitioner argued that Section 18 of PD 957 is merely a directory provision, noncompliance with which does not render the mortgage transaction void.
• Innocent Mortgagee Status: Petitioner claimed to be an innocent mortgagee whose lien must be respected, since the title offered as security was clean of any encumbrance or lien.
• Superiority of Foreclosure Sale Rights: Petitioner maintained that its rights as buyer in the foreclosure sale were superior to those of respondent over the lot.
• Certification Against Forum Shopping: Petitioner argued that the inadvertent failure of the notary public to affix his signature on the Certification against forum shopping did not provide a sufficient basis for dismissal of the appeal before the CA.

• Validity of Mortgage under PD 957: Whether the mortgage contract violated Section 18 of PD 957, hence void insofar as third persons are concerned.
• Propriety of HLURB Remedy: Assuming arguendo that the mortgage contract violated Section 18 of PD 957, whether the remedy granted and imposed by the HLURB, as sustained by the Office of the President and the Court of Appeals, is proper.
• Certification Against Forum Shopping: Whether the inadvertent failure of the notary public to affix his signature on the Certification against forum shopping executed by petitioner FEBTC in connection with the Petition for Review it filed with the Court of Appeals provided a sufficient basis for the dismissal of the appeal.

• Validity of Mortgage under PD 957: Yes. The mortgage violated Section 18 of PD 957 and was void insofar as respondent was concerned, Section 18 being a mandatory/prohibitory provision whose violation renders acts void under Article 5 of the Civil Code.
• Propriety of HLURB Remedy: Partly yes. The remedy was proper only insofar as it referred to respondent's lot; the HLURB exceeded its authority in paragraphs 3 and 4 of its dispositive, which pertained to the entire parcel of land over which respondent had no standing.
• Certification Against Forum Shopping: No ruling necessary. The CA ruled on the merits despite the procedural defect, and the Court itself resolved the petition on the merits against petitioner.

• Validity of Mortgage under PD 957: Section 18 of PD 957 requires prior written approval of the Authority (HLURB) before a developer may mortgage any subdivision lot or condominium unit. The subject 52.5-square-meter lot was technically described and segregated in a Contract to Sell entered into before the mortgage loan was contracted. That the lot had no separate TCT did not make it less of a "subdivision lot" entitled to PD 957's protection. That the mortgage covered the entire parcel rather than individual subdivided lots did not take the loan beyond Section 18's coverage, because the lot was necessarily mortgaged when the entire parcel of which it was a part was encumbered. Section 18 is mandatory/prohibitory, not directory, because it relates to matters of substance affecting substantial rights — specifically, the protection of innocent lot buyers from fraud when their lots are mortgaged without their knowledge. The avowed purpose of PD 957 compels this reading; acts committed contrary to mandatory or prohibitory laws are void under Article 5 of the Civil Code. Petitioner was not an innocent mortgagee because the mortgage contract's "Whereas" clause indicated the loan was to partially finance a 20-unit townhouse project, circumstances that should have prompted a reasonably prudent person to inquire into the existence of buyers like respondent. Petitioner should not have relied solely on TSE's representation that it had secured all requisite permits; it should have required submission of certified true copies and verified their authenticity independently. Having been negligent in ascertaining respondent's rights, petitioner was deemed to possess constructive knowledge of those rights.
• Propriety of HLURB Remedy: The mortgage being void as against respondent under Article 5 of the Civil Code, the remedy granted by the HLURB was proper only insofar as it referred to respondent's lot. The first and second paragraphs of the HLURB dispositive — declaring the mortgage unenforceable against respondent and ordering FEBTC to accept payment and deliver title — were in accord with equity, there being no law specifying the precise remedy. However, paragraphs 3 and 4, which ordered cancellation of mortgage and certificate of sale annotations on the entire TCT No. 156254, exceeded the subject of litigation. Respondent had no personality or standing to bring suit on the whole property, as his actionable interest was limited to the lot he was buying.
• Certification Against Forum Shopping: The Court found no cogent reason to alter the CA's ruling on the unnotarized certification, but noted that the CA had ruled on the merits despite the procedural noncompliance. Since the Court itself resolved the petition on the merits against petitioner, there was no need to pass upon this issue.

• Mandatory vs. Directory Statutory Provisions — Statutory provisions relating to matters of form or convenience, which do not affect substantial rights or the essence of the thing to be done, are directory. Provisions relating to matters of substance, affecting substantial rights and constituting the very essence of the thing required, are mandatory. Section 18 of PD 957 was held mandatory/prohibitory because it directly addresses fraud against subdivision lot buyers — a matter of substance affecting substantial rights — and acts committed contrary to it are void.

• Innocent Mortgagee in Good Faith — Exception — As a general rule, a purchaser or mortgagee is not required to look beyond what the Torrens title indicates on its face. This rule admits of an exception where the mortgagee has knowledge of a defect or lack of title, or is aware of sufficient facts to induce a reasonably prudent person to inquire into the status of the property. A bank financing an ongoing townhouse project should not be content with a clean title but must investigate the existence of buyers; failure to do so constitutes negligence, barring a claim of good faith and imputing constructive knowledge of buyers' rights.

• Void Acts Under Mandatory/Prohibitory Laws — Acts executed against the provisions of mandatory or prohibitory laws are void, except when the law itself authorizes their validity (Article 5, Civil Code). A mortgage on a subdivision lot executed by a developer without prior written HLURB approval is void.

• "Under PD 957, the mortgage of a subdivision lot or a condominium unit is void, if executed by a property developer without the prior written approval of the Housing and Land Use Regulatory Board (HLURB). That an encumbrance has been constituted over an entire property, of which the subject lot or unit is merely a part, does not affect the invalidity of the lien over the specific portion at issue." — The opening syllabus of the decision, articulating the core ruling and its application to mortgages covering entire parcels that include subdivided lots.

• "The fact that the lot had no separate TCT did not make it less of a 'subdivision lot' entitled to the protection of PD 957." — Defines what constitutes a "subdivision lot" for purposes of PD 957 coverage, establishing that segregation in a Contract to Sell suffices even without a separate certificate of title.

• "Concededly, PD 957 aims to protect innocent lot buyers. Section 18 of the decree directly addresses the problem of fraud committed against buyers when the lot they have contracted to purchase, and which they have religiously paid for, is mortgaged without their knowledge. The avowed purpose of PD 957 compels the reading of Section 18 as prohibitory -- acts committed contrary to it are void." — Explains the ratio decidendi for classifying Section 18 as mandatory/prohibitory rather than directory, grounding the holding in the protective purpose of the decree.

• "Having been negligent in finding out what respondent's rights were over the lot, petitioner must be deemed to possess constructive knowledge of those rights." — States the consequence of the bank's failure to investigate, establishing that negligence in ascertaining a buyer's rights imputes constructive knowledge, precluding a claim of good faith.

• Philippine National Bank vs. Office of the President, 322 Phil. 6 (Jan. 18, 1996) — Controlling precedent on the intent of PD 957 to protect innocent lot buyers from subdivision developers. The Court relied on this case to establish that the law, as an instrument of social justice, must favor small lot buyers over financial institutions, and that banks are presumed to have conducted due diligence in their loan activities.

• Col. De la Merced vs. Government Service Insurance System, 417 Phil. 324 (Sept. 11, 2001) — Followed for the doctrine on innocent mortgagee in good faith, establishing the exception where a mortgagee has knowledge of a defect or awareness of facts warranting further inquiry into the status of the property.

• State Investment House, Inc. vs. Court of Appeals, 254 SCRA 368 (Mar. 5, 1996) — Cited within De la Merced as the source of the innocent mortgagee rule applied by the Court.

• Section 18, PD 957 — Requires prior written approval of the Authority (HLURB) before any mortgage on a subdivision lot or condominium unit may be made by the owner or developer. Such approval shall not be granted unless the proceeds are used for development and effective measures ensure such utilization. The loan value of each lot or unit shall be determined, and the buyer shall be notified before release of the loan. Held to be mandatory/prohibitory; violation renders the mortgage void.

• Article 5, Civil Code — Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity. Applied to render the mortgage void for violating Section 18 of PD 957.

Davide Jr., C.J. (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.