Heirs of Gregorio Lopez vs. Development Bank of the Philippines

A person who purchases or mortgages unregistered property covered only by a tax declaration cannot claim protection as an innocent purchaser for value or mortgagee in good faith, because the defense of good faith purchase may be availed of only where registered land is involved and the buyer or mortgagee relied in good faith on the clear title of the registered owner. Banks are held to a higher standard of diligence and may not simply rely on the face of a certificate of title; they must ascertain the status or condition of property offered as security as a standard and indispensable part of their operations.

Gregoria Lopez owned a 2,734-square-meter property in Bustos, Bulacan. She died on March 19, 1922, survived by her three sons: Teodoro, Francisco, and Carlos Lopez. Tax Declaration No. 613 was issued under the names of the three sons. Upon the deaths of Teodoro, Francisco, and Carlos, only Teodoro was survived by children: Gregorio, Enrique, Simplicio, and Severino. The petitioners are Simplicio (substituted by his daughter Eliza Lopez) and the heirs of Gregorio and Severino; Enrique is deceased. The property remained unregistered under the Torrens system until 1993.

Gregoria Lopez owned a 2,734-square-meter property in Bustos, Bulacan. She died on March 19, 1922, survived by her three sons: Teodoro, Francisco, and Carlos. Tax Declaration No. 613 was issued under the names of the three sons. Teodoro, Francisco, and Carlos subsequently died, and only Teodoro was survived by children: Gregorio, Enrique, Simplicio, and Severino. The petitioners are Simplicio (substituted by his daughter Eliza Lopez) and the heirs of Gregorio and Severino; Enrique is deceased.

Petitioners discovered that on November 29, 1990, Enrique executed an affidavit of self-adjudication declaring himself to be Gregoria Lopez's only surviving heir, thereby adjudicating upon himself the land in Bulacan. He then sold the property to Marietta Yabut. Petitioners demanded from Marietta the nullification of Enrique's affidavit of self-adjudication and the deed of absolute sale, and also sought to redeem Enrique's one-fourth share. Marietta, who was already in possession of the property, refused.

Sometime in 1993, Marietta obtained a loan from the Development Bank of the Philippines (DBP) and mortgaged the property to DBP as security. At the time of the loan, the property was covered by Tax Declaration No. 18727, with the agreement that the land shall be brought under the Torrens system. On July 26, 1993, an original certificate of title was issued in Marietta's name. Marietta and DBP executed a supplemental document dated February 28, 1995, placing the subject property within the coverage of the mortgage, and the mortgage was annotated to the title.

Sometime between 1993 and 1994, petitioners filed a complaint and an amended complaint with the Regional Trial Court for the annulment of document, recovery of possession, and reconveyance of the property. They prayed for the annulment of Enrique's affidavit of self-adjudication, the deed of sale executed by Enrique and Marietta, and the deed of real estate mortgage executed by Marietta in favor of DBP, as well as the reconveyance of their three-fourths share, their exercise of their right of redemption of Enrique's one-fourth share, and attorney's fees and costs of suit. Petitioners caused the annotation of a notice of lis pendens at the back of the original certificate of title, inscribed on June 27, 1994.

Marietta failed to pay her loan to DBP. DBP instituted foreclosure proceedings on the land and was awarded the sale of the property as the highest bidder. The Certificate of Sale was registered with the Register of Deeds on September 11, 1996. Marietta failed to redeem the property, and the title was consolidated in favor of DBP.

The Regional Trial Court found that the affidavit of self-adjudication and the deed of absolute sale did not validly transfer to Marietta the title to the property, since Enrique could not transfer three-fourths of the property belonging to his co-heirs. The trial court also found that Marietta was not an innocent purchaser for value because at the time of the deed of absolute sale, the property was only covered by a tax declaration in the name of the heirs of Gregoria Lopez, and that DBP was not a mortgagee in good faith because at the time of the execution of the mortgage contract, a certificate of title was yet to be issued in favor of Marietta. The Court of Appeals reversed, holding that DBP was a mortgagee in good faith, as there was no evidence that DBP was privy to the fraudulent execution of Enrique's affidavit of adjudication.

• Erroneous Application of Innocent Purchaser Doctrine: Petitioners argued that the Court of Appeals erred in its application of the doctrine on "innocent purchaser for value," and that DBP should have exercised diligence in ascertaining Marietta's claim of ownership since at the time of the mortgage, the property was only covered by a tax declaration under Marietta's name.
• Higher Standard for Banks: Petitioners argued that as a financial institution of which "greater care and prudence" is required, DBP should not have relied on the face of a certificate of title to the property.

• Lack of Participation in Fraud: DBP, citing Blanco vs. Esquierdo, argued that since its participation in Enrique's execution of the affidavit of self-adjudication was not shown on record, it could not have been aware that there was any irregularity in the sale in favor of Marietta and in her title to the property.
• Reliance on Possession and Title: DBP argued that Marietta was in possession of the property at the time of the contract with DBP, and therefore DBP should enjoy the protection accorded to innocent purchasers for value.

• Validity of Enrique's Affidavit and Sale to Marietta: Whether the property was validly transferred to Marietta given that Enrique executed a false affidavit of self-adjudication and sold the property despite having only a one-fourth undivided share.
• Marietta's Status as Innocent Purchaser for Value: Whether Marietta could claim protection as an innocent purchaser for value when the property was unregistered and covered only by a tax declaration at the time of the sale.
• Validity of the Mortgage in Favor of DBP: Whether a valid mortgage was executed over the property in favor of DBP when Marietta had no valid title to the portions belonging to petitioners' predecessors-in-interest.
• DBP's Status as Mortgagee in Good Faith: Whether DBP could claim protection as a mortgagee in good faith despite the property being unregistered at the time of the mortgage and DBP being a banking institution held to a higher standard of diligence.

• Validity of Enrique's Affidavit and Sale to Marietta: No. Enrique's affidavit of self-adjudication was invalid because it was false — his siblings were still alive and entitled to the three-fourths undivided share of the property. The affidavit did not vest upon Enrique ownership or rights to the property beyond his one-fourth share.
• Marietta's Status as Innocent Purchaser for Value: No. Marietta cannot claim the protection accorded to innocent purchasers for value because at the time of the sale, the property was still unregistered and only a tax declaration issued under the name of "Heirs of Lopez" was available. The defense of good faith purchase applies only where registered land is involved.
• Validity of the Mortgage in Favor of DBP: No. Since Marietta acquired no valid title or ownership from Enrique over the undivided portions of the property, no valid mortgage was executed over the same property in favor of DBP. Without a valid mortgage, there was no valid foreclosure sale and no transfer of ownership to DBP.
• DBP's Status as Mortgagee in Good Faith: No. The exception for mortgagees in good faith applies only when, at the time of the mortgage, the mortgagor has already obtained a certificate of title under his or her name. DBP disregarded circumstances that should have aroused suspicion, and as a bank, it was expected to exercise a higher degree of diligence.

• Validity of Enrique's Affidavit and Sale to Marietta: The Court applied the principle "nemo dat quod non habet" — no one can give what one does not have. Under Article 1458 of the Civil Code, the seller binds himself to transfer the ownership of the thing sold, and under Article 1459, the vendor must have a right to transfer ownership. Title or rights to a deceased person's property pass immediately to heirs upon death under Article 777, and before partition, the heirs are co-owners under Article 1078. Since Enrique's right was limited to his one-fourth share, he had no right to sell the undivided portions belonging to his siblings or their heirs. The issuance of the original certificate of title in favor of Marietta does not cure Enrique's lack of title, as a certificate of title is merely evidence of ownership, not a grant of title.
• Marietta's Status as Innocent Purchaser for Value: An innocent purchaser for value purchases property without any notice of defect or irregularity as to the right or interest of the seller. As a rule, an ordinary buyer may rely on the certificate of title issued in the name of the seller and need not look beyond what appears on the face of the certificate. However, the defense of having purchased the property in good faith may be availed of only where registered land is involved and the buyer relied in good faith on the clear title of the registered owner. At the time of the sale, the property was unregistered, and the unregistered status should have prompted Marietta to inquire further as to Enrique's right over the property.
• Validity of the Mortgage in Favor of DBP: Article 2085 of the Civil Code requires that the mortgagor be the absolute owner of the thing mortgaged. Since Marietta acquired no valid title or ownership from Enrique over the undivided portions of the property, no valid mortgage was executed over the same property in favor of DBP. Consequently, there was no valid foreclosure sale and no transfer of ownership of petitioners' undivided portions to DBP.
• DBP's Status as Mortgagee in Good Faith: The doctrine of mortgagee in good faith, explained in Torbela vs. Rosario, gives effect to the mortgage contract and any foreclosure sale arising therefrom by reason of public policy, based on the rule that persons dealing with property covered by a Torrens Certificate of Title are not required to go beyond what appears on the face of the title. However, this exception applies only when the mortgagor has already obtained a certificate of title under his or her name at the time of the mortgage. Here, Marietta only had a tax declaration, which neither proves ownership nor grants title. The rule on innocent purchasers or mortgagees for value is applied more strictly when the purchaser or mortgagee is a bank, as held in Cruz vs. Bancom Finance Corporation: banks are expected to exercise greater care and prudence in their dealings, and the ascertainment of the status or condition of a property offered as security must be a standard and indispensable part of their operations. DBP's reliance on Blanco vs. Esquierdo was misplaced because in that case, the certificate of title had already been issued under the name of the mortgagor when the property was mortgaged to DBP.

• Nemo dat quod non habet — No one can give what one does not have. A seller can only sell what he or she owns, or that which he or she does not own but has authority to transfer, and a buyer can only acquire what the seller can legally transfer. The Court applied this principle to hold that Enrique could only convey his undivided one-fourth share to Marietta, and any sale of the co-heirs' portions was void with respect to their shares.
• Innocent purchaser for value — An innocent purchaser for value purchases a property without any notice of defect or irregularity as to the right or interest of the seller, and is without notice that another person holds claim to the property being purchased. The defense of having purchased the property in good faith may be availed of only where registered land is involved and the buyer had relied in good faith on the clear title of the registered owner. The Court held that this defense does not apply when the land is not yet registered with the Registry of Deeds.
• Mortgagee in good faith — Under this doctrine, even if the mortgagor is not the owner of the mortgaged property, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy. This principle is based on the rule that all persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title. The exception applies only when, at the time of the mortgage, the mortgagor has already obtained a certificate of title under his or her name; it does not apply when the mortgagor had yet to register the property under her name.
• Higher degree of diligence required of banks — The rule on innocent purchasers or mortgagees for value is applied more strictly when the purchaser or mortgagee is a bank. Banks are expected to exercise a higher degree of diligence in their dealings, including those involving lands, and may not rely simply on the face of the certificate of title. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations.

• "We have consistently upheld the principle that 'no one can give what one does not have.' A seller can only sell what he or she owns, or that which he or she does not own but has authority to transfer, and a buyer can only acquire what the seller can legally transfer." — This passage articulates the foundational principle of the decision, applying the nemo dat rule to the sale of property by a co-owner who attempted to convey the shares of his co-heirs.
• "The defense of having purchased the property in good faith may be availed of only where registered land is involved and the buyer had relied in good faith on the clear title of the registered owner. It does not apply when the land is not yet registered with the Registry of Deeds." — This passage defines the scope of the innocent purchaser defense, limiting it to transactions involving registered land, which was dispositive of Marietta's claim.
• "Banks are expected to exercise higher degree of diligence in their dealings, including those involving lands. Banks may not rely simply on the face of the certificate of title." — This passage establishes the stricter standard applied to banking institutions in mortgage transactions, which was central to the Court's rejection of DBP's claim of good faith.
• "To reiterate, the protection accorded to mortgagees in good faith cannot be extended to mortgagees of properties that are not yet registered or registered but not under the mortgagor's name." — This passage summarizes the Court's holding on the limits of the mortgagee-in-good-faith doctrine, directly addressing DBP's situation.

• Blanco vs. Esquierdo, 110 Phil. 494 (1960) — Distinguished. In that case, DBP was declared a mortgagee in good faith because the certificate of title was already in the name of the mortgagor when the property was mortgaged. The Court held that DBP's reliance on this case was misplaced because the factual situation differed — here, no certificate of title had been issued under Marietta's name at the time of the mortgage.
• Torbela vs. Rosario, G.R. No. 140528, December 7, 2011, 661 SCRA 633 — Cited as controlling authority defining the doctrine of mortgagee in good faith, including its basis in public policy and the rule that persons dealing with property covered by a Torrens Certificate of Title are not required to go beyond what appears on the face of the title.
• Cruz vs. Bancom Finance Corporation, 429 Phil. 225 (2002) — Cited as controlling authority for the proposition that a mortgagee-bank is expected to exercise greater care and prudence in its dealings, including registered lands, and that ascertainment of the status or condition of a property offered as security must be a standard and indispensable part of its operations.
• Daclag vs. Macahilig, 582 Phil. 138 (2008) — Cited in support of the nemo dat principle and the rule that the defense of good faith purchase applies only where registered land is involved.
• Naval vs. Court of Appeals, 518 Phil. 271 (2006) — Cited for the proposition that issuance of a certificate of title is not a grant of title, and the physical certificate does not vest ownership but is merely evidence of such ownership or right.

• Article 1458, Civil Code — Defines the contract of sale, obligating the seller to transfer ownership of and deliver a determinate thing. Applied to establish that Enrique could not perform this obligation for portions of the property he did not own.
• Article 1459, Civil Code — Requires that the thing sold be licit and the vendor have a right to transfer ownership at the time of delivery. Applied to invalidate the sale of the co-heirs' portions.
• Article 493, Civil Code — Provides that each co-owner has full ownership of his part and may alienate, assign, or mortgage it, but the effect of such alienation or mortgage with respect to co-owners is limited to the portion allotted to him upon division. Applied to limit Enrique's conveyance to his one-fourth share.
• Article 777, Civil Code — Provides that rights to succession are transmitted from the moment of death of the decedent. Applied to establish that the heirs' rights vested immediately upon Gregoria Lopez's death without need for declaration as heirs.
• Article 1078, Civil Code — Provides that before partition, heirs are co-owners of the property. Applied to establish the co-ownership among Gregorio, Simplicio, Severino, and Enrique.
• Article 2085, Civil Code — Enumerates the requisites of a contract of pledge or mortgage, including that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. Applied to invalidate the mortgage in favor of DBP since Marietta had no valid title to the co-heirs' portions.

• Associate Justice Antonio T. Carpio (Chairperson)
• Associate Justice Arturo D. Brion
• Associate Justice Mariano C. Del Castillo