Home Bankers Savings & Trust Co. vs. Court of Appeals

A real estate mortgage constituted by a subdivision developer over subdivision lots without the prior written approval of the HLURB, as required by Section 18 of P.D. No. 957, is void and unenforceable against lot buyers, and the HLURB has exclusive jurisdiction to so declare. A mortgagee bank that knows the loan is for a subdivision project but fails to verify whether the developer obtained HLURB approval to mortgage or whether buyers already exist cannot claim good faith merely because the certificates of title were clean.

Petitioner Home Bankers Savings & Trust Company is a banking institution that extended a ₱4,000,000 loan to Engr. Jesus Garcia and his wife, secured by a real estate mortgage over eight lots in a townhouse project in Quezon City. Garcia was the owner and general manager of TransAmerican Sales and Exposition, the developer of the eight-unit townhouse project on the subject lots. Private respondents are individual buyers who had entered into separate contracts to sell with Garcia/TransAmerican for specific units in the project. The dispute arose from the intersection of the buyers' contractual rights under P.D. No. 957 (the Subdivision and Condominium Buyer's Protective Decree) and the bank's mortgage and foreclosure over the same lots.

Each of the private respondents entered into separate contracts to sell with TransAmerican Sales and Exposition, through its owner and general manager Engr. Jesus Garcia, involving portions of land covered by Transfer Certificate of Title No. 19155 located at No. 45 Gen. Lim Street, Heroes Hill, Quezon City, each with a three-storey townhouse to be built thereon. Respondent Pablo N. Arevalo purchased Unit No. 5 (TCT No. 3352) for ₱750,000 on August 21, 1988 and fully paid the purchase price on September 3, 1988. Respondent Alfredo Lim purchased Unit No. 1 (TCT No. 3356) for ₱800,000 on December 22, 1988 and paid in full upon execution of the agreement. Respondent Francisco A. Uy purchased Unit No. 6 (TCT No. 3351) on October 29, 1988 for ₱800,000 payable in installments and had made total payments of ₱581,507.41 before stopping payment of postdated checks from September 1990 to November 1995 on the ground of non-completion of his unit, later discovering the foreclosure of the property. Respondent spouses Leandro A. Soriano, Jr. and Lilian Soriano purchased Unit No. 3 (TCT No. 3354) on February 15, 1990 for ₱1,600,000 and had paid ₱669,960.00 before stopping payments due to non-completion, also later learning of the foreclosure. Respondents Alfredo Lim and Santos Lim purchased Unit No. 7 (TCT No. 3350) for ₱700,000 in October 1988, fully paid as of March 18, 1989; Santos Lim subsequently sold and assigned his share to Felisa Chi Lim on May 12, 1989. The contracts stipulated that the townhouses would be fully completed and the titles delivered free from liens and encumbrances upon full payment, but despite repeated demands, Garcia and TransAmerican failed to comply.

On May 30, 1989, Garcia and his wife obtained a ₱4,000,000 loan from petitioner Home Bankers Savings and Trust Company and, without the prior approval of the Housing and Land Use Regulatory Board (HLURB), mortgaged eight lots covered by TCT Nos. 3349 to 3356 as collateral. Petitioner registered its mortgage on these titles, which bore no other encumbrance or lien. The loan proceeds were intended for development of the lots into an eight-unit townhouse project, but five of the eight titles turned out to cover the townhouses subject of the contracts to sell with the private respondents. When the loan became due and Garcia failed to pay, petitioner instituted an extrajudicial foreclosure and, as highest bidder at the public auction, obtained a sheriff's certificate of sale on February 26, 1990, which was registered and annotated on the titles.

On November 8, 1990, the private respondents filed a complaint with the OAALA, HLURB, against Garcia/TransAmerican as seller/developer and petitioner as indispensable party, for non-delivery of titles and non-completion of the subdivision project. They prayed for completion of the units, annulment of the mortgage, release of the mortgage on fully paid lots and delivery of titles, and for petitioner to compute individual loan values of amortizing respondents and accept their payments. Petitioner answered that the respondents had no cause of action against it, that at the time of the loan and mortgage there were no known buyers or annotations on the titles, and that HLURB notification was unnecessary. Upon motion of the private respondents, the case against Garcia/TransAmerican was archived for failure to serve summons, and the case was submitted for decision.

• HLURB Jurisdiction: Petitioner asserted that the HLURB has no power to declare a mortgage contract over real property executed between a real estate developer and a banking institution void or unenforceable, as this properly falls within the jurisdiction of the Regional Trial Court. Petitioner argued that, as a mortgagee and not a project owner, developer, or dealer under P.D. No. 1344, and absent any seller-buyer relationship with private respondents, the HLURB lacked jurisdiction to rule on the mortgage's validity and annul the foreclosure proceedings.
• Validity of the Mortgage: Petitioner contended that since the titles on their face were free from any claims, liens, and encumbrances at the time of the mortgage, it was not obliged under the law to go beyond the certificates of title and had every reason to rely on their correctness and validity. Petitioner claimed to be a mortgagee in good faith and an innocent purchaser for value.
• Unregistered Contracts to Sell: Petitioner argued that private respondents were negligent in failing to register their contracts to sell in accordance with Section 17 of P.D. No. 957, and that the unregistered contracts are binding only on the parties thereto but unenforceable against petitioner, which had no actual or constructive notice of the sales at the time the mortgage was constituted.

• HLURB Jurisdiction: Whether the HLURB has jurisdiction to nullify or declare unenforceable a real estate mortgage validly constituted by a subdivision lot owner in favor of a banking institution.
• Validity of the Mortgage: Whether the real estate mortgage in favor of petitioner is invalid and unenforceable against private respondents.
• Effect of Unregistered Contracts to Sell: Whether the unregistered contracts to sell in favor of private respondents should be held valid only as between the parties but unenforceable against petitioner.

• HLURB Jurisdiction: Yes. The HLURB has jurisdiction to declare invalid the mortgage contract executed between a subdivision developer and a bank over subdivision lots insofar as lot buyers are concerned, pursuant to P.D. No. 957 and P.D. No. 1344, as applied in Union Bank vs. HLURB.
• Validity of the Mortgage: No. The mortgage is void and unenforceable against private respondents because it was constituted without the prior written approval of the HLURB, in violation of Section 18 of P.D. No. 957, which is a prohibitory law. Petitioner is not a mortgagee in good faith due to its negligence in failing to verify the existence of buyers and the developer's authority to mortgage.
• Effect of Unregistered Contracts to Sell: No. The unregistered contracts to sell are binding on petitioner. The duty to register contracts to sell under Section 17 of P.D. No. 957 rests on the seller, not the buyers, and petitioner's negligence precludes it from claiming good faith as against the buyers' contractual rights.

• HLURB Jurisdiction: The jurisdiction of the HLURB to regulate the real estate trade is broad enough to include complaints for specific performance of the sale or annulment of the mortgage of a subdivision unit, with damages. This follows from Section 3 of P.D. No. 957, which grants the National Housing Authority (now HLURB) exclusive jurisdiction to regulate the real estate trade and business; P.D. No. 1344, which expanded NHA jurisdiction to include cases of unsound real estate business practices, claims for refund, and specific performance filed by subdivision lot buyers; and Executive Order Nos. 648 and 90, which transferred these functions to the HLURB. In Union Bank vs. HLURB, the Court squarely held that a condominium buyer's complaint for annulment of a mortgage constituted by the project owner without buyer consent and without NHA approval falls within the HLURB's exclusive jurisdiction. The mortgage here was constituted without the prior written approval of the HLURB, as petitioner itself admitted it did not notify the HLURB because it believed such notification was unnecessary. This admission is fatal to petitioner's defense.

• Validity of the Mortgage: Section 18 of P.D. No. 957 provides that no mortgage on any unit or lot shall be made by the owner or developer without prior written approval of the authority. In Far East Bank and Trust Co. vs. Marquez, the Court held that Section 18 is a prohibitory law, and acts committed contrary to it are void. The legislative intent of P.D. No. 957 is to protect innocent lot buyers from scheming subdivision developers; as between small lot buyers and the financial institutions that deal with developers, the law as an instrument of social justice must favor the weak. Since the mortgage was void for lack of HLURB approval, the HLURB's orders cancelling the sheriff's certificate of sale, releasing the mortgaged lots, and delivering titles to fully paid buyers are necessary consequences of that invalidity. Petitioner cannot claim good faith because it knew the loan was for a townhouse project yet failed to verify whether Garcia had secured HLURB authority to mortgage or whether buyers already existed. While the general rule is that a mortgagee is not required to look beyond a clean certificate of title, this admits an exception where the mortgagee has knowledge of facts that should induce a reasonably prudent person to inquire into the status of the property. Petitioner's negligence in ascertaining the existence of buyers and HLURB approval takes the place of registration, and petitioner is deemed to have constructive knowledge of the buyers' rights. The conversion of petitioner's status from mortgagee to buyer-owner at foreclosure does not lessen the importance of such knowledge or set aside the consequences of its negligence.

• Effect of Unregistered Contracts to Sell: Section 17 of P.D. No. 957 provides that the seller shall register contracts to sell with the Register of Deeds. Thus, it was Garcia's responsibility as seller to register the contracts, and petitioner cannot blame private respondents for failing to do so. Given petitioner's negligence in ascertaining whether Garcia had secured HLURB authority to mortgage, petitioner cannot claim to be an innocent purchaser for value and in good faith, and is bound by the contracts to sell. Furthermore, the last paragraph of Section 18 of P.D. No. 957 provides that buyers who have not yet paid in full have the option to pay their installments directly to the mortgagee, who is required to apply such payments to the corresponding mortgage indebtedness secured by the particular lot, with a view to enabling the buyer to obtain title promptly after full payment. Petitioner is thus obliged to accept remaining unpaid amortizations, without prejudice to its right to seek relief against the subdivision developer. The absence of Garcia/TransAmerican did not hamper resolution of the dispute, as Garcia/TransAmerican is not an indispensable party — a final determination on the validity of the mortgage can be rendered against petitioner alone, following China Bank vs. Oliver.

• Section 18 of P.D. No. 957 as a Prohibitory Law — Section 18 of P.D. No. 957, which requires prior written approval of the authority (HLURB) before any mortgage on a subdivision lot or unit may be made by the owner or developer, is a prohibitory law. Acts committed contrary to a prohibitory law are void. The Court applied this doctrine to declare the mortgage constituted by Garcia/TransAmerican in favor of petitioner void, because no HLURB approval was obtained. The void mortgage could not support a valid foreclosure sale, and the HLURB's orders cancelling the certificate of sale and releasing the lots were necessary consequences.

• Exception to the Mortgagee-in-Good-Faith Doctrine — The general rule is that a mortgagee is not required to look beyond the certificate of title when it is free from liens or encumbrances. However, this rule admits an exception where the mortgagee has knowledge of a defect or lack of title in the vendor, or is aware of sufficient facts to induce a reasonably prudent person to inquire into the status of the property. A bank that knows the loan is for a subdivision project but fails to verify whether the developer secured HLURB approval to mortgage or whether buyers already exist is negligent and cannot claim good faith. Such negligence takes the place of registration, and the mortgagee is deemed to have constructive knowledge of the buyers' rights.

• HLURB's Exclusive Jurisdiction over Real Estate Trade Regulation — The HLURB's jurisdiction to regulate the real estate trade is broad enough to include jurisdiction over complaints for specific performance of the sale or annulment of the mortgage of a subdivision unit, with damages. This jurisdiction derives from P.D. No. 957 (Section 3), P.D. No. 1344 (Section 1), Executive Order No. 648, and Executive Order No. 90, which collectively transferred the regulatory and quasi-judicial functions over the real estate trade from the NHA to the HLURB.

• Duty to Register Contracts to Sell Rests on the Seller — Under Section 17 of P.D. No. 957, the seller — not the buyer — bears the responsibility to register contracts to sell with the Register of Deeds. A buyer cannot be blamed for the seller's failure to register, and a negligent mortgagee cannot invoke the non-registration of contracts to sell as a defense against the buyers' rights.

• "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 P.D. No. 957 compels the reading of Section 18 as prohibitory – acts committed contrary to it are void." — This passage articulates the ratio decidendi for declaring the mortgage void, establishing that Section 18 of P.D. No. 957 is a prohibitory provision whose violation renders the mortgage void.

• "Petitioner's want of knowledge due to its negligence takes the place of registration, thus it is presumed to know the rights of respondents over the lot. The conversion of the status of petitioner from mortgagee to buyer-owner will not lessen the importance of such knowledge. Neither will the conversion set aside the consequence of its negligence as a mortgagee." — This passage establishes that a negligent mortgagee is deemed to have constructive knowledge of unregistered buyer rights, and that acquiring ownership through foreclosure does not cure the mortgagee's prior negligence.

• "As a general rule, where there is nothing on the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title upon its face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. This rule, however, admits of an exception as where the purchaser or mortgagee has knowledge of a defect or lack of title in the vendor, or that he was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the property in litigation." — This passage, quoted from Far East Bank and Trust Co. vs. Marquez, states the canonical formulation of the exception to the mortgagee-in-good-faith doctrine, frequently cited in subsequent jurisprudence on banking diligence and Torrens system reliance.

• Union Bank of the Philippines vs. HLURB, et al., 210 SCRA 558 — Controlling precedent directly applied. The Court held that the HLURB has exclusive jurisdiction over a condominium buyer's complaint for annulment of a mortgage constituted by the project owner without buyer consent and without NHA approval, and for annulment of the foreclosure sale and certificate of title issued to the highest bidder. The present case followed this ruling on the jurisdictional issue.
• Far East Bank and Trust Co. vs. Marquez, 420 SCRA 349 — Followed on two points: (1) Section 18 of P.D. No. 957 is a prohibitory law, and acts contrary to it are void; and (2) the exception to the mortgagee-in-good-faith doctrine where the mortgagee has knowledge of facts that should induce inquiry into the property's status.
• Philippine National Bank vs. Office of the President, 252 SCRA 5 — Followed for the proposition that P.D. No. 957 was enacted to protect innocent lot buyers from scheming subdivision developers, and that as between small lot buyers and financial institutions, the law must favor the weak. Also cited for the rule that buyers who have not fully paid may pay installments directly to the mortgagee.
• China Bank vs. Oliver, 390 SCRA 263 — Applied on the issue of indispensable parties. The Court held that the mortgagor (Garcia/TransAmerican) is not an indispensable party in a case for annulment of mortgage, since a final determination on the validity of the mortgage can be rendered against the mortgagee (petitioner) alone.

• Section 18, P.D. No. 957 (Subdivision and Condominium Buyer's Protective Decree) — Provides that no mortgage on any unit or lot shall be made by the owner or developer without prior written approval of the authority (HLURB). Such approval shall not be granted unless the proceeds of the mortgage loan are used for project development. The loan value of each lot or unit shall be determined and the buyer notified before release of the loan. The buyer may, at his option, pay installments directly to the mortgagee, who shall apply the payments to the corresponding mortgage indebtedness. Applied to declare the mortgage void for lack of HLURB approval and to require petitioner to accept amortization payments from partially paid buyers.
• Section 17, P.D. No. 957 — Provides that the seller shall register all contracts to sell, deeds of sale, and similar instruments with the Register of Deeds. Applied to hold that the duty to register contracts to sell rests on the seller (Garcia/TransAmerican), not on the buyers, and that petitioner cannot blame private respondents for non-registration.
• Section 3, P.D. No. 957 — Grants the National Housing Authority (now HLURB) exclusive jurisdiction to regulate the real estate trade and business. Applied as the statutory basis for HLURB jurisdiction.
• Section 1, P.D. No. 1344 — Expanded NHA jurisdiction to include cases of unsound real estate business practices, claims for refund by subdivision lot buyers, and specific performance of contractual and statutory obligations by buyers against owners, developers, brokers, or salesmen. Applied as the statutory basis for HLURB's jurisdiction over the buyers' complaint.
• Executive Order No. 648 (Feb. 7, 1981) — Transferred the regulatory and quasi-judicial functions of the NHA to the Human Settlements Regulatory Commission, including approval of mortgages on subdivision lots and hearing of cases on unsound real estate business practices. Applied as part of the jurisdictional chain establishing HLURB authority.
• Executive Order No. 90 (Dec. 17, 1986) — Changed the name of the Human Settlements Regulatory Commission to the Housing and Land Use Regulatory Board (HLURB). Applied to confirm the HLURB as the successor agency with jurisdiction over the case.

Puno (Chairman), Callejo, Sr., Tinga, and Chico-Nazario, JJ., concurred.