Land Bank of the Philippines vs. Republic of the Philippines

A certificate of title covering property of the public domain classified as forest land is void ab initio and confers no protection even upon an innocent mortgagee for value, because forest lands are outside the commerce of man and incapable of private appropriation, and a mortgagor who is not the absolute owner lacks the legal capacity to encumber the property under the Civil Code.

Angelito Bugayong obtained Sales Patent No. 4576 and Original Certificate of Title (OCT) No. P-2823 in 1969 over a 41,276-square-meter parcel in Davao City. The land was subsequently subdivided and conveyed to several purchasers, eventually reaching Lourdes Farms, Inc., which mortgaged a portion to petitioner Land Bank of the Philippines (LBP) in 1980. In 1981, following a petition by residents, the Bureau of Lands investigated and found that the land was classified as forest zone under Project No. 1, LC-47 dated August 6, 1923, at the time the patent was issued; it was released as alienable and disposable only on March 25, 1981. The Bureau further found the land to be marshy and submerged during high tide, and that Bugayong had never been in actual possession.

• Issuance of Title and Subdivision: On September 22, 1969, a Sales Patent was issued to Angelito Bugayong over Lot No. 4159 in Davao City, leading to the issuance of OCT No. P-2823. The lot was subsequently subdivided into four lots under an approved subdivision plan. Bugayong sold the lots to various persons; one lot eventually reached Lourdes Farms, Inc., which obtained TCT No. T-57348.
• Mortgage to LBP: Lourdes Farms, Inc. mortgaged the property covered by TCT No. T-57348 to Land Bank of the Philippines on April 14, 1980.
• Bureau of Lands Investigation: On July 15, 1981, residents filed a formal petition before the Bureau of Lands. Investigation revealed that: (1) at the time the sales patent was issued, the land was still within the forest zone under a 1923 classification, and was only released as alienable and disposable on March 25, 1981; (2) the land was marshy and covered by sea water during high tide; and (3) Bugayong was never in actual possession of the land.
• Reversion Action: Based on the investigation, the Republic, through the OSG, filed a complaint for cancellation of title/patent and reversion against Bugayong, Lourdes Farms, Inc., LBP, and others. LBP filed an answer with a cross-claim against Lourdes Farms, Inc., praying for payment of the outstanding obligation or substitution of collateral should the title be annulled.

• Innocent Mortgagee for Value: LBP argued that it validly acquired a mortgage interest because it relied on the Torrens title (TCT No. T-57348), which bore no visible indication of defect, and a bank is not required to investigate beyond what the title indicates on its face.
• Incontrovertibility of Title: LBP contended that the title had become incontrovertible pursuant to Section 32 of Presidential Decree No. 1529, proscribing the review or reopening of registration.
• Non-Impairment of Contracts: LBP invoked the constitutional guarantee of non-impairment of contracts, asserting that its mortgage rights and interest over the subject land must be respected and cannot be impaired.
• Cross-Claim for Payment or Substitute Collateral: LBP maintained that should TCT No. T-57348 be annulled, Lourdes Farms, Inc. should be ordered to pay its outstanding obligation or provide a substitute collateral.

• Inalienability of Forest Lands: The Republic asserted that forest lands are outside the commerce of man and cannot be the subject of private appropriation; titles covering such non-disposable lands are void ab initio.
• No Protection for Mortgagees: The Republic countered that mortgagees of non-disposable lands with erroneously issued titles acquire no protection under the Land Registration Law.
• Imprescriptibility and Estoppel: The Republic argued that prescription does not lie against the State in reversion cases involving public forest land, and the government is not estopped by the erroneous or fraudulent acts of its agents.

• Validity of Mortgage Interest: Whether LBP possesses a valid and subsisting mortgage interest as an innocent mortgagee for value over land that was classified as forest zone at the time the original patent was issued.
• Non-Impairment of Contracts: Whether the nullification of the mortgage contract violates the constitutional guarantee against impairment of contracts.
• Cross-Claim Resolution: Whether LBP is entitled to the relief prayed for in its cross-claim against Lourdes Farms, Inc., given the nullification of the title.

• Validity of Mortgage Interest: No valid mortgage interest exists. Because the land was within the forest zone when the patent was issued, OCT No. P-2823 and all derivative titles were void ab initio. Under Article 2085 of the Civil Code, absolute ownership by the mortgagor is an essential requisite of a mortgage; since Lourdes Farms, Inc. was not the absolute owner, it lacked the capacity to encumber the property. Titles covering non-disposable public lands are cancellable even in the hands of innocent purchasers or mortgagees for value.
• Non-Impairment of Contracts: The constitutional guarantee of non-impairment of contracts cannot be invoked to validate the mortgage. The restraint upon acquiring ownership or interest over forest lands constitutes a valid exercise of State police power to promote the general welfare and preserve the environment, which prevails over contractual obligations.
• Cross-Claim Resolution: The cross-claim was remanded to the RTC for further proceedings. No factual basis exists on record to resolve the cross-claim, as the RTC did not require an answer to it, no evidence was adduced, and the Supreme Court is not a trier of facts. Furthermore, LBP failed to assign the RTC's inaction as an error in its appellant's brief before the CA.

• Regalian Doctrine and Inalienability of Forest Lands — All lands of the public domain are owned by the State, and forest lands are outside the commerce of man, incapable of private appropriation. Possession thereof, however long, cannot convert them into private property. A certificate of title covering property of the public domain classified as forest land is void ab initio. The Court applied this to nullify OCT No. P-2823 and all titles derived from it, as the land was forest zone at the time of the grant.
• Innocent Mortgagee for Value (Limitation) — Mortgagees of non-disposable lands where titles were erroneously issued acquire no protection under the Land Registration Law. The Court applied this to deny LBP's claim of good faith, holding that a void title cannot validate a mortgage interest, irrespective of the mortgagee's lack of notice of the land's public domain status.
• Imprescriptibility of Reversion Actions — Prescription and laches do not lie against the State in actions for reversion of public forest land fraudulently included in patents or certificates of title. The Court applied this to reject LBP's claim that the title had become incontrovertible over time.
• Police Power over Non-Impairment of Contracts — The State's police power to regulate the use and occupancy of forest lands prevails over the constitutional guarantee of non-impairment of contracts. The Court applied this to subordinate LBP's mortgage rights to the State's environmental and public welfare concerns.

• "Forest lands are outside the commerce of man and unsusceptible of private appropriation in any form."
• "It is well settled that a certificate of title is void when it covers property of public domain classified as forest, timber or mineral lands. Any title issued covering non-disposable lots even in the hands of an alleged innocent purchaser for value shall be cancelled."
• "Since Lourdes Farms, Inc. is not the owner of the land, it does not have the capacity to mortgage it to LBP."
• "Preservation of our forest lands could entail intrusion upon contractual rights as in this case but it is justified by the Latin maxims Salus populi est suprema lex and Sic utere tuo ut alienum non laedas, which call for the subordination of individual interests to the benefit of the greater number."

• Republic v. Reyes, 155 SCRA 313 (1987) — Followed. Held that a certificate of title covering non-disposable public land is void even in the hands of an innocent purchaser for value.
• De la Cruz v. Court of Appeals, 349 Phil. 898 (1998) — Applied. Ruled that a mortgagor lacks the proprietary power to encumber forest land, and even if the mortgagee acknowledged the mortgagor as owner, the latter could never be presumed owner in the eyes of the law.
• Director of Forestry v. Muñoz, 132 Phil. 637 (1968) — Applied. Upheld the validity of the State's exercise of police power to regulate forest lands over individual property or contract rights.
• Republic v. Court of Appeals, 258 SCRA 223 (1996) — Followed. Declared that prescription does not run against the State in actions for reversion of public land.

• Article 2085, Civil Code — Enumerates the essential requisites of pledge and mortgage, including that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. Applied to deny the validity of the mortgage because Lourdes Farms, Inc. was not the absolute owner of the forest land.
• Section 48(b), Commonwealth Act No. 141 (Public Land Act) — Requires possession under claim of ownership since June 12, 1945, for confirmation of imperfect title. Applied to show that possession prior to the land's release as alienable and disposable in 1981 cannot be credited toward the 30-year requirement.
• Section 101, Commonwealth Act No. 141 (Public Land Act) — Authorizes the State to recover or revert public land fraudulently included in patents or certificates of title. Applied to justify the reversion action despite the issuance of a patent.
• Section 13, Presidential Decree No. 705 (Revised Forestry Code) — Governs the release of forest lands as alienable and disposable. Applied to determine that the subject land was released as alienable only on March 25, 1981.
• Section 32, Presidential Decree No. 1529 (Property Registration Decree) — Provides that after one year from the date of issuance, a decree of registration shall become incontrovertible. Rejected by the Court as inapplicable, since a void title cannot become incontrovertible, and prescription does not lie against the State.

Ynares-Santiago, Chairperson, Austria-Martinez, Corona, Nachura