Metrobank vs. Pascual

A declaration of nullity of marriage does not ipso facto convert conjugal properties into separate properties of the former spouses; the conjugal nature of the property subsists until liquidation is effected, during which time the former spouses become co-owners under an implied ordinary co-ownership governed by Article 493 of the Civil Code. Under this regime, a spouse may mortgage or alienate only her undivided share without the consent of the other, and the mortgagee's rights are limited to such share. Furthermore, banking institutions are held to a higher standard of diligence than private individuals and cannot rely merely on the face of the certificate of title when entering into mortgage transactions.

The case involves a dispute over a property purchased by Florencia Nevalga during her marriage to Nicholson Pascual. After their marriage was declared null and void due to psychological incapacity, Florencia obtained a loan from Metropolitan Bank and Trust Co. (Metrobank) secured by a real estate mortgage on the disputed property, allegedly without Nicholson's consent. When Metrobank initiated foreclosure proceedings, Nicholson filed an action to declare the mortgage null and void, claiming the property was conjugal and could not be encumbered without his consent.

• Nicholson Pascual and Florencia Nevalga were married on January 19, 1985. During the marriage, Florencia purchased a 250-square meter lot with a three-door apartment in Makati City from spouses Clarito and Belen Sering.
• Transfer Certificate of Title (TCT) No. 156283 was issued in the name of Florencia, described as "married to Nelson Pascual" a.k.a. Nicholson Pascual.
• In 1994, Florencia filed a suit for declaration of nullity of marriage under Article 36 of the Family Code. On July 31, 1995, the RTC, Branch 94 in Quezon City rendered a decision declaring the marriage null and void due to psychological incapacity on the part of Nicholson, and ordered the dissolution and liquidation of the conjugal partnership of gains. The couple separated without liquidating the conjugal partnership.
• On April 30, 1997, Florencia, together with spouses Norberto and Elvira Oliveros, obtained a PhP 58 million loan from Metrobank. To secure the obligation, Florencia executed real estate mortgages on several properties, including the lot covered by TCT No. 156283.
• Among the documents Florencia submitted to Metrobank were a copy of TCT No. 156283, a photocopy of the marriage-nullifying RTC decision, and a document denominated as "Waiver" purportedly executed by Nicholson on April 9, 1995, covering conjugal properties but not including the disputed lot.
• Due to failure to pay the loan, Metrobank initiated foreclosure proceedings on November 29, 1999, and caused the publication of the notice of sale in Remate. At the auction sale on January 21, 2000, Metrobank emerged as the highest bidder.
• On June 28, 2000, Nicholson filed a Complaint before the RTC in Makati City (Civil Case No. 00-789, Branch 65) to declare the nullity of the mortgage, alleging the property was conjugal and was mortgaged without his consent. He claimed the waiver document was forged.
• Metrobank alleged in its Answer that the property was paraphernal, being registered in Florencia's name alone, and asserted it was a mortgagee in good faith. Florencia was declared in default for failure to file an answer.
• The RTC found the property to be conjugal under Article 116 of the Family Code (or Article 160 of the Civil Code), noting the presumption that property acquired during marriage is conjugal unless proven otherwise. It found the waiver defective and forged, and declared Metrobank a mortgagee in bad faith due to negligence in failing to scrutinize the supporting documents.
• The CA affirmed the RTC decision, holding that Article 124 of the Family Code requires the written consent of the other spouse for the disposition or encumbrance of conjugal property, but deleted the awards for moral damages and attorney's fees, holding that Metrobank's failure was not due to ill-will or fraudulent purpose.

• Metrobank argued that Article 160 of the Civil Code, not Article 116 of the Family Code, applies since the marriage was contracted before the effectivity of the Family Code on August 3, 1988.
• It contended that for the presumption of conjugal ownership under Article 160 to operate, there must be proof not only that the property was acquired during the marriage but also that conjugal funds were used for the acquisition, which burden Nicholson failed to discharge.
• It cited Francisco v. Court of Appeals and Jocson v. Court of Appeals to support the argument that registration in the name of a married person does not prove the property was acquired during the marriage.
• It maintained that the declaration of nullity of marriage ipso facto dissolved the conjugal partnership regime, and that the waiver executed by Nicholson vested full ownership of the conjugal properties on Florencia.
• It argued that it was an innocent purchaser for value and mortgagee in good faith, entitled to rely on the face of the certificate of title.

• Nicholson contended that Metrobank failed to overcome the legal presumption that the disputed property is conjugal, citing De Leon v. Rehabilitation Finance Corporation and Wong v. IAC. He argued that only proof of acquisition during marriage is needed to raise the presumption.
• He distinguished Francisco and Jocson, noting they apply only when there is no indication as to the exact date of acquisition.
• He asserted that the mere declaration of nullity of marriage, without liquidation of the conjugal assets, does not automatically result in a regime of complete separation.
• He pointed out that Metrobank had virtually recognized the conjugal nature of the property by naming him as co-mortgagor and referring to them as "spouses" in the foreclosure proceedings and demand letters.
• He argued that the waiver was forged and spurious, and that Metrobank could not be considered a mortgagee in good faith as it failed to exercise the required diligence expected of banking institutions.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the disputed property is conjugal or paraphernal, and whether the presumption under Article 160 of the Civil Code requires proof that conjugal funds were used for the acquisition.
  • Whether the declaration of nullity of marriage ipso facto dissolved the regime of community property without need of liquidation.
  • Whether Metrobank is an innocent mortgagee for value entitled to protection, or whether it was negligent in failing to exercise the diligence required of banking institutions.

• Procedural: N/A
• Substantive:
  • The Court held that Article 160 of the Civil Code applies (not Article 116 of the Family Code) since the property was acquired before the Family Code's effectivity. However, the presumption of conjugal ownership under Article 160 arises upon proof of acquisition during the marriage alone; it does not require proof that conjugal funds were used. The registration of the property in the name of "Florencia Nevalga, married to Nelson Pascual" coupled with proof of acquisition during the marriage is sufficient to establish the conjugal nature of the property.
  • The Court ruled that the declaration of nullity of marriage severed the marital bond and dissolved the conjugal partnership, but the character of the properties acquired before such declaration continues to subsist as conjugal properties until and after the liquidation and partition of the partnership. Pending liquidation, the conjugal partnership is converted into an implied ordinary co-ownership governed by Article 493 of the Civil Code.
  • Under Article 493, Florencia had the right to mortgage her one-half (1/2) undivided interest in the disputed property without Nicholson's consent. However, the mortgage is null and void with respect to the remaining 1/2 undivided portion belonging to Nicholson, who did not consent to the mortgage. The principle of "quando res non valet ut ago, valeat quantum valere potest" (when a thing is of no effect as I do it, it shall have effect as far as it can) was applied to give effect to the mortgage as to Florencia's share while declaring it void as to Nicholson's share.
  • The Court held that where the mortgagee is a banking institution, the general rule that a purchaser or mortgagee need not look beyond the four corners of the title is inapplicable. Banks must exercise greater care and due diligence before entering into a mortgage contract, and the ascertainment of the status of the property and validity of the mortgagor's title must be a standard part of their operations. Metrobank failed to observe this diligence and cannot be accorded the status of a bona fide mortgagee.
  • The Court affirmed the deletion of moral damages and attorney's fees, agreeing with the CA that Metrobank's failure to comply with due diligence was not the result of dishonest purpose, moral obliquity, or fraud that would justify damages.

• Presumption of Conjugal Ownership (Article 160, Civil Code) — Provides that all property of the marriage is presumed to belong to the conjugal partnership unless proven otherwise. The presumption arises upon proof of acquisition during the marriage alone, without need to prove that conjugal funds were used. The Court clarified that requiring proof of conjugal funds would render the legal presumption a superfluity.
• Effect of Declaration of Nullity on Conjugal Properties — A declaration of nullity of marriage does not automatically convert conjugal properties into separate properties of the former spouses. The conjugal nature subsists until liquidation is effected. Prior to liquidation, the former spouses become co-owners under an implied ordinary co-ownership governed by Article 493 of the Civil Code.
• Rights of Co-Owners (Article 493, Civil Code) — Each co-owner has full ownership of his undivided share and may alienate, assign, or mortgage it. However, the effect of the alienation or mortgage with respect to the co-owners is limited to the portion which may be allotted to the alienating co-owner in the division upon termination of the co-ownership.
• Partial Validity of Contracts (Quando res non valet ut ago, valeat quantum valere potest) — When a contract is partially invalid, it shall be valid to the extent possible. Applied here to validate the mortgage as to the mortgagor's undivided share while declaring it void as to the non-consenting co-owner's share.
• Duty of Diligence of Banking Institutions — Banking institutions are held to a higher standard of diligence than private individuals in mortgage transactions. They cannot rely merely on the face of the certificate of title but must ascertain the status or condition of the property and the validity of the mortgagor's title as a standard part of their operations.

• "Article 160 of the New Civil Code. It provides that 'all property of the marriage is presumed to be conjugal partnership, unless it be prove[n] that it pertains exclusively to the husband or to the wife.' This article does not require proof that the property was acquired with funds of the partnership. The presumption applies even when the manner in which the property was acquired does not appear."
• "While the declared nullity of marriage of Nicholson and Florencia severed their marital bond and dissolved the conjugal partnership, the character of the properties acquired before such declaration continues to subsist as conjugal properties until and after the liquidation and partition of the partnership."
• "Under [Article 493], Florencia has the right to mortgage or even sell her one-half (1/2) undivided interest in the disputed property even without the consent of Nicholson. However, the rights of Metrobank, as mortgagee, are limited only to the 1/2 undivided portion that Florencia owned."
• "Where the mortgagee is a banking institution, the general rule that a purchaser or mortgagee of the land need not look beyond the four corners of the title is inapplicable. Unlike private individuals, it behooves banks to exercise greater care and due diligence before entering into a mortgage contract."

• Manongsong v. Estimo — Cited by Metrobank but clarified by the Court; held that the presumption of conjugal ownership under Article 160 does not require proof that conjugal funds were used for acquisition.
• Francisco v. Court of Appeals — Distinguished; held that when there is no showing as to when the property was acquired, the fact that title is in the name of the spouse is an indication that the property belongs exclusively to said spouse.
• Jocson v. Court of Appeals — Distinguished for the same reason as Francisco; applicable only when there is no indication of the date of acquisition.
• Castro v. Miat — Cited for the proposition that Article 160 does not require proof that the property was acquired with funds of the partnership.
• Dael v. Intermediate Appellate Court — Applied to hold that pending liquidation following dissolution, the conjugal partnership of gains is converted into an implied ordinary co-ownership among the former spouses.
• De Leon v. Rehabilitation Finance Corporation — Cited by Nicholson to support the presumption of conjugal ownership.
• Wong v. IAC — Cited by Nicholson regarding the presumption of conjugal ownership.
• Uy v. Court of Appeals — Cited for the rule that banks must look beyond the four corners of the title.
• Cruz v. Bancom Finance Corporation — Cited for the duty of banks to ascertain the status of property offered as security.
• Rural Bank of Compostela v. Court of Appeals — Cited for the standard of diligence required of banks.
• Aromin v. Floresca — Cited for the maxim "quando res non valet ut ago, valeat quantum valere potest."

• Article 36 of the Family Code — Cited as the basis for the declaration of nullity of marriage due to psychological incapacity.
• Article 116 of the Family Code — Mentioned by the lower courts but held inapplicable by the Supreme Court since the property was acquired before the Family Code's effectivity; provides the presumption that all property acquired during marriage is conjugal.
• Article 124 of the Family Code — Cited by the CA regarding the requirement of written consent of the other spouse for disposition or encumbrance of conjugal property.
• Article 129 of the Family Code — Cited regarding the liquidation of the conjugal partnership upon dissolution.
• Article 160 of the Civil Code — Applied as the governing provision; establishes the presumption that all property of the marriage is conjugal unless proven otherwise.
• Article 493 of the Civil Code — Applied to the co-ownership relationship of the former spouses pending liquidation; governs the rights of co-owners to alienate or mortgage their undivided shares.
• Act No. 3135 — Cited as the law governing the extrajudicial foreclosure of mortgage.
• Rule 45 of the Rules of Court — Cited as the procedural basis for the Petition for Review on Certiorari.