Metropolitan Fabrics, Inc. and Enrique Ang vs. Prosperity Credit Resources Inc., Domingo Ang and Caleb Ang

A notarized deed of real estate mortgage enjoys a presumption of regularity that can be overcome only by clear and convincing evidence; where consent is allegedly obtained through fraud, the contract is voidable (not void) and subject to a four-year prescriptive period reckoned from the registration of the instrument, and a party's subsequent unequivocal recognition of the mortgage's validity estops them from assailing it.

Metropolitan Fabrics, Inc., a family corporation engaged in textile manufacturing, owned a 5.8-hectare industrial compound in Novaliches, Quezon City. In July 1984, facing financial distress and the threat of repossession of its boiler machine, MFI sought a loan of P3,443,330.52 from Prosperity Credit Resources, Inc., a money-lending corporation owned by the Ang family, with whom the petitioners shared membership in the Lioc Kui Tong Fraternity. The loan was allegedly secured by a real estate mortgage covering seven parcels of land. Following default and foreclosure in 1986, petitioners instituted an action in 1991 to annul the mortgage and foreclosure, alleging that they had signed blank documents and that respondents had fraudulently inserted onerous terms without their consent.

• The Loan Transaction: In July 1984, Metropolitan Fabrics, Inc., through its president Enrique Ang, negotiated a P3,443,330.52 loan with Prosperity Credit Resources, Inc. (PCRI), represented by its president Domingo Ang and vice-president Caleb Ang. The parties belonged to the same Chinese family association. According to petitioners, PCRI released the loan proceeds on August 3, 1984, even before the execution of formal documents, and handed blank loan forms to Enrique Ang. Enrique, together with his wife Natividad Africa (vice-president) and son Edmundo Ang, allegedly signed the blank real estate mortgage contract, promissory note, comprehensive surety agreement, and disclosure statement at their office, without any PCRI representative present. Petitioners claimed they entrusted seven transfer certificates of title to PCRI to allow the latter to select sufficient collateral, with the understanding that excess titles would be returned.

• Alleged Fraudulent Insertions: Petitioners asserted that they agreed to an interest rate of 24% to 26% per annum with a five-to-ten-year term. However, when the first amortization check bounced in September 1984, they allegedly discovered that PCRI had filled in the blank checks and documents to reflect a 35% annual interest rate and a two-year repayment period. They claimed to have protested these terms immediately. Vicky Ang Gapido, Enrique's daughter, testified that the family found these terms prohibitive and would have rejected the loan had they known the actual conditions.

• Foreclosure and Subsequent Negotiations: On September 4, 1986, petitioners received a Notice of Sheriff's Sale dated August 29, 1986, announcing the auction of all seven lots on September 24, 1986 for an alleged indebtedness of P10.5 million. Following protestations and requests for postponement, the auction was reset thrice, ultimately proceeding on October 27, 1986, with PCRI as the sole bidder for P6.5 million. Thereafter, petitioners negotiated with PCRI for the partial redemption of three lots through a buyer, Winston Wang, and executed a Board Resolution authorizing such redemption. They also executed a Memorandum of Undertaking regarding right of way, paid P490,000.00, and caused Winston Wang to pay P3 million to PCRI. When petitioners failed to complete redemption of the remaining four lots, PCRI consolidated ownership and demanded vacation. Petitioners eventually vacated the premises per a June 21, 1990 letter.

• Filing of Action: On October 9, 1991, petitioners filed the complaint for annulment of mortgage and reconveyance. Enrique Ang died on November 15, 1993 during the pendency of the proceedings. The trial court gave credence to Vicky Ang Gapido's testimony that the documents were signed in blank and that the high interest rate was unilaterally imposed.

• Fraud in Execution: Petitioner maintained that the real estate mortgage and promissory note were void ab initio because they were executed in blank and the material terms—specifically the 35% interest rate and two-year term—were inserted by respondents without their knowledge or consent, constituting fraud that vitiated consent.

• Void Contract vs. Voidable Contract: Petitioner argued that the Court of Appeals erred in not holding that the absence of consent rendered the contract void rather than merely voidable, asserting that a void contract is inexistent and cannot prescribe.

• Prescription: Petitioner contended that the action to declare the contract void does not prescribe, or alternatively, that prescription should be reckoned from the discovery of the fraud or the foreclosure sale, not from the registration of the mortgage.

• Estoppel: Petitioner denied being guilty of estoppel or laches, asserting that their subsequent acts were performed under duress or to mitigate losses, not as recognition of the mortgage's validity.

• Presumption of Regularity: Respondent countered that the deed of real estate mortgage, being a public document acknowledged before a notary public, enjoys a presumption of regularity and authenticity that petitioners failed to overcome by clear and convincing evidence.

• Prescription and Estoppel: Respondent argued that assuming the contract was merely voidable due to fraud, the action to annul prescribed four years from the registration of the mortgage on September 5, 1984, making the 1991 filing untimely. Respondent further contended that petitioners' conduct—surrendering titles, requesting postponements of foreclosure, negotiating partial redemption, and voluntarily vacating the premises—estopped them from denying the mortgage's validity and belied the allegation of fraud.

• Factual Findings: Whether the Court of Appeals committed reversible error in disregarding the factual findings of the trial court regarding fraud.

• Nature of Contract: Whether the absence of consent makes a contract void rather than merely voidable.

• Prescription: Whether an action to declare a contract void prescribes, or if voidable, whether the four-year period had lapsed.

• Estoppel: Whether petitioners are guilty of estoppel and laches precluding them from assailing the mortgage.

• Factual Findings: The Court of Appeals did not commit reversible error in overturning the trial court's factual conclusions. Appellate courts are not bound by trial court findings when substantial facts were overlooked or misapplied. The trial court's reliance on the lone, uncorroborated testimony of Vicky Ang Gapido—who was neither a signatory nor an officer of MFI at the time of execution—was insufficient to overcome the presumption of regularity attaching to the notarized mortgage. The silence of the actual signatories (Enrique, Natividad, and Edmundo Ang), who never assailed the document during their lifetimes, further undermined the fraud allegation.

• Nature of Contract: The contract is voidable, not void. A contract is void only when there is absolute absence of consent, which petitioners failed to establish. The evidence showed petitioners voluntarily applied for the loan, executed the mortgage, and surrendered the TCTs. At most, Vicky Ang's testimony established vitiation of consent through fraud (dolo causante), which renders a contract voidable under Article 1390 of the Civil Code, not void ab initio.

• Prescription: The action to annul the mortgage had prescribed. Article 1391 of the Civil Code provides that actions based on fraud must be brought within four years from the discovery thereof, which is reckoned from the registration of the instrument with the Register of Deeds as constructive notice to the world. The mortgage was registered on September 5, 1984; the complaint filed in 1991 was clearly barred by prescription.

• Estoppel: Petitioners are estopped from denying the mortgage's validity. Their subsequent acts—surrendering all seven titles, repeatedly requesting postponements of the foreclosure sale, executing a Board Resolution authorizing partial redemption, entering into a Memorandum of Undertaking, and voluntarily vacating the foreclosed properties—demonstrated recognition of the mortgage's validity and belied the claim of fraud. These acts were inconsistent with the position that the mortgage was fraudulent or void.

• Presumption of Regularity of Notarized Documents — A deed acknowledged before a notary public is admissible in evidence without further proof of its authenticity and enjoys full faith and credit upon its face. The presumption of regularity can be overcome only by evidence that is clear, convincing, and more than merely preponderant.

• Causal Fraud (Dolo Causante) — Fraud that vitiates consent must be the causal inducement to the contract (dolo causante), not merely incidental (dolo incidente). It must be established by clear and convincing evidence; mere allegation is insufficient.

• Void vs. Voidable Contracts — A void contract is inexistent and produces no effect, and cannot be ratified. A voidable or annullable contract is existent, valid, and binding until annulled by a competent court. Where consent is obtained through fraud, the contract is voidable, not void.

• Prescription of Actions to Annul Voidable Contracts — Under Article 1391 of the Civil Code, an action to annul a voidable contract based on fraud must be brought within four years from the discovery of the fraud. For registered land, discovery is deemed to occur upon registration of the instrument, as registration constitutes constructive notice to the whole world.

• Estoppel by Conduct — A party who, by their acts or conduct, recognizes the validity of a contract or transaction is estopped from subsequently denying such validity where injustice or prejudice would result to the other party.

• "The genuineness and due execution of a deed of real estate mortgage that has been acknowledged before a notary public are presumed. Any allegation of fraud and forgery against the deed must be established by clear and competent evidence." — This passage establishes the threshold for overcoming the presumption of regularity attaching to notarized instruments.

• "Fraud cannot be presumed but must be proved by clear and convincing evidence. Whoever alleges fraud affecting a transaction must substantiate his allegation, because a person is always presumed to take ordinary care of his concerns, and private transactions are similarly presumed to have been fair and regular." — This articulates the burden of proof required to establish fraud sufficient to vitiate consent.

• "As between the duly executed real estate mortgage and the unsubstantiated allegations of fraud, the Court affords greater weight to the former." — This summarizes the evidentiary hierarchy between public documents and uncorroborated testimony.

• "Where the consent was given through fraud, the contract was voidable, not void ab initio. This is because a voidable or annullable contract is existent, valid and binding, although it can be annulled due to want of capacity or because of the vitiated consent of one of the parties." — This distinguishes the legal effects of void and voidable contracts under the Civil Code.

• "The discovery of fraud is reckoned from the time the document was registered in the Register of Deeds in view of the rule that registration was notice to the whole world." — This explains the commencement of the prescriptive period for actions to annul contracts involving registered land.

• Samson v. Court of Appeals, G.R. No. 108245, November 25, 1994, 238 SCRA 397 — Defined causal fraud (dolo causante) as deception employed to secure consent.

• Loyola v. Court of Appeals, G.R. No. 115734, February 23, 2000, 326 SCRA 285 — Established that notarized documents enjoy presumption of regularity and evidentiary weight regarding due execution.

• Tongson v. Emergency Pawnshop Bula, Inc., G.R. No. 167874, January 15, 2010, 610 SCRA 150 — Distinguished causal fraud from incidental fraud.

• First Philippine Holdings Corporation v. Trans Middle East (Phils.) Equities, Inc., G.R. No. 179505, December 4, 2009, 607 SCRA 605 — Distinguished void from voidable contracts.

• Viloria v. Continental Airlines, Inc., G.R. No. 188288, January 16, 2012, 663 SCRA 57 — Applied Article 1391 on prescription of actions to annul voidable contracts.

• Article 1338, Civil Code — Defines fraud as insidious words or machinations inducing a party to enter into a contract.

• Article 1390, Civil Code — Enumerates voidable contracts, including those where consent is vitiated by fraud.

• Article 1391, Civil Code — Provides the four-year prescriptive period for actions to annul contracts based on fraud, reckoned from discovery (or registration for registered land).

• Section 3(p), Rule 131, Rules of Court — Presumption that private transactions have been fair and regular.

Maria Lourdes P.A. Sereno, Teresita J. Leonardo-De Castro, Martin S. Villarama, Jr., Bienvenido L. Reyes