Municipal Rural Bank of Libmanan, Camarines Sur vs. Ordoñez

In an action for quieting of title, possession through a duly authorized caretaker constitutes evidence of the claimant's possession, and a banking institution that fails to exercise the highest degree of diligence in verifying ownership of unregistered land offered as mortgage security cannot claim good faith when the mortgagor is not the true owner, rendering the mortgage void.

Respondent Virginia Ordoñez claims ownership of a 2,174-square-meter parcel of land in Fundado, Libmanan, Camarines Sur, which she acquired through inheritance, with her predecessors-in-interest allegedly in open, peaceful, adverse, and uninterrupted possession in the concept of owner since time immemorial. Petitioner Municipal Rural Bank of Libmanan, Camarines Sur traces its claim to one Roberto Hermita, who mortgaged the property to the bank on March 23, 1995, and whose father Sofronio Hermita allegedly declared the property for taxation beginning in 1970. The property was unregistered land at the time of the mortgage and subsequent foreclosure.

Respondent Virginia Ordoñez is the claimant of a 2,174-square-meter parcel of land in Fundado, Libmanan, Camarines Sur, which she alleges to have acquired through inheritance. She and her predecessors-in-interest had been in open, peaceful, adverse, and uninterrupted possession of the property in the concept of owner since time immemorial. Respondent's mother designated one Roman Zamudio as caretaker of the subject land, and Zamudio occupied the property in that capacity as early as 1975. Respondent and her predecessors-in-interest declared the property for tax purposes and paid realty taxes thereon as early as 1949. Perpetuo Parafina, owner of the land adjacent to the disputed property, testified that since 1960 he knew the property as owned by respondent's mother, and confirmed that Zamudio was the person assigned by respondent's mother as caretaker.

Petitioner bank's claim derives from Roberto Hermita, who mortgaged the subject land to the bank on March 23, 1995. Roberto's father, Sofronio Hermita, allegedly declared the property for taxation purposes beginning only in 1970 and purportedly sold the property to Roberto. When Roberto failed to satisfy his obligation to the bank, petitioner foreclosed the mortgage, acquired the property at auction, and transferred title to its name. Critically, before Roberto mortgaged the property to the bank, respondent's mother had already approached him and claimed ownership over the subject land, undermining any claim of good faith on Roberto's part. The RTC, in its January 19, 2010 decision, found that petitioner's bank manager had done his best to ascertain Roberto's claim of ownership and ruled that the weight of evidence preponderated in favor of petitioner. The CA reversed, finding that respondent's predecessors-in-interest had prior possession, had declared the property for tax purposes as early as 1949 compared to 1970 for Roberto's father, and that the evidence preponderated in favor of respondent.

• Prior Possession: Petitioner argued that the CA erred in holding that respondent's predecessors-in-interest designated Roman Zamudio as caretaker of the subject lot and that respondent had prior possession through Zamudio, contending that respondent's possession must be actual and not a mere fiction.
• Acquisitive Prescription: Petitioner maintained that the CA erred in ruling that acquisitive prescription could not apply to Roberto Hermita's possession of the subject property.
• Due Diligence: Petitioner contended that the CA seriously erred in finding the bank utterly remiss in its duty to establish who the true owners and possessors of the subject property were, alleging that its bank manager had consulted the local assessor's office and conducted an ocular inspection.

• Ownership and Prior Possession: Respondent alleged that she is the owner of the subject property acquired through inheritance, that she and her predecessors-in-interest had been in open, peaceful, adverse, and uninterrupted possession in the concept of owner since time immemorial, and that petitioner's claim of ownership is unfounded, unmeritorious, invalid, and based upon an instrument which is null and void or otherwise unenforceable.
• Tax Declarations: Respondent relied on tax declarations and realty tax payments dating back to 1949 as evidence of her and her predecessors-in-interest's prior possession and ownership of the subject property.

• Prior Possession Through Caretaker: Whether respondent proved prior possession of the subject property through her caretaker Roman Zamudio.
• Acquisitive Prescription: Whether Roberto Hermita acquired ownership of the subject property through acquisitive prescription.
• Banking Due Diligence: Whether petitioner bank was remiss in exercising the required degree of diligence before entering into the mortgage contract with Roberto Hermita over unregistered land.

• Prior Possession Through Caretaker: Yes. Possession through a duly authorized caretaker constitutes evidence of the claimant's possession, and respondent's caretaker occupied the property as early as 1975, while petitioner's predecessor-in-interest began occupying only in 1986.
• Acquisitive Prescription: No. Roberto Hermita's possession was not in good faith because respondent's mother had already claimed ownership before he mortgaged the property, and no evidence was presented that Sofronio Hermita ever possessed the subject land.
• Banking Due Diligence: Yes. Petitioner was remiss in exercising the highest degree of diligence expected of banking institutions, having failed to verify ownership of the unregistered land before accepting it as mortgage security; a simple check with the proper authorities would have revealed respondent's prior tax declarations.

• Prior Possession Through Caretaker: The Court found no reason to depart from the CA's conclusion, corroborated by the testimony of respondent's witness Perpetuo Parafina and even by the RTC's own finding, that Zamudio was indeed the caretaker assigned by respondent's mother. Possession need not be actual or physical occupation of every square inch of the property at all times; it can be acquired by juridical acts to which the law gives the force of acts of possession. The Court had previously considered a claimant's act of assigning a caretaker who cultivated the land and built a hut thereon as evidence of possession. Zamudio's occupation as early as 1975 thus constituted evidence of respondent's possession, while petitioner's predecessor-in-interest began occupying only in 1986. Respondent's tax declarations dating to 1949 further supported prior possession, as tax declarations and realty tax payments, while not conclusive evidence of ownership, are good indicia of possession in the concept of owner. Petitioner's argument that possession must be actual was unavailing, as that requirement applies only to land registration proceedings under Presidential Decree 1529, which was not the case here.

• Acquisitive Prescription: The Court agreed with the CA that Roberto Hermita could not have acquired ownership through ordinary acquisitive prescription under Article 1134 of the Civil Code, which requires possession in good faith and with just title. Roberto's possession was not in good faith, as respondent's mother had already approached him and claimed ownership over the subject land before he mortgaged it to the bank. Nor could extraordinary acquisitive prescription under Article 1137 apply in favor of Sofronio Hermita, because no evidence—testimonial or documentary—was ever presented to prove that Sofronio was ever in possession of the subject land. The RTC's conclusion that Sofronio's uninterrupted possession since 1970 ripened into title by prescription was without evidentiary basis. Since Sofronio did not acquire ownership, he had no power to transfer ownership to Roberto. Aside from tax declarations, petitioner failed to present evidence that Sofronio exercised acts of ownership over the property.

• Banking Due Diligence: It is settled that a banking institution is expected to exercise due diligence before entering into a mortgage contract, and the ascertainment of the status or condition of a property offered as security must be a standard and indispensable part of its operations. The highest degree of diligence and high standards of integrity and performance are required of banks given their vital role in the economy. The Court agreed with the CA that petitioner was remiss in exercising the required diligence, prudence, and care. With more reason should petitioner have practiced caution, considering the lot was untitled. A simple check with the proper authorities would have shown that the property had been previously declared as owned by respondent's predecessors-in-interest and that realty taxes had been paid as early as 1949. Petitioner's allegation that its manager consulted the local assessor's office was unsupported by the manager's testimony. Moreover, an ocular inspection would have revealed that respondent's caretaker was occupying a portion of the property. The issue of good faith or bad faith of a buyer is relevant only where the subject is registered land; one who purchases unregistered land does so at his peril, and a claim of good faith would not protect the buyer if the seller does not actually own the property. Since the property was unregistered at the time of the mortgage and auction sale, petitioner could not claim good faith. Accordingly, the CA committed no error in nullifying the real estate mortgage and declaring respondent as owner.

• Quieting of Title — Requisites — Two indispensable requisites must concur: (1) the plaintiff has a legal or equitable title or interest in the real property subject of the action; and (2) the deed, claim, encumbrance, or proceeding claimed to be casting a cloud on his title must be shown to be in fact invalid or inoperative despite its prima facie appearance of validity or legal efficacy. The Court found both requisites satisfied: respondent proved legal or equitable title through prior possession and tax declarations, and the real estate mortgage was invalid because Roberto was not the true owner.

• Possession Through Caretaker — Possession can be acquired not only by material occupation but also by the fact that a thing is subject to the action of one's will or by proper acts and legal formalities. Possession can be acquired by juridical acts—acts to which the law gives the force of acts of possession. The assignment of a caretaker who occupies and cultivates the land constitutes evidence of the claimant's possession. The Court applied this doctrine to hold that Zamudio's occupation as caretaker since 1975 was evidence of respondent's possession.

• Tax Declarations as Indicia of Possession — Although tax declarations or realty tax payments are not conclusive evidence of ownership, they are good indicia of possession in the concept of owner, for no one would pay taxes for property not in his actual or at least constructive possession. The Court relied on respondent's tax declarations dating to 1949, compared to Roberto's father's declaration beginning only in 1970, to support the finding of prior possession.

• Banking Institution Due Diligence — A banking institution is expected to exercise due diligence before entering into a mortgage contract; the ascertainment of the status or condition of a property offered as security must be a standard and indispensable part of its operations. The highest degree of diligence and high standards of integrity and performance are required of banks. The Court held petitioner remiss because it failed to verify ownership of the unregistered land, and a simple check would have revealed respondent's prior tax declarations and caretaker's occupation.

• Good Faith in Purchase of Unregistered Land — The issue of good faith or bad faith of a buyer is relevant only where the subject of the sale is registered land, not where the property is unregistered. One who purchases unregistered land does so at his peril; a claim of good faith would not protect the buyer if the seller does not actually own the property. The Court applied this rule to deny petitioner any claim of good faith in dealing with Roberto over the unregistered lot.

• Ordinary Acquisitive Prescription — Under Article 1134 of the Civil Code, ordinary acquisitive prescription requires possession in good faith and with just title for the time fixed by law. The Court held Roberto's possession was not in good faith because respondent's mother had already claimed ownership before he mortgaged the property.

• Imprescriptibility of Actions to Quiet Title — Actions to quiet title to property in the possession of the plaintiff are imprescriptible. The right to have title quieted is not barred while the plaintiff or his grantors remain in actual possession claiming ownership, because the owner has a continuing right to the aid of a court of equity to ascertain the nature of an adverse claim and its effect on his title.

• "For one to be considered in possession, one need not have actual or physical occupation of every square inch of the property at all times. Possession can be acquired not only by material occupation, but also by the fact that a thing is subject to the action of one's will or by the proper acts and legal formalities established for acquiring such right." — This passage defines the legal standard for possession and supports the holding that a caretaker's occupation constitutes evidence of the principal's possession.

• "One who purchases an unregistered land does so at his peril. His claim of having bought the land in good faith, i.e., without notice that some other person has a right to, or interest in, the property, would not protect him if it turns out that the seller does not actually own the property." — This articulates the controlling rule on good faith in transactions involving unregistered land, which barred petitioner from claiming protection as a buyer in good faith.

• "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." — This states the standard of diligence required of banking institutions before entering into a mortgage contract, which petitioner was found to have breached.

• Herminio M. De Guzman vs. Tabangao Realty Inc., 753 Phil. 456 (2015) — Cited for the nature and purpose of an action for quieting of title and the two indispensable requisites for the action to prosper; followed.
• Spouses Ragasa vs. Spouses Roa, 526 Phil. 587 (2006) — Cited for the doctrine that actions to quiet title to property in the possession of the plaintiff are imprescriptible; followed.
• Bunyi vs. Factor, 609 Phil. 134 (2009) — Cited for the principle that possession can be acquired not only by material occupation but also by juridical acts; followed.
• Heirs of Bienvenido & Araceli Tanyag vs. Gabriel, 685 Phil. 517 (2012) — Cited for the proposition that a claimant's act of assigning a caretaker over disputed land constitutes evidence of possession; followed.
• Villasi vs. Garcia, 724 Phil. 519 (2014) — Cited for the rule that tax declarations and realty tax payments are good indicia of possession in the concept of owner; followed.
• Philippine National Bank vs. Jumamoy, 670 Phil. 472 (2011) — Cited for the doctrine that banking institutions are expected to exercise due diligence before entering into a mortgage contract; followed.
• Rural Bank of Siaton vs. Macajilos, 527 Phil. 456 (2006) — Cited for the rule that the issue of good faith is relevant only where the subject of the sale is registered land, not unregistered land; followed.
• David vs. Bandin, 233 Phil. 139 (1987) — Cited alongside Rural Bank of Siaton for the same proposition on good faith and unregistered land; followed.

• Article 476, Civil Code — Provides that whenever there is a cloud on title to real property by reason of any instrument, record, claim, encumbrance, or proceeding which is apparently valid but is in truth invalid, an action may be brought to remove such cloud or quiet the title. Applied as the statutory basis for respondent's action.
• Article 477, Civil Code — Provides that the plaintiff in an action to quiet title must have legal or equitable title to or interest in the real property but need not be in possession. Applied as the first requisite for quieting of title.
• Article 478, Civil Code — Provides that there may also be an action to quiet title when the contract, instrument, or obligation has been extinguished, terminated, or barred by extinctive prescription. Cited as an additional ground for the remedy.
• Article 480, Civil Code — Made applicable the American jurisprudential rule that actions to quiet title to property in the possession of the plaintiff are imprescriptible. Applied to support the imprescriptibility of respondent's action.
• Article 1134, Civil Code — Provides that ordinary acquisitive prescription requires possession in good faith and with just title for the time fixed by law. Applied to reject Roberto Hermita's claim of acquisitive prescription due to lack of good faith.
• Article 1137, Civil Code — Governs extraordinary acquisitive prescription. The Court rejected its application in favor of Sofronio Hermita for lack of evidence that he ever possessed the subject land.

Justices Perlas-Bernabe, Caguioa, and Reyes, Jr. concurred. Justice Carpio (Chairperson) was on official leave.