Phil. National Bank vs. Court of Appeals

An innocent mortgagee for value who relies on a Torrens title in the mortgagor's name, without any annotation or defect to excite suspicion, is entitled to protection of its mortgage lien, even if the mortgagor obtained the title through fraud, where the true owner's own acts of confidence in the fraudulent mortgagor made the fraud possible.

Chu Kim Kit, a Chinese national, was the registered owner of a commercial lot and building on Rizal Avenue, Tacloban City, covered by Transfer Certificate of Title No. T-1412. His mother, Felisa Boyano, was entrusted with the title and administration of the property when Chu Kim Kit departed for mainland China in 1945 and was unable to return due to the Communist takeover. The Philippine National Bank, Tacloban Branch, was one of two mortgagees who extended loans to Boyano on the security of the property after she fraudulently obtained a new title in her own name.

Chu Kim Kit, a Chinese national, was the absolute owner of a commercial lot and building on Rizal Avenue, Tacloban City, registered in his name under Transfer Certificate of Title No. T-1412 with the Registry of Deeds of Tacloban City. In 1945, Chu Kim Kit went to mainland China and was prevented from returning to the Philippines when the Communists took over. Before leaving, he entrusted his certificate of title to his mother, Felisa Boyano, and allowed her to administer the property and enjoy its fruits during his absence. Through letters, he requested his uncle, Chu Tong U, to take care of the property as well.

Although Boyano was aware that her son was still alive, she executed an affidavit on May 21, 1963, alleging that he had died and adjudicating the property to herself as his sole heir. By means of this affidavit of adjudication, she obtained Transfer Certificate of Title No. T-1439 in her name. Thereafter, she mortgaged the property to the Philippine National Bank, Tacloban Branch, to secure a loan of ₱25,000, and was about to dispose of the property.

On September 6, 1968, Chu Kim Kit, represented by Chu Tong U, filed an action in the Court of First Instance of Leyte against Felisa Boyano for cancellation of TCT No. T-1439. Boyano admitted in her answer that Chu Kim Kit was still alive but alleged that she signed the affidavit of adjudication without reading its contents, as it was written in English, which she did not understand. She also raised as an affirmative defense that Chu Tong U was not the real party in interest, being only an uncle and co-heir. Lucy Perez and the Philippine National Bank, as mortgagees, were allowed to intervene.

The trial court found that the cancellation of TCT No. T-1412 was unauthorized and illegal, rendering the issuance of TCT No. T-1439 null and void, and the mortgages in favor of PNB and Lucy Perez likewise null and void insofar as the property was concerned. The Court of Appeals affirmed, ruling that as between the mortgagees and the innocent owner, the latter was entitled to first consideration. The Supreme Court, however, found that the factual findings of the lower courts did not conform to the evidence, as the record showed that Chu Kim Kit had entrusted his title to Boyano and allowed her to administer the property, thereby enabling the fraud and creating the impression in third persons that she was the owner.

• Insufficiency of Evidence: Petitioner argued that the Court of Appeals' decision does not conform with the evidence on record, as the factual findings show that Chu Kim Kit was partly to blame for the fraud by entrusting his title to Felisa Boyano and allowing her to administer the property.
• Contrary to Law and Jurisprudence: Petitioner maintained that the lower courts' ruling contravenes established jurisprudence on the rights of innocent mortgagees for value under the Torrens System, as PNB had the right to rely on what appeared on the certificate of title in the mortgagor's name without obligation to investigate further.

• Validity of Mortgage: Whether the real estate mortgage in favor of PNB is valid and enforceable despite the mortgagor's title having been obtained through fraud.
• Comparative Negligence: Whether the true owner's own acts of entrusting his title to and allowing administration of the property by the fraudulent mortgagor should place the loss on him rather than on an innocent mortgagee for value.
• Rights of Innocent Mortgagee for Value: Whether PNB, as a mortgagee in good faith and for value, is entitled to protection under the Torrens System when it relied on a clean certificate of title in the mortgagor's name.

• Validity of Mortgage: Yes. The real estate mortgage in favor of PNB is valid, legal, and enforceable, as PNB was an innocent mortgagee for value that relied on a Torrens title in the mortgagor's name without any defect or annotation to excite suspicion.
• Comparative Negligence: Yes. As between an innocent mortgagee and a negligent owner who made the fraud possible by his own acts of confidence in the fraudulent mortgagor, the latter must bear the loss.
• Rights of Innocent Mortgagee for Value: Yes. A mortgagee has the right to rely on what appears in the certificate of title and, in the absence of anything to excite suspicion, is under no obligation to look beyond the certificate and investigate the title of the mortgagor.

• Validity of Mortgage: At the time the mortgage was constituted on October 30, 1963, the property was covered by TCT No. T-1439 in the name of Felisa Boyano, which carried no annotation, defect, or flaw that would have aroused suspicion as to its authenticity. Under established jurisprudence, a fraudulent or forged document may become the root of a valid title if the certificate of title has already been transferred from the name of the true owner to the name of the forger, and while it remained that way, the land was subsequently mortgaged to an innocent mortgagee. The mortgagee had the right to rely on what appeared in the certificate, and in the absence of anything to excite suspicion, was under no obligation to look beyond the certificate and investigate the mortgagor's title. The ruling of the lower courts that the nullity of the cancellation of TCT No. T-1412 necessarily invalidated the mortgage contravened this doctrine.

• Comparative Negligence: The records showed that Chu Kim Kit entrusted his certificate of title to his mother before leaving for China and allowed her to administer the property and enjoy its fruits. Those acts enabled Boyano to cause the cancellation of his title and obtain a new one in her name, and may have created the impression in third persons that she was the owner and could dispose of it. By his own acts of confidence in Boyano, Chu Kim Kit was partly to blame for the fraud committed against him. As between him and PNB, which was totally innocent and free from negligence or wrongdoing, the latter was entitled to the protection of the law. Under the doctrine that as between two innocent persons, the one who made the fraud possible by his act of confidence must bear the loss, the owner rather than the mortgagee must suffer.

• Rights of Innocent Mortgagee for Value: The Torrens System insures the efficacy and conclusiveness of the certificate of title. Every person dealing with registered land may safely rely on the correctness of the certificate issued, and the law does not oblige him to go behind the certificate to determine the condition of the property. If the rule were otherwise, public confidence in the certificate of title would be impaired, as everyone dealing with registered land would have to inquire in every instance whether the title was regularly or irregularly issued. The right or lien of an innocent mortgagee for value upon the land mortgaged must be respected and protected, even if the mortgagor obtained title through fraud. The remedy of the prejudiced owner is to bring an action for damages against those who caused the fraud and, if they are insolvent, an action against the Treasurer of the Philippines for recovery from the Assurance Fund.

• Doctrine of Innocent Mortgagee for Value — A mortgagee in good faith and for value has the right to rely on what appears on the certificate of title and, in the absence of anything to excite suspicion, is under no obligation to look beyond the certificate and investigate the title of the mortgagor. The Court applied this doctrine to PNB, which accepted the mortgage on the basis of a clean Torrens title in Felisa Boyano's name, finding no duty to inquire beyond the face of the certificate.

• Fraudulent Title as Root of Valid Title — Although a forged or fraudulent deed is generally a nullity and conveys no title, it may become the root of a valid title where the certificate of title has already been transferred from the name of the true owner to the forger, and while it remained that way, the land was subsequently sold or mortgaged to an innocent purchaser or mortgagee for value. The Court relied on this principle to uphold the mortgage despite Boyano's fraudulent acquisition of TCT No. T-1439.

• Comparative Negligence — Loss on the Party Who Enabled the Fraud — As between two innocent persons, the one whose act of confidence or negligence made the fraud possible must bear the loss. The Court applied this doctrine by placing the loss on Chu Kim Kit, who had entrusted his title to and allowed administration of the property by the fraudulent mortgagor, rather than on PNB, which was entirely free from negligence.

• "Although generally a forged or fraudulent deed is a nullity and conveys no title, however there are instances when such a fraudulent document may become the root of a valid title. One such instance is where the certificate of title was already transferred from the name of the true owner to the forger, and while it remained that way, the land was subsequently sold to an innocent purchaser. For then, the vendee had the right to rely upon what appeared in the certificate." — This passage, quoted by the Court from the petitioner's brief citing Fule vs. Legare, articulates the core doctrine that a fraudulent title may serve as the root of a valid transfer to an innocent party under the Torrens System.

• "Where there was nothing in 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. If the rule were otherwise, the efficacy and conclusiveness of the certificate of title which the Torrens System seeks to insure would entirely be futile and nugatory." — This passage defines the rationale for protecting innocent parties who rely on the face of a Torrens title, emphasizing the systemic purpose of the land registration law.

• "When a mortgagee relies upon a Torrens title and loans money in all good faith on the basis of the title standing in the name of the mortgagor, only thereafter to discover one defendant to be an alleged forger and the other defendant to have by his negligence or acquiescence made it possible for the fraud to transpire, as between two innocent persons, the mortgagee and one of the mortgagors, the latter who made the fraud possible by his act of confidence must bear the loss." — This passage, cited from Blondeau vs. Nano, states the comparative negligence doctrine the Court applied to allocate the loss to the negligent owner rather than the innocent mortgagee.

• Gonzales vs. Intermediate Appellate Court, 157 SCRA 587 — Followed for the proposition that a mortgagee had the right to rely on the certificate of title in the mortgagor's name and was under no obligation to investigate beyond it in the absence of suspicious circumstances.
• Duran vs. Intermediate Appellate Court, 138 SCRA 489 — Followed for the doctrine that a fraudulent or forged document may become the root of a valid title once the certificate has been transferred to the forger's name and an innocent party subsequently relies on it.
• Blondeau vs. Nano, 61 SCRA 625 — Followed for the principle that as between two innocent persons, the one who made the fraud possible by his act of confidence must bear the loss.
• Fule vs. Legare, 7 SCRA 351 — Followed, as quoted in the petitioner's brief, for the rule that a purchaser is not required to explore beyond the face of a Torrens title in the absence of any indicated cloud or vice.
• Medina vs. Chanco, 117 SCRA 201 — Followed for the proposition that under Section 55 of the Land Registration Act, an original owner's remedy to annul a fraudulent transfer is without prejudice to the rights of any innocent holder for value.
• Blanco vs. Esquierdo, 110 Phil. 494 — Followed for the rule that the lien of an innocent mortgagee for value must be respected even if the mortgagor obtained title through fraud, with the prejudiced party's remedy being an action for damages or against the Assurance Fund.

• Section 55, Land Registration Act (Presidential Decree No. 1529, formerly Act No. 496) — Cited for the rule that although an original owner of registered land may seek annulment of a transfer on the ground of fraud, such remedy is without prejudice to the rights of any innocent holder for value of the certificate of title. The Court applied this provision to protect PNB's mortgage lien despite the fraudulent origin of Boyano's title.

Narvasa (Chairman), Cruz, Gancayco, and Medialdea, JJ., concurred.