Philippine National Bank vs. Heirs of Estanislao Militar

A mortgagee, particularly a bank whose business is impressed with public interest, is expected to exercise greater care and prudence than a private individual and cannot simply rely on the certificate of title when the property is occupied by persons other than the mortgagor; however, a purchaser from such bank may be considered a buyer in good faith if they rely on the bank's title held for several years, exercise due diligence by making inquiries appropriate for an average person, and where the sellers' bad faith is not proven by clear and convincing evidence, especially when the original owners slept on their rights for decades.

The case involves a dispute over Lot 3017-B originally owned by the Militar family. Through a forged Deed of Absolute Sale executed on April 24, 1975, the Jalbuna Spouses acquired title to the property and subsequently mortgaged it to PNB on June 5, 1975. After the Jalbuna Spouses defaulted, PNB foreclosed the mortgage in 1978 and consolidated title in its name in 1982. In 1987, PNB sold the property to the Lucero Spouses. The heirs of the original Militar owners, who had been occupying the property, filed a complaint for reconveyance only in 1989, despite their predecessors having died decades earlier and never registering the property in their names.

• The disputed property is Lot 3017-B, originally owned by Deogracias, Glicerio, Tomas, and Caridad Militar, who died in 1964, 1939, 1959, and 1957 respectively.
• On April 24, 1975, the Jalbuna Spouses executed a Deed of Absolute Sale purportedly transferring the property to them, which was later found to be forged.
• On June 5, 1975, the Jalbuna Spouses mortgaged the property to PNB to secure a loan.
• On September 5, 1978, PNB extrajudicially foreclosed the mortgage due to default, with PNB emerging as the highest bidder for P119,961.36.
• On November 11, 1982, a Deed of Sale was executed in favor of PNB after the mortgagors failed to redeem the property, and on December 6, 1982, Transfer Certificate of Title was issued to PNB.
• The Lucero Spouses, who resided in the adjoining property, purchased the disputed property from PNB on November 9, 1987 for P229,000.00 as an acquired asset, and TCT No. 76938 was issued in their names on November 11, 1987.
• Respondents (Heirs of Militar) were in actual possession of the property from the time of their predecessors' deaths, but failed to register the property in their names or pay real property taxes.
• Respondents filed a Complaint for reconveyance and damages only on October 2, 1989, nearly two years after the Lucero Spouses acquired title, and amended their complaint three times, the last on December 26, 1994.
• The trial court found that PNB and the Lucero Spouses were purchasers in good faith, but the Court of Appeals reversed, holding that neither were in good faith as they failed to inquire from the occupants regarding the status of the property.
• The Supreme Court initially affirmed the Court of Appeals on August 18, 2005, prompting the present motions for reconsideration.

• PNB asserts that it is a mortgagee in good faith, arguing that it could not have known of the forgery committed by the Jalbuna Spouses and that it complied with the requirements for extrajudicial foreclosure, including publication of notice, which operated as constructive notice.
• The Lucero Spouses contend that they are buyers for value in good faith, praying for a "second hard look" at the facts. They argue that they relied on PNB's title which had been registered for almost five years, conducted inquiries and were told that the occupants were merely tolerated, and exercised due diligence appropriate for an average person dealing with a bank.

• Respondents argue that PNB cannot be considered a mortgagee in good faith because it failed to inspect the disputed property when offered as security, which would have led to the discovery of the forged instruments of sale.
• Respondents claim that the Lucero Spouses cannot be regarded as innocent purchasers for value because they failed to inquire from the occupants of the disputed property regarding the status of the property and knew that third parties were in possession.

• Procedural:
  • Whether the Supreme Court may review factual findings on good faith when the Court of Appeals' findings contradict those of the trial court.
• Substantive Issues:
  • Whether PNB qualifies as a mortgagee in good faith despite the forged deed in the chain of title.
  • Whether the Lucero Spouses qualify as innocent purchasers for value in good faith despite knowing that the property was occupied by third parties.

• Procedural:
  • The Court held that while the determination of good faith is generally a question of fact outside the Supreme Court's province in petitions for review, this is not an iron-clad rule. The Court may review factual findings when the Court of Appeals' findings are contrary to those of the trial court, as in this case.
• Substantive:
  • PNB is NOT a mortgagee in good faith: A mortgagee, particularly a bank impressed with public interest, is expected to exercise more care and prudence than a private individual. PNB failed to present evidence that it conducted an ocular inspection or investigation regarding the nature of possession by respondents, who were occupying the property. Had PNB inspected the property, it would have discovered that the mortgagors were not in actual possession, which should have prompted further inquiry. The bank's mere reliance on the certificate of title and foreclosure formalities was insufficient.
  • Lucero Spouses ARE buyers in good faith: The Lucero Spouses exercised due diligence expected of an average prudent person, not a lawyer. They relied on PNB's clean title which had been held for five years and acquired through foreclosure proceedings conducted over eight years. They knew of the occupants but were told the occupation was merely tolerated. Bad faith cannot be presumed and must be established by clear and convincing evidence, which respondents failed to prove. The trial court's finding of good faith is reinstated.

• Mortgagee in Good Faith — A mortgagee of real property, particularly a bank or financial institution whose business is impressed with public interest, is expected to exercise more care and prudence than a private individual in its dealings. It cannot simply rely on the certificate of title but must conduct an ocular inspection and investigate the status of possession when the property is occupied by persons other than the mortgagor.
• Purchaser in Good Faith — Defined as one who buys property of another without notice that some other person has a right to or interest in such property and pays full and fair price for the same. Good faith connotes an honest intention to abstain from taking unconscientious advantage of another.
• Constructive Notice — Registration of instruments affecting title to registered land operates as constructive notice to all persons claiming any title or interest adverse to the registered owners. Under Section 51 of P.D. 1529, once an instrument is registered, it binds the whole world.
• Bad Faith — Does not simply connote bad judgment or negligence but imports a dishonest purpose or moral obliquity and conscious doing of wrong. It cannot be presumed; it must be established by clear and convincing evidence.
• Vigilantibus sed non dormientibus jura subveniunt — The law aids the vigilant, not those who slumber on their rights. Respondents' failure to register the property or assert their rights for decades while the property went through multiple transfers constitutes laches.

• "Good faith connotes an honest intention to abstain from taking unconscientious advantage of another."
• "Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of wrong."
• "Vigilantibus sed non dormientibus jura subveniunt. The law aids the vigilant, not those who slumber on their rights."
• "The diligence with which the law requires the individual or a corporation at all times to govern a particular conduct varies with the nature of the situation in which one is placed, and the importance of the act which is to be performed."
• "The average man weighs facts and circumstances without resorting to the calibration of our technical rules of evidence of which his knowledge is nil. Rather, he relies on the calculus of common sense of which all reasonable men have an abundance."

• Cabuhat v. Court of Appeals — Cited for the principle that a forged or fraudulent document may become the root of a valid title in the hands of an innocent purchaser for value, and that persons dealing with registered land may rely on the correctness of the certificate of title.
• Consolidated Rural Bank (Cagayan Valley), Inc. v. Court of Appeals — Applied the rule that purchasers must inquire into the status of possession when the property is occupied by another, and held that this rule equally applies to mortgagees.
• Crisostomo v. Court of Appeals — Cited for the rule that a purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man upon his guard and then claim that he acted in good faith.
• Sunshine Finance and Investment Corp. v. Intermediate Appellate Court — Emphasized that financing institutions must ascertain the status and condition of properties offered as security and cannot simply rely on examination of Torrens certificates.
• Sigaya v. Mayuga — Defined good faith as consisting in the possessor's belief that the person from whom he received the thing was the owner and could convey title.
• Magat, Jr. v. Court of Appeals — Defined bad faith as importing a dishonest purpose or moral obliquity, not merely bad judgment or negligence.
• Gabriel v. Spouses Mabanta and Floro v. Llenado — Cited for the exception to the rule that the Supreme Court is not a trier of facts, specifically when the findings of the Court of Appeals are contrary to those of the trial court.

• Section 51, P.D. 1529 (Property Registration Decree) — Provides that every registered owner receiving a new certificate of title shall hold the same subject to any entry, annotation, or encumbrance appearing in the certificate, and to any claim or interest of any person appearing in the certificate or shown by the books of the registry as prior in date to the certificate, which constitutes constructive notice.