Philippine National Bank vs. Spouses Angel and Buenvenida Anay, and Spouses Francisco and Dolores Lee

The doctrine of mortgagee in good faith presupposes that the mortgagor, not being the rightful owner of the property, has already succeeded in obtaining Torrens title over the property in his own name and thereafter mortgaged it to another who relies on what appears on the face of that title; it does not apply where the registered owner's title is undisputed and the only controversy concerns the mortgagor's authority to mortgage the property. A mortgagee whose own employee witnessed the execution of the special power of attorney, including the circumstances showing the grantors' incapacity to give consent, cannot claim protection as a mortgagee in good faith. Corollarily, a certificate of title that emanated from a void SPA may be canceled in the very action in which the SPA is annulled, without violating the rule against collateral attack.

The Spouses Lee maintained a credit accommodation with Philippine National Bank, initially in the amount of P400,000.00 and later increased to P7,500,000.00 under a Revolving Credit Line. The Spouses Anay were the registered owners of a 5,503-square-meter parcel of land situated at Iponan, Cagayan de Oro City and covered by Transfer Certificate of Title No. T-25805, and their daughter, Marietta Anay Cabinatan, was employed by the Spouses Lee. Section 48 of Presidential Decree No. 1529 supplies the governing statutory backdrop, providing that a certificate of title shall not be subject to collateral attack and cannot be altered, modified, or canceled except in a direct proceeding in accordance with law.

The Spouses Lee obtained a loan from Philippine National Bank initially in the amount of P400,000.00, which was later increased to P7,500,000.00 under a Revolving Credit Line. To cover the increased credit accommodation, the Spouses Lee offered additional securities, among them a parcel of land registered in the name of the Spouses Anay, located at Iponan, Cagayan de Oro City, with an area of 5,503 square meters and covered by Transfer Certificate of Title No. T-25805. For that purpose, the Spouses Anay executed a Special Power of Attorney in favor of the Spouses Lee, authorizing the latter to use the subject property as security for the loan.

The circumstances surrounding the execution of the SPA were the core of the dispute. Marietta Anay Cabinatan, a daughter of the Spouses Anay, was urged by the Spouses Lee to let them borrow her parents' property for use as additional security for their increased loan with PNB. Marietta could not refuse because the Spouses Lee were her employers. At that time, the Spouses Anay were both of old age, weak, hard of hearing, and could barely see, so much so that Marietta had to move her father's hand to sign and had to hold her mother's hand while the latter affixed her thumbmark on the SPA. The contents of the SPA were never explained to the elderly couple, as Marietta summarily told them to "just sign" the instrument. Neither of the Spouses Anay received any amount out of the loan obtained by the Spouses Lee from PNB.

When the Spouses Lee failed to pay their loan obligations, PNB initiated extrajudicial foreclosure proceedings against the mortgaged properties, including that of the Spouses Anay. PNB emerged as the highest bidder in the auction sale, and a Sheriff's Certificate of Sale was thereafter issued. The redemption period expired without either the Spouses Lee or the Spouses Anay having exercised the right of redemption, and PNB consolidated its title over the foreclosed properties. TCT No. T-25805 was accordingly canceled and, in lieu thereof, TCT No. T-120269 was issued in PNB's name.

The Spouses Anay then filed a Complaint against the Spouses Lee and PNB for annulment of the SPA, the foreclosure proceedings, and the Sheriff's Certificate of Sale on the ground of vitiated consent. Dolores Lee herself testified to the same factual circumstances and further testified that she did not mind losing all her properties, as she was bothered by her conscience because the Spouses Lee had merely borrowed the Spouses Anay's property. PNB Inspector Marcial Abucay, a PNB employee who was present, together with another PNB employee, Jun Abella, at the time of the signing of the SPA, testified that the husband was already bedridden, half-blind, unable to recognize anyone, and unable to read the SPA, and that his hand had to be moved by Marietta to approximate the act of signing; he further testified that he did not hear whether Marietta explained the contents of the document to the Spouses Anay before she made them sign it.

On these facts, the trial court found overwhelming evidence that the consent of the Spouses Anay to the SPA had been vitiated, if not totally absent, and that the nullity of the Supplemental to Existing Real Estate Mortgage and the Sheriff's Certificate of Sale affected only the mortgaged and foreclosed property of the Spouses Anay covered by TCT No. T-25805. Those documents were found to remain valid and binding as to the other properties enumerated therein, particularly those owned by Francisco and Dolores Lee, who acknowledged their indebtedness to PNB. Angel Anay died on May 16, 2004.

• Mortgagee in Good Faith: PNB maintained that it is a mortgagee in good faith, having allegedly had no hand in the fraud or bad faith perpetrated by the Spouses Lee in securing the SPA, and that as such its title cannot be subjected to collateral attack.
• Collateral Attack: PNB argued that the cancellation of its title, TCT No. T-120269, as a result of the nullity of the SPA constitutes a collateral attack proscribed under Section 48 of Presidential Decree No. 1529.
• Restitution and Damages: PNB contended that the Spouses Lee, as debtors-mortgagors, should be ordered to restitute to PNB the value of the excluded property and to pay damages, considering the overwhelming evidence of their bad faith.

• Mortgagee in Good Faith: Whether PNB may be considered a mortgagee in good faith entitled to the protection of the rule that persons dealing with property covered by a Torrens certificate of title are not required to go beyond what appears on the face of the title.
• Collateral Attack: Whether the cancellation of PNB's certificate of title, TCT No. T-120269, in the action for annulment of the SPA constitutes a collateral attack proscribed by Section 48 of Presidential Decree No. 1529.
• Restitution and Damages: Whether the Spouses Lee should be ordered to restitute to PNB the value of the Anay property excluded from the foreclosure and to pay damages for bad faith.

• Mortgagee in Good Faith: No. The doctrine does not apply where the registered owner's title is undisputed and the controversy concerns only the mortgagor's authority to mortgage, and PNB's own inspector witnessed the defective execution of the SPA, negating good faith.
• Collateral Attack: No. The complaint was not an indirect attack, the title having been irregularly and illegally issued to begin with, and the RTC having acquired jurisdiction over both the subject matter and the parties, a separate action being unnecessary.
• Restitution and Damages: No. The claim was never raised before the RTC and no cross-claim was filed against the Spouses Lee, so it could not be raised for the first time on appeal.

• Mortgagee in Good Faith: The doctrine of a mortgagee in good faith finds its basis in the rule that persons dealing with property covered by a Torrens certificate of title, whether as buyers or as mortgagees, are not required to go beyond what appears on the face of the title. The doctrine, however, presupposes that the mortgagor, who is not the rightful owner of the property, has already succeeded in obtaining Torrens title over the property in his own name and that, after obtaining that title, he succeeds in mortgaging the property to another who relies on what appears on the title. That premise was absent here: the Spouses Anay were the registered owners of the subject property, a fact never disputed, so the genuineness of their title was never an issue; what was controversial was the authority of the Spouses Lee to mortgage the Anay property. Apart from this, the issue of whether PNB was a mortgagee in good faith is a factual matter that cannot be raised in a petition for review on certiorari. PNB's self-serving claim of ignorance was easily dispelled by the testimony of its very own employee, PNB Inspector Marcial Abucay, who was present, together with another PNB employee, Jun Abella, at the time of the signing of the SPA. Abucay testified that the husband was already bedridden, half-blind, unable to recognize anyone, and unable to read the SPA, and that his hand had to be moved by Marietta to approximate the act of signing; he did not hear whether Marietta explained the contents of the document before the spouses were made to sign. On that evidence, PNB itself connived with the Spouses Lee if only to ensure that the signatures of the Spouses Anay on the SPA were secured, and since PNB was not a mortgagee in good faith, it was not entitled to protection.

• Collateral Attack: Because the SPA was secured through vitiated consent and there was no ratification on the part of the Spouses Anay, the SPA was void and could not be the basis of a valid mortgage contract, nor of the subsequent foreclosure and consolidation of title in favor of PNB. The complaint did not constitute an indirect attack on PNB's title, which was irregularly and illegally issued to begin with. Since the RTC acquired jurisdiction not only over the subject matter of the case but also over the parties thereto, it was unnecessary to institute a separate action to nullify PNB's title insofar as the property of the Spouses Anay was concerned. It not having been shown that PNB had transferred the subject property to an innocent purchaser for value, it was but proper that the subject property be retained by the Spouses Anay.

• Restitution and Damages: No reason appeared to depart from the CA's denial of PNB's claim for restitution and damages against the Spouses Lee. The CA correctly held that the issue was never raised before the RTC, and as such the Spouses Lee could not have been afforded the opportunity to rebut PNB's claims. Further, PNB itself failed to file the necessary cross-claim against the Spouses Lee, and thus could not belatedly complain on appeal.

• Mortgagee in good faith — A mortgagee who relies on what appears on the face of a Torrens certificate of title is generally protected, but the doctrine presupposes that the mortgagor, not being the rightful owner of the property, has already succeeded in obtaining Torrens title over the property in his own name and thereafter mortgaged it to another who relies on that title. The doctrine has no application where the registered owner's title is undisputed and the only controversy concerns the mortgagor's authority to mortgage the property. In this case, the Spouses Anay were the undisputed registered owners, and PNB's own inspector witnessed the defective execution of the SPA, so PNB was not a mortgagee in good faith and was not entitled to protection.

• Collateral attack on a Torrens certificate of title — Under Section 48 of Presidential Decree No. 1529, a certificate of title shall not be subject to collateral attack and cannot be altered, modified, or canceled except in a direct proceeding in accordance with law. A title that was irregularly and illegally issued from the outset — here, one emanating from a void SPA — may be canceled in the very action in which the SPA is annulled, particularly where the court acquired jurisdiction over both the subject matter and the parties, rendering a separate action unnecessary.

• Void special power of attorney; ex nihilo nihil fit — A special power of attorney procured through vitiated consent and never ratified is void, and from nothing comes nothing. It cannot be the basis of a valid mortgage contract, nor of the subsequent foreclosure and consolidation of title in favor of the mortgagee.

• Issues raised for the first time on appeal; cross-claim — A claim for restitution and damages against a co-defendant that was never raised before the trial court, and which was not the subject of a cross-claim, cannot be entertained for the first time on appeal, since the opposing party would thereby be deprived of the opportunity to rebut it.

• "The doctrine of a mortgagee in good faith 'presupposes that the mortgagor, who is not the rightful owner of the property, has already succeeded in obtaining Torrens title over the property in his name and that, after obtaining the said title, he succeeds in mortgaging the property to another who relies on what appears on the title.'" — This passage supplies the canonical formulation of the doctrine's operative presupposition and is the pivot on which the rejection of PNB's defense rests, since the Anay title was never in dispute.

• "PNB's theory of being a mortgagee in good faith is therefore unavailing. On the contrary, what appears to be evident is that PNB itself connived with the Spouses Lee if only to ensure that the signatures of the Spouses Anay on the SPA were secured. Since PNB is not a mortgagee in good faith, it is not entitled to protection." — This states the ratio decidendi on the good-faith issue, grounding the finding of connivance in the testimony of PNB's own inspector.

• "It having been established that the SPA was secured through vitiated consent and there being no ratification on the part of the Spouses Anay, the SPA is, consequently void. As such, the SPA cannot be the basis of a valid mortgage contract, nor of the subsequent foreclosure and consolidation of title in favor of PNB." — This articulates the causal chain by which the nullity of the SPA vitiated the mortgage, the foreclosure, and PNB's consolidated title.

• "The Complaint a quo does not constitute an indirect attack on PNB's title which was irregularly and illegally issued to begin with. On the contrary, since the RTC acquired jurisdiction not only over the subject matter of the case but also over the parties thereto, it was unnecessary to institute a separate action to nullify PNB's title insofar as the property of the Spouses Anay is concerned." — This disposes of the Section 48, PD 1529 collateral-attack defense and defines when a separate direct action to nullify a title is dispensed with.

• Ereña vs. Querrer-Kauffman, 525 Phil. 381, 403 (2006) — Cited as the source of the rule that persons dealing with property covered by a Torrens certificate of title, whether as buyers or as mortgagees, are not required to go beyond what appears on the face of the title; the Court used it to frame the doctrine before holding it inapplicable.
• Philippine National Bank vs. Heirs of Militar, 504 Phil. 634 (2005), citing Spouses Uy vs. Court of Appeals, 411 Phil. 788 (2001) — Cited for the rule that the issue of whether one is a mortgagee in good faith is a factual matter that cannot be raised in a petition for review on certiorari.
• Bank of Commerce vs. Spouses San Pablo, Jr., 550 Phil. 805, 821 (2007) — Cited for the presupposition underlying the doctrine of mortgagee in good faith, and again for the rule that where the property has not been transferred to an innocent purchaser for value, it should be retained by its rightful owner.
• Land Bank of the Philippines vs. Poblete, 704 Phil. 610 (2013) — Cited in support of the conclusion that PNB, having connived with the Spouses Lee in securing the Anay signatures, was not a mortgagee in good faith and was not entitled to protection.
• Lao vs. Villones-Lao, 366 Phil. 49 (1999) — Cited for the consequence that a void SPA cannot be the basis of a valid mortgage contract, nor of the foreclosure and consolidation of title that followed it.
• Gregorio Araneta University Foundation vs. RTC of Kalookan City, Br. 120, et al., 599 Phil. 677 (2009) — Cited for the rule that where the court has acquired jurisdiction over the subject matter and the parties, a separate action to nullify a certificate of title is unnecessary.

• Section 48, Presidential Decree No. 1529 (Property Registration Decree) — "A certificate of title shall not be subject to collateral attack. It cannot be altered, modified, or canceled except in a direct proceeding in accordance with law." PNB invoked the provision to argue that the cancellation of TCT No. T-120269 in the complaint for annulment of the SPA was a prohibited collateral attack. The provision was held inapplicable: the complaint was not an indirect attack because PNB's title was irregularly and illegally issued from the outset, having emanated from a void SPA, and the RTC had acquired jurisdiction over both the subject matter and the parties, making a separate direct action unnecessary.

Leonardo-De Castro (Acting Chairperson), Del Castillo, Jardeleza, and Gesmundo, JJ.