Philippine Trust Company vs. Court of Appeals

A bank accepting a mortgage over registered land cannot rely solely on the Torrens certificate; it must exercise extraordinary diligence, and if suspicious circumstances appear, it must look beyond the title. A mortgagee that fails to do so is in bad faith and cannot acquire any title under a forged instrument.

Forfom Development Corporation is a corporation engaged in agricultural business and real estate development and owns several parcels of land in Pampanga. Philippine Trust Company is a banking institution. The dispute requires applying the Torrens system rule allowing reliance on a certificate of title against the higher standard of care imposed on banks because their business is impressed with public interest.

Forfom Development Corporation, engaged in agricultural business and real estate development, owns several parcels of land in Pampanga and is the registered owner of two parcels in Angeles City covered by Transfer Certificate of Title Nos. 10896 and 64884, consisting of 1,126,530 and 571,014 square meters, respectively. Sometime in 1989, Forfom received a letter from the Department of Agrarian Reform with Ma. Teresa Limcauco and Ellenora Limcauco as addressees. Upon verification with the DAR and the Register of Deeds by Forfom’s Vice-President Jose Marie L. Ramos, Forfom discovered that the subject properties had already been transferred in the names of Ma. Teresa Limcauco and Ellenora Limcauco, who were never known to Forfom or its employees. Forfom’s Board of Directors decided to seek the assistance of the National Bureau of Investigation, and on November 23, 1989, Forfom caused the annotation of its adverse claim on TCT No. 75533 of the Registry of Deeds of Angeles City.

The NBI investigation and Forfom’s own inquiry revealed that a “Deed of Absolute Sale” dated March 6, 1987 was executed over the lot covered by TCT No. 64884 in favor of Ellenora Vda. De Limcauco for ₱500,000.00, while a separate “Deed of Absolute Sale” dated October 5, 1987 was executed over the property covered by TCT No. 10896 in favor of Ma. Teresa Limcauco for ₱500,000.00. In both instruments, the signature of Forfom’s President Felix H. Limcauco was forged, and a certification that Forfom’s Board of Directors had duly approved the sale contained the forged signature of Felix H. Limcauco. On July 7, 1987, a petition for issuance of owner’s duplicate copy was filed with the RTC of Angeles City, Branch 57, by Ellenora Limcauco, who allegedly lost the owner’s duplicate copy of TCT No. 64884; the case was docketed as Cad. Case No. A-124-160. On January 10, 1989, a separate petition for issuance of a new owner’s duplicate copy was filed with the same court by counsel for Ma. Teresa Limcauco, who allegedly lost the owner’s duplicate copy of TCT No. 10896; the case was docketed as Cad. Case No. A-124-280. After due hearing, the court in Cad. Case No. A-124-280 granted the petition in an Order dated February 1, 1989, directing the Register of Deeds to issue another owner’s duplicate copy of TCT No. 10896 in place of the lost one.

As a consequence of the court’s order in Cad. Case No. A-124-280, TCT No. 10896 was cancelled and TCT No. 82760/T-414 was issued in the name of Ma. Teresa Limcauco, who had the property subdivided into different lots covered by TCT Nos. 85585, 85587, 85589, and 85591 in her name. TCT No. 64884 was also cancelled by the Register of Deeds of Angeles City, Honesto G. Guarin, by virtue of a purported court order issued by Judge Eliodoro B. Guinto of RTC-Branch 57. Entry No. 1127 in TCT No. 64884 is the “Secretary’s Certificate” in favor of Felix H. Limcauco, and Entry No. 1128 is the sale in favor of Ellenora Limcauco. The copy of the court order in Cad. Case No. A-124-160 presented to the Register of Deeds was not signed by Judge Guinto, who had denied before the NBI authorities having signed such order or having conducted a hearing on the case; the copy submitted was merely stamped “Original Signed.” Another document certifying that the Order granting the petition in Cad. Case No. A-124-160 had become final and executory was also submitted to the Register of Deeds, but then Branch Clerk of Court Benedicto A. Pineda testified that he did not sign the certification and was not aware of the proceedings; his signature appeared to have been falsified by Lorenzo San Andres.

Although the property covered by TCT No. 10896 had already been subdivided into different lots and covered by separate titles in the name of Ma. Teresa Limcauco, those lots were not yet transferred or conveyed to third parties. As to the property covered by TCT No. 64884, the certificate of title was cancelled and a new certificate of title, TCT No. 75436/T-378, was issued in the name of Ellenora Vda. De Limcauco. On September 23, 1987, a Deed of Absolute Sale was executed by Ellenora Vda. De Limcauco in favor of Raul P. Claveria, whereby the property covered by TCT No. 64884 was supposedly sold to him for ₱5,139,126.00. On September 24, 1987, TCT No. 75436/T-378 was cancelled and a new certificate of title, TCT No. 75533, was issued in the name of Raul P. Claveria. On October 21, 1987, the spouses Raul and Elea Claveria mortgaged the property with Philtrust to guarantee a loan of ₱8,000,000.00; the mortgage was duly registered and annotated as Entry No. 2858 in TCT No. 75533.

On December 26, 1989, Forfom instituted the present action against Ma. Teresa Limcauco, Ellenora D. Limcauco, the spouses Raul P. Claveria and Elea R. Claveria, Philtrust, and the Register of Deeds of Angeles City. The Complaint alleged conspiratorial acts that caused the fraudulent transfer of registration of Forfom’s properties in the names of Ma. Teresa Limcauco and Ellenora D. Limcauco and the subdivision of the land covered by TCT No. 10896. Forfom prayed that the trial court declare the deeds of sale of March 9, 1987, October 5, 1987, and September 23, 1987, as well as TCT Nos. 75436, 75533, 87269, 85585, 85587, 85589, and 85591, all of the Registry of Deeds of Angeles City, void ab initio; direct reconveyance of the real property in Forfom’s name; and sentence the defendants to pay ₱1,000,000.00 as moral damages, ₱100,000.00 plus a daily appearance fee of ₱1,000.00 as attorney’s fees, and costs. Philtrust filed a motion for bill of particulars, which was granted, and Forfom amended its Complaint to allege that the supposed court order directing the issuance of another owner’s duplicate copy did not exist, that the copy did not bear the signature of the judge or the branch clerk of court or the court seal yet was accepted at face value in conspiracy or at least negligently by the Register of Deeds, and that the mortgage in favor of Philtrust was characterized by irregularities because the bank extended a loan of ₱8 million, far in excess of the property’s market value of ₱2,855,070.00, and granted it with haste.

In its Answer, Philtrust denied the allegations of irregularities. It claimed that the Claveria spouses had been its clients since 1986 and that on October 2, 1987, all their outstanding obligations in the amount of ₱7,300,000.00 were consolidated into one account on a clean basis; that it required the spouses to secure their clean loan of ₱7,300,000.00 with a real estate mortgage; and that on October 21, 1987, the spouses executed a mortgage on the property covered by TCT No. 75533 for an obligation of ₱8 million after securing an advance of ₱700,000.00. Philtrust said it had subjected the land to the usual bank appraisals and examined the genuineness and authenticity of TCT No. 75533 with the Register of Deeds of Angeles City and found the same to be in existence and in order; it then registered the deed of mortgage and had it annotated on the original copy of the title. It prayed that the mortgage be held valid and legal and sought damages on its counterclaim. The Register of Deeds filed an Answer denying conspiracy and averring that he issued the questioned transfer certificates of title on the basis of documents filed with his office, with no reason to question their validity or the genuineness of the signatures and court orders, and that he had the right to assume that official functions were regularly performed. Summons by publication was ordered for the Limcaucos and the Claverias, whose addresses could not be located. On October 30, 1991, the trial court declared Ma. Teresa Limcauco, Ellenora Limcauco, Raul P. Claveria, and Elea R. Claveria in default for failure to file responsive pleadings and allowed Forfom to present evidence ex parte against them. During the pre-trial conference on November 25, 1991, Forfom’s counsel manifested that it was joining the Register of Deeds only as a nominal party, and the Register of Deeds waived his counterclaim. On February 4, 1992, the trial court granted Forfom’s motion to authenticate the signatures appearing in the Deeds of Sale of October 5, 1987 and March 6, 1987, and that of Josefina K. Limcauco appearing in the Secretary’s Certificate containing the supposed Board resolution approving the sale; the documents were ordered forwarded to the NBI for authentication. During the pre-trial conference on August 25, 1992, the parties agreed on two issues for resolution: whether the Deeds of Absolute Sale and the titles issued pursuant thereto were genuine and valid, and whether the mortgage on the property covered by TCT No. 75533 was valid and legal. At trial, Forfom presented Jose Marie L. Ramos, NBI officer Alberto Ramos, NBI handwriting expert Eliodoro Constantino, former Forfom President Felix H. Limcauco, Jr., and former Branch Clerk of Court Benedicto Pineda; Philtrust presented the testimony of Atty. Honesto Guarin, Register of Deeds of Angeles City. The case was then submitted for decision.

The RTC and the CA found Philtrust negligent in its credit investigation procedures and its standards for granting loans, as shown by its previous extension of unsecured and uncollateralized loans to the Claveria spouses and its failure to discover the latter’s statement of a fictitious address in the mortgage contract and that they were the subject of estafa cases. They also found that Philtrust acted in haste in the execution of the mortgage and loan contracts because the property, assessed only at more than ₱2 million and allegedly purchased at more than ₱5 million, was made to secure the principal loan obligation of ₱8 million. The CA further noted Philtrust’s refusal to present the records and details of its transactions with the Claveria spouses despite being pressed to do so, which cast serious doubt on its claim that it was a mortgagee in good faith. In its Answer to Interrogatories, Philtrust said the Claveria spouses passed the standards set by the bank; that it requested collateral on the ₱8,300,000.00 loan preferably located in Metro Manila; that the Angeles property was appraised in accordance with the usual procedure and visited by investigators of the Credit Department; that the last known address of the spouses was 406 Caliraya Street, New Alabang, Muntinlupa; and that the Loans and Discounts Department handled their accounts, but it refused to give the names of the persons who visited the property and the bank officers who dealt with the spouses. Philtrust also persistently refused to cooperate with the NBI in its investigation, as testified by NBI agents Alberto V. Ramos and Pastor T. Pangan and as shown in the NBI Investigation Report. The NBI investigation and the homeowners association of New Alabang revealed that the Claveria spouses did not reside and never resided at the address they had declared.

• Grave Abuse — Mortgagee in Good Faith: Philtrust argued that the CA gravely abused its discretion in finding no evidence that it was a mortgagee in good faith and in ascribing bad faith to it; it claimed that the Claveria loans were granted after it was satisfied of their credit worthiness and capacity to pay, that the spouses maintained a satisfactory record of payment during the early period of their transactions, and that it followed standard operating procedures, including having investigators visit and appraise the property. It cited the Promissory Note, the Deed of Mortgage, and TCT No. 75533, and argued that its notarized Answer to Interrogatories was conclusive as to the truth of its contents.
• Grave Abuse — Actual Knowledge: Philtrust argued that the CA gravely abused its discretion in finding that it had actual knowledge of facts and circumstances pertaining to the fraudulent transfer of the property when there was no evidence to support that finding.
• Forged Deed as Root of Valid Title: Philtrust argued that the CA gravely abused its discretion in disregarding the rule that a forged deed may be the root of a valid title and in nullifying the real estate mortgage executed by the Claveria spouses in its favor.

• Grave Abuse — Mortgagee in Good Faith: Whether the CA committed grave abuse of discretion amounting to lack or excess of jurisdiction in finding that Philtrust was not a mortgagee in good faith and in ascribing bad faith to it.
• Grave Abuse — Actual Knowledge: Whether the CA committed grave abuse of discretion amounting to lack or excess of jurisdiction in finding that Philtrust had actual knowledge of facts and circumstances pertaining to the fraudulent transfer.
• Forged Deed as Root of Valid Title: Whether the CA committed grave abuse of discretion amounting to lack or excess of jurisdiction in nullifying the real estate mortgage despite the rule that a forged deed may be the root of a valid title.

• Grave Abuse — Mortgagee in Good Faith: No. The CA did not gravely abuse discretion; Philtrust failed to prove the extraordinary diligence required of banks, and the CA’s finding of bad faith is supported by the record. The rule allowing reliance on the Torrens certificate does not apply to banks.
• Grave Abuse — Actual Knowledge: No. The CA’s finding of actual knowledge is supported by circumstantial evidence, including Philtrust’s unsecured loans to the Claverias, evasive answers, refusal to present transaction records, and non-cooperation with the NBI.
• Forged Deed as Root of Valid Title: No. The rule that a forged deed may be the root of a valid title protects only an innocent mortgagee for value; Philtrust was in bad faith and cannot acquire any title under the forged instrument.

• Grave Abuse — Mortgagee in Good Faith: The SC began by noting that because Philtrust filed a Petition for Certiorari rather than a Petition for Review, a finding that it was in good faith would not be enough; nothing less than grave abuse of discretion by the CA was required. On the merits, the SC held that banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands. The rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks. Philtrust therefore had to prove that it exercised extraordinary diligence in approving the mortgage in favor of the Claveria spouses. The SC found that the Promissory Note, Deed of Mortgage, and TCT No. 75533 did not prove that Philtrust followed standard operating procedure, was satisfied of the spouses’ credit worthiness, or verified their payment record; the mere acceptance of the property as security did not establish compliance. As for Philtrust’s notarized Answer to Interrogatories, the SC clarified that notarized documents are public documents under Section 19, Rule 132, but not all public documents are prima facie evidence of the facts therein stated. Under Section 23, notarized documents are proof of the fact that gave rise to their execution and of the date, not of the truth of their contents; the acknowledgment is prima facie evidence of execution under Section 30. Affidavits, including Answers to Interrogatories, are self-serving and must be received with caution. Philtrust thus presented no evidence rebutting the badges of bad faith, and the CA did not gravely abuse its discretion in finding Philtrust a mortgagee in bad faith.
• Grave Abuse — Actual Knowledge: The SC held that the CA’s finding of actual knowledge was supported by circumstantial evidence sufficient to prove by preponderance of evidence that Philtrust was aware of the fraudulent scheme against Forfom. Within a period of less than one year, Philtrust extended unsecured loans amounting to ₱7,300,000.00 to the Claveria spouses, and its only explanation was that they “passed the standards set by the bank.” Although the spouses had declared their residence in Ayala Alabang, Philtrust accepted as security land outside Metro Manila that they had only recently acquired, and it answered evasively when asked why it did not require collateral in Metro Manila. When pressed for details of its investigation, the names of the persons who visited the property and the spouses’ alleged home, and the bank officers who dealt with the spouses, Philtrust refused to provide them; the presumption that evidence willfully suppressed would be adverse if produced applied. Philtrust also persistently refused to cooperate with the NBI in its investigation. Had Philtrust properly conducted a credit investigation, it would have discovered that the Claveria spouses did not reside and never resided at the address they declared. These circumstances supported the CA’s finding of actual knowledge, and no grave abuse of discretion was shown.
• Forged Deed as Root of Valid Title: The SC held that the CA did not disregard the rule that a forged deed may be the root of a valid title. The CA clearly specified that the rule applies when an innocent purchaser for value intervenes, and that an innocent mortgagee for value is entitled to protection. A mortgagee in good faith and for value may rely on the certificate of title, except when it has actual knowledge of facts and circumstances that would impel a reasonably cautious person to make an inquiry. If anything excites or arouses suspicion, the vendee or mortgagee must look beyond the certificate and investigate the title of the vendor appearing on its face. If the vendee or mortgagee fails to do so before the execution of the contract, it is deemed to be in bad faith and cannot acquire any title under the forged instrument. Since Philtrust was in bad faith, it could not invoke the rule to preserve its mortgage, and the CA did not gravely abuse its discretion in nullifying the real estate mortgage.

• Mortgagee in good faith / innocent mortgagee for value — A mortgagee in good faith and for value is protected under the Torrens system and may rely on the certificate of title, except when it has actual knowledge of facts and circumstances that would impel a reasonably cautious person to inquire further. Banks are not ordinary persons dealing with registered land; because banking is impressed with public interest, they must exercise extraordinary diligence, and the rule allowing reliance solely on the certificate does not apply to them. In this case, Philtrust failed to prove extraordinary diligence; its documents and Answer to Interrogatories did not establish compliance, and the CA’s finding of bad faith was supported.
• Forged deed as root of a valid title — A forged deed may be the root of a valid title when an innocent purchaser for value intervenes. The protection extends to an innocent mortgagee for value. But if the mortgagee fails to investigate suspicious circumstances before executing the contract, it is deemed in bad faith and cannot acquire any title under the forged instrument. Philtrust, being in bad faith, could not invoke the rule to save its mortgage.
• Banks’ extraordinary diligence — Banks are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands. They cannot rely solely on the Torrens certificate. Philtrust’s unsecured loans, evasive answers, refusal to present records, and non-cooperation with the NBI showed that it did not meet this standard.
• Notarized documents as evidence — Notarized documents are public documents under Section 19, Rule 132, but not all public documents are prima facie evidence of the facts therein stated. Under Section 23, notarized documents are proof of the fact that gave rise to their execution and the date, not of the truth of their contents; the acknowledgment is prima facie evidence of execution under Section 30. Affidavits, including Answers to Interrogatories, are self-serving and must be received with caution. Philtrust’s notarized Answer to Interrogatories was not conclusive proof of its good faith.
• Willful suppression of evidence — Under Rule 131, Section 3(e), evidence willfully suppressed is presumed adverse if produced. Philtrust refused to give details and names of its investigators and bank officers and refused to present records of its transactions with the Claverias; the presumption supported the finding of bad faith.
• Grave abuse of discretion as certiorari ground — A mere error in judgment by the CA is not enough for certiorari; nothing less than grave abuse of discretion amounting to lack or excess of jurisdiction is required. Even if Philtrust were in good faith, the SC could not grant the petition without grave abuse. The SC found none.

• “It is settled that banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands.” — This establishes the higher diligence standard for banks and is the basis for rejecting Philtrust’s reliance on the Torrens certificate.
• “The rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.” — This directly disposes of Philtrust’s defense that it could rely on TCT No. 75533 without further investigation.
• “A forged deed may be the root of a valid title when an innocent purchaser for value intervenes.” — This states the exception Philtrust invoked, which the SC held did not apply because Philtrust was not an innocent mortgagee for value.
• “If the vendee or mortgagee failed to do so before the execution of the contract, the vendee or mortgagee is deemed to be in bad faith and therefore cannot acquire any title under the forged instrument.” — This supplies the consequence of Philtrust’s failure to investigate the suspicious circumstances surrounding the Claveria mortgage.

• Development Bank of the Philippines vs. Court of Appeals, 387 Phil. 283 (2000) — Relied on for the rule that banks must exercise more care and prudence than private individuals in dealings involving registered lands.
• Cavite Development Bank vs. Lim, 381 Phil. 355 (2000) — Cited to support the same higher standard of diligence for banks.
• Tomas vs. Philippine National Bank, 187 Phil. 183 (1980) — Cited for the same rule on banks’ extraordinary care.
• Ursal vs. Court of Appeals, G.R. No. 142411, October 14, 2005, 473 SCRA 52 — Relied on for the rule that the Torrens certificate reliance rule does not apply to banks.
• Rural Bank of Compostela vs. Court of Appeals, 337 Phil. 521 (1997) — Cited for the same exception to the reliance rule for banks.
• Sandoval vs. Court of Appeals, 329 Phil. 48 (1996) — Relied on for the rule that suspicious circumstances require a vendee or mortgagee to look beyond the certificate of title.
• Philippine Long Distance Telephone Company, Inc. vs. Tiamson, G.R. Nos. 164684-85, November 11, 2005, 474 SCRA 761 — Relied on for the rule that affidavits, though notarized, are self-serving and must be received with caution.

• Section 19, Rule 132, Rules of Court — Defines public documents; notarized documents fall under the second class. Applied to treat Philtrust’s notarized Answer to Interrogatories as a public document but not as conclusive proof of its contents.
• Section 23, Rule 132, Rules of Court — Provides that entries in public records made in the performance of duty are prima facie evidence of the facts stated, while all other public documents are evidence only of the fact giving rise to their execution and the date. Applied to hold that the notarized Answer to Interrogatories was proof only of its execution and date, not of the truth of its statements.
• Section 30, Rule 132, Rules of Court — Provides that the acknowledgment in a notarized document is prima facie evidence of the execution of the instrument. Applied to treat the Answer as prima facie proof of execution, not of the facts asserted.
• Section 3(m), Rule 131, Rules of Court — Presumes official duty regularly performed. Applied to limit the presumption to the notary’s jurat, not to the truth of the affiant’s statements.
• Section 2, Rule 25, Rules of Court — Requires Answers to Interrogatories to be signed and sworn to. Applied to classify Philtrust’s Answer as an affidavit, which is self-serving and must be received with caution.
• Section 3(e), Rule 131, Rules of Court — Presumes that evidence willfully suppressed would be adverse if produced. Applied against Philtrust for refusing to present transaction records and details of its investigation.