Prudential Bank vs. Panis

A building erected on land belonging to another is itself an immovable property that may be validly mortgaged separately from the land, and possessory rights over public land may be mortgaged before the issuance of a sales patent; however, a mortgage executed after the issuance of the patent and certificate of title over public-land acquisitions is void if it violates the restrictions of the Public Land Act and Republic Act No. 730, and estoppel cannot cure that nullity.

Spouses Fernando and Teodula Magcale occupied a residential lot in Olongapo City under a Miscellaneous Sales Application pending before the Bureau of Lands, on which they had erected a two-storey semi-concrete residential building with warehouse spaces. Prudential Bank was the mortgagee of both the building and the possessory rights over the lot, extending credit to the spouses in two tranches. The legal framework governing the alienability and encumbrance of public-land patents — Commonwealth Act No. 141 (the Public Land Act), particularly Sections 121, 122, and 124, and Republic Act No. 730, Section 2 — imposes restrictions on lands acquired under the Public Land Act, restrictions that are annotated on the face of the original certificate of title issued to the patentee.

On November 19, 1971, spouses Fernando and Teodula Magcale secured a loan of ₱70,000 from Prudential Bank. To secure repayment, they executed a deed of real estate mortgage over two properties: a two-storey semi-concrete residential building with warehouse spaces, with a floor area of approximately 263 square meters, declared under Tax Declaration No. 21109 in the name of Fernando Magcale with an assessed value of ₱35,290; and the right of occupancy on the lot where the building stood, identified as Lot No. 720 of the Olongapo Townsite Subdivision, a first-class residential land of approximately 465 square meters, declared under Tax Declaration No. 19595 with an assessed value of ₱1,860. A rider typed at the bottom of the mortgage deed expressly acknowledged that the mortgagors had filed a Miscellaneous Sales Application over the lot, and stipulated that upon release or issuance of the sales patent by the Bureau of Lands, the mortgagors authorized the Register of Deeds to hold registration of the patent until the mortgage was cancelled, or to annotate the encumbrance on the title upon authority from the Secretary of Agriculture and Natural Resources. This first mortgage was registered under Act 3344 with the Registry of Deeds of Zambales on November 23, 1971.

On April 24, 1972, the Secretary of Agriculture issued Miscellaneous Sales Patent No. 4776 over the lot in favor of the spouses. On the basis of that patent, Original Certificate of Title No. P-2554 was issued in the name of Fernando Magcale by the Ex-Officio Register of Deeds of Zambales on May 15, 1972. Thereafter, on May 2, 1973, the spouses secured an additional loan of ₱20,000 from Prudential Bank and executed a second deed of real estate mortgage over the same properties. This second mortgage was registered with the Registry of Deeds of Olongapo City on the same date.

When the spouses failed to pay their obligations after they became due, Prudential Bank applied for extrajudicial foreclosure of both mortgages. The properties were sold to the bank as the highest bidder at a public auction conducted by the City Sheriff on April 12, 1978, notwithstanding a written request from the spouses through counsel dated March 29, 1978 asking the sheriff to desist from proceeding with the sale. The spouses then filed Civil Case No. 2443-0 before the Court of First Instance of Zambales and Olongapo City, which, in a decision dated November 13, 1978, declared both deeds of real estate mortgage null and void. The bank's motion for reconsideration was denied on January 10, 1979, prompting the instant petition.

• Validity of the Mortgages: Petitioner argued that the deeds of real estate mortgage are valid, asserting that a building may be mortgaged separately from the land on which it stands and that possessory rights over public land may be validly conveyed.
• Effect of the Patent and OCT Issuance: Petitioner maintained that the supervening issuance of Miscellaneous Sales Patent No. 4776 and Original Certificate of Title No. P-2554 did not have the effect of invalidating the deeds of real estate mortgage.
• Estoppel by Voluntary Surrender of Title: Petitioner pointed out that private respondents, after physically possessing the title for five years, voluntarily surrendered it to the bank in 1977 so that the mortgage could be annotated, without requiring the bank to obtain prior approval from the Ministry of Natural Resources, thereby implicitly authorizing the bank to cause the annotation.

• Legitimacy of Debts Acknowledged: Respondents declared that they were not denying the legitimacy of their debts and appeared open to new negotiations under the law, while opposing the bank's motion for reconsideration before the CFI.

• Validity of Mortgage on Building on Another's Land: Whether a valid real estate mortgage can be constituted on a building erected on land belonging to another.
• Validity of the First Mortgage: Whether the deed of real estate mortgage for ₱70,000, executed on November 19, 1971 before the issuance of the sales patent and original certificate of title, is valid.
• Validity of the Second Mortgage: Whether the deed of real estate mortgage for ₱20,000, executed on May 2, 1973 after the issuance of the sales patent and original certificate of title, is valid.
• Effect of Estoppel: Whether the voluntary surrender of the title by private respondents to the bank for annotation of the mortgage can validate the otherwise void second mortgage.

• Validity of Mortgage on Building on Another's Land: Yes. A building is by itself an immovable property under Article 415 of the Civil Code and may be mortgaged apart from the land on which it is built; possessory rights over public land before title is vested may likewise be validly conveyed.
• Validity of the First Mortgage: Yes. The first mortgage, executed on November 19, 1971 before the issuance of the sales patent and before the government was divested of title, is valid, the restrictions of the Public Land Act and Republic Act No. 730 being inapplicable to mortgages executed before such eventuality.
• Validity of the Second Mortgage: No. The second mortgage, executed on May 2, 1973 after the issuance of the patent and the original certificate of title, falls squarely under the prohibitions of Sections 121, 122, and 124 of the Public Land Act and Section 2 of Republic Act No. 730, and is therefore null and void.
• Effect of Estoppel: No. Estoppel cannot give validating effect to a void contract prohibited by law or against public policy; it is not within the competence of any citizen to barter away what public policy by law was designed to preserve.

• Validity of Mortgage on Building on Another's Land: Article 415 of the Civil Code enumerates buildings separate and distinct from the land among immovable properties, which means a building is by itself an immovable property. While a mortgage of land necessarily includes improvements thereon in the absence of stipulation, a building may be mortgaged apart from the land, and such a mortgage remains a real estate mortgage because the building retains its character as immovable property even when dealt with separately. Possessory rights over public land before title is vested on the grantee may likewise be validly transferred or conveyed, as in a deed of mortgage. The first mortgage therefore validly covered both the spouses' building and their possessory rights over the lot.

• Validity of the First Mortgage: The first mortgage was executed on November 19, 1971 and registered under Act 3344 on November 23, 1971. Miscellaneous Sales Patent No. 4776 was issued on April 24, 1972, and OCT No. P-2554 on May 15, 1972. The government is divested of title to public land only upon issuance of the sales patent and its subsequent registration. Because the mortgage was executed before the patent was issued and before the government was divested of title, the restrictions in Sections 121, 122, and 124 of the Public Land Act — which refer to land already acquired under the Public Land Act — have no application. Section 2 of Republic Act No. 730, while referring to encumbrance before the patent is issued, applies specifically to the land itself and does not mention improvements existing thereon. The first mortgage is accordingly valid.

• Validity of the Second Mortgage: The second mortgage was executed on May 2, 1973, after the issuance of the sales patent and the original certificate of title. At that point, the land had already been acquired under the Public Land Act, bringing the transaction squarely within the prohibitions of Sections 121, 122, and 124 of the Public Land Act and Section 2 of Republic Act No. 730. The second mortgage is therefore null and void.

• Effect of Estoppel: Petitioner argued that the spouses' voluntary surrender of their title to the bank in 1977 for annotation of the mortgage implicitly authorized the bank to cause the annotation without prior approval from the Ministry of Natural Resources. This argument was rejected. As held in Arsenal vs. IAC, the doctrine of estoppel cannot give validating effect to a void contract, just as pari delicto may not be invoked to defeat the policy of the State. It is not within the competence of any citizen to barter away what public policy by law was designed to preserve. The voluntary surrender of the title could not cure the nullity of the second mortgage.

• Building as Immovable Property — A building is by itself an immovable property under Article 415 of the Civil Code, separate and distinct from the land on which it is built. It may therefore be mortgaged apart from the land, and such a mortgage remains a real estate mortgage. The Court relied on this doctrine to uphold the validity of the first mortgage over the spouses' building, independently of the government-owned lot.

• Mortgage of Possessory Rights over Public Land — Possessory rights over public land, before title is vested on the grantee, may be validly transferred or conveyed, including by way of mortgage. The Court applied this doctrine to sustain the mortgage of the spouses' right of occupancy over the lot, executed before the sales patent was issued.

• Divestment of Government Title upon Issuance and Registration of Sales Patent — The government is divested of title to public land only upon the issuance of the sales patent and its subsequent registration in the Office of the Register of Deeds. Mortgages executed before this eventuality are not subject to the restrictions of the Public Land Act, which apply only to land already acquired under the Act.

• Estoppel Cannot Validate a Void Contract — Estoppel cannot give validating effect to a contract that is prohibited by law or against public policy. Neither may the doctrine of pari delicto be invoked to defeat State policy. It is not within the competence of any citizen to barter away what public policy by law was designed to preserve. The Court applied this doctrine to reject the argument that the spouses' voluntary surrender of their title to the bank cured the nullity of the second mortgage.

• "it is obvious that the inclusion of 'building' separate and distinct from the land, in said provision of law can only mean that a building is by itself an immovable property." — This passage, quoting Lopez vs. Orosa, Jr., establishes the foundational principle that a building is independently classifiable as immovable property under Article 415 of the Civil Code, enabling its separate mortgage.

• "while it is true that a mortgage of land necessarily includes, in the absence of stipulation of the improvements thereon, buildings, still a building by itself may be mortgaged apart from the land on which it has been built. Such a mortgage would be still a real estate mortgage for the building would still be considered immovable property even if dealt with separately and apart from the land" — This articulates the ratio decidendi on the separability of a building mortgage from the land, directly resolving the pivotal issue.

• "neither may the doctrine of estoppel give a validating effect to a void contract. Indeed, it is generally considered that as between parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or against public policy. It is not within the competence of any citizen to barter away what public policy by law was to preserve." — This passage, quoting Arsenal vs. IAC, states the controlling rule on the inability of estoppel to cure statutory nullity, a principle frequently invoked in public-land and natural-resources cases.

• Lopez vs. Orosa, Jr., L-10817-18, Feb. 28, 1958 — Followed. Established that a building, separate and distinct from the land, is an immovable property under Article 415 of the Civil Code.
• Associated Inc. and Surety Co., Inc. vs. Iya, L-10837-38, May 30, 1958 — Followed. Corroborated the rule that a building is by itself an immovable property.
• Leung Yee vs. Strong Machinery Co., 37 Phil. 644 — Followed. Established that a building may be mortgaged apart from the land, and such a mortgage remains a real estate mortgage.
• Vda. de Bautista vs. Marcos, 3 SCRA 438 (1961) — Followed. Held that possessory rights over public land before title is vested may be validly transferred or conveyed, as in a deed of mortgage.
• Visayan Realty Inc. vs. Meer, 96 Phil. 515 — Followed. Held that the government is divested of title to public land only upon issuance of the sales patent and its subsequent registration.
• Director of Lands vs. De Leon, 110 Phil. 28 — Followed. Corroborated the rule on divestment of government title upon issuance and registration of the sales patent.
• Director of Lands vs. Jurado, L-14702, May 23, 1961 — Followed. Further supported the divestment-of-title principle.
• Arsenal vs. IAC, 143 SCRA 54 (1986) — Followed. Held that estoppel cannot give validating effect to a void contract prohibited by law or against public policy, and that pari delicto may not be invoked to defeat State policy.

• Article 415, Civil Code of the Philippines — Enumerates immovable properties, including buildings separate and distinct from the land. Applied to classify the spouses' building as immovable property capable of being mortgaged independently of the government-owned lot.
• Sections 121, 122, and 124, Commonwealth Act No. 141 (Public Land Act) — Impose restrictions on the alienation, encumbrance, or disposition of lands acquired under the Public Land Act. Held inapplicable to the first mortgage (executed before acquisition) but applicable to the second mortgage (executed after issuance of the patent and OCT), rendering the latter null and void.
• Section 2, Republic Act No. 730 — Restricts encumbrance or alienation of land before the patent is issued. Held inapplicable to the first mortgage because it refers specifically to the land itself and does not mention improvements thereon; applied to invalidate the second mortgage.
• Act No. 3344 — Governs registration of instruments affecting land not yet brought under the Torrens system. The first mortgage was registered under this Act with the Registry of Deeds of Zambales on November 23, 1971.

Teehankee, C.J., Narvasa, Cruz, and Gancayco, JJ., concurred.