Prudential Bank vs. Rapanot

A bank is not a mortgagee in good faith when it fails to ascertain, through the exercise of the highest degree of diligence required of banking institutions, whether a developer has obtained prior HLURB approval to mortgage a condominium unit and whether the unit has already been sold to a buyer, and a mortgage executed in violation of Section 18 of Presidential Decree No. 957 is null and void as against the buyer who was not notified before the release of the loan.

Golden Dragon Real Estate Corporation, the developer of Wack-Wack Twin Towers Condominium in Mandaluyong City, sold Unit 2308-B2 to Ronald Rapanot, who paid a reservation fee on May 9, 1995, executed a Contract to Sell on May 21, 1996, and completed payment via a Deed of Absolute Sale on April 23, 1997. Prior to these sales transactions, on September 13, 1995, Golden Dragon obtained a ₱50,000,000.00 loan from Prudential Bank (now Bank of the Philippine Islands) and mortgaged several units, including Unit 2308-B2, as collateral. The mortgage was annotated on the Condominium Certificate of Title on the same date. After completing payment, Rapanot demanded delivery of the unit and title, but Golden Dragon failed to comply after the Bank refused a request to substitute collateral. Rapanot subsequently filed a complaint for specific performance with the HLURB.

The Sale to Rapanot: On May 9, 1995, Ronald Rapanot paid Golden Dragon Real Estate Corporation a reservation fee of ₱453,329.64 for Unit 2308-B2 (41.1050 sqm) of the Wack-Wack Twin Towers Condominium, covered by CCT No. 2383. On May 21, 1996, Rapanot and Golden Dragon executed a Contract to Sell. Rapanot completed payment of the full purchase price of ₱1,511,098.97 on April 23, 1997, on which date Golden Dragon executed a Deed of Absolute Sale in his favor.

The Mortgage to the Bank: On September 13, 1995—four months after Rapanot's reservation but before the Contract to Sell and Deed of Absolute Sale—the Bank extended a ₱50,000,000.00 loan to Golden Dragon. To secure the loan, Golden Dragon executed a Mortgage Agreement constituting a real estate mortgage over several condominium units, including Unit 2308-B2. The mortgage was annotated on CCT No. 2383 on the same day.

Failure to Deliver and HLURB Complaint: Rapanot made verbal demands for delivery of the unit and title. Golden Dragon requested the Bank to allow substitution of collateral for Unit 2308-B2 on March 17, 1998, but the Bank refused due to Golden Dragon's unpaid accounts. Rapanot then sent formal demand letters to both Golden Dragon and the Bank, which were not complied with. On April 27, 2001, Rapanot filed a complaint with the HLURB.

HLURB Proceedings: Despite summons, only the Bank filed an Answer. Golden Dragon and its President were declared in default by the Arbiter's Order dated April 5, 2002, which also directed Rapanot and the Bank to submit position papers and draft decisions within 30 days. The Bank's copy of this Order was returned to the Arbiter with the notation "refused to receive." However, on May 22, 2002, Rapanot personally served his position paper on the Bank; this document made reference to the April 5, 2002 Order. On July 3, 2002, the Arbiter rendered a Decision in favor of Rapanot without the Bank having submitted its position paper or draft decision.

Denial of Due Process: The Bank maintained that it was deprived of due process because it never received the April 5, 2002 Order requiring submission of position papers and draft decisions. It asserted that it was taken by surprise when it received Rapanot's Manifestation on July 25, 2002, indicating that a decision had already been rendered on July 3, 2002. It argued that the notation "refused to receive" on the returned envelope was false and that its immediate manifestation before the Arbiter seeking clarification proved it had not received the order.

Status as Mortgagee in Good Faith: The Bank argued that it exercised due diligence before approving the loan by deploying representatives to verify the properties and confirming that the titles were free from liens and encumbrances. It contended that since the mortgage was executed before the Contract to Sell and Deed of Absolute Sale, no amount of verification could have revealed Rapanot's rights. It relied on the doctrine that a mortgagee in good faith and for value is entitled to protection, asserting that the CA erred in not recognizing it as such.

Due Process Complied With: Rapanot countered that the Arbiter sent the April 5, 2002 Order via registered mail and that the Bank "refused to receive" it. He argued that the Bank was not denied due process because it had participated in the preliminary hearing and scheduled conferences, filed an Answer with special and affirmative defenses, and was served with Rapanot's position paper and draft decision. The Bank could have filed its own pleadings upon receipt of Rapanot's submissions but chose not to.

Bank Not a Mortgagee in Good Faith: Rapanot argued that the Bank could not be considered a mortgagee in good faith because it failed to ascertain whether Golden Dragon obtained prior written approval from the HLURB as required by Section 18 of PD 957. He emphasized that banks are expected to exercise more care and prudence than private individuals and cannot simply rely on the face of the certificate of title, especially when dealing with a condominium developer.

Due Process in Administrative Proceedings: Whether the Court of Appeals erred in affirming the Office of the President's finding that the Bank was not deprived of due process before the HLURB.

Mortgagee in Good Faith: Whether the Court of Appeals erred in holding that the Bank cannot be deemed a mortgagee in good faith.

Due Process in Administrative Proceedings: The Bank was not deprived of due process. The essence of due process in administrative proceedings is a fair and reasonable opportunity to explain one's side, not necessarily a formal trial-type hearing. The Bank participated in preliminary hearings and conferences and filed an Answer asserting its special and affirmative defenses, thereby presenting its position. Under the 1996 HLURB Rules of Procedure, the Arbiter was authorized to resolve the case with or without position papers and draft decisions based on verified pleadings and records. Moreover, the Bank had actual notice of the directive to file pleadings as early as May 22, 2002, when it was served with Rapanot's position paper, which explicitly referenced the April 5, 2002 Order. Its claim of surprise was belied by its failure to act for five months until it secured a certified copy of the decision.

Mortgagee in Good Faith: The Bank is not a mortgagee in good faith. Section 18 of Presidential Decree No. 957 prohibits the owner or developer from mortgaging any unit without prior written approval of the HLURB and requires that the buyer be notified before the release of the loan. A mortgage executed in violation of this provision is null and void as against the buyer. Banks are held to a higher standard of diligence than private individuals; they cannot rely solely on the face of the certificate of title but must investigate the status of the property, verify HLURB approval, and ascertain whether units have existing buyers. The Bank failed to verify Golden Dragon's compliance with PD 957 and ignored the fact that Rapanot had paid a reservation fee four months before the mortgage was executed. This negligence negates any claim of good faith.

Due Process in Administrative Proceedings: Due process in administrative contexts requires only a fair and reasonable opportunity to explain one's side or seek reconsideration of the action complained of. Formal or trial-type hearings are not always necessary, and technical rules of procedure are not strictly applied. The opportunity to participate in hearings and submit pleadings satisfies this requirement.

Mortgagee in Good Faith (Banks): A bank, as a mortgagee, is expected to exercise the highest degree of diligence and a higher standard of care than private individuals. It cannot rely merely on what appears on the face of the certificate of title but must conduct further investigation to verify the status of the property, especially when dealing with real estate developers. A bank that fails to ascertain compliance with statutory requirements (such as HLURB approval under PD 957) or ignores facts that would prompt a reasonable inquiry (such as prior sales to buyers) cannot claim status as a mortgagee in good faith.

Effect of Violation of PD 957, Section 18: A mortgage constituted by a developer on a condominium unit without prior written approval from the HLURB and without notice to the buyer is null and void as against the buyer. Acts executed against mandatory or prohibitory laws are void ab initio.

• "The essence of due process is to be heard."
• "In administrative proceedings, due process entails a fair and reasonable opportunity to explain one's side, or an opportunity to seek a reconsideration of the action or ruling complained of. Administrative due process cannot be fully equated with due process in its strict judicial sense, for in the former a formal or trial-type hearing is not always necessary, and technical rules of procedure are not strictly applied."
• "Acts executed against the provisions of mandatory or prohibitory laws shall be void. Hence, the mortgage over the lot is null and void insofar as private respondent is concerned."
• "When the purchaser or the mortgagee is a bank, the rule on innocent purchasers or mortgagees for value is applied more strictly. Being in the business of extending loans secured by real estate mortgage, banks are presumed to be familiar with the rules on land registration. Since the banking business is impressed with public interest, they are expected to be more cautious, to exercise a higher degree of diligence, care and prudence, than private individuals in their dealings, even those involving registered lands."
• "A person who deliberately ignores a significant fact that could create suspicion in an otherwise reasonable person cannot be deemed a mortgagee in good faith."

• Far East Bank & Trust Co. v. Marquez, 465 Phil. 276 (2004) — Controlling precedent establishing that a mortgage executed in violation of Section 18 of PD 957 is null and void as against the buyer, and that a bank's failure to investigate beyond the face of the title negates good faith.
• Philippine National Bank v. Lim, 702 Phil. 461 (2013) — Followed; reiterated that mortgages violating PD 957 are void as against the buyer.
• United Overseas Bank of the Philippines, Inc. v. Board of Commissioners-HLURB, G.R. No. 182133, June 23, 2015 — Followed; affirmed the nullity of mortgages under PD 957.
• Land Bank of the Philippines v. Belle Corporation, G.R. No. 205271, September 2, 2015 — Followed; emphasized the strict application of the rule on innocent mortgagees to banks and the requirement for banks to verify property status beyond the title.
• Philippine National Bank v. Vila, G.R. No. 213241, August 1, 2016 — Followed; discussed the highest degree of diligence required of banks and their vital role in the economy.

• Section 18, Presidential Decree No. 957 (The Subdivision and Condominium Buyers' Protective Decree) — Mandates prior written approval from the HLURB before a developer may mortgage a unit, and requires notification of the buyer before loan release. Violation renders the mortgage void as against the buyer.
• Rule VI, Sections 4 and 5, 1996 HLURB Rules of Procedure — Provided that parties must submit position papers and draft decisions within 30 days if no settlement is reached, and authorized the Arbiter to summarily resolve the case with or without such submissions based on verified pleadings and records.

Maria Lourdes P.A. Sereno (Chief Justice, Chairperson), Teresita J. Leonardo-De Castro, Mariano C. Del Castillo, and Estela M. Perlas-Bernabe.