Spouses Miles vs. Lao

A mortgagee who relies in good faith on the mortgagor's certificate of title, without any signs arousing suspicion as to the title's validity, is considered a mortgagee in good faith entitled to protection under the Torrens system; dealing with the mortgagor through a middleman does not per se constitute bad faith absent corrupt motive or intention to take unconscientious advantage of another.

Petitioners-spouses Miles were registered owners of a parcel of land in Makati City covered by Transfer Certificate of Title (TCT) No. 120427. Prior to leaving for the United States, they entrusted the duplicate certificate of title to their niece, Rodora Jimenez, to offer the property to prospective buyers. While the petitioners were abroad, the property was allegedly transferred to spouses Ricardo and Cresencia Ocampo through a falsified Deed of Donation, resulting in the cancellation of TCT No. 120427 and the issuance of TCT No. 212314 in the name of spouses Ocampo.

• On March 28, 1983, petitioners became registered owners in fee simple of a parcel of land in Makati City under Transfer Certificate of Title (TCT) No. 120427.
• Before leaving for the United States, petitioners entrusted the duplicate of TCT No. 120427 to their niece, Rodora Jimenez, for the purpose of offering the property to interested buyers; no written Special Power of Attorney (SPA) to sell was executed in her favor.
• Rodora Jimenez allegedly conspired with spouses Ricardo and Cresencia Ocampo to execute a falsified Deed of Donation dated April 21, 1998, purporting to donate the subject property to spouses Ocampo.
• As a result of the falsified Deed of Donation, TCT No. 120427 was cancelled and TCT No. 212314 was issued in the name of spouses Ocampo on May 6, 1998.
• On December 22, 1998, spouses Ocampo executed a Real Estate Mortgage over the subject property in favor of respondent Bonnie Bautista Lao as security for a loan of Php2,500,000.00.
• When spouses Ocampo failed to pay the loan, respondent Lao foreclosed the mortgage.
• Petitioners filed a complaint with the RTC seeking the cancellation of TCT No. 212314, restoration of TCT No. 120427, nullification of the Deed of Donation and the Real Estate Mortgage, and cancellation of the mortgage inscription.
• Respondent Lao claimed she entered into the mortgage contract without knowledge of the defective title, relied on the clean title in the name of spouses Ocampo, and conducted an ocular inspection of the property which was found vacant and unoccupied.
• The RTC ruled in favor of petitioners, declaring the mortgage null and void and ordering the restoration of petitioners' title.
• The CA reversed the RTC regarding respondent Lao, declaring the Real Estate Mortgage valid and with legal force and effect on the ground that Lao is a mortgagee in good faith.

• Respondent Lao never conducted an investigation on the title of spouses Ocampo and the status of the subject property when she entered into the mortgage contract.
• Respondent was not diligent in dealing with spouses Ocampo only through a middleman, Carlos Talay, rather than dealing with them directly.
• The circumstances surrounding the transaction, including the use of a middleman and the subsequent foreclosure, indicate lack of good faith and suggest collusion or negligence on the part of respondent.

• She entered into the mortgage contract with spouses Ocampo without knowledge that their title was defective or fraudulently acquired.
• At the time of the mortgage, the subject property was registered in the name of spouses Ocampo and there was nothing in the title suggesting fraudulent acquisition or any defect that would arouse suspicion.
• She conducted an ocular inspection of the property prior to the mortgage and found it vacant, with no other occupants, thereby exercising due diligence.
• She is a mortgagee in good faith entitled to protection under the Torrens system, and her decision to foreclose rather than file a criminal case was merely an exercise of her rights as a secured creditor.

• Procedural Issues: Whether the issue of whether a mortgagee is in good faith, being a factual matter involving the determination of negligence and intention, may be entertained in a petition for review on certiorari under Rule 45 despite the general rule that such petitions only raise questions of law.
• Substantive Issues: Whether the Court of Appeals erred in ruling that respondent Lao is a mortgagee in good faith entitled to protection despite the subsequent finding that spouses Ocampo obtained their title through falsified documents.

• Procedural: The Court held that while the ascertainment of good faith or lack thereof, and the determination of negligence are generally factual matters outside the scope of a petition for review on certiorari under Rule 45, a recognized exception applies when the Regional Trial Court and the Court of Appeals have divergent findings of fact, as in this case.
• Substantive: The Court affirmed the Court of Appeals' ruling that respondent is a mortgagee in good faith. It held that: (1) a mortgagee has the right to rely in good faith on the certificate of title of the mortgagor, and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation; (2) the doctrine of mortgagee in good faith presupposes that the mortgagor has obtained Torrens title and mortgaged the property to another who relies on what appears on the title; (3) dealing with mortgagors through a middleman does not equate to bad faith, as bad faith requires a corrupt motive or intention to take unconscientious advantage, not merely bad judgment or negligence; (4) respondent's conduct of an ocular inspection, which remained uncontroverted, supports her claim of good faith; and (5) respondent's choice to file a foreclosure suit instead of a criminal case against spouses Ocampo does not indicate bad faith but merely the exercise of a privilege granted by law as a secured creditor.

• Mortgagee in Good Faith — A doctrine based on public policy and the social interest embedded in the indefeasibility of Torrens titles, which protects mortgagees who deal with property covered by a Torrens Certificate of Title and are not required to go beyond what appears on the face of the title. The burden of discovering invalid transactions is shifted from the third party relying on the title to the co-owners or predecessors of the title holder. In this case, the Court applied this doctrine to protect respondent Lao who relied on the clean title of spouses Ocampo.
• Reliance on Torrens Title — The principle that buyers or mortgagees dealing with property covered by a Torrens Certificate of Title are not required to go beyond what appears on the face of the title. The Court reiterated that a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor, and absent suspicious circumstances, has no obligation to investigate further.
• Burden of Discovery — The principle explained in Andres v. Philippine National Bank that the costs of discovering the basis of invalidity of a title are better borne by co-owners or predecessors who are more intimately knowledgeable about the property's status and history, rather than third parties relying on the title, to avoid increasing costs for the economy and delaying transactions.

• "The doctrine protecting mortgagees and innocent purchasers in good faith emanates from the social interest embedded in the legal concept granting indefeasibility of titles. The burden of discovery of invalid transactions relating to the property covered by a title appearing regular on its face is shifted from the third party relying on the title to the co-owners or the predecessors of the title holder."
• "Good faith connotes an honest intention to abstain from taking unconscientious advantage of another."
• "Good faith, or want of it, is not a visible, tangible fact that can be seen or touched, but rather a state or condition of mind which can only be judged by actual or fancied token or signs."
• "In business relations, it means good faith as understood by men of affairs."

• Andres, et al. v. Philippine National Bank — Cited for the explanation of the dynamics of the burden of discovery in the doctrine of mortgagee in good faith, emphasizing that the burden is shifted to co-owners or predecessors who are more knowledgeable about the property's status.
• Manaloto, et al. v. Veloso III — Cited for the definition of good faith as "an honest intention to abstain from taking any unconscientious advantage of another, even through the forms or technicalities of the law, together with an absence of all information or belief of fact which would render the transaction unconscientious."
• Bank of Commerce v. San Pablo, et al. — Cited for the proposition that despite the mortgagor not being the owner and his title being fraudulent, the mortgage contract and foreclosure sale are given effect by reason of public policy.
• Mercado v. Allied Banking Corporation — Cited for the rule that when a mortgagee does not directly deal with the registered owner, a higher degree of prudence is required.
• Sps. Yap and Guevarra v. First e-Bank Corp. — Cited for the principle that a creditor with remedies of foreclosure and criminal prosecution may choose to foreclose without such choice indicating bad faith.
• Arguelles, et al. v. Malarayat Rural Bank, Inc. — Cited for the rule that issues of good faith are generally factual but may be entertained in Rule 45 when there are divergent findings of fact between the RTC and CA.
• Philippine National Bank v. Juan F. Villa — Cited for the rule that determination of good faith is a factual matter.
• Expresscredit Financing Corp. v. Sps. Velasco — Cited for the principle that good faith is a condition of the mind judged by outward acts.
• PNB v. Heirs of Estanislao and Deogracias Militar — Cited for the definition of good faith.
• Adriano, et al. v. Lasala, et al. — Cited for the proposition that bad faith does not simply connote bad judgment or negligence.
• Sps. Guidangen v. Wooden — Cited for the rule that allegations not presented during trial and unsupported by evidence cannot be accorded weight.

• Rule 45 of the 1997 Rules of Civil Procedure — The provision governing petitions for review on certiorari, which generally limits review to questions of law, but recognizes an exception when there are divergent factual findings by the RTC and CA.