State Investment House Inc. vs. Court of Appeals

A mortgagee who is a financing institution cannot claim the status of a mortgagee in good faith, and thus cannot rely solely on the face of a Torrens Title, when it has constructive knowledge of a defect in the mortgagor's title or when it was negligent in failing to ascertain the status and condition of the property offered as security. The unregistered rights of a prior buyer are preferred over a subsequently registered mortgage because the original owner, having parted with ownership, no longer has the right to mortgage the property.

The petitioner, State Investment House Inc. (STATE), is a financing institution engaged in the business of extending loans secured by real property. The private respondents, spouses Canuto and Ma. Aranzazu Oreta, entered into a Contract to Sell with Solid Homes, Inc. (SOLID), a business entity engaged in the business of selling subdivision lots, for a parcel of land in the Capitol Park Homes Subdivision, Quezon City. The dispute is governed by the provisions of P.D. 957, which regulates the sale of subdivision lots and condominiums, and involves the interplay between the rights of a buyer under an unregistered contract to sell and the rights of a mortgagee under a subsequently registered real estate mortgage.

On October 15, 1969, Contract to Sell No. 36 was executed by the Spouses Canuto and Ma. Aranzazu Oreta and Solid Homes, Inc. (SOLID), involving a parcel of land identified as Block No. 8, Lot No. 1, Phase I of the Capitol Park Homes Subdivision, Quezon City, containing 511 square meters, for a consideration of P39,347.00. Upon signing the contract, the spouses Oreta made a payment amounting to P7,869.40, with the agreement that the balance would be payable in monthly installments of P451.70, at 12% interest per annum. The spouses fully paid the purchase price as of January 7, 1981.

On November 4, 1976, SOLID executed several real estate mortgage contracts in favor of State Investment House Inc. (STATE) over its subdivided parcels of land, one of which was the subject lot covered by Transfer Certificate of Title No. 209642. For failure of SOLID to comply with its mortgage obligations, STATE extra-judicially foreclosed the mortgaged properties, including the subject lot, on April 6, 1983, with the corresponding certificate of sale issued therefor to STATE annotated at the back of the titles covering the said properties on October 13, 1983. On June 23, 1984, SOLID, through a Memorandum of Agreement, negotiated for the deferment of consolidation of ownership over the foreclosed properties by committing to redeem the properties from STATE.

On August 15, 1988, the spouses filed a complaint before the Housing and Land Use Regulatory Board (HLRB) against SOLID and STATE for failure on the part of SOLID "to execute the necessary absolute deed of sale as well as to deliver title to said property x x x in violation of the contract to sell x x x," despite full payment of the purchase price. In its Answer, SOLID, by way of alternative defense, alleged that the obligations under the Contract to Sell had become so difficult that the respondents be partially released from said obligation by substituting the subject lot with another suitable residential lot from another subdivision which respondents own/operates. STATE, to which the subject lot was mortgaged, averred that unless SOLID pays the redemption price of P125,1955.00 (sic), it has "a right to hold on and not release the foreclosed properties."

The OAALA found that "at the time the lot was mortgaged, respondent State Investment House, Inc., [now petitioner] had been aware of the lot's location and that said lot formed part of Capital Park/Homes Subdivision." STATE admitted to being a financing institution. The Court took judicial notice of the uniform practice of financing institutions to investigate, examine and assess the real property offered as security for any loan application, especially where the subject property is a subdivision lot located at Quezon City.

• Superiority of Registered Rights: Petitioner argued that the respondent court erred in ruling that private respondent spouses Oreta's unregistered rights over the subject property are superior to the registered mortgage rights of petitioner State Investment House, Inc. (STATE).
• Torrens Title Reliance: Petitioner argued that the respondent court erred in not applying the settled 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, asserting that a purchaser or mortgagee of land covered under the Torrens System "is not required to do more than rely upon the certificate of title [for] it is enough that the [purchaser or mortgagee] examines the pertinent certificate of title [without] need [of] look[ing] beyond such title."
• Alternative Relief: Petitioner admitted the superior rights of respondents-spouses Oreta over the subject property as it did not pray for the nullification of the contract between respondents-spouses and SOLID, but instead asked for the payment of the release value of the property in question, plus interest, attorney's fees and costs of suit against SOLID or, in case of the latter's inability to pay, against respondents-spouses before it can be required to release the title of the subject property in favor of the respondent spouses.

N/A — The decision does not recount the specific arguments raised by the respondents-spouses Oreta or the other respondents in their defense.

• Superiority of Rights: Whether the unregistered rights of the spouses Oreta over the subject property are superior to the registered mortgage rights of petitioner State Investment House, Inc. (STATE).
• Application of the Torrens Rule: Whether the settled 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 should apply to petitioner, a financing institution.

• Superiority of Rights: Yes. The unrecorded sale between respondents-spouses and SOLID is preferred over STATE's registered mortgage right because if the original owner (SOLID) had parted with his ownership of the thing sold, then he no longer had ownership and free disposal of that thing so as to be able to mortgage it again. Registration of the mortgage is of no moment since it is understood to be without prejudice to the better right of third parties.
• Application of the Torrens Rule: No. The general rule that a purchaser or mortgagee is not required to explore further than what the Torrens Title upon its face indicates admits of an exception where the purchaser or mortgagee has knowledge of a defect or lack of title in his vendor, or was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the title. Petitioner, as a financing institution, was well aware that it was dealing with SOLID, a business entity engaged in the business of selling subdivision lots, and had constructive knowledge of the defect in the title of the subject property, or lacked such knowledge due to its negligence, which takes the place of registration of the rights of respondents-spouses.

• Superiority of Rights: The Court found the respondent court's ruling on the first assigned error to be well-founded. Citing Reyes, et al. vs. De Leon, the Court held that the unrecorded sale between respondents-spouses and SOLID is preferred because if the original owner (SOLID) had parted with his ownership of the thing sold, then he no longer had ownership and free disposal of that thing so as to be able to mortgage it again. The Court further noted that registration of the mortgage is of no moment since it is understood to be without prejudice to the better right of third parties, citing Rivera vs. Moran.

• Application of the Torrens Rule: The Court acknowledged the general rule that where there is nothing in the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title upon its face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. However, the Court noted that this rule admits of an exception where the purchaser or mortgagee has knowledge of a defect or lack of title in his vendor, or that he was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the title of the property in litigation. In this case, petitioner was well aware that it was dealing with SOLID, a business entity engaged in the business of selling subdivision lots, and the OAALA found that at the time the lot was mortgaged, petitioner had been aware of the lot's location and that said lot formed part of Capital Park/Homes Subdivision.

The Court applied the ruling in Sunshine Finance and Investment Corp. vs. Intermediate Appellate Court, which deviated from the general rule because of the failure of the petitioner therein, a financing corporation, to take the necessary precautions to ascertain if there was any flaw in the title of the mortgagors and to examine the condition of the property they sought to mortgage. The Court quoted the ruling that an investment and financing corporation is presumed to be experienced in its business, and that ascertainment of the status and condition of properties offered to it as security for the loans it extends must be a standard and indispensable part of its operations. The Court held that this rule should apply in the present case as petitioner admits to being a financing institution. The Court took judicial notice of the uniform practice of financing institutions to investigate, examine and assess the real property offered as security for any loan application, especially where the subject property is a subdivision lot located at Quezon City. The Court concluded that petitioner's constructive knowledge of the defect in the title of the subject property, or lack of such knowledge due to its negligence, takes the place of registration of the rights of respondents-spouses, and that respondent court correctly ruled that petitioner was not a purchaser or mortgagee in good faith.

• Prior Unregistered Rights vs. Subsequent Registered Mortgage — Where the original owner has parted with ownership of the thing sold, he no longer has ownership and free disposal of that thing so as to be able to mortgage it again. The unrecorded sale between the buyer and the seller is preferred over a subsequently registered mortgage, and registration of the mortgage is understood to be without prejudice to the better right of third parties. The Court applied this doctrine to hold that the spouses Oreta's unregistered rights over the subject property were superior to STATE's registered mortgage rights.

• Exception to the Torrens Rule (Mortgagee in Good Faith) — The general rule that a purchaser or mortgagee is not required to explore further than what the Torrens Title upon its face indicates admits of an exception where the purchaser or mortgagee has knowledge of a defect or lack of title in his vendor, or was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the title of the property in litigation. A purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. The Court applied this exception to hold that STATE, as a financing institution, was not a mortgagee in good faith.

• Duty of Financing Institutions to Investigate Properties — Financing institutions are presumed to be experienced in their business, and ascertainment of the status and condition of properties offered to them as security for the loans they extend must be a standard and indispensable part of their operations. They cannot simply rely on an examination of a Torrens certificate to determine what the subject property looks like, as its condition is not apparent in the document. The Court took judicial notice of the uniform practice of financing institutions to investigate, examine and assess the real property offered as security for any loan application, especially where the subject property is a subdivision lot.

• "The unrecorded sale between respondents-spouses and SOLID is preferred for the reason that if the original owner (SOLID, in this case) had parted with his ownership of the thing sold then he no longer had ownership and free disposal of that thing so as to be able to mortgage it again." — This passage states the ratio decidendi for the first issue, establishing the superiority of the prior unregistered rights of the buyers over the subsequently registered mortgage.

• "This rule, however, admits of an exception as where the purchaser or mortgagee, has knowledge of a defect or lack of title in his vendor, or that he was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the title of the property in litigation." — This passage defines the exception to the general rule on reliance on the Torrens Title, which is the controlling doctrine for the second issue.

• "We presume it is experienced in its business. Ascertainment of the status and condition of properties offered to it as security for the loans it extends must be a standard and indispensable part of its operations. Surely, it cannot simply rely on an examination of a Torrens certificate to determine what the subject property looks like as its condition is not apparent in the document." — This passage, quoted from Sunshine Finance and Investment Corp. v. Intermediate Appellate Court, articulates the standard of care expected of financing institutions when dealing with properties offered as security.

• "Petitioner's constructive knowledge of the defect in the title of the subject property, or lack of such knowledge due to its negligence, takes the place of registration of the rights of respondents-spouses." — This passage states the legal effect of the petitioner's constructive knowledge or negligence, which is the basis for holding that petitioner was not a mortgagee in good faith.

• Reyes, et al. vs. De Leon, 126 Phil. 710 — Cited as controlling precedent for the rule that the unrecorded sale between the buyer and the seller is preferred over a subsequently registered mortgage because the original owner, having parted with ownership, no longer has the right to mortgage the property.

• Rivera vs. Moran, 48 Phil. 836 — Cited to support the proposition that registration of the mortgage is understood to be without prejudice to the better right of third parties.

• Sunshine Finance and Investment Corp. vs. Intermediate Appellate Court, 203 SCRA 210 — Followed as controlling precedent for the rule that a financing corporation cannot simply rely on an examination of a Torrens certificate and must take the necessary precautions to ascertain if there was any flaw in the title of the mortgagor and to examine the condition of the property sought to be mortgaged.

• Capitol Subdivision vs. Province of Negros Occidental, 7 SCRA 60 — Cited to support the exception to the general rule on reliance on the Torrens Title where the purchaser or mortgagee has knowledge of a defect or lack of title in his vendor.

• Crisostomo vs. Court of Appeals, 197 SCRA 833 — Cited to support the settled rule that a purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith.

• Section 25, P.D. 957 — The provision under which the administrative fine of P6,000.00 was imposed on SOLID by the OAALA, in relation to Section 38 of the same decree.

• Section 38, P.D. 957 — The provision cited in relation to Section 25 for the imposition of the administrative fine on SOLID.

• Narvasa, C.J. (Chairman)
• Davide, Jr., J.
• Melo, J.
• Panganiban, J.

N/A — There were no dissenting opinions noted in the case text.