Torres vs. Court of Appeals

A certificate of title derived from a forged instrument cannot prevail over the true owner's valid and existing certificate of title, even as against an innocent mortgagee for value. The doctrine that a forged instrument may become the root of a valid title applies only where the forger obtains the owner's duplicate certificate and transfers it to an innocent holder for value; where the owner retains a valid and existing certificate, his title remains indefeasible against the whole world.

Mariano Torres was the registered owner of a parcel of land at the corner of Quezon Boulevard and Raon Street (now Gonzalo Street), Manila, and the building erected thereon known as "M. Torres Building," covered by Transfer Certificate of Title No. 53628. Francisco Fernandez was Torres' brother-in-law. Rosario Mota was the wife of Ernesto Cue; the Spouses Cue extended loans to Fernandez secured by mortgages over the subject realties. The National Treasurer was impleaded as custodian of the Assurance Fund under the Land Registration Law. The dispute arose within the framework of the Torrens system of land registration, governed by Act 496 (the Land Registration Law) and Presidential Decree No. 1529 (the Property Registration Decree), which provide for the indefeasibility of certificates of title and the creation of an Assurance Fund to indemnify persons suffering loss by reason of the operation of the Torrens system.

Mariano Torres was the registered owner of a parcel of land located at the corner of Quezon Boulevard and Raon Street (now Gonzalo Street), Manila, and the building erected thereon known as "M. Torres Building," as evidenced by Transfer Certificate of Title No. 53628 issued in his name. Torres remained in possession of the realties, held his owner's duplicate certificate of title, paid real estate taxes thereon at least until 1971, and collected rentals from tenants occupying the building.

Sometime in 1966, Francisco Fernandez, Torres' brother-in-law, filed a petition with the Court of First Instance of Manila docketed as LRC GLRO Cad. Rec. No. 133, misrepresenting himself as Torres' attorney-in-fact and falsely alleging that the duplicate copy of TCT No. 53628 was lost. Fernandez succeeded in obtaining a court order for the issuance of another copy of the certificate. Once in possession thereof, he forged a simulated deed of sale of the realties in his favor, resulting in the cancellation of TCT No. 53628 and the issuance of TCT No. 86018 in his name.

On various dates from December 1966 to November 1967, Fernandez mortgaged the realties to Rosario Mota, wife of Ernesto Cue, and also to Angela Fermin, who later assigned her credit to the Spouses Cue. The mortgages and the deed of assignment were annotated at the back of TCT No. 86018. Torres, who still held his owner's duplicate certificate and continued collecting rentals, upon learning of the fraud, caused the annotation of a notice of adverse claim on Fernandez's TCT on March 18, 1968. On March 30, 1968, Torres filed Civil Case No. 72494 against Fernandez to annul TCT No. 86018 and the LRC proceedings, and on April 2, 1968, a notice of lis pendens was annotated at the back of Fernandez's TCT.

Fernandez failed to pay his loans, prompting the Cues to institute an extrajudicial foreclosure. Fernandez filed Civil Case No. 75643 against the Cues for annulment of the mortgage with preliminary injunction. After the foreclosure was enjoined, the parties entered into an amicable settlement, approved by the court, whereby Fernandez acknowledged his debt of ₱562,955.28 and promised to pay on or before March 30, 1970, while the Cues bound themselves to execute documents releasing the mortgages upon receipt of payment. Before Fernandez could comply, a decision was rendered in Civil Case No. 72494 declaring the LRC proceedings void and TCT No. 86018 without force and effect. Fernandez appealed to the Court of Appeals, which affirmed on April 20, 1979, and the judgment became final.

Fernandez failed to comply with the amicable settlement, and the Cues obtained a writ of execution. The subject realties were levied upon and sold at public auction, where Rosario Mota was the highest bidder. On August 31, 1971, after the redemption period lapsed without redemption by either Fernandez or Torres, Mota was issued the Sheriff's Deed of Sale, TCT No. 86018 was canceled, and TCT No. 105953 was issued in her name. On December 7, 1971, Mota notified the tenants of the building that she was the new owner and directed them to pay rentals to her.

On December 17, 1971, Torres filed Civil Case No. 85753 against Fernandez and the Cues to restrain the latter from collecting rentals and to declare TCT No. 105953 void. The Cues filed a cross-claim against the Fernandez spouses and a third-party complaint against the National Treasurer as custodian of the Assurance Fund. Torres died sometime in 1974 and was substituted by his widow. On June 3, 1977, the trial court rendered judgment declaring TCT No. 105953 null and void, upholding TCT No. 53628 as the true evidence of title, and dismissing the Cues' cross-claim and third-party complaint. The Court of Appeals reversed on July 30, 1982, holding Mota legally entitled to the realties as an innocent mortgagee. Torres elevated the case to the Supreme Court via petition for review.

• Execution Sale vs. Foreclosure Sale: Petitioner argued that the properties were sold on execution, not on foreclosure sale, and therefore the purchaser was bound by his notice of adverse claim and lis pendens annotated at the back of Fernandez's TCT.
• Indefeasibility of Original Title: Petitioner contended that the doctrine that a forged instrument may become the root of a valid title cannot apply where the true owner still holds a valid and existing certificate of title covering the same property.

• Innocent Mortgagee Status: Respondents argued that Rosario Mota was an innocent mortgagee protected under Section 55 of the Land Registration Law, and that Torres was bound by the mortgage on Fernandez's title.
• Validity of Foreclosure and Title: Respondents maintained that the foreclosure sale, where Mota was the highest bidder, bound Torres, and that the certificate of title issued in Mota's name prevailed over Torres's certificate.

• Nature of the Sale: Whether the sale of the subject realties was an execution sale or a foreclosure sale, and whether the purchaser was bound by the notice of adverse claim and lis pendens annotated on the forged title.
• Indefeasibility of Title: Whether the doctrine that a forged instrument may become the root of a valid title applies where the true owner still holds a valid and existing certificate of title.
• Innocent Mortgagee Protection: Whether an innocent mortgagee's title can prevail over the original owner's valid and existing certificate of title.
• Recovery from the Assurance Fund: Whether the Cues are entitled to recover from the Assurance Fund for the loss sustained.

• Nature of the Sale: The properties were sold on execution, not on foreclosure sale. The purchaser was therefore bound by Torres's notice of adverse claim and lis pendens annotated at the back of Fernandez's TCT.
• Indefeasibility of Title: No. The doctrine that a forged instrument may become the root of a valid title cannot apply where the owner still holds a valid and existing certificate of title. The owner's title is indefeasible against the whole world.
• Innocent Mortgagee Protection: No. Even granting Mota the status of an innocent mortgagee, no certificate of title covering the subject realties in derogation of Torres's certificate may validly be issued.
• Recovery from the Assurance Fund: No. The Cues were negligent in protecting their interests and failed to contest the trial court's ruling negating the liability of the Assurance Fund.

• Nature of the Sale: The Court of Appeals erroneously treated the sale as a foreclosure sale. The records show that the Cues obtained a writ of execution to enforce the compromise agreement in Civil Case No. 75643, and the properties were levied upon and sold at public auction pursuant to that writ. As an execution sale, the purchaser was bound by the notice of adverse claim annotated on March 18, 1968 and the notice of lis pendens annotated on April 2, 1968, both of which appeared on the back of Fernandez's TCT No. 86018. These annotations served as constructive notice to all persons dealing with the property, including Mota.

• Indefeasibility of Title: The doctrine that a forged instrument may become the root of a valid title applies only where the forger, through insidious means, obtains the owner's duplicate certificate of title, converts it to his name, and subsequently sells or encumbers it to an innocent holder for value — as in De la Cruz vs. Fable, Fule vs. De Legare, and Republic vs. Umali. In such cases, the new certificate is binding upon the owner under Section 55 of Act 496 and Section 53 of P.D. No. 1529. But where the owner holds a valid and existing certificate of title, his title is indefeasible against the whole world, and not that of the innocent holder's. The principle "prior tempore potior jure" applies. Torres never parted with his owner's duplicate certificate, never delivered it to anyone, and could not be charged with negligence in its keeping. A certificate is not conclusive evidence of title if it is shown that the same land had already been registered and an earlier certificate for the same land is in existence.

• Innocent Mortgagee Protection: Even if Mota were granted the status of an innocent mortgagee, no certificate of title covering the subject realties in derogation of Torres's certificate could validly be issued. As between two persons both in good faith and both innocent of any negligence, the law must protect and prefer the lawful holder of registered title over the transfer of a vendor bereft of any transmissible rights. The Cues' remaining remedies are to go against Fernandez or his estate, or the Assurance Fund.

• Recovery from the Assurance Fund: The trial court found the Cues negligent in protecting their interests. The property was very valuable, accepted as collateral for more than half a million pesos; its value lay principally in its income potential in the form of substantial monthly rentals. A prudent mortgagee would have inquired into who was collecting rentals and who was recognized by tenants as landlord. Furthermore, the visible dimensions of the M. Torres Building made it obvious that the area covered by TCT No. 86018 could not accommodate the building, as it also rested upon a lot covered by TCT No. 56387 and partly upon a lot leased by Torres from the City of Manila. The Cues also failed to investigate the payment of real estate taxes. The Office of the Solicitor General manifested that the Cues failed to contest the trial court's ruling negating the liability of the Assurance Fund. The Cues' remedy is to proceed against Fernandez's estate.

• Indefeasibility of the Original Owner's Title — A certificate of title derived from a forged instrument cannot prevail over the true owner's valid and existing certificate of title, even against an innocent holder for value. The doctrine that a forged instrument may become the root of a valid title applies only where the forger obtains the owner's duplicate certificate and transfers it to an innocent holder for value. Where the owner retains a valid and existing certificate, his title is indefeasible against the whole world. Applied in this case: Torres never parted with his owner's duplicate, so his TCT No. 53628 prevailed over Mota's TCT No. 105953 derived from the forged TCT No. 86018.

• Prior Tempore Potior Jure — "Earlier in time, stronger in law." As between two certificates of title covering the same land, the earlier one prevails. Applied: Torres's TCT No. 53628, being the earlier valid title, prevailed over all subsequent titles derived from the forged transfer.

• Constructive Notice of Adverse Claim and Lis Pendens — A notice of adverse claim and lis pendens annotated on a certificate of title serves as constructive notice to all persons dealing with the property. In an execution sale, the purchaser is bound by such annotations. Applied: Mota, as purchaser at the execution sale, was bound by the adverse claim and lis pendens annotated on Fernandez's TCT.

• Negligence of Mortgagee Precluding Recovery from Assurance Fund — A person dealing with registered lands need not go beyond the certificate of title, but circumstances such as the substantial value of the property, visible discrepancies between the building and the lot area covered by the title, and the failure to inquire into rental collections and tax payments should put a prudent mortgagee on guard. Negligence in protecting one's interests bars recovery from the Assurance Fund.

• "The claim of indefeasibility of the petitioner's title under the Torrens land title system would be correct if previous valid title to the same parcel of land did not exist. The respondent had a valid title ... It never parted with it; it never handed or delivered to anyone its owner's duplicate of the transfer certificate of title, it could not be charged with negligence in the keeping of its duplicate certificate of title or with any act which could have brought about the issuance of another certificate upon which a purchaser in good faith and for value could rely." — This passage, quoted from C.N. Hodges vs. Dy Buncio & Co., Inc., articulates the controlling doctrine: indefeasibility of a Torrens title cannot defeat a prior valid title held by an owner who never parted with the owner's duplicate.

• "But if the owner holds a valid and existing certificate of title, his would be indefeasible as against the whole world, and not that of the innocent holder's." — This sentence crystallizes the ratio decidendi: the true owner's existing title prevails over any title derived from a forged instrument, regardless of the innocent holder's status.

• "a certificate is not conclusive evidence of title if it is shown that the same land had already been registered and an earlier certificate for the same land is in existence." — Quoted from Register of Deeds vs. PNB, this formulation is frequently cited in subsequent jurisprudence on the limits of Torrens indefeasibility.

• De la Cruz vs. Fable, 35 Phil. 144 (1916) — Cited as an example of a case where the forger obtained the owner's duplicate certificate and transferred it to an innocent holder for value, making the new certificate binding upon the owner. Distinguished from the present case where Torres retained his owner's duplicate.

• Fule vs. De Legare, 7 SCRA 351 (1963) — Similarly cited as an example where the doctrine of a forged instrument becoming the root of a valid title properly applies. Distinguished from the present case.

• Republic vs. Umali, G.R. No. 80687 (April 10, 1989) — Another example case where the forager obtained the owner's duplicate through insidious means. Distinguished.

• C.N. Hodges vs. Dy Buncio & Co., Inc., 6 SCRA 287 (1962) — The source of the controlling doctrine quoted at length: indefeasibility of a Torrens title cannot prevail over a prior valid title where the owner never parted with the owner's duplicate. Followed and applied.

• Register of Deeds vs. Philippine National Bank, 13 SCRA 46 (1965) — Affirmed the principle that a certificate is not conclusive evidence of title if an earlier certificate for the same land is in existence. Followed.

• Baltazar vs. Court of Appeals, 168 SCRA 354 (1988) — Held that as between two persons in good faith, the law protects the lawful holder of registered title over a transfer from a vendor without transmissible rights. Followed.

• Legarda vs. Saleeby, 31 Phil. 590; Roman Catholic Bishop vs. Philippine Railway, 49 Phil. 546; Reyes vs. Borbon, 50 Phil. 791 — Cited in support of the "prior tempore potior jure" principle.

• Section 55, Act 496 (Land Registration Law) — Provides for the rights of an innocent mortgagee or purchaser for value dealing with registered land. The Court acknowledged that this provision protects innocent holders but held it inapplicable where the true owner retains a valid and existing certificate of title.

• Section 53, P.D. No. 1529 (Property Registration Decree) — Corresponds to Section 55 of Act 496 regarding the binding effect of a new certificate upon the owner in cases where the forger obtains the owner's duplicate. Cited to show the limited scope of the doctrine.

Narvasa (Chairman), Cruz, and Gancayco, JJ., concurred.