In the case of Philippine National Bank vs. Heirs of Estanislao Militar, the Supreme Court ruled that a bank cannot claim to be a mortgagee in good faith if it fails to exercise due diligence in verifying the ownership and actual possession of a property offered as collateral. This decision emphasizes that banks must conduct thorough inquiries beyond simply relying on the face of the title, especially when the property is occupied by persons other than the mortgagor. The ruling serves as a caution for financial institutions to diligently investigate real estate transactions to protect themselves and the public from fraudulent activities involving land titles. Failure to do so will void the protection typically afforded to mortgagees in good faith, impacting their rights in foreclosure proceedings.

Unraveling Deception: When Due Diligence Exposes a Mortgagee’s Claim of Good Faith

The case revolves around a property dispute that originated from a fraudulent sale. Spouses Rodolfo and Nilda Jalbuna, through deceitful means, obtained titles to land that rightfully belonged to the heirs of Estanislao Militar. Subsequently, they mortgaged one of the lots to Philippine National Bank (PNB). Upon defaulting on the loan, PNB foreclosed the mortgage and later sold the property to spouses Johnny and Nona Lucero. The heirs of Militar then filed a case seeking to annul the sales and recover the land, claiming the original transactions were fraudulent. This legal battle raised a critical question: Can PNB and spouses Lucero be considered innocent parties if the titles they relied upon were derived from fraudulent transactions?

The lower court initially dismissed the heirs’ complaint, citing prescription and the good faith of PNB and the Luceros. However, the Court of Appeals reversed this decision, finding that PNB and the Luceros were not innocent purchasers for value. The appellate court highlighted their failure to conduct adequate inquiries into the actual possession of the property, thereby negating their claim of good faith. This led to the Supreme Court, where the central issue was whether PNB and spouses Lucero exercised the level of diligence expected of them, especially given that individuals other than the sellers occupied the property. The Supreme Court emphasized the principle that a person dealing with registered land is not automatically protected if circumstances suggest a need for further investigation.

Building on this principle, the Court delved into the concept of an indispensable party, defining it as one whose interest will be affected by the court’s action in the litigation. The absence of such a party prevents a final determination of the case. In this instance, the Court clarified that not all heirs needed to be joined in the action for reconveyance because the suit aimed to revert the titles to the estates of the deceased co-owners, whose interests remained undivided. Thus, any single co-heir can bring action for the benefit of all.

Art. 1003. If there are no descendants, ascendants, illegitimate children, or a surviving spouse, the collateral relatives shall succeed to the entire estate of the deceased in accordance with the following articles.

Central to the case was the determination of whether PNB and the Luceros qualified as mortgagees and buyers in good faith, respectively. The Court reiterated that the burden of proving good faith lies upon the one asserting it and emphasized the need for a higher degree of diligence for banks. The Court cited Tomas v. Tomas, reminding that it is standard practice for banks to send representatives to the property offered as collateral to assess its actual condition and to investigate who are the real owners thereof. This contrasts sharply with the actions taken by PNB. Failing this degree of care, a banking institution cannot be deemed a mortgagee in good faith.

The Court highlighted the importance of investigating the rights of those in possession of the property. PNB argued it conducted an inquiry and believed Nilda Jalbuna had the right to mortgage the land, but the Court found this insufficient. Spouses Lucero also failed to inquire from the possessors of the property, they could have easily determined the true ownership of the property by a simply inquiry.

Moreover, the Supreme Court addressed the issue of prescription, emphasizing that an action for reconveyance based on a fictitious deed of sale is effectively an action for the declaration of nullity, which does not prescribe. Similarly, the doctrine of laches, which is based on equity, cannot override statutory law that confers imprescriptibility to actions for declaring the inexistence of a contract. The court then applied these considerations:

Certificates of title, while indefeasible, cannot be used to protect a usurper from the true owner or to perpetrate fraud; they merely confirm or record an already existing title and cannot enrich one at the expense of others.

FAQs

What was the key issue in this case?	The key issue was whether Philippine National Bank (PNB) and spouses Lucero could be considered mortgagees and buyers in good faith, respectively, despite a fraudulent transaction in the chain of title. This hinged on whether they exercised due diligence in verifying the property’s ownership and possession.
What does it mean to be a ‘mortgagee in good faith’?	A ‘mortgagee in good faith’ refers to someone who, in securing a mortgage, acts honestly, with reasonable care, and without knowledge of any defect in the mortgagor’s title. This status usually protects the mortgagee’s rights, but can be invalidated by a lack of due diligence.
What duty of care do banks have in mortgage transactions?	Banks have a higher duty of care than private individuals because their business is affected with public interest. This includes thoroughly investigating the property offered as collateral and verifying the real owners and occupants.
What is an action for reconveyance, and when does it prescribe?	An action for reconveyance seeks to transfer the title of a property back to its rightful owner. If based on fraud or a void contract, such as a fictitious sale, it is considered imprescriptible, meaning it does not have a statute of limitations.
What is the legal concept of ‘laches’?	Laches is a doctrine in equity where a right or claim is not enforced or pursued for a period of time, especially when it prejudices another party. However, laches cannot override statutory laws, such as the imprescriptibility of actions for void contracts.
Who is considered an indispensable party in a legal case?	An indispensable party is someone whose interest will be affected by the court’s action and without whom the case cannot be fully resolved. Their presence is essential for a complete and fair adjudication of the issues.
What happens if a buyer doesn’t investigate the property’s occupants?	If a buyer fails to inquire about the rights of those occupying a property, they are less likely to be considered a buyer in good faith. This can jeopardize their claim to the property, especially if there are underlying title issues.
Why didn’t all the heirs of Militar need to be part of the case?	Since the action aimed to revert the property to the estates of the original co-owners, not to distribute individual shares, it was sufficient for one or more heirs to represent the collective interest. This simplifies the legal process while protecting everyone’s rights.

This case serves as a strong reminder that good faith in property transactions requires more than just reliance on a clean title. It necessitates thorough investigation and due diligence, especially for financial institutions. This principle safeguards against fraud and ensures the integrity of land titles in the Philippines.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Philippine National Bank vs. Heirs of Estanislao Militar, G.R. No. 164801 & 165165, August 18, 2005