The Supreme Court has affirmed that a properly notarized deed of real estate mortgage carries a strong presumption of genuineness and due execution. This presumption can only be overcome by clear, convincing, and more than merely preponderant evidence of fraud or forgery. This ruling underscores the importance of proper documentation and the high evidentiary standard required to challenge the validity of notarized documents in property transactions, providing legal certainty for lenders and borrowers alike.

Signing on the Dotted Line: Can Allegations of Fraud Overturn a Real Estate Mortgage?

The case of Metropolitan Fabrics, Inc. vs. Prosperity Credit Resources Inc. revolves around a disputed real estate mortgage. Metropolitan Fabrics, Inc. (MFI) sought a loan from Prosperity Credit Resources Inc. (PCRI), using several land titles as collateral. Later, MFI alleged that the mortgage documents were signed in blank and that PCRI fraudulently filled them with unfavorable terms. This led to a legal battle over the validity of the mortgage and the subsequent foreclosure of the properties.

The central legal question was whether MFI could successfully prove fraud in the execution of the real estate mortgage, thereby nullifying the agreement. The outcome hinged on the evidentiary weight given to the notarized deed of mortgage and the standard of proof required to overcome its presumption of regularity. This case highlights the tension between protecting borrowers from potential lender abuse and upholding the integrity of notarized documents in commercial transactions.

The Regional Trial Court (RTC) initially ruled in favor of MFI, declaring the real estate mortgage and foreclosure null and void. However, the Court of Appeals (CA) reversed this decision, finding that MFI failed to present clear and convincing evidence of fraud. The CA emphasized the presumption of regularity afforded to notarized documents and noted inconsistencies in the testimony of MFI’s witness. The appellate court also pointed out that MFI’s actions, such as requesting postponements of the foreclosure sale and negotiating partial redemption, suggested an acknowledgment of the mortgage’s validity.

The Supreme Court upheld the CA’s decision, reiterating the high standard of proof required to challenge the genuineness and due execution of a notarized document. According to Article 1338 of the Civil Code, fraud exists when one party uses insidious words or machinations to induce the other party into a contract they would not otherwise enter. However, such fraud must be the causal inducement (dolo causante), not merely incidental (dolo incidente). It is not presumed but must be proved by clear and convincing evidence. The court emphasized that a person is presumed to take ordinary care of their concerns, and private transactions are presumed fair and regular, as stated in Section 3(p), Rule 131 of the Rules of Court.

“Fraud cannot be presumed but must be proved by clear and convincing evidence. Whoever alleges fraud affecting a transaction must substantiate his allegation, because a person is always presumed to take ordinary care of his concerns, and private transactions are similarly presumed to have been fair and regular.”

Building on this principle, the Supreme Court noted that the deed of real estate mortgage was a public document, having been acknowledged before a notary public. This conferred a presumption of regularity and due execution, meaning it was admissible in evidence without further proof of authenticity and entitled to full faith and credit. As the court explained, rebutting such a document requires evidence that is clear, convincing, and more than merely preponderant.

The Court found that MFI failed to meet this burden. The testimony of Vicky Ang, MFI’s sole witness, was deemed insufficient, especially since she was not a signatory to the deed. The signatories themselves did not testify to the alleged fraud, weakening MFI’s case. Furthermore, MFI’s actions, such as surrendering the land titles, requesting postponements of the foreclosure sale, and negotiating partial redemption, contradicted their claim of fraud. In essence, their behavior indicated an acceptance of the mortgage’s validity, despite their later allegations.

Adding to MFI’s troubles was their argument of lack of consent. Petitioners claimed that the CA committed a reversible error in not holding that the absence of consent made the deed of real estate mortgage void, not merely voidable. However, the Supreme Court found that this argument lacked a firm foundation. The records showed that MFI agreed to mortgage their properties as security for their loan and signed the deed of mortgage for that purpose. They also delivered the TCTs of the properties to the respondents. Ultimately, the court held that even if there was fraud, it made the contract voidable, not void ab initio, as stated in First Philippine Holdings Corporation v. Trans Middle East (Phils.) Equities, Inc.

Because the contract was deemed voidable due to fraud, the prescriptive period for filing an action to annul the real estate mortgage had lapsed. Article 1390 in relation to Article 1391 of the Civil Code stipulates that actions based on fraud must be brought within four years from the discovery of the fraud. The discovery is reckoned from the registration of the document in the Register of Deeds, which serves as notice to the whole world. As stated in People v. Villalon, registration serves as notice to the whole world.

In this case, the mortgage was registered on September 5, 1984, meaning MFI had until September 5, 1988, to contest its validity. Their complaint was filed in the RTC on October 10, 1991, well beyond the prescriptive period. The Supreme Court thus ruled that the action was time-barred and should be dismissed.

FAQs

What was the key issue in this case?	The key issue was whether Metropolitan Fabrics, Inc. (MFI) could successfully prove fraud in the execution of a real estate mortgage to nullify the agreement and subsequent foreclosure. The Supreme Court assessed the evidence presented by MFI against the presumption of regularity of the notarized deed of mortgage.
What standard of evidence is required to prove fraud in a contract?	Fraud must be proven by clear and convincing evidence, not merely alleged or presumed. The party alleging fraud must substantiate their claim with sufficient proof to overcome the presumption of regularity in private transactions.
What is the legal effect of a notarized document?	A notarized document, such as a deed of real estate mortgage, carries a presumption of regularity and due execution. It is admissible in evidence without further proof of authenticity and is entitled to full faith and credit upon its face.
What is the difference between a void and a voidable contract?	A void contract is invalid from the beginning and has no legal effect, while a voidable contract is valid and binding until annulled due to a defect like fraud or lack of consent. In this case, the court deemed the contract voidable, not void.
What is the prescriptive period for annulling a contract based on fraud?	The prescriptive period for annulling a contract based on fraud is four years from the discovery of the fraud. This discovery is reckoned from the time the document was registered in the Register of Deeds, serving as notice to the whole world.
Why was the testimony of Vicky Ang insufficient to prove fraud?	Vicky Ang was not a signatory to the deed of real estate mortgage. The signatories themselves did not testify to the alleged fraud, and her testimony lacked corroboration and was contradicted by MFI’s actions.
How did MFI’s actions affect their claim of fraud?	MFI’s actions, such as surrendering the land titles, requesting postponements of the foreclosure sale, and negotiating partial redemption, suggested an acknowledgment of the mortgage’s validity. These actions contradicted their claim of fraud and weakened their case.
What was the significance of MFI’s failure to act within the prescriptive period?	MFI’s failure to file their complaint within four years of the mortgage’s registration meant that their action to annul the mortgage was time-barred. As such, the Supreme Court upheld the Court of Appeals’ decision dismissing their complaint.

In conclusion, the Supreme Court’s decision in Metropolitan Fabrics, Inc. vs. Prosperity Credit Resources Inc. reinforces the legal principle that notarized documents hold significant evidentiary weight and can only be overturned by clear and convincing proof of fraud. This ruling provides clarity and stability in property transactions, emphasizing the importance of due diligence and timely action in asserting legal rights.

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: Metropolitan Fabrics, Inc. vs. Prosperity Credit Resources Inc., G.R. No. 154390, March 17, 2014