When both parties are equally at fault in a contract, Philippine courts apply the principle of pari delicto, meaning neither party can seek legal remedies from the court. They are left in their existing situation at the time the lawsuit is filed. This principle prevents the courts from favoring one wrongdoer over another, ensuring that those who engage in unlawful or immoral acts do not benefit from their actions. This doctrine underscores the importance of good faith and legality in contractual agreements, maintaining the integrity of the Philippine legal system.

Land Dispute: Can a Defaulter Sell Property Already Mortgaged?

This case, Luz S. Nicolas v. Leonora C. Mariano, revolves around a property dispute in Caloocan City. Leonora Mariano, a grantee of land from the National Housing Authority (NHA) under the Bagong Barrio Project, mortgaged and later sold the property to Luz Nicolas despite not fully paying her obligations to the NHA. The core legal question is whether Mariano, who had not yet fully acquired ownership of the property, could validly mortgage or sell it. This issue brings into focus the legal principle of nemo dat quod non habet, which states that one cannot give what one does not have.

The facts of the case reveal that Mariano obtained a land grant from the NHA in 1978, subject to a mortgage. The title, Transfer Certificate of Title (TCT) No. C-44249, was issued in her name, but the original was withheld by the NHA until full payment of the mortgage. Despite this, Mariano entered into a series of transactions with Nicolas. First, she secured a loan of P100,000.00 from Nicolas in 1998, using the property as collateral. When she defaulted, she executed a second mortgage for P552,000.00 in 1999, which included the original loan. By 2000, still unable to pay, Mariano executed a deed of Absolute Sale of Real Property, transferring ownership to Nicolas for P600,000.00.

The Regional Trial Court (RTC) initially ruled in favor of Mariano, citing that the deed of sale was flawed due to a lack of valid consent and consideration. The RTC believed the transactions were merely mortgage contracts and ordered their cancellation. However, the Court of Appeals (CA) partially reversed this decision. While it agreed that the sale was invalid, it did so on the grounds that Mariano was not the true owner of the property because she had not fully paid the NHA. This lack of ownership meant she could not legally transfer the property to Nicolas. The CA also declared both mortgage contracts void and vacated the award of moral damages, applying the principle of pari delicto.

The Supreme Court (SC) upheld the CA’s decision, reinforcing the principle that Mariano could not transfer ownership of what she did not own. The court emphasized that although the TCT was in Mariano’s name, her failure to complete the installment payments to the NHA meant she never fully acquired ownership. The Court cited Lee Tek Sheng v. Court of Appeals, which clarified that a TCT is merely the best proof of ownership, not ownership itself. Furthermore, the SC noted that Nicolas should have been aware of the property’s encumbered status, given that Mariano only possessed a photocopy of the TCT and that the title itself contained entries regarding the NHA mortgage. These circumstances should have alerted Nicolas to the fact that Mariano’s ownership was not absolute.

Article 2085 of the Civil Code requires that a mortgagor must be the absolute owner of the property being mortgaged. Since Mariano was not the absolute owner, the mortgages were void from the beginning. The Supreme Court also highlighted the pari delicto principle, stating that because both Mariano and Nicolas were aware of the questionable nature of their transactions, neither could seek positive relief from the courts. The court reiterated that it would leave them as they were at the time the case was filed, as indicated in Constantino v. Heirs of Pedro Constantino, Jr., quoting Packaging Products Corporation v. National Labor Relations Commission stating that “[n]either one may expect positive relief from courts of justice in the interpretation of their contract. The courts will leave them as they were at the time the case was filed.”

The implications of this decision are significant. It underscores the importance of due diligence in property transactions. Buyers and mortgagees must thoroughly investigate the ownership status of a property before entering into any agreement. This includes verifying the authenticity of the title, checking for any existing liens or encumbrances, and confirming that the seller or mortgagor is indeed the absolute owner. The case also serves as a reminder that the Torrens system of land registration, while providing a degree of security, does not guarantee absolute ownership. As Peralta v. Heirs of Bernardino Abalon stated, it “merely confirms ownership and does not create it.” The ruling reinforces the principle that parties cannot benefit from their own wrongdoing. When both parties are equally at fault, the courts will not intervene to provide relief, leaving them to bear the consequences of their actions.

The Court emphasized that Nicolas was “charged with knowledge of the circumstances surrounding the subject property.” This highlights the principle of constructive notice, where a party is deemed to know facts that they could have discovered through reasonable diligence. In this case, the absence of the original TCT and the annotations on the title should have prompted Nicolas to conduct a more thorough investigation. Her failure to do so contributed to her predicament. Conversely, Mariano’s actions were equally blameworthy. By mortgaging and selling property that she had not fully paid for, she acted in bad faith and could not claim damages or other forms of relief from the court.

The ruling confirms that both parties acted improperly, creating a situation where neither could claim legal remedy. The principle of pari delicto, deeply rooted in Philippine jurisprudence, prevented either party from benefiting from their actions. The Supreme Court’s decision reinforces the need for transparency and honesty in all property transactions. It serves as a warning to those who attempt to circumvent legal requirements or take advantage of others, highlighting that the courts will not reward such behavior. The decision also clarifies the scope and limitations of the Torrens system, reminding parties that registration under the system does not automatically guarantee indefeasible ownership.

In this case, the Supreme Court sends a clear message: parties engaging in questionable dealings should expect no assistance from the courts, emphasizing the necessity of lawful conduct in property transactions. The principle of nemo dat quod non habet and the doctrine of pari delicto were central to the court’s decision, providing a framework for resolving disputes where both parties are at fault. As such, the Supreme Court upheld the Court of Appeals decision.

FAQs

What was the key issue in this case?	The key issue was whether Leonora Mariano, who had not fully paid for land granted to her by the NHA, could validly mortgage or sell the property to Luz Nicolas.
What is the principle of nemo dat quod non habet?	This legal principle means that one cannot give what one does not have. In this case, it means Mariano could not transfer ownership of the property to Nicolas because she was not the absolute owner herself.
What is the doctrine of pari delicto?	The doctrine of pari delicto applies when both parties to a contract are equally at fault. In such cases, neither party can seek legal remedies from the court, and they are left in their current situation.
What did the Court rule regarding the mortgage contracts?	The Court ruled that both mortgage contracts were void ab initio (from the beginning) because Mariano was not the absolute owner of the property, violating Article 2085 of the Civil Code.
Why was the deed of sale declared invalid?	The deed of sale was declared invalid because Mariano, as the seller, did not have full ownership of the property. One cannot sell what one does not own.
What does the Torrens system of land registration do?	The Torrens system confirms ownership but does not create it. It provides a system for registering land titles to provide security and notice but does not guarantee absolute ownership if the underlying claim is flawed.
What is constructive notice?	Constructive notice means that a party is considered to know facts that they could have discovered through reasonable diligence. Nicolas was deemed to have constructive notice of the property’s encumbered status.
What was the outcome of the case?	The Supreme Court denied Nicolas’s petition and affirmed the Court of Appeals’ decision, which declared the sale and mortgage contracts void and denied both parties any relief.

This case underscores the critical importance of conducting thorough due diligence before engaging in any property transaction. Verifying ownership, checking for encumbrances, and ensuring all legal requirements are met can prevent significant financial losses and legal disputes. The principles of nemo dat quod non habet and pari delicto serve as important reminders that the courts will not assist those who knowingly participate in unlawful or questionable transactions.

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: Luz S. Nicolas, vs. Leonora C. Mariano, G.R. No. 201070, August 01, 2016