In the Philippines, a fundamental principle in property law is that a forged deed is generally null and conveys no title. This case clarifies the rights of a property owner whose title was fraudulently transferred and subsequently mortgaged. The Supreme Court emphasizes that a mortgagee’s claim of “good faith” is a defense that must be proven during trial, not a basis for dismissing a case outright. This ruling protects the rights of legitimate property owners against fraudulent transactions.

When a Forged Deed Leads to a Bank Mortgage: Who Bears the Loss?

Marie Iole Nacua-Jao entrusted her property title to Lee Ching Hsien, who then fraudulently sold the land to Spouses Gan. The Spouses Gan, in turn, mortgaged the property to China Banking Corporation (CBC). Jao filed a complaint seeking to nullify the transfer of title and the mortgage. CBC moved to dismiss the complaint, arguing that Jao had no cause of action against them. The Regional Trial Court (RTC) granted CBC’s motion, a decision upheld by the Court of Appeals (CA). The central legal question is whether CBC, as a mortgagee, had a duty to ascertain the validity of the Spouses Gan’s title before accepting the mortgage.

The Supreme Court reversed the CA’s decision, holding that Jao’s complaint did state a cause of action against CBC. The Court emphasized the established principle that a forged deed is a nullity and transfers no title. As the Court stated:

That from the foregoing, therefore, it is very evident that defendants had connived and conspired to effect the so-called sale and mortgage of Lot No. 561 and the transfer of the title thereof to Gan spouses’ name.

The complaint alleged that Jao was the original owner, that her title was illegally canceled based on a forged deed, and that CBC accepted the property as security despite the void title of Spouses Gan. These allegations, if proven true, could entitle Jao to the cancellation of the mortgage. The Court reiterated that in a motion to dismiss based on failure to state a cause of action, the allegations in the complaint are hypothetically admitted.

CBC argued that it was a mortgagee in good faith, meaning it had no knowledge of the fraud and relied on the clean title presented by the Spouses Gan. However, the Supreme Court clarified that **good faith is a matter of defense** that must be proven during trial. Dismissing the complaint before resolving this issue would be premature. The Court cited precedent:

We already ruled that the claim that a mortgagee is one in good faith is a matter of defense which should be determined during the trial.

The Court also addressed the issue of whether Jao’s complaint sufficiently alleged CBC’s participation in the fraud. The complaint stated that CBC “connived and conspired” with the Spouses Gan. While this allegation may seem general, the Court found it sufficient as a statement of ultimate fact. An **ultimate fact** is a principal, determinative fact upon which the cause of action rests. If CBC required more specifics, its proper recourse was a motion for a bill of particulars, not a motion to dismiss.

The Supreme Court further underscored that CBC was an **indispensable party** to the case. Without CBC, the court could not render a complete judgment on the validity of TCT No. T-602202, on which CBC’s mortgage was annotated. An indispensable party is one whose interest will be affected by the outcome of the case, and without whom a final determination cannot be reached.

This case highlights the importance of due diligence in real estate transactions. While mortgagees are often protected as innocent third parties, they cannot turn a blind eye to red flags or potential irregularities. The burden is on the mortgagee to prove that it acted in good faith and without knowledge of any defect in the mortgagor’s title. The ruling underscores the principle that a forged deed conveys no title and that individuals cannot be deprived of their property rights through fraud.

FAQs

What was the key issue in this case?	The key issue was whether a complaint stated a cause of action against a bank that accepted a mortgage on a property with a title derived from a forged deed.
What is a “mortgagee in good faith”?	A “mortgagee in good faith” is a lender who, without knowledge of any defect in the borrower’s title, accepts a mortgage on a property as security for a loan.
Does a forged deed transfer ownership of property?	No. The Supreme Court clearly stated that a forged deed is a nullity and transfers no title whatsoever.
What is an “ultimate fact” in legal terms?	An “ultimate fact” refers to the principal, determinative facts upon which a cause of action rests; it’s a key element needed to prove a case.
What is the effect of a Motion to Dismiss?	A Motion to Dismiss, when granted, results in the termination of the case; however, in this case, it was improperly granted and reversed by the Supreme Court.
What is the remedy when a pleading is vague?	The proper remedy is a Motion for a Bill of Particulars to seek clarification, rather than a Motion to Dismiss the case entirely.
Why was China Banking Corporation considered an “indispensable party”?	China Banking Corporation was an indispensable party because its mortgage was directly affected by the suit to nullify the title under which the mortgage was constituted.
What did the Supreme Court order in this case?	The Supreme Court ordered the case to be remanded to the trial court for trial on the merits, overturning the dismissal by the lower courts.

This case serves as a reminder of the vulnerabilities present in real estate transactions and emphasizes the need for vigilance. While the legal system strives to protect innocent parties, it also prioritizes the rights of legitimate property owners against fraudulent schemes. This decision underscores the principle that a claim of good faith requires substantiation and cannot be used as a shield to perpetuate injustice.

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: MARIE IOLE NACUA-JAO VS. CHINA BANKING CORPORATION, G.R. NO. 149468, October 23, 2006