In the case of Sps. Felix A. Chua and Carmen L. Chua, et al. vs. United Coconut Planters Bank, et al., the Supreme Court ruled that a trustee cannot mortgage properties held in trust without the express written consent of the trustors (owners). This decision reinforces the principle that a trustee’s power is strictly limited by the terms of the trust agreement, protecting the rights of property owners against unauthorized encumbrances. The court emphasized the importance of due diligence on the part of banks in verifying the true ownership of mortgaged properties, especially when trust arrangements are involved, safeguarding the interests of beneficiaries.

The Tangled Web of Mortgages: When a Bank’s Due Diligence Fails

The case revolves around a Joint Venture Agreement (JVA) between the Spouses Chua and Gotesco Properties, Inc., represented by Jose Go, for developing a 44-hectare property in Lucena City. As part of this agreement, the Spouses Chua transferred several parcels of land to Revere Realty and Development Corporation, controlled by Jose Go. A deed of trust was executed, confirming that Revere held these properties in trust for the Spouses Chua. Both the Spouses Chua and Jose Go had existing loan obligations with United Coconut Planters Bank (UCPB) at the time.

Later, the Spouses Chua and UCPB entered into a Memorandum of Agreement (MOA) to consolidate the spouses’ and Lucena Grand Central Terminal, Inc.’s (LGCTI) obligations. To secure these consolidated obligations, the Spouses Chua executed a real estate mortgage (REM) in favor of UCPB. Simultaneously, and unbeknownst to the Spouses Chua, Jose Go, acting for Revere, also executed another REM (Revere REM) over the properties held in trust. When UCPB foreclosed on both REMs, it applied a portion of the proceeds to Jose Go’s obligations, prompting the Spouses Chua to file a complaint, arguing that the Revere REM was invalid and that their obligations had been improperly settled. The central issue before the Supreme Court was whether the Revere REM was valid and whether UCPB properly applied the foreclosure proceeds.

The Supreme Court found that the Revere REM was invalid because Revere, as trustee, did not have the authority to mortgage the properties without the Spouses Chua’s written consent, as explicitly stated in the deeds of trust. The Court emphasized the legal principle that a trustee’s powers are strictly construed and limited to those expressly granted in the trust agreement. The deeds of trust clearly stated,

“The TRUSTEE hereby acknowledges and obliges itself not to dispose of, sell, transfer, convey, lease or mortgage the said twelve (12) parcels of land without the written consent of the TRUSTORS first obtained.”

This provision unequivocally prohibited Revere from mortgaging the properties without the Spouses Chua’s consent. Building on this principle, the Court also addressed the bank’s responsibility in such transactions. The Court highlighted UCPB’s failure to exercise due diligence in verifying the true ownership of the mortgaged properties. Despite the existence of the deeds of trust, which indicated that Revere held the properties in trust, UCPB proceeded with the mortgage without obtaining the Spouses Chua’s consent.

The Court stated, “By approving the loan application of Revere obviously without making prior verification of the mortgaged properties’ real owners, UCPB became a mortgagee in bad faith.” This underscores the importance of banks conducting thorough investigations to ascertain the real owners of properties offered as collateral, especially when there are indications of trust arrangements or other complexities. This approach contrasts with the bank’s apparent reliance solely on the representation of Revere, without further inquiry into the underlying ownership structure.

Furthermore, the Supreme Court addressed the issue of how the foreclosure proceeds were applied. UCPB had applied a portion of the proceeds to settle Jose Go’s obligations, which the Court found improper. The Court ruled that the foreclosure proceeds should have been applied first to fully satisfy the Spouses Chua’s obligations before any excess was applied to Jose Go’s debts. This ruling is based on the principle that the primary obligor’s debt should be satisfied first before applying proceeds to the debt of a secondary obligor or guarantor.

The Court also clarified that the Memorandum of Agreement (MOA) executed by the Spouses Chua and UCPB consolidated all their outstanding obligations. The Court emphasized that the MOA represented the entire agreement between the parties and that any prior agreements or understandings not incorporated into the MOA were superseded. The Court stated:

“This Agreement constitutes the entire, complete and exclusive statement of the terms and conditions of the agreement between the parties with respect to the subject matter referred to herein. No statement or agreement, oral or written, made prior to the signing hereof and no prior conduct or practice by either party shall vary or modify the written terms embodied hereof, and neither party shall claim any modification of any provision set forth herein unless such modification is in writing and signed by both parties.”

Therefore, the 1997 REM was deemed extinguished by the subsequent MOA. The ruling provides clarity on the legal effect of a Memorandum of Agreement (MOA) in consolidating and restructuring obligations. Parties entering into an MOA must ensure that all prior agreements and understandings are properly integrated to avoid future disputes. This also means any claims of outstanding loans and the sort must be substantiated by evidence.

The Supreme Court’s decision underscores the principle of unjust enrichment, preventing UCPB from unjustly benefiting at the expense of the Spouses Chua. The Court emphasized that unjust enrichment occurs when a person unjustly retains a benefit to the loss of another, without a valid basis or justification. Had the Court upheld the CA’s decision, it would have allowed UCPB to unjustly enrich itself by applying the foreclosure proceeds in a manner that did not fully satisfy the Spouses Chua’s obligations and by pursuing them for a deficiency that no longer existed. This provides assurance that the courts will look out to prevent instances of unfair enrichment.

In essence, the Supreme Court’s decision in this case reinforces several key legal principles: the limited powers of a trustee, the importance of due diligence by banks, the primacy of the trustor’s rights, and the prevention of unjust enrichment. By invalidating the Revere REM and directing the proper application of the foreclosure proceeds, the Court protected the Spouses Chua’s property rights and ensured that UCPB did not unjustly benefit from the situation. The case serves as a reminder to trustees to act strictly within the bounds of their authority and to banks to exercise caution and diligence in their dealings with mortgaged properties.

FAQs

What was the key issue in this case?	The key issue was whether a trustee could mortgage properties held in trust without the express written consent of the trustors (owners). The Supreme Court ruled that the trustee could not, thereby upholding the trustors’ rights.
What is a deed of trust?	A deed of trust is a legal document that outlines the terms and conditions under which one party (the trustee) holds property for the benefit of another party (the beneficiary or trustor). It specifies the trustee’s responsibilities and limitations.
What does it mean for a bank to be a mortgagee in bad faith?	A bank is considered a mortgagee in bad faith if it approves a loan application without properly verifying the true ownership of the mortgaged properties. This typically involves failing to investigate readily available information, such as existing trust arrangements.
What is unjust enrichment?	Unjust enrichment occurs when a person unjustly retains a benefit at the expense of another without a valid legal basis. The law seeks to prevent such situations by requiring restitution or compensation.
What is a Memorandum of Agreement (MOA)?	A Memorandum of Agreement (MOA) is a document outlining an agreement between two or more parties. It typically describes the terms and conditions of the agreement, as well as the responsibilities of each party involved.
What is a real estate mortgage (REM)?	A real estate mortgage (REM) is a legal agreement in which a borrower pledges real property as security for a loan. If the borrower defaults on the loan, the lender has the right to foreclose on the property.
What is the significance of consolidating loan obligations?	Consolidating loan obligations involves combining multiple debts into a single loan. This can simplify repayment and potentially lower interest rates, but it’s crucial to understand the terms and conditions of the consolidation agreement.
How does this case affect the responsibilities of trustees?	This case reinforces that trustees must act strictly within the bounds of their authority as defined in the trust agreement. They cannot dispose of or mortgage trust properties without the express written consent of the trustors.
What should banks do to avoid becoming mortgagees in bad faith?	Banks should conduct thorough due diligence to verify the true ownership of mortgaged properties. This includes investigating any indications of trust arrangements, liens, or other encumbrances.

This case underscores the importance of clear contractual agreements and the protection of property rights within trust arrangements. The Supreme Court’s decision provides valuable guidance for trustees, banks, and property owners alike, emphasizing the need for transparency, due diligence, and adherence to legal principles.

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: SPS. FELIX A. CHUA AND CARMEN L. CHUA, ET AL. VS. UNITED COCONUT PLANTERS BANK, ET AL., G.R. No. 215999, August 16, 2017