In the case of Homeowners Savings and Loan Bank vs. Felonia, the Supreme Court clarified that a mortgagee who purchases property with a prior notice of lis pendens (pending litigation) on the title is not considered a purchaser in good faith. This means that even if the bank initially acted in good faith when granting the mortgage, its rights are subject to the outcome of the pending litigation. The Court emphasized that a notice of lis pendens serves as a warning to prospective buyers, and failing to heed this warning means assuming the risks of the ongoing legal battle. Ultimately, this decision underscores the importance of due diligence in real estate transactions, especially regarding potentially encumbered properties.

Navigating Title Disputes: When Does “Good Faith” Protect a Mortgage?

This case revolves around a property dispute between Asuncion Felonia and Lydia de Guzman (respondents) and Marie Michelle Delgado, with Homeowners Savings and Loan Bank (HSLB) entering the picture as a mortgagee. The core legal question is whether HSLB, as a mortgagee, can claim protection as a “mortgagee in good faith” despite a prior notice of lis pendens annotated on the property’s title.

The dispute began when Felonia and De Guzman mortgaged their property to Delgado. Instead of executing a real estate mortgage, they signed a Deed of Absolute Sale with an Option to Repurchase. Subsequently, Felonia and De Guzman filed a case for Reformation of Contract, arguing that the true intention was a mortgage, not a sale. The Regional Trial Court (RTC) ruled in their favor, directing the parties to execute a deed of mortgage. Delgado appealed, but the Court of Appeals (CA) affirmed the RTC’s decision. Despite the pending Reformation case, Delgado filed a Petition for Consolidation of Ownership, which the RTC granted, leading to a new title under Delgado’s name.

In the meantime, Delgado mortgaged the subject property to HSLB, and the mortgage was annotated on the title. Later, Felonia and De Guzman annotated a Notice of Lis Pendens on Delgado’s title, informing the public of the ongoing legal dispute. HSLB foreclosed the property and consolidated ownership in its favor, obtaining a new title. However, the CA later annulled the RTC’s decision in the Consolidation case, declaring Felonia and De Guzman as the absolute owners. This prompted Felonia and De Guzman to file a complaint against Delgado and HSLB, seeking the nullification of the mortgage and foreclosure sale. HSLB argued that it was a mortgagee in good faith and should not be bound by the previous court decisions.

The RTC ruled in favor of Felonia and De Guzman, declaring the mortgage and foreclosure sale null and void, and ordering the cancellation of Delgado’s and HSLB’s titles. The CA affirmed the RTC’s decision with modifications. HSLB appealed to the Supreme Court, arguing that its mortgage lien should be carried over to the restored title of Felonia and De Guzman, citing the protection afforded to a mortgagee in good faith. The Supreme Court denied HSLB’s petition.

Arguably, HSLB was initially a mortgagee in good faith. The Court cited the doctrine of “mortgagee in good faith” as explained in Bank of Commerce v. San Pablo, Jr.:

There is, however, a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising there from are given effect by reason of public policy. This is the doctrine of “the mortgagee in good faith” based on the rule that all persons dealing with property covered by the Torrens Certificates of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title. The public interest in upholding indefeasibility of a certificate of title, as evidence of lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certificate of title.

However, the Court distinguished between a mortgagee in good faith and a purchaser in good faith. The Court emphasized that the rights of the parties in this case are defined not by whether HSLB was initially a mortgagee in good faith, but by whether HSLB became a purchaser in good faith. A purchaser in good faith is defined as one who buys a property without notice that some other person has a right to, or interest in, the property and pays a full and fair price at the time of purchase or before they have notice of the claim or interest of other persons in the property. When a prospective buyer is faced with facts and circumstances as to arouse his suspicion, he must take precautionary steps to qualify as a purchaser in good faith.

The Court underscored the importance of the Notice of Lis Pendens. The Supreme Court held that HSLB could not be considered a purchaser in good faith because the Notice of Lis Pendens was already annotated on the title at the time HSLB purchased the property. As defined by the court, a lis pendens is a Latin term which literally means, “a pending suit or a pending litigation” while a notice of lis pendens is an announcement to the whole world that a real property is in litigation, serving as a warning that anyone who acquires an interest over the property does so at his/her own risk, or that he/she gambles on the result of the litigation over the property. It is a warning to prospective buyers to take precautions and investigate the pending litigation.

The purpose of a notice of lis pendens is to protect the rights of the registrant while the case is pending resolution or decision. With the notice of lis pendens duly recorded and remaining uncancelled, the registrant could rest secure that he/she will not lose the property or any part thereof during litigation. The Court cited Rehabilitation Finance Corp. v. Morales to emphasize the significance of a lis pendens:

The notice of lis pendens in question was annotated on the back of the certificate of title as a necessary incident of the civil action to recover the ownership of the property affected by it. The mortgage executed in favor of petitioner corporation was annotated on the same title prior to the annotation of the notice of lis pendens; but when petitioner bought the property as the highest bidder at the auction sale made as an aftermath of the foreclosure of the mortgage, the title already bore the notice of lis pendens. Held: While the notice of lis pendens cannot affect petitioner’s right as mortgagee, because the same was annotated subsequent to the mortgage, yet the said notice affects its right as purchaser because notice of lis pendens simply means that a certain property is involved in a litigation and serves as a notice to the whole world that one who buys the same does so at his own risk.

In conclusion, the Supreme Court ruled that HSLB’s rights as a mortgagee were subject to the final outcome of the Reformation case. The Court also stated that the mortgage of real property executed by one who is not an owner thereof at the time of the execution of the mortgage is without legal existence. HSLB was not entitled to have its mortgage lien carried over to the restored title of Felonia and De Guzman.

FAQs

What was the key issue in this case?	The central issue was whether a mortgagee who foreclosed and purchased a property with a prior notice of lis pendens on the title could claim protection as a purchaser in good faith.
What is a notice of lis pendens?	A notice of lis pendens is a warning to the public that a property is involved in a pending litigation. It serves as a caution to prospective buyers that they acquire the property at their own risk, subject to the outcome of the lawsuit.
What is the difference between a mortgagee in good faith and a purchaser in good faith?	A mortgagee in good faith refers to someone who, in good faith, relies on the certificate of title of the mortgagor when granting a mortgage. A purchaser in good faith is one who buys a property without notice of any other person’s right or interest in the property and pays a fair price.
Why was HSLB not considered a purchaser in good faith?	HSLB was not considered a purchaser in good faith because at the time it purchased the property through foreclosure, a Notice of Lis Pendens was already annotated on the title, indicating pending litigation concerning the property.
What is the significance of annotating a Notice of Lis Pendens?	Annotating a Notice of Lis Pendens protects the rights of the party who registered it by warning potential buyers that the property is subject to a legal dispute. This ensures that the buyer is aware of the risk involved in acquiring the property.
What happens if a mortgage is executed by someone who is not the owner of the property?	If a mortgage is executed by someone who is not the owner of the property, the mortgage is considered without legal existence. The ownership of the property is an essential requisite for the validity of a mortgage contract.
Can a mortgagee rely solely on the certificate of title?	While a mortgagee has the right to rely on the certificate of title, they must also exercise due diligence. If there are circumstances that should arouse suspicion, the mortgagee should investigate further to ensure they are acting in good faith.
What was the final ruling of the Supreme Court in this case?	The Supreme Court denied HSLB’s petition, affirming the decision of the Court of Appeals. The Court ruled that HSLB was not entitled to have its mortgage lien carried over to the restored title of Felonia and De Guzman.

This case underscores the critical importance of conducting thorough due diligence before engaging in real estate transactions. The presence of a Notice of Lis Pendens should serve as a clear warning to prospective buyers, compelling them to investigate the underlying legal dispute and assess the risks involved. Failing to do so may result in the loss of their investment, as demonstrated in this case.

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: HOMEOWNERS SAVINGS AND LOAN BANK vs. ASUNCION P. FELONIA, G.R. No. 189477, February 26, 2014