The Supreme Court ruled that Land Bank of the Philippines was not a mortgagee in good faith, emphasizing the higher standard of diligence required of banks in verifying land titles. The Court underscored that banks cannot solely rely on the face of a certificate of title but must conduct thorough investigations to ascertain the true status of the property, especially when there are visible indications of adverse claims.

Overlapping Titles and Overlooked Roads: Who Bears the Loss in Tagaytay Highlands?

This case revolves around a dispute between Belle Corporation, a real estate developer, and Land Bank of the Philippines concerning a 7,693 square meter portion of land in Tagaytay City. Belle Corporation claimed ownership of the land, asserting that its title originated from Original Certificates of Title (OCT) registered earlier than the title of Florosa Bautista, who mortgaged the property to Land Bank. The conflict arose when Bautista posted a signboard claiming that a portion of the entrance road to Tagaytay Highlands was within her property, covered by Transfer Certificate of Title (TCT) No. P-671. Subsequently, Land Bank foreclosed on Bautista’s property and claimed to be an innocent mortgagee for value. The central legal question is whether Land Bank exercised due diligence in verifying Bautista’s title before accepting the property as collateral, and whether it can claim the rights of a mortgagee in good faith.

The Regional Trial Court (RTC) initially ruled in favor of Bautista, but the Court of Appeals (CA) reversed this decision, declaring Belle Corporation the legitimate owner of the disputed property and nullifying Bautista’s title and Land Bank’s derivative title. The CA found that Belle Corporation’s title could be traced back to earlier registered OCTs, and that Land Bank failed to exercise due diligence in investigating the property’s status, especially given the presence of the access road leading to Tagaytay Highlands. The Supreme Court (SC) affirmed the CA’s decision with modification. The SC scrutinized the origin of the titles, tracing Belle Corporation’s claim to OCT Nos. 0-216 and 55, which were registered in 1959 and 1941, respectively. In contrast, Bautista’s title originated from OCT No. OP-283, registered in 1977. This difference in registration dates was pivotal.

The SC emphasized the principle that a bank, as a mortgagee, must exercise a higher degree of diligence, care, and prudence compared to private individuals, especially when dealing with registered lands. This heightened standard stems from the fact that the banking business is imbued with public interest. The Court referenced established jurisprudence, noting that banks are presumed to be familiar with land registration rules and cannot solely rely on the face of the certificate of title.

Being in the business of extending loans secured by real estate mortgage, banks are presumed to be familiar with the rules on land registration. Since the banking business is impressed with public interest, they are expected to be more cautious, to exercise a higher degree of diligence, care and prudence, than private individuals in their dealings, even those involving registered lands. Banks may not simply rely on the face of the certificate of title.

Building on this principle, the SC analyzed whether Land Bank acted in good faith. The Court found that Land Bank failed to conduct a thorough investigation despite knowing that the property was traversed by an access road leading to Tagaytay Highlands Golf Course. The bank’s representatives had noted this observation during the appraisal and inspection, but they erroneously concluded that the access road was still part of Bautista’s property. This oversight, according to the Court, was a critical lapse.

The SC stated that Land Bank should have made further inquiries into the identity of possible adverse claimants and the status of their occupancy. The Court noted that, had Land Bank earnestly probed by simply talking to Bautista or asking the possessors/owners of adjacent lots regarding the presence of the traversing access road, it could have easily discovered the opposing claim of respondent, which is a known real estate developer in the area. Thus, the failure to make such inquiry would hardly be consistent with any pretense of good faith.

Furthermore, the Court noted that even if Land Bank were considered a mortgagee in good faith, it could not be deemed an innocent purchaser for value because it had notice of the lis pendens when it purchased the lot during the foreclosure sale. The notice of lis pendens was inscribed on TCT P-671 on November 20, 1996, the same day when Civil Case No. TG-1672 was filed, while the public auction was held on September 10, 1997.

In addressing the issue of attorney’s fees, the Supreme Court upheld the CA’s award of attorney’s fees to Belle Corporation, stating that due to Land Bank’s bad faith, there was no reason to overturn this decision. This award recognizes the considerable expenses and effort Belle Corporation incurred to protect its interests throughout the prolonged litigation.

Additionally, the Court addressed the liability of Florosa Bautista and Liezel’s Garments, Inc. The CA had ordered them to jointly pay Land Bank the amount for which the property was sold at public auction. However, the Supreme Court modified this ruling, clarifying that only Liezel’s Garments, Inc. was liable to pay Land Bank. The Court emphasized that Bautista acted as a third-party or accommodation mortgagor, securing the indebtedness of Liezel’s Garments, Inc. without being a party to the principal obligation. Citing Cerna v. Court of Appeals, the Court reiterated that a third person who secures the fulfillment of another’s obligation by mortgaging their property is not solidarily bound with the principal obligor, and their liability extends only to the property mortgaged.

FAQs

What was the key issue in this case?	The key issue was whether Land Bank of the Philippines was a mortgagee in good faith when it accepted a property as collateral without thoroughly investigating its title and the existence of an access road traversing it. The court also determined the extent of liability of a third-party mortgagor.
What is a mortgagee in good faith?	A mortgagee in good faith is one who buys a property without notice that some other person has a right to, or interest in, the property and pays full and fair price at the time of purchase or before he has notice of the claim or interest of other persons in the property. However, this standard is applied more strictly to banks.
What level of diligence is expected of banks when dealing with real estate mortgages?	Banks are expected to exercise a higher degree of diligence, care, and prudence than private individuals due to the public interest attached to the banking business. They cannot simply rely on the face of the certificate of title but must conduct further investigations.
What is a notice of lis pendens?	A notice of lis pendens is a legal notice filed in court to indicate that a lawsuit is pending that affects the title to or possession of a certain piece of real property. It serves as a warning to prospective buyers or lenders that the property is subject to litigation.
Who is an accommodation mortgagor?	An accommodation mortgagor is a third party who mortgages their property to stand as security for the indebtedness of another person or entity. They are not a party to the principal obligation but merely provide security for it.
Can an accommodation mortgagor be held solidarily liable for the debt?	No, unless there is an express agreement. The liability of the third-party mortgagor extends only to the property mortgaged. The creditor may only have recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount of the loan.
What was the basis for awarding attorney’s fees in this case?	The Court upheld the award of attorney’s fees due to Land Bank’s bad faith in failing to conduct a thorough investigation of the property’s title and ignoring the visible presence of the access road. This justified the reimbursement of expenses incurred by Belle Corporation to protect its interests.
What did the Supreme Court change in the Court of Appeals’ decision?	The Supreme Court modified the ruling regarding the liability for the debt. Only Liezel’s Garments, Inc. was held liable to pay Land Bank the amount for which the disputed property was sold at public auction, clarifying that Bautista was not solidarily liable.

In conclusion, this case reinforces the stringent standards imposed on banks in verifying land titles for mortgage purposes. It underscores the importance of conducting thorough due diligence, especially when there are visible indicators of potential adverse claims. The ruling also clarifies the extent of liability for third-party mortgagors, ensuring they are not held solidarily liable for the principal debt.

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: Land Bank of the Philippines vs. Belle Corporation, G.R. No. 205271, September 02, 2015