In Spouses Ellis R. Miles and Carolina Ronquillo-Miles v. Bonnie Bautista Lao, the Supreme Court affirmed the principle of “mortgagee in good faith,” protecting lenders who rely on a clean title. The Court ruled that a mortgagee who acts in good faith, relying on a valid Torrens title without any indication of fraud, is protected even if the mortgagor’s title is later found to be defective. This decision underscores the importance of the Torrens system in ensuring stability and reliability in real estate transactions, providing assurance to lenders who extend credit based on the security of a registered property.

The Case of the Defective Deed: When Can a Mortgagee Claim Good Faith?

This case originated from a complaint filed by Spouses Ellis and Carolina Miles against several parties, including Bonnie Bautista Lao, concerning a property dispute. The Spouses Miles claimed ownership of a property in Makati City, alleging that their niece, Rodora Jimenez, facilitated a falsified Deed of Donation transferring the property to Spouses Ricardo and Cresencia Ocampo. Subsequently, Spouses Ocampo mortgaged the property to Bonnie Bautista Lao. The Spouses Miles sought the nullification of the Deed of Donation and the mortgage, arguing collusion among the defendants.

The central legal question revolved around whether Bonnie Bautista Lao could be considered a mortgagee in good faith, thereby protecting her rights despite the alleged fraudulent transfer of the property. The doctrine of mortgagee in good faith protects individuals or entities who, in good faith, rely on the face of a Torrens title when entering into a mortgage agreement. This doctrine balances the need to protect property rights with the need to maintain confidence in the Torrens system.

The Regional Trial Court (RTC) initially ruled in favor of the Spouses Miles, declaring the transfer of title to Spouses Ocampo void and restoring the original title. However, the Court of Appeals (CA) reversed the RTC’s decision, finding that Bonnie Bautista Lao was indeed a mortgagee in good faith. The appellate court reasoned that Lao had no knowledge of the fraudulent acquisition of the property by Spouses Ocampo and had relied on the clean title presented to her. The Supreme Court then took up the case to resolve the conflicting findings and definitively rule on Lao’s status as a mortgagee in good faith.

The Supreme Court, in affirming the CA’s decision, reiterated the importance of the Torrens system and the protection it affords to those who rely on it in good faith. The Court acknowledged that while the mortgagor, Spouses Ocampo, may not have been the rightful owners of the property due to the alleged fraudulent transfer, public policy dictates that mortgage contracts and foreclosure sales arising from them should be given effect when the mortgagee acted in good faith. The Court emphasized that buyers or mortgagees dealing with property covered by a Torrens Certificate of Title are not required to go beyond what appears on the face of the title.

In this context, the Court cited Andres, et al. v. Philippine National Bank, explaining that the doctrine protecting mortgagees and innocent purchasers in good faith stems from the social interest in granting indefeasibility of titles. According to the court:

The doctrine protecting mortgagees and innocent purchasers in good faith emanates from the social interest embedded in the legal concept granting indefeasibility of titles. The burden of discovery of invalid transactions relating to the property covered by a title appearing regular on its face is shifted from the third party relying on the title to the co-owners or the predecessors of the title holder. Between the third party and the co-owners, it will be the latter that will be more intimately knowledgeable about the status of the property and its history. The costs of discovery of the basis of invalidity, thus, are better borne by them because it would naturally be lower. A reverse presumption will only increase costs for the economy, delay transactions, and, thus, achieve a less optimal welfare level for the entire society.

However, the Court also clarified that a higher degree of prudence is expected when the mortgagee does not directly deal with the registered owner of the property. In such cases, the mortgagee must exercise due diligence to ascertain the validity of the mortgagor’s title. The Spouses Miles argued that Lao’s lack of direct dealing with them, coupled with her reliance on an agent, Carlos Talay, indicated bad faith. The Court, however, rejected this argument, stating that Lao’s decision to deal with the Spouses Ocampo through a middleman did not automatically equate to bad faith. The Court emphasized that the Spouses Ocampo were already the registered owners of the property at the time of the mortgage, justifying Lao’s reliance on the TCT.

The Court also addressed the issue of good faith, clarifying that it is a question of intention, determined by the conduct and outward acts of the party claiming it. In Manaloto, et al. v. Veloso III, the Court defined good faith as:

…an honest intention to abstain from taking any unconscientious advantage of another, even through the forms or technicalities of the law, together with an absence of all information or belief of fact which would render the transaction unconscientious. In business relations, it means good faith as understood by men of affairs.

In this case, the Supreme Court found no evidence to suggest that Lao acted with a corrupt motive or intended to take advantage of another person. The Court noted that while Lao’s decision to use a middleman could be considered risky, it did not establish bad faith. Furthermore, the Court highlighted Lao’s claim that she conducted an ocular inspection of the property and found it vacant, a claim that remained uncontroverted throughout the trial.

Finally, the Court addressed the argument that Lao’s filing of a foreclosure suit instead of a criminal case against Spouses Ocampo indicated bad faith. Citing Sps. Yap and Guevarra v. First e-Bank Corp., the Court recognized that a creditor has multiple remedies against a debtor, including foreclosure and filing a criminal case for violation of BP 22 (Bouncing Checks Law). The Court held that Lao’s decision to foreclose was a legitimate exercise of her rights as a secured creditor and did not, in itself, demonstrate bad faith.

FAQs

What is the doctrine of “mortgagee in good faith”?	This doctrine protects lenders who, in good faith, rely on a clean title when providing a mortgage loan, even if the mortgagor’s title is later found to be defective.
What did the Supreme Court rule in this case?	The Supreme Court ruled that Bonnie Bautista Lao was a mortgagee in good faith, upholding the validity of her mortgage despite the Spouses Miles’ claim of fraudulent transfer of the property.
What factors did the Court consider in determining good faith?	The Court considered whether the mortgagee had knowledge of any defects in the mortgagor’s title, whether the mortgagee conducted due diligence, and whether the mortgagee acted with an honest intention.
Does dealing through an agent automatically mean bad faith?	No, the Court clarified that dealing through an agent does not automatically indicate bad faith, especially if the mortgagor is the registered owner of the property at the time of the mortgage.
What is the significance of the Torrens system in this case?	The Torrens system, which ensures the indefeasibility of titles, played a crucial role, as the mortgagee was entitled to rely on the clean title presented to her.
What should a mortgagee do to ensure they are considered in good faith?	A mortgagee should conduct due diligence, which includes verifying the title, inspecting the property, and ensuring there are no red flags or suspicious circumstances.
Can a mortgagee foreclose on a property even if the mortgagor’s title is later found to be defective?	Yes, if the mortgagee acted in good faith and without knowledge of the defect, they are generally protected and can foreclose on the property.
What is the effect of this ruling on real estate transactions?	This ruling provides assurance to lenders that they can rely on the Torrens system, encouraging investment and stability in the real estate market.

In conclusion, the Supreme Court’s decision in Spouses Ellis R. Miles and Carolina Ronquillo-Miles v. Bonnie Bautista Lao reaffirms the importance of the mortgagee in good faith doctrine in protecting lenders and ensuring the stability of real estate transactions. By upholding the validity of the mortgage, the Court has reinforced the reliability of the Torrens system and provided clarity for lenders in navigating complex property disputes.

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: Spouses Ellis R. Miles and Carolina Ronquillo-Miles v. Bonnie Bautista Lao, G.R. No. 209544, November 22, 2017