Key Takeaway: Banks Must Exercise Higher Diligence as Mortgagees in Property Transactions

Ceferino Bautista, et al. v. Spouses Francis and Minda Balolong, et al., G.R. No. 243296, July 29, 2020

Imagine entrusting your family’s property to a relative, only to discover years later that it’s been fraudulently mortgaged. This nightmare scenario became a reality for the Bautista family, who found themselves embroiled in a legal battle over their ancestral land. The Supreme Court’s decision in this case sheds light on the responsibilities of banks as mortgagees and the importance of due diligence in property transactions.

The case revolves around the Bautista family’s attempt to reclaim their property after discovering that it had been fraudulently subdivided and mortgaged by their daughter’s husband. The central legal question was whether the bank that accepted the mortgage could be considered a mortgagee in good faith, despite the fraudulent nature of the transaction.

Legal Context: Mortgagee in Good Faith and Bank Diligence

The concept of a mortgagee in good faith is crucial in property law. It protects lenders who rely on the validity of a property’s title when accepting it as collateral for a loan. However, banks are held to a higher standard due to their role in the economy and the public trust they carry.

Under Philippine law, banks are expected to exercise extraordinary diligence before approving mortgage loans. This includes conducting thorough background checks, ocular inspections of the property, and verifying the authenticity of titles. The Supreme Court has emphasized this in several cases, such as Arguelles v. Malarayat Rural Bank, Inc., where it stated, “Since its business is impressed with public interest, the mortgagee-bank is duty-bound to be more cautious even in dealing with registered lands.”

The relevant provision here is Section 47 of the Property Registration Decree (P.D. No. 1529), which states that a person dealing with registered land may rely on the certificate of title, but this does not apply to banks. This means that while an ordinary individual might be protected by relying solely on the title, banks must go further to protect themselves and the true owners of the property.

For example, if a bank is considering a loan secured by a property, it should not only check the title but also visit the property, talk to neighbors, and verify the financial capacity of the borrowers. This extra diligence helps prevent situations like the one faced by the Bautistas.

Case Breakdown: The Bautista Family’s Ordeal

The story began when the Bautista family migrated to Canada in the 1980s, leaving their properties in the care of their daughter, Minda. Unbeknownst to them, Minda’s husband, Francis, fraudulently subdivided the land and mortgaged one portion to Metropolitan Bank and Trust Company (Metrobank) for a loan of P1,500,000.00.

The family only discovered the fraud when they received a call from Metrobank about an impending foreclosure. They immediately filed a complaint in the Regional Trial Court (RTC) of San Carlos City, Pangasinan, seeking to cancel the fraudulent titles and declare the mortgage null.

The RTC found that the deed of sale used to transfer the property was indeed a forgery, and Francis was later convicted of falsification of public documents. However, the court ruled that Metrobank was a mortgagee in good faith, as it had conducted due diligence before approving the loan.

The Bautista family appealed to the Court of Appeals (CA), which upheld the RTC’s decision. They then brought the case to the Supreme Court, arguing that Metrobank failed to exercise the required extraordinary diligence.

The Supreme Court, in its decision, noted that the issue of whether Metrobank was a mortgagee in good faith was a factual matter not typically entertained in a petition for review on certiorari. However, it affirmed the findings of the lower courts, stating:

“In this case, We find that Metrobank had conducted the necessary due diligence in dealing with the property mortgaged to secure the loan of Francis and Minda. As correctly found by the trial court, Metrobank had conducted a background check to find out if Minda and Francis had the means to pay their loan, and found that they did.”

The Court also emphasized the importance of banks exercising a higher degree of care:

“However, such rule does not apply to banks, which businesses are impressed with public interest. Thus, banks are expected to exercise a higher degree of care and diligence compared to private individuals before entering a mortgage contract.”

Practical Implications: Lessons for Property Owners and Banks

This ruling reaffirms the responsibility of banks to conduct thorough due diligence before accepting property as collateral. For property owners, it highlights the importance of monitoring their assets, even when entrusted to family members.

Businesses and individuals dealing with property transactions should:

• Conduct regular checks on their properties, especially if they are not in the country.
• Be aware of the need for banks to perform extensive background checks and ocular inspections.
• Understand that fraudulent transactions can still lead to valid mortgages if the bank is deemed to have acted in good faith.

Key Lessons:

• Banks must go beyond mere title checks to protect themselves and the true owners of properties.
• Property owners should remain vigilant and consider legal safeguards when leaving properties in the care of others.
• Fraudulent acts by family members can have serious legal consequences, but banks may still be protected if they exercise due diligence.

Frequently Asked Questions

What does it mean to be a mortgagee in good faith?
A mortgagee in good faith is a lender who accepts a property as collateral for a loan, believing the title to be valid and free from defects. They are protected from claims of fraud if they have conducted due diligence.

Why are banks held to a higher standard than ordinary mortgagees?
Banks are expected to exercise extraordinary diligence due to their role in the economy and the public trust they carry. They must conduct thorough checks beyond just verifying the title.

What should property owners do to protect their assets from fraud?
Property owners should regularly monitor their properties, especially if they are not physically present. They can also consider legal safeguards like appointing a trusted representative or setting up a trust.

Can a bank foreclose on a property if the mortgage was based on a fraudulent transaction?
Yes, if the bank is found to be a mortgagee in good faith, having conducted due diligence, it can still foreclose on the property despite the fraudulent nature of the transaction.

What are the consequences for individuals committing fraud in property transactions?
Individuals committing fraud can face criminal charges, as seen in this case where Francis was convicted of falsification of public documents. They may also be liable for damages to the true owners of the property.

ASG Law specializes in property law and banking regulations. Contact us or email hello@asglawpartners.com to schedule a consultation.