J.A.B. Bulao & Associates

CASE 2011-0175: UNION BANK OF THE PHILIPPINES VS. LAIN^⃰ JUNIAT, WINWOOD APPAREL, INC., WINGYAN APPAREL, INC., NONWOVEN FABRIC PHILIPPINES (G.R. NO. 171569, 01 AUGUST 2011, DEL CASTILLO, J.) SUBJECTS: MORTGAGE; PLEDGE; DACION EN PAGO. (BRIEF TITLE: UNION BANK VS. JUNIAT).

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DIGEST/SUBJECT/DOCTRINE

JUNIAT EXECUTED A CHATTEL MORTGAGE IN FAVOR OF UNION BANK COVERING SEWING MACHINES AND OTHER EQUIPMENT FOR AND ON BEHALF OF WINWOOD AND WINGYAN. JUNIAT ET AL DID NOT PAY SUBJECT LOAN. UNION BANK SUED THEM FOR SUM OF MONEY AND MOVED TO ATTACH THE SEWING MACHINES AND EQUIPMENT. THE MACHINES AND EQUIPMENT  WERE IN THE POSSESSION OF NONWOVEN. COURT ISSUED SUMMONS TO NONWOVEN. NONWOVEN ARGUED THAT IT HAS A BETTER RIGHT TO THE MACHINES AND EQUIPMENT BECAUSE  JUNIAT EXECUTED DACION EN PAGO IN THEIR FAVOR. THEY THEFORE HOLD THE MACHINES AS OWNER WHILE PETITIONER HOLDS THE MACHINES ONLY AS MORTGAGEE. NONWOVEN PRESENTED A DOCUMENT WHERE JUNIAT PLEGED THE MACHINES TO NONWOVEN TO SECURE AN OBLIGATION. WHO HAS A BETTER RIGHT TO THE MACHINES AND EQUPMENT?

UNION BANK HAS A BETTER RIGHT. NONWOVEN FAILED TO PROVE THAT THERE WAS DACION EN PAGO. THE DOCUMENT EXECUTED BY JUNIAT APPEARS TO BE AN UNNOTARIZED  PLEDGE. IN CASE OF DOUBT WHETHER A DEED IS A SALE OR A PLEDGE, THE DEED IS DEEMED A PLEDGE. SINCE THE PLEDGE WAS NOT NOTARIZED IT CANNOT BIND THIRD PARTIES.

A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap machines and boilers were pledged to Nonwoven by Juniat to guarantee his obligation.  However, under Article 2096 of the Civil Code, “[a] pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument.”  Hence, just like the chattel mortgage executed in favor of petitioner, the pledge executed by Juniat in favor of Nonwoven cannot bind petitioner.

Neither can we sustain the finding of the CA that: “The machineries were ceded to THIRD PARTY NONWOVEN by way of dacion en pago, a contract later entered into by WINWOOD/WINGYAN and THIRD PARTY NONWOVEN.”^[1][53] As aptly pointed out by petitioner, no evidence was presented by Nonwoven to show that the attached properties were subsequently sold to it by way of a dacion en pago.  Also, there is nothing in the Agreement dated May 9, 1992 to indicate that the motorized sewing machines, snap machines and boilers were ceded to Nonwoven as payment for the Wingyan’s and Winwood’s obligation.  It bears stressing that there can be no transfer of ownership if the delivery of the property to the creditor is by way of security.^[2][54]  In fact, in case of doubt as to whether a transaction is one of pledge or dacion en pago, the presumption is that it is a pledge as this involves a lesser transmission of rights and interests.^[3][55]

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FIRST DIVISION

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D E C I S I O N

DEL CASTILLO, J.:

To have a binding effect on third parties, a contract of pledge must appear in a public instrument.^[4][1]

This Petition for Review on Certiorari^[5][2] under Rule 45 of the Rules of Court assails the June 23, 2005 Decision^[6][3] and the February 9, 2006 Resolution^[7][4] of the Court of Appeals (CA) in CA-G.R. CV No. 66392.

Factual Antecedents

Petitioner  Union  Bank  of  the  Philippines   (Union Bank)   is  a  universal banking corporation organized and existing under Philippine laws.^[8][5] 

Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan) are domestic corporations engaged in the business of apparel manufacturing.^[9][6] Both respondent corporations are owned and operated by respondent Alain Juniat (Juniat), a French national based in Hongkong.^[10][7] Respondent Nonwoven Fabric Philippines, Inc. (Nonwoven) is a Philippine corporation engaged in the manufacture and sale of various types of nonwoven fabrics.^[11][8]

On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati, Branch 57, a Complaint^[12][9] with prayer for the issuance of ex-parte writs of preliminary attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the mortgaged motorized sewing machines and equipment.^[13][10] Petitioner alleged that Juniat, acting for and in behalf of Winwood and Wingyan, executed a promissory note^[14][11] dated April 11, 1992 and a Chattel Mortgage^[15][12] dated March 27, 1992 over several motorized sewing machines and other allied equipment to secure their obligation arising from export bills transactions to petitioner in the amount of P1,131,134.35;^[16][13] that as additional security for the obligation, Juniat executed a Continuing Surety Agreement^[17][14] dated April 11, 1992 in favor of petitioner;^[18][15] that the loan remains unpaid;^[19][16] and that the mortgaged motorized sewing machines are  insufficient to answer for the obligation.^[20][17]

On September 10, 1992, the RTC issued writs of preliminary attachment and replevin in favor of petitioner.^[21][18]  The writs were served by the Sheriff upon Nonwoven as it was in possession of the motorized sewing machines and equipment.^[22][19] Although Nonwoven was not impleaded in the complaint filed by petitioner, the RTC likewise served summons upon Nonwoven since it was in possession of the motorized sewing machines and equipment.^[23][20]

On September 28, 1992, Nonwoven filed an Answer,^[24][21]  contending that the unnotarized Chattel Mortgage executed in favor of petitioner has no binding effect on Nonwoven and that it has a better title over the motorized sewing machines and equipment because these were assigned to it by Juniat pursuant to their Agreement^[25][22] dated May 9, 1992.^[26][23]  Juniat, Winwood, and Wingyan, on the other hand, were declared in default for failure to file an answer within the reglementary period.^[27][24]

On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by Replevin,^[28][25] praying that the motorized sewing machines and equipment be sold to avoid depreciation and deterioration.^[29][26]  However, on May 18, 1993, before the RTC could act on the motion, petitioner sold the attached properties for the amount of P1,350,000.00.^[30][27]

Nonwowen moved to cite the officers of petitioner in contempt for selling the attached properties, but the RTC denied the same on the ground that Union Bank acted in good faith.^[31][28]

Ruling of the Regional Trial Court

On May 20, 1999, the RTC of Makati, Branch 145,^[32][29] rendered a Decision^[33][30] in favor of petitioner.  The RTC ruled that both the Chattel Mortgage dated March 27, 1992 in favor of petitioner and the Agreement dated May 9, 1992 in favor of Nonwoven have no obligatory effect on third persons because these documents were not notarized.^[34][31]  However, since the Chattel Mortgage in favor of petitioner was executed earlier, petitioner has a better right over the motorized sewing machines and equipment under the doctrine of “first in time, stronger in right” (prius tempore, potior jure).^[35][32]  Thus, the RTC disposed of the case in this wise:

WHEREFORE, above premises considered, judgment is hereby rendered as follows:

1.]   Declaring the [petitioner] UNION BANK OF THE PHILIPPINES, as having the better right to the goods and/or machineries subject of the Writs of Preliminary Attachment and Replevin issued by this Court on September 10, 1992.

2.]   Declaring the [petitioner] as entitled to the proceeds of the sale of the subject machineries in the amount of P1,350,000.00;

3.]   Declaring [respondents] Allain Juniat, Winwood Apparel, Inc.  and Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner], for the deficiency between the proceeds of the sale of the machineries subject of this suit [P1,350,000.00] and original claim of the plaintiff [P1,919,907.03], in the amount of P569,907.03, with legal interest at the rate of 12% per annum from date of this judgment until fully paid; and

4.]   Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner] for the amount of P50,000.00 as reasonable attorneys fees;  and

5.]   Cost of this suit against the [respondents].

SO ORDERED.^[36][33]

Nonwoven moved for reconsideration^[37][34]  but the RTC denied the same in its Order^[38][35] dated July 14, 1999.

Ruling of the Court of Appeals

On appeal, the CA reversed the ruling of the RTC.  The CA ruled that the contract of pledge entered into between Juniat and Nonwoven is valid and binding, and that the motorized sewing machines and equipment were ceded to Nonwoven by Juniat by virtue of a dacion en pago.^[39][36]  Thus, the CA declared Nonwoven entitled to the proceeds of the sale of the attached properties.^[40][37]  The fallo reads:

WHEREFORE, premises considered, the assailed decision is hereby REVERSED and SET ASIDE.  [Petitioner] Union Bank of the Philippines is hereby DIRECTED to pay Nonwoven Fabric Philippines, Inc. P1,350,000.00,  the amount it holds in escrow, realized from the May 18, 1993 sale of the machineries to avoid deterioration during pendency of suit.  No pronouncement as to costs.

SO ORDERED.^[41][38]

Petitioner sought reconsideration^[42][39] which was denied by the CA in a Resolution^[43][40] dated February 9, 2006.

Issues

Hence, the present recourse where petitioner interposes the following issues:

1.     Whether x x x the Court of Appeals committed serious reversible error in setting aside the Decision of the trial court holding that Union Bank of the Philippines had a better right over the machineries seized/levied upon in the proceedings before the trial court and/or the proceeds of the sale thereof;

2.     Whether x x x the Court of Appeals seriously erred in holding that [Nonwoven] has a valid claim over the subject sewing machines.^[44][41]

Petitioner’s Arguments

Echoing the reasoning of the RTC, petitioner insists that it has a better title to the proceeds of the sale.^[45][42]  Although the Chattel Mortgage executed in its favor was not notarized, petitioner insists that it is nevertheless valid, and thus, has preference over a subsequent unnotarized agreement.^[46][43] Petitioner further claims that except for the said agreement, no other evidence was presented by Nonwoven to show that the motorized sewing machines and equipment were indeed transferred to them by Juniat/Winwood/Wingyan.^[47][44]

Respondent Nonwoven’s Arguments

            Nonwoven, on the other hand, claims ownership over the proceeds of the sale under Article 1544^[48][45] of the Civil Code on double sale, which it claims can be applied by analogy in the instant case.^[49][46]  Nonwoven contends that since its prior possession over the motorized sewing machines and equipment was in good faith, it has a better title over the proceeds of the sale.^[50][47]  Nonwoven likewise maintains that petitioner has no right over the proceeds of the sale because the Chattel Mortgage executed in its favor was unnotarized, unregistered, and without an affidavit of good faith.^[51][48] 

Our Ruling

The petition has merit.

Nonwoven lays claim to the attached motorized sewing machines and equipment pursuant to the Agreement it entered into with Juniat, to wit: 

Hong Kong, 9^th May, 1992

With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop, among the following parties:

1. Redflower Garments Inc. – Mrs. Maglipon
2. Nonwoven Fabrics Phils. Inc. – Mr. J. Tan
3. Winwood Apparel Inc./Wing Yan Apparel, Inc. – Mr. A. Juniat, Mrs. S. Juniat

IT WAS AGREED THAT:

a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood Apparel Inc./Wing Yan Apparel, Inc. should be effected as agreed through partial payment by L/C with the balance to be settled at a later date for which Winwood Apparel, Inc. agrees to consign 94 sewing machines, 3 snap machines and 2 boilers,  presently in the care of Redflower Garments Inc., to the care of Nonwoven Fabrics Phils., Inc. as guarantee. Meanwhile, Nonwoven will resume delivery to Winwood/Win Yang as usual.

x x x x^[52][49]  (Emphasis supplied.)

It insists that since the attached properties were assigned or ceded to it by Juniat, it has a better right over the proceeds of the sale of the attached properties than petitioner, whose claim is based on an unnotarized Chattel Mortgage.

We do not agree.

Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan and Winwood, in favor of petitioner does not bind Nonwoven.^[53][50]  However, it must be pointed out that petitioner’s primary cause of action is for a sum of money with prayer for the issuance of ex-parte writs of attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the motorized sewing machines and equipment.^[54][51]  Thus, the fact that the Chattel Mortgage executed in favor of petitioner was not notarized does not affect petitioner’s cause of action.  Petitioner only needed to show that the loan of Juniat, Wingyan and Winwood remains unpaid and that it is entitled to the issuance of the writs prayed for.  Considering that writs of attachment and replevin were issued by the RTC,^[55][52] Nonwoven had to prove that it has a better right of possession or ownership over the attached properties. This it failed to do.

A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap machines and boilers were pledged to Nonwoven by Juniat to guarantee his obligation.  However, under Article 2096 of the Civil Code, “[a] pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument.”  Hence, just like the chattel mortgage executed in favor of petitioner, the pledge executed by Juniat in favor of Nonwoven cannot bind petitioner.

Neither can we sustain the finding of the CA that: “The machineries were ceded to THIRD PARTY NONWOVEN by way of dacion en pago, a contract later entered into by WINWOOD/WINGYAN and THIRD PARTY NONWOVEN.”^[56][53] As aptly pointed out by petitioner, no evidence was presented by Nonwoven to show that the attached properties were subsequently sold to it by way of a dacion en pago.  Also, there is nothing in the Agreement dated May 9, 1992 to indicate that the motorized sewing machines, snap machines and boilers were ceded to Nonwoven as payment for the Wingyan’s and Winwood’s obligation.  It bears stressing that there can be no transfer of ownership if the delivery of the property to the creditor is by way of security.^[57][54]  In fact, in case of doubt as to whether a transaction is one of pledge or dacion en pago, the presumption is that it is a pledge as this involves a lesser transmission of rights and interests.^[58][55]

In view of the foregoing, we are constrained to reverse the ruling of the CA.  Nonwoven is not entitled to the proceeds of the sale of the attached properties because it failed to show that it has a better title over the same.   

WHEREFORE, the petition is hereby GRANTED.  The assailed June 23, 2005 Decision and the February 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 66392 are hereby REVERSED and SET ASIDE.  The May 20, 1999 Decision of the Regional Trial Court of Makati, Branch 145, is hereby REINSTATED and AFFIRMED.

            SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

RENATO C. CORONA

Chairperson

Chief Justice

MARTIN S. VILLARAMA, JR.

Associate Justice

C E R T I F I C A T I O N

            Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

RENATO C. CORONA

Chief Justice

CASE 2011-0174: PHILIPPINE NATIONAL BANK VS. CIRIACO JUMAMOY AND HEIRS OF ANTONIO GO PACE REPRESENTED BY ROSALIA PACE (G.R. NO. 169901, 03 AUGUST 2011, DEL CASTILLO, J.) SUBJECT: LAND TITLES. (BRIEF TITLE: PNB VS. JUMANOY)

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Republic of thePhilippines

Supreme Court

Manila

FIRST DIVISION

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D E C I S I O N

DEL CASTILLO, J.:

                A PARTY enters into an agreement or contract with an eye to reap benefits therefrom or be relieved of an oppressive economic condition. The other party likewise assumes that the agreement would be advantageous to him. But just like in any other human undertaking, the end-result may not be as sweet as expected.

                The problem could not be resolved by any other means but to litigate.

                Courts, however, are not defenders of bad bargains. At most, they only declare the rights and obligations of the parties to the contract in order to preserve sanctity of the same.

                We are confronted in this case with this legal predicament.^[1][1]

This Petition for Review on Certiorari assails the February 28, 2005 Decision^[2][2] of the Court of Appeals (CA) in CA-G.R. CV No. 73743 which dismissed petitioner Philippine National Bank’s (PNB’s) appeal from the July 30, 2001 Decision^[3][3] of the Regional Trial Court (RTC), Branch 18, Digos City, Davao del Sur.  Said Decision of the RTC ordered PNB to reconvey to respondent Ciriaco Jumamoy (Ciriaco) a portion of the parcel of land subject of this case.

Likewise assailed in this petition is the September 28, 2005 Resolution^[4][4] of the CA denying PNB’s Motion for Reconsideration.

Factual Antecedents

On December 27, 1989, the RTC, Branch 19, of Digos City, Davao del Sur, rendered a Decision^[5][5] in Civil Case No. 2514 (a case for Reconveyance and Damages), ordering the exclusion of 2.5002 hectares from Lot 13521.  The trial court found that said 2.5002 hectares which is part of Lot 13521, a 13,752-square meter parcel of land covered by Original Certificate of Title (OCT) No. P-4952^[6][6] registered in the name of Antonio Go Pace (Antonio) on July 19, 1971 actually pertains to Sesinando Jumamoy (Sesinando), Ciriaco’s predecessor-in-interest.  The RTC found that said 2.5002-hectare lot was erroneously included in Antonio’s free patent application which became the basis for the issuance of his OCT.  It then ordered the heirs of Antonio (the Paces [represented by Rosalia Pace (Rosalia)]) to reconvey said portion to Ciriaco.  In so ruling, the RTC acknowledged Ciriaco’s actual and exclusive possession, cultivation, and claim of ownership over the subject lot which he acquired from his father Sesinando, who occupied and improved the lot way back in the early 1950s.^[7][7]

            The December 27, 1989 RTC Decision became final and executory but the Deed of Conveyance^[8][8] issued in favor of Ciriaco could not be annotated on OCT No. P-4952 since said title was already cancelled.  Apparently, Antonio and his wife Rosalia mortgaged Lot 13521 to PNB as security for a series of loans dated February 25, 1971, April 26, 1972, and May 11, 1973.^[9][9]  After Antonio and Rosalia failed to pay their obligation, PNB foreclosed the mortgage on July 14, 1986^[10][10] and title toLot 13521 was transferred to PNB under Transfer Certificate of Title (TCT) No.T-23063.  Moreover, the Deed of Conveyance could not be annotated at the back of OCT No. P-4952 because PNB was not impleaded as a defendant in Civil Case No. 2514. 

Thus, in February 1996, Ciriaco filed the instant complaint against PNB and the Paces for Declaration of Nullity of Mortgage, Foreclosure Sale, Reconveyance and Damages,^[11][11] docketed as Civil Case No. 3313 and raffled to Branch 18 of RTC,DigosCity, Davao del Sur. 

In his complaint, Ciriaco averred that Antonio could not validly mortgage the entire Lot13521 to PNB as a portion thereof consisting of 2.5002 hectares belongs to him (Ciriaco), as already held in Civil Case No. 2514.  He claimed that PNB is not an innocent mortgagee/purchaser for value because prior to the execution and registration of PNB’s deed of sale with the Register of Deeds, the bank had prior notice that the disputed lot is subject of a litigation.  It would appear that during the pendency of Civil Case No. 2514, a notice of lis pendens was annotated at the back of OCT No. P-4952 as Entry No. 165547^[12][12] on November 28, 1988.  

The Paces did not file any answer and were declared in default.^[13][13] Meanwhile PNB filed its Amended Answer^[14][14] denying for lack of knowledge and information Ciriaco’s claim of ownership and reliance on the judgment in Civil Case No. 2514.  It argued that it is a mortgagee and a buyer in good faith since at the time of the mortgage, Antonio’s certificate of title was “clean” and “devoid of any adverse annotations.”  PNB also filed a cross-claim against the Paces.    

Instead of having a full-blown trial, Ciriaco and PNB opted to submit the case for decision based on their respective memoranda.

Ruling of the Regional Trial Court     

In its July 30, 2001 Decision,^[15][15] the RTC ordered the partial nullification of the mortgage and the reconveyance of the subject lot claimed by Ciriaco.  The RTC found that PNB was not a mortgagee/purchaser in good faith because it failed to take the necessary steps to protect its interest such as sending a field inspector to the area to determine the real owner, its occupants, its improvements and its boundaries.

            The dispositive portion of the RTC Decision reads:

            WHEREFORE, it is hereby ordered that defendant PNB shall reconvey, by the proper instrument of reconveyance, that portion of the land owned and claimed by plaintiff CIRIACO JUMAMOY.

                The claim for damages by all the parties are hereby DISMISSED for lack of proper basis.

                SO ORDERED.^[16][16]

PNB filed a Motion for Reconsideration.^[17][17]  It argued that the trial court erred in finding that it is not an innocent mortgagee for value due to its alleged failure to send its field inspector to the area considering that such matter was never alleged in Ciriaco’s complaint.  PNB claimed that Ciriaco merely stated in his complaint that the bank is not an innocent mortgagee for value because it had already constructive notice that the subject land is under litigation by virtue of the notice of lis pendens already annotated on Antonio’s title when PNB consolidated in its name the title for Lot 13521.  PNB however argued that at the time of the constitution and registration of the mortgage in 1971, Antonio’s title was clean as the notice of lis pendens was annotated only in 1988.  And since there was no cause to arouse suspicion, it may rely on the face of theTorrens title.  As for its cross-claim against the heirs of Antonio, PNB prayed that a hearing be set.  

Ciriaco filed an Opposition to the Motion for Reconsideration.^[18][18]  He insisted that PNB cannot validly claim that it is an innocent mortgagee based on its reliance on Antonio’sTorrens title because when it first granted Antonio’s loan application, the subject property was still untitled and unregistered.

On January 7, 2002, the RTC denied PNB’s motion for reconsideration.^[19][19]

PNB thus filed its appeal with the CA.

Ruling of the Court of Appeals

            In its Decision of February 28, 2005,^[20][20] the CA affirmed the RTC’s ruling that PNB is not an innocent mortgagee/purchaser.  The CA reiterated that the business of a bank or a financial institution is imbued with public interest thus it is obliged to exercise extraordinary prudence and care by looking beyond what appears on the title.  The CA pointed out that in this case, PNB failed to prove that it conducted an investigation on the real condition of the mortgaged property.  Had the bank done so, it could have discovered that Ciriaco had possession of the disputed lot for quite some time.  Moreover, the CA held that PNB could not validly claim that it merely relied on the face of a “clean”Torrens title because when the disputed lot was first mortgaged in 1971, the same was still an untitled and unregistered land.  It likewise ruled that Ciriaco’s action for reconveyance is based on implied trust and is imprescriptible because the land has always been in his possession.

Anent PNB’s cross-claim against the Paces, the CA gave due course thereto and ordered the records remanded to the RTC for further proceedings.

The dispositive portion of the CA Decision reads:

                WHEREFORE, premises considered, herein appeal is hereby DISMISSED and the decision of the trial court is hereby AFFIRMED with MODIFICATION, giving due course to the cross-claim of the defendant-appellant PNB against the Heirs of ANTONIO GO PACE as represented by ROSALIA PACE.  Accordingly, let the entire records of this case be remanded to the lower court for further proceedings of the said cross-claim.

                SO ORDERED.^[21][21]

PNB moved for a reconsideration.^[22][22]  However, the CA sustained its ruling in a Resolution^[23][23] dated September 28, 2005.

Hence, this petition.

Issues

PNB ascribed upon the CA the following errors:

A.  THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURT’S DECISION IN DECLARING THAT PNB FAILED TO QUALIFY AS AN INNOCENT MORTGAGEE FOR VALUE IN THE ABSENCE OF EVIDENCE TO ESTABLISH THIS FACT.

B.    THE COURT OF APPEALS ERRED IN ORDERING THE PARTIAL NULLIFICATION OF THE REAL ESTATE MORTGAGE EXECUTED IN FAVOR OF PNB IN DISREGARD OF THE LAW AND ESTABLISHED JURISPRUDENCE ON THE MATTER.

C.    THE COURT OF APPEALS ERRED IN ORDERING THE PARTIAL NULLIFICATION OF PNB’S TITLE CONTRARY TO THE LAW AND ESTABLISHED JURISPRUDENCE ON THE MATTER.

D.    THE COURT OF APPEALS ERRED IN DENYING PNB’S MOTION FOR RECONSIDERATION AND SUSTAINING RESPONDENT JUMAMOY’S INVOCATION OF THE RULING OF THE SUPREME COURT IN SPOUSES FLORENTINO AND FRANCISCA TOMAS VS. PNB (98 SCRA 280) INSTEAD OF THE LANDMARK CASE OF LILIA Y. GONZALES VS. IAC AND RURAL BANK OF PAVIA, INC. (157 SCRA 587) WHICH IS THE ONE APPLICABLE TO THE INSTANT CASE.

E.    THE COURT OF APPEALS ERRED IN ORDERING PNB TO RECONVEY THE PORTION OF LAND CLAIMED BY RESPONDENT JUMAMOY NOTWITHSTANDING THE FACT THAT IT IS APPARENT FROM THE COMPLAINT THAT RESPONDENT JUMAMOY’S ACTION FOR RECONVEYANCE IS ALREADY BARRED BY PRESCRIPTION.^[24][24]

            In essence, PNB contends that the lower courts grievously erred in declaring that it is not an innocent mortgagee/purchaser for value.  PNB also argues that Ciriaco’s complaint is barred by prescription.  TCT No. T-23063 was issued on March 23, 1990, while Ciriaco filed his complaint only six years thereafter.  Thus, the one-year period to nullify PNB’s certificate of title had lapsed, making PNB’s title indefeasible.  Moreover, PNB claims that an action for reconveyance prescribes in four years if based on fraud, or, 10 years if based on an implied trust, both to be counted from the issuance of OCT No. P-4952 in July 1971 which constitutes as a constructive notice to the whole world.  Either way, Ciriaco’s action had already prescribed since it took him 17 years to file his first complaint for reconveyance in Civil Case No. 2514 and around 23 years to file his second complaint in Civil Case No. 3313. 

Our Ruling

            We deny the petition.

PNB is not an innocent purchaser/ mortgagee for value.

Undoubtedly, our land registration statute extends its protection to an innocent purchaser for value, defined as “one who buys the property of another, without notice that some other person has a right or interest in such property and pays the full price for the same, at the time of such purchase or before he has notice of the claims or interest of some other person in the property.”^[25][25] An “innocent purchaser for value” includes an innocent lessee, mortgagee, or other encumbrancer for value.^[26][26] 

Here, we agree with the disposition of the RTC and the CA that PNB is not an innocent purchaser for value.  As we have already declared:

A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations.^[27][27]   (Emphasis ours.)   

PNB’s contention that Ciriaco failed to allege in his complaint that PNB failed to take the necessary precautions before accepting the mortgage is of no moment.  It is undisputed that the 2.5002-hectare portion of the mortgaged property has been adjudged in favor of Ciriaco’s predecessor-in-interest in Civil Case No. 2514.  Hence, PNB has the burden of evidence that it acted in good faith from the time the land was offered as collateral.  However, PNB miserably failed to overcome this burden.  There was no showing at all that it conducted an investigation; that it observed due diligence and prudence by checking for flaws in the title; that it verified the identity of the true owner and possessor of the land; and, that it visited subject premises to determine its actual condition before accepting the same as collateral. 

Both the CA and the trial court correctly observed that PNB could not validly raise the defense that it relied on Antonio’s clean title.  The land, when it was first mortgaged, was then unregistered under our Torrenssystem.  The first mortgage was on February 25, 1971^[28][28] while OCT No. P-4952 was issued on July 19, 1971.  Since the Paces offered as collateral an unregistered land, with more reason PNB should have proven before the RTC that it had verified the status of the property by conducting an ocular inspection before granting Antonio his first loan.  Good faith which is a question of fact could have been proven in the proceedings before the RTC, but PNB dispensed with the trial proper and let its opportunity to dispute factual allegations pass.  Had PNB really taken the necessary precautions, it would have discovered that a large portion ofLot 13521 is occupied by Ciriaco. 

Ciriaco’s action for reconveyance is

inprescriptible.

Also, the incontrovertibility of a title does not preclude a rightful claimant to a property from seeking other remedies because it was never the intention of the Torrenssystem to perpetuate fraud.  As explained in Vda. de Recinto v. Inciong:^[29][29]

The mere possession of a certificate of title under the Torrenssystem does not necessarily make the possessor a true owner of all the property described therein for he does not by virtue of said certificate alone become the owner of the land illegally included. It is evident from the records that the petitioner owns the portion in question and therefore the area should be conveyed to her. The remedy of the land owner whose property has been wrongfully or erroneously registered in another’s name is, after one year from the date of the decree, not to set aside the decree, but, respecting the decree as incontrovertible and no longer open to review, to bring an ordinary action in the ordinary court of justice for reconveyance or, if the property has passed into the hands of an innocent purchaser for value, for damages. (Emphasis supplied.)

“If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes.”^[30][30]  An action for reconveyance based on implied trust prescribes in 10 years as it is an obligation created by law,^[31][31] to be counted from the date of issuance of the Torrens title over the property.^[32][32]  This rule, however, applies only when the plaintiff or the person enforcing the trust is not in possession of the property. 

In Vda. de Cabrera v. Court of Appeals,^[33][33] we said that there is no prescription when in an action for reconveyance, the claimant is in actual possession of the property because this in effect is an action for quieting of title: 

[S]ince if a person claiming to be the owner thereof is in actual possession of the property, as the defendants are in the instant case, the right to seek reconveyance, which in effect seeks to quiet title to the property, does not prescribe. The reason for this is that one who is in actual possession of a piece of land claiming to be the owner thereof may wait until his possession is disturbed or his title is attacked before taking steps to vindicate his right, the reason for the rule being, that his undisturbed possession gives him a continuing right to seek the aid of a court of equity to ascertain and determine the nature of the adverse claim of a third party and its effect on his own title, which right can be claimed only by one who is in possession.^[34][34]

In Ciriaco’s case, as it has been judicially established that he is in actual possession of the property he claims as his and that he has a better right to the disputed portion, his suit for reconveyance is in effect an action for quieting of title.  Hence, petitioner’s defense of prescription against Ciriaco does not lie.

            WHEREFORE, the petition is DENIED.  The February 28, 2005 Decision and September 28, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 73743 are hereby AFFIRMED.

            SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

RENATO C. CORONA

Chief Justice

Chairperson

MARTIN S. VILLARAMA, JR.

Associate Justice

C E R T I F I C A T I O N

            Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

RENATO C. CORONA

Chief Justice