CASED DIGESTS

CONTRACTS OF SALE; ELEMENTS;CONTRACT WHERE CONSENT IS VITIATED IS VOIDABLE;ANNULMENT AND RESTITUTION OF THE PROPERTY AND ITS FRUITS TO THE RESPONDENT IS JUST AND PROPER.

KATIPUNAN VS. KATIPUNAN, JR.
3537 SCRA 199. January 30, 2002


Facts: Respondent Braulio Katipunan Jr. is the registered owner of a lot and a five-door apartment constructed thereon, which were occupied by lessees. Respondent assisted by his brother petitioner Miguel entered into a Deed of Absolute Sale with brothers Edardo Balguma and Leopoldo Balguma, Jr. ( co-petitioners), represented by their lawyer-father involving the subject property for a consideration of P187,000.00. So, the title was registered in the names of the Balguma brothers and they started collecting rentals thereon.
Later, Braulio filed a complaint for annulment of the Deed of Absolute Sale, contending that his brother Miguel, Atty. Balguma and Inocencio Valdez ( one of the petitioners) convinced him to work abroad. Through insidious words and machinations, they made him sign a document purportedly a contract of employment, which document turned out to be a Deed of Absolute Sale. He further alleged that he did not receive the consideration stated in the contract. He claimed that there was evident bad faith and conspiracy in taking advantage of his ignorance, he being only a third grader.
The RTC dismissed the complaint because Braulio failed to prove his cause of action since he admitted that he obtained loans from the Balgumas, he signed the Deed of Absolute Sale, and he acknowledged selling the property and stopped collecting the rentals. But when the case was elevated, the decision of RTC was reversed and it was held that Braulio was incompetent, has very low I.Q., illiterate and has a slow comprehension. The CA based its decision on Arts.1332 and 1390 of NCC and Sec. 2, Rule 92 of the Rules of Court, concerning the incompetence of a party in contract.

Issue: Whether there was a valid contract of sale between the parties.

Held: The Supreme Court found the petition devoid of merit. There was a vitiated consent on the part of the respondent as he signed the Deed of Absolute Sale without the remotest idea of what it was and received no consideration thereof. The contract entered into by the parties being voidable contract, was correctly annulled on appeal.
A contract of sale is born from the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. This meeting of minds speaks of the intent of the parties in entering the contract respecting the subject matter and the consideration thereof. Thus, the elements of a contract of a sale are consent, object, and price in money or its equivalent. Under Art. 1330 of NCC, consent may be vitiated by any of the following: mistake, violence, intimidation, undue influence, and fraud. The presence of any of these vices renders the contract voidable.
A contract where one of the parties is incapable of giving consent or where consent is vitiated by mistake, fraud, or intimidation is not void ab initio but only voidable and is binding upon the parties unless annulled proper court action. The effect of annulment is to restore the parties to the status quo ante insofar as legally and equitably possible---this much is dictated by Art. 1398 provides that when the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution, except when he has been benefited by the things or price received by him. Thus, since the Deed of Absolute Sale between respondent and Balguma brothers is voidable and hereby annulled, then the restitution of the property and its fruits to respondent is just and proper.


SALE BY AN AGENT;SPECIAL POWER OF ATTORNEY

PINEDA VS. COURT OF APPEALS
367 SCRA 222. February 6,2002

Facts: Nelson and Mercedez Bañez are the original owners of a parcel of land together with its improvements located at White Plains, Q.C.(Q.C. Property) while Alejandria Pineda is the owner of a house located at Los Angeles, California (California Property), the two parties executed an “Agreement to Exchange Real Properties.” In the agreement, they agreed to: 1) exchange their respective properties, 2) Pineda to pay an earnest money of $ 12,000 on February 1983, and 3) to consummate the exchange of properties not later than June 1983. It was agreed also that both should undertake to clear the mortgages over their respective properties.
The Bañez were allowed to occupy or lease to a tenant the California property, and Pineda was authorized to occupy the Q.C. property. Pursuant to the agreement, Pineda paid the earnest money of $12,000, but the latter failed to clear the mortgages over her California property. Later, unknown to the Bañezes, Pineda and spouses Duque executed an “Agreement to Sell” over the Q.C. property whereby Pineda sold the property to the spouse Duque for 1.6 M.
The record shows that pursuant to the agreement to sell, there were payments that occupying their Q.C. property. The latter were interested in the property so the Bañezes did not insist on the return of said property. So, there were negotiations for the purchase of the property that was held between them, but the same failed which resulted in the Bañezes’ demanding for the Duques to vacate the property and later filed a case before the court.

Issue: Whether the Duques validly acquired the Q.C. property.

Held: Pineda’s sale of the property to Duques was not authorized by the real owners of the land Bañez. The Civil Code provides that in a sale of a parcel of land or any interest therein made through an agent, a special power of attorney is essential. This authority must be in writing; otherwise the sale shall be void. In his testimony, Duque confirmed that at the time he purchased the property from Pineda, the latter had no special power of attorney to sell the property.
A special power of attorney is necessary to enter into any contract by which the ownership of an immovable is transmitted or acquired for a valuable consideration. Without an authority in writing, Pineda could not validly sell the subject property to Duque. Hence, any sale in favor of Duque is void.
As the consent of the real owner of the property was not obtained, no contract was perfected (Art. 1318 of the Civil Code)


LAND TITLES AND DEEDS
JURISDICTION

MATEO vs. COURT OF APPEALS
G.R. No. 128392 April 29, 2005

Facts: Casimiro Development Corporation (CDC) alleged that it was the owner of a parcel of registered land since it acquired the same from the previous owner, China Banking Corporation (CBC). After the sale CDC advised the petitioners that it was the new owner and that they had failed to pay the rentals due to it and to its predecessors-in-interest. The petitioners refused to pay and vacate the premises despite demands to settle their obligations and notice to vacate were served upon them. This prompted CDC to file a complaint for Unlawful Detainer against the petitioners before the Metropolitan Trial Court (MeTC). The petitioners maintained that since the land was classified as agricultural as evidenced by a Tax Declaration Certificate, it is the Department of Agrarian Reform Adjudication Board (DARAB) that has jurisdiction over the case. It should be noted that the land is covered by a Transfer Certificate of Title in the name of CDC’s predecessor-in-interest CBC.

Issue: Whether or not jurisdiction over the subject matter lies with the DARAB or with the Metropolitan Trial Court.

Held: For the DARAB to have jurisdiction over the case, there must be a tenancy relationship between the parties. One of the indispensable elements in order for a tenancy agreement to take hold over a dispute is that the parties are the landowner and the tenant or agricultural lessee. It must be noted that the petitioners failed to adequately prove ownership of the land. They merely showed tax declarations. As against a transfer certificate of title, tax declarations or receipts are not adequate proofs of ownership. Hence, it is the MeTC that has jurisdiction over the subject matter there being no proof of tenancy relationship.


RECONVEYANCE

HEIRS OF POMPOSA SALUDARES VS. COURT OF APPEALS
G.R. No. 128254. January 16, 2004

Facts: The heirs and their father, Juan Dator executed a Deed of Extrajudicial Partition of the share of Pomposa in the Tanza estate with the eastern portion thereof going to Juan and the western half to the children. Juan remained in possession of his share until his death. Isabel Dator applied for a free patent over the entire Tanza estate in behalf of the heirs thus it was awarded. Private respondents filed an action for reconveyance against petitioner heirs. They alleged that they were the owners in fee simple and they were in possession of the land, and Isabel Dator obtained free patent in favor of the heirs by means of fraud and misrepresentation. Petitioners alleged that they and their predecessors in interest had been in actual, continuous, adverse and public possession of the land in the concept of owners since time immemorial, and the title to the lot was issued to them after faithful compliance with the requirements for the issuance of a free patent.

Issues: 1) Whether or not the reconveyance is still available notwithstanding the indefeasibility of the Torrens Title.

2) Whether or not the heirs have been in open and continuous possession of the disputed lot.

Held: 1) The registered owner may still be compelled to reconvey the registered property to its true owner. Reconveyance does not set aside or re-subject to review the findings of fact of the Bureau of Lands. Thus, the decree of registration is respected as incontrovertible. What is sought is the transfer of the property or its title, which has been wrongfully or erroneously registered in another person’s name, to its rightful or legal owner or to the one with a better right.

2) The heirs convincingly established their open and continuous occupation of the entire Tanza estate. The farm was under the administration of Beata and Isabel Dator who took over its management after Petra Dator died; heir’s tenant Miguel Dahilig had been consistently tending the land since 1947 and was the one who planted the various crops and trees on the lot.

EXTRINSIC FRAUD

REXLON REALTY GROUP, INC. VS. COURT OF APPEALS
G.R. No. 128412. March 15, 2002

Facts: Respondent Alex David was the registered owner of two parcel of land. Petitioner Rexlon Realty Group, Inc. (Rexlon) entered into an agreement with respondent for the purchase of the two parcels of land as evidenced by an “absolute deed of sale.” Respondent filed with the Regional Trial Court a petition for the issuance of the owner’s duplicate copies which were allegedly lost; petition granted by the court. Rexlon then filed with the Court of Appeals a petition for annulment of the decision of the trial court on the ground that David allegedly employed fraud and deception in securing the replacement owner’s duplicate copies.

Issue: Whether or not such misrepresentation or fraud of respondent David can be characterized as an extrinsic fraud as to merit the annulment of the trial court’s decision.

Held: Extrinsic fraud contemplates a situation where a litigant commits acts outside the trial of the case; the effect of which prevents a party from having a trial, a real contest, or from presenting all of his case to the court, or where it operates upon matters pertaining to the judgment itself, but to the manner in which it was produced so that there is not a fair submission of the controversy. It is well settled that the use of forged instrument or prejudiced testimonials during trial is not an extrinsic fraud, because such evidence does not preclude the participation of any party in the proceedings. While a perjured testimony may prevent a fair and just determination of a case, it does not bar the adverse party from rebutting or opposing the use of such evidence. Furthermore, it should be stressed that extrinsic fraud pertains to an act committed outside of the trial. The alleged fraud in this case was perpetrated during the trial.

PRESCRIPTION DOES NOT RUN AGAINST THE STATE

PAGKATIPUNAN VS. COURT OF APPEALS
G.R. No. 129682. March 21, 2002

Facts: On June 15, 1967, the Court of First Instance of Gumaca, Quezon promulgated a decision confirming petitioner’s title to properties located in San Narciso, Quezon. Almost eighteen (18) years later, the Republic of the Philippines filed with the Intermediate Appellate Court an action to declare the proceedings in the LRC case null and void and to cancel the original certificate of title and to confirm the subject land as part of the public domain. The Republic claimed that the subject land was classified as timberland; hence, inalienable and not subject to registration. On the other hand, petitioners raised the special defense of indefeasibility of title and res judicata.

Issues: 1) Whether or not prescription runs against the state.

2) Whether or not occupation will ripen into ownership.

Held: 1) Prescription does not run against the state. The lengthy occupation of the disputed land by petitioners cannot be counted in their favor, as it remained part of the patrimonial property of the state which is inalienable and not disposable.

2) Unless public land is shown to have been reclassified or alienated to a private person by the state it remains part of the inalienable public domain. Occupation thereof in the concept of owner, no matter how long, cannot ripen into ownership and be registered as a title.




A TORRENS TITLE, ONCE REGISTERED, SERVES AS NOTICE TO THE WHOLE WORLD

ALVARICO VS. SOLA
G.R. No. 138953. June 6, 2002

Facts: Fermina Lopez executed a Deed of Self-Adjudication and Transfer of Rights over lot 5 in favor of Amelita Sola, who agreed to assume all the obligations, duties and conditions imposed which was approved by the Bureau of Lands. Castorio Alvarico filed a civil case for reconveyance against Amelita. He claimed that Fermina donated the land to him and immediately thereafter, he took possession of the same. He averred that the donations to him had the effect of withdrawing the earlier transfer to Amelita. Amelita maintained that the donation to petitioner was void because Fermina was no longer the owner of the property when it was allegedly donated to petitioner, the property having been transferred earlier to her. She added that the donation was void because of lack of approval from the Bureau of Lands and that she had validly acquired the land as Fermina’s rightful heir.

Issue: Who between the petitioner and respondent has a better claim to the land?

Held: The execution of public documents, as in the case of Affidavits of Adjudication is entitled to the presumption of regularity, hence convincing evidence is required to assail and controvert them. A Torrens title, once registered, serves as notice to the whole world. All persons must take notice and no one can plead ignorance of its registration. Clearly then, petitioner has no standing at all to question the validity of Amelita’s title. It follows that he cannot recover the property because he has not shown that he is the rightful owner thereof.

OPEN, CONTINUOUS, AND NOTORIOUS POSSESSION OF THE LAND

DEL ROSARIO VS. REPUBLIC
G.R. No. 148338. June 6, 2002

Facts: Petitioner filed an application for registration of a parcel of land. The clerk of court transmitted to the Land Registration Authority (LRA) the duplicate copy of petitioner’s application for registration, the original tracing cloth plan, and the other documents submitted by petitioner in support of his application. During the initial hearing, no oppositor appeared except for the provincial prosecutor who appeared on behalf of the Solicitor General in representation of the Republic of the Philippines. The trial court granted the application. Respondent appealed for failure of petitioner to submit in evidence the original tracing cloth plan and to establish that he and his predecessors in interest had been in open, continuous, and notorious possession of the land.

Issues: 1) Whether or not the submission in evidence of the original tracing cloth plan is a mandatory requirement.

2) Whether or not petitioners had been in open, continuous, and notorious possession of the land.

Held: 1) The submission in evidence of the original tracing cloth plan duly approved by the Bureau of Lands in cases for application of original registration of land is mandatory requirement. The reason for the rule is to establish the true identity of the land to ensure that it does not overlap a parcel of land or portion thereof already covered by a previous land registration, and to forestall the possibility that it will be overlapped by a subsequent registration.

2) A mere casual cultivation of portions of the land by the claimant does not constitute possession under claim of ownership for him. Possession is not exclusive and notorious so as to give rise to a presumptive grant from the state. The possession of the land however long the period thereof may have extended never confers title thereto upon the possessor because the Statute of Limitations with regard to public land does not operate against the state unless the occupant can prove possession and occupation of the same under the claim of ownership for the required number of years.







REDEMPTION PERIOD OF THE PROPERTY

RECAÑA VS. COURT OF APPEALS
G.R. No. 123850. January 5, 2001

Facts: Lot 6 of Block 2 of the Tondo Foreshore Land of the Land Tenure Administration was sold to Macario Arboleda, petitioner-spouses’ predecessor in interest. The land was covered by an original certificate in the name of Arboleda. The city treasurer of Manila auctioned the lot at a public auction sale due to tax delinquency. Spouses Cirilo and Miguela Montejo sold the property to petitioner-spouses who refunded the amount equivalent to the delinquent taxes and other expenses entailed. Private respondents, the other children and heirs of Macarion Arboleda filed for declaration of co-ownership and partition against petitioner. They asserted that the repurchase by the petitioner of the lot redounded to their benefit as co-heirs and now as co-owners. Petitioners contended that Section 4 of R.A. 1597, the law governing the subdivision of the Tondo Foreshore Lands from which the subject property emanated does not apply to the attendant facts in this case. Instead they instead that it was Section 78 of P.D. 464 which was applicable.

Issue: Which of the two laws, Section 4 of R.A. 1597 or Section 78 of P.D. 464, should apply in so far as the redemption period of the subject property is concerned?

Held: A special statute, provided for a particular case or class of cases, is not repealed by a subsequent statute, general in its terms, provisions and applications, unless the intent to repeal or alter is manifest although the terms of the general law are broad enough to include the cases embraced in the special law. Repeal of laws should be made clear and express. The failure to add a specific repealing clause indicates that the intent was not to repeal any existing law unless there is an irreconcilable or repugnancy between Section 4 of R.A. 1597 and Section 78 of P.D. 464. The former law is of special and exclusive application to lots acquired from the Tondo Foreshore Land only. The latter is a law or decree of general application. Petitioner’s repurchase of the subject lot within the five-year redemption period of Section 4 of R.A. 1597 is within the purview of redemption by a co-owner which inures to the benefit of all the other co-owners of the property.

INNOCENT PURCHASER FOR VALUE

NAZARENO VS. COURT OF APPEALS
G.R. No. 138842. October 18, 2000

Facts: Petitioners and respondent Romeo Nazareno are three of the five children of spouses Maximino and Aurea Nazareno, who during their marriage had acquired properties. After the death of Maximino, Sr., Romeo filed for intestate proceedings and he was thereafter appointed administrator of his father’s estate. Romeo discovered a deed o f sale selling petitioner Natividad six lots including Lot-3b occupied by Romeo but which was sold to petitioner Maximino, Jr. Maximino, Jr. filed an action for recovery of possession which was favored by the court. Romeo in turn filed an annulment of the sales on the ground of lack of consideration in that the transfer was merely to avoid inheritance tax and that Natividad was only to hold the said lots in trust for her siblings. Petitioners on the other hand filed a third party complaint against Romeo and his wife Eliza seeking the annulment of the transfer to Romeo of Lot 3 which is granted by the trial court except as to Lots 3, 13-b, 13 and 14 which had passed on to third persons.

Issue: Whether or not a person dealing with a registered land may rely on the certificate of title.

Held: The sale of Lots 13 and 14 to Ros-Alva Marketing will have to be upheld for Ros-Alva Marketing is an innocent purchaser for value which relied on the title of Natividad. The rule is settled that “every person dealing with registered land may safely rely on the correctness of the certificate of title issued therefore and the law will in no way oblige him to go behind the certificate to determine the condition of the property.”

TORTS AND DAMAGES

YHT Realty Corp, et al vs. Court of Appeals
G.R. No. 126780. February 17, 2005
Facts: MAURICE McLaughlin is an Australian national who comes to the Philippines for business. During his trips he stays in Tropicana, a hotel recommended to him by Brunhilda Tan. McLaughlin deposited cash and jewelry to the safety deposit box of the Hotel. The safety deposit box cannot be opened unless the key of the guest and that of the management are present. Lainez and Payam are employees of Tropicana who is charged with the custody of the keys. Thereafter, McLaughlin found out that some of the money and jewelry he deposited were missing. Lainez and Payam admitted that they assisted Tan to open his deposit box. Tan admitted that she stole McLaughlin’s keys. Tan executed a promissory note to cover the amount of the stolen money and jewelry. McLaughlin wanted to make the management liable.
Issue: Whether or not a hotel may evade liability for the loss of items left with it for safekeeping by its guests, by having these guests execute written waivers holding the establishment or its employees free from blame for such loss in light of Article 2003 of the Civil Code which voids such waivers.
Held: The issue of whether the “Undertaking For The Use of Safety Deposit Box” executed by McLoughlin is tainted with nullity presents a legal question appropriate for resolution in this petition. Notably, both the trial court and the appellate court found the same to be null and void. We find no reason to reverse their common conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in Articles 1998 to 2001[37] is suppressed or diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy precisely to apply to situations such as that presented in this case. The hotel business like the common carrier’s business is imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel guests and security to their persons and belongings. The twin duty constitutes the essence of the business. The law in turn does not allow such duty to the public to be negated or diluted by any contrary stipulation in so-called “undertakings” that ordinarily appear in prepared forms imposed by hotel keepers on guests for their signature.

Nikko Hotel Manila Garden & Ruby Lim vs. Reyes
G.R. No. 154259. February 28, 2005
Facts: Robeto Reyes known as “Amay Bisaya” saw in a hotel lobby his friend Dr. Violeta Filart who he said to have invite him the party of the hotel’s outgoing manager. So Reyes carried the fruit basket of Filart to the penthuse where the party is. However, Ruby Lim, the coordinator of the party asked him to leave since it is an exclusive party and he is not one of those invited. Reyes did not leave the party as was instructed but created a scene, thereby he was escorted out. He sued the hotel and Ruby Lim for damages.
Issue: Whether or not Ruby Lim acted abusively in asking Roberto Reyes, a.k.a. “Amay Bisaya,” to leave the party where he was not invited by the celebrant thereof thereby becomes liable under Articles 19 and 21 of the Civil Code.
Held: The Supreme Court ruled that Ruby Lim did not act abusively in asking Roberto Reyes in leaving the party to which he is not invited. In the absence of any proof of motive on the part of Ms. Lim to humiliate Mr. Reyes and expose him to ridicule and shame, it is highly unlikely that she would shout at him from a very close distance. Ms. Lim having been in the hotel business for twenty years wherein being polite and discreet are virtues to be emulated, the testimony of Mr. Reyes that she acted to the contrary does not inspire belief and is indeed incredible. Thus, the lower court was correct in observing that –Considering the closeness of defendant Lim to plaintiff when the request for the latter to leave the party was made such that they nearly kissed each other, the request was meant to be heard by him only and there could have been no intention on her part to cause embarrassment to him. It was plaintiff’s reaction to the request that must have made the other guests aware of what transpired between them, had plaintiff simply left the party as requested; there was no need for the police to take him out.
Article 19 involves a legal wrong committed for which the wrongdoer must be responsible. The object of this article, therefore, is to set certain standards which must be observed not only in the exercise of one’s rights but also in the performance of one’s duties. Its elements are the following: (1) There is a legal right or duty; (2) which is exercised in bad faith; (3) for the sole intent of prejudicing or injuring another. When Article 19 is violated, an action for damages is proper under Articles 20 or 21 of the Civil Code. Article 20 pertains to damages arising from a violation of law which does not obtain herein as Ms. Lim was perfectly within her right to ask Mr. Reyes to leave. Article 21refers to acts contra bonus mores and has the following elements: (1) There is an act which is legal; (2) but which is contrary to morals, good custom, public order, or public policy; and (3) it is done with intent to injure. Under the above mentioned articles the act must be intentional. Absent such intention and as the Court observed the conduct of Lim of asking Reyes to leave was in an exemplary manner, there can be no damages to be awarded. Any damage suffered by Reyes must be borne by him alone.

Quezon City Government vs. Dacara
G R No. 150304 June 15, 2005
Facts: Dacara Jr.’s car turned turtle upon hitting a rammed into a pile of earth/street diggings found at Matahimik St., Quezon City, which was then being repaired by the Quezon City government. As a result, Dacarra (sic), Jr. allegedly sustained bodily injuries and the vehicle suffered extensive damage. Thus his father Fulgencio Dacara Senior (Fulgencio) filed a calim for damages against the Local Government. The LGU contended that the fault is with the driver, since the LGU have out up warning signs. The trial court ruled that the LGU is liable.
Issue: Whether or not the Quezon City Government is liable for moral and exemplary damges due to the injuries suffered by Dacara Jr.
Held: To award moral damages, a court must be satisfied with proof of the following requisites: (1) an injury -- whether physical mental, or psychological -- clearly sustained by the claimant; (2) a culpable act or omission factually established; (3) a wrongful act or omission of the defendant as the proximate cause of the injury sustained by the claimant; and (4) the award of damages predicated on any of the cases stated in Article 2219. In the present case, the Complaint alleged that respondent’s son Fulgencio Jr. sustained physical injuries. The son testified that he suffered a deep cut on his left arm when the car overturned after hitting a pile of earth that had been left in the open without any warning device whatsoever. It is apparent from the Decisions of the trial and the appellate courts, however, that no other evidence (such as a medical certificate or proof of medical expenses) was presented to prove Fulgencio Jr.’s bare assertion of physical injury. Thus, there was no credible proof that would justify an award of moral damages based on Article 2219(2) of the Civil Code. Moreover, the Decisions are conspicuously silent with respect to the claim of respondent that his moral sufferings were due to the negligence of petitioners. The Decision of the trial court, which summarizes the testimony of respondent’s four witnesses, makes no mention of any statement regarding moral suffering, such as mental anguish, besmirched reputation, wounded feelings, social humiliation and the like. well-settled is the rule that moral damages cannot be awarded -- whether in a civilor a criminal case, in the absence of proof of physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, or similar injury. The award of moral damages must be solidly anchored on a definite showing that respondent actually experienced emotional and mental sufferings. Mere allegations do not suffice; they must be substantiated by clear and convincing proof.
Article 2231 of the Civil Code mandates that in cases of quasi-delicts, exemplary damages may be recovered if the defendant acted with gross negligence. Gross negligence means such utter want of care as to raise a presumption that the persons at fault must have been conscious of the probable consequences of their carelessness, and that they must have nevertheless been indifferent (or worse) to the danger of injury to the person or property of others. The negligence must amount to a reckless disregard for the safety of persons or property. Such a circumstance obtains in the instant case. A finding of gross negligence can be discerned from the Decisions of both the CA and the trial court. We quote from the RTC Decision: “Sad to state that the City Government through its instrumentalities have failed to show the modicum of responsibility, much less, care expected of them (sic) by the constituents of this City. It is even more deplorable that it was a case of a street digging in a side street which caused the accident in the so-called ‘premier city.’ Article 2229 of the Civil Code provides that exemplary damages may be imposed by way of example or correction for the public good. The award of these damages is meant to be a deterrent to socially deleterious actions. Public policy requires such imposition to suppress wanton acts of an offender. It must be emphasized that local governments and their employees should be responsible not only for the maintenance of roads and streets, but also for the safety of the public. Thus, they must secure construction areas with adequate precautionary measures.

SUCCESSION

AZNAR BROTHERS REALTY COMPANY VS. LAURENCIO AYING
G.R. No. 144773. May 16, 2005
Facts: The disputed property is Lot No. 4399 with an area of 34,325 square meters located at Dapdap, Lapu-Lapu City. Crisanta Maloloy-on petitioned for the issuance of a cadastral decree in her favor over said parcel of land. After her death in 1930, the Cadastral Court issued a Decision directing the issuance of a decree in the name of Crisanta Maloloy-on’s eight children, namely: Juan, Celedonio, Emiliano, Francisco, Simeon, Bernabe, Roberta and Fausta, all surnamed Aying. The certificate of title was, however, lost during the war. The siblings extra-judicially sold the lot however, three siblings, namely, Roberta, Emiliano and Simeon Aying did not participate in the extra-judicial partition. After the partition the lot was sold. 29 years after, the Roberta, Emiliano and Simen filed a case for the ejectment of the present occupants.
Issue: Whether or not respondents’ cause of action is imprescriptible
Held: The facts on record show that petitioner acquired the entire parcel of land with the mistaken belief that all the heirs have executed the subject document. Thus, the trial court is correct that the provision of law applicable to this case is Article 1456 of the Civil Code which states: ART. 1456. 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. The rule that a trustee cannot acquire by prescription ownership over property entrusted to him until and unless he repudiates the trust, applies to express trusts and resulting implied trusts. However, in constructive implied trusts, prescription may supervene even if the trustee does not repudiate the relationship. Necessarily, repudiation of said trust is not a condition precedent to the running of the prescriptive period. An action for reconveyance based on an implied or constructive trust must perforce prescribe in ten years and not otherwise. A long line of decisions of this Court, and of very recent vintage at that, illustrates this rule. Undoubtedly, it is now well-settled that an action for reconveyance based on an implied or constructive trust prescribes in ten years from the issuance of the Torrens title over the property. With regard to petitioner’s argument that the provision of Article 1104 of the Civil Code, stating that a partition made with preterition of any of the compulsory heirs shall not be rescinded, should be applied, suffice it to say that the Extra-Judicial Partition of Real Estate with Deed of Absolute Sale is not being rescinded. In fact, its validity had been upheld but only as to the parties who participated in the execution of the same. As discussed above, what was conveyed to petitioner was ownership over the shares of the heirs who executed the subject document. Thus, the law, particularly, Article 1456 of the Civil Code, imposed the obligation upon petitioner to act as a trustee for the benefit of respondent heirs of Emiliano and Simeon Aying who, having brought their action within the prescriptive period, are now entitled to the reconveyance of their share in the land in dispute.

TESTATE ESTATE OF THE LATE ALIPIO ABADA, BELINDA CAPONONG-NOBLE, petitioner, vs. ALIPIO ABAJA and NOEL ABELLAR
G.R. No. 147145. January 31, 2005
Facts: This is a case of the probate of the will of Alipio Abada. Thereafter, the probate of the will of Paula Toray was also filed with the court. The oppositors in the will of Abada nand Toray are their nephews and nieces. The ground for opposition is that decedent left no will or if there is a will it was executed not in consonance with the law. Belinda Caponong-Noble was assigned as the administratix of the estate of Abada by the trial court. Thereafter, Abellar was appointed administratix of Toray’s property. The RTC ruled only on , whether the will of Abada has an attestation clause as required by law. The RTC-Kabankalan further held that the failure of the oppositors to raise any other matter forecloses all other issues. Unsatisfied with the decision Caponong-Noble appealed.
Issue: Whether or not the will of Abada has an attestation clause, and if so, whether the attestation clause complies with the requirements of the applicable laws.
Held: The Court of Appeals did not err in sustaining the RTC-Kabankalan in admitting to probate the will of Abada. Abada executed his will on 4 June 1932. The laws in force at that time are the Civil Code of 1889 or the Old Civil Code, and Act No. 190 or the Code of Civil Procedurewhich governed the execution of wills before the enactment of the New Civil Code. The matter in dispute in the present case is the attestation clause in the will of Abada. Section 618 of the Code of Civil Procedure, as amended by Act No. 2645 governs the form of the attestation clause of Abada’s will.
There is no statutory requirement to state in the will itself that the testator knew the language or dialect used in the will. This is a matter that a party may establish by proof aliunde. Caponong-Noble further argues that Alipio, in his testimony, has failed, among others, to show that Abada knew or understood the contents of the will and the Spanish language used in the will. However, Alipio testified that Abada used to gather Spanish-speaking people in their place. In these gatherings, Abada and his companions would talk in the Spanish language. This sufficiently proves that Abada speaks the Spanish language. An attestation clause is made for the purpose of preserving, in permanent form, a record of the facts attending the execution of the will, so that in case of failure of the memory of the subscribing witnesses, or other casualty, they may still be proved. (Thompson on Wills, 2d ed., sec. 132.) A will, therefore, should not be rejected where its attestation clause serves the purpose of the law. We rule to apply the liberal construction in the probate of Abada’s will. Abada’s will clearly shows four signatures: that of Abada and of three other persons. It is reasonable to conclude that there are three witnesses to the will. The question on the number of the witnesses is answered by an examination of the will itself and without the need for presentation of evidence aliunde. The Court explained the extent and limits of the rule on liberal construction. Precision of language in the drafting of an attestation clause is desirable. However, it is not imperative that a parrot-like copy of the words of the statute be made. It is sufficient if from the language employed it can reasonably be deduced that the attestation clause fulfills what the law expects of it.

PRESCRIPTIVE PERIOD TO RECOVER PROPERTY OBTAINED BY FRAUD GIVING RISE TO AN IMPLIED TRUST; PROBATE FOR WILL
SPOUSES RICARDO PASCUAL AND CONSOLACION SISON VS. COURT OF APPEALS AND REMEDIOS EGUENIO-GINO
G.R. No. 115925. August 15, 2003

Facts: Petitioner Sison and respondent Eugenio-Gino are the niece and granddaughter , respectively of the late Canuto Sison. Canuto and 11 other individuals including his sister Catalina and his brother Victoriano were co-owners of a property known as Lot 2 covered by an original certificate of title.
On September 26, 1956, Canuto and Consolacion executed a Kasulatan ng Bilihang Tuluyan under which, Canuto sold his share in Lot 2 in favor of Consolacion.
On October 23, 1968, the surviving children of Canuto, namely Felicidad and Beatriz, executed a joint affidavit affirming the Kasulatan in favor of Consolacion, which the latter registered with the Office of the Register of Deeds.
On February 4, 1988, Remedios filed a complaint against Consolacion and her spouse, Ricardo Pascual for annulment of transfer of certificate of title because the former claimed that she is the owner of the lots since Catalina devised the land to her in Catalina’s last will. Remedies also added that the lots were obtained through fraudulent means since the area covered by the TCT is twice the size of Canuto.
Petitioner sought to dismiss the complaint on the ground of prescription. Petitioners claim that the basis of the action is fraud and the action should have been filed within four years from the registration of Consolacion’s title on October 28, 1968 and not some 19 years later on February 4, 1988.
The trial court denied petitioner’s motion to dismiss holding that the reckoning of the prescriptive period for filing complaint is evidentiary in nature and must await the presentation of the parties’ evidence during the trial.
Issue: Whether or not the action for annulment or cancellation of transfer of certificate of title by Remedios has prescribed.
Held: The four-year prescriptive period relied upon by the trial court applies only if the fraud does not give rise to an implied trust and the action is to annul a voidable contract under Article 1390 of the Civil Code. In such a case, the four-year prescriptive period begins to run from the time of the discovery of the mistake, violence, intimidation, undue influence or fraud.
It is now well-settled that the prescriptive period to recover property obtained by fraud or mistake, giving rise to an implied trust under Article 1456 of the Civil Code is ten years pursuant to Article 1144. this ten-year prescriptive period begins to run from the date the adverse party repudiates the implied trust which repudiation takes place when the adverse party registers the land.
Remedies filed her complaint on February 4, 1988 or more than 19 years after Consolacion registered her title over the lot on October 28, 1968. Unquestionably, Remedios filed the complaint late thus warranting its dismissal.
Remedies anchors her right in filing the suit on her being a devisee of Catalina’s last will. However, since the probate court has not admitted Catalina’s last will, Remedios has not acquired any right under the last will. Remedies is thus without any cause of action either to seek reconveyance of Lot 2 or to enforce an implied trust over these lots.
It was inappropriate to order the reconveyance of the subject lots to Remedios in her capacity as executrix of Catalina’s last will because she sued petitioners not in such capacity but as the alleged owner of the disputed lots.

SUCCESSION; PARTITION INTER VIVOS MAY BE DONE FOR AS LONG AS LEGITIMATES ARE NOT PRECLUDED; LEGITIME OF COMPULSORY HEIRS IS DETERMINED AFTER COLLATION; PROPERTY CERTIFICATE NOT SUBJECT TO COLLATERAL ATTACK
SPOUSES FLORENTINO ZARAGOZA AND ERLINDA ENRIQUEZ-ZARAGOZA VS. THE HONORABLE COURT OF APPEALS
G.R. No. 106401. September 29, 2000
Facts: Flavio Zaragoza Cano was the registered owner of certain parcels of land. He had four children namely: Gloria, Zacariaz, Florentino and Alberta, all surnamed Zaragoza. On December 9, 1964, he died without a will and was survived by his four children.
On December 28, 1981, private respondent Alberta Zaragoza-Morgan filed a complaint with the Court of First Instance against petitioner-spouses Florentino and Erlinda for delivery of her inheritance share and for payment of damages. She claims that she is a natural-born Filipino citizen and the youngest child of the late Flavio. She further alleged that her father in his lifetime partitioned the properties among his four children. The shares of her brothers and sister were given to them in advance by way of deed of sale, but without valid consideration, while her share was not conveyed by way of deed of sale then.
Petitioners denied knowledge of an alleged distribution by way of deeds of sale to them by their father. They denied knowledge of the alleged intention of their father to convey the cited lots to Alberta, much more, the reason for his failure to do so because she became an American citizen. They denied that there was partitioning of the estate of their father during his lifetime.
The Regional Trial Court rendered judgment adjudicating Lot 471 in the name of Flavio Zaragoza Cano to Alberta Zaragoza-Morgan as appertaining her share in his estate.
Issues: (1) Whether the partition inter vivos by Flavio Zaragoza Cano of his properties is valid.
(2) Whether the validity of the deed of sale and consequently, the transfer certificate of title over the lot registered in the name of petitioners can be a valid subject matter of the entire proceeding for the delivery of inheritance share.
Held: Both the trial court and the public respondent found that during the lifetime of Flavio, he already partitioned and distributed his properties among his three children, excepting private respondent through deeds of sale. A deed of sale was not executed in favor of private respondent because she had become an American citizen and the Constitution prohibited a sale in her favor.
It is basic in the law of succession that a partition inter vivos may be done for as long as legitimes are not prejudiced. Unfortunately, collation cannot be done in this case where the original petition for delivery of inheritance share only impleaded one of the other compulsory heirs. The petition must therefore be dismissed without prejudice to the institution of a new proceeding where all the indispensable parties are present for the rightful determination of their respective legitime and if the legitimes were prejudiced by the partitioning inter vivos.
Private respondent, in submitting her petition for the delivery of inheritance share, was in effect questioning the validity of the deed of sale in favor of petitioner and consequently, the transfer of certificate of title issued in the latter’s name. although the trial court, as an obiter, made a finding of validity of the conveyance of the said lot, since according to it, private respondent did not question the genuineness of the signature of the deceased, nevertheless, when the case was elevated to the Court of Appeals, the latter declared the sale to be fictitious because of finding of marked differences in the signature of Flavio in the deed of sale vis-à-vis signatures found in earlier documents. Could this be done? The petition is a collateral attack. A certificate of title shall not be subject to collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in accordance with law.

CREDIT TRANSACTIONS
FIRST FIL-SIN LENDING CORPORATION VS. GLORIA PADILLO
G.R. No. 160533. January 12, 2005

Facts: Respondent Gloria D. Padillo obtained a P500,000.00 loan from petitioner First Fil-Sin Lending Corp. and subsequently obtained another P500,000.00 loan from the same. In both instances, respondent executed a promissory note and disclosure statement. For the first loan, respondent made 13 monthly interest payments of P22,500.00 each before she settled the P500,000.00 outstanding principal obligation. As regards the second loan, respondent made 11 monthly interest payments of P25,000.00 each before paying the principal loan of P500,000.00. In sum, respondent paid a total of P792,500.00 for the first loan and P775,000.00 for the second loan. Thereafter, respondent filed an action for sum of money against petitioner alleging that she only agreed to pay interest at the rates of 4.5% and 5% per annum, respectively, for the two loans, and not 4.5% and 5% per month. The trial court dismissed respondent’s complaint. On appeal, the appellate court ruled that, based on the disclosure statements executed by respondent, the interest rates should be imposed on a monthly basis but only for the 3-month term of the loan. Thereafter, the legal interest rate will apply. The court also found the penalty charges pegged at 1% per day of delay highly unconscionable as it would translate to 365% per annum. Thus, it was reduced to 1% per month or 12% per annum.
Petitioner maintains that the interest rates are to be imposed on a monthly and not on a per annum basis. However, it insists that the 4.5% and 5% monthly interest shall be imposed until the outstanding obligations have been fully paid.
As to the penalty charges, petitioner argues that the 12% per annum penalty imposed by the Court of Appeals in lieu of the 1% per day as agreed upon by the parties violates their freedom to stipulate terms and conditions as they may deem proper.
Respondent avers that the interest on the loans is per annum as expressly stated in the promissory notes and disclosure statements. The provision as to annual interest rate is clear and requires no room for interpretation. Respondent asserts that any ambiguity in the promissory notes and disclosure statements should not favor petitioner since the loan documents were prepared by the latter.
Issue: Whether or not the applicable interest should be the legal interest of twelve percent (12%) per annum despite the clear agreement of the parties on another applicable rate.
Held: Perusal of the promissory notes and the disclosure statements pertinent to the loan obligations of respondent clearly and unambiguously provide for interest rates of 4.5% per annum and 5% per annum, respectively. Nowhere was it stated that the interest rates shall be applied on a monthly basis. Thus, when the terms of the agreement are clear and explicit that they do not justify an attempt to read into it any alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the contract. It is only in instances when the language of a contract is ambiguous or obscure that courts ought to apply certain established rules of construction in order to ascertain the supposed intent of the parties.

PHILIPPINE NATIONAL BANK VS. COURT OF APPEALS
G.R. No. 126908. January 16, 2003
Facts: Spouses Mateo and Carlita Cruz owned a parcel of land. They obtained a loan from the Philippine National Bank (PNB) in the amount of Php70,000 and constituted a real estate mortgage using their parcel of land to secure said loan. Subsequently, Mateo Cruz obtained an agricultural crop loan from PNB in the amount of Php156,000 which was also secured by a real estate mortgage. After Land Bank remitted to PNB Php359, 500 in bonds, Php174.43 in cash and transferred Php25,500 in bonds, PNB issued a Deed of Release of Real Estate Mortgage in favor of the Spouses Cruz. Consequently, PNB released all titles to them. Later Spouses Cruz loaned again from PNB and secured it with another real estate mortgage. Spouses Antonio and Soledad So Hu paid for the release of the mortgaged property since they were interested in it. Thus a Deed of Absolute Sale was entered into by Spouses So Hu and Spouses Cruz, conveying the property to the former. PNB conducted a public auction sale covering the property in question under the contention that Spouses Cruz failed to pay their loan. Since it was the sole and highest bidder, it now claimed the property. When PNB found Spouses So Hu In possession of the property, they were asked to vacate the property.
Issue: Is the extra judicial foreclosure of the third mortgage valid?
Held: It is manifested in records that Spouses So Hu had already paid the principal obligation secured by the third mortgage. A contract of mortgage is an accessory contract which derives its existence from the principal contract. Thus, if the principal ceases to be it also ceases. In this case, with the extinguishment of the loan, the mortgage is also extinguished.
Note that the loan secured by the mortgage was already paid prior to the foreclosure. Thus, the property can no longer be validly foreclosed since it would be a foreclosure that satisfies an extinguished obligation.

RAMIREZ VS. COURT OF APPEALS
G.R. No. 133841. August 15, 2003
Facts: On December 29, 1965, private respondent spouses Loreto Claravall and Victoria Claravall executed a deed of sale in favor of spouses Francisco and Carolina Ramirez covering a parcel of land including the improvements thereon with an option to repurchase within a period of two years. At the expiration of the two-year period, the Claravalls failed to redeem the property, prompting them to file a complaint against the spouses Ramirez to compel the latter to sell the property back to them. The Supreme Court found that the Deed of Absolute sale with option to repurchase was one of equitable mortgage.
Following the death of Francisco Ramirez, the spouses Claravall filed a complaint for accounting and damages against the Intestate Estate of Francisco Ramirez alleging among others that the spouses Ramirez acted fraudulently and in bad faith in refusing and obstructing the redemption of the property by the private respondents from January 2, 1968 to December 31, 1993 during which petitioners were receiving rentals from the tenants of the property which must be accounted for and returned to private respondents.
Issue: Whether or not petitioners were entitled to the fruits of the property as prior to the redemption thereof, they were the registered owners and not private respondents.
Held: The declaration by the Supreme Court in the first case that the deed of sale with option to repurchase entered into by the spouses Ramirez and private respondents was an equitable mortgage necessarily takes the deed out of the ambit of the law on sales and puts into operation the law on mortgage.
It is a well-established doctrine that the mortgagor’s default does not operate to vest the mortgagee the ownership of the encumbered property and the act of the mortgagee in registering the mortgaged property in his own name upon the mortgagor’s failure to redeem the property amounts to pactum commissorium, a forfeiture clause declared by the Court as contrary to good morals and public policy and, therefore, void. Before perfect title over a mortgaged property may thus be secured by the mortgagee, he must, in case of non-payment of the debt, foreclose the mortgage first and thereafter purchase the mortgaged property at the foreclosure sale.

CONTRACT OF LOAN; REAL CONTRACT; RECIPROCAL OBLIGATION

BPI INVESTMENT CORPORATION VS. COURT OF APPEALS
377 SCRA 177. February 15, 2002

Facts: Frank Roa obtained a loan Ayala Investment and Development Corporation (AIDC), the predecessor of BPIIC, for the construction of a house on his lot in Muntinlupa. Said house and lot were mortgaged to AIDC to secure the loan. In 1980, Roa sold the house and lot to respondents ALS Management and Development Corporation (ALS) and Antonio Litonjua. As paty of the purchase price, ALS and Litonjua assumed the balance of the Roa’s indebtedness with AIDC. Thereafter, AIDC granted the respondents a new loan of P500 000 to be applied to Roa’s debt and such loan to be secured by the property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding principal balance payable within ten years. On March 31, 1981, respondents executed a mortgage deed containing the above stipulations with the provision that payments of monthly amortization shall commence on May 1, 1981. On September 13, 1982, BPIIC released to respondents P&146.87 purporting to be what was left of the latter5’s loan after fully paying the loan of Roa.
On June 1984, BPIIC instituted foreclosure proceedings against the respondents because of their failure to pay the mortgage indebtedness. However, respondents filed a civil case against BPIIC opposing the foreclosure proceedings. In the said case, BPIIC claims that a contract of loan is a consensual contract and a contract of loan is perfected at the time the contract of mortgage is executed conformably with the ruling in Bonnevie vs. CA (125 SCRA 122). In the present case, the loan contract was perfected on March 31, 1981, the date when the mortgage deed was executed; hence, the amortization and interests on the loan should be computed from the said date. On the other hand, respondents argue that based on Article 1934 of the NCC, a simple loan was perfected upon the delivery of the contract, hence a real contract. In this case, it was only on September 13, 1982 that the loan contract was perfected, the date when the full loan was released to the respondents. The trial court rendered a decision in favor of the respondents, which was subsequently affirmed by the Court of Appeals.

Issue: Whether or not a contract of loan is a consensual contract or real contract.

Held: A contract of loan is not a consensual contract but a real contract. It is perfected only upon the delivery of the object of the contract. Petitioner misapplied the Bonnevie case. The contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause of Art. 1934 of the NCC. It is an accepted promise to deliver something by way of a simple loan.
Also, a contract of loan involves a reciprocal obligation wherein the obligation of each party is the consideration for that of the other. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him; only when a party has performed his part if the contract can he demand that the other party also fulfill his own obligation an if the latter fails, default sets in. Consequently, petitioner could not demand for the payment of the monthly amortization after September 134, 1982 for it was only then when it complied with its obligation under the loan contract. Therefore, in computing the amount due, the starting date is October 13, 1982 not May 1981.

MORTGAGE; BANKING INSTITUTION

BENJAMIN NAVARRO VS. SECOND LAGUNA DEV’T. BANK
G.R. No. 129428. February 27, 2003

Facts: Spouse Catalino and Consuelo Navarro owned a certain registered land and sold 5/6 of the said lot to their five children. By virtue of the sale, petitioners Benjamin and Rosita Navarro are listed as co-owners of the property. Without the knowledge and consent of the petitioners, the other owners of the property executed a falsified deed of absolute sale wherein they made it appear that the entire lot was sold to spouses Donalito Velasco and Esther Navarro. Thus a new TCT was issued in the name of the spouses Velasco. Subsequently, spouses Velasco mortgaged the property to respondent Laguna Development Bank to secure payment of a loan. Thereafter, the bank had the mortgaged foreclosed. On two occasions, petitioners wrote the bank, offering to redeem the property which petitioner failed to do and led to the consolidation of the ownership over the property in favor of the respondent bank. Petitioners filed a complaint praying, inter alia, the annulment of the mortgage. They alleged that the sale of the lot with respect to their 1/6 share is void ab initio considering the signatures appearing in the Deed of Absolute Sale were falsified and as such the mortgage contract involving their share executed by spouses alleging that the respondent spouses were purchasers in bad faith because they knew of the pending litigation concerning the property.

Issue: Whether or not the respondent bank acted in bad faith when it accepted said mortgage the property subject of a falsified Deed of Sale and when it subsequently sold property to respondent spouses Guzman.

Held: Respondent did not act in bad faith. This Court stressed that a mortgagee-bank is expected to exercise greater care and prudence before entering into a mortgage contract, even those involving registered land. The ascertainment of the status or the consdition of a property offered to it as a security for a loan must be a standard and indispensable part of its operation.
In entering into a mortgage contract with spouses Velasco, there was no indication that respondent bank acted in bad faith. Spouses Velasco presented to the bank their TCT showing they were then the absolute owners thereof. Indeed there was no circumstances or indications that aroused respondent bank’s suspicion that the title was defective. Moreover, it is a settled jurisprudence that whoever alleges bad faith in any transaction must substantiate his allegation, since, it is presumed that a person takes ordinary care of his concerns and that private transactions are entered into in good faith. Clearly, petitioners are wanting in this respect. In this connection, it bears reiterating that in their two letters to respondent bank earlier mentioned, petitioners did not state that spouses Velasco falsified their signatures appearing in the Deed of Absolute Sale. Nor did they question the validity of the mortgage and its foreclosure. Indeed, those letters could have led the bank to believe that petitioners recognize the validity of the Deed of Absolute Sale and the mortgage as well as its subsequent foreclosure.

MORTGAGE; BANKING INSTITUTION

CRUZ VS. BANCOM FINANCE CORPORATION
379 SCRA 490. March 19, 2002

Facts: Petitioners Edilberto and Simplicio Cruz were registered owners of a parcel of agricultural land. They sold the land for P700,000 to Norma Sulit who gave P25, 000 as earnest money. However, Sulit failed to pay the balance price; consequently, the petitioners did not transfer the title of the land to Sulit. But capitalizing on the close relationship of one Candelaria Sanchez with the petitioners, Sulit succeeded in having the petitioners execute a document of sale of the land in favor of Sanchez and on the same day, Sanchez executed another deed of absolute sale over the said land in favor of Sulit. As a result, Sulit was able to effect the transfer of the title in her name. In a special agreement, Sulit assumed Sanchez’s obligation to pay the petitioners within six months. Unknown to the petitioners, Sulit managed to obtain a loan from respondent Bancom secured by a mortgage over the land.
On account of Sulit’s failure to pay the amount stipulated, petitioners filed a complaint for reconveyance of the land. Bancom intervened in the case and claimed priority as mortgagee in good faith. Meanwhile, Sulit defaulted in her payment to Bancom and her mortgage was foreclosed. Petitioners argue that respondent was not a mortgagee in good faith because at the time it registered the real estate mortgage over the subject matter, their adverse claim and notice of lis pendens had already been annotated in the title. On the other hand, respondent maintains that petitioners were the ones in bad faith because they already had knowledge of the existence of the mortgage over the property when they caused the annotations. Respondent further claims that, being an innocent mortgagee, it should not be required to conduct an exhaustive investigation on the mortgagor’s title before it could extend a loan.

Issue: Whether or not respondent Bancom is a mortgagee in good faith.

Held: First, as a general rule, every person dealing with a registered land may safely rely on the correctness of the certificate of title and is no longer required to look behind the certificate in order to determine the actual owner. This rule, however, is subject to the right of a person deprived of the land through fraud to bring an action for rconveyance, provided the rights of innocent purchaser for value and in good faith are not prejudiced. An innocent purchaser for value includes an innocent lessee, mortgage or any other encumbrancer for value. Respondent, however, is not an ordinary mortgagee; it is a mortgagee bank. As such, unlike private individuals, it is expected to exercise greater care and prudence in its dealings, including those involving registered lands. The ascertainment of the status for a loan must be a standard and indispensable part of its operations. Respondent was clearly wanting in the observance of the necessary precautions to ascertain flaws in the title of Sulit. It should have not simply relied on the face of the certificate of title as its ancillary function of investing funds required a greater degree of diligence. The rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.
Second, respondent was already aware that there was an adverse claim and notice of lis pendens annotated on the certificate of title when it registered the mortgage. Although, registration is not the operative act for a mortgage to be binding between parties, to third persons, it is indispensable. Thus, petitioners being third parties to the unregistered mortgage were not bound by it.