G.R. No. 107109 ; February 6, 1996
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS, SILVESTRA CERENA and HEIRS OF HILARION ALONZO represented by ALFREDO ALONZO, et al.

FACTS

The case involves parcels of land originally owned by spouses Adriano Alonzo and Damiana Basibas. After their deaths, their daughter Aurelia waived her interests in favor of other relatives, including Margarita Alonzo (also known as Margarita Nalda), who was purportedly the child of the deceased son Ambrosio. Margarita sold a 700-square-meter portion of the land to spouses Feliciano and Gloria Daa. The Daa spouses obtained multiple loans from the Philippine National Bank (PNB), secured by a real estate mortgage on this lot. Upon the Daa spouses’ default, PNB foreclosed the mortgage, acquired the property as the highest bidder, and consolidated its title after the redemption period lapsed.
The heirs of Hilarion and Hilario Alonzo filed an action to annul the deed of sale between Margarita and the Daa spouses and the subsequent mortgage to PNB. They contended that Margarita was not the legitimate child of Ambrosio Alonzo, who died single and without issue, and thus had no valid title to sell. They further alleged that PNB acted with gross negligence amounting to bad faith in approving the loans without proper verification of the seller’s title and the property’s ownership history.

ISSUE

Whether the Philippine National Bank is entitled to reimbursement for the fair market value of the foreclosed property after its title was cancelled and the property was returned to the rightful owners.

RULING

The Supreme Court denied PNB’s petition and affirmed the Court of Appeals’ decision. The Court held that PNB was not a mortgagee in good faith. Banks are expected to exercise a higher degree of diligence, care, and prudence than private individuals because their business is imbued with public interest. PNB failed to conduct the necessary due diligence to verify the ownership history of the mortgaged property and the validity of the mortgagors’ title. This negligence precluded PNB from availing itself of the protection afforded to purchasers or mortgagees in good faith under the land registration law.
Consequently, the cancellation of PNB’s consolidated title rendered it null and void. The Court ruled that PNB never acquired a valid title to the property; therefore, the lot could not be considered an “acquired asset” of the bank under relevant banking circulars. Since there was no valid acquired asset, PNB’s claim for indemnity equivalent to the property’s fair market value had no legal basis. The bank’s recourse was against the Daa spouses and Margarita Nalda, as ordered by the trial court, for reimbursement of the loan amounts and related costs.