G.R. No. 146997 . April 26, 2005
SPOUSES GODOFREDO & DOMINICA FLANCIA, Petitioners, vs. COURT OF APPEALS & WILLIAM ONG GENATO, Respondents.

FACTS

Petitioners Spouses Flancia purchased a house and lot from Oakland Development Resources Corporation under a Contract to Sell. They made substantial payments and took possession. Subsequently, they discovered that Oakland had mortgaged the entire mother title, which included their lot, to respondent William Ong Genato to secure a loan. Upon Oakland’s default, Genato initiated foreclosure proceedings. The petitioners filed an action to declare the mortgage and foreclosure null and void as to their lot, arguing that Oakland, not being the absolute owner of the specific lot sold to them, could not validly mortgage it under Article 2085 of the Civil Code.
The trial court initially ruled in favor of the Flancias, declaring the mortgage void as to their lot. On reconsideration, the regular judge reversed, upholding the mortgage. The Court of Appeals reinstated the first decision but only as to the award of damages against Oakland, ultimately ruling that the mortgage in favor of Genato was valid and binding. The appellate court held that Genato, as a mortgagee in good faith, had the right to rely on the clean certificate of title presented by Oakland at the time of the mortgage.

ISSUE

Whether the real estate mortgage executed by Oakland Development Resources Corporation over the property, which included the lot subject to the Flancias’ Contract to Sell, is valid and binding against the petitioners.

RULING

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals. The mortgage in favor of Genato is valid. The Court emphasized the principle of mortgagee in good faith. Genato, at the time the mortgage was constituted, was presented with a clean Transfer Certificate of Title (TCT No. 366380) covering the entire parcel, with no annotation of the Flancias’ unregistered Contract to Sell. A mortgagee is not obliged to look beyond the title to investigate the mortgagor’s ownership; reliance on the face of the certificate is sufficient. The unregistered contract did not bind Genato.
Consequently, Genato’s mortgage rights, duly annotated on the title, are superior to the unregistered personal rights of the Flancias arising from their contract with Oakland. However, the Court affirmed the trial court’s award of damages against Oakland for fraudulently mortgaging property it had already contracted to sell. The Flancias’ recourse is solely against Oakland for the return of their payments with interest and damages, not against the innocent mortgagee Genato. The decision balances the protection of a registered encumbrance made in good faith with providing relief to the defrauded buyers against the fraudulent seller.