G.R. No. 142411 . October 14, 2005.
WINIFREDA URSAL, Petitioner, vs. COURT OF APPEALS, THE RURAL BANK OF LARENA (SIQUIJOR), INC. and SPOUSES JESUS MONESET and CRISTITA MONESET, Respondents.

FACTS

Spouses Jesus and Cristita Moneset (Monesets) were the registered owners of a house and lot in Cebu City. On January 9, 1985, they executed a “Contract to Sell Lot & House” in favor of Winifreda Ursal (Ursal) for ₱130,000.00, payable as follows: a ₱50,000.00 downpayment and the balance in monthly installments of ₱3,000.00. The contract stipulated that if Ursal defaulted on six monthly installments, the agreement would be deemed cancelled, with the Monesets obligated to refund the downpayment and pay for Ursal’s improvements. Upon receipt of the downpayment, Ursal was to take possession and hold the property’s Transfer Certificate of Title (TCT). Upon full payment, the Monesets were to execute a Deed of Absolute Sale.
Ursal paid the downpayment, took possession, and made improvements worth ₱50,000.00. After paying six monthly installments, she stopped payments because the Monesets failed to deliver the TCT as agreed, preventing her from annotating the contract on the title.
Unknown to Ursal, the Monesets executed an absolute deed of sale over the property to Dr. Rafael Canora, Jr. on November 5, 1985. Later, on September 15, 1986, they executed a sale with pacto de retro with Restituto Bundalo. On the same day, Bundalo, as the Monesets’ attorney-in-fact, executed a real estate mortgage over the property with the Rural Bank of Larena (Bank) for ₱100,000.00. The mortgage was annotated on the title. Due to non-payment of the loan, the Bank initiated extrajudicial foreclosure.
Ursal filed an action for declaration of non-effectivity of mortgage and damages against the Monesets, Bundalo, and the Bank, alleging fraud and bad faith. The Monesets claimed Ursal breached the contract by stopping payments. The Bank asserted it relied on the clean title.
The Regional Trial Court (RTC) found the Monesets liable for fraud and breach of contract, as they violated the contract by selling and mortgaging the property while the contract with Ursal was subsisting. It held the real estate mortgage valid, ruling the Bank was not obliged to look beyond the certificate of title, though it noted the Bank could have been more astute. The RTC dismissed the complaint against the Bank but, on equity, gave Ursal a preferential right to redeem the property. It also ordered the Monesets to reimburse Ursal’s payments and the cost of improvements. The Court of Appeals reversed the RTC decision, prompting Ursal’s petition to the Supreme Court.

ISSUE

1. Whether the Rural Bank of Larena was a mortgagee in good faith.
2. Whether the Monesets are liable for damages due to fraud and breach of contract.
3. Whether Ursal is entitled to reimbursement and damages.

RULING

The Supreme Court GRANTED the petition in part. It REVERSED and SET ASIDE the Court of Appeals’ decision and REINSTATED the RTC decision with modifications.
1. The Rural Bank of Larena was a mortgagee in good faith. The Bank had the right to rely on the face of the Monesets’ clean certificate of title and was under no obligation to investigate further. The Bank’s appraiser, upon ocular inspection, was informed by the Monesets that the occupant (Ursal) was merely a lessee. The Bank’s approval of the loan, though facilitated by the Monesets’ deception, was based on documents that were regular on their face. Therefore, the real estate mortgage was valid, and the Bank was not liable.
2. The Monesets are liable for damages due to fraud and breach of contract. The Monesets acted in bad faith by selling and mortgaging the property to third parties while their Contract to Sell with Ursal was still in force and without notice to her. Ursal’s suspension of installment payments was justified under Article 1169 of the Civil Code on reciprocal obligations, as the Monesets first breached the contract by failing to deliver the TCT. The Monesets’ subsequent fraudulent acts rendered them liable for damages under Article 1170.
3. Ursal is entitled to reimbursement and damages. The Court ordered the Monesets to reimburse Ursal for the downpayment of ₱50,000.00, the six monthly installments totaling ₱18,000.00, and the cost of improvements amounting to ₱50,000.00. However, the Supreme Court DELETED the RTC’s award of a preferential right to redeem the property in favor of Ursal, as such a right is not supported by law or equity given the Bank’s status as a mortgagee in good faith. The property rightfully belonged to the Bank following the valid foreclosure.