G.R. No. 107554 February 13, 1997
Cebu International Finance Corporation, petitioner, vs. Court of Appeals, Roberto Ong and Ang Tay, respondents.

FACTS

Jacinto Dy authorized Ang Tay to sell the vessel LCT “Asiatic.” Ang Tay sold it to Roberto Ong for P900,000.00, payable by checks. The Deed of Absolute Sale contained a handwritten stipulation that the vessel “shall not be registered or transferred to Robert Ong until complete payment.” Ong obtained possession and copies of the unnotarized deed. However, Ong had his copy, which lacked the handwritten condition, notarized. Using this document, he secured a Certificate of Ownership from the Philippine Coast Guard, renamed the vessel LCT “Orient Hope,” and subsequently obtained a loan from Cebu International Finance Corporation (CIFC). Ong executed a chattel mortgage over the vessel in favor of CIFC as security. Ong later defaulted on his loan payments to CIFC and the checks issued to Ang Tay were dishonored.

ISSUE

Whether the chattel mortgage constituted by Roberto Ong over the vessel in favor of CIFC is valid and enforceable against the rightful owner, Ang Tay.

RULING

No, the chattel mortgage is void. The Supreme Court affirmed the lower courts’ decisions. The legal logic rests on the principle that a person can only mortgage property to which he has valid title. Ong’s title was defective because the sale from Ang Tay was conditional upon full payment, which never occurred due to the dishonored checks. The handwritten condition in the original deed was integral and binding. Ong’s act of registering the vessel based on a copy lacking this condition was fraudulent. Consequently, Ong did not acquire ownership and had no capacity to mortgage the vessel. CIFC, as mortgagee, was not a mortgagee in good faith. It was duty-bound, under maritime law and general diligence, to investigate the mortgagor’s title. The existence of the prior civil case for rescission (CEB-6565) involving the same vessel, which CIFC was aware of, was a clear red flag requiring further inquiry into Ong’s ownership claims. CIFC’s failure to conduct a prudent investigation precludes it from invoking the protection accorded to innocent purchasers or mortgagees for value. Thus, the chattel mortgage, being based on a voidable and subsequently rescinded title, is null and void.