GR 109305; (October, 2000) (Digest)
G.R. No. 109305; October 2, 2000
INSURANCE SERVICES and COMMERCIAL TRADERS, INC. (INSTRADE Inc.), petitioner, vs. THE COURT OF APPEALS, and/or MANUEL C. HERRERA, JUSTO P. TORRES, JR., PACITA CAÑIZARES-NYE, and PAZ SALVALEON, MANUEL GARCIA, VIVENCIA SALVALEON, and DALMACIO ABAD, respondents.
FACTS
Private respondents Paz and Vivencia Salvaleon owned a parcel of land. They borrowed P2,000.00 from spouses Amador and Mila de Castro, mortgaging the property and surrendering their title. Amador de Castro sought advice from Cesar Busque, General Manager of Cantrade Davao, on securing a loan using the property as collateral. The Salvaleons signed a special power of attorney authorizing Mila de Castro to mortgage the property, which was given to Busque. However, Busque later negotiated a real estate mortgage with petitioner Instrade using a forged special power of attorney that purported to authorize him to use the Salvaleons’ property as security for Cantrade’s debt to Instrade.
When Cantrade defaulted, Instrade initiated extrajudicial foreclosure. The Salvaleons discovered the impending foreclosure and filed a complaint for annulment of the sale and damages against Instrade, Cantrade, and Busque. They alleged the special power of attorney was forged, rendering the mortgage and foreclosure void. Despite a temporary restraining order that was quickly lifted, the foreclosure proceeded, and a new title was issued to Instrade.
ISSUE
Whether the Court of Appeals erred in affirming the trial court’s decision annulling the extrajudicial foreclosure sale and declaring the real estate mortgage null and void.
RULING
The Supreme Court denied the petition and affirmed the Court of Appeals. The core legal principle applied is that a mortgagee must exercise due diligence in verifying the authority of an agent and the ownership of the property offered as collateral. Petitioner Instrade cannot be considered a mortgagee in good faith or an innocent purchaser for value.
The forged special power of attorney was void and conferred no authority upon Busque to mortgage the Salvaleons’ property. Consequently, the real estate mortgage contract derived from it was also void. Instrade failed to exercise the requisite prudence. It acted with undue haste, granting the loan without verifying the authenticity of the special power of attorney or ascertaining the true owners’ consent, despite the property being registered in the names of third parties (the Salvaleons) who were not the debtor (Cantrade). The Court cited precedent that one who purchases or accepts a mortgage with knowledge of facts that should prompt a reasonable inquiry cannot claim good faith if a title defect is later discovered. Instrade’s failure to investigate, especially given Cantrade’s prior questionable dealings, demonstrated a lack of good faith. Therefore, the annulment of the mortgage and the subsequent foreclosure proceedings was proper. The Court upheld the reinstatement of the Salvaleons’ title and the award of damages against Cantrade and Busque.