G.R. No. 147788; March 19, 2002
EDILBERTO CRUZ and SIMPLICIO CRUZ, petitioners, vs. BANCOM FINANCE CORPORATION (NOW UNION BANK OF THE PHILIPPINES), respondent.

FACTS

Petitioners Edilberto and Simplicio Cruz were the registered owners of agricultural land in Bulacan. In 1978, Norma Sulit offered to purchase it for ₱700,000.00, giving ₱25,000.00 as earnest money. Sulit failed to pay the balance. She then proposed a scheme where the petitioners would execute a Deed of Absolute Sale over the property in favor of Candelaria Sanchez for a stated consideration of ₱150,000.00, so Sanchez could obtain a bank loan using the land as collateral. On the same day, Sanchez executed another deed selling the property to Sulit for the same amount. A separate Special Agreement showed Sulit assumed the obligation to pay the petitioners the actual balance of ₱655,000.00. Sulit then obtained title in her name.
Unknown to the petitioners, Sulit secured a ₱569,000.00 loan from respondent Bancom Finance Corporation, mortgaging the property. Upon Sulit’s default on both her obligation to the petitioners and the bank loan, the petitioners filed for reconveyance. Bancom foreclosed on the mortgage, purchased the property at auction, and intervened in the suit. The trial court ruled the sale between the petitioners and Sanchez was an absolute simulation, void ab initio, and declared Bancom not a mortgagee in good faith. The Court of Appeals reversed, upholding the deeds of sale and mortgage and declaring Bancom a mortgagee in good faith with a preferential right.

ISSUE

The core issues are: (1) Whether the Deeds of Sale were absolutely simulated and thus void; and (2) Whether Bancom was a mortgagee in good faith entitled to a preferential right over the property.

RULING

The Supreme Court granted the petition, reversing the Court of Appeals and reinstating the trial court’s decision. The Court ruled the Deeds of Sale were absolutely simulated contracts. The evidence, particularly the Special Agreement, conclusively showed the parties had no intention to transfer ownership for the stated price of ₱150,000.00. The true agreement was for Sanchez (and later Sulit) to secure a loan to pay the petitioners the actual purchase price. An absolutely simulated contract is void from the beginning and transfers no title. Consequently, Sanchez acquired no ownership, and her subsequent sale to Sulit was also void. Sulit thus did not become the owner.
Since Sulit was not the owner, she could not validly mortgage the property under Article 2085 of the Civil Code. A mortgage constituted by a non-owner is invalid. Bancom, therefore, did not acquire any lien or right through the void mortgage. The subsequent foreclosure and auction sale conveyed no title to Bancom. The Court further held that Bancom could not invoke the protection accorded to a mortgagee in good faith under the Property Registration Decree. The principle of an innocent purchaser for value presupposes a valid contract in the chain of title. Here, the root contract of sale was void, rendering Sulit’s certificate of title void. A void title cannot be a source of valid rights. Bancom’s claim of good faith was immaterial, as its rights derived from a null transaction.