G.R. No. 149231 ; July 17, 2006
ARACLEO ERASUSTA, JR., GONZALO ERASUSTA and FAUSTINO ERASUSTA, in substitution of their mother LUCENA DE LOS REYES, petitioners, vs. COURT OF APPEALS, PACIFIC BANKING CORPORATION, ANTONIO PRIETO, SR., and AMPARO AMORIN, IMELDA, EVANGELINE, TERESITA, FORTUNATO, JR., REYNALDO, MARIBEL and ELIZABETH, all surnamed AMORIN, respondents.

FACTS

The controversy involves Lots 19-A and 19-C of the Prieto Estate in Manila. Lucena De Los Reyes purchased both lots from owner Antonio Prieto, Sr. under separate installment contracts. The contracts lacked technical descriptions but identified the lots by the addresses of existing houses: 925 Maria Luisa St. for Lot 19-A and 933 Maria Luisa St. for Lot 19-C. In 1968, De Los Reyes transferred her rights over Lot 19-C to Fortunato Amorin, who obtained title. The Amorins built a house at 933 Maria Luisa St., believing it was Lot 19-C. Separately, a certain Benjamin Valenzuela defrauded De Los Reyes, using forged documents to obtain titles to Lot 19-A and other properties in his name. Valenzuela then mortgaged these properties to respondent Pacific Banking Corporation.
The Bank foreclosed on the mortgages and acquired titles. In 1973, the Bank demanded that the Amorins vacate the property at 933 Maria Luisa St., claiming it was actually Lot 19-A, which it now owned. An investigation revealed a critical mix-up: the Land Registration Commission records showed that Lot 19-C was actually located at 925 Maria Luisa St., and Lot 19-A was at 933 Maria Luisa St. Thus, the Amorins, who believed they owned Lot 19-C, were physically occupying Lot 19-A. The Amorins then filed an action for Recovery of Ownership with Damages against De Los Reyes and the Bank.

ISSUE

The core issue is whether the Bank was a mortgagee in good faith, entitled to the protection of the Torrens system, despite the fraud perpetrated by Valenzuela and the underlying mix-up in the lot identities.

RULING

The Supreme Court ruled in favor of the petitioners, reinstating the trial court’s decision. The Court held that the Bank was not a mortgagee in good faith. While a mortgagee generally relies on the certificate of title, this protection is not absolute. The Bank failed to exercise the due diligence required of banking institutions. It merely relied on the certificates of title presented by Valenzuela without conducting an ocular inspection of the mortgaged properties. Had it done so, it would have discovered that Lot 19-A, with the address 933 Maria Luisa St., was actually occupied by the Amorins, who were not the registered owner Valenzuela. This possession by a third party constituted a red flag that should have prompted further investigation into Valenzuela’s claim of ownership. The Bank’s failure to ascertain the status of the property constituted gross negligence, making it a mortgagee in bad faith. Consequently, the titles derived from the fraudulent transactions were declared null and void. The Court also ordered the technical descriptions of Lots 19-A and 19-C to be interchanged to reflect their correct physical locations.