G.R. No. 158566 September 20, 2005
Josephine Orola, Myrna Orola, Angeline Orola, Manuel Orola, Antonio Orola and Althea Orola, Petitioners, vs. The Rural Bank of Pontevedra (Capiz), Inc., Emilio Q. Orola, The Register of Deeds of Capiz and The Ex-Officio Provincial Sheriff of Capiz, Respondents.

FACTS

Trinidad Laserna Orola died intestate in 1969, survived by her husband Emilio and their six minor children. Emilio was appointed judicial guardian of the children and administrator of the estate. To finance a fishpond development project on estate property, Emilio, as administrator, negotiated a loan with respondent Rural Bank. The bank’s scheme required splitting the loan into three applications. Consequently, Emilio, with court approval, executed amended contracts of lease over estate properties with three of his children—Josephine, Manuel, and Antonio—as lessees, authorizing them to secure loans using the leased premises as collateral. The children then obtained loans from the bank and, acting as attorneys-in-fact for Emilio as administrator, executed real estate mortgages over the estate properties. These mortgage contracts were never submitted to the guardianship or intestate court for approval.
When the loans defaulted, the bank foreclosed on the mortgaged properties. The children (petitioners) filed an action for annulment of the mortgages and foreclosure, arguing the mortgages were void for lack of requisite court approval. The Regional Trial Court ruled in favor of the petitioners, declaring the mortgages void. The Court of Appeals reversed, holding the mortgages valid, reasoning that the court-approved leases, which authorized the encumbrance, sufficed.

ISSUE

Whether the real estate mortgages executed over properties of the estate, without prior approval from the intestate court, are valid.

RULING

No, the mortgages are void. The Supreme Court reversed the Court of Appeals and reinstated the RTC decision. The legal logic is anchored on the nature of estate administration and the fiduciary role of an administrator. Properties under judicial settlement are in custodia legis; the court has exclusive jurisdiction over their disposition. An administrator is merely a court agent with powers defined by statute and court orders. Under the Rules of Court, a court-appointed administrator must seek prior court approval for any act of ownership, such as encumbering estate property. The authority granted in the lease contracts for the lessees to mortgage the property did not dispense with this mandatory requirement. The administrator himself needed court approval to execute the mortgages. His failure to secure it rendered the mortgages null and void for being executed beyond his authority. The bank, as a lending institution, was charged with the duty to ascertain the administrator’s authority and ensure compliance with judicial approval requirements. Its failure to do so meant it could not claim status as a mortgagee in good faith. Consequently, the foreclosure based on void mortgages was invalid.