G.R. No. 189477 ; February 26, 2014
HOMEOWNERS SAVINGS AND LOAN BANK, Petitioner-Appellant, vs. ASUNCION P. FELONIA and LYDIA C. DE GUZMAN, represented by MARIBEL FRIAS, Respondents-Appellees.

FACTS

Respondents Asuncion Felonia and Lydia de Guzman mortgaged their property to Marie Michelle Delgado to secure a loan. The transaction was documented as a Deed of Absolute Sale with Option to Repurchase. Respondents successfully sued for reformation of the instrument, with the RTC and later the CA declaring the true agreement to be an equitable mortgage. This decision became final in October 2000. However, during the pendency of that reformation case, Delgado filed a separate petition for consolidation of ownership over the same property. The RTC in that case granted her petition ex-parte, leading to the cancellation of respondents’ title and the issuance of a new one in Delgado’s name. Using this new title, Delgado mortgaged the property to petitioner Homeowners Savings and Loan Bank (HSLB) in June 1995. HSLB annotated its mortgage on June 5, 1995. Respondents annotated a notice of lis pendens regarding the reformation case on Delgado’s title on September 14, 1995. HSLB later foreclosed on the property. In October 2000, the CA annulled the RTC decision in the consolidation case, reinstating respondents as the absolute owners.

ISSUE

Whether HSLB can be considered a mortgagee in good faith, such that its mortgage and subsequent foreclosure are valid against the true owners, Felonia and de Guzman.

RULING

No, HSLB cannot be considered a mortgagee in good faith. The Supreme Court affirmed the rulings of the lower courts, ordering the cancellation of all titles derived from Delgado’s void title and the reinstatement of respondents’ original certificate of title. The legal logic is anchored on the principle that a forged or fraudulent title is void from the beginning. Delgado’s title, issued pursuant to an ex-parte proceeding that was later annulled, was void. One cannot mortgage a property one does not own. Since Delgado had no valid ownership, she could not convey any mortgage rights to HSLB. The Court rejected HSLB’s claim of being a mortgagee in good faith. Good faith requires a mortgagee to exercise due diligence in examining the title and its annotations. HSLB’s mortgage was annotated on June 5, 1995. The Court found that the notice of lis pendens for the reformation case, which directly challenged Delgado’s ownership, was annotated on the title on September 14, 1995. Crucially, the Court held that the notice of lis pendens relates back to the filing of the complaint. The reformation case was filed in 1991, long before HSLB’s transaction. Therefore, HSLB is deemed to have constructive notice of this pending litigation challenging the very root of Delgado’s title. By failing to account for this, HSLB did not exercise the required diligence and cannot claim good faith. The subsequent annulment of Delgado’s title rendered all derivative transactions, including the mortgage to HSLB, null and void.