G.R. No. L-36897 June 26, 1980
SPOUSES FLORENTINO S. TOMAS and FRANCISCA CARIÑO, plaintiffs-appellees, vs. EUSEBIA TOMAS, defendant, PHILIPPINE NATIONAL BANK, SANTIAGO, ISABELA BRANCH, defendant-appellant.

FACTS

Plaintiffs-appellees Florentino S. Tomas and Francisca Cariño were the registered owners of a homestead parcel of land under OCT No. I-4620. Through fraud, defendant Eusebia Tomas, who was unrelated to Florentino, secured the cancellation of the appellees’ title. She executed a deed of extrajudicial settlement falsely representing herself as the sole heir of the deceased Florentino Tomas, who was in fact alive. She then petitioned for and obtained a new owner’s duplicate copy of the OCT by falsely alleging its loss. Using this fraudulent title, TCT No. 8779 (later TCT-350) was issued in her name. She subsequently mortgaged this land to defendant-appellant Philippine National Bank (PNB) to secure a loan.
The fraud was discovered when Florentino Tomas himself applied for a loan with PNB, offering the same property as collateral. The appellees filed an action to annul the fraudulent title and the mortgage. The trial court declared Eusebia Tomas’s title and the deed of settlement null and void, revived the appellees’ original title, and declared the mortgage in favor of PNB as without force and effect against the plaintiffs. PNB appealed, claiming it was a mortgagee in good faith.

ISSUE

Whether the Philippine National Bank is a mortgagee in good faith, such that the real estate mortgage it obtained from the fraudulent owner is valid and enforceable against the true owners.

RULING

The Supreme Court affirmed the trial court’s decision, ruling that the mortgage was without force and effect against the true owners. The Court rejected PNB’s claim of being a mortgagee in good faith entitled to protection under the Land Registration Act. The legal logic centered on the bank’s failure to exercise the due diligence required under the circumstances. While a certificate of title free from liens is generally a basis for invoking good faith, the nature of the title in this case—originating from a deed of extrajudicial settlement by a stranger claiming to be the sole heir of a living owner—should have excited the bank’s suspicion and prompted a more thorough inquiry.
The Court applied the principle that as between two innocent parties—the defrauded owner and the mortgagee bank—the one who enabled the fraud to succeed must bear the loss. The bank, by failing to conduct a basic investigation, such as sending a representative to inspect the land and ascertain the true occupant and owner, did not act with the care expected of a banking institution. This was especially pertinent for a homestead patent, which carries a legal policy against alienation. Since the bank failed to prove its good faith, it could not claim protection. The mortgage, executed by a non-owner, was therefore correctly declared unenforceable against the true registered owners.