G.R. No. 67115, January 20, 1989
Filoil Marketing Corporation (now Petrophil Corporation), petitioner, vs. The Honorable Intermediate Appellate Court and Josefina Alberto de Pabalan, respondents.

FACTS

Josefina Alberto de Pabalan sold a parcel of land to Villa Rey Transit, Inc., represented by its President Jose M. Villarama, for P140,000.00 payable in installments. The Deed of Sale, executed on December 22, 1971, contained a stipulation that the vendor would execute the final deed of sale and deliver the title only upon full payment. Pabalan delivered TCT No. 87322 to Villarama. On February 2, 1972, Villarama caused the cancellation of that title and secured a new one, TCT No. 94229, in his name without any annotation of the installments. Using this clean title, Villarama mortgaged the property to Filoil Marketing Corporation to secure a loan. Filoil, which was already leasing the property from Pabalan, accepted the mortgage. Upon Villa Rey’s default, Filoil foreclosed and purchased the property at auction.
Pabalan filed a complaint for rescission and damages against Villa Rey Transit, Villarama, and Filoil. She alleged the sale was conditional, title did not pass, and Villarama’s acts were fraudulent. Filoil defended itself as an innocent mortgagee for value, relying on the clean title. The trial court rescinded the sale, annulled the subsequent titles and mortgage, and held all defendants solidarily liable for damages. The Intermediate Appellate Court affirmed. Only Filoil appealed to the Supreme Court.

ISSUE

Whether Filoil is an innocent mortgagee for value entitled to protection, and thus not liable for the rescission of the original conditional sale between Pabalan and Villa Rey Transit.

RULING

The Supreme Court modified the decision, ruling in favor of Filoil as an innocent mortgagee for value. The Court held that the contract between Pabalan and Villa Rey was a contract to sell, not a contract of sale, as ownership was reserved until full payment. However, Villarama’s act of securing a clean certificate of title constituted fraud. Despite this, Filoil’s status was protected. When it accepted the mortgage, it had no duty to investigate beyond the face of TCT No. 94229, which showed Villarama as the absolute owner with no liens. Filoil’s prior lease from Pabalan did not constitute bad faith, as the lease was a distinct contract and did not imply knowledge of the conditional sale’s terms. The legal logic is anchored on the principle of indefeasibility of a Torrens title and the protection afforded to innocent purchasers or mortgagees in good faith and for value who rely on the certificate of title. The Court emphasized that to hold otherwise would undermine public confidence in the Torrens system. Consequently, the mortgage and foreclosure sale in Filoil’s favor were declared valid. Filoil was, however, ordered to pay Pabalan the unpaid balance of the purchase price plus interest, as it ultimately benefited from the property. The awards for moral and exemplary damages and attorney’s fees against Filoil were disallowed.