G.R. No. 78011 . July 5, 1989.
RURAL BANK OF SARIAYA, INC., petitioner, vs. BENJAMIN YACON, MAXIMA BAUTISTA, HONORIO BAUTISTA, ISABEL ALVAREZ, PAULINO BAUTISTA, CONSUELO YACON, and COURT OF APPEALS, respondents.

FACTS

The private respondents, registered owners of a parcel of land, entrusted their owner’s duplicate certificate of title to their nephew, Florentino Alcantara, to secure a loan. Alcantara, conspiring with others, deceived the respondents into signing documents they did not understand, written in English. These documents included a Special Power of Attorney authorizing Alcantara to negotiate, mortgage, and sell the property. Using this authority, Alcantara executed a Deed of Absolute Sale over the land in favor of Luis Parco. Parco then obtained a new title in his name and mortgaged the property to petitioner Rural Bank of Sariaya to secure a loan. The respondents received no proceeds from the purported sale and remained in possession of the land. Upon discovery, they filed an action for annulment of the documents and cancellation of Parco’s title.
The trial court nullified the Special Power of Attorney, the Deed of Sale, and the subsequent Real Estate Mortgage, and ordered the restoration of the respondents’ original title. It also awarded damages. The Court of Appeals affirmed this decision. Petitioner bank appealed, arguing it was a mortgagee in good faith entitled to rely on Parco’s certificate of title.

ISSUE

Whether the petitioner bank was a mortgagee in good faith, such that its real estate mortgage over the property should be upheld despite the nullity of the preceding sale to its mortgagor, Luis Parco.

RULING

No, the petitioner bank was not a mortgagee in good faith. The Supreme Court affirmed the appellate court’s decision, ruling that the bank failed to exercise the due diligence required of a financial institution before approving a mortgage loan. While the general rule protects an innocent mortgagee who relies on the face of a Torrens title, this protection is forfeited when the mortgagee is guilty of negligence amounting to bad faith. The bank’s agent admitted he did not conduct a thorough ocular inspection of the property and failed to ascertain who was in actual possession. The respondents were continuously and openly in possession, a fact that would have been easily discovered by a prudent inquiry. Furthermore, the Court noted suspicious circumstances: Parco applied for the loan merely three days after obtaining the new title, and the bank approved it with undue haste just two days later, despite Parco being a new client from a different town. These circumstances collectively indicated a lack of the requisite caution, stripping the bank of the protective mantle of a mortgagee in good faith. Consequently, the mortgage was correctly annulled along with the void sale.