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, owners of a parcel of land, entrusted their Transfer Certificate of Title (TCT) 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 conveying the land to Luis Parco. Parco then obtained a new title and mortgaged the property to petitioner Rural Bank of Sariaya to secure a loan. The respondents, who never received any proceeds and remained in possession, discovered the fraud and 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 Real Estate Mortgage, ordered the cancellation of Parco’s title, and awarded damages. It ruled the bank was not a mortgagee in good faith. The Court of Appeals affirmed. The bank appealed, arguing it had the right to rely on Parco’s clean certificate of title and was a mortgagee in good faith.

ISSUE

Whether the petitioner bank was a mortgagee in good faith, entitled to protection under the Torrens system, despite the fraudulent acquisition of the mortgagor’s title.

RULING

The Supreme Court denied the petition and affirmed the lower courts’ rulings. The legal logic is that while a mortgagee in good faith can generally rely on the face of a Torrens title, this protection is not absolute. The mortgagee must exercise the diligence of a prudent person. If circumstances exist that would excite suspicion and prompt a reasonably prudent man to investigate further, failure to do so constitutes negligence amounting to bad faith, stripping the mortgagee of protective status.
Here, the bank failed to exercise due diligence. Critical circumstances should have alerted it: the mortgagor, Luis Parco, was a new client from a distant town; the loan application was filed with unusual haste just three days after the new title was issued; and the bank approved the loan within two days without sufficient inquiry. Most importantly, the bank’s own appraiser testified he did not verify who was in actual possession of the property. The respondents were in open, continuous, and undisturbed possession, a fact an onsite inspection would have easily revealed. This failure to conduct a basic physical investigation of the property, coupled with the suspicious timing of the transaction, constituted gross negligence. Therefore, the bank could not claim to be a mortgagee in good faith, and its mortgage right was not protected. The annulment of the mortgage and the restoration of the respondents’ title were upheld.