G.R. No. 81524 February 4, 2000
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF APPEALS and CONSUELO YU, respondents.

FACTS

Consuelo Yu, the absolute owner of an unregistered agricultural land, filed a complaint for annulment of mortgage and damages against Manuel de los Santos and the Philippine National Bank (PNB). Yu alleged that de los Santos, through fraud, executed an affidavit falsely claiming ownership of the land by inheritance. Based on this affidavit, the tax declaration in Yu’s name was cancelled and reissued in de los Santos’s name. De los Santos then used this tax declaration to mortgage the land to PNB to secure a loan. Yu asserted that PNB acted in bad faith in approving the mortgage.
PNB defended its actions, presenting the loan documents and the supporting papers de los Santos submitted, including the affidavit of ownership, joint affidavits from adjoining owners, and the tax declaration in his name. PNB claimed it exercised due diligence in processing the loan for the unregistered land. The trial court ruled in favor of Yu, declaring the mortgage null and void and ordering de los Santos and PNB to pay damages and attorney’s fees solidarily. The Court of Appeals affirmed this decision in toto.

ISSUE

Whether the Philippine National Bank was a mortgagee in good faith, having exercised the requisite diligence in approving the real estate mortgage over the unregistered land.

RULING

The Supreme Court denied PNB’s petition and affirmed the lower courts’ rulings. The Court held that PNB was not a mortgagee in good faith. The legal logic centers on the distinction between registered and unregistered land. The protection afforded to an innocent mortgagee for value, who may rely on the face of a Torrens title, does not apply to transactions involving unregistered land. For unregistered property, a mortgagee is required to exercise a higher degree of diligence by investigating the title and ownership of the mortgagor.
PNB failed to exercise this necessary diligence. The bank relied solely on the tax declaration and the self-serving affidavit executed by de los Santos. It did not conduct a thorough inquiry into the history of the property’s ownership, which would have easily revealed Yu’s longstanding possession, tax payments, and the administration of the land by her representative. The Court found that PNB’s investigation was superficial and insufficient given that it was dealing with unregistered land, where no certificate of title exists to provide a conclusive indication of ownership. Consequently, PNB was correctly held liable in solidum with de los Santos for damages and attorney’s fees.