GR 89561; (September, 1990) (Digest)
G.R. No. 89561 September 13, 1990
BUENAFLOR C. UMALI, ET AL., petitioners, vs. COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS MANUFACTURING CO., INC., respondents.
FACTS
Petitioners, the heirs of Felipe Castillo, owned four parcels of land in Lucena City. Their co-petitioner, Santiago Rivera, as President of Slobec Realty & Development, Inc., purchased a tractor from respondent Bormaheco, Inc. To secure a surety bond required for this sale, Slobec and the Castillo heirs executed a Real Estate Mortgage over the four parcels in favor of the Insurance Corporation of the Philippines (ICP). The tractor was later returned to Bormaheco for repairs. Subsequently, Bormaheco made a claim on the surety bond. ICP paid Bormaheco and then foreclosed the mortgage on the Castillo properties. The properties were sold at public auction to ICP, which later sold them to respondent Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts). Petitioners filed a complaint for annulment of title, claiming the foreclosure and subsequent sale were void.
ISSUE
The core issue is whether the foreclosure of the real estate mortgage by ICP and the subsequent sale to PM Parts were valid, or whether they were tainted by fraud and bad faith, warranting annulment.
RULING
The Supreme Court reversed the Court of Appeals and declared the foreclosure and subsequent transfers null and void. The legal logic centered on the finding of fraud and collusion, which vitiated the entire transaction. The Court found that the foreclosure was based on a claim by Bormaheco that was not legally demandable at the time, as the tractor had already been returned to Bormaheco’s possession for repairs, negating any actionable default by Slobec that would trigger liability under the surety bond. ICP’s act of foreclosing the mortgage under these circumstances constituted bad faith.
Crucially, the Court found PM Parts to be a purchaser in bad faith. PM Parts was not an innocent purchaser for value. The evidence established a clear identity of directors and officers among Bormaheco, ICP, and PM Parts, demonstrating they were not acting at arm’s length. Modesto Cervantes and Atty. Martin de Guzman held key positions in all three corporations. This interlocking directorate meant PM Parts was fully aware of the defective title and the fraudulent nature of the foreclosure from which ICP derived its ownership. A purchaser who buys property with knowledge of a defect in the seller’s title cannot be considered in good faith. Consequently, the titles issued to ICP and later to PM Parts were declared void. The Register of Deeds was ordered to cancel PM Parts’ titles and reinstate the titles in the names of the Castillo heirs.