G.R. No. L-10064; April 23, 1957
REHABILITATION FINANCE CORPORATION, petitioner-appellant, vs. BUEN MORALES, oppositor-appellee.

FACTS

The property covered by Transfer Certificate of Title No. 12226 was originally bought by Consuelo A. Agoncillo from Gregorio Araneta, Inc. on installment. Before full payment, Agoncillo sold the property to Buen Morales, with the agreement that the account would remain in Agoncillo’s name until fully paid, after which she would transfer the title to Morales; this sale was not recorded with Gregorio Araneta, Inc. Without Morales’s knowledge, Agoncillo obtained a loan from the Rehabilitation Finance Corporation (RFC), mortgaging the property as security. RFC guaranteed the balance of the purchase price to Gregorio Araneta, Inc., leading to the issuance of a title in Agoncillo’s name with the mortgage annotated. RFC paid the balance and released the rest of the loan to Agoncillo. Upon discovering this, Morales filed a criminal complaint for estafa against Agoncillo and a civil action against Agoncillo and RFC to recover the property, annotating a notice of lis pendens on the title. Subsequently, RFC foreclosed the mortgage due to Agoncillo’s default, bought the property at auction, and a new title was issued in RFC’s name with the notice of lis pendens carried forward. RFC then petitioned for the cancellation of this notice under Section 112 of Act No. 496 . Morales opposed, arguing he is an innocent third party protected by the notice and that cancellation would cause him considerable damage, and that the court lacked jurisdiction to resolve ownership issues in this incident. The lower court sustained the opposition, holding that while the notice did not affect RFC’s rights as a mortgagee (as the mortgage preceded the annotation), it affected RFC’s rights as a purchaser because the notice serves as a warning to all that the property is in litigation. RFC appealed.

ISSUE

Can the notice of lis pendens, annotated on the title after the mortgage but before RFC’s purchase of the property at the foreclosure sale, be cancelled at RFC’s instance while the civil action for recovery of the property involving both Agoncillo and RFC as defendants is still pending?

RULING

No. The order of the lower court denying the petition for cancellation is affirmed. The notice of lis pendens should be maintained. Under Section 24, Rule 7, the notice serves as constructive notice to all purchasers or encumbrancers of the property affected by the pending action. The civil action filed by Morales to recover ownership of the property is still pending and undisposed of, and RFC is a party defendant in that case. Therefore, RFC not only has constructive knowledge of the litigation but is actually a party to it. The notice is a warning that anyone who buys the property does so at their own risk. While the notice cannot affect RFC’s prior rights as a mortgagee, it properly affects its subsequent acquisition of the property as purchaser at the foreclosure sale. The validity of the mortgage itself is also involved in the pending litigation. Until the civil case is finally terminated, it is neither right nor proper to cancel the notice of lis pendens.