G.R. No. L-50008 August 31, 1987
PRUDENTIAL BANK, petitioner, vs. HON. DOMINGO D. PANIS, Presiding Judge, Court of First Instance of Zambales and Olongapo City; FERNANDO MAGCALE & TEODULA BALUYUT-MAGCALE, respondents.

FACTS

Spouses Fernando and Teodula Magcale obtained a P70,000 loan from Prudential Bank on November 19, 1971. To secure it, they executed a real estate mortgage over a residential building and their “right of occupancy” on the lot where it stood, which was public land under a pending Miscellaneous Sales Application. This mortgage was registered under Act 3344. On May 2, 1973, the spouses obtained an additional P20,000 loan from the same bank and executed a second mortgage over the same properties.
Between these transactions, the Secretary of Agriculture issued Miscellaneous Sales Patent No. 4776 over the lot on April 24, 1972, and Original Certificate of Title No. P-2554 was issued to Fernando Magcale on May 15, 1972. Upon the spouses’ loan default, the bank extrajudicially foreclosed the mortgages. The spouses sued, and the trial court declared both mortgages null and void.

ISSUE

Whether the two deeds of real estate mortgage are valid.

RULING

The Supreme Court modified the trial court’s decision. It upheld the validity of the first mortgage (for P70,000) but declared the second mortgage (for P20,000) null and void. The legal logic turns on the application of the Public Land Act ( Commonwealth Act No. 141 ) and the timing of the sales patent issuance.
For the first mortgage, executed before the patent was issued, the Court ruled it was valid. The mortgaged object was the mortgagors’ possessory rights and improvements on the public land, which are considered personal property under Article 415(1) of the Civil Code and can be validly mortgaged as chattels under the Chattel Mortgage Law (Act 1508). The bank was aware of the pending sales application, and the mortgage rider contemplated future annotation on the title. This did not violate the Public Land Act’s prohibitions against alienation before patent issuance, as the mortgage was on the possessory right, not the land itself.
For the second mortgage, executed after the sales patent and original certificate of title were issued, the Court found it void. Sections 121 and 122 of the Public Land Act prohibit any alienation or encumbrance of land acquired under a free patent or homestead within five years from patent issuance. The second mortgage, created within this prohibited period without the required Secretary’s approval, was expressly illegal. The Court emphasized that the doctrines of estoppel or pari delicto cannot validate a contract prohibited by law and against public policy. The decision is without prejudice to new, lawful contracts between the parties and any reversion action the government may take.