Case Digest: Agag v. Alpha Financing Corp, G.R. No. 154826, July 31, 2003

Commercial Law | Mortgagee in good faith and bad faith

Facts: 

• On March 15, 1977, Romy Agag and Teresita Vda. De Castro signed a document, "Pinagtibay na Pagpapatibay," in which De Castro sold three parcels of land in Camias, San Miguel, Bulacan, to Agag for P36,120.00, payable in installments.
• Agag took possession of the lots after paying a P10,000.00 down payment on the same date.
• By November 29, 1978, he made total payments of P37,295.78.
• By 1985, Agag made improvements to the lots, including planting fruit trees and building a residential house worth around P500,000.00.
• Despite Agag's repeated requests, De Castro failed to deliver the titles of the lots to him.
• On January 30, 1997, Alpha Financing Corporation sent a letter to Agag, requesting him to vacate the lots, claiming ownership after purchasing the land in a foreclosure sale after Teresita Vda. De Castro, the original owner thereof failed to pay her loan with a mortgagee bank.
• The titles were transferred to Alpha Financing Corporation on December 4, 1986.
• Agag refused to vacate.
• Alpha Financing Corporation filed an ejectment case.
• During the preliminary conference, the parties agreed on three stipulations of fact: 
1. Agag had been in possession since March 15, 1977; 
2. he received a letter on January 30, 1997, from Alpha Financing Corporation; and
3. the disputed property was the same one Agag had been purchasing from De Castro.
• MTC-San Miguel Bulacan: Ruled in favor of Agag, stating that the mortgage and foreclosure were invalid as De Castro had already sold the property to Agag. The court also ruled that Alpha Financing Corporation was not a purchaser in good faith.
• RTC-Malolos, Bulacan: Affirmed the MTC decision.
• CA: Reversed the lower courts' decisions, ruling that Alpha Financing Corporation had a better right to possess the lots based on their registered title.

Issue: 

• Whether the Alpha Financing Corporation can be considered a mortgagee in good faith.  NO

Held:

The rule that a purchaser or mortgagee of land is not required to look further than what appears on the face of the title does not apply to banks and other financial institutions. These entities are required to exercise more care and prudence in dealing even with registered lands for their business is one affected with public interest. The ascertainment of the status and condition of properties offered to it must be a standard and indispensable part of its operations.

The principal issue to be resolved in the instant petition is: Who, between petitioner and respondent, has a better right to possess the disputed lots?

The settled rule is that in an action for ejectment, the only question involved is possession de facto. However, when the issue of possession cannot be decided without resolving the issue of ownership, the court may receive evidence on the question of title to the property, but the resulting judgment would be conclusive only with respect to the possession, but not the ownership of the property. 

In the case at bar, the resolution of the issue of ownership is indispensable because respondent’s cause of action and petitioner’s defense are both grounded on ownership of the questioned lots. Respondent invokes good faith and the indefeasibility of the transfer certificates of title issued in its name, while petitioner anchors his claim on prior possession as well as on the unregistered sale in his favor of subject lots as embodied in the "Pinagtibay na Pagpapatibay" .

When the terms of a contract are clear and unambiguous about the intention of the contracting parties, the literal meaning of its stipulations shall control. The real nature of a contract may be determined from the express terms of the agreement, as well as from the contemporaneous and subsequent acts of the parties thereto.

An examination of the "Pinagtibay na Pagpapatibay" in the case at bar shows that the document is indeed an absolute sale and not a contract to sell. In a contract to sell, ownership is by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price. However, such is not the case here. Although the purchase price is to be paid in installments, the "Pinagtibay na Pagpapatibay" contains no stipulation conditioning the transfer of ownership upon the full payment of the purchase price. 

In fact, after paying a down payment of P10,000.00 on March 15, 1977, petitioner immediately took possession of the lots and introduced improvements thereon. The terms of the sale having been reduced to writing is considered as containing all the stipulations agreed upon by petitioner and Teresita Vda. De Castro, and the Court cannot add therein a proviso subjecting petitioner’s ownership to the full payment of the purchase price.

Hence, the Municipal Trial Court correctly found that petitioner’s actual occupation of the controverted lots vested in him ownership thereof. Verily, ownership was transferred not by the contract alone, but by tradition or delivery, i.e., by placing the property in the control and possession of the vendee. 

Likewise, the Municipal Trial Court did not err in sustaining the claim of petitioner that the sale of the questioned lots preceded the mortgage and foreclosure sale claimed by Respondent. Petitioner had repeatedly challenged respondent to produce documentary evidence which would substantiate the mortgage and foreclosure sale, but the latter failed to produce any. Neither did respondent question the finding of the Municipal Trial Court that the sale occurred prior to the mortgage, nor did it give the name of the mortgagee bank which foreclosed and sold the lots at public auction, assuming that the said bank exists. Finally, respondent failed to show that the properties were indeed mortgaged, and that the mortgage was foreclosed and the lots sold at public action.

Even granting that the lots were indeed mortgaged by the original owner, the sale in favor of petitioner would still be superior to the mortgage. In Dela Merced v. Government Service Insurance System, a case involving a suit for annulment of a foreclosure sale instituted by the successor-in-interest of the mortgagor, against the mortgagee and the buyer of the lots at the foreclosure sale, it was held that the unrecorded sale is preferred for the reason that the original owner’s act of parting with his ownership of the thing sold, as in the case at bar, divested him of ownership and free disposal of that thing so as to be able to mortgage it again. Conformably, the unregistered sale of the lots to petitioner should be upheld over the mortgage and foreclosure sale from which respondent allegedly derived its rights.

As a general rule, where there is nothing on the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title indicates on its face, in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto.  This rule, however, applies only to innocent purchasers for value and in good faith. 

An innocent purchaser for value or any equivalent phrase shall be deemed, under Section 39 of Act 496 (Land Registration Act), 28 to include an innocent lessee, mortgagee or any other encumbrancer for value. It excludes a purchaser or mortgagee who has knowledge of a defect or lack of title in the vendor, or of facts sufficient to induce a reasonably prudent man to inquire into the status of the property.  

In Sunshine Finance and Investment Corp. v. Intermediate Appellate Court, we ruled that when the purchaser or mortgagee is a financing institution, the general rule that a purchaser or mortgagee of land is not required to look further than what appears on the face of the title does not apply. Thus —

Nevertheless, we have to deviate from the general rule because of the failure of petitioner in this case to take the necessary precautions to ascertain if there was any flaw in the title of the Nolascos and to examine the condition of the property they sought to mortgage. The petitioner is an investment and financing corporation. We presume it is experienced in its business. Ascertainment of the status and condition of properties offered to it as security for the loans it extends must be a standard and indispensable part of its operations. Surely it cannot simply rely on an examination of a Torrens certificate to determine what the subject property looks like as its condition is not apparent in the document. The land might be in a depressed area. There might be squatters on it. It might be easily inundated. It might be an interior lot without convenient access. These and other similar factors determine the value of the property and so should be of practical concern to the petitioner.

So also, in Cruz v. Bancom Finance Corporation, a case for reconveyance of property against a purchaser in a foreclosure sale, it was stressed that the due diligence required of banks extended even to persons regularly engaged in the business of lending money secured by real estate mortgages. Their expertise or experience in dealing with encumbrances on lands, not to mention the public interest affecting their business, require them to exercise more care and prudence in dealing even with registered lands. 

Respondent, being a financial institution, cannot claim good faith considering that neither it nor the alleged mortgagee bank was in possession of the lots prior and after the foreclosure sale. Had respondent conducted an ocular inspection of the premises, this being the standard practice in the real estate industry, it would have discovered that the land is occupied by petitioner. The failure of respondent to take such precautionary steps is considered negligence on its part and would thereby preclude the defense of good faith.

In any event, judgment rendered in the instant case shall not bar an action between the same parties respecting title to the land or building, nor shall it be conclusive as to the facts therein found in a case between the same parties upon a different cause of action involving possession. Any pronouncement made on the question of ownership in this case is provisional in nature. 

WHEREFORE, in view of all the foregoing, the instant petition is GRANTED and the April 30, 2002 decision of the Court of Appeals in CA-G.R. SP No. 58635 is REVERSED and SET ASIDE. The November 19, 1999 decision of the Regional Trial Court of Malolos, Bulacan, Branch 8, in Civil Case No. 426-M-99, and the February 17, 1999 judgment of the Municipal Trial Court of San Miguel, Bulacan, in Civil Case No. 2327, declaring petitioner Romy Agag as having a better right of possession over the subject parcels of land as against respondent Alpha Financing Corporation, and dismissing the petitioner’s counterclaim, are REINSTATED.

SO ORDERED.