TL;DR
The Supreme Court affirmed that banks must exercise a higher degree of diligence than ordinary individuals when dealing with registered lands, especially in mortgage transactions. Malayan Bank was deemed not a mortgagee in good faith because it failed to conduct sufficient due diligence, ignoring red flags such as the property title still being in the original owner’s name during the loan application. This ruling underscores that banks cannot solely rely on the face of a certificate of title but must undertake a more thorough investigation to protect public interest and prevent fraudulent transactions. Ultimately, the Court upheld the nullification of the mortgage and title obtained through fraudulent means, reinforcing the principle that banks bear a greater responsibility in ensuring the legitimacy of property offered as collateral.
Red Flags Ignored: When Bank Diligence Falls Short in Real Estate Mortgages
Can a bank, dealing with registered land, simply rely on the certificate of title, or is there a higher standard of care expected, especially when public interest is involved? This question lies at the heart of the Malayan Bank vs. Spouses Cabigao case. Spouses Cabigao, legitimate landowners, discovered their title was fraudulently cancelled and transferred to Rosalinda Techico, who then mortgaged the property to Malayan Bank. The Spouses sued to nullify the fraudulent sale, title, and mortgage. Malayan Bank argued it was a mortgagee in good faith, having supposedly verified the title’s authenticity. The lower courts, and ultimately the Supreme Court, disagreed, emphasizing the heightened duty of diligence required from banks.
The case unfolded when Spouses Cabigao found their land title cancelled and a new one issued to Techico. Techico then mortgaged the property to Malayan Bank. Crucially, the Spouses Cabigao never sold their property and their original title remained in their possession. They filed a complaint against Techico, Malayan Bank, and the Register of Deeds, seeking to annul the fraudulent documents and the mortgage. Malayan Bank, in defense, claimed due diligence, stating they verified Techico’s identity, financial capacity, and the title’s authenticity with the Registry of Deeds, even conducting an ocular inspection. However, Malayan Bank failed to appear at the pre-trial conference and present evidence, leading the Regional Trial Court (RTC) to proceed with ex parte evidence presentation by the Spouses Cabigao.
The RTC ruled against Malayan Bank, declaring them not a mortgagee in good faith and nullifying the sale, titles, and mortgage. The Court of Appeals (CA) affirmed this decision, emphasizing Malayan Bank’s failure to prove good faith. The Supreme Court (SC) echoed these findings. The SC reiterated a crucial principle in Philippine jurisprudence: while individuals dealing with registered lands can generally rely on the certificate of title, this rule does not apply to banks. Banks, due to the public interest nature of their business, are held to a higher standard of care and prudence. The Court highlighted that Malayan Bank had knowledge, through its own Inspection and Appraisal Report, that the property was still registered under the Spouses Cabigao’s name when Techico applied for the loan. This discrepancy was a significant red flag that should have prompted a more thorough investigation.
The Supreme Court emphasized several key pieces of evidence that demonstrated Malayan Bank’s lack of due diligence and Techico’s fraudulent actions. Techico never surrendered the original TCT No. 282258 (M) for cancellation, which remained with the Spouses Cabigao. The tax clearances presented by Techico were proven fictitious. The Deed of Absolute Sale was falsified, as the Spouses Cabigao denied executing it, and the purported notary public lacked authority. Furthermore, the speed at which the mortgage was executed—barely two months after the alleged sale—should have raised suspicion. All these factors, especially the bank’s own report showing the title was still in the Spouses’ name, collectively proved Malayan Bank’s negligence. The Court underscored that banks must go beyond mere reliance on the title and conduct independent investigations, especially when irregularities are apparent.
The Court also addressed Malayan Bank’s procedural arguments, clarifying the implications of failing to appear at pre-trial. While the term “as in default” has been removed from the Rules of Court concerning pre-trial absences, the effects remain. Malayan Bank, by failing to appear and submit evidence, lost its right to present its own evidence in court. However, it retained the right to appeal, albeit limited to challenging the judgment based on the evidence presented by the opposing party. This procedural point reinforces the importance of active participation in court proceedings.
Ultimately, the Supreme Court’s decision serves as a stern reminder to the banking industry. It reiterates that banks cannot be passive actors in mortgage transactions, especially when dealing with registered lands. They must exercise “utmost diligence” and “highest meticulous attention to detail” to safeguard against fraud and protect public interest. This case reinforces the principle that banks have a responsibility that extends beyond simply checking the certificate of title; they must actively investigate and verify the legitimacy of property offered as collateral.
FAQs
| What is a mortgagee in good faith? | A mortgagee in good faith is someone who innocently enters into a mortgage contract without knowledge of any defect or flaw in the mortgagor’s title. They rely on the certificate of title’s face value and are protected by law if fraud is later discovered. |
| Why was Malayan Bank not considered a mortgagee in good faith? | Malayan Bank was deemed not in good faith because it had information, through its own report, indicating the title was still in the original owners’ names. This red flag, coupled with other irregularities, obligated them to conduct a more thorough investigation, which they failed to do. |
| What is the heightened duty of diligence for banks? | Due to the public interest nature of their business, banks must exercise a higher degree of care and prudence than ordinary individuals. This includes not just checking the title but also investigating any inconsistencies or red flags that may indicate fraud or misrepresentation. |
| What are some examples of due diligence banks should perform? | Beyond title verification, banks should conduct ocular inspections, verify tax payments, scrutinize the history of the title, and thoroughly investigate any discrepancies or inconsistencies in the documents or information provided by the mortgagor. |
| What is the practical implication of this ruling for banks? | Banks must enhance their due diligence procedures in mortgage transactions. Relying solely on the certificate of title is insufficient. They must proactively investigate and address any red flags to ensure they are truly mortgagees in good faith and to protect themselves and the public from fraudulent schemes. |
| What happens to the mortgage if the bank is not a mortgagee in good faith? | If a bank is not considered a mortgagee in good faith, the mortgage can be declared null and void, especially if the mortgagor’s title is proven to be fraudulent. The bank may lose its security interest in the property. |
For inquiries regarding the application of this ruling to specific circumstances, please contact Atty. Gabriel Ablola through gaboogle.com or via email at connect@gaboogle.com.
Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Malayan Bank Savings and Mortgage Bank vs. Spouses Cabigao, G.R No. 249281, March 17, 2021
Leave a Reply