Dear Atty. Gab,

Musta Atty! My name is Ricardo Cruz. I’m writing to you because I’m in a really tight spot and very worried about our ancestral property here in Batangas. About two years ago, my nephew, Daniel, needed a large sum of money for his business startup. He couldn’t get a loan on his own because he lacked collateral. To help him out, we agreed that I would ‘sell’ him a piece of land I inherited. We executed a Deed of Absolute Sale, but the price stated was much lower than its actual value, and honestly, no money changed hands between us. It was understood that this was just so he could present the title (already transferred to his name) to the bank for a loan of PHP 1,500,000. Our private agreement was that he would pay me the real value of the land over five years once his business took off, and he would solely be responsible for the bank loan.

The bank approved his loan, and he got the money using the property as collateral. Unfortunately, his business failed after just a year, and he hasn’t made any payments to the bank for the last six months. He also hasn’t paid me anything. Now, the bank sent a notice that they will foreclose on the property. I panicked and told the bank manager the truth – that the sale to my nephew was simulated, just to facilitate the loan. He seemed dismissive, saying the mortgage was valid. Atty., was the sale really void? And if it was, can the bank still take the property even though the title transfer was based on a fake sale? I feel so stupid for agreeing to it, but I just wanted to help family. What are my rights, if any? Can I get the property back or stop the foreclosure?

Salamat po for any guidance.

Truly yours,
Ricardo Cruz

Dear Ricardo,

Thank you for reaching out. I understand your distress regarding your ancestral property and the complicated situation stemming from your arrangement with your nephew. It’s a tough spot to be in when trying to help family leads to potential loss.

The core issue here involves the validity of the bank’s mortgage lien over property acquired through a title based on a simulated sale, especially considering your admitted participation in the simulation. Generally, a simulated contract of sale is indeed void and transfers no ownership. However, the law also protects banks or other third parties who rely in good faith on a clean title when granting a mortgage loan. While banks have a duty to exercise high diligence, your own actions in creating the simulated sale significantly complicate your ability to invalidate the bank’s mortgage rights. Let’s delve deeper into the relevant principles.

When ‘Fake’ Sales Meet Real Mortgages: Understanding Bank Rights

The situation you described involves several interconnected legal concepts, primarily concerning simulated contracts, the Torrens system of land registration, the doctrine of mortgagee in good faith, and the principle of estoppel.

Firstly, a contract of sale is considered absolutely simulated when the parties do not intend to be bound by it at all. Such contracts are void from the beginning, meaning they produce no legal effect. If the sale from you to your nephew was purely for show, intended only to enable him to obtain a loan without any genuine intention to transfer ownership or receive payment as per the deed, it falls under this category. A void contract cannot typically be the source of valid rights.

However, our legal system, particularly under the Torrens system of land registration, aims to protect the public dealing with registered land. The general rule is that a person dealing with property covered by a Torrens Certificate of Title can rely on the face of the title.

“Primarily, it bears noting that the doctrine of ‘mortgagee in good faith’ is based on the rule that all persons dealing with property covered by a Torrens Certificate of Title are not required to go beyond what appears on the face of the title. This is in deference to the public interest in upholding the indefeasibility of a certificate of title as evidence of lawful ownership of the land or of any encumbrance thereon.”

This principle protects innocent third parties who transact based on the title’s validity. When the property was transferred to your nephew’s name, the bank, upon seeing his apparently clean title, processed the mortgage. A mortgagee (the bank, in this case) is considered in good faith if it grants a loan and accepts the mortgage without knowledge of any defect in the mortgagor’s (your nephew’s) title or any competing claims, and after exercising reasonable diligence.

Crucially, the standard of diligence required is higher for banks and financial institutions compared to ordinary individuals because their business is imbued with public interest.

“In the case of banks and other financial institutions, however, greater care and due diligence are required since they are imbued with public interest, failing which renders the mortgagees in bad faith. Thus, before approving a loan application, it is a standard operating practice for these institutions to conduct an ocular inspection of the property offered for mortgage and to verify the genuineness of the title to determine the real owner(s) thereof.”

This means the bank should ideally have inspected the property and made reasonable inquiries. However, even if the bank’s diligence wasn’t perfect (e.g., if an inspection might have revealed you still occupied the land, raising questions), your own participation in the simulation becomes a major factor. You admittedly created the situation that led the bank to believe your nephew was the legitimate owner. By executing the simulated deed and allowing the title transfer, you essentially represented to the world, including the bank, that the transaction was legitimate.

This brings us to the concept of estoppel and the consequences of participating in fraud or simulation intended to deceive a third party. When parties conspire to create a simulated transaction to mislead someone (like a bank), they generally cannot later turn around and claim the simulation to invalidate the rights acquired by the deceived party in good faith.

“To be sure, fraud comprises ‘anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal duty or equitable duty, trust, or confidence justly reposed, resulting in damage to another, or by which an undue and unconscientious advantage is taken of another.’ […] As such, Sps. Delgado cannot now be allowed to deny the validity of the mortgage executed by the Dys in favor of Philbank as to hold otherwise would effectively sanction their blatant bad faith to Philbank’s detriment.”

While the original case context differs slightly, the principle applies: your deliberate participation in the simulated sale to enable the loan application constitutes conduct that likely prevents you (estops you) from challenging the bank’s mortgage, especially since you informed the bank only after the loan default, not before the loan was granted. The law generally does not allow a party to benefit from their own wrongdoing or misrepresentation at the expense of an innocent party who relied on that misrepresentation.

Therefore, even if the underlying sale was void between you and your nephew, the bank, as a mortgagee potentially in good faith (or whose lack of perfect diligence might be overlooked due to your participation in the simulation), likely has a valid and enforceable mortgage lien on the property.

“[F]or reasons of public policy, the subsequent nullification of title to a property is not a ground to annul the contractual right which may have been derived by a purchaser, mortgagee or other transferee who acted in good faith.”

Practical Advice for Your Situation

• Gather All Documentation: Collect copies of the Deed of Sale, the title under your nephew’s name, your private agreement with him, the loan and mortgage documents from the bank, and all correspondence, especially the foreclosure notice.
• Assess Bank’s Knowledge Timing: The fact you informed the bank about the simulation after the loan was granted and default occurred significantly weakens your case. If you had informed them before the loan release, your position might be different.
• Evaluate Your Participation: Acknowledge that your active role in the simulated sale is a major legal hurdle. The principle of estoppel likely prevents you from invalidating the bank’s mortgage rights based on the simulation you helped create.
• Consult a Lawyer Immediately: Your situation is complex. You need personalized legal advice from a lawyer who can review all facts and documents, assess the bank’s diligence, and advise on any potential (though likely limited) defenses against foreclosure.
• Consider Action Against Your Nephew: While it may not save the property from the bank, you likely have a cause of action against your nephew for breaching your private agreement (failure to pay you for the land and failure to handle the bank loan).
• Negotiate with the Bank (Realistically): Your lawyer might explore negotiating with the bank, perhaps for a revised payment plan or a settlement, but understand the bank holds a strong position to foreclose given the circumstances.
• Prepare for Foreclosure Reality: Given your participation in the simulation and the established legal principles protecting mortgagees in good faith (or where the owners contributed to the situation), the bank likely has the right to foreclose on the property to recover the unpaid loan.

Ricardo, while the law protects property owners, it also guards against bad faith and protects financial institutions that rely on ostensibly valid documents, especially when the original owners contribute to the deceptive situation. Your participation in the simulated sale unfortunately places you in a very difficult legal position regarding the bank’s mortgage.

Hope this helps!

Sincerely,
Atty. Gabriel Ablola

For more specific legal assistance related to your situation, please contact me through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This correspondence is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please schedule a formal consultation.