Facts:
1. Ownership and Initial Transaction: A 500-square-meter property in Valenzuela City, Metro Manila, originally owned by the late Juan C. Ramos and his spouse Pilar L. Ramos, became the center of a controversy. The property was mortgaged through a Deed of Real Estate Mortgage (REM) dated January 11, 1999, purportedly to secure loan obligations of Parada Consumer and Credit Cooperative, Inc. (PCCCI) with Land Bank of the Philippines (LBP).
2. Allegations of Fraudulent Transaction: Respondent Pilar Ramos and her children contested the mortgage, as the REM was executed via a Special Power of Attorney (SPA) they claim was improperly obtained. The SPA dated December 5, 1998, supposedly included the signature of Juan Ramos, who died in 1985.
3. Issuance and Execution of the REM: PCCCI, facilitated by officers Lilia Ching and Roberto Salazar, represented the mortgaged property to LBP. The bank, upon appraisal and inspection, accepted the subject property as collateral based on the SPA and REM documents. When PCCCI defaulted, LBP prepared to foreclose.
4. Legal Proceedings:
– Complaint Filed: Pilar and her children filed a complaint in 2003 against LBP and PCCCI for annulment of the REM and damages.
– RTC Decision: In the trial court, the REM was nullified based on the void SPA, as it contained the signature of the deceased Juan Ramos.
– CA Proceedings: LBP appealed to the Court of Appeals (CA), which affirmed the RTC decision, adding exemplary damages against LBP and modifying the RTC’s award of moral damages and attorney’s fees.
– Supreme Court Review: LBP filed a petition for review with the Supreme Court, contesting its liability and the characterization of it being a mortgagee in bad faith.
Procedural Posture:
– The case proceeded from the Regional Trial Court to the Court of Appeals via a Notice of Appeal from LBP and then to the Supreme Court through a Petition for Review on Certiorari under Rule 45.
Issues:
1. Did the Court of Appeals err in determining LBP’s failure to exercise appropriate caution and due diligence in approving the mortgage?
2. Is LBP solidarily liable with PCCCI for the damages sustained by the respondents?
3. Did the CA err in its award of moral damages, exemplary damages, attorney’s fees, and litigation expenses against LBP?
Court’s Decision:
1. Degree of Caution: The Supreme Court held LBP responsible for failing to exercise due diligence expected of it as a banking institution. The bank relied heavily on the notarized SPA and failed to conduct adequate checking into the authenticity of the SPA, the identity of property owners, and the authority of PCCCI.
2. Mortgagee in Bad Faith: The Court affirmed that LBP’s reliance on the facial validity of property documents without deeper verification demonstrated bad faith, given discrepancies in SPA, such as the use of only one community tax certificate when two were required, and failure to locate or confirm property ownership details.
3. Award of Damages: Affirmed – The respondents deserved moral damages for the injury sustained from LBP’s negligence and bad faith. The Supreme Court sustained exemplary damages for public example purposes, and attorney’s fees were appropriate as the respondents were forced to litigate to defend their property rights.
Doctrine:
– The doctrine of “mortgagee in good faith” mandates lenders, especially banks with public interest responsibilities, to thoroughly verify property titles and transactions to ensure they are dealing genuinely with legally authorized parties. The absence of such diligence results in bad faith and potential liabilities.
Class Notes:
– **Mortgagee in Good Faith**: A financial institution must perform an inquiry beyond the Judicial Title Registry when faced with dubious indications like conflicting documents. Banks are held to high standards due to the public interest nature of their operations and their professional expertise.
– **Doctrine Application**: While banks can generally rely on Torrens certificates, any irregularity demands investigation.
– **Civil Code on Damages**: Arts. 2220 & 2208: Moral damages compensate for willful injury, and attorney fees are recoverable when wrongful acts cause plaintiffs to litigate.
Historical Background:
– The case underscores the stringent due diligence requirements for financial institutions, especially post-Asian financial crises of the late 1990s, reflecting a greater emphasis on transactional security and borrower authenticity verification in the Philippines’ banking sector.
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