ENCARNACION GATIOAN, PLAINTIFF-APPELLEE, VS. SIXTO GAFFUD, ET AL., DEFENDANTS, PHILIPPINE NATIONAL BANK, DEFENDANT-APPELLANT.

Gatioan versus Gaffud

The Case

This is an action for quieting of title over a parcel of land in Isabela, brought by Encarnacion Gatioan against the spouses Sixto Gaffud and Villamora Logan and the Philippine National Bank. Gatioan holds the earlier Torrens title; the Gaffud spouses later obtained a free patent and a second original certificate over the identical land, then mortgaged it to the Bank. The Bank, whose loans were secured by that later title, insists it is an innocent mortgagee for value and that its mortgage should be carried over to Gatioan's title. The case matters because it fixes the rule on double registration: the earlier certificate prevails, and a bank that fails to examine the record cannot claim the protection of good faith.

Procedural History

The case began in the Court of First Instance of Isabela. The parties submitted stipulations of fact, and the Gaffud spouses were declared in default. The trial court rendered judgment for Gatioan: it declared the patent and the later original certificate void from the beginning, ordered their cancellation, and declared the Bank's mortgage on that later title void and unenforceable against Gatioan, without prejudice to the Bank's right to collect from the Gaffud spouses. It also awarded damages and attorney's fees against the spouses. Only the Bank appealed, and only on a question of law, assailing the portions of the judgment that voided the later title and the mortgage annotations. The case thus reached the Supreme Court on appeal.

Facts

The land was originally registered in the name of Rufina Permison under an original certificate issued in December 1935 on the basis of a free patent. In 1948 Permison sold it to Sibreno Novasteras, who in turn conveyed it to Encarnacion Gatioan in April 1949. Through Gatioan's initiative, the original certificate was cancelled in June 1949 and a transfer certificate was issued in her name.

Gatioan then borrowed from the Philippine National Bank three times, mortgaging the same land each time: 900 pesos in 1950, 1,100 pesos in 1954, and 2,800 pesos in 1957. She also obtained an additional loan of 3,170 pesos in July 1957, secured by another parcel covered by a different title and executed jointly with her co-owners. In August 1960 she paid the 2,800 peso loan in full, with interest, and made a partial payment on the joint obligation. Despite these payments, the Bank executed no instrument releasing the mortgage annotation on her title.

Meanwhile, in January 1956, the Gaffud spouses procured a free patent over the identical parcel and obtained an original certificate in their names. They then borrowed from the same Bank, mortgaging that land. The Secretary of Agriculture and Natural Resources compared the technical descriptions, areas, lot numbers, and cadastral numbers of the two titles, became convinced they covered the same land, and recommended cancellation of the later one. Because the later title stood in the registry with the Bank's mortgage annotated, and because the Bank refused to cancel the annotation of the already paid loan on her own title, Gatioan filed the complaint for quieting of title.

Issues

• Whether or not the Bank may be considered an innocent mortgagee for value over the land covered by the later certificate issued to the Gaffud spouses.
• Whether or not the mortgage annotations in favor of the Bank on that later certificate should be carried over to and treated as encumbrances on the earlier title of Gatioan.

Applicable Provisions

The decision invokes the rule of notice under the Torrens system as established in the earlier case of Legarda versus Saleeby, which construed the Land Registration Act. The Court quoted that ruling:

The first original certificate is recorded in the public registry. It is never issued until it is recorded. The record is notice to all the world. All persons are charged with the knowledge of what it contains.

This is the core of the ruling: registration charges every person dealing with the land with knowledge of the earlier title, which defeats any claim of innocence.

The Court also quoted the rule on conflicting certificates:

We have laid the rule that where two certificates of title are issued to different persons covering the same land in whole or in part, the earlier in date must prevail as between original parties and in case of successive registrations where more than one certificate is issued over the land, the person holding under the prior certificate is entitled to the land as against the person who rely on the second certificate.

This governs the conflict between Gatioan's earlier title and the Gaffud spouses' later one.

Finally, the Court quoted the rule on purchasers with notice of a defect:

One who purchases real estate with knowledge of a defect or lack of title in his vendor cannot claim that he has acquired title thereto in good faith as against the true owner of the land or of an interest therein; and the same rule must be applied to one who has knowledge of facts which should have put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his vendor.

This disposes of the Bank's claim of good faith.

Ruling

On the first issue, the Court held that the Bank cannot be considered a mortgagee in good faith. The point had already been settled in Legarda versus Saleeby and later cases. Under the rule of notice, the record of the first original certificate is notice to all the world, and the presumption that a purchaser examined every instrument of record is irrebuttable; it cannot be overcome by proof of innocence or good faith. The Court also noted that banks carefully examine titles and physically investigate the land before granting loans. Had the Bank done so, it would easily have discovered the flaw in the Gaffud spouses' title; if it did not, it was guilty of gross negligence. In either case, it cannot be a mortgagee in good faith.

The Court added a factual approach. The Bank had previously held and examined Gatioan's title in connection with her earlier loans, so it was charged with notice of the technical descriptions, areas, lot numbers, and cadastral numbers of the land. It had no excuse for approving the Gaffud spouses' application. A purchaser cannot close his eyes to facts that should put a reasonable man on guard and then claim good faith.

On the second issue, the Court refused to carry the mortgage annotations over to Gatioan's title. The earlier certificate must prevail, and the purchaser from the owner of the later certificate and his successors should resort to his vendor for redress rather than molest the holder of the first certificate. The Bank was not without remedy, since the Gaffud spouses had another parcel also mortgaged to it, and it could still collect from them. The Court distinguished the cases cited by the Bank, where the titles bore nothing on their face to excite suspicion, unlike here where an examination of the later title would have revealed the identity of the land.

Doctrine

Where two certificates of title are issued to different persons covering the same land in whole or in part, the earlier in date prevails, and the person holding under the prior certificate is entitled to the land as against the person relying on the second certificate. Registration is notice to all the world, and every person dealing with the land is charged with knowledge of what the record contains; this presumption cannot be overcome by proof of innocence or good faith. A mortgagee who fails to examine the record, or who closes his eyes to facts that should put a prudent man on guard, is not an innocent mortgagee for value. The remedy of the purchaser or mortgagee under the later certificate is to go against his vendor for redress, not against the holder of the first certificate.

Disposition

The Supreme Court affirmed the judgment of the trial court in favor of Gatioan, upholding the cancellation of the later certificate and the declaration that the Bank's mortgage on it is void and unenforceable against her.

Remember This

Memorize the line: the earlier certificate prevails, and registration is notice to all the world. Examiners use this case to test whether a bank or mortgagee can claim good faith when the record itself would have revealed the defect in the title.