SPOUSES MARCELINO V. ROSARIO AND ELEUTERIA T. ROSARIO, PLAINTIFFS-APPELLANTS, VS. OFELIA H. MOREDO, EQUITABLE SAVINGS BANK AND THE REGISTER OF DEEDS OF MAKATI CITY. DEFENDANTS-A…

Rosario versus Moredo

The Case

This is the case of Rosario versus Moredo. Spouses Marcelino and Eleuteria Rosario sued their former boarder, Ofelia Moredo, together with Equitable Savings Bank and the Register of Deeds of Makati City, to have a deed of sale declared void as simulated and to recover their registered land. The spouses admit they signed the deed to make Moredo appear as owner so that she could obtain a bank loan using the property as collateral. The case matters because it pits two rules against each other: a simulated sale is void and produces no effect, yet a mortgagee in good faith who relies on a clean Torrens title is protected by public policy. The Court tells us which rule prevails, and why a bank is held to a higher standard of care than a private individual.

Procedural History

The spouses filed suit in the Regional Trial Court of Makati City against Moredo, Equitable Savings Bank, and the Register of Deeds. The bank answered with counterclaims and a cross claim against Moredo. Moredo filed an answer, but she and her counsel failed to appear and present evidence, so she was deemed to have waived that right. The trial court rendered its decision in July 2010. It declared the deed of sale null and void for being simulated, but only as between the spouses and Moredo. It ordered Moredo to reconvey the property by paying her obligation to the bank, or failing that, to pay actual damages of 975,000 pesos based on the assessed value, plus 100,000 pesos in moral damages and 50,000 pesos in attorney's fees. As against the bank, the trial court held that the simulated sale did not affect its mortgage, which remained valid and foreclosable. It dismissed the complaint against the bank and dismissed the bank's counterclaim, but granted the bank's cross claim against Moredo. It also reprimanded the Register of Deeds for neglect. The spouses appealed directly to the Supreme Court.

Facts

Moredo was a boarder of the Rosario spouses. She convinced Eleuteria Rosario to invest in a purported socialized program of a Governor of Laguna. Because the spouses had no capital, Moredo suggested that they obtain a bank loan, with the Rosario property to be transferred to Moredo as collateral.

On September 18, 2006, the spouses executed a deed of sale over the property in favor of Moredo, stating a price of 200,000 pesos. The spouses later learned that the property had been mortgaged with Equitable Savings Bank, their title cancelled, and a new transfer certificate of title issued in Moredo's name. The title had been used to secure Moredo's loan.

At trial, Marcelino Rosario admitted that Moredo was merely their dummy, that they entered into a simulated deed of sale so that Moredo would appear to have property to offer as collateral, and that they voluntarily surrendered their owner's duplicate title to her. The bank, for its part, showed that it did not rely on the title alone. It conducted title verification, and sent an appraiser and a credit investigator who inspected the property. Moredo met them, ushered them inside, and showed them around without objection. The loan was approved at 2.2 million pesos.

Issues

• Whether or not the deed of sale between the spouses and Moredo was genuine or simulated.
• Whether or not Equitable Savings Bank was a mortgagee in good faith, such that its mortgage remains valid despite the void deed of sale.

Applicable Provisions

Article 1471 of the Civil Code provides:

If the price in a contract of sale is simulated, the sale is void.

This is the provision the Court uses to strike down the deed, because the stipulated price was not the real agreement of the parties and was never actually paid.

Ruling

On the first issue, the Court held that the deed of sale was simulated and therefore void. Several circumstances supported this. The price of 200,000 pesos was grossly inadequate against the assessed value of 975,000 pesos. The deed bore a jurat instead of the acknowledgment required by law. Moredo offered no proof that she paid the 900,000 pesos she claimed. And the spouses themselves admitted the simulation. The Court quoted its earlier ruling:

Where the deed of sale states that the purchase price has been paid but in fact has never been paid, the deed of sale is null and void ab initio for lack of consideration.

Being void, the sale produced no legal effects and did not alter the juridical situation of the parties.

On the second issue, the Court held that the bank was a mortgagee in good faith. Where property is covered by a Torrens title, a mortgagee need not go beyond what appears on the face of the title. But the Court stressed that a bank is not an ordinary mortgagee. It is expected to exercise greater care and prudence, and the ascertainment of the condition of the property offered as security must be a standard and indispensable part of its operations. The Court quoted its earlier ruling:

Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, for their business is one affected with public interest, keeping in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence which amounts to lack of good faith by which they would be denied the protective mantle of the land registration statute, Act Number 496, extended only to purchasers for value and in good faith, as well as to mortgagees of the same character and description.

Here the bank met that standard. It verified the title, and its appraiser and credit investigator inspected the property and confirmed that Moredo was the registered owner and in actual possession. The spouses, who clothed Moredo with apparent ownership, must bear the loss.

Doctrine

First, a sale with a simulated price is void under Article 1471 of the Civil Code, and a void sale produces no legal effect and does not alter the juridical situation of the parties. Second, the doctrine of the mortgagee in good faith protects one who relies on what appears on the face of a Torrens title, because of the public interest in the indefeasibility of that title. Third, a bank is not an ordinary mortgagee. It must exercise greater care and prudence, and inspection of the property offered as security is a standard and indispensable part of its operations. Fourth, as between two innocent parties, the loss falls on him who empowered a third person to perpetuate the wrong.

Disposition

The Supreme Court denied the appeal and affirmed the trial court's decision, upholding the deed of sale as void but sustaining the bank's mortgage as that of a mortgagee in good faith.

Remember This

Memorize this line: a simulated sale is void, but a mortgagee in good faith who relies on a clean Torrens title is protected, and a bank must exercise greater care than a private individual. Examiners use this case to test the conflict between the nullity of a simulated sale and the protection of an innocent mortgagee, and to test the higher diligence required of banks.