OSMUNDO S. CANLAS AND ANGELINA CANLAS, PETITIONER, VS. COURT OF APPEALS, ASIAN SAVINGS BANK, MAXIMO C. CONTRERAS AND VICENTE MAÑOSCA, RESPONDENTS.

Canlas versus Court of Appeals

The Case

This is the story of the Canlas spouses, Osmundo and Angelina, who sued to annul a real estate mortgage over their two parcels of land in Parañaque, a mortgage they never signed, because it was executed by impostors who passed themselves off as the spouses before Asian Savings Bank. The action was for annulment of the deed of real estate mortgage, with a prayer for a writ of preliminary injunction to stop the foreclosure sale. The case matters because it fixes the standard of care owed by banks when they take a mortgage as security, and because it applies the doctrine of last clear chance to decide who bears the loss when a fraud succeeds. It is a favorite of examiners on the diligence of banks and on the validity of a mortgage constituted by one who is not the owner.

Procedural History

The spouses Canlas filed the complaint for annulment of the mortgage before Branch 59 of the Regional Trial Court of Makati City, and the trial court restrained the sheriff from issuing the certificate of sale. Vicente Mañosca was declared in default for failure to file his answer. The trial court then rendered judgment declaring the deed of real estate mortgage null and void, declaring the public auction sale illegal and without binding effect, ordering the defendants to pay attorney's fees, and on the bank's crossclaim ordering Mañosca to pay the bank the amount he received as proceeds of the loan, with legal interest. Asian Savings Bank appealed to the Court of Appeals, which reversed the trial court, dismissed the complaint, and ordered the Canlas spouses to pay the bank moral and exemplary damages and attorney's fees, with costs. The spouses then came to the Supreme Court by a petition for review on certiorari under Rule 45.

Facts

In August 1982, Osmundo Canlas and Vicente Mañosca agreed to go into business together. Osmundo executed a special power of attorney authorizing Mañosca to mortgage two parcels of land in San Dionisio, BF Homes, Parañaque, each with a semi-concrete house, one titled in Osmundo's name and the other in Angelina's name. Osmundo then agreed to sell the lots to Mañosca for 850,000 pesos, with 500,000 pesos payable within a week and the balance of 350,000 pesos to be his investment in the business. Osmundo delivered the owner's copies of the titles to Mañosca, who issued two postdated checks, but the larger check was not sufficiently funded.

Mañosca then used the titles to raise money. On September 3, 1982, he mortgaged the lots for 100,000 pesos to a certain Attorney Manuel Magno, and on September 29, 1982, he obtained a loan of 500,000 pesos from Asian Savings Bank secured by the same lots. In both transactions, persons posing as the Canlas spouses signed the deeds. The bank relied on residence certificates whose signatures seemed to match those on the earlier Magno mortgage, and asked for no other identification. When the loan was not paid, the bank extrajudicially foreclosed.

On January 15, 1983, Osmundo wrote the bank that the mortgage was executed without their authority and asked that it be annulled. On January 18, he asked the sheriff to cancel or hold in abeyance the auction sale set for February 3, 1983. Both refused, and the sale proceeded. The spouses then filed this case.

Issues

• Whether or not the Court of Appeals erred in holding that the mortgage over the properties was valid.
• Whether or not the Court of Appeals erred in holding that the petitioners were negligent and must therefore bear the loss.
• Whether or not the Court of Appeals erred in holding that Asian Savings Bank exercised due diligence in granting the loan.
• Whether or not the Court of Appeals erred in holding that the bank did not act with bad faith in proceeding with the foreclosure sale.
• Whether or not the Court of Appeals erred in awarding moral damages to the bank.

Applicable Provisions

Article 1173 of the Civil Code provides:

Article 1173. The fault or negligence of the obligor consist in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required.

This is the measure of care the Court uses, and it holds that the bank owes more than the diligence of a good father of a family.

Article 2085 of the Civil Code, cited by the Court, provides:

Article 2085. The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

This is why a mortgage signed by impostors, who are not the owners, is void.

Ruling

On the first issue, the Court held the mortgage void. A contract of mortgage must be constituted only by the absolute owner of the property mortgaged, and a mortgage constituted by an impostor is void. The deeds were signed by persons misrepresenting themselves as the Canlas spouses, and the special power of attorney did not authorize Mañosca to constitute the mortgage himself. The mortgage is therefore a complete nullity.

On the second and third issues, the Court held that the bank was negligent and must bear the loss. The degree of diligence required of banks is more than that of a good father of a family, because banking is affected with public interest and holds in trust the money of depositors. The bank accepted the impostors on the strength of residence certificates alone, without a single identification card, and did not require additional proof even though the earlier mortgage it used for comparison lacked the tax account number of the spouses and the community tax certificate of Angelina. The Court applied the doctrine of last clear chance: where both parties are negligent but one had the last clear opportunity to avoid the harm and failed, that party bears the consequences. Even assuming Osmundo was negligent in entrusting the titles to Mañosca, the bank had the last clear chance to prevent the fraud by faithfully complying with the requirements for ascertaining the identity of persons transacting with it.

The Court also rejected the Court of Appeals' finding that Osmundo connived in the fraud. The failure to correct Mañosca's introduction of him as Leonardo Rey at the Metropolitan Club luncheon was not fraudulent, as he did not want to embarrass Mañosca, and the bank's own account officer testified that the loan and the collateral were not discussed at that meeting. His presence when the documents were submitted and when the check was released did not show knowledge that his lots were the collateral, and his receipt of the check was payment of the purchase price. The Court added that Osmundo was negligent, which made the spouses undeserving of attorney's fees.

On the fourth and fifth issues, since the mortgage was void and the bank was negligent, the foreclosure could not stand and the award of moral damages to the bank had no basis.

Doctrine

A contract of mortgage must be constituted only by the absolute owner of the property mortgaged, and a mortgage constituted by an impostor is void. Banks owe a degree of diligence higher than that of a good father of a family under Article 1173, and a bank that fails to verify the identity of persons transacting with it cannot claim the protective mantle of the land registration law, which is accorded only to mortgagees for value and in good faith. Under the doctrine of last clear chance, the antecedent negligence of one party does not preclude recovery from the party who had the last fair opportunity to prevent the harm by due diligence.

Disposition

The petition was granted, the decision of the Court of Appeals was set aside, and the decision of the trial court annulling the mortgage and the auction sale was reinstated, with no pronouncement as to costs.

Remember This

Memorize this line: a mortgage constituted by an impostor is void, and the bank that had the last clear chance to verify identity bears the loss. Examiners use this case to test the higher diligence of banks and the doctrine of last clear chance in mortgage fraud.