REHABILITATION FINANCE CORPORATION (NOW DEVELOPMENT BANK OF THE PHILIPPINES), PETITIONER, VS. LUCIO JAVILLONAR, ET AL., RESPONDENTS.

This is an appeal from the decision of the Court of Appeals, 4th
Division, affirming in all its parts the decision of the Court of First
Instance of Quezon City, in Civil Case No. Q-255.

The property involved is a house described as No. 2, Bulusan St.,
Quezon City, mortgaged by Consuelo Agrava Vda. de Agoncillo in favor of
Paz R. de Tubangui. The house was built on a lot which at the time of
the mortgage was not owned by the mortgagor, but which was later
acquired by her. The house was subsequently sold in an execution sale
and bought by Tubangui, who later sold it to Lucio Javillonar. In the
meantime, the lot above mentioned together with its improvements were
mortgaged to the Rehabilitation Finance Corporation (RFC), and later
sold at a foreclosure sale to the RFC, which took possession of the
house and collected the rentals for the same. The question is whether
or not the right of the RFC is superior to that of Javillonar and of
his predecessor-in-interest, Tubangui.

The facts of the case are embodied in the decision of the Court of
Appeals, the pertinent portions of which we reproduce below:

“This is an appeal from a decision of the Court of
First Instance of Quezon City of which the following is the dispositive
portion:

‘IN VIEW OF THE FOREGOING, judgment is hereby rendered as follows :

(a)
Declaring the plaintiff, Lucio Javillonar, owner of the building in
question, that is, House No. 2, Bulusan St., Quezon City;

(b) Ordering the defendant, Rehabilitation Finance Corporation, to deliver possession of the said building to the plaintiff;

(c)
Ordering the defendant, Rehabilitation Finance Corporation, to turn
over the rental collected for the use and occupation of said building
to the plaintiff corresponding to the period from August 14, 1951,
until the plaintiff shall have been placed in possession of the
building; and,

(d) Without special pronouncement as to costs.’

“On
September 9, 1947, Consuelo Agrava Vda. de Agoncillo constituted a
mortgage over her real and personal properties in favor of Paz R. de
Tubangui to secure the repayment of a loan in the sum of P11,000.00 on
or before September 25, 1947. Among the properties covered by the
mortgage and considered personal property by the parties for purposes
of their contract is a house denominated as No. 2, Bulusan St., Quezon
City, and located on a lot not then owned by Agoncillo. On September
17, 1947, the mortgage contract was registered with the Chattel
Mortgage Register of Quezon City (Exhibits A and B.) Agoncillo failed
to pay her indebtedness. On October 20, 1947, Tubangui sued Agoncillo
for the recovery of her money (Civil Case No. 338 of the Court of First
Instance of Rizal). The house in question, among others, was attached
in said case on or about October 28, 1947 (Exhibits C and C-1). The
case was decided on March 2, 1948, upon an amicable settlement,
resulting in the lifting of the attachment only with respect to the
personal properties of Agoncillo (Exhibits C-2 and C-3 Agoncillo did
not comply with the amicable settlement, so that an order of execution
was issued on April 7, 1948, and a land and the house in question were
attached on April 24, 1948, and sold at public auction to Tubangui on
May 27, 1948. On June 21, 1949, an ‘Officer’s Deed of Sale was executed
by the Sheriff of Manila in favor of Tubangui for the said land and
house. On August 14, 1951, Tubangui sold the building in question to
plaintiff Lucio Javillonar for P1.00 and for services rendered in
criminal case No. Q-359, People versus ‘Consuelo Agrava Vda. de
Agoncillo.’ (Exhibit D).

“In the meantime, the land in which
the house in dispute was built was subsequently acquired by Agoncillo
who obtained Transfer Certificate of Title No. 5431. On March 8, 1948,
Agoncillo mortgaged several properties, among which is the parcel of
land and its improvement, the building in question, covered by Torrens
Title No. 5431 to secure the repayment of a loan of P42,000.00 obtained
from the defendant Rehabilitation finance Corporation which shall
hereafter be referred to briefly as the RFC. On March 10, 1948, the
mortgage agreement (Exhibit E) was registered in the Registry of Deeds
of Quezon City, and an annotation thereof inscribed on Transfer
Certificate of Title No. 5431. Agoncillo Jailed to pay the
amortizations and the mortgage was foreclosed by the RFC. On November
29, 1948, the RFC was awarded the mortgaged properties as the highest
bidder at the auction sale. A year after the sale, without Agoncillo
exercising her right of redemption, Transfer Certificate of Title No.
12226 was issued in the name of the RFC. Since then, the RFC has been
collecting the rentals for the use and occupation of the building.

“These
were the antecedents leading up to the filing of the complaint in the
instant action, wherein it is urged that: (a) the sale in favor of
plaintiff Lucio Javillonar be declared valid; (2) the mortgage
agreement between the, RFC and Consuelo Agrava Vda. de Agoncillo be
declared null and void ab initio; and, (3) the plaintiff be
declared the owner of the building at No. 2 Bulusan St. La Loma, Quezon
City, free from any lien or encumbrance whatever including that of the
RFC, and the RFC be ordered to render an accounting of all rentals
collected by it from August 14, 1951, and to turn over the house and
the rents to the plaintiff. The RFC filed its answer, but defendant
Agoncillo did not. Upon the facts, the lower court declared that
Tubangu’s lien and right over the house were superior td those of the
RFC. In this appeal, appellant RFC maintains that the levy and
execution sale in its favor should be preferred over that of Tubangui.”

In finding and holding that the right of Javillonar derived from his
predecessor-in-interest Tubangui was superior to that of the RFC for
the reason that the latter was aware of the mortgage of the house by
Agoncillo in favor of Tubangui, the Court of Appeals said the following:

“It is noteworthy that the amount of P11,000.00
earmarked by the parties for payment to Tubangui and representing the
expenses incurred by Agoncillo ‘in the construction of the building’ is
the same amount alleged in Civil Case No. 338 to have been advanced by
Tubangui for which Agoncillo had mortgaged the house, among others, to
secure its repayment. The RFC was apprised of this credit before the
execution of the mortgage agreement of March 8, 1948. The RFC
recognized it when the parties stipulated that the sum of P11,000.00
out of loan shall be paid to Tubangui. If the RFC bad acted with that
measure of diligence reasonably expected of a prudent man in a like
situation, it would have furthermore learned that Agoncillo’s debt of
P11,000.00 was long overdue and Tubangui has filed a case and obtained
a judgment in her favor on March 2, 1948, which was not yet satisfied.
In Leung Yee vs. F. L. Strong Machinery Co., 37 Phil. 644,
611, it was stated that a party’s mere refusal to believe that a defect
exists or his willful closing of his eyes to the possibility of the
existence of a defect in his vendor’s title, will not make him an
innocent purchaser for value, if it afterwards develops that, the title
was in fact defective, and it appears that he had such notice of the
defect as would have led to its discovery had he acted with that
measure of precaution which may reasonably be required of a prudent man
in a like situation. That previous knowledge of the RFC was equivalent
to registration, thereby making Tubangui’s lien superior to the
mortgage lien of the said KFC over the house. In Parsona Hardware Co.,
Inc. vs. Villahermosa, 40 Off. Gaz., No. 10, September 6, 1941, p. 111, our Supreme Court ruled as fellows:

‘Without
deciding upon the effect of the notation of respondents’ purchase in
the register of deeds’ entry book and even assuming that such purchase
has not been duly registered, we believe and so hold that the same has
preference over the levy. After the property was levied upon for the
first time, a third-party claim was filed by the respondents V and his
wife, alleging under oath, their having purchased the property on a
previous date. The levy was dissolved upon the creditor’s failure,
after notice, to give the indemnity bond, Of course, this dissolution
could not operate to wipe out the notice given the creditor as to the
purchase made by said respondents, as alleged in their verified
third-party claim. When, therefore, the second levy was effected, the
creditor, may be regarded as having a previous knowledge of said
purchase; and, although the purchase was not duly registered, the
creditor’s knowledge thereof was equivalent to registration, at least
with respect to the creditor itself who acquired the property at the
judicial sale.'”

After a careful study of the case, we are in entire accord with the holding of the Court of Appeals.

In view of the foregoing, finding no error in the appealed decision, the same is hereby affirmed, with costs.

Paras, C. J., Bengzon, Bautista Angelo, Labrador, Concepcion, Barrera, and Gutierrez David, JJ., concur.