ARACLEO ERASUSTA, JR., GONZALO ERASUSTA AND FAUSTINO ERASUSTA, IN SUBSTITUTION OF THEIR MOTHER LUCENA DE LOS REYES, PETITIONERS, VS. COURT OF APPEALS, PACIFIC BANKING CORPORATIO…

Erasusta versus Court of Appeals

The Case

This is a petition for review on certiorari brought by Aracleo Erasusta, Junior, Gonzalo Erasusta, and Faustino Erasusta, who substituted for their deceased mother, Lucena de los Reyes. They ask the Supreme Court to set aside the decision of the Court of Appeals which had reversed the trial court and declared Pacific Banking Corporation the rightful owner of a parcel of land in Sampaloc, Manila. The case began as an action for recovery of ownership with damages filed by the Amorin family against De los Reyes and the Bank. It matters because it tests the classic rule that a person dealing with registered land may rely on the face of the Torrens title, and it shows the limits of that rule when the buyer or mortgagee is a bank that failed to look at who was actually occupying the land.

Procedural History

The Amorins filed the action for recovery of ownership with damages before the then Court of First Instance of Manila, Branch 34, which later became the Regional Trial Court. De los Reyes answered and filed a cross-claim against the Bank, and also sought to bring the subdivision owner, Antonio Prieto, into the case as a third-party defendant. On January 23, 1986, the trial court rendered judgment cancelling the Bank's title over the lot and ordering corrections in the titles and the subdivision plan. De los Reyes moved for modification, and on August 9, 1996, the trial court issued an order cancelling the titles of both Valenzuela and the Bank over the several lots and directing the Register of Deeds to interchange the technical descriptions of the two lots. Both the Bank and De los Reyes appealed to the Court of Appeals. During the appeal, De los Reyes died and was substituted by her sons, the petitioners. On April 30, 2001, the Court of Appeals reversed the trial court, granted the Bank's appeal, dismissed that of De los Reyes, and declared the Bank's titles valid. The Court of Appeals denied reconsideration on July 27, 2001. The petitioners then came to the Supreme Court by petition for review on certiorari.

Facts

The late Antonio Prieto owned the Prieto Estate, which was subdivided and sold to tenants on installment. Lucena de los Reyes bought two adjoining lots, Lot 19-C under a contract dated September 30, 1959, and Lot 19-A under a contract dated December 13, 1960. The contracts carried no technical descriptions, but each lot had a house on it: the house on Lot 19-C bore the address 933 Maria Luisa Street, and the house on Lot 19-A bore the address 925 Maria Luisa Street. On January 30, 1968, De los Reyes transferred her rights over Lot 19-C to Fortunato Amorin, and the next day Prieto executed a deed of sale in his favor. A title was issued in his name, and the Amorins took possession of the house at 933 Maria Luisa Street and built their residence there. After Fortunato died, his widow Amparo and their children partitioned the property and a new title was issued in their names.

Meanwhile, De los Reyes entrusted the documents covering Lot 19-A and two other lots to a certain Benjamin Valenzuela, who promised to help transfer the titles to her children. Instead, Valenzuela fraudulently transferred the rights to himself. Prieto, unaware of the fraud, executed deeds of sale in Valenzuela's favor, and Valenzuela obtained titles in his own name. Valenzuela then mortgaged the lots to Pacific Banking Corporation. De los Reyes discovered the fraud and filed two criminal complaints for estafa through falsification of public documents against Valenzuela, who was convicted in both. When Valenzuela failed to pay, the Bank foreclosed the mortgages in 1970 and bought the lots at public auction as the highest bidder, later consolidating ownership and securing new titles in its name.

In 1973 and 1974, the Bank sent the Amorins demands to vacate, insisting that the Amorins were occupying Lot 19-A, which the Bank now owned. The Amorins checked the records of the Land Registration Commission and discovered a mix-up in the lot designations: Lot 19-C was in fact the lot at 925 Maria Luisa Street, and Lot 19-A was the lot at 933 Maria Luisa Street. The Amorins then demanded that De los Reyes surrender the lot at 925 Maria Luisa Street, but she refused, insisting that the lot the Amorins occupied was Lot 19-C. Ejectment suits filed by the Amorins were dismissed, and so they were compelled to file the present action for recovery of ownership with damages.

Issues

• Whether or not the Court of Appeals erred in declaring Pacific Banking Corporation an innocent mortgagee and purchaser for value entitled to protection of the law over Lot 19-A.
• Whether or not the Bank's certificates of title may be cancelled in this action, or whether such cancellation amounts to a prohibited collateral attack on the title.
• Whether or not Benjamin Valenzuela was an indispensable party without whom no valid judgment could be rendered.

Applicable Provisions

Section 48 of Presidential Decree Number 1529, the Property Registration Decree, provides:

Certificate not Subject to Collateral attack. A certificate of title shall not be subject to collateral attack. It cannot be altered, modified, or cancelled except in a direct proceeding in accordance with law.

This provision bears on the Bank's argument that its titles cannot be cancelled in the Amorins' action for recovery of ownership.

Ruling

On the first issue, the Court ruled in favor of the petitioners. The Court accepted the familiar rule that a person dealing with registered land may safely rely on the correctness of the certificate of title, and that a purchaser is not required to explore beyond what the Torrens title shows on its face. But the Court held that this protection belongs only to a purchaser or mortgagee in good faith. The Court noted that a banking institution, before approving a loan, sends its representative to the premises and investigates who the true owners and possessors are. Here, the Bank made no investigation at all. An employee of the Bank was a close friend of Valenzuela, and no officer or employee inspected the premises before the mortgage. Neither the mortgagor nor the seller was in possession; the lots were in the visible and public possession of persons other than the mortgagor. The Court held that this failure, contrary to the standard practice of banks, constituted gross negligence amounting to bad faith. The Court also observed that the deed of assignment over the lots was signed only on its second page and had only one attesting witness, facts that should have put the Bank upon inquiry. The Court concluded that the Bank was a mortgagee in bad faith.

On the second issue, the Court held that what cannot be collaterally attacked is the certificate of title, not the title itself. Ownership is different from a certificate of title, and placing land under the Torrens system does not mean that ownership can no longer be disputed. The Court also noted that the Bank did not raise this defense in the trial court, so it was deemed waived.

On the third issue, the Court held that there was no need to implead Valenzuela. The forgeries had been established beyond reasonable doubt in the two criminal cases, whose decisions were presented in evidence, and the trial court had made a final determination of the action.

Doctrine

A certificate of title is not conclusive evidence of title; registration does not vest title but is merely evidence of it. A forged or fraudulent document may become the root of a valid title only where the property has already been transferred from the owner to the forger, and a person who deals with registered property in good faith may acquire good title from a forger. But the protection of the Torrens system belongs only to a purchaser or mortgagee in good faith. A bank, being in the business of extending loans secured by real estate, is expected to exercise greater care and prudence than private individuals, and its failure to investigate the premises and the rights of those in actual possession constitutes gross negligence amounting to bad faith. What Section 48 of Presidential Decree Number 1529 protects from collateral attack is the certificate of title, not the ownership it represents.

Disposition

The petition was granted; the Court of Appeals decision and resolution were reversed and set aside, and the trial court decision as modified was reinstated, cancelling the titles of Valenzuela and the Bank and ordering the Register of Deeds to interchange the technical descriptions of the two lots.

Remember This

The single line to memorize: a bank that fails to investigate the actual possessor of land offered as collateral is a mortgagee in bad faith and cannot claim the protection of the Torrens system. Examiners like to use this case on the innocent purchaser for value rule, on the difference between a certificate of title and title itself, and on the higher diligence expected of banks.