SPOUSES EMILIANO L. JALBAY, SR. AND MAMERTA C. JALBAY, PETITIONERS, VS. PHILIPPINE NATIONAL BANK, RESPONDENT.

Jalbay versus Philippine National Bank

The Case

This is a petition for review brought by the spouses Emiliano Jalbay, Senior, and Mamerta Jalbay against the Philippine National Bank. The spouses sued to have a real estate mortgage and the foreclosure sale that followed declared null and void, on the ground that the mortgage had been constituted without their consent by persons who were not the registered owners. The case matters because it is the Supreme Court's clearest statement that the doctrine of the mortgagee in good faith, which ordinarily lets a mortgagee rely on the face of a Torrens title, does not apply to banks in the same way it applies to private individuals. Banks must do more, and this case tells us exactly how much more.

Procedural History

The spouses Jalbay filed a complaint against the Philippine National Bank before the Regional Trial Court of Quezon City, Branch 100, seeking to invalidate the real estate mortgage and the foreclosure proceedings, and to stop the bank from consolidating ownership over the land while the case was pending. The trial court ruled in their favor, declaring the real estate mortgage null and void and the foreclosure proceedings without force and effect. The bank and the spouses Agus appealed to the Court of Appeals, which reversed the trial court and ordered the dismissal of the complaint. The spouses Jalbay moved for reconsideration, but the Court of Appeals denied the motion. The spouses then came to the Supreme Court by a petition for review under Rule 45.

Facts

The subject property is a two hundred fifty seven square meter lot in Novaliches, Quezon City, registered in the names of the spouses Jalbay. In June 1988 the transfer certificate of title covering the lot was destroyed when fire gutted the Office of the Quezon City Register of Deeds. When the title was reconstituted, it was issued in the name of Emiliano Jalbay, married to Mamerta Jalbay. Because the spouses were then working and residing abroad, the title was released to their daughter, Virginia Agus.

Sometime in 1993, Virginia and her husband Danilo Agus applied for a loan with the Philippine National Bank, Ermita Branch, to raise additional funds for their garments business. As security, the spouses Agus constituted a real estate mortgage over the subject lot, which they represented as being owned by siblings Emiliano Jalbay, Junior, and Teresita Jalbay Cinco. The borrowers failed to pay, and the bank foreclosed the mortgage and emerged as the highest bidder at the public auction.

During a short vacation in the country, the spouses Jalbay learned of the mortgage and the foreclosure of their property. Contending that the mortgage and the foreclosure proceedings were invalid for lack of their consent as the real registered owners, they filed the complaint that began this case.

Issues

• Whether or not the Philippine National Bank acted with the degree of diligence required of a banking institution before approving the loan and accepting the real estate mortgage.
• Whether or not the bank may be considered a mortgagee in good faith, so that the mortgage and the foreclosure sale arising from it are given effect despite the mortgagors not being the true owners of the property.

Applicable Provisions

This decision does not quote a specific statutory provision. It applies the settled doctrine of the mortgagee in good faith, which the Court states in these words:

This is the doctrine of "the mortgagee in good faith," wherein buyers or mortgagees dealing with property covered by a Torrens Certificate of Title are no longer required to go beyond what appears on the face of the title.

That doctrine is the rule the spouses Jalbay sought to defeat and the bank invoked, and the whole case turns on whether it protects a bank that failed to look beyond the title.

The Court also states the qualification that governs banks:

However, the rule that persons dealing with registered lands can rely solely on the certificate of title is not applicable to banks.

This is the decisive sentence, because it removes the bank from the ordinary protection and subjects it to a higher standard.

Ruling

On the first issue, the Court held that the bank complied with the required degree of diligence, prudence, and care in dealing with the mortgagors. The Court of Appeals had found that the bank followed standard banking practices: it required the borrowers to submit their biodata, a duly accomplished loan application, and the transfer certificate of title; it caused the property to be inspected and appraised; and it conducted a thorough credit investigation on the borrowers. The bank's branch manager testified that the credit department, whose functions are independent from the branch, submitted its appraisal and investigation reports, and that the bank found nothing wrong with either report before approving the loan. The Court stressed that banks are required to exert a higher degree of diligence than individuals, and that before approving a loan application it is standard operating practice to conduct an ocular inspection of the property and to verify the veracity of the title to determine its real owners. On the facts, the bank met that standard.

On the second issue, the Court held that the bank was a mortgagee in good faith. Although the mortgagors were not the owners, the mortgage and the foreclosure sale are given effect by reason of public policy. The Court found no sign or circumstance that could have triggered suspicion on the bank's part: the certificate of title was authentic and issued in the name of Emiliano Jalbay, and he appeared to be the one occupying the property. There was therefore no compelling reason to depart from the rulings of the Court of Appeals.

Doctrine

First, the doctrine of the mortgagee in good faith provides that a mortgagee dealing with property covered by a Torrens certificate of title need not go beyond what appears on the face of the title, and even where the mortgagor is not the owner because his title is fraudulent, the mortgage and any foreclosure sale arising from it are given effect by reason of public policy.

Second, that rule is not available to banks. A bank is expected to exercise a higher degree of diligence, care, and prudence than a private individual, and before approving a loan application it must conduct an ocular inspection of the property offered as security and verify the veracity of the title to determine its real owners. A bank that does so, and finds no circumstance that could trigger suspicion, is a mortgagee in good faith.

Disposition

The petition was denied, and the Decision of the Court of Appeals dated November 29, 2006 and its Resolution dated April 27, 2007 were affirmed. The bank won.

Remember This

The line to memorize is that the rule allowing persons dealing with registered lands to rely solely on the certificate of title is not applicable to banks, which must inspect the property and verify the title. Examiners use this case to test the mortgagee in good faith doctrine and the higher diligence owed by banks in mortgage and loan transactions.