CRESENTE PICHAY, ET AL., PLAINTIFFS-APPELLEES, VS. ISAIAS CELESTINO, ET AL., DEFENDANTS, THE PHILIPPINE NATIONAL BANK, (DAGUPAN BRANCH), DEFENDANT-APPELLANT.

Pichay versus Philippine National Bank

The Case

This is a case about a lawyer and notary public, Isaias Celestino, who forged powers of attorney and deeds of sale over registered lands in Pangasinan, secured loans from the Philippine National Bank on the strength of the titles he thereby obtained, and then disappeared from the picture, leaving the true owners and the Bank to fight over who must bear the loss. The owners sued to rescind the forged documents and annul the mortgages; the Bank sued to foreclose. The Supreme Court's answer turns on one question every Bar candidate must master: when is a mortgagee a mortgagee in good faith? The case matters because it fixes the standard of diligence required of banks dealing with Torrens titles, and it settles the allocation of loss between innocent registered owners and an innocent but careless lender.

Procedural History

Four civil actions were commenced in the Court of First Instance of Pangasinan in the early months of 1957. Three were actions by the registered owners and their co-owners to rescind forged documents and annul the mortgages; the fourth was the Bank's action to foreclose the real estate mortgages. Because the cases involved common questions of law and fact, they were jointly tried. The trial court rendered a single judgment declaring the forged powers of attorney, deeds of sale, and mortgages null and void, ordering the cancellation of the titles issued in Celestino's name, dismissing the Bank's foreclosure complaint as against the true owners, and holding Celestino personally liable to the Bank for the loans. The Bank appealed from the portions of the judgment adverse to it. The appeals did not affect one of the civil cases in which the Bank was not a party. The case reached the Supreme Court on appeal from the trial court's judgment.

Facts

In the first case, the spouses Cresente Pichay and Juana Larioza, Esteban Renopa and Eugenia Agdoma, Esteban Lariosa and Mercedes Agdoma, and Pedro Agdoma were co-owners of land covered by a Torrens title. In August 1955 Celestino obtained two loans from the Bank and executed real estate mortgages as security. He forged the owners' signatures in two special powers of attorney, making it appear that they had authorized him to borrow. To enable registration, he filed a verified petition making it appear that one of the owners had asked for a replacement owner's duplicate certificate of title. The owners learned of the fraud only when they received a letter of demand from the Bank.

In the second case, Celestino and the Agdomas were the forced heirs of the deceased spouses Julian Agdoma and Anastacia Cabatic. Celestino renounced his share in favor of the other co-owners. On August 14, 1955 he fabricated a deed of sale making it appear that Julian Agdoma, who had been dead since July 23, 1945, had sold him the land. He then obtained a second owner's duplicate certificate of title, caused the cancellation of the original and the issuance of a new title in his own name, and mortgaged the property to the Bank to secure two loans. In the third case, Celestino forged a deed purporting to sell him land owned by the spouses Eugenio Papa and Maria Mangaoang and by Julia Libed, who had died in 1954. Following the same pattern, he secured a replacement duplicate certificate, registered the falsified deed, obtained a new title in his name, and borrowed 800 pesos from the Bank secured by a mortgage. In all these transactions the notary public before whom the documents were supposedly acknowledged was a non-existing person, and his supposed signatures were forged by Celestino.

The Bank's defense throughout was that it was a mortgagee in good faith and for value. The trial court found, however, that the Bank approved the loans with undue haste. In the Pichay case, the chattel mortgage, the two real estate mortgages, and the issuance of the replacement duplicate certificate all bore the same date, August 8, 1955, and the special power of attorney was made only five days earlier. In the Agdoma case, the court order for the replacement duplicate was issued on August 17, 1955 and the mortgage was executed the very next day. In the Papa case, the petition for a replacement duplicate was presented on December 23, 1955 and the mortgage was executed on January 5, 1956. The court held that no representative of the Bank had gone to the premises to investigate who the true owners were, as the common practice of banks requires.

Issues

• Whether or not the Philippine National Bank may be considered a mortgagee in good faith and for value, given the circumstances under which it approved the loans and accepted the mortgages.
• Whether or not the forged powers of attorney, deeds of sale, and deeds of mortgage are null and void, and whether the titles issued in Celestino's name should be cancelled.
• Whether or not the Bank or the innocent registered owners must bear the loss caused by Celestino's fraud.

Applicable Provisions

The decision rests on the settled doctrine on purchasers and mortgagees in good faith, which the Court quotes through the trial court's citation of prior jurisprudence:

One who purchases real estate with knowledge of a defect or lack of title in his vendor cannot claim that he has acquired title thereto in good faith as against the true owner of the land of an interest therein; and the same rule must be applied to one who has knowledge of facts which should have put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his vendor.

This rule bears directly on the Bank, because a mortgagee is held to the same standard of inquiry as a purchaser, and the Bank had facts before it that should have prompted investigation.

The Court also invokes the equitable maxim governing the allocation of loss between innocent parties:

As between two innocent persons, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence must bear the loss.

This maxim determines who must ultimately absorb the loss, and the Court examines whether the true owners contributed by their negligence or acquiescence to making the fraud possible.

Ruling

On the first issue, the Court held that the Bank may not be considered a mortgagee in good faith. The trial court's observations, which the Supreme Court found appropriate and conclusive, showed that the Bank approved the transactions with undue haste. The dates of the mortgages coincided suspiciously with the dates of the replacement certificates of title, and the Bank made no investigation of the true ownership of the lands. A mortgagee who closes his eyes to facts that should put a reasonable man upon his guard cannot claim the protection of good faith. The Court quoted with approval the rule that a purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and that his mere refusal to believe a defect exists, or his willful closing of his eyes to the possibility of a defect, will not make him an innocent purchaser for value.

On the second issue, the Court affirmed the nullity of the forged documents. The owners did not execute the powers of attorney or the deeds of sale. Without their knowledge and consent, and without even a trace of negligence on their part, the documents were forged and used by Celestino to secure the loans and execute the mortgages. The notary public before whom the documents were supposedly acknowledged was a non-existing person. The forged instruments therefore conveyed no title, and the mortgages built upon them were void.

On the third issue, the Court held that the Bank, and not the true owners, must suffer the consequence of the fraud. Even assuming the Bank were an innocent mortgagee, the maxim that as between two innocent persons the one who made the loss possible by his act of confidence must bear it could not be invoked by the Bank, because the records showed that the true owners had not in any way contributed to the fraud. They were not guilty of negligence, and there was no acquiescence on their part. Their owner's duplicate certificates were not lost; they had no hand in the ex parte petitions for replacement copies; and they filed their actions promptly upon discovering the fraud. The Bank's recourse was against Celestino, who was held liable for the loans.

Doctrine

A mortgagee is bound by the same standard of good faith as a purchaser for value. Good faith requires not only honest belief but also reasonable inquiry. A mortgagee who relies on a Torrens title must still exercise due diligence to ascertain the true ownership of the property and the authority of the mortgagor. One who has knowledge of facts that should put him upon inquiry is charged with knowledge of what that inquiry would have revealed. The willful closing of one's eyes to the possibility of a defect in the vendor's or mortgagor's title negates good faith.

Where registered owners are entirely innocent and have not contributed by negligence or acquiescence to the fraud, they do not bear the loss. The equitable maxim that as between two innocent persons the one who made the loss possible by his act of confidence must bear it applies against the party whose confidence in the forger enabled the fraud, not against the true owners. Forged documents convey no title, and mortgages executed on the strength of forged documents are void.

Disposition

The Supreme Court affirmed the trial court's judgment: the forged documents and mortgages were declared null and void, the titles in Celestino's name were cancelled, the foreclosure complaint against the true owners was dismissed, and Celestino was ordered to pay the Bank the loans, interest, attorney's fees, and costs.

Remember This

The single line to memorize: a mortgagee who closes his eyes to facts that should put a reasonable man upon his guard is not a mortgagee in good faith, and as between innocent parties, the one whose confidence made the fraud possible bears the loss. Examiners use this case to test the diligence required of banks under the Torrens system and the rule that forgery produces no title.