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MACARIA ARGUELLES v. MALARAYAT RURAL BANK

FACTS:

The late Fermina M. Guia owned a parcel of agricultural land in Barrio Pinagkurusan, Batangas. She sold a portion of the land to the spouses Petronio and Macaria Arguelles, but the sale was not registered. Fermina M. Guia then instructed her son and daughter-in-law, Eddie and Teresita Guia, to subdivide the land into three lots and apply for separate titles for each lot. The Transfer Certificate of Title (TCT) for Lot 3-C, which was supposed to be delivered to the Arguelles, was never received by them.

The Guia spouses were able to cancel the original Certificate of Title (OCT) and obtain separate titles for the subdivided lots. They then obtained a loan from Malarayat Rural Bank and secured it with a mortgage over Lot 3-C. The mortgage and Special Power of Attorney were duly annotated on the TCT for Lot 3-C.

The Arguelles discovered several years later that the land had been subdivided and that a mortgage had been created over Lot 3-C. They filed a complaint seeking the annulment of the mortgage and the cancellation of the mortgage lien.

The Regional Trial Court (RTC) ruled in favor of the Arguelles, declaring the mortgage null and void and ordering the cancellation of the mortgage annotation. The RTC found that the Guia spouses were no longer the owners of Lot 3-C at the time they mortgaged it to Malarayat Rural Bank because of the unregistered sale to the Arguelles. The RTC also declared that the bank was not a mortgagee in good faith.

Malarayat Rural Bank appealed to the Court of Appeals (CA) and the CA reversed the RTC decision. The CA held that since the sale had not been registered, it could not affect the bank. The CA also found that the bank was a mortgagee in good faith.

The Arguelles filed a petition for review on certiorari before the Supreme Court, raising several issues for resolution.

ISSUES:

  1. Whether the unregistered sale of the property to the spouses Arguelles can be enforced against respondent Malarayat Rural Bank, despite it not being registered and annotated in the certificate of title.

  2. Whether respondent Malarayat Rural Bank is considered a mortgagee in good faith.

  3. Whether the Court of Appeals erred in declaring respondent Malarayat Rural Bank the absolute owner of the subject property despite the nullity of the real estate mortgage extrajudicially foreclosed by it.

  4. Whether the Court of Appeals erred in holding that the spouses Arguelles did not put in issue that respondent Malarayat Rural Bank had constructive notice and possession of the subject lot.

RULING:

  1. The unregistered sale in favor of the spouses Arguelles must prevail over the mortgage lien of respondent Malarayat Rural Bank since the latter is not considered a mortgagee in good faith.

  2. Respondent Malarayat Rural Bank is not a mortgagee in good faith as it failed to exercise the required degree of diligence and prudence, particularly by not investigating the possession status of the land and the authenticity of the authority purportedly given under a Special Power of Attorney.

  3. The Court of Appeals erred in granting ownership to respondent Malarayat Rural Bank because the real estate mortgage and the foreclosure sale were nullified due to the bank's lack of good faith.

  4. The issue of whether the Court of Appeals erred in holding that the spouses Arguelles did not put in issue that respondent bank had constructive notice and possession became moot since the main ruling was favorable to the spouses Arguelles.

PRINCIPLES:

  1. Doctrine of Mortgagee in Good Faith: A mortgagee in good faith can rely on the certificate of title presented without needing to investigate beyond what appears on its face.

  2. Due Diligence by Banks: Banks are required to exercise a higher degree of diligence compared to individuals in transactions, particularly when the mortgagor is not the registered owner but an attorney-in-fact.

  3. Priority of Registration: Generally, unregistered transactions cannot affect subsequent transactions duly registered under the Torrens system. Exceptions apply if the subsequent registrant is not a purchaser or mortgagee in good faith.

  4. Nullity of Transactions Involving Fraudulent Titles or Lack of Good Faith: Mortgages and other transactions are rendered void if not conducted in good faith, even when conducted under a seemingly valid certificate of title.