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PHILIPPINE NATIONAL BANK v. JUAN F. VILA

FACTS:

Petitioner Philippine National Bank (PNB), a universal banking corporation authorized by the Bangko Sentral ng Pilipinas, seeks to reverse the decisions of the Court of Appeals and the Regional Trial Court (RTC) of Villasis, Pangasinan in a case concerning the validity of a mortgage. In 1986, Spouses Reynaldo and Erlinda Cornista mortgaged a parcel of land to Traders Royal Bank (Traders Bank) to secure a loan. Due to their failure to pay, the bank foreclosed the mortgage and sold the property in a public auction where Juan F. Vila emerged as the highest bidder. Vila subsequently obtained a Certificate of Final Sale and took possession of the property, paying the real estate taxes. Despite this, the Spouses Cornista were allowed to buy back the property and a Certificate of Redemption was issued. Vila challenged this redemption and filed an action for nullification, transfer of title, and damages. The RTC ruled in Vila's favor, and this decision was upheld by the CA. During this period, the Spouses Cornista secured another loan from PNB using the same property as collateral. PNB foreclosed the property when the Cornistas defaulted, resulting in PNB obtaining a new title. Vila then initiated another case against the Cornistas and PNB, seeking the nullification of PNB's title. Both the RTC and CA ruled against PNB, finding that the bank failed to meet the diligence standards required for financial institutions and was not a mortgagee in good faith. These rulings are now under review by the Supreme Court.

ISSUES:

I. WHETHER PNB IS A MORTGAGEE IN GOOD FAITH

II. WHETHER PNB IS LIABLE FOR DAMAGES

RULING:

I. PNB is not a mortgagee in good faith. The Supreme Court affirmed that PNB failed to exercise the necessary due diligence expected of banks and financial institutions, particularly in the conduct of an ocular inspection and verification of the real owner of the property being mortgaged.

II. PNB is liable for damages. The Supreme Court affirmed the award of moral damages, exemplary damages, attorney's fees, and litigation costs in favor of Vila. The court found that PNB's negligence in ascertaining the status and condition of the property caused damage to Vila.

PRINCIPLES:

  • Due Diligence in Real Estate Transactions: Banks are required to exercise the highest degree of diligence in dealing with properties offered as securities for loans. They are expected to conduct ocular inspections and verify titles to protect the interests of true owners and innocent third parties.

  • Good Faith of Mortgagees: Good faith, or lack thereof, is a factual matter typically assessed by evidence of conduct and outward facts. For banks, being in a public-interest business, the standards for establishing good faith are more stringent.

  • Legal Ground for Moral and Exemplary Damages: Willful injury to property and negligence causing damage can justify the awarding of moral and exemplary damages. Attorney's fees and litigation expenses may also be awarded if the injured party was compelled to litigate to protect their rights.

  • Higher Standards for Banks: Banks, due to their significant role in commercial transactions and the economy, are held to higher standards of integrity, diligence, and prudence in their operations. Failure to meet these standards can result in liability for damages.