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LAND BANK OF PHILIPPINES v. LORENZO MUSNI

FACTS:

This case involves a dispute over a lot in Tarlac between petitioner Land Bank of the Philippines, respondent Lorenzo Musni, and Spouses Nenita Sonza Santos and Ireneo Santos. Musni claimed that Nenita falsified a Deed of Sale and transferred the title of the lot to her and Eduardo's names. The Spouses Santos and Eduardo then mortgaged the lot to Land Bank as security for their loan, which they failed to pay, resulting in the foreclosure of the property. Musni filed a criminal case against Nenita and Eduardo for falsification of a public document, with Nenita being found guilty. The trial court ruled in favor of Musni, declaring the sale null and void and Land Bank not an innocent purchaser for value. Land Bank and Nenita filed motions for reconsideration, but these were denied. Land Bank and the Spouses Santos appealed to the Court of Appeals, which affirmed the trial court's decision, declaring the sale null and void and Land Bank not a mortgagee in good faith or an innocent purchaser for value.

In another case, Land Bank entered into a Real Estate Mortgage Contract with the Spouses Santos, mortgaging two parcels of land. After the Spouses Santos failed to redeem the properties within the redemption period, Land Bank acquired ownership of the properties through extrajudicial foreclosure proceedings. However, Lorenzo Musni filed a complaint against Land Bank and the Spouses Santos, contending that the mortgage was void due to the falsification of the deed of sale. The trial court deemed the mortgage and foreclosure sale null and void, ordered the reconveyance of the title to Musni, and directed Musni to pay the respondents the amount due. The Court of Appeals affirmed the decision with modifications. Land Bank then filed a petition for review before the Supreme Court, arguing that it acted in good faith and complied with all the requirements for foreclosure. The Supreme Court required the parties to submit their memoranda and resolved the issues of whether Land Bank is a mortgagee in good faith and an innocent purchaser for value.

ISSUES:

  1. Whether petitioner is a mortgagee in good faith and an innocent purchaser for value;

  2. Whether petitioner is entitled to the award of damages.

  3. Whether Land Bank conducted an exhaustive investigation before approving the mortgage loan.

  4. Whether Land Bank acted in good faith in granting the mortgage loan.

  5. Whether Land Bank can be considered an innocent purchaser for value.

  6. Whether the trial court erred in awarding damages to the petitioner equivalent to the appraised value of the property being claimed by respondent Musni.

  7. Whether the Court of Appeals erred in deleting the award of damages based on the ground that it constituted a partial nullification of the real estate mortgage.

RULING:

  1. Petitioner is neither a mortgagee in good faith nor an innocent purchaser for value. The determination of whether petitioner acted in good faith is a factual matter, which cannot be raised before the Court in a Rule 45 petition. However, the Court recognized the relevance of the concepts of a mortgagee and a purchaser in good faith, emphasizing the doctrine protecting mortgagees and innocent purchasers in good faith. It explained that the burden of discovering invalid transactions relating to a property covered by a title appearing regular on its face is shifted from the third party relying on the title to the co-owners or the predecessors of the title holder. While banks and other financial institutions are not required to conduct an exhaustive investigation of the mortgagor's title, they are expected to exercise greater caution and due diligence. In this case, the Court of Appeals found that petitioner failed to ascertain the title of the respondents to the property, thus it could not be considered a mortgagee in good faith.

  2. The issue of whether petitioner is entitled to the award of damages was not discussed in the provided text. Therefore, the ruling for this issue is not available.

  3. The Court found that Land Bank's claim of an exhaustive investigation was a mere generalization without any evidence of its officers following the bank's operating procedures. The Credit Investigation Report also did not support Land Bank's claim of conducting verifications with the Treasurer's Office, courts, and adjoining property owners. Hence, Land Bank failed to prove that it conducted an exhaustive investigation.

  4. The Court held that Land Bank did not act in good faith in granting the mortgage loan. Land Bank's reliance on TCT No. 304649, which was issued before the inscription of the Decision of the Department of Agrarian Reform Adjudication Board (DARAB), showed a defect in the owner's title. The fact that the property was mortgaged shortly after the inscription of the alleged DARAB Decision should have raised suspicion on the part of Land Bank. Therefore, Land Bank cannot be regarded as a mortgagee in good faith.

  5. The Court ruled that Land Bank cannot be considered an innocent purchaser for value. The foreclosure of the subject property occurred after the filing of the complaint for falsification, which should have alerted Land Bank to the questionable ownership of Nenita Sonza, the mortgagor. As a bank, Land Bank was expected to exercise a higher degree of diligence in its dealings, especially involving lands. Had Land Bank exercised the required diligence, it would have discovered the ownership of the property before granting the mortgage loan.

  6. The Court affirms the removal of the award of damages on a different ground since the petitioner did not come to the Court with clean hands and could have avoided the losses incurred if due diligence was exercised.

  7. The Court agrees with the Court of Appeals that the award of damages constituted a partial extinguishment of the real estate mortgage, which is not allowed due to its indivisibility.

PRINCIPLES:

  • The determination of good faith is a factual matter and cannot be raised before the Court in a Rule 45 petition.

  • The doctrine protecting mortgagees and innocent purchasers in good faith is based on the social interest embedded in the legal concept of indefeasibility of titles.

  • Banks and other financial institutions are expected to exercise greater caution and due diligence in dealing with properties, even registered ones, because their business is imbued with public interest.

  • Petitioners claiming to be mortgagees in good faith must comply with the standard operating procedures of banks, which include conducting an ocular inspection of the property and verifying the genuineness of the title.

  • A mortgagee is expected to conduct an exhaustive investigation before approving a loan.

  • The absence of a diligent investigation and failure to discover defects in the owner's title would indicate a lack of good faith on the part of the mortgagee.

  • A bank is expected to exercise a higher degree of diligence in its dealings, including those involving lands.

  • Banks cannot merely rely on the face of the certificate of title and should ascertain the ownership of properties mortgaged to them.

  • Bankruptcy does not exempt a mortgagee from conducting a diligent investigation.

  • Damages may be awarded to compensate a party for the loss suffered in transacting with another party, but the award may be denied if the party seeking relief did not come to the court with clean hands.

  • The mortgage is an indivisible contract, and any partial nullification or extinguishment of the mortgage is not allowed.

  • The principle of due diligence requires parties to exercise reasonable care and prudence in their transactions to avoid unnecessary losses or harm.