Development Bank of the Philippines v. Court of Appeals
REITERATIONFacts
The Antecedents: The Development Bank of the Philippines (DBP) granted loans to spouses Santiago and Oliva Olidiana, secured by real estate mortgages on several properties, including Lot 2029 (Pls-61). At the time of the mortgage, Lot 2029 was the subject of a Free Patent application by the Olidiana spouses with the Bureau of Lands, although it was registered under their name for taxation purposes. Subsequently, the Olidiana spouses renounced their rights and interests over Lot 2029 in favor of respondents Mylo O. Quinto and Jesusa Christine S. Chupuico, who were then granted Free Patents and issued Original Certificates of Title for their respective halves of the lot. DBP later foreclosed the mortgaged properties, including Lot 2029, due to the Olidiana spouses' failure to pay. DBP was the highest bidder at the public auction. However, when DBP attempted to register the sale and consolidate ownership, it discovered that Lot 2029 had already been patented and titled in the names of respondents. Procedural History: DBP filed an action for Quieting of Title and Cancellation or Annulment of Certificate of Title against respondents. The Regional Trial Court (RTC) ruled against DBP, declaring the mortgages, foreclosure sale, certificate of sale, and affidavit of consolidation null and void concerning Lot 2029, on the ground that the Olidiana spouses were not the absolute owners of the property when they mortgaged it. The Court of Appeals affirmed the RTC's decision. DBP then filed a petition for review on certiorari with the Supreme Court. The Petition: DBP assailed the decision of the Court of Appeals, which upheld the ruling that the mortgages on Lot 2029 were void and ineffectual because the mortgagors were not the owners in fee simple at the time of the mortgage. The core issue was whether the land could be validly mortgaged while still under a Free Patent Application.
Issue(s)
Whether Lot No. 2029 (Pls-61) could be validly mortgaged while it was still the subject of a Free Patent Application. Whether the mortgage contracts and subsequent foreclosure proceedings involving Lot No. 2029 were valid. Whether respondents fraudulently obtained the property in litigation.
Ruling
The petition is DENIED and the questioned decision of the Court of Appeals is AFFIRMED. The Supreme Court held that petitioner DBP did not acquire valid title over Lot No. 2029 (Pls-61) because it was public land when mortgaged to the bank.
Ratio Decidendi
On the validity of the mortgage while the property was under Free Patent Application: The Supreme Court affirmed the ruling of the lower courts that Lot No. 2029 (Pls-61) could not be validly mortgaged while it was still the subject of a Free Patent Application. The Court reiterated the principle that what divests the government of title to public land is the issuance of the sales patent and its subsequent registration with the Register of Deeds, which segregates the land from the public domain and converts it into private property. Since no patent was granted to the Olidiana spouses at the time of the mortgage, Lot No. 2029 remained part of the public domain. The Court cited Visayan Realty, Inc. v. Meer and Director of Lands v. De Luna to support this conclusion, emphasizing that the approval of a sales application merely authorizes possession for compliance with legal requirements, but ownership remains with the government until patent issuance and registration. On the validity of the mortgage contracts and subsequent foreclosure proceedings: The Court held that the mortgage contracts were null and void ab initio concerning Lot No. 2029. Article 2085, par. 2, of the New Civil Code explicitly requires that the mortgagor be the absolute owner of the thing mortgaged. As the Olidiana spouses were not the absolute owners of Lot No. 2029 at the time of the mortgage, they could not validly encumber it. Consequently, all subsequent legal consequences, including the foreclosure sale and the certificate of sale, were also rendered void and ineffectual with respect to Lot No. 2029. The Court relied on its previous ruling in Vda. de Bautista v. Marcos, which stressed the imperative nature of the mortgagor's absolute ownership for the validity of a mortgage. On the alleged fraudulent acquisition of the property by respondents: The Supreme Court found no evidence to support DBP's claim that respondents fraudulently obtained the property. The lower courts had correctly found that there was no proof that respondents had prior knowledge of the real estate mortgages executed by the Olidiana spouses in favor of DBP. Therefore, the act of respondents in securing the patents could not be categorized as tainted with fraud.
Main Doctrine
A mortgage constituted on property that is still the subject of a Free Patent Application and has not yet been granted is void and ineffectual because the mortgagor is not yet the absolute owner thereof, as required by Article 2085, par. 2, of the New Civil Code. The government retains ownership of public land until a patent is issued and the certificate of title is registered.