Cruz v. Bancom Finance Corporation
REITERATIONFacts
1. The Antecedents: Brothers Edilberto and Simplicio Cruz, the registered owners of a 33.9335-hectare parcel of agricultural land with improvements in Angat, Bulacan, entered into a transaction with Norma Sulit for the sale of the property. Initially, the Cruz brothers agreed to sell the land for P700,000.00, accepting P25,000.00 as earnest money. When Sulit failed to pay the balance, she, through Candelaria Sanchez, convinced the Cruz brothers to execute a Deed of Absolute Sale in favor of Sanchez for P150,000.00, with the understanding that Sanchez would facilitate a bank loan using the land as collateral. On the same day, Sanchez executed another Deed of Absolute Sale in favor of Sulit, also for P150,000.00. Sulit subsequently obtained a loan of P569,000.00 from Bancom Finance Corporation (now Union Bank of the Philippines), mortgaging the land which was by then titled in her name. Sulit defaulted on the loan, leading to the foreclosure of the mortgage and Bancom emerging as the highest bidder at the auction sale. 2. Procedural History: The Cruz brothers filed a complaint for reconveyance of the land, alleging that the deeds of sale were absolutely simulated. Norma Sulit initially filed an answer but was declared in default. Bancom Finance Corporation intervened, asserting its right as a mortgagee in good faith. The Regional Trial Court (RTC) ruled in favor of the Cruz brothers, declaring the sale contracts simulated and Bancom not a mortgagee in good faith. The Court of Appeals (CA) reversed the RTC's decision, finding the deeds of sale valid, Bancom a mortgagee in good faith, and thus upholding Bancom's right to the subject land. 3. The Petition: Petitioners Edilberto and Simplicio Cruz filed a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking to overturn the Court of Appeals' decision. They argue that the CA erred in holding that the deeds of sale were not simulated and that Bancom was a mortgagee in good faith. The petitioners contend that the simulated nature of the sale contracts rendered them void ab initio, meaning Sulit never acquired valid ownership and thus could not validly mortgage the property. They further argue that Bancom failed to exercise due diligence expected of a banking institution, particularly by not conducting an ocular inspection and by registering its mortgage after the annotation of the petitioners' adverse claim and notice of lis pendens on the title, thereby not acquiring preferential rights as a mortgagee in good faith.
Issue(s)
Whether or not the Honorable Court of Appeals erred in holding that the Deeds of Sale were valid and not absolutely simulated. Whether or not the Honorable Court of Appeals erred in ruling that respondent bank was a mortgagee in good faith, considering the circumstances surrounding the property and the prior annotations on the title. Whether or not the Honorable Court of Appeals erred in ruling that respondent bank possesses a preferential right over petitioners on the subject land as a mortgagee in good faith, despite the prior registration of petitioners' adverse claim and notice of lis pendens.
Ruling
The Petition is granted. The assailed Decision of the Court of Appeals is set aside, and the Decision of the RTC of Bulacan (Branch 21) dated January 25, 1996 is reinstated. The Deeds of Sale were absolutely simulated and therefore void. Consequently, the mortgage constituted by Norma Sulit in favor of Bancom was also void, as she was not the owner of the property. Bancom was not a mortgagee in good faith.
Ratio Decidendi
On the validity of the Deeds of Sale: The Supreme Court held that the Deeds of Sale were absolutely simulated. The stipulated consideration of ₱150,000.00 was never actually paid. The deeds were executed to facilitate Sulit's acquisition of a loan. The buyers never asserted rights of ownership, which is a badge of simulation. An absolutely simulated contract is void ab initio, producing no legal effect, and a transfer certificate of title issued pursuant to such a void sale should be cancelled. On the good faith of the mortgagee: The Court ruled that Bancom was not a mortgagee in good faith. As a banking institution, it is expected to exercise greater care and prudence. It failed to conduct an ocular inspection of the property and investigate the ownership thereof. Several circumstances should have aroused suspicion, such as the unusually low price of the land and the same-day sale. Moreover, Bancom registered its mortgage after petitioners' adverse claim and notice of lis pendens were already annotated on the title. On the preferential right of the mortgagee: The prior registration of the adverse claim and lis pendens created a preference. Therefore, Bancom's mortgage was binding only between it and Sulit, not on petitioners as third parties. Since the simulated deeds of sale did not convey any rights, Sulit was not the owner and could not constitute a valid mortgage. Consequently, the foreclosure and auction sale were also void.
Main Doctrine
An absolutely simulated contract is void ab initio and transfers no ownership rights. Consequently, a purported buyer, not being the owner, cannot validly mortgage the subject property, and neither does the buyer at the foreclosure sale acquire any title thereto. Banks, as mortgagees, are expected to exercise greater care and prudence and conduct ocular inspections and investigations to ascertain the status of the property offered as collateral.