Expresscredit Financing Corp. v. Velasco
REITERATIONFacts
The Antecedents: Respondents purchased a house and lot from the Garcia spouses on May 25, 1988, with a promise to deliver the title free from liens and encumbrances within 15 days from full payment. The keys were delivered in August 1988, and respondents moved in. They later discovered that the Garcia spouses had mortgaged the property to petitioner, Expresscredit Financing Corporation, on June 15, 1989, for ₱250,000. Respondents filed a case for Quieting of Title and Specific Performance against the Garcia spouses, with a notice of lis pendens annotated on the title. Procedural History: The Regional Trial Court (RTC) dismissed the case against Expresscredit Financing Corporation, ruling that it was an innocent purchaser in good faith, although it recognized respondents' rights as also innocent purchasers, albeit subservient to petitioner's. The RTC ordered the Garcia spouses to reimburse respondents for the purchase price. The Court of Appeals (CA) reversed the RTC decision, declaring respondents as purchasers for value and in good faith, and holding the mortgage, sheriff's certificate of sale, affidavit of consolidation, and title in petitioner's name as void. The CA also ordered the Garcia spouses to pay damages and attorney's fees to respondents. The Petition: Petitioner Expresscredit Financing Corporation filed a Petition for Review on Certiorari, raising issues regarding the appellate court's reversal of the RTC decision, its holding of an unregistered deed of absolute sale over a registered real estate mortgage, and its voiding of the foreclosure sale.
Issue(s)
Whether the appellate court committed grave error in reversing the decision of the lower court; and who has preferential right over the property: the respondents who acquired it through prior purchase or the petitioner who acquired the same in a foreclosure sale as the highest bidder? Whether the appellate court committed grave abuse of discretion and error in holding an unregistered deed of absolute sale supreme over a registered real estate mortgage; and the good faith of the petitioner. Whether the appellate court erred in voiding the sale on public auction as a result of the extrajudicial petition for foreclosure of mortgage; and the validity of the mortgage and foreclosure sale. On the application of Article 1544 of the Civil Code; and the duty of due diligence for financing companies.
Ruling
The Supreme Court affirmed the Decision and Resolution of the Court of Appeals. It held that respondents, as prior purchasers in good faith, have a preferential right over the property. The mortgage constituted by the Garcia spouses in favor of petitioner was declared void for having been entered into in bad faith, rendering the subsequent foreclosure sale ineffectual.
Ratio Decidendi
On the issue of preferential right over the property: The Court reiterated the rule on double sale under Article 1544 of the Civil Code, which states that for immovable property, ownership belongs to the person who first recorded it in the Registry of Property in good faith. If there is no inscription, ownership pertains to the one who was first in possession in good faith, and in the absence thereof, to the one with the oldest title, provided there is good faith. In this case, respondents were the first purchasers and were in actual possession of the property. Petitioner, a financing corporation, had knowledge of the prior sale through its agents who were informed by the property's caretaker that the property had already been sold to respondents. This knowledge, coupled with the fact that the property was occupied by persons other than the mortgagors, should have prompted petitioner to conduct further inquiry beyond the certificate of title. Its failure to do so constituted bad faith, rendering its mortgage and subsequent purchase at the foreclosure sale void as against the prior unregistered sale to respondents. On the issue of good faith of the petitioner: The Court emphasized that good faith requires an honest intention to abstain from taking unconscionable and unfair advantage of another. A purchaser cannot close his eyes to facts that should put a reasonable man on guard. Petitioner, as a financing corporation engaged in real estate loans, has a greater duty of due diligence. The testimony of Conchita Cotoner, the caretaker, clearly indicated that petitioner's credit investigators were informed of the prior sale to respondents. This notice of defect in the title of the mortgagors meant that petitioner could not claim to be an innocent mortgagee or purchaser for value. The Court found that petitioner, despite having knowledge of the unregistered sale, still accepted the mortgage and purchased the property at the foreclosure sale, acting in bad faith. On the validity of the mortgage and foreclosure sale: Since the mortgage contract was constituted in bad faith, it was void from the beginning. Consequently, the foreclosure of the property based on a void mortgage was ineffectual. The Court of Appeals correctly declared the Deed of Mortgage, Sheriff's Certificate of Sale, Affidavit of Consolidation, and the Transfer Certificate of Title in petitioner's name as having no force and effect. The respondents, as prior purchasers in good faith, retained their preferential right over the property. On the application of Article 1544 of the Civil Code: The Court applied Article 1544 to resolve the conflict between the unregistered sale to respondents and the registered mortgage and subsequent foreclosure sale to petitioner. While petitioner's mortgage was registered, it was not acquired in good faith. The respondents, though their sale was unregistered, were in prior possession and had established the bad faith of the petitioner. Therefore, the principle of prior registration in good faith did not favor the petitioner. The Court found that respondents, by virtue of their prior purchase and possession, and the petitioner's bad faith, had the superior right. On the duty of due diligence for financing companies: The Court highlighted that financing companies, by the nature of their business, are expected to exercise a higher degree of diligence when dealing with real estate loans. They have the resources to ascertain encumbrances and prior sales. The fact that the property was occupied by persons other than the mortgagors should have alerted petitioner's investigators. Their failure to conduct a more thorough investigation, despite being informed of the prior sale, was a breach of their duty of due diligence and demonstrated bad faith.
Main Doctrine
A financing corporation, engaged in extending credit to the public, including real estate loans, has a greater charge than ordinary buyers or encumbrancers for value and is expected to exercise greater due diligence, including ascertaining whether the property being offered as security has already been sold to another, to prevent injury to prior innocent buyers. Failure to do so, despite knowledge of facts that should have put it on inquiry, renders its acquisition in bad faith.