Philippine National Bank v. Banatao
REITERATIONFacts
The Antecedents: Plaintiffs-respondents initiated an action for recovery of real property against defendant-respondent Marciano Carag, claiming accretion to their Lot 3192. While the case was pending, defendants-respondents secured homestead patents (OCTs) for the disputed property, which contained a proviso prohibiting alienation or encumbrance for five years from issuance. Defendants-respondents then obtained loans from petitioner Philippine National Bank (PNB), securing them with real estate mortgages on their titled portions of the disputed property. These mortgages were annotated on the OCTs. The trial court initially ruled in favor of the plaintiffs-respondents, but the Court of Appeals (CA) remanded the case for amendment of the complaint to implead other parties and for further proceedings. Procedural History: An amended complaint was filed, impleading additional defendants and PNB, and adding causes of action for cancellation of OCTs and annulment of mortgages. PNB extrajudicially foreclosed one of the mortgaged properties. Subsequently, plaintiffs-respondents and defendants-respondents entered into a compromise agreement, ceding ownership of portions of the disputed property to the plaintiffs-respondents and acknowledging their indebtedness to PNB. The trial court approved the compromise agreement. PNB moved for reconsideration and to set aside the agreement, which was denied. PNB appealed to the CA. The Petition: The CA dismissed PNB's appeal, ruling that PNB was not an indispensable party to the compromise agreement concerning property recovery and cancellation of OCTs. The CA also held that PNB was only a necessary party for the annulment of mortgage, and that the mortgages were void because the mortgagors were not absolute owners. PNB filed a petition for review on certiorari with the Supreme Court, arguing it was an indispensable party and a mortgagee in good faith.
Issue(s)
Whether the compromise agreement entered into by plaintiffs-respondents and defendants-respondents, and approved by the trial court, legally binds petitioner PNB, which is not a party thereto, and constitutes a sufficient legal basis to nullify PNB's mortgage lien on the realty in question. Whether the mortgages constituted on the homestead patents are void ab initio due to the prohibition against encumbrance within five years from the issuance of the patent; and whether PNB can claim to be a mortgagee in good faith despite the clear proviso in the Original Certificates of Title (OCTs).
Ruling
The Supreme Court dismissed the petition. It declared the mortgages constituted on OCT Nos. 24800, 24801, 25217, and 25802 void. The Court affirmed the approval of the compromise agreement and the disposition of the case on the basis of compromise, reversing the order to remand the case to the Regional Trial Court.
Ratio Decidendi
On the binding effect of the compromise agreement on PNB: The Court held that a compromise agreement, as a contract, is binding only upon the parties to the compromise. A judgment based entirely on a compromise agreement is binding only on the parties who participated in the compromise and in the proceedings leading to its submission and approval. Since PNB was not a party to the compromise agreement, the judgment on compromise rendered by the trial court and affirmed by the CA is final only with respect to the plaintiffs-respondents and defendants-respondents, but not with respect to PNB. Therefore, the ownership issue settled by the compromise agreement could not be made applicable to PNB without hearing its side. On the validity of the mortgages and PNB's claim of good faith: The Court found that the mortgages constituted on the homestead patents were void ab initio. The Original Certificates of Title (OCTs) issued to the defendants-respondents contained a clear proviso, echoing Section 118 of the Public Land Act, that the patented homestead shall be inalienable and shall not be subject to encumbrance for five (5) years from the date of issuance of the patent. The annotations of the mortgage liens occurred only months after the issuance of the homestead patents, clearly within the prohibited five-year period. The Court emphasized that the prohibition is unmistakable even on a cursory reading of the OCTs, and thus, PNB could not claim to be a mortgagee in good faith. The bank failed to observe the diligence required in its transactions by approving loans secured by mortgages of properties that could not be mortgaged.
Main Doctrine
Mortgages constituted on lands granted by homestead patent within five years from the issuance of the patent are void ab initio, and the bank cannot claim to be a mortgagee in good faith as the prohibition is clearly stated on the face of the Original Certificates of Title.