Topic/Doctrine: Mortgage

Facts:
The controversy began with a parcel of land inherited by the Torbela siblings from
their parents. They executed a deed of absolute quitclaim over the property in favor of Dr.
Rosario. 4 days after, a TCT was issued in Dr. Rosario’s name covering the property.

Another deed of absolute quitclaim was subsequently executed twelve days after by
Dr. Rosario acknowledging that he only borrowed the lot from the Torbela Siblings. This
deed was notarized but not immediately annotated. Dr. Rosario used the land as mortgage for
a loan he obtained through DBP for 70,000 Pesos. He used the loaned money to build a 4-
storey building which was initially used as a hospital but later converted into a commercial
space. Part was leased to PT&T and the rest to Rosario’s sister who operated the Rose Inn
Hotel and Restaurant.

Dr. Rosario paid fully the loan from DBP and the mortgage was cancelled and ratified
by a notary public. But however, Dr. Rosario got another loan from PNB. He later acquired a
third loan from Banco Filipino and bought out the loan from PNB cancelling the mortgage
with PNB. Rosario failed to pay their loan in Banco Filipino and the property was
extrajudicially foreclosed. Back in 1965, the Torbela Siblings sought to register their
ownership over the lot and to perfect their title but couldn’t because the title was still with
DBP. They showed the deed of absolute quitclaim as proof. In 1986, they filed a case for
recovery of ownership and possession and damages. They tried to redeem the lot from Banco
Filipino but failed. TCT was issued to Banco Filipino.

ISSUE:
Whether or not the honorable Court of Appeals gravely erred in finding that
respondent Banco Filipino savings and mortgage bank is a mortgagee in good faith.

HELD:

Banco Filipino is not a mortgagee and buyer in good faith. Under Article 2085 of the
Civil Code, one of the essential requisites of the contract of mortgage is that the mortgagor
should be the absolute owner of the property to be mortgaged; otherwise, the mortgage is
considered null and void. However, an exception to this rule is the doctrine of "mortgagee in
good faith." Under this doctrine, even if the mortgagor is not the owner of the mortgaged
property, the mortgage contract and any foreclosure sale arising therefrom are given effect by
reason of public policy.
 This principle is based on the rule that all persons dealing with property covered by a
Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what
appears on the face of the title. This is the same rule that underlies the principle of "innocent
purchasers for value." even if the mortgagor is not the rightful owner of, or does not have a
valid title to, the mortgaged property, the mortgagee in good faith is, nonetheless, entitled to
protection. The Court finds that Banco Filipino is not a mortgagee in good faith. Entry Nos.
274471-274472 were not validly cancelled, and the improper cancellation should have been
apparent to Banco Filipino and aroused suspicion in said bank of some defect in Dr.
Rosario’s title.

The purpose of annotating the adverse claim on the title of the disputed land is to
apprise third persons that there is a controversy over the ownership of the land and to
preserve and protect the right of the adverse claimant during the pendency of the controversy.
It is a notice to third persons that any transaction regarding the disputed land is subject to the
outcome of the dispute.