Cruz vs. Bancom Finance Corporation

An absolutely simulated contract of sale is void ab initio and transfers no ownership; consequently, a mortgage constituted by a purported buyer who obtained title through a simulated sale is null and void, and the mortgagee bank that failed to exercise the higher diligence expected of it — including inspecting the property and verifying possession — is not a mortgagee in good faith, and its registration of the mortgage after the annotation of an adverse claim and notice of lis pendens creates no preference over the true owners.

Brothers Edilberto and Simplicio Cruz were registered owners of a 33.9335-hectare agricultural land in Angat, Bulacan. In May 1978, Norma Sulit offered to purchase the land for P700,000 and paid P25,000 as earnest money. Unable to pay the balance, she proposed transferring the title to Candelaria Sanchez, a close family friend, so that Sanchez could obtain a bank loan using the property as collateral; Sulit would assume the obligation to pay the remaining balance. On June 21, 1978, the Cruzes executed a Deed of Absolute Sale in favor of Sanchez for a stated consideration of P150,000, although no money was actually paid. On the same day, Sanchez executed another Deed of Absolute Sale over the same property to Sulit, also for P150,000 and without consideration. Sulit subsequently mortgaged the land to Bancom Finance Corporation (later Union Bank) to secure a loan of P569,000. Sulit defaulted, and Bancom foreclosed and emerged as the highest bidder at the auction sale. The Cruzes, who never received the balance of the purchase price or any loan proceeds, sought reconveyance.

The Simulated Sales: Petitioners Edilberto and Simplicio Cruz owned a 33.9335-hectare agricultural land covered by TCT No. 19587. Norma Sulit offered to buy it for P700,000 and paid P25,000 earnest money. Unable to pay the balance of P675,000, she proposed that the Cruzes transfer the title to Candelaria Sanchez, a close family associate, so Sanchez could obtain a bank loan using the land as collateral; Sulit would assume the remaining obligation. On June 21, 1978, the Cruzes executed a Deed of Absolute Sale in favor of Sanchez for a stated consideration of P150,000. On the same day, Sanchez executed another Deed of Absolute Sale over the same property to Sulit, also for P150,000. No consideration was paid by Sanchez to petitioners or by Sulit to Sanchez; the stipulated amounts were never delivered. Petitioners’ testimony that they received “not a single centavo” was corroborated by Sanchez, who confirmed the transfer was solely to place the title in Sulit’s name. The two deeds were executed solely to enable a bank loan. Sulit never took possession of the property; petitioners remained in possession throughout.

The Mortgage and Foreclosure: On August 22, 1979, Sulit mortgaged the property to Bancom Finance Corporation to secure a loan of P569,000. Petitioners received none of the loan proceeds. Sulit later defaulted; in mid-1980 Bancom foreclosed the mortgage and became the highest bidder at the auction sale.

Annotations on the Title: Petitioners caused an adverse claim to be annotated on TCT No. T-248262 (issued in Sulit’s name) on October 30, 1979. A notice of lis pendens was annotated on December 10, 1979. Bancom registered the real estate mortgage only on March 14, 1980, after the adverse claim and lis pendens had already been inscribed.

RTC Findings: The trial court found that the two deeds of sale were absolutely simulated and void. It listed suspicious circumstances that Bancom should have investigated: the grossly inadequate price of P150,000 for 33.9 hectares of agricultural land even in 1978; the same-day double sale at identical price; the failure to verify whether tenants or squatters occupied the land; and the fact that possession was never transferred. The RTC concluded Bancom was not a mortgagee in good faith.

• Absolute Simulation of the Sale: Petitioners argued that the deeds of sale were absolutely simulated because no consideration was paid by Sanchez or Sulit; the sole purpose was to create a façade enabling Sulit to mortgage the land. They contended that the transfer of title was a subterfuge and conveyed no ownership.

• Bank’s Bad Faith and Lack of Due Diligence: Petitioners maintained that Bancom was not a mortgagee in good faith. It failed to conduct an ocular inspection of the large agricultural land, ignored the suspiciously low stated consideration, and did not verify who was in possession. As a banking institution, it was required to exercise greater care and could not simply rely on the certificate of title.

• Preference of Prior Annotations: Petitioners asserted that their adverse claim (annotated October 30, 1979) and notice of lis pendens (annotated December 10, 1979) predated the bank’s registration of the mortgage on March 14, 1980. Thus, the mortgage could not prejudice them as prior registrants, and the bank acquired no preferential right over the property.

• Validity of the Sales: Respondent contended that petitioners intended to be bound by the deeds of sale, as demonstrated by their subsequent execution of a special agreement to enforce payment of the balance of P655,000. It argued that the contracts were valid and not simulated.

• Mortgagee in Good Faith: Respondent maintained that it was an innocent mortgagee entitled to rely solely on the certificate of title. It argued that a bank should not be required to conduct an exhaustive investigation into the history of the mortgagor’s title before extending a loan, and that it had no duty to look beyond the face of the certificate.

• Petitioners’ Bad Faith in Annotation: Respondent claimed that petitioners were in bad faith because they already knew of the mortgage when they caused the annotations of adverse claim and lis pendens. It insisted that the prior annotations should not defeat its rights.

• Validity of the Sale and Mortgage: Whether the Deeds of Absolute Sale executed by petitioners in favor of Sanchez and by Sanchez in favor of Sulit were absolutely simulated and void ab initio for lack of consideration, and consequently whether the real estate mortgage constituted by Sulit over the property was null and void.

• Good Faith of the Mortgagee: Whether Bancom could be considered a mortgagee in good faith and a purchaser in good faith at the foreclosure sale, such that its rights prevail over petitioners’ ownership, given the bank’s failure to exercise the heightened diligence required of banking institutions, the suspicious circumstances surrounding the transaction, and the prior annotation of petitioners’ adverse claim and notice of lis pendens.

• Validity of the Sale and Mortgage: The deeds of sale were absolutely simulated and void ab initio. No consideration was actually paid by either Sanchez or Sulit; the true intent was not to transfer ownership but merely to enable Sulit to obtain a bank loan using the property as collateral. The execution of two sale documents on the same day, the complete failure of the supposed buyers to take possession, and the absence of any assertion of ownership rights confirmed the simulation. Under Articles 1345 and 1346 of the Civil Code, an absolutely simulated contract is void and produces no legal effect. Because Sulit never acquired ownership, the real estate mortgage she constituted was likewise null and void, and the subsequent foreclosure sale transferred no title. Petitioners remained the lawful owners.

• Good Faith of the Mortgagee: Bancom was not a mortgagee in good faith. As a banking institution, it was required to exercise greater care and prudence than private individuals. It failed to conduct an ocular inspection of the property or to investigate manifestly suspicious circumstances: the grossly inadequate stated consideration of P150,000 for 33.9 hectares of agricultural land, the same-day double sale at the same price, and the fact that the land was agricultural and occupied by tenants. Had it exercised the required diligence, it would have discovered that possession remained with petitioners. Moreover, when the mortgage was registered on March 14, 1980, an adverse claim (annotated October 30, 1979) and notice of lis pendens (annotated December 10, 1979) were already inscribed on the title. Under Section 51 of P.D. No. 1529 and the doctrine of prior tempore prior jure, the prior annotations created a preference in favor of petitioners. Consequently, the bank could not claim the status of a mortgagee or purchaser in good faith.

• Absolute Simulation (Articles 1345 and 1346, Civil Code) — An absolutely simulated contract occurs when the parties do not intend to be bound at all; it is void ab initio. A relative simulation, where the parties conceal their true agreement, binds them if it does not prejudice third persons and is not contrary to law. In this case, the two deeds of sale were absolutely simulated: no consideration was paid, the sole purpose was to create a façade for a loan, and no ownership rights were intended to pass. Consequently, the void sales could not serve as the basis for a valid mortgage or foreclosure.

• Heightened Diligence of Banks as Mortgagees — Banks are not entitled to rely solely on the certificate of title in the same manner as ordinary purchasers or mortgagees. Because their business is affected with public interest and they hold depositors’ money in trust, they must exercise greater care and prudence. This includes conducting an ocular inspection of the property offered as collateral, verifying physical possession, and investigating suspicious circumstances such as grossly inadequate consideration, same-day multiple sales, and the nature and size of the land. Failure to observe this standard of diligence negates good faith, and the bank is denied the protection of the land registration law.

• Prior Tempore, Prior Jure in Registration — A prior annotation of a lien, adverse claim, or notice of lis pendens on a certificate of title creates a preference. Under Section 51 of P.D. No. 1529, registration is the operative act to bind the land against third persons. Because petitioners’ adverse claim and notice of lis pendens were recorded months before the bank’s mortgage, the bank’s subsequent registration could not prejudice petitioners’ rights. The prior annotations retroacted to their respective dates and defeated any claimed preference of the later-registered mortgage.

• “A simulated contract is not a recognized mode of acquiring ownership.”
• “Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, for their business is one affected with public interest, keeping in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence which amounts to lack of good faith by which they would be denied the protective mantle of the land registration statute, Act [No.] 496, extended only to purchasers for value and in good faith, as well as to mortgagees of the same character and description.” (quoting Rural Bank of Compostela v. CA)
• “The failure of Sulit to take possession of the property purportedly sold to her was a clear badge of simulation that rendered the whole transaction void and without force and effect, pursuant to Article 1409 of the Civil Code.”
• “The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of [a bank’s] operations.”

• Rongavilla v. Court of Appeals, 294 SCRA 289 — Followed; a deed of sale where the stated consideration was not actually paid is a false contract void ab initio.
• Ocejo v. Flores, 40 Phil. 921 — Applied; a contract of purchase and sale is null and void when the purchase price stated as paid was never actually paid by the purchaser.
• Rural Bank of Compostela v. CA, 271 SCRA 76 — Controlling; established that the rule allowing reliance solely on the certificate of title does not apply to banks, which must exercise greater care and prudence.
• Sunshine Finance and Investment Corp. v. IAC, 203 SCRA 210 — Followed; financing institutions are required to exercise due diligence in ascertaining the condition of property offered as collateral.
• Adriano v. Pangilinan, G.R. No. 13747, January 16, 2002 — Cited to reinforce that the higher diligence extends to persons regularly engaged in lending secured by real estate mortgages.

• Articles 1345 and 1346, Civil Code — Define absolute and relative simulation; absolute simulation produces a void contract. Applied to declare the two deeds of absolute sale void ab initio.
• Article 1409(2), Civil Code — Absolutely simulated or fictitious contracts are inexistent and void from the beginning. Served as the statutory basis for nullity.
• Article 2085(2), Civil Code — Requires that the mortgagor be the absolute owner of the property; because Sulit was not the owner, no valid mortgage could be constituted.
• Article 2125, Civil Code — Registration of a mortgage is indispensable for it to bind third persons. The bank’s unregistered mortgage could not prejudice petitioners.
• Section 38 of Act No. 496 (Land Registration Act) — Defines “innocent purchaser for value” to include an innocent mortgagee; invoked but held inapplicable because the bank was not in good faith.
• Section 39 of Act No. 496 — Every person dealing with registered land may rely on the certificate of title, but this rule does not apply unconditionally to banks.
• Section 51 of Presidential Decree No. 1529 (Property Registration Decree) — Registration is the operative act to convey and affect land; prior annotations of adverse claim and lis pendens gave petitioners a preference over the later-registered mortgage.

Melo, Sandoval-Gutierrez, and Carpio, JJ., concurred. Vitug, J., was abroad on official business.