Bank of the Philippine Islands v. Bentley House Furniture, Co., Inc.

THIRD DIVISION

[G.R. No. 194509. August 23, 2017.]

BANK OF THE PHILIPPINE ISLANDS, petitioner,vs. BENTLEY HOUSE FURNITURE, CO., INC.; LAND BANK OF THE PHILIPPINES; and FIRST ORIENTAL PROPERTY VENTURES, INC., respondents.

NOTICE

Sirs/Mesdames :

Please take notice that the Court, Third Division, issued a Resolution dated August 23, 2017, which reads as follows:

"G.R. No. 194509 (BANK OF THE PHILIPPINE ISLANDS, Petitioner, v. BENTLEY HOUSE FURNITURE, CO., INC.; LAND BANK OF THE PHILIPPINES; and FIRST ORIENTAL PROPERTY VENTURES, INC., Respondents.) — We resolve the appeal of the decision promulgated on February 26, 2010, 1 whereby the Court of Appeals (CA) affirmed the judgment of the Regional Trial Court (RTC), Branch 16, in Davao City rendered on October 30, 2006 dismissing the complaint of the petitioner. 2

The facts as culled from the records are as follows.

Respondent First Oriental Property Ventures, Inc. (First Oriental) constituted a real estate mortgage (REM) over several parcels of land in favor of respondent Land Bank of the Philippines (LBP) on November 28, 1996. The parcels of land were registered under the name of First Oriental in the following transfer certificates of title (TCT) of the Registry of Deeds of Davao City, namely: TCT No. T-231589, TCT No. T-231590, TCT No. T-231592, TCT No. T-242574, TCT No. T-242575, TCT No. T-242576, TCT No. T-242577, TCT No. T-242578, TCT No. T-242579, TCT No. T-242580, TCT No. T-242593, and TCT No. T-242600. The parcels of land were subsequently consolidated under TCT No. T-277338 along with other parcels of land registered in the name of First Oriental. Nevertheless, the previous TCTs of the parcels mortgaged to LBP were not cancelled. Neither did the TCT covering the consolidation bear any annotation of the REM to LBP. 3

The consolidated parcels of land were subdivided into two, with one portion being transferred to East Asian International Marketing Venture, Inc. (East Asian), and the other remaining under the name of First Oriental. The two portions were mortgaged by East Asian and First Oriental to the petitioner on May 21, 1997 and September 1, 1997, respectively, and the corresponding mortgages were annotated on the affected TCTs. 4

East Asian and First Oriental eventually defaulted on their obligations, and thus, prompted the petitioner to cause the extrajudicial foreclosure of the mortgages. As the sole bidder during the foreclosure sale, the petitioner was declared the winning bidder. In 1998, Bentley acquired East Asian and changed the latter's name to Bentley House Furniture, Co. (Bentley). Prior to the acquisition Bently knew that East Asian had an outstanding loan with BPI secured by a mortgage. 5

In the meantime, First Oriental also failed to pay its obligations with LBP. In the ensuing extrajudicial foreclosure sale, LBP was the sole bidder and thus acquired the mortgaged properties on February 23, 1999. On March 2, 2000, a writ of possession was issued to LBP and New TCTs were then issued in its name. 6

Bentley communicated to the petitioner its intent to redeem the foreclosed assets of East Asian. The parties agreed that the redemption price would be P150,000,000.00. Bentley deposited the amount of P118,830,000.00, which the petitioner acknowledged on June 21, 2000. Out of this amount, the petitioner applied P100M to the payment of taxes and the fees incidental to the redemption. Bentley then executed and delivered a promissory note in favor of the petitioner for the payment of the P50 million balance of the redemption price. On July 21, 2000, Bentley constituted a REM on the redeemed properties to secure the payment of the P50 million balance. 7

Subsequently, when Bently tried to enter the properties, it discovered that LBP already owned the properties. Bentley immediately informed the petitioner that it would suspend payment of the P50 million obligations until it could take possession of the properties. The petitioner denied any responsibility about the matter, and insisted that it had relied in good faith on the clean titles presented by East Asian; hence, it posited that it was East Asian that must be held liable for its misrepresentation that there were no prior liens in respect of the mortgaged properties. 8 Bentley ultimately failed to repay its P50 million obligations to the petitioner.

Thus, the petitioner commenced the judicial foreclosure of the REM on June 28, 2001. 9 Bentley filed a counterclaim for malicious prosecution, and for the return of the P118,000,000.00 that the petitioner had actually received from Bentley, as well as damages. 10 For its part, Bentley submitted a certification dated April 15, 2004 issued by the Register of Deeds of Davao City to the effect that TCT No. T-282176 and TCT No. T-282177 still existed; and that the records disclosed that the same parcels of land were found to be within the area covered by TCT No. T-328495 and TCT T-328497, the new titles registered under the name of LBP.

The RTC dismissed the complaint and the counterclaim, holding that it could not order Bentley to pay the petitioner the balance of the redemption price because the petitioner could not also deliver the property to Bentley; 11 and that the counterclaim should likewise be dismissed because there was no concrete proof of malicious prosecution on the part of the petitioner, and that there was another case pending in another court involving the claim for refund by Bentley. 12

Both the petitioner and Bentley appealed to the CA.

On February 26, 2010, the CA promulgated its assailed decision, disposing thusly:

FOR REASONS STATED, the assailed Decision is MODIFIED in that the dismissal of the counter-claim is SET ASIDE. BPI is ordered to return to Bentley House Furniture, Co. the amount of P118.83M with interest at 6% per annum to be computed from September 20, 2001 until finality of judgment. Upon finality, an interest of 12% per annum shall be imposed until the judgment is fully satisfied.

SO ORDERED. 13

The CA denied the petitioner's motion for reconsideration on October 18, 2010.

On August 11, 2015, LBP sold its rights and interests in 15 parcels of land, including the two properties subject matter of this case covered by TCT No. T-242580 and TCT No. T-242600 to the Davao Solar Best Realty Corporation (Davao Solar). On May 25, 2017, LBP moved for substitution by Davao Solar as a party in its stead.

Issues

The petitioner seeks the reversal of the decision of the CA, arguing that the CA erred in thereby affirming the dismissal of its complaint for judicial foreclosure; and in granting Bentley's counterclaim by ordering it to return the P118.83 million paid by Bentley. It contends that its ownership should be preferred to that of LBP.

Ruling of the Court

The appeal lacks merit.

To recapitulate the antecedents of this case, First Oriental consolidated the titles of several parcels of land, including those mortgaged to LBP. Unfortunately, the Register of Deeds of Davao City did not cancel the previous titles and carry over the annotations of the encumbrances to the new title. Subsequently, First Oriental subdivided the consolidated title into two and gave one parcel of land to East Asian, now owned by Bentley. First Oriental and East Asian, holding clean titles to their respective properties, executed REMs over their lands in favor of the petitioner. When the petitioner foreclosed the REMs, Bentley exercised its right to redeem the property, but the property could not be delivered because LBP was already in possession thereof.

Given the factual backdrop, LBP as the first mortgagee had a superior lien over the parcels of land subject matter of this case. It is a basic principle that the rights of the first mortgage creditor or mortgagee over the mortgaged properties are superior to those of a subsequent attaching creditor and other junior mortgagees. 14 Accordingly, the petitioner's lien as a second mortgagee was subordinate to that of LBP's in relation to the properties.

Moreover, as between two persons who both stand to suffer loss, the possessor of the property is preferred in its possession, the ownership having been transferred by delivery. 15 As such, LBP, as the entity with legal possession of the properties, was preferred in its possession.

The concept of mortgagee in good faith is derived from the rule that whoever deals with property covered by a Torrens certificate of title need not go beyond what appears on the face of the title. This in effect gives meaning to the indefeasibility of the Torrens certificate of title as evidence of lawful ownership of the land or of any encumbrance thereon. Nonetheless, the rule admits of exceptions such as in the case of banks and other financial institutions because much greater care and due diligence are required of them because their business has been imbued with public interest. Any failure on their part to exercise caution and due diligence turns them into mortgagees in bad faith. 16 It is customary as well as prudent for them to exercise due diligence and caution as well as to adopt certain standard operating procedures like conducting ocular inspections of the properties offered for mortgage and verifying the genuineness of the certificates of title to determine the real owners thereof before approving loan applications.

Herein, the petitioner failed to exercise greater care in conducting the ocular inspection of the properties offered for mortgage. Such omission could unduly prejudice innocent third parties. Admittedly, First Oriental and Bentley presented clean titles for purposes of the mortgage to the petitioner. However, the petitioner, despite being expected to exercise greater care and prudence than other individuals in dealings involving registered lands, merely relied on the certificates of title; it did not ascertain the status of the properties to be mortgaged, contrary to the standard procedure of its operations. Thus, the CA properly ruled that the petitioner was a mortgagee in bad faith.

The petitioner was not entitled to the judicial foreclosure for being a mortgagee in bad faith. LBP had the prior lien, making the petitioner's lien subordinate to that of LBP's. It did not matter, therefore, that the petitioner foreclosed the mortgages on the properties first. Moreover, the ownership of the properties was already consolidated in the name of LBP and the corresponding certificates of title were issued in its name when First Oriental, as mortgagor, did not redeem the properties within the reglementary period allowed by the rules. 17 In this regard, subordinate lien holders like the petitioner could acquire only a lien upon the equity of redemption pertaining to the mortgagor, and their rights are strictly subordinate to the superior lien of the mortgagee. 18 Unfortunately for the petitioner, the reglementary period to redeem the properties allowed by the rules had also already lapsed.

Finally, there is no longer any need to comment on the substitution of Davao Solar for LBP, as well as on the request by the Regional Director of the Department of Environment and Natural Resources for a written authorization to conduct a survey of the property due to its being under litigation.

WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS the decision promulgated on February 26, 2010 by the Court of Appeal; and ORDERS the petitioner to pay the costs of suit.

SO ORDERED."

Very truly yours,

(SGD.) WILFREDO V. LAPITANDivision Clerk of Court

 

Footnotes

1.Rollo, pp. 63-72; penned by Associate Justice Edgardo T. Lloren, with the concurrence of Associate Justice Romulo V. Borja and Associate Justice Angelita A. Gacutan.

2.Id. at 76-82; penned by Judge Emmanuel C. Carpio.

3.Id. at 63-64.

4.Id. at 64.

5.Id.

6.Id. at 65.

7.Id.

8.Id. at 65-66.

9.Id. at 66.

10.Id. at 92-93.

11.Id. at 81.

12.Id. at 82.

13.Id. at 72.

14.Lee v. Bangkok Bank Public, Limited, G.R. No. 173349, February 9, 2011, 642 SCRA 447, 481.

15.Id.

16. See Hacienda Luisita, Incorporated v. Presidential Agrarian Reform Council, G.R. No. 171101, July 5, 2011, 653 SCRA 154; Alano v. Planter's Development Bank, G.R. No. 171628. June 13, 2011, 651 SCRA 766.

17.Rollo, p. 78.

18.Looyuko v. Court of Appeals, G.R. Nos. 102696, 102716, 108257 and 120954, July 12, 2001, 361 SCRA 150, 169.