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G.R. No. 183774. November 14, 2012.*

PHILIPPINE BANKING CORPORATION, petitioner, vs.

ARTURO DY, BERNARDO DY, JOSE DELGADO and
CIPRIANA DELGADO, respondent.

Civil Law; Contracts; The subsequent nullification of title to a

property is not a ground to annul the contractual right which may
have been derived by a purchaser, mortgagee or other transferee
who acted in good faith.—While it is settled that a simulated deed
of sale is null and void and therefore, does not convey any right
that could ripen into a valid title, it has been equally ruled that,
for reasons of public policy, the subsequent nullification of title to
a property is not a ground to annul the contractual right which
may have been derived by a purchaser, mortgagee or other
transferee who acted in good faith.
Same; Loans; Banks and Banking; Extraordinary Diligence;
 In the case of banks and other financial institutions, greater care
and due diligence are required since they are imbued with public
interest, failing which renders the mortgagees in bad faith. Thus,
before approving a loan application, it is a standard operating
practice for these institutions to conduct an ocular inspection of the
property offered for mortgage and to verify the genuineness of the
title to determine the real owner(s) thereof.—Primarily, it bears
noting that the doctrine of “mortgagee in good faith” is based on
the rule that all persons dealing with property covered by a
Torrens Certificate of

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* SECOND DIVISION.

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568 SUPREME COURT REPORTS ANNOTATED

Philippine Banking Corporation vs. Dy

Title are not required to go beyond what appears on the face of

the title. This is in deference to the public interest in upholding

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the indefeasibility of a certificate of title as evidence of lawful

ownership of the land or of any encumbrance thereon. In the case
of banks and other financial institutions, however, greater care
and due diligence are required since they are imbued with public
interest, failing which renders the mortgagees in bad faith. Thus,
before approving a loan application, it is a standard operating
practice for these institutions to conduct an ocular inspection of
the property offered for mortgage and to verify the genuineness of
the title to determine the real owner(s) thereof. The apparent
purpose of an ocular inspection is to protect the “true owner” of
the property as well as innocent third parties with a right,
interest or claim thereon from a usurper who may have acquired a
fraudulent certificate of title thereto.
Same; Same; Same; Same; Nothing short of extraordinary
diligence is required of banks whose business is impressed with
public interest.—A finding of negligence must always be
contextualized in line with the attendant circumstances of a
particular case. As aptly held in Philippine National Bank v.
Heirs of Estanislao Militar, 494 SCRA 308 (2006), “the diligence
with which the law requires the individual or a corporation at all
times to govern a particular conduct varies with the nature of the
situation in which one is placed, and the importance of the act
which is to be performed.” Thus, without diminishing the time-
honored principle that nothing short of extraordinary diligence is
required of banks whose business is impressed with public
interest, Philbank’s inconsequential oversight should not and
cannot serve as a bastion for fraud and deceit.
Same; Fraud; Words and Phrases; Fraud comprises “anything
calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal duty or equitable duty,
trust, or confidence justly reposed, resulting in damage to another,
or by which an undue and unconscientious advantage is taken of
another.”—To be sure, fraud comprises “anything calculated to
deceive, including all acts, omissions, and concealment involving a
breach of legal duty or equitable duty, trust, or confidence justly
reposed, resulting in damage to another, or by which an undue
and unconscientious advantage is taken of another.” In this light,
the Dys’ and Sps. Delgado’s deliberate simulation of the sale
intended to obtain loan proceeds from and to prejudice Philbank
clearly constitutes fraudulent conduct. As

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such, Sps. Delgado cannot now be allowed to deny the validity of

the mortgage executed by the Dys in favor of Philbank as to hold
otherwise would effectively sanction their blatant bad faith to
Philbank’s detriment.

PETITION for review on certiorari of a decision of the

Court of Appeals.
   The facts are stated in the opinion of the Court.
  E.F. Rosello & Associates Law Offices for petitioner.
  Mario Ortiz for respondents Delgado.
  Alentajan Law Office for respondents Dy.

PERLAS-BERNABE, J.:
This Petition for Review on Certiorari assails the
January 30, 2008 Decision1 of the Court of Appeals (CA) in
CA-GR. CV No. 51672, which set aside the October 5, 1994
Dccision2 of the Regional Trial Court of Cebu City, Branch
22 (RTC) and directed the Register of Deeds of Cebu City to
cancel Transfer Certificate of Title (TCT) Nos. 517683 and
519014 in the names of respondents Arturo Dy and
Bernardo Dy (Dys) and to issue the corresponding TCTs in
the name of respondent Cipriana Delgado (Cipriana).

The Factual Antecedents

  Cipriana was the registered owner of a 58,129-square

meter (sq.m.) lot, denominated as Lot No. 6966, situated in
Bar-

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1  Rollo, pp. 28 43. Penned by Associate Justice Antonio L. Villamor,
with Associate Justices Stephen C. Cruz and Amy C. Lazaro-Javier,
concurring.
2 Id., at pp. 45-55. Penned by Judge Pampio A. Abarintos.
3 Id., at p. 62.
4 Id., at p. 63.

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Philippine Banking Corporation vs. Dy

rio Tongkil, Minglanilla, Cebu, covered by TCT No. 18568.

She and her husband, respondent Jose Delgado (Jose),
entered into an agreement with a certain Cecilia Tan
(buyer) for the sale of the said property for a consideration
of P10.00/sq.m. It was agreed that the buyer shall make
partial payments from time to time and pay the balance
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when Cipriana and Jose (Sps. Delgado) are ready to

execute the deed of sale and transfer the title to her.
At the time of sale, the buyer was already occupying a
portion of the property where she operates a noodle (bihon)
factory while the rest was occupied by tenants which Sps.
Delgado undertook to clear prior to full payment. After
paying the total sum of P147,000.00 and being then ready
to pay the balance, the buyer demanded the execution of
the deed, which was refused. Eventually, the buyer learned
of the sale of the property to the Dys and its subsequent
mortgage to petitioner Philippine Banking Corporation
(Philbank), prompting the filing of the Complaint5 for
annulment of certificate of title, specific performance
and/or reconveyance with damages against Sps. Delgado,
the Dys and Philbank.
In their Answer, Sps. Delgado, while admitting receipt
of the partial payments made by the buyer, claimed that
there was no perfected sale because the latter was not
willing to pay their asking price of P17.00/sq.m. They also
interposed a cross-claim against the Dys averring that the
deeds of absolute sale in their favor dated June 28, 19826
and June 30, 19827 covering Lot No. 6966 and the adjoining
Lot No. 4100-A (on which Sps. Delgado’s house stands),
were fictitious and merely intended to enable them (the
Dys) to use the said properties as collateral for their loan
application with Philbank and thereafter, pay the true
consideration of P17.00/sq.m. for Lot No. 6966. However,
after receiving the loan

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5 Id., at pp. 82-87.
6 Id., at pp. 60-61.
7 Id., at pp. 58-59.

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proceeds, the Dys reneged on their agreement, prompting

Sps. Delgado to cause the annotation of an adverse claim
on the Dys’ titles and to inform Philbank of the simulation
of the sale. Sps. Delgado, thus, prayed for the dismissal of
the complaint, with a counterclaim for damages and a
cross-claim against the Dys for the payment of the balance
of the purchase price plus damages.

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For their part, the Dys denied knowledge of the alleged

transaction between cross-claimants Sps. Delgado and
buyer. They claimed to have validly acquired the subject
property from Sps. Delgado and paid the full consideration
therefor as the latter even withdrew their adverse claim
and never demanded for the payment of any unpaid
balance.
On the other hand, Philbank filed its Answer8 asserting
that it is an innocent mortgagee for value without notice of
the defect in the title of the Dys. It filed a cross-claim
against Sps. Delgado and the Dys for all the damages that
may be adjudged against it in the event they are declared
seller and purchaser in bad faith, respectively.
In answer to the cross-claim, Sps. Delgado insisted that
Philbank was not a mortgagee in good faith for having
granted the loan and accepted the mortgage despite
knowledge of the simulation of the sale to the Dys and for
failure to verify the nature of the buyer’s physical
possession of a portion of Lot No. 6966. They thereby
prayed for the cancellation of the mortgage in Philbank’s
favor.
Subsequently, Sps. Delgado amended their cross-claim
against the Dys to include a prayer for the nullification of
the deeds of absolute sale in the latter’s favor and the
corresponding certificates of title, and for the consequent
reinstatement of Cipriana’s title.9

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8 Id., at pp. 88-92.
9 Id., at pp. 94-99.

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Philippine Banking Corporation vs. Dy

The complaints against the Dys and Philbank were

subsequently withdrawn. On the other hand, both the
buyer and Sps. Delgado never presented any evidence in
support of their respective claims. Hence, the RTC limited
itself to the resolution of the claims of Sps. Delgado,
Philbank and the Dys against one another.

The RTC Ruling

In the Decision10 dated October 5, 1994, the RTC

dismissed the cross-claims of Sps. Delgado against the Dys
and Philbank. It noted that other than Sps. Delgado’s bare
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allegation of the Dys’ supposed non-payment of the full

consideration for Lot Nos. 6966 and 4100-A, they failed to
adduce competent evidence to support their claim. On the
other hand, the Dys presented a cash voucher11 dated April
6, 1983 duly signed by Sps. Delgado acknowledging receipt
of the total consideration for the two lots.
The RTC also observed that Sps. Delgado notified
Philbank of the purported simulation of the sale to the Dys
only after the execution of the loan and mortgage
documents and the release of the loan proceeds to the
latter, negating their claim of bad faith. Moreover, they
subsequently notified the bank of the Dys’ full payment for
the two lots mortgaged to it.

The CA Ruling

However, on appeal, the CA set aside12 the RTC’s

decision and ordered the cancellation of the Dys’
certificates of title and the reinstatement of Cipriana’s
title. It ruled that there were no perfected contracts of sale
between Sps. Delgado and the Dys in view of the latter’s
admission that the deeds of sale

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10 Supra note 3.
11 “Exhibit 7,” List of Exhibits for the Defendants, RTC Records, p.
537.
12 Supra note 1.

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were purposely executed to facilitate the latter’s loan

application with Philbank and that the prices indicated
therein were not the true consideration. Being merely
simulated, the contracts of sale were, thus, null and void,
rendering the subsequent mortgage of the lots likewise
void.
The CA also declared Philbank not to be a mortgagee in
good faith for its failure to ascertain how the Dys acquired
the properties and to exercise greater care when it
conducted an ocular inspection thereof. It thereby canceled
the mortgage over the two lots.

The Petition

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In the present petition, Philbank insists that it is a

mortgagee in good faith. It further contends that Sps.
Delgado are estopped from denying the validity of the
mortgage constituted over the two lots since they
participated in inducing Philbank to grant a loan to the
Dys.
On the other hand, Sps. Delgado maintain that Philbank
was not an innocent mortgagee for value for failure to
exercise due diligence in transacting with the Dys and may
not invoke the equitable doctrine of estoppel to conceal its
own lack of diligence.
For his part, Arturo Dy filed a Petition-in-Intervention13
arguing that while the deeds of absolute sale over the two
properties were admittedly simulated, the simulation was
only a relative one involving a false statement of the price.
Hence, the parties are still bound by their true agreement.
The same was opposed/objected to by both Philbank14 and
Sps. Delgado15 as improper, considering that the CA
judgment had long become final and executory as to the
Dys who neither moved for reconsideration nor appealed
the CA Decision.

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13 Rollo, pp. 238-253.
14 Id., at pp. 258-260.
15 Id., at pp. 330-332.

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Philippine Banking Corporation vs. Dy

The Ruling of the Court

The petition is meritorious.
At the outset, the Court takes note of the fact that the
CA Decision nullifying the questioned contracts of sale
between Sps. Delgado and the Dys had become final and
executory. Accordingly, the Petition-in-Intervention filed by
Arturo Dy, which seeks to maintain the subject contracts’
validity, can no longer be entertained. The cancellation of
the Dys’ certificates of title over the disputed properties
and the issuance of new TCTs in favor of Cipriana must
therefore be upheld.
However, Philbank’s mortgage rights over the subject
properties shall be maintained. While it is settled that a
simulated deed of sale is null and void and therefore, does
not convey any right that could ripen into a valid title,16 it

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has been equally ruled that, for reasons of public policy,17

the subsequent nullification of title to a property is not a
ground to annul the contractual right which may have been
derived by a purchaser, mortgagee or other transferee who
acted in good faith.18
The ascertainment of good faith or lack of it, and the
determination of whether due diligence and prudence were
exercised or not, are questions of fact19 which are generally
improper in a petition for review on certiorari under Rule
45 of the Rules of Court (Rules) where only questions of law
may be raised. A recognized exception to the rule is when
there are

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16 Cruz v. Bancom Finance Corporation, G.R. No. 147788, March 19,
2002, 379 SCRA 490, 509.
17 Ereña v. Querrer-Kauffman, G.R. No. 165853, June 22, 2006, 492
SCRA 298, 319, citing Cavite Development Bank v. Lim, 324 SCRA 346,
358 (2000).
18 Premiere Development Bank v. Court of Appeals, G.R. Nos. 128122,
128184 & 128229, March 18, 2005, 453 SCRA 630, 654.
19 Vide Philippine National Bank v. Heirs of Estanislao Militar, G.R.
Nos. 164801 & 165165, June 30, 2006, 494 SCRA 308, 319.

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conflicting findings of fact by the CA and the RTC,20 as in

this case.
Primarily, it bears noting that the doctrine of
“mortgagee in good faith” is based on the rule that all
persons dealing with property covered by a Torrens
Certificate of Title are not required to go beyond what
appears on the face of the title. This is in deference to the
public interest in upholding the indefeasibility of a
certificate of title as evidence of lawful ownership of the
land or of any encumbrance thereon.21 In the case of banks
and other financial institutions, however, greater care and
due diligence are required since they are imbued with
public interest, failing which renders the mortgagees in
bad faith. Thus, before approving a loan application, it is a
standard operating practice for these institutions to
conduct an ocular inspection of the property offered for
mortgage and to verify the genuineness of the title to
determine the real owner(s) thereof.22 The apparent

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purpose of an ocular inspection is to protect the “true

owner” of the property as well as innocent third parties
with a right, interest or claim thereon from a usurper who
may have acquired a fraudulent certificate of title
thereto.23
In this case, while Philbank failed to exercise greater
care in conducting the ocular inspection of the properties
offered for mortgage,24 its omission did not prejudice any
innocent

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20 Canadian Opportunities Unlimited, Inc. v. Dalangin, Jr., G.R. No.
172223, February 6, 2012, 665 SCRA 21, 31.
21 Ereña v. Querrer-Kauffman, supra note 17.
22 Alano v. Planter’s Development Bank, G.R. No. 171628, June 13,
2011, 651 SCRA 766, 774.
23 The fact that petitioners were able to secure titles in their names did
not operate to vest upon them ownership over the subject properties.
Registration under the Torrens system does not create or vest title, but
only confirms and records title already existing and vested. It does not
protect a usurper from the true owner, and cannot be a shield for the
commission of fraud. See Campos v. Pastrana, G.R. No. 175994, December
8, 2009, 608 SCRA 55, 68.
24 Assailed January 30, 2008 Decision, Rollo, p. 40.

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third parties. In particular, the buyer did not pursue her

cause and abandoned her claim on the property. On the
other hand, Sps. Delgado were parties to the simulated sale
in favor of the Dys which was intended to mislead Philbank
into granting the loan application. Thus, no amount of
diligence in the conduct of the ocular inspection could have
led to the discovery of the complicity between the ostensible
mortgagors (the Dys) and the true owners (Sps. Delgado).
In fine, Philbank can hardly be deemed negligent under the
premises since the ultimate cause of the mortgagors’ (the
Dys’) defective title was the simulated sale to which Sps.
Delgado were privies.
Indeed, a finding of negligence must always be
contextualized in line with the attendant circumstances of
a particular case. As aptly held in Philippine National
Bank v. Heirs of Estanislao Militar,25 “the diligence with
which the law requires the individual or a corporation at

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all times to govern a particular conduct varies with the

nature of the situation in which one is placed, and the
importance of the act which is to be performed.”26 Thus,
without diminishing the time-honored principle that
nothing short of extraordinary diligence is required of
banks whose business is impressed with public interest,
Philbank’s inconsequential oversight should not and cannot
serve as a bastion for fraud and deceit.
To be sure, fraud comprises “anything calculated to
deceive, including all acts, omissions, and concealment
involving a breach of legal duty or equitable duty, trust, or
confidence justly reposed, resulting in damage to another,
or by which an undue and unconscientious advantage is
taken of another.”27 In this light, the Dys’ and Sps.
Delgado’s deliberate simulation of the sale intended to
obtain loan proceeds from and to

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25 Supra note 19.
26 Id., at p. 317.
27 Galvez v. Court of Appeals, G.R. Nos. 187919, 187979 & 188030,
April 25, 2012, 671 SCRA 222.

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prejudice Philbank clearly constitutes fraudulent conduct.

As such, Sps. Delgado cannot now be allowed to deny the
validity of the mortgage executed by the Dys in favor of
Philbank as to hold otherwise would effectively sanction
their blatant bad faith to Philbank’s detriment.
Accordingly, in the interest of public policy, fair dealing,
good faith and justice, the Court accords Philbank the
rights of a mortgagee in good faith whose lien to the
securities posted must be respected and protected. In this
regard, Philbank is entitled to have its mortgage carried
over or annotated on the titles of Cipriana Delgado over the
said properties.
WHEREFORE, the assailed January 30, 2008 Decision
of the Court of Appeals in CA-GR. CV No. 51672 is hereby
AFFIRMED with MODIFICATION upholding the
mortgage rights of petitioner Philippine Banking
Corporation over the subject properties.
SO ORDERED.

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Carpio (Chairperson), Brion, Del Castillo and Perez,

JJ., concur.

Judgment affirmed with modification.

Notes.—It is settled that banks, their business being

impressed with public interest, are expected to exercise
more care and prudence than private individuals in their
dealings, even those involving registered lands; The rule
that persons dealing with registered lands can rely solely
on the certificate of title does not apply to banks.
(Philippine Trust Company vs. Court of Appeals, 635 SCRA
518 [2010])
Banks are expected to exercise greater care and
prudence than others in their dealings because their
business is impressed with public interest. (Metropolitan
Bank & Trust Co. [Metrobank] vs. Tobias III, 664 SCRA
165 [2012])
——o0o—— 

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