Mater Dei College

Tubigon, Bohol

Group 13 | The Case Digest

The Law on Obligation and Contracts – Second Activity

[G.R. No. 191636. January 16, 2017] (Article 1173)

PRUDENTIAL BANK (NOW BANK OF THE PHILIPPINE ISLANDS),

FACTS:

Golden Dragon Real Estate Corporation (Golden Dragon) is the developer

of Wack-Wack Twin Towers Condominium in Mandaluyong City. On May

9, 1995, Rapanot paid Golden Dragon the amount of P453,329.64 as

reservation fee for a 41.1050-square meter unit in said condominium,

particularly designated as Unit 2308-B2, and covered by Condominium

Certificate of Title (CCT) No. 2383 in the name of Golden Dragon. On

September 13, 1995, the Bank of the Philippine Islands, formerly known as

Prudential Bank (Bank), extended a loan to Golden Dragon in the amount of

P50,000,000.00 to be utilized by the latter as additional working capital. To

secure the loan, Golden Dragon executed a mortgage Agreement in favor of

the Bank, which had the effect of constituting a real estate mortgage over

several condominium units owned and registered under Golden Dragon’s

name. Unit 2308-B2 is among said units subject of said mortgage agreement.
On May 21, 1996, Rapanot and Golden Dragon entered into a Contract to Sell

covering Unit 2308-B2. On April 23, 1997, Rapanot completed payment of

the full purchase price of said unit amounting to P1,511,098.97. Golden

Dragon executed a Deed of Absolute Sale in favor of Rapanot of the same

date.

Ronald made several verbal demands for the delivery of Unit 2308-B2, being

its lawful owner, but to no avail. Hence, he filed a complaint before the

Expanded National Capital Region Field Office of the Housing and Land Use

Regulatory Board (HLURB). No settlement was arrived at before the said

Office. The Arbiter rendered a decision on July 3, 2002, in favor of Ronald,

directing Golden Dragon and the Bank to deliver to Ronald the title of the

condominium unit and to pay damages and costs.

On January 16, 2003, the Bank filed a Petition for Review with the HLURB

Board Commissioner, who, in turn affirmed the decision of the HLURB.

Thereafter, the Bank went to the Office of the President, which denied its

appeal declaring that the Bank was given due process, and adopted the

ruling of the HLURB. Again, the Bank appealed to the Court of Appeals,

who in turn affirmed the decision of the HLURB.

ISSUES:

Whether or not the CA erred when it affirmed the resolution of the OP

finding that the Bank had been afforded due process before the HLURB; and

Whether or not the CA erred when it affirmed the resolution of the OP

holding that the Bank cannot be considered a mortgagee in good faith.

No. The bank could have easily confirmed this information by asking Golden

Dragon whether Unit 2308-B2 had a buyer, considering Golden Dragon's

primary business is selling condominium units on a large scale. It's crucial

to emphasize that banks have a strict duty to exercise the utmost diligence

in their operations. The recent case of Philippine National Bank v. Vila

underscores this requirement.

In the case of Land Bank of the Philippines v. Belle Corporation, the court

urged banks to exercise the highest degree of diligence when dealing with

properties used as collateral for loans. This is especially applicable when the

bank itself is the purchaser or mortgagee.

Banks, due to their involvement in providing loans secured by real estate,

are presumed to be well-versed in land registration rules. They are held to

higher standards of caution, diligence, and care compared to private

individuals, even in transactions involving registered lands. Relying solely

on the certificate of title is insufficient; thorough verification and property

inspection are essential aspects of a bank's operations.

The importance of banking institutions in commercial transactions and the

nation's economy cannot be overstated. Banks serve as essential entities for

safeguarding funds and facilitating business activities, and the public places

great trust and confidence in them. Consequently, banks are expected to

maintain the highest level of diligence, integrity, and performance.

fulfill all necessary documentary requirements for loan approval and fund

disbursement.

If the bank had exercised the necessary diligence required by its role as a

financial institution, it would have uncovered two critical facts: Golden

Dragon's non- compliance with the approval requirement under Section 18

of PD 957 and Rapanot's actions indicating an intent to acquire Unit 2308-B2.

The bank's failure to meet the diligence standards constitutes negligence and

undermines its claim of being an innocent mortgagee. The case of Far East

Bank & Trust Co. v. Marquez is instructive in this regard.

The petitioner insists it is an innocent mortgagee whose lien should be

respected, given the clean title offered as security. However, this argument

is not valid.

It should be noted that the bank was dealing with an ongoing townhouse

project where sources of funds other than the loan were likely used.

Therefore, it was imperative to verify if any part of the property was already

under contract with other buyers. Simply relying on a clean title was

insufficient due to circumstances indicating the need for a thorough

investigation of potential buyers.

The petitioner cannot assert innocence as a mortgagee in good faith. Its

negligence, as determined by the Office of the President and the CA, is

permits and licenses from government agencies was inadequate. The bank

should have demanded certified true copies and independently verified

their authenticity.

By failing to ascertain the rights of the respondent over the lot, the petitioner

is deemed to possess constructive knowledge of those rights.

The court can readily acknowledge that commercial banks routinely extend

credit to real estate developers. In the course of their daily operations, banks

are undoubtedly aware of the approval and notice requirements specified in

Section 18 of PD 957. It's essential to stress that someone deliberately

disregarding a significant fact that would raise suspicions in a reasonable

person cannot be considered an innocent mortgagee. Given the exacting

diligence standards demanded of banks, they cannot feign ignorance of the

necessity to confirm compliance with these requirements before releasing a

loan in favor of Golden Dragon.

Based on the preceding points, it's clear that the Court of Appeals did not err

in its decision. The decision was grounded in a thorough review of the facts

presented by the parties and the evidence in the case.

Therefore, the petition is denied for lack of merit. As a result, the Petition for

Review on Certiorari is denied, and the Decision of November 18, 2009, and

Resolution of March 17, 2010, by the Court of Appeals in CA-G.R. SP No.

93862 are affirmed.