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When lending becomes a question of good faith

(Article published in the April 23, 2002 issue of TODAY, Business Section)

The business of lending is becoming more difficult these days not only because the regulatory authorities, the Bangko Sentral ng Pilipinas and the Security and Exchange Commission, have been tightening the screws lately. It is also because the courts seem to be imposing on banks a standard of good faith more stringent than before. This was the painful lesson learned by The Malayan Bank (formerly Republic Planters Bank) in the case it lost to the Lagramas on April 27, 2001 (The Malayan Bank v Lagrama, et al. G.R. 144884).

Sometime in 1987 when it decided on Saint Dominic Corp. v. Intermediate Appellate Court, 151 SCRA 577, the Supreme Court had pronounced that the foreclosure sale of mortgaged property retroacts to the date of the registration of the mortgage. Moreover, a person who takes the mortgage in good faith, and for valuable consideration which is the record showing clear title to the mortgagor, will be protected against equitable claims on the title in favor of third parties of which he had no actual or constructive notice.

When the Republic Planters Bank (now The Malayan Bank) accepted a mortgage on land to secure the debt of a certain Demetrio Llego in 1982, it did not seem to know of the claim of Lagrama on the land. But because it did not make the right moves after it became aware of the cloud on Demetrio’s ownership, its rights as buyer in the subsequent foreclosure sale was not protected by the ruling in Saint Dominic. It’s claim of good faith was in effect undermined by subsequent acts that, in my view, showed tints of negligence as well as opportunism.

The case started innocently enough in 1976 when Demetrio, together with his mother and his siblings, inherited from his father a parcel of land located in Lucena City. The heirs apportioned the land among themselves, but did not execute the proper extrajudicial partition nor bring the correct judicial action for partition of the estate. Hence, the land remained in the name of Demetrio’s father.

Demetrio sold his portion of the land to his uncle Agustin Lagrama and aunt Paz Abastillas on installments. No deed of sale was executed because the land was still in the father’s name, but Agustin and Paz took possession of the land. Demetrio promised to execute the appropriate deed of absolute sale as soon as the title of his portion was issued in his name.

Three years later, Demetrio and his coheirs executed an extrajudicial partition of the estate. A title was issued to Demetrio for his share, which had been previously sold to Agustin and Paz who had by then fully paid. But Demetrio did not transfer the title to his uncle and aunt. Instead, in 1982, through his attorney-in-fact Ceferino Tan, he mortgaged the land to Republic Planters Bank. Demetrio failed to pay. The property was foreclosed with the bank as highest bidder. Demetrio failed to redeem.

In 1983 the Lagramas went to court to compel the execution of a deed of sale in their favor. Impleaded, in addition to Demetrio, were Republic Planters Bank and the attorney-in-fact, Tan. Demetrio did not answer and was defaulted. The bank claimed that it was a mortgagee in good faith. Tan said he only acted to accommodate Demetrio. The court ordered Demetrio to execute the deed of absolute sale in favor of the Lagramas.

Republic Planters Bank appealed, but the appeal was dismissed because the appeal brief was not filed on time. The decision of the lower court became final; but to the court’s surprise, it could not be executed because while the case was pending, Republic Planters Bank foreclosed on the mortgage. Furthermore, the bank emerged as the highest bidder and consolidated the title to itself after Demetrio failed to redeem.

Clearly, it acquired the land knowing of the accusation that the land Demetrio mortgaged to the bank was no longer his. Since the bank acquired, from Demetrio, title to the land during the pendency of the case, it merely stepped into Demetrio’s shoes.

The Supreme Court took pains to explain why the mortgagee in the case of Saint Dominic was protected by his good faith and Republic Planters Bank was not. The crucial difference is that in Saint Dominic, the mortgagee and its subsequent transferees did not have actual or constructive knowledge of the flaw in the mortgagor’s title all the way to the time the property was transferred to them. In the case of Republic Planters Bank, it became aware one year after the mortgage that the Lagramas were claiming the property. The bank was impleaded in the case. The bank lost in the lower court and also lost its appeal for, of all reasons, failure to file an appeal brief on time.

Whatever benefit the bank could have derived from its good faith at the inception of the mortgage was forfeited when it failed to pursue its appeal and tried to short-circuit the judicial process by foreclosing on the mortgage, buying the property and consolidating title on itself and, to boot, without telling the courts about it. Such acts are not consistent with being in good faith. For good faith to be a good defense, one must be really good and remain consistently good.