The Supreme Court, in this case, ruled that a real estate mortgage is invalid if the underlying loan it secures was never actually delivered to the borrower. This means that even if a mortgage deed exists, it is unenforceable if the borrower never received the loan proceeds. This decision underscores the principle that real contracts, like loans, require delivery of the object to be perfected and for any accessory contract, like a mortgage, to be valid.

The Untapped Loan: When a Mortgage Falters on Undelivered Funds

This case revolves around a loan agreement between Aurora Queaño and Celestina Naguiat, secured by a real estate mortgage. Queaño sought a loan of P200,000 from Naguiat. Naguiat issued checks to Queaño, but Queaño claimed she never received the loan proceeds, alleging the checks were held by Naguiat’s agent. When Queaño defaulted, Naguiat sought to foreclose on the mortgage, prompting Queaño to file a lawsuit to nullify the mortgage deed. The central legal question is whether a real estate mortgage is valid and enforceable when the underlying loan was never actually disbursed to the borrower.

The Regional Trial Court (RTC) ruled in favor of Queaño, declaring the mortgage null and void, a decision affirmed by the Court of Appeals. Naguiat appealed to the Supreme Court, arguing that the mortgage deed, as a public document, carries a presumption of validity, and that Queaño failed to prove she didn’t receive the loan. She also challenged the admissibility of statements made by Ruebenfeldt, her supposed agent. The Supreme Court, however, emphasized its role is not to re-evaluate facts already determined by lower courts unless specific exceptions apply, which were not present in this case.

The Supreme Court upheld the lower courts’ findings, stating that the **presumption of truthfulness** in a public document like a mortgage deed can be overturned by clear and convincing evidence. In this case, the evidence showed Queaño never actually received the loan proceeds. Naguiat failed to provide evidence that the checks she issued or endorsed were ever cashed or deposited. This failure was critical because, under Article 1249 of the New Civil Code, the delivery of checks only produces the effect of payment when they have been cashed:

“The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.”

The Court further explained that a **loan contract is a real contract**, meaning it is perfected not by mere agreement, but by the delivery of the object of the contract, in this case, the loan proceeds. As Article 1934 of the Civil Code states:

“An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract.”

Because Queaño never received the loan amount, the loan contract was never perfected. Consequently, the real estate mortgage, being an **accessory contract** to the loan, is also invalid. The validity of a mortgage depends on the validity of the principal obligation it secures. No loan, no valid mortgage.

Naguiat’s argument regarding Ruebenfeldt’s representations was also dismissed. The Court of Appeals correctly recognized the existence of an agency relationship between Naguiat and Ruebenfeldt, invoking the principle of **agency by estoppel**. Even if Ruebenfeldt wasn’t formally appointed as Naguiat’s agent, Naguiat’s actions created the impression that she was, leading Queaño to believe Ruebenfeldt had the authority to act on Naguiat’s behalf.

More importantly, the existence or non-existence of agency has little impact on the core matter. Since checks were never actually cashed or deposited, there was no valid contract of loan, and therefore, the nullification of the accessory contract of mortgage followed.

FAQs

What was the key issue in this case?	The key issue was whether a real estate mortgage is valid if the loan it secures was never actually delivered to the borrower.
What is a real contract?	A real contract, like a loan, requires delivery of the object for its perfection, not just an agreement. In this case, the delivery of the loan proceeds was essential.
What is an accessory contract?	An accessory contract, like a mortgage, depends on the existence and validity of a principal contract. If the principal contract (the loan) is invalid, the accessory contract is also invalid.
What does ‘agency by estoppel’ mean?	Agency by estoppel occurs when a person’s actions lead another to believe that someone is their agent, even if no formal agency agreement exists, preventing them from later denying the agency.
What is the effect of issuing a check for payment?	Under Article 1249 of the Civil Code, the delivery of a check only produces the effect of payment when the check is cashed or if the creditor’s fault impairs it.
Can the presumption of truthfulness in a public document be challenged?	Yes, the presumption of truthfulness in a public document like a mortgage deed can be challenged and overturned by clear and convincing evidence to the contrary.
What evidence did the Court rely on in this case?	The Court relied on the absence of evidence showing that the checks issued by Naguiat were ever cashed or deposited to Queaño’s account.
What happens if the underlying loan is invalid?	If the underlying loan is invalid because it was never perfected (due to lack of delivery), any mortgage securing that loan is also invalid and unenforceable.

This case emphasizes the crucial element of delivery in loan agreements and its impact on related security arrangements. Lenders must ensure actual transfer of funds to borrowers to create a valid and enforceable loan and mortgage. The decision serves as a reminder of the importance of documentary evidence in proving the fulfillment of contractual obligations.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Celestina T. Naguiat vs. Court of Appeals and Aurora Queaño, G.R. No. 118375, October 03, 2003