In Cunanan v. Jumping Jap Trading Corp., the Supreme Court addressed the binding effect of a notice of lis pendens on parties who acquire interest in a property under litigation. The Court ruled that a notice of lis pendens, which serves as a public warning about ongoing litigation involving a property, binds those who acquire interest in the property, such as mortgagees. This means mortgagees are subject to the outcome of the suit. The ruling underscores the importance of due diligence in property transactions, requiring parties to investigate beyond the face of the title, especially when there are indications of existing disputes. This case reinforces the principle that those who deal with litigated properties do so at their own risk.

The Gamble on Ayala Alabang: When Does a Mortgagee Assume the Risk of Litigation?

This case revolves around a property in Ayala Alabang, originally owned by Metropolitan Land Corporation (MLC). Jumping Jap Trading Corporation (Jumping Jap) claimed a superior right to the property based on a prior deed of conditional sale with MLC. However, MLC later sold the property to Carmencita Nemoto, who then mortgaged it to Isabelita and Carolyn Cunanan (the Cunanans). Jumping Jap filed a suit to annul the sale to Nemoto, and a notice of lis pendens was annotated on the property’s title. This case questions whether the Cunanans, as mortgagees, were bound by this notice of lis pendens, which would subject their mortgage rights to the outcome of Jumping Jap’s suit.

The central issue here is the effect of the notice of lis pendens on the mortgagees’ rights. A notice of lis pendens serves as a warning to the world that a particular property is involved in a lawsuit. The Supreme Court has consistently held that filing such a notice places any subsequent acquirer of the property on notice of the pending litigation and subjects their rights to the outcome of the suit. This principle is rooted in public policy, aiming to maintain the court’s authority over the property until the case is resolved.

The Cunanans argued they were mortgagees in good faith. They relied on the principle that one dealing with registered property need not go beyond the title. The Court disagreed, noting exceptions to this rule. One such exception arises when the party has actual knowledge of facts that should prompt a cautious person to inquire further. Here, the notice of lis pendens, even if briefly cancelled, put the Cunanans on notice. They should have been wary of the ongoing dispute between Jumping Jap and Nemoto.

The Court emphasized that at the time the mortgage deed was executed, the notice of lis pendens was still active. While the trial court had ordered its cancellation, that order wasn’t yet final. Moreover, the Cunanans were aware of the pending litigation. This knowledge made them mortgagees in bad faith, thus binding them to the results of the pending litigation between Jumping Jap and Nemoto. As a result, the Supreme Court ruled the Cunanans’ mortgage rights were subject to Jumping Jap’s superior claim to the property.

This ruling underscores the importance of due diligence in property transactions. Parties cannot simply rely on the face of the title, especially if there are red flags, such as a notice of lis pendens or knowledge of a pending dispute. The decision serves as a warning to prospective buyers and mortgagees to conduct thorough investigations before entering into any transaction involving real estate. It reinforces the legal principle that acquiring property rights subject to a notice of lis pendens carries the risk of being bound by the outcome of the underlying litigation.

The Supreme Court distinguished this case from Po Lam v. Court of Appeals, where the buyers were considered in good faith because a court order canceling the notice of lis pendens existed at the time of purchase, and no motions for reconsideration were pending. In this case, the notice was in effect when the mortgage deed was executed, and a motion for reconsideration was indeed pending. This made the Cunanans’ reliance on the cancelled order insufficient to establish good faith.

This case highlights the significance of a notice of lis pendens as a tool to protect the rights of parties involved in real estate litigation. It ensures that properties remain within the court’s jurisdiction and prevents judgments from being defeated by subsequent transfers. Moreover, it underscores the duty of prospective buyers and mortgagees to exercise due diligence, particularly when acquiring interest in properties that are the subject of ongoing legal disputes.

FAQs

What is a notice of lis pendens?	A notice of lis pendens is a warning recorded in the registry of deeds, informing the public that a property is subject to pending litigation. It essentially announces that anyone acquiring an interest in the property does so subject to the outcome of the lawsuit.
What happens if a notice of lis pendens is annotated on a property’s title?	Once a notice of lis pendens is annotated, any buyer or mortgagee is deemed to have constructive notice of the pending action. This means their rights to the property are subject to the results of the ongoing case.
What does it mean to be a mortgagee in good faith?	A mortgagee in good faith is one who, at the time they entered into the mortgage agreement, had no knowledge of any defect in the mortgagor’s title. They must have exercised due diligence in investigating the title and have no reason to believe the mortgagor did not have the right to mortgage the property.
What is the effect of bad faith on a mortgagee’s rights?	If a mortgagee is deemed to be in bad faith, meaning they were aware of a defect in the mortgagor’s title or failed to exercise due diligence, they cannot claim the protection afforded to mortgagees in good faith. Their rights are subordinate to those of prior claimants with superior rights.
What due diligence should a potential mortgagee conduct?	Potential mortgagees should check the property’s title, investigate any annotations or encumbrances, and inquire into any circumstances that could indicate a defect in the title. This includes being aware of pending litigation and evaluating its potential impact on the property.
When can a notice of lis pendens be cancelled?	A notice of lis pendens can be cancelled upon order of the court after a showing that the notice was recorded for the purpose of harassing the adverse party or that it is not necessary to protect the rights of the party who caused it to be recorded. Also, it’s cancelled upon final judgment in favor of the defendant.
Is a buyer or mortgagee always bound by a notice of lis pendens?	Generally, yes. However, there can be exceptions if the notice was improperly recorded or if the buyer or mortgagee can prove they were a good faith purchaser for value without knowledge of the pending litigation. The burden of proof is on the buyer or mortgagee to establish their good faith.
What was the outcome of this case?	The Supreme Court ruled against the Cunanans. It found that they were bound by the notice of lis pendens and were not mortgagees in good faith. As a result, Jumping Jap’s claim to the property took precedence over their mortgage rights.

In conclusion, Cunanan v. Jumping Jap Trading Corp. underscores the importance of exercising diligence and caution when dealing with real estate transactions. The case shows that potential buyers or mortgagees must investigate beyond the title. It highlights that they assume certain risks if they choose to acquire properties subject to ongoing litigation, as indicated by a notice of lis pendens. This case emphasizes that ignorance of pending disputes will not excuse mortgagees, highlighting that protecting property rights depends on thoroughness and knowledge of surrounding conditions.

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: Isabelita Cunanan, et al. vs. Jumping Jap Trading Corporation, G.R. No. 173834, April 24, 2009