In a case involving a double sale of property, the Supreme Court reiterated that a buyer who purchases property in good faith and takes possession has a better right than a subsequent mortgagee who fails to exercise due diligence. The Court emphasized that entities engaged in real estate and financing must conduct thorough investigations to protect prior innocent buyers. This decision reinforces the principle that actual possession coupled with good faith outweighs a later registered mortgage when the mortgagee had notice of the prior sale.

Navigating the Murky Waters of Real Estate: Whose Claim Prevails?

The case of Expresscredit Financing Corporation v. Sps. Velasco arose from a dispute over a house and lot in Quezon City. Spouses Velasco (respondents) purchased the property from spouses Garcia in May 1988, paying in installments. In July 1988, a Deed of Absolute Sale was executed, obligating the Garcias to deliver the title free of liens upon full payment. The Velascos took possession in August 1988, applied for utilities, and insured the house, indicating their ownership and good faith.

Unbeknownst to the Velascos, the Garcias mortgaged the same property to Expresscredit Financing Corporation (petitioner) in June 1989. Upon discovering this, the Velascos filed a case for Quieting of Title and Specific Performance, registering a notice of lis pendens. Despite this notice and a court injunction, Expresscredit foreclosed on the property and consolidated title in its name after the Garcias failed to redeem it. The trial court initially ruled in favor of Expresscredit, finding them to be innocent purchasers in good faith, but ordered them to reimburse the Velascos. On appeal, the Court of Appeals reversed this decision, declaring the Velascos as purchasers in good faith. Expresscredit then elevated the matter to the Supreme Court.

The Supreme Court, in affirming the Court of Appeals’ decision, anchored its analysis on Article 1544 of the Civil Code, which governs double sales. This article states that if immovable property is sold to two different buyers, ownership belongs to the one who, in good faith, first recorded the sale in the Registry of Property. In the absence of registration, ownership goes to the one who, in good faith, was first in possession. And lacking both registration and possession, to the one who presents the oldest title, provided there is good faith.

The pivotal question, therefore, was whether Expresscredit could be considered a purchaser in good faith. The Court referenced established jurisprudence, noting that a buyer cannot claim good faith if they had knowledge of a defect in the seller’s title or had knowledge of facts that should have prompted further inquiry. The Court emphasized that **good faith** is judged by a party’s actions and state of mind, inferable from their conduct. The Court held that Expresscredit could not be considered a mortgagee in good faith.

The Court noted that the Velascos had been in actual, continuous possession of the property since May 1988. Furthermore, the Court highlighted that Expresscredit’s own credit investigators were informed of the prior sale to the Velascos. The Supreme Court found that Expresscredit, through its agents, knew of the prior sale, negating any claim of good faith. This knowledge meant the mortgage was invalid, as the Garcias no longer had the right to encumber the property.

Additionally, the Court placed a higher burden of due diligence on Expresscredit. Since Expresscredit was engaged in extending credit and the Garcia spouses were involved in constructing and selling real estate, both were held to a higher standard than ordinary buyers. The Court explained it is standard practice for banks and financing companies to ascertain whether property offered as security has already been sold to protect innocent buyers.

In conclusion, the Supreme Court held that the Velascos, as prior purchasers in good faith and in possession of the property, had a superior right compared to Expresscredit, which had knowledge of the prior sale. The Court thus upheld the decision of the Court of Appeals, declaring the mortgage, foreclosure sale, and title consolidation in favor of Expresscredit as void.

FAQs

What was the key issue in this case?	The central issue was determining who had the preferential right to the property: the prior purchaser (Velascos) who had taken possession or the subsequent mortgagee (Expresscredit) who foreclosed on the property. The court had to assess whether the mortgagee acted in good faith.
What is a double sale?	A double sale occurs when the same property is sold to two different buyers. Philippine law (Article 1544 of the Civil Code) provides rules to determine who has a better right in such situations.
What does it mean to be a purchaser in good faith?	A purchaser in good faith is someone who buys property without knowledge of any defect in the seller’s title or any prior claim to the property. They must have acted honestly and diligently in the transaction.
How does possession affect a claim in a double sale situation?	If neither buyer in a double sale has registered their claim, the buyer who first took possession of the property in good faith has a stronger right to ownership. This highlights the importance of taking and maintaining possession.
What is the significance of a notice of lis pendens?	A notice of lis pendens is a legal notice filed to inform the public that a lawsuit is pending that affects the title to or possession of a particular property. It serves as a warning to potential buyers or lenders.
What is the due diligence required of banks and financing companies in real estate transactions?	Banks and financing companies are expected to conduct a thorough investigation of the property being offered as collateral, including checking for prior sales or encumbrances. This helps protect innocent buyers.
What was the ruling of the Supreme Court in this case?	The Supreme Court ruled in favor of the Velascos, affirming the Court of Appeals’ decision. It declared the mortgage, foreclosure sale, and title consolidation in favor of Expresscredit as void, recognizing the Velascos as the rightful owners.
What is the practical implication of this ruling?	The decision underscores the importance of due diligence for financial institutions and protects the rights of prior good faith purchasers. It highlights that actual possession coupled with good faith outweighs a later registered mortgage.

This case illustrates the complexities of real estate transactions and the critical importance of conducting due diligence before entering into any agreement. It serves as a reminder that good faith and actual possession can provide strong protection against subsequent claims on a property.

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: Expresscredit Financing Corporation vs. Sps. Velasco, G.R No. 156033, October 20, 2005