The Supreme Court affirmed the validity of a real estate mortgage, clarifying that mere allegations of forgery must be substantiated by clear and convincing evidence. Even a defectively notarized document can still be binding if its validity is proven by a preponderance of evidence. This ruling underscores the importance of diligence for both parties in mortgage agreements, ensuring that property rights are secure while facilitating financial transactions.

Challenging a Brother’s Authority: When a Special Power of Attorney Comes Under Scrutiny

This case revolves around a dispute between Leonardo C. Castillo and his brother, Leon C. Castillo, Jr., concerning a real estate mortgage constituted over Leonardo’s property. Leon, along with his wife Teresita Flores-Castillo, obtained loans from Security Bank Corporation (SBC) using several family properties as collateral, including Leonardo’s land. Leonardo later claimed that the Special Power of Attorney (SPA) he purportedly granted to Leon, authorizing him to mortgage the property, was a forgery. The central legal question is whether the real estate mortgage on Leonardo’s property is valid, given his allegations of forgery and lack of consent.

The Regional Trial Court (RTC) initially ruled in favor of Leonardo, declaring the real estate mortgage void concerning his property. However, the Court of Appeals (CA) reversed this decision, upholding the validity of the mortgage. The Supreme Court then reviewed the case, focusing on whether Leonardo successfully proved his forgery claim and whether SBC exercised due diligence in accepting the mortgage. As the Court pointed out, its jurisdiction in appealed cases is generally limited to errors of law. However, an exception exists when the CA’s factual findings contradict those of the trial court, necessitating a re-evaluation of the evidence.

Leonardo contended that his signature on the SPA was forged, arguing he was in America when it was supposedly executed. He highlighted a discrepancy in the Community Tax Certificate (CTC) date on the SPA’s notarization. The Supreme Court, however, emphasized that allegations of forgery must be proven with clear, positive, and convincing evidence. The burden of proof lies on the party alleging forgery, and it cannot be presumed. Leonardo’s reliance on the CTC discrepancy alone was insufficient to establish forgery. He failed to present comparative signature analysis or evidence of his whereabouts during the SPA’s execution.

The Court addressed the implications of a defectively notarized document. Even if Leonardo’s CTC claim were true, the SPA would not automatically be invalid. As the appellate court aptly held that defective notarization will simply strip the document of its public character and reduce it to a private instrument, but nonetheless, binding, provided its validity is established by preponderance of evidence. Article 1358 of the Civil Code addresses the form of contracts:

Article 1358 of the Civil Code requires that the form of a contract that transmits or extinguishes real rights over immovable property should be in a public document, yet the failure to observe the proper form does not render the transaction invalid. The necessity of a public document for said contracts is only for convenience; it is not essential for validity or enforceability.

The Court stated that the necessity of a public document is for convenience and not essential for validity. Therefore, the validity of the SPA could still be established through a preponderance of evidence, regardless of the notarization issue.

The Supreme Court found that the preponderance of evidence favored the respondents, indicating Leonardo’s awareness and consent to the mortgage. Leon possessed all the titles, including Leonardo’s, suggesting a level of trust and agreement within the family. Leonardo’s delay in questioning the mortgage, coupled with his admission that he authorized Leon to mortgage the property (albeit supposedly with a different bank), further weakened his claim. As the CA noted, there is no mention of a certain bank in the subject SPA with which Leon must specifically deal. Leon, therefore, was simply acting within the bounds of the SPA’s authority when he mortgaged the lot to SBC.

Furthermore, the Court addressed the due diligence required of banks in mortgage contracts. Banks must exercise reasonable care in ascertaining the status of properties offered as security. However, in this case, there was no evidence that SBC failed to exercise the required standard of care or was negligent in accepting the mortgage. SBC was entitled to rely on the presumption of regularity of the notarized SPA.

Finally, the Court upheld the interest and penalty charges imposed by SBC, finding them just and not unconscionable. Section 47 of The General Banking Law of 2000 clarifies the redemption price in foreclosure cases:

Section 47. Foreclosure of Real Estate Mortgage. – In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom.

The redemption price includes the amount due under the mortgage deed, interest at the specified rate, and all foreclosure expenses. The Court noted that SBC’s interest rate of 16% per annum (1.33% per month) was not excessive and that the 24% per annum penalty charge for default was also reasonable. The Court emphasized that the debtor has the burden of proving that the failure of the performance was due to either force majeure or the creditor’s own acts. In the instant case, petitioner failed to discharge said burden and thus cannot avoid the payment of the penalty charge agreed upon.

FAQs

What was the key issue in this case?	The key issue was whether the real estate mortgage on Leonardo’s property was valid, given his claim that the Special Power of Attorney (SPA) authorizing his brother to mortgage the property was a forgery.
What did Leonardo claim about the SPA?	Leonardo claimed that his signature on the SPA was forged and that he was in America when it was supposedly executed. He also pointed to a discrepancy in the date of his Community Tax Certificate (CTC) on the SPA.
What does the court say about forgery claims?	The court emphasized that allegations of forgery must be proven with clear, positive, and convincing evidence, and the burden of proof lies on the party making the allegation.
What happens if a document is defectively notarized?	A defectively notarized document loses its public character and becomes a private instrument, but it can still be binding if its validity is proven by a preponderance of evidence.
What evidence suggested Leonardo knew about the mortgage?	Evidence included the fact that Leon possessed all the titles, including Leonardo’s, and Leonardo admitted authorizing Leon to mortgage the property, albeit supposedly with a different bank.
What is the due diligence requirement for banks?	Banks must exercise reasonable care in ascertaining the status of properties offered as security, but they can rely on the presumption of regularity of notarized documents.
What does the redemption price in a foreclosure include?	The redemption price includes the amount due under the mortgage deed, interest at the specified rate, and all foreclosure expenses incurred by the mortgagee bank.
Were the interest and penalty charges imposed by SBC considered excessive?	The court found that SBC’s interest rate of 16% per annum and the 24% per annum penalty charge for default were not excessive or unconscionable.

This case highlights the importance of substantiating forgery claims with concrete evidence and the binding nature of agreements even with minor technical defects, provided their validity is otherwise established. Banks, while required to exercise due diligence, can rely on the regularity of notarized documents unless there is evidence of negligence or bad faith. These principles ensure stability in financial transactions and protect the rights of all parties involved.

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: LEONARDO C. CASTILLO vs. SECURITY BANK CORPORATION, G.R. No. 196118, July 30, 2014