In Col. Francisco Dela Merced vs. Government Service Insurance System (GSIS) and Spouses Victor and Milagros Manlongat, the Supreme Court affirmed that an unregistered sale of land takes precedence over a subsequently registered mortgage, especially when the mortgagee (GSIS) had prior knowledge of the sale. This ruling protects the rights of prior land purchasers and emphasizes the duty of financial institutions to exercise due diligence in ascertaining the status of properties they accept as collateral. The decision underscores the principle that a mortgagee cannot claim good faith if they are aware of existing claims or possessory rights on the property.

Mortgage vs. Prior Sale: Who Prevails in a Dispute Over Antonio Village Lots?

This case revolves around a dispute over several lots in Antonio Village Subdivision, originally owned by Governor Jose C. Zulueta and his wife Soledad Ramos. The Zuluetas mortgaged these lands to GSIS as security for loans. Prior to some of these mortgages, the Zuluetas entered into a contract to sell certain lots to Col. Francisco dela Merced, who eventually paid the full purchase price and received a Deed of Absolute Sale. When the Zuluetas defaulted on their loans, GSIS foreclosed the mortgages, and later sold one of the lots to Elizabeth Manlongat. Dela Merced then filed a complaint to declare the foreclosure sale null and void, arguing that his prior sale should be honored. The central legal question is whether the unregistered sale to Dela Merced should take precedence over GSIS’s registered mortgage and subsequent sale to Manlongat, given GSIS’s knowledge of the prior sale.

The heart of the matter lies in the principle that **a seller cannot mortgage property they no longer own**. The Supreme Court, citing State Investment House, Inc. v. Court of Appeals, emphasized that a registered mortgage is inferior to an unregistered sale if the original owner had already transferred ownership before the mortgage was constituted. In the words of the Court:

STATE’s registered mortgage right over the property is inferior to that of respondents-spouses’ unregistered right. The unrecorded sale between respondents-spouses and SOLID is preferred for the reason that if the original owner (SOLID, in this case) had parted with his ownership of the thing sold then he no longer had ownership and free disposal of that thing so as to be able to mortgage it again. Registration of the mortgage is of no moment since it is understood to be without prejudice to the better right of third parties.

Building on this principle, the Court addressed the issue of GSIS’s status as a mortgagee. Generally, a mortgagee dealing with land registered under the Torrens system can rely on the certificate of title. However, this rule has an exception: if the mortgagee has knowledge of a defect in the vendor’s title or is aware of facts that should prompt a reasonable person to inquire further, they cannot claim good faith. In this instance, the Court considered GSIS’s role as a financing institution, highlighting a higher standard of due diligence.

The Supreme Court referred to Sunshine Finance and Investment Corp. v. Intermediate Appellate Court, stating that financial institutions are expected to conduct thorough investigations to ascertain the status and condition of properties offered as security. This expectation goes beyond a simple examination of the Torrens certificate. The Court explained:

Nevertheless, we have to deviate from the general rule because of the failure of petitioner in this case to take the necessary precautions to ascertain if there was any flaw in the title of the Nolascos and to examine the condition of the property they sought to mortgage. The petitioner is an investment and financing corporation. We presume it is experienced in its business. Ascertainment of the status and condition of properties offered to it as security for the loans it extends must be a standard and indispensable part of its operations. Surely it cannot simply rely on an examination of a Torrens certificate to determine what the subject property looks like as its condition is not apparent in the document. The land might be in a depressed area. There might be squatters on it. It might be easily inundated. It might be an interior lot without convenient access.  These and other similar factors determine the value of the property and so should be of practical concern to the petitioner.

The Court found no evidence that GSIS conducted an ocular inspection or properly assessed the subdivision lots before accepting them as security. This lack of due diligence, combined with GSIS’s knowledge of Dela Merced’s claim of ownership, negated any claim of good faith. Moreover, GSIS had, in fact, acknowledged Dela Merced’s claim over one of the lots in a letter, further undermining their position.

The Supreme Court also cited Philippine National Bank v. Office of the President, emphasizing the need to protect small lot buyers against powerful financial institutions. The Court noted that banks have the resources to conduct due diligence and ascertain the actual status of properties offered as collateral. Furthermore, GSIS received a letter from Dela Merced prior to the public auction, informing them of his acquisition of the lots. This underscores the principle that a mortgagee cannot claim ignorance of existing claims on the property.

As between these small lot buyers and the gigantic financial institutions which the developers deal with, it is obvious that the law — as an instrument of social justice — must favor the weak.  Indeed, the petitioner Bank had at its disposal vast resources with which it could adequately protect its loan activities, and therefore is presumed to have conducted the usual “due diligence” checking and ascertained (whether thru ocular inspection or other modes of investigation) the actual status, condition, utilization and occupancy of the property offered as collateral. It could not have been unaware that the property had been built on by small lot buyers. On the other hand, private respondents obviously were powerless to discover the attempt of the land developer to hypothecate the property being sold to them. It was precisely in order to deal with this kind of situation that P.D. 957 was enacted, its very essence and intendment being to provide a protective mantle over helpless citizens who may fall prey to the razzmatazz of what P.D. 957 termed “unscrupulous subdivision and condominium sellers.”

Regarding Elizabeth Manlongat, the purchaser at the auction sale, the Court applied the principle of Nemo potest plus juris ad alium transferre quam ipse habet: no one can transfer a greater right than he himself has. Since GSIS’s title was derived from a null and void foreclosure sale, Manlongat’s title was also invalid. Furthermore, Manlongat could not claim good faith because she, like GSIS, failed to conduct a proper inspection of the property and was deemed negligent in ascertaining the possessory rights of Dela Merced, who was already in possession and had built a house on the land.

FAQs

What was the key issue in this case?	The key issue was whether an unregistered sale of land should take precedence over a subsequently registered mortgage, especially when the mortgagee had knowledge of the prior sale. The court had to determine who had a better claim over the property.
Why did the Supreme Court favor Dela Merced despite the unregistered sale?	The Court favored Dela Merced because GSIS, the mortgagee, had knowledge of Dela Merced’s prior claim to the property. Additionally, GSIS failed to exercise due diligence in investigating the property’s status before accepting it as collateral.
What is the significance of GSIS being a financing institution?	As a financing institution, GSIS is held to a higher standard of due diligence. The Court expects such institutions to conduct thorough investigations of properties offered as security, going beyond a simple title search.
What does “Nemo potest plus juris ad alium transferre quam ipse habet” mean?	This Latin phrase means “no one can transfer a greater right than he himself has.” It means that if a seller does not have a valid title, they cannot pass a valid title to a buyer.
Why was Elizabeth Manlongat’s claim as a purchaser in good faith rejected?	Manlongat’s claim was rejected because she failed to conduct a proper inspection of the property before purchasing it. The Court held that a prudent buyer would have investigated the possessory rights of Dela Merced, who was already occupying the land.
What is the practical implication of this ruling for land buyers?	This ruling protects the rights of land buyers who have unregistered sales. It reinforces the importance of possession as notice and emphasizes the need for mortgagees to conduct due diligence.
What should financial institutions learn from this case?	Financial institutions should learn to conduct thorough investigations of properties offered as collateral. They must go beyond title searches and actively inquire about existing claims and possessory rights.
How does this case relate to Presidential Decree No. 957?	While not explicitly discussed in the dispositive portion, the case echoes the protective spirit of Presidential Decree No. 957, also known as “The Subdivision and Condominium Buyers’ Protective Decree,” which aims to safeguard the interests of vulnerable real estate buyers.

In conclusion, the Supreme Court’s decision underscores the importance of protecting prior ownership rights and ensuring that financial institutions exercise due diligence when dealing with real estate transactions. This case serves as a reminder that an unregistered sale can prevail over a registered mortgage when the mortgagee has knowledge of the prior sale or fails to conduct a reasonable investigation of the 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: Col. Francisco Dela Merced vs. Government Service Insurance System (GSIS) and Spouses Victor and Milagros Manlongat, G.R. No. 140398, September 11, 2001