In Armando V. Alano v. Planter’s Development Bank, the Supreme Court ruled that a bank acting as a mortgagee must exercise a higher degree of diligence than ordinary individuals, especially when dealing with property offered as security. The Court found that Planter’s Development Bank (formerly Maunlad Savings and Loan Association, Inc.) failed to adequately verify the ownership and occupancy status of a property, making them a mortgagee in bad faith. As a result, the mortgage was declared invalid with respect to the share of the co-owner who did not consent to the mortgage, safeguarding the co-owner’s property rights.

The Unseen Apartment: When Due Diligence in Mortgage Deals Falls Short

Armando V. Alano and his brother inherited a property, later using its proceeds to purchase a house in Quezon City. After his brother’s death, the title to the Quezon City property was reconstituted solely in the names of his brother’s wife and children, prompting Armando to file an adverse claim. Subsequently, the adverse claim was canceled, and the property was mortgaged to Maunlad Savings and Loan Association, Inc. (later Planter’s Development Bank). Armando then filed a complaint seeking the cancellation of the title and the nullification of the mortgage insofar as his share was concerned. The central legal question revolves around whether the bank exercised due diligence in assessing the property before accepting it as collateral for a loan.

The Regional Trial Court (RTC) initially ruled in favor of Armando, recognizing his co-ownership but upheld the validity of the mortgage, reasoning that the bank had the right to rely on the Torrens title. However, Armando appealed, arguing that the bank was not a mortgagee in good faith. The Court of Appeals (CA) affirmed the RTC’s decision, stating that the bank had taken necessary precautions. Dissatisfied, Armando elevated the case to the Supreme Court.

At the heart of the matter lies the principle of due diligence required of banks and financial institutions. The Supreme Court emphasized that these entities, imbued with public interest, must exercise greater caution compared to ordinary individuals. Imbued with public interest, they “are expected to be more cautious than ordinary individuals,” the Court stated. This heightened standard necessitates a thorough investigation of the property offered as collateral, including an ocular inspection and verification of the title’s genuineness.

The Court referenced its previous rulings which reinforced the responsibility of banks to conduct thorough investigations. The standard practice involves ocular inspections to ascertain actual occupants and verify ownership. Failure to meet this standard results in being deemed a mortgagee in bad faith.

In this specific case, the credit investigator’s admission during cross-examination was critical. The testimony revealed that the inspection was limited to assessing the finishing of the house, the number of bedrooms, and bathrooms, without verifying who actually resided there. This oversight was particularly significant because, as Armando claimed, he had a separate apartment at the back of the property which the investigator failed to notice.

The court noted the credit investigator’s testimony, When we went there ma’am, we only checked on the finishing of the house and also checked as to the number of bedrooms and number of CR, ma’am. The investigator further stated that he did not verify who were actually residing there. The investigator also did not verify from the neighbors as to whether anybody else was residing there.

The failure to discover Armando’s occupancy was a crucial factor in the Court’s decision. Due diligence would have required the bank to ascertain all occupants of the property. Had the bank done so, it would have discovered Armando’s co-ownership. Since the bank failed to meet this standard, the Supreme Court deemed them a mortgagee in bad faith. Therefore, the mortgage was only valid to the extent of the mortgagor’s (Lydia’s) share in the property.

The ruling is deeply rooted in Article 493 of the Civil Code, which states that a co-owner can only alienate their pro indiviso share in the co-owned property. This legal principle ensures that no co-owner can unilaterally dispose of the entire property without the consent of the other co-owners. Here’s the provision:

Article 493. Each co-owner shall have full ownership of his part and of the fruits and benefits pertaining thereto, and he may therefore alienate, assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon the termination of the co-ownership.

This case reaffirms the importance of protecting the rights of co-owners in property transactions. Banks and financial institutions must conduct comprehensive investigations to ascertain the true ownership and occupancy status of properties offered as collateral. Failure to do so can have significant legal and financial consequences, rendering mortgages invalid with respect to non-consenting co-owners.

To better illustrate the differing obligations and outcomes, here’s a comparison of the duties of a mortgagee in good faith versus one in bad faith:

Criteria	Mortgagee in Good Faith	Mortgagee in Bad Faith
Due Diligence	Exercises reasonable care in inspecting the property and verifying the title.	Fails to exercise reasonable care; does not thoroughly investigate ownership and occupancy.
Knowledge of Co-ownership	Unaware of any co-ownership or adverse claims despite reasonable inquiry.	Aware or should have been aware of co-ownership or adverse claims through diligent inquiry.
Validity of Mortgage	Mortgage is generally valid and binding on the entire property.	Mortgage is valid only to the extent of the mortgagor’s share in the property.
Protection Under the Law	Protected by the Torrens system if reliance on a clean title is justified.	Not fully protected; bears the risk of losing rights over the co-owner’s share.

FAQs

What was the key issue in this case?	The key issue was whether the bank, as a mortgagee, exercised due diligence in inspecting the property and verifying the ownership before granting the loan. The court had to determine if the bank was a mortgagee in good faith.
What does it mean to be a mortgagee in good faith?	A mortgagee in good faith is one who conducts a reasonable investigation of the property offered as security and has no knowledge of any defects in the mortgagor’s title. They can rely on the title presented by the mortgagor.
What is the duty of a bank when taking property as collateral?	Banks must exercise a higher degree of diligence than private individuals, including conducting thorough ocular inspections and verifying the genuineness of the title to determine the real owner or owners.
What is the effect of a mortgage on a co-owned property when one co-owner mortgages it without the others’ consent?	The mortgage is valid only to the extent of the mortgaging co-owner’s share in the property. The shares of the non-consenting co-owners are not affected.
What is an adverse claim?	An adverse claim is a notice filed with the Registry of Deeds to inform third parties that someone is claiming an interest in the property that is adverse to the registered owner.
Why was the bank deemed a mortgagee in bad faith in this case?	The bank was deemed in bad faith because its credit investigator failed to ascertain the actual occupants of the property and to discover the co-owner’s apartment during the ocular inspection.
What is the significance of Article 493 of the Civil Code in this case?	Article 493 allows a co-owner to alienate, assign, or mortgage their share, but the effect of the mortgage is limited to the portion that may be allotted to them upon the termination of the co-ownership.
What should banks do to avoid being deemed mortgagees in bad faith?	Banks should conduct thorough investigations, including ocular inspections to identify all occupants, verify titles, and check for any adverse claims or indications of co-ownership.

This case serves as a reminder of the importance of due diligence in real estate transactions, particularly for financial institutions. Ensuring that all parties’ rights are respected and protected is crucial for maintaining the integrity of the Philippine property system.

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: Armando V. Alano v. Planter’s Development Bank, G.R. No. 171628, June 13, 2011