Banks’ Duty of Diligence: Protecting Property Owners from Mortgage Fraud

G.R. No. 150318, November 22, 2010, Philippine Trust Company (also known as Philtrust Bank) vs. Hon. Court of Appeals and Forfom Development Corporation

Imagine discovering that your property has been fraudulently mortgaged without your knowledge. This nightmare scenario highlights the importance of due diligence in real estate transactions, especially on the part of banks and lending institutions. The Philippine Supreme Court, in the case of Philippine Trust Company v. Court of Appeals, addressed the responsibilities of banks in ensuring the validity of mortgage contracts, providing crucial safeguards for property owners against fraudulent schemes.

This case revolves around Forfom Development Corporation, which discovered that its land titles had been fraudulently transferred and subsequently mortgaged to Philippine Trust Company (Philtrust). The central legal question was whether Philtrust acted in good faith when it accepted the mortgage, or whether it was negligent, making it a mortgagee in bad faith, and thus, not entitled to protection under the law.

Understanding Mortgage Principles and Good Faith

Philippine law recognizes the concept of a “mortgagee in good faith,” which protects lenders who, without knowledge of any defect in the mortgagor’s title, accept a property as security for a loan. However, this protection is not absolute. Banks, due to the nature of their business and the public interest involved, are held to a higher standard of diligence compared to private individuals.

The relevant legal principles are rooted in the Civil Code and jurisprudence concerning property rights and obligations. A key provision is the concept of constructive notice, where the registration of a document with the Registry of Deeds serves as notice to the whole world. However, for banks, this is not enough. They are expected to conduct a more thorough investigation of the mortgagor’s title. As the Supreme Court has stated, “The rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.”

For example, if a bank is presented with a title that appears to have been recently transferred, or if the mortgagor’s address is inconsistent with the location of the property, these circumstances should raise red flags and prompt further inquiry. Failure to do so may result in the bank being deemed a mortgagee in bad faith.

The Case Unfolds: Fraud and Failed Diligence

The story begins with Forfom Development Corporation owning several parcels of land in Pampanga. Through a series of fraudulent acts, including forged deeds of sale and court orders, individuals using fictitious names managed to transfer the land titles to themselves. Subsequently, these individuals mortgaged the property to Philtrust Bank.

The procedural journey of the case is as follows:

• Forfom Development Corporation filed a complaint with the Regional Trial Court (RTC) against the fraudsters, Philtrust, and the Register of Deeds.
• The RTC ruled in favor of Forfom, declaring the deeds of sale and titles void and ordering the reinstatement of Forfom’s original titles.
• Philtrust appealed to the Court of Appeals (CA), arguing that it was a mortgagee in good faith.
• The CA affirmed the RTC’s decision, finding that Philtrust was negligent in its credit investigation.
• Philtrust then filed a Petition for Certiorari with the Supreme Court, questioning the CA’s findings.

The Supreme Court ultimately denied Philtrust’s petition, emphasizing the bank’s failure to exercise the required degree of diligence. The Court highlighted several red flags that should have alerted Philtrust to the fraudulent scheme. As the Supreme Court stated, “It is settled that banks, their business being impressed with public interest, are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands.”

The Supreme Court pointed to Philtrust’s persistent refusal to cooperate with the National Bureau of Investigation (NBI) in its investigation of the fraudulent scheme perpetrated against Forfom, as testified by NBI agents Alberto V. Ramos and Pastor T. Pangan.

Practical Implications for Banks and Property Owners

This ruling serves as a stern reminder to banks to conduct thorough due diligence before accepting properties as collateral. It also provides recourse for property owners who fall victim to fraudulent schemes. The case reinforces the principle that banks cannot blindly rely on the face of a land title but must actively investigate the circumstances surrounding the transaction.

For property owners, this case underscores the importance of regularly monitoring their land titles and promptly reporting any suspicious activity to the authorities. For banks, it means implementing robust credit investigation procedures and training personnel to identify potential red flags in real estate transactions.

Key Lessons

• Banks must exercise extraordinary diligence in mortgage transactions, going beyond the face of the title.
• Red flags, such as recent transfers or inconsistencies in addresses, should trigger further investigation.
• Failure to conduct thorough due diligence can result in a bank being deemed a mortgagee in bad faith, losing its protection under the law.

Hypothetical Example: A bank approves a mortgage on a property based solely on a clean title, without verifying the identity of the mortgagor or investigating a recent transfer of ownership. Later, it is discovered that the mortgagor was an impostor and the transfer was fraudulent. The bank, having failed to exercise due diligence, may be deemed a mortgagee in bad faith and lose its claim on the property.

Frequently Asked Questions

What is a mortgagee in good faith?

A mortgagee in good faith is a lender who accepts a property as security for a loan without knowledge of any defect in the mortgagor’s title.

What level of due diligence is required of banks in mortgage transactions?

Banks are required to exercise extraordinary diligence, going beyond the face of the title and actively investigating the circumstances surrounding the transaction.

What are some red flags that should prompt further investigation by a bank?

Red flags include recent transfers of ownership, inconsistencies in addresses, and any other circumstances that raise suspicion about the validity of the mortgagor’s title.

What happens if a bank is deemed a mortgagee in bad faith?

A mortgagee in bad faith loses its protection under the law and may not be able to enforce its claim on the property.

What can property owners do to protect themselves from mortgage fraud?

Property owners should regularly monitor their land titles and promptly report any suspicious activity to the authorities.

What is the effect of notarization of a document?

Notarization only serves as proof of the execution of the document and the date of execution. It is not prima facie evidence of the facts stated in the document.

ASG Law specializes in real estate law and litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.