G.R. No. 131679 – CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST COMPANY, petitioners, vs. SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT OF APPEALS, respondents.
MENDOZA, J.
Rule Synopsis
While the seller is not required to be owner of the thing at the time of the perfection of the contract, he must be so at the time that he is required to transfer ownership thereof. Also, as a general rule, persons dealing with properties covered by a Torrens title may rely on said title, however, banks accepting such properties as security for loans are bound to stricter standards in view that their business is imbued by public interest.
Facts
Rodolfo Guansing obtained a loan from Cavite Development Bank (CDB; seller) secured by a mortgage on the former’s land. Guansing failed to pay and the security was foreclosed; CDB was the highest bidder at the auction sale. Guansing failed to redeem. One Lolita Chan Lim (buyer) then offered to purchase the subject property from CDB for P300k, payable 10% “Option Money,” balance in cash. However, the prospective buyer found out that Rodolfo’s title had been cancelled for being fraudulent.
The buyer and her husband then filed an action against CDB for specific performance and damages arguing that the latter committed serious misrepresentation. CDB contended, among others, that there was no perfected contract of sale yet as the buyer’s offer was still subject to approval.
The RTC ruled in favor of the buyers holding, among others, that there was already a perfected contract of sale and that the sellers failed to exercise due diligence for failure to discover the defect on Rodolfo’s title. The CA affirmed. The SC affirmed.
Issues
- Was there already a perfected contract of sale?
- Was the sale between CDB and Chan Lim null and void?
- Was the CDB a “mortgagee in good faith,” which would allow the foreclosure sale to be given effect by reason of public policy?
- Who, if any, among the parties was at fault for the nullity of the contract?
- What are the legal effects of the nullity of the contract of sale?
Ruling and Discussion
- Yes. There was already a perfected contract of sale.
Giving effect to the substance of the contract, the SC found that the “option money” defined in the subject agreement was actually an earnest money, which is a proof of the contract’s perfection. This is in light of the fact that after the payment of such “option money,” the buyer was liable only for the balance of the purchase price; this is precisely the definition of an earnest money under Art. 1482 of the Civil Code. The effect is that, there was a perfected contract of sale entered into by the parties, which had also been partially consummated given the part payment. The SC reiterated the doctrine that contracts are not defined by the parties thereto but by principles of law. - Yes. The sale between CDB and Chan Lim null and void.
While the seller is not required to be owner of the thing at the time of the perfection of the contract, he must be so at the time that he is required to transfer ownership thereof. The principle nemo dat quod non habet applies to the consummation stage of the contract of sale, not at the time of its perfection. In this case, CDB never acquired valid title over the subject property as the foreclosure sale was void since the mortgagor was not the absolute owner of thing mortgaged (the rule that the mortgagor or pledger be the absolute owner of the thing is in anticipation of the eventual foreclosure of the property). Rules on ordinary sales apply to foreclosure sales as well since the debtor-mortgagor is obliged to transfer ownership of the mortgaged property to the highest bidder, the latter being obliged to pay its price. Thus, the debtor-mortgagor, as the seller, must be the owner of the thing sold at the time it has to be delivered. - No. The CDB was not a “mortgagee in good faith,” which would allow the foreclosure sale to be given effect by reason of public policy.
CDB failed to exercise their duty of exercising the due diligence required of banking institutions. While it is not required to make a detailed investigation of the history of the title of the property given as security before accepting a mortgage as this was covered by a Torrens Title (persons dealing with properties covered by a Torrens title are not required to look further than what is stated on its face). It was noted by the SC that it is standard for banks to investigate on the properties offered to them as security for loans. Banks are held at stricter standards given that their business is imbued with public interest. In this case, it was shown that Rodolfo obtained a his fraudulent title via a self-executed deed showing that he and Perfecto were the only heirs over the subject properties, and that the latter waived his rights thereto This should have placed the bank on-guard to conduct further inquiry. There was also no showing that the records of the investigation conducted by CDB was introduced as evidence. - CBD was at fault for the nullity of the contract for being negligent.
The SC deferred with the ruling of the lower courts, this question being one of fact. In any case, the high court was convinced that CDB acted negligently. - The legal effects of the nullity of the contract of sale follow:
(a) The buyers were entitled to recover the “option money” paid;
(b) Interest at legal rate shall commence from the time of filing of the action;
In case of a void sale, the seller has no right whatsoever to keep the money paid by virtue thereof and should refund it, with interest at the legal rate, computed from the date of filing of the complaint until fully paid.
(c) The buyers were entitled to moral damages.
Dispositive
Decision affirmed with modification.