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[G.R. No. 149481.October 24, 2001]

PRUDENTIAL BANK vs. KIM HYEUN SOON, et al.

FIRST DIVISION

Gentlemen:

Quoted hereunder, for your information, is a resolution of this Court dated OCT 24 2001.

G.R No. 149481 (Prudential Bank vs. Kim Hyeun Soon, et al.)

Prudential Bank (petitioner bank) filed this petition for review on certiorari assailing the Decision, dated August 15, 2001, of the Court of Appeals in CA-G.R. CV No. 65240 which affirmed the decision of the Regional Trial Court of Makati in Civil Case No. 96-796. The RTC decision annulled the real estate mortgage executed between petitioner and the spouses Julius and Corazon Strachan.

On February 1, 1993, respondent Kim Hyeun Soon purchased from the spouses Strachan a condominium unit for the price of P3,700,000.00. It was agreed that the spouses Strachan would deliver the Certificate of Title to the unit upon full payment of the purchase price. Thus, on said date, respondent drew a check in the amount of P2,000,024.00 as partial payment thereof. Said check was encashed by the spouses Strachan. Respondent and her grandson forthwith took possession of the unit and resided therein. Respondent thereafter remitted the sums of P700,000.00 (February 9, 1993) and P200,000.00 (March 8, 1993) to the spouses Strachan as additional partial payments.

Unknown to respondent, however, the spouses Strachan obtained a loan from petitioner bank in the amount of P2,000,000.00 and executed, as security therefor, a real estate mortgage, dated March 17, 1993, covering the subject condominium unit. Said mortgage was not registered with the Housing and Land Use Regulatory Board (HLURB) but the same was registered with the Register of Deeds.

Subsequently, respondent paid the following amounts to the spouses Strachan: P200,000.00 (April 12, 1993); P200,000.00 (April 30, 1993) and P150,000.00 (May 7, 1993). Moreover, respondent likewise paid $7,000 and consequently completing the payments of the purchase price of P3,700,000.00. Despite demand by respondent, the spouses Strachan refused to deliver the certificate of title to the unit. They asked that respondent pay an additional P150,000.00 to which the latter agreed. On August 27, 1993, the parties executed a certification/receipt under which the spouses Strachan acknowledged having sold the subject unit to respondent.

Instead of delivering the title, however, the spouses Strachan asked respondent to sign Deed of Absolute Sale with Assumption of Mortgage over the unit in the amount of P1,700,000.00. Respondent refused since her balance was only 150,000.00 and she was ready to pay the same.

Because of the failure of the spouses Strachan to deliver the title, respondent was constrained to file a complaint against them with the HLURB, docketed as HLRB Case No. REM-5709. In the course of the proceedings, the parties executed a compromise agreement where the spouses Strachan undertook to deliver the title to respondent upon payment by the latter of P150,000.00.

In the meantime, the spouses Strachan failed to pay their loan to petitioner bank which initiated the foreclosure proceedings on the subject unit. A public auction sale was then set on May 29, 1996. Upon inquiry, respondent learned that said sale could be averted only if she assumed the account of the spouses Strachan with petitioner bank in the amount of P5,151,407.68. On May 29, 1996, the public auction proceeded and petitioner bank, as the highest bidder, acquired the subject unit. A certificate of sale was issued in favor of petitioner bank.

Respondent thus filed with the RTC a complaint for the annulment of mortgage and injunction. After due hearing, the RTC rendered judgment in favor of respondent:

xxx

             Wherefore, premises considered, judgment is hereby rendered in favor of the plaintiff and against defendants. The real estate mortgage dated March 17, 1993 is hereby declared annulled, and the writ of preliminary injunction dated April 28, 1998 is hereby made permanent.

Defendant-spouses Strachan are hereby ordered to pay plaintiff the amount of P100,000.00 as and by way of moral damages, P50,000.00 as exemplary damages and another P100,000.00 as and for attorney's fees plus cost of suit. 1 Rollo, p. 47-48.

             Aggrieved, petitioner bank appealed to the CA. Upon finding that respondent and the spouses Strachan entered into a contract of sale and title to the subject condominium unit had already, passed to respondent even before the spouses Strachan mortgaged the same to petitioner bank, the CA held that the mortgage agreement covering the said unit entered into between the spouses Strachan and petitioner bank was void. Moreover, contrary to petitioner bank's claim, the CA found that petitioner is not a mortgagee in good faith the dispositive portion of the CA decision reads:

IN THE LIGHT OF THE FOREGOING, the appeal is DISMISSED. The Decision appealed from is AFFIRMED. With costs against the Appellant. 2 Id., at 61.

Petitioner bank now comes to this Court alleging that:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE AGREEMENT BETWEEN RESPONDENT SOON AND THE SPOUSES IS A CONTRACT OF SALE NOT A CONTRACT TO SELL.

II. THE COURT OF APPEALS ERRED IN AFFIRMING THE LOWER COURT'S RULING THAT TITLE TO THE SUBJECT PROPERTY PASSED TO RESPONDENT SOON IN FEBRUARY, 1993 EVEN WHEN THE PURCHASE PRICE WAS NOT FULLY PAID;

III. THE COURT OF APPEALS ERRED IN NOT FINDING THAT PETITIONER BANK ACTED IN GOOD FAITH AND. FOR VALUABLE CONSIDERATION WHEN IT ACCEPTED THE REAL ESTATE MORTGAGE OVER THE SUBJECT PROPERTY AS COLLATERAL FOR THE LOAN OF SPOUSES STRACHAN;

IV. CONSEQUENTLY, THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURT'S FINDING THAT THE REAL ESTATE MORTGAGE IS NOT VALID;

V. THE COURT OF APPEALS ERRED IN NOT GRANTING THE BANK'S CROSS-CLAIM AGAINST THE SPOUSES STRACHAN WHEN IT RENDERED ITS JUDGMENT DECLARING THE SUBJECT REAL ESTATE MORTGAGE DATED MARCH 17, 1993, AS NULL AND VOID. 3 Id., at 20.

The petition is bereft of merit.

             It is petitioner bank's contention that the contract executed between the spouses Strachan and respondent was one of a "contract to sell" and not a "contract of sale." As a contract to sell, title to the property had not yet passed to respondent; thus, the real estate mortgage constituted over the subject condominium unit in favor of petitioner bank was allegedly valid. According to petitioner, that the agreement was one of "contract to sell" is supported by the following: the compromise judgment rendered by the HLURB spoke of a contract to sell; the payments made by respondent to the spouses Strachan were in installments; and the agreement that title to the property will be delivered on or before December 31, 1994.

This contention fails to persuade.

We agree with .the findings and conclusion of the CA, as it affirmed that of the RTC, that what was entered into between respondent and the spouses Strachan was a "contract of sale." Article 1458 of the Civil Code reads:

By the contract of sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

A contract of sale maybe absolute or conditional.

The essential elements of a contract of sale are: (a) Consent or meeting of the minds between the parties, i.e., consent to transfer ownership in exchange for the price; (b) determinate subject matter; and (c) price certain in money or its equivalent. 4 Heirs of Juan San Andres vs. Rodriguez, 332 SCRA 769 (2000).Upon the other hand, there is a "contract to sell" when the parties agree that the ownership in the thing or object shall not pass to the purchaser until he has fully paid the price (Article 1478 of the Civil Code).

In this case, the CA found that:

x x x the evidence on record shows that, on February 1, 1993, the Spouses Julius Strachan, Sr., through Julius Strachan, Sr., sold their subject condominium unit to the Appellee for the price of P3,700,000.00, the Spouses obliging themselves to deliver to the Appellee the owner's duplicate of the "Condominium Certificate of Title" over the unit upon the payment of the purchase price of the property in full. The Spouses did not reserve their ownership over the unit until payment, by the Appellee, of the purchase price of the said unit in full. Neither did they reserve the right to rescind said contract if the Appellee failed or refused to pay the balance of the purchase price of the unit, in full. On the contrary, the Spouses delivered possession of the said unit, on February 1, 1993, to the Appellee who, with her grandson, forthwith, took residence of said unit. x x x 5 Rollo, p. 52.

In People's Industrial and Commercial Corporation vs. Court of Appeals, 6 281 SCRA 206 (1997).the Court ruled:

A deed of sale is considered absolute in nature where there is neither a stipulation in the deed that title to the property sold is reserved in the seller until full payment of the price, nor one giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a fixed period. 7 Id., at 217.

Following this principle, the CA correctly held that the agreement between respondent and the spouses Strachan was one of absolute sale. The spouses Strachan did not reserve ownership in the subject condominium unit nor did they stipulate for a unilateral rescission of the contract in case of failure of respondent to pay the balance of the purchase price. In fact, the sale was consummated as early as February 1, 1993, upon the delivery of the subject property to respondent. 8 See Note 4.Thus, Article 1477 of the Civil Code provides that the ownership of the thing sold shall be transferred to the, vendee upon the actual or constructive delivery thereof.

The fact that the compromise judgment of the HLURB designated the contract between the parties as a contract to sell is of no moment. It bears reiterating that a deed of sale is absolute in nature although denominated as a "contract to sell" in the absence of a stipulation reserving title on the spouses Strachan until full payment of the purchase price. In this case, ownership of the thing sold passed to respondent when she took possession of the subject condominium unit on February 1, 1993 because this constitutes delivery within the meaning of Article 1477 of the Civil Code. 9 See Laforteza vs. Machuca, 333 SCRA 643 (2000).

The nullification of the real estate mortgage between petitioner bank and the spouses Strachan is warranted. Since the spouses Strachan were no longer the owners of the subject property as early as February 1, 1993, the mortgage they executed covering the same in favor of petitioner bank was, therefore, void:

In a real estate mortgage contract, it is essential that the mortgagor be the absolute owner of the property to be mortgaged, otherwise, the mortgage is void. 10 Robles vs. CA, 328 SCRA 97 (2000).

Petitioner bank, however, maintains that it is a mortgagee in good faith. As such, it prays that the real estate mortgage it entered with the spouses Strachan be upheld. Petitioner bank's claim of good faith is, unfortunately, futile. In Development Bank of the Philippines vs. Court of Appeals, 11 331 SCRA 267 (2000).the Court gave scant consideration to DBP's claim of good faith, thus:

The evidence before us, however, indicates that petitioner is not a mortgagee in good faith. To be sure, an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor's title. Nonetheless, especially in the case of a banking institution, a mortgagee must exercise due diligence before entering into said contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof. 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. 12 Id., p. 289.

The same principle applies in this case. While petitioner bank did conduct an ocular inspection of the subject condominium unit, said inspection was merely cursory. The trial court made the following findings on the matter:

The defendant Bank's assertion that it exercised due diligence by letting its representative, specifically Manuel Rayos, Sr., to conduct an ocular inspection is negated by the fact that Mr. Rayos failed to inquire from Herbert Viduya, the Building Administrator, who are the present occupants of the property and as to what capacity they are holding the same. Instead, the representative concentrated on the appraised value of the property when he talked with Viduya. Although he proceeded to the unit itself and was able to talk with a maid who told him that they are the lessees therein, such fact will not negate defendant bank's lack of knowledge due to negligence that the property had already been sold. If Mr. Rayos had only inquired from the building administrator the status of the present occupants of the subject premises, he would have discovered plaintiff's right thereto. 13 Rollo, p. 56.

With respect to the cross-claim of petitioner bank against the spouses Strachan, it does not appear from the records that this issue was raised in the appellate court. In any case, petitioner bank's claim against the spouses Strachan can exist independently of and is certainly separable from the action instituted by respondent in the court a quo. Accordingly, petitioner bank should just initiate the necessary action against the spouses Strachan before the proper court.

WHEREFORE, premises considered, the petition is hereby DENIED for lack of merit. The Decision, dated August 15, 2001, of the Court of Appeals in C.A.-G.R. CV No. 65240 is AFFIRMED in toto.

Very truly yours,

(Sgd.) VIRGINIA ANCHETA-SORIANO

Clerk of Court


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