Facts:
The petitioners are the registered owners of an agricultural land. Candelaria Sanchez introduced the petitioner to Norma Sulit who offered to buy the petitioner’s lot. The asking price for the property is P7000,000 but Norma only has P25,000 which the petitioner accepted as an earnest money with agreement that the title will be transferred in the name of Norma after she pays the remaining balance. Norma failed to pay the balance but negotiated to transfer the title in her name which the petitioner refused. However, through Candelaria Sanchez the title was transferred to Norma upon the execution of a deed of sale made by the petitioner in favor of Sanchez who obtained a bank loan using the petitioner’s land as collateral. She then executed on the same day another deed of sale in favor of Norma. Both deed of sales reflect the amount of only P150,000.00. Using the deed of sale Norma was able to register the property in her name. Norma obtained a loan from Bancom while mortgaging the land title. Meanwhile, a special agreement was entered into by petitioner and Norma. When Norma failed to pay the remaining balance stipulated in their special agreement, the petitioner filed a complaint for the reconveyance of the land. Bancom claimed priority as mortgagee in good faith. Norma defaulted payment with the bank and the property was foreclosed and auctioned with Bancom as the highest bidder.
Trial Court decision: The trial court held that the contract of sale between petitioner and Candelaria was absolutely simulated thereby producing no legal effect. Bancom was not a mortgagee in good faith cannot claim priority rights over the property.
Court of Appeals: Reversed the RTC decision holding the deed of sale as valid and binding and not simulated. The mortgage contract between Norma and Bancom is likewise valid and Bancom has a priority rights over the property. It also ruled that the petitioner intended to be bound by the sale and mortgage since they did not seek to annul the same but instead executed a special agreement to enforce payment of the remaining balance.
Issues:
Whether or not the sale and mortgage are valid?
Whether or not the respondent is an innocent mortgagee in good faith?
Ruling:
As a general rule, if the terms of the contract are clear and unambiguous its stipulations shall control but when its words contravene with the intention of the parties, the intention shall prevail over the words of the contract. Simulation of contract takes place when the parties do not want the express words of the contract to have its legal effect. It may be absolute or relative. When parties do not intend to be bound at all it is absolute simulated contract and considered void. When the parties conceal their true agreement, it is a relative simulated contract and binds the parties when it does not prejudice third persons and is not contrary to law, morals, good custom, public order, and public policy. It was shown that although a deed of absolute sale was executed in the amount of P150,000 no consideration was involved as no exchange of money took place between them. Norma and Candelaria also did not assert their right to ownership over the property. It was clear that the deed of sale was simulated in order to facilitate the bank loan to be secured by Candelaria using the property as collateral. The fact that Norma obtained registration of the property in her name does not entitle her to ownership since the simulated deed of sale produced no legal effect. A simulated contract is not a recognized mode of transferring ownership.
With the contention of Bancom that it is a mortgagee in good faith, the court ruled otherwise pointing out that it is a mortgagee-bank thus is expected to exercise greater care and prudence when dealing with registered lands. Failure to observe due diligence was shown with judicial notice that the bank did not conduct an ocular inspection on the property and did not send a representative to investigate the ownership of the land, these being a standard procedure before approving loans. It is also aware of the adverse claim because of the notice of lis pendens annotated to the title. Because it was established that the two deeds of sale were simulated thus null and void, it does not convey any right that may ripen into a valid title. The mortgage was also null and void because Norma was not the owner of the property. The property cannot be validly foreclosed by the respondent. The court declares the petitioner to remain as the valid owner of the property.
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