CASE: HOME BANKERS SAVINGS & TRUST CO. VS.

CA

FACTS:
 Each of private respondents entered into separate contracts to sell with TransAmerican
Sales and Exposition (TransAmerican) through the latter’s Owner/General Manager, Engr.
Jesus Garcia, involving certain portions of land covered by Transfer Certificate of Title
(TCT) No. 19155, located at No. 45 Gen. Lim Street, Heroes Hill, Quezon City, together
with one unit three-storey townhouse to be built on each portion.
 It is stipulated in their respective contracts that their individual townhouses will be fully
completed and constructed as per plans and specifications and the respective titles thereto
shall be delivered and transferred to private respondents free from all liens and
encumbrances upon their full payment of the purchase price.  However, despite repeated
demands, Garcia/TransAmerican failed to comply with their undertakings.
 On May 30, 1989, Engr. Garcia and his wife Lorelie Garcia obtained from petitioner Home
Bankers Savings and Trust Company (formerly Home Savings Bank and Trust Company)
a loan in the amount of P4,000,000.00 and without the prior approval of the Housing and
Land Use Regulatory Board (HLURB), the spouses mortgaged [7] eight lots covered by TCT
Nos. 3349 to 3356 as collateral.  Petitioner registered its mortgage on these titles without
any other encumbrance or lien annotated therein.  The proceeds of the loan were intended
for the development of the lots into an eight-unit townhouse project.  However, five out of
these eight titles turned out to be private respondents’ townhouses subject of the contracts
to sell with Garcia/TransAmerican.
 When the loan became due, Garcia failed to pay his obligation to petitioner.  Consequently,
petitioner instituted an extrajudicial foreclosure [8] on the subject lots and being the highest
bidder in the public auction, a certificate of sale [9] in its favor was issued by the sheriff on
February 26, 1990.  Subsequently, the sheriff’s certificate of sale was registered and
annotated on the titles of the subject lots in the Register of Deeds of Quezon City.
 OAALA
 Private respondents filed a complaint with the Office of Appeals, Adjudication and Legal
Affairs (OAALA), HLURB, against Garcia/TransAmerican as seller/developer of the
property and petitioner, as indispensable party, for non-delivery of titles and non-
completion of the subdivision project.[10] They prayed for the completion of the units,
annulment of the mortgage in favor of petitioner, release of the mortgage on the lots
with fully paid owners and delivery of their titles, and for petitioner to compute individual
loan values of amortizing respondents and to accept payments from them and
damages.
 OAALA rendered it Decision in favor herein respondents.
 BOARD OF COMMISSIONERS OF HLRUB
 Petitioner filed an appeal with the Board of Commissioners of the HLURB which
dismissed the same in a decision.
 OFFICE OF THE PRESIDENT
 Petitioner then elevated the case to the Office of the President which rendered a
decision dismissing the appeal and affirming the June 15, 1992 decision of the HLURB. 
Petitioner’s motion for reconsideration was also denied.
 CA
 Petitioner filed a petition for review with the CA which, denied the petition and affirmed
the decision of the Office of the President.
 RULING: The CA upheld the findings of the OAALA, HLURB that private respondents
had already entered into separate contracts to sell with TransAmerican as early as

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 1988 while it was only in 1989 that spouses Garcia applied for a loan with petitioner and
executed a mortgage contract over the subject lots; that the proceeds of the loan were
purposely intended for the development of a property which was the same property
subject of the contracts to sell; that despite the contracts to sell, Garcia/TransAmerican
did not apprise petitioner of the existence of these contracts nor did petitioner exhaust
any effort to inquire into their existence since petitioner merely relied on the purported
clean reconstituted titles in the name of Garcia; that the mortgage of the subject lots
without the consent of the buyers and the authorization of the HLURB is a clear
violation of P.D. No. 957; that the mortgage contract is void and unenforceable against
private respondents.
 MR: MR was denied.

ISSUE:
1. WON HLURB has no power to declare the mortgage contract over real property executed
between a real estate developer and petitioner, a banking institution, void or unenforceable,
as it is properly within the jurisdiction of the Regional Trial Court.
2. WON respondent have no cause of action since petitioner had no knowledge of any buyer of
the subject lots at the time the mortgage was constituted; that there was no construction in
the subject lots at the time petitioner accepted the same as collateral; that the title to the
subject property was still in the process of being reconstituted and the loan was in fact
meant for the development of the subject lots into an eight-unit townhouse project.
3. WON Petitioner is not obliged under the law to go beyond the certificates of title registered
under the Torrens systems and had every reason to rely on the correctness and validity of
those titles when on its face, it was free from lien or encumbrances, the mortgagees therein
were considered in good faith as they were totally innocent and free from negligence or
wrongdoing in the transaction..
4. WON Petitioner is an innocent mortgagee whose lien must be respected and protected,
since the title offered as security was clean of any encumbrances or lien.
5. WON respondents were negligent in failing to register their contracts to sell in accordance
with Section 17 of PD No. 957; that private respondents’ unregistered contracts to sell are
binding only on them and Garcia/TransAmerican but not on petitioner which had no actual or
constructive notice of the sale at the time the mortgage was constituted.

RULING:
1. HLURB has jurisdiction to declare invalid the mortgage contract executed between
Garcia/TransAmerican and petitioner over the subject lots insofar as private respondents
are concerned.  It correctly relied on Union Bank of the Philippines vs. HLURB, et al. where
we squarely ruled on the question of HLURB’s jurisdiction to hear and decide a
condominium buyer’s complaint for: (a) annulment of a real estate mortgage constituted by
the project owner without the consent of the buyer and without the prior written approval of
the NHA; (b) annulment of the foreclosure sale; and (c) annulment of the condominium
certificate of title that was issued to the highest bidder at the foreclosure sale.

The jurisdiction of the HLURB to regulate the real estate trade is broad enough to include
jurisdiction over complaints for specific performance of the sale, or annulment of the
mortgage, of a condominium unit, with damages.

2. Contrary to petitioner’s claim that there were no buyers of the subject lots at the time of the
constitution of the mortgage, records show that private respondents Arevalo, Uy, Alfredo
Lim and Santos Lim had entered into contracts to sell with Garcia/TransAmerican as early
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 as 1988 for their respective lots. While private respondents spouses Soriano bought the
subject lots after the constitution of the mortgage in favor of petitioner, the subject lots are,
as early as 1988, subdivision lots which as defined under Section 2(e) of P.D. No. 957 to
mean any of the lots, whether residential, commercial, industrial, or recreational in a
subdivision project are entitled to the protection of P.D. No. 957.
Under Section 18 of P.D. No. 957, it is provided that no mortgage on any unit or lot shall be
made by the owner or developer without prior written approval of the authority.  Such
approval shall not be granted unless it is shown that the proceeds of the mortgage loan
shall be used for the development of the condominium or subdivision project and effective
measures have been provided to ensure such utilization.

Notwithstanding that petitioner became the owner of the subject lots by being the highest
bidder in the extrajudicial foreclosure sale, it must be remembered that it was first a
mortgagee of the same.  Since the lot was mortgaged in violation of Section 18 of P.D. No.
957, HLURB has jurisdiction to declare the mortgage void insofar as private respondents
are concerned and to annul the foreclosure sale.

Concededly, P.D. No. 957 aims to protect innocent lot buyers.  Section 18 of the decree
directly addresses the problem of fraud committed against buyers when the lot they have
contracted to purchase, and which they have religiously paid for, is mortgaged without their
knowledge.  The avowed purpose of P.D. No. 957 compels the reading of Section 18 as
prohibitory – acts committed contrary to it are void.  Such construal ensures the attainment
of the purpose of the law: to protect lot buyers, so that they do not end up still homeless
despite having fully paid for their home lots with their hard-earned cash.

Since the mortgage is void, HLURB’s orders of the cancellation of the sheriff’s certificate of
sale, release of the mortgaged lots and delivery of the corresponding titles to respondents
who had fully paid the purchase price of the units are but the necessary consequences of
the invalidity of the mortgage for the protection of private respondents.

3. Petitioner knew that the loan it was extending to Garcia/TransAmerican was for the
purpose of the development of the eight-unit townhouses.  Petitioner’s insistence that prior
to the approval of the loan, it undertook a thorough check on the property and found the
titles free from liens and encumbrances would not suffice.  It was incumbent upon
petitioner to inquire into the status of the lots which includes verification on whether Garcia
had secured the authority from the HLURB to mortgage the subject lots.  Petitioner failed to
do so.  We likewise find petitioner negligent in failing to even ascertain from Garcia if there
are buyers of the lots who turned out to be private respondents.  Petitioner’s want of
knowledge due to its negligence takes the place of registration, thus it is presumed to know
the rights of respondents over the lot.  The conversion of the status of petitioner from
mortgagee to buyer-owner will not lessen the importance of such knowledge. Neither will
the conversion set aside the consequence of its negligence as a mortgagee.

Judicial notice can be taken of the uniform practice of banks to investigate, examine and
assess the real estate offered as security for the application of a loan.  We cannot
overemphasize the fact that the Bank cannot barefacedly argue that simply because the
title or titles offered as security were clean of any encumbrances or lien, that it was thereby
relieved of taking any other step to verify the over-reaching implications should the
subdivision be auctioned on foreclosure.

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4. Petitioner bank should have considered that it was dealing with a [townhouse] project that
was already in progress.  A reasonable person should have been aware that, to finance the
project, sources of funds could have been used other than the loan, which was intended to
serve the purpose only partially.  Hence, there was need to verify whether any part of the
property was already the subject of any other contract involving buyers or potential buyers. 
In granting the loan, petitioner bank should not have been content merely with a clean title,
considering the presence of circumstances indicating the need for a thorough investigation
of the existence of buyers like respondent.  Having been wanting in care and prudence, the
latter cannot be deemed to be an innocent mortgagee.

Petitioner cannot claim to be a mortgagee in good faith.  Indeed it was negligent, as found
by the Office of the President and by the CA.  Petitioner should not have relied only on the
representation of the mortgagor that the latter had secured all requisite permits and
licenses from the government agencies concerned.  The former should have required the
submission of certified true copies of those documents and verified their authenticity
through its own independent effort.

Having been negligent in finding out what respondent’s rights were over the lot, petitioner
must be deemed to possess constructive knowledge of those rights.

5. Section 17 of P.D. No. 957[28] provides that the seller shall register the contracts to sell with
the Register of Deeds of Quezon City.  Thus, it is Garcia’s responsibility as seller to
register the contracts and petitioner should not blame private respondents for not doing
so.  As we have said earlier, considering petitioner’s negligence in ascertaining the
existence or absence of authority from HLURB for Garcia/TransAmerican to mortgage the
subject lots, petitioner cannot claim to be an innocent purchaser for value and in good
faith.  Petitioner is bound by private respondents’ contracts to sell executed with
Garcia/TransAmerican.

The last paragraph of Section 18 of P.D. No. 957 provides that respondents who have not
yet paid in full have the option to pay their installment for the lot directly to the mortgagee
(petitioner) who is required to apply such payments to the corresponding mortgage
indebtedness secured by the particular lot or unit being paid for, with a view to enabling
said buyer to obtain title over the lot or unit promptly after full payment thereof.  Thus,
petitioner is obliged to accept the payment of remaining unpaid amortizations, without
prejudice to petitioner bank’s seeking relief against the subdivision developer.

In the present case, private respondents, in their complaint, alleged that the mortgage was
constituted without the prior written approval of the HLURB which is in violation of Section
18 of P.D. No. 957.  Petitioner’s admission that it granted and released the loan without
notifying the HLURB because of its belief that it was not necessary to do so, is fatal to
petitioner’s defense.  As a consequence thereof, the mortgage constituted in favor of
petitioner can be declared invalid as against private respondents even without the
presence of Garcia/TransAmerican.  It is worthy to mention that the assailed decision was
rendered merely against petitioner and had not made any pronouncement as to
Garcia/TransAmerican’s liability to private respondents for the non-completion of the
projects; or to herein petitioner, as mortgagee.

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