FIRST DIVISION

[G.R. No. 156033. October 20, 2005.]

EXPRESSCREDIT * FINANCING CORPORATION, petitioner, vs . SPS.

MORTON AND JUANITA VELASCO , respondents.

DECISION

QUISUMBING , J : p

Before us is a Petition for Review on Certiorari under Rule 45 appealing the

Decision 1 dated August 20, 2002 and the Resolution 2 dated November 12, 2002 of the
Court of Appeals in CA-G.R. CV No. 56491, entitled "Juanita Velasco v. Sps. Jesus V.
Garcia." The assailed Decision reversed the Decision of the Regional Trial Court of Quezon
City, Branch 101, in Civil Case No. Q-90-7037, while the assailed Resolution denied
petitioner's Motion for Reconsideration.
The antecedent facts are as follows:
On May 25, 1988, 3 respondents purchased on installment, from spouses Jesus and
Lorelei Garcia ("Garcia spouses"), a house and lot in Quezon City, covered by Transfer
Certificate of Title No. 3250 in the name of Jesus Garcia.
In July 1988, 4 a Deed of Absolute Sale 5 was executed whereby the Garcia spouses
bound themselves to deliver the title of the property purchased, free from all liens and
encumbrances within 15 days from full payment. Respondents were thereafter informed
by the Garcia spouses that since the house on the property was still under construction,
the lot was still covered by the mother title and had no separate title as yet. They promised
to give the title after the construction was completed.
In August 1988, the keys to the property were delivered to the respondents. They
moved in, applied for a telephone connection, and insured the house. When respondents
followed up on the title, the Garcia spouses told them that since the Quezon City Hall was
razed by a re in June, the title had to be reconstituted, so their separate title could not yet
be delivered to them. Because the Garcia spouses would not deliver the title despite
repeated demands, respondents went to the Register of Deeds in Quezon City and
discovered that the Garcia spouses had mortgaged the property to petitioner,
Expresscredit Financing Corporation, for P250,000 on June 15, 1989, or more than a year
after the property was sold to them.
On October 23, 1990, the respondents led a case for Quieting of Title and Speci c
Performance against the Garcia spouses before the court a quo, whereby they caused
registration of a notice of lis pendens on the title, attaching thereto a copy of their
complaint stating that they have been the owners of the said property since May 25, 1988.
The Garcia spouses were subsequently declared in default for failing several times to
appear in court despite notice.
On October 7, 1992, petitioner foreclosed on the property in de ance of the notice
of lis pendens and the Writ of Preliminary Injunction issued by the lower court, enjoining
CD Technologies Asia, Inc. © 2018 cdasiaonline.com
 petitioner from selling or in any manner disposing of the property without permission from
the court. Petitioner sold the property in a public auction where petitioner was the highest
bidder. Due to the failure of the Garcia spouses to redeem the property, petitioner
thereafter executed an A davit of Consolidation and secured Certi cate of Title No.
69049 in its name. TcSCEa

On March 1, 1996, the Regional Trial Court rendered its Decision, stating as follows:
Under the foregoing circumstances, there is no need for the defendant
corporation to go beyond the title itself because the title is in the name of
defendant Garcia and it was defendant Garcia who offered the title as collateral
to the loan agreement. But nonetheless, defendant corporation went beyond the
certi cate of title by conducting an [ocular] inspection of the property. Surely,
defendant corporation could never have accepted the property as a collateral to
the loan of defendant spouses Garcia had there been any knowledge of any
encumbrance over the same, much more that the title thereto had been
transferred and sold. The defendant corporation's failure to make further inquiry
apart from the ocular inspection, concerning the rights of herein plaintiffs who
were in possession of the property thru their caretakers is not fatal because it
relied on the title on the property which is in the name of Garcia and it was Garcia
himself who is the registered owner of the land and not someone else claiming
the right from Garcia.

Clearly then, under the foregoing circumstances, defendant [Expresscredit]

Financing Corporation is an innocent purchaser and is, therefore, in good faith.

The Court, however, recognized the rights pertaining to herein plaintiffs,

only said rights are subservient to that of defendant corporation. Plaintiffs, based
on the evidence, both testimonial and documentary, adduced in Court are likewise
considered as innocent purchasers of the subject property. Had they registered
the Deed of Sale executed between them and Spouses Garcia, they [would] have,
undoubtedly, a preferential right over the property.

Plaintiffs spouses [deserve] to be reimbursed of whatever amount they

have [spent] for the purchase of the property sold to them by the Garcia spouses.
Considering the predicament of herein plaintiffs, and the fact that they were the
rst to buy the properties, were it not for their failure to register the sale before the
Registry of Property, defendant corporation is hereby enjoined to REIMBURSE
plaintiffs of the amount spent for the purchase of the 37.50 square meters of a
parcel of residential land, Lot 6-B-1, Subdivision plan PSD 342248, situated in the
district of Diliman, Quezon City and formerly covered by TCT No. 3250 now TCT
No. 69049, Registry of Deeds, Quezon City, with right of recovery from co-
defendants, spouses Garcia.

WHEREFORE, premises above considered, the above-entitled case led

against defendant [Expresscredit] Financing Corporation is hereby ordered
DISMISSED for lack of merit.
Counterclaims led by defendant [Expresscredit] Financing Corporation
against herein plaintiffs are likewise ordered DISMISSED.

No pronouncement as to the costs of the suit. AEITDH

SO ORDERED. 6

The spouses Velasco, herein respondents, then led an appeal before the Court of
CD Technologies Asia, Inc. © 2018 cdasiaonline.com
 Appeals alleging that the court a quo erred in (1) not declaring Expresscredit Financing
Corporation as an incumbrancer in bad faith such that it did not acquire good title as
against them and (2) not incorporating in the dispositive portion of the decision, an order
to Expresscredit Financing Corporation to reimburse the money they paid.
The Court of Appeals reversed the Decision of the trial court as follows:
WHEREFORE , the Decision of the lower court is hereby REVERSED and
SET ASIDE . Accordingly:

1. Appellants Juanita and Morton Velasco are declared purchaser for

value and in good faith with respect to the subject property;

2. The Deed of Mortgage, Sheriff's Certi cate of Sale, A davit of

Consolidation in favor of appellee [Expresscredit], and the Transfer Certi cate of
Title No. 69049 in the name of [Expresscredit], are hereby declared of no force and
effect;

3. Defendants Jesus and Lorelei Garcia are hereby ordered to pay to

appellants Velasco the amount of P40,000 as moral damages, P15,000 as
attorney's fees; and P10,000 as litigation expenses.
Costs against appellee.

SO ORDERED . 7

Before us, petitioner raises the following issues:

I. THE APPELLATE COURT COMMITTED GRAVE ERROR IN REVERSING THE
DECISION OF THE LOWER COURT.

II. THE APPELLATE COURT COMMITTED GRAVE ABUSE OF DISCRETION

AND ERROR IN HOLDING SUPREME, AN UNREGISTERED DEED OF
ABSOLUTE SALE OVER A REGISTERED REAL ESTATE MORTGAGE.

III. THE APPELLATE COURT ERRED IN VOIDING THE SALE ON PUBLIC

AUCTION AS A RESULT OF THE EXTRA JUDICIAL PETITION FOR
FORECLOSURE OF MORTGAGE. 8

The main issue is, Who has preferential right over the property, the respondents who
acquired it through prior purchase or the petitioner who acquired the same in a foreclosure
sale as the highest bidder?
Petitioner alleges that this is a clear case of a double sale. The rst sale is the
unregistered sale of the property covered by TCT No. 3250 by the Garcia spouses to the
respondents; the second is the sale during the foreclosure proceedings by the Ex-O cio
Sheriff in favor of the petitioner as the winning bidder. HDAECI

Article 1544 of the Civil Code is the rule on double sale. It provides:
xxx xxx xxx
Should it be immovable property, the ownership shall belong to the person
acquiring it who in good faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person
who in good faith was rst in the possession; and, in the absence thereof, to the
person who presents the oldest title, provided there is good faith.
CD Technologies Asia, Inc. © 2018 cdasiaonline.com
 An "innocent purchaser for value" or any equivalent phrase shall be deemed to
include, under the Torrens System, the innocent lessee, mortgagee, and other
encumbrancer for value. 9
I n Bautista v. Court of Appeals , 1 0 we held that where the thing sold twice is an
immovable, the one who acquires it and first registers it in the Registry of Property, in good
faith, shall be the owner.
Who then can be considered a purchaser in good faith?
In the early case of Leung Yee v. F.L. Strong Machinery Co. and Williamson , 11 we
explained good faith in this wise:
One who purchases real estate with knowledge of a defect or lack of title in
his vendor cannot claim that he has acquired title thereto in good faith as against
the true owner of the land or of an interest therein; and the same rule must be
applied to one who has knowledge of facts which should have put him upon such
inquiry and investigation as might be necessary to acquaint him with the defects
in the title of his vendor. 1 2

Good faith, or the want of it, is capable of being ascertained only from the acts of
one claiming its presence, for it is a condition of the mind which can only be judged by
actual or fancied token or signs. 1 3
As shown by the evidence, the property had already been sold by the Garcia spouses
to the respondents on May 25, 1988. The respondents immediately took possession,
applied for a telephone line, and insured the property with Pioneer Insurance in September
1988. When the same land was mortgaged by the Garcia spouses, respondents have been,
since May 25, 1988 in actual, physical, continuous and uninterrupted possession. SDHETI

Petitioner justi es its acquisition of the property by saying that when it was
mortgaged, the previous sale of the land was not annotated on the title and so its
purchase was in good faith. To ful ll the requirement of good faith, it is imperative for a
mortgagee of the land, in the possession of persons not the mortgagor, to inquire and
investigate into the rights or title of those in possession. It is true that a person dealing
with the owner of registered land is not bound to go beyond the certi cate of title. He may
rely on the notices of the encumbrances on the property annotated on the certi cate of
title or absence of any annotation. However, we note that the Garcia spouses are unlike
other mortgagors. They are in the business of constructing and selling townhouses and
are past masters in real estate transactions. Further, petitioner is in the business of
extending credit to the public, including real estate loans. In both these businesses, it
devolves upon both, greater charge than ordinary buyers or encumbrancers for value, who
are not in such venture. It is standard in their business, as a matter of due diligence 1 4
required of banks and nancing companies, to ascertain whether the property being
offered as security for the debt has already been sold to another to prevent injury to prior
innocent buyers. They also have the resources to ascertain any encumbrances over the
properties they are dealing with.
According to respondents' witness, Conchita Cotoner, on the second week of June
1989, two credit investigators of petitioner visited the subject property to investigate
concerning the occupants on the property. They were promptly informed by the witness,
who was the caretaker of the property, that the same had been sold to respondents by the
Garcia spouses in May of 1988. Clearly, petitioner, through its agents, had been informed
CD Technologies Asia, Inc. © 2018 cdasiaonline.com
 of the earlier sale of the subject property to the respondents. Since the Garcia spouses no
longer had the right to alienate the property, no valid mortgage was ever constituted on it.
1 5 Since the mortgage contract was void, the foreclosure of the property was ineffectual
as well. 1 6 Sadly, petitioner, despite having knowledge of the unregistered sale still
accepted the mortgage and to our mind, in bad faith, purchased the same at the
foreclosure sale.
A purchaser cannot close his eyes to facts which should put a reasonable man upon
his guard and claim that he acted in good faith under the belief that there was no defect in
the title of the vendor. His mere refusal to believe that such defect exists, or his willful
closing of his eyes to the possibility of the existence of a defect in his vendor's title, will
not make him an innocent purchaser for value, if it afterwards develops that the title was in
fact defective, and it appears that he had such notice of the defect as would have led to its
discovery had he acted with that measure of precaution which may reasonably be required
of a prudent man in a like situation. Good faith or the lack of it, is a question of intention;
but in ascertaining the intention, courts are necessarily controlled by the evidence as to the
conduct and outward acts by which alone the inward motive may, with safety, be
determined. 1 7
Indeed, where the land sold in auction sale was registered under the Torrens
System, the purchaser at the execution sale acquired such rights, title and interest of the
judgment debtor as appearing on the certi cate of title issued on the property, subject to
no liens, encumbrances or burdens that were not noted thereon. Petitioner's claim that it
purchased the property at an auction sale is of no moment. In this case, particular
circumstances constrain us to rule that petitioner was neither a mortgagee nor a
purchaser in good faith and as such, could not acquire good title to the property as against
the former transferee. 1 8
WHEREFORE, the assailed Decision dated August 20, 2002 and Resolution dated
November 12, 2002 of the Court of Appeals in CA-G.R. CV No. 56491 are AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., Ynares-Santiago, Carpio and Azcuna, JJ., concur.

Footnotes
* Sometimes "Express Credit" in the records.
1. Rollo, pp. 22-32. Penned by Associate Justice Romeo A. Brawner, with Associate
Justices Jose L. Sabio, Jr., and Mario L. Guariña III concurring.
2. Id. at 33-34.
3. Records, pp. 125-127.
4. CA Decision in CA-G.R. CV No. 56491, Rollo, p. 28.

5. Records, pp. 139-141.

6. Records, pp. 347-348.
7. Rollo, p. 31.
8. Id. at 14-15.
CD Technologies Asia, Inc. © 2018 cdasiaonline.com
 9. NARCISO PEÑA, ET AL., REGISTRATION OF LAND TITLES AND DEEDS 145-146 (1994).

10. G.R. No. 106042, 28 February 1994, 230 SCRA 446, 454.
11. No. 11658, 15 February 1918, 37 Phil. 644.
12. Id. at 651.
13. Id. at 652.
14. See Agag v. Alpha Financing Corporation, G.R. No. 154826, 31 July 2003, 407 SCRA
602, 611.

15. CIVIL CODE, Art. 2085. The following requisites are essential to the contracts of pledge
and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal
of their property, and in the absence thereof, that they be legally authorized for the
purpose.
xxx xxx xxx

16. Puerto v. Court of Appeals, G.R. No. 138210, 6 June 2002, 383 SCRA 185, 201.
17. Supra, note 11 at 651.
18. See William H. Anderson & Co. v. Garcia, No. 42897, 27 July 1937, 64 Phil. 506.

CD Technologies Asia, Inc. © 2018 cdasiaonline.com