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1/3/2018 The Trust Guru - Articles in TODAY #67

When lending becomes a question of good

Article published in the April 23, 2002 issue of TODAY, Business

The business of lending is becoming more difficult these days not only
because the regulatory authorities, the Bangko Sentral ng Pilipinas and
the Security and Exchange Commission, have been tightening the screws
lately. It is also because the courts seem to be imposing on banks a
standard of good faith more stringent than before. This was the painful
lesson learned by The Malayan Bank (formerly Republic Planters Bank) in
the case it lost to the Lagramas on April 27, 2001 ( The Malayan Bank v
Lagrama, et al. G.R. 144884 ).

Sometime in 1987 when it decided on Saint Dominic Corp. v. Intermediate

Appellate Court , 151 SCRA 577, the Supreme Court had pronounced that
the foreclosure sale of mortgaged property retroacts to the date of the
registration of the mortgage. Moreover, a person who takes the mortgage
in good faith, and for valuable consideration which is the record showing
clear title to the mortgagor, will be protected against equitable claims on
the title in favor of third parties of which he had no actual or constructive

When the Republic Planters Bank (now The Malayan Bank) accepted a
mortgage on land to secure the debt of a certain Demetrio Llego in 1982,
it did not seem to know of the claim of Lagrama on the land. But because
it did not make the right moves after it became aware of the cloud on
Demetrio’s ownership, its rights as buyer in the subsequent foreclosure
sale was not protected by the ruling in Saint Dominic. It’s claim of good
faith was in effect undermined by subsequent acts that, in my view,
showed tints of negligence as well as opportunism.

The case started

innocently enough in
1976 when Demetrio,
together with his mother
and his siblings, inherited
from his father a parcel of
land located in Lucena
City. The heirs
apportioned the land
among themselves, but
did not execute the
proper extrajudicial
partition nor bring the
correct judicial action for
partition of the estate.
Hence, the land remained
in the name of Demetrio’s

Demetrio sold his portion

of the land to his uncle
Agustin Lagrama and
aunt Paz Abastillas on
installments. No deed of
sale was executed
because the land was still
in the father’s name, but
Agustin and Paz took
possession of the land.
Demetrio promised to
execute the appropriate
deed of absolute sale as
soon as the title of his
portion was issued in his

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Three years later,
Demetrio and his coheirs
executed an extrajudicial
partition of the estate. A
title was issued to
Demetrio for his share,
which had been
previously sold to Agustin
and Paz who had by then
fully paid. But Demetrio
did not transfer the title
to his uncle and aunt.
Instead, in 1982, through
his attorney-in-fact
Ceferino Tan, he
mortgaged the land to
Republic Planters Bank.
Demetrio failed to pay.
The property was
foreclosed with the bank
as highest bidder.
Demetrio failed to

In 1983 the Lagramas

went to court to compel
the execution of a deed
of sale in their favor.
Impleaded, in addition to
Demetrio, were Republic
Planters Bank and the
attorney-in-fact, Tan.
Demetrio did not answer
and was defaulted. The
bank claimed that it was
a mortgagee in good
faith. Tan said he only
acted to accommodate
Demetrio. The court
ordered Demetrio to
execute the deed of
absolute sale in favor of
the Lagramas.

Republic Planters Bank

appealed, but the appeal
was dismissed because
the appeal brief was not
filed on time. The
decision of the lower
court became final; but to
the court’s surprise, it
could not be executed
because while the case
was pending, Republic
Planters Bank foreclosed
on the mortgage.
Furthermore, the bank
emerged as the highest
bidder and consolidated
the title to itself after
Demetrio failed to

Clearly, it acquired the

land knowing of the
accusation that the land
Demetrio mortgaged to
the bank was no longer
his. Since the bank
acquired, from Demetrio,
title to the land during
the pendency of the case,

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it merely stepped into
Demetrio’s shoes.

The Supreme Court took

pains to explain why the
mortgagee in the case of
Saint Dominic was
protected by his good
faith and Republic
Planters Bank was not.
The crucial difference is
that in Saint Dominic, the
mortgagee and its
subsequent transferees
did not have actual or
constructive knowledge of
the flaw in the
mortgagor’s title all the
way to the time the
property was transferred
to them. In the case of
Republic Planters Bank, it
became aware one year
after the mortgage that
the Lagramas were
claiming the property.
The bank was impleaded
in the case. The bank lost
in the lower court and
also lost its appeal for, of
all reasons, failure to file
an appeal brief on time.

Whatever benefit the

bank could have derived
from its good faith at the
inception of the mortgage
was forfeited when it
failed to pursue its appeal
and tried to short-circuit
the judicial process by
foreclosing on the
mortgage, buying the
property and
consolidating title on
itself and, to boot,
without telling the courts
about it. Such acts are
not consistent with being
in good faith. For good
faith to be a good
defense, one must be
really good and remain
consistently good.

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