Mercado v.

Allied Banking Corporation

G.R. No. 171460
July 24, 2007
Chico-Nazario, J.

FACTS: Petitioners are heirs of Perla N. Mercado who owned several pieces of real
property situated in different provinces of the Philippines. Respondent, on the other hand,
is a banking corporation duly authorized as such under the Philippine laws.

Perla executed a Special Power of Attorney (SPA) in favor of her husband Julian
D. Mercado on May 28, 1992 over several pieces of real property registered under her
name. The SPA executed by Perla specified the particular properties over which his
husband is authorized to sell, alienate, mortgage, lease, deal and otherwise exercise any
or all acts of strict dominion or ownership.

On December 1996, Julian obtained a loan obtained a loan from the respondent in
the amount of ₱3,000,000.00, secured by real estate mortgage constituted on TCT No.
RT-18206 (106338), which covers a parcel of land registered with the Registry of Deeds of
Quezon City.

Julian obtained an additional loan from the respondent in the sum of ₱5,000,000.00
with the same property as security.

It appears, however, that there was no property identified in the SPA as TCT No.
RT – 18206 (106338) and registered with the Registry of Deeds of Quezon City. What was
identified in the SPA instead was the property covered by TCT No. RT-106338 registered
with the Registry of Deeds of Pasig.

Julian defaulted in the payment of his obligation. Thus, respondent initiated extra-
judicial foreclosure proceedings over the subject property (Pasig property) which was
subsequently sold at public auction wherein the respondent was declared as the highest
bidder.

Petitioners instituted an action for the annulment of REM over the said property on
the ground that the same was not covered by the SPA and that the SPA was revoked by
Perla on March 10, 1993 or prior to the date by which Julian obtained a loan from the
respondent. Petitioner likewise alleged that Perla notified the Registry of Deeds of Quezon
City that any attempt to mortgage or sell the subject property must be with her full consent.

On the other hand, it is respondent’s contention that the SPA in favor of Julian
included the subject property. According to respondent, the subject property was
purportedly registered previously under TCT No. T-106338, and was only subsequently
reconstituted as TCT RT-18206 (106338). Respondent explained that the discrepancy in
the designation of the Registry of Deeds in the SPA was merely an error that must not
prevail over the clear intention of Perla to include the subject property in the said SPA.
 The RTC rendered a Decision declaring the REM constituted over the subject
property null and void, for Julian was not authorized by the terms of the SPA to mortgage
the same. The court a quo likewise ordered that the foreclosure proceedings and the
auction sale conducted pursuant to the void REM, be nullified.

The Court of Appeals, however, reversed the RTC Decision and upheld the validity
of the REM constituted over the subject property on the strength of the SPA. The appellate
court declared that Perla intended the subject property to be included in the SPA she
executed in favor of Julian, and that her subsequent revocation of the said SPA, not being
contained in a public instrument, cannot bind third persons.

ISSUES: (1) Whether or not there was a valid mortgage constituted over the property;

(2) Whether or not there was a valid revocation of the SPA; and

(3) Whether or not the respondent was a mortgagee in good faith.

HELD:

Anent the first issue, the Court ruled that there was no valid mortgage constituted
over the subject property.

Art. 2085 of the New Civil Code provides for the requisites for a mortgage to be
valid, thus: (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;
and (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.

In the case at bar, the SPA which is the source of power of Julian to mortgage the
property registered in the name of Perla is specific as to the particular properties over
which Julian may exercise such powers. Nowhere is it stated in the SPA that Julian’s
authority extends to the subject property covered by TCT No. RT – 18206 (106338)
registered with the Registry of Deeds of Quezon City. Consequently, the act of Julian of
constituting a mortgage over the subject property is unenforceable for having been done
without authority.

Respondent argues that there is valid mortgage constituted over the property
inasmuch as it was the intention of Perla to include such property in the SPA. The Court,
however, gives no merit to such contention. The Court ruled that there was nothing in the
language of the SPA from which it be could deduced that Perla intended to include the
subject property therein. In cases where the terms of the contract are clear as to leave no
room for interpretation, resort to circumstantial evidence to ascertain the true intent of the
parties, is not countenanced.

Equally relevant is the rule that a power of attorney must be strictly construed and
pursued. The instrument will be held to grant only those powers which are specified
therein, and the agent may neither go beyond nor deviate from the power of attorney.
 With respect to the second issue, the Court ruled that there was a valid revocation
of the SPA.

In this case, the revocation of the agency or Special Power of Attorney is

expressed and by a public document executed on March 10, 1993 The Register of Deeds
of Quezon City was even notified that any attempt to mortgage or sell the property covered
by TCT No. [RT-18206] 106338 must have the full consent of Perla.

The non-annotation of the revocation of the Special Power of Attorney on TCT No.
RT-18206 is of no consequence as far as the revocation’s existence and legal effect is
concerned since actual notice is always superior to constructive notice. The actual notice
of the revocation relayed to defendant Registry of Deeds of Quezon City is not denied by
either the Registry of Deeds of Quezon City or the defendant Bank.

As to the last issue, the Court ruled that respondent is not a mortgagee in good
faith.

The palpable difference between the TCT numbers referred to in the real estate
mortgages and Julian’s SPA, coupled with the fact that the said TCTs are registered in the
Registries of Deeds of different cities, should have put respondent on guard. Respondent’s
claim of prudence is debunked by the fact that it had conveniently or otherwise overlooked
the inconsistent details appearing on the face of the documents, which it was relying on for
its rights as mortgagee, and which significantly affected the identification of the property
being mortgaged.

The Court ruled further that while it is true that a person dealing with registered
lands is not required to inquire further than what the Torrens title on its face indicates, it is
likewise a settled rule that a purchaser or mortgagee cannot close his eyes to facts which
should put a reasonable man on his guard, and then claim that he acted in good faith
under the belief that there was no defect in the title of the vendor or mortgagor.

Likewise, the Court ruled that as a banking institution, jurisprudence stringently

requires that respondent should take more precautions than an ordinary prudent man
should, to ascertain the status and condition of the properties offered as collateral and to
verify the scope of the authority of the agents dealing with these. Had respondent acted
with the required degree of diligence, it could have acquired knowledge of the letter sent
by Perla to the Registry of Deeds of Quezon City. The failure of the respondent to
investigate into the circumstances surrounding the mortgage of the subject property belies
its contention of good faith.

The Court, however, explained that the REM is not void but rather unenforceable, it
having been entered into by Julian without authority. An unenforceable contract may be
ratified, expressly or impliedly, by the person in whose behalf it has been executed, before
it is revoked by the other contracting party. Thus, without Perla’s ratification of the same,
the real estate mortgages constituted by Julian over the subject property cannot be
enforced by any action in court against Perla and/or her successors in interest.