G.R. No.

125585

June 8, 2005

HEIRS OF EDUARDO MANLAPAT, represented by GLORIA MANLAPAT-BANAAG and LEON M.

The controversy involves Lot No. 2204, a parcel of land with an area of 1,058 square meters,
located at Panghulo, Obando, Bulacan. The property had been originally in the possession of
Jose Alvarez, Eduardos grandfather, until his demise in 1916. It remained unregistered until 8
October 1976 when OCT No. P-153(M) was issued in the name of Eduardo pursuant to a free
patent issued in Eduardos name3 that was entered in the Registry of Deeds of Meycauayan,
Bulacan.4 The subject lot is adjacent to a fishpond owned by one Ricardo Cruz (Ricardo),
predecessor-in-interest of respondents Consuelo Cruz and Rosalina Cruz-Bautista (Cruzes).

Thereafter, two separate contract of sale was entered into by Eduardo with Ricardo, constituting
the area of 603 square meters of the lot, the first 503 square meters was sold on 19 December
1954, before it was titled, while the succeeding 50 square meters was sold on 18 March 1981,
after it was titled.
In December 1981, Leon Banaag, Jr. (Banaag), as attorney-in-fact of his father-in-law Eduardo,
executed a mortgage with the Rural Bank of San Pascual, Obando Branch (RBSP),
for P100,000.00 with the subject lot as collateral. Banaag deposited the owners duplicate
certificate of OCT No. P-153(M) with the bank.
Upon learning of their right to the subject lot, the Cruzes immediately tried to confront petitioners
on the mortgage and obtain the surrender of the OCT. The Cruzes, however, were thwarted in
their bid to see the heirs. On the advice of the Bureau of Lands, NCR Office, they brought the
matter to the barangay captain of Barangay Panghulo, Obando, Bulacan. During the hearing,
petitioners were informed that the Cruzes had a legal right to the property covered by OCT and
needed the OCT for the purpose of securing a separate title to cover the interest of Ricardo.
Petitioners, however, were unwilling to surrender the OCT.
Secured copy of OCT from RBSP. Made a photocopy of the same OCT. Showed the copy to the
Registry of Deeds which advice them to make a subdivision plan to segregate their interest in the
whole property.
They asked the opinion of Land Registration Officer, who agreed with the advice given by the
Registry of Deeds. Made a subdivision plan with the help of 2 geodetic engineers. Presented the
plan to the Land Management Bureau who approved of the same plan.
After the Cruzes presented the owners duplicate certificate, along with the deeds of sale and the
subdivision plan, the Register of Deeds cancelled the OCT and issued in lieu thereof TCT No. T9326-P(M) covering 603 square meters of Lot No. 2204 in the name of Ricardo and TCT No. T9327-P(M) covering the remaining 455 square meters in the name of Eduardo.
On 9 August 1989, the Cruzes went back to the bank and surrendered to Salazar TCT No. 9327P(M) in the name of Eduardo and retrieved the title they had earlier given as substitute collateral.

After securing the new separate titles, the Cruzes furnished petitioners with a copy of TCT No.
9327-P(M) through the barangay captain and paid the real property tax for 1989.
n October of 1989, Banaag went to RBSP, intending to tender full payment of the mortgage
obligation. It was only then that he learned of the dealings of the Cruzes with the bank which
eventually led to the subdivision of the subject lot and the issuance of two separate titles thereon.
In exchange for the full payment of the loan, RBSP tried to persuade petitioners to accept TCT
No. T-9327-P(M) in the name of Eduardo.
The trial court found that petitioners were entitled to the reliefs of reconveyance and damages.
On this matter, it ruled that petitioners were bona fide mortgagors of an unclouded title bearing no
annotation of any lien and/or encumbrance. This fact, according to the trial court, was confirmed
by the bank when it accepted the mortgage unconditionally on 25 November 1981. It found that
petitioners were complacent and unperturbed, believing that the title to their property, while
serving as security for a loan, was safely vaulted in the impermeable confines of RBSP. To their
surprise and prejudice, said title was subdivided into two portions, leaving them a portion of 455
square meters from the original total area of 1,058 square meters, all because of the fraudulent
and negligent acts of respondents and RBSP. The trial court ratiocinated that even assuming that
a portion of the subject lot was sold by Eduardo to Ricardo, petitioners were still not privy to the
transaction between the bank and the Cruzes which eventually led to the subdivision of the OCT
into TCTs No. T-9326-P(M) and No. T-9327-P(M), clearly to the damage and prejudice of
petitioners.
The CA reversed the RTC decision. The appellate court ruled that petitioners were not bona
fide mortgagors since as early as 1954 or before the 1981 mortgage, Eduardo already sold to
Ricardo a portion of the subject lot with an area of 553 square meters. This fact, the Court of
Appeals noted, is even supported by a document of sale signed by Eduardo Jr. and Engracia
Aniceto, the surviving spouse of Eduardo, and registered with the Register of Deeds of Bulacan.
The appellate court also found that on 18 March 1981, for the second time, Eduardo sold to
Ricardo a separate area containing 50 square meters, as a road right-of-way. Clearly, the OCT
was issued only after the first sale. It also noted that the title was given to the Cruzes by RBSP
voluntarily, with knowledge even of the banks counsel. Hence, the imposition of damages cannot
be justified, the Cruzes themselves being the owners of the property. Certainly, Eduardo misled
the bank into accepting the entire area as a collateral since the 603-square meter portion did not
anymore belong to him. The appellate court, however, concluded that there was no conspiracy
between the bank and Salazar.

Issue: W/N the mortgage of the entire property, with the inclusion of the disputed portion of Ricardos
interest, is valid
Held:
A careful perusal of the evidence on record reveals that the Cruzes have sufficiently proven their claim of
ownership over the portion of Lot No. 2204 with an area of 553 square meters. The duly notarized
instrument of conveyance was executed in 1954 to which no less than Eduardo was a signatory. The
execution of the deed of sale was rendered beyond doubt by Eduardos admission in his Sinumpaang
Salaysay dated 24 April 1963.35These documents make the affirmance of the right of the Cruzes
ineluctable.
Registration is not a requirement for validity of the contract as between the parties, for the effect of
registration serves chiefly to bind third persons. The principal purpose of registration is merely to notify
other persons not parties to a contract that a transaction involving the property had been entered into.
Where the party has knowledge of a prior existing interest which is unregistered at the time he acquired a

right to the same land, his knowledge of that prior unregistered interest has the effect of registration as to
him.
Further, the heirs of Eduardo cannot be considered third persons for purposes of applying the rule. The
conveyance shall not be valid against any person unless registered, except (1) the grantor, (2) his heirs
and devisees, and (3) third persons having actual notice or knowledge thereof. Not only are petitioners
the heirs of Eduardo, some of them were actually parties to the Kasulatan executed in favor of Ricardo.
Thus, the annotation of the adverse claim of the Cruzes on the OCT is no longer required to bind the heirs
of Eduardo, petitioners herein.
The requirements of a valid mortgage are clearly laid down in Article 2085 of the New Civil Code, viz:
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.
Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property. (emphasis supplied)
For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof
as required by Article 2085 of the New Civil Code. The mortgagor must be the owner, otherwise the
mortgage is void. In a contract of mortgage, the mortgagor remains to be the owner of the property
although the property is subjected to a lien. A mortgage is regarded as nothing more than a mere lien,
encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right
or claim to the possession of the property. In this kind of contract, the property mortgaged is merely
delivered to the mortgagee to secure the fulfillment of the principal obligation. Such delivery does not
empower the mortgagee to convey any portion thereof in favor of another person as the right to dispose is
an attribute of ownership. The right to dispose includes the right to donate, to sell, to pledge or mortgage.
Thus, the mortgagee, not being the owner of the property, cannot dispose of the whole or part thereof nor
cause the impairment of the security in any manner without violating the foregoing rule. The mortgagee
only owns the mortgage credit, not the property itself.