YBC Bank extended a loan of PhP 50 million to Mr.

Yamato secured by a real estate mortgage (REM) on

a large tract of land. The covering Transfer Certificate of Title (TCT) of the property mortgaged did not
indicate any encumbrance or lien on it, and the bank was able to obtain a certified true copy of the TCT
from the Register of Deeds showing that the owner's copy submitted to the bank was a genuine title.
The Loan Agreement provided an escalation clause which stated that, at the anniversary date of the
loan, YBC Bank was granted the option to increase the interest rate whenever there would be an
increase in the Bangko Sentral ng Pilipinas' prevailing rates. Three years later, Mr. Yamato received a
formal notice from YBC Bank raising the interest rate of the loan based on the escalation clause provided
for in the Loan Agreement. Mr. Yamato refused to pay based on the increased interest rate that was
effected without his consent. YBC Bank insists on the binding effect of the escalation clause appearing
on their Loan Agreement.
Mr. Yamato subsequently defaulted on the loan and vanished. Thus, YBC Bank extrajudicially foreclosed
on the REM, and was the highest bidder at the public auction sale. It was only then that the bank
determined that there were actually two separate TCTs issued for the property and one of which was
in the name of Mr. Yamsuan who occupied the property after having bought it earlier from Mr. Yamato.
(2018)

24. Is YBC Bank a mortgagee buyer in good faith? Is it preferred over Mr. Yamsuan?

Yes. YBC Bank is a mortgagee buyer in good faith.

The doctrine of "mortgagee in good faith" is based on the rule that all persons dealing with property
covered by a Torrens Certificate of Title are not required to go beyond what appears on the face of the title. In
the case of banks and other financial institutions, however, greater care and due diligence are required since
they are imbued with public interest, failing which renders the mortgagees in bad faith. Thus, before approving
a loan application, it is a standard operating practice for these institutions to conduct an ocular inspection of
the property offered for mortgage and to verify the genuineness of the title to determine the real owner thereof.
The apparent purpose of an ocular inspection is to protect the "true owner" of the property as well as innocent
third parties with a right, interest or claim thereon from a usurper who may have acquired a fraudulent
certificate of title thereto.

In this case, while Philbank failed to exercise greater care in conducting the ocular inspection of the
properties offered for mortgage, its omission did not prejudice any innocent third parties. Also, no amount of
diligence in the conduct of the ocular inspection could have led to the discovery of the sale of the property to
Mr. Yamsuan.
DMP Corporation (DMP) obtained a loan of P20 M from National Bank (NB) secured by a real estate
mortgage over a 63,380-square meter land situated in Cabanatuan City. Due to the Asian Economic
Crisis, DMP experienced liquidity problems disenabling it from paying its loan on time. For that reason,
NB sought the extrajudicial foreclosure of the said mortgage by filing a petition for sale on June 30,
2003. On September 4, 2003, the mortgaged property was sold at public auction, which was eventually
awarded to NB as the highest bidder. That same day, the Sheriff executed a Certificate of Sale in favor
of NB.
On October 21, 2003, DMP filed a Petition for Rehabilitation before the RTC. Pursuant to this, a Stay
Order was issued by the RTC on October 27, 2003.
On the other hand, NB caused the recording of the Sheriff’s certificate of Sale on December 3, 2003 with
the Register of Deeds of Cabanatuan City. NB executed an Affidavit of Consolidation of Ownership and
had the same annotated on the title of DMP. Consequently, the Register of Deeds cancelled DMP’s title
and issued a new title in the name of NB on December 10, 2003.
NB also filed on March 17, 2004 an Ex-Parte Petition for Issuance of Writ of Possession before the RTC
of Cabanatuan City. After hearing, the RTC issued on September 6, 2004 an Order directing the Issuance
of the Writ of Possession, which was issued on October 4, 2004. DMP claims that all subsequent actions
pertaining to the Cabanatuan property should have been held in abeyance after the Stay Order was
issued by the rehabilitation court. Is DMP correct?

NO. DMP is not correct. In the given case, the foreclosure of the mortagage and the
issuance of the certificate in favor of the mortgagee preceded the issuance of the Stay
Order. Thus, actions subsequent to the issuance of the Stay Order were not affected by
the said Stay Order. Consequently, the mortgagee bank becomes the absolute owner of
the property if the redemption period has expired without the mortgagor redeeming the
foreclosed property. Hence, notwithstanding the Stay Order, the writ of possession issued
in favor of the mortgagee bank is valid.