Can a Trustee Mortgage Property Without the Owner's Consent? Supreme Court Says No

The Supreme Court's 2017 ruling in Spouses Chua v. United Coconut Planters Bank (G.R. No. 215999) clarifies a fundamental principle in Philippine property law: a trustee who holds property for the benefit of another cannot mortgage that property without the owner's explicit consent. The case also serves as a warning to banks that fail to exercise due diligence when accepting mortgaged properties.

The Facts of the Case

In 1997, the Spouses Chua and other petitioners entered into a Joint Venture Agreement with Gotesco Properties, Inc. for the development of their 44-hectare property in Lucena City. As part of this arrangement, several parcels of land were transferred to Revere Realty and Development Corporation, a company controlled by Jose Go.

However, two deeds of trust dated April 30, 1998 confirmed that Revere did not actually pay for these properties. The deeds expressly acknowledged that the petitioners remained the absolute owners and that Revere held the properties merely as trustee. Critically, the deeds contained an express prohibition: Revere could not "dispose of, sell, transfer, convey, lease or mortgage" the properties without the written consent of the trustors.

On March 21, 2000, the petitioners and UCPB entered into a Memorandum of Agreement consolidating the petitioners' outstanding obligations. Unknown to the petitioners, on the same day, Jose Go — acting for Revere — executed a separate real estate mortgage in favor of UCPB covering the trust properties. This mortgage was meant to secure not only the petitioners' obligations but also Jose Go's personal loans.

When UCPB foreclosed on the properties, it applied approximately P75 million of the P227.7 million proceeds to settle Revere's and Jose Go's obligations — before fully satisfying the petitioners' own debts.

The Legal Issue

The central question was whether the Revere REM was valid despite the fact that Revere, as trustee, mortgaged the properties without the petitioners' consent, and whether UCPB could apply the foreclosure proceeds to Jose Go's obligations before settling the petitioners' debts.

The Supreme Court's Ruling

The Supreme Court ruled in favor of the petitioners, declaring the Revere REM null and void. The Court emphasized several key points:

First, the deeds of trust were never cancelled or rescinded. They remained the controlling documents regarding the properties. Since Revere was merely a trustee, it had no authority to mortgage properties it did not own.

Second, the Court found no evidence that the petitioners ever consented to the mortgage. The deeds of trust expressly required written consent from the trustors before any mortgage could be executed. Revere's act of mortgaging the properties was a clear breach of its obligations as trustee.

Third, the Court rejected UCPB's claim that it was unaware of the trust arrangement. UCPB's own vice president had written to the petitioners acknowledging that the bank would secure the necessary titles from Jose Go. As a banking institution, UCPB was expected to exercise greater care and due diligence in its dealings. By approving the loan without verifying the true ownership of the mortgaged properties, UCPB was deemed a mortgagee in bad faith.

Fourth, the Court held that the proceeds of the foreclosure should have been applied first to the petitioners' entire outstanding obligation. Only any excess should have been applied to Revere's and Jose Go's obligations.

Practical Takeaways

• Trustees have no authority to mortgage trust property without the owner's written consent. Any mortgage executed without such consent is void.

• Banks must verify ownership before accepting mortgaged properties. A bank that fails to conduct proper due diligence risks being declared a mortgagee in bad faith.

• Express prohibitions in contracts are enforceable. The deeds of trust in this case contained an explicit prohibition against mortgaging the properties. Courts will uphold such provisions.

• Foreclosure proceeds must be applied to the mortgagor's own obligations first. Creditors cannot divert proceeds to settle the debts of third parties without clear contractual authority.

• Documentation matters. Property owners should ensure that trust arrangements are properly documented and that any dealings with their property require their explicit written consent.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.