Equitable Mortgage VS Absolute Sale Protecting Property Rights IN Disguised Transactions

The Supreme Court's 2007 ruling in Mercado v. Allied Banking Corporation (G.R. No. 171460) clarifies when a mortgage over another person's property can be invalidated. The case involved a wife's property mortgaged by her husband without proper authority, leading to foreclosure. The Court's decision underscores that banks must exercise higher diligence when dealing with agents, and that a special power of attorney (SPA) must be strictly construed.

The Facts of the Case

Perla N. Mercado owned several properties. In 1992, she executed a Special Power of Attorney in favor of her husband, Julian, authorizing him to sell, alienate, or mortgage specific properties enumerated in the document. One entry referred to a property covered by TCT No. RT-106338, described as registered with the Registry of Deeds of Pasig (now Makati).

In December 1996, Julian obtained a loan of P3 million from Allied Banking Corporation, secured by a real estate mortgage over a property covered by TCT No. RT-18206 (106338), registered with the Registry of Deeds of Quezon City. He obtained an additional P5 million loan in February 1997 using the same property as security.

Julian defaulted, and the bank foreclosed on the property. Perla's heirs sued to annul the mortgage, arguing that the SPA did not cover the Quezon City property and that Perla had already revoked the SPA in 1993.

The Issue: Was the Mortgage Valid?

The central question was whether Julian had authority to mortgage the subject property. The SPA enumerated specific properties, and the Quezon City property did not match any description. The bank argued that the property referred to in the SPA and the mortgaged property were one and the same, and that the discrepancy was merely a clerical error.

The Court rejected this argument. It found no evidence—such as certifications from the Registries of Deeds or copies of the titles—to prove that the two properties were identical. The SPA's language was clear and left no room for interpretation.

Strict Construction of Powers of Attorney

The Court emphasized that a power of attorney must be strictly construed. An agent may only exercise powers expressly granted in the instrument and cannot go beyond them. As the Court quoted from the commentaries of Manresa, vague or general language cannot be used to confer authority to alienate or encumber property; such authority must be set down in the most formal and explicit terms.

Because the SPA did not clearly include the Quezon City property, Julian acted without authority when he mortgaged it. The resulting mortgages were deemed unenforceable under Article 1403(1) of the Civil Code—not void, but contracts that cannot be enforced unless ratified by the principal.

The Bank Was Not a Mortgagee in Good Faith

The bank claimed it exercised due diligence before granting the loans. The Court disagreed. While a person dealing with registered land generally need not look beyond the Torrens title, this rule does not apply when facts should put a reasonable person on guard.

Here, the bank dealt not with the registered owner but with her agent. The Court cited Abad v. Guimba: one who deals with someone who is not the registered owner must examine not only the certificate of title but all factual circumstances to determine if there are flaws in the transferor's authority.

The Court also applied Cruz v. Bancom Finance Corporation, which holds that banks are expected to exercise greater care and prudence than ordinary individuals. The bank's failure to verify the discrepancy in the title numbers and its disregard of Perla's letter to the Registry of Deeds—notifying it of the SPA's revocation—belied its claim of good faith.

Practical Takeaways

• SPAs must be explicit. An agent's authority to mortgage or sell real property must be clearly stated in the SPA. Vague descriptions or clerical errors can invalidate transactions.
• Banks must verify authority. Financial institutions dealing with agents must scrutinize the SPA and the property's title. Failure to do so can result in losing the collateral.
• Revocation matters. A principal may revoke an SPA at any time. Notifying the Registry of Deeds of the revocation can protect against unauthorized transactions.
• Unenforceable vs. void. Contracts entered into without authority are unenforceable, not automatically void. The principal may still ratify them, but until then, they cannot be enforced in court.
• Know the property. Always confirm that the property described in the SPA matches the title offered as security, including the registry where it is registered.

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