THIRD DIVISION

[G.R. No. 147788. March 19, 2002.]

EDILBERTO CRUZ and SIMPLICIO CRUZ , petitioners, vs . BANCOM

FINANCE CORPORATION (NOW UNION BANK OF THE PHILIPPINES) ,
respondent.

Vicente H. Reyes for petitioners.

Macalino and Associates for private respondent.

SYNOPSIS

Petitioners, owners of a lot for sale, executed a simulated deed of sale in favor of
their close associate, Candelaria Sanchez, to enable the latter to obtain a bank loan in her
name using the petitioner's land as collateral. Candelaria thereafter executed a simulated
deed of sale of said lot in favor of Norma, who assumed Candelaria's obligation to pay the
purchase price of the lot within 6 months. Unknown to petitioners, title of the lot was
transferred in Norma's name and she was able to obtain a loan from Bancom in the
amount of P569,000 secured by a mortgage over the land. Upon Norma's failure to pay her
obligation, petitioners led a complaint for reconveyance of the lot. Bancom intervened in
the proceedings, claiming priority as mortgagee in good faith. The mortgaged lot was
subsequently foreclosed and Bancom was declared the highest bidder. The RTC decided
the case in petitioners' favor, ruling: that the contract of sale between petitioners and
Candelaria was absolutely simulated, consequently, the second contract of sale, that is,
between Candelaria and Norma, produced no legal effect; and that BANCOM, was not a
mortgagee in good faith because it should have exercised more prudence, even in dealing
with registered lands, for their business is one affected by public interest. The CA reversed
the decision on appeal. CA reversed the decision on appeal and held that BANCOM was a
mortgagee in good faith; ergo, it had a preferential right over the lot.
The Supreme Court set aside the CA decision and reinstated the decision of the RTC,
ruling: that the two deeds of sale were absolutely simulated, hence, null and void and they
did not convey any right that could ripen into valid titles; there being no valid mortgage,
there could be no valid foreclosure; that BANCOM cannot be considered as a mortgagee
or as a purchaser in good faith; and that this being so, petitioners would be in the same
position as they are still the owners of the property.

SYLLABUS

1. CIVIL LAW; LAND REGISTRATION; MORTGAGES; GREATER DEGREE OF

DILIGENCE EXPECTED OF MORTGAGEE BANK WHEN DEALING WITH REGISTERED
PROPERTY; CASE AT BAR. — Respondent was clearly wanting in the observance of the
necessary precautions to ascertain the aws in the title of Sulit and to examine the
condition of the property she sought to mortgage. It should not have simply relied on the
face of the Certi cate of Title to the property, as its ancillary function of investing funds
required a greater degree of diligence. Considering the substantial loan involved at the
time, it should have exercised more caution. Moreover, the subject property, being situated
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 in Bulacan, could have been easily and conveniently inspected by respondent. A person
who deliberately ignores a signi cant fact that would create suspicion in an otherwise
reasonable person is not an innocent purchaser for value. EHSADc

2. ID.; ID.; ID.; PRIOR REGISTRATION OF A LIEN CREATES A PREFERENCE; CASE

AT BAR. — Unless duly registered, a mortgage does not affect third parties like herein
petitioners, as provided under Section 51 of PD NO. 1529. . . . True, registration is not the
operative act for a mortgage to be binding between the parties. But to third persons, it is
indispensable. In the present case, the adverse claim and the notice of lis pendens were
annotated on the title on October 30, 1979 and December 10, 1979, respectively; the real
estate mortgage over the subject property was registered by respondent only on March
14, 1980. Settled in this jurisdiction is the doctrine that a prior registration of a lien creates
a preference. Even a subsequent registration of the prior mortgage will not diminish this
preference, which retroacts to the date of the annotation of the notice of lis pendens and
the adverse claim. Thus, respondent's failure to register the real estate mortgage prior to
these annotations, resulted in the mortgage being binding only between it and the
mortgagor, Sulit. Petitioners, being third parties to the mortgage, were not bound by it.
Contrary to respondent's claim that petitioners were in bad faith because they already had
knowledge of the existence of the mortgage in favor of respondent when they caused the
aforesaid annotations, petitioner Edilberto Cruz said that they only knew of this mortgage
when respondent intervened in the RTC proceedings.
3. ID.; REAL ESTATE MORTGAGE; VALIDITY; ONLY THE ABSOLUTE OWNER OF
THE PROPERTY CAN CONSTITUTE A VALID MORTGAGE ON IT; CASE AT BAR. — On the
question of who has a preferential right over the property, the long-standing rule, as
provided by Article 2085 of the Civil Code, is that only the absolute owner of the property
can constitute a valid mortgage on it. In case of foreclosure, a sale would result in the
transmission only of whatever rights the seller had over of the thing sold. In the instant
case, the two Deeds of Sale were absolutely simulated; hence, null and void. Thus, they did
not convey any rights that could ripen into valid titles. Necessarily, the subsequent real
estate mortgage constituted by Sulit in favor of respondent was also null and void,
because the former was not the owner thereof. There being no valid real estate mortgage,
there could also be no valid foreclosure or valid auction sale, either. At bottom, respondent
cannot be considered either as a mortgagee or as a purchaser in good faith. This being so,
petitioners would be in the same position as they were before they executed the simulated
Deed of Sale in favor of Sanchez. They are still the owners of the property.

DECISION

PANGANIBAN , J : p

An absolutely simulated contract of sale is void ab initio and transfers no ownership

right. The purported buyer, not being the owner, cannot validly mortgage the subject
property. Consequently, neither does the buyer at the foreclosure sale acquire any title
thereto.
Statement of the Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
assailing the March 30, 2001 Decision 1 of the Court of Appeals (CA) in CA-GR No. 58346.
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 The decretal portion of the challenged Decision reads as follows:
"WHEREFORE, upon the premises, the assailed Decision is REVERSED and
SET ASIDE. A new one is rendered declaring BANCOM's right to the subject land
as a purchaser in good faith and for value, and ordering the cancellation of the
Notice of Lis Pendens on TCT No. 248262-Bulacan. Without pronouncement as to
costs." 2

The Facts
The factual antecedents of the case are summarized by the Court of Appeals thus:
"Brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz, plaintiffs herein, were
the registered owners of a 339,335 square meter or 33.9335 hectare parcel of
agricultural land together with improvements located in Barangay Pulang Yantoc,
Angat, Bulacan covered by TCT No. 19587. Sometime in May 1978, defendant
Norma Sulit, after being introduced by Candelaria Sanchez to Fr. Cruz, offered to
purchase the land. Plaintiffs' asking price for the land was P700,000.00, but
Norma only had P25,000.00 which Fr. Cruz accepted as earnest money with the
agreement that titles would be transferred to Norma upon payment of the balance
of P675,000.00. Norma failed to pay the balance and proposed [to] Fr. Cruz to
transfer the property to her but the latter refused, obviously because he had no
reason to trust Norma. But capitalizing on the close relationship of Candelaria
Sanchez with the plaintiffs, Norma succeeded in having the plaintiffs execute a
document of sale of the land in favor of Candelaria who would then obtain a
bank loan in her name using the plaintiffs' land as collateral. On the same day,
Candelaria executed another Deed of Absolute Sale over the land in favor of
Norma. In both documents, it appeared that the consideration for the sale of the
land was only P150,000.00. Pursuant to the sale, Norma was able to effect the
transfer of the title to the land in her name under TCT No. T-248262.

"Evidence shows that aside from the P150,000.00, Candelaria undertook to

pay the plaintiffs the amount of P655,000.00 representing the balance of the
actual price of the land. In a Special Agreement dated September 1, 1978, Norma
assumed Candelaria's obligation, stipulating to pay the plaintiffs the said amount
within six months on pain of ne or penalty in case of non-ful llment. Unknown
to the plaintiffs, Norma managed to obtain a loan from Bancom in the amount of
P569,000.00 secured by a mortgage over the land now titled in her name.
"On account of Norma's failure to pay the amount stipulated in the Special
Agreement and her subsequent disappearance from her usual address, plaintiffs
were prompted to file the herein complaint for the reconveyance of the land.
"Norma led an Answer on February 11, 1980 but failed to appear in court
and was eventually declared in default. On May 20, 1980, Bancom led a motion
for leave to intervene which was granted by the trial court. In its Answer in
Intervention, Bancom claimed priority as mortgagee in good faith; and that its
contract of mortgage with Norma had been executed before the annotation of
plaintiffs' interest in the title.
"Meanwhile in the middle of 1980, Norma defaulted in her payment to the
Bank and her mortgage was foreclosed. At the subsequent auction sale, Bancom
was declared the highest bidder and was issued the corresponding certi cate of
sale over the land.

"On January 25, 1996, the trial court rendered the herein assailed Decision
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 in favor of the plaintiffs. It ruled that the contract of sale between plaintiffs and
Candelaria was absolutely simulated. Consequently, the second contract of sale,
that is, between Candelaria and Norma, produced no legal effect. As for Bancom,
the trial court held that the Bank was not a mortgagee in good faith thus it can
not claim priority of rights over plaintiffs' property." 3

Ruling of the Court of Appeals

In reversing the RTC, the CA held that the Deeds of Sale were valid and binding, not
simulated. Thus, the Contract of Mortgage between Sulit and respondent was likewise
valid.
Petitioners, the CA ruled, intended to be bound by the Contracts of Sale and
Mortgage, because they "did not seek to annul the same but instead executed a special
agreement to enforce payment of the balance of the price in the amount of P665,000.00."
4

Furthermore, it upheld respondent as a "mortgagee in good faith;" ergo, it had a

preferential right to the land.
Hence, this Petition. 5
Issues
In their Memorandum, petitioners raise the following issues for this Court's
consideration:
I
"Whether or not the Honorable Court of Appeals seriously erred when it held
that the petitioners intended to enter into a sale of the property in question and
that the declarations of Petitioner Fr. Edilberto Cruz in Court belied the court a
quo's finding that the Deeds of Sale in question were absolute simulations.
II
"Whether or not the Honorable Court of Appeals gravely erred when it ruled
that respondent bank was a mortgagee in good faith, despite the fact that
respondent Bancom was in truth and in fact a mortgagee in bad faith over the
subject property.
III

"Whether or not the Honorable Court of Appeals seriously erred when it

ruled that the face of the title [to] the property did not disclose any irregularity that
would arouse suspicion by respondent bank as to the condition of the subject
land despite the fact that questions and circumstances abound which would
render respondent bank not a mortgagee in good faith, and that the case of
Sunshine Finance Investment Corporation vs. Intermediate Appellate Court
applies to the instant case.

IV
"Whether or not the Honorable Court of Appeals gravely erred when it ruled
that respondent bank possesses a preferential right over petitioners on the subject
land as a mortgagee in good faith." 6

The above issues can be summed up into two: (1) the validity of the Deeds of Sale
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 and Mortgage and (2) the good faith of the mortgagee.
This Court's Ruling
The Petition is meritorious.
First Issue:
Validity of the Sale and the Mortgage
Petitioners claim that the Deed of Sale 7 they executed with Sanchez, as well as the
Deed of Sale 8 executed between Sanchez and Sulit, was absolutely simulated; hence, null
and void. On the other hand, echoing the appellate court, respondent contends that
petitioners intended to be bound by those Deeds, and that the real estate mortgage over
the subject property was valid.
As a general rule, when the terms of a contract are clear and unambiguous about the
intention of the contracting parties, the literal meaning of its stipulations shall control. But
if the words appear to contravene the evident intention of the parties, the latter shall
prevail over the former. 9 The real nature of a contract may be determined from the
express terms of the agreement, as well as from the contemporaneous and subsequent
acts of the parties thereto." 1 0
On the other hand, simulation takes place when the parties do not really want the
contract they have executed to produce the legal effects expressed by its wordings. 1 1
Simulation or vices of declaration may be either absolute or relative. Article 1345 of the
Civil Code distinguishes an absolute simulation from a relative one while Article 1346
discusses their effects, as follows:
"Art. 1345. Simulation of a contract may be absolute or relative. The
former takes place when the parties do not intend to be bound at all; the latter
when the parties conceal their true agreement.

"Art. 1346. An absolutely simulated contract is void. A relative

simulation, when it does not prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public order or public policy binds
the parties to their agreement."

In Rongavilla v. Court of Appeals , 1 2 we held that a deed of sale, in which the stated
consideration had not in fact been paid, was "a false contract"; that is "void ab initio."
Furthermore, Ocejo v. Flores , 1 3 ruled that "a contract of purchase and sale is null and void
and produces no effect whatsoever where it appears that [the] same is without cause or
consideration which should have been the motive thereof, or the purchase price which
appears thereon as paid but which in fact has never been paid by the purchaser to the
vendor."
Although the Deed of Sale 1 4 between petitioners and Sanchez stipulated a
consideration of P150,000, there was actually no exchange of money between them.
Petitioner Edilberto Cruz narrated how the transaction came about:
"ATTY. CABRERA:
Q Why did you execute the deed of sale in favor of Candelaria Sanchez since
it was Norma Sulit with whom you are transacting?

A Because Norma Sulit made the promise to Mrs. Candelaria Sanchez that
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 upon acquiring the title from us, they can borrow money from the Bank. So
it is a way of acquiring the title from us, sir.
Q. This deed of sale marked Exhibit 'D' which you just identified, stipulates a
consideration of P150,000.00. The question, Father, is — did you receive
the P150,000.00?
ATTY. AGRAVANTE

Objection, your Honor, the document is the best evidence.

ATTY. CABRERA

This is an action to annul a certain contract.

COURT
He received the consideration stated in the contract. The witness may
answer.
WITNESS
A Not a single centavo we received from Candelaria Sanchez as if it is
nominal, sir.
ATTY. CABRERA

Q If you did not receive this P150,000.00 stated in this deed of sale that you
and your brother executed from Candelaria Sanchez, did you receive the
said amount from Norma Sulit or anybody else for that matter?
A Not a single centavo, sir." 1 5

His claim was corroborated by Sanchez. She likewise said that the Deed of Sale 1 6
she executed with Sulit, for which she did not receive any consideration was only for the
purpose of placing the title to the property in the latter's name. She testified as follows:
"Q And so you transferred the property in favor of Norma Sulit?
A Yes, sir.

Q I am showing to you this document which has already been marked when
the representative of the Register of Deeds produced the pertinent
documents before the court as Exhibit "C", is this that document that you
executed transferring the property in the name of Norma Sulit?
A Yes, sir, this is it.
Q There is a consideration of P150,000.00 stated in this Exhibit "C", were you
paid by Norma Sulit the amount of P150,000.00 appearing in this Exhibit
"C"?
ATTY. BUYCO
The question is leading, Your Honor.
COURT:

Witness may answer.

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 A No amount was given, sir. We prepared this document to transfer the title
[to] her name only." 1 7

Respondent never offered any evidence to refute the foregoing testimonies. 1 8 On

the contrary, it even admitted that the stipulated consideration of P150,000 in the two
Deeds of Sale had never been actually paid by Sanchez to petitioners; 1 9 neither by Sulit to
the former. 2 0
Another telling sign of simulation was the complete absence of any attempt on the
part of the buyers — Sanchez and Sulit — to assert their alleged rights of ownership over
the subject property. 2 1 This fact was con rmed by respondent which, however, tried to
justify the non-occupancy of the land by Sanchez and Sulit. Supposedly, because the two
failed to pay the purchase price of the land, they could not force petitioners to vacate it. 2 2
The records clearly show that the two Deeds of Absolute Sale were executed over
the same property on the same date, June 21, 1978. Six days thereafter, on June 27, 1978,
it was mortgaged by Sulit to Federal Insurance Company for P500,000. The mortgage was
cancelled when she again mortgaged the property to respondent for P569,000 on August
22, 1979. It is also undisputed that petitioners did not receive any portion of the proceeds
of the loan.
Clearly, the Deeds of Sale were executed merely to facilitate the use of the property
as collateral to secure a loan from a bank. 2 3 Being merely a subterfuge, these agreements
could not have been the source of any consideration for the supposed sales. 2 4 Indeed, the
execution of the two documents on the same day sustains the position of petitioners that
the Contracts of Sale were absolutely simulated, and that they received no consideration
therefor. 2 5
The failure of Sulit to take possession of the property purportedly sold to her was a
clear badge of simulation that rendered the whole transaction void and without force and
effect, pursuant to Article 1409 2 6 of the Civil Code. 2 7 The fact that she was able to secure
a Certi cate of Title to the subject property in her name did not vest her with ownership
over it. 2 8 A simulated deed of sale has no legal effect; consequently any transfer
certi cate of title (TCT) issued in consequence thereof should be cancelled. 2 9 A simulated
contract is not a recognized mode of acquiring ownership. 3 0
Second Issue:
Good Faith of Mortgagee
Petitioners argue that respondent was not a mortgagee in good faith because, at
the time it registered the real estate mortgage over the subject property, their adverse
claim and notice of lis pendens had already been annotated on the TCT (on October 30,
1979 and December 10, 1979, respectively). On the other hand, respondent maintains that
petitioners were the ones in bad faith, because they already had knowledge of the
existence of the mortgage over the property when they caused the annotation of their
adverse claim and notice of lis pendens.
As a general rule, every person dealing with registered land may safely rely on the
correctness of the certi cate of title and is no longer required to look behind the
certi cate in order to determine the actual owner. 3 1 To do so would be contrary to the
evident purpose of Section 39 of Act 496 which we quote hereunder:
"Sec. 39. Every person receiving a certi cate of title in pursuance of a
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 decree of registration, and every subsequent purchaser of registered land who
takes a certi cate of title for value in good faith shall hold the same free of all
encumbrances except those noted on said certi cate, and any of the following
encumbrances which may be subsisting, namely:

"First. Liens, claims, or rights arising or existing under the laws or

Constitution of the United States or of the Philippine Islands which the statutes of
the Philippine Islands cannot require to appear of record in the Registry.
"Second. Taxes within two years after the same became due and
payable.
"Third. Any public highway, way, private way established by law, or any
Government irrigation canal or lateral thereof, where the certi cate of title does
not state that the boundaries of such highway, way, or irrigation canal or lateral
thereof, have been determined.

"But if there are easements or other rights appurtenant to a parcel of

registered land which for any reason have failed to be registered, such easements
or rights shall remain so appurtenant notwithstanding such failure, and shall be
held to pass with the land until cut off or extinguished by the registration of the
servient estate, or in any other manner."

This rule is, however, subject to the right of a person deprived of land through fraud
to bring an action for reconveyance, provided the rights of innocent purchasers for value
and in good faith are not prejudiced. An innocent purchaser for value or any equivalent
phrase shall be deemed, under Section 38 of the same Act, 3 2 to include an innocent
lessee, mortgagee or any other encumbrancer for value. 3 3
Respondent claims that, being an innocent mortgagee, it should not be required to
conduct an exhaustive investigation on the history of the mortgagor's title before it could
extend a loan. 3 4
Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such,
unlike private individuals, it is expected to exercise greater care and prudence in its
dealings, including those involving registered lands. 3 5 A banking institution is expected to
exercise due diligence before entering into a mortgage contract. 3 6 The ascertainment of
the status or condition of a property offered to it as security for a loan must be a standard
and indispensable part of its operations. 3 7
In Rural Bank of Compostela v. CA , 3 8 we held that a bank that failed to observe due
diligence was not a mortgagee in good faith. In the words of the ponencia:
". . . [T]he rule that persons dealing with registered lands can rely solely on
the certificate of title does not apply to banks.

"Banks, indeed, should exercise more care and prudence in dealing even
with registered lands, than private individuals, for their business is one affected
with public interest, keeping in trust money belonging to their depositors, which
they should guard against loss by not committing any act of negligence which
amounts to lack of good faith by which they would be denied the protective
mantle of the land registration statute, Act [No.] 496, extended only to purchasers
for value and in good faith, as well as to mortgagees of the same character and
description." (Citations omitted)

Recently, in Adriano v. Pangilinan, 3 9 we said that the due diligence required of banks
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 extended even to persons regularly engaged in the business of lending money secured by
real estate mortgages.
The evidence before us indicates that respondent bank was not a mortgagee in
good faith. 4 0 First, at the time the property was mortgaged to it, it failed to conduct an
ocular inspection. 4 1 Judicial notice is taken of the standard practice for banks before they
approve a loan: to send representatives to the premises of the land offered as collateral
and to investigate the ownership thereof. 4 2 As correctly observed by the RTC, respondent,
before constituting the mortgage over the subject property, should have taken into
consideration the following questions:
"1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel
of land not too cheap even in 1978?
"2) Why did Candelaria Sanchez sell the property at the same price of
P150,000.00 to Norma Sulit on the same date, June 21, 1978 when she
supposedly acquired it from the plaintiffs?
"3) Being agricultural land, didn't it occur to the intervenors that there
would be tenants to be compensated or who might pose as obstacles to the
mortgagee's exercise of acts of dominion?
"4) In an area as big as that property, [why] did they not verify if there
were squatters?
"5) What bene ts or prospects thereof could the ultimate owner expect
out of the property?
"Verily, the foregoing circumstances should have been looked into, for if
either or both companies did, they could have discovered that possession of the
land was neither with Candelaria nor with Norma." 4 3

Respondent was clearly wanting in the observance of the necessary precautions to

ascertain the aws in the title of Sulit and to examine the condition of the property she
sought to mortgage. 4 4 It should not have simply relied on the face of the Certi cate of
Title to the property, as its ancillary function of investing funds required a greater degree
of diligence. 4 5 Considering the substantial loan involved at the time, it should have
exercised more caution. 4 6
Moreover, the subject property, being situated in Bulacan, could have been easily
and conveniently inspected by respondent. A person who deliberately ignores a signi cant
fact that would create suspicion in an otherwise reasonable person is not an innocent
purchaser for value. 4 7
Second, respondent was already aware that there was an adverse claim and notice
o f lis pendens annotated on the Certi cate of Title when it registered the mortgage on
March 14, 1980. Unless duly registered, a mortgage does not affect third parties like
herein petitioners, as provided under Section 51 of P.D. NO. 1529, 4 8 which we reproduce
hereunder:
"SEC. 51. Conveyance and other dealings by registered owner. — An
owner of registered land may convey, mortgage, lease, charge or otherwise deal
with the same in accordance with existing laws. He may use such forms of deeds,
mortgages, leases or other voluntary instruments [as] are su cient in law. But no
deed, mortgage, lease, or other voluntary instrument except a will, purporting to
convey or affect registered land, shall take effect as a conveyance or bind the
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 land, but shall operate only as a contract between the parties and as evidence of
authority to the clerk or register of deeds to make registration.

"The act of registration shall be the operative act to convey and affect the
land, and in all cases under this Act the registration shall be made in the o ce of
the register of deeds for the province or city, where the land lies."

True, registration is not the operative act for a mortgage to be binding between the
parties. But to third persons, it is indispensable. 4 9 In the present case, the adverse claim
and the notice of lis pendens were annotated on the title on October 30, 1979 and
December 10, 1979, respectively; the real estate mortgage over the subject property was
registered by respondent only on March 14, 1980. Settled in this jurisdiction is the doctrine
that a prior registration of a lien creates a preference. 5 0 Even a subsequent registration of
the prior mortgage will not diminish this preference, which retroacts to the date of the
annotation of the notice of lis pendens and the adverse claim. 5 1 Thus, respondent's failure
to register the real estate mortgage 5 2 prior to these annotations, resulted in the mortgage
being binding only between it and the mortgagor, Sulit. Petitioners, being third parties to
the mortgage, were not bound by it. 5 3 Contrary to respondent's claim that petitioners
were in bad faith because they already had knowledge of the existence of the mortgage in
favor of respondent when they caused the aforesaid annotations, petitioner Edilberto Cruz
said that they only knew of this mortgage when respondent intervened in the RTC
proceedings. 5 4
On the question of who has a preferential right over the property, the long-standing
rule, as provided by Article 2085 5 5 of the Civil Code, 5 6 is that only the absolute owner of
the property can constitute a valid mortgage on it. In case of foreclosure, a sale would
result in the transmission only of whatever rights the seller had over of the thing sold. 5 7
In the instant case, the two Deeds of Sale were absolutely simulated; hence, null and
void. 5 8Thus, they did not convey any rights that could ripen into valid titles. 5 9 Necessarily,
the subsequent real estate mortgage constituted by Sulit in favor of respondent was also
null and void, because the former was not the owner thereof. There being no valid real
estate mortgage, there could also be no valid foreclosure or valid auction sale, either. At
bottom, respondent cannot be considered either as a mortgagee or as a purchaser in
good faith. This being so, petitioners would be in the same position as they were before
they executed the simulated Deed of Sale in favor of Sanchez. They are still the owners of
the property. 6 0
WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. The
Decision of the RTC of Bulacan, (Branch 21) dated January 25, 1996 is REINSTATED. No
costs.
SO ORDERED.
Melo, Sandoval-Gutierrez and Carpio, JJ., concur.
Vitug, J.,abroad on official business.

Footnotes
1. Rollo, pp. 105-116. Penned by Justice Portia Aliño-Hormachuelos and concurred in by
JJ. Fermin A. Martin Jr. (Division chairman) and Mercedes Gozo-Dadole (member).
2. Assailed CA Decision, p. 11; rollo, p. 115.
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 3. Assailed Decision, pp. 3-5; rollo, pp. 107-109.
4. Assailed Decision, p. 10; rollo, p. 114.
5. The case was deemed submitted for decision on November 22, 2001 upon the Court's
receipt of respondent's Memorandum, which was signed by Attys. Marilyn Salamanca
Guzman and Raymund Hilarion R. Genilo. Petitioners' Memorandum, filed on November
5, 2001, was signed by Atty. Vicente H. Reyes.
6. Petitioners' Memorandum, pp. 13-14; rollo, pp. 217-218; original in upper case.

7. Annex "H"; rollo, pp. 119-120.

8. Annex "I"; rollo, p. 121.
9. Art. 1370 of the Civil Code.
10. Art. 1371 of the Civil Code; Cruz v. CA, 293 SCRA 239 July 27, 1998; Sicad v. CA, 294
SCRA 183, August 13, 1998; People's Aircargo and Warehouse Co., Inc. v. CA, 297 SCRA
170, October 7, 1998.
11. Cf. Villaflor v. CA, 280 SCRA 297, October 9, 1997; Tongoy v. CA, 123 SCRA 99, 118,
June 28, 1983; Rodriguez v. Rodriguez, 20 SCRA 908, 914, July 31, 1967.
12 294 SCRA 289, 304-305, August 17, 1998, per Quisumbing, J.
13 40 Phil 921, March 16, 1920, Torres, J.

14 Annex "H"; rollo, pp. 119-120.

15. TSN, December 4, 1984, pp. 9-10.

16. Annex "I"; rollo, p. 121.

17. TSN, September 16, 1982, pp. 4-5.

18. Sunshine Finance and Investment Corp. v. IAC, 203 SCRA 210, October 28, 1991.
19. Respondent's Memorandum, p. 6; rollo, p. 277.
20. Ibid., p. 5; ibid., p. 276.
21. Suntay v. CA, 251 SCRA 430, December 19, 1995.
22. Respondent's memorandum, p. 12; rollo, p. 283.

23. Velasquez v. CA, 345 SCRA 468, November 22, 2000.

24. Yu Bun Guan v. Elvira Ong, supra.
25. Velasquez v. Court of Appeals; supra, p. 475.
26. This article provides:

"The following contracts are inexistent and void from the beginning:
"xxx xxx xxx

"(2) Those which are absolutely simulated or fictitious;

"xxx xxx xxx."

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 27. Santiago v. CA, 278 SCRA 98, 107, August 21, 1997.
28. Reyes v. CA, 315 SCRA 626 September 30, 1999.
29. Yu Bun Guan v. Elvira Ong, supra.
30. Santiago v. CA, supra.
31. Development Bank of the Philippines v. CA, supra, p. 288; Heirs of Spouses Benito
Gavino and Juana Euste v. CA, 291 SCRA 495, June 29, 1998.
32. Sec. 38 of Act No. 496, the Land Registration Act, provides:

"If the court after hearing nds that the applicant or adverse claimant has title as
stated in his application or adverse claim and proper for registration, a decree of
con rmation and registration shall be entered. Every decree of registration shall bind the
land, and quiet title thereto, subject only to the exceptions stated in the following section.
It shall be conclusive upon and against all persons, including the Insular Government
and all the branches thereof, whether mentioned by name in the application, notice, or
citation, or included in the general description "To whom it may concern." Such decree
shall not be opened by reason of the absence, infancy, or other disability of any person
affected thereby, nor by any proceeding in any court for reversing judgments or decrees;
subject, however, to the right of any person deprived of land or of any estate or interest
therein by decree of registration obtained by fraud to le in the competent Court of First
Instance a petition for review within one year after entry of the decree provided no
innocent purchaser for value has acquired an interest. Upon the expiration of said term
of one year, every decree or certificate of title issued in accordance with this section shall
be incontrovertible. If there is any such purchaser, the decree of registration shall not be
opened, but shall remain in full force and effect forever, subject only to the right of
appeal hereinbefore provided: Provided, however, That no decree or certi cate of title
issued to persons not parties to the appeal shall be cancelled or annulled. But any
person aggrieved by such decree in any case may pursue his remedy by action for
damages against the applicant or any other person for fraud in procuring the decree.
Whenever the phrase "innocent purchaser for value" or an equivalent phrase occurs in
this Act, it shall be deemed to include an innocent lessee, mortgagee, or other
encumbrancer for value." (As amended by §3, Act 3621; and §1, Act No. 3630.)
33. Sunshine Finance and Investment Corp. v. IAC, supra, p. 216.
34. Development Bank of the Philippines v. CA, 331 SCRA 267, 289, April 28, 2000.
35. Cavite Development Bank v. Lim, 324 SCRA 346, February 1, 2000, citing Tomas v.
Tomas, 98 SCRA 280, June 25, 1980.
36. Development Bank of the Philippines v. Court of Appeals, supra.
37. Sunshine Finance and Investment Corp v. IAC, supra, p. 216.
38. 271 SCRA 76, 88, April 8, 1997, per Davide Jr., C.J.

39. G.R. No. 13747, January 16, 2002.

40. Development Bank of the Philippines v. CA, supra.
41. Government Service Insurance System v. CA, 287 SCRA 204, March 6, 1998.
42. Development Bank of the Philippines v. CA, supra.
43. RTC Decision, pp. 5-6; rollo, pp. 100-101, per Judge Cesar M. Solis.
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 44. Sunshine Finance and Investment Corp. v. IAC, supra.
45. Government Service Insurance System v. CA, supra, p. 211.
46. Ibid., p. 210.
47. Development Bank of the Philippines v. CA, supra, p. 290.
48. Property Registration Decree.

49. "Art. 2125. In addition to the requisites stated in article 2085, it is indispensable in order
that a mortgage may be validly constituted, that the document in which it appears be
recorded in the Registry of Property. If the instrument is not recorded, the mortgage is
nevertheless binding between the parties.

"The persons in whose favor the law establishes a mortgage have no other right than
to demand the execution and the recording of the document in which the mortgage is
formalized."
50. Lavides v. Pre, G.R. No. 127830, October 17, 2001.
51. Ibid.
52. Annex "L"; rollo, pp. 130-135.

53. Ramos v. CA, 302 SCRA 589, February 3, 1999.

54. See TSN, July 28, 1986, pp. 14-15.
55. "Art. 2085. The following requisites are essential to the contracts of pledge and
mortgage:

"xxx xxx xxx

"(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;

"xxx xxx xxx."

56. Lagrosa v. CA, 312 SCRA 298, August 12, 1999.
57. Art. 1458 Civil Code; Nufable v. Nufable, 309 SCRA 692, July 2, 1999.

58. Francisco v. Francisco-Alfonso, G.R. No. 138774, March 8, 2001, per Pardo, J.
59. Velasquez v. CA, supra.
60. Government Service Insurance System v. CA, supra, p. 211.

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