POWER TO SELL AND TO RAISE MONEY
Mortgage and Cancellation of Mortgage Lien with
MACARIA ARGUELLES and the HEIRS OF THE
DECEASED PETRONIO ARGUELLES, Petitioners,
vs. MALARAYAT RURAL BANK, INC., Respondent.
FACTS: The late Fermina M. Guia was the registered
owner of Lot 3, a parcel of agricultural as evidenced by
OCT No. P-12930.
Fermina M. Guia sold the south portion of the land to the
spouses Petronio and Macaria Arguelles. Although the
spouses Arguelles immediately acquired possession of the
land, the Deed of Sale was neither registered with the
Register of Deeds nor annotated on OCT No. P-12930.
At the same time, Fermina M. Guia ordered her son Eddie
Guia and the latter's wife Teresita Guia to subdivide the
land covered by OCT No. P-12930 into three lots and to
apply for the issuance of separate titles therefor, to wit:
Lot 3-A, Lot 3-B, and Lot 3-C. Thereafter, she directed
the delivery of the Transfer Certificate of Title (TCT)
corresponding to Lot 3-C to the vendees of the
unregistered sale or the spouses Arguelles. However,
despite their repeated demands, the spouses Arguelles
claimed that they never received the TCT corresponding
to Lot 3-C from the spouses Guia.
In accordance with the instructions of Fermina M. Guia,
the spouses Guia succeeded in cancelling OCT No. P-
12930 and in subdividing the lot: 3-A to Fermina Guia; 3-
B to Sps Datingaling; and 3-C to Fermina Guia.
The spouses Guia obtained a loan in the amount of
₱240,000 from the respondent Malarayat Rural Banlc and
secured the loan with a Deed of REM over Lot 3-C. The
loan and REM were made pursuant to the
SPA purportedly executed by the registered owner of Lot
3-C, Fermina M. Guia, in favor of the mortgagors,
spouses Guia.
Moreover, the Real Estate Mortgage and Special Power
of Attorney were duly annotated in the memorandum of
encumbrances of TCT No. T-83944 covering Lot 3-C.
The spouses Arguelles alleged that it was only in 1997 or
after seven years from the date of the unregistered sale
that they discovered from the Register of Deeds of
Batangas City the following facts: (1) subdivision of Lot
3 into Lots 3-A, 3-B, and 3-C; (2) issuance of separate
TCTs for each lot; and (3) the annotation of the Real
Estate Mortgage and Special Power of Attorney over Lot
3-C covered by TCT No. T-83944. Two years thereafter,
or on June 17, 1999, the spouses Arguelles registered their
adverse claim9 based on the unregistered sale dated
December 1, 1990 over Lot 3-C.
The sps Arguelles filed a complaint10 for Annulment of
Damages against the respondent Malarayat Rural Banlc
with the RTC. In asserting the nullity of the mortgage lien,
the spouses Arguelles alleged ownership over the land
that had been mortgaged in favor of the Bank.
RTC rendered a Decision ruling that the spouses Guia
were no longer the absolute owners of the land described
as Lot 3-C and covered by TCT No. T-83944 at the time
they mortgaged the same to the respondent Malarayat
Rural Bank in view of the unregistered sale in favor of the
vendee spouses Arguelles. Thus, the RTC annulled the
real estate mortgage, the subsequent foreclosure sale, and
the corresponding issuance of the certificate of title.
Moreover, the RTC declared that the respondent
Malarayat Rural Bank was not a mortgagee in good faith
as it failed to exercise the exacting degree of diligence
required from banking institutions.
The CA reversed and set aside the decision of the RTC.
CA held that because of the failure of the spouses
Arguelles to register their deed of sale, the unregistered
sale could not affect the respondent Malarayat Rural
Bank. Thus, the respondent Malarayat Rural Bank has a
better right to the land mortgaged as compared to spouses
Arguelles who were the vendees in the unregistered sale.
In addition, the CA found that the respondent Malarayat
Rural Bank was a mortgagee in good faith as it
sufficiently demonstrated due diligence in approving the
loan application of the spouses Guia.
Petitioners imputed negligence on the part of respondent
Bank when it approved the loan application of the spouses
Guia. They pointed out that the bank failed to conduct a
thorough ocular inspection of the land mortgaged and an
extensive investigation of the title of the registered owner.
And since the respondent Malarayat Rural Bank cannot
be considered a mortgagee in good faith, petitioners
argued that the unregistered sale in their favor takes
precedence over the duly registered mortgage lien. On the
other hand, respondent Malarayat Rural Bank claimed
that it exercised the required degree of diligence before
granting the loan application. In particular, it asserted the
absence of any facts or circumstances that can reasonably
arouse suspicion in a prudent person. Thus, the
respondent argued that it is a mortgagee in good faith with
a better right to the mortgaged land as compared to the
vendees to the unregistered sale.
ISSUE: W/N the respondent Malarayat Rural Bank is a
mortgagee in good faith who is entitled to protection on
its mortgage lien
RULING: NO, respondent Malarayat Rural Bank is not Since the subject land was not mortgaged by the owner
a mortgagee in good faith. Therefore, the spouses thereof and since the respondent Malarayat Rural Bank is
Arguelles as the vendees to the unregistered sale have a not a mortgagee in good faith, said bank is not entitled to
superior right to the mortgaged land. protection under the law. The unregistered sale in favor of
the spouses Arguelles must prevail over the mortgage lien
There is a situation where, despite the fact that the
of respondent Malarayat Rural Bank.
mortgagor is not the owner of the mortgaged property, his
title being fraudulent, the mortgage contract and any
foreclosure sale arising therefrom are given effect by
reason of public policy. This is the doctrine of "mortgagee
in good faith" based on the rule that all persons dealing
with the property covered by a Torrens Certificate of
Title, as buyers or mortgagees, are not required to go
beyond what appears on the face of the title. The public
interest in upholding the indefeasibility of a certificate of
title, as evidence of lawful ownership of the land or of any
encumbrance thereon, protects a buyer or mortgagee who,
in good faith, relied upon what appears on the face of the
certificate of title.
However, in one case we also ruled that "[i]n cases where
the mortgagee does not directly deal with the registered
owner of real property, such that when the mortgagor is
not the registered owner but merely an atty-in-fact of the
same, the law requires that a higher degree of prudence be
exercised by the mortgagee."
In this case, the respondent Malarayat Rural Bank fell
short of the required degree of diligence in approving the
loan application of the spouses Guia.
Respondent should have diligently conducted an
investigation of the land offered as collateral. Although
the Report of Inspection and Credit Investigation found at
the dorsal portion of the Application for Agricultural
Loan29 proved that the respondent Malarayat Rural Bank
inspected the land, the respondent turned a blind eye to
the finding therein that the "lot is planted [with] sugarcane
with annual yield (crops) in the amount of ₱15,000."30
We disagree with respondent's stance that the mere
planting and harvesting of sugarcane cannot reasonably
trigger suspicion that there is adverse possession over the
land offered as mortgage. Indeed, such fact should have
immediately prompted the respondent to conduct further
inquiries, especially since the spouses Guia were not the
registered owners of the land being mortgaged. They
merely derived the authority to mortgage the lot from the
Special Power of Attorney allegedly executed by the late
Fermina M. Guia. Hence, it was incumbent upon the
respondent Malarayat Rural Bank to be more cautious in
dealing with the spouses Guia, and inquire further
regarding the identity and possible adverse claim of those
in actual possession of the property.
ALVIN PATRIMONIO, Petitioner, vs. NAPOLEON
GUTIERREZ and OCTAVIO MARASIGAN
III, Respondents.
FACTS: The petitioner and the respondent Napoleon
Gutierrez (Gutierrez) entered into a business venture
under the name of Slam Dunk Corporation (Slum Dunk),
a production outfit that produced mini-concerts and
shows related to basketball. Petitioner was already then a
decorated professional basketball player while Gutierrez
was a well-known sports columnist.
In the course of their business, the petitioner pre-signed
several checks to answer for the expenses of Slam Dunk.
Although signed, these checks had no payee’s name, date
or amount. The blank checks were entrusted to Gutierrez
with the specific instruction not to fill them out without
previous notification to and approval by the petitioner.
According to petitioner, the arrangement was made so that
he could verify the validity of the payment and make the
proper arrangements to fund the account.
Without the petitioner’s knowledge and consent,
Gutierrez went to Marasigan (the petitioner’s former
teammate), to secure a loan in the amount of ₱200,000.00
on the excuse that the petitioner needed the money for the
construction of his house. In addition to the payment of
the principal, Gutierrez assured Marasigan that he would
be paid an interest of 5% per month
Marasigan acceded and gave him ₱200,000.00. Gutierrez
simultaneously delivered to Marasigan one of the blank
checks the petitioner pre-signed with Pilipinas Bank, with
the blank portions filled out with the words "Cash" "Two
Hundred Thousand Pesos Only", and the amount of
"₱200,000.00". The upper right portion of the check
corresponding to the date was also filled out with the
words "May 23, 1994" but the petitioner contended that
the same was not written by Gutierrez.
Marasigan deposited the check but it was dishonored for
the reason "ACCOUNT CLOSED." Marasigan sought
recovery from Gutierrez, to no avail. He thereafter sent
several demand letters to the petitioner asking for the
payment of ₱200,000.00, but his demands likewise went
unheeded. Consequently, he filed a criminal case for
violation of B.P. 22 against the petitioner
Petitioner then filed before the RTC a Complaint for
Declaration of Nullity of Loan and Recovery of Damages
against Gutierrez and co-respondent Marasigan. He
completely denied authorizing the loan or the check’s
negotiation, and asserted that he was not privy to the
parties’ loan agreement.
The RTC ruled in favor of Marasigan.4 It found that the
petitioner, in issuing the pre-signed blank checks, had the
intention of issuing a negotiable instrument, albeit with
specific instructions to Gutierrez not to negotiate or issue
the check without his approval. RTC declared Marasigan
as a holder in due course. CA affirmed the RTC ruling.
The petitioner argues that: (1) there was no loan between
him and Marasigan since he never authorized the
borrowing of money nor the check’s negotiation to the
latter; (2) under Article 1878 of the Civil Code, a special
power of attorney is necessary for an individual to make
a loan or borrow money in behalf of another; (3) the loan
transaction was between Gutierrez and Marasigan, with
his check being used only as a security; (4) the check had
not been completely and strictly filled out in accordance
with his authority since the condition that the subject
check can only be used provided there is prior approval
from him, was not complied with; (5) even if the check
was strictly filled up as instructed by the petitioner,
Marasigan is still not entitled to claim the check’s value
as he was not a holder in due course; and (6) by reason of
the bad faith in the dealings between the respondents, he
is entitled to claim for damages.
ISSUE: W/N the contract of loan in the amount of
200,000 granted by respondent Marasigan to the
petitioner, through respondent Gutierrez, may be nullified
for being void
RULING: YES.
The petitioner seeks to nullify the contract of loan on the
ground that he never authorized the borrowing of money.
He points to Article 1878, paragraph 7 of the Civil Code,
which explicitly requires a written authority when the
loan is contracted through an agent. The petitioner
contends that absent such authority in writing, he should
not be held liable for the face value of the check because
he was not a party or privy to the agreement.
Article 1878 paragraph 7 of the Civil Code expressly
requires a special power of authority before an agent can
loan or borrow money in behalf of the principal, to wit:
Art. 1878. Special powers of attorney are necessary in the
following cases:
xxxx
(7) To loan or borrow money, unless the latter act be
urgent and indispensable for the preservation of the things
which are under administration. (emphasis supplied)
Article 1878 does not state that the authority be in writing.
As long as the mandate is express, such authority may be
either oral or written. We unequivocably declared in one
case that the requirement under Article 1878 of the Civil
Code refers to the nature of the authorization and not to
its form. Be that as it may, the authority must be duly
established by competent and convincing evidence other
than the self serving assertion of the party claiming that
such authority was verbally given. And more recently, We
stated that, if the special authority is not written, then it
must be duly established by evidence.
Here, the Contract of Loan Entered Into by Gutierrez in
Behalf of the Petitioner Should be Nullified for Being
Void; Petitioner is Not Bound by the Contract of Loan.
A review of the records reveals that Gutierrez did not have
any authority to borrow money in behalf of the petitioner.
Records do not show that the petitioner executed any
special power of attorney (SPA) in favor of Gutierrez. In
fact, the petitioner’s testimony confirmed that he never
authorized Gutierrez (or anyone for that matter), whether
verbally or in writing, to borrow money in his behalf, nor
was he aware of any such transaction:
Marasigan however submits that the petitioner’s acts of
pre-signing the blank checks and releasing them to
Gutierrez suffice to establish that the petitioner had
authorized Gutierrez to fill them out and contract the loan
in his behalf.
Marasigan’s submission fails to persuade us. In the
absence of any authorization, Gutierrez could not enter
into a contract of loan in behalf of the petitioner.
In the absence of any showing of any agency relations or
special authority to act for and in behalf of the petitioner,
the loan agreement Gutierrez entered into with Marasigan
is null and void. Thus, the petitioner is not bound by the
parties’ loan agreement.
Furthermore, that the petitioner entrusted the blank pre-
signed checks to Gutierrez is not legally sufficient
because the authority to enter into a loan can never be
presumed. The contract of agency and the special
fiduciary relationship inherent in this contract must exist
as a matter of fact. The person alleging it has the burden
of proof to show, not only the fact of agency, but also its
nature and extent.
The records show that Marasigan merely relied on the
words of Gutierrez without securing a copy of the SPA in
favor of the latter and without verifying from the
petitioner whether he had authorized the borrowing of
money or release of the check. He was thus bound by the
risk accompanying his trust on the mere assurances of
Gutierrez.
Other rulings:
 It is a contract of loan so the petitioner denied liability
on the ground that the contract lacked the essential
element of consent. We agree with the petitioner. As
we explained above, Gutierrez did not have the
petitioner’s written/verbal authority to enter into a
contract of loan. While there may be a meeting of the
minds between Gutierrez and Marasigan, such
agreement cannot bind the petitioner whose consent
was not obtained and who was not privy to the loan
agreement. Hence, only Gutierrez is bound by the
contract of loan.
 Sec. 14 of NIL. This provision applies to an
incomplete but delivered instrument. Under this rule,
if the maker or drawer delivers a pre-signed blank
paper to another person for the purpose of converting
it into a negotiable instrument, that person is deemed
to have prima facie authority to fill it up. It merely
requires that the instrument be in the possession of a
person other than the drawer or maker and from such
possession, together with the fact that the instrument
is wanting in a material particular, the law presumes
agency to fill up the blanks.
 In order however that one who is not a holder in due
course can enforce the instrument against a party prior
to the instrument’s completion, two requisites must
exist: (1) that the blank must be filled strictly in
accordance with the authority given; and (2) it must
be filled up within a reasonable time.
 Notably, Gutierrez was only authorized to use the
check for business expenses; thus, he exceeded the
authority when he used the check to pay the loan he
supposedly contracted for the construction of
petitioner's house. This is a clear violation of the
petitioner's instruction to use the checks for the
expenses of Slam Dunk. It cannot therefore be validly
concluded that the check was completed strictly in
accordance with the authority given by the petitioner.
 Considering that Marasigan is not a holder in due
course, the petitioner can validly set up the personal
defense that the blanks were not filled up in
accordance with the authority he gave. Consequently,
Marasigan has no right to enforce payment against the
petitioner and the latter cannot be obliged to pay the
face value of the check.
LEONARDO C. CASTILLO, REPRESENTED BY
LENNARD V. CASTILLO VS SECURITY BANK
CORPORATION, JRC POULTRY FARMS OR SPS
LEON C. CASTILLO, JR., AND TERESITA
FLORESCASTILLO
FACTS: Petitioner Leonardo C. Castillo and respondent
Leon C. Castillo, Jr. are siblings. Leon and Teresita
Flores-Castillo (the Spouses Castillo) were doing
business under the name of JRC Poultry Farms. Sometime
in 1994, the Spouses Castillo obtained a loan from
respondent SBC in the amount of ₱45,000,000.00. To
secure said loan, they executed a real estate mortgage on
August 5, 1994 over eleven (11) parcels of land belonging
to different members of the Castillo family and which are
all located in San Pablo City.4 They also procured a
second loan5 amounting to ₱2,500,000.00, which was
covered by a mortgage on a land in Pasay City.
Subsequently, the Spouses Castillo failed to settle the
loan, prompting SBC to proceed with the foreclosure of
the properties. SBC was then adjudged as the winning
bidder in the foreclosure sale held on July 29, 1999.
Thereafter, they were able to redeem the foreclosed
properties, withthe exception of the lots covered by
Torrens Certificate of Title(TCT) Nos. 28302 and 28297.
On January 30, 2002, Leonardo filed a complaint for the
partial annulment of the real estate mortgage. He alleged
that he owns the property covered by TCT No. 28297 and
that the Spouses Castillo used it as one of the collaterals
for a loan without his consent. He contested his supposed
Special Power of Attorney (SPA) in Leon’s favor,
claiming that it is falsified. According to him, the date of
issuance of his Community Tax Certificate (CTC) as
indicated on the notarization of said SPA is January 11,
1993, when he only secured the same on May 17, 1993.
He also assailed the foreclosure of the lots under TCT
Nos.20030 and 10073 which were still registered in the
name of their deceased father. Lastly, Leonardo attacked
SBC’s imposition of penalty and interest on the loans as
being arbitrary and unconscionable.
On the other hand, the Spouses Castillo insisted on the
validity of Leonardo’s SPA. They alleged that they
incurred the loan not only for themselves, but also for the
other members of the Castillo family who needed money
at that time. Upon receipt of the proceeds of the loan, they
distributed the same to their family members, as agreed
upon. However, when the loan became due, their relatives
failed to pay their respective shares such that Leon was
forced to use his own money until SBC had to finally
foreclose the mortgage over the lots.
RTC ruled in favor of Leonardo that REM is null/void.
Both parties elevated the case to the CA. The CA denied
Leonardo’s appeal and granted that of the Spouses
Castillo and SBC. It reversed and set aside the RTC
Decision, essentially ruling that the August 5, 1994 real
estate mortgage is valid.
ISSUE: W/N the real estate mortgage constituted over the
property under TCT No. T-28297 is valid and binding.
RULING: YES. CA affirmed.
The following are the legal requisites for a mortgage to be
valid:
(1) It must be constituted to secure the fulfillment of a
principal obligation;
(2) The mortgagor must be the absolute owner of the thing
mortgaged;
(3) The persons constituting the mortgage must have the
free disposal of their property, and in the absence thereof,
they should be legally authorized for the purpose
Leonardo asserts that his signature inthe SPA authorizing
his brother, Leon, to mortgage his property covered by
TCT No. T-28297 was falsified. He claims that he was in
America at the time of its execution. As proof of the
forgery, he focuses on his alleged CTC used for the
notarization10 of the SPA on May 5, 1993 and points out
that it appears to have been issued on January 11, 1993
when, in fact, he only obtained it on May 17, 1993. But it
is a settled rule that allegations of forgery, like all other
allegations, must be proved by clear, positive, and
convincing evidence by the party alleging it. It should not
be presumed, but must beestablished by comparing the
alleged forged signature with the genuine
signatures.11 Here, Leonardo simply relied on his self-
serving declarations and refused to present further
corroborative evidence, saying that the falsified document
itself is the best evidence.12 He did not even bother
comparing the alleged forged signature on the SPA with
samples of his real and actual signature. What he
consistently utilized as lone support for his allegation was
the supposed discrepancy on the date of issuance of his
CTC as reflectedon the subject SPA’s notarial
acknowledgment. On the contrary, in view of the great
ease with which CTCs are obtained these days,13 there is
reasonable ground to believe that, as the CA correctly
observed, the CTC could have been issued with the space
for the date left blank and Leonardo merelyfilled it up to
accommodate his assertions. Also, upon careful
examination, the handwriting appearing on the space for
the date of issuance is different from that on the
computation of fees, which in turn was consistent with the
rest of the writings on the document.14 He did not likewise SBC was remiss in the exercise of the standard care and
attempt to show any evidence that would back up his prudence required of it or that it was negligent in
claim that at the time of the execution of the SPA on May accepting the mortgage.26 SBC could not likewise
5, 1993, he was actually in America and therefore could befaulted for relying on the presumption of regularity of
not have possibly appeared and signed the document the notarized SPA when it entered into the subject
before the notary. mortgage agreement.
And even if the Court were to assume, simply for the sake Finally, the Court finds that the interest and penalty
of argument, that Leonardo indeed secured his CTC only charges imposed by SBC are just, and not excessive or
on May 17, 1993, this does not automatically render the unconscionable.
SPA invalid. The appellate court aptly held that defective
notarization will simply strip the document of its public
character and reduce it to a private instrument, but
nonetheless, binding, provided its validity is established
by preponderance of evidence
Here, the preponderance ofevidence indubitably tilts in
favor of the respondents, still making the SPA binding
between the parties even with the aforementioned
assumed irregularity. There are several telling
circumstances that would clearly demonstrate that
Leonardo was aware of the mortgage and he indeed
executed the SPA to entrust Leon with the mortgage of
his property. Leon had in his possession all the titles
covering the eleven (11) properties mortgaged, including
that of Leonardo.20 Leonardo and the rest of their relatives
could not have just blindly ceded their respective TCTs to
Leon.21 It is likewise ridiculous how Leonardo seemed to
have been totally oblivious to the status of his property for
eight (8) long years, and would only find outabout the
mortgage and foreclosure from a nephew who himself had
consented to the mortgage of his own lot.22 Considering
the lapse of time from the alleged forgery on May 5, 1993
and the mortgage on August 5, 1994, to the foreclosure on
July 29, 1999, and to the supposed discovery in 2001, it
appears that the suit is a mere afterthought or a last-ditch
effort on Leonardo’s part to extend his hold over his
property and to prevent SBC from consolidating
ownership over the same. More importantly, Leonardo
himself admitted on cross-examination that he granted
Leon authority to mortgage, only that, according to him,
he thought it was going to be with China Bank, and not
SBC.23 But as the CA noted, there is no mention of a
certain bank in the subject SPA with which Leon must
specifically deal. Leon, therefore, was simply acting
within the bounds of the SPA’s authority when he
mortgaged the lot to SBC.
True, banks and other financing institutions, in entering
into mortgage contracts, are expected to exercise due
diligence.24 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.25 In this
case, however, no evidence was presented to show that
LIMITATION ON AUTHORITY
NPC VS NATIONAL MERCHANDISING CORP
SYNOPSIS: Plaintiff-appellant National Power
Corporation (NPC) and defendant- appellant National
Merchandising Corporation (NAMERCO), the Philippine
representative of New York-based International
Commodities Corporation, executed a contract of sale of
sulfur with a stipulation for liquidated damages in case of
breach. Defendant-appellant Domestic Insurance
Company executed a performance bond in favor of NPC
to guarantee the seller’s obligation. In entering into the
contract, Namerco, however, did not disclose to NPC that
Namerco’s principal, in a cabled instruction, stated that
the sale was subject to availability of a steamer, and
contrary to its principal’s instruction, Namerco agreed
that non-availability of a steamer was not a justification
for non-payment of liquidated damages. The New York
supplier was not able to deliver the sulfur due to its
inability to secure shipping space. Consequently, the
Government Corporate Counsel rescinded the contract of
sale due to the supplier’s non-performance of its
obligations, and demanded payment of liquidated
damages from both Namerco and the surety. Thereafter,
NPC sued for recovery of the stipulated liquidated
damages. After trial, the Court of First Instance rendered
judgment ordering defendants-appellants to pay solidarity
to the NPC reduced liquidated damages with interest.

The Supreme Court held that Namerco is liable fur

damages because under Article 1897 of the Civil Code the
agent who exceeds the limits of his authority without
giving the party with whom he contracts sufficient notice
of his powers is personally liable to such party. The Court,
however, further reduced the solidary liability of
defendants-appellants for liquidated damages.