Court Voids Delinquent Mortgage & Subsequent Forced Sale Of Property Earlier Conveyed By Forged Deed; Lender Called A "Mortgagee/Buyer In Bad Faith"

In Quezon City, The Philippines, the Manila Buletin reported that a Court of Appeals affirmed a lower court ruling voiding a foreclosure sale where the property owner who lost the title to a 5-unit building by forced sale originally acquired her interest by forging the true owner's name on a deed, and who then subsequently used the property as collateral for a loan from the private lender who ultimately initiated the foreclosure action.

The court found that the foreclosing mortgagee, being an associate of the alleged forger, had some reason to suspect the defect in the title of the alleged forger, and accordingly, declared the lender a “mortgagee and buyer in bad faith,” which made both the mortgage and the subsequent foreclosure sale void.(1)

The court also ruled that, because the property that was mortgaged by the alleged forger was acquired by her through the execution of a forged deed, the deed was null and void, thereby making the subsequent mortgage and foreclosure sale also null and void.(2)(3)

For the story, see Man loses right to property.

(1) In denying the foreclosing lender's appeal, the Seventh (7th) Division of the Philippine Court of Appeals said:

• “where a purchaser [Editor's Note: or, in this case, the mortgage lender] neglects to make the necessary inquiries and closes his eyes to facts which should put a reasonable man on his guard as to the possibility of the existence of a defect on his vendor’s title and relying on the belief that there was no defect in the title of the vendor, purchases [or, in this case, loans money secured by] the property without making any further investigation, he cannot claim that he is a purchaser in good faith for value.”

The same rule is generally applied to real estate purchasers in the U.S. (as well as in other jurisdictions that draw on the English common law on this issue - see The Bona Fide Purchaser for Value of a Legal Estate Without Notice) who invoke the doctrine of bona fide purchaser when attempting to establish that their later-acquired, recorded interest in property is superior to someone else's earlier acquired, unrecorded interest in the same property. Go here for more on the bona fide purchaser doctrine .

(2) The Court of Appeals also reportedly said that since the deed purportedly conveying title was nullified by the lower court for being a forgery:

• “it cannot convey any right that could ripen into a valid title. Necessarily, the subsequent real estate mortgage between Suiza and Santiago was also null and void because the former is not the owner thereof and Santiago cannot be considered a mortgagee in good faith.” “In real estate mortgage contract, it is essential that the mortgagor must be the absolute owner of the property to be mortgaged; otherwise, the mortgage is void,” the Court added.

Since there is no valid real estate mortgage, there could also be no valid foreclosure or valid auction sale of the property.

(3) The bona fide purchaser doctrine typically has no application in the context of a forged deed. A purchaser who takes title to property that was earlier conveyed by a forged deed acquires no title, even if the purchaser could have otherwise established him/herself as a bona fide purchaser. However, assuming it can apply, it seems to me that either of the two legal theories invoked by the court, standing alone, would have been enough to support the voiding of the lender's mortgage and the subsequent foreclosure sale. By applying both legal theories to the same set of facts, it appears that the appeals court took a "belt & suspenders approach" to upholding the lower court decision, arguably making it more difficult for the end result to be reversed should the ruling be appealed further.