G.R. No. 25694 , December 31, 1926
LEOCADIO ANGELO, applicant, vs. THE DIRECTOR OF LANDS, ET AL., claimants-appellees; LUCIA F. VALLE CRUZ and CIPRIANO PACHECO, claimants-appellants.

Ponente: J. Ostrand

FACTS

Leocadia Angelo applied for the registration of a 659-hectare land in Tarlac. She stated in her application that she was in actual, peaceful possession and that there were no other claimants. The court granted her application, and a decree of registration and certificate of title were issued. Angelo then sold the land to Cipriano Pacheco, who obtained a transfer certificate of title. Five days later, Pacheco executed a deed in favor of Lucia F. Valle Cruz, ostensibly a sale with pacto de retro for P15,000 with a 5-year repurchase term, but which the court later characterized as a loan secured by an equitable mortgage. Pacheco remained in possession as a tenant.

Subsequently, the Director of Lands and numerous adverse claimants/occupants filed petitions for review of the decree under Section 38 of the Land Registration Act ( Act No. 496 ). They alleged that Angelo obtained the decree by fraud, as she knew the land was occupied by about 350 persons but concealed this fact, depriving them of notice. The trial court found fraud, declared the decree null and void, and ordered the cancellation of Pacheco’s title. Pacheco and Valle Cruz appealed.

ISSUE

1. Whether the decree of registration was obtained by fraud.
2. Whether the petitions for review under Section 38 of the Land Registration Act can prosper given that an “innocent purchaser for value” (mortgagee Valle Cruz) had acquired an interest in the land.

RULING

1. YES, the decree was obtained by fraud. The Court found that Angelo’s deliberate misrepresentation in her applicationthat she was in sole possession and there were no other claimantsconstituted fraud under Section 38 of the Land Registration Act. This fraud prevented the actual occupants from receiving formal notice and asserting their rights.

2. YES, the petitions for review can proceed, but the rights of the innocent mortgagee for value must be protected. The Court held that:
* Pacheco was NOT in good faith. He had full knowledge of the situation (the adverse claimants) before obtaining his title.
* Valle Cruz WAS an innocent mortgagee for value. The transaction, though styled as a sale with pacto de retro, was in substance a loan with an equitable mortgage. Under the last sentence of Section 38, an “innocent purchaser for value” includes an innocent mortgagee. The Court found no evidence of bad faith on her part.
* The Torrens System does not protect fraud. While Section 38 generally bars review if an innocent purchaser for value has acquired an interest, the law was not designed to shield fraud. The Court, looking to the spirit of the law, held that it would be inequitable to allow a fraudfeasor to insulate a fraudulent decree by merely mortgaging the property to an innocent party.
* Equitable Solution: The Court balanced the interests. The occupants were partly negligent for not asserting their rights sooner despite the survey and prolonged proceedings. Justice required protecting Valle Cruz’s lien. Consequently, the Court MODIFIED the trial court’s order:
* The decree was declared null and void, and Pacheco’s title was canceled, affirming the trial court’s ruling against Angelo and Pacheco.
* However, Valle Cruz was declared to have a valid lien on the land for P15,000 with 12% interest from July 23, 1924.
* This lien must be paid. If not paid within six months, it may be foreclosed. In the foreclosure sale, the unoccupied portions of the land must be sold first before the occupied portions.

DISPOSITIVE PORTION:
The appealed order was MODIFIED. Lucia F. Valle Cruz was declared to have a lien on the land. In all other respects, the order was affirmed. No costs.

SEPARATE OPINION:
Justices Romualdez and Villa-Real DISSENTED. They believed that since Valle Cruz was a mortgage creditor in good faith, Section 38 of Act No. 496 expressly barred the review of the decree, and therefore the courts had no jurisdiction to reopen it.