G.R. No.

149221 April 7, 2009 property; (2) cancellation of the OCTs; and (3) annulment of real estate mortgage. The
bank was made a party to the case in view of the suit for annulment of mortgage.
PHILIPPINE NATIONAL BANK, Petitioner,
vs. The records disclose that on March 29, 1973, while the case was pending before the
MARCELINO BANATAO, ROSA BANATAO, VICTORINA B. CADANGAN, AVELINO trial court, the bank extrajudicially foreclosed the property. The bank was declared the
BANATAO, ROSALINDA B. GUMABAY, EDNA B. CALUCAG, CATALINA BANATAO, highest bidder in the ensuing public auction, resulting in the consolidation of title in
ABDON BANATAO, GELACIO BANATAO, CONSTANCIO BANATAO, DOMINGO the bank’s name; hence, the issuance on October 3, 1985 of TCT No. T-65664 in the
BANATAO, RICHARD BANATAO, ARNOLD BANATAO, SALVACION BANATAO, name of the bank.
LANIE BANATAO, VIVIAN BANATAO, ALVIN BANATAO, ROLAND BANATAO, FE
SACQUING, MAXIMO SACQUING, POMPEO BANTAO, ANNIE MALUPENG, BONG
On February 28, 1991, the plaintiffs-respondents and the defendants-respondents
MALUPENG, EDILBERTO BANGAYAN, EVANGELINE BANGAYAN, ELPIDIO
entered into a compromise agreement whereby ownership of virtually the northern half
BANGAYAN, MARLIN PAMITTAN, LOIDA PAMITTAN, VICENTE PAMITTAN,
of the disputed property was ceded to the plaintiffs-respondents, while the remaining
MICHAEL PAMITTAN, EDGARDO PAMITTAN, LORINA BANATAO, ASSISTED BY
southern half was given to the defendants-respondents. In the same compromise
HUSBAND WILLY BANATAO, MARAVITA BANATAO, PAULINA BANATAO ASSISTED
agreement, the defendants-respondents acknowledged their indebtedness to petitioner
BY HUSBAND DOMINGO CUNTAPAY, JULIETA BANATAO, ROSITA PAMITTAN
PNB and bound themselves to pay their respective obligations to the bank, including
ASSISTED BY HUSBAND SALVADOR BANATO, AND ELENA BANATAO, Plaintiffs-
the interests accruing thereon. Petitioner PNB, however, was not a party to the
Respondents,
compromise agreement.
and MARCIANO CARAG, EUGENIO SORIANO, MARIA CAUILAN, PEDRO SORIANO,
PAZ TACACAY, BENJAMIN TACACAY, FAUSTA AGUSTIN, MILAGAROS B. CARAG,
Defendants-Respondents. The trial court rendered its decision, approving and adopting in toto the compromise
agreement, and ordering the participating parties to strictly comply with its terms. The
appellate court dismissed the appeal in its decision of March 30, 2001.
BRION, J.:

PNB submits that its consent to the compromise agreement is necessary to secure a
FACTS
final and complete determination of the claims and defenses of all the parties to the
case. The PNB further argues that when the appellate court approved in toto the trial
On November 16, 1962, Banatao, et al. (plaintiffs-respondents) initiated an action for court's judgment on the compromise agreement, it failed to consider that the bank was
recovery of real property against Marciano Carag (one of the defendants-respondents) a mortgagee in good faith. The bank claims good faith on the position that the OCTs
before the Regional Trial Court (RTC). The disputed property was a new land formation presented to it were all clean on their faces at the time the mortgages were applied for;
on the banks of the Cagayan River — an accretion to Lot 3192 of the Iguig Cadastre — that there were no notices of lis pendens or any annotation of liens or encumbrances
that the plaintiffs-respondents claimed as the owners of the adjoining Lot 3192. The on all of them; and that it had no knowledge, actual or constructive, of facts or
defendants-respondents, on the other hand, were the occupants of the disputed circumstances to warrant further inquiry into the titles of the defendants-respondents.
property.

While the case was pending, the defendants-respondents were able to secure
homestead patents evidenced by Original Certificates of Title (OCTs) issued in their
ISSUES
names. The OCTs were issued in 1965 and 1966, and all bear the proviso that, in
accordance with the Public Land Act, the patented homestead shall neither be
alienated nor encumbered for five (5) years from the date of the issuance of the patent. 1. Whether or not the compromise agreement entered into by some of the parties in
litigation is binding upon those who did not participate to the agreement.
The defendants-respondents separately applied for loans with the Philippine National
Bank (PNB or the bank) secured by real estate mortgages on their respective titled 2. Whether or not the mortgage constituted on the disputed land covered by a
portions of the disputed property. The PNB mortgages were annotated on the homestead patent is valid.
defendants-respondents' respective OCTs also in the years 1965 and 1966.

The trial court decided the case in favor of the plaintiffs-respondents and ordered the
return of the disputed property to the plaintiffs-respondents. Carag appealed the trial RULING
court decision to the Court of Appeals (CA).
1. The compromise agreement does not bind those who are not part of such
In an amended complaint, the plaintiffs-respondents also added two (2) additional compromise.
causes of action, or a total of three (3) causes of action, namely: (1) recovery of real

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It is basic in law that a compromise agreement, as a contract, is binding only upon the PNB cannot claim that it is a mortgagee in good faith. The proscription against
parties to the compromise, and not upon non-parties. This is the doctrine of alienation or encumbrance is unmistakable even on a cursory reading of the OCTs.
relativity of contracts. Consistent with this principle, a judgment based entirely on a Thus, one who contracts with a homestead patentee is charged with knowledge of the
compromise agreement is binding only on the parties to the compromise the court law's proscriptive provision that must necessarily be read into the terms of any
approved, and not upon the parties who did not take part in the compromise agreement involving the homestead. Under the circumstances, the PNB simply failed to
agreement and in the proceedings leading to its submission and approval by the court. observe the diligence required in the handling of its transactions and thus made the
Otherwise stated, a court judgment made solely on the basis of a compromise fatal error of approving the loans secured by mortgages of properties that cannot, in
agreement binds only the parties to the compromise, and cannot bind a party litigant the first place, be mortgaged.
who did not take part in the compromise agreement. In the case of Castañeda v. Heirs
of Maramba, we held that:
WHEREFORE, we hereby DECLARE the mortgages constituted on OCT Nos. 24800,
24801, 25217 and 25802 VOID and, for this reason, we DISMISS the petition. We
Judgment based on a compromise affects only participating litigants—A partial AFFIRM the approval of the compromise agreement by the Court of Appeals and the
decision, stemming from an amicable settlement among two of several parties to an disposition of the case on the basis of compromise.
action, binds only the parties so participating in the settlement. This decision never
becomes final with respect to the parties who did not take part in the settlement
confirmed by the partial decision aforesaid.

Following Castañeda, the judgment on compromise rendered by the trial court in this
case, and later affirmed by the appellate court, is final with respect only to the
plaintiffs-respondents and defendants-respondents, but not with respect to the PNB.
Hence, the trial court's judgment on compromise which settles the issue of ownership
over the properties in question is but a partial decision that does not completely decide
the case and cannot bind the PNB.

2. The mortgage on the land covered by a homestead patent is not valid.

We conclude from our own examination of these OCTs that the mortgages cannot but
be void ab initio. On the faces of all the OCTs—secured through homestead patents—
are inscribed the following words that echo the mandatory provisions of law:

TO HAVE AND TO HOLD the said tract of land with the appurtenances thereunto x x x
subject to the provisions of Sections 118, 121, 122 and 124 of Commonwealth Act No.
141, as amended, which provide that except in favor of the Government or any of its
branches, units or institutions, THE LAND HEREBY ACQUIRED SHALL BE
INALIENABLE AND SHALL NOT BE SUBJECT TO [E]NCUMBRANCE FOR A PERIOD
OF FIVE (5) YEARS NEXT FOLLOWING THE DATE OF THIS PATENT, and shall not
be liable for the satisfaction of any debt contracted prior to the expiration of that
period; x x x.

This inscription reproduces Section 118 of the Public Land Act, as amended, which
contains a proscription against the alienation or encumbrance of homestead patents
within five years from issue. The rationale for the prohibition, reiterated in a line of
cases, first laid down in Pascua v. Talens states that "x x x homestead laws were
designed to distribute disposable agricultural lots of the State to land-destitute citizens
for their home and cultivation. It aims to preserve and keep in the family of the
homesteader that portion of public land which the State had gratuitously given to
him."

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