G.R. No. L-32116 - Rural Bank of Caloocan, Inc. vs. Court of Appeals

Case Summary (G.R. No. L-32116)

Factual Background

In December 1959, respondent Maxima Castro sought a P3,000 loan from Rural Bank of Caloocan, Inc. She was accompanied by Severino and Catalina Valencia, who arranged the transaction and supplied personal data. On December 11, 1959 Castro signed a promissory note for P3,000 for her personal loan. On the same day the Valencias obtained a separate P3,000 loan and caused Castro to sign a second promissory note (Exhibit 2) as co-maker. Both loans were secured by a real-estate mortgage (Exhibit 6) on Castro’s house and lot covered by T.C.T. No. 7419. Castro later received notice of a sheriff’s sale and learned that the mortgage secured an obligation of P6,000 rather than P3,000.

Complaint and Relief Sought

On April 4, 1961 Castro filed suit denominated “Re: Sum of Money” against the bank, Desiderio, the Valencias, the sheriff Basilio Magsambol and Arsenio Reyes. She deposited P3,383 with the clerk as payment of her personal loan and in her amended complaint sought annulment of the promissory note (Exhibit 2) as to her, annulment of the mortgage (Exhibit 6) insofar as it exceeded P3,000, annulment of the foreclosure sale, application of her deposit to discharge her obligation, and an award of attorney’s fees, damages and costs.

Stipulation of Facts

The parties submitted a partial stipulation of facts admitting, among other matters, Castro’s ownership of the mortgaged property, the genuineness of her signatures on the relevant loan documents and promissory notes, the notice of sheriff’s sale dated February 13, 1961, postponement of the sale from March 10 to April 10, 1961, the sale held on April 11, 1961 with Arsenio Reyes as highest bidder, issuance of a transfer certificate to Reyes, and subsequent annotation of lis pendens by Castro.

Trial Evidence

At trial Castro testified that she was seventy years old, illiterate in English, spoke only Pampango, had only a second grade education, and that the Valencias handed her preprepared documents to sign without explanation or copies. She asserted that she did not learn of the P6,000 mortgage encumbrance until receipt of the sheriff’s letter in February 1961. The bank produced testimony that Castro had been interviewed and that she represented she sought P3,000 for investment in a drugstore and offered her property as security. The bank’s manager admitted that information in the application overstated Castro’s age, occupation and income.

Trial Court and Court of Appeals Rulings

The Court of First Instance of Manila rendered judgment in favor of Castro and ordered, among other things, that (1) promissory note Exhibit 2 was invalid as to Castro; (2) mortgage Exhibit 6 was null and void insofar as it exceeded P3,000; (3) the extrajudicial foreclosure sale of April 11, 1961 was annulled; (4) Castro’s unpaid obligation was limited to P3,000 plus 12% interest and her deposit of P3,383 was to be applied; (5) the bank was ordered to reimburse Arsenio Reyes for the purchase price and expenses; and (6) the Valencias were ordered to pay the bank P3,000 plus interest. The Court of Appeals affirmed the decision in toto.

Issues Presented on Review

Petitioners raised six assignments of error summarized as follows: that the Court of Appeals erred in partially annulling Exhibit 2 and Exhibit 6 absent allegation or proof of fraud or unlawful conduct by petitioners; that the court improperly imputed the Valencias’ fraud to the bank in violation of the res inter alios acta principle; that Castro was estopped from impugning the transaction; that Castro’s negligence or acquiescence should deny her relief; that Castro’s consignation of P3,383 was invalid for failure to tender to the bank; and that the foreclosure sale held on the business day following the holiday was valid under Section 31, Revised Administrative Code.

Parties’ Contentions on Fraud, Mistake and Agency

Petitioners contended that the Valencias alone committed fraud and that the bank could not be prejudiced by that fraud under the res inter alios acta doctrine. They argued further that Castro’s conduct amounted to negligence or apparent authority conferred on the Valencias, thereby precluding her from impugning the instruments. Castro and respondents below contended that the Valencias defrauded Castro and misrepresented information to the bank, producing a mutual and substantial mistake that vitiated consent.

Findings on Fraud, Mistake and Bank’s Negligence

The Court found that the Valencias had defrauded Castro and that their misrepresentations to the bank produced substantial, mutual mistake affecting the consents of both Castro and the bank. The Court noted the bank’s failure to verify Castro’s qualifications or ensure she understood the documents she signed given her age, illiteracy and dependence, invoking Article 24 and Article 1332 of the Civil Code to afford protection. The Court further relied on Article 1342, holding that misrepresentation by a third person can vitiate consent where it results in mutual substantial mistake, and cited Hill v. Veloso to the same effect. The Court rejected petitioners’ estoppel and agency arguments because the Valencias’ authority was limited to following up Castro’s loan application and because the bank should have required a special power of attorney if it thought the Valencias acted on Castro’s behalf.

On Consignation of P3,383

The Court upheld Castro’s deposit of P3,383 with the clerk as a valid consignation sufficient to discharge her personal obligation for P3,000 plus interest. The Court reasoned that prior tender to the bank would have been futile given the bank’s position and the existing foreclosure proceedings, and that equitable considerations supported acceptance of the consignation under Article 1256.

On Validity of the Foreclosure Sale

The Court held the extrajudicial foreclosure sale of April 11, 1961 void. It explained that Section 9, Act No. 3135 required notices to be posted for not less than twenty days and, where the property exceeded PHP 400 in value, publication once a week for three consecutive weeks. The Court ruled that the pretermission rule of Section 31, Revised Administrative Code — permitting acts whose last day falls on a holiday to be done on the next business day — did not apply to a deputy sheriff’s fixed sale date because the pretermission rule governs statutory or periodical last days, not discretionary dates set by an officer; consequently the sale held on April 11 lacked the required notices for that day.

Disposition and Relief O

Case Syllabus (G.R. No. L-32116)

Parties and Procedural Posture

RURAL BANK OF CALOOCAN, INC. and Jose O. Desiderio, Jr. filed a petition for certiorari seeking review of the decision of THE COURT OF APPEALS in favor of MAXIMA CASTRO.
Maxima Castro was plaintiff-appellee below and respondent in the present petition.
The Court of Appeals affirmed the judgment of the Court of First Instance of Manila in favor of Maxima Castro and this Court was asked to review that affirmance.
The Court of Appeals decision under review was entered in CA-G.R. No. 39760-R and the petition to this Court assails factual findings and legal conclusions of that court.

Key Factual Allegations

Maxima Castro applied for an industrial loan of P3,000 on December 7, 1959 and signed a promissory note for P3,000 on December 11, 1959.
On December 11, 1959, the Valencia spouses obtained a separate P3,000 loan and caused Castro to sign as co-maker on a distinct promissory note, Exhibit '2', which she later claimed she did not understand.
A real estate mortgage, Exhibit '6', dated December 11, 1959, purportedly secured obligations totalling P6,000 over T.C.T. No. 7419, the house and lot of Castro.
A notice of sheriff's sale dated February 13, 1961 announced auction on March 10, 1961 for nonpayment and the sale was postponed to April 10, 1961 and was actually conducted on April 11, 1961, with Arsenio Reyes as highest bidder.
Castro deposited P3,383 with the trial court on filing her complaint, asserting payment of her personal loan of P3,000 plus interest.

Documents and Exhibits

The parties stipulated the genuineness of Exhibit '2' (promissory note with Castro as co-maker), Exhibit '6' (real estate mortgage for P6,000), and the application and promissory note documents for P3,000.
The stipulation also included posting and publication evidence relevant to the sheriff's sale and the final deed of sale to Arsenio Reyes for P7,000.
The record contains correspondence of the Acting Chief Deputy Sheriff, receipts of consignation, and the annotation of lis pendens upon the register of deeds.

Procedural History

Castro filed Civil Case No. 46698 in the Court of First Instance of Manila on April 4, 1961 claiming fraud or mistake and sought annulment of Exhibit '2' and rescission of Exhibit '6' insofar as it exceeded P3,000, annulment of the foreclosure sale, application of her deposit to her indebtedness, and damages.
The Court of First Instance rendered judgment in favor of Castro, annulling Exhibit '2' as to her, limiting Exhibit '6' to P3,000, annulling the foreclosure sale, and ordering various restitutions and payments.
THE COURT OF APPEALS affirmed the judgment in toto and denied petitioners' motion for reconsideration, prompting the present petition to this Court.

Issues Presented

Whether the Court of Appeals erred in annulling Exhibit '2' as to Castro and limiting Exhibit '6' to P3,000 despite the absence of fraud attributed to the bank in the lower court record.
Whether the res inter alios acta rule barred the court from imputing the Valencianas' fraud to the bank.
Whether Castro is estopped from impugning the transactions by reason of negligence, acquiescence, or agency.
Whether Castro validly discharged her obligation by consignation of P3,383 without prior tender to the bank.
Whether the foreclosure sale held on April 11, 1961 was valid when April 10, 1961 was declared a special holiday and the sale was held on the next business day.

Contentions of Petitioners

Petitioners contended that the Court of Appeals erred in annulling contractual obligations as to the bank in the absence of proof that the bank participated in or knew of any fraud.
Petitioners invoked the res inter alios acta principle to argue that fraud by the Valencia spouses should not prejudice the bank.
Petitioners argued that Castro