G.R. No. 110672 - Rural Bank of Sta. Maria, Pangasi vs. Court of Appeals

Case Summary (G.R. No. 110672)

Relevant Dates and Procedural Posture

Material events: extrajudicial settlement and subsequent transactions from 1978–1986; Deed of Absolute Sale with Assumption of Mortgage and related Agreement dated January 9, 1985; Memorandum of Agreement between purchasers and the Bank dated August 1, 1985; Assignment of Mortgage to Halsema on July 28, 1986; foreclosure sale held September 2, 1986. Trial judgment rendered March 6, 1989. Court of Appeals decision dated March 17, 1993. Supreme Court proceedings: consolidated Rule 45 petitions (G.R. No. 110672 and G.R. No. 111201), with final resolution denying the bank’s petition (decision affirmed).

Applicable Law and Authorities Relied Upon

Applicable constitution: 1987 Philippine Constitution (decision date post-1990). Civil Code provisions expressly considered: Article 1338 (fraud by insidious words or machinations) and Article 1339 (failure to disclose when under a duty to reveal). Jurisprudence invoked in the decision includes Reyes v. Court of Appeals, Constantino v. Court of Appeals, and Policarpio v. Court of Appeals; doctrinal reference to Tolentino’s commentary on the Civil Code is also cited in the court’s discussion.

Property and Title History

TCT No. T-29817 (about 49,969 sq.m.) was registered in the name of Manuel Behis. The land originated from a larger tract covered by OCT-0-33 owned by the Behis family. Following the elder Behis’s death, a 1978 extrajudicial settlement and subsequent confirmations reflected continued co-ownership among the siblings, although an apparent arrangement was made to facilitate transactions in favor of Manuel.

Mortgage, Debt, and Sale to Private Respondents

Manuel and Cristina Behis executed a real estate mortgage in favor of the Bank on October 23, 1978 as security for loans totaling P156,750 (annotated on the title in 1979). Manuel became delinquent. On January 9, 1985 Manuel executed a Deed of Absolute Sale with Assumption of Mortgage in favor of Rayandayan and Arceao (signed by Cristina as well), and on the same date a separate Agreement (Exhibit 15) declared a much larger “real” consideration of P2,400,000 with specified recourse in case of default. The purchasers did not immediately annotate the deed or present the two contracts to the Register of Deeds or to the Bank.

Negotiation with the Bank and Memorandum of Agreement

The purchasers negotiated with Engr. Edilberto Natividad and, without disclosing the separate Agreement reflecting the P2.4M consideration, entered into a Memorandum of Agreement with the Bank on August 1, 1985. Under that Memorandum: (a) the purchasers paid an initial P35,000 and agreed three monthly payments of P36,000 (totaling P143,000 for the short-term portion), and (b) the balance of P200,000 was to be renewed and secured by a new mortgage; the Bank agreed to release the original mortgage and to consent to transfer of title after compliance. The purchasers made payments totaling P143,000 (though delayed), which the Bank initially received.

Cristina Behis’s Protests and Bank’s Position

Cristina Behis sent letters to the Bank in September and October 1985, and later in February 1986, protesting that her signature on the Deed of Sale was forged and that she did not authorize any redemption. The Bank cited these protests and the purchasers’ delayed payments and alleged non-disclosure of the P2.4M Agreement as reasons to consider the Memorandum of Agreement cancelled. The Bank also acknowledged receiving payments and later returned or paid sums to the purchasers in connection with a criminal case settlement involving Bank officers.

Assignment to Halsema and Foreclosure Proceedings

Halsema, interested in acquiring the property, entered into an Assignment of Mortgage with the Bank on July 28, 1986 for the total indebtedness then outstanding (P520,765.45). The assigned interest was the original mortgage created by Manuel Behis, not the restructured obligations under the Memorandum of Agreement as between the Bank and the purchasers. Halsema instituted foreclosure, published notices, and was the sole bidder at the public auction held September 2, 1986, resulting in issuance of a Sheriff’s Certificate of Sale. The purchasers registered and annotated an adverse claim on the title on September 3, 1986, and subsequently filed suit.

Trial Court Judgment

The Regional Trial Court (Branch 6, Baguio City) rendered judgment on March 6, 1989. The trial court (inter alia) declared the Deed of Sale with Assumption of Mortgage and the Agreement valid until annulled; ordered the Bank to pay the purchasers moral and exemplary damages, attorney’s fees and litigation expenses for bad faith in violating the Memorandum of Agreement; simultaneously ordered the purchasers to pay similar damages to the Bank for deceiving the Bank; and declared the Memorandum of Agreement annulled due to alleged fraud by the purchasers. The decision contained cross-awards and an order to set off damages between parties.

Court of Appeals Ruling

The Court of Appeals affirmed the validity of the Deed of Absolute Sale with Assumption of Mortgage and the Memorandum of Agreement as between the parties thereto, reversed the trial court’s finding that the purchasers acted in bad faith by concealing the P2.4M consideration, and modified damages: it ordered the Bank to pay the purchasers P229,135.00 as actual damages plus moral, exemplary damages, attorney’s fees and litigation expenses (specified amounts). The appellate court dismissed other counterclaims for damages and reversed inconsistent dispositions of the trial court.

Issues Presented to the Supreme Court

The Supreme Court considered the petition by the Rural Bank (G.R. No. 110672) challenging the Court of Appeals’ portions that affirmed the Memorandum of Agreement and awarded damages to the purchasers; the Bank argued the Memorandum was voidable due to fraud (non-disclosure of the true purchase price) and that the purchasers acted in bad faith, thus not entitled to damages.

Supreme Court’s Legal Analysis on Fraud and Non-Disclosure

The Court reviewed the elements necessary to vitiate consent by fraud (Article 1338) and the rule that nondisclosure, by itself, is not fraud unless there is a duty to disclose (Article 1339). The Court emphasized that fraud must be the determining cause inducing consent and that mere omission to disclose the purchase price of a separate transaction did not demonstrate the kind of insidious machination required by Article 1338. The Court found that the Bank entered into the Memorandum to effect

Case Syllabus (G.R. No. 110672)

Case Caption, Citation and Procedural Posture

Consolidated petitions for review on certiorari under Rule 45: G.R. No. 110672 (Rural Bank of Sta. Maria, Pangasinan as petitioner) and G.R. No. 111201 (Rosario R. Rayandayan and Carmen R. Arceao as petitioners).
Supreme Court Third Division decision authored by Gonzaga-Reyes, J.; Melo (Chairman), Vitug, and Purisima, JJ., concur. Panganiban, J. took no part.
Reported at 373 Phil. 27; 97 O.G. No. 4, 558 (January 22, 2001). The consolidated petitions arose from CA-G.R. CV No. 21918 and Civil Case No. 890-R (Regional Trial Court, Branch 6, Baguio City).
G.R. No. 111201 was denied by the Supreme Court as filed out of time and for late payment of docket fees; reconsideration denied. G.R. No. 110672 proceeded for resolution on its merits.

Essential Facts (as found by trial court and adopted by the Court of Appeals)

Property: a parcel of about 49,969 square meters in Residence Section J, Camp 7, Baguio City, covered by TCT No. T-29817, registered in the name of Manuel Behis (married to Cristina Behis).
Title history: land originally part of a larger tract covered by OCT-0-33 owned by Behis (one name); upon death of the elder Behis (September 24, 1971) his children executed an extrajudicial settlement with sale to Manuel (September 28, 1978) but later a Confirmation of Rights of Co-Ownership (September 26, 1983) showed co-ownership remained among siblings.
Mortgage and indebtedness: Manuel Behis mortgaged the land to Rural Bank of Sta. Maria by Real Estate Mortgage dated October 23, 1978, to secure loans evidenced by six promissory notes and trust receipts totaling P156,750.00; the mortgage was annotated on the title on February 13, 1979. Both Manuel and Cristina Behis signed the mortgage, promissory notes and trust receipts.
Deed of sale and separate agreement: On January 9, 1985 Manuel Behis executed a Deed of Absolute Sale with Assumption of Mortgage in favor of plaintiffs Rosario Rayandayan and Carmen Arceao for P250,000.00 (Exhibit A), bearing Cristina Behis’s signature; on the same date plaintiffs and Manuel executed a separate Agreement (Exhibit 15) stating the real consideration as P2,400,000.00 and providing that in case of default Manuel would have legal recourse to portions of the land equivalent to unpaid balances.
Registration and title status: Plaintiffs did not present the two contracts to the Register of Deeds for cancellation and reissuance of title in their names, nor did they annotate those contracts on the title immediately; TCT No. T-29817 remained in the name of Manuel Behis.
Payments by plaintiffs to Manuel: plaintiffs paid Manuel sums including P10,000.00, P50,000.00, P145,800.00 (per Exhibit U and hearing) and P21,353.75 for hospitalization/medical/burial expenses upon Manuel’s death on June 21, 1985; these payments were far short of the P2,400,000.00 stated in Exhibit 15.
Bank’s foreclosure attempts and negotiations: Manuel’s indebtedness became delinquent and increased (by May 30, 1985 the indebtedness ballooned to P316,368.13); the bank published foreclosure but discontinued it pending outside buyers; plaintiffs sought a more detailed statement of account (letter of Atty. William Arceao, June 19, 1985).
Memorandum of Agreement with the Bank: On August 1, 1985 plaintiffs presented the Deed of Absolute Sale with Assumption of Mortgage to the Bank (but not Exhibit 15) and entered into a Memorandum of Agreement (Exhibit F) with salient terms: (a) acknowledgment of the Deed of Absolute Sale; (b) total obligation of Manuel to the bank P343,782.22; (c) terms for release of mortgage and substitution of assignees, including P35,000 immediate, P36,000 monthly for September–November 1985 (total P108,000), and renewal of a P200,000 balance for one year secured by a new mortgage requiring payment of interest and at least 10% principal.
Payments under the Memorandum: plaintiffs paid the bank P35,000 on August 1, 1985; payments in September and October 1985 totaling the needed installments (some late); P36,000 in dollars remitted December 18, 1985 to cover November installment. In total plaintiffs paid P143,000 under paragraphs 5(a) and 5(b) though with delays; an instruction letter from Engr. Edilberto Natividad to credit payments was sent.
Objections by Cristina Behis: On September 5 and October 28, 1985 Cristina Behis wrote to the bank asserting the mortgage was without her signature and that she did not authorize redemption of the property on her behalf; on February 15, 1986 she wrote again claiming she was not a party to the Deed and that her signature was forged, requesting the Bank not to release the title.
Assignment of mortgage to Halsema, Inc.: On July 28, 1986 Halsema, Inc. entered into an Assignment of Mortgage with the Bank for P520,765.45 (the total indebtedness of Manuel with the Bank at the time); what was assigned was the original mortgage made by Manuel Behis, not any mortgage as assumed by plaintiffs under the Memorandum. The Bank considered the Memorandum cancelled for reasons including Cristina’s protest, plaintiffs’ failure to timely comply with Memorandum terms and alleged fraud in obtaining the Bank’s consent (non-disclosure of Exhibit 15).
Foreclosure and auction: Halsema, as assignee mortgagee, filed an Application for Foreclosure on July 31, 1986, set a public auction on September 2, 1986, which was published and posted; Halsema was the sole bidder at the auction and received the Sheriff’s Certificate of Sale. Plaintiffs registered and annotated their adverse claim on the title on September 3, 1986.
Bank’s return and settlement of payments: After assignment of mortgage, the Bank returned P143,000.00 to plaintiffs but plaintiffs rejected it; the Bank subsequently paid plaintiffs P143,000.00 and P90,000.00 interest in settlement of a criminal estafa case against Edilberto and Vicente Natividad.

Procedural History and Pleadings

Plaintiffs (Rayandayan and Arceao) filed Civil Case No. 890-R on September 5, 1986 against Rural Bank of Sta. Maria and Halsema, Inc., for Specific Performance, Declaration of Nullity and/or Annulment of Assignment of Mortgage and Damages; notice of lis pendens annotated the back of TCT T-29817 the same date.
Trial court (RTC Branch 6, Baguio City) rendered judgment on March 6, 1989 with a dispositive awarding mutual damages, declaring the Deed and Agreement valid until annulled, and declaring the Memorandum of Agreement annulled due to fraud of plaintiffs, among other dispositions.
Plaintiffs and Hal