Rural Bank of Caloocan, Inc. vs. Court of Appeals

A contract may be annulled on the ground of vitiated consent even when fraud is perpetrated solely by a third party without the connivance of either contracting party, provided such fraud results in substantial mutual error on the part of the contracting parties. Misrepresentation by a third person does not vitiate consent unless it has created substantial mistake and that mistake is mutual (Article 1342, Civil Code).

Maxima Castro, a 70-year-old widow of limited education who could not read or write English and spoke only Pampango, needed P3,000.00 to invest in the business of the spouses Severino and Catalina Valencia. The Valencias accompanied her to the Rural Bank of Caloocan to apply for an industrial loan. On December 7, 1959, Castro applied for a P3,000.00 loan. On December 11, 1959, after approval, she signed a promissory note for that amount. On the same day, the Valencia spouses obtained their own P3,000.00 loan and had Castro sign as co-maker on their promissory note. Both loans were secured by a real estate mortgage on Castro's house and lot. Castro alleged she did not understand she was signing as co-maker for the Valencias' loan or that her property secured P6,000.00 rather than only her own P3,000.00 obligation. She learned of the larger encumbrance only upon receiving a notice of sheriff's sale in February 1961.

• Nature: Maxima Castro, a 70-year-old widow, could not read or write English, spoke only Pampango, and had completed only the second grade. She sought to annul a promissory note she signed as co-maker and a real estate mortgage on her property, contending that her consent was obtained through fraud or mistake.

• The Loan Transactions: On December 7, 1959, Castro, accompanied by Severino Valencia, applied for a P3,000.00 industrial loan from the Rural Bank of Caloocan. Valencia supplied her personal data and arranged everything. On December 11, 1959, the bank approved the loan. Castro signed a promissory note (Exhibit "1") for P3,000.00 in her favor. On the same day, the Valencia spouses obtained their own P3,000.00 loan and signed a separate promissory note (Exhibit "2") on which Castro affixed her signature as co-maker. Both loans were secured by a real estate mortgage (Exhibit "6") on Castro's house and lot of 150 square meters covered by TCT No. 7419.

• Discrepancies in Documentation: The bank's witness claimed Castro had been interviewed. The Court of Appeals found significant inaccuracies in the bank's records: Castro's age was listed as 61 instead of 70, she was described as a drug manufacturer when she was not, and the application stated she had an income of P20,000.00 when her actual income was far more modest—P1.20 per picul of sugarcane and 500 cavans of palay. These misrepresentations were supplied by the Valencias and accepted by the bank without direct verification with Castro.

• Discovery and Foreclosure: Castro alleged she first learned the mortgage secured P6,000.00 and not merely P3,000.00 when she received a notice of sheriff's sale dated February 13, 1961. The auction was originally scheduled for March 10, 1961, postponed to April 10, 1961, at the request of Castro and the Valencias. April 10, 1961, was declared a special public holiday. The sheriff sold the property on April 11, 1961, the next business day, without posting new notices. Arsenio Reyes was the highest bidder and later consolidated ownership.

• Consignation: Upon filing her complaint on April 4, 1961, Castro deposited P3,383.00 with the trial court in full payment of her personal loan plus 12% interest. The bank, holding Castro liable for P6,000.00 plus interest, made no claim on the deposited amount.

• Stipulated Facts: The parties entered into a partial stipulation of facts admitting Castro's ownership of the property, the genuineness of her signatures on all documents, the issuance of the notice of sheriff's sale, the postponement and eventual auction sale on April 11, 1961, the sale to Arsenio Reyes, the consolidation of ownership, and the annotation of a notice of lis pendens on TCT No. 67299.

• Absence of Bank Participation in Fraud: Petitioners argued that the amended complaint contained no allegation and the evidence no proof of fraud or unlawful conduct committed or participated in by the bank in procuring Castro's execution of the contracts. Since the Valencias alone were found to have defrauded Castro, the promissory note and mortgage should remain valid between Castro and the bank under the res inter alios acta rule.

• Estoppel and Negligence: Petitioners maintained that Castro was estopped from impugning the regularity and validity of the transactions because her own negligence, acquiescence, or actual connivance made the fraud possible. By holding the Valencias out as her agents, she clothed them with apparent authority, and she should bear the consequences of their acts.

• Validity of Consignation: Petitioners contended that Castro's consignation of P3,383.00 was invalid because it was made without prior offer or tender of payment to the bank, as required by Article 1256 of the Civil Code.

• Validity of Foreclosure Sale: Petitioners argued that the auction sale held on April 11, 1961—the next business day after the scheduled April 10, 1961 date, which was declared a holiday—was valid under Section 31 of the Revised Administrative Code, which permits acts falling due on a holiday to be performed on the next succeeding business day.

• Fraud and Mistake: Castro maintained that she was fraudulently induced by the Valencia spouses to sign as co-maker of their promissory note and to mortgage her property for P6,000.00 without understanding the nature and contents of the documents. She neither read nor understood English and no one explained the documents to her.

• Bank's Lack of Due Care: Castro argued that the bank, as an institution affected with public interest, failed to exercise the highest degree of care required in its business dealings, particularly in verifying her personal circumstances and ensuring she understood the obligations she was assuming.

• Valid Tender and Consignation: Castro contended that her deposit with the court constituted valid consignation because the bank was holding her liable for a greater sum, it had already foreclosed the mortgage extrajudicially, and any prior tender would have been futile and useless.

• Invalid Foreclosure Sale: Castro argued that the auction sale on April 11, 1961, was void because no new notices were posted as required by Section 9 of Act No. 3135 for a sale on that date.

• Vitiated Consent: Whether the promissory note and mortgage could be partially annulled as to Castro absent any finding of fraud or unlawful conduct participated in by the bank.

• Allocation of Loss: Who between Castro and the bank should bear the consequences of the fraud perpetrated by the Valencia spouses.

• Validity of Consignation: Whether Castro's deposit of P3,383.00 with the trial court constituted valid consignation sufficient to discharge her obligation.

• Validity of Foreclosure Sale: Whether the extrajudicial foreclosure sale held on April 11, 1961, the next business day after the scheduled sale date declared a holiday, was valid without new notices.

• Vitiated Consent: The promissory note was properly declared invalid as to Castro and the mortgage valid only up to P3,000.00, not on the ground of fraud (since the bank did not participate), but on the ground of substantial mutual mistake under Article 1342 of the Civil Code. The fraud by the Valencias against Castro and their misrepresentations to the bank caused both contracting parties to err in giving consent. Under Article 1342, misrepresentation by a third person vitiates consent when it creates substantial mistake that is mutual. The precedent in Hill v. Veloso (31 Phil. 160) established that a contract may be annulled if deceit by a third person, even without connivance with a contracting party, resulted in mutual error. The amended complaint sufficiently averred fraud against the Valencias, and since the mutual mistake was a mere consequence of that proven fraud, the absence of an explicit averment of mistake did not preclude relief.

• Allocation of Loss: The bank's own negligence barred it from claiming the full benefit of the contracts. The Court of Appeals' findings showed the bank failed to exercise due care: it recorded Castro's age as 61 instead of 70, described her as a drug manufacturer when she was not, and attributed an income of P20,000.00 to her without verifying these data with Castro herself. The bank relied on the Valencias' representations instead of directly obtaining information from Castro, the acknowledged property owner. Considering Castro's lack of education, ignorance, and old age, the bank—engaged in a business affected with public interest—was required to exercise the highest order of care and prudence. The bank should have ascertained her awareness of what she was signing and explained her obligations. No agency existed between Castro and the Valencias for borrowing purposes; had the bank believed otherwise, it should have required a special power of attorney. The Valencias acted on their own behalf, and the bank should have inquired whether Castro's consent to mortgage her property for their loan was free from defect.

• Validity of Consignation: The consignation was valid. Although no prior tender of payment was made directly to the bank, the circumstances showed substantial compliance with Article 1256, if not under strict law then under equity. The bank held Castro liable for P6,000.00 plus interest while the consigned amount was only P3,000.00 plus interest. The bank had already foreclosed the mortgage extrajudicially and scheduled the sale. Despite knowing of the deposit because the receipt was attached to the record, the bank never claimed it. Under these circumstances, a prior tender would have been futile and useless.

• Validity of Foreclosure Sale: The extrajudicial foreclosure sale on April 11, 1961, was null and void. Section 31 of the Revised Administrative Code, which permits an act falling due on a holiday to be done on the next business day, applies only when the day or the last day for doing an act required or permitted by law falls on a holiday, or when the last day of a given period falls on a holiday. It does not apply to a date fixed by an office or officer for an act to be done, as distinguished from a period within which an act may be done on any day within that period. Since April 10, 1961, was not the last day set by law but a date fixed by the deputy sheriff, the sale could not legally be held on the next business day without posting new notices as required by Section 9 of Act No. 3135.

• Mutual Mistake Caused by Third-Party Fraud (Article 1342, Civil Code): Misrepresentation by a third person does not vitiate consent unless it has created substantial mistake and the mistake is mutual. When fraud perpetrated by a third party causes both contracting parties to err substantially in giving their consent, the contract may be annulled even absent participation by either party in the fraud. This doctrine, rooted in Hill v. Veloso, allows invalidation on the ground of vitiated consent where deceit by a third person, without connivance with a contracting party, results in mutual error.

• Protection of the Disadvantaged Party (Articles 24 and 1332, Civil Code): Courts must be vigilant to protect a party disadvantaged by ignorance, indigence, mental weakness, old age, or other handicap. When one party is unable to read or the contract is in a language not understood by that party, and mistake or fraud is alleged, the person enforcing the contract must prove that its terms were fully explained. Banks, as institutions affected with public interest, are required to exercise the highest order of care and prudence in their dealings, particularly with unschooled and elderly clients.

• Pretermission of Holiday in Extrajudicial Foreclosure: Section 31 of the Revised Administrative Code applies only when the day or last day for doing an act required or permitted by law falls on a holiday; it does not apply to a date fixed by an office or officer. An extrajudicial foreclosure sale scheduled on a date subsequently declared a holiday cannot automatically be held on the next business day without compliance with the posting requirements of Section 9, Act No. 3135.

• Exception to Tender Requirement in Consignation: Consignation may be valid even without prior tender of payment when tender would be futile or useless, such as when the creditor holds the debtor liable for a larger sum, has already initiated foreclosure proceedings, and makes no claim on the deposited amount despite knowledge thereof.

• "Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual." — This excerpt from Article 1342 forms the core ratio decidendi.

• "A contract may be annulled on the ground of vitiated consent if deceit by a third person, even without connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract." — The Court's restatement of the rule from Hill v. Veloso (31 Phil. 160), directly applied to validate the partial annulment.

• "With the recent occurrence of events that have supposedly affected adversely our banking system, attributable to laxity in the conduct of bank business by its officials, the need of extreme caution and prudence by said officials and employees in the discharge of their functions cannot be over-emphasized." — The Court's expression of the heightened standard of care demanded of banking institutions given their public character.

• "Since April 10, 1961 was not the day or the last day set by law for the extrajudicial foreclosure sale, nor the last day of a given period but a date fixed by the deputy sheriff, the aforesaid sale cannot legally be made on the next succeeding business day without the notices of the sale on that day being posted as prescribed in Section 9, Act No. 3135." — The dispositive reasoning distinguishing statutory periods from administratively fixed dates for purposes of the pretermission rule.

• Hill vs. Veloso, 31 Phil. 160 — Controlling precedent establishing that a contract may be annulled on the ground of vitiated consent when deceit by a third person, even without connivance with a contracting party, results in mutual error. Applied to justify partial annulment of the promissory note and mortgage.

• Guico vs. Mayuga, 63 Phil. 328; Velasco vs. Court of Appeals, 90 Phil. 688; Fonacier vs. Court of Appeals, 96 Phil. 417 — Cited for the rule that findings of fact by the Court of Appeals are final and binding on the Supreme Court.

• Article 1342, Civil Code: Misrepresentation by a third person does not vitiate consent unless it creates substantial mistake and the same is mutual. Applied as the legal basis for annulling the promissory note and limiting the mortgage despite the bank's non-participation in the fraud.

• Article 24, Civil Code: Courts must be vigilant to protect parties disadvantaged by ignorance, indigence, mental weakness, or other handicap in contractual relations. Cited to support the protective stance toward Castro.

• Article 1332, Civil Code: When a party is unable to read or the contract is in a language not understood by that party, and mistake or fraud is alleged, the person enforcing the contract must prove its terms were fully explained. Applied to place the burden on the bank to show Castro understood the documents.

• Article 1256, Civil Code: Governs valid consignation. The Court found substantial compliance under equitable considerations.

• Section 9, Act No. 3135: Requires posting of notices of extrajudicial foreclosure sale for at least 20 days in three public places and publication once a week for three consecutive weeks in a newspaper of general circulation. Applied to invalidate the sale on April 11, 1961, which lacked new notices.

• Section 31, Revised Administrative Code: Pretermission of holiday rule—where a day or last day for doing an act required or permitted by law falls on a holiday, the act may be done on the next business day. Distinguished and held inapplicable to dates fixed by an officer rather than by law.

Acting Chief Justice Teehankee, Justices Makasiar, Fernandez, Guerrero, and Melencio-Herrera concurred.