Rural Bank of Caloocan vs. CA and Castro

Title Rural Bank of Caloocan, Inc. and Jose O. Desiderio, JR.
Ponente De Castro, J.
Doctrine
Facts  Respondent Maxima Castro, a 70-year old widow who cannot read and write the
English language and can only speak Pampango dialect and that she only finished
second-grade was accompanied by Severino Valencia, went to the Rural Bank of
Caloocan to apply for an industrial loan. But it was Severino Valencia who arranged
everything about the loan with the bank and who supplied to the latter the personal
data required for Castro's loan application.
 after the bank approved the loan for the amount of P3,000.00, Castro, accompanied
by the Valencia spouses, signed a promissory note corresponding to her loan in
favor of the bank.
 Valencia spouses obtained a loan for P3,000.00. They signed a promissory note and
Castro affixed thereon her signature as co-maker.
 The loans ere secured by a real-estate mortgage on Castro’s house.
 The Sheriff of Manila sent a note of sale to Castro announcing that her property ould
be sold to satisfy the obligation of the promissory notes.
 Castro immediately requested for postponement and learned for the first time that
the mortgage contract was for 6,000.00 and not for P3,000.00 and that she as
made to sign as co-maker without her consent.
 Castro filed a suit against petitioner Bank and Spouses Valencia that thru mistake
on her part or fraud on the part of Valencias she was induced to sign as co-maker of
a promissory note and to constitute a mortgage on her house and lot to secure the
questioned note.
 At the time of filing her complaint, respondent Castro deposited the amount of
P3,383.00 with the court a quo in full payment of her personal loan plus interest.
 Castro prayed, amongst other, for the annulment as far as she is concerned of the
promissory note and mortgage insofar as it exceeds P3,000.00; for the discharge of
her personal obligation with the bank by reason of a deposit of P3,383.00 with the
court a quo upon the filing of her complaint; for the annulment of the foreclosure
sale of her property.

Contentions Petitioner Respondent
That originally, she needed money in the amount of
P3,000.00 to invest in the business of the defendant
spouses Valencia, who accompanied her to the
defendant bank for the purpose of securing a loan
of P3,000.00;
that while at the defendant bank, an employee

handed to her several forms already prepared which
she was asked to sign on the places indicated, with
no one explaining to her the nature and contents of
the documents;
that she did not even receive a copy thereof; that

she was given a check in the amount of P2,882.85
which she delivered to defendant spouses;
Lower Courts 1. Declared that the promissory note, Exhibit '2', is invalid as against plaintiff herein;
2. the contract of mortgage is null and void, in so far as the amount thereof exceeds
the sum of P3,000.00 representing the principal obligation of plaintiff
3. Annulled the extrajudicial foreclosure sale of the property
Appellate Affirmed in toto.
Court
Issue 1. Whether or not respondent court correctly affirmed the lower court in declaring the
promissory note invalid insofar as they affect respondent Castro vis-a-vis petitioner
bank, and the mortgage contract valid up to the amount of P3,000.00 only. (YES)
2. Who between Castro and the bank should suffer the consequences of the fraud
perpetrated by the Valencias.
SC Ruling While the Valencias defrauded Castro by making her sign the promissory note and the
mortgage contract, they also misrepresented to the bank Castro's personal qualifications in
order to secure its consent to the loan. This must be the reason which prompted the bank
to contend that it was defrauded by the Valencias.
Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted
by the Valencias both Castro and the bank committed mistake in giving their consents to
the contracts. In other words, substantial mistake vitiated their consents given. For if Castro
had been aware of what she signed and the bank of the true qualifications of the loan
applicants, it is evident that they would not have given their consents to the contracts.
Pursuant to Article 1342 of the Civil Code which provides:
Art. 1342. Misrepresentation by a third person does not vitiate consent,

unless such misrepresentation has created substantial mistake and the same
is mutual.
We cannot declare the promissory note valid between the bank and Castro and the
mortgage contract binding on Castro beyond the amount of P3,000.00, for while the
contracts may not be invalidated insofar as they affect the bank and Castro on
the ground of fraud because the bank was not a participant thereto, such may
however be invalidated on the ground of substantial mistake mutually
committed by them as a consequence of the fraud and misrepresentation
inflicted by the Valencias.
Who between Castro and the bank should suffer the consequences of the fraud perpetrated
by the Valencias?
It is evident that the bank was as much, guilty as Castro was, of negligence in giving its
consent to the contracts. It apparently relied on representations made by the
Valencia spouses when it should have directly obtained the needed data from
Castro who was the acknowledged owner of the property offered as
collateral. Moreover, considering Castro's personal circumstances – her lack of education,
ignorance and old age – she cannot be considered utterly neglectful for having been
defrauded. On the contrary, it is demanded of petitioners to exercise the highest order of
care and prudence in its business dealings with the Valencias considering that it is engaged
in a banking business –a business affected with public interest.
When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a
promissory note and mortgaged Castro's property to secure said loan, the Valencias acted
for their own behalf. Considering however that for the loan in which the Valencias appeared
as principal borrowers, it was the property of Castro that was being mortgaged to secure
said loan, the Bank should have exercised due care and prudence by making proper inquiry
if Castro's consent to the mortgage was without any taint or defect.

Rural Bank of Caloocan vs. CA and Castro

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Title Rural Bank of Caloocan, Inc. and Jose O. Desiderio, JR.

that while at the defendant bank, an employee

that she did not even receive a copy thereof; that

Pursuant to Article 1342 of the Civil Code which provides:

Art. 1342. Misrepresentation by a third person does not vitiate consent,

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