G.R. No. L-32116, 21 April 1981


Respondent Castro, accompanied by Valencia, went to the Rural Bank of Caloocan to apply for an industrial loan. It was 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. Having 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. On the same day, the Valencia spouses also obtained from the bank an equal amount of loan for P3,000.00 in which Castro was the co-maker. The two loans were secured by a real-estate mortgage on Castro’s house and lot. For failure to satisfy the loans of P6,000 covering the two promissory notes, the said property was sold at an auction sale.

Castro only learned later that the mortgage contract which was an encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she was made to sign as co-maker of the promissory note without her being informed of this. Thus, she filed a suit praying for annulment of the foreclosure sale of her property, and 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.


Who between Castro and the bank should suffer the consequences of the fraud perpetrated by the Valencias?


The authority of the Valencias was only to follow-up Castro’s loan application with the bank. They were not authorized to borrow for her. This is apparent from the fact that Castro went to the Bank to sign the promissory note for her loan of P3,000.00. If her act had been understood by the Bank to be a grant of an authority to the Valencia to borrow in her behalf, it should have required a special power of attorney executed by Castro in their favor. Since the bank did not, we can rightly assume that it did not entertain the notion, that the Valencia spouses were in any manner acting as an agent of Castro.

We cannot declare the promissory note valid between the bank and Castro and the mortgage contract binding on Castro, 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.

*Case digest by Krishianne Louise C. Labiano, JD – 4, Andres Bonifacio College, SY 2019 – 2020