Rural Bank of Caloocan vs Courts of Appeals

GR No. L-32116 April 21, 1981

Facts:

Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of Caloocan to apply for
a loan. Valencia arranged everything about the loan with the bank. He 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.

On the same day, the Valencia spouses obtained from the bank an equal amount of loan for P3,
000.00. They signed another promissory note (Exhibit “2”) corresponding to their loan in favor of the
bank and had Castro affixed thereon her signature as co-maker. Both loans were secured by a real-
estate mortgage on Castro’s house and lot.

Later, the sheriff of Manila sent a notice to Castro, saying that her property would be sold at public
auction to satisfy the obligation covering the two promissory notes plus interest and attorney’s fees.
Upon request by Castro and the Valencias and with conformity of the bank, the auction sale was
postponed, but was nevertheless auctioned at a later date. Castro claimed that she is a 70-year old
widow who cannot read and write in English. According to her, she has only finished second grade.
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 bank to secure a loan of P3,000.00. While at the bank, an
employee handed to her several forms already prepared which she was asked to sign, with no one
explaining to her the nature and contents of the documents. She also alleged that it was only when
she received the letter from the sheriff that she learned 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.

Castro filed a suit against petitioners contending that thru mistake on her part or fraud on the part
of Valencia’s 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.

Issue:

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

Ruling:

The Court held that although it is the principle that a person whose acts holding another person to
be his agent and would lead a third person to believe such purported agent was authorized to speak
and bind him, cannot now be permitted to deny the authority of the purported agent; but this is only
true when the purported agent was clothed with apparent authority. In this case, where the
authority of the purported agent was only to follow up the principal's loan application with the bank,
it cannot be presumed that he was also granted authority to borrow on behalf of the principal,
especially when the principal herself went to the bank to sign the promissory note for the loan
obtained from the bank. If the principal's act had been understood by the bank to be a grant of an
authority to the agent to borrow on behalf of the principal, the bank should have required a special
power of attorney covering such power to borrow.