Valenzuela vs. Court of Appeals

The rule requiring all claims against an insolvent bank to be filed in the liquidation proceeding admits of exceptions where "as far as lawful and practicable" such claims should be so filed, and the Court may deviate from this procedure when compelling circumstances of fraud, poverty, and justice demand otherwise. The Court may set aside the decision of a court that took cognizance of a case involving an insolvent bank's assets, but may also affirm such decision where refiling and relitigating before the liquidation court would be an exercise in futility.

The Rural Bank of Lucena, Inc. became a distressed bank after its officers, directors, and employees committed anomalies and resorted to unsound banking practices prejudicial to the government, its depositors, and creditors. The Monetary Board decided to liquidate the bank, and the Central Bank, pursuant to Section 29 of its charter, filed a petition for assistance and supervision in the liquidation with the Court of First Instance of Manila, docketed as Civil Case No. 50019. The Superintendent of Banks, Carlota P. Valenzuela, was designated to take charge of the bank's assets and later ordered to convert them to money. The heirs of Carlos Telosa invoked Article 24 of the New Civil Code, which mandates courts to be vigilant for the protection of parties at a disadvantage due to moral dependence, ignorance, indigence, mental weakness, tender age, or other handicap.

Carlos Telosa, a fisherman and farmer with very limited education, obtained a loan from the Rural Bank of Lucena, Inc. on November 29, 1960, mortgaging a parcel of land of 50,000 square meters located at Bo. Amugeria, Malunay, Quezon, registered in the name of the spouses Carlos and Rufina Telosa. Several months later, the Rural Bank of Lucena became a distressed bank. In a letter dated June 16, 1961, the Acting Governor of the Central Bank apprised the stockholders that the Monetary Board, in Resolution No. 928 approved on June 13, 1961, found that the bank's officers, directors, and employees had committed anomalies or resorted to unsound banking practices prejudicial to the government, its depositors, and creditors.

The Monetary Board later decided to liquidate the bank, and the Central Bank, pursuant to Section 29 of its charter, filed a petition dated March 27, 1962 with the Court of First Instance of Manila for assistance and supervision in the liquidation, docketed as Civil Case No. 50019. The Court of First Instance of Manila issued an order dated March 28, 1963 directing the bank to turn over its assets to the Central Bank's authorized representative. The Monetary Board, in Resolution No. 426 dated April 2, 1963, designated Superintendent of Banks Carlota P. Valenzuela to take charge of the bank's assets, and in a resolution of November 27, 1963, ordered the conversion of those assets to money.

Among the accounts inventoried was the account of Carlos Telosa in the principal amount of P5,000.00. A demand letter was sent to Telosa on August 27, 1965 by Central Bank examiner Agapito S. Fajardo. Because Telosa knew his obligation was only P300.00, not P5,000.00, he executed an affidavit dated January 24, 1966 protesting the demand. On January 4, 1966, Telosa paid P400.00, which he claimed represented the principal and interest, with a remaining balance of P11.25 paid by Dolores Telosa on April 18, 1972. Carlos Telosa died on January 13, 1968.

Claiming the payments did not fully satisfy the amount due because the record still showed a balance of P9,032.22 including interest as of February 29, 1972, Napoleon R. Cruz, the authorized deputy of the Central Bank, petitioned the Deputy Provincial Sheriff of Quezon to extra-judicially foreclose the mortgage and sell the collateral at public auction, scheduled for April 20, 1972. To restrain the sheriff, the widow and children of Carlos Telosa filed a complaint on April 18, 1972 before the Court of First Instance of Quezon, contending that the loan obtained was only P300.00 and had already been fully paid. Judge Delia P. Medina issued an Order on April 18, 1972 directing the plaintiffs to amend their complaint to implead all proper parties. As no restraining order was issued, the foreclosure sale took place on April 20, 1972, with the Rural Bank of Lucena, Inc. as the lone and highest bidder; the certificate of sale was issued and registered with the Registry of Deeds on September 11, 1972.

On May 4, 1972, the plaintiffs filed their amended complaint against Carlota P. Valenzuela in her capacity as Superintendent of Banks, adding a prayer for the annulment of the foreclosure sale. The defendant moved to dismiss on grounds of lack of jurisdiction and lack of cause of action, but the motion was denied. After trial, the court a quo rendered judgment in favor of the plaintiffs, ordering reformation of the mortgage to reflect a loan of P300.00 over one-half of the property, setting aside the foreclosure sale, ordering delivery of the property, and awarding P2,000.00 moral damages, P1,500.00 attorney's fees, and P900.00 litigation expenses. The Court of Appeals affirmed in toto.

The evidence established that the actual loan was only P300.00, as shown by Exhibit "E," a receipt signed by the deceased dated December 2, 1960, the oral testimony of Rufina Telosa, and the testimony of Ponciano Mendoza, who was with the deceased at the time of the transaction and testified that the loan was P300.00 in six P50.00 bills but that Carlos Telosa was made to sign blank forms by the bank. The transaction was one of the fraudulent and anomalous transactions involving the officers of the Rural Bank of Lucena, Inc., who took advantage of Telosa's very limited education.

• Jurisdiction over Liquidation: Petitioner contended that a separate action involving the assets, properties, and records of an insolvent bank in the process of liquidation in the Court of First Instance of Manila cannot be maintained in another court.
• Evidentiary Weight of Notarial Documents: Petitioner argued that a public instrument celebrated with all the requisites under the safeguard of a notarial certificate is evidence of a high character, and to overcome its recitals, the party challenging it must prove his claim with clear, convincing, and more than merely preponderant evidence.
• No Basis for Reformation: Petitioner maintained that respondent Rufina Telosa had no factual, valid, and legal basis to ask for reformation of the real estate mortgage contract, and even assuming she did, her cause of action to reform had already prescribed.
• Moral Damages Not Alleged: Petitioner argued that moral damages, to warrant recovery, must be alleged in the complaint and duly proved.
• Attorney's Fees and Litigation Expenses: Petitioner contended that the reason for awarding attorney's fees and litigation expenses must be stated in the decision.
• Inapplicability of Article 24: Petitioner argued that there was no legal and factual basis for the application of Article 24 of the New Civil Code in the instant case.

• Fraudulent Transaction: Private respondents contended that the amount of the loan obtained by Carlos Telosa was only P300.00 and that the same had already been fully paid, the mortgage contract having been executed through fraudulent means by bank officers who took advantage of Telosa's very limited education.
• Reformation and Annulment: Private respondents prayed for judgment declaring the contract of mortgage null and void and/or for reformation of the contract to state the true intention and agreement of the parties, and for the annulment of the extra-judicial foreclosure sale.
• Lack of Marital Consent: Private respondents asserted that the mortgage contract was executed without the knowledge and marital consent of the wife, Rufina Telosa, hence voidable insofar as her conjugal share is concerned.

• Jurisdiction over Liquidation: Whether the Court of First Instance of Quezon had jurisdiction to take cognizance of the case involving the assets of the Rural Bank of Lucena, Inc., which was in the process of liquidation before the Court of First Instance of Manila.
• Evidentiary Weight of the Mortgage Document: Whether the private respondents overcame the evidentiary weight of the notarized mortgage document reflecting a loan of P5,000.00, given their claim that the actual loan was only P300.00.
• Prescription of Action for Reformation: Whether the private respondents' cause of action for reformation of the instrument had prescribed.
• Award of Attorney's Fees and Litigation Expenses: Whether the trial court properly awarded attorney's fees and litigation expenses without stating the reason therefor in its decision.
• Award of Moral Damages: Whether moral damages were properly awarded despite the alleged failure to duly allege the same in the complaint.
• Applicability of Article 24: Whether Article 24 of the New Civil Code applies to the instant case.

• Jurisdiction over Liquidation: No, but with an exception. While the general rule from Hernandez vs. Rural Bank of Lucena, Inc. requires all claims against an insolvent bank to be filed in the liquidation proceeding, the Court deviated from this procedure given the circumstances of the case and in the interest of justice, as refiling and relitigating before the liquidation court would be an exercise in futility.
• Evidentiary Weight of the Mortgage Document: Yes, the private respondents overcame the evidentiary weight of the notarized mortgage document. The Court was convinced, as were the trial court and the appellate court, that the amount of loan actually obtained by the deceased Telosa was only P300.00, not P5,000.00, as established by Exhibit "E," the oral testimony of Rufina Telosa, and the testimony of Ponciano Mendoza.
• Prescription of Action for Reformation: No. The private respondents filed their complaint well within the ten-year prescriptive period to bring an action for reformation of an instrument, having discovered the fraudulent transaction on March 14, 1972, and filed their complaint only 14 days thereafter.
• Award of Attorney's Fees and Litigation Expenses: Yes. The trial court did state the reason for the award of attorney's fees in its decision, and the circumstances showed that the award was proper and just, as the bank's fraudulent acts compelled private respondents to litigate and incur litigation expenses.
• Award of Moral Damages: Yes. The lower court granted moral damages because of the private respondents' prayer for general relief, and they had proven that they suffered mental anguish, serious anxiety, and moral shock as a consequence of the fraudulent act of the Rural Bank of Lucena, Inc., as expressly allowed by Article 2217 of the New Civil Code.
• Applicability of Article 24: Yes. The Court applied Article 24 of the New Civil Code, as the bank officers took advantage of the very limited education of Carlos Telosa, a fisherman and farmer, in a fraudulent transaction.

• Jurisdiction over Liquidation: The Court cited Hernandez vs. Rural Bank of Lucena, Inc. (G.R. No. L-29791, January 10, 1978, 81 SCRA 75), which ruled that if there is a judicial liquidation of an insolvent bank, all claims against the bank should be filed in the liquidation proceeding. The judicial liquidation is intended to prevent multiplicity of actions against the insolvent bank, and the liquidation court should assist the Superintendent of Banks and control his operations. However, the Court noted that the ruling in Hernandez admits of exception, stating "as far as lawful and practicable" all claims should be filed in the liquidation proceeding. The Court found this case to be one of those exceptions. To order the private respondents to refile and relitigate their case before the liquidation court would be an exercise in futility, meaning another several years of trial and additional expenses to private respondents who are admittedly living in poverty, and the property in question is their only property. The Court also noted that at the time the action was instituted to enjoin the foreclosure, the Court of First Instance of Quezon had territorial jurisdiction over the acts sought to be enjoined and thus had authority to exercise its injunctive relief.
• Evidentiary Weight of the Mortgage Document: The Court carefully reviewed the records and was convinced, as were the trial court and the appellate court, that the amount of loan actually obtained by the deceased Telosa was only P300.00, not the P5,000.00 claimed by petitioner. This was established by: (a) Exhibit "E," the receipt signed by the deceased dated December 2, 1960 showing the amount of loan to be only P300.00; (b) the oral testimony of Rufina Telosa, wife of the deceased; and (c) the testimony of Ponciano Mendoza, who was with the deceased at the time of the transactions and categorically testified that the amount of the loan was P300.00 in six P50.00 bills but that Carlos Telosa was made to sign blank forms by the bank. The Court stated that this particular transaction was one of the fraudulent and anomalous transactions involving the officers of the Rural Bank of Lucena, Inc., who took advantage of the very limited education of Carlos Telosa. The records further showed that private respondents made payment of P400.00 on January 4, 1966 and P11.25 on April 18, 1972, constituting full payment of the principal loan of P300.00 and the interest thereon.
• Prescription of Action for Reformation: The Court held that the private respondents filed their complaint well within the ten-year prescriptive period to bring an action for reformation of an instrument. After discovering the fraudulent transaction on March 14, 1972, private respondents allowed only 14 days to pass before filing their complaint.
• Award of Attorney's Fees and Litigation Expenses: The Court rejected petitioner's allegation that the trial court did not state in its decision why it was awarding attorney's fees, noting that a cursory reading of the decision would show that the reason for the award is contained therein. The circumstances showed that the award of attorney's fees was proper and just, as the bank, through its fraudulent acts, compelled private respondents to litigate and incur litigation expenses.
• Award of Moral Damages: The Court held that the lower court granted moral damages because of the private respondents' prayer for general relief, which includes moral damages. Private respondents had proven that they suffered mental anguish, serious anxiety, and moral shock as a consequence of the fraudulent act of the Rural Bank of Lucena, Inc., which is expressly allowed by Article 2217 of the New Civil Code.
• Applicability of Article 24: The Court applied Article 24 of the New Civil Code, which provides that in all contractual, property, or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age, or other handicap, the Court must be vigilant for his protection. The bank officers took advantage of the very limited education of Carlos Telosa, a fisherman and farmer, in executing the fraudulent mortgage transaction.

• Judicial Liquidation of Insolvent Banks — If there is a judicial liquidation of an insolvent bank, all claims against the bank should be filed in the liquidation proceeding. The judicial liquidation is intended to prevent multiplicity of actions against the insolvent bank, and the liquidation court should assist the Superintendent of Banks and control his operations. However, this rule admits of exceptions "as far as lawful and practicable," and the Court may deviate from this procedure where compelling circumstances of fraud, poverty, and justice demand otherwise.
• Protection of Parties at a Disadvantage (Article 24, New Civil Code) — In all contractual, property, or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age, or other handicap, the Court must be vigilant for his protection. The Court applied this provision where bank officers took advantage of the very limited education of a fisherman and farmer in executing a fraudulent mortgage transaction.
• Reformation of Instruments — An action for reformation of an instrument must be filed within the ten-year prescriptive period. The prescriptive period runs from the discovery of the fraudulent transaction, not from the execution of the instrument.
• Moral Damages for Fraudulent Acts — Moral damages may be awarded where the party suffered mental anguish, serious anxiety, and moral shock as a consequence of the fraudulent act of another, as expressly allowed by Article 2217 of the New Civil Code, even where the complaint includes only a prayer for general relief.

• "In all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age or other handicap, the Court must be vigilant for his protection." — This is the canonical formulation of Article 24 of the New Civil Code, which the Court applied to protect Carlos Telosa, a fisherman and farmer with very limited education, against the fraudulent acts of bank officers.
• "The fact that the insolvent bank is forbidden to do business, that its assets are turned over to the superintendent of Banks, as a receiver, for conversion into cash, and that its liquidation is undertaken with judicial intervention means that, as far as lawful and practicable, all claims against the insolvent bank should be filed in the liquidation proceeding." — This passage from Hernandez vs. Rural Bank of Lucena, Inc. states the general rule on judicial liquidation of insolvent banks, which the Court applied but found subject to exception in the instant case.
• "To order the private respondents to refile and relitigate their case before the liquidation court would be an exercise in futility. It would mean another several years of trial and additional expenses to private respondents who are admittedly living in poverty. Incidentally, the property in question is the only property of private respondents." — This passage articulates the Court's rationale for deviating from the general rule requiring claims against insolvent banks to be filed in the liquidation proceeding, based on the exceptional circumstances of the case.
• "Needless to state in this regard this particular transaction was one of the fraudulent and anomalous transactions involving the officers of the Rural Bank of Lucena, Inc. The latter took advantage of the very limited education of Carlos Telosa." — This passage identifies the fraudulent nature of the transaction and the bank officers' exploitation of Telosa's limited education, which justified the application of Article 24 of the New Civil Code.

• Hernandez vs. Rural Bank of Lucena, Inc., G.R. No. L-29791, January 10, 1978, 81 SCRA 75 — Controlling precedent on the rule that all claims against an insolvent bank should be filed in the liquidation proceeding. The Court applied this case but found that its ruling admits of exceptions "as far as lawful and practicable," making the instant case one of those exceptions.

• Article 24, New Civil Code — Provides that in all contractual, property, or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age, or other handicap, the Court must be vigilant for his protection. The Court applied this provision to protect Carlos Telosa, whose very limited education was exploited by bank officers in a fraudulent mortgage transaction.
• Article 2217, New Civil Code — Allows the award of moral damages for mental anguish, serious anxiety, and moral shock. The Court applied this provision to sustain the award of moral damages to private respondents, who proved they suffered these harms as a consequence of the fraudulent act of the Rural Bank of Lucena, Inc.
• Section 29, Central Bank Charter — Authorizes the Central Bank to file a petition for assistance and supervision in the liquidation of an insolvent bank. The Central Bank invoked this provision in filing the petition for liquidation of the Rural Bank of Lucena, Inc. before the Court of First Instance of Manila.

Chief Justice Fernan, and Justices Melencio-Herrera, Cruz, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, Griño-Aquino, Medialdea, and Regalado concurred. Justice Gutierrez, Jr. concurred in the result. Justice Narvasa was on leave.

N/A — No dissenting opinions were noted in the case text.