G.R. No. L-7003 January 18, 1912MANUEL ORIA Y GONZALES vs. JOSE McMICKING

Facts: Gutierrez Hermanos sued Oria Hermanos & Co. for the recovery of P147,204.28. In March, 1910 the plaintiff sued the same defendant for the recovery of P12,318.57. Before the suits the members of the company of Oria Hermanos & Co., on account of the expiration, dissolved their relations and entered into liquidation. Tomas Oria y Balbas, as managing partner in liquidation, acting for himself and on behalf of his other coowners Casimiro Oria y Balbas and Adolfo Fuster Robles, entered into a contract with the plaintiff in this case, Manuel Orio Gonzales, which said contract was for the purpose of selling and transferring to the plaintiff in this action all of the property of Oria Hermanos & Co. Said instrument contained the following clauses:

In consideration of the sum of two hundred seventy-four thousand pesos (P274,000), which the said Don Manuel Oria y Gonzales undertakes and engages to pay to the firm of Oria Hermanos & Co, myself and the persons I represent, as partners in Oria Hermanos & Co., which whom shall be paid in installments. I hereby sell to the said Don Manuel Oria y Gonzales, his heirs and his assigns, all and every part of the property mentioned in the fourth section hereof and more specially described in the general inventory of Oria Hermosa & Co.; under the following mutual conditions:

(a) Don Manuel Oria y Gonzales engages and undertakes to pay and to settle the sum agreed upon within a period of twelve (12) years, further engaging to pay each year a sum of not less than ten thousand (10,000) pesos.

(b) After the first six (6) years of the period for the payment of the stipulated price, Don Manuel Oria y Gonzales engages and undertakes to pay the interest at 3 per cent a year on the price stipulated or the part thereof unpaid at such time; provided, that this is mutual obligation and interest payable annually.

(c) Don Manuel Oria y Gonzales further engages to pay Don Tomas Oria, Don Casimiro Oria and Don Adolfo Fuster during the time that they remain in the Philippines and do not reside abroad, the sum of one hundred and fifty (150) pesos monthly.

(d) Don Manuel Oria y Gonzales engages and undertakes not to sell, alienate, transfer or mortgage, either wholly or in part, the property hereby sold to him, without the written authorization of Don Tomas Oria as liquidator of the firm of Oria Hermanos & Co.

(e) Don Manuel Oria y Gonzales engages to cede gratuitously in the dwelling-house in the town of Laoag, hereby sold, the use of the same or the portion thereof that may be necessary for Don Tomas Oria to establish provided, that this cession is made for a period of only two (2) years.

( f ) Don Tomas Oria y Balbas and Don Adolfo Fuster engage and undertake to place their personal services at the disposal of Don Manuel Oria y Gonzales in everything relating to his instruction in the management and conduct of the property and business hereby sold; maximum period of 12 months.

7. I, Manuel Oria y Gonzales, being informed of the foregoing action and contract executed by Don Tomas Oria y Balbas, do on my part stipulated and agree: that I accept the sale, cession and transfer hereby made by him in my favor and engage and undertake to pay Oria Hermanos & Co., either in liquidation, or if necessary to the partners of Oria Hermanos & Co., the price of said sale, cession and transfer, that is, the sum of P274,000 within a period of 12 years, in the manner and under the conditions set forth by him in the preceding section, and especially engaged not to sell, alienate, transfer or mortgage the property involved in this sale which is specified in paragraph (d) of the preceding section, without the previous written authorization of the vendor, Oria Hermanos & Co., such property being so exempted as a guaranty for the payment of the purchase price of this sale.

Among the goods transferred by this instrument was the steamship Serantes, which is the subject of litigation.

Upon the trial judgment was found in favor of the defendant and against the plaintiff, and the complaint was dismissed upon the merits with costs. From that judgment this appeal is taken.

Rationale: The substantial question presented for our consideration is the validity of the sale from Oria Hermanos & Co. to Manuel Oria y Gonzalez as against the creditors of said company. It is the contention of Gutierrez Hermanos that said sale is fraudulent as against the creditors of Oria Hermanos & Co., and that the transfer thereby consummated of the steamship in question was void as to said creditors and as to Gutierrez Hermanos in particular.

There is some contention on the part of the plaintiffs that aside from the property included in the sale referred to, Oria Hermanos & Co. had sufficient other property to pay the judgment of Gutierrez Hermanos. The trial court found, however, against the plaintiff in this regard. A careful examination of the record fails to disclose any sufficient reason for the reversal of the finding. While the evidence is somewhat conflicting, we are of the opinion that there is sufficient to sustain the findings made.

In determining whether or not a certain conveyance is fraudulent the question in every case is whether the conveyance was a bona fide transaction or a trick and contrivance to defeat creditors, or whether it conserves to the debtor a special right. It is not sufficient that it is founded on good consideration or is made with bona fide intent: it must have both elements. If defective in either of these particulars, although good between the parties, it is voidable as to creditors. The rule is universal both at law and in equity that whatever fraud creates justice will destroy. The test as to whether or not a conveyance is fraudulent is, does it prejudice the rights of creditors?

In the consideration of whether or not certain transfers were fraudulent, courts have laid down certain rules by which the fraudulent character of the transaction may be determined. The following are some of the circumstances attending sales which have been dominated by the courts badges of fraud:

1. The fact that the consideration of the conveyance is fictitious or is inadequate.2. A transfer made by a debtor after suit has been begun and while it is pending against him.3. A sale upon credit by an insolvent debtor.4. Evidence of large indebtedness or complete insolvency.5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially.6. The fact that the transfer is made between father and son, when there are present other of the above circumstances.7. The failure of the vendee to take exclusive possession of all the property.

The case at bar presents every one of the badges of fraud above enumerated. Tested by the inquiry, does the sale prejudice the rights of the creditors, the result is clear. The sale in the form in which it was made leaves the creditors substantially without recourse. The property of the company is gone, its income is gone, the business itself is likely to fail, the property is being dissipated, and is depreciating in value. As a result, even if the claims of the creditors should live twelve years and the creditors themselves wait that long, it more than likely that nothing would be found to satisfy their claim at the end of the long wait.

Since the records shows that there was no property with which the judgment in question could be paid, the defendants were obliged to resort to and levy upon the steamer in suit. The court below was correct in finding the sale fraudulent and void as to Gutierrez Hermanos in so far as was necessary to permit the collection of its judgment. As a corollary, the court below found that the evidence failed to show that the plaintiff was the owner or entitled to the possession of the steamer in question at the time of the levy and sale complained of, or that he was damaged thereby. Defendant had the right to make the levy and test the validity of the sale in that way, without first resorting to a direct action to annul the sale. The creditor may attack the sale by ignoring it and seizing under his execution the property, or any necessary portion thereof, which is the subject of the sale.

G.R. No. 134685November 19, 1999MARIA ANTONIA SIGUAN vs. ROSA LIM, LINDE LIM, INGRID LIM and NEIL LIM

Facts: LIM issued two Metrobank checks that were dishonored for the reason "account closed." Demands to make good the checks proved futile. As a consequence, a criminal case for violation of Batas Pambansa Blg. 22 were filed by petitioner against LIM. In its decision, the court a quo convicted LIM as charged.

It also appears that on 31 July 1990 LIM was convicted of estafa by the RTC of Quezon City filed by a certain Victoria Suarez. This decision was affirmed by the Court of Appeals. On appeal, however, this Court, acquitted LIM but held her civilly liable.

Meanwhile, on 2 July 1991, a Deed of Donation conveying the following parcels of land and purportedly executed by LIM on 10 August 1989 in favor of her children, Linde, Ingrid and Neil, was registered with the Office of the Register of Deeds of Cebu City.

Petitioner filed an accion pauliana against LIM and her children before Branch 18 of the RTC of Cebu City to rescind the questioned Deed of Donation and to declare as null and void the new transfer certificates of title issued for the lots covered by the questioned Deed.

Rationale: We resolve these issues in the negative.

Art. 1381 of the Civil Code enumerates the contracts which are rescissible, and among them are "those contracts undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them."

The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation, although demandable later; (2) the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud.

The general rule is that rescission requires the existence of creditors at the time of the alleged fraudulent alienation, and this must be proved as one of the bases of the judicial pronouncement setting aside the contract. 16 Without any prior existing debt, there can neither be injury nor fraud. While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the credit was constituted. In the instant case, the alleged debt of LIM in favor of petitioner was incurred in August 1990, while the deed of donation was purportedly executed on 10 August 1989.

We are not convinced with the allegation of the petitioner that the questioned deed was antedated to make it appear that it was made prior to petitioner's credit. Notably, that deed is a public document, it having been acknowledged before a notary public. 18 As such, it is evidence of the fact which gave rise to its execution and of its date, pursuant to Section 23, Rule 132 of the Rules of Court.

Even assuming arguendo that petitioner became a creditor of LIM prior to the celebration of the contract of donation, still her action for rescission would not fare well because the third requisite was not met. Under Article 1381 of the Civil Code, contracts entered into in fraud of creditors may be rescinded only when the creditors cannot in any manner collect the claims due them. Also, Article 1383 of the same Code provides that the action for rescission is but a subsidiary remedy which cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. The term "subsidiary remedy" has been defined as "the exhaustion of all remedies by the prejudiced creditor to collect claims due him before rescission is resorted to." 19 It is, therefore, "essential that the party asking for rescission prove that he has exhausted all other legal means to obtain satisfaction of his claim. 20 Petitioner neither alleged nor proved that she did so. On this score, her action for the rescission of the questioned deed is not maintainable even if the fraud charged actually did exist."

The fourth requisite for an accion pauliana to prosper is not present either.

Art. 1387, first paragraph, of the Civil Code provides: "All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors when the donor did not reserve sufficient property to pay all debts contracted before the donation. Likewise, Article 759 of the same Code, second paragraph, states that the donation is always presumed to be in fraud of creditors when at the time thereof the donor did not reserve sufficient property to pay his debts prior to the donation.

For this presumption of fraud to apply, it must be established that the donor did not leave adequate properties which creditors might have recourse for the collection of their credits existing before the execution of the donation.

As earlier discussed, petitioner's alleged credit existed only a year after the deed of donation was executed. She cannot, therefore, be said to have been prejudiced or defrauded by such alienation.

G.R. No. 108346 July 11, 2001VELARDE vs.COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO

Facts: David Raymundo owns of a parcel of land, together with the house and other improvements located at Makati. George Raymundo (vendor) is David's father who negotiated with plaintiffs Avelina and Mariano Velarde (vendee) for the sale of said property, which was, however, under lease.

A Deed of Sale with Assumption of Mortgage was executed by defendant David Raymundo infavor of plaintiff Avelina Velarde, with the following terms and conditions: Consideration (P800,000.00)

On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of her husband, Mariano, executed an Undertaking: In the event I violate any of the terms and conditions of the said Deed of Real Estate Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments made with the Bank of the Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as and by way of liquidated damages, without necessity of notice or any judicial declaration to that effect, and Mr. David A. Raymundo shall resume total and complete ownership and possession of the property.

Failure to pay happened.

Rationale: The Petition is partially meritorious.

First Issue: Breach of Contract

Petitioner aver that their nonpayment of private respondents' mortgage obligation did not constitute a breach of contract, considering that their request to assume the obligation had been disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and, instead, it devolved upon private respondents again.

However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the balance of the purchase price. Thus, on December 15, 1986, when petitioners received notice of the bank's disapproval of their application to assume respondents' mortgage, they should have paid the balance of the P1.8 million loan.

Instead of doing so, petitioners sent a letter to private respondents offering to make such payment only upon the fulfillment of certain conditions not originally agreed upon in the contract of sale. Such conditional offer to pay cannot take the place of actual payment as would discharge the obligation of a buyer under a contract of sale.

Private respondents had already performed their obligation through the execution of the Deed of Sale, which effectively transferred ownership of the property to petitioner through constructive delivery. Prior physical delivery or possession is not legally required, and the execution of the Deed of Sale is deemed equivalent to delivery.

Second Issue: Validity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not justified, inasmuch as the former had signified their willingness to pay the balance of the purchase price only a little over a month from the time they were notified of the disapproval of their application for assumption of mortgage. Petitioners also aver that the breach of the contract was not substantial as would warrant a rescission. They cite several cases in which this Court declared that rescission of a contract would not be permitted for a slight or casual breach. Finally, they argue that they have substantially performed their obligation in good faith, considering that they have already made the initial payment of P800,000 and three (3) monthly mortgage payments.

In the present case, private respondents validly exercised their right to rescind the contract, because of the failure of petitioners to comply with their obligation to pay the balance of the purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that consequently gave rise to private respondent's right to rescind the same in accordance with law.

True, petitioners expressed their willingness to pay the balance of the purchase price one month after it became due; however, this was not equivalent to actual payment as would constitute a faithful compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the performance by private respondents of additional burdens that had not been agreed upon in the original contract. Thus, it cannot be said that the breach committed by petitioners was merely slight or casual as would preclude the exercise of the right to rescind.

Misplaced is petitioners' reliance on the cases they cited, because the factual circumstances in those cases are not analogous to those in the present one. In Song Fo there was, on the part of the buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyer's offer to pay was unconditional and was accepted by the seller.

In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which was actually paid.

In Tan, the alleged breach was private respondent's delay of only a few days, which was for the purpose of clearing the title to the property; there was no reference whatsoever to the nonpayment of the contract price.

In the instant case, the breach committed did not merely consist of a slight delay in payment or an irregularity; such breach would not normally defeat the intention of the parties to the contract. Here, petitioners not only failed to pay the P1.8 million balance, but they also imposed upon private respondents new obligations as preconditions to the performance of their own obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which was legally due and demandable under the contract of sale. Hence, private respondents were left with the legal option of seeking rescission to protect their own interest.

Mutual Restitution: Required in Rescission

As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution is required to bring back the parties to their original situation prior to the inception of the contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners should be returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only when the one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract has been made.

G.R. No. 191336 January 25, 2012CRISANTA ALCARAZ MIGUEL vs. JERRY D. MONTANEZ

Facts:

(Montanez) secured a loan of One Hundred Forty-Three Thousand Eight Hundred Sixty-Four Pesos (P143,864.00), payable in one (1) year from the petitioner. The respondent gave as collateral therefor his house and lot.

Due to the respondents failure to pay the loan, the petitioner filed a complaint against the respondent before the Lupong Tagapamayapa of Barangay San Jose, Rodriguez, Rizal. The parties entered into a Kasunduang Pag-aayos wherein the respondent agreed to pay his loan in installments in the amount of (P2,000.00) per month, and in the event the house and lot given as collateral is sold, the respondent would settle the balance of the loan in full. However, the respondent still failed to pay, and on December 13, 2004, the Lupong Tagapamayapa issued a certification to file action in court in favor of the petitioner.

After trial, on August 16, 2006, the MeTC rendered a Decision ordering defendant Jerry D. Montanez to pay plaintiff.

On appeal to the Regional Trial Court (RTC) decision was affirmed.

CA: 2 issues, namely, (1) whether or not venue was improperly laid, and (2) whether or not the Kasunduang Pag-aayos effectively novated the loan agreement. Petition is hereby GRANTED. The appealed Decision dated March 14, 2007 of the Regional Trial Court (RTC) of Makati City, Branch 146, is REVERSED and SET ASIDE. A new judgment is entered dismissing respondents complaint for collection of sum of money, without prejudice to her right to file the necessary action to enforce the Kasunduang Pag-aayos.

Rationale: Because the respondent failed to comply with the terms of the Kasunduang Pag-aayos, said agreement is deemed rescinded pursuant to Article 2041 of the New Civil Code and the petitioner can insist on his original demand. Perforce, the complaint for collection of sum of money is the proper remedy.

It is true that an amicable settlement reached at the barangay conciliation proceedings, like the Kasunduang Pag-aayos in this case, is binding between the contracting parties and, upon its perfection, is immediately executory insofar as it is not contrary to law, good morals, good customs, public order and public policy. This is in accord with the broad precept of Article 2037 of the Civil Code, viz:

A compromise has upon the parties the effect and authority of res judicata; but there shall be no execution except in compliance with a judicial compromise.

Being a by-product of mutual concessions and good faith of the parties, an amicable settlement has the force and effect of res judicata even if not judicially approved. It transcends being a mere contract binding only upon the parties thereto, and is akin to a judgment that is subject to execution in accordance with the Rules.

It must be emphasized, however, that enforcement by execution of the amicable settlement, either under the first or the second remedy, is only applicable if the contracting parties have not repudiated such settlement within ten (10) days from the date thereof in accordance with Section 416 of the Local Government Code. If the amicable settlement is repudiated by one party, either expressly or impliedly, the other party has two options, namely, to enforce the compromise in accordance with the Local Government Code or Rules of Court as the case may be, or to consider it rescinded and insist upon his original demand. This is in accord with Article 2041 of the Civil Code, which qualifies the broad application of Article 2037, viz:

If one of the parties fails or refuses to abide by the compromise, the other party may either enforce the compromise or regard it as rescinded and insist upon his original demand.

In the case of Leonor v. Sycip, the Supreme Court (SC) had the occasion to explain this provision of law. It ruled that Article 2041 does not require an action for rescission, and the aggrieved party, by the breach of compromise agreement, may just consider it already rescinded, to wit:

It is worthy of notice, in this connection, that, unlike Article 2039 of the same Code, which speaks of "a cause of annulment or rescission of the compromise" and provides that "the compromise may be annulled or rescinded" for the cause therein specified, thus suggesting an action for annulment or rescission, said Article 2041 confers upon the party concerned, not a "cause" for rescission, or the right to "demand" the rescission of a compromise, but the authority, not only to "regard it as rescinded", but, also, to "insist upon his original demand". The language of this Article 2041, particularly when contrasted with that of Article 2039, denotes that no action for rescission is required in said Article 2041, and that the party aggrieved by the breach of a compromise agreement may, if he chooses, bring the suit contemplated or involved in his original demand, as if there had never been any compromise agreement, without bringing an action for rescission thereof. He need not seek a judicial declaration of rescission, for he may "regard" the compromise agreement already "rescinded".22 (emphasis supplied)

As so well stated in the case of Chavez v. Court of Appeals,23 a party's non-compliance with the amicable settlement paved the way for the application of Article 2041 under which the other party may either enforce the compromise, following the procedure laid out in the Revised Katarungang Pambarangay Law, or consider it as rescinded and insist upon his original demand. To quote:

In the case at bar, the Revised Katarungang Pambarangay Law provides for a two-tiered mode of enforcement of an amicable settlement, to wit: (a) by execution by the Punong Barangay which is quasi-judicial and summary in nature on mere motion of the party entitled thereto; and (b) an action in regular form, which remedy is judicial. However, the mode of enforcement does not rule out the right of rescission under Art. 2041 of the Civil Code. The availability of the right of rescission is apparent from the wording of Sec. 417 itself which provides that the amicable settlement "may" be enforced by execution by the lupon within six (6) months from its date or by action in the appropriate city or municipal court, if beyond that period. The use of the word "may" clearly makes the procedure provided in the Revised Katarungang Pambarangay Law directory or merely optional in nature.

Thus, although the "Kasunduan" executed by petitioner and respondent before the Office of the Barangay Captain had the force and effect of a final judgment of a court, petitioner's non-compliance paved the way for the application of Art. 2041 under which respondent may either enforce the compromise, following the procedure laid out in the Revised Katarungang Pambarangay Law, or regard it as rescinded and insist upon his original demand. Respondent chose the latter option when he instituted Civil Case No. 5139-V-97 for recovery of unrealized profits and reimbursement of advance rentals, moral and exemplary damages, and attorney's fees. Respondent was not limited to claiming P150,000.00 because although he agreed to the amount in the "Kasunduan," it is axiomatic that a compromise settlement is not an admission of liability but merely a recognition that there is a dispute and an impending litigation which the parties hope to prevent by making reciprocal concessions, adjusting their respective positions in the hope of gaining balanced by the danger of losing. Under the "Kasunduan," respondent was only required to execute a waiver of all possible claims arising from the lease contract if petitioner fully complies with his obligations thereunder. It is undisputed that herein petitioner did not.24 (emphasis supplied and citations omitted)

In the instant case, the respondent did not comply with the terms and conditions of the Kasunduang Pag-aayos. Such non-compliance may be construed as repudiation because it denotes that the respondent did not intend to be bound by the terms thereof, thereby negating the very purpose for which it was executed. Perforce, the petitioner has the option either to enforce the Kasunduang Pag-aayos, or to regard it as rescinded and insist upon his original demand, in accordance with the provision of Article 2041 of the Civil Code. Having instituted an action for collection of sum of money, the petitioner obviously chose to rescind the Kasunduang Pag-aayos. As such, it is error on the part of the CA to rule that enforcement by execution of said agreement is the appropriate remedy under the circumstances.

Considering that the Kasunduang Pag-aayos is deemed rescinded by the non-compliance of the respondent of the terms thereof, remanding the case to the trial court for the enforcement of said agreement is clearly unwarranted.

G.R. No. 182435 August 13, 2012LILIA B. ADA vs. FLORANTE BA YLON

Facts:

This case involves the estate of spouses Florentino Maximina Elnas Baylon who died on November 7, 1961 and May 5, 1974, respectively. At the time of their death, Spouses Baylon were survived by their legitimate children, namely, Rita Baylon (Rita), Victoria Baylon (Victoria), Dolores Baylon (Dolores), Panfila Gomez (Panfila), Ramon Baylon (Ramon) and herein petitioner Lilia B. Ada (Lilia).

Dolores died intestate and without issue. Victoria was survived by her daughter, herein petitioner Luz B. Adanza. Ramon died intestate and was survived by herein respondent Florante Baylon (Florante), his child from his first marriage, as well as by petitioner Flora Baylon, his second wife, and their legitimate children, namely, Ramon, Jr. and herein petitioners Remo, Jose, Eric, Florentino and Ma. Ruby, all surnamed Baylon.

The petitioners filed with the RTC a Complaint for partition, accounting and damages against Florante, Rita and Panfila. They alleged therein that Spouses Baylon, during their lifetime, owned 43 parcels of land all situated in Negros Oriental. After the death of Spouses Baylon, they claimed that Rita took possession of the said parcels of land and appropriated for herself the income from the same. Using the income produced by the said parcels of land, Rita allegedly purchased two parcels of land, Lot No. 47096 and half of Lot No. 4706,7 situated in Canda-uay, Dumaguete City. The petitioners averred that Rita refused to effect a partition of the said parcels of land.

In their Answer, Florante, Rita and Panfila asserted that they and the petitioners co-owned 229 out of the 43 parcels of land mentioned in the latters complaint, whereas Rita actually owned 10 parcels of land out of the 43 parcels which the petitioners sought to partition, while the remaining 11 parcels of land are separately owned by Petra Cafino Adanza, Florante, Meliton Adalia, Consorcia Adanza, Lilia and Santiago Mendez. Further, they claimed that Lot No. 4709 and half of Lot No. 4706 were acquired by Rita using her own money. They denied that Rita appropriated solely for herself the income of the estate of Spouses Baylon, and expressed no objection to the partition of the estate of Spouses Baylon, but only with respect to the co-owned parcels of land.

During the pendency of the case, Rita, through a Deed of Donation conveyed Lot No. 4709 and half of Lot No. 4706 to Florante. Rita died intestate and without any issue. Thereafter, learning of the said donation inter vivos in favor of Florante, the petitioners filed a Supplemental Pleading praying that the said donation in favor of the respondent be rescinded in accordance with Article 1381(4) of the Civil Code. They further alleged that Rita was already sick and very weak when the said Deed of Donation was supposedly executed and, thus, could not have validly given her consent thereto.

Florante and Panfila opposed the rescission of the said donation, asserting that Article 1381(4) of the Civil Code applies only when there is already a prior judicial decree on who between the contending parties actually owned the properties under litigation.

Rationale: The petition is partly meritorious.

Main Issue: Propriety of Rescission

The petitioners assert that the CA erred in remanding the case to the RTC for the determination of ownership of Lot No. 4709 and half of Lot No. 4706. They maintain that the RTC aptly rescinded the said donation inter vivos of Lot No. 4709 and half of Lot No. 4706 pursuant to Article 1381(4) of the Civil Code.

In his Comment, Florante asserts that before the petitioners may file an action for rescission, they must first obtain a favorable judicial ruling that Lot No. 4709 and half of Lot No. 4706 actually belonged to the estate of Spouses Baylon. Until then, Florante avers that an action for rescission would be premature.

Rescission is a remedy to address the damage or injury caused to the contracting parties or third persons.

Rescission is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if it should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contract. It is a remedy to make ineffective a contract, validly entered into and therefore obligatory under normal conditions, by reason of external causes resulting in a pecuniary prejudice to one of the contracting parties or their creditors.

Contracts which are rescissible are valid contracts having all the essential requisites of a contract, but by reason of injury or damage caused to either of the parties therein or to third persons are considered defective and, thus, may be rescinded.

The kinds of rescissible contracts, according to the reason for their susceptibility to rescission, are the following: first, those which are rescissible because of lesion or prejudice; second, those which are rescissible on account of fraud or bad faith; and third, those which, by special provisions of law, are susceptible to rescission.

Contracts which refer to things subject of litigation is rescissible pursuant to Article 1381(4) of the Civil Code.

Contracts which are rescissible due to fraud or bad faith include those which involve things under litigation, if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority. Thus, Article 1381(4) of the Civil Code provides:

Art. 1381. The following contracts are rescissible: (4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority.

The rescission of a contract under Article 1381(4) of the Civil Code only requires the concurrence of the following: first, the defendant, during the pendency of the case, enters into a contract which refers to the thing subject of litigation; and second, the said contract was entered into without the knowledge and approval of the litigants or of a competent judicial authority. As long as the foregoing requisites concur, it becomes the duty of the court to order the rescission of the said contract.

The reason for this is simple. Article 1381(4) seeks to remedy the presence of bad faith among the parties to a case and/or any fraudulent act which they may commit with respect to the thing subject of litigation.

When a thing is the subject of a judicial controversy, it should ultimately be bound by whatever disposition the court shall render. The parties to the case are therefore expected, in deference to the courts exercise of jurisdiction over the case, to refrain from doing acts which would dissipate or debase the thing subject of the litigation or otherwise render the impending decision therein ineffectual.

There is, then, a restriction on the disposition by the parties of the thing that is the subject of the litigation. Article 1381(4) of the Civil Code requires that any contract entered into by a defendant in a case which refers to things under litigation should be with the knowledge and approval of the litigants or of a competent judicial authority.

Further, any disposition of the thing subject of litigation or any act which tends to render inutile the courts impending disposition in such case, sans the knowledge and approval of the litigants or of the court, is unmistakably and irrefutably indicative of bad faith. Such acts undermine the authority of the court to lay down the respective rights of the parties in a case relative to the thing subject of litigation and bind them to such determination.

It should be stressed, though, that the defendant in such a case is not absolutely proscribed from entering into a contract which refer to things under litigation. If, for instance, a defendant enters into a contract which conveys the thing under litigation during the pendency of the case, the conveyance would be valid, there being no definite disposition yet coming from the court with respect to the thing subject of litigation. After all, notwithstanding that the subject thereof is a thing under litigation, such conveyance is but merely an exercise of ownership.

This is true even if the defendant effected the conveyance without the knowledge and approval of the litigants or of a competent judicial authority. The absence of such knowledge or approval would not precipitate the invalidity of an otherwise valid contract. Nevertheless, such contract, though considered valid, may be rescinded at the instance of the other litigants pursuant to Article 1381(4) of the Civil Code.

Here, contrary to the CAs disposition, the RTC aptly ordered the rescission of the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. The petitioners had sufficiently established the presence of the requisites for the rescission of a contract pursuant to Article 1381(4) of the Civil Code. It is undisputed that, at the time they were gratuitously conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are among the properties that were the subject of the partition case then pending with the RTC. It is also undisputed that Rita, then one of the defendants in the partition case with the RTC, did not inform nor sought the approval from the petitioners or of the RTC with regard to the donation inter vivos of the said parcels of land to Florante.

Although the gratuitous conveyance of the said parcels of land in favor of Florante was valid, the donation inter vivos of the same being merely an exercise of ownership, Ritas failure to inform and seek the approval of the petitioners or the RTC regarding the conveyance gave the petitioners the right to have the said donation rescinded pursuant to Article 1381(4) of the Civil Code.

Rescission under Article 1381(4) of the Civil Code is not preconditioned upon the judicial determination as to the ownership of the thing subject of litigation.

In this regard, we also find the assertion that rescission may only be had after the RTC had finally determined that the parcels of land belonged to the estate of Spouses Baylon intrinsically amiss. The petitioners right to institute the action for rescission pursuant to Article 1381(4) of the Civil Code is not preconditioned upon the RTCs determination as to the ownership of the said parcels of land.

It bears stressing that the right to ask for the rescission of a contract under Article 1381(4) of the Civil Code is not contingent upon the final determination of the ownership of the thing subject of litigation. The primordial purpose of Article 1381(4) of the Civil Code is to secure the possible effectivity of the impending judgment by a court with respect to the thing subject of litigation. It seeks to protect the binding effect of a courts impending adjudication vis--vis the thing subject of litigation regardless of which among the contending claims therein would subsequently be upheld. Accordingly, a definitive judicial determination with respect to the thing subject of litigation is not a condition sine qua non before the rescissory action contemplated under Article 1381(4) of the Civil Code may be instituted.

Moreover, conceding that the right to bring the rescissory action pursuant to Article 1381(4) of the Civil Code is preconditioned upon a judicial determination with regard to the thing subject litigation, this would only bring about the very predicament that the said provision of law seeks to obviate. Assuming arguendo that a rescissory action under Article 1381(4) of the Civil Code could only be instituted after the dispute with respect to the thing subject of litigation is judicially determined, there is the possibility that the same may had already been conveyed to third persons acting in good faith, rendering any judicial determination with regard to the thing subject of litigation illusory. Surely, this paradoxical eventuality is not what the law had envisioned.

G.R. No. 3246 February 9, 1907CADWALLADER & COMPANY vs. SMITH, BELL & COMPANY

Facts:

In May 1902, the Pacific Export Lumber Company of Portland shipped (581) piles to the defendant, Henry W. Peabody & Company, at Manila, on the sale of which before storage the consignees were to receive a commission of one half of whatever sum was obtained over $15 for each pile and 5 per cent of the price of the piles sold after storage. After the arrival of the steamer, Peabody and Company wrote the agent of the Pacific Company at Shanghai that for lack of a demand the piles would have to be sold at considerably less than $15 apiece; whereupon the company's agent directed them to make the best possible offer for the piles, in response to which on August 5 they telegraphed him an offer of $12 apiece. It was accepted in consequence of which the defendant paid the Pacific Company $6,972.

It afterwards appeared that on July 9 Peabody & Company had entered into negotiations with the Insular Purchasing Agent for the sale for the piles at $20 a piece, resulting of August 4 in the sale to the Government of two hundred and thirteen (213) piles at $19 each. More of them were afterwards sold to the Government at the same figure and the remainder to other parties at carrying prices, the whole realizing to the defendants $10,41.66, amounting to $3,445.66 above the amount paid by the defendant to the plaintiff therefor. Thus it is clear that at the time when the agents were buying from their principal these piles at $12 apiece on the strength of their representation that no better price was obtainable, they had already sold a substantial part of them at $19. In these transactions the defendant, Smith, Bell & Company, were associated with the defendants, Henry W. Peabody & Company, who conducted the negotiations, and are consequently accountable with them.

Rationale: It is plain that in concealing from their principal the negotiations with the Government, resulting in a sale of the piles at 19 apiece and in misrepresenting the condition of the market, the agents committed a breach of duty from which they should benefit. The contract of sale to themselves thereby induced was founded on their fraud and was subject to annulment by the aggrieved party. (Civil Code, articles 1265 and 1269.) Upon annulment the parties should be restored to their original position by mutual restitution. (Article 1303 and 1306.) Therefore the defendants are not entitled to retain their commission realized upon the piles included under the contract so annulled. In respect of the 213 piles, which at the time of the making of this contract on August 5 they had already sold under the original agency, their commission should be allowed.

G.R. No. L-25400 January 14, 1927THE PHILIPPINE NATIONAL BANK vs. THE PHILIPPINE VEGETABLE OIL CO., INC.

Facts: Vegetable Oil Company, found itself in financial straits. It was in debt to the extent of approximately P30,000,000. The Philippine National Bank was the largest creditor. The Vegetable Oil Company owed the bank P17,000,000. Over P13,000,000 were due the other creditors. The Philippine National Bank was secured principally by a real and chattel mortgage for P3,500,000. Vegetable Oil Company executed another chattel mortgage in favor of the bank on its vessels Tankerville and H. S. Everett to guarantee the payment of sums not to exceed P4,000,000.

Bankruptcy was imminent. On January 1, 1921, Mr. Whitaker made his first offer to pledge certain private properties to secure the creditors of the Oil Company. In February of the same year, a creditors' meeting was held. At the instance of Mr. Whitaker but inspired to such action by the bank, a receiver for the Vegetable Oil Company was appointed by the Court of First Instance of Manila on March 11, 1921.

During the period when a receiver was in control of the property of the Vegetable Oil Company, a number of events occurred. The first was the agreement the creditors transferred to Mr. Whitaker a part of their claims against the Vegetable Oil Company in consideration of the execution by Mr. Whitaker of a trust deed of his property. The Philippine National Bank was not a direct party to the agreement although the officials of the bank had full knowledge of its accomplishment and the general manager of the bank placed his O. K. at the end of the final draft. The next move of the bank was to obtain a new mortgage from the Vegetable Oil Company on February 20, 1922. Shortly thereafter, on February 28, 1922, the receivership for the Vegetable Oil Company was terminated. The bank suspended the operation of the Vegetable Oil Company in May, 1922, and definitely closed the Oil Company's plant.

Philippine National Bank tried to foreclose its mortgage on the property of the Vegetable Oil Company. The Vegetable Oil Company on its part countered. Phil. C. Whitaker presented a complaint in intervention.

Rationale:

The mortgage, Exhibit A, was executed on February 20, 1922, by "Philippine Vegetable Oil Co., Inc., By E. G. Abry, Secretary-Treasurer" "Philippine National Bank By E. W. Wilson, General Manager." E. G. Abry, according to his testimony, was employed as secretary-treasurer of the Vegetable Oil Company after a conference with Mr. Wilson and continued in this position during the period when the Vegetable Oil Company was under the control either of a receiver or of the bank. The other signature to the instrument was that of E. W. Wilson, General Manager of the Philippine National Bank.

It has been said that the mortgage was executed on February 20, 1922. That is undeniable. The allegation of the plaintiff's complaint is "That the defendant, on the 20th day of February, 1922, duly executed to the plaintiff a mortgage." The mortgage in question recites: "This mortgage, executed at the City of Manila, Philippine Islands, this twentieth day of February, nineteen hundred and twenty-two." However, the mortgage was not ratified before a notary public until March 8, 1922, and was not recorded in the registry of property until March 21, 1922.

To add one more date, it will be recalled that the receivership ended on February 28, 1922. In other words, as partially interpretative of the situation, the mortgage was executed by the Philippine National Bank, through its General Manager, and another corporation before the termination of the receivership of the said corporation, but was not acknowledged or recorded until after the termination of the receivership.

It must be evident to all that the Philippine National Bank could legally secure no new mortgage by the accomplishment of documents between its officials and the officials of the Vegetable Oil Company while the property of the latter company was in custodia legis. The Vegetable Oil Company was then inhibited absolutely from giving a mortgage on its property. The receiver was not a party to the mortgage. The court had not authorized the receiver to consent to the execution of a new mortgage. Whether the court could have done so is doubtful, but that it would have thus consented is hardly debatable, considering that it would desire to protect the rights of all the creditors and not the rights of one particular creditor. The legal conclusion is axiomatic.

To place emphasis on the outstanding facts, it must be repeated that the mortgage was executed while a receiver was in charge of the Vegetable Oil Company. A mortgage accomplished at such a time by the corporation under receivership and a creditor would be a nullity. The mortgage was definitely perfected subsequent to the lifting of the receivership pursuant to implied promises that the bank would continue to operate the Vegetable Oil Company. It was then accomplished when the Philippine National Bank was a dominating influence in the affairs of the Vegetable Oil Company. On the one hand was the Philippine National Bank in person. On the other hand was the Philippine National Bank by proxy. Under such circumstances, it would be unconscionable to allow the bank, after the hands of the other creditors were tied, virtually to appropriate to itself all the property of the Vegetable Oil Company.

Whether we consider the action taken as not expressing the free will of the Vegetable Oil Company, or as disclosing undue influence on the part of the Philippine National Bank in procuring the mortgage, or as constituting deceit under the civil law, or whether we go still further and classify the facts as constructive fraud, the result is the same. The mortgage is clearly voidable.

Separate Opinions:

AVANCEA: The insinuation made in the majority opinion of undue influence, deceit and fraud on the part of the plaintiff as grounds for declaring this mortgage void, is absolutely unsupported by the record. Supposing that undue influence, which is a general and abstract conception, exists to some extent, it does not constitute a cause for annulment of the contract so far as it affects the consent, unless the same amounts to violence, or intimidation, or constitutes fraud, or produces substantial error on the part of the other contracting party. (Art. 1265, Civil Code.) The mere intervention of the two representatives of the plaintiff in the Board of Directors of the defendant and, on the other hand, no act has been proved to have been executed by them in connection with the mortgage which might be considered as undue influence. Neither has it been shown that anything was done which might constitute a fraud on the part of the plaintiff in the execution of this mortgage. Fraud is not presumed. The only thing which can be considered in connection with this point is the supposed promise given to the defendant to finance its operations. But, according to the majority opinion, there is no indication of any act of the Board of Directors of the plaintiff corporation which might imply consent to an agreement to give unlimited support to the defendant, nor ratification of any promise to this effect made by the general manager. In order to annul a contract for fraud it must have been committed by one of the contracting parties. (Art. 1269, Civil Code.) On the other hand, the general manager of the plaintiff as also admitted in the majority decision, only intimated generally that the plaintiff corporation would finance its operations.

The appellant's allegation that the mortgage affects him and the foreclose thereof would injure him, does not give him the right to bring an action for annulment, but, for rescission, if any, which is not the one brought herein. Commenting on this aspect of the question, Manresa in vol. 8, p. 780, 2d ed., says: "Third persons need not bring an action for annulment, as provided for in this article (1302, Civil Code)." The contract really injures or it does not. If it does, whether or not the act or contract is valid or void, whether or not it is valid or void, they cannot have any interest in the matter.

JOHNSON: A. Legality of the mortgage

First. That the mortgage in question was executed by the Philippine Vegetable Oil Co., Inc., to the Philippine National Bank and is a valid subsisting contract.

Second. That the statement that the mortgage was executed upon property in custodia legis is not supported by the facts of record.

At the time said document became a mortgage, the property covered thereby was not in custodia legis. It is true that at the time the document was signed on the 20th day of February, 1922, the property was then in the hands of a receiver. At that time, however, the said document was not a mortgage; it was nothing more nor less than an evidence of indebtedness. It did not contain all the requisites of a mortgage. Two additional requisites, under the law, were necessary: (a) It was not a public document at that time and (b) it had not been registered in the registry of property, which is a prerequisite to its becoming a mortgage (art. 1875, Civil Code). The property included in said document passed out of the hands of the receiver on the 28th day of February, 1922, and back into the hands of its owner, the Philippine Vegetable Oil Company, as its private property. The document became a public document by acknowledgment before the notary public on the 18th day of March, 1922. Even that act was not sufficient to make said document a mortgage. It even then was only an evidence of an indebtedness existing between the parties thereto. One thing more, under the law, was necessary in order to give said document the dignity of a mortgage. Under the law, it had to be registered in order to become a mortgage. The document was registered on the 21st day of March, 1922, nearly a month after the property had ceased to be in custodia legis, and thus it became a mortgage. At the same time said document became a mortgage the property was not in custodia legis. Therefore the reason given in the majority opinion for pronouncing said mortgage illegal and void fails, under the facts and the law. (Arts. 1857-1875, Civil Code. Olivares vs. Hoskyn & Co., 2 Phil., 689; McMicking vs. Kimura, 12 Phil., 98; Susara vs. Martinez, 17 Phil., 254; Lozano vs. Tan Suico, 23 Phil., 16; Borcelis vs. Golingco, 27 Phil., 560; Legarda and Prieto vs. Saleeby, 31 Phil., 590; Lim Julian vs. Lutero, G.R. No. 25235.1)

From the foregoing facts and the law it becomes clear that, that part of the majority opinion which declares the mortgage null and void because it covered property in custodia legis cannot be supported.

Third. I cannot give my conformity to that part of the majority opinion which charges that said mortgage did not express the free will of the Philippine Vegetable Oil Co., Inc. The Philippine Vegetable Oil Co. not only signed said mortgage voluntarily, before witnesses, but nearly three weeks later ratified its due execution before a notary public. And not only that, the Philippine Vegetable Oil Co., Inc., recognized the validity of said document, by later, making payments thereon.

Fourth. Neither can I give my conformity to that part of the majority opinion which imputes to the Philippine National Bank bad faith, undue influence, deceit and constructive fraud in procuring the execution of said mortgage. The record clearly shows that the mortgage was given to secure the payment of a preexisting indebtedness for a valuable consideration. In addition to the fact that the Philippine Vegetable Oil Co. had recognized the validity of said mortgage by making payments thereon, there is nothing in the record which shows, in the slightest degree, that it had, prior to the commencement of the present action, even intimated that the mortgage was illegal and void. It may be added that the failure of the Philippine Vegetable Oil Co., Inc., to appeal is an additional proof of its belief that the defense of illegality is not well founded.

In my opinion, the facts of record an the law applicable thereto fully support the conclusions of the lower court that the mortgage had been legally executed, was a valid subsisting contract of mortgage, and in ordering the foreclosure of the same. That part of the judgment appealed from should therefore be affirmed.

STREET: Upon inspection of the prevailing opinion it will be seen that the last mortgage executed by the defendant Philippine Vegetable Oil Company, Inc., in favor of the Philippine National Bank, has been declared null and void by the court at the instance of the intervenor, Phil. C. Whitaker, who is a principal stockholder in the defendant company. It will be further observed that the nullity of this contract was originally asserted in the answer of the corporation defendant, but this defense was disallowed by the trial court in giving judgment in favor of the plaintiff for the foreclosure of the mortgage. From this judgment the Philippine Vegetable Oil Company did not appeal; and the adjudication of the validity of the mortgage thereby became conclusive as against the company. There is nothing in the record to suggest that the abandonment of this defense by the corporation itself and its failure to appeal from the judgment was due to anything else than a fair exercise of the judgment of its officers and of the attorney who represented the corporation in the lower court.

G.R. No. L-27343 February 28, 1979MANUEL G. SINGSONG vs. ISABELA SAWMILL Facts: Defendants Leon Garibay, Margarita G. Saldejeno, and Timoteo Tubungbanua entered into a Contract of Partnership under the firm name "Isabela Sawmill".

Plaintiff Oppen, Esteban, Inc. sold a Motor Truck and two Tractors to the partnership Isabela Sawmill. In order to pay the said purcahse price, the said partnership agreed to make arrangements with the International Harvester Company at Bacolod City so that the latter would sell farm machinery to Oppen, Esteban, Inc. with the understanding that the price was to be paid by the partnership.

That through the method of payment stipulated in the contract the International Harvester Company has been paid a total of P19,211.11, leaving an unpaid balance of P1,288.89.

Spouses Cecilio Saldajeno and Margarita G. Saldajeno sued Isabela Sawmill, Leon Garibay, and Timoteo Tubungbanua.

Leon Garibay, Timoteo Tubungbanua and Margarita G. Saldajeno entered into a "Memorandum Agreement".

Leon Garibay, Timoteo Tubungbanua and Margarita G. Saldajeno executed a document entitled "Assignment of Rights with Chattel Mortgage".

That thereafter the defendants Leon Garibay and Timoteo Tubungbanua did not divide the assets and properties of the "Isabela Sawmill" between them, but they continued the business of said partnership under the same firm name "Isabela Sawmill".

Provincial Sheriff of Negros Occidental published two (2) notices that he would sell at public auction on June 5, 1959 at Isabela, Negros Occidental certain trucks, tractors, machinery, officeequipment and other things that were involved in Civil Case No. 5223 of the Court of First Instance of Negros Occidental, entitled "Margarita G. Saldajeno vs. Leon Garibay, et al.

Provincial Sheriff of Negros Occidental executed a Certificate of Sale in favor of the defendant Margarita G. Saldajeno.

Margarita G. Saldajeno executed a deed of sale in favor of the Pan Oriental Lumber Company transfering to the latter for the sum of P45,000.00 the trucks, tractors, machinery, and other things that she had purchashed at a public auction.

Rationale: The contention of the appellant that the appleees cannot bring an action to annul the chattel mortgage of the properties of the partnership executed by Leon Garibay and Timoteo Tubungbanua in favor of Margarita G. Saldajeno has no merit.

As a rule, a contract cannot be assailed by one who is not a party thereto. However, when a contract prejudices the rights of a third person, he may file an action to annul the contract.

This Court has held that a person, who is not a party obliged principally or subsidiarity under a contract, may exercise an action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him from the contract in which he has no intervention.

The plaintiffs-appellees were prejudiced in their rights by the execution of the chattel mortgage over the properties of the partnership "Isabela Sawmill" in favopr of Margarita G. Saldajeno by the remaining partners, Leon Garibay and Timoteo Tubungbanua. Hence, said appelees have a right to file the action to nullify the chattel mortgage in question.

The portion of the decision appealed from ordering the appellants to pay attorney's fees to the plaintiffs-appellees cannot be sustained. There is no showing that the appellants displayed a wanton disregard of the rights of the plaintiffs. Indeed, the appellants believed in good faith, albeit erroneously, that they are not liable to pay the claims.

The defendants-appellants have a right to be reimbursed whatever amounts they shall pay the appellees by their co-defendants Leon Garibay and Timoteo Tubungbanua. In the memorandum-agreement, Leon Garibay and Timoteo Tubungbaun undertook to release Margarita G. Saldajeno from any obligation of "Isabela Sawmill" to third persons.

G.R. No. 154390, March 17, 2014METROPOLITAN vs. PROSPERITY

Facts: In July 1984, Metropolitan (MFI) sought from Prosperity (PCRI) a loan in the amount of P3,443,330.52, the balance of the cost of its boiler machine, to prevent its repossession by the seller. PCRI was represented by Domingo Ang (Domingo) its president, and his son Caleb, vicepresident. The parties knew each other because they belonged to the same family association, the Lioc Kui Tong Fraternity.

Even before the signing of the mortgage and loan documents, PCRI released the P3.5 million loan to MFI. It found that the blank loan forms, consisting of the real estate mortgage contract, promissory note, comprehensive surety agreement and disclosure statement, which Domingo himself handed to Enrique, had no entries specifying the rate of interest and schedules of amortization. On the same day, to reciprocate the gesture of PCRI, Enrique, together with his wife Natividad Africa, vicepresident, and son Edmundo signed the blank forms at their office at 685 Tandang Sora Avenue, Novaliches, Quezon City. The signing was allegedly witnessed by Vicky, Ellen and Alice, all surnamed Ang, without any PCRI representative present. Immediately thereafter, Enrique and Vicky proceeded to the PCRI office at 1020 Soler St., Binondo.

Vicky further stated that it was agreed that once PCRI had chosen the lots to be covered by the mortgage, the defendants would return the remaining titles to the plaintiffs. Plaintiffs also secured an additional loan of about P199,000.00 to pay for real estate taxes and other expenses. Significantly, Vicky testified that the plaintiffs delivered to PCRI twentyfour (24) checks, bearing no dates and amounts, to cover the amortization payments, all signed in blank by Enrique and Natividad.

In September 1984, the first amortization check bounced for insufficient fund due to MFIs continuing business losses. It was then that the appellees allegedly learned that PCRI had filled up the 24 blank checks with dates and amounts that reflected a 35% interest rate per annum, instead of just 24%, and a twoyear repayment period, instead of 10 years. Vicky avers that her strong protest caused PCRI to desist from depositing the other 23 checks, and that it was about this time that PCRI finally furnished MFI with its copy of the promissory note and the disclosure statement.

On September 4, 1986, Enrique received a Notice of Sheriffs Sale dated August 29, 1986, announcing the auction of the seven lots on September 24, 1986 due to unpaid indebtedness of P10.5 million.

MFI protested the foreclosure, and the auction was reset to October 6, 1986, then to October 16, 1986, and finally October 27, 1986 after they assured PCRI that they had found a serious buyer for three of the lots. In the meeting held on October 15, 1986 at defendants office, the buyer, Winston Wang of Asia Cotton and his lawyer, Atty. Ismael Andres were present. It was agreed to release the mortgage over TCT Nos. 317705, 317706, and 317707 upon payment of P3.5 million. Winston Wang would pay to MFI P500,000.00 as downpayment, which MFI would in turn pay to PCRI as partial settlement of the P3.5 million loan. Winston Wang was given 15 days from October 16, 1986 to pay the P500,000.00. Vicky claims that these agreements were made verbally, although she kept notes and scribbles of them.

On January 19, 1987, Winston Wang confronted Vicky about their sale agreement and PCRIs refusal to accept their P3 million payment, because according to Caleb, the three lots had been foreclosed. Vicky was shocked, because the agreed 60day period to pay the P3 million was to lapse on January 13, 1987 yet. Caleb himself put the particulars of the P500,000.00 payment in the cash voucher as partial settlement of the loan.

At the auction sale on October 27, 1986, PCRI was the sole bidder for P6.5 million. Vicky however also admitted that discussions continued on the agreement to release three lots for P3.5 million. The reduction of interest rate and charges and the condonation of the attorneys fees of P300,000.00 for the foreclosure proceedings were also sought. Present in these conferences were Enrique and Vicky, Domingo and Caleb, Winston Wang and his lawyer, Atty. Ismael Andres.

Upon defendants continued failure to honor their agreement, Atty. Ismael Andres threatened to sue PCRI in a letter dated February 17, 1987 if they would not accept the P3 million payment of his client. Atty. Andres also sent them similar letters dated May 15, August 5 and 7, 1987, and after several more discussions, the defendants finally agreed to accept the P3 million from Winston Wang, but under these conditions: a) MFI must pay the P300,000.00 attorneys fees paid for the foreclosure proceedings and the P190,000.00 for real estate taxes; b) PCRI shall issue the certificate of redemption over the three lots; c) plaintiffs shall execute a Memorandum of Undertaking concerning their right of way over the other properties, the lots being redeemed being situated along Tandang Sora Street.

MFI paid to PCRI P490,000.00 as agreed, and likewise complied with the required documentation. Winston Wang also paid the balance of P3 million for the three lots he was buying. The discussion then turned to how the plaintiffs P3 million interest arrearages would be settled, which they agreed to be payable over a period of one year, from October 26, 1987 to October 26, 1988.

In October, 1988, however, plaintiffs were able to raise only P2 million. After a meeting at defendants office, the period to pay was extended to October 26, 1989, but subject to 18% interest per annum, which Caleb however allegedly refused to put in writing. Plaintiffs were later able to raise P3 million plus P540,000.00 representing the 18% interest per annum. On October 26, 1989, Vicky and Enrique tendered the same to Caleb at his office. Caleb however became furious, and now insisted that the interest due since 1984 was already P7 million computed at 35% per annum.

On January 16, 1990 and again on March 5, 1990, PCRI sent the plaintiffs a letter demanding that they vacate the four remaining lots. Caleb was also now asking for P10.5 million. On March 19, 1990, Caleb executed an affidavit of nonredemption of TCT Nos. 317699, 317702, 317703 and 317704. On June 7, 1990, S.G. del Rosario, PCRIs vicepresident, wrote Vicky reiterating their demand to vacate the premises and remove pieces of machinery, equipment and persons therein, which MFI eventually heeded.

Rationale: The appeal has no merit.

The CA did not disregard the factual findings of the RTC:

Petitioners insist that respondents committed fraud when the officers of Metropolitan were made to sign the deed of real estate mortgage in blank.

According to Article 1338 of the Civil Code, there is fraud when one of the contracting parties, through insidious words or machinations, induces the other to enter into the contract that, without the inducement, he would not have agreed to. Yet, fraud, to vitiate consent, must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract. In Samson v. Court of Appeals, causal fraud is defined as a deception employed by one party prior to or simultaneous to the contract in order to secure the consent of the other.

Fraud cannot be presumed but must be proved by clear and convincing evidence. Whoever alleges fraud affecting a transaction must substantiate his allegation, because a person is always presumed to take ordinary care of his concerns, and private transactions are similarly presumed to have been fair and regular. To be remembered is that mere allegation is definitely not evidence; hence, it must be proved by sufficient evidence.

Did petitioners clearly and convincingly establish their allegation of fraud in the execution of the deed of real estate mortgage?

Petitioners undeniably failed to adduce clear and convincing evidence against the genuineness and authenticity of the deed. Instead, their actuations even demonstrated that their transaction with respondents had been regular and at armslength, thereby belying the intervention of fraud.

To start with, the evidence adduced by Vicky Ang, the lone witness for petitioners, tried to cast doubt on the contents and due execution of the deed of real estate mortgage by pointing to certain irregularities. But she could not be effective for the purpose because she had not been among the signatories of the deed. The signatories were her late father Enrique Ang, her mother Natividad Africa, and her brother Edmundo Ang, none of whom came forward to testify against the deed, or otherwise to assail the genuineness and due execution of the deed by any other means. They would have been in the better position than Vicky Ang to substantiate the allegation of fraud if that was the case. Their silence reflected the inanity of the allegation of fraud by Vicky Ang.

Secondly, petitioners freely and voluntarily surrendered to respondents the seven transfer certificates of title (TCTs) of their lots. Such surrender of the TCTs evinced their intention to offer the lots as collateral for the performance of their obligations contracted with respondents. They thereby confirmed the genuineness and due execution of the deed of real estate mortgage. Surely, they would not have surrendered the TCTs had their intention been otherwise.

Thirdly, another circumstance belying the commission of fraud by respondents was petitioners pleading with respondents for the resetting of foreclosure sale of the properties after receiving the notice of the impending sale. As a result, the sale was reset thrice. Had the mortgage and its foreclosure been unreasonable or fraudulent, petitioners should have instead resolutely contested respondents move to foreclose.

Fourthly, even after their properties were eventually sold as the consequence of the foreclosure, petitioners negotiated with respondents on the partial redemption of three of the seven lots. They also took the trouble of finding a buyer (Mr. Winston Wang of Asia Cotton) of some of the lots. Had the mortgage been fraudulent, they could have instead instituted a complaint to nullify the real estate mortgage and the foreclosure sale.

And, lastly, Vicky Angs own letters to respondents had an apologetic tenor, and was seeking leniency from them. Such tenor and tone of her communications were antithetical to her allegation of having been the victim of their fraudulent acts.

These circumstances tended to indicate that fraud was not attendant during the transactions between the parties. Verily, as between the duly executed real estate mortgage and the unsubstantiated allegations of fraud, the Court affords greater weight to the former.

Action to assail the mortgage already prescribed:

To resolve the issue of prescription, it is decisive to determine if the mortgage was void or merely voidable.

It appears that the original stance of petitioners was that the deed of real estate mortgage was voidable. In their complaint, they averred that the deed, albeit in printed form, was incomplete in essential details, and that Metropolitan, through Enrique Ang as its president, signed it in good faith and in absolute confidence. Yet, petitioners now claim that the CA committed a reversible error in not holding that the absence of consent made the deed of real estate mortgage void, not merely voidable. In effect, they are now advancing that their consent was not merely vitiated by means of fraud, but that there was complete absence of consent. Although they should be estopped from raising this issue for the first time on appeal, the Court nonetheless opts to consider it because its resolution is necessary to arrive at a just and complete resolution of the case.

As the records show, petitioners really agreed to mortgage their properties as security for their loan, and signed the deed of mortgage for the purpose. Thereafter, they delivered the TCTs of the properties subject of the mortgage to respondents.

Consequently, petitioners contention of absence of consent had no firm moorings. It remained unproved. To begin with, they neither alleged nor established that they had been forced or coerced to enter into the mortgage. Also, they had freely and voluntarily applied for the loan, executed the mortgage contract and turned over the TCTs of their properties. And, lastly, contrary to their modified defense of absence of consent, Vicky Angs testimony tended at best to prove the vitiation of their consent through insidious words, machinations or misrepresentations amounting to fraud, which showed that the contract was voidable. Where the consent was given through fraud, the contract was voidable, not void ab initio. This is because a voidable or annullable contract is existent, valid and binding, although it can be annulled due to want of capacity or because of the vitiated consent of one of the parties.

With the contract being voidable, petitioners action to annul the real estate mortgage already prescribed. Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting parties was obtained through fraud, the contract is considered voidable and may be annulled within four years from the time of the discovery of the fraud.31 The discovery of fraud is reckoned from the time the document was registered in the Register of Deeds in view of the rule that registration was notice to the whole world.32 Thus, because the mortgage involving the seven lots was registered on September 5, 1984, they had until September 5, 1988 within which to assail the validity of the mortgage. But their complaint was instituted in the RTC only on October 10, 1991.33 Hence, the action, being by then already prescribed, should be dismissed.

G.R. No. 12605 September 7, 1918UY SOO LIM vs. BENITO TAN UNCHUAN

Facts: At the age of about thirteen Santiago Pastrano Uy Toco, a Chinese, came from China to reside in the Philippine Islands. He was then unmarried. On August 2, 1882, he married Candida Vivares, a Filipina. Of this marriage there were born two daughters, Francisca and Concepcion. Francisca is a defendant in this suit and is the wife of the co-defendant, Benito Tan Unchuan. At the time of this marriage, Santiago Pastrano possessed very little property a tienda worth about two thousand pesos. The large estate left by him at his death was acquired by him during his marriage with Candida Vivares.

Santiago Pastrano returned to China were he remained for little less than a year. While there he entered into illicit relations with a Chinese woman, Chan Quieg, also referred to as Chan Ni Yu.

Santiago Pastrano returned to the Philippines. He never saw Chan Quieg again, but received letters from her informing him that she had borne him a son, Uy Soo Lim, the present plaintiff. He died without ever having seen Uy Soo Lim, but under the belief that he was his only son, and it was in this belief that he dictated the provisions of his will.

On March 6, 1901, Santiago Pastrano died in Cebu, leaving a large estate. The persons who survived him, were his wife, Candida Vivares, his daughters, Francisca Pastrano and Concepcion Pastrano, Chan Quieg, and the plaintiff Uy Soo Lim.

By the terms of his will, Santiago Pastrano attempted to dispose of the greater part of his estate in favor of the appellant, Uy Soo Lim. The will was duly probated in the Court of First Instance of Cebu, and the defendant Benito Tan Unchuan, husband of the defendant Francisca Pastrano, who was named in the will as executor. Basilio Uy Bundan, one of the defendants herein and brother of Santiago Pastrano, was named by the testator as guardian of Francisca Pastrano, Concepcion Pastrano, and Uy Soo Lim, who were all three minors at the time of the death of the testator, and duly qualified as such before the court on August 6, 1902.

Court of First Instance of Cebu, in the matter of the testamentary estate of Santiago Pastrano issued an order requiring Benito Tan Unchuan, as executor of the testamentary estate of Santiago Pastrano, to deliver to Basilio Uy Bundan, guardian of Francisca Pastrano, Concepcion Pastrano, and Uy Soo Lim, the property to which they were entitled under the will of said Santiago Pastrano. This order was complied with and the administration of the testamentary estate declared closed.

Basilio Uy Bundan having received, as guardian of the minors Francisca Pastrano, Concepcion Pastrano, and Uy Soo Lim, the property devised to them under the will of said Santiago Pastrano, continued to administer the said property as guardian without incident till October, 1910. The court issued an order on the guardian, Basilio Uy Bundan, in which it was noted that Francisca Pastrano had reached majority, that Concepcion Pastrano would reach her majority in a few months, and that Uy Soo Lim had married and the guardian was therefore ordered to present a plan of distribution of the estate in accordance with the dispositions of the will of Santiago Pastrano.

The guardian did not comply with this order at once, and, before the plan of the distribution called for by this order could be presented, objections against carrying into effect the provisions of the will were presented to this court.

On May 25, 1991, Candida Vivares presented, through her attorneys, a motion in the matter of the testamentary estate of Santiago Pastrano in which she claimed the right as the widow of the deceased to one-half of all the estate, and asked that the administration of said estate reopened and the rights of the persons readjudged and determined according to law. A motion of similar purport was filed by her in the matter of the guardianship of Uy Soo Lim et al.

On June 5, 1911, Francisca Pastrano and Concepcion Pastrano filed, through their attorneys, a motion in the guardianship of Uy Soo Lim et al., in which they opposed the distribution of the estate of Santiago Pastrano in accordance with the terms of his will, alleging that Uy Soo Lim was not entitled under the law to the amount of the estate assigned him in the will, for the reason that the marriage alleged therein of Santiago Pastrano with Chan Quieg, was null and void, and, furthermore, that Uy Soo Lim was not a son, legitimate or illegitimate, of said Santiago Pastrano. They, therefore, asked for a suspension of the distribution and a reopening of the matter of the testamentary estate of Santiago Pastrano and that the rights of all persons in interest be readjudged and determined according to law. Chan Quieg also appeared in the matter of the estate of Santiago Pastrano on October 7, 1911, and asked that she be declared entitled to one-half the estate on account of "having in the year 1892 in the city of Amoy, China, held carnal relations with the deceased Santiago Pastrano, having lived maritally with him during his stay in said city that year, which union, under the laws and customs of China, constitutes all the forms of valid marriage in said jurisdiction."

About the end of October, 1911, or, perhaps the early part of November, an agreement was reached between Choa Tek Hee and plaintiff, of the one part, and Tan Unchuan and Del Rosario, an attorney of Cebu, representing the interest of Candida Vivares, Francisca and Concepcion Pastrano, on the other, to submit the entire matter in dispute to the judgment of three respectable Chinese merchants designated. The persons thus designated were not, strictly speaking, arbitrators, but rather friendly advisers, since there was no agreement that their findings should be binding on the parties. These advisers came to the conclusion that the sum of P82,500 should be accepted by plaintiff in full satisfaction and relinquishment of all his right, title, and interest in and to the estate of the deceased Santiago Pastrano, and this recommendation was accepted by Choa Tek Hee and plaintiff and by Tan Unchuan and Del Rosario. In accordance with this agreement, plaintiff, on November 18, 1911, executed a deed by which he relinguished and sold to Francisca Pastrano all his right, title, and interest in the estate of the deceased Santiago Pastrano in consideration of P82,500, of which sum P10,000 was received in cash and the balance was represented by six promissory notes payable to Choa Tek Hee as attorney in fact for Uy Soo Lim, the first for P22,500 and the remaining five for P10,000 each. This is the document known as plaintiff's Exhibit B, which plaintiff is seeking to annul in the present action. Thereafter, on December 6, 1911, Candida Vivares and Concepcion Pastrano, then of age, executed separate deeds by where they relinquished and sold to Francisca Pastrano all their right, title, and interest in the estate left by Santiago Pastrano.

On November 29, 1911, Chan Quieg, then temporarily in the port of Cebu, executed a deed whereby she sold and relinquished to Francisca Pastrano all her right, title, and interest in the estate of Santiago Pastrano. On December 4, 1911, Chan Quieg executed a public document in which she gave her consent to the sale by Uy Soo Lim of his right and interest in said estate "in case the same should be necessary by virtue of any legal requirements of the laws of the Philippine Islands."

And finally, on December 4, 1911, Basilio Uy Bundan executed a public document in which he declared that in spite of the statements in the will of Santiago Pastrano, said testator was the owner of the entire business in Cebu known as Santiago Pastrano & Co., and that Calixto Uy Conchio, the brother of testator and of said Basilio Uy Bundan, did not, as declared in said will, own a three-quarter interest in said business, or any interest at all therein, for which reason the said Basilio Uy Bundan renounced any interest in said business which he might appear to have as brother and heir of said Calixto Uy Conchio, who died without direct heirs in the ascending or descending line, said renunciation of right being made in favor of Francisca Pastrano.

All the documents above mentioned having been duly presented to the lower court by Pantaleon del Rosario acting as attorney of Francisca Pastrano, that court, on December 11, 1911, issued an order in the matter of the guardianship of Uy Soo Lim et al., by which Francisca Pastrano was declared the sole owner of the property left by the deceased Santiago Pastrano, and the guardian Basilio Uy Bundan was order to deliver the same to Francisca Pastrano. On December 14, 1911, upon proof of compliance with said order, the guardianship was closed and the guardians bond cancelled.

On August 24, 1914, the plaintiff and appellant, Uy Soo Lim, commenced the present action in the Court of First Instance of Cebu, for the purpose of vacating the orders of the lower court of December 11, 1911 and to rescind and annul the contract by which he had sold and transferred to Francisca Pastrano his interest in the estate of Santiago Pastrano.

Rationale: The complaint alleges as one of the reasons for setting aside plaintiffs sale of his rights to Francisca Pastrano that defendants Benito Tan Unchuan and Basilio Uy Bundan induced the plaintiff to execute the deed of cession by conspiring together to exercise under influence upon the plaintiff, by taking advantage of his youth, passions, and inexperience, by misrepresenting materials facts concerning the value of the property and interest in questions, and by concealing others. The court below held that appellant had not been induced by deceit, or undue influence to enter into the contract, but did so deliberately with full knowledge of the facts, after mature deliberation and upon the advice of capable counsel.

Some shadow of claim might be made on this issue if plaintiff, then a minor, had signed the document without careful and competent advisers to direct him. He had however three advisers. One of them was Choa Tek Hee, characterized by Judge Del Rosario as a person of unusual ability. Whatever discord may have arisen subsequently between plaintiff and Choa Tek Hee, there is no serious claim either in the complaint or based on the evidence that Choa Tek Hee was a party to the supposed conspiracy against plaintiff, and the Court does not doubt but what Choa Tek Hee exerted all his ability to procure for plaintiff the best possible terms. But plaintiff from the very beginning until the end had the benefit of the advice of two lawyers, Major Bishop to consult with in Manila, where the document itself was signed, and Mr. Levering of Cebu, where most of the property was situated, where the other parties in interest lived and where the litigation itself was pending. To claim that plaintiff did not know what he was signing appears to the court to be an impeachment of the intelligence which a reading of the testimony shows the plaintiff to have possessed at the time in question. To claim that the two attorneys named allowed their client to sign the document without being satisfied that he understood its import and thereafter consented to the final decree issued by the court in Cebu based on said sale, constitutes in the opinion of the court an untenable impeachment of the conduct of two lawyers well and favorably known to the Bench and Bar of these Islands as attorneys of ability and integrity.

In support of the claim that material facts were concealed and misrepresented by defendants, special stress is laid on a memorandum furnished the "arbitrators" by Tan Unchuan. This memorandum was shown to plaintiff's agent Choa Tek Hee and was a general account of the property left by Santiago Pastrano's estate was credited with a quarter interest in the business known as Santiago Pastrano & Co., his deceased brother Calixto Uy Conchio being credited with only the remaining three-fourths, while as a matter of fact it would appear that Santiago Pastrano was the owner of the entire interest in said business and subsequently to the execution of the document in question by plaintiff the entire interest in the business passed by decree of this court to Francisca Pastrano who has purchased the interest of all the other heirs. But whatever may have been the effect of the presentation of this memorandum, plaintiff is not shown to have relied thereon. It was for the purpose among others of being informed as to the nature and value of his interests and as to the weight that might be attached to the claims made by persons with adverse interest that plaintiff employed a lawyer in Cebu where most of the property (and the business known as Santiago Pastrano &