Obligations and Contracts Final Exam Coverage

OBLIGATIONS AND CONTRACTS S.Y. 2012-2013 FINAL EXAM: Defective Contracts to Estoppel 1

RESCISSIBLE CONTRACTS ............................................................................3

ROSENCOR vs. INQUING [G.R. No. 140479. March 8, 2001] ........................... 3

KHE HONG CHENG vs. CA [G.R. No. 144169. March 28, 2001] ....................... 14

UNION BANK vs. ONG (G.R. No. 152347 June 21, 2006) ...................... 20

HEIRS OF QUIRONG vs. DBP (G.R. No. 173441, December 3, 2009) ............. 29

ADA VS. BAYLON, 678 SCRA 293, G.R. No. 184235, August 13, 2012 ................ 33

VOIDABLE CONTRACTS ............................................................................ 46

SAMONTE vs. CA [G.R. No. 104223. July 12, 2001] ............................................ 46

MENDEZONA VS. OZAMIZ (376 SCRA 482) .................................................... 52

FAMANILA vs. CA (G.R. No. 150429, August 29, 2006) .................................... 61

CATALAN vs. BASA (G.R. No. 159567, July 31, 2007) ......................................... 66

VILLANUEVA vs. CHIONG [G.R. No. 159889, June 05, 2008] .......................... 71

AYSON vs. PARAGAS (557 SCRA 50) .................................................................. 76

DESTREZA vs. ALAROS (G.R. No. 176863, October 30, 2009) ......................... 84

KINGS PROPERTIES vs. GALIDO (G.R. No. 170023, November 27, 2009) ...... 91

VILORIA vs. CONTINENTAL AIRLINES, 663 SCRA 57, G.R. NO. 188288..... 102

UNENFORCEABLE CONTRACTS ............................................................... 120

REGAL FILMS vs. CONCEPCION [G.R. No. 139532. August 9, 2001] .......... 120

LITONJUA vs. FERNANDEZ [G.R. No. 148116. April 14, 2004] ....................... 123

GOZUN vs. MERCADO (G.R. No. 167812, December 19, 2006) ...................... 132

CABALES vs. CA (G.R. No.162421, 3-Aug-2007) ................................................ 138

PENALBER vs. RAMOS (G.R. No. 178645, 30-Jan-2009) .................................. 144

THE ESTATE OF PEDRO GONZALES vs. THE HEIRS OF MARCOS PEREZ (G.R. No. 169681, 5-Nov-2009) ............................................................................ 154

VOID CONTRACTS .................................................................................... 161

MODINA vs. CA (G.R. No. 109355., 29-Oct-1999) ............................................. 161

DOMINGO vs. CA (G.R. No. 127540. 17-Oct-2001) .......................................... 166

SPS. BAUTISTA vs. SILVA (G.R. No. 157434, 19-Sept-2006) ............................ 172

HULST vs. PR BUILDERS, INC. (G.R. No. 156364 , 3-Sept-2007) ................... 179

QUIMPO vs. VDA. DE VELTRAN (G.R. No. 160956, 13-Feb-2008) ................ 189

SPS ALINAS vs. SPS ALINAS (G.R. No. 158040, 14-Apr-2008) ........................ 195

NUNGA vs. NUNGA (G.R. No. 178306, 18-Dec-2008) ..................................... 203

CAMPOS VS. PASTRANA (G.R. No. 175994, 8-Dec-2009) .............................. 215

TECSON vs. FRANCISCO (G.R. No. 180683, 1-Jun-2011) .................................. 222

DPWH vs. QUIWA 665 SCRA 479, G.R. No. 183444 ........................................ 233

ESTOPPEL .................................................................................................. 243

LIM vs. QUEENSLAND TOKYO COMMODITIES, INC. (G.R. No. 136031, 4-Jan-2002) .............................................................................................................. 243

REPUBLIC vs. CA, SPS SANTOS, ST. JUDGES ENT., INC., SPS CALAGUIAN (G.R. No. 116111, 21-Jan-1999) .............................................................................. 248


HEIRS OF HERMOSILLA vs. SPS REMOQUILLO (G.R. No. 167320, 30-Jan-2007) ..................................................................................................................... 256

ASILO, JR. vs. PEOPLE and SPOUSES BOMBASI, G.R. No. 159017-18, March 9, 2011 ........................................................................................................................ 260


RESCISSIBLE CONTRACTS

ROSENCOR vs. INQUING [G.R. No. 140479. March 8, 2001]1

This is a petition for review on certiorari under Rule 45 of the Rules of Court

seeking reversal of the Decision[1]

of the Court of Appeals dated June 25, 1999 in

CA-G.R. CV No. 53963. The Court of Appeals decision reversed and set aside the

Decision[2]

dated May 13, 1996 of Branch 217 of the Regional Trial Court of

Quezon City in Civil Case No. Q-93-18582.

The case was originally filed on December 10, 1993 by Paterno Inquing, Irene

Guillermo and Federico Bantugan, herein respondents, against Rosencor

Development Corporation (hereinafter Rosencor), Rene Joaquin, and

Eufrocina de Leon. Originally, the complaint was one for annulment of absolute

deed of sale but was later amended to one for rescission of absolute deed of

sale. A complaint-for intervention was thereafter filed by respondents Fernando

Magbanua and Danna Lizza Tiangco. The complaint-in-intervention was

admitted by the trial court in an Order dated May 4, 1994.[3]

The facts of the case, as stated by the trial court and adopted by the appellate

court, are as follows:

This action was originally for the annulment of the Deed of Absolute Sale dated

September 4, 1990 between defendants Rosencor and Eufrocina de Leon but

later amended (sic) praying for the rescission of the deed of sale.

1 Rescissible Contracts

Plaintiffs and plaintiffs-intervenors averred that they are the lessees since 1971 of

a two-story residential apartment located at No. 150 Tomas Morato Ave.,

Quezon City covered by TCT No. 96161 and owned by spouses Faustino and

Cresencia Tiangco. The lease was not covered by any contract. The lessees were

renting the premises then for P150.00 a month and were allegedly verbally

granted by the lessors the pre-emptive right to purchase the property if ever

they decide to sell the same.

Upon the death of the spouses Tiangcos in 1975, the management of the

property was adjudicated to their heirs who were represented by Eufrocina de

Leon. The lessees were allegedly promised the same pre-emptive right by the

heirs of Tiangcos since the latter had knowledge that this right was extended to

the former by the late spouses Tiangcos. The lessees continued to stay in the

premises and allegedly spent their own money amounting from P50,000.00 to

P100,000.00 for its upkeep. These expenses were never deducted from the

rentals which already increased to P1,000.00.

In June 1990, the lessees received a letter from Atty. Erlinda Aguila demanding

that they vacate the premises so that the demolition of the building be

undertaken. They refused to leave the premises. In that same month, de Leon

refused to accept the lessees rental payment claiming that they have run out of

receipts and that a new collector has been assigned to receive the

payments. Thereafter, they received a letter from Eufrocina de Leon offering to

sell to them the property they were leasing for P2,000,000.00. xxx.

The lessees offered to buy the property from de Leon for the amount of

P1,000,000.00. De Leon told them that she will be submitting the offer to the

other heirs. Since then, no answer was given by de Leon as to their offer to buy


the property. However, in November 1990, Rene Joaquin came to the leased

premises introducing himself as its new owner.

In January 1991, the lessees again received another letter from Atty. Aguila

demanding that they vacate the premises. A month thereafter, the lessees

received a letter from de Leon advising them that the heirs of the late spouses

Tiangcos have already sold the property to Rosencor. The following month Atty.

Aguila wrote them another letter demanding the rental payment and

introducing herself as counsel for Rosencor/Rene Joaquin, the new owners of

the premises.

The lessees requested from de Leon why she had disregarded the pre-emptive

right she and the late Tiangcos have promised them. They also asked for a copy

of the deed of sale between her and the new owners thereof but she refused to

heed their request. In the same manner, when they asked Rene Joaquin a copy

of the deed of sale, the latter turned down their request and instead Atty. Aguila

wrote them several letters demanding that they vacate the premises. The

lessees offered to tender their rental payment to de Leon but she refused to

accept the same.

In April 1992 before the demolition can be undertaken by the Buiding Official,

the barangay interceded between the parties herein after which Rosencor raised

the issue as to the rental payment of the premises. It was also at this instance

that the lessees were furnished with a copy of the Deed of Sale and discovered

that they were deceived by de Leon since the sale between her and Rene

Joaquin/Rosencor took place in September 4, 1990 while de Leon made the offer

to them only in October 1990 or after the sale with Rosencor had been

consummated. The lessees also noted that the property was sold only for

P726,000.00.

The lessees offered to reimburse de Leon the selling price of P726,000.00 plus an

additional P274,000.00 to complete their P1,000.000.00 earlier offer. When

their offer was refused, they filed the present action praying for the following: a)

rescission of the Deed of Absolute Sale between de Leon and Rosencor dated

September 4, 1990; b) the defendants Rosencor/Rene Joaquin be ordered to

reconvey the property to de Leon; and c) de Leon be ordered to reimburse the

plaintiffs for the repairs of the property, or apply the said amount as part of the

price for the purchase of the property in the sum of P100,000.00.[4]

After trial on the merits, the Regional Trial Court rendered a Decision[5]

dated

May 13, 1996 dismissing the complaint. The trial court held that the right of

redemption on which the complaint was based was merely an oral one and as

such, is unenforceable under the law. The dispositive portion of the May 13,

1996 Decision is as follows:

WHEREFORE, in view of the foregoing, the Court DISMISSES the instant

action. Plaintiffs and plaintiffs-intervenors are hereby ordered to pay their

respective monthly rental of P1,000.00 per month reckoned from May 1990 up to

the time they leave the premises. No costs.

SO ORDERED.[6]

Not satisfied with the decision of the trial court, respondents herein filed a

Notice of Appeal dated June 3, 1996. On the same date, the trial court issued an

Order for the elevation of the records of the case to the Court of Appeals. On

August 8, 1997, respondents filed their appellate brief before the Court of

Appeals.


On June 25, 1999, the Court of Appeals rendered its decision

[7] reversing the

decision of the trial court. The dispositive portion of the June 25, 1999 decision

is as follows:

WHEREFORE, premises considered, the appealed decision (dated May 13, 1996)

of the Regional Trial Court (Branch 217) in Quezon City in Case No. Q-93-18582

is hereby REVERSED and SET ASIDE. In its stead, a new one is rendered

ordering:

(1) The rescission of the Deed of Absolute Sale executed between the appellees

on September 4, 1990;

(2) The reconveyance of the subject premises to appellee Eufrocina de Leon;

(3) The heirs of Faustino and Crescencia Tiangco, thru appellee Eufrocina de

Leon, to afford the appellants thirty days within which to exercise their right of

first refusal by paying the amount of ONE MILLION PESOS (P1,000,000.00) for

the subject property; and

(4) The appellants to, in turn, pay the appellees back rentals from May 1990 up

to the time this decision is promulgated.

No pronouncement as to costs.

SO ORDERED.[8]

Petitioners herein filed a Motion for Reconsideration of the decision of the

Court of Appeals but the same was denied in a Resolution dated October 15,

1999.[9]

Hence, this petition for review on certiorari where petitioners Rosencor

Development Corporation and Rene Joaquin raise the following assignment of

errors[10]

:

I.

THE COURT OF APPEALS GRAVELY ERRED WHEN IT ORDERED THE

RESCISSION OF THE ABSOLUTE DEED OF SALE BETWEEN EUFROCINA DE

LEON AND PETITIONER ROSENCOR.

II.

THE COURT OF APPEALS COMMITTED MANIFEST ERROR IN MANDATING

THAT EUFROCINA DE LEON AFFORD RESPONDENTS THE OPPORTUNITY

TO EXERCISE THEIR RIGHT OF FIRST REFUSAL.

III.

THE COURT OF APPEALS GRIEVOUSLY ERRED IN CONCLUDING THAT

RESPONDENTS HAVE ESTABLISHED THEIR RIGHT OF FIRST REFUSAL

DESPITE PETITIONERS RELIANCE ON THEIR DEFENSE BASED ON THE

STATUTE OF FRAUDS.

Eufrocina de Leon, for herself and for the heirs of the spouses Faustino and

Crescencia Tiangco, did not appeal the decision of the Court of Appeals.

At the onset, we note that both the Court of Appeals and the Regional Trial

Court relied on Article 1403 of the New Civil Code, more specifically the

provisions on the statute of frauds, in coming out with their respective

decisions. The trial court, in denying the petition for reconveyance, held that

right of first refusal relied upon by petitioners was not reduced to writing and as

such, is unenforceable by virtue of the said article. The Court of Appeals, on the

other hand, also held that the statute of frauds governs the right of first refusal

claimed by respondents. However, the appellate court ruled that respondents

had duly proven the same by reason of petitioners waiver of the protection of


the statute by reason of their failure to object to the presentation of oral

evidence of the said right.

Both the appellate court and the trial court failed to discuss, however, the

threshold issue of whether or not a right of first refusal is indeed covered by the

provisions of the New Civil Code on the statute of frauds. The resolution of the

issue on the applicability of the statute of frauds is important as it will

determine the type of evidence which may be considered by the trial court as

proof of the alleged right of first refusal.

The term statute of frauds is descriptive of statutes which require certain

classes of contracts to be in writing. This statute does not deprive the parties of

the right to contract with respect to the matters therein involved, but merely

regulates the formalities of the contract necessary to render it enforceable. Thus,

they are included in the provisions of the New Civil Code regarding

unenforceable contracts, more particularly Art. 1403, paragraph 2. Said article

provides, as follows:

Art. 1403. The following contracts are unenforceable, unless they are ratified:

x x x

(2) Those that do not comply with the Statute of Frauds as set forth in this

number. In the following cases an agreement hereafter made shall be

unenforceable by action, unless the same, or some note or memorandum

thereof, be in writing, and subscribed by the party charged, or by his agent;

evidence, therefore, of the agreement cannot be received without the writing, or

a secondary evidence of its contents:

a) An agreement that by its terms is not to be performed within a year from the

making thereof;

b) A special promise to answer for the debt, default, or miscarriage of another;

c) An agreement made in consideration of marriage, other than a mutual

promise to marry;

d) An agreement for the sale of goods, chattels or things in action, at a price not

less than five hundred pesos, unless the buyer accept and receive part of such

goods and chattels, or the evidences, or some of them, of such things in action,

or pay at the time some part of the purchase money; but when a sale is made by

auction and entry is made by the auctioneer in his sales book, at the time of the

sale, of the amount and kind of property sold, terms of sale, price, names of

purchasers and person on whose account the sale is made, it is a sufficient

memorandum;

e) An agreement for the leasing of a longer period than one year, or for the sale

of real property or of an interest therein;

f) A representation to the credit of a third person.

The purpose of the statute is to prevent fraud and perjury in the enforcement of

obligations depending for their evidence on the unassisted memory of witnesses

by requiring certain enumerated contracts and transactions to be evidenced by a

writing signed by the party to be charged.[11]

Moreover, the statute of frauds

refers to specific kinds of transactions and cannot apply to any other transaction

that is not enumerated therein.[12]

The application of such statute presupposes

the existence of a perfected contract.[13]

The question now is whether a right of first refusal is among those enumerated

in the list of contracts covered by the Statute of Frauds. More specifically, is a

right of first refusal akin to an agreement for the leasing of a longer period than


one year, or for the sale of real property or of an interest therein as

contemplated by Article 1403, par. 2(e) of the New Civil Code.

We have previously held that not all agreements affecting land must be put

into writing to attain enforceability[14]

. Thus, we have held that the setting up of

boundaries,[15]

the oral partition of real property[16]

, and an agreement creating a

right of way[17]

are not covered by the provisions of the statute of frauds. The

reason simply is that these agreements are not among those enumerated in

Article 1403 of the New Civil Code.

A right of first refusal is not among those listed as unenforceable under the

statute of frauds. Furthermore, the application of Article 1403, par. 2(e) of the

New Civil Code presupposes the existence of a perfected, albeit unwritten,

contract of sale.[18]

A right of first refusal, such as the one involved in the instant

case, is not by any means a perfected contract of sale of real property. At best, it

is a contractual grant, not of the sale of the real property involved, but of the

right of first refusal over the property sought to be sold[19]

It is thus evident that the statute of frauds does not contemplate cases involving

a right of first refusal. As such, a right of first refusal need not be written to be

enforceable and may be proven by oral evidence.

The next question to be ascertained is whether or not respondents have

satisfactorily proven their right of first refusal over the property subject of the

Deed of Absolute Sale dated September 4, 1990 between petitioner Rosencor

and Eufrocina de Leon.

On this point, we agree with the factual findings of the Court of Appeals that

respondents have adequately proven the existence of their right of first

refusal. Federico Bantugan, Irene Guillermo, and Paterno Inquing uniformly

testified that they were promised by the late spouses Faustino and Crescencia

Tiangco and, later on, by their heirs a right of first refusal over the property they

were currently leasing should they decide to sell the same. Moreover,

respondents presented a letter[20]

dated October 9, 1990 where Eufrocina de

Leon, the representative of the heirs of the spouses Tiangco, informed them that

they had received an offer to buy the disputed property for P2,000,000.00 and

offered to sell the same to the respondents at the same price if they were

interested. Verily, if Eufrocina de Leon did not recognize respondents right of

first refusal over the property they were leasing, then she would not have

bothered to offer the property for sale to the respondents.

It must be noted that petitioners did not present evidence before the trial court

contradicting the existence of the right of first refusal of respondents over the

disputed property. They only presented petitioner Rene Joaquin, the vice-

president of petitioner Rosencor, who admitted having no personal knowledge

of the details of the sales transaction between Rosencor and the heirs of the

spouses Tiangco[21]

They also dispensed with the testimony of Eufrocina de

Leon[22]

who could have denied the existence or knowledge of the right of first

refusal. As such, there being no evidence to the contrary, the right of first

refusal claimed by respondents was substantially proven by respondents before

the lower court.

Having ruled upon the question as to the existence of respondents right of first

refusal, the next issue to be answered is whether or not the Court of Appeals

erred in ordering the rescission of the Deed of Absolute Sale dated September 4,

1990 between Rosencor and Eufrocina de Leon and in decreeing that the heirs of

the spouses Tiangco should afford respondents the exercise of their right of first

refusal. In other words, may a contract of sale entered into in violation of a


third partys right of first refusal be rescinded in order that such third party can

exercise said right?

The issue is not one of first impression.

In Guzman, Bocaling and Co, Inc. vs. Bonnevie[23]

, the Court upheld the decision

of a lower court ordering the rescission of a deed of sale which violated a right of

first refusal granted to one of the parties therein. The Court held:

xxx Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381

(3) of the Civil Code, a contract otherwise valid may nonetheless be

subsequently rescinded by reason of injury to third persons, like creditors. The

status of creditors could be validly accorded the Bonnevies for they had

substantial interests that were prejudiced by the sale of the subject property to

the petitioner without recognizing their right of first priority under the Contract

of Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting

parties and even to third persons, to secure reparations for damages caused to

them by a contract, even if this 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 relief allowed for the protection of one of the contracting parties

and even third persons from all injury and damage the contract may cause, or to

protect some incompatible and preferent right created by the

contract. Rescission implies a contract which, even if initially valid, produces a

lesion or pecuniary damage to someone that justifies its invalidation for reasons

of equity.

It is true that the acquisition by a third person of the property subject of the

contract is an obstacle to the action for its rescission where it is shown that such

third person is in lawful possession of the subject of the contract and that he did

not act in bad faith. However, this rule is not applicable in the case before us

because the petitioner is not considered a third party in relation to the Contract

of Sale nor may its possession of the subject property be regarded as acquired

lawfully and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of

Sale. Moreover, the petitioner cannot be deemed a purchaser in good faith for

the record shows that it categorically admitted that it was aware of the lease in

favor of the Bonnevies, who were actually occupying the subject property at the

time it was sold to it. Although the Contract of Lease was not annotated on the

transfer certificate of title in the name of the late Jose Reynoso and Africa

Reynoso, the petitioner cannot deny actual knowledge of such lease which was

equivalent to and indeed more binding than presumed notice by registration.

A purchaser in good faith and for value is one who buys the property of another

without notice that some other person has a right to or interest in such property

without and pays a full and fair price for the same at the time of such purchase

or before he has notice of the claim or interest of some other person in the

property. Good faith connotes an honest intention to abstain from taking

unconscientious advantage of another. Tested by these principles, the

petitioner cannot tenably claim to be a buyer in good faith as it had notice of the

lease of the property by the Bonnevies and such knowledge should have

cautioned it to look deeper into the agreement to determine if it involved

stipulations that would prejudice its own interests.

Subsequently[24]

in Equatorial Realty and Development, Inc. vs. Mayfair Theater,

Inc.[25]

, the Court, en banc, with three justices dissenting,[26]

ordered the

rescission of a contract entered into in violation of a right of first refusal. Using


the ruling in Guzman Bocaling & Co., Inc. vs. Bonnevie as basis, the Court

decreed that since respondent therein had a right of first refusal over the said

property, it could only exercise the said right if the fraudulent sale is first set

aside or rescinded. Thus:

What Carmelo and Mayfair agreed to, by executing the two lease contracts, was

that Mayfair will have the right of first refusal in the event Carmelo sells the

leased premises. It is undisputed that Carmelo did recognize this right of

Mayfair, for it informed the latter of its intention to sell the said property in

1974. There was an exchange of letters evidencing the offer and counter-offers

made by both parties. Carmelo, however, did not pursue the exercise to its

logical end. While it initially recognized Mayfairs right of first refusal, Carmelo

violated such right when without affording its negotiations with Mayfair the full

process to ripen to at least an interface of a definite offer and a possible

corresponding acceptance within the 30-day exclusive option time granted

Mayfair, Carmelo abandoned negotiations, kept a low profile for some time, and

then sold, without prior notice to Mayfair, the entire Claro M. Recto property to

Equatorial.

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the

property in question, rescissible. We agree with respondent Appellate Court

that the records bear out the fact that Equatorial was aware of the lease

contracts because its lawyers had, prior to the sale, studied the said

contracts. As such, Equatorial cannot tenably claim that to be a purchaser in

good faith, and, therefore, rescission lies.

X X X

As also earlier emphasized, the contract of sale between Equatorial and Carmelo

is characterized by bad faith, since it was knowingly entered into in violation of

the rights of and to the prejudice of Mayfair. In fact, as correctly observed by

the Court of Appeals, Equatorial admitted that its lawyers had studied the

contract of lease prior to the sale. Equatorials knowledge of the stipulations

therein should have cautioned it to look further into the agreement to

determine if it involved stipulations that would prejudice its own interests.

Since Mayfair had a right of first refusal, it can exercise the right only if the

fraudulent sale is first set aside or rescinded. All of these matters are now before

us and so there should be no piecemeal determination of this case and leave

festering sores to deteriorate into endless litigation. The facts of the case and

considerations of justice and equity require that we order rescission here and

now. Rescission is a relief allowed for the protection of one of the contracting

parties and even third persons from all injury and damage the contract may

cause or to protect some incompatible and preferred right by the contract. The

sale of the subject real property should now be rescinded considering that

Mayfair, which had substantial interest over the subject property, was

prejudiced by the sale of the subject property to Equatorial without Carmelo

conferring to Mayfair every opportunity to negotiate within the 30-day stipulate

period.[27]

In Paranaque Kings Enterprises, Inc. vs. Court of Appeals,[28]

the Court held that

the allegations in a complaint showing violation of a contractual right of first

option or priority to buy the properties subject of the lease constitute a valid

cause of action enforceable by an action for specific performance. Summarizing

the rulings in the two previously cited cases, the Court affirmed the nature of


and concomitant rights and obligations of parties under a right of first

refusal. Thus:

We hold however, that in order to have full compliance with the contractual

right granting petitioner the first option to purchase, the sale of the properties

for the amount of P9,000,000.00, the price for which they were finally sold to

respondent Raymundo, should have likewise been offered to petitioner.

The Court has made an extensive and lengthy discourse on the concept of, and

obligations under, a right of first refusal in the case of Guzman, Bocaling & Co.

vs. Bonnevie. In that case, under a contract of lease, the lessees (Raul and

Christopher Bonnevie) were given a "right of first priority" to purchase the

leased property in case the lessor (Reynoso) decided to sell. The selling price

quoted to the Bonnevies was 600,000.00 to be fully paid in cash, less a mortgage

lien of P100,000.00. On the other hand, the selling price offered by Reynoso to

and accepted by Guzman was only P400,000.00 of which P137,500.00 was to be

paid in cash while the balance was to be paid only when the property was

cleared of occupants. We held that even if the Bonnevies could not buy it at the

price quoted (P600,000.00), nonetheless, Reynoso could not sell it to another

for a lower price and under more favorable terms and conditions without first

offering said favorable terms and price to the Bonnevies as well. Only if the

Bonnevies failed to exercise their right of first priority could Reynoso thereafter

lawfully sell the subject property to others, and only under the same terms and

conditions previously offered to the Bonnevies.

X X X

This principle was reiterated in the very recent case of Equatorial Realty vs.

Mayfair Theater, Inc. which was decided en banc. This Court upheld the right of

first refusal of the lessee Mayfair, and rescinded the sale of the property by the

lessor Carmelo to Equatorial Realty "considering that Mayfair, which had

substantial interest over the subject property, was prejudiced by its sale to

Equatorial without Carmelo conferring to Mayfair every opportunity to

negotiate within the 30-day stipulated period"

In that case, two contracts of lease between Carmelo and Mayfair provided "that

if the LESSOR should desire to sell the leased premises, the LESSEE shall be

given 30 days exclusive option to purchase the same." Carmelo initially offered

to sell the leased property to Mayfair for six to seven million pesos. Mayfair

indicated interest in purchasing the property though it invoked the 30-day

period. Nothing was heard thereafter from Carmelo. Four years later, the latter

sold its entire Recto Avenue property, including the leased premises, to

Equatorial for P11,300,000.00 without priorly informing Mayfair. The Court held

that both Carmelo and Equatorial acted in bad faith: Carmelo for knowingly

violating the right of first option of Mayfair, and Equatorial for purchasing the

property despite being aware of the contract stipulation. In addition to

rescission of the contract of sale, the Court ordered Carmelo to allow Mayfair to

buy the subject property at the same price of P11,300,000.00.

In the recent case of Litonjua vs. L&R Corporation,[29]

the Court, also citing the

case of Guzman, Bocaling & Co. vs. Bonnevie, held that the sale made therein in

violation of a right of first refusal embodied in a mortgage contract, was

rescissible. Thus:

While petitioners question the validity of paragraph 8 of their mortgage

contract, they appear to be silent insofar as paragraph 9 thereof is

concerned. Said paragraph 9 grants upon L&R Corporation the right of first

refusal over the mortgaged property in the event the mortgagor decides to sell


the same. We see nothing wrong in this provision. The right of first refusal has

long been recognized as valid in our jurisdiction. The consideration for the loan

mortgage includes the consideration for the right of first refusal. L&R

Corporation is in effect stating that it consents to lend out money to the spouses

Litonjua provided that in case they decide to sell the property mortgaged to it,

then L&R Corporation shall be given the right to match the offered purchase

price and to buy the property at that price. Thus, while the spouses Litonjua

had every right to sell their mortgaged property to PWHAS without securing the

prior written consent of L&R Corporation, they had the obligation under

paragraph 9, which is a perfectly valid provision, to notify the latter of their

intention to sell the property and give it priority over other buyers. It is only

upon the failure of L&R Corporation to exercise its right of first refusal could the

spouses Litonjua validly sell the subject properties to the others, under the same

terms and conditions offered to L&R Corporation.

What then is the status of the sale made to PWHAS in violation of L & R

Corporation's contractual right of first refusal? On this score, we agree with the

Amended Decision of the Court of Appeals that the sale made to PWHAS is

rescissible. The case of Guzman, Bocaling & Co. v. Bonnevie is instructive on this

point.

X X X

It was then held that the Contract of Sale there, which violated the right of first

refusal, was rescissible.

In the case at bar, PWHAS cannot claim ignorance of the right of first refusal

granted to L & R Corporation over the subject properties since the Deed of Real

Estate Mortgage containing such a provision was duly registered with the

Register of Deeds. As such, PWHAS is presumed to have been notified thereof

by registration, which equates to notice to the whole world.

X X X

All things considered, what then are the relative rights and obligations of the

parties? To recapitulate: the sale between the spouses Litonjua and PWHAS is

valid, notwithstanding the absence of L & R Corporation's prior written consent

thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its

tender of the redemption price, as successor-in-interest of the spouses Litonjua,

within the one-year period should have been accepted as valid by the L & R

Corporation. However, while the sale is, indeed, valid, the same is rescissible

because it ignored L & R Corporation's right of first refusal.

Thus, the prevailing doctrine, as enunciated in the cited cases, is that a contract

of sale entered into in violation of a right of first refusal of another person, while

valid, is rescissible.

There is, however, a circumstance which prevents the application of this

doctrine in the case at bench. In the cases cited above, the Court ordered the

rescission of sales made in violation of a right of first refusal precisely because

the vendees therein could not have acted in good faith as they were aware or

should have been aware of the right of first refusal granted to another person by

the vendors therein. The rationale for this is found in the provisions of the New

Civil Code on rescissible contracts. Under Article 1381 of the New Civil Code,

paragraph 3, a contract validly agreed upon may be rescinded if it is undertaken

in fraud of creditors when the latter cannot in any manner collect the claim due

them. Moreover, under Article 1385, rescission shall not take place when the


things which are the object of the contract are legally in the possession of third

persons who did not act in bad faith.[30]

It must be borne in mind that, unlike the cases cited above, the right of first

refusal involved in the instant case was an oral one given to respondents by the

deceased spouses Tiangco and subsequently recognized by their heirs. As such,

in order to hold that petitioners were in bad faith, there must be clear and

convincing proof that petitioners were made aware of the said right of first

refusal either by the respondents or by the heirs of the spouses Tiangco.

It is axiomatic that good faith is always presumed unless contrary evidence is

adduced.[31]

A purchaser in good faith is one who buys the property of another

without notice that some other person has a right or interest in such a property

and pays a full and fair price at the time of the purchase or before he has notice

of the claim or interest of some other person in the property.[32]

In this regard,

the rule on constructive notice would be inapplicable as it is undisputed that the

right of first refusal was an oral one and that the same was never reduced to

writing, much less registered with the Registry of Deeds. In fact, even the lease

contract by which respondents derive their right to possess the property

involved was an oral one.

On this point, we hold that the evidence on record fails to show that petitioners

acted in bad faith in entering into the deed of sale over the disputed property

with the heirs of the spouses Tiangco. Respondents failed to present any

evidence that prior to the sale of the property on September 4, 1990, petitioners

were aware or had notice of the oral right of first refusal.

Respondents point to the letter dated June 1, 1990[33]

as indicative of petitioners

knowledge of the said right. In this letter, a certain Atty. Erlinda Aguila

demanded that respondent Irene Guillermo vacate the structure they were

occupying to make way for its demolition.

We fail to see how the letter could give rise to bad faith on the part of the

petitioner. No mention is made of the right of first refusal granted to

respondents. The name of petitioner Rosencor or any of it officers did not

appear on the letter and the letter did not state that Atty. Aguila was writing in

behalf of petitioner. In fact, Atty. Aguila stated during trial that she wrote the

letter in behalf of the heirs of the spouses Tiangco. Moreover, even assuming

that Atty. Aguila was indeed writing in behalf of petitioner Rosencor, there is no

showing that Rosencor was aware at that time that such a right of first refusal

existed.

Neither was there any showing that after receipt of this June 1, 1990 letter,

respondents notified Rosencor or Atty. Aguila of their right of first refusal over

the property. Respondents did not try to communicate with Atty. Aguila and

inform her about their preferential right over the disputed property. There is

even no showing that they contacted the heirs of the spouses Tiangco after they

received this letter to remind them of their right over the property.

Respondents likewise point to the letter dated October 9, 1990 of Eufrocina de

Leon, where she recognized the right of first refusal of respondents, as indicative

of the bad faith of petitioners. We do not agree. Eufrocina de Leon wrote the

letter on her own behalf and not on behalf of petitioners and, as such, it only

shows that Eufrocina de Leon was aware of the existence of the oral right of first

refusal. It does not show that petitioners were likewise aware of the existence of

the said right. Moreover, the letter was made a month after the execution of the

Deed of Absolute Sale on September 4, 1990 between petitioner Rosencor and

the heirs of the spouses Tiangco. There is no showing that prior to the date of


the execution of the said Deed, petitioners were put on notice of the existence of

the right of first refusal.

Clearly, if there was any indication of bad faith based on respondents evidence,

it would only be on the part of Eufrocina de Leon as she was aware of the right

of first refusal of respondents yet she still sold the disputed property to

Rosencor. However, bad faith on the part of Eufrocina de Leon does not mean

that petitioner Rosencor likewise acted in bad faith. There is no showing that

prior to the execution of the Deed of Absolute Sale, petitioners were made aware

or put on notice of the existence of the oral right of first refusal. Thus, absent

clear and convincing evidence to the contrary, petitioner Rosencor will be

presumed to have acted in good faith in entering into the Deed of Absolute Sale

over the disputed property.

Considering that there is no showing of bad faith on the part of the petitioners,

the Court of Appeals thus erred in ordering the rescission of the Deed of

Absolute Sale dated September 4, 1990 between petitioner Rosencor and the

heirs of the spouses Tiangco. The acquisition by Rosencor of the property

subject of the right of first refusal is an obstacle to the action for its rescission

where, as in this case, it was shown that Rosencor is in lawful possession of the

subject of the contract and that it did not act in bad faith.[34]

This does not mean however that respondents are left without any remedy for

the unjustified violation of their right of first refusal. Their remedy however is

not an action for the rescission of the Deed of Absolute Sale but an action for

damages against the heirs of the spouses Tiangco for the unjustified disregard of

their right of first refusal[35]

.

WHEREFORE, premises considered, the decision of the Court of Appeals dated

June 25, 1999 is REVERSED and SET ASIDE. The Decision dated May 13, 1996 of

the Quezon City Regional Trial Court, Branch 217 is hereby REINSTATED

insofar as it dismisses the action for rescission of the Deed of Absolute Sale

dated September 4, 1990 and orders the payment of monthly rentals of P1,000.00

per month reckoned from May 1990 up to the time respondents leave the

premises.

SO ORDERED.


KHE HONG CHENG vs. CA [G.R. No. 144169. March 28, 2001]2

Before the Court is a Petition for Review on Certiorari under Rule 45, seeking to

set aside the decision of the Court of Appeals dated April 10, 2000 and its

resolution dated July 11, 2000 denying the motion for reconsideration of the

aforesaid decision. The original complaint that is the subject matter of this case

is an accion pauliana-- an action filed by Philam Insurance Company, Inc.

(respondent Philam) to rescind or annul the donations made by petitioner Khe

Hong Cheng allegedly in fraud of creditors. The main issue for resolution is

whether or not the action to rescind the donations has already

prescribed. While the first paragraph of Article 1389 of the Civil Code

states: The action to claim rescission must be commenced within four years...

the question is, from which point or event does this prescriptive period

commence to run?

The facts are as follows:

Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping

Lines. It appears that on or about October 4, 1985, the Philippine Agricultural

Trading Corporation shipped on board the vessel M/V PRINCE ERIC, owned by

petitioner Khe Hong Cheng, 3,400 bags of copra at Masbate, Masbate, for

delivery to Dipolog City, Zamboanga del Norte. The said shipment of copra was

covered by a marine insurance policy issued by American Home Insurance

Company (respondent Philam's assured). M/V PRINCE ERIC, however, sank

somewhere between Negros Island and Northeastern Mindanao, resulting in the


total loss of the shipment. Because of the loss, the insurer, American Home,

paid the amount of P354,000.00 (the value of the copra) to the consignee.

Having been subrogated into the rights of the consignee, American Home

instituted Civil Case No. 13357 in the Regional Trial Court (RTC) of Makati,

Branch 147 to recover the money paid to the consignee, based on breach of

contract of carriage. While the case was still pending, or on December 20, 1989,

petitioner Khe Hong Cheng executed deeds of donations of parcels of land in

favor of his children, herein co-petitioners Sandra Joy and Ray Steven. The

parcel of land with an area of 1,000 square meters covered by Transfer

Certificate of Title (TCT) No. T-3816 was donated to Ray Steven. Petitioner Khe

Hong Cheng likewise donated in favor of Sandra Joy two (2) parcels of land

located in Butuan City, covered by TCT No. RT-12838. On the basis of said

deeds, TCT No. T-3816 was cancelled and in lieu thereof, TCT No. T-5072 was

issued in favor of Ray Steven and TCT No. RT-12838 was cancelled and in lieu

thereof, TCT No. RT-21054 was issued in the name of Sandra Joy.

The trial court rendered judgment against petitioner Khe Hong Cheng in Civil

Case No. 13357 on December 29, 1993, four years after the donations were made

and the TCTs were registered in the donees names. The decretal portion of the

aforesaid decision reads:

Wherefore, in view of the foregoing, the Court hereby renders judgment in

favor of the plaintiff and against the defendant, ordering the latter to pay the

former:

1) the sum of P354,000.00 representing the amount paid by the plaintiff to the

Philippine Agricultural Trading Corporation with legal interest at 12% from the

time of the filing of the complaint in this case;


2) the sum of P50,000.00 as attorneys fees;

3) the costs.[1]

After the said decision became final and executory, a writ of execution was

forthwith issued on September 14, 1995. Said writ of execution, however, was

not served. An alias writ of execution was, thereafter, applied for and granted in

October 1996. Despite earnest efforts, the sheriff found no property under the

name of Butuan Shipping Lines and/or petitioner Khe Hong Cheng to levy or

garnish for the satisfaction of the trial court's decision. When the sheriff,

accompanied by counsel of respondent Philam, went to Butuan City on January

17, 1997, to enforce the alias writ of execution, they discovered that petitioner

Khe Hong Cheng no longer had any property and that he had conveyed the

subject properties to his children.

On February 25, 1997, respondent Philam filed a complaint with the Regional

Trial Court of Makati City, Branch 147, for the rescission of the deeds of

donation executed by petitioner Khe Hong Cheng in favor of his children and

for the nullification of their titles (Civil Case No. 97-415). Respondent Philam

alleged, inter alia, that petitioner Khe Hong Cheng executed the aforesaid deeds

in fraud of his creditors, including respondent Philam.[2]

Petitioners subsequently filed their answer to the complaint a quo. They moved

for its dismissal on the ground that the action had already prescribed. They

posited that the registration of the deeds of donation on December 27, 1989

constituted constructive notice and since the complaint a quo was filed only on

February 25, 1997, or more than four (4) years after said registration, the action

was already barred by prescription.[3]

Acting thereon, the trial court denied the motion to dismiss. It held that

respondent Philam's complaint had not yet prescribed. According to the trial

court, the prescriptive period began to run only from December 29, 1993, the

date of the decision of the trial court in Civil Case No. 13357.[4]

On appeal by petitioners, the CA affirmed the trial court's decision in favor of

respondent Philam. The CA declared that the action to rescind the donations

had not yet prescribed. Citing Articles 1381 and 1383 of the Civil Code, the CA

basically ruled that the four year period to institute the action for rescission

began to run only in January 1997, and not when the decision in the civil case

became final and executory on December 29, 1993. The CA reckoned the accrual

of respondent Philam's cause of action on January 1997, the time when it first

learned that the judgment award could not be satisfied because the judgment

creditor, petitioner Khe Hong Cheng, had no more properties in his name. Prior

thereto, respondent Philam had not yet exhausted all legal means for the

satisfaction of the decision in its favor, as prescribed under Article 1383 of the

Civil Code.[5]

The Court of Appeals thus denied the petition for certiorari filed before it, and

held that the trial court did not commit any error in denying petitioners' motion

to dismiss. Their motion for reconsideration was likewise dismissed in the

appellate court's resolution dated July 11, 2000.

Petitioners now assail the aforesaid decision and resolution of the CA alleging

that:

I


PUBLIC RESPONDENT GRAVELY ERRED AND ACTED IN GRAVE ABUSE OF

DISCRETION WHEN IT DENIED THE PETITION TO DISMISS THE CASE

BASED ON THE GROUND OF PRESCRIPTION.

II

PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING

THAT PRESCRIPTION BEGINS TO RUN WHEN IN JANUARY 1997 THE

SHERIFF WENT TO BUTUAN CITY IN SEARCH OF PROPERTIES OF

PETITIONER FELIX KHE CHENG TO SATISFY THE JUDGMENT IN CIVIL

CASE NO. 13357 AND FOUND OUT THAT AS EARLY AS DEC. 20, 1989,

PETITIONERS KHE CHENG EXECUTED THE DEEDS OF DONATIONS IN

FAVOR OF HIS CO-PETITIONERS THAT THE ACTION FOR RESCISSION

ACCRUED BECAUSE PRESCRIPTION BEGAN TO RUN WHEN THESE

DONATIONS WERE REGISTERED WITH THE REGISTER OF DEEDS IN

DECEMBER 1989, AND WHEN THE COMPLAINT WAS FILED ONLY IN

FEBRUARY 1997, MORE THAN FOUR YEARS HAVE ALREADY LAPSED AND

THEREFORE, IT HAS ALREADY PRESCRIBED.[6]

Essentially, the issue for resolution posed by petitioners is this: When did the

four (4) year prescriptive period as provided for in Article 1389 of the Civil Code for

respondent Philam to file its action for rescission of the subject deeds of donation

commence to run?

The petition is without merit.

Article 1389 of the Civil Code simply provides that, The action to claim

rescission must be commenced within four years. Since this provision of law is

silent as to when the prescriptive period would commence, the general rule, i.e,

from the moment the cause of action accrues, therefore, applies. Article 1150 of

the Civil Code is particularly instructive:

Art. 1150. The time for prescription for all kinds of actions, when there is no

special provision which ordains otherwise, shall be counted from the day they

may be brought.

Indeed, this Court enunciated the principle that it is the legal possibility of

bringing the action which determines the starting point for the computation of

the prescriptive period for the action.[7]

Article 1383 of the Civil Code provides as

follows:

Art. 1383. An action for rescission is subsidiary; it cannot be instituted except

when the party suffering damage has no other legal means to obtain reparation

for the same.

It is thus apparent that an action to rescind or an accion pauliana must be of last

resort, availed of only after all other legal remedies have been exhausted and

have been proven futile. For an accion pauliana to accrue, the following

requisites must concur:

1) That the plaintiff asking for rescission has a credit prior to the alienation,

although demandable later; 2) That the debtor has made a subsequent contract

conveying a patrimonial benefit to a third person; 3) That the creditor has no

other legal remedy to satisfy his claim, but would benefit by rescission of the

conveyance to the third person; 4) That the act being impugned is fraudulent; 5)

That the third person who received the property conveyed, if by onerous title,

has been an accomplice in the fraud.[8]

(Emphasis ours)

We quote with approval the following disquisition of the CA on the matter:


An accion pauliana accrues only when the creditor discovers that he has no

other legal remedy for the satisfaction of his claim against the debtor other than

an accion pauliana. The accion pauliana is an action of a last resort. For as

long as the creditor still has a remedy at law for the enforcement of his claim

against the debtor, the creditor will not have any cause of action against the

creditor for rescission of the contracts entered into by and between the debtor

and another person or persons. Indeed, an accion pauliana presupposes a

judgment and the issuance by the trial court of a writ of execution for the

satisfaction of the judgment and the failure of the Sheriff to enforce and satisfy

the judgment of the court. It presupposes that the creditor has exhausted the

property of the debtor. The date of the decision of the trial court against the

debtor is immaterial. What is important is that the credit of the plaintiff

antedates that of the fraudulent alienation by the debtor of his property. After

all, the decision of the trial court against the debtor will retroact to the time

when the debtor became indebted to the creditor.[9]

Petitioners, however, maintain that the cause of action of respondent Philam

against them for the rescission of the deeds of donation accrued as early as

December 27, 1989, when petitioner Khe Hong Cheng registered the subject

conveyances with the Register of Deeds. Respondent Philam allegedly had

constructive knowledge of the execution of said deeds under Section 52 of

Presidential Decree No. 1529, quoted infra, as follows:

Section 52. Constructive knowledge upon registration. Every conveyance,

mortgage, lease, lien, attachment, order, judgment, instrument or entry

affecting registered land shall, if registered, filed or entered in the Office of the

Register of Deeds for the province or city where the land to which it relates lies,

be constructive notice to all persons from the time of such registering, filing, or

entering.

Petitioners argument that the Civil Code must yield to the Mortgage and

Registration Laws is misplaced, for in no way does this imply that the specific

provisions of the former may be all together ignored. To count the four year

prescriptive period to rescind an allegedly fraudulent contract from the date of

registration of the conveyance with the Register of Deeds, as alleged by the

petitioners, would run counter to Article 1383 of the Civil Code as well as settled

jurisprudence. It would likewise violate the third requisite to file an action for

rescission of an allegedly fraudulent conveyance of property, i.e., the creditor

has no other legal remedy to satisfy his claim.

An accion pauliana thus presupposes the following: 1) A judgment; 2) the

issuance by the trial court of a writ of execution for the satisfaction of the

judgment, and 3) the failure of the sheriff to enforce and satisfy the judgment of

the court. It requires that the creditor has exhausted the property of the debtor.

The date of the decision of the trial court is immaterial. What is important is

that the credit of the plaintiff antedates that of the fraudulent alienation by the

debtor of his property. After all, the decision of the trial court against the debtor

will retroact to the time when the debtor became indebted to the creditor.

Tolentino, a noted civilist, explained:

xxx[T]herefore, credits with suspensive term or condition are excluded, because

the accion pauliana presupposes a judgment and unsatisfied execution, which

cannot exist when the debt is not yet demandable at the time the rescissory

action is brought. Rescission is a subsidiary action, which presupposes that the


creditor has exhausted the property of the debtor which is impossible in credits

which cannot be enforced because of a suspensive term or condition.

While it is necessary that the credit of the plaintiff in the accion pauliana must

be 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.[10]

These principles were reiterated by the Court when it explained the requisites of

an accion pauliana in greater detail, to wit:

The following successive measures must be taken by a creditor before he may

bring an action for rescission of an allegedly fraudulent sale: (1) exhaust the

properties of the debtor through levying by attachment and execution upon all

the property of the debtor, except such as are exempt from execution; (2)

exercise all the rights and actions of the debtor, save those personal to him

(accion subrogatoria); and (3) seek rescission of the contracts executed by the

debtor in fraud of their rights (accion pauliana). Without availing of the first

and second remedies, i.e., exhausting the properties of the debtor or

subrogating themselves in Francisco Baregs transmissible rights and actions,

petitioners simply undertook the third measure and filed an action for

annulment of sale. This cannot be done.[11]

(Emphasis ours)

In the same case, the Court also quoted the rationale of the CA when it upheld

the dismissal of the accion pauliana on the basis of lack of cause of action:

In this case, plaintiffs appellants had not even commenced an action against

defendants-appellees Bareng for the collection of the alleged indebtedness.

Plaintiffs-appellants had not even tried to exhaust the property of defendants-

appellees Bareng. Plaintiffs-appellants, in seeking the rescission of the contracts

of sale entered into between defendants-appellees, failed to show and prove that

defendants-appellees Bareng had no other property, either at the time of the

sale or at the time this action was filed, out of which they could have collected

this (sic) debts. (Emphasis ours)

Even if respondent Philam was aware, as of December 27, 1989, that petitioner

Khe Hong Cheng had executed the deeds of donation in favor of his children,

the complaint against Butuan Shipping Lines and/or petitioner Khe Hong

Cheng was still pending before the trial court. Respondent Philam had no

inkling, at the time, that the trial court's judgment would be in its favor and

further, that such judgment would not be satisfied due to the deeds of donation

executed by petitioner Khe Hong Cheng during the pendency of the case. Had

respondent Philam filed his complaint on December 27, 1989, such complaint

would have been dismissed for being premature. Not only were all other legal

remedies for the enforcement of respondent Philams claims not yet exhausted

at the time the deeds of donation were executed and registered. Respondent

Philam would also not have been able to prove then that petitioner Khe Hong

Chneg had no more property other than those covered by the subject deeds to

satisfy a favorable judgment by the trial court.

It bears stressing that petitioner Khe Hong Cheng even expressly declared and

represented that he had reserved to himself property sufficient to answer for his

debts contracted prior to this date:

That the DONOR further states, for the same purpose as expressed in the next

preceding paragraph, that this donation is not made with the object of

defrauding his creditors having reserved to himself property sufficient to answer

his debts contracted prior to this date.[12]


As mentioned earlier, respondent Philam only learned about the unlawful

conveyances made by petitioner Khe Hong Cheng in January 1997 when its

counsel accompanied the sheriff to Butuan City to attach the properties of

petitioner Khe Hong Cheng. There they found that he no longer had any

properties in his name. It was only then that respondent Philam's action for

rescission of the deeds of donation accrued because then it could be said that

respondent Philam had exhausted all legal means to satisfy the trial court's

judgment in its favor. Since respondent Philam filed its complaint for accion

pauliana against petitioners on February 25, 1997, barely a month from its

discovery that petitioner Khe Hong Cheng had no other property to satisfy the

judgment award against him, its action for rescission of the subject deeds clearly

had not yet prescribed.

A final point. Petitioners now belatedly raise on appeal the defense of improper

venue claiming that respondent Philams complaint is a real action and should

have been filed with the RTC of Butuan City since the property subject matter of

the donations are located therein. Suffice it to say that petitioners are already

deemed to have waived their right to question the venue of the instant case.

Improper venue should be objected to as follows 1) in a motion to dismiss filed

within the time but before the filing of the answer;[13]

or 2) in the answer as an

affirmative defense over which, in the discretion of the court, a preliminary

hearing may be held as if a motion to dismiss had been filed.[14]

Having failed to

either file a motion to dismiss on the ground of improper of venue or include

the same as an affirmative defense in their answer, petitioners are deemed to

have their right to object to improper venue.

WHEREFORE, premises considered, the petition is hereby DENIED for lack of

merit. SO ORDERED.


UNION BANK vs. ONG (G.R. No. 152347 June 21, 2006)3

By this petition for review under Rule 45 of the Rules of Court, petitioner Union

Bank of the Philippines (Union Bank) seeks to set aside the decision1 dated

December 5, 2001 of the Court of Appeals (CA) in CA-G.R. No. 66030 reversing

an earlier decision of the Regional Trial Court (RTC) of Pasig City in Civil Case

No. 61601, a suit thereat commenced by the petitioner against the herein

respondents for annulment or rescission of sale in fraud of creditors.

The facts:

Herein respondents, the spouses Alfredo Ong and Susana Ong, own the

majority capital stock of Baliwag Mahogany Corporation (BMC). On October 10,

1990, the spouses executed a Continuing Surety Agreement in favor of Union

Bank to secure a P40,000,000.00-credit line facility made available to BMC. The

agreement expressly stipulated a solidary liability undertaking.

On October 22, 1991, or about a year after the execution of the surety agreement,

the spouses Ong, forP12,500,000.00, sold their 974-square meter lot located in

Greenhills, San Juan, Metro Manila, together with the house and other

improvements standing thereon, to their co-respondent, Jackson Lee (Lee, for

short). The following day, Lee registered the sale and was then issued Transfer

Certificate of Title (TCT) No. 4746-R. At about this time, BMC had already

availed itself of the credit facilities, and had in fact executed a total of twenty-

two (22) promissory notes in favor of Union Bank.

On November 22, 1991, BMC filed a Petition for Rehabilitation and for

Declaration of Suspension of Payments with the Securities and Exchange


Commission (SEC). To protect its interest, Union Bank lost no time in filing

with the RTC of Pasig City an action for rescission of the sale between the

spouses Ong and Jackson Lee for purportedly being in fraud of creditors.

In its complaint, docketed as Civil Case No. 61601 and eventually raffled to

Branch 157 of the court, Union Bank assailed the validity of the sale, alleging

that the spouses Ong and Lee entered into the transaction in question for the

lone purpose of fraudulently removing the property from the reach of Union

Bank and other creditors. The fraudulent design, according to Union Bank, is

evidenced by the following circumstances: (1) insufficiency of consideration, the

purchase price of P12,500,000.00 being below the fair market value of the

subject property at that time; (2) lack of financial capacity on the part of Lee to

buy the property at that time since his gross income for the year 1990, per the

credit investigation conducted by the bank, amounted to only P346,571.73; and

(3) Lee did not assert absolute ownership over the property as he allowed the

spouses Ong to retain possession thereof under a purported Contract of Lease

dated October 29, 1991.

Answering, herein respondents, as defendants a quo, maintained, in the main,

that both contracts of sale and lease over the Greenhills property were founded

on good and valid consideration and executed in good faith. They also scored

Union Bank for forum shopping, alleging that the latter is one of the

participating creditors in BMCs petition for rehabilitation.

Issues having been joined, trial followed. On September 27, 1999, the trial court,

applying Article 1381 of the Civil Code and noting that the evidence on record

"present[s] a holistic combination of circumstances distinctly characterized by

badges of fraud," rendered judgment for Union Bank, the Deed of Sale executed


on October 22, 1991 by the spouses Ong in favor of Lee being declared null and

void.

Foremost of the circumstances adverted to relates to the execution of the sale

against the backdrop of the spouses Ong, as owners of 70% of BMC's stocks,

knowing of the companys insolvency. This knowledge was the reason why,

according to the court, the spouses Ong disposed of the subject property leaving

the bank without recourse to recover BMC's indebtedness. The trial court also

made reference to the circumstances which Union Bank mentioned in its

complaint as indicia of conveyance in fraud of creditors.

Therefrom, herein respondents interposed an appeal to the CA which docketed

their recourse as CA-G.R. No. 66030.

In its Decision dated December 5, 2001, the CA reversed and set aside the trial

court's ruling, observing that the contract of sale executed by the spouses Ong

and Lee, being complete and regular on its face, is clothed with the prima facie

presumption of regularity and legality. Plodding on, the appellate court said:

In order that rescission of a contract made in fraud of creditors may be decreed,

it is necessary that the complaining creditors must prove that they cannot

recover in any other manner what is due them. xxx.

There is no gainsaying that the basis of liability of the appellant spouses in their

personal capacity to Union Bank is the Continuing Surety Agreement they have

signed on October 10, 1990. However, the real debtor of Union Bank is BMC,

which has a separate juridical personality from appellants Ong. Granting that

BMC was already insolvent at the time of the sale, still, there was no showing

that at the time BMC filed a petition for suspension of payment that appellants

Ong were themselves bankrupt. In the case at bench, no attempt was made by

Union Bank, not even a feeble or half-hearted one, to establish that appellants

spouses have no other property from which Union Bank, as creditor of BMC,

could obtain payment. While appellants Ong may be independently liable

directly to Union Bank under the Continuing Surety Agreement, all that Union

Bank tried to prove was that BMC was insolvent at the time of the questioned

sale. No competent evidence was adduced showing that appellants Ong had no

leviable assets other than the subject property that would justify challenge to

the transaction.2

Petitioner moved for a reconsideration of the above decision but its motion was

denied by the appellate court in its resolution of February 21, 2002.3

Hence, petitioners present recourse on its submission that the appellate court

erred:

I. xxx WHEN IT CONSIDERED THAT THE SALE TRANSACTION BETWEEN

[ RESPONDENTS SPOUSES ONG AND LEE] ENJOYS THE PRESUMPTION OF

REGULARITY AND LEGALITY AS THERE EXISTS ALSO A PRESUMPTION

THAT THE SAID SALE WAS ENTERED IN FRAUD OF CREDITORS.

PETITIONER THEREFORE NEED NOT PROVE THAT RESPONDENTS

SPOUSES ONG DID NOT LEAVE SUFFICIENT ASSETS TO PAY THEIR

CREDITORS. BUT EVEN THEN, PETITIONER HAS PROVEN THAT THE

SPOUSES HAVE NO OTHER ASSETS.

II. IN CONCLUDING, ASSUMING EX-GRATIA ARGUMENTI THAT THE SALE

BETWEEN DEFENDANT-APPELLANTS ENJOY THE PRESUMPTION OF

REGULARITY AND LEGALITY, THAT THE EVIDENCE ADDUCED BY THE

PETITIONER WAS NOT SUFFICIENT TO OVERCOME THE PRESUMPTION.


III. xxx IN FINDING THAT IT WAS [RESPONDENT] LEE WHO HAS

SUFFICIENTLY PROVEN THAT THERE WAS A VALID AND SUFFICIENT

CONSIDERATION FOR THE SALE.

IV. xxx IN NOT FINDING THAT JACKSON LEE WAS IN BAD FAITH WHEN

HE PURCHASED THE PROPERTY.4

Petitioner maintains, citing China Banking Corporation vs. Court of

Appeals,5 that the sale in question, having been entered in fraud of creditor, is

rescissible. In the same breath, however, petitioner would fault the CA for

failing to consider that the sale between the Ongs and Lee is presumed

fraudulent under Section 70 of Act No. 1956, as amended, or the Insolvency Law.

Elaborating on this point, petitioner states that the subject sale occurred thirty

(30) days prior to the filing by BMC of a petition for suspension of payment

before the SEC, thus rendering the sale not merely rescissible but absolutely

void.

We resolve to deny the petition.

In effect, the determinative issue tendered in this case resolves itself into the

question of whether or not the Ong-Lee contract of sale partakes of a

conveyance to defraud Union Bank. Obviously, this necessitates an inquiry into

the facts and this Court eschews factual examination in a petition for review

under Rule 45 of the Rules of Court, save when, as in the instant case, a clash

between the factual findings of the trial court and that of the appellate court

exists,6 among other exceptions.

As between the contrasting positions of the trial court and the CA, that of the

latter commends itself for adoption, being more in accord with the evidence on

hand and the laws applicable thereto.

Essentially, petitioner anchors its case on Article 1381 of the Civil Code which

lists as among the rescissible contracts "[T]hose undertaken in fraud of creditors

when the latter cannot in any other manner collect the claim due them."

Contracts in fraud of creditors are those executed with the intention to

prejudice the rights of creditors. They should not be confused with those

entered into without such mal-intent, even if, as a direct consequence thereof,

the creditor may suffer some damage. In determining whether or not a certain

conveying contract is fraudulent, what comes to mind first is the question of

whether the conveyance was a bona fide transaction or a trick and contrivance

to defeat creditors.7 To creditors seeking contract rescission on the ground of

fraudulent conveyance rest the onus of proving by competent evidence the

existence of such fraudulent intent on the part of the debtor, albeit they may fall

back on the disputable presumptions, if proper, established under Article 1387 of

the Code.8

In the present case, respondent spouses Ong, as the CA had determined, had

sufficiently established the validity and legitimacy of the sale in question. The

conveying deed, a duly notarized document, carries with it the presumption of

validity and regularity. Too, the sale was duly recorded and annotated on the

title of the property owners, the spouses Ong. As the transferee of said property,

respondent Lee caused the transfer of title to his name.

There can be no quibbling about the transaction being supported by a valid and

sufficient consideration. Respondent Lees account, while on the witness box,

about this angle of the sale was categorical and straightforward. An excerpt of

his testimony:

Atty. De Jesus :


Before you prepared the consideration of this formal offer, as standard operating

procedure of buy and sell, what documents were prepared?

xxx xxx xxx

Jackson Lee:

A. There is a downpayment.

Q. And how much was the downpayment?

A. P2,500,000.00.

Q. Was that downpayment covered by a receipt signed by the seller?

A. Yes, Sir, P500,000.00 and P2,000,000.00

xxx xxx xxx

Q. Are you referring to the receipt dated October 19, 1991, how about the other

receipt dated October 21, 1991?

A. Yes, Sir, this is the same receipt.

xxx xxx xxx

Q. Considering that the consideration of this document is for P12,000,000.00

and you made mention only ofP2,500,000.00, covered by the receipts, do you

have evidence to show that, finally, Susana Ong received the balance

of P10,000,000.00?

A. Yes, Sir.

Q. Showing to you a receipt denominated as Acknowledgement Receipt, dated

October 25, 1991, are you referring to this receipt to cover the balance

of P10,000,000.00?

A. Yes, sir.9

The foregoing testimony readily proves that money indeed changed hands in

connection with the sale of the subject property. Respondent Lee, as purchaser,

paid the stipulated contract price to the spouses Ong, as vendors. Receipts

presented in evidence covered and proved such payment. Accordingly, any

suggestion negating payment and receipt of valuable consideration for the

subject conveyance, or worse, that the sale was fictitious must simply be

rejected.

In a bid to attach a badge of fraud on the transaction, petitioner raises the issue

of inadequate consideration, alleging in this regard that only P12,500,000.00 was

paid for property having, during the period material, a fair market value

of P14,500,000.00.

We do not agree.

The existence of fraud or the intent to defraud creditors cannot plausibly be

presumed from the fact that the price paid for a piece of real estate is perceived

to be slightly lower, if that really be the case, than its market value. To be sure, it

is logical, even expected, for contracting minds, each having an interest to

protect, to negotiate on the price and other conditions before closing a sale of a

valuable piece of land. The negotiating areas could cover various items. The

purchase price, while undeniably an important consideration, is doubtless only

one of them. Thus, a scenario where the price actually stipulated may, as a

matter of fact, be lower than the original asking price of the vendor or the fair

market value of the property, as what perhaps happened in the instant case, is

not out of the ordinary, let alone indicative of fraudulent intention. That the

spouses Ong acquiesced to the price ofP12,500,000.00, which may be lower than

the market value of the house and lot at the time of alienation, is certainly not

an unusual business phenomenon.


Lest it be overlooked, the disparity between the price appearing in the

conveying deed and what the petitioner regarded as the real value of the

property is not as gross to support a conclusion of fraud. What is more, one

Oliver Morales, a licensed real estate appraiser and broker, virtually made short

shrift of petitioners claim of gross inadequacy of the purchase price. Mr.

Morales declared that there exists no gross disparity between the market value

of the subject property and the price mentioned in the deed as consideration.

He explained why:

ATTY. EUFEMIO:

Q. I am showing to you the said two (2) exhibits Mr. Morales and I would like

you to go over the terms and conditions stated therein and as an expert in real

estate appraiser (sic) and also as a real estate broker, can you give this

Honorable Court your considered opinion whether the consideration stated

therein P12,500,000.00 in the light of all terms and conditions of the said Deed

of Absolute Sale and Offer to Purchase could be deemed fair and reasonable?

xxx xxx xxx

MR. MORALES:

A. My opinion generally a Deed of Absolute Sale indicated prescribed not only

the amount of the consideration. There are also other expenses involved in the

sales. I do not see here other payment of who takes care of capital gains stocks

(sic) in this Deed of Sale neither who shouldered the documentary stamps or

even transfer tax. That is my comment regarding this.

Q. Precisely Mr. Witness we have also shown to you the Offer to Purchase which

has been marked as Exhibit "9" as to the terms which we are asking?

xxx xxx xxx

A. Well, it says here in item C of the conditions the Capital Gains Stocks (sic),

documentary stamps, transfer tax registration and brokers fee for the buyers

account. I do not know how much is this worth. If at all in condition (sic) to the

12.5 million which is the selling price, may I, therefore aside (sic) how much is

the total cost pertaining to this. The capital gains tax on (sic), documentary

stamps, transfer tax are all computed on the basis of the consideration which is

P12.5 M, the capital gain stocks (sic) is 5%, 5% of 12.5 M.

xxx xxx xxx

Yes sir if the 5% capital gains tax and documentary stamps respectively shall be

added to the 12.5 Million before the inclusion of the transfer tax, the amount will

be already in the vicinity of P13,250.000.

Q. With such consideration Mr. Witness and in the light of the terms and

conditions in the said Offer to Purchase and Deed of Absolute Sale could you

give your opinion as to whether the consideration is fair and reasonable.

xxx xxx xxx

A. With our proposal of P14.5 M as compared now to P13,250,000.00 may I give

my opinion that generally there will be two appraisers. In fairness to the

situation, they should not vary by as much as 7% down so we are playing at a

variance actually of about 15%. In my experience in this profession for the last 27

years as I have said in fairness if there is another appraisal done by another

person, that kind of difference is very marginal should at least indicate the

fairness of the property and so therefore the only way to find out is to determine

the difference between the P14.5 M and the P13,250,000.00. My computation

indicates that it is close to 10% something like that difference. What is the

question again?


Q. Whether it is fair and reasonable under the circumstances.

A. I have answered already the question and I said maximum of 15%.

Q. So based on your computation this is about 10% which is fair and reasonable.

A That is right sir.10

Withal, the consideration of the sale is fair and reasonable as would justify the

conclusion that the sale is undoubtedly a true and genuine conveyance to which

the parties thereto are irrevocably and undeniably bound.

It may be stressed that, when the validity of sales contract is in issue, two

veritable presumptions are relevant: first, that there was sufficient consideration

of the contract11 ; and, second, that it was the result of a fair and regular private

transaction.12

If shown to hold, these presumptions infer prima facie the

transaction's validity, except that it must yield to the evidence adduced13

which

the party disputing such presumptive validity has the burden of overcoming.

Unfortunately for the petitioner, it failed to discharge this burden. Its bare

allegation respecting the sale having been executed in fraud of creditors and

without adequate consideration cannot, without more, prevail over the

respondents' evidence which more than sufficiently supports a conclusion as to

the legitimacy of the transaction and the bona fides of the parties.

Parenthetically, the rescissory action to set aside contracts in fraud of creditors

is accion pauliana, essentially a subsidiary remedy accorded under Article 1383 of

the Civil Code which the party suffering damage can avail of only when he has

no other legal means to obtain reparation for the same.14

In net effect, the

provision applies only when the creditor cannot recover in any other manner

what is due him.

It is true that respondent spouses, as surety for BMC, bound themselves to

answer for the latters debt. Nonetheless, for purposes of recovering what the

eventually insolvent BMC owed the bank, it behooved the petitioner to show

that it had exhausted all the properties of the spouses Ong. It does not appear in

this case that the petitioner sought other properties of the spouses other than

the subject Greenhills property. The CA categorically said so. Absent proof,

therefore, that the spouses Ong had no other property except their Greenhills

home, the sale thereof to respondent Lee cannot simplistically be considered as

one in fraud of creditors.

Neither was evidence adduced to show that the sale in question peremptorily

deprived the petitioner of means to collect its claim against the Ongs. Where a

creditor fails to show that he has no other legal recourse to obtain satisfaction

for his claim, then he is not entitled to the rescission asked.15

For a contract to be rescinded for being in fraud of creditors, both contracting

parties must be shown to have acted maliciously so as to prejudice the creditors

who were prevented from collecting their claims.16

Again, in this case, there is

no evidence tending to prove that the spouses Ong and Lee were conniving

cheats. In fact, the petitioner did not even attempt to prove the existence of

personal closeness or business and

Obligations and Contracts Final Exam Coverage

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