FRAUD

Metropolitan Fabrics, Inc., et al. vs. Prosperity Credit Resources, Inc. et al., (Re: Voidable Contracts)

DOCTRINE:

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.

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.”

FACTS:

Metropolitan Fabrics, Incorporated (MFI), a family corporation, owned a 5.8hectare industrial compound at No. 685 Tandang Sora Avenue, Novaliches, Quezon City which was covered by TCT No. 241597.

Pursuant to a P2 million, 10 – year 14% per annum loan agreement with ManphilInvestment Corporation (Manphil) dated April 6, 1983, the said lot was subdivided into11 lots, with Manphil retaining four lots as mortgage security. The other seven lots, nowcovered by TCT Nos. 317699 and 317702 to 317707, were released to MFI.

In July 1984, MFI sought from PCRI a loan in the amount of P3,443,330.52, the balanceof the cost of its boiler machine, to prevent its repossession by the seller. PCRI, also a family – owned corporation licensed since 1980 to engage in money lending, was represented by Domingo Ang (“Domingo”) its president, and his son Caleb, vice – president. The parties knew each other because they belonged to the same familyassociation, the Lioc Kui Tong Fraternity .

On the basis only of his interview with Enrique, feedback from the stockholders and the Chinese community, as well as information given by his own father Domingo, and without further checking on the background of Enrique and his business and requiring him to submit a company profile and a feasibility study of MFI, Caleb recommended the approval of the P3.44 million with an interest ranging from 24% to 26% per annum and a term of between five and ten years (Decision, p. 5). According to the court, it sufficed for Caleb that Enrique was a well – respected Chinese businessman, that he was the president of their Chinese family association, and that he had other personal businesses aside from MFI, such as the Africa Trading.

However, in September 1984, the first amortization check bounced for insufficient fund due to MFI’s 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 two – year repayment period, instead of10 years.

On September 4, 1986, Enrique received a Notice of Sheriff’s Sale dated August 29,1986, announcing the auction of the seven lots on September 24, 1986 due to unpaid indebtedness of P10.5 million. Vicky (daughter of owner of MFI, because their father went into a coma because of intense pressure from

the foreclosure) insisted that prior to the auction notice, they never received any statement or demand letter from the defendants to pay P10.5 million, nor did the defendants inform them of the intended foreclosure.

ISSUES: Was the Mortgage Contract VOID?

HELD:

 No. 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 voluntarilyapplied 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 Ang’s 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

.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.

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 thecontract 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.”

SIMULATION OF CONTRACTS

Calabu vs Tabu

Contracts; capacity. Contracting parties must be juristic entities at the time of the consummation of the contract. Stated otherwise, to form a valid and legal agreement it is necessary that there be a party capable of contracting and a party capable of being contracted with. Hence, if any one party to a supposed contract was already dead at the time of its execution, such contract is undoubtedly simulated and false and, therefore, null and void by reason of its having been made after the death of the party who appears as one of the contracting parties therein. The death of a person terminates contractual capacity. De Belen Vda. de Cabalu, et al. v. Tabu, et al.; G.R. No. 188417. September 24, 2012

Contracts; future inheritance; contractual capacity – Under Article 1347 of the Civil Code, no contract may be entered into upon future inheritance except in cases expressly authorized by law. Paragraph 2 of Article 1347 characterizes a contract entered into upon future inheritance as void. The law applies when the following requisites concur: (1) the succession has not yet been opened; (2) the object of the contract forms part of the inheritance; and (3) the promissor has, with respect to the object, an expectancy of a right which is purely hereditary in nature. De Belen Vda. de Cabalu, et al. v. Tabu, et al.;G.R. No. 188417. September 24, 2012

SIMULATION OF CONTRACTS

Heirs of Intac vs. CA

Facts:

Ireneo Mendoza, married to Salvacion Fermin, was the owner of the subject property located in Quezon city which he purchased in 1954. (TCT No. 242655)

Ireneo had two children: respondents Josefina and Martina (respondents), Salvacion being their stepmother. 

When he was still alive, Ireneo, also took care of his niece, Angelina, since she was three years old until she got married. 

On October 25, 1977, Ireneo, with the consent of Salvacion, executed a deed of absolute sale of the property in favor of Angelina and her husband, Mario (Spouses Intac). 

Despite the sale, Ireneo and his family, including the respondents, continued staying in the premises and paying the realty taxes. After Ireneo died intestate in 1982, his widow and the respondents remained in the premises. After Salvacion died, respondents still maintained their residence there. Up to the present, they are in the premises, paying the real estate taxes thereon, leasing out portions of the property, and collecting the rentals.

The controversy arose when respondents sought the cancellation of TCT No. 242655, claiming that the sale was only simulated and, therefore, void.

The heirs of Ireneo, the respondents in this case, alleged that: 1. When Ireneo was still alive, Spouses Intac borrowed the title of the property (TCT No. 106530) from him to be used as collateral for a loan from a financing institution; 2. they objected because the title would be placed in the names of said spouses and it would then appear that the couple owned the property; that Ireneo, however, tried to appease them, telling them not to worry because Angelina would not take advantage of the situation considering that he took care of her for a very long time; that during his lifetime, he informed them that the subject property would be equally divided among them after his death; and 3. that respondents were the ones paying the real estate taxes over said property.

Spouses Intac countered, among others, that the subject property had been transferred to them based on a valid deed of absolute sale and for a valuable consideration; that the action to annul the deed of absolute sale had already prescribed; that the stay of respondents in the subject premises was only by tolerance during Ireneo’s lifetime because they were not yet in need of it at that time; and that despite respondents’ knowledge about the sale that took place on October 25, 1977, respondents still filed an action against them.

RTC ruled in favor of the respondents saying that the sale to the spouses Intac was null and void. The CA also ruled that there was no consideration in the sale to the spouses Intac and that the contract was one for equitable mortgage.

Issues: 

WON the Deed of Absolute Sale was a simulated contract or a valid agreement. 

WON the Deed of Absolute Sale, dated October 25, 1977, involving the subject real property in Pagasa, Quezon City, was a simulated contract or a valid agreement.

Held: 

The deed of sale executed by Ireneo and Salvacion was absolutely simulated for lack of consideration and cause and, therefore, void. 

Articles 1345 and 1346 of the Civil Code provide:

Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement.

Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.

Relatively simulated agreement vs. Absolute simulation  

If the parties state a false cause in the contract to conceal their real agreement, the contract is only relatively simulated and the parties are still bound by their real agreement. Hence, where the essential requisites of a contract are present and the simulation refers only to the content or terms of the contract, the agreement is absolutely binding and enforceable between the parties and their successors in interest

In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. "The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties." "As a result, an absolutely simulated or fictitious contract is void, and the parties may recover from each other what they may have given under the contract."

No valid sale took place between Ireneo and Spouses Intac

In the case at bench, the Court is one with the courts below that no valid sale of the subject property actually took place between the alleged vendors, Ireneo and Salvacion; and the alleged vendees, Spouses Intac. There was simply no consideration and no intent to sell it.

Evidences to prove that there was no absolute deed of sale between the parties

Critical is the testimony of Marietto, a witness to the execution of the subject absolute deed of sale. He testified that Ireneo personally told him that he was going to execute a document of sale because Spouses Intac needed to borrow the title to the property and use it as collateral for their loan application. Ireneo and Salvacion never intended to sell or permanently transfer the full ownership of the subject property to Spouses Intac. Marietto was characterized by the RTC as a credible witness.

Aside from their plain denial, the heirs of Intac failed to present any concrete evidence to disprove Marietto’s testimony. They claimed that they actually paid P150,000.00 for the subject

property. They, however, failed to adduce proof, even by circumstantial evidence, that they did, in fact, pay it. Even for the consideration of P60,000.00 as stated in the contract, petitioners could not show any tangible evidence of any payment therefor. Their failure to prove their payment only strengthened Marietto’s story that there was no payment made because Ireneo had no intention to sell the subject property.

Angelina’s story, except on the consideration, was consistent with that of Marietto. Angelina testified that she and her husband mortgaged the subject property sometime in July 1978 to finance the construction of a small hospital in Sta. Cruz, Laguna. Angelina claimed that Ireneo offered the property as he was in deep financial need.

The contract of sale was only for the purpose of lending the title of the property to Spouses Intac to enable them to secure a loan.  

Their arrangement was only temporary and could not give rise to a valid sale. Where there is no consideration, the sale is null and void ab initio. The case of Lequin vs. VIzconde was cited in this case.

The fact that Ireneo was still in physical possession of the subject property after the sale is a strong evidence to prove that there was no valid sale between the parties.

More importantly, Ireneo and his family continued to be in physical possession of the subject property after the sale in 1977 and up to the present. They even went as far as leasing the same and collecting rentals. If Spouses Intac really purchased the subject property and claimed to be its true owners, why did they not assert their ownership immediately after the alleged sale took place? Why did they have to assert their ownership of it only after the death of Ireneo and Salvacion? One of the most striking badges of absolute simulation is the complete absence of any attempt on the part of a vendee to assert his right of dominion over the property.

As heretofore shown, the contemporaneous and subsequent acts of both parties in this case, point to the fact that the intention of Ireneo was just to lend the title to the Spouses Intac to enable them to borrow money and put up a hospital in Sta. Cruz, Laguna. Clearly, the subject contract was absolutely simulated and, therefore, void.

The Spouses Intac never became the owners of the property despite its registration in their names.

It is also of no moment that TCT No. 106530 covering the subject property was cancelled and a new TCT (TCT No. 242655)21 was issued in their names. After all, registration does not vest title. As a logical consequence, petitioners did not become the owners of the subject property even after a TCT had been issued in their names.

SIMULATION OF CONTRACTS

Formaran vs Ong

Contract; absolutely simulated contracts; void from the beginning.   The Court is in accord with the observation and findings of the (RTC, Kalibo, Aklan) thus:

“The amplitude of foregoing undisputed facts and circumstances clearly shows that the sale of the land in question was purely simulated. It is void from the very beginning (Article 1346, New Civil Code). If the sale was legitimate, defendant Glenda should have immediately taken possession of the land, declared in her name for taxation purposes, registered the sale, paid realty taxes, introduced improvements therein and should not have allowed plaintiff to mortgage the land. These omissions properly militated against defendant Glenda’s submission that the sale was legitimate and the consideration was paid.

Dr. Lorna C. Formaran v. Dr. Glenda B. Ong and Solomon S. Ong, G.R. No. 186264, July 8, 2013.

FORM OF CONTRACTS

Meneses vs Venturozo

Contracts; public documents; forms. The necessity of a public document for contracts which transmit or extinguish real rights over immovable property, as mandated by Article 1358 of the Civil Code, is only for convenience; it is not essential for validity or enforceability. As notarized documents, Deeds of Absolute Sale carry evidentiary weight conferred upon them with respect to their due execution and enjoy the presumption of regularity which may only be rebutted by evidence so clear, strong and convincing as to exclude all controversy as to falsity. The presumptions that attach to notarized documents can be affirmed only so long as it is beyond dispute that the notarization was regular. A defective notarization will strip the document of its public character and reduce it to a private instrument. Consequently, when there is a defect in the notarization of a document, the clear and convincing evidentiary standard normally attached to a duly-notarized document is dispensed with, and the measure to test the validity of such document is preponderance of evidence. Adelaida Meneses (deceased), substituted by her heir Marilyn M. Carbonel-Garcia vs. Rosario G. Venturozo; G.R. No. 172196. October 19, 2011.