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Art. 1381-1389
G.R. No. 86150 March 2, 1992
GUZMAN,
BOCALING
&
CO.,
vs.
RAOUL S. V. BONNEVIE, respondent.

petitioner,

CRUZ, J.:
The subject of the controversy is a parcel of land
measuring six hundred (600) square meters, more or
less, with two buildings constructed thereon, belonging
to the Intestate Estate of Jose L. Reynoso.
This property was leased to Raoul S. Bonnevie and
Christopher Bonnevie by the administratrix, Africa
Valdez de Reynoso, for a period of one year beginning
August 8, 1976, at a monthly rental of P4,000.00.
The Contract
stipulation:

of

lease

contained

the

following

20. In case the LESSOR desire or


decides to sell the lease property, the
LESSEES shall be given a first priority
to purchase the same, all things and
considerations being equal.
On November 3, 1976 according to Reynoso, she
notified the private respondents by registered mail that
she was selling the leased premises for P600.000.00
less a mortgage loan of P100,000.00, and was giving
them 30 days from receipt of the letter within which to
exercise their right of first priority to purchase the
subject property. She said that in the event that they
did not exercise the said right, she would expect them
to vacate the property not later then March, 1977.
On January 20, 1977, Reynoso sent another letter to
private respondents advising them that in view of their
failure to exercise their right of first priority, she had
already sold the property.
Upon receipt of this letter, the private respondents
wrote Reynoso informing her that neither of them had
received her letter dated November 3, 1976; that they
had advised her agent to inform them officially should
she decide to sell the property so negotiations could be
initiated; and that they were "constrained to refuse
(her) request for the termination of the lease.
On March 7, 1977, the leased premises were formally
sold to petitioner Guzman, Bocaling & Co. The Contract
of Sale provided for immediate payment of
P137,500.00 on the purchase price, the balance of
P262,500.00 to be paid only when the premises were
vacated.

On April 12, 1977, Reynoso wrote a letter to the private


respondents demanding that they vacate the premises
within 15 days for their failure to pay the rentals for
four months. When they refuse, Reynoso filed a
complaint for ejectment against them which was
docketed as Civil Case No. 043851-CV in the then City
Court of Manila.
On September 25, 1979, the parties submitted a
Compromise Agreement, which provided inter alia that
"the defendant Raoul S.V. Bonnevie shall vacate the
premises subject of the Lease Contract, Voluntarily and
Peacefully not later than October 31, 1979."
This agreement was approved by the City Court and
became the basis of its decision. However, as the
private respondents failed to comply with the aboveqouted stipulation, Reynoso filed a motion for
execution of the judgment by compromise, which was
granted on November 8, 1979.
On November 12, 1979, private respondent Raoul S.
Bonnevie filed a motion to set aside the decision of the
City Court as well as the Compromise Agreement on
the sole ground that Reynoso had not delivered to him
the "records of payments and receipts of all rentals by
or for the account of defendant ..." The motion was
denied and the case was elevated to the then Court of
First Instance. That Court remanded the case to the
City Court of Manila for trial on the merits after both
parties had agreed to set aside the Compromise
Agreement.
On April 29, 1980, while the ejectment case was
pending in the City Court, the private respondents filed
an action for annulment of the sale between Reynoso
and herein petitioner Guzman, Bocaling & Co. and
cancellation of the transfer certificate of title in the
name of the latter. They also asked that Reynoso be
required to sell the property to them under the same
terms ands conditions agreed upon in the Contract of
Sale in favor of the petitioner This complaint was
docketed as Civil Case No. 131461 in the then Court of
First Instance of Manila.
On May 5, 1980, the City Court decided the ejectment
case, disposing as follows:
WHEREFORE, judgment is hereby
rendered ordering defendants and all
persons holding under them to vacate
the premises at No. 658 Gen. Malvar
Street, Malate, Manila, subject of this
action, and deliver possession thereof
to the plaintiff, and to pay to the latter;
(1) The sum of P4,000.00 a month from

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April 1, 1977 to August 8, 1977; (2) The
sum of P7,000.00 a month, as
reasonable compensation for the
continued unlawful use and occupation
of said premises, from August 9, 1977
and every month thereafter until
defendants actually vacate and deliver
possession thereof to the plaintiff; (3)
The sum of P1,000.00 as and for
attorney's fees; and (4) The costs of
suit.

WHEREFORE, premises considered, this


Court in Civil Case No. 132634 hereby
modifies the decision of the lower court
as follows:

leased by him in the amount of


P400,000.00 under the same terms and
conditions should there be any other
occupants or tenants in the premises;
ordering the defendants jointly and
severally to pay the plaintiff Raoul
Bonnevie the amount of P50,000.00 as
temperate damages; to pay the
plaintiff jointly and severally the of
P2,000.00 per month from the time the
property was sold to defendant
Guzman and Bocaling by defendant
Africa Valdez Vda de Reynoso on March
7, 1977, up to the execution of a deed
of sale of the property by defendant
Africa Valdez Vda. de Reynoso in favor
of plaintiff Bonnevie; to pay jointly and
severally the plaintiff Bonnevie the
amount of P20,000.00 as exemplary
damages, for attorney's fees in the
amount of P10,000.00, and to pay the
cost of suit.

1 Ordering defendants Raoul S.V.


Bonnevie and Christopher Bonnevie
and all persons holding under them to
vacate the premises at No. 658 Gen.
Malvar St., Malate, Manila subject of
this action and deliver possessions
thereof to the plaintiff; and

Both Reynoso and the petitioner company filed with


the Court of Appeals a petition for review of this
decision. The appeal was eventually resolved against
them in a decision promulgated on March 16, 1988,
where the respondent court substantially affirmed the
conclusions of the lower court but reduced the award
of damages. 1

2 To pay the latter the sum of


P4,000.00 a month from April 1, 1977
up to September 21, 1980 (when
possession of the premises was turned
over to the Sheriff) after deducting
whatever payments were made and
accepted by Mrs. Africa Valdez Vda. de
Reynoso during said period, without
pronouncement as to costs.

Its motion for reconsideration having been denied on


December 14, 1986, the petitioner has come to this
Court asserting inter alia that the respondent court
erred in ruling that the grant of first priority to
purchase the subject properties by the judicial
administratrix needed no authority from the probate
court; holding that the Contract of Sale was not
voidable but rescissible; considering the petitioner as a
buyer in bad faith ordering Reynoso to execute the
deed of sale in favor of the Bonnevie; and not passing
upon the counterclaim. Reynoso has not appealed.

The decision was appealed to the then Court of First


Instance of Manila, docketed as Civil Case No. 132634
and consolidated with Civil Case No. 131461. In due
time, Judge Tomas P. Maddela, Jr., decided the two
cases as follows:

As to Civil Case No. 131461, the Court


hereby renders judgment in favor of
the plaintiff Raoul Bonnevie as against
the defendants Africa Valdez Vda. de
Reynoso and Guzman and Bocaling &
Co. declaring the deed of sale with
mortgage executed by defendant Africa
Valdez Vda. de Reynoso in favor of
defendant Guzman and Bocaling null
and void; cancelling the Certificate of
Title No. 125914 issued by the Register
of Deeds of Manila in the name of
Guzman and Bocaling & Co.,; the name
of Guzman and Bocaling & Co.,;
ordering the defendant Africa Valdez
Vda. de Reynoso to execute favor of
the plaintiff Raoul Bonnevie a deed of
sale with mortgage over the property

The Court has examined the petitioner's contentions


and finds them to be untenable.
Reynoso claimed to have sent the November 3, 1976
letter by registered mail, but the registry return card
was not offered in evidence. What she presented
instead was a copy of the said letter with a photocopy
of only the face of a registry return card claimed to
refer to the said letter. A copy of the other side of the
card showing the signature of the person who received
the letter and the data of the receipt was not
submitted. There is thus no satisfactory proof that the
letter was received by the Bonnevies.
Even if the letter had indeed been sent to and received
by the private respondent and they did not exercise

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their right of first priority, Reynoso would still be guilty
of violating Paragraph 20 of the Contract of Lease
which specifically stated that the private respondents
could exercise the right of first priority, "all things and
conditions being equal." The Court reads this mean
that there should be identity of the terms and
conditions to be offered to the Bonnevies and all other
prospective buyers, with the Bonnevies to enjoy the
right of first priority.

comply with her duty to give them the first opportunity


to purchase the subject property.

The selling price qouted to the Bonnevies was


P600,000.00, to be fully paid in cash less only the
mortgage lien of P100,000.00. 2 On the other hand, the
selling price offered to and accepted by the petitioner
was only P400,000.00 and only P137,500.00 was paid
in cash while the balance of P272,500.00 was to be
paid "when the property (was) cleared of tenants or
occupants. 3

The respondent court correctly held that the Contract


of Sale was not voidable 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.

The fact that the Bonnevies had financial problems at


that time was no justification for denying them the first
option to buy the subject property. Even if the
Bonnevies could not buy it at the price qouted,
Reynoso could not sell it to another for a lower price
and under more favorable terms and conditions. Only if
the Bonnevies failed to exercise their right of first
priority could Reynoso lawfully sell the subject property
to others, and at that only under the same terms and
conditions offered to the Bonnevies.
The Court agrees with the respondent court that it was
not necessary to secure the approval by the probate
court of the Contract of Lease because it did not
involve an alienation of real property of the estate nor
did the term of the lease exceed one year so as top
make it fall under Article 1878(8) of the Civil Code.
Only if Paragraph 20 of the Contract of Lease was
activated and the said property was intended to be
sold would it be required of the administratrix to secure
the approval of the probate court pursuant to Rule 89
of the Rules of Court.
As a strict legal proposition, no judgment of the
probate court was reviewed and eventually annuled
collaterally by the respondent court as contended by
the petitioner. The order authorizing the sale in its
favor was duly issued by the probate court, which
thereafter approved the Contract of Sale resulting in
the eventual issuance if title in favor of the petitioner.
That order was valid insofar as it recognized the
existence of all the essential elements of a valid
contract of sale, but without regard to the special
provision in the Contract of Lease giving another party
the right of first priority.
Even if the order of the probate court was valid, the
private respondents still had a right to rescind the
Contract of Sale because of the failure of Reynoso to

The petitioner argues that assuming the Contract of


Sale to be voidable, only the parties thereto could bring
an action to annul it pursuant to Article 1397 of the
Civil Code. It is stressed that private respondents are
strangers to the agreement and therefore have no
personality to seek its annulment.

According to Tolentino, rescission is a remedy granted


by law to the contracting parties and even to third
persons, to secure reparation 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. 4
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. 5 Recission implies a contract which,
even if initially valid, produces a lesion or pecuniary
damage to someone that justifies its invalidation for
reasons of equity. 6
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. 7
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 its categorically admitted 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.

4
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 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. 8 Good
faith connotes an honest intention to abstain from
taking unconscientious advantage of another. 9 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.
The petitioner insists that it was not aware of the right
of first priority granted by the Contract of Lease,
Assuming this to be true, we nevertherless agree with
the observation of the respondent court that:
If Guzman-Bocaling failed to inquire
about the terms of the Lease Contract,
which includes Par. 20 on priority right
given to the Bonnevies, it had only
itself to blame. Having known that the
property it was buying was under
lease, it behooved it as a prudent
person to have required Reynoso or the
broker to show to it the Contract of
Lease in which Par. 20 is contained.
Finally, the petitioner also cannot invoke the
Compromise Agreement which it says canceled the
right of first priority granted to the Bonnevies by the
Contract of Lease. This agreement was set side by the
parties thereto, resulting in the restoration of the
original rights of the private respondents under the
Contract of Lease. The Joint Motion to Remand filed by
Reynoso and the private respondents clearly declared
inter alia:
That without going into the merits of
instant petition, the parties have
agreed to SET ASIDE the compromise
agreement, dated September 24, 1979
and remand Civil Case No. 043851 of
the City Court of Manila to Branch IX
thereof for trial on the merits. 10
We find, in sum, that the respondent court did not
commit the errors imputed to it by the petitioner. On
the contrary, its decision is conformable to the
established facts and the applicable law and
jurisprudence and so must be sustained.
WHEREFORE, the petition in DENIED, with costs against
the petitioner. The challeged decision is AFFIRMED in
toto. It is so ordered.

G.R. No. 104234 June 30, 1995


AIR
FRANCE,
petitioner,
vs.
HONORABLE
COURT
OF
APPEALS,
IOLANI
DIONISIO,
MULTINATIONAL
TRAVEL
CORPORATION OF THE PHIL., FIORELLO and
VICKY PANOPIO, respondents.
ROMERO, J.:
This is a petition for review on certiorari of the decision
of the Court of Appeals 1 which annulled and set aside
the orders of the Regional Trial Court of Manila, Branch
27.
The facts, as found by respondent Court of Appeals,
are as follows:
Petitioner Air France filed a complaint for sum of money
and damages against private respondents Multinational
Travel Corporation of the Philippines, Fiorello Panopio
and Vicky Panopio before the Regional Trial Court of
Manila, Branch 27, then presided over by the Hon.
Ricardo Diaz.
After trial, the court rendered judgment on August 31,
1987 in favor of petitioner, ordering private
respondents to pay petitioner, jointly and severally, the
amount of P2,518,698.66, with legal rate of interest per
annum from September 22, 1986, until fully paid and
P50,000.00 as and for attorney's fees.
On December 29, 1989, petitioner moved for the
issuance of an alias writ of execution on the ground of
unsatisfied judgment. It likewise moved to declare the
sale to Iolani Dionisio of a parcel of land with a house
erected thereon in the name of the Multinational Food
Corporation and covered by Transfer Certificate of Title
No. 353935 as one in fraud of creditors.
Petitioner, in said motion, stated that private
respondent spouses jointly owned 91% of Multinational
Food and Catering Corporation (Multinational Food),
other stockholders being: Aldo Glen Panopio (brother of
Fiorello) 3%; Jaime Dionisio (husband of private
respondent Iolani Dionisio) 3%; and Marie Rose
Ricasa 3%. Petitioner stated that although
Multinational Food was registered with the Securities
and Exchange Corporation, it neither engaged in
operations nor held meetings because of adverse
business conditions. The Corporation, through its
President Iolani Dionisio, filed a sworn statement to this
effect with the SEC dated July 28, 1986. However,
petitioner alleged that despite its being nonoperational, Multinational Food acquired from Ayala

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Investment and Development Corporation (Ayala
Corporation) the subject property on February 1, 1985.
Petitioner further alleged that private respondent
spouses subsequently sold the property to Iolani
Dionisio on April 11, 1985. However, the sale was not
registered until one year and nine months later or at
the time petitioner was pursuing the issuance of a writ
of attachment.
Petitioner's motion was set for hearing on January 4,
1990, on which date the respondent court ordered the
issuance of an alias writ of execution and on January 8,
1990, the same was issued.
Private respondent spouses filed
thereto on the following grounds:

their

opposition

. . . (a) the respondent court has no


jurisdiction because the alleged buyer
in the person of Iolani Dionisio is not a
party in the case; (b) that Iolani
Dionisio was not served with summons
and therefore to declare the sale to her
in fraud of creditors without even
jurisdiction
would
amount
to
deprivation of property without due
process of law; and (c) that the proper
remedy is an independent civil action
where indispensable parties are to be
impleaded to afford them to answer
and/or refute charges.
On January 19, 1990, the trial court issued an order
requiring Iolani Dionisio and Multinational Food to
answer the allegations contained in petitioner's motion.
However, both parties failed to file their respective
answers thereto.
On November 19, 1990, the court issued an order
finding the sale in favor of Iolani Dionisio of the subject
property covered by TCT No. 353935 registered with
the Registry of Deeds of Quezon City in the name of
Multinational Food as having been made in fraud of
creditors.
Private respondents filed a motion for reconsideration
which was denied in the order of February 15, 1991;
whereupon, they then filed a petition for certiorari with
the Court of Appeals, alleging that the lower court
acted with grave abuse of discretion amounting to lack
of jurisdiction.
On February 24, 1992, the appellate court rendered a
decision annulling and setting aside the questioned
orders. It further enjoined petitioner from proceeding
against the property in question.

Hence, this petition.


The sole issue to be resolved in the instant case is
whether or not the Court of Appeals erred in annulling
and setting aside the orders of the trial court.
Petitioner claims that a separate civil action, as
proposed by private respondents, will only perpetrate
fraud.
We find petitioner's contention to be devoid of merit.
First, the subject property is registered with the
Register of Deeds of Quezon City in the name of the
Multinational Food and Catering Corporation and not in
the name of either the Multinational Travel Corporation
of the Philippines or of the spouses Fiorello and Vicky
Panopio who are the judgment debtors.
It is well-settled that the power of the court in the
execution of judgments extends only over properties
unquestionably belonging to the judgment debtor. 2
Here, the property in question was sold to private
respondent Iolani Dionisio, who was not a party to the
case subject of execution.
In Bayer Philippines, Inc. v. Agana,

the Court said:

. . . Once a court renders a final


judgment, all the issues between or
among the parties before it are
deemed resolved and its judicial
function as regards any matter related
to the controversy litigated comes to
an end. The execution of its judgment
is purely a ministerial phase of
adjudication. Indeed, the nature of its
duty to see to it that the claim of the
prevailing party is fully satisfied from
the properties of the loser is generally
ministerial. . . .
xxx xxx xxx
In other words, construing Section 17
of Rule 39 of the Revised Rules of
Court,
the
rights
of
third-party
claimants over certain properties levied
upon by the sheriff to satisfy the
judgment should not be decided in the
action where the third-party claims
have been presented, but in the
separate action instituted by the
claimants.
This is evident from the very nature of
the proceedings. In Herald Publishing,
supra, We intimated that the levy by

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the sheriff of a property by virtue of a
writ of attachment may be considered
as made under authority of the court
only when the property levied upon
unquestionably
belongs
to
the
defendant. If he attach properties (sic)
other than those of defendant, he acts
beyond the limits of his authority.
Otherwise stated, the court issuing a
writ of execution is supposed to
enforce
its
authority
only
over
properties of the judgment debtor, and
should a third party appear to claim
the property levied upon by the sheriff,
the procedure laid down by the Rules is
that such claim should be the subject
of a separate and independent action.
(Emphasis supplied)
Multinational Food and Iolani Dionisio, not being parties
to the case, the property covered by TCT No. 353935
may not be levied upon to satisfy the obligations of
private respondent spouses and the Multinational
Travel Corporation.
Petitioner's contrary claim that the property belongs to
private respondent spouses, if true, requires a
rescissory action which cannot be done in the same
case, but through the filing of a separate action.
Rescission is a relief which the law grants on the
premise that the contract is valid for the protection of
one of the contracting parties and third persons from
all injury and damage the contract may cause, or to
protect some incompatible and preferential right
created by the contract. 4
Under Art. 1381 of the Civil Code, the following
contracts are rescissible:

(4) Those which refer to things under


litigation if they have been entered into
by
the
defendant
without
the
knowledge and approval of the litigants
or of competent judicial authority;
(5) All other contracts specially
declared by law to be subject to
rescission.
Rescissible contracts, not being void, they remain
legally effective until set aside in a rescissory action
and may convey title. Nor can they be attacked
collaterally upon the grounds for rescission in a land
registration proceeding. 5
An action for rescission may not be raised or set up in a
summary proceeding through a motion, but in an
independent civil action and only after a full-blown
trial. As Article 1383 of the Civil Code provides:
Art. 1383. The 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.
Regarding contracts undertaken in fraud of creditors,
the existence of the intention to prejudice the same
should be determined either by the presumption
established by Article 1387 6 or by the proofs
presented in the trial of the case. 7 In any case, the
presumption of fraud established by this article is not
conclusive, and may be rebutted by satisfactory and
convincing evidence. 8 To repeat, an independent
action is necessary to prove that the contract is
rescissible.

xxx xxx xxx

Under Article 1389 of the Civil Code, an "accion


pauliana," 9 the action to rescind contracts made in
favor of creditors, must be commenced within four
years.

(1) Those which are entered into by


guardians whenever the wards whom
they represent suffer lesion by more
than one fourth of the value of the
things which are the object thereof;

Clearly, the rights and defenses which the parties in a


rescissible contract may raise or set up cannot be
properly ventilated in a motion but only in a full trial.

(2)
Those
agreed
upon
in
representation of absentees, if the
latter suffer the lesion stated in the
preceeding number;
(3) Those undertaken in fraud of
creditors when the latter cannot in any
other manner collect the claims due
them;

The appellate court did not err in holding that the trial
court acted with grave abuse of discretion in resolving
these matters through mere motion of petitioner.
WHEREFORE, the decision of the Court of Appeals is
hereby AFFIRMED in toto.
SO ORDERED.

7
G.R. No. 144934

January 15, 2004

ADELFA S. RIVERA, CYNTHIA S. RIVERA, and JOSE


S.
RIVERA,
petitioners,
vs.
FIDELA DEL ROSARIO (deceased and substituted
by her co-respondents), and her children,
OSCAR, ROSITA, VIOLETA, ENRIQUE JR., CARLOS,
JUANITO and ELOISA, all surnamed DEL ROSARIO,
respondents.
DECISION
QUISUMBING, J.:
Before us is a petition for review on certiorari of the
Court of Appeals decision1, dated November 29, 1999,
in CA-G.R. CV No. 60552, which affirmed the judgment 2
of the Regional Trial Court (RTC) of Malolos, Bulacan,
Branch 17, in Civil Case No. 151-M-93. The RTC granted
respondents complaint for nullity of contract of sale
and annulment of the transfer certificates of title
issued in favor of petitioners.
The facts, as found by the Court of Appeals, are as
follows:
Respondents Fidela (now deceased), Oscar,
Rosita, Violeta, Enrique Jr., Carlos, Juanito and
Eloisa, all surnamed Del Rosario, were the
registered owners of Lot No. 1083-C, a parcel of
land situated at Lolomboy, Bulacan. This lot
spanned an area of 15,029 square meters and
was covered by TCT No. T-50.668 (M)
registered in the Registry of Deeds of Bulacan.
On May 16, 1983, Oscar, Rosita, Violeta, Enrique Jr.,
Juanito, and Eloisa, executed a Special Power of
Attorney3 in favor of their mother and co-respondent,
Fidela, authorizing her to sell, lease, mortgage, transfer
and convey their rights over Lot No. 1083-C. 4
Subsequently, Fidela borrowed P250,000 from Mariano
Rivera in the early part of 1987. To secure the loan, she
and Mariano Rivera agreed to execute a deed of real
estate mortgage and an agreement to sell the land.
Consequently, on March 9, 1987, Mariano went to his
lawyer, Atty. Efren Barangan, to have three documents
drafted: the Deed of Real Estate Mortgage5, a
Kasunduan (Agreement to Sell)6, and a Deed of
Absolute Sale.7
The Kasunduan provided that the children of Mariano
Rivera, herein petitioners Adelfa, Cynthia and Jose,
would purchase Lot No. 1083-C for a consideration of
P2,141,622.50. This purchase price was to be paid in
three installments: P250,000 upon the signing of the
Kasunduan, P750,000 on August 31, 1987, and
P1,141,622.50 on December 31, 1987. 8 It also provided

that the Deed of Absolute Sale would be executed only


after the second installment is paid and a postdated
check for the last installment is deposited with Fidela. 9
As previously stated, however, Mariano had already
caused the drafting of the Deed of Absolute Sale. But
unlike the Kasunduan, the said deed stipulated a
purchase price of only P601,160, and covered a certain
Lot No. 1083-A in addition to Lot No. 1083-C. 10 This
deed, as well as the Kasunduan and the Deed of Real
Estate Mortgage11, was signed by Marianos children,
petitioners Adelfa, Cynthia and Jose, as buyers and
mortgagees, on March 9, 1987.12
The following day, Mariano Rivera returned to the office
of Atty. Barangan, bringing with him the signed
documents. He also brought with him Fidela and her
son Oscar del Rosario, so that the latter two may sign
the mortgage and the Kasunduan there.
Although Fidela intended to sign only the Kasunduan
and the Real Estate Mortgage, she inadvertently affixed
her signature on all the three documents in the office
of Atty. Barangan on the said day, March 10, 1987.
Mariano then gave Fidela the amount of P250,000. On
October 30, 1987, he also gave Fidela a check for
P200,000. In the ensuing months, also, Mariano gave
Oscar del Rosario several amounts totaling P67,800
upon the latters demand for the payment of the
balance despite Oscars lack of authority to receive
payments under the Kasunduan.13 While Mariano was
making payments to Oscar, Fidela entrusted the
owners copy of TCT No. T-50.668 (M) to Mariano to
guarantee compliance with the Kasunduan.
When Mariano unreasonably refused to return the
TCT,14 one of the respondents, Carlos del Rosario,
caused the annotation on TCT No. T-50.668 (M) of an
Affidavit of Loss of the owners duplicate copy of the
title on September 7, 1992. This annotation was offset,
however, when Mariano registered the Deed of
Absolute Sale on October 13, 1992, and afterwards
caused the annotation of an Affidavit of Recovery of
Title on October 14, 1992. Thus, TCT No. T-50.668 (M)
was cancelled, and in its place was issued TCT No.
158443 (M) in the name of petitioners Adelfa, Cynthia
and Jose Rivera.15
Meanwhile, the Riveras, representing themselves to be
the new owners of Lot No. 1083-C, were also
negotiating with the tenant, Feliciano Nieto, to rid the
land of the latters tenurial right. When Nieto refused to
relinquish his tenurial right over 9,000 sq. m. of the
land, the Riveras offered to give 4,500 sq. m. in
exchange for the surrender. Nieto could not resist and
he accepted. Subdivision Plan No. Psd-031404-052505
was then made on August 12, 1992. Later, it was
inscribed on TCT No. 158443 (M), and Lot No. 1083-C
was divided into Lots 1083 C-1 and 1083 C-2. 16

8
To document their agreement with Feliciano Nieto, the
Riveras executed a Kasulatan sa Pagtatakwil ng
Karapatan sa Pagmamay-ari ng Bahagi ng Isang Lagay
na Lupa (Written Abdication of Rights over a Portion of
a Parcel of Land)17 on November 16, 1992. Four days
later, they registered the document with the Registry of
Deeds. Two titles were then issued: TCT No. T-161784
(M) in the name of Nieto, for 4,500 sq. m. of land, and
TCT No. T-161785 (M) in the name of petitioners Adelfa,
Cynthia and Jose Rivera, over the remaining 10,529 sq.
m. of land.18
On February 18, 1993, respondents filed a complaint 19
in the Regional Trial Court of Malolos, asking that the
Kasunduan be rescinded for failure of the Riveras to
comply with its conditions, with damages. They also
sought the annulment of the Deed of Absolute Sale on
the ground of fraud, the cancellation of TCT No. T161784 (M) and TCT No. T-161785 (M), and the
reconveyance to them of the entire property with TCT
No. T-50.668 (M) restored.20
Respondents claimed that Fidela never intended to
enter into a deed of sale at the time of its execution
and that she signed the said deed on the mistaken
belief that she was merely signing copies of the
Kasunduan. According to respondents, the position
where Fidelas name was typed and where she was
supposed to sign her name in the Kasunduan was
roughly in the same location where it was typed in the
Deed of Absolute Sale. They argued that given Fidelas
advanced age (she was then around 72 at the time) 21
and the fact that the documents were stacked one on
top of the other at the time of signing, Fidela could
have easily and mistakenly presumed that she was
merely signing additional copies of the Kasunduan. 22
They also alleged that petitioners acquired possession
of the TCT through fraud and machination.
In their defense, petitioners denied the allegations and
averred that the Deed of Absolute Sale was validly
entered into by both parties. According to petitioners,
Fidela del Rosario mortgaged Lot No. 1083-C to their
predecessor in interest, Mariano Rivera, on March 9,
1987. But on the following day Fidela decided to sell
the lot to petitioners for P2,161,622.50. When Mariano
agreed (on the condition that Lot No. 1083-C will be
delivered free from all liens and encumbrances), the
Kasunduan was consequently drawn up and signed.
After that, however, Fidela informed Mariano of the
existence of Feliciano Nietos tenancy right over the lot
to the extent of 9,000 sq. m. When Mariano continued
to want the land, albeit on a much lower price of only
P601,160, as he had still to deal with Feliciano Nieto,
the parties drafted the Deed of Absolute Sale on March
10, 1987, to supersede the Kasunduan.
Petitioners likewise argued that respondents cause of
action had been barred by laches or estoppel since

more than four years has lapsed from the time the
parties executed the Deed of Absolute Sale on March
10, 1987, to the time respondents instituted their
complaint on February 18, 1993.
Petitioners also filed a counterclaim asking for moral
and exemplary damages and the payment of
attorneys fees and costs of suit.
After trial, the RTC ruled in favor of respondents:
WHEREFORE, in the light of all the foregoing,
judgment is hereby rendered:
1. Declaring the Deed of Absolute Sale
dated March 10, 1987 as null and void;
2. Annulling TCT No. T-158443 (M) and
TCT No. T-161785 (M) both in the
names of Adelfa, Cynthia and Jose, all
surnamed Rivera;
3. Declaring the plaintiffs to be the
legitimate owners of the land covered
by TCT No. T-161785 (M) and ordering
defendant Adelfa, Cynthia, and Jose, all
surnamed Rivera, to reconvey the
same to the plaintiffs;
4. Ordering the Register of Deeds of
Bulacan to cancel TCT No. T-161785
(M) and to issue in its place a new
certificate of title in the name of the
plaintiffs as their names appear in TCT
No. T-50.668;
5. Declaring TCT No. T-161784 (M) in
the name of Feliciano Nieto as valid;
6. Ordering the defendant Riveras to
pay
the
plaintiffs
solidarily
the
following amounts:
a) P191,246.98 as balance for
the 4,500 square-meter portion
given to defendant Feliciano
Nieto
b)
P200,000.00
damages

as

moral

c) P50,000.00 as exemplary
damages
d) P50,000.00
fees

as

attorneys

9
e) costs of the suit.
7. Dismissing the counterclaim of the
defendant Riveras;
8. Dismissing the counterclaim and the
crossclaim of defendant Feliciano Nieto.

While this petition was pending, respondent Fidela del


Rosario died. She was substituted by her children,
herein respondents.
In this petition, petitioners rely on the following
grounds:
I

SO ORDERED.23
The trial court ruled that Fidelas signature in the Deed
of Absolute Sale was genuine, but found that Fidela
never intended to sign the said deed. Noting the
peculiar differences between the Kasunduan and the
Deed of Absolute Sale, the trial court concluded that
the Riveras were guilty of fraud in securing the
execution of the deed and its registration in the
Registry of Deeds.24 This notwithstanding, the trial
court sustained the validity of TCT No. T-161784 (M) in
the name of Feliciano Nieto since there was no fraud
proven on Nietos part. The trial court found him to
have relied in good faith on the representations of
ownership of Mariano Rivera. Thus, Nietos rights,
according to the trial court, were akin to those of an
innocent purchaser for value.25
On the foregoing, the trial court rescinded the
Kasunduan but ruled that the P450,000 paid by
petitioners be retained by respondents as payment for
the 4,500 sq. m. portion of Lot No. 1083-C that
petitioners gave to Nieto.26 The trial court likewise
ordered petitioners to pay P191,246.98 as balance for
the price of the land given to Nieto, P200,000 as moral
damages, P50,000 as exemplary damages, P50,000 as
attorneys fees, and the costs of suit.27
On appeal to the Court of Appeals, the trial courts
judgment was modified as follows:
WHEREFORE, the judgment appealed from is
hereby AFFIRMED with the MODIFICATION that
the Deed of Absolute Sale dated March 10,
1987 is declared null and void only insofar as
Lot No. 1083-C is concerned, but valid insofar
as it conveyed Lot No. 1083-A, that TCT No.
158443 (M) is valid insofar as Lot No. 1083-A is
concerned and should not be annulled, and
increasing the amount to be paid by the
defendants-appellants
to
the
plaintiffsappellees for the 4,500 square meters of land
given to Feliciano Nieto to P323,617.50.
Costs against the defendants-appellants.
SO ORDERED.28
Petitioners motion for reconsideration was denied.
Hence, this petition.

THE HONORABLE COURT OF APPEALS COMMITTED A


SERIOUS, GRAVE AND REVERSIBLE ERROR IN
AWARDING LOT 1083-A IN FAVOR OF THE
PETITIONERS AND FELICIANO NIETO WHICH IS
ADMITTEDLY A PART AND PORTION OF THE EXISTING
NORTH LUZON EXPRESSWAY AND AS SUCH ACTED
WITHOUT OR IN EXCESS OF ITS JURISDICTION, OR WITH
GRAVE ABUSE OF JUDICIAL DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION.
II
RESPONDENTS FAILED TO PAY THE CORRECT DOCKET,
FILING AND OTHER LAWFUL FEES WITH THE OFFICE OF
THE CLERK OF COURT OF THE COURT A QUO (RTC,
MALOLOS, BULACAN) AT THE TIME OF THE FILING OF
THE ORIGINAL COMPLAINT IN 1993 PURSUANT TO THE
SIOL29 DOCTRINE.
III
[THE]
TRIAL
COURT
AWARDED
RELIEFS
NOT
SPECIFICALLY PRAYED FOR IN THE AMENDED
COMPLAINT WITHOUT REQUIRING THE PAYMENT OF
THE CORRECT DOCKET, FILING AND OTHER LAWFUL
FEES.
IV
THE COURT A QUO HAS NO JURISDICTION OVER THE
RESPONDENTS CAUSE OF ACTION AND OVER THE RES
CONSIDERING
THAT
FELICIANO
NIETO
IS
AN
AGRICULTURAL TENANT OF THE RICELAND IN
QUESTION.
V
RESPONDENTS[] MAIN CAUSE OF ACTION [IS] FOR
RESCISSION OF CONTRACT WHICH IS SUBSIDIARY IN
NATURE[,] AND ANNULMENT OF SALE[,] BOTH OF
WHICH HAVE ALREADY PRESCRIBED UNDER ARTICLES
1389 AND 1391 OF THE CIVIL CODE.30
Petitioners assignment of errors may be reduced into
three issues: (1) Did the trial court acquire jurisdiction
over the case, despite an alleged deficiency in the
amount of filing fees paid by respondents and despite
the fact that an agricultural tenant is involved in the

10
case? (2) Did the Court of Appeals correctly rule that
the Deed of Absolute Sale is valid insofar as Lot 1083-A
is concerned? (3) Is the respondents cause of action
barred by prescription?
On the first issue, petitioners contend that jurisdiction
was not validly acquired because the filing fees
respondents paid was only P1,554.45 when the relief
sought was reconveyance of land that was worth
P2,141,622.50 under the Kasunduan. They contend
that respondents should have paid filing fees
amounting to P12,183.70. In support of their argument,
petitioners invoke the doctrine in Sun Insurance Office,
Ltd., (SIOL) v. Asuncion31 and attach a certification32
from the Clerk of Court of the RTC of Quezon City.
Respondents counter that it is beyond dispute that
they paid the correct amount of docket fees when they
filed the complaint. If the assessment was inadequate,
they could not be faulted because the clerk of court
made no notice of demand or reassessment,
respondents argue. Respondents also add that since
petitioners failed to contest the alleged underpayment
of docket fees in the lower court, they cannot raise the
same on appeal.33
We rule in favor of respondents. Jurisdiction was validly
acquired over the complaint. In Sun Insurance Office,
Ltd., (SIOL) v. Asuncion,34 this Court ruled that the filing
of the complaint or appropriate initiatory pleading and
the payment of the prescribed docket fee vest a trial
court with jurisdiction over the subject matter or nature
of the action. If the amount of docket fees paid is
insufficient considering the amount of the claim, the
clerk of court of the lower court involved or his duly
authorized deputy has the responsibility of making a
deficiency assessment. The party filing the case will be
required to pay the deficiency, but jurisdiction is not
automatically lost.
Here it is beyond dispute that respondents paid the full
amount of docket fees as assessed by the Clerk of
Court of the Regional Trial Court of Malolos, Bulacan,
Branch 17, where they filed the complaint. If
petitioners believed that the assessment was incorrect,
they should have questioned it before the trial court.
Instead, petitioners belatedly question the alleged
underpayment of docket fees through this petition,
attempting to support their position with the opinion
and certification of the Clerk of Court of another
judicial region. Needless to state, such certification has
no bearing on the instant case.
Petitioners also contend that the trial court does not
have jurisdiction over the case because it involves an
agricultural tenant. They insist that by virtue of
Presidential Decree Nos. 316 and 1038,35 it is the
Department of Agrarian Reform Adjudication Board
(DARAB) that has jurisdiction.36

Petitioners contention lacks merit. The DARAB has


exclusive original jurisdiction over cases involving the
rights and obligations of persons engaged in the
management, cultivation and use of all agricultural
lands covered by the Comprehensive Agrarian Reform
Law.37 However, the cause of action in this case is
primarily against the petitioners, as indispensable
parties, for rescission of the Kasunduan and
nullification of the Deed of Sale and the TCTs issued
because of them. Feliciano Nieto was impleaded
merely as a necessary party, stemming from whatever
rights he may have acquired by virtue of the
agreement between him and the Riveras and the
corresponding TCT issued. Hence, it is the regular
judicial courts that have jurisdiction over the case.
On the second issue, contrary to the ruling of the Court
of Appeals that the Deed of Absolute Sale is void only
insofar as it covers Lot No. 1083-C, we find that the
said deed is void in its entirety. Noteworthy is that
during the oral arguments before the Court of Appeals,
both petitioners and respondents admitted that Lot No.
1083-A had been expropriated by the government long
before the Deed of Absolute Sale was entered into. 38
Whats more, this case involves only Lot No. 1083-C. It
never involved Lot 1083-A. Thus, the Court of Appeals
had no jurisdiction to adjudicate on Lot 1083-A, as it
was never touched upon in the pleadings or made the
subject of evidence at trial.39
As to the third issue, petitioners cite Articles 1383, 40
138941 and 139142 of the New Civil Code. They submit
that the complaint for rescission of the Kasunduan
should have been dismissed, for respondents failure to
prove that there was no other legal means available to
obtain reparation other than to file a case for
rescission, as required by Article 1383. Moreover,
petitioners contend that even assuming respondents
had satisfied this requirement, prescription had already
set in, the complaint having been filed in 1992 or five
years after the execution of the Deed of Absolute Sale
in March 10, 1987.
Respondents counter that Article 1383 of the New Civil
Code applies only to rescissible contracts enumerated
under Article 1381 of the same Code, while the cause
of action in this case is for rescission of a reciprocal
obligation, to which Article 119143 of the Code applies.
They assert that their cause of action had not
prescribed because the four-year prescriptive period is
counted from the date of discovery of the fraud, which,
in this case, was only in 1992.
Rescission of reciprocal obligations under Article 1191
of the New Civil Code should be distinguished from
rescission of contracts under Article 1383 of the same
Code. Both presuppose contracts validly entered into
as well as subsisting, and both require mutual

11
restitution when proper, nevertheless they are not
entirely identical.44
In countless times there has been confusion between
rescission under Articles 1381 and 1191 of the Civil
Code. Through this case we again emphasize that
rescission of reciprocal obligations under Article 1191 is
different from rescissible contracts under Chapter 6 of
the law on contracts under the Civil Code. 45 While
Article 1191 uses the term rescission, the original term
used in Article 1124 of the old Civil Code, from which
Article 1191 was based, was resolution.46 Resolution is
a principal action that is based on breach of a party,
while rescission under Article 1383 is a subsidiary
action limited to cases of rescission for lesion under
Article 1381 of the New Civil Code, 47 which expressly
enumerates the following rescissible contracts:
ART. 1381.
rescissible:

The

following

contracts

are

(1) Those which are entered into by


guardians whenever the wards whom
they represent suffer lesion by more
than one-fourth of the value of the
things which are the object thereof;
(2)
Those
agreed
upon
in
representation of absentees, if the
latter suffer the lesion stated in the
preceding number;
(3) Those undertaken in fraud of
creditors when the latter cannot in any
other manner collect the claims due
them;
(4) Those which refer to things under
litigation if they have been entered into
by
the
defendant
without
the
knowledge and approval of the litigants
or of competent judicial authority;
(5) All other contracts specially
declared by law to be subject to
rescission.
Obviously, the Kasunduan does not fall under any of
those
situations
mentioned
in
Article
1381.
Consequently, Article 1383 is inapplicable. Hence, we
rule in favor of the respondents.
May the contract entered into between the parties,
however, be rescinded based on Article 1191?
A careful reading of the Kasunduan reveals that it is in
the nature of a contract to sell, as distinguished from a
contract of sale. In a contract of sale, the title to the

property passes to the vendee upon the delivery of the


thing sold; while in a contract to sell, ownership is, by
agreement, reserved in the vendor and is not to pass
to the vendee until full payment of the purchase
price.48 In a contract to sell, the payment of the
purchase price is a positive suspensive condition, 49 the
failure of which is not a breach, casual or serious, but a
situation that prevents the obligation of the vendor to
convey title from acquiring an obligatory force.50
Respondents in this case bound themselves to deliver a
deed of absolute sale and clean title covering Lot No.
1083-C after petitioners have made the second
installment. This promise to sell was subject to the
fulfillment of the suspensive condition that petitioners
pay P750,000 on August 31, 1987, and deposit a
postdated check for the third installment of
P1,141,622.50.51 Petitioners, however, failed to
complete payment of the second installment. The nonfulfillment of the condition rendered the contract to sell
ineffective and without force and effect. It must be
stressed that the breach contemplated in Article 1191
of the New Civil Code is the obligors failure to comply
with an obligation already extant, not a failure of a
condition to render binding that obligation. 52 Failure to
pay, in this instance, is not even a breach but an event
that prevents the vendors obligation to convey title
from acquiring binding force.53 Hence, the agreement
of the parties in the instant case may be set aside, but
not because of a breach on the part of petitioners for
failure to complete payment of the second installment.
Rather, their failure to do so prevented the obligation
of respondents to convey title from acquiring an
obligatory force.54
Coming now to the matter of prescription. Contrary to
petitioners assertion, we find that prescription has not
yet set in. Article 1391 states that the action for
annulment of void contracts shall be brought within
four years. This period shall begin from the time the
fraud or mistake is discovered. Here, the fraud was
discovered in 1992 and the complaint filed in 1993.
Thus, the case is well within the prescriptive period.
On the matter of damages, the Court of Appeals
awarded respondents P323,617.50 as actual damages
for the loss of the land that was given to Nieto,
P200,000 as moral damages, P50,000 as exemplary
damages, P50,000 as attorneys fees and the costs of
suit. Modifications are in order, however.
Moral damages may be recovered in cases where one
willfully causes injury to property, or in cases of breach
of contract where the other party acts fraudulently or
in bad faith.55 Exemplary damages are imposed by way
of example or correction for the public good, 56 when
the party to a contract acts in a wanton, fraudulent,
oppressive or malevolent manner. 57 Attorneys fees are
allowed when exemplary damages are awarded and

12
when the party to a suit is compelled to incur expenses
to protect his interest.58
While it has been sufficiently proven that the
respondents are entitled to damages, the actual
amounts awarded by the lower court must be reduced
because damages are not intended for a litigants
enrichment, at the expense of the petitioners. 59 The
purpose for the award of damages other than actual
damages would be served, in this case, by reducing the
amounts awarded.
Respondents were amply compensated through the
award of actual damages, which should be sustained.
The other damages awarded total P300,000, or almost
equivalent to the amount of actual damages.
Practically this will double the amount of actual
damages awarded to respondents. To avoid breaching
the doctrine on enrichment, award for damages other
than actual should be reduced. Thus, the amount of
moral damages should be set at only P30,000, and the
award of exemplary damages at only P20,000. The
award of attorneys fees should also be reduced to
P20,000, which under the circumstances of this case
appears justified and reasonable.
WHEREFORE, the assailed decision of the Court of
Appeals is MODIFIED. The Deed of Absolute Sale in
question is declared NULL and VOID in its entirety.
Petitioners are ORDERED to pay respondents
P323,617.50 as actual damages, P30,000.00 as moral
damages, P20,000.00 as exemplary damages and
P20,000.00 as attorneys fees. No pronouncement as to
costs.
SO ORDERED.

THIRD DIVISION
METROPOLITAN BANK and TRUST COMPANY,
substituted
by
MERIDIAN
(SPV-AMCI)
CORPORATION,
Petitioner,
- versus INTERNATIONAL EXCHANGE BANK,
Respondent.
G.R. No. 176008
Promulgated:
August 10, 2011
DECISION

PERALTA, J.:
Before the Court are two consolidated petitions for
review on certiorari under Rule 45 of the Rules of
Court, both of which are seeking the reversal and
setting aside of the Decision1 and Resolution2 of the
Court of Appeals (CA) dated May 5, 2006 and
December 22, 2006, respectively, in CA-G.R. SP No.
00549-MIN which annulled and set aside the Orders
dated September 6, 2004 and February 14, 2005, the
Resolution dated March 15, 2005 and the Joint
Resolution dated June 8, 2005 of the Regional Trial
Court (RTC) of Misamis Oriental, Branch 17 in Civil Case
Nos. 2004-197 and 2004-200.
The pertinent factual and procedural antecedents of
the case are as follows:
Sacramento Steel Corporation (SSC) is a business
entity engaged in manufacturing and producing steel
and steel products, such as cold rolled coils and
galvanized sheets, in its own steel manufacturing plant
located at Tagoloan, Misamis Oriental.
For the purpose of increasing its capital, SSC entered
into a Credit Agreement with herein respondent
International Exchange Bank (IEB) on September 10,
2001 wherein the latter granted the former an omnibus
credit line in the amount of P60,000,000.00, a loan of
P20,000,000.00 and a subsequent credit line with a
limit of P100,000,000.00.
As security for its loan obligations, SSC executed five
separate deeds of chattel mortgage constituted over
various equipment found in its steel manufacturing
plant. The deeds of mortgage were dated September
17, 2001, February 26, 2003, April 16, 2003, May 25,
2004 and June 7, 2004.
Subsequently, SSC defaulted in the payment of its
obligations. IEB's demand for payment went unheeded.
On July 7, 2004, the IEB filed with the RTC of Misamis
Oriental an action for injunction for the purpose of
enjoining SSC from taking out the mortgaged
equipment from its premises. The case was docketed
as Civil Case No. 2004-197. Thereafter, IEB filed a
Supplemental Complaint praying for the issuance of a
writ of replevin or, in the alternative, for the payment
of SSC's outstanding obligations and attorney's fees.3
On the other hand, on July 18, 2004, SSC filed with the
same RTC of Misamis Oriental a Complaint for
annulment of mortgage and specific performance for
the purpose of compelling the IEB to restructure SSC's
outstanding obligations. SSC also prayed for the
issuance of a Temporary Restraining Order (TRO) and
writ of preliminary injunction to prevent IEB from taking
any steps to dispossess SSC of any equipment in its
steel manufacturing plant as well as to restrain it from
foreclosing the mortgage on the said equipment.4 The
RTC issued a TRO. The case was docketed as Civil Case

13
No. 2004-200 and was subsequently consolidated with
Civil Case No. 2004-197.

into with SSC.10 IEB filed its Opposition to the said


Motion.11

On July 23, 2004, the RTC issued an Order5 granting


IEB's application for the issuance of a writ of replevin.
However, upon agreement of the parties, the
implementation of the said writ was held in abeyance
pending the trial court's resolution of the other
incidents in the said case.6 The RTC also directed that
there shall be no commercial operation without court
approval.7

On February 14, 2005, the RTC issued an Order12


admitting the motions for intervention filed by CSMC
and Metrobank.

On August 26, 2004, the IEB filed a petition for


extrajudicial foreclosure of chattel mortgage.
SSC opposed IEB's petition and prayed for the issuance
of a writ of preliminary injunction.
On September 6, 2004, the RTC issued an Order
disposing as follows:
WHEREFORE, let a Writ of preliminary injunction be
issued restraining defendant iBank [IEB], the Sheriff,
his agents and other person/s acting in their behalf as
agents privies or representative[s] in whatever
capacity, from conducting foreclosure, whether judicial
or extrajudicial, of any properties subject of the
controversy and are further directed not to take any
steps that will, in effect, dispossess plaintiff [SSC] of
any of its machineries and equipment in its steel
manufacturing plant pending determination of the
case. Let a bond (cash or surety) of Five Hundred
Thousand (P500,000.00) Pesos be posted by the
plaintiff Sacramento Steel Corporation as required by
law.
SO ORDERED.8
Meanwhile, on August 30, 2004, SSC entered into a
Capacity Lease Agreement with herein petitioner
Chuayuco Steel Manufacturing Corporation (CSMC)
which allowed the latter to lease and operate the
former's cold rolling mill and galvanizing plant for a
period of five years.
On October 21, 2004, herein petitioner Metropolitan
Bank and Trust Company (Metrobank) filed a motion for
intervention contending that it has legal interest in the
properties subject of the litigation between IEB and
SSC because it is a creditor of SSC and that the
mortgage contracts between IEB and SSC were entered
into to defraud the latter's creditors.9 Metrobank
prayed for the rescission of the chattel mortgages
executed by SSC in favor of IEB.
On January 21, 2005, CSMC filed an Omnibus Motion
for intervention and for allowance to immediately
operate the cold rolling mill and galvanizing plant of
SSC contending that its purpose in intervening is to
seek the approval of the court to operate the said plant
pursuant to the Capacity Lease Agreement it entered

On March 15, 2005, the RTC issued a Resolution, the


dispositive portion of which reads, thus:
WHEREFORE, premises considered, the motion to
operate the machineries pendente lite is hereby
GRANTED based on law and equity as soon as
practicable. This is without prejudice on the part of the
I-bank [IEB] to assert the enforcement of the proposed
schedule of payment submitted by SSC to the Court
(Exh. A Motion for Early Resolution, 2/16/2005
hearing) and to continually post their security guards
unless withdrawn.
SO ORDERED.13
On June 8, 2005, the RTC issued a Joint Resolution14
reiterating its admission of CSMC's motion for
intervention and directing the latter to file its
complaint-in-intervention.
On August 25, 2005, IEB filed a petition for certiorari,
prohibition and mandamus with the CA assailing the
RTC Orders dated September 6, 2004 and February 14,
2005, Resolution dated March 15, 2005 and Joint
Resolution dated June 8, 2005.15
On May 5, 2006, the CA rendered its presently assailed
Decision which disposed of the case as follows:
WHEREFORE, the petition is hereby GRANTED. The
questioned Orders dated September 6, 2004, February
14, 2005, March 15, 2005 and June 8, 2005 issued by
public respondent RTC, Branch 17, Misamis Oriental,
presided by Hon. Florencia D. Sealana-Abbu in Civil
Case Nos. 2004-197 and 2004-200 are hereby
ANNULLED and SET ASIDE. Public respondent is hereby
DIRECTED to turn-over the mortgaged properties
covered by the writ of replevin to petitioner I-Bank for
the eventual foreclosure thereof.
SO ORDERED.16
Metrobank, CSMC and SSC filed their respective
motions for reconsideration, but these were all denied
by the CA in its Resolution dated December 22, 2006.
Hence, the instant petitions for review on certiorari.
In G.R. No. 176008, petitioner Metrobank submits the
following issues:
(A) WHETHER OR NOT THE HONORABLE COURT OF
APPEALS ERRED WHEN IT RULED THAT PETITIONER'S
COMPLAINT-IN-INTERVENTION IS AN ACCION PAULIANA,
A SUBSIDIARY ACTION, WHICH PRESUPPOSES AN

14
UNSATISFIED
JUDGMENT,
WHICH
UNSATISFIED
JUDGMENT IS ABSENT IN THE CASE AT BAR.
(B) WHETHER OR NOT THE HONORABLE COURT OF
APPEALS ERRED WHEN IT RULED THAT THE TRIAL
COURT COMMITTED GRAVE ABUSE OF DISCRETION IN
ALLOWING
PETITIONER'S
COMPLAINT-ININTERVENTION.17
In G.R. No. 176131, petitioner CSMC raises the
following grounds:
I. THE HONORABLE COURT ERRED IN NOT PASSING
UPON THE ISSUE THAT HEREIN RESPONDENT IBANK IS
GUILTY OF FORUM-SHOPPING.
II. THE HONORABLE COURT ERRED IN NOT RULING
THAT HEREIN RESPONDENT IBANK'S FAILURE TO FILE A
MOTION FOR RECONSIDERATION TO THE ORDER DATED
08 JUNE 2005 IS FATAL TO ITS PETITION.
III. THE HONORABLE COURT ERRED IN RULING THAT
THE ORDER OF JUDGE SEALANA-ABBU ADMITTING THE
INTERVENTION OF HEREIN PETITIONER CSMC IS
WITHOUT LEGAL BASIS.18
In a Manifestation and Motion dated September 26,
2007, petitioner Metrobank manifested that it no
longer has any interest in pursuing the instant case as
the loan obligation owed by SSC to it has been sold by
the latter to a corporation known as Meridian (SPVAMC) Corporation (Meridian). Accordingly, Metrobank
prayed that it be substituted by Meridian as petitioner
in the instant case.19
In a Resolution20 dated November 12, 2007, this Court
granted Metrobank's Motion.
At the outset, the Court takes note that no arguments
or questions were raised by petitioners with respect to
the September 6, 2004 Order and March 15, 2005
Resolution of the RTC which were annulled by the CA.
Hence, the only issues left for resolution in the instant
petition are whether or not petitioners Metrobank and
CSMC may be allowed to intervene in Civil Case Nos.
2004-197 and 2004-200.
The Court will dwell first on the issues raised by
Metrobank in G.R. No. 176008.
In its first assigned error, Metrobank contends that the
CA erred in ruling that its Complaint-in-Intervention is
in the nature of an accion pauliana.
The Court does not agree.
A perusal of Metrobank's Complaint-in-Intervention
would show that its main objective is to have the
chattel mortgages executed by SSC in favor of IEB
rescinded. This is clearly evident in its prayer, which
reads as follows:

WHEREFORE, premises considered, it is respectfully


prayed unto the Honorable Court that judgment be
rendered:
(1) RESCINDING the chattel mortgages executed by
Defendants Sacramento and Delmo in favor of
Defendant Ibank dated May 25, 2004 and June 7, 2004,
respectively;
(2) Ordering defendants Sacramento, Delmo and Ibank
to pay, jointly and severally, Plaintiff-Intervenor the
amounts of:
(A) P500,000.00,
damages;

as

and

by

way

of

exemplary

(B) P500,000.00, as and by way of attorney's fees; and


(C) Costs of suit.
Other reliefs as may be just and equitable under the
premises are likewise prayed for.
x x x x21
Under Article 1381 of the Civil Code, an accion
pauliana is an action to rescind contracts in fraud of
creditors.22
However, jurisprudence is clear that the following
successive measures must be taken by a creditor
before he may bring an action for rescission of an
allegedly fraudulent contract: (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 by law 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).23 It is thus
apparent that an action to rescind, or an accion
pauliana, must be of last resort, availed of only after
the creditor has exhausted all the properties of the
debtor not exempt from execution or after all other
legal remedies have been exhausted and have been
proven futile.24
It does not appear that Metrobank sought other
properties of SSC other than the subject lots alleged to
have been transferred in fraud of creditors. Neither is
there any showing that Metrobank subrogated itself in
SSC's transmissible rights and actions. Without availing
of the first and second remedies, Metrobank simply
undertook the third measure and filed an action for
annulment of the chattel mortgages. This cannot be
done. Article 1383 of the New Civil Code is very explicit
that the right or remedy of the creditor to impugn the
acts which the debtor may have done to defraud them
is subsidiary in nature.25 It can only be availed of in
the absence of any other legal remedy to obtain
reparation for the injury.26 This fact is not present in

15
this case. No evidence was presented nor even an
allegation was offered to show that Metrobank had
availed of the abovementioned remedies before it tried
to question the validity of the contracts of chattel
mortgage between IEB and SSC.
Metrobank also contends that in order to apply the
concept of, and the rules pertaining to, accion
pauliana, the subject matter must be a conveyance,
otherwise valid, which is undertaken in fraud of
creditors. Metrobank claims that since there is no
conveyance involved in the contract of chattel
mortgage between SSC and IEB, which Metrobank
seeks to rescind, the CA erred in ruling that the latter's
Complaint-in-Intervention is an accion pauliana.
The Court is not persuaded.
In the instant case, the contract of chattel mortgage
entered into by and between SSC and IEB involves a
conveyance of patrimonial benefit in favor of the latter
as the properties subject of the chattel mortgage stand
as security for the credit it extended to SSC. In a very
recent case involving an action for the rescission of a
real estate mortgage,27 while this Court found that
some of the elements of accion pauliana were not
present, it found that a mortgage contract involves the
conveyance of a patrimonial benefit.
In sum, Metrobank may not be allowed to intervene
and pray for the rescission of the chattel mortgages
executed by SSC in favor of IEB. The remedy being
sought by Metrobank is in the nature of an accion
pauliana which, under the factual circumstances
obtaining in the present case, may not be allowed.
Based on the foregoing, the Court finds no error in the
ruling of the CA that the RTC committed grave abuse of
discretion in allowing Metrobank's intervention.
The Court will now proceed to resolve the issues raised
by petitioner CSMC in G.R. No. 176131.
Firstly, CSMC contends that IEB was forum shopping
when it filed a petition for certiorari with the CA
seeking, among others, the enjoinment of the
commercial operation of the subject machineries and
equipment
when
its
Opposition28
to
the
implementation of the Capacity Lease Agreement
between SSC and CSMC is still pending determination
by the RTC.
The Court does not agree.
Forum shopping has been defined as an act of a party,
against whom an adverse judgment has been rendered
in one forum, of seeking and possibly getting a
favorable opinion in another forum, other than by
appeal or a special civil action for certiorari, or the
institution of two or more actions or proceedings
grounded on the same cause on the supposition that

one or the other court would make a favorable


disposition.29
Forum shopping exists when two or more actions
involve the same transactions, essential facts and
circumstances, and raise identical causes of action,
subject matter, and issues.30 Still another test of
forum shopping is when the elements of litis pendencia
are present or where a final judgment in one case will
amount to res judicata in another whether in the two
or more pending cases, there is an identity of (a)
parties (or at least such parties as represent the same
interests in both actions); (b) rights or causes of action,
and (c) reliefs sought.31
In the instant case on the one hand, IEB's Opposition
questions the legality and seeks to prevent the
implementation of the Capacity Lease Agreement
between CSMC and SSC which, in essence, authorizes
CSMC to operate the subject machineries pendente
lite. On the other hand, the petition for certiorari filed
by IEB assails and seeks to nullify, among others, the
March 15, 2005 and June 8, 2005 Orders of the RTC
allowing SSC to operate the subject machineries
pendente lite. It is, thus, clear that there is no identity
of subject matter, cause of action and reliefs sought in
IEB's Opposition filed with the RTC and in its petition for
certiorari filed with the CA. Hence, IEB is not guilty of
forum shopping.
Secondly, CSMC argues that IEB's failure to file a
motion for reconsideration of the RTC Order dated June
8, 2005 is fatal to its petition for certiorari filed with the
CA.
The Court is not persuaded.
While the general rule is that before certiorari may be
availed of, petitioner must have filed a motion for
reconsideration of the act or order complained of, the
Court has dispensed with this requirement in several
instances.32
Thus,
a
previous
motion
for
reconsideration before the filing of a petition for
certiorari is necessary unless: (i) the issue raised is one
purely of law; (ii) public interest is involved; (iii) there is
urgency; (iv) a question of jurisdiction is squarely
raised before and decided by the lower court; and (v)
the order is a patent nullity.33 In the instant case, the
Court agrees with the CA that there is no need for such
motion because the issue regarding the applicability of
the rule on intervention raised by IEB in its petition for
certiorari filed with the CA, insofar as the June 8, 2005
Order of the RTC is concerned, is one purely of law.
The foregoing notwithstanding, the Court finds that the
CA erred in ruling that the allowance of CSMC's motion
for intervention is improper. CSMC's intervention
should be allowed.
The purpose of intervention is to enable a stranger to
an action to become a party in order for him to protect

16
his interest and for the court to settle all conflicting
claims.34 Intervention is allowed to avoid multiplicity
of suits more than on due process considerations.35 To
warrant intervention under Rule 19 of the Rules of
Court, two requisites must concur: (1) the movant has
a legal interest on the matter in litigation; and (2)
intervention must not unduly delay or prejudice the
adjudication of the rights of the parties, nor should the
claim of the intervenor be capable of being properly
decided in a separate proceeding.36
In the present case, CSMC, being a lessee of the
subject properties, has a legal interest therein. The RTC
correctly held, thus:
Under the Rules of Court, intervention is permissive
and maybe permitted by the Court when the applicant
shows facts which satisfy the requirements of the law
authorizing intervention. (Firestone Ceramics Inc. vs.
CA 313 SCRA 522) Records of the case showed that on
August 30, 2004, an agreement was finalized and
entered
into
by
applicant
Chuayuco
and
defendant/plaintiff Sacramento Steel Corporation
whereby the former shall lease and make use of the
machineries of Sacramento Steel under the Capacity
Lease Agreement (CLA). One of the terms and
condition[s] under [the] CLA was for the monthly lease
payments to take effect upon signing of the contract. A
person seeking to intervene in a suit must show that
he has legal interest which must be actual and
material, direct and immediate. He must show that he
will either gain or lose by direct legal operation and
effect of a judgment. (Hrs. of Nicolas Orosa vs. Migrino
218 SCRA 311) The Court finds that Chuayuco had a
constituted and sufficient legal interest in the
machineries subject of the litigation which is actual and
material. Any disposition of the case will adversely
affect the standing of the intervenor.37
Moreover, considering that CSMC's interest is limited
only to the operation of the subject machineries
pursuant to its lease contract with SSC, its intervention
would not unduly delay or prejudice the adjudication of
the rights of SSC and IEB. CSMC's intervention should
be treated as one pro interesse suo which is a mode of
intervention in equity wherein a stranger desires to
intervene for the purpose of asserting a property right
in the res, or thing, which is the subject matter of the
litigation, without becoming a formal plaintiff or
defendant, and without acquiring control over the
course of a litigation, which is conceded to the main
actors therein.38
Lastly, the Court does not agree with the CA when it
ruled that the applicable provision is Rule 3, Section 19
(erroneously cited as Section 20) of the Rules of Court
on transfer of interest and substitution of parties. Being
a mere lessee of the subject properties, CSMC is a
stranger insofar as the dispute between SSC and IEB is
concerned. The action filed by IEB against SSC is an

action for the payment or satisfaction of the loans


incurred by the latter, which includes a possible
foreclosure of the subject properties given as security
for the said loans. CSMC may not be considered a
successor, and may not be substituted in place of SSC,
insofar as these loans are concerned. If any, what has
been transferred to CSMC is only the right of SSC to
operate the subject equipment and machineries which
it owns. As such, SSC may not be removed as
defendant because its interest in the subject properties
remains, being the owner thereof.
WHEREFORE, the assailed Decision and Resolution of
the Court of Appeals in CA-G.R. SP No. 00549-MIN are
AFFIRMED with MODIFICATION. The February 14, 2005
Order of the Regional Trial Court of Misamis Oriental,
Branch 17, is MODIFIED by denying Metrobank's Motion
for Intervention, while the Joint Resolution of the same
trial court, dated June 8, 2005, reiterating its admission
of CSMC's Motion for Intervention and directing the
latter
to
file
its
complaint-in-intervention,
is
REINSTATED.
SO ORDERED.

G.R. No. 144169 March 28, 200


KHE HONG CHENG, alias FELIX KHE, SANDRA JOY
KHE and RAY STEVEN KHE, petitioners,
vs.
COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC
147, MAKATI CITY and PHILAM INSURANCE CO.,
INC., respondents.
KAPUNAN, J.:
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

17
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 ERlC,
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.1wphi1.nt
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. RT12838. 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 attorney's 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

18
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

19
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 Bareg's
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 defendantsappellees Bareng for the collection of the
alleged indebtedness, Plaintiffs-appellants had
not even tried to exhaust the property of
defendants-appellees
Bareng,
Plaintiffsappellants, 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

20
petitioner Khe Hong Cheng was still pending before the
trial court. Respondent Philam had no inkling, at the
time, that the trial courts 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
Philam's claims not yet exhausted at the time the
needs of donation were executed and registered.
Respondent Philam would also not have been able to
prove then that petitioner Khe Hong Cheng 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.1wphi1.nt
A final point. Petitioners now belatedly raise on appeal
the defense of improper venue claiming that
respondent Philam's complaint is a real action and
should have been filed with the RTC of Butuan City
since the property subject matter or 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.
G.R. No. 47206 September 27, 1989
GLORIA M. DE ERQUIAGA, administratrix of the
estate of the late SANTIAGO DE ERQUIAGA &
HON. FELICIANO S. GONZALES, petitioners,
vs.
HON. COURT OF APPEALS, AFRICA VALDEZ VDA.
DE
REYNOSO,
JOSES
V.
REYNOSO,
JR.,
EERNESTO
,
SYLVIA
REYNOSO,
LOURDES
REYNOSO, CECILE REYNOSO, EDNA REYNOSO,
ERLINDA
REYNOSO
&
EMILY
REYNOSO,
respondents.
GRINO-AQUINO, J.:
This is a case that began in the Court of First Instance
of Sorsogon in 1970. Although the decision dated
September 30, 1972 of the trial court (pp. 79-106,
Rollo) became final and executory because none of the
parties appealed, its execution has taken all of the past
seventeen (17) years with the end nowhere in sight.
The delay in writing finis to this case is attributable to
several factors, not the least of which is the
intransigence of the defeated party. Now, worn down
by this attrital suit, both have pleaded for a decision to
end this case.
Assailed in this petition for review are:
(a) the decision of the Court of Appeals
dated May 31, 1976 in CA-G.R. No. SP
04811, entitled "Africa Valdez Vda. de
Reynoso et al. vs. Hon. Feliciano S.
Gonzales and Santiago de Erquiaga"
(pp. 275-290, Rollo);
(b) its resolution dated August 3, 1976,
denying the motion for reconsideration
(p. 298, Rollo);
(c) its resolution of August 24, 1977,
ordering entry of judgment (p. 316,
Rollo); and

21
(d) its resolution of October 4, 1977,
denying the motion to set aside the
entry of judgment.
Santiago de Erquiaga was the owner of 100% or 3,100
paid-up shares of stock of the Erquiaga Development
Corporation which owns the Hacienda San Jose in
Irosin, Sorsogon (p. 212, Rollo). On November 4,1968,
he entered into an Agreement with Jose L. Reynoso to
sell to the latter his 3,100 shares (or 100%) of Erquiaga
Development Corporation for P900,000 payable in
installments on definite dates fixed in the contract but
not later than November 30, 1968. Because Reynoso
failed to pay the second and third installments on time,
the total price of the sale was later increased to
P971,371.70 payable on or before December 17, 1969.
The difference of P71,371.70 represented brokers'
commission and interest (CFI Decision, pp. 75, 81, 90,
99,Rollo).
As of December 17, 1968, Reynoso was able to pay the
total sum of P410,000 to Erquiaga who thereupon
transferred all his shares (3,100 paid-up shares) in
Erquiaga Development Corporation to Reynoso, as well
as the possession of the Hacienda San Jose, the only
asset of the corporation (p. 100, Rollo). However, as
provided in paragraph 3, subparagraph (c) of the
contract to sell, Reynoso pledged 1,500 shares in favor
of Erquiaga as security for the balance of his obligation
(p. 100, Rollo). Reynoso failed to pay the balance of
P561,321.70 on or before December 17, 1969, as
provided in the promissory notes he delivered to
Erquiaga. So, on March 2, 1970, Erquiaga, through
counsel, formally informed Reynoso that he was
rescinding the sale of his shares in the Erquiaga
Development Corporation (CFI Decision, pp. 81-100,
Rollo).
As recited by the Court of Appeals in its decision under
review,
the
following
developments
occurred
thereafter:
On March 30, 1970, private respondent
Santiago de Erquiaga filed a complaint
for
rescission
with
preliminary
injunction against Jose L. Reynoso and
Erquiaga Development Corporation, in
the Court of First Instance of Sorsogon,
Branch I (Civil Case No. 2446).** After
issues have been joined and after trial
on the merits, the lower court rendered
judgment (on September 30, 1972),***
the dispositive portion of which reads
as follows:
In
view
of
the
foregoing, judgment is
hereby
rendered
in
favor of the plaintiff

and
against
the
defendant
Jose
L.
Reynoso, rescinding the
sale of 3,100 paid up
shares of stock of the
Erquiaga Development
Corporation
to
the
defendant,
and
ordering:
(a) The defendant to return and
reconvey to the plaintiff the 3,100 paid
up shares of stock of the Erquiaga
Development Corporation which now
stand in his name in the books of the
corporation;
(b) The defendant to render a full
accounting of the fruits he received by
virtue of said 3,100 paid up shares of
stock of the Erquiaga Development
Corporation, as well as to return said
fruits received by him to plaintiff
Santiago de Erquiaga;
(c) The plaintiff to return to the
defendant the amount of P100,000.00
plus legal interest from November
4,1968,
and
the
amount
of
P310,000.00 plus legal interest from
December 17, 1968, until paid;
(d) The defendant to pay the plaintiff
as actual damages the amount of
P12,000.00;
(e) The defendant to pay the plaintiff
the amount of P50,000.00 as attorney's
fees; and
(f) The defendant to pay the costs of
this suit and expenses of litigation.
(Annex A-Petition.)
The parties did not appeal therefrom
and it became final and executory.
On March 21, 1973, the CFI of Sorsogon
issued an Order, pertinent portions of
which reads:
It will be noted that
both parties having
decided not to appeal,
the
decision
has
become
final
and
executory.
Nevertheless, the Court

22
finds merit in the
contention
of
the
plaintiff
that
the
payment
to
the
defendant of the total
sum of P410,000.00
plus
the
interest,
should be held in
abeyance
pending
rendition
of
the
accounting
by
the
defendant of the fruits
received by him on
account of the 3,100
shares of the capital
stock
of
Erquiaga
Development
Corporation. The same
may be said with
respect to the sums
due the plaintiff from
the
defendant
for
damages
and
attorney's fees. Indeed
it is reasonable to
suppose, as contended
by the plaintiff, that
when such accounting
is
made
and
the
accounting, as urged
by plaintiff, should refer
not
only
to
the
dividends due from the
shares of stock but to
the products of the
hacienda which is the
only
asset
of
the
Erquiaga Development
Corporation,
certain
sums may be found
due to the plaintiff from
the defendant which
may
partially
or
entirely off set (sic) the
amount
adjudged
against him in the
decision.
It is the sense of the
court that the fruits
referred to in the
decision include not
only
the
dividends
received, if any, on the
3,100 shares of stocks
but more particularly
the products received
by the defendant from
the
hacienda.
The

hacienda
and
the
products
thereon
produced
constitute
the physical assets of
the
Erquiaga
Development
Corporation
represented
by
the
shares of stock and it
would be absurd to
suppose
that
any
accounting could be
made by the defendant
without
necessarily
taking into account the
products
received
which could be the only
basis for determining
whether dividends are
due or not on account
of the investment. The
hacienda
and
its
natural
fruits
as
represented
by
the
shares of stock which
the defendant received
as
manager
and
controlling stockholder
of
the
Erquiaga
Development
Corporation can not be
divorced
from
the
certificates of stock in
order
to
determine
whether the defendant
has correctly reported
the income of the
corporation
or
concealed part of it for
his
personal
advantage. It is hardly
necessary for the Court
to restate an obvious
fact that on both legal
and equitable grounds,
the
Erquiaga
Development
Corporation
and
defendant
Jose
Reynoso are one and
the same persons as
far as the obligation to
account
for
the
products
of
the
hacienda is concerned,'
(pp. 4-6, Annex 1,
Answer.)

23
In the same Order, the CFI of Sorsogon
appointed a receiver upon the filing of
a bond in the amount of P100,000.00.
The reasons of the lower court for
appointing a receiver 'were that the
matter of accounting of the fruits
received by defendant Reynoso as
directed in the decision will take time;
that plaintiff Erquiaga has shown
sufficient and justifiable ground for the
appointment of a receiver in order to
preserve the Hacienda which has
obviously been mismanaged by the
defendant to a point where the
amortization of the loan with the
Development Bank of the Philippines
has been neglected and the arrears in
payments have risen to the amount of
P503,510.70 as of October 19, 1972,
and there is danger that the
Development Bank of the Philippines
may institute foreclosure proceedings
to the damage and prejudice of the
plaintiff.' (p. 7, Id.)
On April 26, 1973, defendant Jose L.
Reynoso died and he was substituted
by his surviving spouse Africa Valdez
Vda. de Reynoso and children, as party
defendants.
Defendants
filed
a
petition
for
certiorari with a prayer for a writ of
preliminary injunction seeking the
annulment of the aforementioned
Order of March 21, 1973. On June 28,
1973, the Court of Appeals rendered
judgment dismissing the petition with
costs against the petitioners, ruling
that said Order is valid and the
respondent court did not commit any
grave abuse of discretion in issuing the
same (Annex 2, Id.). Petitioners
brought the case up to the Supreme
Court on a petition for review on
certiorari which was denied by said
tribunal in a Resolution dated February
5, 1974 (Annex 3, Id.). Petitioners'
motion for reconsideration thereof was
likewise denied by the Supreme Court
on March 29,1974.
Upon motion of Erquiaga, the CFI of
Sorsogon issued an order, dated
February 12,1975,
dissolving the
receivership and ordering the delivery
of the possession of the Hacienda San
Jose to Erquiaga, the filing of bond by
said Erquiaga in the amount of

P410,000.00
conditioned
to
the
payment of whatever may be due to
the substituted heirs of deceased
defendant Reynoso (petitioners herein)
after the approval of the accounting
report submitted by Reynoso. Said
order
further
directed
herein
petitioners to allow counsel for
Erquiaga
to
inspect,
copy
and
photograph certain documents related
to the accounting report (Annex B,
Petition).
On March 3,1975, the CFI of Sorsogon
approved
the
P410,000.00
bond
submitted by Erquiaga and the
possession, management and control
of the hacienda were turned over to
Erquiaga
(Annex
C,
Petition).
Petitioners
(Reynosos)
filed
their
motion for reconsideration which the
CFI of Sorsogon denied in an Order,
dated June 23, 1975 (Annex D, Id.).
In an Omnibus Motion, dated July
25,1975, filed by Erquiaga, and over
the objections interposed thereto by
herein petitioners (Reynosos), the CFI
of Sorsogon issued an Order, dated
October 9, 1975, the dispositive portion
of which reads:
WHEREFORE, in view of
the foregoing, on the
first
count,
the
defendants
are
directed (to deliver) to
the plaintiff or his
counsel within five (5)
days from receipt of
this order the 1,600
shares of stock of the
Erquiaga Development
Corporation which are
in their possession.
Should the defendants
refuse or delay in
delivering such shares
of stock, as prayed for,
the
plaintiff
is
authorized:
(a) To call and hold a special meeting of
the stockholders of the Erquiaga
Development Corporation to elect the
members of the Board of Directors;
(b) In the said meeting the plaintiff is
authorized to vote not only the 1,500

24
shares of stock in his name but also the
1,600 shares in the name and
possession of the defendants;
(c) The question as to who shall be
elected members of the Board of
Directors and officers of the board is
left to the discretion of the plaintiff;
(d) The members of the board and the
officers who are elected are authorized
to execute any and all contracts or
agreements under such conditions as
may be required by the Development
Bank for the purpose of restructuring
the loan of the Erquiaga Development
Corporation with the said bank.
On the second count,
the prayer to strike out
all expenses alleged[ly]
incurred
by
the
defendants
in
the
production of the fruits
of Hacienda San Jose
and
declaring
the
obligation
of
the
plaintiff
under
paragraph (c) of the
judgment to pay the
defendant the sum of
P410,000.00
with
interest
as
fully
compensated by the
fruits earned by the
defendants from the
property, as well as the
issuance of a writ of
execution against the
defendants to pay the
plaintiffs
P62,000.00
under paragraphs (e)
and (d) and costs of
litigation
under
paragraph (f) of the
judgment of September
30, 1972, is denied.
The defendants are
once more directed to
comply with the order
of February 12, 1975,
by
answering
the
interrogatories
propounded by counsel
for the plaintiff and
allowing said counsel
or his representative to
inspect,
copy
and

photograph
the
documents mentioned
by the plaintiff during
reasonable hours of
any working day within
twenty (20) days from
receipt of this order,
should the defendants
persist in their refusal
or failure to comply
with the order, the
plaintiff may inform the
court seasonably so
that the proper action
may be taken. (Annex J,
Id.)
Hence, the present petition for
certiorari, prohibition and mandamus
instituted
by
the
substituted
defendants, heirs of the deceased
defendant Jose L. Reynoso against the
CFI of Sorsogon and (plaintiff) Santiago
de Erquiaga. (pp. 276- 281, Rollo.)
On May 31, 1976, the Court of Appeals rendered
judgment holding that:
IN VIEW OF ALL THE FOREGOING, this
court finds that the respondent court
had acted with grave abuse of
discretion or in excess of jurisdiction in
issuing the assailed order of October 9,
1975 (Annex A, Petition) insofar only as
that part of the Order (1) giving private
respondent voting rights on the 3,100
shares of stock of the Erquiaga
Development Corporation without first
divesting petitioners of their title
thereto and ordering the registration of
the same in the corporation books in
the name of private respondent,
pursuant to Section 10, Rule 39 of the
Revised Rules of Court; (2) authorizing
corporate meetings and election of
members of the Board of Directors of
said corporation and (3) refusing to
order the reimbursement of the
purchase price of the 3,100 shares of
stock in the amount of P410,000.00
plus interests awarded in said final
decision of September 30, 1972 and
the set-off therewith of the amount of
P62,000.00 as damages and attorney's
fees in favor of herein private
respondent are concerned. Let writs of
certiorari and prohibition issue against
the aforesaid acts, and the writ of
preliminary
injunction
heretofore

25
issued is hereby made permanent only
insofar as (1), (2) and (3) above are
concerned. As to all other matters
involved in said Order of October 9,
1975, the issuance of writs prayed for
in the petition are not warranted and
therefore denied.
FINALLY, to give effect to all the
foregoing, with a view of putting an
end to a much protracted litigation and
for the best interest of the parties, let a
writ of mandamus issue, commanding
the respondent Judge to order (1) the
Clerk of Court of the CFI of Sorsogon to
execute the necessary deed of
conveyance to effect the transfer of
ownership of the entire 3,100 shares of
stock of the Erquiaga Development
Corporation to private respondent
Santiago Erquiaga in case of failure of
petitioners to comply with the Order of
October 9, 1975 insofar as the delivery
of the 1,600 shares of stock to private
respondent is concerned, within five (5)
days from receipt hereof; and (2) upon
delivery by petitioners or transfer by
the Clerk of Court of said shares of
stock to private respondent, as the
case may be, to issue a writ of
execution ordering private respondent
to pay petitioners the amount of
P410,000.00
plus
interests
in
accordance with the final decision of
September 30, 1972 in Civil Case No.
2448, setting-off therewith the amount
of P62,000.00 adjudged in favor of
private
respondent,
and
against
petitioners'
predecessor-in-interest,
Jose L. Reynoso, in the same decision,
as damages and attorney's fees. (pp.
289-290, Rollo.)
It may be seen from the foregoing narration of facts
that as of the time the Court of Appeals rendered its
decision on May 31, 1976 (now under review) only the
following have been done by the parties in compliance
with the final judgment in the main case (Civil Case No.
2446):
1. The Hacienda San Jose was returned
to Erquiaga on March 3, 1975 upon
approval of Erquiaga's surety bond of
P410,000 in favor of Reynoso;
2. Reynoso has returned to Erquiaga
only the pledged 1,500 shares of stock
of
the
Erquiaga
Development
Corporation, instead of 3,100 shares,

as ordered in paragraph (a) of the final


judgment.
What the parties have not done yet are:
1. Reynoso has not returned 1,600
shares of stock to Erquiaga as ordered
in paragraph (a,) of the decision;
2. Reynoso has not rendered a full
accounting of the fruits he has received
from Hacienda San Jose by virtue of the
3,100 shares of stock of the Erquiaga
Development Corporation delivered to
him under the sale, as ordered in
paragraph (b) of the decision;
3. Erquiaga has not returned the sum
of P100,000 paid by Reynoso on the
sale, with legal interest from November
4, 1968 and P310,000 plus legal
interest from December 17, 1968, until
paid (total: P410,000) as ordered in
paragraph (c) of the decision;
4. Reynoso has not paid the judgment
of Pl2,000 as actual damages in favor
of Erquiaga, under paragraph (d) of the
judgment;
5. .Reynoso has not paid the sum of
P50,000 as attorney's fees to Erquiaga
under paragraph (e) of the judgment;
and
6. Reynoso has not paid the costs of
suit and expenses of litigation as
ordered in paragraph (f) of the final
judgment.
The petitioner alleges, in her petition for review, that:
I. The decision of the Court of Appeals
requiring the petitioner to pay the
private respondents the sum of
P410,000 plus interest, without first
awaiting Reynoso's accounting of the
fruits of the Hacienda San Jose, violates
the law of the case and Article 1385 of
the Civil Code, alters the final order
dated February 12, 1975 of the trial
court, and is inequitous.
II. The Court of Appeals erroneously
applied the Corporation Law.
III. The Court of Appeals erred in
ordering entry of its judgment.

26
We address first the third assignment of error for it will
be futile to discuss the first and second if, after all, the
decision complained of is already final, and the entry of
judgment which the Court of Appeals directed to be
made in its resolution of August 24,1977 (p. 316, Rollo)
was proper. After examining the records, we find that
the Court of Appeals' decision is not yet final. The entry
of judgment was improvident for the Court of Appeals,
in its resolution of December 13, 1976, suspended the
proceedings before it "pending the parties' settlement
negotiations" as prayed for in their joint motion (p.
313, Rollo). Without however giving them an ultimatum
or setting a deadline for the submission of their
compromise agreement, the Court of Appeals, out of
the blue, issued a resolution on August 24, 1977
ordering the Judgment Section of that Court to enter
final judgment in the case (p. 316, Rollo).
We hold that the directive was precipitate and
premature. Erquiaga received the order on September
2, 1977 and filed on September 12, 1977 (p. 317,
Rollo) a motion for reconsideration which the Court of
Appeals denied on October 4, 1977 (p. 322, Rollo). The
order of denial was received on October 14, 1977 (p. 7,
Rollo). On October 28, 1977, Erquiaga filed in this Court
a timely motion for extension of time to file a petition
for review, and the petition was filed within the
extension granted by this Court.
We now address the petitioners' first and second
assignments of error.
After deliberating on the petition for review, we find no
reversible error in the Court of Appeals' decision
directing the clerk of court of the trial court to execute
a deed of conveyance to Erquiaga of the 1,600 shares
of stock of the Erquiaga Development Corporation still
in Reynoso's name and/or possession, in accordance
with the procedure in Section 10, Rule 39 of the Rules
of Court. Neither did it err in annulling the trial court's
order: (1) allowing Erquiaga to vote the 3,100 shares of
Erquiaga Development Corporation without having
effected the transfer of those shares in his name in the
corporate books; and (2) authorizing Erquiaga to call a
special meeting of the stockholders of the Erquiaga
Development Corporation and to vote the 3,100
shares, without the pre-requisite registration of the
shares in his name. It is a fundamental rule in
Corporation Law (Section 35) that a stockholder
acquires voting rights only when the shares of stock to
be voted are registered in his name in the corporate
books.
Until registration is accomplished, the
transfer, though valid between the
parties, cannot be effective as against
the corporation. Thus, the unrecorded
transferee cannot enjoy the status of a
stockholder; he cannot vote nor be

voted for, and he will not be entitled to


dividends. The Corporation will be
protected when it pays dividend to the
registered owner despite a previous
transfer of which it had no knowledge.
The purpose of registration therefore is
two-fold; to enable the transferee to
exercise all the rights of a stockholder,
and to inform the corporation of any
change in share ownership so that it
can ascertain the persons entitled to
the rights and subject to the liabilities
of a stockholder. (Corporation Code,
Comments, Notes and Selected cases
by Campos & Lopez-Campos, p.
838,1981 Edition.)
The order of respondent Court directing Erquiaga to
return the sum of P410,000 (or net P348,000 after
deducting P62,000 due from Reynoso under the
decision) as the price paid by Reynoso for the shares of
stock, with legal rate of interest, and the return by
Reynoso of Erquiaga's 3,100 shares with the
fruits(construed to mean not only dividends but also
fruits of the corporation's Hacienda San Jose) is in full
accord with Art. 1385 of the Civil Code which provides:
ART. 1385. Rescission creates the
obligation to return the things which
were the object of the contract,
together with their fruits, and the price
with its interest; consequently, it can
be carried out only when he who
demands
rescission
can
return
whatever he may be obliged to restore.
Neither shall rescission 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.
In this case, indemnity for damages
may be demanded from the person
causing the loss.
The Hacienda San Jose and 1,500 shares of stock have
already been returned to Erquiaga. Therefore, upon the
conveyance to him of the remaining 1,600 shares,
Erquiaga (or his heirs) should return to Reynoso the
price of P410,000 which the latter paid for those
shares. Pursuant to the rescission decreed in the final
judgment, there should be simultaneous mutual
restitution of the principal object of the contract to sell
(3,100 shares) and of the consideration paid
(P410,000). This should not await the mutual
restitution of the fruits, namely: the legal interest
earned by Reynoso's P410,000 while in the possession
of Erquiaga and its counterpart: the fruits of Hacienda

27
San Jose which Reynoso received from the time the
hacienda was delivered to him on November 4,1968
until it was placed under receivership by the court on
March 3, 1975. However, since Reynoso has not yet
given an accounting of those fruits, it is only fair that
Erquiaga's obligation to deliver to Reynoso the legal
interest earned by his money, should await the
rendition and approval of his accounting. To this extent,
the decision of the Court of Appeals should be
modified. For it would be inequitable and oppressive to
require Erquiaga to pay the legal interest earned by
Reynoso's P410,000 since 1968 or for the past 20 years
(amounting to over P400,000 by this time) without first
requiring Reynoso to account for the fruits of
Erquiaga's hacienda which he allegedly squandered
while it was in his possession from November 1968 up
to March 3, 1975.
WHEREFORE, the petition for review is granted. The
payment of legal interest by Erquiaga to Reynoso on
the price of P410,000 paid by Reynoso for Erquiaga's
3,100 shares of stock of the Erquiaga Development
Corporation should be computed as provided in the
final judgment in Civil Case No. 2446 up to September
30,1972, the date of said judgment. Since Reynoso's
judgment liability to Erquiaga for attorney's fees and
damages in the total sum of P62,000 should be set off
against the price of P410,000 that Erquiaga is
obligated to return to Reynoso, the balance of the
judgment in favor of Reynoso would be only P348,000
which should earn legal rate of interest after
September 30,1972, the date of the judgment.
However, the payment of said interest by Erquiaga
should await Reynoso's accounting of the fruits
received by him from the Hacienda San Jose. Upon
payment of P348,000 by Erquiaga to Reynoso,
Erquiaga's P410,000 surety bond shall be deemed
cancelled. In all other respects, the decision of the
Court of Appeals in CA-G.R. No, 04811-SP is affirmed.
No pronouncement as to costs.
SO ORDERED.

G.R. No. 134241

August 11, 2003

DAVID REYES (Substituted by Victoria R.


Fabella),
petitioner,
vs.
JOSE LIM, CHUY CHENG KENG and HARRISON
LUMBER, INC., respondents.
CARPIO, J.:
The Case

This is a petition for review on certiorari of the


Decision1 dated 12 May 1998 of the Court of Appeals in
CA-G.R. SP No. 46224. The Court of Appeals dismissed
the petition for certiorari assailing the Orders dated 6
March 1997, 3 July 1997 and 3 October 1997 of the
Regional Trial Court of Paranaque, Branch 2602 ("trial
court") in Civil Case No. 95-032.
The Facts
On 23 March 1995, petitioner David Reyes ("Reyes")
filed before the trial court a complaint for annulment of
contract and damages against respondents Jose Lim
("Lim"), Chuy Cheng Keng ("Keng") and Harrison
Lumber, Inc. ("Harrison Lumber").
The complaint3 alleged that on 7 November 1994,
Reyes as seller and Lim as buyer entered into a
contract to sell ("Contract to Sell") a parcel of land
("Property") located along F.B. Harrison Street, Pasay
City. Harrison Lumber occupied the Property as lessee
with a monthly rental of P35,000. The Contract to Sell
provided for the following terms and conditions:
1. The total consideration for the purchase of
the aforedescribed parcel of land together with
the perimeter walls found therein is TWENTY
EIGHT
MILLION
(P28,000,000.00)
PESOS
payable as follows:
(a) TEN MILLION (P10,000,000.00) PESOS upon
signing of this Contract to Sell;
(b) The balance of EIGHTEEN MILLION
(P18,000,000.00) PESOS shall be paid on or
before March 8, 1995 at 9:30 A.M. at a bank to
be designated by the Buyer but upon the
complete vacation of all the tenants or
occupants of the property and execution of the
Deed of Absolute Sale. However, if the tenants
or occupants have vacated the premises earlier
than March 8, 1995, the VENDOR shall give the
VENDEE at least one week advance notice for
the payment of the balance and execution of
the Deed of Absolute Sale.
2. That in the event, the tenants or occupants
of the premises subject of this sale shall not
vacate the premises on March 8, 1995 as
stated above, the VENDEE shall withhold the
payment of the balance of P18,000,000.00 and
the VENDOR agrees to pay a penalty of Four
percent (4%) per month to the herein VENDEE
based on the amount of the downpayment of
TEN MILLION (P10,000,000.00) PESOS until the
complete vacation of the premises by the
tenants therein.4

28
The complaint claimed that Reyes had informed
Harrison Lumber to vacate the Property before the end
of January 1995. Reyes also informed Keng 5 and
Harrison Lumber that if they failed to vacate by 8
March 1995, he would hold them liable for the penalty
of P400,000 a month as provided in the Contract to
Sell. The complaint further alleged that Lim connived
with Harrison Lumber not to vacate the Property until
the
P400,000
monthly
penalty
would
have
accumulated and equaled the unpaid purchase price of
P18,000,000.
On 3 May 1995, Keng and Harrison Lumber filed their
Answer6 denying they connived with Lim to defraud
Reyes. Keng and Harrison Lumber alleged that Reyes
approved their request for an extension of time to
vacate the Property due to their difficulty in finding a
new location for their business. Harrison Lumber
claimed that as of March 1995, it had already started
transferring some of its merchandise to its new
business location in Malabon.7
On 31 May 1995, Lim filed his Answer8 stating that he
was ready and willing to pay the balance of the
purchase price on or before 8 March 1995. Lim
requested a meeting with Reyes through the latters
daughter on the signing of the Deed of Absolute Sale
and the payment of the balance but Reyes kept
postponing their meeting. On 9 March 1995, Reyes
offered to return the P10 million down payment to Lim
because Reyes was having problems in removing the
lessee from the Property. Lim rejected Reyes offer and
proceeded to verify the status of Reyes title to the
Property. Lim learned that Reyes had already sold the
Property to Line One Foods Corporation ("Line One") on
1 March 1995 for P16,782,840. After the registration of
the Deed of Absolute Sale, the Register of Deeds
issued to Line One TCT No. 134767 covering the
Property. Lim denied conniving with Keng and Harrison
Lumber to defraud Reyes.
On 2 November 1995, Reyes filed a Motion for Leave to
File Amended Complaint due to supervening facts.
These included the filing by Lim of a complaint for
estafa against Reyes as well as an action for specific
performance and nullification of sale and title plus
damages before another trial court.9 The trial court
granted the motion in an Order dated 23 November
1995.
In his Amended Answer dated 18 January 1996, 10 Lim
prayed for the cancellation of the Contract to Sell and
for the issuance of a writ of preliminary attachment
against Reyes. The trial court denied the prayer for a
writ of preliminary attachment in an Order dated 7
October 1996.
On 6 March 1997, Lim requested in open court that
Reyes be ordered to deposit the P10 million down

payment with the cashier of the Regional Trial Court of


Paraaque. The trial court granted this motion.
On 25 March 1997, Reyes filed a Motion to Set Aside
the Order dated 6 March 1997 on the ground the Order
practically granted the reliefs Lim prayed for in his
Amended Answer.11 The trial court denied Reyes
motion in an Order12 dated 3 July 1997. Citing Article
1385 of the Civil Code, the trial court ruled that an
action for rescission could prosper only if the party
demanding rescission can return whatever he may be
obliged to restore should the court grant the rescission.
The
trial
court
denied
Reyes
Motion
for
Reconsideration in its Order13 dated 3 October 1997. In
the same order, the trial court directed Reyes to
deposit the P10 million down payment with the Clerk of
Court on or before 30 October 1997.
On 8 December 1997, Reyes 14 filed a Petition for
Certiorari15 with the Court of Appeals. Reyes prayed
that the Orders of the trial court dated 6 March 1997, 3
July 1997 and 3 October 1997 be set aside for having
been issued with grave abuse of discretion amounting
to lack of jurisdiction. On 12 May 1998, the Court of
Appeals dismissed the petition for lack of merit.
Hence, this petition for review.
The Ruling of the Court of Appeals
The Court of Appeals ruled the trial court could validly
issue the assailed orders in the exercise of its equity
jurisdiction. The court may grant equitable reliefs to
breathe life and force to substantive law such as Article
138516 of the Civil Code since the provisional remedies
under the Rules of Court do not apply to this case.
The Court of Appeals held the assailed orders merely
directed Reyes to deposit the P10 million to the
custody of the trial court to protect the interest of Lim
who paid the amount to Reyes as down payment. This
did not mean the money would be returned
automatically to Lim.
The Issues
Reyes raises the following issues:
1. Whether the Court of Appeals erred in
holding the trial court could issue the
questioned Orders dated March 6, 1997, July 3,
1997 and October 3, 1997, requiring petitioner
David Reyes to deposit the amount of Ten
Million Pesos (P10,000,000.00) during the
pendency of the action, when deposit is not
among the provisional remedies enumerated in

29
Rule 57 to 61 of the 1997 Rules on Civil
Procedure.
2. Whether the Court of Appeals erred in
finding the trial court could issue the
questioned Orders on grounds of equity when
there is an applicable law on the matter, that
is, Rules 57 to 61 of the 1997 Rules on Civil
Procedure.17
The Courts Ruling
Reyes contentions are without merit.
Reyes points out that deposit is not among the
provisional remedies enumerated in the 1997 Rules of
Civil Procedure. Reyes stresses the enumeration in the
Rules is exclusive. Not one of the provisional remedies
in Rules 57 to 6118 applies to this case. Reyes argues
that a court cannot apply equity and require deposit if
the law already prescribes the specific provisional
remedies which do not include deposit. Reyes invokes
the principle that equity is "applied only in the absence
of, and never against, statutory law or x x x judicial
rules of procedure."19 Reyes adds the fact that the
provisional remedies do not include deposit is a matter
of dura lex sed lex.20
The instant case, however, is precisely one where there
is a hiatus in the law and in the Rules of Court. If left
alone, the hiatus will result in unjust enrichment to
Reyes at the expense of Lim. The hiatus may also
imperil restitution, which is a precondition to the
rescission of the Contract to Sell that Reyes himself
seeks. This is not a case of equity overruling a positive
provision of law or judicial rule for there is none that
governs this particular case. This is a case of silence or
insufficiency of the law and the Rules of Court. In this
case, Article 9 of the Civil Code expressly mandates the
courts to make a ruling despite the "silence, obscurity
or insufficiency of the laws."21 This calls for the
application of equity,22 which "fills the open spaces in
the law."23
Thus, the trial court in the exercise of its equity
jurisdiction may validly order the deposit of the P10
million down payment in court. The purpose of the
exercise of equity jurisdiction in this case is to prevent
unjust enrichment and to ensure restitution. Equity
jurisdiction aims to do complete justice in cases where
a court of law is unable to adapt its judgments to the
special circumstances of a case because of the
inflexibility of its statutory or legal jurisdiction. 24 Equity
is the principle by which substantial justice may be
attained in cases where the prescribed or customary
forms of ordinary law are inadequate.25

Reyes is seeking rescission of the Contract to Sell. In


his amended answer, Lim is also seeking cancellation
of the Contract to Sell. The trial court then ordered
Reyes to deposit in court the P10 million down
payment that Lim made under the Contract to Sell.
Reyes admits receipt of the P10 million down payment
but opposes the order to deposit the amount in court.
Reyes contends that prior to a judgment annulling the
Contract to Sell, he has the "right to use, possess and
enjoy"26 the P10 million as its "owner" 27 unless the
court orders its preliminary attachment.28
To subscribe to Reyes contention will unjustly enrich
Reyes at the expense of Lim. Reyes sold to Line One
the Property even before the balance of P18 million
under the Contract to Sell with Lim became due on 8
March 1995. On 1 March 1995, Reyes signed a Deed of
Absolute Sale29 in favor of Line One. On 3 March 1995,
the Register of Deeds issued TCT No. 134767 30 in the
name of Line One.31 Reyes cannot claim ownership of
the P10 million down payment because Reyes had
already sold to another buyer the Property for which
Lim made the down payment. In fact, in his Comment 32
dated 20 March 1996, Reyes reiterated his offer to
return to Lim the P10 million down payment.
On balance, it is unreasonable and unjust for Reyes to
object to the deposit of the P10 million down payment.
The application of equity always involves a balancing
of the equities in a particular case, a matter addressed
to the sound discretion of the court. Here, we find the
equities weigh heavily in favor of Lim, who paid the
P10 million down payment in good faith only to
discover later that Reyes had subsequently sold the
Property to another buyer.
In Eternal Gardens Memorial Parks Corp. v. IAC,33
this Court held the plaintiff could not continue to
benefit from the property or funds in litigation during
the pendency of the suit at the expense of whomever
the court might ultimately adjudge as the lawful owner.
The Court declared:
In the case at bar, a careful analysis of the records will
show that petitioner admitted among others in its
complaint in Interpleader that it is still obligated to pay
certain amounts to private respondent; that it claims
no interest in such amounts due and is willing to pay
whoever is declared entitled to said amounts. x x x
Under the circumstances, there appears to be no
plausible reason for petitioners objections to the
deposit of the amounts in litigation after having asked
for the assistance of the lower court by filing a
complaint for interpleader where the deposit of
aforesaid amounts is not only required by the nature of
the action but is a contractual obligation of the
petitioner under the Land Development Program (Rollo,
p. 252).

30
There is also no plausible or justifiable reason for Reyes
to object to the deposit of the P10 million down
payment in court. The Contract to Sell can no longer be
enforced because Reyes himself subsequently sold the
Property to Line One. Both Reyes and Lim are now
seeking rescission of the Contract to Sell. Under Article
1385 of the Civil Code, rescission creates the obligation
to return the things that are the object of the contract.
Rescission is possible only when the person demanding
rescission can return whatever he may be obliged to
restore. A court of equity will not rescind a contract
unless there is restitution, that is, the parties are
restored to the status quo ante.34

There is unjust enrichment when a person unjustly


retains a benefit to the loss of another, or when a
person retains money or property of another against
the fundamental principles of justice, equity and good
conscience.41 In this case, it was just, equitable and
proper for the trial court to order the deposit of the P10
million down payment to prevent unjust enrichment by
Reyes at the expense of Lim.42
WHEREFORE, we AFFIRM the Decision of the Court of
Appeals.
SO ORDERED.

Thus, since Reyes is demanding to rescind the Contract


to Sell, he cannot refuse to deposit the P10 million
down payment in court.35 Such deposit will ensure
restitution of the P10 million to its rightful owner. Lim,
on the other hand, has nothing to refund, as he has not
received anything under the Contract to Sell.36

G.R. No. 155634

In Government of the Philippine Islands v.


Wagner and Cleland Wagner,37 the Court ruled the
refund of amounts received under a contract is a
precondition to the rescission of the contract. The
Court declared:

DECISION

The Government, having asked for rescission,


must restore to the defendants whatever it has
received under the contract. It will only be just
if, as a condition to rescission, the Government
be required to refund to the defendants an
amount equal to the purchase price, plus the
sums expended by them in improving the land.
(Civil Code, art. 1295.)

August 16, 2004

REPUBLIC OF THE PHILIPPINES, Represented by


the SOCIAL SECURITY SYSTEM, petitioner,
vs.
JERRY V. DAVID, respondent.

PANGANIBAN, J.:
Under the terms of the subject Contract, "actual
possession"
cannot
be
equated
with
"actual
occupancy." Inasmuch as the housing unit was
physically occupied by parties other than those
intended to be benefited by the housing program of
the Social Security System, there was a clear violation
of the Contract. Since respondent did not comply with
his obligations, rescission is proper.
The Case

The principle that no person may unjustly enrich


himself at the expense of another is embodied in
Article 2238 of the Civil Code. This principle applies not
only to substantive rights but also to procedural
remedies. One condition for invoking this principle is
that the aggrieved party has no other action based on
contract, quasi-contract, crime, quasi-delict or any
other provision of law.39 Courts can extend this
condition to the hiatus in the Rules of Court where the
aggrieved party, during the pendency of the case, has
no other recourse based on the provisional remedies of
the Rules of Court.

Before us is a Petition for Review1 under Rule 45 of the


Rules of Court, assailing the October 9, 2002 Decision 2
of the Court of Appeals (CA) in CA-GR CV No. 61374.
The appellate court disposed as follows:
"WHEREFORE, the instant appeal is DENIED
for lack of merit. The decision of the Regional
Trial Court, Quezon City, Branch 105, in Civil
Case No. Q-96-27031 is hereby AFFIRMED."3
The Facts
The CA narrated the facts thus:

Thus, a court may not permit a seller to retain,


pendente lite, money paid by a buyer if the seller
himself seeks rescission of the sale because he has
subsequently sold the same property to another
buyer.40 By seeking rescission, a seller necessarily
offers to return what he has received from the buyer.
Such a seller may not take back his offer if the court
deems it equitable, to prevent unjust enrichment and
ensure restitution, to put the money in judicial deposit.

"x x x [Respondent] Jerry V. David is an


employee of the SSS, formerly assigned at its
Membership (Backroom) Department. Pursuant
to its Employees' Housing Loan Program, SSS
awarded David a house and lot located at
North Fairview, Quezon City. A Deed of
Conditional Sale over the subject property was
thereafter executed between the parties.

31
"On reports that numerous violations have
been committed by some of the housing
awardees in connection with the conditions
governing their sales, SSS conducted an
investigation on the matter. The investigation
revealed that in the case of [Respondent]
David, he committed two (2) violations of his
deed of conditional sale, to wit: (1) neither the
[respondent] nor his immediate family resided
and/or occupied the said housing unit, and (2)
he allowed a certain Buenaventura Penus to
possess and occupy the property.
"As a consequence of these violations, SSS
sent a letter to David formally revoking,
terminating and/or rescinding the deed of
conditional sale. However, the latter refused to
vacate and surrender possession of the subject
property, prompting SSS to institute a
complaint with the Quezon City RTC on March
28, 1996 revoking the deed of conditional sale
and likewise praying for the issuance of a writ
of possession in its favor.
"During the pre-trial of the case, the court
observed that while the complaint was
captioned 'Petition for Recovery of Possession
with [P]rayer for Issuance of a Writ of
Possession,' an examination of its body shows
that the prayer was actually for the rescission
of the deed of conditional sale. For this reason,
the court ordered the amendment of the
complaint
and
in
compliance
thereto,
[petitioner] submitted its amended complaint
on March 19, 1997.
"[Respondent] David denied the alleged
violations of the deed of conditional sale,
stating that Buenaventura Penus, alluded to by
the [petitioner] as possessor-occupant of the
subject property, was in fact a caretaker until
and after the necessary renovations and
modifications on the house were made.
"In a [D]ecision dated July 1, 1998, the court a
quo dismissed the complaint and adjudged the
[petitioner] liable for costs. The dispositive
portion of the trial court's decision reads:
'WHEREFORE, in the light of the
foregoing, the Amended Complaint is
dismissed, with costs against the
plaintiff.
'SO ORDERED.'
"In dismissing the complaint, the court ruled
that the [petitioner] failed to prove that the
[respondent] purchased the subject property
for the use and benefit of another undisclosed
party and not for his exclusive use, or that the
defendant
sold,
assigned,
encumbered,
mortgaged, leased, subleased or in any
manner altered or disposed of the subject
property or his rights thereto at any other time.
In arriving at its [D]ecision, the lower court

considered the testimony of the [respondent]


that when the subject property was delivered
to him on October 23, 1992, the unit was not
habitable so he had to make a few
constructions thereon. He secured the services
of his cousin, Buenaventura Penus, to be the
caretaker while construction on the house was
going on. With this, the court concluded that
possession, as a condition of the deed of sale
between the parties, was sufficiently satisfied.
"Aggrieved, [Petitioner] SSS brought [an]
appeal [to the CA], arguing that the court a
quo erred in holding that [respondent] did not
violate the terms and conditions of the Deed of
Conditional
Sale
and
in
consequently
dismissing the case."4
Ruling of the Court of Appeals
Affirming the trial court, the CA ruled that while other
persons had been found occupying the subject
property, no proof was adduced by petitioner to prove
that they had taken possession of it on their own behalf
and not merely as respondent's caretakers. The
appellate court added that because of the squalid
condition of the property when it was delivered,
respondent had to make improvements thereon as well
as ask Penus, and later on Oden Domingo, to stay
there as caretakers.
Through his caretakers, respondent was deemed to
have occupied and possessed the property as required
by the Deed of Sale between him and petitioner. The
CA concluded that the property had clearly been
subject to respondent's will, a fact equivalent to
possession under Article 5315 of the Civil Code.
Hence, this Petition.6
Issues
In its Memorandum, petitioner raises this sole issue:
"whether the Court of Appeals committed reversible
error in affirming the Decision of the trial court holding
that respondent did not violate the terms and
conditions of the Deed of Conditional Sale."7
The Court's Ruling
The Petition is meritorious.
Sole
Violation of the Terms and
of the Deed of Conditional Sale

Issue:
Conditions

Petitioner avers that respondent violated the terms and


conditions of the Deed of Conditional Sale, when he
failed to "actually occupy and possess the property at
all times"8 and allowed other persons to do so.9
It argues that contrary to the rulings of the trial and the
appellate courts, the Deed of Conditional Sale required
"actual physical possession at all times," not just

32
simple possession. It contends that the material
occupation of the property by other persons ran
counter to the objective of the Social Security System
(SSS) housing program to restrict the use and
enjoyment of the housing units to SSS employees and
their immediate families only.
Petitioner likewise submits that the appellate court
erred in believing the claim of respondent that the
house was uninhabitable when it was delivered to him
in 1992. His claim was belied by his acceptance of the
property without protest, as well as by the fact that his
alleged caretakers had lived there from 1992 to 1996.
Petitioner adds that he should have used his available
money to improve the property, if the unit was indeed
unlivable, instead of fully settling in advance in
December 1992 the unpaid balance of its purchase
price.
Propriety of Review
At the outset, the Court stresses that a question of law
has arisen from petitioner's contention that simple
possession under Article 531 of the Civil Code is not
the same as "actual occupancy and possession at all
times," as required of respondent under the Deed.
Such question -- of what law, rule or principle is to
govern a given state of facts -- is decidedly one of
law.10 It may be raised in this appeal by certiorari under
Rule 45 of the Rules of Court.

(b) The purpose of the sale shall be to


aid the VENDEE in acquiring a house
and lot for himself/herself and/or
his/her immediate family, and not to
provide him/her with a means for
speculation or profit by a future
assignment of his/her right herein
acquired or the resale of the PROPERTY
subject of this Contract. Therefore, the
VENDEE, within the first FIVE (5) years
of the existence of this contract agrees
not
to
sell,
assign,
encumber,
mortgage, lease, sub-let or in any
manner alter or dispose of the property
subject hereof, or his rights thereto, at
any time, in whole or in part. After the
FIVE (5) year period, VENDEE shall
have the right to the full disposal of the
property, provided that, VENDEE has
been able to fully pay all of his/her
obligations
herein.
However,
the
foregoing notwithstanding, the VENDEE
may x x x at any time with prior
consent of the VENDOR transfer his
right to the PROPERTY to any eligible
employee of the VENDOR, subject,
however, to the right of first refusal by
the VENDOR who may refund to the
VENDEE all of his/her installment
payments and the value of substantial
improvements introduced by him/her if
any, as appraised by the VENDOR;

Rules of Contract Interpretation


Certain rules of contract interpretation come to mind at
this point. First, in construing a contract, it is a
fundamental task to ascertain the intention of the
contracting parties.11 As a rule, such intention is
determined by looking at the words used -- at all the
words rather than at a particular word or two; and at
words in context rather than just words standing
alone.12
Indeed, under Article 1374 of the Civil Code, "the
various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense
which may result from all of them taken jointly."
Second, the ascertained intention of the parties is
deemed an integral part of the contract, as though it
has been originally expressed in unequivocal terms. 13
And third, the reasonableness of the result obtained,
after analysis and construction of a contract, must also
be carefully considered.14
The conditions that were allegedly violated by
respondent are contained in paragraph 10 of the Deed
of Conditional Sale, as follows:
"10. The Contract shall further [provide] the
following terms and conditions:
(a) The VENDEE is making this
purchase for his/her own exclusive use
and benefit and not for the use and
benefit
of
another
undisclosed
party/parties;

(c) The VENDEE, and his heirs and/or


successors, shall actually occupy and
be in possession of the PROPERTY at all
times;
(d) The VENDEE shall not obstruct or
interfere in any manner whatsoever
with the right of the VENDOR or any of
its duly authorized representatives to
inspect, survey, repair, lay water pipes,
gas, electric and telephone lines or
other works of similar purposes;
(e) The VENDEE shall abide by and
comply with the Vendor's Occupancy
Rules and Regulations the terms and
conditions of which are made an
integral part hereof by reference, as
well as that issued by any other
governmental authority which may,
from time to time, be promulgated in
regard to the use and preservation of
the house and lot;
(f) The VENDEE warrants in full the
truth of the representation made in
his/her Application For EMPLOYEE
HOUSING LOAN, the terms of which are
likewise made an integral part hereof
by reference.
"The violation of any of the conditions herein
stipulated shall be considered as a breach of

33
this Contract, and shall subject the VENDEE to
the penalties provided for in paragraphs (11)
and (12) hereof, including administrative
sanctions, when warranted, in the event x x x
the VENDEE has been found to have committed
a misrepresentation/falsification in his/her
application for an Employee Housing Loan."15
Actual
Occupancy
Possession at All Times

and

Plainly, the primary intention behind the above-quoted


stipulations is to restrict the sale, the use and the
benefit of the housing units to SSS employees and their
immediate families only. This objective is in line with
that of the SSS housing loan program -- to aid its
employees in acquiring their own dwelling units at a
low cost.16 Such intent, draws life also from the social
justice policy of RA 1161, as amended, otherwise
known as the "Social Security System Law" granting
direct housing loans to covered employees and giving
priority to low-income groups.17
Indeed, the above goal is confirmed by the
requirement that respondent-vendee and his heirs or
assigns must actually occupy and possess the property
at all times; by the proscription that he must not sell,
assign, encumber, mortgage, lease, sublet or in any
manner alter or dispose of the property for the first five
(5) years; and by the further proviso that he may
alienate or transfer his rights thereto at any time prior
to full payment, but only to petitioner under its right of
first refusal or to any other eligible SSS employee.
These restrictive covenants are undeniably valid under
Article 130618 of the Civil Code.
The use of the conjunctive and in subparagraph (c) is
not by any chance a surplusage. Neither is it meant to
be without any legal signification. Its use is
confirmatory of the restrictive intent that the houses
provided by petitioner should be for the exclusive use
and benefit of the SSS employee-beneficiary.
It is easily discernible, therefore, that both "actual
occupancy" and "possession at all times" -- not just one
or the other -- were imposed as conditions upon
respondent. The word and -- whether it is used to
connect words, phrases or full sentences -- must be
accepted in its common and usual meaning as "binding
together and as relating to one another."19 And implies
a conjunction, joinder or union.20
Thus, respondent had to comply with not one, but two,
concurring conditions -- actual occupancy and
possession at all times. The question is, did he?
We rule that he did not.
No Actual Occupancy
First, actual possession is not the same as actual
occupancy. Hence, it was an error on the part of the
lower courts to hold that the requirement of possession
alone was a sufficient compliance with the conditions
under subparagraphs (a) and (c).

Under the law,21 "[p]ossession is acquired by the


material occupation of a thing or the exercise of a
right, or by the fact that it is subject to the action of
our will, or by the proper acts and legal formalities
established for acquiring such right." As such, actual
possession consists in the manifestation of acts of
dominion over property of such a nature as a party
would naturally exercise over his own 22 -- as when
respondent himself is physically in occupation of the
property, or even when another person who recognizes
the former's rights as owner is in occupancy. 23 In short,
possession can be either "actual" or merely
constructive.
On the other hand, actual occupancy connotes
"something real, or actually existing, as opposed to
something merely possible, or to something which is
presumptive or constructive."24 Unlike possession, it
can only be actual or real, not constructive.
Second, the uncontroverted fact remains that it was
not respondent and/or his immediate family, but Penus
and his wife, who had lived in the property since 1992;
and that it was from Penus that Domingo took over
possession in 1996. Thus, while it may be conceded
that respondent "possessed" the property through his
caretakers, there is no escaping the fact that he and/or
his immediate family did not "actually occupy" it; and
that he allowed other persons to benefit from its use. In
his letter to SSS Assistant Administrator Amador
Monteiro on January 24, 1996,25 respondent admitted
as much, but tried to justify his noncompliance by
saying that the property was not in a habitable
condition at the time of delivery. This line of defense
was sustained by the trial court on the ground of
respondent's allegedly "uncontroverted or unrebutted
evidence."26
The RTC's finding, however, is neither borne out by the
records nor by substantial evidence. Hence, it
constitutes an exception to the rule that this Court
cannot review factual findings.27
Indeed, a thorough review of the records reveals that
the averments of respondent were ably controverted
by denials made by petitioner. Negating his claim that
the house was located adjacent to a creek, 28 it lengthily
argued against it in the Memorandum it submitted to
the trial court. Likewise, it must be stressed that under
the Rules of Court,29 the defense alleged in his Answer
is deemed controverted, whether or not petitioner filed
a reply.
Moreover, it is a basic rule of evidence that the party
asserting an affirmative allegation must prove it. 30
However, all that there is to back up the defense of
respondent in this case is his self-serving testimony
and that of his witness, Domingo. As to the latter's
testimony, it suffices to say that he could not have
affirmed the alleged condition of the unit in 1992, as
he took possession of it only in 1996, four years after it
had lain exposed to the elements with no
improvements whatsoever.
For four years, respondent likewise kept his silence
about the purported condition of the unit. He accepted

34
it without any whimper of protest on October 23, 1992,
and even paid the housing loan in full in December of
the same year. If it was indeed uninhabitable, he
should have refused to accept it or immediately
protested its condition.
On the other hand, there is enough documentary
evidence to debunk his claim. The report of petitioner's
Internal Audit Service31 significantly established that
509 of the 728 awardees -- presumably situated
similarly as he was -- had occupied their units in
compliance with the assailed requirement. The
Interview Slip32 submitted in evidence by petitioner
also showed that Penus and his wife, and later
Domingo, had lived in the unit since 1992. In the face
of these facts, it is difficult to believe the defense of
respondent. For how could the units be habitable to
many others, but not to him?
Likewise, this Court takes judicial notice of the fact that
low-cost houses such as those offered by petitioner 33
are usually core or shell units without adequate
divisions, ceilings, cabinets, paint and, in some cases,
electrical connections -- features that have to be
installed, completed or refurbished by the awardees.
The idea, of course, is to provide immediate but
affordable living spaces that they can work at
improving, according to their needs and finances and
while living therein. Certainly, at P172,978.85 (the cost
of the house and lot in this case), it is but fair to accept
the lack of amenities.
Neither can respondent assail the validity of the
Contract as a one-sided "take it or leave it" agreement.
To begin with, a contract of adhesion -- wherein one
party imposes a ready-made form of contract on the
other -- is not strictly against the law. 34 The terms of
the agreement cannot be modified, but can be freely
rejected in its entirety, by the other party. On the other
hand, the latter's adherence thereto would mean
consent.35 We need only to remind respondent that
contractual obligations between the parties have the
force of law and must be complied with in good faith. 36
We therefore do not see any reason to discuss
respondent's added arguments, other than to say that
the objectives of low-cost housing -- mandated under
the social justice provisions of the Constitution 37 -- are
too important to be sidetracked by lame, untimely and
unfounded excuses. Such excuses do nothing but harm
to the salutary efforts of providing the underprivileged
and the homeless with cheap but decent houses. It is
for this reason that we regard this case as no ordinary
skirmish over contractual relations.
Rescission
In view of the foregoing discussion, we rule that
rescission of the Contract is the proper recourse. Article
1191 of the Civil Code provides:
"Art. 1191. The power to rescind obligations is
implied in reciprocal ones, in case one of the
obligors should not comply with what is
incumbent upon him.

"The injured party may choose between


fulfillment and the rescission of the obligation,
with the payment of damages in either case.
He may also seek rescission even after he has
chosen fulfillment, if the latter should become
impossible."
As
noted
in previous
cases,
the rescission
contemplated under Article 1191 is a principal action
for "resolution," which is based on a breach by a party
of its reciprocal obligations. 38 The present Contract is
one of conditional sale -- oftentimes referred to as a
contract to sell, wherein ownership or title is retained
by the vendor39 until "full payment by the VENDEE of
the full purchase price of the PROPERTY, with all the
interest due thereon, as well as taxes and other
charges AND upon their faithful compliance with all the
conditions of this Contract x x x."40
Although a transfer of ownership or title from the seller
to the buyer is normally predicated upon the payment
of the purchase price, the parties are nevertheless free
to stipulate other lawful conditions by which they bind
themselves and upon which transfer of ownership
depends.41 In this case, that other obligation was
faithful compliance with the conditions of the Contract.
Respondent did not faithfully comply with the
conditions under subparagraphs (10)(a) and (c). His
noncompliance also constituted a breach of his
reciprocal obligations under the Deed.
The Deed itself provides for its annulment and
cancellation by reason of a breach of the terms and
conditions stipulated therein. Paragraphs 11 and 12
provide thus:
"11. Should the VENDEE violate, refuse or fail
to comply with any of the terms and conditions
stipulated herein, for whatever reason, or is
found
to
have
committed
any
misrepresentation in his/her application for
EMPLOYEE HOUSING LOAN, this Contract shall
be deemed annulled and cancelled without
prejudice of the rights of the parties under
Republic Act No. 6652, otherwise known as the
Maceda Law, and shall entitle the VENDOR to
immediately repossess the property as if this
Contract was never made; for this purpose, the
VENDEE shall be considered and treated as a
tenant holding the property without the
permission of the VENDOR, and must
peacefully vacate the premises immediately
upon repossession thereof by the VENDOR. The
annulment and cancellation of this Contract
and the right of the VENDOR to repossess the
property shall become effective upon mere
written notice thereof to the VENDEE.
"12. In addition to the consequences stated in
the immediately preceding paragraph, the
VENDEE shall forfeit in favor of the VENDOR all
the installments made, to stand as rent for
his/her occupation of the property, likewise
subject to the provisions of Republic Act No.
6552."42 (Italics supplied)

35
However, this Court holds that the forfeiture provision
under paragraph 12 does not apply to the payment
made by respondent. The plain and simple reason is
that he did not pay the purchase price by installment,
but instead paid it in full in December 1992 -- two
months after the delivery of the unit. Hence, that
payment was beyond the ambit of Republic Act 6552,
otherwise known as the Realty Installment Buyer Act or
the Maceda Law.
Doctrinally, mutual restitution must follow rescission.
Under Article 1385 of the Civil Code, "rescission creates
the obligation to return the things which were the
object of the contract, together with their fruits, and
the price with its interests x x x." 43 Moreover, "[t]o
rescind is to declare a contract void at its inception and
to put an end to it as though it never was." 44 Hence,
rescission restores the parties to their relative
positions, as if no contract has been made. Paragraph
11, cited above, supports the mutual restitution
required in rescission.
Respondent is thus obliged to return the house and lot
sold, as well as rental payments he may have earned,
if any. On the other hand, petitioner is mandated to
refund to him his full payment of P172,978.85 plus
legal interest of 6 percent per annum, as well as the
value of substantial improvements introduced by him,
as appraised by petitioner. Indeed, stipulated in the
Deed is such appraisal by the vendor,45 upon transfer
of the property to petitioner or to any of its eligible
employees. This condition is reasonably and justly
applicable and proper in the present case.
WHEREFORE, this Petition is hereby GRANTED and the
assailed Decision SET ASIDE. The Deed of Conditional
Sale is CANCELLED. Petitioner is ORDERED to pay
respondent P172,978.85, plus the legal interest and
the value of any substantial improvements thereon.
Respondent is ORDERED to vacate immediately Block
18, Lot 8, SSS Housing, North Fairview, Quezon City;
and to surrender possession thereof to petitioner. No
costs.
SO ORDERED.

G.R. No. 134685 November 19, 1999


MARIA
ANTONIA
SIGUAN,
petitioner,
vs.
ROSA LIM, LINDE LIM, INGRID LIM and NEIL LIM,
respondents.
DAVIDE, JR., C.J.:
May the Deed of Donation executed by respondent
Rosa Lim (hereafter LIM) in favor of her children be
rescinded for being in fraud of her alleged creditor,
petitioner Maria Antonia Siguan? This is the pivotal
issue to be resolved in this petition for review on
certiorari under Rule 45 of the Revised Rules of Court.

The relevant facts, as borne out of the records, are as


follows:
On 25 and 26 August 1990, LIM issued two Metrobank
checks in the sums of P300,000 and P241,668,
respectively, payable to "cash." Upon presentment by
petitioner with the drawee bank, the checks were
dishonored for the reason "account closed." Demands
to make good the checks proved futile. As a
consequence, a criminal case for violation of Batas
Pambansa Blg. 22, docketed as Criminal Cases Nos.
22127-28, were filed by petitioner against LIM with
Branch 23 of the Regional Trial Court (RTC) of Cebu
City. In its decision 1 dated 29 December 1992, the
court a quo convicted LIM as charged. The case is
pending before this Court for review and docketed as
G.R. No. 134685.
It also appears that on 31 July 1990 LIM was convicted
of estafa by the RTC of Quezon City in Criminal Case
No. Q-89-2216 2 filed by a certain Victoria Suarez. This
decision was affirmed by the Court of Appeals. On
appeal, however, this Court, in a decision 3
promulgated on 7 April 1997, acquitted LIM but held
her civilly liable in the amount of P169,000, as actual
damages, plus legal interest.
Meanwhile, on 2 July 1991, a Deed of Donation 4
conveying the following parcels of land and purportedly
executed by LIM on 10 August 1989 in favor of her
children, Linde, Ingrid and Neil, was registered with the
Office of the Register of Deeds of Cebu City:
(1) a parcel of land
situated
at
Barrio
Lahug,
Cebu
City,
containing an area of
563 sq. m. and covered
by TCT No. 93433;
(2) a parcel of land
situated
at
Barrio
Lahug,
Cebu
City,
containing an area of
600 sq. m. and covered
by TCT No. 93434;
(3) a parcel of land
situated at Cebu City
containing an area of
368 sq. m. and covered
by TCT No. 87019; and
(4) a parcel of land
situated at Cebu City,
Cebu containing an
area of 511 sq. m. and

36
covered
87020.

by

TCT

No.

New transfer certificates of title were thereafter


issued in the names of the donees. 5
On 23 June 1993, petitioner filed an accion pauliana
against LIM and her children before Branch 18 of the
RTC of Cebu City to rescind the questioned Deed of
Donation and to declare as null and void the new
transfer certificates of title issued for the lots covered
by the questioned Deed. The complaint was docketed
as Civil Case No. CEB-14181. Petitioner claimed therein
that sometime in July 1991, LIM, through a Deed of
Donation, fraudulently transferred all her real property
to her children in bad faith and in fraud of creditors,
including her; that LIM conspired and confederated
with her children in antedating the questioned Deed of
Donation, to petitioner's and other creditors' prejudice;
and that LIM, at the time of the fraudulent conveyance,
left no sufficient properties to pay her obligations.
On the other hand, LIM denied any liability to
petitioner. She claimed that her convictions in Criminal
Cases Nos. 22127-28 were erroneous, which was the
reason why she appealed said decision to the Court of
Appeals. As regards the questioned Deed of Donation,
she maintained that it was not antedated but was
made in good faith at a time when she had sufficient
property. Finally, she alleged that the Deed of Donation
was registered only on 2 July 1991 because she was
seriously ill.
In its decision of 31 December 1994, 6 the trial court
ordered the rescission of the questioned deed of
donation; (2) declared null and void the transfer
certificates of title issued in the names of private
respondents Linde, Ingrid and Neil Lim; (3) ordered the
Register of Deeds of Cebu City to cancel said titles and
to reinstate the previous titles in the name of Rosa Lim;
and (4) directed the LIMs to pay the petitioner, jointly
and severally, the sum of P10,000 as moral damages;
P10,000 as attorney's fees; and P5,000 as expenses of
litigation.
On appeal, the Court of Appeals, in a decision 7
promulgated on 20 February 1998, reversed the
decision of the trial court and dismissed petitioner's
accion pauliana. It held that two of the requisites for
filing an accion pauliana were absent, namely, (1)
there must be a credit existing prior to the celebration
of the contract; and (2) there must be a fraud, or at
least the intent to commit fraud, to the prejudice of the
creditor seeking the rescission.
According to the Court of Appeals, the Deed of
Donation, which was executed and acknowledged
before a notary public, appears on its face to have

been executed on 10 August 1989. Under Section 23 of


Rule 132 of the Rules of Court, the questioned Deed,
being a public document, is evidence of the fact which
gave rise to its execution and of the date thereof. No
antedating of the Deed of Donation was made, there
being no convincing evidence on record to indicate that
the notary public and the parties did antedate it. Since
LIM's indebtedness to petitioner was incurred in August
1990, or a year after the execution of the Deed of
Donation, the first requirement for accion pauliana was
not met.
Anent petitioner's contention that assuming that the
Deed of Donation was not antedated it was
nevertheless in fraud of creditors because Victoria
Suarez became LIM's creditor on 8 October 1987, the
Court of Appeals found the same untenable, for the
rule is basic that the fraud must prejudice the creditor
seeking the rescission.
Her motion for reconsideration having been denied,
petitioner came to this Court and submits the following
issue:
WHETHER OR NOT THE DEED OF
DONATION, EXH. 1, WAS ENTERED INTO
IN FRAUD OF [THE] CREDITORS OF
RESPONDENT ROSA [LIM].
Petitioner argues that the finding of the Court of
Appeals that the Deed of Donation was not in fraud of
creditors is contrary to well-settled jurisprudence laid
down by this Court as early as 1912 in the case of Oria
v. McMicking, 8 which enumerated the various
circumstances indicating the existence of fraud in a
transaction. She reiterates her arguments below, and
adds that another fact found by the trial court and
admitted by the parties but untouched by the Court of
Appeals is the existence of a prior final judgment
against LIM in Criminal Case No. Q-89-2216 declaring
Victoria Suarez as LIM's judgment creditor before the
execution of the Deed of Donation.
Petitioner further argues that the Court of Appeals
incorrectly applied or interpreted Section 23, 9 Rule 132
of the Rules of Court, in holding that "being a public
document, the said deed of donation is evidence of the
fact which gave rise to its execution and of the date of
the latter." Said provision should be read with Section
30 10 of the same Rule which provides that notarial
documents are prima facie evidence of their execution,
not "of the facts which gave rise to their execution and
of the date of the latter."
Finally, petitioner avers that the Court of Appeals
overlooked Article 759 of the New Civil Code, which
provides: "The donation is always presumed to be in
fraud of creditors when at the time of the execution

37
thereof the donor did not reserve sufficient property to
pay his debts prior to the donation." In this case, LIM
made no reservation of sufficient property to pay her
creditors prior to the execution of the Deed of
Donation.
On the other hand, respondents argue that (a) having
agreed on the law and requisites of accion pauliana,
petitioner cannot take shelter under a different law; (b)
petitioner cannot invoke the credit of Victoria Suarez,
who is not a party to this case, to support her accion
pauliana; (c) the Court of Appeals correctly applied or
interpreted Section 23 of Rule 132 of the Rules of
Court; (d) petitioner failed to present convincing
evidence that the Deed of Donation was antedated and
executed in fraud of petitioner; and (e) the Court of
Appeals correctly struck down the awards of damages,
attorney's fees and expenses of litigation because
there is no factual basis therefor in the body of the trial
court's decision.
The primordial issue for resolution is whether the
questioned Deed of Donation was made in fraud of
petitioner and, therefore, rescissible. A corollary issue
is whether the awards of damages, attorney's fees and
expenses of litigation are proper.
We resolve these issues in the negative.
The rule is well settled that the jurisdiction of this Court
in cases brought before it from the Court of Appeals via
Rule 45 of the Rules of Court is limited to reviewing
errors of law. Findings of fact of the latter court are
conclusive, except in a number of instances. 11 In the
case at bar, one of the recognized exceptions
warranting a review by this Court of the factual
findings of the Court of Appeals exists, to wit, the
factual findings and conclusions of the lower court and
Court of Appeals are conflicting, especially on the issue
of whether the Deed of Donation in question was in
fraud of creditors.
Art. 1381 of the Civil Code enumerates the contracts
which are rescissible, and among them are "those
contracts undertaken in fraud of creditors when the
latter cannot in any other manner collect the claims
due them."

The action to rescind contracts in fraud of creditors is


known as accion pauliana. For this action to prosper,
the following requisites must be present: (1) the
plaintiff asking for rescission has a credit prior to the
alienation, 12 although demandable later; (2) the debtor
has made a subsequent contract conveying a
patrimonial benefit to a third person; (3) the creditor
has no other legal remedy to satisfy his claim; 13 (4) the
act being impugned is fraudulent; 14 (5) the third
person who received the property conveyed, if it is by
onerous title, has been an accomplice in the fraud. 15
The general rule is that rescission requires the
existence of creditors at the time of the alleged
fraudulent alienation, and this must be proved as one
of the bases of the judicial pronouncement setting
aside the contract. 16 Without any prior existing debt,
there can neither be injury nor fraud. While it is
necessary that the credit of the plaintiff in the accion
pauliana must exist prior to the fraudulent alienation,
the date of the judgment enforcing it is immaterial.
Even if the judgment be subsequent to the alienation,
it is merely declaratory, with retroactive effect to the
date when the credit was constituted. 17
In the instant case, the alleged debt of LIM in favor of
petitioner was incurred in August 1990, while the deed
of donation was purportedly executed on 10 August
1989.
We are not convinced with the allegation of the
petitioner that the questioned deed was antedated to
make it appear that it was made prior to petitioner's
credit. Notably, that deed is a public document, it
having been acknowledged before a notary public. 18
As such, it is evidence of the fact which gave rise to its
execution and of its date, pursuant to Section 23, Rule
132 of the Rules of Court.
Petitioner's contention that the public documents
referred to in said Section 23 are only those entries in
public records made in the performance of a duty by a
public officer does not hold water. Section 23 reads:
Sec. 23. Public documents as evidence.
Documents consisting of entries in
public
records
made
in
the
performance of a duty by a public
officer are prima facie evidence of the
facts therein stated. All other public
documents are evidence, even against
a third person, of the fact which gave
rise to their execution and of the date
of the latter. (Emphasis supplied).
The phrase "all other public documents" in the second
sentence of Section 23 means those public documents
other than the entries in public records made in the

38
performance of a duty by a public officer. And these
include notarial documents, like the subject deed of
donation. Section 19, Rule 132 of the Rules of Court
provides:
Sec. 19. Classes of docum/ents. For
the purpose of their presentation in
evidence, documents are either public
or private.
Public documents are:
(a) . . .
(b) Documents acknowledged before a
notary public except last wills and
testaments. . . .
It bears repeating that notarial documents, except last
wills and testaments, are public documents and are
evidence of the facts that gave rise to their execution
and of their date.
In the present case, the fact that the questioned Deed
was registered only on 2 July 1991 is not enough to
overcome the presumption as to the truthfulness of the
statement of the date in the questioned deed, which is
10 August 1989. Petitioner's claim against LIM was
constituted only in August 1990, or a year after the
questioned alienation. Thus, the first two requisites for
the rescission of contracts are absent.
Even assuming arguendo that petitioner became a
creditor of LIM prior to the celebration of the contract
of donation, still her action for rescission would not fare
well because the third requisite was not met. Under
Article 1381 of the Civil Code, contracts entered into in
fraud of creditors may be rescinded only when the
creditors cannot in any manner collect the claims due
them. Also, Article 1383 of the same Code provides
that the action for rescission is but a subsidiary remedy
which cannot be instituted except when the party
suffering damage has no other legal means to obtain
reparation for the same. The term "subsidiary remedy"
has been defined as "the exhaustion of all remedies by
the prejudiced creditor to collect claims due him before
rescission is resorted to." 19 It is, therefore, "essential
that the party asking for rescission prove that he has
exhausted all other legal means to obtain satisfaction
of his claim. 20 Petitioner neither alleged nor proved
that she did so. On this score, her action for the
rescission of the questioned deed is not maintainable
even if the fraud charged actually did exist." 21
The fourth requisite for an accion pauliana to prosper is
not present either.

Art. 1387, first paragraph, of the Civil Code provides:


"All contracts by virtue of which the debtor alienates
property by gratuitous title are presumed to have been
entered into in fraud of creditors when the donor did
not reserve sufficient property to pay all debts
contracted before the donation. Likewise, Article 759 of
the same Code, second paragraph, states that the
donation is always presumed to be in fraud of creditors
when at the time thereof the donor did not reserve
sufficient property to pay his debts prior to the
donation.
For this presumption of fraud to apply, it must be
established that the donor did not leave adequate
properties which creditors might have recourse for the
collection of their credits existing before the execution
of the donation.
As earlier discussed, petitioner's alleged credit existed
only a year after the deed of donation was executed.
She cannot, therefore, be said to have been prejudiced
or defrauded by such alienation. Besides, the evidence
disclose that as of 10 August 1989, when the deed of
donation was executed, LIM had the following
properties:
(1) A parcel of land
containing an area of
220 square meters,
together
with
the
house
constructed
thereon, situated in
Sto.
Nio
Village,
Mandaue City, Cebu,
registered in the name
of
Rosa
Lim
and
covered by TCT No.
19706; 22
(2) A parcel of land
located
in
Benros
Subdivision, Lawa-an,
Talisay, Cebu; 23
(3) A parcel of land
containing an area of
2.152 hectares, with
coconut trees thereon,
situated at Hindag-an,
St. Bernard, Southern
Leyte, and covered by
Tax Declaration No.
13572. 24
(4) A parcel of land
containing an area of
3.6
hectares,
with
coconut trees thereon,

39
situated at Hindag-an,
St. Bernard, Southern
Leyte, and covered by
Tax Declaration No.
13571. 25
During her cross-examination, LIM declared that the
house and lot mentioned in no. 1 was bought by her in
the amount of about P800,000 to P900,000. 26 Thus:

other manner recognized by the law of evidence. Thus


in the consideration of whether certain transfers are
fraudulent, the Court has laid down specific rules by
which the character of the transaction may be
determined. The following have been denominated by
the Court as badges of fraud:

ATTY. FLORIDO:

(1) The fact that the


consideration of the
conveyance is fictitious
or is inadequate;

Q These properties at
the Sto. Nio Village,
how much did you
acquire this property?

(2) A transfer made by


a debtor after suit has
begun and while it is
pending against him;

A
Including
residential
P800,000.00
P900,000.00.

(3) A sale upon credit


by an insolvent debtor;

the
house
to

Q How about the lot


which
includes
the
house. How much was
the price in the Deed of
Sale of the house and
lot at Sto. Nio Violage
[sic]?
A I forgot.
Q How much did you
pay for it?
A That is P800,000.00
to P900,000.00.
Petitioner did not adduce any evidence that the
price of said property was lower. Anent the
property in no. 2, LIM testified that she sold it
in 1990. 27 As to the properties in nos. 3 and 4,
the total market value stated in the tax
declarations dated 23 November 1993 was
P56,871.60. Aside from these tax declarations,
petitioner did not present evidence that would
indicate the actual market value of said
properties. It was not, therefore, sufficiently
established that the properties left behind by
LIM were not sufficient to cover her debts
existing before the donation was made. Hence,
the presumption of fraud will not come into
play.
Nevertheless, a creditor need not depend solely upon
the presumption laid down in Articles 759 and 1387 of
the Civil Code. Under the third paragraph of Article
1387, the design to defraud may be proved in any

(4) Evidence of large


indebtedness
or
complete insolvency;
(5) The transfer of all or
nearly
all
of
his
property by a debtor,
especially when he is
insolvent or greatly
embarrassed
financially;
(6) The fact that the
transfer
is
made
between father and
son, when there are
present other of the
above circumstances;
and
(7) The failure of the
vendee
to
take
exclusive possession of
all the property. 28
The above enumeration, however, is not an exclusive
list. The circumstances evidencing fraud are as varied
as the men who perpetrate the fraud in each case. This
Court has therefore declined to define it, reserving the
liberty to deal with it under whatever form it may
present itself. 29
Petitioner failed to discharge the burden of proving any
of the circumstances enumerated above or any other
circumstance from which fraud can be inferred.
Accordingly, since the four requirements for the
rescission of a gratuitous contract are not present in
this case, petitioner's action must fail.

40
In her further attempt to support her action for
rescission, petitioner brings to our attention the 31 July
1990 Decision 30 of the RTC of Quezon City, Branch 92,
in Criminal Case No. Q-89-2216. LIM was therein held
guilty of estafa and was ordered to pay complainant
Victoria Suarez the sum of P169,000 for the obligation
LIM incurred on 8 October 1987. This decision was
affirmed by the Court of Appeals. Upon appeal,
however, this Court acquitted LIM of estafa but held
her civilly liable for P169,000 as actual damages.
It should be noted that the complainant in that case,
Victoria Suarez, albeit a creditor prior to the questioned
alienation, is not a party to this accion pauliana. Article
1384 of the Civil Code provides that rescission shall
only be to the extent necessary to cover the damages
caused. Under this Article, only the creditor who
brought the action for rescission can benefit from the
rescission; those who are strangers to the action
cannot benefit from its effects. 31 And the revocation is
only to the extent of the plaintiff creditor's unsatisfied
credit; as to the excess, the alienation is maintained. 32
Thus, petitioner cannot invoke the credit of Suarez to
justify rescission of the subject deed of donation.
Now on the propriety of the trial court's awards of
moral damages, attorney's fees and expenses of
litigation in favor of the petitioner. We have pored over
the records and found no factual or legal basis therefor.
The trial court made these awards in the dispositive
portion of its decision without stating, however, any
justification for the same in the ratio decidendi. Hence,
the Court of Appeals correctly deleted these awards for
want of basis in fact, law or equity.
WHEREFORE, the petition is hereby DISMISSED and the
challenged decision of the Court of Appeals in CA-G.R.
CV. No. 50091 is AFFIRMED in toto.
No pronouncement as to costs.
SO ORDERED.

[G.R. No. 129644. March 7, 2000]


CHINA BANKING CORPORATION, petitioner, vs.
HON. COURT OF APPEALS, PAULINO ROXAS CHUA
and KIANG MING CHU CHUA, respondents.
DECISION
YNARES-SANTIAGO, J.:
Before us is a petition for review on certiorari assailing
the decision rendered by the Court of Appeals on June
26, 1997 which affirmed the decision of the Regional

Trial Court of Pasig, Metro Manila, Branch 163 in Civil


Case No. 63199 entitled "Paulino Roxas Chua and Kiang
Ming Chu Chua, Plaintiffs versus China Banking
Corporation, the Sheriff of Manila and the Register of
Deeds of Pasig, Defendants."
The facts of the case are not in dispute:
Alfonso Roxas Chua and his wife Kiang Ming Chu Chua
were the owners of a residential land in San Juan,
Metro Manila, covered by Transfer Certificate of Title
No. 410603. On February 2, 1984, a notice of levy
affecting the property was issued in connection with
Civil Case No. 82-14134 entitled, "Metropolitan Bank
and Trust Company, Plaintiff versus Pacific Multi
Commercial Corporation and Alfonso Roxas Chua,
Defendants," before the Regional Trial Court, Branch
XLVI of Manila. The notice of levy was inscribed and
annotated at the back of TCT 410603. Subsequently,
Kiang Ming Chu Chua filed a complaint against the City
Sheriff of Manila and Metropolitan Bank and Trust
Company, questioning the levy of the abovementioned
property. She alleged that the judgment of the court in
Civil Case No. 82-14134 against Alfonso Roxas Chua
could not be enforced against TCT 410603 inasmuch as
the land subject thereof was the conjugal property of
the spouses.
The parties thereafter entered into a compromise
agreement to the effect that the levy on TCT 410603
was valid and enforceable only to the extent of the
undivided portion of the property pertaining to the
conjugal share of Alfonso Roxas Chua.
Meanwhile, on June 19, 1985, petitioner China Bank
filed with the Regional Trial Court of Manila, Branch 29,
an action for collection of sum of money against Pacific
Multi Agro-Industrial Corporation and Alfonso Roxas
Chua which was docketed as Civil Case No. 85-31257.
The complaint was anchored on three (3) promissory
notes with an aggregate amount of P2,500,000.00 plus
stipulated interest.
On November 7, 1985, the trial court promulgated its
decision in Civil Case No. 85-31257 in favor of China
Banking Corporation, the dispositive portion of which
reads as follows:
PREMISES CONSIDERED, judgment is hereby rendered
in favor of the plaintiff and against the defendants;
ordering the latter to pay, jointly and severally, the
former, under the first cause of action, the sum of
P1,800,000.00, representing the unpaid of the
promissory note, plus 21% interest per annum and an
additional amount equivalent to 1/10 of 1% per day of
the total amount due, as penalty both from and after
October 4, 1983, until fully paid; under the second
cause of action, to pay the plaintiff the amount of

41
P350,000.00 representing the unpaid principal of the
promissory note, plus 12% interest per annum and an
additional amount equivalent to 1/10 of 1% per day of
the total amount due, as penalty both from and after
September 14, 1983, until fully paid; under the third
cause of action, to pay the plaintiff the further sum of
P350,000.00, representing the unpaid principal of the
promissory note, plus 12% interest per annum and an
additional amount equivalent to 1/10 % of 1% per day
of the total amount due as penalty both from and after
September 14, 1983, until fully paid; and to pay the
same plaintiff the amount equivalent to 10% of the
foregoing sums, as and for attorneys fees, such
amount to bear the same rate of interest as the
principal obligation under each promissory note,
compounded monthly, until fully paid; and to pay the
costs of suit.
SO ORDERED.[1]
On September 8, 1986, an alias notice of levy on
execution on the one-half () undivided portion of TCT
410603 belonging to Alfonso Chua was issued in
connection with Civil Case 82-14134. The notice was
inscribed and annotated at the back of TCT 410603 on
September 15, 1986 and a certificate of sale covering
the one-half undivided portion of the property was
executed in favor of Metropolitan Bank and Trust
Company. The certificate of sale was inscribed at the
back of said TCT on December 22, 1987.
Meanwhile, Pacific Multi Agro-Industrial Corporation
and Alfonso Roxas Chuas appeal was dismissed by the
Court of Appeals on September 29, 1988 for failure to
file brief.[2]
On November 21, 1988, Alfonso Roxas Chua executed
a public instrument denominated as "Assignment of
Rights to Redeem," whereby he assigned his rights to
redeem the one-half undivided portion of the property
to his son, private respondent Paulino Roxas Chua.[3]
Paulino redeemed said one-half share on the very same
day. The instrument was inscribed at the back of TCT
410603 as Entry No. 7629, and the redemption of the
property by Paulino was inscribed as Entry No. 7630,
both dated March 14, 1989.[4]
On the other hand, in connection with Civil Case No.
85-31257, another notice of levy on execution was
issued on February 4, 1991 by the Deputy Sheriff of
Manila against the right and interest of Alfonso Roxas
Chua in TCT 410603. Thereafter, a certificate of sale on
execution dated April 13, 1992 was issued by the
Sheriff of Branch 39, RTC Manila in Civil Case No. 8531257, in favor of China Bank and inscribed at the back
of TCT 410603 as Entry No. 01896 on May 4, 1992.[5]

On May 20, 1993, Paulino Roxas Chua and Kiang Ming


Chu Chua instituted Civil Case No. 63199 before the
RTC of Pasig, Metro Manila against China Bank, averring
that Paulino has a prior and better right over the rights,
title, interest and participation of China Banking
Corporation in TCT 410603; that Alfonso Roxas Chua
sold his right to redeem one-half (1/2) of the aforesaid
conjugal property in his favor on November 21, 1988
while China Banking Corporation acquired its right from
the notice of levy of execution dated January 30, 1991;
that the assignment of rights in his favor was
annotated at the back of TCT 410603 on March 14,
1989 and inscribed as Entry No. 7629, and his
redemption of the property was effected in an
instrument dated January 11, 1989 and inscribed and
annotated at the back of TCT 410603 on March 14,
1989, two years before the annotation of the rights of
China Banking Corporation on TCT 410603 on February
4, 1991.
The trial court rendered a decision on July 15, 1994 in
favor of private respondent Paulino Roxas Chua and
against China Banking Corporation, the decretal
portion of which reads:
WHEREFORE, foregoing premises considered, this Court
finds sufficient preponderance of evidence against
defendants in favor of plaintiffs and therefore render
(sic) judgment ordering defendant to pay plaintiffs:
a)
P100,000.00 as moral damages and P50,000.00
as exemplary damages plus 12% interest per annum to
start from the date of this decision until fully paid;
b)

P100,000.00 attorneys fee; and

c)

the cost of the suit.

The writ of preliminary injunction issued by this Court


on 30 June 1993 enjoining China Banking Corporation,
the Sheriff of Manila and the Register of Deeds of San
Juan, their officers, representatives, agents or persons
acting on their behalf from causing the transfer of
possession, ownership and certificate of title or
otherwise disposing of the property covered by TCT No.
410603 in favor of defendant bank or to any other
person is hereby made permanent. The Register of
Deeds of San Juan, Metro Manila is also hereby ordered
to cancel all annotations in TCT No. 410603 in favor of
defendant China Banking Corporation adverse to the
rights and interest of plaintiffs.
SO ORDERED.[6]
The trial court ruled that the assignment was made for
a valuable consideration and was executed two years
before petitioner China Bank levied the conjugal share
of Alfonso Roxas Chua on TCT 410603. The trial court

42
found that Paulino redeemed the one-half portion of
the property, using therefor the amount of P100,000.00
which he withdrew from his savings account as
evidenced by his bankbook and the receipts of
Metrobank for his payment of the redemption price.
The court noted that Paulino at that time was already
of age and had his own source of income.
On appeal, the Court of Appeals affirmed the ruling of
the trial court. It held that petitioner China Bank had
been remiss in the exercise of its rights as creditor; and
that it should have exercised its right of redemption
under Sections 29 and 30, Rule 39 of the Rules of
Court.
The issues raised by petitioner before us essentially
boil down to whether or not the assignment of the right
of redemption made by Alfonso Roxas Chua in favor of
private respondent Paulino was done to defraud his
creditors and may be rescinded under Article 1387 of
the Civil Code.
Under Article 1381(3) of the Civil Code, contracts which
are undertaken in fraud of creditors when the latter
cannot in any manner collect the claims due them, are
rescissible.
The existence of fraud or intent to defraud creditors
may either be presumed in accordance with Article
1387 of the Civil Code or duly proved in accordance
with the ordinary rules of evidence. Article 1387 reads:
Art. 1387. All contracts by virtue of which the debtor
alienates property by gratuitous title are presumed to
have been entered into in fraud of creditors, when the
donor did not reserve sufficient property to pay all
debts contracted before the donation.

Alienation by onerous title are also presumed


fraudulent when made by persons against whom some
judgment has been rendered in any instance or some
writ of attachment has been issued. The decision or
attachment need not refer to the property alienated,
and need not have been obtained by the party seeking
rescission.
In addition to these presumptions, the design to
defraud creditors may be proved in any other manner
recognized by the law of evidence.
Hence, the law presumes that there is fraud of
creditors when:
a) There is alienation of property by gratuitous title by
the debtor who has not reserved sufficient property to
pay his debts contracted before such alienation; or

b) There is alienation of property by onerous title made


by a debtor against whom some judgment has been
rendered in any instance or some writ of attachment
has been issued. The decision or attachment need not
refer to the property alienated and need not have been
obtained by the party seeking rescission.
After his conjugal share in TCT 410603 was foreclosed
by Metrobank, the only property that Alfonso Roxas
Chua had was his right to redeem the same, it forming
part of his patrimony. "Property" under civil law
comprehends every species of title, inchoate or
complete, legal or equitable.
Alfonso Roxas Chua sold his right of redemption to his
son, Paulino Roxas Chua, in 1988. Thereafter, Paulino
redeemed the property and caused the annotation
thereof at the back of TCT 410603. This preceded the
annotation of the levy of execution in favor of China
Bank by two (2) years and the certificate of sale in
favor of China Bank by more than three (3) years. On
this basis, the Court of Appeals concluded that the
allegation of fraud made by petitioner China Bank is
vague and unsubstantiated.
Such conclusion, however, runs counter to the law
applicable in the case at bar. Inasmuch as the
judgment of the trial court in favor of China Bank
against Alfonso Roxas Chua was rendered as early as
1985, there is a presumption that the 1988 sale of his
property, in this case the right of redemption, is
fraudulent under Article 1387 of the Civil Code. The
fact that private respondent Paulino Roxas Chua
redeemed the property and caused its annotation on
the TCT more than two years ahead of petitioner China
Bank is of no moment. As stated in the case of Cabaliw
vs. Sadorra,[7] "the parties here do not stand in
equipoise, for the petitioners have in their favor, by a
specific provision of law, the presumption of fraudulent
transaction which is not overcome by the mere fact
that the deeds of sale were in the nature of public
instruments."
This presumption is strengthened by the fact that the
conveyance has virtually left Alfonsos other creditors
with no other property to attach. It should be noted
that the presumption of fraud or intention to defraud
creditors is not just limited to the two instances set
forth in the first and second paragraphs of Article 1387
of the Civil Code. Under the third paragraph of the
same article, the design to defraud creditors may be
proved in any other manner recognized by the law of
evidence. In the early case of Oria vs. Mcmicking,[8]
the Supreme Court considered the following instances
as badges of fraud:
1. The fact that the consideration of the conveyance is
fictitious or is inadequate.

43
2. A transfer made by a debtor after suit has begun
and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence
insolvency.

of

large

indebtedness

or

complete

5. The transfer of all or nearly all of his property by a


debtor, especially when he is insolvent or greatly
embarrassed financially.
6. The fact that the transfer is made between father
and son, when there are present other of the above
circumstances
7. The failure of the vendee to take exclusive
possession of all the property. (Underscoring provided)
Before China Bank obtained judgment against Pacific
Multi Agro-Industrial Corporation and Alfonso Roxas
Chua on November 7, 1985, Alfonso Roxas Chua had
only his one-half share of the conjugal property in
question to pay his previous creditor, Metrobank. Even
his son, private respondent Paulino Roxas Chua
himself, knew this as shown by the following excerpts
of his testimony during the trial:
Q:
You said that month before or October 1988 your
father approached you regarding his problem with
respect to his property, subject of this case, can you
tell us what in particular did he tell you about
Metrobank?
A:
He told me about his problem with
Metrobank,about the loan with Metrobank and
Metrobank gonna foreclose his property.
xxx xxx xxx
Q:
What did your father tell you regarding his
problem?
A:
He told me about Metrobank, our house will
gonna foreclose (sic). He cannot pay Metrobank
anymore. His business is down.[9]
Despite Alfonso Roxas Chuas knowledge that it is the
only property he had which his other creditors could
levy, he still assigned his right to redeem his one-half
share of the conjugal property in question from
Metrobank in favor of his son, Paulino. Alfonsos intent
to defraud his other creditors, specifically, China Bank,
becomes even more apparent when we take into
consideration the fact that immediately after the Court
of Appeals rendered its Resolution dated September
29, 1988, dismissing the appeal of Pacific Multi-Agro

and Alfonso Roxas Chua in CA-G.R. No. CV-14681


entitled, "China Banking Corporation, Plaintiff-Appellee
versus Pacific Multi Agro-Industrial Corporation, et al.,
Defendants-Appellants,"[10] he assigned his right to
redeem one-half of the conjugal property to his son on
November 21, 1988.
The Court of Appeals, however, maintained that
although the transfer was made between father and
son, the conveyance was not fraudulent since Paulino
had indeed paid the redemption price of P1,463,375.39
to Metrobank and the sum of P100,000.00 to his father.
The Court of Appeals reiterated the findings of the trial
court that Paulino at that time had his own source of
income, having been given HK$1Million by his maternal
grandmother which he used to invest in a buy-and-sell
business of stuffed toys.
It bears emphasis that it is not sufficient that the
conveyance is founded on a valuable consideration. In
the case of Oria vs. Mcmicking,[11] we had occasion to
state that "In determining whether or not a certain
conveyance is fraudulent the question in every case is
whether the conveyance was a bona fide transaction or
a trick and contrivance to defeat creditors, or whether
it conserves to the debtor a special right. It is not
sufficient that it is founded on good considerations or is
made with bona fide intent: it must have both
elements. If defective in either of these, although good
between the parties, it is voidable as to creditors. x x x
The test as to whether or not a conveyance is
fraudulent is, does it prejudice the rights of creditors?"
The mere fact that the conveyance was founded on
valuable consideration does not necessarily negate the
presumption of fraud under Article 1387 of the Civil
Code. There has to be a valuable consideration and the
transaction must have been made bona fide.
In the case at bar, the presumption that the
conveyance is fraudulent has not been overcome. At
the time a judgment was rendered in favor of China
Bank against Alfonso and the corporation, Paulino was
still living with his parents in the subject property.
Paulino himself admitted that he knew his father was
heavily indebted and could not afford to pay his debts.
The transfer was undoubtedly made between father
and son at a time when the father was insolvent and
had no other property to pay off his creditors. Hence, it
is of no consequence whether or not Paulino had given
valuable consideration for the conveyance.
With regard to the finding of the Court of Appeals that
petitioner was remiss in its duties for not having
availed of redemption under Rule 39 of the Rules of
Court, it should be borne in mind that petitioner is not
limited to the procedure outlined in Rule 39 of the
Rules of Court to enforce its claim against its debtor
Alfonso Roxas Chua. Verily, Article 1387 of the Civil

44
Code clearly states that conveyances made by the
debtor to defraud his creditor may be rescinded.
WHEREFORE, the petition is GRANTED. The decision of
the Court of Appeals in CA-G.R. CV No. 46735 is
REVERSED and SET ASIDE. The permanent injunction
enjoining petitioner, the Sheriff of Manila, the Register
of Deeds of San Juan, their officers, representatives,
agents and persons acting on their behalf from causing
the transfer of possession, ownership and title of the
property covered by TCT No. 410603 in favor of
petitioner is LIFTED. The Assignment of Rights to
Redeem dated November 21, 1988 executed by
Alfonso Roxas Chua in favor of Paulino Roxas Chua is
ordered RESCINDED. The levy on execution dated
February 4, 1991 and the Certificate of Sale dated April
30, 1992 in favor of petitioner are DECLARED VALID
against the one-half portion of the subject property.
SO ORDERED.

G.R. No. 144169 March 28, 200


KHE HONG CHENG, alias FELIX KHE, SANDRA JOY
KHE and RAY STEVEN KHE, petitioners,
vs.
COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC
147, MAKATI CITY and PHILAM INSURANCE CO.,
INC., respondents.
KAPUNAN, J.:
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 ERlC,
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.1wphi1.nt
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. RT12838. 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 attorney's 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

45
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

46
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

47
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 Bareg's
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 defendantsappellees Bareng for the collection of the
alleged indebtedness, Plaintiffs-appellants had
not even tried to exhaust the property of
defendants-appellees
Bareng,
Plaintiffsappellants, 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 courts 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
Philam's claims not yet exhausted at the time the
needs of donation were executed and registered.
Respondent Philam would also not have been able to
prove then that petitioner Khe Hong Cheng 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.1wphi1.nt
A final point. Petitioners now belatedly raise on appeal
the defense of improper venue claiming that
respondent Philam's complaint is a real action and
should have been filed with the RTC of Butuan City
since the property subject matter or the donations are
located therein. Suffice it to say that petitioners are

48
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.