ART.

1386

RESCISSION REFERRED TO IN NOS. 1 AND 2 OF ARTICLE 1381 SHALL NOT TAKE

PLACE WITH RESPECT TO CONTRACTS APPROVED BY THE COURTS.

Contracts Approved by Courts Cannot be Rescinded

If a contract entered into in behalf of a ward or absentee has been approved by the court,
rescission cannot take place because it is valid whether there is lesion or not. (De Leon, H., The
Law on Obligations and Contracts)

Approval by the Courts

Approval by the Courts implies that the parties were given their day in court to justify to the court
the necessity and reasonableness of the contract to be entered into. Hence, once judicially
approved, such contract cannot anymore be the subject of rescission. (Sta. Maria, Jr., M.,
Obligations and Contracts Text and Cases)

Petition of Guardian for Leave to Sell or Encumber Estate

When the income of the estate under guardianship is insufficient to maintain the ward and his
family, or to maintain and educate the ward when a minor, or when it appears that it is for the
benefit of the ward that his real estate or some part thereof be sold, or mortgaged or otherwise
encumbered, and the proceeds thereof put out at interest, or invested in some productive
security, or in the improvement or security or other real estate of the ward, the guardian may
present a verified petition to the court by which he was appointed setting forth such facts, and
praying that an order issue authorizing the sale or encumbrance. (Sec. 1, Rule 95, Rules of
Court)

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.

ALIENATIONS 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 THE RESCISSION.

IN ADDITION TO THESE PRESUMPTIONS, THE DESIGN TO DEFRAUD CREDITORS MAY

BE PROVED IN ANY OTHER MANNER RECOGNIZED BY THE LAW OF EVIDENCE.

Statutory Presumptions of Fraud in Article 1387

1. Alienation by gratuitous title. When a debtor donates his property without reserving
sufficient property to pay all his pre-existing debts, the law presumes that the gratuitous
dispositions are made in fraud of creditors.

2. Alienation by onerous title. The contract is presumed fraudulent if at the time of

alienation, some judgement has been rendered against him, whether it is on appeal or has
already become final and executory; or some writ of attachment has been issued against him in
any case.

The decision or writ of attachment need not refer to the very property subject of alienation. The
person who obtained the judgement or writ of attachment need not be the same person seeking
the rescission.
Presumptions are Rebuttable

These presumptions are rebuttable, which means, they may be overcome by clear, strong and
convincing evidence.

Test for Determining Whether a Conveyance is Fraudulent

“In determining whether or not a certain conveyance is fraudulent, the question in every case is
whether the conveyance was a bona fi de transaction or a trick and contrivance to defeat
creditors, or whether it conserves to the debtor a special right.

It is not sufficient that it is founded on good consideration, or is made with bona fi de intent; it
must have both elements. If defective in either of these particulars although good between the
parties, it is rescindable as to creditors. The rule is universal both in law and in equity that
whatever fraud creates, justice will destroy. The test as to whether or not a conveyance is
fraudulent is: Does it prejudice the right of creditors?” (Oria vs. McMicking, 21 Phil. 243 [1912];
China Banking Corporation vs. Court of Appeals, 327 SCRA 378 [2000])

Badges of Fraud

Badges of fraud are circumstances indicating that certain alienation have been made in fraud of
creditors.

(1) The fact that the consideration of the conveyance is fictitious or inadequate;
(2) A transfer made by a debtor after suit has been begun and while it is pending against him. It
has been held, however, that while inadequacy of price and the pendency of a case against the
vendor may be considered badges of fraud, the sale cannot be considered in fraud of creditors
in the absence of proof that the vendor had no other property except that sold, especially where
the creditor knew of such sale and did nothing to have it annulled as in fraud of him nor did he
cause a cautionary notice to be inscribed in his certificate of title to protect his interest (Bobis vs.
Provincial Sheriff of Camarines Norte, 121 SCRA 28 [1983].);
(3) A sale upon credit by an insolvent debtor;
(4) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or
greatly embarrassed financially;
(5) Evidence of large indebtedness or complete insolvency;
(6) The fact that the transfer is made between father and son, when there are present some or
any of the above circumstances;
(7) The failure of the vendee to take exclusive possession of the property sold (Oria vs.
McMicking, supra.), unless such failure is with legal basis or practical reason, as where there
exists what appears to be a genuine lessor-lessee relationship between the vendor and the
vendee (Union Bank of the Phils. vs. Ong, 491 SCRA 581 [2006].);
(8) At the time of the conveyance, the vendee was living with the vendor and the former knew
that there was a judgment against the latter;
(9) It was known to the vendee that the vendor had no properties other than that sold to him
(Cabaliw vs. Sadorra, supra.);
(10) The certificate of title covering the lands sold remained in the name of the vendor who
declared them for taxation purposes and paid the taxes, a duty assumed by his heirs after his
death (Castro vs. Escutin, 90 SCRA 349 [1979]);
(11) Where the mortgagor-vendor and mortgagee-vendee are bosom friends with long history of
trust and intimacy and the element of trust is further accentuated by the execution between
them in addition to the two instruments (i.e., mortgage and subsequently, sale of the property) in
question, of two secret documents known as counter-receipt (contra recibo). Fraud is generally
accompanied by a secret trust, and, as in this case, the ostensible debtor selects a person in
whom he can repose trust and confidence (Ibid.);
(12) Where the seller and the buyer are half-brothers and the sale was executed and registered
about one month after a decision was rendered against the seller. The allegation that the
property was sold two (2) years before the decision by means of a private document is
ineffective to avoid the nullity of the sale for a private document can be easily produced with any
date which is convenient (Nerona vs. Intermediate Appellate Court, 133 SCRA 837 [1984].); and
(13) Where it appears, among others, that: (a) the sale was in English, the alleged vendor being
illiterate; (b) his wife did not join the sale; (c) the price was inadequate; (d) the notarization of the
sale was made on the day following the alleged thumb marking of the document; (e) the
boundaries of the lot sold were not stated; and (f) the sale was registered more than five (5)
years later. (Yanas vs. Acaylar, 136 SCRA 52 [1985].)