ART.

1381 RESCISSIBLE CONTRACTS RESCISSION,DEFINED

# 70 BOCALING & CO. VS BONNAVIE

HELD:

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rescinded by reason of injury to third persons, like creditors.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

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.

#71 AIRFRANCE VS CA NOT RATIFICATION

HELD:

The circumstances that AIR FRANCE personnel at the ticket counter in the airport allowed the GANAS to leave
is not tantamount to an implied ratification of travel agent Ella's irregular actuations. It should be recalled that
the GANAS left in Manila the day before the expiry date of their tickets and that "other arrangements" were to
be made with respect to the remaining segments. Besides, the validating stickers that Ella affixed on his own
merely reflect the status of reservations on the specified flight and could not legally serve to extend the validity
of a ticket or revive an expired one.

#72 RIVERA VS FIDEL DEL ROSARIO ART. 1191 VS ART. 1383\ART. 1381\PRESCRIPTION

HELD:

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 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. The following contracts are rescissible:

(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 non-fulfillment 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 (EXISTING), 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]

~PRESCRIPTION:

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.

#73 METROBANK VS INTERNATIONAL BANK REQUISITES: ACCION PAULIANA(IN FRAUD OF CREDITORS)

HELD:

Under Article 1381 of the Civil Code, an accion pauliana is an action to rescind contracts in fraud of creditors.22

REQUISITES:
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 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 Metrobankseeks 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.

ART. 1383 ACTION FOR RECISSION IS SUBSIDIARY

HELD:

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.

REQUISITES:
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:

~ACCION PAULIANA: DEFINED/LAST RESORT/WHEN DOES IT ACCRUE?

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.

~WHAT DOES ACCION PAULIANA PRESUPPOSES?

An accion pauliana thus presupposes the following:

1) A judgment;

2) the issuance by the trial court of a writ of execution for the satisfaction of the judgment, and

3) the failure of the sheriff to enforce and satisfy the judgment of the court.

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

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

What is important is that the credit of the plaintiff antedates that of the fraudulent alienation by the
debtor of his property.

After all, the decision of the trial court against the debtor will retroact to the time when the debtor
became indebted to the creditor.

Tolentino, a noted civilist, explained:

xxx[T]herefore, credits with suspensive term or condition are excluded, because the accion
pauliana presupposes a judgment and unsatisfied execution, which cannot exist when the debt is not
yet demandable at the time the rescissory action is brought.

Rescission= is a subsidiary action, which presupposes that the creditor has exhausted the property of
the debtor which is impossible in credits which cannot be enforced because of a suspensive term or
condition.

While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory with retroactive effect to the date when the
credit was constituted.[10]

These principles were reiterated by the Court when it explained the requisites of an accion pauliana in
greater detail, to wit:

The following successive measures must be taken by a creditor before he may bring an action for
rescission of an allegedly fraudulent sale:

(1) exhaust the properties of the debtor through levying by attachment and execution upon all the
property of the debtor, except such as are exempt from execution;

(2) exercise all the rights and actions of the debtor, save those personal to him (accion subrogatoria);
and

(3) seek rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana).

Without availing of the first and second remedies, i.e., exhausting the properties of the debtor or
subrogating themselves in Francisco Baregs transmissible rights and actions, petitioners simply
undertook the third measure and filed an action for annulment of sale. This cannot be
done.[11] (Emphasis ours)

In the same case, the Court also quoted the rationale of the CA when it upheld the dismissal of
the accion pauliana on the basis of lack of cause of action:
In this case, plaintiffs appellants had not even commenced an action against defendants-appellees
Bareng for the collection of the alleged indebtedness. Plaintiffs-appellants had not even tried to
exhaust the property of defendants-appellees Bareng. Plaintiffs-appellants, in seeking the rescission of
the contracts of sale entered into between defendants-appellees, failed to show and prove that
defendants-appellees Bareng had no other property, either at the time of the sale or at the time this
action was filed, out of which they could have collected this (sic) debts. (Emphasis ours)

Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng had
executed the deeds of donation in favor of his children, the complaint against Butuan Shipping Lines
and/or petitioner Khe Hong Cheng was still pending before the trial court. Respondent Philam had no
inkling, at the time, that the trial court's judgment would be in its favor and further, that such
judgment would not be satisfied due to the deeds of donation executed by petitioner Khe Hong Cheng
during the pendency of the case. Had respondent Philam filed his complaint on December
27, 1989, such complaint would have been dismissed for being premature. Not only were
all other legal remedies for the enforcement of respondent Philams claims not yet exhausted at the
time the deeds of donation were executed and registered. Respondent Philam would also not have
been able to prove then that petitioner Khe Hong Chneg had no more property other than those
covered by the subject deeds to satisfy a favorable judgment by the trial court.

It bears stressing that petitioner Khe Hong Cheng even expressly declared and represented that he had
reserved to himself property sufficient to answer for his debts contracted prior to this date:

That the DONOR further states, for the same purpose as expressed in the next preceding paragraph,
that this donation is not made with the object of defrauding his creditors having reserved to himself
property sufficient to answer his debts contracted prior to this date. [12]

As mentioned earlier, respondent Philam only learned about the unlawful conveyances made by
petitioner Khe Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan City
to attach the properties of petitioner Khe Hong Cheng. There they found that he no longer had any
properties in his name. It was only then that respondent Philam's action for rescission of the deeds
of donation accrued because then it could be said that respondent Philam had exhausted all legal
means to satisfy the trial court's judgment in its favor.

Since respondent Philam filed its complaint for accion

pauliana against petitioners on February 25, 1997, barely a
month from its discovery that petitioner Khe Hong Cheng had
no other property to satisfy the judgment award against him,
its action for rescission of the subject deeds clearly had not yet
prescribed.

ART. 1385 RESCISSION CREATES OBLIGATION TO RETURN OBJECT OF CONTRACT

# 75 DE ERGUIAGA VS CA

HELD:

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 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.

#76 DAVID REYES VS JOSE LIM BOTH PARTIES ASKED FOR

RESCISSION OF CONTRACT/DEPOSIT OF p10M MUST
RETURN TO LIM(VENDEE)

HELD:

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]

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]

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:

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.)

The principle that no person may unjustly enrich himself at the expense of another is embodied in Article
22[38] 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.

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.

# 77 REPUBLIC VS DAVID MUTUAL RESTITUTION MUST FOLLOW RESCISSION

HELD:

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 vendor[39] 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.

XXXX 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.

ART. 1387 CONTRACTS BY W/C THE DEBTOR ALIENATES PROPERTY BY GRATUITOUS TITLE PRESUMED TO
HAVE BEEN ENTERED INTO IN FRAUD OF CREDITORS

#78 SIGUAN VS LIM

BADGES OF FRAUD/
REQUISITES FOR ACCION PAULIANA/ WHO CAN ASSAIL
& CAN BENEFIT?

HELD:

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.

Article 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, petitioners 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: XXXX

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 other manner recognized by the law of evidence.

~BADGES OF FRAUD:

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:

(1) The fact that the consideration of the conveyance is fictitious or is inadequate;

(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 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, petitioners action must fail.

`WHO CAN BENEFIT FROM ACCION PAULIANA?

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 creditors
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.

#79 CHINABANK VS CA

HELD:

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.

~BADGES OF FRAUD SET BY SC:

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.

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 of large indebtedness or complete insolvency.

5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present other of the
above circumstances

7. The failure of the vendee to take exclusive possession of all the property. (Underscoring provided)

XXXX

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.

~PETITIONER DID NOT AVAIL THE RIGHT OF REDEMPTION-IMMATERIAL

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 Code clearly states that conveyances made by the debtor to defraud his
creditor may be rescinded.