Rescissible Contracts

H. Rescissible Contracts (Arts.
1380 to 1389)
316. Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668
Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 86150 March 2, 1992
GUZMAN, BOCALING & CO., petitioner,

vs.
RAOUL S. V. BONNEVIE, respondent.
E. Voltaire Garcia for petitioner.
Guinto Law Office for private respondent.
CRUZ, J.:
H. Rescissible Contracts (Arts. 1380 to 1389)
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 of lease contained the following stipulation:
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 above-qouted 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 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.
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:
WHEREFORE, premises considered, this Court in Civil Case No.

132634 hereby modifies the decision of the lower court as
follows:
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
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.
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 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.
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
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 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 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.
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 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 comply with her duty to give
them the first opportunity to purchase the subject property.
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.
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.
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.
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.
Narvasa, C.J., Griño-Aquino and Medialdea, JJ., concur.
Footnotes
1 Rollo, pp. 45-60; Penned by Mendoza, J., with Paras and

Limcoaco, JJ., concurring.
2 Exhibit "5", Original Records, p. 88.
3 Exhibit "B" Original Records, p. 99.
4 Tolentino, Commentaries and Jurisprudence on the Civil

Code of the Philippines, Vol. IV p. 571.
5 Aquino v. Tañedo, 39 Phil. 517.
6 Id., p. 572
7 Cordovero and Alcazar v. Villaruz and Borromeo, 46 Phil.

473.
8 De Santos v. IAC, 157 SCRA 295.
9 De la Cruz, IAC, 157 SCRA 660; Cui and Joven v. Henson, 51

Phil., 606.
10 Rollo, p. 182.
317. Siguan v. Lim, 318 SCRA 725
FIRST DIVISION
[G.R. No. 134685. November 19, 1999]
MARIA ANTONIA SIGUAN, petitioner, vs. ROSA LIM, LINDE LIM,

INGRID LIM and NEIL LIM, respondents.
DECISION
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 covered by TCT No. 87020.
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 petitioners 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 attorneys 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 petitioners 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 LIMs 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 petitioners contention that assuming that the Deed of

Donation was not antedated it was nevertheless in fraud of
creditors because Victoria Suarez became LIMs 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 LIMs 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 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, attorneys fees and expenses of litigation
because there is no factual basis therefor in the body of the trial
courts 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,
attorneys 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.
Article 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 petitioners 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.
Petitioners 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 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 documents. -- 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. Petitioners
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.
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:
(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, 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:
ATTY. FLORIDO:
Q These properties at the Sto. Nio Village, how much did you
acquire this property?
A Including the residential house P800,000.00 to P900,000.00.
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 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:
(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.
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 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.
Now on the propriety of the trial courts awards of moral

damages, attorneys 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.
Puno, Kapunan, Pardo, and Ynares-Santiago, JJ., concur.
[1] Original Record (OR), 42.
[2] Id., 135.
[3] G.R. No. 102784, 271 SCRA 12 [1997].
[4] OR, 10-12.
[5] Id., 6-9.
[6] OR, 160; Rollo, 22. Per Judge Galicano C. Arriesgado.
[7] Rollo, 31. Per Tuquero, A., J., with Imperial, J., and Verzola, E.,
JJ., concurring.
[8] 21 Phil. 243 [1912].

[9] 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.
[10] Sec. 30. Proof of notarial documents. -- Every instrument

duly acknowledged or proved and certified as provided by law
may be presented in evidence without further proof, the
certificate of acknowledgment being prima facie evidence of the
execution of the instrument or document involved.
[11] In Sta. Maria v. Court of Appeals, 285 SCRA 351 [1998], the
Court enumerated some of the instances when the factual
findings of the Court of Appeals are not deemed conclusive, to
wit: (1) when the findings are grounded entirely on speculation,
surmises, or conjectures; (2) when the inference made is
manifestly mistaken, absurd, or impossible; (3) when there is
grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of fact are
conflicting; (6) when in making its findings the Court of Appeals
went beyond the issues of the case, or its findings are contrary
to the admissions of both the appellant and the appellee; (7)
when the findings are contrary to those of the trial court; (8)
when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in
the petition as well as in the petitioners main and reply briefs
are not disputed by the respondent; and (10) when the findings
of fact are premised on the supposed absence of evidence and
contradicted by the evidence on record.
[12] Panlilio v. Victoria, 35 Phil. 706 [1916]; Solis v. Chua Pua

Hermanos, 50 Phil. 636 [1927].
[13] Article 1383, Civil Code.
[14] 4 Tolentino, Arturo M., Civil Code of the Philippines 576

(1991), [hereafter 4 Tolentino]; citing 8 Manresa 756, 2 Castan
543-555, and 3 Camus 207.
[15] 4 Tolentino 576, citing 2 Castan 543-555 and 3 Camus 107.
[16] Solis v. Chua Pua Hernanes, supra note 12, at 639.
[17] 4 Tolentino 576-577, citing Sentencia (Cuba) of 7 May 1910

and 1 Gasperi 484-485.
[18] Section 19(b), Rule 132, Rules of Court.
[19]19 Moreno, Federico B., Philippine Law Dictionary 915 (1988).
[20] Article 1177, Civil Code.
[21] See Goquiolay v. Sycip, 9 SCRA 663, 677 [1963]; Solis v. Chua
Pua Hermanos, supra note 12, at 639-640.
[22] Exhibit M; Exhibit 2; OR, 114.
[23] TSN, 12 November 1993, 4.
[24] Exhibit N; OR, 146.
[25] Exhibit O; Id., 147.
[26] TSN, 12 November 1993, 7.
[27] Id., 6.
[28] Oria v. McMicking, supra note 8.
[29] Rivera v. Litam & Co., 4 SCRA 1072 [1962].
[30] Exhibit K; OR, 135.
[31] 4 Paras, Edgardo L., Civil Code Of The Philippines, 70 (1994);

4 Tolentino 586, citing 7 Planiol & Ripert 274-275.
[32] 4 TOLENTINO 586, Citing 7 Planiol & Ripert 271-272.

318. Pryce Corp. v. PAGCOR, 458 SCRA 164
THIRD DIVISION
[G.R. No. 157480. May 6, 2005]
PRYCE CORPORATION (formerly PRYCE PROPERTIES

CORPORATION), petitioner, vs. PHILIPPINE AMUSEMENT AND
GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not

equivalent to its rescission. When an agreement is terminated, it
is deemed valid at inception. Prior to termination, the contract
binds the parties, who are thus obliged to observe its provisions.
However, when it is rescinded, it is deemed inexistent, and the
parties are returned to their status quo ante. Hence, there is
mutual restitution of benefits received. The consequences of
termination may be anticipated and provided for by the contract.
As long as the terms of the contract are not contrary to law,
morals, good customs, public order or public policy, they shall
be respected by courts. The judiciary is not authorized to make
or modify contracts; neither may it rescue parties from
disadvantageous stipulations. Courts, however, are empowered
to reduce iniquitous or unconscionable liquidated damages,
indemnities and penalties agreed upon by the parties.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules

of Court, assailing the May 22, 2002 Decision[2] of the Court of
Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003
Resolution[3] denying petitioners Motion for Reconsideration.
The assailed Decision disposed thus:
WHEREFORE, in view of the foregoing, judgment is hereby

rendered as follows: (1) In Civil Case No. 93-68266, the appealed
decision[,] is AFFIRMED with MODIFICATION[,] ordering
[Respondent] Philippine Amusement and Gaming Corporation to
pay [Petitioner] Pryce Properties Corporation the total amount of
P687,289.50 as actual damages representing the accrued rentals
for the quarter September to November 1993 with interest and
penalty at the rate of two percent (2%) per month from date of
filing of the complaint until the amount shall have been fully
paid, and the sum of P50,000.00 as attorneys fees; (2) In Civil
Case No. 93-68337, the appealed decision is REVERSED and SET
ASIDE and a new judgment is rendered ordering [Petitioner]
Pryce Properties Corporation to reimburse [Respondent]
Philippine Amusement and Gaming Corporation the amount of
P687,289.50 representing the advanced rental deposits, which
amount may be compensated by [Petitioner] Pryce Properties
Corporation with its award in Civil Case No. 93-68266 in the
equal amount of P687,289.50.[4]
The Facts
According to the CA, the facts are as follows:

Sometime in the first half of 1992, representatives from Pryce

Properties Corporation (PPC for brevity) made representations
with the Philippine Amusement and Gaming Corporation
(PAGCOR) on the possibility of setting up a casino in Pryce Plaza
Hotel in Cagayan de Oro City. [A] series of negotiations followed.
PAGCOR representatives went to Cagayan de Oro City to
determine the pulse of the people whether the presence of a
casino would be welcomed by the residents. Some local
government officials showed keen interest in the casino
operation and expressed the view that possible problems were
surmountable. Their negotiations culminated with PPCs counter-
letter proposal dated October 14, 1992.
On November 11, 1992, the parties executed a Contract of Lease

x x x involving the ballroom of the Hotel for a period of three (3)
years starting December 1, 1992 and until November 30, 1995.
On November 13, 1992, they executed an addendum to the
contract x x x which included a lease of an additional 1000
square meters of the hotel grounds as living quarters and
playground of the casino personnel. PAGCOR advertised the
start of their casino operations on December 18, 1992.
Way back in 1990, the Sangguniang Panlungsod of Cagayan de

Oro City passed Resolution No. 2295 x x x dated November 19,
1990 declaring as a matter of policy to prohibit and/or not to
allow the establishment of a gambling casino in Cagayan de Oro
City. Resolution No. 2673 x x x dated October 19, 1992 (or a
month before the contract of lease was executed) was
subsequently passed reiterating with vigor and vehemence the
policy of the City under Resolution No. 2295, series of 1990,
banning casinos in Cagayan de Oro City. On December 7, 1992,
the Sangguniang Panlungsod of Cagayan de Oro City enacted
Ordinance No. 3353 x x x prohibiting the issuance of business

permits and canceling existing business permits to any
establishment for using, or allowing to be used, its premises or
any portion thereof for the operation of a casino.
In the afternoon of December 18, 1992 and just hours before the
actual formal opening of casino operations, a public rally in front
of the hotel was staged by some local officials, residents and
religious leaders. Barricades were placed [which] prevented some
casino personnel and hotel guests from entering and exiting
from the Hotel. PAGCOR was constrained to suspend casino
operations because of the rally. An agreement between PPC and
PAGCOR, on one hand, and representatives of the rallyists, on
the other, eventually ended the rally on the 20th of December,
1992.
On January 4, 1993, Ordinance No. 3375-93 x x x was passed by

the Sangguniang Panlungsod of Cagayan de Oro City, prohibiting
the operation of casinos and providing for penalty for violation
thereof. On January 7, 1993, PPC filed a Petition for Prohibition
with Preliminary Injunction x x x against then public respondent
Cagayan de Oro City and/or Mayor Pablo P. Magtajas x x x before
the Court of Appeals, docketed as CA G.R. SP No. 29851 praying
inter alia, for the declaration of unconstitutionality of Ordinance
No. 3353. PAGCOR intervened in said petition and further
assailed Ordinance No. 4475-93 as being violative of the non-
impairment of contracts and equal protection clauses. On March
31, 1993, the Court of Appeals promulgated its decision x x x,
the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and

Ordinance No. 3375-93 are hereby DECLARED
UNCONSTITUTIONAL and VOID and the respondents and all
other persons acting under their authority and in their behalf are
PERMANENTLY ENJOINED from enforcing those ordinances.
SO ORDERED.
Aggrieved by the decision, then public respondents Cagayan de

Oro City, et al. elevated the case to the Supreme Court in G.R. No.
111097, where, in an En Banc Decision dated July 20, 1994 x x x,
the Supreme Court denied the petition and affirmed the decision
of the Court of Appeals.
In the meantime, PAGCOR resumed casino operations on July 15,

1993, against which, however, another public rally was held.
Casino operations continued for some time, but were later on
indefinitely suspended due to the incessant demonstrations. Per
verbal advice x x x from the Office of the President of the
Philippines, PAGCOR decided to stop its casino operations in
Cagayan de Oro City. PAGCOR stopped its casino operations in
the hotel prior to September, 1993. In two Statements of Account
dated September 1, 1993 x x x, PPC apprised PAGCOR of its
outstanding account for the quarter September 1 to November
30, 1993. PPC sent PAGCOR another Letter dated September 3,
1993 x x x as a follow-up to the parties earlier conference. PPC
sent PAGCOR another Letter dated September 15, 1993 x x x
stating its Board of Directors decision to collect the full rentals
in case of pre-termination of the lease.
PAGCOR sent PPC a letter dated September 20, 1993 x x x

[stating] that it was not amenable to the payment of the full
rentals citing as reasons unforeseen legal and other
circumstances which prevented it from complying with its
obligations. PAGCOR further stated that it had no other
alternative but to pre-terminate the lease agreement due to the
relentless and vehement opposition to their casino operations.
In a letter dated October 12, 1993 x x x, PAGCOR asked PPC to
refund the total of P1,437,582.25 representing the reimbursable
rental deposits and expenses for the permanent improvement of
the Hotels parking lot. In a letter dated November 5, 1993 x x x,
PAGCOR formally demanded from PPC the payment of its claim
for reimbursement.
On November 15, 1993 x x x, PPC filed a case for sum of money

in the Regional Trial Court of Manila docketed as Civil Case No.
93-68266. On November 19, 1993, PAGCOR also filed a case for
sum of money in the Regional Trial Court of Manila docketed as
Civil Case No. 93-68337.
In a letter dated November 25, 1993, PPC informed PAGCOR that

it was terminating the contract of lease due to PAGCORs
continuing breach of the contract and further stated that it was
exercising its rights under the contract of lease pursuant to
Article 20 (a) and (c) thereof.
On February 2, 1994, PPC filed a supplemental complaint x x x in

Civil Case No. 93-68266, which the trial court admitted in an
Order dated February 11, 1994. In an Order dated April 27, 1994,
Civil Case No. 93-68377 was ordered consolidated with Civil Case
No. 93-68266. These cases were jointly tried by the court a quo.
On August 17, 1995, the court a quo promulgated its decision.

Both parties appealed.[5]
In its appeal, PPC faulted the trial court for the following reasons:
1) failure of the court to award actual and moral damages; 2) the
50 percent reduction of the amount PPC was claiming; and 3) the
courts ruling that the 2 percent penalty was to be imposed from
the date of the promulgation of the Decision, not from the date
stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the
latters failure to rule that the Contract of Lease had already been
terminated as early as September 21, 1993, or at the latest, on
October 14, 1993, when PPC received PAGCORs letter dated
October 12, 1993. The gaming corporation added that the trial
court erred in 1) failing to consider that PPC was entitled to avail
itself of the provisions of Article XX only when PPC was the party
terminating the Contract; 2) not finding that there were valid,
justifiable and good reasons for terminating the Contract; and 3)
dismissing the Complaint of PAGCOR in Civil Case No. 93-68337
for lack of merit, and not finding PPC liable for the
reimbursement of PAGCORS cash deposits and of the value of
improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the PAGCORS

pretermination of the Contract of Lease was unjustified. The
appellate court explained that public demonstrations and rallies
could not be considered as fortuitous events that would exempt
the gaming corporation from complying with the latters

contractual obligations. Therefore, the Contract continued to be
effective until PPC elected to terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article

1659 of the Civil Code, PPC had the right to ask for (1) rescission
of the Contract and indemnification for damages; or (2) only
indemnification plus the continuation of the Contract. These two
remedies were alternative, not cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for

September to November 1993, PPC correctly exercised the option
to terminate the lease agreement. Previously, the Contract
remained effective, and PPC could collect the accrued rentals.
However, from the time it terminated the Contract on November
25, 1993, PPC could no longer demand payment of the remaining
rentals as part of actual damages, the CA added.
Denying the claim for moral damages, the CA pointed out the
failure of PPC to show that PAGCOR had acted in gross or evident
bad faith in failing to pay the rentals from September to
November 1993. Such failure was shown especially by the fact
that PPC still had in hand three (3) months advance rental
deposits of PAGCOR. The former could have simply applied this
deposit to the unpaid rentals, as provided in the Contract.
Neither did PPC adequately show that its reputation had been
besmirched or the hotels goodwill eroded by the establishment
of the casino and the public protests.
Finally, as to the claimed reimbursement for parking lot

improvement, the CA held that PAGCOR had not presented
official receipts to prove the latters alleged expenses. The
appellate court, however, upheld the trial courts award to PPC of
P50,000 attorneys fees.
Hence this Petition.[6]
Issues
In their Memorandum, petitioner raised the following issues:
MAIN ISSUE:
Did the Honorable Court of Appeals commit x x x grave and

reversible error by holding that Pryce was not entitled to future
rentals or lease payments for the unexpired period of the
Contract of Lease between Pryce and PAGCOR?
Sub-Issues:
1. Were the provisions of Sections 20(a) and 20(c) of the Contract

of Lease relative to the right of PRYCE to terminate the Contract
for cause and to moreover collect rentals from PAGCOR
corresponding to the remaining term of the lease valid and
binding?
2. Did not Article 1659 of the Civil Code supersede Sections 20(a)
and 20(c) of the Contract, PRYCE having rescinded the Contract
of Lease?
3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al.

and the other cases cited by PAGCOR support its position that
PRYCE was not entitled to future rentals?
4. Would the collection by PRYCE of future rentals not give rise

to unjust enrichment?
5. Could we not have harmonized Article 1659 of the Civil Code

and Article 20 of the Contract of Lease?
6. Is it not a basic rule that the law, i.e. Article 1659, is deemed
written in contracts, particularly in the PRYCE-PAGCOR Contract
of Lease?[7]
The Courts Ruling
The Petition is partly meritorious.
Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the

provisions of the Contract. Likewise, it argues that termination,
as defined under the Contract, is different from the remedy of
rescission prescribed under Article 1659 of the Civil Code. On
the other hand, PAGCOR contends, as the CA ruled, that Article
1659 of the Civil Code governs; hence, PPC is allegedly no longer
entitled to future rentals, because it chose to rescind the
Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that obligations arising

from contracts have the force of law between the contracting
parties and should be complied with in good faith.[8] In
deference to the rights of the parties, the law[9] allows them to
enter into stipulations, clauses, terms and conditions they may
deem convenient; that is, as long as these are not contrary to law,
morals, good customs, public order or public policy. Likewise, it
is settled that if the terms of the contract clearly express the
intention of the contracting parties, the literal meaning of the
stipulations would be controlling.[10]
In this case, Article XX of the parties Contract of Lease provides

in part as follows:
XX. BREACH OR DEFAULT

a) The LESSEE agrees that all the terms, conditions and/or

covenants herein contained shall be deemed essential conditions
of this contract, and in the event of default or breach of any of
such terms, conditions and/or covenants, or should the LESSEE
become bankrupt, or insolvent, or compounds with his creditors,
the LESSOR shall have the right to terminate and cancel this
contract by giving them fifteen (15 days) prior notice delivered
at the leased premises or posted on the main door thereof. Upon
such termination or cancellation, the LESSOR may forthwith lock
the premises and exclude the LESSEE therefrom, forcefully or
otherwise, without incurring any civil or criminal liability. During
the fifteen (15) days notice, the LESSEE may prevent the
termination of lease by curing the events or causes of
termination or cancellation of the lease.
b) x x x x x x x x x
c) Moreover, the LESSEE shall be fully liable to the LESSOR for the
rentals corresponding to the remaining term of the lease as well
as for any and all damages, actual or consequential resulting
from such default and termination of this contract.
d) x x x x x x x x x. (Italics supplied)
The above provisions leave no doubt that the parties have

covenanted 1) to give PPC the right to terminate and cancel the
Contract in the event of a default or breach by the lessee; and 2)
to make PAGCOR fully liable for rentals for the remaining term
of the lease, despite the exercise of such right to terminate.
Plainly, the parties have voluntarily bound themselves to require
strict compliance with the provisions of the Contract by

stipulating that a default or breach, among others, shall give the
lessee the termination option, coupled with the lessors liability
for rentals for the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law,
morals, good customs, public order or public policy. Neither is
there anything objectionable about the inclusion in the Contract
of mandatory provisions concerning the rights and obligations
of the parties.[11] Being the primary law between the parties, it
governs the adjudication of their rights and obligations. A court
has no alternative but to enforce the contractual stipulations in
the manner they have been agreed upon and written.[12] It is well
to recall that courts, be they trial or appellate, have no power to
make or modify contracts.[13] Neither can they save parties from
disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask

for termination plus the full payment of future rentals under the
provisions of the Contract, rather than just rescission under
Article 1659 of the Civil Code. This Court is not unmindful of the
fact that termination and rescission are terms that have been
used loosely and interchangeably in the past. But distinctions
ought to be made, especially in this controversy, in which the
terms mean differently and lead to equally different
consequences.
The term rescission is found in 1) Article 1191[14] of the Civil

Code, the general provision on rescission of reciprocal
obligations; 2) Article 1659,[15] which authorizes rescission as
an alternative remedy, insofar as the rights and obligations of
the lessor and the lessee in contracts of lease are concerned; and
3) Article 1380[16] with regard to the rescission of contracts.
In his Concurring Opinion in Universal Food Corporation v.

CA,[17] Justice J. B. L. Reyes differentiated rescission under
Article 1191 from that under Article 1381 et seq. as follows:
x x x. The rescission on account of breach of stipulations is not

predicated on injury to economic interests of the party plaintiff
but on the breach of faith by the defendant, that violates the
reciprocity between the parties. It is not a subsidiary action, and
Article 1191 may be scanned without disclosing anywhere that
the action for rescission thereunder is subordinated to anything
other than the culpable breach of his obligations to the
defendant. This rescission is a principal action retaliatory in
character, it being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in the old
Latin aphorism: Non servanti fidem, non est fides servanda.
Hence, the reparation of damages for the breach is purely
secondary.
On the contrary, in rescission by reason of lesion or economic

prejudice, the cause of action is subordinated to the existence of
that prejudice, because it is the raison detre as well as the
measure of the right to rescind. x x x.[18]
Relevantly, it has been pointed out that resolution was originally

used in Article 1124 of the old Civil Code, and that the term
became the basis for rescission under Article 1191 (and,
conformably, also Article 1659).[19]
Now, as to the distinction between termination (or cancellation)

and rescission (more properly, resolution), Huibonhoa v. CA[20]
held that, where the action prayed for the payment of rental
arrearages, the aggrieved party actually sought the partial
enforcement of a lease contract. Thus, the remedy was not
rescission, but termination or cancellation, of the contract. The
Court explained:
x x x. By the allegations of the complaint, the Gojoccos aim was

to cancel or terminate the contract because they sought its
partial enforcement in praying for rental arrearages. There is a
distinction in law between cancellation of a contract and its
rescission. To rescind is to declare a contract void in its inception
and to put an end to it as though it never were. It is not merely
to terminate it and release parties from further obligations to
each other but to abrogate it from the beginning and restore the
parties to relative positions which they would have occupied had
no contract ever been made.
x x x. The termination or cancellation of a contract would

necessarily entail enforcement of its terms prior to the
declaration of its cancellation in the same way that before a
lessee is ejected under a lease contract, he has to fulfill his
obligations thereunder that had accrued prior to his ejectment.
However, termination of a contract need not undergo judicial
intervention. x x x.[21] (Italics supplied)
Rescission has likewise been defined as the unmaking of a

contract, or its undoing from the beginning, and not merely its
termination. Rescission may be effected by both parties by
mutual agreement; or unilaterally by one of them declaring a
rescission of contract without the consent of the other, if a
legally sufficient ground exists or if a decree of rescission is
applied for before the courts.[22] On the other hand, termination
refers to an end in time or existence; a close, cessation or
conclusion. With respect to a lease or contract, it means an
ending, usually before the end of the anticipated term of such
lease or contract, that may be effected by mutual agreement or
by one party exercising one of its remedies as a consequence of
the default of the other.[23]
Thus, mutual restitution is required in a rescission (or

resolution), in order to bring back the parties to their original
situation prior to the inception of the contract.[24] Applying this
principle to this case, it means that PPC would re-acquire
possession of the leased premises, and PAGCOR would get back
the rentals it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored

to their original situation; neither is the contract treated as if it
never existed. Prior to its termination, the parties are obliged to
comply with their contractual obligations. Only after the contract
has been cancelled will they be released from their obligations.
In this case, the actions and pleadings of petitioner show that it

never intended to rescind the Lease Contract from the beginning.
This fact was evident when it first sought to collect the accrued
rentals from September to November 1993 because, as

previously stated, it actually demanded the enforcement of the
Lease Contract prior to termination. Any intent to rescind was
not shown, even when it abrogated the Contract on November
25, 1993, because such abrogation was not the rescission
provided for under Article 1659.
Future Rentals
As to the remaining sub-issue of future rentals, Rios v.

Jacinto[25] is inapplicable, because the remedy resorted to by the
lessors in that case was rescission, not termination. The rights
and obligations of the parties in Rios were governed by Article
1659 of the Civil Code; hence, the Court held that the damages
to which the lessor was entitled could not have extended to the
lessees liability for future rentals.
Upon the other hand, future rentals cannot be claimed as

compensation for the use or enjoyment of anothers property
after the termination of a contract. We stress that by abrogating
the Contract in the present case, PPC released PAGCOR from the
latters future obligations, which included the payment of rentals.
To grant that right to the former is to unjustly enrich it at the
latters expense.
However, it appears that Section XX (c) was intended to be a

penalty clause. That fact is manifest from a reading of the
mandatory provision under subparagraph (a) in conjunction with
subparagraph (c) of the Contract. A penal clause is an accessory
obligation which the parties attach to a principal obligation for
the purpose of insuring the performance thereof by imposing on

the debtor a special prestation (generally consisting in the
payment of a sum of money) in case the obligation is not fulfilled
or is irregularly or inadequately fulfilled.[26]
Quite common in lease contracts, this clause functions to

strengthen the coercive force of the obligation and to provide, in
effect, for what could be the liquidated damages resulting from
a breach.[27] There is nothing immoral or illegal in such
indemnity/penalty clause, absent any showing that it was forced
upon or fraudulently foisted on the obligor.[28]
In obligations with a penal clause, the general rule is that the

penalty serves as a substitute for the indemnity for damages and
the payment of interests in case of noncompliance; that is, if
there is no stipulation to the contrary,[29] in which case proof of
actual damages is not necessary for the penalty to be
demanded.[30] There are exceptions to the aforementioned rule,
however, as enumerated in paragraph 1 of Article 1226 of the
Civil Code: 1) when there is a stipulation to the contrary, 2) when
the obligor is sued for refusal to pay the agreed penalty, and 3)
when the obligor is guilty of fraud. In these cases, the purpose
of the penalty is obviously to punish the obligor for the breach.
Hence, the obligee can recover from the former not only the
penalty, but also other damages resulting from the
nonfulfillment of the principal obligation. [31]
In the present case, the first exception applies because Article XX

(c) provides that, aside from the payment of the rentals
corresponding to the remaining term of the lease, the lessee shall
also be liable for any and all damages, actual or consequential,
resulting from such default and termination of this contract.

Having entered into the Contract voluntarily and with full
knowledge of its provisions, PAGCOR must be held bound to its
obligations. It cannot evade further liability for liquidated
damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be

equitably reduced by the courts.[32] This power is explicitly
sanctioned by Articles 1229 and 2227 of the Civil Code, which
we quote:
Art. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with
by the debtor. Even if there has been no performance, the penalty
may also be reduced by the courts if it is iniquitous or
unconscionable.
Art. 2227. Liquidated damages, whether intended as an

indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable.
The question of whether a penalty is reasonable or iniquitous is

addressed to the sound discretion of the courts. To be
considered in fixing the amount of penalty are factors such as --
but not limited to -- the type, extent and purpose of the penalty;
the nature of the obligation; the mode of the breach and its
consequences; the supervening realities; the standing and

relationship of the parties; and the like.[33]
In this case, PAGCORs breach was occasioned by events that,

although not fortuitous in law, were in fact real and pressing.
From the CAs factual findings, which are not contested by either
party, we find that PAGCOR conducted a series of negotiations
and consultations before entering into the Contract. It did so not
only with the PPC, but also with local government officials, who
assured it that the problems were surmountable. Likewise,
PAGCOR took pains to contest the ordinances[34] before the
courts, which consequently declared them unconstitutional. On
top of these developments, the gaming corporation was advised
by the Office of the President to stop the games in Cagayan de
Oro City, prompting the former to cease operations prior to
September 1993.
Also worth mentioning is the CAs finding that PAGCORs casino

operations had to be suspended for days on end since their start
in December 1992; and indefinitely from July 15, 1993, upon the
advice of the Office of President, until the formal cessation of
operations in September 1993. Needless to say, these
interruptions and stoppages meant that PAGCOR suffered a
tremendous loss of expected revenues, not to mention the fact
that it had fully operated under the Contract only for a limited
time.
While petitioners right to a stipulated penalty is affirmed, we

consider the claim for future rentals to the tune of P7,037,835.40
to be highly iniquitous. The amount should be equitably reduced.
Under the circumstances, the advanced rental deposits in the
sum of P687,289.50 should be sufficient penalty for respondents

breach.
WHEREFORE, the Petition is GRANTED in part. The assailed

Decision and Resolution are hereby MODIFIED to include the
payment of penalty. Accordingly, respondent is ordered to pay
petitioner the additional amount of P687,289.50 as penalty,
which may be set off or applied against the formers advanced
rental deposits. Meanwhile, the CAs award to petitioner of actual
damages representing the accrued rentals for September to
November 1993 -- with interest and penalty at the rate of two
percent (2%) per month, from the date of filing of the Complaint
until the amount shall have been fully paid -- as well as the
P50,000 award for attorneys fees, is AFFIRMED. No costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ.,

concur.
[1] Rollo, pp. 39-85.
[2] Id., pp. 88-106. Sixth Division. Penned by Justice Sergio L.

Pestao and concurred in by Justices Delilah Vidallon-Magtolis
(Division chair) and Candido V. Rivera (member).
[3] Id., pp. 108-109.

[4] CA Decision, pp. 18-19; rollo, pp. 105-106.
[5] Id., pp. 2-6 & 89-93. Citations omitted.
[6] The Petition was deemed submitted for decision on March 8,

2004, upon the Courts receipt of petitioners Memorandum
signed by Attys. Ramon R. Torralba Jr. and Geoffrey G. Cagakit.
Respondents Memorandum, signed by Assistant Government
Corporate Counsels Efren B. Gonzales and Herman R.
Cimafranca and Government Corporate Attorney Achilles A. A.
C. Bulauitan, was received by the Court on February 20, 2004.
[7] Petitioners Memorandum, pp. 11-12; rollo, pp. 188-189.

Original in upper case.
[8] See Premiere Development Bank v. CA, 427 SCRA 686, 696,
April 14, 2004; National Housing Authority v. Grace Baptist
Church, 424 SCRA 147, 151-152, March 1, 2004; Philippine
National Construction Corp. v. CA, 338 Phil. 691, 699, May 5,
1997.
[9] Article 1306 of the Civil Code.
[10] Article 1370 of the Civil Code. See also Henson v.

Intermediate Appellate Court, 148 SCRA 11, 16, February 19,
1987; Gonzales v. Court of Appeals, 209 Phil. 515, 521,
September 21, 1983; Matienzo v. Servidad, 194 Phil. 263, 269,
September 10, 1981.
[11] Heirs of the Late Justice Jose B. L. Reyes v. CA, 392 Phil. 827,
842, August 16, 2000; Peoples Industrial and Commercial Corp.
v. CA, 346 Phil. 189, 202, October 24, 1997; Manila Bay Club Corp.
v. CA, 315 Phil. 805, 826, July 11, 1995.
[12] Valarao v. CA, 363 Phil. 495, 506, March 3, 1999; Luzon
Brokerage Co., Inc. v. Maritime Building Co., Inc., 150-B Phil. 264,
275, August 18, 1972; Manila Racing Club v. Manila Jockey Club,
69 Phil. 55, 57, October 28, 1939.
[13] Top-Weld Manufacturing, Inc. v. ECED, S.A., 138 SCRA 118,
133, August 9, 1985.
[14] Art. 1191 of the Civil Code states:
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 the 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.
The court shall decree the rescission claimed, unless there be

just cause authorizing the fixing of a period.
[15] Article 1659 of the Civil Code provides as follows:
"Art. 1659. If the lessor or the lessee should not comply with the
obligations set forth in articles 1654 and 1657, the aggrieved
party may ask for the rescission of the contract and
indemnification for damages, or only the latter, allowing the
contract to remain in force."
[16] Art. 1380 of the Civil Code reads thus:
Art. 1380. Contracts validly agreed upon may be rescinded in the

cases established by law.
[17] 144 Phil. 1, May 28, 1970.
[18] Id., pp. 21-22, per Castro, J.
[19] Rivera v. Del Rosario, 419 SCRA 626, 637, January 15, 2004;
Ong v. CA, 369 Phil. 243, 252, July 6, 1999.
[20] 378 Phil. 386, December 14, 1999.
[21] Id., pp. 422-423, per Purisima, J. See also Spouses Velarde v.
CA, 413 Phil. 360, 375, July 11, 2001; Ocampo v. CA, 233 SCRA
551, 561, June 30, 1994.
[22] Blacks Law Dictionary, 6th ed., p. 1306.

[23] Id., p. 1471.
[24] Spouses Velarde v. CA, supra; Asuncion v. Evangelista, 375

Phil. 328, 356, October 13, 1999.
[25] 49 Phil. 7, March 23, 1926.
[26] Ligutan v. CA, 427 Phil. 42, 52, February 12, 2002, per Vitug,
J.; Social Security System v. Moonwalk Development & Housing
Corporation, 221 SCRA 119, 124 & 127, April 7, 1993; Country
Bankers Insurance Corporation v. CA, 201 SCRA 458, 465,
September 9, 1991.
[27] Ibid.
[28] Azcuna Jr. v. CA; 325 Phil. 500, 504, March 20, 1996.
[29] Article 1226, par. 1 of the Civil Code
[30] Article 1228 of the Civil Code.
[31] Ligutan v. CA, supra, p. 53.
[32] Lo v. CA, 411 SCRA 523, September 23, 2003; Asia Trust
Development Bank v. Concepts Trading Corporation, 404 SCRA
449, June 20, 2003; Ruiz v. CA, 401 SCRA 410, April 22, 2003;
First Metro Investment Corp. v. Este Del Sol Mountain Reserve,

Inc., 420 SCRA 902, November 15, 2001; Segovia Development
Corp. v. J.L. Dumatol Realty and Development Corp., 416 Phil.
528, August 30, 2001; State Investment House, Inc. v. CA, 413
Phil. 518, July 12, 2001.
[33] Ligutan v. CA, supra; Rizal Commercial Banking Corp. v. CA,

352 Phil. 101, 126, April 20, 1998.
[34] Ordinance Nos. 3353 and 3375-93.

319. Cabaliw v. Sadorra, 64 SCRA 310

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-25650 June 11, 1975
ISIDORA L. CABALIW and SOLEDAD SADORRA, petitioners,

vs.
SOTERO SADORRA, ENCARNACION SADORRA, EMILIO
ANTONIO, ESPERANZA RANJO, ANSELMO RALA, BASION
VELASCO, IGNACIO SALMAZAN, and THE HONORABLE COURT
OF APPEALS, respondents.
Jose W. Diokno for petitioners.
Angel A. Sison for respondents.
MUNOZ PALMA, J.:

Isidora Cabaliw was the wife of Benigno Sadorra by his second

marriage solemnized on May 5, 1915, before the Justice of the
Peace of Bayambang, Pangasinan. This couple had a daughter
named Soledad Sadorra. During their marriage, the spouses
acquired two (2) parcels of land situated in Iniangan, Dupax,
Nueva Vizcaya. One parcel with an area of 14.4847 hectares was
acquired by a Sales Patent and covered by Original Certificate of
Title No. 1 of the Land Records of Nueva Vizcaya issued in the
name of Benigno Sadorra. The other piece of land of about 1-1/2
hectares and covered by Tax Declaration Nos. 6209 and 6642 was
secured through purchase.
Having been abandoned by her husband, Isidora Cabaliw

instituted an action for support with the Court of First Instance
of Manila, entitled "Isidora Cabaliw de Orden versus Benigno
Sadorra" docketed therein as Civil Case No. 43193. On January
30, 1933, judgment was rendered requiring Benigno Sadorra to
pay his wife, Isidora Cabaliw, the amount of P75.00 a month in
terms of support as of January 1, 1933, and P150.00 in concept
of attorney's fees and the costs.
Unknown to Isidora Cabaliw, on August 19, 1933, Benigno

Sadorra executed two (2) deeds of sale over the two parcels of
land above described in favor of his son-in-law, Sotero Sadorra,
the latter being married to Encarnacion Sadorra, a daughter of
Benigno Sadorra by his first marriage. These deeds were duly
registered and Original Certificate of Title No. 1 was cancelled
and replaced with T.C.T. No. 522 of the Register of Deeds of
Nueva Vizcaya.
Because of the failure of her husband to comply with the

judgment of support, Isidora Cabaliw filed in Civil Case 43192 a
motion to cite Benigno Sadorra for contempt and the Court of
First Instance of Manila in its Order of May 12, 1937, authorized
Isidora to take possession of the conjugal property, to
administer the same, and to avail herself of the fruits thereof in
payment of the monthly support in arrears. With this order of
the Court, Isidora proceeded to Nueva Vizcaya to take possession
of the aforementioned parcels of land, and it was then that she
discovered that her husband had sold them to his son-in-law
Sotero. On February 1, 1940, Isidora filed with the Court of First
Instance of Nueva Vizcaya Civil Case No. 449 against her
husband and Sotero Sadorra for the recovery of the lands in
question on the ground that the sale was fictitious; at the same
time a notice of lis pendens was filed with the Register of Deeds
of Nueva Vizcaya.
In May of 1940, Benigno Sadorra died.
On June 7, 1948, the above-mentioned notice of lis pendens was

cancelled by the Register of Deeds of Nueva Vizcaya upon the
filing of an affidavit by Sotero Sadorra to the effect that Civil
Case No. 449 had been decided in his favor and that he was
adjudged the owner of the land covered by T.C.T. No. 522, but
that his copy of the decision was lost during the war.
On October 1, 1954, Isidora and her daughter Soledad filed with

the Court of First Instance of Nueva Vizcaya Civil Case 634 to
recover from the spouses Sotero and Encarnacion Sadorra the
aforementioned two parcels of land; they also caused the
annotation of a cautionary notice and notice of lis pendens over

T.C.T. 522. 1
On November 22, 1955, the complaint was amended and named

additional party-defendants were the children of Benigno
Sadorra by his first marriage. The amended complaint prayed
among others: (1) that the deeds of sale executed by Benigno
Sadorra be declared null and void; (2) that defendant spouses
Sotero and Encarnacion Sadorra be directed to yield the
possession of the lands in question; and (3) that said lands be
ordered partitioned among plaintiffs and defendants who are
children by the first marriage of Benigno Sadorra in the
proportions provided by law. 2
During the pendency of civil case 634 certain parties intervened

claiming that they had purchased parts of the land covered by
T.C.T. 522.
After trial, the lower court rendered judgment and among other
things: (1) declared the deeds of sale executed by Benigno
Sadorra to be simulated and fictitious; (2) recognized and upheld
the rights of the intervenor-purchasers who acquired their
portions prior to the registration of the notice of lis pendens on
October 1, 1954, but dismissed the claims of the intervenors who
allegedly bought parts of the land subsequent thereto; and (3)
ordered the partition of the remaining unsold lands between
Isidora Cabaliw, Sotero Sadorra, on one hand and the children by
the first marriage of Benigno Sadorra on the other. 3
From the foregoing decision of the lower court in civil case 634
spouses Sotero and Encarnacion Sadorra appealed to the Court
of Appeals and so did the intervenors whose claim were
dismissed. (CA-G.R. No. 26956-R) On November 29, 1965, the
appellate court by a vote of 3 to 2 reversed the decision of the
trial court, and dismissed the amended complaint of Isidora
Cabaliw. 4
Hence, this petition filed by Isidora Cabaliw and her daughter,

Soledad Sadorra, for the Court to review the adverse judgment
of the Court of Appeals.
Several errors have been assigned by petitioners but the vital

question upon which depends the outcome of this appeal is
given in Error I, to wit:
The Honorable Court of Appeals gravely erred in holding that the

fraud could not be presumed in the transfer of the lots in
question by the late Benigno Sadorra to his son-in-law Sotero
Sadorra, even if this transfer was done shortly after judgment
was rendered against the former and in favor of your petitioner
Isidora Cabaliw. (p. 1, Petitioner's Brief)
The Court of Appeals sustained the validity and efficacy of the

deeds of sale executed by Benigno Sadorra in favor of his son-in-
law (Exhibits I and I-1) on the ground that these are public
documents and as such are presumed by law to have been fair
and legal; that the vendee Sotero Sadorra, is presumed to have
acted in good faith, citing Art. 44, Spanish Civil Code, Art. 627
New Civil Code; that fraud is never presumed, and it is settled in
this jurisdiction that strong and convincing evidence is

necessary to overthrow the validity of an existing public
instrument. The appellate court continued that inasmuch as
under the old Civil Code in force at the time of the sale, the
husband was empowered to dispose of the conjugal property
without the consent of the wife, the sales made by Benigno
Sadorra were valid, and the wife Isidora cannot now recover the
property from the vendee.
The judgment of the Court of Appeals cannot be sustained.
The facts narrated in the first portion of this Decision which are
not disputed, convincingly show or prove that the conveyances
made by Benigno Sadorra in favor of his son-in-law were
fraudulent. For the heart of the matter is that about seven
months after a judgment was rendered against him in Civil Case
No. 43192 of the Court of First Instance of Manila and without
paying any part of that judgment, Benigno Sadorra sold the only
two parcels of land belonging to the conjugal partnership to his
son-in-law. Such a sale even if made for a valuable consideration
is presumed to be in fraud of the judgment creditor who in this
case happens to be the offended wife.
Article 1297 of the old Civil Code which was the law in force at
the time of the transaction provides: 5
Contracts by virtue of which the debtor alienates property by

gratuitous title are presumed to be made in fraud of creditors.
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
rescission. (emphasis supplied)
The above-quoted legal provision was totally disregarded by the

appellate court, and there lies its basic error.
We agree with petitioners that the parties here do not stand in

equipoise, for the petitioners have in their favor, by a specific
provision of law, the presumption of a fraudulent transaction
which is not overcome by the mere fact that the deeds of sale in
question were in the nature of public instruments. As well said
in the dissenting opinion of Justice Magno Gatmaitan, the
principle invoked by the majority opinion that to destroy the
validity of an existing public document "strong and convincing
evidence is necessary", operates "where the action was brought
by one party against the other to impugn the contract ... but that
rule can not operate and does not, where the case is one wherein
the suit is not between the parties inter se but is one instituted
by a third person, not a party to the contract but precisely the
victim of it because executed to his prejudice and behind his
back; neither law, nor justice, nor reason, nor logic, should so
permit, otherwise, in such a suit, the courts would be furnishing
a most effective shield of defense to the aggressor." (pp. 30-31,
CA Decision)
Furthermore, the presumption of fraud established by the law in

favor of petitioners is bolstered by other indicia of bad faith on
the part of the vendor and vendee. Thus (1) the vendee is the son-
in-law of the vendor. In the early case of Regalado vs. Luchsinger
& Co., 5 Phil. 625, this Court held that the close relationship
between the vendor and the vendee is one of the known badges
of fraud. (2) At the time of the conveyance, the vendee, Sotero,
was living with his father-in-law, the vendor, and he knew that
there was a judgment directing the latter to give a monthly
support to his wife Isidora and that his father-in-law was
avoiding payment and execution of the judgment. 6 (3) It was
known to the vendee that his father-in-law had no properties
other than those two parcels of land which were being sold to
him. 7 The fact that a vendor transfers all of his property to a
third person when there is a judgment against him is a strong
indication of a scheme to defraud one who may have a valid
interest over his properties. 8
Added to the above circumstances is the undisputed fact that the

vendee Sotero Sadorra secured the cancellation of the lis
pendens on O.C.T. No. 1, which was annotated in 1940 at the
instance of Isidora Cabaliw, and the issuance of a transfer
certificate of title in his favor, by executing an affidavit, Exhibit
H, on June 7, 1948, wherein he referred to Isidora as "the late
Isidora Cabaliw' when he knew for a fact that she was alive, and
alleged that Civil Case 449 of the Court of First Instance of Nueva
Vizcaya was decided in his favor where in truth there was no
such decision because the proceedings in said case were
interrupted by the last world war. Such conduct of Sotero
Sadorra reveals, as stated by the lower court, an "utter lack of
sincerity and truthfulness" and belies his pretensions of good
faith.
On the part of the transferee, he did not present satisfactory and

convincing evidence sufficient to overthrow the presumption
and evidence of a fraudulent transaction. His is the burden of
rebutting the presumption of fraud established by law, and
having failed to do so, the fraudulent nature of the conveyance
in question prevails. 9
The decision of the Court of Appeals makes mention of Art. 1413

of the old Civil Code which authorizes the husband as
administrator to alienate and bind by onerous title the property
of the conjugal partnership without the consent of the wife, and
by reason thereof, concludes that petitioner Isidora Cabaliw can
not now seek annulment of the sale made by her husband. On
this point, counsel for petitioners rightly claims that the lack of
consent of the wife to the conveyances made by her husband was
never invoked nor placed in issue before the trial court. What
was claimed all along by plaintiff, Isidora Cabaliw now petitioner,
was that the conveyances or deeds of sale were executed by her
husband to avoid payment of the monthly support adjudged in
her favor and to deprive her of the means to execute said
judgment. In other words, petitioner seeks relief not so much as
an aggrieved wife but more as a judgment creditor of Benigno
Sadorra. Art. 1413 therefore is inapplicable; but even if it were,
the result would be the same because the very article reserves to
the wife the right to seek redress in court for alienations which
prejudice her or her heirs. 10 The undisputed facts before Us
clearly show that, the sales made by the husband were merely a
scheme to place beyond the reach of the wife the only properties
belonging to the conjugal partnership and deprive her of what
rightly belongs to her and her only daughter Soledad.
PREMISES CONSIDERED, We find merit to this Petition for Review

and We set aside the decision of the appellate court for being
contrary to the law applicable to the facts of the case. The
decision of the trial court stands affirmed with costs against
private respondents.
So Ordered.
Castro (Chairman), Makasiar, Esguerra and Martin, JJ., concur.
Teehankee, J., took no part.
Footnotes
1 Record on Appeal, CA-G.R. 26956-R pp. 1-11.
2 pp. 3041, ibid.
3 pp. 145-184, ibid.
4 Nicasio Yatco, J. ponente with Antonio G. Lucero and

Hermogenes Concepcion, Jr., JJ. concurring; Gregorio S. Narvasa
and Magno Gatmaitan, JJ. dissenting
5 See also Art. 1387 of the new Civil Code which states:
"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."
6 See dissenting opinion of Justice Gatmaitan p. 28, CA

Decision.
7 p. 29, ibid.
8 Oria vs. McMicking, 21 Phil. 243.

9 Bachrach. vs. Peterson, et al. 7 Phil. 571; Panlilio vs. Victorio,

35 Phil. 706; Alpuerto vs. Perez Pastor, et al. 38 Phil. 785;
National Exchange Co. vs. Katigbak, 54 Phil. 599.
10 Article 1413. In addition to the powers which the husband

has as administrator he may alienate and bind by onerous title
the property of the conjugal partnership without the consent of
the wife.
Nevertheless, every alienation or compromise which the husband

may make in respect to said property in violation of this Code or
in fraud of the wife shall not prejudice her or her heirs. (Old Civil
Code)
320. China Banking Corp v. CA, 327 SCRA378

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 117604 March 26, 1997
CHINA BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB,
INC., respondents.
KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the

Revised Rules of Court, petitioner China Banking Corporation
seeks the reversal of the decision of the Court of Appeals dated
15 August 1994 nullifying the Securities and Exchange
Commission's order and resolution dated 4 June 1993 and 7
December 1993, respectively, for lack of jurisdiction. Similarly
impugned is the Court of Appeals' resolution dated 4 September

1994 which denied petitioner's motion for reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity)

a stockholder of private respondent Valley Golf & Country Club,
Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219
to petitioner China Banking Corporation (CBC, for brevity). 1
On 16 September 1974, petitioner wrote VGCCI requesting that

the aforementioned pledge agreement be recorded in its books.
2
In a letter dated 27 September 1974, VGCCI replied that the deed

of pledge executed by Calapatia in petitioner's favor was duly
noted in its corporate books. 3
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from

petitioner, payment of which was secured by the aforestated
pledge agreement still existing between Calapatia and petitioner.
4
Due to Calapatia's failure to pay his obligation, petitioner, on 12

April 1985, filed a petition for extrajudicial foreclosure before
Notary Public Antonio T. de Vera of Manila, requesting the latter
to conduct a public auction sale of the pledged stock. 5
On 14 May 1985, petitioner informed VGCCI of the above-

mentioned foreclosure proceedings and requested that the
pledged stock be transferred to its (petitioner's) name and the
same be recorded in the corporate books. However, on 15 July
1985, VGCCI wrote petitioner expressing its inability to accede
to petitioner's request in view of Calapatia's unsettled accounts
with the club. 6
Despite the foregoing, Notary Public de Vera held a public

auction on 17 September 1985 and petitioner emerged as the
highest bidder at P20,000.00 for the pledged stock.
Consequently, petitioner was issued the corresponding
certificate of sale. 7
On 21 November 1985, VGCCI sent Calapatia a notice demanding

full payment of his overdue account in the amount of
P18,783.24. 8 Said notice was followed by a demand letter dated
12 December 1985 for the same amount 9 and another notice
dated 22 November 1986 for P23,483.24. 10
On 4 December 1986, VGCCI caused to be published in the

newspaper Daily Express a notice of auction sale of a number of
its stock certificates, to be held on 10 December 1986 at 10:00
a.m. Included therein was Calapatia's own share of stock (Stock
Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed

Calapatia of the termination of his membership due to the sale
of his share of stock in the 10 December 1986 auction. 11
On 5 May 1989, petitioner advised VGCCI that it is the new owner

of Calapatia's Stock Certificate No. 1219 by virtue of being the
highest bidder in the 17 September 1985 auction and requested
that a new certificate of stock be issued in its name. 12
On 2 March 1990, VGCCI replied that "for reason of delinquency"

Calapatia's stock was sold at the public auction held on 10
December 1986 for P25,000.00. 13
On 9 March 1990, petitioner protested the sale by VGCCI of the

subject share of stock and thereafter filed a case with the
Regional Trial Court of Makati for the nullification of the 10
December 1986 auction and for the issuance of a new stock
certificate in its name. 14
On 18 June 1990, the Regional Trial Court of Makati dismissed

the complaint for lack of jurisdiction over the subject matter on
the theory that it involves an intra-corporate dispute and on 27
August 1990 denied petitioner's motion for reconsideration.
On 20 September 1990, petitioner filed a complaint with the

Securities and Exchange Commission (SEC) for the nullification
of the sale of Calapatia's stock by VGCCI; the cancellation of any
new stock certificate issued pursuant thereto; for the issuance of
a new certificate in petitioner's name; and for damages,
attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered

a decision in favor of VGCCI, stating in the main that
"(c)onsidering that the said share is delinquent, (VGCCI) had valid

reason not to transfer the share in the name of the petitioner in
the books of (VGCCI) until liquidation of
delinquency." 15 Consequently, the case was dismissed. 16
On 14 April 1992, Hearing Officer Perea denied petitioner's

motion for reconsideration. 17
Petitioner appealed to the SEC en banc and on 4 June 1993, the

Commission issued an order reversing the decision of its hearing
officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a

prior right over the pledged share and because of pledgor's
failure to pay the principal debt upon maturity, appellant-
petitioner can proceed with the foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992

and April 14, 1992 are hereby SET ASIDE. The auction sale
conducted by appellee-respondent Club on December 10, 1986
is declared NULL and VOID. Finally, appellee-respondent Club is
ordered to issue another membership certificate in the name of
appellant-petitioner bank.
SO ORDERED. 18
VGCCI sought reconsideration of the abovecited order. However,

the SEC denied the same in its resolution dated 7 December
1993. 19
The sudden turn of events sent VGCCI to seek redress from the
Court of Appeals. On 15 August 1994, the Court of Appeals
rendered its decision nullifying and setting aside the orders of
the SEC and its hearing officer on ground of lack of jurisdiction
over the subject matter and, consequently, dismissed
petitioner's original complaint. The Court of Appeals declared
that the controversy between CBC and VGCCI is not intra-
corporate. It ruled as follows:
In order that the respondent Commission can take cognizance of

a case, the controversy must pertain to any of the following
relationships: (a) between the corporation, partnership or
association and the public; (b) between the corporation,
partnership or association and its stockholders, partners,
members, or officers; (c) between the corporation, partnership or
association and the state in so far as its franchise, permit or
license to operate is concerned, and (d) among the stockholders,
partners or associates themselves (Union Glass and Container
Corporation vs. SEC, November 28, 1983, 126 SCRA 31). The
establishment of any of the relationship mentioned will not
necessarily always confer jurisdiction over the dispute on the
Securities and Exchange Commission to the exclusion of the
regular courts. The statement made in Philex Mining Corp. vs.
Reyes, 118 SCRA 602, that the rule admits of no exceptions or
distinctions is not that absolute. The better policy in determining
which body has jurisdiction over a case would be to consider not
only the status or relationship of the parties but also the nature
of the question that is the subject of their controversy (Viray vs.

Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent bank

which involves ownership of the stock that used to belong to
Calapatia, Jr. is not within the competence of respondent
Commission to decide. It is not any of those mentioned in the
aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated

December 7, 1993 of respondent Securities and Exchange
Commission (Annexes Y and BB, petition) and of its hearing
officer dated January 3, 1992 and April 14, 1992 (Annexes S and
W, petition) are all nullified and set aside for lack of jurisdiction
over the subject matter of the case. Accordingly, the complaint
of respondent China Banking Corporation (Annex Q, petition) is
DISMISSED. No pronouncement as to costs in this instance.
SO ORDERED. 20
Petitioner moved for reconsideration but the same was denied

by the Court of Appeals in its resolution dated 5 October 1994.
21
Hence, this petition wherein the following issues were raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former

Eighth Division) GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE

04, 1993 AND ORDER DATED DECEMBER 07, 1993 OF THE
SECURITIES AND EXCHANGE COMMISSION EN BANC, AND WHEN
IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST
RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION
OVER THE SUBJECT MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES

AND EXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993
DESPITE PREPONDERANT EVIDENCE SHOWING THAT
PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP
CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT
VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has

jurisdiction over the controversy, the regular courts or the SEC.
P. D. No. 902-A conferred upon the SEC the following pertinent

powers:
Sec. 3. The Commission shall have absolute jurisdiction,

supervision and control over all corporations, partnerships or
associations, who are the grantees of primary franchises and/or
a license or permit issued by the government to operate in the
Philippines, and in the exercise of its authority, it shall have the
power to enlist the aid and support of and to deputize any and
all enforcement agencies of the government, civil or military as
well as any private institution, corporation, firm, association or
person.
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative

functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear
and decide cases involving:
a) Devices or schemes employed by or any acts of the board

of directors, business associates, its officers or partners,
amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the
stockholders, partners, members of associations or
organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership

relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members or associates, respectively; and between such

corporation, partnership or association and the State insofar as
it concerns their individual franchise or right to exist as such
entity;
c) Controversies in the election or appointment of directors,

trustees, officers, or managers of such corporations,
partnerships or associations.
d) Petitions of corporations, partnerships or associations to be

declared in the state of suspension of payments in cases where
the corporation, partnership or association possesses property
to cover all of its debts but foresees the impossibility of meeting
them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets
to cover its liabilities, but is under the Management Committee
created pursuant to this Decree.
The aforecited law was expounded upon in Viray v. CA 22 and in

the recent cases of Mainland Construction Co., Inc. v. Movilla 23
and Bernardo v. CA, 24 thus:
. . . .The better policy in determining which body has jurisdiction

over a case would be to consider not only the status or
relationship of the parties but also the nature of the question
that is the subject of their controversy.
Applying the foregoing principles in the case at bar, to ascertain

which tribunal has jurisdiction we have to determine therefore
whether or not petitioner is a stockholder of VGCCI and whether

or not the nature of the controversy between petitioner and
private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of

the subject share or membership certificate at public auction by
petitioner (and the issuance to it of the corresponding Certificate
of Sale) transferred ownership of the same to the latter and thus
entitled petitioner to have the said share registered in its name
as a member of VGCCI. It is readily observed that VGCCI did not
assail the transfer directly and has in fact, in its letter of 27
September 1974, expressly recognized the pledge agreement
executed by the original owner, Calapatia, in favor of petitioner
and has even noted said agreement in its corporate books. 25 In
addition, Calapatia, the original owner of the subject share, has
not contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona

fide stockholder of VGCCI and, therefore, the conflict that arose
between petitioner and VGCCI aptly exemplies an intra-corporate
controversy between a corporation and its stockholder under
Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the

controversy between petitioner and private respondent
corporation. VGCCI claims a prior right over the subject share
anchored mainly on Sec. 3, Art VIII of its by-laws which provides
that "after a member shall have been posted as delinquent, the
Board may order his/her/its share sold to satisfy the claims of
the Club. . ." 26 It is pursuant to this provision that VGCCI also
sold the subject share at public auction, of which it was the
highest bidder. VGCCI caps its argument by asserting that its

corporate by-laws should prevail. The bone of contention, thus,
is the proper interpretation and application of VGCCI's
aforequoted by-laws, a subject which irrefutably calls for the
special competence of the SEC.
We reiterate herein the sound policy enunciated by the Court in

Abejo v. De la Cruz 27:
6. In the fifties, the Court taking cognizance of the move to

vest jurisdiction in administrative commissions and boards the
power to resolve specialized disputes in the field of labor (as in
corporations, public transportation and public utilities) ruled
that Congress in requiring the Industrial Court's intervention in
the resolution of labor-management controversies likely to cause
strikes or lockouts meant such jurisdiction to be exclusive,
although it did not so expressly state in the law. The Court held
that under the "sense-making and expeditious doctrine of
primary jurisdiction . . . the courts cannot or will not determine
a controversy involving a question which is within the
jurisdiction of an administrative tribunal, where the question
demands the exercise of sound administrative discretion
requiring the special knowledge, experience, and services of the
administrative tribunal to determine technical and intricate
matters of fact, and a uniformity of ruling is essential to comply
with the purposes of the regulatory statute administered.
In this era of clogged court dockets, the need for specialized

administrative boards or commissions with the special
knowledge, experience and capability to hear and determine
promptly disputes on technical matters or essentially factual
matters, subject to judicial review in case of grave abuse of

discretion, has become well nigh indispensable. Thus, in 1984,
the Court noted that "between the power lodged in an
administrative body and a court, the unmistakable trend has
been to refer it to the former. 'Increasingly, this Court has been
committed to the view that unless the law speaks clearly and
unequivocably, the choice should fall on [an administrative
agency.]'" The Court in the earlier case of Ebon v. De Guzman,
noted that the lawmaking authority, in restoring to the labor
arbiters and the NLRC their jurisdiction to award all kinds of
damages in labor cases, as against the previous P.D. amendment
splitting their jurisdiction with the regular courts, "evidently, . .
. had second thoughts about depriving the Labor Arbiters and
the NLRC of the jurisdiction to award damages in labor cases
because that setup would mean duplicity of suits, splitting the
cause of action and possible conflicting findings and conclusions
by two tribunals on one and the same claim."
In this case, the need for the SEC's technical expertise cannot be
over-emphasized involving as it does the meticulous analysis
and correct interpretation of a corporation's by-laws as well as
the applicable provisions of the Corporation Code in order to
determine the validity of VGCCI's claims. The SEC, therefore,
took proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying

its earlier position, in the first complaint it filed with the RTC of
Makati (Civil Case No. 90-1112) that there is no intra-corporate
relations between itself and VGCCI.
VGCCI's contention lacks merit.

In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice

Isagani A. Cruz, declared that:
It follows that as a rule the filing of a complaint with one court

which has no jurisdiction over it does not prevent the plaintiff
from filing the same complaint later with the competent court.
The plaintiff is not estopped from doing so simply because it
made a mistake before in the choice of the proper forum. . . .
We remind VGCCI that in the same proceedings before the RTC

of Makati, it categorically stated (in its motion to dismiss) that
the case between itself and petitioner is intra-corporate and
insisted that it is the SEC and not the regular courts which has
jurisdiction. This is precisely the reason why the said court
dismissed petitioner's complaint and led to petitioner's recourse
to the SEC.
Having resolved the issue on jurisdiction, instead of remanding

the whole case to the Court of Appeals, this Court likewise deems
it procedurally sound to proceed and rule on its merits in the
same proceedings.
It must be underscored that petitioner did not confine the

instant petition for review on certiorari on the issue of
jurisdiction. In its assignment of errors, petitioner specifically
raised questions on the merits of the case. In turn, in its
responsive pleadings, private respondent duly answered and
countered all the issues raised by petitioner.
Applicable to this case is the principle succinctly enunciated in

the case of Heirs of Crisanta Y. Gabriel-Almoradie v. Court of
Appeals, 29 citing Escudero v. Dulay 30 and The Roman Catholic
Archbishop of Manila v. Court of Appeals. 31
In the interest of the public and for the expeditious

administration of justice the issue on infringement shall be
resolved by the court considering that this case has dragged on
for years and has gone from one forum to another.
It is a rule of procedure for the Supreme Court to strive to settle

the entire controversy in a single proceeding leaving no root or
branch to bear the seeds of future litigation. No useful purpose
will be served if a case or the determination of an issue in a case
is remanded to the trial court only to have its decision raised
again to the Court of Appeals and from there to the Supreme
Court.
We have laid down the rule that the remand of the case or of an
issue to the lower court for further reception of evidence is not
necessary where the Court is in position to resolve the dispute
based on the records before it and particularly where the ends
of justice would not be subserved by the remand thereof.
Moreover, the Supreme Court is clothed with ample authority to
review matters, even those not raised on appeal if it finds that
their consideration is necessary in arriving at a just disposition
of the case.
In the recent case of China Banking Corp., et al. v. Court of

Appeals, et al., 32 this Court, through Mr. Justice Ricardo J.
Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that since
the filing of this suit before the trial court, none of the
substantial issues have been resolved. To avoid and gloss over
the issues raised by the parties, as what the trial court and
respondent Court of Appeals did, would unduly prolong this
litigation involving a rather simple case of foreclosure of
mortgage. Undoubtedly, this will run counter to the avowed
purpose of the rules, i.e., to assist the parties in obtaining just,
speedy and inexpensive determination of every action or
proceeding. The Court, therefore, feels that the central issues of
the case, albeit unresolved by the courts below, should now be
settled specially as they involved pure questions of law.
Furthermore, the pleadings of the respective parties on file have
amply ventilated their various positions and arguments on the
matter necessitating prompt adjudication.
In the case at bar, since we already have the records of the case
(from the proceedings before the SEC) sufficient to enable us to
render a sound judgment and since only questions of law were
raised (the proper jurisdiction for Supreme Court review), we
can, therefore, unerringly take cognizance of and rule on the
merits of the case.
The procedural niceties settled, we proceed to the merits.

VGCCI assails the validity of the pledge agreement executed by

Calapatia in petitioner's favor. It contends that the same was null
and void for lack of consideration because the pledge agreement
was entered into on 21 August
1974 33 but the loan or promissory note which it secured was
obtained by Calapatia much later or only on 3 August 1983. 34
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily reveal that

the contracting parties explicitly stipulated therein that the said
pledge will also stand as security for any future advancements
(or renewals thereof) that Calapatia (the pledgor) may procure
from petitioner:
xxx xxx xxx
This pledge is given as security for the prompt payment when

due of all loans, overdrafts, promissory notes, drafts, bills or
exchange, discounts, and all other obligations of every kind
which have heretofore been contracted, or which may hereafter
be contracted, by the PLEDGOR(S) and/or DEBTOR(S) or any one
of them, in favor of the PLEDGEE, including discounts of Chinese
drafts, bills of exchange, promissory notes, etc., without any
further endorsement by the PLEDGOR(S) and/or Debtor(s) up to
the sum of TWENTY THOUSAND (P20,000.00) PESOS, together
with the accrued interest thereon, as hereinafter provided, plus
the costs, losses, damages and expenses (including attorney's
fees) which PLEDGEE may incur in connection with the collection
thereof. 35 (Emphasis ours.)
The validity of the pledge agreement between petitioner and

Calapatia cannot thus be held suspect by VGCCI. As candidly
explained by petitioner, the promissory note of 3 August 1983
in the amount of P20,000.00 was but a renewal of the first
promissory note covered by the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his

delinquent accounts, it had the right to sell the share in question
in accordance with the express provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant

to note that VGCCI began sending notices of delinquency to
Calapatia after it was informed by petitioner (through its letter
dated 14 May 1985) of the foreclosure proceedings initiated
against Calapatia's pledged share, although Calapatia has been
delinquent in paying his monthly dues to the club since 1975.
Stranger still, petitioner, whom VGCCI had officially recognized
as the pledgee of Calapatia's share, was neither informed nor
furnished copies of these letters of overdue accounts until
VGCCI itself sold the pledged share at another public auction. By
doing so, VGCCI completely disregarded petitioner's rights as
pledgee. It even failed to give petitioner notice of said auction
sale. Such actuations of VGCCI thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner

is bound by its by-laws. It argues in this wise:
The general rule really is that third persons are not bound by the
by-laws of a corporation since they are not privy thereto
(Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to this

is when third persons have actual or constructive knowledge of
the same. In the case at bar, petitioner had actual knowledge of
the by-laws of private respondent when petitioner foreclosed the
pledge made by Calapatia and when petitioner purchased the
share foreclosed on September 17, 1985. This is proven by the
fact that prior thereto, i.e., on May 14, 1985 petitioner even
quoted a portion of private respondent's by-laws which is
material to the issue herein in a letter it wrote to private
respondent. Because of this actual knowledge of such by-laws
then the same bound the petitioner as of the time when
petitioner purchased the share. Since the by-laws was already
binding upon petitioner when the latter purchased the share of
Calapatia on September 17, 1985 then the petitioner purchased
the said share subject to the right of the private respondent to
sell the said share for reasons of delinquency and the right of
private respondent to have a first lien on said shares as these
rights are provided for in the by-laws very very clearly. 36
VGCCI misunderstood the import of our ruling in Fleischer v.

Botica Nolasco Co.: 37
And moreover, the by-law now in question cannot have any effect
on the appellee. He had no knowledge of such by-law when the
shares were assigned to him. He obtained them in good faith and
for a valuable consideration. He was not a privy to the contract
created by said by-law between the shareholder Manuel Gonzales
and the Botica Nolasco, Inc. Said by-law cannot operate to defeat
his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his

shares without first offering them to the corporation for a period
of thirty days is not binding upon an assignee of the stock as a
personal contract, although his assignor knew of the by-law and
took part in its adoption. (10 Cyc., 579; Ireland vs. Globe Milling
Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of

corporate stock, a purchaser is not affected by any contractual
restriction of which he had no notice. (Brinkerhoff-Farris Trust &
Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who

has assented to an unauthorized by-law has only the effect of a
contract by, and enforceable against, the assignor; the assignee
is not bound by such by-law by virtue of the assignment alone.
(Ireland vs. Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock

shall not be valid unless approved by the board of directors,
while it may be enforced as a reasonable regulation for the
protection of the corporation against worthless stockholders,
cannot be made available to defeat the rights of third persons.
(Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa,
336.) (Emphasis ours.)
In order to be bound, the third party must have acquired

knowledge of the pertinent by-laws at the time the transaction
or agreement between said third party and the shareholder was
entered into, in this case, at the time the pledge agreement was
executed. VGCCI could have easily informed petitioner of its by-

laws when it sent notice formally recognizing petitioner as
pledgee of one of its shares registered in Calapatia's name.
Petitioner's belated notice of said by-laws at the time of
foreclosure will not suffice. The ruling of the SEC en banc is
particularly instructive:
By-laws signifies the rules and regulations or private laws

enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and
among themselves in their relation to it. In other words, by-laws
are the relatively permanent and continuing rules of action
adopted by the corporation for its own government and that of
the individuals composing it and having the direction,
management and control of its affairs, in whole or in part, in the
management and control of its affairs and activities. (9 Fletcher
4166, 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the

duties of the members towards the corporation and among
themselves. They are self-imposed and, although adopted
pursuant to statutory authority, have no status as public law.
(Ibid.)
Therefore, it is the generally accepted rule that third persons are

not bound by by-laws, except when they have knowledge of the
provisions either actually or constructively. In the case of
Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held
that the by-law restricting the transfer of shares cannot have any
effect on the transferee of the shares in question as he "had no
knowledge of such by-law when the shares were assigned to him.

He obtained them in good faith and for a valuable consideration.
He was not a privy to the contract created by the by-law between
the shareholder . . . and the Botica Nolasco, Inc. Said by-law
cannot operate to defeat his right as a purchaser. (Emphasis
supplied.)
By analogy of the above-cited case, the Commission en banc is of

the opinion that said case is applicable to the present
controversy. Appellant-petitioner bank as a third party can not
be bound by appellee-respondent's by-laws. It must be recalled
that when appellee-respondent communicated to appellant-
petitioner bank that the pledge agreement was duly noted in the
club's books there was no mention of the shareholder-pledgor's
unpaid accounts. The transcript of stenographic notes of the
June 25, 1991 Hearing reveals that the pledgor became
delinquent only in 1975. Thus, appellant-petitioner was in good
faith when the pledge agreement was contracted.
The Commission en banc also believes that for the exception to

the general accepted rule that third persons are not bound by by-
laws to be applicable and binding upon the pledgee, knowledge
of the provisions of the VGCI By-laws must be acquired at the
time the pledge agreement was contracted. Knowledge of said
provisions, either actual or constructive, at the time of
foreclosure will not affect pledgee's right over the pledged share.
Art. 2087 of the Civil Code provides that it is also of the essence
of these contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage consists maybe
alienated for the payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club,

Inc., the Commission issued an opinion to the effect that:
According to the weight of authority, the pledgee's right is

entitled to full protection without surrender of the certificate,
their cancellation, and the issuance to him of new ones, and
when done, the pledgee will be fully protected against a
subsequent purchaser who would be charged with constructive
notice that the certificate is covered by the pledge. (12-A Fletcher
502)
The pledgee is entitled to retain possession of the stock until the

pledgor pays or tenders to him the amount due on the debt
secured. In other words, the pledgee has the right to resort to its
collateral for the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of

new certificate to a third person who purchased the same
certificate covered by the pledge, will certainly defeat the right
of the pledgee to resort to its collateral for the payment of the
debt. The pledgor or his representative or registered
stockholders has no right to require a return of the pledged stock
until the debt for which it was given as security is paid and
satisfied, regardless of the length of time which have elapsed
since debt was created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities
or liens in favor either of the corporation or of third persons, if
he has no notice thereof, but not otherwise. He also takes it free
of liens or claims that may subsequently arise in favor of the
corporation if it has notice of the pledge, although no demand

for a transfer of the stock to the pledgee on the corporate books
has been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v.
Eagle Fruit Co., 75 F2d739) 38
Similarly, VGCCI's contention that petitioner is duty-bound to

know its by-laws because of Art. 2099 of the Civil Code which
stipulates that the creditor must take care of the thing pledged
with the diligence of a good father of a family, fails to convince.
The case of Cruz & Serrano v. Chua A. H. Lee, 39 is clearly not
applicable:
In applying this provision to the situation before us it must be

borne in mind that the ordinary pawn ticket is a document by
virtue of which the property in the thing pledged passes from
hand to hand by mere delivery of the ticket; and the contract of
the pledge is, therefore, absolvable to bearer. It results that one
who takes a pawn ticket in pledge acquires domination over the
pledge; and it is the holder who must renew the pledge, if it is to
be kept alive.
It is quite obvious from the aforequoted case that a membership

share is quite different in character from a pawn ticket and to
reiterate, petitioner was never informed of Calapatia's unpaid
accounts and the restrictive provisions in VGCCI's by-laws.
Finally, Sec. 63 of the Corporation Code which provides that "no

shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation"
cannot be utilized by VGCCI. The term "unpaid claim" refers to
"any unpaid claim arising from unpaid subscription, and not to

any indebtedness which a subscriber or stockholder may owe the
corporation arising from any other transaction." 40 In the case
at bar, the subscription for the share in question has been fully
paid as evidenced by the issuance of Membership Certificate No.
1219. 41 What Calapatia owed the corporation were merely the
monthly dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the

Court of Appeals is REVERSED and the order of the SEC en banc
dated 4 June 1993 is hereby AFFIRMED.
SO ORDERED.
Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.
Footnotes
1 Original Records, pp. 34-35.
2 Id., at 36.
3 Id., at 37.
4 Id., at 38.
5 Id., at 39-40.
6 Id., at 41-42.
7 Id., at 43-44.
8 Id., at 45.
9 Id., at 46.
10 Id., at 47.
11 Id., at 49.
12 Id., at 50.
13 Id., at 51.
14 Id., at 52-54.
15 Rollo, p. 48.
16 Id., at 51.
17 Id., at 52.
18 Id., at 38.
19 Id., at 43.
20 Id., at 28-29.
21 Id., at 31.
22 191 SCRA 308 (1990).
23 250 SCRA 290 (1995).
24 G.R. No. 120730, 28 October 1996.
25 Rollo, p. 88.
26 Id., at 34.
27 149 SCRA 654 (1987).
28 183 SCRA 279 (1990).

29 229 SCRA 15 (1994).
30 158 SCRA 69 (1988).
31 198 SCRA 300 (1991).
32 G.R. No. 121158, 5 December 1996.
33 Rollo, pp. 84-85.
34 Id., at 89.
35 Rollo, p. 84; For an analogous case see Ajar Marketing and

Development Corporation v. CA, 248 SCRA 222 (1995) where it
was held that:
An action to foreclose a mortgage is usually limited to the

amount mentioned in the mortgage, but where on the four
corners of the mortgage contracts, as in this case, the intent of
the contracting parties is manifest that the mortgaged property
shall also answer for future loans or advancements then the
same is not improper as it is valid and binding between the
parties. . .
See also Mojica v. CA 201 SCRA 517 (1991).

36 Rollo, pp. 162-163.
37 47 Phil. 583 (1925).
38 Rollo, pp. 36-37.
39 54 Phil. 10 (1929).
40 Agpalo, Ruben E., Comments on the Corporation Code of

the Philippines, First ed., 1993, p. 286; See also Lopez, Rosario
N., The Corporation Code of the Philippines Annotated, Vol. Two,
1994, p. 816.
41 Rollo, p. 86.
321. Coastal Pacific Trading v. Southern Rolling, 497 SCRA 11
FIRST DIVISION
COASTAL PACIFIC
TRADING, INC.,
Petitioner,
- versus -
G.R. No. 118692

Present:
Panganiban, CJ,
Chairman,
Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ
Promulgated:
July 28, 2006
SOUTHERN ROLLING MILLS, CO., INC. (now known as Visayan

Integrated Steel Corporation), FAR EAST BANK & TRUST
COMPANY, PHILIPPINE COMMERCIAL INDUSTRIAL[1] BANK,
EQUITABLE BANKING CORPORATION, PRUDENTIAL BANK,
BOARD OF TRUSTEES-CONSORTIUM OF BANKS-VISCO, UNITED
COCONUT PLANTERS BANK, CITYTRUST BANKING
CORPORATION, ASSOCIATED BANK, INSULAR BANK OF ASIA
AND AMERICA, INTERNATIONAL CORPORATE BANK, COMMER-
CIAL BANK OF MANILA, BANK OF THE PHILIPPINE ISLANDS,
NATIONAL STEEL CORPORA-TION, THE PROVINCIAL SHERIFF OF
BOHOL, and DEPUTY SHERIFF JOVITO DIGAL,[2]
Respondents.
X -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- - -- -- X
DECISION
PANGANIBAN, CJ:
D
irectors owe loyalty and fidelity to the corporation they serve and
to its creditors. When these directors sit on the board as
representatives of shareholders who are also major creditors,
they cannot be allowed to use their offices to secure undue
advantage for those shareholders, in fraud of other creditors
who do not have a similar representation in the board of
directors.
The Case
Before us is a Petition for Review[3] under Rule 45 of the Rules

of Court, assailing the September 27, 1994 Decision[4] and the
January 5, 1995 Resolution[5] of the Court of Appeals (CA) in CA-
GR CV No. 39385. The challenged Decision disposed as follows:
WHEREFORE, the decision of the Regional Trial Court is hereby

AFFIRMED in toto.[6]
The challenged Resolution denied reconsideration.
The Facts
Respondent Southern Rolling Mills Co., Inc. was organized in

1959 for the purpose of engaging in a steel processing business.
It was later renamed Visayan Integrated Steel Corporation
(VISCO).[7]
On December 11, 1961, VISCO obtained a loan from the
Development Bank of the Philippines (DBP) in the amount of
P836,000. This loan was secured by a duly recorded Real Estate
Mortgage over VISCOs three (3) parcels of land, including all the
machineries and equipment found there.[8]
On August 15, 1963, VISCO entered into a Loan Agreement[9]

with respondent banks (later referred to as Consortium[10]) for
the amount of US$5,776,186.71 or P21,745,707.36 (at the then
prevailing exchange rate) to finance its importation of various
raw materials. To secure the full and faithful performance of its
obligation, VISCO executed on August 3, 1965, a second
mortgage[11] over the same land, machineries and equipment in

favor of respondent banks. This second mortgage remained
unrecorded.[12]
VISCO eventually defaulted in the performance of its obligation

to respondent banks. This prompted the Consortium to file on
January 26, 1966, Civil Case No. 1841, which was a Petition for
Foreclosure of Mortgage with Petition for Receivership.[13] This
case was eventually dismissed for failure to prosecute.[14]
Afterwards, negotiations were conducted between VISCO and

respondent banks for the conversion of the unpaid loan into
equity in the corporation.[15] Vicente Garcia, vice-president of
VISCO and of Far East Bank and Trust Company (FEBTC),[16]
testified that sometime in 1966, the creditor banks were given
management of and control over VISCO.[17] In time,[18] in order
to reorganize it, its principal creditors agreed to group
themselves into a creditors consortium.[19] As a result of the
reorganized corporate structure of VISCO, respondent banks
acquired more than 90 percent of its equity. Notwithstanding
this conversion, it remained indebted to the Consortium in the
amount of P16,123,918.02.[20]
Meanwhile from 1964 to 1965, VISCO also entered into a

processing agreement with Petitioner Coastal Pacific Trading,
Inc. (Coastal). Pursuant to that agreement, petitioner delivered
3,000 metric tons of hot rolled steel coils to VISCO for processing
into block iron sheets. Contrary to their agreement, the latter was
able to process and deliver to petitioner only 1,600 metric tons

of those sheets. Hence, a total of 1,400 metric tons of hot rolled
steel coils remained unaccounted for.[21] The fact that petitioner
was among the major creditors of VISCO was recognized by the
latters vice-president, Vicente Garcia.[22] Indeed, on October 9,
1970, it forwarded to petitioner a proposal for a Compromise
Agreement.[23] Subsequent developments indicate, however,
that the parties did not arrive at a compromise.
Two years later, on October 20, 1972, Garcia wrote Arturo P.

Samonte, representative of FEBTC[24] and director of VISCO,[25]
a letter that reads as follows:
In the light of recent development on IISMI and Elirol which were

taken over by the government, I suggest that we take certain
precautionary measures to protect the interests of the
Consortium of Banks. One such step may be to insure the safety
of the unexpended funds of VISCO from any contingencies in the
future. As of now VISCOs account with the Far East Bank is in the
name of BOARD OF TRUSTEES VISCO CONSORTIUM OF BANKS.
It may be better to eliminate the term VISCO and just call the
account BOARD OF TRUSTEES CONSORTIUM OF BANKS.[26]
According to a notation on this letter, an FEBTC assistant cashier

named Silverio duly complied with the above request.[27] Indeed,
events would later reveal that the bank held a deposit account in
the name of the Board of Trustees-Consortium of Banks.[28]
On September 20, 1974, respondent banks held a luncheon
meeting[29] in the FEBTC Boardroom to discuss how they would
address the insistent demands of the DBP for VISCO to settle its
obligations. Jose B. Fernandez, Jr., VISCOs then chairman and
concurrent FEBTC President,[30] expressed his apprehension
that either the DBP or the government would soon pursue extra-
judicial foreclosure against VISCO.
In this regard, Fernandez informed the members of the

Consortium that he had received letter-offers from two
corporations that were interested in purchasing VISCOs
generator sets.[31] After deliberating on the matter, the
members decided to approve the sale of these two generator sets
to Filmag (Phil.), Inc. It was also agreed that the proceeds of the
sale would be used to pay VISCOs indebtedness to DBP and to
secure the release of the first mortgage.[32] The Consortium
agreed with Filmag on the following payment procedure:
The payment procedure will be as follows: Filmag pays to VISCO;

VISCO pays the Consortium; and then the Consortium pays the
DBP with the arrangement that the Consortium subrogates to the
rights of the DBP as first mortgagee to the VISCO plant. The
Consortium further agreed to call a meeting of the VISCO board
of directors for the purpose of considering and formally
approving the proposed sale of the 2 generators to Filmag.[33]
Accordingly, on October 4, 1974, the VISCO board of directors

had a meeting in the FEBTC Boardroom.[34] The board was asked
to decide how VISCO would settle its debt to DBP: whether by
asking the Consortium to put up the necessary amount or by
accepting Filmags offer to purchase VISCOs generator sets.[35]
The latter option was unanimously chosen[36] in a Resolution

worded as follows:
RESOLVED, That the offer of Filmag (Philippines) Inc. in their

letters of December 14, 1973 and March 19, 1974 to purchase
two (2) units of generator sets, including standard accessories,
of VISCO is hereby accepted under the following terms and
conditions:
xxxxxxxxx
2. The price for the two (2) generator sets is PESOS: ONE MILLION
FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY
TWO ONLY (P1,550,572) x x x and shall be payable upon signing
of a letter-agreement and which shall be later formalized into a
Deed of Sale. The amount, however, shall be held by the
depositary bank of VISCO, Far East Bank and Trust Company, in
escrow and shall be at VISCOs disposal upon the signing of
Filmag of the receipt/s of delivery of the said two (2) generator
sets.
xxxxxxxxx
FURTHER RESOLVED, That the sales proceeds of PESOS: ONE

MILLION FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED
SEVENTY TWO ONLY (P1,550,572) shall be utilized to pay the
liability of VISCO with the Development Bank of the
Philippines.[37]
The sale of the generator sets to Filmag took place and, according
to the testimony of Garcia, the proceeds were deposited with
FEBTC in a special account held in trust for the Consortium.[38]
A year after, on May 22, 1975, petitioner filed with the Pasig
Regional Trial Court (RTC) a Complaint[39] for Recovery of
Property and Damages with Preliminary Injunction and
Attachment.[40] Petitioners allegation was that VISCO had
fraudulently misapplied or converted the finished steel sheets
entrusted to it.[41] On June 3, 1975, Judge Pedro A. Revilla issued
a Writ of Preliminary Attachment over its properties that were
not exempt from execution.[42]
In compliance with the Writ, Sheriff Andres R. Bonifacio
attempted to garnish the account of VISCO in FEBTC,[43] which
denied holding that account. Instead, the bank admitted that
what it had was a deposit account in the name of the Board of
Trustees-Consortium of Banks, particularly Account No. 2479-
1.[44] FEBTC reported to Sheriff Bonifacio that it had instructed
its accounting department to hold the account, subject to the
prior liens or rights in favor of [FEBTC] and other entities.[45]
While petitioners case was pending, VISCOs vice-president
(Garcia) and director (Arturo Samonte) requested from FEBTC a
cash advance of P1,342,656.88 for the full settlement of VISCOs
account with DBP.[46] On June 29, 1976, FEBTC complied by
issuing Check No. FE239249 for P1,342,656.88, payable to [DBP]
for [the] account of VISCO.[47] On even date, DBP executed a
Deed of Assignment of Mortgage Rights Interest and
Participation[48] in favor of Respondent Consortium of Banks.
The deed stated that, in consideration of the payment made, all
of DBPs rights under the mortgage agreement with VISCO were
being transferred and conveyed to the Consortium.[49] Thus did

the latter obtain DBPs recorded primary lien over the real and
chattel properties of VISCO.
On September 23, 1980, the Consortium filed a Petition for Extra-

Judicial Foreclosure with the Office of the Provincial Sheriff of
Bohol.[50] The Notice of Extrajudicial Foreclosure of Mortgage,
published in the Bohol Newsweek on October 10, 1980,
announced that the auction sale was scheduled for November 11,
1980.[51]
On November 3, 1980, Southern Industrial Projects, Inc. (SIP),

which was a judgment creditor[52] of VISCO, filed Civil Case No.
3383. It was a Complaint[53] for Declaration of Nullity of the
Mortgage and Injunction to Restrain the Consortium from
Proceeding with the Auction Sale. SIP argued that DBP had
actually been paid by VISCO with the proceeds from the sale of
the generator sets. Hence, the mortgage in favor of that bank had
been extinguished by the payment and could not have been
assigned to the Consortium.[54] A temporary restraining order
against the latter was thus successfully obtained; the provincial
sheriff could not proceed with the auction sale of the mortgaged
assets.[55] But SIPs victory was short-lived. On March 2, 1984,
Civil Case No. 3383 was decided in favor of the Consortium.[56]
Judge Andrew S. Namocatcat ruled thus:
The evidence of the plaintiff is only anchored on the fact that the
deed of assignment executed by the DBP in favor of the
defendant banks is an act which would defraud creditors. It is
the thinking of the court that the payment of defendant banks
to DBP of VISCOs loan and the execution of the DBP of the deed
of assignment of credit and rights to the defendant banks is in

accordance with Article 1302 and 1303 of the New Civil Code,
and said transaction is not to defraud creditors because the
defendant banks are also creditors of VISCO.[57]
On June 14, 1985, this Decision was affirmed by the Intermediate

Appellate Court in CA-GR No. 03719. [58]
The auction sale of VISCOs mortgaged properties took place on

March 19, 1985 and the Consortium emerged as the highest
bidder.[59] The Certificate of Sale[60] in its favor was registered
on May 22, 1985.[61]
On June 27, 1985, VISCO executed through Vicente Garcia, a

Deed of Assignment of Right of Redemption[62] in favor of the
National Steel Corporation (NSC), in consideration of P100,000.
[63] On the same day, the Consortium sold the foreclosed real
and personal properties of VISCO to the NSC.[64]
On August 16, 1985, petitioner filed against respondents Civil

Case No. 3929, which was a Complaint for Annulment or
Rescission of Sale, Damages with Preliminary Injunction.[65]
Coastal alleged that, despite the Writ of Attachment issued in its
favor in the still pending Civil Case No. 21272, the Consortium
had sold the properties to NSC. Further, despite the attachment
of the properties, the Consortium was allegedly able to sell and
place them beyond the reach of VISCOs other creditors.[66] Thus
imputing bad faith to respondent banks actions, petitioner said

that the sale was intended to defraud VISCOs other creditors.
Petitioner further contended that the assignment in favor of the

Consortium was fraudulent, because DBP had been paid with the
proceeds from the sale of the generator sets owned by VISCO,
and not with the Consortiums own funds.[67] Petitioner offered
as proof the minutes of the meeting[68] in which the transaction
was decided. Respondent Consortium countered that the
minutes would in fact readily disclose that the intention of its
members was to apply the proceeds to a partial payment to
DBP.[69] Respondent insisted that it used its own funds to pay
the bank.[70]
On August 20, 1985, a temporary restraining order (TRO)[71] was

issued by Judge Mercedes Gozo-Dadole against VISCO, enjoining
it from proceeding with the removal or disposal of its properties;
the execution and/or consummation of the foreclosure sale; and
the sale of the foreclosed properties to NSC. On September 6,
1985, the trial court issued an Order requiring the Consortium
to post a bond of P25 million in favor of Coastal for damages
that petitioner may suffer from the lifting of the TRO. The bond
filed was then approved by the RTC in its Order of September
13, 1985.[72]
On December 15, 1986, Civil Case No. 21272 was finally decided
by Judge Nicolas P. Lapena, Jr., in favor of Coastal.[73] VISCO was
ordered to pay petitioner the sum of P851,316.19 with interest
at the legal rate, plus attorneys fees of P50,000.00 and costs.[74]

Coastal filed a Motion for Execution,[75] but the judgment has
remained unsatisfied to date.
On January 5, 1992, a Decision[76] on Civil Case No. 3929 was

rendered as follows:
WHEREFORE, this Court hereby renders judgment in favor of the

defendants and against the plaintiff Coastal Pacific Trading, Inc.
BY WAY OF THE MAIN COMPLAINT, to wit:
1. Declaring the extrajudicial foreclosure sale conducted by the

sheriff and the corresponding certificate of sale executed by the
defendant sheriffs on March 15, 1985 relative to the real
properties of the defendant SRM/VISCO of Cortes, Bohol,
Philippines, which were registered in the Register of Deeds of
Bohol, on May 22, 1985 and the Transfer of Assignment to the
defendant National Steel Corporation of any or part of the
foreclosed properties arising from the extrajudicial foreclosure
sale as valid and legal;
2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the
defendant Consortium of Banks[,] Southern Rolling Mills, Co.,
Inc., Far East Bank & Trust Company, Philippine Commercial
Industrial Bank, Equitable Banking Corporation, Prudential Bank,
Board of Trustees-Consortium of Banks- [VISCO], United Coconut
Planters Bank, City Trust Banking Corporation, Associated Bank,
Insular Bank of Asia and America, International Corporate Bank,
Commercial Bank of Manila, Bank of the Philippine Islands and
the National Steel Corporation in the instant case the amount of
FIVE HUNDRED THOUSAND PESOS (P500,000.00) representing

damages;
3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc. to

pay the defendants the amount of FIFTEEN THOUSAND PESOS
(P15,000.00) representing attorneys fees;
4. Dismissing the Amended Complaint of the plaintiff;

5. Ordering the plaintiff to pay the cost; AND
BY WAY OF CROSS CLAIM INTERPOSED
BY THE DEFENDANT National Steel Corporation against the
Consortium of Banks and SRM/VISCO, the same is dismissed for
lack of merit, without pronouncement as to cost.[77]
Insisting that the trial court erred in holding that it had failed to
prove its case by preponderance of evidence, Coastal filed an
appeal with the CA. Allegedly, the purported insufficiency of
proof was based on the sole ground that petitioner did not file
an objection when the properties were sold on execution. It
contended that the court a quo had arrived at this erroneous
conclusion by relying on inapplicable jurisprudence.[78]
Additionally, Coastal argued that the trial court had erred in not
annulling the foreclosure proceedings and sale for being
fictitious and done to defraud petitioner as VISCOs creditor.
Supposedly, the DBP mortgage had already been extinguished by
payment; thus, the bank could not have assigned the contract to
the Consortium.[79]
Petitioner also prayed for the annulment of the sale in favor of

NSC on the ground that the latter was a party to the fraudulent
foreclosure and, hence, not a buyer in good faith.[80]
Ruling of the Court of Appeals
At the outset, the CA stressed that the validity of the

Consortiums mortgage, foreclosure, and assignments had
already been upheld in CA-GR CV No. 03719, entitled Southern
Industrial Projects v. United Coconut Planters Bank[81] Citing
Valencia v. RTC of Quezon City, Br. 90[82] and Vda. de Cruzo v.
Carriaga,[83] the CA explained that the absolute identity of
parties was not necessary for the application of res judicata. All
that was required was a shared identity of interests, as shown by
the identity of reliefs sought by one person in a prior case and
by another in a subsequent case.
While Coastal was not a party to Southern Industrial Projects, it

should nevertheless be bound by that Decision, because it had
raised substantially the same claim and cause of action as SIP,
according to the appellate court. The CA held that the basic
reliefs sought by Coastal and SIP were substantially the same: the
nullification of the Deed of Assignment in favor of the
Consortium, the foreclosure sale, and the subsequent sale to
NSC. Because this identity of reliefs sought showed an identity
of interests, the CA concluded that it need not rule on those

issues.[84]
As to the issue that the DBP mortgage had been extinguished by

payment, the CA quoted its earlier Decision in Southern
Industrial Projects:
The evidence shows that the proceeds of the sale of the two
generating sets were applied by defendants-appellees in the
payment of the outstanding obligation of VISCO. It appears that
said proceeds were deposited in the bank account of the
consortium of creditors to avoid it being garnished by the
creditors notwithstanding the set-off, VISCO was still indebted
to the defendants-appellees.
The evidence x x x shows that upon VISCOs request for [cash]

advance, the Far East Banks (sic) and Trust Co., the manager of
the consortium of creditors, issued FEBTC check No. 239249 on
June 29, 1976 in the amount of P1,342,656.68 payable to the DBP
to pay off its loan to the latter.
xxxxxxxxx
x x x. A public document celebrated with all the legal formalities

under the safeguard of notarial certificate is evidence against a
party, and a high degree [of] proof is necessary to overcome the
legal presumption that the recital is true. The biased and
interested testimony of one of the parties to such instrument
who attempts to vary or repudiate what it purports to be, cannot
overcome the evidentiary force of what is recited in the

document.[85]
The appellate court also rejected petitioners contention that the

Consortiums Petition for Extrajudicial Foreclosure was already
barred by the earlier resort to a judicial foreclosure. The CA
clarified that in filing a Petition for Judicial Foreclosure, the
Consortium had pursued its right as junior encumbrancer. On
the other hand, the Consortium filed a Petition for Extrajudicial
Foreclosure as a first encumbrancer by virtue of DBPs
assignment in its favor.[86]
The CA also rejected petitioners theory of extinguishment of

obligation by merger. It observed that the merger could not have
possibly taken place, because respondent banks and VISCO were
not creditors and debtors in their own right.[87]
Petitioners Motion for Reconsideration,[88] which was received

by the CA on November 15, 1994,[89] was denied for lack of
merit.
Hence, this Petition.[90]
Issues
Petitioner raises the following issues for our consideration:

Respondent Court of Appeals, seemingly to avoid the irrefutable

evidence of fraud and collusion practised by [respondents]
against [Petitioner] Coastal, erroneously sustained the trial
courts holding that the present case is barred by res judicata
because of the previous decision in the case of Southern
Industrial Projects, Inc., vs. United Coconut Planters Bank, CA-
G.R. No. 03719, considering that the elements that call for the
application of this rule are not present in the case at bar, and the
exceptions allowed by this Honorable Supreme Court are not
applicable here for variance or distinction in facts and issues, x
x x:[91]
"II
Respondent Court of Appeals further erred in not annulling the

Deed of Assignment of the DBP mortgage x x x, the extrajudicial
foreclosure proceedings of the two mortgages x x x, and the
separate sale of the land and machineries as real and personal
properties by the foreclosing banks to NSC, as well as the
assignment or waiver of SRM/Viscos legal right of redemption
over the foreclosed properties, for being fraudulently executed
through collusion among the [respondents] and in fraud of
SRM/Viscos creditor, [Petitioner] Coastal, x x x;[92]
Stripped of nonessentials, the two issues may be restated as

follows:
1. Whether the present action is barred by res judicata

2. Whether respondents disposed of VISCOs assets in
fraud of the creditors
The Courts Ruling
The Petition is meritorious.
First Issue:
Res judicata
The CA cited Valencia v. RTC of Quezon City[93] to support the

finding that SIP and Coastal were substantially the same parties.
We distinguish.
In Valencia, the plaintiff-intervenor in the first case, Cario,

claimed Lot 4 based on an alleged purchase of Valencias
squatters rights over the property. The trial court dismissed the
claim and held that no such purchase ever took place.[94] It also
held that, on the assumption that a sale had taken place, the sale
was null and void for being contrary to the pertinent housing
law. It also found that all current occupants of Lot 4 were illegal
squatters; thus, it ordered their ejectment.
When this first case attained finality, Carinos daughter,

Catbagan, filed another suit against Valencia. Catbagan
challenged the applicability of the ejectment Order issued to her;
as an occupant of the lot, she was allegedly not a party to the
first case. Her Petition was denied for lack of merit.[95]
The execution of the Decision in the first case was again

forestalled when Llanes, Carios sister-in-law who was another
occupant of Lot 4, filed another suit against the same
respondent. Like Cario, Llanes insisted on having purchased the
subject lot from Valencia.[96] This Court ruled that the suit was
barred by res judicata. There was a substantial identity of
parties, because the right claimed by both Cario and Llanes were
based on each ones alleged purchase of Valencias squatters
rights.[97]
In the first case, sales of squatters rights were already

categorically declared null and void for being contrary to law.
Thus, Llanes admission that she had purchased Valencias
squatters rights placed her in the same category as Cario. The
purchase could not be treated differently, because the final and
executory Decision held that all purchases of squatters rights
(regardless of who the purchasers were) were null and void.[98]
Further, the earlier ruling held that the present occupants are
illegal squatters. That ruling included Llanes, who was
admittedly one of the occupants.[99] Simply put, she and
Valencia were considered identical parties for purposes of res
judicata, because they were obviously litigating under the same
void title and capacity as vendees of squatters rights and as
occupants of Lot 4.
Moreover, we held in Valencia that Llanes suit was merely a clear

attempt to prevent or delay the execution of the judgment in the
first case, which had become final by reason of the three
affirmances by this Court. The pattern to obstruct the execution
of the first judgment was obvious: after Cario lost the first case,
her daughter filed a second one. When the daughter lost the
second, the daughter-in-law filed a third case. It may be observed
that the three successive plaintiffs were all occupants of the
same property and belonged to the same family; this fact was
also indicative of their privity.
Given this background, it becomes clear that the finding of a
substantial identity of parties in Valencia was based on its
peculiar factual circumstances, which are different from those in
the present case.
Unlike Llanes, Coastal is not asserting a right that has been

categorically declared null and void in a prior case. In fact, its
right based on the processing agreement was upheld in Civil
Case No. 21272. Clearly, Coastal cannot be treated in the same
manner as Llanes.
The CA erred in applying Southern Industrial Projects v. United

Coconut Planters Bank[100] as a bar by res judicata with respect
to the present case. For this principle to apply, the following
elements must concur: a) the former judgment was final; b) the
court that rendered it had jurisdiction over the subject matter
and the parties; c) the judgment was based on the merits; and, d)
between the first and the second actions, there is an identity of
parties, subject matters, and causes of action.[101]
It is axiomatic that res judicata does not require an absolute, but
only a substantial, identity of parties. There is a substantial
identity when there is privity between the two parties or they are
successors-in-interest by title subsequent to the commencement
of the action, litigating for the same thing, under the same title,
and in the same capacity.[102] Petitioner was not acting in the
same capacity as SIP when it filed Civil Case No. 3383, which
eventually became AC-GR CV No. 03719. It brought this latter
action as a creditor under a processing agreement with VISCO;
on the other hand, the latter was sued by SIP, based on an alleged
breach of their management contract. Very clearly, their rights
were entirely distinct and separate from each other. In no
manner were these two creditors privies of each other.
The causes of action in the two Complaints were also different.

Causes of action arise from violations of rights. A single right
may be violated by several acts or omissions, in which case the
plaintiff has only one cause of action. Likewise, a single act or
omission may violate several rights at the same time, as when
the act constitutes a violation of separate and distinct legal
obligations.[103] The violation of each of these separate rights is
a separate cause of action in itself.[104] Hence, although these
causes of action arise from the same state of facts, they are
distinct and independent and may be litigated separately;
recovery on one is not a bar to subsequent actions on the

others.[105]
In the present case, the right of SIP (arising from its management
contract with VISCO) is totally distinct and separate from the
right of Coastal (arising from its processing contract with
VISCO). SIP and Coastal are asserting distinct rights arising from
different legal obligations of the debtor corporation. Thus,
VISCOs violation of those separate rights has given rise to
separate causes of action.
The confusion in the resolution of the issue of identity of parties
occurred, because the two creditors were assailing the same
transactions of VISCO on the same grounds. Since the two cases
they filed presented similar legal issues, the appellate court held
that its ruling in AC-GR CV No. 03719 was also applicable to the
instant case.
Common but palpable is this misconception of the doctrine of

res judicata. Persons do not become privies by the mere fact that
they are interested in the same question or in proving the same
set of facts, or that one person is interested in the result of a
litigation involving the other. Hence, several creditors of one
debtor cannot be considered as identical parties for the purpose
of assailing the acts of the debtor. They have distinct credits,
rights, and interests, such that the failure of one to recover
should not preclude the other creditors from also pursuing their
legal remedies.
Further, petitioner, which was not a party to Southern Industrial

Projects (their causes of action being separate and distinct), did
not have the opportunity to be heard in that case, much less to
present its own evidence. Thus, to bind petitioner to the Decision

in that case would clearly violate its rights to due process. As a
separate party, it has the right to have its arguments and
evidence evaluated on their own merits.
Second Issue:
Fraud of Creditors
We now come to the heart of the Petition. Coastal alleges that the
assignment of mortgage, the extrajudicial foreclosure
proceedings, and the sale of the properties of VISCO should all
be rescinded on the ground that they were done to defraud the
latters creditors.
The CA found no merit in petitioners arguments. It ruled that the

assignment conformed to the requirements of law; that the
consideration for the assignment had allegedly been given by
FEBTC; and that, hence, the Consortium had a right to foreclose
on the mortgaged properties.
By focusing on the innate validity of these Contracts, the CA

totally overlooked the issue of fraud as a ground for rescission.
Elementary is the principle that the validity of a contract does
not preclude its rescission. Under Articles 1380 and 1381 (3) of
the Civil Code, contracts that are otherwise valid between the
contracting parties may nonetheless be subsequently rescinded
by reason of injury to third persons, like creditors.[106] In fact,
rescission implies that there is a contract that, while initially

valid, produces a lesion or pecuniary damage to someone.[107]
Thus, when the CA confined itself to the issue of the validity of
these contracts, it did not at all address the heart of petitioners
cause of action: whether these transactions had been undertaken
by the Consortium to defraud VISCOs other creditors.
There is more than a preponderance of evidence showing the

Consortiums deliberate plan to defraud VISCOs other creditors.
Consortium Banks as Directors
It will be recalled that Respondent Consortium took over

management and control of VISCO by acquiring 90 percent of the
latters equity. Thus, 9 out of the 10 directors of the corporation
were all officials of the Consortium,[108] which may thus be said
to have effectively occupied and/or controlled the board.
Significantly, nowhere in the records can we find any denial by
respondent of this allegation by petitioner.[109]
As directors of VISCO, the officials of the Consortium were in a

position of trust; thus, they owed it a duty of loyalty. This trust
relationship sprang from the fact that they had control and
guidance over its corporate affairs and property.[110] Their duty
was more stringent when it became insolvent or without
sufficient assets to meet its outstanding obligations that arose.
Because they were deemed trustees of the creditors in those
instances, they should have managed the corporations assets

with strict regard for the creditors interests. When these
directors became corporate creditors in their own right, they
should not have permitted themselves to secure any undue
advantage over other creditors.[111] In the instant case, the
Consortium miserably failed to observe its duty of fidelity
towards VISCO and its creditors.
Duty of the Consortium Banks

to VISCOs Creditors
Recall that as early as 1966, the Consortium, through its

directors on the board of VISCO, had already assumed
management and control over the latter. Hence, when VISCO
recognized its outstanding liability to petitioner in 1970 and
offered a Compromise Agreement,[112] respondent banks were
already at the helm of the debtor corporation. The members of
the Consortium, therefore, cannot deny that they were aware of
those claims against the corporation. Nonetheless, they did not
adopt any measure to protect petitioners credit.
Quite the opposite, they even took steps to hide VISCOs

unexpended funds. Garcias 1972 letter to Samonte unmistakably
reveals that they kept those funds in an account named Board of
Trustees VISCO Consortium of Banks. This fact alone shows an
effort to hide, with the evident intent to keep, those funds for
themselves. The letter even says that, for the protection of the
Consortium, the name VISCO should be eliminated entirely, so
that the account name would read Board of Trustees Consortium

of Banks. Clearly, this particular move was found to be necessary
to avoid a takeover by the government, which was also a creditor
of VISCO.[113] This express intent of the latter, under the
direction and for the benefit of the Consortium, corroborated
petitioners contention that respondent banks had defrauded
VISCOs creditors.
Assignment of Mortgage
in Favor of the Consortium Banks
The assignment of mortgage in favor of the Consortium also

bears the earmarks of fraud. Initially, respondent banks had
agreed that VISCO should sell two of its generator sets, so that
the proceeds could be utilized to pay DBP. This plan was direct,
simple, and would extinguish the encumbrance in favor of the
bank.
Then, quite surprisingly, the Consortium set down the following

payment procedure: Filmag would pay VISCO; the latter would
pay the Consortium, which would pay DBP; and the Consortium
would then subrogate DBP to the latters rights as first
mortgagee. One is then led to ask: if the intention was to pay
DBP; from the sales proceeds of the generator sets, why did the
money have to pass through the Consortium?
The answer lies in the nature of respondents mortgage. It will be

recalled that this mortgage remained unrecorded and not legally
binding on the other creditors.[114] Thus, if DBP had been

directly paid by VISCO, the latter could have freed up its
properties to the satisfaction of all its other creditors. This
procedure would have been fair to all, but it was not followed by
the Consortium.
Instead, the proceeds from the sale of the generator sets were
first paid to respondent banks, which used the money to pay
DBP. The last step in the payment procedure explains the reason
for this preferred though roundabout manner of payment. This
final step entitled the Consortium to obtain DBPs primary lien
through an assignment by allowing it to pay VISCOs loan to the
bank, without incurring additional expenses.
In the end, by collecting the money from VISCO, respondent

banks recovered what they had ostensibly remitted to DBP.
Moreover, the primary lien that respondent banks acquired
allowed them, as unsecured creditors of VISCO, to foreclose on
the assets of the corporation without regard to its inferior
claims. It was a clever ruse that would have worked, were it not
done by creditors who were duty-bound, as directors, not to take
clever advantage of other creditors.
To be sure, there was undue advantage. The payment scheme

devised by the Consortium continued the efficacy of the primary
lien, this time in its favor, to the detriment of the other creditors.
When one considers its knowledge that VISCOs assets might not
be enough to meet its obligations to several creditors,[115] the
intention to defraud the other creditors is even more striking.

Fraud is present when the debtor knows that its actions would
cause injury.[116]
The assignment in favor of the Consortium was a rescissible

contract for having been undertaken in fraud of creditors.[117]
Article 1385 of the Civil Code provides for the effect of
rescission, as follows:
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.
Indeed, mutual restitution is required in all cases involving

rescission. But when it is no longer possible to return the object
of the contract, an indemnity for damages operates as
restitution. The important consideration is that the indemnity
for damages should restore to the injured party what was lost.
In the case at bar, it is no longer possible to order the return of

VISCOs properties. They have already been sold to the NSC,
which has not been shown to have acted in bad faith. The party
alleging bad faith must establish it by competent proof. Sans that
proof, purchasers are deemed to be in good faith, and their
interest in the subject property must not be disturbed.
Purchasers in good faith are those who buy the property of
another without notice that some other person has a right to or
interest in the property; and who pay the full and fair price for
it at the time of the purchase, or before they get notice of some
other persons claim of interest in the property.[118]
In the present case, petitioner failed to discharge its burden of

proving bad faith on the part of NSC. There is insufficient
evidence on record that the latter participated in the design to
defraud VISCOs creditors. To NSC, petitioner imputes fraud from
the sole fact that the former was allegedly aware that its vendor,
the Consortium, had taken control over VISCO including the
corporations assets.[119] We cannot appreciate how knowledge
of the takeover would necessarily implicate anyone in the
Consortiums fraudulent designs. Besides, NSC was not shown to
be privy to the information that VISCO had no other assets to
satisfy other creditors respective claims.
The right of an innocent purchaser for value must be respected

and protected, even if its vendors obtained their title through
fraud.[120] Pursuant to this principle, the remedy of the
defrauded creditor is to sue for damages against those who
caused or employed the fraud. Hence, petitioner is entitled to
damages from the Consortium.
Award of Damages
It is essential that for damages to be awarded, a claimant must

satisfactorily prove during the trial that they have a factual basis,
and that the defendants acts have a causal connection to
them.[121] Thus, the question of damages should normally call
for a remand of the case to the lower court for further
proceedings. Considering, however, the length of time that
petitioners just claim has been thwarted, we find it in the best
interest of substantial justice to decide the issue of damages now
on the basis of the available records. A remand for further
proceedings would only result in a needless delay.
Going over the records of the case, we find that petitioner has a
final and executory judgment in its favor in Civil Case No. 21272.
The judgment in that case reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the

plaintiffs ordering defendant VISCO/SRM to pay the plaintiffs
the sum of P851,316.19 with interest thereon at the legal rate
from the filing of this complaint, plus attorneys fees of
P50,000.00 and to pay the costs.[122]
The foregoing is the judgment credit that petitioner cannot

enforce against VISCO because of Respondent Consortiums
fraudulent disposition of the corporations assets. In other

words, the above amounts define the extent of the actual damage
suffered by Coastal and the amount that respondent has to
restore pursuant to Article 1385.
On the basis of the finding of fraud, the award of exemplary

damages is in order, to serve as a warning to other creditors not
to abuse their rights. Under Article 2229 of the Civil Code,
exemplary or corrective damages are imposed by way of example
or correction for the public good. By their nature, exemplary
damages should be imposed in an amount sufficient and
effective to deter possible future similar acts by respondent
banks. The court finds the amount of P250,000 sufficient in the
instant case.
As a rule, a corporation is not entitled to moral damages because,

not being a natural person, it cannot experience physical
suffering or sentiments like wounded feelings, serious anxiety,
mental anguish and moral shock.[123] The only exception to this
rule is when the corporation has a good reputation that is
debased, resulting in its humiliation in the business realm.[124]
In the present case, the records do not show any evidence that
the name or reputation of petitioner has been sullied as a result
of the Consortiums fraudulent acts. Accordingly, moral damages
are not warranted.
WHEREFORE, the Petition is GRANTED. The assailed Decision of

the Court of Appeals dated September 27, 1994, and its
Resolution dated January 5, 1995, are hereby REVERSED and SET

ASIDE. Respondent Consortium of Banks is ordered to PAY
Petitioner Coastal Pacific Trading, Inc., the sum adjudged by the
Regional Trial Court of Pasig, Branch 167, in Civil Case No. 21272
entitled Coastal Pacific Trading, Felix de la Costa, and Aurora del
Banco v. Visayan Integrated Corporation, to wit: x x x the sum of
P851,316.19 with interest thereon at the legal rate from the filing
of [the] [C]omplaint, plus attorneys fees of P50,000 and x x x the
costs. Respondent Consortium of Banks is further ordered to pay
petitioner exemplary damages in the amount of P250,000.
SO ORDERED.
ARTEMIO V. PANGANIBAN
Chief Justice
Chairman, First Division
W E C O N C U R:
CONSUELO YNARES-SANTIAGO MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice Associate Justice
ROMEO J. CALLEJO, SR. MINITA V. CHICO-NAZARIO

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify

that the conclusions in the above Decision were reached in
consultation before the case was assigned to the writer of the
opinion of the Courts Division.
Chief Justice
[1] Also referred to as Philippine Commercial International Bank

in respondents Memorandum (rollo, p. 223).
[2] The Petition impleaded the Court of Appeals (CA) as a
respondent. Pursuant to Sec. 4 of Rule 45 of the Rules of Court,
this Court has deleted the CA from the title of the case.
[3] Rollo, pp. 10-33.
[4] Id. at 35-54. Special Seventh Division. Penned by Justice
Antonio M. Martinez (Division chair), with the concurrence of
Justices Ramon Mabutas, Jr., and Delilah Vidallon-Magtolis

(members).
[5] Id. at 56.
[6] Assailed CA Decision, p. 20; rollo, p. 54.
[7] Id. at 3; id. at 37.
[8] Id.
[9] Records, Vol. I, pp. 77-84.
[10] Far East Bank and Trust Company (FEBTC), Philippine
Commercial International Bank (PCIB), Equitable Banking
Corporation (EBC), Prudential Bank and Trust Company (PBTC),
United Coconut Planters Banks (UCPB), Bank of the Philippine
Islands (BPI), Philippine Bank of Commerce, CityTrust Banking
Corporation (CityTrust), Associated Bank, Insular Bank of Asia
and America, Commercial Bank of Manila, and International
Corporate Bank. Respondents Memorandum, pp. 1-2; rollo, pp.
223-224.
[12] Petition, p. 4; rollo, p. 13.
[13] Documentary Evidence of Coastal Pacific; records, pp. 74-86.
[14] RTC Decision, p. 9; CA rollo, p. 104.
[15] Respondents Memorandum, p. 4; rollo, p. 226.
[16] IAC Decision, AC-GR CV No. 03719, p. 4; records, Vol. I, p.
136.
[18] Particularly on January 29, 1970. SGV Audit Report (records,
Vol. I, p. 176).
[19] Records, Vol. I, p. 176.
[20] CA Decision, p. 4; rollo, p. 38.

[21] Petitioners Memorandum, p. 3; rollo, p. 260.
[24] Rollo, p. 57.
[25] Id. at 61.
[26] Annex D of the Petition; rollo, p. 66.
[27] Exhibit K-2 on Annex D of the Petition; rollo, p. 66.
[28] Documentary Evidence of Coastal Pacific; records, p. 34.
[29] Minutes of the Luncheon Meeting of the Creditors
Consortium for Visayan Integrated Steel Corporation held at the
FEBTC Boardroom on Friday, September 20, 1974, pp. 1-4; rollo,
pp. 57-60.
[30] IAC Decision, AC-GR CV No. 03719, p. 4; records, Vol. I, p.
136.
[31] Supra note 28, at 2; rollo, p. 58.
[32] Id. at 3; id. at 59.
[33] Id.
[34] Minutes of the Special Board Meeting of Visayan Integrated
Steel Corporation Held at the FEBTC Boardroom, Manila, on
October 4, 1974, pp. 1-5; rollo, pp. 61-65.
[35] Id. at 3; id. at 63.
[36] Id.
[37] Id. at 3-5; id. at 63-65.
[38] CA rollo, p. 104.
[39] Exhibit D, Documentary Evidence of Coastal Pacific; records,

pp. 7-22.
[40] Docketed as Civil Case No. 21272 and entitled Coastal Pacific
Trading, Inc., v. Visayan Integrated Steel Corporation,
Continental Bank and the Provincial Sheriff of Rizal.
[41] Complaint, pp. 12-13; Documentary Evidence of Coastal
Pacific; records, pp. 18-19.
[42] Exhibit E-1, Documentary Evidence of Coastal Pacific;
records, p. 26.
[43] Exhibit E-2, id. at 29-30.
[44] Exhibit E-5, id. at 34-35.
[45] Refer to Hector Villavecers reply letters dated June 9, 1975
(records, Vol. I, p. 31) and June 30, 1975 (records, Vol. I, pp. 34-
35).
[47] Id. at 176.
[48] Records, Vol. I, pp. 100-105.
[49] Id. at 101.
[50] Id. at 111-118.
[51] Id. at 137.
[52] In Civil Case No. 3136, VISCO was sentenced to pay Southern
Industrial Projects, Inc. the sum of P11,194,512.32 with interest
from June 30, 1970. (Refer to IAC Decision dated June 14, 1985,
p. 5; records, Vol, I, p. 137)
[53] Records, Vol. I, pp. 119-123.
[54] Id. at 121.
[56] Records, Vol. I, pp. 124-131.

[57] Id. at 131.
[58] Id. at 133-145.
[59] Id. at 25.
[60] Id. at 25-48.
[61] Id. at 4 and 48.
[62] Id. at 166-170.
[63] Id. at 184.
[64] Deed of Absolute Sale of Rights, Interests, and Participation
over Personal Movable Properties (Records, Vol. I., pp. 146-155);
and Deed of Absolute Sale of Rights, Interests, and Participation
over Real Properties (records, Vol. I., pp. 156-165).
[66] Id. at 11.
[67] Petitioners Memorandum, pp. 11-12; rollo, pp. 268-269.
[68] Annex B of the Petition; rollo, pp. 57-60.
[69] Respondents Consolidated Rejoinder, p. 3; rollo, p. 173.
[71] Records, Vol. I, p. 18.
[73] Documentary Evidence of Coastal Pacific; records, pp. 150-
158.
[74] Id. at 158.
[75] Id. at 159-161.
[76] CA rollo, pp. 96-108.

[78] Appellants Brief, pp. 11-13; CA rollo, pp. 58-60.
[79] Id. at 13-25; id. at 60-72.
[80] Id. at 40-46; id. at 87-93.
[81] IAC Decision, records, Vol. I, pp. 133-145.
[82] 184 SCRA 80, April 3, 1990.
[83] 174 SCRA 330, June 28, 1989.
[84] Assailed CA Decision, pp. 14-15; rollo, pp. 48-49.
[85] Id. at 15-16; id. at 49-50.
[86] Id. at 17; id. at 51.
[87] Id. at 17-18; id. at 51-52.
[88] CA rollo, pp. 170-178.
[89] Id. at 170.
[90] To resolve old cases, the Court created the Committee on
Zero Backlog of Cases on January 26, 2006. Consequently, the
Court resolved to prioritize the adjudication of long-pending
cases by redistributing them among all the justices. This case
was recently re-raffled and assigned to the undersigned ponente
for study and report.
[92] Id. at 10; id. at 267.
[93] Supra at note 82.
[94] Id. at 85.
[95] Id. at 86-87.
[96] Id. at 87.
[97] Id. at 91.

[98] Id. at 93.
[99] Id.
[100] Supra note 81.
[101] Aldovino v. National Labor Relations Commission, 359 Phil.
54, November 16, 1998.
[102] Taganas v. Emuslan, 410 SCRA 237, September 2, 2003;
Cagayan de Oro Coliseum v. CA, 320 SCRA 731, December 15,
1999.
[103] Perez v. CA, 464 SCRA 89, July 22, 2005.
[104] Id.
[105] See The City of Bacolod v. San Miguel Brewery, Inc., 140
Phil. 363, October 30, 1969.
[106] Guzman, v. Bonnevie, 206 SCRA 668, March 2, 1992.
[107] A. TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON
THE CIVIL CODE OF THE PHILIPPINES 571, Vol. IV (1991). See Ong
v. CA, 310 SCRA 1, July 6, 1999.
[108] The members of the board of directors were Jose B.
Fernandez, Jr. (FEBTC), Arturo P. Samonte (FEBTC), Benjamin J.
Aldaba (PBC), Ruperto M. Carpio, Jr. (EBC), Rene H. Peronilla
(PCIB), Octavio D. Fule (PBTC), Primer B. Leonen (BPI), Caesar U.
Querubin (FBTC), Felicisimo Asoy (OBM), and Gregorio A.
Concon. The vice-president and assistant corporate secretary
was Vicente T. Garcia (FEBTC). Refer to Minutes dated October 4,
1974 (rollo, p. 61), in relation to Minutes of September 20, 1974
(rollo, p. 57).
[109] Petitioners Memorandum, p. 4; rollo, p. 261. See
International Corporate Bank, Inc. v. CA, 214 SCRA 364,
September 30, 1992.
[110] Prime White Cement Corporation v. IAC, GR No. 68555,

March 19, 1993, 220 SCRA 103.
[111] J. CAMPOS, JR. and M.C. CAMPOS, THE CORPORATION
CODE: COMMENTS, NOTES AND SELECTED CASES 780, Vol. I
(1990) citing Mead v. McCullough, 21 Phil. 95, December 26,
1911.
[113] Minutes of the Luncheon Meeting of the Creditors
Consortium for Visayan Integrated Steel Corporation held at the
FEBTC Boardroom on Friday, September 20, 1974, p. 2; rollo, p.
58.
[114] See CIVIL CODE, Art. 2125.
[115] SGV Report to VISCO Board of Directors (records, Vol. I, pp.
171-178).
[116] A. TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON
THE CIVIL CODE OF THE PHILIPPINES 580, Vol. IV (1991).
[117] CIVIL CODE, Art. 1381(3).
[118] Agricultural and Home Extension Development Group v.
CA, 213 SCRA 563, September 3, 1992; Co v. CA, 196 SCRA 705,
May 6, 1991.
[119] Petitioners Consolidated Reply, pp. 1-9; rollo, pp. 146-152.
[120] Veloso v. CA, 260 SCRA 593, August 21, 1996.
[121] Air France v. CA, 171 SCRA 399, March 21, 1989.
[123] Solid Homes, Inc. v. CA, 275 SCRA 267, July 8, 1997.
[124] Simex International, Inc. v. CA, 183 SCRA 360, March 19,
1990.
322. Caltex Philippines v. PNOC Shipping, 498 SCRA 400

THIRD DIVISION
CALTEX (PHILIPPINES), INC., G.R. No. 150711

Petitioner,
Present:
QUISUMBING, J.,
Chairperson,
CARPIO,
- versus - CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
PNOC SHIPPING AND TRANSPORT Promulgated:
CORPORATION,
Respondent. August 10, 2006
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- -x
DECISION
CARPIO, J.:
The Case
Before the Court is a petition for review[1] assailing the 31 May

2001 Decision[2] and 9 November 2001 Resolution[3] of the
Court of Appeals in CA-G.R. CV No. 46097. The Court of
Appeals reversed the 1 June 1994 Decision[4] of the Regional
Trial Court of Manila, Branch 51 (trial court), and dismissed the
complaint filed by Caltex (Philippines), Inc. (Caltex) against
PNOC Shipping and Transport Corporation (PSTC).
The Antecedent Facts
On 6 July 1979, PSTC and Luzon Stevedoring Corporation

(LUSTEVECO) entered into an Agreement of Assumption of
Obligations (Agreement). The Agreement provides that PSTC
shall assume all the obligations of LUSTEVECO with respect to
the claims enumerated in Annexes A and B (Annexes) of the
Agreement. The Agreement also provides that PSTC shall
control the conduct of any litigation pending or which may be
filed with respect to the claims in the Annexes. The Agreement
further provides that LUSTEVECO shall deliver to PSTC all
papers and records of the claims in the Annexes. Finally, the
Agreement provides that LUSTEVECO appoints and constitutes
PSTC as its attorney-in-fact to demand and receive any claim
out of the countersuits and counterclaims arising from the
claims in the Annexes.
Among the actions enumerated in the Annexes is Caltex (Phils.),

Inc. v. Luzon Stevedoring Corporation docketed as AC-G.R. CV
No. 62613 which at that time was pending before the then
Intermediate Appellate Court (IAC). The case was an appeal
from the Decision by the then Court of First Instance of Manila
(CFI) directing LUSTEVECO to pay Caltex P103,659.44 with legal
interest from the filing of the action until full payment. In its
12 November 1985 Decision,[5] the IAC affirmed with
modification the Decision of the CFI. The dispositive portion of
the Decision reads:
WHEREFORE, the decision appealed from is hereby MODIFIED

and judgment is rendered ordering the defendant [LUSTEVECO]
to pay plaintiff [Caltex]:
(a) P126,771.22 under the first cause of action, with legal

interest until fully paid;
(b) P103,659.44 under the second cause of action with legal

interest until fully paid;
(c) 10% of the sums due as and for attorneys fees;
(d) costs of the suit.
SO ORDERED.[6]
The Decision of the IAC became final and executory.

The Regional Trial Court of Manila, Branch 12, issued a writ of

execution in favor of Caltex. However, the judgment was not
satisfied because of the prior foreclosure of LUSTEVECOs
properties. The Manila Bank Intramuros Branch and the Traders
Royal Bank Aduana Branch did not respond to the notices of
garnishment.
Caltex subsequently learned of the Agreement between PSTC

and LUSTEVECO. Caltex sent successive demands to PSTC
asking for the satisfaction of the judgment rendered by the CFI.
PSTC requested for the copy of the records of AC-G.R. CV No.
62613. Later, PSTC informed Caltex that it was not a party to
AC-G.R. CV No. 62613 and thus, PSTC would not pay
LUSTEVECOs judgment debt. PSTC advised Caltex to demand
satisfaction of the judgment directly from LUSTEVECO.
Caltex continued to send several demand letters to PSTC. On 5

February 1992, Caltex filed a complaint for sum of money
against PSTC. The case was docketed as Civil Case No. 91-
59512.
On 1 June 1994, the trial court rendered its Decision, the

dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby

rendered in favor of the plaintiff, ordering defendant to pay
plaintiff the sums due the latter in the decision rendered by the
Court of Appeals in CA-G.R. No. 62613, CALTEX vs.
LUSTEVECO, or to pay plaintiff (Exhibit C):
(a) P126,771.22 under the first cause of action, with legal

interest from the date of the promulgation of the decision on
November 12, 1985 until fully paid;
(b) P103,659.44 under the second cause of action with legal

interest from the date of the promulgation of the decision on
November 12, 1985 until fully paid;
(c) 10% of the sums due as and for attorneys fees; and
(d) Costs of suit.
SO ORDERED.[7]
PSTC appealed the trial courts Decision.
The Ruling of the Court of Appeals
In its 31 May 2001 Decision, the Court of Appeals found the

appeal meritorious. The Court of Appeals ruled that Caltex has
no personality to sue PSTC. The Court of Appeals held that
non-compliance with the Agreement could only be questioned
by the signatories to the contract, namely, LUSTEVECO and
PSTC. The Court of Appeals stated that LUSTEVECO and PSTC
are the only parties who can file an action to enforce the
Agreement. The Court of Appeals considered fatal the omission
of LUSTEVECO, the real party in interest, as a party defendant
in the case. The Court of Appeals further ruled that Caltex is
not a beneficiary of a stipulation pour autrui because there is
no stipulation in the Agreement which clearly and deliberately

favors Caltex.
The dispositive portion of the Decision of the Court of Appeals

reads:
WHEREFORE, premises considered, the appealed Decision dated

June 1, 1994, rendered by the Regional Trial Court of Manila,
Branch 51, is hereby REVERSED and SET ASIDE and a new one
entered DISMISSING the complaint filed by appellee [Caltex],
against appellant [PSTC], for want of cause of action.
SO ORDERED.[8]
Caltex filed a motion for reconsideration of the 31 May 2001

Decision. In a Resolution promulgated on 9 November 2001, the
Court of Appeals denied the motion for lack of merit.
Hence, this petition before this Court.
The Issues
The issues in this case are:

1. Whether PSTC is bound by the Agreement when it assumed

all
the obligations of LUSTEVECO; and
2. Whether Caltex is a real party in interest to file an action to

recover from PSTC the judgment debt against LUSTEVECO.
The Ruling of this Court
The petition is meritorious.
Caltex May Recover from PSTC Under the Terms of the

Agreement
Caltex may recover the judgment debt from PSTC not because
of a stipulation in Caltexs favor but because the Agreement
provides that PSTC shall assume all the obligations of
LUSTEVECO.
In this case, LUSTEVECO transferred, conveyed and assigned to

PSTC all of LUSTEVECOs business, properties and assets
pertaining to its tanker and bulk business together with all the
obligations relating to the said business, properties and assets.
The Agreement, reproduced here in full, provides:
AGREEMENT OF ASSUMPTION
OF OBLIGATIONS
KNOW ALL MEN BY THESE PRESENTS:
This Agreement of Assumption of Obligations made and

executed this 6th day of July 1979, in the City of Manila, by and
between:
LUZON STEVEDORING CORPORATION, a corporation duly

organized and existing under and by virtue of Philippine Laws,
with offices at Tacoma and Second Streets, Port Area, Manila,
represented by GERONIMO Z. VELASCO, in his capacity as
Chairman of the Board, hereinafter referred to as ASSIGNOR,
- and -
PNOC SHIPPING AND TRANSPORT CORPORATION, a
corporation duly organized and existing under and by virtue of
Philippine Laws, with offices at Makati Avenue, Makati, Metro
Manila, represented by MARIO V. TIAOQUI, in his capacity as
Vice-President, hereinafter referred to as ASSIGNEE,
WITNESSETH : T h a t -
WHEREAS, on April 1, 1979, ASSIGNOR, for valuable

consideration, executed an Agreement of Transfer with
ASSIGNEE whereby ASSIGNOR transferred, conveyed and
assigned unto ASSIGNEE all of ASSIGNORs business, properties
and assets appertaining to its tanker and bulk all (sic)
departments, together with all the obligations relating to said
business, properties and assets;
WHEREAS, relative to the conduct, operation and management

of the business, properties and assets transferred, conveyed
and assigned by ASSIGNOR to ASSIGNEE certain actions and
claims particularly described in Annex A consisting of four (4)
pages and Annex B, consisting of one (1) page, attached hereto
and made integral parts hereof, have been filed, either with
ASSIGNOR or with appropriate courts and administrative
tribunals.
WHEREAS, under the terms and conditions hereinafter

mentioned, ASSIGNEE agree[s] to assume the obligations
incident and relative to the actions and claims enumerated and
described in Annexes A and B hereof.
NOW, THEREFORE, for and in consideration of the foregoing

premises, the parties hereto have agreed as follows:
1. ASSIGNEE shall assume, as it hereby assumes all the

obligations of ASSIGNOR in respect to the actions and claims
and described in Annexes A and B;
2. ASSIGNEE shall have complete control in the conduct of

any and all litigations now pending or may be filed with respect
to the actions and claims enumerated and described in Annexes
A and B;
3. ASSIGNOR shall deliver and convey unto ASSIGNEE all

papers, documents, files and any other records appertaining to
the actions and claims enumerated and described in Annexes A
and B;
4. ASSIGNOR hereby constitutes and appoints ASSIGNEE, its

successors and assigns, the true and lawful attorney of
ASSIGNOR, with full power of substitution, for it and in its
name, place and stead or otherwise, but on behalf and for the
benefit of ASSIGNEE, its successors and assigns, to demand and
receive any and all claim[s] out of countersuits or
counterclaims arising from the actions and claims enumerated
and described in Annexes A and B.[9] (Emphasis supplied)
When PSTC assumed all the properties, business and assets of

LUSTEVECO pertaining to LUSTEVECOs tanker and bulk
business, PSTC also assumed all of LUSTEVECOs obligations

pertaining to such business. The assumption of obligations was
stipulated not only in the Agreement of Assumption of
Obligations but also in the Agreement of Transfer. The
Agreement specifically mentions the case between LUSTEVECO
and Caltex, docketed as AC-G.R. CV No. 62613, then pending
before the IAC. The Agreement provides that PSTC may demand
and receive any claim out of counter-suits or counterclaims
arising from the actions enumerated in the Annexes.
PSTC is bound by the Agreement. PSTC cannot accept the

benefits without assuming the obligations under the same
Agreement. PSTC cannot repudiate its commitment to assume
the obligations after taking over the assets for that will amount
to defrauding the creditors of LUSTEVECO. It will also result in
failure of consideration since the assumption of obligations is
part of the consideration for the transfer of the assets from
LUSTEVECO to PSTC. Failure of consideration will revert the
assets to LUSTEVECO for the benefit of the creditors of
LUSTEVECO. Thus, PSTC cannot escape from its undertaking to
assume the obligations of LUSTEVECO as stated in the
Agreement.
Disposition of Assets should not Prejudice Creditors
Even without the Agreement, PSTC is still liable to Caltex.
The disposition of all or substantially all of the assets of a

corporation is allowed under Section 40 of Batas Pambansa Blg.
68, otherwise known as The Corporation Code of the

Philippines (Corporation Code). Section 40 provides:
SEC. 40. Sale or other disposition of assets. ─ Subject to the
provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board
of directors, or trustees, sell, lease, exchange, mortgage, pledge
or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money,
stocks, bonds or other instruments for the payment of money
or other property or consideration, as its board of directors or
trustees may deem expedient, when authorized by the vote of
the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock; or in case of non-stock corporation,
by the vote of at least two-thirds (2/3) of the members, in a
stockholders or members meeting duly called for the purpose.
Written notice of the proposed action and of the time and place
of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office
with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under
the conditions provided in this Code.
A sale or other disposition shall be deemed to cover

substantially all the corporate property and assets, if thereby
the corporation would be rendered incapable of continuing the
business or accomplishing the purposes for which it was
incorporated.
xxxx
While the Corporation Code allows the transfer of all or

substantially all the properties and assets of a corporation, the
transfer should not prejudice the creditors of the assignor. The
only way the transfer can proceed without prejudice to the
creditors is to hold the assignee liable for the obligations of the
assignor. The acquisition by the assignee of all or substantially
all of the assets of the assignor necessarily includes the
assumption of the assignors liabilities,[10] unless the creditors
who did not consent to the transfer choose to rescind the
transfer on the ground of fraud.[11] To allow an assignor to
transfer all its business, properties and assets without the
consent of its creditors and without requiring the assignee to
assume the assignors obligations will defraud the creditors.
The assignment will place the assignors assets beyond the
reach of its creditors.
Here, Caltex could not enforce the judgment debt against

LUSTEVECO. The writ of execution could not be satisfied
because LUSTEVECOs remaining properties had been foreclosed
by lienholders. In addition, all of LUSTEVECOs business,
properties and assets pertaining to its tanker and bulk business
had been assigned to PSTC without the knowledge of its
creditors. Caltex now has no other means of enforcing the
judgment debt except against PSTC.
If PSTC refuses to honor its written commitment to assume the

obligations of LUSTEVECO, there will be fraud on the creditors
of LUSTEVECO. PSTC agreed to take over, and in fact took over,
all the assets of LUSTEVECO upon its express written
commitment to pay all obligations of LUSTEVECO pertaining to
those assets, including specifically the claim of Caltex.

LUSTEVECO no longer informed its creditors of the transfer of
all of its assets presumably because PSTC committed to pay all
such creditors. Such transfer, leaving the claims of creditors
unenforceable against the debtor, is fraudulent and
rescissible.[12] To allow PSTC now to welsh on its commitment
is to sanction a fraud on LUSTEVECOs creditors.[13]
In Oria v. McMicking, the Court enumerated the badges of fraud

as follows:
1. The fact that the consideration of the conveyance is

fictitious or is inadequate.
2. A transfer made by a debtor after suit has been 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.[14] (Emphasis supplied)
In Pepsi-Cola Bottling Co. v. NLRC,[15] which involved the illegal

dismissal of the employees of Pepsi-Cola Distributors of the
Philippines (PCD), the Court has ruled that Pepsi-Cola Products
Philippines, Inc. (PCPPI) which acquired the franchise of PCD is
liable for the reinstatement of PCDs employees. The Court
rejected PCPPIs argument that it is a company separate and
distinct from PCD. The Court ruled that the complaint was filed
when PCD was still in existence. Further, there was no evidence
that PCPPI, as the new entity or purchasing company, was free
from any liabilities incurred by PCD.
In this case, PSTC was aware of the pendency of the case

between Caltex and LUSTEVECO. PSTC assumed LUSTEVECOs
obligations, including specifically any obligation that might
arise from Caltexs suit against LUSTEVECO. The Agreement
transferred the unencumbered assets of LUSTEVECO to PSTC,
making any money judgment in favor of Caltex unenforceable
against LUSTEVECO. To allow PSTC to renege on its obligation
under the Agreement will allow PSTC to defraud Caltex. This
militates against the statutory policy of protecting creditors
from fraudulent contracts.
Article 1313 of the Civil Code provides that [c]reditors are

protected in cases of contracts intended to defraud them.
Further, Article 1381 of the Civil Code provides that contracts
entered into in fraud of creditors may be rescinded when the
creditors cannot in any manner collect the claims due them.[16]
Article 1381 applies to contracts where the creditors are not
parties, for such contracts are usually made without their
knowledge. Thus, a creditor who is not a party to a contract can
sue to rescind the contract to prevent fraud upon him. Or, the
same creditor can instead choose to enforce the contract if a
specific provision in the contract allows him to collect his
claim, and thus protect him from fraud.
If PSTC does not assume the obligations of LUSTEVECO as PSTC

had committed under the Agreement, the creditors of
LUSTEVECO could no longer collect the debts of LUSTEVECO.
The assignment becomes a fraud on the part of PSTC, because
PSTC would then have inveigled LUSTEVECO to transfer the
assets on the promise to pay LUSTEVECOs creditors. However,
after taking over the assets, PSTC would now turn around and
renege on its promise.
The Agreement, under Article 1291 of the Civil Code,[17] is also

a novation of LUSTEVECOs obligations by substituting the
person of the debtor. Under Article 1293 of the Civil Code, a
novation which consists in substituting a new debtor in place of
the original debtor cannot be made without the consent of the
creditor.[18] Here, since the Agreement novated the debt
without the knowledge and consent of Caltex, the Agreement
cannot prejudice Caltex. Thus, the assets that LUSTEVECO
transferred to PSTC in consideration, among others, of the
novation, or the value of such assets, remain even in the hands
of PSTC subject to execution to satisfy the judgment claim of

Caltex.
Caltex is a Real Party in Interest
Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides:
SEC. 2. Parties in interest. ─ A real party in interest is the party

who stands to be benefited or injured by the judgment in the
suit, or the party entitled to the avails of the suit. Unless
otherwise authorized by law or these Rules, every action must
be prosecuted or defended in the name of the real party in
interest.
Ordinarily, one who is not a privy to a contract may not bring

an action to enforce it. However, this case falls under the
exception. In Oco v. Limbaring, we ruled:
The parties to a contract are the real parties in interest in an

action upon it, as consistently held by the Court. Only the
contracting parties are bound by the stipulation in the contract;
they are the ones who would benefit from and could violate it.
Thus, one who is not a party to a contract, and for whose
benefit it was not expressly made, cannot maintain an action on
it. One cannot do so, even if the contract performed by the
contracting parties would incidentally inure to ones benefit.
As an exception, parties who have not taken part in a contract

may show that they have a real interest affected by its
performance or annulment. In other words, those who are not
principally or subsidiarily obligated in a contract, in which they
had no intervention, may show their detriment that could result
from it. x x x[19] (Emphasis supplied)
Caltex may enforce its cause of action against PSTC because

PSTC expressly assumed all the obligations of LUSVETECO
pertaining to its tanker and bulk business and specifically,
those relating to AC-G.R. CV No. 62613. While Caltex is not a
party to the Agreement, it has a real interest in the
performance of PSTCs obligations under the Agreement
because the non-performance of PSTCs obligations will defraud
Caltex.
Even if PSTC did not expressly assume to pay the creditors of

LUSTEVECO, PSTC would still be liable to Caltex up to the value
of the assets transferred. The transfer of all or substantially all
of the unencumbered assets of LUSTEVECO to PSTC cannot
work to defraud the creditors of LUSTEVECO. A creditor has a
real interest to go after any person to whom the debtor
fraudulently transferred its assets.
WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001

Decision and 9 November 2001 Resolution of the Court of
Appeals in CA-G.R. CV No. 46097. We AFFIRM the 1 June 1994
Decision of the Regional Trial Court of Manila, Branch 51, in
Civil Case No. 91-59512. Costs against respondent.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
CONCHITA CARPIO MORALES DANTE O. TINGA

PRESBITERO J. VELASCO, JR.

Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.
LEONARDO A. QUISUMBING
Associate Justice
Chairperson
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the
Division Chairpersons Attestation, I certify that the conclusions
in the above Decision had been reached in consultation before
the case was assigned to the writer of the opinion of the Courts
Division.
Chief Justice
[1] Under Rule 45 of the 1997 Rules of Civil Procedure.

[2] Penned by Associate Justice Juan Q. Enriquez, Jr. with
Associate Justices Presbitero J. Velasco, Jr. and Bienvenido L.
Reyes, concurring. Rollo, pp. 41-47.
[3] Penned by Associate Justice Juan Q. Enriquez, Jr. with
Associate Justices Wenceslao I. Agnir, Jr. and Bienvenido L.
Reyes, concurring. Rollo, p. 49.
[4] Penned by Judge Rustico V. Panganiban. Rollo, pp. 66-72.
[5] Penned by Associate Justice Jose C. Campos, Jr. with
Associate Justices Crisolito Pascual, Serafin E. Camilon and
Desiderio P. Jurado, concurring. Records, pp. 14-21.
[6] Id. at 20-21.
[7] Rollo, pp. 71-72.
[8] Id. at 46.
[9] Id. at 50-52.
[10] See Rivera v. Litam & Company, Inc., L-16954, 25 April

1962, 4 SCRA 1072.
[11] See note 16 infra.
[12] Article 1381(3), Civil Code.

[13] See China Banking Corp. v. Court of Appeals, 384 Phil. 116
(2000).
[14] 21 Phil. 243, 250-251 (1912).
[15] G.R. No. 101900, 23 June 1992, 210 SCRA 277. See also
Pepsi-Cola Distributors of the Phil., Inc. v. NLRC, 317 Phil. 461
(1995) and Corral v. National Labor Relations Commission, G.R.
No. 96795, 12 July 1996, 258 SCRA 704.
[16] Article 1381 of the Civil Code provides:
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. (Emphasis supplied)
[17] Article 1291 provides:

Art. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
[18] Article 1293 provides:

Art. 1293. Novation which consists in substituting a new debtor
in the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor. Payment made by the new debtor gives
him the rights mentioned in Articles 1236 and 1237.
[19] G.R. No. 161298, 31 January 2006, 481 SCRA 348, 358-359.
323. Uy Tong v. Silva, 132 SCRA 448

SUPREME COURT
Manila
EN BANC
G.R. No. L-28377 October 1, 1984
IN RE: PETITION FOR VOLUNTARY INSOLVENCY OF UY TONG,

alias TEODORO UY. UY TONG, alias TEODORO UY, petitioner-
appellee,
vs.
MARIO R. SILVA, assignee, EDUARDO LOPEZ, et al., claimants-
appellants.
RESOLUTION
Direct appeal on a pure question of law from the orders of the

then Court of First Instance of Manila, Branch XXI, sitting as an
insolvency court in Special Proceedings No. 29835, entitled "In
Re: Petition for Voluntary Insolvency of Uy Tong alias Teodoro
Uy," declaring as duly proved the indebtedness of insolvent Uy
Tong in favor of herein appellants, claimants Eduardo Lopez, et
al., in the amount of P100,575.00 with legal interest from
August 10, 1954; but denying the set-off of such amount
against the indebtedness of said claimants to insolvent Uy Tong
amounting to P55,000.00 with legal interest from February 24,

1954, until the preferred claims shall have been fully satisfied.
Unquestionably, the principle of compensation or set-off as

recognized both in Article 1279 of the Civil Code 1 and Section
58 of the Insolvency Law 2 is applicable to the case at bar.
However, the amount which claimants Eduardo Lopez, et al.,
may set off against their indebtedness in favor of insolvent Uy
Tong is limited only to the rentals of the Benavides Building
due from the latter for the period from February 28, 1955 up to
May 25, 1955, the date when the petition for voluntary in
solvency was filed, and not the whole amount representing
rentals from February 28, 1955 to June 16, 1961. It is a settled
principle that "a debt of the bankrupt arising prior to the
bankruptcy cannot be set off against installments of rent falling
due after bankruptcy, although the installments are payable
under a written lease in effect before the bankruptcy." 3 Upon
this premise, the conclusion is easily reached that the debt of
claimants which arose prior to bankruptcy cannot be set-off
against the installments of rent falling due from the insolvent
after bankruptcy. The reason therefor is quite evident: with
respect to the difference between the debt of claimants
Eduardo Lopez, et al., in the amount of P55,000.00 plus
interest, and the rentals corresponding to the period from
February 28 to May 25, 1955, retention or controversy had been
effectively commenced by third persons upon their filing of
claims in the insolvency proceedings of which claimants Lopez,
et al., had due notice. For compensation to take place, it is
necessary, among other legal requisites, "that over neither of
them (the two debts) there be any retention or controversy,
commenced by third persons and communicated in due time to
the debtor." 4 This essential element of compensation being
absent, the same cannot take place.
Besides, to allow compensation to the concurrent amount of

the mutual debts and credits would in effect give claimants
Lopez, et al., undue preference over other creditors, as such
set-off will totally deplete the estate of the insolvent, a situation
entirely contrary to the purpose of insolvency proceedings,
which is to effect an equitable distribution of the insolvent's
estate among his creditors.
WHEREFORE, the orders appealed from are hereby modified in

the sense that claimants Eduardo Lopez, et al., are allowed to
set off from their indebtedness of P55,000.00 plus interest,
whatever amount was due from insolvent Uy Tong as rentals of
the Benavidez Building from February 28 to May 25, 1955. The
difference shall be paid pro rata with other unpreferred claims,
but only after the preferred claims, if any, shall have been
satisfied. Let the records of this case be remanded to the court
a quo for further proceedings. No costs.
SO ORDERED.1äwphï1.ñët
Footnotestêñ.£îhqwâ£
1 Art. 1279 of the New Civil Code reads: Art. 1279. In order
that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and

that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things

due are consumable, they be of the same kind, and of the same
quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable',
(5) That over neither of them there be any retention or

controversy, commenced by third persons and communicated
in due time to the debtor."
2 Section 58 of the Insolvency Law (Act No. 1956) provides:
"In all cases of mutual debts and mutual credits between the
parties, the account between them shall be stated, and one debt
set off against the other, and the balance only shall be allowed
and paid. But no set off or counterclaim shall be allowed of a
claim in its nature not provable against the estate; PROVIDED,
that no set off or counterclaim in favor of any debtor to the
insolvent of a claim purchased by or transferred to such debtor
within thirty days immediately preceding the filing or after the
filing of the petition by or against the insolvent.
3 Standard Oil Co. v. Elliot (CA 4 SC 80 F2d 158, cited in 9

Am Jur 2d 400).
4 par. 5. Art. 1279, Civil Code.

324. Floro Enterprises v. CA, 249 SCRA 354

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 105649 October 18, 1995
FLORO ENTERPRISES, INC., petitioner,

vs.
COURT OF APPEALS and PHILIPPINE RABBIT BUS LINES, INC.,
respondents.
RESOLUTION
FELICIANO, J.:
In this Petition for Review, Floro Enterprises, Inc. seeks to set

aside the decision of the Court of Appeals in CA-G.R. CV No.
27602 which reversed the decision of the Regional Trial Court,
Branch 16, Manila, in the action for replevin with damages

instituted by herein petitioner Floro Enterprises, Inc. ("Floro,
Inc.") against herein private respondent Philippine Rabbit Bus
Lines, Inc. ("Phil. Rabbit ").
On 25 February 1981, Floro, Inc. and Phil. Rabbit entered into

an agreement denominated as "Agreement for Equipment
Lease, Service and Maintenance" whereby Floro, Inc. agreed to
furnish Phil. Rabbit with certain computer equipment including
four (4) Model 85 Visual Display Units or monitors. Appearing
on the bottom portion of the Agreement was a handwritten
annotation made by Mr. Ernesto P. Lagman, a sales
representative of Floro, Inc., which read: "After (5) five years,
the computer becomes your property."
The Agreement provided for the payment by Phil. Rabbit to

Floro, Inc. of a downpayment upon signing of the Agreement
and certain monthly payments, plus certain other amounts
upon delivery of the computer equipment. 1 The computer
equipment specified in the Agreement was delivered to Phil.
Rabbit on September 1981 except for the four (4) Model 85
monitors. In lieu thereof, Floro, Inc. delivered and installed
Model 82 monitors. Phil. Rabbit made several verbal and written
demands on Floro, Inc. to deliver the Model 85 monitors. Upon
assurances made by Floro, Inc. that the Model 85 monitors "will
be forthcoming", Phil. Rabbit made several payments in
accordance with the terms of the Agreement. However, despite
the assurances made by Floro, Inc., the Model 85 monitors were
never delivered to Phil. Rabbit.
On 10 January 1983, Phil. Rabbit wrote Floro, Inc. asking for the
cancellation of the Agreement alleging that the computers were
not placed in full operation due to the nondelivery of the Model
85 monitors. In a letter dated 4 February 1983, Floro, Inc.
expressed its conformity to the "mutual cancellation" of the
Agreement and demanded the return of the computer
equipment. Phil. Rabbit informed Floro, Inc. that the computer
equipment would be returned only upon the reimbursement of
the amount of P295,169.00, which the former had already paid
the latter.
On 31 May 1983, Floro, Inc. wrote Phil. Rabbit reiterating its

demand for the return of the equipment and payment of back
rentals in the amount of P265,291.50. Phil. Rabbit insisted on
the return of the payments it had previously made. On 10
August 1983, Floro, Inc. proposed to put the computer systems
in operating condition and to start the "lease contract" all over
again for another sixty (60) months but crediting under the new
contract the monthly rentals already paid by Phil. Rabbit. No
agreement was reached by the parties.
On 27 July 1984, Floro, Inc. filed in the Regional Trial Court

("RTC"), Branch 16, Manila, an action to recover possession of
the computer equipment through a writ of replevin, unpaid
rentals, damages for depreciation and attorney's fees.
The RTC rendered judgment ordering Phil. Rabbit to pay Floro,

Inc. the sums of P291,008.36 as back rental payments,
P8,000.00 as attorney's fees and the costs of suit. 2 The trial
court characterized the Agreement between the parties as one
of lease and ruled that the handwritten annotation made by Mr.
Ernesto P. Lagman on the Agreement was not authorized by

Floro, Inc. The trial court also held that Phil. Rabbit was not
entitled to reimbursement of the amounts it had paid to Floro,
Inc. since it had been able to make use of the computer
equipment for its operations despite the nondelivery of the
Model 85 monitors. 3
On appeal, the Court of Appeals ("CA") reversed the decision of

the trial court. The CA characterized the agreement between
the parties as one of sale on an installment basis and not of
lease. That the intention of Phil. Rabbit and Floro, Inc. was to
enter into a contract of sale on installment was found by the
CA to have been sufficiently established by the handwritten
annotation made by Mr. Ernesto P. Lagman on the bottom
portion of the Agreement stating: "After (5) five years, the
computer becomes your property." 4
The CA did not give credence to the contention of Floro, Inc.

that it did not authorize Mr. Lagman to make said annotation
on its behalf. Respondent appellate court noted that Floro, Inc.
did not express any objection to the annotation despite
knowledge of the existence thereof. In addition, officers of
Floro Inc. who were presented as its witnesses testified to the
effect that the transaction between Phil. Rabbit and Floro, Inc.
had been one of sale on an installment basis. 5
Since the parties had agreed to a mutual cancellation of the

Agreement, respondent appellate court ordered each to restore
to the other what each had received under the Agreement in
accordance with Article 1385 of the Civil Code. The computer
equipment had been previously returned to Floro, Inc. by virtue
of the writ of replevin issued by the trial court. The CA found

that Phil. Rabbit had been able to make use of the computer
equipment for a period of six (6) months; hence, Phil. Rabbit
was ordered to pay the sum of P120,564.00 to be deducted
from the sum of P295,169.00 which it had already paid to
Floro, Inc. For its part, Floro, Inc. was ordered to return the
balance of P174,605.00. 6
Floro, Inc. filed this Petition for Review on Certiorari praying

for the reversal of the decision of the CA and the reinstatement
of the RTC decision. 7
Specifically, Floro, Inc. takes exception to the finding of

respondent appellate court that the Agreement between the
parties was one of sale on installment and not of lease. Floro,
Inc. maintains that it was not bound by the annotation made by
Mr. Lagman on the Agreement as it did not authorize the latter
to make said annotation.
It would seem that the issue to be resolved in this case is

whether the contract entered into by petitioner Floro, Inc. and
private respondent Phil. Rabbit was one of sale on installment
basis, as found by the CA, or one of lease, as found by the RTC.
However, the Court does not see any real need for resolving
this issue in view of the fact that the parties had agreed to a
mutual cancellation of their transaction. As established by both
respondent appellate court and the trial court, on 10 January
1983 private respondent Phil. Rabbit wrote petitioner Floro, Inc.
asking for the cancellation of the Agreement and the latter,
through a letter dated 4 February 1983, communicated to the
former its conformity thereto. 8 Whether the contract is
characterized as a sale or a lease, the consequences of the

cancellation would be the same. The parties are to be restored
to their original positions inter se as far as practicable.
When petitioner Floro, Inc. failed to deliver the Model 85

monitors, private respondent Phil. Rabbit would have been
entitled to refuse to pay the full amount stipulated in the
Agreement. However, private respondent Phil. Rabbit opted to
cancel the Agreement, to which petitioner Floro, Inc. expressed
its conformity. In legal effect, the parties entered into another
contract for the dissolution of the previous one, and they are
bound by that contract. The dissolution or the cancellation of
the original Agreement necessarily involves restoration of the
parties to the status quo ante prevailing immediately prior to
the execution of the Agreement i.e. the computer equipment
reverts back to petitioner Floro, Inc. and private respondent
Phil. Rabbit is reimbursed the amounts it had paid to the
former. However, in this case, Phil. Rabbit cannot reasonably
demand reimbursement for the full amount it had paid to
petitioner Floro, Inc. because it cannot be gainsaid that Phil.
Rabbit had utilized the computer equipment for its operations
and benefitted from such use. Phil. Rabbit cannot be allowed to
unjustly enrich itself at the expense of Floro, Inc.
Hence, respondent appellate court was correct in ordering the

parties to restore to each other what each of them had received
under the contract but taking into account the use by private
respondent Phil. Rabbit of the computer equipment. However, it
was not quite correct in invoking, in this connection, Article
1385 of the Civil Code. Article 1385 refers to contracts that are
rescissible for causes specified in Articles 1381 and 1382 of the
Civil Code but it does not refer to contracts that are dissolved
by mutual consent of the
parties. 9 Rather, the mutual restoration is in consonance with
the basic principle that when an obligation has been
extinguished or resolved, it is the duty of the court to require
the parties to surrender whatever they may have received from
the other so that they may be restored, as far as practicable, to
their original situation. 10
Petitioner Floro, Inc. had already been able to recover the

computer equipment through the writ of replevin issued by the
trial court in its favor. Upon the other hand, on the basis of the
records of the case, respondent appellate court ordered Phil.
Rabbit to pay petitioner Floro, Inc. the sum of P120,564.00
representing payment for the use of the computer equipment
for a period of approximately six (6) months, said amount to be
deducted from the sum of P295,169.00 which had already been
paid to the latter. Floro, Inc. was accordingly ordered to return
to Phil. Rabbit the remaining balance of P174,605.00. The Court
finds no reason to disturb this finding by the CA there being no
showing that the same was based on a misapprehension of
facts or constituted grossly excessive imputed compensation
for the period of use by Phil. Rabbit.
The Court sees no need to resolve the other issues raised in the
petition.
WHEREFORE, finding no reversible error on the part of

respondent Court of Appeals, the Court Resolved to DENY the
Petition for Review on Certiorari and the decision in CA-G.R. CV
No. 27602 is hereby AFFIRMED.
Romero, Melo, Vitug and Panganiban, JJ., concur.
Footnotes
1 Rollo, p. 57.
2 RTC Decision, p. 6; Rollo, p. 74.
3 id., pp. 4-5; id., pp. 72-73.
4 CA Decision, p. 3; Rollo, p. 51.
5 id., pp. 3-4 ; id., pp. 51-52.
6 id., p. 6 ; id., p. 54.
7 Rollo, p. 45.
8 RTC Decision, pp. 2-3; Rollo, pp. 70-71. CA Decision, p. 2 ;

Rollo, p. 50.
9 Pagco vs. Court of Appeals, 231 SCRA 354 (1994); Aquino

vs. Tanedo, 39 Phil. 517 (1919).
10 Agustin vs. Court of Appeals, 186 SCRA 375 (1990);

Magdalena Estate, Inc. vs. Myrick, 71 Phil. 344 (1941); Po Pauco
vs. Siguenza, et al., 49 Phil. 404 (1926).

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H. Rescissible Contracts (Arts.

316. Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668

Republic of the Philippines

G.R. No. 86150 March 2, 1992

GUZMAN, BOCALING & CO., petitioner,

E. Voltaire Garcia for petitioner.

Guinto Law Office for private respondent.

The subject of the controversy is a parcel of land measuring six

This property was leased to Raoul S. Bonnevie and Christopher

The Contract of lease contained the following stipulation:

20. — In case the LESSOR desire or decides to sell the lease

On November 3, 1976 according to Reynoso, she notified the

On January 20, 1977, Reynoso sent another letter to private

Upon receipt of this letter, the private respondents wrote

On March 7, 1977, the leased premises were formally sold to

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

On September 25, 1979, the parties submitted a Compromise

On November 12, 1979, private respondent Raoul S. Bonnevie

On May 5, 1980, the City Court decided the ejectment case,

WHEREFORE, judgment is hereby rendered ordering defendants

The decision was appealed to the then Court of First Instance of

WHEREFORE, premises considered, this Court in Civil Case No.

1 Ordering defendants Raoul S.V. Bonnevie and Christopher

2 To pay the latter the sum of P4,000.00 a month from April

Valdez Vda. de Reynoso during said period, without

As to Civil Case No. 131461, the Court hereby renders judgment

affirmed the conclusions of the lower court but reduced the

Its motion for reconsideration having been denied on December

The Court has examined the petitioner's contentions and finds

Reynoso claimed to have sent the November 3, 1976 letter by

The selling price qouted to the Bonnevies was P600,000.00, to be

As a strict legal proposition, no judgment of the probate court

The petitioner argues that assuming the Contract of Sale to be

recognizing their right of first priority under the Contract of

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

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

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

If Guzman-Bocaling failed to inquire about the terms of the Lease

Finally, the petitioner also cannot invoke the Compromise

WHEREFORE, the petition in DENIED, with costs against the

Narvasa, C.J., Griño-Aquino and Medialdea, JJ., concur.

1 Rollo, pp. 45-60; Penned by Mendoza, J., with Paras and

2 Exhibit "5", Original Records, p. 88.

3 Exhibit "B" Original Records, p. 99.

4 Tolentino, Commentaries and Jurisprudence on the Civil

5 Aquino v. Tañedo, 39 Phil. 517.

7 Cordovero and Alcazar v. Villaruz and Borromeo, 46 Phil.

8 De Santos v. IAC, 157 SCRA 295.

9 De la Cruz, IAC, 157 SCRA 660; Cui and Joven v. Henson, 51

317. Siguan v. Lim, 318 SCRA 725

MARIA ANTONIA SIGUAN, petitioner, vs. ROSA LIM, LINDE LIM,

May the Deed of Donation executed by respondent Rosa Lim

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

On 25 and 26 August 1990, LIM issued two Metrobank checks in

convicted LIM as charged. The case is pending before this Court

It also appears that on 31 July 1990 LIM was convicted of estafa

Meanwhile, on 2 July 1991, a Deed of Donation[4] conveying the

(1) a parcel of land situated at Barrio Lahug, Cebu City,

(2) a parcel of land situated at Barrio Lahug, Cebu City,

(3) a parcel of land situated at Cebu City containing an area of

(4) a parcel of land situated at Cebu City, Cebu containing an area

New transfer certificates of title were thereafter issued in the

On 23 June 1993, petitioner filed an accion pauliana against LIM

On the other hand, LIM denied any liability to petitioner. She