Oblicon Cases 12.docx

Ada et al vs Baylon, GR 182435, August 13, 2012 Facts: On July 3, 1996, the petitioners filed with the RTC a Complaint4 for partition, accounting and damages against Florante, Rita and Panfila. They alleged therein that Spouses Baylon, during their lifetime, owned 43 parcels of land5all situated in Negros Oriental. After the death of Spouses Baylon, they claimed that Rita took possession of the said parcels of land and appropriated for herself the income from the same. Using the income produced by the said parcels of land, Rita allegedly purchased two parcels of land, Lot No. 47096 and half of Lot No. 4706,7 situated in Canda-uay, Dumaguete City. The petitioners averred that Rita refused to effect a partition of the said parcels of land. 8

In their Answer, Florante, Rita and Panfila asserted that they and the petitioners co-owned 229 out of the 43 parcels of land mentioned in the latter’s complaint, whereas Rita actually owned 10 parcels of land10 out of the 43 parcels which the petitioners sought to partition. Further, they claimed that Lot No. 4709 and half of Lot No. 4706 were acquired by Rita using her own money. They denied that Rita appropriated solely for herself the income of the estate of Spouses Baylon, and expressed no objection to the partition of the estate of Spouses Baylon, but only with respect to the co-owned parcels of land. During the pendency of the case, Rita, through a Deed of Donation conveyed a Lot to Florante. On July 16, 2000, Rita died intestate and without any issue. Thereafter, learning of the said donation inter vivos in favor of Florante, the petitioners filed a Supplemental Pleading17 dated February 6, 2002, praying that the said donation in favor of the respondent be rescinded in accordance with Article 1381(4) of the Civil Code. They further alleged that Rita was already sick and very weak when the said Deed of Donation was supposedly executed and, thus, could not have validly given her consent thereto.

entered into and therefore obligatory under normal conditions, by reason of external causes resulting in a pecuniary prejudice to one of the contracting parties or their creditors.42 Contracts which are rescissible are valid contracts having all the essential requisites of a contract, but by reason of injury or damage caused to either of the parties therein or to third persons are considered defective and, thus, may be rescinded. The kinds of rescissible contracts, according to the reason for their susceptibility to rescission, are the following: first, those which are rescissible because of lesion or prejudice;43 second, those which are rescissible on account of fraud or bad faith;44 and third, those which, by special provisions of law,45 are susceptible to rescission.46 Contracts which refer to things subject of litigation is rescissible pursuant to Article 1381(4) of the Civil Code. Contracts which are rescissible due to fraud or bad faith include those which involve 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. Thus, Article 1381(4) of the Civil Code provides: Art. 1381. The following contracts are rescissible: xxxx (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. The rescission of a contract under Article 1381(4) of the Civil Code only requires the concurrence of the following:

Florante and Panfila opposed the rescission of the said donation, asserting that Article 1381(4) of the Civil Code applies only when there is already a prior judicial decree on who between the contending parties actually owned the properties under litigation

first, the defendant, during the pendency of the case, enters into a contract which refers to the thing subject of litigation; and

Ruling

As long as the foregoing requisites concur, it becomes the duty of the court to order the rescission of the said contract.

Rescission is a remedy to address the damage or injury caused to the contracting parties or third persons. Rescission is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if it should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contract.41 It is a remedy to make ineffective a contract, validly

second, the said contract was entered into without the knowledge and approval of the litigants or of a competent judicial authority.

The reason for this is simple. Article 1381(4) seeks to remedy the presence of bad faith among the parties to a case and/or any fraudulent act which they may commit with respect to the thing subject of litigation. When a thing is the subject of a judicial controversy, it should ultimately be bound by whatever disposition the court shall render. The parties to the

case are therefore expected, in deference to the court’s exercise of jurisdiction over the case, to refrain from doing acts which would dissipate or debase the thing subject of the litigation or otherwise render the impending decision therein ineffectual. There is, then, a restriction on the disposition by the parties of the thing that is the subject of the litigation. Article 1381(4) of the Civil Code requires that any contract entered into by a defendant in a case which refers to things under litigation should be with the knowledge and approval of the litigants or of a competent judicial authority. Further, any disposition of the thing subject of litigation or any act which tends to render inutile the court’s impending disposition in such case, sans the knowledge and approval of the litigants or of the court, is unmistakably and irrefutably indicative of bad faith. Such acts undermine the authority of the court to lay down the respective rights of the parties in a case relative to the thing subject of litigation and bind them to such determination. It should be stressed, though, that the defendant in such a case is not absolutely proscribed from entering into a contract which refer to things under litigation. If, for instance, a defendant enters into a contract which conveys the thing under litigation during the pendency of the case, the conveyance would be valid, there being no definite disposition yet coming from the court with respect to the thing subject of litigation. After all, notwithstanding that the subject thereof is a thing under litigation, such conveyance is but merely an exercise of ownership. This is true even if the defendant effected the conveyance without the knowledge and approval of the litigants or of a competent judicial authority. The absence of such knowledge or approval would not precipitate the invalidity of an otherwise valid contract. Nevertheless, such contract, though considered valid, may be rescinded at the instance of the other litigants pursuant to Article 1381(4) of the Civil Code. Here, contrary to the CA’s disposition, the RTC aptly ordered the rescission of the donation inter vivos of Lot No. 4709 and half of Lot No. 4706 in favor of Florante. The petitioners had sufficiently established the presence of the requisites for the rescission of a contract pursuant to Article 1381(4) of the Civil Code. It is undisputed that, at the time they were gratuitously conveyed by Rita, Lot No. 4709 and half of Lot No. 4706 are among the properties that were the subject of the partition case then pending with the RTC. It is also undisputed that Rita, then one of the defendants in the partition case with the RTC, did not inform nor sought the approval from the petitioners or of the RTC with regard to the donation inter vivos of the said parcels of land to Florante. Although the gratuitous conveyance of the said parcels of land in favor of Florante was valid, the donation inter vivos of the same being merely an exercise of ownership, Rita’s failure to inform and

seek the approval of the petitioners or the RTC regarding the conveyance gave the petitioners the right to have the said donation rescinded pursuant to Article 1381(4) of the Civil Code. Rescission under Article 1381(4) of the Civil Code is not preconditioned upon the judicial determination as to the ownership of the thing subject of litigation. In this regard, we also find the assertion that rescission may only be had after the RTC had finally determined that the parcels of land belonged to the estate of Spouses Baylon intrinsically amiss. The petitioners’ right to institute the action for rescission pursuant to Article 1381(4) of the Civil Code is not preconditioned upon the RTC’s determination as to the ownership of the said parcels of land. It bears stressing that the right to ask for the rescission of a contract under Article 1381(4) of the Civil Code is not contingent upon the final determination of the ownership of the thing subject of litigation. The primordial purpose of Article 1381(4) of the Civil Code is to secure the possible effectivity of the impending judgment by a court with respect to the thing subject of litigation. It seeks to protect the binding effect of a court’s impending adjudication vis-à-vis the thing subject of litigation regardless of which among the contending claims therein would subsequently be upheld. Accordingly, a definitive judicial determination with respect to the thing subject of litigation is not a condition sine qua non before the rescissory action contemplated under Article 1381(4) of the Civil Code may be instituted. Moreover, conceding that the right to bring the rescissory action pursuant to Article 1381(4) of the Civil Code is preconditioned upon a judicial determination with regard to the thing subject litigation, this would only bring about the very predicament that the said provision of law seeks to obviate. Assuming arguendo that a rescissory action under Article 1381(4) of the Civil Code could only be instituted after the dispute with respect to the thing subject of litigation is judicially determined, there is the possibility that the same may had already been conveyed to third persons acting in good faith, rendering any judicial determination with regard to the thing subject of litigation illusory. Surely, this paradoxical eventuality is not what the law had envisioned. Rosencor vs Inquing, GR 140479, March 8, 2001 Facts Plaintiffs and plaintiffs-intervenors were allegedly verbally granted by the lessors the pre-emptive right to purchase the property if ever they decide to sell the same. Upon the death of the spouses Tiangcos in 1975, the management of the property was adjudicated to their heirs. The lessees were allegedly promised the same pre-emptive right by the heirs of Tiangcos

since the latter had knowledge that this right was extended to the former by the late spouses Tiangcos. Thereafter, they received a letter from Eufrocina de Leon offering to sell to them the property they were leasing for P2,000,000.00. xxx. The lessees offered to buy the property from de Leon for the amount of P1,000,000.00. De Leon told them that she will be submitting the offer to the other heirs. Since then, no answer was given by de Leon as to their offer to buy the property. However, in November 1990, Rene Joaquin came to the leased premises introducing himself as its new owner. The lessees received a letter from de Leon advising them that the heirs of the late spouses Tiangcos have already sold the property to Rosencor. The following month Atty. Aguila wrote them another letter demanding the rental payment and introducing herself as counsel for Rosencor/Rene Joaquin, the new owners of the premises. The lessees requested from de Leon why she had disregarded the pre-emptive right she and the late Tiangcos have promised them. They also asked for a copy of the deed of sale between her and the new owners thereof but she refused to heed their request. In the same manner, when they asked Rene Joaquin a copy of the deed of sale, the latter turned down their request and instead Atty. Aguila wrote them several letters demanding that they vacate the premises. The lessees offered to tender their rental payment to de Leon but she refused to accept the same. In April 1992 before the demolition can be undertaken by the Buiding Official, the barangay interceded between the parties herein after which Rosencor raised the issue as to the rental payment of the premises. It was also at this instance that the lessees were furnished with a copy of the Deed of Sale and discovered that they were deceived by de Leon since the sale between her and Rene Joaquin/Rosencor took place in September 4, 1990 while de Leon made the offer to them only in October 1990 or after the sale with Rosencor had been consummated. The lessees also noted that the property was sold only for P726,000.00. The lessees offered to reimburse de Leon the selling price of P726,000.00 plus an additional P274,000.00 to complete their P1,000.000.00 earlier offer. When their offer was refused, they filed the present action praying for the following: a) rescission of the Deed of Absolute Sale between de Leon and Rosencor dated September 4, 1990. After trial on the merits, the Regional Trial Court rendered a Decision[5] dated May 13, 1996 dismissing the complaint. Ruling the prevailing doctrine, as enunciated in the cited cases, is that a contract of sale entered into in violation of a right of first refusal of another person, while valid, is rescissible.

There is, however, a circumstance which prevents the application of this doctrine in the case at bench. In the cases cited above, the Court ordered the rescission of sales made in violation of a right of first refusal precisely because the vendees therein could not have acted in good faith as they were aware or should have been aware of the right of first refusal granted to another person by the vendors therein. The rationale for this is found in the provisions of the New Civil Code on rescissible contracts. Under Article 1381 of the New Civil Code, paragraph 3, a contract validly agreed upon may be rescinded if it is undertaken in fraud of creditors when the latter cannot in any manner collect the claim due them. Moreover, under Article 1385, rescission shall not 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.[30] It must be borne in mind that, unlike the cases cited above, the right of first refusal involved in the instant case was an oral one given to respondents by the deceased spouses Tiangco and subsequently recognized by their heirs. As such, in order to hold that petitioners were in bad faith, there must be clear and convincing proof that petitioners were made aware of the said right of first refusal either by the respondents or by the heirs of the spouses Tiangco. It is axiomatic that good faith is always presumed unless contrary evidence is adduced.[31] A purchaser in good faith is one who buys the property of another without notice that some other person has a right or interest in such a property and pays a full and fair price at the time of the purchase or before he has notice of the claim or interest of some other person in the property.[32] In this regard, the rule on constructive notice would be inapplicable as it is undisputed that the right of first refusal was an oral one and that the same was never reduced to writing, much less registered with the Registry of Deeds. In fact, even the lease contract by which respondents derive their right to possess the property involved was an oral one. On this point, we hold that the evidence on record fails to show that petitioners acted in bad faith in entering into the deed of sale over the disputed property with the heirs of the spouses Tiangco. Respondents failed to present any evidence that prior to the sale of the property on September 4, 1990, petitioners were aware or had notice of the oral right of first refusal. Respondents point to the letter dated June 1, 1990[33] as indicative of petitioners knowledge of the said right. In this letter, a certain Atty. Erlinda Aguila demanded that respondent Irene Guillermo vacate the structure they were occupying to make way for its demolition. We fail to see how the letter could give rise to bad faith on the part of the petitioner. No mention is made of the right of first refusal granted to respondents. The name of petitioner Rosencor or

any of it officers did not appear on the letter and the letter did not state that Atty. Aguila was writing in behalf of petitioner. In fact, Atty. Aguila stated during trial that she wrote the letter in behalf of the heirs of the spouses Tiangco. Moreover, even assuming that Atty. Aguila was indeed writing in behalf of petitioner Rosencor, there is no showing that Rosencor was aware at that time that such a right of first refusal existed. Neither was there any showing that after receipt of this June 1, 1990 letter, respondents notified Rosencor or Atty. Aguila of their right of first refusal over the property. Respondents did not try to communicate with Atty. Aguila and inform her about their preferential right over the disputed property. There is even no showing that they contacted the heirs of the spouses Tiangco after they received this letter to remind them of their right over the property. Respondents likewise point to the letter dated October 9, 1990 of Eufrocina de Leon, where she recognized the right of first refusal of respondents, as indicative of the bad faith of petitioners. We do not agree. Eufrocina de Leon wrote the letter on her own behalf and not on behalf of petitioners and, as such, it only shows that Eufrocina de Leon was aware of the existence of the oral right of first refusal. It does not show that petitioners were likewise aware of the existence of the said right. Moreover, the letter was made a month after the execution of the Deed of Absolute Sale on September 4, 1990 between petitioner Rosencor and the heirs of the spouses Tiangco. There is no showing that prior to the date of the execution of the said Deed, petitioners were put on notice of the existence of the right of first refusal. Clearly, if there was any indication of bad faith based on respondents evidence, it would only be on the part of Eufrocina de Leon as she was aware of the right of first refusal of respondents yet she still sold the disputed property to Rosencor. However, bad faith on the part of Eufrocina de Leon does not mean that petitioner Rosencor likewise acted in bad faith. There is no showing that prior to the execution of the Deed of Absolute Sale, petitioners were made aware or put on notice of the existence of the oral right of first refusal. Thus, absent clear and convincing evidence to the contrary, petitioner Rosencor will be presumed to have acted in good faith in entering into the Deed of Absolute Sale over the disputed property. Considering that there is no showing of bad faith on the part of the petitioners, the Court of Appeals thus erred in ordering the rescission of the Deed of Absolute Sale dated September 4, 1990 between petitioner Rosencor and the heirs of the spouses Tiangco. The acquisition by Rosencor of the property subject of the right of first refusal is an obstacle to the action for its rescission where, as in this case, it was shown that Rosencor is in lawful possession of the subject of the contract and that it did not act in bad faith.[34]

This does not mean however that respondents are left without any remedy for the unjustified violation of their right of first refusal. Their remedy however is not an action for the rescission of the Deed of Absolute Sale but an action for damages against the heirs of the spouses Tiangco for the unjustified disregard of their right of first refusal Khe Hong Cheng vs CA, GR 144169, March 28, 2001 Facts Petitioner Khe Hong Cheng, alias Felix Khe, is the owner of Butuan Shipping Lines. It appears that on or about October 4, 1985, the Philippine Agricultural Trading Corporation shipped on board the vessel M/V PRINCE ERIC, owned by petitioner Khe Hong Cheng, 3,400 bags of copra at Masbate, Masbate, for delivery to Dipolog City, Zamboanga del Norte. The said shipment of copra was covered by a marine insurance policy issued by American Home Insurance Company (respondent Philam's assured). M/V PRINCE ERIC, however, sank somewhere between Negros Island and Northeastern Mindanao, resulting in the total loss of the shipment. Because of the loss, the insurer, American Home, paid the amount of P354,000.00 (the value of the copra) to the consignee. Having been subrogated into the rights of the consignee, American Home instituted Civil Case No. 13357 in the Regional Trial Court (RTC) of Makati, Branch 147 to recover the money paid to the consignee, based on breach of contract of carriage. While the case was still pending, or on December 20, 1989, petitioner Khe Hong Cheng executed deeds of donations of parcels of land in favor of his children, herein co-petitioners Sandra Joy and Ray Steven. The parcel of land with an area of 1,000 square meters covered by Transfer Certificate of Title (TCT) No. T-3816 was donated to Ray Steven. Petitioner Khe Hong Cheng likewise donated in favor of Sandra Joy two (2) parcels of land located in Butuan City, covered by TCT No. RT12838. On the basis of said deeds, TCT No. T-3816 was cancelled and in lieu thereof, TCT No. T-5072 was issued in favor of Ray Steven and TCT No. RT12838 was cancelled and in lieu thereof, TCT No. RT21054 was issued in the name of Sandra Joy. The trial court rendered judgment against petitioner Khe Hong Cheng Issue: When did the four (4) year prescriptive period as provided for in Article 1389 of the Civil Code for respondent Philam to file its action for rescission of the subject deeds of donation commence to run? Ruling Article 1389 of the Civil Code simply provides that, The action to claim rescission must be commenced within four years. Since this provision of law is silent as to when the prescriptive period would commence, the general rule, i.e, from the moment the cause of action accrues, therefore,

applies. Article 1150 of the Civil Code is particularly instructive: Art. 1150. The time for prescription for all kinds of actions, when there is no special provision which ordains otherwise, shall be counted from the day they may be brought. Indeed, this Court enunciated the principle that it is the legal possibility of bringing the action which determines the starting point for the computation of the prescriptive period for the action.[7] Article 1383 of the Civil Code provides as follows: Art. 1383. An action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. It is thus apparent that an action to rescind or an accion pauliana must be of last resort, availed of only after all other legal remedies have been exhausted and have been proven futile. For an accion pauliana to accrue, the following requisites must concur: 1) That the plaintiff asking for rescission has a credit prior to the alienation, although demandable later; 2) That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person; 3) That the creditor has no other legal remedy to satisfy his claim, but would benefit by rescission of the conveyance to the third person; 4) That the act being impugned is fraudulent; 5) That the third person who received the property conveyed, if by onerous title, has been an accomplice in the fraud.[8] (Emphasis ours) We quote with approval the following disquisition of the CA on the matter: An accion pauliana accrues only when the creditor discovers that he has no other legal remedy for the satisfaction of his claim against the debtor other than an accion pauliana. The accion pauliana is an action of a last resort. For as long as the creditor still has a remedy at law for the enforcement of his claim against the debtor, the creditor will not have any cause of action against the creditor for rescission of the contracts entered into by and between the debtor and another person or persons. Indeed, an accion pauliana presupposes a judgment and the issuance by the trial court of a writ of execution for the satisfaction of the judgment and the failure of the Sheriff to enforce and satisfy the judgment of the court. It presupposes that the creditor has exhausted the property of the debtor. The date of the decision of the trial court against the debtor is immaterial. What is important is that the credit of the plaintiff antedates that of the fraudulent alienation by the debtor of his property. After all, the decision of the trial court against the debtor will retroact to the time when the debtor became indebted to the creditor.[9]

Petitioners, however, maintain that the cause of action of respondent Philam against them for the rescission of the deeds of donation accrued as early as December 27, 1989, when petitioner Khe Hong Cheng registered the subject conveyances with the Register of Deeds. Respondent Philam allegedly had constructive knowledge of the execution of said deeds under Section 52 of Presidential Decree No. 1529. Petitioners argument that the Civil Code must yield to the Mortgage and Registration Laws is misplaced, for in no way does this imply that the specific provisions of the former may be all together ignored. To count the four year prescriptive period to rescind an allegedly fraudulent contract from the date of registration of the conveyance with the Register of Deeds, as alleged by the petitioners, would run counter to Article 1383 of the Civil Code as well as settled jurisprudence. It would likewise violate the third requisite to file an action for rescission of an allegedly fraudulent conveyance of property, i.e., the creditor has no other legal remedy to satisfy his claim. An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by the trial court of a writ of execution for the satisfaction of the judgment, and 3) the failure of the sheriff to enforce and satisfy the judgment of the court. It requires that the creditor has exhausted the property of the debtor. The date of the decision of the trial court is immaterial. What is important is that the credit of the plaintiff antedates that of the fraudulent alienation by the debtor of his property. After all, the decision of the trial court against the debtor will retroact to the time when the debtor became indebted to the creditor. Tolentino, a noted civilist, explained: xxx[T]herefore, credits with suspensive term or condition are excluded, because the accion pauliana presupposes a judgment and unsatisfied execution, which cannot exist when the debt is not yet demandable at the time the rescissory action is brought. Rescission is a subsidiary action, which presupposes that the creditor has exhausted the property of the debtor which is impossible in credits which cannot be enforced because of a suspensive term or condition. While it is necessary that the credit of the plaintiff in the accion pauliana must be prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely declaratory with retroactive effect to the date when the credit was constituted.[10] These principles were reiterated by the Court when it explained the requisites of an accion pauliana in greater detail, to wit:

The following successive measures must be taken by a creditor before he may bring an action for rescission of an allegedly fraudulent sale: (1) exhaust the properties of the debtor through levying by attachment and execution upon all the property of the debtor, except such as are exempt from execution; (2) exercise all the rights and actions of the debtor, save those personal to him (accion subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana). Without availing of the first and second remedies, i.e., exhausting the properties of the debtor or subrogating themselves in Francisco Baregs transmissible rights and actions, petitioners simply undertook the third measure and filed an action for annulment of sale. This cannot be done. [11] (Emphasis ours) In the same case, the Court also quoted the rationale of the CA when it upheld the dismissal of the accion pauliana on the basis of lack of cause of action: In this case, plaintiffs appellants had not even commenced an action against defendants-appellees Bareng for the collection of the alleged indebtedness. Plaintiffs-appellants had not even tried to exhaust the property of defendantsappellees Bareng. Plaintiffs-appellants, in seeking the rescission of the contracts of sale entered into between defendants-appellees, failed to show and prove that defendants-appellees Bareng had no other property, either at the time of the sale or at the time this action was filed, out of which they could have collected this (sic) debts. (Emphasis ours) Even if respondent Philam was aware, as of December 27, 1989, that petitioner Khe Hong Cheng had executed the deeds of donation in favor of his children, the complaint against Butuan Shipping Lines and/or petitioner Khe Hong Cheng was still pending before the trial court. Respondent Philam had no inkling, at the time, that the trial court's judgment would be in its favor and further, that such judgment would not be satisfied due to the deeds of donation executed by petitioner Khe Hong Cheng during the pendency of the case. Had respondent Philam filed his complaint on December 27, 1989, such complaint would have been dismissed for being premature. Not only were all other legal remedies for the enforcement of respondent Philams claims not yet exhausted at the time the deeds of donation were executed and registered. Respondent Philam would also not have been able to prove then that petitioner Khe Hong Chneg had no more property other than those covered by the subject deeds to satisfy a favorable judgment by the trial court. It bears stressing that petitioner Khe Hong Cheng even expressly declared and represented that he had reserved to himself property sufficient to answer for his debts contracted prior to this date: That the DONOR further states, for the same purpose as expressed in the next preceding paragraph, that this donation is not made with the object of defrauding his creditors having reserved to

himself property sufficient to answer his debts contracted prior to this date.[12] As mentioned earlier, respondent Philam only learned about the unlawful conveyances made by petitioner Khe Hong Cheng in January 1997 when its counsel accompanied the sheriff to Butuan City to attach the properties of petitioner Khe Hong Cheng. There they found that he no longer had any properties in his name. It was only then that respondent Philam's action for rescission of the deeds of donation accrued because then it could be said that respondent Philam had exhausted all legal means to satisfy the trial court's judgment in its favor. Since respondent Philam filed its complaint for accion pauliana against petitioners on February 25, 1997, barely a month from its discovery that petitioner Khe Hong Cheng had no other property to satisfy the judgment award against him, its action for rescission of the subject deeds clearly had not yet prescribed. Lee et al vs Bangkok Bank, GR 173349, February 9, 2011 Facts: Midas Diversified Export Corporation (MDEC) and Manila Home Textile, Inc. (MHI) entered into two separate Credit Line Agreements (CLAs) with Respondent Bangkok Bank Public Company, Limited (Bangkok Bank) Consequently, the Lee family executed guarantees in favor of Bangkok Bank on December 1, 1995 for the CLA for MDEC and on April 17, 1996 for the CLA of MHI. Prior to the granting of the CLAs, Bangkok Bank conducted a property check on the Lee family and required Samuel to submit a list of his properties. Bangkok Bank, however, did not require the setting aside, as collateral, of any particular property to answer for any future unpaid obligation. [6] Subsequently, MDEC and MHI made several availments from the CLAs. In time, the advances, which MDEC and MHI had taken out from the CLAs, amounted to three million dollars (USD 3,000,000).[7] On July 25, 1996, MDEC was likewise granted a loan facility by Asiatrust Development Bank, Inc. (Asiatrust).[8] This facility had an available credit line of forty million pesos (PhP 40,000,000) for letters of credit, advances on bills and export packing; and a separate credit line of two million dollars (USD 2,000,000) for bills purchase.[9] In the same year, particularly in August 1997, when MDEC had defaulted in the payment of its loan that matured on July 15, 1997. In December 1997, the negotiation was concluded when Asiatrust had agreed to Samuels proposition that he would mortgage the subject Antipolo properties to secure the loan, and therefore execute a REM over the properties.[12] While the titles of the Antipolo properties had been delivered by Samuel to Asiatrust and the REM had been executed in January 1998, spouses Samuel and Pauline Lee (spouses Lee) were requested to sign a new deed of mortgage on

February 23, 1998, and, thus, it was only on that date that the said mortgage was actually notarized, registered, and annotated at the back of the titles. [13] Similarly, MDEC and MHI initially had made payments with their CLAs until they defaulted and incurred aggregate obligations to Bangkok Bank in the amount of USD 1,998,554.60 for MDEC and USD 800,000 for MHI.[14] Similarly, the Lee corporations defaulted in their obligations with other creditors. Issue: whether the February 23, 1998 REM executed over the subject Antipolo properties and the April 15, 1998 foreclosure sale were committed in fraud of petitioner’s other creditors, and, as a consequence of such fraud, the questioned mortgage could, therefore, be rescinded. Ruling the mere existence of fraud on the part of one party, i.e., the spouses Lee (against whom some judgment or some writ of attachment has been issued),[45] does not necessarily result in the rescission of a supposed alienation, if there is any. The presumption of fraud under Art. 1387 of the Civil Code does not apply in the present case Under Art. 1381(3) of the Civil Code, contracts, which were undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them, are rescissible. Art. 1387 of the Code states when an act is presumed to be fraudulent, thus: Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered 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. It is with regard to the foregoing provisions that the CA anchored its ruling of the existence of a presumption of fraud in the instant case. This presumption, however, finds no application to this case. The presumption of fraud established under Art. 1387 does not apply to registered lands IF the judgment or attachment made is not also registered.[46] In Abaya v. Enriquez,[47] Abaya was able to obtain a judgment against Enriquez for a sum of money, and the judgment was partially unsatisfied after Enriquez made a partial payment. The judgment and the writ of execution, however, was

never annotated on the titles of the registered lands owned by Enriquez.[48] Subsequently, Enriquez sold the said lands. In an action for rescission instituted by Abaya, the Court ruled that the presumption of fraud does not apply as the judgment and the attachment have not been registered and annotated on the title. In this case, prior to the annotation of the REM on February 23, 1998, SBC was able to successfully acquire a writ of preliminary attachment in its favor against the spouses Lee on January 30, 1998 in a case for a sum of money for nonpayment of its obligation. Bangkok Bank alleges that because of this, the presumption of fraud under Art.1387 of the Civil Code applies. But while a judgment was made against the spouses Lee in favor of SBC on January 30, 1998, this, however, was not annotated on the titles of the subject properties. In fact, there is no showing that the judgment has ever been annotated on the titles of the subject properties. As established in the facts, there were only two annotations at the back of the titles of the Antipolo properties: first, the REM executed in favor of Asiatrust on February 23, 1998; and second, the writ of preliminary attachment in favor of Bangkok Bank on March 18, 1998. Considering that the earlier SBC judgment or attachment was not, and in fact never was, annotated on the titles of the subject Antipolo properties, prior to the execution of the REM, the presumption of fraud under Art. 1387 of the Code clearly cannot apply. Even assuming that Art. 1387 of the Code applies, the execution of a mortgage is not contemplated within the meaning of alienation by onerous title under the said provision Under Art. 1387 of the Code, fraud is presumed only in alienations by onerous title of a person against whom a judgment or attachment has been issued. The term, alienation, connotes the transfer of the property and possession of lands, tenements, or other things, from one person to another.[51] This term is particularly applied to absolute conveyances of real property and must involve a complete transfer from one person to another.[52] A mortgage does not contemplate a transfer or an absolute conveyance of a real property.[53] It is an interest in land created by a written instrument providing security for the performance of a duty or the payment of a debt.[54] When a debtor mortgages his property, he merely subjects it to a lien but ownership thereof is not parted with. [55] It is merely a lien that neither creates a title nor an estate.[56] It is, therefore, certainly not the alienation by onerous title that is contemplated in Art. 1387 where fraud is to be presumed. In this very action, Bangkok Bank claims that when the spouses Lee executed the REM in favor of Asiatrust, the presumption of fraud under Art. 1387 became applicable. We hold in the negative. As We have plainly discussed, a mortgage is not that which is contemplated in the term alienation that would make the presumption of fraud under Art.1387

apply. It requires a full and absolute conveyance or transfer of property from one person to another, such as that in the form of a sale. As elucidated earlier, a mortgage merely creates a lien on the property that would afford the mortgagee/creditor greater security in the obligation of the mortgagor/debtor. This being so, as the REM is not the alienation contemplated in Art. 1387 of the Code, the presumption of fraud cannot apply. In any case, the application of the presumption of fraud under Art. 1387, if applicable, could only be made to apply to the spouses Lee as the person against whom a judgment or writ of attachment has been issued; not to Asiatrust A careful reading of Art. 1387 of the Code vis--vis its Art. 1385 would plainly show that the presumption of fraud in case of alienations by onerous title only applies to the person who made such alienation, and against whom some judgment has been rendered in any instance or some writ of attachment has been issued. A third person is not and should not be automatically presumed to be in fraud or in collusion with the judgment debtor. In allowing rescission in case of an alienation by onerous title, the third person who received the property conveyed should likewise be a party to the fraud.[57] As clarified by Art. 1385(2) of the Code, so long as the person who is in legal possession of the property did not act in bad faith, rescission cannot take place. Thus, in all instances, as to the third person in legal possession of the questioned property, good faith is presumed. Accordingly, it is upon the person who alleges bad faith or fraud that rests the burden of proof.[58] Asiatrust, being a third person in good faith, should not be automatically presumed to have acted fraudulently by the mere execution of the REM over the subject Antipolo properties, there being no evidence of fraud or bad faith. Regrettably, in ratiocinating that fraud was committed by both the spouses Lee and Asiatrust, the CA merely anchored its holding on the presumption espoused under Art. 1387 of the Code,[59] nothing more. The alleged fraud on the part of the spouses Lee was not proved and substantiated It appears that the argument of Bangkok Bank on the existence of fraud on the part of the spouses Lee[60] revolves around the application of the presumption of fraud under Art. 1387 of the Code. [61] Bangkok Bank failed to substantiate its allegations by presenting clear and convincing proof that the spouses Lee indeed committed fraud in mortgaging the subject properties to Asiatrust, and instead anchored its existence of the presumption under Art. 1387. This cannot stand before this Court. On the contrary, the spouses Lee proved the absence of fraud on their part. During trial, the spouses Lee and Asiatrust were able to substantially establish that, indeed, a loan agreement has been existing between them since 1996 and that MDEC

made use of it on several occasions in 1997. It has likewise been established that, as MDEC defaulted in its payment of the loan that matured in 1997, the parties began negotiations as to how MDEC could secure the loans. It was concluded in December 1997 upon Samuels proposal that his Antipolo properties be used to secure MDECs loans by means of a mortgage. This settlement has been agreed upon even before any action was filed against the Lee corporations in 1998. These facts have been established during trial without any controversy. No deception could have been used by the spouses Lee in including in the list of properties, which they submitted to the SEC, the subject Antipolo properties. First, it is undisputed that the list of properties submitted by the Lee corporations to the SEC clearly indicated that the subject Antipolo properties have already been earmarked, or have already been serving as security, for its loan obligations with Asiatrust. Second, MDEC, through its counsel, truly believed in good faith that the inclusion of the spouses Lees private properties in the list submitted to the SEC is valid and regular. As can be seen in the letter sent by the counsel of the Midas Group of Companies to the Office of the Clerk of Court and Ex-Officio Sheriff of the Antipolo RTC on April 4, 1998, at the time when the subject Antipolo properties were being foreclosed by Asiatrust, its counsel vigorously countered the actions of Asiatrust and stated that the subject Antipolo properties cannot be foreclosed pursuant to the SEC Suspension Order.[62] And as discussed infra, the alleged collusion between the spouses Lee and Asiatrust appears to be a mere figment of imagination. In any case, the facts show no presence of fraud on the part of Asiatrust; therefore, the REM was not a sham Even pushing further to say that the REM was executed by the spouses Lee to defraud creditors, the REM cannot be rescinded and shall, therefore, stand, as Asiatrustthe third party, in favor of which the REM was executed, and which subsequently foreclosed the subject propertiesacted in good faith and without any badge of fraud. As a general rule, whether the person, against whom a judgment was made or some writ of attachment was issued, acted with or without fraud, so long as the third person who is in legal possession of the property in question did not act with fraud and in bad faith, an action for rescission cannot prosper. Art. 1385 of the Civil Code explicitly states this, thus: Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. (Emphasis Ours.)

As to who or which entity is in legal possession of a property, the registration in the Registry of Deeds of the subject property under the name of a third person indicates the legal possession of that person. [63] In this case, Asiatrust is in the legal possession of the subject Antipolo properties after the titles under the name of Spouses Lee have been canceled, and new TCTs have been issued on April 20, 1999, under the name of Asiatrust. What is more, 12 title out of the 120 titles in the Antipolo properties in question have already been sold to different persons, which make them in legal possession of the properties. It is, thus, established that Asiatrust and the 12 other unnamed persons are in legal possession of the subject Antipolo properties; and it is imperative to prove that they legally took possession of them in good faith and without any badge of fraud. Now, as to whether Asiatrust acted with fraud or bad faith, Bangkok Bank failed to present any clear and convincing evidence that would ascertain its existence. Contracts in fraud of creditors are those executed with the intention to prejudice the rights of creditors. They should not be confused with those entered into without such mal-intent, even if, as a direct consequence, a creditor may suffer some damage. More so it is, when the allegation involves not only fraud on the part of the debtor, but also that of another creditor. In determining whether or not a certain conveying contract is fraudulent, what comes to mind first is the question of whether the conveyance was a bona fidetransaction or a trick and contrivance to defeat creditors.[64] Haste alone in the foreclosure of the mortgage does not constitute the existence of fraud. Considering that the totality of circumstances clearly manifests the want of fraud and bad faith on the part of the parties to the REM in question, consequently, the REM cannot be rescinded. In this case, it is clearly established that there was a bona fide transaction between the spouses Lee and Asiatrust that necessitated the negotiations resulting from the formers default in the payment of its obligations; and which brought about the execution of the REM to secure their pre-existing obligations. Particularly on the part of Asiatrust, the testimonies of Shirley Benedicto, its Vice-President, who was part of the banks account management group tasked to ensure the proper management of loans from its inception up to its collection, and of Atty. Neriza San Juan, the banks former VicePresident, and Head of its Credit Support Services and Legal Services Groups, amply proved the existence of good faith and dismissed the allegation of fraud. Asiatrust was able to establish (1) the existence of a loan agreement through a loan facility/credit line between Asiatrust and MDEC since July 25, 1996, which was guaranteed by the Lee family, including Samuel; (2) the advances made by MDEC throughout 1997, which amounted to an aggregate sum of PhP 31,000,000; (3) the default in

payment of MDEC on its maturing loans; and (4) the negotiations, which took place between Asiatrust and Samuel on behalf of MDEC that led, in December 1997, to the agreement for Samuel to mortgage the subject Antipolo properties to secure the defaulting loan and the loans, which were yet to mature.[65] And as the last advances made by MDEC matured on February 20, 1998, it was just timely and appropriate for Asiatrust to foreclose the subject properties on April 15, 1998 in order to ensure that it is paid of the obligations, which MDEC owed to it. In this case, Asiatrust was left with only one clear and practicable means by which it could be paid of MDECs obligations, i.e., by foreclosing the mortgaged properties. After all, [t]he only right of a mortgagee in case of non-payment of a debt secured by mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness.[66] Conversely, Asiatrust did not sleep on its rights as a mortgage creditor of MDEC by foreclosing the mortgage on the spouses Lees Antipolo properties. On the contrary, it is odd but worth noting that Bangkok Bank never acted on its rights as creditor at the soonest possible time. It could have asserted it rights as creditor at the time when the Lee familys corporations started to default in their payments of the loans as early as October 1997.[67] When Bangkok Bank finally instituted an action against the Lee family on March 12, 1998 to collect the outstanding obligations of MDEC and MHI, a writ of preliminary attachment was issued by the Makati RTC in the same month covering the properties of the Lee family, including the subject Antipolo properties. And while enforcing the said writ, Bangkok Bank discovered the existing REM that had already been annotated on the titles of the subject Antipolo properties. But Bangkok Bank did nothing upon its knowledge and discovery. Worse, even at the time of the foreclosure and the redemption period, or until April 30, 1999, Bangkok Bank likewise did not act on the alleged fraudulent execution of the REM; nor did it redeem the subject properties. Rather, it was only on July 20, 1999 that Bangkok Bank seems to have belatedly realized that the subject Antipolo properties could properly be another means by which it could be paid of the defaulting obligations of MDEC and MHI. Interestingly, even on the elevation of this case to Us, Bangkok Banks counsel had to move for four extensions, totaling to 52 days within which to file a comment on the instant petition, and has been warned for it.[68] Asiatrust cannot be faulted for acting with prudence, in good faith, and without any badge of fraud in the creation of the REM and in the foreclosure of the mortgage to ensure the satisfaction of the debts owed to it by MDEC. Bangkok Bank should have likewise done so at the earliest possible opportunity. Furthermore, Asiatrust, in good faith, conducted the necessary diligence and meticulousness expected of it. During cross-examination, Atty. San Juan established that when the spouses Lee offered the subject Antipolo properties as collateral,

Asiatrust had them appraised and required the spouses Lee to submit a photocopy of the titles, location map, and the relevant tax declarations, which was forwarded to its Appraisal Team. She further explained that credit investigation is a continuing annual process since the bank considers the market information in connection with the account of the borrower. There was no collusion between the spouses Lee and Asiatrust Besides the fact that individually, fraud was not sufficiently and convincingly established on the part of the spouses Lee and Asiatrust, Bangkok Banks allegation of collusion between them was likewise unsubstantiated and therefore untenable. First, even after the subject Antipolo properties were foreclosed by Asiatrust, Asiatrust sought the recovery of the deficiency amounting to at least PhP 14,800,000. And until the filing of the memoranda by the parties before this Court, the said action remains pending before the CA.[71] Second, Asiatrust filed a criminal case against Samuel for violation of BP 22.[72] At the time of the filing of the petition for review, the case was still pending before the Metropolitan Trial Court of Quezon City.[73] Later, at the time of the filing of the spouses Lees Memorandum, it was indicated that it has already been dismissed. Third, contrary to the CAs appreciation of the facts, the letter sent by Atty. Macam, counsel of the Midas Group of Companies, actually strengthens the proof that no collusion existed between the parties. Acting on the interest of MDEC, Atty. Macam sent a letter to the Clerk of Court and the ExOfficio Sheriff of the Antipolo RTC, arguing that the subject Antipolo properties cannot be foreclosed as they are the subject of an existing SEC Suspension Order.[75] In fact, counsel for MDEC alleged that the foreclosure sale was illegal.[76] On the other hand, when the Ex-Officio Sheriff presented a copy of the letter to Asiatrust and asked the latter to comment, Asiatrust categorically stated that the subject properties could not be made a subject of the SEC Suspension Order, they being properties of the spouses Lee, natural persons outside the jurisdiction of the SEC.[77]In fact, it was Bangkok Banks sole witness, Capalaran, who firmly agreed that, indeed, the subject properties are not covered by the Suspension Order that is why Bangkok Bank, too, filed an action against the spouses Lee on March 12, 1998 and sought the attachment of the said properties.[78] [74]

With all the foregoing facts strongly established, We confirm the absence of fraud, bad faith, and collusion between the spouses Lee and Asiatrust. The requisite (1) good faith on the part of the third person and (2) fraud, necessary for an action to rescind under Art. 1381 of the Civil Code, were not complied with

In Siguan v. Lim,[79] this Court held that in an action to rescind under Art. 1381, the following requisites must exist: 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, 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; (4) the act being impugned is fraudulent; (5) the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. Considering the discussions previously expounded, the extant records show that the fourth and fifth requisites enumerated above are absent. As between Asiatrust and Bangkok Bank, the former has a better right over the subject Antipolo properties, it being the first to annotate its lien on the titles of the properties It is evidently a well-settled and elementary principle that the rights of the first mortgage creditor or mortgagee over the mortgaged properties are superior to those of a subsequent attaching creditor and other junior mortgagees. [80] In this case, it is a fact that the REM was annotated on the titles of the subject Antipolo properties ahead of the writs of preliminary attachment issued in favor of Bangkok Bank. In fact, it was admitted by Bangkok Bank that it only knew of the existing mortgage that has already been annotated at the back of the subject titles when it sought the annotation of the writs of preliminary attachment. [81] Therefore, as between Asiatrust as mortgage creditor and Bangkok Bank as attaching creditor, it is apparent that the former has a superior right over the latter. Besides, as between two persons who both stand to suffer loss, the possessor of the property should be preferred in that possession, the ownership having been transferred by delivery.[82] In this case, Asiatrust, being the entity with legal possession of the subject Antipolo properties, should be preferred in that possession. In addition, 12 of the titles in question have already been sold to 12 different persons, whose identities have not been introduced in the instant case and who have not been impleaded as parties. As these persons have been in legal possession of the said properties and are in good faith, their ownership and possession, should not be disturbed. As a final note, in ruling for Bangkok Bank, the CA strangely did not even delve upon any fact that could have ascertained the allegation of fraud from

which Bangkok Bank based its arguments. Quite the opposite, the RTC discussed in detail the facts and testimonies presented by the parties, upon which its finding of the absence of fraud was based. Indeed, factual findings by the trial court are afforded great weight by this Court especially when supported by substantial evidence on record.[88]

price of P2,376,805.00 or about P400.00 per square meter;

While prejudice to Bangkok Bank ultimately resulted in the series of inopportune events that led to the present case, it cannot be denied that no clear, satisfactory and convincing evidence was presented to show fraud on the part of both the spouses Lee and Asiatrust. Nor was bad faith on the part of Asiatrust and the 12 other subsequent purchasers established. Accordingly, the REM annotated on the titles of the subject Antipolo properties and the subsequent foreclosure of the same properties cannot and should not be rescinded.

11. That the only factor which caused plaintiffs to sell their properties to defendant DBP was the threats and intimidation employed upon them by defendants;

Miailhe vs CA, GR 108991, March 20, 2001 Facts On March 23, 1990, [Petitioner] William Alain Miailhe, on his own behalf and on behalf of Victoria Desbarats-Miailhe, Monique Miailhe-Sichere and Elaine Miailhe-Lencquesaing filed a Complaint for Annulment of Sale, Reconveyance and Damages against [Respondent] Republic of the Philippines and defendant Development Bank of the Philippines before the [trial] court. It was alleged, to wit: xxxxxxxxx 4. That plaintiffs were the former registered owners of three parcels of land located at J.P. Laurel St., San Miguel, Manila with an aggregate area of 5,574.30 square meters, and a one (1) storey building erected thereon, formerly covered by Transfer Certificate of Title No. 80645 of the Register of Deeds of Manila; 5. That the above-mentioned properties had been owned by and in the possession of plaintiffs and their family for over one hundred (100) years until August 1, 1976; 6. That on August 1, 1976, during the height of the martial law regime of the late President Ferdinand Marcos, [Respondent] Republic of the Philippines, through its armed forces, forcibly and unlawfully took possession of the aforesaid properties from defendants; 7. That [Respondent] Republic of the Philippines, through its armed forces, continued its lawful and forcible occupation of the premises from August 1, 1976 to August 19, 1977 without paying rentals, despite plaintiffs demands therefor; 8. That meanwhile, the Office of the President showed interest in the subject properties and directed defendant DBP to acquire for the government the subject properties from plaintiff; 9. That on or about August 19, 1977, through threats and intimidation employed by defendants, plaintiffs, under duress, were coerced into selling the subject properties to defendant DBP for the grossly low

10. That defendant DBP, in turn, sold the subject properties to [Respondent] Republic of the Philippines, through the Office of the President, in 1982;

12. That after the late President Marcos left the country on February 24, [sic] 1986 after the EDSA revolution, plaintiffs made repeated extrajudicial demands upon defendants for [the] return and reconveyance of subject properties to them, the last being the demand letters dated 24 October 1989, copies of which are attached and made integral parts hereof as Annexes A and A-1; 13. That despite demands, defendants unjustifiably failed and refused, and still unjustifiably fail and refuse, to return and reconvey the subject properties to plaintiff; xxxxxxxxx (par. 4-13 of the Complaint, pp. 28-29, Rollo). On May 25, 1990, [respondent] filed its Answer denying the substantial facts alleged in the complaint and raising, as special and affirmative defenses, that there was no forcible take-over of the subject properties and that the amount paid to private respondents was fair and reasonable. Defendant DBP also filed its Answer raising as Special and Affirmative Defense that [petitioners] action had already prescribed. On August 3, 1990, the [trial] court issued an Order setting the pre-trial on September 20, 1990. Petitioner and private respondents filed their respective pre-trial briefs. On March 5, 1992, [respondent] filed a Motion to Dismiss the complaint on the ground that the action ha[d] prescribed pursuant to Article (1)391 in relation to Article (1)390 of the Civil Code. Defendant DBP likewise filed a Motion for Preliminary Hearing of the Affirmative Defense raising the same ground of prescription as contained in the [respondents] Motion to Dismiss. On September 11, 1992, the [trial] court issued an Order, the dispositive portion of which reads, as follows: WHEREFORE, the motion for a preliminary hearing is hereby denied and the resolution of the motion to dismiss is deferred until trial Ruling Interruption of Prescription

Petitioner asserts that the extrajudical demands pleaded in paragraph 12 of the Complaint legally

interrupted prescription in accordance with Article 1155 of the Civil Code, which states: ART. 1155. The prescription of actions is interrupted when they are filed before the court, when there is extrajudicial demand by the creditors, and when there is any written acknowledgment of the debt by the debtor. In other words, petitioner claims that because he is covered by the term creditor, the above-quoted provision is applicable to him. We are not persuaded. Petitioner himself avers that the use of the terms creditor and/or debtor in Article 1155 of the Civil Code must relate to the general definition of obligations.[10] He then asserts that an obligation is a juridical relation whereby a person (called the creditor) may demand from another (called the debtor) the observance of a determinate conduct, and in case of breach, may obtain satisfaction from the assets of the latter.[11] He also defines credit as the right to demand the object of the obligation. From his statements, it is clear that for there to be a creditor and a debtor to speak of, an obligation must first exist. In the present case, there is as yet no obligation in existence. Respondent has no obligation to reconvey the subject lots because of the existing Contract of Sale. Although allegedly voidable, it is binding unless annulled by a proper action in court. [12] Not being a determinate conduct that can be extrajudically demanded, it cannot be considered as an obligation either. Since Article 1390 of the Civil Code states that voidable contracts are binding, unless they are annulled by a proper action in court, it is clear that the defendants were not obligated to accede to any extrajudicial demand to annul the Contract of Sale.[13] In the absence of an existing obligation, petitioner cannot be considered a creditor, and Article 1155 of the Civil Code cannot be applied to his action. Thus, any extrajudicial demand he made did not, or will not, interrupt the prescription of his action for the annulment of the Contract of Sale.

Spouses Viloria vs Continental Airlines, GR 188288, January 16, 2012 Facts Fernando purchased for himself and his wife, Lourdes, two (2) round trip airline tickets from San Diego, California to Newark, New Jersey on board Continental Airlines. Fernando purchased the tickets at US$400.00 each from a travel agency called “Holiday Travel” and was attended to by a certain Margaret Mager (Mager). According to Spouses Viloria, Fernando agreed to buy the said tickets after Mager informed them that there were no available seats at Amtrak, an intercity passenger train service provider in the United States. Per the tickets, Spouses Viloria were scheduled to leave for Newark on August 13, 1997 and return to San Diego on

August 21, 1997. Subsequently, Fernando requested Mager to reschedule their flight to Newark to an earlier date or August 6, 1997. Mager informed him that flights to Newark via Continental Airlines were already fully booked and offered the alternative of a round trip flight via Frontier Air. Since flying with Frontier Air called for a higher fare of US$526.00 per passenger and would mean traveling by night, Fernando opted to request for a refund. Mager, however, denied his request as the subject tickets are non-refundable and the only option that Continental Airlines can offer is the re-issuance of new tickets within one (1) year from the date the subject tickets were issued. Fernando decided to reserve two (2) seats with Frontier Air. As he was having second thoughts on traveling via Frontier Air, Fernando went to the Greyhound Station where he saw an Amtrak station nearby. Fernando made inquiries and was told that there are seats available and he can travel on Amtrak anytime and any day he pleased. Fernando then purchased two (2) tickets for Washington, D.C. From Amtrak, Fernando went to Holiday Travel and confronted Mager with the Amtrak tickets, telling her that she had misled them into buying the Continental Airlines tickets by misrepresenting that Amtrak was already fully booked. Fernando reiterated his demand for a refund but Mager was firm in her position that the subject tickets are nonrefundable. Upon returning to the Philippines, Fernando sent a letter to CAI on February 11, 1998, demanding a refund and alleging that Mager had deluded them into purchasing the subject tickets.[3] In a letter dated February 24, 1998, Continental Micronesia informed Fernando that his complaint had been referred to the Customer Refund Services of Continental Airlines at Houston, Texas.[4] In a letter dated March 24, 1998, Continental Micronesia denied Fernando’s request for a refund and advised him that he may take the subject tickets to any Continental ticketing location for the reissuance of new tickets within two (2) years from the date they were issued. Continental Micronesia informed Fernando that the subject tickets may be used as a form of payment for the purchase of another Continental ticket, albeit with a re-issuance fee.[5] On June 17, 1999, Fernando went to Continental’s ticketing office at Ayala Avenue, Makati City to have the subject tickets replaced by a single round trip ticket to Los Angeles, California under his name. Therein, Fernando was informed that Lourdes’ ticket was non-transferable, thus, cannot be used for the purchase of a ticket in his favor. He was also informed that a round trip ticket to Los Angeles was US$1,867.40 so he would have to pay what will not

be covered by the value of his San Diego to Newark round trip ticket. In a letter dated June 21, 1999, Fernando demanded for the refund of the subject tickets as he no longer wished to have them replaced. In addition to the dubious circumstances under which the subject tickets were issued, Fernando claimed that CAI’s act of charging him with US$1,867.40 for a round trip ticket to Los Angeles, which other airlines priced at US$856.00, and refusal to allow him to use Lourdes’ ticket, breached its undertaking under its March 24, 1998 letter.[6] On September 8, 2000, Spouses Viloria filed a complaint against CAI, praying that CAI be ordered to refund the money they used in the purchase of the subject tickets with legal interest from July 21, 1997 and to pay P1,000,000.00 as moral damages, P500,000.00 as exemplary damages and P250,000.00 as attorney’s fees.[7] CAI interposed the following defenses: (a) Spouses Viloria have no right to ask for a refund as the subject tickets are non-refundable; (b) Fernando cannot insist on using the ticket in Lourdes’ name for the purchase of a round trip ticket to Los Angeles since the same is non-transferable; (c) as Mager is not a CAI employee, CAI is not liable for any of her acts; (d) CAI, its employees and agents did not act in bad faith as to entitle Spouses Viloria to moral and exemplary damages and attorney’s fees. CAI also invoked the following clause printed on the subject tickets: 3. To the extent not in conflict with the foregoing carriage and other services performed by each carrier are subject to: (i) provisions contained in this ticket, (ii) applicable tariffs, (iii) carrier’s conditions of carriage and related regulations which are made part hereof (and are available on application at the offices of carrier), except in transportation between a place in the United States or Canada and any place outside thereof to which tariffs in force in those countries apply.[8] According to CAI, one of the conditions attached to their contract of carriage is the non-transferability and non-refundability of the subject tickets. Issue Ruling III. Even on the assumption that CAI may be held liable for the acts of Mager, still, Spouses Viloria are not entitled to a refund. Mager’s statement cannot be considered a causal fraud that would justify the annulment of the subject contracts

that would oblige CAI to indemnify Spouses Viloria and return the money they paid for the subject tickets. Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting parties was obtained through fraud, the contract is considered voidable and may be annulled within four (4) years from the time of the discovery of the fraud. Once a contract is annulled, the parties are obliged under Article 1398 of the same Code to restore to each other the things subject matter of the contract, including their fruits and interest. On the basis of the foregoing and given the allegation of Spouses Viloria that Fernando’s consent to the subject contracts was supposedly secured by Mager through fraudulent means, it is plainly apparent that their demand for a refund is tantamount to seeking for an annulment of the subject contracts on the ground of vitiated consent. Whether the subject contracts are annullable, this Court is required to determine whether Mager’s alleged misrepresentation constitutes causal fraud. Similar to the dispute on the existence of an agency, whether fraud attended the execution of a contract is factual in nature and this Court, as discussed above, may scrutinize the records if the findings of the CA are contrary to those of the RTC. Under Article 1338 of the Civil Code, there is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. In order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract. [30] In Samson v. Court of Appeals,[31] causal fraud was defined as “a deception employed by one party prior to or simultaneous to the contract in order to secure the consent of the other.”[32] Also, fraud must be serious and its existence must be established by clear and convincing evidence. As ruled by this Court in Sierra v. Hon. Court of Appeals, et al.,[33] mere preponderance of evidence is not adequate: Fraud must also be discounted, for according to the Civil Code: Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which without them, he would not have agreed to. Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. After meticulously poring over the records, this

Court finds that the fraud alleged by Spouses Viloria has not been satisfactorily established as causal in nature to warrant the annulment of the subject contracts. In fact, Spouses Viloria failed to prove by clear and convincing evidence that Mager’s statement was fraudulent. Specifically, Spouses Viloria failed to prove that (a) there were indeed available seats at Amtrak for a trip to New Jersey on August 13, 1997 at the time they spoke with Mager on July 21, 1997; (b) Mager knew about this; and (c) that she purposely informed them otherwise. This Court finds the only proof of Mager’s alleged fraud, which is Fernando’s testimony that an Amtrak had assured him of the perennial availability of seats at Amtrak, to be wanting. As CAI correctly pointed out and as Fernando admitted, it was possible that during the intervening period of three (3) weeks from the time Fernando purchased the subject tickets to the time he talked to said Amtrak employee, other passengers may have cancelled their bookings and reservations with Amtrak, making it possible for Amtrak to accommodate them. Indeed, the existence of fraud cannot be proved by mere speculations and conjectures. Fraud is never lightly inferred; it is good faith that is. Under the Rules of Court, it is presumed that "a person is innocent of crime or wrong" and that "private transactions have been fair and regular."[35] Spouses Viloria failed to overcome this presumption. Assuming the contrary, Spouses Viloria are nevertheless deemed to have ratified the subject contracts. Even assuming that Mager’s representation is causal fraud, the subject contracts have been impliedly ratified when Spouses Viloria decided to exercise their right to use the subject tickets for the purchase of new ones. Under Article 1392 of the Civil Code, “ratification extinguishes the action to annul a voidable contract.” Ratification of a voidable contract is defined under Article 1393 of the Civil Code as follows: Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. Implied ratification may take diverse forms, such as by silence or acquiescence; by acts showing approval or adoption of the contract; or by acceptance and retention of benefits flowing therefrom.[36] Simultaneous with their demand for a refund on the ground of Fernando’s vitiated consent, Spouses

Viloria likewise asked for a refund based on CAI’s supposed bad faith in reneging on its undertaking to replace the subject tickets with a round trip ticket from Manila to Los Angeles. In doing so, Spouses Viloria are actually asking for a rescission of the subject contracts based on contractual breach. Resolution, the action referred to in Article 1191, is based on the defendant’s breach of faith, a violation of the reciprocity between the parties[37] and in Solar Harvest, Inc. v. Davao Corrugated Carton Corporation,[38] this Court ruled that a claim for a reimbursement in view of the other party’s failure to comply with his obligations under the contract is one for rescission or resolution. However, annulment under Article 1390 of the Civil Code and rescission under Article 1191 are two (2) inconsistent remedies. In resolution, all the elements to make the contract valid are present; in annulment, one of the essential elements to a formation of a contract, which is consent, is absent. In resolution, the defect is in the consummation stage of the contract when the parties are in the process of performing their respective obligations; in annulment, the defect is already present at the time of the negotiation and perfection stages of the contract. Accordingly, by pursuing the remedy of rescission under Article 1191, the Vilorias had impliedly admitted the validity of the subject contracts, forfeiting their right to demand their annulment. A party cannot rely on the contract and claim rights or obligations under it and at the same time impugn its existence or validity. Indeed, litigants are enjoined from taking inconsistent positions. Malabanan vs Gaw Ching, GR 74938-39, January 17, 1990 Facts Gaw Ching has been leasing the house and lot located [in] 697-699 Asuncion Street, Binondo, Manila from Mr. Jabit since 1951. Plaintiff conducted his business (Victoria Blacksmith Shop) on the ground floor and lived on the second floor. When Mr. Jabit died, his daughter, defendant Malabanan continued to lease the premises to plaintiff but at an increased rental of P1,000.00 per month. Before the increase, Gaw Ching paid P700.00 per month, as evidenced by receipts of rentals. There was no written contract of lease between plaintiff and Mr. Jabit as to its duration but the rentals were evidently, paid monthly. On April 27, 1980, Angelina Malabanan told him that she was selling the house and lot for P5,000.00 per square meter. Plaintiff told her however, that the price is prohibitive. On May 13, 1980, defendant Malabanan wrote plaintiff, reiterating that she was selling the house and lot at P5,000.00 per square meter and that if he is not agreeable, she will sell it to another person. After receiving the letter, plaintiff turned over the letter to his counsel, Atty. Sugay. Gaw Ching claims that he is not in a position to buy the property at

P5,000.00 per square meter because it was expensive. Subsequently, Gaw Ching tried to pay the rent for June, 1980, but Malabanan refused to accept it. Plaintiff's counsel advised him to deposit the rentals in a bank which he did, after which, his counsel wrote Malabanan informing her about the deposit (Exh. B). On October 2, 1980, plaintiff received another letter from defendant Malabanan which he gave to his counsel who told him that said defendant is offering the house and lot at P5,000.00 per square meter and that if he is not agreeable, she will sell the premises to another person at P4,000.00 per square meter. Plaintiff testified that he was willing to buy the subject property at P4,000.00 but hastened to add that it was still expensive and did not ask his counsel to write Malabanan about it. So, also, it was the opinion of his counsel that it was not necessary to reply because the context of the letter was invariably a threat. On November 3, 1980, plaintiff received another letter from Defendant Malabanan, informing him that the premises in question had already been sold to defendant Leonida Senolos. This time, Atty. Sugay sent a reply dated November 24, 1980, requesting that the pertinent documents of the sale be sent to them but according to plaintiff, they were not furnished a copy of said sale. Consequently, plaintiff received a letter from Atty. Techico dated December 5, 1980 demanding that he vacate the premises and to pay the arrearages in rentals from October to December, as they were more importantly, going to repair and convert the dwelling into a warehouse. Atty. Sugay sent a reply dated February 17, 1981 (Exh. C) requesting Atty. Techico to furnish them with the Deed of Sale and TCT because he doubted the veracity of the sale. It took a long time before Atty. Sugay's letter was answered and he was never furnished a copy of the Deed of Sale and Transfer Certificate of Title. After exerting all efforts, plaintiff finally was able to procure a copy of the Deed of Sale and TCT No. 14789 (Exh- A) which reflected that the date of entry of the Deed of Sale was December 9, 1980, whereas the Deed of Sale was dated August 23, 1979 (Exh. I). Plaintiff then told Atty. Sugay to file a civil case against defendants. On October 7, 1981, Atty. Techico sent a reply to Atty. Sugay's letter of February 17, 1981 (Exh K). Plaintiff presented the receipt of rentals he paid (Exhs. L to L-6). He deposited the monthly rentals which Malabanan refused to accept, with the Pacific Banking Corporation (Exh. M). At a later period, plaintiff had to move out of the premises when it was demolished by the defendant. Gaw Ching however, admitted that he was not yet a Filipino Citizen at the time the offer to sell was made, i.e., on April 27, 1980, May 13, 1980 and October 2, 1980 and that he became a Filipino citizen only on October 7, 1980, when he was issued a certificate of naturalization (Exh. 1-Malabanan). He did not, however, inform Malabanan on the matter of his

newly acquired citizenship. Likewise, Gaw Ching admitted that he did not make any counter-offer in writing so as to price the property. Ruling The firmly settled rule is that strangers to a contract cannot sue either or both of the contracting parties to annul and set aside that contract. Article 1397 of the Civil Code embodies that rule in the following formulation: Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (Emphasis supplied) Article 1397 itself follows from Article 1311 of the Civil Code which establishes the fundamental rule that: Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. Mr. Justice Torres went on to indicate a possible qualification to the above general principle, that is, a situation where a non-party to a contract could be allowed to bring an action for declaring that contract null: He who is not the party obligated principally or subsidiarily in a contract may perhaps be entitled to exercise an action for nullity, if he is prejudiced in his rights with respect to one of the contracting parties; but, in order that such be the case, it is indispensable to show the detriment which positively would result to him from the contract in which he had no intervention There is an important and clear, albeit implicit, limitation upon the right of a person who is in fact injured by the very operation of a contract between two (2) third parties to sue to nullify that contract: that contract may be nullified only to the extent that such nullification is absolutely necessary to protect the plaintiff's lawful rights. It may be expected that in most instances, an injunction restraining the carrying out of acts in fact injurious to the plaintiff's rights would be sufficient and that there should be no need to set aside the contract itself which is a res inter alios acta and which may have any number of other provisions, implementation of which might have no impact at all upon the plaintiff's rights and interests. What is important for present purposes is that respondent Gaw Ching, admittedly a stranger to the contract of sale of a piece of land between

petitioners Malabanan and Senolos inter se, does not fall within the possible exception recognized in Ibanez v. Hongkong & Shanghai Bank. In the first place, Gaw Ching had no legal right of preemption in respect of the house and lot here involved. The majority opinion of the appellate court itself explicitly found that the subject piece of land is located outside the Urban Land Reform Zones declared pursuant to P.D. No. 1517. 7Even assuming for purposes of argument merely, that the land here involved was in fact embraced in a declared Urban Land Reform Zone (which it was not), Gaw Ching would still not have been entitled to a right of preemption in respect of the land sold. In Santos v. Court of Appeals, 8 this Court held that the preemptive or redemptive rights of a lessee under P.D. No. 1517 exists only in respect of the urban land under lease on which the tenant or lessee had built his home and in which he had resided for ten (10) years or more and that, in consequence, where both land and building belong to the lessor, that preemptive or redemptive right was simply not available under the law. Finally, we are unable to understand the respondent appellate court's view that respondent Gaw Ching having been a long-time tenant of the property in question, had acquired a preferred right to purchase that property. This holding is simply bereft of any legal basis. We know of no law, outside the Urban Land Reform Zone or P.D. No. 1517, that grants such a right to a lessee no matter how long the period of the lease has been. If such right existed at all, it could only have been created by contract; 9 respondent Gaw Ching does not, however, pretend that there had been such a contractual stipulation between him and petitioners. In the second place, assuming once again, for present purposes only, that respondent Gaw Ching did have a preemptive right to purchase the land from petitioner Malabanan (which he did not), it must be stressed that petitioner Malabanan did thrice offer the land to Gaw Ching but the latter had consistently refused to buy. Since Gaw Ching did not in fact accept the offer to sell and did not buy the land, he suffered no prejudice, and could not have suffered any prejudice, by the sale of the same piece of land to petitioner Senolos. No fraud was thus worked upon him notwithstanding his insinuation that the sale of the land to petitioner Senolos had preceded the offer of the same piece of land to himself. In the third place, and contrary to the holding of the majority appellate court opinion, the fact that Gaw Ching had been lessee of the house and lot was simply not enough basis for a right to bring an action to set aside the contract of sale between the petitioners inter se. A lessee, it is elementary, cannot attack the title of his lessor over the subject matter of the lease. 10 Moreover, the lease contract between petitioner Malabanan and respondent Gaw Ching must in any case be held to have lapsed when the leased house was condemned and the order of demolition issued.

Armentia vs Patriarca, GR L-18210, December 29, 1966 Facts Marta Armentia did two things: First, she adjudicated to herself a parcel of land which she inherited from her deceased husband — pursuant to Section 1, Rule 74 of the 1940 Rules of Court; 1 and second, for and in consideration of P99.00, which she acknowledged to have received from Erlinda Patriarca, 13 years of age, single, and Florencia Someciera, 20 years of age, single, she sold to them the property just mentioned. The foregoing document was, on July 22, 1955, recorded in the registry of deeds. Whereupon, Torrens title 21323 was canceled by Transfer Certificate of Title 18797 in the names of Erlinda Patriarca and Florencia Someciera. Marta Armentia died intestate and without forced heirs on May 28, 1960. On September 17, 1960, Laurentio Armentia commenced suit 2 against Erlinda Patriarca and Florencia Someciera as principal defendants. 3 The complaint, as amended, and reamended, avers: That the sale made by Marta in favor of Erlinda and Florencia "is null and void because it is simulated and fictitious and if not null and void it is voidable because the said defendants were minors at the time the contract was executed and could not then have given their consent to the sale" ; that "the said sale was fraudulently executed, and after the supposed sale, Marta Armentia remained in possession of the house and lot, as owner paying the taxes on the land until she died" ; that" even assuming hypothetically that there was consideration in the supposed sale, the consideration was grossly inadequate" ; that "plaintiff only came to know of the supposed sale in Annex A one week before the suit was filed" ; that "at the time of the alleged sale in Annex A", the "house was already standing on the land", and that "after its execution Maria Armentia repaired the house" ; and that "the defendants Erlinda Patriarca, Florencia Someciera, Juliana Armentia and Jose Someciera are personally possessing the land and the house in question." The complaint further avers that Marta Armentia also left a "Singer" sewing machine. Paragraph 8 thereof says that said sewing machine is "now in the possession of Erlinda Patriarca and Florencia Someciera." However, paragraph 20 of the very same complaint speaks of said sewing machine as "now in the possession of the defendants Erlinda Patriarca, Florencia Someciera, Jose Someciera and Juliana Armentia." 4 The complaint winds up with the prayer that the deed of sale be "declared inexistent or in the alternative annulled" ; that plaintiff Laurentio Armentia and defendant Juliana Armentia, as heirs of Marta Armentia, be declared owners of the land in dispute; that the Register of Deeds be directed to cancel Torrens title 18797 in the names of Erlinda Patriarca and Florencia Someciera, and, in lieu thereof, to issue a new title in the names of Laurentio Armentia and Juliana Armentia; that the

house and lot and sewing machine be partitioned and plaintiff’s share be delivered to him; and that should partition not be feasible, said properties be sold and plaintiff given his share.

legitimes are impaired. Therefore, plaintiff has no cause of action to annul or to rescind the sale.

Issue

Berg vs Magdalena, GR L-3784, October 17, 1952

Ruling

Facts

Plaintiff’s attack is primarily directed at the sale. Plaintiff charges that the contract therefor was fraudulently executed, but in the same breadth characterizes it as simulated and fictitious. These statements are but conclusions of law. Controlling, of course, is the statement of ultimate facts. 5

Plaintiff and defendant are co-owners of the property known as the Crystal Arcade, the former being the owner of one-third interest and the latter of the remaining two-thirds. The division is asked because plaintiff and defendant are unable to agree upon the management of the property and upon the partition thereof.

Let us then look at the factual recitals. Particularly striking is the fact that plaintiff does not dispute the self-adjudication made by Marta Armentia in the deed. Plaintiff does not impugn the genuineness of Marta’s signature thereon. He solely puts in issue that portion of the document where the sale appears to have been made to Erlinda Patriarca and Florencia Someciera. To drive home his averment of nullity, plaintiff summons to his aid the following circumstances: At the time of the sale, the vendees were still minors and the consideration was grossly inadequate; after the sale, Marta Armentia repaired the house, continued possession of the premises, paid the taxes thereon until her demise. Hypothetically admitting the truth of these allegations, the conclusion is irresistible that the sale is merely voidable. Because Marta Armentia executed the document, and this is not controverted by plaintiff. Besides, the fact that the vendees were minors, makes the contract, at worst, annullable by them. Then again, inadequacy of consideration does not imply total want of consideration. Without more, the purported acts of Marta Armentia after the sale do not indicate that said sale was void from the beginning. The sum total of all of these is that, in essence, plaintiff’s case is bottomed on fraud, which renders the contract voidable. By Article 1397 of the Civil Code," [t]he action for annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily." This must be construed in conjunction with Article 1311 of the same code providing that" [c]ontracts take effect only between the parties, their assigns and heirs except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law", and that "the heir is not liable beyond the value of the property he received from the decedent." Plaintiff is not a forced heir. He is not obliged principally or subsidiarily under the contract. Marta Armentia did not transmit to him by devise or otherwise any rights to the property, the subject thereof. On the contrary, Marta voluntarily disposed of it. No creditors are defrauded; there are none. No

On the other hand, defendant claims that in 1943 it sold to plaintiff one-third of the property in litigation subject to the express condition that should either vendor or vendee decide to sell or its undivided share, the party selling would grant to the other party first an irrevocable option to purchase the same at the seller’s price. In 1946, plaintiff fixed the sum of P200,000 as the price of said share and offered to sell it to defendant, which offer was accepted, and for the payment of said price plaintiff gave defendant a period of time which would expire in May 1947; and that, in spite of its acceptance of the offer, plaintiff refused to accept the payment of the price, and for this refusal defendant suffered damages in the amount of P100,000. For these reasons, defendant asks for specific performance. Issue Ruling Viewing in this light the clause on which defendant relies for the enforcement of its right to buy the property, it would seem that it is not a term, but a condition. Considering the first alternative, that is, until defendant shall have obtained a loan from the National City Bank of New York, it is clear that the granting of such loans is not definite and cannot be held to come within the terms "day certain" provided for in the Civil code, for it may or it may not happen. As a matter of fact, the loan did not materialize. And if we consider that the period given was until such time as defendant could raise money from other sources, we also find it to be indefinite and contingent and so it is also a condition and not a term within the meaning of the law. In any event it is apparent that the fulfillment of the condition contained in this second alternative is made to depend upon the defendant's exclusive will, and viewed in this light, we are of the opinion that plaintiff's obligation to sell did not arise, for, under Article 1115 of the old Civil Code, "when the fulfillment of the condition depends upon the exclusive will of the debtor the conditional obligation shall be void." Having reached the foregoing conclusions, we find no legal way by which plaintiff could be compelled to carry out the terms of his agreement to sell

considering the circumstances surrounding the transaction. To our mind, it is clear that there was an agreement to sell between the parties under the terms appearing in the applications Exhibit "3" and "4". But it also appears that the plaintiff has decided to agree to sell his interest because of his need of money at the time. He needed it not only for his immediate needs but to pay the obligations of his own company, the Red Star Stores. Inc. At that time the values of real estate were fast moving. They were growing up in a rapid fashion. Time element was then of the essence of every transaction, and the parties knew it. When, therefore, more than a year had transpired since the negotiations started and defendant failed to come across, plaintiff changed his mind. The interest of defendant to purchase the share of plaintiff in the property is understandable, not only because of the advisability to consolidate its ownership in said property, but because it was a handsome transaction with a brighter prospect in the future. But it is to be regretted that both Berg and Hemady who were both experienced businessmen did not put the terms of their agreement clearly in writing. Had they done so perhaps this case would have been avoided.

It was Albano who dictated the terms under which the installment payment may be approved, and acting thereon, Alfonso Lim, on the same date, July 11, 1988, wrote BPI through Merlin Albano embodying the payment initially of 10% and the remaining 90% within a period of 90 days. Two or three days later, petitioner learned that its offer to pay on terms had been frozen. Alfonso Lim went to BPI on July 18, 1988 and tendered the full payment of P33,056,000.00 to Albano. The payment was refused because Albano stated that the authority to sell that particular piece of property in Pasig had been withdrawn from his unit. The same check was tendered to BPI Vice-President Nelson Bona who also refused to receive payment. An action for specific performance with damages was thereupon filed on August 25, 1988 by petitioner against BPI. In the course of the trial, BPI informed the trial court that it had sold the property under litigation to NBS on July 14, 1989. The complaint was thus amended to include NBS. Issue: Ruling

Limketkai Sons vs CA, GR 118509, December 1, 1995 Facts Broker Revilla contacted Alfonso Lim of petitioner company who agreed to buy the land. On July 8, 1988, petitioner’s officials and Revilla were given permission by Rolando V. Aromin, BPI Assistant VicePresident, to enter and view the property they were buying. On July 9, 1988, Revilla formally informed BPI that he had procured a buyer, herein petitioner. On July 11, 1988, petitioner’s officials, Alfonso Lim and Albino Limketkai, went to BPI to confirm the sale. They were entertained by Vice-President Merlin Albano and Asst. Vice-President Aromin. Petitioner asked that the price of P1,000.00 per square meter be reduced to P900.00 while Albano stated the price to be P1,100.00. The parties finally agreed that the lot would be sold at P1,000.00 per square meter to be paid in cash. Since the authority to sell was on a first come, first served and non-exclusive basis, it may be mentioned at this juncture that there is no dispute over petitioner’s being the first comer and the buyer to be first served. Notwithstanding the final agreement to pay P1,000.00 per square meter on a cash basis, Alfonso Lim asked if it was possible to pay on terms. The bank officials stated that there was no harm in trying to ask for payment on terms because in previous transactions, the same had been allowed. It was the understanding, however, that should the term payment be disapproved, then the price shall be paid in cash.

In the case at bench, the allegation of NBS that there was no concurrence of the offer and acceptance upon the cause of the contract is belied by the testimony of the very BPI official with whom the contract was perfected. Aromin and Albano concluded the sale for BPI. The fact that the deed of sale still had to be signed and notarized does not mean that no contract had already been perfected. A sale of land is valid regardless of the form it may have been entered into (Claudel v. Court of Appeals, 199 SCRA 113, 119 [1991]). The requisite form under Article 1458 of the Civil Code is merely for greater efficacy or convenience and the failure to comply therewith does not affect the validity and binding effect of the act between the parties (Vitug, Compendium of Civil Law and Jurisprudence, 1993 Revised Edition, p. 552). If the law requires a document or other special form, as in the sale of real property, the contracting parties may compel each other to observe that form, once the contract has been perfected. Their right may be exercised simultaneously with action upon the contract (Article 1359, Civil Code). Regarding the admissibility and competence of the evidence adduced by petitioner, respondent Court of Appeals ruled that because the sale involved real property, the statute of frauds is applicable. In any event, petitioner cites Abrenica v. Gonda (34 Phil. 739 [1916]) wherein it was held that contracts infringing the Statute of Frauds are ratified when the defense fails to object, or asks questions on crossexamination. The succinct words of Justice Araullo still ring in judicial cadence: As no timely objection or protest was made to the admission of the testimony of the plaintiff with

respect to the contract; and as the motion to strike out said evidence came too late; and, furthermore, as the defendants themselves, by the crossquestions put by their counsel to the witnesses in respect to said contract, tacitly waived their right to have it stricken out, that evidence, therefore, cannot be considered either inadmissible or illegal, and court, far from having erred in taking it into consideration and basing his judgment thereon, notwithstanding the fact that it was ordered to be stricken out during the trial, merely corrected the error he committed in ordering it to be so stricken out and complied with the rules of procedure hereinbefore cited. Moreover, under Article 1403 of the Civil Code, an exception to the unenforceability of contracts pursuant to the Statute of Frauds is the existence of a written note or memorandum evidencing the contract. The memorandum may be found in several writings, not necessarily in one document. The memorandum or memoranda is/are written evidence that such a contract was entered into. In accordance with the provisions of Art. 1403 of the Civil Code, the existence of a written contract of the sale is not necessary so long as the agreement to sell real property is evidenced by a written note or memorandum, embodying the essentials of the contract and signed by the party charged or his agent. Thus, it has been held: "The Statute of Frauds, embodied in Article 1403 of the Civil Code of the Philippines, does not require that the contract itself be written. The plain test of Article 1403 paragraph (2) is clear that a written note or memorandum, embodying the essentials of the contract and signed by the party charges, or his agent suffices to make the verbal agreement enforceable, taking it out of the operation of the statute. In the case at bar, the complaint in its paragraph 3 pleads that the deal had been closed by letter and telegram (Record on Appeal, p. 2), and the letter referred to was evidently the one copy of which was appended as Exhibit A to plaintiffs opposition to the motion to dismiss. The letter, transcribed above in part, together with the one marked as Appendix B, constitute an adequate memorandum of the transaction. They are signed by the defendantappellant; refer to the property sold as a Lot in Puerto Princesa, Palawan. We have in them, therefore, all the essential terms of the contract and they satisfy the requirements of the Statute of Frauds. While there is no written contract of sale of the Pasig property executed by BPI in favor of plaintiff, there are abundant notes and memoranda extant in the records of this case evidencing the elements of a perfected contract. Combining all these notes and memoranda, the Court is convinced of the existence of perfected contract of sale. Aptly, the Supreme Court, citing American cases with approval, held:

"‘No particular form of language or instrument is necessary to constitute a memorandum or note in writing under the statute of frauds; any document or writing, formal or informal, written either for the purpose of furnishing evidence of the contract or for another purpose, which satisfies all the requirements of the statute as to contents and signature, as discussed respectively infra secs. 178200, and infra sec. 201-205, is a sufficient memorandum or note. A memorandum may be written as well with lead pencil as with pen and ink. It may also be filled in on a printed form.’ (37 C.J.S., 653-654). "‘The note or memorandum required by the statute of frauds need not be contained in a single document, nor, when contained in two or more papers, need each paper be sufficient as to contents and signature to satisfy the statute. Two or more writings properly connected may be considered together, matters missing or uncertain in one may be supplied or rendered certain by another, and their sufficiency will depend on whether, taken together, they meet the requirements of the statute as to contents and the requirements of the statutes as to signature, as considered respectively infra secs. 179200 and secs. 201-215." Babao vs Perez, GR L-8334, December 28, 1957 Facts Celestina Perez was in her lifetime the owner of the parcel of land. Sometime in 1924 when the deceased Santiago Babao married Maria Cleofe Perez, niece of Celestina Perez, the latter and the former entered into a verbal agreement whereby Santiago Babao bound himself to improve the land by levelling and clearing all the forest trees standing thereon and planting in lieu thereof coconuts, rice, corn and other crops such as bananas and bamboo trees, and to act at the same time as administrator thereof during the lifetime of Celestina Perez, all expenses for labor and materials to be at his cost, in consideration of which Celestina in turn bound herself to convey to Santiago Babao or his wife 1/2 of the land, together with all the improvements thereon upon her death. For clearing and improving the portions of land above-mentioned, Santiago Babao incurred expenses amounting to P7,400 which added to his salary as administrator from 1924 to 1946 at the rate of P150 a month amounting to P39,600, makes a total of P47,000. In violation of the aforesaid verbal agreement, Celestina Perez, acting through Leovigildo Perez, to whom she extended a power of attorney to sell, sold few days before she died about 127 1/2 hectares of the land in question in consequence of which Santiago Babao was deprived of the possession and administration thereof from 1945; That said sales were fictitious and were made in clear violation of the oral agreement made between Celestina Perez and Santiago Babao and as such the

same are null and void. Celestina Perez died on August 24, 1947 as a result of which intestate proceedings were instituted for the settlement of her estate and one Florencio Perez was named as judicial administrator.

consider that in order that a partial performance of the contract may take the case out of the operation of the statute, it must appear clear that the full performance has been made by one party within one year, as otherwise the statute would apply.

Santiago Babao died on January 6, 1948 and as a consequence intestate proceedings were instituted for the settlement of his estate and Bienvenido Babao was appointed judicial administrator; and that in the event the estate of Santiago Babao failed to recover the 1/2 portion of the land herein litigated, said estate would suffer an irreparable damage of not less than P366,700 representing fruits which it has failed to receive during the last 20 years.

Thus, the rule on this point is well stated in Corpus Juris in the following wise: "Contracts which by their terms are not to be performed within one year, may be taken out of the statute through performance by one party thereto. All that is required in such case is complete performance within the year by one party, however many years may have to elapse before the agreement is performed by the other party. But nothing less than full performance by one party will suffice, and it has been held that, if anything remains to be done after the expiration of the year besides the mere payment of money, the statute will apply.". It is not therefore correct to state that Santiago Babao has fully complied with his part within the year from the alleged contract in question.

Plaintiff prayed for the conveyance of 1/2 portion of the land in question and for annulment of the sales of the portion thereof for having been made fictitiously, and in the alternative, for judgment in plaintiff’s favor for the sum of P47,000 representing the amount of useful and necessary expenses incurred by Santiago Babao in improving the land in line with the oral agreement. Defendants denied plaintiff’s claim that a verbal agreement was entered into between Celestina Perez and Santiago Babao relative to the clearing, improving and administering the land belonging to the former having an area of 156 hectares, as well as the other claim that Santiago Babao had actually cleared and improved a great portion thereof at a cost of around P7,400. Issue: whether or not the alleged verbal agreement falls within the prohibition of the Statute of Frauds. Ruling That the alleged verbal agreement is one which by its terms is not to be performed within one year is very apparent from the allegations of the complaint. Thus, it is therein alleged that the agreement was allegedly made in 1924. From the above terms, therefore, it is not difficult to see that the undertaking assumed by Santiago Babao which was to clear, level and plant to coconut trees and other plants 156 hectares of forest land could not be accomplished in one year. In fact, the alleged improvements were supposedly accomplished during the lifetime of Celestina, which lasted over a period of 23 years, and even then not all was cleared and planted but only a portion thereof. Another part of his undertaking is that he is to administer the land during the lifetime of Celestina, and as we have already said, her death occurred 23 years after the agreement. But the trial court expressed the view that the statute does not apply because it assumed that Santiago Babao fully complied with his part of the oral contract between the parties, and in its opinion "performance by one party of his part of the contract takes the case out of the statute." Even if this assumption were correct, still we find one flaw in its logic which fully nullifies it for it fails to

"When, in an oral contract which, by its terms, is not to be performed within one year from the execution thereof, one of the contracting parties has complied within the year with the obligations imposed on him by said contract, the other party cannot avoid the fulfillment of those incumbent on him under the same contract by invoking the statute of frauds because the latter aims to prevent and not to protect fraud." (Shoemaker v. La Tondeña, Inc. 68 Phil., 24.) "The broad view is that the statute of Frauds applies only to agreements not to be performed on either side within a year from the making thereof. Agreements to be fully performed on one side within the year are taken out of the operation of the statute." (National Bank v. Philippine Vegetable Oil Co., 49 Phil., 857, 858.) Assuming arguendo that the agreement in question falls also under paragraph (a) of Article 1403 of the new Civil Code, i. e., it is a contract or agreement for the sale of real property or of an interest therein, it cannot also be contended that that provision does not apply to the present case for the reason that there was part performance on the part of one of the parties. In this connection, it must be noted that this statute is one based on equity. It is based on equitable estoppel or estoppel by conduct. It operates only under certain specified conditions and when adequate relief at law is unavailable (49 Am. Jur., Statute of Frauds, Section 422, p. 727). And one of the requisites that need be present is that the agreement relied on must be certain, definite, clear, unambiguous and unequivocal in its terms before the statute may operate. Thus, the rule on this matter is as follows:j "The contract must be fully made and completed in every respect except for the writing required by the statute, in order to be enforceable on the ground of part performance. The parol agreement relied on

must be certain, definite, clear, unambiguous, and unequivocal in its terms, particularly where the agreement is between parent and child, and be clearly established by the evidence. The requisite of clearness and definiteness extends to both the terms and the subject matter of the contract. Also, the oral contract must be fair, reasonable, and just in its provisions for equity to enforce it on the ground of part performance. If it would be inequitable to enforce the oral agreement, or if its specific enforcement would be harsh or oppressive upon the defendant, equity will withhold its aid. Clearly, the doctrine of part performance taking an oral contract out of the statute of frauds does not apply so as to support a suit for specific performance where both the equities and the statute support the defendant’s case." Paterno vs Jao Yan, GR L-12218, February 28, 1961 Facts Paterno, leased to the appellant Jao Yan a parcel of land. The lease was to be for a period of seven (7) years, commencing on the 15th of July, 1948. The lessee bound himself to construct a building "to be made of strong wooden materials" on the leased premises, which would become property of the lessors at the termination of the lease; to pay P5,500,00 monthly rental, and all taxes, charges, and assessments on the building. By complaint, the lessors filed action to recover from the lessee rentals in the sum P23,250.00 due for the months of March to June, 1955 and the first days of July, 1955; P7,680 for real estate taxes and penalties due on the building for the years 1953 to 1955; P2,500.00 attorney's fees; and for the recovery of the building constructed on the leased land. Defendant lessee averred, in his answer, that the original written contract had been orally extended from seven (7) to ten (10) years, in consideration of his constructing a semi-concrete building (instead of the wooden one originally contemplated), as he actually had done, at a cost of P13,000.00, higher than the original wooden structure would have cost of P13,000.00, higher than the original wooden structure would have cost; that the rentals due had been retained by him because of plaintiff's refusal to recognize the modified contract; that [plaintiff's refusal to recognize the modified contract; that plaintiffs maliciously garnished the rents due from

his sub-lessees; and prayed for judgment compelling plaintiffs to recognize the modified contract and to pay him damages, material and moral. Issue Ruling It is established doctrine in this jurisdiction that partial performance takes an oral contract out of the scope of the Statute Frauds (27 C.J. 206; Hernandez v. Andal, 78 Phil. 196). With particular reference to contract of sale has been partially executed by payment of the price, oral testimony is admissible to evidence the existence of the contract (Almirol and Cariño vs. Monserrat, 48 Phil. 67). The rule is entirely applicable supports the doctrine that "The taking of possession by the lessee and the making of valuable improvement, and the like, on the faith of the oral agreement, may operate to the case out of the prohibition of the statute, for it would be gross fraud to permit the lessor in such a case to avoid the lease." (49 Am. Jur. p. 809, sec. 106, case cited)1 It is the rule that The expenditure of money by a tenant in making improvement on the premises on the faith of an oral agreement for a lease for a further term, may be viewed not only as constituting in itself an act of part performance but as furnishing strong if not conclusive evidence that possession is continued under the oral contract and not as a tenant holding over under the original lease. (49 Am. Jur. 810; 33 A.L.R.. 1489, 1501). Accordingly, in Read Drug & Chemical Co. vs. Nattans, 129 Md. 67, 98 Atl. 158, it was held that a parol agreement of a landlord to extend a lease for a specified term of years and at a specified rental, provided the tenant made a certain extensive repairs to the property, was enforceable notwithstanding the Statute of Frauds, where the tenant fully performed his part of the agreement. This is precisely the case before us. The written contract of lease called for the erection, by the tenant, of a building of strong wooden materials, yet it is not contested that what he actually did construct on leased lot was semi-concrete edifice, at a much higher cost. Since this modification is plainly referable to the oral agreement as

claimed, and the same cannot be explained on the record except as executed in reliance on the verbal modification of the original lease, and in the performance thereof, as contended by the appellant. We are of the opinion that the Court below should have accepted and taken into account the offered testimony on the extension and modification of the original terms of the lease, instead of declaring the same unenforceable under the Statute of Frauds. Of course the lessors are entitled to controvert the evidence of the lessee with proof of their own; but

we are not here concerned with the questions of weight of evidence, but of admissibility. Indeed, the Court below made no pronouncements on the credibility of the preferred evidence, obviously because it was deemed useless since the testimony was rejected. Reiss vs Memije, GR 5447, March 1, 1910 Facts

Defendant appellant entered into a contract with Buenaventura Kabalsa for the repair of a house in Manila. The contractor being unable to secure credit therefor, and was compelled to pay cash for all purchases. Having no money and no credit he was unable to continue the purchase of the necessary lumber, hence, the work on the house has been delayed. Defendant accompanied the contractor to plaintiffs’ lumber yard, and after satisfying plaintiffs as to his own financial responsibility, and that as a property owner and an attorney in active practice in Manila, he was good for the amount of lumber needed in the repair of his house, he entered into an agreement with them whereby they were to deliver the necessary lumber to the contractor for use in the repair of his house. In pursuance of and in accordance with the directions of the defendant, plaintiffs delivered to Kabalsa a considerable amount of lumber which was used in the repairs upon defendant’s house. Issue: Whether or not the alleged guaranty of payment of the purchase price of the lumber furnished at his request to his contractor Kabalsa not being in writing, it is unenforceable in this action. Ruling To determine to whom the credit has actually been given, the language and expressions used by the parties promising, and from an examination of the circumstance showing the understanding of the parties, should be considered. The word was not used by this witness in its technical sense, and that he did not mean thereby to say that defendant guaranteed payment by the contractor, but rather that after satisfying plaintiffs as to his own financial responsibility, he obligated himself to pay for the lumber delivered to his contractor for use in his house. The SC are satisfied that the credit for the lumber delivered by the plaintiffs to defendant’s contractor was extended solely and exclusively to the defendant under the verbal agreement had with him, and therefore, that the provisions of the statue did not require that it should be made in writing. Hermosisima vs CA, GR L-14628, September 30, 1960 Facts Complainant Soledad Cagigas, was born in July 1917. Since 1950, Soledad then a teacher in the Sibonga Provincial High School in Cebu, and petitioner, who was almost ten (10) years younger than she, used to go around together and were regarded as engaged, although he had made no promise of marriage prior thereto. In 1951, she gave up teaching and became a life insurance underwriter in the City of Cebu, where intimacy developed among her and the petitioner,

since one evening, in 1953, when after coming from the movies, they had sexual intercourse in his cabin on board M/V "Escaño" to which he was then attached as apprentice pilot. In February, 1954, Soledad advised petitioner that she was in the family way, whereupon he promised to marry her. Their child, Chris Hermosisima, was born on June 17, 1954, in a private maternity and clinic. However, subsequently, or on July 24, 1954, defendant married one Romanita Perez. Hence, the present action, which was commenced on or about October 4, 1954. Issue Ruling Inasmuch as these articles were never in force in the Philippines, this Court ruled in de Jesus v. Syquia (58 Phil., 866), that "the action for breach of promise to marry has no standing in the civil law, apart from the right to recover money or property advanced . . . upon the faith of such promise." The Code Commission charged with the drafting of the Proposed Civil Code of the Philippines deemed it best, however, to change the law thereon. We quote from the report of the Code Commission on said Proposed Civil Code: "Articles 43 and 44 of the Civil Code of 1889 refer to the promise of marriage. But these articles are not in force in the Philippines. The subject is regulated in the proposed Civil Code not only as to the aspects treated of in said articles but also in other particulars. It is advisable to furnish legislative solutions to some questions that might arise relative to betrothal. Among the provisions proposed are: That authorizing the adjudication of moral damages, in case of breach of promise of marriage, and that creating liability for causing a marriage engagement to be broken. Martinez vs CA, GR 123547, May 21, 2001 Facts Sometime in February 1981, private respondents Godofredo De la Paz and his sister Manuela De la Paz, married to Maximo Hipolito, entered into an oral contract with petitioner Rev. Fr. Dante Martinez, then Assistant parish priest of Cabanatuan City, for the sale of Lot No. 1337-A-3 at the Villa Fe Subdivision in Cabanatuan City for the sum of P15,000.00. On January 31, 1983, petitioner completed payment of the lot for which private respondents De la Paz executed two documents. However, private respondents De la Paz never delivered the Deed of Sale they promised to petitioner. In the meantime, in a Deed of Absolute Sale with Right to Repurchase dated October 28, 1981 (Exh. 10),[11] private respondents De la Paz sold three lots with right to repurchase the same within one year to

private respondents spouses Reynaldo and Susan Veneracion for the sum of P150,000.00. One of the lots sold was the lot previously sold to petitioner.[12] Reynaldo Veneracion had been a resident of Cabanatuan City since birth. He used to pass along Maharlika Highway in going to the Municipal Hall or in going to and from Manila. Two of the lots subject of the sale were located along Maharlika Highway, one of which was the lot sold earlier by the De la Pazes to petitioner. The third lot (hereinafter referred to as the Melencio lot) was occupied by private respondents De la Paz. Private respondents Veneracion never took actual possession of any of these lots during the period of redemption, but all titles to the lots were given to him.[13] Before the expiration of the one year period, private respondent Godofredo De la Paz informed private respondent Reynaldo Veneracion that he was selling the three lots to another person for P200,000.00. Indeed, private respondent Veneracion received a call from a Mr. Tecson verifying if he had the titles to the properties, as private respondents De la Paz were offering to sell the two lots along Maharlika Highway to him (Mr. Tecson) for P180,000.00 The offer included the lot purchased by petitioner in February, 1981. Private respondent Veneracion offered to purchase the same two lots from the De la Pazes for the same amount. The offer was accepted by private respondents De la Paz. Accordingly, on June 2, 1983, a Deed of Absolute Sale was executed over the two lots (Exh. I/Exh. 5-Veneracion).[14] Sometime in January, 1984, private respondent Reynaldo Veneracion asked a certain Renato Reyes, petitioners neighbour, who the owner of the building erected on the subject lot was. Reyes told him that it was Feliza Martinez, petitioners mother, who was in possession of the property. Reynaldo Veneracion told private respondent Godofredo about the matter and was assured that Godofredo would talk to Feliza. Based on that assurance, private respondents Veneracion registered the lots with the Register of Deeds of Cabanatuan on March 5, 1984. The lot in dispute was registered under TCT No. T-44612 (Exh. L/Exh. 4-Veneracion).[15] Petitioner discovered that the lot he was occupying with his family had been sold to the spouses Veneracion after receiving a letter (Exh. P/Exh. 6Veneracion) from private respondent Reynaldo Veneracion on March 19, 1986, claiming ownership of the land and demanding that they vacate the property and remove their improvements thereon. [16] Petitioner, in turn, demanded through counsel the execution of the deed of sale from private respondents De la Paz and informed Reynaldo Veneracion that he was the owner of the property as he had previously purchased the same from private respondents De la Paz.[17] The matter was then referred to the Katarungang Pambarangay of San Juan, Cabanatuan City for conciliation, but the parties failed to reach an agreement (Exh. M/Exh. 13).[18] As a consequence, on

May 12, 1986, private respondent Reynaldo Veneracion brought an action for ejectment in the Municipal Trial Court, Branch III, Cabanatuan City against petitioner and his mother Issue Ruling 3. The appellate courts reliance on Arts. 1357 and 1358 of the Civil Code to determine private respondents Veneracions lack of knowledge of petitioners ownership of the disputed lot is erroneous. Art. 1357[36] and Art. 1358,[37] in relation to Art. 1403(2) [38] of the Civil Code, requires that the sale of real property must be in writing for it to be enforceable. It need not be notarized. If the sale has not been put in writing, either of the contracting parties can compel the other to observe such requirement.[39] This is what petitioner did when he repeatedly demanded that a Deed of Absolute Sale be executed in his favor by private respondents De la Paz. There is nothing in the above provisions which require that a contract of sale of realty must be executed in a public document. In any event, it has been shown that private respondents Veneracion had knowledge of facts which would put them on inquiry as to the nature of petitioners occupancy of the disputed lot. Estate of Gonzales vs Heirs of Perez, GR 169681, November 5, 2009 Facts The former Municipality of Marikina in the Province of Rizal (now City of Marikina, Metro Manila) used to own a parcel of land located in Barrio Concepcion of the said municipality covered by Original Certificate of Title (OCT) No. 6293 of the Register of Deeds of Rizal. The said property was subdivided into three (3) lots, namely, lots A, B and C, per subdivision plan (LRC) Psd-4571.4 On January 14, 1966, the Municipal Council of Marikina passed Resolution No. 9, series of 1966 which authorized the sale through public bidding of Municipal Lots A and C. On April 25, 1966, a public bidding was conducted wherein Pedro Gonzales was the highest bidder. Two days thereafter, or on April 27, 1966, the Municipal Council of Marikina issued Resolution No. 75 accepting the bid of Pedro. Thereafter, a deed of sale was executed in favor of the latter which was later forwarded to the Provincial Governor of Rizal for his approval. The Governor, however, did not act upon the said deed. Sometime in September 1966, Pedro sold to Marcos Perez a portion of Lot C, denominated as Lot C-3, which contains an area of 375 square meters. The contract of sale was embodied in a Deed of Sale5which, however, was not notarized. Subsequently, Pedro and Marcos died.

On February 7, 1992, the Municipality of Marikina, through its then Mayor Rodolfo Valentino, executed a Deed of Absolute Transfer of Real Property over Lots A and C in favor of the Estate of Pedro C. Gonzales. Subsequently, herein petitioners executed an extrajudicial partition wherein Lot C was subdivided into three lots. As a result of the subdivision, new titles were issued wherein the 370-square-meter portion of Lot C-3 is now denominated as Lot C-1 and is covered by TCT No. 2444479 and the remaining 5 square meters of the subject lot (Lot C-3) now forms a portion of another lot denominated as Lot C-2 and is now covered by TCT No. 244448.10 On October 1, 1992, herein respondents sent a demand letter to one of herein petitioners asking for the reconveyance of the subject property.11 However, petitioners refused to reconvey the said lot. Issue: Ruling On the question of whether the subject Deed of Sale is invalid on the ground that it does not appear in a public document, Article 1358 of the same Code enumerates the acts and contracts that should be embodied in a public document, to wit: Art. 1358. The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by Articles 1403, No. 2 and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; and (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles 1403, No. 2 and 1405. On the other hand, pertinent portions of Article 1403 of the Civil Code provide as follows: Art. 1403. The following contracts are unenforceable, unless they are ratified: xxx (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following

cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; xxx (e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein; x x x27 Under Article 1403(2), the sale of real property should be in writing and subscribed by the party charged for it to be enforceable.28 In the case before the Court, the Deed of Sale between Pedro and Marcos is in writing and subscribed by Pedro and his wife Francisca; hence, it is enforceable under the Statute of Frauds. However, not having been subscribed and sworn to before a notary public, the Deed of Sale is not a public document and, therefore, does not comply with Article 1358 of the Civil Code. Nonetheless, it is a settled rule that the failure to observe the proper form prescribed by Article 1358 does not render the acts or contracts enumerated therein invalid. It has been uniformly held that the form required under the said Article is not essential to the validity or enforceability of the transaction, but merely for convenience.29 The Court agrees with the CA in holding that a sale of real property, though not consigned in a public instrument or formal writing, is, nevertheless, valid and binding among the parties, for the time-honored rule is that even a verbal contract of sale of real estate produces legal effects between the parties.30 Stated differently, although a conveyance of land is not made in a public document, it does not affect the validity of such conveyance. Article 1358 does not require the accomplishment of the acts or contracts in a public instrument in order to validate the act or contract but only to insure its efficacy.31 Thus, based on the foregoing, the Court finds that the CA did not err in ruling that the contract of sale between Pedro and Marcos is valid and binding. Cenido vs Apacionado, GR 132474, November 19, 1999 Facts On May 22, 1989, respondent spouses Amadeo Apacionado and Herminia Sta. Ana filed with the Regional Trial Court, Branch 70, Rizal a complaint against petitioner Renato Cenido for Declaration of Ownership, Nullity, with Damages.[3] The spouses alleged that: (1) they are the owners of a parcel of unregistered land

(2) this house and lot were purchased by the spouses from its previous owner, Bonifacio Aparato, now deceased, who lived under the spouses' care and protection for some twenty years prior to his death;

intended for greater efficacy or convenience or to bind third persons, if not done, would not adversely affect the validity or enforceability of the contract between the contracting parties themselves.[41]

(3) while he was alive, Bonifacio Aparato mortgaged the said property twice, one to the Rural Bank of Binangonan and the other to Linda C. Ynares, as security for loans obtained by him;

Article 1358 of the Civil Code requires that:

(4) the loans were paid off by the spouses thereby securing the release and cancellation of said mortgages; (5) the spouses also paid and continue to pay the real estate taxes on the property;

(1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by Articles 1403, No. 2 and 1405;

(6) from the time of sale, they have been in open, public, continuous and uninterrupted possession of the property in the concept of owners;

(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;

(7) that on January 7, 1987, petitioner Renato Cenido, claiming to be the owner of the subject house and lot, filed a complaint for ejectment against them with the Municipal Trial Court, Branch 2, Binangonan, Rizal;

(3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person;

(8) through fraudulent and unauthorized means, Cenido was able to cause the issuance in his name of Tax Declaration No. 02-0368 over the subject property, which fact the spouses learned only upon the filing of the ejectment case; Issue Ruling The Pagpapatunay is undisputably a private document. And this fact does not detract from its validity. The Civil Code, in Article 1356 provides: Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. Generally, contracts are obligatory, in whatever form such contracts may have been entered into, provided all the essential requisites for their validity are present. When, however, the law requires that a contract be in some form for it to be valid or enforceable, that requirement must be complied with. A certain form may be prescribed by law for any of the following purposes: for validity, enforceability, or greater efficacy of the contract.[38] When the form required is for validity, its non-observance renders the contract void and of no effect.[39] When the required form is for enforceability, non-compliance therewith will not permit, upon the objection of a party, the contract, although otherwise valid, to be proved or enforced by action.[40] Formalities

Art. 1358. The following must appear in a public document:

(4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles 1403, No. 2 and 1405. Acts and contracts which create, transmit, modify or extinguish real rights over immovable property should be embodied in a public document. Sales of real property are governed by the Statute of Frauds which reads: Art. 1403. The following contracts are unenforceable, unless they are ratified: (1) x x x (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed and by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; xxx (e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (3) x x x. The sale of real property should be in writing and subscribed by the party charged for it to be enforceable. The Pagpapatunay is in writing and

subscribed by Bonifacio Aparato, the vendor; hence, it is enforceable under the Statute of Frauds. Not having been subscribed and sworn to before a notary public, however, the Pagpapatunay is not a public document, and therefore does not comply with Article 1358, paragraph 1 of the Civil Code. The requirement of a public document in Article 1358 is not for the validity of the instrument but for its efficacy.[42] Although a conveyance of land is not made in a public document, it does not affect the validity of such conveyance.[43] Article 1358 does not require the accomplishment of the acts or contracts in a public instrument in order to validate the act or contract but only to insure its efficacy,[44] so that after the existence of said contract has been admitted, the party bound may be compelled to execute the proper document.[45] This is clear from Article 1357, viz: Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article [Article 1358], the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. The private conveyance of the house and lot is therefore valid between Bonifacio Aparato and respondent spouses. The question of whether the Pagpapatunay is sufficient to transfer and convey title to the land for purposes of original registration[46] or the issuance of a real estate tax declaration in respondent spouses' names, as prayed for by respondent spouses,[47] is another matter altogether.[48] For greater efficacy of the contract, convenience of the parties and to bind third persons, respondent spouses have the right to compel the vendor or his heirs to execute the necessary document to properly convey the property.[49] Anent petitioner's second assigned error, the fact that the Court of Appeals sustained the validity of the Pagpapatunay was not a conclusion that necessarily resulted from the weakness of petitioner's claim of filiation to Bonifacio Aparato. Of and by itself, the Pagpapatunay is a valid contract of sale between the parties and the Court of Appeals did not err in upholding its validity.