EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC.

v MAYFAIR THEATER,
INC.,
G.R. No. 106063 November 21, 1996

FACTS:

Carmelo, the owner of a parcel of land together with two 2-storey buildings constructed thereon entered into a
contract of lease with Mayfair on June 1, 1967 for the latter's lease of a portion of Carmelo's property to wit:

A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto
Avenue, Manila, with a floor area of 1,610 square meters.

THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated at C.M. Recto
Avenue, Manila, with a floor area of 150 square meters.

for use by Mayfair as a motion picture theater and for a term of twenty (20) years. Mayfair thereafter
constructed on the leased property a movie house known as "Maxim Theatre."

Two years later, on March 31, 1969, Mayfair entered into a second contract of lease with Carmelo for the lease
of another portion of Carmelo's property, to wit:

A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto
Avenue, Manila, with a floor area of 1,064 square meters.

THE TWO (2) STORE SPACES AT THE GROUND FLOOR and MEZZANINE of the two-storey
building situated at C.M. Recto Avenue, Manila, with a floor area of 300 square meters and
bearing street numbers 1871 and 1875,

for similar use as a movie theater and for a similar term of twenty (20) years. Mayfair put up another movie
house known as "Miramar Theatre" on this leased property.

Both contracts of lease provides (sic) identically worded paragraph 8, which reads:

That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-
days exclusive option to purchase the same.

In the event, however, that the leased premises is sold to someone other than the LESSEE, the
LESSOR is bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed
of Sale hereof that the purchaser shall recognize this lease and be bound by all the terms and
conditions thereof.

Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang, President of Mayfair,
through a telephone conversation that Carmelo was desirous of selling the entire Claro M. Recto property. Mr.
Pascal told Mr. Yang that a certain Jose Araneta was offering to buy the whole property for US Dollars
1,200,000, and Mr. Pascal asked Mr. Yang if the latter was willing to buy the property for Six to Seven Million
Pesos.

Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23, 1974, Mayfair replied
through a letter stating as follows:

It appears that on August 19, 1974 your Mr. Henry Pascal informed our client's Mr. Henry Yang
through the telephone that your company desires to sell your above-mentioned C.M. Recto
Avenue property.

Under your company's two lease contracts with our client, it is uniformly provided:
 8. That if the LESSOR should desire to sell the leased premises the LESSEE shall be given 30-
days exclusive option to purchase the same. In the event, however, that the leased premises is
sold to someone other than the LESSEE, the LESSOR is bound and obligated, as it is ( sic) here
binds (sic) and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall
recognize this lease and be bound by all the terms and conditions hereof (sic).

Carmelo did not reply to this letter.

On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express interest in acquiring not
only the leased premises but "the entire building and other improvements if the price is reasonable. However,
both Carmelo and Equatorial questioned the authenticity of the second letter.

Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and building, which
included the leased premises housing the "Maxim" and "Miramar" theatres, to Equatorial by virtue of a Deed of
Absolute Sale, for the total sum of P11,300,000.00.

In September 1978, Mayfair instituted the action a quo for specific performance and annulment of the sale of
the leased premises to Equatorial. In its Answer, Carmelo alleged as special and affirmative defense (a) that it
had informed Mayfair of its desire to sell the entire C.M. Recto Avenue property and offered the same to
Mayfair, but the latter answered that it was interested only in buying the areas under lease, which was
impossible since the property was not a condominium; and (b) that the option to purchase invoked by Mayfair
is null and void for lack of consideration. Equatorial, in its Answer, pleaded as special and affirmative defense
that the option is void for lack of consideration ( sic) and is unenforceable by reason of its impossibility of
performance because the leased premises could not be sold separately from the other portions of the land and
building. It counterclaimed for cancellation of the contracts of lease, and for increase of rentals in view of
alleged supervening extraordinary devaluation of the currency. Equatorial likewise cross-claimed against co-
defendant Carmelo for indemnification in respect of Mayfair's claims.

During the pre-trial conference held on January 23, 1979, the parties stipulated on the following:

1. That there was a deed of sale of the contested premises by the defendant Carmelo . . . in
favor of defendant Equatorial . . .;

2. That in both contracts of lease there appear (sic) the stipulation granting the plaintiff exclusive
option to purchase the leased premises should the lessor desire to sell the same (admitted
subject to the contention that the stipulation is null and void);

3. That the two buildings erected on this land are not of the condominium plan;

4. That the amounts stipulated and mentioned in paragraphs 3 (a) and (b) of the contracts of
lease constitute the consideration for the plaintiff's occupancy of the leased premises, subject of
the same contracts of lease, Exhibits A and B;

xxx xxx xxx

6. That there was no consideration specified in the option to buy embodied in the contract;

7. That Carmelo & Bauermann owned the land and the two buildings erected thereon;

8. That the leased premises constitute only the portions actually occupied by the theaters; and

9. That what was sold by Carmelo & Bauermann to defendant Equatorial Realty is the land and
the two buildings erected thereon.
ISSUE:

Whether or not the contract is rescissible?

HELD.
Yes, the contract is rescissible. First and foremost is that the petitioners acted in bad faith to render Paragraph 8
"inutile".

What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair will have the right of
first refusal in the event Carmelo sells the leased premises. It is undisputed that Carmelo did recognize this right of
Mayfair, for it informed the latter of its intention to sell the said property in 1974. There was an exchange of letters
evidencing the offer and counter-offers made by both parties. Carmelo, however, did not pursue the exercise to its
logical end. While it initially recognized Mayfair's right of first refusal, Carmelo violated such right when without
affording its negotiations with Mayfair the full process to ripen to at least an interface of a definite offer and a
possible corresponding acceptance within the "30-day exclusive option" time granted Mayfair, Carmelo abandoned
negotiations, kept a low profile for some time, and then sold, without prior notice to Mayfair, the entire Claro M Recto
property to Equatorial.

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible. We
agree with respondent Appellate Court that the records bear out the fact that Equatorial was aware of the lease
contracts because its lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot tenably
claim to be a purchaser in good faith, and, therefore, rescission lies.

. . . Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a
contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons,
like creditors. The status of creditors could be validly accorded the Bonnevies for they had substantial
interests that were prejudiced by the sale of the subject property to the petitioner without recognizing their
right of first priority under the Contract of Lease.

RESCISSION DEFINED
According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third
persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by
means of the restoration of things to their condition at the moment prior to the celebration of said contract. It
is a relief allowed for the protection of one of the contracting parties and even third persons from all injury
and damage the contract may cause, or to protect some incompatible and preferent right created by the
contract. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary damage
to someone that justifies its invalidation for reasons of equity.

It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the
action for its rescission where it is shown that such third person is in lawful possession of the subject of the
contract and that he did not act in bad faith. However, this rule is not applicable in the case before us
because the petitioner is not considered a third party in relation to the Contract of Sale nor may its
possession of the subject property be regarded as acquired lawfully and in good faith.

A purchaser in good faith and for value is one who buys the property of another without notice that
some other person has a right to or interest in such property and pays a full and fair price for the
same at the time of such purchase or before he has notice of the claim or interest of some other
person in the property. Good faith connotes an honest intention to abstain from taking
unconscientious advantage of another. Tested by these principles, the petitioner cannot tenably
claim to be a buyer in good faith as it had notice of the lease of the property by the Bonnevies and
such knowledge should have cautioned it to look deeper into the agreement to determine if it
involved stipulations that would prejudice its own interests.

The petitioner insists that it was not aware of the right of first priority granted by the Contract of Lease.
Assuming this to be true, we nevertheless agree with the observation of the respondent court that:
 If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes
Par. 20 on priority right given to the Bonnevies, it had only itself to blame. Having known that
the property it was buying was under lease, it behooved it as a prudent person to have
required Reynoso or the broker to show to it the Contract of Lease in which Par. 20 is
contained. 25

Petitioners assert the alleged impossibility of performance because the entire property is indivisible property. It was
petitioner Carmelo which fixed the limits of the property it was leasing out. Common sense and fairness dictate that
instead of nullifying the agreement on that basis, the stipulation should be given effect by including the indivisible
appurtenances in the sale of the dominant portion under the right of first refusal. A valid and legal contract where the
ascendant or the more important of the two parties is the landowner should be given effect, if possible, instead of
being nullified on a selfish pretext posited by the owner. Following the arguments of petitioners and the
participation of the owner in the attempt to strip Mayfair of its rights, the right of first refusal should include
not only the property specified in the contracts of lease but also the appurtenant portions sold to Equatorial
which are claimed by petitioners to be indivisible. Carmelo acted in bad faith when it sold the entire
property to Equatorial without informing Mayfair, a clear violation of Mayfair's rights. While there was a
series of exchanges of letters evidencing the offer and counter-offers between the parties, Carmelo
abandoned the negotiations without giving Mayfair full opportunity to negotiate within the 30-day period.

Accordingly, even as it recognizes the right of first refusal, this Court should also order that Mayfair be authorized to
exercise its right of first refusal under the contract to include the entirety of the indivisible property.  The boundaries
of the property sold should be the boundaries of the offer under the right of first refusal . As to the remedy to enforce
Mayfair's right, the Court disagrees to a certain extent with the concluding part of the dissenting opinion of Justice
Vitug. The doctrine enunciated in Ang Yu Asuncion vs. Court of Appeals should be modified, if not amplified under
the peculiar facts of this case.

As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad faith,
since it was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact, as correctly
observed by the Court of Appeals, Equatorial admitted that its lawyers had studied the contract of lease prior to the
sale. Equatorial's knowledge of the stipulations therein should have cautioned it to look further into the agreement to
determine if it involved stipulations that would prejudice its own interests.

Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside
or rescinded. All of these matters are now before us and so there should be no piecemeal determination of this
case and leave festering sores to deteriorate into endless litigation. The facts of the case and considerations of
justice and equity require that we order rescission here and now. Rescission is a relief allowed for the protection
of one of the contracting parties and even third persons from all injury and damage the contract may cause
or to protect some incompatible and preferred right by the contract.  The sale of the subject real property
26

by Carmelo to Equatorial should now be rescinded considering that Mayfair, which had substantial interest
over the subject property, was prejudiced by the sale of the subject property to Equatorial without Carmelo
conferring to Mayfair every opportunity to negotiate within the 30-day stipulated period. 27

This Court has always been against multiplicity of suits where all remedies according to the facts and the law can be
included. Since Carmelo sold the property for P11,300,000.00 to Equatorial, the price at which Mayfair could have
purchased the property is, therefore, fixed. It can neither be more nor less. There is no dispute over it. The
damages which Mayfair suffered are in terms of actual injury and lost opportunities. The fairest solution
would be to allow Mayfair to exercise its right of first refusal at the price which it was entitled to accept or
reject which is P11,300,000.00. This is clear from the records.

To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale to the latter
of the disputed property would be unjust and unkind to Mayfair because it is once more compelled to
litigate to enforce its right. It is not proper to give it an empty or vacuous victory in this case. From the
viewpoint of Carmelo, it is like asking a fish if it would accept the choice of being thrown back into the river.
Why should Carmelo be rewarded for and allowed to profit from, its wrongdoing? Prices of real estate have
skyrocketed. After having sold the property for P11,300,000.00, why should it be given another chance to
sell it at an increased price?
ANG YU ASUNCION CASE COMPARED WITH PRESENT CASE; OBLIGATION OF FIRST REFUSAL EMBODIED
IN PARAGRAPH 8 OF THE CONTRACT;

Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to execute
because a contract over the right of first refusal belongs to a class of preparatory juridical relations governed not by
the law on contracts but by the codal provisions on human relations. This may apply here if the contract is limited to
the buying and selling of the real property. However, the obligation of Carmelo to first offer the property to
Mayfair is embodied in a contract. It is Paragraph 8 on the right of first refusal which created the
obligation. It should be enforced according to the law on contracts instead of the panoramic and indefinite
rule on human relations. The latter remedy encourages multiplicity of suits. There is something to execute and
that is for Carmelo to comply with its obligation to the property under the right of the first refusal according
to the terms at which they should have been offered then to Mayfair, at the price when that offer should
have been made. Also, Mayfair has to accept the offer. This juridical relation is not amorphous nor is it merely
preparatory. Paragraphs 8 of the two leases can be executed according to their terms.

On the question of interest payments on the principal amount of P11,300,000.00, it must be borne in mind
that both Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a contract
entered into with Mayfair. It sold the property to Equatorial with purpose and intend to withhold any notice
or knowledge of the sale coming to the attention of Mayfair. All the circumstances point to a calculated and
contrived plan of non-compliance with the agreement of first refusal.

On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and
full knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo and
Equatorial took unconscientious advantage of Mayfair.

Neither may Carmelo and Equatorial avail of considerations based on equity which might warrant the grant of
interests. The vendor received as payment from the vendee what, at the time, was a full and fair price for the
property. It has used the P11,300,000.00 all these years earning income or interest from the amount. Equatorial, on
the other hand, has received rents and otherwise profited from the use of the property turned over to it by Carmelo.
In fact, during all the years that this controversy was being litigated, Mayfair paid rentals regularly to the buyer who
had an inferior right to purchase the property. Mayfair is under no obligation to pay any interests arising from this
judgment to either Carmelo or Equatorial.

FACTS:

Carmelo & Bauermann, Inc. owned a land, together with two 2-storey buildings at Claro M. Recto Avenue,
Manila, and covered by TCT No. 18529.

On June 1, 1967, Carmelo entered into a Contract of Lease with Mayfair Theater Inc. fpr 20 years. The lease
covered a portion of the second floor and mezzanine of a two-storey building with about 1,610 square
meters of floor area, which respondent used as Maxim Theater.

Two years later, on March 31, 1969, Mayfair entered into a second Lease with Carmelo for another portion of
the latter’s property this time, a part of the second floor of the two-storey building, and two store spaces on
the ground floor. In that space, Mayfair put up another movie house known as Miramar Theater. The
Contract of Lease was likewise for a period of 20 years.

Both leases contained a clause giving Mayfair a right of first refusal to purchase the subject properties. Sadly,
on July 30, 1978 - within the 20-year-lease term -- the subject properties were sold by Carmelo to Equatorial
Realty Development, Inc. for eleven million smackers, without their first being offered to Mayfair.
As a result of the sale of the subject properties to Equatorial, Mayfair filed a Complaint before the Regional
Trial Court of Manila for the recission of the Deed of Absolute Sale between Carmelo and Equatorial, specific
performance, and damages. RTC decided for Carmelo and Equatorial. Tsk tsk.
CA reversed and ruled for Mayfair. The SC denied a petition questioning the CA decision. What happened is
that the contract did get rescinded, Equatorial got its money back and asserted that Mayfair have the right to
purchase the lots for 11 million bucks.

Decision became final and executory, so Mayfair deposited with the clerk the 11M (less 847grand withholding)
payment for the properties (Carmelo somehow disappeared).
Meanwhile, on Sept 18, 1997, barely five months after Mayfair submitted its Motion for Execution, Equatorial
demanded from Mayfair backrentals and reasonable compensation for the Mayfair’s continued use of the
subject premises after its lease contracts expired. Remember that Mayfair was still occupying the premises
during all this hullabaloo.

1. WON the sale of the property to Equatorial is valid?

HELD:
The sale is rescissible. Both Carmelo and Equatorial acted in bad faith knowing that a right of
first refusal was agreed upon in the lease contract and Mayfair was an interested buyer of the
property.
 GUZMAN, BOCALING & CO., petitioner -versus- RAOUL S.V. BONNEVIE, respondent
G.R. No. 86150, FIRST DIVISION, March 2, 1992,
CRUZ, J.
Under Article 1380 to 1381(3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by
reason of injury to third persons, like creditors.

In the present case, the Bonnevies could be considered as creditors since they had substantial interests that were
prejudiced by the sale of the subject property to the petitioner without recognizing their right of first priority under the
Contract of Lease.

A purchaser in good faith is one who buys the property of another without notice that some other person has a right to
or interest in such property. Good faith connotes an honest intention to abstain from taking unconscientious advantage
of another.

In the present case, the petitioner admitted that it was aware of the lease in favor of the Bonnevies, who were occupying
the subject property at the time it was sold to it. It had notice of the lease of the property by the Bonnevies and such
knowledge should have cautioned it to look into the agreement to determine if it involved stipulations that would
prejudice its own interests

FACTS:

A parcel of land owned by the Intestate Estate of Jose L. Reynoso was leased to Raoul S. Bonnevie and Christopher
Bonnevie for a period of one year beginning August 8, 1976, at a monthly rental of Php 4,000. The contract of lease
contained a stipulation that the lessees shall be given a first priority to purchase the property in case the lessor decides
to sell the leased property.

On November 3, 1976, Reynoso notified the private respondents that she was selling the leased premises for Php
600,000 less a mortgage loan of Php 100,000 and was giving them 30 days from receipt of the letter to decide whether
they would buy the property or not.

On January 20, 1977, Reynoso informed them that due to their failure to exercise their right of first priority, she had
already sold the property. The private respondents informed Reynoso that they did not received any letter and advised
her agent to inform them officially should she decide to sell the property.

The leased premises were sold to petitioner Guzman, Bocaling & Co. and Reynoso demanded the respondents to vacate
the premises within 15 days for their failure to pay rentals for four months. The parties submitted a Compromise
Agreement in which the Raoul S.V. Bonnevie shall vacate the premises not later than October 31, 1979.

However, Reynoso filed a motion for execution due to the failure of private respondents to comply with the
Compromise Agreement. Private respondent filed a motion to set aside the decision of the City Court as well as the
Compromise Agreement on the ground that Reynoso had not delivered to him the records of payments and receipts of
all rentals by or for the account of defendants.

On April 29, 1980, while the ejectment case was pending, the private respondents filed an action for annulment of the
sale between Reynoso and petitioner Guzman, Bocailing & Co and required Reynoso to sell the property to them under
the same terms and conditions agreed upon in the Contract of Sale in favor of the petitioner.

The Court of Appeals affirmed the decision of the CFI ordering the private respondents to vacate the premises. The
Court of Appeals also considered the petitioner as a buyer in bad faith and ordered Reynoso to execute the deed of sale
in favor of the Bonnevies. Hence, the appeal by the petitioner before the Supreme Court.

ISSUE:
1. Whether or not the contract is not voidable but rescissible. (YES)
2. Whether or not the petitioner is a buyer in bad faith. (YES)

RULING:
I.
Under Article 1380 to 1381(3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded
by reason of injury to third persons, like creditors. In the present case, the Bonnevies could be considered as creditors
since they had substantial interests that were prejudiced by the sale of the subject property to the petitioner without
recognizing their right of first priority under the Contract of Lease.

II.
The acquisition by a third person of the property subject of the contract is an obstacle to the action for its rescission
where it is shown that such third person is in lawful possession of the subject of the contract and that he did not act in
bad faith. A purchaser in good faith is one who buys the property of another without notice that some other person has
a right to or interest in such property. Good faith connotes an honest intention to abstain from taking unconscientious
advantage of another In the present case, the petitioner admitted that it was aware of the lease in favor of the
Bonnevies, who were occupying the subject property at the time it was sold to it. It had notice of the lease of the
property by the Bonnevies and such knowledge should have cautioned it to look into the agreement to determine if it
involved stipulations that would prejudice its own interests.

DOCTRINE
The Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381 (3) of the Civil Code, a contract
otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors.

FACTS
1. The subject of the controversy is a parcel of land with two buildings constructed thereon, belonging to the
Intestate Estate of Jose L. Reynoso.
2. This property was leased to Raoul S. Bonnevie and Christopher Bonnevie by the administratrix, Africa Valdez
de Reynoso, for a period of one year, at a monthly rental of P4,000.00.
3. The Contract of lease contained the following stipulation:
20. — In case the LESSOR desire or decides to sell the lease property, the LESSEES shall be given a first priority
to purchase the same, all things and considerations being equal.
4. According to Reynoso, she notified the private respondents by registered mail that she was selling the
leased premises for P600.000.00 less a mortgage loan of P100,000.00, and was giving them 30 days from
receipt of the letter within which to exercise their right of first priority to purchase the subject property. She
said that in the event that they did not exercise the said right, she would expect them to vacate the property.
5. Reynoso sent another letter to private respondents advising them that in view of their failure to exercise
their right of first priority, she had already sold the property.
6. Private respondents wrote Reynoso informing her that neither of them had received her 1st letter.
7. The leased premises were formally sold to petitioner Guzman, Bocaling & Co. The Contract of Sale provided
for immediate payment of P137,500.00 on the purchase price, the balance of P262,500.00 to be paid only
when the premises were vacated.
8. Reynoso wrote a letter to the private respondents demanding that they vacate the premises within 15 days
for their failure to pay the rentals for four months. When they refuse, Reynoso filed a complaint for ejectment
against them in the City Court of Manila.
9. The parties submitted a Compromise Agreement, which provided inter alia that "the defendant Raoul S.V.
Bonnevie shall vacate the premises subject of the Lease Contract, Voluntarily and Peacefully
10. Respondent failed to comply with the agreement and filed a motion for execution of the judgment by
compromise, which was granted.
11. Respondent filed a motion to set aside the decision of the City Court as well as the Compromise
Agreement on the sole ground that Reynoso had not delivered to him the "records of payments and receipts
of all rentals by or for the account of defendant ..."; denied, elevated to CFI.
12. Both parties agreed to set aside the Compromise Agreement.
13. While the ejectment case was pending in the City Court, the respondent filed an action for annulment of
the sale between Reynoso and herein petitioner Guzman, Bocaling & Co. They also asked that Reynoso be
required to sell the property to them under the same terms ands conditions agreed upon in the Contract of
Sale in favor of the petitioner.
14. City Court decided the ejectment case against the respondents.
15. Appealed to CFI, consolidated the ejectment and annulment case. Respondents were ordered to vacate
but decided that the sale between Reynoso and petitioner as null and void. Reynoso was ordered to in favor to
respondent the deed of sale with mortgage for 400k same terms and conditions as with petitioner.
16. Reynoso and petitioner filed with the CA; affirmed decision of CFI, reduced payment for damages. MR
denied.
17. According to petitioner, the respondent court erred in ruling that the grant of first priority to purchase the
subject properties by the judicial administratrix needed no authority from the probate court; holding that the
Contract of Sale was not voidable but rescissible; considering the petitioner as a buyer in bad faith ordering
Reynoso to execute the deed of sale in favor of the Bonnevie; and not passing upon the counterclaim.

ISSUE/S
1. Was the sale valid?
PROVISIONS
Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)
Article 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever
the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the
object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in
the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them; (4) Those which refer to things under litigation if they have been entered into by
the defendant without the knowledge and approval of the litigants or of competent judicial authority; (5) All
other contracts specially declared by law to be subject to rescission. (1291a)

RULING & RATIO 1. No

 There is no satisfactory proof that the letter was received by the Bonnevies.
 Even if the letter had indeed been sent to and received by the private respondent and they did not exercise
their right of first priority, Reynoso would still be guilty of violating Paragraph 20 of the Contract of Lease
which specifically stated that the private respondents could exercise the right of first priority, "all things and
conditions being equal." The Court reads this mean that there should be identity of the terms and conditions
to be offered to the Bonnevies and all other prospective buyers, with the Bonnevies to enjoy the right of first
priority. (Price offered to respondent 600k; to petitioner, 400k)
 The petitioner argues that assuming the Contract of Sale to be voidable, only the parties thereto could bring
an action to annul it pursuant to Article 1397 of the Civil Code. It is stressed that private respondents are
strangers to the agreement and therefore have no personality to seek its annulment.
 The respondent court correctly held that the Contract of Sale was not voidable but rescissible. Under Article
1380 to 1381 (3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by
reason of injury to third persons, like creditors. The status of creditors could be validly accorded the Bonnevies
for they had substantial interests that were prejudiced by the sale of the subject property to the petitioner
without recognizing their right of first priority under the Contract of Lease.
 According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third
persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by means
of the restoration of things to their condition at the moment prior to the celebration of said contract. It is a
relief allowed for the protection of one of the contracting parties and even third persons from all injury and
damage the contract may cause, or to protect some incompatible and preferent right created by the contract.
Recission implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone
that justifies its invalidation for reasons of equity.
 Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the petitioner cannot
be deemed a purchaser in good faith for the record shows that its categorically admitted it was aware of the
lease in favor of the Bonnevies
 Good faith connotes an honest intention to abstain from taking unconscientious advantage of another.
Tested by these principles, the petitioner cannot tenably claim to be a buyer in good faith as it had notice of
the lease of the property by the Bonnevies and such knowledge should have cautioned it to look deeper into
the agreement to determine if it involved stipulations that would prejudice its own interests.
 We find, in sum, that the respondent court did not commit the errors imputed to it by the petitioner.

The Court has examined the petitioner's contentions and finds them to be untenable.

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

Even if the letter had indeed been sent to and received by the private respondent and they did not exercise their
right of first priority, Reynoso would still be guilty of violating Paragraph 20 of the Contract of Lease which
specifically stated that the private respondents could exercise the right of first priority, "all things and conditions
being equal." The Court reads this mean that there should be identity of the terms and conditions to be offered to
the Bonnevies and all other prospective buyers, with the Bonnevies to enjoy the right of first priority.

The selling price qouted to the Bonnevies was P600,000.00, to be fully paid in cash less only the mortgage lien of
P100,000.00.   On the other hand, the selling price offered to and accepted by the petitioner was only P400,000.00
2

and only P137,500.00 was paid in cash while the balance of P272,500.00 was to be paid "when the property (was)
cleared of tenants or occupants.  3

The fact that the Bonnevies had financial problems at that time was no justification for denying them the first option
to buy the subject property. Even if the Bonnevies could not buy it at the price qouted, Reynoso could not sell it to
another for a lower price and under more favorable terms and conditions. Only if the Bonnevies failed to exercise
their right of first priority could Reynoso lawfully sell the subject property to others, and at that only under the same
terms and conditions offered to the Bonnevies.

The Court agrees with the respondent court that it was not necessary to secure the approval by the probate court of
the Contract of Lease because it did not involve an alienation of real property of the estate nor did the term of the
lease exceed one year so as top make it fall under Article 1878(8) of the Civil Code. Only if Paragraph 20 of the
Contract of Lease was activated and the said property was intended to be sold would it be required of the
administratrix to secure the approval of the probate court pursuant to Rule 89 of the Rules of Court.

As a strict legal proposition, no judgment of the probate court was reviewed and eventually annuled collaterally by
the respondent court as contended by the petitioner. The order authorizing the sale in its favor was duly issued by
the probate court, which thereafter approved the Contract of Sale resulting in the eventual issuance if title in favor of
the petitioner. That order was valid insofar as it recognized the existence of all the essential elements of a valid
contract of sale, but without regard to the special provision in the Contract of Lease giving another party the right of
first priority.

Even if the order of the probate court was valid, the private respondents still had a right to rescind the Contract of
Sale because of the failure of Reynoso to comply with her duty to give them the first opportunity to purchase the
subject property.

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

The respondent court correctly held that the Contract of Sale was not voidable rescissible. Under Article 1380 to
1381 (3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of
injury to third persons, like creditors. The status of creditors could be validly accorded the Bonnevies for they had
substantial interests that were prejudiced by the sale of the subject property to the petitioner without recognizing
their right of first priority under the Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons, to
secure reparation for damages caused to them by a contract, even if this should be valid, by means of the
restoration of things to their condition at the moment prior to the celebration of said contract.   It is a relief allowed for
4

the protection of one of the contracting parties and even third persons from all injury and damage the contract may
cause, or to protect some incompatible and preferent right created by the contract.   Recission implies a contract
5

which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its invalidation for
reasons of equity.  6

It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the action for
its rescission where it is shown that such third person is in lawful possession of the subject of the contract and that
he did not act in bad faith.   However, this rule is not applicable in the case before us because the petitioner is not
7

considered a third party in relation to the Contract of Sale nor may its possession of the subject property be
regarded as acquired lawfully and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the petitioner cannot be
deemed a purchaser in good faith for the record shows that its categorically admitted it was aware of the lease in
favor of the Bonnevies, who were actually occupying the subject property at the time it was sold to it. Although the
Contract of Lease was not annotated on the transfer certificate of title in the name of the late Jose Reynoso and
Africa Reynoso, the petitioner cannot deny actual knowledge of such lease which was equivalent to and indeed
more binding than presumed notice by registration.

A purchaser in good faith and for value is one who buys the property of another without notice that some other
person has a right to or interest in such property and pays a full and fair price for the same at the time of such
purchase or before he has notice of the claim or interest of some other person in the property.  Good faith connotes
8

an honest intention to abstain from taking unconscientious advantage of another.   Tested by these principles, the
9

petitioner cannot tenably claim to be a buyer in good faith as it had notice of the lease of the property by the
Bonnevies and such knowledge should have cautioned it to look deeper into the agreement to determine if it
involved stipulations that would prejudice its own interests.

The petitioner insists that it was not aware of the right of first priority granted by the Contract of Lease, Assuming
this to be true, we nevertherless agree with the observation of the respondent court that:
 If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes Par. 20
on priority right given to the Bonnevies, it had only itself to blame. Having known that the property it
was buying was under lease, it behooved it as a prudent person to have required Reynoso or the
broker to show to it the Contract of Lease in which Par. 20 is contained.

Finally, the petitioner also cannot invoke the Compromise Agreement which it says canceled the right of first priority
granted to the Bonnevies by the Contract of Lease. This agreement was set side by the parties thereto, resulting in
the restoration of the original rights of the private respondents under the Contract of Lease. The Joint Motion to
Remand filed by Reynoso and the private respondents clearly declared inter alia:

That without going into the merits of instant petition, the parties have agreed to SET ASIDE the
compromise agreement, dated September 24, 1979 and remand Civil Case No. 043851 of the City
Court of Manila to Branch IX thereof for trial on the merits. 
10

We find, in sum, that the respondent court did not commit the errors imputed to it by the petitioner. On the contrary,
its decision is conformable to the established facts and the applicable law and jurisprudence and so must be
sustained.

Joinder and mis-joinder of causes of action

ADA VS BAYLON
G.R. NO. 182435, AUGUST 13, 2012
Background of the case:
Spouses Florentino and Maximina Baylon died in 1961 and 1974 respectively. Children: Rita, Victoria, Dolores,
Panfila, Ramon and Lilia, herein petitioner. Dolores died intestate and without issue in 1976. Victoria died in
1981 and was survived by daughter, Luz, herein petitioner. Ramon died intestate in 1989, and was survived by
herein respondent Florante, his child from his first marriage, and Flora his second wife, and their legitimate
children, the other herein
petitioners.

Facts:
Petitioners filed with the RTC a complaint for partition, accounting and damages against Florante, Rita and
Panfila, alleging therein that Spouses Baylon, during their lifetime, owned 43 parcels of land all 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. The petitioners averred that Rita refused to effect
a partition of the said parcels of land.

In their Answer, Florante, Rita and Panfila asserted t hat they and the petitioners co-owned 22 out of the 43
parcels of land mentioned in the latter’s complaint, whereas Rita actually owned parcels of land, 10 out of the
43 parcels which the petitioners sought to partition, while th e remaining parcels of land are separately owned
by Petra Cafino Adanza, Florante, Meliton Adalia, Consorcia Adanza, Lilia & Santiago Mendez. Further, they
claimed that the 2 parcels of land, claimed to be brought from the income produced from the estate of the
late spouses, 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 the 2 above mentioned parcels
of land 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 Pleading, 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.

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.

RTC Decision:
The RTC held that the death of Rita during the pendency of the case, having died intestate and without any
issue, had rendered the issue of ownership insofar as parcels of land which she claims as her own moot since
the parties below are the heirs to her estate. Thus, the RTC regarded Rita as the owner of the said 10 parcels
of land and, accordingly, directed that the same be partitioned among her heirs. Nevertheless, the RTC
rescinded the donation inter vivos in favor of Florante, holding th at the donation inter vivos was executed to
prejudice the plaintiffs’ right to succeed to the estate of Rita in case of death considering that it refers to the
parcels of land in litigation.

Florante sought reconsideration insofar as to the rescission of the donation. The trial court denied the motion.

CA Decision:
On appeal, the CA rendered a decision reversing the RTC decision. The CA remanded the case to RTC for the
determination of ownership of the said 2 parcels of land. The CA held that before the petitioners may file a
rescission, they must first obtain a favorable judicial ruling that the subject 2 parcels of land belonged to the
estate of Spouses Baylon and not to Rita. Until then, an action for rescission is premature.

The petitioners moved for the reconsideration, but it was denied, hence, the instant petition.

Issue:
Whether or not an action for partition and rescission may be joined in a single cause of action.

Held:
NO. There was a misjoinder of causes of action. The action for partition filed by the petitioners could not be
joined with the action for the rescission of the said donation inter vivos in favor of Florante. Lest it be
overlooked, an action for partition is a special civil action governed by Rule 69 of the Rules of Court while an
action for rescission is an ordinary civil action governed by the ordinary rules of civil procedure. The variance
in the procedure in the special civil action of partition and in the ordinary civil action of rescission precludes
their joinder in one complaint or their being tried in a single proceeding to avoid confusion in determining
what rules shall govern the conduct of the proceedings as well as in the determination of the presence of
requisite elements of each particular cause of action.  

By a joinder of actions, or more properly, a joinder of causes of action is meant the uniting of two or more
demands or rights of action in one action, the statement of more than one cause of action in a declaration. It is
the union of two or more civil causes of action, each of which could be made the basis of a separate suit, in
the same complaint, declaration or petition. A plaintiff may under certain circumstances join several distinct
demands, controversies or rights of action in one declaration, complaint or petition.
[29]
 
The objectives of the rule or provision are to avoid a multiplicity of suits where the same parties and subject
matter are to be dealt with by effecting in one action a complete determination of all matters in controversy
and litigation between the parties involving one subject matter, and to expedite the disposition of litigation at
minimum cost. The provision should be construed so as to avoid such multiplicity, where possible, without
prejudice to the rights of the litigants.

Nevertheless, while parties to an action may assert in one pleading, in the alternative or otherwise, as many
causes of action as they may have against an opposing party, such joinder of causes of action is subject to the
condition, inter alia, that the joinder shall not include special civil actions governed by special rules.

Disposition: WHEREFORE, in consideration of the foregoing disquisitions, the petition is PARTIALLY GRANTED.

NOTES:
 A misjoined cause of action, if not severed upon motion of a or by the court sua sponte, may be adjudicated
by the court together with the other causes of action; not a ground for dismissal  
 A supplemental pleading may raise a new cause of action as long as it has some relation to the original cause
of action set forth in the original complaint  
 The purpose of supplemental pleading is to bring into the records new facts which will enlarge or change the
kind of relief to which the plaintiff is entitled; hence, any supplemental facts which further develop the original
right of action, or extend to vary the relief, are available by way of supplemental complaint even though they
themselves constitute a right of action.

AIR FRANCE vs. HONORABLE COURT OF APPEALS,

G.R. NO. 104234 June 30, 1995

FACTS:
A court judgment was held in favor of petitioner, Air France against Multinational Travel
Corporation of the Philippines, Fiorello Panopio and Vicky Panopio, the private respondents, who were
held jointly and severally liable. However, judgment was unsatisfied, thus, Air France issued an alias writ of
execution and further alleged that the private respondent spouses sold a property to a certain
Iolani Dionisio registered in the name of Multinational Food and Catering Corporation where the
private respondent spouses were said to own91% of its share, thus, viewed as made to defraud the creditors.

ISSUE: WON the contract between Multinational Food and Iolani Dionisio is rescissible.

HELD: No, the contract cannot be determined as rescissible in the present case instead an independent
action is necessary to prove that the contract is rescissible. Under Article 1389 of the Civil
Code, an "accion pauliana", the action to rescind contracts made in favor of creditors, must be
commenced within four years. The rights and defenses which the parties in a rescissible contract may
raise or setup cannot be properly discussed in a motion but only in a full trial.

SAMUEL U. LEE AND PAULINE LEE AND ASIA TRUST DEVELOPMENT BANK, INC. VS. BANGKOK
BANK PUBLIC COMPANY, LIMITED
G.R. NO. 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. MDEC and MHI are
owned and controlled by the Lee family: Thelma U. Lee, Maybelle L. Lim, Daniel U. Lee and Samuel U. Lee
(Samuel). MDEC was likewise granted by Asiatrust Development Bank, Inc. a loan facility having an available
credit line of P40,000,000 for letters of credit, advances on bills and export packing; and a separate credit line
of US$2,000,000 for bills purchase.

Samuel bought several parcels of land in Cupang, Antipolo, and later entered into a joint venture with
Louisville Realty and Development Corporation to develop the properties into a residential subdivision. When
MDEC defaulted on the payment of its loan, the spouses Samuel and Pauline Lee executed a real estate
mortgage (REM) over the properties in favor of Asiatrust.

Eventually, the Lee corporations defaulted in their obligations with other creditors. MDEC, MHI, and three
other corporations owned by the Lee family filed before the Securities and Exchange Commission (SEC) a
Consolidated Petition for the Declaration of a State of Suspension of Payments and for Appointment of a
Management Committee/Rehabilitation Receiver. The SEC issued a Suspension Order enjoining the Lee
corporations from disposing of their property in any manner except in the ordinary course of business, and
from making any payments outside the legitimate expenses of their business during the pendency of the
petition.

Bangkok Bank filed an action before the Regional Trial Court (RTC) to recover the loans extended to MDEC and
MHI under the guarantees. The RTC dismissed the case. The Court of Appeals (CA), however, reversed and set
aside the RTC decision.

ISSUE:
Were the REM executed over the subject Antipolo properties and the foreclosure sale committed in fraud of
petitioners’ other creditors such that, as a consequence of such fraud, the questioned mortgage could,
therefore, be rescinded?

HELD: No. The presumption of fraud established under Article 1387 does not apply to registered lands if the
judgment or attachment made is not also registered. Even assuming that Article 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 Article 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. This term is particularly
applied to absolute conveyances of real property and must involve a complete transfer from one person to
another. A mortgage does not contemplate a transfer or an absolute conveyance of a real property. 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. When a debtor mortgages his property, he merely subjects it to a lien but ownership
thereof is not parted with. It is merely a lien that neither creates a title nor an estate. It is, therefore, certainly
not the alienation by onerous title that is contemplated in Article 1387 where fraud is to be presumed.

Maria Antonia Siguan vs. Rosa Lim, Linde Lim, Ingrid Lim and Neil Lim
G.R. No. 134685 November 19, 1999

FACTS:
On 25 and 26 August 1990, Rosa Lim issued two Metrobank checks in the sums of P300,000 and P241,668. The
checks were dishonored for the reason “account closed” when petitioner Maria Antonia Siguan presented the
checks with the drawee bank. Demands to make good the checks proved futile such that petitioner filed a
criminal case for violation of B.P. 22 against Lim. The court a quo convicted Lim as charged.
On 2 July 1991, a Deed of Donation conveying parcels of land and purportedly executed by Lim on 10 August
1989 in favor of her children, Linde, Ingrid and Neil, was registered with the Office of the Register of Deeds of
Cebu City. New transfer certificates of title were thereafter issued in the names of the donees.

On 23 June 1993, petitioner filed an accion pauliana against Lim and her children before Branch 18 of the
Regional Trial Court (RTC) of Cebu City to rescind the questioned Deed of Donation and to declare as null and
void the new transfer certificates of title issued for the lots covered by the questioned Deed. Petitioner
claimed Lim, through the Deed of Donation, fraudulently transferred all her real property to her children in
bad faith and in fraud of creditors, including her; that Lim conspired and confederated with her children in
antedating the questioned Deed of Donation, to petitioner’s and other creditors’ prejudice; and that Lim, at
the time of the fraudulent conveyance, left no sufficient properties to pay her obligations.

The trial court ordered the rescission of the questioned deed of donation; declared null and void the transfer
certificates of title issued in the names of private respondents Linde, Ingrid and Neil Lim; ordered the Register
of Deeds of Cebu City to cancel said titles and to reinstate the previous titles in the name of Rosa Lim; and
directed the Lims to pay the petitioner, jointly and severally, the sum of P10,000 as moral damages; P10,000
as attorney’s fees; and P5,000 as expenses of litigation. On appeal, the Court of Appeals reversed the decision
of the trial court.

ISSUE: May the Deed of Donation executed by respondent Rosa Lim in favor of her children be rescinded for being in
fraud of her alleged creditor, petitioner Maria Antonia Siguan?

HELD:
No. Article 1381 of the Civil Code enumerates the contracts which are rescissible, and among them are those
contracts undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due
them.

The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the following
requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation, 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.

The general rule is that rescission requires the existence of creditors at the time of the alleged fraudulent
alienation, and this must be proved as one of the bases of the judicial pronouncement setting aside the
contract. Without any prior existing debt, there can neither be injury nor fraud. While it is necessary that the
credit of the plaintiff in the accion pauliana must exist prior to the fraudulent alienation, the date of the
judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely
declaratory, with retroactive effect to the date when the credit was constituted.

In the instant case, the alleged debt of Lim in favor of petitioner was incurred in August 1990, while the deed
of donation was purportedly executed on 10 August 1989. The Court is not convinced with petitioner’s
allegation that the questioned deed was antedated to make it appear that it was made prior to petitioner’s
credit. That deed is a public document, it having been acknowledged before a notary public. As such, it is
evidence of the fact which gave rise to its execution and of its date, pursuant to Section 23, Rule 132 of the
Rules of Court.
 MARIA ANTONIA SIGUAN, petitioner, VS. ROSA LIM, LINDE LIM, INGRID LIM and NEIL LIM,
respondents
1999 Nov 19 G.R. No. 134685
FACTS:
On 25 and 26 August 1990, Lim issued two Metrobank checks in the sums of P300,000 and P241,668,
respectively, payable to "cash." Upon presentment by petitioner with the drawee bank, the checks were
dishonored for the reason "account closed." Demands to make good the checks proved futile. As a
consequence, a criminal case for violation of Batas Pambansa Blg. 22, docketed as Criminal Cases Nos. 22127-
28, were filed by petitioner against LIM with Branch 23 of the Regional Trial Court (RTC) of Cebu City.

In its decision dated 29 December 1992, the court a quo convicted Lim as charged. The case is pending before
this Court for review and docketed as G.R. No. 134685. It also appears that on 31 July 1990, Lim was convicted
of estafa by the RTC of Quezon City in Criminal Case No. Q-89-22162 filed by a certain Victoria Suarez. This
decision was affirmed by the Court of Appeals. On appeal, however, the Supreme Court, in a decision
promulgated on 7 April 1997, acquitted Lim but held her civilly liable in the amount of P169,000, as actual
damages, plus legal interest.

Meanwhile, on 2 July 1991, a Deed of Donation conveying parcels of land and purportedly executed by Lim on
10 August 1989 in favor of her children, Linde, Ingrid and Neil, was registered with the Office of the Register of
Deeds of Cebu City. New transfer certificates of title were thereafter issued in the names of the donees.

On 23 June 1993, petitioner filed an accion pauliana against Lim and her children before Branch 18 of the RTC
of Cebu City to rescind the questioned Deed of Donation and to declare as null and void the new transfer
certificates of title issued for the lots covered by the questioned Deed. The complaint was docketed as Civil
Case No. CEB-14181. Petitioner claimed therein that sometime in July 1991, Lim, through a Deed of Donation,
fraudulently transferred all her real property to her children in bad faith and in fraud of creditors, including
her; that Lim conspired and confederated with her children in antedating the questioned Deed of Donation, to
petitioner's and other creditors' prejudice; and that Lim, at the time of the fraudulent conveyance, left no
sufficient properties to pay her obligations.

On the other hand, Lim denied any liability to petitioner. She claimed that her convictions in Criminal Cases
Nos. 22127-28 were erroneous, which was the reason why she appealed said decision to the Court of Appeals.
As regards the questioned Deed of Donation, she maintained that it was not antedated but was made in good
faith at a time when she had sufficient property. Finally, she alleged that the Deed of Donation was registered
only on 2 July 1991 because she was seriously ill.

In its decision of 31 December 1994 the trial court ordered the rescission of the questioned deed of donation;
(2) declared null and void the transfer certificates of title issued in the names of private respondents Linde,
Ingrid and Neil Lim; (3) ordered the Register of Deeds of Cebu City to cancel said titles and to reinstate the
previous titles in the name of Rosa Lim; and (4) directed the LIMs to pay the petitioner, jointly and severally,
the sum of P10,000 as moral damages; P10,000 as attorney's fees; and P5,000 as expenses of litigation.

On appeal, the Court of Appeals, in a promulgated on 20 February 1998, reversed the decision of the trial
court and dismissed petitioner's accion pauliana. It held that two of the requisites for filing an accion pauliana
were absent, namely, (1) there must be a credit existing prior to the celebration of the contract; and (2) there
must be a fraud, or at least the intent to commit fraud, to the prejudice of the creditor seeking the rescission.
According to the Court of Appeals, the Deed of Donation, which was executed and acknowledged before a
notary public, appears on its face to have been executed on 10 August 1989. Under Section 23 of Rule 132 of
the Rules of Court, the questioned Deed, being a public document, is evidence of the fact which gave rise to its
execution and of the date thereof. No antedating of the Deed of Donation was made, there being no
convincing evidence on record to indicate that the notary public and the parties did antedate it.

Since Lim's indebtedness to petitioner was incurred in August 1990, or a year after the execution of the Deed
of Donation, the first requirement for accion pauliana was not met.

Anent petitioner's contention that assuming that the Deed of Donation was not antedated it was nevertheless
in fraud of creditors because Victoria Suarez became Lim’s creditor on 8 October 1987, the Court of Appeals
found the same untenable, for the rule is basic that the fraud must prejudice the creditor seeking the
rescission.

ISSUE: Whether or not the deed of donation is valid.

RULING:
The Supreme Court upheld the validity of the deed of donation.

Article 1381 of the Civil Code enumerates the contracts which are rescissible, and among them are "those
contracts undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due
them."

The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to prosper, the
following requisites must be present: (1) the plaintiff asking for rescission has a credit prior to the alienation,
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.

The general rule is that rescission requires the existence of creditors at the time of the alleged fraudulent
alienation, and this must be proved as one of the bases of the judicial pronouncement setting aside the
contract. Without any prior existing debt, there can neither be injury nor fraud. While it is necessary that the
credit of the plaintiff in the accion pauliana must exist prior to the fraudulent alienation, the date of the
judgment enforcing it is immaterial. Even if the judgment be subsequent to the alienation, it is merely
declaratory, with retroactive effect to the date when the credit was constituted.

In the instant case, the alleged debt of Lim in favor of petitioner was incurred in August 1990, while the deed
of donation was purportedly executed on 10 August 1989. The Supreme Court is not convinced with the
allegation of the petitioner that the questioned deed was antedated to make it appear that it was made prior
to petitioner's credit. Notably, that deed is a public document, it having been acknowledged before a notary
public. As such, it is evidence of the fact which gave rise to its execution and of its date, pursuant to Section
23, Rule 132 of the Rules of Court.

In the present case, the fact that the questioned Deed was registered only on 2 July 1991 is not enough to
overcome the presumption as to the truthfulness of the statement of the date in the questioned deed, which
is 10 August 1989. Petitioner's claim against Lim was constituted only in August 1990, or a year after the
questioned alienation. Thus, the first two requisites for the rescission of contracts are absent.
Even assuming arguendo that petitioner became a creditor of Lim prior to the celebration of the contract of
donation, still her action for rescission would not fare well because the third requisite was not met. Under
Article 1381 of the Civil Code, contracts entered into in fraud of creditors may be rescinded only when the
creditors cannot in any manner collect the claims due them. Also, Article 1383 of the same Code provides that
the action for rescission is but a subsidiary remedy which cannot be instituted except when the party suffering
damage has no other legal means to obtain reparation for the same. The term "subsidiary remedy" has been
defined as "the exhaustion of all remedies by the prejudiced creditor to collect claims due him before
rescission is resorted to." It is, therefore, essential that the party asking for rescission prove that he has
exhausted all other legal means to obtain satisfaction of his claim. Petitioner neither alleged nor proved that
she did so. On this score, her action for the rescission of the questioned deed is not maintainable even if the
fraud charged actually did exist." The fourth requisite for an accion pauliana to prosper is not present either.

KHE HONG CHENG, ALIAS FELIX KHE, SANDRA JOY KHE AND RAY STEVEN KHE VS. COURT OF APPEALS, HON.
TEOFILO GUADIZ, RTC 147, MAKATI CITY AND PHILAM INSURANCE CO., INC.
G.R. NO. 144169 MARCH 28, 2001

FACTS:
Petitioner Khe Hong Cheng is the owner of Butuan Shipping Lines. On or about October 4, 1985, the Philippine
Agricultural Trading Corporation shipped on board the vessel M/V Prince Eric, owned by petitioner, 3,400 bags
of copra at Masbate, Masbate, for delivery to Dipolog City, Zamboanga del Norte. The said shipment was
covered by a marine insurance policy issued by American Home Insurance Company (respondent Philam’s
assured). M/V Prince Eric 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,
which was the equivalent value of the copra, to the consignee.

Having been subrogated into the rights of the consignee, American Home instituted a civil case to recover the
money paid to the consignee, based on breach of contract of carriage. While the case was still pending,
petitioner Khe Hong Cheng executed deeds of donations of parcels of land in favor of his children, co-
petitioners Sandra Joy and Ray Steven.

The trial court rendered judgment against petitioner Khe Hong Cheng in the civil case filed by American Home
four years after the donations were made and the transfer certificates of title were registered in the donees’
names. After the decision became final and executory, a writ of execution was issued but was not served. An
alias writ of execution was, thereafter, applied for and granted. Despite earnest efforts, the sheriff found no
property under the name of Butuan Shipping Lines and/or petitioner Khe Hong Cheng to levy or garnish for the
satisfaction of the trial court’s decision. When the sheriff, accompanied by counsel of respondent Philam,
went to Butuan City, however, they discovered that petitioner no longer had any property and that he had
conveyed the subject properties to his children.

Respondent Philam filed a complaint with the Regional Trial Court (RTC) of Makati City, Branch 147, for the
rescission of the deeds of donation executed by petitioner Khe Hong Cheng in favor of his children and for the
nullification of their titles. Respondent alleged, inter alia, that petitioner Khe Hong Cheng executed the
aforesaid deeds in fraud of his creditors, including respondent Philam. The trial court ruled in favor of Philam.
The Court of Appeals (CA) affirmed the trial court’s decision.

ISSUE: Has the action to rescind the donations prescribed?

HELD:
No. 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.

It is the legal possibility of bringing the action which determines the starting point for the computation of the
prescriptive period for the action. Moreover, 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.

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 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.

CARMELA BROBIO MANGAHAS VS. EUFROCINA A. BROBIO

G.R. NO. 183852 OCTOBER 20, 2010

FACTS:
Pacifico S. Brobio died intestate, leaving three parcels of land. He was survived by his wife, respondent
Eufrocina A. Brobio, and four legitimate and three illegitimate children. Petitioner Carmela Brobio Mangahas is
one of the illegitimate children.

The heirs of the deceased executed a Deed of Extrajudicial Settlement of Estate of the Late Pacifico Brobio
with Waiver in which petitioner and Pacifico’s other children waived and ceded their respective shares over
the three parcels of land in favor of respondent. Petitioner alleges that respondent promised to give her an
additional amount for her share in her father’s estate but, after the signing of the Deed, respondent refused to
pay, claiming that she had no more money.
A year later, while processing her tax obligations, respondent was required to submit an original copy of the
Deed. Left with no more original copy of the Deed, respondent asked petitioner to countersign a copy of the
Deed but petitioner refused and demanded that respondent first give her the additional amount that she
promised. Because respondent did not have the money at that time and petitioner refused to countersign the
Deed without any assurance that the amount would be paid, respondent executed a promissory note.
Petitioner agreed to sign the Deed when respondent signed the promissory note.

When the promissory note fell due, respondent failed and refused to pay despite demand. Petitioner made
several more demands upon respondent but the latter kept on insisting that she had no money. Petitioner
thus filed a Complaint for Specific Performance with damages against respondent. The Regional Trial Court
(RTC) rendered a decision in favor of petitioner. The Court of Appeals (CA) reversed the RTC decision and
dismissed the complaint.

ISSUE: Is the promissory note void for lack of consent and consideration?

HELD:
No. Contracts are voidable where consent thereto is given through mistake, violence, intimidation, undue
influence, or fraud. In determining whether consent is vitiated by any of these circumstances, courts are given
a wide latitude in weighing the facts or circumstances in a given case and in deciding in favor of what they
believe actually occurred, considering the age, physical infirmity, intelligence, relationship, and conduct of the
parties at the time of the execution of the contract and subsequent thereto, irrespective of whether the
contract is in a public or private writing.

Nowhere is it alleged that mistake, violence, fraud, or intimidation attended the execution of the promissory
note. Still, respondent insists that she was “forced” into signing the promissory note because petitioner would
not sign the document required by the BIR. In one case, the Court – in characterizing a similar argument by
respondents therein – held that such allegation is tantamount to saying that the other party exerted undue
influence upon them. However, the Court said that the fact that respondents were “forced” to sign the
documents does not amount to vitiated consent.

There is undue influence when a person takes improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice. For undue influence to be present, the influence
exerted must have so overpowered or subjugated the mind of a contracting party as to destroy his free
agency, making him express the will of another rather than his own.

Respondent may have desperately needed petitioner’s signature on the Deed, but there is no showing that
she was deprived of free agency when she signed the promissory note. Being forced into a situation does not
amount to vitiated consent where it is not shown that the party is deprived of free will and choice.
Respondent still had a choice: she could have refused to execute the promissory note and resorted to judicial
means to obtain petitioner’s signature. Instead, respondent chose to execute the promissory note to obtain
petitioner’s signature, thereby agreeing to pay the amount demanded by petitioner.

BROBIO MANGAHAS V. BROBIO G.R. NO. 183852, OCTOBER 20, 2010

PONENTE: NACHURA, J.
TOPIC: INTIMIDATION - ART. 1335 -1336

FACTS:
Pacifico S. Brobio died intestate, leaving three parcels of land. He was survived by his wife, respondent
Eufrocina A. Brobio, and four legitimate and three illegitimate children; petitioner Carmela Brobio Mangahas is
one of the illegitimate children.

The heirs signed a deed of extrajudicial settlement of the estate of the Late Pacifico with waiver of any share in
said three parcel of land. Respondent promised petitioner that the former will give the latter some share
thereon. A year later, respondent was asked by the BIR to submit an original copy of the deed. Respondent
asked petitioner to sign the deed however petitioner told respondent that she will sign only if she will give her
the additional money she promised as her share in the estate in the amount of P1,000,000.00. Respondent
bargained until the reduced amount of P600,000.00 was agreed. Since respondent has no money at that time,
she executed a promissory note. When the due date came, respondent refused to pay. Petitinor sued. The
defense of respondent was there was no consent since she was just forced to sign the promissory note and
there was no consideration.

ISSUE: Whether or not the promissory note was void for lack of consent

HELD: Nowhere is it alleged that mistake, violence, fraud, or intimidation attended the execution of the
promissory note. Still, respondent insists that she was “forced” into signing the promissory note because
petitioner would not sign the document required by the BIR.

Respondent may have desperately needed petitioner’s signature on the Deed, but there is no showing that
she was deprived of free agency when she signed the promissory note. Being forced into a situation does not
amount to vitiated consent where it is not shown that the party is deprived of free will and choice.
Respondent still had a choice: she could have refused to execute the promissory note and resorted to judicial
means to obtain petitioner’s signature. Instead, respondent chose to execute the promissory note to obtain
petitioner’s signature, thereby agreeing to pay the amount demanded by petitioner.

The fact that respondent may have felt compelled, under the circumstances, to execute the promissory note
will not negate the voluntariness of the act. As rightly observed by the trial court, the execution of the
promissory note in the amount of P600,000.00 was, in fact, the product of a negotiation between the parties.

Cornelia M. Hernandez vs. Cecilio F. Hernandez

G.R. No. 158576 March 9, 2011

FACTS:
The Republic of the Philippines, through the Department of Public Works and Highways (DPWH), offered to
purchase a portion of a parcel of land with an area of 80,133 square meters and located at San Rafael, Sto.
Tomas, Batangas, for use in the expansion of the South Luzon Expressway. The land is pro-indiviso owned by
petitioner Cornelia M. Hernandez; Atty. Jose M. Hernandez, deceased father of respondent Cecilio F.
Hernandez represented by Paciencia Hernandez; and Mena Hernandez, also deceased and represented by her
heirs.

After a series of negotiations with the DPWH, the last offer made by the government stood at P70.00 per
square meter. The owners did not accept the offer, prompting the government to file an expropriation case.
Cornelia, and her other co-owners executed an irrevocable Special Power of Attorney (SPA) appointing Cecilio
Hernandez as their “true and lawful attorney” with respect to the expropriation of the subject property. The
SPA stated that the authority shall continue to be binding all throughout the negotiation, and shall bind all
successors and assigns in regard to any negotiation with the government until its consummation and binding
transfer of a portion to be sold to that entity with Cecilio as the sole signatory in regard to the rights and
interests of the signatories therein. There was no mention of the compensation scheme for Cecilio.

The just compensation for the condemned properties was fixed subsequently, with Cornelia’s share
amounting to P7,321,500, the amount a pro-indiviso owner is to receive. At this point, Cecilio’s SPA was
revoked by Cornelia. However, Cornelia received from Cecilio a check amounting to P1,123,000. The check
was accompanied by a Receipt and Quitclaim document in favor of Cecilio stating that: (1) the amount
received will be the share of Cornelia in the just compensation paid by the government in the expropriated
property; (2) in consideration of the payment, it will release and forever discharge Cecilio from any action,
damages, claims or demands; and (3) Cornelia will not institute any action and will not pursue her complaint
or opposition to the release to Cecilio or his heirs or assigns.

After she learned of her true share in the expropriation proceedings, Cornelia, through a letter, demanded the
accounting of the proceeds.The letter was left unanswered. She then decided to have the courts settle the
issue. A Complaint for the Annulment of Quitclaim and Recovery of Sum of Money and Damages was filed
before the Regional Trial Court (RTC). Cecilio was declared in default, but this was reversed by the Court of
Appeals (CA).

ISSUE:
Did the Court of Appeals err in holding the validity of the receipt and quitclaim document?

HELD:
Yes. The service contract gave Cecilio compensation based on the 1998 skyrocketed price that essentially will
give Cecilio 83.07% of the just compensation due Cornelia as the co-owner of the land. No evidence on record
showed that Cornelia agreed to give Cecilio 83.07% of the proceeds of the sale of her land. Furthermore,
quitclaims are also contracts and can be voided if there was fraud or intimidation that leads to lack of consent.
The facts show that a simple accounting of the proceeds of the just compensation will be enough to satisfy the
curiosity of Cornelia. However, Cecilio did not disclose the truth and instead of coming up with the request of
his aunt, he made a contract intended to bar Cornelia from recovering any further sum of money from the sale
of her property.

Moreover, when Cecilio accepted the position as commissioner, he created a barrier that prevented his
performance of his duties under the SPA. Cecilio could not have been a hearing officer and a defendant at the
same time. Indeed, Cecilio foisted fraud on both the Court and the Hernandezes when, after his appointment
as commissioner, he accepted the appointment by the Hernandezes to “represent” and “sue for” them.

A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is
voidable. In determining whether consent is vitiated by any of the circumstances mentioned, courts are given
a wide latitude in weighing the facts or circumstances in a given case and in deciding in their favor what they
believe to have actually occurred, considering the age, physical infirmity, intelligence, relationship, and the
conduct of the parties at the time of the making of the contract and subsequent thereto, irrespective of
whether the contract is in public or private writing. In order that mistake may invalidate consent, it should
refer to the substance of the thing which is the object of the contract, or those conditions which have
principally moved one or both parties to enter the contract.

Manuel O. Fuentes and Leticia L. Fuentes vs. Conrado G. Roca, Annabelle R. Joson, Rose
Marie R. Cristobal and Pilar Malcampo
G.R. No. 178902 April 21, 2010
FACTS:
On, Oct 11, 1982, Tarciano Roca bought a 358-square meter lot in Zambales from his mother. In 1988,
Tarciano offered to sell the lot to petitioners Fuentes spouses through the help of Atty. Romulo D. Plagata who
would prepare the documents and requirements to complete the sale. Their agreement stipulated that the
Fuentes spouses will pay a down payment of P60,000, and another P140,000 will be paid upon the removal of
Tarciano of certain structures on the land and after the consent of Tarciano’s estranged wife, Rosario, is
attained. Atty. Plagata went to Manila to get Rosario’s signature but notarized the document in Zamboanga .
The deed of sale was executed January 11, 1989.

When Tarciano and Rosario died, their children filed a case to annul the sale and reconvey the property on
grounds that the sale was void since Rosario’s consent was not attained and that Rosario’s signature was a
mere forgery. The Fuentes spouses claimed that the action had prescribed since an action to annul a sale on
the ground of fraud is four years from discovery. The Regional Trial Court (RTC) ruled in favor of the Fuentes
spouses. The Court of Appeals (CA) reversed the RTC ruling.

ISSUE: Has the Rocas’ action for the declaration of nullity of sale to the spouses already prescribed?

HELD:
No. The law that applies to this case is the Family Code, not the Civil Code. Although Tarciano and Rosario got
married in 1950, Tarciano sold the conjugal property to the Fuentes spouses on January 11, 1989, a few
months after the Family Code took effect on August 3, 1988. The provisions of the Family Code apply to
Conjugal Partnerships already established at the enactment of the Family Code.

In contrast to Article 173 of the Civil Code which gives the wife right to have the sale annulled during the
marriage within ten years from the date of the sale, Article 124 of the Family Code does not provide a period
within which the wife who gave no consent may assail her husband’s sale of the real property. It simply
provides that without the other spouse’s written consent or a court order allowing the sale, the same would
be void. The passage of time did not erode the right to bring such an action.

Rosario L. de Braganza, et. al. vs. Fernando F. de Villa Abrille G.R. No. L-12471 April 13, 1959
FACTS: Rosario Braganza and her sons loaned from De Villa Abrille P70,000 in Japanese war notes and, in
consideration thereof, promised in writing to pay him P10,000 plus 2% per annum in legal currency of the
Philippines two years after the cessation of the war. Payment, however, was not made and Abrille instituted a
suit. The Manila Court of First Instance and Court of Appeals held the family solidarily liable to pay according
to the contract they signed despite the fact that Guillermo and Rodolfo were minors .

ISSUE: Are Rosario’s sons, who were 16 and 18 respectively, bound by the contract of loan that they signed?

HELD:
No. Being minors, Rodolfo and Guillermo could not be legally bound by their obligation. However, these
minors may not be entirely absolved from monetary responsibility. In accordance with the provisions of Civil
Code, even if their written contact is unenforceable because of non-age, they shall make restitution to the
extent that they have profited by the money they received. There is testimony that the funds delivered to
them by Villa Abrille were used for their support during the Japanese occupation. Such being the case, it is but
fair to hold that they had profited to the extent of the value of such money.

EFFECTS OF ANNULMENT OF VOIDABLE CONTRACTS

BRAGANZA VS. VILLA ABRILLE 105 PHIL 456

FACTS:
Petitioners Braganza and her two sons, Rodolfo and Guillermo appears to have received from Villa Abrille, as a
loan, on October 30, 1944 P70, 000 in Japanese war note and in consideration thereof, promised in writing to
pay him P10, 000 in legal currency on the P.I. two years after the cessation of the present hostilities or as soon
as International Exchange has been established in the Philippines, plus 2% per annum.

Because of no payment had been made, Abrille sued them on March 1949. In their answer, defendants
claimed to have received P40, 000 only instead of P70, 000 as plaintiff asserted. Also they raised the defense
of minority because at the time they signed the promissory notes, Rodolfo and Guillermo were only 16 and 18
yrs. of age. The lower court rendered judgment whereby the defendants were required solidarily to pay Abrille
the sum of P10, 000 plus 2% interest from October 30, 1944, which was affirmed by the CA.

ISSUE: Whether or not petitioners are excused from complying with their monetary obligation on account of
minority of the two consigners.

RULING: NO. Petitioners are not absolved from monetary responsibility. In accordance with the provisions of
the Civil Code, even if the contract is unenforceable because of non-age, they shall make restitution to the
extent that they may have profited by the money they received. There is testimony that the funds delivered to
them by Abrille were used for their support during the Japanese occupation. Such being the case, it is but fair
to hold that they had profited to the extent of the value of such money, which value has been authoritatively
established in the so-called Ballantine Schedule: in October 1944, P40.00 Japanese notes were equivalent to
P1.00 of current Philippine money.

JULIAN FRANCISCO vs. PASTOR HERRERA G.R. No. 139982 November 21, 2002

Facts
Eligio Herrera, Sr., the father of respondent, was the owner of two parcels of land. On January 3, 1991,
petitioner bought from said landowner the first parcel for the price of P1,000,000, paid in installments from
November 30, 1990 to August 10, 1991. On March 12, 1991, petitioner bought the second parcel for P750,000.

Contending that the contract price for the two parcels of land was grossly inadequate, the children of Eligio,
Sr., namely, Josefina Cavestany, Eligio Herrera, Jr., and respondent Pastor Herrera, tried to negotiate with
petitioner to increase the purchase price. When petitioner refused, herein respondent then filed a complaint
for annulment of sale, with the RTC of Antipolo City. In his complaint, respondent claimed ownership over the
second parcel, allegedly by virtue of a sale in his favor since 1973. He likewise claimed that the first parcel was
subject to the co-ownership of the surviving heirs of Francisca A. Herrera, the wife of Eligio, Sr., considering
that she died intestate on April 2, 1990, before the alleged sale to petitioner. Finally, respondent also alleged
that the sale of the two lots was null and void on the ground that at the time of sale, Eligio, Sr. was already
incapacitated to give consent to a contract because he was already afflicted with senile dementia,
characterized by deteriorating mental and physical condition including loss of memory.

In his answer, petitioner as defendant below alleged that respondent was estopped from assailing the sale of
the lots. Petitioner contended that respondent had effectively ratified both contracts of sales, by receiving the
consideration offered in each transaction.
The trial court declared the Deeds of Sale null and void. Francisco was ordered to return the lots in question
including all improvements. Concomitantly, Herrera was ordered to return the purchase price of the lots sold.
This was affirmed by the Court of Appeals.

Issue
Whether or not the assailed contracts of sale are void or merely voidable and hence capable of being ratified

RULING
In the present case, it was established that the vendor Eligio, Sr. entered into an agreement with petitioner,
but that the former’s capacity to consent was vitiated by senile dementia. Hence, we must rule that the
assailed contracts are not void or inexistent per se; rather, these are contracts that are valid and binding
unless annulled through a proper action filed in court seasonably.

An annullable contract may be rendered perfectly valid by ratification, which can be express or implied.
Implied ratification may take the form of accepting and retaining the benefits of a contract. This is what
happened in this case. Respondent’s contention that he merely received payments on behalf of his father
merely to avoid their misuse and that he did not intend to concur with the contracts is unconvincing. If he was
not agreeable with the contracts, he could have prevented petitioner from delivering the payments, or if this
was impossible, he could have immediately instituted the action for reconveyance and have the payments
consigned with the court. None of these happened. As found by the trial court and the Court of Appeals, upon
learning of the sale, respondent negotiated for the increase of the purchase price while receiving the
installment payments. It was only when respondent failed to convince petitioner to increase the price that the
former instituted the complaint for reconveyance of the properties. Clearly, respondent was agreeable to the
contracts, only he wanted to get more. Further, there is no showing that respondent returned the payments
or made an offer to do so. This bolsters the view that indeed there was ratification. One cannot negotiate for
an increase in the price in one breath and in the same breath contend that the contract of sale is void.

Nor can we find for respondent’s argument that the contracts were void as Eligio, Sr., could not sell the lots in
question as one of the properties had already been sold to him, while the other was the subject of a co-
ownership among the heirs of the deceased wife of Eligio, Sr. Note that it was found by both the trial court
and the Court of Appeals that Eligio, Sr., was the "declared owner" of said lots. This finding is conclusive on us.
As declared owner of said parcels of land, it follows that Eligio, Sr., had the right to transfer the ownership
thereof under the principle of jus disponendi.

In sum, the appellate court erred in sustaining the judgment of the trial court that the deeds of sale of the two
lots in question were null and void.

THE ROMAN CATHOLIC CHURCH v PANTE

G.R. No. 174118, 11 April 2012

The Church, represented by the Archbishop of Caceres, owned a 32-square meter lot located in Camarines
Sur. The Church contracted with respondent Regino Pante for the sale of the lot on the belief that the latter
was an actual occupant of the lot. The contract between them fixed the purchase price at P11,200.00, with the
initial P1,120.00 payable as down payment, and the remaining balance payable in three years. However, on a
later date, the Church sold in favor of the spouses Rubi a 215-square meter lot that included the lot previously
sold to Pante. The spouses Rubi asserted their ownership by erecting a concrete fence over the lot sold to
Pante, blocking the passage of Pante’s home. Pante instituted with the RTC an action to annul the sale
between the Church and the spouses Rubi. The Church 􏰀led its answer, seeking the annulment of its contract
with Pante. The Church alleged that its consent to the contract was obtained by fraud when Pante, in bad faith,
misrepresented that he had been an actual occupant of the lot sold to him. (making it voidable) RTC ruled in
favor of the Church, fi􏰀nding that the Church's consent to the sale was secured through Pante's
misrepresentation. Pante appealed to the CA - reversed the decision of RTC (valid daw kung sale between
pants and the church) Hence this petition.

ISSUE: (1) WON the contract between the Church and Pante is voidable? – No, it is valid. No
misrepresentation happened.

HELD/RATIO:

 Contract is valid, there was no vitiation of consent to make the contract voidable. The SC stated that there
could not have been a deliberate, willful, or fraudulent act committed by Pante that misled the Church into
giving its consent to the sale of the subject lot in his favor. That Pante was not an actual occupant of the lot he
purchased was a fact that the Church either ignored or waived as a requirement. In any case, the Church was
by no means led to believe or do so by Pante's act; there had been no vitiation of the Church's consent to the
sale of the lot to Pante.

 Contrary to the Church's contention, the actual occupancy or residency of a buyer over the land does not
appear to be a necessary quali􏰀cation that the Church requires before it could sell its land. Had this been
indeed its policy, then neither Pante nor the spouses Rubi would qualify as buyers of the 32-square meter lot,
as none of them actually occupied or resided on the lot.

 We 􏰀find it unlikely that Pante could successfully misrepresent himself as the actual occupant of the lot; this
was a fact that the Church (which has a parish chapel in the same barangaywhere the lot was located) could
easily verify had it conducted an ocular inspection of its own property. The surrounding circumstances actually
indicate that the Church was aware that Pante was using the lot merely as a passageway.

 Consent is an essential requisite of contracts as it pertains to the meeting of the offer and the acceptance
upon the thing and the cause which constitute the contract. To create a valid contract, the meeting of the minds
must be free, voluntary, willful and with a reasonable understanding of the various obligations the parties
assumed for themselves. Where consent, however, is given through mistake, violence, intimidation, undue
influence, or fraud, the contract is deemed voidable. However, not every mistake renders a contract voidable.
WHEREFORE, we DENY the petition for review on certiorari, and AFFIRM the decision of the Court of Appeals
dated May 18, 2006, and its resolution dated August 11, 2006, issued in CA-G.R.-CV No. 65069. Costs against
the Roman Catholic Church.

 ANNULMENT
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 infl uence, or employed fraud, or caused mistake base
their action upon these flaws of the contract.

 Who May Institute Action. — From Art. 1397 of the Code it can be inferred that two different requisites
are required to confer the necessary capacity for the exercise of the action for annulment.
1. that the plaintiff must have an interest in the contract.
2. The second is that the victim and not the party responsible for the vice or defect must be the person who
must assert the same.
Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is
lost through the fraud or fault of the person who has a right to institute the proceedings. If the right of action is
based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the
success of the action, unless said loss took place through the fraud or fault of the plaintiff.

 PRESCRIPTIVE PERIOD
Art. 1391. The action for annulment shall be brought within four years. This period shall begin: In cases of
intimidation, violence or undue influence, from the time the defect of the consent ceases. In case of mistake
or fraud, from the time of the discovery of the same. And when the action refers to contracts entered into
by minors or other incapacitated persons, from the time the guardianship ceases.
Prescriptive Period. — According to Art. 1391, the action for annulment must be commenced within a
period of four years. If the action refers to contracts entered into by incapacitated persons, the period shall
be counted from the time the guardianship ceases; if it refers to those where consent is vitiated by violence,
intimidation or undue infl uence, the period shall be counted from the time such violence, intimidation or
undue infl uence ceases or disappears; and if it refers to those where consent is vitiated by mistake or
fraud, the period shall be counted from the time of the discovery of such mistake or fraud. If the action is
not commenced within such period, the right of the party entitled to institute the action shall prescribe.

William Alain Miailhe vs. Court of Appeals and Republic of the Philippines G.R. No. 108991
March 20, 2001

FACTS:
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
(DBP). Petitioners 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-storey building erected thereon.
Petitioners alleged that during the height of the martial law regime of the late President Ferdinand Marcos,
the Office of the President showed interest in the subject properties and directed defendant DBP to acquire
for the government the subject properties from petitioners. Through threats and intimidation employed by
defendants, petitioners, under duress, were coerced into selling the subject properties to defendant DBP for a
grossly low price. The Regional Trial Court denied the motion for a preliminary hearing filed by DBP. The Court
of Appeals ruled that petitioners’ action had prescribed.

ISSUE: Is the Court of Appeals correct in ruling that petitioners’ action had prescribed?

HELD:
Yes. A perusal of the Complaint shows that the threat and intimidation ceased after then President Marcos left
the country on February 24, 1986. In fact, it was only then that petitioner was allegedly able to muster the
courage to make extrajudicial demands on the Republic of the Philippines. Since an action for the annulment
of contracts must be filed within four years from the time the cause of vitiation ceases, the suit before the trial
court should have been filed anytime on or before February 24, 1990. In this case, petitioner did so only on
March 23, 1990. Clearly, his action had prescribed by then.

WILLIAM ALAIN MIALHE, petitioner, VS. COURT OF APPEALS and REPUBLIC OF THE PHILIPPINES, respondent
G.R. No. 10899 March 20, 2001
FACTS:

On March 23, 1990, William Alain Mialhe, on his own behalf and on behalf of Victoria Desbarats-Mialhe,
Momique Mialhe-Sichere and Elaine MialheLencquesaing filed a Complaint for Annulment of Sale,
Reconveyance and Damages against Republic of the Philippines and defendant Development Bank of the
Philippines before the court.

On May 25, 1990 filed its Answer denying the substantial facts allrged 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 action had already prescribed.

On September 11, 1992, the court issued an Order.

The Court of Appeals ruled that petitioner’s action had prescribed. A suit to annul a voidable contract may be
filed within four (4) years from the time the defect ceases.

The CA also ruled that Article 1155 of the Civil Code, according to which a written extrajudicial demand by the
creditors would interrupt prescription, referred only to a creditor-debtor relationship, which is not the case
here.

ISSUE: Whether or not the action for the annulment of the Contract of Sale has prescribed.

RULING:
CA correctly set aside the Order of the trial court.

The records in this case indubitably show the lapse of the prescriptive period, thus warranting the immediate
dismissal of the Complaint.

The suit before the trial court was an action for the annulment on the Contract of Sale on the alleged ground
of vitiation of consent by intimidation. The reconveyance of the three parcels of land, which the petitioner
half-heatedly espouses as the real nature of the action, can prosper only if and when the Contract of Sale
covering the subject lots is annulled. Thus, the reckoning period for prescription would be that pertaining to
an action for the annulment of contract; that is, four years from the time the defect in the consent ceases.

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. Not binding a determinate conduct that can be extra judicially 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 defendant were not obligated to accede to any
extra judicial demand to annul the Contract of Sale.

First Philippine Holdings Corporation vs. Trans Middle East Equities Inc.
G.R. No. 179505 December 4, 2009

FACTS:
First Philippine Holdings Corporations (FPHC), formerly known as Meralco Securities Corporation, sold its
P6,299,179 shares of common stock in Philippine Commercial International Bank (PCIB), now Equitable PCIB,
to Trans Middle East Equities Inc. (TMEE). The 6,299,179 shares of common stock in PCIB are part of the
sequestered properties that were allegedly illegally amassed by Benjamin Romualdez during the twenty-year
reign of former President Ferdinand E. Marcos, and are among the purported ill-gotten wealth sought to be
recovered by the Presidential Commission on Good Government (PCGG). According to FHPC, the shares were
obtained by TMEE through fraud, acts contrary to law, morals, good customs and public policy, thus, such
acquisition was either voidable, void or unforceable.

FPHC filed before the Sandiganbayan its Motion for Leave to Intervene and to Admit Complaint in Intervention
which was granted by the court. TMEE, on the other hand, filed its Motion to Dismiss the Complaint-in-
Intervention by the FHPC on the ground that the action of FHPC has already prescribed under Article 1391 of
the Civil Code. TMEE averred that since the action was filed only on 28 December 1988 and the sale was 24
May 1984, the action was already seven months late from the prescriptive period. The Sandiganbayan ruled in
TMEE’s favor by granting its motion to dismiss.

ISSUE: Is the sale of the property void?

HELD:
No. A complaint may be dismissed when the facts establishing prescription are apparent in the complaint or
from the records. Here, the pleadings filed before the anti-graft court are replete with averments and proof
that PCIB shares of stock were sold on 24 May 1984, and that FPHC filed its complaint-in-intervention on 28
December 1988. From the execution of the sale to the filing of the complaint, it is readily apparent that four
years and seven months had lapsed. Certainly the complaint was filed beyond the four-year prescriptive
period.

CABILAO V TAMPAN

EFFECTS OF ANNULMENT OF VOIDABLE CONTRACTS

KATIPUNAN VS. KATIPUNAN 375 SCRA 199

FACTS:
Respondent is the owner of a lot and a five-door apartment constructed thereon occupied by lessees. On
December 29, 1985, respondent, assisted by his brother, petitioner, entered into a Deed of Absolute Sale with
their other brothers (co-petitioners, represented by their father, Atty. Balguma involving the subject property
for P187, 000. 00. Consequently, respondent’s title to the property was cancelled and in lieu thereof, a new
TCT was issued in favor of petitioners.

Thereafter, respondent filed with the RTC a complaint for annulment of the above Deed of Absolute Sale on
the ground that petitioners, with evident bad faith, conspired with one another in taking advantage of his
ignorance, he being only a third grader and through insidious words and machinations, they made him sign a
document purportedly a contract of employment, which turned out to be a Deed of Absolute Sale.

The lower court dismissed the complaint holding that respondent failed to prove his causes of action since he
admitted that: 1.) He obtained loans from the Balgumas; 2.) He signed the Deed of Absolute Sale; and 3.) He
acknowledged selling the property and that he stopped collecting the rentals. The said decision was however
reversed by the Court of Appeals.

ISSUE:
Whether or not the subject contract is void ab initio or voidable on the ground that one of the parties is
incapable of giving consent or where consent is vitiated by mistake, fraud, or intimidation.

RULING:
A contract of sale is born from the moment there is meeting of minds upon the thing which is the object of the
contract and upon the price. This meeting of minds speaks of the intent of the parties in entering into the
contract respecting the subject matter and the consideration thereof. Thus, the elements of a contract of sale
are consent, object, and price in money or its equivalent. Under Article 1330 of the Civil Code, consent may be
vitiated by any of the following: 1.) mistake, 2.) violence, 3.) intimidation, 4.) undue influence, and 5.) fraud.
The presence of any of these vices renders the contract voidable.

A contract where one of the parties is incapable of giving consent or where the consent is vitiated by mistake,
fraud, or intimidation, is not void ab initio but only voidable and is binding upon the parties unless annulled by
proper court action. The effect of annulment is to restore the parties to the status quo ante in so far as legally
and equitably possible. As an exception, however, to the principle of mutual restitution, Article 1399 provides
that when the defect of the contract consists in the incapacity of one of the parties, the incapacitated person
is not obliged to make restitution, except when he has been benefited by the things or price received by him.
Since the Deed of Absolute Sale between Respondent and the Balguma brothers is voidable, and hereby
annulled, then the restitution of the property and its fruits to respondent is just and proper.

Therefore, the petitioners are hereby ordered to turn over to respondent Braulio Katipunan, Jr. the rentals
they received for the five-door apartment corresponding to the period from January, 1986 up to the time the
property shall have been returned to him, with interest at the legal rate.

Miguel Katipunan, Inocencio Valdez, Edgardo Balguma and Leopoldo Balguma, Jr. vs. Braulio Katipunan, Jr.
G.R. No. 132415 January 30, 2002

FACTS:
Respondent Braulio Katipunan Jr. is the registered owner of a lot and a five-door apartment constructed
thereon, which was occupied by lessees. Respondent, assisted by his brother, petitioner Miguel, entered into a
Deed of Absolute Sale with brothers Edgardo Balguma and Leopoldo Balguma, Jr., represented by their
lawyer-father, involving the subject property for a consideration of P187,000. The title was registered in the
names of the Balguma brothers and they started collecting rentals on the property.

Later, however, Braulio filed a complaint for annulment of the Deed of Absolute Sale, contending that his
brother Miguel, Atty. Balguma and Inocencio Valdez convinced him to work abroad. Through insidious words
and machinations, they made him sign a document, purportedly a contract of employment, which document
turned out to be a Deed of Absolute Sale. He further alleged that he did not receive the consideration stated
in the contract. He claimed that there was evident bad faith and conspiracy in taking advantage of his
ignorance, he being only a third grader.

The Regional Trial Court (RTC) dismissed the complaint. The Court of Appeals set aside the RTC decision.

ISSUE: Was there a valid contract of sale between the parties?

HELD:
No. There was vitiated consent on the part of the respondent as he signed the Deed of Absolute Sale without
the remotest idea of what it was and received no consideration thereof. The contract entered into by the
parties, being a voidable contract, was correctly annulled on appeal.
A contract where one of the parties is incapable of giving consent or where consent is vitiated by mistake,
fraud, or intimidation is not void ab initio but only voidable, and is binding upon the parties unless annulled by
proper court action. The effect of annulment is to restore the parties to the status quo ante insofar as legally
and equitably possible. This much is dictated by Article 1398 which provides that when the defect of the
contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any
restitution, except when he has been benefited by the things or price received by him. Thus, since the Deed of
Absolute Sale between respondent and Balguma brothers is voidable and hereby annulled, then the
restitution of the property and its fruits to respondent is just and proper.

EFFECTS OF ANNULMENT OF VOIDABLE CONTRACTS

JUMALON VS. COURT OF APPEALS 375 SCRA 175 JANUARY 30, 2002
FACTS:
On July 16, 1991, petitioner and complainant entered into a Conditional Sales Agreement whereby the latter
purchased from the former a house and lot. On July 24, 1991, petitioner executed in favor of complainant a
Deed of Absolute Sale. Title was transferred to complainant on July 29, 1991.

Thereafter, complainant learned from neighboring residents that the presence of high-tension wires in the
subdivision where the house and lot is located generate tremendous static electricity and produce electric
sparks whenever it rains. Upon complainant’s inquiries to the Meralco and HLURB, he found out that the
subject house and lot was built within the 30-meter right of way of Meralco wherein high tension wires
carrying 115, 000 volts are located which posed serious risks on the property and its occupants.

Consequently, sometime in November 1992, complainant filed a case for declaration of nullity or annulment
of sale of real property before the R.T.C.. The lower court dismissed the case. Thereafter, complainant filed
before the HLURB a complaint before the HLURB seeking the rescission of the Conditional Sales Agreement
and the Absolute Deed of Sale on the ground of fraud. HLURB rendered decision in favor of complainant which
was upheld by the Court of Appeals, hence this petition.

ISSUE
Whether or not there was fraud on the part of petitioner as to warrant the rescission of the Conditional Sales
Agreement and of the Absolute Deed of Sale.

RULING:

The Supreme Court found the petition without merit for it involved questions of fact which is not reviewable
unless it is within the ambit of exceptions.

Nonetheless, SC agrees with the Court of Appeals that respondent de Leon was entitled to annul the sale.
There was fraud in the sale of the subject house. It is not safely habitable. It is built in a subdivision area where
there is an existing 30-meter right of way of the Manila Electric Company (Meralco) with high-tension wires
over the property, posing a danger to life and property. The construction of houses underneath the high
tension wires is prohibited as hazardous to life and property because the line carries 115,000 volts of
electricity, generates tremendous static electricity and produces electric sparks whenever it rained.
 NILO R. JUMALON VS. COURT OF APPEALS, HON. RUBEN D. TORRES, IN HIS CAPACITY AS
EXECUTIVE SECRETARY, HOUSING AND LAND USE REGULATORY BOARD, AND MA.
ASUNCION DE LEON
G.R. No. 127767 January 30, 2002

FACTS:
Ma. Asuncion de Leon and petitioner, Nilo R. Jumalon, executed a conditional sales agreement whereby the
former purchased from the latter a house and lot. Jumalon executed in favor of de Leon a Deed of Absolute
Sale. De Leon learned of the danger posed by the wires over the property, and was informed by Housing and
Land Use Regulatory Board (HLURB) Enforcement Center that construction of houses and buildings of
whatever nature is strictly prohibited within the right-of–way of the transmission lines. De Leon filed a case for
declaration of nullity or annulment of sale of real property which was subsequently dismissed.

De Leon then filed a complaint before the HLURB seeking the rescission of the conditional sales agreement
and the Absolute Deed of Sale. The HLURB arbiter rendered judgement in favor of de Leon. The Board of
Commissioners of HLURB affirmed the decision of the arbiter. The Court of Appeals affirmed the appealed
decision.

ISSUE: Did the Court of Appeals err in affirming the decision of Executive Secretary Ruben D. Torres and the
HLURB declaring the rescission of the contract of sale of a house and lot between the petitioner and private
respondent?

HELD: No. Respondent de Leon is entitled to annul the sale as there was fraud in the sale of the subject house
and the house is not safely habitable. It is built in a subdivision area where there is an existing 30-meter right
of way of the Manila Electric Company (Meralco) with high-tension wires over the property, posing a danger
to life and property. The construction of houses underneath the high tension wires is prohibited as hazardous
to life and property because the line carries 115,000 volts of electricity, generates tremendous static
electricity and produces electric sparks whenever it rained.