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Rescissible Contracts

Group 1

Meaning of Rescissible Contracts


ARTICLE 1380. Contracts validly agreed upon may be rescinded in the cases established by law.

Meaning of Rescissible Contracts


Rescissible Contracts those validly agreed upon because all the essential elements exist and, therefore, legally effective, but in the cases established by law, the remedy of rescission is granted in the interest of equity.

Meaning of Rescissible Contracts


Binding Force of Rescissible Contracts Valid and enforceable although subject to rescission by the court when there is damage or prejudice to one of the parties or to a third person.

Meaning of Rescissible Contracts


Meaning of Rescission An equitable remedy granted by law to the contracting parties and sometimes even to third persons in order to secure reparation of damages caused them by a valid contract, by means of the restoration of the things to their condition prior to the celebration of said contract.

Meaning of Rescissible Contracts


Requisites of Rescission 1. The contract must be validly agreed upon (Art 1380);

2. There must be lesion or pecuniary damage or prejudice to one of the parties or to a third person (Art 1381); 3. The rescission must be based upon a case especially provided by law (Art 1380-1382); 4. There must be no other legal remedy to obtain reparation for the damage (Art 1383);

Meaning of Rescissible Contracts


Requisites of Rescission 5. The party asking for rescission must be able to return what he is obliged to restore by reason of the contract (Art 1385, par 1); 6. The object of the contract must not legally be in the possession of third persons who did not act in bad faith (Art 1385, par 2); and 7. The period for filing the action for rescission must not have prescribed (Art 1389).

Meaning of Rescissible Contracts


Two Kinds of Rescission Article 1380 of the Civil Code

Article 1191 of the Civil Code

Meaning of Rescissible Contracts


Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.

Meaning of Rescissible Contracts


Two Kinds of Rescission - Distinctions
Rescission under Article 1191 Basis: non-performance/nonfulfilment of the obligation Rescission under Article 1380 Basis: lesion or fraud upon creditors

Who May Institute the Action: Who May Institute the Action: injured party to the contract either of the contracting parties or a 3rd person

Non-performance by the other Non-performance by the other party: important party: immaterial
Governed by: agreement or other legal provisions Governed by: Chapter 6, Articles 1380-1389, Civil Code

Meaning of Rescissible Contracts


Illustrative Case ALFONSO L. IRINGAN, petitioner, vs. HON. COURT OF APPEALS and ANTONIO PALAO, represented by his Attorney-in-Fact, FELISA P. DELOS SANTOS, respondents. G.R. No. 129107 September 26, 2001

Meaning of Rescissible Contracts


Illustrative Case Facts On March 22, 1985, Antoni Palao sold a piece of land to Alfonso Iringan: Lot No. 992 located at the Poblacion of Tuguegarao with Transfer Certificate No. T-5790. Both parties executed a Deed of Sale on the same date with a purchase price of P295,000, payable as follows: P 10,000.00 upon the execution of the contract received on the same date; P140,000.00 on or before April 30, 1985; P145,000.00 on or before December 31, 1985.

Meaning of Rescissible Contracts


Illustrative Case Facts However, on the second payment, Iringan defaulted by just paying P40,000. Thus, on July 18, 1985, Palao sent Iringan a letter stating that he has considered the contract to be rescinded considering that Iringan failed to comply with his obligation. On August 20, 1985, Iringan replied that they were not opposing the decision of Palao but asked for the reimbursement of the following amounts:(a) P50,000.00 previous cash received by Palao; (b) P 3,200.00 geodetic engineers fee; (c) 500.00 attorneys fee (d) current interest on the total amount of the above.

Meaning of Rescissible Contracts


Illustrative Case Facts On July 1, 1991, Palao filed a complaint for Judicial Confirmation of Rescission of Contract and Damages against Iringan and his wife. In response, spouses Iringan said that the contract was consummated and that the remedy is to collect the remainder of the purchase price and not rescission. Besides, they said that they had always been ready and willing to comply with their obligations in accordance with said contract.

Meaning of Rescissible Contracts


Illustrative Case Facts On September 25, 1992, the RTC of Cagayan, Branch I, ruled in favor of Palao and affirmed the rescission of the contract; cancelled the claim of the defendants annotated at the back of TCT No. T-5790; ordered the defendants to vacate the premises; and lastly, ordering the defendants to pay solidarily the sum of P100,000 as reasonable compensation for use of the property minus 50% of the amount paid by them; and to pay P50,000 as moral damages; P10,000 as exemplary damages; and P50,000 as attorneys fee and to pay the costs of suit.

Meaning of Rescissible Contracts


Illustrative Case Facts The Court of Appeals affirmed the lower courts decision. Hence, this petition for review.

Meaning of Rescissible Contracts


Illustrative Case Issue Whether the CA erred in its decision holding that the lower court did not err in affirming the rescission of the contract of sale

Meaning of Rescissible Contracts


Illustrative Case Held The Supreme Court ruled that the basis of the appellate court and lower court in affirming the rescission was Article 1191. Petitioner contends that the action should be deemed prescribed based on the provisions of Article 1389 of the Civil Code. This provision of law applies only to rescissible contracts, as enumerated and defined in Articles 1380 and 1381.

Meaning of Rescissible Contracts


Illustrative Case Held The rescission in Article 1381 is not akin to the term rescission in Article 1191 and Article 1592. In Articles 1191 and 1592, the rescission is the principal action which seeks the resolution or cancellation of the contract while in Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated in said Article.

Meaning of Rescissible Contracts


Illustrative Case Held In case at hand, the prescription was still in force. The suit was brought on July 1, 1991 or six years after the default. It was filed within the period of rescission. Thus, the contract of sale between the parties as far as the prescriptive period applies, can still be validly rescinded.

Cases of Rescissible Contracts


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;

Cases of Rescissible Contracts


ARTICLE 1381. The following contracts are rescissible:
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.

Cases of Rescissible Contracts


Lesion the damage or injury which one of the parties suffers by virtue of a contract which is disadvantageous to him. To give rise to rescission, the lesion must be known or could have been known at the time of making the contract, and not due to circumstances subsequent thereto or unknown to the parties.

Cases of Rescissible Contracts


A. Contract in Behalf of Wards 1st paragraph Acts of Administration - A guardian is authorized only to manage the estate of his ward. If he enters into a contract falling within his scope of powers as guardian of the person and property, or only for the property of his ward, such as when the contract involves acts of administration, express judicial approval is not necessary. The contract is rescissible if the latter suffers lesion or damage by more than of the value of the property, which is the object of the contract.

Cases of Rescissible Contracts


A. Contract in Behalf of Wards 1st paragraph Contracts involving real property - When a guardian enters into a contract, involving the disposition (sale or encumbrance) of the wards real property, juridical approval is indispensable. Consequently, if guardian sells, mortgages or otherwise encumbers real property belonging to his ward without judicial approval, the contract is unenforceable, and NOT rescissible, even if the ward suffers lesion of more than of the value of the property.

Cases of Rescissible Contracts


A. Contract in Behalf of Wards 1st paragraph Example - The purchase of equipment for the cultivation of lands belonging to the ward, the sale of the harvest of such lands, the purchase of materials for the repair of building, etc., are contracts that would not require court approval, because they are made in the ordinary course of the management of the estate of the ward. If the required lesion exists, they are rescissible. But even if such lesion exists, the contract cannot be rescinded, if the guardian has secured the approval of the guardianship court for such contract (Article 1386)

Cases of Rescissible Contracts


B. Contract in Behalf of Absentees 2nd paragraph General rule - If the absentee suffers lesion stated in the preceding number, the contract is rescissible. Powers and duties of a legal representative of an absentee are exactly the same as those of a guardian, so the principle enunciated in the preceding section are also applicable.

Cases of Rescissible Contracts


Essential Requisites in Rescinding Contracts Entered into in Behalf of Wards and Absentees on the Ground of Lesion:
Before a contract entered into by a guardian or a legal representative in behalf of his ward or an absentee can be rescinded on the ground of lesion, the following requisites must concur: 1. The contract must have been entered into by a guardian in behalf of his ward or by a legal representative in behalf of an absentee;

Cases of Rescissible Contracts


Essential Requisites in Rescinding Contracts Entered into in Behalf of Wards and Absentees on the Ground of Lesion: 2. The ward or absentee must have suffered lesion of more than of the value of the property which is the object of the contract; 3. The contract must have been entered into without judicial approval (Article 1386); 4. There must be no other legal means for obtaining reparation for the lesion (Article 1383);

Cases of Rescissible Contracts


Essential Requisites in Rescinding Contracts Entered into in Behalf of Wards and Absentees on the Ground of Lesion: 5. The person bringing the action must be able to return whatever he may be obliged to restore (Article 1385, par 1); 6. The object of the contract must not be legally in the possession of a third person who did not act in bad faith (Article 1385, par 2).

Cases of Rescissible Contracts


C. Contract in Fraud of Creditors 3rd paragraph Guidelines - These are contracts executed with the intention to prejudice the rights of creditors, if the creditor cannot in any manner collect the claims due them. Only creditors can ask for the rescission of the contract. The remedy of rescission is available to all creditors who were already such at the time of the fraudulent alienation, when they cannot collect what is due them.

Cases of Rescissible Contracts


Essential Requisites in Rescinding Contracts Entered into Fraud of Creditors Before a contract can be rescinded on the ground that it has been entered into in fraud of creditors, it is indispensable that the following requisites must concur: 1. There must be a credit existing prior to the celebration of the contract; 2. There must be a fraud, or at least, the intent to commit fraud, or at least, the intent to commit fraud to the prejudice of the creditor seeking the rescission;

Cases of Rescissible Contracts


Essential Requisites in Rescinding Contracts Entered into Fraud of Creditors 3. The creditor cannot in any other legal manner collect his credit; and 4. The object of the contract must not be legally in the possession of a third person who did not act in bad faith*. *the remedy available to the creditor is to proceed against the person causing the loss for damages (Article 1385, par 3).

Cases of Rescissible Contracts


Illustrative Case Contract in Fraud of Creditors Maria Antonia Siguan, petitioner vs. Rosa Lim, Ingrid Lim and Neil Lim, respondents GR No. 134685, November 19, 1999

Cases of Rescissible Contracts


Illustrative Case Contract in Fraud of Creditors Facts Rosa Lim executed a Deed of Donation of 4 parcels of lands on August 10, 1989 in favor of her children. Lims indebtedness to the petitioner was incurred on August 1990. On June 23, 1993, the petitioner filed an accion pauliana against Lim and her children to rescind the questioned Deed of Donation.

Cases of Rescissible Contracts


Illustrative Case Contract in Fraud of Creditors Facts Petitioner claimed that Lim fraudulently transferred all her real properties to her children in bad faith and in fraud of creditors, including her; and that Lim conspired and confederated with her children in antedating the questioned Deed of Donation to petitioners and other creditors prejudice; and that Lim, at the time of the fraudulent conveyance, left no sufficient properties to pay her obligation.

Cases of Rescissible Contracts


Illustrative Case Contract in Fraud of Creditors Issue

Whether the donation was entered into in fraud of the creditors of respondent.

Cases of Rescissible Contracts


Illustrative Case Contract in Fraud of Creditors

Held
For this action to prosper, the following requisites must be present: 1. The plaintiff asking for rescission has a credit prior to the alienation;

2. The debtor has made a subsequent contract conveying a patrimonial benefit to a third person;

Cases of Rescissible Contracts


Illustrative Case Contract in Fraud of Creditors

Held
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.

Cases of Rescissible Contracts


Illustrative Case Contract in Fraud of Creditors

Held
The Court was not convinced that the notarized Deed of Donation was antedated. Notarial documents are public documents and are evidence of the facts that gave rise to their execution and of their date. In the present case, the fact that the questioned Deed was registered only of July 2, 1991 is not enough to overcome the presumption as to the truthfulness of the statement of the date of the deed, which is August 10, 1989. Thus, first and second requisites are absent.

Cases of Rescissible Contracts


Illustrative Case Contract in Fraud of Creditors

Held
Petitioner neither alleged nor proved that she had exhausted all remedies to collect claims due her before rescission was resorted to. Third requisite is also absent. Evidence disclosed that after the Deed of Donation was executed, Lim has still some other properties.

Cases of Rescissible Contracts


Illustrative Case Contract in Fraud of Creditors

Held
Petitioner did not adduce any evidence that the price of these other properties were lower. Therefore, presumption of fraud did not come into play, the fourth requisite. Accordingly, since four requirements for the rescission of a gratuitous contract are not present in this case, petitioners action must fail.

Cases of Rescissible Contracts


Illustrative Case Contract in Fraud of Creditors

Panlilio vs Victorio (35 Phil. 706)


Where a sale of a shop and its contents is made by a debtor eleven days after a judgment against him has become final, said sale is presumed to have been effected in fraud, not only of the judgment creditor, but also of the other legitimate creditors by virtue of debts long overdue before the said sale; and although these latter creditor did not obtain a judgment until a couple of months after the sale, it is indisputable that they have been defrauded by such sale.

Cases of Rescissible Contracts


Test of Fraud Whether the conveyance prejudiced the rights of creditors Example: The alienation must have been prejudicial to the creditor, it must have had the effect of making the debtor insolvent, having diminished his property to such an extent that he cannot pay the debt.

Cases of Rescissible Contracts


D. Contracts Referring to Things in Litigation 4th paragraph
executed by the defendant in a suit involving the ownership or possession of a thing, when such contract is made without the knowledge and approval of the plaintiff or of the court

Cases of Rescissible Contracts


D. Contracts Referring to Things in Litigation 4th paragraph Distinctions
Contracts Referring to Things in Litigation Purpose: secure the possible effectivity of the claim Involved: real right that deserves the protection of law Person who can avail the remedy of rescission: stranger to the contract Contracts in Fraud of Creditors

Purpose: to guarantee an existing claim Involved: personal right that deserves the protection of law Person who can avail the remedy of rescission: stranger to the contract

Cases of Rescissible Contracts


D. Contracts Referring to Things in Litigation 4th paragraph Example:

Where X has brought an action to recover possession of a piece of land from Y, and during the pendency of the action, Y sells the land to Z, the sale is rescissible and may be set aside at the instance of X, when he obtains a judgment in his favor in his action against Y.

Premature Payments Made in a State of Insolvency


ARTICLE 1382. Payments made in a state of insolvency for obligations to whose fulfilment the debtor could not be compelled at the time they were effected, are also rescissible.

Premature Payments Made in a State of Insolvency


Essential Requisites 1. The debtor-payor must have been insolvent (insolvency need not be judicially declared); and 2. The debt was not yet due and demandable.

Nature of Action for Rescission


ARTICLE 1383. The 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.

Nature of Action for Rescission


Rescission is not a principal remedy. It is only subsidiary and can be availed of only if the injured party proves that he has no other legal means aside from rescinding the contract to obtain redress for the damage caused.

Nature of Action for Rescission


The following successive measures must be taken by a creditor before he may bring an action for rescission of an allegedly fraudulent sale: 1. Exhaust the properties of the debtor through levying by attachment and execution, except such as are exempt by law from execution; 2. Exercise all the rights and actions of the debtor, save those personal to him (accion subrogatoria); and 3. Seek rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana)

Nature of Action for Rescission


If the damage is repaired (as in the first and second instances of Art. 1381), rescission cannot take place. A rescissible contract may be assailed directly only by a proper action in court, and not indirectly or collaterally by way of defense.

Nature of Action for Rescission


Illustrative Case SALVADOR ADORABLE and LIGAYA ADORABLE, petitioners,

vs.
COURT OF APPEALS, HON. JOSE O. RAMOS, FRANCISCO BARENG and SATURNINO BARENG, respondents., 116 SCAD 189, 319 SCRA 200 [1999]

Nature of Action for Rescission


Illustrative Case Facts Private Respondent is the debtor of Petitioners for the amount of P 26,000.00. On the other hand, Petitioners were lessees of a 200 sq.m. portion of a certain Lot No. 661-D-5-A owned by Petitioners.

On August 27, 1986, private respondent sold 3000 sq. m. of said lot to Jose Ramos, to which lot the portion occupied by Petitioners are contained.

Nature of Action for Rescission


Illustrative Case Facts Private Respondent then failed to pay their loan on maturity date. A demand letter was sent to Private Respondent, but he refused to pay. This prompted Petitioner to file a complaint for the rescission of sale made between Private Respondent and Jose Ramos, upon knowledge of such sale.

Nature of Action for Rescission


Illustrative Case Issue

Whether the sale of land between Private Respondent Bareng to Private Respondent Jose Ramos is fraudulently prepared and executed as to warrant the rescission of said contract in favor of petitioner.

Nature of Action for Rescission


Illustrative Case Held The sale was not made in fraud of creditors.

It further settled that the following successive measures must be taken by a creditor before he may bring an action for rescission of an allegedly fraudulent sale: 1. exhaust the properties of the debtor through levying by attachment and execution upon all the property of the debtor, except such as are exempt by law from execution;

Nature of Action for Rescission


Illustrative Case Held 2. exercise all the rights and actions of the debtor, save those personal to him; and 3. seek rescission of the contracts executed by the debtor in fraud of their rights.

Nature of Action for Rescission


Illustrative Case

Held
Without availing of the 1st and 2nd remedies, i.e., exhausting the properties of the debtor or subrogating themselves in Francisco Barengs transmissible rights and actions, petitioners simply undertook the third measure and filed an action for annulment of the sale. This cannot be done.

Indeed, an action for rescission is a subsidiary remedy; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same.

Extent of Rescission
ARTICLE 1384. Rescission shall only be to the extent necessary to cover the damages caused.

Extent of Rescission
Partial Rescission
The entire contract need not be set aside by rescission if the damage can be repaired or covered by partial rescission. The rescission shall only be to the extent of the creditors unsatisfied credit. The policy of the law is to preserve or respect the contract, not extinguish it.

Extent of Rescission
Illustrative Case
G, the guardian of M, a minor, was authorized by the court to sell two (2) parcels of land valued at P500,000 each. G sold the 2 properties for only P500,000. The entire contract need not be rescinded. Rescission may properly be applied only to one parcel to cover the damage caused by G. But if G or B is willing to pay the difference of P500,000, rescission is precluded.

Effect of Rescission
ARTICLE 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss.

Effect of Rescission
Obligation of Mutual Restitution Rescission creates the obligation of mutual restitution. When the court declares a contract rescinded, the parties must return to each other:

1. Object of the contract + fruits


2. Price + legal interest

Effect of Rescission
Obligation of Mutual Restitution The purpose of rescission is to place the parties as far as practicable in their original situation, that is the parties are restored to the status quo ante. The law presumes that the party who received the object of the contract has enjoyed the fruits thereof while the other has used the money which is the price of the object.

Effect of Rescission
Requisites of the Action for Rescission 1. The plaintiff must be able to return what has been received. 2. The thing object of the contract is not in the legal possession of third persons in good faith, (that is, he acquired the property and registered it in the Registry of Property unaware of the flaw in his title or mode of acquisition).

Effect of Rescission
Requisites of the Action for Rescission 3. There must be no other legal remedy. 4. The action must be brought within the proper prescriptive period.

Effect of Rescission
Illustrative Case A sold a parcel of land owned by B, a minor, to C for P10,000, when the true value is 20,000. Upon reaching the age of majority, B can ask for the rescission of the sale on the ground of lesion. If the contract is rescinded, C must return the land with the fruits received by him therefrom while B must return the P10,000 plus legal interest. However, if B cannot return the price with the interest, he cannot rescind the contract. If C sells the land to D, a third person who acted in good faith, rescission cannot take place. The remedy of B is to file an action against A.

Contracts Approved by the Courts


ARTICLE 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts.

Contracts Approved by the Courts


If a contract entered into in behalf of a ward or absentee has been approved by the court, rescission cannot take place because it is valid, whether there is lesion or not. Presumption the court is acting in the interest of the ward or absentee when it approves the contract, in spite of the lesion.

Presumptions of Fraud
ARTICLE 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission.

Presumptions of Fraud
ARTICLE 1387. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence.

Presumptions of Fraud
Gratuitous Alienation Presumed Fraudulent - when the debtor did not reserve sufficient property to pay all debts contracted before the donation. Presumed Valid a gratuitous conveyance or donation validly executed (prima facie). It cannot be declared fraudulent and be subject to rescission, unless it can be shown that at the time of the execution of the conveyance, there was a creditor whom said transaction may affect adversely.

Presumptions of Fraud
Gratuitous Alienation Example: A donated his land to B. Before the time he made the donation, he had several debts but he did not reserve enough property to pay all these debts. Instead, he made the donation. Is the donation presumed fraudulent? The donation is presumed fraudulent. However, the presumption may be rebutted by adequate proof.

Presumptions of Fraud
Onerous Alienation Presumed Fraudulent - when made by persons: 1. against whom some judgment has been rendered in any instance (even if not yet a final judgment); or 2. against whom some writ of attachment has been issued.

Presumptions of Fraud
Onerous Alienation Example: A brought an action against B, his debtor. A won. B's property was attached by the court. After judgment, B sold to C another property which has not been levied upon or attached. D, another creditor of B, wants to rescind this sale to C. The sale to C is also presumed fraudulent because the law says that the decision need not have been obtained by the party seeking rescission; and the attachment need not refer to the property alienated.

Presumptions of Fraud
Badges of Fraud Existence of fraud may be shown by circumstantial evidence Direct evidence of fraud is seldom available because of the concomitant deceit, deception and cunning, which are usually hidden. Courts have laid down certain rules by which the fraudulent character of the transaction may be determined.

Presumptions of Fraud
Badges of Fraud The following are some of the circumstances attending sales which have been denominated by the courts as badges of frauds: 1. The fact that the consideration of the conveyances is fictitious or is inadequate; 2. A transfer made by a debtor after suit has been begun and while it is pending against him; 3. A sale upon credit by an insolvent debtor;

Presumptions of Fraud
Badges of Fraud 4. Evidence of large indebtedness or complete insolvency; 5. The transfer of all or nearly all of his properties by a debtor, especially when he is insolvent or greatly embarrassed financially; 6. The fact that the transfer is made between father and son, where there are present some or any of the above circumstances;

Presumptions of Fraud
Badges of Fraud 7. The failure of the vendee to take exclusive possession of all the property; 8. At the time of conveyance, the vendee was living with the vendor and the former knew that there was a judgement against the latter; 9. It was known to the vendee that the vendor has no properties other than that sold to him;

Presumptions of Fraud
Badges of Fraud The above enumeration is not an exclusive list. When clear and unmistakable, badges of fraud will serve to destroy the camouflage of validity of a contract.

Presumptions of Fraud
Illustrative Case - Badges of Fraud To defraud his Creditors, a father sold a certain real property to his son for a very small sum. That property, although apparently sold, was nevertheless still occupied by the father. The transfer was made after suit by the creditors had been instituted against the father. It was also proved that the father had no other property. The contract may be rescinded as being in fraud of creditors.

Presumptions of Fraud
Evidence to Overcome Presumption of Fraud The presumptions are disputable and may be rebutted by contrary evidence. It is incumbent upon the transferee to establish affirmatively by satisfactory and convincing evidence that the conveyance was executed in good faith for a good and valuable consideration.

Liability of Purchaser in Bad Faith


ARTICLE 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first, and so on successively.

Liability of Purchaser in Bad Faith


1. Return the same if the sale is rescinded 2. Should it be impossible for him to return it due to any cause, he must indemnify the former 3. Should there be two or more alienations, the first acquirer shall be liable first, and so on successively.

Liability of Purchaser in Bad Faith


Illustrative Case: 1st scenario Von sold his car to Yves in order to avoid the payment of his debt to Yvo, his creditor. Yves knew of Von's purpose. If the sale is rescinded, Yves must return the car.

Should the car be destroyed with or without his fault, then Yvo is entitled to be indemnified for damages by Yves.

Liability of Purchaser in Bad Faith


Illustrative Case: 2nd scenario Suppose, Yves transferred the car to Descie who also acted in bad faith. Then Descie sold it to Rex who did not know of the purpose behind the previous conveyance. As the first acquirer, Yves is liable first. If he cannot pay, then Descie will be liable. If Yves acted in good faith, the good or bad faith of Descie is not important, except where Descie connived with Von to make Yves a mere innocent intermediary in which case Descie can be held liable.

Liability of Purchaser in Bad Faith


Bad Faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means breach of a known duty through some motive or interest or ill-will. It partakes of the nature of fraud. is a state of mind indicated by acts and circumstances and can be demonstrated, not only by direct proof, but also by circumstantial evidence.

Liability of Purchaser in Bad Faith


Purchaser in Good Faith is one who buys 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. A party's mere refusal to believe that a defect exists or his willful closing of his eyes to the possibility of the existence of a defect in his vendor's title, will not make him an innocent purchaser for value, if it afterwards develops that the title was in fact defective.

Period for Filing of Action for Rescission


ARTICLE 1389. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the formers incapacity, or until the domicile of the latter is known.

Period for Filing of Action for Rescission


General Rule within four years from the date the contract was entered into Exceptions 1. Persons under guardianship period shall begin from the termination of incapacity (when ward reaches the age of majority) 2. Absentees - from the time the domicile is known

Period for Filing of Action for Rescission


Computation of the four-year period Article 1389 is silent as to the date from which the period of four (4) years is to be counted. Some guidelines in determining the computation of the four-year period: 1. From the time the creditor knows of the contract (Code Commission) 2. From the celebration of the contract (where the action is based on fraud)

Period for Filing of Action for Rescission


Computation of the four-year period 3. Within four (4) years from the date the judgment became final and executory (in a case decided under Art. 1911, where the fulfilment of the obligation of the seller became impossible because of a judgment rendered against the seller) 4. From the moment the cause of action accrues [since Art. 1389 is silent, the general rule applies (Art. 1150) (Khe Hong Cheng vs Court of Appeals, 355 SCRA 701)]

Period for Filing of Action for Rescission


Persons entitled to bring the action for rescission 1. injured party or the defrauded creditor; 2. His heirs, assigns, or successors-in-interest; or 3. Creditors of 1 and 2 entitled to subrogation (accion subrogatoria under Art. 1177)

Period for Filing of Action for Rescission


Illustrative Case KHE HONG CHENG, SANDRA JOY KHE and RAY STEVEN KHE, petitioners, vs. COURT OF APPEALS, HON. TEOFILO GUADIZ, RTC 147, MAKATI CITY and PHILAM INSURANCE CO., INC., respondents. G.R. No. 144169 March 28, 2001

Period for Filing of Action for Rescission


Illustrative Case

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 Khe Hong Cheng, 3,400 bags of copra. The said shipment of copra was covered by a marine insurance policy issued by American Home Insurance Company. M/V PRINCE ERlC, however, sank, resulting in the total loss of the shipment. Because of the loss, the insurer, American Home, paid the amount of P354,000.00 (the value of the copra) to the consignee.

Period for Filing of Action for Rescission


Illustrative Case Facts

Having been subrogated into the rights of the consignee, American Home instituted a civil case to recover the money paid to the consignee. While the case was still pending, or on December 20, 1989, Petitioner Khe Hong Cheng executed deeds of donations of parcels of land in favor of his children, herein co-petitioners Sandra Joy and Ray Steven. On the basis of said deeds, the Transfer Certificate of Titles of said lands were cancelled and new ones were issued in favor of Petitioner Khe Hong Chengs children.

Period for Filing of Action for Rescission


Illustrative Case Facts

On December 29, 1993 or four years after the donations were made and the TCTs were registered in the donees' names, the trial court rendered judgment against Petitioner Khe Hong Cheng. A writ of execution was issued on September 14, 1995. Thereafter, an alias writ of execution was granted in October 1996. 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.

Period for Filing of Action for Rescission


Illustrative Case Facts

When the sheriff, accompanied by counsel of Respondent Philam, went to Butuan City on January 17, 1997, to enforce the alias writ of execution, they discovered that Petitioner Khe Hong Cheng no longer had any property and that he had conveyed the subject properties to his children.

Period for Filing of Action for Rescission


Illustrative Case Facts

On February 25, 1997, Respondent Philam filed a Complaint 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. In their Answer, Petitioners moved for the Complaints dismissal on the ground that the action had already prescribed. They posited that the registration of the deeds of donation on December 27, 1989 constituted constructive notice and since the Complaint court a quo was only filed on February 25, 1997, or more than four (4) years after said registration, the action was already barred by prescription.

Period for Filing of Action for Rescission


Illustrative Case Facts

The trial court denied the motion to dismiss. The Court of Appeals affirmed RTCs decision. Hence, this Petition.

Period for Filing of Action for Rescission


Illustrative Case Issue

Whether the action to rescind the donations has already prescribed.

Period for Filing of Action for Rescission


Illustrative Case Held

No. Article 1389 of the Civil Code 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 provides: 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.

Period for Filing of Action for Rescission


Illustrative Case Held

Indeed, this Court enunciated the principle that it is the legal possibility of bringing the action which determines the starting point for the computation of the prescriptive period for the action.

Period for Filing of Action for Rescission


Illustrative Case Held Even if Respondent Philam was aware, as of December 27, 1989, that Petitioner had executed the deeds of donation in favor of his children, the complaint against Butuan Shipping Lines and/or petitioner Khe Hong Cheng was still pending before the trial court. Respondent Philam had no inkling, at the time, that the trial courts judgment would be in its favor and further, that such judgment would not be satisfied due to the deeds of donation executed by Petitioner during the pendency of the case. Had respondent Philam filed his complaint on December 27, 1989, such complaint would have been dismissed for being premature.

Period for Filing of Action for Rescission


Illustrative Case Held

Respondent Philam only learned about the unlawful conveyances made by Petitioner in January 1997 when its counsel accompanied the sheriff to Butuan City to attach the properties of Petitioner. 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.

The End
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Tuazon, Julie Ann