Contracts in Fraud of Creditors, A1313 Civil Code
1. Concept
Article 1313. Creditors are protected in cases of contracts intended to defraud them. (n)
Related provisions:
Article 759. There being no stipulation regarding the payment of debts, the donee shall be responsible therefor only when the donation has been made in fraud of creditors.
The donation is always presumed to be in fraud of creditors, when at the time thereof the donor did not reserve sufficient property to pay his debts prior to the donation.
Article 1381. The following contracts are rescissible:
x x x
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
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.
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. (1298a)
1) Contracts in fraud of creditors are those executed with the intention to prejudice the rights of creditors. They should not be confused with those entered into without such mal-intent, even if, as a direct consequence thereof, the creditor may suffer some damage. In determining whether or not a certain conveying contract is fraudulent, what comes to mind first is the question of whether the conveyance was a bona fide transaction or a trick and contrivance to defeat creditors. To creditors seeking contract rescission on the ground of fraudulent conveyance rest the onus of proving by competent evidence the existence of such fraudulent intent on the part of the debtor, albeit they may fall back on the disputable presumptions, if proper, established under Article 1387 of the Code. (Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21, 2006, Per Garcia, J.)
2) Under Article 1381 of the Civil Code, contracts entered into in fraud of creditors may be rescinded only when the creditors cannot in any manner collect the claims due them.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.(Siguan v. Lim, G.R. No. 134685, November 19, 1999, Per Davide, JR., C.J.)
a. Definition of fraud
1) [F]raud has no technical legal meaning in our laws. In its general sense, fraud is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust, or confidence justly reposed, resulting in damage to another, or by which an undue and unconscientious advantage is taken of another. It is a generic term embracing all multifarious means which human ingenuity can devise, and which are resorted to by one individual to secure an advantage over another by false suggestions or by suppression of truth and includes all surprise, trick, cunning, dissembling and any unfair way by which another is cheated. While the generic concept of fraud is similar for both civil and criminal cases, the term is descriptive rather than substantive. In its specific and substantive sense, a right of action occasioned by fraud is dependent on the law upon which the action is based. Based on its nature, actionable fraud may be civil or criminal. (Information Technology Foundation of the Philippines v. COMELEC, G.R. No. 159139, June 6, 2017, Per Jardaleza, J.)
Alpuerto v. Pastor, En Banc, G.R. No. L-12794, October 14, 1918, Per Street, J.:
• This brings us to the question whether the transaction evidenced by Exhibit A should be pronounced fraudulent in fact. Upon turning to the evidence for the purpose of determining this question, the following circumstances are revealed, namely; (1) the grantee is the son-in-law of the grantor; (2) at the time conveyance is made an action is pending against the grantor to recover several thousand pesos of money; and of the pendency of this action the grantee has full knowledge; (3) the debtor has no other satisfied (4) the consideration for the transfer is less than half of the value of the property in question. These circumstances are familiar badges of fraud, and their combined effect is such, we think, as to raise a presumption of fraud, even apart from the legal presumption expressed in article 1297, and to impose upon the vendee the burden of proving the bona fides of the transaction by a preponderance of evidence and to the satisfaction of the court.
We are of the opinion that the proof adduced not only fails to remove the imputation of fraud thus cast upon the transaction but strongly tends to engender the suspicion that the transaction was wholly fictitious. It is true that both the plaintiff himself and Simon Batuigas, one of the subscribing witnesses, declared in the clearest terms that the transaction took place on July 3, 1912, as claimed; that two thousand pesos of the money charged hands in the act; and that the balance of the consideration consisted in the satisfaction and released of the debt for five hundred pesos owing from Juan Llenos to Eladio Alpuerto. It should not escape notice that neither Juan Llenos nor the other attesting witness, Geronimo Godinez, were examined as to the circumstances attending the transaction; and no explanation is given as to why these witnesses were not produced.
• The plaintiff did not try to show where or how he acquired the two thousand pesos of ready money with which the purchased was made, and it does not appear that his resource are sufficient to enable him readily to command that sum. The proof of the existence of the debt of five hundred pesos which Juan Llenos is supposed to have owed to the plaintiff and which constituted the balance of the purchase price over and above the amount which was paid in cash rests almost exclusively in the statement of the plaintiff himself. Upon these important points the testimony of Juan Llenos, if adduced, might possibly have shed something about what become of the money. the effect of these observations cannot be evaded by saying that the defendant might himself have summoned Juan Llenos and examined him in court. The burden of the proof was on the plaintiff; and the defendant could not be expected to call of the principles in the transaction which was impeached.
• We do not overlook the circumstances that the supposed sale in this case was effected by a contract with pacto de retro; and where such a sale is made, as frequently occurs, to secure money intended as a mere loan, the consideration is naturally less than the true value of the property. In such case, if the bona fides of the original contract is not under suspicion, the fact that the consideration for the sale is less than the value of the property is not indicative of fraud. But where the original sale is presumptively tained with fraud. But where the original sale is presumptively tained with fraud, the entire transaction from the time of the making of the contract until the consolidation of the title in the purchaser should be considered as a whole, and absolutely transferred at once. otherwise the contract of sale with pacto de retro could be as an instrument to shield parties in their efforts to defraud creditors. this cannot be permitted.
• In the connection reliance is placed by the appellee upon the case of Chiong Veloso vs. Ro and Levering (37 Phil. Rep., 63); and it is urged that this decision affords support for the view that the transaction in question, having been accomplished by means of contract of sale with facto de retro, cannot be considered fraudulent. It must be remember, however, that the original sale to contract of pacto de retro was made in the case last cited to a purchaser for value and in good faith; and the question was not so much whether the original transaction was fraudulent as whether the failure of the debtor to redeem was fraudulent as whether, it being the theory of the defendant that the plaintiff had colluded with the debtor (who as a sister) and had redeemed the property with her money or for her benefit. Moreover, it was found in that case that at the time of the original conveyance the debtor had other property more than sufficient to satisfy any judgment that might be recovered in the pending action.
• The conclusion to which we come is that the questioned transaction, if actually any simulated, was made in fraud of creditors and must be annulled.
b. Presumption against fraud
Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21, 2006, Per Garcia, J.:
• The existence of fraud or the intent to defraud creditors cannot plausibly be presumed from the fact that the price paid for a piece of real estate is perceived to be slightly lower, if that really be the case, than its market value. To be sure, it is logical, even expected, for contracting minds, each having an interest to protect, to negotiate on the price and other conditions before closing a sale of a valuable piece of land. The negotiating areas could cover various items. The purchase price, while undeniably an important consideration, is doubtless only one of them. Thus, a scenario where the price actually stipulated may, as a matter of fact, be lower than the original asking price of the vendor or the fair market value of the property, as what perhaps happened in the instant case, is not out of the ordinary, let alone indicative of fraudulent intention. That the spouses Ong acquiesced to the price of P12,500,000.00, which may be lower than the market value of the house and lot at the time of alienation, is certainly not an unusual business phenomenon.
• Lest it be overlooked, the disparity between the price appearing in the conveying deed and what the petitioner regarded as the real value of the property is not as gross to support a conclusion of fraud. What is more, one Oliver Morales, a licensed real estate appraiser and broker, virtually made short shrift of petitioner’s claim of gross inadequacy of the purchase price. Mr. Morales declared that there exists no gross disparity between the market value of the subject property and the price mentioned in the deed as consideration.
• It may be stressed that, when the validity of sales contract is in issue, two veritable presumptions are relevant: first, that there was sufficient consideration of the contract; and, second, that it was the result of a fair and regular private transaction. If shown to hold, these presumptions infer prima facie the transaction’s validity, except that it must yield to the evidence adduced which the party disputing such presumptive validity has the burden of overcoming. Unfortunately for the petitioner, it failed to discharge this burden. Its bare allegation respecting the sale having been executed in fraud of creditors and without adequate consideration cannot, without more, prevail over the respondents’ evidence which more than sufficiently supports a conclusion as to the legitimacy of the transaction and the bona fides of the parties.
c. Badges of fraud
Siguan v. Lim, G.R. No. 134685, November 19, 1999, Per Davide, JR., C.J.:
• [A] creditor need not depend solely upon the presumption laid down in Articles 759 and 1387 of the Civil Code. Under the third paragraph of Article 1387, the design to defraud may be proved in any other manner recognized by the law of evidence. Thus, in the consideration of whether certain transfers are fraudulent, the Court has laid down specific rules by which the character of the transaction may be determined. The following have been denominated by the Court as badges of fraud:
(1) The fact that the consideration of the conveyance is fictitious or is inadequate;
(2) A transfer made by a debtor after suit has begun and while it is pending against him;
(3) A sale upon credit by an insolvent debtor;
(4) Evidence of large indebtedness or complete insolvency;
(5) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially;
(6) The fact that the transfer is made between father and son, when there are present other of the above circumstances; and
(7) The failure of the vendee to take exclusive possession of all the property.
• The above enumeration, however, is not an exclusive list. The circumstances evidencing fraud are as varied as the men who perpetrate the fraud in each case. This Court has therefore declined to define it, reserving the liberty to deal with it under whatever form it may present itself.
Orsal v. Aurelio, En Banc, G.R. No. L-13310, Per Bautista Angelo, J.:
• At least three of the [seven] circumstances above indicated as determinative of the existence of fraud may be said to be existing in the instant case, to wit : (1) the transfer of the properties was made by the spouses Alisbo after knowing that a judgment of indemnity was rendered against their driver who is insolvent for which they are subsidiarily liable; (2) defendant spouses transferred all their properties without leaving anything behind which may be levied upon to satisfy the judgment of indemnity; and (3) according to the admission of defendants themselves, after the sale of the funeral business to Medel, Aurelio Alisbo continued to be the manager of the business. This is an indication that the transfer is a mere scheme to circumvent the civil liability of the spouses more so when there is no clear evidence that the consideration of the sale has been actually paid.
• Considering our ruling in Abaya vs. Enriquez, G.R. No. L-8988, May 17, 1957, where the sale was made even after the judgment has been rendered against the vendor, that the transaction cannot be rescinded on the ground of fraud, unless the complicity of the buyer in the fraud imputed to the vendor is established by other means than the presumption of fraud under Article 1387, and having in mind on the other hand that there is no clear proof of such direct complicity other than the suspicious circumstances we have pointed out above, which constitute badges of fraud incriminatory to the purchaser, it is the sense of this Court to remand this case to the trial court in order to give the parties an opportunity to present evidence relative to the matter so that no undue harshness may be committed against the purchaser if the sale be now rescinded merely on the strength of those circumstances.
d. Remedy: rescission
1) 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. (Siguan v. Lim, supra.)
2) 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. (Ibid.)
Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21, 2006, Per Garcia, J.:
• For a contract to be rescinded for being in fraud of creditors, both contracting parties must be shown to have acted maliciously so as to prejudice the creditors who were prevented from collecting their claims. Again, in this case, there is no evidence tending to prove that the spouses Ong and Lee were conniving cheats. In fact, the petitioner did not even attempt to prove the existence of personal closeness or business and professional interdependence between the spouses Ong and Lee as to cast doubt on their true intent in executing the contract of sale. With the view we take of the evidence on record, their relationship vis-à-vis the subject Greenhills property was no more than one between vendor and vendee dealing with each other for the first time. Any insinuation that the two colluded to gyp petitioner bank is to read in a relationship something which, from all indications, appears to be purely business.
• It cannot be overemphasized that rescission is generally unavailing should a third person, acting in good faith, is in lawful possession of the property, that is to say, he is protected by law against a suit for rescission by the registration of the transfer to him in the registry.
