G.R. No. 152347 ; June 21, 2006
Union Bank of the Philippines, Petitioner, vs. Sps. Alfredo Ong and Susana Ong and Jackson Lee, Respondents.

FACTS

Petitioner Union Bank extended a credit line to Baliwag Mahogany Corporation (BMC), secured by a Continuing Surety Agreement executed by respondent spouses Alfredo and Susana Ong, who owned the majority of BMC’s stock. On October 22, 1991, the spouses sold a Greenhills property to their co-respondent, Jackson Lee, for P12.5 million. The sale was registered the following day. BMC had already availed of the credit facilities and subsequently filed a Petition for Rehabilitation. Union Bank then filed an action for rescission of the sale, alleging it was executed in fraud of creditors. The bank cited insufficient consideration, Lee’s alleged lack of financial capacity, and the spouses’ retention of possession via a lease contract as badges of fraud.
The Regional Trial Court ruled in favor of Union Bank, declaring the sale null and void. It found a holistic combination of circumstances constituting badges of fraud, particularly the spouses’ knowledge of BMC’s insolvency when they disposed of the property. The Court of Appeals reversed this decision, holding that the sale enjoyed a presumption of regularity and that Union Bank failed to prove the spouses had no other leviable assets to satisfy their obligation, a requisite for rescission based on fraud of creditors.

ISSUE

Whether the Court of Appeals erred in reversing the trial court and in ruling that the sale between the spouses Ong and Lee was not in fraud of creditors.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals’ decision. The legal logic is anchored on the requirements for rescinding a contract under Article 1381(3) of the Civil Code for fraud of creditors. The Court emphasized that for such rescission, the creditor must prove two elements: (1) the debtor’s fraudulent intent, and (2) that the creditor cannot recover their claim in any other manner, meaning the debtor has no other sufficient leviable property.
The Court found Union Bank’s evidence insufficient to establish actual fraudulent intent. The alleged badges of fraud, such as the price being below market value and the execution of a leaseback, were adequately explained by the respondents and did not conclusively prove a scheme to defraud. More critically, Union Bank failed to discharge its burden of proving the second essential element. The bank merely focused on BMC’s insolvency but did not present competent evidence to show that the spouses Ong themselves, as the solidary sureties, had no other leviable assets from which the bank could collect. Since the bank did not demonstrate that it could not satisfy its claim from other properties of the sureties, the rescission of the sale could not be granted. The contract of sale, being regular on its face, stands.