G.R. No. 173349 ; February 9, 2011
SAMUEL U. LEE and PAULINE LEE and ASIATRUST DEVELOPMENT BANK, INC., Petitioners, vs. BANGKOK BANK PUBLIC COMPANY, LIMITED, Respondent.

FACTS

Respondent Bangkok Bank extended credit lines to corporations owned by the Lee family. The Lee family members, including petitioner Samuel Lee, executed continuing guarantees, making themselves solidarily liable as principal debtors for the corporations’ obligations. Later, Samuel Lee purchased properties in Antipolo. When another Lee corporation defaulted on a separate loan from petitioner Asiatrust Development Bank, Samuel Lee mortgaged these Antipolo properties to Asiatrust in January 1998 to secure the debt. The mortgage was annotated on the titles on February 23, 1998. Meanwhile, the Lee corporations defaulted on their obligations to Bangkok Bank. In February 1998, the corporations filed a petition for suspension of payments with the SEC, which issued an order enjoining the disposition of corporate assets. Subsequently, Bangkok Bank filed a collection case against the Lee family based on their guarantees and obtained a writ of preliminary attachment over their properties, which was annotated on the Antipolo titles on March 18, 1998. Bangkok Bank then sued to rescind the mortgage to Asiatrust, alleging it was a fraudulent conveyance intended to defraud creditors.

ISSUE

Whether the real estate mortgage constituted by Samuel Lee in favor of Asiatrust is a fraudulent conveyance under Article 1387 of the Civil Code, thereby making it rescissible.

RULING

No, the mortgage is not a fraudulent conveyance. The Supreme Court affirmed the Court of Appeals’ reversal of the trial court and ruled in favor of Asiatrust and the Lee spouses. For a contract to be rescinded as a fraudulent conveyance under Article 1387, the creditor must prove that the debtor made the alienation to defraud creditors, and that the creditor seeking rescission has no other legal remedy to satisfy his claim. The Court found both elements absent. First, the mortgage was constituted for valuable and sufficient consideration—to secure a pre-existing, legitimate obligation of a Lee corporation to Asiatrust. It was not a gratuitous alienation. The timing, while suspicious, did not by itself prove fraud, especially since the SEC suspension order applied to corporate assets, not directly to Samuel Lee’s personal properties mortgaged here. Second, and decisively, Bangkok Bank failed to exhaust legal remedies against the principal debtors (the Lee corporations) and the solidary guarantors (the Lee family). A rescissory action is subsidiary; it can only be invoked when the creditor has exhausted the properties of the principal debtor. Bangkok Bank’s separate collection case against the Lees was still pending. Since it had not yet executed a judgment against the guarantors’ other assets, it could not avail itself of the extraordinary remedy of rescission. The mortgage in favor of Asiatrust, being a registrable lien, was validly annotated and thus had priority over Bangkok Bank’s subsequent attachment.