G.R. No. 226213. September 27, 2017.
G. HOLDINGS, INC., PETITIONER, VS. CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC. (CEPALCO) AND FERROCHROME PHILIPPINES, INC., RESPONDENTS.

FACTS

Cagayan Electric Power and Light Company, Inc. (CEPALCO) supplied power to Ferrochrome Philippines, Inc. (FPI). Due to FPI’s unpaid electric bills exceeding P29 million by May 1996, CEPALCO disconnected the power supply and filed a collection suit. The RTC-Pasig rendered a Partial Summary Judgment in 1999, ordering FPI to pay CEPALCO. In 2004, the RTC-Pasig granted CEPALCO’s motion for execution pending appeal. The sheriff levied FPI’s properties, including its ferro-alloy smelting plant.
Prior to the levy, on March 11, 2003, FPI executed a Deed of Assignment in favor of G. Holdings, Inc. (GHI), a sister company, covering all of FPI’s properties at the PHIVIDEC Industrial Estate. The stated consideration was FPI’s obligation to GHI amounting to P50,366,926.71. Based on this deed, GHI filed a separate case before the RTC-CDO to nullify the sheriff’s levy, claiming ownership of the levied properties. CEPALCO countered that the Deed of Assignment was an absolutely simulated contract, executed in fraud of creditors like CEPALCO, especially since it was made after the RTC-Pasig had already rendered a judgment against FPI.

ISSUE

Whether the Deed of Assignment executed by FPI in favor of GHI is an absolutely simulated or fictitious contract, and therefore void ab initio.

RULING

Yes, the Deed of Assignment is an absolutely simulated contract. The Supreme Court affirmed the findings of the lower courts that the contract lacked a true cause or consideration, rendering it void from the beginning under Article 1409 of the Civil Code. The legal logic hinges on the inconsistency between the deed’s terms and the contemporaneous documents outlining the parties’ actual intent.
The Deed of Assignment purported an absolute transfer of ownership. However, a letter dated February 28, 2003, confirmed by GHI, revealed the true agreement: the assignment was merely security for FPI’s debt, and the parties contemplated future operational arrangements (Options A or B) where FPI would either operate the plant or retain rights to the work process for a share of earnings. This letter proved the parties did not genuinely intend an absolute sale; the deed did not reflect their true meeting of the minds. A simulated contract has no cause because the declared cause is false. Here, the declared cause—an absolute conveyance for a pre-existing debt—was belied by the evidence showing a plan for continued collaboration and profit-sharing, not an outright transfer.
Furthermore, the timing of the deed—executed after a judgment was rendered against FPI in favor of CEPALCO—supported the finding of simulation intended to defraud creditors. Since an absolutely simulated contract produces no legal effect, GHI acquired no ownership over the properties. Thus, the properties rightfully remained part of FPI’s assets subject to execution for the benefit of its creditor, CEPALCO. The sheriff’s levy was valid.