G.R. No. L-19160, December 26, 1963
MARSMAN INVESTMENT LTD., ET AL., plaintiffs-appellants, vs. PHILIPPINE ABACA DEVELOPMENT CO., ET AL., defendants-appellees.

FACTS

Marsman Investment Ltd., a British corporation, filed a derivative suit in the Court of First Instance of Davao on behalf of itself and Marsman and Co., Inc., against Philippine Abaca Development Co. (PADCO) and its controlling stockholder, Mary A. Marsman. The complaint alleged three causes of action. First, that PADCO’s corporate existence had ended with unpaid debts to the plaintiffs. Second, that PADCO had mortgaged and subsequently sold a large tract of land in Davao to Mary A. Marsman, which transactions were alleged to be sham, simulated, and fraudulent, executed to prejudice PADCO’s other creditors. Third, a claim for litigation expenses and attorney’s fees.
The defendants moved to dismiss the complaint. The trial court granted the motion, holding that the first cause of action (for breach of personal obligation) was improperly joined with the second (for rescission of fraudulent conveyance) due to a lack of common venue. It also ruled that the second cause of action could not be prosecuted because the plaintiffs had released their claims against PADCO in 1959 and because Marsman and Co., Inc., had repudiated the suit. The third cause of action was deemed dependent on the others. The plaintiffs appealed the dismissal.

ISSUE

Whether the trial court correctly dismissed the complaint.

RULING

The Supreme Court affirmed the order of dismissal, but on different legal grounds. The Court clarified that the joinder of causes of action was proper. The first cause of action, alleging the unpaid debts, was not an independent claim for collection but was necessary to establish the plaintiffs’ standing as creditors to sue for the rescission of the allegedly fraudulent mortgage and sale under Articles 1381(3) and 1382 of the Civil Code. The two causes were logically combined to lay the foundation for the rescissory action.
The Court also rejected the trial court’s reliance on the repudiation of the suit by Marsman and Co., Inc. The complaint was a derivative suit filed precisely because Mary A. Marsman was in absolute control of that corporation; allowing a majority-controlled entity to repudiate such a suit would nullify the very purpose of derivative actions.
However, the dismissal was ultimately upheld based on a fatal defect in the plaintiffs’ cause of action. The record established that in April and May 1959, both plaintiff corporations had executed valid releases, waiving their credits against PADCO. These releases were executed two years before the suit was filed and were not alleged to be invalid. Consequently, upon executing those releases, the plaintiffs ceased to be creditors of PADCO. Under the Civil Code, only actual creditors have the legal personality to institute an action for rescission of fraudulent alienations made by their debtor. Having waived their credits, the plaintiffs lost any legal interest in assailing the transfer of PADCO’s property to Mary A. Marsman. With no remaining creditor status, they had no cause of action for rescission. The order of dismissal was therefore affirmed.