CARLOS KAHN AND LUZ S. KAHN, PLAINTIFFS-APPELLANTS, VS. JACOBO ASUNCION, DECEASED, SUBSTITUTED BY TRINIDAD R. DE ASUNCION, ROBERTO ASUNCION, SILVINO ANTONIO AND CONSUELO ASUNCIO…

Kahn versus Asuncion

The Case

This is the case of Kahn versus Asuncion, decided by the Supreme Court in April 1967. Luz S. Kahn, assisted by her husband Carlos Kahn, sued the spouses Jacobo Asuncion and Trinidad R. de Asuncion to enforce an alleged oral agreement for the development of the Asuncions' parcel of land into a subdivision. The defendants raised the statute of frauds as an affirmative defense, and the trial court dismissed the complaint outright on that ground. The case matters because it teaches when a defendant may win on the statute of frauds at the very threshold of the case, and when the claim of partial execution is still too uncertain to be resolved without a full trial.

Procedural History

Luz Kahn filed her complaint in the Court of First Instance of Rizal. The defendants answered, denying that any agreement was reached and pleading the statute of frauds as an affirmative defense. They then moved for a preliminary hearing on that defense, and the court granted the motion. After the hearing and the submission of memoranda, the trial court issued an order dismissing the complaint on the ground that the claim is not enforceable under the statute of frauds. Kahn appealed directly to the Supreme Court, raising only questions of law. Pending the appeal, a notice of lis pendens had been registered on the defendants' title, and the defendants moved to cancel it; the Court deferred action until the case was taken on the merits. The Court also allowed the substitution of the surviving spouse for Jacobo Asuncion, who had died in December 1965.

Facts

In January 1964, according to the complaint, Luz Kahn and the Asuncions entered into an oral agreement. Kahn would develop the Asuncions' lot into a subdivision of fifty lots. The gross income would be divided at fifty five percent for Kahn and forty five percent for the Asuncions. Kahn would borrow money from a lending institution to pay off the debts secured by encumbrances on the lot, and the Asuncions would amortize that loan out of their share. The lots would be sold at not less than forty pesos per square meter, and Kahn would spend at least 160,000 pesos on development and on a right of way. The Asuncions would immediately deliver possession of the lot.

Kahn alleged that she had performed her side: she obtained a loan or overdraft line with her bank to pay the encumbrances, negotiated with prospective buyers, contracted an engineer to subdivide the land, caused a project study to be made and paid for, and took over negotiations for a right of way over an adjoining government corporation lot. She asked that the oral agreement be reduced to a public instrument, that the land be delivered, and that a twelve meter right of way be granted, plus damages and attorney's fees.

The Asuncions answered that no agreement was ever reached, that the joint venture negotiations were abandoned, and that later talks for an outright sale also failed. They pleaded the statute of frauds. After a preliminary hearing, the trial court dismissed the complaint. The Supreme Court noted that the parties never went to trial and adduced no evidence, so the dismissal amounted to a dismissal upon a motion to dismiss.

Issues

• Whether or not the statute of frauds bars the present suit to enforce the alleged oral agreement.
• Whether or not the plaintiff's alleged acts of partial execution take the agreement out of the statute of frauds, so that the dismissal at the preliminary stage was proper.

Applicable Provisions

Article 1403 of the Civil Code provides:

Article 1403. The following contracts are unenforceable, unless they are ratified: (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein.

This is the provision the defendants invoke, because the alleged contract concerns real property and is not in writing.

Section 3 of Rule 16 of the Rules of Court provides:

Section 3. Hearing and order. After hearing the court may deny or grant the motion to allow amendment of pleading, or may defer the hearing and determination of the motion until the trial if the ground alleged therein does not appear to be indubitable.

This is the procedural rule the Court applies in deciding whether the dismissal could stand at the preliminary stage.

Ruling

On the first issue, the Court did not rule that the statute of frauds does or does not bar the suit. It held that the question could not be resolved on the pleadings alone. The defendants contended that the contract is one for the sale of real property or an interest therein and so is unenforceable for want of writing. Kahn countered that even if the contract falls under the statute, it has been partially executed through her performance. The Court explained the reason for the exception: executed agreements are excluded from the statute because otherwise fraud would be promoted instead of prevented, since one party could keep the benefits of the other's partial execution while evading his own obligations.

On the second issue, the Court examined each alleged act of partial execution and found that none could be shown, from the records, to have redounded to the defendants' benefit. On the loan or overdraft line, the complaint's use of "and/or" left it unclear whether a loan was actually obtained, and nothing appeared on record about the status of the encumbrances. On the negotiations with buyers, the Court asked what benefit they yielded to the defendants. On the engineer, the subdivision had not yet been actually undertaken. On the project study, there was no evidence of who asked for it or what was agreed. On the right of way, whether the defendants' lot profited was a matter best left for evidence. The Court also noted that negotiations for a joint venture and later for an outright purchase were undenied, and that the plaintiff referred to an alleged handwritten document signed by the defendants, which should be threshed out before the trial court.

Since the question whether the defendants benefited from the plaintiff's acts could not as yet be ascertained from the records, the ground for dismissal under the statute of frauds did not appear to be indubitable. The Court therefore applied Section 3 of Rule 16 and held that the determination should be deferred until trial.

Doctrine

First, a contract for the sale of real property or of an interest therein is unenforceable by action unless it, or some note or memorandum, is in writing and subscribed by the party charged, under Article 1403 of the Civil Code.

Second, the statute of frauds does not apply where the agreement has been partially executed, because to allow a party to keep the benefits of the other's performance while evading his own obligations would promote the very fraud the statute seeks to prevent.

Third, a motion to dismiss grounded on the statute of frauds may be granted only where the ground is indubitable. Where the benefit to the defendant from the plaintiff's partial acts cannot be ascertained from the records, the court must defer determination until trial, as Section 3 of Rule 16 commands.

Disposition

The Supreme Court set aside the order of dismissal and remanded the case to the trial court for trial and further proceedings, without prejudice to the ultimate resolution of the statute of frauds defense as the evidence may warrant, and denied the motion to lift the annotation of lis pendens.

Remember This

The one line to memorize: the statute of frauds yields to partial execution, and a dismissal on that ground stands only if the ground is indubitable. Examiners use this case to test the indubitability standard for motions to dismiss and the exception of partial execution to the statute of frauds.