PHILIPPINE BANK OF COMMUNICATIONS, PETITIONER, VS. COURT OF APPEALS, JOSEPH L. G. CHUA AND JALECO DEVELOPMENT, INC., RESPONDENTS.

Philippine Bank of Communications versus Chua

The Case

This is a petition for review filed by the Philippine Bank of Communications against Joseph L. G. Chua and Jaleco Development, Inc., arising from a complaint for annulment of a Deed of Exchange on the ground that the deed was executed in fraud of creditors. The bank had extended credit accommodations to two corporations for which Chua stood as surety, and it later discovered that Chua had transferred his only real property to Jaleco in exchange for shares of stock. The case matters because it is the classic illustration of the accion pauliana, the rescissory action available to a creditor against a fraudulent alienation by the debtor, and of the piercing of the corporate veil where the transferee corporation is a mere alter ego of the debtor.

Procedural History

The bank filed a complaint for annulment of the Deed of Exchange before the Regional Trial Court of Makati, which dismissed the complaint. The bank appealed to the Court of Appeals, which affirmed the dismissal. The appellate court held that the Deed of Exchange was never submitted or offered in evidence, that the annulment case was premature because two other actions for sums of money against Chua as surety were still pending, and that the bank's interests were in the meantime sufficiently protected by a writ of preliminary attachment on properties of one of the principal debtors. The bank then elevated the matter to the Supreme Court by petition for review.

Facts

Fortune Motors (Phils.), Inc. executed surety agreements in favor of the bank in April 1976 and October 1981, with Chua as one of the sureties. Forte Merchant Finance, Inc. likewise executed a surety agreement in March 1981, again with Chua as one of the sureties. From March to May 1983, Fortune Motors obtained credit accommodations through trust receipts with a total principal amount of 2,492,543 pesos. From May 1983 to March 1984, Forte Merchant Finance obtained credit accommodations through a trust receipt and promissory notes totaling 2,609,862 pesos.

On October 24, 1983, Chua executed a Deed of Exchange transferring a parcel of land in Dasmariñas Village, Makati, covered by a transfer certificate of title, to Jaleco Development, Inc. in exchange for 12,000 shares with a par value of 1,200,000 pesos. Title was issued in Jaleco's name on November 24, 1983. Shortly thereafter, Chua sold 6,000 of those shares to Chua Tiong King for 600,000 pesos and another 6,000 shares to Guillermo Jose, Jr. for 600,000 pesos, while Chua's wife sold 6,000 shares to Chua Tiong King for 200,000 pesos.

When both principal debtors failed to pay, the bank sued them and Chua, among others, for sums of money before the Regional Trial Court of Manila and obtained a writ of preliminary attachment. The attached properties of Fortune Motors turned out to be already mortgaged or attached to prior lien holders for about 70,000,000 pesos, and Forte Merchant Finance had no property. The bank then located the Dasmariñas property, only to find it already transferred to Jaleco. Investigation with the Securities and Exchange Commission showed that Jaleco's stockholders were mostly members of Chua's immediate family, and that before the acquisition the family held 88 percent of the shares, and after it, 94 percent. Despite the sale, Chua continued to stay on the property.

Issues

• Whether or not the Court of Appeals erred in refusing to consider the Deed of Exchange as evidence when it was attached to the complaint and its existence was admitted by Chua and not validly denied by Jaleco.
• Whether or not the action for annulment of the Deed of Exchange is premature because of the pendency of the two actions for sums of money against Chua as surety.
• Whether or not the bank, as creditor, may bring the rescissory action to annul the Deed of Exchange executed in fraud of creditors.
• Whether or not the separate personality of Jaleco may be disregarded and the corporate veil pierced.

Applicable Provisions

Section 4, Rule 129 of the Rules of Court on judicial admissions provides:

Judicial Admissions. - An admission, verbal or written, made by a party in the course of the proceeding in the same case, does not require proof. The admission may be contradicted only by showing that it was made through palpable mistake or that no such admission was made.

This provision supplies the basis for treating Chua's admission of the Deed of Exchange as requiring no further proof.

Article 2047 of the Civil Code, cited by the Court on the liability of a surety, provides:

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.

This provision is the source of Chua's solidary liability, which in turn gives the bank the standing of a creditor entitled to protect its credit.

Ruling

On the first issue, the Court ruled that the appellate court committed reversible error in not admitting the Deed of Exchange as evidence. Chua expressly admitted the existence of the deed in his answer, and that admission falls squarely within the scope of judicial admissions. Jaleco's statement that it had no knowledge or information sufficient to form a belief as to the truth of the allegation was an invalid denial, because the fact was plainly and necessarily within its own knowledge. The Court applied its earlier ruling that documents attached to the complaint are considered part of it and may be considered as evidence although not formally introduced.

On the second issue, the Court held that the pendency of the two actions for sums of money did not render the annulment case premature. As surety, Chua bound himself solidarily with the principal debtors, and the bank may demand payment of the whole obligation from him directly. Since the only property of Chua was transferred to Jaleco after the debts became due, the bank had the right to file the annulment action so as not to make the judgments in the two cases illusory. The Court quoted with approval the rule that rescission requires the existence of creditors at the time of the fraudulent alienation, and that while the credit must be prior to the alienation, the date of the judgment enforcing it is immaterial.

On the third and fourth issues, the Court held that the circumstances showed the Deed of Exchange was not what it purported to be. Chua and his immediate family controlled Jaleco, the deed covered Chua's only property at a time when his obligations were due and demandable, and despite the sale Chua continued to stay on the property. These circumstances showed a sham or simulated transaction executed with the sole intention to defraud the creditor. The Court therefore disregarded Jaleco's separate personality, holding that the corporation is a mere alter ego of Chua, and that the transaction must be considered a transaction between Chua and himself.

Doctrine

A creditor may bring the rescissory action, the accion pauliana, to annul a fraudulent alienation by the debtor, provided the credit existed at the time of the alienation even if not yet due, and is already due at the time the action is brought. The pendency of an action to enforce the credit does not make the rescissory action premature, because the judgment enforcing the credit is merely declaratory and retroactive to the date the credit was constituted. A surety who binds himself solidarily with the principal debtor is directly liable, and the creditor may go after him at once. Documents attached to the complaint form part of it and may be considered as evidence even if not formally offered, especially where their authenticity is admitted or not validly denied under the rule on judicial admissions. Finally, the separate personality of a corporation may be disregarded when it is used as a cloak or cover for fraud or illegality, or to work an injustice, or when necessary for the protection of creditors.

Disposition

The Supreme Court granted the petition, reversed and set aside the decision of the Court of Appeals, and declared null and void the Deed of Exchange between Chua and Jaleco as well as the title issued in Jaleco's name on the basis thereof, with costs against the private respondents.

Remember This

The single line worth memorizing is that the accion pauliana lies even while the creditor's collection suit is pending, because the judgment is merely declaratory and retroactive to the date the credit arose. Examiners use this case to test the accion pauliana, judicial admissions, and the piercing of the corporate veil where the transferee corporation is the debtor's alter ego.