SAMUEL U. LEE and PAULINE LEE and ASIATRUST DEVELOPMENT BANK, INC.

, Petitioners,
vs. BANGKOK BANK PUBLIC COMPANY, LIMITED, Respondent.

FACTS:

- Midas Diversified Export Corporation (MDEC) and Manila Home Textile, Inc. (MHI), both
owned controlled by the Lee family, entered into two separate Credit Line Agreements
(CLAs) with Bangkok Bank Public Company, Limited (Bangkok Bank).
- Bangkok Bank required guarantees from the Lee family so the Lee family executed
guarantees in favor of Bangkok Bank for the CLA for MDEC and MHI, wherein they
irrevocably and unconditionally guaranteed, as principal debtors, the payment of any and
all indebtedness of MDEC and MHI with Bangkok Bank.
- Prior to the granting of the CLAs, Bangkok Bank conducted a property check on the Lee
family and required Samuel Lee to submit a list of his properties. Bangkok Bank, however,
did not require the setting aside, as collateral, of any particular property to answer for any
future unpaid obligation.
- Subsequently, MDEC and MHI made several availments from the CLAs. In time, the
advances, which MDEC and MHI had taken out from the CLAs, amounted to three million
dollars (USD 3,000,000).
- MDEC was granted a loan facility by Asiatrust Development Bank, Inc. (Asiatrust). This
facility had an available credit line of PhP 40,000,000 for letters of credit, advances on bills
and export packing; and a separate credit line of USD 2,000,000 for bills purchase.
- In the meantime, Samuel bought several parcels of land and later entered into a joint
venture with Louisville Realty and Development Corporation to develop the properties into
a residential subdivision, called Louisville Subdivision.
- These properties in Cupang, Antipolo are the subject properties in the instant case
(Antipolo properties) and are covered by Transfer Certificate of Title (TCT) Nos. 329663 to
329511 of the Registry of Deeds of Rizal in Marikina City (RD).
- MDEC availed itself of the omnibus credit line granted by Asiatrust on three occasions: PhP
10,000,000; PhP 11,000,000; and another
- When MDEC had defaulted in the payment of its loan, Asiatrust initiated negotiations with
MDEC and required the Lee family to provide additional collateral that would secure the
loan.
- Negotiation was concluded when Asiatrust had agreed to Samuel’s proposition that he
would mortgage the subject Antipolo properties to secure the loan and execute a REM over
the properties.
- While the titles of the Antipolo properties had been delivered by Samuel to Asiatrust and
the REM had been executed in January 1998, spouses Samuel and Pauline Lee (spouses
Lee) were requested to sign a new deed of mortgage on February 23, 1998, and, thus, it
was only on that date that the said mortgage was actually notarized, registered, and
annotated at the back of the titles
- MDEC and MHI initially had made payments with their CLAs until they defaulted and
incurred aggregate obligations to Bangkok Bank in the amount of USD 1,998,554.60 for
MDEC and USD 800,000 for MHI.
- Similarly, the Lee corporations defaulted in their obligations with other creditors.
- MDEC, MHI, and three other corporations owned by the Lee family filed before the
Securities and Exchange Commission (SEC) a Consolidated Petition for the Declaration of a
State of Suspension of Payments and for Appointment of a Management
Committee/Rehabilitation Receiver. The SEC issued a Suspension Order enjoining the Lee
corporations from disposing of their property.
- Bangkok Bank instituted an action before the RTC, Branch 141 in Makati City to recover
the loans extended to MDEC and MHI under the guarantees and was granted writ of
attachment.
- While enforcing the writs of preliminary attachment, Bangkok Bank discovered that the
spouses Lee had executed a real estate mortgage over the subject Antipolo properties in
favor of Asiatrust; and that the mortgage had previously been annotated on the titles.
- Believing the REM and the foreclosure sale to be fraudulent, Bangkok Bank did not redeem
the subject properties. As there had been no effort to redeem the properties,
consequently, the TCTs covering the subject properties were consolidated in the name of
Asiatrust.
- Bangkok filed a suit in the RTC, which found no concrete proof of the alleged fraud
committed by the Lee family and Asiatrust, more so, that of a collusion or conspiracy
between them. Consequently, it ruled that Art. 1381(3) of the Civil Code does not apply.
 The appellate court reversed this decision, holding that fraud was perpetrated pursuant to
the presumption in the second paragraph of Art. 1387 of the Civil Code, which provides
that “alienations by onerous title are also presumed fraudulent when made by persons
against whom … some writ of attachment has been issued.”
- RTC: dismissed the case; found no concrete proof of the alleged fraud committed by the
Lee family and Asiatrust, more so, that of a collusion or conspiracy between them; ruled
that Art. 1381(3) and Art. 1387 of the Civil Code does not apply.
- CA: reversed and set aside the RTC decision; ruled that Samuel, being a guarantor, is
jointly and severally liable to Bangkok Bank for the corporate debts of MDEC and MHI, as
he divested himself from the protection of the limited liability doctrine, which, the CA held,
was shown (1) through the inclusion of the said subject Antipolo properties in the list
submitted to the SEC; and (2) by Samuel, through the guarantees that he executed, thus
voluntarily binding himself to the payment of the loans incurred from Bangkok Bank.

ISSUE:

- WON the REM executed over the subject Antipolo properties and the foreclosure sale were
committed in fraud of Lee’s other creditors, and, as a consequence of such fraud, the
questioned mortgage could, therefore, be rescinded. NO

RULING:

- The presumption of fraud under Art. 1387 of the Civil Code does not apply in the present
case
- Under Art. 1381(3) of the Civil Code, contracts, which were "undertaken in fraud of
creditors when the latter cannot in any other manner collect the claims due them," are
rescissible.
- Under Art. 1387, All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered in fraud of creditors, when the donor
did not reserve sufficient property to pay all debts contracted before the donation.
- Alienations by onerous title are also presumed fraudulent when made by persons against
whom some judgment has been rendered in any instance or some writ of attachment has
been issued. The decision or attachment need not refer to the property alienated, and
need not have been obtained by the party seeking the rescission.
- The presumption of fraud established under Art. 1387 does not apply to registered lands IF
"the judgment or attachment made is not also registered.
- In this case, prior to the annotation of the REM, SBC was able to successfully acquire a
writ of preliminary attachment in its favor against the spouses Lee in a case for a sum of
money for nonpayment of its obligation. Bangkok Bank alleges that because of this, the
presumption of fraud under Art. 1387 of the Civil Code applies. But while a judgment
was made against the spouses Lee in favor of SBC on January 30, 1998, this,
however, was not annotated on the titles of the subject properties. In fact, there
is no showing that the judgment has ever been annotated on the titles of the
subject properties.
- Considering that the earlier SBC judgment or attachment was not annotated on the titles
of the subject Antipolo properties, prior to the execution of the REM, the presumption of
fraud under Art. 1387 of the Code clearly cannot apply.
- Even assuming that Art. 1387 of the Code applies, the execution of a mortgage is not
contemplated within the meaning of alienation by onerous title under the said provision
- Under Art. 1387 of the Code, fraud is presumed only in alienations by onerous title of a
person against whom a judgment or attachment has been issued. The term, alienation,
connotes the "transfer of the property and possession of lands, tenements, or other things,
from one person to another."
- A mortgage does not contemplate a transfer or an absolute conveyance of a real property.
It is "an interest in land created by a written instrument providing security for the
performance of a duty or the payment of a debt.”
- Asiatrust, being a third person in good faith, should not be automatically presumed to have
acted fraudulently by the mere execution of the REM over the subject Antipolo properties,
there being no evidence of fraud or bad faith. Regrettably, in ratiocinating that fraud was
 committed by both the spouses Lee and Asiatrust, the CA merely anchored its holding on
the presumption espoused under Art. 1387 of the Code, nothing more.
- Neither shall rescission take place when the things which are the object of the contract are
legally in the possession of third
- The action to rescind contracts in fraud of creditors is known as accion pauliana. For this
action to prosper, the following requisites must be present: (1) the plaintiff asking for
rescission has a credit prior to the alienation, although demandable later; (2) the debtor
has made a subsequent contract conveying a patrimonial benefit to a third person; (3) the
creditor has no other legal remedy to satisfy his claim; (4) the act being impugned is
fraudulent; (5) the third person who received the property conveyed, if it is by onerous
title, has been an accomplice in the fraud.
- Records show that the fourth and fifth requisites enumerated above are absent.
- As between Asiatrust and Bangkok Bank, the former has a better right over the subject
Antipolo properties, it being the first to annotate its lien on the titles of the properties
- It is evidently a well-settled and elementary principle that the rights of the first mortgage
creditor or mortgagee over the mortgaged properties are superior to those of a subsequent
attaching creditor and other junior mortgagees.
- WHEREFORE, the petition is hereby GRANTED. Accordingly, the CA’s Decision is
REVERSED and SET ASIDE. The RTC’s Decision is hereby REINSTATED.