G.R. No. 173349 - Spouses Lee vs. Bangkok Bank Public Co., Ltd.

Case Summary (G.R. No. 173349)

Business Relationships and the Credit Line Agreements

Midas Diversified Export Corporation (MDEC) and Manila Home Textile, Inc. (MHI) entered into separate Credit Line Agreements (CLAs) with Bangkok Bank on November 29, 1995 and April 17, 1996, respectively. The Lee family owned and controlled both corporations, with management led by members of the Lee family. Bangkok Bank required guarantees from the Lee family for the two CLAs. Accordingly, the Lee family executed guarantees in favor of Bangkok Bank on December 1, 1995 (for MDEC) and April 17, 1996 (for MHI). Under the guarantees, the Lee family irrevocably and unconditionally guaranteed, as principal debtors, the payment of any and all indebtedness of MDEC and MHI with Bangkok Bank.

Asiatrust’s Facility and the Proposed Security Over the Antipolo Properties

MDEC later obtained a loan facility from Asiatrust Development Bank, Inc. (Asiatrust) on July 25, 1996. The facility included an available credit line that enabled advances on bills and export packing, and a separate credit line for bills purchase. In May 1997, Samuel bought parcels of land in Cupang, Antipolo, which later formed part of a joint venture to develop a residential subdivision known as the Louisville Subdivision. The Antipolo properties were covered by multiple Transfer Certificates of Title issued by the Registry of Deeds of Rizal in Marikina City.

By 1997, MDEC availed itself of its omnibus credit line with Asiatrust. In August 1997, after MDEC defaulted on a loan that matured on July 15, 1997, Asiatrust required additional collateral from the Lee family. In December 1997, negotiations culminated in Samuel’s proposition that the Antipolo properties be mortgaged to secure the loan. While the REM had been executed in January 1998 after the titles were delivered, spouses Lee were requested to sign a new deed of mortgage on February 23, 1998, and only on that date was the mortgage actually notarized, registered, and annotated at the back of the titles.

Defaults, Other Creditors, and the SEC Suspension of Payments

MDEC and MHI made payments until they later defaulted and incurred total obligations to Bangkok Bank of USD 1,998,554.60 for MDEC and USD 800,000 for MHI. The Lee corporations also defaulted with other creditors. Security Bank Corporation (SBC) filed a case for collection of money resulting from nonpayment of obligations, docketed as Civil Case No. 98-196 before the RTC, Branch 132 in Makati City. On January 30, 1998, the RTC issued a Writ of Preliminary Attachment in favor of SBC. The writ, however, was not registered or annotated on the titles of the Antipolo properties at the registry.

On February 16, 1998, MDEC, MHI, and three other Lee family-owned corporations 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 petition acknowledged the indebtedness of MDEC and MHI to Bangkok Bank and admitted that matured and maturing obligations could not be met due to liquidity problems. It also listed creditors, including Asiatrust, and attached a list of properties that included the Antipolo properties. The list indicated that the Antipolo properties had already been earmarked or served as security for MDEC’s unpaid obligation with Asiatrust.

On February 20, 1998, the SEC issued a Suspension Order enjoining the Lee corporations from disposing of their property except in the ordinary course of business, and from making payments outside legitimate business expenses during the pendency of the petition.

Bangkok Bank’s Attachment Actions and Discovery of the Earlier REM

On March 12, 1998, Bangkok Bank filed an action before the RTC, Branch 141 in Makati City, docketed as Civil Case No. 98-628, seeking recovery of the loans extended under the guarantees. Bangkok Bank’s application for preliminary attachment was granted on March 17 and 18, 1998, covering, among others, the properties of the Lee family in Antipolo, Cavite, Quezon City, and Baguio. During enforcement of the writs, Bangkok Bank discovered that the spouses Lee had already executed and that the REM had already been annotated on the titles of the Antipolo properties in favor of Asiatrust. Bangkok Bank’s writs of preliminary attachment were subsequently inscribed at the back of the TCTs, next to the REM annotation.

With MDEC still unable to pay the defaulting loans due to Asiatrust, Asiatrust foreclosed the mortgaged Antipolo properties. On April 15, 1998, Asiatrust won as highest bidder at the auction sale for PhP 20,864,735. The sale was registered on April 21, 1998. Up to the filing of the memoranda before the Court, Asiatrust’s action against MDEC and the spouses Lee for collection of deficiency at least PhP 14,800,000 remained pending before the CA. Because Bangkok Bank believed the REM and foreclosure sale were fraudulent, it did not redeem. Consequently, on April 30, 1999, TCTs were consolidated in Asiatrust’s name, and 120 new titles were issued in Asiatrust’s name without annotations of Bangkok Bank’s attachment writs, which were deemed canceled.

The Louisville Subdivision Results After Foreclosure and Bangkok Bank’s Subsequent Suit

After foreclosure, only twelve of the foreclosed properties in the Louisville Subdivision were sold for a maximum price of PhP 250,000 for a house and lot. The remaining one hundred eight titles could not be immediately converted into cash. Asiatrust maintained security services and paid real estate taxes for the properties.

Believing the REM and foreclosure sale were fraudulent, Bangkok Bank filed the instant suit on July 20, 1999 before the RTC, Branch 73 in Antipolo City, Civil Case No. 99-5388, for rescission of the REM, annulment of the April 15, 1998 foreclosure sale, cancellation of the new titles issued in Asiatrust’s name, and damages of PhP 600,000. Bangkok Bank alleged that the presumption of fraud under Article 1387 of the Civil Code applied because of SBC’s preliminary attachment. It also alleged collusion and fraud between the Lee spouses and Asiatrust in executing the REM.

Bangkok Bank amended its complaint on August 5, 1999 to implead the Register of Deeds.

Parallel Collection Case and Partial Decision in Civil Case No. 98-628

Meanwhile, on March 23, 2000, the RTC in Civil Case No. 98-628 rendered a partial decision in favor of Bangkok Bank, ordering the Lee family, pursuant to the guarantees, to pay USD 1,998,554.60 for the MDEC CLA and USD 800,000 for the MHI CLA, with 12% interest per annum from the filing date of the complaint on March 12, 1998 until fully paid. Bangkok Bank’s execution, however, had only reached levy on assets valued at approximately PhP 600,000, which was insufficient relative to Bangkok Bank’s total claim.

RTC Proceedings and Dismissal for Lack of Proof of Fraud

After due hearing, the RTC dismissed the action on April 21, 2003 for lack of merit. The RTC found no concrete proof of the alleged fraud by the Lee family and Asiatrust, and no proof of collusion or conspiracy. It therefore ruled that Article 1381(3) of the Civil Code did not apply. The RTC further held that Bangkok Bank had not proved it could not collect its claims, noting primarily that Bangkok Bank elected not to exercise its right of redemption and that the subject properties were not the only properties belonging to the Lee family as admitted by Bangkok Bank’s witness.

On the supposed presumption under Article 1387, the RTC reasoned that a mortgage is not a gratuitous alienation but an onerous undertaking to secure an obligation, and thus Article 1387 did not apply. Finally, the RTC held that neither fraud nor a violation of the SEC suspension order could arise from the REM and foreclosure, because the subject properties were allegedly not covered by the SEC suspension order as Bangkok Bank’s witness testified that Bangkok Bank had filed an action to attach them.

CA Reversal and the Doctrine of Estoppel in Pais and Fraud Presumptions

On appeal, the CA reversed the RTC’s dismissal on March 15, 2006. The CA ordered rescission of the REM, annulment of the foreclosure sale, cancellation of Asiatrust’s titles, and reversion of titles to the spouses Lee.

The CA considered crucial a letter dated April 4, 1998 sent by counsel of the Midas Group of Companies to the Office of the Clerk of Court and Ex-Officio Sheriff of the trial court. The letter assailed the then scheduled extrajudicial foreclosure on the ground that it lacked legal and factual bases in light of the February 20, 1998 SEC Suspension Order. The CA held that Bangkok Bank could not take a 360-degree turn in position from what had earlier been taken by the spouses Lee, reasoning that Bangkok Bank merely adopted petitioners’ earlier stance, and ruled that petitioners were in estoppel in pais under Article 1431 of the Civil Code and Section 2(a) of Rule 131 of the Revised Rules on Evidence.

The CA found that the subject Antipolo properties, though private assets of the spouses Lee, were included in the list submitted to the SEC and were thus covered by the suspension order. It also reasoned that Samuel, as a guarantor, was jointly and severally liable for the corporate debts and that the inclusion of the Antipolo properties in the list submitted to the SEC and the guarantees showed Samuel’s divestment from the limited liability doctrine.

Rejecting the claim that the Antipolo properties had been allocated to Asiatrust, the CA reasoned that if so, they would not have been included in the SEC list, and that the lack of encumbrance on the TCTs prior to SBC’s January 30, 1998 writ of preliminary attachment and the February 20, 1998 suspension order belied petitioners’ allocation theory.

Most importantly, the CA held that fraud had been perpetrated through the REM executed and registered on February 23, 1998, relying on the presumption in the second paragraph of Article 1387: alienations b

Case Syllabus (G.R. No. 173349)

The petitioners, Samuel U. Lee, Pauline Lee, and Asiatrust Development Bank, Inc., sought reversal of the Court of Appeals’ decision which ordered rescission of the Real Estate Mortgage (REM), annulment of the foreclosure sale, cancellation of titles, and reversion of ownership.
The respondent, Bangkok Bank Public Company, Limited (Bangkok Bank), alleged that the REM and the foreclosure sale were fraudulent, and prayed for rescission, annulment, cancellation of titles, and damages.
The Supreme Court ultimately reinstated the trial court’s dismissal of the action for lack of proof of fraud and failure to satisfy rescission requisites.
The decision turned chiefly on (a) whether the disputed properties were subject to a SEC Suspension Order, (b) whether the statutory presumption of fraud under Art. 1387 of the Civil Code applied, and (c) whether rescission was still available after lapse of the redemption period.

Parties and Procedural Posture

The petitioners filed a Petition for Review on Certiorari under Rule 45, challenging the March 15, 2006 Court of Appeals decision and the June 29, 2006 resolution denying reconsideration.
The Court of Appeals reversed and set aside the RTC, Branch 73 in Antipolo City decision dated April 21, 2003, which had dismissed Civil Case No. 99-5388.
The RTC had dismissed Bangkok Bank’s complaint for rescission, annulment of foreclosure, cancellation of titles, and damages for lack of meritorious basis.
The Supreme Court reversed the Court of Appeals and reinstated the RTC decision.

Key Factual Background

Bangkok Bank granted two separate Credit Line Agreements (CLAs): one to Midas Diversified Export Corporation (MDEC) on November 29, 1995, and another to Manila Home Textile, Inc. (MHI) on April 17, 1996.
MDEC and MHI were owned and controlled by the Lee family, with management and interlocking directors led by the Lee family.
Bangkok Bank required guarantees from the Lee family for the CLAs, and the Lee family executed guarantees as principal debtors for payment of MDEC’s and MHI’s indebtedness.
Before the CLAs were granted, Bangkok Bank required Samuel to submit a list of his properties but did not require setting aside any particular property as collateral for future unpaid obligations.
MDEC and MHI subsequently made availments from the CLAs, accumulating aggregate obligations to Bangkok Bank of USD 1,998,554.60 for MDEC and USD 800,000 for MHI.
Asiatrust Development Bank, Inc. (Asiatrust) granted MDEC a loan facility on July 25, 1996, and the loan facility included multiple credit lines and bills purchase arrangements.
In May 1997, Samuel bought parcels of land in Cupang, Antipolo (the Antipolo properties), which were later developed for a residential subdivision.
The Antipolo properties were covered by numerous Transfer Certificates of Title (TCTs) issued by the Registry of Deeds of Rizal in Marikina City.
Throughout 1997, MDEC availed itself of Asiatrust’s credit line, but defaulted on a loan maturing on July 15, 1997.
In response to MDEC’s default, Asiatrust required additional collateral, and in December 1997, an agreement was reached that Samuel would mortgage the Antipolo properties via an REM.
The REM was executed in January 1998, but notarization, registration, and annotation were completed on February 23, 1998.
Bangkok Bank later discovered that a REM had been executed and annotated on the Antipolo properties, and that the REM was later foreclosed by Asiatrust after MDEC’s continued default.
Asiatrust won the foreclosure at auction on April 15, 1998, purchasing the properties for PhP 20,864,735, and the sale was registered on April 21, 1998.
Bangkok Bank did not redeem the foreclosed properties within the statutory period, and the TCTs were consolidated in Asiatrust’s name on April 30, 1999, with issuance of 120 new titles.
As described in the record, only twelve properties were sold for a maximum price of PhP 250,000 while the remaining 108 titles remained unsold, and Asiatrust maintained security services and paid taxes.

Parallel Creditors and Earlier Proceedings

Security Bank Corporation (SBC) filed a case against the Lee family before the RTC, Branch 132 in Makati City on nonpayment of obligations, docketed as Civil Case No. 98-196.
A Writ of Preliminary Attachment issued in SBC’s favor on January 30, 1998, attaching the defendants’ properties.
The writ was not registered or annotated on the Antipolo properties’ titles at the Registry of Deeds prior to subsequent events involving the REM and foreclosure.
The Lee family and their corporations also filed a Consolidated Petition before the SEC on February 16, 1998 for a State of Suspension of Payments and appointment of a rehabilitation management committee/receiver.
The consolidated SEC petition acknowledged indebtedness to Bangkok Bank, listed creditors including Asiatrust, and included the subject Antipolo properties among the properties asserted to cover liabilities.
The SEC issued a Suspension Order on February 20, 1998, enjoining the Lee corporations from disposing of property except in the ordinary course and from making payments outside legitimate business expenses.
Bangkok Bank instituted a separate collection action in Makati RTC, Branch 141 on March 12, 1998 (Civil Case No. 98-628), and obtained writs of preliminary attachment in orders dated March 17 and 18, 1998.

Core Causes of Action

Bangkok Bank filed the instant suit before the RTC, Branch 73 in Antipolo City on July 20, 1999, docketed as Civil Case No. 99-5388.
Bangkok Bank prayed for rescission of the REM, annulment of the foreclosure sale, cancellation of the new TCTs, and damages.
Bangkok Bank alleged that the REM and foreclosure were fraudulent and collusive, particularly invoking the statutory presumption of fraud under Art. 1387 of the Civil Code arising from SBC’s writ of attachment.
Bangkok Bank further alleged collusion and fraud between the spouses Lee and Asiatrust in the execution of the REM.
Bangkok Bank amended the complaint to implead the Registry of Deeds (RD) on August 5, 1999.

RTC Findings and Dismissal

After trial, the RTC dismissed the complaint for lack of merit on April 21, 2003.
The RTC found no concrete proof of fraud committed by the Lee family and Asiatrust, and it likewise found no evidence of collusion or conspiracy.
The RTC ruled that Art. 1381(3) of the Civil Code did not apply because Bangkok Bank failed to prove inability to collect claims by other means.
The RTC noted that Bangkok Bank did not prove that it could not in any manner collect its claims from the Lee family.
The RTC reasoned that Bangkok Bank’s decision not to exercise its right of redemption showed that it had another avenue to protect its interests.
The RTC also found that the Antipolo properties were not the only assets and that the alleged premise that the properties were the only security was not established.
The RTC held that a mortgage is not a gratuitous alienation and thus does not fit the concept of fraudulent alienation contemplated under Art. 1387.
The RTC additionally held that fraud and violation of the SEC suspension order could not be inferred because the Antipolo properties were, according to the RTC’s findings, not covered by the SEC Suspension Order.

CA’s Reversal

On March 15, 2006, the Court of Appeals granted Bangkok Bank’s appeal and reversed the RTC decision.
The Court of Appeals anchored its reversal on a Letter dated April 4, 1998 sent by counsel of the Midas Group, which assailed the scheduled extrajudicial foreclosure as lacking legal and factual bases in light of the SEC Suspension Order.
The Court of Appeals ruled that the spouses Lee could not reverse positions from those taken earlier and found them in estoppel in pais under Art. 1431 of the Civil Code and Section 2(a) of Rule 131 of the Revised Rules on Evidence.
The Court of Appeals found that the subject Antipolo properties were included in the property list submitted to the SEC, and thus were covered by the SEC Suspension Order.
The Court of Appeals held that Samuel, as guarantor, was jointly and severally liable to Bangkok Bank for the corporate debts of MDEC and MHI, and treated the inclusion of Antipolo properties in the SEC list and Samuel’s guarantees as evidence of the waiver of limited liability protection.
The Court of Appeals rejected petitioners’ claim that the Antipolo properties were allotted to Asiatrust, reasoning that such alleged allotment would have prevented inclusion in the SEC list.
The Court of Appeals treated the REM and foreclosure as fraudulent under the presumption under the second paragraph of Art. 1387 of the Civil Code because a writ of attachment had been issued.

Supreme Court’s Issues Framed

The Court treated the core issue as whether the REM and foreclosure were committed in fraud of Bangkok Bank and its status as another creditor such that the mortgage could be rescinded.
One issue addressed whether Bangkok Bank could maintain rescission despite