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[G.R. No. L-3764. January 15, 1908. ]

LUISA PEÑA, Plaintiff-Appellant, v. W. H. MITCHELL, Defendant-Appellee.

C. W. O’Brien and Ramon Salinas, for Appellant.

Gibbs and Gale and C. W. Ney, for Appellee.


1. DEBTS AND DEBTORS; INSOLVENCY; PREFERENCE. — There is not provision of existing law which forbids the preferring of one creditor over another by an insolvent debtor in the payment of his debts.

2. PRESUMPTION OF FRAUD; CIVIL CODE. — The presumption of fraud which arises under the provisions of article 1297 of the Civil Code is not a conclusively presumption and may be rebutted by the introduction of proper testimony.



The complaint alleges that by order of the Court of First Instance of Manila (issued in the course of proceedings wherein one P. B. Florence is defendant and at the petition respectively of Macke & Chandler and Rubert & Guamis), W. H. Mitchell, the defendant in this action and acting sheriff of the city of Manila, on the 13th of September and on the 17th of October, 1905, attached certain personal property, supposed to be the property of said P. B. Florence, including furniture, bar fittings, billiard and pool tables, in the establishment known as "Florence’s Cafe," in the city of Manila; that the plaintiff Luisa Peña claimed to be the real owner of the said property, having purchased it from said P. B. Florence on the 26th day of August, 1905; that the said sheriff refused to restore to her the said property, although she supported her claim with two affidavits accompanied by a copy of a bill of sale for the property in question; that the value of this property was P15,000; and that by reason of the attachment the plaintiff had suffered damages to the amount of P10,000. Upon these allegations the plaintiff prays that the said property be restored to her, and that she be given judgment for damages in the sum of P10,000.

Rubert & Guamis and Macke & Chandler, at whose instance the attachments set out in the complaint were levied, were permitted to intervene, and to file their respective answers, in which they prayed that their complaint be dismissed; that the alleged sale to the plaintiff by P. B. Florence be annulled and declared of no effect; and that the said property which had been restored to the plaintiff upon the filing of a forthcoming bond be ordered returned to the hands of the sheriff. The principal ground upon which the intervenors rely is the alleged fraud upon the creditors arising from the sale of the property in question by the said P. B. Florence to the plaintiff in this action.

The fact as found by the trial court are substantially as follows:chanrob1es virtual 1aw library

First. On the 26th day of August, 1905, P. B. Florence and his wife executed a notarial instrument setting out that, in consideration of the sum of P13,441, which had been paid to the said P. B. Florence by Luisa Peña, the plaintiff in this action, they sold to her the property in litigation in this action.

Second. That prior to the execution of the said sale, the plaintiff, Luisa Peña, had paid the greater part of the indebtedness of the said P. B. Florence to W. H. Anderson & Co. for the purchase price of the property in question; that this payment was made by way of a loan to the said Florence; that the amount loaned for this purpose together with other loans made for the purpose of purchasing supplies for the said cafe amounted to some P12,000; that the said Luisa Peña signed, together with the said Florence, an obligation in favor of the said W. H. Anderson & Co. for a balance due on account; and that the object of the said Luisa Peña in obtaining the sale in her favor of the property in question was to secure herself from loss of the amount which the said P. B. Florence was indebted to her.

Third. That on the said 26th day of August, 1905, on which day the sale appears to have been made, Florence was indebted (a) to Macke & Chandler in the sum of P1,120.75 for liquors and other supplies furnished; (b) to Rubert & Guamis in the sum of P650 for rent of the said Florence’s Cafe and for unliquidated damages for the breach of the rental contract; (c) to W. H. Anderson & Co. for a balance due on a note for P5,500 signed by the said Florence and the plaintiff Luisa Peña.

Fourth. That on the 20th of July, 1904, prior to the date of the said sale, judgment was rendered in the Court of First Instance of Manila against P. B. Florence in favor of Zoilo, Garcia & Vasquez for the sum of P1,533.10; and that said judgment was affirmed on appeal on the 28th day of October, 1905.

Fifth. That at the time when the alleged sale was made, the said P. B. Florence owned no property other than that set out in the deed of sale, except only certain precious stones of the value of P2,000 which were pledged in the sum of P1,000; and that, upon his own statement, he had other debts than those above mentioned, amounting to some two or three thousand pesos.

Sixth. That on the 25th day of August of said year, that is to say, one day before the date of the execution of the said deed of sale, demand having been made upon the said Florence and his wife, Maria, for the payment of the amount indebted to Macke & Chandler, his wife replied to the letter making the demand, stating that her husband was sick, but that he was trying to settle his affairs so that he could make a payment on account of the said indebtedness within two or three days, and that he hoped to be able to do so satisfactorily to both parties.

Seventh. That notwithstanding the said promise, the amount of indebtedness to the said Macke & Chandler had not been satisfied.

Eighth. That the said Maria Florence, wife of P. B. Florence, is the daughter of the plaintiff Luisa Peña.

The trial court held that these facts sustained the intervenor’s allegation of fraud in the execution of the alleged sale of the property in question to the plaintiff, and gave judgment against the plaintiff in accordance with the prayer of the intervenors’ complaint. The judgment is based primarily on the provisions of article 1297 of the Civil Code, which are as follows:jgc:chanrobles.com.ph

"Contracts by virtue of which the debtor alienates property, without a valuable consideration (a titulo gratuito), are presumed to be executed in fraud of creditors.

"Alienates for a valuable consideration, made by persons against whom a condemnatory judgment, in any instance, has been previously rendered, or a writ of seizure of property has been issued, shall also be presumed fraudulent."cralaw virtua1aw library

As appears in the fourth finding of facts, judgment in the "first instance" had been rendered against P. B. Florence prior to the date of the sale to the plaintiff, and the court properly held that the presumption of fraud attached to said sale by virtue of the above-cited provisions of article 1297 of the Civil Code. But it will be observed that these provisions raise no more than a presumption of fraud which may be overthrown by competent testimony. Under the second finding of facts, the trial court found that the valuable consideration passing from the plaintiff purchaser to P. B. Florence and wife was the cancellation of a lawful indebtedness existing at the time of the sale; that this indebtedness actually existed and amounted to considerably more than P12,000; and that the object of the plaintiff in making the purchase of the property in question, valued at not more than P15,000, was to secure herself from loss of the amount which the said P. B. Florence was indebted to her. If there were no other facts in the case, these facts would be amply sufficient to rebut the presumption of fraud.

The trial court, however, was of opinion that the other facts proven at the trial tended to establish the fraudulent character of the sale, and sustain the presumption of fraud established by the provisions of article 1297. These facts may be summarized as follows:chanrob1es virtual 1aw library

First. That at the time when the sale was made the vendor was insolvent, being indebted to other creditors than the plaintiff; that as a consequence the purchaser received payment in full for her debt while the remaining creditors received nothing. In other words, that the insolvent debtor by the terms of the contract with the plaintiff preferred one creditor over another in making the payment of his debts.

Second. That the plaintiff, the preferred creditor, was the mother-in-law of the debtor.

But there is no provision of existing law which forbids the preferring of one creditor over another by an insolvent debtor at his election, whether the preferred creditor be a relative or otherwise. Section 524 of Act No. 190 provides that:jgc:chanrobles.com.ph

"No new bankruptcy proceedings shall be instituted until a new bankruptcy law shall come into force in the Islands. All existing laws and orders relating to bankruptcy and proceedings therein are hereby repealed . . ."cralaw virtua1aw library

Thus all those bankruptcy provisions of the Civil Code, whereby an insolvent debtor was prohibited from making discriminations in favor of or against particular creditors, are repealed. The language of this section of Act No. 190 is so sweeping in its terms that it leaves no room for doubt as to its meaning or its effect, wherever a question arises as to its application.

We are not unaware of the grave consequences entailed by a holding that there is no provision of law prohibiting an insolvent debtor from preferring one creditor over another, in the payment of his debts; but this holding is a necessary consequence of the above-cited provisions of Act No. 190, enjoining the institution of bankruptcy proceedings" until a new bankcruptcy law shall come into force in the islands."cralaw virtua1aw library

It appears therefore that the sale of the property in question was made to the plaintiff by the lawful owner thereof; that the parties to the sale were competent to enter into the contract; that there is no provision of law which forbade the execution of the contract by the parties; that the vendor was lawfully indebted to the plaintiff in an amount equal to or nearly equal to the value of the property sold; and that this indebtedness was the consideration which passed to the vendor, and was an adequate and a valuable consideration therefor.

The presumption of fraud attaching to the sale of the property in question being overthrown by the evidence of the record, the plaintiff so clearly entitled to the possession of the property in question. The record does not sustain the allegations of the complaint as to damages.

After twenty days let judgment be entered reversing the judgment below without costs in this instance, and ten days thereafter let the record be returned to the court below, where judgment will be entered in accordance herewith, and in the event that the property is now in the hands of the plaintiff, proper orders will be issued for the cancellation of the bond or bonds under which it may have been restored to her possession. So ordered.

Mapa, Johnson, Willard, and Tracey, JJ., concur.

Separate Opinions

TORRES, J., concurring:chanrob1es virtual 1aw library

As there is no existing legislation governing the subject of preference of credits, and inasmuch as, according to the provisions of the Civil Code, a debtor having insufficient property is allowed to prefer a creditor, having a better right, to persons who are not entitled to the same preference, I agree with the majority opinion.

Arellano, C.J., did not sit in this case.


FEBRUARY 14, 1908.


This is a motion for rehearing based chiefly on the contention of counsel for the intervenors, Rubert & Guamis, that notwithstanding the holding of this court that the contract of sale of the property in question from Florence to Peña was not invalid as in fraud of Florence’s creditors under the provisions of article 1297 of the Civil Code, these intervenors were entitled to judgment in their favor, because as it is alleged, they had a lien on the property in question to the amount of their claim against Florence, and the sale thereof to Peña should be held to have been made subject to such lien.

This contention rests on the undisputed finding of the trial court that at the time of the sale a considerable part of the amount claimed by Rupert & Guamis was due on account of rent for the use and occupation of the establishment wherein the property in question was found when it was attached, and that the attachment had been executed within thirty days after the sale. In support of his contention that these facts establish the existence of a lien on the property attached, counsel relies:chanrob1es virtual 1aw library

First, on paragraph 7, article 1922, of the Civil Code;

Second, on the doctrine laid down in the American decisions and text-books;

Third, upon reasons of public policy and convenience.

It is not necessary to review the American decisions cited because liens of this nature are creatures of statute law, and if such lien be found to exist in these Islands, it must rest on the provisions of law in force here, and its nature, extent, and limitations must be ascertained from an examination of the provisions of law which create it. Motives of convenience or public policy which might be sufficient to move the legislator to enact laws securing liens to certain classes of creditors do not justify this court in arrogating to itself the functions of the legislator, by declaring the existence of such liens, unless authority so to do can be found in the provisions of existing law. Such authority, if it exists at all, must be found in paragraph 7, article 1922, of the Civil Code, upon which counsel relies, and which provides that, with relation to particular property of the debtor, preferences shall be given "to credits for rents and leases for one year with regard to the personal property of the lessee existing on the estate leased and on the fruits thereof."cralaw virtua1aw library

It will be observed, however, that this article is found in Chapter II of Title XVII [Book IV] of the Civil Code; and that this chapter is devoted to a classification of credits "for their graduation and payment in the order therein established," while Title XVII is devoted exclusively to la concurrencia y prelacion de creditors (the concurrence and preference of credits). From an examination of all the provisions of this title we are of opinion that they are intended merely to provide rules for the ascertainment of the right of priority in payment of various classes of credits when the property of the debtor is in course of distribution in a judicial proceeding, and the creditor duly asserts his rights as a preferred creditor. We do not think that these rules for classification of credits create, or were intended to create, a lien in favor of the creditor upon the property of the debtor, which attaches to such property and gives to the creditor a special interest therein, other than the mere right to a preference in the distribution of the proceeds of the sale of such property in the course of judicial proceedings wherein the creditor is a proper party and duly asserts his right to a preference. (Peterson v. Newberry, 6 Phil. Rep., 260.)

Counsel contends, however, that the provision contained in the final paragraph of article 1922, immediately following paragraph 7 of that article, expressly and specifically establishes a lien upon the property mentioned in that subparagraph. This paragraph is as follows:jgc:chanrobles.com.ph

"If the personal property, with regard to which the preference is allowed, has been surreptitiously removed, the creditor may claim it from the person who has the same, within the term of thirty days counted from the time it was so removed."cralaw virtua1aw library

It is not quite clear whether the word "sustraidos" (carried away surreptitiously), as used in this paragraph, implies a carrying away without the knowledge or consent of the debtor, which seems to be the view taken by Manresa (Spanish Civil Code, Commentaries on art. 1922), or a carrying away by the debtor without the knowledge or consent of the creditor. But whatever construction be put upon the word, it is evident that it is applicable only to cases wherein the right of ownership in such property continues in the debtor, and the provisions of this paragraph, therefore, are not applicable to cases where the debtor has sold the property and parted with his ownership therein.

Paragraph 7 of article 1922 not conferring a lien upon the property therein mentioned, and the property in question having become the property of the plaintiff in this action prior to the date of the attachment in favor of the intervenors Rubert & Guamis, the attachment was illegal, and this motion should, therefore, be denied. So ordered.

Torres, Mapa, Johnson, Willard, and Tracey, JJ., concur.

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