G. Holdings, Inc. v. Cagayan Electric Power and Light Company, Inc.
REITERATIONFacts
The Antecedents: Ferrochrome Philippines, Inc. (FPI) was supplied power by Cagayan Electric Power and Light Company, Inc. (CEPALCO). FPI defaulted on its payments, leading to a collection suit filed by CEPALCO. The Regional Trial Court (RTC) of Pasig City ruled in favor of CEPALCO, ordering FPI to pay substantial amounts. CEPALCO moved for execution pending appeal, which was granted. Sheriff Renato B. Baron issued notices of levy on FPI's properties. Procedural History: G. Holdings, Inc. (GHI) filed a case against Sheriff Baron, CEPALCO, and FPI, seeking the nullification of the levy and auction sale, and recovery of possession of properties. GHI claimed ownership of the levied assets through a Deed of Assignment executed by FPI in its favor. CEPALCO countered that the Deed of Assignment was simulated, executed in fraud of creditors, and thus null and void. The RTC-CDO ruled in favor of CEPALCO, rescinding the Deed of Assignment and ordering GHI to pay damages. The Court of Appeals (CA) affirmed the RTC-CDO Decision, finding the Deed of Assignment to be absolutely simulated and executed in fraud of creditors. GHI's motion for reconsideration was denied. The Petition: GHI filed a petition for review on certiorari before the Supreme Court, assailing the CA's decision.
Issue(s)
Whether the CA erred in not dismissing CEPALCO's permissive counterclaim for non-payment of docket fees. Whether the CA erred in holding that the Deed of Assignment was absolutely simulated. Whether the CA erred in rescinding the Deed of Assignment absent an independent action for rescission. Whether the CA erred in holding that the Deed of Assignment was done in fraud of creditors and badges of fraud accompanied its execution. Whether GHI is entitled to its claims for damages.
Ruling
The Supreme Court denied the petition for lack of merit. It affirmed the CA's Decision and Resolution, with modifications. The Deed of Assignment dated March 11, 2003, between FPI and GHI was declared inexistent for being absolutely simulated. GHI's complaint was dismissed for lack of cause of action. The total amount awarded in the RTC-CDO Decision shall earn 6% interest per year from the date of finality of the Supreme Court's Decision until fully paid.
Ratio Decidendi
On the issue of filing fees for CEPALCO's counterclaim: The Court held that CEPALCO's counterclaim was compulsory because it arose out of or was connected with the transaction constituting the subject matter of GHI's claim, and its adjudication did not require the presence of third parties. As a compulsory counterclaim, CEPALCO was not liable to pay filing fees at the time it filed its Answer with Compulsory Counterclaim and Cross-Claim on April 26, 2004, as the rule requiring docket fees for such claims became effective only on August 16, 2004. Therefore, the CA did not commit reversible error in not dismissing the counterclaim for non-payment of docket fees. On the efficacy of the Deed of Assignment: The Court found that the Deed of Assignment was absolutely simulated and therefore inexistent and void from the beginning. This was evidenced by a letter dated February 28, 2003, which revealed FPI's true intention not to divest itself of ownership and control of its assets, as it retained the right to the "Outokumpo" work process and provided options for FPI to operate the assigned assets. The Court noted that FPI's Acting President himself admitted that GHI could not operate the facilities without the patented process. Furthermore, the physical possession of the equipment and the continued employment of personnel by FPI indicated a lack of effective delivery and control. The Court concluded that FPI's intention was not to transfer the assets absolutely but to place them beyond the reach of its creditor, CEPALCO, especially since the Deed was executed after a partial summary judgment had been rendered in CEPALCO's favor. The badges of fraud confirmed this intention to defraud CEPALCO. On the rescission of the Deed of Assignment: The Court clarified that rescissible contracts and void or inexistent contracts belong to mutually exclusive groups. Since the Deed of Assignment was found to be absolutely simulated, it was inexistent and void from the beginning, not rescissible. While the RTC-CDO ordered rescission and the CA affirmed the RTC-CDO's decision, the Supreme Court corrected this by declaring the Deed of Assignment inexistent due to absolute simulation, rather than rescissible. This distinction is crucial because void contracts cannot be ratified and the action for declaration of nullity does not prescribe, unlike rescissible contracts. On the Deed of Assignment being done in fraud of creditors: The Court agreed that the Deed of Assignment was executed in fraud of creditors, as evidenced by the badges of fraud and the timing of its execution after a partial judgment was rendered in favor of CEPALCO. However, this finding of fraud, while confirming the intent to defraud, did not render the contract merely rescissible. Instead, it fortified the conclusion that the Deed was a sham, a contrato simulado, and thus inexistent and void from the beginning. The Court emphasized that the action for rescission is subsidiary, whereas the action for declaration of nullity of a simulated contract is a principal action that does not prescribe. On GHI's entitlement to damages: Given the declaration of the inexistence of the Deed of Assignment, GHI's complaint was dismissed for lack of cause of action. Consequently, GHI was not entitled to its claims for damages. The Court noted that the total amount awarded in the RTC-CDO Decision would earn legal interest from the finality of its decision.
Main Doctrine
A Deed of Assignment that is absolutely simulated is inexistent and void from the beginning, and cannot be rescinded as a rescissible contract. Such simulation, particularly when undertaken to place assets beyond the reach of creditors after a partial judgment has been rendered, constitutes fraud and renders the contract void.