G.R. No. L-7003, 18 January 1912

FACTS:

Gutierrez Hermanos brought two actions Oria Hermanos & Co. for the recovery of sum of money. Subsequent to the beginning of the above actions, the members of the company of Oria Hermanos & Co., dissolved their relations and entered into liquidation. Tomas Oria y Balbas, as managing partner in liquidation, acting for himself and on behalf of his other coowners entered into a contract with the plaintiff in this case, Manuel Orio Gonzales, which said contract was for the purpose of selling and transferring to the plaintiff in this action all of the property of which the said Oria Hermanos & Co. was owner. Among the goods transferred by this instrument was the steamship Serantes, which is the subject of litigation.

One of the actions instituted by Hermanos was decided by the court in his favor and subsequently, the execution was issued thereon and placed in the hands of the sheriff. The sheriff immediately demanded that Tomas Oria y Balbas, as liquidator of the firm of Oria Hermanos & Co. make payment of the said judgment, to which he replied that there were no funds with which to pay the same. Thereupon the sheriff levied upon the said steamer Serantes, took possession of the same, and announced it for sale at public auction. Three days before the sale, the plaintiff in this action presented to the sheriff a written statement claiming to be the owner of the said steamship, and to have the right of possession of the same by reason of the sale to him by Oria Hermanos & Co. of all of the property belonging to said company, including the said steamer Serantes.

ISSUE:

Whether or not the sale between Oria Hermanos & Co. and Manuel Orio Gonzales was valid.

RULING:

In determining whether or not a certain conveyance is fraudulent the question in every case is whether the conveyance was a bona fide transaction or a trick and contrivance to defeat creditors, or whether it conserves to the debtor a special right. It is not sufficient that it is founded on good consideration or is made with bona fide intent: it must have both elements. If defective in either of these particulars, although good between the parties, it is voidable as to creditors. The rule is universal both at law and in equity that whatever fraud creates justice will destroy. The test as to whether or not a conveyance is fraudulent is, does it prejudice the rights of creditors.

In the consideration of whether or not certain transfers were fraudulent, courts have laid down certain rules by which the fraudulent character of the transaction may be determined. The following are some of the circumstances attending sales which have been dominated by the courts badges of fraud:

  1. The fact that the consideration of the conveyance is fictitious or is inadequate.
  2. A transfer made by a debtor after suit has been begun and while it is pending against him.
  3. A sale upon credit by an insolvent debtor.
  4. Evidence of large indebtedness or complete insolvency.
  5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially.
  6. The fact that the transfer is made between father and son, when there are present other of the above circumstances.
  7. The failure of the vendee to take exclusive possession of all the property.

The case at bar presents every one of the badges of fraud above enumerated. Tested by the inquiry, does the sale prejudice the rights of the creditors, the result is clear. The sale in the form in which it was made leaves the creditors substantially without recourse. The property of the company is gone, its income is gone, the business itself is likely to fail, the property is being dissipated, and is depreciating in value. As a result, even if the claims of the creditors should live twelve years and the creditors themselves wait that long, it more than likely that nothing would be found to satisfy their claim at the end of the long wait.

Since the records shows that there was no property with which the judgment in question could be paid, the defendants were obliged to resort to and levy upon the steamer in suit. The court below was correct in finding the sale fraudulent and void as to Gutierrez Hermanos in so far as was necessary to permit the collection of its judgment. As a corollary, the court below found that the evidence failed to show that the plaintiff was the owner or entitled to the possession of the steamer in question at the time of the levy and sale complained of, or that he was damaged thereby. Defendant had the right to make the levy and test the validity of the sale in that way, without first resorting to a direct action to annul the sale. The creditor may attack the sale by ignoring it and seizing under his execution the property, or any necessary portion thereof, which is the subject of the sale.

 * Case digest by   Paula Bianca B. Eguia, LLB-1, Andres Bonifacio Law School, SY 2017-2018