Encarnacion vs. Johnson

A third-party claimant adversely affected by the execution of a judgment, rather than the judgment itself, must avail of the cumulative remedies under Section 16, Rule 39 of the Rules of Court (terceria, claim for damages against the bond, or an independent action to vindicate ownership), not annulment of judgment under Rule 47. Furthermore, aliens are absolutely prohibited from acquiring private lands in the Philippines, including through execution sales, as such acquisition constitutes a patent violation of Section 7, Article XII of the Constitution.

Thomas Johnson, a Canadian citizen, obtained a default judgment from the Supreme Court of British Columbia against spouses Narvin and Mary Edwarson (the latter being Mateo Encarnacion's daughter) for breach of contract involving a fraudulent vehicle leasing scheme. Prior to the default judgment, a Mareva injunction was issued to restrain the spouses from dealing with their assets. Johnson subsequently sought recognition and enforcement of this foreign judgment in the Philippines, leading to the levy and public auction of properties registered under Mateo Encarnacion's name, which Johnson claimed were fraudulently transferred to avoid creditors.

• The Canadian Judgment: Johnson sued Narvin and Mary Edwarson in the Supreme Court of British Columbia for breach of contract. The court issued a Mareva injunction to restrain the spouses from dealing with their assets, followed by a default judgment awarding C$380,431.00 plus interest, costs, and aggravated damages.
• Recognition Proceedings: Johnson filed an action for recognition and enforcement of the foreign judgment in the RTC of Olongapo City. The RTC granted his petition to litigate as a pauper litigant, recognized the foreign judgment on December 1, 2003, and issued writs of execution.
• Levy and Execution: The sheriff levied properties registered under Mateo Encarnacion's name based on the RTC's amended writs of execution. Public auctions were held on June 23, 2004 and November 29, 2006, with Johnson emerging as the highest bidder for a total of ₱14,000,000.00.
• Third-Party Claim: Mateo filed an Affidavit of Third Party Claim dated January 17, 2005, asserting ownership over 14 parcels of land (later amended to 18), alleging he was never made a party to the case and received no notice of the levy.
• Annulment Proceedings: On September 10, 2007, more than two years after the February 17, 2005 Order further amending the writ of execution to expressly authorize levy on his properties, Mateo filed a petition for annulment of judgment before the CA. He died during the pendency of the proceedings and was substituted by his heirs, including his daughter Mary Edwarson (one of the judgment debtors).

• Lack of Jurisdiction and Extrinsic Fraud: Petitioners maintained that the entire proceedings in Civil Case No. 110-0-2003 should be annulled on grounds of lack of jurisdiction and extrinsic fraud, citing specific irregularities: (1) the RTC allowed respondent to sue as an indigent party despite his ability to post a bond; (2) the complaint contained a grossly defective certification against forum shopping; (3) the RTC allowed service of summons by publication in an action in personam and exercised jurisdiction on that basis; (4) the RTC recognized a global injunction issued by a foreign court as a writ of attachment; (5) the RTC promulgated final orders without requiring the presentation of evidence and without distinctly stating the facts and law; (6) the RTC allowed the levy on execution of properties belonging to a party who was not named as defendant; and (7) the RTC allowed the sale and delivery of properties to a foreigner disqualified from owning private lands under the Constitution.

• Fraudulent Transfer and Lack of Standing: Respondent countered that the tax declarations under Mateo's name were fraudulently issued after the March 5, 2003 Order and the July 23, 2004 execution sale. He argued that Mateo was not the proper party to file the petition because he had already transferred his interest in the properties to Mary by virtue of a deed of quitclaim dated February 27, 1995. Respondent further asserted that the RTC had conducted an investigation and had already excluded from the levy certain properties which undisputedly belonged to Mateo.

• Proper Remedy for Third-Party Claimants: Whether an action for annulment of judgment is the proper remedy of a third-party claimant of properties levied and sold under execution sale.
• Alien Land Ownership: Whether respondent, an alien, may own private lands by virtue of an execution sale.

• Annulment of Judgment Not Available to Third-Party Claimants: Annulment of judgment under Rule 47 is a remedy in equity so exceptional in nature that it may be availed of only when other remedies are wanting through no fault of the petitioner. A third-party claimant must first avail of the cumulative remedies under Section 16, Rule 39: (a) terceria by serving an affidavit of title upon the levying officer and the judgment creditor; (b) an action for damages against the bond filed by the judgment obligee within 120 days; or (c) an independent action to vindicate claim to the property. Mateo was not a party to the recognition proceedings (neither an indispensable party nor a real party in interest having transferred the properties to Mary), and the alleged injury arose from the execution, not the judgment itself. Granting annulment would nullify the entire proceeding in Civil Case No. 110-0-2003, which is more than what is necessary to address the wrongful levy.
• Absolute Prohibition on Alien Land Ownership: Aliens are absolutely prohibited from acquiring private lands under Section 7, Article XII of the Constitution. This prohibition extends to acquisition through execution sales; what cannot be legally done directly cannot be done indirectly. The auction sales where Johnson, a Canadian citizen, was the highest bidder are void ab initio under Article 1409(1) and (7) of the Civil Code as contracts contrary to law and public policy.

• Annulment of Judgment (Rule 47): An equitable remedy independent of the original case, available only when ordinary remedies (new trial, appeal, petition for relief) are no longer available through no fault of the petitioner. Grounds are limited to lack of jurisdiction or extrinsic fraud. The petitioner must be a party adversely affected by the judgment, a successor in interest by title subsequent to the commencement of the action, or a party to an in rem proceeding.
• Third-Party Claim Remedies (Section 16, Rule 39): Cumulative remedies available to a third-party claimant: (1) terceria (affidavit of title served on the levying officer and judgment obligee); (2) action for damages against the indemnity bond within 120 days from filing of the bond; and (3) an independent action (entirely distinct from the enforcement proceeding) to vindicate claim to the property, which may seek recovery of ownership, possession, and damages.
• Alien Land Ownership Prohibition: Section 7, Article XII of the Constitution absolutely prohibits aliens from acquiring private lands, save in cases of hereditary succession. This prohibition applies to execution sales, and courts may take cognizance of such constitutional violations even if not raised by the parties below.

• "A petition for annulment of judgment is a remedy in equity so exceptional in nature that it may be availed of only when other remedies are wanting, and only if the judgment, final order or final resolution sought to be annulled was rendered by a court lacking jurisdiction or through extrinsic fraud."
• "The rule is clear and inflexible: aliens are absolutely not allowed to acquire public or private lands in the Philippines, save only in constitutionally recognized exceptions. There is no rule more settled than this constitutional prohibition, as more and more aliens attempt to circumvent the provision by trying to own lands through another."
• "What cannot be legally done directly cannot be done indirectly."

• Dare Adventure Farm Corporation v. Court of Appeals, G.R. No. 161122, September 24, 2012: Controlling precedent on the exceptional nature of annulment of judgment and the requirement that ordinary remedies must be wanting without fault of the petitioner.
• Pinausukan Seafood House, Roxas Boulevard, Inc. v. Far East Bank & Trust Company, G.R. No. 159926, January 20, 2014: Cited for the four requirements before granting annulment of judgment.
• Matthews v. Taylor, G.R. No. 164584, June 22, 2009: Controlling precedent establishing that courts may take cognizance of constitutional violations regarding alien land ownership even if not raised by the trial or appellate courts.
• Sy v. Discaya, G.R. No. 86301, January 23, 1990: Controlling precedent recognizing the right of third-party claimants to file independent actions under Section 16, Rule 39.

• Section 1, Rule 47, Rules of Court: Coverage of annulment of judgment remedy.
• Section 16, Rule 39, Rules of Court: Remedies available to third-party claimants of levied property.
• Section 7, Article XII, 1987 Constitution: Prohibition on transfer of private lands to aliens except in cases of hereditary succession.
• Article 1409(1) and (7), Civil Code: Void contracts whose cause, object, or purpose is contrary to law, morals, good customs, public order or public policy, and those expressly prohibited or declared void by law.

Teresita J. Leonardo-De Castro (Acting Chairperson), Mariano C. Del Castillo, Noel Gimenez Tijam, Alexander G. Gesmundo.