Khe Hong Cheng vs. Court of Appeals

The four-year prescriptive period for an accion pauliana commences from the time the creditor discovers, after exhausting all legal remedies, that the debtor has no other properties to satisfy the claim, not from the date of registration of the fraudulent conveyance.

Khe Hong Cheng, owner of Butuan Shipping Lines, was sued for the value of lost cargo insured by American Home. While the subrogation suit was pending, Cheng donated parcels of land to his children. The trial court eventually ruled against Cheng, but writs of execution returned unsatisfied because Cheng had no properties in his name. Philam Insurance, subrogated to the claim, then sought to rescind the donations.

• The Indebtedness: In October 1985, a shipment of copra on board petitioner Khe Hong Cheng's vessel, M/V PRINCE ERIC, was lost at sea. American Home Insurance Company, the insurer, paid the consignee P354,000.00 and was subrogated into the consignee's rights. American Home subsequently filed Civil Case No. 13357 in the RTC of Makati against Cheng for breach of contract of carriage.
• The Fraudulent Alienation: While the subrogation case was pending, Cheng executed deeds of donation on December 20, 1989, conveying parcels of land to his children, Sandra Joy and Ray Steven. New transfer certificates of title were issued in the children's names. The deeds of donation contained a stipulation that Cheng had reserved sufficient property to answer for his debts contracted prior to the donation.
• The Unsatisfied Judgment: On December 29, 1993, the RTC ruled against Cheng and ordered him to pay American Home. After the decision became final and executory, a writ of execution was issued on September 14, 1995, and an alias writ in October 1996. The sheriff found no properties under Cheng's name to levy upon. In January 1997, accompanied by respondent Philam's counsel, the sheriff went to Butuan City and discovered that Cheng had conveyed the subject properties to his children.
• The Accion Pauliana: On February 25, 1997, Philam filed a complaint for rescission of the deeds of donation and nullification of the children's titles, alleging that the conveyances were made in fraud of creditors.

• Prescription: Petitioners argued that the four-year prescriptive period commenced upon the registration of the deeds of donation on December 27, 1989, which constituted constructive notice under Section 52 of Presidential Decree No. 1529. Because the complaint was filed in February 1997, more than four years after registration, the action had prescribed.
• Improper Venue: Petitioners belatedly contended that the complaint was a real action that should have been filed in the RTC of Butuan City where the donated properties are located.

• Accrual of Cause of Action: Respondent countered that the prescriptive period began to run only in January 1997, when the sheriff and counsel discovered that Cheng had no more properties to satisfy the judgment. Prior to this, respondent had not yet exhausted all legal means for satisfaction as required by Article 1383 of the Civil Code.

• Prescription of Accion Pauliana: Whether the four-year prescriptive period for an accion pauliana commences from the registration of the fraudulent conveyance or from the time the creditor discovers the debtor's insolvency after exhausting legal remedies.
• Venue: Whether the defense of improper venue can be raised for the first time on appeal.

• Prescription of Accion Pauliana: The prescriptive period commences from the time the cause of action accrues, which is when the creditor discovers the debtor's insolvency after exhausting legal means. An accion pauliana is a subsidiary action that presupposes a judgment, the issuance of a writ of execution, and the failure of the sheriff to enforce the judgment. Counting the period from the date of registration would run counter to Article 1383, as filing the action upon registration would be premature; the creditor must first exhaust the debtor's properties.
• Venue: The defense of improper venue was deemed waived. Pursuant to Rule 16 of the Rules of Court, improper venue must be objected to either in a motion to dismiss filed before the answer or as an affirmative defense in the answer.

• Accion Pauliana — A subsidiary action available to creditors to rescind contracts entered into by the debtor in fraud of their rights. The following successive measures must be taken before filing: (1) exhaust the properties of the debtor through levying by attachment and execution; (2) exercise all the rights and actions of the debtor (accion subrogatoria); and (3) seek rescission of the contracts (accion pauliana). The action accrues only when the creditor has no other legal remedy to obtain reparation for the damage.
• Accrual of Cause of Action for Rescission — The cause of action to rescind a fraudulent conveyance accrues not from the registration of the conveyance, but from the moment the creditor discovers that the debtor has no other properties to satisfy the claim after exhausting all legal remedies.

• "An accion pauliana thus presupposes the following: 1) A judgment; 2) the issuance by the trial court of a writ of execution for the satisfaction of the judgment, and 3) the failure of the sheriff to enforce and satisfy the judgment of the court. It requires that the creditor has exhausted the property of the debtor."
• "To count the four year prescriptive period to rescind an allegedly fraudulent contract from the date of registration of the conveyance with the Register of Deeds, as alleged by the petitioners, would run counter to Article 1383 of the Civil Code as well as settled jurisprudence."

• Tolentino vs. CA, et al., 162 SCRA 66 — Followed. Cited for the principle that the legal possibility of bringing the action determines the starting point for the computation of the prescriptive period.
• Siguan vs. Lim, 318 SCRA 725 — Followed. Cited for the requisites of an accion pauliana.
• Adorable vs. CA, 319 SCRA 201 — Followed. Cited for the successive measures a creditor must take before bringing an accion pauliana, emphasizing the necessity of exhausting the debtor's properties and exercising subrogatory rights prior to filing a rescissory action.

• Article 1389, Civil Code — Provides that the action to claim rescission must be commenced within four years. Applied to determine the prescriptive period for accion pauliana, with the starting point supplied by Article 1150 due to the provision's silence on when prescription commences.
• Article 1150, Civil Code — Provides that the time for prescription shall be counted from the day the action may be brought. Applied as the general rule for computing prescription since Article 1389 is silent on its commencement.
• Article 1383, Civil Code — Declares that an action for rescission is subsidiary and cannot be instituted except when the party suffering damage has no other legal means to obtain reparation. Applied to rule that the action accrues only upon exhaustion of legal remedies.
• Section 52, Presidential Decree No. 1529 (Property Registration Decree) — Provides that registration of conveyances constitutes constructive notice to all persons. Distinguished and held not to override the specific requirement of exhaustion of remedies in an accion pauliana.
• Sections 1 and 6, Rule 16, 1997 Rules of Court — Govern objections to improper venue, requiring such objection in a motion to dismiss before the answer or as an affirmative defense in the answer. Applied to hold that petitioners waived the defense of improper venue.

Davide, Jr., Puno, Pardo, and Ynares-Santiago, JJ.