Metro, Inc. and Spouses Frederick Juan and Liza Juan vs. Lara's Gifts and Decors, Inc., Luis Villafuerte, Jr. and Lara Maria R. Villafuerte

Where a writ of preliminary attachment is issued upon a ground that is at the same time the applicant's cause of action, the writ may be lifted or dissolved only by the filing of a counter-bond under Section 12, Rule 57 of the Rules of Court; a motion to discharge under Section 13 on the ground of improper issuance is unavailable, since hearing it would force a trial on the merits of the case on a mere motion. For attachment to issue under Section 1(d), Rule 57, the applicant must sufficiently allege and show the factual circumstances of the fraud, which must relate to the execution of the agreement and have induced the other party's consent; fraudulent intent cannot be inferred from mere non-payment or non-compliance with an obligation.

Lara's Gifts and Decors, Inc. (LGD) and Metro, Inc. are corporations engaged in the business of manufacturing, producing, selling, and exporting handicrafts. Luis Villafuerte, Jr. and Lara Maria R. Villafuerte are the president and vice-president of LGD, while Frederick Juan and Liza Juan are the principal officers of Metro, Inc. Sometime in 2001, the parties agreed that respondents would endorse to petitioners purchase orders received from their buyers in the United States in exchange for a 15% commission, to be shared equally by respondents and James R. Paddon, LGD's agent, with the terms later embodied in an e-mail labeled the "2001 Agreement." The dispute thus arose from a commercial arrangement for the endorsement of export purchase orders and the commission payable thereon, which supplied the contractual context for the attachment proceedings under Rule 57 of the Rules of Court.

Lara's Gifts and Decors, Inc. (LGD) and Metro, Inc. are corporations engaged in the business of manufacturing, producing, selling, and exporting handicrafts. Luis Villafuerte, Jr. and Lara Maria R. Villafuerte serve as president and vice-president of LGD, respectively, while Frederick Juan and Liza Juan are the principal officers of Metro, Inc.

Sometime in 2001, the two groups agreed that respondents would endorse to petitioners purchase orders received by respondents from their buyers in the United States of America in exchange for a 15% commission, to be shared equally by respondents and James R. Paddon (JRP), LGD's agent. The terms of the agreement were later embodied in an e-mail labeled as the "2001 Agreement."

In May 2003, respondents filed with the Regional Trial Court, Branch 197, Las Piñas City, a complaint against petitioners for sum of money and damages with a prayer for the issuance of a writ of preliminary attachment. In their amended complaint, respondents alleged that, as of July 2002, petitioners defrauded them in the amount of $521,841.62, and prayed for ₱1,000,000 as moral damages, ₱1,000,000 as exemplary damages, and 10% of the judgment award as attorney's fees, as well as the issuance of a writ of preliminary attachment. According to the amended complaint, petitioners were guilty of fraud both at the inception of the agreement and in its performance: through machinations and schemes they enticed respondents into the 2001 Agreement, and in order to secure respondents' full trust and lure them into endorsing more purchase orders, they initially remitted respondents' shares under the agreement; thereafter, just as the orders and the amounts involved increased, petitioners suddenly, without justifiable reason and in bad faith, abandoned their contractual obligation to remit respondents' shares and transacted directly with respondents' foreign buyer, to the latter's exclusion and damage. Respondents further alleged that petitioners violated the trust and confidence reposed in them by receiving the proceeds of respondents' letters of credit with the clear obligation of remitting 15% thereof, and that their refusal and failure to remit despite demand constituted a breach of trust amounting to malice and fraud.

On 23 June 2003, the trial court granted respondents' prayer and issued a writ of attachment against the properties and assets of Metro, Inc. and of the spouses Frederick and Liza Juan not exempt from execution, as may be sufficient to satisfy the applicants' demand of US$521,841.62 or its equivalent in pesos, about ₱27 Million, unless the defendants made a deposit or gave a bond in an amount equal to ₱27 Million to satisfy the demand exclusive of costs, upon posting by the plaintiffs of a bond for preliminary attachment in the amount of ₱25,000,000 subject to the court's approval.

On 26 June 2003, petitioners filed a motion to discharge the writ of attachment. Petitioners argued that the writ should be discharged on the following grounds: (a) the 2001 Agreement was not a valid contract because it did not show that there was a meeting of the minds between the parties; (b) assuming the 2001 Agreement was a valid contract, the same was inadmissible because respondents failed to authenticate it in accordance with the Rules on Electronic Evidence; (c) respondents failed to substantiate their allegations of fraud with specific acts or deeds showing how petitioners defrauded them; and (d) respondents failed to establish that the unpaid commissions were already due and demandable.

After considering the parties' arguments, the trial court granted petitioners' motion and lifted the writ of attachment. In its 12 August 2003 Order, the trial court held that, after taking a second hard look at the 23 June 2003 Order, the issuance of a writ of preliminary attachment in the case was not justified, and ordered the writ immediately discharged and/or lifted. Respondents moved for reconsideration, but the trial court denied the motion in its 10 September 2003 Order.

Respondents then filed a petition for certiorari before the Court of Appeals, alleging that the trial court gravely abused its discretion when it ordered the discharge of the writ of attachment without requiring petitioners to post a counter-bond. The Court of Appeals granted the petition, annulled and set aside the assailed orders, and ruled that the issued writ of preliminary attachment may be ordered discharged upon the filing by the private respondents of the proper counter-bond pursuant to Section 12, Rule 57 of the Rules of Civil Procedure. Petitioners' motion for reconsideration was denied, and the case was elevated to the Supreme Court.

As to the factual findings material to the appeal, the trial court found that respondents failed to sufficiently show that petitioners were guilty of fraud either in incurring the obligation upon which the action was brought or in the performance thereof; that there was no proof petitioners were motivated by malice in entering into the 2001 Agreement; and that petitioners' failure to fully comply with their obligation, absent other facts or circumstances indicating evil intent, did not automatically amount to fraud. The Court of Appeals, for its part, found that fraud was not only alleged as the ground for the issuance of the writ of attachment but was actually the core of respondents' complaint, and that the only way the writ could be discharged was by posting a counter-bond in accordance with Section 12, Rule 57 of the Rules of Court.

• Insufficiency of the Fraud Allegation: Petitioners contended that the writ of attachment was improperly issued because respondents' amended complaint failed to allege specific acts or circumstances constitutive of fraud.
• Discharge Without Counter-Bond: Petitioners insisted that an improperly issued writ of attachment may be discharged without the necessity of filing a counter-bond.
• Ground Not Coterminous with the Cause of Action: Petitioners argued that respondents failed to show that the writ of attachment was issued upon a ground which was at the same time also respondents' cause of action, maintaining that respondents' amended complaint was not an action based on fraud but a simple case for collection of sum of money plus damages.
• Invalidity and Inadmissibility of the 2001 Agreement: In their motion to discharge, petitioners argued that the 2001 Agreement was not a valid contract because it did not show a meeting of the minds between the parties, and that, assuming its validity, it was inadmissible because respondents failed to authenticate it in accordance with the Rules on Electronic Evidence.
• Absence of a Due and Demandable Claim: Petitioners argued that respondents failed to establish that the unpaid commissions were already due and demandable.

• Counter-Bond as the Exclusive Mode of Discharge: Respondents argued that the Court of Appeals did not err in ruling that the writ of attachment can only be discharged by filing a counter-bond.
• Inapplicability of Section 13, Rule 57: Respondents asserted that petitioners cannot avail of Section 13, Rule 57 of the Rules of Court to have the attachment set aside because the ground for the issuance of the writ of attachment is also the basis of respondents' amended complaint.
• Nature of the Complaint: Respondents maintained that the amended complaint is a complaint for damages for the breach of obligation and acts of fraud committed by petitioners.

• Sufficiency of the Allegation of Fraud: Whether the writ of preliminary attachment was improperly issued on the ground that the amended complaint failed to allege specific acts or circumstances constitutive of fraud.
• Discharge Without Counter-Bond: Whether the writ of preliminary attachment may be discharged without the filing of a counter-bond where the ground for its issuance is also the applicant's cause of action.

• Sufficiency of the Allegation of Fraud: No. The allegation that petitioners undertook to sell exclusively and only through JRP/LGD for Target Stores Corporation but transacted directly with respondents' foreign buyer is a sufficient allegation of fraud under Section 1(d), Rule 57 of the Rules of Court.
• Discharge Without Counter-Bond: No. Since the writ was properly issued and the fraud grounding it is also the core of the complaint, the only way it can be dissolved is by filing a counter-bond in accordance with Section 12, Rule 57 of the Rules of Court.

• Sufficiency of the Allegation of Fraud: The application for the writ rested on Section 1(d), Rule 57 of the Rules of Court, which authorizes attachment in an action against a party who has been guilty of fraud in contracting the debt or incurring the obligation upon which the action is brought, or in the performance thereof. Citing Liberty Insurance Corporation vs. Court of Appeals, the Court explained that to sustain an attachment on this ground, it must be shown that the debtor in contracting the debt or incurring the obligation intended to defraud the creditor; the fraud must relate to the execution of the agreement and must have been the reason which induced the other party into giving consent which he would not have otherwise given; and a debt is fraudulently contracted if at the time of contracting it the debtor has a preconceived plan or intention not to pay. The applicant must sufficiently show the factual circumstances of the alleged fraud, because fraudulent intent cannot be inferred from the debtor's mere non-payment of the debt or failure to comply with his obligation. Measuring the amended complaint against this standard, the Court found sufficient the allegation that petitioners undertook to sell exclusively and only through JRP/LGD for Target Stores Corporation but transacted directly with respondents' foreign buyer — an act pleaded as part of a preconceived plan and scheme to defraud respondents and to take from them a valuable client. That allegation supplied the factual circumstances of the fraud and distinguished the case from one of mere non-payment, so that the writ was properly issued.

• Discharge Without Counter-Bond: Because the writ was properly issued, the Court held that the only way it can be dissolved is by filing a counter-bond in accordance with Section 12, Rule 57 of the Rules of Court. The Court affirmed the Court of Appeals' reliance on Chuidian vs. Sandiganbayan, FCY Construction Group, Inc. vs. Court of Appeals, and Liberty Insurance Corporation vs. Court of Appeals, which established the rule that when the writ of attachment is issued upon a ground which is at the same time the applicant's cause of action, the only other way the writ can be lifted or dissolved is by a counter-bond. That rule applied because fraud in respondents' amended complaint was not only alleged as a ground for the issuance of the writ of preliminary attachment but was also the core of respondents' complaint. Consequently, petitioners could not invoke Section 13, Rule 57 to secure discharge on the ground of improper issuance, since the Court of Appeals' concern that petitioners could force a trial on the merits of the case on the strength of a mere motion to dissolve the attachment had basis.

• Fraud as a ground for preliminary attachment under Section 1(d), Rule 57 — Attachment may issue in an action against a party guilty of fraud in contracting the debt or incurring the obligation upon which the action is brought, or in the performance thereof. To sustain attachment on this ground, it must be shown that the debtor, in contracting the debt or incurring the obligation, intended to defraud the creditor; the fraud must relate to the execution of the agreement and must have been the reason which induced the other party into giving consent which he would not have otherwise given; and a debt is fraudulently contracted if at the time of contracting it the debtor has a preconceived plan or intention not to pay. In this case, the allegation that petitioners violated their undertaking to sell exclusively through respondents by transacting directly with respondents' foreign buyer was held sufficient to satisfy the ground.
• Evidentiary standard for fraudulent intent in attachment — The applicant for a writ of preliminary attachment must sufficiently show the factual circumstances of the alleged fraud, because fraudulent intent cannot be inferred from the debtor's mere non-payment of the debt or failure to comply with his obligation. The Court applied this standard to uphold the sufficiency of the amended complaint's allegations of a preconceived plan and scheme, as distinguished from the trial court's finding of bare non-compliance.
• Discharge of attachment where the ground is also the cause of action — When the writ of attachment is issued upon a ground which is at the same time the applicant's cause of action, the only other way the writ can be lifted or dissolved is by a counter-bond under Section 12, Rule 57 of the Rules of Court. The rationale is that a motion to discharge under Section 13, Rule 57 on the ground of improper issuance would necessarily force a trial on the merits of the case on a mere motion. The doctrine was applied because fraud was both the ground for the writ and the core of respondents' complaint.

• "To sustain an attachment on this ground, it must be shown that the debtor in contracting the debt or incurring the obligation intended to defraud the creditor. The fraud must relate to the execution of the agreement and must have been the reason which induced the other party into giving consent which he would not have otherwise given. To constitute a ground for attachment in Section 1(d), Rule 57 of the Rules of Court, fraud should be committed upon contracting the obligation sued upon. A debt is fraudulently contracted if at the time of contracting it the debtor has a preconceived plan or intention not to pay, as it is in this case." — This passage, quoted from Liberty Insurance Corporation vs. Court of Appeals, states the requisites for attachment on the ground of fraud and is the doctrinal core of the decision.
• "The applicant for a writ of preliminary attachment must sufficiently show the factual circumstances of the alleged fraud because fraudulent intent cannot be inferred from the debtor's mere non-payment of the debt or failure to comply with his obligation." — This defines the evidentiary threshold for the fraud ground and explains why the trial court's reliance on petitioners' non-compliance was misplaced.
• "We rule that respondents' allegation that petitioners undertook to sell exclusively and only through JRP/LGD for Target Stores Corporation but that petitioners transacted directly with respondents' foreign buyer is sufficient allegation of fraud to support their application for a writ of preliminary attachment." — This is the Court's application of the fraud standard to the amended complaint and the basis for holding that the writ was properly issued.
• "The rule that 'when the writ of attachment is issued upon a ground which is at the same time the applicant's cause of action, the only other way the writ can be lifted or dissolved is by a counter-bond' is applicable in this case." — This states the controlling rule on the mode of discharge and is the proposition for which the decision is most often cited.

• Liberty Insurance Corporation vs. Court of Appeals, G.R. No. 104405, 13 May 1993, 222 SCRA 37 — Controlling precedent on the fraud ground under Section 1(d), Rule 57; the Court quoted its formulation of the requisites of fraud for purposes of attachment and relied on it in holding that the amended complaint sufficiently alleged fraud.
• Chuidian vs. Sandiganbayan, 402 Phil. 795 (2001) — Source of the rule that when the writ of attachment is issued upon a ground which is at the same time the applicant's cause of action, the only other way the writ can be lifted or dissolved is by a counter-bond; cited as the primary authority for the disposition.
• FCY Construction Group, Inc. vs. Court of Appeals, 381 Phil. 282 (2000) — Cited, together with Chuidian and Liberty Insurance, as supporting the Court of Appeals' ruling on the exclusive mode of discharge by counter-bond.
• Foundation Specialists, Inc. vs. Betonval Ready Concrete, Inc., G.R. No. 170674, 24 August 2009 — Cited for the proposition that fraudulent intent cannot be inferred from the debtor's mere non-payment of the debt or failure to comply with his obligation.
• Tanchan vs. Allied Banking Corporation, G.R. No. 164510, 25 November 2008, 571 SCRA 512 — Cited, together with the other authorities, for the requirement that the applicant sufficiently show the factual circumstances of the alleged fraud.
• Ng Wee vs. Tankiansee, G.R. No. 171124, 13 February 2008, 545 SCRA 263 — Cited for the same evidentiary requirement on fraudulent intent in applications for preliminary attachment.
• Philippine National Construction Corporation vs. Dy, G.R. No. 156887, 3 October 2005, 472 SCRA 1 — Cited for the same proposition that fraudulent intent cannot be presumed from mere non-payment or non-compliance.

• Section 1(d), Rule 57, Rules of Court — Authorizes the issuance of a writ of preliminary attachment in an action against a party who has been guilty of fraud in contracting the debt or incurring the obligation upon which the action is brought, or in the performance thereof. The Court identified this as the basis of respondents' application and applied its requisites to the amended complaint.
• Section 12, Rule 57, Rules of Court — Governs discharge of attachment upon giving a counter-bond. After a writ of attachment has been enforced, the party whose property has been attached may move for discharge on the security given, and the court shall, after due notice and hearing, order the discharge if the movant makes a cash deposit or files a counter-bond in an amount equal to that fixed in the order of attachment, exclusive of costs, securing the payment of any judgment the attaching party may recover. The Court held that this was the only mode by which petitioners could obtain the lifting of the writ.
• Section 13, Rule 57, Rules of Court — Governs discharge of attachment on other grounds, allowing the party whose property has been attached to move to set aside or discharge the attachment on the ground that it was improperly or irregularly issued or enforced, or that the bond is insufficient. The Court held that petitioners could not avail of this provision because the ground for the issuance of the writ was also the basis of respondents' amended complaint.
• Section 13, Article VIII, 1987 Constitution — Cited in the Chief Justice's certification that the conclusions in the Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

• Teresita J. Leonardo-De Castro (designated additional member per Special Order No. 776)
• Arturo D. Brion
• Mariano C. Del Castillo
• Roberto A. Abad