The Manila Banking Corporation vs. Edmundo S. Silverio

A contract of sale that is absolutely simulated is void ab initio and produces no legal effects; a creditor whose interests are directly affected may attack its nullity without first exhausting the debtor’s other properties, because the remedy of acción pauliana—which requires subsidiarity—applies solely to rescissible contracts, not to void or inexistent ones.

Purificacion Ver owned two parcels of land in La Huerta, Parañaque City. She sold them to Ricardo C. Silverio, Sr. in 1979, but the absolute deed of sale remained unregistered; title stayed in Ver’s name. Ricardo Sr. later incurred a debt to The Manila Banking Corporation (TMBC), which filed a collection suit and obtained a writ of preliminary attachment. The writ was annotated on the titles on 2 July 1990. When Edmundo S. Silverio, Ricardo Sr.’s nephew, later sought cancellation of the levy, he claimed the properties had been sold to him as early as 11 September 1989. The dispute thus turned on whether the alleged prior sale was valid or merely simulated to place the properties beyond the reach of creditors.

• Original Title and Sale to Ricardo Sr.: Purificacion Ver was the registered owner of two parcels of land in La Huerta, Parañaque City, covered by TCT Nos. 31444 (452448) and 45926 (452452). On 16 April 1979, she sold the properties to Ricardo C. Silverio, Sr. for ₱1,036,475.00 by an absolute deed of sale. The sale was not registered, leaving title in Ver’s name.

• The Alleged Sale to Edmundo: Edmundo S. Silverio, nephew of Ricardo Sr., claimed that on 11 September 1989, Ricardo Sr. sold the same properties to him for ₱3,109,425.00 under a notarized deed of sale. The deed was not registered, and Edmundo did not take possession of the properties, collect rentals, or assert ownership in any visible manner until 1993.

• TMBC’s Collection Suit and Attachment: On 22 February 1990, TMBC filed a complaint for sum of money with a prayer for preliminary attachment against Ricardo Sr. and Delta Motors Corporation. By virtue of an order of the RTC, a notice of levy on attachment and writ of attachment were inscribed on the two titles on 2 July 1990. TMBC eventually obtained a favorable judgment on 29 March 1993.

• Edmundo’s Demand and Petition: On 22 July 1993, Edmundo wrote TMBC requesting cancellation of the annotations, asserting that the properties were no longer owned by Ricardo Sr. TMBC, then under statutory receivership of the Bangko Sentral ng Pilipinas, took no action. On 17 December 1993, Edmundo filed a petition in the RTC of Makati City for cancellation of the notice of levy on attachment and writ of attachment. TMBC answered, contending the sale to Edmundo was void and the properties still belonged to Ricardo Sr.

• Trial Court’s Findings: The RTC found the sale absolutely simulated and void. The notarial register of Atty. Anacleto T. Lacanilao, Jr. for 1989, as kept by the Records Management and Archives Office (RMAO), contained only a loose-leaf entry for an affidavit of one Maria J. Segismundo—not the deed of sale allegedly notarized as Document No. 444, Page 90, Book No. 17, Series of 1989. The RTC concluded that no valid sale was executed between the Silverios, and thus Edmundo had no right to seek cancellation.

• Additional Indicia of Simulation: Edmundo testified evasively regarding the transaction; he could not recall whether he personally handed the purchase price to Ricardo Sr. or even whether Ricardo Sr. was in the country at the time. The deed stated the price was paid “by hand” during execution, yet Edmundo claimed he could not remember the circumstances of payment. Edmundo never registered the sale until 1993, did not possess the properties, had no lease contract with the actual occupant, and admitted that as late as 1991 it was Ricardo Sr. who filed an ejectment case against third persons, still asserting ownership. When asked why Ricardo Sr. did so, Edmundo merely replied, “because I am asking him so.”

• Standing to Question Nullity: TMBC argued that under Article 1421 of the Civil Code, the defense of nullity of a contract is available to third persons whose interests are directly affected; as a judgment creditor with a lien on the properties, its interest was direct and substantial.

• Preference of Registered Attachment: TMBC maintained that the registered attachment should prevail over Edmundo’s alleged earlier unregistered right. It contended that the sale was fictitious and therefore no right ever vested in Edmundo.

• Bad Faith Finding: TMBC challenged the Court of Appeals’ conclusion that it acted in bad faith by failing to inquire into the rights of Ricardo Sr. over the properties, asserting that it relied on the registered titles and the absence of any recorded adverse claim.

• Validity of the Sale: Edmundo contended that the 1989 deed of sale validly transferred ownership to him before the attachment, and that the sale was not void.

• Lack of Material Interest and Subsidiarity of Acción Pauliana: Edmundo argued that TMBC could not impugn the sale without first exhausting all other properties of the debtor, invoking the subsidiarity of acción pauliana under Article 1177 of the Civil Code. He claimed that TMBC had not shown it had exhausted Ricardo Sr.’s other assets and thus had no material interest to question the sale.

• Bad Faith of TMBC: Edmundo asserted that TMBC acted in bad faith by causing the attachment without verifying whether Ricardo Sr. still owned the properties.

• Simulation of the Sale: Whether the deed of sale dated 11 September 1989 between Ricardo C. Silverio, Sr. and Edmundo S. Silverio was absolutely simulated and void ab initio.

• Right of Creditor to Attack Void Contract: Whether TMBC may directly impugn the nullity of the sale without prior resort to acción pauliana or exhaustion of the debtor’s other properties.

• Bad Faith: Whether TMBC acted in bad faith in levying upon the properties without first inquiring into the ownership rights of Ricardo Silverio, Sr.

• Simulation of the Sale: The sale was absolutely simulated and void ab initio. Indicia of simulation were overwhelming: the notarial register contained no deed of sale but only an affidavit of a different person; the deed did not form part of the records transmitted by the notary public to the Clerk of Court, rendering it virtually worthless in the absence of corroboration. Edmundo’s testimony was evasive—he could not remember whether he personally handed the ₱3,109,425.00 purchase price or whether Ricardo Sr. was even present. A deed of sale where the stated consideration has not in fact been paid is a false contract, void ab initio. Further, Edmundo made no attempt to register the sale, take possession, collect rentals, or otherwise assert ownership; instead, Ricardo Sr. continued to claim ownership in an ejectment suit in 1991. The complete absence of any exercise of dominium is a protuberant index of simulation, rendering the contract void under Article 1409(2) of the Civil Code.

• Right of Creditor to Attack Void Contract: TMBC was entitled to question the nullity directly and need not first exhaust other properties. An absolutely simulated contract produces no legal effects and is void from the beginning; the defense of nullity is available to third persons whose interests are directly affected, as provided in Article 1421. The subsidiarity rule applies only to acción pauliana—the rescission of contracts undertaken in fraud of creditors under Article 1381(3) in relation to Article 1383—which presupposes an otherwise valid contract. In absolute simulation, the contract is inexistent, and no rescission is required. The distinction, drawn from Tolentino, is that absolute simulation implies no real contract at all and can be attacked by any creditor without need of exhausting other remedies or proving debtor’s insolvency. Because the sale was void, Ricardo Sr. remained the owner, and the attachment was validly made.

• Bad Faith: The Court of Appeals’ finding of bad faith was reversed. TMBC’s attachment was justified by the simulated nature of the prior sale; it relied on the registered title and had no reason to recognize an unregistered, void transaction. The levy on the properties, which still belonged to the debtor, was lawful.

• Absolute Simulation — Under Articles 1345 and 1346 of the Civil Code, an absolutely simulated contract is one where the parties do not intend to be bound at all; it is void and produces no legal effect. The apparent contract is a sham, lacking true consent. The characteristic is that the juridical situation of the parties is not intended to be altered. Such a contract cannot serve as a mode of acquiring ownership.

• Badges of Simulation — The most protuberant index of simulation is the complete absence of any attempt by the ostensible buyer to assert rights of ownership over the property, such as taking exclusive possession, collecting rentals, or registering the sale. Other badges include: (a) failure to present the notarized deed in the notarial register or the official transmissions to the archives; (b) evasiveness of the buyer regarding payment of consideration; (c) lack of actual payment of the stated purchase price, which renders the deed a false contract void ab initio.

• Distinction Between Absolute Simulation and Fraudulent Alienation — Absolute simulation produces no contract at all; it can be attacked by any creditor, including one subsequent to the simulated transfer, without need of proving insolvency or prior exhaustion of the debtor’s property. Fraudulent alienation, on the other hand, involves a true and existing contract that is rescissible under Article 1381(3); the creditor must first exhaust other legal remedies and the action prescribes in four years. The action to declare a contract absolutely simulated does not prescribe (Arts. 1409, 1410).

• Right of Third Parties to Invoke Nullity — Under Article 1421, the defense of illegality or nullity of contracts is not available to third persons whose interests are not directly affected. Conversely, third persons whose interests are directly affected may set up the nullity of a void contract. A judgment creditor with a lien acquired through attachment has a direct interest sufficient to challenge a simulated sale of the attached property.

• Effect of Simulated Sale on Attachment — Because an absolutely simulated sale is void ab initio, ownership never leaves the transferor-debtor. A levy on attachment over the property is therefore valid and the attaching creditor may resist cancellation of the annotation.

• “An absolutely simulated contract, under Article 1346 of the Civil Code, is void. It takes place when the parties do not intend to be bound at all. The characteristic of simulation is the fact that the apparent contract is not really desired or intended to produce legal effects or in any way alter the juridical situation of the parties. Thus, where a person, in order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does not really intend to divest himself of his title and control of the property; hence, the deed of transfer is but a sham. Lacking, therefore, in a fictitious and simulated contract is consent which is essential to a valid and enforceable contract.”

• “…the most proturberant index of simulation is the complete absence of an attempt in any manner on the part of the [ostensible buyer] to assert his rights of ownership over the [properties] in question. The supposed buyer’s failure to take exclusive possession of the property allegedly sold or, in the alternative, to collect rentals, is contrary to the principle of ownership. Such failure is a clear badge of simulation that renders the whole transaction void pursuant to Article 1409 of the Civil Code.”

• “Absolute simulation implies that there is no existing contract, no real act executed; while fraudulent alienation means that there is a true and existing transfer or contract. The former can be attacked by any creditor, including one subsequent to the contract; while the latter can be assailed only by the creditors before the alienation. In absolute simulation, the insolvency of the debtor making the simulated transfer is not a prerequisite to the nullity of the contract; while in fraudulent alienation, the action to rescind, or accion pauliana, requires that the creditor cannot recover in any other manner what is due him. Finally, the action to declare a contract absolutely simulated does not prescribe (articles 1409 and 1410); while the accion pauliana to rescind a fraudulent alienation prescribes in four years (article 1389).”

• Suntay v. Court of Appeals, 251 SCRA 430 (1995) — Applied as controlling for the rule that a contract enjoys presumptions of sufficient consideration and regularity, but these yield to evidence; also cited for the proposition that the complete absence of assertion of ownership is a protuberant index of simulation.

• Cruz v. Bancom Finance Corporation, 379 SCRA 490 (2002) — Followed for the doctrine that a deed of sale where the stated consideration has not in fact been paid is a false contract void ab initio; also reiterated the badge of simulation consisting of failure to exercise ownership.

• Tala Realty Services Corporation v. Banco Filipino Savings and Mortgage Bank, 325 SCRA 768 (2000) and subsequent Tala cases — Applied to hold that a notarized deed not reported to the Clerk of Court and not found in the notarial register militates against its use as proof of a transaction.

• Tongoy v. Court of Appeals, 123 SCRA 99 (1983) — Cited for the definition of simulation and the rule that an absolutely simulated contract produces no effects and does not transfer ownership.

• People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, 297 SCRA 170 (1998) — Followed for the rule that lack of consent in a simulated contract makes it void; also noted that exceptions to the rule against factual review in Rule 45 petitions include conflicting findings of the trial and appellate courts.

• Ramos v. Heirs of Ramos, Sr., 381 SCRA 594 (2002) and Santiago v. Court of Appeals, 278 SCRA 98 (1997) — Consistently applied the principle that failure of the buyer to assert rights of ownership indicates simulation.

• Article 1345, Civil Code — Defines simulation of contracts: absolute simulation occurs when parties do not intend to be bound at all; relative simulation when they conceal their true agreement. Applied to classify the 1989 deed as absolutely simulated.

• Article 1346, Civil Code — Declares an absolutely simulated or fictitious contract void. Applied to render the sale void ab initio.

• Article 1409(2), Civil Code — Enumerates absolutely simulated or fictitious contracts as inexistent and void from the beginning. The sale fell within this provision.

• Article 1421, Civil Code — The defense of illegality of contracts is not available to third persons whose interests are not directly affected. Interpreted a contrario to allow TMBC, whose interests were directly affected, to assert the nullity.

• Article 1381(3) in relation to Article 1383, Civil Code — Covers rescissible contracts undertaken in fraud of creditors when the creditor cannot otherwise collect; rescission is subsidiary. Distinguished from void simulated contracts; held inapplicable because the sale was not merely rescissible but void.

• Article 1410, Civil Code — An action to declare the inexistence of a void contract does not prescribe. Noted in the distinction between absolute simulation and fraudulent alienation.

• Section 5, Rule 57, Rules of Court — Only properties belonging to the debtor may be attached. Applied to validate the attachment because the properties remained Ricardo Sr.’s after the simulated sale.

Justice Reynato S. Puno (Chairman), Justice Ma. Alicia Austria-Martinez, Justice Romeo J. Callejo, Sr., and Justice Dante O. Tinga concurred. No separate opinions were registered.