Metropolitan Fabrics, Inc., et al. v. Prosperity Credit Resources, Inc. et al.,

FACTS:

Metropolitan Fabrics, Incorporated (MFI), a family corporation, owned a 5.8hectare industrial compound at No. 685 Tandang Sora Avenue, Novaliches, Quezon City which was covered by TCT No. 241597.Pursuant to a P2 million, 10-year 14% per annum loan agreement with Manphil Investment Corporation (Manphil) dated April 6, 1983, the said lot was subdivided into11 lots, with Manphil retaining four lots as mortgage security.

The other seven lots, now covered by TCT Nos. 317699 and 317702 to 317707, were released to MFI. In July 1984, MFI sought from PCRI a loan in the amount of P3,443,330.52, the balance of the cost of its boiler machine, to prevent its repossession by the seller. PCRI, also family-owned corporation licensed since 1980 to engage in money lending, was represented by Domingo Ang (“Domingo”) its president, and his son Caleb, vice-president. The parties knew each other because they belonged to the same familyassociation, the Lioc Kui Tong Fraternity.

On the basis only of his interview with Enrique, feedback from the stockholders and the Chinese community, as well as information given by his own father Domingo, and without further checking on the background of Enrique and his business and requiring him to submit a company profile and a feasibility study of MFI, Caleb recommended the approval of the P3.44 million with an interest ranging from 24% to 26% per annum and a term of between five and ten years (Decision, p. 5).

According to the court, it sufficed for Caleb that Enrique was a well-respected Chinese businessman, that he was the presidentof their Chinese family association, and that he had other personal businesses aside fromMFI, such as the Africa Trading.However, in September 1984, the first amortization check bounced for insufficient fund due to MFI’s continuing business losses. It was then that the appellees allegedly learnedthat PCRI had filled up the 24 blank checks with dates and amounts that reflected a 35%interest rate per annum, instead of just 24%, and a two year repayment period, instead of10 years.

On September 4, 1986, Enrique received a Notice of Sheriff’s Sale dated August 29, 1986, announcing the auction of the seven lots on September 24, 1986 due to unpaid indebtedness of P10.5 million. Vicky (daughter of owner of MFI, because their father went into a coma because of intense pressure from the foreclosure) insisted that prior to the auction notice, they never received any statement or demand letter from the defendants to pay P10.5 million, nor did the defendants inform them of the intended foreclosure.

ISSUES:                   Was the Mortgage Contract VOID?

HELD:                    

No. As the records show, petitioners really agreed to mortgage their properties as security for their loan, and signed the deed of mortgage for the purpose. Thereafter, they delivered the TCTs of the properties subject of the mortgage to respondents. Consequently, petitioners’ contention of absence of consent had no firm moorings. It remained unproved. To begin with, they neither alleged nor established that they had been forced or coerced to enter into the mortgage. Also, they had freely and voluntarily applied for the loan, executed the mortgage contract and turned over the TCTs of their properties. And, lastly, contrary to their modified defense of absence of consent, Vicky Ang’s testimony tended at best to prove the vitiation of their consent through insidious words, machinations or misrepresentations amounting to fraud, which showed that the contract was voidable. 

Where the consent was given through fraud, the contract was voidable, not void ab initio. This is because a voidable or annullable contract is existent, valid and binding, although it can be annulled due to want of capacity or because of the vitiated consent of one of the parties. Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent of the contracting parties was obtained through fraud, the contract is considered voidable and may be annulled within four years from the time of the discovery of the fraud. 

According to Article 1338 of the Civil Code, there is fraud when one of the contracting parties, through insidious words or machinations, induces the other to enter into the contract that, without the inducement, he would not have agreed to. Yet, fraud, to vitiate consent, must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract. In Samson v. Court of Appeals, causal fraud is defined as “a deception employed by one party prior to or simultaneous to the contract in order to secure the consent of the other.”

Rosencor v Inquing

March 08, 2001

Paterno Inquing, Irene Guillermo, Frederico Bantugan, Fernando Magbanua, and Liza Tiangco, herein respondents, averred that they are the lessees, since 1971, of a two-story residential apartment located at Tomas Morato Ave., Quezon City owned bythe spouses Faustino and Cresencia Tiangco.

The lease was not covered by a contract and the lessees were assured by the Spouses Tiangco that they had the pre-emptive right to purchase the property if ever there was a decision to sell it..

The original lessors died and their heir also promised the lessees the same pre-emptive right to purchase. The new lessors represented by Eufrocina de Leon demanded the lessees to vacate the property because the building will allegedly be demolished but after the lessees declined, she sent them a letter offering to sell the property for 2M. Lessees made a counter offer of 1M but no reply was made by the lessors.

De leon subsequently informed the lessees that the property was already sold to Rosencor. Lessees claimed that they were deceived because the property was already sold to Rosencor before it was offered to them. They offered to reimburse the payment to the lessors but the offer was declined as hence, this petition.

ISSUE:

WON the contract of sale is rescissible

HELD:

The right of first refusal is not covered by the Statute of Frauds. The application of such statute presupposes the existence of a perfected contact which is not applicable in this case. As such, a right of first refusal need not be written to be enforceable and can be proved by oral evidence.

Lessees have proven that the lessors admit the right of first refusal given to them when the property was offered to them by 2M.

The prevailing doctrine is that a contract of sale entered in violation of right of first refusal is rescissible. However, that doctrine cannot be applied to the case at bar. Under Article 1381 of the Civil Code, paragraph 3, a contract validly agreed upon may be rescinded if it is “undertaken in fraud of creditors when the latter cannot in any manner collect the claim due them.”

Moreover, under Article 1385, rescission shall not take place “when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.”

Good faith is always presumed unless contrary to the evidence is adduced. In the case at bar, there clear and convincing evidence should have been shown to prove that petitioners were aware of the right of first refusal accorded to the respondents.

Respondents point to the letter by Atty. Aguila as proof. However, no mention about the rights of first refusal was made in said letter. Neither was there any showing that respondents notified Rosencor of Atty. Aguila of their right of first refusal after they received the said letter.

Respondents also point to the letter by De Leon where she recognized the right of first refusal of the respondents. However, De Leon was writing on her behalf and not on behalf of petitioners and, as such, it only shows that De Leon was aware of the existence of the rights. It does not show that petitioners were aware of such rights. Clearly, De Leon is the only party in bad faith in this case.

Considering the there was no showing of bad faith on the part of the petitioners, the CA erred in ordering for the rescission of the Deed of Absolute Sale between Rosencor and De Leon.

Rosencor could not have acted in bad faith because they are not aware of the right of first refusal given verbally. Respondents remedy is not rescission but an action for damages against De Leon and the heirs of the Spouses Tiangco for the unjustified disregard of their right of first refusal.