GR 92067; (March, 1991) (Digest)
G.R. No. 92067 ; March 22, 1991
PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COURT OF APPEALS, JOSEPH L.G. CHUA and JALECO DEVELOPMENT, INC., respondents.
FACTS
Petitioner Philippine Bank of Communications (PBCOM) filed a complaint for the annulment of a Deed of Exchange executed by respondent Joseph L.G. Chua in favor of Jaleco Development, Inc. (JALECO). Chua, as a surety, was liable under several Surety Agreements for the obligations of Fortune Motors (Phils.), Inc. and Forte Merchant Finance, Inc. to PBCOM. On October 24, 1983, Chua executed the Deed of Exchange, transferring his real property in Dasmariñas Village to JALECO in exchange for 12,000 corporate shares. PBCOM alleged this transfer was fraudulent, executed to place the asset beyond the reach of creditors after the principal obligations became due. The Regional Trial Court dismissed the complaint, a decision affirmed by the Court of Appeals. The appellate court held the action was premature, as PBCOM’s main collection cases against the debtors and sureties were still pending, and that PBCOM’s interests were protected by a writ of preliminary attachment on other properties.
ISSUE
Whether the Deed of Exchange executed by Chua in favor of JALECO is fraudulent and should be annulled.
RULING
The Supreme Court reversed the Court of Appeals and annulled the Deed of Exchange. The legal logic centered on the doctrine of piercing the corporate veil. The Court found that Chua and his immediate family controlled JALECO. The transfer involved Chua’s only substantial property at the time his financial liabilities to PBCOM became demandable. Critically, despite the purported transfer, Chua continued to occupy the property. These circumstances demonstrated that the transaction was not bona fide but a sham executed to defraud PBCOM as a creditor. JALECO was used as an alter ego of Chua to conceal the asset. When a corporation is used as a cloak for fraud or to work an injustice against creditors, its separate juridical personality may be disregarded. Consequently, the transaction was deemed a nullity as it was essentially a transaction by Chua with himself, designed to hinder PBCOM’s right to collect on a valid credit. The Court held the action for annulment was not premature, as the fraudulent conveyance itself created a distinct cause of action to preserve the asset for the satisfaction of the creditor’s claim.