Case Digest: G. Holdings, Inc. vs Light Co., Inc. 841 SCRA 234

G. Holdings, Inc. vs Light Co., Inc. 841 SCRA 234

Subject: Obligations and Contracts

FACTS

From March 1990, Cagayan Electric Power and Light Company, Inc. (CEPALCO), which operates a light and power distribution system in Cagayan de Oro City, supplied power to the ferro-alloy smelting plant of Ferrochrome Philippines, Inc. (FPI) at the PfflVIDEC Industrial Estate in Tagoloan, Misamis Oriental.

When FPI defaulted in the payment of its electric power bills amounting to P16,301,588.06 as of March 1996, CEPALCO demanded payment thereof FPI paid CEPALCO on three separate dates the total amount of P13,161,916.44, leaving a balance of P2,899,859.15.9 FPI failed again to pay its subsequent electricity bills, thereby increasing its unpaid electric bills to P29,509,240.89 as of May 1996.

For failure to pay FPI's outstanding bills, CEPALCO disconnected the electric power supply to FPI in May 1996.After sending a statement of account with P30,147,835.65 unpaid bills plus 2% monthly surcharge, CEPALCO filed a collection suit (Civil Case No. 65789) against FPI in July 1996 before the Regional Trial Court of Pasig City, Branch 264 (RTC Pasig).

In the meantime, Sheriff Renato B. Baron (Baron) of RTC-Pasig issued notices of levy upon personal and real properties dated April 1 and 2, 2004 and notices of sale on execution of personal and real properties dated April 1, 2004.

On April 5, 2004, GHI filed a case against Sheriff Baron, CEPALCO and FPI for Nullification of Sheriffs Levy on Execution and Auction Sale, Recovery of Possession of Properties and Damages before the RTC-CDO. GHI claimed that the levied ferro-alloy smelting facility, properties and equipment are owned by it as evidenced by a Deed of Assignment executed by FPI in consideration of P50,366,926.71.

In the unilateral Deed of Assignment, FPI duly authorized GFI, in consideration of obligations, inclusive of the interest charges, assigned, transferred, ceded and conveyed, “absolutely in all of the assignor's properties, equipment and facilities. Prior to the Deed of Assignment, FPI sent to GFII a letter stating the terms and conditions pertaining how the obligation of FPI was obtained. The letter bears the conformity of GHI.

ISSUE

Whether or not the CA erred in holding that the Deed of Assignment was absolutely simulated.

RULING

Yes, it is absolutely simulated.

Under the law (Art 1409, NCC), (2) absolutely simulated or fictitious contracts are inexistent and void from the beginning. These contracts cannot be ratified and the right to set up the defense of illegality cannot be waived.

Under Article 1345 of the Civil Code, simulation of a contract may be absolute, when the parties do not intend to be bound at all, or relative, when the parties conceal their true agreement. The former is known as contracto simulado while the latter is known as contracto disimulado. An absolutely simulated or fictitious contract is void while a relatively simulated contract when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.

In this case, in executing the Deed of Assignment, spite of the wordings in the Deed of Assignment that FPI "assigned, transferred, ceded and conveyed them absolutely in favor of GHI", FPI was in no intention to transfer absolutely the assigned assets to GHI in payment of their obligation to them. Evidence is the letter dated February 28, 2003, which reveals the true intention of FPI and GHI. FPI's real intention was to defraud its creditor CEPALCO. However, these findings do not thereby render as rescissible the Deed of Assignment under Article 1381(3). Rather, they fortify the finding that the Deed of Assignment was "not really desired or intended to produce legal effects or in any way alter the juridical situation of the parties" or put differently, that the Deed of Assignment was a sham, or a contracto simulado. Hence, the Deed of Assignment is declared inexistent for being absolutely simulated or fictitious. Accordingly, the CA correctly ruled that the Deed of Assignment was absolutely simulated, although it was in error in affirming the rescission ordered by the RTC-CDO because, as explained above, rescissible contracts and void or inexistent contracts belong to two mutually exclusive groups. This error, however, does not justify the granting of the Petition.