In FCY Construction Group, Inc. vs. Court of Appeals, the Supreme Court clarified the requirements for issuing a writ of preliminary attachment based on fraud. The Court ruled that fraud must exist at the time of contracting the debt or obligation, not arise during its performance, to justify the attachment. This decision highlights the importance of establishing fraudulent intent at the very inception of an agreement when seeking preliminary attachment as a remedy.

Flyover Funds and Broken Promises: Did Fraudulent Intent Justify Attachment?

FCY Construction Group, Inc. and Ley Construction and Development Corporation entered into a joint venture for a government flyover project. Ley Construction provided funds and materials, and later sought to recover its share of the project’s collections. Alleging fraud, Ley Construction obtained a writ of preliminary attachment against FCY Construction. The central legal question was whether the alleged fraud occurred at the time of contracting the obligation, as required by Section 1(d), Rule 57 of the Revised Rules of Court.

The petitioners argued that the writ was improperly issued because there was no evidence of fraud when the obligations were incurred. They pointed to testimony suggesting that assurances from Department of Public Works and Highways (DPWH) officials induced Ley Construction to continue providing resources. However, the Court emphasized that these assurances occurred during the performance of the contract, not at its inception. Therefore, they could not serve as a basis for a writ of attachment based on fraud in contracting the obligation.

The Supreme Court, in analyzing the application for the writ of attachment, referenced Section 1(d), Rule 57 of the Revised Rules of Court, which states:

“SECTION 1. Grounds upon which attachment may issue. – A plaintiff or any proper party may, at the commencement of the action or at any time thereafter, have the property of the adverse party attached as security for the satisfaction of any judgment that may be recovered in the following cases:

(d) In an action against a party who has been guilty of a fraud in contracting the debt or incurring the obligation upon which the action is brought, or in concealing or disposing of the property for the taking, detention or conversion of which the action is brought;”

The Court stressed that to justify an attachment on the ground of fraud, it must be proven that the debtor intended to defraud the creditor at the time the debt was contracted. The fraud must relate to the execution of the agreement and be the reason that induced the other party to enter into the agreement. In essence, the fraud must be present at the very beginning, influencing the decision to enter into the obligation.

The Court also cited Liberty Insurance Corporation vs. Court of Appeals, which elucidated the nature of the fraud required for attachment:

“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.“

The Court highlighted the significance of the timing of the alleged fraudulent acts. If the inducement or fraudulent acts occurred after the obligation was already established, they are considered immaterial for the purpose of issuing a writ of preliminary attachment based on fraud in contracting the obligation. The key is whether the intent to defraud existed at the moment the agreement was made.

Furthermore, the Court addressed the argument that payments made by the petitioners should negate the claim of fraud. It noted that these payments were for labor, materials, and advances, not for the profits that Ley Construction was seeking. The failure to remit the agreed-upon profits was the basis of the complaint, and the payments for other expenses did not negate the claim of fraud related to the profit-sharing agreement.

Regarding the dissolution of the writ of preliminary attachment, the Court referenced Mindanao Savings and Loan Assoc. vs. Court of Appeals, clarifying that when the attachment is based on the same grounds as the cause of action (e.g., fraud in contracting the debt), the defendant cannot simply move to dissolve the attachment by disproving the plaintiff’s claims. This is because such a hearing would essentially be a trial on the merits, which is not appropriate for a motion to dissolve an attachment. In such cases, the only way to dissolve the attachment is by posting a counterbond.

The issue of Francis Yu’s personal liability as President of FCY Construction was also addressed. The Court acknowledged the general principle that a corporation’s personality is separate from its officers, protecting them from personal liability. However, it also recognized exceptions, such as when a corporate officer assents to an unlawful act, acts in bad faith, or is made personally liable by law. Ultimately, the Court deferred the determination of Francis Yu’s personal liability to the trial court, to be decided based on the evidence presented during the trial.

The Court cited Tramat Mercantile, Inc. vs. Court of Appeals, which outlined the circumstances under which a corporate director, trustee, or officer may be held personally liable:

“Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when –

1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by a specific provision of law, to personally answer for his corporate action.”

Thus, the Supreme Court upheld the Court of Appeals’ decision, dismissing the petition and affirming the writ of preliminary attachment, subject to the trial court’s determination of Francis Yu’s personal liability. The case underscores the strict requirements for establishing fraud as a basis for preliminary attachment and reinforces the principle of separate corporate personality while acknowledging exceptions for personal liability of corporate officers.

FAQs

What was the key issue in this case?	The key issue was whether the writ of preliminary attachment was properly issued based on allegations of fraud in contracting the obligation, specifically if the fraud occurred at the time of contracting the debt.
What is a writ of preliminary attachment?	A writ of preliminary attachment is a provisional remedy where a plaintiff can have the defendant’s property seized as security for the satisfaction of a judgment they might obtain in the future.
What does the Revised Rules of Court say about attachment?	Section 1(d), Rule 57 of the Revised Rules of Court allows for attachment in actions against a party guilty of fraud in contracting the debt or obligation upon which the action is brought.
What kind of fraud is required to issue a writ of attachment?	The fraud must exist at the time of contracting the debt or obligation, not during its performance, and must have induced the other party to enter into the agreement.
What was the argument of FCY Construction?	FCY Construction argued that there was no fraud in incurring the obligation because Ley Construction was induced by DPWH officials to continue delivering materials and cash.
Why did the Court reject FCY Construction’s argument?	The Court rejected the argument because the DPWH assurances occurred during the contract’s performance, not at its inception, so they could not establish fraud in contracting the obligation.
Can a corporate officer be held personally liable for corporate debts?	Generally, a corporate officer is not personally liable for corporate debts, but there are exceptions, such as when the officer assents to an unlawful act or acts in bad faith.
What happens if the attachment is based on the same grounds as the cause of action?	If the attachment is based on the same grounds as the cause of action, the defendant cannot simply move to dissolve the attachment by disproving the plaintiff’s claims, but must post a counterbond.

This case serves as a reminder of the stringent requirements for obtaining a writ of preliminary attachment based on fraud. The fraud must be present at the very inception of the agreement, influencing the decision to enter into the obligation. The ruling also clarifies the circumstances under which corporate officers may be held personally liable for corporate acts, emphasizing the need for a thorough examination of evidence during trial.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: FCY Construction Group, Inc. vs. Court of Appeals, G.R. No. 123358, February 01, 2000